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policy brief No. 2016-6 (December)

Key points Economic Growth and • Exports of the Pacific (PICs) Sustainable Development have increased by 169%, reaching $9.6 billion in the past 20 years. in the Pacific Island Countries • Given the lack of economies of scale Wawan Juswanto, Senior Economist, ADBI as a result of their Zulfiqar Ali, Research Associate, ADBI small sizes, the PICs need to establish “niche markets,” targeting high-end Overview of the economies of Pacific island countries products or services. • Lack of interconnectivity The Pacific island countries (PICs) have benefited from the growth in and the among the PICs because Pacific in the last 2 decades, strengthening their economic links while loosening ties of inefficient transport with the Americas and in most cases, although not all. Still, more needs to be infrastructure and a done to deepen their integration with Asia, but the ’ diverse demographics dearth of skilled labor remain key concerns make integration difficult to accomplish. For instance, Table 1 shows that Papua New in developing these Guinea (PNG) (with a population of 7.6 million), (850,000), and Solomon Islands niche markets. (611,500) together account for about 90% of the population of all 15 PICs while • About 13% of the 6 PICs have populations of less than 20,000. The relatively small population sizes PIC population is discount the economies of scale in the PICs as industrialization remains minimal. either unemployed or underemployed, High transportation and raw material costs make entrepreneurship difficult to prompting them to sustain, leaving the islanders to survive at subsistence levels with family, clan, and seek work in , community ties providing the social safety net (UNFPA 2014). , and the neighboring Fiji, with its sizable garment industry, is an exception because of its unfettered trade countries, and the remittances they send access to Australia and New Zealand through the nonreciprocal South Pacific form a critical slice of Regional Trade and Economic Co-operation Agreement (SPARTECA) and the the countries’ gross establishment of tax-free factories and tax-free zones. Its industry is well domestic product. developed, attracting around 500,000 people annually because of its proximity • With the number of to Australia and New Zealand compared with other PICs and a well-functioning people over 60 years old increasing by 400 million airline, Air Pacific (Duncan and Nakagawa 2006). in the next 15 years in Asia, the demand Endowed with natural resources—but unfit for large-scale manufacturing owing to for skilled care workers their small economies—agriculture and forestry account for about 20%–30% of the is slated to increase, PICs’ gross domestic product (GDP) with products such as copra, , cocoa, making the PICs a possible location for fruit, kava, fresh and canned fish, pearls, seaweed, timber, and mining gold forming tropical retirement the bulk of their exports (Duncan and Nakagawa 2006). PNG, for instance, exported homes for Asia’s gold, crude , petroleum gas, wood, and copper worth $7.39 billion in 2014. burgeoning middle class. The top export destinations were Australia ($3.23 billion), ($2.29 billion), and the People’s Republic of China ($1.31 billion), followed by Germany ($366 million) and the ($196 million) (OEC web page). Figure 1 illustrates the most and least competitive PIC “export” industries. © 2016 Asian Development Bank Institute ISSN 2411-6734 2016 Pacific Update Conference: Inclusive Growth for Enhanced Resilience 18–19 July 2016 University of the South Pacific, Suva, Fiji This work is licensed under a Creative Commons Attribution- Organized by the Asian Development Bank, the Asian Development Bank Institute, NonCommercial-ShareAlike 4.0 University of the South Pacific, and Australian National University. International License. Table 1 Demographic Composition of the Pacific Island Countries Population Size Land Area Population Density (’000) (sq km) (per sq km) 7,587.2 462,840 16 Fiji 847.6 18,273 46 Solomon Islands 611.5 30,407 20 271.1 12,281 22 190.7 2,935 65 111.2 811 137 Tonga 104.2 650 160 FSM 102.8 701 147 53.8 181 297 17.7 444 40 15.0 237 63 11.0 26 424 10.6 21 504 1.6 259 6 Tokelau 1.2 12 100 Total 9,937 FSM = Federated States of , sq km = square kilometer. Source: United Nations Population Fund (UNFPA) Pacific Sub-Regional Office. 2014. Population and Development Profiles: Pacific Island Countries. Suva, Fiji: UNFPA.

