- . ,.~~~~~~~~~~IS 1 Ap- II'1 ~~~~~~~~~~~~ ½ -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 11 4~~~~~~~~~~~~~~~~~~~~~4 f ~~~ ~~~~ iWA 2 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~I rt~~~~~~~~~~~~~~~~~~~~~~~~~E P-r.A- VAn~~~~~~~~~~~~~~O *~~~~~I- IT A W O R L D B A N K C O U N T R Y S T U D Y Pacific Island Economies Building a Resilient Economic Base for the Twenty-First Century The World Bank Washington, D.C. Copyright © 1996 The Intemational Bank for Reconstruction and Development/ THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing April 1996 World Bank Country Studies are among the many reports originally prepared for intemal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the govemments. 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ISSN: 0-0253-2123 Library of Congress Cataloging-in-Publication Data Pacific Island economies: building a resilient economic base for the twenty-first century. p. cm. - (A World Bank country study, 0253-2123) The report includes economic profiles of eight Pacific Island countries: Fiji, Federated States of Micronesia, Kiribati, Marshall Islands, Solomon Islands, Tonga, Vanuatu, and Western Samoa; it was prepared by a team led by Hilarian Codippily. Includes bibliographical references (p. ISBN 0-8213-3554-5 1. Oceania-Economic conditions. 2. Oceania-Commerce. I. Codippily, Hilarian M. A., 1938- . II. International Bank for Reconstruction and Development. III. Series. HC681.P276 1996 95-48482 338.99- dc2O CIP iii CONTENTS Page No. Abstract ................................................................ vii Acknowledgments ................................................................ viii Acronyms and Abbreviations ................................................................ ix Currency Equivalents ................................................................ xi Executive Summary ................................................................ xiii Introduction. 1 2 Growth and Trade in the Pacific Island Economies. 7 Growth, Investment and Shocks. 7 Pacific Island Trading Conditions .13 The Changing Global Economic Scene .16 The Changing Trade Environent .17 Recomendations .22 3 Tourism .29 Background and Introduction .29 Tourism Demand .30 Tourist Accomodation .33 Promotion and Diversification .33 Supporting Infrastructure .39 Role of Governent .41 Country Specific Initiatives .42 Priorities for Action .43 4 Fsheries .45 Background .45 Economic Contribution .46 Offshore Fisheries .49 Maximizing Rent from Offshore Tuna Fisheries .49 Managing Investment Effectively .58 Coastal Fisheries .61 5 Forestry .73 Introduction .73 Recent Developments in the Sector .73 Role of Forests .74 The Forest Resource .75 Forest Products Markets .78 Forestry Policies and Management .79 Key Issues to be Addressed in Improving Forest Conservation and Management .86 Summary .93 iv 6 Priorities for Regional Actions ............................................................. 95 Background ............................................................. 95 Trade Cooperation ............................................................. 95 Cooperation in Aviation and Sea Transportation ........................ ........................ 96 Cooperation in Resource Management ............................................................ 98 Cooperation in Economic and Social Services: Higher Education and Environment .... 100 Annex: Country Profdes .103 Fiji .103 Kiribati .110 Federated States of Micronesia .113 Marshall Islands .116 Solomon Islands .119 Tonga .122 Vanuatu .125 Western Samoa .128 Bibliography .................................................................. 131 map v List of Tables 1.1 Average Growth Performance, 1983-93 ....................... ..................... 1 1.2 Comparative Indicators ......................................................... 3 2.1 Average GDP Growth Rates and Investment Rates, 1983-1993 ................. 8 2.2 Sectoral Allocation of Development Assistance (Avg. 1986-92) ....... ......... 9 2.3 Selected Indicators of External Trade, 1993 ................ ....................... 13 2.4 Destination of Export Trade in Percentage, 1982-84 and 1991-93 ....... ...... 15 2.5 Export Concentration and Trade Taxes ......................... .................... 16 2.6 SPARTECA and Trade Expansion: PMC Trade with Australia and New Zealand (1987-1993) ..................................................... 18 2.7 Schedule of Tariff Reductions in Australia and New Zealand ........ .......... 19 2.8 Foreign Direct Investment Regime .................................................. 26 2.9 Foreign Direct Investment Incentives .............................. ................. 27 3.1 Tourism in PMC Economies, 1993 .................................................. 29 3.2 Tourist Arrivals and Receipts by Region 1988 and 1993 ......................... 30 3.3 Pacific Member Countries: Total Arrivals and Holiday Arrivals, 1988-1993 ........................................................ 32 3.4 Tourist Accommodation Stock in PMCs ....................... ..................... 34 3.5 Existing and Potential Product/Market Match ............... ...................... 36 4.1 Selected Aitributes of Fisheries Sector in the Pacific .......... ................... 48 4.2 Artisanal and Commercial Nearshore Production, 1989 -92 ........ ............. 48 4.3 Subsistence Fisheries in Selected Pacific Island Countries, 1992 ....... ........ 48 4.4 Catch in the SPC Statistical Area, 1984-93 .................. ....................... 49 4.5 Access Fees-Major Fishing Nations, 1993 ................. ....................... 53 4.6 Rent for U.S. Purse Seiners Under Various Scenarios, 1992 ........ ........... 55 4.7 Rent for Japanese Longliners Under Various Scenarios, 1992 ........ .......... 55 4.8 Illustrative Costs of Investment in Fisheries, 1992 ............ .................... 59 4.9 Trends in Per Capital Supply of Fisheries Products, 1974/76-92 ....... ........ 63 4.10 Main Uses and Markets for Nearshore Fisheries Products in the Pacific .71 5.1 Timber Production from Natural Forests in 1993 ............ ..................... 74 5.2 Trade in Forest Products in Selected Pacific Island Countries, 1993 ...... .... 75 5.3 Extent of Forest Cover in Selected Pacific Island Nations in 1993 ....... ...... 76 5.4 Extent of Customary Land Tenure in Selected Pacific Islands ........ .......... 77 5.5 Indicative Reference Prices for Logs in 1992, 1993 and 1994 CIF (Japan) Price in US$/Cubic Meter .79 5.6 Forest and Tree Crop Plantations .................................................... 85 vi List of Figures 1.1 Real GDP Per Capita Growth Rate . ................................................. 2 2.1 Real GDP Growth Rates in the PMCs, Average 1983-88 and 1989-93 ........................................................ 7 2.2 Real GDP Growth Rates 1983-1993 .................................... ............. 11 2.3 Percent Changes in the Terms of Trade, 1983-92 ............ ..................... 12 2.4 Real Effective Exchange Rates (Indices), 1983-1992 ........... .................. 12 2.5 Composition of PMC Exports, 1982-84 and 1991-93 ............................. 14 2.6 Composition of PMC Imports, 1982-84 and 1991-93 ............................. 14 4.1 Fish Exports (% of total exports) .................................................... 46 4.2 (a) Access Fees-External Sector Contribution (% of merchandise exports) ...................... 47 4.2 (b) Access Fees-Fiscal Contribution (% of taxes) .47 4.3 (a) Access Fees Paid, 1993 ........................................................ 54 4.3 (b) Volume of Catch, 1993 ......................................................... 54 4.3 (c) Catch Value, 1993 ........................................................ 54 4.4 Beche-de-Mer Exports from Selected PMCs, 1984-93 .......... ................. 64 5.1 Indicative Distribution of Income fro m Logging of Natural Forests ....... .... 81 List of Boxes 4.1 Maximizing Economic Returns from a Fishery .............. ...................... 51 4.2 The Fishery Management Regime-FMR ....................... ..................... 52 4.3 Transfer Pricing in the Pacific ........................................................ 60 4.4 Trends in the Use of Coastal Fisheries-The Case of Vanuatu ........ ........... 62 4.5 Collaborative Management of Coastal Resources- The Case of Vanuatu .65 vii 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 environment 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. viii ACKNOWLEDGMENTS The World Bank wishes to express its appreciation to all member Governments, bilateral donor agencies, the Asian Development Bank, the Forum Secretariat, The South Pacific Forum Fisheries Agency, the South Pacific Commission, the United Nations Development Programme, Institut Francais de Recherche Scientifique Pour le Developpement en Cooperation (ORSTOM), the University of the South Pacific, International Center for Living Aquatic Resources Management, South Pacific Forestry Development Programme, and several research organizations, non-governmental 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 International Development (AusAID). This report was prepared by a team led by Hilarian Codippily and was based on field work carried out in mid-1994. The core team included Irene Davies, Cyrus Talati, Monique Garrity, Farrakh 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. ix 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 C02 = 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 x 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 Progranune 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 xi CURRENCY EQUIVALENTS FEDERATED STATES OF MICRONESIA (FSM) (The US Dollar is the official currency of exchange) FISCAL YEAR October I - September 30 FIJI Annual Averages 1991 F$1.00 = US$0.68 1992 F$1.00 = US$0.67 1993 F$1.00 = US$0.65 FISCAL YEAR January 1 - December 31 KIRIBATI Annual Averages (The Australian dollar is the official currency and the main medium of exchange) 1991 A$1.00 = US$0.78 1992 A$1.00 = US$0.74 1993 A$1.00 = US$0.68 FISCAL YEAR January 1 - December 31 MARSHALL