Lewis' Industrialization by Invitation Strategy and Resource Based Manufacturing. Steel Production in T&T - B. Tewarie and R. Hosein

March 18, 2018 | Author: Rachel Rose | Category: Labour Economics, Factors Of Production, Economies, Exports, Current Account


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1052Lewis’ 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 1 We would like to acknowledge the research assistance of Mr. Rishi Singh. 1052 1053 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, Moyne’s 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.” 2 1053 1054 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 Commission’s 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 4 5 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) 1054 1055 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. If MPLth + n = 0. Lewis’s surplus labor force existed in the agricultural sector of the Caribbean economies and such workers argued Lewis. the overall macroeconomy). 7 Lewis raised and answered the following question: which type of manufacturing goods to produce . if TPL = a and TPL+n = a. 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. Lewis observed that: Let us define MPL and TPL as the marginal and total product of the Lth and L workers respectively. then surplus labour is representable by these n remaining workers. He also advocated that these goods should be sold to the developed world or extra-regional market. However. Lewis identified that the agricultural sector utilized little capital and was technologically backward.’ Regarding access to foreign markets. 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. He was of the view that too much labour was employed in the traditional agricultural sector. Alternatively said. resulting in the marginal productivity of labour in that sector being zero. should be siphoned off to facilitate the growth and development of the fledgling manufacturing sector (and by extension. 7 1055 . 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. then the total output of the n ((L + n) -L) workers is zero and represents the surplus labor force. in the modern manufacturing sector productivity is much higher because the sector makes use of reproducible capital.he answered by noting that Caribbean islands needed to produce those manufactures which were intensive in the natural resources of the region. Thus. were those which had an established financial and technological base. and tries to persuade them to set up branches in the new country. the difficulties may prove almost insuperable. 8 Apart from having an established market base. 1056 . tax holidays. except the former USSR. 38. Lewis also advised that the type of MNCs to be wooed by Caribbean economies. 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. Lewis 1950). Caribbean economies needed to “woo” and “fawn” upon foreign multinationals to become pioneers in the region. As such. 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. 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.” (pg. and a period of wooing and fawning upon such people. Lewis 1950).” (page 31. tax exemptions or tariff protection. 34. Incentives can take the form of subsidies. Therefore. Foreign capital is needed because industrialization is a frightfully expensive business quite beyond the resources of the islands. one seeks manufacturers who are already established in the market. there will be no need for government to actively start such an economic 8 In ‘Aspects of Industrialization’.1056 To start manufacturing in a new country is a formidable enough problem: if one adds to it trying to break into established markets. According to Lewis. 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. 1057 venture. if the local people are thrifty. the foreign capitalist with the Industrialization by Invitation (IBI) strategy was to act like a foreign teacher to develop local skills for self-reliance. therefore. Lewis 1950). It is in this light. having learnt the tricks of the trade to set up in the business themselves…” (pg. However. Lewis viewed such thinking as unsubstantiated for developing countries as there was a need for direct intervention for development to take place. Lewis notes that the acid test of development is measured by a country’s ability to initiate economic development on its own without foreign business. Lewis noted that industries are “gregarious” and “like to move together”. 39. if an industry is not initiated it could discourage the formation of new ones. they can build up savings which in due course enable them. Thus. if an industry were started it is more likely that others will follow and enter the industry. On the other hand. which is now an important part of the macroeconomic literature is premised on human capital as the key ingredient for the growth of economies. However.. 