New Caledonia

Country Report

New Caledonia

December 2005

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

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New Caledonia 1

Contents

New Caledonia

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators

6 Outlook for 2006-07

7 The political scene

9 Economic policy

11 The domestic economy

The region

12 Summary

13 Outlook for 2006-07

15 The political scene

16 Economic policy and the domestic economy

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New Caledonia 3

New Caledonia December 2005 Summary

Outlook for 2006-07 The Avenir Ensemble (AE)-led territorial government will continue to show greater commitment than its predecessor to political progress in collaboration with indigenous Kanak leaders, as well as to social reform. However, Kanak leaders are becoming increasingly impatient with the slow pace of implementation of the Nouméa Accord, an agreement signed in 1998 that outlines processes for the progressive transfer of government functions from France to the local government and for a referendum on independence to be held between 2013 and 2018. Industrial disputes, strikes and occasional riots will remain a feature of the economic and political scene. Nickel output is set to expand rapidly, although New Caledonia will remain heavily dependent on direct financial transfers from France. The Pacific franc could be replaced by the euro in 2007. The pace of New Caledonia’s political and economic integration with the Pacific’s independent island states is accelerating.

The political scene A former Kanak leader has protested to the UN over the slow pace of political reform and the expansion of the nickel mining industry. The president of the territorial government, Marie-Noelle Théméreau, has reaffirmed her commitment to greater regional co-operation. A new Kanak resource-management lobby group has been formed.

Economic policy The AE has pledged to reduce personal taxation in the expectation that the resulting loss of revenue will be more than offset by rising income from the expansion of nickel mining. The prospect of an imminent merger between the two Canadian mining companies behind New Caledonia’s new nickel projects has been met with concern. The Territorial Congress (the legislature) has given its approval in principle to New Caledonia’s future membership of the Pacific Island Countries Trade Agreement (PICTA).

The domestic economy The primary sector produced a record US$100m worth of output in 2004, although floods have reduced the 2005 pumpkin crop.

Editors: Kate Allard (editor); Kil Dosanjh (consulting editor) Editorial closing date: November 29th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report December 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 New Caledonia

Political structure

Official name New Caledonia

Form of state A French overseas territory, largely autonomous except in areas such as foreign relations, defence, justice, currency and credit. The Nouméa Accord, signed in May 1998, provides for the devolution of power to New Caledonia. A referendum on complete independence is due to be held between 2013 and the end of 2018

The executive The French high commissioner for New Caledonia and Wallis and Futuna, Michel Mathieu

Head of state The president of France, Jacques Chirac

Territorial legislature The 54-seat Territorial Congress, comprising a proportion of the combined elected membership of the three provincial assemblies (15 members from the Northern province, 32 from the Southern province and seven from the province of the Loyalty Islands). Members are elected for terms of five years by universal suffrage

Local government Three provincial assemblies, plus 32 basic local government units known as communes

Legal system The French system, augmented by mandatory consultation with the Advisory Council on Customs (Conseil coutumier territorial, comprising 40 members drawn from eight areas) in matters of customary and land law. Magistrates preside over the decentralised lower courts. The Court of Appeal is based in the capital, Nouméa, and there is access to the higher appeal court of France for certain matters

National elections Provincial assembly elections, May 2004. These elections also determine the composition of the Territorial Congress and thus of the government. The next provincial elections are due in 2009

National government The first president, Jean Lèques, of the Rassemblement pour la Calédonie dans la République (RPCR), resigned in March 2001 and was replaced by Pierre Frogier, also of the RPCR. The election in May 2004 brought to power a restructured coalition, led by Marie-Noelle Théméreau of Avenir Ensemble (AE), a new political group that had broken away from the RPCR. AE and the RPCR each hold four of the 11 executive positions in the territorial government; a pro-independence grouping, the Front de libération nationale kanak socialiste (FLNKS), holds three

Main political organisations The main groupings are the RPCR, AE and the FLNKS. The RPCR is affiliated with the Rassemblement pour la République (RPR) in France. AE was formed in 2004 by dissidents from the RPCR. The FLNKS comprises the Union Calédonienne (UC), Parti de libération kanak (Palika), the Rassemblement démocratique océanien (RDO), the Union progressiste mélanésienne (UPM) and the Union nationale pour l’indépendance (UPI). The Libération kanak socialiste (LKS) is strong in the Loyalty Islands

