ArthurLewisandIndustrialDevelopmentintheCaribbean:AnAssessment*

By

AndrewSDownesProfessorofEconomicsandUniversityDirectorSirArthurLewisInstituteofSocialandEconomicStudiesUniversityoftheWestIndies,CaveHillCampusPOBox64,StMichael,BARBADOS

Telno:(246)4174476Faxno:(246)4247291Email:asdownes@uwichill.edu.bb

June2004

Presented at a conference on TheLewisModel after 50 years:Assessing SirArthurLewisContributiontoDevelopmentEconomicsandPolicy,UniversityofManchester,July67,2004.

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CONTENTS

Page

1 Introduction 1

2 Lewis'StrategyofIndustrialDevelopment 4

3 TheIndustrialisationExperienceintheCaribbean 12

4 TheFutureofIndustrialDevelopmentintheCaribbean 18

Tables 23

References 30

Arthur Lewis and Industrial Development in the

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Caribbean:AnAssessment**

1 Introduction

The economic history of several developed or advanced countries indicates that industrial

development (namely, the expansion of manufacturing activities) has been an important

elementintheachievementofahighstandardofliving.Severallessdevelopedcountrieshave

soughttoemulatetheexperienceofthesedevelopedcountriesbyfosteringthedevelopmentof

manufacturing operations. Governments have provided the necessary infrastructure (roads,

water and electrical systems, ports, etc) and the policy framework to expand industrial

operationswhichwouldwiden therangeofavailablegoodsandservicesandprovideforeign

exchangeearningsandemploymentopportunities.

Countries within the Commonwealth Caribbean have not been an exception to this

industrialisation drive. Although smallscale residential manufacturing activity took place

during the early decades of this century, industrial development in the Caribbean has been

largelyapostWorldWarIIphenomenon.CommonwealthCaribbeancountriesexperienceda

long period of British colonial rule which fashioned the nature of economic activity until

independence inthe1960sand1970s. ColonialeconomicpolicytowardstheCaribbeanwas

reflected in the neomercantilist ideology of comparative advantage (Best, 1980). Colonial

economic policy reinforced by a political systemwhich supported the interests of the agro

commercialelitedidnotincorporatemeasures tofoster industrialdevelopment in theregion.

The crux of the argument against industrial development in the regionwas that Caribbean

countries lacked the raw materials (coal, iron, etc), the capital and the industrial skills to

undertake fullfledged industrial activity. Furthermore, the small and fragmented domestic

marketsexistingintheCaribbeanwouldhavebeenunabletosupportmanymediumandlarge

scale operations. Official economic policy supported the continuance of agricultural

production(thatis, sugar,bananas)underapreferential tradingarrangementwiththeUnited

Kingdom.Earlypostwardevelopmentplansproducedbythecolonialauthoritiesemphasized

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agricultural development with a few `minor' residential industries processing local raw

materials.

Many local politicians and social commentators strongly advocated the need for industrial

developmentintheCaribbeaninanefforttocreateemploymentopportunitiesandtodiversify

domesticproductioninlightofthedepressionofthe1930s(seeBernal,1988Figueroa,1992

Downes, 1985 Farrell, 1980). Figueroa (1992), for example, traced the advent of

manufacturing in Jamaica back to the 1830s. He noted that while much of the early

manufacturingactivitywas linkedtotheagriculturalsector(thatis, thesugarindustry),there

wasagrowingmanufacturingsector intheearly1900sproducingprimarilyfor thedomestic

market(matches,bakingproducts,aerateddrinks,bricks).Figueroa(1992)furthernotedthat

pioneerlawstopromoteindustrialdevelopmentinJamaicawereenactedinthefirstdecadeof

the20thcentury.ItwasSirArthurLewis,however,whofirstformulatedacoherentstrategy

for industrial development in theCaribbean. In the aftermathof theuprisings in the1930s,

Lewis(1938),writingonthebirthoftheworkers'movementintheCaribbean,advocatedthe

need for industrial development based on the utilisation of local rawmaterials (e.g., sugar

refining,chocolatemaking,copraanddairyproducts).Hispaperentitiled"Industrialisationof

the British West Indies", published in 1950, provided a fully articulated framework for

capitalistindustrialdevelopmentin thesmall statesof theCaribbean(Lewis,1950).Priorto

this seminal paper, Lewis had outlined aspects of a strategy for industrial development in

Jamaica inhiscritiqueof theBenhameconomicplanforJamaicaandreviewedtheindustrial

development experience of Puerto Rico which provided important insights for the

Commonwealth Caribbean (Lewis, 1944, 1949). These works no doubt helped him to

formulateamoregeneral`model'ofeconomicdevelopmentasdiscussedinhiscelebrated1954

paperon"EconomicDevelopmentwithUnlimitedSuppliesofLabour"(Lewis, 1954).

ThepurposeofthispaperistoassessLewis'ideasonindustrialdevelopmentintheCaribbean

formulated over the period 1938 to 1950. In section two, Lewis' strategy of industrial

developmentinthesmallstatesoftheCaribbeanisoutlined.The industrialisationexperienceof

Caribbean countries since the 1950s is then reviewed in section three. The final section

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examinesthefutureofindustrialdevelopmentintheCaribbeaninlightofthechangingregional

andinternationalenvironments.

2 Lewis'StrategyofIndustrialDevelopment

Lewis'writingsonindustrialdevelopmentintheCaribbeanoverthe19381950periodsuggest

an`exportledlabourintensivestrategyofindustrialdevelopment'. Therearetwovariantsof

this general strategy(seeDownes,1985,pp.6071). Thefirstvariant is theoutcomeofhis

critique of theBenham economic plan for Jamaica and is based on theuse of local natural

resources that is, `exportled natural resourcebased industrialisation' (Lewis, 1944). The

secondvariantisbasedontheexperienceofPuertoRicoandplacesgreatemphasisonforeign

investmentand thegrantingof fiscal incentives(Lewis,1950). Thisvarianthasbeencoined

`exportledindustrialisationbyinvitation'(Best,1976).

