ArthurLewisandIndustrialDevelopment intheCaribbean:AnAssessment*

By

AndrewSDownes
ProfessorofEconomicsandUniversityDirector SirArthurLewisInstituteofSocialandEconomicStudies UniversityoftheWestIndies,CaveHillCampus POBox64,StMichael,BARBADOS Telno:(246)4174476 Faxno:(246)4247291 Email:asdownes@uwichill.edu.bb

June2004

Presented at a conference on The Lewis Model after 50 years: Assessing Sir Arthur LewisContributiontoDevelopmentEconomicsandPolicy,UniversityofManchester, July67,2004.

CONTENTS

Page 1 2 3 4 Introduction Lewis'StrategyofIndustrialDevelopment TheIndustrialisationExperienceintheCaribbean TheFutureofIndustrialDevelopmentintheCaribbean Tables References 1 4 12 18 23 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 operationswhich wouldwiden 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 system which supported the interests of the agro commercial elitedidnotincorporate measures tofoster industrial development in theregion. The crux of the argument against industrial development in the region was 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)under a preferential trading arrangementwiththeUnited 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 was a growing manufacturingsector intheearly1900s producingprimarilyfor thedomestic market(matches,bakingproducts,aerateddrinks,bricks).Figueroa(1992)furthernotedthat pioneerlawstopromoteindustrialdevelopmentinJamaicawereenactedinthefirstdecadeof
th the20 century.ItwasSirArthurLewis,however,whofirstformulatedacoherentstrategy

for industrial development in the Caribbean. In the aftermath of the uprisings in the 1930s, Lewis(1938),writingonthebirthoftheworkers'movementintheCaribbean,advocatedthe need for industrial development based on the utilisation of local raw materials (e.g., sugar refining,chocolatemaking,copraanddairyproducts).Hispaperentitiled"Industrialisationof the British West Indies", published in 1950, provided a fully articulated framework for capitalistindustrialdevelopmentin the small statesof the Caribbean(Lewis,1950).Priorto this seminal paper, Lewis had outlined aspects of a strategy for industrial development in Jamaica inhiscritiqueof the Benhameconomic planforJamaicaandreviewedtheindustrial 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.

Lewis'StrategyofIndustrialDevelopment

Lewis'writingsonindustrialdevelopmentintheCaribbeanoverthe19381950periodsuggest an`exportledlabourintensivestrategyofindustrialdevelopment'.Therearetwovariantsof this general strategy(seeDownes, 1985,pp.6071). Thefirst variant is the outcome ofhis critique of the Benham economic plan for Jamaica and is based on the use of local natural resources that is, `exportled natural resourcebased industrialisation' (Lewis, 1944). The secondvariantisbasedontheexperienceofPuertoRicoandplacesgreatemphasisonforeign investment and the grantingof fiscal incentives(Lewis, 1950). Thisvarianthasbeencoined `exportledindustrialisationbyinvitation'(Best,1976).

Lewis'strategyisbasedonasetofpremises: (i) (ii) (iii) (iv) (v) surpluslabour marketsize labourcost financialinvestment riskaversion

