Report No. 13803-EAP Pacific Island Economies Building a Resilient Economic Base for the Twenty-First Century June 8, 1995 Countuy De[partmenl III East A,i.i m(d Pacific Region Document of the World Bank FEDERATED STATES OF MICRONESIA (FSM) CURRENCY EQuIVALENTS (The US Dollar is the official currency of exchange) FISCAL YEAR October I - September 30 FIJI CURRENCY EQuIVALENTS Annual Averages 1991 F$1.00 = US$0.68 1992 FS1.00 = US$0.67 1993 F$1.00 = US$0.65 FISCAL YEAR January 1 - December 31 KIRIBATI CURRENCY EQuIVALENTS Annual Averages 1991 A$1.00 = US$0.78 1992 A$1.00 = US$0.74 1993 A$1.00 = US$0.68 (The Australian dollar is the official currency and the main medium of exchange) FISCAL YEAR January 1 - December 31 MARSHALL ISLANDS CURRENCY EQuIVALENTS (The US Dollar is the official currency of exchange) FISCAL YEAR October 1 - September 30 SOLOMON ISLANDS CURRENCY EQUIVALENTS Annual Averages 1991 US$1.00= SI$2.7148 1992 US$1.00 = SI$2.9281 1993 US$1.00 = SI$3.1877 FISCAL YEAR January 1 to December 31 TONGA CURRENCY EQUIVALENTS Annual Averages 1991 US$1.00 = T$1.2961 1992 US$1.00 = T$1.3471 1993 US$1.00 = T$1.3841 FiSCAL YEAR July 1 - June 30 VANUATU CURRENCY EQUIVALENTS Annual Averages 1991 US$1.00 = Vt 111.68 1992 US$1.00 = Vt 113.39 1993 US$1.00 = Vt 121.58 FISCAL YEAR January 1 - December 31 WESTERN SAMOA CURRENCY EQUIVALENTS Annual Averages 1991 WS$1.00 = US$0.4171 1992 WS$1.00 = US$0.4056 1993 WS$1.00 = US$0.3894 FisCAL YEAR July 1 - June 30 ACRONYMS AND ABBREVIATIONS A$ = Australian Dollar ACP = African, Caribbean and Pacific States ADB = Asian Development Bank AIDAB = Australian International Development Assistance Bureau (now AusAID) APEC = Asia Pacific Economic Cooperation ATC = Australian Tourist Commission AusAID = Australian Agency for International Development CER = Closer Economic Relations CMT = Customary Marine Tenure Systems CO2 = Carbon Dioxide CPUE = Catch Per Unit of Effort DP7 = Development Plan 7 EEZ = Exclusive Economic Zone EU = European Union FAO = Food and Agriculture Organization FDI = Foreign Direct Investment FFA = Forum Fisheries Agency FFI = Fiji Forest Industries FIJ = Fiji FIT = Frequent Independent Travel FJS = Fishery Judicial System FORSPA = Forestry Research Support Program for Asia and the Pacific FMR = Fisheries Management Regime FMS = Fishery Management System FRIM = Forest Research Institute of Malaysia FSM = Federated States of Micronesia FSP = Foundation for the Peoples of the South Pacific GATT = General Agreement on Tariffs and Trade GDP = Gross Domestic Product GNP = Gross National Product GRT = Gross (registered) Tonnage GSP = Generalized System of Preferences GTZ = German Technical Cooperation HMTA = Harmonized Minimum Terms and Conditions of Access IFC = International Finance Corporation ITQs = Individual Transferable Quotas ITTO = International Tropical Timber Organization IUCN = The World Conservation Union KFPL = Kolombangara Forest Plantation Ltd. KIR = Kiribati LDC = Less Developed Country MEY = Maximum Economic Yield MFN = Most Favored Nation MOU = Memorandum of Understanding MSY = Maximum Sustainable Yield MT = Metric Tons NAFTA = North American Free Trade Agreement NGO = Non-Government Organization NLTB = Native Lands Trust Board NTO = National Tourism Organization NZ$ = New Zealand Dollar NZFS = New Zealand Forest Service NZODA = New Zealand Overseas Development Assistance ODA = Overseas Development Assistance OECD = Organization for Economic Cooperation and Development PIMRIS = Pacific Islands Marine Resource Information System PMC = Pacific Island Member Country PNG = Papua New Guinea REER = Real Effective Exchange Rate RER = Regional Economic Report RERF = Revenue Equalization Reserve Fund RIL = Reduced Impact Logging RMI = Republic of Marshall Islands SI$ = Solomon Islands Dollar SOL = Solomon Islands SPARTECA = South Pacific Regional Trade and Economic Cooperation Agreement SPC = South Pacific Commission SPC/OFP = South Pacific Commission, Oceanic Fisheries Programme SPFDP = UNDP/FAO South Pacific Forestry Development Program STABEX = Export Earning Stabilization System TC = Total Cost TCSP = Tourism Council of the South Pacific TON = Tonga TR = Total Revenue U.K. = United Kingdom U.S. = United States UN-ESCAP = United Nations-Economic and Social Commission for Asia and the Pacific UNDP = United Nations Development Programme US$ = United States Dollar USA = United States of America USAID = United States Agency for International Development USP = University of the South Pacific VAN = Vanuatu VAT = Value Added Tax WS$ = Western Samoa Dollar WSM = Western Samoa WSVB = Western Samoa Visitors Bureau WTO = World Trade Organization WWF = World Wildlife Fund TITLE : Pacific Island Economies: Building A Resilient Economic Base For The Twenty-First Century COUNTRY : Pacific Islands REGION : East Asia SECTOR : Regional Economic REPORT TYPE CLASSIFICATION MM/YY LANGUAGE 13803-EAP ERA 06/95 English ABSTRACT: This report presents a selection of topics of special interest and relevance to eight Pacific Island countries that are members of the World Bank (PMCs)-Fiji, Federated States of Micronesia, Kiribati, Marshall Islands, Solomon Islands, Tonga, Vanuatu, and Western Samoa. The themes selected are: the impact of recent changes in the external trading environrnent of the PMCs; economic diversification into tourism; improving the management of and getting better returns for natural resources, i.e. fisheries and forestry; and regional cooperation. The report also includes eight country profiles. I ACKNOWLEDGMENTS The World Bank wishes to express its appreciation to all member Governments, bilateral dcnor agencies, the Asian Development Bank, the Forum Secretariat; The South Pacific Forum Fisheries Agency, the South Pacific Commission, the United Nations Development Programme, istitut Francais de Recherche Scientifique Pour le Developpement en Cooperation (ORSTOM), the University of the South Pacific, Intemational Center for Living Aquatic Resources Management, South Pacific Forestry Development Programme, and several research organizations, non-govemmental organizations and individuals for their cooperation in preparing this report. The World Bank acknowledges, in particular, the valuable support for the study provided by the Australian Agency for itemational Development (AusAID). This report was prepared by a team led by Hilarian Codippily. The core team included Irene Davies, Cyrus Talati, Monique Garrity, Farrukh Iqbal, Sofia Bettencourt, Eduardo Loayza, Jay Blakeney, Steven Tabor, Sonia Pahwa and Peter Osei. Geoffrey Waugh, Richard Bramley, Jesse Floyd, Robert Johannes, Carolyn Wiltshire, Thorsten Block, and Joan Curry made major contributions. The report was prepared under the guidance of Mr. Ajay Chhibber and Mrs. Marianne Haug. Ms. Phyllis Williams provided administrative support and coordinated the processing of the report. i Contents CONTENTS Page No. Exeutive Summry ............................................................................. v I Intrduion .1 2 Growth and Trade in the Paiaf Island Economin . .6 A. Growth, Investment and Shocks .6 B. Pacific Island Trading Conditions .12 C. The Chaging Global Econoniic Scene .15 D. The Changing Trade Envirment.16 E. Recomendations .22 3 Tourim . .27 A. Backgund and Introduction .27 B. Tourisnm Daan. .28 C. Tourist Acconimodatin .31 D. Promotion and Diversification .31 E. Supporting Infastructure .37 F. Role of Govement .39 G. Caomtry Specific Initiatives .40 H. Priofities for Action .42 4 Fisheries ..43 A. Bac4ground.43 B. Econoniic Contribution .44 C. Offsho Fisheries .47 Maximizing Rent from Offshore Tuna Fisheies .48 Issues in Ret .51 Isues in Collection .53 Negotiating Agrmnts .55 Maging Investment Effectively .56 D. Coastal Fisheries .59 Changing Patterns of Resource Exploitation .60 A Management State for Coastal Resoes. .61 A Development Strategy for Coastal Fisheries .64 S Foresty ..70 A. Introductio .70 B. Recent Devebpments in the Sector .70 C. Roleof Forests .71 D. The Forest Rsource .72 E. Forest Products Markets .75 F. Forestry Policies and Management .77 G. Key Issues to be Addressed in Improving Forest Conservation and Managemnt .83 Recommendations for Protection Conservation of Naural Forests .85 Recommendations for Improved Managenent of Natual Forests .88 ii Contents Recommendations for a More Equitable Distribution of Economic Rents.... 89 H. Summay ..90 6 Priorities for Regional Actions... 91 A. Background ..91 B. Trade Cooperation 91 C. Cooperation in Aviation and Sea Transportation ..93 D. Cooperation in Resource Management ..94 E. Cooperation in Economic and Social Services: Higher Education and Environment ..96 7 Country Profiles .98 Fiji.98 Kiribati .105 Federated States of Micronesia .108 Marshall Islands .111 Solomon Islands .114 Tonga .117 Vanuatu .120 Westem Saoa .123 Contents: Background Recent Economic Developments Key Issues Government Objectives and Policies Bibliography . ...................................................................................................................... 126 ALiP Tables in Text 1.1 Average Growth Performance, 1983-93. 1 1.2 Comparative Indicators. 3 2.1 Average GDP Growth Rates and Investment Rates, 1983-1993. 7 2.2 Sectoral Allocation of Development Assistance (Avg. 1986-92). 8 2.3 Selected Indicators of External Trade, 1993 .12 2.4 Destination of Export Trade in Percentage, 1982-84 and 1991-93 .14 2.5 Export Concentration and Trade Taxes .15 2.6 SPARTECA and Trade Expansion: PMC Trade with Australia and New Zealand (1987-1993) .17 2.7 Schedule of Tariff Reductions in Australia and New Zealand .18 2.8 Foreign Direct Investment Regime .25 2.9 Foreign Direct Investment Incentives .26 3.1 Tourism in PMC Economies, 1993 .27 3.2 Tourist Arrivals and Receipts by Region 1988 and 1993 .28 3.3 Pacific Member Countries: Total Arrivals and Holiday iii Contents Arrivals, 1988-1993 ........................................................ 30 3.4 Tourist Accommodation Stock in PMCs .......................... ................... 32 3.5 Existing and Potential Product/Market Match ....................................... 34 4.1 Selected Attributes of Fisheries Sector in the Pacific ............ .................. 46 4.2 Artisanal and Commercial Nearshore Production, 1989-92 ......... ............. 46 4.3 Subsistence Fisheries in Selected Pacific Island Countries, 1992 ................ 47 4.4 Catch in the SPC Statistical Area, 1984-93 .......................................... 47 4.5 Access Fees-Major Fishing Nations, 1993 .................... ..................... 51 4.6 Rent for U.S. Purse Seiners Under Various Scenarios, 1992 ......... ........... 53 4.7 Rent for Japanese Longliners Under Various Scenarios, 1992 ................... 53 4.8 Illustrative Costs of Investment in Fisheries, 1992 ................................. 57 4.9 Trends in Per Capital Supply of Fisheries Products, 1974/76-92 ........ ....... 61 4.10 Main Uses and Markets for Nearshore Fisheries Products in the Pacific ........................................................ 69 5.1 Timber Production from Natural Forests in 1993 ............. ..................... 71 5.2 Trade in Forest Products in Selected Pacific Island Countries, 1993 ........... 72 5.3 Extent of Forest Cover in Selected Pacific Island Nations in 1993 ....... ...... 73 5.4 Extent of Customary Land Tenure in Selected Pacific Islands ........ ........... 74 5.5 Indicative Reference Prices for Logs in 1992, 1993 and 1994 CIF (Japan) Price in US$/Cubic Meter ........................ .................... 76 5.6 Forest and Tree Crop Plantations ...................................................... 82 Figures in Text 1.1 Real GDP Per Capita Growth Rate .................................................... 2 2.1 Real GDP Growth Rates in the PMCs, Average 1983-88 and 1989-93 ........................................................ 6 2.2 Real GDP Growth Rates 1983-1993 ................................................... 10 2.3 Percent Changes in the Terms of Trade, 1983-92 .............. .................... 11 2.4 Real Effective Exchange Rates (Indices), 1983-1992 ............ .................. 11 2.5 Composition of PMC Exports, 1982-84 and 1991-93 ............ ................. 13 2.6 Composition of PMC Imports, 1982-84 and 1991-93 .............................. 13 4.1 Fish Exports (% of total exports) ...................................................... 44 4.2 (a) Access Fees-External Sector Contribution (% of merchandise exports) ....................... 45 4.2 (b) Access Fees-Fiscal Contribution (% of taxes) .45 4.3 (a) Access Fees Paid, 1993 ........................................................ 52 4.3 (b) Volume of Catch, 1993 ................................. ....................... 52 4.3 (c) Catch Value, 1993 ..................... ................................... 52 4.4 Beche-de-Mer Exports from Selected PMCs, 1984-93 ........... ................. 62 5.1 Indicative Distribution of Income from Logging of Natural Forests ....... ..... 78 Boxes in Text 4.1 Maximizing Economic Returns from a Fishery ................................. 49 4.2 The Fishery Management Regime-FMR ................................. 50 iv Contents 4.3 Transfer Pricing in the Pacific .58 4.4 Trends in the Use of Coastal Fisheries-The Case of Vanuatu .60 4.5 Collaborative Management of Coastal Resources- The Case of Vanuatu .63 v Executive Summary PACIFIC ISLAND ECONOMIES: BUILDING A RESILIENT ECONOMIC BASE FOR THE TWENTY-FIRST CENTURY EXECuTIVE SUMMARY 1. With so many of East Asia's economies economic growth, improvements in the quality of now poised to leap onto the economic center stage life may not be possible. and become full-fledged competitors in the world market, the next century has been dubbed the iv. Throughout the past decade, the Pacific "Century of the Pacific". Yet for the Pacific Island Member Countries (PMCs) have invested Islands-hovering at the edges of this whirlwind an average of 29 percent of GDP in their of activity-how best to participate in it is less economy, yet economic growth has remained at a certain. low 2 percent a year. As a recent study showed, this may reflect the lumpiness and long gestation ii. Small and remote, scattered across the period of public investments, which accounted for Pacific Ocean, these Island nations face many 17 percent of GDP, as well as some unproductive development challenges. The heritage of the Pacific investments. The 12 percent of GDP provided by Islands, however, rests in their unique cultures, their private investment, on the other hand, was natural beauty, their forests, and their fish. They will positively correlated with growth, confirming the have to work together to protect, conserve, and importance of the role of the private sector in make the most of these rare gifts. Can the Pacific economic growth, as emphasized in previous Islands ensure that the Century of the Pacific will be reports. one of economic opportunity and prosperity for all their people? v. The PMCs need to change course and rely on a more effective private and public iii. Favorable physical environments, and investment oriented growth strategy. Change is all rich cultural traditions including the extended family the more essential because of external system, customary land ownership and benefit vulnerability and rising demands for modem sharing practices, have endowed their populations goods and services within the PMCs. As with a relatively safe and secure lifestyle. By world elaborated below, an outward oriented standards, the average life expectancy of over 60 investment-led growth strategy is needed-but not years is high. But while life is safe and secure in the necessarily the path of labor intensive agriculture Pacific Islands, economic growth has been slow. and manufacturing witnessed in the early stages of Unless the Islands achieve moderate sustainable East Asian growth. Achieving such a strategy would depend on evolving a more effective Figure 1: Avg. Growth Rates, 1983-93 development partnership between the state and the ............... private sector. In such a partnership, the state should focus on ensuring macroeconomic stability 5 11 OReal GDP and competitiveness, creating a more enabling 4- ,,.,.,., ,,,,-,i,.,regulatory framework, prov g 3- Population social infrastructure and reducing its role in the * Per Capita productive and service sectors. Such an environment would provide the private sector 1 -. ...... _; 1 with the impetus to save and invest in the o F _g ~l-1f productive sectors, and thereby contribute to PMCs Caribbean Africa & output and employment but with careful Countries Indian Ocean regulation to ensure that it is environmentally Islands sustainable in the long term. v vi Executive Summary vi. In building a more resilient economic * there have been major changes both in base, the PMCs could follow two broad composition and direction of exports; approaches. The first is to diversify their economic base into tourism and services. Second, t the PMCs need to obtain higher returns from their but natural capital, i.e. from fisheries in all PMCs, * vulnerability to external factors remains and will and from forestry in some of the PMCs. continue to do so. Regarding the latter a fundamental question facing the PMCs is: how can these countries exploit their ix. Over the last decade, the structure of natural resources sustainably to maximize trade in the Pacific Islands has been changing. While economic returns while preserving stocks for the export of traditional commodities remains future generations? Efficient import substitution important, the Islands have expanded earnings from possibilities also need to be exploited. Recent services, fish and forestry products. Manufactured trends in external trade show that the PMCs are exports rose from negligible to almost 8 percent in moving in this direction. But much more remains 1991-93 mainly due to the garment industry in Fiji. to be done. Islanders have also begun to import far more manufactured goods, machinery, beverages, and vii. Foreign aid will and should continue to tobacco, while the share of food, chemicals, mineral play an important role but the content needs to be fuels, oils and fats imported declined. changed and linked much more directly to overall development impact, greater improvement of public x. Notwithstanding attempts to diversify the service delivery and growth. This report does not export mix and to build links into new markets, the analyze aid-effectiveness in any detail. It shows Islands remain vulnerable to external shocks. Trade nevertheless, that aid programs need to be better penetration ratios are close to 80 percent of GDP, focused on getting coherent results, instead of being with imports accounting for more than half of GDP. spread thinly among a multitude of small With the exception of Fiji, the Islands run large individually worthwhile activities. Further, the merchandise and current account deficits, and technical assistance component of aid programs is correspondingly large capital inflows to finance these very high, and may well add to public consumption deficits. They are also heavily dependent on trade instead of investment by maintaining large public taxes for a large share of public revenue. Where sector bureaucracies. even minor changes in the terms of trade can devastate external balances and economic growth, Working with the World managing vulnerability and exploiting emerging opportunities become the governments' key viii. In the recent past, trends in Pacific economic challenges. Island trade indicate that: FgIure 2: Composition of PMC Exports: 1982-84 & 1991-93 Total Goods & Services: US$748 million Total Goods & Services: US$1372 million vii Executive Summary xi. The recent changes in the global trading governments need to focus more attention on environment arising from the conclusion of the enhancing competitiveness in the PMCs. This will Uruguay Round of the GATT Agreement, NAFTA require: and trade deregulation in Australia and New Zealand will have some effect on the PMCs trading a the maintenance of a macroeconomic environment. Benefits are likely to favor countries environment that meets the twin goals of price with open economies and those that have the capacity stability and competitive pricing of PMC to adjust and take advantage of new market resources; opportunities likely to arise from the projected real *a reduction in the anti-export bias of trade GDP growth rates of around 2.7 percent per year for the G-7 economies over the medium term. Two policy, and tax regimes; and other favorable factors are the outlook for low real * reducing barriers to domestic and foreign direct interest rates and inflation as well as the resurgence investment. of higher private capital inflows. Some likely effects of changes in the global economic environment are xv. An Enabling Macroeconomic that: Environment. A low rate of inflation and the pricing of capital, labor and land so as to be * overall growth and trade will increase internationally competitive are two of the main dramatically; macroeconomic challenges. With small financial .. a more competitiv tradeenvironnentwmarkets, even smaller domestically financed fiscal eamorge; competitivetradedenvirnment will deficits can quickly spark inflationary upsurges, emerge; and and discourage private investment and private * trends toward regional integration will intensify. saving. It points to the need for prudent fiscal management especially during periods of volatile xii. To reduce their vulnerability to external external developments. Towards this end, a shocks the Pacific Islands (along with all other combination of exchange rate, public sector wage, countries) will need to increase the breadth and depth and overall fiscal policies is the main set of of their trading relations. To date, they have instruments that can be used to ensure that benefited from preferential trade agreements (such as domestic resources are competitively priced in SPARTECA) that have allowed their exports into global markets. If domestic resources are major markets largely duty free. By reducing duties overvalued, then domestic investors will be levied on their competitors, the new trade encouraged to shift their capital abroad while liberalization agreements will wipe out much of this overseas investors will be reluctant to make new competitive advantage. This explains why the growth commitments. in manufactured exports from Fiji is now threatened over the medium term. xvi. Reducing Anti-Export Bias. Several of the PMCs rely heavily on trade taxes to finance xiii. Trade agreements such as SPARTECA the recurrent costs of government. While that provide Island manufacturers the opportunity to providing a steady stream of revenue, high import enter new markets under the shelter of another duties raise the cost of doing business in the nation's trade protection carry with them serious PMCs and discourage exports. In terms of hidden costs. To meet the 50 percent local content providing protection to domestic producers, high requirement (reduced recently to 45 percent), for import duties are counter-productive. Remoteness example, Island garment industries have been forced from major markets already provides the PMCs to buy capital goods and inputs from Australia and with a high degree of natural trade protection. New Zealand rather than from more competitive While high tariffs convey a measure of protection Asian markets and have under-invested in new to domestic producers, opportunities for import technology to maintain a high labor-cost share. substitution are quickly exhausted because of small populations and low incomes. A progressive xiv. Building upon their small yet significant reduction of import duties over the medium term recent success in trade diversification, PMC would lower enterprise costs and reduce the anti- viii Executive Summary export bias of PMC trade regimes. Lowering incentives. In general, the investment incentives tariff rates would, by necessity, need to be that are granted are distortionary, erode the tax accompanied by measures to develop new base, and encourage rent-seeking behavior. A domestic revenue sources, suggesting the need for more appropriate strategy for PMC governments careful coordination of resource mobilization and would be to move away from wide-ranging trade reform measures. foreign investment incentives, and concentrate instead on improving the overall domestic xvii. Reducing Barriers. Competitiveness enterprise environment. can be further enhanced by lowering costs to domestic and foreign businesses through reducing xx. Promoting trade, aid and investment barriers affecting them. A healthy domestic links with all APEC countries including the rapidly private sector will be the first step towards growing Asian economies provides a means of attracting foreign investment. In addition to diversifying market ties and finding new sources of capital, foreign investment brings with it the growth. PMCs have certain resources that are in technology and market access needed to penetrate short supply in Asia-most notably calm, quiet new markets. GATT, the emergence of major Island locations, and a large share of the canning- regional trading blocs, and the opening up of grade tuna supply. Sparking the interest of all APEC protected markets signal growing competitiveness entrepreneurs to invest in areas in which they already in the international environment for both foreign have technology, market links and expertise is an direct investment and trade. For the PMCs to important challenge for the PMC leaders. Adjusting attract foreign direct investment and expand trade, to trade standards and markets of the Pacific Rim efforts will be required to: countries and APEC presents a natural diversification strategy for the Pacific Island countries. X examine barriers to foreign direct investment; * examine the framework for "niche market Tourism: Profiting from Paradise agreements' and the ability to assess costs, xxi. In the unique natural settig of the benefits, and risks; and Pacific Islands, tourism offers considerable potential - strengthen trade and investment links with for both revenue and jobs. While tourism grew 4.5 rapidly growing Asian economies. percent worldwide from 1988 to 1993, in the remote Pacific Islands, it grew 6.8 percent. Over the same xviii. Investment approval mechanisms, period, the 8.7 percent growth in the East Asia and access to land, and restrictions on the hiring of Pacific Region suggests that there is a far greater expatriate workers are three of the most often market waiting to be tapped. cited impediments to foreign direct investment in the South Pacific. Establishing up-to-date foreign xxii. Within the PMC group, Fiji alone direct investment legislation, streamlining the FDI offers frequent air services to Australia and New approval process, clarifying property rights and Zealand and direct access to long-haul markets. With relaxing regulatory barriers to land use by beaches no longer pulling in new markets and repeat foreigners, and easing requirements related to the visitors in great numbers, however, promotion is hiring of expatriate workers are some of the shifting to terrestrial and marine attractions. Tonga measures that the PMC states could adopt to make and Westem Samoa have strong cultural identities the domestic economic environment more but limited and inconvenient flight connections. conducive to inward investment. Among the Melanesian group, Vanuatu's tourism industry is limited by its airline and hotel capacity. xix. To offset adverse investmnent The Solomon Islands are still at an early stage of regulations and a perceived lack of tourism development. The Federated States of competitiveness, PMC governments offer a wide Micronesia, the Marshall Islands, and Kiribati are range of fiscal incentives to lure private investors. distinctly different from the five other Pacific Island But there is a lack of automaticity and Member Countries-far more remote from source transparency in the granting of investment markets, much smaller, and more widely scattered- ix Executive Summary and not easily accessible. of the Islands and as a contributor to output and employment from coastal fisheries. In offshore xxiii. The Pacific Islands' many cultural and fisheries PMC governments need to focus on natural assets are the foundation for a strong tourist three inter-related issues: trade. As more and more tourists have visited villages and become familiar with local cultures, * strengthen the present system of resource governments have begun to recognize the importance management to ensure sustainability of of preserving and promoting local cultural assets. the tuna resources for the benefit of The Islands also possess unusual flora, fauna, and future generations; geophysical features-on land and under the sea. The * increase rents received from access fees key to developing Pacific Island tourism lies in the through collective action from the present sensitive presentation of their cultural heritage and level of about 4 percent of the output the careful management of the natural environment. value; and xxiv. The Islands' geographical isolation * manage public and private investment and remoteness are their drawback as well as their with the twin objectives of reducing the blessing. Access to tourist markets is of necessity fiscal burden of existing investments, and difficult and costly. A fundamental priority must preparing the groundwork for future therefore be to improve air access, flight private investment in the sector. frequency, and fare levels by rationalizing aircraft, routes, and services and developing an xxvii. Active off-shore fisheries resource improved network of regional routes and inter- management comprises three components-a Island routes within countries. Improvements are fisheries management system, a component for also needed on links with larger neighboring monitoring, control, and surveillance, and a destinations and source markets (particularly fisheries judicial system for effective Australia and New Zealand) to supplement the enforcement. A crucial requirement for this is that present system of point-to-point links from each fishing access agreements must incorporate catch capital. limits by species or other appropriate measures. cThe present system encourages overexploitation, xxv. With global competition for which is not in the interests of the coastal states development capital becoming intense, Pacific nor the distant water fishing nation fleets. There Island governments seeking investment in the is also considerable variation under the present tourist industry will need to reassure potential licensing arrangements-both in terms of the low investors that the decision making process average level of fees paid, and in payments across regarding investments will be consistent and countries (see below). Limiting access effectively timely; that government commitments (such as the should also generate benefits in terms of helping provision of infrastructure or air services) will be to maintain the price of output in major markets. honored; that there will not be unforeseen or excessive increases in government fees and xxviii. Implementation of a multilateral charges; and that regulations will be applied approach to fee negotiation and licensing based on consistently and without overlapping or collaborative action has the potential to raise duplication. average access fees from the present level of 4 Fisheries: Harvesting the Bounty of the Sea percent of output. In order to move in this direction Pacific Island countries need to work xxvi. Fisheries are an important present together first to define a long-term strategy to and future resource in most PMC countries raise fees, and to develop the vital fisheries varying from about 7 percent of GDP in the infrastructure (e.g., transshipment facilities and Solomon Islands to higher shares in the ports) which would complement the former. Micronesian group. The Fisheries sector offers Negotiations under such a multilateral system considerable potential for development both as a should be carried out by professional negotiators. revenue earner from off-shore fisheries for some x Executive Summary trend. The most important element of this strategy TAbes 1:e D asicb Variaon Eitsion should be to shift the thrust of fisheries Access Fe Pi by V Nations departments, particularly fisheries extension, .... ng. N..ion . .A c... ......................cess Fees away from fisheries development and redirect it to ........ .. .... . ............ .fisheries management. This will require ...... ....... . .. ... VaU 0 institutional strengthening and re-training in many place in most PMCs-customary systems of USA 10 percent ~~~~marine tenure exist in most PMCs. Given the Japan 5.0 percent limited resources of PMCs, it is advisable to use Taiwan 3.7 percent ~~~the customary systems complemented by modern Korea 2.2 percent methods and backed-up by modern systems to Average 4.4 percent ~manage dwindling coastal resources. Such Source: World Bank staff estimates. experiments have been demonstrated successfully in Vanuatu and other parts of the region. xxxiv. Investment in modern off-shore Forestry fisheries is a highly capital-intensive activity requiring resources and private savings which xxx. Throughout the Islands of the most of the PMCs do not have. Consequently Pacific, tropical rainforests are rapidly private investment will need to be foreign disappearing. Widespread agricultural activities sourced. In order to manage investment more and commercial logging have resulted in effectively, PMC governments first need to deforestation and forest degradation. Timber separate out any welfare objectives from harvesting rates are unsustainable and harvesting economic ones when evaluating projects. Second, methods unnecessarily destructive. Regeneration PMC governments should not be directly rates range from slow to nil. In addition, involved in commercial activities in the sector- inadequate logging agreements have enabled this is an activity for the private sector. This logging companies to reap windfall profits; implies that in the short to medium term, PMC moreover, governments and landowners lose governments involved in commercial activities revenues through transfer pricing, under- mrlust move out of such activities in order to reporting of log exports and other malpractices. r-educe the existing fiscal burden. The strategy for this transition from public to private management xxxi. Significant forest resources still exist should be to invite foreign participation, with the in the Solomon Islands, Fiji, Vanuatu, and government a silent partner, requiring only Western Samoa. If present practices are allowed payment of a fee to manage the enterprise. Over to continue, however, the natural forests-and the the medium term private operators should be myriad species they contain-may be gone in provided an option to purchase the enterprise, fifteen to twenty years. If forest resources are to Similarly new foreign investments in the sector be preserved and managed on a more sustainable should be allowed, but with an up-front annual basis, governments need to develop and enforce fee payment to be made to government, long-term, comprehensive national forestry independent of profit. policies based on sustainable management principles now. Action is urgently required in the xxxv. Coastal fisheries are an important following three key areas: protection and source of food for all PMCs and therefore a conservation of natural forests; improved source of foreign exchange savings. Present management of natural forests; and a more trends indicate a significant decline in coastal equitable distribution of economic rents. resources across all PMCs and a deterioration in the environmental quality of some coastal areas. Urgent action will be required to reverse this xi Executive Summary Protection and Conservation of Natural Forests * Logging practice codes. National Codes of Logging Practice, which seek to minimize the xxxii. While governments in the region destructive impacts of logging should be may recognize the social and economic developed, incorporated into logging importance of conserving their countries' unique contracts and enforced with realistic penalties. gifts of flora and fauna for future generations, they have been slow to counteract the forces * Performance Bonds and surveillance are favoring rapid exploitation. Areas set aside for the internationally tested and effective means to protection of biodiversity in Fiji, Solomon ensure that logging companies comply with Islands, Western Samoa and Vanuatu are quite Codes of Logging Practice and with their inadequate. Effective systems of protected areas contractual obligations and that should be established immediately and in close economic/ecological benefits accrue to the consultation with communities and landowners to country. preserve biodiversity. These could include conservation areas, national parks, and ecological Equitable Distribution of Economic Rents reserves. xxxv. Governments and landowners in the xxxiii. Donor participation. Donors Pacific are forsaking economic rents, to which should explicitly include conservation of natural they are entitled, to logging contractors. The chart forests as a priority for grant aid support to the in Figure 3 shows that resources owners sector either directly or through assistance to local consistently receive the smallest portion (10-15 and international non government organizations, percent) of log value, while loggers consistently which are working with local landowners, to receive 30-50 percent in the form of excess develop feasible and socially acceptable profits. Government taxes and levies vary from approaches to forest protection and conservation. 30-35 percent in PNG and the Solomon Islands to 5-15 percent in Fiji and Vanuatu. Recent Bank Management of Natural Forests research indicates that, based on current log prices and logging costs, the combined revenue xxxiv. Although the forestry sector is a collected by landowners and governments could significant source of income to landowners and be increased to 50 percent of f.o.b. log value national governments in the region, the principles while maintaining internationally competitive of natural forest management have not yet been profit margins to loggers. In order to achieve this, adopted. Forestry operations typically "mine" the it is recommended that governments should resource with little regard for regeneration. consider instituting stumpage and export taxes; Whereas sustainable forestry may be difficult in increasing the royalties paid to landowners, natural tropical forests, there is ample scope for merging field-based and export (output) taxes; improving the way Pacific Island natural forests and adopting independent inspection/surveillance are currently managed: of exports. * Forest management plans. Governments, Pulling Together owners, and managers should develop detailed plans for the management of natural xxxvi. Regional collaboration that combines forests for sustained timber production, with the Islands' individually limited manpower, and substantial areas set aside for conservation. financial and natural resources may in certain areas, * Sustainable yields. To preserve natural allow for economies of scale, reduce vulnerability to external shocks, and thereby improve overall forestry resources, total annual timber welfare. It could also lower the unit cost of essential harvests must not exceed the best estimate of inrsucreevcs.A egoaapocht sustainable yield. The allocation of the total infrastructure services. A regional approach to harvest,amoreover.msthe esustainablefwthin total resource management and exploitation has the harvest, moreover,mpotential to significantly enhance the bargaining each region. position of all the Island countries. If the PMCs can xii Executive Summary Figure 3: Indicative Distribution of Income from Logging of Natural Forests DExcess Logging Profits 100% 90% 11111*Government Tax/Levy 80% 70% OLandowner Royalties 60% 60% - Logging Costs (including normal 40% profit margins to loggers) 30% 20% 0% PNG Sol. Is. Vanuatu FiJi Note: PNG is included as a comparator. Data for Western Samoa were not available. Source: World Bank estimates. cooperate in key areas, they can begin to achieve the administrative costs involved. Under these standards of living they value. circumstances the PMCs may wish to adopt an outward orientation in this regard. This can be xxxvii. Yet in the past, regional efforts have done through trade cooperation and integration had only mixed results, and costs in terms of limited with larger more dynamic economies such as staff time and administrative resources have been those of APEC. At the same time care needs to very high compared to the value added. It is be exercised to avoid the high costs of therefore vital that the Pacific Island nations be inefficient administration and decision making. highly selective in choosing areas requiring economic cooperation. The number of such efforts * Transportation. There are many potential should therefore be small. Regional collaborations benefits from cooperation to promote better must also seek to benefit all participants, improving access to aviation and maritime transport. their welfare beyond what individual nations could There is an urgent need to restructure the have achieved on their own. National interests would Forum Shipping Lines currently regulating therefore not outweigh and supersede regional ocean transport, for instance, and to separate interests. Finally, regional cooperative efforts must commercial operators from services to the be designed to be flexible enough to adapt to more remote Islands, which is a welfare changing circumstances and have the capacity to be function. Greater transparency in commercial self-policing and, if necessary, to terminate in the goals and a clearer definition of appropriate event of poor performance. demands for public support would increase the scope for ocean transport profitability. xxxviii. The Pacific Islands' regional Moreover, standardization of ship design for cooperation efforts, while mindful of the general the region could reduce initial capital costs shortage of human resources and limited institutional for both repair and maintenance. capacity, should focus on four priority areas: (a) building trading relationships with larger, more a Natural resource management. In both forestiy dynamic trading blocs outside the region; (b) s cooperative arrangements in transport; (c) a substantially from regional collaboration. There common approach to natural resource management; is an urgent need to establish and implement a and (d) a regional approach to providigce rtain common code of conduct regulating logging ecnmcand socal servic operations in natural forests across the region. economic and socila services. The need to improve the monitoring of logging * Trade: The benefits of trade within the PMCs and timber exports is equally urgent. In are likely to be limited and largely offset by the fisheries, collective initiatives could reduce costs xiii Executive Summary significantly through economies of scale and regional training programs from the present improve monitoring, control, surveillance and emphasis on liberal arts and public conservation to help ensure that fishery stocks administration towards business and technical will be exploited in a sustainable manner. programs in order to generate the human Negotiating access fees on a multilateral basis, resources which will be required in the future. moreover, will require regional collaboration on In the area of environmental management there an unprecedented scale. is considerable potential for benefit from cooperation given the depth and similarity of * Economic and Social Services: The two major environmental issues. Based on the frequency areas where the Pacific Islands stand to gain and rapidity of natural disasters in the region, a are higher education and environmental case can also be made for collaborating in the management. In higher education there is an preparation for and response to such disasters. urgent need to resolve the current difficulties Finally, utilizing a regional agency such as over the USP as this is a most valuable regional SPREP, the PMCs can address the common resource from which all countries have derived nexus of coastal zone management issues and great benefit and can expect to do so into the marine conservation needs of the region. future. Additionally, there is a need to re-orient I Chapter I PACIFIC ISLAND ECONOMIES: BUILDING A RESILIENT ECONOMIC BASE FOR THE TWENTY-FIRST CENTURY 1. INTRODUCTION Overview: The Pacific Island Member Countries face a unique set of development challenges. Favorable physical environments and rich cultural traditions have endowed their populations with safe and secure lifestyles. But economic growth has been slow despite high levels of overall investment andforeign aid. The countries continue to 'depend on a narrow range of export commodties and remain vulnerable to external shocks. Recent changes in the global economic environment offer opportunities for economic diversification. At the same time these economies can sustainably exploit their natural resources to maximize revenues while preserving sufficient stocks for future generations. 1.1 Scope and Content of the Report. The Table 1.1: Average growth performance, 1983-93 central objective of this report is to discuss how the (in percent per annum) Pacific Island Economies can enter the twenty-first - Mica : century on a more resilient economic base. This .. . .: -:. . report seeks to build upon the findings of the last Real GDP 2.1 3.2 5.4 two reports which have shown that past patterns of growth and development in the Pacific Island Population 1.7 0.9 2.0 Member Countries (PMCs) do not appear to be sufficient to provide a progressive improvement in Per Capita 0.4 2.3 3.4 living standards in the future. The next century is Real GDP sometimes referred to as the "Pacific Century" Source: World Bank. because of the major role the East Asian economies /a Selected island economies-see Table 1.2. are likely to play. In view of such a scenario, the PMCs need to assess carefully emerging opportunities and challenges and decide on the kind 1.2 In contrast to the last two reports which of participation and development strategies that were country specific, this report is thematic in would be in their best interests in the future. character and seeks to transcend inter-country Change is all the more essential because of PMCs' differences. The key questions posed in this report vulnerability to external influences as well as rising are: demands for modem goods and services within the PMCs.' * How can the Pacific Islands-individually or collectively-build a more resilient economic structure in a rapidly changing external environment ? S *~~~~~~~~~~~~ How can Pacific Island economies reduce The eight Pacific Island Member Countries (PMCs) covered in this report are Fiji, Kiribati, their vulnerability to extemal events? Marshall Islands, Federated States of Micronesia, Solomon Islands, Tonga, Vanuatu * How can the PMCs sustainably exploit their and Westem Samoa. The PICs form a wider natural resources to maximize revenues group, and in addition to the PMCs, it includes while preserving sufficient stocks for future Cook Islands, Niue, Tuvalu. Papua New generations ? Guinea, also a Pacific Island Member Country is covered in separate reports. 2 Chapter 1 1.3 Given the fragile resource base of the 1.5 In 1992, GDP per capita averaged PMCs, the management of their natural resources US$1,320 in the PMCs compared to US$3,280 in has assumed considerable importance. Previous the Caribbean and US$1,390 in the African and reports have also noted that there is still a tendency Indian Ocean island economies. Per capita GNP in the PMCs to look inward and remain isolated varies considerably within the PMCs ranging from from the rest of the world. External factors do affect US$2,130 in Fiji to US$710 in Kiribati in 1993 the PMCs in a significant manner and have been (see Table 1.2). Population growth rates have been accentuated by recent changes in external trading high. Solomon Islands and Vanuatu recorded the arrangements. Thus, the unifying theme of the highest rates reflecting declining mortality and report is about how the PMCs can diversify in increasing fertility, but population growth rates response to these changes and optimize the use of have been much lower in Fiji. Rapid population their natural resources. growth per se is not a cause for concern if accompanied by commensurate levels of 1.4 Background. The eight PMCs, spread environmental sustainable economic growth. But across the Pacific Ocean in the form of hundreds of with low and erratic growth rates in most of the small islands and atolls, face a unique set of PMCs, high population growth rates would lead to development challenges. Favorable physical declining or stagnant GDP per capita levels. environments and rich cultural traditions including Nevertheless, despite the many constraints and the extended family system, customary land challenges faced by the PMCs arising from their ownership and benefit sharing practices, have small size, isolation and fragmentation, the endowed their populations with a relatively safe and countries have made considerable progress in their secure lifestyle. However, economic growth and efforts to improve the quality of life of their people. diversification have been rather slow in the PMCs in the 1980s and in the early 1990s compared to 1.6 Average life expectancy in the PMCs is other island economies (see Table 1.1). During the relatively high by world standards. In almost all period 1983-88, real GDP per capita growth was the PMCs, people have an average life expectancy negative in the PMCs, compared to robust growth of over 60 years. This is comparable to the life in the other two island groups (see Figure 1.1). expectancy in other island economies in Africa During 1989-93, however, the PMCs performed and the Indian Ocean, but is less than in the better than the Caribbean Island group as a whole, Caribbean, where the average life expectancy is largely reflecting the recovery in Fiji, but their 71 years. growth performance was below that in the Africa and Indian Ocean Group. 1.7 Similarly, as a group, the PMCs show infant mortality rate of 39 per thousand births which is lower than in the African and Indian Figure 1.1 Real GDP Per Capita Growth Rate Ocean island countries, where the average is 47. However, the infant mortality rate in the PMCs is 4- .......................... .......much higher than that in the Caribbean countries 3 S _;g; _ ............................ estimated to be 23 per thousand births. Within the 23S ; ~ _ _ PMCs the infant mortality rates are lower in Tonga (21), Fiji (23), and Western Samoa (25). 0.5- . ...... 1.8 Overall literacy rates in the Pacific are 0 _ = m _ _ L generally higher than the average in developing -0.S- X S- - _ ........................countries. Most Pacific countries have made great -1 Caribbean A .ia 188 progress in extending access to primary education Caribbeas African Oce in the last decade and primary enrollment rates are Islands _.wif comparable with those of other island economies. Except for the Solomon Islands, primary education 3 Chapter I is virtually universal in all the other PMCs. the average sea to land area in the PMCs is 13 However, primary school dropout rates are high in times that of the Caribbean countries. However, the PMCs compared to other developing countries. their spread over larger sea areas has also led to higher unit costs of transportation and hence a 1.9 As for health status, there have been constraint even to supply their small domestic widespread gains over the last two decades with markets. As for external markets, the PMCs are increased life expectancy and decreased infant constrained by the "tyranny of distance". They do mortality in most PMCs. Overall, infant mortality not have the advantage of proximity to the large and child health conditions have improved, though high income American markets, enjoyed by the conditions vary across countries. Solomon Islands Caribbean countries. and Vanuatu provide examples where diseases of underdevelopment still account for most sickness 1.11 Furthermore, the PMCs which depend on a and death. In the other PMCs, the main causes of few commodities are subject to terms of trade death are non-communicable diseases related to shocks and remain highly vulnerable. First, the poor diet, and the ills of urbanization. In several terms of trade became unfavorable in the 1980s; PMCs, pregnancy and motherhood also continue to prices for PMC commodities (e.g., coconut, copra) pose a significant risk to the health of women. In declined in the 1980s. Second, in the recent past, fact, the Pacific regional average for pregnancy and there has been increasing activity in a narrow set of motherhood-related deaths is considered to be natural resource-based activities, i.e., in fisheries significantly higher than the global average. and forestry. Accordingly, the discussion in this report will be broadly structured as follows: 1.10 The archipelagic nature of the PMCs have * Recent trends in Pacific Island trade and likely endowed them with a more extensive command effects of changes in the global economic over ocean resources (see Table 1.2). For example, Table 1.2 Comparative Indicators * ; , ,,,,, S - n D~~~~~~~~~~~~~~~~~ . . . .. .. . ... . . ... : ... . . .: e PacIfc: Fiji 762 1.31 18272 1146 1647 2130 72 23 FSM 105 2.71 705 2500 194 1850 b/ 64 52 Kinbati 76 2.01 810 3550 32 710 58 60 Marshall Islands 51 3.99 181 1942 85 1670 bl 61 63 Solomon Islands 354 3.00 27990 1500 245 740 61 44 Tonga 98 -0.18 720 543 145 1530 68 21 Vanuatu 161 2.71 12000 680 186 1230 63 45 Western Samnoa 167 0.40 2934 130 122 950 65 25 Caribbean: Antigua &Barbuda 67 0.68 440 110 457 6390 74 20 Barbados 260 0.32 430 167 1631 6240 75 10 Belize 205 2.62 22800 n.a 524 2440 69 41 )otnijaica 72 -0.26 750 15 189 2680 72 18 Grenada 91 0.02 340 27 214 2410 71 29 St- Kitts &.Nevis 41 -0.78 360 11 177 4470 68 34 St.Lucia 158 1.85 610 16 496 3040 70 19 St.Vincenit&Orenadineg 110 0.88 340 33 191 2130 71 20 Mirca & Indian Ocean: Cape Verde 398 2.60 4030 790 325 870 68 40 Comaros 528 3.67 2230 249 276 520 56 89 M*ldives 236 3.31 300 959 132 820 62 55 Matattiua 1111 1.01 850 1171 3280 2980 70 18 Sso Tome & P.tucipo 125 2.24 960 128 44 350 68 65 &Schel1ea 10 0.79 270 1349 443 6370 71 16 S02Dre: World Bank, IMF StaffReports and Recent Economic Development Reports a/ 1992 or most recent estimate, b/ GDP per capita 4 Chapter 1 environment; economic diversification into tourism-a sector in * Trade and management of resource-based which PMCs have made significant strides in recent activities; and years, with a growth 'm visitor arrivals significantly exceeding worldwide growth. Today, Fiji alone * Options for regional cooperation. attracts twice as many visitors as French Polynesia-a favorite destination for many decades. 1.12 The External Trading Environment. Major changes have taken place in the composition 1.15 Returns from Natural Resources. One and direction of trade in the PMCs, as shown in opportunity for the PMCs is to expand natural Chapter 2. Although merchandise exports are resource based activities and improve its somewhat more diversified than a decade ago, the management. In off-shore fisheries, resources are PMCs still remain vulnerable to external shocks. still biologically underexploited. The challenge here Thus, the key issues facing the PMCs will be that of is to obtain a fair return from this resource in the managing this vulnerability and exploiting emerging form of rents from foreign fishing vessels in the opportunities. Export destinations have also territorial waters of the PMCs. At the same time, to changed considerably in the 1980s. Japan and other prevent a rapid depletion of natural resources, there Asian countries have emerged as export is a need to ensure these resources are sustainably destinations for Fiji, Solomon Islands, Tonga, developed. Furthermore, the PMCs need to receive Vanuatu and FSM-indicating a shift away from adequate economic rents for their natural capital. In traditional ties to more market-based arrangements. the case of coastal fisheries, there is evidence of over-exploitation of certain fishery stocks, 1.13 The new global trading environment particularly in the vicinity of urban centers- presents both challenges and opportunities for the pointing to the need for better management of this PMCs. The benefits arising from preferential access sector. to protected markets-sugar to Europe and the US, copra to Europe and textiles to the Pacific-will 1.16 As regards forestry, propelled by currently diminish over time. At the same time, the overall high timber prices, logging operations in some boost to global growth and trade afforded by a PMCs (e.g., Solomon Islands) are until recently, reduction in trade barriers will open up new sources proceeding well beyond sustainable levels. The of demand for PMCs' traditional export collaboration between foreign investors and commodities. Analysts predict that prices of traditional land owners with forest reserves is primary commodities may rise in the medium term. difficult to control, but indirect methods, This by itself will have a positive effect on export particularly market-based ones (export taxes, earnings in the PMCs. Likewise an increase in stumpage fees, forest surveillance), are needed to private capital flows may benefit the PMCs by manage this natural resource. Thus, Chapters 4 and expanding the export capacity in sectors such as 5 discuss the possibilities for PMCs to link up with tourism and fisheries. As regards imports, the global markets without endangering their fragile PMCs are likely to be adversely affected by rising resource base in the longer term. food, petroleum and manufactured goods prices. With most countries already experiencing large The discussion will illustrate that: trade deficits, high import prices may lead to widening balance of payments deficits, pointing to * obtaining a larger share from natural resources is the need for flexible macroeconomic management a "win-win strategy"; in the face of changing market conditions. * it helps external balance and domestic revenues; 1.14 The above issues will be discussed in and that Chapter 2, which explores suggestions for * resources can be exploited in a more sustainable developing a trade policy framework to encourage manmer. diversification. Considering the limited degrees of freedom imposed by the PMCs' narrow production 1.17 Regional cooperation provides one means base, Chapter 3 will focus on the importance of of fostering global links through achieving greater 5 Chapter I economies of scope and scale. Factors such as the administrative costs and diversion of effort. The geographic remoteness, extreme dispersion, small chapter discusses four areas of regional integration: populations and land areas, have combined to limit (a) co-operation in trade and services within the the productive base of the PMCs. Furthermore APEC framework; (b) aviation and ocean transport; these same factors are responsible for the (c) natural resource management; and (d) co- diseconomies of scale, leading to high costs in operation in economic and social services, production, particularly with respect to unit costs of particularly in higher education and environmental infrastructure, which further constrain competi- management. tiveness and efficient production. Thus, integration through regional collaboration, based on combining 1.18 The substantive discussion in this report the manpower, financial and natural resources of will begin with the story of growth and external the region, has the potential to improve welfare by trade in the PMCs, in Chapter 2. This aims to allowing economies of scale to be exploited, provide the backdrop for the subsequent discussion thereby reducing the vulnerability of the PMCs. on building upon the PMCs' small but significant The report argues that cooperation by Pacific Island export diversification, focusing greater attention on countries does not necessarily create net benefits to tourism and negotiating better terms for natural PMCs because gains from economies of scale, trade resources. access, growth or market power are easily offset by 6 Chapter 2 2. GROWTH AND TRADE IN THE PACIFIC ISLAND ECONOMIES Overview. Economic growth in the PMCs during the last decade has been very volatile, reflecting, in part, their dependence on a narrow range of primary export conunodities which are subject to exogenous shocks as well as natural disasters and political developments. Trends in economic growth closely reflect those of external trade. Despite significant diversification in the 1980s, the PMCs remain vulnerable to external shocks. This vulnerability continues to have adverse effects on their fiscal balances-mainly via trade taxes and on the balance of payments situation through export earnings. With a view to setting the stage for subsequent chapters, the discussion highlights issues such as recent changes both in the composition and in the direction of trade, vulnerability to external factors, and how to manage this vulnerability and exploit emerging opportunities. Recent changes in the global environment point to the need for further economic diversification and strengthening links with non- traditional markets. A. Growth, Investment and Shocks general trend indicates that PMC average output growth improved from 0.8 percent in the period 2.1 The PMCs as a group recorded an 1983-88 to 3.8 percent in 1989-93. Also there average annual output growth rate of 2.1 was remarkable improvement in per capita GDP percent during the period 1983-93. Real GDP growth rate which increased from -0. I percent growth per capita was much lower and averaged annually to about 2 percent. However, if Fiji is 0.4 percent per year in the period 1983-93. If excluded, the increase in growth rate is smaller. Fiji, which accounts for two thirds of the groups' output, is excluded, per capita GDP 2.3 For the individual PMCs growth growth fluctuated around a low negative rate of performance was mixed: (see Figure 2. 