President of the territorial government Marie-Noelle Théméreau (AE) President of the Northern province Paul Néaoutyne (FLNKS) President of the Southern province Philippe Gomes (AE) President of the Loyalty Islands Hnepeune Neko (UC) Vice-president Déwé Gorodé (FLNKS) Deputies to the French Assemblée nationale Jacques Lafleur (RPCR) Pierre Frogier (RPCR) Representative to the French Senate Simon Loueckhote (RPCR)

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Economic structure

Annual indicators 2001a 2002a 2003a 2004a 2005b GDP at current prices (CFPfr m)c n/a n/a n/a n/a n/a Real GDP growth (av; %)c n/a n/a n/a n/a n/a Consumer price inflation (av; %)d 2.2 1.6 1.0 0.9 2.2 Population (‘000)c n/a 215.9 219.0 222.0 n/a Exports fob (US$ m)e 453.1 493.4 797.3 1,015.1 n/a Imports cif (US$ m)e 932.2 1,007.0 1,595.1 1,626.1 n/a Exchange rate (av; CFPfr:US$) 133.2 126.3 103.8 95.5 94.7 a Actual. b Economist Intelligence Unit estimates. c Institut Territorial de la statistique et études économiques. d Central Bank of the French Territories in the Pacific. e Customs Service, New Caledonia.

Origins of gross domestic product 1997 % of total Agriculture 3.7 Mining & metallurgy 10.7 Construction & energy 4.0 Miscellaneous industries 5.0 Transport & communications 6.7 Commerce 43.7 Other services 26.2

Principal exports fob 2003a US$ m Principal imports cif 2003a US$ m Ferro-nickels 486.2 Air navigation equipment 243.1 Metals & metal products 91.9 Vehicles 190.0 Nickel ore 89.7 Petroleum products 167.5 Fish & crustaceans 25.9 Electrical machinery 106.4

Main destinations of exports 2004a % of total Main origins of imports 2004a % of total Japan 23.3 France 41.0 France 16.5 Singapore 11.1 Taiwan 13.8 Australia 9.1 South Korea 12.8 New Zealand 5.0 Spain 6.5 US 3.8 a Customs Service, New Caledonia.

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Outlook for 2006-07

Kanaks are impatient with the The Avenir Ensemble (AE)-led territorial government, which came to power in slow pace of political reform mid-2004 after 25 years of dominance by the anti-independence Rassemble- ment pour la Calédonie dans la République (RPCR), will continue to show greater commitment than its predecessor to political progress in collaboration with indigenous Kanak leaders, as well as to social reform. The government has raised the minimum wage, has begun to tackle a chronic shortage of low-cost housing, will introduce indigenous languages into the school system in 2006 and will pursue policies designed to bring more Kanaks into mainstream business and government administration. However, the government remains opposed to full independence for the territory from France. Moreover, Kanak leaders, who mostly favour full independence, are becoming increasingly impatient with the slow pace of the implementation of Nouméa Accord, an agreement signed in 1998 that outlines processes for the progressive transfer of government functions from France to the local government and for a referendum on independence to be held between 2013 and 2018. Kanak political influence will, however, continue to be hampered by dissent and rivalries within the pro-independence Front de libération nationale kanak socialistes (FLNKS, a now shaky alliance of pro-independence indigenous Melanesian parties), which remains leaderless. Industrial disputes, strikes and occasional riots will remain a feature of the economic and political scene.

Nickel output is set to expand New Caledonia possesses around one-quarter of the world’s known nickel rapidly reserves, and the territory’s nickel output is set to expand sharply in the coming years following the completion of a significant new nickel mining and smelting project at Goro in the south. The prospect of an imminent merger between the two Canadian mining companies that operate in the territory, Inco, which is behind the Goro project, and Falconbridge, the main backer of a second proposed new mine project at Koniambo in the north of the main island, has fuelled speculation that the latter project may not go ahead, despite further financial concessions from the French government. However, a another mining company is likely to take over the Koniambo project if the newly merged Canadian firm pulls out. The construction of both the Koniambo and Goro mines would provide much- needed investment and create several thousand new jobs, while the completed mines would boost New Caledonia’s annual nickel output to around 200,000 tonnes within three or four years. However, a groundswell of opposition to mines from Kanak groups worried about possible environmental damage, along with demonstrations and industrial disputes, could hinder the projects’ progress. High world nickel prices are already providing a significant boost to the territory’s mining revenue. Despite the prospects of the nickel bonanza and healthy growth in the still small fishing and aquaculture industries, New Caledonia will remain heavily dependent on direct financial transfers from France, which are equivalent to around 30% of GDP. Approximately 80% of the transfers is spent on health, education and the payment of public service

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salaries, with the remainder funding development schemes, mainly in the northern and island provinces.

