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Lewis Industrialization by Invitation strategy and Resource Based Manufacturing: Steel Production in T&T. 1
B. Tewarie and R. Hosein

Abstract In the 1950s, Lewis proposed an industrialization by invitation strategy through which the economies of the Caribbean sphere could become competitive producers of manufactures. In his policy advice, Lewis specifically emphasized that the type of industrial goods that these economies should specialize in were those which were intensive in the use of their abundant natural resources. He recommended that the capital and markets for this industrialization process be sourced from established foreign Multinational Corporations (MNCs). This paper reviews Lewis' industrialization by invitation strategy and traces his focus on the production of comparative advantage natural resource intensive manufactures. The paper uses the iron and steel industry of Trinidad and Tobago (T&T) as a case study. Steel production started in the 1980s under the ownership of the T&T government but was privatized in 1994. The economic performance of the firm under both the state and the foreign MNC was starkly different. The paper also provides some relevant policy advice for CARICOM economies for the deployment of an industrialization by invitation strategy in the current global economic environment.

Introduction In the 1930s the English speaking Caribbean was still characterized by political control resting with the colonial rulers. In this era, there were a series of riots and general labour unrest over improper and sometimes harsh working conditions in the Caribbean sphere. For example, Brereton and Yelvington (1999) note that industrial conflict was extremely evident in the periods 1919-1920 and again in 1935-1937. These labour strikes were the direct result of the harsh working conditions of those individuals employed in the associated oil and asphalt industries. Wages in the oil and agricultural sector were

We would like to acknowledge the research assistance of Mr. Rishi Singh.

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extremely low, as a skilled worker in the agriculture sector earned $1.00-1.60 cents per day; while their counterparts in the oil sector earned from $1.26-$2.34 per day. For unskilled workers the pay was much worse, as an agricultural sector worker earned $0.55-$0.65 cents per day and oil workers received approximately $0.81-$1.26 dollars per day. Such low wages in the oil sector were commented upon by Millet (1999), who claimed that several years after the industry was securely established, unskilled labourers worked long hours and in return got starvation wages in the Caribbean region. At this stage, therefore, the unemployment rates in the economies of the region were high and were also characterised by high levels of poverty. 2 During this period, sugar the main hub around which economic activity in most of the islands revolved, had actually seen better times as a cash crop and was on its way out. 3 Ties with the metropolitan countries remained strong as ever and the extent of inter-island integration was at best weak. In this era, two main intellectual schools of reasoning emerged in the CARICOM sphere. The first of these were based on the Moyne Commission. Lord Moyne was sent into the Caribbean area in 1938 to evaluate the progress of its socioeconomic position since they had gained emancipation and to assess what could be done to quell the raging bouts of labour riots existing in the region. However, Moynes report emphasised, that;

Brereton, B. and Yelvington, A.K. (1999) The Colonial Caribbean Transition: Essays on Post Emancipation Social and Cultural History, Millet, J. The wage problem in Trinidad and Tobago, UWI Press, Chapter 3 pp. 55. 3 According to Millett (1999 pp 69 ch. 3):Among sugar workers retrenchment added to the woes of low wage payments. In July 1934 all of these factors coalesced to stimulate a significant strike movement on the sugar estate Retrenchment and longer and harder tasks completed the cycle of oppression and exploitation and resulted in the prolonged unrest in the period 1934-1935.

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Lacking mineral resources, it is hardly to be expected that small communities living in considerable isolation from the outside world, and climates and traditions that are perhaps uncongenial to regular industrial life would have developed manufacturing industries on an important scale. Agriculture is the main basis of the economic life of the West-Indies; and it must necessarily remain so even if the most optimistic hopes of the advocates of new industries were to be realized the essential dependence of the West-Indies upon agriculture would not be materially affected. 4 Against this backdrop another major intellectual strand of reasoning emerged with the research work of Sir Arthur Lewis. 5 Lewis launched an aggressive intellectual offensive against the Moyne Commissions Report and promoted a development strategy that called for the greater utilization of indigenous natural resources. Lewis argument was predominantly a response to the issues raised by Moyne and his policy prescriptions premised on the industrial experience of Puerto Rico, a neighbouring island in which foreign direct investment had started to play an increasingly important role in directing the growth process. Lewis writings on industrial development in the period 1938-1950 focused on an export led growth strategy and included two instructive strands. The first variant is the export led natural resource based industrialization strategy. In a second variant, Lewis emphasized, export led industrialization by invitation. 6 Lewis argued that agriculture had reached the boundaries of internal and externally profitable cultivation, so that a
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Moyne report (1938 pp.14.). Lewis received the Nobel prize in economics in 1979 together with Theodore Schultz. In awarding Lewis the Nobel prize, special mention was made by the awarding committee of his 1954 work on Economic Development with Unlimited Supplies of Labour. 6 Lewis argued that all small island developing countries need to trade in order to support themselves, as they may lack the resources to be self-sufficient. Specifically, he stated that All overpopulated countries, with a reasonable standard of living are forced to support themselves by exporting manufacturing goods and importing food and raw materials. If a country is rich in natural resources, relative to its population; it can hope to be self-sufficient. But if it is poor in natural resources it can only get all the food and raw materials it needs by exporting its labour in the form of manufactures (Lewis 1950 pp 17)

