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World Bank East Asia and Pacifi c Regional Report

Well-being from Work in the Pacifi c Island Countries

Acknowledgments

his report is a joint product of the Melissa Adelman, Thomas Bowen, Ximena Poverty Reduction and Economic del Carpio, Jennifer Golan, Alexander Krauss, TManagement, Finance and Ahmed Rostom, Mee Jung Kim, Nataliya Private Sector Development, and Human Mylenko, Marek Hanusch, Reena Badiani, Development departments of the World Jennifer Golan, Christian Bodewig, Gabriel Bank’s East Asia Pacific Regional Office. Demombynes, Karl Kendrick Tiu Chua, Tobias Haque wrote this report under the Rogier Van Den Brink, Lars Sondergaard, guidance of Truman Packard. Substantive Frederico Gil Sanders, and Dewen Wang. inputs were provided by David Knight. The work was conducted under the over- The report has benefitted greatly from all guidance of Bert Hofman, Sudhir Shetty, discussions with and comments provided by and Xiaoqing Yu. We are thankful to our Franz Drees-Gross, Vivek Suri, Sudhir Shetty, peer reviewers—Martin Rama, Carolina Stephen Howes, Jesse Doyle, Phillip O’Keefe, Sanchez-Paramo, and Omar Arias—for their Trang Van Nguyen, Robert Jauncey, Mona detailed comments on early drafts and for Sur, Virginia Horscroft, Shubham Chaudhuri, their advice.

iii

Well-being from Work in the Pacifi c Island Countries

Introduction and summary emergence of an export-oriented private sec- tor are unlikely to be effective in generating In the Pacific island countries, which are substantial employment growth. The chal- small and far from world markets, labor lenge for policy-makers is therefore to think mobility represents the most significant and about how to meet employment challenges substantial opportunity for overcoming within the formidable constraints imposed geographic constraints on employment. by geography. Slow economic growth, population his report presents a brief overview of growth, and accelerating urbanization mean employment challenges in small Pacific that employment creation is a pressing pri- Tisland countries and recommenda- ority for small Pacific island countries. The tions for addressing them. The report con- appropriate employment strategy will vary tributes to an ongoing World Bank analytical between these countries, given their diversity program examining the linkages between in size, location, natural resource endow- employment and well-being around the ments, and demographics. Nevertheless, this world, begun with the World Development report proposes five priorities that are likely Report 2013: Jobs (henceforth WDR2013: to be broadly applicable to this unique group World Bank 2012b). of countries. Discussion in this report relates to Pacific First, stakeholders’ expectations about Island states, with populations of sig- the trajectory of development will need nificantly less than one million, including to be realistic. Due to inherent geographic Solomon Islands, Vanuatu, Samoa, Tonga, obstacles, PICs are unlikely to experience Tuvalu, Kiribati, Republic of Marshall export-driven development and associated Islands, Federated States of Micronesia, and employment creation on the scale seen in the Palau. Economic growth and diversifica- broader East Asia Pacific region. While busi- tion has been very limited in these countries ness environment reforms can open up new because of the barriers imposed by small- opportunities for private sector develop- ness and distance, and these barriers will not ment and employment creation, such mea- be quickly overcome. Policy tweaks to the sures are unlikely to spur sufficient work business environment aimed at fostering the to meet emerging demands even in the best

1 2 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

possible business environment. Employment urban areas. This will require (1) movement strategies must therefore include less con- away from policies aimed at preventing ventional policy options and focus on areas urbanization, such as inadequate legal pro- where PICs have established strengths and tection for recent arrivals in urban areas, advantages. underprovision of peri-urban services and Second, the volume of international infrastructure, and production subsidies for labor mobility should be increased through rural areas; (2) sufficient public investment the erosion of regulatory barriers and in infrastructure links between agricultural investment in transferable human capi- areas and urban areas; (3) improved land tal. PICs will never be able to achieve the administration and increased investment scale and integration seen in larger regional in services in urban areas; and (4) inter- economies. The greatest potential for ventions to assist agricultural productivity work is therefore through the movement and support rural services and standards of of Pacific Islanders to areas where employ- living. ment opportunities are concentrated. The Fourth, productive public spending can priority for policy is to provide people be used as a mechanism for creating new from PICs with access to work wherever it employment opportunities. Large public sec- exists. Echoing the conclusions of earlier tors in PICs are often a source of concern, World Bank reports (Luthria 2006), this with public sector employment thought to will require both changes in the immigra- exist at the expense of increased private sec- tion policies of the nearest large economies tor employment. In reality, the scope for and careful investment in internationally private sector–led employment creation is transferable human capital by small PIC often constrained by geography. Public sec- governments. tors, while large relative to the size of the Third, governments can work to har- economy, remain small in absolute terms ness the positive potential of urbaniza- and with regard to diseconomies of scale in tion through investment in improved administration and service delivery. Public rural services, connective infrastructure, sector employment is therefore likely to and improved urban administration. continue to provide a substantial share of Urbanization is a reality in most PICs work in PICs. Policy attention can usefully and one that should be enthusiastically focus on ensuring that such employment is embraced. Urbanization accompanies devel- productive and sustainable rather than on opment, allowing the realization of scale reducing the number of public sector jobs. economies, greater thickness in markets, Private participation can provide incentives and increased specialization. Urbanization for efficient delivery of public services, but driven by these positive economic ben- needs to be approached carefully and selec- efits should be facilitated. But urbaniza- tively. Broader public sector reforms to tion occurring as a result of poor services ensure efficiency and effectiveness need to in rural areas, conflict, food insecurity, or continue. Donor agencies and governments land shortages simply leads to congestion can work to ensure that development expen- and urban unemployment, delivering few diture supports the creation of local employ- economic benefits and placing pressure ment opportunities. on social cohesion. Policies should not be Finally, policies can ensure that natural biased toward employment in either urban resource industries provide a sustainable or rural areas, but rather should seek to source of employment creation. Natural ensure acceptable standards of living across resource industries can flourish in PICs all communities and allow individuals to despite higher cost structures. But work in respond as they choose to the inevitable natural resource industries is often unsus- concentration of economic opportunities in tainable and contributes little to living WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 3

standards. Judgments about policy inter- a factor of nine since 1990, while exports ventions to create employment within these from these Pacific island countries are only industries should consider the quality and about twice their 1990 value (figure 1.1). sustainability of the work they are likely The percentage of the population living in to create. PICs might often benefit most cities in the average small PIC is about the from converting rents from natural resource same as the percentage of the population industries into improved infrastructure, living in cities in East Asia in 1960, and the services, and human capital, rather than scale of urbanization since 1990 has been seeking to create direct large-scale employ- significantly less (figure 1.2). ment in those industries through implicit or Official statistics are scarce, providing an explicit subsidization. incomplete picture of employment and work in small Pacific island countries. Little data on employment are available beyond that 1 Employment challenges of which are collected from household income the small Pacifi c island countries and expenditure surveys and censuses. There are important inconsistencies in the defini- The Pacific island countries are following tions used in available surveys across coun- an employment trajectory different from tries, leading to large variation in reported the rest of the region. Much of East Asia labor force participation and unemployment Pacific has enjoyed rapid economic growth rates that do not reflect underlying economic and economy-wide increases in produc- or social realities. tivity in recent years, driven by the large Some employment patterns are common emerging economies of East Asia. This across most PICs. A small number of Pacific has occurred with an explosion of work Islanders have formal employment, most of opportunities in higher-productivity manu- which is in cities and much of which is in the facturing and service sectors, often glob- public sector (box 1). Most Pacific Islanders ally integrated and focused on exporting and almost entirely in urban areas. This FIGURE 1.1 Pacifi c island countries have not transitioned to transformation has fed on itself, with pro- export-led manufacturing and services ductivity gains from agglomeration and increasing wage incomes fueling domestic demand. In short, export-driven structural Real export values, Pacific island countries and East Asia Pacific transitions of East Asian economies have 1,000 contributed to creating employment and 900 boosting the well-being that people get 800 from work. The experience of East Asia, 700 however, has not been the experience of 600 most Pacific island countries. There is lit- 500 tle sign in PICs of the broader economic 400 changes that are transforming much of the

Index (1990 = 100) 300 region. Access to regular paid work is lim- 200 ited, and labor productivity remains almost 100 static. Real gross domestic product (GDP) per capita has increased 650 percent for 0 19901994 1998 2002 2006 2010 the East Asia Pacific region since 1982, but for the larger of the economies discussed in Kiribati Solomon Islands Tonga Vanuatu this report, output per person has increased East Asia Pacific (developing) Samoa only 38 percent. Real exports from East Asia Pacific as a whole have increased by Source: World Development Indicators. 4 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 1.2 Pacifi c island countries have lower rates of growth Women’s economic activity tends to be and are less urbanized than the rest of East Asia Pacifi c concentrated in the informal sector, especially in agriculture (UNESCAP 2007). While data Urbanization and growth, Pacific island countries and East Asia Pacific constraints preclude extensive analysis, it is 600 clear that women have access to a narrower CHN range of employment opportunities than men 500 and often lack access to higher-paid work. This imposes costs on the economy, with 400 EAP analysis from the broader East Asia Pacific region suggesting that eliminating barriers to 300 women’s participation in certain sectors and VNM 200 occupations could improve labor productiv- THA ity by up to 25 percent for some countries 100 WSM TUV IDN MYS (UNESCAP 2007). TON RMI VUT Growing youth populations put pressure FSM SLB KIR FJI % change in real GDP per capita since 1990 0 on the economy to generate enough work. –5 0 5 10 1520 25 30 High fertility rates are driving rapid popula- % change in share of population living in urban areas since 1990 tion growth in several PICs, with the Pacific East Asia Pacific Small Pacific island countries population expected to double over the next 28 years. PICs also face a youth bulge: Source: World Development Indicators. 54 percent of the population is below the age of 24—a higher proportion than in East engage in some combination of agricul- Asia, all developing countries, and the world. ture, subsistence activities and cash or bar- The number of people between the ages of ter exchange, and informal small-business 0 and 14 substantially exceeds the propor- activity, either as part-time employees or as tion of the population between the ages of business owners. In cities, many individu- 14 and 25, and the number of working-age als are employed on a part-time or casual youth is expected to grow quickly over the basis by small businesses operating infor- next decade (figures 1.4 and 1.5). Previous mally, while many others generate income research by the World Bank has shown that through a range of informal and part-time it will be a challenge for the private sector to own- business trading opportunities, such as generate enough new jobs to meet expected operating a temporary retail stall or selling increases in labor supply. Formal employ- products in the town market. Many Pacific ment opportunities are already limited rela- Islanders move between agricultural produc- tive to the labor force in many PICs. Recent tion for exchange, subsistence agriculture, estimates from the International Labour and informal small-business activities and Organization (ILO) suggest that the percent- cannot easily be assigned to a single employ- age of men between 20 and 24 years of age ment category. Those with formal employ- who are not engaged in productive activities ment may also engage in agricultural or (defined as “paid or unpaid activity that con- subsistence activities at various times to gen- tributes to their personal livelihood or that of erate additional cash income or meet various their family and community as a whole”) is social obligations.2 as high as 58 percent in Kiribati, 44 percent Work patterns vary strongly by gender in the Marshall Islands, and 46 percent in (figure 1.3). Across Pacific island countries, Samoa (ILO 2013). men dominate paid employment outside Other factors will also affect the demand of agriculture, with approximately half as for work. Social services have achieved many women accessing these opportunities. remarkable success in improving health and In Melanesia, women occupy only a third education outcomes across small Pacific of positions within the formal economy. countries in recent decades. At the same WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 5

BOX 1 Where is the work?

