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VOLUME 5
RESEARCH AND POLICY WORKING PAPERS
2012
Research and Planning UnitEconomic AffairsDivision
Ministry of Finance and Economic Affairs
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Publishers Note: These papers are still in draft form and are subject to
revision. Please do not quote or reproduce without the expressed
permission of the authors. Enquires can be directed to:Director, Research and Planning Unit
Ministry of Finance and Economic Affairs
Economic Affairs Division
Research and Planning Unit
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St. Michael
Note that the Research and Policy Working Papers is not intended to provide any policy
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VOLUME 5
RESEARCH AND POLICY WORKING PAPERS
2012
CONTENTS
I. ECONOMIC DEVELOPMENT AND COMPETITIVENESS: ACARRIBBEANREVIEW...................................................................................5By Antonio Alleyne
II. EXAMINING THE CONSTRAINTS TO ECONOMIC GROWTH INBARBADOS:AGROWTHDIAGNOSTICAPPROACH................................19By Derek Gibbs
III. LINKINGEDUCATIONTOTHECHANGINGNEEDSOFTHELABOURMARKETS.........................................................................................................37By The Research Unit, Ministry of Labour and Social Security
IV. TOURSIMFINANCINGINBARBADOS.......................................................48By Antonio Alleyne
V. BARBADOS,THEMILLENIUMDEVELOPMENTGOALS(MDGS):ANDTHEPOST-2015DEVELOPMENTFRAMEWORK.......................................62
By Mark Durant
VI. AN EXPLORATORY STUDY ON THE RELATIONSHIP BETWEENREAL EFFECTIVE EXCHANGE RATESAND IMPORT DEMAND INBARBADOS-ACOINTEGRATION-ECMANALYSIS...................................76By Cyril Gill
VII. IS THE RESTAURANT SECTOR WITHIN THE BARBADOS TOURISMINDUSTRY TAKINGADVANTAGE OF THE BENEFITSALLOCATEDTOTHEM?(1982-2006)....................................................................................100
By Ricardo Norville
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ECONOMIC DEVELOPMENT AND COMPETITIVENESS:
A CARIBBEAN REVIEW
Mr. Antonio Alleyne
Economist
Economic Affairs Division
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I. ECONOMIC DEVELOPMENTAND COMPETITIVENESS: A
CARIBBEAN REVIEW
By
Antonio Alleyne
INTRODUCTIONThe issue of being internationally
competitive has long been a critical one forthe states of the Caribbean1 region; priorand into the 21stcentury. According to theWorld Bank, the Caribbean region is at adevelopment crossroads and its membernations must take significant and concretesteps to improve productivity and
competitiveness and face up to more globalcompetition if they are to accelerate oreven maintain past growth. By taking suchsteps, they will reposition themselvesstrategically as an emerging trading bloc forgoods and services; without such action,they risk growing economicmarginalization and erosion of many of thesocial gains of the last three decades(TheWorld Bank 2005).
The Caribbean region is largely
made up of small island developing statesthat bear the similar physical characteristicsof being located a considerable distanceaway from the main lands of largerterritories, which leaves them essentiallyisolated and for the most part disconnectedfrom these territories. It is argued that thispositioning has had the effect of retardingtheir ability to develop and achievingcompetitiveness within the globaleconomy. Coupled with these physical
constraints is the fact that historically, localbusiness persons focused on low-riskbusiness activities such as wholesale andretail trade or services, which avoided
1Antigua and Barbuda, The Bahamas, Barbados,Belize, Bermuda, Dominica, Dominican Republic,Grenada, Guyana, Haiti, Jamaica, St. Kitts andNevis, St. Lucia, St. Vincent and the Grenadines,Suriname and Trinidad and Tobago.
issues related to economies of scale(Baldacchino 1998). However, the practiceof such areas of activity have tended toexhaust the countrys already limitedresources and provide limited employment
opportunities, which in turn perpetuate thesocial issue of poverty and generallyrenders such economies highly vulnerableto external shocks.
Despite several physical and socio-economic similarities, and all beingregarded as among some of the mostbeautiful land masses in the world, therehas been little homogeneity witnessed inthe growth and development of Caribbeaneconomies. Each has continued to showvarying levels of economic development
related to differences in natural resourceendowments, the choice ofmacroeconomic, trade, and investmentpolicies and levels of economicdiversification. (U.S. International TradeCommission 2008).
Adding to their existing challenges,the move towards global economicliberalisation in the 1990s has broughtwith it significant challenges for theCaribbean economies particularly with
regard to the issues of primary production,since the process of trade liberalization hasresulted in a shifting of agriculturalproduction to more competitive regionsacross the globe world (Ahmed 2001). Thisinevitably forced the region to explorealternative avenues in trading services. Inso doing, the process has also affected theuse of natural resources, the expansion ofhuman settlements and necessitated achange in the development policies aimed
at addressing poverty and incomeinequality, which are among theCaribbeans most challenging issues whenconfronting sustainable development(ECLAC 2002).
More specifically, during this phaseof development, Caribbean economiesrecognized the need to diversify the traderegime away from the inward-looking
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policies of the past towards policies ofopen regionalism. This meant extending itstrade links with extra-regional tradingpartners and deepening and perfecting theintra-regional integration regime and its
institutions (ECLAC 2002).Over the years, the dependence ofCaribbean economies upon theinternational trade in both commodities
and services has grown exponentially.Analysis of the data, sourced from theWorld Development Indicators (WDI),indicates that with the exclusion of Guyanaand Suriname, the average trade-to-GDP
ratio exceeded 100 percent in 2008.Compared with the worlds average, this issignificantly higher.
Table 1: Trade to GDP in the CaribbeanCountry Name 2001 2002 2003 2004 2005 2006 2007 2008
World 48.4 47.8 48.3 51.4 53.7 56.5 57.3 59.2
Antigua and Barbuda 129.3 122.4 127.9 132.7 134.9 129.3 127.6 126.6
Bahamas, The 87.1 86.2 87.3 94.1 102.0 107.8 104.9 95.1
Barbados 106.4 107.6 108.5 115.5 128.7 126.4 129.5 130.5
Belize 120.0 118.7 119.4 109.2 117.3 123.2 121.6 132.1
Bermuda - - - - 62.5 66.8 67.7 62.5Dominica 107.5 109.3 104.5 106.3 108.3 107.9 108.4 108.5
Dominican Republic 74.7 72.8 86.5 83.9 65.5 68.0 66.7 64.7
Grenada 112.1 101.2 101.5 109.0 97.5 98.8 101.5 93.5
Guyana 206.4 198.2 189.6 201.5 203.8 - - -
Haiti 48.5 48.1 63.7 59.4 57.0 59.5 52.2 56.9
Jamaica - - - - - - - 110.1
St. Kitts and Nevis 114.5 116.3 115.5 108.0 114.3 113.2 110.6 109.4
St. Lucia 104.9 101.2 119.2 118.6 124.6 121.4 122.9 140.6
St. Vincent and the Grenadines 109.7 105.5 104.6 107.8 109.6 107.3 109.9 110.3
Suriname 78.0 58.4 65.3 74.2 75.6 - - -
Trinidad and Tobago 99.9 95.0 90.0 96.7 104.8 107.0 100.6 103.0
Caribbean Average 100.2
Source:World Development Indicators
Within the context of increasedliberalization and open-market policies,one of the more important components ofgrowth and more importantly overalleconomic development is a countrysability to compete. While the concept ofcompetitiveness continues to be the subjectof much debate among academics, policy-
makers and such like, it is without questiona key factor in achieving sustainableeconomic development. High levels ofcompetitiveness in the internationaleconomy have been linked to a highercapacity for reducing such socioeconomicills as high levels ofpoverty, income inequality,
unemployment/underemployment, andgenerally improves the level ofsusceptibility to external forces in thedeveloping economies. It is instructive toreiterate the point at this juncture that,Caribbean countries already suffer thehandicap, that is, the inability to enjoyeconomies of scale.
To compete successfully at aninternational level it is imperative to knowwhere a countrys competitiveness lies, andwith the Caribbean this is no exception.Downes (2010) refers to competitivenessas the ability of the enterprise, industry,country to produce and sell goods andservices in domestic/foreign markets at
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prices and with the quality that ensureslong run viability andsustainability(Downes 2010). Further,Bobirca and Miclaus have sought to definecompetitiveness as the ability of an
economy to attract the demand not onlyfor its exports but also the necessaryinvestment to supply that demand, whichresults in an improved standard of living(Bobirca and Miclaus 2007), and overalleconomic development. Therein lies themutual interdependence between thecompetitiveness and economicdevelopment for a country.