Fig. 1 Comparative Advantage of Pacific Island Countries (in Exports)

Services

Manufacturing Less competitive Exchange rate Agriculture More competitive

Tourism

Natural resources

Source: H. Chen, L. Rauqeuqe, S. Raj Singh, Y. Wu, and Y. Yang. 2014. Pacific Island Countries: In Search of a Trade Strategy. IMF Working Paper WP/14/158. Washington, DC: International Monetary Fund.

ADBI Policy Brief No. 2016-6 December 2 Fig. 2 Total Pacific Exports, 1993–2013 ($ million)

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Note: Data for ADB’s Pacific developing member countries comprising the Cook Islands, Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, and Vanuatu. Source: B. Radoc. 2016. Evolving Trade Linkages between the Pacific and Asia. Presentation at the 2016 Pacific Update Conference: Enhanced Resilience for Inclusive Asia. 18–19 July. University of the South Pacific, Suva, Fiji.

In general, PIC exports have increased exports, increased by 219% in 2015 by 169% over the past 20 years, reaching coupled with the 28.7% above expected $9.6 billion in 2013. Food and live animals oil production in 2015 and $125.3 million accounted for 17% of exports while crude (17.9% of its 2016 budget forecast) in and mineral oils comprised the bulk of petroleum taxes and royalties in the first export earnings between 1993 and 2013 quarter of 2016. For Tuvalu, government (see Figure 2; Radoc 2016). Foreign direct revenues are slated to be 25% higher investments have also surged to around in 2016 than in 2015 owing to a 2% 3.5% of the combined GDP of the PICs, increase in tax revenues, 49% increase in with many Asian countries investing in collection of government charges, and fisheries, mining, and agriculture. These 88% increase in revenues from fishing statistics combined with the relative licenses coinciding with fiscal expansion macroeconomic stability and open boosting growth in 2016 (ADB 2016). trade regimes have led the economic development of the PICs. Despite the intermittent gains, the PICs face numerous challenges in forging However, not all of the PICs have sustainable economic growth. performed consistently well. As Figure 3 shows, there are significant variations in exports among 14 PICs with Kiribati, Key challenges Timor-Leste, and Tuvalu outperforming to sustainable others. economic growth The strong gains for Kiribati can be partially attributed to the newly released Improving tourism infrastructure licenses for fisheries under the vessel day scheme, which widened the current The tourism industry has been one of the account surplus from 44.7% of the key niche markets for the PICs, owing to country’s GDP in 2014 to 77.2% of GDP in their pristine beaches, clear skies, and 2015. For Timor-Leste, exports of coffee, marine life. At least 1.5 million people visit which is chief among its merchandise the region each year. The industry has

2 Economic Growth and Sustainable Development in the Pacific Island Countries 3 Fig. 3 Average Annual Export Growth, 2008–2013 (%)





– TUV KIR TIM RMI SOL FSM VAN PNG FIJ COO TON PAL NAU SAM –

COO = Cook Islands, FIJ = Fiji, FSM = Federated States of Micronesia, KIR = Kiribati, NAU = Nauru, PAL = Palau, PNG = Papua New Guinea, RMI = Marshall Islands, SAM = Samoa, SOL = Solomon Islands, TIM = Timor-Leste, TON = Tonga, TUV = Tuvalu, VAN = Vanuatu. Source: B. Radoc. 2016. Evolving Trade Linkages between the Pacific and Asia. Presentation at the 2016 Pacific Update Conference: Enhanced Resilience for Inclusive Asia. 18–19 July. University of the South Pacific, Suva, Fiji.

