The Pacific Blue Economy: Towards Economies of Scale
(The author acknowledges the support of the Fiji National University and the Office of the Vice Chancellor in expediting this research.)
One
of the challenges of the Pacific is that 90 percent of the total Pacific
population live in only 3 nations, namely, PNG, Fiji and the Solomon Islands. 6
nations have populations of less than 20,000 and 6 have populations that are
less than 300,000. This raises the point that because of their smallness it
makes sense for many Pacific nations to develop economies of scale and form an
Economic union.
1
- Economic Developments in Pacific Island Countries
Summary
of key economic points and strategies
The
Pacific region benefited from economic growth in Asian nations like China,
South Korea, Japan and India. It is important that while Pacific nations nurture
trade ties to traditional partners like Australia and New Zealand that they also
strengthen links with Asia. S&P Global Inc notes that economies in the Asia-Pacific
region will dominate global growth in 2023 of approximately 3.5%. This growth
is supported by regional free-trade agreements, efficient supply chains and
competitive costs. The Asia region produces 35% of the world’s GDP (Jihye Lee, 2022).
Pacific
2023 Economic Forecast
Asian
Development Bank https://www.adb.org/countries/fiji/economy
Pacific
economies can anticipate a return to growth from 2023 although fiscal balances,
debt sustainability, and inflation needs to be carefully dealt with. Pacific
nations need to strike a balance between supporting more jobs and reducing
future public debt risks. All Pacific countries are forecast to grow through
2023, with some like Palau seeing bigger growth of 18 per cent in GDP due to a
tourism boom. The closure of borders from 2020 - 22 during the pandemic has
eased after causing havoc to the tourism-dependent economies of Fiji, Vanuatu,
Samoa, Tonga, and Palau. Inflation and global economic uncertainty caused by
the Russia – Ukraine conflict will need to be closely monitored as costs of
shipping and imports have risen to their highest levels in over 20 years.
Although prices have come down slowly in 2023, the tensions are still being
felt by the Pacific. Inflationary pressures will start coming down in the first
half of 2023, with consumer prices projected to fall in every Pacific Island
country except Samoa, where inflation may reach as high as 12 per cent in the
second half of 2023, before falling in 2024 (World Bank, 2023).
No
longer the hole in the doughnut!
It
is becoming clearer that the Pacific is no longer the 'hole of the Asia-Pacific
doughnut', and the biggest economies want to engage substantively. China and a
group of Pacific nations are working towards formal trade agreements according
to an official from the Pacific Islands Forum. Feasibility studies have been
carried out and forum members "are interested in getting more preferential
market access for Pacific goods". China is world renowned for its expertise
in the digital economy area. Some of the biggest Chinese global digital companies
can potentially share their capacity, in terms of business-to-business
exchanges with Pacific nations. The ten Pacific nations that recognise the one
China policy can look at a free-trade agreement (FTA) that slashes import
tariffs (Ralph Jennings, 2023).
While
a few Pacific nations prefer closer ties to Australia and the United States, due
to historical alliances, there is a growing perception that economic
development in the islands should transcend traditional alliances. This
thinking is based on the notion that
economic development and trade should be based on shared interests
rather than shared Cold War ideologies. It is strange for some Pacific leaders
to say that they will be aligned to Western powers because they have similar
ideologies. This seems to be a misnomer
since Pacific nations represent the colonised and these metropolitan nations
represent the colonisers. All Pacific nations should engage with the global
community of nations on shared interests rather than on the basis of shared
Faith as Christians or shared interest in entertainment media, for example..