ISLANDS (The US Dollar is the official currency of exchange) FISCAL YEAR October 1 - September 30 xii SOLOMON ISLANDS 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 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 I - June 30 VANUATU 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 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 xiii ExEcuTivE SuMMARY With so many of East Asia's economies now yet economic growth has remained at a low 2 poised to leap onto the economic center stage and percent a year. As a recent study showed, this become full-fledged competitors in the world may reflect the lumpiness and long gestation market. the next century has been dubbed the periods of public investments, which accounted "Century of the Pacific". Yet for the Pacific for 17 percent of GDP, as well as some Islands-hovering at the edges of this whirlwind unproductive investments. The 12 percent of of activity-how best to participate in it is less GDP provided by private investment, on the certain. other hand, was positively correlated with growth, confirming the importance of the role of Small and remote, scattered across the Pacific the private sector in economic growth, as Ocean, these Island nations face many emphasized in previous reports. development challenges. The heritage of the Pacific Islands, however, rests in their unique The PMCs need to change course and rely on a cultures, their natural beauty, their forests, and more effective private and public investment their fish. They will have to work together to oriented growth strategy. Change is all the more protect, conserve, and make the most of these rare essential because of external vulnerability and gifts. Can the Pacific Islands ensure that the rising demands for modern goods and services Century of the Pacific will be one of economic within the PMCs. As elaborated below, an opportunity and prosperity for all their people? outward oriented investment-led growth strategy is needed-but not necessarily the path of labor Favorable physical environments, and rich cultural intensive agriculture and manufacturing witnessed traditions including the extended family system, in the early stages of East Asian growth. customary land ownership and benefit sharing Achieving such a strategy would depend on practices, have endowed their populations with a evolving a more effective development relatively safe and secure lifestyle. By world partnership between the state and the private standards, the average life expectancy of over 60 sector. In such a partnership, the state should years is high. But while life is safe and secure in focus on ensuring macroeconomic stability and the Pacific Islands, economic growth has been competitiveness, creating a more enabling slow. Unless the Islands achieve moderate regulatory framework, providing economic and sustainable economic growth, improvements in the social infrastructure and reducing its role in the quality of life may not be possible. productive and service sectors. Such an environment would provide the private sector Throughout the past decade, the Pacific Island with the impetus to save and invest in the Member Countries (PMCs) have invested an productive sectors, and thereby contribute to average of 29 percent of GDP in their economy, output and employment but with careful regulation to ensure that it is environmentally sustainable in the long term. Figure 1: Avg. Growth Rates, 1983-93 6 v . | In building a more resilient economic base, the 5 PMCs could follow two broad approaches. The 4Real GDP first is to diversify their economic base into .Population tourism and services. Second, the PMCs need to 3 r . _ *_ obtain higher returns from their natural capital, E Per Capita 2 Real GDP i.e. from fisheries in all PMCs, and from forestrv 1 in some of the PMCs. Regarding the latter a fundamental question facing the PMCs is: how 0 can these countries exploit their natural resources PMCs Caribbean Africa & Countries Indian sustainably to maximize econoiuiic returns while Ocean preserving stocks for futurr: genertions? Efficiciit Islands xiv import substitution possibilities also need to be almost 8 percent in 1991-93 mainly due to the exploited. Recent trends in external trade show garment industry in Fiji. Islanders have also begun that the PMCs are moving in this direction. But to import far more manufactured goods, much more remains to be done. machinery, beverages, and tobacco, while the share of food, chemicals, mineral fuels, oils and Foreign aid will and should continue to play an fats imported declined. important role but the content needs to be changed and linked much more directly to overall Notwithstanding attempts to diversify the export development impact, greater improvement of mix and to build links into new markets, the public service delivery and growth. This report Islands remain vulnerable to external shocks. does not analyze aid-effectiveness in any detail. It Trade penetration ratios are close to 80 percent of shows nevertheless, that aid programs need to be GDP, with imports accounting for more than half better focused on getting coherent results, instead of GDP. With the exception of Fiji, the Islands run of being spread thinly among a multitude of small large merchandise and current account deficits, and individually worthwhile activities. Further, the correspondingly large capital inflows to finance technical assistance component of aid programs is these deficits. They are also heavily dependent on very high, and may well add to public consumption trade taxes for a large share of public revenue. instead of investment by maintaining large public Where even minor changes in the terms of trade sector bureaucracies. can devastate external balances and economic growth, managing vulnerability and exploiting Working with the World emerging opportunities become the governments' key economic challenges. In the recent past, trends in Pacific Island trade indicate that: The recent changes in the global trading * there have been major changes both in environment arising from the conclusion of the como)osition and direction of exports; Uruguay Round of the GATT A . xnient, NAFTA and trade deregulation in Australia and * thc composition of imports has also changed; New Zealand will have some effect on the PMCs' but trading environment. Benefits are likely to favor . vulnerabilit to extemal factors remainsand countries with open economies and those that have wivulneabilit to er f r m athe capacity to adjust and take advantage of new market opportunities likely to arise from the Over the last decade, the structure of trade in the projected real GDP growth rates of around 2.7 Pacific Islands has been changing. While the percent per year for the G-7 economies over the export of traditional commodities remains medium term. Two other favorable factors are the important, the Islands have expanded earnings outlook for low real interest rates and inflation as from services, fish and forestry products. well as the resurgence of higher private capital Manufactured exports rose from negligible to inflows. Some likely effects of changes in the FEure 2: Coniosition of PMC Exports: 1982-84 & 1991-93 Sp~~Aoee 1982-84 ~I1991-93 1er Total Goods & Services: US$748 nmilon Total Goods & Services: US$1372 miillion xv global economic environment are that: labor and land so as to be internationally competitive are two of the main macroeconomic * overall growth and trade will increase challenges. With small financial markets, even dramatically; smaller domestically financed fiscal deficits can quickly spark inflationary upsurges, and eamorge; compeitivetradnenvionmendwil discourage private investment and private saving. emerge; and It points to the need for prudent fiscal * trends toward regional integration will management especially during periods of volatile intensify. external developments. Towards this end, a combination of exchange rate, public sector To reduce their vulnerability to external shocks the wage, and overall fiscal policies is the main set of Pacific Islands (along with all other countries) will instruments that can be used to ensure that need to increase the breadth and depth of their domestic resources are competitively priced in trading relations. To date, they have benefited global markets. If domestic resources are from preferential trade agreements (such as overvalued, then domestic investos will be SPARTECA) that have allowed their exports into encouraged to shift their capital abroad while major markets largely duty free. By reducing overseas investors will be reluctant to make new duties levied on their competitors, the new trade commitments. liberalization agreements will wipe out much of this competitive advantage. This explains why the Reducing Anti-Export Bias. Several of the PMCs growth in manufactured exports from Fiji is now rely heavily on trade taxes to finance the threatened over the medium term. recurrent costs of government. While providing a steady stream of revenue, high import duties raise Trade agreements such as SPARTECA that the cost of doing business in the PMCs and provide Island manufacturers the opportunity to discourage exports. In terms of providing enter new markets under the shelter of another protection to domestic producers, high import nation's trade protection carry with them serious duties are counter-productive. Remoteness from hidden costs. To meet the 50 percent local content major markets already provides the PMCs with a requirement (reduced recently to 45 percent), for high degree of natural trade protection. While example, Island garnent industries have been high tariffs convey a measure of protection to forced to buy capital goods and inputs from domestic producers, opportunities for import Australia and New Zealand rather than from more substitution are quickly exhausted because of competitive Asian markets and have under-invested small populations and low incomes. A in new technology to maintain a high labor-cost progressive reduction of import duties over the share. medium term would lower enterprise costs and reduce the anti-export bias of PMC trade Building upon their small yet