ILO NOTES

FACING THE CRISIS IN EUROPE: REFLECTIONS ON THE CASE OF

I. CRISIS IN EUROPE AND ITS EFFECTS ON BARBADOS Despite a series of policy measures which were adopted, the European economy remained plagued by fi scal and debt problems which posed a major setback to the global economy in general, and small developing countries in particular. In the USA, there is optimism as a result of positive indicators for housing and labour. But the United States still has some downside risks, primarily as a result of fi scal adjustment uncertainties. The economic challenges in Europe and the USA have affected many economies in Latin America and the Caribbean. The Barbados economy has been hit hard by the recent fi scal crisis and this can be explained by the fact that this economy is heavily dependent on tourist arrivals from Europe, the USA and Canada. While the country enjoys one of the highest per capita income in the region, and three-quarts of GDP and 80% of exports come from the services sector (mainly those associated with tourism, offshore fi nance and information services), there is currently a very high public debt to GDP ratio which, if not properly managed, could widen further. As can be seen from table 1, the performance of the Barbados economy was fl at in 2012, resulting from declines in tourism, other related services and manufacturing. Tourism, the mainstay of the economy, continued to perform below par in 2012. Long-stay arrivals were down by 5%, while cruise passenger arrivals declined by 2.1% in the fi rst three quarters, refl ecting the diffi cult economic conditions in the main source markets of Europe and the United States. This was compounded by reduced airlift to the Caribbean, when regional airline RedJet ceased operations. Manufacturing output declined by a further 4% while agriculture also contracted notwithstanding a 4.4% increase in sugar production. Output in the non-traded sectors grew by a small 1% because of fi scal spending limits and the reduction in the traded sectors. While several tourism related projects remained on-going, foreign investment in the real estate sector declined by 16%.

TABLE 1: Latin America and Barbados: GDP trends and forecasts, 2009-2013 (annual GDP percentage variations) - Institutions 2009 2010 2011 2012 2013 Latin America and the Caribbean -1.5 6.1 4.6 - International Monetary Fund (IMF) 3.0 3.4 - Economic Commission for Latin America and the Caribbean (ECLAC) 3.0 3.5 The Caribbean - International Monetary Fund (IMF) 2.4 2.2 - Economic Commission for Latin America and the Caribbean (ECLAC) -3.1 -0.1 0.4 0.9 2.0 Barbados - of Barbados -4.1 0.3 0.8 0.0 0.7 - International Monetary Fund (IMF) -4.1 0.2 0.6 0.0 0.5 - Economic Commission for Latin America and the Caribbean (ECLAC) -3.7 0.2 0.4 0.0 0.7

Copyright ©International Labour Organization, 2013 Source: IMF (2013) World Economic Outlook. Hopes, realities, risks (Washington D.C., IMF) ECLAC (2013) Balance económico actualizado de América Latina y el Caribe (Santiago, ECLAC), April Central Bank of Barbados (2012) Economic Press Release (Barbados), December

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On current trends, tourism and the international business sectors defer for one year their contribution to the National Insurance are not expected to contribute to GDP in 2013, and not much Scheme contingent on the maintenance of employment levels. contribution is expected to come from the rest of the economy. The government also increased spending on capital projects. As a result, GDP growth is expected to remain practically stable These included the construction of an offi ce complex, road works (0.5 to 0.7%). Efforts are needed to encourage investments and coastal and infrastructure program, as well as a housing and better fi nancing for new business ventures and to reduce programme. Fiscal policy at the time included tax exemptions government bureaucracy. The fi scal consolidation strategy is for essential consumption items, increased capital transfers and expected to be brought back on track in the near future. The subsidies for educational institutions and public infrastructure fi scal defi cit for 2013 is estimated at 5.3% of GDP. agencies. Additionally, temporary subsidies for basic food The poor economic growth trajectory led to a slight decline in items, like fl our were introduced and there was expansion of infl ation which fell by 2.3 percentage points from the end of 2011 welfare grants and pensions and tax exemptions for low income to 7.8% in July 2012, refl ecting the moderation in international workers. These measures led to a worsening of the fi scal defi cit food and fuel prices. However, Barbados in general has a higher by 2010 and worsened also the debt –to-GDP ratio. infl ation rate than those in neighbouring countries, refl ecting To stem the rising debt, the authorities developed a Medium higher mark-up and wage productivity gap in the domestic Term Fiscal Strategy in early 2010 to reduce the fi scal defi cit, economy. The unemployment situation deteriorated however, balance the budget over the medium term, reduce the debt- as the average unemployment rate for 2012 was approximately to-GDP ratio to 90.5% by 2014/15 while ensuring moderate 11.6%, compared to 11.3% in 2011 and this refl ected job losses growth. The approach proposed a number of revenue and in accommodation, airline and food services subsectors as expenditure measures to be implemented during the medium a result of the activity downturn in the tourism sector. The term. Based on this approach, the fi scal defi cit to GDP ratio is construction sector also was affected by job losses as a result projected to decline to 2.1% by 2013/14 and then to return to of a slower performing economy. a balanced position by 2014/15. Notwithstanding all the attempts at fi scal consolidation to return FIGURE 1 the economy to a growth trajectory, the diffi cult economic Evolution of unemployment rate, 2006-2012 conditions continue to affect Barbados and growth remains