In recent years, the concept ofcompetitiveness has emerged as a newparadigm of economic development. It has
been argued that competitiveness capturesthe awareness of both the limitations andchallenges posed by global competition,coupled with the budgetary constraints andsignificant barriers to compete in markets(Inter-American Development Bank 2011).Additionally, observers of economicdevelopment recognize that the absenceof coordination mechanisms that facilitatetaking advantage of competitiveopportunities (Inter-American
Development Bank 2003) are among thelimiting factors in achieving better growth.
The World Economic Forum hasidentified twelve (12) pillars used formeasuring the competitiveness of a countrywhich are also factors that determineproductivity. These include, the fiveoverarching requirements (institutions,infrastructure, macroeconomic stability,health and primary education), sevenefficiency enhancers (higher education and
training goods market efficiency, labourmarket efficiency, financial marketsophistication, technology readiness,market size), and two innovation andsophistication (business sophistication,innovation) factors (see World EconomicForum, 2009).
Based on the foregoing this paperwould seek to, highlight the hypothesis that
in order for the Caribbean to maintain orsurpass its current levels of development ina globalized environment, activitiestowards building their economiccompetitiveness must be undertaken. This
paper will attempt to trace the historicalstages of economic development of theCaribbean and in so doing will also attemptto highlight the linkages betweendevelopment and competitivenessstrengths from a Caribbean perspective.
ECONOMIC DEVELOPMENTWhat is economic development?
Howard (2005) defines economicdevelopment as a process of structural
change which guarantees sustainableeconomic growth and improvements in thequality of life of the population. Furtherdeconstructed, in the current globalenvironment, economic development isabout improving and sustainingcompetitiveness at national, regional andinternational levels in relation toenhancement of businesses, and overallimprovement in human well-being.
A major goal of poor countries is
economic development or economicgrowth (E. W. Nafziger 2006). The twoterms are not the same. It is argued that theadvances in the standard of livingassociated with economic growth mayrepresent a necessary but not sufficientcondition of economic development andthe construction of a good society. Mandle(1996), in a critique of views provided byGuyanese economist C.Y. Thomas on whatdevelopment means in a Caribbean
context, suggests that economicdevelopment is an approach whichprovides insight into how and why somecountries have been better able to satisfythe needs of their citizens (Payne andSutton 2001). This implies that Caribbeancountries are competitive at varying levels.However, Lewis lamented that by its verynature, economic development is
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accompanied by both benefits and costs(Lewis 1955).
Nafziger (1997) posits thateconomic expansion can decrease famine,infant mortality, and death; it gives us
greater periods of leisure; enhances art,music and philosophy; and gives us theresources to be humanitarian. Nafzigeremphasizes that without growth the desireof one group can only be met at theexpense of others. He however expressedthe view that mobility, impersonality, andemphasis on self-reliance associated witheconomic development may alsodestabilize the extended family systemwhich in turn may have a negative impacton social structures.
IN THE CARIBBEANThe study of economic
development in the Caribbean has beenafflicted by the lack of consensus in theregion concerning the definition of itsprocess. Despite the small-scale residentialmanufacturing activity that took placeduring the early decades of the 20thcentury,thoughts of economic development in theCaribbean only really occupied the minds
of leaders after the Second World War,following the move towards thedecolonization of the territories of theregion (Payne and Sutton 2001).
Mandle has argued that without asolid academic consensus over theobjectives of development policy,politicians have been left without clearguidelines concerning the target towardswhich their policies should be designed(Mandle 1996). Payne and Sutton once
described Caribbean development as aseries of bouts of optimistic endeavourfollowed by disillusion (Payne and Sutton2001). Further outlining four phases ofeconomic development in the Caribbean:(1) the confident espousal of themodernising potential of industrialisationand economic diversification; (2) thedependency theory - emergency of
dependency analysis and the attemptedescape from dependency; (3) the counteroffensive of neo-liberal political economyand the enforced embrace of the market asthe dominant philosophy of development;
and (4) globalisation and promotingregionlism in response to questions ofnational states and societies abilities tochart their own path to development. Theyalso stressed that there has been force inthe forth phase (Payne and Sutton 2001).
Industrialisation and EconomicDiversification
Historically, many politicians andsocial commentators strongly advocatedthe need for industrial development in the
Caribbean in an effort to createemployment opportunities and to diversifydomestic production in light of thedepression of the 1930s ( Bernal, 1988;Figueroa, 1992; Downes, 1985; Farrell,1980). However it was the theoreticalinsights of the nobel laureate, Sir ArthurLewis, which underpinned the coherentstrategy for industrial development in theCaribbean otherwise known in the regionas industrialisation by invitation or simply
as the Lewis model (Lewis 1950). Itsought development by diversification ofthe national economy and the traditionalCaribbean problem of dependence onagriculture. Noteably, Lewis envisagedindustrialization as a process requiring thesimultaneous development of agricultureand industry (Lewis 1950). Competing onlabour cost, it was believed that industrywould absorb the surplus labour emanatingfrom agriculture through the provision of
new jobs, thereby allowing the sector toincrease its productivity and standard ofliving.
However, recognizing that thesmall volume of island trade preventedthese economies from exporting on acompetitive basis Lewis recommended thatinstead of exporting, the Caribbean should,through a series of policy measures, court
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foreign entrepreneurs to install and opentheir businesses and factories in the islands.This policy termed in the literature asexport-led industrialisation by invitation(Best 1976) suggested an export-led labour
intensive strategy of industrial developmentof which two variations exist (Downes,1985).
The first variant is the outcome ofLewis critique of the economic plan forJamaica, which was based on the use oflocal natural resources; that is, `export-lednatural resource based industrialisation.The second variant is based on theexperience of Puerto Rico and places greatemphasis on foreign investment and thegranting of fiscal incentives to investors
(Lewis, 1950). Lewis however argued thatreliance on foreign investment would betemporary, since it would raise nationalincome, which would increase nationalsavings, and local manufacturers wouldeventually learn the tricks of the trade andtake over from foreign capitalists as thedriving force in industrialisation (Girvan2003).
Sir Arthur Lewis' solution thatCaribbean islands should embrace
industrialization as essential to economictransformation was, in its full theoreticalformulation, labelled as a thoughtful andprogressive model to follow (Lewis 1950).Unfortunately, in practice the derivative"industry-by-invitation" policies failed tofully implement Lewis' broader agenda ofsectoral diversification, of the need forsubstantial investments in human capitaldevelopment, and diversification in theagricultural sectors (Bernal, Figueroa and
Witter 1984).Expressed differently, as a nationdevelops, wages tend to increase, howeverto sustain the higher income levels, laborproductivity must improve for the nationto be competitive (Schwab 2011).According to the Global CompetitivenessReport 2009-2010, as wages rise withadvancing development, efficiency of
production and improved quality ofproduct and service becomes the stage atwhich a nation can become competitive.To achieve this higher level, an economymust attain higher education and training
market efficiency, labour market efficiency,financial market sophistication, technologyreadiness, market size (World EconomicForum 2009). However, what enhancesproductivity for one country is generallynot the same for another country. Thus,the impact of the competitiveness factorsmay vary across countries, despite thesimilarities within the Caribbean region.
The Dependency ApproachDefined as an explanation of the
economic development of a state in termsof the external influences - political,economic, and cultural - on nationaldevelopment policies (Sunkel 1969); thedependency approach emerged as a criticalreaction to the conventional approaches toeconomic development that emerged in1950s. The school of dependency thoughtin the Caribbean was founded on thetenets of structural Marxism and waspromulgated by such thinkers as Beckford,
Best, Demas and Girvan. Bernal, Figueroa,and Witter (1984) placed dependencywithin the critical tradition of Caribbeaneconomic thought, following Sir ArthurLewis work on Caribbean industrialization.
Theorists argued that thedependency concept represented thestructure of Caribbean economies morerealistically than W. Arthur Lewis (1954)dual economy model of development.They argued that the typical firms in the
Caribbean are not the independentcompetitive firms; rather, they are parts ofwider systems of decision-making andresource allocation. Economic dependencewas seen to be a property of the economicsystem at the level of the individual firmthat complemented the structuraldependence of the macro economy(Girvan, 2006).
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During the 1970s, the dependencydoctrine became the official philosophy ofpolitical opposition groups such as theworkers party in Jamaica and small radicalparties in other parts of the Caribbean. It
also shaped the actions of the leadingelement of the People's RevolutionaryGovernment (PRG) in Grenada after theyobtained power in 1979. However, thestrategy proved too rigid and by very early1980s it disintegrated into bitter conflictand would later result in a bloody ending(Payne and Sutton 2001).