1057 . 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. 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: “. 9 Note that the depth of Lewis’ foresight as endogenous growth theory. Lewis also made the point that MNC’s should not be allowed to enter into the islands and do as they please. 9 Importantly. A key part of economic policy according to Lewis (1949) was to facilitate the training and development of locals. The environment in which Lewis made his policy proposition has no doubt changed.8 0.850 0. The CARICOM market. To assist in the process of development. Downes (2004) has highlighted the following fundamental facets of Lewis’s 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. is still useful to the extent it can serve as a base market for immature CARICOM firms. however.6 Tobago Source: United Nation (Human Development Report 2004).1058 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.3 9.9 Trinidad and 4. Table 1: Basic Indicators of Size of Selected CARICOM Countries Country Land Area Population GDP Billion Km2 million US$ 2002 Barbados 430 0. the IBI strategy requires the establishment of an Industrial Development Corporation.5 Guyana 196.6 7. however.828 1. Such an institution would have the responsibility of facilitating foreign investment.7 Jamaica 10.911 2. For example by providing an outlet for settling grievances relating to investment. 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.3 2. 1058 . has the highest population of 2.1059 Specifically. To prevent human capital becoming a bottleneck to the industrialization process and to facilitate the learning of the tricks of the trade. Barbados is very small in comparison with its larger CARICOM partners. Jamaica on the other hand. these statistics clearly reflect that CARICOM economies are still economically small. the quantity and quality of skilled post secondary school graduates must be enhanced.850 km2. • Policy measures should be appropriately established so that domestic competitive capabilities are expanded and well explored. secondary and tertiary gross enrolment. while Guyana has the largest land space of 196. The education index as calculated by the United Nation’s HDR (2004) shows: “a country’s relative achievement in both adult literacy and combined primary. Then these two indices are combined to create the education index. with a land space of only 430 km2. In terms of population. In total.’ 1059 . Barbados has a population of 0. The state can act as a facilitator of the development process including getting the Lewisian snowball moving downhill.3 million. None of the more developed CARICOM countries has a GDP in excess of US$10 billion. and as the Table 1 above shows.6 million people followed by Trinidad and Tobago. Important on the list of such policies will be productivity enhancing measures. with two thirds weight given to adult literacy and one third weight to combined gross enrolment. First an index for adult literacy and one for combined gross enrolment are calculated. 1060 Table 2: Education indices for CARICOM and various other economies. Lucia St. U.S. Kitts and Nevis St.87 Table 2 above shows that as compared to benchmark economies such as Norway.83 0.98 0. Country Mauritius Norway Singapore U. 1060 .77 0.79 0.88 0.76 0.80 0.75 0. Vincent and the Grenadines Suriname Trinidad and Tobago Source: HDR (2004) Education Index 0.91 0.K.99 0.89 0.95 0. this RBI effort should focus on utilization of natural resources as far downstream as possible.88 0. As before.85 0. The RBI agenda can take a number of varied forms but can include both direct foreign control and joint venturing.99 0. Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica St.87 0. 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.97 0. 1061 Resource Based Export Led Industrialization As mentioned previously. Some of the benefits of the primary export processing variant of the RBI strategy include the following: 1061 . However. 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.. 18. It calls for reduced dependence on world trade to promote industrialization. for any country. Specifically he noted that: “The secret of success. According to Roemer (1978) there are two types of Resource Based Industrialization (RBI) strategies. chemicals.”. is to specialize in those (manufactures) to which its resources are most appropriate and to avoid the others” (pg. Lewis 1950). 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. these are: primary export processing and basic goods production. in terms of the Caribbean this strategy is inappropriate because according to Roemer (1978) “it relies on the development of heavy industries . 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. It is a typical strategy adopted by socialist countries including China and North Korea.basic metals. rubber. paper etc. where primary exports are vital for the purchasing of intermediate capital goods and for import substituting goods.. 