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manufacturing base became increasingly necessary to absorb the output from the agricultural sector and at the same time remove surplus labour and create employment opportunities. He was of the view that too much labour was employed in the traditional agricultural sector, resulting in the marginal productivity of labour in that sector being zero. Lewis identified that the agricultural sector utilized little capital and was technologically backward. However, in the modern manufacturing sector productivity is much higher because the sector makes use of reproducible capital. In the light of these facts Lewis argued that the development of the Caribbean required the movement of resources (surplus labour) out of the traditional sector into the modern sector. 7 Lewis raised and answered the following question: which type of manufacturing goods to produce - he answered by noting that Caribbean islands needed to produce those manufactures which were intensive in the natural resources of the region. He also advocated that these goods should be sold to the developed world or extra-regional market. He emphasized dependence on the foreign market because the domestic market was too small to support economies of scale and whilst an intra-regional integration arrangement could serve as a launching pad, the longer term emphasis needed to be on the foreign market and went so far as to argue that every inquiry into industrialization must begin with the market. Regarding access to foreign markets, Lewis observed that:

Let us define MPL and TPL as the marginal and total product of the Lth and L workers respectively. If MPLth + n = 0, then surplus labour is representable by these n remaining workers. Alternatively said, if TPL = a and TPL+n = a, then the total output of the n ((L + n) -L) workers is zero and represents the surplus labor force. Lewiss surplus labor force existed in the agricultural sector of the Caribbean economies and such workers argued Lewis, should be siphoned off to facilitate the growth and development of the fledgling manufacturing sector (and by extension, the overall macroeconomy).

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To start manufacturing in a new country is a formidable enough problem: if one adds to it trying to break into established markets, the difficulties may prove almost insuperable. Therefore, one seeks manufacturers who are already established in the market, and tries to persuade them to set up branches in the new country. (page 31, Lewis 1950). 8 Apart from having an established market base, Lewis also advised that the type of MNCs to be wooed by Caribbean economies, were those which had an established financial and technological base. As such, Caribbean economies needed to woo and fawn upon foreign multinationals to become pioneers in the region. Incentives can take the form of subsidies, tax holidays, tax exemptions or tariff protection. Lewis emphasized that foreign capitalists were necessary because: The islands cannot be industrialized to anything like the extent that is necessary without a considerable inflow of foreign capital and capitalists, and a period of wooing and fawning upon such people. Foreign capital is needed because industrialization is a frightfully expensive business quite beyond the resources of the islands, (pg. 38, Lewis 1950). In Lewis reasoning there was a distinct role for government in the whole process as Lewis felt that changes in economies such as those of the Caribbean (at the time of his writings) would not come naturally and argued that the: Laissez-faire economic philosophy of British West Indian governments has been the principal obstacle to the industrialization of the islands (pp. 34, Lewis 1950). According to Lewis, advocates of laissez-faire theory are of the view that if a particular economic activity is feasible then the market by some natural process will initiate it. Thus, there will be no need for government to actively start such an economic

In Aspects of Industrialization, Lewis noted that industrialization was usually the work of foreigners and that such an experience was true of the British and every other modern industrial society, except the former USSR.

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venture. However, Lewis viewed such thinking as unsubstantiated for developing countries as there was a need for direct intervention for development to take place. Lewis noted that industries are gregarious and like to move together, therefore, if an industry is not initiated it could discourage the formation of new ones. On the other hand, if an industry were started it is more likely that others will follow and enter the industry. It is in this light, that Lewis agued that there is need for governments in the Caribbean region to force industrial activity to advance the pace of structural economic diversification away from the agricultural sector. However, Lewis also made the point that MNCs should not be allowed to enter into the islands and do as they please. He believed that MNC involvement was only important in the initial stages of development and their basic role was to provide the foreign capital necessary to increase the natural level of income but was careful to note that: .. if the local people are thrifty, they can build up savings which in due course enable them, having learnt the tricks of the trade to set up in the business themselves (pg. 39, Lewis 1950). A key part of economic policy according to Lewis (1949) was to facilitate the training and development of locals. Thus, the foreign capitalist with the Industrialization by Invitation (IBI) strategy was to act like a foreign teacher to develop local skills for self-reliance. 9 Importantly, Lewis notes that the acid test of development is measured by a countrys ability to initiate economic development on its own without foreign business.

Note that the depth of Lewis foresight as endogenous growth theory, which is now an important part of the macroeconomic literature is premised on human capital as the key ingredient for the growth of economies.

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Foreign involvement should be restricted to those firms that are willing to teach the tricks of the trade to locals so as to facilitate domestic capacity advancement. To assist in the process of development, the IBI strategy requires the establishment of an Industrial Development Corporation. Such an institution would have the responsibility of facilitating foreign investment. For example by providing an outlet for settling grievances relating to investment. The environment in which Lewis made his policy proposition has no doubt changed, however, Downes (2004) has highlighted the following fundamental facets of Lewiss work which still remain relevant to the Caribbean today: The main destination for commodities from the CARICOM sphere should be the extra-regional market as the CARICOM market is still small. The CARICOM market, however, is still useful to the extent it can serve as a base market for immature CARICOM firms. A reflection of the small size of the CARICOM markets can be gleaned from some of the typical indicators of size used in the economic literature and for which data are presented in Table 1 below.