Thesurpluslabourpremiseisprobablythemostimportantone.Lewisarguedthatthecasefor industrial development in the Caribbean restedon the overpopulationexisting in the region. Thepopulationtolandratiowastoohighforagriculturetosupportthegrowthinthelabour force.Giventhehighlevelsofunemploymentandunderemployment,especiallyinBarbados, Jamaica andtheWindward andLeewardislands,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 requiring marketing 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 unemployment problem. Foreigninvestmentwould berequired to provide accessto 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 thatdomesticdemand formanufactured goodswould be too lowto support domestic production on an economic scale. The low level of per capita income and the diversity of demand would not permit largescale economic production for the domestic or regional markets. Lewis was aware of the potential difficulties which `small, newly industrializing' countries would face in their attempt to compete in established markets 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 successful atexporting a range ofproducts. 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 equipment and specialized skills should be given priority.Third,industrieswhicharenotassociatedwithmarked`internaleconomiesofscale', thatis,thosewhichdonothavealarge`minimumefficientscaleofplant'orhighcostpenalty, should be developed. In addition, those industries offering a great scope for female employmentshould also behighlyconsideredsincethehighestrateofunemploymentexisted (andstillexists)amongyoungfemales.Lewisfurtherelaboratedonthechoiceofindustriesin his seminal paper on industrial development in the British West Indies (Lewis, 1950). His choice of industries was based on eight indices reflecting four aspects of his industrial development programme for the Caribbean: the labour intensity of production resource and energyrequirements,theextentofscaleeconomiesandthedegreeofagglomerationeconomies (which reflects his regional approach to industrial development). Using available census information,Lewisidentifiedthe`mostfavourable'industriesforestablishmentintheCaribbean as:garments, footwear,leather andhosiery, 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 exportled path. Since the domestic market would be too small to support any meaningful industrialisation, both traditional and nontraditional trading partnerships would have to be forged(i.e.,strategicmarketingandalliances).WithinthewiderCaribbeancontext,therewere (are)afew industries whichtheregional market couldsupportonaneconomicscale.Ifthe planning of regional industrial projects can be 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 areas offered the bestprospectsasextraregionalmarkets.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 could be made, the tariff and other import restrictions associated with
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importsubstitutionwouldhavemadeentryintotheLatinAmericanmarketdifficult.Itisnot clear if Lewis was aware of the Latin American approach to industrial development in his identificationofLatinAmericaasapossibletargetmarketforCaribbeanexports.

Therealitiesoftheinternationaleconomyinthe1950smeantthattheUSAwouldbethemain market for West Indian manufactured goods. He felt that American industrialists could be encouragedtoestablishoperationsintheCaribbean.Thesecompanieswouldbeabletoexport theirmanufacturedgoodsthroughwellestablishedintrabranchtradingarrangements.Healso felt that the workforce was flexible and adaptable to industrial tasks which were needed by exporters. The Caribbeanwouldbe the centreof Americanoffshoremanufacturing activity 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 philosophy of the peopleofthecountry.Byincreasingproductivity,especiallyintheagriculturalsector,incomes would increase and consequently, the proportion spent on manufactured 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 industrial development as an alternative. Nevertheless,he regarded thisapproachas`second best' visvis `export expansion' via devaluation. Thefour measures must not beviewedas being mutuallyexclusivesincethepracticalitiesofeconomicpolicymakingmakeitinevitable toconsiderthefourmeasuressimultaneously.Thefirstthreemeasures(devaluation,incomes policy and productivity) reflect the measures needed to increase international price competitivenessbyreducingacountry'srelativerealunitcostsofproduction.

Anotheraspect ofeconomic policymakingin Lewis'strategy is the granting ofincentivesto overcomethehandicapsofsettingupanindustrialplant.Insuchpioneeringactivities,Lewis usedthe`infantindustryargument'thatpioneersneedtohave"considerableincentives,suchas temporarymonopolyrights,orsubsidies,orataxholidayortariffprotection"since"theinitial cost may be very high (Lewis, 1950, p. 37). These incentives along with the relatively low wagecostswereviewedascrucialtoattractingforeigninvestorstotheregion.Sincedomestic resources were not forthcoming from the local capitalist class to meet the required level of industrial development, foreign investment wasneededto bridgethegap and hencegenerate employmentin the `mediumrun'. AsLewis notes,thelocalcapitalistclasswas"notfamiliar withnewmanufacturingindustries,inthesenseboththattheydonotknowthetechniquesand alsothattheydonotknowhowmuchrisktoattachtonewventures"(Lewis,1955,p.349).

In Lewis' industrial development strategy a prominent role is played by the government. In additiontothedesignandimplementationofpolicymeasures,thegovernmentisexpectedto establishtheappropriateinstitutionstofacilitatetheindustrialisationprocess.Lewisenvisaged the industrial development process in the Caribbean with an integrated regional framework (similar to a CARICOM single market and economy now being advocated by regional politiciansandtechnocrats).AnessentialelementoftheLewisianstrategywastheformation
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of acustoms union. The firststep aftertheestablishmentofacustomsunionwouldbethe settingup of aRegional Industrial DevelopmentCorporationwhich wouldundertakethe promotionofindustrialdevelopment.Byestablishingofficesinmoreindustrialisedcountries, the Corporation would be able to encourage foreign industrialists to establish plants in the regionduring a tenyearperiodof "wooingand fawning". ARegionalDevelopmentBank wouldsupplementthefinancialrequirementsoftheprogrammesinceforeigninvestorswould be the main financiers. The Bank would be a `lender of last resort'as wellas supportlocal capitalistsinjointventuresandseparateundertakingssincetheseindustrialistswouldformthe backbone of long term and sustainable industrialisation in the region. Both the Bank and Corporationwould beinvolvedintheestablishmentofindustrialestateswhichwouldservice 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 development was conceived in the socioeconomic and political 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
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international

