Industrialisation by invitation
January 20, 2004
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In 1949 the St Lucian born economist Arthur Lewis, who was subsequently knighted and won a Nobel Prize in economics, in articles in the Caribbean Economic Review put forward a development strategy, partly inspired by what had happened in Puerto Rico, in which he contended that agriculture had reached its limits of internal and externally profitable cultivation, that the growth rate of the population was faster than the growth of agriculture and that a manufacturing base had to be established to absorb agricultural output, to create employment opportunities and to remove the surplus labour.
In a paper presented at a symposium in Trinidad in September, 2002 to assess the work of Lloyd Best by Bhoendradatt Tewarie and Roger Hosein in which the development model outlined by Lewis was contrasted with that outlined by Best and Kari Levitt, they noted that Lewis had argued that since the size of the West Indian islands (we can include Guyana), even with a customs union, was insufficient to facilitate a manufacturing base of the magnitude to benefit from economies of scale it was necessary for the West Indies to industrialise on the basis of selling many of the products to a foreign market. The local population was too small to provide a basis for internally propelled growth as might be possible in a much larger economy like India or China. The small size of the market, it was contended, would also stifle resources mobilisation.
Lewis further argued that a country should specialise in manufactures to which its resources are most appropriate and avoid the others. These products could be sold to the dominant industrial markets and to nearby Latin America. But, he acknowledged, it was difficult and very expensive to break into new markets. "To start manufacturing in a new country is a formidable enough problem; if one adds to it trying to break into established markets, the difficulties may prove almost insuperable. Therefore, one seeks manufacturers who are already established in the market, and tries to persuade them to set up branches in the new country."
In other words, one would have to woo large multinationals because, Lewis said, "industrialisation is a frightfully expensive business quite beyond the resources of the islands." These multinationals would bring with them the vital access to markets. Lewis argued that governments had to play a strong, active role in attracting investment and could not sit waiting for it come.
He also said that industries are gregarious and like to move together and the absence of industry acts to discourage the formation of new ones. Conversely, if industries exist in a country there is a likelihood that new ones will enter the market. He said no one would develop a manufacturing industry if it were not worth doing so and that it might be necessary for a period to offer fiscal incentives.
Tewarie and Hosein continued: "Alert to the multiple implications of foreign capital, Lewis argued that private foreign multinational firms should not be allowed to come into the islands and do as they please. Even more than this Lewis only saw foreign (multinationals) involvement in the initial stages of the industrial life of the islands. He saw the role of foreign capital as one which increased the natural level of income but was also careful to acknowledge that "if the local people are thrifty, they can build up savings which in due course enable them, having learnt the tricks of the trade to set up in the business themselves"."
Lewis' policies were tried and Industrial Development Corporations were set up in several territories to woo investment, with more or less success. Similar policies have enjoyed considerable success in Trinidad more recently in the petro-chemical sector though it must be hoped lessons have been learnt from the previous boom.
What is interesting to note is that this debate has been ongoing for over fifty years? The situation has, of course, changed. In the Caribbean, there has been independence for forty years. Some may question Lewis's assumptions on the limitations for development in the agricultural sector.
On the industrial front, attitudes to foreign direct investment have fluctuated and are perhaps more welcoming now than they were at one stage. The basic problem of the need for a large market and economies of scale posed by Lewis persists.
Hemispheric and global movements towards free trade raise fresh issues and may indeed put the whole policy of industrialisation by invitation outlined by Lewis in a fresh perspective. But whether one accepts all of the late Sir Arthur's prescriptions or not, his work represents the kind of basic theoretical formulation that has been lacking for some time in the region's approach to development, in particular as regards the possibilities of regional integration by means of joint projects of economic development.