Chapter 2
Economic performance
Economic growth
2.1
Although economic growth in the Pacific has improved over recent years,
historically it has been lacklustre recording rises of two to three per cent
per year.[1]
The Pacific Economic Survey 08 reported that 'after negligible growth in
the early years of the decade, growth in regional gross domestic product (GDP) increased to 3.5 per cent in 2004'.[2]
Growth averaged 2.8 per cent between 2005 and 2007 and was forecast to reach
4.8 per cent for 2008.[3]
This chapter examines the economic performance of Pacific island
countries—their productivity and growth and what this means for their economic
future and the lives of their people.
2.2
The economic performance of individual Pacific island countries varies
greatly, with most showing highly fluctuating growth rates in GDP. Fiji had a real GDP growth rate of 3.4 per cent in 2006, which fell to negative 6.6 per cent
in 2007. On the other hand, PNG had a 2.6 per cent growth rate in 2006, which
climbed to 6.7 per cent in 2007.[4]
In 2000, Solomon Islands' real GDP growth rate was negative 14.2 per cent,
increasing to 8.0 per cent in 2004 and 10.3 per cent in 2007.[5]
Currently, PNG and Solomon Islands lead the way with their recent accelerated
growth rates. Samoa has also performed well, with AusAID describing its
economic performance and forecasts as 'quite a standout'.[6]
The Pacific Economic Survey 08 noted:
It is striking that the Melanesian countries of PNG, Vanuatu and Solomon Islands (which make up more than 70 per cent of the Pacific’s
population) are now growing at around 6 per cent, a rate which, if sustained,
can make a serious dent in poverty and improve human development indicators.[7]
2.3
The statistics on economic productivity and growth rates over the past
decade contained in the table below show the patchy performance of most Pacific
island countries and the region as a whole.
Table
2.1: Real GDP growth rates in selected Pacific island countries (per cent)
|
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
Pacific island
economies |
–4.0 |
3.3 |
8.0 |
–0.3 |
2.0 |
1.9 |
2.7 |
3.7 |
2.7 |
3.0 |
2.4 |
4.8 |
Cook
Islands |
–2.4 |
–0.8 |
2.7 |
13.9 |
4.9 |
2.6 |
8.2 |
4.3 |
0.2 |
1.4 |
0.4 |
... |
Fiji |
–2.2 |
1.3 |
8.8 |
–1.6 |
1.9 |
3.2 |
0.9 |
5.5 |
0.6 |
3.4 |
–6.6 |
1.2 |
Marshall
Islands |
-5.2 |
-3.6 |
-2.9 |
5.1 |
2.7 |
3.8 |
3.5 |
5.6 |
1.7 |
1.3 |
2.3 |
1.2 |
Kiribati |
8.8 |
15.8 |
8.2 |
–0.1 |
1.5 |
5.3 |
-1.1 |
–1.7 |
1.6 |
-5.2 |
0.5 |
3.7 |
Micronesia
(Federated States of) |
–10.6 |
5.5 |
–2.1 |
4.7 |
0.1 |
0.9 |
2.9 |
–3.3 |
-0.6 |
–2.3 |
-3.6 |
-1.0 |
Nauru |
|
|
|
|
|
|
|
|
14.5 |
6.3 |
-27.3 |
