|The Courier N° 123 Sept - October 1990 - Dossier Higher Education - Country Reports: Barbados - (EC Courier, 1990, 104 p.)|
|Barbados: Basking in the economic sunshine|
The coyness may sometimes be there in official circles, but Barbados is definitely a middle-income country, compares favourably in many areas with many a developed country and has an outlook that is unmistakably upbeat.
In 1989, Barbados recorded its seventh consecutive year of economic growth, 3.5%, and attained its highest ever GDP per capita: BD$ 11270 or US$ 5635 - a growth that is clearly reflected on the ground in the countrys sound social and economic infrastructures: a good health-care and social security system, educational facilities of very high standard, efficient public services and telecommunications network.
In a Caribbean of seemingly endless economic gloom, Barbados achievement, in the face of an unfavourable international situation, is without parallel. In a way, it fits in with that first or best image, that uniqueness that has always been associated with the island since the British claimed it in 1627. Geographically, it is the most easterly of the Caribbean islands (sitting pretty, as they say, in splendid isolation). It was the only island that was not disputed by the colonial powers.
Arguably the choicest of British colonial possessions in the region (certainly the most anglicised, a fact that has earned it the name Little England), Barbados was the first to establish a parliamentary democracy in the Caribbean. Indeed its Parliament dates as far back as 1639, the third oldest in the Commonwealth. It was here in the 17th century that large sugarcane plantations were first set up in the Caribbean, leading to the massive importation of slaves from Africa. (Previously indentured English labourers were used). This, it should be noted, was a momentous event for Barbados for it saw not only the squeezing out of smallholders and the consolidation of large estates, but also the drastic reduction of the white population. The slaves were freed in 1834.
The society which has emerged from these fortunate and unfortunate circumstances is one that is peaceful, enlightened, hard-working, fair-minded and friendly. Ninety-five per cent of the population are of African descent, the remainder European.
Although Barbados, in terms of natural attributes, is equally blessed with white sandy beaches and fine tropical sunshine like most of the other islands, it is believed by many to have an edge not only in beauty, but also in the pleasantness of its climate, constantly tempered as it is by the sea breeze. This makes Barbados one of the most sought-after holiday resorts in the Caribbean.
Small reserves of oil and gas, and 438 sq km of land are virtually the only assets with which nature has endowed the island. The greatest, however, is its human resources, about 250 000 people, 98% of whom are literate.
Independent since 1966 and politically stable with its functioning democracy, Barbados has been able to capitalise on all the resources at its disposal, thanks mainly to the fact that it has had successive governments whose economic policies were fundamentally not different from one and another.
These governments have so far emerged from either the Barbados Labour Party, BLP (which was founded in the colonial days and led Barbados to independence), or from the Democratic Labour Party, DLP (a break-away faction of the BLP which is currently in government). There is now a third party, the National Democratic Party, NDP, which was set in 1988. It is also of the Labour family, having itself broken away from the DLP. This similarity and, as a result, more or less consistency in policies has created foreign confidence in Barbados, and a very healthy climate for investment.
There is no doubt that this factor has, to a large extent, contributed to the resilience shown by the Barbadian economy to the bouts of depression it has suffered since independence, the most notable being the setbacks caused by the oil crisis of 1973/74 and the world recession of 1981/82 which saw the virtual collapse of Barbados exports to Trinidad and Tobago. Despite these setbacks, Barbados maintained an average growth rate of 5.1 % in the 70s and 2.5% in the 80s.
In the crises, manufacturing and the sugar industry were worst affected, and it has been Barbados good fortune to have been one of the few developing countries to lead the way in reforms in the early 80s. Rather than wait for the Bretton Woods institutions to intervene, the government of the day carried out adjustments it considered necessary. These won the approval and the backing of the International Monetary Fund which provided a stand-by credit of $ 13.4 million in 1982. By the end of the following year Barbados was back on its feet and along the path of growth, with tourism expanding, the industrial sector moving into the new area of offshore business, and agriculture laying more emphasis on non-sugar production. These were in effect the result of concerted efforts at diversification of an economy that had been dominated by sugar.
