Country Report

Samoa

September 2006

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Samoa 1

Contents

Samoa

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07

8 The political scene

9 Economic policy

10 The domestic economy

11 Foreign trade and payments

The region

13 Summary

14 Outlook for 2006-07

15 The political scene

17 Economic policy and the domestic economy

List of tables 7 Samoa: GDP by sector

List of figures 5 Samoa: gross domestic product 5 Samoa: consumer price inflation 7 Samoa: consumer prices 7 Samoa: foreign trade

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Samoa September 2006 Summary

Outlook for 2006-07 The abandonment of a defamation lawsuit against two rival political parties suggests that the government may take a more subtle approach to political dissent. Difficulties with drug abuse and juvenile crime will continue, and the government looks flat-footed on social policy. The value-added goods and services tax (VAGST) will rise this year, and government spending is set to increase sharply next year, partly to fund the staging of the 2007 Pacific Games. The games will help to underpin GDP growth in 2007, and continued tourism growth should ensure economic expansion this year, despite a fall in merchandise exports. The political scene A number of people who voted twice in the March general election have been charged with electoral fraud. An associate revenue minister has been revealed as having a manslaughter conviction dating back to the 1980s. The reporting of crimes of a sexual nature has recently increased.

Economic policy The VAGST rate will rise from 12.5% to 15% from October 1st. Other tax and excise rates have been adjusted, largely upwards, particularly affecting tobacco and beverage imports. The Ministry of Finance has announced that government expenditure will increase by 16% in fiscal year 2006/07 (July-June), largely because Samoa is staging the 2007 South Pacific Games.

The domestic economy The economy has generally performed well in recent months, with the fish sector showing the most notable improvement. However, coconut product exports are suffering, particularly coconut oil. Visitor arrival numbers and revenue have been picking up. Fiji television has signed a two-year contract with SKY Samoana to provide SKY television services in Samoa.

Foreign trade and payments China!s foreign minister, Li Zhaoxing, visited in July, and committed further financial assistance to Samoa. The Chinese government is funding the construction of a number of new buildings for Samoan courts and the parliament.

Editors: Graham Richardson (editor); Gerard Walsh (consulting editor) Editorial closing date: August 17th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Political structure

Official name Independent State of Samoa

Form of state UK-style cabinet government

The executive The prime minister, chosen by a majority in the Fono (parliament), selects 12 ministers to form a cabinet; cabinet decisions may be reviewed by the Executive Council, which consists of the cabinet and the head of state

Head of state HH Malietoa Tanumafili II until his death, when a successor will be elected by the Fono for a five-year period

National legislature Unicameral, 49-member Fono. Of the total, 47 members are elected by all Samoans aged 21 or over to represent 41 constituencies, while the remaining two members are elected from electoral rolls made up of non-Samoans. Elections are held every five years

Legal system System of lower courts leading to the Court of Appeal

National elections March 2006; the next election is due by 2011

National government The Human Rights Protection Party (HRPP), led by Tuila!epa Sa!ilele Malielegaoi, holds 30 of the 49 seats in the Fono

Main political parties Human Rights Protection Party (HRPP); Samoa Democratic United Party (SDUP)

Prime minister, minister of foreign affairs & public service, immigration, police & prisons, civil aviation Tuila!epa Sa!ilele Malielegaoi

Deputy prime minister & minister of finance Misa Telefoni Retzlaff

Key ministers Agriculture, forests & fisheries To!omata Alapati Poese Communications & information technology Palusalue Fa!apo II Education, sport & culture Fiame Naomi Mata!afa Finance Niko Lee Hang Health Mulitalo Siafausa Justice Unasa Mesi Natural resources & environment Tuisugaleataua Sofara Aveau Police, prisons & fire service Toleafoa Faafisi Revenue Tofa Tuuu Anasii Le ota Trade, commerce, industry & tourism Hans Joachim Keil Women's affairs, community & social development Tuala Ainiu Iuisitino Works, transport & infrastructure Faumuina Liuga

