19 May 2010 By Bruce Gale, Senior Writer Straits Times
BENEFITING in part from a resurgence in East Asian economies, most Pacific island nations are expected to emerge from recession this year. But with long-term growth likely to remain low, these small and remote states are being confronted yet again with the need to implement the potentially painful steps needed to overcome their geographic isolation and lay the groundwork for sustainable growth.
One of the main reasons for the current optimism is an improvement in commodity prices. Palm oil and copra exporters such as the Solomon Islands and Vanuatu should benefit from increases in the price of biofuels. Samoa and Tonga, both heavily dependent upon foreign remittances, can also expect to ride the global economic revival as overseas employment opportunities increase. Tourism is yet another industry likely to experience a revival.
This more positive perspective was reflected in the Asian Development Outlook 2010 released last month by the Asian Development Bank (ADB). But the ADB forecast only a very moderate rate of growth. Excluding Papua New Guinea and Timor Leste - which are tipped to grow strongly - the Manila-based development institution expects the Pacific nations to expand by a mere 0.5 per cent overall this year, after contracting by an estimated 1.4 per cent last year.
Papua New Guinea and Timor Leste are exceptions to the low growth scenario largely because they have reserves that can be used to maintain economic stimulus measures. Most other Pacific island governments are still feeling the impact of the economic slowdown on their tax revenues. Fiscal pressures are particularly intense in the Fiji Islands, Marshall Islands, Samoa, the Solomon Islands and Tonga.
Sadly, very few Pacific states have been able to overcome local vested interests, shake off corruption and free up their economies in a way that would encourage sustained growth.
What can be done? For decades, the Pacific states have played Beijing and Taipei off against each other, trading diplomatic recognition for development funds. More recently, they have also been wooing wealthy fugitive businessmen. Last July, former Thai prime minister Thaksin Shinawatra was reported to have visited Fiji, the Asia-Pacific's worst performing economy, as well as Tonga and Vanuatu.
Economists generally agree, however, that long-term growth requires that the Pacific Island states integrate economically with one another, and also with their nearest large market - which happens to be either New Zealand or Australia. Efforts in this direction, however, have been plagued by political problems.
For years, member states of the Pacific Islands Forum have toyed with a progressive trade liberalisation agreement among themselves that would also include Australia and New Zealand. But the idea, known as the Pacific Agreement on Closer Economic Relations (Pacer) Plus, has proven highly controversial.
Critics claim free trade would greatly favour Australia and New Zealand, which already have a heavy trade surplus with the island countries. They also say that local industries would be destroyed by cheaper imports, and that Pacific island governments would lose a large slice of their revenue if duties were lifted on Australian and New Zealand imports.
Canberra and Wellington, on the other hand, argue that the deal would increase trade and investment, while the associated development assistance would ensure that governments would not lose out.
There would certainly need to be a major change in the way governments collect revenue. Tariff revenues in Tonga and Vanuatu for instance, make up 33.3 per cent and 27.1 per cent, respectively, of total government income.
Facing strong domestic opposition, increasing numbers of Pacific island leaders have been seeking a postponement of the Pacer Plus negotiations, arguing that they need more time to consult local interest groups.
Then there are the political problems associated with ensuring the comprehensiveness of any proposed agreement. Fiji, one of the largest economies in the region, is excluded from the talks because of its suspension from the Pacific Islands Forum in the wake of a military coup in December 2006.
All this suggests that - for the time being at least - each Pacific island state will have to find its own solution.
Having posted six straight years of positive economic growth, Vanuatu is already leading the way. Some argue that the nation's more recent success has been the result of its ability to take advantage of the misfortunes of its neighbours. The ADB report points out, for example, that the number of cruise-ship visitors to Vanuatu increased sharply last year mainly because the country's competitors in the tourism industry - Fiji, Samoa and Tonga - were hit by major natural disasters.But Vanuatu's success also derives from its sound economic management, political stability and willingness to bite the bullet on economic reform - factors that are all too rare in the region. The recent growth in Vanuatu's services sector, for example, can be attributed to the reform of the nation's international air transport industry.
It remains to be seen whether other Pacific island states can do the same.