14 anaemic, despite the rebound in tourism. In 2012, real GDP remained fl at. While tourist arrival rebounded, real tourism 12 expenditure declined by about 15% as visitors cut their length of stay and looked for value, limiting the impact of higher headcount, 10 notably on reserve accumulation. And the prolonged adverse 8 economic environment has negatively affected the labour market.

6 The unemployment rate has almost doubled since 2007 from Percentage 6.7% to 11.6% in December 2012. The average unemployment 4 rate in tourism, construction and wholesale and retail trade 2 sectors increased from 9.8% in June 2007 to 16% by the corresponding period in 2011. The fi scal position continues 0 2006 2007 2008 2009 2010 2011 2012 a to be cause for concern, as fi scal defi cit is estimated to be

Year around 6.4% of GDP. However, the banks maintained capital positions well above the statutory requirements and remain Source: ECLAC and Central Bank of Barbados highly profi table, with adequate levels of liquidity. However, a/ Estimated there has been deterioration in credit quality and the servicing of loans on time. II. DIFFERENCES BETWEEN THE CURRENT Real economic growth for Barbados is forecasted at 0.7% in 2013 by the Barbados Central Bank, but the IMF forecasts SITUATION AND 2008 growth of 0.5%. These projections are based on improvements Barbados has been seriously affected by the global fi nancial in consumer expenditure in source markets. In addition, private crisis which has in turn led to a decline in tourism and offshore capital infl ows of $ 600 million are anticipated for activity in activity with broader spill-over effects to the rest of the economy. the tourism and construction sectors. No signifi cant gains in The government relaxed fi scal policy during the recession and employment are expected and domestic infl ation is projected focussed its spending on helping to support key industries, as at 5% for 2013. well as to protect jobs and reduce inequality. But economic activity is estimated to have declined by a cumulative 5% between 2008 and 2010 with the weakness severely hurting III. POSSIBLE AREAS OF INTERVENTION the labour market. The government responded to the crisis by Given the uncertainty as mentioned above in Barbados, it implementing a number of countercyclical measures. A Tourism is useful to review labour market policy instruments in the Investment Relief Fund was set up in 2009 to encourage the country to see if they can respond in a timely manner if and renovation of tourism related facilities and an employment when the economic situation worsens. Some instruments don’t stabilization scheme was introduced to allow employees to respond automatically, but require a long time to implement.