Table 1: Basic Indicators of Size of Selected CARICOM Countries Country Land Area Population GDP Billion Km2 million US$ 2002 Barbados 430 0.3 2.5 Guyana 196,850 0.8 0.7 Jamaica 10,911 2.6 7.9 Trinidad and 4,828 1.3 9.6 Tobago Source: United Nation (Human Development Report 2004).

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Specifically, and as the Table 1 above shows, Barbados is very small in comparison with its larger CARICOM partners, with a land space of only 430 km2, while Guyana has the largest land space of 196,850 km2. In terms of population, Barbados has a population of 0.3 million, Jamaica on the other hand, has the highest population of 2.6 million people followed by Trinidad and Tobago. None of the more developed CARICOM countries has a GDP in excess of US$10 billion. In total, these statistics clearly reflect that CARICOM economies are still economically small. Policy measures should be appropriately established so that domestic competitive capabilities are expanded and well explored. Important on the list of such policies will be productivity enhancing measures. The state can act as a facilitator of the development process including getting the Lewisian snowball moving downhill. To prevent human capital becoming a bottleneck to the industrialization process and to facilitate the learning of the tricks of the trade, the quantity and quality of skilled post secondary school graduates must be enhanced. The education index as calculated by the United Nations HDR (2004) shows: a countrys relative achievement in both adult literacy and combined primary, secondary and tertiary gross enrolment. First an index for adult literacy and one for combined gross enrolment are calculated. Then these two indices are combined to create the education index, with two thirds weight given to adult literacy and one third weight to combined gross enrolment.

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Table 2: Education indices for CARICOM and various other economies. Country Mauritius Norway Singapore U.S. U.K. Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Suriname Trinidad and Tobago Source: HDR (2004) Education Index 0.79 0.99 0.91 0.97 0.99 0.80 0.88 0.95 0.75 0.76 0.85 0.89 0.83 0.98 0.88 0.77 0.87 0.87

Table 2 above shows that as compared to benchmark economies such as Norway, T&T still has considerable room for improvement on its education index There is still scope for Resource Based Industrialization (RBI) strategies given the current economic structure of CARICOM economies. The RBI agenda can take a number of varied forms but can include both direct foreign control and joint venturing. As before, this RBI effort should focus on utilization of natural resources as far downstream as possible.

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Resource Based Export Led Industrialization As mentioned previously, Lewis explicitly noted as part of his policy that the type of manufactures to produce were those in which the economy had an abundance of natural resources. Specifically he noted that: The secret of success, for any country, is to specialize in those (manufactures) to which its resources are most appropriate and to avoid the others (pg. 18, Lewis 1950). According to Roemer (1978) there are two types of Resource Based Industrialization (RBI) strategies, these are: primary export processing and basic goods production. Primary export processing is based on the premise that greater processing and fabricating will allow the country to benefit from more value added in the production process. The basic goods production strategy involves the promotion of industries that are intensive in natural agricultural and human resources, not mainly for export but for home consumption as well. It calls for reduced dependence on world trade to promote industrialization, where primary exports are vital for the purchasing of intermediate capital goods and for import substituting goods. However, in terms of the Caribbean this strategy is inappropriate because according to Roemer (1978) it relies on the development of heavy industries - basic metals, chemicals, rubber, paper etc.... It is a typical strategy adopted by socialist countries including China and North Korea. Some of the benefits of the primary export processing variant of the RBI strategy include the following:

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(i)

Greater resource utilization: RBI allows a country to take advantage of underutilized natural resources. RBI facilitated by an Industrialization by Invitation strategy (IBI), can as Lewis (1950) argued, enhance the prospects of economic growth and transformation in less developed countries, as multinationals can combine their ownership specific advantage with the natural resources of host economies. The opportunity to benefit from economies of scale: specifically, Roemer (1978) has noted that almost all of the industries based in natural resources are subject to economies of scale. Multinationals are capable of undertaking investments on a large scale that not only provide for the host economys needs but also to large tracts of international demand. The facilitation of technological progress: developing countries lack the financial resources to meet the various challenges of economic development on their own, however, according to Roemer (1978), RBI can shift comparative advantage towards the exporting country. Employment creation: The creation of employment opportunities within an RBI setting allows domestic firms to take advantage of new skills and technology that not only increase employment but generate greater worker productivity. Foreign firms, for example, investing in T&Ts hydrocarbon sector often made contributions to the human resource development of the country. Some of these contributions went into institutions such as the National Energy Skills Center (NESC) and the University of Trinidad and Tobago (UTT). More importantly, foreign firms often employ students from these institutions under apprenticeship programs. Current account pressures: RBI helps to relax the current account pressures by increasing the countrys external earnings and attracting foreign investment. Greater foreign exchange inflows, especially in developing countries where such resources are scarce, reduces pressure placed on an economys current account balance by import demand. In T&T where RBI strategies have been practiced for several decades large inflows of FDI has helped to create buoyant export levels and favorable current account balances (See Table 3 below).