The Pacific franc may be New Caledonia’s currency, the Pacific franc, could be replaced by the euro in replaced by the euro in 2007 2007. Business leaders in the territory agree that the euro would be a more practical currency, although pro-independence political parties argue that the switch would merely serve to bind New Caledonia more closely to France.

Closer ties with the Pacific The pace of New Caledonia’s political and economic integration with the region are likely Pacific’s independent island states is accelerating. The territorial government will begin negotiating with the Pacific Islands Forum (the region’s main political grouping) for accession to the Pacific Island Countries Trade Agreement (PICTA), and, along with French Polynesia, its status at PIF meetings is likely to be upgraded from observer to associate member.

The political scene

A former Kanak leader protests Growing Kanak impatience over the slow pace of political reform and

to the UN reservations about the expansion of nickel mining were highlighted in October by Roch Wamytan, the former president of the pro-independence Front de libération nationale kanak socialistes (FLNKS, an alliance of pro-independence indigenous Melanesian parties), when he addressed the UN’s decolonisation committee in New York in October. As the FLNKS president at the time, Mr Wamytan was a signatory to the 1998 Nouméa Accord. The FLNKS, which has been without a leader since 2002 owing to splits within the alliance, insists that the referendum is about full independence rather that an endorsement of a continuing relationship with France, as advocated by the anti-independence party, the Rassemblement pour la Calédonie dans la République (RPCR), and leaders of the ruling Avenir Ensemble (AE). Mr Wamytan also told the UN committee that he feared that the expansion of nickel mining would flood the country with “newcomers”, as it did during the 1968-72 nickel boom, during which time the population swelled by 40,000. Kanaks accounted for around 43% of the population in 1996, according to a census in that year. Another census in 2004 controversially avoided the question of ethnicity on the orders of the French government, but the Kanak population is believed to be growing at a pace that could eventually make it the single largest ethnic group in New Caledonia. Mr Wamytan told the UN committee that independence for New Caledonia was “non-negotiable”, and that only the processes leading up to it were open to discussion. He also expressed his anger and disappointment that, seven and a half years after the Nouméa Accord had been signed, negotiations appeared to deadlocked. He called on the UN to hold a “decolonisation seminar” in New Caledonia in 2006, and to open a mission there for the protection of Kanaks from exploitation by mining interests. Mr Wamytan stated that indigenous claims to land were being overridden in the interests of commercial development and to satisfy demand for land, particularly in Nouméa, the capital, where an estimated 93,000 people live.

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Commitment to regional The president of the territorial government, Marie-Noelle Théméreau, told other

co-operation is reaffirmed Pacific leaders at the annual summit of the Pacific Islands Forum (PIF, the regions’ main political organisation) in October that New Caledonia was committed to greater regional integration and co-operation. However, she pointed out that the government had to consult with and secure the agreement of the French government before the territory could apply for associate membership of the PIF. She also stressed that such membership should not be seen as a step towards independence from France.

Kanaks form a resource- Indigenous Kanak organisations have formed a council for the management of management lobby group natural resources, known as the Conseil Autochtone pour la gestion des ressources naturelles (CAUGERN), to lobby for a moratorium on nickel mining projects until their environmental, social, economic and political impacts are assessed and greater consultation with Kanaks on the planning of mines. CAUGERN is backed by the main trade union, the Union of Kanak and Exploited Workers (USKTE), the Kanak Customary Senate, the National Council for Indigenous People and the Living Coral Association. According to Georges Mandaoue, CAUGERN’s spokesman and the former chairman of the Kanak Customary Senate, the simultaneous opening of the Goro and Koniambo mines was “too risky”. He has proposed that Koniambo mine, in the Kanak- dominated north of the country, should proceed first, and the opening of the Goro mine should be delayed, given that it was located in the already affluent south. Kanak supporters of CAUGERN have staged what they called a “dead mines” day to protest against environmental damage caused by nickel mining and the lack of the benefits for indigenous people from nickel revenue. The protest saw chains used to bar access to many mining sites. Meanwhile, a 12-metre Kanak totem pole, known as the Mwa Kaa, was erected in the Nouméa suburb of Baie de la Moselle on September 24th, the anniversary of French annexation of New Caledonia. The totem pole is a symbol of Kanaks’ desire to put aside past bitterness and build a prosperous, multiracial community. The ceremony was attended by Ms Théméreau and representatives of 12 ethnic communities. Nouméa’s anti-independence mayor, Jean Léques, opposed the siting of the totem pole in the city’s main square, as was initially proposed.

