Pacific Studies Series About AusAID AusAID is the Australian Government agency responsible for managing Australia’s overseas aid program. The objective of the aid program is to assist developing countries reduce poverty and achieve sustainable development, in line with Australia’s national interest. AusAID provides advice and support to the Minister and Parliamentary Secretary on development policy, and plans and coordinates poverty reduction activities in partnership with developing countries. AusAID’s head office is in Canberra. AusAID also has representatives in 25 Australian diplomatic missions overseas. Portfolio Partners Tuvalu 2006 Economic Report 2006 Economic Tuvalu The Australian Agency for International Development is an administratively autonomous agency within the Foreign Affairs and Trade portfolio. In addition to AusAID the organisations comprising the Foreign Affairs and Trade portfolio are the Department of Foreign Affairs and Trade, the Australian Centre for Agricultural Research (ACIAR), AusTrade and the Export Finance and Insurance Corporation. About the Asian Development Bank ADB aims to improve the welfare of the people in the Asia and Pacific region, particularly the nearly 1.9 billion who live on less than $2 a day. Despite many success stories, the region remains home to two thirds of the world’s poor. ADB is a multilateral development finance institution owned by 67 members, 48 from the region and 19 from other parts of the globe. ADB’s vision is a region free of poverty. Its mission is to help its developing member countries reduce poverty and improve their quality of life. ADB’s main instruments for helping its developing member countries are policy uau dialogue, loans, equity investments, guarantees, grants, and technical assistance. ADB’s annual lending volume is typically about $6 billion, with technical assistance usually Plan to ActionFrom totaling about $180 million a year. ADB’s headquarters is in Manila. It has 26 offices around the world and more than 2,000 employees from over 50 countries. 2006 Economic Report From Plan to Action AusAID 62 Northbourne Avenue Canberra ACT 2601, Australia GPO Box 887 Canberra ACT 2601, Australia www.ausaid.gov.au Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org ISBN 978-971-561-608-9 Publication Stock No. 112006 Printed in the Philippines TTuvaluuvalu 22006006 EEconomicconomic RReporteport ((Mai1Mai1 1 220/06/20070/06/2007 88:31:52:31:52 AAMM Chapter 1 Introduction iii Pacific Studies Series Tuvalu 2006 Economic Report From Plan to Action This publication is funded by the Asian Development Bank and the Australian Government Tuvalu Main Report Prelim.pmd1 02/08/2007, 4:49 PM ii Tuvalu 2006 Economic Report: From Plan to Action Pacific Studies Series The series is published by the Asian Development Bank to provide the governments of its Pacific developing member countries with analyses of economic and other issues. The studies are also expected to shed light on the problems facing governments and the people in the Pacific Islands, and to suggest development strategies that combine both political and economic feasibility. © 2007 Asian Development Bank All rights reserved. Published 2007 Printed in the Philippines ISBN No.: 971-561-608-9 Publication Stock No: 112006 Cataloging-in-Publication Data Available 1. Tuvalu 2. Economic and Social Development 3. Assessment The views expressed in this book are those of the authors and do not necessarily reflect the views or policies of ADB, 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 the ADB as to the legal or other status of any territorial entity. Tuvalu Main Report Prelim.pmd2 02/08/2007, 4:49 PM Chapter 1 Introduction iii Contents Foreword xi Executive Summary xiii Purpose xiii The economic setting xiii Public sector management xvi Assisting the private sector xviii Living standards xx Pro-poor service delivery xxi Moving from plan to action xxiv Key recommendations xxvi Chapter 1 Introduction 1 Chapter 2 The Economy 5 2.1 Economic Activity 5 2.2 Trade and the Balance of Payments 8 2.3 Prices and the Monetary Sector 9 2.4 The Labor Market 12 2.5 The Changing Structure of the Economy 18 2.6 The Direction of Economic Policy 21 Chapter 3 Managing the Public Sector 23 3.1 The Current Situation 23 Key budget aggregates 23 The composition of government expenditure 29 Public debts and trusts 31 Government businesses 34 3.2 Key Policy Issues 38 Achieving fiscal sustainability 38 Managing volatility and uncertainty 47 Reforming the revenue system 48 Normalizing infrastructure provision 54 Accountability and transparency 58 3.3 Priorities and Strategies 61 Tuvalu Main