Lewis'strategyisbasedonasetofpremises:

(i) surpluslabour

(ii) marketsize

(iii) labourcost

(iv) financialinvestment

(v) riskaversion

Thesurpluslabourpremiseisprobablythemostimportantone.Lewisarguedthatthecasefor

industrial development in theCaribbean restedon theoverpopulationexisting in the region.

Thepopulationtolandratiowastoohighforagriculturetosupportthegrowthinthelabour

force.Giventhehighlevelsofunemploymentandunderemployment,especiallyinBarbados,

JamaicaandtheWindwardandLeewardislands,therewasanurgentneedtocreatejobsoff

the land.Hesawindustrialdevelopmentcomplementingagriculturaldevelopmentinraising

thestandardoflivingandprovidingproductiveemployment.

Withregardstothemarketsizepremise,itwasarguedthatthedomesticandregionalmarkets

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were too small in terms of population size and per capita income to support the level of

industrial development needed to achieve `full employment'. Although regional economic

integrationisregardedasasinequanonforalargescaleindustrialprogrammeintheregion,

Caribbeancountriesneedtotargetmanufacturedproductsforextraregionalmarkets.

The relatively low labour costs in Caribbean labour markets (occasioned by high levels of

unemployment and low productivity in the agricultural sector) would be one incentive to

industrialistsseekingtominimizethecostsofproduction.Thisrelativepriceadvantagewould

encouragetheuseoflabour intensivemethodsofproduction.

The establishment of an industrial complex is an expensive undertaking requiringmarketing

skills, capital and technical expertise. With a low level of per capita income, the level of

savings would be insufficient to meet the level of industrialisation needed to resolve the

unemploymentproblem. Foreigninvestmentwouldberequired toprovideaccessto foreign

marketsandtofillthe`resourcegap'.AlthoughLewislaterarguedthat"theWestIndiescan

supplyallthecapitalthatisrequired" forindustrialdevelopment(forexample,viataxation),the

marketingandlabourcostissueswerestillcrucial.

Finally, Caribbean capitalists were regarded as `risk averse', expressing a preference for the

distributivetradesandprotectedagricultural productionratherthanmanufacturingproduction,

especially for export. In order to develop the industrial sector, there was a need to invite

foreignindustrialiststoestablishoperationssothatlocalcapitalistscouldbetaughtthe`tricks

of thetrade'(i.e., industrialisationbyinvitation). Havinglearntthe`tricks',localindustrialists

wouldbeabletotakeoverthedriveforgreaterindustrialisationintheregion.

TherearethreemainelementsinLewis'approachtoindustrialdevelopmentintheCaribbean:

markets,resourceavailabilityandeconomypolicyformulation.Withrespecttothemarketfor

manufactured goods, Lewis argued that the extraregional market provided the greatest

potential for utilizing the surplus labour of the Caribbean. The primary reason for this

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conclusionwas thatdomesticdemandformanufacturedgoodswouldbe too lowtosupport

domestic production on an economic scale. The low level of per capita income and the

diversity of demandwould not permit largescale economicproduction for thedomestic or

regional markets. Lewis was aware of the potential difficulties which `small, newly

industrializing' countries would face in their attempt to compete in establishedmarkets for

manufactured goods. Nevertheless, by applying the theory of monopolistic competition to

international trade, he indicated that product differentiation would allow small states to be

successfulatexportinga rangeofproducts. This is theessenceof`nichemarketing'being

suggestedfortoday's manufacturersattemptingtobreakintointernationalmarkets.

With respect to resource availability,Lewis indicated that the secret of successful industrial

developmentrestedonacountryspecialisinginthosegoods"towhichitsresourcesaremost

appropriate" and the avoidance of others (Lewis, 1950, p. 18). In his strategy for natural

resourcebasedindustrialdevelopmentinJamaica(variantone),Lewis(1944)suggestedthree

criteria to govern the selection of industries. First, there was need to encourage those

industrieswhichprocesslocallyavailablerawmaterials.Second,thoseindustrieswhichrequire

relatively small quantities of power, capital equipmentandspecializedskills shouldbegiven

priority.Third,industrieswhicharenotassociatedwithmarked`internaleconomiesofscale',

thatis,thosewhichdonothavealarge`minimumefficientscaleofplant'orhighcostpenalty,

should be developed. In addition, those industries offering a great scope for female

employmentshouldalsobehighlyconsideredsincethehighestrateofunemploymentexisted

(andstillexists)amongyoungfemales.Lewisfurtherelaboratedonthechoiceofindustriesin

his seminal paper on industrial development in the BritishWest Indies (Lewis, 1950). His

choice of industries was based on eight indices reflecting four aspects of his industrial

developmentprogramme for theCaribbean: the labour intensityof production resource and

energyrequirements,theextentofscaleeconomiesandthedegreeofagglomerationeconomies

(which reflects his regional approach to industrial development). Using available census

information,Lewisidentifiedthe`mostfavourable'industriesforestablishmentintheCaribbean

as:garments, footwear,leatherandhosiery, textiles,chinaandglass,buildingmaterials(non

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metallic mineral products), paper products and food canning. In addition, plastics, rubber

goods, electrical switches, toys and electrical lamps could be produced along with light

engineeringindustries.Lewis alsonotedthatindustrialdevelopmentcouldthrive"byimporting

rawmaterials,processingthemandexportingthefinishedproduct"(Lewis,1950,p.35).

The promotion of labourintensive export industrialisation requires appropriate economic

policiesandinstitutionsinordertobesuccessfulinsmalldevelopingcountries.Intheareaof

economicpolicymaking,Lewis(1944,1950,1958,1972)emphasizedseveralmeasureswhich

wereneededtopromoteindustrialdevelopmentintheregion.