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Table 3: FDI Flows, Current Account balance and Exports from Trinidad and Tobago US$ m, 1999-2003. 1999 2000 2001 2002 2003 FDI US$m 379.2 654.3 684.9 684.8 425.2 Current Account Balance 30.6 544.3 416.0 49.6 917.4 US$m Exports US$m 2,812.29 4,294.02 4,153.02 3,874.77 4,001.84 Source: Annual Economic Survey (2003) 1062

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RBI investments increase the Total Factor Productivity (TFP) and consequently the well-being of the country. RBI not only increases worker productivity but increases the productivity of all the other factors of production. Barclay (2003) notes, The dynamic interaction between the ownership of specific advantages of the MNC and the location bound attributes of the host developing economy may result in externalities or productivity spillovers. These productivity spillovers, range from increased productivity of local firms, worker training, industry linkages and market accessIndeed the catalytic effect of the spillovers may be strong enough to eventually propel the domestic firms into driving the MNCs out of the host economy.

In addition, Adelman (1999) notes that greater local content requirements have forced MNCs to utilize indigenous factors of production more intensively. As a result, economic growth is subject to increasing returns to scale facilitating high factor productivity and maximizing the social welfare for the country.

Snowball effect of Resource Based Industrialization Lewis in using the analogy of a snowball for the industrial sector noted: once the snowball starts to move downhill, it will move of its own momentum, and will get bigger and bigger as it goes along (pg. 36, Lewis 1950). The basis of Lewis advice to produce low cost labour intensive manufactures was founded on the existence of low wage and surplus labour in the CARICOM at the time. This facet of the CARICOM environment has changed over time, no doubt due to rising wage rates on account of militant trade unions. This is one significant difference between the economic climate in the CARICOM now and that associated with the time of Lewis writing (See Table 4 below). Basically, the average wage rate in CARICOM economies is today much higher than in other parts of the world. The brute facts are that the

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participation of India and China in global trade has made a mockery of labour wage rates being used as a basis for competitive efficiency by any other country.

Table 4: Minimum Wage in Selected countries Per Hour US$ Trinidad and 1.31a Tobago India 0.66b China 0.16c Source: a: Country Report on Human Rights Practices (2003). b: Asian Labour News, July 2nd (2004) c: The Times of India, December 18th (2004). This means that within the current economic framework Lewis export led natural resource based industrialization strategy has to be capital intensive with the capital for this process coming from foreign firms. Lewis snowball effect is reflective of an industrial clustering process. Albu (1997) defines industrial clustering as broadly signifying any form of industrial organization featuring a spatial concentration of numerous firms belonging to a similar industrial branch or filire. 10 Some of the distinct advantages of participating in a cluster include:

The concept of a filire can best be understood as a channel of production and distribution, incorporating all the economic and technically interrelated operations, which feed goods directly or indirectly towards a similar end market.

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Specialised local suppliers of inputs and services, A local mobile pool of labour with highly relevant skills and knowledge, A local industrial atmosphere in which relevant technological know-how and ideas are in the air, and readily available to all. Clustering also reduces transaction costs by reducing uncertainty, through the following avenues: Collective information-gathering and screening (Albu 1997, pp.19). Informal exchange of information and demonstration effects of successful decisions can create a collective information-gathering and screening function in clusters. The screening function can help overcome the difficulties small firms encounter in inspecting and monitoring the quality and hidden characteristics of inputs, components and technical equipment. Signaling: many firms cluster because it has the ability of building a good reputation for quality. This sends signals to the market, not only as a form of advertising but quality certification and reduces uncertainty and transaction costs from buying from a cluster.

Steel production in T&T: Lewis IBI at work. On June 20th, 1975 the Iron and Steel Corporation of Trinidad and Tobago (ISCOTT) was incorporated. It was initially conceptualized as a joint venture, between the T&T government, Estel of Europe and Kawasaki of Japan. After three years, this relationship was broken and Estel and Kawasaki were released from their obligation. Government went ahead on its own and built the plant at a cost of US$350 million dollars, commercial production from which began in 1980. ISCOTT was seen as a viable option for the use of natural gas, since it was often flared off when extracting oil and so could be redirected for use to make Direct Reduced Iron (DRI) for a steel complex.

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The steel company represented a means of increasing the development process through the use of natural gas, while at the same time diversifying the economy. The steel plant was capable of satisfying local demand, as well as, providing the means of diversifying the economys export base. The plant was capable of processing iron ore into finished products, such as wire rods, billets and reinforcing bars. However, not too long after the plants inception the US steel industry lobbied the US Department of commerce to impose Anti-Dumping (AD) 11 and Countervailing Duties (CD) 12 on Trinidad and Tobagos steel exports. Specifically, as one source observed:

The United States Department of Commerce, investigated allegations that the Government of Trinidad and Tobagos (GOTT) equity infusions into the Iron and Steel Company of Trinidad and Tobago (ISCOTT) constituted countervailable subsidies. It determined that payments made by the GOTT to ISCOTT from January 1st, 1986 through April 8th, 1988 were not consistent with the practice of a reasonable private investor and were thus countervailable subsidies. 13

Thus although the steel plant was modern, it proved to be an unprofitable investment undertaken at the time, mainly resulting from market access problems. By 1985 production of iron and steel fell to 513,000 marking the second year of declining production. During the same year exports also fell by 143,200 tons, representing only

Anti dumping duties are trade restrictions that are imposed on producers in other countries who sell at a price that is lower than the fair market value or at a price that is lower than what it will be sold for in the producers home country.
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Countervailing Duties are duties imposed on foreign goods that have been heavily subsidized by the foreign countrys government. It raises the cost of the goods so that it is representative of the true market value. 13 The United States Court of International Trade Slip Op. 03-81, 2003, Case # 01-00834, Judge Wallach. www.cit.uscourts.gov/slip.