One major premise of thedependency theory is that poor nationsprovide natural resources, cheap labor, adestination for obsolete technology, and
markets for developed nations, withoutwhich the latter could not have thestandard of living they enjoy (Gaavson2002). However, according to dependencytheorists, the worlds capitalist system failsto pay Caribbean states a fair wage for theirlabour and a fair price for their exportednatural resources and agricultural andmanufactured products. By late 1970s, achorus of voices dissented against thedependence theory. Some of the biggest
criticisms were:
1. The countries on the periphery ofdevelopment are not destined tostagnation. So, the dependency theoryis an incomplete and inaccuratedescription of the socioeconomicconditions of lesser developedcountries (LDCs).
2. The theory does not highlight how
the countries that follow a dependentdevelopment pattern suffer from avariety of economic ills, such asregressive income distribution,emphasis on luxury goods, underutilization and exploitation of humanresources, over reliance of foreignfirms for capital intensive technology,
and the perennial problems of povertyand unemployment.
3. One need not accept dependencyas a necessarily zero sum game in
which the periphery loses, and thecentre gains. The dependencycondition provides opportunities for awin-win game, in which bothdeveloped countries and LDCs gainfrom each other.
Payne & Sutton (2001) furtherstated that the collapse of the Grenadianrevolution brought this radical phase ofCaribbean development to an end, andcondemned all forms of Marxism across
the entire Caribbean region. They alsostressed that despite the theorys ability tocorrectly identify the core elements of theinternational capitalist agenda, whichwould respond to challenges, it failed toconsider the politics by which suchchallenges were to be sustained.
The neoliberal policy era beganaround 1980 (Harvey 2005). Advocatesadmit that in the early years neoliberaldevelopment was implemented according
to a top-down approach, which prioritizednational economic growth above all otherconcerns. As neo-liberal architect JeffreySachs describes it, internationaldevelopment agencies applied a 10-stepprogramme with few modifications fromcountry to country. Sachs further admitsthat such a universal approach was toorigid to accommodate the needs of diverseeconomies (Sachs 1999).
In the mid 1980s, when a chartered
path to the regions development seemedlost, the future of Caribbean states restedsolely in the hands of the United States(Payne and Sutton 2001). Guided by theviews of neoliberalists, it was assumed thatthe United States main developmentobjective was to create a growing numberof market-based Caribbean economiescapable of competing successfully in
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international export markets. Additionally,the neo-liberal policy was enforced by theInternational Monetary Fund and theWorld Bank under the structuraladjustment prescription. This required
less reliance on statism, marketintervention and import substitution thanhad been the norm in the developmentstrategies deployed in the earlier decades(Payne and Sutton 2001).
Throughout the 80s, Caribbeanstates indiscriminately followed thestructural adjustment prescription; so farthat at a regional summit in the Bahamas in1984, CARICOM2 heads of governmentsissued the Nassau Understanding3, inwhich they endorsed structural adjustment
as a conscious shift to a new developmentpath. Why? There were little alternatives(Payne and Sutton 2001).
By the end of the internationalrecession (1980-82) the region had realiseda drastic reduction in the demand for anumber of the main exports, particularlybauxite, petroleum products and sugar, anda fall off in the number of tourists visitingislands. This recession created, in effect,three crises in one, in nearly all Caribbean
economies: balance of paymentsconstraints, fiscal imbalances, and anational debt crisis (Karagiannis 2003).Desperate for financial assistance,Commonwealth Caribbean nations turnedto the IMF and other multilateral financialinstitutions. As a result, their governmentswere forced to follow the neo-liberalprescription. The favoured measures werealways the same: liberalisation of foreignexchange and import controls, devaluation
of the currency, and the deflation ofdomestic demand. After following thisprescription, the economy in question wasexpected to be ready to return to theinternational market-place purportedly able
2CARICOM - Caribbean Community3The Nassau Understanding, a declaration issuedby the heads of government of CARICOMcountries, Nassau, 1984.
to achieve higher levels of exports andeconomic growth (Karagiannis 2003).
Predicated on the notion that arising tide lifts all boats, the social costs ofthese neoliberal policies, measured in terms
of unemployment, inflation, and sharplydeclining living standards were immense.Further, by the end of the 1980s,Caribbean economies still facedfundamental structural problems associatedwith the character of their production baseas well as with the distribution of theireconomic assets (Karagiannis and Witter2004). Critical analyses of the economicand social impact of structural adjustmentdid appear and had their impact, especiallyin drawing attention to the peculiarly harsh
costs imposed by such programmes(Polanyi-Levitt 1991). Neo-liberalprescriptions broke little new theoreticalground and did not succeed in charting anysort of realistic alternative course of actionfor Caribbean governments in the criticalarenas of national and regional economicmanagement (Payne and Sutton 2001).
Upon reflection, the average annualGDP growth for the Caribbean states hasslowed since neo-liberalism began to take
hold; dropping from 7.1 per cent in 1970,to 5.4 per cent in 1980, to 3.0 per cent inthe 1990, to a modest rebound of 3.4 in2000.
The 1990s were characterised bythe consolidation of the neoliberalrevolution, tempered only by the realisationthat more attention had to be paid tohuman resource development if the newtechnological imperatives of a globalisingeconomy were not to pass the region by.
Development was seen as a market-drivenprivate sector-led process. The role of thestate should be to meet the demands forgood governance imposed by theinternational financial institutions(Karagiannis 2003). The prevailing attitudewas best expressed by the then primeminister of Barbados Owen Arthur in1996:
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Generally, the strategy has to accept thereality of the globalisation of economic forcesrather than hanker after a less complicated butimpoverished past. The strategy must alsorecognise that the Caribbean countries, singly
and as a group, must make the transitionfrom the old age of preferences to the new age ofreciprocity in its international economicrelationships. In so doing, it must be designedto minimise the costs and dislocationsassociated with the transition, and to put inplace mechanisms that can allow the region toexploit the market opportunities which arebeing created by the international liberalisationof trade and the formation of mega tradeblocs. (Arthur 1996)
Table 2: Annual percentagegrowth rate of GDP at market prices for
the Caribbean
Country Name 1970 1980 1990 2000Antigua andBarbuda - 8.6 2.5 1.5
Bahamas, The -5.6 6.5 -1.6 4.1
Barbados 9.5 4.7 -4.8 2.3
Belize 4.8 15.2 10.6 13.0
Bermuda 6.3 7.9 0.0 2.9
Dominica - 14.3 5.3 0.7
DominicanRepublic 18.2 8.0 -5.5 5.7
Grenada - -0.4 5.2 12.6
Guyana 4.3 1.7 -3.0 -1.4
Haiti - - - 0.9
Jamaica 12.1 -5.7 4.2 0.9
St. Kitts and Nevis - 8.2 2.3 2.8
St. Lucia - - 23.5 0.0St. Vincent and theGrenadines 10.7 2.0 5.0 1.8
Suriname - -5.3 -0.5 -0.1
Trinidad andTobago 3.5 10.4 1.5 6.1
Caribbean Average 7.1 5.4 3.0 3.4
Source: The World Bank National Accounts Data
Globalisation and Regional IntegrationOne of the characteristics of this
new economic era is the integration ofeconomies, where countries do not
compete as an individual nation, but as abloc or region. Bishop and Payne notedthat within the Caribbean, regionalintegration has been a topic of discussionfrom colonial times. In the post-colonial
era, a number of distinct phases can beidentified in the evolution of regionalism(Bishop and Payne 2010):
Decolonisation and Federation - TheWest Indies Federation lasted from1958-1962 and was supposed to seemost of the Caribbean gainindependence as a single federatedstate.
CARIFTA The Caribbean FreeTrade Association (1965-1973) was afree trade arrangement whichliberalised trade in manufacturedgoods.
The Caribbean Community andCommon Market (CARICOM) 1973-1989, which replaced CARIFTA in1973 with the signing of the Treaty ofChaguaramas (Bishop, et al. 2011).
Resulting from the policies of the1990s, many Caribbean economiescollectively sought to protect and guaranteeregional access to markets (ECLAC 2002).However, Professor Norman Girvanindicated that the limited economicintegration accomplished to date has notimpacted significantly on regionaleconomic development and the majority ofCaribbean member states do not perceivesignificant benefits to be had from
deepening economic integration, especiallywhen the financial and political costs arefactored in. He further stated that from2001 to 2007, intra-regional trade was14.5% of CARICOM total trade, a modestincrease from the 8.3% recorded in 1973-1979 (see Girvan, 2011).