First, themarketingofproductsisimportantforasmalldevelopingcountryembarkingonan

exportledpath. Since the domesticmarketwould be too small to support anymeaningful

industrialisation, both traditional and nontraditional trading partnerships would have to be

forged(i.e.,strategicmarketingandalliances).WithinthewiderCaribbeancontext,therewere

(are)afew industrieswhichtheregionalmarketcouldsupportonaneconomicscale.Ifthe

planningof regional industrial projects canbe carefully undertaken, then intraregional trade

canberealised.Theregionalmarketwouldhoweverbeabletosupportasmallpercentageof

theindustriesrequiredtoachieve`fullemployment'.ThecountriesoftheCaribbeantherefore

hadtolookoutsideoftheregionformarkets.

Two possibilities were identified by way of `SouthSouth' trade and ` NorthSouth' trade.

SincethesmallCaribbeanstatesarenotremotefromeitherLatinorNorthAmerica,thesetwo

areasoffered thebestprospectsasextraregionalmarkets. AsLewishopefullynoted,if"the

West Indies could capture half of its own domestic market, plus 2% of the manufactured

imports of Latin America and of the USA, the islands' employment problems would be

completelysolved"(Lewis,1950,p.32).However,theinfluenceofthe`structuralist'schoolin

LatinAmericawouldhavemadeitdifficulttoexporttothatmarket.Prebisch(1949)wasat

thesametimemakingacaseforimportsubstitutingindustrialisationinLatinAmerica.Unless

special arrangements couldbemade, the tariff and other import restrictions associatedwith

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importsubstitutionwouldhavemadeentryintotheLatinAmericanmarketdifficult.Itisnot

clear if Lewis was aware of the Latin American approach to industrial development inhis

identificationofLatinAmericaasapossibletargetmarketforCaribbeanexports.

Therealitiesoftheinternationaleconomyinthe1950smeantthattheUSAwouldbethemain

market forWest Indianmanufactured goods. He felt thatAmerican industrialists couldbe

encouragedtoestablishoperationsintheCaribbean.Thesecompanieswouldbeabletoexport

theirmanufacturedgoodsthroughwellestablishedintrabranchtradingarrangements.Healso

felt that theworkforcewas flexible and adaptable to industrial taskswhichwereneededby

exporters. TheCaribbeanwouldbe thecentreofAmericanoffshoremanufacturingactivity

and`full'employmentwouldbeachieved.

Lewis considered four possible ways of achieving `full' employment through industrial

development (Lewis, 1944, pp. 1601, 1958, 1972). First, exchange rate policy, namely, a

devaluationofthecurrencywhichwouldreducethecostsofexportsintermsofworldprices.

Such a policy measure would enhance international price competitiveness thus expanding

foreign demand and through the foreign trade multiplier, increasing domestic income and

employment. The income and employment effects of this policy measure depend on the

relative price elasticities of demand for imports and exports (that is, the MarshallLerner

condition).Thesecondmeasureinvolvestheuseofanincomespolicy,wherebythepricelevel

wouldbereducedby"cuttingwages,salaries,profit,rentsandotherincomes.Thiswouldhave

thesameultimateeffectsasdevaluationproductionwouldexpand,importsbecut,payments

balanceandemploymentbecreated",whilemaintaininganominalexchangeratepolicyanchor

(Lewis,1944,p.160). Thethirdmeasure,whichisconsideredthebesttheoreticalandlong

termsolution,isincreasingproductivity. Thisrequiresamultidimensionalpolicyframework

since increases in productivity depend on health and nutritional facilities, education and

training, incentives, capital allocation and use and the social and political philosophyof the

peopleofthecountry.Byincreasingproductivity,especiallyintheagriculturalsector,incomes

would increase and consequently, the proportion spent onmanufactured goods would rise.

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The fourth measure relates to the direct promotion of manufacturing activities and is

consideredastheonlypracticalalternativetodeveluation.A"deliberaterestrictionofimports

and concentration on an attempt to increase production for home consumption" could be

adopted(Lewis,1944,p.161).Lewisthereforesuggestedan`importsubstitution'strategyof

industrialdevelopmentasanalternative. Nevertheless,he regarded thisapproachas`second

best'visvis `exportexpansion'viadevaluation. Thefourmeasuresmustnotbeviewedas

beingmutuallyexclusivesincethepracticalitiesofeconomicpolicymakingmakeit inevitable

toconsiderthefourmeasuressimultaneously.Thefirstthreemeasures(devaluation,incomes

policy and productivity) reflect the measures needed to increase international price

competitivenessbyreducingacountry'srelativerealunitcostsofproduction.

AnotheraspectofeconomicpolicymakinginLewis'strategy is thegrantingofincentivesto

overcomethehandicapsofsettingupanindustrialplant.Insuchpioneeringactivities,Lewis

usedthe`infantindustryargument'thatpioneersneedtohave"considerableincentives,suchas

temporarymonopolyrights,orsubsidies,orataxholidayortariffprotection"since"theinitial

costmaybeveryhigh (Lewis, 1950,p. 37). These incentives alongwith the relatively low

wagecostswereviewedascrucialtoattractingforeigninvestorstotheregion.Sincedomestic

resources were not forthcoming from the local capitalist class tomeet the required level of

industrialdevelopment, foreign investmentwasneededtobridgethegapandhencegenerate

employmentin the `mediumrun'. AsLewisnotes,thelocalcapitalistclasswas"notfamiliar

withnewmanufacturingindustries,inthesenseboththattheydonotknowthetechniquesand

alsothattheydonotknowhowmuchrisktoattachtonewventures"(Lewis,1955,p.349).