Jacques Lafleur is fined for The former RPCR leader, Jacques Lafleur, has been found guilty of threatening a

threatening a journalist journalist with assault four years ago, and has been ordered to pay US$23,000 in fines and damages. The journalist, Etienne Dutailly, the editor of a satirical magazine, was assaulted by unidentified attackers shortly before he received a telephone call from Mr Lafleur saying that he might be targeted again. Mr Lafleur lost control of the RPCR after its decisive 2004 election defeat after 25 years in power, and failed in a bid to be re-elected RPCR president in July 2005.

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Economic policy

The AE has pledged to reduce Speaking at the second annual party congress of the ruling Avenir Ensemble personal taxation (AE) in November, the party's president, Harold Martin, pledged future cuts in personal taxation worth around US$20m in the expectation that the resulting loss of revenue would be more than offset by rising income from the expansion of nickel mining. The tax cuts will mainly benefit middle-income earners.

A merger between Inco and The prospect of an imminent merger between Inco and Falconbridge, the two

Falconbridge causes concern Canadian mining companies behind New Caledonia’s new nickel projects, has been met with unease in the local political and business communities. Some Kanak politicians are concerned at the prospect of foreign dominance of two- thirds of New Caledonia’s nickel mines, which account for around 25% of known global nickel reserves. Rheebu Nuu, a Kanak lobby group which earlier in 2005 erected roadblocks en route to the Goro mine, has claimed that the merged mining group will use its increased bargaining power to influence local and French authorities on environmental issues. Some in the business community fear that the merged company may decide not to proceed with the Koniambo nickel mine and smelting project in the north of the main island. Goro Nickel’s chief executive, Ron Renton, has, however, denied that the merger would threaten the feasibility of either the Goro nickel mine being constructed by Inco in the south or the proposed nickel mine and smelter project at Koniambo, which is backed by Falconbridge. This position was echoed by Andre Dang, the chairman of the northern provincial government’s investment arm, Société Minière de Sud Pacifique (SMSP), which is a major shareholder in the US$2.2bn Koniambo mine project. Falconbridge has until the end of 2005 to make a final commitment and invest an initial US$100m in the Koniambo project and secure tax concessions offered by the French government. To help to ensure that the project proceeds, the French government has also agreed to fund the construction of a US$620m power station and to guarantee loans raised by the northern provincial government. The New Caledonian nickel mining company, Société Le Nickel (SLN), a subsidiary of a French mining company, Eramet, has indicated that it has the financial means and technical expertise to take over the Koniambo project should Inco/Falconbridge withdraw. Some local politicians have argued that the merger would lead to better co- ordination of the two mining projects and a fairer balance between the development of the northern and southern regions. For its part, the territorial government has said it is crucial that both projects go ahead if the lightly populated and little-developed Kanak-dominated north is to have any chance of catching up with the wealthier white-settler-dominated south. It is projected that on completion the Koniambo mine will produce around 60,000 tonnes of nickel each year. The Goro mine, which is due to open in September 2007, will also produce around 60,000 tonnes of nickel and 4,000-5,000 tonnes of cobalt each year. The opening of both the Koniambo and Goro mines would lift New Caledonia’s annual nickel output to around 200,000 tonnes within the next three or four years.

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The territorial government has agreed to allow up to 4,000 workers from the Philippines to work on the construction of the Goro nickel mine. Most workers will be allowed to work up to 60 hours a week, compared with the normal French legal limit of 35 hours, although those engaged in “hard” or “dangerous” jobs will be limited to working 40 hours. The two-year suspension of the 35-hour week will apply only to the Goro project, and working conditions there will be strictly supervised by a committee made up of representatives from employers, trade unions and the labour department. However, local trade unions, led by the Union of Kanak and Exploited Workers (USKTE), have challenged the need for workers to be imported from the Philippines, arguing that such jobs should be reserved for locals. SLN was hit in November by a strike over the sacking of two of its employees. The strike was preceded by weeks of blockades and strikes, which forced the company to reduce the operations of its furnaces to their minimum level. The Employers’ Federation said the worsening industrial-relations climate was caused in part by deteriorating social conditions, and estimated that the number of working days lost through strike action in 2005 would exceed that in 2004, when 22,000 working days were lost.