294. 1999-2003. Foreign firms.84 Source: Annual Economic Survey (2003) 1062 . Current Account balance and Exports from Trinidad and Tobago US$ m. The facilitation of technological progress: developing countries lack the financial resources to meet the various challenges of economic development on their own.8 425. investing in T&T’s hydrocarbon sector often made contributions to the human resource development of the country. (ii) (iii) (iv) (v) Table 3: FDI Flows. More importantly. as multinationals can combine their “ownership specific advantage” with the natural resources of host economies. especially in developing countries where such resources are scarce.4 US$m Exports US$m 2. foreign firms often employ students from these institutions under apprenticeship programs. Greater foreign exchange inflows. Some of these contributions went into institutions such as the National Energy Skills Center (NESC) and the University of Trinidad and Tobago (UTT).77 4.9 684.02 4.0 49.3 684. RBI facilitated by an Industrialization by Invitation strategy (IBI).02 3. Roemer (1978) has noted that “almost all of the industries based in natural resources are subject to economies of scale.6 544.874. can as Lewis (1950) argued. 1999 2000 2001 2002 2003 FDI US$m 379. RBI can shift comparative advantage towards the exporting country. The opportunity to benefit from economies of scale: specifically. Current account pressures: RBI helps to relax the current account pressures by increasing the country’s external earnings and attracting foreign investment. enhance the prospects of economic growth and transformation in less developed countries.2 Current Account Balance 30. according to Roemer (1978).6 917.153.” Multinationals are capable of undertaking investments on a large scale that not only provide for the host economy’s needs but also to large tracts of international demand.812.29 4.1062 (i) Greater resource utilization: RBI allows a country to take advantage of underutilized natural resources. reduces pressure placed on an economy’s current account balance by import demand.001. however. for example.2 654. 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). 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.3 416. no doubt due to rising wage rates on account of militant trade unions. The brute facts are that the 1063 . “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. Barclay (2003) notes. 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. and will get bigger and bigger as it goes along” (pg. it will move of its own momentum. These productivity spillovers. worker training. economic growth is subject to increasing returns to scale facilitating high factor productivity and maximizing the social welfare for the country. range from increased productivity of local firms. 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).” In addition. 36. industry linkages and market access…Indeed 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. Adelman (1999) notes that greater local content requirements have forced MNCs to utilize indigenous factors of production more intensively. the average wage rate in CARICOM economies is today much higher than in other parts of the world. This facet of the CARICOM environment has changed over time. Lewis 1950). Basically. 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. RBI not only increases worker productivity but increases the productivity of all the other factors of production.1063 (vi) RBI investments increase the Total Factor Productivity (TFP) and consequently the well-being of the country. As a result. December 18th (2004).1064 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. Lewis’ snowball effect is reflective of an industrial clustering process. 10 Some of the distinct advantages of participating in a cluster include: The concept of a filière can best be understood as a channel of production and distribution.31a Tobago India 0. 10 1064 . Table 4: Minimum Wage in Selected countries Per Hour US$ Trinidad and 1.16c Source: a: Country Report on Human Rights Practices (2003). 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. July 2nd (2004) c: The Times of India.66b China 0. b: Asian Labour News. 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 filière. incorporating all the economic and technically interrelated operations. which feed goods directly or indirectly towards a similar end market. between the T&T government. • Steel production in T&T: Lewis’ IBI at work.1065 · Specialised local suppliers of inputs and services.19). 