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Country Profile 2004

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Copyright © 2004 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 1460-7093

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Comparative economic indicators, 2003

Gross domestic product Gross domestic product per head US$ bn US$ ’000

Australia 506.8 Australia 25.5

New Zealand 78.2 New Zealand 19.5

Papua New Guinea Fiji(b)

Fiji(b) Samoa(b)

Solomon Islands(a) Tonga(b)

Samoa(b) Vanuatu(b)

Vanuatu(b) Papua New Guinea

Tonga(b) Solomon Islands(a)

012345 0.0 0.5 1.0 1.5 2.0 (a) 2001. (b) 2002. (a) 2001. (b) 2002. Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product Consumer prices % change, year on year % change, year on year

Solomon Islands Papua New Guinea

Fiji Tonga

Samoa Solomon Islands

New Zealand Vanuatu

Australia Australia

Papua New Guinea New Zealand

Tonga Samoa

Vanuatu Fiji

-6 -4 -2 0 2 4 6 -6 -3 0 3 6 9 12 15 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Contents 1

Contents

Cook Islands

4 Basic data

5 Politics

6 Resources and infrastructure

6 The economy

7 Economic sectors 8 Reference tables 8 Main indicators

Kiribati

9 Basic data

10 Politics

10 Resources and infrastructure

11 The economy

12 Economic sectors 12 Reference tables 12 Main indicators

Nauru

13 Basic data

14 Politics

15 Resources and infrastructure

15 The economy

16 Economic sectors 17 Reference tables 17 Main indicators 17 Net official development assistance

Tuvalu

18 Basic data

19 Politics

19 Resources and infrastructure

20 The economy

21 Economic sectors 21 Reference tables 21 Main indicators

Federated States of Micronesia

22 Basic data

23 Politics

23 Resources and infrastructure

23 The economy

24 Economic sectors 24 Reference tables 24 Main indicators

Marshall Islands

25 Basic data

26 Politics

27 Resources and infrastructure

27 The economy

28 Economic sectors 28 Reference tables 28 Main indicators

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Contents 3

Palau

29 Basic data

30 Politics

30 Resources and infrastructure

31 The economy

31 Economic sectors 32 Reference tables 32 Main indicators

33 Regional overview 33 Membership of organisations 35 The regional economy

Cook Islands

Basic data

Land area 237 sq km

Population 18,400 (July 2003 Asian Development Bank estimate)

Major islands Rarotonga (65 sq km), Mangaia (51 sq km)

Capital Avarua, on Rarotonga (population of Rarotonga 19,020 at 1996 census)

Climate Tropical; warm and humid from December to March with the possibility of serious tropical storms; mild and equable in the south from April to November

Weather in Avarua Mean annual temperature in the capital 23.9°C; average yearly rainfall 2,030 mm

Languages English (official language) and Reo (a local Maori dialect)

Measures Imperial and metric

Currency New Zealand dollar (NZ$)=100 cents. There are also Cook Island coins for NZ$1 and 50, 20, 10, 5, 2 cents and 1 cent in silver, and for NZ$100 in gold. Average exchange rate in 2003: NZ$1.718:US$1. Exchange rate on September 6th 2004: NZ$1.545:US$1

Time 10 hours behind GMT

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Cook Islands 5

Politics

The Cook Islands became self- The southern islands of what are now known as the Cook Islands were governing in 1965 declared a British Protectorate in 1888. New Zealand annexed all 15 islands in 1901, and in 1965 the Cook Islands became self-governing in free association with New Zealand. In practical terms, it acts as a fully independent country. The main political parties are the Cook Islands Party (CIP), the Democratic Alliance Party (DAP) and the New Alliance Party (NAP). In the first decade of self-government, Sir Albert Henry, leader of the CIP, dominated Cook Islands politics. He was elected premier in 1965, 1968, 1971 and 1974. Sir Albert Henry was elected again in 1978, but an inquiry found voting malpractice and excluded some of the votes cast, thereby handing victory to the Democratic Party (DP), whose leader, Thomas (later Sir Thomas) Davis, was sworn in as premier. In 1983 the CIP returned to power, led by Geoffrey (later Sir Geoffrey) Henry, a cousin of the former premier. However, he lost his parliamentary majority and resigned after only six months, and the DP, under the leadership of Sir Thomas Davis, returned to office. A vote of no confidence removed Sir Thomas Davis in July 1987, and he was replaced by his deputy, Pupuke Robati. The general election of early 1989 continued the pattern of alternating power between the two main parties, with the CIP winning the election and Sir Geoffrey Henry becoming prime minister once more; he retained the prime ministership in 1994. A general election in June 1999 produced near-deadlock and after a period of skirmishing, the long-time DAP leader, Terepai Maoate, emerged as prime minister in coalition with the relatively new NAP, led by Norman George, who became deputy prime minister. Dr Maoate was ousted in a no-confidence vote in February 2002. Dr Robert Woonton became prime minister, leading a coalition of three parties and independents. However, Mr George fell out with Dr Woonton and was dismissed in June 2004. Dr Woonton's DP won 14 parliamentary seats to the CIP's 9 in the general election on September 7th 2004 (the remaining seat went to an independent), although 13 appeals had been lodged against the election result at the time of writing."

The overseas parliamentary Frequent changes of government have prompted demand for political reform. seat has been abolished Local organisations such as the Group for Political Reform have long pushed for a shortening of the parliamentary term from five to four years, a ban on party- hopping and a reduction in the number of members of parliament (MPs). Successive governments had, for many years, shown little appetite for real political reform. However, voters strongly supported reducing the parliamentary term to four years in a referendum held at the same time as the 2004 general election and another key demand of political reformists—the abolition of the "overseas" parliamentary seat—has also been met. An "overseas" MP was based in Auckland, New Zealand, to look after the interests of the many Cook Islanders who have emigrated to that country. However, the constituency was abolished in April 2003, owing to the relatively high cost of servicing the post and the fact that these emigrants no longer pay taxes in the Cook Islands.

The overseasThe parliamentary constitution The parliament has 25 members who are currently elected every five years by seat has been abolished universal suffrage. The executive consists of the cabinet, comprising the prime minister and six other ministers chosen by him. The head of state is the British monarch, with a resident Queen's Representative, who is a Cook Islander appointed on the advice of the government. Cook Islanders are, therefore, British subjects but hold New Zealand passports. The constitution provides that the House of Ariki (paramount chiefs), which has no legislative powers, can be called upon to advise the parliament on traditional issues relating to custom and land tenure. Local government includes the island councils, vake (district councils) and village committees on every inhabited island. Resources and infrastructure

Land-based resources are The country consists of two groups of islands—13 inhabited and two scarce uninhabited, extending over 2m sq km of ocean. The combined land is one- half the size of Singapore but spread over an area larger than India. The North Cook Islands are atolls whereas the South Cook Islands are volcanic and comparatively fertile. More than 1,400 km separates the furthermost islands from each other. The waters surrounding the Cook Islands are believed to contain substantial reserves of manganese, cobalt and other metals, lying as yet untouched on the seabed. It is estimated that the reserves of cobalt alone are enough to meet world demand for the next 500 years. Rarotonga has a good international airport and there are regular air services to neighbouring island countries, as well as to New Zealand and North America. There are regular inter-island airline and shipping services to all 13 inhabited islands, and limited international shipping services.

Migration is a major problem More than one-half of the population lives on Rarotonga, where the capital, fo r the government Avarua, is located. At the time of the 1996 census the total population was 19,020, although the figure had dropped to 18,400 by July 2003, according to Asian Development Bank estimates. There are now believed to be more than 60,000 Cook Islanders living in New Zealand and 20,000 in Australia. The high cost of living and political uncertainty are the principal reasons why people leave (although the local minimum wage is one of the highest in the Pacific island region, New Zealand and Australia by comparison offer twice the average rate of pay). Many local people have decided to leave not only because of the constant changes of government, but also because political affiliations are very personal. Indeed, the biggest recent migration outflow took place not following the 1994-96 economic crisis, but following the departure from office of Sir Geoffrey Henry in 1999. The economy

In 2002 agriculture accounted for about 12% of GDP, industry 8.4% and services around 82%; public administration accounted for 11.5%. The key economic activities are tourism, pearl farming and the newly emerging fishing sector.

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Cook Islands 7

In late 1994 there was a currency crisis, caused by the government printing money to finance its fiscal deficit. The government withdrew the Cook Islands dollar from circulation, reinstated the New Zealand dollar and adopted a wide- ranging reform programme. There was extensive retrenchment in the public service, which sharply reduced consumer confidence, since about 30% of the workforce were government employees. However, restructuring, privatisations and a rescue package from the Asian Development Bank (ADB) have been fairly effective. Combined with a steady expansion in tourism, this saw real GDP growth accelerate to 2.7% in 1999 and 13.9% in 2000. This was followed by annual average growth of 4.4% in 2002-03. Income from tourism is critical to finance much-needed projects including extending the airport at Rarotonga and expanding port facilities to cater for the potential growth in offshore fishing. Meanwhile, aid from the EU, agreed in April 2003, will inject US$2m into health and education projects in the outer islands over the next four years. This figure could rise to US$3.4m, provided the government meets stringent standards of financial supervision.