developed significantly since the 1980s travel and quality services, leading to a from large-scale resort development to general dissatisfaction among tourists. ecotourism in the 1990s and 2000s. Palau, Palau, Fiji, and other PICs must therefore for example, has gradually advertised upgrade their tourism infrastructure and itself to the Japanese market as a popular services while maintaining a healthy diving and ecotourism destination competition to ensure tourist satisfaction starting in the 1980s before expanding and domestic economic growth. its promotions to Taipei,China and the Republic of Korea in the 2000s. Palau has Encouraging private sector involvement strategically advertised itself as a high- end resort country luring high-income The PICs need to involve the private sector visitors from the three Asian economies to bridge the knowledge and capital over the years (Pacific Islands Centre deficit required to develop their niche 2013). Fiji’s tourism industry has also been markets for products and services. For flourishing, bolstered by its internationally instance, instead of severely regulating competitive airline developed over and protecting markets, the government a long period by competing in other should provide the private sector with sectors (Duncan and Nakagawa 2006). logistical support and practical market However, aggressive competition among information on Asia, connecting them travel companies, resorts, and hotels has with buyers and distributors in the led to a price war cutting down on luxury region. Prohibitive costs of transportation

“The Pacific island countries need to involve the private sector to bridge the knowledge and capital deficit required to develop their niche markets for products and services.”

ADBI Policy Brief No. 2016-6 December 4 “Even though unilateral liberalization may be easy for the Pacific island countries to enforce, without the reciprocal arrangements from other countries, it would be difficult to gain concessions, making it politically disastrous for governments as well. ”

and of setting up manufacturing units communication with the WTO is routed severely undermine industry growth. through the The transportation of raw materials Secretariat. More importantly, trade in the also suffers from lack of efficient PICs is conducted through regional and airports and seaports. According to an multilateral agreements with Australia, Asian Development Bank study, these New Zealand, and the European Union. constraints restrain the growth of niche For instance, SPARTECA—signed in markets for high-end products like pearls, 1981 between the PICs (excluding Palau vanilla, and cocoa. Since exuberant and Tokelau) and Australia and New transportation costs downgrade export Zealand—helped Fiji and Samoa develop competitiveness by increasing the time garment and automotive harness and costs involved in manufacturing industries, respectively creating 23,000 these goods, the PIC governments jobs for Fiji and 3,600 jobs for Samoa at must pursue substantial investments to one time, by allowing duty-free access improve their transport infrastructure. of specific PIC exports to Australia and For the smaller countries with scarce New Zealand. However, as Australia and resources for investing in transport New Zealand have reduced tariffs on infrastructure, Fiji and PNG could be imports over time, the intended benefit regional hubs for exporting products of SPARTECA to the PICs has diminished (Duncan 2008). considerably. More recently, the PICs have negotiated the Pacific Island Countries Trade liberalization Trade Agreement to reduce tariffs on selected services and products, but only The PICs need to redress technical barriers Nauru and Samoa have ratified it. The to trade—including customs, quarantine, agreement awaits ratification by the and registration procedures—to decrease other PICs to become fully operational. the costs of doing business. Trade The Melanesian Spearhead Group liberalization, however, must be managed Trade Agreement between Fiji, Vanuatu, proactively to minimize its baneful PNG, Solomon Islands, and the Kanak environmental, social, and economic and Socialist National Liberation Front effects. Since most of their exports, of New Caledonia includes 180 duty- consisting of natural resource-based free products, but sporadic conflicts of products, are extractive in nature, the PICs interest between the member countries must stringently regulate industries that have marred its success. could adversely affect their environment. So far, only six PICs have joined the The benefits of trade liberalization for World Trade Organization (WTO), which the PICs, while potent, are difficult to allows “most-favored nation” trade access ascertain. Even though unilateral to all member countries. For smaller liberalization may be easy for the PICs countries with limited resources, the to enforce, without the reciprocal administrative and human resources arrangements from other countries, it costs for engaging with the WTO could would be difficult to gain concessions, be prohibitive and, hence, day-to-day making it politically disastrous for

