Barbados - Economic memorandum

Report No. 3822-BAR LE yr Economic Memorandum on Barbados May 28, 1982 Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted disiribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  l CURRENCY EQUIVALENTS Currency Unit: Until November 1973 Eastern Caribbean Dollar (EC$) Since December 1973 : Barbados Dollar (BDS$) December 1971 US$1.00 = EC$1.975 EC$1.95 US$0.506 Since July-1975 US$1.00 = BDS$2.00 BDS$1.00 = US$0.50 f  FOR OFFICIAL USE ONLY This report is based on the findings of an IBRD economic mission to Barbados in February/March 1982. The mission consisted of: Arturo Meyer, (Economist); Peter Harrold (Economist); Jose Marques (Research Assistant); Dolores Velasco (Research Assistant); and Juan Buttari (Consultant). This document his a restrlcted distribution and may be used by recipients only in the performance of their offIIl dulle Its contents may not otherwise be disclosed without World Bank authorization.  I I  BARBADOS Table of Contents Page No. COUNTRY DATA SUMMARY AND CONCLUSIONS ....................... ..... ........... i - vii I. ECONOMIC BACKGROUND ...................................... 1 A. Economic Developments 1976-80 ........................ 1 B. Economic Developments in 1981 ........................ 8 II. DEVELOPMENT ISSUES ...................................... 12 III. PRIVATE INVESTMENT AND EXPORT DEVELOPMENT ................ 24 IV. PUBLIC SECTOR INVESTMENT PROGRAM ......................... 28 A. Introduction ............ .......... . .................. 28 B. Short-term Prospects..* ........ ......... .............. . 29 C. Medium-term prospects (1983-86) ...................... 30 ANNEX I. LABOR AND EMPLOYMENT IN BARBADOS.......*.... 37 ANNEX II. RECENT FISCAL MEASURES ........................ 69 ANNEX III. PUBLIC SECTOR INVESTMENT AND FINANCING ........ 73 GOVERNMENT'S PROJECT LIST ........... ......................... . 79 STATISTICAL APPENDIX ........................ - ............ 133 MAP   PREFACE AND ABSTRACT After five years of economic growth, the economy of Barbados suffered a decline in 1981. It is estimated that real GDP fell by 2.6%, due to low sugar production, a decline in tourist arrivals, and a fall in manufacturing output. Public finances deteriorated sharply, and the current account of the balance of payments showed a deficit of 11% of GDP. Prospects for 1982 are also poor, due to stagnant international demand, but public finances are expected to improve following measures undertaken by the Government. The medium prospects are better, however, but will depend crucially on Barbados' ability to remain competitive in tourism, in manufactured exports, and as a location for private investment. Labor issues are becoming increasingly important in all sectors of the economy, both with respect to the level of wages, and with respect to labor unrest. (This issue is discussed fully in Annex I of this report). The essential development strategy, with its emphasis on private sector investment and export development, remains sound.   Page 1 of 2 pages COUNTRY DATA - BARBADOS AREA 2/ POPULATION DENSITY 431kmr 0.249million (mid-1980) 580 per kJ-/ Rate of Growth: 0.5% (from 1970to 1979) 958 per km-Yof arable land POPULATION CILkRACTERISTICS (1980 HEALTH (1980) Crude Birth Rate (per 1,000) 16.5 Population per physician 1,174 Crude Death Rate (per 1,000) 8.0 Population per hospital bed 116.9 Insant MortaliLy (per 1,000 live births) 22.7 INCOME DISTRIBUTION (1Q7E) DISTRIBUTION OF LAND OWhNERSHIP (.970) %. of national income, nghest quintile 44.0 % ownned by top 10% of owners 77.0 lowest quintile 18.6 % owned by smallest 10% of owners 0.5 ACCESS TO PIPED WATER (j171) ACCESS TO ELECTRICITY (1980) % of population - urban 100.0 % of population - urban 96.0 - rural 100.0 - rural 90.0 NUTRITION EDUCATION (1979) Calorie intake as % of requirements 129.0 Adult literacy rate % 99.0 Per capita protein intake 82.8 Primary school enrollment Z 116.0 l/ GNP PER CAPITA in 1980 US $3,040 GROSS NATIONAL PRODUCT IN 1981 ANNUAL RATE OF GROWTH (7.. constant prices) US $ Mln. Z 1978-80 1981 GNP at Market Pr' es 950.4 100.0 6.4 -1.1 Gross Domestic Investment 232.9 24.5 6.7 -1.5 Gross National Saving 130.9 13.8 Current Account Balance -102.0 -10.7 Exports of Goods, NFS 567.7 59.7 15.5 -14.2 Imports of Goods, NFS 689.7 72.6 6.4 -1.1 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1981 Value Added Employment V. A. Per Worker US $Ml. 7. Thousands % US % % Agriculture 63.0 7.7 9.5 9.2 6632 82.8 Industry 174.8 21.2 21.8 21.2 8018 100.1 Services 585.6 71.1 71.5 69.6 8190 102.3 Unallocated Total/Average 823a4 100.0 1- 27 100.0 8010 100.0- GOVERNMENT FINANCE General Government Central Government (BD$ iMn.) 7.% of GDP 2 ( BD$ Mln.) % of GDP i/ 1981/82 1981/82 1981/82 1981/82 Current Receipts 496.3 29.9 437.1 26.4 Current Expenditure 464.8 28.0 431.1 26.0 Current Surplus 31.5 1.9 6.0 0.4 Capital Expenditures 203.0 12.2 176.5 10.6 External Assistance (net) 98.8 6.0 98.8 6.0 1/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during Lhe period covered. 2 GDP used is for calendar year 1980. not available not applicable  Page 2 of 2 page 14ONEY. CREDIT and PRICKS 1976 1977 1978 1979 1980. -6911ion outstanding nd perLod) Money and Quasi Money 366.5 416.9. 476.6 596.7 698.5 788.1 Bank Credit to Public ector 45.5 93.5 58.0 73.0 58.6 120.9 Bank Credit to Private Sector 323.2 352.7 397.5 495.3. 593.0 723.1 (Percent-ges or Index Numbers)- Money and Quasi MHony as $ of GDP Money and Quasi Money as $ of GDP 42.0 42.0 42.9 44.2 42.1 42.4 General Price Index (October,1965-100) 317.4 343.9 376.7 426.1 - - (March. 1980 -100) - - - - 90.4 103.5 118.6 Annual percentage chnges in: General Priwe. Index 5.0 8.3 9.6 13.1 14.5 14.6 Bank credit to Public Sector 209.5 105.5 -61.2 25.9 -24.6 106.3 Dank credit to Private Sector 13.4 9.1 12.7 24.6 19.7 21.9 IAIANCE OF PAYMZNTS JUBCH4hDISE mOBTS (AVnAdG 1975-80) 1979 1980 1981 IN $ Min % gllo onal US S) Sugar -3T- 25 I Molasses 4.4 3.3 Other Primary 6.2 4.6 Exports of Goods, WFS 445.3 586.8 567.7 Run 2.2 1.7 Imports of Goods, VS 497.2 614.8 689.7 Chemicals 5.3 4.0 Resource Gap (deficit - -) -519 L.o -Innb Clothing 19.2 14.4 Electrical Components 15.5 11.6 All other c oditLe 47.2 35.3 Interest on Public Debt -5.0 -6.4 -6.5 Total 133.6 lOQ,O Other Factor PaYmnts (net) 3.6 2.4 1.5 Current Transfers (net) 22.0 21.5 - 25.0 EXTERNAL DUBT. DURCEt 31.1981 Balance on Current Account -31.3 5 -=ob U5=S H ln Net Public Disbursements 6.7 11.9 86.2 (Gross Disbursements) (13.5) (20.3) (95.8) oublic Debt, iranee. Pvate d 164 2 (Amortization) (-6.1) (-8.4) (-9.6) ~~Total outstanding &-Disbursed.. Other Capital 28.4 14.9 -5.8 1/ DEBT SERVICF RATIO for 1981-1 Change in Reserves d/ -3.8 -16.3 21.6 Public Debt, 1DC1. guaranteed 2.8 Non-Guaranteed Private Debt Total outstanding & Disbursed RATE OF EXCHANGE IBRD/IDA LENDING. (Dc. 31,1981) (Mllion us $) December - 1971 IDA US $ 1.00 - EC$ 1.975 1.00 - US $0.506 Outstanding & Disbursed 4 4 - Ubdisbursed 28.6 - Since -July 1975 outstanding il. IUdiburd 33. US $ 1.00 - JDS$ 2.00 BDS$ 1.00 U DS $ 0.50 I Ratio of Debt Service to Exports of Goods and Non-Factor Services. . . mot available not pplicable  SUMMARY AND CONCLUSIONS i. Barbados, the most easterly of the Caribbean islands, is one of the most densely populated countries in the world. Its total area of 166 square miles, and population of 250,000 give it a density of 1506 persons per square mile. Population growth has traditionally been low, with natural growth of about 1% and net emigration of about 0.6% in recent years. Economic development has been achieved with social and political stability. Barbados' income distribution is relatively equitable, and health, education and welfare facilities are comparatively good. A shortage of adequate housing, and persistent unemployment, however, affect the lower income groups. Barbados has a long history of constitutional government, attaining self-government in 1961, and independence in 1966. Stable social and political conditions, and well-conceived and implemented governmental policies have fostered a good investment climate, which has stimulated high levels of private investment, both external and domestic. Thus, in spite of its limited resources endowment, the quality of its economic management has converted it into one of the most rapidly developing countries of the Commonwealth Caribbean during the last two decades. ii. 1976-80 was overall a very good period for Barbados as economic growth averaged 5% a year. Growth was export-led, with manufacturing output increasing by 7.5% a year, and the number of tourist arrivals rising from 220,000 in 1976 to 370,000 in 1980. This growth performance brought about a rapid fall in unemployment and rapidly increasing real wages, but was accompanied by rising inflation. iii. Public finances had a mixed performance over the period. Starting from a difficult position in 1976-77 with an overall public sector deficit of 6.8% of GDP, government introduced measures to raise revenues and held back capital expenditure, and reduced the overall deficit to near zero in 1978-79, before the expansion of capital expenditures caused it to rise again to 3.9% of GDP in 1980-81. At the same time as revenues were rising, there was a gradual shift from direct to indirect taxes, to permit a reduction of the personal income tax burden. iv. The growth of tourism and manufacturing brought about a rapid growth in export earnings which rose from 51% of GDP in 1976 to 71% of GDP in 1980. Imports also rose, but less rapidly, and thus the current account deficit fell from 7.9% of GDP in 1976 to only 1.3% of GDP in 1980, which, together with the high level of capital inflows, permitted some accumulation of international reserves. v. In 1981, adverse international events and a difficult domestic situation combined to bring about an economic decline. It is estimated that GDP declined by 2.6%, with sugar production falling by 35%, tourist arrivals declining by 7%, and a 5% fall in manufacturing output. Inflation continued to be high at an average annual rate of 14.6% and the average level of wage settlements (for two years) was 30%, although the small number of such settlements kept the overall wage increase down to 8.4%.  - 1i - vi. Public finances deteriorated sharply in 1981-82; in relative terms, revenues declined while capital expenditures increased, and the overall public sector deficit increased from 4% of GDP in 1980-81 to 9% of GDP in 1981-82. The fall in revenue was the result of reduced personal taxation with insufficient compensatory changes in indirect taxation. vii. There was a major expansion of domestic credit in 1981, with net domestic assets rising by 33%, net claims on the public sector by 106%, and credit to the private sector by 22%. The Central Bank consequently raised reserve requirements from 20% to 27%. Interest rates have also risen steadily, with prime lending rates at 14% at the end of the year, compared to 9% a year earlier, and the Bank rate at 22% compared to 7% in December 1980. viii. The balance of payments also deteriorated sharply. The current account deficit increased from US$10 million (1.2% of GDP) in 1980, to US$102 million (11% of GDP) in 1981, due to a 10% fall in domestic exports, a stagnation in tourism receipts, and an 11% increase in retained imports. Sugar earnings fell by 50%, and the value of fuel imports rose by 60% due to a shortfall in domestic production. To finance the deficit, Government borrowed US$30 million on the Eurodollar market, and the Central Bank borrowed US$16 million in medium term lines of credit. In addition there was a reduction in net international reserves of US$21.6 million. Public and publicly guaranteed debt thus doubled to US$166 million at the end of 1981 compared to US$80 million at the end of 1980. ix. The essential development strategy of Barbados remains unchanged, with an emphasis on private sector investment in productive sectors, with the role of the public sector largely restricted to the provision of essential infrastructure and basic social services within a framework of financial stability. A heavy reliance is placed on the development of export industries, notably tourism and manufacturing. The broad strategy can be judged appropriate for Barbados given its natural and human resource endowment. x. The rapid deterioration in public sector finances and the high current account balance of payments deficit are the most pressing economic problems facing Barbados at the present time. The public finance situation could be approached on a two-year basis, so that by the end of FY83/84, public sector finances are left on a sounder footing. The 1982-83 budget has already introduced measures to increase net revenues by BDS$28.2 million.  - iii - xi. The major issue facing the tourism industry in Barbados is price competitiveness, after its prices have risen at about 20% a year during the 1976-80 period. In order to keep down the rate of increase in costs, and thus prices, attention should be given to two particular areas: the increase in wages in the forthcoming (December 1982) wage contract, and increased efforts in energy conservation. Despite the depressed state of the industry, there continues to be a high level of activity in the construction of new facilities. As capacity increases, Government will wish to become more selective about new construction permissions, with emphasis on developments that cater to the high-spending tourist. Tourism promotion efforts need to be continued. Government should consider some redistribution of this expenditure, reorienting it towards the Caribbean area (notably Trinidad and Tobago) and possibly South America (notably Venezuela). xii. There are four principal agencies dealing with the development of the manufacturing industry in Barbados: the Ministry of Trade and Industry, the Industrial Development Corporation (IDC), the Barbados Development Bank (BDB), and the Export Promotion Corporation (EPC). A major effort is needed to coordinate the efforts of the different agencies, both in connection with their operations and regarding the preparation of the Industrial Development Plan for 1983-86. xiii. The future of manufacturing in Barbados will depend on how much further Barbados' competitive position is eroded in terms of its attractiveness as a location for private investment. There still appears to be considerable interest in establising industries in Barbados, with 49 applications for registration under the Fiscal Incentives Act having been received by IDC in 1980-81, and 33 in 1981-82. However, none of these applications was for a major new enclave industry. This apparent lack of interest from such industries is potentially serious, and labor issues are becoming increasingly important. Four principal factors are: (i) increasing real wages; (ii) a worsening industrial relations climate; (iii) more agressive unions; and (iv) increased weight of non-wage labor costs, such as national insurance premiums and paid vacation. xiv. In the sugar industry, labor issues are also becoming increasingly important, not only because recent wage increases aggravated the industry's unprofitability, but also because of the aging labor force. It is estimated that 28% of the present labor force will retire over the next five years, with little prospect of their being replaced by new entrants. This reinforces the need to speed up the mechanization of sugar harvesting, and consideration could be given to incentives to encourage this.  - iv - xv. The non-sugar agricultural sector has been largely stagnant in recent years. Seven major constraints have been identified and are to be tackled in the coming period: lack of coordination among institutions; a weak extension service; poor irrigation systems; inadequate local marketing; a shortage of workers; a lack of farmer organization; and a certain unwillingness to take risks amongst farmers. xvi. The fisheries sector has been neglected until recently. However, new ice-boats are now being built, and Government has undertaken or is preparing projects to improve berthing and marketing facilities, as well as expand ice production. In addition there remains a need for credit facilities for the purchase of new vessels, for a resource survey to determine the sustainable annual catch, and for training in improved fishing methods and equipment handling. xvii. Although over half the adult population has been in employment in recent years, there remains a considerable unemployment problem, particularly among youth, with 60% of the unemployed under 25 years of age. This is explained by the existence of a divorce between career aspirations and job-market opportunities, since two-thirds of the unemployed have secondary level education, compared to 50% of the employed, but also reflects certain deficiencies of the education and training system: (i) the basic skills of a school-leaver are of a lower level than could be expected with ten years of universal education; (ii) school-leavers are not being equipped with skills directly relevant to the world of work; and (iii) vocational training is being provided in a vacuum, without reference to existing or future skill shortages. xviii. Besides labor costs, other labor-related issues are becoming increasingly important: (i) no effective machinery exists for the maintenance of a permanent dialogue between employers, workers and government; (ii) the organized labor movement does not seem to have grasped the seriousness of the present economic situation in spite of the Government's efforts to do so, and it has expressed some reservations over the thrust and possible impect of Government's proposed policy on the growth of money incomes; and (iii) the machinery for mediation and conciliation in labor disputes is inefficient, understaffed and under-trained. xix. The Government of Barbados has consistently supported a dynamic role for the private sector. Most productive enterprises are privately owned, including electricity supply. The major areas of government direct involvement in productive activities are transportation, construction and leasing of factories, a flour mill, housing, and the distribution of natural gas. Furthermore, an export led strategy has been maintained, with the emphasis on tourism, export agriculture, and manufacturing for export, with certain incentives only available to export industries. xx. In addition to the IDC, BDB, and EPC, there are three other institutions relevant to the private sector; the Central Bank, which operates an 'Export Credit Guarantee Facility' and a 'Credit Guarantee Scheme for Small Business'; the Barbados Marketing Corporation, which has a  - v minor involvement in agricultural exports; and the Barbados Institute of Management and Productivity, which provides management training and consultancy services to the private sector, particularly small businesses. A set of laws has been passed to provide investment incentives, notably the Fiscal Incentives Act of 1974, under which approved enterprises can expect freedom from import and export duties, no taxes for 10-15 years, and only 50% of taxes thereafter if the enterprise is primarily an exporter. xxi. Four major factors have stimulated private sector investment and exports: economic and social stability; comparative proximity to North America; a relatively well-educated and trainable labor force at reasonable wages; and a history of calm industrial relations. A number of constraints also exist; there is a lack of basic raw materials; a shortage of trained manpower, notably at management level and in engineering; inadequate marketing arrangements for non-sugar agriculture; and an eventual physical limit to the expansion of tourism. Two areas of costs are also rapidly becoming constraints to further development; labor and construction. Both have been rising faster than both domestic and international inflation rates. These two factors are severely eroding the competitive position of Barbados as a tourist destination, as a location for foreign private investment, and as an exporter. xxii. Barbados has had one of the best investment climates in the Caribbean region. In order to maintain and enhance it, the following orientations would be appropriate: (a) to improve coordination among the main agencies involved in industrial development; (b) to maintain the industrial promotion and factory construction programs; (c) to institute certain investment tax credits; (d) to continue the shift away from direct taxation towards indirect taxation; (e) to place greater emphasis on extraregional export markets; (f) to diversify tourism promotion efforts in line with sources of visitors; (g) to address labor problems as soon as possible, both from the point of view of costs and also with regard to industrial relations; (h) to continue the improvement in training facilities, notably in the areas of management and construction skills. xxiii. The maintenance of a realistic exchange rate should also be considered as an essential element of a policy directed towards maintaining the export orientation of the Barbadian economy. The need to monitor closely the competitiveness of the country's exports has become increasingly important recently, owing to the appreciation of the US$. Since the BDS$ is pegged to the US$, it has appreciated considerably against the pound sterling and other European currencies during the past year. This development has been particularly harmful to the Barbados sugar industry and to other exports to the EEC, and it has also rendered tourist services more expensive for visitors from Europe and Canada. xxiv. Despite the temporary set-back to the economy in 1981 (and 1982), the essential structure and economic strategy of Barbados is judged to be appropriate. With an open, export-oriented economy, higher long term growth rates are to be expected, but also sharper fluctuations in the year-to-year growth rates are likely to occur. The present economic  - vi - conjuncture requires, however, corrective actions, most of which either have been adopted or are now being considered by the Government. The temporary decline has exposed the fragility of Barbados' economy, and the need to assure sound economic management. xxvii. The prospects for economic recovery in 1982 are poor. Sugar production is forecasted at the same level as 1981 with falling prices, tourist arrivals are expected to decline further, and only a modest increase in industrial activity is expected. The best that can be expected under such circumstances is zero real growth. However, major improvement in public sector finances is expected, with the overall public sector deficit reduced to 6% of GDP in FY1982-83 from 9% of GDP in 1981-82. xxviii. Exports of goods and nonfactor services are expected to rise by 10%, to US$539 million, primarily because of a further rise in electronic components exports and the late export of 17,000 tons of the 1981 sugar crop early in 1982. Imports of goods and nonfactor services are expected to rise by 12%, to US$685 million, because of high capital-goods imports. The current account deficit is projected at US$130 million (12.7% of GDP) compared to US$102 million (11% of GDP) in 1981. xxix. The medium-term prospects for Barbados remain good provided that short-term economic management is sound. Economic recovery can only be expected to start in 1983, so a modest growth rate of 2% is projected for that year. Thereafter, growth is projected at about 5%. Public finances, after recovering in 1983-84, are projected to remain strong throughout the period, with the restriction of the overall public sector deficit to 2.5% of GDP being a major policy target; in order to achieve this, a current account surplus of about 5% of GDP should be achieved each year. XXx. A gradual improvement in the balance of payments is foreseen after 1982, although the current account deficit is expected to remain high in 1983. To achieve this improvement, major restraint on consumption-goods imports will be necessary throughout the period. Exports of goods and nonfactor services are expected to grow about 4% a year in real terms. Imports of capital and intermediate goods are projected to increase broadly in line with GDP. Thus the current account deficit is expected to fall from the record level of US$130 million (12.7% of GDP) in 1982 to US$46 million (3.4% of GDP) in 1984, and US$26 million (1.5% of GDP) in 1986. xxxi. Gross project-related disbursements are projected to reach US$253 million over the period, of which US$100 million would represent disbursements from commitments yet to be made. With the projected current account deficit, project financing and amortization, and on the assumption of a minimum gross international reserves requirement equivalent to two months of imports, CDF-type financing needs over the five-year period are projected at US$97.8 million, of which US$87 million will be required from new commitments. Most of this is required in 1982 and 1983. The requirement for CDF fiscal year 1982-83 is estimated at US$44.5 million, and taking account of existing commitments and carry-overs, a new commitment of about US$53 million would be needed. Because of the heavy  - vii - commercial borrowing of 1981, debt service payments will rise substantially over the period, from US$16 million in 1981 to.US$52 million in 1984. However, this still remains under 8% of export earnings. Total external public and publicly guaranteed debt would increase from 17.6% of GDP in 1981 to 30.6% of GDP in 1983, and decline to 25% of GDP by 1986, ascommercial bank financing is repaid. On this basis, Barbados can be considered creditworthy for loans on conventional terms, although care must be taken at the present time not to contract excessive debt with short repayment periods.   