Economic sectors

Tourism is the most significant Tourism is the biggest industry, generating an estimated US$44m for the local industry economy in 2002. The number of visitors rose by 25,000 between 1991 and 2001, when 74,575 people visited the islands (of which 65,168 were tourists). Visitor arrivals rose further to 78,328 in 2003. Around 40% of tourists are from New Zealand and 26% from Europe. The vast majority of visitors arrive by Air New Zealand, making the carrier the most significant economic partner to the Cook Islands. In December 2002 Aloha Airlines, operating out of Hawaii, launched scheduled flights to Rarotonga but ended its service in September 2004. The government has supported the development of the black pearl industry in the lagoons of Manihiki and Penhryn in the northern Cook Islands. This sector generated foreign earnings of NZ$18.4m (US$8.4m) in 2000 and NZ$14.6m in 2001, making them by far the most important export. The fall in earnings in 2001 mainly reflected a drop in the price of the pearls, although producers blame the government for failing to market the pearls effectively and complain that, as a result, they now earn less than one-tenth of what they used to make. Oyster disease also affected Manihiki badly in 2000, but stocks are slowly recovering. Earnings from pearl exports have nevertheless continued to fall, to NZ$6.4m in 2002 and NZ$2.8m in 2003, when they were overtaken by fresh and chilled fish as the most important export. Remittances from overseas The once substantial revenue derived from the agricultural sector has dimin- workers are important ished, although paw paw and nono remain significant export crops. Other crops produced include cassava, sweet potatoes, coconuts, copra, melons, mangoes, papaya, pineapples, bananas and avocados. Some of these are grown for local consumption, but copra, citrus, pineapples, bananas and fresh fruit are exported. Tuna fishing is a growing industry and the government also sells fishing licences to foreign fleets.

The manufacturing industry in the Cook Islands is small, consisting of clothing, footwear, fruit-processing and brewing. However, the islands have a dynamic arts industry that flourishes with little government support and contributed US$2.5m to the local economy in 2002. Remittances from the large number of Cook Islanders living overseas continue to make an important contribution to the economy. The country is an offshore banking centre but remains blacklisted by the OECD's Financial Action Task-Force (FATF), set up to combat money-laundering. The government is in the process of enacting the laws required for the country to be removed from the blacklist.

Reference tables

This table provides the most up-to-date statistics available at the time of publication.

Main indicators 1999 2000 2001 2002 2003 GDP at current market prices (NZ$ m) 152.8 177.8 203.2 220.9 n/a GDP per head (NZ$) at current market prices 9,315 9,935 11,167 12,005 n/a GDP at constant (2000) prices (NZ$ m) 156.2 177.8 186.6 193.9 n/a Real GDP growth (%) 2.7 13.9 4.9 3.9 n/a Population (‘000) 16.5 18.0 18.2 18.4 18.4 Consumer price inflation (av; %) 1.4 3.1 8.7 3.4 2.0 Government current revenue (NZ$ m)a 43.5 51.4 61.9 63.0 64.8 Grants (NZ$ m) a 4.5 5.1 12.0 13.2 10.0 Government current expenditure (NZ$ m)a 46.1 54.7 67.5 72.8 82.2 Government current balance excl grants (NZ$ m)a -2.5 -3.3 -5.7 -9.8 -17.4 Government capital account balance (NZ$ m)a -5.6 -4.9 -3.6 -3.0 0.3 Exports fob (NZ$ m) 6.7 20.0 16.1 10.9 14.6 Imports cif (NZ$ m) 78.6 111.7 111.6 101.7 121.0 Trade balance (NZ$ m) -71.9 -91.7 -95.5 -90.7 -106.4 Exports of pearls (NZ$ m) 5.3 18.4 14.6 6.4 2.8 Exports of fish (NZ$ m) n/a n/a n/a 2.3 8.3 a Fiscal years ending June 30th. Source: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries.

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Kiribati 9

Kiribati

Basic data

Land area 811 sq km

Population 88,800 (mid-2003 Asian Development Bank estimate)

Major islands The country is composed of three main island groups: the 16 atolls of the Gilbert Islands chain, north of Fiji; the eight atolls of the Phoenix Islands south- east of the Gilberts; and the Line Islands chain, further east. Kiritimati (Christmas Island) is the largest and Tarawa the most populous island

Capital The official residence of the beretitenti (president) and the main maneaba (meeting place) are on Bairiki islet on Tarawa atoll

Climate Tropical

Weather in Tarawa Temperature varies between 22°C and 37°C in the shade. Rainfall varies between the islands and from year to year. The season of rains and westerly gales runs from October to March. In an average year, annual rainfall is over 1,500 mm

Languages English (official language) and Gilbertese

Measures Imperial and metric

Currency The Australian currency (A$) is currently used. Average exchange rate in 2003: A$1.534:US$1. Exchange rate on September 6th 2004: A$1.446:US$1

Time 12 hours ahead of GMT

Politics

The Gilbert Islands, which were annexed by Great Britain in 1915, gained full independence as the Republic of Kiribati (pronounced Kirri-bas) in July 1979. The president (beretitenti) is head of government as well as head of state, and presides over a cabinet that includes the vice-president, the attorney-general and no more than eight others, whom he selects from the parliament, known as the maneaba ni maungatapu. After each election, the maneaba nominates three or four candidates for the presidency from its membership and the choice is then made by universal suffrage. The maneaba has 42 members elected for four-year terms by universal suffrage (the attorney-general may be an additional member if he has not been elected). Most candidates for election to the maneaba present themselves as independents. The first president was Ieremia Tabai, who had previously been chief minister under UK sovereignty. Mr Tabai served the maximum of four terms allowed by the constitution, and was succeeded in 1991 by Teatao Teannaki. In 1994 a motion of no confidence, prompted by allegations of abuse of travel allowances, resulted in the election of a new president, Teburoro Tito (pronounced Seetoh).

The last couple of years have Mr Tito was re-elected in February 2003, but fresh presidential and parlia- seen a spate of elections mentary elections were called after a vote of no confidence. The incumbent government won the parliamentary election in May, although the opposition candidate, Anote Tong, won the presidential election in July, beating his brother, Harry Tong, the government's candidate. One of the key issues of the campaign was the future of a Chinese satellite base on the main atoll of South Tarawa, which allegedly was being used to spy on a US missile-testing range. Mr Tong decided in November 2003 to switch allegiance to Taiwan, which established a mission at Tarawa. China closed down its mission there in protest (the Chinese satellite base was also closed) and has cut all financial aid to Kiribati. The Chinese-funded aid projects have been picked up by the Taiwanese government. In mid-1998 Kiribati protested strongly against the potential environmental impact of the Boeing Corporation's Sea Launch project, which involves a satellite launch pad converted from an oil-rig platform positioned 20 km out- side the exclusive economic zone of Kiritimati island. Launches have gone ahead without mishap, but the whole Pacific Islands Forum (PIF) group remains opposed because of pollution risks. There is also widespread concern among the population about the danger posed by a rise in sea levels as a result of climate change. Kiribati opened its first diplomatic mission in 2002, in Suva, the capital of Fiji.

Resources and infrastructure

There are considerable The 1978 census recorded 56,213 residents and a total population of 58,212, population pressures including nationals working overseas. By 1993 Kiribati had a population of 77,100 and population growth averaged 2.1% per year in 1985-92. The official

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Kiribati 11

estimate of the population in mid-2002 was 96,335. A high population density (96.1 persons per sq km at the 1995 census, but now estimated to be much higher) has resulted in considerable population pressures. Kiribati has one island and 32 coral atolls, which have little or no soil, and rainfall is variable, except in the north, giving only limited opportunities for agricultural development. The greatest development potential lies in the exploitation of marine resources within Kiribati's 200-mile exclusive economic zone. Covering about 3m sq km, it is one of the world's largest fishing zones (hence the government's concern about the potential damage caused by the Sea Launch project). Ships of the Kiribati Shipping Corporation visit each island about once a month for the collection of copra, delivery of cargo and transport of passengers. The Pacific Forum Line provides a feeder service, linking Tarawa with international routes. The main port is Betio on Tarawa, which has been expanded significantly with funding from Japan. Some inhabited Kiribati islands have airports served by the government–owned airline, Air Kiribati. After taking office in July 2003, Mr Tong cancelled the airline's lease of a 60-seater ATR 72 aircraft, acquired 18 months previously to fly to Fiji and other regional destinations, owing to cost concerns. Tarawa has the main international airport. International air services are provided by Air Nauru. A statutory body, the Broadcasting and Publications Authority, runs a radio service and a weekly newspaper. Mr Tabai, the former president, launched the country's first independent newspaper in 2001, in the face of strong government opposition. There are more than 3,000 vehicles, of which nearly three-quarters are motorcycles.

