The Slowing of the Engine of Growth

A review of Sir Arthur’s paper of growth in developing economies

Growth Development
Author

Janai Leonce

Published

May 29, 2024

Getty Images: Sir Arthur

1 Introduction

World War 2 affected people of all races, creeds and geographical land masses.  Its aftermath led to three occurrences which influenced the writings of Sir Arthur Lewis.   These included decolonisation, racial tensions and questions surrounding the role of government1.  The end of the war spurred debate on what ideological consensus should be invented to avert a recurrence of war.  Consequently, issues such as racial justice, political independence, economic growth and the re-distribution of wealth were topical in the mid 1950s to 1970s2.  Sir Arthur sought to contribute to this debate through his writings and musings by using economic theory to provide solutions to these pertinent issues.  The Slowing Down of the Engine of Growth is the lecture delivered by Sir Arthur in Stockholm in 1979 upon receipt of the Nobel Prize in Economics.  Lewis noted that developing country growth rates over history (before the 1970s) appear to have moved in lockstep (see Figure 1 ) with developed country growth.  Post-1970 however there appeared to be a break in this trend which prompted Lewis to examine the proximate causes. 

Code 
chart_growth <- growth_long |> 
  filter(`Country Code`=='OED'|
         `Country Code`== 'LIC'|
         `Country Code`== 'LCN',
         `Indicator Name`=='GDP growth (annual %)') |> 
  ggplot(aes(x=Year, y=Indicators, color=`Country Name`))+
  geom_line(size=1.5, alpha=0.8)+
  labs(title = 'GDP Growth Rates for High and Low-Income Countries',
       subtitle = 'Do growth rates move in lockstep?',
       y='%',
       color='',
       caption = 'Source: World Bank Development Indicators')+
  theme_fivethirtyeight()+
  scale_y_continuous(labels = scales::comma)

chart_growth
Figure 1: Developed and developing country growth rates

Developing country growth rates as proxied by Latin America and the Caribbean3 and low-income economies 4growth rates do appear to move in sync with that of the developed world as proxied by OECD member country average growth. The disconnect referenced in the 1970s appears to have been short-lived as the 1980 to the present day confirms lockstep developments.

2 Transmission mechanism

2.1 Trade

Lewis sought to expound on the transmission mechanism responsible for developing and developed country growth to move in tandem and how it had and may continue to change over time.  One of the chief mechanisms responsible for this lockstep movement was in his opinion, trade between the two. He posited that  as developed countries grow they import more and developing countries export more.  This trade, at the time of his writings, happened primarily in primary products.   Nonetheless, it served to bring in much-needed foreign reserves, enable a nascent manufacturing base and consequently provide the platform for a middle class in the developing world. In Figure 2 we see that trade has been steadily growing in most economies.

Code 
chart_trade <- trade_long |> 
  filter(`Country Code`=='OED'|
         `Country Code`== 'LIC'|
         `Country Code`== 'LCN',
         `Indicator Name`=='Trade (% of GDP)') |> 
  ggplot(aes(x=Year, y=Indicators, color=`Country Name`))+
  geom_line(size=1.5, alpha=0.8)+
  labs(title = 'Trade as a Percentage of GDP for \n High and Low Income Countries',
       subtitle = 'Does trade growth move in lockstep?',
       y='%',
       color='',
       caption = 'Source: World Bank Development Indicators')+
  theme_fivethirtyeight()+
  scale_y_continuous(labels = scales::comma)

chart_trade
Figure 2: Developed and developing country trade as a % of GDP

Consistent with Sir Arthur’s thinking trade has increasingly become a major contributor to economic development across country classifications.

2.2 Labor and remittances

Further to these effects, the need for labour by the developed world, to convert the imported resources into finished goods, provided another channel by which the developing world benefited from developed country growth, i.e. migration (see Figure 3.)  These new entrants to the developed world would then send remittances (see Figure 4) back home which greatly assisted capital formation there.  Over the review period studied by Lewis these factors positively affected both country groupings and consequently, both developed and developing countries grew at around 5.0 per cent annually. 

Code 
chart_migration <- migration_long |> 
  filter(`Country Code`=='OED'|
         `Country Code`== 'LIC'|
         `Country Code`== 'LCN',
         `Indicator Name`=='Net migration') |> 
  ggplot(aes(x=Year, y=Indicators, color=`Country Name`))+
  geom_line(size=1.5, alpha=0.8)+
  labs(title = 'Net Migration High and Low Income Countries',
       subtitle = 'Who are the winners and losers?',
       y='%',
       color='',
       caption = 'Source: World Bank Development Indicators')+
  theme_fivethirtyeight()+
  scale_y_continuous(labels = scales::comma)

chart_migration
Figure 3: Net Annual Migration

In Figure 3 we see that the OECD is a net gainer of migrants while the Latin American and Caribbean (LAC) region is a net loser. Figure 4 however shows that remittances are a much larger contributor to the LAC and low income region than it is to the OECD, which again is consistent with Sir Arthur’s writing.