Report Prelim.pmd3 02/08/2007, 4:49 PM iv Tuvalu 2006 Economic Report: From Plan to Action Chapter 4 Private Sector Development 65 4.1 The Current Situation 65 4.2 Key Policy Issues 68 Reducing “crowding out” 68 Foreign participation in the economy 72 Providing credit to business 75 Land and credit security 80 Simplifying the rules 82 Providing skills 88 4.3 Priorities and Strategies 90 Chapter 5 Living Standards 93 5.1 The Current Situation 93 The setting for service delivery 93 The nature and distribution of poverty 95 The supply and demand for services 99 Education services 102 Health services 106 Electricity 108 Water 110 Sanitation 110 Solid waste management 112 Housing 114 5.2 Key Policy Issues 114 Maintaining education standards 114 Restraining the rising cost of health care 116 Sustaining the living environment 117 Devolving authority to communities 120 Distributing services equitably 123 5.3 Priorities and Strategies 127 Local government 128 Education 129 Health 131 Infrastructure 132 Chapter 6 Implementing Te Kakeega II 134 6.1 Introduction 134 6.2 A Process for Prioritization 136 6.3 Road Maps to Implementation 139 6.4 Financing Implementation and the Role of Funding Agencies 148 6.5 Overcoming Barriers to Change 150 Tuvalu Main Report Prelim.pmd4 02/08/2007, 4:49 PM Chapter 1 IntroductionContents vv Chapter 7 Conclusions 155 Annex A: Participation and consultation 159 Annex B: Data 175 Annex C: Business surveys 183 Annex D: References 187 Figures Figure 2.1 GDP by sector 7 Figure 2.2 Tuvalu’s recent offshore income 7 Figure 2.3 Lending by the main financial institutions 11 Figure 2.4 Distribution of wages and salaries in 2005 by sector 13 Figure 2.5 Public servant numbers and pay rates 14 Figure 2.6 Food and beverage imports 19 Figure 2.7 Average income by source per recipient 20 Figure 3.1 Revenue and grants 24 Figure 3.2 Expenditure and the budget balance 25 Figure 3.3 Government on-budget expenditure in 2004 by category 29 Figure 3.4 Government on-budget expenditure in 2004 by Ministry 31 Figure 3.5 Key fiscal targets 46 Figure 4.1 Composition of the formal private business sector 67 Figure 5.1 Distribution of household income by region 97 Figure 5.2 Cumulative distribution of income by region 97 Figure 5.3 Average income levels in 2004–2005 98 Figure 5.4 Preschool enrollments 103 Figure 5.5 School attendance in 2002 106 Figure 5.6 In-service and preservice training scholarships 107 Figure 5.7 Use of FTF distributions 123 Boxes Box 2.1 Sustaining the employment of Tuvalu seafarers 15 Box 3.1 Interpreting Tuvalu’s fiscal position 27 Box 3.2 Tuvalu’s trust funds 35 Box 3.3 Key factors driving TEC’s performance 39 Box 3.4 Challenges facing NAFICOT, TEC, TMC, and TTC 57 Box 3.5 Efficiency of stevedoring in Funafuti 59 Box 3.6 Public sector management initiatives of Te Kakeega II 63 Tuvalu Main Report Prelim.pmd5 02/08/2007, 4:49 PM vi Tuvalu 2006 Economic Report: From Plan to Action Box 4.1 Views from the private sector in the central group 69 of the Outer Islands Box 4.2 A note on cooperatives 83 Box 6.1 Implementation mechanisms for Te Kakeega II 135 Box 6.2 Part of the unfinished economic agenda of Kakeega o Tuvalu 152 Tables Table 2.1 Formal and subsistence employment in Tuvalu 19 Table 3.1 Operating subsidies in 2004 38 Table 3.2 Trend revenue and expenditure 42 Table 5.1 Distribution of households by income deciles by island 98 Table 5.2 Water and sanitation facilities by household income in 2004–2005 (in %) 111 Table 5.3 Distribution of toilet types, by island, in 2002 112 Table 5.4 Total economic cost of human waste management (in A$) 118 Table 5.5 Are women adequately involved in community decisions? 126 Table 5.6 Are youth adequately involved in community decisions? 126 Table 6.1 Road map to improved public sector management 140 Table 6.2 Road map to private sector development 143 Table 6.3 Road map to improved service delivery 145 Table A.1 Persons consulted in researching the PIER 160 Table A.2 Persons consulted in the Outer Islands 162 Table A.3 Outer Island views on social service delivery 165 Table A.4 Outer Island views on private sector development 168 Table A.5 Agenda for the informal retreat on social service delivery 171 Table A.6 Participants at the informal retreat on social service 172 delivery Table A.7 Agenda for the informal retreat on private sector 173 development Table A.8 Participants at the informal retreat on private sector development 174 Table B.1 Real GDP at factor cost 175 Table B.2 Selected economic indicators 176 Table B.3 Merchandise imports 176 Table B.4 Balance of payments 177 Tuvalu Main Report Prelim.pmd6 02/08/2007, 4:49 PM Chapter