HRPP parliamentary speaker Tolofuaivalelei Falemoe Leiataua

Central Bank governor Papali!i Tommy Scanlan

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Economic structure

Annual indicators 2001a 2002a 2003a 2004a 2005b GDP at current prices (Tala m)c 834.0 885.0 945.3 1,042.2 n/a Real GDP growth (av; %)c 6.8 1.2 3.5 3.9 5.1 Consumer price inflation (av; %)d 3.8 8.4 0.1 18.4 2.4 Population ('000)c 176.8 177.7 179.3 180.9 n/a Exports fob (US$ m)c 15.1 13.7 14.7 11.9 12.0 Imports cif (US$ m)c 129.2 134.6 135.6 168.8 188.0 Current-account balance (US$ m)c -6.5 4.9 19.1 10.8 n/a Reserves excl gold (US$ m)d 56.64 62.49 83.91 95.51 92.23 Total external debt (US$ m)c 204 234 365 n/a n/a Debt-service ratio, paid (%)c 8.8 9.1 8.7 7.9 n/a Exchange rate (av; Tala:US$)d 3.472 3.375 2.998 2.780 2.700 a Actual. b Economist Intelligence Unit estimates. c Asian Development Bank. d IMF, International Financial Statistics.

Origins of gross domestic product 2004a % of total Agriculture & fishing 13.8 Manufacturing 14.8 Construction 8.3 Trade 21.6 Transport & communications 12.3 Government & finance 17.0

Principal exports fob 2004a % of total Principal imports 2004a % of total Fresh fish 38.4 Food & live animals 15.9 Garments 37.2 Mineral fuels 14.6 Beer 12.1 Crude non-fuel materials 2.6 Coconut cream 8.2 Beverages & tobacco 1.1 Taro 4.1

Main destinations of exports fob 2004a % of total Main origins of imports 2004a % of total Australia 60.7 New Zealand 23.1 Indonesia 17.1 Fiji 17.9 US 4.9 Australia 9.6 American Samoa 2.8 Singapore 9.1 New Zealand 1.6 Japan 8.1 a Asian Development Bank.

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Quarterly indicators 2004 2005 2006 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Prices Consumer prices (2000=100) 133.1 131.4 129.8 131.7 132.6 132.9 135.1 137.7 Consumer prices (% change, year on year) 17.2 13.6 17.5 2.7 -0.4 1.1 4.1 4.6 Financial indicators Exchange rate Tala:US$ (av) 2.847 2.815 2.719 2.685 2.690 2.728 2.738 2.776 Exchange rate Tala:US$ (end-period) 2.847 2.768 2.673 2.687 2.726 2.721 2.764 2.861 Deposit rate (av; %) 5.1 5.1 5.1 5.1 5.1 5.1 5.1 5.1 Lending rate (av; %) 9.8 9.8 9.8 9.8 9.8 9.8 9.8 9.8 M1 (end-period; Tala m) 112.63 116.55 124.93 122.30 132.79 141.20 160.74 146.31 M1 (% change, year on year) 20.0 14.8 5.7 3.4 17.9 21.1 28.7 19.6 M2 (end-period; Tala m) 383.59 400.51 418.52 424.12 441.22 451.88 484.01 490.92 M2 (% change, year on year) 12.7 12.4 8.3 9.8 15.0 12.8 15.6 15.8 Foreign trade (Tala '000) Exports foba 7,935 10,674 8,761 6,663 9,127 8,080 8,433 5,099 Imports cif -102,046 -110,218 -123,743 -93,251 -137,813 -125,291 -151,355 -134,367 Trade balance -94,111 -99,544 -114,982 -86,588 -128,686 -117,211 -142,922 -129,268 Foreign reserves (US$ m) Reserves excl gold (end-period) 73.27 81.55 95.51 96.83 98.0 96.90 92.23 72.78 a Includes re-exports. Source: IMF, International Financial Statistics.

Samoa: consumer prices Samoa: foreign trade (% change, year on year) (Tala '000)

18.0 Exports (a) Imports Trade balance 20,000 16.0 0 14.0 -20,000 12.0 -40,000 10.0 -60,000 8.0 -80,000 6.0 -100,000 4.0 -120,000 2.0 -140,000 0.0 -160,000 -2.0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2004 05 06 2004 05 06 (a) Includes re-exports. Source: IMF, International Financial Statistics. Source: IMF, International Financial Statistics.