1975 the Iron and Steel Corporation of Trinidad and Tobago (ISCOTT) was incorporated. · A local mobile pool of labour with highly relevant skills and knowledge. commercial production from which began in 1980. · A local industrial atmosphere in which relevant technological know-how and ideas are “in the air”. ISCOTT was seen as a viable option for the use of natural gas. not only as a form of advertising but quality certification and reduces uncertainty and transaction costs from buying from a cluster. On June 20th. components and technical equipment. and readily available to all. After three years. this relationship was broken and Estel and Kawasaki were released from their obligation. Clustering also reduces transaction costs by reducing uncertainty. This sends signals to the market. pp. Informal exchange of information and demonstration effects of successful decisions can create a collective information-gathering and screening function in clusters. 1065 . Government went ahead on its own and built the plant at a cost of US$350 million dollars. Signaling: many firms cluster because it has the ability of building a good reputation for quality. 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. Estel of Europe and Kawasaki of Japan. The screening function can help overcome the difficulties small firms encounter in inspecting and monitoring the quality and hidden characteristics of inputs. It was initially conceptualized as a joint venture. through the following avenues: • Collective information-gathering and screening (Albu 1997. 12 11 Countervailing Duties are duties imposed on foreign goods that have been heavily subsidized by the foreign country’s government. investigated allegations that the Government of Trinidad and Tobago’s (GOTT)… equity infusions into the Iron and Steel Company of Trinidad and Tobago (“ISCOTT”) constituted countervailable subsidies. as one source observed: The United States Department of Commerce.1066 The steel company represented a means of increasing the development process through the use of natural gas. It determined that payments made by the GOTT to ISCOTT from January 1st. as well as. The plant was capable of processing iron ore into finished products. 13 Thus although the steel plant was modern.gov/slip. billets and reinforcing bars. 03-81.000 marking the second year of declining production. 2003. while at the same time diversifying the economy. such as wire rods.200 tons. mainly resulting from market access problems.cit. Specifically. Case # 01-00834. providing the means of diversifying the economy’s export base. 1986 through April 8th. The steel plant was capable of satisfying local demand. However. 13 The United States Court of International Trade Slip Op.uscourts. 1988 were not consistent with the practice of a reasonable private investor and were thus countervailable subsidies. Judge Wallach. By 1985 production of iron and steel fell to 513. not too long after the plant’s 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 Tobago’s steel exports. www. 1066 . During the same year exports also fell by 143. it proved to be an unprofitable investment undertaken at the time. It raises the cost of the goods so that it is representative of the true market value. 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 producer’s home country. by the late 1980s amidst depressed price and production levels of crude oil. However. Government turned the management of ISCOTT over to Voest – Alpine Industries of Austria and Hamburger Stahlwerke (HSW) of Germany. T&T still exported steel to the USA. without one country having to resort to more severe trade restriction policies such as: quotas. they were unable to turn the fortunes of the company around partly due to the voluntary export restraint agreement which was still in force. for a three year period in exchange for the withdrawal of the AD and CD cases. the company faced management problems. 14 In addition. 15 Schriefer John (1996) “An Empire of Direct reduced Iron and Steel”. Despite paying AD and CD duties for several years. (the average annual growth rate for the period 1983-1989 was -4. Production did increase in 1986. In 1993. Since the government had overextended itself during the boom and early years of the recession it had to turn to international lending institutions.newsteel. 15 Although benefiting from a boom in the 1970s.6%). in 1987 T&T signed a voluntary restraint agreement to limit the amount of steel entering the USA to 73. This was due to the implementation of the 14% levy on Trinidad and Tobago’s steel exports.com/features/ns9608f7. This persuaded government to source West European firms to manage ISCOTT's operations under a two-year contract. such as the International Monetary Voluntary Restraint Agreement (VRA) is an agreement signed by government or industry to reduce the volume of exports. New Steel Published August http://www.000 tons per year. signalling the early success of the outside management contract. However.htm . the US wire rod industry filed a new round of AD and CVD cases against several steel exporting countries including Trinidad and Tobago. 