Pacific Islands

Country Report September 2003

Pacific Islands

September 2003

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7830 1023 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office

Copyright © 2003 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Pacific Islands 3

Summary September 2003

Outlook for 2003-04 Political instability and economic weakness will continue to hinder the development of the Pacific island nations, although there are hopes that greater Australian involvement in the region will provide fresh impetus to efforts aimed at dealing with some of the islands’ many problems.

The political scene In a surprise development, Greg Urwin, an Australian former diplomat, has been appointed secretary-general designate of the Pacific Islands Forum (PIF). He will be the first non-Pacific islander to hold the post.

Economic policy and the The prospect of a Pacific Economic and Political Community has raised interest domestic economy in the ideas of a regional single currency, and of Pacific Islanders being given greater rights to work in Australia. Tourist arrivals are set to rise in the second half of 2003. However, increased competition could spell trouble for some of the islands’ own airlines.

Editors: Kate Allard (editor); Graham Richardson (consulting editor) Editorial closing date: August 29th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 Pacific Islands

Outlook for 2003-04

Instability and poor governance Political instability and economic weakness will continue to hinder the will hinder development development of the Pacific island nations. Poverty, racial tensions, law-and- order problems and poor governance are rife in countries such as the Solomon Islands, Vanuatu and Fiji, and will deter much-needed foreign investment. The significant differences between the islands make generalisations difficult. However, overpopulation, environmental degradation, corruption, weak or non-existent growth, vulnerability to periodic cyclone damage and a proliferation of small arms mean that many island governments are finding it increasingly difficult to protect and provide for the most disadvantaged sections of their populations. The Economist Intelligence Unit remains pessimistic about the ability of existing governments in the region to address these issues.

Greater Australian engagement Concern about instability in the region has increased since the bombing in Bali, raises hopes of progress Indonesia, in 2002 and, more recently, the bombing of a hotel in the Indonesian capital, Jakarta. This has led the Australian government, in particular, to take far more interest in the affairs of the small island states, amid fears that the breakdown of their political systems could lead to infiltration by terrorists. There are hopes that greater Australian involvement in the region, as demonstrated by the country’s newfound willingness to intervene directly to prevent the Solomon Islands from descending further into lawlessness, will provide fresh impetus to efforts to deal with some of the islands’ many problems. The Australian prime minister, John Howard, has already spoken of his belief that the island nations should pool their limited resources to provide essential services, such as policing and air travel, and he has gone as far as to suggest that they could form a federal government. The appointment of an Australian diplomat as head of the main regional body, the Pacific Islands Forum (PIF), is likely to lead to further debate on such proposals, which are not without merit. However, the success of Australia’s greater engagement will depend in part on how sensitively the Australian government pushes such issues, as any heavy- handedness is likely to be poorly received by island governments anxious not to cede any sovereignty. Indeed, while island governments gave their blessing to the Australian-led intervention in the Solomon Islands, many politicians expressed fears of an Australian takeover in the region, suggesting that the action had lowered the bar to direct intervention and could lead Australia to intervene more readily in other troublespots. This would appear unlikely, given that the levels of lawlessness and social collapse in the Solomons are so much more serious than elsewhere. However, intervention in other island troublespots cannot be ruled out, should there be a sudden flare-up in one of the other island nations.

Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Pacific Islands 5

The island nations will depend The support of aid donors and financial institutions will be critical to the heavily on foreign aid development of the Pacific island nations, which for the most part lack the resources to extricate themselves from their current predicaments. The Asian Development Bank (ADB) and the UN Development Programme (UNDP) will continue to provide financial and technical support for a broad range of projects and initiatives. Substantial funds will also be made available to Pacific island nations over the next few years under the Cotonou Agreement, an accord signed in June 2000 to succeed the Lomé Convention in setting out relations between the EU and the 78 African, Caribbean and Pacific (ACP) states. These funds will be channelled into projects in areas such as fisheries, tourism, investment and trade facilitation. Many of the island nations will also benefit from funding and expertise via the donor programmes of Australia and New Zealand, both of which have experience in peacekeeping and strong links with many island communities through large expatriate populations. However, aid donors can only work through conventional channels, funding projects for capacity building, rewarding efforts to improve transparency and accountability, and advocating greater fiscal discipline, private-sector development and the facilitation of foreign investment. Any progress is, therefore, likely to be slow. Moreover, there is concern that aid is feeding a culture of dependency and blunting the incentive for structural reform. Financial aid is thus likely to become increasingly conditional on the achieve- ment by recipient counties of tangible progress in areas such as law and order, standards of governance and the reform of bloated public sectors.

