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$Unique_ID{COW00337}
$Pretitle{233D}
$Title{Barbados
Chapter 2B. Macroeconomic Overview}
$Subtitle{}
$Author{Beatrice Berle Meyerson, John F. Hornbeck and Richard A. Haggerty}
$Affiliation{HQ, Department of the Army}
$Subject{percent
barbados
foreign
sector
economy
government
manufacturing
economic
development
goods}
$Date{1987}
$Log{Sugar Mill*0033702.scf
}
Country: Barbados
Book: Caribbean Commonwealth, An Area Study: Barbados
Author: Beatrice Berle Meyerson, John F. Hornbeck and Richard A. Haggerty
Affiliation: HQ, Department of the Army
Date: 1987
Chapter 2B. 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.
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.
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 it