InLewis' industrial development strategyaprominent role is playedby thegovernment. In

additiontothedesignandimplementationofpolicymeasures,thegovernmentisexpectedto

establishtheappropriateinstitutionstofacilitatetheindustrialisationprocess.Lewisenvisaged

the industrial development process in theCaribbeanwith an integrated regional framework

(similar to a CARICOM single market and economy now being advocated by regional

politiciansandtechnocrats).AnessentialelementoftheLewisianstrategywastheformation

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ofacustomsunion. The firststepaftertheestablishmentofacustomsunionwouldbethe

settingupofaRegionalIndustrialDevelopmentCorporationwhichwouldundertakethe

promotionofindustrialdevelopment. Byestablishingofficesinmoreindustrialisedcountries,

the Corporation would be able to encourage foreign industrialists to establish plants in the

regionduringa tenyearperiodof"wooingandfawning". ARegionalDevelopmentBank

wouldsupplementthefinancialrequirementsoftheprogrammesinceforeigninvestorswould

be themain financiers. TheBankwouldbea `lenderof last resort'aswellassupportlocal

capitalistsinjointventuresandseparateundertakingssincetheseindustrialistswouldformthe

backbone of long term and sustainable industrialisation in the region. Both the Bank and

Corporationwouldbeinvolvedintheestablishmentofindustrialestateswhichwouldservice

the foreign and local industrialists. The government would also be responsible for the

preparation of industrial plans, finance industrial feasibility studies, estimate manpower and

energyrequirements,initiatetrainingschemesandprovidethenecessaryfacilitiesandservices

inmodernindustrialestates.

Lewis' strategy of industrial developmentwas conceived in the socioeconomicandpolitical

environments of the 1940s and 1950s. Although the domestic, regional and international

economicenvironmentshavechangedoverthepastfourtofivedecades,hisstrategyprovides

certain fundamental elements of industrial development in small developing states. These

are:

(i) theneedtofocusontheinternationalexportmarket,withanemphasison

internationalnichemarketing.Whererelevant,regionalintegrationshould

supporttheexportdriveintheformofregionalindustries(i.e.,aformof

asinglemarketandeconomy)

(ii) sincetheexportmarketisvitaltotheindustrialisationdrive,small

developingcountriesneedtopursuepolicymeasureswhichwouldmake

theirproductsinternationallycompetitive(e.g.,exchangeratepolicy,

incomespolicy,productivitymeasures)

(iii) giventheirnarrowresourcebaseand limitedbargainingpower,small

developingcountrieshavetoestablishstrategicallianceswith international

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(foreign)industrialists(e.g.,directforeigninvestment,joint ventures,franchising)

(iv) theState has an important role to play in the industrial development process via the

designandimplementationofappropriatepolicymeasuresandtheestablishmentofthe

institutional framework and social infrastructure needed to facilitate the

industrialisationprocess

(v) wheretherearehigh levelsofunemployment, industrialpolicyshouldbedesignedto

provide direct and indirect employment opportunities. These small developing

countriesshouldhoweverengageinhumanresourcedevelopmenttomatch the

technologicalchangestakingplaceinthemanufacturingsector

(vi) industrialenterprisesshouldseektoutilizelocalresourceswherepossible

andthuscreatebackwardandforwardlinkageswithothersectorsofthe

economy(agriculture,generalservices,tourism).

3 TheIndustrialisationExperienceintheCaribbean

Prior to the 1950s industrial activity in the Caribbean was limited to the processing of

agriculturalproductsforexport(e.g.,rum)andanumberofsmallscaleresidentialenterprises

geared towards local consumption (bread, biscuits, clothing, bricks, edible oils, cigarettes).

Someoftheseoperationswereencouragedbytheshortagescausedbythedisruptionsofthe

world wars. Sir Arthur Lewis'work on industrial development however helped to fashion

industrial policymaking in the 1950s. Political leaders sawLewis' strategyas avehicle for

overcoming the unemployment problem facing their countries. Rather than adopt a unified

approachtoindustrialdevelopmentinthecontextofacustomsunionassuggestedbyLewis,

Caribbeangovernmentsdecidedtoapproachindustrialdevelopmentindividually.

Areviewoftheindustrialisationexperiencein theCaribbeancanbepresentedintermsof(i)

theinstitutionalandpolicyframeworkadoptedand(ii)thecontributionof industrialexpansion

tooveralleconomicgrowth,employmentgenerationandforeignexchangeearnings.

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In termsof the institutionalandpolicy framework,all theCaribbeancountriesenacted fiscal

incentives to encourage foreign and local capitalists to establish industrial plants. Pioneer

incentive legislationwas introduced inmostCaribbeancountriesin theearly1950sandlater

refined in the late 1950s and during the 1960s and 1970s. Industrial incentives legislation

includedsuchmeasuresas:

(i) exemptionofprofitandgainsfromcorporateincometax(i.e.,thegranting

ofataxholidaywhichvariedfrom6to15yearsdependingonthedegree

of`localvalueadded'generatedbytheenterprise)

(ii) theadjustmentofincomeandpropertytaxestoprovideacceleratedcapital

depreciationallowancestofirms.Thismeasurewouldallowcompanies

toquicklywriteoffcapitalequipmentandpurchasenewtechnologically

advancedequipmentandmachinery

(iii) carryoverlossesmadeduringthetaxholidaytobesetagainstfuture profits

(iv) exemptionfrompersonalincometaxforinterestincomeobtainedfrom

debenturestockinanapprovedenterprise

(v) relieffromtradetaxesandfees

(vi) dutyfreeimportationofrawmaterials,machinery,equipmentandspare

parts

(vii) theprovisionoflowrentalfactoryspaceestablishedmainlyinindustrial

parkssupportedbygoodroads,watersupply,seweragesystems,

electricity,etc

(viii) specialtaxconcessionsforexportorientedcompanies.

EachCaribbeancountryofferedthesamebasicfiscalincentivestoindustrialists,sothatonthe

formationoftheCaribbeanCommunityandCommonMarket(CARICOM)in1972,therewas

aneedtoharmonizethoseincentivesinordertoavoidintercountryrivalry.Thisharmonizaton

wasachievedin1974.Thesefiscalincentiveshaveplayedanimportantroleinthelocationand

investment decisions of local and foreign industrialists,especially in theareasof textiles and

wearingapparel(garments),chemicals,assemblytypeoperations(electroniccomponentsand

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othermiscellaneousmanufacturingactivity).

Ithasbeenarguedthattaxincentiveslegislationislargelyredundantsincesuchinitiativeshave

limited,ifany,impactinattractingforeigninvestment[see,forexample,ChenYoung,1967].

Recentresearchindicatesthatbotheconomicvariables(exchangerate,marketsize,wagerate

differentials and tax on foreign firms income) and structural/locational variables (human

capital,physicalinfrastructure)aresignificantfactorsinattractingUSdirectinvestmenttothe

Caribbean[Lall,NormanandFeatherstone,2003].