Based on data from the National Provident Funds the Solomon Islands to nearly 80 percent in of Kiribati, the Solomon Islands, and Vanuatu, fi g- Kiribati. Given that the vast majority of Pacifi c ure B1.1 shows employment shares in the formal Islanders are engaged in some form of work, private sector, the public sector, and various forms the dominance of informal employment, includ- of informal employment. ing agriculture for exchange, is also clear from A large share of formal employment is in the size of the working-age population without the public sector, ranging from 30 percent in formal work.

FIGURE B1.1 The majority of Pacifi c islanders are engaged in some form of work, many in informal employment

Kiribati

Solomon Islands

Vanuatu

0 1020304050 6070 80 90 100 % of working age population Public sector Other formal employment Informal employment

Sources: National Provident Fund and census data.

time, the spread of telecommunications and opportunities. While global trends sug- mass media has fueled aspirations for higher gest that agriculture-based livelihoods are living standards and increased awareness of becoming less desirable, they may also be the wider world. Relatively better-educated becoming more difficult. In some coun- and healthier people are more likely to have tries, including Kiribati and the Solomon aspirations beyond village-based and family- Islands, rural population growth is placing oriented agricultural and fishing activities. pressure on subsistence systems, leading to The pressure associated with these grow- falling productivity and crop yields (Reddy ing aspirations is already spilling over into 2007). Pressure on subsistence systems may higher rates of urban migration as young become an additional driver of urban migra- people seek cash incomes and broader oppor- tion and demand for alternative employment tunities. It is likely to be felt most acutely in opportunities. countries with currently low levels of emigra- Small Pacific island countries face a cluster tion and limited formal sector employment of overlapping employment challenges (box 2). 6 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 1.3 Women are less likely than men to participate in the Without the opportunities generated by rapid labor force economic transformation, PICs face several challenges to creating employment. Many have rapidly growing populations of young 90 people who are unlikely to be satisfied with 80 the limited opportunities for self-advancement 70 offered by agricultural subsistence. Some 60 small PICs are already facing the related chal- lenge of rapid urbanization and are struggling 50 to generate work for growing urban popula- 40 tions. Some have emerged from conflict and 30 face ongoing conflict pressures, with the 20 accompanying need to maintain access to Labor force participation (%) opportunities and ensure their careful distri- 10 bution between groups and regions. Several 0 countries are struggling to ensure sustainable Samoa Solomon Islands Tonga Vanuatu benefits from extractive resource industries, Female Male including encouraging the development of ancillary industries, diversification, and sus- Source: World Development Indicators. tainable employment generation.

FIGURE 1.4 Pacifi c island countries have very young populations

16

14

12

10

8

% of population 6

4

2

0 0–4 5–9 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65–69 70–74 75–79 80+ Age band (years) Eastern Asia Micronesia, Fed. Sts Samoa Solomon Islands Southeastern Asia Tonga Vanuatu World

Source: United Nations Department of Economic and Social Aff airs. WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 7

Governments and donors are con- FIGURE 1.5 Rapid growth in the number of youth is expected over cerned about the quality and quantity of the coming years employment available to Pacific Islanders. Governments and donors in PICs and else- Expected growth of 15–24 age cohort by 2020 where have previously implemented policies to support employment creation in spe- cific geographic locations or sectors, based Palau on prior assumptions about what “good” employment is. Often, policies have sought Tuvalu to support employment in rural areas over employment in urban areas; work within the local economy over work in larger markets; Kiribati private sector employment over public sec- tor employment; and employment within Micronesia, specific natural resource industries, through Fed. Sts. concessions or subsidies. Results of this Nauru approach have mostly been unsatisfactory, with underlying economic realities derail- ing well-intentioned plans. As discussed in Vanuatu the World Development Report 2013; Jobs (hereafter referred to as WDR 2013), the Marshall employment strategies that are most likely to Islands succeed focus on ensuring that work raises living standards, drives greater productivity, Samoa and contributes to greater social cohesion, regardless of the geographic location or sec- Tonga tor where that work takes place. Solomon Islands 2 Five employment priorities for Pacifi c island countries 020 40 60 80 100 120 Percent In this section we present five employment priorities for PICs. The applicability of these Source: Adapted from Bedford 2012. priorities varies across countries accord- ing to size, location, demographic profile, natural resource endowments, and nature of existing economic activities. No single associated employment creation of the scale strategy will be appropriate for all countries. and nature seen in much of the East Asia Nonetheless, shared geographic character- Pacifi c region, even with the best possible istics suggest some shared challenges and business environment. Employment strate- some potential common solutions. gies need to include less conventional policy options and focus on areas where Pacifi c 2.1 Trajectory of development countries have established strengths and advantages. Priority 1 Set realistic expectations about Q
Countries of relevance. All Pacifi c island the trajectory of development countries, especially those where popula- tions are very small and dispersed. Q
Summary. Due to inherent geographic obsta- Q
Living standards. Forces of economic cles, Pacifi c island countries are unlikely to geography mean that Pacifi c island coun- experience export-driven development and tries are unlikely to see rapid improvements 8 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

BOX 2 Pacifi c island countries face overlapping employment challenges

The World Development Report 2013: Jobs (here- lead to uneven and unsustainable development and after WDR 2013; World Bank 2012c) explicitly squeeze out growth in other parts of the economy. recognizes that different employment challenges The Solomon Islands remains a postconfl ict country will require different policy responses. Small Pacifi c and faces continued confl ict pressures arising partly island countries face a complex and overlapping from uneven distribution of economic opportunities, range of challenges, including at least five of the including the concentration of formal sector employ- challenges specifi cally identifi ed in the WDR 2013. ment in the capital city, Honiara. Urbanization con- Figure B2.1 shows the challenges relevant to PICs tinues to generate pressures for small Pacifi c island and the associated priorities for policy makers iden- countries like Kiribati, the Marshall Islands, the tifi ed in the WDR 2013. These priorities are elabo- Solomon Islands, and Vanuatu, with the pace of rated in the recommendations of this report. growth in urban populations outstripping the pace of All small island countries face inherent barriers of employment creation and feeding concerns regarding scale and distance, which can preclude the develop- youth unemployment and associated social problems. ment of manufacturing and service industries associ- These problems are exacerbated by very large and ated with high-productivity, better-paid work. Many growing youth populations in many PICs, especially countries in the region are endowed with natural in Melanesia. resources, in the form of mineral deposits, forests, and fi sheries. The development of these industries can Source: World Bank 2012c.

FIGURE B2.1 Small Pacifi c island countries face a complex and overlapping range of challenges requiring a range of priorities

Small Pacific island countries

Conflict-affected Small island Resource-rich Urbanizing High youth Challenges economies nations countries economies unemployment

Jobs not Jobs providing Jobs connected Jobs supporting Jobs not leading Jobs integrating allocated on the Priorities alternatives to global export to excessive rural migrants basis of to confrontation markets diversification congestion connections

in living standards from private sector Q
Social cohesion. Social cohesion can be employment creation. Alternative means undermined by unrealistic expectations of supporting higher living standards regarding the prospects for economic and through work are required. employment growth. Q
Productivity. Scale and concentration are vital for productivity. Small, dispersed, Export-driven, private sector develop- and distant populations face inherent lim- ment is unlikely to be the answer to employ- its to productivity that need to be refl ected ment challenges facing small Pacific island in employment strategies. countries. A common message in reports WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 9

regarding economic growth or employment FIGURE 2.1 Costs to start a business are higher in many Pacifi c creation in PICs is the importance of reforms island countries aimed at improving the environment for the private sector. Improving the business envi- Cost to start a business ronment can deliver important benefits to small Pacific island countries. A legal and Thailand regulatory framework that supports invest- ment and the sound functioning of factor Samoa markets can facilitate the creation of employ- ment within businesses supplying local mar- Tonga kets or in niche export industries. Continued investment in reforms to reduce the costs of Cambodia doing business therefore remains an impor- tant priority, especially for countries where Malaysia compliance costs facing businesses are out of line with regional or global norms Figures Marshall 2.1 and 2.2 and box 3. It is important, how- Islands ever, not to overstate the likely impact of such reforms on employment creation. Due Indonesia to inherent geographic obstacles, PICs are unlikely to experience the scale of export- Philippines driven development and associated employ- ment growth seen in much of the East Asia Kiribati Pacific region under any regulatory or policy setting. Fiji The formidable geographic challenges Solomon of smallness and distance impose costs. Islands The small PICs discussed in this report are among the world’s 50 smallest countries. Vanuatu Smallness makes it hard for businesses to achieve economies of scale. With relatively Micronesia, Fed. Sts. few domestic businesses, firms find it dif- ficult to outsource upward and downward 020 40 60 80 100 120 140 160 through the supply chain. Firms also expe- % GNI per capita rience less exposure to positive knowledge externalities, as they are unable to observe Source: Doing Business Indicators 2013. the practices of other firms in the same industry and lack access to a pool of work- ers with experience in different firms. In other small countries, firms overcome some (Figures 2.3 and 2.4). Recent quantitative of the costs of smallness by trading inter- research has investigated just how signifi- nationally. But PICs are also some of the cant the costs arising from small scale and most isolated countries in the world, when remoteness might be for countries like those measured using a variety of economic mea- in the Pacific (Yang et al. 2012; Tumbarello, sures.3 Great distances increase the costs of Cabezon, and Wu 2013). Winters and exporting and the price of imported inputs. Martins (2004) find that capital would earn The combined impacts of smallness and negative returns if it were invested in export distance on cost are sufficient to under- manufacturing in nearly all of the Pacific mine competitiveness of the industries that island economies. Even if wages were zero in have supported growth in larger economies most Pacific countries, total costs would still 10 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 2.2 The time required to start a business is burdensome in production, reflecting higher local cost Pacifi c island countries structures. Economic activity and employ- ment have occurred in areas where inevitably higher costs do not undermine viability and Days needed to start a business local activity does not face direct interna- Malaysia tional competition (World Bank 2011). These areas include (1) public services and infra- Samoa structure, which account for a large share of formal employment; (2) nontradable pri- Micronesia, vate sector goods and services, often focused Fed. Sts. on meeting demand from the public sector or public sector employees; and (3) natural Tonga resource industries, including tourism, where Marshall rents can be generated despite higher cost Islands structures. Although the economic drivers in small PICs are different from those in larger Thailand economies, they have served PICs very well in lifting incomes and living standards well Kiribati above those in many larger and less isolated developing economies. Philippines The geographic forces that determine what work is available in PICs will remain signifi- Vanuatu cant over time. Contrary to the East Asian experience of diversification, PICs might Solomon Islands expect further concentration in traditional areas as preferential access arrangements for Cambodia key export industries are removed, trade and investment are liberalized, and transport and Indonesia communication links are improved. Loss of preferential access will mean that PICs face Fiji the full impacts of higher costs in manufac- turing and services for export, while eco- 05010 20 30 40 nomic integration will reduce barriers to competition from imports. As global eco- Source: Doing Business Indicators 2013. nomic activity becomes more and more con- centrated and the benefits of agglomeration exceed world prices both in manufacturing in large urban centers increase, the scale dis- and also in a service industry such as tourism. advantages faced by PICs will become rela- Constraints of geography have been tively more significant. consistently reflected in the structure and Employment strategies will need to be fea- performance of small PIC economies. The sible within the constraints imposed by geog- economies of small PICs have remained raphy. The extent of employment creation dependent on aid, remittances, and natural from improvements in the business environ- resource industries (Bertram and Watters ment should not be overstated. Even under 1985). Large structural current account defi- the best possible business environment, it is cits have continued for all but a few natural not clear that the private sector would be able resource–rich Pacific countries. Growth in to generate significant employment through consumption, fueled by aid and remittances, export-driven growth, due to the cost dis- has been met almost entirely by increased advantages of geography (box 4). This is imports rather than increased domestic not, however, reason for pessimism. Policy WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 11

BOX 3 Is labor regulation “off the plateau” in Pacifi c island countries?