Sugar: what future?
Sugarcane is, of course Barbados major agricultural crop. For long the the main, and currently the second most important foreign exchange earner, it is still in a state of profound crisis.
Since 1986 when -111 000 tonnes of sugar were produced, output has fallen as the acreage under cane cultivation shrank and two of the six factories closed: 83 000 tonnes in 1987, 80 300 t in 1988 and 63 600 t last year, earning respectively $71.2 million, $67.2 m and $52 m. The situation, however, would have been worse but for a guaranteed export quota of 50 000 tonnes on the European market which Barbados enjoys under the Sugar Protocol of the Lomonvention, at prices above those of the world and the US markets. Barbados however runs the risk of shortly not being able to supply its preferential markets, given its domestic sugar requirement of around 15 000 tonnes. Most telling of the situation is the rising cost of production: $1328 per tonne in 1987 and $1360 per tonne in 1988 against export prices of respectively $ 1040 and $1085 per tonne. The industry has had to survive in recent years more on public support, a tradition that was started as far back as the late 1930s following the Moyne Commissions recommendations, which established the socio-economic link of the product.
The growing gap between revenue and cost of production of sugar, however, has raised the question of whether it would not be wiser to phase out its production altogether. Each time, the argument is advanced that the fates of sugar and non-sugar agriculture are too tightly linked to be separated. As can be seen in the interviews (pages 17 and 22), there are rather powerful arguments in favour of maintaining sugar production, among which are the fact that the industry is a large employer of labour and that sugar is a commodity that cannot easily be replaced. The plan is to maintain a production level of around 90 000 tonnes at least and to earn between $60 million to $70 million annually from the industry. It is yet to be seen whether these targets can be met and how economically sustainable they will be.
Tourism, a driving force that is losing momentum
There is no doubt that Barbados owes much of its economic achievements of the past few years to tourism which has expanded faster than any other sector. In 1983, 328 000 tourists visited the island, spending a total of BD$ 503.2 million. In 1989 there were 460 000 and expenditures were just over one billion Barbados dollars. Contributing 14.3 % of GDP, tourism is, of course, the biggest foreign exchange earner. Its growth is not only a reflection of the boom in international tourism generally and the natural attractiveness of Barbados, but also a result of intensified promotion, backed-up with the expansion and improvement of facilities to cater for all classes of visitors mass, middle and up-market. In 1987, for example, a new port facility for cruise ships was opened in Bridgetown. There are now better road networks across the island and sports and cultural calendars have been introduced to provide tourists with a variety of recreational activities, in addition to the traditional sun, sand and sea.
A new marketing strategy has also been adopted involving the tapping of the United Kingdom, European and Canadian markets, with the introduction of such practices as package tours. The result has been an extension of the tourist season well into the so-called off-season , i.e. April to November. The strategy now is to make tourism a year-round industry not only for foreign exchange purposes, but to ensure greater job security for Barbadians engaged in the industry.
Traditionally, the United States provided the bulk of visitors to Barbados, but their numbers have been falling in recent years, from a share of the market that averaged 41.2 % between 1986 and 88 to 33 % in 1989. Although these deficits have been made up largely by increased arrivals from the United Kingdom and Europe (from 22.4 % in 1988 to 26.2% last year), Barbados is clearly facing greater competition in the American market, particularly from other Caribbean resorts like the Bahamas, St Kitts and Antigua where, noticeably, arrivals from America have increased significantly in the past few years. At a time when Barbados is increasingly being seen as an expensive destination, this must be particularly worrying, although Minister of Tourism and Sport, Wesley Hall, feels confident that Barbados can hold its own by offering value for money. Observers, however, point out that if Cuba democratises and opens up realistically to international tourism (it has already indicated its intention to cash in on tourism), the competition is bound to intensify in the Caribbean, and particularly for Barbados.