1) with -0.2 percent annually in the same time period. an improvement in Fiji, the Solomon Islands, and Vanuatu, stagnation in Tonga, and declines 2.2 However, despite low average growth in Kiribati and Western Samoa. performance over the last decade, there was substantial improvement in the early 1990s. The 2.4 However, despite favorable levels of natural and human resources, high levels of investment and aid, and reasonably prudent Figure 2.1: Real GDP Gwth Rates in the PMCs economic management, growth patterns among (Average 19B3-88 & 19B9 93) the PMCs, are characterized by low and extremely volatile growth rates. The pattern has .-: .. . ................... .. . been a series of growth spurts followed by --"'.'.' .. . . .' . .. .. . . .. ..""':. .. .. ..- ................ . . .. ..... . --But this is not surprising given the PMCs' , - ,,,,:"'.... ....... .. . ........ .. ... - . . ....... -.-. ..both natural disasters and the dependence on .'..: .. .. ... . . ...:, . .'.' -- :.,. ... ..... .... . _.-.... ... 19..... which are subject to large price and quantity ....... .. ...1993 variations. Thus, economic growth and external .. ...... ---l- .. _--:: -:-.--:.--.trade in the PMCs are very closely related. .' .-.'.'.""''''..... .. .... 2.5 This pattern of considerable fluctuation .4 -2 0 2 4 6 around a very low base growth rate is found for ._.._.._.._.._...._.each of the six PMCs considered here. As 7 Chapter 2 Table 2.1 Average GDP Growth rates and Investment Rates, 1983-1993 /b ;t';,X''t: ,--..0.0,V,'0,,,,.-.'..'','.'(: - 0Q''''''''"''''''~ ~ ~ ~~~~~~~~~~~~~~~~~~~~.......... Fiji 2.4 6.0 18.10 9.2 8.9 PSM a/ .0.8 3.6 - -- K(iribati 0.8 5.0 31.0 .12.0 19.0 Marshall Islands a/ 0.8 2.0 - -- Solomon Islands ... 3.2 6.0 30.7 15.1 . 15.6 Tonga 2.1 2.9 .30.0 10.4 19.6 .anuatu 2,8 ..3.0 32.4 20.4 12.0 Wester. Samoa 1.0 3.3 . 32.1 5.6 26.5 AverageFPMCs 2.1 4.4 0285 11.5 17.0 al 1988/89-92/93 b/ Data for investment ratios are the averages from 1980-92. Source: World Bank Reports; IMF Recent Economic Development Reports. shown in Table 2.1, five of the six island equal. In Vanuatu, on the other hand, until very countries had average growth rates less than recently, private investment has tended to 3 percent; only Solomon Islands had a higher dominate. This pattern of public versus private growth rate (3.2 percent) and, even in this case, investment shows an interesting relationship to the per capita growth averaged only around pattern of growth: where public investment has 0.4 percent. While the timing of growth spurts tended to dominate, growth has been lower. For and declines is different across the individual example, Westen Samoa and Kiribati have had countries, the long-run picture of stagnation is the lowest average growth rates among the PMCs, remarkably similar, whereas Solomon Islands and Vanuatu have had amnong the highest. 2.6 Investment. A notable feature of the Pacific Islands development experience has 2.8 Productivity Impact of Public been the coexistence of low growth with high Expenditures. The composition and investment. During 1980-92, the average gross effectiveness of public sector expenditures has a investment rate was 28.5 percent (see Table direct influence on growth. Composition refers 2. 1), while average growth, as noted above, to the distribution between government was about 2 percent. Indeed, in terms of investment and consumption as well as to the investment rates, the region is similar to the level and economic return of government high-performing East Asian countries, but, investment among different sectors. The data unlike these countries, investment efficiency show public consumption in the PMCs to be appears to be very low. The only exception to high. The average public consumption rate this pattern is Fiji, where gross investment rates during the period 1980-92 was 27 percent of declined by half during the 1980s and are now GDP. Disaggregation by country shows around 13 percent; of course, even in Fiji, the considerable variance: Fiji, Tonga and Western average growth rate has been low. Samoa have much lower rates than Vanuatu, the Solomon Islands and Kiribati. With a public 2.7 Public investment tends to dominate in consumption rate of over 50 percent of GDP, the PMCs. Average public investment rates are Kiribati is the slowest growing country in the around 17 percent while average private region, which suggests a negative relationship investment rates are around 11.5 percent. between public consumption and growth. However, individual PMCs vary greatly in the relative importance of public versus private 2.9 Role of Aid. Aid has been a dominant investment. In Western Samoa, Kiribati and feature in the PMC economies during the past Tonga, public investment has tended to be much two decades. On average, official development higher than private investment whereas in Fiji and assistance amounted to almost 27 percent of Solomon Islands, the two have been roughly GDP during 1980-92. This average, however, 8 Chapter 2 conceals much variation. At one extreme, aid equipment and training of local professionals. amounted to only around 3.3 percent of GDP It also helps meet shortages in specific areas, a for Fiji while, at the other extreme, it amounted role that could theoretically improve to 56 percent for Kiribati. For the remaining productivity. four PMCs, the aid ratio averaged between 21 percent and 27 percent of GDP. Thus, 2.11 Investment and Growth. The role of except for Fiji, aid was a major source of investment in explaining growth was analyzed development financing with a substantial with the aid of econometric methods'. The capacity to influence economic growth. The results suggest that further increases in public ability of aid to influence depends on how it is investment of the type and efficiency provided and how it is used. For most PMCs, experienced in the past, may not lead to the great bulk of aid has been in "services" i.e. additional growth in the typical PMC economy. technical assistance, or supplies "in kind" on This result probably reflects the fact that, in the grant terms, rather than loans. Only in Solomon aggregate, public investment in the PMCs Islands and Western Samoa does the ratio of probably has been in low-return areas such as loans in total aid exceed 15 percent. Thus, there public buildings and much may have been is little reason to consider the external debt managed ineffectively and have led to low service burden as a factor determining growth returns. The investments of public enterprises performance. engaged in loss-making commercial activities have probably also contributed much to this 2.10 A dominant characteristic of aid in the outcome. However, some components of PMCs is the high proportion of technical public investment may have a positive assistance; around 45 percent of all grant aid relationship with growth. In particular, has been in the fonn of technical assistance. investments in such physical and social (see Table 2.2) It is not clear what relationship infrastructure as access roads, electricity this might have to growth performance. On the supply, school buildings and health clinics are one hand, it is thought that the bulk of the likely to have improved the prospects for funds provided as technical assistance replaces growth. Such a positive relationship has been current public expenditure such as in schools widely observed in other countries. But for hospitals and some ministries and that it accrues present purposes, there was insufficient data to as income to expatriates rather than as tangible permit analysis of the different effects of the investments to the aid-receiving country. specific components of public investmenit. Technical assistance also takes the form of PMC nationals being trained abroad in the 2.12 Public consumption is also found to have donor country or of expatriates providing a statistically significant negative impact on training and advice in the recipient country or growth in the PMCs. Here again, there is a implementing investment programs. Thus, need to differentiate between wasteful current technical assistance does provide expertise, expenditures on activities that could be performed more effectively by the public or Table 2.2 Sectoral Allocation of Development private sector and vital expenditures on basic Assistance (Avg. 1986-92) (%) -Cwuniry - - FIJ K1X TON: :SOL VAN: .$SM l World Bank "Determinants of Growth in Pacific Social infra. 18.1 24.4 11.8 14.2 11.4 7.9 Island Member Countries", Working Paper. Econ infra. 9.9 8.9 17.8 14.1 15.5 34.6 These results, however, need to be interpreted Production 15.1 7.6 12.3 23.6 11.4 9.3 with caution given the weakness of economic data o/w Agric. (9.1) (4.1) (4.9) (18.6) (6.7) (9.1) in the Pacific. Several countries lack the capacity Prog. type 5.1 2.4 8.1 2.7 2.9 3.4 to conduct field surveys to gather data for Tech. Asst. 50.9 55.1 43.7 44.4 55.1 36.7 computation of national income estimates and to Other 0.9 1.6 6.3 1.0 3.7 8.1 organize and compile existing data. Nevertheless, Memo item: the above analysis provides preliminary results, Total (US$m) 47.8 19.0 21.8 45.7 42.5 39.1 which merit further study. Source: OECD/DAC 9 Chapter 2 services including health and education. infrastructure support, (both economic and Quality of life and the quality of the labor force social), and reducing its role in the production needed for sustainable economic growth and service sectors to create more "space" for crucially depends on recurrent cost support for the private sector. In other words, the state is health and education. Such expenditures, for market friendly and complements the private example, will include salaries for health sector rather than supplanting it. Such an workers and provision of essential environment provides the private sector with a pharmaceuticals or teacher salaries, school level of confidence and a framework to save books and teaching materials. Again, the data and invest in the productive sectors and thereby did not permit a disaggregated analysis. contribute to output and employment. 2.13 The results of the statistical analysis 2.16 Effects of Disasters and Shocks. suggest a positive relationship between private PMCs' economies are subject to three types of investment and growth during the 1980s shocks: natural disasters like cyclones, volcanic indicating the often quick yielding nature of eruptions and tidal waves; economic shocks like private investment, as noted above. Indeed this sharp adverse movements in terms of trade; and is the only positive policy variable supported by other shocks which may be political or the empirical analysis, and thus confirming the economic in nature. The PMCs have importance of the role of the private sector in experienced shocks of all three varieties during economic growth emphasized in previous the last decade, and short-term performance reports. was influenced by these factors to a great degree (see Figure 2.2). 2.14 However, for several PMCs, the private investment rate has tended to decline in 2.17 Cyclones occur with notable frequency recent years. The decline was sharpest in Fiji and ferocity in the PMCs. During the thirteen and Kiribati and less pronounced in Solomon year period from 1980 to 1992, major cyclones Islands and Western Samoa. No strong trend is hit every one of the islands except Kiribati at detectable in Tonga and Vanuatu. The pattern least once. Fiji, Solomon Islands, Vanuatu and of general decline in private investment rates is, Western Samoa were hit at least four times in of course, consistent with the low growth rate this period. Often, the damage caused by observed among the PMCs over the same cyclones results in negative growth for the period. economy, either in the same year or in the next. The most recent example of this is Western 2.15 The Role of the State. A broad Samoa which experienced negative growth rates conclusion that can be drawn from the above three years in a row during 1990-92 on account discussion concerns the respective roles of of cyclone activity in the years 1990 and 1991. government and the private sector. Experience Much of the damage is caused to exports as of some of the East Asian economies and even shown by the following examples of negative small island economies in the Caribbean and export growth rates in the year of a cyclone: Asian regions have demonstrated how a Fiji (1980): -31 percent; Vanuatu (1985): development partnership between the state and -42 percent; Western Samoa (1990): the private sector can work to produce -25 percent; and Western Samoa (1991): heartening results. Typically, in such a -39 percent. The evidence clearly shows that partnership the state focuses on ensuring cyclones have the capacity to inflict great macroeconomic stability and competitiveness, damage to the productive base of the PMCs and creating a more encouraging regulatory this should be taken into account in any environment for the private sector, providing assessment of the growth experience of the PMCs. S~~~~~~~~~~~ --:3:" :. :,. :. . . . ... . . . . : f £66L 66L 6B6L Z S6L ML~~~~~~~~~~~~........ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. -.A-.:.-:.- ......... .....w.:. ~A I: Z- o- , .:, - . '''. ' ' :--. '-'''':' 1:';''.. ..... ........ ':- I ~~~~~~~~~~.... , . , - .: w-. - ~~~~~~~~~~~~~~~~~~F Z £661 £T861 S9I IflOJ d(E9jU)J leE aij z Ja,drn. Ol 11 Chapter 2 2.18 Terms of trade shocks are another shocks to the economies of Fiji, Western Samoa major concern for the PMCs. Since most PMCs and Solomon Islands during 1983-93 resulting are heavily reliant on a few primary exports, on from changes in the terms of trade and global the one hand, and on imports of food and fuel, demand. The results indicate that terms-of-trade on the other, adverse movements in the prices shocks both positive and negative can be very of these goods can have a major impact on large, are difficult to anticipate, and may linger growth. Volatile terms of trade can have an for several years. Furthermore, the evidence indirect effect on growth also. A pattern of suggests that it has been difficult to coordinate large swings in export prices generates export promotion, import substitution and considerable uncertainty with regard to economic compression policies in response to earnings, which in turn discourages long-term such shocks. The manner in which the PMCs investment and keeps growth lower than it responded to adverse external conditions was would otherwise have been. mainly through increasing recourse to financing from both ODA and private remittances. 2.19 The data show that, on average, terms of trade deteriorated slightly for the PMCs 2.21 Certain policy measures were also during 1980-92 (see Figure 2.3). This is pursued to enhance competitiveness. During the consistent with the observed pattern of low 1985-1993 period, the PMCs responded to average growth. What is more relevant, declining terms of trade by allowing a however, is the high volatility that is shown by depreciation of the real exchange rate and by the data. The coefficient of variation for diversifying exports (see Figure 2.4). In all of changes in terms of trade across all six PMCs is the PMCs, except Tonga and FSM, the real over 5. This compares with coefficients of less exchange rate declined during 1985-1993, as than I for such macroeconomic variables as policymakers struggled to restrain imports and investment, consumption, inflation and aid enhance the competitiveness of exports. In Fiji, flows. The only variables that have similar Tonga and Solomon Islands, there was a volatility in the PMC context are growth rates conscious shift in exports away from low value and export growth rates. This pattern suggests a traditional products towards higher value strong link, working through exports, between non-traditional products (e.g. garments, squash external shocks, terms of trade changes and and tropical hardwoods). This shift in export overall growth. mix led to an improvement in the terms-of-trade for these nations. 2.20 An analysis was carried out on external Flgure 2.3: Plat Uaxh in the ingure 2.4 Real Effective Exdc W Tam of Trad, 1983-1992 Rates (hlces) 19834992 60 130 . . . ............ -20.... ...........j_1 - ::- 40 EEE E - -20 : E . . - 120 -4.0° O .. ' .. .... ... .. .. -60 : -:: . . X .. -10 6... ... 00 oo oo0 o o oo X X - o O oo oo X o X 00 oi 00 00 00 00 00 ON ON oi 00 00 00 00 00 00 00 ON ON O. O_ ON ON ON ON ON ON ON ON ON ON ON ON ON O ON O ON ON ON - - - -…- -~~~~~~~~~~~~~~.... .. ........ - 12 Chapter 2 2.22 The strong links between external B. Pacific Island Trading Conditions conditions and growth, and relatively weak links between investment, public spending and 2.23 The PMCs are very open, or trade- economic output pose special challenges for dependent economies. Trade penetration ratios PMC policymakers. The PMCs remain average close to 80 percent of GDP (see Table vulnerable to external shocks and this 2.3) with the import content of most activities vulnerability continues to have adverse effects also very high, often in excess of 50 percent. on their fiscal balance through trade taxes and Exports have in the past been confined to a on the balance of payments via lower export narrow range of primary commodities and earnings. In most of the PMCs, government earnings from these exports usually equal to expenditure is typically between 40 and 70 only 5-15 percent of imports. Most imports are percent of GDP and well in excess of domestic for essential commodities with machinery, tax and non tax revenue. Fiscal policy is the capital goods and petroleum imports accounting main instrument of macroeconomic for 50 to 60 percent of total imports. Food management, owing to limitations on monetary imports are particularly important in Kiribati, policy in small open economies with relatively Marshall Islands and Vanuatu. Other consumer high levels of external grants and worker goods account for less than a quarter of import remittances. Thus, effective use of fiscal policy requirements. instruments to widen the revenue base and to change the composition of expenditures, can 2.24 Hence, trade is characterized by large contribute significantly not only in cushioning merchandise trade deficits ranging from the effects of external shocks, but also 5 percent of GDP in the Solomon Islands to as promoting growth and development to build a much as 81 percent of GDP in Western Samoa. more resilient economic base. Given that Invisible earnings are important in all these domestic economic conditions are so closely countries: tourism in Fiji, Vanuatu, Tonga, and linked to trade outcomes, how can the PMCs Western Samoa, investment income for best exploit global market opportunities? A Kiribati; and remittances from nationals closer review of changing trade conditions can working abroad in the case of Kiribati, Tonga, help answer that question. Vanuatu, and Western Samoa. Services, Table 2.3 Selected Indicators of External Trade, 1993 ~~~~~~~~~~. .. .. .. - ..... .. . . ..-.... .. . .... .. . -.-...... -... .. i-. . ,., n ,... ..,.. .et . ......t... ,.. . . ....... ;~~~~~~~~~~~~~~~~~~~~~~~. . . . . . . ..: ' > : e:.. -. ::..; .::,;,...::.:. :- :::::. ::.:: -..: :.: .:: .- ...:> .--,-;:. : . ::::::.. :-. . Fiji -653.0 422.0 -14.0 182.0 -3.6 65.3 94.7 71.3 Solomonislands -144 .5 d/ 131.7 -5.2 -43.4 -21.1 112.7 73.9 65.0 Tonga -50.7 12.0 -26.7 -12.3 -11.9 42.9 108.2 128.7 Western Samoa -102.0 d/ 6.5 -81.3 12.8 -44.0 92.4 53.3 86.2 Vanuatu -72.7 22.7 -26.9 3.5 25.0 51.3 n.a. 95.6 Kiribati -27.8 3.0 -77.3 6.3 -37.4 96.0 37.8_el 96.7 el Marshall Islands -75.5 d/ 9.5 -77.3 -4.3 -84.0 99.5 n.a. 96.1 FSM -148.1 25.6 -63.0 16.4 -67.0 89.4 n.a. 101.9 a/ Current account deficit excluding official transfers; b/ Ratio of total merchandise trade to GDP; c/ IMF definition. A reduction refers to a real depreciation; d/ c.i.f.; e/ Refers to 1992 data. Source:: World Bank, Country Economic Memoranda, 1993, IMF Staff Reports and Recent Economic Development Reports, NCDS Statistical Data Base of the South Pacific Nations, and National Reports of the Central Bank or Monetary Authority 13 Chapter 2 Figure 2.5: Composition of PMC Exports: 1982-84 & 1991-93 .,.,- ,,, ,~~~. .. .--......... ... ..,. ... ...... .''' . .. .. .. , . . .. . . . . .. ... .. .. ......... current ...... ..................... 1982 844 ............... 1991- 9982-84 ... ....... 57% 5 -........... Totarveylag Good to Servi rcest: o US$74 m iin Tot aluatue G oods a evcs:uS$137 milor ecnt thereorhe, PMake an pstivse countribution to d the strongitalue -art,ddmnaed product or mnFaci.Tures currkent accout,txcespta nipratr in thoStmohelns,(ail inC F tiji) Betwee 192-4avl ond 1991-93, Miarshislnsgn theor Fedire erated Statsdouth saexpofariuturaltcommh odiisindtoable MicroneIa.th C rrent paccut, deficis are smacili exports fell from28serchnesnt toh1 percent (see (4sercntd fGP i ii reflectingate thet Figusrae 2.5) AMC deadeit ago, rexponds tof imprtaceof oursmearing i tht cunry,maunfacturabes wereisgfimay canodtbuby 1991-b bu ahre veyharge (12n tao84prceante boftDP in 93,vmanufacturedt hgoods vaccune-ddford perodcts the potherPMCs Ind thesectountis aionfooa exports, n aufcue adominatdminlyb Fijihe Thret" woke rhecmpoittnce plafa importsant rolsodsie inohrPC strilalrel hetfcntaviyto tprimaryo financingimportrequirements.l product expotes, alHoughe cosintderablee changed ~ ~ ~ ~ ~ ~ ~ ~ ieriicto has taetpaewihnthi 2.25 Intercnlps,tedansaii xot meix.a Teechangesin thepot expor-tymix Isvlanderadeindicte, thaet:ra atoswl illustrties the PMCsn ablty sito frespondly tod continue to remain.teunfaoroiable primarys ommdt priges bycosue *there have been ma changin ntes bosth incde diesfyingch inrkto. hihevausre-iadded poducts compositionrandodirectioofexports;il andy m anufactureas aondg findin "nircheo emarkyents" the compsition o importshasalsodespiwte has foridble sreateof cosrints catyicaln o choranged andwtha small island states Howver asnoedinth Figur2.6ompostionlastM regional: economic reot niche-typ vulnerability to external factors will activitiesareknowntosh continue to remain, technological progress or. changes in consumer 2.26. Treds.n.xpots. Th.stucureof.reerecescold .ea to.a.apid.isapparanc trade. has.. ben.hngngi.te.at.ea...fnihemrkt. Thu,.elane.n. uc .......... ~ ~ ~ ~ ndstie as.ongter.sorcs .o.emloyen While.. priar comodtis.restllvey.ndroth.astobetratd.it.cuton important, growth over recent years has been.............. .... ......26....ito. o MCImots 18-8 &1919 .... . .. . .. 1982..4.1991-..3 Oth~~~~~~~~~~~~~~~~~~~.............. ~~~ave ~ ~ ~ ~ .....g.... ..&.... ..................~~~~~7 .. . . . . ... . . .. . . . a ~ ~ ~ ~ ~ ~ ~~~~~.......... .. ... ............... Total Goods & Services: US$939 million Total Goods & Services:......US$1790..million 14 Chapter 2 Table 2.4 Destination of Export Trade in Percentage, 1982-84 and 1991-93 (1982-84) * ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. :.:-::. .. .:-. , ::...-:--.:... "' :" ': '-b/No' Zeataw .: . .......- . ... ... '.' .-..:.-- ........: Fiji a/ 11 26 24 6 9 24 (10) (30) (18) (3) (2) (37) Solomon Islands 1 24 3 34 28 11 (0) (26) (3) (33) (14) (24) Tonga 17 5 18 55 2 3 (1) (14) (77) (0) n.a. (8) Western Samoa 23 0 67 0 0 10 (45) (15) (35) (1) (0) (4) Vanuatu 0 50 13 19 6 13 (0) (74) (1) (13) (6) (6) Micronesia cl 18 n.a. n.a. 78 n.a. 4 (28) n.a. n.a. (48) n.a. (24) Kiribati d/ 13 20 1 0 49 17 (45) (40) (1) (6) (0) (8) a/ 1984 and 1991; b/ including the United States and American Samoa c/ 1987 and 1992: d/ 1983 and 1991 Source: World Bank, Country Economic Memoranda, 1993, IMF Staff Reports, NCDS Statistical Data Base of the South Pacific Nations. 2.27 Even within the traditional product from "administrative" and "traditional" ties categories, the PMCs have demonstrated an to more market-based arrangements. The ability to nurture successful new export Solomon Islands is the only PMC industries. This includes garments in Fiji; increasing trade with Europe in non- squash in Tonga; logging in the Solomon traditional products (based on one Islands, veal in Vanuatu, seaweed in Kiribati, successful joint venture with Japan to and sashimi in the Federated States of supply canned Tuna to U.K); and Micronesia. * Intra-regional trade has diminished in 2.28 TedinIprs Copimportance, except for Fiji, where its 2.28 Trends in Imports. Composition of sinfiac ha inceaed imports has also changed over the last decade signficance has mcreased. with the shares of machinery, and beverages 2.30 Vulnerabiity. Despite attempts to and tobacco, and of services increasing diversify the export mix and to build links into significantly, while the share of food, chemicals, mineral fuels, oils and fats declined new csorema es, vulnrailit texternal shocks remains very high. Hence minor for the PMCs as a group (see Figure 2.6). changes in the terms of trade can have major effects on external balances and growth. 2.29 Direction of Trade. The direction of Indicts of vulerabil nclu de: exports has changed significantly in the last Indicators of vulnerability include: decade. (see Table 2.4). For example: * large merchandise trade deficits; * Japan and other Asian countries have * large current account deficits, except in emerged as major export destinations for Fiji; Fiji, Solomon Islands, Tonga, Vanuatu and * high trade penetration ratios, ranging from Federated States of Micronesia; 50 to 100 percent of GDP in 1991-93 (see * In terms of merchandise trade flows, there Table 2.3); is considerably less reliance on Europe, as Pacific Island country trade shifts awa5high export concentration ratios (see Table Pacifc Islnd contry rade hiftsaway2.5) where the average three-product export 15 Chapter 2 concentration ratio for the PMCs is 80 sugar, coconut, cocoa, fish products, garments, percent, compared to 64 percent for Sub- and service sectors including tourism. Benefits Saharan Africa and 26 percent for are most likely to favor countries with open Australia. This further underscores the economies and those that have the capacity to continuing vulnerability of PMCs to global adjust and take advantage of new market developments; opportunities likely to arise from the projected real GDP growth rates of around 2.7 percent per year for the G-7 economies over the Table 2.5 Export Concentration and Trade Taxes medium term. Faster growth means more ~~Tht~e ~~sdus~~t international trade-projected to grow at around 6 percent per year. Two other favorable factors are the outlook for low real interest rates and inflation as well as the resurgence of higher ~. . - 26 private capital inflows. More importantly, the ..:Fijj::>K.7.7. 70 .. 26~ :30 Kiribati 99; 0 770! ; 78900 0 0 0 22 24 i; 0 Uruguay Round Agreement is expected to t Marshall::00000 - 098 i t:iEt i 97 i ! 0 25 27: i ! E accelerate world trade and thereby help expand 0;jit;;0$03;Islands} t:$;} Sf 00;: :ES;000$;;; E :t developing country production and exports. gSolomon; i: ggg:400471 76 50 :.E 65 Islands 2.32 The global trading environment is Tonga..: .55 72 54 52: changing in several ways that will be of Vanua:tq::u t;i::: 93 75: :::0:: 60 ; 53: ;0; i importance to the PMCs. Some likely effects of W '-YSamoa ; 634 67G4 44; 5891. 7 changes in the global economic environment FSMI I 93 94 9 : Suib :Sah t ti Ti:j:;79 3f:64 I: : are: I: African Australia - 26 i; 15 2 with global trade liberalization, marked by the NewIZealand - 36:E 5 :2 conclusion of the GATT Uruguay Round Bfarbados 0;;0 ;0-; i0; - : 0 i0 ;00 17 1i1 Accord, it is estimated that overall growth and Ma:dagascar:: < -:g -: : 17 11: trade will increase dramatically; Source: Bank Staff Estimates. t a more competitive trade environment is likely *the importance of trade taxes to total to emerge; revenue varies considerably among the PMCs, accounting for a large share in the * trends toward regional integration and Solomon Islands, Tonga, Vanuatu and emergence of regional growth centers in East Western Samoa; a moderate share in Fiji, Asia, Europe, and North America; and Kiribati and Marshall Islands; and a small share in the Federated states of Micronesia * moves towards free trade in OECD states, (see Table 2.5). Hence domestic revenue such as Australia and New Zealand, to will also be heavily affected by external overcome sluggish growth and enhance performance. external performance. C. The Changing Global Economic Scene 2.33 The economic fortunes of the PMCs 2.31 The External Trading Environment, are closely linked to developments in the world 2.31The far-Eachingchans arising Eironme. economy. Viewed in its broadest terms, PMC The far-reaching changes arising from the trade encompasses the exchange of conclusion of the Uruguay Round of the GATT merchandise, aid flows, migration and tourism. Agreement, NAFTA and trade deregulation in And with their small domestic markets, trade is Australia and New Zealand will significantly by definition a major source of economic affect the external trading environment of the growth and development. However, despite PMCs. These changes will affect economic remoteness, wide geographic span and sparse performance in the PMCs owing to their populations, the PMCs have astutely capitalized on global opportunities. The changes in the 16 Chapter 2 composition and direction of PMC trade is compensatory financing in response to a secular evidence of the region's ability to take decline in international trading conditions. In advantage of new global market opportunities. addition, as a founding signatory to the Commonwealth Sugar Agreement, Fiji is 2.34 But a high degree of trade dependence provided a quota of 200,000 tons of sugar for implies that the PMCs are vulnerable to changes export to the European Union. The European in world market conditions. They are "price- Union and the United States have also granted takers" on world markets, and hence even Fiji a quota for garment exports. minor changes in global trading conditions can have significant effects on domestic economic 2.37 Within the Southern Pacific, PMCs are performance. The vagaries of nature and shifts provided duty-free access to the markets of in aid policy compound the vulnerability. Australia and New Zealand (see Table 2.6). Managing vulnerability while taking advantage Preferential market access into Australia and of global market opportunities is one of the key New Zealand has been particularly important to challenges for Pacific Island policymakers. the development of garment exports and One of the ways in which vulnerability can be footwear from Fiji, and automotive wiring managed is to increase the breadth and depth of harnesses from Western Samoa. As Australia the trade and investment linkages between the and New Zealand reduce trade protection, Pacific Island states and the global markets. competition will intensify in these markets. Opportunities to improve trade performance abound. The challenge for the PMCs will be to 2.38 Since 1989, Australia and New Zealand ensure that these opportunities are identified and have undertaken coordinated, wide-ranging exploited in a truly competitive fashion. trade liberalization programs. Under these programs, a free trade zone has been D. The Changing Trade Enviromnent established between Australia and New Zealand and specific timetables were set for the phase- Preferential Arrangements down of tariffs in garments, footwear and motor vehicles (see Table 2.7). Textiles trade 2.35 The PMCs have benefited from between Australia and New Zealand was preferential trade agreements which convey liberalized under the Closer Economic Relations duty-free or low-duty rate access for their (CER) Treaty of 1989 and New Zealand exports into the markets of the major industrial abolished quotas on textile imports in 1992. countries. Trade liberalization while creating Since the CER treaty, trade has increased significant new opportunities is contributing, significantly between Australian and New however, to the erosion of these benefits. Zealand. In the textiles area, for example, New Zealand's share of the Australian market 2.36 All of the PMCs receive "generalized increased from 4 to 11 percent. As import system of preference" (GSP) treatment which tariffs in Australia and New Zealand decline, accords them the lowest duties on offer for the tariff preference that Fiji's garment and products exported to OECD nations. FSM and footwear exporters enjoy will fall by an average the Marshall Islands have special trade access of 33 percent between 1994-2000. agreements with the US granting them, for example, duty-free access for tuna canned in 2.39 Fiji's export-oriented garment industry water up to a limit of 10 percent of total US has been built around low-value-added cut, demand. Fiji, Kiribati, Solomon Islands, make and trim (CMT) assembly operations. It Tonga, Tuvalu, Papua New Guinea, Vanuatu is in these types of operations that low-wage and Solomon Islands are signatories to the Asian producers, many of whom have access to Lome convention which, in addition to nationally produced raw materials, are likely to development assistance, provides them with have a comparative cost advantage as Australian duty-free access for most products to European and New Zealand tariffs fall. Fiji and other Union markets. Under the Lome Agreement, PMC garment producers can maintain their the aforementioned PMCs are also eligible for foothold in the Southern Pacific markets by 17 Chapter 2 Table 2.6 SPARTECA and Trade Expansion: PMC Trade with Australia and New Zealand (1987-1993) 5, S , , ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. .... . . ..... ... .. .. ..,,., .. i i% ~~~~~ £eas^- tXhii't S7 3t.'s| F;ji t:0--:000 40,161: ;::62,901i: 96,229 ii93,745 89,07:0i: 114,998 158,151 294 0 :0j:i; ;; i0(19;,488):tt t(38t,009) (83,103): (i:g1 14,517): (72:,888): (53,631> (42,417) (1 18) |Solomon Islands: ; 1j,908 02.737 : 5,350 0 6,194 : 1,533 ;:2,508 2,628 :;38: ;00l0;:00: :;;gi ::;i(928) (6; -33);40: (609) j .i (856): :(939) (i1257) (792) (-15) :Tongatg 000 2,2610 i 2;,l191 00i 3,164::: 2,339 1,t7080 1 ,979 1 ,879: -17 0: 70:0; 0 0 ;(4.,241)j (3,323) (2,699) ;0 (3,043) (2: ;,259) (1.625)f (1,2108) (-25) Western Samoa 2.323 ; 3,189 1,485. 1,834 3542 34,449 69,667 2,899 *ig :000000 . ; ;i(9,l810) (000;7,431) :(9,425)0;g (6,347): (8,064) (6,409) 0 (7,414) (-25) Yanuatu ; g;; :68300000jl 0920 7i;1,47700;:0 2,413: ;:01,1930 1,474 1,728 153 : :;;;;; :.0(979) li: : (68); :(90)E::00 (61) :(52) iD (120) (107) ( t40) Marshall Islands 0 0 0 0; 0 : 0 45 .127 : 1 n.a. f : 0 00 ; (0) (0): 0 (0>: (0) : ; (5) (30) 0 (40) : (n.a.) FFSM; 0: 0:l:o; 0; :t0: 0 i: 15 35 :18: n.a. * E.; - t: : 0:009Et:i0: ;0)E i 0:0) - : 0:: () : (6)8 (0 :(0): (n.a.) f TOTAL ; 47,336 000;g71,938 107,705 0 1706,525 097,1006: 155,570 234,072 0 394 i:;:0:5:0 E :f;i0(35,546) :(49,464) (95,926): (1:24,824) (18113:19) (218,642) (51,988) (46) Source: Government of Australia, Department of Foreign Affairs and Trade; Government of New Zealand, Department of Statistics. diversifying production into "specialty requirement2. Such factors tend to lock-in a garments"' (e.g. diving wear), by promoting the high-cost structure in the industry, and reduce region's ability to provide small lots and "just- incentives to modernize and become globally in-time" service to Australia and New Zealand, competitive, as will be necessary when garment and by upgrading design, assembly and tariffs in Australia and New Zealand decline. packaging technology to be able to provide a more complete range of services. 2.41 As shown in Table 2.4, the USA has become an important export market for Fiji 2.40 Preferential trade agreements, such as (garments and sugar) and for Western Samoa SPARTECA, provide PMC manufacturers with and FSM, from which fresh and canned fish are an opportunity to enter new markets under the the most important exports. The USA is also a shelter of another nation's trade protection. But major market for services (principally tourism) there are also serious, hidden costs associated in Fiji, FSM, and Marshall Islands. The export with languishing under another country's trade of canned fish to the USA could suffer from protection. For example, to meet the 50 trade diversion effects associated with NAFTA, percent local content requirements, regional but only if Mexico significantly expands garment industries have sourced capital goods canning capacity and reduces its production and raw materials in Australia and New Zealand costs. rather than from more competitive Asian markets. They have also under-invested in new technology to maintain a high labor cost share 2 New Zealand has cut the rate 45 percent and so as to meet the 50 percent local content some relaxation of SPARTECA rules by Australia is considered to have an equivalent effect. 18 Chapter 2 Table 2.7 Schedule of Tariff Reductions in Australia and New Zealand (In percent) High Rates 15 10 5 Medium Rates 10 8 5 Low Rates 8 8 S S.e.K. . ......... a*& A at. 99... Apparel and finished textiles general 43 37 25 LIJC 38 32 20 Conaon sheeting and woven fabrics general 31 25 15 LDC 26 17 10 Other fabrics general 27 23 15 LDC 22 18 10 Footwear general 33 27 15 LD)C 28 22 10 Autoniotives general 30 25 -15 ~~~~~~~~~~~~~~~~~........... . . .. ..,.... .................. ...... . .. .. .t;~~~~~~~t>.& ~~~~~~~~~~~NR. ~~~~~~~~~tA..t............ Higih Rates 25.5 22.0 14 23.5 20.0 14 Medium Rates 18.0 16.0 12 15.0 13.0 10.0 Ldow Rates 12.0 10.0 8.0 9.0 8.0 6.0- Bottom Rates 5.0 5.0 5.0 ,~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~: ., -.... ... .. .... . ...... ........ ..... ... . . . .. .. .. ........ . ....................... . . .............. .. .. Motoreladrnse Vehiclesgeeral35. 30.0 25. Clothing 40.0~~~LC 3 35. 30. Source: Government of Australia, Trade and Investment Promotion Service, "Australia's Trade Arrangements for Developing Countries", 1994. New Zealand Treasury, Budget, 1992 and I. Duncan et. al., "Dismantling the Bafflers: Tariff Policy in New Zealand" (Wellington: NZIER, 1992). Significant changes in fisheries trade between creation effects; in other words, higher incomes Mexico, the USA and Canada are not generated in North America will create more anticipated. Unlike the island economies in the demand for PMC goods and services, offsetting Caribbean that are highly dependent on the potential fall in demand resulting from preferential access for manufactured goods to increased Mexican exports to the US market. the USA, the main PMC export to the US market, fresh fish, enters at already low tariff 2.42 Implications of GATT. Of the PMCs, rates. For the PMCs, the trade diversion effects only Fiji is a full contracting party to GATT, from NAFTA will tend to be offset by the trade having joined in November 1993. PNG. 19 Chapter 2 Solomon Islands, Kiribati, and Tonga are de intervention prices were 2.5 times higher than facto members. Fiji participated in the world market prices. Fiji also has a quota of Uruguay Round Negotiations and has applied 0.9percent of US sugar imports, or 11,000 for membership in the World Trade tonnes in 1994, which was priced (in mid-1994) Organization (WTO). In its Uruguay Round at 90 percent above world market levels. The Submission, Fiji has agreed to reduce and bind Government has also entered into a contract to tariffs for 52 categories of goods, and has supply Malaysia with 1 10,000 tonnes of refined scheduled reductions of tariffs for milk and sugar, at approximately world market prices. rice. Although the other PMCs did not participate directly in the Uruguay Round 2.46 The high sugar prices that Fiji receives negotiations, they will be affected by the as a result of trade preferences appear to have outcomes. encouraged the industry to lose competitiveness and become a high-cost source of supply. 2.43 Practically all of the PMCs present and Production has shifted onto marginal lands; potential exports will suffer from some measure yields have stagnated; factories operate well of preference erosion as a result of GATT- below capacity; cane-burning is commonly agreed tariff reduction. For certain African practised; and milling yield remains far below nations, the loss of trade preferences could that achieved by neighboring producers3. The cause a sharp fall in exports. But how world's most efficient producers, such as important will this actually be to short and Australia, can profitably export sugar at world medium-term trade performance in the Pacific market prices, which have ranged from US 9- Island states? The answer to this is probably 12 cents/lb in recent years. The Fijian sugar very little in the short run, but potentially much sector received US 20 cents/lb in 1992. more so over 5 to 10 years unless PMC economies adjust to a more competitive global 2.47 Under GATT, the USA and the EU marketplace. have agreed to convert sugar import quotas to tariffs. The US has established a tariff of 17 2.44 The great majority of tropical cents per pound which will be reduced by 15 commodities that the PMC nations export will percent (to 14.45 cents per pound) by the Year be largely unaffected by preference erosion, 2000. Similarly, the EU has agreed to replace because tariffs are very low to begin with and its variable import levy for white sugar by a because preference holders dominate these fixed tariff rate and reduce this by 3.3 percent markets. The effects could be greater still for per year until it reaches the 20 percent total temperate products, where tariff barriers are reduction required. The EU has also agreed that quite high and where low-cost sources of supply subsidized sugar exports from EU producers already hold a significant share of the market. will be reduced by 340,000 tons from the Refined sugar and canned-tuna for export to the average quantity of 1,277,000 tons in 1986-90. European market are cases where trade preferences are high and could potentially be eroded by tariff 2.48 Even after GATT, internal sugar prices reduction, although the EU has not included in the EU and the USA are forecast to remain 4 reforms that would significantly erode PMC trade well in excess of world market price levels preferences in its Uruguay Round offers. The high tariffs levied on sugar imports into the US and EU will keep internal prices high. In 2.45 Sugar. Fiji exports approximately addition, Fiji may gain a portion of the 390,000 tonnes of sugar of which about 74 approximately 400,000 tons which are imported percent of the sales value is obtained at preferential prices, at almost double market prices. The most significant of these markets is 3 This is discussed in more detail in M. Singh, the EU which, under the Sugar Protocol to the "Sugar: the Challenge", The Pacific Island's Lome Convention, agrees to purchase up to Review, July 1994, and in D.Mitchell, "Fiji 200,000 tonnes of sugar per annum from Fiji at Sugar Sector Study", World Bank, 1994. EU support prices. As of July 1994, EU 4 See D. Mitchell, "Fiji Sugar Sector Study", World Bank, August 1994. 20 Chapter 2 by Portugal now that it is has become a member Philippines and the USA. Even with tariff of the European Union. The EU has also protection in the EU market, the PMC tuna argued that the Lome Sugar Protocol supersedes canning operations have recorded a dismal GATT commitments. financial performance. Asian exporters have lobbied the EU to significantly reduce its MFN 2.49 Sugar is one of the world's most tariffs. Should this occur, PMC canning protected agricultural commodities. As such, operations would have to adjust to a 20 to 25 this makes it vulnerable to various "liberalizing percent fall in export prices. initiatives". In Europe, the combination of interests that gave rise to the agreement to 2.52 There has also been concern that the provide Fiji, and other ACP states, with reduction in OECD agricultural subsidies could preferential market access no longer exists. The lead to higher global food prices. If temperate Commonwealth Sugar Agreement was entered product prices of foodstuffs rise by 5 to 10 into at a time when Europe was a significant percent as a result of GATT reforms, this sugar importer, when British industry would increase PMC import requirements by (principally Tate & Lyle) owned large between 2 and 4 percent but at the same time plantation holdings and was concerned with there might be some stimulus for domestic food safeguarding its access to European consumers. production. This would require, on average, an The situation is vastly different now. Despite additional 2 percent of national income to meet the Lome-imports, Europe is now the world's higher food import costs. Existing evidence largest sugar exporter. Britain's sugar does not point to a significant rise in global plantation holdings are no longer of any food prices as a result of GATT. At most, a importance. And finally, implementation of the short-term slowdown in the long-term decline in sugar protocol has become very expensive, global food prices is outweighed. The GATT costing the European Union approximately recognized that least developed nations, and ECU 600 million in 1993. Even amongst other developing nation food importers may be ACP states, this level of fiscal support is adversely affected by these provisions. A considered excessive compared with other special decision of the Uruguay Accord defined forms of Lome assistance. objectives related to food aid, food grants and aid for agricultural development. In addition, 2.50 Moreover, the current Lome the possibility of World Bank and IMF Convention will expire in February 2000. providing short-term financing for commercial While some form of preferential arrangement imports was also raised. may replace the existing arrangement, current benefits are likely to be reviewed. This points 2.53 There will be both positive and to the need for Fiji to become more efficient negative effects on the PMCs as a result of the and competitive in sugar production to build up GATT accord. The GATT will expand global resilience to any possible preference erosion trade and with it demand for PMC products. At from such a review. the same time, tariff preferences will erode for tree crop products and may, in the future, erode 2.51 Fisheries. The tariff preference for sugar and canned tuna. granted to PMC canned tuna in the EU markets is 24 percent over the MFN rates. The EU has 2.54 Extension of Accord Into Services declined to reduce its variable levy for canned and Intellectual Property Rights. The tuna, although it has agreed to an 18 percent Uruguay Accord has also extended the principle aggregate reduction in import tariffs for of national and MFN (most favored nation) processed fish products. The cannery operations treatment to trade related services. The in Fiji, Solomon Islands and in PNG (in 1995) framework agreement services seeks out the rely primarily on the EU market and, without principle of establishing clear, transparent and preferential tariffs, would find it difficult to objective criteria for licensing service compete with the much larger canning providers, eliminating restrictive barriers to operations (partly state-owned) in Thailand, the cross border trade in services and eliminating 21 Chapter 2 restraint on temporary employment of skilled 2.57 That the "net" effects of the GATT expatriates. Similarly trade and intellectual Uruguay Accord are predicted to be relatively property rights were also included in the GATT modest is a common finding. The results of a discipline. comprehensive attempt to model the effects of GATT on the trade performance of Caribbean 2.55 Extending GATT discipline into these states were examined. For these nations, the net areas is essentially designed to reduce trade effects of the GATT Uruguay Round also tend friction and uncertainty arising from the varying to be within 0 to 2 percent of export earnings. national treatment of these issues. The PMCs have much to gain, and very little to lose. In the 2.58 While the forecast quantitative effects PMCs, services, account for more than half of of GATT are small, this does not imply that the all foreign exchange earnings and encompass a global economy is not changing in a wide range of activities, including tourism, fundamental fashion. Trade reform on a global offshore banking, merchant marine services, scale triggers further reforms in initial trading and overseas employment by temporary nations. The trade liberalization efforts in migrants. The PMCs can gain to the extent that Australia and New Zealand, and the emergence addressing barriers to foreign direct investment of regional free-trade zones, are signs of further in services and safeguarding intellectual moves to a more competitive international property rights will boost investor confidence. economy. This is likely to increase investment flows and also ease access for skilled PMC citizens to 2.59 The PMCs will need to adjust to the developed country markets5. changing global environment. There will be short-term adjustment costs, but against this the 2.56 Given the year-to-year volatility in prospects for significant long-term gains. PMC terms-of-trade, a 1 to 2 percent shift in export earnings due to GATT might well be 2.60 A more important consideration, imperceptible. Furthermore, narrow markets however, is that competitiveness has become imply that PMC export prices can differ the single most important determinant of a significantly, both in magnitude and direction- nation's ability to capitalize on a growing global of-change, from global market prices6. trading environment. How to exploit emerging Accordingly, the degree to which GATT- opportunities in a changing and increasingly induced effects will actually impact upon the competitive global marketplace is a key issue PMCs is closely linked to the efficiency of facing Pacific Island policymakers. price-transmission between global and national markets. E. Recommendations 2.61 A three pronged strategy is required to 5 Australia has been one of the main recipients of enhance competitiveness in the PMCs. This will PMC migrants. In recent years restrictions on net require: immigration have been tightened. A loss of access to Australian labor markets would have * the maintenance of a macroeconomic serious repercussions for those PMC economies environment that meets the twin goals of price (Tonga, Western Samoa, Kiribati, Fiji) which are stability and competitive pricing of PMC highly dependent on remittances and overseas resources; employment. 6 The difference between export prices in the a reduction in the anti-export bias of trade Solomon Islands and the world market were policy, and tax regimes; and analyzed. The results illustrate the relatively reducing barriers to domestic and foreign "weak" transmission of global prices to PMC markets. This can be explained by a combination direct mvestment. of factors including narrow markets, non- competitive trading systems, "small-lot" pricing, 2.62 An Enabling Macroeconomic and year-to-year fluctuation in PMC export Environment. A low rate of inflation and the quality, relative to world market norms. 22 Chapter 2 pricing of capital, labor and land so as to be doing business in the PMCs and discourage internationally competitive are two of the main exports. In terms of providing protection to macroeconomic challenges. With fragile domestic producers, high import duties are financial markets, even small domestically counter-productive. Remoteness from major financed fiscal deficits can quickly spark markets already provides the PMCs with a high inflationary upsurges, as has occurred with degree of natural trade protection. some frequency in Solomon Islands, Western Samoa and Vanuatu during 1990-94. High rates 2.66 PMC Governments have consciously of inflation will tend to discourage private attempted to reduce the coverage of import investment and private saving, and point to the licensing and to lower tariffs in order to reduce need for prudent fiscal management especially enterprise costs. This is reflected in a decline in during periods of volatile external the effective average import duty rates between developments. Towards this end, exchange rate, 1984-1993. While heading in the right public sector wage, and fiscal policies are the direction, effective average import duty rates main instruments that can be used to ensure that are still in the 10 to 40 percent range, domestic resources are competitively priced in significantly higher than in Australia or New global markets. If domestic resources are Zealand, and on the high end of the range overvalued, then domestic investors will be found in other small island economies. encouraged to shift their capital abroad while overseas investors will be reluctant to make new 2.67 High import duties for final goods, commitments. combined with generally low duty rates for raw materials, can result in very high effective rates 2.63 The new portfolio of export oriented of protection. These range from 7 percent in industries in the PMCs-tourism, garments, the low-tariff Marshall Islands to an estimated high value agricultural commodities, niche 63 percent in Tonga, with most values clustered market fisheries products-tend to be highly around the 30 to 40 percent range. While responsive to improved price prospects, in indicative ERPs are not as high in the Pacific contrast to the lower short-run response in the Island States as in some Caribbean nations, they traditional exports (e.g. tree crops). This are still high enough to discourage exports. And underscores the need to develop and sustain a while high tariffs convey a measure of strategy of enhancing macroeconomic protection to domestic producers, opportunities competitiveness as an integral part of any effort for import substitution are quickly exhausted to improve trade and global market integration. because of small populations and low incomes. A progressive reduction of import duties over 2.64 Reducing Anti-Export Bias. Several the medium term would lower enterprise costs of the PMCs rely heavily on trade taxes to and reduce the anti-export bias of PMC trade finance the recurrent costs of Government. regimes. However, lowering tariff rates would, Solomon Islands, Tonga, Western Samoa and by necessity, need to be accompanied by Vanuatu derive more than half of their domestic measures to develop new domestic revenue revenues from trade taxes. Fiji, Kiribati and sources such as a value added tax or a Marshall Islands derive between a quarter and a consumption tax. This highlights the need for third of their domestic revenues from trade careful coordination of resource mobilization taxes. In half of the cases, trade taxes have and trade reform measures. become a more important source of domestic revenue over the decade 1983-1993. The PMCs 2.68 Reducing Barriers. Competitiveness are considerably more reliant on trade taxes for can be further enhanced by lowering the cost of Government revenue than are the Northern doing business through reducing barriers to Pacific nations or other small-island countries private investments, both domestic and foreign. such as Barbados. Although private entrepreneurship is still in its infancy in the PMCs, recent examples have 2.65 While providing a steady stream of shown that it can contribute significantly to revenue, high import duties raise the cost of growth and employment provided it is 23 Chapter 2 competitive. Moreover, a healthy domestic practised in some PMCs and signals wavering private sector will be the key to attracting government support for foreign investment as a foreign investment via joint ventures. In whole. Application procedures for expatriate addition to capital, foreign investment brings work permits tend to be both time-consuming with it the technology and market access needed and costly. to penetrate new markets. GATT, the emergence of major regional trading blocs, and 2.72 Establishing up-to-date foreign direct the opening-up of protected markets in the investment legislation, streamlining the FDI Northern Pacific, signal growing investment approval process, clarifying competitiveness in the international environment property rights and relaxing regulatory barriers for both foreign direct investment and trade. on foreign land use, and easing requirements For the PMCs to develop domestic private related to the hiring of expatriate workers are investments and attract foreign direct some of the measures that the PMC states could investment and expand trade, efforts will be adopt to make the domestic economic required to: environment more conducive to inward investment. * examine barriers to domestic and foreign investment; 2.73 Rationalizing Fiscal Incentives. To • examine the framework for "niche market offset adverse investment regulations and a agreemente and the ability to assess costs perceived lack of competitiveness, PMC genefitsm and risks and Governments offer a wide range of fiscal benefits, and risks; and incentives to lure private investors. The * strengthen trade and investment links with different foreign direct investment incentives rapidly growing Asian economies. are listed in Table 2.9. In all PMCs, there is a lack of automaticity and transparency in the 2.69 Foreign Direct Investment Require- granting of investment incentives. In general, ments. Investmnent approval mechanisms, the investment incentives that are granted are ments~~. Inetmn aprvlmehnss distortionary, erode the tax base, and encourage access to land, and restrictions on the hiring of trent-seeking behavior. There is little evidence expatriate workers are three of the most often frethermore thatisuchinenis actuallyvattrct cited impediments to foreign direct investment furthermore, that such incentives actually attract in the South Pacific (see Table 2.8). Many of foreign investment. And in some instances, the the PMCs do not have up-to-date foreign direct incentives are actually a form of disguised investment legislation. Investment applications subsidy to a small category of enterprises that tend to be time-consuming and require generate little domestic value-added. A more clearance from several layers of government appropriate strategy for PMC governments bureaucracy including, in some instances, the would be to move away from wide-ranging senior most ranks of Government. Once an foreign investment incentives, and concentrate senio mos rans ofGovenmen. One an instead on improving the overall domestic investment is approved, lengthy deliberations are often required to obtain a suitable enterprise environment. investment site. 2.74 Strengthening Trade And Investment 2.70 With the exception of Fiji where about Links With APEC. Promoting trade, aid and 10 percent of the land is freehold, land cannot investment links with all APEC countries be purchased by foreign investors. In several including the rapidly growing Asian economies PMCs, property rights in land are poorly provides a means of diversifying market ties defined while in others land lease periods are and finding new sources of growth. PMCs have insufficient for long-gestating investment certain resources that are in short supply most projects. notably calm, quiet island locations, close to a third of the world's total fish supply. Close 2.71 All PMCs limit issuance of expatriate cooperation through trade and investment work permits to selected skill categories. characterizes the strategy of integrated Asia- Periodic revocation of stay permits is still region development that has led to the 24 Chapter 2 emergence of multi-country growth-triangles in 2.77 Perceptions may not always match East Asia7, while links with some APEC reality. Even so, adverse perceptions countries are well developed. Sparking the discourage investors from expanding opera- interest of Asian entrepreneurs to invest in areas tions in the region, and underscore the in which they already have technology, market importance of improving the overall business links and expertise is an important challenge for environment. Measures to strengthen economic the PMCs leaders. infrastructure, bolster human resource development, establish stable regulatory 2.75 Japan is the single largest Asian regimes, protect law-and-order, and improve investor in the PMCs. Between 1981 and 1992, shipping and aviation links between major there were 90 instances of Japanese foreign markets and the PMCs are a high priority. investments in Fiji, 28 in Vanuatu, 27 in the Such measures will improve not only the PMCs Marshall Islands, 10 in Western Samoa, and 6 ability to attract inward investment, but also to each in the Cook Islands and Solomon Islands. mobilize effectively and harness local private The total amount invested was about US$350 initiative. million of which 43 percent was in Fiji, 27 percent in Vanuatu and 30 percent divided 2.78 Improving the private sector investment among the other countries. While Japanese FDI environment is necessary to stimulate trade- has been the largest single source of foreign expanding private initiatives, but it is not investment into the Pacific Island region and sufficient to guarantee that this investment will has assumed a prominent position in the local result in strong sustained growth. As noted fisheries industry and tourism, it has been very above, the PMCs in the 1980s have been small (less than one percent of outward plagued by weak links between investment and investment) in the overall scheme of Japanese growth. One of the keys to improving the overseas investment. effectiveness of trade-expanding investment is to ensure that clear and coherent strategies are 2.76 While improved flows of information adopted in support of those sectors with the and political contact are vital to stimulating most productive potential namely tourism, investor interest, it is equally important that an fisheries and forestry. The challenge is to define investment enviromnent is moulded that is appropriate strategies for increasing the PMCs' conducive to sustained growth and capacity and competitiveness in providing development. recreational services, fish and forestry products while ensuring that the resource-base, from which these goods and services are drawn, is sensibly managed for present and future generations. 