Very limited data are available on labor mar- of labor market policies. These data suggest, how- ket policies and their impacts on PICs. The Labor ever, that labor regulation in PICs is not unusually Freedom Index—a component of the Heritage restrictive (fi gure B3.1). Four of seven PICs included Foundation’s Index of Economic Freedom—ranks in the index are among the 25 countries with the the restrictiveness of labor regulations from an least restrictive policies. Only Vanuatu is among employer perspective, using data collected through the “more restrictive” half of countries covered by the World Bank’s Doing Business survey. Reaching the index. On the basis of this evidence, it seems any fi rm conclusions regarding labor regulation in unlikely that overly prescriptive labor regulation is PICs would require better information, as labor a primary constraint on private sector growth and regulations imposed on fi rms are just one element productivity in most PICs.

FIGURE B3.1 Labor market regulation is not especially restrictive in Pacifi c island countries

Labor freedom index, all countries 100 90 80 70 60 50 40 30 20 10 0 Tonga Kiribati Micronesia, Fed. Sts. Samoa Solomon Islands Vanuatu

Source: Heritage Foundation Labor Freedom Index.

options are available that build on Pacific employment opportunities even across island countries’ existing strengths, despite national boundaries. This will require inherent geographic constraints. both changes in the immigration policies of the large regional economies and careful 2.2 Labor mobility investment in internationally transferable human capital. Priority 2 Improve international labor Q
Countries of relevance. All Pacific mobility through the erosion of regulatory island countries, especially those where barriers and investment in transferable population growth is rapid and current human capital access to international labor markets is limited. Q
Summary. Geographic realities will con- Q
Living standards. Overseas employment strain work opportunities in Pacifi c island opportunities have been shown to support countries. Governments and donors can higher living standards for migrant work- facilitate access of Pacifi c Islanders to ers and their families. 12 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

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BOX 4 Are the costs of distance declining?

Advances in technology might be expected to have kilometers would cease at a distance of 9,000 kilo- reduced the costs of transport over time, mitigating meters. Because costs of distance are so important, the disadvantages faced by PICs in accessing inter- around 23 percent of global trade occurs across a national export markets and reducing the cost of shared land border between countries. This propor- imported inputs. A trend of falling transport costs tion has been constant for several decades. Hummels might suggest new export and economic develop- (2007) provides a detailed analysis of air and ship ment opportunities for PICs and a decline in the sig- freight costs over time. He fi nds that, despite innova- nifi cance of geography in constraining employment tions including containerization and introduction of creation in the private sector. Unfortunately, avail- the jet engine, there has been no signifi cant reduc- able evidence suggests that geographic proximity tion in shipping costs (as a proportion of the value of remains a primary determinant of trade links and products shipped) since the 1950s, while air trans- shows no signifi cant reduction in costs of distance port costs have actually increased substantially over over time. the past decade (fi gure B4.1). Cost trends have been Analysis from economic “gravity models” shows driven by higher fuel costs, with oil price increases that even in the current age of globalization, 90 per- more than offsetting the cost reductions associated cent of the trade that occurs over a distance of 1,000 with new technologies.

FIGURE B4.1 Shipping costs remained relatively stable, while air transport costs have risen substantially over the past decade

a. Liner price index b. Trends in airline costs 250 3.0 0.30

2.5 0.25 200 2.0 0.20 150 ting expenses (%) a Index 1.5 0.15

100 1.0 0.10 Cost index (2,000 = 100) re of oper a Sh 50 0.5 0 1954 1964 1974 1984 1994 2004 With GDP deflator 1988–Q11990–Q31992–Q11994–Q31996–Q11998–Q32000–Q12002–Q32004–Q1 With traded goods price deflator Composite cost index Fuel cost index Fuel share in operating expenses

Sources: Venables 2006; Hummels 2007; Yang et al. 2012.

migration is reflected in large proportions population in migrant-receiving countries, of the working-age population of some migrants generally foresee broader educa- PICs now living abroad. While social and tional and economic opportunities for their economic indicators for recent migrants to children, even for those whose own immedi- these countries can lag those of the broader ate opportunities are limited. Recent analyses 14 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

BOX 5 Labor mobility arrangements in Australia and New Zealand aff ect development outcomes in Pacifi c island countries

New Zealand, Australian, and U.S. migration poli- granted residence-class visas in New Zealand cies continue to have an important impact on labor each year. The cap includes principal applicants, mobility and broader development outcomes in PICs. partners, and dependent children. Applicants Increases in Pacifi c populations living in New Zealand must meet English language profi ciency standards and Australia have fueled remittance flows, offset and have a “suitable offer of employment” that population growth, and expanded economic opportu- provides a salary equal to a specifi ed minimum nities. Since 1971, the Pacifi c-born population of New income requirement (currently NZ$31,500). This Zealand and Australia has increased from 46,000 to scheme is also oversubscribed, despite offer-of- more than 250,000, with around 140,000 in New employment requirements. Zealand and 110,000 in Australia (Bedford 2012). Q
Recognized seasonal employer (RSE) scheme. The growth in Pacifi c-born populations has occurred Under this scheme, up to 8,000 PIC workers can be through very different channels, refl ecting divergent hired on a part-time basis by New Zealand farmers policy approaches to Pacifi c migration. in the horticulture and viticulture industry. Alongside its country-neutral points-based immi- gration schemes, New Zealand has maintained a In contrast to New Zealand, Australia has very range of special access arrangements for PICs. These limited special labor access for Pacifi c island coun- are targeted toward those countries that have the tries. Consequently, three times more Pacifi c island- strongest constitutional or historical links to New ers migrated to New Zealand than to Australia Zealand. Such arrangements include the following between 2003 and 2007, despite Australia’s much measures: larger population and economy (Bedford 2012). Nearly all Pacifi c-born workers in Australia either Q
Special citizenship relationships. The populations qualifi ed for entry through country-neutral schemes of the Cook Islands, Niue, and Tokelau have full (including large numbers of relatively highly edu- New Zealand citizenship and associated rights to cated Fijians, following recent coups) or traveled to work in New Zealand. Australia after acquiring New Zealand citizenship Q
The Samoan quota. New Zealand allocates through the Trans-Tasman Travel Arrangement, residence visas, by ballot, to 1,100 Samoans which allows free movement of Australian and between the ages of 18 and 45 each year. Successful New Zealand citizens across both countries. A very primary applicants must obtain an offer of work small number of Pacifi c-born workers have accessed in New Zealand before immigration is approved. employment opportunities in Australia through the The scheme is typically oversubscribed, partly due recent pilot of the Pacifi c seasonal worker scheme, to the number of places taken up by secondary which operates on a basis similar to New Zealand’s applicants, who are included within the quota RSE scheme. Places within the scheme were lim- cap. Over the past three years, 1,201 out of ited to 2,500 over the four years from 2008 to 19,326 registrations were drawn from the ballot, 2012, and only around 1,600 places were offered representing odds of around 6 percent (Gibson, due to low uptake by employers (Reed et al. 2011). McKenzie, and Stillman 2011, 11). Participation has increased slowly, with around 710 Q
The Pacifi c access category. Under the Pacifi c visas being issued under the scheme during the fi rst access category, 250 citizens of Tonga, 75 citizens half of FY2013/14, and the cap is still unlikely to be of Tuvalu, and 75 citizens of Kiribati can be reached.

of the recognized seasonal employer (RSE) overseas, demonstrate the benefits to fami- scheme, which provides short-term access lies in sending countries of both short-term to New Zealand labor opportunities, pri- and permanent migration (McKenzie and marily in horticulture, and broader survey Gibson 2010; Gibson, McKenzie, and data of families with members working Stillman 2011; Luthria et al. 2006; Gibson WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 15

and McKenzie 2011). Households in PICs residents on study and work opportuni- with family members working overseas expe- ties, and 20 percent providing sponsorships rience the following improvements: for Tongan residents seeking work overseas (Gibson and McKenzie 2010). Diaspora Q
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30 also increasing (Chand and Clemens 2008). Available evidence from small countries sug- 25 gests that the benefits to sending countries from the emigration of high-performing stu- 20 dents and academics—including remittances Percent 15 and knowledge transfer—generally outweigh the costs, especially when high rates of return 10 migration are taken into account (Gibson and McKenzie 2010, 2013). Knowledge transfer 5 is particularly significant, with 13 percent 0 of expatriate Tongans from a sample of aca- Solomon Vanuatu KiribatiSamoa Tonga demic high achievers providing advice to the Islands Tongan government while overseas, more than 50 percent providing advice to Tongan Source: Estimates based on data from country authorities. 16 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 2.6 Remittances support imports, consumption, and of unskilled labor during the construction living standards boom following the Christchurch earth- quake have led the local business community Foreign exchange receipts by source to call for increased migration opportuni- ties.6 Recent labor shortages in Australia, 120 where Pacific-born workers currently consti- tute a negligible proportion of migrants and 100 the total workforce, have also led to appeals 80 from the business community for increased temporary work arrangements from develop- 60 ing countries (Earl 2012).

