Catalog

	Table of Contents
p. 6 of 29 BACK | NEXT Executive Summary I. Introduction II. Development Challenges A. Economic Growth B. Poverty C. Private Sector Development D. Environmental Degradation E. Gender III. Key Variables Influencing Development IV. External Assistance V. Review of ADB Assistance and Strategy VI. The New Pacific Strategy

A Pacific Strategy for the New Millennium : II. Development Challenges

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C. Private Sector Development

15. Private investment remains low and continues to lag public investment. While investment rates in the PDMCs were generally about 25-35 percent during the 1990s, this was substantially public investment. The virtuous circle of economic growth, private savings, and private investment has yet to occur in the PDMCs, as reflected by the low growth rates and little deepening of the financial sectors. Despite the multitude of reforms undertaken in macroeconomic management and private sector development since the mid-1990s, the PDMCs remain heavily dependent on official foreign aid to finance their economic development. For the most part, the flow of private sector investments in the Pacific has been modest and limited to a narrow range of industries and countries. Domestic savings mobilization is low because there are few incentives to save. Also, large segments of the population remain outside the monetized economy. Liquidity in the financial systems is high because of the few profitable projects and lack of alternative investments. Commercial banks finance at the low-risk end of the market, and microfinance institutions have yet to mature. Development finance institutions are generally ineffective; capital markets are virtually absent in the region.

16. The financial systems generally reflect the dichotomized economies in which they operate. On the one hand urban areas are characterized by fairly sophisticated private and financial sectors that reflect traditional banking system architecture; but the markets are too small to allow for competition among the branches of large foreign banks. On the other hand, the subsistence, nonmonetized rural areas and the outer islands where the large majority of the population live have little or no financial services. As a result, a substantial part of scarce savings in the form of commodities cannot effectively be allocated to investment opportunities. These dichotomized economies are no longer appropriate for most of the PDMCs because of population pressures and insufficient land to provide subsistence. There is an urgent need to develop the cash economy in rural areas as well.

17. If the governments are to reach sustainable growth at rates sufficient to improve the life of people on a noticeable level, private sector investment will need to be facilitated. Domestic sources of such investments remain and will likely remain quite limited for sometime, due to the relatively modest levels of incomes and low saving rates. The only remaining option is to facilitate foreign investment.

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