Countries and Regions

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p. 2 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. Assessment of Development Strategies from a Regional Perspective III. Asian Development Bank Development Experience IV. Asian Development Bank Strategy V. Asian Development Bank Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2004-2006: The Pacific

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I. Current Development Trends and Issues

A. Economic Growth

1. The Pacific Setting

1. Geographical setting. The 13 Pacific developing member countries (PDMCs) of the Asian Development Bank (ADB) are widely dispersed over a large geographical area and differ significantly in size, population, endowments, opportunities, and development constraints. The total population of the PDMCs is 8.2 million. About 83% of the total population of the Pacific lives in the four low-income, resource-rich countries¹. The total exclusive economic zone of the PDMCs is 19.1 million square kilometers, or 36 times larger than their total landmass of about 544,000 square kilometers.

2. Economic features. Despite small land areas, most PDMCs command vast marine-based resources, including fish, pearls, and seabed minerals. The region offers great biodiversity and substantial other natural resources, including forests, agricultural land, and minerals. The subsistence sector in the Pacific is productive, and extreme poverty and hunger is virtually unknown. In some areas, the pristine environment offers tourism potential. The Pacific also has high potential for the development of niche markets in many other areas, such as organic, ethnic, and marine products. Further, some Pacific countries have benefited substantially in terms of bilateral aid and preferential trade and immigration agreements largely due to their historical ties with industrial countries and the strategic location of some of the countries. On the other hand, the economies in the Pacific face many constraints due to their small size, narrow production base, remoteness, and geographical dispersion. Import dependence and external openness are common to all Pacific countries. There is limited diversification in production, which adds to their vulnerability to external developments. The Pacific is also highly vulnerable² to natural calamities. Thus, PDMCs face unique, but common, challenges. Having a larger population, Papua New Guinea (PNG) is the only exception to the above, although only partially, as it manifests many of the features described above.

3. Implications. The Pacific setting is substantially different from most of the rest of the world. No two Pacific countries have a common land boundary, and many of them are widely separated by vast expanses of ocean. Intra-Pacific trade is also very low (below 5% of the total trade of these countries), which reflects a low level of economic integration. However, there is a strong commonality within the Pacific in terms of its specialized features and isolation. This setting defines the stage for regional cooperation in the Pacific, which turns out to be quite different from regional cooperation found elsewhere in Asia.

2. Structure of the Economy

4. Primary commodity production and export, and tourism are the two basic economic activities of the Pacific. All of these are impacted strongly by the quality of environment and natural resources management. The main primary commodities are agricultural and forestry products, fisheries, and minerals. Except for fisheries, most other primary commodities have a limited regional dimension. The structure of economies varies widely across the Pacific (Figures 1 and 2). In general, the services sector (including public services) dominates and manufacturing is small, which is also reflected in the low level of private sector activities in the Pacific. While minerals and petroleum are important for many low-income, resource-rich countries, fisheries and tourism are two of the most important sectors in almost all Pacific countries. The total contribution of fisheries³ ranges from 1.4% (Papua New Guinea) to 21.5% (Kiribati) of gross domestic product (GDP), with a weighted average of 3.2% of total GDP for the whole Pacific. Fisheries contributes to GDP both directly and indirectly, through income from fishing license fees. Fisheries is particularly important for smaller countries. In the case of Kiribati and Tuvalu, the contribution of fisheries license fees exceeded 40% of GDP in 1999. Tourism, which depends strongly upon the ease of access and "connectivity", and the quality of the environment, contributed about 8% of the total GDP of the Pacific in 1998.