Percent Differences in the supply of and demand 40 for labor across countries present oppor- tunities for mutual benefits from mobil- 20 ity (Bedford 2012). The net economic gains from labor mobility have been long estab- 0 lished in the economic literature (World Micronesia, Kiribati Tonga Samoa Vanuatu Solomon Bank 2006; Walmsley, Ahmed, and Parsons Fed. Sts. Islands 2005). Recent evaluations have demonstrated ODA Remittances Exports how businesses have benefited from reli- able and relatively low-cost labor provided Source: Estimates based on data from country authorities. through New Zealand’s RSE scheme at the Note: ODA = offi cial development assistance. micro level (Department of Labour 2010). The benefits of labor mobility will increase remittances during the recent global eco- further as demographic trends lead to a scar- nomic crisis, over the longer term, remit- city of young workers in the larger regional tances tend to provide a more dependable economies. source of foreign exchange than the natural Distribution of opportunities could be bet- resource industries or donor aid flows on ter matched with development needs. Many which small PICs typically rely.5 PICs already enjoy relatively easy access to Demographic shifts are creating oppor- larger labor markets, including the North tunities for greater mutual benefit from Pacific countries with access to the U.S. labor mobility (figures 2.7 and 2.8). Patterns of market. Samoa and Tonga have strong his- demographic change vary between coun- torical ties with New Zealand, and preferen- tries in the Pacific region. While some PICs tial access to the New Zealand labor market have large and growing youth popula- has translated, through step migration, into tions, the populations of the larger regional large populations in Australia. Partly because economies are aging and likely to decline of migration opportunities and their large over coming decades. The larger regional Australian and New Zealand populations, economies face impending labor shortages Samoa and Tonga have some of the best devel- that could partially be met by Pacific labor. opment outcomes in the Pacific. Strong edu- Permanent migration to New Zealand dur- cation outcomes and transport links support ing fiscal 2010–11 was below planned levels participation in seasonal worker schemes, by 9,000 places, even as the Samoan quota with Samoa and Tonga accounting for 50 per- and Pacific access entries remained over- cent of participants in the first seasons of the subscribed (Department of Labour 2013). New Zealand scheme and more than 80 per- In fiscal 2011–12, net permanent and long- cent of participants in the Australian scheme. term migration to New Zealand was nega- Other Pacific countries, where domestic eco- tive for the first time in more than a decade nomic opportunities are most constrained (Department of Labour 2013). Shortages by smallness and isolation (Tuvalu) or where WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 17

incomes are lowest (Kiribati and the Solomon FIGURE 2.7 Migrants to high-income countries make up a Islands), tend to have less access to short-term substantial portion of Pacifi c working people and permanent migration opportunities and are constrained in their participation in sea- Migrants in Australia, New Zealand, and the United States sonal schemes by costs of transport and insti- 90 tutional weaknesses. Greater policy effort on the part of receiv- 80 ing countries is required to expand access. 70 Opportunities for labor mobility are heavily 60 constrained by the immigration policies of 50 large neighboring countries, such as Australia 40 and New Zealand. These same neighboring 30 countries allocate a large proportion of their overseas development budgets to the Pacific 20 region with the stated aim of improving eco- % of sending-country population 10 nomic opportunities and living standards 0 a in the region. Increased policy coherence Micronesia, Samoa PalauMarshall Tonga Fed. Sts. Islands between aid and immigration policies would see a large expansion in temporary and per- Source: Adapted from Bedford 2012. manent labor mobility opportunities avail- Note: Opportunities for permanent labor mobility are greatest for Polynesian countries. able to Pacific people. This would not only a. Samoa excludes the U.S. diaspora due to inability to isolate American Samoa in census data. represent a very cost-effective development intervention, but also bring economic ben- efits to those receiving countries, especially as their populations age. Achieving the great- Australia and New Zealand can be dem- est mutual benefits from emerging demo- onstrated by the relatively small number graphic transitions will require more action of seasonal workers arriving from Pacifi c from large economies in the region on several countries, compared to the number of fronts: job opportunities available to citizens of much wealthier countries through “work- Q
Expansion and improvement of tempo- ing holiday” visa schemes (fi gures 2.9 rary worker schemes. Efforts to expand and 2.10). Expansion of the successful participation in the seasonal worker New Zealand scheme and improvements schemes could bring substantial benefi ts to the Australian scheme could generate to PICs. Seasonal schemes currently make development impacts that are signifi cant only a small contribution to overall remit- at the macroeconomic scale. tance fl ows to Pacifi c countries. Samoa Q
Increased permanent migration. While and Tonga alone receive around US$270 seasonal schemes could provide impor- million a year in remittances from per- tant opportunities for generating remit- manent migrants, compared to around tances, evidence demonstrates the broader US$30 million a year in remittances from range of benefi ts accruing to Pacifi c island seasonal workers in Australia and New countries from access to permanent labor. Zealand. If Australia were to offer as many Such benefi ts include skills and knowledge seasonal worker places as New Zealand transfer, increased tourism receipts, and relative to its population, however, total huge improvements in living standards remittances from seasonal workers in the for permanent migrants. Under any sce- scheme could reach 10 percent of the GDP nario, seasonal schemes will not close of participating countries or 60 percent of the very large gap in incomes between their current aid fl ows (see box 6). Scope to large regional economies and small expand seasonal worker schemes in both Pacifi c islands. The best opportunities for 18 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 2.8 Demographic diff erences suggest mutual gains from workers tend to dominate in the sectors mobility for receiving and sending countries best suited to seasonal work schemes— such as agriculture and horticulture— Expected growth in youth population (ages 15–35) posing challenges for greater participation by women. Permanent migration must therefore remain a key focus of policy Tonga attention. Allocations for New Zealand’s existing Pacifi c Access category could be expanded and a broader range of coun- Australia tries could be offered a dedicated quota (as provided to Samoa). Australia could consider the introduction of similar New Zealand quota or lottery-based permanent access schemes. A modest start-point would be the introduction of an Australian Pacifi c Micronesia, Fed. Sts. Access category visa, with 2,000 per- manent visas offered per year to immi- grants from small PICs, based on the New Samoa Zealand Pacific Access category alloca- tions adjusted for Australia’s larger popu- lation size.7 Another important priority Solomon Islands is to develop processes through which seasonal workers can transition to more permanent visas. Vanuatu Q
Reorientation of mobility links. With the exception of high Vanuatu participa- –0.50 0.5 1.0 1.5 2.0 2.5 3.0 3.5 tion in the New Zealand seasonal worker % change scheme, existing labor mobility arrange- 2005–10 2010–20 2020–30 ments deliver greatest benefi t to the Pacifi c countries where incomes are highest and development outcomes are strongest. Source: Adapted from Bedford 2012. Note: Population pressures are building in Melanesia, while the working-age population is declining To boost well-being from work, further in nearby large economies. expansion of both seasonal and perma- nent labor mobility arrangements should be targeted toward countries such as improved productivity and incomes for Kiribati and the Solomon Islands, where many Pacific Islanders will be to move domestic economic prospects and mobil- to where greater opportunities exist. ity opportunities are heavily constrained Seasonal schemes must be viewed as a and challenges from growing youth popu- complement to, rather than a substitute lations and accelerating urbanization are for, increased permanent labor mobil- most severe. Increased participation of ity. Seasonal schemes are appropriate these countries in seasonal schemes would only to certain industries, and not those, likely require further country-specific such as elderly care and construction, donor subsidization of training and trans- where demand is likely to be greatest over port costs. coming decades. Seasonal work schemes require intensive involvement of sending Improving and expanding seasonal labor and receiving governments and therefore mobility opportunities for Pacific Islanders impose administrative costs with sustain- offers immediate benefits without any sig- able gains less easily assured. Finally, male nificant costs. Large policy shifts toward WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 19

BOX 6 An expanded seasonal worker scheme has potential benefi ts

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FIGURE B6.1 Remittances could grow signifi cantly with expanded seasonal work opportunities

Possible growth in seasonal worker remittances 70

60

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40

Percent 30

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0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Remittance from seasonal workers (% of ODA) Remittance from seasonal workers (% of GDP)

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increased permanent labor mobility also offer immigrant workers; expanding low-skilled clear mutual benefits, but will require some immigration while avoiding the displacement balancing of several important objectives: of opportunities for low-skilled New Zealand protecting labor rights while ensuring access and Australian workers; and expanding to employment for relatively low-skilled migration opportunities to lower-skilled 20 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 2.9 Immigration policies in Australia favor guest workers and less-educated Pacific Islanders while from high-income countries ensuring that these workers have adequate skills for employment within Australian and Australia visa approvals, FY 2011/12 New Zealand businesses. New Zealand and 45 Australia both have demonstrated strong 40 commitment to improving development out- comes in neighboring Pacific countries over 35 recent decades. Improved labor access for 30 Pacific workers offers one of the most effec- 25 tive means of achieving this objective and can 20 help to address growing labor shortages as Thousands 15 the Australian and New Zealand populations age (box 7). 10 Policy action is also needed from govern- 5 ments in sending countries. Within Pacific 0 island countries, continued investment is United Korea, Ireland GermanyTaiwan, Total needed to build human capital through both Kingdom Rep. China pilot health and education, so that working-age Working holiday Seasonal workers Pacific Islanders have the capacity to take advantage of the overseas opportunities that Source: Department of Immigration and Citizenship 2012. Note: The number of working holiday visas approved in Australia and New Zealand demonstrates are available. This is an immediate prior- potential to expand seasonal worker opportunities. ity in the “compact countries” of the North Pacific, where—despite populations having access to the U.S. labor market—remit- tance flows and development impacts have FIGURE 2.10 Pacifi c seasonal workers account for a small so far been limited because migrants can proportion of temporary work visas in New Zealand only access very low-paying work (Connell and Brown 2005). Basic numeracy, literacy,

New Zealand temporary visa approvals, FY 2011/12 and behavioral skills are transferable across work types and countries and should con- 45 tinue to receive strong emphasis within 40 human development strategies. More spe- 35 cifically, PIC governments could ensure that 30 some qualifications are recognized interna- 25 tionally, through the adoption of Australian, 20 New Zealand, or U.S. education standards. Thousands 15 The Kiribati Institute of Technology, for example, now offers a curriculum and 10 qualifications fully aligned with those of 5 Technical and Further Education Australia, 0 while international accreditation has been Working FamilyEssential Study Specific Seasonal Work to Other holiday skills to work purposes work residence achieved by the Marine Training Centre, visas or event scheme allowing graduates to access a wide range of international opportunities. Policies should be designed to improve Source: Department of Labour 2013. Note: The number of working holiday visas approved in Australia and New Zealand demonstrates opportunities for women. Women have lim- potential to expand seasonal worker opportunities. ited access to labor mobility options. The majority of participants in the Australian and New Zealand seasonal worker schemes are men, exacerbating gender differences in WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 21

BOX 7 Seasonal worker schemes in New Zealand and Australia are an important opportunity to expand work opportunities for Pacifi c people

New Zealand’s seasonal labor scheme was launched in the program has resulted in better-quality and in 2007, allowing 5,000 workers to fill positions more productive workers and a more stable work- for 7 months over an 11-month period in the horti- force than in previous years. culture and viticulture industries. Kiribati, Samoa, Q
The scheme benefi ts worker-sending families. Tonga, Tuvalu, and Vanuatu were selected for Research carried out in Tonga and Vanuatu found special assistance in mobilizing workers, but the that participating in the RSE scheme has a large and scheme is open to all Pacifi c Island Forum member statistically signifi cant positive impact on household countries other than Fiji. A “New Zealander fi rst” income per capita. Household expenditure per principle is applied, under which vacancies have to capita also increases with participation in the RSE be lodged with government agencies responsible for scheme in Tonga. Substantial, statistically signifi cant social welfare benefi ts so that available opportuni- increases in subjective well-being were identifi ed, ties are offered to local employment seekers before along with positive impacts on housing quality and they are offered to migrant workers. Pacifi c workers higher ownership rates of durable assets. can be hired directly by employers, through agents, Q
The scheme increases incomes of workers. The or through a prescreened “work-ready pool” admin- median after-tax income earned in New Zealand, istered by government agencies. Demand has been as reported by seasonal migrants, is approximately strong, with the number of workers in the “work- $NZ12,000, several times the income per capita of ready pool” far outstripping the number of available those not participating in the scheme (approximately places. Since its introduction, 24,600 workers have $NZ1,400 in Tonga and $NZ2,500 in Vanuatu). participated in the scheme (with annual quotas of 5,000–8,000 workers). More than half of work- With the New Zealand scheme considered “one ers return at least once, and 23 percent of workers of the most effective development policies evaluated have participated in all four seasons, suggesting to date,” there is a clear case to expand the num- that the scheme can provide a sustainable source of ber of available places, including through expan- income. Knowledge of and access to the scheme are sion into additional sectors where domestic labor uneven, with the majority of workers from Tonga shortages are present or emerging (Mackenzie and and Vanuatu. Gibson 2010). The scheme has been subject to several evalu- The Australian seasonal worker scheme was ations (Department of Labour 2010; McKenzie introduced following completion of a pilot scheme and Gibson 2010; Merwood 2012; Research in 2012. An evaluation of the scheme’s develop- New Zealand 2012). The following are the key ment impacts found signifi cant benefi ts for the small fi ndings: number of participating households in Tonga, with incomes per household increasing almost 40 per- Q
The scheme benefi ts employers. Employers rate cent. Evaluations have also shown productivity ben- Pacifi c RSE workers higher than all other groups efi ts for participating farmers (Leith and Davidson of employees for their dependability, enthusiasm 2013). But the scheme operates at a much smaller while working, and productivity. Specifically, scale than the New Zealand scheme and has been Pacifi c RSE workers are viewed as signifi cantly subject to various implementation problems. During more dependable, productive, and enthusias- the pilot, 2,300 places were offered, but only 1,600 tic than all other categories of seasonal worker. of these were actually fi lled. The number of workers Many employers (86 percent) believe that return- recruited was around 100 a month in 2012, about ing workers are “much more productive” than half of the cap and a third of the number hired those in the initial season. Almost all employers under the New Zealand program. (93 percent) believe that the benefi ts of partici- The largest constraint to uptake is the absence pating in the scheme outweigh the costs. At least of labor shortages in targeted sectors of agricul- 95 percent of employers agree that participation ture and horticulture. Such labor shortages have