1.0 |
Palau |
2.3 |
2.0 |
–5.4 |
0.3 |
1.3 |
–3.5 |
–1.3 |
4.9 |
5.9 |
5.5 |
3.0 |
2.5 |
Papua
New Guinea |
–6.3 |
4.7 |
1.9 |
-2.5 |
-0.1 |
-0.2 |
2.2 |
2.7 |
3.7 |
2.6 |
6.7 |
7.3 |
Samoa |
0.8 |
2.4 |
3.1 |
7.1 |
8.1 |
1.8 |
3.1 |
3.4 |
5.2 |
2.6 |
6.1 |
3.3 |
Solomon
Islands |
–1.7 |
3.2 |
–1.6 |
-14.2 |
–8.2 |
–2.8 |
6.5 |
8.0 |
5.0 |
6.1 |
10.3 |
7.0 |
Tonga |
–3.2 |
3.5 |
2.3 |
5.4 |
7.2 |
1.4 |
3.4 |
1.1 |
-3.3 |
4.4 |
–0.3 |
1.0 |
Tuvalu |
3.5 |
14.9 |
3.0 |
3.0 |
5.9 |
1.3 |
4.0 |
4.0 |
2.0 |
1.0 |
2.0 |
1.2 |
Vanuatu |
8.6 |
4.3 |
–3.2 |
2.7 |
–2.6 |
–7.4 |
3.2 |
5.5 |
6.5 |
7.2 |
6.6 |
5.7 |
Developed
ESCAP economies |
1.6 |
–1.4 |
0.3 |
2.9 |
0.4 |
0.7 |
1.6 |
2.8 |
2.0 |
2.1 |
2.6 |
-0.4 |
Australia |
4.0 |
5.1 |
4.4 |
3.4 |
2.1 |
4.2 |
3.0 |
3.8 |
2.8 |
2.7 |
4.2 |
2.4 |
Japan |
1.6 |
–2.1 |
–0.1 |
2.9 |
0.2 |
0.3 |
1.4 |
2.7 |
1.9 |
2.0 |
2.4 |
-0.7 |
New
Zealand |
2.9 |
0.8 |
4.7 |
3.8 |
2.4 |
4.7 |
4.4 |
4.4 |
2.7 |
2.7 |
3.0 |
-0.8 |
The table is based on tables
in Economic and Social Commission for Asia and the Pacific, Economic and
Social Survey of Asia and the Pacific 2009, Addressing Triple Threats to
Development, Table 1, p. 174, http://www.unescap.org/pdd/publications/survey2009/download/Survey2009.pdf.
GDP per capita
2.4
GDP is a measure of production and used widely as an indicator of
economic activity. It tracks the production activity of resident producer units
within a given period. Increases in population, however, have a significant
effect on productivity measurements in Pacific island countries when determined
on a per capita basis.[8]
Thus, although statistics indicate a general improvement in productivity in
Pacific island countries, their economic performance over an extended period of
time is less impressive when measured by GDP on a per capita basis.[9]
Table
2.2: Pacific island countries—Growth rate of GDP per capita, 2005–2010
Growth
rate of per capital GDP (per cent per year) |
|
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
Per
capita GNP US$, 2007 |
Fiji |
0.2 |
2.8 |
-7.1 |
0.7 |
-1.2 |
-0.5 |
3,800 |
Kiribati |
-0.7 |
-6.9 |
-1.3 |
-0.8 |
-0.8 |
- |
1,170 |
Nauru |
-12.7 |
8.8 |
-28.4 |
-1.1 |
-0.5 |
-0.5 |
- |
Papua
New Guinea |
0.8 |
-1.7 |
4.3 |
5.0 |
1.9 |
1.4 |
850 |
Samoa |
3.5 |
1.5 |
5.1 |
-0.1 |
-1.4 |
-0.5 |
2,430 |
Solomon
Islands |
2.1 |
3.2 |
7.3 |
3.5 |
-0.4 |
-0.9 |
730 |
Tonga |
2.0 |
0.5 |
-3.8 |
0.8 |
-2.4 |
-1.0 |
2,320 |
Tuvalu |
1.5 |
0.5 |
1.5 |
1.2 |
0.7 |
0.6 |
- |
Vanuatu |
3.9 |
4.6 |
4.2 |
3.6 |
1.0 |
-1.7 |
1,840 |
The table is based on table A2
in Asian Development Outlook 2009, Rebalancing Asia's growth, Asian
Development Bank, April 2009, p. 297.
