Rolling out the welcome carpet through improved business facilitation, legislation and regulation will not suffice if government wants to reawaken investment in Barbados.
Recent research by University of the West Indies economist Anthony Wood has established an “empirical” correlation between Government’s spending on “productive activities” and the island’s ability “to spur private investment”, and also linked this to the “crucial” need for reliable sources of institutional financing.
And Wood, a former parliamentarian and member of the last Barbados Labour Party Cabinet, further advised authorities that “formulation of financial policy should take due recognition of the result that real interest rates have an adverse (though small) effect on private investment in the longer term”.
He made the observations in a paper on the topic Understanding The Influences On Private Investment In Barbados During The 1966-1990 Period.
“Some conclusions can be drawn from the analysis. Firstly, it is possible to identify a well-behaved empirical function for the private investment process in the small economy of Barbados,” the former Minister of Agriculture said.
“From a development planning viewpoint, such an investment function may be of immense benefit to the planning authorities in their determination of appropriate policy measures in order to achieve a desired level of private investment consistent with the target of economic growth. Second, the positive impact of the output variable means that government should ensure that its macroeconomic programme focuses on boosting aggregate output on a sustained basis.”
He recommended that “the existence of a complementary relationship between government investment and private investment . . . be carefully observed by policymakers”.
“. . . Successful in fashioning an enabling environment for private investors. The Government should therefore ensure that it continues to devote an appropriate proportion of its spending to productive activities which help to spur private investment,” the economist said.
Beyond action by the state, however, Wood said the research results “indicate that domestic credit availability could play an important role in stimulating private investment activity and, hence, economic growth”, and thus, “the financial system has a vital role to play in the functioning of the Barbadian economy”.
He believed sound knowledge of the factors influencing the supply of institutional finance to the private sector “is therefore of crucial importance”.
“The rudimentary nature of capital markets in developing countries limits the financing of private investment to the use of retained profits, institutional finance (mainly bank credit) and foreign borrowing. Of these, the flow of bank credit to the private sector is quantitatively very important, particularly for developing countries which experience rapid economic growth,” the economics lecturer observed.
“Further, changes in the availability of credit for working capital, by relieving the pressures on entrepreneurs for the daily operations, can influence the rate of growth of investment and its efficiency, and rolling over bank loans can sufficiently lengthen the maturity of the debt.
“. . . In countries heavily dependent on imported machinery and equipment, and where advance import deposits are requested, credit availability will facilitate imports and exercise a positive impact on private investment.
“We should note, however, that it is not just the quantity of financial resources allocated to the private sector, but also the distributional pattern of credit that is important for the enhancement of investment activities,” he added.
Having found that “despite the recognition that investment is vital for economic growth, there has been surprisingly little research on its determinants in the Caribbean and in developing countries as a whole”, Wood said the primary aim of the research paper was to “extend the Caribbean empirical literature on investment behaviour by formulating and testing a model of private investment behaviour”.
“Restricting the coverage to the period 1966-1990 allows us to assess the impact of government investment policy on capital formation in the private sector in the immediate twenty five years post Barbados’ independence from the United Kingdom,” he explained.