Governmentsintheregionalsoestablishedindustrialdevelopmentcorporations(and,insome

cases, development banks) to promote andfinance industrial development. For example, in

Barbados,aDevelopmentBoardwasestablishedin1957tofacilitateindustrialdevelopment.

ThisBoardwasdivided into two institutions in 1969 theBarbadosDevelopmentBank to

providefinancialassistanceandtheBarbadosIndustrialDevelopmentCorporationtopromote

and administer the incentives to industry. Today, the Bank has been closed and the

Corporationhas been renamed theBarbados InvestmentandDevelopmentCorporation. St

Luciahasestablished aNationalDevelopmentCorporationtopromoteindustrialdevelopment.

AlthoughCaribbeangovernmentshaveactivelysought to promote industrialdevelopment in

the region, the manufacturing sector accounts for a relatively small percentage of total

domestic production (see Table 1). The available data indicate that in 1980 the share of

manufacturingoutputintotaldomesticproductionvariedfrom3.3percentinGuyanato16.6

percent inJamaica. The evidence alsoshows adecline inthecontributionofmanufacturing

production to total production over the period 19802000 in Antigua/Barbuda, Barbados,

Belize,Jamaica,Montserrat,StKitts/Nevis,StLuciaandStVincent.Thisdeclinemaybedue

to the promotion of services sector along with factors which have adversely affected

manufacturingproductioninthesecountries.

An analysis of growth and structural change in themanufacturingsectorwould indicate the

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followingfeatures:

(i) areductioninthenumberof`earlyindustries'cateringtolocaldemand

(handicraftindustries,bakeries,softdrinkfactories)

(ii) afocusonlightmanufacturing(consumerorientedgoods)withlittleorno

capitalgoodsindustries(withtheexceptionofTrinidadandTobago)

(iii) weakintersectoralandintrasectorallinkagesastheimportcontentof

manufacturedgoodsremainshigh

(iv) thegrowthofexportprocessing(enclave)companiesinJamaica,StLucia,

Barbados.Thesecompaniesareengagedinoffshoredataprocessing and in

theassemblyandmanufactureof garments,footwear,electricaland electronic

equipment,toysandothergoods(seeWillmore,1994,1995). These companies are

largelyforeignowned(especiallybyUSnationals) and take advantage of special

tradeprovisions(e.g.,CaribbeanBasin Initiative (CBI), Special Access Program

807A/9802AandtheJamaica Export Industry Encouragement Act). They are also

very`footloose'.

(v) althoughsmallestablishments(lessthan25employees)aredominantinthe

manufacturingsector,theyaccountforarelativelysmallproportionof

industrialoutput.Mediumandlargeestablishmentsaccountforarelatively

smallproportionofindustrialoutput.Mediumandlargeestablishments

accountformostoftheoutputandtendtobeexportoriented. Small

enterpriseshowevercontributetothediversityofproductioninthesector.

IntheCaribbean,therefore,threetypesofindustrieshavedevelopedsincethe1950s:

(i) importsubstitutingindustrieswhichwerefirstestablishedinthe1960s.

Theseprovidesuchgoodsasbeverages,tobacco,textiles/garments,

furniture,paperproducts.Someoftheenterprisesintheseindustrieshave

beenabletoexportsomeoftheirgoodstootherCaribbeancountries

(ii) exportprocessingindustrieswhich takeontwoforms:

(a) thosewhichprocesslocalrawmaterials handicrafts,agro

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products(soap,juices,foodproducts),

(b) thosewhichhaveenclavestatus garments,electronic

components,officemachinery,informationprocessing

(iii) heavyprocessingindustriessuchasaluminaprocessinginJamaicaand Guyana

andpetrorefiningandenergybasedindustriesinTrinidadand Tobago.

Themainreasonbehindtheindustrialdevelopmentdriveintheregionhasbeentheprovisionof

employment opportunities both directly and indirectly. Data on employment in the

manufacturingsectorintheCaribbeanaredifficulttoobtain.TheavailabledataforBarbados

indicate that in 1980, themanufacturing sector accounted for 15 percent of the employed

labour forceof 100,300persons,whilein2000, thecontributionwas10percentof125,500

persons.InJamaica,thecontributionswere11.1%and8%for1978and2000,respectively.

Willmore(1995)indicatedthatin1993,themanufacturingsectoraccountedfor12.2%oftotal

manufacturingemployment (i.e., 6000persons),withexportprocessing firmsaccountingfor

approximately 47 percent of these employed persons. Trinidad and Tobago has however

witnessedanincreaseintheproportionofpersonsemployedinthemanufacturingsectorfrom

9.5percentin1987to12.3percentin2000.Despitetheindustrialisationdrive,unemployment

still remains a serious problem in the region (see Table 2). Data for selected Caribbean

countriesshowthatinthe1990s,officialunemploymentratesweregenerallyover10percent.

Unemployment is particularly acute among young females (also identified by Lewis in the

1940s). Export processing industries (garments, electronic assembly and informatics) have

beenabletoprovideemploymentforyoungfemales,butgreaterindustrialexpansionisneeded

inordertoovercometheproblem.

Themanufacturing sectorhascontributed significantly to thedomestic exports ofCaribbean

countries. For example, manufactured exports accounted for 30 percent of total domestic

exportsinthe1990sinmostcountries(seeTable3).InBarbadosandJamaica,manufactured

exports accounted for 50percent of domestic exports in the 1990s. Manufactured exports

have however suffered from recession in the world economy and economic difficulties in

CARICOMstates.

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The principal manufactured exports from the region include rum (Bahamas, Barbados,

Guyana), chemicals (Bahamas, Barbados), clothing (Belize, St Kitts), alumina (Jamaica),

petroleumproducts(TrinidadandTobago),agroproducts(Barbados,Belize,Jamaica).The

USAisthemainexportmarketforCaribbeanproducts[seeTable4].Althoughtheproportion

ofCARICOMexportstotheUSAdeclinedfrom48.7percentin1980to35.2percentin1998,

exportsofthemanufacturingsectorhavebenefitedfromspecialtradingagreementssuchasthe

CaribbeanBasinInitiative(CBI)andthepresenceofAmericanforeigninvestorsinthesector.