The adoption of the euro French Polynesia’s Economic Social and Cultural Council (CESC) has ruled

moves a step closer unanimously in favour of adopting the euro in place of the territory’s existing currency, the Pacific franc, a move which will give added momentum to the proposed adoption by New Caledonia of the euro. The business sector in New Caledonia is strongly in favour of the switch, which according the French government and the EU would probably take place in 2007. However, the adoption of the euro will be permitted only if all three French Pacific territories (French Polynesia, New Caledonia, and Wallis and Futuna) agree to it.

New Caledonian membership The Territorial Congress (the legislature) has approved in principle New

of PICTA has been approved Caledonia’s future membership of the Pacific Island Countries Trade Agreement (PICTA), which commits the 14 island members of the Pacific Islands Forum (PIF, the region’s main political organisation) to forming a free-trade area by 2012. This paves the way for formal accession talks between New Caledonia and the PIF. The territorial government has already begun a preliminary study of which industries could benefit from greater involvement in regional trade. Parts of the 150-year-old general hospital in Nouméa have been closed after deteriorating to the point of collapse, reducing the hospital’s capacity by 65%. Four wards have been replaced by temporary prefabricated buildings, but non- urgent medical treatment has been deferred and some patients requiring urgent treatment have been evacuated to Australia. The construction of a new, US$205m hospital will begin in 2008 and is scheduled for completion in 2012.

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The domestic economy

Primary sector output reached The agriculture and fisheries sectors produced a record US$100m worth of

a new record level in 2004 output in 2004, according to the Institut territorial de la statistique et des études économiques (ITSEE, the statistics bureau). Agricultural and fisheries exports were worth US$26m, with shrimp exports the single largest export earner at US$22m, followed by pumpkins (US$2.2m), essential oils (US$640,000) and venison (US$520,000). Agricultural and fisheries output has doubled in the past ten years, even though the number of farmers has fallen by around one-half. However, floods have cut New Caledonia’s 2005 pumpkin crop by about 500 tonnes to 3,000 tonnes. Growers who have lost their crop will be compensated by the territorial government. New Caledonia has a niche export market for the crop in Japan, but unfavourable weather has caused local producers to suffer crop losses for three consecutive years.

Country Report December 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 12 The region

The region December 2005 Summary

Outlook for 2006-07 Island governments will start to execute the long-awaited Pacific Plan, produced by the Pacific Islands Forum (PIF, the main political organisation in the region). The plan is intended to improve co-operation between the 14 island states on political, economic and social development. Talks with the EU on free-trade and aid arrangements will continue, and Australia will continue to play a crucial role in the region. Despite political instability in the region, most island economies are showing signs of improving economic activity and will expand further in 2006-07. Foreign aid will remain crucial to economic development. The economic importance of tourism will grow.

The political scene The Pacific Plan was approved unanimously at the PIF’s annual summit in Papua New Guinea in October 2005. The Australian and New Zealand governments have rejected calls for greater labour mobility in the region, although the Australian government is to fund the building of a college to train carpenters, plumbers, electricians and other trades people to Australian standards. A referendum on Tokelau’s future status will be held in December 2005. A study commissioned by the PIF has proposed that the region’s key institutions be amalgamated to improve efficiency.

Economic policy and the The Pacific Plan outlines a framework for promoting trade in goods and services domestic economy between its members, based around the main existing mechanisms for boosting trade. Other priorities agreed at the summit include the launch of a regional statistics service, boosting revenue from fishing and improving vocational training. Concern is growing about the potential cost to island countries of World Trade Organisation membership. Tourist arrivals rose by 5% year on year in the first half of 2005.

Editors: Kate Allard (editor); Gerard Walsh (consulting editor) Editorial closing date: November 29th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