BARBADOS I. ECONOMIC BACKGROUND General 1. Barbados, the most easterly of the Caribbean islands, is one of the most densely populated countries in the world. Its total area of 166 square miles, and population of 250,000 give it a density of 1506 persons per square mile. Population growth has traditionally been low, with natural growth of about 1% and net emigration of about 0.6% in recent years. 2. Economic development has been achieved with social and political stability. Barbados' income distribution is relatively equitable, and health, education and welfare facilities are comparatively good. A shortage of adequate housing, and persistent unemployment, however, affect the lower income groups. Barbados has a long history of constitutional government, attaining self-government in 1961, and independence in 1966. Stable social and political conditions, and well-conceived and implemented governmental policies have fostered a good investment climate, which has stimulated high levels of private investment, both external and domestic. Thus, in spite of its limited resources endowment, the quality of its economic management has converted Barbados into one of the most rapidly developing countries of the Commonwealth Caribbean during the last two decades. 3. Barbados' natural resources are limited. Soil, topography, and rainfall have dictated the traditional emphasis placed on sugar cane in the agricultural sector. No metallic mineral deposits are known, but pockets of petroleum and natural gas now supply about one quarter of energy requirements. In recent years, the country's most valuable natural assets have been its beautiful beaches and pleasing climate, which presently attract about 350,000 tourists a year. A. Economic Developments 1976-80 4. This was overall, therefore, a very good period for Barbados. It started from a difficult situation in 1976 with high unemployment, a large current account deficit on the balance of payments, and a poor fiscal performance, and thereafter rapidly improved. Above all, unemployment was greatly reduced and with high export growth, the balance of payments problem was temporarily solved. Although this was a period of high external demand, the good performance reflects also excellent management of the economy during this period. The correct environment was created to enable the economy to derive the maximum benefit from the prevailing external conditions. 5. However, there were signs in 1980 that the performance of the economy was beginning to deteriorate, and it was displaying the fragility that must be expected from an economy that is so dependent on external forces. External demand was weak, and thus tourist arrivals did not increase, and there was only minor growth in non-sugar domestic exports. The current account deficit would have deteriorated sharply were it not for  a bumper sugar crop and high sugar prices. The overall public sector deficit was increasing, and price and wage inflation were accelerating. Economic Growth 6. After declining in 1974 and 1975, as a result of the deterioration in the international economic environment that followed the increase in energy costs, the economy of Barbados began to grow again in 1976, with a rate of growth of 4% per annum in 1976-78. In 1979 this rate of increase jumped to nearly 8%. Tourism and manufacturing led the growth, and stimulated rapid growth in the construction sector. Although the rate of growth in 1980 was good, at 5%, this was largely due to a bumper sugar crop, as tourist arrivals failed to grow in that year. The economy was showing the first signs of the serious decline that was to come in 1981. Table 1. Real Growth Rates, 1976-80 GDP Tourism Manufacturing Construction 1976 4.3 3.1 16.9 13.1 1977 3.7 33.2 3.2 -14.7 1978 4.8 11.9 9.1 7.5 1979 7.9 24.1 1.7 13.9 1980 4.9 3.8 6.1 7.0 Source: Department of Statistics Tourism 7. From 1976 to 1980, tourist arrivals rose from 220,000 a year to 370,000, while gross tourism earnings rose from US$83 million to US$238 million, and the sector's contribution to GDP doubled. This was a period of rapid growth in tourism to the Caribbean in general, but Barbados' higher than average growth ratel/ can be attributed to several factors: (i) An aggressive promotion campaign; (ii) a multi-source approach, attracting tourists from US, Canada, Europe and the Caribbean; (iii) a relatively well-developed industry prior to this period, which was therefore poised to take advantage of the rise in demand; and (iv) the stable and peaceful social conditions. 1/ Visitor arrivals in the Caribbean increased at a rate of 6.4% a year during the period, whilst arrivals in Barbados increased by 11.2% a year.  -3- 8. The multi-source approach has paid off handsomely for Barbados, for the tourism industry is now less seasonal than other Caribbean destinations, with bed-occupancy rates at an average 60% over the period. Whereas Canada and the US accounted for 58% of visitor arrivals in 1976, this proportion had fallen to 46% by 1980, as a result of rapid increases in arrivals from UK, West Germany, and CARICOM countries. In fact, less than 30% of the increase in arrivals over the period is accounted for by the traditional North American sources. This same diversification of sources has also led to an increase in the average length of stay from 8.5 days to 9.8 days. 9. However, in 1980, the industry did not grow in terms of arrivals, although expenditure rose because of higher prices. Although arrivals from North America fell, they were compensated by increases in arrivals from CARICOM and UK. This trend in arrivals was to continue in 1981. Table 2. Tourism Trends, 1976-80 Visitor Gross Tourism Arrivals Earnings Value Added (000's) (BDS$ million) (1974 BDS$ million) 1976 224 203 58 1977 269 261 77 1978 317 324 86 1979 371 416 107 1980 370 507 111 Source: Statistical Appendix Tables 2.2, 3.1, 8.5. Agriculture 10. The agricultural sector had a mixed performance over the period; although agricultural output registered sharp year to year fluctuations, the sector's growth rate was 3.8% per annum. The area under sugar remained broadly constant, with weather conditions being the main determinant of output that, on average, grew at 4.9% a year. However, this area was some 10% below the level planted in the earlier part of the decade. The 1980 production of 135,000 tons was nevertheless the highest output since 1971. Production of domestic food crops has remained below the levels achieved earlier in the decade. In particular, marketing problems have constrained the output of root crops. The livestock sector has achieved growth of about 4.2% a year, with particularly rapid increases in the production of poultry and milk. This has been the result of the modernization of these industries, with the development of a modern dairy at Pine Hill, and the gradual transformation of the poultry industry from a 'back-yard' activity into a commercial enterprise.  -4- Table 3. Indices of Agricultural Production 1972=100 1976 1977 1978 1979 1980 Sugar 91.8 106.4 89.5 101.1 119.7 Domestic Food Crops 66.8 39.1 99.0 94.1 52.7 Livestock Products 135.6 128.6 164.1 158.3 150.4 Export Agriculture (excluding sugar) 77.5 47.0 54.5 35.7 27.7 All Products 109.5 94.4 137.5 131.5 112.0 Source: Central Bank. Manufacturing 11. Manufacturing has been one of the dynamic sectors of the Barbadian economy, as output grew rapidly in response to the Government's policies designed to achieve an export drive that would lead to further diversification of the sources of growth, employment, and foreign exchange earnings. Manufacturing output increased by about 7.5% a year during 1976- 80. The most rapidly growing sub-sector was electronic components, whose output mDre than tripled over the period. Growth in this sub-sector is expected to continue at a similar rate for a further 2-3 years, to the extent that production plans associated with recent investments are executed. Other sub-sectors which experienced rapid growth were food-processing, chemicals and garments. The pattern of growth in industrial production over the period reflects the impact of certain enterprises on the overall picture. The electronics output jumped in 1978 with the opening of a plant, and similar jumps were recorded for chemicals in 1980 and garments in 1976, as major foreign firms opened factories. Table 4. Industrial Production Indexes, 1975-80 (1975=100) All Wearing Electronic Industries Food Apparel Chemicals Products 1980 144 132 129 125 344 Source: Barbados Statistical Service, Central Bank. 12. Much of the output growth took place in foreign companies operating as enclaves, that were attracted to Barbados as a result of its propitious investment climate and prospered as a result of buoyant external demand. The structure under which the enclave industries prospered during this period is described in paragraphs 75-80 below. The growth of the enclave sector is significant not only for its effects on growth and employment, but also because of its impact on net foreign exchange  - 5 - earnings. Thus, exports of clothing, chemicals and electronic components alone rose from US$21 million in 1975 to US$67 million in 1980, while total manufactured exports rose from US$30 million in 1975 (34% of domestic exports) to US$106 million in 1980 (63% of domestic exports). Of course this increase has been accompanied by rising imports of intermediate goods. Employment and Unemployment 13. The rapid economic growth of the past few years has perhaps had its greatest impact in the area of employment. In 1975, unemployment was estimated at over 22%. By 1980, this had fallen to 11.4%, with a steady decline each year. This reduction of unemployment is particularly impressive when put against the background of the high labor force participation rates in Barbados. The labor force averaged 64% of the adult population over the period, and the female participation rate has been around 54%. 14. The lack of recent reliable data on employment by sector impedes tracing the sources of employment creation accurately. It appears, however, that many of the new jobs are in manufacturing, tourism (or tourism related industries), and in construction. Employment in agriculture has fallen, with, for example, the number of permanent sugar workers falling from 4,583 in 1975 to 4,079 in 1980. Prices and Wages 15. Inflation, as measured by changes in the Retail Price Index (RPI), rose rapidly over the period from an annual rate of 5% in 1976 to 14.4% in 1980. Food and beverages, housing and 'household operations and supplies' were the major sources of increases. However, the GDP deflator generally rose faster than the retail price index during this period. Wages rose faster than prices in every year over the period, and more than compensated for the price rises. Particularly high rates of wage increase were achieved in construction (18% p.a.), trade (19% p.a.), and hotels (21% p.a.). The rapid increases in wages that were granted reflect both the increased degree of trade union activity that took place at this time, and also the buoyant state of the economy. Table 5. Prices and Wages, 1976-80 1976 1977 1978 1979 1980 (percentage changes) GDP Deflator 7.9 9.0 5.6 12.7 18.6 Retail Prices 5.0 8.3 9.4 13.3 14.4 Wages 12.6 15.2 13.9 14.3 26.1 Source: Statistical Appendix Table  -6- Public Finance 16. Public finances had a mixed performance over the period, starting in a poor position in 1976-77, improving rapidly through 1978-79, then beginning a process of deterioration in 1979-80 and 1980-81. The performance in different years was primarily affected by changes in current revenue and capital expenditure. Public sector current expenditure averaged about 29% of GDP over the period. 17. Current revenue of the consolidated public sector rose rapidly over the period, because of both the performance of the economy and also various Government measures. In response to the difficult financial situation of 1976-77, Government raised tax rates in 1977-78, notably on consumption taxes, corporation tax, and taxes on motor vehicles. Further increases in indirect taxes took place in 1978-79, with the adoption of the CARICOM Common External Tariff. These measures served to raise public sector current revenues from 31.1% of GDP in 1976-77 to 35.6% of GDP in 1978-79. At the same time, there was a gradual change in the composition of central government revenue, with taxes on income and profits falling from 44% of revenue to 37%, and indirect taxation rising from 42% to 48% of revenue. This was a policy objective, with the raising of indirect tax rates permitting not only an improvement of Government's overall financial position, but also an easing of the personal tax burden. 18. Capital expenditure was at a high level at the beginning of the period, but was then held back until 1980-81, when it jumped again, as can be seen from Table 6 below. This is a most important determinant of the overall public sector deficit, and its gradual increase over the last three years of the period goes a long way towards explaining the increasing overall deficit. Thus, the overall public sector deficit fell from 6.8% of GDP in 1976-77 to nearly zero in 1978-79 with the rise in revenue accompanied by declining capital expenditures (in relationship to GDP). With revenue then falling slightly in relation to GDP and capital expenditures rising again, the overall deficit increased to 3.9% of GDP in 1980-81. Overall, however, public finances were well-managed during this period, particularly with regard to the general restraint on current expenditure, and the gradual shift in the tax burden from direct to indirect taxation, with the added inducements which this gave to personal endeavor.  Table 6. Public Finances, 1976-80 (Share of GDP %) 1976/77 1977/78 1978/79. 1979/80 1980/81 Central Government Current Revenue 23.4 23.9 26.7 25.4 25.7 Current Expenditure 23.5 23.3 23.0 22.5 22.9 Current Surplus -0.1 0.5 3.7 2.8 2.8 Capital Expenditure 7.0 8.6 6.5 6.5 8.3 Overall Surplus -7.1 -8.1 -2.8 -3.6 -5.6 Consolidated Public Sector Current Revenue 31.1 31.4 35.4 34.3 34.3 Current Expenditure 29.4 28.9 28.9 28.6 29.2 Current Surplus 1.7 3.0 6.5 5.7 5.1 Capital Expenditure 8.5 9.8 6.7 7.2 9.0 Overall Surplus -6.8 -6.8 -0.2 -1.5 -3.9 Source: Statistical Appendix Tables 5.4, 5.6. Balance of Payments 19. The performance in external trade and on the balance of payments has mirrored the situation in the rest of the economy. In 1976, the current account deficit stood at 9.9% of GDP, because of the low level of external demand for Barbados' exports and for tourism, combined with the low sugar price of that year compared with 1975, and also because of the continued affects of the oil price rises of 1973 and 1974. Thereafter, export earnings rose very rapidly, particularly from manufactured goods and tourism, as noted above. Exports rose from US$224 million (51.2% of GDP) in 1976 to US$586 million (70.7% of GDP) in 1980, reflecting the very strong performance of these two sectors over the period. 20. Imports also rose rapidly, rising from 64.6% of GDP in 1976 to 74.2% of GDP in 1980, reflecting both increased imports of inputs to the tourism and manufacturing sectors, and also the higher levels of income. However, as the table below clearly shows, the rise in imports was much less rapid than that in exports, permitting the improvement in the current account deficit that occurred. Table 7. Trade and the Balance of Payments, 1976-80 Exports of Imports of Current Account Goods and NFS Goods and NFS Balance (as % of GDP) 1976 51.2 64.6 -9.9 1977 55.7 64.2 -5.5 1978 62.3 66.9 -1.3 1979 64.3 71.1 -3.7 1980 70.7 74.2 -1.2 Source: Statistical Appendix Table 3.1.  -8- 21. The financing of the current account deficit was primarily through direct private foreign investment, particularly in tourism and manufacturing, and through project-related public disbursements. Private capital flows averaged US$20 million a year, and net public disbursements US$11 million. The high level of private capital flows, together with the improving current account balance permitted a buildup of international reserves in every year except 1976, with net international reserves rising from US$21.2 million in 1976 to US$79.6 million in 1980, and with gross official reserves rising from the equivalent of 1.5 months of imports in 1976 to 2.2 months in 1980. At the same time outstanding public and publicly guaranteed debt rose from US$26.7 million (6.1% of GDP) in 1976 to US$70.3 million (8.5% of GDP) in 1980, and debt service payments rose from 1.7% of exports in 1976 to 2.5% of exports in 1980. B. Economic Developments in 1981 Overview 22. As noted in earlier paragraphs, although in 1980 the economy of Barbados still grew at about 5% in real terms, there were certain signs of deterioration, both in terms of the real sectors (slow growth of tourism) and a deterioration in the financial performance of the public sector. In 1981, the interaction of adverse international events and a continued deterioration in the financial performance of the public sector brought about a serious economic decline., It was the first year, since 1975, of negative economic growth. Growth and Employment 23. Preliminary estimates for real GDP in 1981 show a drop of 2.6%. All three major sectors registered declines. Sugar production fell by 35% from the 1980 ten-year high of 135,000 tons to 95,000 tons; excessive rains delayed the harvest and prevented its completion. This meant two things: firstly, a significant proportion of the crop was not harvested at all, and secondly, mechanical harvesting under such conditions led to soil compaction which also reduces yields. These two factors will also significantly affect the 1982 harvest. In tourism, the decline in visitor arrivals led to a reduction in real value-added of 9%. Finally, real value-added in manufacturing is estimated to have declined by about 5%, despite a significant rise in the output of electronic components. The only sectors to register any significant growth were construction, wholesale and retail trade, and government services. 24. The reduction in the level of economic activity has not yet had an impact on unemployment, except that the declining trend in unemployment rates experienced over the 1976-80 period has now levelled off. The unemployment rate of 11.4% for October-December 1980 had fallen to only 11.1% in October-December 1981. Prices and Wages 25. From December 1980 to December 1981 the retail price index (RPI) increased by 12.3%, with an average annual rate of increase of 14.6%. The rise in prices in 1981, slightly lower than the increase in 1980, is  - 9 - despite the appreciation of the BDS$ against some currencies of major trading partners, which dampened the effect of international inflation, because of the strength of the US$ to which it is tied. For example, the BDS$ increased by 20% against the pound sterling, and by about 10% against the SDR. The RPI components which showed the biggest rises were housing (29%), clothing and footwear (14%), and transportation (19%). On the other hand, beverages and tobacco, and fuel and light showed virtually no increase. These figures, the lower rate of international price increases, and the strength of the US$, suggest that Barbados' inflationary process has had its origin mostly in domestic factors. 26. The number of wage negotiations in 1981 was small, and thus the average wage increase for all sectors was 8.4%. However, those wage settlements which took place were mostly over 30% for a two-year period. Transport workers received 33%, electricity workers 26-31%, and bakery workers 33-39%. The garment workers' union demanded a 50% rise for the new two-year contract but no settlement was reached yet. After a short strike, the sugar workers reached a settlement in February 1982 for a 20% increase for the two-year period, with 10% in January 1982, 5% staged during the year, and the full 20% in January 1983. This settlement will affect the sugar industry negatively, since production costs exceeded prices even before the settlement, given that short-term improvements in prices are not likely (see paragraph 58 below). Government intervention at the level of the Prime Minister was necessary to settle the dispute. Finally, a claim for the new public sector contract, due to start on April 1, 1982, has been submitted by the union, for rises ranging from 35% at lower levels to 20% at the top. A settlement is not expected before June 1982. Public Finances 27. The financial performance of the public sector deteriorated sharply in 1981-82. This can partly be explained by revenue measures taken in the 1981-82 budget, which resulted in a large fall in revenue in real terms. Public sector revenues rose only from BDS$569 million (34.3% of GDP) to BDS$604 million (32.4% of GDP). The main measure which reduced revenue (as a percentage of GDP) was a 50% increase in personal income tax allowances. In addition, the lower levels of profits in 1981 led to a fall in taxes on companies. Whilst the reduction in direct taxes has been encouraged as a stimulus to personal endeavor, it had also been suggested that compensatory changes in indirect taxes should be made at the same time, as in the 1980-81 budget. 28. Public sector current expenditure rose from BDS$484 million (29.2% of GDP) to BDS$567 million (30.5% of GDP). Particularly significant in this increase was the rise in interest payments from BDS$29.9 million to BDS$39.0 million, largely accounted for by domestic payments as the discount rate on treasury bills rose from 6% in late 1980 to 16% at the end of 1981, together with the higher overall financing requirement.  - 10 - 29. Capital expenditure and net lending, which had risen to BDS$150 million (9.0% of GDP) in 1980-81, rose again to BDS$205 million (11.0% of GDP) in 1981-82. The figure would have been higher had it not been for a freeze on new projects introduced in late 1981, and a slowing down or scaling back of ongoing projects. The major increase in capital expenditure over the last two years is not so much due to increased real levels of expenditure, but rather reflects the rapid increases in construction costs (of perhaps 30% a year) which has been causing severe cost overruns on existing projects. 