ReportNo. 9059-ASIA TowardHigher Growth in Pacific Island Economies:Lessons from the 1980s (In Two Volumes) Volume l: RegionalOverview Public Disclosure Authorized January18, 1991 CountryOperations Division CountryDepartment V Asia Region FOR OFFICIALUSE ONLY r_vt7F*s -- - t - . Public Disclosure Authorized Public Disclosure Authorized DoaCM of#s WaM S,k Public Disclosure Authorized Thisdocument has a resricteddisn1bution and may be usedby recipients onlyin theperfonnance of teir officialduties. ks contents may not oderise be disckoedwihot Wbrld Dankauthrization. ACRONYMSAND ABBREVIATIONS ADB - Asian Development Bank AIDAB - Australian International Development Assistance Bureau CB Commodity Board CER - Closer Economic Relationship DAC - Development Assistance Committee EEC - European Economic Community GSP - Generalized System of Preferences IBRD - International Bank for Reconstruction and Development IDA - International Development Association IFC - International Finance Corporation IMF - International Monetary Fund NIC - Newly Industrialized Country ODA - Official Development Assistance OECD - Organization for Economic Cooperation and Development PMC - Pacific Island Member Country PSIP - Public Sector Investment Program REER - Real Effective Exchange Rate RERF - Revenue Equalization Reserve Fund RTM - Round Table Meeting SPPF - South Pacific Project Facility STABEX - Export Earnings Stabilization System UNDP - United Nations Development Programme USP - University of the South Pacific FOR OFFICIALUSE ONLY TITLE Toward Higher Growth in Pacific Island Economies: Lessons from the 1980s COUNTRY : Pacific Islands REGION Asia SECTOR Regional Economic REPORT TYPE CLASSIFICATION MM/YY LANGUAGE 9059-ASI ERA Official Use 01/91 English ABSTRACT This report is the first of its kind for the six Pacific island countries that are members of the Bank--Fiji, Kiribati, Solomon Islands, Tonga, Vanuatu and Western Samoa. The first volume is a regional overview that examines the growth performance of the South Pacific countries in the 1980s, assesses the factors underlying the relatively weak performance, and develops a framework for achieving higher rates of growth in the 1990s. Chapter 1 reviews the economic performance of the South Pacific countries in the 1980s; Chapter 2 reviews the underlying policy environment during the past decade; Chapter 3 suggests strategies for accelerated and sustained growth and explores development prospects in the 1990s; and Chapter 4 examines the past and future role of development assistance in the growth process. The second volume contains country surveys on each of the six countries. These surveys provide more detailed background on the economies, review recent economic developments, assess development prospects and policies, and provide medium- term projects including of external financing requirements. This document has a restricteddistribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TOWARD HIGHER GROWTH IN PACIFIC ISLAND ECONOMIES: LESSONS FROM THE 19808 Volume I. Regional Overview Table of Contents Page No. EXECUTIVE SUMHARY.......................................... i I. ECONOMIC PERFORMANCEIN THE 19809 .. 1 A. Introduction........................................... 1 Geography and Society.................................. 1 Living Standards....................................... 4 B. Economic Performancein the 1980s...................... 6 Growth: Low and Volatile............................... 6 Savings and Investment................................. 8 Employment............................................. 11 External Balance and Trade Performance................. 12 C. The External Environment............................... 17 Terms of Trade......................................... 18 Natural Disasters...................................... 20 Instabilityof Output and Incomes...................... 22 Availabilityof Finance................................ 23 Conclusion............................................. 23 II. THE DOMESTIC POLICY ENVIRONMENTIN THE 1980s............... 25 A. Overview.............................................. 25 B. MacroeconomicManagement ............................... 25 Fiscal Policy.......................................... 25 Monetary Policy........................................ 