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It is necessary to understand these policies to ensure their taken over in recent years. Females have made much higher effectiveness. numbers of claims than males. In 2011, the , in an attempt to improve the UI, approved the a) Improving protection against unemployment temporary extension of unemployment benefi ts, moving it from Unemployment insurance (UI) in its basic form provides income 26 weeks to 40 weeks which was paid at an adjusted rate and support for recently laid-off workers as they try to fi nd new designed to assist out-of-work Barbadians to survive while they employment. The major motivation for unemployment insurance continued to search to fi nd employment. The measure was schemes is consumption stabilisation as benefi ts are paid to designed to alleviate distress of those persons who lose their jobs workers whose consumption is likely to contract in the event and experience diffi culty in securing other employment. While of unforeseen severance. attempts are therefore in train to improve the scheme, issues of capitalization should also be addressed before it is too late. Unemployment insurance also acts as an automatic fi scal stabilizer although this objective is dependent on its coverage b) Including employment variable in assessment of of the labour force and the suffi ciency of the Scheme’s reserves. public work The Unemployment Benefi t Scheme was introduced in July During the crisis, as we have already seen, many countries 1981 as a branch of the National Insurance and Social Security increased their expenditure in public investment to partially offset Scheme. At the time of its introduction, the UI scheme was the fall in private investment. Barbados also increased public unique in the Caribbean and rare in the developing world. works, but like most countries, suffered from implementation Workers and employers in Barbados paid into the new UI system in terms of project planning and execution. It is important to for about one year in order to build up its reserves after which know which capital projects can be undertaken and which workers were then eligible to receive benefi ts the following can be postponed based on project delivery. Also important year. The objective of the Scheme is to provide fi nancial relief is a mapping of job intensive projects. Necessary mechanisms to employees, who because of total separation, lay-off or short must also be put in place to minimize administrative times for time, suffer total or partial loss of earnings. start-up of new projects. This is important, since non income Coverage is provided to employed persons between sixteen earning projects in the long run only add to the fi scal challenges. and sixty-four years. However, permanent government employees and self -employed persons are not eligible for c) Credit to small enterprises unemployment benefi ts and hence are not required to contribute In Barbados, access to venture capital is very limited. However, to the Scheme. To qualify for unemployment benefi t from the a few government-affi liated institutions and a handful of private Barbados National Insurance Scheme requires an individual fi rms have stepped in to try to fi ll the funding gap. These entities to be actively insured for at least thirty-two weeks, as well as principally provide debt and equity fi nancing to help launch to have at least twenty contributions paid or credited in three micro-enterprises; fund the incubation of new businesses; and consecutive quarters ending with the quarter, or one before assist small businesses in expansionary efforts. that, in which the individual became unemployed. Given the start of a claim, one is not allowed to reclaim until a period of The terms of equity fi nancing differ, depending on the level of fi fty-two weeks has passed. involvement of the venture capitalist, the size of the investment and the business’ prospects of success. With the exception of In order to claim for unemployment insurance the worker must the Enterprise Growth Fund Limited, which can provide fi nancing have been contributing to the unemployment fund usually when in excess of BB$ 5 million to certain businesses in the tourism he/she is employed (that is partial insurance premium), which sector, lending limits generally range from BB$ 50.000 to goes towards the income the employee receives on becoming BB$ 1 million, and tenors ranging from 5 to 10 years. unemployed. An individual is required to complete a claim form, register at the National Employment Bureau and report The major players in venture capital and equity fi nancing in to the Unemployment Section every two weeks after qualifying. Barbados are: Funds are not paid to an individual during the fi rst three days • The Enterprise Growth Limited of unemployment unless the person is unemployed for three weeks or more. The current daily rate of unemployment benefi t Enterprise Growth Fund Limited (EGFL) provides small and is 60% of a person’s average insurable earnings divided by six medium-sized Barbadian companies in the productive sectors days per week as benefi t is received for each day excluding with debt and equity fi nancing, business advisory services and Sundays for a maximum of twenty-six weeks providing the technical assistance. EGFL serves as the Fund Manager offering individual remains unemployed. Effective 4th January 2010, for the following Funds which fall under its purview: the maximum monthly insurable earnings limit increased from ✓ Loans & equity for small & medium-sized businesses $ 3720 to $ 3900. ✓ Small hotels investment fund With the overall rate of joblessness fl uctuating between 11%- 12.5%, Barbadians have been fi ling for unemployment claims ✓ Tourism loan fund by the hundreds. For December 2011, close to 500 new and ✓ Agricultural development fund returning individuals turned up at the National Insurance offi ce to make a claim. Throughout the existence of the Barbados ✓ Industrial, investment and employment fund scheme, claims have been rising steadily, as shown by recent ✓ Innovation fund studies. The sectors of the economy giving rise to the greatest number of claims are manufacturing and tourism. Tourism has ✓ Export promotion and marketing fund