Payne and Sutton highlighted thatdespite the evolution of different
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theoretical perspectives, the concept ofglobalisation, which has forced into beingthis new era of development thoughtremains far from being fully understood(Payne and Sutton 2001). Thus the battle
for Caribbean countries to improve theirlevel of competitiveness and seekinggreater development remains.
Overview of the CaribbeanCompetitiveness Level
For decades, Caribbean productionand exports were based on preferentialaccess to markets; whether it was sugar,bananas and rum to the European Union(EU) market under the Lom Convention;rum and tobacco to the United States
under the Caribbean Basin Initiative (CBI);or a range of other commodities to Canadaunder CARIBCAN. Trade liberalization,market opening and access stipulations bydeveloped countries in the 1990s meant theend of preferences for these economies.The global market, which is founded oncompetition that rewards efficiency andproductivity, is now the major decider ofthe prospects and fortunes of countries(ECLAC 1999). This automatically meant
that the competitiveness of the Caribbeaneconomies has become an increasinglyimportant determinant of its ability togenerate wealth from international trade.
In attracting internationalbusinesses there are some factors thatshould be available to an investor inadvance. These include, among others, thegovernment, legal and social systems,culture, and currency strength of thecountry or region (Hill 2005). Caribbean
economies offer a variety for the investorin terms of these factors. This varietyshould be viewed as a competitive edge forthe region.
The types of government systemsthat are represented in the region are:constitutional monarchy and democracy,parliamentary and representativedemocracy, republic and commonwealth.
While most are based on the Englishcommon law system there are fewexceptions, which include the DominicanRepublic, which has a system based onFrench civil codes, the Haitian legal system
is based on the Roman civil law; whileSurinames legal system is based on Dutchrules.
In terms of social systems andstandard of living the Caribbean is quitediverse. Based on the gross domesticproduct (GDP) per capita, Bermuda andBahamas are considered the mostdeveloped countries of the group.Bermuda has a (GDP) per capita adjustedfor Purchasing Power Parity (PPP) ofUS$69,900 and The Bahamas US$28,700
(CIA World Factbook 2010). According tothe Human Development Report (2011)most of the countries in the Caribbean areclassified between high humandevelopment and medium humandevelopment; with the exception of Haiti.On a scale of 0 to 1, the Caribbeaneconomies rest between 0.793 (Barbados)and 0.454 (Haiti).
According to the United NationsDevelopment Programme (UNDP) Report
for 2009, all countries of the Caribbean(except for Belize and Haiti) have highlevels of literacy compared to othercountries around the world. Currently theaverage Caribbean adult literacy rate is90.2%, compared to the world average of83.0%.
Although these developmentindicators can prove to be positiveincentives for investors to the Caribbeanregion, they are mitigated by the number of
adverse factors that hamper the potentialof their competitiveness. Currently thereexist weak linkages between themanufacturing and infrastructural sectors.The protectionist policy measures, whichincluded tax exemptions, tariffs and quotas,have also stifled competition and weakenedproductivity while the continued supportof declining industries resulted in the
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allocation of credit to uncompetitiveactivities (ECLAC 1999). Consequently,after decades of attempting to create avibrant manufacturing sector, it continuesto show signs of weakness and inflexibility
which may be damaging particularly withinthe context of a liberalized globaleconomy. According to the United
Nations, Economic Commission for LatinAmerica and the Caribbean (1999), thecountries that are prepared to undertakenecessary change are more likely tomaintain and improve their rate of
development in the competitive economicenvironment.
Table 3: Caribbean Latest Competitiveness Indicators
Caribbean Country2009 Literacy
rate
GDP - percapita (PPP)
2011
HumanDevelopment Index
2011
Antigua and Barbuda 99.0 16,400 0.764
Bahamas, The 95.8 28,700 0.771
Barbados 99.7 21,800 0.793
Belize 75.1 8,400 0.699
Bermuda - 69,900 -Dominica 88.0 10,400 0.724
Dominican Republic 89.1 8,900 0.689
Grenada 96.0 10,200 0.748
Guyana 99.0 7,200 0.633
Haiti 54.8 1,200 0.454
Jamaica 86.0 8,300 0.727
St. Kitts and Nevis 97.8 13,700 0.735
St. Lucia 94.8 11,700 0.723
St. Vincent and the Grenadines 88.1 10,300 0.717
Suriname 90.4 9,700 0.680
Trinidad and Tobago 98.7 21,200 0.760
Caribbean Average 90.2 16,125
Source: CIA World Factbook - January 1, 2011
Table 4: Global Competitiveness Index and Ranking - Caribbean and Other Major PlayersGCI
2001/2002 GCI 2010/2011
Country Rank Score Rank Score
Switzerland 5 1 5.63
Barbados - 43 4.45Trinidad and Tobago 34 84 3.97
Jamaica 40 95 3.85Guyana - 110 3.62
Chad - 139 2.73
Caribbean Major Trading Partners -
United States 2 4 5.43United Kingdom 7 12 5.25
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CONCLUSIONThe process of Caribbean
development over the years has been by nomeans an easy undertaking. With theimplementation of varying development
theories, pioneered primarily by foreigninfluences, the Caribbean remains severelychallenged with respect to its ability tocompete in the international arena. Part ofwhich can be attributed to an incoherentregional understanding of the conceptcompetitiveness and its value for economicdevelopment. This of course does notoverlook the handicap of limited resourceendowments faced by the countries in theregion. From the periods ofindustrialisation by invitation; to the
dependency analysis phase; to neo-liberalpolicy economy; the true potential of theregions competitiveness waspredominantly over shadowed by theenjoyment of preferential arrangements,which have now for all intents andpurposes can be deemed to have run itscourse.
For Caribbean countries to movebeyond the current levels of developmentthey must first understand the
interdependence between competitivenessand the development process. This is ofgreater importance given their endowmentchallenges and the slow pace, of theprocess of full integration in the region.(Acknowledging a major characteristic ofthe current economic era is the integrationof economies, where countries do notcompete as an individual nation, but as abloc or region.) Despite the diversechallenges facing the Caribbean in their
ability to raise their level of developmentthrough competition on the internationalmarket, it must be recognised that thefoundations for this process have alreadybeen laid. Historical experiences aside,Caribbean economies have a number ofpositive attributes to offer.
Overall, strengthening of thecurrent linkages between sectors combined
with the economic collaboration as aunited region, using the existingagreements and efficiently implementingany lingering ones, can be seen as aposition to improving the regions
competitiveness ultimately itsdevelopment.
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ECLAC. Competitiveness of the manufacturingand agro-industrial sector in theCaribbean with a focus on Dominica,Guyana, St. Vincent and the Grenadinesand Trinidad and Tobago. Port ofSpain : ECLAC Library , 1999.
ECLAC. "THE EFFECTS OFGLOBALIZATION ONCARICOM CARIBBEAN
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Figueroa, M. "PreWar Industrialisation inJamaica: Policy Ideas and
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Gaavson, Terkula. Foreign Direct InvestmentInflows and the Development Crisis in
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Girvan, Norman. "Caribbean DependencyThought Revisited." CanadianJournal of Development Studies 27, no.3 (2006): 329-352.
. "The quest for regional integration inthe Caribbean successes andchallenges." ECLAC CaribbeanDevelopment Round Table . Port ofSpain : ALAI, Amrica Latina en
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Harvey, D. A brief history of neoliberalism.New York: Oxford UniversityPress, 2005.
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Nafziger, E. Wayne. "The Meaning andMeasurement of EconomicDevelopment." In EconomicDevelopment, 15-52. New York:
Cambridge University Press, 2006.Nafziger, Wayne. The Economics of DevelopingCountries. Kansas: Prentice Hall,1997.
Payne, Anthony, and Paul Sutton. ChartingCaribbean Development . Florida:University Press of Florida, 2001.
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Porter, Michael E. On Competition, Updatedand Expanded Edition . Harvard
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Schwab, Klaus. The Competitiveness Report2011-2012. Geneva, Switzerland:World Economic Forum, 2011.
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EXAMINING THE CONSTRAINTS TO ECONOMIC GROWTH IN
BARBADOS: A GROWTH DIAGNOSTIC APPROACH
Derek Gibbs
Chief Economist
Economic Affairs Division
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II. EXAMINING THECONSTRAINTS TO ECONOMIC
GROWTH IN BARBADOS: AGROWTH DIAGNOSTIC
APPROACH
By
Derek Gibbs
I. IntroductionThis draft paper seeks to incite
discussion on what are the key constraintsimpeding stronger economic growth inBarbados. Equally, the paper would alsowant to explore ideas as to what could bethe possible short and long-term solutions
that could be submitted for considerationand perhaps implementation. Theapproach to this would be to employ thegrowth diagnostic methodology framework(See Hausman, Rodrik and Velasco, 2005)and apply it to the special case ofBarbados, a small open economy with nonatural resources and limited financialcapacity. The study also draws on a similarstudy done on Malawi by the World Bank(2009).