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27.9% of production. This was due to the implementation of the 14% levy on Trinidad and Tobagos steel exports. Despite paying AD and CD duties for several years, T&T still exported steel to the USA. However, in 1987 T&T signed a voluntary restraint agreement to limit the amount of steel entering the USA to 73,000 tons per year, for a three year period in exchange for the withdrawal of the AD and CD cases. 14 In addition, the company faced management problems, which was manifested in decreasing output in 1984 and 1985. This persuaded government to source West European firms to manage ISCOTT's operations under a two-year contract. Government turned the management of ISCOTT over to Voest Alpine Industries of Austria and Hamburger Stahlwerke (HSW) of Germany. Production did increase in 1986, signalling the early success of the outside management contract. However, they were unable to turn the fortunes of the company around partly due to the voluntary export restraint agreement which was still in force. In 1993, the US wire rod industry filed a new round of AD and CVD cases against several steel exporting countries including Trinidad and Tobago. 15 Although benefiting from a boom in the 1970s, by the late 1980s amidst depressed price and production levels of crude oil, the T&T economy plunged into a recession, (the average annual growth rate for the period 1983-1989 was -4.6%). Since the government had overextended itself during the boom and early years of the recession it had to turn to international lending institutions, such as the International Monetary

Voluntary Restraint Agreement (VRA) is an agreement signed by government or industry to reduce the volume of exports, without one country having to resort to more severe trade restriction policies such as: quotas, tariffs or other import controls. 15 Schriefer John (1996) An Empire of Direct reduced Iron and Steel; New Steel Published August http://www.newsteel.com/features/ns9608f7.htm .

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Fund (IMF) for financial assistance. 16 This resulted in the implementation of a Structural Adjustment Program (SAP) with the attendant conditionality of a minimalist state. In its privatization thrust, the government of T&T sold the steel plant in 1995 to Caribbean Ispat Limited, which is a subsidiary of Ispat International NV and part of the LNM Group founded by Lakshmi N Mittal. This is the worlds largest steel producer with integrated steel making facilities in 12 countries, an annual steel production capacity of over 32 million tonnes and revenues estimated to be US$9.9 billion and operating income of US$3.2 billion in the first nine months of 2004. 17 The Group, including LNM Holdings N.V. and Ispat International N.V., has approximately 120,000 employees worldwide from over 45 nationalities. The Group supplies steel to over 5,000 customers in 120 countries and has an established list of customers who are leaders in the automotive, appliance, engineering and other sectors. Currently, the Group has major integrated steelmaking operations in the U.S., Canada, Mexico, Trinidad, France, Germany, Kazakhstan, Algeria, Romania, Czech Republic, South Africa and Indonesia, (Ispat International NV Annual Report 2004, www.ispat.com). Caribbean ISPAT limited was formed with the lease of ISCOTT in 1989 and as mentioned previously the company was purchased from the Government of the Republic of Trinidad and Tobago on December 30th, 1994. As it stands the plant is integrated,

During the 1980s severe financial problems on account of the decline in oil revenues resulted in the T&T government being unable to effectively continue with its development goals. In particular, excessive imports caused the current account balance to go into deficit from 1982 to 1989 with 1983 being the worst year, as the deficit amounted to TT$2,461.9 million. The government also found itself running large fiscal deficits; for example in 1981 the fiscal balance stood at TT$1,350.5 million but by 1983 there was a deficit of TT$2,344 million. This caused net foreign reserves to decline from US$2,983.3 million in 1982 to US$23.8 million in 1988. 17 Rao, H. S. (2004) Mittal Steel is Worlds Largest http://inhome.rediff.com

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comprising gas based direct reduction iron (DRI) 840,000 metric tones per year (mty), an electric arc furnace (EAF) type steel melt shop of 600,000 mty, a wire rod mill of 420,000 mty and ancillary facilities. Caribbean Ispat was able to turn out profits in its first year, following a strategy designed to increase production, improve processes, reduce costs, improve product mix and broaden customer base. Steel Production in T&T: Trends in periods of Local and Foreign ownership
Table 5a: Production and Exports of Iron and Steel Products Tonnes Direct Reduced Iron Billets Wire Rods Years Production Export Production Export Production Pre ISPAT Local ownership 1981 179.5 87.1 53.1 0 29.1 1982 217.9 53.1 179.2 14.9 115.5 1983 302.3 56.5 209.6 14.4 164.2 1984 239 61.1 198.9 17.3 134.7 1985 243.2 65.3 166.9 1 102.9 1986 337.2 53.2 327 23.1 217.1 1987 441.2 106.7 375.5 24 276.2 1988 548 151.4 361.2 40.9 251 1980-1988 281.09 71.60 208.29 15.07 143.41 Table 5b: Post ISPAT Foreign Lease/ownership 1989 674.8 288.8 340.1 12.8 270.1 1990 681.6 313.3 364.5 1.9 252.1 1991 654 196.3 439.7 8.8 364.1 1992 647.7 171.7 552.8 12 446.1 1993 714.5 223.9 492.1 15.7 413 1994 914.5 292.3 630.2 12.6 594.4 1995 1039.9 270.5 676.1 21 521.1 1996 954.5 272.9 643.6 8.2 575.4 1997 1133.8 344.9 747 12.7 668 1998 1023.1 209.1 776.9 3.8 649.9 1999 1,293.00 521.7 723.9 0 638.2 2000 1,524.80 677.2 743.8 0 630.8 2001 2,187.40 1,364.20 668.3 14.8 604.8 2002 2,316.30 1,377.10 816.9 0 704.5 2003 2,275.00 1,268.30 896 0 640.9 Average 1,202.33 519.48 634.13 8.29 531.56 1989-2003 Source: Central Bank Annual Economic Survey (various years)