30. The combined result of the reduction in revenue and rising current and capital expenditure was a reduction of the public sector current surplus from BDS$85 million (5.1% of GDP) to BDS$37 million (2.0% of GDP) in 1981-82. The overall deficit was therefore BDS$168 million (9.0% of GDP) compared with BDS$65 million (3.9% of GDP) in 1980-81. This was financed by BDS$99 million in net external borrowing and BDS$69 million in net domestic financing. The proposed measures to deal with this situation are discussed in paragraphs 40-43, but it should be noted that major action has already been taken in the 1982-83 budget. Banking and Credit 31. There was a major expansion of domestic credit in 1981 due to heavy demands by the public sector to finance its overall deficit, and to a lesser extent by the private sector. Net domestic assets rose by 33%, with credit to the central government rising by 24% - and thus, with falling deposits of the rest of the public sector, an increase in net claims on the overall public sector of 106% - and credit to the private sector rising by 22%. This rapid expansion caused the Central Bank to raise reserve requirements from 20% to 25% in November 1981, and again to 27% in February 1982. The second rise was necessary because the first rise merely absorbed existing excess reserves. Interest rates have risen steadily over the year, as the Central Bank has gradually increased its rediscounting rates. Thus the Bank rate has risen from 7% in December 1980 to 10% for January-August 1981, 18% in September 1981, and 22% since then. This has raised all other rates and commercial banks' prime lending rates have risen from about 9% in December 1980 to 13-14% in December 1981, but with average rates on overdrafts reaching as high as 17%. Interest rates on deposits have also risen, with the minimum rates on savings rising from 5% in December 1980 to 9% in December 1981, and with rates on large deposits rising to 10-11%. Deposits with the commercial banks increased by 13% over the year. 32. While general credit expanded rapidly in 1981, the same was not as true for mortgage lending. Commercial banks' mortgage lending was lower at the end of 1981 than the end of 1979. Trust companies' lending did rise, however, by almost 25%, but with virtual stagnation in lending by the mortgage division of the National Bank, total mortgage lending only rose by about 15%, which is considerably below the rate of increase in building costs. This situation should be relieved considerably with the recent availability of a USAID guaranteed line of credit for mortgage lending of up to US$30 million over a three year period.  - 11 - Balance of Payments 33. While other indicators have shown adverse trends in 1981, it is on the balance of payments that the most dramatic deterioration has taken place. The current account deficit has increased from US$10 million (1.2% of GDP) to US$102 million (11% of GDP). This is the result of a 15% fall in the value of domestic exports, an 11% increase in retained imports, and a stagnation in the value of tourism receipts. It was stated earlier that signs of stress in the balance of payments were evident in 1980, but that the exceptional sugar crop and price had made the year appear better than it actually was. The fall in sugar production of 35%, the 20% decline in the value of the pound sterling against the US$, and, to compound the situation, a delay in exporting 17,000 tons of sugar at the end of the year, combined to produce a 50% fall in sugar earnings. Tourist arrivals fell by 7%, and with expenditure only estimated to have risen by a similar amount, total tourism earnings are estimated to have fallen from US$254 million in 1980 to US$251 million in 1981. An additional problem was that domestic oil production fell by about 25% as drilling equipment was transferred from shallow, producing wells to exploratory deep drilling. The value of fuel imports thus rose from US$54 million in 1980 to about US$82 million in 1981. Since the deep drilling program did not prove successful, the equipment was moved back to the shallow wells in late 1981, and production should gradually recover in 1982. 34. To finance the widening current account deficit, the authorities resorted to commercial bank borrowing. The Government contracted a US$30 million Eurodollar loan and the Central Bank borrowed US$16 million from commercial banks at medium-term maturity. Project related disbursements increased from US$18 million in 1980 to US$38 million in 1981, as public sector investment accelerated. A decline of US$20 million in net foreign assets financed most of the remaining deficit and compensated for short-term private capital outflows due to interest rate differentials which persisted in 1981 despite increases in local interest rates. 35. After deteriorating substantially during the first three quarters of 1981, the gross reserves position of the monetary authorities improved in the last part of the year as the commercial foreign loans mentioned above were disbursed. By the end of the year, gross reserves were equivalent to 2.5 months of retained imports. However, net official reserves fell by US$21.6 million from US$79.6 million at the end of 1980 to US$58 million at the end of 1981. Public and publicly guaranteed debt had doubled by the end of 1981 to US$164 million compared to US$80 million at the end of 1980. At 18% of GDP, this remains manageable. Debt servicing increased to US$16 million but this represented only 3.3% of exports of goods and non-factor services.  - 12 - II. DEVELOPMENT ISSUES Background 36. The current fragile economic situation of Barbados and the need for adjustment in the balance of payments and public finances overshadow medium term development issues at the present time. Therefore, sectors and issues are examined primarily in the context of a restoration of the growth path, and measures are highlighted which may be necessary in order to take maximum advantage of a future upturn in the world economy. Public finance issues are considered specifically, and only the major sectors are examined. Particular attention has been paid to employment and labor issues, both in the sectoral context and in general. A complete review of these issues can be found in Annex I, with a summary in paragraphs 65-71 below. Development Strategy 37. The essential development strategy has been outlined in the 1979-83 Development Plan and in other government statements and documents. During the course of FY1982-83 a new development plan is scheduled to be prepared to cover the four financial years 1983/84-1986/87. However, the Government has stated that the strategy will remain essentially unchanged, with an emphasis on private sector investment in productive sectors, with the role of the public sector largely restricted to the provision of essential infrastructure and basic social services within a framework of financial stability. The four basic components of the strategy are therefore: (a) to sustain rapid economic growth and reduce unemployment, mainly by promoting a sustained expansion of tourism and manufacturing, and increased sugar production; (b) to achieve a higher degree of economic diversification by promoting manufacturing and nonsugar agricultural exports; (c) to achieve a higher degree of self-sufficiency by promoting energy conservation, the development of traditional and nontraditional sources of energy, increased nonsugar agricultural production, and the use of mineral resources; and (d) to increase the opportunity of the population to satisfy its basic needs, mainly by improved health and education services, and by increasing access to low-cost housing. 38. This strategy can be considered appropriate for Barbados given its natural and human resource endowment. It is a highly open economy, dependent on external economic conditions. The country is lacking in natural resources and remains highly dependent on tourism and sugar earnings for its foreign exchange. It does have three major advantages in its resource endowment: it has a relatively literate and trainable labor force; it is close to the major markets of North America with adequate transport facilities; and it has been blessed with good beaches and a pleasing climate, with a consequent high quality tourism product.  - 13 - 39. To take full advantage of its resources and to achieve the outlined development objectives requires the avoidance of certain critical problems which are examined below, but which are worthy of being highlighted here. These are: maintenance of price competitiveness in tourism; maintenance of a good industrial relations climate; avoidance of excessively high labor costs in manufacturing industry; the creation of an appropriate government structure in the fields of energy, agriculture, and industry; and the avoidance of excessive public sector deficits. Sectoral Issues and Policies A. Public Sector Finances 40. The rapid deterioration in public sector finances, with its impact on the balance of payments is one of the most pressing problems. The public sector financial position was healthy in 1978-79 and 1979-80, with the public sector current surplus at around 6% of GDP, financing 80% of the capital program. Public sector current revenue was about 34% of GDP, current expenditure about 28%, and capital expenditure about 7%. This has deteriorated to almost no current surplus by 1981-82, with the consequent overall deficit of 9% of GDP. 41. This situation could be approached on a two-year basis, so that by the end of FY1983-84 public sector finances are again on a sound footing. Government is well aware of the problem, and has already begun the process of adjustment. Thus, the 1982-83 budget announced revenue measures designed to raise an additional BDS$30.25 million, which, together with income tax concessions and additional agricultural incentives, would yield a net revenue increase of BDS$28.2 million. The measures are listed in Annex II, and include an increase in stamp duty on imports, higher banking fees, a temporary 3% surcharge on profits, higher vehicle taxes, and increased excise duties on liquor and tobacco. 42. Further restraint will be needed in 1983-84. The Central Government current surplus should be increased by a further BDS$35 million in that year, to achieve a surplus of about BDS$63 million (2.7% of GDP). Attempts should be made to bring this about primarily by adjustments to expenditure rather than revenue, as the combined Central Government/ National Insurance revenue is already 30% of GDP in 1982-83. The target for the combined Central Government/National Insurance current surplus would thus be about BDS$110million. If capital expenditure does not increase in real terms in FY1983-84, the Central Government overall deficit would be reduced to BDS$87 million (4% of GDP) and that of the public sector to BDS$57 million (2.5% of GDP). Achievement of such targets would put public sector finances on a sound basis for the upturn in the economy that can be expected at that time if the world economy recovers in 1983. Such an upturn would increase revenues without additional measures and permit some increase in capital expenditure in 1984-85.  - 14 - 43. Government has found it difficult to reduce current expenditure in the past. In 1982-83, no real increases in expenditure are to take place. There is an apparent reduction achieved through the transfer of pensions to national insurance, and the introduction of a 4% pension levy to cover these, but this is only an accounting entry and a rise in taxation. The figures in paragraph 41 above assume, however, a BDS$20 million (10%) increase in the wage bill in 1982-83, but none in 1983-84. Any increase in wage and salary costs above this level would have serious implications for government finances. In addition to expenditure restraint, the main area that offers scope for reduction is transfers (see Appendix Table 5.5). In particular, there are current transfers of BDS$13 million to the Transport Board, and BDS$5 million to the Water Authority. Urgent consideration should be given during the course of 1982 to ways to reduce these with a view to reducing transfers by about BDS$15 million in 1983-84. Measures that could be examined would include: (i) a reduction in non-economic bus-routes; (ii) scrapping of old, inefficient buses, made possible by (i) and recently acquired new buses; (iii) elimination of conductors on buses, or the institution of multiple rates rather than the present flat rate fares; (iv) some increases in bus-fares; and (v) more rapid increases in water rates. B. Tourism 44. The major issue facing the tourism industry in Barbados is certainly price competitiveness. Although there is scant information available on the tourism industry in Barbados, it appears that prices were rising at about 20% a year during 1976-80. Labor costs, which form about 25% of total costs, were rising at about 21% per annum, and energy costs, which probably account for another 10-15% of costs, also rose rapidly in recent years. Much of the food requirement of the tourism industry is imported, and this therefore rose only relatively modestly. Finally construction costs and financing charges have increased at an extremely rapid rate. No study has been made of the extent of the erosion of Barbados' price competitiveness, and it would be advisable for such a study to be made. 45. Maintaining the international competitiveness of the tourism industry will be a major challenge. Attention should be given to two particular areas: (a) anything more than a modest increase in wages in the forthcoming (December 1982) new wage contract would be most undesirable; and (b) increased efforts in energy conservation deserve support, and Government should perhaps consider tax credits for the installation of  - 15 - solar-powered water-heating and air-conditioning. Any further increases in the tax burden of the industry should be avoided, and any steps to keep down costs in the construction industry would also be of major assistance to the tourism sector. 46. Despite the depressed state of the industry in 1981, there continues to be a high level of activity in the construction of new facilities. The average number of beds available in 1981 rose to 14,100 from 13,400 in 1980, and 11,800 in 1979. In addition, there are over 2,000 more beds planned or under construction. This continued increase in capacity has led to a reduction in bed occupancy from a level of 76% in 1979 to 65% in 1980 and only 53% in 1981. In order to restrict further increases, the Government announced in late 1981 that no new approvals for concessions under the Hotel Aids Act would be granted for hotels on the south and west coasts, except for expansion of small establishments up to 24 rooms. As capacity increases, and begins to approach a ceiling in certain areas, Government will wish to become more selective about new construction permissions, with emphasis on developments that cater to the high-spending tourist rather than apartment-style facilities. 47. Barbados remains a desirable tourist destination and there is every prospect that business should improve once the recession ends, unless the competitive position is further eroded. Promotional efforts will need to be continued, and when budgetary restraints permit, could be raised from the 1981-82 level of BDS$1.7 million. Some thought should also be given to the distribution of this expenditure, as demonstrated by the table below: Table 8. Tourist Arrivals and Tourism Promotion Expenditure 1980 1981 COUNTRY Share of Share of Share of Share of Arrivals Promotion Arrivals Promotion (%) Expenditure(%) (%) Expenditure(%) US 23 25 21 44 Canada 23 25 20 22 Europe and UK 21 38 23 23 Caribbean 23 6 25 5 Venezuela 2 6 2 6 Others 8 - 9 - Source: Barbados Statistical Service, Barbados Economic Report. There is room for increased expenditure in the Caribbean area, notably Trinidad and Tobago, whose tourists are largely attracted to Barbados by its shopping facilities. Some increase could also be considered in South America, including Venezuela.  - 16 - C. Manufacturing 48. There is scope for improving the coordination among agencies involved in the industrial sector. There are four principal agencies dealing with the development of the manufacturing industry in Barbados; the Ministry of Trade and Industry, the Industrial Development Corporation (IDC), the Barbados Development Bank (BDB), and the Export Promotion Corporation (EPC). Their respective roles are broadly self-explanatory. The IDC has been a major factor in stimulating the attraction and development of the manufacturing industry in Barbados; it is responsible for the construction and management of factory space, the promotion of Barbados as a location for private investment, and processing and making recommendations on applications for concessions under the Fiscal Incentives Act. The IDC already has constructed and operates over 1.2 million sq. ft. of factory space and plans to construct an additional 500,000 sq. ft. with the assistance of a 1980 World Bank loan. It has recently begun a process of increasing rentals for its factories in order to become financially self-sufficient within 2-3 years. 49. The Barbados Development Bank has a paid-in capital of BDS$15.8 million and by March 1982 had approved BDS$78 million in loans. For many years tourism was the dominating sector, with a total of BDS$39.3 million in loans, but recently industry has been more important, with BDS$8.8 million in 1980-81 and BDS$10.7 million in 1981-82, for a cumulative total of BDS$35.2 million. Small business loans of up to BDS$100,000 are becoming increasingly important, accounting for BDS$5.2 million in 1980-81 and BDS$3.9 million in 1981-82. Its capacity to appraise and supervise projects has been strengthened recently and it has succeeded in reducing the level of arrears. 50. The Export Promotion Corporation is a new institution established to provide assistance to Barbadian exporters. It has taken over from the now defunct Export Promotion Agency, which was an arm of IDC. It is still in the process of establishing itself, but has already had promotions in Jamaica and St. Thomas, and has had a visit from importers in Margarita (Venezuela) and discussions with Guyana. With EDF assistance it has launched studies on the potential benefits from the Lome Convention and US/GSP, it has published an Export Directory for Barbados, and it is about to appoint a representative in Trinidad. The services the Corporation is providing are already proving to be of major benefit to manufacturers in Barbados. 51. There are, therefore, three major institutions concerned with the manufacturing industry, with the Ministry responsible for policy. The main institutional problem is that although the agencies are in the process of building operational linkages, full coordination has not yet been achieved. There is a 'Coordinating Committee for Industrial Development' which includes these institutions, the Ministry, and the Central Bank, but it has not met regularly. There is, for example, little feedback from EPC  - 17 - on exporting opportunities to BDB on its lending program or to IDC on the type of industry it should be seeking. A major effort is needed by the Ministry to coordinate the activities of these three institutions. In particular, it will be vital to ensure that all three institutions are fully involved in the preparation of the new Industrial Development Plan which is to be prepared for the years 1983-86. 52. There still appears to be considerable interest in establishing industries in Barbados despite the current recession, and the actual decline in production in 1981. Over the period 1968-80, 398 applications for registration under the Fiscal Incentives Act were received by IDC. (The provisions of this act are discussed in Chapter III below.) Of these, 159 were approved, 75 rejected, 21 withdrawn, and 143 undetermined. On average, therefore, 33 applications were received every year. In 1980-81, 49 applications were received, and in 1981-82, 33. The 1980-81 applications were for the following industries: Food and Beverage: 5 Textiles and Weaving: 8 Wood and Paper Products: 5 Chemicals and Plastics: 13 Fabricated Metal Products: 13 Other: 3 TOTAL 49 Eleven of these were for joint ventures, which is an increase on previous levels and an encouraging sign. However, all the largest existing industries in terms of employment creation are foreign enclave industries, and no major applications for such industries have been received in the last two years. Most of the recent applications are for industries aimed at the local or CARICOM markets. 53. The apparent lack of interest from new enclave industries is potentially very serious for Barbados. One of the most important factors for such industries in determining locations for investments is the cost of labor, and other labor related issues. This is discussed more fully in paragraphs 65-71 below. However, four critical factors should be highlighted here: (i) real wages have been increasing, both in absolute terms and relative to real wages in the US, and there is little evidence of such increases being matched by increases in productivity; (ii) the industrial relations climate has worsened in the last 2-3 years, with a growing incidence of strikes;  - 18 - (iii) a partial explanation of this phenomenon is the existence of new, more aggressive unions, which are competing with the Barbados Workers Union for membership; and (iv) at the same time as real wages are rising, so too are other labor costs, such as national insurance premiums, and compulsory paid vacation. 54. These factors are steadily eroding the competitive position of Barbados as a location for foreign private investment. For example, two of the major foreign enterprises in Barbados have recently decided to expand in Mexico and Puerto Rico rather than in Barbados. In the 1970s, the economic and social stability of Barbados was its major attraction, together with its low labor costs and peaceful industrial relations climate. Today, the wage issue has become increasingly important and may be affecting decisions on whether or not to locate in Barbados. The Government is fully aware of this factor, as instanced by the strong statements on the issue in the 1982-83 budget speech of the Prime Minister. 55. The prospects for the manufacturing industry in Barbados are therefore by no means clear. There are sufficient plans for expansion of existing industries (notably in electronic components) and for certain new industries to maintain a certain momentum for the next two years. However, whether major new foreign enterprises can be attracted will depend on how much further the competitive position of Barbados is eroded in this period or whether other corrective action is taken. D. Agriculture and Fisheries Sugar 56. As has already been emphasized, 1981 was a very bad year for sugar. Not only did the price fall, and output decline by 35%, but, partly as a consequence, production costs rose 38% from BDS$756/ton to BDS$1050/ton, compared to the average price received of BDS$973/ton.2/ Production costs will rise further in 1982, following the new two-year contract agreed in February, with a wage rise of 20% over the two years. 57. The labor issue is becoming increasingly important. Labor costs have risen rapidly, and, despite the halving of employment in sugar over the 1970s, wages have remained at about 50% of total costs. There is in addition the problem of the aging labor force. Of the 4,079 registered sugar workers in 1980, 470 (12%) were over 65 years of age, and a further 2/ 53,000 tons of sugar is exported annually to the EEC under the Lome Convention at a guaranteed price. This price is presently about BDS$750/ton, compared to the 1980 price of BDS$900/ton, because of the appreciation of the US$. The balance of exports is sold on the world market. The average price received in 1982 is expected to be about BDS$700/ton.  - 19 - 1980 (49%) were between 51 and 65 years of age. It is thus estimated that 28% of the existing labor force will retire over the next five years, with little prospect of their being replaced by new entrees into the industry. 