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A WORLD BANK COUNTRY STUDY 10058 Public Disclosure Authorized FILECF Pacific Island Economies Toward Higher Growth in the 1990s Public Disclosure Authorized Public Disclosure Authorized II @t Public Disclosure Authorized \ ~~FiLE COPY \\ 1/7// I -Srl-1- 1 1 / A WORLD BANK COUNTRY STUDY Pacific Island Economies Toward Higher Growth in the 1990s The World Bank Washington, D.C. Copyright i 1991 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433,U.S.A. All rights reserved Manufactured in the United States of America First printing September 1991 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is shown in the annual Index of Publications,which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433,U.S.A., or from Publications, The World Bank, 66, avenue d'I6na, 75116Paris, France. ISSN: 0253-2123 Libraryof Congress Cataloging-in-PublicationData Pacific Island economies: toward higher growth in the 1990s. p. cm. - (A World Bank country study) ISBN0-8213-1938-8 1. Oceania-Economic conditions. 2. Oceania-Economic policy. 3. Economic forecasting-Oceania. I. International Bank for Reconstruction and Development. II. Series. HC681.P295 1991 338.99-dc2O 91-33516 CIP - iii - PREFACE This work on economic development strategiesand policy options for the Pacific Island economieswas initiated in 1989. The report was prepared and discussedwith member Governmentsand donor agencies at a seminar in Singapore in November, 1990. A final version of the report was presented at the Forum Secretariatmeeting on regional aid coordinationin Fiji in February 1991. This report is the first of its kind for the six Pacific island countries that are members of the World Bank--Fiji,Kiribati, Solomon Islands, Tonga, Vanuatu and Western Samoa. The first volume is a regional overview that examines the growth performanceof the South Pacific countries in the 1980s, assesses the factors underlying the relativelyweak performance,and develops a framework for achievinghigher rates of growth in the 1990s. Chapter 1 reviews the economic performanceof the South Pacific countries in the 1980s; Chapter 2 reviews the underlying policy environmentduring the past decade; Chapter 3 suggests strategies for acceleratedand sustained growth and explores developmentprospects in the 1990s; and Chapter 4 examines the past and future role of developmentassistance 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 developmentprospects and policies, and provide medium- term prospects including that of external financing requirements. The World Bank would like to express its appreciationto all the member Governments,donor agencies and several research and regional organizationsthat cooperated in support of this review. The World Bank would also like to acknowledge the support provided for this study by the AIDAB South Pacific Facility. This report is based on a mission that visited the region in November 1989, with follow-upmissions in May-June, 1990. The principal authors are Amar Bhattacharya,Steven Tabor, Lloyd Kenward, John Kerr-Stevens, Ranji Salgado, Mark Baird, R. Kyle Peters, Graeme Thompson and Zaidi Sattar. Other contributorsincluded: Te'o Fairbairn, Paul Flanagan, Colin Pratt and Jayshree Sengupta. Statistical support for the study was provided by Anna Maripuu, Peter Osei, and Cyrus Talati. Fay Willey provided editorial assistance and Sharon E. Gustafson provided administrativesupport and coordinatedthe processing of the document. - iv - 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 - v - Table of Contents Page No. EXECUTIVE SUMMARY .......................................... vii Part I. Regional Overview I. ECONOMIC PERFORMANCE IN THE 1980s .......................... 1 A. Introduction ........................................... 1 Geography and Society .................................. 1 Living Standards....................................... 4 B. Economic Performance in 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 Instability of Output and Incomes ...................... 22 Availability of Finance ................................ 23 Conclusion ............................................. 23 II. THE DOMESTIC POLICY ENVIRONMENT IN THE 1980s ............... 25 A. Overview ............................................... 25 B. Macroeconomic Management ............................... 25 Fiscal Policy .......................................... 25 Monetary Policy ........................................ 27 C. The Role of the Public Sector .......................... 28 Overview ............................................... 28 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 - vi - III. DEVELOPMENT CHALLENGES AND GROWTH PROSPECTS IN THE 1990s... 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