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(foreign)industrialists(e.g.,directforeigninvestment,joint (iv)

ventures,franchising)

the State 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 levels ofunemployment, industrial policyshould be designedto provide direct and indirect employment opportunities. These small developing countriesshouldhoweverengageinhumanresourcedevelopmenttomatch technologicalchangestakingplaceinthemanufacturingsector the

(vi)

industrialenterprisesshouldseektoutilizelocalresourceswherepossible andthuscreatebackwardandforwardlinkageswithothersectorsofthe economy(agriculture,generalservices,tourism).

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 policy making in the 1950s. Political leaders saw Lewis' strategy as a vehicle for overcoming the unemployment problem facing their countries. Rather than adopt a unified approachtoindustrialdevelopmentinthecontextofacustomsunionassuggestedbyLewis, Caribbeangovernmentsdecidedtoapproachindustrialdevelopmentindividually.

A review oftheindustrialisation experiencein the Caribbeancanbepresentedintermsof(i) theinstitutionalandpolicyframeworkadoptedand(ii)thecontributionof industrialexpansion tooveralleconomicgrowth,employmentgenerationandforeignexchangeearnings.

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In terms of the institutional and policy framework, all the Caribbean countries enacted fiscal incentives to encourage foreign and local capitalists to establish industrial plants. Pioneer incentive legislation was introduced in most Caribbeancountriesin the early 1950s andlater 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) (iv) carryoverlossesmadeduringthetaxholidaytobesetagainstfuture exemptionfrompersonalincometaxforinterestincomeobtainedfrom debenturestockinanapprovedenterprise (v) (vi) relieffromtradetaxesandfees dutyfreeimportationofrawmaterials,machinery,equipmentandspare parts (vii) theprovisionoflowrentalfactoryspaceestablishedmainlyinindustrial parkssupportedbygoodroads,watersupply,seweragesystems, electricity,etc (viii) specialtaxconcessionsforexportorientedcompanies. profits

EachCaribbeancountryofferedthesamebasicfiscalincentivestoindustrialists,sothatonthe formationoftheCaribbeanCommunityandCommonMarket(CARICOM)in1972,therewas aneedtoharmonizethoseincentivesinordertoavoidintercountryrivalry.Thisharmonizaton wasachievedin1974.Thesefiscalincentiveshaveplayedanimportantroleinthelocationand investment decisions of local and foreign industrialists, especially in the areas of textiles and wearing apparel(garments),chemicals, assemblytype operations(electroniccomponents and
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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 and finance industrial development. For example, in Barbados,aDevelopmentBoard wasestablishedin1957tofacilitateindustrialdevelopment. This Board was divided into two institutions in 1969 the Barbados Development Bank to providefinancialassistanceandtheBarbadosIndustrialDevelopmentCorporationtopromote and administer the incentives to industry. Today, the Bank has been closed and the Corporation has been renamed the Barbados Investment and Development Corporation. St Luciahasestablished aNationalDevelopmentCorporationtopromoteindustrialdevelopment.

Although Caribbean governments have actively sought to promote industrial development 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 in Jamaica. The evidence also shows a decline inthecontribution ofmanufacturing 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 the manufacturing sector would 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 theassemblyandmanufactureof garments,footwear,electricaland equipment,toysandothergoods(seeWillmore,1994,1995). largelyforeignowned(especiallybyUSnationals) tradeprovisions(e.g.,CaribbeanBasin 807A/9802AandtheJamaica very`footloose'. (v) althoughsmallestablishments(lessthan25employees)aredominantinthe manufacturingsector,theyaccountforarelativelysmallproportionof industrialoutput.Mediumandlargeestablishmentsaccountforarelatively smallproportionofindustrialoutput.Mediumandlargeestablishments accountformostoftheoutputandtendtobeexportoriented. Small enterpriseshowevercontributetothediversityofproductioninthesector. and in electronic These companies are and take advantage of special