Therehasbeensomenotablegrowthin intraCARICOMtrade from8.9percentin1980to

22.5percentin1998.

Thomas(1988)hasidentifiedseveralweaknessesintheindustrialisationdriveintheCaribbean

over the past three decades which have affected the realisation of the potential whichwas

envisaged.Theseweaknessesinclude:

(i) afocusinthedomesticmarketthroughimportsubstitution.Therehas beenan

antiexportbiasinthedesignandimplementationofindustrial policy (e.g., high tariff

walls),

(ii) highcapitalintensityofproductionwhichhasbeenanoutcomeofthefiscal

incentivesgrantedtoforeigninvestors(e.g.,accelerateddepreciation

allowanceanddutyfreeimportationofcapitalandequipment),

(iii) underutilisationofplantasaresultof(i)and(ii)above,

(iv) fewbackwardandforwardlinkages,especiallyinexportprocessing

industries,

(v) ahighdegreeofindustrialconcentration,thatis,oneortwofirms

dominateinthemarket,

(vi) theabsenceofregionalindustrialprogrammingtopromoteregional

industriesasenvisagedbyLewis.Thereareveryfew(56)companies

operatingonaregionalbasisinthemanufacturingsector.TheCARICOM

Enterprise Regime, designed to promote regional firms, has not taken root in the

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region,

(vii) industrialdevelopmenthasbeenassociatedwithincreasingurbanisation

especiallyinJamaica,BarbadosandTrinidadandTobago,

(viii) anunderdevelopedindigenousindustrialclasswhichcandevelopstrategic

allianceswithforeigncapitalists.Theemphasisonexportprocessingzones

hasstymied thedevelopmentofthisclassand therefore ithasnotlearntthetricksof

thetrade.

Although industrialdevelopmenthasbeenpartlyinfluencedbytheideasofSirArthurLewis,

theexperienceshowsthatsomeimportantelementsofhisstrategyhavenotbeenpursued(for

example, the pursuit ofexportled industrialisationwithin a regional integration framework).

Aninsularornationalisticapproachhasbeentakentoindustrialdevelopmentalthoughattempts

havebeenmadetoharmonize fiscal incentives. Attemptsatregionalindustrialprogramming

and a regional enterprise regime have not been successful.With themovement towards a

CARICOM single market and economy and a gradual reduction of the Common External

Tariff (CET), a greater effortmaybemade towards theestablishment of regional industries

gearedtowardstheextraregionalmarket.

4 TheFutureofIndustrialDevelopmentintheCaribbean

Overthenextdecade,themanufacturingsectorintheregionwillfacemajorchallengeswhich

can affect itsabilitytocontributemeaningfully todomesticproduction,employmentcreation

and foreign exchange generation. First, the postUruguay Round world of trading

relationships,beingoverseenbytheWorldTradeOrganisation(WTO),wouldmean:

(i) tariffreductionsforarangeofmanufacturedgoods(woodandwood

products,metals,textiles,clothing,etc)

(ii) thephasingoutofthebilaterallynegotiatedimportquotasontextilesand

clothingundertheMultifiberArrangement(MFA)whichcameinto

existencein1974.DuringthephasingoutoftheMFA,goodssubjectto

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MFAquotaswillgraduallybeintegratedintoGATT(theGeneral

AgreementonTariffsandTrade)

(iii) theeliminationofsuchnontariffbarriersasvoluntaryexportrestraints (VERs)

agreementbetweenanimportingandanexportingcountry whereby the latter

agreesvoluntarilytorestrictexportstotheformer and orderly marketing

arrangements(OMAs) whicharesimilartoVERswith theprovisionthatifthe

agreedlimitisexceededanexplicitimportquota can be imposed automatically

bytheimportingcountry

(iv) prohibitionofexportsubsidies

(v) newarrangements for traderelated investmentmeasures (TRIMs) and traderelated

intellectualpropertyrights(TRIPs)

(vi) ageneralagreementontradeinservices(GATS)whichcanimpactonindustrialpolicy

[seeBora,LloydandPangestu,2000].

Thesemeasureswould intensify thedegreeof trade liberalisationwithin theworld economy

andhastentheneedfornewindustrialpolicies.

Second, the formation of the North American Free Trade Area (NAFTA) between USA,

Canada andMexico and its possible extension to the Free Trade of theAmericas (FTAA)

incorporatingotherLatinAmericanandCaribbeancountrieswouldmeangreatercompetition

in theNorthAmericanmarket forCaribbeanproducts. Inasmallscalequalitativesurveyof

manufacturing firms in selected Eastern Caribbean countries,Marshall andWilliams (2002)

foundthatonlyafewfirmshadthecapabilitytocompetewithinaFTAAarrangementandto

achieve world classmanufacturing standards. Themain areas inwhich firmshadastrong

potentialtobeworldclasswerefoodandbeverage(thatis,abrewery),electronicsandpaper

products.Thesefirmshavelinkswithforeigninvestors.

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19

Third,thegradualreductionoftheCommonExternalTariff(CET)withinCARICOMwould

enhanceinternationalcompetitivenessandforcerationalisationofproductionstructures.

Fourth, themovementtowardsaCARICOMSingleMarketandEconomy(CSME)withthe

free movement of capital and labour, the removal of nontariff barriers, the creation of a

common currency and the harmonization of economic policies would also lead to a

rationalisationofregionalproductionandenhanceinternationalcompetitiveness.Itisexpected

that theCSMEwould form the platform onwhich Caribbean enterpriseswouldbe able to

achieveeconomiesofscaleandscopeandthereforereachtheminimumefficientsizeneededto

lower theunitcostsofproduction. The revisedTreatyofChaguaramas,whichgovernsthat

CSMEhasprovisionsforthepromotionofindustrialdevelopmentintheregion.