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Outlook for 2006-07

A subtler approach to dissent The political scene has settled down since the March general election, with the

is possible Human Rights Protection Party (HRPP) still the dominant force in parliament. Following advice from colleagues and family, the prime minister, Tuila!epa Sa!ilele Malielegaoi, has dropped a lawsuit against the leaders of the rival Samoa Democratic United Party (SDUP) and the Samoa United Party (SUP), which had sought defamation damages. The charges arose from accusations made by both parties that the HRPP leader had secretly undertaken to change the constitution in order to free up the use of communal lands. Pursuing the case further could potentially have led to deeper divisions in Samoa!s political scene, and generated resentment against the current government, although Mr Tuila!epa did not reveal his motives for withdrawing the action. However, the SDUP did suffer a setback when it was revealed that one of the party!s ministers, Lafaitale Patrick, carries a conviction for manslaughter from his involvement in the death of a Tongan man in New Zealand in the late 1980s. The incident has brought into question the screening process for political candidates, and questions have been asked as to the tenability of Mr Patrick!s position. The clannish nature of Samoan politics was underlined by the lack of reaction to the revelation, with the general consensus being that Mr Patrick had admitted the charge and should therefore suffer no further repercussions.

Social issues will remain Criminality appears to have increased significantly in Samoa in the past five

important years, with drug abuse and juvenile crime a particular concern. Since broadcasting a series of programmes via radio and television earlier in the year to highlight the problem of sex-related crimes, and to encourage people to come forward to report them, there has been a significant increase in the number of incidents reported, and the data reveal that many of the crimes involve underage victims. The HRPP will need to be seen to be doing something to reverse this situation if its popularity is to be sustained.

Government spending will One move that will certainly have eroded confidence in the HRPP party is the

increase value-added goods and services tax (VAGST) rate increase that will come into effect in October. The tax, already unpopular with the majority of the population, will rise from 12.5% to 15%. Despite the fact that essential commodities and services will generally be exempt, the rise is an indicator of the government!s high expenditure requirements. Public spending is set to increase by 16% in fiscal year 2006/07 (July-June), and despite protestations from the HRPP that the staging of the 2007 South Pacific Games is the central cause for this, there are signs that the Ministry of Finance is facing an uphill struggle to balance its books.

GDP growth will be sustained GDP growth reached an estimated 5.1% in 2005, and relatively strong rates of growth are likely in both 2006 and 2007. Tourism numbers and revenue have already started to pick up significantly, and this will bolster growth in 2006. Next year, further tourism growth and the holding of the 2007 Pacific Games will provide further impetus. But relatively strong growth will not fully conceal problems with public finances and a generally disappointing performance by

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merchandise exports. Consumer price inflation is currently low, but this may pick up slightly as suppliers seek to pass on the effects of higher oil costs: as ever, inflation will be more immediately influenced by seasonal movements in food prices.

Samoa: gross domestic product Samoa: consumer price inflation (% change, year on year) (av; %)

Samoa Asia excl Japan Samoa Asia excl Japan 8.0 20.0 7.0 18.0 16.0 6.0 14.0 5.0 12.0 4.0 10.0 3.0 8.0 6.0 2.0 4.0 1.0 2.0 0.0 0.0 02 03 04 05 05 02 03 04 2001 2001

The political scene

Double voters are brought to The general election in March earlier this year saw Samoa!s leading political

justice group, the Human Rights Protection Party (HRPP) returned to power, despite some speculation about an upset. The HRPP leader, Tuila!epa Sa!ilele Malielegaoi, was returned to power as prime minister unopposed in his constituency, and five of the eight independent candidates that won seats were accepted into the HRPP retroactively. Prospects for the main opposition party, the Samoan Democratic United Party (SDUP), continue to look unfavourable, and in the absence of any major political or economic upheaval, the SDUP looks set to remain outside government for some time to come. The election was not without its faults, however. Although an electoral registration procedure was initially thought to have reduced the number of fraudulent votes, it has since transpired that transgressions nonetheless occurred. The electoral commissioner, Tanuvasa Meleisea Isitolo Lemisio, began legal proceedings in June against around 150 people who are alleged to have voted twice. The matter might have gone unchecked had the former police minister, Ulu Vaomalo Ulu Kini, not filed a petition concerning suspected irregularities following the loss of his seat in parliament to Lealailepule Rimoni Aiafi.

Mr Tuila'epa drops a Mr Tuila!epa has cancelled the lawsuit he filed against leaders of the SDUP and defamation suit the Samoa United Party (SUP) that was initially prompted by what he maintained were false allegations that the HRPP secretly planned to make changes to the constitution to allow the sale of communal lands with a view to their being used for commercial purposes. The charges were levelled at Mr Tuila!epa and the HRPP in the run-up to the March general election, giving rise to speculation that their purpose may have been deliberately defamatory.

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Mr Tuila!epa said that he was encouraged to drop the suit by church leaders and members of his family.