58. This reinforces the need to speed up the mechanization of sugar harvesting if the area under sugar is not to be reduced. Consideration should be given to the type of incentives that could be given for mechanization in sugar. A locally manufactured harvester, developed by the Sugar Producers' Association, is available ._/ 59. Without an expansion of mechanization, the industry is likely to decline further over the coming years. The prospects for 1982 are not very good, because of the presence of cane which was not harvested in 1981, but the favorable weather conditions should compensate for the late start to the harvest due to the strike over wages in January and February of 1982. Thus the 1982 crop should about equal the 1981 crop. There could then be some improvement, but over the medium term achievement of the Government target of 150,000 tons will depend heavily of the speed of mechanization, and it is unlikely, given the present profitability in the industry, that this will be rapid. Nonsugar Agriculture 60. The nonsugar agricultural sector (primarily vegetables and some livestock, notably poultry and sheep) has been stagnant over the past decade. It is only recently that renewed attention has been given to this sector, with the recent approval of the Scotland District Project, the Rural Development Project (both of which provide land settlement, irrigation, extension, and credit) and the World Bank Technical Assistance Loan. This latter project has been designed to assist Government to overcome seven major constraints that have been identified: (a) a lack of clarity of roles and coordination among the various institutions operating in the sector; (b) a weak extension service with inadequate technical knowledge of modern production techniques; (c) inadequate water management practices and irrigation systems; (d) an inadequate local marketing system; (e) a shortage of agricultural workers; 31 By 1980, only 11.5% of the crop was mechanically harvested, although 60% of the cane was moved from the fields by mechanical loaders. At high capacity levels, mechanical harvesting offers greater economic efficiency, but requires high capital outlays and expensive preparation of a large acreage to justify its use. See McGregor et al., "The Barbados Sugar Industry: Problems and Perspectives" (1979); and Central Bank of Barbados: "Sugar and the Barbadian Economy: 1946-80" (1982).  - 20 - (f) lack of organization among growers of crops other than sugarcane, except through the recent efforts of the Barbados Agricultural Society; and (g) the small number of farmers willing and able to take the risks of growing agricultural products on a larger scale. Fisheries 61. During the 1960s, the fishing industry was a major export earner for Barbados through the 70 shrimp catchers that operated at that time. This industry died in the mid-1970s with rising fuel costs and with the introduction of exclusive economic zones, since the vessels were operating out of what are now Guyanese and Venezuelan waters. What is left is a small, old industry catering purely to domestic needs. There are 450-500 fishing vessels, and perhaps 2000 fisherman. The annual catch is 3000-4000 tons, compared to annual consumption of 7000-8000 tons. This is also a highly specialized industry since it is estimated that 50% of the catch is flying fish and perhaps another 30% is dolphin. Very few boats are equipped with ice facilities and consequently fishing trips generally last one day. Marketing facilities are poor, storage very limited, ice production inadequate, harbor facilities overcrowded, training nonexistent, and credit hard to come by. 62. This situation will gradually change over the next few years. Firstly, the fishermen have begun to modernize the fleet, and now ice boats are being built and utilized. By the end of 1982, 25 new boats will be in operation capable of trips of 5-6 days. Ice-making facilities will be greatly improved with a new 15 tons/day flake-ice plant to be installed in the Careenage. In addition, a 4 tons/day machine is to be installed at the new fish marketing complex being built at Oistins. It is hoped that an arrangement over storage can be reached within existing cold storage facilities in Bridgetown. Finally, plans are under way for a new fishing harbor to be constructed in Bridgetown to replace the overcrowded facilities in the Careenage. All of this should greatly improve the productivity of the industry and the availability of fish over a longer period of the year. At present, fresh fish is normally only easily available during the main season of December to May. 63. Several other constraints also affect the fishing industry: (i) there is a shortage of credit for the purchase of new vessels (at an average cost of BDS$100,000); (ii) there is a need to carry out a resource survey to determine the sustainable annual catch; and (iii) there is a need for training for fishermen, in the following main areas:  - 21 - (a) diesel engine maintenance; (b) navigation, radio, and safety equipment; (c) fish handling methods; and (d) new improved fishing methods including use of fish-finders, etc. 64. While it is not to be expected that the fishing industry will become a major source of employment creation, it is an area where major potential exists for improving the productivity of the existing labor force, and saving foreign exchange. The present backward state of the industry is in stark contrast to other sectors of the Barbadian economy, and the support that the industry is now receiving and is expected to receive in the future should pay dividends. E. Labor and Employment 65. Annex I provides a full analysis of labor and employment issues in Barbados, and these issues are summarized here. The most striking features of the labor market situation in Barbados are the high labor force participation rates, and the associated high employment ratios for both men and women. The overall participation rate is about 65%, with a rate of about 53% for women. Moreover, the employment ratio (the proportion of the adult population employed) has been about 58% in Barbados, which is largely explained by the employment ratio for women of over 40%. Focussing on 'prime-age' persons of 25-59 years, employment ratios of 90% for men and 60% for women are found. Therefore the Barbadian economy inrecent years has been able to provide jobs to a relatively high proportion of its labor force. Various explanations for this high female participation rate (demographic factors, job opportunities, the pattern of marital unions, etc.) are put forward in Annex I. 66. As noted in paragraph 13 above, unemployment has fallen from a high of 23% in 1975 to 11.1% in late 1981. Thus unemployment, although falling, has remained high, despite the impressive performance of the economy in providing jobs. As in many countries, the unemployed are concentrated amongst the young. Twenty-seven percent of the unemployed in 1981 were 19 years or younger, and 61% were under 25 years old. First-time job seekers comprise 20-30% of the unemployed, depending on the time of year. However, available indicators suggest that while unemployment is a problem, underemployment does not seem to be acute in Barbados. 67. The average level of schooling in Barbados is very high, with about 50% of the labor force classified as having at least some secondary level education. Interestingly, 66% of the unemployed have a similar level of education, reinforcing the general impression of the existence of a divorce between career aspirations and job-market opportunities. This may be further reinforced by the quality of this education (see paragraph 71 below). Whether this results in an inflated unemployment rate is not clear, because of the lack of vacancy information, but it certainly suggests that parts of the education system are in need of reorientation.  - 22 - 68. Three issues arise in considering the quality of the education and training system. Firstly, there is some evidence to suggest that despite an average 10 years of schooling, the basic skills of an average school-leaver are of a lower level than could be reasonably expected. Secondly, school-leavers are not being equipped with skills that are directly relevant to the world of work. Rather, the system has been largely geared to the needs of the few academically bright. Finally, for those who pass from school to vocational training, such training is being provided in a vacuum, in that there is no systematic manpower or training needs survey on which to base the provision of training. (The recently established National Training Board may be able to improve this situation.) Partly as a result of these factors, there are labor shortages in certain skill areas, despite the high level of unemployment. This is in addition to the shortage of sugar workers, which is explained by other, largely socioeconomic factors. Particular shortages are found in construction, equipment maintenance, and hotels, as well as in management, and in training itself. 69. An issue which has already been discussed is that of wages. Two issues are dominant in this respect. Firstly, there was a clear acceleration of wages during the 1976-80 period, and certain rapidly growing sectors, notably hotels and construction, have been able to pay above average wage increases (see paragraphs 17-18). Secondly, because Barbadian prices have risen faster than world prices, wages have also risen faster than world levels, reducing the differential between Barbados' wages and industrial countries' wages. Thus while wages, on average, increased by 16.4% per annum from 1976-80, prices increased by 11% p.a. in Barbados, and under 9% p.a. in the United States. The following table compares consumer prices and wages in the two countries over the period 1975-80. Table 9. Comparative Wage-Price Data for Barbados and US, 1975-80. 1975=100 United States Barbados Prices Wages Real Wages Prices Wages Real Wages 1975 100.0 100.0 100.0 100.0 100.0 100.0 1976 105.8 108.1 102.2 105.0 112.6 107.2 1977 112.7 117.6 104.3 113.8 129.7 114.0 1978 121.2 127.7 105.4 124.5 147.7 118.6 1979 134.9 138.7 102.8 141.0 168.9 119.8 1980 153.1 150.5 98.3 158.0 213.0 134.8 Sources: Statistical Appendix Tables 7.1, 7.1.1, and 7.2, and IMF. Given the relatively recent expansion in the enclave sector in Barbados, it is clear that for them, real wages have increased very rapidly over recent years, in comparison to the United States. It is particularly interesting to note the 12.5% increase in real wages in Barbados in 1980, while US real wages declined by 4.5%.  - 23 - 70. Collective bargaining is a most important wage-determining factor in Barbados, with about one-third of the labor force unionized, and many non-unionized establishments following wage settlements in the unionized sector. The Barbados Workers Union is by far the most powerful, representing workers in manufacturing, sugar, tourism, and the public sector. Although traditionally the industrial relations climate has been stable, in recent years the situation has become increasingly tense, and a source of concern. The unions are becoming increasingly militant, and with new unions emerging, competition for membership is escalating. Thus, whilst in 1979 there was only one strike with 270 mandays lost, this rose to 7 strikes in 1980, with 14,342 mandays lost. Government only intervenes in disputes once a deadlock is reached, and the Ministry of Labour's competence in this area appears to be very limited. Thus the Prime Minister had to personally intervene to solve the recent sugar workers' dispute. Three particular elements seem to be important in this area: (i) no effective machinery exists for the maintenance of a permanent dialogue between employers, workers, and government; (ii) The organized labor movement does not seem to have grasped the seriousness of the present economic situation in spite of the Government's efforts to do so, and it has expressed some reservations over the thrust and possible impact of Government's proposed policy on the growth of money incomes; and (iii) the machinery for mediation and conciliation in labor disputes is inefficient, understaffed, and under-trained. Recommendations 71. A full set of recommendations can be found in Annex I, but the more important of these are listed below: (i) ongoing efforts to improve the quality and relevance of education and training should be reinforced; (ii) annual manpower or training needs surveys should be carried out by the Statistical Service in cooperation with the Ministries of Labour, Education, and Finance and Planning; (iii) the staff of the Ministry of Labour should be upgraded and expanded, especially in areas of mediation and statistical services; (iv) Government should strive to reestablish a climate of mutual trust between labor, management and itself; (v) a wider labor market information system should be developed; and (vi) in order to avoid excessive increases in labor costs, it is recommended that voluntary tying of real wage rises to productivity increases be set as a key national economic objective.  - 24 - III. PRIVATE INVESTMENT AND EXPORT DEVELOPMENT Policy 72. The Government of Barbados has consistently supported an active private sector, and has maintained an open economy pursuing an export oriented development strategy. The Barbados Development Plan 1979-83 emphasizes this in stating that: "The attainment of the objectives and targets which have been set for the industrial sector will be determined largely by the response of private enterprise since it is essentially within a private sector organizational context that productive activity will be undertaken. It is in this sense that governmental planning is largely an indicative exercise whose programs are designed to stimulate the private sector." Accordingly the major proportion of productive enterprises are privately owned, including electricity supply. The only major areas of government involvement are in transportation, construction and leasing of factories (which is designed to stimulate private investment), a flour mill, housing, and the distribution of natural gas. 73. Furthermore, a positive export orientation has been maintained. Firstly, the leading growth sector has been tourism, both directly, and indirectly through its effect on the construction industry. The tourism industry in Barbados has been the leading earner of foreign exchange for several years. Agriculture too has been export oriented, primarily because Barbados has a comparative advantage in crops which are not staples and for which the domestic market is therefore limited, i.e., sugar and vegetables. In industry, there has been a conscious policy of export orientation, with certain incentives being available only to export-oriented industries. Institutional and Legal Framework 74. The functions and activities of three of the institutions concerned with private investment and export development--the Industrial Development Corporation (IDC), the Barbados Development Bank (BDB) and the Export Promotion Corporation (EPC)--have been described in the previous chapter. Of these, the role of the IDC is perhaps most critical and could become even more so if rising wage costs force a reorientation of the labor-intensive industrial strategy. Three other institutions are relevant. Firstly, the Central Bank operates two schemes which directly affect private investment and exports. The Export Credit Insurance Facility indemnifies exporters against losses to the extent of 90% for political risks and 80% for commercial risks. To date the scheme has not been used extensively, probably because of the dominance of the enclave sector, but it can be expected to become increasingly important in years to come. Secondly, the Central Bank introduced a "Credit Guarantee Scheme for  - 25 - Small Business" in late 1979. Under this scheme, the Central Bank guarantees credit institutions repayment of 70-80% of loans to BDS$50,000 for small business (broadly defined as companies with less than 35 employees). 75. The Barbados Marketing Corporation (BMC) is a public corporation established to buy and sell local produce and to import and export. It primarily deals with fruits and vegetables and with its duty-free outlets at the airport. It is not an efficient organization and it is estimated that only 10-15% of all local produce is marketed through it. It does not concentrate on its export activities which provide less than 1% of total revenue. 76. The final institution worthy of mention is the Barbados Institute of Management and Productivity (BIMAP), which is a private, non-profit making corporation established in 1971 to "improve the efficiency and effectiveness of management and to increase national productivity." It is supported partly by subscriptions from the private sector, which are matched by government grants, but more by its charges for its courses and consultancy fees, which provide over 80% of all its revenue. It gives basic courses in management, either in-plant or at its headquarters, and also provides advisory services, particularly to small businesses. It provides training for about 1,250 people annually, and has trained some 7,500 persons since it began operations. It is an efficient and dynamic institution which is fulfilling a vital need in Barbados. The fact that it does so without being a major burden on the public purse is all the more creditworthy, and, furthermore, its financial independence also gives it professional independence in pursuing its goals. 77. There are four main laws which govern the activities of the private sector and provide industrial and export incentives: the Pioneer Industries Act of 1958, the Industrial Incentives Act of 1963, the Industrial Development Act of 1969, and the Fiscal Incentives Act of 1974. This final Act was the one introduced to harmonize the laws along CARICOM lines and is the only one now being used for new approvals. Older enterprises still operate under previous Acts, however. There is, in addition, the Trade Incentives Committee of the Ministry of Finance, which is empowered to extend duty-free privileges to enterprises after their initial operating period, or to other companies which do not qualify under the Act. The basic incentives are therefore duty-free import and export, and tax holidays for up to 15 years. After this period, there is a sliding scale of tax rebates, depending on the proportion of profits derived from exports. An enterprise which relies on exports can therefore expect permanent freedom from import and export duties, no taxes for 10-15 years, and only 50% of normal taxes thereafter (i.e., a profit tax rate of 22-1/2% plus 1-1/2% surcharge in FY82/83). Advantages and Constraints 78. The fact that Barbados has been so successful in attracting private investment and in promoting exports is indicative of several areas of advantage. Apart from its obvious physical characteristics which have stimulated the tourism industry, there are four major factors which have led to the attraction of industry. Perhaps the most significant has been its economic and social stability. This is thought to have been  - 26 - particularly important in the mid to late 1970s, after the Vietnam War, when international corporations showed certain reluctance to invest in Asia, and an alternative, safe, location was needed. Added to this was its comparative proximity to North America, and relatively well-educated and trainable labor at reasonable wages, whose native language was English. Finally, there was a history of stable and harmonious industrial relations. 79. Along with these considerable advantages go several major constraints. Barbados has few known natural resources to exploit, and consequently, industrial development has been based on its labor force, concentrating on the transformation of imported materials. The lack of raw materials clearly puts certain constraints on the industries which could be established in Barbados. A shortage of trained manpower, notably at management level and in construction is also a serious problem, hard to overcome in a small country. (For example, an electronic components testing factory would require more electrical engineers than have ever graduated from U.W.I. in Barbados.) 80. Two serious constraints affect exports. Firstly, there are serious problems in the marketing arrangements for non-sugar crops. As noted earlier, the Barbados Marketing Corporation is inadequate, and aside from this institution, agricultural marketing is primarily carried out by "hawkers" in a very informal and inefficient way. Major efforts in this area would be required if agricultural exports other than sugar are to increase. Secondly, over and above its present problems, the tourism industry will eventually come up against a physical limit. Already, the South and West coasts are relatively crowded, to the extent that there are fears about possible sea pollution because of untreated sewage outflow. Clearly, certain areas will soon be fully developed, and in time, development will have to stop. This will be serious not simply because of its direct effects, but also through its effects on the construction industry, another major growth sector. 81. The final area that is rapidly becoming a constraint is costs in two particular areas: labor and construction. Much has already been made of this point in this report, but it cannot be overemphasized. Costs of construction have been rising by 20-30% a year, greatly increasing the costs of investment. As already noted, labor costs have been rising faster than prices in recent years, and faster than wage costs in the United States, thus increasing the relative costs of production in Barbados. These two factors are severely eroding the competitive position of Barbados as a tourist destination, as a location for foreign private investment, and as an exporter. Recommendations 82. With a good set of institutions, adequate banking and insurance facilities, a positive government attitude, and a stable political and economic climate, Barbados has had one of the best investment climates in the Caribbean region, and this has been demonstrated by its success in  - 27 - recent years. Several of the actions recommended below have already been noted in the discussion on development issues, since with an economy which is explicitly geared towards private sector development and export-oriented industries, overlap between development issues and issues covered in this chapter is inevitable. For completeness, these recommended actions are repeated below insofar as they also affect private investment or export development. 83. The following actions could be considered by the Government; (a) an improvement in coordination between the main agencies involved in industrial development; (b) maintaining the industrial promotion campaign, and continuation of the factory construction program; (c) in addition to existing fiscal incentives, Government could consider the granting of investment tax credits, just as it has recently introduced incentives for the construction of industrial buildings; (d) an extension of the recent moves away from direct taxation towards indirect taxation as budgetary constraints permit, in order to improve incentives; (e) the Export Promotion Corporation should devote more effort to investigate extra regional export markets; (f) tourism promotion may need to diversify in line with sources of visitors and should be expanded when resources permit; (g) knowledge of the tourism sector should be greatly improved, with regard to its cost structure, its competitiveness, and ultimate ceilings on its expansion; (h) the maintenance of a realistic exchange rate should also be considered as an essential element of any effective program directed towards stimulating exports of goods and services. The need to monitor closely the competitiveness of the country's exports has become increasingly important recently owing to the appreciation of the US$. Since the BDS$ is pegged to the US$, it has appreciated considerably against the pound sterling during the past year. This development has been particularly harmful to the Barbados sugar industry and to other exports to the EEC, and it has also rendered tourist services more expensive for visitors from Europe and Canada; (i) labor problems should be tackled as soon as possible, both from the point of view of costs, and also with regard to industrial relations; and (j) continued improvement in training facilities, notably in the areas of management and construction skills.  28 - IV. ECONOMIC PROSPECTS 1982-86 A. Introduction 84. The economy of Barbados has suffered a severe set-back in 1981, and the prospects for a recovery in the short run are not good. (See paragraphs 92-96 below). The short-run objectives are therefore to minimize the damage and to prepare for an upturn in later years. Before presenting economic projections for the coming period, it is appropriate to briefly consider the structure of the economy, and whether it is in need of more fundamental adjustment than is at present proposed. 