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Students' Centre
Barbados has a small open economy (SOE). ‘Small’ refers to the county’s inability to influence the price it pays or charges when doing trade with the rest of the world. In other words, Barbados is a ‘price-taker’ for both exports and imports.
'Small' also refers to the size of the economy in terms of the relatively limited value of the total output and production of the country when compared to other countries in the world. 'Open' implies the extent to which a country is dependent on international trade in goods and services for the generation of foreign exchange. This is especially important since it is also highly dependent on imports for all aspects of its function and for the survival of the people of the country. The country has a very limited resource base and this contributes significantly to its high degree of openness.
WHAT ARE THE ECONOMIC SECTORS?
The economy is usually looked at in terms of sectors. These are the real, financial/monetary, public or fiscal, external, regional and international sectors. The Central Bank monitors these sectors and publishes information on them quarterly and annually.
Real Sector
The real sector refers to those areas of activity that result in the production of traded (foreign-exchange earning) and non-traded (foreign-exchange using) goods and services. Construction, wholesale and retail trade and the production of electricity and water are examples of ‘foreign-exchange using’ sectors, whilst tourism, sugar production and International Business Services are foreign-exchange earning sectors. The total value of output produced locally in this sector is commonly referred to as the country’s Gross Domestic Product (GDP). The movement in the prices of goods and services, along with the fluctuations in the level of unemployment are also aspects of the real sector activity, which are monitored on a regular basis by the economists of the Central Bank.
Financial / Monetary Sector
The financial/monetary sector includes all of the activities of commercial banks and non-bank financial institutions, such as trust companies, insurance companies and finance companies. These financial intermediaries are regulated by the Central Bank in order to ensure that they operate efficiently. Credit unions are also part of financial sector activity, but are not currently regulated by the Central Bank. The financial sector also includes Government’s activities in the financing of the fiscal deficit which can be from domestic sources or foreign sources. In order to have a stable financial sector close attention is paid to the fluctuations in the overall levels of deposits, credit and liquidity (that is the amount of money) in the banking system, and the level of interest rates.
Public Sector
The public sector’s focus is on tax administration, i.e. the imposition and collection of taxes, and the provision of goods and services to the citizens of a country. Government’s revenue comes from tax collections or from borrowing. Government’s then uses these funds to provide hospitals, schools, parks, roads etc; to pay salaries to public workers and to make interest payments to its creditors. Expenditures on Government’s capital works programmes (for infrastructural development or maintenance) are also closely monitored because these expenditures use valuable foreign exchange. In many instances, expenditure is greater than revenue collected and this gives rise to what is known as a fiscal deficit (where revenue is more than expenditure, we realize a fiscal surplus). Running a deficit becomes dangerous when it becomes too large in relation to the level of productivity within the economy. In Barbados, a deficit of 2% or less of GDP is considered reasonable and manageable.
External Sector
The external sector records the activities of the Balance of Payments (BOP) of Barbados. The BOP can be described as an orderly record of all transactions between the residents of the local economy and the residents of the rest of the world. The BOP can be broken down into;
- The Current Account. This captures the transactions of exports and imports of goods and services (the “Visible trade balance”) , the arrival of income or the transfer of money in the form of gifts or grants.
- The Capital and Financial Account. This records the movements in Barbados’ foreign assets such as deposits overseas in Banks and foreign liabilities, eg. in interest payments on debt.
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Regional Sector
The regional sector includes the economies of regional countries, especially those that are members of CARICOM, of which Barbados is also a member. Regional trade is important to Barbados and the integration of economies is important to realize the Single Market Economy (SME) for the benefit of the region as a whole. As a result, careful monitoring of the performance (growth trends) of regional economies is essential. It is hoped that someday CARICOM member-states will share a common currency and the possible benefits that will accrue. However, unless member-countries can consistently achieve certain convergence criteria, optimism surrounding the success of such a venture will be very little. Convergence criteria refer to agreed standards of performance for each economy within the proposed currency area. This should be reflected in the leading economic indicators.