significant recent regimes. Lowering tariff rates would, by success in trade diversification, PMC governments necessity, need to be accompanied by measures to need to focus more attention on enhancing develop new domestic revenue sources, competitiveness in the PMCs. This will require: suggesting the need for careful coordination of resource mobilization and trade reform measures. * the maintenance of a macroeconomic environment that meets the twin goals of price Reducing Barriers. Competitiveness can be stability and competitive pricing of PMC further enhanced by lowering costs to domestic resources; and foreign businesses through reducing barriers affecting them. A healthy domestic private sector * a reduction in the anti-export bias of trade will be the first step towards attracting foreign policy, and tax regimes; and investment. In addition to capital, foreign * reducing barriers to domestic and foreign investment brings with it the technology and direct investment. market access needed to penetrate new markets. GATT, the emergence of major regional trading An Enabling Macroeconomic Environment. A blocs, and the opening up of protected markets low rate of inflation and the pricing of capital, signal growing competitiveness in the xvi international environment for both foreign direct of the Pacific Rim countries and APEC presents a investment and trade. For the PMCs to attract natural diversification strategy for the Pacific foreign direct investment and expand trade, Island countries. efforts will be required to: Tourism: Profiting from Paradise * examine barriers to foreign direct investment; In the unique natural setting of the Pacific Islands, * examine the framework for "niche market tourism offers considerable potential for both agreements and the ability to assess costs, revenue and jobs. While tourism grew 4.5 percent benefits, and risks; and worldwide from 1988 to 1993, in the remote~ * strengthen trade and investment links with Pacific Islands, it grew 6.8 percent. Over the rapidly growing Asian economies. same period, the 8.7 percent growth in the East Asia and Pacific Region suggests that there is a far Investment approval mechanisms, access to land, greater market waiting to be tapped. and restrictions on the hiring of expatriate workers are three of the most often cited Within the PMC group, Fiji alone offers frequent impediments to foreign direct investment in the air services to Australia and New Zealand and South Pacific. Establishing up-to-date foreign direct access to long-haul markets. With beaches direct investment legislation, streamlining the no longer pulling in new markets and repeat FDI approval process, clarifying property rights visitors in great numbers, however, promotion is and relaxing regulatory barriers to land use by shifting to terrestrial and marine attractions. Tonga foreigners, and easing requirements related to the and Western Samoa have strong cultural identities hiring of expatriate workers are some of the but limited and inconvenient flight connections. measures that the PMC states could adopt to Among the Melanesian group, Vanuatu's tourism make the domestic economic environment more industry is limited by its airline and hotel capacity. conducive to inward investment. The Solomon Islands are still at an early stage of tourism development. The Federated States of To offset adverse investment regulations and a Micronesia, the Marshall Islands, and Kiribati are perceived lack of competitiveness, PMC distinctly different from the five other Pacific governments offer a wide range of fiscal Island Member Countries-far more remote from incentives to lure private investors. But there is a source markets, much smaller, and more widely lack of automaticity and transparency in the scattered and not easily accessible. granting of investment incentives. In general, the investment incentives that are granted are The Pacific Islands' many cultural and natural distortionary, erode the tax base, and encourage assets are the foundation for a strong tourist trade. rent-seeking behavior. A more appropriate As more and more tourists have visited villages strategy for PMC governments would be to move and become familiar with local cultures, away from wide-ranging foreign investment governments have begun to recognize the incentives, and concentrate instead on improving importance of preserving and promoting local the overall domestic enterprise environment, cultural assets. The Islands also possess unusual flora, fauna, and geophysical features-on land and Promoting trade, aid and investment links with all under the sea. The key to developing Pacific Island APEC countries including the rapidly growing tourism lies in the sensitive presentation of their Asian economies provides a means of diversifying cultural heritage and the careful management of the market ties and finding new sources of growth. natural environment. PMCs have certain resources that are in short supply in Asia-most notably calm, quiet Island The Islands' geographical isolation and locations, and a large share of the canning-grade remoteness are their drawback as well as their tuna supply. Sparking the interest of all APEC blessing. Access to tourist markets is of necessity entrepreneurs to invest in areas in which they difficult and costly. A fundamental priority must already have technology, market links and therefore be to improve air access, flight expertise is an important challenge for the PMC frequency, and fare levels by rationalizing leaders. Adjusting to trade standards and markets aircraft, routes, and services and developing an xvii the tuna resources for the benefit of Table 1: Drastic Variation Exists in the future generations; Access Fees Paid by Various Nations -. . .. ... .... .. .. ... . . . ..... ..* increase rents received from access fees PtsNng .ation Aess ees ---through collective action from the present level of about 4 percent of the output .-erc:-tv- u.: f .value; and USA 10 percent * manage public and private investment Japan 5.0 percent with the twin objectives of reducing the Taiwan 3.7 percent fiscal burden of existing investments, and Korea 2.2 percent preparing the groundwork for future Average 4.4 percent private investment in the sector. Source: World Bank staff estimates. Active off-shore fisheries resource management comprises three components-a fisheries management system, a component for improved network of regional routes and inter- monitoring, control, and surveillance, and a Island routes within countries. Improvements are fisheries judicial system for effective also needed on links with larger neighboring enforcement. A crucial requirement for this is destinations and source markets (particularly that fishing access agreements must incorporate Australia and New Zealand) to supplement the catch limits by species or other appropriate present system of point-to-point links from each measures. The present system encourages capital. overexploitation, which is not in the interests of the coastal states nor the distant water fishing With global competition for development capital nation fleets. There is also considerable variation becoming intense, Pacific Island governments under the present licensing arrangements-both in seeking investment in the tourist industry will terms of the low average level of fees paid, and need to reassure potential investors that the in payments across countries (see below). decision making process regarding investments Limiting access effectively should also generate will be consistent and timely; that government benefits in terms of helping to maintain the price commitments (such as the provision of of output in major markets. infrastructure or air services) will be honored; that there will not be unforeseen or excessive Implementation of a multilateral approach to fee increases in government fees and charges; and negotiation and licensing based on collaborative that regulations will be applied consistently and action has the potential to raise average access without overlapping or duplication. fees from the present level of 4 percent of output. Fisheries: Harvesting the Bounty of the Sea In order to move in this direction Pacific Island countries need to work together first to define a Fisheries are an important present and future long-term strategy to raise fees, and to develop resource in most PMC countries varying from the vital fisheries infrastructure (e.,., about 7 percent of GDP in the Solomon Islands to transshipment facilities and ports) which would higher shares in the Micronesian group. The complement the former. Negotiations under such Fisheries sector offers considerable potential for a multilateral system should be carried out by development both as a revenue earner from off- professional negotiators. shore fisheries for some of the Islands and as a contributor to output and employment from Investment in modern off-shore fisheries is a coastal fisheries. In offshore fisheries PMC highly capital-intensive activity requiring governments need to focus on three inter-related resources and private savings which most of the issues: PMCs do not have. Consequently private investment will need to be foreign sourced. In * strengthen the present system of resource order to manage investment more effectively, management to ensure sustainability of PMC governments first need to separate out any welfare objectives from economic ones when xviii evaluating projects. Second, PMC governments revenues through transfer pricing, under-reporting should not be directly involved in commercial of log exports and other malpractices. activities in the sector-this is an activity for the private sector. This implies that in the short to Significant forest resources still exist in the medium term, PMC governments involved in Solomon Islands, Fiji, Vanuatu, and Western commercial activities must move out of such Samoa. If present practices are allowed to activities in order to reduce the existing fiscal continue, however, the natural forests-and the burden. The strategy for this transition from myriad species they contain-may be gone in public to private management should be to invite fifteen