3. Macroeconomic Trends ⁴

5. There was a declining trend in the economic growth rate of the Pacific over the 1990s (Figure 3 and Appendix 1), reflecting the low productivity of investment and declining stock of natural resources. In 2000-2002, the situation worsened in comparison with the performance of 1999. This was due to sociopolitical instability, which reflected the long period of weak economic performance, increasing unemployment, hardship, and frustration. In 2002, despite some strengthening of international commodity prices, a rise in tourist arrivals, and generally expansionary fiscal policies, the internal problems accompanied by weak macroeconomic management prevented the Pacific from posting a recovery after 2 years of near stagnation, and in fact, real GDP declined by a weighted average rate of 0.1% that year. The regional economic growth figure masks a variation in outcomes in different PDMCs. The low-income, resource-rich countries, higher-income countries, and island atoll countries and Nauru showed a wide variation in 2002, with subregional growth rates of -2.5%, 3.4%, and 3.4%, respectively. The decline in 2002 was confined to the low-income, resource-rich countries, with each country individually recording a decline in GDP; this generally reflected sociopolitical instability, and poor economic and environmental management in this group of countries. Regional economic indicators are in Appendix 1.

6. The management of public finances continues to be a major issue in the Pacific. Fiscal outcomes in 2002 (Table 1) were disappointing, particularly among the larger countries. Although there has been some improvement from the early to mid-1990s, nearly all PDMCs are facing fiscal stability, vulnerability, or sustainability issues. In some countries, the situation is approaching crisis proportions. The average inflation rate increased from 6.9% in 2001 to 7.1% in 2002, reflecting a weakening of most Pacific currencies, and higher local food and transport prices in some countries. Despite some rise in several countries, merchandise exports declined by around 10% for the region as a whole, largely reflecting a sharp fall in Papua New Guinea's exports due to declining oil reserves. Imports also declined by about 6.0%, reflecting higher costs as currencies generally depreciated in real effective terms. In 2002, the overall current account for the region recorded a small deficit for the first time since 1997, primarily reflecting the current account situation in Papua New Guinea. The flow of remittances, which is very important for some PDMCs, particularly Samoa and Tonga, remained strong in 2002. In several PDMCs, trust funds suffered capital losses in 2002, reflecting the weakness in global equity markets.

7. The Pacific Agreement on Closer Economic Relations (PACER), which covers 12 PDMCs (excluding Timor-Leste) was signed in August 2001. As a first step under PACER, a free trade agreement, the Pacific Island Countries Trade Agreement (PICTA), was also initiated. PICTA aims to remove most tariffs on trade among PDMCs by 2010 and all tariffs by 2016. PICTA came in force recently. In view of these developments, the European Commission (EC) has allocated substantial funds for assistance to the Pacific in the area of economic integration over the next 5 years. Trade liberalization entails adjustment costs but also brings benefits in terms of improved international competitiveness. To help realize these benefits to the maximum, complementary reforms to improve the efficiency of public enterprises and enhance the regulatory environment for business will be critical for all Pacific countries as they move toward greater economic integration under PACER.

B. Poverty

8. In the past, poverty was not a major issue in the Pacific due to the relatively high per capita GDP, the existence of a productive subsistence sector, and strong traditional family or community support mechanisms. However, poverty has been increasing in the Pacific because of more than two decades of weak economic performance associated with rapid population growth (at an annual rate of 2.4% during 1985-2001), lack of creation of new formal sector employment opportunities, urban drift, and changes in traditional support mechanisms. Lack of employment opportunities and access to basic services are the main problems facing the poor. Further, because of the high costs associated with distance, per capita GDP does not best reflect the consumption and welfare levels of the people of the Pacific. While hunger is not a major problem, consumption of a diversified basket of goods and services is somewhat more difficult than in most other regions. Further, poverty varies widely in incidence, depth, and severity across the Pacific. Income levels vary substantially, with per-capita gross national product (GNP) in 2000 ranging from $453 in Timor-Leste to $4,355 in the Cook Islands (Table 2). The problem of poverty is now being increasingly recognized by governments in the Pacific, and a number of countries have either signed or are in the process of entering into poverty partnership agreements (PPAs) with ADB. Pacific poverty and social indicators are in Appendix 1.

