Rising tourism-based activities supported growth in the Cook Islands, Palau, Samoa, and Vanuatu in 2007, while logging fueled growth in Solomon Islands. But economies contracted in the Federated States of Micronesia, Nauru, and Tonga owing to cuts in government spending; growth was low elsewhere in the subregion. The outlook is for growth in the better performing economies to ease in 2008. Inflation is generally projected at moderate levels. Renewed efforts are required across the Pacific to lift growth by strengthening the environment for private sector development. The need is greatest in the weaker economies, which would also benefit from a determined effort to raise standards of governance.
Cook Islands
Economic performance
Growth of 3' in 2007 was attributable mainly to a 5.1' upturn in tourist arrivals (Figure 3.34.1). Agriculture continued to recover from 2005 cyclone damage, but pearl and fish exports fell. The consequent widening in the merchandise trade deficit was largely offset by an increased surplus in services resulting from the expansion in tourism. The improvement in tourism was also reflected in growth in lending by commercial banks to the trading and hotel subsectors.
Use of the New Zealand dollar as the domestic currency means that inflation generally tracks the New Zealand rate, which decelerated in 2007. Also, the Cook Islands removed most import duties from July 2006, which helped offset the effect of higher global oil prices. Subsequently, inflation eased to 2.4' (Figure 3.34.2).
The Government's operating surplus declined in FY2007 (ended 30 June 2007) as the budget moved to near balance. Cyclone rehabilitation works lifted capital spending and most other expenditures edged higher. Public debt—all of it external—remained moderate at 19.1' of GDP and, accounting for reserves built up to meet loan repayments and cash holdings, net debt remained low at about 3' of GDP. A supplementary budget passed in November 2007 suspended a cost-of-living adjustment that would have increased the civil service wage bill by 12', but it still projected an overall budget deficit for FY2008 (Figure 3.34.3), the first deficit since the mid-1990s.
The deficit is largely due to a projected decline in domestic revenues from 31.3' of GDP to 29.5' following the removal of most import duties. The fiscal outcome will depend on how the cost-of-living adjustments to civil service salaries are handled and the extent of a subsidy provided to Air New Zealand to help meet any losses on the direct air service between Rarotonga and Los Angeles that started in March 2007.
GDP growth in 2008 is expected to accelerate to 3.5' and to be maintained at this rate in 2009, while inflation is forecast rising slightly in line with the trend in New Zealand. The growth projection assumes that tourist arrivals continue to rise at the 2007 rate and that pearl exports grow by 10', in reflection of stronger marketing efforts.
The solid fiscal position gives the Government the capacity to borrow in order to finance a backlog of infrastructure works. Deteriorating infrastructure, particularly water and sanitation, is straining to service increasing numbers of tourists. Substantial capital spending is provided for under a National Sustainable Development Plan and 20-year Infrastructure Master Plan adopted in 2007. These infrastructure works are central to protecting the natural environment and to ensuring that tourism-led growth is sustainable. The investments proposed under the infrastructure plan could see net general government debt rise to about 20' of GDP by 2026, and result in debt service payments rising to 2' of GDP. The Government should have the capacity to handle such an increase in debt, provided that the loan funds are used to support the economy.
A decline in the population of the outer islands remains a policy concern. The number of people on 11 smaller islands fell by more than 40' between the mid-1990s and a census in 2006, with many leaving for better jobs and services overseas. The population on the second-largest island, Aitutaki, also declined, although the development of a vibrant tourism industry there limited the fall to 13'. An overall recovery in the population since a financial crisis in the mid-1990s (Figure 3.34.4) is entirely the result of growth on Rarotonga. The outer islands are becoming more costly to sustain as working age people emigrate, leaving the elderly and their grandchildren (see also Box 3.34.1). The demographic changes also carry important repercussions for the future of the traditional Cook Islands culture.
3.24.1 Migration and remittances in the Pacific
Many of the Pacific island countries have long-standing links with Australia, New Zealand, or the United States (US), with significant implications for the small economies. In the north, residents of the Federated States of Micronesia, Republic of the Marshall Islands, and Palau can freely enter the US, while in the south Cook Islanders hold New Zealand citizenship, which also provides direct access to Australia. Fiji Islands, Samoa, and Tonga have developed deep links with Australia, New Zealand, and the US through extensive emigration. Kiribati and Tuvalu are also exporters of labor—their seafarers work on international ships.
The ability to emigrate has led to very low population growth rates in some Pacific countries. Only a few, however, receive large remittances. In Tonga, remittances have reached as high as 40% of GDP and remittances in Samoa also are relatively high. In these two countries, enduring community links are important in maintaining such flows. Remittances are also important in the Fiji Islands, and to a lesser extent in Kiribati and Tuvalu, but not elsewhere (at least not in official statistics).
These links to industrial economies and their labor markets have important flow-on effects. Some small Pacific economies face fiscal pressures from their need to compete with much higher salary levels in foreign labor markets, and this affects their ability to provide funding for essential public services. Some economies are now short of labor. In Palau, foreign workers now take up about half of all jobs as the growth of tourism has spurred employment, while the importance of foreign workers is increasing in the Cook Islands as tourism-based growth absorbs the supply of local labor.
The prospect of migration or obtaining overseas employment also encourages local education systems to respond to the needs of overseas markets rather than their own. Families "invest" in selected children in the hope that they can secure opportunities abroad and provide a flow of remittances for the family. The safety net provided by remittances can dull incentives for those at home. But it can also help some take the risk of moving away from traditional forms of livelihood into formal sector activities such as small-scale retail or tourism-based activities.
This chapter was written by Emma Ferguson and Craig Sugden of the Pacific Department, ADB, Manila; Anqian Huang of the Pacific Subregional Office, ADB, Suva; Milovan Lucich of the Pacific Liaison and Coordination Office, ADB, Sydney; and Bruce Knapman and Sining Cuevas, consultants.
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