So far this season, there have been falls in both arrivals and bed occupancy (see interview with Minister of Tourism and Sports, page 20) from virtually all the countrys sources of tourists. No doubt there is a need to step up promotional campaign - a fact already recognised by the Barbados Hotel Association (BHA) which has, this year, launched a tourism enhancement fund of BD$ 5 million, to be raised annually for promotional activities.
It is noticeable that, in order to recoup losses being incurred whether as a result of the demands for wage increases by the Unions or as a result of low occupancy, hoteliers have increased room rates this year. The extent to which this will affect overall income from tourism is yet to be seen, but it does not augur well for the expensive image that is being associated with Barbados.
Diversification, constrained by export markets
A declining sugar industry and a dominant tourist sector, whose faltering this year could spell trouble for Barbados, bring to the fore the issue of diversification which has been the policy pursued vigorously, especially since independence. As already seen, it has had a measure of success.
It is important, however, to note that, given its poor resource base and small domestic market, manufacturing in Barbados relies heavily on imports and exports (indeed if account is taken of tourism, the economy as a whole is dependent on the state of the world economy). The international scene has not altogether been favourable in recent years to Barbados, and if manufacturing, which was virtually non-existent 35 years ago, accounts today for a significant volume of exports light manufactures such as furniture, food and beverages, pharmaceuticals, garments, electronics, chemicals, cosmetics, it is not for want of dynamism, it is constrained very much by export markets.
Manufacturing accounts for 9.9 % of GDP. It grew last year by 5.4 %. A good deal of the credit for this expension goes to the Barbados Industrial Development Corporation (BIDC), which was set up by an Act of Parliament in the late 50s to stimulate, facilitate and undertake the development of industry in the country. The BIDC goes out to Europe and America to identify companies that it feels can operate viably in Barbados and then persuades them to come either solely or in partnership with local entrepreneurs with a package of incentives: tax holidays, duty-free imports of all raw materials, production equipment and spare parts, subsidised factory shells and, sometimes, technical assistance, in addition to guarantees on the repatriation of dividends, property and capital. Every year one or two manufacturing units are set up in the country providing greatly needed employment opportunities.
Unlike manufacturing, the export-oriented service industry has had no problems. Indeed, its progress has been spectacular in the past nine years.
Whereas, for example, there were only two data processing companies in 1981, there are now 11 operating in Barbados. Manufacturing employs 13000 people (13% of the labour force).
Since the revision in 1977 of the International Business Companies Act, the offshore business sector has also been expanding. Many foreign insurance companies, sales corporations and banks are choosing Barbados as a base, attracted mainly by the tax treaties which Barbados has concluded with their home countries, aimed at ensuring that such benefits as they gain in Barbados are not lost at home through taxes. Barbados currently has tax treaties with the United States, Canada, Denmark, Norway, Sweden and the United Kingdom.
Whether in manufacturing, in services or in off-shore business, Barbados is attractive to foreign investors because of the availability of skills, and a trainable workforce generally, as well as its political stability and good infrastructure.
There is now a drive for an all-round expansion of industry, but there are two major problems: wages are very high, indeed, higher than productivity - in the last 10 years, wages, according to some reports, have risen by 75%, while production has increased by only 10%; Barbados still has serious market difficulties.
The first is an issue which the government recognises but which it will have difficulty dealing with, as it adheres to the principles of collective bargaining (a democratic process, as the Prime Minister puts it), and the Trade Unions show no signs of moderating demands.
It is believed in some quarters, however, that the level of wages is directly related to a new industrial phase, that Barbados is no longer a country of cheap labour and that it is moving on in manufacturing to a new stage of higher quality products during which a few companies would be lost. These would be replaced, they say, by stronger, more competitive ones and, in time, wages will be aligned with productivity.