The economy

GDP growth has slowed The indigenous people, known as the i-Kiribati, walk a fine line between cultural tradition and the need for real economic growth. Economic performance in Kiribati has been poor, particularly in the early 1990s, but averaged 9.2% in 1998-99 according to the Asian Development Bank (ADB). However, growth has since slowed again, averaging just 1.7% in 2000-01 and 0.9% in 2002, although consumer price inflation accelerated to an average of 4.6% in 2001-02. It eased to 1.8% in 2003. Kiribati relies heavily on income from abroad, from the sale of fishing licences, development assistance, workers' remittances and tourism. Given its limited domestic resources, the country depends on imports for most of its basic food needs as well as manufactured goods. Government policy has focused on decentralising economic activity and institutions and development strategies that do not focus solely on the main islands, such as Kiritimati and the other Northern Line Group islands.

Economic sectors

Copra is Kiribati’s leading Most islanders are involved in subsistence activities ranging from fishing to the export growing of bananas, vegetables, breadfruit and papaya. The leading export is copra, which generates around two-thirds of export earnings, although copra output varies in response to weather conditions and world prices. Other exports include pet fish, shark fins and seaweed. Revenue derived from fishing is important for the overall economy, with the sale of licences to foreign fleets allowing them to fish in Kiribati's waters an important source of government revenue. In May 2003 an agreement was reached with the EU allowing Spanish, French and Portuguese fishing boats to catch tuna in Kiribati's large fishing zone. In return, Kiribati was paid €546,000 (US$630,000) for the first year and will receive €416,000 in subsequent years, of which €100,000 per year is earmarked for spending on fisheries management, conservation and research. Kiribati also sells fishing licences to South Korea, Japan, Taiwan and the US. The tourism industry is underdeveloped, attracting only 3,000-4,000 visitors each year. However, Kiritimati's unique wildlife and other attractions means it receives a small flow of sports fishermen from Hawaii and has an air- conditioned 24-room hotel, by far the country's biggest tourist facility. Relics from the second world war are a source of interest to tourists on Tarawa and Butaritari.

Reference tables

This table provides the most up-to-date statistics available at the time of publication.

Main indicators 1999 2000 2001 2002 2003 GDP at current market prices (A$ ‘000) 83,332 83,240 91,321 98,213 n/a GDP per head (A$) at current market prices 1,003 985 1,063 1,124 n/a GDP at constant (1995) prices, factor cost (A$ ‘000) 52,153 53,688 54,698 55,116 n/a Real GDP growth (%) 13.4 1.6 1.8 0.9 n/a Population (‘000) 83.0 84.5 85.9 87.4 88.8 Consumer price inflation (av; %) 1.8 0.4 5.9 3.2 1.8 Government current revenue excl grants (A$ ‘000) 82,835 88,804 106,281 n/a n/a Grants (A$ ‘000) 17,774 18,984 n/a n/a n/a Government current expenditure (A$ ‘000) 67,139 79,415 n/a n/a n/a Government capital expenditure (A$ ‘000) 13,090 11,660 n/a n/a n/a Government current balance, excl grants (A$ ‘000) 15,696 9,389 n/a n/a n/a Exports fob (A$ ‘000) 14,065 10,694 n/a n/a n/a Imports fob (A$ ‘000) 63,720 67,924 n/a n/a n/a Trade balance (A$ ‘000) -49,655 -57,230 n/a n/a n/a Exports of copra (A$ ‘000) 8,841 2,501 1,987 746 n/a Exports of fish (A$ ‘000) 311 195 353 16 n/a Exports of seaweed (A$ ‘000) 1,103 1,699 422 140 n/a Total external debt (US$ m) 9.2 8.3 4.5 3.9 n/a

Source: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries.

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Nauru 13

Nauru

Basic data

Land area 21 sq km

Population 12,329 (July 2002 national estimate)

Major island Nauru

Capital There is no designated capital. The town centre is situated in the Yaren district between the airport and the main government offices

Climate Tropical, tempered by sea breezes. Average temperatures range from 24°-34°C. Rainfall is extremely variable. The wettest period is from November to February

Languages English and Nauruan (but only English is written)

Measures Metric

Currency The Australian currency (A$) is used. Average exchange rate in 2003: A$1.534:US$1. Exchange rate on September 6th 2004: A$1.446:US$1

Time 12 hours ahead of GMT

Politics

Personality-based politics Nauru became independent in 1968 and its local politics have always been makes for instability personality-based and inherently unstable. The number of changes of president, and therefore government, has risen well into double digits since 1996, with most of the changes resulting from parliamentary motions of no confidence. Much of the turmoil reflects discontent over poor financial management. The country is ruled by a unicameral parliament of 18 members, elected by popular vote for a term of three years. Voting is compulsory for Nauruans over the age of 20. Politics is influenced by family, clan and religious links, although there are two informal parties, the Democratic Party and the Naoero Amo Party. Parliament elects one member to be president, who serves both as head of state and head of government. The president selects four or five members of parliament to serve in his cabinet. The country was on the verge of bankruptcy in August 2004, when the Nauru consulate in Melbourne, Australia was forced to move out of the building owned by it when it failed to keep up repayments. The 50-floor building, Nauru House, was one in a portfolio of five buildings owned by the country in Australia. The buildings are among the country's last remaining assets, bought with wealth from Nauru's one natural resource, phosphate, reserves of which are nearly exhausted.

There have been 16 changes of After three changes of president in 1996, a caretaker government took over, government in ten years pending an election in February 1997. After the election, Kinza Clodumar, a veteran politician and civil servant, was elected president by the parliament, defeating Lagumot Harris (who had served as president on two previous occasions). In mid-1998 Bernard Dowiyogo was elected president for a fifth term after Mr Clodumar was ousted in a no-confidence motion. Mr Dowiyogo was himself defeated in a no-confidence motion in April 1999, and René Harris, who tabled the motion, was sworn in. Twelve months later, however, there was a further change that returned Mr Dowiyogo to the presidency after a no- confidence vote, then another in October 2001 that reversed the result, returning Mr Harris to the presidency. Mr Dowiyogo was re-elected president in January 2003 after Mr Harris was deposed in another vote of no confidence, but he died in March 2003. In May 2003 the former parliamentary speaker, Ludwig Scotty, won the parliamentary election scheduled before Mr Dowiyogo's death, but his reformist agenda led to his ousting in yet another no-confidence vote in August, which saw René Harris returned to power. Mr Scotty regained power on June 16th 2004, when Mr Harris lost a vote of no confidence. It was the 16th change of government in ten years.

The governement agrees to In July 2004 the government agreed to accept Australian financial support on Australian aid conditions condition that an Australian would be appointed head of the police force and Australian advisers placed in key positions in the public service, starting with the finance ministry. In August a team from the Pacific Islands Forum (PIF, the main regional organisation) secretariat arrived to identify areas in which the body could assist with Nauru's recovery.

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Resources and infrastructure

The 1992 official census gave a population of 9,919, which according to national sources had increased to 12,329 by 2002. The government-owned airline, Air Nauru, has been corporatised under independent management. Air Nauru's international destinations include Brisbane and Melbourne in Australia, Fiji, the Solomon Islands, the Federated States of Micronesia and Kiribati. The construction, with Japanese funding, of a much-needed boat harbour in Anibare Bay has helped to boost the underdeveloped fishing industry. The harbour, which was completed in 2000, is also used for recreational boating. Nauru does not have a natural port, but has deep- water facilities equipped with large cantilevers for loading phosphate and other cargo. A sealed 19 km road circles the island, and another road heads inland to the phosphate-mining areas. A 5-km rail track carries phosphate to the coast.

The economy

Phosphate resources are The economy of Nauru has for many years rested almost entirely on the almost exhausted mining of phosphate rock (used in the manufacture of fertiliser). Three decades ago, the country had one of the highest incomes per head in the world. Exports of the mineral reached well over 1.2m tonnes in 1989. However, by 1995 the total had fallen to 500,000 tonnes and resources are nearly exhausted. There is a small amount of agricultural production for domestic consumption, but most food, like all other necessities, has to be imported. No national accounts are published, but in 2000 gross national product per head was estimated at US$7,270, one of the highest in the Pacific islands. This figure is likely to have fallen sharply since then. According to a new political party, Naoero Amo, formed by group of young, reform-minded individuals, the country has squandered wealth worth an estimated A$2.1bn (US$1.5bn) and foreign debts exceed A$400m (US$276m). Economic policy is focused on the consequences of mining, and on how to achieve economic growth by other means. The mined-out areas, covering all but the coastal fringe, are useless for agriculture or as building sites in their present state. The government, in association with Australia, has plans for a massive rehabilitation programme, which will span more than two decades and probably cost about US$300m, according to an official study by the two governments in 2002. However, the implementation of this programme has been delayed by Nauru's political and financial difficulties. Successive governments have also used income from past mining activities to invest in property throughout the Pacific, North America and in Australia. The returns on these investments have played a part in the economy, but by mid-2004 the income had almost entirely evaporated owing to mismanagement. The sale of a hotel in Sydney reduced debt by A$80m, but other properties are in the hands of receivers. The Australian foreign minister has described Nauru as "effectively bankrupt", although the economy has been kept afloat partly by special aid in return for Nauru providing a processing centre for some 1,200 asylum-seekers intercepted

in 2001 while trying to enter Australia using Indonesian-based people smugglers. The special aid allowed an urgent upgrade of the island's electricity- generating system, which had been causing frequent blackouts and threatening water supplies.