Minister's criminal record The government has nonetheless had to weather a recent scandal in which the comes to light associate revenue minister, Lafaitele Patrick, was revealed to have been convicted of manslaughter following the death of a Tongan man in New Zealand in the late 1980s. Mr Lafaitele, who was elected to office for the first time this year as an independent and then retroactively inaugurated into the HRPP, served four years in a New Zealand jail in the early 1990s before being deported back to Samoa where he changed his name. The incident has prompted the electoral commission to review the laws that allow for the disqualification of political candidates. Currently, only people convicted and sentenced to a term of two or more years in Samoa or American Samoa can be banned from holding a government post.

Sex crime reports increase Since running a series of radio and television programmes highlighting the problem of underage sex, underlining both the importance of reporting sex crimes, and the penalties that can subsequently be imposed, the Ministry of Police has announced a sharp increase in the number of incidents reported. Most of the cases involve girls between the age of 12 and 16, and have been reported for the large part by members of the victims! families. The associate police commissioner, Papalii Lio, said that local mayors and church leaders had also been involved in the campaign.

Economic policy

Budget signals tax changes The Ministry of Finance presented its budget for fiscal year 2006/07 (July-June) to parliament at the beginning of June. The most important feature of the budget was an increase in the unpopular value-added goods and services tax (VAGST). The rate of VAGST will rise from 12.5% to 15%, with effect from October 1st. In an attempt to assuage the public, the finance minister, Niko Lee Hang, was at pains to point out that daily necessities such as electricity, water, medical and education fees, and most raw fish, fruit and vegetables would be exempt from the tax. He estimated that the net increase in revenue generated by the rise would be approximately Tala14.75m (US$5.18m) in 2006/07.

Tax and excise rates are Individual and company tax rates are to be brought down, with the highest

adjusted personal tax rate, along with company tax, reduced from 29% to 27%. At the same time, the qualifying threshold for personal tax exemption has increased from Tala10,000 to Tala12,000 annually, although ceilings for all other tax bands will remain at current levels. Excise rates on both soft and alcoholic drinks, and tobacco, have been raised in what the finance minister described as a dual effort to benefit the nation!s health as well as its coffers. A rate rise of 10% was imposed on alcoholic drinks from July 1st, with unrolled tobacco rates suffering a more significant 45.25% increase. Cigarettes will be affected by a rate rise of 17.3% from February 1st 2007.

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Government expenditure will Proposed government expenditure in 2006/07 is Tala539.7m (US$189.7m), an

increase sharply increase of 16% on 2005/06. The finance minister highlighted the fact that the development of infrastructure for the staging of the South Pacific Games in 2007 would act as an additional draw on the public purse, with education, health and agriculture also remaining primary areas for government expenditure in the coming financial year.

The domestic economy

Growth hit 5.1% in 2005 Recent data from the Ministry of Finance confirm that GDP growth (at constant prices) reached 5.1% in 2005. The driving force was agriculture, which expanded by 15.1%, thanks largely to rapid growth in coconuts and coconut products. (The downside of this has been evident this year, as the return of agricultural output to more normal output has depressed exports.) Construction also grew strongly in 2005, expanding by over 10%.

Samoa: GDP by sector (Tala m at constant 2002 prices unless otherwise indicated) 2004 2005 % change Agriculture 63.2 72.7 15.1 Fisheries 52.8 50.7 -3.9 Food & beverages manufacturing 30.6 33.6 9.6 Other manufacturing 108.8 104.6 -3.9 Construction 74.3 82.2 10.7 Electricity & water 42.6 44.3 3.9 Commerce 189.5 203.4 7.3 Hotels & restaurants 25.4 27.0 6.5 Transport & communications 119.5 123.3 3.1 Public administration 78.9 83.9 6.4 Finance & business services 92.3 99.4 7.7 Total incl others 950.3 999.2 5.1

Source: Ministry of Finance, Quarterly Economic Review.

Consumer price inflation One piece of good news in a rather uneven economic landscape is that

slows consumer price inflation has slowed. Consumer prices in the second quarter of 2006 were up by only 1.9% on a year earlier, compared with an average annual rate of 16.3% for 2005 as a whole. Food prices were 1.3% higher in June than a year earlier, and clothing prices fell year on year. Unsurprisingly, the largest increase in prices was registered by the transport and communications sector: pushed up by high oil prices, this component rose by 7.8% year on year in June.

Tourism arrivals are Tourist arrivals appear to be picking up. The latest figures show strong growth

picking up so far this year, with arrivals and receipts up by 18.4% and 21.5% year on year respectively for the first six months of 2006 thanks to increased numbers of visitors from New Zealand and Australia. The improvement has been attributed to cheaper air travel provided by Polynesian Blue between the Pacific Islands and Australia and New Zealand.