2.5
Mr Dan Devlin, Treasury, explained that the GDP per capita figures are
aggregates and 'an average of how it works out if all of the income were
divided equally between all of the citizens of the country'.[10]
Mr John Burch, Treasury, noted that, from 1998 and on a per capita basis, many
of the Pacific island countries have been 'pretty much just standing still',
with a number performing 'very badly when you look back far enough'. He cited
Solomon Islands where, in spite of recent growth, 'they are nowhere near where
they were at the end of the 1990s in per capita terms'.[11]
Growth in context
2.6
Other factors also influence the interpretation of GDP numbers. Mr Thomas
Mahony, Treasury, drew the committee's attention to the large informal
component of Pacific island countries' economies which is not counted in GDP. He noted:
For instance, in Vanuatu you have 70 per cent of the economy
that is informal; it is subsistence agriculture and things of that nature. When
you see growth in the formal economy in GDP it does not necessarily reflect on the
welfare outcomes of the entire population. In fact, it only reflects on the
outcomes of those in the formal economy.[12]
2.7
Furthermore, Treasury observed that, while there had been strong GDP
growth rates in a number of Pacific island countries, many started from a low
base. AusAID gave the example of PNG where, although economic growth had picked
up, even if it were to increase growth 'to (a fast) eight per cent per year',
it would take two decades to achieve Samoa’s current GDP per person.[13]
Treasury and AusAID agreed that Pacific island countries must sustain solid economic
growth rates if economic gains are to be realised.
2.8
Economic growth rates in the region, including the accelerated growth
rates in PNG and Solomon Islands, should also be considered in a broader
context. Even those countries that have recently demonstrated sound economic
growth do not necessarily compare favourably with other developing countries
outside the region. Indeed, some have been 'well below the average for
developing countries'. According to the Pacific Economic Survey 08:
The world economy has enjoyed strong growth in recent years
of around 5 per cent. East Asia is growing at 9 per cent and South Asia at 8 per cent. Both sub-Saharan Africa and the Caribbean region show better
performance than the Pacific in recent years, although this gap is narrowing.[14]
2.9
Treasury similarly noted that in aggregate, the growth rates of Pacific
island countries do not compare well with many other developing countries. Mr
Neil Motteram, Treasury, suggested that it is 'comparable with sub-Saharan
Africa and so forth, so the outcomes are not as strong as we would like'.[15]
2.10
Many Pacific island countries rely on external sources of income,
including remittances and foreign aid, to support their economies.
Remittances
2.11
Remittances are funds or goods sent home to relatives or communities by
migrants working abroad and are an important source of income for many Pacific
island countries. The Pacific Economic Survey 08 noted that since 2000,
remittances to Pacific island countries had grown rapidly, 'with annualised
average growth of 36 per cent to reach US$425 million in 2005'. According to
AusAID, remittances are currently worth more than US$500 million per annum and
if the trend continues they are likely to exceed the value of aid flows to the
region by 2009.[16]
Four countries, Fiji, Kiribati, Samoa and Tonga, account for 90 per cent of
Pacific remittances, with Tonga and Samoa among the leading recipients of
remittances in relation to GDP for all developing countries.[17]
The remittances are in the order of 30 per cent to 35 per cent of GDP in Tonga, 20 per cent in Samoa and 5 per cent in Fiji, Kiribati and Tuvalu.[18]
2.12
For some of these Pacific island countries, remittances contribute substantially
to their revenue base and, because of their heavy reliance on imports (mostly
of food and fuel) and narrow export base, are an important buffer against
economic shocks.[19]
Remittances also help to address their unemployment problems. For example,
Tonga has more of its people living abroad than at home and the large inflows
of remittances sustain the economy.[20]
The President of the Tongan Free Wesleyan Church noted that without
contributions from Tongans abroad, many local community projects would not 'get
off the ground'.[21]
Table
2.3: Pacific island countries: Indicators of remittances 1997–2005 (per cent of GDP)
|
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
Fiji |
2.0 |
2.0 |
1.4 |
2.7 |
5.0 |
5.4 |
5.5 |
6.6 |
6.6 |
Kiribati |
14.0 |
14.0 |
15.7 |
11.8 |
11.3 |
11.0 |
17.4 |
16.6 |
15.0 |
Papua
New Guinea |
-0.7 |
0.3 |
-0.2 |
-0.3 |
-1.4 |
0.7 |
1.0 |
0.9 |
0.8 |
Samoa |
16.8 |
16.9 |
18.5 |
18.5 |
20.4 |
20.2 |
21.3 |
24.5 |
25.5 |
Solomon
Islands |
1.3 |
0.1 |
0.1 |
0.2 |
1.1 |
0.4 |
0.5 |
0.8 |
0.9 |
Tonga |
23.2 |
21.9 |
25.5 |
32.4 |
37.1 |
36.9 |
43.7 |
42.7 |
39.3 |
Vanuatu |
-3.4 |
-5.7 |
-4.3 |
-3.8 |
1.8 |
-3.7 |
-3.6 |
-3.2 |
-2.3 |
Christopher Browne and Aiko Mineshima, Remittances in the Pacific Region, IMF Working Paper WP/07/35, February
2007, p. 12.