continued 22 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

BOX 7 (continued) historically been very significant. But, in 2006, widespread use of illegal labor in the agriculture and reforms were implemented under which primar- horticultural sectors; (b) investing in promotion of ily European “backpackers” on working holiday the scheme to potential employers; (c) reducing the visas are offered one-year visa extensions subject minimum number of employment hours in order to to working for three months or more in the agri- ensure a good balance between fl exibility to employ- culture or horticulture sectors. These reforms—and ers and certainty to workers; (d) requiring employers the associated increase in supply of farm labor from to meet a lower proportion of travel costs (given the backpackers—are reported to have almost entirely differential in minimum wages between Australia eliminated previously pressing labor shortages. The and New Zealand, most workers under the scheme continued prevalence of illegal labor in the horticul- would have the capacity to meet a larger proportion ture industry also undermines demand for seasonal of transport costs); and (e) reviewing reporting and workers. Additional factors constraining growth paperwork requirements to reduce transaction costs of the scheme include (a) lack of knowledge of the that are frequently cited as a major constraint to scheme among potential employers (a recent review participation. found that around half of farmers have simply not For both the New Zealand and Australian heard of the scheme) and (b) perceptions that the schemes, future work could also focus on oppor- scheme involves high transaction costs and red tape tunities to expand the participation of small PICs (Howes and Hay 2012). where domestic employment opportunities are Australia has recently decided to expand the most constrained and participation in seasonal scheme, opening opportunities in additional sec- schemes has so far been limited (such as Kiribati, tors, including tourism, and placing a higher cap on the Solomon Islands, and Tuvalu). In these cases, the total number of participants. However, uptake further investment could be made in two important in new sectors has also been very low, and signifi - areas. First, donor agencies could do more to sup- cant reforms of the scheme and broader policy set- port training and vetting of potential participants tings are needed if it is to achieve the same success to ensure that participating workers are able to meet as the New Zealand program. The fi rst priority is to the productivity expectations of farmers and other address the existing policy distortion that encourages employers. This would maximize the likelihood backpackers to work for short periods in the agri- of repeated participation and ensure that seasonal culture and horticulture sectors in order to access workers from that country build a good reputation a visa extension. Options include simply removing among potential employers. Second, donor agen- this offer of extension to backpackers, offering it to cies could consider subsidizing the transport costs those who work in a different or broader range of for those participating from more remote PICs. This sectors, or making Pacifi c Islanders eligible for the would address an important existing cost wedge same visa class (that is, the working holiday maker that disadvantages some of the small PICs with visa). Additional priorities include (a) addressing the greatest need.

access to paid work. Such disparities arise members of the household (Connell and primarily because of disproportionate male Brown 2005). Broadening seasonal work representation in the pool of workers nomi- opportunities in sectors such as hospitality nated for potential selection by recruitment would be likely to create new opportunities agencies and authorities within Pacific island for women. Expansion of permanent migra- countries. Such gender disparities may be tion schemes may also have positive gender of particular concern given evidence that impacts. Evidence from Fiji and Tonga sug- women migrants remit a greater proportion gests that equivalent numbers of men and of their income more regularly and are more women are able to access long-term and likely to send remittances to other women permanent migration opportunities (Luthria WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 23

et al. 2006). Family access provisions under and urban unemployment, delivering few preferential New Zealand schemes allow economic benefi ts and placing pressure spouses to access the New Zealand labor on social cohesion. Policies should not be market, regardless of the gender of the pri- biased toward jobs in either urban or rural mary applicant, ensuring rough gender areas, but rather seek to ensure acceptable balance. Ensuring equitable access to edu- standards of living across all communities cational opportunities for women (including and allow individuals to respond as they support for dependent family members for choose to the concentration of economic scholarship recipients), increasing women’s opportunities in urban areas. participation in seasonal schemes (including Q
Countries of relevance. Rapidly urban- through addressing constraints to uptake in izing Pacific island countries, includ- new sectors), expanding permanent migra- ing Kiribati, the Marshall Islands, the tion opportunities for families, and closely Solomon Islands, and Vanuatu. monitoring the impacts on women of the Q
Living standards. Access to paid employ- long-term absence of males from households ment is, and will likely remain, concen- participating in seasonal schemes are impor- trated in urban areas. People should be free tant priorities. to seek the broader opportunities available International assistance is needed to sup- in cities. But adequate living standards, port the policy and institutional improve- involving access to adequate services, must ments required for increased international be maintained in rural areas. mobility of Pacific Islanders. Institutions with Q
Productivity. Population concentration responsibility for negotiating international allows specialization and some economies labor arrangements need to be strength- of scale. Urbanization therefore presents ened. Financial and technical support con- an important opportunity for productiv- tinues to be needed for agencies facilitating ity growth. Subsidizing work in particular the participation of workers in regional or places is an ineffi cient use of resources and global schemes, such as divisions within PIC undermines the potential benefi ts of con- foreign ministries responsible for selecting centration for private sector development. workers for participation in Australia’s and Q
Social cohesion. Poorly managed urban- New Zealand’s seasonal worker schemes. ization can weaken social cohesion. Public Finally, ongoing aid assistance for all levels investment should be prioritized toward of education—including provision of tertiary improving urban administration and ser- scholarships—can provide a major boost vices rather than preventing urbanization to prospects for increased labor mobility from occurring. through seasonal and permanent schemes. Urbanization is an important phenom- 2.3 Urbanization enon for employment in the Pacific. Pacific cities are growing very rapidly. Measured as Priority 3 Make the most of urbanization the percentage growth of urban populations, through investment in rural services, Kiribati, the Solomon Islands, and Vanuatu connective infrastructure, and improved are urbanizing at similar rates as the rapidly urban administration growing East Asian economies (figures 2.11 and 2.12).8 Even in countries where recorded Q
Summary. Urbanization brings employment rates of urban growth are slower, urbaniza- benefi ts if it allows the realization of scale tion is frequently cited as a major policy issue. economies, greater thickness in markets, A challenge for policy makers is to ensure and increased specialization. But urbaniza- that the potential benefits of urbanization tion occurring as a result of poor services can be realized while minimizing the costs. in rural areas, confl ict, food insecurity, or Urbanization can be an engine of growth land shortages simply leads to congestion and employment opportunities. It is typically 24 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 2.11 Pacifi c populations remain largely rural provision of services for local markets, includ- ing the public sector, lie in a more urbanized future. Urbanization also offers governments Malaysia the chance to provide services and infrastruc- ture at efficient scale—reducing the costs Marshall Islands associated with serving disbursed and inac- Fiji cessible rural populations—and facilitating World important improvements in quality and cov- Indonesia erage. Many Pacific Islanders demonstrate a strong revealed preference for urban life, Tuvalu which provides improved access to earning China opportunities, relief from the insecurity and East Asia Pacific (developing) physical labor associated with rural subsis- Kiribati tence, access to consumer goods and services, and the prospect of upward social mobility. Thailand Urbanization in PICs is not always hap- Vietnam pening for the right reasons. People who Vanuatu are moving to cities are not always doing so Tonga because they expect more productive and better-paid work. Rather, urbanization is Micronesia, Fed. Sts. also being fueled by a lack of adequate ser- Solomon Islands vices and declining living standards in rural Samoa areas (figures 2.14 and 2.15). For these rea- sons, some PICs face an unusual combination 09010 20 30 40 50 60 70 80 of slow economic growth and rapid urban- Share of population that is rural (%) ization (figure 2.16). Even when relatively broad coverage is achieved in rural areas, the quality of services typically lags far behind Source: United Nations Department of Economic and Social Aff airs. what is available in urban areas. Inadequate services are compounded by poor agricul- tural productivity. Agricultural production in PICs remains concentrated around small- associated with higher incomes, improved holder subsistence production, with market- service quality and coverage, lower fertility ing options often constrained by insufficient rates leading to slower population growth, scale, poor transport links between islands more integration with global markets, and or regions, limited access to finance, and diversification leading to broader economic lack of knowledge and training on agricul- opportunities (World Bank 2008; United tural production techniques. Subsistence Nations Center for Human Settlements 1994; farming in rural areas is often only weakly see figure 2.13). Urbanization in PICs can linked to food markets in urban areas, with provide an engine for employment creation. PICs heavily reliant on food imports despite Increased urban populations offer businesses large agriculture sectors. There is little evi- the opportunity to integrate into supply dence of any significant increase in agri- chains, thicker labor and input markets, and cultural productivity in PICs over recent larger markets for goods and services. While decades, while population growth has placed prospects for export-driven diversification pressure on agricultural subsistence systems into manufacturing and service exports are in some areas. likely to remain limited even in the largest Potential benefits are in danger of being Pacific island cities, the best prospects for outweighed by a range of social and eco- expanding private sector opportunities in the nomic costs. Rather than moving into WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 25

