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Caribbean Islands-Macroeconomic Overview





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Caribbean Islands Index

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

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

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

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

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

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

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

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

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

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

Data as of November 1987



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