14 1067 .9% of production. tariffs or other import controls. the T&T economy plunged into a recession.1067 27. which was manifested in decreasing output in 1984 and 1985. 1994. Currently. In particular.000 employees worldwide from over 45 nationalities. Kazakhstan. Germany. the Group has major integrated steelmaking operations in the U.000 customers in 120 countries and has an established list of customers who are leaders in the automotive. which is a subsidiary of Ispat International NV and part of the LNM Group founded by Lakshmi N Mittal. This is the world’s largest steel producer with integrated steel making facilities in 12 countries. France. the government of T&T sold the steel plant in 1995 to Caribbean Ispat Limited.V. In its privatization thrust. This caused net foreign reserves to decline from US$2. Canada.1068 Fund (IMF) for financial assistance. Algeria. as the deficit amounted to TT$2.461. has approximately 120. H.983. 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. Romania. 16 This resulted in the implementation of a Structural Adjustment Program (SAP) with the attendant conditionality of a minimalist state. an annual steel production capacity of over 32 million tonnes and revenues estimated to be US$9. As it stands the plant is integrated. South Africa and Indonesia.S. (2004) “ Mittal Steel is World’s Largest” http://inhome. The Group supplies steel to over 5.2 billion in the first nine months of 2004. and Ispat International N.9 million. for example in 1981 the fiscal balance stood at TT$1. During the 1980’s 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. (Ispat International NV Annual Report 2004.344 million. 17 Rao. Czech Republic.9 billion and operating income of US$3.8 million in 1988.3 million in 1982 to US$23. The government also found itself running large fiscal deficits. 17 The Group. Trinidad.5 million but by 1983 there was a deficit of TT$2.com).350. www. S. Mexico.rediff.. appliance.V.ispat. excessive imports caused the current account balance to go into deficit from 1982 to 1989 with 1983 being the worst year. engineering and other sectors..com 16 1068 . including LNM Holdings N. 9 252.80 677.7 171.6 313.5 1983 302.8 0 630.2 743.9 115.9 3.60 208.9 0 638.83 205.000 mty.00 521.2 40.1 635.7 375.6 8.3 345.3 497.316.2 495.7 668 1998 1023.9 603.5 676.09 71.9 747 12.2 14.5 223.8 288.1 1987 441. reduce costs.1 53.56 1989-2003 Source: Central Bank Annual Economic Survey (various years) Export 5.9 186.275.29 531.377.2 551. improve product mix and broaden customer base.9 270. 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 179.1 1982 217.30 896 0 640.364.33 519.3 14.10 816.2 575.2 327 23.8 364.6 130.268.1 1996 954.1069 comprising gas based direct reduction iron (DRI) 840.2 2000 1.5 2003 2.8 2002 2.8 649. an electric arc furnace (EAF) type steel melt shop of 600.1 776.6 223.2 65. following a strategy designed to increase production.6 594.4 1997 1133.30 1.41 Table 5b: Post ISPAT – Foreign Lease/ownership 1989 674.202.000 metric tones per year (mty).5 292.20 668.3 56.3 630.1 12.3 357.5 1.7 723.8 604.4 561 655.9 17.9 1986 337.17 1069 .3 439.8 12 446.8 588. Caribbean Ispat was able to turn out profits in its first year.1 217.524.5 209.9 492.8 344.1 198.1 1992 647.4 87.4 164.5 24 276.3 166.2 106.1 21 521.4 76.000 mty and ancillary facilities.1 0 29.5 276.7 552.48 634.8 2001 2.8 590.6 119.2 239.1 209.2 1984 239 61.9 0 704.9 1999 1.29 15.40 1.8 270.1 1990 681.6 14.1 1993 714.1 15.7 8. a wire rod mill of 420.8 564.8 340.3 134. improve processes.7 1985 243.5 87.00 1.9 Average 1.2 1988 548 151.187.13 8.7 626.2 12.3 364.2 53.9 1 102.1 179.07 143.5 272.1 1991 654 196.7 413 1994 914.3 400.293.9 53.4 361.4 1995 1039.9 643.9 251 1980-1988 281.8 118. 275 tonnes in 2003 and wire rod production reaching 640. billets and wire rods for the period 1980 to 1983 improved.co.2 tonnes in the same period. This pattern continued. saw production of DRI under ISPAT management increasing from 674. as billets are a factor input into the production of wire rods and bars. 1070 .2 tonnes of DRI produced in 1986 only 53. This however. the exports of billets decreased from an average of 15.5 tonnes to 495. of the 337. production of billets only increased marginally.2 tonnes in 1985.364. Specifically. while ISPAT was able to turn around the production of DRI and wire rods.1070 From the Table 4 above.6 tonnes in 1983 to 164.tt.8 tonnes in 1989 to 1039. However.07 tonnes during the 1980-1988 era to 8.2 tonnes during the period 1989 to 2001. with DRI production reaching 2.9 tonnes for the same period.2 tonnes were exported. while production of billets and wire rods fell from 209. Greater market access amongst other factors. it fell shortly thereafter. In terms of exports during the pre-ISPAT era a small percentage of what was produced were exported because of export restraint.gurdian.9 tonnes in 1995. it can clearly be seen that during the pre ISPAT era the output of the plant was depressed.29 tonnes during the post ISCOTT period. Even more. while wire rod production rose from 205. is due to the fact that most of ISPAT’s billets are used to facilitate downstream production.3 tonnes in 1983 to 239 tonnes in 1984. For example. 