Initiative (CBI), Special Access Program Export Industry Encouragement Act). They are also

IntheCaribbean,therefore,threetypesofindustrieshavedevelopedsincethe1950s: (i) importsubstitutingindustrieswhichwerefirstestablishedinthe1960s. Theseprovidesuchgoodsasbeverages,tobacco,textiles/garments, furniture,paperproducts.Someoftheenterprisesintheseindustrieshave beenabletoexportsomeoftheirgoodstootherCaribbeancountries (ii) exportprocessingindustrieswhich takeontwoforms: (a)
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thosewhichprocesslocalrawmaterials handicrafts,agro 14

products(soap,juices,foodproducts), (b) thosewhichhaveenclavestatus garments,electronic

components,officemachinery,informationprocessing (iii) heavyprocessingindustriessuchasaluminaprocessinginJamaicaand Tobago. Guyana

andpetrorefiningandenergybasedindustriesinTrinidadand

Themainreasonbehindtheindustrialdevelopmentdriveintheregionhasbeentheprovisionof employment opportunities both directly and indirectly. Data on employment in the manufacturingsectorintheCaribbeanaredifficulttoobtain.TheavailabledataforBarbados indicate that in 1980, the manufacturing sector accounted for 15 percent of the employed labour force of 100,300 persons, whilein 2000, the contribution was 10 percent of125,500 persons.InJamaica,thecontributionswere11.1%and8%for1978and2000,respectively. Willmore(1995)indicatedthatin1993,themanufacturingsectoraccountedfor12.2%oftotal manufacturing employment (i.e., 6000 persons), with export processing 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.

The manufacturing sector has contributed significantly to the domestic exports of Caribbean countries. For example, manufactured exports accounted for 30 percent of total domestic exportsinthe1990sinmostcountries(seeTable3).InBarbadosandJamaica,manufactured exports accounted for 50 percent 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. There has been some notablegrowthin intraCARICOM trade from 8.9 percentin1980to 22.5percentin1998.

Thomas(1988)hasidentifiedseveralweaknessesintheindustrialisationdriveintheCaribbean over the past three decades which have affected the realisation of the potential which was envisaged.Theseweaknessesinclude: (i) afocusinthedomesticmarketthroughimportsubstitution.Therehas been an

antiexportbiasinthedesignandimplementationofindustrial walls), (ii)

policy (e.g., high tariff

highcapitalintensityofproductionwhichhasbeenanoutcomeofthefiscal incentivesgrantedtoforeigninvestors(e.g.,accelerateddepreciation allowanceanddutyfreeimportationofcapitalandequipment),

(iii) (iv)

underutilisationofplantasaresultof(i)and(ii)above, 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 has stymied the development ofthis classand therefore it has notlearntthetricksof thetrade.

Although industrial development hasbeenpartlyinfluencedbytheideasofSirArthurLewis, theexperienceshowsthatsomeimportantelementsofhisstrategyhavenotbeenpursued(for example, the pursuit of exportled industrialisation within a regional integration framework). Aninsularornationalisticapproachhasbeentakentoindustrialdevelopmentalthoughattempts havebeenmadeto harmonize fiscal incentives. Attempts atregionalindustrialprogramming and a regional enterprise regime have not been successful. With the movement towards a CARICOM single market and economy and a gradual reduction of the Common External Tariff (CET), a greater effort may be made towards the establishment of regional industries gearedtowardstheextraregionalmarket.

TheFutureofIndustrialDevelopmentintheCaribbean

Overthenextdecade,themanufacturingsectorintheregionwillfacemajorchallengeswhich can affect its abilityto contributemeaningfully to domestic production, 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 whereby orderly the (VERs) latter

agreementbetweenanimportingandanexportingcountry agreesvoluntarilytorestrictexportstotheformer and arrangements(OMAs) whicharesimilartoVERswith agreedlimitisexceededanexplicitimportquota bytheimportingcountry (iv) (v) prohibitionofexportsubsidies

marketing

theprovisionthatifthe can be imposed automatically

new arrangements for traderelated investment measures (TRIMs) and traderelated intellectualpropertyrights(TRIPs)

(vi)

ageneralagreementontradeinservices(GATS)whichcanimpactonindustrialpolicy [seeBora,LloydandPangestu,2000].

