Information about Asia and the Pacific Asia y el Pacífico
Chapter

Overview of Regional Economic Performance and Prospects

Author(s):
Christopher Browne
Published Date:
August 2006
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Information about Asia and the Pacific Asia y el Pacífico
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Christopher Browne

The island countries of the Pacific region face many challenges in developing their economies and raising living standards over the medium term.1 Most of these countries enjoyed generally favorable domestic and external conditions at the time of their independence in the 1970s and 1980s, but more recently have faced an increasing number of mac-roeconomic hurdles. For all countries in the region, these include slower economic growth, increased poverty, heightened governance concerns, lack of private sector activity, limited regional integration (including of labor markets), and questions about aid effectiveness. In several parts of the region, there are additional concerns about a lack of fiscal discipline and potential political uncertainties.

There have been some notable achievements since 2003. Solomon Islands continues to achieve good progress in building on the positive impact of the intervention in 2003 by the Regional Assistance Mission to the Solomon Islands (RAMSI). Papua New Guinea has raised official external reserves to historically high levels through macro stability and higher oil and mineral export prices, and the government appears likely to complete its full term in 2007. Fiji is enjoying strong tourism growth, which helps to offset the loss of textile markets and the potential loss of sugar markets in 2007. Samoa, Tonga, and Vanuatu are receiving more reliable airline service through a partnership with an Australian airline. Marshall Islands and Micronesia are successfully implementing the renewed Compact of Free Association with the United States (Compact II), which runs through 2023.

Perhaps the most positive sign was the final approval by Pacific Forum leaders at their meeting in Papua New Guinea in October 2005 of the Pacific Plan, an ambitious strategy to strengthen regional cooperation and integration over the next 10 years (the Plan is outlined in Chapter 4). It was prepared by the Pacific Islands Forum Secretariat, with the strong endorsement of Australia and New Zealand, and addresses most priority needs, including the need to promote the private sector, strengthen public enterprise reforms, address corruption and law-and-order problems, and encourage integration and trade liberalization. The overall emphasis is on the importance of structural reforms, which is welcome. Of course, the key to the Plan’s success will be the pace of its implementation, which depends on the support of Pacific island countries, civil society and private sector organizations, development partners, and other stakeholders for regional approaches to addressing the region’s existing capacity constraints and lack of economic opportunities. Regionalism under the Plan does not imply any limitations on national sovereignty. The main objective is to support and complement national programs, not to replace them.

There will be close monitoring and evaluation by the Pacific Islands Forum Secretariat of implementation of the Plan’s initiatives. Detailed indicators have been incorporated into the Plan to measure progress during the first three years. The initiatives proposed for this initial period relate to encouraging development of National Sustainable Development Strategies; promoting good governance through transparent, accountable, and equitable management of all resources, assisted by the establishment of anticorruption institutions; strengthening infrastructure, especially in telecommunications and transport; enhancing regional integration in trade and labor markets; and increasing security through safer social and political conditions.

While these initiatives are encouraging, the challenges remain formidable, especially to achieving the goal of faster, sustainable economic development. The region has clearly experienced relatively low growth performance, although it is also evident that inflation has been less serious than in other developing country regions (Table 1.1). Some worrying fiscal deficits have been brought under control, most notably in Papua New Guinea and Solomon Islands, but insufficient public expenditure control, transparency, and accountability remain of concern in many countries. On the external front, the countries of the region have largely avoided balance of payments and debt problems, in part with the help of generous aid receipts. Exchange rate policies have been generally appropriate, with basket pegs or dollarization, except for the floating regime in Papua New Guinea.

Nevertheless, current conditions fall far short of what is needed to secure the medium-term growth objective. In particular, the authorities of all countries must make a much greater commitment to accelerate structural reforms in order to improve public sector efficiency, create private sector employment opportunities, and alleviate poverty. Samoa is the most advanced in the reform process, which has been under way there for the past decade, and the benefits are now increasingly evident in higher investment, including foreign direct investment. Fiji is also attracting considerable foreign investment in the tourism sector. However, in most other parts of the region, there has been minimal interest in investment from abroad because of highly cumbersome and restrictive administrative regulations.