Pacific
nations want China to build infrastructure for them, and China wants fishing
and basing rights. The Chinese Ministry of Commerce indicates that China is
working on - or has completed - joint free-trade feasibility studies with Fiji
and Papua New Guinea. A China-centred trade pact would add to the Pacific
Agreement on Closer Economic Relations Plus (PACER+) that was signed by 10
forum members in 2017 and ratified by three. PACER+ covers goods, services and
investment linked to the region's wealthier, larger nations, Australia and New
Zealand. The European Union has separate economic "partnership"
agreements on trade and development with Papua New Guinea and Fiji. Samoa and
the Solomon Islands intend to join these deals, according to the Pacific
Islands Forum website. (Ralph
Jennings (2023)
The
Pacific Islands News Association published an article noting that China’s
economic transformation to become an active leader in digital innovation with
rapid growth in artificial intelligence and e-commerce is impressive. Mona
Mato, the trade commissioner of “Pacific Trade Invest China” whose organisation
promotes trade and investment opportunities between Pacific nations and China,
said that China has provided a significant step for Pacific Island countries’
export growth. This is in the area of value-added products produced to meet the
growing demand in China. According to the Ministry of Commerce, China’s total
trade volume with Pacific Island countries with which it has diplomatic ties
was US$5.3 billion since 2021, and its accumulated investment has reached
US$2.72 billion since November 2022. (PINA, 2022).
Challenges
to economic growth
The
Pacific Region include some of the world’s smallest and most remote states in
the world. Though they differ in population size, geographical spread and development
progress, they share challenges and vulnerabilities: high exposure to natural
disasters, climate change, and global economic shocks, as well as small or
unstable domestic revenues and limited borrowing opportunities. These prevent
them from investing in resilient development and seriously hinder their growth
prospects. These nations are highly vulnerable developing states that suffer
from low economic diversification, often characterised by high dependence on
tourism and remittances, volatility due to fluctuations in private income flows
and the prices of raw materials, and debt stress situations. Globally small
island states make up two thirds of the countries that suffer the highest
relative losses – between 1% and 9% of their GDP each year – from natural
disasters and are acutely vulnerable to the impacts of climate change.(Oecd.org, 2023)
While small nations have been able to contain
the health consequences of the COVID-19 pandemic, they are among the worst hit
developing economies in economic and fiscal terms: in 2020 their GDP dropped by
6.9% against 4.8% in all other developing countries. This is mainly due to
global contractions in two ocean economy sectors that are key to many small
nations: coastal tourism and fisheries. The crisis is worsened by their
over-reliance on one or two economic sectors, high fiscal deficits and public
debt levels, and significant challenges to the mobilisation of both public and
private finance (Oecd.org, 2023)
Small
nations vast ocean resources provide some of the most tangible opportunities
for a more diverse set of economic activities. However, they will have to deal
effectively with the debt situation to preserve fiscal space for investments
for a sustainable and resilient recovery. Small nations need to be supported to
develop new ocean economy opportunities that can sustainably foster economic
diversification. They also need to explore international cost-sharing
mechanisms for the conservation and sustainable use of ocean assets and schemes
to enhance expertise and risk assessment for emerging ocean-related economic activities.
(Oecd.org, 2021)
Small
nations can develop sustainable economies by (i) addressing longstanding debt issues; (ii)
embedding sustainability requirements and standards in concessional lending and
recovery packages; and (iii) seizing new, sustainable opportunities, including
through new long-term development co-operation schemes, such as international
cost-sharing mechanisms for the conservation and sustainable use of ocean
assets and schemes to enhance expertise and risk assessment for emerging
ocean-related economic activities (Oecd, 2021).
The Pacific islands: An overview
The Pacific Islands comprise of 10 million
people and a combined GDP of about US$33.77 billion. Pacific nations economies
were very seriously affected by the COVID-19 pandemic. Their economies
contracted by 5.4% between 2019 and 2021. Nations that were dependent on
tourism revenues like Fiji, Vanuatu, Samoa and Palau suffered huge two-digit
losses due to the pandemic. Other Pacific nations that did not have tourism-based
economies also suffered in terms of contracted economies. The positive
International Monetary Fund projection showed that Pacific nations will grow at
5.3% over 2022 -2023. However growth will only happen if Pacific nations are
able to manage post COVID-19 risks. (Stephen Howes & Huiyuan Liu, 2022)
One huge advantage for the Pacific is that
during the pandemic period, there were large remittances sent by Pacific
islanders living overseas to their families. The rise in fishing fees brought
in much needed cash for many Pacific nations with large fishing waters. There
was also an increase in development aid in the Pacific. (For Fiji, the Fiji Sun
of 14/5/2021 reported that New Zealand had provided recurrent budget support of
NZ$40 million. The Fiji Times of 30/4/21 reported that Australia had given $55
million for budget support.)