18 18 The Trinidad Guardian (2004) “Ispat Using Unfair Tattics” By Jahel Browne hptt//:www. DRI exports also increased significantly from 288. DRI production fell from 302. while the production of direct reduced iron.8 tonnes to 1. all of which has been spent. after five years of leasing the plant. Between 1989 and 1994. 1994. In 1982 Anti-Dumping and Countervailing Duties investigations were initiated by five US companies which resulted in a successful anti-dumping penalty of 14%. provides a chronological list of key developments of the steel company in T&T from its ISCOTT to ISPAT eras. government went ahead on its own and built the plant in the late 1970s at a cost of US$350 million dollars. Ispat bought ISCOTT on Dec. and raw materials to get the plant up to speed. which was deducted from the asset valuation.6 million. backups. Caribbean Ispat made certain commitments to spend US$73.000 metric tones. They were able to increase the production of Direct Reduced Iron in the space of one year from 548 tonnes in 1988 to 674. 31. The depreciated value of Ispat’s US$60 million in capital improvements was set at US$31 million. two-continuous caster meltshop with an annual capacity of 700. As part of the acquisition.000 tons per year. 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. for three years.2 tonnes of billets. 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. It started off as a joint venture between the then government of Trinidad and Tobago and Estel of Europe and Kawasaki of Japan.8 tonnes in 1989. However.000 metric tones. the Table 6 reviews the major financial investments undertaken in the plant from 1975 to 2004. Still the new management fared little better than the Government. two electric arc furnaces. In particular. 1975 The Iron and Steel Corporation of Trinidad and Tobago (ISCOTT) was incorporated on June 20th 1975.5 tonnes of Direct Reduced Iron being produced and 3. Cumulative losses by 1982 amounted to almost TT$400 million dollars equal to onefifth of 1979 oil revenue.1071 The Table 6 below. that made the final purchase price US$70 million. The plant consisted of two direct reduction plants with an annual output of 900. Commercial production began in 1980 with 21. Table 6: Historical Development of ISCOTT and ISPAT from 1975-2003. Total capital expenditure by Caribbean Ispat from its inception until 2003 was US$433. Cumulative losses at the plant by the end of 1988 totaled $473 million. Ispat invested US$60 million in capital upgrades for spares. These included a new Fume extracting system with a capacity of 10.5 million in capital expenditures over a threeyear period. 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.500 horse power 1980 1982 1987 1989 1994 1995 1071 . a wire rolling mill and a fully equipped deep water marine terminal and necessary auxiliary facilities. In 1995 Ispat started an extensive upgrading programme of the current systems. 1999 In 1999 Caribbean Ispat limited completed the construction of a 1.64 per tonne in 2003. a Conveyor System costing US$2. 19 Plipdeco News (2003).187. Billet prices averaged US$244. in contrast with 62.htm. while billet production fell from 743.4% as compared to the first quarter of 2003. improved dust control system for the Lime plant. 1072 . 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.5 million tones per annum DRI Midrex TM Megamod plant. The environmental upgrade would cost US$25. Prices for wire rods reached US$221 per tonne while that of Billets reached US$171 per tonne (See table 5b).000 tons for the months of January and March.1 million and included: an air Emissions control system.plipdeco. 2003 International iron and steel prices were extremely buoyant in 2003. an increase of 25. The production and exports of iron and steel products in Trinidad and Tobago fell in 2003. 19 With this system in place production capacity stands at 2. land reclamation and landscaping and an environmental and monitoring programme to verify ongoing compliance with environmental standards.com/steel.V. However.5 million. 