Samoa!s Visitor Bureau is now looking to China to boost the tourism sector. The chief executive of the Samoa Visitor Bureau, Reupena Matafeo, said that his organisation is hoping to have a representative office established in China by the end of 2006, and that it will be lobbying the government to allow flights to arrive directly from China.

Polynesian Airlines Late in 2005, Polynesian Blue took over neighbouring Niue!s only international struggles on route from Samoa!s national airline, Polynesian Airlines, and the troubled Samoan carrier has recently announced that it will be ceasing its remaining weekly service from Apia, in Samoa, to Niue in August. However, negotiations with Hawaiian Air led to an agreement at the end of June over code-share flights between Apia and Honolulu. Hawaiian Air is in the process of applying for a licence to fly to Samoa, but no date has yet been set for the commencement of the service.

SKY TV now available in Fiji Television has signed a two-year contract with SKY Samoana that will see it

Samoa become the exclusive provider and distributor of SKY Pacific broadcasting services to Samoa. SKY Samoana is a subsidiary of Samoana Broadcasting, one of the main service providers in Samoa, and is now the fifth licensed distributor of SKY Pacific in the region. The deal will see a further 16 news and entertainment channels made available to Samoa-based subscribers.

Foreign trade and payments

Exports remain depressed Exports are substantially down compared with a year ago. Exports in the first six months of 2006 were down by 24% year on year: exports of food fell by 27%, and exports of animal and vegetable oils fell by 50%. Meanwhile, imports have continued to rise; the value of oil imports was 30.7% higher in the first six months of 2006 than a year earlier, jacked up by a 37% rise in mineral fuels imports. The big problem is coconuts. Products yet to be traded in 2006 include coconut oil, which accounted for 7% of total export revenue in 2005, and copra meal. In addition to this, revenue from desiccated coconut has almost halved compared with the same period in 2005. The coconut industry was once a mainstay in the export market, but the first half of 2006 has seen coconut-related exports fall by just over 45% year on year.

China pledges more funds China!s foreign minister, Li Zhaoxing, met with the prime minister, Tuila!epa Sa!ilele Malielegaoi, in Samoa at the end of July, re-affirming ties between the two countries, which have grown stronger since a raft of favourable measures towards Pacific island countries was announced by Chinese prime minister, Wen Jiabao, in Fiji in April. Economic support from China is repaid by political support from Samoa in the form of adherence to and agreement with the "one China" policy, whereby Taiwan designated as a part of the Peoples! Republic of China, and therefore not recognised as a nation in its own right.

China is buying such allegiance with a mixture of debt forgiveness and new funds. It has cancelled a debt of approximately US$11.9m that was owed by Samoa, and has agreed to finance the construction of a new multi-million dollar headquarters for the Lands and Titles Court, along with a separate complex next to Parliament House which will house politicians! offices. In addition to assisting with the construction of a swimming centre for the South Pacific Games, due to be held in Samoa in 2007, China has also provided US$6m to upgrade the country!s main sports stadium for the same purpose. A further US$1m grant offered by Mr Li during his visit will help the Ministry of Health to purchase and maintain the nation!s first CAT scanner which will be used at the National Hospital in Motootua.

The region September 2006 Summary

Outlook for 2006-07 The political situation will remain fragile in many countries in the region. Fiji!s multi-party cabinet could experience increased friction with the military, and New Caledonia!s government will have to deal with large-scale environmental protests. Tonga must manage a difficult transition to democracy, and the Solomon Islands administration will need to deal with the aftermath of years of violence. Samoa!s government must face up to some difficult social issues, whereas Vanuatu!s will struggle simply to keep functioning. Continued Chinese interest in the region suggests that it may have a new agenda. Increased inflows of aid could create problems, both in relation to more allegations of corruption and to increased internal tensions through uneven distribution of aid. Increased aid could also lead to an unfortunate loosening of already poor controls over government spending. Merchandise export growth is likely to remain disappointing this year and next, although some relief is likely to be provided through increased services receipts from tourism. Despite this, GDP growth in 2006 could be better than some governments predict.

