Daniel Boamah: The state of the manufacturing sector in Barbados
Remarks by Dr Daniel Boamah, Deputy Governor of the Central Bank of Barbados, at a
meeting of manufacturers and private sector officials, Bridgetown, 27 April 2010.
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To say that the manufacturing sector has been in a secular decline would be an
understatement because it is so obvious to the keen and not so keen observer.
Let us look at its performance during the last decade or so beginning in 1998. As a
proportion of GDP, the sector has so far declined from a position just under 7.6% of real
GDP in 1998 to approximately 4.9% in 2009. At the same time, employment in the sector has
fallen from about 10,900 persons in 1998 to approximately 6,800 in 2008. If we were to take
a much longer view, the secular decline becomes even starker. In 1980, for instance, the
share of manufacturing in real economic activity was 11.8%, while the sector employed
approximately 15,000 persons.
Part of the reason for the secular decline may be related to the fact that the country has
indeed become a service-based economy. A major part of the fall may be attributed to a
gradual loss of market share to regional and international competitors. In its last statement
on the performance of the economy during the first quarter, the Central Bank reported that
the recession in the economy appears to be bottoming out. Real output declined by about
0.1% compared with a decline of 4.8% witnessed during the first quarter of 2009.
New and emerging evidence from international forecasters suggest that the world economy
is poised to emerge from the worst recession in eighty years. The IMF has raised its forecast
of world growth in 2010 to 4.2% in its April 2010 analysis from about 3.9% while affirming
growth of 4.3% in 2011, with little inflation.
The United States is expected to record growth of about 3.1% in 2010, followed by a slightly
reduced expansion of 2.6% in 2011. The United Kingdom is projected to grow at about 1.3%
in 2010 and 2.5% in 2011, following a decline of 4.9% in 2009. Canada is also expected to
experience growth of about 3.1% and 3.2% in 2010 and 2011, respectively.
Based on the new evidence, the Central Bank of Barbados has also revised the outlook for
the Barbados economy. We now expect economic growth to be between 0.5% and 1% in
2010 and between 2% and 2.5% for 2011. We therefore see some light at the end of the
proverbial tunnel but one is not sure how helpful this new found optimism would be for the
manufacturing sector. Although the sector is estimated to have expanded by 1% during the
first quarter of 2010, the Bank is forecasting a decline of nearly 4% for the sector in 2010,
following a fall of nearly 13% in 2009.
It goes without saying that the revised projection is largely predicated on the performance of
tourism, as the sector's performance has a spill-over effect on several industries, notably
wholesale and retail, transportation and construction activity. Various reasons have been
suggested for the continued weaknesses in the manufacturing sector. These include:
(a) High cost of production, particularly for energy, and hence the inability of the sector
to compete with regional and international products.
(b) Low productivity, partly due to the adoption of relatively inefficient processes which
in turn may be attributed to.
(c) The continued reliance on aging and obsolete plants.
A few years ago I read an article about the US auto industry. The author was trying to explain
why the US industry was becoming increasingly unable to compete with its Asian
competitors, during the period from the mid 1980s to 1990s. The indicator used by the author
was the labour-income ratio. This is the proportion of value added that goes to wages and
fringe benefits. If that ratio goes above a certain threshold, apparently between 80% and
85%, productivity declines and capital formation falls too low to maintain present jobs, let
alone create new ones. The author intimated that the US auto industry was operating with a
labour - income ratio of between 85% to 90%. In contrast, the Germans and Japanese auto
makers were operating on labour - income ratio of 75% to 80%. It was not surprising
therefore that the Germans and especially the Japanese auto industry gained significant
market shares at the expense of the US auto makers in the US market. The fact is that the
labour - income ratios of 85% to 90% made capital formation impossible as US companies
were barely able to generate or raise the investment capital needed to modernize their plants
and convert them to the production of fuel efficient cars. We should recall that only recently
General Motors had to be supported by the US Federal Government, otherwise the company
would have collapsed. It is my considered opinion that the manufacturing sector in Barbados
can take a valuable lesson from this. It would not be easy to estimate the labour - income
ratio for the entire industry in Barbados (as data may not easily be available). What I can
suggest is for each firm to do its own analysis. One is assuming here that the average
manufacturer operates with factors of production consisting of labour (including
management) and physical capital. A company may estimate value added in its operations
by netting out purchases of inputs from other firms from total sales. After that if it is a simple
issue of estimating the proportion of income that goes to pay wages, including the cost of
absenteeism and fringe benefits. Each firm may then be able to roughly determine where it
stands with respect to the labour - income ratio yardstick. In conclusion, one could say that
prospects for the traditional manufacturing products are weak. Only certain niches could
survive and the industry needs to create more niches. One can note that the Jamaican jerk
food industry has caught the imagination of North America and Europe to such an extent that
jerk meat products are gradually becoming standard fare in many restaurants in these areas.
It is even difficult to obtain some of the leading jerk products in Jamaica because of the high
demand by foreigners.
The Barbados manufacturing sector should be ready to diversify product lines and markets,
including export markets. Some of the larger firms have already tightened their operations,
shed labour and re-visited investment plans.
There are indications that finance is not a major constraint. The Central Bank's own financing
schemes are under-utilized. Nevertheless, available evidence points to about 30%
delinquency rate among small and medium-sized companies which access funds to finance
their operations. In order to ensure uninterrupted availability of finance, it may be necessary
to provide basic accounting skills to companies in the sector so as to keep the proportion of
companies which are unable to service their debts to the minimum.