Size and Survival

The first serious contribution by a West Indian economist to the general theory of development has recently been published. The Book, The Economics of Development in Small Countries with Special Re­ference to the Caribbean, is a reproduction of four lectures delivered at McGill University in 1964. The author is Mr. William Demas, Head of the Economic Planning Division of the Government of Trinidad and Tobago. He is concerned to show that the theory of development can profit from a distinction between ‘large’ and ‘small’ economies. For this purpose, he discusses development and under-development in re­lation to the concepts of structural transformation and self-sustaining growth.

For Demas, structural transformation is both the process by which an economy becomes developed and the path which the economy follows after it has been developed. An economy is developed when it has acquired the capacity to proceed with transformation on its own steam. This capacity has two components: the ability, first of all, to generate sufficient domestic savings and, secondly, to adapt and innovate in re­sponse to changing needs.

Most important, Demas claims that size is what governs the character of the initial process of trans­formation. What distinguishes a small economy from a large one is that the small economy can never achieve the kind of transformation of its internal structure which will create a capacity for continuing transformation. For one thing, it can hardly hope to establish a capital-goods sector nor to escape from the influences of other national economies on its consumption and investment patterns. For another thing, if it is going to profit from large scale pro­duction, it must specialise in a few commodities and sell in foreign markets. The character of its natural and other resources forces it always to depend upon external aids to growth. Hence it cannot ever sustain its own advance and therefore cannot ever become fully developed.

Since only a large country has the resources and the population to admit such a structure, what Demas is doing here is in fact defining away the possibility that a small economy can ever become fully deve­loped. He seems here to be caught in the trap of implicit theorising.

If, however, he is to say more than that differen­ces in natural resources account for part of the differ­ence in the wealth of nations — or indeed, even if he is to say that alone — he has also to do more than list criteria for transforming the structure of the economy, describe the type of economic structure likely to exist when a country has achieved self-sustaining growth and then state, that a favourably-endowed (large) economy is well placed to achieve it. What his thesis requires him to demonstrate about large economies is that they automatically or inevitably exploit the con­ditions for “transformation” which he defines them to have. He must also identify the mechanism and the main instruments through which the transform­ation is accomplished; and he must demonstrate how it is that smallness necessarily places economies at a disadvantage in the exploitation of their own ‘endow­ment’ of resources.

Demas does attempt, in an indirect way, to meet these requirements. But by focussing his arguments on the ‘natural variables’, for example size of popul­ation and natural resources, he fails to recognise that there are other ‘variables’ which can be manipulated by policy. Demas’s argument virtually destroys the notion of ‘natural endowment of an economy’. In other words, he often argues as if the significant feature of the development of what he classifies as transformed and wealthy nations was the fact that they began as economies with large populations and favourable resource endowments. But might it not have been that the crucial factor was their ability to discover and exploit whatever resources they had?

It is not that Demas is unaware of the impor­tance of the ‘manipulable’ variables. He states quite positively that:

In any economy, development is facilitated by certain attitudes such as a high propen­sity to save, hard work, readiness to invest and to innovate; by institutions such as a well-developed capital market and an agrarian system which provides incentive for increasing agricultural productivity; and by the pursuit of appropriate monetary, fiscal and other economic policies, (p. 43). He notes, too. that the Japanese had to rely entirely on their own skills and resources to create the new technology which was needed to expand their economy- Yet it seems that he will not concede the possibility that there may be a path of innovation which may lead to the fullest transformation of a small economy.

Though liberally informed by the history of economic development and by contemporary thought in the field, Demas’s defence of this position is less than convincing. Properly, the process of development involves for him, an initial raising of productivity in some sector of the economy, and a sub­sequent utilization of the additional income to provide investment funds and markets. In the process, all sectors of the economy become technologically pro­gressive (p. 14).

There are, however, different kinds of growth. The alternatives open to small economies are more narrowly circumscribed than those open to large (p. 39). Their resources are distorted and their pattern of demand more highly diversified. Total domestic demand for most commodities is too small to allow large-scale production of these commodities which alone would make their manufacture profitable. For these reasons the small economy, unlike the large, needs to specialise in fewer lines of production, to rely on exports and to depend on imported supplies. It has to be specially active in order to bring new resources into play by the introduction of new forms of organisation and new techniques of production. However, the process of diversification stops sooner than in a large country.

Small economies, however, are not altogether without possibilities of growth. They can, for example, always exploit the growth potential in the construction sector. They can also take advantage of certain opportunities for substituting local manu­factures for imported consumer goods and of some of the intermediate goods associated with them. But unlike the large economies with larger total incomes and varied resources, small countries cannot develop all sectors of their economy at once, and since they must concentrate on one sector at a time, foreign trade plays an important role in their growth. This means, for instance, that for them the foreign exchange con­straint constitutes “a permanent fact of the national economy”, (p. 48)