4 Economic Growth and Sustainable Development in the Pacific Island Countries 5 “The Pacific economies have diversified greatly over the past few decades and increased their exports to the neighboring countries.”

governments as well. Further, a potential middle class. A skilled workforce could agreement between a small country and a therefore become one of the major large country would be a likely better deal sources of revenue for the PICs. than any intraregional trade agreement since the effects of trade diversion as compared with trade creation would be Conclusion less likely with greater benefits accruing from integration into vibrant supply The PIC economies have diversified chains (ADB and ADBI 2015). greatly over the past few decades and increased their exports to the Human capital development neighboring countries. While crystal clear seas, pristine beaches, and abundant The PICs should focus on developing natural resources fuel their economic skilled human capital to cater to the growth, their peculiar geography also needs of a wealthier Asia. About limits their economic potential. A lack 1.4 million people in the PICs—13% of of interconnectivity amid inefficient the population—are either unemployed transport and communication or underemployed, prompting them infrastructure has led to sluggish to seek work abroad in Australia, New development of its natural resource- Zealand, and the neighboring countries based primary industries. Regional and send remittances, which form trade agreements have also been a critical slice of their GDPs. However, partly successful with their relatively unchecked and steady migration high negotiation and operational of semiskilled and skilled workers to costs. Therefore, to foster a sustained neighboring countries will only drain economic development, the PICs need human capital from the PICs, worsening to improve their outdated infrastructure, their capacity to provide essential services increase regional coordination with to their citizens and sustain economic each other, and refocus on developing growth (Centre for International niche markets. Finally, because their Economics 2007). Moreover, with the small economies heavily depend number of people over 60 years old on ecotourism, the PICs must closely increasing by 400 million in the next 15 monitor any potential negative years in Asia, the demand for skilled care economic, social, and environmental workers is slated to increase, making impacts of their trade links with the rest the PICs a possible location for tropical of Asia to avoid adverse effects on the retirement homes for Asia’s burgeoning livelihoods of their people.

ADBI Policy Brief No. 2016-6 December 6 6 References Asian Development Bank (ADB). 2016. Pacific Economic Monitor. Manila. Asian Development Bank (ADB) and Asian Development Bank Institute (ADBI). 2015. Pacific Opportunities: Leveraging Asia’s Growth. Manila. Centre for International Economics. 2007. Pacific Island Economies: The Role of International Trade. Canberra and Sydney. Chen, H., L. Rauqeuqe, S. Raj Singh, Y. Wu, and Y. Yang. 2014. Pacific Island Countries: In Search of a Trade Strategy. IMF Working Paper WP/14/158. Washington, DC: International Monetary Fund. https://www.imf.org/external/ pubs/ft/wp/2014/wp14158.pdf Duncan, R. 2008. Pacific Trade Issues. Pacific Studies Series. Manila: ADB. Duncan, R., and H. Nakagawa. 2006. Obstacles to Economic Growth in Six Pacific Island Countries. https://pdfs. semanticscholar.org/6838/577476647f5b045254dfa012eaf80e7f0b96.pdf The Observatory of Economic Complexity (OEC). Papua New Guinea. http://atlas.media.mit.edu/en/profile/ country/png/ (accessed 2015). Pacific Islands Centre. 2013. The Pacific Islands’ Challenges: Perspectives of Economic Development in the Small Island States. http://blog.pic.or.jp/images/book/ritou.pdf Radoc, B. 2016. Evolving Trade Linkages between the Pacific and Asia. Presentation at the 2016 Pacific Update Conference: Enhanced Resilience for Inclusive Asia. 18–19 July. University of the South Pacific, Suva, Fiji. United Nations Population Fund (UNFPA) Pacific Sub-Regional Office. 2014. Population and Development Profiles: Pacific Island Countries. Suva, Fiji: UNFPA.

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ADBI Policy Brief No. 2016-6 December 8