Economic sectors

Agricultural output is limited The only parts of the island suitable for agriculture are the narrow coastal strip and the area surrounding the inland Buada Lagoon. Coconut and pandanus palms grow around the lagoon. Coconut production has averaged around 2,000 tonnes/year in recent years. Owing to porous soil and uncertain rainfall, production is limited to small quantities grown by individuals for home consumption. A few food crops are grown on the inland plateau. These include guavas, limes, breadfruit and bananas. Most consumer items are imported, as was the island's drinking water before the construction of a desalination plant. Fishing is popular and provides a limited amount of food. The total fish catch was estimated at 400 tonnes in 1997. More recent data is not available. Significant fishing resources are found in the country's waters, although commercial fishing is underdeveloped. Even so, revenue raised from the granting of fishing licences to other countries has risen in recent years.

Efforts to increase tourism go Nauru has a number of small service businesses, including restaurants and two unrewarded hotels. In 1994 the government completed an US$8.7m expansion of the Menem hotel to 125 rooms in an attempt to capitalise on the island's central Pacific location and make it a stopover for tourists travelling between Asia and the South Pacific. However, tourism remains almost non-existent. Tele- communication services are patchy. There were hopes that Nauru could establish itself as a centre for offshore banking, but the industry has been poorly managed and the government has come under pressure from the OECD's Financial Action Task-Force (FATF) for failing to strengthen money-laundering legislation. Moreover, in April 2003 the US government stated that it was considering cutting off the country's financial institutions from the US banking system. The Nauruan government subsequently closed down more than 80 foreign banks registered there, and announced in June 2003 that it had revoked over 100 offshore banking licences. The country remains blacklisted by the FATF.

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Nauru 17

Reference tables

This table provides the most up-to-date statistics available at the time of publication.

Main indicators 1999 2000 2001 2002 2003 Population n/a n/a n/a n/a 12,100 Consumer price inflation (av; %) 6.7 7.5 4.0 n/a n/a GDP at current prices (US$m) n/a n/a 60 n/a n/a Merchandise exports fob (US$ m) n/a n/a 18 n/a n/a Merchandise imports cif (US$ m) n/a n/a 31 n/a n/a Source: Department of Foreign Affairs and Trade, Australia, Ministry of Foreign Affairs and Trade, New Zealand.

Net official development assistance (US$ m) 1998 1999 2000 2001 2002 Bilateral 2.0 6.5 3.9 7.1 11.6 Australia 1.8 2.0 1.7 7.0 11.4 Japan 0.2 4.5 2.3 0.1 0.2 Multilateral 0.1 0.1 0.1 0.1 0.1 UN Technical Assistance 0.1 0.1 0.1 0.1 0.1 Total 2.1 6.6 4.0 7.3 11.7

Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients.

Tuvalu

Basic data

Land area 26 sq km

Population 11,020 (July 2003 Asian Development Bank estimate)

Major islands Funafuti, Vaitupu, Niutao and Nanumea. The majority of the population lives on Funafuti

Capital Funafuti

Climate Tropical The temperature varies from 22°C to 38°C. The season of rain and westerly Weather gales is between November and February. Rainfall varies considerably, falling more than one-half the days of the year. In a typical year the annual rainfall is around 3,000 mm in the south

Languages English, Tuvaluan (official languages) and a Gilbertese dialect spoken on Nui

Measures Metric

Currency The Australian currency (A$) is legal tender, but Tuvaluan coins are also in circulation. Average exchange rate in 2003: A$1.534:US$1. Exchange rate on September 6th 2004: A$1.446:US$1

Time 12 hours ahead of GMT

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Tuvalu 19

Politics

Tuvalu became independent from the UK in 1978. The first prime minister was Toaripi Lauti, who had been chief minister before independence. He was succeeded after the election in 1981 by Dr Tomasi Puapua, who was re-elected in 1985. Bikenibeu Paeniu took over as prime minister after the 1989 election, but, after the 1993 poll, he and Dr Puapua tied in the new parliament's ballot for prime minister, with six votes each. A second vote produced the same result and another general election was called. In the subsequent ballot for prime minister, Kamuta Latasi, previously the speaker of parliament, defeated Mr Paeniu by seven votes to five and Dr Puapua was elected speaker. In 1996 Mr Latasi lost his majority and resigned after a motion of no confidence was passed by the parliament. Mr Paeniu was re-elected prime minister in December of that year. There was another general election in March 1998, and Mr Paeniu retained the premiership. However, he was forced to resign in April 1999 after another parliamentary vote of no confidence. He was replaced by a former education minister, Ionatana Ionatana, who died unexpectedly in December 2000. Faimalaga Luka was elected prime minister in February 2001, but was also brought down by a no-confidence motion in December that year, which saw Koloa Talake take over. After a general election in July 2002 the parliament elected Saufatu Sopoanga as prime minister by a majority that seemed to promise greater stability. However, Mr Sopoanga was forced to resign in August 2004 when he lost a surprise no-confidence motion by two votes after a member of the government defected to the opposition, and another was in New Zealand for medical treatment. Mr Sopoanga's decision to resign his seat in parliament will delay the parliamentary ballot to elect a new prime minister. Mr Sopoanga has indicated that he will stand in the by-election for the seat. In the meantime, the deputy prime minister, Maatia Toafa, is acting prime minister.

The country is a constitutional Tuvalu, formerly the Ellice (or Lagoon) Islands of Britain's former Gilbert and monarchy Ellice Islands colony (the Gilbert Islands are now Kiribati), is a constitutional monarchy with the British sovereign as head of state, represented by a governor-general, who must be a Tuvaluan. Its parliamentary system is based on the Westminster model, with free elections and a cabinet directly responsible to the parliament. The parliament consists of a single chamber with 15 members elected for four-year terms. The parliament elects the prime minister, who selects four other members of parliament to form the cabinet. There are no political parties. Each island has an elected council.

Resources and infrastructure

Returning Tuvaluans will The population was 9,043 according to the 1991 census and according to the boost the population Asian Development Bank (ADB), the population stood at 11,020 in July 2003. Many Tuvaluans work abroad, mainly in phosphate mining on Nauru or as seamen on foreign ships, although the population is expected to swell as phosphate mining in Nauru declines further and Tuvaluans employed there

return home. There is already an excess of skilled labour. Of around 1,000 people in paid employment, one-half work for the government. Tuvalu's soil is poor; fish are the only natural resource of significance. The nine scattered atolls are all less than 6 metres above sea level and at risk if global warming causes sea levels to rise. Increasing amounts of sea water have seeped into plantations of coconut and pulaka, and the country has made a request to the Australian government to accept its citizens as refugees or migrants before the islands become uninhabitable. The Tuvaluan government proposed that islanders could settle in Queensland or on a couple of uninhabited islands that it has offered to purchase in the Torres Strait. The Australian government has rejected Tuvalu's request, but has stated that it will provide assistance for a rescue effort if the islands are ever swamped. The greatly depopulated tiny Pacific island nation of Niue has invited settlement by Tuvaluans, and the Tuvalu government is also exploring the possibility of buying land for settlement in Fiji. The isolation of Tuvalu and the distance between its islands make all forms of transport difficult and costly. Maintenance of frequent and regular air services between Tuvalu and Fiji is a priority. In 2001 the government bought a substantial shareholding in Fiji Air, which operates the service between Suva and Funafuti. Outer island roads are made of crushed coral and have little traffic. However, Funafuti's sealed roads are becoming increasingly crowded, as the number of vehicles continues to rise. A feeder shipping service links Tuvalu every six weeks with the regionally owned network of the Pacific Forum Line. A service of about the same frequency is operated by the Karlander Line. Tuvalu itself has only one small freighter for inter-island services. There is a good telecommunications system and limited but adequate Internet access.