Fifth, the globalisation of production and new developments in technology (computer,

information and materials) would bring greater flexibility in the production process as

computeraidmanufacturing(CAM)andjustintime(JIT)systemsbecomemoreprominent.

Thesechangesin the regionaland internationalenvironmentsemphasizetheneedtoincrease

productivity and improve international competitiveness. Caribbean countriesmust adjust to

meet the challenges and opportunities created by the new economic environment. Many

commentatorshave looked toEastAsia toidentifythefactorsforsuccessfulindustrialisation

and economic growth. For example, a World Bank study of the socalled `East Asian

Miracle' "maintains that East Asian economies thrived because governments used a

combinationoffundamentalandinterventionistpoliciesto(1) accumulatephysicalandhuman

capital(2)allocatethiscapitaltohighlyproductiveinvestmentsand(3)acquireandmaster

technologyandachieverapidproductivitygrowth"(Page,1994,p.3).Manyofthemeasures

usedinthesecountriescanbefoundintheworkofSirArthurLewis,namely,thebuildingof

humancapital,theneedtoincreasesavingsanddomesticinvestment,governmentintervention,

the use of foreign technology, the encouragement of exportand thepromotionof domestic

entrepreneurship(seeTable6).

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Recentstudiesonproductivityandcompetitivenessof theJamaicanmanufacturingsectorre

emphasisedthemainelementsneededtofacetheneweconomicenvironment[seeHarris1995,

Downes,2003].Harrisstudycalledforapolicymatrixwhichcontainsmeasuresto:promote

specificinfrastructuralinvestmentswhichreducethecostsofproduction,developinformation

technology asakeystrategysectoralactivity, reorienttechnologyasakeystrategysectoral

activityreorientthesystemofincentivestoboostexportvalueandoverallproductionandto

target specific investment projects in such areas as agroprocessing, industrial minerals,

mineralsandservices.AsMarshallandWilliams(2002)haveargued,thereisneedtoanchor

the servicessector orienteddevelopmentstrategy adoptedby severalCaribbeancountries to

themanufacturingsector. ThismeansthatCaribbeancountriesmustseektodevelopanew

manufacturing strategywhichwould include theuse ofmodern technology, skilledpersons

and a focus on world class standards and greater sectoral linkages. Downes (2003) has

argued that in the case of Jamaica, greater emphasis should beplaced on human resources

development, (education and training), productivitymanagement, social dialogue andpublic

sector reform (to reduce the bureaucratic red tape) in order to boost productivity and

competitivenessintheeconomy[seealsoWint,2003].

There is evidence of an evolving new industrial thrust in the region [see Farrell, 2003

CARICOM,2000]. SeveralCaribbeanenterprisesaremergingoramalgamating inorderto

achieve the critical size required for the extraregional market. These are becoming Pan

Caribbean firms, very much along the lines suggested by Arthur Lewis: Grace Kennedy

(Jamaica), Neal and Massy, Bermudez, TCL (Trinidad and Tobago). These regional

companies are diversifying into servicesoriented activities as part of theirmarket extension

diversification strategies. Furthermore, several of these companies are crosslisted in the

regionsstockexchangesthusgainingaccesstoaregionalcapitalmarket.

Althoughtheeconomicenvironmenthaschangedsincethe1950s,severalofthefundamental

elements of the industrial development strategy for small developing countries suggestedby

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Lewisarestillrelevant.Inmanyrespects,thedrivetowardsaCSMEandtheformationofthe

FTAAwillhighlightseveraloftheelementsofthestrategywhichhavenotbeenimplemented

byCaribbeangovernmentsoverthepastfiftyyears.

There isnodoubtthatSirArthurLewis'workhashadapowerfuleffectoneconomicpolicy

makingintheCaribbean.Areassessmentofhisworkonindustrialstrategyandpolicywould

indicatethatmanyofthefundamentalsarestillrelevantintoday'seconomicenvironmentand

thattheframeworkshowsakeenunderstandingoftheanalyticalissuesfacingsmalldeveloping

countries. Theseelementsarecriticaltothediscussionintheinternationalarenaontheneed

forspecialanddifferentialtreatmentforsmalldevelopingcountries.

**AnearlierversionofthispaperwaspresentedattheinauguralSirArthurLewislectureheld

attheSirArthurLewisCommunityCollege,Castries,StLuciain1996.Iwouldliketothank

MichaelHoward,DelisleWorrellandMarkFigueroafortheirusefulcommentsontheearlier

version.Iamfullyresponsibleforthecontentsofthispaper.

Table1

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TheContributionofManufacturingtoGrossDomesticProduct

1980,1985,1990,1995,2000

(%)

Country 1980 1985 1990 1995 2000

Anguilla n.a. 1.1 0.7 0.8 1.4Antigua/Barbuda 5.3 4.3 3.4 2.3 2.3Bahamas n.a. n.a. 3.2 3.2 n.a.Barbados 12.5 10.6 8.0 6.7 6.2Belize 16.1 16.7 15.7 13.7 13.2Dominica 4.8 6.4 7.1 7.2 8.7Grenada 3.9 5.1 6.5 7.4 7.6Guyana 3.3 9.8 5.2 3.8 2.6Jamaica 16.6 20.0 19.5 17.5 13.7Montserrat 6.0 6.0 1.0 3.2 0.8StKitts/Nevis 15.2 12.1 12.8 10.7 10.4StLucia 8.4 8.5 8.1 6.9 5.1StVincent 10.7 11.6 8.5 8.4 6.0Trinidad/Tobago 6.9 7.3 8.6 8.1 8.0

Source:CaribbeanDevelopmentBank: SocialandEconomic Indicators,variousissuesECCBBankofGuyana,StatisticalBulletin,StatisticalBureauCentralStatisticalOfficeandCentralBankofTrinidadandTobago

Table2

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EstimatesofUnemploymentintheCaribbean19902002(%)