to twenty years. If forest resources are to foreign participation, with the government a be preserved and managed on a more sustainable silent partner, requiring only payment of a fee to basis, governments need to develop and enforce manage the enterprise. Over the medium term long-term, comprehensive national forestry private operators should be provided an option to policies based on sustainable management purchase the enterprise. Similarly new foreign principles now. Action is urgently required in the investments in the sector should be allowed, but following three key areas: protection and with an up-front annual fee payment to be made conservation of natural forests; improved to government, independent of profit. management of natural forests; and a more equitable distribution of economic rents. Coastal fisheries are an important source of food for all PMCs and therefore a source of foreign Protection and Conservation of Natural Forests exchange savings. Present trends indicate a significant decline in coastal resources across all While governments in the region may recognize PMCs and a deterioration in the environmental the social and economic importance of conserving quality of some coastal areas. Urgent action will their countries' unique gifts of flora and fauna for be required to reverse this trend. The most future generations. they have been slow to important element of this strategy should be to counteract the forces favoring rapid xploitation. shift the thrust of fisheries departments, Areas set aside for the protection of oiodiversity particularly fisheries extension, away from in Fiji, Solomon Islands, Wee'ern Samoa and fisheries development and redirect it to fisheries Vanuatu are quite inadeqtaie. Effective systems management. This will require institutional of protected areas should .e establ. bhed strengthening and re-training in many countries immediately and in close consultation with but the basic elements are already in place in communities and landowners to preserve most PMCs-customary systems of marine tenure biodiversity. These could include conservation exist in most PMCs. Given the limited resources areas, national parks, and ecological reserves. of PMCs, it is advisable to use the customary systems complemented by modern methods and Donor participation. Donors should explicitly backed-up by modern systems to manage include conservation of natural forests as a dwindling coastal resources. Such experiments priority for grant aid support to the sector either have been demonstrated successfully in Vanuatu directly or through assistance to local and and other parts of the region. international non government organizations, which are working with local landowners, to Forestry develop feasible and socially acceptable approaches to forest protection and conservation. Throughout the Islands of the Pacific, tropical rainforests are rapidly disappearing. Widespread Management of Natural Forests agricultural activities and commercial logging have resulted in deforestation and forest degradation. Although the forestry sector is a significant Timber harvesting rates are unsustainable and source of income to landowners and national harvesting methods unnecessarily destructive. governments in the region, the principles of Regeneration rates range from slow to nil. In natural forest management have not yet been addition, inadequate logging agreements have adopted. Forestry operations typically "mine" the enabled logging companies to reap windfall profits; resource with little regard for regeneration. moreover, governments and landowners lose Whereas sustainable forestry may be difficult in xix natural tropical forests, there is ample scope for and adopting independent inspection/surveillance improving the way Pacific Island natural forests of exports. are currently managed: Pulling Together * Forest management plans. Governments, owners, and managers should develop Regional collaboration that combines the Islands' detailed plans for the management of natural individually limited manpower, and financial and forests for sustained timber production, with natural resources may in certain areas, allow for substantial areas set aside for conservation. economies of scale, reduce vulnerability to external shocks, and thereby improve overall welfare. It - Sustainabl yields.Topreservenaturcould also lower the unit cost of essential forestry resources, total annual timber infrastructure services. A regional approach to harvests must not exceed the best estimate of sustinale ield Th alocaion f te ttal resource management and exploitation has the sustainable yield. The allocation of the total potential to significantly enhance the bargaining harvest, moreover, must be sustainable position of all the Island countries. If the PMCs within each region. can cooperate in key areas, they can begin to * Logging practice codes. National Codes of achieve the standards of living they value. Logging Practice, which seek to minimize the destructive impacts of logging should be Yet in the past, regional efforts have had only developed, incorporated into logging mixed results, and costs in terms of limited staff contracts and enforced with realistic time and administrative resources have been very penalties. high compared to the value added. It is therefore vital that the Pacific Island nations be highly * Performance Bonds and surveillance are selective in choosing areas requiring economic internationally tested and effective means to cooperation. The number of such efforts should ensure that logging companies comply with therefore be small. Regional collaborations must Codes of Logging Practice and with their also seek to benefit all participants, improving their contractual obligations and that welfare beyond what individual nations could have economic/ecological benefits accrue to the achieved on their own. National interests would country. therefore not outweigh and supersede regional interests. Finally, regional cooperative efforts must Equitable Distribution of Economic Rents be designed to be flexible enough to adapt to changing circumstances and have the capacity to be Governments and landowners in the Pacific are self-policing and, if necessary, to terminate in the forsaking economic rents, to which they are event of poor performance. entitled, to logging contractors. The chart in Figure 3 shows that resource owners The Pacific Islands' regional cooperation efforts, consistently receive the smallest portion (10-15 while mindful of the general shortage of human percent) of log value, while loggers consistently resources and limited institutional capacity, should receive 30-50 percent in the form of excess focus on four priority areas: (a) building trading profits. Government taxes and levies vary from relationships with larger, more dynamic trading 30-35 percent in PNG and the Solomon Islands to blocs outside the region; (b) cooperative 5-15 percent in Fiji and Vanuatu. Recent Bank arrangements in transport; (c) a common research indicates that, based on current log approach to natural resource management; and prices and logging costs, the combined revenue (d) a regional approach to providing certain collected by landowners and governments could economic and social services. be increased to 50 percent of f.o.b. log value while maintaining internationally competitive * Trade: The benefits of trade within the PMCs profit margins to loggers. In order to achieve are likely to be limited and largely offset by this, it is recommended that governments should the administrative costs involved. Under consider instituting stumpage and export taxes; these circumstances the PMCs may wish to increasing the royalties paid to landowners, adopt an outward orientation in this regard. merging field-based and export (output) taxes; This can be done through trade cooperation xx Figure 3: Indicative Distribution of Income from Logging of Natural Forests 100% 90% .GovernmentTax/Levy 80% 70% _Landowner Royalties 60% 50% ULogging Costs (including normal 40% rofit margins to loggers) 30% 20% *10% PNG Sol. Is. Vanuatu Fiji Note: PNG is included as a comparator. Data for Western Samoa were not available. Source: World Bank estimates. and integration with larger more dynamic monitoring, control, surveillance and economies such as those of APEC. At the conservation to help ensure that fishery stocks same time care needs to be exercised to avoid will be exploited in a sustainable manner. the high costs of inefficient administration Negotiating access fees on a multilateral basis, and decision making. moreover, will require regional collaboration on an unprecedented scale. Transportation. There are many potential benefits from cooperation to promote better * Economic and Social Services. The two access to aviation and maritime transport. major areas where the Pacific Islands stand to There is an urgent need to restructure the gain are higher education and environmental Forum Shipping Lines currently regulating management. In higher education there is an ocean transport, for instance, and to separate urgent need to resolve the current difficulties commercial operators from services to the over the USP as this is a most valuable more remote Islands, which is a welfare regional resource from which all countries function. Greater transparency in commercial have derived great benefit and can expect to goals and a clearer definition of appropriate do so into the future. Additionally, there is a demands for public support would increase need to re-orient regional training programs the scope for ocean transport profitability. from the present emphasis on liberal arts and Moreover, standardization of ship design for public administration towards business and the region could reduce initial capital costs technical programs in order to generate the for both repair and maintenance. human resources which will be required in Natural resource management. In both the future. In the area of environmental forestry and fisheries, the Islands could benefit management there is considerable potential substantially from regional collaboration. for benefit from cooperation given the depth There is an urgent need to establish and and similarity of environmental issues. Based implement a common code of conduct on the frequency and rapidity of natural regulating logging operations in natural forests disasters in the region, a case can also be across the region. The need to improve the made for collaborating in the preparation for monitoring of logging and timber exports is and response to such disasters. Finally, equally urgent. In fisheries, collective utilizing a regional agency such as SPREP, initiatives could reduce costs significantly the PMCs can address the common nexus of through economies of scale and improve coastal zone management issues and marine conservation needs of the region. 