The economy

Sources of government income The cash economy depends largely on remittances from citizens working are diverse abroad (many as merchant seamen) and government spending. Government finances are supported by foreign aid and the Tuvalu Trust Fund, a publicly owned investment vehicle established in 1987 with capital of A$27m (US$39m), of which Australia provided about one-third, the UK and New Zealand most of the rest, with contributions from Japan and South Korea. Under commercial management, the fund has on the whole been successful. Income from the fund has been used by the government to finance projects such as improvements to schools and the development of the fisheries industry. The government also garners revenue from sales of fishing licences, stamps, access to its international telephone codes (initially for use by the sex industry, but now used for gambling) and an investment migration scheme, which involves the sale of passports (US$11,000 for an individual, US$22,000 for a family of four). The government has also sold the rights to market its Internet suffix ".tv", for which the country received around A$48m between 1999 and 2002, much of which was earmarked for infrastructure development. External aid, mainly from Australia, New Zealand, the EU, Taiwan and Japan, is also a major source of income. Australian aid to Tuvalu was estimated at A$2.9m in

Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Tuvalu 21

fiscal year 2003/04 (July-June), with much of the money going towards education and training. National accounts are not prepared, but in 2002 GDP per head was estimated at A$2,528 (US$1,374). According to the Asian Development Bank, real GDP expanded by 1.2% in 2002, underpinned mainly by government spending.

Economic sectors

The copra crop is vulnerable to The majority of the population is supported by subsistence farming and fishing. the weather Tuvalu has only one export crop, copra. Coconuts, bananas and breadfruit are also produced, but resources are extremely limited and Tuvalu is reliant on imported food, petroleum, building materials, and manufactured goods, which come mostly from Australia and Fiji. Tuvalu is above the cyclone belt and generally does not suffer serious cyclone damage. The manufacturing industry consists only of handicraft and garment production, and there is little tourism. Tuvalu normally receives around 1,000 overseas visitors each year, although visitor arrivals fell to 299 in 2001, of which just 13 were on holiday. Most overseas visitors are aid workers, consultants and government workers.

Reference tables

This table provides the most up-to-date statistics available at the time of publication.

Main indicators 1999 2000 2001 2002 2003 GDP at current prices, factor cost (A$ ‘000) 21,213 24,044 26,412 27,490 n/a GDP per head (A$) at current market prices 2,070 2,301 2,477 2,528 n/a GCP at constant (1988) prices (A$ ‘000) 13,946 15,809 16,746 16,947 n/a Real GDP growth (%) -0.5 13.4 5.9 1.2 n/a Population (‘000) 10.3 10.5 10.7 10.9 11.0 Consumer price inflation (av; %) 4.0 3.9 1.5 5.0 2.9 Government revenue excl grants (A$ ‘000) 19,554 43,048 22,019 43,280 n/a Grants (A$ ‘000) 2,692 4,901 12,921 1,978 n/a Government current expenditure (A$ ‘000) 18,846 38,196 24,091 25,656 n/a Government capital expenditure (A$ ‘000) 8,414 6,260 8,965 9,384 n/a Government current balance, excl grants (A$ ‘000) 708 4,852 -2,071 17,624 n/a Exports fob (A$ ‘000) 177 17 32 252 n/a Imports fob (A$ ‘000) 12,466 8,883 6,769 20,362 n/a Trade balance (A$ ‘000) -12,289 -8,866 -6,737 -20,110 n/a Exchange rate (av; A$:US$) 1.550 1.717 1.932 1.839 1.530

Source: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries.

Federated States of Micronesia

Basic data

Land area 702 sq km

Population 107,800 (September 2003 Asian Development Bank estimate)

Major islands Kosrae, Yap, Pohnpei, Chuuk

Capital Palikir (Pohnpei)

Climate Tropical

Weather in Palikir Temperatures average 27°C year round. There is rainfall all year, with the interior of Pohnpei receiving the most rain. The country is located on the southern edge of a typhoon belt

Languages English and eight indigenous languages

Measures Imperial

Currency US dollar

Time 10 hours ahead of GMT (Chuuk, Yap); 11 hours ahead of GMT (Pohnpei, Kosrae)

Politics

The states of the Federated States of Micronesia (FSM) are Kosrae, Yap, Pohnpei and Chuuk (known until 1990 as Truk). They agreed to federate in 1979 and the federation ceased to be part of the UN Trust Territory of the Pacific Islands (administered by the US) in 1986, when the FSM became an independent state in free association with the US. Under the Compact of Free Association signed in 1986, the US is responsible for defence and the provision of regular economic assistance. FSM citizens also have the right to tap into US federal programmes. A renegotiated compact signed in May 2003 provides for reduced funding of US$1.8bn over the next 20 years, some of which will be used to build up a trust fund to replace direct financial assistance from 2024. The federal legislature is the Congress, comprising 14 popularly elected members. Congress elects the president, who in turn selects members to serve in the cabinet. The current president is Joseph Urusemal, who was elected by Congress in May 2003 following a general election in March. Mr Urusemal replaced Leo A Falcam, who took office in 1999 but lost his seat in the March election. Each of the four states has an elected governor and a unicameral legislature.

Resources and infrastructure

The Federated States of Micronesia (FSM), which is part of the Caroline Islands archipelago, comprises 607 islands stretching over 2,900 km. Only 65 of these islands are inhabited. At the last census in 1994 the population was 105,506; according to the Asian Development Bank, the population stood at 107,800 at end-September 2003. Approximate state populations are: Chuuk, 53,595; Kosrae, 7,886; Pohnpei, 34,692; and Yap, 11,241.

The tourism industry is Continental Air Micronesia, a subsidiary of Continental Airlines of the US, growing provides international and interstate passenger services within the FSM, and to and from Honolulu and Guam. Air services are vital to the growing tourism industry. The main attractions are scuba diving, especially in Chuuk; lagoons; battle sites; relics; and the ancient ruined city of Nan Madol on Pohnpei. There are international airports in each state and a few airstrips in the outer islands. There is a reasonable road system on most of the important islands and a variety of shipping services. All state centres in the FSM have deep harbours capable of handling most commercial shipping needs.

The economy

The FSM is heavily dependent The economy is heavily dependent on foreign aid, mainly from the US. on US aid According to the Asian Development Bank, the original compact agreement provided about US$80m a year in recent years by way of budget support to the national and state governments. Recurrent government expenditure amounts to more than 50% of nominal GDP, which in 2003 stood at an estimated US$222m. Real GDP growth slowed to 0.1% in 2003, from 0.9% in 2002. Imports,

mainly of food and manufactured goods, amounted to US$108.9m in 2003 (balance-of-payments basis). Exports, mainly fish (which accounts for around 80% of exports), but also trochus shells, meat, copra and bananas, totalled US$20.1m.

Economic sectors

The government is the main employer although most of the population relies on subsistence farming and fishing. Copra and coconut oil are stable exports, but are produced in small quantities. Fish, white pepper and handicrafts are also exported. Other important agricultural products include betel nuts, taro and tropical fruits. Successive governments have sought to promote further development of agriculture, with limited success. There are also hopes of encouraging foreign investment in fishing and tourism. Visitor arrivals dwindled from 16,500 in 2000 to 15,250 in 2001, with the fall concentrated among tourists from Japan and other parts of Asia, but picked up to 19,046 in 2002. Tourist numbers are expected to rise in the medium term, with the main attractions being diving and eco-tourism, although infrastructure inadequacies are likely to constrain strong growth in the sector. A cyclone in April 2004 damaged roads and other infrastructure on the island of Yap. Developments in the fisheries sector have been promising. The government has drafted a national fisheries development plan in collaboration with the Asian Development Bank. Shipment and cold storage facilities, and a tuna-processing plant have been built in Pohnpei. Pohnpei is also host to the new regional Tuna Commission headquarters, a reflection in part of important tuna migratory paths than run between the islands.

Reference tables

This table provides the most up-to-date statistics available at the time of publication.

Main indicators 1999 2000 2001 2002 2003 GDP current market prices (US$ m)a 194.1 216.6 220.6 222.1 221.8 GDP constant 1998 market prices (US$ m)a 190.5 208.3 209.3 211.2 211.4 Real GDP growth (%)a -3.5 9.3 0.5 0.9 0.1 GDP per head at current market prices (US$)a 1,819 2,025 056 2,066 2,058 Population (‘000) 106.8 107.0 107.3 107.5 107.8 Government revenue excluding grants (US$ m)a 53.4 52.0 41.5 46.1 48.4 Grants (US$m) a 96.0 96.2 96.2 114.2 115.3 Government current expenditure (US$ m)a 126.6 131.9 125.5 129.1 130.7 Government capital expenditure (US$ m)a 38.8 31.3 25.9 25.7 28.9 Government current balance, excluding grants (US$ m)a -73.1 -79.9 -84.0 -83.0 -82.3 Exports fob (US$ m)ab 15.1 16.3 16.7 19.6 20.1 Imports fob (US$ m)ab 92.4 101.7 110.5 100.6 108.9 Trade balance (US$ m)ab -77.3 -85.4 -93.8 -80.9 -88.8 Current-account balance (US$ m)a 4.8 -0.7 -17.5 11.6 17.7 a Fiscal years ending September 30th. b Balance-of-payments basis. Source: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries.

