August 5, 2021

Lewis’ Industrialisation by Invitation Model and the COVID-19 Conundrum

Alicia Nicholls

The COVID-19 shock inflicted on Caribbean economies and societies is both deep and multi-sectoral. The shockwaves will be palpable for years to come. Stimulating resilience-based economic and social recovery will require large injections of capital which cannot come solely from public coffers. Moreover, heavy borrowing is unsustainable given the already high debt burdens many fiscally-constrained Caribbean economies carry, narrowing revenue bases and the limited access to concessional financing.

Caribbean countries must step up current investment facilitation and promotion efforts to increase private investment by local, foreign and diaspora investors to assist their recovery efforts. In this blog piece, I rely conceptually on Sir W. Arthur Lewis’ Industrialisation by Invitation model and apply it to the present-day COVID-19 conundrum. I ultimately posit that efforts at facilitating and promoting greater private domestic and foreign investment flows must be informed by a sound development strategy, with clear measurable targets and built-in monitoring mechanisms if they are to achieve the desired development outcomes.

The Lewisian Model of Industrialisation by Invitation

Caribbean countries generally have very liberal and open investment regimes offering investors a wide suite of fiscal and other incentives as inducements to invest. In large part, our countries followed the ‘Industrialisation by Invitation’ model proposed by St. Lucian-born Nobel Prize Laureate in economics, the venerable Sir W. Arthur Lewis.

Lewis’ model, outlined in his magnum opus ‘Industrialisation of the British West Indies’ of 1950, was informed by the development model he observed in the United States (US) Commonwealth of Puerto Rico. The Puerto Rico government lured foreign investors to the island’s shores by means of various fiscal incentives to assist in the development of industry in that territory.

Lewis based his case for industrialization of the BWI on the overpopulation then experienced in the agrarian-based economies of the BWI. Technology, he argued, was causing a reduction in the amount of labour agriculture could absorb and this was exacerbated by population increases. Industrialisation would provide jobs for this surplus labour.

His case for attracting foreign capital for industrialization was based on two major premises. First, financing industrialization was an expensive task for governments. Second, the local private sector at the time lacked expertise in manufacturing. He further noted that the involvement of foreign capital was less risky in manufacturing than in agriculture or mining. Moreover, while he recommended ‘inducements to foreign capital’, that is, incentives, he cautioned that “a sense of proportion” is required.

Lewis recommended the creation of an industrial development corporation which would have three main roles, including to prospect the market and decide what types of industry to encourage, to advise the government on the types of assistance to offer and to interest manufacturers in coming into the area. He based this on several development agency examples he observed across the world, and these functions are fulfilled, in varying degrees, these form the blueprint of our contemporary investment promotion agencies. Today, all Caribbean countries have at least one agency charged with the promotion of investment.

Why is investment facilitation even more critical now?

Since the start of the COVID-19 pandemic, various multilateral institutions have provided sobering reports of the damage inflicted by the pandemic on Caribbean economies and societies. Pienknagura, Roldos & Werner (2020) in an International Monetary Fund (IMF) blog post of October 2020 noted that although the region had been relatively successful at managing the virus spread, our countries were the hardest hit economically because of their heavy dependence on tourism for economic activity and employment. The authors likened the sudden stop in tourist arrivals and local lockdowns to ‘a cardiac arrest to their economies’. The IDB has also noted the high social costs of the pandemic, which has led to job losses and increases in inequality. In short, the pandemic has reversed many of the development gains the region has realized.

In order to rebuild for resilience post-COVID-19, domestic and foreign private foreign capital inflows must supplement increasingly constrained public revenue sources. Rising unemployment and a growing informal sector have caused a declining tax base. In Barbados, whose GDP contracted nearly 18% in 2020, personal and corporate tax receipts declined over the review period, according to the latest Central Bank of Barbados Report. This means that Governments are further unlikely to be able to finance capital works projects and spending on social and economic recovery programmes through taxes alone. Barbados is currently in an IMF-sponsored homegrown Barbados Economic Recovery and Transformation (BERT) programme which has unlocked some multilateral financing it otherwise would not have been able to access. However, what about those countries which lack this option?