Export 5.4 87.6 119.6 130.4 76.9 186.2 239.6 223.8 118.83 205.5 276.3 345.3 400.3 357.8 564.2 495.2 551.9 603.7 626.8 588.8 590.4 561 655.1 635.3 497.17

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From the Table 4 above, it can clearly be seen that during the pre ISPAT era the output of the plant was depressed. Specifically, while the production of direct reduced iron, billets and wire rods for the period 1980 to 1983 improved, it fell shortly thereafter. DRI production fell from 302.3 tonnes in 1983 to 239 tonnes in 1984, while production of billets and wire rods fell from 209.6 tonnes in 1983 to 164.2 tonnes in 1985. In terms of exports during the pre-ISPAT era a small percentage of what was produced were exported because of export restraint. For example, of the 337.2 tonnes of DRI produced in 1986 only 53.2 tonnes were exported. Greater market access amongst other factors, saw production of DRI under ISPAT management increasing from 674.8 tonnes in 1989 to 1039.9 tonnes in 1995, while wire rod production rose from 205.5 tonnes to 495.2 tonnes in the same period. This pattern continued, with DRI production reaching 2,275 tonnes in 2003 and wire rod production reaching 640.9 tonnes for the same period. DRI exports also increased significantly from 288.8 tonnes to 1,364.2 tonnes during the period 1989 to 2001. However, while ISPAT was able to turn around the production of DRI and wire rods, production of billets only increased marginally. Even more, the exports of billets decreased from an average of 15.07 tonnes during the 1980-1988 era to 8.29 tonnes during the post ISCOTT period. This however, is due to the fact that most of ISPATs billets are used to facilitate downstream production, as billets are a factor input into the production of wire rods and bars. 18

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The Trinidad Guardian (2004) Ispat Using Unfair Tattics By Jahel Browne hptt//:www.gurdian.co.tt.

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The Table 6 below, provides a chronological list of key developments of the steel company in T&T from its ISCOTT to ISPAT eras. In particular, the Table 6 reviews the major financial investments undertaken in the plant from 1975 to 2004.

Table 6: Historical Development of ISCOTT and ISPAT from 1975-2003.


1975 The Iron and Steel Corporation of Trinidad and Tobago (ISCOTT) was incorporated on June 20th 1975. It started off as a joint venture between the then government of Trinidad and Tobago and Estel of Europe and Kawasaki of Japan. However, government went ahead on its own and built the plant in the late 1970s at a cost of US$350 million dollars. The plant consisted of two direct reduction plants with an annual output of 900,000 metric tones, two electric arc furnaces, two-continuous caster meltshop with an annual capacity of 700,000 metric tones, a wire rolling mill and a fully equipped deep water marine terminal and necessary auxiliary facilities. Commercial production began in 1980 with 21.5 tonnes of Direct Reduced Iron being produced and 3.2 tonnes of billets. In 1982 Anti-Dumping and Countervailing Duties investigations were initiated by five US companies which resulted in a successful anti-dumping penalty of 14%. Cumulative losses by 1982 amounted to almost TT$400 million dollars equal to onefifth of 1979 oil revenue. In 1987 T&T entered a five year deal with the USA by signing a voluntary restraint agreement to limit the amount of steel entering the USA to 73,000 tons per year, for three years. During the same year mounting losses and poor management saw government turning to Voest Alpine Industries of Austria and Hamburger Stahlwerke (HSW) of Germany to run the day to day operations of the firm. Still the new management fared little better than the Government. Cumulative losses at the plant by the end of 1988 totaled $473 million, or an average of $59 million per year since the first full year of production in 1981. ISPAT In 1989 Caribbean Ispat entered into a lease agreement and assembled a management and operations team of 62 expatriates and took over the plant. They were able to increase the production of Direct Reduced Iron in the space of one year from 548 tonnes in 1988 to 674.8 tonnes in 1989. Between 1989 and 1994, Ispat invested US$60 million in capital upgrades for spares, backups, and raw materials to get the plant up to speed. Ispat bought ISCOTT on Dec. 31, 1994, after five years of leasing the plant. The depreciated value of Ispats US$60 million in capital improvements was set at US$31 million, which was deducted from the asset valuation; that made the final purchase price US$70 million. As part of the acquisition, Caribbean Ispat made certain commitments to spend US$73.5 million in capital expenditures over a threeyear period, all of which has been spent. Total capital expenditure by Caribbean Ispat from its inception until 2003 was US$433.6 million. In 1995 Ispat started an extensive upgrading programme of the current systems. These included a new Fume extracting system with a capacity of 10,500 horse power

