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p. 37 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific Cook Islands Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

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Cook Islands

Real GDP improved by 3.2 percent in 2000, led by growth in tourism. The economy is set to maintain this momentum in the medium term. The Government’s principal policy issue remains completing the Economic Restructuring Program that began in 1996, and consolidating its achievements.

Recent Trends and Prospects

Real GDP grew by 3.2 percent in 2000 (see Figure 2.18). Tourism receipts amounted to NZ$71 million, representing an improvement of 8 percent as visitor numbers reached a record 64,500. This was partly due to more visitors from the northern hemisphere, reflecting a strong US dollar, and political instability in the Fiji Islands that prompted tourists to switch destination. The black pearl industry and the commercial agriculture sector also showed moderate growth rates of 6 percent and 4 percent, respectively.

Inflation in 2000 was 2.0 percent, a moderate increase from the 1999 rate of 1.4 percent. Inflation rose through the three quarters ending September 2000 to reach 3.5 percent. Employment expanded strongly in 2000, as a flow-on effect of the growth in tourism that stimulated buoyant demand in the retail, commercial agriculture, and restaurant and hotel sectors.

The budget surplus in 2000 was NZ$2.3 million. Tax revenues increased by 15.3 percent, reflecting improved trading conditions for the private sector and settlement of large tax assessments. Government expenditure rose by 7.5 percent to NZ$50 million. Government debt stood at 74.5 percent of GDP in 2000, an improvement on the 1999 level of 77.2 percent. While no official figures are released on the level of debt service, the Government has reported improvements in this regard.

Total merchandise trade for 2000 was equivalent to 65 percent of GDP. It consisted of NZ$9.4 million in exports in a narrow range of primary products (predominantly black pearls), and NZ$89 million in imports (principally food and live animals, machinery, and transport equipment). In comparison, merchandise trade in 1999 amounted to 55 percent of GDP. The trade deficit in 2000 rose to NZ$79.6 million, or 53 percent of GDP, from 47 percent of GDP in 1999. While the trade balance has deteriorated since 1990, the current account has consistently been in surplus because tourism has been a major source of foreign exchange. The current account surplus for 2000 was NZ$9 million, or 5.9 percent of GDP.

In June 2000, the Cook Islands became party to the Partnership Agreement between the African, Caribbean, and Pacific states, and the EU. This may improve access to the EU’s trade and tourism market.

The official medium-term forecasts are for GDP growth to remain at slightly over 3 percent a year in 2001 and 2002. These do not take account of several large hotel and aid-assisted infrastructure developments that may occur in the period. Growth may also be larger than forecast if a commercial long-line fishing venture comes to fruition. Inflation is projected to decline in 2001 and 2002 to around 1 percent. The budget surplus is projected to fall to NZ$0.5 million in 2001 from NZ$2.3 million in 2000, largely reflecting higher government spending on infrastructure to support the tourism industry. Net government debt is forecast to decrease slightly to 72.4 percent of GDP by 2002. This is due to stronger projected real GDP growth. However, the debt burden will remain high, even if the Government maintains its commitment to observing manageable debt levels (which are expected to decline to 70 percent of GDP by 2003). The current account balance is forecast to improve in 2001 and 2002 on the basis of increased returns from tourism receipts and investment activities now coming onstream.

Issues in Economic Management

The Government’s principal policy issue is to complete the Economic Restructuring Program that began in 1996, and to consolidate its achievements. The numbers of ministries (22) and public servants (1,200) are still too high for a population of around 16,000. The recommendations of the 1998 Political Reform Commission, which included downsizing Parliament, also need to be acted upon. In respect of improving the economic content for the private sector, progress has been made in tax reform and effective promotion of the Cook Islands as friendly to foreign investors. Areas still requiring government attention include tariff reform, privatization (with appropriate attention to the regulatory framework), and a review of laws and regulations affecting the operation of markets for labor and transport services. Improved environmental management is also needed if growth is to be sustainable.

Another issue, which the Government has indicated as one of its key concerns, is maintaining a skilled labor force. There has been an outward migration of skilled and qualified workers. Residents of the Cook Islands hold New Zealand citizenship and can freely access the New Zealand and Australian job markets as well as those countries’ health, education, and social security systems. A lack of suitable staff may hold back expansion of the tourism sector. Continued economic growth may, though, create wage growth and employment demand necessary to encourage Cook Islanders to return home.

Policy and Development Issues

A major issue is devolution, under which outer island councils are given more responsibility for the delivery of social and infrastructure services. To facilitate the devolution process, the Government plans to establish an appropriate legal framework to empower the outer islands, increase their management capacity, and develop management mechanisms to ensure the efficient delivery of goods and services. This important national policy needs to be carried out in line with the Government’s commitment to public sector reform and fiscal discipline.

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