productive work that spurs economic growth FIGURE 2.12 And this will continue despite urbanization and finances increased service delivery, many urban arrivals face limited prospects and sim- Rural population by region ply add to the burden on overstretched urban services and infrastructure. Urbanization 100 in PICs is therefore often associated with a 90 higher risk of poverty, high youth unemploy- 80 ment, and frustrated aspirations for social 70 mobility, feeding into increased rates of sub- 60 stance abuse, crime, and loss of social cohe- 50 sion (Allen and others 2013). The breakdown Percent 40 in family structures and informal social 30 safety net systems as young people move to cities has led to unprecedented levels of 20 inequality and crime. These dangers are fre- 10 quently cited in analyses of Pacific urbaniza- 0 tion and are reflected in available statistics Pacific Africa Asia World Europe Latin America and on crime and violence (Connell 2011; ADB the Caribbean 2012a; United Nations Office on Drugs and Crime data from Storey 2003). 1960 2000 2050 The right reforms can facilitate both urban and rural development (box 8). Policy Source: United Nations Department of Economic and Social Aff airs. discussions of urbanization in PICs often pose an artificial choice between rural and urban employment. Obvious problems of urbanization, accompanied by stagnation in rural livelihoods, have fostered opposi- FIGURE 2.13 Urbanization is associated with improved human tion to urbanization and fed perceptions that development economic development in urban centers is occurring at the cost of development in rural Urbanization and human development, small countries areas. Common complaints include the ineq- uitable concentration of public and private 180 sector employment in urban areas, the loss of human capital in rural areas as working-age 160 people move to cities, and growing dispari- 140 ties in access to services and infrastructure 120 between urban and rural areas. But economic 100 development is not a zero-sum game, and 80 urban development does not have to impose 60 costs on rural areas. Urbanization can pro- 40 vide a pathway to employment for many if it 20 occurs for the right reasons. With appropri- Human development index, low = good 0 ate linkages between urban and rural areas, 020406080 100 120 economic opportunities in urban areas can Urban population (%) support improvements in rural standards of living. At the same time, reasonable services and living standards in rural areas can ensure Source: World Development Indicators. that urbanization is driven by opportunity rather than desperation and leads to good outcomes. Focusing on the following policy 26 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 2.14 Access to sanitation in rural areas is not as good as in intended to slow or prevent urbanization urban areas and redistribute economic production to rural areas. Examples include (a) the Access to improved sanitation explicit or implicit subsidization of eco- 100 nomic activities in rural areas (including 90 production subsidies and government investment in production facilities); (b) 80 deliberate underinvestment in provision of 70 urban services and infrastructure to grow- 60 ing urban populations (especially in squat- 50 ter settlements where recent arrivals are 40 concentrated); (c) absence of measures by % of population 30 which squatters can acquire formal land 20 rights; and (d) destruction of residential 10 and commercial properties in settlement 0 areas by state or municipal authorities. FijiKiribati Marshall Micronesia, Solomon Vanuatu Islands Fed. Sts. Islands Such measures have destroyed jobs and Rural Urban seldom fostered sustainable economic growth in rural areas or arrested the pace of urbanization. Source: World Development Indicators. Q
Provide adequate basic services across all communities. Urbanization fueled by FIGURE 2.15 Access to water in rural areas is not as good as in uneven access to services leads to the con- urban areas gestion of urban facilities and excess sup- ply of low-skilled labor in urban areas. Access to an improved water source Relatively large aid fl ows to PICs provide an opportunity to finance a basic stan- 100 dard of services in all communities, allow- 90 ing migration decisions to be based on 80 economic opportunities and preferences 70 rather than basic service needs. 60 Q
Invest in connective infrastructure. Rural 50 areas can share the benefi ts of increased 40 employment opportunities and improved

% of population 30 service delivery in urban areas if people, 20 goods, and information can move freely 10 and at reasonable cost. Infrastructure 0 links between capitals and other areas of FijiKiribati Marshall Micronesia Solomon Vanuatu concentrated population are vital to facili- Islands Islands Rural Urban tate the supply of urban markets by rural producers. Subsidization of transport links can facilitate access of rural people Source: World Development Indicators. to urban services, reducing urbanization motivated by the desire to access services. areas may increase the likelihood of comple- Good-quality, low-cost, and reliable trans- mentary urban and rural development: port can also allow people to take advan- tage of work opportunities on a short-term Q
Avoid policies to prevent urbanization. basis, as they arise, allowing reversibility In several PICs, policies have been dis- and reducing the risks facing persons seek- cussed or implemented that are explicitly ing urban jobs. WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 27

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good coverage of sanitation and water ser- The public sector provides a large share vices. Adequate public investment in laws of cash employment in many Pacific island and institutions to prevent crime and sexual countries (figures 2.17 and 2.18). PICs face exploitation can also facilitate women’s par- challenges in meeting the high fixed costs asso- ticipation in a broader range of economic ciated with a fully functioning sovereign gov- activities (box 9). ernment. Because there are large economies of scale in operating the various institutions 2.4 Public spending required for governance and service delivery, the costs of government are high relative to Priority 4 Ensure that public spending the size of the economy. At the same time, delivers effi cient services and creates barriers of geography prevent rapid employ- employment ment growth in export-oriented manufactur- ing and services. Consequently, public sector Q
Summary. Public sectors in Pacifi c island employment is likely to continue to represent countries are often viewed as a source of a large share of total formal and cash-earning concern, with public sector employment employment, especially for the smallest PICs. thought to exist at the expense of private Given the continued importance of the public sector employment. In reality, scope for sector, an important challenge for PICs is to private sector–led employment creation is ensure that public sector jobs are good jobs, often constrained by geography, and pub- both for public servants and for society. lic sectors, while large relative to the size The benefits of public sector employment of the economy, remain small in absolute are broad and widely shared. Public sector terms. This is especially true when disec- salaries are often well above average levels onomies of scale in administration and ser- of income. Recent analysis suggests that the vice delivery are taken into account. Policy average public servant earns around 5 times attention can usefully focus on improving GDP per capita in Kiribati and around 2.8 the quality of public sector jobs, regarding times GDP per capita in Tonga, compared what they provide for civil servants and to global norms of about 1.2 times. In both society, rather than on reducing public sec- countries, public service salaries are also tor employment. higher than average private sector salaries. Q
Countries of relevance. All Pacifi c island Benefits of public sector employment also countries, especially those where popula- include training opportunities, international tions are very small and employment is travel, and opportunities to form global net- concentrated in the public sector. works that would be very unusual in most Q
Living standards. Public servants tend to private sector employment. Given strong enjoy higher living standards, with salaries social pressures for sharing wealth, the ben- often supporting larger family and com- efits from higher pay and broader opportu- munity networks. nities are often widely shared, with every Q
Productivity. Incentives for effort and public sector job often supporting the living skills acquisition are sometimes blunted in standards of a wider family group or commu- the public sector. Selective use of private nity. Training and networking opportunities participation and continued public sector available to public sector employees are often reform have the potential to achieve pro- a key gateway to international labor market ductivity gains. opportunities and much higher standards of Q
Social cohesion. Social cohesion would be living, sometimes via scholarships and fur- strengthened if appointments in the public ther higher education. sector were based on merit and employ- Public sectors in PICs experience the same ment opportunities were distributed equi- incentive problems as public sectors in the tably among social groups and geographic rest of the developing world. Given the extent areas. to which their economy-wide resources are WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 29

BOX 9 Unmanaged urbanization increases poverty and weakens social cohesion in the Solomon Islands

The squatter settlements of Honiara illustrate many is widespread, especially among youth; in a recent of the issues associated with rapid urbanization in survey, 67 percent of youth residing in the squatter PICs. Evidence from the national census and the settlement of White River reported that they had no “people’s survey” commissioned by the regional regular source of cash employment and were look- peacekeeping and reconstruction force reflect the ing for work. These dynamics have led to declines in risks associated with rapid urbanization driven social cohesion, including higher levels of crime and partly by uneven access to services (fi gure B9.1). violence and dissatisfaction with the performance of These surveys show that persons living in urban police and government. areas not only have far greater access to paid There is little evidence of significant return employment than persons living in rural areas, but migration to rural areas, and challenges in urban also far greater access to services and infrastructure. areas need to be addressed. Improved administra- As Solomon Islanders move to access both economic tion, improved services, and better infrastructure opportunities and better services, the population in urban areas might allow Solomon Islanders to of Honiara has grown at around 5 percent a year. continue to seek the economic opportunities asso- Weak land administration has led to infl exible land ciated with urbanization without facing such severe use, contributing to housing shortages and forcing declines in living standards and social cohesion. many immigrants to live in squatter settlements Increased investment in rural services might reduce located outside the formal town boundaries and the incentives for migration for those with little with limited access to services and infrastructure. prospect of fi nding employment. With urbanization being driven by both economic opportunities and the desire to access services, labor Sources: World Bank 2010a; Regional Assistance Mission to Solomon Islands supply has outgrown demand. Underemployment people’s survey 2011; Solomon Islands National Statistics Offi ce.

FIGURE B9.1 Rapid urbanization in the Solomon Islands is accompanied by risks

a. Responses from RAMSI people's survey b. Responses from 2009 national census 90 90 80 80 70 70 60 60 50 50

Percent 40 40 Percent 30 30 20 20 10 10 0 0 Victim of Do not believe Do not think There has been My current Housing Access to waste Share of Rank: Share of crime within the police treat government more dishonesty financial quality and energy labor force Literacy rate adults with household people fairly and performing and misuse of situation worse in paid work of adult post-primary in past year with respect well power in past than two years women education year ago

Provinces Honiara Honiara settlements Provincial urban Honiara Rural

Sources: Data from the Regional Assistance Mission to Solomon Islands (RAMSI) people’s survey, 2011; national census, 2009. 30 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

FIGURE 2.17 Government in Pacifi c island FIGURE 2.18 Public service employment is countries is large substantial

Government expenditure Payroll Kiribati Marshall Islands Kiribati Solomon Islands Samoa Tonga Tonga Vietnam Vanuatu Malaysia Vanuatu Fiji Solomon Islands Thailand Timor-Leste Marshall Islands Lao PDR China Palau Indonesia Philippines Caribbean Cambodia islands Myanmar Small island 09010 20 30 40 50 60 70 80 100 developing states % of GDP 06010 20 30 40 50 70 % of recurrent government expenditure

Source: Estimates based on data from country authorities. Source: Estimates based on data from country authorities.

invested in the public sector, efficiency in pub- lic administration and in the delivery of public employment opportunities in PICs. Well- services is especially important. Good public paid jobs in large public sectors can come at sector jobs would provide strong incentives a cost to the private sector, with businesses for human capital development and produc- facing higher taxes to support bloated gov- tivity, while also supporting adequate liv- ernments and increased public sector compe- ing standards for public sector workers and tition for labor and associated wage inflation. their families. Public services in Pacific island However, it is not clear that the public sector countries, however, face common challenges, is crowding out the private sector in PICs. including limited accountability, weak per- First, a large proportion of government rev- formance management systems, and severe enues typically comes from natural resource capacity constraints that impede the delivery royalties and aid. Government spending often of core government outputs and functions supplements domestic demand, with public (ADB 2010b). The severity of these challenges servants supporting the emergence of private varies across countries, but public sector sector service economies, especially in capital employment, while providing benefits for pub- cities. For some countries, economic growth lic sector employees and their families, often has closely tracked growth in public spend- does not have as positive an impact on society ing, with changes in public sector demand as it could (ADB 2010b). These issues often exerting a determining influence on private lead to calls to reduce government spending sector performance (see box 10). and the role of government in the economy.9 Second, given sluggish growth, reliance There is little evidence that simply reduc- on natural resource industries, and the pre- ing public spending would lead to improved dominance of agricultural work, it is not WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 31

BOX 10 Public sector expenditure supports economic growth in Vanuatu and the Marshall Islands