1980 1982

1987

1989

1994

1995

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(HP) at an estimated cost of US$12.7 million, a main Shaft Furnace costing US$2 million, a Conveyor System costing US$2.5 million and a Lime Plant Air Control System costing US$0.5 million. 1996 In 1996 Ispat announced an Environmental and Plant upgrade with a total cost of US$82.4 million. The environmental upgrade would cost US$25.1 million and included: an air Emissions control system, Solid waste management, a compressive dust control system for the DRI plant, development of an irrigation system within the plant boundary for the plant waste water, improved dust control system for the Lime plant, land reclamation and landscaping and an environmental and monitoring programme to verify ongoing compliance with environmental standards. 1999 In 1999 Caribbean Ispat limited completed the construction of a 1.5 million tones per annum DRI Midrex TM Megamod plant, the largest of its kind in the world at a cost of approximately US$ 200 million. 19 With this system in place production capacity stands at 2.7 million tones per year. The erection and commission of the DRI 3 plant and Electric Arc Furnace Emission control, Caribbean Ispats total shipments went up from 395 thousand tons in the year prior to acquisition to approximately 1 million tons in 2003. 2001 In 2001 the iron and steel industry had to adjust to some of the lowest global prices for iron and steel products by cutting back on production in both the Billet and Wire rod plant. Prices for wire rods reached US$221 per tonne while that of Billets reached US$171 per tonne (See table 5b). Production for wire rod fell from 630.8 tonnes in 2000 to 604.8 tonnes by 2001, while billet production fell from 743.8 tonnes in 2000 to 668.3 tonnes in 2001. Despite these production cutbacks DRI production reached record levels producing 2,187.40 tonnes for the year; which was the direct result of the DRI 3 plant. 2003 International iron and steel prices were extremely buoyant in 2003. Billet prices averaged US$244.64 per tonne in 2003, an increase of 25.9 per cent from 2002. Wire rod prices averaged US$277.71 per tonne, representing an increase of 26.1 per cent from 2002. The production and exports of iron and steel products in Trinidad and Tobago fell in 2003, resulting from operational problems which caused a temporary shutdown of the Caribbean ISPAT plant in May. Production of DRI (2,275 thousand tonnes) and wire rods (640.9 thousand tonnes) declined by 1.8 per cent and 9 per cent respectively, from output levels recorded in 2002. 2004 For the first quarter of 2004 production of DRI increased by to 9.4% as compared to the first quarter of 2003. However, the production of Billets decreased by 4% from the corresponding period last year. The unavailability of vessels hampered the exports during February, as exports stood at 29,300 tons, in contrast with 62,000 tons for the months of January and March. Source: The News letter of Caribbean Ispat Limited Point Lisas, Trinidad, West Indies (various years) and Ispat N.V. Annual Report 2003.

19

Plipdeco News (2003), Trinidad and Tobago a Regional Powerhouse in Iron and Steel. www.plipdeco.com/steel.htm.

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Industrial Clusters Based in Steel production in T&T Nucor Corporation, (Nuclear Corporation of America) is the largest steel producer in the United States and has over US$6.2 billion in sales annually. Nucor is the nation's largest recycler, recycling over 14 million tons of scrap steel annually. In January 1993 Nucor Corp Inc., agreed to establish an iron carbide plant in an industrial estate in Trinidad. Nucor spent about US$80 million on the plant, land acquisition and infrastructure before the much-anticipated project was commissioned in 1994, and likely spent another US$50 million or more trying to get the plant to work economically. Iron carbide initially was seen as another Nucor Innovation, designed to utilize the plentiful natural gas of Trinidad and Tobago to produce, through new technology, high-quality iron units as a substitute for costly low-residual scrap. Nucor was expanding its sheet-making capacity at the time and believed a substantial supply of a high-quality but relatively cheap iron units would allow it to achieve its sheet quality goals, including an eventual foray into the exposed auto panel market. However, Nucor closed its facility after the iron Carbide plant in October 2001 failed to meet the required profit margin and sold it to the National Gas Company of Trinidad and Tobago Ltd. (NGC). According to the Ministry of Energy the acquisition was settlement of Nucors indebtness to NGC. 20 The assets acquired by NGC include the moth-balled plant, a pier, specially constructed to handle Nucor's import and export transactions, and conceivably all rights to the site, however, despite these acquisitions the plant is currently idle. NGC is currently seeking an investor to restart the

20

Source: Trinidad Express Business. October 17, 2001. p.4.

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operations of the Iron Carbide plant and in the near future it is hoped that the plant can begin production of high quality cheap steel on a sustainable basis. 21 Another major player in the international steel market is Cleveland-Cliffs, which is the largest producer of iron ore pellets in North America. Cleveland Cliffs, Lurgi Metallurgie (now known as Outokumpu Technology GmbH), and LTV Steel came to Trinidad and Tobago in the mid-1990s as part of a joint venture for the production of Hot Briquette Iron (HBI). Production of HBI began in 2000 but ceased a year later, as a result of depressed global scrap iron and HBI prices. However, Cleveland-Cliffs Inc. announced that its affiliate, Cliffs and Associates Ltd., jointly owned by a subsidiary of ClevelandCliffs Inc. and Outokumpu Technology GmbH, a German company, has closed on the sale of Cliffs and Associates Limiteds idle Circored Hot Briquette Iron facility in Trinidad and Tobago to International Steel Group Inc. (ISG). The terms of the sale include a purchase price of US$8 million plus assumption of liabilities. In addition, CAL may receive up to US$10 million in future payments contingent upon production and shipments. The license to the technology will transfer to ISG. The HBI process uses natural gas to reduce iron ore fines and yields a low-cost scrap steel substitute that can be used in both electric arc furnace and traditional blast furnace steelmaking. ISG began HBI production at the facility during the fourth quarter of 2004 (Metal Producing and Processing 2004). 22

National Gas Company of Trinidad and Tobago December 2004 http://www.ngc.co.tt/News_Centre/Recent_Releases/Nucor.asp 22 Metal Producing and Processing (2004), ISG Calls Trinidad Restart Successful http://www.33metalproducing.com.