The motivation for the studycomes at a time when Barbados is facingsome of its greatest challenges since thestart of the global recession late 2008. Thisled to negative economic growth at the endof 2009 (4.1%) and negligible positivegrowth for 2010 and 2011. However, itcannot be the argument that sluggishgrowth is a recent occurrence. As capturedin Table 1 below, Barbados has movedfrom an average annual growth position of
2.2% (1980 to 1989) to 0.8% (1990 to1999) and 0.4% (2000 to 2011). Associatedwith this has been declining domesticsavings, while the investment pattern hasbeen mixed. This weak growth has had animpact on labour with the unemploymentrate, between 1980 and 2011, averaging14.0%. Over this period, the rate wouldhave reached as high as 24.0% owning to
negative economic growth and as low as7.4%. Consistent single digitunemployment rates were possible from2004 to 2008, a period associated with faireconomic growth.
Compared to similar small states,outside the region, Barbados has laggedbehind. If the example of Mauritius istaken, the data shows that for the period1980 to 1989, its development was similarto that of Barbados. However, withaccelerated growth after this period, drivenby higher investment and domestic savings,Mauritius has proven to be an economicsuccess story with some lessons to belearnt. Similarly, Singapore a country with adevelopment history similar to Barbados
has also seen great economic achievementwith consistently high growth rates.
II. Barbados Growth History andStructural Change
The history of Barbados economicgrowth pre-1960s can be characterized bysugar and basic agriculture with some lightmanufacturing. However, given the controlof the sugar sector by a minority class the
drive was to diversify the economy in lightof Lewis (1950) argument for an alternativepath of development for Caribbeancountries. This line of thinking led togreater promotion of manufacturing andtourism, and later in the 1980s the drivetowards international business. This was alldone by encouraging direct investment.These actions clearly marked the beginningof a more post-1960 modern and diverseeconomy.
The period 1960 to 1970 was oneassociated with relatively high economicgrowth. Real GDP grew at an averageannual rate of 6.8% per annum. Particularlyduring the 1965-70 period Barbados wouldhave benefitted from favourable export forits sugar (Downes, 2004). Post 1970,economic growth slowed as real GDP grewby 2.5% (1970-80). Specifically, the period
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1970-75 was marked by economicstagnation attributed to commodityshortages and the oil crisis of 1973-74. Theresults saw a reduction in domestic andforeign demand and overall a fall in
domestic production. Economic recoverywas experienced during the late 1970s asgrowth averaged 5.0% over the 1975-80
period. This recovery was mainly due tolower import prices and stronger tourismactivity. However, with the event of the1979 increase in oil prices the globaleconomy was back in recession which
negatively impacted the countrys tourismand manufacturing sector.
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Between 1981 and 1982 thecountry recorded negative growth. A
reversal in fortunes was not seen until 1986when there was a noticeable increase in realoutput of 9.0%. The country between 1985and 1990 had a modest recovery as theaverage annual growth rate rose to 2.3%.This outcome was again driven by thetourism sector which was quite buoyantduring the 1986-89 period, growing at anaverage of 10.0% per annum. It should be
noted that the 1981 and 1982 slump sawthe country going into a short lived
International Monetary Fund (IMF)standby programme.However, by 1990 there was a
slump in economic performance as outputin most major sectors fell. Real tourismoutput fell by 9.8% after growing by 10.0%the previous year, while manufacturingoutput dropped by 2.7% in contrast togrowth of 5.4% the year before. The early
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1990s was particularly harsh for economicgrowth as this period could becharacterized as one which saw low growthrates and low real GDP per capita. From1990 to 1995, real output fell by 1.2%, due
mainly to negative growth in 1990, 1991,and 1992. This bleak performance forcedthe Government of the day into an IMFstabilization and adjustment programme.
With a recovery in place by 1993,the country entered into a relatively stablegrowth pattern lasting eight years (1993 to2000) and averaging 2.9% per annum.However, by 2001 the country experienceda slump due mainly to the 9/11 eventwhich caused major disruption to tourismactivity which fell by 5.9%. Nevertheless,
growth returned by 2002 driven mainly bythe non-traded sector. This new growthperiod lasted until 2008, averaging 2.3%per annum. By 2009 with the on-set of thegreat recession, the country economicfortunes declined and to date has remained
weak even though some gains have beenmade.
If a summary can be given, thegrowth pattern that emerges from the dataand experiences has been one of
inconsistency and high vulnerability toexternal shocks. This is captured in Figure1 and 2, which demonstrates the highvolatility in Barbados real output, andwhich could explain the struggle with highunemployment levels. Observed also is thefact that the country has never been able tomaintain strong economic growth. We seethis in 1979, 1986, 1997 and 2006 wherewhen growth rose above an average of5.0% per annum it was followed by weakerperformances, hence the show of high
volatility. The question therefore that canbe asked is why, when we have seen othercountries like Mauritius and Singaporebeing able to maintain high growth rates.What are the constraints stopping thecountry from achieving this and what arethe solutions to these constraints?
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GROWTH DYNAMICS
III. Explaining the Methodology
The framework used to access the
growth constraints which Barbados faces isone developed by Hausmann, Rodrik andVelasco (2005)4. The aim is to identify theprinciple obstacles to an economysoptimal rate of capital growth, whichmaterializes into overall economic growth.In particular the question can be asked asto what are the binding constraints oninvestment and by relaxing theseconstraints what impact will this have ongrowth. Within this framework thengrowth can be seen as been constrained by:
Low social returns lack of importantfactors such as infrastructure,human capital, low productivity,and unfavourable externalities.
Poor appropriability (environmentalfactors or conditions) high taxation,poor property rights, weakenforcement of contracts, labourconflict, incomplete information,other market failures.
High cost of capital throughdomestic financial markets orexternal ones.
While the above constraints areidentified, it is reasonable to assume thateach country may have specific constraintsthat need to be identified and set withincontext. For Barbados these importantconstraints could be identified as businessfacilitation (by Government agencies) and
foreign reserves. For the latter, this is seenas even more important since it is whatkeeps the country moving by enablinginvestment and for the payment of neededimports. As such, the role of reserves as aprecautionary and transactional factor is
4This is normally referred to in the literature asthe HRV framework.
quite important for maintainingmacroeconomic stability.
While the HRV framework has itsgroundings in the standard economictheory outlined in the Ramsey model, it is
best viewed within a simple constraintmatrix that matches symptoms withconstraints (See Hausmann, Klinger andWagner, 2008). Within this matrix eachcolumn identifies a constraint and eachrow represents a symptom of thatconstraint. The matrix could be morecomplex but for this discussion it is kept assimple as possible.
IV. What has Driven BarbadosGrowth
Growth in Barbados has beendominated by exports of services mainlytourism and international business5. Whileon the non-traded side the key drivers havebeen wholesale and retail, and business andother services. While manufacturingremains important, this sector has been ona decline since 1997 and was overtaken byconstruction in 1999 in its contribution toreal GDP. Nonetheless, there have been
some winners in the industrial sector asexports of rum have risen significantly.Similarly, the export of chemicals between2010 and 2011 more than doubled, leadingto an increase in overall domestic exports.
The export of tourism services hasbenefitted the country well, contributingon average just over 13.0% to real GDP(1980 to 2011). This is compared to thebusiness and other services sector whichon average has contributed just over 17%
for the same period. While the averageappears high, the reality is that the annualcontribution from the sector has beendeclining. As shown in Table 2, the sectorscontribution in 2000 stood at 16.1%, but
5T
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by 2011 this was 12.2%. While there havebeen some periods were the contributionwas close too or just above the average, ithas not been consistent.
With problems ranging from
economic recession, lost of airlift and other
external threats, the constraints to strongertourism performance seems difficult toresolve, particularly given the sectorsvulnerable to external shocks.