The recent experiences of Vanuatu and the FIGURE B10.1 In small Pacifi c island countries, Marshall Islands illustrate the potential for pub- public expenditure and economic growth move in lic expenditure and public employment to “crowd tandem in” private sector activity, supporting broader eco- nomic growth. a. Growth and public expenditure in Vanuatu In Vanuatu, tourism-based private sector growth 8 30 during the previous decade drove a rapid increase 6 in government revenues. This revenue growth sup- 20 4 ported rapid increases in government expenditure 10 and employment (an increase in real wage expen- 2 diture of more than 50 percent), with changes in 0 0 Percent aggregate economic growth, tourism arrivals, and –2 Percent government spending closely aligned. With many –10 –4 tourism operations weakly integrated into local sup- –20 ply chains, growth of public expenditure through –6 increased tax revenues supported a broader expan- –8 –30 sion of paid employment opportunities both within 1997 2000 2003 2006 2010 the public sector and in private sector businesses b. Growth and public expenditure in Marshall Islands supplying goods and services to public servants and government entities. 7 25 In the Marshall Islands, under renewed arrange- 6 20 ments for fi scal transfers from the United States, 5 15 public expenditures grew at an annual average rate 4 of 12 percent between fi scal 2003 and fi scal 2007. 3 10 Employment in the public sector added 507 jobs, 2 5

growing at an annual average rate of 6 percent over Percent Percent 1 the period. Expansion in public spending fueled 0 0 growth of 1.9 percent in this period, peaking at –5 3 percent in 2007. With the fl attening off of pub- –1 –10 lic expenditure, growth fell during 2008 and 2009, –2 but recovered during 2010 and 2011 partly due to –3 –15 the impact of new publicly funded infrastructure 20002003 2006 2009 2011 projects. Public expenditure was the dominant Real growth driver of both employment creation, inside and Real change in government expenditure (right axis) outside the public sector, and economic growth in an economy with limited alternative prospects Source: Estimates based on data from country authorities. (fi gure B8.10.1).

clear that public sector workers could find or specialized staff often reflect a legitimate employment acceptable to them in the private attempt to retain the vital skills required to sector if the size of government were sub- undertake key government functions in the stantially reduced. For many jobs, competi- context of a very narrow pool of appropri- tion for labor between the public and private ately educated professionals and competition sectors is not always apparent. In some cases, from overseas employers, nongovernmental higher public sector salaries for more senior organizations, and donor agencies. Recent 32 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

reviews of the experience of public sector Outsourcing and privatization should be reforms in the Pacific cast serious doubt on approached cautiously, but they can some- the assumption that the private sector will times bring benefits. Outsourcing the deliv- necessarily absorb retrenched public employ- ery of services and privatizing government ees in the context of widespread redundan- agencies that can operate on a commercial cies (ADB 2009a; Collins and Warrington basis are often seen as an effective means 1997). The large-scale retrenchment of pub- of overcoming the agency problems associ- lic sector workers in the Cook Islands and ated with public sector delivery of services. the Marshall Islands led to the emigration of The profit motive and competition can qualified workers rather than their absorp- sharpen the incentives for productivity, feed- tion into the private sector. ing through into better services at lower cost. Finally, public sector spending and pub- Privatizing state-owned enterprises that were lic service numbers may need to be large, competing directly with the private sector relative to very small economies and popu- in Kiribati, Samoa, and other PICs has led lations, to ensure the delivery of vital ser- to the expansion of employment opportuni- vices (Brown 2010). Cross-country evidence ties and improvements in services, as inef- shows that small countries tend to have ficiencies associated with poor public sector larger public sectors and more public sec- management have been eliminated (ADB tor employment, reflecting diseconomies of 2011). Restructuring the road transport sec- scale in service delivery and administration tor in Samoa to allow the outsourcing of road (figure 2.19. Reducing the capacity of gov- maintenance has facilitated the emergence ernments to hire and retain enough people of several efficient and well-run private sec- to carry out all the necessary functions of tor firms that provide both employment and government and provide the public goods vastly improved services to government. But required for successful private sector activity privatization and outsourcing in the absence is likely to have an adverse impact on living of a competitive market environment can standards, employment creation, and pro- also undermine service delivery and employ- ductivity (World Bank 2011). ment creation. Inadequately regulated pri- vate monopolies are no better than public monopolies at expanding access to services and are more likely to involve loss of local FIGURE 2.19 Government is bigger in smaller countries employment and expatriation of monopoly rents. Efficient delivery of outsourced gov- Population and government expenditure ernment services relies on competition for contracts and effective monitoring of delivery 70 by government agencies. While outsourcing 60 and privatization continue to provide impor- tant opportunities for increasing work in 50 the delivery of public services, these oppor- 40 tunities need to be pursued carefully, taking 30 account of the following: % of GDP 20 Q
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34 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

Donors could introduce preferences in their Natural resource opportunities, including procurement processes for businesses using tourism, attract investment to areas where local labor or produce. Donors could also resources and attractions are located rather make greater use of general and sector budget than to where business costs are low. High support, with expenditure of this kind typi- business costs in PICs do not, therefore, cally having a larger impact on local employ- preclude investment, as economic rent can ment than project financing. be earned from the exploitation of natural resources even given the high costs associ- 2.5 Natural resource industries ated with distance. This is reflected in Pacific island countries’ historically high reliance Priority 5 Generate sustainable employment on fisheries, minerals, forestry, and tourism from natural resource industries for foreign exchange and income. With rapid growth in international tourism arrivals pro- Q
Summary. Natural resource extraction is jected over coming decades, a large share of often seen as an easy source of new employ- global stocks of certain fish species located ment. In reality, employment in natural in Pacific waters, and ongoing discoveries of resource industries in the Pacifi c is often new mineral wealth in the region, PICs will unsustainable, of poor quality, and reliant continue to attract the attention of natural on implicit or explicit subsidies. Countries resource investors (figure 2.20). with natural resource endowments should Policy makers and the public often want support employment creation in natural to see substantial direct employment created resource industries based on careful con- from natural resource endowments, given sideration of the likely quality of associated growing populations. Sometimes, govern- work, taking careful account of the oppor- ments have considered or pursued mandates tunity costs of the implicit and explicit sub- for local employment creation as a negoti- sidies often required. ated condition of resource access or have Q
Countries of relevance. Pacific island provided tax exemptions or subsidies to countries with natural resource endow- encourage tourism investments expected to ments, including fi sheries, minerals, and bring employment. The labor intensity of forestry. extractive natural resource industries is typi- Q
Living standards. Natural resource indus- cally very low. Work with higher pay and tries have a poor record of delivering productivity within natural resource indus- sustainable improvements in living stan- tries is often highly specialized and tends to dards in the region. The most sustainable be performed by expatriates rather than local improvements may come from investing labor. Because PICs lack economies of scale, rents from these activities in areas that there are limited opportunities for develop- open new employment opportunities in ment of ancillary industries around natural other sectors, locally or internationally. resources, and natural resource industries are Q
Productivity. Investing rents from natural not typically integrated into local chains of resource industries into improved service production. It is generally cheaper for natural delivery and human capital can avoid the resource investors to process products over- problems of low-productivity employment seas than to develop local production chains, in natural resource industries. given high operating costs and skill shortages. Q
Social cohesion. Social cohesion can The forestry industry in the Solomon Islands, be undermined by geographically con- for example, which has contributed double- centrated, short-term natural resource– figure shares of GDP and government reve- related employment. Public investment nues for several decades, employs only around of natural resource rents can provide 5,000 unskilled workers, mostly at wage rates broader and more equitably distributed below the national minimum established opportunities. for all other industries (World Bank 2010a). WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 35

Nearly all processing is undertaken offshore, FIGURE 2.20 Tourism to the Pacifi c island countries is expected to and forestry methods are purely extrac- keep growing tive, with very little local investment. Pacific tuna fishery resources are among the larg- a. Global tourism arrival projections est in the world and generate more than 10 percent of government revenue for four PICs. 2,000 But onshore processing and value added have 1,800 been difficult to establish, with employment 1,600 in the industry contracting in the years since 1,400 independence (Gillett 2009). 1,200 The need to subsidize tourism investment 1,000 reflects pressures of regional and global tax Millions 800 competition. In contrast to extractive indus- 600 tries, tourism is relatively labor intensive, 400 hires a large percentage of local workers, 200 and can be better integrated into local sup- 0 ply chains with broader economic impacts World Advanced Emerging Asia and economies economies the Pacific (Scheyvens and Russell 2009). For this rea- son, tourism investment is often attractive, 1980 1995 2010 2020 2030 with several PIC governments offering tax b. International tourism arrivals concessions for tourism investors. This has 400 fueled “tax competition” in the region, with governments competing to offer the most 350 favorable tax or investment incentive package 300 to international investors, despite high fiscal 250 nds costs and limited evidence that such conces- a 200 sions exert a determining influence on invest- ment decisions (James 2009). Thous 150 While tourism has been proven to generate 100 employment that is reasonably sustainable and can open the doors to broader oppor- 50 tunities in Pacific countries, work based 0 on extractive natural resource industries is 2007 2008 20092010 2011 often short term and limited to the lifespan Palau Samoa Tonga Vanuatu of extractive activities. Creating unsustain- able employment creates risks of lower living Source: World Tourism Organization. standards and pressures on social cohesion when natural resources are exhausted and employment opportunities cease. Work based on extractive natural resource indus- Gender discrimination limits the role of tries also tends to be geographically con- women in fisheries in many Pacific island centrated around the location of resources. countries, due to prevailing cultural divisions Such concentration can lead to rapid growth of labor (Novakzec, Mitchell, and Veitayaki in inequality, rapid internal migration, 2005). As a result, access to economic and a corresponding emergence of conflict opportunities around the tuna industry is pressures—a possibility illustrated by natural strongly gendered in favor of men (Barclay resource development in Papua New Guinea and Cartwright 2007). Fishing, logging, and (Collier and Hoeffler 2004). mining activities have been associated with Employment in natural resource indus- increased sexual abuse and exploitation in tries can have negative impacts on women. Pacific island countries (Herbert 2007). 36 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

More generally, cross-country evidence the costs of associated economic inefficien- suggests that reliance on natural resource cies in the form of lower royalties, access industries reduces and discourages female payments, or profit taxes. As an alternative labor force participation, which reduces to mandating or subsidizing direct employ- women’s political influence (Ross 2008; ment creation in natural resource industries, World Bank 2012b). The historical reliance PICs could support overall employment in of PICs on natural resource industries may other ways: directly (through sustainable help to explain, at least in part, slow prog- increases in public employment) or indirectly ress toward gender equality, particularly (through investment in the human capital, with respect to voice and influence in society infrastructure, and social services that can (World Bank 2012a). support new economic opportunities in a Decisions to subsidize employment cre- broad range of sectors, locally and overseas). ation in natural resource industries and Therefore, policy makers have to consider tourism should be informed by careful carefully the full explicit and implicit costs analysis of the opportunity costs of alterna- and benefits of subsidizing employment in tive public investments (box 12). Ultimately, natural resource industries and take account the public bears the costs of tax conces- of alternative employment-creating invest- sions and employment creation mandates. ments that potentially could be financed Concessions lead directly to forgone tax with these resources (box 13). This requires revenue. Mandating job creation for natural the following: resource industries is only required if such jobs are not efficiently undertaken locally, Q
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BOX 12 Employment in fi sheries or employment supported by fi sheries revenues?