The political scene

An Australian has been In a surprise development and a break with tradition, Greg Urwin, an appointed as secretary-general Australian and a former high commissioner to Fiji, Samoa and Vanuatu, was appointed secretary-general designate of the Pacific Islands Forum (PIF) at the organisation’s annual summit in mid-August. Mr Urwin will replace Noel Levi, from Papua New Guinea, who has already served two terms (under PIF rules tenure is limited to two three-year terms). The post of secretary-general, the top regional position, has always been filled by a Pacific islander, and the leaders of some of the smaller PIF member states, including Nauru and the Cook Islands, were unhappy at the aggressiveness of Australian lobbying for their candidate. Indeed, at one point the sub-group of six small island nations (comprising the Marshall Islands, the Cook Islands, Kiribati, Tuvalu, Nauru and Niue) appeared to veto Mr Urwin’s appointment, suspicious of Australia’s motives in seeking the top position in the organisation. However, Mr Urwin, who is married to a Samoan, was finally appointed in a secret ballot. It remains to be seen whether differences of opinion on his appointment, which takes effect in January 2004, will reduce his effectiveness as secretary-general—although he has dismissed suggestions that he is “John Howard’s man”.

Summit hints at further areas The appointment of a new secretary-general of the PIF is likely to lead to a of co-operation review of the direction of the organisation and a re-assessment of the range of issues on which the 16 PIF members co-operate. The issues discussed during the recent PIF annual summit in Auckland give an indication of the future direction

of debate. Central to the agenda were issues such as pooled regional governance, greater co-operation on regional air transport, security and cross- border crime and the role of foreign aid, as well as the perennial issues of climate change and the impact of globalisation and trade liberalisation on small island economies. One concrete measure agreed at the summit was the creation of a new regional police training centre, which will be based in Fiji. The initiative, to be sponsored by Australia and New Zealand, will see several hundred police officers from the Pacific islands receive training at the centre each year in an effort to improve policing skills and standards across the region.

Economic policy and the domestic economy

A single currency and labour Although not part of the summit agenda, the prospect of a Pacific Economic mobility would be contentious and Political Community, comprising the 13 island states together with Papua New Guinea, Australia and New Zealand, was hotly debated. The idea, proposed in a recent report by the Australian Senate’s Standing Committee on Foreign Affairs, Defence and trade Reference, included the possibility of a single currency within the region, based on the Australian dollar, and greater labour mobility, giving Pacific islanders increased rights to work in Australia. The ideas were coolly received by Mr Howard, Alexander Downer (the Australian foreign minister) and Michael Cullen (the New Zealand finance minister), as well as by most Pacific island leaders, with the chief concern being the possible undermining of the island states’ independence.

Tourist arrivals set to recover Heightened global uncertainty before and during the US-led war in Iraq, in the second half of 2003 together with the outbreak of Severe Acute Respiratory Syndrome (SARS) in Asia, inevitably persuaded many tourists to stay at home in early 2003; the destinations most dependent on Japanese tourists were worst hit. However, the impact on tourist arrivals was not as severe as had been feared, and there were some signs of recovery towards the end of the second quarter. Bookings to most Pacific destinations are expected to pick up in the second half of the year, with the Pacific island nations, for the most part, continuing to be viewed as low-risk in terms of terrorism. Tourism in several of the island nations will receive a further boost when Virgin Blue, which operates low-cost, no-frills domestic flights in Australia, launches new services to several leading island destinations, such as Fiji and Vanuatu, later this year. However, there are fears that the increased competition and lower fares resulting from Virgin Blue’s entry into the market could spell further trouble for the islands’ own airlines, many of which are already struggling to survive.