Caribbean Islands - Barbados Economy

Macroeconomic Overview

Annual economic growth in the 1960s and 1970s averaged 5 percent. The 1980s, by contrast, saw little or no real growth in the economy. In addition to being affected by the global recession in the early 1980s, the 3.5-percent growth of GDP in 1984 was offset by near zero growth in 1985 because Barbados' leading export sectors all performed poorly. In 1985 the economy expanded slightly by 0.3 percent, but only because the nontrading sectors, such as mining, quarrying, utilities, construction, and government services, performed well. Otherwise, Barbados would have experienced a decline in GDP.

Among the most disturbing economic developments for the island in the 1980s was the use of protectionist policies by Trinidad and Tobago and Jamaica with respect to clothing and other goods that faced strong regional competition. The tourist sector also slumped in the early 1980s, falling victim to a strong Barbadian dollar, which greatly reduced the number of tourist visitors from Britain. Tourism lessened because of the deterioration in the exchange rate of the British pound that accompanied the strengthening of the United States dollar. The United States dollar is tied to the Barbadian dollar at a fixed exchange rate.

Preliminary statistics for 1986, however, suggested that the economy was improving dramatically, registering an annual growth rate of 5 percent. This improvement was primarily the result of enhanced performance by tourism, manufacturing, and agriculture, the three sectors generating foreign exchange earnings.

External factors also improved when the United States dollar began to depreciate in 1984. The depreciation of the United States dollar increased the foreign exchange rate of the British pound sterling in Barbados and led to a 25-percent rise in British visitors. Tourism for the first three-quarters of 1986 increased 3.2 percent; the manufacturing sector registered a 9-percent increase in production over the same period because of a recovery in chemicals and processed foods. Nonsugar agriculture also improved. The electronics industry, however, continued to decline because of strong Japanese competition, and textiles still faced regional trade restrictions.

The quick turnaround in Barbados' aggregate economic performance in 1986 graphically demonstrated its strong dependence on external markets. To a large extent, the economy's overall performance in the 1980s paralleled that of the leading export sectors; the economy, however, has been able to survive periods in which trade was sharply reduced.

The growth and diversification of the economy since World War II did not result in substantial new employment opportunities. The unemployment rate exceeded 10 percent throughout the 1980s; it averaged 18.7 percent in 1985 and 19 percent in 1986. There were three primary reasons for high unemployment. First, the decline of the agricultural sector in favor of tourism resulted in a less labor-intensive economy, causing a slow, yet inevitable, displacement of agricultural workers. Second, employment figures also reflected improved productivity across sectors. As productivity grew after World War II, fewer workers were needed even though the economy had expanded. Finally, Barbados' relatively large population also contributed to the development of an entrenched unemployment base.

In 1985 the services sector, including government workers, accounted for 35 percent of the work force. The second largest employer was restaurants and hotels, which had a combined contribution of 22.7 percent of the work force; this was followed by manufacturing (13.2 percent), agriculture and fishing (9.8 percent), and construction and quarrying (7.6 percent).

Because agriculture retained only a small percentage of the work force as the economy diversified, the manufacturing sector began to play a pivotal role in absorbing the unemployed. In the 1985-86 period, however, manufacturing experienced severe problems as a result of international competition and regional trade imbalances that directly affected employment levels. By 1986 it appeared unlikely that alternative jobs for the newly displaced manufacturing workers could be found.

Historically, Barbados has experienced periods of high inflation caused by both internal and external forces, but external causes have been responsible for the more acute inflationary periods. Domestic inflation has been fueled by government overspending financed by increasing the money supply, excess demand caused by import restrictions, and large real wage increases. Because of the open nature of the Barbadian economy and its heavy reliance on foreign markets, inflationary pressures also were exerted from abroad.

Since 1981, however, Barbados has experienced a steady decline in its inflation rate; the rate fell from a high of 14.6 percent in that year to less than 2 percent in 1986. The work force, as a whole, fared well during this period; wages rose faster than prices each year. Although wage hikes could not be justified based on productivity gains, they apparently did not have a significant impact on the general price level as evidenced by the decreasing inflation rate.

For more recent information about the economy, see Facts about Barbados.

Role of Government

In general, the Barbadian government has taken a strong stand against government interference in the operation of the national economy. During his second term as prime minister, Barrow favored a minimal role for government in managing economic enterprises and emphasized the supportive nature of the government in promoting the development of the economy. Nevertheless, government spending has been a major tool of economic growth. The government has conducted its economic policy by employing fiscal and monetary measures and by supporting the social and productive sectors of society with public sector investment. Public sector investment, however, was also inextricably linked to outcomes of fiscal policy.

In fiscal year (FY--see Glossary) 1986, the government introduced fiscal policies aimed at enhancing the purchasing power of the private sector. Tax concessions to individuals and businesses were expected to stimulate the economy and minimize demand for wage increases, whereas increased consumption duties were designed to regulate consumer activity. Indirect taxation was to offset the loss of direct revenue from income and business tax concessions.