The fi sheries industry in the Pacifi c is a good exam- coordinated controls on access, implementation of ple of the pressures faced by government to create the vessel day scheme has allowed parties to the work in natural resource industries. Nauru Agreement to generate signifi cantly higher For several decades, Pacifi c island countries have license fees and improve data collection, strength- been working to conserve fi sh stocks and increase ening the prospects for sustainable management license revenues through coordinated control of of the resource. Estimates based on limited public access to fi sheries resources. Substantial progress data suggest that the value of a fi shing day may have has been made in recent years through the estab- increased from around US$1,350 in 2004 to more lishment of a vessel day scheme by eight Pacific than US$5,000 due to the impacts of the scheme countries with the most signifi cant tuna resources (Havice 2013). (Kiribati, the Marshall Islands, the Federated States Progress toward maximizing license revenues, of Micronesia, Nauru, Palau, Papua New Guinea, however, is being slowed by a countervailing trend the Solomon Islands, and Tuvalu). Under this toward granting special access rights or discounted scheme, participating countries are allocated a fi xed licenses to foreign fishing firms that commit to number of “vessel days,” through which rights to supporting domestic economic development and undertake any fi shing activity are allocated to purse employment (typically through offloading, provi- seiner vessels for a 24-hour period. Vessel days can sioning, infrastructure investments, and employ- be traded between countries, with the total number ment of crew). Such discounted access arrangements of vessel days issued under the scheme nominally are sometimes accompanied by tax concessions and equivalent to total effort in 2008. By imposing various forms of subsidization to fi shery operators.

continued WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 37

BOX 12 (continued) The number of vessels operating under such arrange- As a result, the primary benefi ciaries have been for- ments increased from 16 in 2001 to 53 by mid- eign fi shing companies. 2012, contributing an 18 percent increase in total Pacifi c island countries with the greatest fi sheries purse seiner business between 2004 and 2010. PIC resources now face a diffi cult decision between grant- governments are often of the view that the employ- ing further discounted licenses guaranteeing onshore ment and direct economic impacts of such arrange- economic and employment impacts and ensuring the ments are worth more than the corresponding loss best possible price for each license sold. The former of license fees and revenues. However, policy deci- option may lead to greater short-term employment in sions to grant special access or discounted licenses fi sheries (dependent on varying degrees of subsidiza- have seldom been informed by detailed analysis of tion). The latter may provide a more sustainable and the costs and benefi ts. Revenue costs have not been substantial stream of revenues with which to fi nance fully calculated. Expected employment creation has public investments for broader employment growth. sometimes not been realized. Dividends from gov- Whatever option is pursued, PICs will need to assess ernment shares in joint venture companies have not accurately the full costs and benefits of different been forthcoming due to poor accounting practices. options before making potentially costly decisions.

BOX 13 Regulatory requirements for extractive industries to support overall employment creation

Sound regulatory and public finance frameworks compliance cannot be monitored and enforced. are indispensable if extractive natural resource Specialist capacity may also be required in tax industries are to support employment creation in departments to ensure that investors are complying small PICs. International and regional experience with local tax rules. Some of this capacity is likely illustrates both the importance and the diffi culty of to need to be sourced from donors or regional establishing basic systems to ensure sound invest- facilities, given the shortage of local specialists. ment of natural resource revenues. Building such Q
Appropriate measures for managing revenue frameworks represents a key priority for small PICs fl ows to government. Increases in government that face particular capacity and political economy revenue from natural resource activities will only challenges. Priorities include the following: deliver benefi ts if they are managed and used wisely. Policies are needed to ensure that revenue Q
Policies and legislation governing royalties and infl ows do not fuel unsustainable and short- taxation. Good regulations and policies can term growth in expenditure, but rather allow for ensure that a fair share of benefits from natu- sustainable improvements in infrastructure and ral resource industries fl ows to government and services, such as health and education. Strong basic resource owners. Licensing and tax provisions public fi nance management systems are required need to be specifi ed in the law, and appropriate to ensure that revenues are allocated to areas regulations and legislation need to be drafted and where investment can facilitate the creation of passed. sustainable employment. Such areas might include Q
Strong capacity in natural resource agencies and tax connective infrastructure between urban and rural departments. Ministries responsible for regulating areas, improved administration and services in natural resource industries need capacity to ensure urban centers, improved extension services for that policies and regulations are well designed and agriculture, and investments in education and implemented. There is no point in having good health to open local and international employment policies or fair benefi t-sharing arrangements if opportunities for Pacifi c island workers. 38 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

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to strengthen the incentives to use public and living standards for people from these resources efficiently. This can sometimes be countries, wherever they might be living achieved through carefully considered and and working, and to use that information to selective involvement of the private sector, establish targets and monitor progress. but continued progress with public sector reforms is also vital. Natural resource industries, which can Notes flourish despite higher cost structures in PICs, offer employment opportunities. But 1. Because of the specifi c set of challenges facing improvement in employment supported by the smaller independent Pacifi c countries, we natural resource industries does not have restrict our analysis to countries with popu- lations of signifi cantly less than 1 million, to involve the creation of jobs within those therefore excluding Fiji, Papua New Guinea, industries. Natural resource industries have and Timor-Leste. a poor track record of delivering substan- 2. Strong institutions of informal reciprocity tial increases in sustainable jobs. But well- within kinship groups mean that a broad regulated natural resource industries can range of social considerations infl uence par- generate sustainable flows of revenue to sup- ticipation in economic activities and the distri- port employment in the delivery of public ser- bution of benefi ts. Labor (or goods and other vices and opportunities for better local and services) may be provided in return for access international employment through improve- to various common-pool resources with- ments in human capital. out immediate or direct cash compensation. Economic growth is not sufficient to cre- Wages from a single individual with a regular formal sector job are often shared widely and ate employment or to sustain well-being from support living standards across family groups. work. A key question posed in the WDR 2013 See Attahir (2002) and Curry (1999). is whether a “job strategy” is any different 3. The average Pacifi c island country is 11,456 from a “growth strategy.” In PICs, growth— kilometers from any other randomly selected in itself—is not a sufficient goal, considering country weighted by rest-of-the world GDP, the role of work in supporting productivity compared to 8,103 kilometers for small gains, higher living standards, and improved countries in the Caribbean. The countries social cohesion. Labor mobility offers the that Pacifi c island countries trade with are best employment prospects for many Pacific typically smaller and more distant than the Islanders. But the output produced by Pacific trade partners of other small states, especially Islanders working overseas is not recorded Caribbean countries, which have easy access to the large U.S. market. in GDP statistics at home. The remittances 4. Ni-Vanuatu participating in the New that they send home to their families fuel the Zealand seasonal worker scheme, in con- consumption of imports and improve living trast, tend to be from wealthier households standards but have a negligible impact on but are still unlikely to have access to over- GDP growth. Efficiency improvements in seas labor markets through any other avail- public sector work are notoriously difficult to able channels (McKenzie, Garcia-Martinez, capture in GDP accounts, and the associated and Winters 2008). improvements in social indicators are not 5. Although remittance fl ows typically fl uctuate reflected. Natural resource extraction tends as the composition of and economic condi- to have a similar impact on growth regard- tions facing remitting migrant populations less of whether it is sustainably managed change, evidence shows no secular decline in the amount remitted by Pacifi c migrants over or employs the local population. Overall, time, although smaller amounts are remit- in PICs, the factors that influence GDP are ted less regularly by second- and third- gen- very different from those that influence liv- eration migrants (Brown 1998; Connell and ing standards and well-being from work. A Brown 2005). key priority is to develop better information 6. “Desperate Need for Unskilled Workers in on employment, economic opportunities, New Zealand,” PacNews Biz, January 8, 2013. 40 WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES

7. Australia has traditionally opposed such Reconciling Customary Land Tenure and country-based allocations in favor of points- Development in the Pacific. Canberra: based, country-neutral allocation systems. AusAID. New Zealand, however, has managed to offer Barclay, Kate, and Ian Cartwright. 2007. preferential access to Pacifi c Islanders for many Capturing Wealth from Tuna: Case Studies decades without signifi cantly undermining the from the Pacifi c. Canberra: Asia Pacifi c Press. integrity of its broader points-based system. Bedford, Richard. 2012. “Population Movement 8. Recorded growth in urban populations may in the Pacific: A Perspective on Future understate the pace of urbanization in many Prospects.” Department of Labour, Labour PICs. Calculations of urban populations are and Immigration Research Centre, Wellington. based on populations within formal munici- Bertram, Geoffrey, and Raymond Watters. 1985. pal boundaries. These boundaries often “The MIRAB Economy in South-Pacifi c Micro- exclude peri-urban settlements where popu- States.” Pacifi c Viewpoint 26 (3): 497–512. lation growth has been most rapid. Brown, Deryck. 2010. “Institutional 9. For examples, see Asian Development Bank Development in Small States: Evidence from economic reports on Pacifi c island countries the Commonwealth.” Halduskultuur— (ADB 2007, 2009b, 2010a, 2012b). Administrative Culture 11 (1): 45–65. Brown, Richard. 1998. “Do Migrants’ Remittances Decline over Time? Evidence from References Tongans and Western Samoans in Australia.” Contemporary Pacifi c 10 (1): 107–51. ADB (Asian Development Bank). 2007. Tuvalu Chand, Satish, and Michael Clemens. 2008. Economic Report: From Plan to Action. “Skilled Emigration and Skill Creation: A Manila: ADB. Quasi-Experiment.” Working Paper, Center ———. 2009a. ADB Support for Public Sector for Global Development, Washington, DC. Reforms in the Pacific: Enhance Results Collier, Paul, and Anke Hoeffl er. 2004. “Greed through Ownership, Continuity, and and Grievance in Civil Wars.” Oxford Capacity. Manila: ADB. Economic Papers 56 (4): 563–95. ———. 2009b. Kiribati Social and Economic Collins, Paul, and Edward Warrington. 1997. Report. Manila: ADB. “The New Public Administration: Lessons ———. 2010a. Solomon Islands Economic from the Experiences of Small Island States.” Report. Manila: ADB. Prepared for the Commonwealth Association ———. 2010b. State Performance and Capacity of Public Administration and Management in the Pacifi c. Manila: ADB. Conference, Toronto, July. ———. 2011. Finding Balance: Benchmarking Connell, John. 2011. “Elephants in the Pacifi c? the Performance of State-Owned Enterprises Pacifi c Urbanization and Its Discontents.” Asia in Fiji, Marshall Islands, Samoa, Solomon Pacifi c Viewpoint 52 (2): 121–35. Islands, and Tonga. Manila: ADB. Connell, John, and Richard Brown. 2005. ———. 2012a. The State of Pacific Towns and Remittances in the Pacific: An Overview. Cities. Manila: ADB. Manila: Asian Development Bank. ———. 2012b. Tonga Economic and Social Curry, George. 1999. “Markets, Social- Report. Manila: ADB. Embeddedness, and Pre-Capitalist Societies: Allen, Matthew, Sinclair Dinnen, Daniel Evans, The Case of Village Tradestores in Papua New and Rebecca Monson. 2013. “Justice delivered Guinea.” Geoforum 30 (3): 285–98. locally : Systems, challenges, and innovations Department of Immigration and Citizenship. in Solomon Islands.” Justice for the Poor 2012. “Working Holiday Maker Visa Program Research Report, World Bank, Washington, Report.” Department of Immigration and DC. Citizenship, Canberra. Attahir, Yusuf. 2002. “Perceived Hurdles Department of Labour. 2010. “Final Evaluation against Small Business Development in the Report of the Recognized Seasonal Employer South Pacific: A Factor Analytical Study.” Policy.” Department of Labour, Wellington. International Journal of Management 33 (2). ———. 2013. “Migration Trends and Outlook AusAID (Australian Agency for International 2011–2012.” Department of Labour, Development). 2008. Making Land Work: Wellington. WELL-BEING FROM WORK IN THE PACIFIC ISLAND COUNTRIES 41

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