7 See T. Nagasaka, "Globalization of Japanese Corporations and Their Changing Role in Asia- Pacific Development" in I. Yamazawa and F. Lo (eds), Evolution of Asia-Pacific Economies: International Trade and Direct Investment, Asian And Pacific Development Centre, 1993, and World Bank, East Asian Leadership in Liberalization, 1994 for a discussion of the close links between Asian FDI and trade, and the emergence of multi-country growth centers. 25 Chapter 2 Table 2.8 Foreign Direct Investment Regime Approval Mechanism Access to Land Expatriate Workers Fi9i Fiji Trade and Investment Board Limited freehold land Foreign investors are acts as a one-stop shop for all available. Land must be leased not expected to employ necessary approvals from native landowners or the expatriates when for new projects. Native Land Trust Board. suitably trained local employees are available. Delays are experienced in obtaining work permits for short-term technicians. Solomon Approval needed from Foreign Registered land may be Expatriates permitted Islands Investment Board (FIB) on advice leased; land registration is only if trained nationals (if Foreign. Investment Division of limited to 12 percent of the are unavailable. Ministry of Commerce and nations total land and land Periodic checks and Primary Industries. Approvals of conflicts arise. withdrawal of stay other Ministries are arranged by permits used to enforce the: FIB, and approvals tend to this policy. require about one month. Tonga Proposals reviewed by Standing Land may only be leased by No formal restrictions, Advisory Committee on Industria foreigners. although Government Licensing of Ministry of Labor, prefers the hiring of Commerce and Industries. . national workers. Western Proposals must be submitted to the Land may be leased. Limited Expatriate permits Samoa Department of Trade, Commerce freehold land is also available. granted only if skills and Industry, reviewed by the are unavailable locally. Enterprises Incentives. Board and Permits are reviewed approved by Cabinet. every 6 months. Vantatu Ministry of Finance approval is Land may be leased for up to Permits granted only if requiredof new ivestors.75 years. Government will there are no qualified required. of new investors. assist in land negotiations. national employees. Undeveloped land must be Periodic checks used to improved within.5 years. ensure that overseas workers are complying with permits. Kiribati Approval of the Freign. Investment 0CKiribatommission is requiredi. Projects Land nmay not be owned by Expatriates allowed aboveUS$15,000requre Cainetforeigners. where qualified national 0 0 t approval. .employees are unavailable. Marshall Cabinet must a prove each foreign 50 year land leases are Expatriates allowed Islands investment appliation. possible, although limited land only where qualified registration, multiple owners national employees are and land rights based on usage unavailable. Permits predominate. for semi-skilled expatriates are limited. Federated Foreign Investment Permits are Land may only be leased and, Expatriates account for Stites :o Issued by the Department of in two states, the maximum a fifth of the labor force Micronesia ::Resources and Development with length of leasehold is 25 and permits are readily the concurrence of dte State years. available. Authorities. Source: Price Waterhouse, Review of the Foreign Investment Climate in South Pacific Forum Countries, South Pacific Forum, Suva, 1994. World Bank, Country Economic Memoranda, 1993, IMF Staff Reports and Recent Economic Development Reports. 26 Chapter 2 Table 2.9 Foreign Direct Investment Incentives FiJi i) Tax Free Zone/Tax Free Factory scheme under which investors have a 13 year corporate tax holiday, import and excise duty exemptions for capital goods and raw materials, and exemption on excise duty for products manufactured within the zone. ii) Tourism investment allowance and 55 percent accelerated depreciation allowance; iii) mining promotion measures providing tax exemption of income, expenditure deduction and accelerated depreciation; and iv) loss carry forward allowances. Solomon Islands Solomon Islands Investment Board may structure an individual incentives package for a foreign investor which may include: i) up to 10 years tax holiday; ii) up to 15 years exemption from withholding tax; iii) up to 10 years exemption on withholding tax for non- residents; iv) loss carry forward; v) accelerated capital write off for tourism projects; vi) double tax-deduction for training; vii) 150 percent deduction for inter-provincial transport of raw materials and export promotion expenditures. Tonga Incentive packages are structured for each investment and may include: i) income tax holiday of 5 years, and a possible 5 year extension; ii) additional tax holidays granted for expansion; iii) assets may be depreciated after the tax holiday; iv) capital goods may be imported duty-free for two years; v) raw materials for export industries are exempt from customs duties; vi) a 50 percent concessional rate of port and service tax is provided; vii) time-bound protection from competition; viii) industrial estate space provided; ix) priority access to phone and water connections. Western Samoa Incentives Governed by Incentive Legislation, Enterprise Incentives and Export Promotion Act of 1992/93 include: i) tax and dividend-tax holiday up to 5 years; ii) import duty exemption for capital goods and raw materials of 5 years; iii) export enterprises are eligible for a 15 year tax holiday, relief on all customs duties, and a subsequent tax rate of 25 percent on corporate income; iv) an export finance facility provides pre- and post- shipment credit at concessionary rates; v) industrial free zone site space with duty-free trade. Kiribati Case-by-case incentives include: i) 10 percent preferential tax rate for five years for pioneering firms; ii) accelerated depreciation allowance and three year loss carry-forward; iii) loan interest deduction; iv) first-time import duty exemptions for capital goods; v) government equity investment or joint-venturing; vi) public infrastructure investment undertaken to assist specific projects. Vanuatu Incentives are provided on a project-by-project basis. Tax haven status of Vanuatu allows freedom from corporate tax, income tax, estate duties, withholding tax, sales tax, and non-capital gains tax. Total or partial exemption from import duties for capital goods and raw materials may be offered to investors in fisheries or tourism. Marshall Islands Cabinet may provide tailor-made investment incentives on each project. Standard incentives include an income tax exemption offered for up to 5 years for firms in priority sectors and duty-free imports offered to export-oriented firms. Federated States of Cabinet may provide tailor-made investment incentives which have included exemption Micronesia from gross revenue tax and custom's duties. US firms may obtain grants for preparing feasibility studies, special loans from the Small Business Administration, and Economic Development Administration grants for expanding facilities that promote commercial development. Source: Price Waterhouse, Review of the Foreign Investment Climate in South Pacific Forum Countries, South Pacific Forum, Suva, 1994. World Bank, Country Economic Memoranda, 1993, IMF Staff. Recent Economic Developments and Reports. 27 Chapter 3 3. TOURISM Overview: Tourism offers considerable potential in terms of output and employment growth. There is now an increasing recognition in the PMCs of the economic importance of tourism, more so considering the strides made during the past few years. The PMCs have performed well over the past 5 years with a visitor growth rate exceeding world wide growth but at the same time it feli far short of the visitor growth rate of 8.7 percent for the East Asia and Pacific Region. The failure of the PMCs to move in tandem with the East Asia-Pacific Region as a whole reflects the constraints to touism development arising from geographical isolation, the dispersed nature of the PMCs, and their limited resources. But the key to developing PMCs' tourism product lies in the sensitive presentation of their cultural heritage and the careful management of the natural environment. The main issues are those of irnproving access to land, developing the tourism product and of the government playing a supportive role to private sector initiative in tourism development. A. Background and Introduction should the strategies be the same. As a group, the PMCs range from Fiji, with a long-established Introduction industry and a well-known tourism product, to newly developing visitor locations such as FSM, 3.1 During the 1980s, tourism surpassed which attract growing interest in specialty niche primary commodities as a source of export earnings markets. What all of the PMCs share, however, is and economic growth. The allure of the Pacific the potential for tourism to make a far more Islands has been translated into a set of competitive, significant contribution to economic growth and recreational services that provide a significant share development. of incomes, export earnings and employment (see Table 3.1). The potential for future expansion of 3.3 The economic significance of tourism is tourism is substantial-a significant share of the illustrated by Fiji, which has the most mature PMCs' rich heritage of cultural and natural assets tourism industry of all the PMCs. Tourism is Fiji's has yet to be made easily accessible to visitors- leading foreign exchange earner which contributed and the Asia-Pacific region as a whole is witnessing F$363.6 million in 1993. Since 1990 foreign rapid growth in tourism. The challenge is to exchange earnings from tourism have increased by harness the untapped supply-potential of the PMCs F$69 million which has more than offset the F$53 to meet the fast growth in different segments of million decline in earnings from gold, timber and visitor demand. fish over the same period. 3.2 But this challenge is not the same for all 3.4 Of the other PMCs, tourism is of greatest countries; nor, given differences in endowments, economic significance in Vanuatu where visitor Table 3.1 Tourism in PMC Economies, 1993 ....................................... ~i~Th~' ............... .......ZI...... . . . . . . . . . .""''""""'"'X"'' '' Fiji 2,130 762 287 15.7 13,500 FSM 1,850 la 105 26 n.a. n.a. Kiribati 710 76 4 6.9 150 Marshall Islands 1,670 la 51 7 4.5 350 Solomon Islands 740 354 12 3.9 496 Tonga 1,530 98 25 6.3 1,624 Vanuatu 1,230 161 44 26.3 1,300 Western Samoa 950 167 47 22.1 1,100 Source: Tourism Council of the South Pacific. /a GDP per capita. 28 Chapter 3 expenditures account for 26.3 percent of GDP, established tourism industry but is plateauing due to followed by Tonga and Western Samoa. Tourism's airline and hotel capacity constraints. The Solomon contribution to GDP in the remaining countries- Islands are still at an early stage of tourism where tourism infrastructure is very limited-is development. FSM, Marshall Islands and Kiribati more modest contributing between about 4 and 22 are distinctly different from the five other PMCs percent of GDP (see Table 3.1). However, all of because they are far more remote from source these countries have increasingly had to turn to markets and their land area is much smaller and tourism to generate export and employment more widely scattered-and hence affected by opportunities. segmentation of access. 3.5 Between 1988 and 1993 visitor arrivals to B. Tourism Demand the East Asia-Pacific Region increased by 8.7 percent per year compared with an annual growth 3.7 Market Growth. Over the five years rate of 4.5 percent world wide. Led by the strong between 1988 and 1993 visitor arrivals to PMCs growvth in arrivals to Australia and New Zealand, increased by 39 percent, from 327,000 to 453,000 the Oceania sub-region experienced an average and holiday arrivals by almost 45 percent, from annual increase of 6.5 percent over the same period. 217,000 to 315,000 (see Table 3.3). However, the During this time the PMCs performed better with aggregate figures mask two very significant factors. an average growth in arrivals of 6.8 percent per In the case of Fiji, which is by far the most year and exceeding world wide growth by a significant PMC destination, accounting for almost substantial margin (see Table 3.2). two thirds of all arrivals, the political events of 1987 resulted in a severe downturn in visitor Destinations and Market Characteristics arrivals from 258,000 in 1986 to 190,000 in 1987. It was not until 1990 that visitor arrivals again 3.6 Within the PMC group, considerable exceeded pre-1987 levels and subsequent growth diversity exists in regard to tourism development. since 1990 has been very weak, averaging only one Fiji is a mature destination with frequent air percent per year. Similarly, as a result of disrupted services to Australia and New Zealand and direct air services, perceived political instability and a access to long haul markets. However, the severe cyclone in early 1987, visitor arrivals to conventional beach product is no longer proving to Vanuatu, the third most popular PMC destination, attract new markets and repeat visitors and the fell from a peak of 32,400 in 1983 to 14,600 in focus is shifting to its terrestrial and marine 1987. Visitor arrivals did not recover to 1983 environments; increasing emphasis is being placed levels until 1990 although, unlike Fiji, they have on cultural heritage. Tonga and Western Samoa continued to grow strongly since. Hence, if the have strong cultural identities, but both countries increase in arrivals was measured from the previous have limited and inconvenient flight connections. peak levels experienced in Fiji and Vanuatu the real Among the Melanesian group, Vanuatu has a well- increase in visitor numbers since 1988 would be Table 3.2 Tourist Arrivals and Receipts by Region 1988 and 1993 Worldwide : 402.0 500.1 4: :: 045% X 0199 .3i; 304.0 8.8% East Asia Pacific Region 45.:1 68.5 8 .7%o 30.6: 45.6 t/: 10.5% Oceania Sub-Region :4.:6 6.3 0 ::000i 6.5% 5.7 7.8:k' 8.2% Pacific Member Countries 0.33 :0.450;:; l:!00g 6.8%D S'ource: World Tourism Organization (WTO), PMC National Statistics Offices and NTOs. da 1992 Data 29 Chapter 3 halved from 126,000 to 62,000 representing a net 3.10 The twvo strongest growing source markets increase of 15.9 percent or 3 percent growth per are Europe and Japan. Visitors from Europe have annum. almost doubled since 1988 and their share of PMC arrivals has increased by three percentage points. 3.8 Purpose of Visit. Fiji attracts almost three Fiji, Vanuatu and Western Samoa have registered quarters of all holiday visitors to PMCs with 81 the highest numerical increases with Fiji recording percent of visitors to Fiji traveling for holiday the strongest growth from the UK and Western purposes. In terms of holiday visitors as a Samoa from Gennany. From a very low base, percentage of total visitors, Fiji is closely followed Japanese visitors have increased to over 50,000 in by the Marshall Islands, with an estimated 80 1993 with Fiji and FSM sharing over 90 percent of percent, Vanuatu (71 percent) and FSM (66 this growth-Fiji bv virtue of its more developed percent). Holiday visitors are of least significance tourism infrastructure and direct air service to in Kiribati and Western Samoa with less than 20 Japan and FSM by virtue of its historic links with percent of arrivals visiting for holiday purposes. Japan, the associated wTeck diving opportunities, Like the Solomon Islands, where holiday visitors and air connections via Guam. have fallen from a half to one third of all visitors, lholiday visitors to Western Samoa have fallen in 3.11 The major market that has scarcely grown number as well as in percentage terms since 1988. and seen its market share decline by almost six In the case of Tonga and Western Samoa, around percentage points is North America. This can half of all arrivals are recorded as holiday visitors. largely be attributed to the slow economic recovery However, it is believed that a significant proportion in the USA and Canada and the reduction of of these are nationals visiting friends and relatives, senrices between the US West Coast and Fiji as US who record "holiday" as their purpose of visit on carriers, specifically Continental, withdrew from their arrival cards (see Table 3.3). Pacific routes. Air Pacific's reinstatement of a weekly B747-200 service between Nadi and Los 3.9 Visitor Origin. Around 40 percent of Angeles from July 1994 can be expected to arrivals in PMCs are from the short haul markets of stimulate this market provided that the Australia and New Zealand. Although arrivals accommodation preferences of American (and from both these sources have grown significantly European tourists who are expected to connect with over the five years since 1988, Australia's share of this service) can be satisfied. total arrivals has fallen by four percentage points and, in the case of Fiji, the number of Australian 3.12 Length of Stay. The average duration of visitors is well below its peak, which exceeded stay for all visitors to PMCs is estimated to be 8.5 100,000 in 1984 and again in 1990 in response to nights and the average stay for holiday visitors heavy discounting following the events of 1987. slightly shorter at 8.1 nights. The average duration However, in the face of increasing competition from of stay has fallen since 1988 and will continue to do Australian resort destinations, resulting from so. The reasons for this are that the long stay short domestic airline deregulation and an oversupply of haul holiday markets of Australia and New Zealand rooms, plus the increasing competition from Asian are growing much less quickly than the short stay destinations, especially Bali which is now serviced Japanese and other Asian markets and the long haul by Ansett as well as Qantas and Garuda, the PMCs European markets, which tend to be multi- are finding it increasingly difficult to maintain their destinational with shorter stays in each destination. share of the Australian outbound market. In the case of New Zealand, renewed economic growth in 3.13 Cruise Market. With the exception of recent years coupled with improved airline Vanuatu, which received almost 60,000 cruise schedules and fare structures and attractive passengers in 1992, and Fiji, which received 30,000 accommodation packages have combined to and which also has small cruise ships operating generate strong growth particularly to Fiji where within Fijian waters, cruise ships make a negligible New Zealand arrivals are now at levels not seen contribution to the economies of PMCs. The North since the 1970s. Pacific nations of FSM, Marshall Islands and Kiribati are too remote from the main cruising 30 Chapter 3 Table 3.3 Pacific Member Countries: Total Arrivals and Holiday Arrivals 1988-1993 .........::::: .:: .--.::.: .. E:....:.-.:.::::::- .. ......::: ,,::,,::,,:,:,,: ,:::.: --: g l.. . . ........ .......h 8-t l0;-l000 0 a Fiji 208,200 63.7 287,462 63.4 6.7 166,560 80.0 233,081 81.1 7.0 8.5 8.0 FSM 14,676 4.5 26,129 5.8 12.2 3,669 25.0/a 17,181 65.8/d 36.2 4.3/d- Kiribati 3,465 1.0 4,755/a 1.0 6.5 270 10.0 1,0)31 15.0/c 30.7-- Marshall Islands 3,578 1.1 7,179/b 1.6 14.9 2,860 79.9 5,743 80.0/c 15.0 - - Solomonlslands 10,679 3.3 11,570 2.6 1.6 5,367 50.3 3,917 33.9 -6.1 13.0/e Tonga 19,456 6.0 24,628 5.4 4.8 9,728 50.0/c 13,792 56.0/c 7.2 16.5/e 8.6/e Vanuatu 17,544 5.4 44,483 9.8 20.5 12,240 69.8 31,565 71.0 20.9 8.7/e 8.7/e WesternSamoa 49,088 15.0 47,071 10.4 -0.8 16,363 33.3/c 8,311 17.7 -12.9 7.8/f 7.1/f Total PMCs 326,686 100.0 453,277 100.0 6.8 217,057 66.6 314,621 69.5 7.7 8.5 8.1 Total Increase 126,591 ±:38.8 97,564 +44.9 Sources: TCSP, National Statistics and Tourism Offices. /a World Bank estimate based on average rate of growth 1988-92. /b World Bank estimate based on FSM growth rate. /c World Bank estimate based on previous or subsequent years. /L World Bank estimate based on individual State statistics. /e 1992 Data. /f 1990-91 Data. 31 Chapter 3 grounds to benefit, as are Tonga and Western hotels are owned and operated by overseas Samoa. The Solomon Islands have also previously investors and managers. There is considerable featured on cruise itineraries receiving up to 5,000 debate about the optimum size of operation which cruise passengers a year until 1992. Although the would assist in the decentralization of tourism economic benefit derived from cruise ship visits is facilities and which: (i) would be within the reach limited, the positive aspect is that, apart from of local investors; (ii) would be operationally berthing or landing facilities, the host countries do viable; and (iii) be capable of being operated by not have to provide the infrastructure to support local people. ship borne visitors. Although there are some moves to encourage cruise ships to visit and contribute to 3.16 The optimum size would appear to be the economies of smaller islands, such as the recent between 15 and 50 units (related to the size of the "Fairstar" visit to Kioa in Fiji, there are equal local community). This scale of operation lends concerns about the cultural impacts, litter and itself to local bungalow style accommodation, pollution problems associated with cruise visits to which matches the expectations of most visitors to more remote islands. the Pacific. At the upper end of the size range, 50 units is about the maximum that can be provided C. Tourist Accommodation without losing the small scale intimacy associated with such resorts. Subject to adequate management 3.14 The quantity, characteristics and cost of and service levels this is also the scale of operation tourist accommodation in PMCs are illustrative of that can be readily packaged. However, largely as many of the problems faced by the industry in these a result of the limited hospitality management and countries. There are estimated to be approximately vocational training opportunities available in 8,000 guest rooms in PMC accommodation PMCs, even accommodation establishments of this establishments ranging from luxury resorts, scale are considered beyond the capability of local standard to simple guest houses (see Table 3.4). In operators, thus contributing to the reluctance of Fiji, 80 percent of guest rooms are found on Viti domestic financial institutions to finance such Levu although not all in a single center. In the projects. other PMCs apart from Fiji, over two thirds of all guest rooms are located in a single town or island in D. Promotion and Diversification each country, indicating the degree of concentration of tourism facilities. The size of the largest hotel in 3.17 Prospects. The prospects for tourism to each country varies greatly but the proportion of the PMCs appear bright with forecasters predicting rooms found in the largest 3 or 4 establishments in that the East Asia Pacific Region is set to be the each country also indicates the concentration of the fastest growing travel market for at least the next room supply. decade. By the year 2000, the World Tourism Organization estimates that arrivals in the East 3.15 Overall, around one third of all rooms are Asia Pacific Region will increase to 101 million contained in 7 percent of total establishments. from 68.5 million in 1993 and that three quarters of Excluding Fiji, the most mature destination, this these travellers will originate within the region. By rises to almost half the rooms (44 percent) in 11 2010, Asia Pacific travel markets will account for percent of all establishments. The average size of 40 percent of all global air traffic. hotels is misleading in that, if the 29 largest hotels are excluded, the average size comes down to 14 3.18 There are three main reasons why the rooms, which is scarcely large enough to be PMCs have not matched the performance of financially and operationally viable and too small to Northeast and Southeast Asia in tourism be included in most tour package programs. In development. contrast, the average size of the 29 largest hotels is almost 100 rooms, which usually requires * First, from a market standpoint their problems expatriate management and an additional are those of the "tyranny of distance" insofar department head level of management (again often as, even within the East Asia Pacific Region, expatriate). Moreover, in the more mature they are long haul or verging on long haul destinations, particularly Fiji and Vanuatu, the large destinations from the fast growing outbound 32 Chapter 3 Table 3.4 Tourist Accommodation Stock in PMCs vcitage Average . . . . .... .. . Fiji.0 : 178 X 4,5:73 572 1-43:6: 26 65 *4 1,311 28.7 FSM : :X 41: 620: 7.8: 4-56 15 :45-50 6 202 32.6 Kiribati ::6: : :::: 110: :: 1.4::i 4-40 :: 18 :2 76 69.1 Marshall Islands : 14: 200 ::: 2.5: 5-48 14 3 93 46.5 Solomon : :0l :55 ::: :572 : ::7.1 ::::1-96: 010 : :3 : 204 35.7 Tonga :44: 613 :D :7.7:: 2-76 14 50 4 216 35.2 Vanuatu : :43 :: 751 :7;:9.4 : 1-165: 18 65 4 414 55.1 WestemnSamoa : :270 5:56 :6.9 :3-156 : 21 ::3 301 54.1 PMC Total : :408: : :7,995: : 100.0 1436 20 29 2,817 :: Source: World Bank estimate based on NTQ accommodation inventories, brochures and previous reports. 33 Chapter 3 markets of Asia. However, the economics of expected to increase to around 20 percent of all long haul travel dictate the use of wide bodied arrivals compared with 15 percent at present as are aircraft which, in most cases, cannot be Japanese and other Asian arrivals. These justified to serve small island tourist anticipated trends will have a significant influence destinations. Consequently, with the exception on shaping the future tourist product of PMCs. To of Fiji, which has a well established aviation broaden access into new markets will require a infrastructure as a legacy of its former refueling concerted effort to improve aviation arrangements. role, the remaining PMCs lie in an ocean vacuum between the major magnets of 3.20 The challenge facing the PMCs and other Guam/Saipan, Hawaii and French Polynesia to Pacific nations is quite clear and was succinctly the north and east and Australia and New expressed in a 1992 ESCAP report on sustainable Zealand to the southwest. Tourism Development in Pacific Island Countries. Quite simply it is "to distinguish themselves from * Second, from a resource standpoint, not only (those) other beach destinations in terms of their are the PMCs characterized by fragile natural cultural differences and other unique attractions". environments and susceptibility to natural "Among themselves they each (i.e. island nations) disasters such as cyclones and tidal waves, but need to emphasize their unique attributes as a also by a lack of qualified and trained visitor destination and plan the development of new personnel; lack of community awareness about attractions and activities based on these attributes, the benefits of tourism; lack of tourism data and ...... to identify very specialized niche markets lack of adequate funding for tourism based on their unique attractions ........" Marketing infrastructure and marketing. This is further these unique tourism attributes to the highest value compounded in most countries by complex markets is undoubtedly the path which the PMCs customary land tenure traditions, which are a must follow. Together with other PICs they must deterrent to investment because of concerns market their unique shared Pacific identity and, about security and duration of tenure. within that framework, promote their own individual cultural identity and unique attractions. * Third, whilst most PMC governments Only in this way can they capitalize on the appreciate that tourism offers perhaps their comparative advantage they have over other only source of foreign exchange and destinations and compensate for their remoteness. employment they, and in some cases the tourist In short, preserving those qualities which make industry, have yet to realize that their real them different is the key to developing a sustainable competitors are outside the region not within it. tourism industry. If the PMCs are going to compete effectively, it will call for a greater degree of regional 3.21 With these objectives in mind, Table 3.5 cooperation than exists at present. The provides an assessment of existing and potential constructive debate and agreements reached on products and markets the PMCs could promote. aviation at the 25th South Pacific Forum held The listing of an activity or attraction as a in Brisbane, Australia, in August 1994 is "potential" product is not meant to offer that it is indicative of a growing recognition of this need. not already part of the destination product, only that it has the potential to become far more important. Marketing Neither is the list of potential products meant to be exhaustive; instead they focus on those attributes or 3.19 Recent trends in visitor arrivals to Oceania qualities which, given proper development and as a whole and expected future growth from adequately resourced and well-targeted marketing, different source markets is likely to result in a very have the potential to pull people from half way different mix of visitors to PMCs by the year 2000. around the world. English speaking Australian, New Zealand and North American visitors are expected to decline to 3.22 The inadequacy of information services around 40 percent of the total compared with almost also features as a major shortcoming in several 60 percent at present. European arrivals are countries. Likewise tour guide services are 34 Chapter 3 Table 3.5 Existing and Potential Product/Market Match ,.... . --.. .................. ............ -. - .................................. ........................... ................ Fiji Mainly price driven Australian and New Zealand :: : :- North American, Japanese Fishermnen beach/resort holidays, families, older couples, Scuba Diving - North American, Japanese TEuropean Divers general interest honeymooners. Cultural Tourism . - Third Age/Special Intcrest Markets sightseeing, "Shop Eco/Soft Adventure - Younxg Japanese and Nlorth:Americans Window"' cultural Events - Australia and New Zealand sports people displays. __ _ _ _ __ _ _ _ _ __ _ _ _ FSM Diving US and Japanese dive travel Cultural Tounism (Yap) |- Third Age/Special Interest Markets World War LI market Cultural Heritage-Nan Madol/Leluh :: :: (Pohpnei. Kosrae): :: Sport fishing (Blue Marlin) : - North American, Japanese, Australian |Kiribati Sport Fishing US sport fishing market Bird Watching (Line Islands) S 0-Special Interest Giroups : Marshall Diving US and Japanese dive travel Sport Fishing (Bluc Marlin) : :- North American, Japanese, Australian |Islands Sport Fishing and sport fishing market Inter-atoll cruises:: ::: ::i rSolomon Diving Australia, New Zealand and. Cultural Tourism :;- Third Age/Special Interest Islands US dive travel markets Bird Watching (e.g., Megapodes on Savo) - Special Intetest Groups l ~~~~~~~~~~~~~~~~Sport Fishing (Black Marlin) - Australian, Japanese Tonga Cultural Sightseeing Mainly FIT couples, half on MarinecEcology (bird watching) .-.SpeciallInterest Groups : ~~~~~~~~~multi-destination trips Cruising/Ytacht Chiarter, Sport fishing - Third Age, Special Interest, Sailors l ~~~~~~~~~~~~~~~~Culture and pre-history :: -Third Age/Special Interest Vanuatu Mainly price driven Mainly Australian couples, |Cultural Tourism - -Special Interest (European) l ~~~sightseeing, beach/resort honeymooners Nature-based Tourism - Third Age/Special Interest: l ~~~holidays Diving (Santo) Wrecks, Coral - North American, Japanese and Australian |Western General Tnterest, Mainly couples, one third on |Cultural tourism - Special Interest (European) :: |Samoa Sightseeing, "Shop package tours, two thirds |Nature based tourism (e.g., Lava fields) - Special Interest l Window" cultural FITS. l : t. l ~~~~displaysl: 35 Chapter 3 frequent sources of dissatisfaction with guides * Cooperation through code-sharing on a frequently not being able to impart anything but the fairly broad range of services between most elementary general information. Eco-tourism, various points; and in particular, would call for well trained tour guides who are knowledgeable about each country's * Some rationalization of aircraft fleet, with natural attractions. This is an important aspect of both Polynesian Airlines and Air Vanuatu adding value to the tourist product and, apart from disposing of uneconomic craft and routes. improved tour guide training, may require licensing and/or accreditation to maintain standards. 3.26 The Relationship between Tourism and Aviation. The two elements are inextricably linked 3.23 Marketing of the PMC tourism product in terms of the nature and potential viability of air merits improvements. Cooperative marketing and services in the South Pacific, although the two are packaging with major neighboring destinations sometimes in total conflict. The basic dilemma is presents another opportunity to undertake cost how to provide adequate and efficient air services effective marketing. Familiarization trips between and among the various island nations when conducted by Air New Zealand as part of their the level of traffic is so low. The development of "Project Pride" program and which included Pacific tourism to boost the total number of travellers is, in island countries are a good example of this. Further turn, hampered by the lack of services available as research of back-to-back fly cruise operations well as suitable infrastructure. It is important to between Sydney and Fiji, re-establishment of the note that in most instances, the level of Honiara-Cairns service and joint packaging of infrastructure could not handle and cater for an North Queensland and Solomon Islands, joint overnight stay for a B747 aircraft load. packaging of Tonga and Western Samoa with New Zealand, all represent different ways in which 3.27 The financial situation of most of the island PMCs can "piggy back" on their larger neighbors. nations is such that it is impractical to run services at a loss in order to build up traffic, especially if Air Access this is done without a coordinated tourism plan, or else the current situation causing such concern at 3.24 Prime among the constraints to tourism the South Pacific Forum is the end result. Even in development are the lack of direct air services, lack Fiji, with a relatively sound airline and a reasonable of frequency and generally high cost of travel to tourism market, forming the basis for island countries combined with the high cost, commercially-stable scheduled services, is infrequency and often unreliability of intra-regional dependent on the further development of tourism for and domestic inter-island services. its financial well-being and prospective growth. 3.25 Airlines in the South Pacific have been Broadening Air Access plagued by low-capacity utilization rates. This, in 3.28 Only Nadi (Fiji), Faleolo (Western turn, has led to severe financial losses, despite high Samoa), Fua'amotu (Tonga) and Bauerfield passenger changes for the national carriers of (Vanuatu) airports have the runway capability to Western Samoa, Solomon Islands, Tonga, FSM and accept wide bodied aircraft, and of these, only Nadi Kiribati. Attempts have been made, however, to has the terminal facilities, ground transport and improve the financial management of air services accommodation capacity to accommodate a B747 by: with a full payload. Of the others, only Vanuatu has the volunme of visitors to justify developing Appointment by a number of gover-nments airport infrastructure to accommodate wide-bodied of experienced managers from outside the services to long haul destinations. relevant country carrier (e.g. Polynesian 3.29 Even if they had the financial resources Ailies Solmo Airlnes Royal Iftevhdnhgann rsure Airlines, Solomon Airlines, Royal Tongan FSM, Kiribati and the Marshall Islands do not have Airlines); the physical or human resources to accommodate the scale of tourism required to support viable 36 Chapter 3 wide-bodied services. Smaller aircraft and greater 3.32 In the case of Tonga and Western Samoa service frequency is likely to do more for these access to longer haul markets is likely to be best countries, especially if more competitive "island achieved by expanding code sharing arrangements. hopper" fares can be introduced. This can provide better access to the major South Pacific gateways of Sydney, Auckland and Nadi. It 3.30 The dilemma of insufficient air access would also improve access through increased limiting resort investment is best illustrated by frequency utilizing smaller narrow-bodied aircraft, Vanuatu. There are limits on airline capacity especially between Tongatapu and Apia and arising from Air Vanuatu's aircraft leasing Tongatapu and Nadi via Vava'u. arrangements with Qantas only for four days per week, but initiatives have been made to increase the 3.33 Domestic Aviation Issues. Within frequency. Low visitor numbers, in turn, have individual countries the infrequency of services, the discouraged investment in new tourist high cost, baggage limits on small aircraft and the accommodation in both Efate and Espiritu Santo. perceived unreliability of inter-island services is a Although Bauerfield Airport at Vila can now handle major constraint on developing tourism limited movements of B767 aircraft on short haul opportunities out of the main centers. The services and direct services to long haul source difficulties of operating low volume inter-island countries such as Japan it is constrained because the services which provide essential passenger and topography prevents the take-off of fully loaded freight services for local people are not B767s. There are no such constraints on Luganville underestimated. However, the fact remains that, Airport on Santo where the runway could be even if they can obtain seats on inter-island upgraded at an estimated cost of US$9.0 million services, FIT tourists are often deterred by the fear (plus the cost of terminal improvements) to permit that delays or re-scheduled flights may cause them the introduction of direct services to markets such (or their baggage) to miss international connections. as Japan and Singapore (which is a major hub for Also, tourists or their agents may be advised that European travellers to the Asia Pacific Region). inter-island services are over-booked by locals but Quite clearly, until investors can see that this not infrequently flights depart with empty seats due constraint on access to long haul markets is being to "no-shows". Vanair, for example, is now taking remedied they will not proceed with new tourism a much firmer line on pre-payment at the time of projects. Similarly, until airlines can see that there booking to overcome this. is sufficient accommodation and tourist product being put in place to support a new service they, in 3.34 Also in Vanuatu, Vanair is planning to turn, will not consider providing the service. increase passenger and especiallv freight capacity between Efate and Santo and between Efate and 3.31 In the case of the Solomon Islands, the Tanna by the acquisition of a turboprop aircraft. quantum of tourism infrastructure and the realistic This would facilitate the development of tourist rate at which it can be expanded suggests that for facilities on Santo and Tanna (and even other the foreseeable future the volume of visitors is neighboring islands with additional feeder services unlikely to be sufficient to justify wide bodied using Twin Otters or Islanders). However, it would services. What is important for the Solomons is to also require access to other intra-regional routes develop its intra-regional links and in particular to such as Noumea (currently served by Air Vanuatu's reinstate the service to Cairns which offers the 18 seat Bandierante) and Nadi to be viable and Solomon Islands the best opportunity to access would require the upgrading of the Lenakel strip on large numbers of Japanese and European visitors to Tanna to a 1,400 meters minimum compacted coral Far North Queensland which, in 1993, numbered standard. 154,000 and 177,000 respectively. This will be greatly assisted by followving the example of 3.35 In Kiribati inter-island air services are only Vanuatu and expediting the construction of a new available in the Gilbert, Line, and Phoenix Groups, international terminal at Honiara. and in Western Samoa the destruction of the airstrip at Asau by Cyclone Ofa in February 1990 has 37 Chapter 3 curtailed access to the west end of Savaii. Both the makes sound commercial sense, its success is likely Western Samoa Tourism Development Plan and the to be hampered by the attitude and business WSVB have identified the replacement of this relations of the various smaller airlines in terms of facility as an urgent need to stimulate visitation and their dealings with Air Pacific. The very difficult further product development opportunities on task for Fiji and Air Pacific is to avoid the tag of Savai'i. "interfering" or trying to dominate the region while Aviation Reform Priorities providing rationalized assistance to other smaller South Pacific airlines via commercial arrangements 3.36 The future of aviation in the South Pacific which cannot always cater for the individual is linked so closely with the future of tourism that carriers' interests rather than the general well-being any programs of regionalization or rationalization of air services in the region. must take into account the urgent need for 3.40 Cruise Operations. At present infrastructure development and investment in the tourism industry, together with a forward-looking opportuiities to attract more large cruise ships are marketing and promotions plan to attract not only limited by the duration of cruises, which are international visitors but international carriers. One relatively short, apart from the seniors market, and of the most difficult tasks will be to remove the fear the distance from the home port, principally of competition which appears to be present in all the Sydney. Traditionally the cruise market has been South Pacific carriers, even Air Pacific, and to locally sourced (Australia and New Zealand), but convince boththe carriers andetheir GovePiments of the Australian Tourist Commission (ATC) is the benefits of a more open, bilateral system or even actively promoting "fly-cruise" business from the some eform of pragmatio multilateral arrangements. USA. Although Fiji has already been down this track without success, there is the potential, with 3.37 Rationalization and Regionalization. the ATCs interest in this market, to develop Fiji- There is no question that an essential element for Australia cruise packages provided aririne survival for the airlines of the South Pacific is the schedules can be tailored to permit back-to-back rationalization of aircraft, routes and services. This cruise operatons. needs to be combined with the development of a network of regional routes and routes beyond the E. Supporting Infrastructure individual island countries to serve at least the major markets of Australia and New Zealand other Human Resource Development than on a point-to-point basis from each capital. 3.41 The low skill levels and poor service 3.38 The major problem facing all the Pacific delivery are an oft repeated criticism of the tourism island carriers, even Air Pacific, is the generally industry within PMCs. With the exception of Fiji low level of traffic to and between countries. This the scale of the tourism industry in PMCs is too small to support the establishment of training represents the classic "chicken and egg" situation in istituto apot the natioalblevel A treional aviation terms-whether providing the aircraft and ap ato at traiong led A re services to cater for a larger volume of traffic will approach to formal training supported by in-service stimulate growth in passenger numbers, or training is therefore the most efficient and cost alternatively, whether the number of visitors to the effective approach utilizing means such as the various countries should grow to a certain level proposed mobile training unit in Western Samoa. various coutrthes servis row aitional cert lagel At the formal tertiary level the University of the before further services or additional or larger South Pacific offers certificate and degree courses in tourism and the Western Samoa Polytechnic is 3.39 Role of Air Pacific. Air Pacific is of the about to introduce a Diploma Course in Business view that there is sufficient inter-island traffic for and Tourism in 1995. Vocational training is all regional carriers to consolidate over a Nadi hub, provided at the Fiji School of Hotel and Catering and is attempting to convince the various In-service training in Fiji is undertaken by the FiJi governments accordingly. While this strategy 38 Chapter 3 National Training Council. But more needs to be * Solomon Islands, the extension of the sealed road done in shifting the training function to the industry. beyond White River in Guadalcanal, and the extension of the road to the southern tip of 3.42 Outside of Fiji, the Tourism Council of the Malaita, which is being funded by the EU; South Pacific has a mobile team which travels around member countries conducting short in- * and n Tonga the improvement of access roads and service training courses. Beyond this there are very parking at principal attractions as identified m the few training opportunities other than in-house Tonga National Toursm Plan. training by tourism operators, scarcely any of whom 3.45 Public Transport In several of the PMCs have a training manager on staff. It is difficult to there is a need to improve the standard of taxis support a case for national vocational training through more rigorous licensing controls, the establishments in that they are difficult to staff with availability of taxis (e.g. ensuring that they are appropriately qualified and experienced teachers available to effect airport transfers regardless of and which may run the risk of turning out trained arrival and departure times) and, in the absence of people for whom there are no jobs. A more meters, to establish a schedule of standard fares effective approach may be through extension of the which are well advertised in airports and hotels. TCSP programs, in-service training programs Similarly in some countries more rigorous licensing intensive pre-opening training by operators. of tour operators is required to eliminate substandard operators who undercut tour prices 3.43 Training initiatives should also focus on through the use of substandard, and sometimes guide training in order to add greater value to the unsafe equipment. ecotourism product of PMCs. This is already 3.46 Water Transport Depending on relative happening through proposed NZODA Nature and Adventure Tourism Programs in Western Samoa proximity water transfers may be the only option, such as transfers within individual coral atolls, or a and AusAID ecotourism guide/interpretafion sc staseswtmmllulcrlaol,o taindng AusnD ecotouris. guide/interpretatipreferable alternative to air transfers. Where the traimng in Fiji option for water transfers exists new tourist Physical Infrastructure facilities or access to attractions should be planned with this in mind. For example, Nan Madol, 3.44 Roads In many of the PMCs the standard of Pohnpei's primary attraction can only be accessed roads is a constraint to access to many toun'sm by water and accessibility is dictated by tides. As resources. Road standards outside the towns and road visitor numbers build up, consideration will need to resources. Road standards outsid the tbe given to the most appropriate type of vessel to networks in general are limited. The principal access this attraction in the least intrusive way, exceptions are Fiji, where it is possible to access tids in m to cont vtr flows circumnavigate Viti Levu on sealed roads for all but regardless of tdes, in order to control visitor flows 20km of gravel; Western Samoa, where roads on both and avoid over-crowding the site. Upolu and Savai'i permit circumnavigation of the Tourism and Environment islands plus cross island alternatives on Upolu and Yap State, which has a good quality circuit road. 3.47 The major existing and potential tourist Elsewhere, some of the needs are: markets for PMCs have certain expectations about the quality of services and products which they use * in Vanuatu the upgrading of the Efate or purchase, and about the environment in which "round-the-island" road from Port Vila to Takara these are experienced. One of the major to further improve the tourist potential; disappointments for people visiting PMCs is the 39 Chapter 3 general lack of cleanliness, the untidy and unkempt an inventory of protected sites that have the appearance not only of towns, villages and even potential to be tourist attractions of international visitor attractions themselves but also of significance and which should be managed as such. accommodation establishments. In several Beyond this governments should not be too rigid countries this is compounded by widespread about where tourism development should occur dumping of household refuse, vehicle bodies and other than to actively encourage tourism other junk. Some countries, such as Western development where it will support the provision or Samoa, seem to manage the problem well through upgrading of infrastructure services to the the strength of the village culture and through community at large. Such simple principles are government incentives. Elsewhere, such as in usually congruent with the needs of genuine Chuuk State, where the Chuuk Visitors Bureau has investors and operators who want sites that not only initiated a beautification program, junk removal and have tourist appeal but which can be most easily garbage collection service, the problem is still acute serviced and which are (or can easily be made) and will require wider community education to readily accessible to their markets. achieve results. Policy and Regulatory Environment 3.48 Tourism is also closely related to the quality of the coastal environment. On the one 3.51 In the face of increasing competition for hand tourism development could exert pressure on scarce capital resources, an overriding objective for the coastal environment through for example, PMC govermnents must be to create a policy and contraction, land filling and sedimentation. This regulatory environment which is conducive to points to the need for intensified coastal zone tourism development and expansion. management. On the other hand, a clean coastal environment can enhance the tourism potential 3.52 From the standpoint of investors this is a considerably. question of confidence-confidence in the certainty, consistency and timeliness of decision making in the F. Role of Government investment and development process. From the standpoint of operators they need confidence that Planning infrastructure and services which are rightly the role of governments, or government business 3.49 Tourism development should take place in enterprises such as airlines, to provide will be the context of an overall tourist strategy or a spatial provided and maintained and that government fees plan. There are a number of externalities which or charges will not be increased unreasonably, or argue strongly against leaving all decisions related without notice. to the location of tourist facilities to the private sector. With limited financial resources, 3.53 Governments need to be aware that infrastructural facilities cannot be laid on wherever package prices are generally negotiated more than a development takes place. Moreover development in year in advance and subsequent cost increases some areas should not be allowed to continue to the cannot be passed on to the customer. Similarly if, point where there could be serious environmental for whatever reason (e.g. loss of an air service), an damage. Individual investment decisions could operator is unable to deliver the advertised product, clearly impose costs on other parts of the economy. there are increasingly onerous legal liability implications, especially in major growth markets 3.50 Planning for tourism needs to be integrated such as the European Union and Japan which have into the broader framework but should not be over- tough consumer protection laws. Without prescriptive. At the same time, however, it should confidence in the ability of PMC destinations to be very strong on protecting prime environmental deliver the product overseas wholesalers and resources and beware of the cumulative effects of retailers simply will not package or promote them. small compromises. Essentially what is required is 40 Chapter 3 3.54 Both regionally and individually the role of achieved by up-scale resorts at the PMC governments needs to be framed within a expense of returns, hence there is no consistent set of principles which: incentive for new investment. Nevertheless, there is a growing demand * develop a vision for the future of tourism for up-market, three to five star hotels. and its place in the community; Air Pacific's new long haul services to Los Angeles and Osaka and Air New * ensure the timely provision and Zealand's new service to Nagoya via maintenance of essential infrastructure; Nadi present an opportunity to break this * provide incentives to facilitate changes nexus. More innovative packaging of necessary to develop tourism; accommodation products offering a combination of up-scale resort * ensures an equitable formula for the accommodation and mid-scale accom- collection of charges and taxes; modation in secondary areas with a nature/cultural focus offers two benefits. * ensures a free and orderly market place; First, it could improve the performance and and encourage the development of more dispersed second tier accommodation and * protects the long term interests of society. second, by reducing the average length of stay in upscale accommodation, could 3.55 Within this framework governments should assist in improving yields without consider tourism proposals on the basis of five necessarily increasing package prices. fundamental criteria: This in tur could provide the stimulus for further investment in new resort . economiczviability; accommodation which will be needed to * economic viability; * environmental sustainability; support current and future expansion of * appropriateness to local culture; Air Pacific services. ^ contribution to diversity of the tourism product; and ~~~~~* Tonga. Tonga urgently needs a catalyst product; and to precipitate action. The recommenda- * preservation of flexibility (i.e. does not tion contained in the Tonga National overcommit resources to a single project Tourism Plan to nominate the Ha'apai or product). Group for World Heritage listing may be G. Country Specific Initiatives useful. It would attract world attention to Tonga's natural resources; it would also 3.56 Within this broad framework, individual provide a stimulus to the development of country strategies will need to be framed. Key tourism beyond Tongatapu. country initiatives might include: * Western Samoa. Western Samoa is the one country that has recorded a fall in * Fiji. In order to sustain tourism growth visitor levels over the last five years. the Fijian tourism product needs to be However, the tourism prospects for strengthened and diversified. This Western Samoa appear more positive than includes further expansion of existing for most other PMCs notwithstanding the activities such as diving and garne problems besetting Polynesian Airlines. fishing and a greater focus on nature proems beseting Polynian airie There Is a positive community attitude based and cultural tourism. At present towards tourism, a well conceived Fij.i is caught in a trap where mid-scaletoad turs,awlcneid ajccommoation in seonary destato Tourism Development Plan is in place, accommodation in secondary destinations and the structure and performance of the is achieving poor occupancy levels, and WSVB is becoming increasingly the high occupancy levels are being 41 Chapter 3 professional and is supported by some as the Doma Resort, Anuha Island and the well targeted bilateral aid from New Governor General's residence site in Zealand. What is lacking is an Honiara, as well as new projects in the investment strategy which will facilitate Western Province. the development of much needed tourist accommodation and other facilities as * FSM. Each of the Micronesian States well as adequate information regarding needs to focus on improving the quality, air connections to Western Samoa in access to and, where appropriate, the airline booking systems. interpretation of its prime attractions; in the case of Yap, its unique cultural heritage; in * Vanuatu. Vanuatu 's tourism development Chuuk, the diving opportunities of Truk could, no doubt, benefit from the Lagoon; in Pohnpei, Nan Madol and in upgrading of Bauerfield and Luganville Kosrae its ecology and the Leluh ruins. Airports to enable wide bodied air services None of the States can expect to become for long haul markets. This is the catalyst long stay destinations, other than for which can be expected to trigger direct special interest visitors such as divers and foreign investment and which will support sports fishermen. Therefore they need to government policy to decentralize tourism work on developing convenient and and economic development especially to economical island hopping packages. In Santo and the immediately adjoining the case of Yap this means capitalizing on islands. This project was estimated to cost traffic between Guam and Palau, and in the around US$15 million, but has recently case of Chuuk, Pohnpei and Kosrae been scaled-down to an extension of the between Guani and Hawaii. runway at the Luganville Airport at a cost of about US$9 million. In any event, the * Kiribati. Given its remoteness, Kiribati project has to be approached with caution has little option but to focus on promoting since it is likely to cause severe fiscal its special interest attractions. The most pressures during the next two years unless urgent need is to improve the frequency other items of expenditures are cut to and reduce the cost of access. Kiribati reduce the deficit. Commercial borrowing should endeavor to achieve this through the in particular will exacerbate the debt service proposed rationalization of regional air burden and is inappropriate. services agreed to at the 1994 South Pacific Forum in Brisbane. * Solomon Islands. Australia provides the best avenue for the Solomon Islands to * Marshall Islands. Given it remoteness, access new long haul markets. Priority limited land resources, shortage of potable should therefore be given to reinstating the water and land tenure problems, as link with Cairns, where hotel illustrated by the aborted Erikub Atoll accommodation is now at a premium, and resort project, the Marshalls need to focus seeking to develop joint promotion and on the tourism potential of its marine packaging into markets such as Japan. This resources. In the immediate future the will require high priority to be given to the further development of sport fishing, which new international terminal at Henderson is already established, should be the Airport. If the Cairns link can be re- primary focus. The market potential and established and successfully developed, this viability of developing inter-atoll cruises may be sufficient to trigger the connecting with air services through development of long-stalled projects such Majuro and Kwajalein should also be researched. 