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 and foreign aid. The countries continue to depend on a narrow range of export commodities 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. Scope and Content of the Report. The central objective of this report is to discuss how the Table 1.1: Average Growth Performance, 1983 - 93 Pacific Island Economies can enter the twenty- (in percent per annum) first century on a more resilient economic base. -- - .-.- ..... :.... This report seeks to build upon the findings of the - - - - -- :: ui last two reports which have shown that past Real GDP 2.1 3.2 5.4 patterns of growth and development in the Pacific Island Member Countries (PMCs) do not appear Population 1.7 0.9 2.0 to be sufficient to provide a progressive Per Capita 0.4 2.3 3.4 improvement in living standards in the future. Real GDP The next century is sometimes referred to as the . . ~~~~~~~~~~~~a/ Selected Island economies-see Table 1.2 . "Pacific Century" because of the major role the Source: World Bank. East Asian economies are likely to play. In view of such a scenario, the PMCs need to assess carefully emerging opportunities and challenges differences. The key questions posed in this and decide on the kind of participation and report are: development strategies that would be in their best interests in the future. Change is all the more * How can the Pacific Islands-individually essential because of PMCs' vulnerability to or collectively-build a more resilient external influences as well as rising demands for economic structure in a rapidly changing modern goods and services within the PMCs.' external environment ? * How can Pacific Island economies reduce their vulnerabilit to external events? In contrast to the last two reports which were country specific, this report is thematic in How can the PMCs sustainably exploit character and seeks to transcend inter-country their natural resources to maximize revenues while preserving sufficient stocks for future generations ? The eight Pacific Island Member Countries (PMCs) covered in this report are Fiji, Kiribati, Given the fragile resource base ol the PMCs, the Marshall Islands, Federated States of Micronesia, management of their natural resources has Solomon Islands, Tonga, Vanuatu and Western assumed considerable importance. Previous Samoa. The PICs form a wider group, and in reports have also noted that there is still a addition to the PMCs, it includes Cook Islands, tendency in the PMCs to look inward and remain Niue, Tuvalu. Papua New Guinea, also a Pacific isolated from the rest of the world. Extemal Island Member Country is covered in separate factors do affect the PMCs in a significant manner and have been accentuated by recent 2 changes in external trading arrangements. Thus, from US$2,130 in Fiji to US$710 in Kiribati in the unifying theme of the report is about how the 1993 (see Table 1.2). Population growth rates PMCs can diversify in response to these changes have been high. Solomon Islands and Vanuatu and optimize the use of their natural resources. recorded the highest rates reflecting declining mortality and increasing fertility, but population Background. The eight PMCs. spread across the growth rates have been much lower in Fiji. Rapid Pacific Ocean in the form of hundreds of small population growth per se is not a cause for islands and atolls, face a unique set of concern if accompanied by commensurate levels development challenges. Favorable physical of environmentally sustainable economic growth. environments and rich cultural traditions But with low and erratic growth rates in most of including the extended family system, customary the PMCs, high population growth rates would land ownership and benefit sharing practices, lead to declining or stagnant GDP per capita have endowed their populations with a relatively levels. Nevertheless, despite the many constraints safe and secure lifestyle. However, economic and challenges faced by the PMCs arising from growth and diversification have been rather slow their small size, isolation and fragmentation, the in the PMCs in the 1980s and in the early 1990s countries have made considerable progress in compared to other island economies (see Table their efforts to improve the quality of life of their 1.1). During the period 1983-88, real GDP per people. capita grov ;Ti was negative in the PMCs, compared to robust growth in the other two island Average life expectancy in the PMCs is relatively g;iups (see Figure 1.1). During 1989-93, high by world standards. In almost all the PMCs, however, the PMCs performed better than the people have an average life expectancy of over 60 Caribbean Island group as a whole, largely years. This is comparable to the life expectancy reflecting the recovery in Fiji, but their growth in other island economies in Africa and the Indian performance was below that in the Africa and Ocean, but is less than in the Caribbean, where Indian Ocean Group. the average life expectancy is 71 years. In 1992, GDP per capita averaged US$1,320 in Similarly, as a group, the PMCs show an infant the PMCs compared to US$3,280 in the mortality rate of 39 per thousand births which is Caribbean and US$1,390 in the African and lower than in the African and Indian Ocean island Indian Ocean island economies. Per capita GNP countries, where the average is 47. However, the varies considerably within the PMCs ranging infant mortality rate in the PMCs is much higher than that in the Caribbean countries estimated to be 23 per thousand births. Within the PMCs the Figure 1.1 Real GDP Per Capita Growth Rate infant mortality rates are lower in Tonga (21), Fiji (23), and Western Samoa (25). Overall literacy rates in the Pacific are generally 3 _ ; _ 7: higher than the average in developing countries. 2.5 _ _ _:: _ Most Pacific countries have made great progress 2 in extending access to primary education in the 1.5^ ___ _ last decade and primary enrollment rates are I _ _ _ comparable with those of other island economies. 0.5 Except for the Solomon Islands, primary o education is virtually universal in all the other -0.5 l f T : e_ PMCs. However, primary school dropout rates -1 . 1983.88 l are lhigh in the PMCs compared to other Caribbean Africa &989-9 developing countries. Countfis India Ocean1989-93 dvlpn Islands - As for health status, there have been widespread Source: World Bank staff estimates. gains over the last two decades with increased life expectancy and decreased infant mortality in most 3 PMCs. Overall, infant mortality and child health PMCs are constrained by the 'tyranny of conditions have improved, though conditions vary distance". They do not have the advantage of across countries. Solomon Islands and Vanuatu proximity to the large high income American provide examples where diseases of markets, enjoyed by the Caribbean cc ntries. underdevelopment still account for most sickness and death. In the other PMCs, the main causes Furthermore, the PMCs which depend on a few of death are non-communicable diseases related commodities are subject to terrns 'f trade shocks to poor diet, and the ills of urbanization. In and remain highly vulnerable. First, the terms of several PMCs, pregnancy and motherhood also trade became unfavorable in the 1980s; prices for continue to pose a significant risk to the health of PMC commodities (e.g., coconut, copra) women. In fact, the Pacific regional average for declined in the 1980s. Second, in the recent past, pregnancy and motherhood-related deaths is there has been increasing activity in a narrow set considered to be significantly higher than the of natural resource-based activities, i.e., in global average. fisheries and forestry. Accordingly, the discussion in this report will be broadly The archipelagic nature of the PMCs have structured as follows: endowed them with a more extensive command * Recent trends in Pacific Island trade and likely over ocean resources (see Table 1.2). For effects of changes in the global economic example, the average sea to land area in the environment; PMCs is 13 times that of the Caribbean countries. However, their spread over larger sea areas has * Trade and management of resource-based also led to higher unit costs of transportation and activities; and hence a constraint even to supply their small * Options for regional cooperation. domestic markets. As for external markets, the Table 1.2: Comparative Indicators .......... ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ...::::... Eaciflc. FHiji 762 1.31 18272 1146 1647 2130 72 23 PSM 105 2.71 705 2500 194 1850 bl 64 52 Kiribati 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 Samoa 167 0.40 2934 130 122 950 65 25 Cardbbeanl: 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 Dominica 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 468 34 St. Lucia 158 1.85 610 16 496 340 .70 19 St. Vincent & Grenadines 110 0.88 340 33 191 2130 71 20 Africa & Ind' Ocean: Cape Verde 398 2.60 4030 790 325 870 68 40 Comoros 528 3.67 2230 249 276 520 56 89 Maldives 236 3.31 300 959 132 .820 62 55 Mauritius 1111 1.01 850 1171 3280 2980 70 18 Sao Tome & Principe 12S 2.24 960 128 44 350 68 65 Seychelles 70 0.79 270 1349 443 6370 71 16 iL 1992 or most recent estimate; b/ GDP per capita. Source: World Bank, IMF Staff Reports and Recent Economic Development Reports. 