Pacific economy slumps – Island Times

By Steve Pollard

SYDNEY, July 26, 2024 (DEVPOLICY.ORG) – As Pacific Island Countries (PICs) prepare for another Pacific Islands Forum Economic Ministers’ Meeting (FEMM) next week, it’s time to ask how they are faring. Things are not looking good for much of the region.

According to preliminary census results, the Federated States of Micronesia (FSM) lost 30% of its population during the last census period (2011-2021), and the Republic of the Marshall Islands lost 20%. During the same period, many other islands outside Melanesia either remained the same or declined. COVID-19 will cause some people to leave, but is stagnant population growth also partly due to underdevelopment and the resulting lack of social and economic opportunities? Are governments meeting the needs and expectations of their people?

Fijians work across the Pacific, in part to replace nationals of other countries. Islanders are replaced by workers from countries such as Bangladesh, Indonesia, Pakistan, the Philippines and Turkey, which come at additional costs and hardships. Meanwhile, the ILO says high youth unemployment is worrying. “In some Pacific island countries, the proportion of young people not in education, employment or training is alarmingly high, with young women accounting for a higher proportion than men.”

The following are generalizations, but there are some exceptions that may help shape better policy.

If we consider social indicators first, according to the United Nations Development Programme, the Pacific has the slowest progress in the Human Development Index in the Asia-Pacific region, increasing by only 14 percentage points between 1990 and 2022. Education and health levels have declined in some Pacific island countries, although educational performance requires closer scrutiny. The incidence of non-communicable diseases and their social and economic impacts are particularly concerning across the region.

According to the World Bank’s Pacific Possible report, most Pacific Island countries experienced very low economic growth rates between 2005 and 2015. In fact, most Pacific Island economies have struggled to grow except through resource extraction, increased reliance on economic rents, or receiving aid, including budget support.

How can we meet the needs and expectations of the people?

There has been no let-up in external attention and international assistance. This attention has been focused on more obvious “downstream” development projects, especially infrastructure and technical assistance. Less attention has been paid to the “upstream” policy and institutional realities that constrain investment returns and growth.

Although there has been a recent increase in interest among development partners in upstream PIC policies under the Joint Policy Reform Matrix and policy-based loans and grants, this has not been guided by any growth and development framework and strategy discussed and agreed between the government and development partners.

The Asian Development Bank and the World Bank are the only two development partners in the region that conduct independent assessments of the performance of their public sector investments in island countries, and the Pacific is the worst performer among its developing country regions.

For years, IMF Article IV staff have called for structural changes in favor of private sector-led growth in every visit to each Pacific Island member country. Yet the climate for private sector investment remains protective, discouraging long-term value-added investment and encouraging short-term, exploitative, and sometimes fraudulent operations. According to the ADB’s Structural Policy Country Performance Review, scores in this area declined for seven of the 10 ADB member countries rated between 2003 and 2022.

Land tenure systems make it difficult for private investors to acquire land. As a result, capital flows out of island economies in the absence of domestic collateral.

Businesses and governments in the region have repeatedly said they are increasingly short of employable labour as skilled and unskilled workers emigrate. They have commented that seasonal worker programmes in Australia and New Zealand are worsening domestic labour markets. It is reported that between 50,000 and 80,000 Fijian workers have emigrated in the past 18 months. The IMF’s 2023 Tonga Article IV report noted that supply-side constraints are hampering post-COVID-19 reconstruction, “including labour shortages resulting from increased demand under the seasonal worker programmes in Australia and New Zealand”.

The reliance of Pacific island economies on remittances, trust and sovereign wealth fund earnings, fishing license fees, aid and other rents makes trade within Pacific island countries more expensive and difficult.

Business rules and regulations that restrict growth prevail in most islands. State-owned enterprises continue to underperform, crowding out private sector activity. Corruption, political instability, internal discord and government incompetence continue to hamper development in some countries. Certain foreign business practices exacerbate this situation. International efforts to curb money laundering threaten correspondent banking and future commerce. The International Monetary Fund estimates that Pacific island countries have lost half of their active correspondent banking relationships in the past 10 years.

Despite significant constraints, some private sector success has resulted in access to land, labor, and capital, overcoming adverse rules and regulations, and succeeding in a protective environment. This has led to some domestic growth and development; however, private sector contributions to GDP and employment in the Federated States of Micronesia, Palau, and the Republic of the Marshall Islands have remained relatively stable between FY2003 and FY2022 due to a poor business climate. Statistics on private sector contributions to the economies of other Pacific island countries are not yet available.

There are many specific exceptions to the above. Depending on the perspectives of stakeholders, some of the above factors will be subject to different interpretations. Any policy prescription applied must take into account differences between islands. Epeli Hau’ofa’s article Our Sea of ​​Islands was a timely, fresh and optimistic introduction to understanding the Pacific Islands in 1994, offering an alternative paradigm. Can we still be so optimistic 30 years later? What can be done to curb this regional malaise? Can FEMM 2024 re-examine the region’s current development model and offer a new direction? …PACNEWS

Between 2012 and 2013, Steve Pollard wrote a series of blogs reflecting on his career as a regional economic advisor.

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