Table 2: GDP and sources of Growth
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Contribution to RGDP - %
Sugar 2.6 2.2 2.0 1.6 1.5 1.6 1.3 1.3 1.2 1.3 1.0 0.9
Non-Sugar Agriculture & fishing 3.7 3.6 3.5 3.6 3.3 3.4 3.1 3.1 3.2 3.5 3.4 3.2
Manufacturing 6.9 6.4 6.4 6.2 6.2 6.1 5.8 5.6 5.5 5.0 4.8 4.5
Tourism 16.1 15.5 15.0 15.8 13.5 12.3 13.8 11.8 11.8 11.9 12.3 12.2
Mining & Quarrying 1.1 1.0 1.0 0.9 0.9 1.0 0.9 0.8 0.8 0.5 0.5 0.5
Electricity, Gas & Water 3.5 3.8 3.9 3.9 3.9 3.8 3.9 3.9 3.9 4.1 4.1 4.1
Construction 7.5 8.2 8.8 8.7 8.8 9.6 9.1 8.9 8.4 7.2 6.5 7.0Wholesale & Retail 19.4 19.3 19.4 19.8 20.7 21.0 21.2 22.2 22.0 21.8 22.3 22.2
Government 13.8 13.9 14.7 13.9 14.4 14.4 14.0 14.2 14.6 15.6 15.8 16.1Transportation, Storage &
Communication 8.4 8.7 8.4 8.5 8.8 8.8 8.8 9.2 9.5 9.6 9.6 9.6
Business & Other Services 17.0 17.3 16.8 17.2 17.9 18.0 18.1 18.9 19.2 19.5 19.6 19.7
GDP - Market Prices (millionsBDS$) 6186.7 6183.2 6234.0 6484.8 6980.0 7837.3 8393.0 8966.2 8687.4 8793.3 8490.4 8625.8
Domestic Exports 379.2 352.7 333.1 329.2 346.9 422.1 497.1 522.3 531.2 458.6 522.8 568.5
Retained Imports 2146.7 1971.0 1991.7 2220.5 2616.3 2911.0 2866.9 2958.2 3396.0 2600.4 2802.9 3231.1
Trade Ratios - as % of GDP
Domestic Exports 6.1 5.7 5.3 5.1 5.0 5.4 5.9 5.8 6.1 5.2 6.2 6.6
Imports 34.7 31.9 31.9 34.2 37.5 37.1 34.2 33.0 39.1 29.6 33.0 37.5
Trade balance -26.4 -24.1 -24.6 -27.0 -30.3 -29.4 -26.0 -26.1 -30.9 -22.4 -25.4 -26.4
Source: Central Bank of Barbados
Likewise, the manufacturingsectors contribution to growth has alsofallen, moving from double digits as seenin the 1980s (between 1980 and 1986 thecontribution to real GDP stood at anannual average of 11.3%), to single digits,
which between 2000 and 2011 averaged5.8%. Loss of market share due, amongother things, to increased operating cost,market liberalization, and low investment,could be seen as some of the constraintsfacing the sector.
Alternatively, while the majorforeign earning traded sectors have beenfacing some challenges, the non-traded
foreign exchange using sectors have beendriving economic output. The main sectorshave been the wholesale and retail sectorfollowed by business and other services. Ascatter plot of the data as captured inFigures 4 and 5 clearly shows the high
relationship between these two sectors andgrowth. With R-squares of over 90.0% thepower of wholesale and business servicesto explain growth is highly important, ascompared with tourism. However, thiscannot all be taken in isolation, as otherfactors needs to be considered whenexamining the growth process. One suchfactor or concern is the countrys
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dependence on foreign exchange topurchase imports that goes into productionand the fact that these non-traded sectors
are consumers, rather than earners, of suchforeign exchange.
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Has Growth been Export Driven?Given the above discussion, the
question that can be asked is whethergrowth is export driven (goods andservices) or whether it is driven by
endogenous factors and consumerdemand. The issue of export-led growthhas been explored extensively in theliterature with early cross-sectional studiesdone by Balassa (1978), Feder (1983) andthen basic time series studies done by Ram(1987), Salvatore and Hatcher (1991), andSengupta (1995). However, with theintroduction of co-integration and errorcorrection modelling, the emphasis shiftedto testing for both short-run and long-runeffects and also for causality (See Van Den
Berg and Schmidt, 1994 and Ahmad andHarnhirun, 1995).
For the purpose of this studyhowever, no elaborate econometric analysisis done. The aim is simply to use basiccorrelation testing to determine thestrength of the linear relationship betweengrowth and the exports of goods andservices. Given this approach, therelationship between domestic exports(goods) and growth was shown to be weak
with just an explanatory power of 15.0%(R = 0.1512). On the other hand thecorrelation between service exports (travelcredit) and growth was stronger with anexplanatory power of 83.0% (R = 0.8375).These basic results support the fact thatservices has been the driving economicforce and hence would have to be giventhe greater focus.
Productivity MeasuresAn important gauge element for
economic growth is to measure theefficiency of labour both at the macro-leveland at the micro-level. Based on work
done by the National Productivity Council,measures of labour productivity arecaptured in Figure 6 below. Represented inthe chart are national productivity growthmeasures, sectoral productivity statistics forkey industries, and real GDP growth. It isthe expectation that decreases/increases innational productivity growth would beaccompanied by similar patterns ineconomic growth. From the pattern thisdoes not seem to be the case except for2009 and 2010. Compared to the individual
sectors there also appears not to be anyreal relationship with growth, except forthe accommodation (tourism related)sector.
Again using basic correlationanalysis to test the linear relationshipbetween national productivity changes andeconomic growth the relationship had anexplanatory power of 42.0% (R = 0.4201).In the case of accommodation theexplanatory power was just 15.0% (R =
0.1466). For the other sectors, theexplanatory power was negligible. Giventhe short time series (only seven years) it isdifficult to draw any strong conclusionfrom these results, except to say thatproductivity levels for most of the sectorsappears to have weaken during the period2008 to 2010. Nonetheless, the fact thattourism productivity was shown to havemore significance than the other sectorwould strengthen the argument of its
importance.
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Way Forward
It would therefore be a strongargument that for the purpose of thisstudy, focus be given to just those foreignexchange earning sectors since in the caseof tourism there are significant spin-offs tothe non-traded sectors. Hence, gettingtourism growing means growth also forothers. It is also important that if we aregoing to look at how growth can be movedbeyond 3.0% or 5.0% consistently then weneed to look not only at the traditionalsectors but also new ones. Currently, thefocus on renewable energy and culture asemerging growth creating sectors is
important. The strategy must be to see howbest resources can be used to obtained themain objective that being growth. It mayalso mean examining the experience ofother countries like Mauritius to determinewhat lessons could be learnt.
V. Does Barbados have a GrowthProblem?
This is a complex and not sostraight forward question; however basedon the above discussion and analysis, thefollowing observations can be made:
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1. Economic growth has beensomewhat volatile and low formost periods with only a few yearswhen it stood 4.0% and over. Thevolatility could be attributed to
external shocks and highdependence on just a few sectors.
2. The early 1980s and 1990s were themajor periods of negative and weakgrowth due to both external andinternal factors.
3. While manufacturing in the pasthas made a significant contributionto real GDP this has fallen withtourism being the only tradedsector making a major contribution(currently international business isnot captured as a sector in thenational accounts).
4. Given the importance of foreignreserves to growth it is a matter ofconcern that the non-tradedforeign exchange using sectors,(mainly wholesale and retail, andbusiness services) have been themajor components of real GDP.
5. While data was lacking theobservation was that the growth inproductivity seems not to have anysignificant impact on economicgrowth. This raises the question asto whether the level of productivityis high enough, which may not bethe case particularly between 2008and 2010. Maybe this could
partially explain the low orinsignificant growth rates duringthis period.
The argument could be expanded upon byidentifying other related issues such asbusiness facilitation, energy cost, taxation,
and financing. While there may be lotsmore reasons, which it would beimpossible to discuss in just one paper, theaim will be to focus on the most relevantand let those be the center of discussion.
VI. HRV Constraints Matrix
The following discussion centerson identifying the major constraints togrowth in Barbados. It is observed thathistorically real GDP growth has primarilybeen low with only a few accessions whenit surpassed 5.0%, but never able tomaintain this level due to external andinternal shocks. The low growth isreflected in the stubbornly high
unemployment rate which has averaged14.0% for the period 1980 to 2011, withthe highest rate being 24.3% (1993) and thelowest being 7.4% (2007).
The approach will be that sincegrowth is primarily driven by investment, itwould be best to focus on those issues thatcan constraint investment in traditional andeven non-traditional sectors, particularlythose sectors earning foreign exchange.Possible issues to target would be
financial constraints (savings, interest rates,private sector credit); government andmarket failure (business facilitation andcost, taxation, crime, innovation, researchand development); and complementaryfactors (human capital, internationalforeign reserves, infrastructural, theenvironment). Also, in the case of smallopen economies like Barbados matterssuch as - market size; trade agreements;and adverse external economic shocks
(increases in global oil and food prices,economic and financial weakness, etc.), areall issues that we have to grapple with butwhich we have little control over. Thegrowth diagnostic tree shown in Figure 9captures the basic HRV model and some
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of the main distortions to growth. In thecase of Barbados,
this would have to be amended.