Marshall Islands

Basic data

Land area 180 sq km

Population 58,800 (July 2003 Asian Development Bank estimate)

Major islands Majuro and Ebeye

Capital Majuro

Climate Tropical

Weather in Majuro Temperatures average 27°C. Average rainfall is 2,030 mm. The rainy period is September to November

Languages English (official language); two Marshallese dialects from the Malayo- Polynesian family; Japanese

Measures Imperial

Currency US dollar

Time 12 hours ahead of GMT

Politics

The Marshall Islands achieved independence in free association with the US under a Compact of Free Association in 1986. The first president of the Marshall Islands was Amata Kabua, the Iroijlaplap, or paramount chief. He was re-elected in 1984, 1988, 1992 and November 1995. Mr Kabua, a leader of great regional standing, died in December 1996. At the time, he was also chairman of the Pacific Islands Forum (PIF) and chancellor of the University of the South Pacific. From a field of three candidates, the nitijela (congress) elected as president Imata Kabua, the new Iroijlaplap, and cousin of the late president. The current president, Kessai H Note, was elected in January 2000, becoming the first "commoner" to become president (his predecessors had been island chiefs). He ran on an anti-corruption ticket and is attempting to make the Marshall Islands more self-sufficient.

Congress elects the president The present constitution came into force in 1979, while the US was still the administering authority under a UN trust territory agreement. Legislative authority is vested in the 33-member nitijela. The members, known as senators, are elected for four-year terms by popular vote. From among its members the nitijela elects the president, who then chooses members to join the cabinet. There are ten ministers in the present cabinet. The nitijela is advised by the House of Iroij, comprising 12 iroij, or high chiefs.

US defence considerations are US defence considerations have had an important effect on the Marshall important Islands. The Compact of Free Association ensured that the US had continued access to Kwajalein atoll, which is a major military base for missile-tracking on the American Pacific testing range. The nuclear weapons tests conducted by the US in the islands in 1946-62 made some areas uninhabitable and caused a wide range of radiation-related health problems among the population. A trust fund was set up under the compact to meet claims from victims. The Marshall Islands has continued to press the US government for additional compensation. Kwajalein is still used by the US military for the testing of non-nuclear missiles.

An amended compact was Under the Compact of Free Association, the Marshall Islands conducts its own agreed in 2003 domestic and foreign policy affairs, although responsibility for defence and security lies with the US. The compact that came into effect in 1986 committed the US to providing substantial economic aid, US$170m in rent over 20 years and a further US$80m for economic development projects. After four years of negotiations, an amended compact was agreed in April 2003, guaranteeing US funding totalling around US$800m over the next 20 years. At the end of this period, US financial assistance will end and the Marshall Islands will have to rely on the proceeds of a trust fund to be set up during the 20-year period. The US government offered to pay an additional US$2.3bn in return for guaranteed access to the Kwajalein missile range by the US military for the next 63 years. However, the Kwajalein landowners' association has indicated that the amount is not acceptable and the matter remained in dispute at the time of writing. Other provisions, such as US responsibility for defence and Marshall Islanders' right to tap into US federal programmes, are unchanged.

Resources and infrastructure

Population growth poses The country is made up of two almost parallel chains of islands, the Ratak many future problems (Sunrise) and Ralik (Sunset) groups, containing 29 coral atolls, with a total of 1,152 islands and islets. There is a land area of about 180 sq km. The population, which according to the Asian Development Bank (ADB) totalled around 58,800 in 2003, is concentrated in the two main urban areas of Majuro, the capital and main commercial centre, and Ebeye, and rapid population growth is a growing concern. The education system is based on the US school system, but only 25% of students proceed beyond primary level because of inadequate resources and teaching. Financial services are provided by the Bank of Guam and the Bank of Hawaii, as well as local banks. Most of the more populous islands have sealed or concrete roads; others have roads finished with stones or crushed coral. Usage of the road networks of Majuro and Kwajalein is close to saturation level, but registration of new vehicles has continued to rise at a high rate, taking the total number of vehicles registered to 3,294 in 2002. Major islands have their own water systems and power plants. There is a wide range of shipping services to the US, Japan and other Pacific island countries, and the government operates an offshore shipping register, with more than 100 vessels on its books. There are 12 deep- water docks for large ocean ships and two international airports, plus airstrips scattered through out the country. Continental Micronesia provides air services from Hawaii and Guam, and Air Marshall Islands flies to the outer atolls. Air Nauru operates a service linking Majuro with Kiribati, Nauru, Fiji, the Solomon Islands and Australia. Aloha Airlines flies weekly from Hawaii to Majuro and Kwajelein in the Marshall Islands.

The economy

The US is committed to The economy is heavily dependent on payments from the US and foreign aid substantial foreign aid from a variety of sources, also including the US. More than 80% of government revenue comes from US grants, directly or indirectly. Income from the sale of fishery rights totalled around US$3m in fiscal year 2000/01 (October- September). In 1996 the government committed itself to an extensive restructuring and reform programme, underwritten by the Asian Development Bank (ADB), to cut back the government sector and encourage private-sector business development. In early 1998 it was able to report to a meeting of principal donors that the size of the public services had been reduced by 25%. The government also announced the gradual scaling back and, ultimately, the abolition of import duties, and has reduced subsidies to the copra industry, utilities, and the local airline, Air Marshall Islands. However, reform in other areas has been slow. According to the ADB, nominal GDP totalled US$99.2m in 2001, with GDP per head standing at US$1,817. In 2001 agriculture and fishing accounted for 10.4% of GDP; manufacturing 4.5%; and construction 11.4%. ADB figures suggest that, on average, real GDP contracted by 0.5% between 1999 and 2001, although real

GDP growth is estimated at 4% in 2002 and 2% in 2003. Between 1999 and 2003 inflation averaged 1.7% per year, according to the Majuro consumer price index, but many observers believe this understates the extent of price rises.

Economic sectors

Subsistence farming is the The government is the major employer in the Marshall Islands, although main economic activity subsistence farming is the main economic activity. Soil quality is generally poor, but fruit and vegetables, coconuts, pandanus, taro and breadfruit are produced for local consumption. Giant clams and sea cucumbers are also farmed on many islands. Fisheries and handicrafts are also important commercial activities and the construction industry is expanding slowly. The country's export base is narrow, with copra and coconut accounting for around 90% of exports. As the value of imports outstrips that of exports by a ratio of seven to one, the country has a chronic trade deficit. The tourism industry remains small, with visitor arrivals of 7,195 in 2003 (up from 6,002 in 2002).

Reference tables

This table provides the most up-to-date statistics available at the time of publication.

Main indicators 1999 2000 2001 2002 2003 GDP at current market prices (US$ ‘000)a 95,360 98,108 99,173 n/a n/a GDP at constant 1991 prices (US$ ‘000)ab 62,857 61,574 60,636 63,062 64,323 Real GDP growth (%) 0.8 -2.0 -1.5 4.0 2.0 GDP per head (US$) 1,876 1,863 1,817 n/a n/a Population (‘000) 50.8 52.7 54.6 56.6 58.8 Government current revenue excluding grants (US$ m)a 26.7 27.2 23.0 24.8 25.9 Grants (US$m) a 38.8 46.7 60.9 58.8 58.9 Government current expenditure (US$ m)a 48.4 56.2 54.8 58.7 51.2 Government capital expenditure (US$ m) a 6.9 8.8 11.5 15.3 16.0 Government current balance, excluding grants (US$ m)a -21.7 -29.0 -31.8 -33.9 -25.3 Merchandise exports fob (US$ ‘000)ab 7,200 7,900 8,300 n/a n/a Merchandise imports cif (US$ ‘000)ab 59,600 58,800 60,500 n/a n/a Trade balance (US$ ‘000)ab -52,400 -50,900 -52,200 -41,100 -47,100 a Fiscal years ending September 30th. b Balance-of-payments basis. Source: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries.