Overseas aid
2.13
Although Pacific island countries receive a high level of official
development assistance (ODA), it varies greatly between countries. Some are
among the highest aid recipients in the developing world. According to AusAID,
net aid from all donor sources to the Pacific rose from US$750 million in 1997
to about US$1.1 billion in 2006, but 'has barely risen in per capita terms over
this period'.[22]
Solomon Islands is a notable exception. Since the inception of RAMSI, Solomon
Islands has been a primary recipient of ODA which more than doubled between
2003 and 2004 and has risen sharply since then. In 2005, ODA to Solomon Islands
was over 50 per cent of its Gross National Income (GNI) and in 2006 stood at
47.8 per cent.[23]
2.14
Aid to PNG fell sharply in the late 1990s, but has risen gradually in
recent years.[24]
Although PNG receives a much larger proportion of ODA for the region, assistance
represents only around seven per cent of its GNI. ODA accounts for
approximately 60 per cent of Tuvalu's GNI; 44 per cent of Nauru's; 13 per cent
of Vanuatu's; and 11 per cent of Samoa's GNI. Tonga (8.8 per cent) and Fiji (2
per cent) are at the lower end of the scale.[25]
For a small Pacific island country such as Nauru, overseas aid is vital to its
economic viability. An ADB report noted that, 'In the absence of Australian and
other donor assistance, Nauru would by now (2007) have been in a state of total
economic collapse'.[26]
2.15
A number of important factors must be taken into account when
considering the economic performance of Pacific island countries including the
large informal component of their economies, their growth rate in the context
of other developing countries and, for some, their heavy reliance on
remittances and overseas aid. A further complicating factor is the changing
global economic circumstances.
Global economic turmoil
2.16
This report was produced at a time of great uncertainty in the world
economy as the effects of the global financial woes, which emanated from the
United States, were unfolding and spreading to other countries. Toward the end
of 2008, many western countries had entered or were teetering on the verge of
economic recession. This trend continued into 2009.
2.17
A policy brief by the ADB suggested that Pacific island countries would
be largely shielded from the most immediate effects of the crisis. It found the
region’s banking system:
...reasonably well placed to weather the crisis, mainly because
it raises most of its own funds from within the region. The generally sound
health of the banking system provides further reassurance.[27]
2.18
The study noted, however, that the global economic situation would 'depress
demand in several Asia Pacific countries and lower commodity prices' which
would concern the region. It identified areas likely to be affected adversely:
-
the value of offshore investments held by trust funds and
superannuation funds—as at October 2008, the Federated States of Micronesia,
Kiribati, Palau, Marshall Islands and Tuvalu were facing 'a 20% to 30% fall in
local currency of their trust funds' (these funds are discussed in chapter 14);
-
export income, which was likely to decline as world commodity
prices eased—AusAID noted in February 2009 that Solomon Islands was 'facing a
major fiscal squeeze around the fall off of logging revenues which would be
exacerbated through the crisis';[28]
-
tourism, which was predicted to experience a downturn as economic
growth slowed in key source economies;
-
flow of remittances, which, as noted earlier, is important to
Samoa, Tonga and to a lesser extent Fiji, Kiribati and Tuvalu—ESCAP noted that
while remittances would be under pressure, they were expected to show
resilience to economic changes;[29]
and
-
levels of overseas development aid with the prospects of cut
backs as donors looked to their own domestic financial and economic problems.[30]
2.19
Although most witnesses agreed that it was too early to determine the
effect that the financial downturn would have on Pacific island economies, some
could also foresee difficulties for Pacific island countries similar to those
identified by the ADB.[31]
2.20
By the end of March 2009, the anticipated effects were beginning to
show. Ms Jennifer Hayward-Jones, Lowy Institute, noted that the value of
trust funds had fallen; the drop in demand for commodities had affected the economies
of PNG and Solomon Islands; tourism had slowed; remittances had started to
shrink; the availability of capital had decreased; and foreign direct
investment was scarce.[32]
Even so, Mr Garry Tunstall, ANZ Bank, was of the view that because Pacific
island countries are less connected to the global economy, they would 'fare
somewhat better'. He agreed with the general view that they would not escape
the current global downturn with lower exports, tourism and remittances
weighing on activity in 2009 and the possibility that aid flows may be
affected.[33]
Mr Francis Yourn, Australia Papua New Guinea Business Council, informed the
committee that foreign investment had slowed 'right down to very low levels'
and that the refurbishment of properties and anything that requires capital was
being deferred.[34]
2.21
Before the global economic downturn set in, the economic forecast for
some Pacific island countries looked promising. In PNG, GDP growth was expected
to remain above 6 per cent; while Solomon Islands' growth was expected to moderate
to 6 per cent during 2008.[35]
Vanuatu had enjoyed consecutive years of strong growth, which, although
projected to ease, was anticipated to be around 5.7 per cent in 2008.[36]
The table below, however, shows a progressive and noticeable downgrading of
economic growth predictions for 2009 as the effects of the economic global
crisis began to take hold.