42 Chapter 3 H. Priorities for Action as a means of adding value to the tourist product. This should be accompanied by improved 3.57 Accessibility. The geographical isolation protection, presentation and interpretation of the and dispensed nature of PMCs is a critical natural environment in which these Pacific cultures constraint making access to tourist markets difficult developed. and costly. Therefore, a fundamental priority is to improve air access, flight frequency and fare levels. 3.59 Government Role. Globally the This calls for rationalization of aircraft, routes and competition for development capital is becoming services combined with the development of an increasingly intense. In order to compete improved network of regional routes (and inter- successfully, PMC govermnents must create a island routes within countries) and improved links positive investment climate by ensuring that with larger neighboring destinations and source potential investors have confidence in the markets (e.g. Australia and New Zealand) other investment and development process. There must than on a point-to-point basis from each capital. be confidence in the certainty, consistency and timeliness of the decision making process; 3.58 Product. It is the unique cultures of the confidence that government commitments (e.g. South Pacific which distinguish PMCs from other provision of infrastructure or air services) will be sun, sand and sea destinations. It is therefore honored; confidence that there will not be vitally important not only to protect, but also to unforeseen or excessive increases in government emphasize these unique cultural attributes in fees and charges and confidence that regulations marketing the South Pacific. Associated with this is will be applied consistently and that there will not the need to improve the presentation and be overlapping or duplication of regulations by interpretation of the cultural heritage of the Pacific different levels of government or government agencies. 43 Chapter 4 4. FISHERIES Overview: This chapter reviews the status of the fisheries sector in the PMCs, in order to identify key issues which offer the greatest opportunity to increase benefits derived by island populations. The chapter concludes that colective action in management and licensing of offshore tuna resources will be necessary to generate financial benefits to PMCs today, and ensure sustainability of the resource for future generations. Coastal fisheries are very important in terms offood security and their contribution to household income, but appear to be under pressure from excessive exploitation throughout the region. Urgent attention to management of coastal resources is thus needed A. Background 4.3 The PMCs' exclusive economic zones (EEZs) cover nearly 12 million square kilometers. 4.1 Fish is the largest single source of animal By comparison, their total land area is meager at protein and the fastest growing food commodity in just under 64,000 square kilometers. Thus, the international trade, providing direct and indirect countries of the region look toward ocean resources employment to over 100 million people globally. as an important means to advance their economic Over 1 billion people rely on fish and shellfish as development, through the creation of employment their main protein source. Of the top forty countries and the generation of exports and income. The ranked by the share of animal protein derived from fisheries sector in the PMCs is dualistic, consisting fish, thirty-nine are developing countries. World of offshore fisheries and nearshore or coastal production of fish currently averages about 100 fisheries. million tons per year, and up to half of the portion consumed by humans is produced by smallholders. 4.4 Fisheries have traditionally occupied an important position in Pacific Island societies, which 4.2 Over the past fifty years global fish catches have relied on nearshore or coastal resources for have grown from about 20 million tons to about 90 much of their food and subsistence needs. More million tons in 1989 before dropping off recently, they have played a role in supplementing presumably because of overfishing. Underlying this cash incomes of coastal communities and in rapid increase in fisheries output, there has been an generating foreign exchange. Coastal fisheries are astonishing increase in the global fishing effort, characterized by low-capital, labor-intensive both in terms of the numbers of vessels and fishing methods targeting reef and lagoon species. technological capacity-total world gross Exploitation of offshore resources-mainly tuna- registered tons of fishing vessels more than doubled is a modem phenomenon introduced to the region between 1970 and 1989. As a consequence of the by foreign countries aiming to supply international rapid expansion of fishing effort, all but two of the markets. This is a technology and capital-intensive world's 15 major fishing areas have experienced activity, employing modern methods and equipment declines in productivity and entire fisheries have in which few PMCs, with their scarce resources, disappeared. The global fishing fleet is excessively are able to participate directly. large and heavily subsidized-the total operating cost of the world fleet exceeds its revenues by about 4.5 The main issues facing the PMCs in US$54 billion yearly. The general lack of property ensuring the sustainability of and increasing the rights in fisheries is considered to be a major returns to fisheries are: contributor to over investment and overexploitation. 44 Chapter 4 * How best to maximize resource rents derived from employment generation, import substitution, the fishing access fees;' receipt of access fees and through exports. Figure 4.1 shows the export shares of fisheries for the * How to protect offshore resources to ensure that PMCs for 1988 and 1993. Most remarkable is the they are not over-fished; large increase in the share of fish in total exports for FSM and the Marshall Islands. For FSM the * How to manage investment in the sector, share of fish in total exports nearly doubled to 86 particularly foreign investment, and further define percent and for the Marshall Islands it increased the appropriate roles of the public and private five-fold to over 80 percent. This transformation is sectors; due to the relatively recent entry to export markets of these two countries, coupled with much untapped * How to protect vulnerable coastal resources from resource potential. Thus, fish exports were growing overexploitation, given the fragility of coastal from a small base, while other export commodities ecosystems, and the strong socio-economic links remained unchanged. The performance of fisheries of this sub sector with nutrition and broad-based exports in the remaining countries has been income generation; and stagnant over the 1988-93 period, largely because of the poor prices prevailing in world markets. The * Identifying and exploiting income-generating relatively low shares for countries such as Tonga opportunities for coastal fisheries. and Western Samoa mainly reflect their poor resource endowment compared to the other B. Economic Contribution 4.6 Fisheries development in the PMCs Figure4.1: FishExports encompasses a diverse range of activities-from (% of tut exirts) purely subsistence activities relying on traditional methods, to commercial fishing, and downstream 100 n. ndustrial activities in processing. Fishing is clearly 80 an economically important activity, especially since 60 in all PMCs a significant share of households .......... ...... 40 ..... ... participate in some form of fishing, often on a part- ...... ....... time basis. 20 O S _ 1 1993 4.7 The fisheries sector appears to have a E modest share of GDP in most PMCs, averaging 'A E about 7 percent in the Solomon Islands and the O2 Marshall Islands and only about 2 percent in Fiji.2 This distribution is in keeping with Fiji's diversified economic base relative to the other PMCs. These national accounts statistics clearly understate the economic importance of the sector because they usually fail to account adequately for artisanal and countries. Nevertheless, fish exports are important subsistence production. in all the PMCs. 4.8 In most Pacific Island countries, fisheries 4.9 All PMCs receive access fees from make an economic contribution through licensing foreign fishing vessels. A comparison of these fees in terms of their balance of payments and fiscal contributions across countries is quite l Issues in rent collection are a complex area, illustrative (see Figures 4.2(a) and 4.2(b)). As covered in greater detail in a background paper. might be expected access fees are very important in 2 Based on detailed sectoral information compiled by the three countries with the best tuna resources and country. catching conditions-FSM, Kiribati and Marshalls. 45 Chapter 4 Agze4: A OSSFEEXTRB L SEIMCaIR UnCN Fg-4tb) ~CES F S AIREIIluCN r/dmdseqwdw, F, N) (%db) O _ . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~."" ......... ......' .' : " ' '"'' '!.. ':.. '' .L f .. .. . . .. . . . B~~~~~~~~~~~~~~~~ B Source: National sources, FFA and Bank staff estimates. mner (dried sea cucumber), shell-gathering and ln the remaining countries access fees are much less processing, reef fish and some aquaculture. important. Thus, the PMCs are characterized by Table 4.10 presents a summary of activities in the g,reat variation in the distribution of offshore sector for the PMCs. From the available data, it is resources and consequently in the economic clear that coastal fisheries are significant compared importance of the sector. to offshore fisheries in terms of output value and employment, but to a much lesser extent in terms of 4.10 Table 4.1 compares key characteristics of export value (see Table 4.2). the fisheries sector and the environment within which it must operate in the PMCs. The table also 4.12 More important than this, however, is the hig,hlights key institutional and environmental role that fisheries play in generating broad-based factors which constrain fisheries development in the benefits for local communities and guaranteeing Pacific. These include the relatively high costs of food security. As many as 83 percent of the coastal labor and other inputs, and the prominent role of the households of the Solomon Islands, 35 and 99 public sector, which often serves to crowd-out percent respectively, of the rural households of private investors. Moreover, public sector Vanuatu and Kiribati; 87 percent of the households involvement in commercial activities in the Pacific, in the Marshall Islands; and half of the rural as elsewhere in the world, has a poor financial track households in Upolu (Western Samoa) fish, record, usually necessitating scarce budgetary primarily for local consumption. In the Solomon resources being expended in support of financially Islands, moreover, about 17 percent of all ailing enterprises. Other factors include the scarcity households integrated into the cash economy sell of management capacity, skills, entrepreneurial coastal fisheries products. By contrast, the spirit and research services. industrial and commercial sector provided full-time employment to 1,097 fishers in 1992, or less than 4 4.11 Exploitation of coastal resources in the percent of formal employment. PMCs is well developed and varies widely across countries, with activities concentrated in beche-de- 46 Chapter 4 Table 4.1: Selected Attributes of Fisheries Sector in the Pacific ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... , ...,.......... . . .......... W Resource endowments Deepslope *c cc c ccc *c cc cc EC.Onomi impo rtance: ccc cc o09 Inputs/labor cost se c cc Trasotton,delopment c c c c0O InfrastructureAdevelpet *. aeaec c Foreign.invest,o lmate *4..: i O . . ... . :Rol of public sector eec ec ccc cc e cc :: a*e Role of private sector c:: c : 00 :0.. c c.0 Traiingi ser s cc : :c .c *:* 00 Information/Research.4 a4 c *. cccc Marketing suppot e cc: me cc ** .. ::. SCusoaxtnursstems: 40 4 000H i;; 0: W 4:: 4 ; 4 : :0 ;; :i::0:i ::; : 0 ;N : : ;; 4::; l Note: *=Low, ee=Mediun, eee=High, +yes, W= Weak; N=No. Source: World Bank staff. 4.13 Nearshore fisheries, including deep-slope Seaweed exports are also important in Kiribati. demersal resources, also account for approximately 65 percent of total fisheries exports in Kiribati, 4.14 Despite increasing commercialization of about 10 percent in Fiji, Marshall Islands, and the catch, subsistence fisheries remain a vital Solomon Islands, and less than 5 percent in FSM. source of animal protein in the region. This is The two most important nearshore export particularly true in isolated and small islands, commodities are beche-de-mer and trochus among coastal communities, and in areas where products, followed by finfish and aquarium fish. sources of cash income are scarce. While their importance is generally recognized among PMC govermments, the value of subsistence fisheries is Table 4.2: Artisanal & Commercial Nearshore largely unknown and tends to be ignored in national Production, 1989-92 accounts. Table 4.3 presents estimates of the value (US$ million, average peryear) of subsistence fisheries in terms of the output, ... J~~~~~~ ~~ ~~~ import savings, and value to consumers. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~"N....... ... 0.M00t l:;0. t i6 ' i°00 04.15 While these estimates are subject to a XFijit;; : :E 11170: :03.0 ff: f 4.3 S 00;19.0 certain degree of uncertainty, they suggest that Kiribati0iV; T:: : 3:.6 ;; : 0.0 1.2 4.8 subsistence fisheries play an important role in the Marshall Islands: : 0.3: OA &0.4: 0.0 0.0 7 economies of PMCs. In Fiji, their value to Solomon Islaids 0.1 1.7 2.6 43: consumers is equivalent to 54 percent of the retail Tonga 2.7 0.1I 00 28 value of the total artisanal catch; and in Vanuatu, Vanuatu 0.5 LO 0.1 115 their value to the consumer is equivalent to more Westem Samoa .0.3 0.0 0.0 0.3 than three times the retail value of the commercial Totalf t:0;: 20O.lu7 i26.7 :: :: 82 35.0 and artisanal fisheries in Port Vila and Espiritu Excltdes absiuerme prduiorL Santo. Source: Daizell and Admn, 1994 4.16 Significant foreign exchange savings can also be attributed to this activity, which reduces the 47 Chapter 4 water and oil. This area represents one of the Table 4.3: Subsistence Fisheries in Selected Pacific richest tuna fishing grounds in the world supplying Island Countries, 1992 over one-half of the world's canned tuna, and a Vjium . : . - - -significant proportion of fresh tuna. .*.-y (US$ mill) siv= 4.18 Tuna are a highly migratory and mobile ...........species. As a result the tuna resources cannot be Fiji 16.4 6.3 8.2 apportioned out by any one country but consist of Solomon several regional stocks. This gives rise to a number Islands 12.7 7.8 7.7 of important issues concerning both the Vanuau 3.1 2.2 1.3 management and exploitation of the resource. W. Samoa 3.1 0.5 2.6 Total 352 16.8 19.8 4.19 The total tuna catch in the region has been Source: World Bank staff estimates. increasing steadily over the past decade, as indicated in Table 4.4 which shows the catch for the statistical area served by the South Pacific need to rely on food imports. For Vanuatu, these Commission (SPC). According to this, the total tuna savings were equivalent to the value of all fish and catch rose to over 1 million metric tons (MT) in meat products imported during 1992. In Western 1991 and declined thereafter. The PMCs' share of Samoa, the foreign exchange savings exceeded the the regional catch is relatively small, approximately value of imported preserved fish in 1991/92 by 35 13 percent in 1993, reflecting both their endowment percent. In the Solomon Islands, the value of of tuna resources and the fact that the SPC region subsistence fisheries was equivalent to more than covers 26 countries. 60 percent of the value of canned fish exports. The protection of subsistence fisheries should therefore 4.20 In 1993, over 90 percent of the PMC tuna remain a high priority for PMC governments. catch was attributed to three countries-FSM, Kiribati and Marshalls. The bulk of this fish was C. Offshore Fisheries captured by purse-seine vessels which increased significantly in number, from 1980 to 1992. The 4.17 Introduction. The main offshore fish resultant increase in purse-seine activity has been resources in the region are tuna, especially the main factor behind the increase in the regional albacore, bigeye, skipjack and yellowfin. Although catch. not as sought after as bluefin tuna, these species are nevertheless quite valuable. The two major end- 4.21 In the SPC region, the purse-seine fishery uses of this tuna are the fresh fish markets of Japan represented about 84.2 percent of the total volume and increasingly the US and Europe, and canning in and 50.6 percent of the total value in 1992, whereas the long-line fishery with only 9.6 percent of the Table 4.4: Catch in the SPC Statistical Area, 1984-93 volume accounted for 41.1 percent of the value. The (thousand metnc tons) final destination of purse-seine tuna are canneries, . .... .. .. - .. . - .... .......... .. - e y S .-.-i .- and of long-line tuna mainly the Japanese sashimi 1984 19.6 32.2 437.7 138.3 627.9 (raw fish) market. 1985 27.5 40.9 371.3 129.4 568.6 1986 32.4 32.1 436.7 129.2 632.3 4.22 In addition to the Oceanic Fisheries 1987 23.5 41.2 407.5 187.7 659.9 Program of the SPC (OFP), which represents 26 1988 33.3 35.4 542.6 133.7 744.9 member countries and is responsible for tuna stock 1989 47.6 33.9 527.0 184.3 794.8 1990 30.6 53.8 579.7 208.8 872.8 assessment and iformation processng, the South 1991 24.9 41.1 754.7 231.1 1051.7 Pacific Forum Fisheries Agency (FFA) with 1992 41.8 45.0 689.9 272.4 1049.0 headquarters in Honiara, is the lead regional agency 1993 40.9 46.7 552.3 291.7 931.7 providing management and logistical assistance to Source: South Pacific Comniision, Tuna FisheryYearbook, 1993. its 16 member states in licensing, management, 48 Chapter 4 control and surveillance. All 8 World Bank PMCs maximum economic yield even if it is not are also members of FFA. biologically threatened at this time.3 A compelling argument to effectively limit entry to the fishery is Maximizing Rents from Offshore Tuna Fisheries the fact that vessels from distant water fishing nations (DWFNs) will be willing to pay higher 4.23 Need for Management Strategy. The access fees if total fishing effort is limited to the market-led growth of the tuna fishing effort in the point where their net revenue per-unit-of-effort is Central and Western Pacific during the last few maximized. Coastal states will therefore need to years is becoming a matter of concern. Much balance this willingness to pay with the total progress has been achieved to date to enhance number of vessels required to optimize the total net regional management of the resources through a revenue they can extract from the fishery. variety of agreements-most notably Minimum Terms and Conditions under the Nauru Agreements, 4.27 Essentially the Pacific Island countries the Niue Treaty, the Palau Agreement which need to be aware that there is no substitute for a attempts to limit purse seine licenses, the Regional well designed regional FMR. If tuna resources Register which has proven an effective enforcement collapse, there are no substitute offshore resources tool against violators, and the recent trends towards capable of providing the same level of revenue to multilateral agreements. Despite this, there are coastal states. West African coastal states as well several major decisions that still need to be taken as many developed countries are plagued with by the Pacific Island countries if an effective excessive fishing effort and depleted resources. fisheries management regime (FMR) is to be Fishing grounds such as the Grand Banks off the established at the regional level. west coast of Canada once considered an inexhaustible source of cod fish supplies are now im 4.24 Based on the best available information, their second year of a complete moratorium without the tuna stocks in the wider Pacific region are not any visible sign of a resource recovery. This is believed to be biologically overexploited at this costing the Canadian Government over C$1.5 time. However, the levels of under reporting are billion per year in subsidies to the fishernen. believed to be high. In addition, the practice of Inappropriate management policies which allowed illegal fishing and discard of by-catch may bias inter alia overcapitalization of the catching catch statistics which together with tagging work capacity was one of the principal factors which led form the basis for stock assessments. Perhaps most to this situation. importantly, the large capital investments in the sector would preclude a rapid adjustment of effort 4.28 Two other reasons favor entering into a should stocks suddenly decline. Active management regional management arrangement which would of the stocks is therefore required even before there limit entry to the fishery: (a) at present, most of the is evidence of overexploitation. known global tuna habitats are being exploited so that the supply appears to be relatively fixed; and 4.25 Experience throughout the world shows (b) over the last two decades the tuna markets have that regardless of how healthy fish stocks may experienced tremendous expansion. Canned tuna appear, sooner or later they will be over-fished if an has increased 300 percent and demand for fresh open access fishing policy prevails and/or if tuna has also grown rapidly. Both these markets are regulation is inefficient. Under these conditions, expected to continue expanding. At the same time technological improvements in vessels and gear the lack of new fishing grounds mentioned above result in a greater fishing intensity than is should constrain supply. Together these two forces economically efficient. It should be noted that the should exert upward pressure on prices in the maximum economic yield of a fishery usually medium to long term. occurs at levels of effort below the biological maximum sustainable yield (see Box 4.x1). 4.26 Thus, it is possible that the tuna fishery in 3 Work is currently underway to answer this question, but the region may be overexploited in relation to the the results will not be available for some time. 49 Chapter 4 o W.1 Mninmimng R9conomk Rtturn-s:from a: isher .BOX 4In... .nn.gtlae fhey u n d -.- .: V . -css gie. aslongs. ....... .. - : : . ............. ...-- . . ..:.. . . . .............: - : .: : . : : : : ..:. . : --- ............. ....-:. -........ -. :.- : . . . - : . - ::: -: . : .. . -- zop¢- ¢acess i .mg as-Io - -: . . -:: : . . - : :. - . . - :: : - -: - profits Mr positive tee is incative- . : . . ... ... . ....................... for additidon l essls t enter: the . -: . ; . :- . : ; :-indus. Ts tiues Until pr : ar---- - .:e dissp ated wh ih is the pintcat . . -: ....-...:.-.-- -w-:ttat eq t cot. . o is den :--::.soted the -pen access .:-e4 blum Ra4. As.the:figue shows, .C\ ' C-, ,,;,thisi inesi. fficient outome / {' : \ - / : - - -~~~~~~~~~~~a th a level of lsun elion is bynd . .- / / ,.,Ope,n.A,Openc Acessi -- ........ MS Y, .- d results , in : :- . :/ / : \ -:: - ~~~~~~~~~~~overfshing -:::-- The fficient pint of. . / / / \ -: ::- : .:~~ ~ ~~~~ ~ ~ ~ ~~~~~~~~. h.] -4C aft :; f S. .profit~~~~~~M is btind. Ti cusa h 'poit -wiere the vetical . distance :. ' / . ' 1 --- ''~~~~~~~~~~~..'..... '-.--.'. ,,&,',,','e'e ^ F.:is:'-'':-i kfng ' the total os lin,e isgreatst Note- '" ..-'",, .,.,.', ''. - ''.'' Efft th''-'','"''Tat hi depiction, t M ... ,, ,,, , w .... ,, - .. , - - - ........ Er ~ E0~ occurs befor theMY n heoe fishery thoughlimitngae ssu ould a : -1 ............. . . . . . . . . . . . .I :||*-:- "',~~~~~~~~~~~~~~~~~pad to .' i',.,,'':,e,,- to stabili.ze: fishibg' :Thrt ' at t he point of . 8.. . ....... -..fishery as fishing etrti naased To'' Rene re (deoedT} as fhry is d-edn inadsne Th- s sshows hat as e,fl,,tonis.Xn ,,r0Lt -0~ s il ,.,,1 w- t inras, res on th th e:disc 'n rate. hel by : th--'e, o,,utpu of- a,: ishery- keep effort -' nd. th" fall 'be'n ? Y soit as wel as iniiul inresi nguptoapon knw a te- T e - cuv Crpresns ft'o ' l egae -in fihn. f ths. rae':is' at2 which moigrtte widely~e eaorcsrosesdsms the lEsomlmnaino eveonl oFM theh open accees up withdepleton. Beond M$Y and tne! cot curve repreents efort Abyon MSY.tec6t c-~ increasing~~~~~~~~~~~~~~~~~ te thepOsintefort(bysf the Pacific Islands, Asian Pacific countries and the components-a fisheries management system area between EEZs known asHi-gh Seas. Therefore appropriately supported by solid research, they cannot be properly managed unless the coastal monitoring control and surveillance, and a fisheries states understand that the resources should be judicial system-becomes a matter of urgency. managed at the regional level, both on their behalf and under their mandate. If the region wants to 4.30 Recommendations. An effective FMR maintain a major role for itself as a tuna supplier to operating under a limited access policy has the world markets in the years to come, the potential to be self-policing. (See Box 4.2 for a 50 Chapter 4 . . ....-.. .. ............ .. ........ ...... ..... ..... ........-' ..'':':::- ..- .. ..' ..iS ';'l; -';0'0'' '0;'-;' ' .-:: ':S:' :..t:SS-- . EEiS : ... . :-E -:72.. --f iST.: ;E S : :t ; ..SSC .: W ..: S.Et..: ...S A q . ; ,: . .... ... . .. ... . .. .... a :: -000g ". Ae iaFa n 0 ; t .$ ...R_ . 0-0-i ..... ....... ... .... .... ... .... ..... 0 7 0 0- i 0-00 l 000-0 ; ; 00 0 : 00 g0-; 00-- 1;- s.; :-;E ::00i;;i t-000:: ..;l; .2- ; : , . .:: , m o . ' ..;0i: .........,S ..... ..0l ..t':' .. .... .....|;.i0 ....l0 ......... 00000jS,;fff,,,i,;... ,,,,-'..}S.'?.Wa 6S.ft '$l i0}. . ;0; ::i :-: f.... .. .. . .. . . i... ; 't:0:t:; .. ' "h -;0.'ti t;ag-: -E; .;;.;; , ;gE ;.. ..... .... . .. .......... 0 s.F...~~~~........... ... ...... s = t - A ' Bicuson of2 the ksery Mattribuesoant Reffcive-* SrntentelmtdMcesplcytute ToR. I brer om v oa effective a FMR rw es ytm.it ises sacto sto ic tho e aumbecr o ut vesl opra tngeo soial agvnd hremenddta c poets-e PMCsb allg cojn tion hat e fiostherttey; pltclcnieain o pia nntwgemwit~~~ ~ ~ ~ ~ ~ ~ sItm (l )srnl euain n hscmlmntsodthe resutsh litmits vey s pcie tint ore pay * supotedbylrsearh mo atoimonthen MCSuan c tie y otenio tew asrntenytoertheusces;- pnropelyad weva luated cmoettee opnents rofnten plt ica im p cts of the s itue-atied ars. tunaong-l pofshible Thessel winclhd phaverecenely (MCe), and obafinhyaddiioal financial J assstne stronl in d pend ient rae in o nditirts pof th reIgion,san Fsupotcen.icefot undartaken the O F isP n rule appeified by ers pluigroupstanl traditonalsocialth asesthe healt poift es t hea theks courefsethso e of thMC*ransshp etoprtos andmtd of thrdurtport r negltr frtakewthe fcssry finshingtuti n dl thest fctusr fting h C Sm ftes set myj f enompse he allot plcs enans the FFA aid cojnto impottn moifctin ofP :tth bies--scm asrffeees ctiveeinl tn itheiesintrsugsmdiiain c poes tenixOhr,ifo: c anc ge meing t icnstiutos ond cathalfof the oastaatnelo nti a dvlpit qutats-adls rca nssc heavmW Oil 1T1IOU ~ attai th econom 4 bene its iSion kei ngwthe onclsin of thelre noumbro rega.......dingHed toh health mf t.he.stock ......... wrwltp Ci ano he. OVmIU a rMCi...hlg.nsit fal h The primary task of the MCSUS . 01 ...h> s PtmO.epteta ..... .......... .fftc v...enn . aagd ..gnrae lzitdoea sysn.s aswl smntuii,cnrl eniern tinovs ntjs 5Jrj ............ The ' isusuall tec.nical.biol .gic.l and economic pad ) of d thegeerl)jdiia discussin of th key atributes f an.efective. Streghntelmtdacs oiyt te P. Inrduecac.lmtsb.seie .n. rert * Establish a moratorium on. th.suac fne.rtcttersore; licenses until appropriate economic evidence. . ...... ...... .. relate to te rapd expnsionof log-lin flees is Conuc.a.i-dpt assssent of th properly evaluated, environmental impacts of the. shore-based. fresh4 tualn-iefsigvsslPhc aercnl * Sek an obtin aditinal inanial ssisanc to.rolieratd.insomepart.of.he .rgion.an suppot scintifc effrts ndertken y OFPto apear o bepolluing oasta lagons, n th assess.. the ..... helho.hetn.tck;cus of trassip en oprtosadohrpr stts;"Tisi n epngWhth oclso s off ie Foumtf j: ::X.: i~ ~ ~ ~ ~ ~ ~ ~~~~edso Saemetn, 94 51 Chapter 4 Support the implementation of a satellite tracking not any part of the U.S. catch comes from the system for fishing vessels operating in the area, waters. The balance is tied to actual catch. complementary to ongoing acnal and surface surveillance. Transponders should be required for 4.33 Although the U.S. Treaty specifies a lump those vessels which have proven unreliable in sum payment, it is customary practice to express the their compliance with the established management fee as a proportion of the value of the catch as all system. other agreements are tied to paying fees, based on Issues in Rent the catch. In 1993 total access fees for the region were about US$56 million compared to a total catch 4.31 Introduction. Tuna fishing is conducted valued at approximately US$1.2 billion. Thus the by vessels from DWFNs who pay access fees for average access fee was about 4.4 percent of the the rights to fish in waters under national value of the catch (see Table 4.5). Access fees from .rdtnTearWp , Kthe U.S. represent about 10 percent of the value of jdohe majplesRepublior Chinsare Japwan, Korea the catch. Exclusion of the US from these estimates Unithe Peopes. Republic to PChin ctatiwns,a the reduces the average access fee to about 3.7 percent UntedSteso. Contrar to rMc epettinons, sor of the value of the catch. This seemingly low level disheades ho DWeneparticiatidmucheconomin of of fees received by the coastal states has generated fisheries has not generated much economic activitymuhdbt,whtePCsflighater in their domestic economies through downstream processing or support activities. Offshore fishing resources are betig under prced and the DpFcs has remained vey much an offshore activity and the vclaiming that this is a fair rent given the price pay-off for the PMCs has been limited largely to the ofathe tor. collection of access fees. Thus, the PMCs face a of the sector. dilemma in terms of how to translate their vast 4.34 Figures 4.3a-c present the distribution of offshore fishery resources into significant domestic access fees, catch volumes and catch value by value-added, in order to generate employment and fishing nation for 1993. Comparison of these incomes. suggests that after the U.S., Japan appears to be paying the most, relative to the output value while 4.3 Curn*cesFe.ttepeettm Korea and Taiwan appear to be the most serious the PMCs derive access fees through a number of undeayers-for ampe, Kore vessel idu1 mostly~~~ ~ ~ ~ biaea.ragmnt ihidvda underpayers-for example, Korean vessels paid I11 mostly bilateral arrangements with individual percent of total access fees, for catch which was countries or operators. The exception to this is the percent of t totala catch value hsi case of the United States which in 1987 negotiated appeaworth 21 percent of the total catch value. Thus it a single multilateral treaty with the FFA member pay s across conries. states. Under the terms of this treaty, all FFA members receive a minimum payment whether or 4.35 Two further points should be noted. First, over 25 percent of the total access fees in the region went to non-PMCs in 1993. Second, of the total Table 4.5: Access Fees-Major Fishing Nations, aess fe received b P 1993, 1993 access fees received by the PMCs in 1993, 1993 approximately 96 percent went to just three cr-FSM, Kiribati and Marshall Islands. U$A -- . 10%0°Me 4.36 Rents. Rent can be defined as the Japan . . - -.5oM Taiwan - - . : 3.7% difference between revenue and costs, where the Taiwan 17 Korea 2,2% latter represent opportunity costs, or the returns that inputs in fishing would have earned in their best Source: World Bank staff estimates based on FFA and alternative use. national sources. 4.37 A number of difficulties arise with the application of this simple definition of rent to the fishing industry. The first is associated with the 52 Chapter 4 ownership of the resource itself. Fish are not owned operating inefficient vessels to coastal states in the until they are caught. Given time and the existence form of lower license fees. of open-access conditions, all rents will be driven to zero because of open access. Rents can only be maximized if there are controls placed on the entry of vessels into each EEZ. Thus, the actual level of observed rent tends to bear little relation to potential rents. For this reason the appropriation of optimal rent, rather than the observed rent, should Figure 4.3a: Access Fe Paid, 1993 be the ultimate goal for coastal states. It should be noted, however, that only in rare circumstances are the economic and biological data easily available to O1h/S calculate the optimal rent. Jaan 4.38 The second difficulty concerns the biological nature of the resource. As noted USA previously, tuna in the South Pacific are either 34%A highly migratory or highly mobile. Their abundance fluctuates between seasons and from year to year. The optimal economic rent for a tuna fishery in any Taiw Ko rea country's EEZ is therefore a biological variable 10% with a large magnitude of uncertainty. Moreover, prices, costs and international exchange rates are subject to large random variations and cyclical Figure 4.3b: Volume of Catch, 1993 movements. Resource rent is therefore also an economic variable which exhibits considerable Other fluctuation through both time and space. 2 % 4.39 This uncertainty adds to the magnitude of the problem more than just in its calculation. It means that this industry has a number of facets which contribute to the very high level of risk associated with harvesting. The logical conclusion Taiwan orea is that fishing companies must be allowed a rate of 23% 234% return above the normal in good years, in order to compensate for the years when returns are low. Thus these rents should be shared between the Figure 4.3c: Catch Value, 1993 DWFNs and the resource owning coastal states. Others 4.40 Resource rent in the tuna fishery was 11% estimated for U.S. tuna purse-seiners for the period USA 1989-92 and for Japanese long-lining vessels for Japan 1992. The estimates were repeated varying the most 43% important factors-such as price, costs, catch per Taivwan unit of effort (CPUE), and days fished. These are summarized in Tables 4.6 and 4.7. An interesting conclusion to emerge from this analysis is that Korea medium-sized (100-200 MT) Japanese long-line 2]% vessels are unprofitable under most scenarios. Clearly it is inappropriate to shift the costs of 53 Chapter 4 Table 4.6: Rent For U.S. Purse Seiners Under Various Scenarios, 1992 (Io of catch value) 600 -21 -16 -12 -9 -52 -24 -5 9 18 -23 -18 -14 -11 700 -4 0 4 7 -30 -7 10 22 22 -I 3 7 10 800 9 13 16 18 -14 7 21 32 26 15 18 21 23 900 19 23 25 27 -1 17 30 39 30 26 29 32 34 1, 000 27 30 33 35 9 25 37 45 Source: USITC 1990, South Pacific Commission 1993 and World BanLk staff estimates. 4.41 The analysis shows the high sensitivity of level of about 4percent of catch value. rent to both prices and CPUE, as other factors are held constant. For example, under the various Issues in Collection scenarios presented in Table 4.6 rent for U.S. purse-seiners varies widely from -52 percent to +45 4.42 DWFNs generally point to low profit levels, percent. A number of conclusions can be drawn calculated for taxation purposes with high capital from this analysis. First, in poor years, vessel costs and high depreciation rates to argue that their owners will make losses, which tend to be ability to pay is low. Inappropriately low license compensated during good years. Second, the wide fees create many problems. First, they may variations in rent illustrate the high degree of risk in encourage inefficient fishers to participate in the the industry. Very low rent figures are obtained industry. More importantly, by driving down costs when the major determinant factors combined they encourage entry into the sector and (price, total effort, and CPUE) are low in exploitation beyond economic and biological magnitude. Under the most likely simulated sustainability, leading to overcapitalization and scenarios, however, rents range between 7 and 30 overfishing. Thus rent capture by the coastal states percent. This analysis therefore suggests that there is a mechanism to automatically reduce is scope to raise the access fees beyond the present overexploitation. 4.43 Under reporting of catch was a serious Table 4.7: Rent for Japanese Longliners Under problem in the past but is much less a concern since Various Scenarios, 1992 the advent of compulsory transshipment in port in (S. f .catch value) 1993. The problem of illegal fishing is believed to ?! . . .... .... A .. . .......... ...... . .. ..... . ........ ... ............ * .S. : ........... - g be serious but there is little evidence to support or CPUE: 1i5: refute such an assertion. Both of these must 50-10OOT -55 -23 10 continue to be addressed through monitoring and 100-200 T -61 -29 4 enforcement with increased collaboration between 200bOO0 T -48 -16 16 coastal states. The present method of fee collection, CPUE: 1.9 for example, encourages under reporting since the 50400 T -42 -I 40 access fee iS based on the value of the expected 100-200 T -48 -34catch-which is derived from prior years' output. 200-600 T -35 6 46 50-lOOT -29 20 70 ~~~4.44 Alternative Collection Methods. The best 500-100 T -29 20 70 method is, in theory, one which collects the rent, or 200-600 T -22 27 77 the profits earned, with an appropriate allowance for some sharing between DWFNs and the coastal Source: Statistical Yearbook, Ministry of Agriculture, Forestry &ste.Autoighefhngihswrkbstn Fisheries, 1992, Japan, and World Bank staff estimates.ste.Auionghefhngrhswrkbstn 54 Chapter 4 theory in terms of market efficiency, flexibility, 4.48 The FFA keeps current records of prices, ease of implementation, enforcement, and rent allowing the expected price to be estimated with collection. However, it requires a competitive ease. The difficulty is that the burden of an market in order to function, which at present does unexpected fall or rise in value of catch, either due not reflect the state of the industry. Thus collusion to environmental factors or economic factors, falls between vessel operators could ensure minimum directly on the DWFNs. To the extent that distant returns to the coastal states. water fishermen are risk averse they will be willing to pay only a lower fee in advance. It is nearly 4.45 Much interest has recently been generated certain that higher fees could be easily negotiated in Individual Transferable Quotas (ITQs) as a based on actual value of catch-the obvious form of fisheries management. ITQs are presently difficulty is the direct incentive this gives for under being used in Australia, New Zealand and the reporting, with immediate cash returns to those United States. Although these have enjoyed a fishing. certain degree of success a number of problems have emerged. First, ownership is transferred to the 4.49 The most serious drawback of the present fishers who may sell their access rights freely. method of assigning fishing rights and access is that Second, there has been no satisfactory way of there is no element of regulating catch by species. dealing with multi-species fisheries and by-catch. Under this system, once fees are negotiated, the This simply means that when species not specified incentives are for fishers to maximize their catch. under an ITQ are caught, they are routinely Consequently, pronouncements on the sustainability discarded at sea. Finally, in spite of ITQs, it has of the fish stocks under the current fishing effort are proven very difficult to reduce fishing effort when a only made ex post. There is therefore an urgent stock is threatened. In the case of southern bluefin need to introduce an element of management into tuna in Australia, the industry, which had invested the licensing as discussed previously (see paras. heavily in vessels, fought vigorously and 4.24-4.29) vociferously against a reduction in fishing effort, despite overwhelming scientific evidence that the 4.50 Value of Aid. The U.S. pays an access fee stock was severely depleted. of about 10 percent of value of catch, of which, only about one-quarter is paid by the U.S. Tuna 4.46 Taxing the value of access is another idea industry, the balance being paid by the U.S. generating interest. The two principal drawbacks to Government. One cannot then argue that the U.S. this approach are: (a) determining the value of Treaty with its generous access fee of 10 percent access would not at this time be practical in the reflects the willingness-to-pay of the fishers and region; and (b) in bad years such as those therefore reflects their profitability. associated with low prices, this method could yield zero rents for coastal states. 4.51 There is ample precedent for these types of agreements-the Protocols between the EU and 4.47 Present Fee Method. The lump sum West African coastal states consist of low value method of charging in advance is the most widely license fees paid by the fishers compensated by a practiced method in fee negotiation, and is probably direct contribution by the EU to the coastal state. the best method available for the South Pacific tuna These agreements, however, have the disadvantage fishery at the present time. The formula used can be of subsidizing the industry, allowing vessels to expressed as: remain profitable at low levels of revenue. Thus fishing effort tends to increase beyond the optimum FEE = EXPECTED CATCH X EXPECTED PRICE economic level. At the next revision or renewal of X FEE RATE the U.S. Treaty, the PMCs should work to raise the The expected catch per vessel can be derived from portion of the access fee paid by the tuna industry The~ ~ ~ ~ ~ ~~~~ ~~ ~a therete istc onr avere ea ren tove berared historical records. The lump sum fee, based on the as there is, on average, rent to be eamed. formula above, is paid in advance of operations. 4.52 It is often claimed that although Japanese fees are low, there is a large amount of Japanese aid 55 Chapter 4 flowing to the region that should be taken into to lower the access fee as much as possible. There account. It has been shown, however, that total aid is clearly substantial room for improvement in this over the period 1983 to 1987 was US$79.3 million practice by resorting to collective action. The to South Pacific countries with Japanese fishing endorsement of the multilateral approach by the agreements, compared to US$78.8 million for Heads of State at the Brisbane Summit in August countries without fishing agreements, over the same 1994 is a first step in this direction. period.5 This provides no support for the argument that Japanese fees contain an aid component: this 4.56 Present Approach to Negotiations. aid is, and should be considered as, distinct from Under the present system, all but the U.S. access negotiated fees. agreements are negotiated bilaterally between the fishers, DWFN fleets/DWFN governments, and the 4.53 Payments in Kind. The practice of individual countries.6 Fisheries and foreign affairs payments in kind should in general be the least officials usually represent the coastal state. The acceptable method of payment. Access to fishing FFA may be invited to participate as advisor to the grounds often generate a number of benefits-other country concerned. In any event they usually than financial-such as grants of goods and provide logistical and technical assistance to the services, provision of scientific data, technical negotiations whether or not they serve as assistance, aid, provision of capital investment participants. As an important repository of including infrastructure, domestic processing, and infonnation on catches and prices their services access to markets for fisheries products. These during the negotiations are invaluable. benefits can be called de facto royalties if, in the absence of a fishing agreement, the particular aid in 4.57 Proposed Approach to Negotiations. It kind would not have been an expenditure for the is recommended that the PMCs along with the other DIWFN. FFA members take further steps to collaborate in moving to a system of collective or multilateral 4.54 The provision of technical assistance to negotiations for licensing fisheries access. processing plants under joint venture agreement, no Notwithstanding the principal attraction that this matter how valuable, cannot be considered a de should result in an increase in the rents going to the facto royalty. Nor can access to markets, or the Pacific Island states, there are a number of provision of infrastructure if its primary goal is to compelling reasons that argue in support of such a serve the DWFN in marketing or during port calls. course of action. First, it reduces the costs of Such payments in kind are part of normal operating negotiations considerably because, at most, it only costs for the DWFN. Since it is so very difficult to requires one negotiation per fishing country rather sort out what is aid, what are de facto royalties, and than the present system of multiple negotiations what are normal operating costs, it is preferable to with different companies. Second, this would negotiate all fee agreements in financial tenns. Aid considerably reduce the costs of monitoring, control ought to be considered separately. and surveillance (MCS) by introducing regional economies of scale. Finally, scarce resources in Negotiating Agreements fisheries departments would be freed up, allowing them to be deployed in other priority areas such as 4.55 If lump-sum financial payments in terms of management of nearshore resources. value of catch are seen as the optimal strategy, there still remains the issue of which is the best 4.58 A successful regional strategy for method of negotiating the fee. Under the present conducting negotiations will depend crucially on negotiating regime which is largely bilateral, the stock assessments and the ability to relate these to DWFNs are able to play off one Pacific Island state against another in order to obtain concessions and 6 The Nauru Agreements were also multilateral agreements but were focussed on establishing 5 See Uwate R. Japanese Aid and Access Fees to FFA Harmonized Minimum Tenns and Conditions Member Countries, FFA Report 89/37, 1989. of Access among member countries. 56 Chapter 4 desirable fishing levels. Thus the advice and this respect, would be a guarantee system to ensure expertise of the OFP and FFA will remain vital. In that no country would receive less under any future particular the role of MCS will be more important multilateral agreement than it presently does under than before because the effectiveness of the new bilateral agreements.7 This could be ensured by strategy will rest squarely on the ability to formula or other appropriate method. The PMCs determine compliance and to penalize offenders could move gradually to full multilateral (see Box 4.2). Another key requirement will be the agreements, initially grouping adjacent states or a effective incorporation and enforcement of the few resource-rich states. Harmonized Minimum Terms and Conditions of Access in all new agreements. Managing Investment Effectively 4.59 This new strategy will require concerted 4.63 Pacific Island countries are keenly effort and cooperation between the Pacific Island interested in developing domestic fisheries capacity countries on an unprecedented scale. The essence of to participate in the harvesting and processing it is that a strong commitment will be required from associated with tuna operations. Yet this goal has all parties for this effort to be successful. As a first remained largely unattainable and generated high step the countries of the region will need to design costs for governments across the region. This and agree upon a comprehensive long-term section examines the issues underlying such negotiating strategy that lays out the steps required participation and tries to determine whether to achieve a specific rent target over a period of governments with limited capital resources should time. This will require countries to make plans invest in off-shore fisheries development, given the regarding all aspects of fishing access and high opportunity costs of other domestic activities, development, for example, where ports, trans- such as health, education and infrastructure. shipment facilities and other infrastructure should Micronesian countries, in particular, have adopted be located. that path, whereas countries like Vanuatu have chosen to focus their resources on the development 4.60 Such plans should be formulated with the of inshore fisheries. major markets and shipping routes in mind and will require close collaboration and agreement between 4.64 Investment in fisheries development is a Pacific Island countries. Clearly it is not optimal for highly capital-intensive undertaking-be it in each and every country or island to have a vessels, loining facilities, or canning plants-and transshipment facility. These decisions will require given the high risk and technical requirements of access to the best possible technical advice. The the sector, success is not easy to achieve. Most potential gains from implementing such a far- PMCs simply lack the private savings which would reaching strategy would seem to far outweigh the be required to finance such investments. costs. Consequently, in many PMCs the government has undertaken such investments directly, in the process 4.61 The second part of this strategy concerns utilizing scarce public savings. The macroeconomic the institutional and technical requirements of a consequences of these decisions are significant and multilateral strategy. The negotiations themselves may have long-term repercussions (see Table 4.8). will need to be carried out by specialized Public investment in a tuna cannery, for example, professional negotiators who would be identified would amount to nearly 20 percent of GDP for and recruited by Pacific Island countries. Moreover, FSM. Thus the opportunity cost of such an they should be utilized extensively in the first investment, especially given its riskiness, should not stage-to design the framework for a regional be taken lightly. strategy on negotiations. 4.62 Efforts will need to be made to ensure that coastal states with richer fishing grounds are not made worse off through the negotiation of 7 This was agreed to in principle at the 1994 Fonim multilateral agreements. A possible safeguard in Heads of State Meeting. 57 Chapter 4 Table 4.8: Illustrative Costs Of Investment in which is scarce in some of the PMCs, and the Fsheries....... 1availability of internationally competitive unskilled P*li1l~~ ........ -..... labor. Conditions in world markets are such that . ..... - :: - . --:- :even after meeting these conditions many canneries GDJ~~~~~~~~~ ~~are in financial distress-several canneries in Thailand and Indonesia with some of the lowest FSM 3 19 1,554 labor costs in the world, for example, are running Fiji 0 2 2,128 financial losses. These losses, however, are being Kiribati 7 44 944 borne by their private operators. Marshall Islands 6 38 1,717 Solomon Islands 2 12 763 4.68 In the short term, PMC governments are Tonga 3 20 1,626 advised to reduce their presence in these purely Vanuatu 3 16 1,236 commercial activities. This calls for a strategy to Western Samoa 3 20 925 cover the transition from publicly managed public Note:_Purse-seiner_assumed_to_cost__US5_r_il_ion and a assets to privately managed public assets and will Note: Purse-seiner assumed to cost $uSs million and a require joint-venture partnerships with foreign canrery $us30 million. investors. However, governments should be cautioned against making any direct financial contribution. On the contrary, foreign investors 4.65 The outcomes of these past investments are should be charged a fee to manage these enterprises easy to quantify-not a single financially viable within a framework which allows for the possibility public enterprise is known to exist in the region. of future ownership. Thus, the government This has usually meant that in addition to the initial concerned is relieved of the immediate financial capital outlay, many governments have remained burden and receives a fiscal contribution. burdened by a continuing call on their budgets to keep these enterprises running, on the grounds of 4.69 Over the long term PMCs will have to rely maintaining employment or income. Thus, it is on attracting foreign direct investment (FDI) while vitally important for governments in the region not continuing to encourage domestic investment in to become involved in direct public investment in activities with low-capital requirements, such as the sector, when it requires a financial contribution. fish smoking and loining (see Chapter 2). Such FDI This applies equally to foreign and domestic should once again not be the basis for government investment. financial contribution. Rather investors should be required to bear the full commercial risk associated 4.66 In addition to the high capital costs already with their investments, thereby maximizing the mentioned, there are a number of other factors potentialforsuccess. which argue against direct government participation in the sector and help explain some of the past 4.70 The role of the govermnent needs to be failures in this area. Modern fishing is a highly confined to creation of an enabling regulatory skill-intensive occupation. These skills presently framework and conducive business environment for exist in the PMCs in a limited fashion. Furthermore, private sector participation, both foreign and investment in vessels is not a cost effective way to domestic. Additionally, it will need to ensure create employment, as a typical purse-seiner will adequate provision of infrastructure. This is one of employ 15 people for an investment of upwards of the prime factors behind the success of the domestic US$5 million. tuna longline fishery in Fiji. In this instance the Government has taken a basically hands-off attitude 4.67 Canneries may be able to provide toward the private sector operator, allowing significant employment, but require even larger expansion and consolidation to take place outlays, in excess of US$30 million. The unfettered. This success has generated some requirements for a successful canning operation are regional interest and the Solomon Islands has also hard to meet in the region. These include the entered into an arrangement with the Fijian operator existence of substantial supplies of fresh water to try to replicate the model. 