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Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia
The PacificReal GDP of the 12 Pacific developing member countries contracted by an average of 1.8 percent in 2000, largely due to political instability and social unrest in the Fiji Islands and Solomon Islands. Weakening currencies and rising international oil prices caused average inflation to rise to 11.5 percent in 2000. Most governments maintained macroeconomic stability because of their generally prudent fiscal and monetary policies. The medium-term outlook for the Pacific is positive, but this depends on a return to macroeconomic and political stability. The momentum of economic recovery in the Pacific, begun in 1999, was not sustained in 2000 due to political instability and social unrest in the Fiji Islands and Solomon Islands. Further, growth in the largest economy in the subregion, Papua New Guinea, slowed significantly. Aggregate real GDP of the 12 Pacific developing member countries (DMCs) declined by 1.8 percent in 2000 compared with 4.1 percent growth in the previous year. However, this masks improved growth for some Pacific DMCs, led largely by tourism and construction. Fiji Islands, Kiribati, Marshall Islands, and Solomon Islands saw their economies contract. While the contraction in Solomon Islands was broad based and affected the entire formal sector of the economy, the nonagriculture sectors, including tourism and garments, were the worst affected in the Fiji Islands. Declines in real GDP in Kiribati and the Marshall Islands were largely due to contractions in the industry sector and weaker domestic demand. Papua New Guinea's growth slowed largely due to a contraction in mining. Cook Islands, Federated States of Micronesia, Papua New Guinea, Samoa, Tonga, Tuvalu, and Vanuatu saw growth in real GDP. While Cook Islands, Tonga, and Vanuatu experienced buoyant growth in visitor numbers due to their weak currencies, promotion activities, and unrest in the Fiji Islands, GDP growth was led by construction activity in Samoa, Tuvalu, and Vanuatu. Inflation in Cook Islands, Kiribati, Federated States of Micronesia, Nauru, Papua New Guinea, Tonga, Tuvalu, and Vanuatu rose in 2000 as a result of weakening currencies and increasing world oil prices. In contrast, the Marshall Islands -which uses the US dollar as its medium of exchange-experienced deflation of about 2 percent, caused by US dollar strength. Inflation in the Fiji Islands and Solomon Islands declined slightly, largely due to a fall in demand, although it still remained high in Solomon Islands at 6.6 percent due to shortages of local food supplies. Except for Cook Islands, Marshall Islands, Papua New Guinea, and Vanuatu, Pacific DMCs' overall balance-of-payments positions deteriorated, mainly due to higher oil costs in 2000. The balance-of-payments positions improved markedly due to a stronger US dollar in the Marshall Islands, improved exports in Papua New Guinea, and increased transfers from international aid agencies in Vanuatu. The external debt position improved in 2000 in most Pacific DMCs. However, a few of them, including the Federated States of Micronesia and Nauru, still have very high debt-service ratios. The outlook is for inflation to fall in most Pacific DMCs during 2001 and 2002 in response to a slowing world economy, rebounding currencies, and lower oil prices. The exceptions to this outlook are Fiji Islands, Marshall Islands, and Samoa, with a buildup of some inflationary pressure in Samoa due to strong economic growth being a concern. Pacific DMCs have only limited opportunities to achieve economies of scale in production due to their small size and geographic fragmentation. Their production base is also narrow. As a result, high external trade ratios and vulnerability to external economic developments are innate to them. In this sense, globalization is not a new concept for the Pacific. Because of a high degree of openness and, in the majority of them, the use of foreign currency as a medium of exchange, Pacific DMCs have to maintain macroeconomic parameters within a narrow range. Over time, these economies have institutionalized mechanisms to operate the macroeconomy under these constraints, while maintaining high external economic interaction. Major economic reforms, which were largely supported by the Asian Development Bank and initiated toward the end of the 1990s, helped the process. Further, despite instabilities caused by external economic events, the Pacific DMCs have recorded modest economic growth and improved their human development indicators over the last two decades. However, greater global integration of markets and associated instabilities pose new challenges for them. The small Pacific DMCs are subject to high variability in government revenue due to their vulnerability to external economic developments, and their heavy reliance on aid, royalties from natural resources, and other irregular or windfall forms of revenue. Some Pacific DMCs have introduced trust funds, or some form of revenue equalization reserve fund, to assist in smoothing government revenues. Success varies: Kiribati, Tonga, and Tuvalu have managed to develop quite substantial funds, though the size of the Marshall Islands fund is still modest. The rapid growth of information and communications technology (ICT) has opened up new opportunities for both external interaction and internal economic management in the subregion. Pacific DMC governments and the South Pacific Forum were quick to spot the importance of ICT, the growth of which has the potential to solve many problems emanating from remoteness and geographic fragmentation. Many Pacific DMCs have adopted specific policies on ICT-for example, Papua New Guinea's Information Technology Board Strategic Plan 2000-while tele-health facilities are already operating from Hawaii for the Marshall Islands and the Federated States of Micronesia, and from New Zealand for the Cook Islands. Many Pacific DMCs, particularly Papua New Guinea, Solomon Islands, and Vanuatu, have low human development and high poverty indices. The cost of living in Pacific DMCs is high because of steep transportation costs. Pacific DMCs also face issues related to vulnerability to natural disasters and access to basic services, particularly in the more remote islands. In addition, social and economic inequalities are growing, as are inter-island and rural-urban disparities. In this regard, greater poverty and rapid environmental degradation, due to increasing populations and overexploitation of natural resources, are issues requiring urgent resolution. Economic reforms initiated near the end of the 1990s were mainly triggered by fiscal crisis. These reforms focused on fiscal discipline, government downsizing, private sector development, and strengthening good governance institutions. In 2000, governments increasingly recognized the need to strengthen public service delivery so as to extend the benefits of reform to the poor and the vulnerable. Further, they placed more emphasis on financial sector development to promote effective mobilization of savings and private sector growth.
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