Island governments will start Island governments will co-operate more closely on political, economic and executing the Pacific Plan social development during the outlook period, following the adoption in Papua New Guinea (PNG) in late October 2005 of the Pacific Islands Forum’s Pacific Plan by the regional body’s 16 member governments, comprising 14 island states plus Australia and New Zealand. (The Pacific Island Forum, or PIF, is the main political organisation in the region.) Some academic and non- governmental organisations (NGOs) are critical of what they describe as a blueprint riddled with inadequacies resulting from a lack of consultation with the local island communities. However, government leaders at the PIF summit argued that there could be no further delay in tackling the long list of economic, social and political problems facing the region’s mostly economically weak and, in some cases, politically unstable island nations. The PIF secretariat, based in the Fijian capital, Suva, will begin implementing 24 initiatives outlined for the next three years, including the expansion of trade within the region and with non-PIF members, maximisation of returns from fisheries, regional co-operation on civil aviation, the development and implementation of waste-disposal plans, the development of anti-corruption institutions, strengthening law enforcement and improving the collection of national and regional statistics. However, requests by island governments for greater labour mobility in the region, which would allow, for example, seasonal fruit-pickers and other temporary workers from the Pacific Islands into Australia and New Zealand, have been rejected by the latter two governments. Island governments will continue to campaign for the concession, and the issue is likely to be raised again at the PIF’s next annual summit in 2006, which will be held in Tonga. Meanwhile, a Pacific Plan Action Committee, to be headed by the PIF chair—currently the prime minister of Papua New Guinea (PNG), Sir Michael Somare—will be given the task of ensuring the smooth and steady implementation of the Pacific Plan, and will provide PIF member governments with quarterly progress reports.

Talks with the EU on free trade Formal negotiations between the EU and the PIF’s 14 island members on free-

will continue trade and aid arrangements will continue. The EU intends to anchor the arrangements to the implementation of the Pacific Plan, but also wants to speed up the pace of negotiations. According to Anders Henriksson, the EU’s director for the Pacific, who toured the region in October 2005, the talks, timetabled for completion in December 2007, were already falling behind schedule. Mr Henriksson says that the EU is ready to start paying direct grants to countries such as PNG, but only on condition that concerns such as fiscal transparency and efficiency were fully addressed and measures taken to conserve forestry, fisheries and other resources. The EU is expected to increase its focus on improving resource management and conservation in the region, as well as on the impact of climate change, by providing technical assistance.

Australia will continue to play Australia will continue to play a crucial role in the region, supported by New a crucial role Zealand. Although some in the region will continue to view Australia’s

involvement with suspicion, most island leaders now appear more accepting of the country’s higher profile in the region’s affairs. This is in part thanks to the largely successful intervention of an Australian-led force in the troubled Solomon Islands, and to the tact with which the secretary-general of the PIF, an Australian former diplomat, Greg Urwin, has so far handled the key issues of reform, improved governance and co-operation since his controversial appoint- ment in 2003. Some politicians in the regions have suggested that Australia should dilute its leading role in the mission to placate Pacific island government sensitivities. Island governments are nevertheless largely resigned to the fact that future flows of aid will be conditional on the implementation of reforms to their governmental and economic systems.

PoliticalMost instabilityisland economies will remain will Despite continued political instability in the region, most island economies are expand ina problem 2006-07 showing signs of improving activity and will continue to expand in 2006-07, thanks to the expansion of the tourism industry, diversification in the agricultural sector and the development of the aquaculture and fishing industries. Some Melanesian countries will benefit from high prices for mineral and commodity exports, unlike the countries of Polynesia and Micronesia, which are generally poor in resources. Concern remains about falling stocks of certain species of tuna in the region. Intense debate on the cause—overfishing, climate change, still little-understood natural weather and ocean-temperature cycles, or a combination of all of these—will continue. Other problems include a heavy dependence on high-cost imported oil and diesel fuel. High oil prices are prompting renewed regional interest in alternative fuel sources, such as ethanol made from local sugar.

Foreign aid will remain crucial The relative weakness of most of the Pacific island economies, as well as to economic development problems of poverty, law and order, population pressure and poor governance, mean that the region will remain heavily dependent on aid from Australia, New Zealand, Japan, China and, in the case of some of the islands, Taiwan, as well as the EU. However, China’s efforts to spread its influence in Oceania through diplomacy and economic aid is causing some concern in Australia, New Zealand and the US, and in some parts of the region the displacement of small, locally owned retail stores and other firms by Chinese-owned businesses is generating anti-Chinese resentment.

The economic importance of Despite the nervousness of the Australian government and, to a lesser extent, tourism will continue to grow that of New Zealand about political instability in the region, the Pacific Islands will continue to be regarded as safe and pleasant destinations for holiday travel. The tourism boom in some of the region’s main destinations is expected to continue, thanks to an increase in air capacity and the expansion of low-cost airline services, which have underpinned a strong rise in the number of tourist arrivals from the key markets of Australia and New Zealand. However, some tourist destinations, such as French Polynesia and New Caledonia, could lose market share to Fiji, which has become the primary focus of low-cost operators.

