ReportNo. 6372-FiJ Fiji A Transitionto Manufacturing Public Disclosure Authorized November25, 1986 EastAsia PrograinsDepartment FOR OFFICIALUSE ONLY Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Documentof the WorldBank Thisdocurnmnt has a restncteddistribution and may be usedby recipients onlyin the performanceof theirofficial duties. Its contentsmay not otherwise - be disdosedwithout World Baik authorization. CURRENCYEQUIVALENTS 1985 May 1986 US$1 F$1.152 F$1.106 F$1 US$0.868 US$0.904 FISCALYEAR January1-December 31 ABBREVIATIONS ANZCERTA - TradingAgreement between Australia and New Zealand DP7 - Fiji'sSeventh Development Plan, 1976-80 DP8 - Fiji'sEighth Development Plan, 1981-85 DP9 - Fij-'sNinth DevelopmentPlan, 1986-)0 EDB - Economic Development Board EPZ - Export processing zone ERP - Effective rate of protection FGDP - Median family income in developingcountries FNTC - Fiji National Training Council FSC - Fiji Sugar Co poration FTUC - Fiji Trade Union Congress HFCS - Uigh fructose corn syrup ICA - International Coffee Agreement KORVA - KoreanTrade PromotionCorporation LOME - EEC trade conventionwith ACP countries MNC - Multinational corporation MOF - Fiji Ministry of Finance NTB - Nontariff barrier PIB - Prices and Incomes Board PJT - Price Justification Tribunal RBF - Reserve Bank of Fiji REER - Real effective exchange rate SDF - SkillsDevelopment Fund (Singapore) SPARTECA - South PacificRegional Trade and EconomicCooperation Agreement TC/TS - Tons cane/tons sugar ratio VAT - Value-added tax FOROMCIAL USE ONLY The reportwas preparedby a mission that visitedFiji during early April 1985. Missionmembers were ShahidYusuf (Mission Chief),R. Kyle Petersand VladimirKonvalov. The reportwas discussedwith the Fijian authoritiesin October 1986. This documenthas a restricteddistribution and may be usedby recipientsonly in the performance of their officialduti. Its contents may not otherwisebe disclosed without World Bank authoiation. FIJI A TRANSITIONTO KANUFACTURING Tableof Contents PageNo. SUNSARYAND CONCLUSIONS*.*******..**** ...........................i I.9 INTRODUCTION¢*oo o o o 00 0 0a0e9 ee@*******4a0*0000000* 0 0 1 Recent?erformance........................................... 1 The Perspectiveof DP9.......................................S II. THE FUTUREOF TRADITIONALINDUSTRIES......................... 7 T.ouri....soo... .**oo.o * o.o.o*.................o........... 11 III. NEW CONCERNSFOR TRADE STRATEGY..............................15 Efficiency Thresholds..... cco.. ......... oo.g...... .g e.oo 17 Sunk Costs...................................................i1 Value Added.oo...o.ooooo.oo......, ..................4, 19 TechnologicalCapaty...............e............................. 19 CapitalSupply................................................... 19 NTIsand GeographicalShifts in Manufacturing................20 DirectForeign ................. ......... .. e...e..... 20 Fiji'sChoices and ReportOutlineo........................... 20 IV. INDUSTRIALINCENTIVES........oo.o.o.. o..o.o.........,...... 22 EastAsian Approacheso..o .................................... 22 Fiji's Manufacturing Sector.oo.o.o ....................... v. 28 Past Incentive Policies.......... *****o.... e.e.c.... c... 33 Incentives Reformoo.....o.o..o**oo**.*.***.** **¢eoooo*o ... 41 V. A TAX PROGRAM FOR GROWTHo .o............e.ooe......... 44 k@ , ... Tax Criteria......e..e.................................oo. o.o 44 Now Burdensome are Direct Taxes in Fiji?o.....e......ee....e.o 47 Taxes,Savings and Investment................................50 Taxes in iji ....... ... ...... ............ 51 Recastingthe Tax System.................. .ee...... 54 - ii - Page No. VI. TRAD& PATTERNS,TRENDS AND INSTRUMENTS..................... 56 Flourishing ................. *0.. .............................56 Factors Influencing .................... ..................... 63 ManufacturedExports from Fiji ........................... 65 Trade Agreements............. O ,, 69 Direct Foreign ...................... 72 Export Processing ...................... Zo nes 72 Exchange Rate ................................ ............... 73 VII. LABOR MARKETSAND THE GROWTH OF EXPORTS...................... 76 Small Statesand the Controlof Wages........................ 76 Unions and Wages in Fiji..................................... 77 Skills ... o £ ~~~~~~~~~~~80 VIII. THE MICROECONOMICSOF A NICHE-FILLINGEXPORT STRATEGY........ 83 An Information ...................... ........................ 83 Coping with NTBs ............. 85 Nices.......... ... ....... .................... ....... ........... 85 piis............. ........ ... .................... .... ............ 86 Wths.............................. ........................... .. 