4 The External Trading Environment. Major Today, Fiji alone attracts twice as many visitors changes have taken place in the composition and as French Polynesia-a favorite destination for direction of trade in the PMCs, as shown in many decades. Chapter 2. Although merchandise exports are somewhat more diversified than a decade ago, the Returns from Natural Resources. One PMCs still remain vulnerable to external shocks. opportunity for the PMCs is to expand natural Thus, the key issues facing the PMCs will be that resource based activities and improve its of managing this vulnerability and exploiting management. In off-shore fisheries, resources are emerging opportunities. Export destinations have still biologically underexploited. The challenge also changed considerably in the 1980s. Japan here is to obtain a fair return from this resource and other Asian countries have emerged as export in the form of rents from foreign fishing vessels destinations for Fiji, Solomon Islands, Tonga, in the territorial waters of the PMCs. At the same Vanuatu and FSM-indicating a shift away from time, to prevent a rapid depletion of natural traditional ties to more market-based resources, there is a need to ensure these arrangements. resources are sustainably developed. Furthermore, the PMCs need to receive adequate The new global trading environment presents economic rents for their natural capital. In the both challenges and opportunities for the PMCs. case of coastal fisheries, there is evidence of The benefits arising from preferential access to over-exploitation of certain fishery stocks, protected markets-sugar to Europe and the US, particularly in the vicinity of urban centers- copra to Europe and textiles to the Pacific-will pointing to the need for better management of this diminish over time. At the same time, the overall sector. boost to global growth and trade afforded by a reduction in trade barriers will open up new As regards forestry, propelled by currently high sources of demand for PMCs' traditional export timber prices, logging operations in some PMCs commodities. Analysts predict that prices of (e.g., Solomon Islands) are until recently, primary commodities may rise in the medium proceeding well beyond sustainable levels. The term. This by itself will have a positive effect on collaboration between foreign investors and export earnings in the PMCs. Likewise an traditional land owners with forest reserves is increase in private capital flows may benefit the difficult to control, but indirect methods, PMCs by expanding the export capacity in sectors particularly market-based ones (export taxes, such as tourism and fisheries. As regards stumpage fees, forest surveillance), are needed to imports, the PMCs are likely to be adversely manage this natural resource. Thus, Chapters 4 affected by rising food, petroleum and and 5 discuss the possibilities for PMCs to link manufactured goods prices. With most countries up with global markets without endangering their already experiencing large trade deficits, high fragile resource base in the longer term. import prices may lead to widening balance of payments deficits, pointing to the need for The discussion will illustrate that: flexible macroeconomic management in the face of changing market conditions. * obtaining a larger share from natural resources is a "win-win strategy"; The above issues will be discussed in Chapter 2, * it helps exteral balance and domestic which explores suggestions for developing a trade revenues; and that policy framework to encourage diversification. Considering the limited degrees of freedom * resources can be exploited in a more imposed by the PMCs' narrow production base, sustainable manner. Chapter 3 will focus on the importance of economic diversification into tourism-a sector in Regional cooperation provides one means of which PMCs have made significant strides in fostering global links through achieving greater recent years, with a growth in visitor arrivals economies of scope and scale. Factors such as the significantly exceeding worldwide growth. geographic remoteness, extreme dispersion, small 5 populations and land areas, have combined to services within the APEC framework; (b) limit the productive base of the PMCs. aviation and ocean transport; 'c) natural resource Furthermore these same factors are responsible management; and (d) co-operation in economic for the diseconomies of scale, leading to high and social services, particularly in higher costs in production, particularly with respect to education and environmental management. unit costs of infrastructure, which further constrain competitiveness and efficient The substantive discussion in this report will production. Thus, integration through regional begin with the story of growth and external trade collaboration, based on combining the manpower, in the PMCs, in Chapter 2. This aims to provide financial and natural resources of the region, has the backdrop for the subsequent discussion on the potential to improve welfare by allowing building upon the PMCs' small but significant economies of scale to be exploited, thereby export diversification, focusing greater attention reducing the vulnerability of the PMCs. The on tourism and negotiating better terms for report argues that cooperation by Pacific Island natural resources. countries does not necessarily create net benefits to PMCs because gains from economies of scale, trade access, growth or market power are easily offset by administrative costs and diversion of effort. The chapter discusses four areas of regional integration: (a) co-operation in trade and 7 2. GROWTH AND TRADE IN THE PACIFIC ISLAND ECONO\IES 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 commodities 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 theirfiscal 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. Growth, Investment and Shocks However, despite low average growth performance over the last decade, there was The PMCs as a group recorded an average substantial improvement in the early 1990s. annual output growth rate of 2.1 percent during The general trend indicates that PMC average the period 1983-93. Real GDP growth per output growth improved from 0.8 percent in capita was much lower and averaged 0.4 the period 1983-88 to 3.8 percent in 1989-93. percent per year in the period 1983-93. If Fiji, Also, there was a remarkable improvement in which accounts for two thirds of the groups' the per capita GDP growth rate which output, is excluded, per capita GDP growth increased from -0. 1 percent annually to about 2 fluctuated around a low negative rate of -0.2 percent. However, if Fiji is excluded, the percent annually in the same time period. increase in growth rate is smaller. For the individual PMCs, growth performance FigureZI: Real GDPGrowth Rates in the PMCs was mixed: (see Figure 2.1) with an (Average 1983-88 & 1989-93) improvement in Fiji, the Solomon Islands, and Vanuatu, stagnation in Tonga, and declines in Kiribati and Western Samoa. we ftnSet However, despite favorable levels of natural Vanou _u and human resources, high levels of investment .arn~tu . and aid, and reasonably prudent economic Tonara 1_ _ management, growth patterns among the PMCs l U 198&88 31 are characterized by low and extremely volatile Sdz .SlanS 01989-93 growth rates. The pattern has been a series of r rn __ growth spurts followed by plunges that effectively cancel each other out. But this is not = surprising given the PMCs' extreme -4 -2 0 2 4 6 vulnerability to external shocks, i.e., both natural disasters and the dependence on Source: World Bank staff estimates. production of a narrow range of commodities which are subject to large price and quantity variations. Thus, economic growth and external trade in the PMCs are very closely related. 8 Table 2.1: Average GDP Growth Rates and Investment Rates, 1983-1993 b/ Fiji 2.4 6.0 18.1 9.2 8.9 FSM a/ 0.8 3.6 - - - Kiribati 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 Vanuatu 2.8 3.0 32.4 20.4 12.0 Western Samoa 1.0 3.3 32.1 5.6 26.5 Average PMCs 2.1 4.4 28.5 11.5 17.0 a! 1988/89-92/93. h/ Data ftr investment ratios are the averages fiom i1980-92 Source: World Bank Reports: IMF Recenit Economic Development Reports I'his pattern of considerable tluctuation around higher than private investment whereas in Fiji a very low base growth rate is found for each and Solomon Islands, the two have been roughly of the six PMCs considered here. As showin in equal. In Vanuatu, on the other hand, until very Table 2. 1, five of the six island countries had recently, private investment has tended to average growth rates less than 3 percent; only dominate. This pattern of public versus private Solomon Islands had a higher growthl rate investment shows an interesting relationship to (3.2 percent) and, even in this case, per capita the pattern of growth: where public investment growth averaged only around 0.4 percent. has tended to dominate, growth has been lower. While the timing of growth spurts and declines For example, Western Samoa and Kiribati have is different across the individual countries, the had the lowest average growth rates among the long-run picture of stagnation is remarkably PMCs, whereas Solomon Islands and Vanuatu si iilar. have had among the highest. Investment. A notable feature of the Pacific Productivity Impact of Public Expenditures. Islands development experience has been the The composition and effectiveness of public coexistence of low growth with high sector expenditures has a direct influence on investment. During 1980-92. the average gross growth. Composition refers to the distribution investment rate was 28.5 percent (see Table between government investment and 2.1), while average growth. as noted above, consumption as well as to the level and was about 2 percent. Indeed, in terms of economic return of government investment investment rates, thie region is similar to the among different sectors. The data show public high-performing East Asian countries, but, consumption in the PMCs to be high. The unlike these countries, investment efficiency average public consumption rate during the appears to be very low. The only exception to period 1980-92 was 27 percent of GDP. this pattern is Fiji, where gross investment Disaggregation by country shows