International Sector
The international sector, like the regional sector, has grown in importance in recent times, especially as globalization and trade liberalization become more important. It consists of all the extra-regional economies, particularly the major world economies such as the USA, Japan, the countries of the European Union (EU), Britain, Canada, China and Mexico and Brazil in Latin America. Economic events in any one of these countries and even smaller countries, as the financial crisis in South-East Asian countries showed, can impact on Barbados’ economy. Furthermore, economic events in the United Kingdom and the USA - Barbados’ major markets for tourists - do affect the number of arrivals from these countries, which in turn affects the income earned from tourism. As countries of the world form regional economic blocs to facilitate trade as well as to increase their ability to influence the world economy, the monitoring of trading arrangements, in which CARICOM-member states are directly involved, is of growing importance. Thus, CARICOM’s relationship with the World Trade Organization (WTO) and the EU (via the EU-ACP arrangement), along with current preparatory negotiations leading up to the formation of the Free Trade Area of the Americas (FTAA) in the year 2005, is closely observed. ACP refers to the economic grouping consisting of those countries that were former colonies of Western European countries and are situated in Africa, the Caribbean and the Pacific Ocean.
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WHO ARE THE PARTICIPANTS IN THE ECONOMY?
Among the actors or agents that participate in the activities of an economy are:
- Consumers (individuals, households, firms and government)
- Producers (firms, government and individuals)
- Commercial intermediaries (wholesalers & retailers)
- Financial intermediaries (commercial banks, trust companies, finance companies, insurance companies, credit unions, etc.)
- Government, and
- The Central Bank.
Consumers / Producers / Commercial Intermediaries
Consumers purchase goods and services, receive salaries, wages or other payments and gain satisfaction from consuming.
Producers supply goods and services as well as intellectual property, generally, with a view of making a profit. They may also hire workers, i.e. buy their time and services, pay salaries, wages or other payments.
Wholesalers purchase goods from foreign and local producers and sell them to retailers. Retailers, who may also be in the wholesale business, sell their goods to consumers. Wholesalers and retailers, in most cases, store goods until consumers demand them. Wholesalers and retailers earn revenue by placing a percentage mark-up on their goods. They may also employ staff or independent salespersons to sell their goods for them on a commission basis.
Financial Intermediaries (Banks & other lending and saving institutions)
Financial Intermediaries are banks and other lending and saving deposit institutions. They are essential as they assist businesses to manage their personal financial transactions. They receive deposits from individuals, firms and/or Government and lend these deposits to borrowers, which may be individuals, firms and/or Government. They also pay interest on deposits and charge interest on loans. Since money transactions are the preoccupation of financial intermediaries, it is important to know what money is. Money, in its most ‘liquid’ form, consists of cash and demand deposits, and is a medium of exchange (replacing the barter system - exchange of goods and services only), a store of value (watched over by the Central Bank) and is the most ‘liquid’ of all assets, the fastest medium of exchange. The history of currency and coins in Barbados.
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Government
Government carries the overall responsibility for the country and management of the economy. It is responsible for the creation of a suitable economic, social and political environment that fosters sustainable development of the people, business and the economy. To accomplish this, it is responsible for drafting and amending (where necessary) laws. As the representative and servant of the people, Government also manages the country’s relationship with other countries so as to obtain benefits for the nation, where possible. It also provides goods and services, such as roads, schools, the hospital, clean air, fresh water, security and freedom, education and health services, etc. to all other economic agents. In order to do so, Government needs to generate and spend revenue. Its main source of revenue comes from devising and administering taxes, some direct (on personal income, business profits and property) and others indirect (on transactions involving the transfer of goods, property and services).
Central Bank
The Central Bank assists the Government in maintaining confidence in the economy. In particular, it looks after the health of the financial system and carries the unique responsibility of defending the value of the Barbados dollar. To achieve these objectives, it:
- develops and administers monetary policy,
- is a banker to Government (making loans, usually short-term, to Government),
- is a banker to commercial banks (acting as the lender of last resort),
- issues the domestic currency and redeems it,
- supervises the banking system, which includes registered offshore institutions,
- oversees and exercises limited control over the movement of foreign exchange (i.e. imposes exchange control restrictions), and
- advises the Government on fiscal policy.
The responsibility within monetary policy includes:
- maintaining stable prices (keeping inflation low),
- setting the bank rate (Central Bank’s discount rate - price of loans - to commercial banks, on which commercial banks base their interest rate charge on customer loans),
- setting the minimum deposit rate (on which commercial banks base their interest rate paid on customer deposits).
More About the Central Bank of Barbados
Now that we have looked at the Economy and how it is structured let us read about the latest Economic Press Release
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