21

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Emerging Economic realities of the 21st century. Small states are usually more vulnerable to changes in the external environment. A number of recent changes in the external environment that small CARICOM economies witness include the formulation of the Free Trade Area of the Americas (FTAA) and the erosion of the African, Caribbean and Pacific (ACP) preferences in the EU market. To emphasize the changing economic realities of CARICOM economies this paper focuses on the latter and draws on a recent study by Greenaway and Milner (2003) which investigated the impact of a proposed Regional Economic Partnership Agreement on CARICOM economies. 23 The Cotonou Agreement which replaces the Lome Conventions was signed on the 31st June 2000 with the dual objectives of: I. Eradicating poverty, II. Enhancing global integration. However, as it stands the Cotonou agreement is due to mature at the end of 2007 and a proposed system of Regional Economic Partnership Agreements (REPAs) are due to come on stream. Greenaway and Milner (2003) in assessing the impact of a REPA between CARICOM and the EU found that all of the small member states of CARICOM would experience a decrease in their economic welfare in the context of the pending REPA between the EU and Cariforum .

23

Greenaway and Milner (2003).

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Table 7: Summary of Revenue and Welfare Effects of Reciprocity to EU Only Change in Change Customs in Net Revenue Welfare EC$m % EC$m Barbados -182.43 -78.1 -131.71 Belize -52.33 -68 -43.5 Dominica -21.85 -75.1 -14.96 Grenada -31.19 -74.4 -21.83 Jamaica -635.12 -76.7 -550.31 St Kitts&Nevis -25.89 -73 -20.39 St. Lucia -60.4 -76.8 -42.64 Trinidad -390.09 -61.8 -292.9 St. Vincent and the Grenadines -27.34 -72 -16.36 Source: Greenaway and Milner (2003). Even more the FTAA which is to come into effect in 2005 emphasises the miniscule size of CARICOM. As the summary information in Table 8 below illustrates, CARICOM accounts for 0.2% of the FTAAs GDP, about 0.7% of merchandise exports and imports and 0.74% of the total population of the FTAA. 24

The FTAA, which was supposed to come on stream in January 2005 has been pushed back to January 2006. Continuing disagreement over farm subsidies between USA and Brazil continue to hamper its progress. Other areas of concern include the Environment, Intellectual property rights, Market access and Services. These differences have stalled the FTAA process, however, while the momentum of negotiations has stalled, the region remains committed to the idea of the FTAA and to break the deadlock and revive talks. By pushing the effective date of the FTAA to 2006 it gives countries a full year to continue negotiations and enact the necessary legislation. (The Trinidad Guardian 2004 Free trade at any cost http://www.guardian.co.tt/archives).

24

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Table 8: Comparative indicators of the relative size of CARICOM countries GDP Merchandise Merchandise Population US$Bn exports imports (millions) Region US$Bn US$Bn CARICOM 30.10 9.11 12.81 6.51 Non- CARICOM FTAA 12736.80 1295.81 1715.10 822.46 CARICOM/FTAA (%) 0.236 0.703 0.747 0.792 Source: International Financial Statistics Year Book (2004).

In the case of the steel industry in Trinidad and Tobago what is at issue is whether an FTAA regime will lead to freer and fairer trade. We have noted that in the case of access to US markets objections to exports from Trinidad and Tobago on the grounds of Government subsidization and subsequently quotas on steel imports from Trinidad and Tobago was the initial framework within which steel exports to the US had to be managed. One of the issues for the FTAA, therefore, is the extent to which the size and relative powerlessness of small countries will be considered in ensuring that trade is in fact free and fair.

Conclusion This paper reviewed the Lewisian industrialization by invitation strategy in a small open oil rich economy, basically the paper showed that prior to the privatization of the steel company, the company made considerable losses and found it difficult to gain market access. With privatization, the iron and steel company benefitted from considerable cash

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injections that improved its physical stock. In total in the period after the MNCs became involved there was an injection of US$ 413 million on the steel complex. The formation of the steel complex in Trinidad and Tobago may have also been influential in precipitating a snowball movement, as two highly innovative steel plants owned by the MNCs have since set up in T&T. The policy lessons from this paper reveal that in the larger CARICOM economies, a resource based industrialization effort of the nature suggested by Lewis can form the basis for a viable developmental strategy. As first advocated by Lewis as much as fifty years ago, the involvement of foreign firms will bring necessary foreign capital, technologies, entrepreneurial talent, and perhaps more than anything else access to an oligopolistic foreign market. If these CARICOM economies were to once more pursue an Industrialization by Invitation pathway, then they will need to put a number of things in place, including: A one stop investment shopping unit, An appropriate taxation regime so as to allow government to garner an optimal share of the economic returns gathered by the MNCs, Resources and other requirements for the establishment of firms upstream and downstream. In this regard, therefore there will be the need for appropriate public policy. The government will also need to seek expert guidance on an appropriate rate of resource depletion.

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