The political scene

The Pacific Plan was approved The annual summit of the Pacific Island Forum (PIF, the main political

at the PIF’s annual summit organisation in the region) took place in Papua New Guinea (PNG) in October. Among the most pressing issues discussed at the summit were the damaging impact on already weak economies of the sharp rise in the cost of oil imports (which the Pacific Plan seeks to address through the setting up of a joint bulk- purchase scheme), the growing threat posed by the spread of HIV/AIDS, and the need to prepare for a possible outbreak of avian influenza (bird flu). The Australian government has agreed to provide an A$8m (US$5.8m) grant to help island governments to prepare for such an outbreak, while the New Zealand government announced an additional grant of NZ$12m (US$8.2m) for the Pacific region’s HIV/AIDS programme. Separately, the PIF summit strongly endorsed the continued presence in the Solomon Islands of the Australian-led regional assistance mission in the country, which it said would be needed for many years. The long-awaited Pacific Plan was approved unanimously at the summit, with one exception. Some island governments interpreted hopefully the plan’s reference to a study of prospects for greater mobility of labour in the region— seen as an open door to the Australian and New Zealand labour markets for seasonal fruit-pickers and other temporary workers from the Pacific Islands. However, such an interpretation was rejected bluntly by the Australian and New Zealand governments. The Australian prime minister, John Howard, said that his country preferred to take permanent migrants rather than see a return to the days of the 19th century, when thousands of Melanesian labourers came to Australia to work on sugar plantations in Queensland. Meanwhile, Helen Clark, the prime minister of New Zealand, said that her country already accepted some temporary workers from Polynesia but did not wish to admit seasonal workers. This partly reflects concern that such workers could overstay their visas. In what some island governments took as a sop to ease anger at his refusal to accept temporary workers, Mr Howard told the PIF summit that the Australian government would spend a significant sum on building a college to train carpenters, plumbers, electricians and other trades people to Australian standards. The location of the main college remains undecided, although the plans also include the setting up of smaller “satellite” institutions elsewhere in the region. The main objective of the measure is to equip the islands with pools of skilled labour, although the scheme would also benefit Australia, which has skills shortages in these areas and encourages those with appropriate qualifications to become skilled migrants.

An amalgamation of regional A radical reorganisation of the structure of the Pacific’s key regional

institutions is proposed organisations has been proposed by Tony Hughes, a former Solomon Islands central bank governor, in a study commissioned and received, with reservations, by the PIF secretariat. According to Mr Hughes, huge savings and efficiencies could be achieved by amalgamating five of the ten major organisations: the Secretariat, the Forum Fisheries Agency, the South Pacific Applied Geoscience Commission, the South Pacific Community and the South

Pacific Environmental Programme. The study was highly critical of the Council of Regional Organisations (CROP), which was formed in the 1980s to co-ordinate the work of other organisations. According to Mr Hughes, CROP had become a cumbersome, time-consuming, excessively formal and wasteful body. Mr Hughes argued that a chief difficulty for the PIF, which was initiated in 1971, was that its affairs were dominated by its two most powerful members, Australia and New Zealand. This was in contrast to a similar regional organisation, the Caribbean Community, to which the US and Canada, the dominant regional powers, did not belong. According to the study, Australia and New Zealand supplied over two-thirds of the PIFs funds and were therefore in a strong position to advance their national interests. Mr Hughes argued that the Australian and New Zealand governments’ sometimes confrontational stance, and the assumption that their security priorities were shared by island governments, grated on the sensitivities of many Pacific islanders. Meanwhile, a study of the Pacific Plan conducted by the Asian Development Bank (ADB) has reported that PIF island members could significantly improve their economic governance by adopting a regional system of analysis, audit and technical support services and co-operating closely in key regional transport and telecommunications sectors.

Tokelau will hold a The New Zealand-administered dependency of Tokelau, which, with a land

referendum on independence area of just 12 sq km and a population of about 1,600, is the region’s smallest dependency, is expected to vote for independence in free association with New Zealand in a referendum in December 2005. More than 6,000 former Tokelau residents already live in New Zealand and Tokelau is dependent on aid of around US$1.5m a year from its larger neighbour. The new arrangement is expected to take effect in June 2006, after which Tokelau will be eligible for full membership of the PIF (the territory currently has observer status in the body). A NZ$25m (US$17.1m) trust fund, financed mainly by New Zealand and Australia, will be a key prop for the tiny economy.

