Transforming Tonga a Private Sector Assessment
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reform recovery growth Transforming Tonga a private sector assessment Summary Transforming Tonga A Private Sector Assessment Summary © 2008 Asian Development Bank All rights reserved. Published 2008. Printed in Australia. Publication Stock No. 081508 ISBN 978-971-561-722-2 Cataloging-In-Publication Data Asian Development Bank. Transforming Tonga: A Private Sector Assessment—Summary. Mandaluyong City, Phil.: Asian Development Bank, 2008. 1. Economic growth. 2. Private sector development. 3. Tonga. I. Asian Development Bank. This report was written by Paul Holden and Chris Russell, under the supervision of Winfried Wicklein, Asian Development Bank (ADB), Pacific Liaison and Coordination Office, Sydney, Australia. Terry Reid contributed to the section on rationalizing commercial laws and regulations. Paul Bullen edited the report, and Melissa Dayrit managed the logistics. This report was funded by the Private Sector Development Initiative, an ADB regional technical assistance project cofinanced by the Australian Agency for International Development. The views expressed in this book are those of the authors and do not necessarily reflect the views and policies of ADB or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. Use of the term “country” does not imply any judgment by the authors or ADB as to the legal or other status of any territorial entity. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax + 63 2 636 4444 www.adb.org Pacific Liaison and Coordination Office Level 18, 1 Margaret Street Sydney, NSW 2000, Australia Tel +61 2 82709444 Fax +61 2 82709445 www.adb.org/plco For more detailed information on the issues raised in this document, please see the full report included in this pack. If the full report is not included, please contact ADB for a replacement copy. For orders, please contact: Department of External Relations Fax +63 2 636 2648 [email protected] Promoting Prosperity in Tonga: Removing Constraints on the Private Sector The Tongan Economy is growth of Tonga’s private sector has been Not Achieving its Potential hampered by a number of constraints, which has resulted in the low productivity The Tongan economy has been of investment. Removing them would make underperforming for more than a decade. The Tonga an attractive, low-cost place to do productivity of both labor and capital has been business. Businesses would start or expand low, resulting in poor returns on investment. and employment would increase. There Few new businesses have started and existing would be new or higher profits for owners, ones have been slow to expand. Job creation new or better wages for employees, and new or higher returns to investors. And if Tonga Businesses would start or were more prosperous, government could afford to supply better health and education expand and employment services. The impetus to seek employment would increase. There would overseas would abate as more Tongans would be able to find good jobs at home. Those who be new or higher profits for had been educated abroad would have new incentives to bring their skills back to Tonga. owners, new or better wages There are certain policy changes that would for employees, and new or raise productivity and increase the profitability higher returns to investors. of investments. Generally, they involve making Tonga an attractive, low-cost place to do business. Some changes would need to be has been insufficient to employ the growing made right away, but others could be made number of school leavers looking for work, over a number of years. If the changes are and, after adjusting for inflation, wages and made, the economy should grow much salaries have not risen. This has led many faster than it has been. Fortunately, the Tongans to seek opportunity overseas. There government has made a strong commitment are now more Tongans living in other countries to implementing reform, and has embarked than in Tonga. Since many emigrants are on a number of new initiatives. A summary of highly skilled, this is a serious loss to a country the major constraints on the private sector and of only 100,000 people. what to do about them follows. Greater detail can be found in the main report. In all dynamic, growing economies, growth comes from the private sector. But the 1 Transforming Tonga: A Private Sector Assessment—Summary Recovering from Two What to do: Shocks to the Economy • Rebuild Nuku’alofa as soon as possible, making sure that whatever combination of Constraint: The destroyed commercial financing alternatives is used, it increases district of the capital city discourages local employment and skills. investment by creating the perception of political instability and of inability of the • Have independent building experts certify economy to recover. that all construction work is of good quality. Background: One of the reasons investment has been low over the past few years is the The rebuilding of the perception that Tonga is a risky place to do business. First, a civil-service strike in 2005 commercial district will serve closed down government for several weeks. as an indicator that political Then the following year, civil disturbances resulted in the destruction of many buildings in stability has returned and that the central business district of Nuku’alofa. The two events created the perception, particularly the government is determined among foreigners, that Tonga is unstable. to press ahead with the And so expected returns on investment have had to be higher than normal before they transformation of the economy. would invest. The rebuilding of the commercial district will Reducing the Presence of serve as an indicator that political stability the State in the Economy has returned and that the government Constraint: An oversized public sector is determined to press ahead with the lowers overall productivity both directly and by transformation of the economy. Some crowding out private sector. progress has already been made in the rebuilding, but the bulk of the work has yet Background: An effective government is to be done. Although the financing required necessary for economic prosperity, but if the is beyond the capacity of the local financial public sector gets too big, it constrains the markets, there are a number of options private sector. Governments have far-reaching available, including grant financing from powers to help—and harm—the private Australia and New Zealand and an in-kind sector, both by what they do and what they do loan from the People’s Republic of China. The not do. Some examples of what governments need to rebuild provides an opportunity to can do to help are maintain law and order, set increase employment and augment the skills and enforce the rules of commerce, enforce of the workforce. And if the task of rebuilding property rights, and provide any infrastructure is handled in the right way, investor confidence that the private sector is not best suited to in Tonga will rise. provide (e.g., roads). There are also things 2 governments should not do. For example, • Continue to enhance effective stewardship they should not employ more people than of the state-owned enterprises by freeing absolutely necessary. Governments should ministers from the requirement to serve not own or operate businesses—experience as directors and by expanding the pool of around the world shows that they are almost skilled directors with targeted training. always poor operators of businesses. Also, • Later, privatize these enterprises or if the public sector (the part of the economy outsource their operations in a transparent in which goods and services are delivered manner through public-private partnerships. by or on behalf of the government) is too • Continue with the civil-service downsizing that had begun after the strike of 2005. Governments should • The government’s commitment to reform not own or operate is indicated by the fact that it has already started this work. But more is necessary to businesses—experience reduce the size of the Tongan public sector around the world shows that so that it supports dynamic private sector development. they are almost always poor operators of businesses. Improving the Infrastructure Constraint: Gaps in the infrastructure cripple business. large, it “crowds out” the private sector (the part of the economy in which goods and Background: An essential function of services are delivered by private enterprise) by government is to ensure that good quality taking skilled workers and private investment infrastructure is widely available and provided opportunities away from it. In Tonga, more in the most effective way. Some infrastructure people work in the public sector than in private is a public good—that is to say, it is something businesses and the government controls that benefits society as a whole, but provides a substantial proportion of the economy’s insufficient incentives for private enterprises capital stock. As a result, the growth of the to supply on their own. As it is a key function economy has been held back by the low or of government to provide public goods, negative rates of return on businesses owned governments must see to it that those parts by the state and the low productivity of public of the infrastructure are built and maintained. sector workers. However, private companies are capable of profitably and efficiently building or operating What to do: other parts of infrastructure and providing • Make sure enterprises owned by the state still other parts efficiently, even though operate on business principles: that they government pays for it.