58 Chapter 4 - :1 4.: .f- T i i JI r i .. .. ... . .. . ... ... .7 . ... . . . . . . . . .. .. . . . . . .. ..... . .. .. ..... ........ .. .. . .......................................................................... . . :. ;0- Transfer0 prFicin : appea's tot l 000 maitned l technicl ali iistance ma -0 ssive; losses, the; firm ened e:intlol0 : f-have been- practiced-in thfe fisheries:S: : areemnts wmithcompanies Vin the a:S thi-a:Qrdt joint-venture agr;eement : t:: isector in the Pacific region at v arious:0 sine f47 isIl:reign tcountry Abut the jgoint-:g: S recently rather tan closing down ar 0 ;0times.; - xainplesl0 0ofi gfinns i ng tw o vfigi00fgtentue; paidg a much- El'gher 2 gfert f 0- tapparenty un; profiXtabl opeation.:0- : - diflferent- PMCs 0which 7have operated iEEE:these.-an: average :off 30-400 percenlt : Liket the: company ti:int: the:: first: i 00for :long; periods :ofE time- withouit of iisales- -throughoult gthxe ::i980s-. ;: examplethsi firm appears to av0kei; slinwing con msistent accounta ing lll :Finally, 0 theti joint-ve-nture rop i;i;l had: ga high-cost js4trutueong sales,li: t:;0;profits iEbut i haste fiailed lto lAexitl thel00 f received a price ifo 00itst pra lvns 0f managementi fees, andi eomsi4ns 00 -DE inidustryare outigned here,EE:0i:EiD:d: consistenty-0 belowiE th;at o Qf-0 the f:E:E which: werei all hanidled through .0 .. Th. .. f ir.s. coces. . .. ... appears tha thefin waslating he count. The effective . rate . of:. I90 5 durifsh ng whichg thre- l «e tfrs l;:its costs an reduc:ing its r~~eveu ll- l;i: sales conussion was nearly double ;g:: d98O; drin:-ic ggthee -imsg t: iorder: to -report Elosses anidaviE Od iEEEthEfe existing: 1: 7 prcent pad :as sales : iEEiE:operated: i:A comparison. of.two of.paying c . ..p..a.e tae . co..issi r .lar .a nn .ed . .tuna. : ..... ..: .E ... ......: : : :. .:EEEE :E :E : :E. E::E: ayn c w nt a es E::E : o si a fr:t iae am d u I g:these-a :freign jomPvnturm e :wil:th :0: !t00g: y0: ti : :0:00:0; 00l !;0 eter ig ng th U.. aret Fnaly the' Oovcrnntent -and Aa (lovennet The secon::;;: :;:0t d; exmple;: of in000stra-group debts have bltallooned: ;;0 operated compan;:t y, ;X in:;ti; qute rAtet;Q:0;eporte losses ncers fa: ford0;eign nXrearly 0nine-fibidi over ithe last fv ..tl t aie:;:gg::;; ::g::: :; g;i g- :::::: ;:; o t v e n ! .....s ed ..e: e .. .; ..t yea . ..: 0 .... .t ... ... .... ... ... .. .. 1970 to rodce' nd e sist. froe.:: ..years......, ... Theg oi nt-venture wasm Whil definitive h co clusions: t g:::: estacompanies le:gEa:nduts comp:Sf:any has operated undera seriest ar-t-se diffcut:0ltto; daw from: such:t adebt fom its parent 6 ra of jointveure W agree ts witthe- :: :;e: .. agg.egate. oIon the preceding ::::icnsequently: hasigmuficat interest; Govenunet-tlir too:-E iEe t dat-the :;00::0exmplest are ;highy suggestive:: of; :- expexises-s~ highEFS 'as f 8 ercenti iof fEirstE00 t: of wh::E E>ich Tit E iE'lE t trnse urctce :which:f: i-7iZii0;ii:: lsales riough the r -1980s. Te 'i to make priingsane - r a ; Siet 461 ~~~~~ iifntve' pofit. tvr'vaorgeerat aco nting losses for the nf g:also g feneated mass1ve. deca0lw. :deste manyh fied: o earn a puposefta av d on . B - echa ge loss swhch by 06 had ' :s profit. making a ' to the revenue ss genead byprt .-escalatede eto 22: :percet f s : i: :'- : pei profit on- . i. eigh ':: .th e i. r a ti es.. te m ay 'be t 00contrast toth.e governent-ri lfirt m -i00: l993 laccnlti sigifan e-iec lose due to wh ' ::showed: no evidence 'of such : s: : : s h' : e: hag losses -:- spit ::-::E:E: f::-E:E -:- E E:,-:::e: e :: on 'e outm us losesinth egprocess.g the- ' thEe- up-fron li drawal' of surplusgg dtihe se' pmc t in f tha e 'e' t i paidc r taxes: more athi t a bottom-Ptne. approahto m k A ot saute ha tey e thi se: 'profits 4.71 Participation in foreign joint-ventures has Transfer pricing usually occurs when a firm been the most common vehicle by which operates in more than one country-international governments in the Pacific Islands have encouraged trade permits transactions beyond the jurisdiction of foreign investment in a host of activities ranging the home country tax authority and creates the from vessel purchase and operation to processing necessary conditions for transfer pricing to take plants. This is an area that needs careful attention place. The existence of tax havens and low tax andmuch caution as some joint-venture agreements areas encourages finns to manipulate prices and are especially unfavorable to the host country and costs so as to reduce profits in the higher tax poorly crafted agreements are often the cause of jurisdiction thereby reducing the tax liability of the other more serious difficulties, such as revenue firm. This can be done in various ways, for leakage due to trade malpractice or transfer pricing example, by raising prices and costs. Although manipulation. transfer pricing is associated with multi-national enterprises it is not limited to such firms. Domestic 4.72 Transfer pricing is the term used to firms may also indulge in this practice through describe the internal sale of goods and services double invoicing of exports or imports This between different divisions of a business enterprise. practice is believed to occur in both the forestry and 59 Chapter 4 fisheries sectors in the Pacific Islands' (see Box closer links between the Pacific Islands and the 4.3). DWFNs. The PMCs should rely on attracting investment from this pool of foreign investors 4.73 Policy Response to Transfer Pricing. In already operating in their midst. From the point of the Pacific the most common response to the view of foreign participants, shore-based processing perception of transfer pricing has been to employ ad facilities have the potential to reduce costs by virtue valorem export or turnover taxes in lieu of of the closeness to the raw material resource, which company taxes. The problem with this approach is can be used to offset lack of labor competitiveness. that it loads a company, that already suffers from distortions to its balance sheet, with up-front costs D. Coastal Fisheries which further decreases profit generating potential. 4.77 Coastal fisheries are influenced by the 4.74 Another option is for governments to general socio-economic trends which occur both auction resource development rights and abolish all within and outside the Pacific Island region. In taxes. The lack of a competitive market in the many PMCs, the traditional role of the government region would render this unviable as would the lack in fostering coastal fisheries development is of monitoring capacity. Privatized market increasingly being adopted by the private sector. monitoring through a company such as Societe There is therefore a need to redirect public services General de Surveillance is an option that several to the management of overexploited resources and developing companies have employed successfully to focus public resources on the provision of but at a cost. In general joint-ventures should rely adequate infrastructure, training, and creating a on profit sharing arrangements and not on ad favorable environment for stable investment. valorem commissions as the latter gives no incentive to minimize costs. 4.78 PMC governments have identified the following goals for coastal fisheries development: 4.75 In particular, transfer pricing may be best (a) protection of food security; (b) utilization of avoided if governments impose taxes on companies coastal fisheries as a substitute for imported that fail to generate a profit. Economic theory protein; (c) maximization of foreign exchange from suggests that the only form of tax that is efficient is coastal resource exploitation; and (d) generation of a lump sum tax, one that cannot be avoided by any local employment. Many PMCs have thus focused action apart from closure. Governmnent can and on developing relatively unexploited fisheries, and should impose taxes based on estimates of what a in creating the national infrastructure necessary for best practice firm would achieve in the market and development of domestic markets. The experience establish the tax liability accordingly. to date has been disappointing. Diseconomies of scale, inappropriate maintenance, poor management 4.76 The strategy outlined in the preceding of collection and distribution centers, lack of section for limiting access to the fishery and raising entrepreneurial spirit and socio-cultural factors access fees through collective action should, over discouraging full-time participation in the sector the medium term, have a positive effect on raw have been but a few of the factors responsible for material prices and raise the value of fishing rights the high failure rate of these programs. in the region. At the same time it should forge 8 See Commission ofInquiry into Aspects ofthe Forestry Industry, Prime Minister's Department, Port Moresby, 1989. 60 Chapter 4 Changing Patterns of Resource O T44:1intwitiO C L i!:; Exploitation 4.79 Future strategies for nearshore 1983 1 i fisheries development in the Pacific need to be based on a good understanding of the socio- %of hiF sCdiedngh 50% 35% economic trends affecting the sector. There is %of RrF Hilds dingrTros 10%/0 19% evidence, for example, that in many areas the %fRrd d ls lng eenS-dl 8% 13% reliance on subsistence fisheries is declining AaeishrgTdipGMek 1 7 due to increased commercialization of the %: f Fisrngu Hs-ds lirig t-ir Qkch rna 400/% catch at both village and national levels. The % dreAbVSdlirgVMntrMllage nla 70/o sales of fisheries products is currently % d HO1ksRrgisfrcmFm-des rVa 31-33% practised by 31 percent and 17 percent, respectively, of the income-earning , ; 1;zI: households of Kiribati and Solomon Islands; 40 perccnt of the fishing households of 40nuatu,and36 percent of the fishing households ofapparent in other PMCs, where fish is a more Vanuatu, and 36 percent of the fishing householdsimotncmpetofamlprensulyth in Upolu, Western Samoa. Village sales appear to cmportant component of animal protest supply, the be replacing traditional bartering systems in many in particularacanned fishrandtmeats-has been areas. m particular canned fish and meats-has been rising in the region. As much as 80 percent of the 4 ~~~~~~~~~~~~~~fish consumed in Honiara, for example, is frozen or 4.80 Some of these trends are highlighted in cane uTedlow iand,non-perishablitoo Box 4.4, which indicates an overall decrease in the cathed.s The lower pf ce and non-peaishability of number of households involved in fishing in tp Vanuatu over the last decade, but a rise in the influencing consumer choice . proportion of households collecting shells-an important source of cash income. Average fishing 4.83 The 'ntroduction of new technology and effort has also increased, suggesting that fishing targeted demand from export markets, tourist effortivhs also bingcncrased,asugeing that fshing ooutlets and urban centers is increasing pressure on activities are being oncentrated in the hands of high-value nearshore resources, especially near fewer, but more intensve, operaturban centers. In Western Samoa, commercial sales 4.81 While domestic sales are expanding, there of inshore fish at the Apia Fish Market decreased is little evidence that public programs are by 90 percent from 1986 to 1991, largely as a result responsible for this trend. The most rapidly of overexploitation". This fishing pressure cannot expanding markets have been informal village be easily reduced by re-directing effort to less outlets, unstructured road-side sales, and direct exploited areas or alternative species. Remote sales to private outlets in major urban areas, often areas, while well endowed with resources, are often at the expense of public and municipal outlets. In commercially unprofitable due to lack of economies Fiji, for example, the share of domestic sales held of scale. Changes in target species, similarly, are no esly compatible with either tourist or export by non-municipal market outlets has increased from not easi. Where it ex ists s on taet 50 percent in 1978 to nearly 80 percent at present. markets. Where it exists, pressure on target In Vanuatu, similarly, 67 percent of the seafood consumed in Efate is sold through private outlets.9 '° Crossland and Philipson ( 1993). 4.82 In countries such as Tonga, Western " For Vanuatu, it has been estimated that for the same Samoa and, to a lesser extent, Vanuatu, the role of value, a consumer in Port Vila could obtain three seafood products in the total protein supply has times as much caloric content, and four to six times as declined (Tabls 4.9). While this trend is not much protein from canned mackerel as from fresh reef fish. (See David and Cillaurren, 1992). 12 Other causes include the destruction of reefs caused by cyclone Ofa, coastal degradation, and shifts in the MacAlister Elliot & Partners (1992). location of sales in favor of private outlets 61 Chapter 4 Table 4.9: Trends in Per Capita Supply of Fisheries reefs have similar productivity, the costs of urban Products, 1974/76-92 pollution in terms of productivity losses could -: Pi - :~!.:: .174/76 .9 : : 85 : .1992 amount to WS$415/ha/year, or nearly Kg/year US$170/ha/year. Fiji 24.9 42.5 40.7 Kiribati 51.4 72.6 74.6 Solomon Islands 55.7 58.3 539 4.86 In view of the above trends, and Tonga 11.5 30.5 15.5 considering the important socio-economic role of Vanuatu 45.7 39.4 31.7 coastal fisheries in Pacific Island economies, Western Samoa 44.2 45.2 43.2 management of coastal resources should become a matter of national priority. Given the limited Protein Consimed capacity of most fisheries departments in the region, Fiji 33.0 35.4 28.9 it will be important to ensure that management Kiribati 70.0 71.3 68.2 strategies are supported by community action and Solomon Islands 70.6 67.1 73.6 effective enforcement mechanisms, and that they Tonga 21.0 32.9 17.9 are adequately linked to broader environmental and Vanuatu 39.0 35.3 30.9 Western Samoa 46.6 39.2 31.8 nutritional strategies. Figures reported are averages for the years 1985-92. Source: FAO, Agrostat Database. A Management Strategy for Coastal Resources 4.87 What justifies management of coastal nearshore resources is thus likely to remain high for resources? In general, overexploitation of fisheries the near future. occurs as a result of market failure due to the lack of incentives to exploit the resource sustainably, 4.84 Because of their proximity to land, coastal commonly associated with unclear property rights fisheries are vulnerable to the environmental or lax enforcement. It can also result from poor impacts of rapid urbanization and poor land understanding of the benefits of management in management. These include urban pollution of reefs ensuring sustainable extraction. The introduction of and lagoons, increased sedimentation of reefs, cost-effective management regimes can enable lagoons, and nearshore ecosystems (e.g., through resource custodians to capture resource rents that logging), and direct alteration of coastal would otherwise be dissipated. Pacific Island environments.'3 The present levels offecal coliform communities know this all too well: in many PMCs, contamination of shellfish in the Tarawa lagoon, for customary leaders imposed taboos (temporary example, are of special concern, since contaminated closures) on fishing grounds to allow stocks to shellfish was the primary cause of the cholera recuperate prior to a ceremony requiring a large epidemic of 1977. Alterations of vital coastal harvest. habitats such as estuaries and mangroves can also have long-lasting negative impacts on coastal 4.88 The absence of adequate management, has fisheries. meant that exploitation of sedentary species for export markets have been characterized by boom- 4.85 Environmental effects on fisheries are and-bust cycles. Figure 4.4 illustrates this pattern difficult to quantify. It has been estimated that in for beche-de-mer exports. During the late 1980s, Upolu, Western Samoa, fishing yields around Fijian exports expanded rapidly to a level of 717 degraded urban reefs average 28 kg/ha/year, MT in 1988, valued at nearly US$2.0 million, only compared to an average productivity of 120 to drop abruptly in 1989 to US$1.3 million (365 kg/ha/year for the island.14 Assuming that urban MT). Subsequently in the Solomon Islands, exports of beche-de-mer peaked in 1992 at 715 MT, but fell by over US$2 million in 1993 to 315 MT. Local 3 See World Bank, Managing Urban Environmental Sanitation Services in Selected Pacific Island Countries, February 1995. Zann(1991). 62 Chapter 4 traders attribute these declines to Figure 4.4: Beche-de-Mer Exports from Selected PMCs, 1984-93 overexploitation'5. The depletion of Boo - ....... -E: . export trends in Tonga and Western 400. ; --; il0||0|:\||t\- 0 :': 0 ; iX | i ; 0 i\-. lgi ........................... ....... Sa noa. -3.0.; . .. ... 0 0 : - - . . 4.89 From a national standpoint, 200 ..gg:- lg0i-g ii:; l..i 0ii.t-i.7 lt:g;iiil.i:i boom-and-bust cycles can result in the ,00 - .:. . -;.f.-f. -gd g000- 0 0 g;: 0 t00-. l: 0 - ....................................... sudden loss of an important source of ni 1.1-d._........... 700 income for households involved in 19B 19B5 1988 1987 1999 1989 1990 1991 1992 1993 collection and processing-in Solomon Source: Fisheries Departments of Fiji, Solomon Islands and Tonga. Islands an estimated 7 percent of hoshod n h as cooypatcpaei through a strict management regime that includes a bpchtedelmer collecgashftion. there a aimited open season, individual transferable quotas, *~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ .. ..................... landmg.. vestment losses in the case of trochus, whereandinspectn u button-processing facilities have been established. Wide fluctuations in the availability of raw material 49 nte omo olbrtv aae areunotrcs conducived to stable investme.ment consists of using customary marine tenure Furthermore, boom and bust.exploitation can, in systems (CMTs) to implement village-based exporthermrensi Tonga and West empoto 4a some cases , drive the resources to extinction. .i fisheries management. The role of the government has happened intheKiritimatiIslandsof ...K.i.r is here limited to facilitation and provision of where pearl oysters never recovered from the heavytehiaadceomngmntsus.Oefte most successful examples of the above has been the exploiationinflited lat cenury. esurgence of villlage-based management m 4.90 Al PMC goernmens have doptedVanuatu, through separate efforts initiated by the fisheries management legislation for keycoastal. Fisheries Department and the Environment Unit resources, ranging from size limitations to closed (Box 4.5). seasons, and gear restrictions for certain species. 4.93 Perhaps the most radical of the.current Th mot iprat cosritt.h experiments in reviving CMTs is the initiative by implementation of these measures IS, however, the the.Government.of .Fiji to grant property.titles.for poor nforcment apacty ofPMC gvernmnts,coastal areas to custodian communities (yavusa). In 4.9 ro nin tdit o m preparation for this all customary marine areas . . (qoliqoli) are being mapped and registered, and budgets and staff, several PMCs have recentlytie arexcedobegnedn19596 shown a renewed interest in establishing. Granting of titles and settlement of disputes will be collaborative management regimes utilizing handled by a board, similar in function to the collaborabve~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~... maaemn ..ge ....... ....... .. . ....... bradtionl rsoure cutodans.In Atutki (ookNative Land Trust Board, and economic activities tromaditional res les custodianresult In Aitutaki (. in the titled areas would reqire the written consent Islands) and Arnavon islands (Solomons), this s i hs rtn he df o t of all resource custodians in the communities. resource management plans. In Aitutaki, trochus ',>~~~~~~~~~~~~~~~~~~~~~~~.... .., ...94. ..... .r case wher .......... resources are managed by the Island Council 49 hr r ae hr ilg-ae management cannot be implemented. These include areas where CMT has never existed or has been weakened, by proximity to urban areas, in- '5 In Fiji, the introduction of size limitations and the migration, or by the weakening of raditional improvement of general socio-economic conditions may authority. Moreover, CMT does not provide a also have contributed to the declie in exports after pacticalemeans for p cing. p 1988. (Adams 1992).paha en o rtetgplgcselso ...... .. .. ..... . . . ..... . . . . ..... . ...... " :" : . ..... ... . .. rp.: ................... ..... . .. .. ... . . .. . ......... ... . . .. .... . .... ....... ......... .. .................... .42... CD O.: ....... 0 CD pr .... Fo r. ........ .. W.M. CD I'D ... ....... ... CD ..Om .. r3r' .... .. :rP MP... 0 0 Fo' O CD Od... eD O .0 .. ... 1. " 0. P . '. . .... 4 ... CD . W . rA :- :4 I. ; 0 ....... .... rA Iz, F., 5-- 9 P W .. A CD C 0 91:4. :,, 2. R ..... .... F .. . .... ...... (D r- ... . .... 0 : rL U.. C) CDn gs 0 0 '-,C 2. 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" R W 0 C, R A . ....... ;.J . . ....... ..... t 0 0 A) v : . , to,:< !n cn rA E03 cn - , 5, CD s- CO:: M QQ En 64 Chapter 4 unlikely to succeed if not supported by solid resource management and increased profits technical back-up from extension services. needs to be publicized. National governments should ensure that coastal fisheries management goals are * Use cost-effective ways to monitor field included in national strategies, and that re- conditions. Full-fledged stock assessments are orientation of extension services is adequately rarely effective for the tropical multi-species supported by incremental budget allocations. conditions of the Pacific region. Often, the type of information required for management * Foster collaborative management with decisions can be obtained by low-cost rapid resource custodians. Collaborative manage- ecological surveys and participatory rural ment regimes should be attempted in areas appraisal techniques. These surveys should be where strong customary leadership and CMT complemented by structured resource exist. A stronger collaboration between utilization surveys implemented at a national Fisheries Departments, Environmental Units level. Additional effort should also be and NGOs could help ensure that field support chanelled into developing regional rules of is adequate. Fisheries staff involved in thumb regarding for example, stock abundance, collaborative management need to have the which can be effective in guiding local level complementary scientific knowledge that management efforts, particularly in the absence villagers need in order to improve resource of national or other public support. management in their area. Management decisions, however, should be formulated and A Development Strategy for Coastal Fisheries. enforced by the resource custodians themselves. Field visits should be 4.96 Development objectives for coastal complemented by awareness raising of fisheries should focus on their role as suppliers of conservation issues through appropriate media. urban and export markets. Improved access to market information, and an emphasis on * Develop management plans for key areas competitiveness, quality control, and consistency of and resources. Area specific and/or species supply should be integral parts of export strategies. specific management plans should be prepared in consultation with resource users, and 4.97 National strategies for the development of implemented so as to involve them in decision coastal fisheries should be reviewed to include a re- making and enforcement (e.g., through the evaluation of how public funds can be used to engagement of village wardens). Legal backing achieve national goals. At the present stage of can be conferred through by-laws but care must development the role of PMC governments in be taken to keep management options flexible coastal fisheries should focus on the following and adjustable to changing conditions. objectives: * Publicize good examples of local * management and regulation of key fisheries; management. In almost every PMC, there are * collection and processing of cost-effective good examples of local-level management that information to back policy decisions; should be disseminated through the media, through the granting of awards during national conservation days, and through cross-visitation economicallyjustifiable; by local chiefs. The recording and * provision of key services such as training and dissemination of traditional resource extension; management practices should also be * creation of an enabling environment for stable encouraged. In particular, the financial gains investment, both foreign and domestic; and from resource management should be * development of quality control and grading for highlighted, as there is often scepticism and export products. ignorance on this subject. The link between 65 Chapter 4 4.98 Substantial public investment has been the Fisheries Department is shifting the emphasis of devoted to the establishment of marketing and extension services from development to distribution centers in many countries, such as management. A strengthening of regional Solomon Islands, Tonga and Vanuatu. Given the collaboration in research could also avoid level of private activity taking place outside these duplication of basic research in fields as hatchery outlets, it is doubtful whether these investments are techniques for aquaculture species. necessary. Privatization of selected marketing and distribution facilities should therefore be 4.102 Creating an enabling environment for considered. private investment will require streamlining procedures for license applications. With the recent 4.99 In order to develop small-scale tuna resurgence of interest in fisheries investment in the fisheries, many PMC governments have invested in Pacific, however, many of the proposals received fish aggregation devices (FADs). Typical deep- are new to PMCs, and investment boards and water FADs cost between US$3,000-12,000, and fisheries departments often lack the capacity to last 3 to 14 months. For the most part, these cests evaluate their feasibility. At the same time, there is are borne by government with no cost-recovery. a need to distinguish between long-term proposals Such an approach is not justified, particularly in and short-term investors who generate little benefit Vanuatu, Western Samoa, Fiji and Kiritimati to the countries. Due to the inherent fragility of (Kiribati) where publicly-financed FADs are coastal resources, it is important that technical extensively used for sports fisheries. There is now departments be consulted on both the feasibility and sufficient experience with FADs in the region to the conditions of proposed investments. promote their privatization, and/or introduce mechanisms for cost-recovery, particularly if 4.103 In general, PMCs hold relatively small exclusive access rights are granted, and enforced. shares in world markets of coastal products. Under these circumstances, competitiveness in world 4.100 PMC governments have devoted markets will depend on consistency of supplies, considerable public funding to promoting new high quality, and ability to access marketing fisheries. These fisheries may in fact be information. Export marketing strategies should be commercially unexploitable because the ex-vessel formulated with a solid knowledge of their current price in remote areas is too low to encourage fishers prospects in world markets. These are outlined to raise effort levels and take advantage of briefly below: economies of scale. New fisheries should not be seen as a panacea for reducing pressure on 4.104 Beche-de-mer. In 1992-93, Fiji, the overexploited coastal resources, and public funding Solomon Islands and PNG supplied about 14 should only be directed to new fisheries if their percent (930 MT) of the total exports of beche-de- economic viability has been proven.'' In any mer to Hong Kong, the principal world market. event, the development of new fisheries should not Approximately 30 percent of this production was be carried out at the expense of improved re-exported, primarily to China. The Pacific Island management of existing fisheries. region also contributed about 15 percent of the total exports to Singapore. A recent review of the Asian 4.101 Training, extension and research functions market for beche-de-mer indicated that the long- should be re-evaluated to focus on those activities term demand prospects appear favorable in the where national fisheries departments have a expanding Chinese market, but that demand is comparative advantage over the private sector or likely to decline in up-scale Asian markets such as regional fisheries institutions. In Fiji, for example, Hong Kong, Singapore and Korea.'8 These prospects favor the continuing extraction of lower 17 In some instances, such as in the case of Tonga, exploitation of a new fishery has been a significant source of economic growth and employment. 1 SeeKriz(l994);Conand(1993). 66 Chapter 4 valued species such as tiger fish, sandfish, and percent of the retail value in export destinations. lollyfish. Aquarium fish extraction can be sustainable if low- impact gear-such as collector nets-are used. 4.105 Trochus. The main export destinations of However, operations in Southeast Asia make trochus products are Japan-to which the Pacific extensive use of stun poison to increase catch rates. Island countries contributed 70 percent of the It is therefore important for PMC governments to supply in 1990-South Korea, and Europe. In favor long-established operations with a record of 1991-92, prices of trochus products declined poison-free guarantees and low mortality. significantly, in part, as a result of stockpiling of raw supplies by button processors. Button 4.108 Live Fish Exports. A recent development manufacturing industries in the region have also in the Asia-Pacific region has been the growing been severely affected by industry over-capacity market for live reef fish to serve restaurant outlets relative to the availability of raw supply. Future in Hong Kong and Singapore. To date, operations demand prospects are uncertain, and will depend to have been set up in PNG and Palau, and an a large extent on regulatory changes in Indonesia, application has recently been approved by the where trochus is currently protected, and supplies Investment Board of the Solomon Islands. Despite from other Southeast Asian countries; the efficiency the financial attractiveness of these ventures, they of management regimes in the Pacific; and the have been associated with severe negative impacts, advent of possible substitutes for trochus buttons.19 including: (a) violation of local agreements prohibiting the use of hookah gear (PNG); (b) 4.106 Deep-Slope Finfish. Exports of deep-slope poaching in areas where access was denied by fnfish such as snapper from PMCs have expanded customary leaders (Palau); (c) widespread use of in recent years to end markets in Australia, Hawaii, cyanide poison leading to extensive coral reef Japan, and New Caledonia. Returns to exporters are damage poison (Indonesia and the Philippines); (d) heavily dependent on freight rates, the species depletion of breeding aggregation sites; and (e) lack composition and quality of the catch, and the landed of compensation of customary owners for the prices of fish in the place of origin. Moreover, the capture of by-catch. Given this experience, live reef long-term prospects for deep-slope finfish exports fish operations should be discouraged in the region. are constrained by the fragility of the resources even in areas where the fishery is economically 4.109 Black Pearl. Following the success of profitable. This has led to a substantial reduction in French Polynesia, pearl culture is presently being the size of the commercial fleets in Tonga and Fiji, considered in the Marshall Islands, FSM, Fiji, in part, due to a shift to the more profitable tuna Kiribati, Solomon Islands and Vanuatu. French long lining. Given these constraints, the recent Polynesia has based the success of its South Pacific granting of exploratory licenses to large-scale pearl on an emphasis on high quality and volume foreign vessels, in Western Samoa and Vanuatu, control. Nonetheless, the average price of black should be strongly discouraged.20 pearls decreased by nearly 30 percent between 1991 and 1992 as a result of over-supply. The Cook 4.107 Aquarium Products. Many PMCs export Islands venture has been plagued by poor quality, live aquarium products, which are air-freighted to overstocking, and poor technology development. markets in the U.S. and the U.K. The industry presently suffers from rising freight costs-40 4.110 Future prospects for pearl farming appear percent of gross revenues for an operation in Fiji, stable, but favor low-cost producers such as China and stagnating export prices, typically only 5 and Indonesia. The market may, however, be able to absorb highly differentiated brand name products such as the South Pacific pearl and white pearls 19 SeeFao(1992);Nash(1992). particularly in view of the significant declines in 20 These vessels, are a product of surplus capacity in the Japanese production. Competing in this dual New Zealand fleet which resulted from the granting of environment will not be easy for PMCs, and will exclusive marine rights to the Maori population. require a careful start to avoid over-stocking. 67 Chapter 4 4.111 Other Aquaculture Products. Giant clam * Introduce quality control and grading standards aquaculture has been constrained, until recently, by for beche-de-mer, as any extra return from this the focus on an end-product food (adductor muscle), fishery is likely to come from improving the which was not cost effective. A recent breakthrough presently low quality of the product, and adopt in Palau and Solomon Island has been the best practice regulatory measures to stabilize production of 2-year old clams for the live supply (e.g. closed seasons). aquarium trade and local handicraft trade. The aquarium market, however, is expected to become * Carry out an updated trochus marketing study saturated in the short term. Tilapia aquaculture has to assess the competitiveness of Pacific Island been successfully developed in Fiji for home products and re-assess the viability of trochus consumption and sales at local markets. This type of button industries in the region, with a view to small-scale aquaculture operation should be formulate appropriate policy decisions. These encouraged in countries with sufficient freshwater may include: (a) strictly enforcing export resources, but care should be taken to closely restrictions for raw shells; (b) restricting the monitor the introduction of exotic species. number of processing licenses to the availability of raw supply; or (c) lifting raw 4.112 Seaweed culture in Kiribati is estimated to shell export restrictions in areas where the have produced export revenues of US$0.9 million in industry is found to be non-competitive; 1993. The seaweed-Eucheuma--is used in the 1993.The sawcedEuchema-isused n theIn the Solomon Islands and Vanuatu, further production of carrageenan, a food additive. Current economic analysis should be carried out on trends appear favorable, especially for low-cost deep-slope finfish to determine the optimal extensive culture, but PMCs will face severe number of vessels that could be licensed in competition from major producing countries such as arer of evss e nc e licer- the Philippines and Indonesia. Despite strong areas showing evidence of over- support from both local fisheries departments and capitalization' . Rotational fishing on sea suppors, frm bothe lcacultereactivities have been mounts should be strictly enforced to allow donors, most other aquaculture stocks to recuperate. No licenses should be unsuccessfull in the region. granted for the operation of foreign vessels 4.113 Recommendations. Experience has because of the fragility of the resources; demonstrated that socio-cultural traditions of * Poison-free guarantees should be established engaging in fishing as a part-time, opportunistic for aquarium fish producers and traders; occupation must not be ignored. Coastal fisheries development programs should be designed with the . Licenses for live reef fish exports should not be understanding that these unstructured fisheries are granted in the region in view of the limited likely to remain the prevalent pattern in the near capacity of PMC governments to enforce future, and build upon these traditions to maximize contract agreements, and the potential for their potential contribution to Pacific Island negative socio-economic impacts. economies. PMC governments should therefore: * PMCs should encourage low stocking rates for * Move towards privatization of selected new black pearl culture operations in order to marketing facilities and distribution centers, avoid over-capacity and gain technical such as the regional fisheries extension centers experience. Stronger regional collaboration in in Vanuatu, the Natai Fish Market in Port Vila, quality control and grading is encouraged to and the provincial fisheries centers in the ensure that the quality reputation of Pacific Solomon Islands. black pearls is not undermined; * Devise cost-recovery mechanisms for the use of FADs, and promote private sector involvement in FAD construction and operation, in 21 Recent MEY estimates for Vanuatu are believed to be conjunction with the allocation of exclusive considerably over-estimated as they are based on fishing rights. older, less reliable estimates of MSY. 68 Chapter 4 * Given the high rate of failure of aquaculture * A fisheries investment advisor position should projects in the region, it is recommended that be established at FFA, with the explicit governments refrain from direct participation in objective of assisting member governments in this area, and ensure that proposed new evaluating fisheries investment proposals, and ventures be subject to rigorous economic, to disseminate information on their potential technical, and market analysis; and impacts. A regional register of investors and investment proposals should also be maintained. 69 Chapter 4 Table 4.10: MAIN USES AND MARKETS FOR NEARSHORE FIsHERIES PRODnUCTS IN THE PACIFIC Products Utilization Main Producers Markets Status and Potential Reef Fish Food, fresh/chilled All PMCs Subsistence use, and domestic trade In general, overexploited near urban centers; export market constrained by susceptibility to overexploitation; domestic market constrained in ciguaterra-prone areas. Smina Pelagics - Bait for large pelagics -Fiji, Solomon Islands, Tonga - Generally caught by industrial tuna Fishery believed to be sustainable, but small pelagics are naturally susceptible to wide operations through payment of royalties; variations in abundance; small pelagic stocks in Micronesia generally insufficient to - Food - Most PMCs - Subsistence use and domestic markets support pole and line tuna fishery. Sharks - Dried Fin Fiji, Vanuatu, FSM, RMI, - Generally caught as a by-catch of longline Generally unknown, but believed to be sustainable; potential exists for the exploitation Solomons fishery, fins exported to SE Asia for food; of shark liver oil (squalene) for the cosmetic and aerospace industries; the use of skin - FSM, Kiribati, Tonga, past attempts at squalene extraction from for leather; and further development of sports-fishing. - Food, fresh Solomons, Vanuatu deep-sea sharks recorded. Deep-slope Food, fresh/ frozen - Fiji, Solomons, Vanuatu, - Domestic market, limited exports to Overcapitalization of the fishery led to shifts to other fisheries in Fiji, Tonga, and Finfsh Tonga Australia, Hawaii Vanuatu. Potential exists for expansion of the fishery in the Solomon Islands and FSM - Micronesia if carefully managed, but resources are limited and susceptible to overexploitation. Can - Subsistence and artisanal use provide an altemative to reef fish in ciguatoxic areas. Aquarium - Live fish, algae, corals, giant clams, - Tonga, Fiji, Solomon - Exported to US, Australia, New Zealand, Status generally unknown, but believed to have low impact if number of operators is Products and other shellfish Islands, Vanuatu, RMI Japan, UK limited, and coral breaking and use of poison is effectively prevented. Need strict guidelines to ensure compliance and respect for customary tenure. Live Flnfish - Live groupers, coral trout, cod, - None known at present; - Exported live to rcstaurant markets in Similar operations in Palau, PNG, and Indonesia have led to extensive coral damage wrasses one license recently approved Hong Kong and Singapore localized stock depletion, and social conflicts; not recommended for PICs due to for Solomon Islands difficulties of monitoring operations and interactions with subsistence and artisanal fishery. Trochus - Shell used for buttons; flakes used - Solomons, Vanuatu, Fiji, - Exported to Japan and Korea Button blank factories have been established in Vanuatu, Fiji, Solomons, Pohnpei, but for lacquer, shampoos; meat consumed FSM, RMI profitability has been eroded by uncontrolled licensing and overexploitation of raw material; fuiture prospects will depend on the success of national and community-based management initiatives and future world demand. - Meat consumed for subsistence Pearl Oyster - Mother-of-pearl used for buttons, - Solomon Islands, RMI, Fiji, - MOP exported, mostly to Japan Black-lip resources substantially reduced in the Solomon Islands and Fiji. Trial surveys jewelry, handicrafts FSM (Chuuk) in Kiribati and RMI revealed insufficient stock densities for pearl culture, with the - RMI, Solomon exception of Namodrik, Marshall Islands. Current experiments in the Solomon Islands - Wild stock used for spat collection (experimental spat collection - Round and half pearls exported to Japan and RMI should take into consideration quality and over-supply problems experienced for pearl culture and grow-out) by the Cook Islands and French Polynesia. - Meat used for subsistence consumption Giant Clans - Meat and adductor muscle eaten; - Solomon Isl., RMI, FSM, - Meat consumed for subsistence Wild stocks are highly vulnerable to overexploitation. Giant clam fanming has been Fiji, Vanuatu, Tonga - Meat and abductor muscle exported to attempted in Micronesia, Solomon Islands and Tonga, but export meat market has not - Shell used for artifacts - FSM Southeast Asia, American Samoa shown to be profitable due to the long grow-out cycle required. Promising - Live giant clam used for aquarium - Solomons, Tonga, - Shell used for artifacts in tourism resorts developments are the export of live giant clams for the aquarium trade, but this market culture - Live giant clam exported to U.S. is limited and expected to become saturated shortly. Lobster Food - Solomons, Vanuatu, Tonga, - Domestic Market (restaurant, hotel Little potential to sustain export-oriented fishery due to difficulty of applying intensive FSM outlets) fishing methods (e.g. traps) - Subsistence Use - Limited exports to Guam, Saipan Crabs Coconut crab used as delicacy food Coconut crab - Solomons, Coconut and mangrove crab used for Status poorly known; coconut crab is in high demand in urban centers, and is very Other crabs used as food Vanuatu,RMI, FSM (Chuuk) subsistence and restaurant consumption;- susceptible to overexploitation. Other crabs - Most PMCs Other crabs used mainly for subsistence Sea Cucumber -Dried, boiled product used as - Solomons, Fiji, Vanuatu, Exported to Hong Kong, Taiwan and Likely overfished in the traditional producing centers of Solomon Islands, Fiji, and specialty food, aphrodisiac, and Tonga Singapore. Approximately half of exports Vanuatu. Exporters will likely expand trade to Micronesia and Polynesia (e.g. Tonga), homeopathic medicine in Asia - FSM into Hong Kong are re-exported to China as prices remain high. -Subsistence Consumption Source: FFA Fisheries Profiles, and WfIorld Bank staff. 70 Chapter 5 5. FORESTRY Overview: This chapter identifies key issues to be addressed in improving conservation and management in the forestry sector. It focuses on those Pacific Islands Member Countries which have significant forest resources, namely Solomon Islands, Fiji, Vanuatu and Western Samoa. Recent developments in the sector, the current status of the resource, factors affecting trade in forest products and issues surrounding the effective nanagement of these resources are discussed. Recommendations are made on how management of the sector could be improved by focusing on: protection and conservation of natural forests, better management of natural forests for production purposes and achieving a more equitable distribution of economic rents. A. Introduction profits. These gains are so lucrative that companies and individuals have been willing to 5.1 Tropical rainforests, a valuable economic use very aggressive tactics in order to obtain resource, are rapidly disappearing throughout the logging licenses. Pacific Islands. Deforestation and forest degradation, resulting from agricultural activities 5.4 Consequently, over the past few years, and commercial logging, are widespread. Not timber licenses have been issued and logging only are timber harvesting rates unsustainable but agreements made far in excess of annual harvesting is being done in a highly destructive sustainable yields in the Solomon Islands and manner, causing unnecessary damage to natural Vanuatu (see Table 5.1). It has been estimated forests and negligible to slow rates of that, at the 1994 rate of harvest ( approximately regeneration. In addition, in recent years logging 700,000 m3 per annum), the Solomon Islands' companies have been extracting windfall profits remaining commercial forests will be logged out during a period of high prices, and often within 15-20 years. This period will be reduced to depriving governments and landowners of 8 years if the harvest rate increases to 1,300,000 additional revenues through various malpractices, m3 per annum. The sharp increase in the rate of such as transfer pricing or under-reporting of both timber harvesting since late 1994 indicates that log values and volume of exports. this is the more likely scenario. The jump in the approved timber license quota from 1,300,000 m3 B. Recent Developments in the Sector per annum to 3,400,000 m3 per aimum since 1993 means that the country's production forests could 5.2 The recent ban imposed on log exports be liquidated in an even shorter period of time, from Sabah and reduced logging quotas in with very serious economic and environmental Sarawak and Western North America, which were consequences. responsible for the marked increase in timber prices in 1993, led to an increase in the number 5.5 In the Solomon Islands, areas which have of overseas logging companies moving into the been logged heavily are not regenerating. As Pacific in search of new sources of supply. Many Poole (1993) has noted, forests in the wet tropics, of these companies have contracts to supply logs along with their associated plants and animals, are to plywood and veneer mills in Japan and Korea. very easy to destroy completely. In most other parts of the world forests can be destroyed while 5.3 These companies have actively sought most of the tree species will survive. This does timber licenses in order to avoid the substantial not seem to be the case in the wet tropics which is losses which would be incurred if they failed to why he argues that exceptional care is required in meet their supply contracts. In addition, logging developing these lands to ensure that their many licenses granted by Pacific Island countries have valuable resources are not wasted and destroyed. generally given most of the economic surplus to logging contractors, providing them with windfall 5.6 It is estimated that an annual cut of 286,000 m3 per annum could be sustained in 71 Chapter 5 perpetuity, if this level of cut is implemented by Table 5.1 Timber Production from Natural January, 1996. If this is not achieved by that date, Fort the sustainable cut figure reduces as excess cutting rests continues. .......... A .g- Ndfl~IsIai4 . Sustuil...e Annual 5.7 In Vanuatu, early in 1994, following . . Cut in lifting of the log export ban imposed in 1990, ..Cut s. .i .... . logging licenses were issued which would a low . ... .. ... . logging of timber volumes 5-6 times that of the .. ......... ; . - estimated annual sustainable yield of 52,000m3. Solomon Ilands 286,000 650,000 Without firm govermment action it is predicted Vanuatu 52,000 *27,000 Weitern.iSamoa 12,00i 22,000 that the country could be logged out of all ten Samoa 1260 22,00 Tonki..NA ~ NA commercial stocks of timber within five years. Soarces. Forest Department Reports, Forest Realizing the seriousness of the situation the Inventory Reports and World Bank Reports. Government reimposed the log export ban in June 1994, and commenced to renegotiate logging licenses, starting with those that had been issued C. Role of Forests on the timber rich island of Erromango. 5.10 Forests play an important role in Pacific 5.8 Because of growing unease about Island societies. Their functions include: developments in the forestry sector, agreement was reached between Australia, Fiji, New * to protect and conserve the environment Zealand, Papua New Guinea, Solomon Islands, (including soil, water and biodiversity and Vanuatu to: resources); * work towards a common code of conduct * to provide cash income to landowners, timber governing logging of indigenous forests, to processors and governments; which companies operating in their countries will have to adhere; and * to produce wood and other forest products; • urgently increase monitoring of logging and * to provide cultural, recreation and tourism exports of timber. opportunities; and 5.9 Subsequently, a South Pacific Forum * to sequester carbon. (This role is gaining Regional Forestry Meeting in Port Vila, Vanuatu prominence as the world's forests are being in October, 1994, began work on drawing up a depleted and concerns are growing regarding code of conduct on logging of indigenous forests. the potential impact of climate change). The meeting agreed on a set of "guiding principles" and "best management practices" for 5.11 The importance of forestry in Pacific logging. Island economies varies as shown in Table 5.2. For example, forestry plays a significant role in the Solomon Islands' economy, accounting for nearly 55% of total merchandise exports in 1993 and 20% of total government revenues. It plays a The term 'natural forests' is used in contrast to forest much lesser but still quite important role in the plantations which are forests in which naturally economies of PNG, Vanuatu and Fiji accounting occurring tree species have been totally replaced by for 16%, 13% and 7% respectively of their total planted trees. Natural forest includes a range of types which have been subjected to varying degrees of value of exports. modification by humans and which grade into one another (Poole, 1993). 5.12 Fiji embarked on an ambitious program of reforestation in the early 1960s with mahogany 72 Chapter 5 in the wetter indigenous forests and Table 5.2 Trade in Forest Products in Selected Pacific pine, Pinus caribaea in drier areas on degraded grasslands. Its plantation program was supported by grant aid .;; - y primarily from New Zealand, the P. effl lnd -...... y E%ffr United Kingdom and Australia. These ,, ........ .... ...W t : p, plantations are expected to support a . ... V: (i--) large, export-based forest products Solomon Islands 69.7 55 NA industry. Forest products exports Fiji 32.9 7 6,500 have grown from 2% of Fiji's exports Vanuatu 2.6 13 500 in 1990, to 7% in 1993, and this is WestemnSamoa Almost nil <1 7,500 anticipated to increase substantially as Tonga Almost nil <1 5,000 the ahoanyplatatonscom on Kiribati Almost nil < 1 NA the mahogany plantations come on Sources: Country Economic Reports and UNDP/FAO South Pacific stream. Forest Development Program. 5.13 While the Solomon Islands, contributed to a steady decline in forest cover. Fiji and Vanuatu have timber resources surplus to Even on abandoned grazing sites, forest has not their needs, most other countries in the region, returned. The most common vegetation type in including Western Samoa, Kiribati and Tonga are Vanuatu is that dominated by Hibiscus tiliaceus, a net importers of timber products. herbaceous shrub which effectively inhibits the development of forests by successfully out- D. The Forest Resource competing trees for soil, water and light resources on disturbed sites. In the Solomon Islands there are many forest areas dominated by single pioneer Current Status species, believed to have been degraded by cyclones and clearing for cultivation. In Fiji and 5. 14 Forests in the region are in decline. Western Samoa, poor, degraded and non- Recently completed national forest inventories in commercial forest types dominate the landscape. the Solomon Islands, Vanuatu and Fiji, which define the extent and condition of their forest 5.16 Deforestation has been endemic in the resources, support this finding. While much of Pacific since first human contact and along with the international media attention has focused on cyclones is responsible for the development of deforestation occurring in the Amazon and jungles secondary forests, savannah grasslands and a of South-East Asia, small countries, like Western degraded fern-grassland. It is also probably the Samoa which has one of the highest deforestation main cause of the extensive anthropogenic rates in the world, have been overlooked. grasslands of higlhland Papua New Guinea, the Western Samoa's rate of deforestation, xerophytic niaouli (Melaleuca lewucadedron) approaching 3.5 percent per annum during the savannah of New Caledonia and the highly past decade, exceeds the average annual rates for degraded "sunburnt lands" or talasiga lands found Brazil (0.6 per cent ), Malaysia (2.0 per cent) throughout Fiji (Thaman, 1993). It has been and Indonesia (1.0 per cent) for the period 1981- suggested that deforestation may have been 902. see Table 5.3. Clearing for agriculture is the responsible for the collapse of the pre-European main cause of deforestation in Western Samoa and contact megalithic culture on Easter Island Tonga. Remnant patches of hardwood forests (Fenley and King, 1984).3 are all that remain of Tonga's natural forests. 5.15 In Vanuatu, the introduction of large scale cattl ranching bye cnrol ionil stlers 3 The Pascuans, a tribe of Polynesians who in 700 AD settled on small Easter Island, proliferated in 900 years from 200 to 70,000 people, before succumbing to a 2 lack of resources due to overpopulation. (Jacques-Yves Cousteau, "The Global Challenge", First Annual 73 Chapter 5 5.17 Deforestation rates alone do not provide small portion of the total forest estate (600,000 ha an accurate indicator of the severity of forest loss. versus 4.4 million ha in total). The definition of Forests are also being rapidly degraded (i.e. the what constitutes a "production forest" varies number of trees, the diversity of species, the across countries, but generally conforms to a portion of crown cover, and soil quality, are standard FAO description which describes these declining), often due to poor logging practices. as areas having productive, merchantable forest The area of non-commercial forest increases cover and located on accessible terrain of less every year, as logging and relogging further than 30 degrees slope. In theory, even when all of erode the growing stock. the production forests have been logged, large areas of "non-production" forest should remain 5.18 While deforestation in Fiji is moderate (ranging from 30% in Fiji to 80% in the Solomon ( < 1% per annum), degradation of natural forests Islands). is continuing at a rate which should be cause for national concern. The Department of Forestry has 5.21 However, these forests are not "self- tended to focus its attention on the development protecting", nor are they protected by legislation of plantations of exotic species, while paying little in most countries in the Pacific. They are often at attention to the management of native forests. risk from fire and encroachment for Decisions to continue "enrichment" plantings of agroconversion. They are also under pressure mahogany in natural forests are not justifiable from logging, particularly once the more when cleared or degraded lands are available for accessible production forests have been logged. In afforestation. order to protect these areas of "non-production" forest, which may include important watersheds Table 5.3 Extent of Forest Cover in Selected Pacific Island Nations in 1993 Land Nat-- .0 - ural Foret F .. F s r Pacific Esland Area Forest % *l~~~~~~~~~~ Total Total Areir.... ..r... LDgg Cuvg Fiji 1.83 0.821 45 0.27 0.16 0.11 -1.0% Kiribati 0 0 0 NA NA NA NA Solomon Islands 2.75 2.20 78 0.254 0.124 0.13 NA Tlonga 0.07 0.004 6 0 NA NA NA Vanuatu 1.20 0.900 75 0.055 NA NA NA Western Samnoa 0.28 0.215 77 0.016 NA NA -3.5% Total 6.13 4.43 72 0.59 NA NA NA Sources: South Pacific Forestry Development Program and Individual Country Forestry Reports. 19 A.eve by . the .. New.ZealandMins .y and land which is too steep to be successfully of Eternl Reatins ad Trde f Ne Zeaand logged or farmed, governments need to introduce of ExternalRelationsad and enforce land use zoning which defines development assistance to the Fiji hardwood plantation program, noted ItS concern about the pemsil ladue rctes nsniiv loss of biodiversity as a result of planting in ecological areas. natural forests. 5.22 In most Pacific Island nations forest areas 5.20 As llusratd inTabe 5., i mos ofthe outside those classified as production forests countries covered, production forests form only a provide an opportunity for setting aside larger, more viable conservation areas involving ________________________________complete catchments or mountain to coast Conference on Environmentally Sustainable continua. The presence of these locational Development. World Bank 1993) opportunities could be useful in setting protected area priorities in these countries. 