However plausible this theory, it assumes a recovery of exports. Barbados, biggest market is the Caribbean, but since the collapse of CARICOMs Multilateral Clearing Facility (resulting mainly from the indebtedness of Guyana) and the imposition of import restrictions by Jamaica, and Trinidad and Tobago in the wake of their economic difficulties, Barbados exports to the Caribbean have been severely affected. Furthermore, the United States restrictions on the import of garments, an area in which Barbados had felt it had a comparative advantage, has brought the countrys textile industry almost to a standstill.
Although exports to the Caribbean Community rose significantly in 1988 and 89 (thanks mainly to a re-entry into the Jamaican market) they are far from returning to normal. The US and Canadian markets remain difficult to penetrate despite the Caribbean Basin Initiative and the CARICOM/Canada trade agreement (CARIBCAN) which were designed to boost Caribbean exports to these countries. It therefore, came as no surprise that Barbados visible trade deficit widened last year to BD$ 979.9 m from DB$ 809.7 in 1988, owing to high imports, mainly from CARICOM countries and the United States.
The United States remains by far potentially Barbados biggest export market, notwithstanding the restrictions on the import of textiles. BIDC officials admit that the problem is essentially one of a very small country trying to master the complexities of producing and exporting to a market as large as the US. But if Barbados is to have any sizeable earnings from manufactured products and succeed realistically in its diversification efforts it has to have access to that market and, on this, Errol Humphrey, Deputy General Manager of the BIDC, believes Barbados is in the process of learning how to assess it effectively .
In a country where manufacturing has expanded and the number of cars on the roads has grown from just under 8000 to 18 000 in five years, Barbados has been fortunate in having small deposits of oil and gas which it exploits, thus reducing its dependence on oil imports - an important factor in the countrys import/export equation.
Non-sugar agriculture: still import-substitution oriented
Not facing any significant problem of export market is non-sugar agriculture, the diversification of which is dogged by a plethora of problems: access to land (emanating from the plantation system inherited from the slavery and colonial era), unfamiliarity with new crops and new technologies, and diseases.
Despite these handicaps, Barbados has achieved a good level of self-sufficiency, which in terms of import-substitution, is considerable - a positive foreign exchange step, as Minister of Agriculture, Food and Fisheries, Warwick Franklin describes it (see interview on page 22). Barbados is not only self-sufficient in such items as yams, sweet potatoes, carrots, cabbage, okras, beets and hot peppers, it exports reasonable quantities to regional markets. It is doing well in livestock production and, until recently, in fisheries produce.
A more significant, and indeed worrying, fact about non-sugar agriculture in Barbados is the decline in the area of arable land under food crop production. Last year, a prolonged dry period, according to the Central Bank 1989 Annual Report, was one reason for the reduction in food crops planted, but farmers also appear to be converting arable land for housing development, in an effort to pay off debts. The result was that food production in 1989 was no higher than in 1988 and way below its 1987 level. This meant that regional and extra regional exports of fresh produce declined to negligible proportions.
The fisheries sector, which grew rapidly between 1984 and 1986, thanks mainly to the Oistins Fisheries Terminal project financed by the EDF, has since been depressed, mainly as a result of difficulties being experienced by fishermen in gaining access to richer fishing grounds within Trinidad and Tobagos territorial waters. Barbados is currently negotiating for that access.
Although Mr Franklin believes fruits and yams have great export potential, the development of cotton and the flower industries, in his opinion, will be the main focus of non-sugar agriculture as the major foreign exchange earners for Barbados in the next 7-15 years.
Maintaining external reserves
Last years deficit in the balance of visible trade was the fifth in a row. For the first time, however, since 1981, Barbados had an overall balance of payments deficit of $70 million.
This, coupled with sizeable debt repayments and servicing (the heaviest the country has ever faced) and increased demand on foreign exchange (as the boom in the construction industry provoked demands for imports of materials and equipment), led to a dramatic fall in the countrys foreign exchange reserves in 1989.