These measures would intensify the degree of trade liberalisation within the world economy andhastentheneedfornewindustrialpolicies.

Second, the formation of the North American Free Trade Area (NAFTA) between USA, Canada and Mexico and its possible extension to the Free Trade of the Americas (FTAA) incorporatingotherLatinAmericanandCaribbeancountrieswouldmeangreatercompetition in the NorthAmerican market for Caribbeanproducts. Inasmallscalequalitativesurveyof manufacturing firms in selected Eastern Caribbean countries, Marshall and Williams (2002) foundthatonlyafewfirmshadthecapabilitytocompetewithinaFTAAarrangementandto achieve world class manufacturing standards. The main areas in which firms had a strong potentialtobeworldclasswerefoodandbeverage(thatis,abrewery),electronicsandpaper products.Thesefirmshavelinkswithforeigninvestors.

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Third,thegradualreductionoftheCommonExternalTariff(CET)withinCARICOMwould enhanceinternationalcompetitivenessandforcerationalisationofproductionstructures.

Fourth, the movementtowardsaCARICOMSingleMarketandEconomy(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 the CSME would form the platform on which Caribbean enterprises would be able to achieveeconomiesofscaleandscopeandthereforereachtheminimumefficientsizeneededto lower the unitcostsof production. The revised TreatyofChaguaramas,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.

These changesin the regionaland internationalenvironments emphasizetheneedtoincrease productivity and improve international competitiveness. Caribbean countries must 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 export and the promotion of domestic entrepreneurship(seeTable6).
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19

Recentstudiesonproductivity and competitivenessof theJamaicanmanufacturingsectorre emphasisedthemainelementsneededtofacetheneweconomicenvironment[seeHarris1995, Downes,2003].Harrisstudycalledforapolicymatrixwhichcontainsmeasuresto:promote specificinfrastructuralinvestmentswhichreducethecostsofproduction,developinformation technology asakeystrategy sectoralactivity, reorienttechnologyas a keystrategy sectoral activityreorientthesystemofincentivestoboostexportvalueandoverallproductionandto target specific investment projects in such areas as agroprocessing, industrial minerals, mineralsandservices.AsMarshallandWilliams(2002)haveargued,thereisneedtoanchor the servicessector oriented development strategy adopted by several Caribbean countries to the manufacturingsector.ThismeansthatCaribbeancountriesmustseektodevelopanew manufacturing strategy which would include the use of modern technology, skilled persons and a focus on world class standards and greater sectoral linkages. Downes (2003) has argued that in the case of Jamaica, greater emphasis should be placed on human resources development, (education and training), productivity management, social dialogue and public 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]. Several Caribbean enterprises are merging or amalgamating 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 their market 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 suggested by
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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 Anguilla Antigua/Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica Montserrat StKitts/Nevis StLucia StVincent Trinidad/Tobago 1980 n.a. 5.3 n.a. 12.5 16.1 4.8 3.9 3.3 16.6 6.0 15.2 8.4 10.7 6.9 1985 1.1 4.3 n.a. 10.6 16.7 6.4 5.1 9.8 20.0 6.0 12.1 8.5 11.6 7.3 1990 0.7 3.4 3.2 8.0 15.7 7.1 6.5 5.2 19.5 1.0 12.8 8.1 8.5 8.6 1995 0.8 2.3 3.2 6.7 13.7 7.2 7.4 3.8 17.5 3.2 10.7 6.9 8.4 8.1 2000 1.4 2.3 n.a. 6.2 13.2 8.7 7.6 2.6 13.7 0.8 10.4 5.1 6.0 8.0

Source:CaribbeanDevelopmentBank: SocialandEconomic Indicators,variousissues ECCB BankofGuyana,StatisticalBulletin,StatisticalBureau CentralStatisticalOfficeandCentralBankofTrinidadandTobago

Table2
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EstimatesofUnemploymentintheCaribbean19902002 (%) Country Anguilla Antigua/Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica Montserrat StKitts/Nevis StLucia StVincent Trinidad/Tobago 1990 n.a. 6.8 n.a. 15.0 n.a. n.a. n.a. n.a. 15.3 1.0 n.a. n.a. n.a. faauto20.0
Source:CDB,SocialandEconomicIndicators,1996 CDB,AnnualReport2001 CaribbeanCommunitySecretariat,TradeandInvestmentReport,2000