Growth Constrained by FinancialIssues
There is a role for financial and private
savings in the growth process when linkedto investment in physical capital. Lookingfirstly at national savings6 for Barbados, itdoes not appear that growth, particularlybetween 1991 and 2011, has been driven
6This is defined as the gross capital formation inthe national accounts plus the balance in thecurrent account of the BOP (IMF approach).
by this. In fact, the gross national savingsratio which stood at 10.6 in 1991 fell to 6.3at the end of 2011. A correlation of 30.0%(R-square = 0.3007) which represents a low
association between national savings andreal GDP suggests that other savings areresponsible for domestic investment andgrowth. This is supported in Figure 10where investment (% GDP) has beenhigher than the savings ratio from 1997,and also higher than the public savings
Figure 9: Growth Diagnostics Decision Tree
Problem: Low levels of private investment and entrepreneurship
Low return to economic High cost of financeactivity
Low social returns Low appropriability Bad international Bad localfinance finance
Poor BadGeography infrastructure
Low Government MarketHuman failure failure Low DomesticCapital savings Poor
intermediationInformationexternalities
Coordination
externalitiesMicro risk: Macro risks:Property rights, financial, monetary,
corruption, taxes fiscal instability
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ratio7 which in most years has been indeficit.
On the other hand private savings8are shown to be significant with a highexplanatory power of 90.0% with real
GDP (See Figure 12). Significant also isforeign direct investment (external savings)which expanded significantly after 2004and which has helped to explain 72.0% ofreal GDP (Figure 11). It appears from thisinformation that national savings has notbeen a significant driver of investment andgrowth, but there has been a heavy relianceon private savings, both local and external.The reliance on external savings hasmaterialized in the form of easy access tocredit owing to good credit ratings over the
years. However, in more recent times,these ratings have fallen due to growingdebt levels and weaker than expectedeconomic performance as the maineconomic drivers, tourism andinternational business, remains highlyexposed to the current global economicchallenges. These challenges have resultedin reduced investment flows, particularly intourism/construction related activities.These actions clearly highlight the high
exposure of the country to these shocks.In terms of the banking system and
lending rates, the recent Financial StabilityReport (FSR) 2011, published by theCentral Bank of Barbados, posits that thebanking and financial system of Barbadosremains robust. Outside the currentchallenges posed by the weak globaleconomic environment, the bankingsystem has over time been shown to bestable and less exposed to external risk, due
mainly to good management andsupervision by the Central Bank ofBarbados. The banking community, whichis small and oligopolistic in nature, is
7 This is defined as tax revenues less currentexpenditure.8 This is made up of savings from financialinstitutions, business firms, and privateindividuals.
dominated mainly by foreign own banksthat are highly capitalized and liquid, asshown by a liquidity asset ratio of 18.9% atthe end of 2011. Commercial banksprovide 70.0% of all loan and holds assets
equivalent to 130.0% of GDP (FSR, 2011).In terms of the distribution ofcredit for productive or growth relatedactivities, the focus has more been towardsservices, mainly professional and otherservices, and tourism. In addition, personalcredit as shown in Figure 13 has seensignificant growth due to increaseddemand for consumer goods.Disappointingly, loans to the potentialforeign earning exports sectors likemanufacturing and agriculture has been
declining, which mirrors the smallcontribution these make to real GDP. Thisthen raises the question of whethercommercial bank lending maybe biasedtowards services and personal credit at theexpense of the more traditional tradedsectors.
The answer to this may lie in therisk perceived by the lender, which caninfluence lending behavior. In a paper byCraigwell and Kaidou-Jefferey (2010) the
point was made that access to credit can berestricted to small businesses because ofthe lack of adequate resources such ascollateral, while similarly, the agriculturaland manufacturing sectors may beconstrained by lack of resources and thehigh risk inherent in them. They also notedthat banks exercise caution in their lendingbehavior and are risk averse in anenvironment of uncertainty. Naturally thisrisk maybe reflected in the level of interest
charged on loans, with larger loansattracting higher interest. While this isassumed, a paper by Moore and Craigwell(2000) showed that in the Barbados casesmaller loans attracted higher interest andvice versa. This may explain the low creditto small and medium size enterprises, manyof whom are operating in the agricultureand manufacturing sectors.
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Given that interest rates areimportant for growth, then higher spreadscould be inimical to growth, as it candiscourage large, medium and small scaleprivate investments. As shown in Table 14,interest rate spreads for Barbados has beenrelatively stable. Also, the average spread
(1980 to 2010) has been 5.4% compared tocountries like Jamaica (10.3%), Mauritius(7.2%), and St. Lucia (6.8%). While thisseems to confirm the stability of thebanking system, the issue of low credit totraditional productive sectors, possibly due
to risk concerns, and the oligopolisticnature of the banking system, may posesome constraints to higher levels ofgrowth. To counteract this, current andpast governments have started to createfinancial structures to assist small andmedium sized businesses given its
importance to growth. However, suchfunding, including that of credit unionsonly accounts for a small percentage whencompared to available funds of commercialbanks.
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Growth Constrained by Government orMarket Failure
The Doing Business Indicators(World Bank, 2013), which ranks the easeof doing business in a country from 1 to185, showed that Barbados moved from aranking of 84 to 88, a four point drop.This result is compared to a ranking of 90for Jamaica and 69 and 53 for Trinidad andTobago and St. Lucia respectively. As thereport showed, there were improvements
in four areas namely construction permitsand registering property, while declineswere seen in six areas, the main ones beingstarting a business, getting credit, andenforcing contracts. Another report ofimportance is the Global CompetitivenessReport 2012-2013, where Barbados isranked at 44 out of 144 countries. Thisranking places it as the top Caribbeancountry followed by Trinidad and Tobagoat 84. This report which is very muchlinked to the World Bank doing business
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publication also identifies access tofinancing as a problematic factor for doingbusiness. Interestingly also it highlights
inefficient government bureaucracy andinsufficient capacity to innovate as high upthe order in terms of constraints.
The results above highlight theconcerns, particularly at a sectoral level, ofthe challenges which we have to overcomein order to improve our level of
competitiveness and have higher and moresustainable growth. For example, intourism there are known challenges thathave to be tackled, particularly thoserelated to the narrow market base, highinput cost (particularly energy), limited airlift, and an aging tourism product. In thearea of construction, some of the keyconstraints are identified as limitedgeography, high input cost, and theavailability of financing, while in the
International Business sector, issues oflimited product offerings, businessenvironment and competition, and fiscalincentives, have all been highlighted asissues to be addressed.
Further, in the industrial sector wealso have to address issues of inadequatefinance, low level of innovation, high cost,lack of market research, limited access to
supply chains, and mature industry. Thesespills over into the small and medium sizedenterprises were also the lack of funding,high operating cost, a high risk adverse
culture, lack of mentorship, and too muchfocus on the domestic market, are also justsome of the concerns.
Another important factor whichidentifies failure of government has to dowith the management of its finances andwhether such management has become aburden on consumers and producers alike.Interestingly, the global competitivenessreport 2012-2013 identifies tax rates asbeing high on the list of problematic
factors for doing business. It is not totallyclear the areas of taxation which is mostproblematic but with the lowering of bothincome and corporate taxes, this hasallowed consumers and businesses to keepmore of their earnings. On the other hand,indirect taxation has increased as VAT, themain tax on goods and services rose from15.0% to 17.5%. This would no doubt
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increase prices which could negativelyimpact growth.
The uncertainty or macroeconomicinstability that can arise due to high pricesis a concern that government cannot
ignore. Fortunately for Barbados, the riskof continued high levels of inflation hasnot been part of the macroeconomiclandscape. Indeed, when we look at thehistory of prices it has been driven mainlyby external factors, particularly given foodand oil shocks, which are not alwayspersistent. Hence, with exception of thelate 1970s and early 1080s, the level ofinflation for most parts has remainedbelow 10.0%. This observation issupported by the weak negative linear
relationship between real growth andinflation, which only has an explanatorypower of 2.6% (R=0.0263). This showsthat inflation does not dominate thedynamics of growth within the analysis9.
Growth Constraint by Low SocialReturns Crime and Corruption
A major constraint to growth canbe a breakdown in social cohesion and
corruption which can translate to humansuffering and failure in the delivery of vitalsocial services. Fortunately for Barbadosthis has not been a major issue. Whilecrime does exist the perception ofcorruption is quite low as judged byTransparency International which ranksBarbados at 15 with a score of 76. This iscompared to a ranking of 24 in 2005 whichclearly shows the level of improvementovertime in our listing in the corruption
perception index. Referring to the globalcompetitiveness report 2012-2013, theissue of crime and corruption is listed lowdown as one of the factors impactingnegatively on doing business in Barbados.