C. Political Environment

9. The political environment in the Pacific has been quite unstable, and frequent change of government is a common feature. Since 1999, most Melanesian⁵ countries have experienced major ethnic conflicts, which resulted in unexpected political changes. Governments in the Solomon Islands and the Fiji Islands were changed around mid-2000 following armed violence. Papua New Guinea and Vanuatu have also been experiencing social tensions, with their own political implications. Timor-Leste also experienced major civil unrest at the end of 2002. According to a 2001 study⁶, competition for resources, exacerbated by the insecurity of property rights, has been a major cause of these conflicts in Melanesia. These tendencies were aggravated by unemployment among the growing young population and the tradition of treating ethnic and communal loyalties as being above allegiances to national governments. In some Pacific countries, such difficulties are significantly mitigated by the ability to migrate to Australia, New Zealand, or the United States.

D. Governance and Institutional Capacity

10. Reflecting the limited availability of human resources and low skill levels, institutional capacities in the Pacific are weak. Almost all Pacific countries suffer from poor governance. Weak governance also reflects the difficulty of managing the transition from traditional to modern systems of management. The process of change is slow due to the strong traditional system of kinship and loyalty to family, and the wide diversity of languages in many countries. These difficulties are further compounded by the diverse political systems emanating from the colonial history of the Pacific. The main areas of concern related to governance and institutional capacity are (i) linkages between the traditional and modern systems of governance; (ii) public finance management; (iii) continuity and predictability in policy; (iv) accountability and transparency in government; (v) quality of public administration; (vi) role and function of good governance institutions, such as the ombudsman, attorney general, auditor general, and public service commission; and (vii) corruption. As a result, the public sector shows low efficiency and productivity, and private sector development is subdued.

E. Gender

11. The Pacific presents a mixed picture on the gender front. While women have shown good academic and social achievements in higher-income countries, their relative position remains lower in a majority of countries. In particular, gender discrimination is a major concern in the low-income, resource-rich countries, which have more than 80% of the total population of the Pacific. This is reflected in low academic achievement, low proportion of women in formal employment, and high population growth rates.

F. Private Sector

12. Private sector development remains one of the greatest failures and most difficult challenges in the Pacific. A number of factors, both natural and introduced, constrain business activity in the Pacific Islands. In particular, private sector development has suffered from excessive state intervention and weak legal and regulatory frameworks. Accordingly, the private sector is relatively small. In 2002, government expenditure ranged from 20% to above 100% of GDP, with the regional average at 33.5%. In addition, public enterprises and joint ventures with substantial public participation contribute significantly to GDP, suggesting a relatively weak role played by the private sector. In the Fiji Islands, private investments exceeded public investments until the mid-1980s, but had fallen well below the level of public investments by 2000. Private investments in smaller countries constitute a much smaller proportion than public investments. While the private sector employs about 60% of the labor force in the formal sector in the larger countries, the proportion is much lower in smaller countries.

13. Some key areas of private activity in the Pacific are commercial agriculture, fisheries, logging, retail and wholesale trade, hotels and restaurants, banking, and transport. In some countries, the private sector is involved in minerals and petroleum, livestock enterprises, pearls, and fish loining and canning. There is significant foreign ownership in most of these ventures. Involvement of the private sector has led to some diversification and development of niche markets. Public-private partnerships, particularly in utilities, offer potential for significant growth in private sector involvement, although the existing public-private partnerships in infrastructure and utilities have not been able to provide cost-effective services due to weak regulations. The primary and tertiary sectors continue to offer most opportunities for the private sector. The growth of the tourism sector is highly dependent on private sector development. Although manufacturing and processing activities are generally small and limited to cottage industries, small-scale manufacturing, and breweries, the private sector can become more active in these activities. Further, governments have paid insufficient attention to private sector development in terms of collective efforts and regional cooperation. ADB is in the process of developing a private sector development (PSD) strategy for the Pacific (Box 1).

G. Environment

14. Pressure on the environment in the Pacific has been increasing due to population growth, urbanization, the use of inappropriate technologies, and climate change. A major problem is the unsustainable exploitation of natural resources, including fisheries. The majority of the Pacific peoples live in low-lying coastal areas that are particularly vulnerable to climate change, climate variability, and sea-level rise. The latter threatens both the availability of fresh water and agricultural productivity through its impact on groundwater lenses. In addition, the Pacific countries have a fragile environment and are vulnerable to natural disasters. Pacific environment indicators are in Appendix 1. ADB has initiated a comprehensive effort to prepare a Pacific Region Environment Strategy (Box 2).