Muhammed Balbaa reported in 2022 that
Russia’s conflict with Ukraine in February 2022 increased geopolitical tensions
between Western countries and Russia. It
lowered global growth expectations due to uncertainty about the effects
of the conflict, especially on the global supply chain. The sanctions imposed
on Russia by Western nations had a spill over effect on the global economy.
This led to energy supply shocks, commodities and trade supply shocks, rising
energy, food and commodities prices, thereby causing global inflation in many
countries.
The World Bank (2023) reported that after
three years of economic slowdown, Pacific nations can expect economic growth to
happen in 2023. For this to become a reality, fiscal balances, debt
sustainability, and inflation will need to be proactively addressed. Pacific
nations will undertake reforms and policies to increase economic growth and
sustainable investments, while moving towards a careful balance between creating
more jobs and bringing down future debt risks. While all Pacific countries expect
to grow in 2023, some nation like Palau, will see huge economic growth of up to
18% in GDP due to growing tourism revenues. Some nations like Solomon Islands, will
grow more slowly with an increase of around 2.3%.
The Pacific is not immune from the fallout of
the conflict in Ukraine. The World Bank notes that the high global economic fallout
associated with the conflict in Ukraine led to a downward revision in growth forecasts
for Pacific economies. The Pacific was beginning
its post-pandemic recovery when it was hit with rising global energy and food
prices. These high costs had negatively affected Pacific national budgets, and
resulted in inflation, and rising costs of living. The World Bank reported that
inflationary pressures will beginning to ease in the first half of 2023 and
consumer prices are expected to fall in every Pacific Island country except
Samoa, where inflation may reach as high as 12 per cent in the second half of
the year, before falling in 2024. (World Bank 2023).
Economies of scale
One of the challenges of the Pacific is that
90 percent of the total Pacific population live in only 3 nations, namely, PNG,
Fiji and the Solomon Islands. 6 nations have populations of less than 20,000
and 6 have populations that are less than 300,000
These
raises the point that because of their smallness, it makes sense for many
Pacific nations to develop economies of scale and form an Economic union
(single market).
An
Economic Union refers to a group of nations coming together to allow goods and
services to move freely in and out of their borders to remove trade barriers
and create better employment of skills and resources. It can even allow free
movement of production factors such as capital investment and labour and has a
common internal and external trading policy. The Union enhances efficiency
because production costs are reduced as the free flow of goods, services, and
production factors take place. Profit margins can increase as each country
produces those goods in which it has a comparative advantage and trades all
other goods so that more is produced in total. When the free flow of goods and
services happen, and the customs duties are removed, the price of imported
goods and services are reduced. More goods and/or services are bought because consumers
can afford a greater quantity at the given income level. Because of the free
movement of production factors, people have greater employment opportunities
leading to higher incomes and better utilization of skills. When, for example,
a group of Pacific nations come together in an economic union, they give one
another strength because the costs of production are reduced. It makes them
more competitive in the regional and global economy, and more profitable. A
union also has the advantage of speaking with one unified voice on for example,
climate change or their shared values. Examples of such unions are the European
Union and the Gulf Cooperation Council in the Middle East. (Shraddha Sureka,
2023)
Tiny
Pacific nations might not get the required resources on their own but can do so
being part of an Economic Union. Companies in a smaller or a weaker country may
not get the needed funding from banks when it tries to generate it on their
credit ratings. However, a guarantee from a stronger company in the union helps
it do so, allowing such companies to develop their potential to a higher level.