Table
2.4: GDP growth projections for selected Pacific island countries starting with
projections from April 2008
|
2009
(as
at April 2008) * |
2009
(as
at September 2008)** |
2009
(as
at March 2009) |
2010
(as
at March 2009) |
Fiji |
1.6 |
1.4 |
-0.5 |
0.2 |
Papua New Guinea |
4.6 |
5.1 |
4.0 |
3.5 |
Samoa |
3.0 |
2.5 |
-1.0 |
-.01 |
Solomon Islands |
2.5 |
4.0 |
2.2 |
1.7 |
Tonga |
2.0 |
2.0 |
-2.0 |
-0.6 |
Vanuatu |
4.3 |
2.9 |
3.5 |
0.8 |
Sources:
Asian Development Bank, Asian Development
Outlook 2009, Rebalancing Asia's growth, Table A1, p. 296.
* Asian Development Bank, Asian
Development Outlook 2008, Workers in Asia, Table A1.
** Asian Development Bank, Asian
Development Outlook 2008 Update, Table A1, p. 209.
2.22
To this stage the committee has relied on statistics, mainly GDP, to gauge and understand the economic health of Pacific island countries. The following
section examines economic productivity in a broader context.
Human development
2.23
When compiling statistics on economic growth rates, it is essential to
remember that the welfare of a country's people depends on many factors besides
the goods and services consumed. The Australian Bureau of Statistics noted that
while national accounting statistics, such as GDP, are an important measure of
economic growth, there is 'no single indicator which can describe all aspects
of the well-being of a country's citizens'. It argued that there are
significant aspects of the 'quality of life' that 'cannot be comprehended in a
system of economic accounts'.[37]
The Hon Natan Teewee, MP, Kiribati, highlighted this point in a statement to
the IMF. On behalf of a number of smaller Pacific island countries, he said
that they view economic growth 'not so much in terms of increase in GDP numbers, but more in terms of providing a better life for our people, now and in the future'.[38]
Also, as noted previously, GDP does not adequately reflect the informal economy
which represents a significant component of economic activity in Pacific island
countries. Mr Devlin, Treasury, stated that because of inequality, some of the very
positive growth rates do not necessarily result in a reduction in poverty.[39]
DFAT maintained that in most cases 'socio-economic indicators remain a concern
and economic growth is lagging well behind other developing countries'.[40]
2.24
The Human Development Report 2007/2008 showed that from a total of 177
countries, with Iceland holding the highest rating at number 1, the Pacific
island countries occupied the following positions on the scale of human
development:
Tonga |
55 |
Samoa |
77 |
Fiji |
92 |
Vanuatu |
120 |
Solomon Islands |
129 |
Papua New Guinea |
145[41] |
2.25
The remaining Pacific island countries were not included in the table.