85. The economy is open and export oriented, being heavily dependent on earnings from tourism, sugar, and manufacturing. As such, the performance of the economy is largely determined by external factors, notably the level of activity in major industrialized countries. This is not to say that economic performance is outside the control of the country entirely, since good performance in such circumstances requires such policies as prudent fiscal management, the maintenance of price competitiveness, and an appropriate investment climate. Nevertheless, Barbados can generally only expect significant growth when the major economies of the world are growing. Therefore, the poor performance of the economy in 1981 and the unfavorable prospects for 1982 can be understood. The seriousness of the problem in 1981 has compounded the coincidence of the low level of external demand with poor weather for sugar, and a deterioration in fiscal performance. 86. Could these problems have been avoided? Certainly, an economic structure which was more geared towards import substitution, or to the CARICOM market would feel the effect of external shocks much less. It would, however, also derive less benefit from upturns in the world economy, which have brought about rapid growth rates in Barbados in recent years; in slightly different words, the cost of affording Barbados greater insulation vis-a-vis developments in the world economy would be a lower level of per capita income and economic welfare. 87. There is corrective action to be taken by Barbados, such as tightening the financial performance of the public sector and ensuring moderation in wage settlements, and if such results are achieved Barbados should be poised to grow again once the world economy recovers. The development strategy that has been adopted is judged appropriate to the resource endowment of the country, and is one that should be maintained. It is an inevitable feature of such a strategy that fluctuations in performance will take place. The fact that a particularly severe fluctuation occurred in 1981 should not deter the authorities from pursuing the chosen strategy, for the underlying growth rate is higher than would otherwise obtain. 88. Therefore, although there is much to be done in Barbados, the essential structure is the one that is appropriate and most likely to maximize growth in the medium term. The problems that exist at present are not structural, but short term, calling for prudent economic management  - 29 - until external demand improves, and the creation of an appropriate climate to take most advantage of that improvement. B. Short-term Prospects (1982) Domestic Economy 89. The prospects for economic recovery in 1982 are poor. Sugar production is forecast at the same level as 1981 (95,000 tons), primarily because of the volume of non-harvested sugar in 1981, but also because of the delayed start of the harvest in 1982 due to the strike by sugar workers. Activity in the tourism industry is likely to decline further, with a projected 2.4% decline in arrivals (mostly in the first quarter). In industry, a moderate increase in activity is projected, largely on account of the continued expansion in the manufacture of electronic components. Other sectors, notably Government services, are unlikely to grow, and some decline may be felt in the retail sector, with the decline in tourism, less readily available credit, and higher interest rates. Ongoing projects may ensure a continued high level of activity in the construction sector, but expansion is not likely. Overall, the best that can be expected is zero real growth in 1982, but a worse than expected sugar crop, or a poor summer tourism season could result in a second year of negative growth. 90. Public sector finances can be expected to improve considerably in FY1982-83 with the measures undertaken in the recent budget. Central Government current revenue is expected to rise by 16% to BDS$509 million (24.9% of GDP) but current expenditure only to BDS$484 million (23.7% of GDP). This will yield a current surplus of BDS$25.2 million (1.2% of GDP). With capital expenditure and net-lending held to BDS$142.2 million,4/ the overall deficit is expected to be reduced to BDS$115 million (5.6% of GDP) compared to the 1981-82 estimate of BDS$171 million (9.2% of GDP). With the current surplus of the national insurance fund rising to BDS$38.1 million, the public sector current surplus is projected to rise to BDS$78 million (3.6% of GDP) from the low level of BDS$37 million (2% of GDP) in 1981-82, but this is still well below the 5% level achieved in 1980-81. However, with a relatively high level of capital expenditure and net lending in the rest of the public sector, the overall public deficit will only fall to BDS$120 million (5.9% of GDP) from the 1981-82 level of BDS$168 million (9% of GDP). 4/ The public investment program is presented in Annex III. The level of capital expenditure in 1982-83 has been determined solely by ongoing projects, and no new projects will be started. Further reductions in capital expenditure below this level would involve stopping or slowing down of projects, and this would have later cost-overrun implications for the Government.  - 30 - 91. Financing this deficit will not be easy. Gross external project related financing (excluding government guaranteed) is estimated at BDS$53.2 million, and amortization at BDS$15.2 million. With disbursements of ongoing CDF-type assistance at BDS$4 million, financing of BDS$42 million is assured, leaving a gap of BDS$76 million. However, CDF-type financing needs will be very heavy in 1982 (see paragraph 105 below) and are projected to be BDS$99 million in FY82-83. If this lending is obtained, no recourse to domestic or commercial bank financing will be necessary. External Economy 92. With a further decline in tourist arrivals of 2.4% expected, with prices only rising by about 5%, tourism earnings are only expected to increase from US$251 million to US$258 million. Sugar exports are expected to rise to US$40 million, mainly because of the late export of 17,000 tons of the 1981 crop early in 1982. Other domestic exports, however, are expected to rise by 16% to US$133 million from US$114 million, primarily because of an expected further rise in the export of electronic components. With only a modest rise in re-exports and other non-factor services, total exports of goods and non-factor services are expected to rise to US$539 million from US$492 million in 1981, or by 10%. Retained imports are expected to fall in volume terms, as domestic oil production rises. However, with a continued high level of capital imports for the cement plant,5/ total imports of goods and non-factor services are expected to rise from US$614 million to US$685 million or by 12%. 93. This yields a resource gap of US$146 million, and a current account deficit of US$130 million (12.7% of GDP) compared to US$102 million (11% of GDP) in 1981. Clearly, therefore, there will continue to be considerable pressure on the balance of payments in 1982. Net public disbursements from existing commitments are expected to cover US$68 million including Government guaranteed loans. Private capital, including Trinidad and Tobago's equity investment in the cement project, is expected to provide US$13 million. With no increase in reserves in 1982 (and thus a fall from 2.5 months of imports to 2.2 months) this yields a CDF-type financing requirement of US$53 million (see paragraph 105 below). C. Medium-term Prospects (1983-86) Growth and Employment 94. The medium-term prospects for Barbados remain good provided that short-term economic management is sound. Continued restraint in the public sector and on imports (through limited credit creation) will be necessary, as well as wage restraint. Failure in this area would mean the 5/ See Annex III, paragraph 14 for details of this project which is the largest in the Public Sector Investment Program, at a total cost of BDS$186 million.  - 31 - continuation of the serious balance of payments problems, rapidly mounting external debt, and a further erosion of Barbados' competitive position. As Government is well aware of these problems and is determined to act accordingly as shown by the fiscal measures taken in the 1982-83 budget, the projections assume that appropriate adjustment measures will continue being taken. Regarding the world economy, it was assumed that the recession will end in mid-1983, with relatively rapid recovery in 1984, and no major recession before 1986. US/European growth rates of 3-4% are assumed for 1984-86. 95. Given these assumptions, the Barbados economy cannot expect real recovery until 1983. A modest growth rate of 2% in 1983 is projected, due to a modest increase in tourism and continued growth in manufacturing. A major recovery of tourism is projected for 1984, with visitor arrivals projected to grow by 7.5%. Together with the expected full recovery of sugar by that time, a real growth rate of 6% is projected for the economy for that year. Growth in 1985-86 is projected at 5% a year with similar growth in tourism6/ and manufacturing, but a decline in sugar production as labor is lost. Table 10. Projections of Leading Indicators 1982 1983 1984 1985 1986 GDP Growth Rate 0% 2% 6% 5% 5% Tourist Arrivals -2.4% 2.5% 7.5% 5% 5% (Growth Rate) Manufacturing Output 5% 5% 7% 6% 6% (Growth Rate) Sugar Production 95 105 110 105 100 ('000 tons) Public Sector Finances 96. As indicated in Chapter II, the adjustment program for the publi sector finances could be implemented over two years. By FY1983-84, the overall public sector deficit could have been reduced to 2.5% of GDP. Th projections assume that this ratio is maintained thereafter. This will require restraint on both current and capital expenditure throughout the 6/ The growth rate for Caribbean tourism in this period can be expect be around 6%, but Barbados will experience more competition from Jamai and the LDCs.  - 32 - period. Thus the only real growth that takes place is in the last three years of the period, but it is assumed that expenditures do not increase faster than GDP in any year. In building up the revenue estimates, it is assumed that average wage increases do not exceed 10% a year, and that r continued efforts are made to reduce direct taxation in line with the Government's stated aim of reducing the personal tax burden. Thus, over the period, revenues, (and current expenditures) fall as a proportion of GDP. This implies that after the required changes in revenue measures and current expenditures (notably on transfers) to be adopted in 1983-84, the only likely fiscal measures would be gradual relaxation of income taxes, but with no real increases in government services. Table 11. Projected Public Sector Finances (BDS$ million) 82/83 83/84 84/85 85/86 86/87 Central Government Current Revenue 509 566 620 682 750 Current Expenditure 484 503 550 598 650 Capital Expenditure 142 150 165 190 215 Overall Deficit/Surplus -117 -87 -95 -106 -115 Rest of Public Sector Current Revenue 222 248 273 300 335 Current Expenditure 172 187 209 230 258 Capital Expenditure 52 31 35 40 50 Overall Deficit/Surplus -2 30 29 30 27 Consolidated Public Sector Current Surplus 75 124 134 154 177 Overall Deficit 119 57 66 76 88 (as % of GDP) solidated Public Sector rent Revenue 35.7 35.5 33.6 32.1 30.8 ent Expenditure 32.1 30.1 28.5 27.1 25.8 wnt Surplus 3.7 5.4 5.0 5.0 5.0 al Expenditures 9.4 7.9 7.5 7.5 7.5 1 Deficit 5.8 2.5 2.5 2.5 2.5  - 33 - Trade and the Balance of Payments 98. After 1982, a gradual improvement in the balance of payments is foreseen. In this connection, two critical assumptions are made: (i) wage rises are not more than 10% a year, implying some decline in real wages over the period; and (ii) credit expansion is held below the rate of growth of nominal GDP. These two assumptions are crucial to the projection of a rate of growth of consumption goods imports below the rate of growth of nominal GDP, and also below the rate of growth of export earnings. It appears most unlikely that growth of export earnings would be rapid enough to permit both the servicing of debt and a real growth of imports without a further expansion of commercial borrowing, which should be avoided at the present time. 99. Overall, exports of goods and non-factor services are expected to grow by about 4% a year in volume terms. Sugar exports are projected to rise slightly until 1984, reaching a level of 95,000 tons in that year, and then decline to 85,000 tons in 1986 as labor is lost. Other domestic exports are projected to grow about 5% a year in volume terms, except for electronic components, where a 15% annual increase in exports is projected (but with no increase in unit values). Tourism is expected to grow by about 5% a year on average in terms of arrivals, but with only a 5% increase in expenditure per tourist expected, growth in earnings is projected at a relatively low rate. This reflects the need to maintain the price competitiveness of the industry. 100. Imports of consumer goods and fuels are projected to remain broadly constant over the period in volume terms. This reflects firstly the assumptions listed in paragraph 98 above, and also the gradual recovery in domestic oil production. Intermediate goods are projected to rise broadly in line with GDP, plus some additional allowance for inputs for the electronics industry. A similar assumption is made with regard to capital goods, but with a separate allowance for imports for the cement and the ongoing power expansion projects, totalling some US$90 million in 1982-83. 101. The current account deficit is therefore projected to show a gradual improvement over the period. From the record 1982 level of US$130 million (12.7% of GDP) it is projected to improve to a level of US$46 million in 1984 (3.4% of GDP) and to US$26 million (1.5% of GDP) in 1986.  - 34 - Table 12. Balance of Payments Projections (US$ million) 1982 1983 1984 1985 1986 Exports of Goods and NFS 538.7 592.3 680.8 764.3 847.1 Imports of Goods and NFS 684.9 690.0 746.0 828.6 908.3 Resource Balance -146.2 -97.7 -65.2 -64.3 -61.2 Net Factor Services -13.9 -19.5 -20.6 -17.4 -14.8 Current Transfers 30.0 35.0 40.0 45.0 50.0 Current Account Balance -130.1 -82.2 -45.8 -36.7 -26.0 Net Public Disbursements 117.4 74.8 42.2 27.3 23.0 Private Investment 12.7 15.9 10.0 11.0 12.0 Net Foreign Assets - -8.5 -6.4 -1.6 -9.0 (- = increase) Source: Statistical Appendix Table 3.7. Project and CDF-type Financing Needs 102. The table below summarizes project related financing needs over the perio9, including government-guaranteed loans for the cement and power projects._/ Table 13. Project Financing Needs (US$ million) TOTAL 1982 1983-86 1982-86 Project Assistance Needed (Gross) 83.6 169.5 253.1 (of which power & cement projects) (57.0) (40.0) (97.0) Disbursements from Existing Commitments 83.6 69.9 153.5 Disbursements from New Commitments - 99.6 99.6 (of which projects already identified) (39.8) (39.8) Government will therefore need to mobilize some US$100 million in new project financing over the period, much of it for projects yet to be 7/ These two projects are not part of the public investment program, except for Government's equity investment in the cement company. However, because Government has had to guarrantee part of the financing, this part is included as official financing for balance of payments and debt recording purposes.  - 35 - identified. Requirements for FY1982-83 and FY1983-84 are relatively modest, however, and should not prove difficult. It will be important to ensure that the revised Barbados Development Plan is prepared on schedule,' and also, in spite of the present necessary restraints on capital expenditure, to ensure that feasibility studies continue to be carried out for future projects. Just as it is important for public finance reasons to restrain capital expenditure at present, it is also vital to ensure that in the process the project pipeline does not dry up. 103. The adverse balance of payments positions of 1981 and 1982 have caused a serious re-assessment of CDF-type financing needs over the period. This is not only because of the large current account deficits of these two years, but also because the financing of the 1981 deficit through commercial borrowing has radically increased amortization and interest payments over the period. Interest and amortization payments rise from 3.3% of export earnings in 1981 to a peak of 7.6% in 1984. Therefore, in calculating CDF-type financing needs over the period, it has been assumed that no new commercial bank financing for the public sector will be sought during this period. It is further assumed that the equivalent of a minimum of 2 months of imports is an acceptable level of gross international reserves. 104. The table below presents projected CDF-type financing needs on a calendar year basis. Total needs over the period, as defined above, are calculated at US$97.8 million of which two-thirds would be required in 1982 and 1983. Most of this will have to come from new commitments, as existing commitments are only expected to provide some US$10.9 million over the period. Table 14. CDF-Type Financing Needs (US$ million) 1982 1983 1984-86 Total Total Disbursements Needed 32.4 29.7 35.7 97.8 From Existing Commitments 5.4 3.0 2.5 10.9 From New Commitments 27.0 26.7 32.2 86.9 105. As the US$27 million balance required for 1982 remains uncommitted at present, this will be required in CDF fiscal year 1982-83. Thus the CDF 1982-83 requirement would be US$44.5 million, of which only US$4.5 million represents existing commitments and oil facilities. In addition, US$13.4 million is sought as carry-over financing for FY 1983-84, and therefore total CDF-type financing of about US$53 million would be needed. A failure to obtain such financing would result in a need to seek other more expensive financing or a running down of reserves, neither of which would be an advisable cause of action at the present time.  - 36 - 106. Barbados external public debt is estimated to increase from 17.6% of GDP in 1981 to 30.6% of GDP in 1983, but to decline to 25% of GDP by 1986, as short-term commercial bank financing is repaid. Debt service payments will increase rapidly over the coming period, from US$16.1 million in 1981 to US$52 million in 1984. However, because of the concessional nature of much of the past debt--with a debt service ratio of only 3.3% of export earnings in 1981--the debt service ratio is expected to remain manageable at under 8% of export earnings over the period. Whilst, therefore, Barbados can be considered creditworthy for loans on conventional terms, care must be taken at the present time not to contract excessive debt with short repayment periods.  - 37 - ANNEX I LABOR AND EMPLOYMENT IN BARBADOS Table of Contents Page No. Labor Force Participation and Employment ..................... 38 Unemployment: Trends and Factors ............................ 40 Sector, Occupation and Age Composition of the Unemployed ..... 43 The Self-Employed and Unpaid Family Workers .... .............. 43 Employment in Manufacturing .................................. 44 Education and Skills in the Labor Force ...................... 45 Vocational Training ..................................... 47 The Need for Quality and Job Market Relevance .... ....... 47 Areas for Skills Training ............................... 49 Wages, Prices and Labor Costs ................................ 51 Industrial Relations ......................................... 52 Towards a National Employment Service ........................ 53 Recommendations for Policy Action ............................ 54  - 38 - LABOR AND EMPLOYMENT IN BARBADOS 1. This report reviews selected topics and issues relating to the Barbadian labor market. Its main purpose is to shed light on the seriousness of unemployment in Barbados, as well as on barriers which have the potential to hinder the generation of productive employment. 2. The report discusses the topics sequentially while focusing on a description of main characteristics, on an explanation of issues and on outlining basic guidelines for policy action. A final section summarizes the policy implications. I. Labor Force Participation and Employment 3. The labor market situation in Barbados is striking in more than one way. To start with, the overall (both sexes) labor force participation rate for adults is very high. Approximately 65% of the adult population are in the labor force while, usually, a much lower proportion is found among developing countries. (For example, in 1979 the overall labor force participation rate of the adult population was 50% in Costa Rica and 51% in Mexico; in contrast, in the United States the rate was 62%.) 4. Part of the explanation for such a high rate in Barbados lies in the fact that its labor force is defined so as to include persons without jobs at the time of the survey as long as they engaged in some job-seeking activity during the three-month period preceding the survey. The use of a three-month reference period instead of the more common practice of using the week immediately precedintg the survey, tends to raise labor force participation (and unemployment) rates. 1/ Nevertheless, the difference in practice seems hardly sufficient to accouint for the difference in labor force participation rates between Barbados and other countries. In fact, a much more important factor would seem to be the inclination of Barbadian women to engage in labor market activities. 1/ In countries where the labor market is subject to strong seasonal fluctuations, the use of relatively long reference periods can be justified on the grounds that such periods provide a more accurate perspective of the number of able-bodied persons willing to engage in labor market work.  - 39 _ 5. According to household survey data (see Table 1), in recent years, at any point in time approximately from 52 to 54% of the adult Barbadian women were in the labor force. In contrast, in developing countries the labor force participation rate for women usually is below 30%. It is to be noted that in spite of the difference in practice regarding the reference period, there is no substantial difference between the labor force participation rate of adult men in Barbados (approximately 75%) and in other developing countries. 6. A detailed analysis of the determinants of the high labor force participation rates of women in Barbados is not possible with the information available for the present report. Nevertheless, indications regarding the likely causes that are at play may be useful for future analysis. 7. The pattern of age-specific participation rates of Barbadian women might be represented by a double-peak curve. The first peak occurs early in life at approximately 22 years of age; the second and highest peak takes place at an age of about 32 years. The double-peak configuration is suggestive of a close relationship between female labor market participation, on the one hand, and marital union and motherhood conventions, on the other. It implies that, in Barbados, young and single women join the labor market when they have no children and tend to withdraw from it when they become mothers.2/ They later return to the labor force after their children do not require their constant care. The reentry of these women into the labor force probably occurs more or less simultaneously with the entry of first-time female job seekers who have also seen their offspring through the first years of life. This coincidence would explain the greater height of the second peak. As these patterns of behavior are consistent with a high concentration of childbearing in young ages and with low fertility rates, it would seem that demographic factors are an important aspect of the analysis of women's participation rates in Barbados. 8. Other likely influencing and interrelated factors are of a different nature. One of them might relate to the impact of urbanization on cultural values and job market opportunities. On the one hand, in some countries urbanization seems to have influenced the perception that people have of women's proper role in society so as to make a rise in labor market participation possible. On the other hand, urbanization might be just a proxy for structural changes which encourage labor market activities by females. In Barbados one such change might be represented by the expansion of a manufacturing sector which is relatively intensive in its use of female labor. This expansion has probably altered the ratio of the 2/ The withdrawal, however, may not be large in Barbados. For a general discussion see John D. Durand, The Labor Force in Economic Development, A Comparison of International Census Data, 1946-1966 (Princeton University Press, 1975).  - 40 - marginal productivities of time allocated to market and nonmarket activities; to the extent that the change in the relative marginal productivity of market time has been reflected in the labor income of women, a substitution (market for nonmarket time) effect is likely to have taken place and thus led to higher participation rates. It is to be noted that the rise in participation rates resulting from the substitution effect mentioned may have tended to, at least, partially compensate for the fall in female participation that sometimes accompanies a decrease in the labor force share of the agricultural sector. Such a decrease has taken place in Barbados during the last two decades or so. 9. An additional socio-economic factor potentially influencing female labor force participation relates to the pattern of marital unions. In contexts where marital unions are significantly unstable and a high proportion of adult women with children are likely to be de facto household heads, it is not surprising to find high female labor force participation rates--in these instances women are a main (if not the main) source of household income. 10. Last but not least, purely statistical factors may account for the difference in women's labor force participation between Barbados and other countries. In rural societies, for example, measuring the labor force participation of women is especially difficult and, accordingly, there probably is significant underreporting. With a predominantly urban and modern economy, in Barbados the probability of misstatement is smaller. 11. A second labor market aspect of interest in Barbados relates to the proportion of the adult population employed. This proportion, referred to in this report as the employment ratio, is higher in Barbados than in many developing countries--approximately 58% in Barbados while one would commonly expect a 50% ratio in other developing areas. The difference is quite pronounced in connection with the employment ratio of adult women. In Barbados (see Tables 2 and 3) the employment ratio of women is over 40%; in other developing countries the ratio generally is under 30%. If one focuses on "prime age" persons (say 25 to 59 years old) one has that, in Barbados, the employment ratio of men and women in such age groups are 90% and 60%, respectively. Probably the most important implication of these figures is that the Barbadian economy has been able to provide jobs to a relatively high proportion of its working age population. Unemployment: Trends and Factors 12. The previous section ended with a note of optimism. Nonetheless, unemployment in Barbados is and has traditionally been high. Over the years comparisons of labor market statistics in Barbados have to be made  _ 41 - with caution. One reason is that the definitions used have changed.3/ Nevertheless, a rough picture of changes in the unemployment rates o7ver the last two decades can be drawn from the available statistics. 13. During the early 1960s the unemployment rate hovered around 12%; it then fell until it reached a low of about 8.5% in 1970. By 1975, however, the rate had peaked to nearly 23%, certainly as a reflection of the deep world recession which preceded that year. After then, and until very recently, unemployment tended to fall. 14. The most recent available survey estimates indicate an overall unemployment rate of 11.1% for October-December 1981. The corresponding rates for women and men were 13.7% and 9.0% respectively. While if one compares these figures with the unemployment rates for October-December 1980 a slight decrease is apparent, the decline is so small that it is statistically insignificant. Accordingly, the conclusion that no change in unemployment rates between the two periods took place is warranted. In contrast, the unemployment rate did show a significant decrease between January-March 1980 and January-March 1981 (from 13.7% to 10.4%). Quarterly estimates in the overall unemployment rate for 1981 range from a 10.0% low for April-June 1981 to a high of 11.9% in July-September 1981, changes which probably reflect the effects of seasonal variations. 15. From these figures, one might conclude that the decline in unemployment rates which developed during the late 1970's was arrested during 1981. Estimates relating to the number of the employed population, a proxy for intensity in the demand for labor, seem to be consistent with this conclusion (see Table 4). 16. In examining variations in unemployment rates, it should be taken into account that their changes might be substantially affected by changes in labor force participation rates and thus may not be a good indicator to 3/ For example, mid-1960s survey rounds used one week as the reference period for the purpose of measuring the economically active population. The 1960 census used a 12-month period, while apparently the 1970 census again used the one week reference period. As mentioned in the text, current surveys use a 3-month reference period. Moreover, as reported by the Ministry of Finance and Planning, 1978 employment figures are probably distorted due to under- reporting (see Barbados Economic Report 1978, p.15). Another difficulty is that pre-1980 figures from the Continuous Household Sample Survey were based on a sample which due to its small size (little more than 1% of the total number of households on the Island) and, presumably, to its design, gave rise to substantial sampling variation. See, for example, the Economic Report for 1977 which indicates that figures are subject to a 10% coefficient of variation.  - 42 - relative job conditions. In this connection it has been pointed out that in Barbados, as in other developing areas, in times of acute recession the labor force participation rate rises significantly. As suggested by the labor force trends in Chart 1, such a rise seems to have taken place in 1975 and thus partially accounts for the dramatic increase in the unemployment rate. It is to be noted that, while the rise in the male labor force was significant in 1975, nevertheless, the main impetus for the increase in the total labor force resulted from the increase in the female labor force. 17. Accordingly, in reviewing recent unemployment trends it is advisable to pay attention also to changes in employment ratios. In Barbados, in fact, over recent years both the unemployment rates and the employment ratios have moved simultaneously but in opposite directions thus providing consistent and similar views of the labor market situation (see Tables 2 and 5). This, of course, reflects the fact that, during those years, labor force participation rates have been relatively stable. 18. Tying together the various lines of thought presented it is possible to argue that: (i) high unemployment rates in Barbados are partially the reflection of high labor force participation rates of women.4/ While this does raise important issues relating to unutilized productive capacity and potential income as well as sociological difficulties affecting Barbadian women and their dependents, it also underlines the need for care when comparing the employment situation in Barbados with that in other countries; and (ii) the arrest in the fall of unemployment rates that has been reported for 1981 is likely to have resulted from some slackening in world demand for Barbadian goods and services. 19. If one takes into consideration the experience of a few years ago, it stands to reason that the current unemployment rate of 11% could be lowered to, say, 8% by virtue of rising demand for Barbadian products and services. Moreover, as for the most part unemployed Barbadians are young and have received at least a basic education (see below), it is plausible to hold that a combination of strong and growing world market demand 4/ For example, if one assumes a labor force participation rate for Barbadian women of 47% in October-December 1981--instead of the reported 54.2%--and takes the number of employed women for that period as a given at 43,300 as reported by the Statistical Service, the corresponding unemployment rate for women would be sliced in half to 6.6% (from 13.7%); moreover, everything else equal, the overall (both sexes) unemployment rate would fall to 8%, a level equivalent to a historical low in the unemployment rate. In pondering about these off-the-cuff estimates one has to bear in mind that a 47% participation rate for adult women still is extraordinarily high for developing areas.  - 43 - conditions for Barbadian goods, and manpower policies aimed at providing the skills needed by expanding sectors could drive the unemployment rate down to around 5%. In fact, frictional unemployment should be relatively small in Barbados given the smallness of the market place and the absence of hard evidence pointing to significant fragmentation of the labor market.5/ Sector, Occupation and Age Composition of the Unemployed 20. Unemployment rates among workers with previous work experience indicate that, around May 1981, only manufacturing showed higher than average rates (15%). This high rate in manufacturing is paralleled by production process and related workers experiencing for the same time period, the highest unemployment rate (18%) according to occupational category (see Tables 6 and 7). This reflects, of course, the weak performance of the manufacturing sector which experienced a zero, or even negative, rate of real product growth between 1980 and 1981. 21. It is interesting to note that 27% of the unemployed were 19 years old or younger, while 61% were less than 25 years old. The high proportion of youths among the unemployed indicates that efforts to reduce unemployment levels should confer priority attention to this segment of the population with little or no previous work experience. In fact, a preliminary calculation suggests that first-time job seekers comprised about 19% of the unemployed around May 1981. For other periods first-time job seekers account for approximately 30% of the unemployed; the variation in the weight of first-time job seekers probably reflects the impact of seasonal variations in the number of persons entering the labor force as a result of the school cycle. Another possible implication of the high proportion of youths unemployed is that the Barbadian labor market would seem to offer a relatively strong premium to work experience. This, in turn, would be a relevant factor for designing skills training programs. Mechanisms which provide in-plant training as part of wider training programs should be explored; such approach would call for close links between potential employers and training centers. The Self-Employed and Unpaid Family Workers 22. In developing countries underemployment and accompanying low incomes tend to affect especially workers in specific occupation statuses. In this light, the proportion of self-employed plus unpaid family workers in the labor force is frequently used in such countries as an indicator of the seriousness of underemployment.6/ 5/ Thus, for example, intersectoral wage differentials are relatively small. These wage rates were quoted in the Barbados Department of Labour, Annual Report for the Year 1978. 6/ Another measure used for the same purpose is the proportion of workers in sales and service activities. Given the importance of the tourism sector, this latter measure would seem inappropriate in Barbados.  - 44 - 23. In Barbados the proportion of employed workers classified as self-employed or unpaid family workers fluctuates around 10%. Relative to other developing areas this is a very low proportion--by way of contrast one could mention that, in 1970, in Guatemala the corresponding proportion was not far from 50%. It would seem, therefore, that underemployment is not particularly acute in Barbados. Employment in Manufacturing 24. By the middle of 1981 manufacturing accounted for nearly 14% of the employed labor force. As prior to its weak performance in 1981 the manufacturing sector had been quite dynamic in terms of employment generation, and as it seems to be a key sector in terms of its potential for development, assessing the employment structure and skills needs in manufacturing is of considerable interest. Moreover, an employment survey in manufacturing carried out in 1980 by the Ministry of Labour provides information relevant to this purpose (see Annex, 2). 25. The following are salient traits of employment conditions in the sector: (i) some 73% of the manufacturing establishments are medium or large size (i.e., establishments having 10 employees or more). Naturally, this means that the proportion of manufacturing employment generated by small-scale establishments is quite small. (ii) The occupations with the largest number of persons were electronic assemblers and sewing machine operators. The highest number of vacancies and additional manpower needs related to, precisely, these two occupations; other manpower needs called for, primarily, other semi-skilled workers. 26. Personal contact is the most common method of recruitment. The use of the public employment exchange is nominal; although the number of establishments which used private employment agencies was small, these establishments were about twice the number of establishments making use of the public employment exchange. The most common method of training in manufacturing is through on-the-job informal training. 27. These aspects suggest that: (i) Given the present size structure of the manufacturing sector, at least in the immediate future, an expansion of small scale establishments is likely to have a small proportional impact on total employment; (ii) there is room for improving the fluidity with which information flows in the labor market and thus positively impact the allocative role of the labor market; (iii) were the sector to experience a considerable expansion, the demand for semi-skilled workers is likely to grow significantly; and (iv) once again, the possibility of integrating in-plant on-the-job training with other elements of a wider manpower training strategy should be carefully assessed.  - 45 - Education and Skills in the Labor Force 28. As is discussed in a later subsection, certain basic skills are scarce in Barbados; nevertheless, in terms of years of schooling the Barbadian labor force is relatively well off. Around 1981, approximately 50% of the labor force was classified as having at least some secondary level education, 5% had at least some university level education, and a negligible 0.2% was classified as with no education. The distribution of schooling shows no marked disparity between sexes. 29. The bulk of the unemployed is formed by persons with at least some secondary level education. While 33% of the unemployed consisted of persons with at least some primarily level education, 66% of the unemployed have received some secondary level education. It would therefore seem that persons which have been exposed to secondary level education have considerable difficulty in finding congenial jobs. As 69% of the unemployed female workers have received some secondary level education, apparently such difficulty is more acute among women. These inferences find support in the fact that the rate of unemployment among persons (both sexes) with at least some secondary level education was 13%, while the rate of unemployment for persons with at least some primary level education was 7%. The unemployment rates for women and men with at least some secondary education are 17% and 10% respectively. 30. One important implication of the figures mentioned is the likelihood that a divorce between career aspirations and job market possibilities exist. Another relevant implication relates to the quality of education (this aspect will be commented in a subsection below). Given the lack of access to results from ad hoc attitudinal surveys, it is difficult to document the claim relating to a divorce between career aspirations and job market possibilities. 31. However, a recent sociological study indicates that the training provided to young people by the primary and secondary educational systems "... begins at early age to prepare them for white collar, if not prestigious, clean jobs. Technical jobs are only recently beginning to appeal to young Barbadians."7/ Moreover, "... prosperity and the very cosmopolitan nature of Barba-Tian society reinforce and perpetuate a very picky, almost cavalier attitude toward work."8/ 7/ G. Brana-Shute and R. Brana-Shute, The Unemployed of the Eastern Caribbean: Attitudes and Aspirations (University of Florida, mimeo 1980), p. 132. This internal document was made available to this consultant by the Barbadian Ministry of Labour. 8/ Ibid.  - 46 - In the same vein, the Barbados Chamber of Commerce refers to "the overwhelming desire among Barbadian school leavers for an "easy job" which is synonymous with white collar employment. Our historical background and the great social pressures to get a "white collar" job are mainly responsible for the extreme academic bias of the Barbadian education system and the illogical attitude of our young people towards technical jobs. Thus there is a crying need to provide more training geared towards equipping the non-academically inclined students with skills that can more easily be applied in a work situation. In a developing country suffering from a shortage of technically skilled persons this must surely be the direction in which our education should be directed."9/ 32. These assertions find some support in the age and occupational composition of the employed labor force towards the middle of 1981. At that time, while 28% of the occupations were professional, technical, administrative or clerical, about 32% of the 15 to 44 year olds employed workers were in these occupations; moreover, while 15 to 44 year olds employed workers comprised 73% of the employed labor force, they accounted for 81% of the labor force employed in the first mentioned occupations. These figures suggest a preference among young workers for such type of occupations.10/ 9/ The Barbados Chamber of Commerce, Unemployment - Some Possible Solutions, A Policy Statement (The Barbados Chamber of Commerce, 1979), p. 7. 10/ Figures based on Continuous Household Sample Survey results. No finer breakdown by age for the occupational distribution of the employed labor force was available to this consultant. One should exercise caution in interpreting these figures. They do not necessarily point to a distortion in the labor market because, after all, the occupations mentioned are high-paying occupations. As a consequence, the unemployed may be acting logically if they queue up for this type of job.  - 47 - Vocational Training 33. Resolute efforts to provide vocational training are of relatively recent origin. They include: skills training programs implemented by the Ministry of Labour; options to receive technical and vocational education through the formal school system; one-to-three year programs in skilled trades at the Samuel Jackman Prescod Polytechnic. The National Training Board is charged with the responsibility of coordinating these efforts; the Board was created in 1979. It is clear that Barbadian policy makers understand the need for training and that serious efforts are being carried out in connection with training needs. Nonetheless, the training system should be improved. One way to accomplish this relates to the information base needed for manpower planning decisions. 34. There are no systematic manpower or training needs surveys. As a consequence, decisions regarding, for example, training areas and types of programs are largely made on the basis of intuition and impression. The National Training Board does not make regular use of a set of labor market statistics which would enable that body to monitor the labor market situation and focus on manpower needs. It is probably in part because of this that the Board has not yet had a significant impact on the training system. 35. In a similar vein, no systematic tracer studies are carried out in order to evaluate the result of ongoing training efforts. The importance of this type of follow-up assessment is highlighted by a tracer study done on a youth skills training program sponsored by the Ministry of Labour. The study showed that 22% of the program trainees remained unemployed several months after graduation. Moreover, at the time of the survey only 35% of the trainees were employed in their field of training.ll/ These results offer ground to conjecture that, although the program probably enhanced the "employability" of the trainees, a closer link with labor demand trends was necessary. The Need for Quality and Job Market Relevance 36. The statistics presented in para. 28 above in connection with the education of the labor force tend to portray a well educated labor force. However, it seems that in fact there are reasons for being skeptical. The functional level of education apparently is significantly lower than the level suggested by the number of years of schooling. Disappointment with the quality of formal education in Barbados is frequently expressed by employers and social scientists.12/ II/ United States Agency for International Development, Report on the Tracer Study of the Barbados Youth Skills Training Project, 1979-1981 (August 1981). The information in the text reflects a follow-up evaluation by AID personnel orally provided to this consultant by AID officials. 12/ In fact, officials of the Barbados Ministry of Education indicated to this consultant that the Ministry is making considerable efforts to correct the deficiencies of the educational system.  - 48 - 37. The expression of dissatisfaction regarding the educational system have found empirical support in a recent study by Women in Development.13/ The study found that the majority of low-income unemployed women had received some secondary schooling. Nevertheless, although this subgroup of women as a whole shows an average of 10 years of schooling, they have only a four year level of achievement in reading and even lower in mathematics. It seems that for every two and one-half years in school these persons advanced only one year in skill level. The study notes that, at the performance levels registered, the persons sampled were unlikely to be able to understand a training manual, benefit from reference materials, prepare reports or use decimals and percents. 38. The deficiency of the formal education system, to which the disparity between years of schooling and academic skills points to, is compounded by the fact that traditionally formal education in Barbados has neglected areas of learning which are of direct relevance to the job market. The issue of job-market relevant education is stressed by Barbadian employers; graduates are frequently deemed as coming out of the formal school system largely without skills directly relevant to the world of work. 39. The above aspects point to the need of improving both the quality of education as well as its orientation towards greater job-market relevance. Recent efforts in these directions are to be encouraged. In this connection, as pointed by Women in Development, it is also to be noted that education and skills training should touch on such fundamentals for job market work as personal appearance, punctuality, the concept of a career as an interrelated series of jobs and interpersonal relations. 40. As the proportion of the national budget spent on education is high (near to 25%), efforts to improve the educational system should focus on raising the cost-effectiveness of the use made of the funds already involved. 4/ A related point relates to the strong possibility of the existence of excessive variation across regions in the quality of educational services. Accordingly, efforts to improve the quality of education should award priority attention to areas inhabited mainly by low income population groups. 13/ See Women in Development, A Study of Low Income Women in Barbados (August 1980). 14/ The educational budget accounts for between 20 and 25% of the total budget.  _ 49 Areas for Skills Training 41. Although unemployment is high, labor shortages in specific trades do exist.15/ As was implicit in preceding sections, the coexistence of surplus 17Eor and labor shortages suggests that there is a scope for attacking unemployment through manpower policies and measures aimed at improving factor allocation.16/ 42. Notwithstanding the lack of systematic sources of information regarding skills in short supply, it is apparent that the following skills are scarce. Needless to say, it would seem that these scarcities could result in bottlenecks that limit employment creation and exert upward pressures on labor costs. - Management. The need for qualified managers is underlined by sources in both the private and public sector and is felt across industries, tourism and manufacturing included. This need refers to both high and intermediate-level managers. - Teaching. Especially in the physical sciences, mathematics and accounting. - Instructors for skills training. The lack of competent instructors is a significant barrier to the activities of skills training institutions. Training instructors should be a basic objective of a manpower strategy. In addition to the skills mentioned, the following shortages, by sector of activity, can be detected. - Construction. Carpenters, masons, painters and plumbers. - Manufacturing. Semi-skilled personnel in general; electronic assemblers and sewing machine operators in particular. - Sugar. Specialists in sugar technology, agricultural equipment operators and repair and general maintenance personnel. It is to be underlined that current trends towards mechanization of the industry calls for changes in the skill structure of its labor force. 15/ This point goes beyond the well-documented shortage of workers for sugar cane harvesting. 16/ This information was obtained through various interviews including meetings with officials of the Ministries of Labour and Education, the National Training Board, the Barbados Institute of Management and Productivity, the Barbados Hotel Association, among other public, semi-public and private institutions.  - 50 - CHART 1 IJb ( Labour Force 1960-1977 TorL. _ Lo - - _ '.w5? 30 I0 30 Source: The Barbados Chamber of Commerce, Unemployment - Some Possible Solutions (1979).  - 51 - Hotels. Shortage of well-trained personnel at all levels. Current training options at dependencies of the Ministry of Education and at the University of the West Indies are held to be not satisfactory. Along with senior managers, workers skilled in food and beverage preparation seem to be particularly scarce. - Fishing. A revamping of the fishing sector is under consideration; if it takes place the industry will become more mechanized. This will bring about a need for workers skilled in the maintenance and repair of diesel engines and in navigation techniques. Wages, Prices and Labor Costs 43. As one can tell from Tables 8, 9, and 10, in general, Barbadian prices have tended to rise faster than international prices and changes in wages have tended to be of the same order as changes in prices. Allowing for some years in which nominal wages in specific occupations and industries did grow faster than retail prices, the predominant pattern of wage changes seems to be one according to which, over time, wages tend to catch up with prices. This pattern reflects the significant importance of collective bargaining in the wage setting process. 44. It would appear that, overall, real wages tended to fall in 1973 and in 1974, and to rise in 1975 and in 1976. With respect to specific sectors, during the 1970 decade nominal wages in the sugar industry tended to rise more or less at par with retail prices, while in manufacturing nominal wages tended to lag behind retail price increases. In contrast, from approximately 1976 to 1980 nominal wages in construction rose faster than retail prices thus at least partially reflecting scarcities in key skilled craftsmen. Basic nominal wages in the hotel industry tended to experience changes in line with retail price changes; however, there are indications that the service charge component of total employee remuneration grew faster than either, thus resulting in an increase in real earnings. Of course, while changes in the service charge component are reflected in the prices of hotel services, and therefore would tend to adversely affect the demand for such services, they do not stand for a direct cost to the employer. 45. In sum, during the 1970s wages tended to change in step with inflation and thus it is hard to perceive them as having exerted, during that period, strong cost-pressures on prices. Nethertheless, in the absence of offsetting changes in productivity, the relatively fast increases in Barbadian prices, and the accompanying changes in Barbadian wages, may have had a potentially important consequence. To the extent that changes in wages in other countries have tended to parallel small price increases in these countries, the cost of labor in Barbados may have risen relatively to labor costs in countries which compete--or may  - 52 - compete--with Barbados. Naturally, in itself this would have acted as a determent to foreign investment in Barbados and to the expansion of Barbadian exports. Moreover, if one takes into account the growing instability in labor-management relations (see below), the fact that in a key industry like hotels labor has done well wage-wise, the forthcoming wage negotiations in the hotel sector and in government, plus the weakness of the world economy at the present juncture, it become quite important to avoid excessive wage increases that would tend to place producers in a squeeze between rising labor costs and a softening of world demand for goods and services. In this connection it is not comforting to note that non-wage costs of labor are tending to rise relatively fast. 46. This seems to be the case with employers' contributions to the National Insurance Board because of the introduction of a training fund and a health and transport levy. Up to June 1981 the employers had to contribute, as payment for national insurance (health) and unemployment insurance and severance payments, the equivalent of approximately 4.5% of employees' insurable earnings; with the introduction of the levies mentioned the employers' contributions are, at present, 5.5%. Furthermore, while up to 1977 employees were entitled to a 2 week paid vacation per year (3 weeks after 5 years of seniority) in 1977 paid vacation was raised to 3 weeks irrespective of seniority; in 1980 employees acquired the right to a 4 week vacation after 5 years of seniority. Industrial Relations 47. As mentioned previously, collective bargaining is a most important wage determining factor in Barbados. Approximately one-third of the labor force is unionized. While there are many labor unions in the country, a national union, the Barbados Workers' Union, is by far the most powerful; it might be able to paralyze the economy. 48. Direct negotiations between management and union characterizes the bargaining process. The government does not intervene in the negotiations unless a deadlock is reached. When that happens the Office of the Chief Labour Officer attempts to mediate; if this attempt is not successful the issue is moved as far up as the Prime Minister, as has happened in recent instances. By that time the situation involves a test of strength between management and labor, and the Office of the Prime Minister is placed in a politically awkward position. 49. Although Barbados has traditionally enjoyed a stable climate of industrial relations, in recent years the situation has become increasingly tense and a source of concern. In contrast to what may well have been the tradition in Barbados, at present reciprocal mistrust characterizes the relations between organized labor and management; the trade union movement (spearheaded by the Barbados Workers' Union) seems to be becoming increasingly aggressive, with the Government being unable to effectively mediate. As a consequence, firms seem to be worried about current trends in industrial relations affairs. The tone that prevailed during the recent  - 53 - settlement in the sugar industry has served to fuel this concern. It is also pertinent to indicate that, according to the most recent figures available in the Labor Ministry, in 1979 (a typical year in the past) there was only one strike involving 45 workers and 270 mandays lost; in contrast, in 1980, 7(seven) strikes took place, 2,166 workers were involved and, as a consequence, 14,342 mandays were lost. When one considers that investors must attach considerable weight to the costs involved in work stoppages, slowdowns and other disruptions in the production process, the growing industrial relations tensions in a small and per force open economy like Barbados call for urgent policy action. 50. The deterioration in the industrial relations climate is aggravated by the following factors: - While a continuous dialogue between labor, management and government is needed, no adequate communication channels exist. The National Economic Council has not been operative. - The Government is deemed by observers as not having seriously attempted to explain Barbados' current economic difficulties to organized labor. - The machinery for mediation and conciliation in labor disputes is inefficient; conciliation personnel is understaffed and undertrained. The key post of Chief Labor Officer is vacant. Union leaders tend to be identified with the opposition. Towards a National Employment Service 50. Ideally, placement centers, potential employers and training institutions should form a well integrated employment system. In such a scheme the placement centers would carefully monitor the change in the number and type of vacancies, would anticipate skill needs felt by employers, would provide guidelines to training institutions regarding needed emphases and would serve as information or communication channels between firms and job seekers. It goes without saying, these functions involve complex tasks and active performance. 51. From the above perspective, the situation in Barbados leaves much to be desired. As mentioned before, decisions regarding training emphases are made haphazardly; moreover, the labor exchange lacks dynamism and relevant information is nonexistent or, at best, spotty. In addition, no appreciable coordination between training institutions, employers and placement centers takes place. 52. The labor exchange plays a useful role in the recruitment of workers for overseas (mainly the United States and Canada) and in the placement of handicapped workers; nevertheless, except for the placement of domestics, in connection with the placement of general workers in Barbados, the center has been very weak and it is not well regarded by the private sector. It is to be taken note that trainees at both the Polytechnic and the skills programs rely mainly on their instructors for placement.  - 54 - 53. The labor exchange should play a more dynamic role in contacting employers regarding current and future vacancies, in the assessment of training needs, in employment counseling and testing, and as an integral part of the system for human resources development in Barbados. A major goal of the exchange should be to encourage the registration of a wider array of job applicants and employers; furthermore, in addition to providing services for the unemployed, it should reach students near graduation as well as even persons with jobs but who are contemplating a change in employment. To attain these objectives it is important that the labor exchange be fuller and better staffed, and that it alter its present image of being, primarily, a welfare agency. II. Recommendations for Policy Action 54. An overall employment strategy in Barbados should be directed to the following major objectives: maintenance of price competitiveness in the international market; attraction of foreign capital and mobilization of domestic resources; elimination of structural unemployment through education and training measures; diminution of frictional unemployment by improving the allocative role of the labor market. The following suggestions are geared to these objectives. Education and Training - Ongoing efforts to improve the quality and relevance of education and training should be reinforced. The attainment of higher quality education requires better management in the schooling system and greater emphases on teacher training, on the provision of adequate teaching aids, and on the improvement of physical facilities. Top priority should be awarded to making quality education accessible in low income areas. - Remediation courses in reading and math should be developed; they should reach, especially, low income population groups. - The practice of providing free advanced education for all should be reassessed; special financial incentives (fellowships or easy terms loans, for example) should be devised with the objective of attracting students to technical and business-related fields in which there is a skills shortage. The education system should move in the direction of making students bear fuller costs of engaging in advanced education; this holds afortiori in connection with areas of little direct relevance to current and perceived manpower needs in Barbados. - Educational programs should focus on training teachers especially in science, business and financial management and accounting. skills programs should concentrate on training instructors and on the provision of training in the high needs areas previously outlined in this report.  - 55 - Skills and education programs should cover also such basic aspects to career development as personal relations, budgeting, personal appearance and punctuality. Instructional programs should be periodically reevaluated. Follow-up studies of samples of graduates from skills training programs, the Polytechnic and other vocational training centers should periodically be carried out so as to assess the performance of trainees and identify deficiencies in the skills training programs. Annual manpower or training needs surveys should be carried out by major sectors of activity. The surveys should be executed by the Statistical Service under the supervision of the Ministry of Planning in consultation with the Ministries of Labor and Education. In-plant training for near graduation trainees should form part of selected regular training programs. The possibility of eliciting the cooperation of employers through special fiscal and labor cost incentives should be explored. Examples of such incentives would be the transitory reduction of national insurance contributions and the payment of lower wage rates for trainees during the training period. The in-plant training schemes, on the one hand, would permit trainees to become familiar with actual work conditions; on the other hand, they would permit firms to assess the potential performance of trainees and derive material returns from their collaboration. The schemes would also provide factual bases for the evaluation of the relevance and appropriateness of skills training programs. Institution Building and Industrial Relations - The staff of the labor exchange of the Ministry of Labour should be upgraded and expanded so as to be able to carry responsibilities along the lines described in the text above. As part of these responsibilities, the exchange should play an active role in suggesting to the National Training Board areas for training, in career and employment counseling and, of course, in after-training placement. The exchange, along with the statistical unit of the Labour Ministry, should be a source for analyses relating to available labor skills and manpower needs. - In order to be able to perform effectively, the staff of the Statistical Department of the Labour Ministry has to be expanded with qualified personnel. It is to be noted that at present there is only one professional working in the department.  - 56 - The Government should strive to reestablish a climate of mutual trust between management, labor and itself. In line with this objective a practice of continuous dialogue is essential. Through it, the problems and constraints faced by the country and each of the parties involved would be reviewed and potential solutions explored. The capacity of the Ministry of Labour to effectively mediate in labor-management disputes needs to be strengthened. It is suggested that the Labour Ministry develop a capacity to closely monitor collective bargaining processes and, if needed, to become involved directly in them as a bona fide mediator or, preferably, indirectly through the intervention of third party mediators acceptable to both labor and management. In any case, the attempt to mediate should take place before differences between labor and management reach crisis proportions. Achieving this objective will require restaffing and retraining of Labour Ministry personnel. In this connection the possibility of benefitting from the assistance of an institution such as the United States Federal Mediation Service (USFMS) should be explored. USFMS could probably provide training courses of different duration for selected officials. Training could take place either in Barbados or in the United States; the former alternative is judged as preferable as it would offer instructors an in-site possibility of becoming acquainted with local conditions. Not only officials or other persons directly involved in conciliation activities could benefit from these courses, but their supervisors as well. The key post of Chief Labour Officer, Ministry of Labour, should be filled as soon as possible. Information Base - A wider labor market information system should be developed so as to permit a thorough monitoring of labor market variables and the timely adoption of appropriate policy measures. The creation and utilization of an information system of the type proposed would involve a close cooperation between the Statistical Office, the Labour Ministry and the Ministry of Finance and Planning. - At the sector level the development of periodic labor market statistics for the tourism sector deserves top priority. It is indeed surprising to see that in an economy where tourism plays such a pivotal role employment data for the sector are lacking. While any definition is likely to be arbitrary, it is suggested  - 57 - that any reasonable measure of the sector--hotels and selected types of restaurants, for example--would be preferable to the continuation of the present state of affairs. In identifying the tourism sector the measures used should allow for consistent estimates of value added and employment. For analytic applications the information in some tables of the Continuous Household Sample Survey is presented at a too aggregated level. For example, the breakdown by occupation and industry could be significantly improved for manpower needs assessment if at least the occupations were broken in finer detail. Analogously, the breakdown of the unemployed labor force by sex and marital status would become more useful if a further breakdown according to family head and dependents status were to be included. In a similar vien, a breakdown of labor income crosstabulated by sex, occupation and industry would be very useful for wage structure analysis (currently only separate tabulations of income by industry or occupation are presented). Also in connection with labor income, it would seem that income classes reported are too wide resulting in excessive lumping together of observations. The usefulness of the household survey would also be enhanced if tabulations relating to job search methods, unemployment by years of labor experience and education, the proportion of households in which at least one person is unemployed, and time involved in traveling to place of work were also reported. A breakdown of persons employed by finer occupation classes would greater increase the usefulness for manpower analysis of the information collected through the annual survey of industrial establishments. Wages and Productivity - In order to avoid excessive increases in labor costs, it is recommended that voluntary tying of real wages rises to productivity increases be set as a key economic national objective. The rationale for this should be widely publicized and discussed with labor and management. A continuation of the rise in the non-wage costs of labor should be prevented. Research - The potential of small firms to provide productive employment in Barbados should be the focus of an ad hoc study. These firms are presently found mainly in retail and repair services; their links with modern sector activities seem tenuous. The study should  - 58 - ascertain the economic viability of small firms in difference sectors, the major problems they face and the government measures that would be warranted. Given the importance that joint ventures could have for economic development in Barbados, an analysis should be carried out of the areas and ways in which governmental action might contribute to the mobilization of domestic savings and entrepreneurial talent in joint venture schemes through the provision of technical or financial facilities.  - 59 - Table 1: BARBADOS - LABOR FORCE PARTICIPATION RATES OF WOMEN BY TIME PERIOD (%) October-December 1981 54.2 July-September 1981 52.3 April-June 1981 52.9 January-March 1981 56.6 (Mean Rate 1981) (54.0) October-December 1980 55.5 July-September 1980 n.a. May 1980 52.5 January-March 1980 56.5 (Mean Rate 1980) (54.8) October-December 1979 53.7 July-September 1979 54.2 Source: World Bank based on Statistical Service, Continuous Household Sample Survey data.  - 60 - Table 2: BARBADOS - EMPLOYMENT RATIOS FOR ADULT POPULATION BY SEX AND TIME PERIOD Employment Ratios Time Period Men Women October-December 1981 70.5 46.7 July-September 1981 72.4 42.6 April-June 1981 68.5 45.9 January-March 1981 74.3 48.4 (Mean Ratio 1981) (71.4) (45.9) October-December 1980 69.3 47.2 July-September 1980 n.a. n.a. May 1980 a/ 72.3 46.1 January-March 1980 71.7 46.1 (Mean Ratio 1980) (71.1) (46.5) October-December 1979 70.9 45.0 July-September 1979 68.0 42.7 a/ Derived from a sample of the 1980 Population Census. Source: World Bank based on Statistical Service, Continuous Household Sample Survey data.  Table 3 : BARBADOS - EMPLOYMENT RATIOS AND UNEMPLOYMENT RATES BY SEX, AGE AND TIME PERIOD a/ (%) January-March 1981 April-June 1981 Age Group Employment Ratio Unemployment Rates Employment Ratio Unemployment Rates Men Women Men Women Men Women Men Women 15-19 38.0 17.9 23.9 50.5 40.9 19.6 20.6 38.0 20-24 83.7 65.6 10.5 21.6 81.4 62.5 12.4 21.1 25-29 89.8 70.4 7.6 11.3 86.4 66.2 5.9 14.2 30-34 95.4 78.9 0.8 9.6 88.4 71.9 4.9 14.2 35-39 94.0 75.6 1.8 6.1 95.4 66.4 1.9 9.2 9 40-44 90.4 69.0 4.5 4.9 92.4.. 65.4. 4.0 0 45-49 93.5 61.7 4.0 6.6 95.7 60.4 2.9 3.5 50-54 97.4 49.5 0 7.0 92.0. 55,5: 1.4 1.5 55-59 94.6 51.0 0 5.6 85.3 43,1. 1.9 4.4 60-64 68.6 37.8 2.0 3.1 66.3 28.1. 4.7 6.9 65+ 32.0 5.8 0 0 19.9 9.0 0 3.5 TOTAL 74.3 48.4 6.5 14.3 68.5 45.9 7.4 13.3 25-59 age group 93.2 67.1 3.2 8.1 90.2 69.4 3.8 8.5 a/ The employment ratio is defined as the proportion of persons in specific age and sex population groups which are employed. The unemployment rate is defined as the proportion of persons in specific age and sex labor force groups which are unemployed. Source: World Bank based on Statistical Service, Continuous Household Sample Survey data.  - 62 - Table 4 : BARBADOS - PERCENTAGE CHANGE IN THE NUMBER OF PERSONS EMPLOYED BY SEX AND TIME PERIOD Period Both Sexes Men Women Jan-March 1981 to Oct-Dec 1981 -2.7 2.2 -8.6 Jan-March 1980 to Oct-Dec 1980 3.7 4.2 3.0 Oct-Dec 1980 to Oct-Dec 1981 0.7 3.5 -2.7 Source: World Bank based on Statistical Service, Continuous Household Sample Survey data.  - 63 - Table 5 : BARBADOS - UNEMPLOYMENT RATES BY SEX AND TIME PERIOD (%) Both Sexes Men Women Oct-Dec 1981 11.1 9.0 13.7 July-Sept 1981 11.9 6.5 18.5 April-June 1981 10.0 7.4 13.2 Jan-March 1981 10.4 6.4 14.7 (Mean Rate 1981) (10.9) (7.3) (15.0) Oct-Dec 1980 11.4 8.6 14.9 July-Sept 1980 n.a. n.a. n.a. May 1980a/ 9.2 6.9 12.2 Jan-March 1980 13.7 9.6 18.5 (Mean Rate 1980) (11.4) (8.3) (15.2) Oct-Dec 1979 11.4 7.4 16.2 July-Sept 1979 15.1 9.9 21.3 a/ Derived from a sample of the 1980 Population Census. Source: Statistical Service, Continuous Household Sample Survey.  - 64 - Table 6: BARBADOS - UNEMPLOYMENT RATES BY INDUSTRIAL DIVISION IN MAY 1981 (%) Industrial Division Unemployment Rate a/ Agriculture 3 Quarrying 0 Manufacturing 15 Electricity, Gas, Water 5 Construction 8 Commerce 8 Transportation and Communications 4 Financial Institutions 6 Services (Government and Other) 8 a/ Excludes first time job seekers. Source: World Bank based on Statistical Service, Continuous Household Sample Survey data.  - 65 - Table 7: BARBADOS - UNEMPLOYMENT RATES BY OCCUPATION IN MAY 1981 (%) Occupation Unemployment Rate a! Professional, Technical and Related Workers 2 Administrative and Management Personnel 0 Clerical and Related Workers 5 Sales Workers 6 Service Workers 12 Agricultural Workers, Fishermen and Related 3 Production Process Workers, Quarry Workers, etc. 18 Skilled Craftsmen, (Shoemakers, Electrical-fitters, Plumbers) 9 Workers in Transport, Carpenters, Printers and others 9 a/ Excludes first time job seekers. Source: World Bank based on Statistical Service, Continuous Household Sample Survey data.  Table 8: BARBADOS - GENERAL RETAIL PRICE INDEX AND WAGE INDICES FOR SPECIFIC OCCUPATIONS IN AGRICULTURE AND INDUSTRY World Bank Agriculture b/ Industry Barbados International Green Cane Cutters General Workers Printers Group b/ Printing and Publishing b/ Price Index a/ Price Index (in crop) (sugar; male; Journeyman (Linotype) Foreman (Printing & Year (December 1970=100) (1977-100) out-of-crop) Publishing) 1970 100 100 100 100 100 100 1971 110 108 102 100 100 106 1972 122 119 122 129 141 106 1973 153 142 128 129 141 137 1974 209 176 186 179 141 137 1975 235 202 278 250 202 144 1976 244 205 278 250 214 193 1977 268 223 278 250 253 207 1978 299 263 319 300 260 236 1979 349 302 319 300 332 243 1980 406 339 a/ Refers to December of each of the respective years. b/ Coverage of collective agreement. Source: World Bank based on Labour Ministry and Statistical Service data for all columns except the International Price Index.  - 67 - Table 9: BARBADOS - GENERAL RETAIL PRICE INDEX AND INDICES OF AVERGE WAGES IN MANUFACTURING AND IN CONSTRUCTION Retail Index of Wages Retail Index of Wages Price Indexa/ in Manufacturing Price Index in Construction (1974=100) (1974=100) (1976=100) (1976=100) 1974 100 100 1975 112 101 1976 117 111 100 100 1977 128 127 109 131 1978 143 n.a. 122 n.a. 1979 167 152 143 171 a/ Refers to December of each of the respective years. Source: World Bank based on Statistical Service, Industrial Establishment data.  - 68 - Table 10: BARBADOS - GENERAL RETAIL PRICE INDEX AND INDICES OF BASIC WAGES IN THE HOTEL INDUSTRY FOR SPECIFIC OCCUPATIONS Retail Index of Wages in the Hotel Industry b/ Price Index a/ Maid General Cook (1974=100) (1976=100) (1976=100) 1976 100 100 100 1977 110 108 107 1978 123 132 130 1979 143 136 134 1980 166 185 175 a/ Refers to December of each of the respective years. _/ Luxury class hotels. Source: World Bank based on Statistical Service, Industrial Establishment data.  - 69 - ANNEX II MAJOR RECENT FISCAL MEASURES 1981/82 Budget Measures introduced in April 1981 1. Increase of 50% on personal allowances for income tax purposes. 2. Increase of 20% on tax credit grants to those on low incomes. 3. Income tax deductions of up to BDS$2,000 allowed for new shares purchased in public companies. 4. Tax exemptions for interest from deposits with credit unions extended. 5. Abolition of estate duty on inherited property. 6. Abolition of employment levy (as scheduled). 7. Introduction of land tax rebates of BDS$150 per hectare to small holders with less than three quarters of a hectare who produce evidence to Commissioner of Valuation that the gross value of crops or livestock produced exceed BDS$1,000 per hectare in the preceding financial year. 8. Increase in property transfer tax, payable by vendors who are citizens and permanent residents, from 2-1/2% to 3%; and that payable by other persons from 2-1/2% to 8%. Land purchase tax increased from 15% to 17%. 9. Increase in court, company, and insurance fees. 10. Training fund contribution introduced at 1/4 of 1% of wage bill. 11. Increases in old age noncontributory pensions from BDS$20 to BDS$28 per week and in contributory pensions from BDS$25 to BDS$33 per week. 12. Pensions to retired sugarcane workers increased from BDS$5 to BDS$7.5 per week and funeral grants increased from BDS$100 to BDS$200. 13. Education subject grants increased from BDS$1,000 to BDS$2,500 to approved secondary schools. Value of bursaries increased from BDS$75 to BDS$100. 14. Introduction of unemployment scheme at 2% of insurable earnings to be paid equally by employers and employees. To be handled by the National Insurance Fund. 15. Increased subsidies on tillage operations for holdings of less than five hectares.  - 70 - Measures introduced in July 1981 16. Revised land valuations for tax purposes. 17. Gasoline tax was increased by BDS$0.03 per liter and diesel (for trucks) tax was increased by BDS$0.05 per liter. Measures introduced in September 1981 18. Income tax exemptions granted on mortgage interest payments. 19. Introduction of a transport levy at 1.25% of insurable earnings to be paid 0.25% by employers and 1% by employees. 20. Health service levy for the health service scheme. Contributions are to be shared equally at 1/2 of 1% by each employers and employees. 21. Reduction of automobile import quota from BDS$25 million in 1981 a year to BDS$15 million in 1982. 22. Export promotion license to finance expenses of the export promotion corporation. 23. Increase in minibus and taxi registration fees. 24. Increase in standard bus fares from BDS$0.45 to BDS$0.60. 1982/83 Budget 1. Changes in Income Tax Allowances for rent as follows: a) An allowance of up to 20% for rent paid for a dwelling-house or $1,800, whichever is the lesser in an income year; b) A limit of $14,400 per annum as the maximum amount to be assessed as the value of the benefit enjoyed by an employee who occupies a residence rent-free whether owned or rented by his employer; c) Where the house is unfurnished the taxable value of the benefit will be computed at 8% of the improved value of the property and at 10% where it is furnished. The above changes come into effect from income year 1982 and the revenue loss is estimated at $1.6 million. 2. Increased Child Allowances for income year 1982. The revenue loss is estimated at $400,000. 3. Vendors will be required to show the amount of commission paid to Real Estate Agents. 4. Imposition of temporary surcharge of 3% on corporate profits. Additonal revenue of $2.0 million is estimated.  - 71 - 5. Tax on insurance premiums remitted to foreign companies which are not registered under the Insurance Act. Additional revenue of $500,000 is anticipated. 6. Increase in non-contributory Old Age Pensions to $33 from April 3, 1982 and to $40 per week from April 1984. Also, the contributory minimum National Insurance Pension will rise to $40 per week from April 3, 1982 and to $50 in 1984. 7. National Insurance Contributions increased 4% to be shared equally be employer and employee to cover non-contributory pensions. 8. Gaming and Betting tax on Instant Money Cards (tickets) to be increased from 10 cents per ticket to $30 cents per ticket and the Consumption Tax from 20% to 30% from April 1, 1982. Additional revenue of $200,000 estimated. 9. Gaming and Betting tax on Barbados Turf Club tickets will be reduced from 10 cents per ticket to 5 cents per ticket. Revenue loss of $100,000 anticipated. 10. Consumption taxes on liquor and cigarettes increased. Also, Excise Duty and distillers' license on rum increased by 65 cents per liter and 4 cents per liter respectively. Additional revenue of $5.5 million is estimated. Changes in Consumption taxes on cosmetics, miscellaneous plastics and other items. Additional revenue of $1.8 million is expected. 11. Tax on gasolene increased by 3 cents per liter and that on diesel (48/52) by 6 cents per liter. Additional revenue of $2.6 million is estimated. 12. Consumption taxes on motor vehicles (excluding lorries) increased to 50% and 70% from April 1, 1982. A rebate of 20% will be granted on vehicles imported by garages. Additional revenue of $1.6 million is anticipated. 13. Price controls on motor vehicles will remain in force for 12 months after date of importation. Also, in order to obtain an import licence for direct importation of a motor vehicle, the full amount of duty and consumption tax will have to be deposited with the Comptroller of Customs. 14. Licence fees for motor vehicles increased from April 1, 1982. A new tax regime has been introduced to deal with trailers and articulated units. Additional revenue of $2.4 million expected. 15. Parking fees increased from April 1, 1982. Additional revenue of $50,000 expected. 16. Driving licences and other fees now collected by the Police Department increased with effect from April 1, 1982. Additional revenue of $1.2 million estimated.  -72- 17. Liquor licences increased from April 1, 1982. Additional revenue of $400,000 estimated. 18. Notarial and other services provided by the Registrar increased with effect from July 1, 1982. Additional revenue of $750,000 expected this financial year. 19. Increased Stamp Duties from April 1, 1982. Additional revenue of $8.5 million is expected. 20. Increased fees for registration of professionals with effect form 1983. Additional revenue of $400,000 is expected. 21. Increased fees for banking licences and the introduction of a tax on average assets for the previous year. Additional revenue of $2.1 million expected in a full year. The tax on assets takes effect from July, 1982. 22. Increased Wireless Telegraphy fees. Additional revenue of $50,000 expected in a financial year. 23. Increased fees at the Queen Elizabeth Hospital and Psychiatric Hospital from April 1, 1982. Additional revenue of $200,000 is estimated. 24. Increased water rates from April 1, 1982, and in successive years, and the introduction of charges for connection to the sewage system. 25. Incentives for Agriculture. Cash incentives will be $600,000. 26. Annual allowance for industrial buildings at the rate of 40% of the cost and for the remaining 60% a per annum allowance at the rate of 4%. 27. New source of funds for Housing being negotiated.  - 73 - ANNEX III PUBLIC SECTOR INVESTMENT AND FINANCING Introduction 1. The Barbados Development Plan, 1979-83 outlined a four-year public investment program totalling some BDS$620 million. In this program, the directly productive sectors and economic infrastructure accounted for about 52% of capital expenditures; housing and social services for about 38%, and the remainder for public buildings and other works. As time has passed since the publication of the plan, new projects have emerged, and others have dropped out, although the overall balance of the program has remained similar. 2. During the course of 1982-83, the Government will be preparing a new Development Plan. For this reason, only limited information on likely investments for the coming four years can be given. Thus, at present, nearly 40% of externally financed, and most locally financed projects for the coming period remain unidentified. In Table 5.7 of the statistical appendix, only the four years to 1985-86 are covered, since very few projects beyond that time are formulated, and the total size of the five-year program, as estimated by the mission, is to be regarded as indicative. It is based on macro-economic considerations, such as available public sector savings, rather than on an identified set of viable projects or programs. In the two sections that follow, therefore, we only provide a description of progress during 1981-82, and highlights of the program for later years, together with an indicative financing plan. Capital Expenditure 1981-82 3. Central Government capital expenditure in FY1981-82 is estimated at BDS$175 million (9.4% of GDP) which is an increase of 26% above the 1980-81 level. Of this amount, BDS$33.5 million was transferred to public enterprises for their capital programs, and BDS$10 million was in the form of equity contributions to other enterprises (notably the cement plant), leaving BDS$94 million in direct capital formation (see Table 5.3). A breakdown of the total expenditure by Ministry is given below (transfers to individual enterprises are attributed to parent Ministries):  - 74 - Capital Expenditure 1981-82 BDS$ million Prime Minister's Office 0.2 Defence and Security 10.0 Ministry of Finance and Planning (including equity) 23.6 Ministry of Agriculture, Food and Consumer Affairs 10.4 Ministry of the Attorney General 1.6 Ministry of Trade and Industry 5.8 Civil Aviation and Tourism 19.5 Ministry of Transport and Works (incl. Transport Board, Water) 23.3 Ministry of Education 21.2 Ministry of Health (including sewerage) 29.2 Ministry of Housing and Lands 11.0 Ministry of Labour and Community Services 1.0 Ministry of Information and Culture (including Carifesta) 17.1 Ministry of Foreign Affairs 1.1 175.0 4. The final out-turn was some BDS$25 million below the original budget, largely because of a freeze on new projects introduced in late 1981, together with a slow-down on other projects. This was caused primarily by the precarious overall financial position of Government. The increase in capital spending over 1980-81 was not so much a real increase in activity, but was more the result of cost overruns on two major projects (Heywoods Holiday Village and Bridgetown Sewerage) together with large once-and-for-all expenditure on Carifesta. These three projects alone accounted for 25% of expenditures in 1981-82, with BDS$15.5 million being spent on the Heywoods project, BDS$15 million on Bridgetown Sewerage, and BDS$12.5 million on Carifesta. 5. In other sectors progress was mixed. In agriculture, there are three major externally-financed projects. The Spring Hall Land Lease Project (CDB) made good progress and should be completed on time. The Scotland District Project (IDB) made slower progress, and will only really get under way this year. Similarly, the Rural Development Project (IDB) underspent due to its slow start, but is expected to spend some BDS$5 million in 1982-83. In fisheries, the Oistins Fisheries Terminal Project (EDF) was slowed down for financial reasons, and will probably take two more years to complete. 6. Education projects continue to receive priority, with some BDS$21 million in expenditure in 1981-82, and a further BDS$20 million programmed for 1982-83. The S.J. Prescod Polylechnic Project (IDB) accounted for BDS$6.5 million and is now virtually complete. The World Bank Education Project accounted for BDS$8.6 million in 1981-82 and is budgeted at BDS$ll million in 1982-83. This is primarily expansion of primary and secondary schools. In the health sector, the Polyclinic Project has proceeded satisfactorily, and is disbursing some BDS$3 million a year. The  - 75 - Bridgetown Sewerage Project (IDB) is now virtually complete, and work is expected to start soon on the preparation of a feasibility study for the South and West Coast Sewerage project. The National Health Service and Drug Plan, which cost BDS$5.5 million in 1981-82 has been cut back to only BDS$0.6 million in 1982-83. 7. Finally, in the area of infrastructure, BDS$5 million was spent on the Spring Garden road project, with a further BDS$1O million to be spent over the next two years to complete the project. BDS$4 million was spent on new bus frames, but future expenditure in this area will be covered by the Transport Levy. BDS$3.7 million was spent on the CIDA financed Water Development project, with a further BDS$18 million (mostly local) to be spent over the next three years to complete the project. Public Sector Investment 1982-86 8. Total public sector investment over the next five years is provisionally estimated at BDS$1,070 million, of which BDS$862 million would be Central Government, and BDS$208 million the rest of the public sector. No sectoral breakdown of the total program can be given at this stage, as this remains to be determined within the context of the Barbados Development Plan 1983-86 to be prepared this year. In this section, therefore, we can only highlight the major known projects for which external financing has either been obtained or is required. 9. Of the total program, some BDS$490 millionl/ is projected as projects for which external financing would be required. Of this, about BDS$165 million is for ongoing projects, and BDS$130 million for identified projects for which external financing is sought, leaving BDS$195 million in unidentified projects. The sectoral breakdown of the identified projects (including technical assistance) is as follows: BDS$ millioh Ongoing New Agriculture 30.7 33.9 Industry 40.1 1.4 Tourism 40.1 - Energy - 9.0 Roads 9.7 52.3 Water 17.9 - Port - 8.4 Education 11.9 6.5 Housing - 12.0 Health 10.9 4.5 Others 3.6 1.9 TOTAL 164.9 129.9 1/ This excludes projects outside the public sector, for which Government guarantees are required, such as the Power project, and Cement Plant.  - 76 - 10. Therefore 75% of identified externally financed projects are for the productive sectors and economic infrastructure. Most of the ongoing projects have already been noted above. The only two needing further mention are the Heywoods Holiday Village Project, on which a further BDS$40 million is to be spent over the next two years (in all, a cost overrun of nearly 100%), and the Industrial Development and Export Promotion project, on which BDS$38 million is to be spent over the four year period, primarily for factory space, industrial credits, and export incentives. 11. Identified projects for which external financing is being sought are highly concentrated in two sectors. As noted in chapter two, the fisheries sector has been neglected in the past. Three projects are included in this sector at a total cost of BDS$66 million. Two projects would provide bathing facilities; a main harbor in Bridgetown, and a smaller terminal at Speightstown. An additional BDS$11.6 million is sought for new vessels, equipment and training. IDB has been approached to assist with these projects. BDS$91 million is allocated to roads projects, of which BDS$40 million would be for the East Coast road, and a further BDS$22 million for coastal protection on the south and west coasts, where severe erosion problems are being encountered. There is also BDS$24 million being sought for construction of a by-pass to connect the airport to a number of industrial estates. 12. A major effort would also be made on housing, with a BDS$12 million program for low cost housing, primarily to be located close to industrial estates, and a BDS$60 million Guaranteed Housing Program, which would essentially be the provision of mortgages to low-income facilities, utilizing USAID guaranteed funds. 13. Three studies should also be mentioned which would be likely to lead to major projects. In energy, feasibility studies are to be mounted into the viability of wind power and wave power. These studies will require several years of data gathering. Also a major study is to be conducted into the feasibility of establishing sewerage facilities for the south and west coasts, with IDB assistance. This is likely to lead to one of the most important projects for later inclusion in the program, and given the difficult terrain, it will be a very expensive project. However, with the increasing density of tourism development in this area, and with industrial estates close by, it is becoming increasingly important, for any pollution of the sea in this region would have very serious consequences for the tourism industry. 14. Although strictly outside the public sector, the cement plant should also be mentioned, as it is the single largest project being implemented in Barbados. It is a joint venture between the Governments of Barbados and Trinidad and Tobago, and is estimated to cost BDS$186 million. Production is expected to be 300,000 tons/year of cement in 1985, of which over half would be exported to the rest of the Caribbean. Only the equity investment is included as public investment, as the company is regarded as private sector, but all loans and suppliers' credits are guaranteed by Government.  - 77 - Financing 15. At this stage, only a very tentative financing plan can be drawn up, given the uncertainties over the size of the program. However, the size of the program as estimated by the mission is based to a large extent on projections of public sector savings and available domestic financing, together with an assumption of available foreign financing at recent levels. 16. Given Barbados' level of income, the level of external resources available on very concessional terms is limited, and with a rising level of debt, it is becoming increasingly important to finance as large a proportion as possible of the investment program out of public sector savings. For this reason, the overall public sector deficit from 1983-84 onwards has been projected at only 2.5% of GDP. This is taken as a major target of public finance policy, and the level of capital spending has been projected accordingly. Thus, public sector savings are projected to rise from the low level of 2% of GDP in 1981-82 to 3.6% in 1982-83 and to return to the average level of the late 1970s of 5% thereafter, as discussed in Chapter IV, and summarized below: Public Sector Savings and Investments (Percentage of GDP) 82/83 83/84 84/85 85/86 86/87 Public Sector Savings 3.6 5.4 5.0 5.0 5.0 Central Government a/ 1.2 2.8 2.6 2.7 2.8 National Insurance/Transport Fund 2.0 2.1 1.9 1.8 1.7 Rest of Public Sectora! 0.4 0.5 0.5 0.5 0.5 Public Sector Investment b/ 9.4 7.9 7.5 7.5 7.5 Central Government 6.9 6.5 6.2 6.2 6.1 Rest of Public Sector 2.5 1.4 1.3 1.3 1.4 Overall Deficit 5.8 2.5 2.5 2.5 2.5 a/ Central Government transfers to the rest of the public sector are included with the latter. b/ Including net lending. The above demonstrates the expected improvement of the financial performance of the rest of the public sector in 1983-84, and the gradual increase in spending of the National Insurance and Transport Funds. The projections also assume major restraint both in current expenditure and in capital spending, particulartly in the early years of the period.  - 78 - 17. The projections for overall financing of the program are shown in statistical appendix table 5.8. These were discussed in chapter four in relation to CDF-type financing needs, and show a major gap in 1982-83 and only moderate requirements thereafter. These are summarized below: BDS$ million 82/83 83/84 84/85 85/86 86787 Public Sector Investment 194.2 181.4 200.0 230.0 265.0 Public Sector Savings 74.6 124.1 133.5 153.6 177.0 Net External Financing 95.0 72.3 41.4 27.4 28.2 Project related 53.2 52.4 59.5 68.4 78.7 CDF-type 63.5 54.9 51.0 8.9 3.7 Other c/ - _ _ _ _ Amortization -21.7 -35.0 -54.1 -49.9 -54.2 Net Domestic Borrowing 24.6 -15.0 25.1 49.0 59.8 Total Financing 194.2 181.4 200.0 230.0 265.0  - 79 - BARBADOS GOVERNMENT'S PROJECT LIST 1. This report contains a list of major ongoing projects, a list of projects for which external finance will be sought during the period 1982-86, and individual project descriptions. The two lists contain the name of the project, the expected lender(s), if any, the total cost, the external financing required, and the status of readiness of the project. The individual descriptions contain additional information which would be of interest to potential donors or lenders, including technical assistance requirements. 2. Data for these project lists, which will be presented at the Caribbean Group for Cooperation in Economic Development scheduled for June 14-18, 1982, were provided by the Barbados Government. The project list reflects the development strategy of the Government of Barbados, as outlined in the Economic Memoranda dated May 30, 1980, and June 10, 1981, and in the present one.  Table 1: BARBADOS - MAJOR PROJECTS WITH FINANCING (US$ millions) Interest Grace Total External Financing Rate Amortization Period Counterpart Financing Projects Cost Amount Source (%) (Years) (Years)Amount (%) Agriculture 19.0 12.5 6.5 Agronomic Research Laboratory 2.5 1.5 EDF 1 40 10 1.0 40 Distin Fisheries Development 2.8 1.5 EDF Grant - - 1.3 46 Scotland District Soil Conservation Project 5.8 4.5 IDB 9