Regions and Countries

	Table of Contents
p. 4 of 9 BACK | NEXT Executive Summary I. Introduction II. Current Development Trends and Issues III. Pacific DMC Development Strategies IV. ADB's Development Experience V. ADB's Strategy VI. Delivering the Pacific Strategy VII. Risks and Performance Monitoring and Evaluation Appendixes

Responding to the Priorities of the Poor: A Pacific Strategy for the Asian Development Bank 2005-2009

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III. Pacific DMC Development Strategies

A. Development Goals and Strategies

52. The status and efficacy of national planning processes vary significantly across the PDMCs. Appendix 4 summarizes national development strategies, where they exist. Most PDMC strategies emphasize both economic growth and equitable outcomes. Within this framework, noteworthy issues and trends are:

1. Statements of commitment to the private sector as the engine of growth are more common and pronounced than in earlier strategies
2. Some strategies increasingly recognize that poverty is a problem to be addressed
3. Promoting more equitable outcomes receives highest priority in some strategies, but for different reasons:
   1. in some PDMCs, outer-island development receives high priority
   2. in post-coup Fiji Islands, the emphasis is on healing social rifts following the 1987 and 2000 coups
   3. in Samoa, the emphasis is on broadening the benefits of reform and economic growth, which are believed to run the risk of leaving the poor behind
4. Strengthening the rule of law, peace and security are priorities for Fiji Islands, PNG, Solomon Islands, and Timor-Leste
5. Agriculture remains the main priority among the productive sectors
6. Maintenance of Pacific cultures is a universal theme.

B. Resource Mobilization and Investment

53. Following a series of macroeconomic crises in the region in the mid- to late 1990s, PDMC governments are now more aware of the importance of macroeconomic and fiscal sustainability, especially as the public sector comprises a large proportion of most of their economies. Relative macroeconomic stability has been an important achievement of many, though not all, PDMCs in recent years. However, maintaining a sustainable fiscal policy is proving difficult in many cases. Revenue collection levels are generally not growing strongly, but demand for scarce public sector resources comes from an expanding population with raised expectations of service delivery. Development partner programs, by providing new assets to be maintained, can have the effect of adding to this demand. Uneconomic or underperforming SOEs are a drain on budgets in some PDMCs and a major source of risk to public finances in virtually all. As a consequence, some PDMCs’ fiscal positions are gradually deteriorating.

54. PDMCs have a narrow range of options for financing their budgets and development programs. In the absence of significant or growing domestic revenues, PDMCs tend to rely on one or more of the following:

1. Remittances. Essentially private flows, remittances from overseas nationals are an important component of some PDMC economies (47.9% of GDP in Tonga in 2001, and 21.1% in Samoa). They largely support consumption expenditure.
2. Natural resource rents. Oil, gas, and minerals in PNG; phosphate in Nauru; timber in PNG and Solomon Islands; fish in several PDMCs; and a missile-testing range in RMI have all been important sources of revenue for governments. However, the sustainability of these resources is problematic to varying degrees. Sustainable management of migratory fish species is an especially critical issue for the Pacific.
3. Trust fund revenues. In Kiribati and Nauru, trust funds have been generated by income from phosphate mining and provide a substantial revenue flow to the economy (albeit severely mismanaged in the case of Nauru). In Tuvalu and the outer islands of RMI, trust funds have been established with development partner support to provide an ongoing revenue stream, and there is potential to replicate this approach elsewhere.
4. Marketing “sovereignty”. Stamp sales in Kiribati and Tuvalu and, in Tuvalu, the licensing of the “.tv” internet domain have been positive examples; the sale of passports and establishment of offshore banking centers have been problematic, bringing the corruption associated with passport sales and international concern that PDMCs have provided a supportive environment for money laundering.
5. External aid. Aid remains an important revenue source to PDMCs, to a very high degree in the smallest PDMCs and specifically for FSM, Palau, and RMI, which receive substantial funds under their Compacts of Free Association with the US.

55. Each of these options carries limits, risks, and uncertainties about future expected revenues. Sustainable domestic private sector-led economic growth, including improved export performance, is therefore critical to securing successful development outcomes. Creating the conditions for this growth should therefore be a top priority for PDMC governments—though, as noted earlier, this is not always the case at present.

