PACIFIC ECONOMIC BULLETIN Economic survey Recent shocks and long-term change in the Samoan economy John Gibson The strengths exhibited by the Samoan economy during the period John Gibson is Professor of steady growth from 1998 to 2007 have since been tested by con- in the Department of siderable volatility in economic activity, declining employment, Economics, University of rapidly rising prices, the global financial crisis, and the September Waikato, New Zealand, and 2009 tsunami. The economy has done reasonably well in the face Senior Research Associate, of these challenges with key economic support in the form of aid, Motu Economic and Public remittances and tourism. Questions are raised about the future Policy Research. viability of these forms of support. The economy of Samoa has been subjected The constraints of smallness to severe shocks since the most recent and remoteness are fundamental for economic update, in 2007. At the time of that Samoa, although greater integration into update, Samoa had benefited from a decade industrialised-country labour markets of annual growth in real GDP—averaging through both settlement and seasonal 3 per cent—accompanied by prudent fiscal migration provide some access to the higher and monetary policies. Yet, in a remarkably paid work that scale and agglomeration prescient caveat to this good performance, economies allow. Samoa is ranked 207 it was noted that of the 219 least economically accessible countries in the world—calculated in terms Samoa remains a small, geographically of the distance to every other country and isolated and highly vulnerable island weighting these distances in terms of GDP economy. Potential fiscal pressures (Gibson 2007). Thus, even as Samoa follows from natural disasters, an ageing the recent advice of development experts and diabetes-prone population, and for small, isolated and island countries to possible resource flow constraints integrate more closely with their nearest from effective graduation out of the large market (World Bank 2009), this least developed country status in 2010, integration process is unlikely to overcome are major medium-term risks facing fully the fundamental constraints of lack of the Samoan economy (Vaai 2007:1). scale and high distance costs. 7 Pacific Economic Bulletin Volume 25 Number 3 © 2010 The Australian National University PACIFIC ECONOMIC BULLETIN Economic survey Events in 2008, in the form of the Attention to these recent shocks—as global financial crisis (GFC), and in 2009, important as they are—masks an important in the form of the devastating tsunami, also longer-term change. Economic activity underscore the potential vulnerability of the in Samoa appears to be increasingly Samoan economy. Critics of Pacific island concentrated on construction, commerce, countries’ closer integration—both amongst transport and communication, and public themselves and with the wider world and private services. Much of this growth economy—might consider the imported is centred on Apia and some also spills over effects of a crisis that started with sub-prime into the Northwest Upolu region. Adjacent mortgages in the United States as prima facie parts of this region appear as a continuation evidence of why freer movement of capital, of the low-density, peri-urban settlement goods and labour should be discouraged. pattern of the Apia suburbs. These two Yet the impact of the GFC on economic areas—Apia and Northwest Upolu—also activity in Samoa was relatively muted, with receive net inflows of people moving from more of the recent volatility in economic elsewhere in Samoa. On the other hand, activity, employment and fiscal outcomes in Savaii and the rest of Upolu, average reflecting domestic factors. incomes appear lower and there is a net Moreover, the engagement of Samoa export of people to the rest of Samoa. It is with the world economy helped considerably not clear to what extent the tsunami damage in dealing with the economic effects of the and reconstruction effort will change this second major shock: the 2009 tsunami. While emerging gap. the generous response of aid donors—who contributed more than ST50 million—is most apparent, there was also important Economic growth support provided by the two other main legs of the Samoan economy: remittances and The growth performance of the Samoan tourism. In the year after the tsunami, there economy has been volatile over the past five was only a small decline in tourism receipts, years. Even before the start of the GFC in late despite the devastation to some of the most 2008 and the tsunami one year later, the rate iconic tourism destinations. The diaspora of real GDP change varied between a low of overseas Samoans also responded very of –0.4 per cent in the June quarter of 2006 generously