15. Good environmental management is critical for sustainable development in the Pacific. In many PDMCs, the loss of the pristine environment can seriously impair the tourism sector. Future sea-level rise could even threaten the existence of some island atoll countries. Many of the environmental issues are common across the Pacific, which can benefit from economies of scale through greater regional cooperation. A good example of a recent regional cooperation initiative is the agreement on sustainable management of tuna fish stocks indicated in Box 3. Almost all PDMCs have ratified the relevant global environmental agreements necessary for accessing the Global Environment Facility (GEF). ADB is now a GEF Executing Agency with direct access to GEF resources, so it can play a new and enhanced role in helping the PDMCs gain access to GEF funds. ADB has actively interacted and collaborated with GEF regarding the environmental issues of the Pacific. Apart from other things, adaptation to climate change and variability is a common area of interest between the two organizations. A recent discussion at management level between ADB and GEF has further strengthened the partnership.

H. Regional Cooperation

16. There is a well-developed framework of regional organizations in the Pacific. Numbering over 200⁷, these organizations support cooperation among governments and nongovernment organizations on a variety of issues, including politics, economics, sector development, commerce, trade, and religion. There are wide differences in the structure and membership of these regional organizations. The major formal regional organizations in the Pacific are more limited in number and can be broadly divided in two groups: organizations associated with the Council of Regional Organisations in the Pacific (CROP)⁸, which is a high-level advisory body, and other regional organizations. The Pacific Islands Forum Secretariat (PIFS) serves as the secretariat of CROP. Organizations associated with CROP are partly funded by the contributions of, and governed by, member governments, and are referred to as intergovernmental organizations (IGOs). The 10 IGOs are: (i) Forum Fisheries Agency (FFA), Honiara, Solomon Islands; (ii) Pacific Islands Development Program (PIDP), Honolulu, Hawaii; (iii) PIFS, Suva, Fiji Islands; (iv) South Pacific Tourism Organisation (SPTO), Suva, Fiji Islands; (v) Secretariat of the Pacific Community (SPC), Noumea, New Caledonia and Suva, Fiji Islands; (vi) South Pacific Regional Environment Programme (SPREP), Apia, Samoa; (vii) South Pacific Applied Geoscience Commission (SOPAC), Suva, Fiji Islands; (viii) University of the South Pacific (USP), Suva, Fiji Islands; (ix) South Pacific Board for Education Assessment (SPBEA), Suva, Fiji Islands; and (x) Fiji School of Medicine, Suva, Fiji Islands. A brief description of these IGOs is given in Appendix 2. Most of the countries that are members of these organizations are also members of ADB. Part of the stimulus for the economic, governance, and public sector reforms in the Pacific is attributable to the annual meetings of Pacific heads of state and ministers, particularly the Forum Economic Ministers Meeting (FEMM), which is organized by PIFS (Box 4). The other regional organizations are nongovernmental in nature, although public agencies are often members. These other regional organizations include the Pacific Power Association, Pacific Water Association, Pacific Islands Telecommunications Association, Pacific Islands Broadcasting Association, Association of South Pacific Airlines, and South Pacific Association of Supreme Audit Institutions, among others. In addition, there are some subregional organizations in the Pacific, the most prominent of which is the Melanesian Spearhead Group.

17. While the past experience of regional organizations in implementation of regional projects is mixed, these organizations serve as facilitators and vehicles of regional cooperation. They have strong regional linkages and possess specialized knowledge related to the region. They also contribute to capacity within the region and, in many cases, are controlled by PDMC governments or public agencies. However, capacity constraints, inadequate involvement of local experts, diffused agendas, and growth of self-serving in-groups have undermined the effectiveness of these organizations and examples of excellence are limited. A good example of regional cooperation in the Pacific is the USP (Box 5).

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