Journal Issue

Northern Pacific islands look for new growth strategies in a globalizing world

International Monetary Fund. External Relations Dept.
Published Date:
June 2004
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The past decade was a disappointing one for Pacific island countries. As globalization intensified, the region’s population growth outpaced economic growth and the private sector created few jobs. Clearly, “business as usual” offered no prescription for the future. In early April, senior government officials and private sector representatives from Kiribati, the Republic of the Marshall Islands, the Federated States of Micronesia, the Republic of Palau, and Tuvalu joined researchers and officials of multilateral and bilateral donors for a high-level seminar—”Seizing Opportunities for Growth in a Globalizing World”—in Palau. The seminar—co-hosted by the IMF, the Asian Development Bank, the World Bank, and the Japan International Cooperation Agency—explored the challenges facing these island economies as they seek their own path to sustainable growth and development.

Weak growth, rapidly rising populations, growing fiscal pressures, and increasing demands for investments in infrastructure, education, and health care services continue to pose major challenges for many Pacific island economies. Add to this a limited ability to capture the opportunities from new technologies and globalization, and significant constraints in the areas of policy and institutions—especially weaknesses of economic and social institutions—and the picture for the region is a gloomy one.

One of the major challenges for the northern Pacific islands, government officials and donor representatives agreed, will be to achieve sustainable growth with diminishing resources from external assistance. In fact, as participants acknowledged, the easier availability of external assistance had translated into a lack of reforms in domestic taxation systems and high, but not necessarily efficient, public expenditure. The northern Pacific island countries have some of the highest wage bills in the region, and human development indicators tend to indicate low levels of efficiency despite very high per capita public spending on health and education.

Acknowledging these issues, Luc Leruth (Pacific Financial Technical Assistance Center) drew parallels between dependency on external assistance and on oil. Wealth of this type, he noted, often encourages complacency and provides disincentives to sound management. In his view, the region needs to take steps to strengthen its institutions, improve governance, and increase the efficiency with which resources are used. While recognizing the constraints on what can be achieved in the short run, he suggested a policy agenda that highlighted the right fiscal priorities and developed realistic sequencing.

Fostering private sector development

The area’s private sector has not yet been able to take the lead in boosting economic growth—one reason why growth in the Pacific is falling behind other developing regions. High wage rates, high communications and transportation costs, difficulties in gaining long-term access to land for investment and commercial use, and small domestic markets remain major impediments to private sector development in an area where there are few industries other than agriculture, fisheries, and tourism. A smaller and more efficient public sector is necessary for private sector development, but several participants suggested that greater use of public-private partnerships could also play a vital role.

One innovative approach was offered by Hiroshi Tsukamoto (Japan External Trade Organization), who touted Japan’s “one-village, one-product” initiative, which sought to encourage local people to be more creative and take leadership in commercial activities. The program, which encourages local participation in identifying and developing niche products, elicited a strong response from many participants, who suggested the possibility of a “one-island, one-product” initiative for the Pacific.

As Manjula Luthria (World Bank) explained, however, economic growth will require job creation. And the path to more jobs, she said, lies in promoting education and boosting private sector growth. Allowing labor access to more developed markets in the region could both increase job opportunities and stimulate overseas remittances, which could, in turn, stimulate private sector development in the very small island states.

Financing for the private sector

Some cautioned, however, that private enterprises are looking for handouts, when they—and financial institutions—should be investing in globally competitive enterprises. For many participants, the principal question was how to strengthen financing for the private sector. While there are no easy practical solutions, all agreed that resolving the land tenure issue—a common constraint in many Pacific islands—was a priority. Allowing the use of land as collateral for loans would help to reorient commercial bank lending toward the private commercial sector. In addition, Hiroto Arakawa (Japan Bank for International Cooperation) highlighted several other financing options, notably two-step loans (onlending to final borrowers through development finance institutions within the recipient country) and micro—finance. The major challenge for these small island economies, however, remains how to develop projects of a scale large enough to be eligible for such financing.

Rapid population growth and urbanization, and increasing dependency on imported goods, have also created a problem more typical of highly developed economies—that is, what to do with a rising volume of solid wastes. Coupled with limited land space, inefficient waste management is threatening environmental sustainability. Shiro Amno (Japan Interna-tional Cooperation Agency) argued that the key to effective waste management will lie in government-provided resources, appropriate technology, capacity building, and action by the community.

Way forward

Although the Pacific island countries may differ from other developing countries—in terms of their small land masses, geographical isolation, and limited natural resources and institutional capacity—a “one size fits all” development strategy is inappropriate for the region. However, participants agreed that it was equally wrong to argue that “no size fits me.” Each country should be able to formulate a strategy for sustainable growth and development that takes account of its unique circumstances.

The discussions clearly yielded a sense that greater participation by governments, businesses, and other stakeholders in designing and implementing development projects was indispensable. And donors could play a greater role in fostering closer public-private partnerships and could lend valuable assistance in helping Pacific island economies convince constituents of the need for structural reforms.

The seminar also featured a genuine debate on the priorities for donor assistance. Donors voiced concern that past projects had performed less than satisfactorily, mainly because of a lack of commitment from recipient countries. To address these concerns, the Asian Development Bank’s proposed strategy for the region, Stephen J. Pollard noted, will stress participatory approaches and technical assistance designed to improve capacity. Japan’s bilateral assistance, its officials explained, will continue to focus on environmental protection, waste management, and capacity building. And the United States indicated that its economic assistance will give greater emphasis to improved accountability and more detailed monitoring of investments in health care, education, public infrastructure, private sector development, capacity building, and environmental protection. For their part, Pacific island participants placed great value on greater project financing to improve physical infrastructure.

There are no easy solutions, Reverend Francis X. Hezel (Micronesian Seminar) noted in his conclusion. But the seminar’s proceedings did convey broad agreement that development processes in the Pacific will require more community ownership and better collaboration among donors in fostering capacity building. Clearly, too, greater integration with the globalizing world would be a driving force for economic growth in the Pacific region.

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