considerable rates declined by half during the 1980s and are variance: Fiji, Tonga and Western Samoa have now around 13 percent; of course, even in Fiji, much lower rates than Vanuatu, the Solomon the average growth rate has been low Islands and Kiribati. With a public consumption rate of over 50 percent of GDP, Kiribati is the Public investment tends to dominate in the slowest growing country in the region, which l'MCs. Average public investment rates are suggests a negative relationship between -.mc arottnd 17 percent while average private consumption and growth. investmient rates are around 11.5 percent. However, individual PMCs vary greatly in the Role of Aid. Aid has been a dominant feature relative importance of public versus private in the PMC economies during the past two investment. In Western Satnoa. Kiribati and decades. On average, official development Toniga, public investment has tended to be much assistance amounted to almost 27 percent of 9 GDP during 1980-92. This average, however, local professionals. It also helps meet conceals much variation. At one extreme, aid shortages in specific areas, a role that could amounted to only around 3.3 percent of GDP theoretically improve productivity. for Fiji while, at the other extreme, it amounted to 56 percent for Kiribati. For the remaining Investment and Growth. The role of four PMCs, the aid ratio averaged between investment in explaining growth was analyzed 21 percent and 27 percent of GDP. Thus, with the aid of econometric methods.' The except for Fiji, aid was a major source of results suggest that further increases in public development financing with a substantial investment of the type and efficiency capacity to influence economic growth. The experienced in the past, may not lead to ability of aid to influence depends on how it is additional growth in the typical PMC economy. provided and how it is used. For most PMCs, This result probably reflects the fact that, in the the great bulk of aid has been in "services" i.e. aggregate, public investment in the PMCs technical assistance, or supplies "in kind" on probably has been in low-return areas such as grant terms, rather than loans. Only in public buildings and much may have been Solomon Islands and Western Samoa does the managed ineffectively and have led to low ratio of loans in total aid exceed 15 percent. returns. The investments of public enterprises Thus, there is little reason to consider the engaged in loss-making commercial activities external debt service burden as a factor have probably also contributed much to this determining growth performance. outcome. However, some components of public investment may have a positive A dominant characteristic of aid in the PMCs is relationship with growth. In particular, the high proportion of technical assistance; investments in such physical and social around 45 percent of all grant aid has been in infrastructure as access roads, electricity the form of technical assistance (see Table 2.2). supply, school buildings and health clinics are It is not clear what relationship this might have likely to have improved the prospects for to growth performance. On the one hand, it is growth. Such a positive relationship has been thought that the bulk of the funds provided as widely observed in other countries. But for technical assistance replaces current public present purposes, there was insufficient data to expenditure such as in schools, hospitals and permit analysis of the different effects of the some ministries and that it accrues as income to specific components of public investment. expatriates rather than as tangible investments to the aid-receiving country. Technical Public consumption is also fount' to have a assistance also takes the form of PMC nationals statistically significant negative impact on being trained abroad in the donor country or of growth in the PMCs. Here again, there is a expatriates providing training and advice in the need to differentiate betwven wastelul current recipient country or implementing investment expenditures on activities that could be programs. Thus, technical assistance does performed more effectively by the public or provide expertise, equipment and training of private sector and vital expenditures on basic services including health and education. Quality of life and the quality of the labor force Table 2.2: Sectoral Allocation of Development needed for sustainable economic growth Assistance (Avg. 1986-92) (%) gtt:- :- : [ 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 93 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. 10 crucially depends on recurrent cost support for complements the private sector rather than health and education. Such expenditures, for supplanting it. Such an environment provides example, will include salaries for health the private sector with a level of confidence and workers and provision of essential a framework to save and invest in the pharmaceuticals or teacher salaries, school productive sectors and thereby contribute to books and teaching materials. Again, the data output and employment. did not permit a disaggregated analysis. Effects of Disasters and Shocks. PMCs' The results of the statistical analysis suggest a economies are subject to three types of shocks: positive relationship between private investment natural disasters like cyclones, volcanic and growth during the 1980s indicating the eruptions and tidal waves; economic shocks often quick yielding nature of private like sharp adverse movements in terms of investment, as noted above. Indeed this is the trade; and other shocks which may be political only positive policy variable supported by the or economic in nature. The PMCs have empirical analysis, and thus confirming the experienced shocks of all three varieties during importance of the role of the private sector in the last decade, and short-term performance economic growth emphasized in previous was influenced by these factors to a great reports. degree (see Figure 2.2). However, for several PMCs, the private Cyclones occur with notable frequency and investment rate has tended to decline in recent ferocity in the PMCs. During the thirteen year years. The decline was sharpest in Fiji and period from 1980 to 1992, major cyclones hit Kiribati and less pronounced in Solomon every one of the islands except Kiribati at least Islands and Western Samoa. No strong trend is once. Fiji, Solomon Islands, Vanuatu and detectable in Tonga and Vanuatu. The pattern Western Samoa were hit at least four times in of general decline in private investment rates is, this period. Often, the damage caused by of course, consistent with the low growth rate cyclones results in negative growth for the observed among the PMCs over the same economy, either in the same year or in the period. next. The most recent example of this is Western Samoa which experienced negative The Role of the State. A broad conclusion growth rates three years in a row during 1990- that can be drawn from the above discussion 92 on account of cyclone activity in the years concerns the respective roles of government 1990 and 1991. Much of the damage is caused and the private sector. Experience of some of to exports as shown by the following examples the East Asian economies and even small island of negative export growth rates in the year of a economies in the Caribbean and Asian regions cyclone: Fiji (1980): -31 percent; Vanuatu have demonstrated how a development (1985): 42 percent; Western Samoa (1990): partnership between the state and the private -25 percent; and Western Samoa (1991): sector can work to produce heartening results. -39 percent. The evidence clearly shows that Typically, in such a partnership the state cyclones have the capacity to inflict great focuses on ensuring macroeconomic stability damage to the productive base of the PMCs and and competitiveness, creating a more this should be taken into account in any encouraging regulatory environment for the assessment of the growth experience of the private sector, providing infrastructure support, PMCs. (both economic and social), and reducing its role in the production and service sectors to create more "space" for the private sector. In other words, the state is market friendly and 4 N_ O M A O m _ o u 8 u o 8 _ o u 8 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ L E 313 m 4 is o 0 M _ 0) M. 0 rX m. 04 X o M v 0 m 8 r0 8 V I 1!~~~- I I i1,__SS I -~~~~~~~ 12 Terms of trade shocks are another major Solomon Islands during 1983-93 resulting from concern for the PMCs. Since most PMCs are changes in the terms of trade and global heavily reliant on a few primary exports, on the demand. The results indicate that terms-of-trade one hand, and on imports of food and fuel, on shocks both positive and negative can be very the other, adverse movements in the prices of large, are difficult to anticipate, and may linger these goods can have a major impact on for several years. Furthermore, the evidence growth. Volatile terms of trade can have an suggests that it has been difficult to coordinate indirect effect on growth also. A pattern of export promotion, import substitution and large swings in export prices generates economic compression policies in response to considerable uncertainty with regard to such shocks. The manner in which the PMCs earnings, which in turn discourages long-term responded to adverse external conditions was investment and keeps growth lower than it mainly through increasing recourse to financing would otherwise have been. from both ODA and private remittances. The data show that, on average, terms of trade Certain policy measures were also pursued to deteriorated slightly for the PMCs during enhance competitiveness. During the 1985- 1980-92 (see Figure 2.3). This is consistent 1993 period, the PMCs responded to declining with the observed pattern of low average terms of trade by allowing a depreciation of the growth. What is more relevant, however, is the real exchange rate and by diversifying exports high volatility that is shown by the data. The (see Figure 2.4). In all of the PMCs, except coefficient of variation for changes in tenus of Tonga and FSM, the real exchange rate trade across all six PMCs is over 5. This declined during 1985-1993, as policymakers compares with coefficients of less than 1 for struggled to restrain imports and enhance the such macroeconomic variables as investment, competitiveness of exports. In Fiji, Tonga and consumption, inflation and aid flows. The only Solomon Islands, there was a conscious shift in variables that have similar volatility in the exports away from low value traditional PMC context are GDP growth rates and export products towards higher value non-traditional growth rates. This pattern suggests a strong products (e.g. garments, squash and tropical link, working through exports, between hardwoods). This shift in export mix led to an external shocks, terms of trade changes and improvement in the terms-of-trade for these overall growth. nations. An analysis was carried out on external shocks The strong links between external conditions to the economies of Fiji, Western Samoa and and growth, and relatively weak links between Fige 23: 1bxt in the Fig" 2.4m Real Effe_di Ex _ m _ 1eN o(f iade, 193-1992 Rates ( )lkBs) 1983-92 60 130 20 110 -20 -40 -60 -100 60 cm tn 10 I> 00 a 0 I t 'i) \O t> 00 ON 0 - 00 0000 0000 00 oo oo o CO 00 00 0X 00 00 00 0 cr a' a' a' a' a' a~ Ca' a \ C' a \ a', a' a a' a' a'a 'a 7\ C' a' Source: World Bank and IMF reports. 