C. Role of External Assistance

56. Aid has long played an important role in the Pacific. On a per capita basis, aid flows are very high on average, and among the highest in the world in the US Compact countries—FSM, Palau, and RMI (Figure 1). However, there are significant disparities among the PDMCs, and it should be noted that aid “buys less” in high-cost PDMCs. Among the poorest PDMCs, PNG receives significantly lower per capita flows¹⁹ and Timor-Leste has experienced significant declines in external assistance quite soon after independence. Aid plays a relatively minor role in the Fiji Islands economy.

57. Some major bilateral partners have recently increased the level and changed the nature of their engagement with selected countries of the region. Australia, with regional support, has played a “hands-on” role in restoring stability in the Solomon Islands through a regional intervention mission. Australia and New Zealand (both Pacific Islands Forum members) are also strong supporters of enhanced regional cooperation through the upcoming Pacific Plan. Australia has also increased its engagement with Papua New Guinea, providing 200-300 personnel to fill in-line positions in central government and law and justice departments. The US is changing the nature of its relationship with the ‘Compact’ countries, requiring greater accountability for the expenditure of Compact funds and increasing the level of its dialogue with the countries on development strategies.

58. Grant assistance predominates. Borrowing from international financial institutions (of which ADB is by far the largest in the Pacific) plays a modest financing role. The largest bilateral donors are Australia, Japan, New Zealand and the US. The European Union is also a significant grant donor. The International Monetary Fund (IMF), World Bank, and United Nations system focus on policy and technical advice, playing minor roles in financial terms. Several major development partners have a subregional approach, with Australia focusing to a large degree on Melanesia, the US almost exclusively on the North Pacific countries, and New Zealand traditionally on Polynesia (but now also extending to Solomon Islands). The sector and thematic focus, though less clear-cut, is highlighted in Appendix 2D. In contrast to the 1980s, agriculture is notable as a sector currently receiving little donor support. Much of the external assistance to the PDMCs over past decades has focused on supporting the provision of social services and the creation of managerial and technical capacity, especially for government.²⁰ Governance and public sector reform issues came increasingly into focus for external agencies in the mid-1990s.

59. Although hard evidence is scarce, it is reasonable to conclude that aid has contributed significantly to rising human development indicators in most PDMCs over recent decades, although in some cases these gains are now under threat. Importantly, external assistance played a decisive role in breaking the spiral of violence and decline in Solomon Islands and in contributing to a settlement of the Bougainville conflict in PNG. Aid has also provided, if not always sustained, important policy and technical contributions to ongoing management of governments. In the past decade, development partners have also played a vital role in highlighting governance issues and in strengthening governance and the rule of law in several PDMCs, with best results in those PDMCs where the partners have supported local commitment to reform (e.g., Samoa). Efforts have been at best a “holding operation” in other cases. In both sets of circumstances, development partner interventions have often been overly complex and unsustainable.

60. However, it is difficult to see that external assistance has been successful in promoting economic growth. Some commentators have argued that development partners have contributed to the weak performance of the Pacific, by underwriting the cost of a large but unresponsive public sectors, undermining the domestic private sector (including promoting commercial SOEs), or by delivering unsustainable prestige infrastructure projects with high recurrent costs.²¹ Aid may have reduced the imperative to focus on generating domestic growth and reinforced a traditional preoccupation with resource distribution. The high transaction costs of managing aid flows from a range of development partners with different expectations and approaches are also a significant burden on small and weak bureaucracies, and at times may have distracted governments from priority functions. However, as indicated by economic crises in some countries that experienced declining aid in the 1990s, Pacific economies would no doubt have been in a significantly worse fiscal position without aid. Nevertheless, PDMCs and development partners alike must reappraise their roles in creating the conditions for pro-poor economic growth in the Pacific.

D. Assessment of the PDMC Development Strategies

61. The production of national development plans, often supported by ADB, has had a very mixed effect in the Pacific, with fine words too infrequently translated into sustained action and insufficient attention given to hard choices and prioritization in light of resource constraints. Notwithstanding significant improvements in some of the more recent examples,²² experience with national development plans, ADB’s private sector and governance assessments, and discussions during ADB consultations on the Pacific Strategy 2005–2009 suggest the importance of getting the basics right: improving the environment for the private sector, reducing costs and inefficiencies in the economy, focusing on the provision of basic social services, and providing good governance.

62. These are not new issues. They have been discussed before and agreed by PDMC governments. However, they are yet to be effectively tackled in most PDMCs—in some cases because development partner-driven approaches failed to cement PDMC ownership. As a result, they remain at the top of the agenda. Building PDMC commitment and finding more effective ways to put in place and sustain appropriate policies and institutions are key to addressing these long-standing issues.

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