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A Pacific Strategy for the New Millennium : II. Development Challenges
A. Economic Growth3. The economic performance of the PDMCs in the 1980s and early 1990s was disappointing despite a high investment ratio. Average growth during the 1980s was around 2 percent, and during the 1990s around 3.5 percent. The five-year period leading up to 1999 was the most volatile, witnessing serious macroeconomic instability and fluctuation in real gross domestic product (GDP) due to the effects of the East Asian crisis and the vagaries of nature. Per capita GDP declined over these 5 years. However, starting in 1995, many countries in the region undertook major reforms that supported a gradual recovery beginning in 1998. In 1999, the year of recovery for the Pacific, the highest growth rate since 1994 was recorded (Table 1). 
4. While external shocks and weak economic management made 1999 a difficult year for Papua New Guinea (PNG), its economic growth rate surpassed expectations to reach 3.8 percent. After two years of recession, the Fiji Islands economy rebounded strongly in 1999. Real GDP for the remaining 10 PDMCs increased by a weighted average of almost 1 percent in 1999; growth rate decelerated in Kiribati, Tuvalu, and Vanuatu and accelerated in the other economies. Overall, the total real GDP of the PDMCs increased by a weighted average of 4 percent in 1999 compared with 1.2 percent in 1998 and minus 3.2 percent in 1997. The growth in the region reflected a recovery from the prolonged effects of drought, improved commodity prices, reforms in many of the PDMCs, and growth in world output and trade. 5. While the PDMCs share several common features, the countries vary widely in size, population, and output. In 1999, PNG contributed 53.2 percent and the Fiji Islands 26.1 percent to the total real GDP of the PDMCs (Table 2). The third largest contribution of 4.5 percent of the total real GDP of the PDMCs came from the Solomon Islands. The rest of the nine PDMCs individually contributed about 3.0 percent or less to the total real GDP of the PDMCs. At the bottom of the list was Tuvalu, contributing only 0.2 percent. Together, the last nine PDMCs account for only about 15 percent of the total real GDP of the PDMCs. Thus the growth performance of the region as a whole largely depends on the performance of PNG and the Fiji Islands. It is notable that PNG has, on average, recorded almost zero growth over the five years ending in 1999; per capita GDP has significantly declined. 
6. Political instability now threatens sustained recovery. With solid economic performance in 1999 and a strong growth expectation in world output and trade, the outlook for the Pacific remained good in early 2000. However, political instability in the Fiji Islands and Solomon Islands in June 2000 drastically changed the outlook for the two countries. Because of their collective weight of about 30 percent of the total output of the PDMCs, growth prospects for the region have also changed substantially. The two crisis economies of the Fiji Islands and Solomon Islands face severe contraction of output, unemployment, loss of business confidence, and strain on government finances. While the balance of payments account is under threat in the Fiji Islands, it is in serious difficulty in the Solomon Islands. Thus, both the Fiji Islands and the Solomon Islands, which enjoyed reasonable prospects of growth in 2000, are now set to fall into deep recession. As a result, the growth projection of the PDMCs has dropped from above 4.0 percent to about minus 2.0 percent in 2000. 7. Inflation remained high during 1995-1999. However, in 1997, inflation eased when the world economy experienced deflationary pressures. Although the inflation rate fell in more than half of the PDMCs in 1999, the Pacific islands group recorded an average inflation rate of 10.4 percent in 1999, compared with 9.9 percent in 1998, largely because of an increase in PNG’s inflation rate after substantial currency devaluation. In 1999, 7 of 12 PDMCs recorded inflation rates below 4.0 percent, while Nauru, PNG, Solomon Islands, and Tuvalu experienced significantly higher levels of inflation. Except for PNG, the overall balance-of-payments position improved for most of the countries in the first half of 1999. After witnessing strain on the external reserves after the mid-1990s, Fiji Islands, Kiribati, Samoa, Solomon Islands, and Tonga improved the level of external reserves in 1999 compared with 1998. 8. Fiscal management has improved due to reforms undertaken since the mid-1990s. However, the PNG budget remained in deficit leading to serious deterioration of the balance of payments position in the first half of 1999. The current PNG Government has committed itself to restoring macroeconomic stability and to economic, public sector, and governance reforms. In the case of the Solomon Islands, the financial position of the Government was in serious difficulty in 1996 and 1997, but gradually improved to more manageable levels by 1999. However, the Government is once again in serious deficit following the ethnic crisis in 2000. Kiribati, Samoa, and Tuvalu managed government finances well, recording budget surpluses in succession until 1999. The Government's financial position in Tonga and Vanuatu has remained within manageable limits. The Cook Islands, Marshall Islands (RMI), and Federated States of Micronesia (FSM) have shown signs of fiscal improvement after initial deterioration in 1990s. By the beginning of 2000, the fiscal and monetary policy settings were generally consistent with maintenance of macroeconomic stability in the Pacific, although the position has reversed in the Fiji Islands and Solomon Islands following the political crises around mid-2000. 9. The PDMCs are still heavily dependent on external grants. To reduce this heavy reliance on external transfers and aid, the PDMCs need to promote more domestic savings and more efficient financial systems. External grants vary considerably; the Fiji Islands is the least dependent and Kiribati the most, with grants averaging almost 40 percent of GDP during 1994-1999. Samoa, Solomon Islands, and Tonga are also heavily dependent on grants for their budgets; these averaged 12 percent of GDP over the same period. These external grants have allowed the countries to maintain high levels of consumption, while allowing for low domestic savings. 10. Trade deficits are a regular feature of PDMC balance of payments. The exception is PNG, which has large mineral exports. Because of their narrow production base, the PDMCs are all dependent on imported goods, mainly but not exclusively from Australia and New Zealand. Private transfers and remittances from nationals living overseas have made a major contribution to offsetting trade deficits, particularly in Kiribati, Samoa, and Tonga. Official transfers in all PDMCs have been necessary to offset the high trade deficits. Appendix 1 provides the economic statistics of the Pacific region.
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