Country 1990 1992 1994 1996 19981 2000Anguilla n.a. 7.2 n.a. n.a. n.a. n.a.Antigua/Barbuda 6.8 7.8 6.7 7.0 7.8 n.a.Bahamas n.a. 14.8 13.3 n.a. n.a. n.a.Barbados 15.0 23.0 21.9 15.6 11.8 9.2Belize n.a. n.a. 11.1 13.8 14.3 11.5Dominica n.a. n.a. n.a. n.a. n.a. n.a.Grenada n.a. n.a. 29.1 17.5 n.a. n.a.Guyana n.a. 11.7 n.a. n.a. n.a. n.a.Jamaica 15.3 15.7 15.3 16.0 n.a. 15.5Montserrat 1.0 9.0 8.3 n.a. n.a. n.a.StKitts/Nevis n.a. n.a. 4.5 n.a. n.a. n.a.StLucia n.a. n.a. n.a. n.a. n.a. 16.5StVincent n.a. n.a. n.a. n.a. n.a. n.a.Trinidad/Tobago

faauto20.019.6 18.4 16.2 14.2 12.8

Source:CDB,SocialandEconomicIndicators,1996CDB,AnnualReport2001CaribbeanCommunitySecretariat,TradeandInvestmentReport,2000

Table3ManufacturingExportsasaPercentageofMerchandisingExports,

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19702000

Country 1970 1975 1980 1985 1990 1995 2000

Anguilla n.a. n.a. n.a. n.a. n.a. n.a. n.a.Antigua/Barbuda n.a. n.a. n.a. n.a. n.a. n.a. n.a.Bahamas n.a. n.a. n.a. n.a. n.a. n.a. 43Barbados n.a. n.a. n.a. n.a. 43 59 52Belize n.a. 18 18 25 15 12 11Dominica n.a. n.a. 54 35 32 47 56Grenada n.a. n.a. 8 5 20 15 65Guyana 3 3 n.a. n.a. n.a. n.a. 16Jamaica n.a. 54 63 53 69 71 73Montserrat n.a. n.a. n.a. n.a. n.a. n.a. n.a.StKitts/Nevis n.a. n.a. n.a. n.a. n.a. 41 73StLucia n.a. 23 42 26 28 32 20StVincent n.a. n.a. 14 n.a. n.a. 14 13Trinidad/Tobago 13 6 5 18 27 26 29Source:WorldDevelopmentIndicatorsDatabase

Table4

DistributionofCARICOMsTotalExportsbyPrincipalDestinations

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19801998(%)

DestinationofExports

1980 1985 1990 1995 1996 1997 1998

USA 48.7 47.2 40.7 34.1 38.5 35.3 35.2EuropeanUnion 16.5 17.8 20.6 20.9 18.0 18.1 16.9CARICOM 8.9 12.8 12.1 16.5 18.3 19 22.5LAIA1 1.9 2.1 2.8 5.4 5.2 4.6 3.7SelectedAsianCountries

0.4 1.3 1.2 1.5 0.9 1 0.6

RestoftheWorld 23.6 18.8 22.5 21.6 19.1 22 21.1Source:CARICOMSecretariat.2000.CaribbeanTradeandInvestmentReportandaQuickReferenceto

someSurveyData,19801996Notes: 1IAIA:LatinAmericanIntegrationAssociation

Table5TrendsinAverageTariffRatesforCaribbeanCountries,

19801999

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Economy 1980 1985 1990 1995 1999

Antigua/Barbuda n.a. 12.0(86) 15.0(89) 12.0 9.0(98)Bahamas 29.8 32.3(87) n.a. 32.0(96) n.a.Barbados n.a 17.3(86) 22.0 17.0 13.6Belize n.a 17.3(86) 20.0 17.0 9.2(98)Dominica n.a. 31.9(87) 28.0 15.0 n.a.Grenada n.a. 22.8(87) 16.0(89) 10.8 7.6Guyana n.a. 17.4 20.0(89) 17.0 n.a.Jamaica 16.0(82) 17.0 20.3(91) n.a. 8.7Montserrat n.a. n.a. n.a. n.a. n.a.StKitts/Nevis n.a. 12.9(87) n.a. n.a. 92(98)StLucia n.a. 12.0(87) n.a. n.a. 9.7(98)StVincent n.a. 17.3(86) n.a. n.a. 9.2(98)TrinidadandTobago n.a. n.a. 18.6(91) 18.7 9.2(98)

Source:TheWorldBank2002:Development,TradeandtheWTO:AHandbook

Table 6

Policy Measures Contributing to the Success of East Asian Economies

1 ACCUMULATING CAPITAL

a. Building Human Capital: public spending on basic education (primary and secondary) limited public funding for postsecondary education in science and

technology

b. Creating Effective and Secure Financial Systems: (i) Increasing Savings

positive real interest rates to increase savings

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strong prudential regulation, good supervision and institutional reforms

stiff taxes on luxury consumption

(ii) Increasing Investments create the social infrastructure to complement private investment low price of capital goods by maintaining low tariffs on imported

capital goods (iii) use mild financial repression (deposits and lending rates kept

below marketclearing levels)

2 ALLOCATING CAPITAL

a. flexible labour markets (little minimum wage legislation; productivity driven wage increases)

b. government intervention to control interest rates and to direct credit to priority activities (e.g., shipbuilding, chemicals, automobile industries in Japan

and Korea)

3 PROMOTING PRODUCTIVITY

a. Absorbing Foreign Technology welcoming technology transfer in the form of licences, capital goods

imports and foreign training

b. Promoting Specific Industries pursuit of sector specific industrial policies (including import protection

and subsidies for capital and other imported inputs)

c. Encouraging Export Strategies halting of import substitution/liberalisation and heavy promotion of

exports institutional support for exporters liberalized exchange rates and currency devaluations to support export

growth manufactured export growth encouraged

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technological upgrading

4 OTHER INNOVATIVE FEATURES

a. political leadership adopted principle of `shared economic growth' (i.e., growth with equity) land reforms, housing programmes, cooperatives, etc

b. private investment was the main engine of growth responsible macroeconomic management, legal and regulatory structure hospitable to private investment; business government deliberation councils' stable and competitive policies.

Source : Page (1995)

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