By late 1986, however, it was clear that the realigned tax structure would cause a large deficit. In December 1986, the CBB recorded a 118-percent increase in the national deficit compared with the previous year. The increase stemmed from the government's inability to control capital expenditures and public wage increases. Such control was a necessary precondition for the success of the new fiscal policy.

In the mid-1980s, analysts raised concerns about the potential effects of the Barbadian deficit. In spite of gains in aggregate productivity, the budget imbalance could not be corrected, and increased foreign borrowing appeared to be imminent. International concerns revolved around Barbados' ability to meet debt payments in the near future, as well as its ability to finance the public sector investment in the out years.

Although fiscal policy was a dominant economic tool of the government, monetary control played a relatively significant role when compared with operations of other Eastern Caribbean islands. The government coordinated economic policy with the CBB, rather than allowing it to develop a completely independent program. Their mutual goal was economic stability for the island, which implied controlling the money supply so that credit markets remained nonvolatile yet were sufficiently liquid to meet the demands of a developing economy.

Government influence over the economy was exercised more directly through public sector investment, which was developed and coordinated in conjunction with the five-year economic development plan. Historically, Barbados has concentrated public investment in three areas: economic infrastructure, such as roads and ports; social infrastructure, including health, education, and housing; and productive sectors, particularly agriculture and tourism. Funds for the 1986-88 period, which coincided with the last two years of the 1983 five-year economic development plan, were allocated mostly to transportation; the social sector received 26 percent of capital outlays, however, split mostly between health and education programs. Agriculture and tourism received a combined total of 30 percent of investment funds available from public sources.

Infrastructure constituted almost 36 percent of the total public sector investment for that period, which was reflected in the excellent communications and transportation networks that were available in the late 1980s. The Barbados Telephone Company operated an entirely automatic system of 75,000 telephones. Tropospheric-scatter links to Trinidad and Tobago and to St. Lucia and a satellite ground station operating with the International Telecommunications Satellite Corporation (INTELSAT) Atlantic Ocean satellite provided high-quality international service. The government-owned Caribbean Broadcasting Corporation broadcast from the capital on 900 kilohertz and had FM service at 98.1 megahertz. Two commercial stations also broadcast from St. George's, Grenada, on 790 kilohertz and 90.7 megahertz. Evening television service was available. The Nation and the Barbados Advocate were the local daily newspapers.

Transportation infrastructure was good and comprised almost 1,500 kilometers of paved roads, a major international airport, and a deep-water port. One highway circled Barbados, and numerous other roads crisscrossed the island; buses served most towns. Grantley Adams International Airport, on the southern tip of Barbados, handled direct flights to points in North America and Western Europe. Bridgetown boasted a manmade deep-water port, which was completed in 1961 and expanded in 1978. The island had no railroads or inland water transportation.

In 1986 informed observers estimated that the next five-year plan would allocate additional capital to productive sectors (tourism, agriculture, and manufacturing) in the form of direct credit. This would take place at the expense of reduced investment in physical infrastructure. Because many of the road projects were scheduled for completion within the decade, a reallocation toward sectors that would directly assist national economic development was considered necessary to enhance the overall performance of the economy.

Foreign sources of capital, which from 1982 to 1986 had included loans or grants from development banks and government agencies, composed 40 percent of the public sector investment budget. This figure was expected to increase to 50 percent for the 1986-88 period, a situation that could further exacerbate a growing foreign debt repayment problem.

Foreign Trade and Balance of Payments

Barbados had expected trade to achieve its goal of export-led economic growth by the mid-1980s. By 1985, however, Barbados had experienced significant declines in all sectors that traditionally accounted for the majority of its foreign exchange earnings. The poor performance was a result of constricting regional demand for Barbadian goods and tighter trade restrictions in the Caricom market.

Barbados' foreign exchange earnings were derived from numerous goods and services. Sugar and molasses accounted for nearly 80 percent of agricultural exports in 1985 and contributed 10 percent of total merchandise exports. This sector, however, accounted for only 4 percent of total foreign exchange earnings and has continued to decline in importance since the early 1960s.

The manufacturing sector provided Barbados with 85 percent of the total value of merchandise exports and 30 percent of total foreign exchange. In 1985 electronic components represented 60 percent of total manufactured goods; secondary exports included clothing, chemicals, and rum. Tourism was the greatest foreign exchange earner in 1985; receipts totaled 38 percent of exported goods and services.

Approximately 23 percent of Barbadian exports went to other Caricom countries in 1985. Guyana and Trinidad and Tobago absorbed 68 percent of regional exports, whereas St. Lucia, Jamaica, Grenada, and St. Vincent and the Grenadines together accounted for 21 percent. The other 11 percent went to numerous other regional trading partners. Preliminary figures for 1986, however, suggested that Caricom trade would fall significantly, perhaps by as much as 20 percent. The United States purchased most of Barbados' electronic components and accounted for 18.4 percent of total merchandise exports. Britain and Canada constituted 5.8 percent and 1.4 percent of the Barbadian export market, respectively; the remainder was sent to numerous other countries.