Palau

Basic data

Land area 487 sq km

Population 20,400 (July 2003 Asian Development Bank estimate)

Major islands Babeldaob, Koror, Peleliu, Angaur, Kayangel, Ngervangel, Rock Islands, Ulong Island

Capital Koror (new capital is under construction in Babeldaob's Melekeok State)

Climate Temperature averages 25°-31° C

Weather in Koror Heavy rainfall occurs from May to January and is heaviest in June and July. The drier period extends from February to April. Short periods of torrential rains result in more than 150 inches of rainfall a year

Languages English and Palauan official in all states except Sonsoral (Sonorolese and English are official), Tobi (Tobi and English are official), and Anguar (Anguar, Japanese, and English are official)

Measures Imperial

Currency US dollar

Time 9 hours ahead of GMT

Politics

Palau achieved independence Palau is an independent republic in free association with the US. It achieved from the US in 1994 internal self-governance in 1981 and independence in 1994. Independence was attained only after a series of bitterly fought referendums over ratification of the Compact of Free Association, an economic, strategic and political treaty between Palau and the US. The central issue in the debate was whether the country would be allowed to have nuclear-free status. Palau conducts its own domestic and foreign affairs, and the US controls Palau's defence and security matters and has exclusive access to Palau's waterways. The constitution provides for popular elections for the president and vice- president every four years. Legislative power is exercised by the 30-seat National Congress (known as Olbiil Era Kelulau', or the meeting place of whispers), made up of a Senate and a House of Delegates, both elected by popular vote. Palau is probably one of the most over-governed countries in the world. There are 14 senators, who represent geographical districts, and 16 delegates, one for each state of the republic, governing a population of 19,129, according to the 2000 census. Each state also elects its own legislature and governor. Changes to the constitution proposed by the current national president, Tommy E Remengesau, will, if approved, see the National Congress slimmed down from two to one chambers and limits set on terms that can be served in the Congress. Another proposal would allow Palauans to hold dual Palauan and US citizenship. The next congressional election is due in November 2004. Mr Remengesau was elected in November 2000. He succeeded Kuniwo Nakamura, who served two terms and was constitutionally barred from a third. Although calm in recent years, Palau witnessed political violence in the 1980s, and Palau's first president, Haruo Remeliik, was assassinated in 1985. The third president of Palau, Lazuros Salii, committed suicide in September 1988 after allegations of bribery were made against him. Mr Salii's personal assistant had been imprisoned several months earlier after firing several shots at the speaker of the House of Delegates.

Resources and infrastructure

Palau has eight main islands and 252 lesser ones, stretching over 650 km. The main island, Babeldaob, has a land area of 409 sq km. There are basic road systems on all the inhabited islands. The national government has responsibility for 61 km of paved, gravel or crushed coral roads. The construction of a 54-mile, two-lane highway is due to be completed in 2005-06. The highway, known as the Compact Road, is being funded by the US under the Compact of Free Association. The Compact Road will connect the villages on the largest island of Babeldaob with Koror, the capital and Palau's commercial centre. There is one commercial port in Palau and one commercial shipping service (to Australia); other shipping services are organised by the government.

A new capital is under There is an international airport on the main island near Koror, and one construction domestic airline. Air Micronesia, operating from Guam, provides international air links to Palau. A new airline, Palau Micronesia Air, was launched in August 2004, initially operating flights from Palau to other Micronesian destinations and to Saipan, Guam, Manila in the Philippines and Darwin in Australia. It also plans to offer flights to Japan. Investors in the new airline include the regional governments of Yap and Pohnpei (in the Federated States of Micronesia) and some private companies and individuals. The construction of a new airport terminal was completed earlier in 2004, along with a new bridge connecting Babeldaob to Koror, which was funded by Japan. Work continues on the building of a new national capital located roughly in the middle of Babeldaob. The construction of the new capital is being funded by a "soft loan" from Taiwan. The three branches of government—the executive, legislative and judicial branches—will each have their own buildings, all in close proximity.

The economy

US aid means living standards Ironically, the drawn-out and bitter debates about the Compact of Free are high Association worked to the economic advantage of Palau. The US funded the administration until independence in October 1994, then signed a compact of 50 years' duration, rather than the 15-year terms of the compacts signed by the US with the Federated States of Micronesia and the Marshall Islands. The compact with Palau committed the US government to providing around US$450m for economic development assistance during the first 15 years following independence and the US also pays for health services among other things. As a result, Palau has among the highest living standards in the Pacific, with GDP per head standing at around US$5,950 in 2002. However, rapid population growth and a stagnant economy has seen per head incomes fall over the last five years and income disparities are wide.

Economic sectors

Tourism and fishing are the Tourism and fishing are the mainstays of the economy. Fishing is critical to mainstays of the economy Palau's domestic food supply, especially in outlying villages. The small commercial fishing industry consists of foreign boats catching fish, mainly tuna and mackerel, in Palau's exclusive economic zone, for sale elsewhere (notably Japan). A total of 2m kg of fish were exported in 2001, taking earnings from fish exports to US$3.4m, although the total value of fish exports fell to just US$700,000 in 2002, mainly reflecting lower fish prices. Garment exports are also an important part of the economy. However, tourism is Palau's main source of income; 58,560 visitors came to Palau in 2002, spending an estimated US$66.1m. Palau is one of the world's top scuba-diving destinations and the Rock Islands, which lie a few miles south of Koror, are recognised as one of the most pristine marine ecosystems in the Pacific. Palau's main tourism activities are concentrated in Koror. The number of hotel rooms in Palau has increased rapidly in recent years, from 573 in 1993 to 1,049 in 2002.

Reference tables

This table provides the most up-to-date statistics available at the time of publication.

Main indicators 1999 2000 2001 2002 2003 GDP at current market prices (US$m) 113.5 117.2 120.8 118.9 n/a GDP per head (US$) at current market prices 6,010 6,128 6,157 5,950 n/a Population (‘000) 18.9 19.1 19.6 20.0 20.4 Government current revenue excluding grants (US$ m)a 25.8 29.1 31.8 28.8 29.8 Grants (US$m) a 22.0 32.1 21.4 22.4 35.5 Government current expenditure (US$ m)a 64.1 67.1 64.6 59.1 58.6 Government capital expenditure (US$ m)a 8.0 12.5 15.4 21.0 14.0 Government current balance (US$ m)a -38.3 -38.0 -32.8 -30.3 -28.8 Exports fob (US$ m) 11.0 n/a 9.0 n/a n/a Imports fob (US$ m) 77.8 127.1 95.8 95.9 n/a a Fiscal years ending September 30th. Source: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries.

Regional overview

Membership of organisations

The PIF is the leading regional The Pacific Islands Forum (PIF) is the most important regional organisation. It organisation was formerly known as the South Pacific Forum, which in turn developed from the South Pacific Bureau for Economic Co-operation, established more than 40 years ago. The Forum officially adopted its new name at its annual meeting in 2000, recognising that not all of its members are in the "South" Pacific since the admission of former US trust territories north of the equator. The Forum was created in 1971 in response to the spread of self-government in the region and the need of the new states to have a political forum. The current members are Australia, the Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Palau, Papua New Guinea (PNG), the Marshall Islands, Samoa, the Solomon Islands, Tonga, Tuvalu and Vanuatu. The Forum meets each year at head of state/government level, and immediately after the meeting ministers spend two days in consultation with the Forum dialogue partners—Canada, China, the EU, France, Indonesia, Japan, Malaysia, the Philippines, South Korea, Thailand, the UK and the US. A separate dialogue session is held with Taiwan by the Forum members that have diplomatic relations with it. The Forum Secretariat (based in Suva, the capital of Fiji, with a staff of about 70), administers a series of programmes aimed at promoting regional co- operation among member states through trade, investment, economic development, and political and international co-operation. It has also developed a growing portfolio of technical training programmes as part of broader initia- tives for institutional strengthening, good governance and accountability. Operations are funded by contributions from member governments and donors. Current donors are the dialogue partners, together with Australia, New Zealand, the Commonwealth Secretariat and Germany. Since October 1994 the Forum has had observer status at the UN General Assembly. Island governments have used the PIF and other regional forums to make their voices heard on other issues, such as climate change and the impact of rising sea levels, and shipments through the Pacific of radioactive materials, notably by the UK-based company, British Nuclear Fuels (BNF). An extensive sea-level monitoring network has been established by Flinders University in Australia, and the PIF secretariat has, for several years, been negotiating with BNF and the other parties involved in nuclear shipments and reprocessing, over an agreement to cover possible mishaps.