Table 1.1.Selected Indicators for Pacific Island Countries1(Millions of U.S. dollars)
1993199419951996199719981999200020012002200320042005
Real GDP (percent change)
Fiji2.65.12.54.7-2.31.29.2-2.82.74.33.04.12.1
Kiribati1.58.45.23.81.912.69.51.61.9-4.22.2-1.40.3
Marshall Islands2.53.93.8-13.9-11.5-1.80.60.95.54.01.80.43.5
Micronesia6.72.01.6-5.1-6.1-0.7-3.19.11.74.2-3.51.3
Palau-9.12.610.010.54.32.2-3.40.31.3-3.5-1.34.95.5
Papua New Guinea18.25.9-3.37.7-3.9-3.87.6-1.2-0.1-0.22.92.93.0
Samoa5.36.46.67.30.81.12.16.17.14.41.83.54.0
Solomon Islands4.09.28.21.6-1.41.8-0.5-14.3-9.0-2.45.65.54.4
Tonga3.74.34.60.3-3.03.62.35.61.82.12.91.52.5
Vanuatu4.51.37.42.58.64.3-3.22.7-2.7-4.62.44.03.0
Consumer prices (percent change)
Fiji5.20.62.24.93.45.92.01.14.30.84.22.83.7
Kiribati (end of period)6.14.04.1-1.52.24.70.41.07.31.11.6-0.60.5
Marshall Islands7.64.96.810.55.82.91.90.91.8-0.4-0.92.03.5
Micronesia3.02.62.82.82.71.61.92.01.3-0.1-0.22.03.5
Palau3.02.62.82.92.31.62.23.00.8-1.2-0.65.82.7
Papua New Guinea5.02.917.311.63.913.614.915.69.311.814.72.12.8
Samoa (end of period)1.712.1-2.95.46.94.1-0.62.71.19.81.617.2-2.9
Solomon Islands9.213.19.811.88.012.38.06.97.69.410.16.96.6
Tonga1.83.9-0.52.72.03.03.95.36.910.411.111.89.9
Vanuatu3.62.32.20.92.83.32.22.53.72.03.01.41.0
Central government balances (in percent of GDP)2
Fiji—4.7-2.6-1.7-2.8-4.0^.0-1.2-3.2-6.5-7.0-6.0-3.3-3.8
Kiribati0.4-1.5-10.2-35.96.418.7-5.8-2.0-17.0-0.6-31.9-42.8-22.6
Marshall Islands-21.318.59.115.510.69.28.2-4.011.0-0.4-2.1
Micronesia-4.6-0.3-1.50.20.4-7.1-8.2-6.7-8.96.87.9-4.8-3.2
Palau-0.3-0.5105.4-10.3-16.8-0.1-18.0-15.6-20.3-28.3-2.4-6.9-3.9
Papua New Guinea-6.00.1-1.3-3.4-3.6-0.4-4.5-1.3-3.9-5.3-1.61.11.9
Samoa-12.8-7.8-2.90.91.02.00.3-0.7-2.3-2.1-0.6-0.9-0.6
Solomon Islands-4.8-3.9-4.31.0-3.3-7.8-12.7-11.0-1.98.3-0.5
Tonga-3.60.9-4.8-2.3-0.2-0.3-1.5-1.5-3.11.30.1
Vanuatu-3.8-1.6-2.8-1.9-0.5-6.7-0.6-7.0-3.7-4.1-1.70.91.0
Central government revenue and grants (in percent of GDP)2
Fiji24.524.924.423.924.624.525.124.222.124.625.125.825.8
Kiribati99.190.893.675.7125.6135.5105.898.9118.4138.7139.2106.2123.2
Marshall Islands73.980.574.674.767.675.270.164.265.056.258.1
Micronesia82.581.581.980.270.976.676.668.564.271.871.853.751.0
Palau63.760.8178.859.449.659.141.852.643.142.454.054.353.6
Papua New Guinea27.427.628.128.431.629.228.831.229.727.828.231.128.1
Samoa44.442.247.646.839.536.140.034.431.933.832.832.540.0
Solomon Islands35.634.728.929.027.022.123.518.837.648.948.5
Tonga43.831.731.528.424.626.427.529.927.327.526.0
Vanuatu23.124.927.824.823.121.825.822.120.921.020.121.922.2
Central government expenditure and net lending (in percent of GDP)2
Fiji29.227.526.126.728.628.526.327.428.631.631.129.129.6
Kiribati98.892.3103.8111.7119.2116.7111.6100.9135.4139.3171.0149.0145.8
Marshall Islands95.262.065.559.257.166.061.968.254.056.660.2
Micronesia87.081.883.380.070.583.884.875.273.165.063.858.654.2
Palau60.161.770.772.168.855.963.072.864.666.362.661.754.2
Papua New Guinea36.330.627.726.732.230.933.432.333.231.829.429.626.2
Samoa57.150.052.545.938.334.139.635.134.335.933.433.440.6
Solomon Islands40.438.633.228.030.329.936.229.839.540.649.0
Tonga47.430.736.330.724.826.829.031.330.426.225.8
Vanuatu26.826.530.626.723.728.426.429.024.625.021.821.021.2
Current account balance (in percent of GDP)
Fiji-1.0-1.10.62.31.81.5-7.1-7.4-3.5-1.7-2.0-5.0-4.5
Kiribati12.53.53.1-12.122.035.212.413.12.0-1.8-19.3-16.3-9.4
Marshall Islands9.43.3-21.6-8.3-0.73.3-7.94.78.88.616.34.40.5
Micronesia-1.90.211.38.2-10.5-3.52.40.3-5.47.30.9-10.6-12.1
Palau11.210.774.48.612.420.6-54.5-30.6-9.4-11.09.612.615.1
Papua New Guinea12.611.119.25.5-5.40.62.88.76.5-1.04.42.14.0
Samoa-19.41.94.85.0-3.69.52.01.00.1-0.62.94.42.2
Solomon Islands-2.60.47.16.9-5.6-1.63.1-10.6-12.8-7.21.312.5-10.8
Tonga3.0-11.2-11.0-5.9-0.9-10.5-0.6-5.9-9.24.9-3.04.0-2.2
Vanuatu-1.1-3.1-2.0-2.1-0.82.7-5.22.02.0-9.0-10.2-9.5-7.1
Gross reserves (in months of imports)
Fiji3.32.93.74.03.84.84.24.64.33.53.13.33.5
Papua New Guinea1.60.93.15.43.32.02.13.25.74.55.65.85.1
Samoa4.55.44.65.45.95.46.34.53.64.23.43.53.9
Solomon Islands1.10.80.81.61.93.64.63.12.82.13.65.74.7
Tonga6.44.33.13.43.71.73.72.41.82.82.04.84.0
Vanuatu3.93.63.33.53.15.24.34.34.84.9
External debt (in percent of GDP)
Fiji17.815.513.512.111.513.614.014.713.613.712.210.911.1
Kiribati19.520.818.318.018.015.315.516.320.016.416.017.519.0
Marshall Islands155.1170.9144.5134.9135.7130.2101.893.377.070.671.276.470.6
Micronesia71.863.856.550.350.047.842.830.726.325.625.225.824.8
Palau16.811.98.14.71.217.216.216.615.914.013.2
Papua New Guinea27.226.433.027.026.635.642.042.848.751.543.834.327.7
Samoa89.793.389.978.065.662.666.163.061.462.059.651.548.1
Solomon Islands32.630.128.929.030.037.739.342.049.067.070.662.061.4
Tonga35.934.038.835.241.234.539.139.040.446.343.940.935.6
Vanuatu21.621.721.218.917.320.822.228.229.728.226.124.623.4
Exchange rates (national currency per US$, period average)3
Fiji (FS)1.541.461.411.401.441.991.972.122.282.181.891.731.68
Kiribati ($A)1.471.371.351.281.341.591.551.721.931.841.531.361.30
Marshall Islands (US$)1.001.001.001.001.001.001.001.001.001.001.001.001.00
Micronesia (US$)1.001.001.001.001.001.001.001.001.001.001.001.001.00
Palau (US$)1.001.001.001.001.001.001.001.001.001.001.001.001.00
Papua New Guinea (K)0.981.011.281.321.442.062.542.763.373.883.543.223.10
Samoa (SAT)2.572.532.472.462.562.773.023.113.443.473.192.862.70
Solomon Islands (SIS)3.193.293.413.574.754.824.845.105.567.467.497.517.52
Tonga (T$)1.371.371.281.261.231.351.581.641.972.182.192.041.94
Vanuatu (VT)121.58116.41112.11111.72115.87127.52129.08137.6414531139.10122.20111.90109.05
Sources: National authorities; IMF, International Financial Statistics; and IMF staff estimates and projections.

