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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program 2004-2006: The Pacific
IV. Asian Development Bank StrategyA. Key Development Challenges33. From a regional perspective, the key development challenges facing the Pacific are (i) increasing productivity, (ii) reducing transaction costs, and (iii) prudently managing the environment and natural resources. These are the necessary underpinnings for sustained economic growth, achievement of the MDGs, and poverty reduction in the Pacific. 1. Increasing Productivity34. Two key factors that explain the "Pacific paradox" of low economic growth alongside high investment are the low efficiency of public expenditure and investments, and weak private sector development. As a result, the growth of employment opportunities has been unable to keep pace with the high population growth rate, resulting in the mixed picture on MDGs, increasing poverty, and increasing social conflicts. These common underlying issues define a major agenda for regional cooperation in the Pacific. 35. Most of the governments in the Pacific generally have a poor track record of effective management of public finances, which is critical from the perspective of macroeconomic stability as well as the delivery of public services. A related aspect is the predominance of low-return public investments in the Pacific. Over the period, public investments have been channeled to low-return areas, including inefficient public enterprises. The public sector covers a wide range of commercial activities related to utilities, trade and marketing, sugar, fisheries, tourism, and finance, among others. Being the largest employer in the formal sector, the public sector has emerged as the residual employer without full productivity considerations. This defines a high reservation wage, which seriously distorts the labor markets and inhibits private sector development. Some key common issues related to public finance management are fiscal sustainability, fiscal and development frameworks, expenditure management, integrity of systems and institutions, and inefficiency of public enterprises. These are common technical and institutional issues, where regional cooperation offers opportunities through economies of scale in building appropriate region-specific knowledge and techniques, and strengthening commitment through knowledge sharing and peer learning. 36. In the Pacific, as elsewhere, a strong and dynamic private sector is vital to long-term economic growth and improved quality of life, and thus is a necessary condition for sustained poverty reduction. However, private sector development in the Pacific has been very slow, reflecting a weak policy and regulatory environment, excessive state involvement, poor governance, low enterprise and risk-taking behavior, poor financial intermediation, and the traditional land tenure system. This land system generally involves community ownership of land, which means that land cannot be used as collateral for commercial loans. This has emerged as a major factor constraining private ventures. In its country operations, ADB is individually addressing issues related to the traditional land tenure system, keeping in view the wide differences in such systems and variations in the level of political readiness. Private sector development in the Pacific is also constrained by the difficulties in achieving economies of scale in small markets. A sustainable solution to the problem of low productivity in the Pacific lies in rapid expansion in the role of the private sector. There is also a need to strengthen the role of public-private partnerships, particularly in the provision of infrastructure and utilities. The private sector faces common problems throughout the region, which the policy and regulatory structure should address appropriately. Some of the problems in the Pacific differ significantly from the experience in most other parts of the world. Some of the standard practices have also been tried in the past but without much success. There is a need to develop appropriate knowledge and technology for the Pacific to address the underlying issues, where there have been insufficient regional efforts in the past. 2. Reducing Transaction Costs37. Transport and other transaction costs in the Pacific are high due to remoteness, geographical fragmentation and dispersion, and the small volume of transactions. As a result, exports obtain lower returns and imports cost more. The geographical dispersion within individual countries adds further to transport costs, which explains the high cost structure in these economies. This adversely affects the consumption level, business profitability, and quality of life. The costly and often unreliable transport infrastructure also reflects a predominant state involvement that crowds out the private sector and causes fiscal problems. Thus, reducing transaction costs offers part of the solution to many of the problems of the Pacific. There are opportunities for Pacific countries to cooperate in the various modes of transport, particularly air services, which is the lifeline of the region's vital tourism sector. A related but much wider issue is the need to improve connectivity in the Pacific. ICT has the potential to address this issue by neutralizing the distance and isolation factors. This is not a new area for the Pacific, as ICT-based health and education systems are already operating on a pilot basis in some countries. However, the full potential of ICT remains unrealized. Promotion of regional cooperation in these areas requires resources