When weaker nations can get the resources more quickly, they can speed up their
development and become stronger, leading to a betterment in the standard of
living of the people of these tiny Pacific nations and gives strength to the
economy of the union as a whole. (Shraddha Sureka, 2023).
It
makes sense for small Pacific nations to form such an economic union as all
tariffs are removed for trade between member countries, creating a uniform
market. There are also free movements of labour, enabling workers in a member
country to move and work in another member country. Monetary and fiscal
policies between member countries are harmonized, which implies a level of
political integration. Small Pacific nations coming together can take a step
further by having a common currency.
When
tiny Pacific nations develop Economies of scale this means that they are coming
together to form a larger entity to reduce production costs in the goods they
export. As they increase in size (in the economic union) they can lower their
production costs and create a competitive advantage by either using those cost
savings for increased profits or using the savings to lower the cost of their
products to the buyers. Economies of scale develop a competitive advantage for
smaller Pacific nations forming a larger unit by bringing out more production
units and reducing their overall cost per unit. As they increase their outputs,
they can spread their variable and fixed costs over a larger number of goods,
lowering the per-unit cost of the product. This means lower prices for buyers.
(Andrew Loo 2023 & Indeed.com 2023)
Western
nations have not developed fully fledged trade agreements with tiny Pacific
nations. The PACER+ Agreement with New Zealand and Australia utilises
development aid to support smaller nations who don’t have fully-fledged
tradeable goods and services sectors,
and binds the Pacific to the larger metropolitan nations. Bigger nations
provide very large amounts of financial aid without proactively nurturing small
and micro enterprises to develop a culture of business among the islanders. The
aid Western nations give, sometimes becomes like a drug which Pacific nations
become addicted to. In the absence of substantive income from trade, these tiny
nations must continue to receive this Western aid for national recurrent
budgets to run their governments otherwise they go bankrupt. It also forces
them to become vassals of these powerful nations in international fora.
To give a concrete example, the Economies of
scale can bring together six Pacific nations with populations of 20,000 each to
form a Union increasing their total population to 120,000. Or they can have a
larger Union with 6 additional nations of populations of 300,000 bringing the
grand total to 2 million. (Jean-Paul Rodrigue, 2023).
Some
observers have argued that an economic union won’t work in the Pacific because
all nations have similar exports such as fish, seaweed, coconuts products,
tropical fruits, root-crops and vegetables, for example. This phenomenon is
called intraindustry trade where they seem to have identical products and
services. Intraindustry trade can be explained in an economic model on
monopolistic competition using Economies of scale. So although the products
(like fish and seaweed for example) may seem identical, in reality they are not
as there are different varieties that appeal to different consumers. Not all
fish are born equal, for example, as high-grade tuna and reef fish fetch higher
prices with consumers. There is also the potential to value-add coconut trunks
into furniture and oil into cosmetic products. (OTPP, 2023)
The
notion of the Pacific economies of scale being realised through an economic
union of a number of tiny Pacific nations comes at a pivotal time. The ADB
(3/2023) notes the following points;
-
Exports of Pacific nations have increased by 169%, reaching $9.6 billion in the
past 20 years.
- About 13% of the Pacific population work
overseas and they send remittances that form a big slice of Pacific nations /
gross domestic product.
-
The Pacific is a possible location for tropical retirement homes for Asia’s
burgeoning middle class.
In
addition, there are untapped marine resources that can be explored for
sustainable harvesting. Although being small can be beautiful and attract more
tourists to the Pacific, getting bigger (through an economic union) is better
as tiny nations combined together can leverage the global market economic
system to boost their collective economic growth.