74 Chapter 5 5.23 Not shown in the comparative figures of a few months through the destruction of habitat forest extent in Table 5.3 are the significant and the introduction of exotic species. The differences in forest structure, diversity and terrestrial biodiversity review commissioned for quality. Generally, forests in the Pacific Islands the South Pacific Biodiversity Conservation are much less diverse in species numbers and in Program cites birds "as an outstanding example of structure than the forests of South-East Asia. The depletion resulting from the impact of human vegetation is also less developed compared to the actions on South Pacific environments. neighboring countries of Papua New Guinea and Worldwide, the largest number of documented New Caledonia, both of which are older extinctions (28 between 1600 and 1899 and 23 geologically and less subject to cyclones. A this century) have occurred on islands of Oceania, typical Malaysian dipterocarp4 forest will have which now has more threatened species (110) than several hundred species of trees. Heights of trees any other" (Dahl, 1984). These factors support emerging from the forest canopy range from 50 to placing a high priority on biodiversity 70 meters. In contrast, the richest forests in conservation in the South Pacific. Melanesia have about 60 tree species, with emergent tree heights of 30 to 40 meters. Forest Ownership 5.24 It is believed that most of the flora and 5.27 Unlike many other tropical forest fauna of the region originated from the centre of countries, the forests of the Pacific Islands are diversity in the Indo-Malayan region and spread largely controlled by communities, not eastward. This may account for the fact that governments. In some countries formerly under diversity drops progressively east of Papua New colonial administrations, a small proportion of the Guinea. The barrier presented by large expanses land was alienated, mostly within the main urban of the Pacific Ocean combined with the fact that areas and in the fertile coastlands. The proportion the island groups become smaller and more is small, however, with 83% of land in Fiji, 82% dispersed are factors which have limited colonization and restricted development of Table 5.4 Extent of Customary Land Tenure biodiversity - and in particular, hampered in Selected Pacific Islands development of Pacific Islands' forest structure. L 5.25 However, the Pacific Islands are thought Solomon Islands 97 to contain the highest proportion of endemic Fiji 83 species per unit of land area or per human Vanuatu 98 inhabitant in the world. High levels of endemism Western Samoa 82 occur throughout the region due to the isolated Tonga5 evolution of island species. Fiji, Solomon Islands, Kiribati UO S P i Vanuatu and Western Samoa are particularly Source. UNDP/FAO South Pacific Forestry iapuatandfor Wstheir Sealthmoa arodveparsitiDevelopment Program and individual country Important for their wealth of biodiversity.stitc. statistics. 5.26 The biological diversity of islands is in Western Samoa and 97% in the Solomon amongst the most critically threatened in the Islands under customary tenure as illustrated in world. Isolated and endemic species can be lost in Table 5.4. 4 Dipterocarp Forest is the major forest type in South- sIn Tonga all land is owned by the Crown. But user East Asia, the term coming from the name of the rights have been vested to private families. dominant tree family found in these forests - the Dipterocarpaceae family. These forests are of greater 6In the Line and Phoenix Islands, most land is owned by height and merchantable timber value than any other the Government; in the case of Kiritimati, all land is broad-leaved tropical rainforest in the world. owned by the Government 75 Chapter 5 5.28 Customary land tenure is advantageous in on log prices. In 1994, prices for tropical logs that it puts control over the resource in the hands decreased by 10% to 35 % from their 1993 highs of those who would stand most to benefit from its while prices of plywood (made in Japan) were sustainable management. However, the down by 20% from 1993. Sawn timber import fragmented, scattered ownership pattern can also prices (cif Japan), have decreased by 10% - high be a hindrance to national level planning for the quality sawntimber decreased from $730/mr in sector and leaves landowners vulnerable to 1993 to $660/m3 in 1994. pressure from logging companies. 5.33 One factor which contributed to the log 5.29 Disputes often arise among customary price decreases of 1994 is substitution of other land owners over clan boundaries; the products which are beginning to make inroads composition of a particular land owning group; into markets traditionally dominated by wood. who has the right to decide whether or how a Examples of this include steel and waferboard. resource is utilized and how the proceeds should Steel construction components are being be distributed. While it is often stated that substituted for wooden building framing materials governments have little control over what (joists, rafters, studs, etc.). landowners do with their lands, they can and often do exert strong influence on landowners. In 5.34 The steel industry is offering attractive the quest for increased incomes, by both prices - competitive with sawn timber components governments and landowners, the longer term at wood prices of more than $400 per 1000fbm7. national interest frequently suffers. Sawn timber prices in 1993 and early 1994 were above this level. Steel suppliers are offering E. Forest Products Markets purchasers who place advance orders, guaranteed prices for up to two years. Steel also enjoys a 5.30 Pacific Island producers of forest competitive advantage in fire insurance rates. products will remain price takers in the major North American steel manufacturers have set a markets in which they sell their output. This target of taking over 25% of the home framing means that they are subject not only to changes in market by the year 2000. Similarly, waferboard is international demand and supply but also to being substituted for plywood, due to its 30% political factors related to environmental concerns lower price. in those markets. 5.35 Some indicative reference prices of logs 5.31 Most of the export trade in forest are shown in Table 5.5. Prices for processed products from the Pacific has been in the form of wood products are consistently down from their logs. With a few notable exceptions, primarily in 1993 high levels - the degree of price decline Fiji (Fiji Forest Industries, Tropik Wood and ranges from 3% for North American sawntimber; Pacific Green Furniture Company), most wood to 10% for Russian and Chilean softwood processed in the Pacific Islands nations is for sawntimber; to 20% for plywood. Log prices are local consumption. The Solomon Islands, generally down by more than processed wood Vanuatu and Fiji are self-sufficient in wood products, ranging from 10% for North American products and have some surplus for export. The conifer logs: to 30-35% for logs from South-East remaining countries of the region produce only a Asia, PNG and the South Pacific Islands. portion of their wood requirements and imports of timber are generally increasing. 5.36 Prices for wood products, and their substitutes, control the price of logs. Price 5.32 In 1993, log prices were 30% to 90% restraints on logs and their wood product above their 1992 levels. Forest products prices derivatives are being imposed through market also increased, but their increase was not as pronounced. This situation led to an imbalance in the normal relationship between log prices and 7 fbm - foot board measure = 12" x 12' x 1' wood product prices - placing downward pressure 76 Chapter 5 resistance and substitution, and therefore further special appearance and natural durability as solid increases in log prices are not likely in the near tropical sawnwood. The product-specific market term. niches have to be researched from the point of view of a technology-specific end use and 5.37 Pressures in developed countries to distribution system. eliminate tropical timber from the market, as a means of slowing tropical deforestation, if 5.39 Japan, the world's largest importer and successful, could further depress tropical timber consumer of tropical hardwood logs, accounting prices. In a 1994 paper, Global Forest Products for more than 40% of the world's imports, is also Trade, Sedjo, Wiseman, Brooks and Lyon the largest importer of tropical hardwood from concluded that removal of forest land from timber the Pacific Islands. Imports of tropical logs have production for environmental reasons would been declining in recent years due to restrictions result in a modest 5% increase in log prices in the on exports in many former supplier countries long-term. However, the paper noted that short- (Philippines, Indonesia, Malaysia). term price increases of up to 36% over normal Table 5.5 Indicative Reference Prices for Logs in 1992, 1993 & 1994 CIF (Japan) Price in US$/m3 South-East Asia Hdwd High Qual. Plylog NA NA 420 -35 275 South-East Asia Hdwd Med. Qual. Plylog 197 +56 309 -32 210 South-East Asia Hdwd Sawlog 132 +70 229 -35 150 North America Conifer High Quality 165 +40 233 -11 207 North America Conifer Med. Quality 136 +33 181 -12 160 North America Conifer Low Quality NA NA 174 -10 156 PNG/Solomon Mixed Light Hdwd 92 +90 175 -23 135 Chile/NZ Pinus radiata Plantation 94 +38 130 -30 91 Russia Conifer Low Quality 97 +10 106 -16 89 Note: CIF (Japan) prices may be somewhat understated as some importers may not include the export taxes charged by the country of origin. This is done to minimize import taxes paid on imported value in Japan. Sources: ITTO statistics and World Bank International Trade Division market trends could occur, under buoyant 5.40 Japan's imports of tropical logs have demand, during the first decade after forest land declined from a peak of 27 million m.3in the early is set-aside. 1990s to 17 million m3 in 1994. Sources have 5.38 Several end-use niches have been also shifted - Philippines, Indonesia and Peninsula identified Seera netropical nichardwoodepds h een Malaysia and the East Malaysian State of Sabah, identified where tropical hardwood products are which once accounted for the majority of tropical likely to remain competitive at higher prices. Inloimrt,hvnwwtdanfomherd. general, the market niches for tropical wood tend Thisplavs, the Eas Malaysawn stathe Strawak to be where some or all of the following Ths leaves the East Malaysian state of Sarawak conditions are met: surface structure and color are g . . limports. Recently Japan' s search for new log of aesthetic value to the user; natural durability sorcs, contion with ter trdiioa and superior strength to weight are demanded; suples (Malaysian l ing cm anies,nas and product value IS high to allow for supir Mlyinlogn opne) a and~~~~~~~~~~ prdc.au shiht lo o expanded to Africa, South America (Suriname, transportation costs. These characteristics are met Guyana, et Aan theAcifica (Solomon in the following products: fittings and joinery for Islands Vanuatu Western Samoa). marine applications; downstream products such as ' V moldings; and reconstituted wood products such 5.41 Increased exposure of Pacific Island as laminated veneer lumber, which offer the same countries to the intemational market for forest 77 Chapter 5 products highlights the need for comprehensive 5.46 Unfortunately, logging contract forest sector strategies designed to maximize conditions covering treatment of the forest, both economic returns while preserving the natural during and after logging are quite weak. In most resources that produce them. cases there are no requirements for reforestation or protection of logged lands and often nothing F. Forestry Policies and Management prohibits landowners from contracting for relogging of their lands to another operator, who Background will remove trees (of lesser quality and size) not removed by the first logging company. This 5.42 Throughout the Pacific, in those countries pattern results in degradation and in some cases with significant forestry resources, the forestry complete loss of the forest resource. sector has operated within a very loose and often ineffective policy framework. Until quite recendly Loss in Economic Rent there have been few attempts to develop comprehensive national forest policies or forest 5.47 The economic rent associated with a sector strategies. Legislation governing forestry standing stock of trees is the difference between management has generally been weak, of limited the sale value of the timber and the costs of coverage and unduly complex. (Reviews of harvesting it, including a reasonable profit margin forestry related legislation have recently been to the logger or concessionaire. This rent conducted in the Solomon Islands and Vanuatu.) approximates the maximum amount a logger would be willing to pay for the concession. 5.43 As pressures increase on remaining forestry resources in the Pacific, governments are 5.48 Low rates of rent "capture" by Pacific slowly beginning to develop more comprehensive Island landowners and governments have several forestry policies. However, they will have to be important effects. The first is to limit government prepared to back up policies with firm action revenues and returns to landowners leading to before it is too late to preserve the resource along benefits foregone. The second is to leave the rent with its associated biodiversity. available to other parties, giving rise to "rent seeking" by concessionaires. This means that 5.44 Professionally staffed national forest there is pressure to harvest large areas in order to services were established in the Pacific Island obtain quick profits. The net result is an nations along typical European/North American acceleration in the rate of forest depletion as lines. In general these forest services have been concessionaires rush to secure their share of primarily involved in overseeing the exploitation profits. Finally, high profit margins permit of forest timber resources, collecting royalties and concessionaires to sell quality timber products at the establishment and maintenance of forest low prices, even though the praqtice may not be plantations. Most forest services have not focused economically sound. on the sustainable management of native forests or on conservation of natural forest areas. This 5.49 Governments and landowners in the lack of involvement in the conservation of natural Pacific are forsaking economic rents, to which forest areas can be partly attributed to a failure to they are entitled, to logging contractors. There provide for this in enabling legislation. are three areas in which countries in the region have unnecessarily foregone timber revenues. The 5.45 In relation to logging, most forest first is the revenue lost in the way logging departments have developed standard logging contracts/concessions have been awarded, the agreements, which spell out the main conditions second is the way in which timber revenue is to be specified in logging contracts between distributed under the existing form of the logging timber companies and landowners. These are contract and the third is losses which they may mainly designed to ensure that the rights and have suffered due to malpractices by parties to the interests of landowner communities are not logging contract. An approximate estimate of the violated. 78 Chapter 5 distribution of income from logging in four 5.52 Increasing royalty payments directly to countries in the region is shown in Figure 5. 1. landowners might lead to increased logging rates, if landowners find it increasingly attractive to 5.50 The graph illustrates that resource owners harvest their forest resources. One approach consistently receive the smallest portion (10%- which has been applied in Scandinavia to counter 15 %) of the log value, while loggers consistently this trend is to establish a forest development fund receive 30%-50% in the form of excess profits. into which a portion of landowner royalties are Governmnent taxes and levies vary, from 30%- placed. Forest landowners who do not log their 35% in PNG and Solomon Islands to 5% -15% in forests in a particular year can receive payments Fiji and Vanuatu. from this fund. This leads to improved forest management, since the decision on whether or not 5.51 There is latitude for increasing both the to log can be based on principles of forest amount collected by landowners, in the form of management rather than the immediate cash needs royalties, as well as that collected by government of particular landowners. This concept can also in the form of taxes and other levies. The positive apply to logged, regenerating forest areas whose Figure 5.1 Indicative Distribution of Income from Logging of Natural Forests 100% n _ ... .. .. 13~~~~ Excess Logging Profits 70 .. ....... L Government Tax/Levy 70 - - = 60% E Landowner Royalties o 50% M Logging Costs (including normal 0 41 0 profit margins to loggers) ° 40h 30% - - 20%-- 10% I 0% I PNG Sol. Is. Vanuatu Fiji Note: PNG is included as a comparison. Data for Western Samoa were not available. Source: World Bank Estimates. j impact of a higher rate of government taxes owners opt to maintain their forests, rather than would be that a lower level of timber harvest liquidate the forest and convert the land to other would be required to meet government revenue uses. Assets from the fund can also be used for requirements. Based on current log prices and extension services to advise landowners on logging costs, the combined revenue collected by improved forest management practices and on landowners and governments could be increased how to negotiate more equitable logging to 50% of log value - while still providing contracts. 8 reasonable profit margins to loggers. 8 Evidence that this distribution of log value is workable order to promote domestic processing, Sabah collected can be found in the East Malaysian State of Sabah, only 20% on domestically processed timber. The net where Government (which owns all forest land) in 1990 only 2 0% on m c ocessed timber. The net collected 56% of export log sales revenues in the form effec u was 5 oflcoed (erta of royalties and other levies. It should be noted that ln 79 Chapter 5 5.53 The contracts between logging forest policy and legislation - the Forestry contractors and customary landowners are similar Department within the Ministry of Agriculture, in the four countries. Agreement is usually Fisheries and Forests, and the Native Lands Trust reached for logging of specified volumes and Board (NLTB). The NLTB is a statutory body species over a set period. Royalties are usually created by the Native Land Trust Act which paid to owners on a log volume basis. empowers NLTB to control and administer all native lands on behalf of their Fijian owners. 5.54 The share of log revenue going to Native lands are leased out for various purposes landowners is in the form of: including agriculture, tourism and forestry. * a small guaranteed payment or royalty; 5.58 Since the Native Lands (Forest) Regulations were revised in 1985, the NLTB * a payment in the form of infrastructure of which previously had little influence on forest uncertain quality and value e.g. roads and policy, has become very actively involved - even bridges which are usually designed to last as to the extent of mounting its own limited but long as the logging; health centers and focused research into natural forest management. community centers; In 1985 the NLTB adopted a set of proposals and policies for rationalization of the timber industry, * an additional premium or goodwill payment protection of the native forest resources and for which may vary with the price of the logs. accelerated involvement of landowners in the industry. The NLTB also at this time adopted a 5.55 The share of revenue going to much more pro-active role in designing legislation government is in the form of small guaranteed and legal instruments for controlling logging. levies, licenses and export taxes, which are levied as a percentage of the f.o.b. log price. 5.59 Fiji's forest policy, written in the 1950s remains relatively unchanged and forest 5.56 In a recent report, Duncan (1994) legislation is currently under review. Several estimated the economic surplus lost to logging reports on the sector have pointed to the need to contractors in Melanesia during the 1993-94 update the policy to reflect current realities. Over timber price boom. For PNG the loss was the years the Department of Forestry appears to estimated to be around K193 million in 1993 and have focused most of its attention on the for 1994 a loss of K32.5 million is projected. The development of plantations, while failing to loss of economic surplus to loggers in the recognize the changing public expectations of the Solomon Islands in 1993 was at least Sl$36 forest resource. Commenting on the situation in million. There is also evidence that the Solomon 1988, an FAO environmental scientist stated that: Islands has been losing large sums of money I through under-reporting of log prices. In 1993 the ... The Department of Forestry still functions in loss from under-reporting of log prices alone a scarcely derived form from that which could have been SI$94 million. Thus the Solomon operated 25 years ago, ... In the intervening Islands total loss in economic surplus in 1993 is period there have been major changes in estimated to be SI$130 million. Logging requirements from the forest resource at both contractors have been allowed to appropriate most the national and landowner level. Only the of the economic surplus from logging and this has plantation sector has developed apace. been considerable, particularly in the past two Management of the native forest has not years of high log prices. developed at all, exploitation is effectively demand generated, the resource is being Forestry Legislation and the Role of Government "mined" the environmental implications of Agencies this are serious. Management of the native forest is in urgent need of a new direction. 5.57 Fiji is unique in the Pacific Island Principles of conservation and sustainable use countries in having two institutions developing 80 Chapter 5 will have to be adopted, if the native forest is economic rents the log export tax was increased in not to degenerate into degraded 'bush'. July, 1994 to 35% on the log price up to SI$250.00 per m3 and 65% on the value of the 5.60 The situation regarding natural forest log above SI$250.00 per m3. The new management has not improved significantly since Government which assumed power in November, 1988. The Forestry Department was not able to 1994 reduced the log export tax, effective from provide information on the portion of natural January 1, 1995, to 32% on the value of a log up forest which remains unlogged and little attention to SI$250.00 per m3 and 35% on the value of a is being given to forest degradation resulting from log above SI$250.00 per m3. This change will overlogging and poor logging practices. Logged result in a high proportion of timber rents once coupes may remain open for several years again accruing to logging companies (See Figure allowing relogging with impunity. When logging 5.1). coupes are finally closed there are no legal requirements for post-logging management of the 5.65 With the finalization of the national forest forest by loggers, Department of Forestry or inventory, sustainable yield estimates can be made landowners. for different areas and sustainable management plans developed. The Timber Control Unit within 5.61 In the Solomon Islands, forestry has the Forestry Division of the Ministry of Forests, recently become the largest foreign exchange Environment and Conservation is completing a earner. Timber exports have jumped from SI$110 review of the inventory data to provide options million (36% of total merchandise exports) in for the Solomon Islands Government to reduce 1992 to SI$230 million (55% of total merchandise license levels in order to achieve sustainable exports) in 1993. forest management. Their findings will be presented to the Government in May/June, 1995. 5.62 The main Act governing forestry is the However, the ongoing granting of logging Forest and Timber Utilization Act (1969). This licenses far in excess of the sustainable yield Act is regarded as inadequate, and due to its many figure strongly indicates a weak commitment by amendments, complex and difficult to apply. A Government to sustainable management of the draft for a bill to replace the present Act was nation's forestry resources. formulated with FAO assistance in 1989 and is generally regarded as a significant improvement 5.66 In Vanuatu, forestry has been a on the present Act. A new forest policy relatively minor economic activity and, unlike the framework was submitted to Cabinet in 1989, in Solomon Islands, the Government is not anticipation of new legislation going forward. dependent on forestry as a source of revenue. In However, to date the legislation is still pending. 1993 Government revenue from forestry in the form of export duties on logs and sawn timber 5.63 In July 1993, a further "Statement of was only 0.4% of total Government revenue. Policy" was issued setting out the Government's policy priorities for the sector. While these 5.67 The Department of Forestry is statements of policy refer to the need for inter alia responsible to the Minister of Agriculture, sustainable management, biodiversity Livestock, Forests and Fisheries for the conservation, equitable sharing of benefits, and development and management of the forestry minimization of environmental damage, sector under the Forestry Act. In particular it is successive Governments have been very slow in responsible for monitoring and control of logging taking any effective policy and legislative action. operations, establishment and maintenance of plantations and forestry research. 5.64 Recent policy actions to improve management of the sector have included the 5.68 There are two legal documents which establishment of a price monitoring system in govern logging. The Memorandum of July, 1993 to prevent under-invoicing and transfer Understanding (MOU) between the Government pricing. In an effort to increase the capture of and the logging company sets out the terms and 81 Chapter 5 conditions which the logging company has agreed more recently the Lands, Surveys and to, such as royalty rates, volume of logs to be Environment Act of 1989 Part VIII, and the felled, time period of permit, infrastructure to be Watershed Protection and Management constructed (e.g. roads, bridges and jetties) and Regulations of 1992; requirements for environmental impact assessments. The Second Schedule is an * the triennial Government development plans- agreement between the logging company and the Development Plan 7 (DP7) completed in landowners. This agreement specifies conditions March 1992 covering the period 1992-94. such as sizes and species of trees to be felled, DP7 uses a strategic approach to development royalty rates, compensation payments for planning, rather than the project by project environmental damage and measures for approach used in previous development plans; resolution of disputes. A forestry officer must and explain the terns and conditions of the Schedule to the landowners and witness its signing. * internal directives - some have originated from Cabinet instructions, and others from within 5.69 In order to obtain cutting rights to forests the Forestry Division. on custom owned land, a company must negotiate for a logging license from the Department of 5.72 Recognizing the rapid decline in Forestry, which will also monitor and control indigenous forests and the inability of the timber harvesting operations. In addition to plantation sector in the medium term to replace paying royalties to land owners, logging the indigenous resource, as the main source of companies must pay a production based wood supply for sawn timber and wood, the reforestation fee, which is placed in a special fund Government of Western Samoa instituted a policy controlled by the Department of Forestry for review in 1991. reforestation work. 5.73 The main objective of this review was to 5.70 Logging companies and some landowner address and resolve national forestry issues and groups have been lobbying for the Government to formulate a policy framework to be approved by lift the ban it placed on log exports in June, 1994. the Government in order to ensure sound forest The Government needs to develop a management. This comprehensive review was comprehensive forest sector management strategy, submitted to Cabinet in late November, 1994. It which carefully controls the amount of timber is a serious attempt to deal with issues exported, since the country is not rich in timber surrounding forest management and to develop a resources. national policy framework and strategies to responsibly manage the forest resources of 5.71 The forestry sector in Westem Samoa Western Samoa. has in the past operated within a relatively loose policy framework. Forest policy has been derived 5.74 Although the formulation of this policy is from the following four main sources:9 a promising start, the success of any national policy will ultimately depend upon the * objectives of specific projects such as those commitment of Government to the principles of funded by NZODA, ADB and FAO/UNDP; conservation and sound forest management. Failure to enforce sound policies will lead to the * legislation - principally the Forests Act of inevitable loss of remaining natural forests, 1967, the Forest Regulations of 1966, the biodiversity and species unique to these islands. National Parks and Reserves Act of 1974 and The Government of Western Samoa like other governments in the region has been slow in 9 Government of Western Samoa, Draft National Forest developing and enforcing policies to protect and Policy: Forestry Situation Outlook and Strategy: preserve remaining indigenous forests. Background to the National Forest Policy. 1994. 82 Chapter 5 The Role of Plantation Forestry environmental effects are being felt. Every year a large portion of the population suffers from 5.75 In most countries of the region forest severe allergy problems (pollenosis) as a result of plantations have been developed - usually with the unprecedented concentrations of mature cedars. assistance of grant funds from bilateral donors - These forests are also relatively poor in with objectives such as promoting rural environmental values compared to the mixed development, increasing rural employment, forests which they replaced. diversifying the national economy and substituting for sawn timber imports. (See Table 5.6) They 5.79 In the Pacific Islands, plantations have have often been promoted as a more productive been almost exclusively comprised of exotic alternative to supplying timber than natural forest species, with few attempts to trial native species. management. However, returns on investment in This has had a negative impact on biodiversity, plantations in the Pacific have been too low to particularly where plantations have been attract significant private investment, reflecting established in natural forest areas. In some cases, similar experience in South-East Asian countries. industrial forest plantations have been established Forest plantation development in South-East Asia on non-productive grasslands, as in the case of has been characterized by distorted incentive Fiji's Pinus caribaea plantations. However others structures and management inefficiencies. have been established on logged over natural forest areas, many of which could have been 5.76 Although there have been few studies conducted on the economics of Table 5.6 Forest and Tree Crop Plantations (1993) plantation development in the _ Pacific Islands, Fiji Pine Limited :Jd d d |od TW estimates that large pine _ _ _ _ _ __ _ plantations in Fiji are producing Solomon Islands 60,000 0 25,000 85,Q00 a return on invested capital of Fiji 65,000 55,000 40,000 160,000 3% to 4%. It is expected that the Vanuatu 100,000 not significant 2,655 102,655 mahogany plantations will Western Samoa 47,000 not significant 3,106 50,106 produce an 8% return on capital Tonga - 34,500. not significant 500 35,000 Kiribati 35,000 NA NA 35,000 of timber. Source. UNDP/FAO South Pacific Forest Development Program. naturally regenerated at far less cost and 5.77 Experience in New Zealand and Japan ecological disruption through a combination of has shown that forest plantations do not always careful p ing,pcontrolgand cu tion of produce the anticipated benefits and may cause can olanvest rotec tion. unforeseen environmental problems. In 1919, the pop New Zealand Forest Service (NZFS) was formed 5.80 Fiji has the most extensively developed and began establishing plantations of softwood plantation sector in the region. Softwood species on land not suitable for agriculture in plantation. sectorint regin. Sotwood plantations, primarily comprising Pinus canzbaea, order to create a wood supply for the future needs now cover 55,000 ha. Fiji's pine plantations are of the country. By 1984, despite huge investments managed by Fiji Pine Limited, a corporation in and vast areas of forest established, these forests which the Government is the main shareholder, did not provide any significant monetary while landowners are minority shareholders dividends to New Zealand. through Fiji Pine Trust. 5.78 Forty percent of Japan's forest estate 5.81 Initial studies on whether to export pine consists of plantations - primarily two coniferous logs or processed wood showed that the poor tree species - cedar and cypress established in the quality of plantation wood would not enable Fiji post World War 2 period. They replaced rich to capture premium prices. It was considered that mixed forests of oak, maple, and conifers. Now, investment in "in country" processing would with a virtual monoculture, negative health and allow Fiji Pine Limited to maximize the value 83 Chapter S from its resource. In 1987 a timber processing on invested capital and provide only a portion of complex and export shipping facility were the environmental services of the natural forests. established on Viti Levu for the Pinus caribaea If governments want to avoid having to subsidize timber. Since additional transportation costs have expensive plantation programs they should pay prohibited the processing of timber from Vanua more attention to conserving natural forests and Levu, an additional 12,000 ha of softwood managing them on a sustainable basis. plantation area are now required on Viti Levu. G. Key Issues to be Addressed in 5.82 The hardwood plantations, consisting Improving Forest Conservation and principally of the introduced hardwood, Management mahogany, Swietenia macrophylla, now cover an area of approximately 40,000 ha. and the 5.86 Those Pacific Island nations with forest Forestry Department plans to expand this to resources are now facing the prospect that unless 85,000 ha over the next 15 years. governments and people are willing to develop and enforce coherent forestry policies based on 5.83 Western Samoa's industrial plantation sustainable management principles, the forest forestry program began in the late 1960s, with the resource along with the products and area devoted to plantations reaching almost 4500 environmental services it provides will be lost ha in 1989. However, severe cyclone damage in within 15-20 years. Many associated endemic 1990 and 1991 resulted in a large portion of W. species will also be lost, leading to a reduction in Samoa's forest plantations being written off, biodiversity. The costs of environmental leaving 2200 ha remaining in 1992. The recent management are likely to rise while the potential severe cyclones significantly increased the revenues from tourism will be reduced as tourists assessment of risk associated with plantation seek more physically attractive locations. investments and significantly reduced the expected rate of return and economic viability of large 5.87 If the above trends are to be slowed or scale plantation forests. reversed and forest resources preserved and managed on a more sustainable basis, action is 5.84 In the Solomon Islands 25,000 ha of urgently required in the following three key areas: hardwood forest plantations have been protection and conservation of natural forests; established, all on Government land. The improved management of natural forests; and a Kolombangara Forest Plantation Ltd (KFPL) is more equitable distribution of economic rents. the only private company involved in forest plantation development. Their plantation estate is approxmatel 3600ha. Poblem facig the Protection and Conservation of Natural Forests approximately 3600 ha. Problems facing the plantation sector include: - poor market prospects, 5.88 Governments in the region have been uncertain stocking, inconsistent annual planting slow to recognize the social, cultural, rates by species and locations, and difficulties in environmental and economic importance of obtaining large contiguous areas of land for conserving their unique flora and fauna for future plantation development. generations. There have been few detailed 5.85 Pacific Island nations should not regard conservation needs assessments and ecological forest plantations, particularly those of non- surveys conducted with a view to designating indigenous species, as a replacement or substitute areas of h rgh conservation value. The areas set for natural forests. The establishment of plantations on bare land is rarely an attractive endangered flora and fauna in Fiji, Solomon financial proposition to private investors, who Islands, Vanuatu and Western Samoa are quite usually require financial incentives, often inadequate. subsidies, to undertake significant new plantings. 5.89 In Fiji, no serious attempt has been made Plantations require high levels of investment in to preserve a representative sample of its varied capital and labour, in general produce low returns ecosystems, placing many endemic species at 84 Chapter S risk. Although large areas of protection forest Conservation Program funded by UNDP and the have been designated, in practice there are few, if Global Environment Fund are beginning to any, restrictions on the development of these address this issue on a regional basis. In addition, areas. the recent completion of State of the Environment Reports and National Environment Management 5.90 Western Samoa was the first Pacific Strategies by countries in the region provide island nation to create a national park, 0 Le governments with the groundwork for developing Pupu-Pue in 1978. Nevertheless the country has more specific strategies and policies aimed at had one of the highest rates of deforestation in the protecting biological diversity. world and actions to conserve the nation's biodiversity have not been pursued. 5.94 Six Pacific Island World Bank member countries have signed the United Nations 5.91 In the Solomon Islands, although some Convention on Biological Diversity. The overall attempts have been made to identify and protect objectives of the Convention include:- the culturally significant areas, there has been little conservation of biological diversity; the effort made to identify and protect sustainable use of its components and the fair and enviromnentally important areas, leaving the equitable sharing of the benefits accruing from its Solomon Islands with no protected forests. utilization, including genetic resources. Consequently, important habitat areas and species may be lost through logging operations or 5.95 In approaching biodiversity conservation, through agrodeforestation. One of the two forest the Convention focuses on a number of reserves, the Queen Elizabeth National Park has development issues, including integrating been degazetted; and the other, a forest reserve on biodiversity concerns into national decision the island of Kolombangara, has been logged making. Article 6 of the Convention calls for (WWF, December, 1993). Two areas, the island parties to prepare national strategies, action plans of Rennell and the Marovo Lagoon in Western or programs and to integrate biodiversity Province have been proposed for World Heritage considerations into sectoral and other national listing. plans. 5.92 Vanuatu established its first forest 5.96 Since many of the remaining forest areas reserve on the island of Erromango in 1995. with high conservation values are found on The reserve covering 3200 ha. will protect stands custom owned land, conservation agencies must of kauri, Agathis macrophylla, which are only convince landowners of the need to conserve found in Vanuatu, Fiji and the Santa Cruz group particular areas. Approaches might include of islands in the Solomon Islands. Apart from this establishing alternative income generation projects reserve there are no other terrestrial protected or providing some form of compensation to areas or restrictive management categories in landowners. Vanuatu. While there have been attempts to pass National Park legislation, the bill has not yet been 5.97 In their 1994 study, The Socio-economic passed. There are currently proposals to establish Assessment of the Erromango Kauri Protected national parks in the Big Bay area on the Island of Area, Tacconi and Bennet attempted to determine Santo; in the Lolihor watershed on Ambrym and the economic incentive for forest landowners to at Wia Wia on the Island of Malekula. However, enter into conservation agreements. They started there has not been a comprehensive assessment, by comparing the net present value (NPV) of a 75 based on sound ecological principles, of what year lease at the current rate at which government areas should be protected. agencies lease unimproved agricultural land from landowners - 100 vatu (US$1) per hectare per 5.93 Urgent action is required to conserve year - with the NPV of logging royalties in order natural forests and the remaining biological to see if the proposed lease payment was diversity of the South Pacific region. Recent sufficient compensation for logging income initiatives such as the South Pacific Biodiversity foregone by landowners. The results showed that, 85 Chapter 5 although the total value of lease payments over a 5.101 In the Solomon Islands, the Isabel 75 year period exceeded the royalties foregone, Provincial Government passed three Conservation when the payments were subjected to discounting Ordinances which were drafted with the assistance - even at a low (social) discount rate of 4% - the of the Maruia Society of New Zealand. This NPV of the lease payments fell short of foregone legislation arose out of landowner concerns over logging royalties. To bring the NPV of the lease their inability to control natural resource payments in line with foregone royalties the lease exploitation through traditional decision making payment was increased over time. By increasing mechanisms. Their concerns were based on a the lease rate by 25% each decade, the NPV of perception that unless firm action was taken to the lease at 4% was equal to that of foregone protect their forests, they could be lost for future royalties. generations. 5.98 NGO Initiatives. In Western Samoa, in Recommendations for Protection and an effort to conserve areas of custom owned land Conservation of Natural Forests with high conservation values, a number of NGOs have developed four private conservation Proposed Government Action agreements with landowners in four villages. Although these agreements are understood not to * Biodiversity. Countries, which have not be enforceable under Western Samoan law, they already done so, should establish the extent are written in a manner that forms a moral and scope of their biodiversity resources by contract between the parties involved. Agreements conducting conservation needs assessments of this type have had problems with landowners and detailed ecological studies. reneging on the agreement after accepting compensation payments or making additional * Protected Areas. Effective systems of demands for increased compensation payments protected areas should be established urgently after the agreements were finalized. to preserve biodiversity. This should be done in close consultation with communities and 5.99 In contrast, the Western Samoan landowners and could include conservation environmental non government organization, 0 areas, national parks, and ecological reserves. Le Siosiomaga Society Inc., in an effort to protect the biodiversity in an area of cloud forest bought Since many of the remaining forest areas with the logging rights to an area of about 6 square high conservation values are found on custom miles from the custom owners for a period of owned land, it is imperative that approaches twenty years. This agreement which was signed in and agreements are developed which will March, 1994 is legally enforceable, unlike the convince landowners of the need to conserve abovementioned private conservation agreements. particular areas. These approaches may This represents one of the first moves by an involve establishing alternative income environmental NGO to purchase logging rights in generating projects or providing some form of the Pacific. Other conservation organizations are compensation to landowners. also considering this approach. a Public Awareness Programs. Develop 5.100 A few international NGOs including programs to create public awareness of the World Wildlife Fund, Maruia Society, need to conserve forest resources to protect Conservation International and Foundation for the coastal areas, stabilize watersheds and Peoples of the South Pacific are working with maintain biological diversity (e.g. media, local groups and organizations to develop community extension programs and school alternative income generating opportunities in curricula). order to encourage landowners to protect their forests. * Institutional Capacity. Streamline institutional capacity and government structure 86 Chapter S to achieve cost effective management of ecosystem equivalents were absent from these protected area systems. forests. These conditions did not apply initially to many of the forests in North America, Australia Donor Involvement and the tropics, which contained extensive areas of old growth forests, with timber volumes * Donors should provide grant aid in support of accumulated over centuries (Cassells et al, 1988). conservation of natural forests, since this is an area which has been neglected in the past in 5.104 Today the concept is shifting away from favor of programs aimed at exploitation of just being associated with sustainable yield of natural forests and promotion of plantation products to embrace forest ecosystems including development. biodiversity, soil and water values and recreation and amenity values. Recent statements on Multilateral and bilateral donors generally are sustainable forest management (Poore et al., not equipped to mount small-scale community- 1989; ITTO, 1991, 1992a; IUCN, 1992) suggest based programs. There is scope for these that for timber production from natural forests to donors to support local and international non be considered sustainable, it should only occur in government organizations, which are working a land planning context that allocates forest lands with local landowners, to develop feasible and for the total protection of biodiversity and the socially acceptable approaches to forest protection of fragile environments such as steep protection and conservation. slopes and critical watersheds (Cassells, 1994). Improved Management of Natural Forests 5.105 However, theoretically and practically, doubts exist as to whether sustainable forestry is 5.102 The forestry sector is a significant source possible in tropical, natural forests (German of income to national governments and to rural Bundestag, 1990). Advocates of sustainable landowners in many Pacific Islands nations. In forestry in the tropics admit that managed forests spite of this, there is little understanding of the are depleted biologically and lose some of their principles and benefits of natural forest diversity. They nevertheless maintain that long- management. Typically forestry operations are term constant yields are possible under certain treated as "mining of a non-renewable resource". conditions. One of the main conditions being that There is a vital need to improve the way logging the volume of timber harvested annually be is carried out to reduce the unnecessary damage to limited to the rate of commercial timber volume forests, improve their regenerative capacity and to increment. However, the small amount of reduce the financial and economic costs of practical work that has been done does not permit logging. Landowners, governments and logging such an optimistic assessment. What is regarded companies all have a vested interest in improving as one of the best examples of forestry in tropical logging practices. forests, namely that in North Queensland, Australia, has not been assessed over a 5.103 While sustainability is a concern of many sufficiently long period to demonstrate policy makers, what is meant by sustainable yield sustainability. However, if sustainable timber can vary quite significantly, even among yields are possible from these systems they are foresters. The concept of sustainable yield in likely to be low by world standards and are only forestry arose under the conditions existing in likely to be economically viable in the long term Germany in the mid-nineteenth century and if they are directed at high value specialty transferred, with little adaptation, to humid products. tropical forests. The concept originated and has continued to the present with the idea of 5.106 Since the likelihood of practicing supplying raw material - largely logs of various sustainable forestry in tropical natural forests is sizes - in perpetuity for the benefit of users. Since poor, where commercial logging does occur it is German forests had experienced a long history of essential to reduce canopy opening to a maximum management, old growth trees and their of 25% to 30% in a given forest stand and to 87 Chapter S minimize damage to residual forest from felling, 5.111 In the Solomon Islands, Australia is skidding and construction of roads, skid trails and supporting a Timber Control project which is log landings. This is necessary to ensure an assisting the Government to establish Timber appropriate environment for regeneration of Inspectorate Control Units and provide training valuable commercial tree species required for for monitoring the activities of logging subsequent harvests. Sufficient canopy must be companies. The project is also helping develop a maintained to ensure germination and regulated export pricing scheme through the development of seedlings and to inhibit the Commercial Unit, improve quality of sawn timber growth of vines, herbaceous plants and pioneer and assist landowners with information and tree species, which often out-compete commercial awareness of their rights and management of the tree species for light, nutrients and moisture. forest resource. 5.107 It is also important in the islands to retain 5.112 The Profitable Environmental a sufficient portion of forest cover to control Protection Project managed by Foundation of the water runoff and reduce soil erosion. For Peoples of the South Pacific and funded by example, excessive sedimentation, when deposited USAID has supported the introduction of portable on coral reefs inhibits, and in extreme cases sawmills in Vanuatu, Solomon Islands and Fiji. destroys, the productive capacity of near shore They argue that portable sawmills give ecosystems upon which the livelihoods of many landowners a means of converting trees to cash Pacific Islanders depend. without harvesting large tracts or using heavy equipment and provides an alternative to the 5.108 A number of donors are supporting wasteful exploitation typical of large-scale programs aimed at improving management of commercial logging. Concerns have been natural forests and reducing damage from expressed that proliferation of these sawmills logging. could accelerate logging in many areas and that their use could lead to loss of log value as a result 5.109 In Fiji, the Australian supported Forest of poor milling. A recent evaluation of the project Resource Tactical Planning Project is providing found that greater emphasis should be placed on assistance to design and implement improved teaching landowners the principles of sustainable logging licenses; more environmentally sound forest management. coupe-level logging plans (selected harvesting on a small area basis); and sustainable yield 5.113 Carbon Offset Funding for Investment management plans for larger areas. Fiji recently in Improved Forest Management. Tropical introduced a National Code of Logging Practice forests have a role in the global carbon cycle and designed to improve the efficiency and safety of the rising atmospheric concentrations of carbon logging operations, while reducing adverse dioxide. Uncontrolled logging results in environmental impacts. unnecessary emissions of CO2 and decreases the forest's capacity to regenerate and sequester 5. 110 The National Forest Management Pilot carbon. Recognizing the potential of improved Project supported by the German Government in forest management for reducing greenhouse Fiji aims to develop management systems for emissions, electric utilities are prepared to natural forests, which stimulate growth and provide funds to forest managers to implement regeneration of the residual species, to provide Reduced Impact Logging (RIL)10 and other sustainable yields of timber and other forest products. The field work on this project was completed in June 1994 and results are now being assessed. This project has addressed a previously '°Experience has shown that to achieve a 50% reduction in damage to soil and residual forests costs $350 per neglected area and one requiring further research ha. In paying for these costs electric utility companies if the management of Fiji's natural forests for can claim the carbon retained in these forests against production purposes is to be improved. their carbon emissions. 