beyond the RETA grant assistance offered by ADB so far. 3. Prudently Managing the Environment and Natural Resources38. Economic activities in the Pacific revolve around the environment and the ocean. Almost all Pacific countries rely heavily on primary commodity production and exports, marine-based resources, and tourism. Primary commodities offer lower value than value-added products, and are often exhaustible. Apart from the direct fish catch, the Pacific benefits from marine-based resources largely from fishing license fees and the marketing of pearls. There is scope for increased revenues from these items. Other marine-based resources, such as mineral deposits, have not been exploited, but may have potential. The high tourism potential of the Pacific is rooted in its pristine environment and clean beaches. Imprudent use or management of these can erode the very basis of their appeal to tourists. Thus, a key to the prosperity of the Pacific is the rational management of its environment and natural resources, where regional cooperation can play a major role due to a convergence of interests. B. Regional Cooperation Strategy and Program Strategic Thrusts1. Strategic Focus39. As explained earlier, the nature and scope of regional cooperation in the Pacific differ significantly from regional cooperation elsewhere. The primary emphasis of the regional cooperation strategy of ADB will be on creating those regional public goods that address the longstanding and underlying problems facing the Pacific. Because of the wide geographical dispersion, the scope for cooperation in physical investment or infrastructure at the regional level is limited. One of the most critically needed regional public goods for the Pacific is appropriate knowledge and technology related to the specialized but common needs of these countries. It is also important to build related regional institutional capacity, with a view to obtaining the benefits of economies of scale or improving skill availability in the Pacific. Accordingly, the key theme of ADB's regional cooperation strategy is to build and/or strengthen knowledge and regional institutional capacity in the following four focus areas. 40. Public Expenditure and Investment. ADB will support regional efforts for improving management of public expenditure and investment, which is a common need across the Pacific. ADB's regional assistance will include sharing of appropriate policies and practices based on regional and global experience in small states, and provision of technical advice. 41. Private Sector Development. The strategy aims to address, on a regional basis, some of the key constraints to private sector development. Based on international and local experience, ADB will support development of effective practices for improving the business environment and private sector development. The focus of ADB assistance will be on reducing the cost of doing business, and improving the legal and regulatory framework. 42. Transport and Communications. ADB will support the development of cost-effective and efficient transport and communications in the Pacific. In the transport sector, ADB will help PDMCs establish sound legal and regulatory frameworks, institutional development, and management of related public infrastructure. In the case of ICT, the strategy aims to improve connectivity to address a wide range of issues, including public service delivery, social inclusion, and disaster mitigation. ADB will also work with regional organizations on building appropriate policy and regulatory frameworks for ICT. 43. Environment and Natural Resources. The strategy will address selected aspects of environment and natural resources management that are of common concern in the Pacific. Accordingly, the strategy will cover management, sustainability, and risk mitigation issues. Among the natural resources, the strategy will focus on fisheries, given their economic importance in the Pacific. 44. In this process, ADB will support the building and strengthening of regional consensus and a local pool of expertise. In order to augment resources for regional cooperation in the Pacific, ADB will explore sources of channel financing and cofinancing available for activities consistent with ADB's strategy. This will also enhance coordination and synergy among various development partners. 2. Enhancing Cooperation-A Geographical Focus45. There is a wide variation in resource endowments, capacities, opportunities, and development constraints across the Pacific. These and the dispersed geography often define the possibilities of economic complementarities. As a result, the areas of common interest existing among the different sets of countries vary both across the Pacific and from issue to issue. Accordingly, to ensure shared interest, ownership, and participation of recipients, the regional cooperation strategy should respond to the differences in the region by variation in emphasis and approach for different groups of countries. This approach will also ensure robust links and appropriate sequencing between regional and country-level operations, as under this approach the regional operations will have strong roots in participating countries' interests. In view of the multiple possibilities, this strategy does not prescribe any specific sets of areas for specific sets of countries. The design of projects will be fully guided by the emerging consensus among participating countries. 3. Operating Principles46. The following operating principles will guide the design and implementation of regional interventions:
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