13 investment, public spending and economic Pacific Island Trading Conditions output pose special challenges for PMC policymakers. The PMCs remain vulnerable to The PMCs are very open, or trade- dependent external shocks and this vulnerability continues economies. Trade penetration ratios average to have adverse effects on their fiscal balance close to 80 percent of GDP (see Table 2.3) through trade taxes and on the balance of with the import content of most activities also payments via lower export earnings. In most of very high, often in excess of 50 percent. the PMCs, government expenditure is typically Exports have in the past been confined to a between 40 and 70 percent of GDP and well in narrow range of primary commodities and excess of domestic tax and non tax revenue. earnings from these exports usually equal to Fiscal policy is the main instrument of only 5-15 percent of imports. Most imiports are macroeconomic management, owing to for essential commodities wvith machinery, limitations on monetary policy in small open capital goods and petroleumrl imports accounting economies with relatively high levels of for 50 to 60 percent ol total imports. Food external grants and worker remittances. Thus, imports are particularly important in Kiribati, effective use of fiscal policy instruments to Marshall Islands and Vanuatu. Other consumer widen the revenue base and to change the goods account for less than a quarter of import composition of expenditures, can contribute requirements. significantly not only in cushioning the effects of external shocks, but also promoting growth Hence, trade is characterized by large and development to build a more resilient merchandise trade deficits ranging from economic base. Given that domestic economic 5 percent of GDP in the Solomon Islands to as conditions are so closely linked to trade much as 81 percent of GDP in Western Samoa. outcomes, how can the PMCs best exploit Invisible earnings are important in all these global market opportunities? A closer review of countries: tourism in Fiji, Vanuatu, Tonga, and changing trade conditions can help answer that Western Samoa, investment income for question. Kiribati; and remittances from nationals working abroad in the case of Kiribati, Tonga, Vanuatu, and Western Samoa. Services, Table 2.3: Selected Indicators of External Trade, 1993 ::~9rt wZ~d8 4Wd - Cunt- -- Trade. -. ,-et Fiji -653.0 422.0 -14.0 182.0 -3.6 65.3 94.7 71.3 Solomon Islands -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 e/ 96.7 e/ 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. 14 Fi2ure 2.5: Comnosition of PMC ExDorts: 1982-84 & 1991-93 Total Goods & Services: US$748 million Total Goods & Services: US$1372 million Source: World Bank, IMF, and Government publications. therefore, make a positive contribution to the value-added products or manufactures (mainly current account, except in the Solomon Islands, in Fiji). Between 1982-84 and 1991-93, the Marshall Islands and the Federated States of share of agricultural commodities in total Micronesia. Current account deficits are small exports fell from 28 percent to 16 percent (see (4 percent of GDP) in Fiji, reflecting the Figure 2.5). A decade ago, exports of importance of tourism earnings in that country, manufactures were insignificant but by 1991- but are very large (12 to 84 percent of GDP) in 93, manufactured goods accounted for 8 the other PMCs. In these countries, aid and percent of total exports, dominated mainly by worker remittances play an important role in Fiji. The other PMCs still rely heavily on financing import requirements. primary product exports, although considerable diversification has taken place within their In the recent past, trends in Pacific Island trade export mix. These changes in the export mix indicate, that: illustrate the PMCs' ability to respond to unfavorable primary commodity prices by - there have been major changes both in diversifying into higher value-added products composition and direction of exports; and manufactures and finding "niche markets", . the composition of imports has also despite a formidable set of constraints typical of c thangedcomposond o imors asalo small island states. However, as noted in the changed; and that last regional economic report, niche-type * vulnerability to external factors will activities are known to shift frequently, and continue to remain. technological progress or changes in consumer Trends in Exports. The structure of trade has preferences could lead to a rapid disappearance beendshanging in Exports.The lastructre. oa e hof niche markets. Thus, reliance on such been changing in the last decade. While industries as long-term sources of employment primary commodities are still very important, and growth has to be treated with caution. growth over recent years has been strong in Fi2ure 2.6 Comwosition of PMC ImDorts: 1982-84 & 1991-93 i,eeS i Food : 1982-84 1991-93 senn ces . O5::: g ther 2 0i: 30° 2:; : t: g t: -;13%:;: laverages 0||7: i ! Food ti;00Di~~~~~~~~~~~~~~~~~~~~~ e-verages & ; 1° Tobacco ~~Aner~~l Fuels, MSOhIflbIy ~~~~~Mineral Fuels, Ots & Fats Menufsotures O~~jy~lB Oils & Fats Total Goods & Services: US$939 million Total Goods & Services: US$1790 million Source: World Bank, IMF, and Government publications. 15 Table 2.4: Destination of Export Trade in Percentage, 1982-84 and 1991-93 (1982-84) Fiji 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-' 18 n.a. n.a. 78 n.a. 4 (28) n.a. n.a. (48) n.a. (24) Kiribati ' 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. Even within the traditional product categories, from "administrative" and "traditional" ties the PMCs have demonstrated an ability to to more market-based arrangements. The nurture successful new export industries. This Solomon Islands is the only PMC includes garments in Fiji; squash in Tonga; increasing trade with Europe in non- logging in the Solomon Islands, veal in traditional products (based on one Vanuatu, seaweed in Kiribati, and sashimi in successful joint venture with Japan to the Federated States of Micronesia. supply canned Tuna to U.K); and .. . ~~~. Intra-regional trade has diminished in Trends in Imports. Composition of imports g importance, except for Fiji, where its has also changed over the last decade with the significanceh ncre a s. shares of machinery, and beverages and signficance has mcreased. tobacco, and of services increasing Vulnerability. Despite attempts to diversify significantly, while the share of food, the export mix and to build links nto new chemicals, mineral fuels, oils and fats declined the eprtmi andntoabild linkshocne for the PMCs as a group (see Figure 2.6). source markets, vulnerability to external shocks remains very high. Hence minor changes in the Direction of Trade. The direction of exports terms of trade can have major effects on has~~~ chne siiiiatyi.h atdcd external balances and growth. Indicators of has changed significantly in the last decade vleaiiyicue (see Table 2.4). For example: vulnerability include: * Japan and other Asian countries have . large merchandise trade deficits; emerged as major export destinations for * large current account deficits, except in Fiji, Solomon Islands, Tonga, Vanuatu and Fiji; Federated States of Micronesia; * high trade penetration ratios, ranging from * In terms of merchandise trade flows, there 50 to 100 percent of GDP in 1991-93 (see is considerably less reliance on Europe, as Table 2.3); Pacific Island country trade shifts away 16 high export concentration ratios (see Table performance in the PMCs owing to their 2.5) where the average three-product dependence on a few commodities such as export concentration ratio for the PMCs is sugar, coconut, cocoa, fish products, garments, 80 percent, compared to 64 percent for and service sectors including tourism. Benefits Sub-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 medium term. Faster growth means more international trade-projected to grow at Table 2.5- Export Concentration and Trade Taxes arndi6 p rcen proyear. T o othe ab * <> . . - ~~~~~~~around 6 percent per year, Two other favorable Trade;T~z~ Xefactors are the outlook for low real interest rates and inflation as well as the resurgence of higher private capital inflows. More importantly, the Uruguay Round Agreement is Fiji 77 70 26 30 expected to accelerate world trade and thereby Kiribati 99 89 22 24 help expand developing country production and Marshall 98 97 25 27 exports. Islands Solomon 71 76 50 65 The global trading environment is chaniging in Islands 72 54 52 several ways that will be of importance to the Vanuatu 93 725 6 52 PMCs. Some likely effects of changes in the W Samoa 64 67 44 58 global economic environment are: FSM 93 94 9 7 Sub Sah 79 64 - - with global trade liberilization. marked by Australia - 26 5 the conclusion of the