Borrowing is also not a particularly attractive option for many fiscally-constrained Caribbean countries. The macroeconomic fundamentals of many of our countries, including the high debt to GDP ratios, make borrowing at preferential rates unrealistic. Borrowing also adds to a country’s debt burden. Every dollar spent on debt-servicing is a dollar that could be spent on social programmes and capital works programmes that benefit the population. This is further compounded by many Caribbean countries’ ineligibility for most concessional financing and official development assistance (ODA) due to their classification as middle income or in some cases, high income countries on an income per capita basis. More recently, the press release for an upcoming Caribbean Development Bank (CDB) report revealed that all, but one (Guyana), of its Bank Member Countries (BMCs) registered double-digit declines in GDP. Moreover, all, except Guyana, saw an increase in their debt to GDP ratios, with the regional debt-to-GDP average rising from 66.5% to 79.5%.

Increasing FDI inflows is the more attractive option for stimulating greater capital inflows. However, UNCTAD’s data estimates a 40% decline in global FDI flows, which means there will be increased competition by countries for a smaller pool of capital. The most competitive countries will be those most attractive to investors for their ease of doing business. Jamaica, ranked 71, is presently ranked as the easiest Caribbean country in which to do business and ranks 6th on the ‘Starting a Business’ indicator. While no CARICOM country ranks within the top fifty countries on the World Bank’s Doing Business Index, some small States have done well. Mauritius, for example, ranks 13th, Taiwan (15th), Iceland (26th) and Cyprus (54th). Clearly, therefore, CARICOM countries can do better.

Applying Lewis’ model to the COVID-19 conundrum

Lewis’ model, though criticized by many, bears much relevance for the current situation facing Caribbean countries today where investment is needed for the stimulation of investment activity, jobs and foreign exchange. However, there are some important differences.

First, given the region’s sizable diaspora, the focus should not just be on attracting and facilitating foreign investors (those without ties to the region) but also diaspora investors. Caribbean IPAs have already made diaspora FDI targeting part of their promotion efforts.

Second, the domestic private sector has become much more sophisticated since the days of Lewis and has a key role to play as investors and source of private capital flows. While some private sector entities have been impacted by the pandemic, the extent of impact differs and some have evinced an appetite to invest despite the current economic climate.

Third, competition for investors cannot be merely on tax rate or incentives alone, but on their value proposition to investors, through things such as market potential, ease of establishment, access to finance, and other factors which investors consider in their decisions.

Fourth, Lewis was focused at the time on inducing investment for building manufacturing capacity. These days, however, the focus should be on attracting and facilitating investment in high-technology and other high value-added sectors of strategic importance to the region, such as FinTech, medicinal cannabis, research & development, the creative industries, as examples. The aim is to attract investment which is development-friendly, sustainable and inclusive. Therefore, screening of proposed investments to prevent environmental degradation, as well as monitoring to ensure compliance with environmental and labour laws will ensure such investments are sustainable.

Fifth, for this reason, investment facilitation reforms must not be ad hoc. They must instead form part of a wider investment strategy, which coheres with the country’s industrial and trade policies, all of which are moored to the country’s development strategy.  

Sixth, monitoring the effectiveness of investment facilitation and promotion policies is needed and requires better data collection. Limited disaggregated data on investment type, source or sector makes it difficult to empirically assess the effectiveness of investment promotion and facilitation strategies. Moreover, investors often rely on such data in making their decisions on whether to invest or reinvest. As such, a concerted approach to improving the quality, timeliness and availability of data should be a key component of the region’s efforts.  

In summary, it has been argued, using Lewis’ Industrialisation by Invitation Model as applied to the COVID-19 conundrum, that facilitating investment by local, foreign and diaspora investors will be critical to assisting Caribbean countries in their economic and social recovery efforts. It can do so by stimulating economic activity, foreign exchange inflows and job creation. However, these benefits are not automatic and must be informed by a sound development strategy and monitored if they are to achieve the desired results.

Alicia Nicholls, B.Sc., M.Sc., LL.B is an international trade and development specialist. Read more of her commentaries here or follow her on Twitter @licylaw. All views expressed herein are her personal views and do not necessarily reflect the views of any institution or entity with which she may from time to time be affiliated.

caribbeantradelaw

The Caribbean Trade Law and Development Blog is owned and was founded by Alicia Nicholls, B.Sc. (Hons), M.Sc. (Dist.), LL.B. (Hons), a Caribbean-based trade and development consultant. She writes and presents regularly on trade and development matters affecting the Caribbean and other small states. You can follow her on Twitter @LicyLaw. All views expressed on this Blog are Alicia's personal views and do NOT necessarily reflect the views of any institution or entity with which she may from time to time be affiliated.

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