Although credit restrictions imposed by the Central Bank resulted in a slight recovery, at only $269.5 million (3) Barbados foreign exchange reserves are worth only three months of imports. Experts agree that renewed pressure on reserves would throw the economy off balance if the foreign exchange earning sectors fail to perform adequately.
As already seen, the prospects are not good for those sectors. Tourism is unlikely to bring in as much foreign exchange as it did last year. This fits in with the forecast of the Central Bank in its 1989 Annual Report. The same report says that sugar exports, will again stagnate while exports of manufactured goods are not likely to increase significantly, concluding that without effective measures to arrest the strong growth in aggregate expenditure and to dampen the import surge, the pressure on the foreign exchange reserves will intensify. Although debt-servicing this year is expected to be much lower than last, this is unlikely to reduce that pressure.
For the immediate future at least Barbados economic stability calls for fiscal prudence. The alternative will be increased external borrowing and probably the intervention of the IMF - an intervention that will inevitably lead to the devaluation of the Barbadian dollar which is currently pegged to the US dollar at two to one.
Barbados needs a stable currency. That is the view of the IMF, according to Deputy Governor of the Central Bank, Delisle Worrell. And for a small country like Barbados, he says the Fund believes that the best of possible options in terms of policy, to avoid devaluation, is to keep a reasonable level of exchange reserves and meet its debt obligations. Barbados, however, has up till now risen to that challenge. It has regularly repaid principals and serviced its debt - a practice that has earned the country the rating of most creditworthy nation in Latin America and the Caribbean. A not altogether laudable feature of this reputation, however, is its tendency to borrow to repay debts. Although this is designed in effect to lengthen the maturity of its debts, it is simply postponing the days of reckoning.
Barbados has excellent relations not only with the IMF but also with other financial institutions, including the Caribbean Development Bank, and the Inter-American Development Bank and the World Bank, both of which have been particularly helpful in recent years in the financing of infrastructural development.
Experts share the Central Banks opinion that there can be only one sound economic course to take - and that is: cuts in expenditures, especially those with foreign exchange implications.
Stabilising the currency, on the other hand, means keeping inflation low, which is something that is difficult to achieve in an economy as open as that of Barbados. The best it can do is to keep inflation at least at the same level as that of the worlds rate of inflation, according to Mr Worrell. At 6.2% in 1989, however, inflation is rising not so much as a result of higher prices in the countries which are Barbados major trading partners as of the governments option increasingly for indirect taxes in preference to direct taxation to raise revenue. The government, as it were, is caught between two poles, says Worrell. To go further as far as indirect taxation is concerned, there is an inflationary impulse that has repercussions, but at the same time there is a strong public reaction against any further indirect taxations. The only solution, in his opinion, is to try over the course of time to reduce the levels of government spending.
So, from the point of view of both capital and current spending there is a need for cuts, certainly sooner than later. Last year, the Sandiford government successfully slashed spending by BD$ 55 million. The 1990 budget appears in that vein in being more modest than expected. The last before the elections, it foresees expenditure of about $1.3 bn against revenue of $1 ten. The government is expected, as usual, to finance the deficit through domestic borrowing, especially from the Central Bank.
The thrust of the budget is to maintain growth and create more jobs. It should be noted, however, that, despite the growth recorded in the past few years, the unemployment figure still hovers at between 16 and 18 %. Moreover, growth has been lopsided: electricity generation, and the construction industry, for example, accounted for the bulk of the growth in 1989. Aiming at a more balanced growth will not be easy. Prime Minister Erskine Sandiford predicts a GDP growth rate of at least 2% this year. This was based on the assumption that tourism and manufacturing will perform at least as well as 1989, but the trend so far will suggest a zero or negative real growth. Whatever happens, Barbados is certainly in for a leaner time.
For more detailed sectoral studies, see the interviews with the Ministers of Tourism, of Trade, Industry and Commerce, and of Agriculture, Food and Fisheries. A historical, socio-economic analysis of Barbadian society by K. Sandiford is published on page 29.