9N
,
Growth Constrained by a Lack ofComplementary Factors
Given its small size Barbados has adense network of roads which makes
accessibility to the entire island possible. In2010, an assessment released by theEconomist Intelligence Unit (EIU) of theUnited Kingdom, ranked Barbados 6th inthe world, and the top spot in the WesternHemisphere for road network density. Ontop of this, it can be argued that themaintenance of a well managed sea portand airport has aided trade and themovement of goods and services.However, the dense road network has hadits challenges in terms of road congestion
and vehicular accidents. This hasimplications for productivity since time iswasted stuck in traffic. That said, otherfactors such as telecommunications and ITservices are growing but still need to beexpanded. The market has been liberalizedand the emergence of new players will helpto cut cost and improve thecompetitiveness of businesses.
In addition to communication andIT costs, another important input for
private consumers and businesses isenergy. Currently, the main energy sourceis oil, which in recent times has seen pricevolatility due to growing demand and othershocks beyond Barbados control. Theincreased energy prices have had a negativeimpact on businesses, which now has toface higher input costs. The same goes alsofor consumers who, having to face higherenergy bills, now have less disposableincome. With an oil import bill at $787.0
million in 2012 or 9.1% of GDP, thesearch for alternate renewable sources hasbeen the drive of government. The aim isto reduce fossil fuel use by 30.0%. Theresults would be a reduction in energy costand increase competitiveness.
An important endogenous growthindicator is the building of human capitalvia education and health care. Primary,
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secondary and tertiary education is virtuallyfree, which has been the policy of
successive governments.
This however, has placed a heavy burdenon governments finances, especially as itrelates to spending at the tertiary level.Going forward, innovative remedies will beneeded and cost savings found. In addition,there needs to be greater focus onproviding education and training for theanticipated new growth area, which servesto empower the workforce and make it
more competitive in a global market.Regarding health, the main challengerelates to non-communicable diseaseswhich have risen due to lifestyle changes.The impact has been on the mostproductive segment of the workforce inthe form of increased absenteeism and lossof workers. If left unchecked, the upsurgecan have a serious impact on our ability toproduce and to be productive and grow.
The final issue that could be raisedis one of the foreign reserves, which is the
life blood of small open economies. Thereis the understanding that developingcountries must maintain adequate reservesin order to support financial stability, thequestion of the importance of such astance to economic growth is essential. Inthe case of Barbados, which dependssignificantly on imports of consumer
goods, intermediate and capital goods, astrong link between reserves and growth isexpected since many of these imports gotowards building productive capacity. Thisis more clearly understood when weconsider that unlike developed economieswhich can stimulate domestic demand anddrive growth, countries like Barbados arelimited in this regard by the lack of
adequate reserves and hence is highlydependent on external factors to determinegrowth. Also, like other small openeconomies we have to purchase capital andintermediate goods since our limitedcapacity and low technologicallycapabilities does not allow us to be fullycreative.
VII. Conclusion
Barbados is a country highly
dependent on the export of services andinvestments. Tourism, the main servicessector, which is a significant contributor togrowth, is highly impacted by externalshocks that can result in increasedvolatility. On top of this, the Barbadoseconomy remains narrow with limitedexport potential and hence in need of re-
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structuring with a focus on broadeningexport-driven growth. Much of theconstraints lie in the areas of businessfacilitation, high labour and productioncost, and implementation of policies and
programmes for various reasons. As aresult, growth has traditionally been low,while the level of productivity andcompetitiveness has been limited.
Notwithstanding these issues, Barbadoshigh level of political and economicstability and high education and healthservices makes it an attractive destinationfor investment and hence all effort should
be taken to build on these attributes.
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LINKING EDUCATION TO THE CHANGING NEEDS OF THE LABOUR
MARKETS
SKILLS NEEDS 2012: BUILDING A STRONGER WORKFORCE THROUGHINFORMATION
The Research Unit
Ministry of Labour and Social Security
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III.LINKING EDUCATION TO THECHANGING NEEDS OF THE
LABOUR MARKETS
SKILLS NEEDS 2012: BUILDINGA STRONGER WORKFORCETHROUGH INFORMATION
By
The Research UnitMinistry of Labour and Social Security
INTRODUCTIONSince gaining independence in
1966, Barbados as a small open economyhas been able to record many significant
accomplishments in spite of having fewnatural resources. With a per capita GDPof some Bds $27 800 in 2011, coupled withfavourable rankings on the United NationsHuman Development Index and theGlobal Competitiveness Index, it can beargued that Barbados has performedcreditably in the management andgovernance of its affairs over the pastcouple of decades.
One of the key contributing factors
that are often highlighted for theattainment of the countrys success hasbeen the creative policies and programmesthat Barbados has pursued to both developits education system and ensure that to thegreatest extent possible, all of its citizenshave had access to this crucial service.
Key characteristics and highlightsof Barbados education system include:
Free education at the primary,secondary and tertiary levels;
Compulsory education for all citizensup to sixteen years of age;
The attainment of a literacy rate of99.0%10;
The incorporation of information andcommunications technology into thelearning process under initiatives such
10National Strategic Plan of Barbados 2006-2025.
as the Educational SectorEnhancement Programme(EDUTECH);
The development of traininginstitutions such as the Samuel
Jackman Prescod Polytechnic tofacilitate the delivery of vocationalsubjects; and
The provision of learning facilities tocater to the needs of children withphysical and cognitive challenges, aswell as at-risk children
In addition to theseaccomplishments, several activities areongoing to enhance and diversify theofferings of the education system, rangingfrom the advancement of National andCaribbean Vocational Qualifications, to theformation of smart-partnerships withinternational institutions such as the Inter-American Development Bank (IADB).Partnerships such as these, aim toinstitutionally strengthen those agenciesthat have the responsibility of providingeducation services to the country.
In acknowledging the variousachievements that have been made, there
still remain several obstacles to the furtherdevelopment of the countrys educationsystem. For instance, it is often reportedthat some sixty percent of students leaveschool without any formal system ofcertification. Moreover, the capacity of thetertiary institutions to adequatelyaccommodate all students that are desirousof pursuing studies at that level is also acause for concern. However, arguably oneof the most critical challenges confronting
Barbados education system has been thechronic disconnect that continues to existbetween the course offerings of Barbadosmajor training institutions and the needs ofemployers operating in the real-world workenvironment. It is with this concern inmind that this paper has been prepared,along with recommendations as to how thedisconnect can be successfully addressed.
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THE PROBLEM OF INFORMATIONASYMMETRY
In developed and developingcountries alike, policy and decision makersare increasingly recognising that there is a
close link that must be established betweeneducation and workforce development. Inan ideal environment, there would beconstant and continuous communicationbetween employers on the one hand andtraining institutions on the other. Such anarrangement would inevitably redound tothe benefit of both parties. Employers,based on their business experience andtheir analysis of environmental trends,would be ideally positioned to advisetraining institutions as to the skills sets they
require to facilitate the growth anddevelopment of their organisation.Training institutions in turn would beassisted in the restructuring of theircurricula to produce quality offerings thatare (i) relevant to the business world (ii) arein sync with changes in technology andthat (iii) ultimately enhance the ability ofthe graduate to enter seamlessly into amodern work environment.
Such arrangements are not new and
can already be found in developedcountries such as Canada, Australia andNew Zealand. Arrangements such as theseare fast proving to be vital action steps thatmust be taken in any countrys endeavor todevelop its human resource, especially ifhuman resource needs can be organisedand reviewed on a sectoral basis. Withpossession of this crucial type of labourmarket information, policy and decisionmakers would be provided with an
overview as to the skills sets that employersin the countrys primary economic sectorsare demanding. They would then beempowered to devise and implementproactive training policies which are basedon factual and objective research, providedby the countrys primary sectors.
In Barbados however, the currentreality is that formal collaborations
between employers and traininginstitutions are often infrequent, sporadicand uncoordinated. Consequently, if thereis general consensus that the humanresource is critical to Barbados emerging as
a developed nation by 2025, innovativemeans must be found to ensure that smart-partnerships between these parties areformed and that information on desiredskills are communicated to Governmentand training institutions in reasonabletimeframes.
The education system must bemindful of such developments, for ifeducation is to be truly placed at theforefront of socio-economic developmentin Barbados, it must implement those
policies and programmes which arenecessary to make it dynamic andresponsive to the needs of its people,particularly businesses that generate anddrive commercial activity.
THE IMPORTANCE OF SKILLS NEEDSINFORMATION AND ITS RELATION TOT