The new PIF secretary-general In a surprise development and a break with tradition, Greg Urwin, an is an Australian Australian and a former high commissioner to Fiji, Samoa and Vanuatu, was appointed secretary-general-designate of the PIF at the organisation's annual summit in August 2003. Mr Urwin replaced Noel Levi, from PNG. The post of secretary-general, the senior regional position, had previously always been filled by a Pacific islander, and the leaders of some PIF member states were unhappy at the aggressiveness of Australian lobbying and suspicious of

Australia's motives in seeking the top position in the organisation. Nevertheless, Mr Urwin, who is married to a Samoan, was finally appointed in a secret ballot, and he took office in January 2004. The issues agreed at the 2003 and 2004 annual summits give an indication of the future direction of debate. Central to the agenda are issues such as pooled regional governance, greater co-operation on regional air transport, security and crossborder crime, and the role of foreign aid, as well as the perennial issues of climate change and the impact of globalisation and trade liberalisation on small island economies. A specially convened meeting of the PIF's 16 government leaders in Auckland, New Zealand in April 2004 agreed on a "Pacific Plan" to achieve closer political and economic co-operation between PIF members and to intensify the efforts of the Fiji-based PIF secretariat in implementing leaders' wishes. For the first time the PIF secretary-general has the authority, in consultation with the incumbent PIF chair, to call meetings of leaders or foreign ministers for speedy action in dealing with a crisis. Some regional officials had hinted before the meeting that the PIF could be turned into an EU-style institution, although the idea was quickly dismissed by several island leaders as premature and probably unworkable given the region's huge geographic spread, the small size and weakness of most of the island economies, scant resources, and barriers such as high transport and energy costs and cultural differences. Apart from a mandate empowering the secretary-general to initiate a speedy response to a crisis—a move influenced by the near-collapse last year of the Solomon Islands—the Pacific Plan does little more than reaffirm existing PIF priorities and instruct the secretariat to become more active in executing them. Key goals are as before: to promote economic growth, sustainable development, good governance and security. However, Mr Urwin's arrival does seem to have breathed some fresh air into an organisation rendered somewhat stagnant under the former leadership. Details of the grand vision floated by the leaders in April, and confirmed by the PIF annual summit in Apia, Samoa in August, will be devised in the coming months by a task-force.

The Pacific Community A second regional organisation is the Pacific Community (formerly the South Pacific Commission), formed in 1947 by Australia, France, the Netherlands, New Zealand, the UK and the US. They were then the colonial powers in the region and insisted that the organisation be non-political, dealing only with technical issues and matters of practical co-operation. It now has 26 members and continues as a non-political body, offering technical advice, assistance, training and research. Its headquarters are in Nouméa, New Caledonia, with a substantial presence in Suva. It is a bilingual organisation (English and French), with a staff of around 175 and a limited budget, augmented by special funding for particular projects. It has an integrated work programme based around the development of the region's land-based, marine-based and human resources.

Other regional organisations The secretary-general of the Forum Secretariat chairs the Council of Regional Organisations of the Pacific (CROP), which brings together the Forum and the Pacific Community, as well as six other regional organisations: the Forum Fisheries Agency (based in Honiara, Solomon Islands); the Pacific Islands Development Programme (based in Hawaii); the South Pacific Regional

Environment Programme (based in Apia); the South Pacific Applied Geoscience Commission (based in Suva); the South Pacific Tourism Organisation (also based in Suva); and the University of the South Pacific (based in Suva, but with campuses and centres throughout the region). A further regional organisation, although narrower in membership than either the PIF or the Pacific Community, is the Melanesian Spearhead Group (MSG), which brings together the Solomon Islands, Papua New Guinea, Vanuatu, Fiji and the New Caledonia independence coalition, the Front de Libération Nationale Kanak Socialiste (FLNKS). The MSG aims to promote co-operation between members in economic, political and cultural matters, and is implementing a free-trade agreement (FTA) between its members.

The EU-ACP Convention The 14 island members of the PIF are also members of the 78-state ACP (Africa, Caribbean and Pacific) group within the Cotonou Agreement. This agreement, which was ratified in February 2003, is the successor to the Lomé Convention and gives the ACP nations preferential trading access to the EU market and a share in EU aid programmes and other assistance. The secretariat of the PIF prepared a joint position for negotiations between the PIF members and the EU provided for under the agreement. Negotiations opened in September 2004 and are scheduled for completion before the end of 2007. The Cotonou Agreement, which is to last 20 years, has a strong political dimension. As well as respect for human rights, democratic principles and the rule of law, which were all essential components of the Lomé Convention, the ACP countries have also agreed—reluctantly—to promote good governance and to combat corruption and illegal immigration into the EU. Under previous conventions, ACP products, whether agricultural or industrial, entered the EU duty-free, but four agricultural products—beef, sugar, bananas and rum—were subject to a more restrictive system of tariff quotas. The new agreement offers a negotiating framework for tailor-made regional free-trade agreements (RFTAs), under which ACP countries, preferably within existing economic groupings, will gradually open their domestic markets to European products. Given the adjustment costs involved, a preparatory period of eight years has been agreed, during which the old system of preferences will continue to apply. In any event, Kiribati, Samoa, the Solomon Islands, Tuvalu and Vanuatu, which are classified as least developed countries (LDCs), will still be given the option of entering the EU generalised system of preferences (GSP). Unlike the Lomé Convention, the GSP, which benefits all developing countries, complies with the rules of the World Trade Organisation (WTO), because it is based on the dual principles of non-reciprocity and non-discrimination.

The regional economy

The region is diverse The 22 island countries of the Pacific region are spread across more than 30m sq km, but occupy less than 2% of that area. Although almost all of the countries are politically independent and have their own governments and

heads of state, aid from the former colonial powers, and from other bilateral and multilateral donors, remains important.

Economies dependent on aid The importance of aid reflects the relative weakness of most of the economies and external conditions in the region, as well as problems of poverty, law and order, and poor governance. Agriculture, in particular the export of agricultural commodities, is central to the economies of many of the Pacific islands. Other important industries are fishing and tourism. Fiji, PNG and New Caledonia have important mining industries, but none of the other small island communities has significant natural resources. The high degree of dependence on such sectors renders the islands vulnerable to external shocks, the weather (most island countries are vulnerable to cyclones, among other things) and the vagaries of commodity markets. The economic performance of trading partners also has a direct and usually rapid impact on the island economies. Tourist arrivals fell in the wake of the terrorist attacks on the US on September 11th 2001, although not to the extent initially feared. Inbound tourism rose once again in 2002, partly as a result of the October bombings in Bali, Indonesia, which had the effect of diverting some tourists to the Pacific. Tourist arrivals rebounded in 2003 and in the first half of 2004, with Fiji benefiting most from the recovery, and the pick up in tourism is expected to continue, thanks to perceptions of the region as being safe and peaceful, the increase in air capacity and the expansion of low-cost airline services. The recent recovery in world gold and nickel prices has also benefited Fiji's small gold production industry and New Caledonia's nickel industry, which is attracting a high level of new investment. However, political instability within the region, and in some cases the difficulties in obtaining secure titles to land, are serious obstacles to investment and growth.

Islands struggle with problems Regional governments, including those of Australia and New Zealand, have for such as crossborder trade some time been intensifying their efforts to deal co-operatively with a range of new problems arising from organised crime and the impact of globalisation, but the smaller states lack the ability and resources to deal effectively with issues such as the smuggling of drugs, arms and people through and into the region, overpopulation, environmental degradation, money-laundering and corruption. The governments of Australia and New Zealand have been reluctant to be seen to be intervening in their neighbours' affairs in a "neo- colonialist" fashion. Although some in the region view greater intervention by Australia in the region with suspicion, most island leaders are now more accepting of the country's higher profile in the region. This is largely thanks to the successful intervention in July 2003 of an Australian-led force in the troubled Solomon Islands and the tact with which the new head of the PIF, Mr Urwin, has so far handled the key issues of reform, improved governance and co-operation since his controversial appointment. Island governments are now largely resigned to the fact that flows of aid are conditional on the implementation of reforms to their government and economic systems. The island states generally depend on patrol and surveillance operations carried out by Australia, New Zealand and France (from New Caledonia). Regular meetings are held between law enforcement, customs, immigration and

legal officials to review developments and exchange information. However, the joint implementation of a modernised legislative framework and co-ordinated border control systems has been slow. Six island jurisdictions have offshore financial centres (tax havens) to augment their meagre revenue. Most of these have implemented new laws following the threat of sanctions, made in 2000 by the Paris-based Financial Action Task-Force (FATF), which operates under OECD auspices, unless regulatory regimes were strengthened to minimise opportunities for money-laundering and other criminal activities.

A Pacific free-trade area has The Pacific Island Countries Trade Agreement (PICTA), first envisaged at the been established inaugural meeting of the Pacific Islands Forum in 1971, came into force on April 13th 2003. The FTA, which will be phased in over the next ten years, aims to remove gradually trade barriers such as import duties, quotas and tariffs between the 14 PIF island nations, to help to boost trade, promote regional integration and improve the economic efficiency of the island economies. There are, however, some concerns about the benefits of a free-trade area relative to the costs, especially given the low level of intra-island trade (which accounts for just 3% of total trade within the region) and the impact on government revenue of lower export taxes and import duties, which represent the main source of income for most island governments. The main beneficiary of the FTA is likely to be Fiji, which has the most developed economy and is the biggest trader with the other islands. Closely connected with PICTA is the Pacific Agreement on Closer Economic Relations (PACER), which provides a framework for the future development of trade relations between the 16 PIF countries. Under this agreement, the two developed PIF members, Australia and New Zealand, have agreed to provide technical assistance to and preferential market access for products from the developing PIF members, which in return have assured Australia and New Zealand that they will not be disadvantaged by any trade arrangements the developing PIF members may enter into with other developed countries.

Editors: Kate Allard (editor); Graham Richardson (consulting editor) Editorial closing date: September 9th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]