89 Machinery ....90 Fashion Garments............................................. 92 TABLESIN THE TEXT 1.1 Fiji: Basic EconomicIndicators.............................. 3 1.2 Commodity Price Projections.......... ... ....... ..... ...... 5 1.3 DP9 Prjcin.................................. 6 3.1 Proportionof IndustrialCountry Imports from East Asian Countries.................................................................... 16 3.2 RelativeChanges in Asian-PacificTrade Flow Ratios,1960-83.. 17 4.1 Korea -- Summaryof IndustrialIncentives..................... 24 4.2 Singapore-- qummaryof IndustrialIncentives................. 26 4.3 GDP by Industrial Origin....................... ............... 30 4.4 Fiji -- Value Added By ManufacturingSubsector................. 31 4.5 Fiji-- Summaryof IndustrialIncentives ...............*...... 35 4.6 Value-Added,Protection Coefficients of Fiji'sIndustrial Sector 38 4.7 Fiji: FiscalEffects of Trade Liberalization................. 43 - lli - Page No. TABLESIN THE TEXT (continued) 5.1 CentralGovernment Savings and InvestmentBalance*............ 45 5.2 Tax Base Indexand InitialMarginal Tax Rate ..................49 5.3 HighestBracket and HighestMarginal Tax Rate.,............... 50 5.4 CentralGovernment Revenues.................................. 52 5.5 Compositionof CentralGovernment Revenues .....................53 6.1 Major ImportItems into North AmericaRanked by Growth Rates, 1975-81. ........ ...... *.* * *ee.e 57 6.2 Major ImportItems into Japan Rankedby GrowthRates, 1975-81 58 6.3 Major ImportItems into the EEC Rankedby GrowthRates, 1975-81 59 6.4 Major ImportItems into East Asia EconomiesRanked by Growth Rates, 1975-81................... ......... ... 60 6.5 LargestManufactured Exports from SelectedAsian Countries to Major OECD Economies.......o........................... , 61 6.6 Fastest-GrowingManufactured Exports from SelectedAsian Countriesto Major OECD Economies........................... 62 6.7 Nontariff Barriers -- Percentage of Industrial Country Importsfrom DevelopingCountries Covered by NTBs........... 64 6.8 Fiji -- Major Exportsby Three-DigitSITC ..................... * 66 6.9 Fiji -- Exportsby SITC Sectionsand Destination ..............67 6.10 Australia-- Fastest-GrowingImport Items..................... 68 6.11 New Zealand-- Fastest-GrowingImport Items................... 68 6.12 Fiji -- SPARTECATrade with Australiaand New Zealand......... 71 7.1 Labor Force Growth Rate............................ ........... 76 7.2 Changesin Mean HourlyWage Rates............................. 78 7.3 AverageWages in Non-UnionGarment Factories, 1970-83......... 79 7.4 AverageWages in Non-UnionFurniture Factories, 1970-83....... 80 8.1 Total Consumptionof SelectedSpirits, 1982..........*****o**. 87 8.2 Consumptionof Rum Worldwide(1982).......................... 88 8.3 Consumptionof DistilledSpirits in the US.................... 89 8.4 Per CapitaConsumption of Fruitsand Vegetables............... 94 8.5 Fiji: Exportsof Fruit in 1985............................. 97 Annex Table 1: Basic Indicatorsof Fiji Sugar Industry,1976-85.... 99 Annex Table ?: NormalTax Schedulesfor PersonalIncome Taxeso..... 100 Annex Table 3: Elasticityof Major Taxes and of the Fiji Tax System,1974-81...................... 101 Annex Table 4: BuoyancyEstimates of CentralGovernment Revenues... 102 CHARTS Chart 1: By-Productsof Sugar Production ...........................32 Chart 2: Real EffectiveExchange Rate............................. 75 FIJIs A TRANSITIONTO MANUFACTURING SUMMARYAND CONCLUSIONS Fiji has made the most of its limitednatural endowment. Plantedto 'ugarcane,about 70,000hectares of the most fertileland have yieldedrich rteturns.The sunnybeaches of Viti Levu have generatedemployment and attract a crowingstream of touristsnot only from Australiaand New Zealandbut also the US and Europe. The dense forestscovering two thirdsof the land area supporta trade in logo and wood productswhile coconutgroves, traditionally the props for the villageeconomy, have continuedto supplycopra and coconut oil for the exportmarket. Fiji'smineral wealth is limited,but incomefrom gold mining,averaging $15 millionp.a. in the eighties,has provideda welcomesupplement to other export earnings. These basesof economicstrength shouldendure well into the future,although as sourcesof growth they are no longerdependable. Even allowingfor the difficultinternational environment of the eighties,Fiji's performance has been below par, with the economy expandingat an averagerate of 1.4X p.a. over the past sevenyears. Much of this growth is traceableto the servicessector. The contributionof sugar was negative,declining by about 1Z p.a. in real terms between1979 and 1986. Similarlyother directlyproductive activities such as manufacturing (non-sugar)registered