The political scene Fiji!s multi-party cabinet has so far worked reasonably well, and some ground rules on its operation are due to be agreed on in September. The Samoan prime minister, Tuila!epa Sa!ilele Malielegaoi, has dropped law suits against opposition leaders. The Solomon Islands government survived its first major internal crisis in August, but talk of outer islands seceding has continued. In New Caledonia, protests against new mining developments have been used to vent public dissatisfaction with other issues. In Tonga, the death of a leading royal reformer is unlikely to derail the move towards democratic government, and could indeed precipitate change. In Vanuatu, the prime minister, Ham Lini, has made some bold policy statements, but continues to struggle with the day-to-day business of government.

Economic policy and the A number of policy reforms have been implemented across the region. Samoa domestic economy is to increase its rate of value-added tax, Tonga is reducing the size of its civil service, the Solomon Islands has introduced a new investment law, and New Caledonia says its will put a greater focus on inflation control. But major problems with economic policy remain, highlighted by recent disappointing merchandise trade performances, and the distinctly shaky state of public finances in many countries. Trade problems will take some time to fix. Tourism growth, thanks to budget airlines, has provided some relief. Inflation rates are currently low, but demand management remains a problem in many countries. Editors: Graham Richardson (editor); Gerard Walsh (consulting editor) Editorial closing date: August 18th 2006 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

The political situation will The political situation will remain fragile in most countries in the region. The remain fragile multi-party cabinet in Fiji has survived well so far, but could be vulnerable to renewed tensions between the government and the military. New Caledonia!s politics will be complicated not just by disputes over the future relationship with France, but also by escalating rows over the environmental impact of planned mining projects. Tonga will continue to suffer from political growing pains, as the monarchy slowly metamorphoses into democratic government. Samoa!s autocratic regime will find it difficult to deal with worsening social problems and criminality. The Solomon Islands government must deal with the aftermath of years of violence, and Vanuatu!s leaders will continue to struggle to hold together an artificially created country, beset by ethnic divides. Many of these political problems have deep roots, and can often be traced back to colonial decisions on national boundaries, or other errors. But blaming the past cannot conceal a general lack of current progress. Hopes of "good governance" seem as remote as ever for a large number of countries in the region, and although Fiji!s cabinet currently shows one way forward, most governments in the region remain beset by ethnic wrangling, and are frequently paralysed by incompetence or corruption. The regional political situation appears to be in a state of transition. Until recently, there were great hopes that increased regional political co-operation" as manifest through the Pacific Plan, approved at the October 2005 summit meeting of the Pacific Islands Forum (PIF, the main regional political body) in Papua New Guinea"could solve the region!s woes. Debate on how to implement many aspects of the Pacific Plan continues, but any mood of optimism has been replaced by cynicism, as individual countries struggle to get to grips with their own political or economic problems.

China may have a new agenda China has responded to this lack of unity by sharply increasing its presence in the region in recent months, with the visit of the its premier, Wen Jiabao, to the Pacific Islands Forum in April followed up by the visit of the Chinese foreign minister, Li Zhaoxing, to a number of regional capitals in late July and early August. China has long been interested in the region, and in recent decades this interest has been focused on ensuring that more countries do not extend diplomatic recognition to Taiwan. The recent Chinese trips have been accompanied by a number of funding initiatives, but their high-profile nature suggests that Chinese diplomacy may now be following other objectives. If China is seeking to counterbalance the role of Australia in the region, it may have picked an opportune time to do so. With its extensive foreign military commitments elsewhere, Australia may be distracted, and must anyway not relish the prospect of being sucked into another Pacific Island contretemps, as it was with the Solomon Islands. New Zealand, whose resources are even more limited, will continue to play quite a canny game, focusing on improving trade links, while still playing a supporting role to Australian security interests.

Increased aid could create Increased inflows of aid, be they from China, Australia, New Zealand, Japan or difficulties elsewhere, may cause as many problems as they solve. Most national institutions remain incapable of handling these large amounts of money, and some aid will be siphoned off, at central government, local government or contractor level. It will be interesting to see how much China gets involved with the disbursement of its aid at a local level. Accusations of corruption will continue to dog political leaders in the region, and an uneven distribution of the benefits of aid within countries could exacerbate internal tensions.