Economic policy and the domestic economy

Trade promotion forms a key The Pacific Plan outlines a comprehensive framework for promoting trade in

element of the Pacific Plan goods and services between its members. These are based around the main existing mechanisms for boosting trade links; the Pacific Island Countries Trade Agreement (PICTA), which aims to foster trade mainly between the PIF’s Melanesian members, and the Pacific Agreement on Closer Economic Relations (PACER), which was signed in 2002 and provides for negotiations on an eventual free-trade deal between Pacific island countries, Australia and New Zealand. Aside from the promotion of trade, it was decided at the PIF annual summit that the initial priorities of the Pacific Plan will include the launch of a regional statistics service, boosting revenue from fishing, waste-management projects and the expansion of regional technical and vocational training institutes for nurses, seamen and tourism workers.

The cost of WTO membership An analysis by the PIF secretariat of the potential cost to its island members of

may be too high meeting World Trade Organisation (WTO) rules and obligations has found that costs have escalated to the point where they may outweigh the potential benefits of membership. The secretariat also noted the declining ability of Pacific island countries to attract foreign direct investment, inflows of which have failed to keep pace with the depreciation of existing capital stock in recent years. Samoa, Tonga and Vanuatu are currently negotiating accession to the WTO, with the latter country having renewed its application after suspending its initial one when faced with demands that many claimed went beyond those that some much wealthier countries had signed up to.

Tourist arrivals rise by 5% in Figures from the South Pacific Tourism Organisation (SPTO) show that tourist the first half of 2005 arrivals in the Pacific region rose by 4.6% year on year in the first half of 2005 to 524,689, although the main tourist destination, Fiji, enjoyed stronger growth of 7.7%. The number of tourists visiting French Polynesia, the second most important tourist destination, continued to decline, while New Caledonia, the third most important tourist destination in the region, reported flat tourist arrivals over the same period. The disappointing outcomes for French Polynesia and New Caledonia mainly reflected a fall in arrivals from their main markets, Japan, North American and France. The SPTO expects overall tourist arrivals to grow at a similar pace in the second half of the year, supported mainly by the expansion of lower-cost airline services.

Scientists warn that key tuna Scientists from the Western and Central Pacific Tuna Commission have warned

species are overfished that two of the western Pacific’s four most commercially-important tuna species are probably being overfished (mainly by the purse-seine and domestic fleets of the Philippines and Indonesia) and are certain to be so within five years if current fish catches are maintained. They also noted that yellowfin tuna, like big-eye tuna, is now an endangered species and that the preservation of both was of “crucial economic importance” to small Pacific island states for which tuna is their main economic resource. Scientists from the Forum Fisheries Agency first listed big-eye tuna as endangered in the late 1990s and warned in late 2003 that yellowfin tuna was heading in the same direction. The Tuna Commission’s assessments for the two other important commercial tuna species, skipjack and albacore, were more optimistic, indicating that present catch rates were sustainable. According to latest available figures, an estimated 1.9m tonnes of tuna, worth around US$2bn, was landed in the western and central Pacific in 2003. This accounted for 72% of the entire tuna catch in the Pacific region and about 50% of the world total tuna catch. Skipjack tuna accounted for 64% of the western and central Pacific catch, yellowfin for 24%, bigeye for 5% and albacore for 7%.

Population statistics reveal According to the latest estimates published by the Secretariat of the Pacific

diverging trends in the region Commission’s (SPC) statistics department, based in New Caledonia, the total population of the Pacific islands reached 8.6m in 2004, an increase of about 1.7m people over the previous decade. Population distribution remained largely unchanged over that period, with the five largest island countries and

territories—those of Melanesia—accounting for 86.4% of the regional population, compared with Polynesia's 7.4% and Micronesia's 6.2%. Two out of every three Pacific islanders live in PNG, while Fiji’s current population of 836,000 is 25% greater than the population of all ten Polynesian island states and territories combined. The SPC reported that the historic and ongoing political associations that Polynesian and Melanesian states have with former colonial powers such as New Zealand and the US had enabled a significant number of their people to migrate. As a result, Micronesian and Polynesian states such as Samoa, the Cook Islands and Niue had low rates of population growth or falling populations. By contrast, Melanesian states such as PNG, the Solomon Islands and Vanuatu had high population growth, owing to relatively high fertility rates and falling death rates.