We all see the evidence of expansion in global economies primarily through the lens of infrastructural development. Surely, many governments’ policies reflect such thinking. It is the simplest way to engender confidence: People simply believe in what they see. Furthermore, we all dream of being able to build wealth in tangible ways. I do not know a single adult who wouldn’t wish to have easier and cheaper access to credit or better yet a mortgage for that dream home. A look across the Caribbean would leave the average reader impressed, along with the other “trappings of economic development” with the belief that improved build quality of residential and commercial properties must be a sign of improved standard of living and wealth of the nation. And I simply cannot blame them. Moreover, I do agree with most that construction, as an industry is, at the very least, a notable contributor to economic and social development.
As aforementioned, governments can spur growth in the short run through the incentivisation of infrastructural development through the following:
- They can influence the decrease in interest rates so as to cheapen access to credit
- They can fully or partially invest in capital projects along with utilising concessions to drive development
This is quite evident when you look closely at the economy of Barbados during the post-independence period (1966 to now) in particular. It is well known to all local economists that an integral component of any wider economic action plan devised through the Ministry of Finance will involve the development of capital projects and the spurring of private sector-related construction projects. For example, a seminal economic strategy utilised by the late Tom Adams-led government of 1980 centered on passing the Freehold Tenantries Act (1980) and the creation of several parastatals (including but not limited to the Barbados Investment Development Corporation (BIDC)). The first act alone created the environment which accounted for a steadily growing collection service providers and construction firms; improved opportunities to expand the private housing stock; and greater means to build financial wealth for the average Barbadian. Furthermore, the creation of the BIDC along with other statutory corporations in the post-1980 period resulted in a legacy where government led or partially financed the largest capital and construction projects in Barbados. These ranged from an improved road network and the creation of highways, the expansion of the Port of Bridgetown, and increased public building stock. An industry was clearly reinvigorated and began its stellar contribution by the way of creating the means through which the Barbadian economy became an example to small developing economies worldwide. Persons born as late as the 1980s saw later on in the early 2000s how the construction boom then has both facilitated and encouraged easier and relatively cheaper access to credit, the latter of which still holds a partially true to this day.
The Barbadian construction sector is one of the major employers in Barbados, employing and empowering directly tens of thousands of people. It is for this reason, in addition to others mentioned previously that the sector is critical and central to short-term economic programmes. But to have a full appreciation of its contribution to the island’s continual development, it is prudent to examine some of the statistical data that gives deeper insights into the sector’s contribution to Real Gross Domestic Product (RGDP), along with its effect on the financial sector. This to my mind is where one can see how much of an effect the construction sector has on another one critical to the Barbadian economy
A deep dive into data for the period of 1976 to 2016 from the Central Bank of Barbados would suggest two tales. On one hand, while the sector’s role as a mechanism for employment and development is well regarded, the statistical evidence states that all other things being equal, the construction sector has directly contributed an annual average of 7 percent to RGDP over the 40 year time period. This pales in comparison to the average proportions attributed to wholesale and retail; business and general services; government; and tourism sectors (20 percent, 18 percent, 14 percent, 13 percent respectively).
Again, construction as a smaller sector of the economy than the aforementioned is still critical to their ability to contribute. What is also very worthwhile to note is the evidence of a close correlation between the growth in the economy and that in the contribution of construction to RGDP. In other words, one can presume that Barbados tends to grow when there is more construction activity even if that contribution is small or that there is more construction because Barbados grows. The same cannot be said of the manufacturing sector. In 1976 it was responsible for 12 percent of the island’s economic activity but no longer is as important as recent data posted in 2016 revealed that the sector created just 4 percent of the total economic activity. Over the timeline of 1976 – 2016, Barbados’ economy can be described as having two expansionary or fast growth (1977 to 1986 and 1997 to 2006) and recessionary or slow growth (1987 to 1996 and 2007 to 2016) periods. The construction sector’s contribution to RGDP fell to an average of 6 percent during both “recessions” while it posted an average of 7 percent and 8 percent during the first and second growth periods, respectively.
Finally, we cannot ever disregard or diminish the construction sector’s positive influence on the success of the Barbadian banking and financial sector. Central Bank of Barbados data supports the view that the sector by the way of the improvement and increase of, primarily, housing and commercial property during the period under examination paved the way for increased bank revenues. Mortgages for private residences have over time become the predominant way through the banking sector captures it revenue. In 1976, commercial bank loan activity was split evenly between private dwellings and commercial mortgages. But in 2016 this spread now favours private residence mortgages (94 percent) over commercial property mortgages (approximately 5 percent).
In fact, the size of the market for mortgages has grown significantly over the time period, beginning as a BB$11 million market in 1976 but growing to BB$2.4 billion in mortgages in 2016. This represents a growth rate of 14 percent per annum in the value of mortgages during the time period. One should at this point consider that banking industry is captured in business and general services sector of the economy and therefore its contribution is rather significant to the economic activity on an annual basis. All other things being equal, it is on paper more important to the economy than construction but the reality is that both do simply depend on each other. With respect to banking revenues, this assertion becomes much clearer to the reader due to the fact that for the period 1976 to 2009 (data was only available for this time with respect to interest income), interest on loans, in general, averaged around 59 percent of total commercial bank income.
Construction activity simply is that important to the banking sector. And this also means that despite its rather small size from an economic point of view, it definitely punches well above its weight. Kind of like Barbados.
The article is taken from the March 2018 Issue of Construction Caribbean Magazine.