Exports will disappoint Increased aid will also only paper over economic problems, not resolve them. Although some countries may see higher GDP growth this year, as aid and a reviving tourism sector push up construction and other sectors, the underlying economic situation of most countries will remain uncertain. The essential problem for most countries will remain that while their merchandise export growth is poor, economic growth is rapidly increasing their demand for consumer and investment goods. Export problems with certain commodities (such as coconut products) this year have served only to highlight a secular trend towards increased merchandise trade deficits, something that can only be partially offset by increasing services receipts from tourism. Increased transfers (private or through aid) are needed to make up the gap, if increased borrowing or payments crises are to be avoided. These can not be guaranteed, and are likely to have strings attached"making a nonsense of Pacific Islands states! long- held wish for economic self-determination. Increased aid could also allow a further loosening of control over public finances, already poorly monitored in many countries. Public spending is likely to increase sharply in Samoa this year, and Vanuatu!s public finances are already creaky. Returning recurrent spending to more normal levels could prove difficult.

Growth could prove better Recent official growth forecasts have varied widely across the region, although

than expected most tend to be on the low side. For example, Fiji!s Reserve Bank currently forecasts GDP growth of 2.7% in 2006, and the Tongan government is predicting an expansion of just 0.9%, owing to that country!s civil-service restructuring. Growth may turn out to be better than expected, however, thanks to a sustained revival in tourism, expectations of further aid inflows, and continued (if unsustainable) consumer confidence across the region. But growth and confidence could take a tumble in 2007 if simmering problems in many countries! public finances finally come to a head.

The political scene

Post-elections stresses continue A number of countries in the region are still coming to terms with the results of elections held earlier this year. Fiji!s general election was held in May, without the predicted unrest, and the incumbent Soqosoqo Duavata ni Lewenivanua (SDL) won a narrow victory, winning 36 of the 71 seats in the House of Representatives. Fiji!s prime minister, Laisenia Qarase, then surprised many by

creating a multiracial cabinet, with nine members of the Indian-based Fijian Labour Party (FLP) being sworn into office at the end of May. This cabinet has functioned reasonably well, despite being overly large (it contains 24 full ministers and 12 junior ministers). The country!s three major political parties have pledged themselves to establish ground rules for the cabinet!s operations by September, and there have been few major rifts so far within the body (one of these, predictably, surrounded the government!s affirmative action programme for native Fijians). However, tensions lurk beneath the surface: the FJP looks unstable, with major divisions in its leadership, and the military could yet try to reassert itself, particularly if it is threatened by spending cuts. The government in Samoa has trod fairly carefully since its unexpectedly easy victory in its general election in March. The ruling Human Rights Protection Party (HRPP) co-opted a few notionally "independent" members of parliament (MPs) with indecent haste and there was criticism about other aspects of the election. But the prime minister and leader of the HRPP, Tuila!epa Sa!ilele Malielegaoi, has subsequently dropped legal suits against opposition leaders, and a more subtle approach towards dissent is likely. The Samoan government needs to focus on getting to grips with a range of social issues, including increased drug abuse and juvenile crime. Violence remains closer to the surface in the Solomon Islands: here, the result of elections in March led to violent clashes, the intervention of Australian and New Zealand security forces, and a replacement government, composed of parties in opposition to the previous government and led by Manasseh Sogovare of the Social Credit Party (Socred). This government survived its first major internal crisis in August, centred on the government!s diplomatic recognition of Taiwan, and Mr Sogavare has grand plans for constitutional change. But the outer islands are again talking of secession, and the exact role of the Australian-led intervention force is being questioned. Major political issues remain unresolved elsewhere in the region. In New Caledonia, protests against massive new mining developments have intensified, and these have been used to vent public dissatisfaction about a number of other issues (for example, the increased cost of living). France has continued to urge its overseas territory to integrate itself better with its Pacific Islands neighbours, but independence is still a long way off. In Tonga, the slow march towards democracy continues. The Princess Regent, Pilolevu Tuita, has spoken of the inevitability of political reform, and the death of a leading royal reformer, Prince Tu!ipelehake, could intensify pressures for change. The death of the elderly King Taufa!ahau Tupou IV, who is presumed to be very ill, would be a likely catalyst. The government in Vanuatu staggers on, with the prime minister, Ham Lini, forced into yet another change in policy over kava exports. Mr Lini has seen off a number of threatened no-confidence votes, and has made some increasingly bold policy statements, but fulfilling these will prove difficult.

China commits more funds As noted above, China!s foreign minister, Li Zhaoxing, visited a number of Pacific island countries at the end of July and early August. China remains keen to ratchet up the pressure on those countries that currently recognise Taiwan

(Tuvalu, Kiribati, Palau, the Solomon Islands, Nauru, Palau and the Marshall Islands) to switch allegiance, but the scale of the largesse being dished out suggests that there is another policy agenda. The visits are already having a number of perhaps unintended side-effects, notably the undermining of the status of the Pacific Islands Forum (PIF, the main political organisation in the region), which includes the Taiwan-supporters as well as the China-supporters among its membership. China!s aid contributions, although high profile, are likely to have less impact on development than those from the more established aid donors. Japan has recently decided to increase aid substantially, and Australia and New Zealand continue to work on more complex economic agreements (New Zealand recently unveiled a deal with Vanuatu, for example). The US is also emerging as an important player, with the arrival of significant Millennium Challenge Compact (MCC) funds in Vanuatu.