Australia rated at no 3 (0.962) and New Zealand at 19 (0.943). The ratings were
based on a score out of 1.000. The following table gives an indication of the trend
over time for a few Pacific island countries.[42]
Table
2.5: Human Development indicators for selected Pacific island countries[43]
Country |
1975 |
1980 |
1985 |
1990 |
1995 |
2000 |
2005 |
Tonga |
|
|
|
|
|
|
0.819 |
Samoa |
|
|
0.709 |
0.721 |
0.740 |
0.765 |
0.785 |
Fiji |
0.665 |
0.688 |
0.702 |
|
0.743 |
0.747 |
0.762 |
Vanuatu |
|
|
|
|
|
|
0.674 |
Solomon Islands |
|
|
|
|
|
|
0.602 |
Papua New Guinea |
0.431 |
0.462 |
0.481 |
0.495 |
0.532 |
0.544 |
0.530 |
2.26
The scores represent performance in three basic dimensions of human
development—a long and healthy life; access to knowledge; and a decent standard
of living.[44]
Since 2000, PNG has lost ground with its overall human development score
declining from 0.544 to 0.530. Recently released figures from the Human
Development Report for 2009 showed that Pacific island countries still rank
poorly on the index. From a total of 182 countries, Samoa was placed at 94;
Tonga, 99; Fiji, 108; Vanuatu, 126; Solomon Islands, 135; and PNG, 148.[45]
2.27
Clearly, there is substantial variation between Pacific island countries
in their performance on this scale of human development. The Centre for
Independent Studies noted that within the Pacific, two groups of islands are
evident:
One group, including Samoa, Tonga, French Polynesia, New Caledonia, Cook Islands and Guam, have grown modestly. They have decent levels of
education and health and decent employment outcomes as a result. Good education
systems have enabled many to emigrate abroad to pursue work or further education.
The islands also experience higher levels of social stability.
A second group of countries, including PNG, Fiji, Solomon Islands and Vanuatu have stagnated at best. In these islands, education is
poor, health treatment sparse and employment outcomes appalling. Unfortunately
for the region, this second, slow-growth group of islands represents 80% of the
regions population. It will be here that the future stability and prosperity of
the region is determined.[46]
2.28
The Millennium Development Goals (MDGs) are used as a key indicator of
human development. In both its August 2008 and 2009 reports on development in
the Pacific, AusAID found the region was 'seriously off-track' in achieving its
MDGs.[47]
These development objectives encompass universally accepted human values and
rights including freedom from hunger and the right to basic education and
health. AusAID used the number of people living in extreme poverty, which has
increased markedly in the Pacific region over the last decade, as an indicator
of the faltering progress being made. It found:
While poverty data are sparse and unreliable, it is estimated
that at least three million people live in extreme poverty: the overwhelming
majority are Papua New Guinean. The incidence of poverty is highest in PNG and Kiribati.[48]
2.29
A number of other witnesses agreed with the overall assessment that some
Pacific island countries were falling behind in achieving their MDGs and used PNG as an example.[49]
Indeed, PNG stands out as an example of a country with a rising GDP but whose performance in human development is not only failing to keep pace with this growth
but in some instances is slipping further behind. At the moment, PNG is enjoying the benefits from an unprecedented surge in demand for mineral resources. A 2007
World Bank Report observed, however, that at the governmental and more
generally at the civil society level there is an emerging consensus in PNG that 'human development outcomes are far less than satisfactory'. It stated that 'service
provision in many parts of the country is collapsing despite the significant
level of both government and development partner financing of the human
development sectors'.[50]
For example, about 53 per cent of PNG children are enrolled in primary school, and
of those starting school, only 45 per cent complete basic education. Education
is discussed in chapter 10.
2.30
Thus, even with assistance from remittances and ODA and those benefiting
from revenue windfalls from increased sales of commodities, it would seem that
a number of Pacific island countries are falling far short in achieving the
performance necessary to place them on a sure and certain economic growth
trajectory.
Conclusion
2.31
Pacific island countries have a generally poor record on economic
performance, with the growth rate of GDP following, in many cases, an erratic
path. Recent performances, however, demonstrate that faster growth is possible.[51]
But even some of the countries whose GDP has shown a marked and steady
improvement are not producing results that indicate that the economy and
population as a whole are benefiting from it.
2.32
The following chapter looks at the structural impediments to economic
growth in Pacific island countries—their size, geography and exposure to
natural hazards. These are the physical disadvantages that cannot be changed
and that create major challenges for the people of Pacific island countries to
develop their economies.
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