2004 For the first quarter of 2004 production of DRI increased by to 9. “Trinidad and Tobago a Regional Powerhouse in Iron and Steel”.40 tonnes for the year. www. a main Shaft Furnace costing US$2 million. The erection and commission of the DRI 3 plant and Electric Arc Furnace Emission control. Source: The News letter of Caribbean Ispat Limited Point Lisas.7 million. Production of DRI (2.8 tonnes by 2001.8 tonnes in 2000 to 604. from output levels recorded in 2002. Wire rod prices averaged US$277.9 thousand tonnes) declined by 1.9 per cent from 2002.4 million.3 tonnes in 2001. Trinidad. Solid waste management. representing an increase of 26.275 thousand tonnes) and wire rods (640. as exports stood at 29.7 million tones per year. Annual Report 2003. The unavailability of vessels hampered the exports during February. the production of Billets decreased by 4% from the corresponding period last year.1 per cent from 2002.5 million and a Lime Plant Air Control System costing US$0. which was the direct result of the DRI 3 plant.8 tonnes in 2000 to 668. 1996 In 1996 Ispat announced an Environmental and Plant upgrade with a total cost of US$82.71 per tonne.1072 (HP) at an estimated cost of US$12. development of an irrigation system within the plant boundary for the plant waste water.300 tons. a compressive dust control system for the DRI plant.8 per cent and 9 per cent respectively. West Indies (various years) and Ispat N. Production for wire rod fell from 630. Despite these production cutbacks DRI production reached record levels producing 2. the largest of its kind in the world at a cost of approximately US$ 200 million. Caribbean Ispat’s total shipments went up from 395 thousand tons in the year prior to acquisition to approximately 1 million tons in 2003. resulting from operational problems which caused a temporary shutdown of the Caribbean ISPAT plant in May. designed to utilize the plentiful natural gas of Trinidad and Tobago to produce. 20 The assets acquired by NGC include the moth-balled plant. NGC is currently seeking an investor to restart the 20 Source: Trinidad Express Business. Iron carbide initially was seen as another Nucor Innovation. land acquisition and infrastructure before the much-anticipated project was commissioned in 1994. (Nuclear Corporation of America) is the largest steel producer in the United States and has over US$6.1073 Industrial Clusters Based in Steel production in T&T Nucor Corporation. 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. 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. despite these acquisitions the plant is currently idle. Nucor spent about US$80 million on the plant. high-quality iron units as a substitute for costly low-residual scrap. specially constructed to handle Nucor's import and export transactions. p. October 17. including an eventual foray into the exposed auto panel market. In January 1993 Nucor Corp Inc.4.. recycling over 14 million tons of scrap steel annually. According to the Ministry of Energy the acquisition was settlement of Nucor’s indebtness to NGC. a pier. (NGC). agreed to establish an iron carbide plant in an industrial estate in Trinidad. 1073 .2 billion in sales annually. through new technology. however. 2001. However. and likely spent another US$50 million or more trying to get the plant to work economically. Nucor is the nation's largest recycler. and conceivably all rights to the site. 21 Another major player in the international steel market is Cleveland-Cliffs. 22 National Gas Company of Trinidad and Tobago December 2004 http://www.1074 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. a German company. jointly owned by a subsidiary of ClevelandCliffs Inc. and Outokumpu Technology GmbH. CAL may receive up to US$10 million in future payments contingent upon production and shipments. as a result of depressed global scrap iron and HBI prices. “ ISG Calls Trinidad Restart Successful” http://www.33metalproducing. Cliffs and Associates Ltd.. has closed on the sale of Cliffs and Associates Limited’s idle Circored Hot Briquette Iron facility in Trinidad and Tobago to International Steel Group Inc.tt/News_Centre/Recent_Releases/Nucor. The terms of the sale include a purchase price of US$8 million plus assumption of liabilities. which is the largest producer of iron ore pellets in North America.ngc. announced that its affiliate. In addition.asp 22 Metal Producing and Processing (2004).co. Cleveland Cliffs. ISG began HBI production at the facility during the fourth quarter of 2004 (Metal Producing and Processing 2004). 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. Production of HBI began in 2000 but ceased a year later.com. Cleveland-Cliffs Inc. However. Lurgi Metallurgie (now known as Outokumpu Technology GmbH). (ISG). 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). 21 1074 . 23 The Cotonou Agreement which replaces the Lome Conventions was signed on the 31st June 2000 with the dual objectives of: I.1075 Emerging Economic realities of the 21st century. 1075 . 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. However. 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. II. 