Economic policy and the domestic economy

Some policy reforms are The immediate policy problems for most Pacific island countries are how to implemented deal with worsening merchandise trade deficits and distinctly shaky public finances. As ever, the temptation is to ignore the complexities of fixing immediate problems and set out grand visions for future improvements. Thus, Fiji has recently announced a five-year government plan to run from 2007 until 2011, and will convene a national economic development conference in September; Vanuatu has unveiled plans for preparing the 2007 budget, and for rejuvenating its agricultural sector. But there has been progress on some issues elsewhere. Samoa is to increase the rate of its controversial value-added tax (VAT) later this year, civil-service redundancies have gone ahead in Tonga, New Caledonia is putting a greater focus on inflation control, and the Solomon Islands has implemented a new investment law.

Trade-related problems may Trade-related problems may take longer to fix, however. High international oil

take time to fix prices have jacked up import bills, and hopes of local substitutes (eg coconut biofuels) remain distant"although one benefit has been that high oil prices have helped to push up the price of palm oil. At the same time, exports of many agricultural products have faltered, either due to long-term underinvestment in agriculture, or changes in trade regimes. The most obvious being the long-running saga over the control of Vanuatu!s kava trade, but changes in EU regulations regarding Fiji!s sugar exports are likely to have a much more profound effect. It remains a concern that several years of high international commodity prices have not elicited much of a rebound in the region!s agricultural sectors, although they have led to increased mining investment, and not just in New Caledonia. One worry is that if Pacific island states become disillusioned about the benefits of international trade, they will simply decide to opt out. At the end of July, Tonga!s prime minister, Fred Sevele, reluctantly bowed to popular pressure and decided to defer his country!s accession to the World Trade Organisation (WTO). As Mr Sevele observed, the problem is that future admission to the WTO may be on much tougher terms.

The longer-term problem of climate change remains in the background. Initiatives will presumably need to be co-ordinated by the PIF, which has much broader development aims. The PIF is now gearing up to deal with its Pacific Plan, which prescribes a wide range of avenues for regional co- operation, with the aim of accelerating economic development and achieving common political objectives. The secretariat of the PIF will establish a small office of officials who will have the task of liaising with the region!s other economic development agencies for the execution of an initial 22 projects over the first three years of the plan!s ten-year time-frame. If global warming does result in significant long-term raising of water levels, many Pacific Islands will be unable to do much to prevent this: attention will then focus on how their populations can be re-housed elsewhere: Australia!s attitude towards immigration will be important here.

Tou ri sm ha s h elp ed GD P Growth in some countries may currently be quite strong, thanks to the impact growth of aid flows on public spending and the revival of tourism. This revival of tourism owes more to external factors than to government strategy: the catalyst has been the appearance of budget airlines such as Virgin Blue and Pacific Blue, which provide a cheaper and (in the short term) more dependable link than the national carriers with major tourism sources, notably Australia. The rapid increase of cheap air travel within Asia will also have spill-over benefits, as will China!s increasingly relaxed attitude towards outward tourism. Hotel construction has responded rapidly to increased inflows of tourists.

Demand management is still a Sustained GDP growth this year looks likely to be accompanied by relatively problem low rates of consumer price inflation; inflation rates in many countries in the region are currently much lower than a year ago, largely reflecting more stable prices for agricultural goods, although they could start to pick up again. But demand-management problems will persist owing to increased public spending. Fiji tightened monetary policy in May, and Reserve Bank of Fiji!s governor, Savenaca Narube, has inferred more recently that further interest rate rises are possible. The problem in Fiji, as elsewhere in the region, is that overly strong credit growth is boosting imports, while exports and imports remain depressed. As noted before, Pacific island countries may be suffering from a form of "moral hazard": they know that other countries will bail them out, if necessary. The costs to Australia of any of these countries going bankrupt"in terms of political instability, or labour migration"would be far higher than simply handing over more money to keep the economy going. This reassurance unfortunately provides a further incentive to go easy on reform to the detriment of the countries! long-term growth prospects.