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• Barbados Business Enterprise Corp. (BBEC) benefi ciaries through qualifi ed fi nancial intermediaries operating in Barbados. Barbados Business Enterprise Corporation (BBEC) is a partnership between the Caribbean Business Enterprise Trust Potential benefi ciaries fi rst approach a fi nancial intermediary with (CBET), the Government of Barbados and the private sector. a project proposal. The intermediary in turn submits a proposal BBEC manages the Barbados Entrepreneurs’ Venture Capital to the ICF for funding. The ICF may advance up to 90% of the Fund (BVCF) and the Barbados Quick Response Revolving requested loan amount; however, the commercial bank retains Seed Capital Fund (BQRRSCF). These funds channel equity all of the credit risk of the loan. The Fund’s resources may be fi nancing to recipients through BBEC, which also provides used to fi nance fi xed assets (excluding real estate purchases), advisory and technical support to participants via the CBET’s working capital (primarily raw material purchases) and technical proprietary shepherding model. assistance. BBEC only provides equity fi nancing to legal entities which have In general, only Barbadian nationals whose primary residence is at least 51% Barbadian ownership. All BBEC equity agreements in Barbados may qualify for funding under government affi liated include a buy-back clause. The Corporation has indicated that schemes. Corporate bodies, headquartered and operating in the use of the shepherding model precludes the need for BBEC’s involvement in recipients’ boards of directors. Barbados, must demonstrate the capacity to improve output and employment as well as earn foreign exchange. Presently, BBEC may invest up to BD$ 500.000 in equity fi nancing to any venture. Through its mentorship programme Although these facilities have provided employment for a few the Corporation also works with funding recipients and lending persons, there is some concern that these avenues are also institutions to secure debt fi nancing. not being fully utilised. One reason for this might be due to a lack of knowledge by businesses of the various sources of • Caribbean Financial Services Corporation fi nancing and technical assistance. This explains why some establishments were not getting badly-needed practical advice A private sector initiative, CFSC has a long track record of on suitable ways to manage their business operations to providing loans and equity fi nancing to small and medium-sized improve the quality of their product. While attempts have been businesses that have the potential to earn foreign exchange and made to make fi nancing more accessible to small businesses, create jobs. The Corporation sources funds from international high interest rates remain an issue. In addition, the tendency development banks and agencies. Additionally, CFSC frequently acts as a catalyst in attracting additional fi nancing from other for commercial banks to mostly fi nance larger loans, only institutions, including commercial banks. exacerbates the problem of affordable fi nancing for small businesses. The alternative, equity fi nancing, is only provided CFSC also manages the Barbados Investment Fund (BIF), which by a few organisations, for example, the Barbados Investment is a facility that is co-funded by the Central Bank of Barbados. The Fund and the Barbados Youth Business Trust. However, for this BIF provides equity fi nancing ranging from BD$ 100.000 – BD$ type of assistance to be truly benefi cial to small fi rms, a change 1 million to small and medium-sized businesses in Barbados. in the scope of equity fi nancing programmes will be needed. Equity facilities also tend to favour larger investment projects. • Government sponsored credit facilities Clearly, it would be more meaningful to have these programmes The Central Bank of Barbados has set up several credit facilities invest in smaller businesses where funds for start-up costs and that are designed to stimulate the growth of output, employment working capital are needed. This should only be done, however, and foreign exchange. upon the presentation of a feasible project proposal. One such facility is the Industrial Credit Fund (ICF) which was Since 2011, tripartite constituents in Barbados have been established by the Government of Barbados in September 1983 involved in an ILO project entitled the Creation of an Enabling with funding from the International Bank for Reconstruction and Environment for Sustainable Enterprises (EESE). This project Development (World Bank) and the Central Bank of Barbados. has provided evidence based recommendations on how to Since then additional funding has been provided by the World improve the business environment in Barbados. The areas Bank under its Agricultural Development Project and by the requiring the most attention were the creation of an appropriate European Investment Bank under its Global Loan Contract. legal and regulatory framework, education, training, and life- The ICF is administered by the Central Bank of Barbados and ICF long learning, and entrepreneurial culture. Within these areas provides medium and long-term credit to productive enterprises we expect the design of appropriate policies, one of which will operating mainly in the private sector. Funding is channelled to be access to credit for SMEs.

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