Overall, exports declined 10.1 percent in 1985 because of decreased demand for all items. Electronic components, sugar, and clothing fell 10 percent, 12.2 percent, and 30.6 percent, respectively. Barbados did not expect a significant change in market conditions in the near future and was developing a market strategy that focused on extraregional economies to absorb sugar and manufactured products.

In addition to declining demand for Barbadian exports, the island's foreign exchange position was also negatively affected by currency devaluations in Trinidad and Tobago and Jamaica, as well as by large wage increases given to workers in the Barbadian tourist and manufacturing sectors. These two problems had a combined effect of lowering the country's competitive position in the region. Because of wage increases and the relatively expensive Barbadian dollar, goods and services originating in Barbados were more expensive than those of the country's primary competitors.

In 1985 Barbados' primary imports were capital goods, food and beverages, fuels and chemicals, and miscellaneous durable goods; these represented 21.7, 15.3, 10, and 5 percent, respectively, of total imports. Other consumer and intermediate goods included textiles, animal feeds, and other unspecified goods. The United States provided 41 percent of total imports and was the trading partner causing the single largest deficit. It was followed by Caricom countries, which shipped 14.7 percent of total imports; the remaining 29.2 percent came from numerous other countries. Britain and Canada supplied 9.1 percent and 5.1 percent, respectively. Trinidad and Tobago furnished 70 percent of all Caricom goods imported by Barbados, and Jamaica supplied 21 percent; the remaining 9 percent represented less significant trade relationships with other regional partners.

Barbados' balance of payments position was relatively healthy at the close of 1985, in spite of trading problems. Exports of goods and services had exceeded imports, providing a current account surplus of US$40.3 million. The surplus occurred when there was a fall in both absolute exports and imports; however, strong tourist receipts narrowed the trade deficit.

The capital account experienced heavy outlays to repay private loans, and much of this debt was essentially replaced by public borrowing. There was a capital account surplus of US$46 million in 1985. When added to the current account and adjusted for errors and omissions, the overall balance of payments was US$22.4 million.

Informed observers suggested that Barbados might experience only slight growth in the late 1980s because of declining manufacturing trade. An increase in tourist receipts and an improved competitive position were expected to help the country adjust to a decline in foreign earnings, but it appeared that increased borrowing would be needed for at least the five-year economic planning period beginning in 1988. Such borrowing would cause Barbados' 1985 debt service ratio of 8 percent of exports to double by the early 1990s. Furthermore, it was expected that a deficit in the current account in later years would cause the overall balance of payments to become negative as well. The need to purchase more intermediate goods and increase borrowing to maintain development goals, as well as greater regional competition in the tourism and manufacturing markets, was the most likely reason for this adjustment.

Economy

Barbados experienced steady economic development and diversification following World War II, outperforming in many ways all of the Windward Islands. The economy was transformed from one dependent on agriculture, primarily sugar, for one-third of its gross domestic product (GDP--see Glossary) to one considered relatively diversified with the development of tourism and manufacturing sectors. By 1980 agriculture accounted for a mere 9 percent of GDP, whereas the wholesale and retail trade had grown to 17 percent, general services to 14 percent, manufacturing to 12 percent, and government services and tourism to 11 percent each. At the same time, Barbados standard of living had increased remarkably as the nation elevated itself from the ranks of the low-income countries to those of middle-income countries.

Barbados' economic success could be traced to many factors. The island had long been a model of social and political stability, which helped attract both public and private foreign investment. The government also assisted with the infrastructural development required of an expanding economy, including a sound education system.

In spite of a lengthy history of economic development, the economy floundered at times during the 1980s. In part the fluctuations were the result of the innate characteristics of a small Caribbean economy, which include a limited resource base and heavy dependence on external markets. To a large extent, however, the setbacks resulted from the worldwide recession in the 1981-83 period. In 1987, however, Barbados was still actively pursuing a policy of growth based on a diversified export market, with a prudent mixture of private and public management of economic resources.

Banking and Finance

The Central Bank of Barbados (CBB) was created in 1972 to assist the government in stabilizing the economy by facilitating development and financial intermediation (see Glossary). Since 1972, Barbados has minted its own Barbadian dollar, which has been pegged to the United States dollar at a rate of B$2.00 to US$1.00.

The government created the CBB for numerous reasons, all related to gaining more control over domestic and international financial intermediation. Paramount to maintaining financial stability was Barbados' new-found control over its money supply. Unlike other Eastern Caribbean states, which were dependent on a regional financial institution for central governance of the monetary system, Barbados was capable of establishing its own monetary program to supplement fiscal policy in meeting national economic goals.

Financial priorities were also advanced by the Barbados Development Bank, which was created in 1963. It functioned as an independent corporation designed to facilitate development by encouraging domestic savings and investment and providing loans to development enterprises, cooperatives, and small businesses. It was also empowered to issue its own securities to ensure sufficient funding to meet development needs. In 1985 it reemphasized its effort to assist the small manufacturing sector, which had failed to expand significantly during the previous year.

In the mid-1980s, Barbados was also served by numerous local banks and seven foreign commercial institutions. In addition, it was the headquarters for the Caribbean Development Bank (CDB), which acted as a conduit for multilateral lending arrangements.

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