Marshall Islands, Federated States of Micronesia, and Palau—fiscal year ending September 30; Samoa and Tonga—fiscal year ending June 30; fiscal year data are shown in the ending calendar year.

Micronesia: consolidated government. Palau: balance figures do not include errors and omissions.

Figures in 2005 are as of end-October.

Sources: National authorities; IMF, International Financial Statistics; and IMF staff estimates and projections.

Marshall Islands, Federated States of Micronesia, and Palau—fiscal year ending September 30; Samoa and Tonga—fiscal year ending June 30; fiscal year data are shown in the ending calendar year.

Micronesia: consolidated government. Palau: balance figures do not include errors and omissions.

Figures in 2005 are as of end-October.

The regional approach of the Pacific Plan is appropriate for assisting the Pacific island countries in overcoming many of these challenges, because these countries continue to share many economic characteristics. They are all small in terms of GDP and population (see Table 1.2). They have narrow productive sectors based on primary commodities, with little diversification into manufacturing. Fiscal pressures limit the effectiveness of monetary policy. They have few export products, high import penetration shares, and are vulnerable to terms of trade fluctuations. They are also subject to frequent natural disasters, especially typhoons. Most of the countries have nowprepared their own medium-term development strategies, which incorporate measures to promote fiscal consolidation and lower public debt burdens, to introduce more modern monetary policy frameworks, to ensure sound financial systems, and to create more favorable business climates. However, there is an urgent need to incorporate into these national plans more specific and integrated policy advice, including to ensure their consistency with medium-term fiscal strategies. The regional approach can help some of these countries overcome any lack of technical skills and institutional capacity to formulate and implement appropriate economic and financial policies.