27 This report is based on a World Bank mission that visited the region in November 1989, with follow-upmissions in May-June, 1990. The principal authors are Amar Bhattacharya(task manager), Lloyd Kenward, John Kerr- Stevens, Ranji Salgado and Steven Tabor for Volume I, and Mark Baird, R. Kyle Peters, Graeme Thompson and Zaidi Sattar for Volume II. Other contributorsincluded Te'o Fairbairn,Paul Flanagan,Colin Pratt and Jayshree Sengupta. Anna Maripuu, Peter Osei and Cyrus Talati provided statisticalsupport, Fay Willey provided editorialassistance, and Sharon E. Gustafsonprovided excellentadministrative support and coordinatedthe processing of the document. The team benefitted from cooperationand support from all the member Governments,donor agencies,and several researchand regional institutions. An earlier draft of this report was discussedwith member Governmentsand donor agencies at a seminar in Singaporein November, 1990. The preparationof this report was supportedin part by the AIDAB South Pacific Facility. C. The Role of the Public Sector .......................... 28 Overview . ............................ 29................... Revenue Structure and Policy ... 30 Current Expenditure .... .......................... 34 Development Planning ................................... 37 Public Enterprises. .......... 40 Marketing and Commodity Boards ......................... 41 D. The Environment for Private Sector Development ......... 42 Competitiveness ... ....... 42 Inward Orientation and Regulation of Investment........ 45 Supporting Institutional Framework ........... .46 Financial Sector Development .......... * ....... 46 Policy Stability ....................................... 51 E. Human Resource Development . 51 F. Sectoral Strategies and Performance ....................55 Agriculture and Fisheries . .. 55 The Forestry Sector .................................... 55 Tourism ................................................ 57 Transport .............................................. 57 III. DEVELOPMENT CHALLENGES AND GROWTH PROSPECTS IN THE 19908... 61 A. Development Strategy and Policies for Sustained Growth............................................... 61 Macroeconomic Management and Fiscal Policy ............. 63 External Competitiveness ............................... 63 Reform of Public Enterprises and Commodity Boards ...... 64 Private Sector Development............................. 64 Strengthening the Financial Sector ..................... 64 Human Resource Development............................. 64 B. The Oil Shock .......................................... 65 C. Income Growth and Primary Commodity Prices ............. 66 D. Trade Opportunities.................................... 68 E. Macroeconomic Projections.............................. 69 External Financing Requirements........................ 71 External Debt and Creditworthiness ..................... 72 F. Conclusions............................................ 73 IV. IMPROVING AID PERFORMANCE.................................. 75 A. The Role of Aid in the South Pacific................... 75 Trends in the Flow of Aid .............................. 75 Aid and its Relationship to Growth in the South Pacific.............................................. 78 B. Towards More Effective Aid Use ......................... 80 Improving Development Planning......................... 81 Improving Project Preparation and Implementation....... 81 Supporting Recurrent Costs ............................. 82 Providing Finance for the Private Sector ............... 83 Developing HlumanResources ............................. 84 C. Aid Coordination and Policy Dialogue ................... 84 Aid Coordination ....................................... 84 Policy Dialogue.................................... 86 Administrative Costs of Aid Coordination.86 D. Conclusions .87 Appendix I. Tax Systems of the PMCs .... 89 EXECUTIVE SUMMARY Growth Performancein the 1980s 1. The six World Bank Pacific Island member countries (PMCs)l/have achieved relativelyhigh living standardsin the face of many constraints. GNP per capita is at the upper end of the low-incometo middle-incomerange. Social indicatorscompare favorablywith developingcountries at the same or higher levels of income. One disappointingaspect, however, is sluggish growth performancein the 1980s--despitesome of the highest inflows of per capita developmentassistance. Viewed across the span of an entire decade, economic growth was quite modest, and year-to-yeargrowth in individual countries showed much volatility. As a group, the six recorded an average growth rate in real GNP of only 0.6 percent per annum during 1980-88,while populationgrew an annual 2 percent. As a result, there was a significant decline in per capita incomes. 2. The poor economic performanceof the PMCs stands in sharp contrast to the more than 5 percent GNP growth averagedby comparablecountries in the Caribbean and the nearly 7 percent growth of the Indian Ocean islands of Maldives and Mauritius. PMC growth was not as unfavorable,however, as that of many Sub-SaharanAfrican countrieswhere dependenceon primary