to Samoa’s needs following the and a peak of 10.6 per cent in the September tsunami, with remittances in the December quarter of 2007 (Figure 1). This volatility quarter of 2009, immediately following reflected the positive impact on GDP of the the disaster, approximately ST25 million 2007 South Pacific Games and several other higher than the usual quarterly inflow major building projects. In fact, between of remittances. The tsunami affected September 2005 and December 2007, the rate approximately 5,000 people, so were of annual real growth in the construction these remittances to be received only by sector averaged 13.2 per cent, while since those affected they would amount to the March 2008 real GDP from construction has replacement of one-third of average per declined at an average rate of –2.2 per cent. capita income in the tsunami-affected region. The impact of this temporary boom is very While still a long way from full insurance, clear—both from the new buildings in Apia this ability of informal networks to respond and from the quarterly real GDP series in to disasters reflects a fundamental strength Figure 1, which went from ST264 million in of the Samoan economy and society. March 2007 to ST290 million by December 8 Pacific Economic Bulletin Volume 25 Number 3 © 2010 The Australian National University Pacific Economic Bulletin Volume 25 Number 3 © 2010 The Australian National University PACIFIC ECONOMIC BULLETIN Economic survey 2007 and then fell back to ST269 million by GDP were sharpest—with changes of –7 and March 2008. –7.3 per cent, respectively, from 12 months As a result of this construction-led earlier—were September and December growth, Samoa is a somewhat unexpected 2008, before there had been much impact case where the volatility of real output has from the GFC on the real sector of most been less in the period since the GFC than economies. Hence, there also appear to it was before. The coefficient of variation be some home-grown contributors to the (the standard deviation over the mean) of declining real GDP growth rates in Samoa. quarterly real output was 4.1 per cent from The other recent feature of overall September 2005 until June 2008 and it has economic activity in Samoa is the declining been only 1.6 per cent since then. Official importance of agriculture, fishing and documents such as the Fiscal Strategy manufacturing. The combined share for Statement, Budget 2009/2010–2011/2012 these sectors has fallen from about 27 per attribute the negative growth rate in 2008–09 cent of real GDP in 2005 to just 20 per cent to the GFC adversely affecting fish exports in 2010 (Figure 1). Since the starting and and labour demand and exports from the ending levels of real GDP were almost EDS/Yazaki motor vehicle harness factory. the same (ST261 million in the September But the two quarters when declines in real quarter of 2005 and ST263 million in the June Figure 1 Real GDP, annual real GDP growth rate, and composition of real GDP, Samoa, 2005–10 (constant 2002 prices) 300 50 GFC Tsunami 280 40 ) on i 260 30 $ mill T S , t y n l r e e t 240 20 c r r a e u P Q ( P D 220 10 G l Rea 200 0 180 -10 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Real GDP (Left hand axis) % from Agriculture, Fishing, Manufacturing (Right hand axis) % change from 12 months ago (Right hand axis) Source: Samoa Bureau of Statistics (SBS), 2010. Gross Domestic Product June 2010, October, Samoa Bureau of Statistics, Apia. 9 Pacific Economic Bulletin Volume 25 Number 3 © 2010 The Australian National University Pacific Economic Bulletin these sectors are declining. these sectorsare and exports goods of providers main the are manufacturing and fishing agriculture, since something other than the export of goods, from funded be to needs hence and Apia on largely centred is growth this that suggests and private services. Casual observation transport and communication, and public concentrated on construction, increasingly commerce, be to appears economy Samoan in absolute terms. Thus, decline a marks trend this 2010), of quarter activity in the Central Bank of Samoa, Apia. Central BankofSamoa, Sources: 2 Figure the GFC hit the labour market (Figure 2). to an end a full year before the effects of with a long period of expansion that came figures, GDP real the to story similar a tells The trend in formal employment largely Employment andprices CentralBankofSamoa(CBS),various years(b). Total employment 1 1 1 2 2 2 2 Formal employmentinSamoa 7 8 9 0 1 2 3 , , , , , , , 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Jun-98 Dec-98 Jun-99 Volume 25 Volume Dec-99 Jun-00 Dec-00 PACIFIC Jun-01 Economic N Dec-01 umber 3© 2010 Jun-02 ECONOMIC Dec-02 10 Jun-03 Selected EconomicIndicatorsReport Dec-03 since the recent low point in has June been2009.