The remaining chapters in this book examine in more detail some of the regional and country-specific challenges to achieving faster and sustainable economic growth. The book comprises two parts. Part I covers a number of pressing regional issues. Chapter 2 reviews the past dominance of the public sector in the countries of the region and the revenue and public expenditure management reforms that will be required to address the resultant fiscal pressures. Chapter 3 assesses the limited role of the private sector in the region and outlines a number of measures to reduce impediments to developing modern market economies and thereby achieving faster rates of growth. As noted, Chapter 4 examines the Pacific Plan, particularly the initiatives to promote growth, sustainable development, good governance, and security, as well as the mechanisms for monitoring and evaluating implementation of the Plan. Chapter 5 outlines the economic issues related to migration and remittances from migrant workers, which in some countries represent a stable source of foreign exchange and play an important role in reducing the economic vulnerability of individuals. Chapter 6 compares the Pacific island economies with those of the developing island countries in the Eastern Caribbean Currency Union (ECCU), drawing lessons from the more successful development policies and experiences of the latter. Chapter 7 examines possible alternatives for exchange rate arrangements in the Pacific island countries, taking into account that their small size and open economies leave them vulnerable to external shocks. Chapters 8-17, which comprise Part II of the book, examine the specific economic and policy challenges facing the 10 IMF member countries in the region.

Table 1.2.Pacific Island Countries: Basic Economic and Social Characteristics
Population

(Thousands)
Area

(In thousands

of square

kilometers)
Year of

Independence
Year of Fund

Membership
Institutional

Inheritance
Main Regional

Link
Fiji84018.319701971United KingdomAustralia
Kiribati900.719711986United KingdomAustralia
Marshall Islands580.219861992United StatesUnited States
Micronesia1080.719861993United StatesUnited States
Palau200.519941997United StatesUnited States
Papua New Guinea5,600461.719751975AustraliaAustralia
Samoa1812.819621971New ZealandNew Zealand
Solomon Islands47128.019781978United KingdomAustralia
Tonga1010.719701985United KingdomNew Zealand
Vanuatu21512.219801981United Kingdom; FranceAustralia
Sources: World Bank, 2005 World Development Indicators; United Nations Development Programme; and World Health Organization.
GDP

(US$ millions)
GDP

per

Capita

(US$)
IMF

Quota

(SDR

millions)
Consultation

Cycle

(Months)
Main Current

Receipts

(Remittances

from private sector)
Exchange

Rate

Regime
Fiji2,6242,19570.324Sugar textiles, tourismBasket peg
Kiribati667515.624Fish licenses,Australian
seamen remittancesdollar
Marshall Islands1442,5593.524Remittances from

United States
U.S. dollar
Micronesia2392,21 15.124Remittances from

United States
U.S. dollar
Palau1346,4823.124TourismU.S. dollar
Papua New Guinea4,00071 4131.612Oil, copper, gold,

coffee, cocoa
Float
Samoa3161,67211.624Remittances from

New Zealand
Basket peg
Solomon Islands25855010.412Timber, palm oil, fishBasket peg
Tonga1651,6296.912Remittances from

New Zealand
Basket peg
Vanuatu31 71,49317.024TourismBasket peg
Sources: World Bank, 2005 World Development Indicators; United Nations Development Programme; and World Health Organization.
Aid per

Capita (U.S.

dollars)
Life

Expectancy

(Years)
Infant

Mortality

(Per 1,000

live births)
Population

Growth

(Percent

per annum)
Health

Spending

(Percent

of GDP)
Education

Spending

(Percent

of GDP)
Fiji6170160.94.25.6
Kiribati19163492.18.04.9
Marshall Islands99165533.510.616.4
Micronesia92369190.66.57.0
Palau1,29570230.79.111.0
Papua New Guinea4057692.14.32.3
Samoa18670190.86.24.8
Solomon Islands13270192.64.83.5
Tonga27071150.46.95.0
Vanuatu15469312.03.811.0
Sources: World Bank, 2005 World Development Indicators; United Nations Development Programme; and World Health Organization.
Sources: World Bank, 2005 World Development Indicators; United Nations Development Programme; and World Health Organization.
1The 10 Pacific island IMF member countries are Fiji, Kiribati, Republic of the Marshall Islands (RMI), Federated States of Micronesia (FSM), Palau, Papua New Guinea (PNG), Samoa, Solomon Islands (SI), Tonga, and Vanuatu.

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