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Notes on Foundation 1301TRANSCRIPT
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ArthurLewisandIndustrialDevelopmentintheCaribbean:AnAssessment*
By
AndrewSDownesProfessorofEconomicsandUniversityDirectorSirArthurLewisInstituteofSocialandEconomicStudiesUniversityoftheWestIndies,CaveHillCampusPOBox64,StMichael,BARBADOS
Telno:(246)4174476Faxno:(246)4247291Email:[email protected]
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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17
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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25
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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26
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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27
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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28
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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