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 . Eradicating poverty. 23 Greenaway and Milner (2003). Small states are usually more vulnerable to changes in the external environment. Enhancing global integration. Caribbean and Pacific (ACP) preferences in the EU market. 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. Vincent and the Grenadines -27.33 -68 -43. Other areas of concern include the Environment.guardian.8 -42. however. (The Trinidad Guardian 2004 “Free trade at any cost” http://www.co. while the momentum of negotiations has stalled.4 -21.83 Jamaica -635.tt/archives).89 -73 -20.8 -292. Market access and Services.2% of the FTAA’s GDP.85 -75.1 -131.19 -74. 24 The FTAA.4 -76. the region remains committed to the idea of the FTAA and to break the deadlock and revive talks.9 St.34 -72 -16. By pushing the effective date of the FTAA to 2006 it gives countries a full year to continue negotiations and enact the necessary legislation.7% of merchandise exports and imports and 0. Lucia -60.31 St Kitts&Nevis -25. CARICOM accounts for 0.96 Grenada -31. As the summary information in Table 8 below illustrates. about 0. Intellectual property rights.1 -14.36 Source: Greenaway and Milner (2003).64 Trinidad -390. Continuing disagreement over farm subsidies between USA and Brazil continue to hamper its progress. Even more the FTAA which is to come into effect in 2005 emphasises the miniscule size of CARICOM.7 -550.5 Dominica -21.71 Belize -52.1076 Table 7: Summary of Revenue and Welfare Effects of Reciprocity to EU Only Change in Change Customs in Net Revenue Welfare EC$m % EC$m Barbados -182.43 -78. These differences have stalled the FTAA process.74% of the total population of the FTAA.12 -76.09 -61. which was supposed to come on stream in January 2005 has been pushed back to January 2006.39 St. 24 1076 . 236 0. the company made considerable losses and found it difficult to gain market access.792 Source: International Financial Statistics Year Book (2004).11 12.703 0.CARICOM FTAA 12736.81 6. Conclusion This paper reviewed the Lewisian industrialization by invitation strategy in a small open oil rich economy. the iron and steel company benefitted from considerable cash 1077 .80 1295. therefore. With privatization. One of the issues for the FTAA.46 CARICOM/FTAA (%) 0. basically the paper showed that prior to the privatization of the steel company. is the extent to which the size and relative powerlessness of small countries will be considered in ensuring that trade is in fact free and fair.10 822. We have noted that in the case of access to US markets objections to exports from Trinidad and Tobago on the grounds of Government subsidization and subsequently quotas on steel imports from Trinidad and Tobago was the initial framework within which steel exports to the US had to be managed.51 Non. In the case of the steel industry in Trinidad and Tobago what is at issue is whether an FTAA regime will lead to freer and fairer trade.747 0.1077 Table 8: Comparative indicators of the relative size of CARICOM countries GDP Merchandise Merchandise Population US$Bn exports imports (millions) Region US$Bn US$Bn CARICOM 30.10 9.81 1715. As first advocated by Lewis as much as fifty years ago. and perhaps more than anything else access to an oligopolistic foreign market. An appropriate taxation regime so as to allow government to garner an optimal share of the economic returns gathered by the MNCs.1078 injections that improved its physical stock. entrepreneurial talent. In total in the period after the MNCs became involved there was an injection of US$ 413 million on the steel complex. The policy lessons from this paper reveal that in the larger CARICOM economies. 1078 . In this regard. • Resources and other requirements for the establishment of firms upstream and downstream. • The government will also need to seek expert guidance on an appropriate rate of resource depletion. 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. 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. a resource based industrialization effort of the nature suggested by Lewis can form the basis for a viable developmental strategy. therefore there will be the need for appropriate public policy. the involvement of foreign firms will bring necessary foreign capital. technologies. including: • • A one stop ‘investment’ shopping unit. Caribbean Ispat Limited. The University of the West Indies (1999). January 2004 Central Bank of T&T (1989).S. Electronic Working Papers Series.O. Lou Anne A.O. Central Bank.S.S.S.. P. The Balance of Payments Yearbook. and Central Bank of T&T. Science Policy Research Unit Mantell Building. P.S. CIL Live Wire Vol. C. The Contribution of Arthur Lewis to Development Studies.O. 1 No. Jamaica: The Press. Curtis Rampersad.O. K. ‘Annual Economic Survey. 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