88 Chapter S forestry measures aimed at increasing carbon capture, these four countries were able to storage. decrease these excess profits to 10% to 30% by increasing their royalty and taxation collection by 5.114 Improved forest management will entail 20% ($30 million), the cost of achieving some costs and if it is to be realized in the Pacific sustainable forest management on the entire Island nations it will have to be accompanied by a production forest estate could be recovered in 25 more equitable distribution of economic rents, years. This is approximately the cutting cycle which is discussed in the following section. upon which native tropical forests are managed. ITTO11 recently reviewed the costs of achieving To recover the cost of sustainable forest sustainable forest management in Indonesia, management on the remaining unlogged Malaysia and the Philippines and concluded that production forest area would require a period of internalizing the additional costs of moving from 12.5 years. the present "liquidation" forestry to sustainable forest management will increase wood production Recommendations for Improved Management costs by $25 to $50 per m3 - equivalent to $1,000 of Natural Forests to $1,500 per ha. Using a different approach, the World Bank12 arrived at a similar figure for Costa Proposed Government Action Rica, where it is estimated that the net present value (NPV) of payments required to ensure * Landowner Involvement. Governments sustainable forest management are between $717 should explore ways of more actively and $1,573 per ha. involving landowners in the management of natural forests, including the monitoring of 5.115 Based on the foregoing estimates and the logging operations. forest areas shown in Table 5.3, the cost of achieving sustainable forest management on * Forest Management Plans. Detailed plans for approximately 600,000 ha of production forest in management of natural forests for sustained Fiji, Solomon Islands, Vanuatu and Western timber production should be established in Samoa would be $750 million. To achieve this on consultation with landowners. Areas of natural the remaining unlogged production forest area of forest should be set aside for production approximately 300,000 ha, would cost $375 purposes only after the conservation needs of million. Whether or not this amount of funding the area have been met. can be raised from readjusting the distribution of economic rent is important in determining * Sustainable Yields. Under internationally whether the forestry industry alone can finance accepted guidelines on sustainability such as sustainable forest management. those adopted by ITTO for tropical forests, timber production can only be considered 5.116 The four countries referred to above have sustainable if it is practiced in a land use a combined annual harvest from natural forests of context that allocates forests for the total approximately I million mi3. Assuming an average protection of biodiversity and protection for log sales price of $150 per m3, this harvest has a environmentally sensitive areas such as value of $150 million. As illustrated in Figure riparian forest, steep slopes and erosion prone 5.1, 30% to 50% ($ 50 - $75 million) of this areas. currently accrues to logging companies in the form of excess profits. If, through improved rent Harvesting should also not exceed the best available estimate of sustainable yield. The 1 ITTO Tropical Forest Update, December, 1994. allocation of the national total harvest should ITTO Tropical Forest Update, December, 1994. be sustainable within regions. Any new 12 Nalin Kishor and Luis Constantino, Sustainable permits or licenses should only be granted if Forestry Can it Compete? Finance and Development, they are within the national and regional World Bank, December, 1994. sustainable yield limit. Proper landowner representation and consultation should be 89 Chapter 5 ensured during the allocation of any new deducted from its bond. Conversely, if it met permits or licenses. the agreement conditions the bond would be returned with accrued interest. * Research. Further research should be conducted into areas such as the development Donor Involvement of appropriate silvicultural systems for the sustainable management of natural forests and * Donors can assist further in improving the the increased use of native trees in management of natural forests by supporting agroforestry and plantations. initiatives relating to the recommendations outlined above. . Extension. The extension services of forestry departments in the countries studied should be A More Equitable Distribution of Economic reoriented and strengthened to ensure that due Rents emphasis is placed on natural forest management and that they have the capacity to 5.117 There is substantial scope for increasing work closely with landowners in improving both the royalties collected by landowners and the the management of their forests. revenues collected by governments in the form of taxes and other levies. Recent Bank research * Logging Practice Codes. National Codes of indicates that, based on current log prices and Logging Practice, which seek to minimize the logging costs, the combined revenue collected by destructive impacts of logging should be landowners and governments could be increased developed, incorporated into logging contracts to 50% of f.o.b. log value without endangering and enforced with realistic penalties. Ongoing the profit margins of loggers. training should be provided to both logging contractors and those charged with monitoring Recommendations for a More Equitable and enforcement. (The use of penalties and Distribution of Economic Rents ongoing training for both Queensland Forestry Service personnel and industry operatives was Proposed Government Action an essential ingredient in making the environmental guidelines for the North * In order to obtain a more equitable distribution Queensland rainforest work in practice.) of economic rents from forestry operations, governments are urged to consider the * Performance Bonds and Surveillance/ following measures, bearing in mind that all Inspection should be considered as approaches have certain strengths and weaknesses: to ensure that logging companies comply with Codes of Logging Practice and with their Stumpage Taxes. There are several types of contractual obligations. stumpage fees. They all tax what is cut and not what is exported or processed. The For example, in the early 1990s the conventional field stumpage system which Philippines Government awarded rights to operates throughout most of Asia uses harvest trees through competitive bidding. The individual marking of trees for felling, bidding process was used to determine the followed by measuring, scaling and grading of level of a performance bond which loggers extracted log volume (usually at a log dump or would be willing to deposit with the Forest pond) to calculate fees payable by loggers. Department to guarantee that they would This approach is time and resource intensive. observe provisions of sustainable forest It is also subject to abuse: officials operating management plans. Five such areas were alone in the forest are subject to bribery or awarded covering a total of 50,000 ha. The coercion. Logs can be removed from other average performance deposit paid was $1,000 areas and given false documentation and evade per ha. If a company failed to comply with its detection by field officers who are involved performance agreement an amount would be with measuring logs at the official dump site. 90 Chapter 5 In these circumstances loggers are free to reflect the true replacement cost, lowers high-grade the resource (i.e. to take only the returns to the producer and forces trees to be most valuable trees, rather than all commercial used for less valuable purposes or cleared to volume) and illegally log a much larger area develop agricultural land. than covered by their license agreement. Independent Inspection of Exports. Export Taxes. They are the most Independent inspection firms and surveillance convenient means of raising revenue from can help to ensure that sustainable forest operations in the short term. These can management objectives are achieved and that be set to recover a significant part of the rents accrue to government and local owners. difference between existing revenue collection Inspection firms should be engaged when the and what could be collected on the basis of uncaptured resource rents they are likely to market price and cost information. The recover significantly exceeds their costs of simplicity of export taxes, the fact that they operation. can be assessed at convenient check points making it difficult to bypass the system and Merging Field Based and Export/Output their appeal to important economic ministries Tax Measures. It is possible to blend aspects has to be traded off against the fact that they of an export tax system with some elements of can be intersectorally distortionary and can a field based stumpage system. PNG will trial facilitate discrimination between products an approach to this system which will require within the sector. In addition, if they are set logs to be tagged as they emerge from logging on a simple ad valorem basis they cannot sites, and then measured and graded at export maximize rent recovery from international points. Thus, it will be possible to reconcile markets in which prices are highly volatile. the number of logs coming from particular This problem can be overcome to some extent logging sites with those arriving at export by a two tiered system. Such a system is points. This system will produce at least some designed to collect as tax a large proportion of of the benefits of a field based system, while the price beyond a defined threshold. The preserving the export tax approach to revenue threshold, which can be adjusted periodically, collection. is based on industry costs and on a reasonable return on capital invested. H. Summary Export Bans. Bans on log exports have been 5.118 In summary, a long-term forestry proposed or are in force in PNG, Solomon strategy requires the protection and conservation Islands, Fiji, Vanuatu, and Western Samoa. of natural forests as a first step, in the interests of This has usually been done to promote future generations. Second, natural forests need domestic processing. High export taxes or better management including improved logging bans may play a useful role in the short term techniques, to reduce unnecessary damage to to allow governments time to develop more forests, improve the regenerative capacity and to appropriate policies for sustainable forest reduce the financial and economic costs of management. Log export bans seem to have logging. Third, a more equitable distribution of been quite successful in slowing the rate of rents is required through a combination of deforestation in countries such as Vanuatu and increased royalties to landowners, stumpage Fiji. However, a major concern regarding the taxes, export taxes, and independent inspection of use of high log export taxes or outright log exports. Prompt action is imperative to save the export bans to promote domestic processing is forests. The scope for regional cooperation on that they push the domestic price of timber these and other issues is discussed in the next below world prices and therefore transfer chapter. income from log owners to the processors. Devaluing the price of logs, which may already be undervalued if the price does not 91 Chapter 6 6. PRIORITIES FOR REGIONAL ACTIONS A. Background advantage of cooperation is sizable, and the potential market increase substantial. Further, 6.1 Regional cooperation has long been cooperation must function efficiently, with attempted and implemented in the Pacific Island consensus building mechanisms able to achieve countries. In principle, cooperation can increase near-optimal economic solutions and not settle on market size, optimize on the use of scarce the lowest common denominator, in order to technical capacity to manage complex avoid the degeneration of administration which undertakings, and reduce asymmetries in would then add costs and delays in decision bargaining power between small states and larger making. economic entities. Acting together, the Pacific B. Trade Cooperation Island states could take advantage of these possibilities. Integration through trade has already been discussed in Chapter 2, which suggests that 6.3 Scope for regional cooperation in trade regional cooperation in trade is best achieved by amongst the Pacific Island nations is limited for a early integration in the APEC framework. number of reasons. Imports are dominated by machinery, other capital goods and petroleum- 6.2 The predominant objective of economic most of which are not produced in the region. cooperation is to raise incomes and provide Likewise, exports are predominantly raw employment. Within this broad objective, two materials which are processed in distant specific categories of economic benefits can be industrialized nations. And finally, external trade identified. First, economic cooperation can policies tend to reflect major differences in the provide member countries with access to broader degree of fiscal dependence on import and export markets. And second, the sharing of common duties, with low tariffs prevailing in Kiribati, services and their costs can reduce unit costs and Marshall Islands and the Federated States of eliminate unnecessary duplication of services'. Micronesia, and moderate-to-high tariffs in Fiji, The chapter discusses four areas of regional Tonga, Western Samoa and Solomon Islands. integration: (a) co-operation in trade and services within the APEC framework; (b) aviation and 6.4 There are, however, significant other ocean transport; (c) natural resource management; constraints to pursuing trade cooperation within and (d) co-operation in economic and social the region. First, the theory of integration services, particularly in higher education and suggests that benefits accrue when the trade environmental management. It is evident, patterns and commodities traded between however, benefits from regional cooperation and countries are quite different. This condition is not integration will only accrue if the comparative met by the PMCs which, by and large produce and trade the same, or similar commodities. Thus, the potential benefits of integration are limited. Moreover, the experience of the South This chapter relies heavily on the comprehensive American countries from the 1970s suggests that review of regional cooperation efforts contained in regional trade accords which aim to promote Uentabo Fakaofo Neermia, Cooperation and Conflict: goods produced within the region by limiting the Costs, Benefits and National Interests in Pacific entry of competing goods into these markets, only Regional Cooperation, Institute of Pacific Studies, encourage inefficiency in production, thereby University of the South Pacific, 1986. extend protection to the producing industries. 92 Chapter 6 Such policies entail a significant loss of welfare, At the same time it must be stressed that such with consumers bearing the brunt of this cooperation must function efficiently in practice, unintended protection. leading to best practice decisions being taken. Otherwise rising administrative costs and inertia 6.5 Another factor which works against the will derail such cooperation efforts and reduce the PMCs is that benefits are maximized through net benefits from integration significantly. regional integration in trade when the partner countries in question are dissimilar in size. Once 6.9 Coordinating Trade Administration. again, the PMCs are more or less similar with The quarantine, labeling, custom's codes, respect to this attribute and so the potential gains consumer protection and rules-of-origin are limited. This does, however, suggest that the procedures differ significantly among the Pacific PMCs need to look outward to improve their Island states and in their major trading partners. competitive positions through trade integration. The lack of uniform trade procedures adds to the costs of importing and exporting and, for fresh 6.6 In the long term the PMCs should produce, the lack of uniform procedures serves to attempt to ally themselves in regional trading jeopardize access to major consumer markets. arrangements with larger, more dynamic economies than their own. In this respect, 6.10 The Forum Secretariat has reviewed the SPARTECA can be considered a first necessary administrative aspects of market access2 and has step in the right direction. However, this must be recommended, amongst others, that steps be taken considered as a stepping-stone to the next logical to harmonize quarantine risk assessment, position which would be to join the APEC treatment and inspection procedures; standardize framework. Such an attempt at integration would phytosanitary and veterinary certification; be truly trade enhancing and would subject the broaden the adoption of the harmonized system of PMCs to the competition necessary to increase tariff classification; standardize custom's efficiency. If direct entry into such an documentation; centralize and make more arrangement is obstacle-ridden, then the PMCs transparent trade licensing; establish regional may want to consider piggy-backing into the consumer protection, packaging and labeling APEC framework through their larger legislation; and establish a uniform certificate of SPARTECA partners. origin for all trade within the region. Such initiatives merit serious consideration. 6.7 Given the difficulty of directly obtaining membership in a regional accord such as APEC, 6.11 There are other benefits that could accrue as well as the long-term nature of such an from coordinating trade policies. As in the case of endeavor, there is, however, a good case for the the Caribbean states, the discipline of a common PMCs to unilaterally adopt investment and trade external tariff could serve to encourage more liberalization measures as they are negotiated and outward oriented and transparent trade regimes. agreed to within the APEC group. This would In this sense, a multilateral trade policy approach serve to increase the outward orientation and could serve to enhance the capacity of each efficiency of the PMCs and could widen their individual nation to respond to changing global duty free access to other markets. At the same trading conditions. time it would have the positive effect of promoting their case for membership in pacts such as APEC. 6.8 The main impediments to benefiting from 2 See Development Strategies Consultants Pty Ltd, intra-regional trade are those mentioned above Review of Administrative Aspects of Market Access which all point to the small size of the market as in the Region, Forum Secretariat, September 1993. the limiting factor. This, in turn, suggested that the PMCs look outward in order to realize benefits from integration and cooperation in trade. 93 Chapter 6 C. Cooperation in Aviation and Sea repercussions3. Conversely, after many years of Transportation losses and capital injections, Air Pacific, Air Vanuatu and Air Niugini have reported operating 6.12 Air and sea transportation link Pacific profits-all three having developed a diversified Island nations to the larger global markets. tourism, business travel and air cargo customer Distances are great and trade volumes tend to be base. Fiji's national carrier, Air Pacific, envisions small. These factors combine to raise transport itself as the hub of the South Pacific in airline and shipment costs. In addition, the operation of operations and has been one of the leading modern aviation and freight facilities is highly proponents of the hubbing concept. In 1985, Air capital intensive, technologically complex and Pacific entered into an alliance agreement with exhibits significant economies of scale and scope. Qantas under which Air Pacific would coordinate All of these are factors that argue in favor of global routes with Qantas. Qantas owns 10 regional cooperation. percent of Air Pacific and is represented on its Board of Directors. The other shareholders of Air 6.13 The PMCs have cooperated in Pacific include the Governments of Western establishing a common sea freight service and in Samoa (5 percent), Tonga (5 percent) and Fiji (70 load-sharing international flight segments. The percent). high financial losses associated with operating L i independent national airlines, however, bears 6.f16 Largely in recognition of the critical witness to the need to improve regional financial situation of many of the smaller island integration in operating international aviation airlines, attempts have already been made to services, rationalize services, through code-sharing different routes, wet-leasing planes and 6.14 During the 1960s, an attempt was made eliminating non-viable routes. As discussed in to establish a regional international airline with Chapter 3, given the precarious financial Fiji (Fiji Airlines) as the hub. While shares of the circumstances of the smaller airlines, new airlines were distributed to different island approaches to international aviation cooperation governments, the airline was unable to adequately may need to be pursued. address the needs of the different island states. In the 1970s, national airlines were founded in 6.17 One option would be to revive efforts Papua New Guinea (Air Niugini), Vanuatu (Air made to establish a truly regional airline. This Vanuatu), Solomon Islands (Solomon Airlines), could be accomplished by merging existing Tonga (Royal Tongan), Kiribati (Air Tungaru), national carriers into an expanded Air Pacific. New Caledonia (Air Caledonia International), The terms and conditions of such a merger would Western Samoa (Polynesian Airlines), and require extensive negotiations and would require Marshall Islands (Airline of the Marshall Islands). some conversion of outstanding airline debt into Many of these airlines have received grants in equity. Once consolidated, Air Pacific should be cash and kind from donors and governments, and granted the autonomy needed to conduct its practically all have operated with large losses. operations as a commercial entity, while providing an assured level of international air 6.15 In 1993, total losses from the region's air access to the smaller regional states. carriers were estimated to be of the order of US$60 million per annum. For some countries, these losses may have serious macroeconomic 3In 1993, operating losses of Solomon Airlines were in excess of US$ 10 million or close to one-fifth of public expenditures. Accumulated debts of Polynesian Air are in excess of US$20 million, with annual losses estimated in 1994 at close to WS$15 million per annum. 94 Chapter 6 6.18 There are other options for improving ECU. Additional subsidies have been provided on regional air access that would benefit from a regular basis by the Governments of Australia collective action. Very few charter flight and New Zealand. Financial problems have operators serve Pacific Island destinations, outside plagued the Forum Lines and have led to the of Tahiti and New Caledonia. The PMCs have not elimination of operations on those routes with actively attempted to encourage charter airlines limited cargo. At the same time, on the higher because of the competition that this would bring volume routes (between Fiji, Japan and the to already financially ailing national carriers. The Northern Pacific), there has been a significant advantages of broadening air access by increase in competition from commercial freighter encouraging charter operations far outweighs the services. costs in market share to national carriers. In fact, the tourism industry in the Maldives, Gabon, the 6.20 The chronic financial problems of the Gambia and the majority of small Caribbean Forum Lines dictate the need to re-examine the nations rely primarily on air access through direction and focus of the cargo service. As a charter flight operations. A combined effort by carrier of last resort, there are numerous the civil aviation authorities of the respective advantages to subsidizing cargo services. But on PMCs to promote charter airline operations, and the more commercial routes, there is little to grant air access into the region on a non- justification for public sector support. reciprocal basis, would help to improve international air access and lower the cost of 6.21 Splitting the Forum Lines into distinct transacting business in the Pacific4. entities merits consideration. One would be responsible for the more commercial routes and 6.19 Forum Shipping Lines. The Pacific would be operated as a fully commercial entity, Forum lines came into being in 1978 to provide without Government subvention. The other would regular sea freight services to all of the Forum be given responsibility for servicing the freight Secretariat nations, including the provision of routes to the small island states, which tend to be essential services on non-commercial routes. The loss-leaders. Separating the commercial from the Forum Lines is owned by the nations of the South non-commercial services would provide greater Pacific Forum and leases boats from four of the transparency in apportioning the costs and member nations. The European Community benefits of providing regular freight services to provided an initial capital subsidy of 6 million the smallest Pacific states. D. Cooperation in Resource Management 4 Pacific Islands States have been reluctant to grant landing rights and fifth-freedom rights to nations that 6.22 The economic fortunes of the PMCs are do not grant reciprocal treatment to their national closely linked to the effective management of carriers. This has hindered the development of charter natural resources. Fragile ecologies, growing operations from distant markets, as these nations population pressures, mounting evidence of generally do not have aviation agreements in place unsustainable rates of resource exploitation and with the PMCs. The general principle in aviation rising demand for fisheries and forestry products negotiation should not be one of securing rights for suggests the need for caref management of the national carriers but should be one of encouraging region's resources. camers to provide links between distant markets and g the South Pacific. Accordingly, a policy of non- reciprocal airline market access should be considered. 6.23 Cooperation in natural resource These efforts have been supported by the Oceanic management has been largely limited to the Fisheries Program of the SPC, which is responsible exchange of scientific information. Each nation for stock assessment and statistical infornation has tended to regulate the use and trade of natural gathering. resource products in an independent fashion. Due to unequal bargaining power and access to information, the PMCs have reached resource 95 Chapter 6 exploitation agreements that are too lax and order of US$56 million, or just over 4 percent of difficult to enforce. the value of the catch. There is considerable variation in access fees paid by the different 6.24 Fisheries. Within the exclusive economic fishing nations: the USA pays 10 percent of the zone of the Forum Island states lies more than value of the catch; Japan 5 percent; Taiwan 3.7 half of the world's supply of canning-grade tuna. percent and Korea 2.2 percent. Under reporting is The distant water fishing resources of the member also an issue, and is estimated to have exceeded states are difficult to police and are exploited by 50 percent of the 1992 Taiwanese and Korean vessels from more than 20 different nations. In catch from the South Pacific. recognition of the importance of the region's marine resources, and of the advantages to 6.28 Shifting the basis of deep-sea fisheries seeking common solutions to resource agreements from bilateral to multilateral accords management, the Forum Fisheries Agency (FFA) will provide PMCs the opportunity to reap was established in Honiara, Solomon Islands in significantly higher resource rents and will ease 1979. The FFA has a professional staff of 25, and enforcement and resource conservation efforts. an annual budget of US$1.6 million. It has been Negotiations are underway to develop a instrumental in assisting member countries with multilateral arrangement with the Government of management, licensing, monitoring, and Taiwan. By signaling the intention to shift surveillance of offshore tuna resources. It has fisheries agreements from bilateral arrangements been largely responsible for establishing, to a common multilateral standard, as agreed at harmonizing and coordinating fisheries policies, the 1994 Brisbane meeting, the Forum States particularly those pertaining to foreign fleet access would improve their negotiating position with to national waters, between it's member states. foreign vessels and enhance their ability to fully Consequently the fisheries sector provides the enforce such agreements. In support of a stronger best example of successful regional cooperation in focus on multilateral agreement it will be the Pacific. important for Pacific Island countries to ensure that sound management principles are harmonized 6.25 Building upon the work conducted at the around the region, by providing legal backing FFA, further efforts are required to monitor and through national legislation, and by incorporating assess the factors influencing fisheries resource these principles as conditions of access in new levels (see Chapter 4). Collective initiatives are multilateral agreements. also needed to improve surveillance and conservation programs. These efforts will help 6.29 Forestry. As seen in Chapter 5, forest ensure that the region's fisheries stocks are products are a major source of export earnings in exploited in a sustainable manner. PNG, Solomon Islands, and Fiji. Over- exploitation of natural forests, under reporting of 6.26 A strong case can also be made for exports, and high profits accruing to logging buttressing collective efforts to assign deep sea firms, particularly in recent years, are problems fishing rights to foreign vessels. With the common to several of the PMCs. Countries have exception of the multilateral fisheries agreement tried to address these problems by developing with the United States, which fixes and distributes forestry policies and by strengthening institutional the resource rent amongst the countries in which capacity in forestry management. Still, forest the fish were caught, other nations have entered resources are not managed in a sustainable and into deep-sea resource use agreements on a economic fashion. bilateral (enterprise or country) basis. 6.30 With the increasing scarcity of natural 6.27 The strategy of bilateralism may have forest products in world markets, there will be reduced possible market returns to the PMCs. As increasing pressure on PMCs to over-exploit noted in Chapter 4, the estimated value of the fragile forest resources. Underscoring the urgency distant PMC catch is of the order of US$1.2 of improving forestry management, Pacific Island billion, while fees paid to island nations are of the countries are exploring the feasibility of adopting 96 Chapter 6 a common code of conduct for logging operations Greater cooperation amongst the PMCs to resolve in indigenous forests and to improve the current problems affecting the USP is urgent, if monitoring of logging and timber exports. the Pacific Island countries wish to benefit from a regional institution. 6.31 The South Pacific Forestry Development Program is an important UNDP regional 6.34 Demand for post-secondary training is program, executed by FAO, which is aimed at forecast to rise rapidly over the coming decade. improving coordination of activities within the This is due to a combination of population sector and providing support to member increase, improved access to secondary education countries. Key initiatives supported by the and a growing demand for students with post- program include, the Regional Heads of Forestry secondary training to provide economic services Meeting held annually, the production of a within the region or abroad. As noted in Chapters regional newsletter entitled, "Pacific Islands 3, 4, and 5, more training in the field of tourism, Forests and Trees", and publication of a fisheries, and forestry will be required. First and Directory of the Oceania Forest Sector. This foremost, such training is most effectively carried program has played a valuable role in fostering out in collaboration with the respective industries. closer cooperation, coordination and collaboration among persons and agencies working in the 6.35 The main regional post-secondary forestry sector within the region. training challenge is to meet rising internal demand and improve the effectiveness of USP. To E. Cooperation in Economnic and Social Services: this end, the following initiatives merit Higher Education and Environment consideration: 6.32 In an increasingly competitive global * tighten management and quality standards for environment, the size, composition and both faculty and student bodies to match rising productivity of the skilled labor force will become global tertiary training standards; an increasingly important determinant of international competitiveness. The small numbers * shift the training focus from liberal arts and of graduates and the need for highly specialized other forms of training from qualifying purely training facilities suggests that there are for public administration to technical sciences significant benefits to be garnered from regional and business administration so that USP training cooperation in higher education. The past efforts will be more responsive to market forces; to support a regional University reflect an awareness of the benefits to be derived from * reallocate a major portion of donor support for regional cooperation in post-secondary education. tertiary training programs from high cost Rim 6.33 Higher Education. The University of the country institutions to USP; and South Pacific (USP), was founded at Laucala Bay, Suva, on the site vacated by the Royal New * establish mechanisms to coordinate training Zealand Air Force in February 1970. The USP offered in USP with the Institutes for Higher continues to occupy the main campus in Suva and Education with those in PMCs and Rim has a smaller agricultural campus in Apia, countries. Western Samoa. Special satellite units of the University are also located in Niue, the Cook 6.36 Environment. A fragile environment is Islands, Tuvalu, the Solomon Islands, Nauru, perhaps the most common feature the Pacific Tonga, Vanuatu and Kiribati. With its 350 Island countries share because of their unique professional staff, an annual budget of US$18 topographies. Managing the environment and million and close to 2,000 students enrolled in environmental services through cooperative tertiary training, USP is the single largest source regional arrangements has the potential to of higher education for students in the region. generate significant benefits for two reasons. 97 Chapter 6 First, given the small physical size of the maintain and improve the quality of the countries, cooperation in this area should allow environment. It's mandate gives it an extremely countries to benefit from economies of scale. broad coverage of environmental issues, both Second, given the weak human resource base in terrestrial and marine. To date, it has assisted the region, sharing in such an area as this should many Pacific Islands with the preparation of their contribute to institution-building. In recognition National Environmental Management Strategies, of this, the Pacific island countries established the playing a largely coordinating role. It also South Pacific Regional Environmental Program conducts research in all pertinent environmental (SPREP) in 1983. areas, relying heavily on a cooperative approach to project implementation. 6.37 Problems of coastal pollution and degradation are evident in all the PMCs with 6.41 Considerable scope exists for SPREP to many common elements-urban encroachment on undertake more initiatives at the regional level as natural habitats, loss of mangrove areas and discussed above. An area which should lend itself lagoon eutrophication. Damage to coral reefs due particularly well to this is the establishment and to pollution or coral blasting may have serious management of marine conservation areas. socio-economic consequences. This is due to the External funding is potentially available for such importance of reefs as centers of marine resources efforts-through, for example, the Global and their relation to the food-chain; and, to the Environment Fund-and SPREP, with its important function that reefs serve by way of technical expertise, is ideally placed to take protecting low-lying-atolls and islands from the advantage of such opportunities at the regional open ocean. Thus protection of coastal habitats is level. Finally, it can play a catalytic role in the an essential function which could form one basis region by actively disseminating information for regional cooperation on the environment. about environmental issues, actions and their outcomes in different Pacific Island countries. 6.38 The vulnerability of many of the Pacific Islands to natural phenomena, such as cyclones, 6.42 NGOs can also play an important role in flooding, etc., suggests another important area articulating and addressing environmental where the countries may benefit from a regional concerns. The Pacific Islands have a strong, and sharing arrangement. Thus, early warning in some instances well-established record of NGO systems and other elements of disaster preparation participation in environmental areas. These and response are issues which lend themselves to organizations can be an extremely cost-effective regional cooperation. Considerable cost savings way of undertaking initiatives whether in surveys, may be realized by lowering the unit costs research, implementation, or dissemination. For through sharing, given the high capital costs of example, in the Solomon Islands NGOs have been some of these activities extremely active in the past few years in the forestry area and are considered to have made a 6.39 Finally, a third area which may lend itself positive contribution. This has been done mainly to regional efforts concerns marine conservation through village-level education programs, issues. Given its status as the largest ocean, the designed and conducted by NGOs, on forestry Pacific is host to a great diversity of marine life conservation practices and the linkages of logging and habitats, and the scope for conservation is to degradation of terrestrial and marine habitats. very large indeed. These potential conservation Thus the PMCs should encourage these types of areas, however, are distributed without regard to initiative, especially since they are in the long- national boundaries. Thus, the trans-boundary term national interest and are usually cost- nature of the resource would necessitate effective, relying on few public funds. multinational or regional efforts in the area of conservation. 6.40 SPREP, headquartered in Apia, was established to assist the countries of the region to 98 Chapter 7 7. COUNTRY PROFILES FM Population: 759,000 (1993) GDP: US$1,647 million (1993) GNP Per Capita: US$2,130 (1993) A. Introduction been disappointing, with real per capita output growth averaging only around 1 percent per annum 7.1 Fiji is endowed with a rich natral resource during 1991-94. base, including abundant stocks of forests, minerals and fisheries resources. Despite remoteness, B. Recent Economic Developments vulnerability to natural hazards and other natural handicaps, as a small island economy, Fiji ranks as 7.3 Overall GDP perfomzance has been one of the largest and most developed of the Pacific somewhat stronger in the 1992-94 period than in Island economies. Sugar and tourism have previous years, with the major contribution traditionally been the life-blood of the economy, occurring from agriculture. Sugar cane value added with garments emerging as a significant new industry expanded by over 9 percent in 1992 and 1994, the beginning in the late 1980s. It has a comparatively two years in which GDP growth exceeded 2 percent. high level of human resource development, with an The slowdown in economic expansion in 1993 to average life expectancy at birth of 72 years, an infant under 2 percent in part reflects adverse weather mortality rate of about 23 per thousand, and a conditions early in the year (Cyclone Kina) as well literacy rate over 80 percent. Fiji has a standard of as industrial disputes in the sugar sector that living of a lower-middle income developing country depressed agricultural production. Non-sugar crops with a per capita income of US$2,130 (1993). suffered a steep fall in value added, and subsistence agriculture registered a 3 percent decline. With the 7.2 The upheavals associated with the events of completion of the construction phase of major public 1987 represent an economic and political watershed investment projects, construction activity also for Fiji, with repercussions still evident. The declined sharply after rapid expansion in the economic recession that followed the political previous two years, an adverse movement that was turmoil quickly eroded the limited gains in income more than offset by strong growth in services, that had been achieved over the previous decade, and particularly tourist activity. much of Fiji's growth since 1987 has served primarily to recover the ground lost in that short 7.4 The most recent Government estimates period. The Government confronted the economic show that GDP grew at 5.2 percent in 1994, led by a crisis by adopting an economic reform program that record sugar production (of 517,000 tons) and an focused on restoring stability through prudent increase in tourist arrivals (to 319,000), surpassing management of fiscal, monetary and exchange rate previous records of sugar production in 1986 and policies. While the initial economic response to the tourist arrivals in 1993. The growth is fairly broad- program was favorable (GDP grew by over 8 based, with all sectors expected to gain except percent per year during 1989-90), the recovery was wholesale and retail trade. Despite the record short-lived. Since then, economic performance has number of tourist arrivals, the services sector is growing more slowly than any other major sector. 99 Chapter 7 FJI: KEY ECONOMIC INDICATORS Real G3DP growith (%3 ) 4.7 0.6 3.01 1.9: GrosslnvestrnentlGDP(%) : : :: ::17.5 13.4 13.1 : 15.1 Public/GDP (%o) i ; 10.4 6.7 :6.9 7.2 ::PnvatelGDP(%) : t : 7.1 : 6.7 : 6.2 6.3. Gross National Savings/GDP (%i) : *...t 14.4 ; : : 14.5 14.4 :: 13.2 Consumer Iflation (%) : i 8.1 000 6.5 0 ; 4.9 5: .2: Broad Money (M3)Growth(%) i:; 24.5; j 15.5 ii14.1 6.500 GoverunmentRevenues (91 GDP) a! . : : :30.4. 29.7 l.g:; 28.8: . 29.5 Governmnent Expendiftues (% GDP) :i:30.1 31.2! 7 32.0 : 33.4 Overall Balance (% GDP) : ; :X0.3; -1.5 : ; -3.2 -3.9 .. .. .. .. . :: . : ' : : I " Exports, fob (US$m) 7; : :467 : 427 E 417 422 Imports, fob (US$m) :: -642 -549 ::-539 i -653: Current Account (US$rn)a1 :.t43 : 16 21i -32 (%.:of GDP) :E :i: -3.1 : 1.1 1.3 7: -2.0 Overall Balance (US$m) 37.5 8.3 53.1 - Q43.0 Gross Reserves (erxlperod, US$m) E i : 261 :271 7 :318 ::269 (months of imports,fob) . ... . 4.9 i.5.9 7.1 : 4.9 External DebSlGDP(%)b/ :25.7 23.4 t 20.7 17.4 Debt Service Ratio (%)/ . . 11.5 .9.2 :76 6.6 Memno items: iE :: .GDP (nominal, US$m) 1,390.6 1,479.7 1,592.6 1,647.0 Grants IUS$m): net official transfers : 16.7 30.0 2 5.8 . 27.1 a] Includes grants. h/ Includes IMF obligations. c/ In percent of exports of goods andl services. Sources: IMF Recent Economic Developments, 12/94 and Fiji: Restoring Growth in a Changing Global Environment, World Bank, 1/95. 7.5 During 1991-94, formal sector employment one thousand additional formal sector jobs in the growth averaged 2 percent annually, indicative of the Fijian economy. Fornal sector unemployment rate generally modest pace of economic activity. Formal is estimated to reach 6.0 percent in 1994, up from (paid) agricultural employment has vacillated 5.4 percent in 1992. With nearly tvo-thirds of the sharply, but this is relatively unimportant given that labor force engaged in self-employed activities, this sector accounts for only 2 percent of the total. primarily in the agricultural sector and in small-scale Manufacturing employment has also been erratic, trade and distribution, this figure may underestimate with a sharp drop in 1992, and an equally sharp the extent of unemployment, particularly for the increase in 1993 as new investment (particularly in 13,000 annual school leavers. garments) took place. In 1994, despite the expected moderate expansion in real income, total formal 7.6 Investment rates in Fiji are low both by sector employment growth will be limited to around Asian and especially by Pacific Island standards. 1 percent, representing the creation of only around Over the past 15 years, gross domestic investment 100 Chapter 7 averaged 32 percent in East Asian and Pacific compared to a target of 2.5 percent) reflected countries and 21 percent in low-income economies revenue shortfalls related to adverse weather as the (excluding China and India). The average for Fiji economy slowed much more than anticipated, and a over the same period was 21 percent of GDP, but decline in customs and excise receipts as a result of this has fallen during the 1990s to less than 15 tariff reductions associated with trade liberalization. percent. At 12-13 percent of GDP, total fixed On the expenditure side, outlays on wages and investment in Fiji is among the lowest in the Pacific salaries increased (by 5 percent), as did allocations Island economies. Public investment has been very for rehabilitation and relief operations following the low at around 7 percent of GDP in recent years, cyclone. Sizable reallocations were made to the compared to much higher ratios in the 1970s operating budget to finance cyclone relief operations, generated by large infrastructure projects. resulting in a drop in capital expenditures. Also contributing to expenditure pressures was increased 7.7 The introduction of the Tax Free military spending and additional on-lending Factory/Tax Free Zone scheme in 1989 generated provisions to public enterprises. significant foreign direct investment inflows, although private investment activity has stiUl 7.10 Current estimates suggest that the exhibited a steady downward trend in recent years: Government has achieved its 1994 Budget deficit Private fixed investment fell from an average of 12 target of 2.9 percent of GDP. The 1995 Budget percent of GDP during 1980-86, to 6 percent in projects a further modest reduction in the deficit to 1989 and remained stagnant at under 5 percent from 2.5 percent. However, these figures were based on 1992-94. Lack of financing does not appear to have government plans to restrict wage pressures by been a serious constraint on investment: the national placing public service wage settlements under control savings rate averaged a healthy 17 percent during of the Counter-Inflation Act, rather than allow for 1980-94. arbitration. Since this proposal has since been rejected by Cabinet, it is not clear whether the target 7.8 Since 1987, as part of the program of of reducing the deficit to 2.5 percent for 1995 is still economic restructuring and financial stabilization, feasible. fiscal policy has aimed at reducing the overall size of the public sector and the size of the budget deficit so 7.11 During the past several years the deficit has as to ensure the availability of resources for private been financed from domestic sources, leading to a sector growth. However, rapid expenditure rise in domestic public debt outstanding. At the end expansions in the face of slower growing revenues of 1994, it is estimated that total outstanding have led to increasing fiscal imbalances in recent government debt reached the equivalent of 42 years. Budgetary targets have been exceeded as percent of GDP, up slightly from 41 percent in expenditure overruns have exerted pressure on the 1992; but the composition has clhanged, with fiscal accounts. These spending overruns have domestic debt now amounting to 34 percent of GDP, resulted particularly from public sector salary and as compared to only 31 percent in 1992. wage increases which, until the 1994 budget, have been consistently under-budgeted and have required 7.12 Monetary policy in recent years has supplementary appropriations. Expenditure control focused on price stability and on managing the high measures put in place in 1993 in an effort to contain build-up of liquidity in the banking system brought expenditure growth have been relatively ineffective. on in part by the low private sector demand for credit. The rapid growth in total liquidity during the 7.9 After averaging around 1 percent of GDP past several years slowed to 3 percent at end-June during 1989-91, the fiscal deficit widened to 3.2 1994, down from 7 percent in 1993 and 25 percent percent in 1992. This deterioration stemmed partly in 1990. Moderation in excess liquidity was from delayed implementation of the VAT, which had achieved primarily through substantial declines in net an adverse impact on revenues. Expenditures, on foreign assets. Domestic credit expansion has the other hand, grew more rapidly owing in part to decelerated slowly since the rapid growth in 1990- generous public sector wage settlements. The higher 91, dropping to only 10 percent for 1994. Public overall deficit in 1993 (3.9 percent of GDP credit demand grew more rapidly than private credit 101 Chapter 7 for 1994; this lackluster private performance reflects latter half of the year. While garrnent exports the continued absence of private investmnent activity recovered, and the services and transfers accounts throughout the economy. improved (in part because of rising tourism earnings), these movements only partially offset the 7.13 Interest rates have generally been on a sizable trade deficit. In 1994, exports are estimated declining trend over the recent period despite to have expanded fairly rapidly, reflecting moderate reduction in excess liquidity. At the end of June increases in the traditional exports of sugar, gold, 1994, the weighted average lending rate of timber and fish, the continued surge in tourism commercial banks stood at 11.5 percent, down from earnings, and the re-export of an aircraft leased in 12.4 percent in January 1993. The weighted average 1990. Imports would remain strong, again due in deposit rate on outstanding savings deposits showed part to the import of an aircraft, but lag behind a similar decline from 4.1 percent to 3.2 percent export growth. The consequent improvement in the during the same period, leaving the intermediation trade deficit, coupled with strong tourism earnings spread virtually unchanged. Low inflationary would improve the 1994 current account deficit to 1 pressures as well as the low Minimum Lending Rate percent. of the Reserve Bank (currently 6 percent, down from 8 percent in November 1992) have also contributed 7.16 The (non-monetary) capital account has to the declining interest rates. remained in surplus since 1992, an outcome attributable to movements in private capital, which 7.14 Inflation. Despite the recent monetary has recorded net inflows in recent years, offsetting expansions, inflation in Fiji has been moderate, net outflows on official capital as public loan indicative of the nation's prudent approach to disbursements slowed and amortization payments monetary management. Consumer inflation fell (including prepayment) increased. The overall from 8 percent in 1990 to around 5 percent during balance registered a surplus of US$53 million in 1992-93, reflecting in part, low imported inflation 1992, causing gross official reserves to increase to from major trading partners. The 1993 rate would over US$300 million (equivalent of 7 months of have been lower except for special factors, including imports) by year-end, the highest level in several the introduction of the value added tax in July 1992, years. In 1993, reserves dropped to less than five weather-related shortages of some locally grown months of import cover, as the overall balance foodstuffs, and substantial increases in public shifted into a deficit owing to the current account housing rental rates in early 1993. Inflationary imbalance, and a sharp decline in nonmonetary pressures have since abated, and the annual average capital flows as prepayment of official capital was inflation rate had fallen to 1.5 percent in 1994 and to accelerated and cornmercial banks increased their a low of 0.7 percent in early 1995. holdings of foreign assets. The 1994 capital account should register a substantial surplus because of direct 7.15 After registering a surplus of 1.3 percent of investmrent inflows to finance the aircraft import and GDP in 1992, up from 1.1 percent in 1991, the a reduction in commercial banks net holdings of extemal current account shifted into a deficit of 2.0 foreign assets which, together, more than offset net percent of GDP in 1993. The surplus in 1992 outflows on official and short-term capital. The stemmed from a moderate decline in exports overall balance should improve but remain in deficit, particularly garment exports (due to recessionary causing reserves to decline to the equivalent of 4.3 conditions in Australia and New Zealand) that was months of import payments. more than offset by strong growth in tourism-related receipts. Imports were stagnant, reflecting the 7.17 In 1987, the Fiji dollar was devalued in two cumulative effect of tight monetary policy, in steps by 30 percent against the weighted basket of particular credit restraint, that has been in effect currencies to which it is pegged in an attempt to stem since 1990. In 1993, the merchandise trade deficit the surge in capital flight and remittances that took widened substantially as food import demand place following the coup. The resulting large responded to domestic production shortfalls, and depreciation in the real effective exchange rate higher demand for investment and other consumer strengthened Fiji's competitive position at a time goods followed the overall credit expansion in the when it was seeking to re-orient its economy towards 102 Chapter 7 production for export. In recent years, however, of the investment shortfall lie in domestic conditions, both the real and nominal effective rates have tended including: continuing political uncertainty; lack of to drift upwards. During 1993, the nominal and real confidence regarding the direction and continuity of effective rates appreciated by some 6 and 3 percent public policy; and concerns over loss of respectively, and while 1994 witnessed some competitiveness. As long as these macro concerns reversal of this trend, attention must be paid in the persist, narrow policy reforms directed at stimulating future to further drift which would erode the investment will have little impact, and Government competitive gains achieved by the 1987 devaluation should avoid introducing policies such as special tax and undermine prospects for strong, export-led holidays that further distort the incentive structure growth over the medium-term. and generate little, if any, desirable new investment. C. Key Policy Issues 7.21 Promoting Public Sector Investment. The slippage in the budget deficit over the last 7.18 Resolving Policy Uncertainty. In the several years is cause for concern primarily because aftermath of 1987, two political issues continue to fiscal policy has been largely ineffective in promoting cast a long shadow over the economic environment. the government's broader development goals. Fiji's First is the issue of political rights. Second is the deficit has been a "low-quality" deficit: rather than issue of the impending expiration of sugarcane land stemming from an active, targeted development leases, which has further aggravated relations strategy, it emerges from expenditure pressure. between ethnic groups. With political and property One corollary of this is public expenditure imbalance rights in question, economic reforms cannot take between recurrent and capital spending; at only 2 hold and entrepreneurs are reluctant to make long- percent of GDP, Fiji's public investment is term investment commitments. exceptionally low. The Public Sector Investment Program (PSIP) needs to reflect more directly a 7.19 Facing a Changing Global Economy. vision about the future needs of the economy, and Historic changes in the global economic environment the Government needs to commit itself to systematic are underway that affect Fiji's current prospects and public investment procedures, rather than allowing future opportunities: investment expenditure to be squeezed by an ever expanding recurrent cost budget. * signing of the Uruguay Round Agreement, which could lead to a downward trend in 7.22 Controlling Public Sector Wages. The sugar prices and a reduction in preferential dominant item in Government expenditures is the market access to the European Union over recurrent cost of the public sector wage bill. Two- time; thirds of discretionary recurrent expenditures is for direct wage and salary-related costs of the Public * increasing international competition in Service. Efforts to consolidate Fiji's fiscal structure textile and garment industries as a must concentrate on efforts to reduce the size of the consequence both of continued erosion of civil service, a need made more pressing by the SPARTECA tariff preferences and eventual leading role played by civil service wage and salary abolition of the distortionary MFA import movements in the pattern of wage settlements in the quotas. private sector. Controlling civil service wage levels and the size of the public wage bill influences the 7.20 Restoring Investment. Both private and overall competitiveness of the economy as well as public investment are needed to restore Fiji to a fiscal and macroeconomic stability. The sustained path of high economic growth and Government should adopt "affordability" as the employment generation. Since 1990, both public primary criterion for determining civil service pay and private investment have been on a flat or awards, and strive to lower the public wage bill from declining trend: fixed investment has dropped to its current 14 percent of GDP. Only 12 percent of GDP, with private investment only 5 percent, the lowest in the region. The roots 7.23 Improving Fiscal Performance. A major restructuring of revenue sources has occurred over 103 Chapter 7 the last few years as Government has developed and determine commercial viability, rather than implemented major tax reforms designed to simplify administrative judgment, by streamlining the and modernize the tax system. The direct tax investment approval process, provide transparent reforms have been relatively successful, in part criteria for determining eligibility for investment because they built on an existing administrative concessions, and elimination of many of the existing structure. A new value added tax (VAT) was fiscal incentives. introduced to provide a non-distortionary source of indirect tax revenue and replace the customs duty, a 7.26 Public Enterprise Reform and series of sales taxes, and miscellaneous excise taxes. Privatization. In 1993, the Fiji government put Difficulties have been encountered with forth a comprehensive public enterprise reform implementation of the VAT, which need to be program emphasizing privatization and/or addressed in order to provide a stable non- commercialization across a wide range of activities, distortionary tax base. but actual progress to date has been limited. There is an urgent need for Government to re-establish the 7.24 Trade Policy Reform. credibility of the program and regain momentum, by Considerable progress has been registered in accelerating contracting for specific professional reducing non-tariff barriers to trade and in reducing services or use of outside management, and give protective tariffs. Since 1990, average tariffs have high priority to plans to commercialize statutory fallen by more than a third in a wide range of bodies and government commercial activities, product categories, many of which are key opening up to competition markets previously intermediate inputs that do not compete with limited to SOEs, and stripping away the non- domestic products. However, despite this progress, economic functions performed by some SOEs so that Fiji's import tariffs remain high, inspiring firms to each enterprise can concentrate on its core business seek import duty concessions and exemptions, and activities. effective rates are well below nominal rates. The tariff burden is unevenly applied, revenues are lost, 7.27 Land Tenure and the Renewal of Land and the fiscal capacity to lower rates further is Leases. More than any other issue, the lease jeopardized. To improve revenue performance and renewal controversy symbolizes the economic, reduce distortions, existing concessions should be political and ethnic polarization that has emerged in documented, the discretionary authority of officials Fiji over the last decade. The renewal question to grant special concessions revoked, and involves difficult issues of individual property rights, concessions for non-exporters phased out over a 2 to tenancy rights and obligations, and governmental 3-year period. authority. The most pressing need is to identify the means to achieve a broad-based settlement as soon as 7.25 Investment Incentives and Capital possible. Uncertainty created by the impending Markets. Initiatives to provide incentives to foreign renewal is already affecting the economy-private and domestic investors have made some headway, banks are pulling back from lending to farmers although one result has been a proliferation of whose leases are due to be renewed in the next different investor incentive schemes that rely on several years. The current confrontational nature of discretionary administrative judgment, including land lease discussions in Fiji means that special some incentives (such as the 13-year tax holiday for efforts should be made to keep tensions from export-oriented firms) which were introduced as mounting unnecessarily. emergency measures taken to restore investor confidence in the aftermath of political turmoil. The 7.28 Restructuring Sugar. The sugar industry current preparation of a comprehensive Investment is now at a crossroads, facing issues that need to be Act provides an opportunity to reassess investment resolved to maintain its economic viability. The approval procedures, and to provide a framework combination of changing world prospects for sugar for more automatic provision of investor incentives and domestic uncertainties over renewal of land and work permit approvals. As the Fijian economy leases creates an explosive mixture. Given the becomes more outward-oriented, the Investment Act importance of the sugar sector in Fiji's economy, will need to rely more on market mechanisms to either issue would pose a difficult challenge. Both of 104 Chapter 7 them occurring together complicates the policy issues strengths, particularly the ability to field and respond substantially, and to some extent, limits the range of to small orders relatively rapidly. The potential for feasible policy choices. Stagnation in the sugar expanding niche-oriented manufacturing and services sector over the last fifteen years has shifted the is considerable, but there is little that the industry from being a relatively low-cost producer to Government can do to directly promote these an average-to-high cost producer. The industry has activities. The most effective form of public sector become especially vulnerable to a reduction in the support for these potentially important industries is a price received for exports to the European Union competitive enterprise environment, improvements (EU). Although the immediate threat of sharply in economic infrastructure, and a sustained lower prices and exports to the EU appears to have commitment to human resource development. been averted for now, eventual erosion in the above- market sugar price received by Fiji must be 7.30 Tourism. Tourism is Fiji's single largest anticipated. source of export earnings, accounting for about a quarter of national output, and providing around 7.29 Industry. While trade measures undertaken 18,000 jobs. Tourism remains an important area of during the period 1987-94 have begun to remove the future growth, and innovative efforts are underway cushion of trade protection from domestic industries, to broaden the range of tourism services including over the next decade, Fijian exporters must anticipate movement into areas such as eco-tourism and the steady erosion of existing preferential trade cultural tourism. In order to improve the access for their products in global markets. Changes attractiveness of the Fiji tourist product, measures in global trading arrangements will have a powerful are needed to improve air access, stimulate the effect on the preferences that Fijian manufacturers rationalization of visitor accommodations by enjoy, particularly those associated with the focusing investment and development activities on SPARTECA and GATT accords. For Fiji's new deluxe sites, and facilitating sale of mid-quality relatively new garment industry, rationalization of resorts to investors that can upgrade the properties to world textiles trade will give Fiji the opportunity to deluxe-premium standards or downgrade to tourist increase market share and expand production, but and budget standards. only if it is able to compete on the basis of its own 105 Chapter 7 Kiribati Population: 76,000 ( 1993) GDP: US$32 million (1993) GNP Per Capita: US$710 (1993) A. Background drawdowns of interest from the Revenue Equalization Reserve Fund (RERF). The interest 7.31 Kiribati consists of 33 atolls dispersed over from the RERF was equivalent to 30 percent of GDP a wide area of the Pacific Ocean. The country has in 1993. Current revenue declined in 1993, mainly vast marine resources with a large exclusive because of a decline in non tax revenue from lower economic zone of 5 million square kms of the central fishing royalties. With external development grants Pacific Ocean, but limited land area composed of half of what they were in 1992, total revenue is poor coralline soil. Agriculture and fisheries employ estimated at 92 percent of GDP in 1993 as compared about half of the labor force and contribute to 133 percent in 1992. Current expenditure in 1993 approximately 25 percent of GDP. Service activities, was estimated to be about the same in GDP terms as dominated by public administration account for in the previous year, but development expenditure about one fourth of GDP. Manufacturing activities was substantially lower so that total expenditure was are limited. The urban population is highly about 102 percent of GDP as compared to 122 dependent on imported food. percent in 1992. Hence the overall fiscal balance shifted from a surplus of about 12 percent of GDP in B. Recent Economic Developments 1992 to a deficit of about 10 percent of GDP in 1993. Taking into account the reinvested RERF 7.32 The sharp drop of 5 percent in real GDP in earnings, there was a fiscal surplus of nearly 1992 abated somewhat in 1993 to 3 percent, similar 9.2 percent of GDP in 1993, as compared with to the decline registered on average in the 1989 to surpluses ranging from 32 percent to 18 percent of 1990 period. Unfavorable weather conditions GDP in the previous three years. adversely affected copra output in 1993 and estimates for the commercial fishing and construction 7.35 The extemal accounts in Kiribati remained sectors were revised downwards for 1992 and 1993. in a healthy position despite large and increasing The manufacturing sector remains small but some trade deficits. Exports (mainly copra and marine gains have been made in producing substitutes for products) have been declining in recent years some consumer imports. whereas imports have risen steadily. The emergence of seaweed and aquarium fish as exports in recent 7.33 Inflation in Kiribati has been relatively years broadened the export base previously limited to modest, averaging 5 percent per year since 1988. copra and edible fish. Despite this development, Price movements strongly reflect inflation in the exports remain only a small fraction of imports. The main import source countries, especially Australia. sustained strong performance of the services and Inflation in 1992 was 5.8 percent and remained at income accounts has enabled not only these deficits that level in 1993 following the weakness of the to be covered but also external reserves to steadily Australian dollar and an increase in import duties in expand. The main sources of these inflows are January 1993. interest income on RERF investments, remittances from workers abroad, and official aid transfers. The 7.34 Public finances have been managed current account balance (including official transfers) prudently, with recurrent expenditure maintained in 1993 registered a surplus of only 5.3 percent of within the bounds of domestic revenue and GDP, a decrease from the previous year. External 106 Chapter 7 KIRIBATI: KEY ECONOMIC INDICATORS . .... ............. ........ ......................................... . . . . .. . . ... ... ... .. . . . . ... ... ... ... ... . ....... .. ... .. . . . . . .. . ....... . . . . . . . . . . . ............................. ... ........ Real GDP Growth Rate (%) -4.5 -1.5 1.9 -5.1 -2.8 Gross Investnment/GDP (%) 26.3 24.9 23.5 21.7 n.a. Public/GDP (%) 28.4 35.4 n.a. r.a, n.a. Private/GDP (%) -2.1 -10.5 n.a. n.a. n.a. Consumier Inflation (%) 6.1 3.8 4.3 5.8 5i8 Government Revenues ( % of GDP) al 82.4 102.8 102.3 133.0 92.3 Government Expenditures (% of GDP 83.4 104.0 95.8 121.5 102.3 Overall Balance (% of GDP) -1.0 -1.2 6.5 11.5 -10.0 Exports, fob (US$m) 5.1 2.9 2.9 4.8 3.0 Imports, fob (US$m) -22.6 -26.8 -25.9 -37.7 -27.8 Current Account (UJS$m) 4.9 4.2 10,3 5.5 1.7 (% of GDP) 14.8 12.5 28.9 16.1 5.3 Overall Balance (US$m) 7.7 7.6 11,<7 14.4 2.3 GrossReserves(inyearsofimports) 8.9 8.1 9.8 7.1 10.1 External Debt i/GDP(%) 6.4 8.6 9.2 12.4 20.8 DebtService Datio (%) h2.4 0.9 0.7 1.0 1.2 Memo iterns: GDP (nominal, US$m) 33.2 33.6 34.7 33.9 32.1 GrantsS$m): net official transfers 14.3 20.4 18.5 24.6 13.7 a/ Includes grants b/ As a percentage of exports of goods and nonfactor services. Source: IMF, Recent Economic Developments August 18,1993, World Bank, Economic Memorandum, Vol. 3, 1993; and Kiribati Statistics Office. reserves increased in 1993 and were equivalent to and the United States. However, there has been about 10 years of imports. some increase in tourist arrivals with the establishment of a regular flight from Honolulu, the 7.36 Kiribati has no monetary authoriy and uses reopening of Kanton airport, and the upgrading of the Australian dollar as its currency. The only Bonriki airport. commercial bank, the Bank of Kiribati is jointly owned by the Government and an Australian bank. C. Key Policy Issues Due to a dearth of domestic investment opportunities, most financial institutions hold a 7.38 Marine resources, remain a mainstay of the significant amount of assets abroad. economy as fishing rights fees paid by foreign vessels provide important budgetary support and 7.37 The contribution of tourism to GDP balance of payments support. In view of the recent remains small. The main factors constraining rapid increase in tuna fishing in the region, it is development of tourism are remoteness, infrequency generally agreed that there is an urgent need: (i) to of flights, limited infrastructure, and poor define sustainable catch levels for all fisheries; (ii) knowledge of Kiribati in the major markets of Japan for countries to work together to enhance monitoring 107 Chapter 7 to prevent illegal fishing; and (iii) to obtain fair being encouraged to facilitate privatization. prices for the fisheries resource. 7.40 Another area of concen for government is 7.39 Unemployment has become a serious the development budget. The government needs to problem in Kiribati, with the public sector, the assume greater control over priority setting. Public dominant employer of the formal labor force, unable investment programming should reflect the long- to meet the growing demands for jobs. This situation term development objective of improving the quality is expected to worsen unless effective measures are of life for the people and providing alternative means taken. A review, undertaken with the aim of of employment, as well as better utilization of donor reducing the size of the public sector and funds. To ensure the sustainability of development government expenditure on unproductive enterprises, expenditures and to preserve the integrity of the identified 12 public enterprises, which could be RERF, the Government needs to reinforce and privatized. In view of the shortage of local skills and maintain recent efforts to strengthen fiscal finance, joint ventures with foreign investors are management. 108 Chapter 7 Federated States of Micronesia Population: 105,000 (1993) GDP: US$194 million (1993) GDP Per Capita: US$1,850 (1993) A. Background exports more than doubled, from US$9 million to US$20 million. Revenue from fishing rights fees 7.41 The Federated States of Micronesia (FSM) charged to foreign vessels that fish in the EEZ rose consists of four states that encompass 607 islands from US$8 million in 1988 to US$17.6 million in and atolls in the Northem Pacific. The country has a 1993, reflecting mainly an enormous influx of narrow productive base comprised primarily of foreign fishing vessels. This has resulted in an subsistence farming (accounting for about 25 percent increase in informal sector activity and all five of GDP), reef and deep-sea fishing. Manufacturing (national and state) governments provide expanded and other industrial activities, such as utilities and dock services to foreign fleets so as to generate construction, are a very small component of GDP. additional income and local employment. The dominant sector and the largest employer is the public sector, accounting for over 75 percent of 7.44 In agriculture, production of the traditional GDP. The economy remains highly dependent on export crop, copra, has steadily declined in recent external assistance, nearly all of which is provided years from the 1979 peak of 8,500 metric tons to by the United States through the Compact 200 metric tons in 1992, recovering partially in Agreement. The major element of this assistance is a 1993. This steady decline in production is a result of block grant of US$60 million annually for the first 5 low world prices, aging trees, and alternative years beginning in 1986, US$51 million for the next opportunities for farners. Pepper, the other major 5 years, and US$40 million for the last 5 years. agricultural crop, recovered partially in 1992/93 Consumption is high and met mainly by imports. after production had declined severely in 1991 as the Significant macroeconomic imbalances exist, on the result of a typhoon. However, income from this external side, with imports exceeding exports by a source remains low because of depressed world factor of five and on the internal side where the prices. budget deficit (before grants) exceeds 50 percent of GDP. 7.45 Manufacturing activity in FSM remains small and concentrated on food processing, with the B. Recent Economic Developments exception of two garment firms. There was some new activity in 1993, with the Pohnpei Government 7.42 Output is estimated to have grown by 5 opening a fish processing plant, which will operate at percent in real terms in 1993, after having stagnated fifty percent of its capacity by mid-1994, and a state in the period 1990-92. Most of this increase came cooperative to process and sell lower quality pepper. from increased activity in fishing and the completion Garment and button production expanded from $1.5 of several large capital projects. million in 1990 to $2.2 million in 1992. 7.43 Tuna is the country's richest natural 7.46 The estimated number of tourists increased resource, and substantial stocks of skipjack, yellow from 22,000 in 1988 to over 30,000 in 1993, yet fm and bigeye tuna are found in the exclusive further development continues to be hindered by a economic zone (EEZ). In 1992, the value of fish lack of direct air service and quality accommodation. 109 Chapter 7 FSM: KEY ECONOMIC INDICATORS .....................EW.E Real GDP Growdh Rate: () V i-:1.7. X :i: -. .1.2 5.2 Consumer Infladon (%) 4.5 0 : .3.5 4.0 5.0 6.0 GovernmentRevenues (%C%ofQDP)a/X 103.2 105.8 101.0 91.0 84.3 GovernmentExpendkires (% of GDP) 91.6 103.7 106.3 91.4 94.4 OveralBalance(% ofGDP) 11.6 2 1 -5.3 -0.4 -10.1 Expors, ftbb (U$m) 2.5 4.6: 1:0.8 21.0 25.6 Impo s-,fob (US$m): 4.94 -107.6 -133.6 -114.6 -148.1 Current countc US$Mi;) : 043.5 iE28.6 -2.0 E 7.6 -20.8 (% of"DP). 28.4 18.5 -1.2 4.4 -10.7 OChverallBalnie (US$mn): 11.8 16,9i: 59.4. -5.3 -15.3 .Gross:Reserves (end period,US$m) 103.3 120.2 179.6 174.30:: 159.0 External: Debt/GDP?(%) n.a. 9.5.V 58.6 67.8: 70.4 Debt Service Ratio (%)b/l:: n.a. n.a.. 8.3 :35.4: 26.1 Memo items: i GDP (nomtial, US$in). 153.3 154.7 167.8 174.1 194.2 Grants(US$m): L:net:official1ransfers 118.9 :124.7 121.9 104.2 108.9 a/ Includes grants. b/ As a percentage of goods and nonfactor services. Source: IMF, 1994. 7.47 Systematic price information is not operated Bank of the Federated States of Micronesia available; therefore, no consumer price index or has expanded operations substantially though limiting GDP deflator is calculated in the country. Hence, itself to consumer and short-term commercial loans. prices are estimated based on trends in the United Interest rate spreads have increased, as banks charge States and the Marshall Islands. Based on such the maximum legal rate for loans, while deposit rates estimates, prices seem to have risen at 5-6 percent have fallen in line with US rates. As of 1994, annually, which is faster than in the United States, commercial banks are allowed to charge 4 percent, mainly due to limited competition in wholesale and rathe than the previous 2 percent above the US retail trade at a time of increasing demand, weather- prime rate for commercial loans. related factors, and public sector tariff increases. 7.50 Corresponding to the weakening fiscal 7.48 The overall consolidated fiscal position of position, the external position has been deteriorating the Government weakened further in 1992/93 to a for the last 3-4 years, reflecting increasing trade and deficit greater than 10 percent of GDP. Both current service account deficits and declining official and capital expenditure increased in all the states transfers, the latter due to the phase-down of U.S. with total expenditure equivalent to 94 percent of grants. Exports of fish, and some manufactured GDP in 1992/93. Tax revenue remained more or products rose sharply, but were only a small less constant, with income tax levied only on wages proportion of imports. The composition and and salaries at a relatively low rate and because of direction of trade changed significantly. In 1993, large scale avoidance of import and sales tax. fish exports comprised 80 percent of total exports, However, there was a substantial increase in non-tax compared with 15 percent of the total in 1988. revenue in 1993, mainly because of an increase in Direction of exports also changed significantly, with fishing rights fees. the share of total exports to Japan increasing to 80 percent in 1993 compared with 20 percent in 1989. 7.49 The role of monetary policy is limited due At the same time, exports to the United States have to use of the U.S. dollar as legal tender. The locally declined. Increased public and private consumption 110 Chapter 7 and large capital projects led to a sharp increase in size of the public sector needs to be reduced not only imports. A sharp increase in earnings from fishing by limiting the range of its functions but also by licensing fees and tourism was more than offset by a increasing the efficiency of what remains. Relatively sharp rise in freight and insurance payments and high wages undermine competitiveness. The major interest payments on public sector debt. Official adjustments, will need to be in public sector transfers declined, reflecting the first phase-down in expenditure, with a substantial reduction in the level Compact funding. of personnel expenditures and transfers to public enterprises. Also any program of public sector C. Key Policy Issues restructuring and possible downsizing must be complemented by improvements in the environment 7.51 One of the main challenges facing the facing the private sector. Government is to reduce its dependence on U.S. assistance as this declines in the next few years and 7.53 In the fisheries sector, the issue of increased to find sustainable alternative sources of financing. fishing fleets is of concern both from the environmental standpoint of damage to the nearshore 7.52 The Government is aware of the need to environment and the sustainability of the resource. focus on fiscal discipline and longer term There are good prospects for development in several development issues. With an excessively large public sectors, specifically, fisheries, agriculture, and sector, public enterprises not covering costs, and tourism. The achievement of significant results in with inadequate infrastructure to promote private these sectors over the next few years will require not investment and growth, public sector reform should only well targeted investment in these areas but also constitute a vital part of the adjustment process. The the building up of a supportive infrastructure. 111 Chapter 7 MARSHALL ISLANDS Population: 51,000 (1993) GDP: US$85 million (1993) GDP Per Capita: US$1,670 (1993) A. Background increased activity in the copra sector im response to price incentives provided by Government, and to 7.54 The Republic of the Marshall Islands (RMI) increased foreign investment in fisheries. Although was part of the Trust Territory of the Pacific economic expansion is expected to continue into the administered by the United States (US) from 1945 to 1993/94 fiscal year, the pace is expected to slow to 2 1986. In 1986, under the terms of the Compact of Free percent as growth in copra output stagnates because of Association, the US formally relinquished its anticipated declines in international prices. trusteeship and the RMI assumed self-governing status. Under the terms of the Compact, the US provides 7.57 Inflation at the consumer level, which had substantial annual economic assistance to the RMI, increased sharply from under 1 percent in 1989/90 to principally through a series of grants to Government. over 10 percent in 1991/92, moderated to 5 percent in The Compact grants provide a total of about US$53 1992/93, because of an improved domestic supply million for each of the first 5 years, declining to about situation. Consumer inflation is estimated to have US$49 million for the next 5 years, and then to about remained low at nearly 3 percent during 1993/94. US$46 million for the last 5 years. Over the 15 years After registering a surplus of 2 percent of GDP in during which the Compact is in effect, the RMI will 1989/90, the overall fiscal balance, inclusive of grants, receive an estimated total of US$1 billion, adjusted for shifted into a deficit of 25 percent of GDP in 1991/92, inflation. reflecting mainly a slowdown in revenue growth, declining grant aid and rapidly increasing current 7.55 The country has a narrow productive base expenditure. While the budget of 1992/93 envisaged a consisting primarily of coconut harvesting and reduction in the fiscal deficit to 10 percent of GDP processing, subsistence farming and deep sea fishing. because of anticipated increases in import duties, lower As a small island economy, economic growth is subsidies and a cut in capital expenditures, the fiscal constrained by the dispersal of the atolls, shortages of situation deteriorated further, resulting in a budget skilled labor, high wages and remoteness from deficit of over 17 percent of GDP. Contributing to the markets. poor fiscal performance were expenditure overruns on purchases of goods and services, increased subsidy to B. Recent Economic Developments Air Marshall Islands and poor revenue performance. The deficits were financed by grants primarily from the 7.56 After stagnating in 1990/91-1991/92, partly Compact, and extemal commercial borrowing against due to adverse weather, economic growth recovered in future Compact assistance. A marked improvement in 1992/93 with real output recording a modest 2.5 the budgetary outcome for 1993/94 was expected as percent increase. This improvement was largely due to major expenditure reductions are anticipated. 112 Chapter 7 MARSHALL ISLANDS: KEY ECONOMIC INDICATORS Real GDP growth (%) 3.2 0.1 0.1 2.5 2.0 Consumer Lnflation (%) 0.7 4.0 10.3 5.0 2.8 Gross Investment/GDP (%)110.7 42.3 33.1 43.3 n.a. n.a. Government Revemnes (% GDP) 110.7 96.0 87.3 78.4 74.2 Government Expenditures (% GDP) 108.6 104.5 112.2 95.6 83.5 Overall Blance(% GDP) 2.1 -8.5 -24.9 -17.2 -9.3 Exports, fob (US$m) 2.7 8.8 9.6 9.5 4.7 hnports, cif(US$m) -63.7 -56.2 -77.0 -75.0 -60.6 Current Account (US$m) 2.4 1.3 -26.9 -21.9 -5.4 (M of GDP) 3.5 1.8 -33.9 -25.7 -6.0 OverallBalance:(US$rm) -5.1 30.7 -17.5 -3.1 -19.6 Extemal Debt/GDP(% 106.2 146.1 157.1 182.2 152.1 Debt ServicelExports(%) 44.7 38.7 55.1 51.9 57.3 Memo items: GDP(nominal, US$m) 69.0 71.8 79.3 85.3 89.3 .Grants (US$m): nettofticial iransfers 62.5 51.4 53.3 49.4 49.0 Source: IMF, 1994. 7.58 The external current account which had 7.60 Reflecting increasing government borrowings recorded surpluses after grants, up to 1990/91, swung in recent years as noted above, extemal public debt into a substantial deficit averaging nearly 34 percent of outstanding rose sharply to US$156 million (182 GDP in 1991/92 and nearly 26percent in 1992/93. percent of GDP) in 1992/93, from US$73 million (106 This reflected primarily increased merchandise trade percent of GDP) in 1989/90. The external debt service deficits, a detenorating services account and reduced ratio increased from 45 percent to 52 percent of external grants. While total exports, comprising exports of goods and services during the same period. mainly coconut oil and fish, amounted to only 11 percent of GDP in 1992/93, imports were the 7.61 The Government recognizes the need for equivalent of 88 percent of GDP because of increased adjustment in light of declining Compact assistance. public and pnvate demand. The growing deficits on Consequently, high priority has been attached to the services account reflected, in part, higher interest strengthening the export sector through expanding and payments on public sector debt diversifying the productive base. 7.59 The capital account, excluding private sector 7.62 The Government has announced its intention capital transactions, has registered moderate surpluses to progressively reduce the size of the civil service and because of public sector borrowing, mainly against the public sector wage and salary bill. future Compact receipts, to finance infrastructure and fisheries projects. International reserves represented by 7.63 The Government is also committed to central government holdings of financial assets abroad substantially reducing subsidies and transfers to public have declined since 1990/91 as substantial fiscal enterprises in the 1994/95 fiscal year. There are plans deficits necessitated their draw down. to privatize enterprises, where feasible and to 113 Chapter 7 commercialize operations of certain remaining state to curb consumption and lessen dependence on owned enterprises. imports. 7.64 To support expansion of the productive base, 7.66 Public Enterprise Reform. Continued including manufacturing and the tourist sector, there is budgetary support to public enterprises in the fomn of a need for adequate infrastructure and services. The subsidies and transfers has contributed to fiscal investment program would need to focus on public pressures in recent years. Reducing and eliminating infrastructure to support private sector activity, the dependence of public enterprises on the budget will particularly in fishing and agriculture, where the significantly help redress the fiscal imbalances. For country has potential for export growth and import the national airline, in particular, measures to reduce substitution. losses would include terminating unprofitable routes, and merging with or establishing a regional carrier. C. Key Policy Issues According to recent reports the losses of Air Marshall Islands declined significantly from US$9 million in 7.65 Fiscal Discipline. As Compact assistance is 1990/91 to US$4 million in 1992/93. scheduled to be phased out, there is a need for Government to undertake major fiscal adjustment. 7.67 Limniting Public Borrowing. The high This will require, inter alia, increased domestic share of debt service payments in current expenditures resource mobilization and reduced public expenditures is of particular concern. Government needs to curtail further borrowing against future Compact flows. 114 Chapter 7 SOLOMON ISLANDS Population: 354,000 (1993) GDP: US$245 million (1993) GNP Per Capita: US$740 (1993) A. Background B. Recent Economic Developments 7.68 Development perfornance in the Solomon 7.70 Economic activity during 1993 was Islands, which became independent in 1978, is dominated by developments in the forestry sector. influenced by its size and geography. First, it is a Due to a rise in the world price, timber production small country, with a population of 354,000 and a increased rapidly in late 1992 to unsustainable levels GDP of around US$245 million (1993). Second, it and was the main factor behind the GDP increase of is archipelagic in nature, comprising six main islands 10.5 percent. Although the rate of logging has been and many smaller ones extending over almost 1300 escalating since 1992, it has not been able to kilometers of ocean; this feature makes it difficult to maintain such a high GDP growth rate. GDP develop a domestic market and increases the unit growth for 1994 was expected to be a more modest 4 costs of providing basic public services. Third, it is percent. The principal productive sectors are remote from major external markets, being over agriculture, forestry and fisheries and copra. 2000 km away from Australia, the closest large Services comprise about 10 percent of GDP and economy. manufacturing which is confined to small-scale activities, about 1 percent. The subsistence or non- 7.69 Economic activity is dominated by monetary economy in the Solomon Islands is still export-oriented production involving tree crop important with much of the population participating plantations, commercial fishing, and logging; a large in both the monetary and subsistence economies. public services sector; and a subsistence agricultural Although no firm estimates are available, it is sector that provides the main source of livelihood for believed that the subsistence sector constitutes about over 80 percent of the population. There has been 20-40 percent of GDP. little structural transformation of the economy in the past decade. The manufacturing sector remains 7.71 Increased logging revenues, combined with minuscule, contributing less than 4 percent of GDP. expenditure restraint, narrowed the budget deficit to Exploitation of natural resources has been rapid, but about 23 percent of GDP in 1992 and 1993. As the the benefits have largely accrued to foreign development budget is largely aid-driven, the budget investors. The economy is quite open, with exports for current expenditure is the principal source of (of fish, timber, copra, palm oil and cocoa) and discretionary spending with over 40 percent of this imports (consumer goods and light machinery) being allocated to wages and salaries. equivalent to 42 and 55 percent of GDP, respectively. Consequently, economic performance 7.72 The Government resorted to domestic is strongly influenced by changes in the external borrowing to sustain the fiscal imbalances of 1991- terms of trade and the availability of foreign 93. This was done through the banking sector and exchange. contributed to a sharp rise in the money supply, and increased aggregate demand pressures which in turn resulted in higher inflation, averaging in excess of 10 percent per year over 1992-93. 115 Chapter 7 SOLOMON ISLANDS: KEY ECONOMIC INDICATORS .........,,.,.........,, .....,.,,, ,., .................... .. .. -............ .. . .. . ..... ..... .. .Real GDP growth.(%) 1.0 1.7 10.5 0.9 Gross:Investment/GDP(%) 29.1 28.1 n.a. n.a. Public/GDP (%) 13.9 14.3 n.a. n.a. Private/GDP(%) 15.2 13.8 n.a. n.a. Consumer Inflation (%) 8.6 15,2 13.1 9.3 Total Liquidity (M3) Growth (%)' 11.5 22.1 26.0 14.5 Government Revenues (% GDP) a!2/ 29.2 27.9 31.2 26.1 GovernmentExpenditures (% GDP) 58.8 60.1 53. 9 49.0 Overall Balance (% GDP):ai -29.6 -32.2 -22. 7 -22.8 Exports, fob (US$m) 70.2 84.7 103.8 131.7 Imports, cif (US$m) -92.8 -1104 -104.9 -144.5 Current Account (TJS$m) a -62.5 -70.6 -37.4 -51.7 (%Vof GDP): -37.1 -37.9 -17,9 -21.1 IOlverall Balanee d(US$m) f t:; t: f ; !:iT ;: q; -7.2 -6.3 :15.9 -3.0 Gross:Reserves:*(nd:period, US$rn) 17.6 o101 23.9 f :21.1 (oDnthsiof imports) 1.4 0.7. 1. 1.2 External Debt (MLT)/GDP (%) 94.1 90.4 109.9 7-81 Debt Service Ratio(D.) 10,7 11.4 13.4 ::23.0 . .Me.mo .items . .: : GD? (nomiial, US$m) 168.8 i 186.4 1209.0 2450 Grants (US$m)o: netofficial transfers: 332 36.3 36.7 37.8 a/ Excludes grants. b/ In percent of exports of goods and nonfactor services. Sources: IMF, Recent Economic Developments, 3/94 and IMF Briefing Paper 6/94. 7.73 The current account balance which had been during the past year, and a one-time lumping of recording deficits of 30-40 percent of GDP each amortization payments, led to a reduction in the debt year, improved considerably in 1992 to about 18 burden from 110 percent of GDP in 1992 to about percent of GDP mainly on account of the increase in 78 percent of GDP in 1993. The ratio of debt log exports. Despite continued high export growth service to exports of goods and non-factor services from the increase in logging, the current account did not show a simnilar improvement in 1993, instead balance deteriorated to about 21 percent of GDP in rising sharply to 23 percent from 13 percent the 1993 due mainly to a surge in imports and a decline previous year. This was due to the increased in the fish catch. Official reserves which were at one amortization payments, and the debt service ratio is point in 1991 down to the equivalent of less than two estimated to decline back to its 1992 trend, weeks import coverage, increased sharply in 1992 to thereafter. nearly two months of imports. The expansion of imports in 1993 reduced the level of reserves to just C. Key Policy Issues over one month of imports but these have since recovered somewhat. 7.75 Fiscal Discipline. Attention to fiscal imbalance is a priority in returning the Solomon 7.74 The relatively low levels of external Islands to a sustainable pattern of growth and borrowing combined with the sharp rise in GDP development. Attaining a sustainable fiscal balance 116 Chapter 7 will require expenditure restructuring, combining: (i) forest management on a sustainable track include: containment of the wage/salary bill by nominal wage (i) negotiation with existing license holders to reduce restraint and targeted reductions in government the annual cut to a sustainable level; (ii) collection of employment of urban-based administrators; (ii) higher export taxes to extract a greater proportion of reductions in transfer payments to public enterprises the economic rent going to loggers and to reduce the and provincial governments; and (iii) additional aid incentives to log; (iii) improvements in the financing in forms which help meet recurrent monitoring of log harvesting techniques and outputs expenditure obligations. In addition, the composition and (iv) greater involvement of landowners in the of expenditure growth needs to be changed in favor sustainable management of forests. of operations and maintenance and higher capital expenditures (particularly in the social sectors). 7.77 Private Sector Development. The Expenditure restructuring can help to raise trend establishment of an enabling environment for private growth in the economy. There is a good opportunity sector development is the core of a reform program. to make progress along these lines in the present Under the present policy stance, domestic borrowing environment of strong revenue growth arising from by the government is expensive and crowding-out favorable terms of trade developments. private investment, adversely affecting both business confidence and the rate of growth of private 7.76 Forest Management. Another priority is to investment. Domestic debt servicing obligations will curtail the present excessive and unsustainable rate of remain a source of pressure on the budget for several timber harvesting. Around 700,000 cubic meters of years to come and could affect spending priorities. logs were harvested in 1994 even though the Moreover, human resource development is suffering sustainable rate is estimated to be only 290,000 cubic because of the large share of resources going into the meters per annum. The rate of timber harvest has wage bill and subsidies and transfers to money- increased sharply early in 1995, with 100,000 cubic losing public enterprises. Sustained stabilization meters approved for export in February, 1995. At policies, restructuring of public expenditures, this rate of extraction, the commercial forest privatization of public enterprises, strengthening of resources of the Solomon Islands will be exhausted the financial sector, reform of investment incentives within eight to ten years. In this sense, therefore, and procedures and creative solutions to greater the Solomon Islands is rapidly depleting its "capital" access to land constitute key elements to bring about whereas, for sustainability it should seek to live off the expansion of the private sector. the "interest". Policies which could set 117 Chapter 7 TONGA Population: 98,000 (1993) GDP: US$145 million (1993) GNP Per Capita: US$1,530 (1993) A. Background development of a broad base of economic infrastructure and human resource services. Aid 7.78 With a per capita income of US$1,610 in flows have also contributed to the buildup of a large 1993, the Kingdom of Tonga ranks among the public sector and to wage pressures in the formal lower-middle income group of developing nations. sector. While aid to Tonga has focused on new However, social indicators reflect living conditions investment in infrastructure and services, there has more akin to those prevailing in upper income been relatively little support provided to the recurrent nations due in part to the high level of investment in costs of managing and maintaining public services. human resources. Agriculture and fisheries are the main economic activities, accounting for 50 percent 7.81 After nearly 150 years of monarchy, of employment, 40 percent of national income, and Tonga's first political party was formed in early approximately 80 percent of export earnings. In August, 1994 by commoner politicians campaigning recent years, rapid expansion of squash and, to a for democracy. The Tongan Democratic Party aims limited extent, vanilla exports, have offset declining to promote democratic principles, and introduce traditional exports of bananas and coconuts. constitutional changes and reforms whereby Parliament would elect the Government, rather than 7.79 Emigration has played an important role in be appointed by the King. shaping economic activity. Nearly 45,000 ethnic Tongans are estimated to be residing abroad, with B. Recent Economic Developments the majority in New Zealand, Australia and the USA. Overseas migrants come disproportionately 7.82 Following stagnation in the late 1980s, the from the highly educated segment of the population Tongan economy picked up moderately in the early and the productive age group. Cash remittances 1990s, with real output growth averaging 3.5 percent from overseas residents are estimated to be about annually during 1990/91-1992/93, albeit with T$40 million per annum, or equivalent to 20 percent considerable yearly variation. Economic growth of nominal GDP. Although cash remittances have over the period was fueled by strong agricultural fallen off in recent years, there has been an upsurge performance, as squash production and exports in the provision of remittances in kind--mostly boomed. The improved economic performance consumer durables and light consumer goods--which benefited from economic policies initiated during the has substantially augmented private consumption latter part of the 1980s. These included domestic levels. policies aimed at promoting a more efficient private sector by reducing government regulations and price 7.80 Tonga has received substantial levels of support for copra, then the major export crop, and official assistance on a per capita basis. For example some incentives and subsidies offered to new during 1988/89-1992/93, external grants and official manufacturing and agricultural activities. Fiscal loan disbursements averaged US$18 million and policy was generally restrictive, as continued high US$3 million, respectively (or equivalent to US$233 levels of foreign aid funded much of the public per capita per annum). Such flows have supported sector investment program. 118 Chapter 7 TONGA: KEY ECONOMIC INDICATORS '~~~~~~~~~~~~~~~~~~~~~~~. ' ,. ..- '.. ', -" '}'' ...... .. ... .. ..." . '''"'''' "'''" ''"''' Real GDP growth (%) -2.0 6.4 0.3 3.7 4.7 Gross Investment/GDP (%) 22.1 28.3 24.4 n.a. n.a. Public/GDP (%) 22.9 18.5 13.6 n.a. n.a. Private/GDP (%) -0.8 9.8 10.8 n.a. n.a. Consumer Lnflation (%) 5.6 13.3 8.7 3.0 2.4 Broad Money (M2) Growth(%) 7.1 9.1 22.6 -4.7 10.9 Government Revenues (% GDP) a/ 39.8 36.1 37.4 42.3 41.2 GovernmnentExpenditures(% GDP) 46.0 40.8 41.0 42.1 39.8 Overall Balance (US$m) a/ -6.2 -4.7 -3.6 0.2 1.4 Exports, fob (US$m) 9.0 10.6 16.6 11.9 20.3 lmports, fob (US$m) -49.4 -51.4 -48.4 -50.7 -57.8 Current Account (US$m) a/ 12.5 -2.4 3.3 3.0 -0.6 (% of GDP) 11.0 -1.7 2.4 2.0 -0.4 Overall Balance (US$m) -2.5 -1.7 0.5 3.8 -6.0 Gross Reserves (end period, US$m) 26.5 25.9 29.7 35.6 31.5 (months of imports) b/ 5.0 4.4 5.8 6.8 5.2 External DebtlGDP (%) 40.0 33.7 35.8 35.2 31.8 Debt Service Ratio (%) cJ 2.4 3.1 3.0 4.4 3.0 Mlemo items: GDP (nomninal, U$$m) 113.0 135.5 140.1 145.0 151.9 Grants (US$m): net official transfers 17.2 11.8 17.5 19.6 20.3 a!/ Includes grants. _/ In months of non-aid imports of goods and services. c/ In percent of private current account receipts. .Source: IMF Staff Report, April 1995. 71.83 Domestic wage pressures, imported 7.84 After an expansionary fiscal stance in inflation, and public sector led monetary expansion 1989/90, stemming mainly from the large civil contributed to high inflation during the early 1990s. service salary increase and an expansion of oulays Consumer inflation, which had averaged 4-5 percent on locally financed projects, budgetary policies have at the end of the 1980s, surged to over 13 percent in subsequently been tightened. The overall fiscal 1990/91, reflecting mainly a 35 percent civil service balance, which had recorded a deficit of over 6 wage and salary increase, higher oil prices and percent of GDP in 1989/90, imnproved steadily increases in indirect tax rates, as well as adverse through 1991/92, and in 1992/93 registered a slight domestic supply conditions. With inflationary surplus. Contributing to the improved fiscal pressures easing in the economies of major trading performnance since 1990/91 was a steady reduction in partners--Australia and New Zealand--and current expenditures, supported in 1992/93 by considerable improvement in domestic food supplies, strong revenue performance-- resulting from several inflation dropped significantly to 3 percent in tax measures and efforts to collect tax arrears, and a 1992/93, down from nearly 9 percent in the 1991/92 large increase in external grants. Reflecting the fiscal year. The moderate growth in2wages since he improved budgetary performance the Government large civil servant salary increases in 1989/90- maintained large net positive balances with the 1990/91 has also contributed to the improved price ban9ing system. performance in recent years. 119 Chapter 7 7.85 During 1989/90 to 1991/92, broad money The current account which had recorded a huge growth averaged about 13 percent per year fueled surplus in 1989/90 but a marginal deficit in the primarily by a surge in domestic credit as net credit subsequent year, shifted back into surplus in to govermnent soared in the face of limited 1991/92. The capital account registered a small expansion in credit to the private sector. In surplus in 1990/91 and 1992/93, mainly as a result 1992/93, the pace of broad money dipped of official external borrowing. downward, reflecting a sharp fall in net credit to the Government and the private sector that was only 7.88 Over the past three years, official external partially offset by a large increase in international debt, almost exclusively on concessional terms, has reserves. remained relatively stable at about 35 percent of GDP. Reflecting the concessional nature of debt 7.86 Despite the rapid monetary expansions, outstanding, debt service obligations have been low, interest rates in Tonga have remained relatively averaging around 3.2 percent of current account stable in nominal terms since the late 1980s. Interest receipts in recent years. rate policy in recent years has focused on maintaining deposit rates which are positive in real C. Key Policy Issues terms. Following the complete elimination of interest rate restrictions in July 1991, the National 7.89 Structural Reforms. Tonga's policies of Reserve Bank of Tonga (NRBT) has influenced courting private investment by maintaining a fully interest rates paid by the Bank of Tonga (BOT), the convertible currency and through provision of tax sole commercial bank until late 1993, through the incentives, protective trade policies, and minimal setting of the interest rate on time deposits at the regulation have been less successful than anticipated. NRBT, and more recently, on central bank notes. This is partly due to structural deficiencies and The BOT's short-tern deposit rate which had continued public sector domination of key areas of remained at 6.5 to 7.5 percent declined in mid-1992 the economy. Structural policy reforms can make an to 4.25 percent in line with a general fall in important contribution to improving the incentives international interest rates. Despite the decline in environment for private sector development. deposit rates, lending rates remained fairly constant up until early 1993, resulting in the widening of 7.90 Public Sector Reform. Tonga faces the BOT's spread as the Bank sought to recover some of challenge of transforming a public sector dominated the costs associated with the loan losses sustained in economy into a more dynamic market-based the late 1980s. In early 1993, the interest rate on economy. There is scope for improving incentives new investment loans was reduced but the spread for private sector development through tariff reform, remained high because of fixed rates on existing provision of adequate infrastructure and broadening loans and the limited opportunities for refinancing. of financial markets. 7.87 The external accounts registered overall 7.91 Export Diversification. Continued reliance surpluses during the early 1990s, except for a small on a narrow range of income generating activities deficit in 1990/91, allowing a build-up of external increases the economy's vulnerability to terms of reserves at comfortable levels. At end 1992/93, trade and other external shocks. This underscores the gross official reserves peaked at US$36 million need to intensify current efforts at diversification. (equivalent to 6.8 months of imports), up from US$26 million (4.4 months of imports) at the end of 7.92 Competitiveness. Declining economy-wide fiscal year 1990/91. Underlying this performance competitiveness in Tonga since 1989 remains a was a fairly stable trade deficit which, together with concern. To correct this, Government needs to moderate net outflows on the services account, was control budgetary expenditures, strengthen tax generally offset by increasing net inflows on the administration, reduce tax exemptions and resist any transfers' accounts. Private and official transfer large, general wage increases. receipts have continued to be high in recent years. 120 Chapter 7 Vanuatu Population: 161,000 (1993) GDP: US$186 million (1993) GNP Per Capita: US$1,230 (1993) A. Background subsistence activity in Vanuatu. The manufacturing sector is small, and inward oriented, accounting for 7.93 The Vanuatu economy is dual in nature with about 7 percent of GDP. The sector has been mosdy about 80 percent of the population engaged in stagnant owing to an uncertain political climate, subsistence or small scale agriculture, primarily protectionist policies (which reserve certain activities copra, cocoa and beef production. The formal for ni-Vanuatu) restricting foreign investment, economy is dominated by services, including difficulties faced by local businessmen in raising government, tourism and an offshore finance center. capital, and the relaxation of certain import Vanuatu faces a variety of geographical constraints restrictions, which may have discouraged private to economie development including vulnerability to investment. external shocks, remoteness from major markets and large distances from constituent islands. While 7.95 The services sector accounts for two thirds poverty is limited, development has been focused on of GDP. Growth in trade, hotels and restaurants has urban centers--particularly Port Vila, resulting in been weak. The tourism industry picked up in 1993 increasing regional income inequality and growing with visitor levels reaching 44,000 and is estimated rural-urban migration. Vanuatu has good economic to increase to 47,000 in 1994. The Government is potential in agriculture, forestry and tourism. giving special attention to the development of External aid has been generous by international tourism, and a master plan has been outlined. standards, yet economic growth has been slow and However, infrastructural constraints such as uneven. inadequate accommodation capacity, limited air accessibility, lack of adequate infrastructure for B. Recent Economic Developments travel within the country, and absence of systematic training for ni-Vanuatu seem to have caused the 7.94 The Vanuatu economy rebounded in 1993, industry to plateau. In support of tourism widt a growth rate of 4.4 percent after virtually development, the Government had embarked upon a having stagnated in 1992. The performance of the program to rehabilitate the airports at Port Vila and agricultural sector, which accounts for 25 percent of at Espiritu Santo, with an estimated cost of US$15 the GDP, showed a strong recovery with a growth million, but has recently limited the project to the rate of 7.5 percent. The total production of copra, latter airport at a cost of US$9 million. the main agricultural product, increased by 3.1 percent in 1993. Other agricultural commodities, 7.96 Price movements in Vanuatu, as in most of such as beef, timber, cocoa, and kava, showed a the other PMCs have been modest, mainly much stronger performance. A new development influenced by price movements in the main import was the increased production of squash for exports source country (Australia), the exchange rate, and from 500 tons in 1992 to 1500 tons in 1993. World import tariffs. Inflation in 1992-93 averaged about prices for squash were very favorable and increased 3.4 percent with almost 60 percent of the consumer about 240 percent in 1993. Fishing is a major price index consisting of imported goods. 121 Chapter 7 VANUATU: KEY ECONONMC INDICATORS -i.--:.- --:..---- .... a.- aa-. l.. --.. ..- Real GDP Growth Rate %) 4.5 5.2 6.5 0.6 4A. Gross Investment/GD (%)? 37.2 43.6 n.a. n.a. n.a. Public/GDP (%) 23.9 : 19.1 n.a. n.a. n.a. Private/GDP (cl) 13.3 24.5 n.a. n.a. n.a. Consumer Inflation (91 6.9 5.2 5.6: 5.1 1.7 Broad Money(M2)Growth (%} 35.8: 11.4 23.8 -0.7 10.4 Governrnent Revenues (% of GDP) a/ 47.3 45.6 37.6 36.5 34.7 Governrment Expenditures (% of GDP).. 52.1 54.1 43.7 39.0 37.3 OverallBalance (%1of GDP) -4.8: -8.5 -6.1 -2.5 -2.6 Exports, fob (US$m) 21.9 118.8: 18.2 23.7 22.7 Imports, fbt (US$m) -59.3 -79.2 -66.5 -67.3 -72.7 Current Account:(US$ni)a/! 11.0::i 4-3 -0.6 5.2 -11.2 (% of GDP) 7.8&t. 2.8 0.3 2.8 -6.0 Overall Balance (US$m) -4.2 1.1 2.2 2.4 3.7 Gross Reserves (end period, USSmn) 36.2 i 37.3 39.5 41.8 45.5 (months of imports) 7.6 5.9 7.6 8.0 8.1 External Debt/GDP(9) 14.8 20.0 21.1 20.9. 20.5 Debt Service Ratio(9)b hi 2.) 2.2 1A 1.5 1.9 Memo items: GD?.(nominal, US$m) . 140.9 152.9 i 180.3 i187.9 1860 Grants (US$m): netofficialtrsfers 31.8 9 29.8 35.5 .36.2.: 35.3 a/ Includes grants b/ In terns of exports of goods, services, and private transfers Source: IMF Recent Economic Developments, February 1995. 7.97 Government budgetary operations in recent which virtually all came from indirect taxes such as years have been conservative with the main aim customs duties (which are very high in the range of being to balance the recurrent budget. A small 40 to 80 percent). There are no direct taxes on surplus in the recurrent budget was achieved in personal and company incomes other than business 1993. Overall fiscal deficit after having declined license fees. The government is aware that such a partially in 1992 widened marginally in 1993 to 2.6 system will not last and is keen to broaden the tax percent of GDP. The budget for 1994 retained a base rather than increase overall tax relative to GDP. commitment to balance the recurrent budget. It may also introduce a personal income tax, Expenditure estimates for 1994 indicated an increase although this has always faced opposition from the of 10 percent in salaries and allowances, to be representatives of the offshore finance center. Some financed by efficiency savings through civil service measures have been taken to broaden the tax base, reform. Initial steps in this direction are yet to be including a turnover tax of 4 percent on wholesale taken. However, as a result of the public servants' and retail trade. The government is also considering strike in 1993, there has already been a 20 percent the lowering of import tariffs. reduction of staff. 7.99 On the expenditure side, current 7.98 The domestic tax base is very narrow with expenditures were higher in 1993 due to reduction in tax receipts about 75 percent of total revenue, of fees for education and health. Most of the capital 122 Chapter 7 budget is financed by donors, and the government is period. A 10 percent increase was given in 1994 keen to set up a fonnal development budget. and the balance will be provided later. As a result of the civil servants' strike from November, 1993 to 7.100 On the external front, Vanuatu has normally March, 1994 there has already been some reduction recorded large merchandise trade deficits. The in the size of the civil service, affecting services in principal export is copra, returns from which have education, agriculture and health. been unstable because of volume and export price fluctuations. Other exports are nearly all agricultural 7.102 Forestry Sector. During the past two products, such as beef, kava, coffee, timber, and years, Vanuatu has faced severe logging pressures more recently squash. Trade data for 1993 indicate which could have resulted in the entire country being that total export receipts were slightly lower than in logged out in less than five years. Licenses granted 1992. Lower earnings from copra, were offset by a had allowed an annual cut of 290,000 cu meters sharp rise in returns from exports of beef, timber, compared to a sustainable rate of about 52,000 cu and squash. Imports in 1993 are estimated to be meters. This situation may have been brought under about 8 percent higher than in 1992, resulting in a control through a ban on log exports imposed in trade deficit of around 27 percent of GDP. The other June 1994 with the aim of limiting the export of raw main sources of foreign exchange receipts are logs. tourism, and official and foreign investment, especially reinvested earnings, which together with 7.103 Investment Program. The Government has official transfers have usually resulted in a sizable stressed that priorities for the 1994-95 budget are in balance of payments surplus. the areas of health, education, rural water supply, and the upgrading of two airports in Port Vila and C. Key Issues Espiritu Santo. Financing for the upgrading of the airports was sought on commercial terms. This will 7.101 Civil Service Reform. The government is put additional pressure on the fiscal balance, unless committed to balancing the recurrent budget, hence other items of expenditure are cut to reduce the fiscal reducing recurrent expenditure of which an average deficit and the decision to limit rehabilitation to the of 45-50 percent is spent on wages and salaries. The latter airport is strictly adhered to. special Restructuring Commission recommended that the civil service be cut by 20 percent. The Government has decided to implement a 17 percent increase in nominal wages spread over a four year 123 Chapter 7 Western Samoa Population: 167,000 (1993) GDP: US$122 million (1993) GNP Per Capita: US$950 (1993) A. Background automotive wiring assembly-plant in 1992 resulted in some export diversification. Production from this 7.104 Western Samoa comprises two main plant has increased rapidly and, in 1993, accounted islands, Upolu and Savai'i, and seven small islands. for an estimated 18.5 percent of the total value of Economic activity is largely based on agriculture manufacturing production, or 3.5 percent of GDP. (mainly coconuts, taro, bananas, and subsistence crops). The small manufacturing sector is oriented 7.108 Total manufacturing output declined by towards the processing of agricultural products. The about 3.5 percent in 1993, reflecting shortages of majority of the population is engaged in the informal locally grown copra and coconut for processing. subsistence area and about one third of employment Coconut cream production fell by 22 percent in 1993 is in the government sector. as a result of the closure of one of the three factories, and for the others, imported copra is being used for B. Recent Economic Developments production. The performance of other industries, such as beer, cigarettes, etc. in 1993 has been 7.105 Economic growth in 1993 was positive and mixed. real GDP is estimated to have increased by about 5.3 percent, after a cumulative decline of over 12 7.109 Tourist arrivals rebounded in 1993, percent in the period 1990-92. Growth was led by a increasing by 24 percent. Gross earnings from strong recovery in agricultural production, especially tourism were WS$35.4 million in the first nine taro, in the first half of 1993, and by a rebound in months of 1993. Although the Government is the service industry, led by tourism. committed to the development of the tourism sector, the lack of appropriate accommodation for tourists 7.106 However, in the latter part of 1993, the from the main source markets (such as Japan) acts as expansion in agricultural production was brought to a major constraint. a halt, as a result of a leaf blight affecting the taro crop. In the absence of effective control measures, 7.110 Inflation performance in recent years has taro production has been reduced from the second been strongly influenced by the impact of external largest agricultural product in the country to almost shocks on the economy, influenced by two major negligible levels. It is estimated that the supplies cyclones in 1990 and 1991. The annual average available at the Apia market in April 1994 were less inflation rate fell from 8.5 percent in 1992 to 1.7 than half of that available in the same months in percent in 1993, mainly as a result of improved 1993. The other major agricultural crop, coconut is domestic production and a tightening of monetary recovering from cyclone damage. Some replanting policy. However, by late 1993 prices came under has taken place and the trees are expected to mature renewed pressure owing partly to shortages due to by 1995. In 1993/94, Coconut and banana the impact of taro leaf blight. The CPI increased by production experienced some positive growth. a further 17 percent in the first four months of 1994, reflecting the combined effect of the 10 percent value 7.107 The manufacturing sector is small, added goods and services tax (introduced on January primarily limited to the processing of agricultural 1, 1994), further declines in taro supplies and products. The opening of an export-oriented increases in the prices of certain essential items. 124 Chapter 7 WESTERN SAMOA: KEY ECONOMIC INDICATORS .. ~ ~ ~ . . .. .'- ' .... . .. . . . ., 191 19Z 1993. Real GDP Growi Rate (%) 1.9 -9.4 -1.9 -1.3 5.3 Gross Investment/GDP (%) 26.4 34.4 40.5 42.0 n.a. Public/GDP (%) 21.6 31.1 36.0 36.6 n.a. Private/GDP (%) 4.8 3.3 4.5 5.4 n.a. Consumer Inflation (%) 6.5 15.2 -1.3 8.5 1.7 Broad Money(M2)Growth (%) 16.7 19.2 -1.9 0.8 -0.7 Govemment Revenues ( % of GDP) a! 57.4 64.8 61.5 65.6 69.0 Government Expenditures (% of GDP) 55.1 69.7 63.9 83.2 90.9 Overall Balance (% of GDP) 2.3 -4.9 -2.4 -17.6 -21.9 Exports, fob (US$m) 12.9 8.9 6.5 5.8 6.4 Inports, fob (US$m) -75.5 -80.6 -94.0 -110.1 -102.7 Current Account (US$m) a/ 15.1 13.A -29.9 -24.7 -33.9 (% of GDP) 13.0 11.8 -26.3 -20.8 -28.0 Overall Balance (US$m) 14.4 16.3 1.4 -8.2 -8.1 Gross Reserves (end period, US$m) 55.2 69.0 67.9 57.6 48.9 (months of imports) 7.6 8.7 7.2 5.3 4.6 ExtemalDebt/GDP(%) 66.3 82.7 101.2 110.9 118.0 Debt Service Ratio (%) b/ 7.8 6.0 6.8 5.7 5.2 Memo itemns: GDP(nominal, US$m) 116.2 113.6 113.7 118.8 122.0 Grants (US$m): net official transfers 16.7 18.8 9.3 19.2 18.3 a/ Includes grants b/ In terms of exports of goods, services, and private transfers Source: IMF Recent Economic Developments, 10/94. 7.111 In the case of fiscal policy, total expenditure 7.112 As for monetary policy, growth in bank has been rising with most of this spending credit to the private sector slowed down in 1993, attributable to cyclone rehabilitation programs. though total domestic credit (as a percent of broad Recurrent expenditures have also been on the rise, money) accelerated from 8.3 percent in 1992 to 13.5 reflecting the increases in government departments percent in 1993, mainly due to a rapid draw down of and continuing high levels of public sector wages government deposits with the banking sector. and salaries. However, despite significant increases in government revenue, overall fiscal balance moved 7.113 The external position of Western Samoa has from a moderate balance in 1989 to a deficit of 22 been deteriorating since the early 1990's. The value percent of GDP in 1993, largely due to the final of merchandise exports fell by more than half stages of cyclone rehabilitation expenditure. In between 1989 and 1993, with the traditional exports 1993/94 with completion of cyclone rehabilitation of cocoa, coconut products and timber virtually and the scaling down of expenditures on other eliminated as a result of the cyclone. Imports for infrastructure projects, the overall budget deficit of reconstruction rose rapidly over this period. The the central government is estimated to have declined. current account balance deteriorated from a surplus in 1990 to a deficit of 28 percent of GDP in 1993, despite substantial increases in remittances, a strong 125 Chapter 7 growth in earnings from export processing and expects a significant reduction in the deficit, owing tourism activities, and a recovery in agricultural to (1) a reduction in development expenditures and production in the first half of the year. ExpoTts of (2) a shift in funding from domestic sources and Yazali wiring harness factory, which are not foreign concessional loans to external grants. included in merchandise exports, have been increasing consistently In 1992, Yazakis' gross 7.115 The greatest risk to the fiscal outlook is exports were US$24 million and it contributed US$2 posed by the state-owned Polynesian Airlines. Since million to service receipts as its net value added. it first leased a long range aircraft in mid-1993 for services to North America, the airline has incurred Key policy issues: large losses and liabilities, which have accumulated to about WS$45 million (about US$18 million) or 7.114 The short term prospects for the economy about 23 percent of central government revenue. The remain difficult, with the continued spread of taro government made unanticipated capital transfers of blight, real GDP is estimated to have declined in WS$8.8 million in 1992/93-1993/94 and has 1994, and exports fell further in 1994. The annual guaranteed a large proportion of the company's non average inflation rate is estimated to have reached 18 operating debt, contracted on commercial terms. It is percent, reflecting shortages in the economy. 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