Code 
chart_remit <- remittances_long |> 
  filter(`Country Code`=='OED'|
         `Country Code`== 'LIC'|
         `Country Code`== 'LCN',
         `Indicator Name`=='Personal remittances, received (% of GDP)',
          Year> year(1978))|> 
  ggplot(aes(x=Year, y=Indicators, color=`Country Name`))+
  geom_line(size=1.5, alpha=0.8)+
  labs(title = 'Personal remittances as a Percentage of GDP for High \n and Low Income Countries',
       subtitle = 'Who are the largest gainers?',
       y='%',
       color='',
       caption = 'Source: World Bank Development Indicators')+
  theme_fivethirtyeight()+
  scale_y_continuous(labels = scales::comma)

chart_remit
Figure 4: Personal remittances received as a % of GDP

Lewis then focused on whether developed country growth will continue to remain as strong as it did post World War 2 and sought to examine what developing countries should do if this strong rate of growth in developed countries didn’t materialize.  Lewis ends the piece by focusing on whether developing countries should pursue a development strategy where they are tied to developed countries via trade.  Lewis assumed that growth rates in developed countries would slow in line with cyclical swings in economic activity which occurred every 10 or so years.  If developed country growth slowed (which it did see Figure 1) and developing nations needed to keep their levels of economic activity constant, then in the face of lower demand Lewis argued that increasing intra-developing country trade was the most appropriate response.  This intra-developing country trade would supplement any loss of trade associated with weak demand from the developed world, should their growth slow.

3 Intra regional trade

Intra-developing trade within the context of slowing developed world growth was the best approach for developing countries to adopt if they wanted to keep robust growth rates.  This allowed for continued utilization of capital stock and kept employment levels within the developing world satisfactory.  Other approaches such as attempting to get a larger share of developed country imports and lowering their export prices would not have been satisfactory since the former was not possible given Lewis’s assumptions and the latter would have resulted in a deterioration of the terms of trade.

4 Predictions

He further went on to state that intra-developing country trade in food-stuffs and basic materials like cement and fertilizer was possible as these required “application of standard/basic technologies” which was within the grasp of most developing countries.  Lewis also correctly predicted that developing countries of the day such as Mexico, Singapore and China would have strong intra-developing country exports in the first instance and then gradually expand to exporting high-value goods to developed markets.  While citing potential limits to intra developing country trade such as some developing countries proving too poor to serve as a viable export market while others may become direct competitors he nonetheless stressed that a customs union operating within a currency clearing system among developing countries was most beneficial. 

5 Regional experience

The link between developed and developing country growth rates with merchandise trade is an intuitively strong one which the Caribbean region will be well placed to study (see Figure 5.)  As an example, a review of the percentage of total merchandise imports5 of the OECD (a grouping of 34 developed states) from Latin America and the Caribbean region shows that regional imports represented an average 4.8 per cent of total OECD imports over the 2001 to 2014 period from 4.1 per cent between 1991 and 2000.  The same statistic for the East Asian region however shows that merchandise imports from East Asia to the OECD rose to 13.3% of total OECD imports during the 2001 to 2014 period from an average of 7.5% between 1991 to 2000.  East Asia, relative to the Caribbean and Latin American region was able to grow its trade significantly with the developed world and it is not surprising that its growth trajectory has been positive and growing when compared to the Latin America and Caribbean basin.  Contributing factors to the relative weakness of regional goods exports are beyond the scope of this piece but the point that a vibrant export sector is needed remains.

Code 
region_names <- read_excel('region names.xlsx')

chart_import <- imports_long |> 
  filter(`Country Code`=='OED',
         `Indicator Name`=='Merchandise imports from low- and middle-income economies in East Asia & Pacific (% of total merchandise imports)'|
         `Indicator Name`=='Merchandise imports from low- and middle-income economies in Latin America & the Caribbean (% of total merchandise imports)'|
         `Indicator Name`=='Merchandise imports from low- and middle-income economies in Middle East & North Africa (% of total merchandise imports)')|>
  left_join(region_names) |> 
  ggplot(aes(x=Year, y=Indicators, color=`Region`))+
  geom_line(size=1.5, alpha=0.8)+
  labs(title = 'Breakout of OECD Imports by Country Grouping',
       subtitle = 'Which country grouping has raised their exports to the OECD?',
       y='%',
       color='',
       caption = 'Source: World Bank Development Indicators')+
  theme_fivethirtyeight()+
  scale_y_continuous(labels = scales::comma)

chart_import
Figure 5: Merchandise imports from developing world

6 Conclusion

In conclusion, Sir Arthur argued that growth in developing countries was largely a function of trade and the interplay between capital, remittances and persons between developing and developed economies. A review of recent data suggests that many of his theories hold true to this day. His piece also supports efforts by the region to create the OECS Economic Union and strengthen the existing CARICOM protocols however Sir Arthur stressed that customs unions and the like work best when robust public institutions and an entrepreneurial class are willing to take risks and develop cross-country operations.  

END

Footnotes

  1. https://economics.wm.edu/wp/cwm_wp152.pdf↩︎

  2. https://www.history.com/topics/1960s↩︎

  3. Latin America & the Caribbean (IDA & IBRD countries) aggregate.↩︎

  4. Low income group aggregate. Low-income economies are those in which 2022 GNI per capita was $1,135 or less.↩︎

  5. Data on services imports was not available. The region (especially the small island states of the Caribbean) will have a stronger export sector on the services side as a result of the tourism industry.↩︎