1992 7.2 7.8 14.8 23.0 n.a. n.a. n.a. 11.7 15.7 9.0 n.a. n.a. n.a. 19.6

1994 n.a. 6.7 13.3 21.9 11.1 n.a. 29.1 n.a. 15.3 8.3 4.5 n.a. n.a. 18.4

1996 n.a. 7.0 n.a. 15.6 13.8 n.a. 17.5 n.a. 16.0 n.a. n.a. n.a. n.a. 16.2

1 1998 n.a. 7.8 n.a. 11.8 14.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 14.2

2000 n.a. n.a. n.a. 9.2 11.5 n.a. n.a. n.a. 15.5 n.a. n.a. 16.5 n.a. 12.8

Table3 ManufacturingExportsasaPercentageofMerchandisingExports,
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19702000 Country Anguilla Antigua/Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica Montserrat StKitts/Nevis StLucia StVincent Trinidad/Tobago 1970 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3 n.a. n.a. n.a. n.a. n.a. 13 1975 n.a. n.a. n.a. n.a. 18 n.a. n.a. 3 54 n.a. n.a. 23 n.a. 6 1980 n.a. n.a. n.a. n.a. 18 54 8 n.a. 63 n.a. n.a. 42 14 5 1985 n.a. n.a. n.a. n.a. 25 35 5 n.a. 53 n.a. n.a. 26 n.a. 18 1990 n.a. n.a. n.a. 43 15 32 20 n.a. 69 n.a. n.a. 28 n.a. 27 1995 n.a. n.a. n.a. 59 12 47 15 n.a. 71 n.a. 41 32 14 26 2000 n.a. n.a. 43 52 11 56 65 16 73 n.a. 73 20 13 29

Source:WorldDevelopmentIndicatorsDatabase

Table4 DistributionofCARICOMsTotalExportsbyPrincipalDestinations
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19801998 (%) Destinationof Exports

USA EuropeanUnion CARICOM 1 LAIA SelectedAsian Countries RestoftheWorld

1980
48.7 16.5 8.9 1.9 0.4 23.6

1985
47.2 17.8 12.8 2.1 1.3 18.8

1990
40.7 20.6 12.1 2.8 1.2 22.5

1995
34.1 20.9 16.5 5.4 1.5 21.6

1996
38.5 18.0 18.3 5.2 0.9 19.1

1997
35.3 18.1 19 4.6 1 22

1998
35.2 16.9 22.5 3.7 0.6 21.1

Source:CARICOMSecretariat.2000.CaribbeanTradeandInvestmentReportandaQuickReferenceto someSurveyData,19801996 Notes: 1IAIA:LatinAmericanIntegrationAssociation

Table5 TrendsinAverageTariffRatesforCaribbeanCountries, 19801999

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Economy
Antigua/Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica Montserrat StKitts/Nevis StLucia StVincent TrinidadandTobago

1980 n.a. 29.8 n.a n.a n.a. n.a. n.a. 16.0(82) n.a. n.a. n.a. n.a. n.a.

1985
12.0(86) 32.3(87) 17.3(86) 17.3(86) 31.9(87) 22.8(87) 17.4 17.0 n.a. 12.9(87) 12.0(87) 17.3(86) n.a.

1990 15.0(89) n.a. 22.0 20.0 28.0 16.0(89) 20.0(89) 20.3(91) n.a. n.a. n.a. n.a. 18.6(91)

1995
12.0 32.0(96) 17.0 17.0 15.0 10.8 17.0 n.a. n.a. n.a. n.a. n.a. 18.7

1999
9.0(98) n.a. 13.6 9.2(98) n.a. 7.6 n.a. 8.7 n.a. 92(98) 9.7(98) 9.2(98) 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

26

 strong prudential regulation, good supervision and institutional reforms stiff taxes on luxury consumption 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) (ii)

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)

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) Encouraging Export Strategies halting of import substitution/liberalisation and heavy promotion of institutional support for exporters liberalized exchange rates and currency devaluations to support export growth manufactured export growth encouraged
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c. exports

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 technological upgrading

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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