2
- Economic Developments in the Melanesian Group of Countries
Melanesia
is located in the South Pacific Ocean and comprises of 2,000 islands stretching
from the Arafura Sea in Indonesian waters to the eastern side of the western
Pacific Ocean, and from the island of New Guinea in the north to New Caledonia
and the surrounding waters to the south. Melanesia’s population is
approximately 12 million. Melanesia is divided among five independent countries
and one colonial dependency. They are: Fiji, New Caledonia (French Dependency),
Papua New Guinea, Solomon Islands and Vanuatu. (World Atlas, 2023)
The
Melanesian Spearhead Group protects the interests of Melanesian nations. It
supports social, political, economic and security interests underscoring the
resoluteness, tenacity and resilience of Melanesian people. The MSG is a
building block for stronger regional cooperation. Leaders had signed the MSG
Treaty on the Protection of Traditional Knowledge and Expressions of Cultures;
and the Skills Movement Scheme to facilitate employment of Melanesian people
across the MSG borders (Peter Ligaiula, 2023).
The
Melanesian Free Trade Agreement (MFTA) is a comprehensive and progressive free
trade agreement that aims to achieve regional integration of economies in the
Melanesian Spearhead Group (MSG). The regional market offers opportunities for:
(a) Trade in Goods to allow free trade on products traded within the MSG
countries, with the exception of sugar, salt and mackerel on products subject
to meeting the rules of origin criteria (b) Trade in Services. This provides
opportunities for trade in services and investment particularly in sectors of
importance to achieve development agendas of MSG parties, (c) Labour Mobility.
This encourages movement of natural persons to fill skills shortages in the
identified categories within MSG countries (MSG, 2023).
Looking
at the historical context, Melanesian nations face economic viability
exacerbated by geographic isolation, climate change, natural disasters, and aid
dependency. In Vanuatu, developing an economy capable of supporting 83 islands
who mainly practice subsistence farming is a great challenge. Vanuatu is ranked as the ninth most
tourism-dependent country in the world. Political instability has taken its
toll on the tourism industry. Whilst Vanuatu invests in renewable energy and
the construction industry is growing, there remains significant challenges. The
Solomon Islands had been propped up by Australian aid for the last decade to
the tune of over AUD$2 billion thanks to the Regional Assistance Mission to
Solomon Islands (RAMSI) occupation. Fiji, with a population just under one
million had been affected by natural disasters and the pandemic. Fiji’s economy
still largely revolves around fisheries, forestry, and subsistence agriculture.
The number one source of income is tourism — constituting some 35 percent of the
entire economy — whilst the second largest source is mining. Papua New Guinea
is the largest Melanesian nation in both economic and population terms. The PNG
economy is largely based on its extractive industries and rich mineral
deposits, which has left the country extremely vulnerable to downturns in
global commodity markets. Melanesian states struggle in general with attracting
private investment and creating investor confidence. Aid dependency, resource
dependency, and natural disasters remain huge challenges for the region. (Sally
Andrews, 2016).
China
and Melanesian Nations
China
has always had a presence in the Pacific. Ethnic Chinese have resided in the
region for centuries, running some of the region’s oldest trading houses. Since
2006, however, China’s trade, aid, diplomatic and commercial activity has
increased dramatically. Between 2006 and 2017, China provided close to US$1.5
billion in foreign aid to the Pacific Islands region through a mixture of
grants and loans. China was the third largest donor to the Pacific,
contributing 8% of all foreign aid to the region between 2011 and 2017
(Johnathan Pryke, 2020).
In
recent decades, countries in Melanesia “have experienced more serious internal
problems of insecurity and instability than their smaller Micronesian and
Polynesian counterparts.” Lack of capacity, discipline and morale in law
enforcement are in themselves threats to security in Melanesian states because
of the complicity of law enforcement in crisis situations. The Solomon Islands
- China security agreement allows for the capacity and resource needs of
Solomon Islands domestic law enforcement to be provided. Since China is the
Solomon Islands’ largest trading partner, riots and anti-Chinese issues need to
be tackled so as not to affect their trade and diplomatic relations. This
security arrangement is not abnormal as Australia had undertaken a similar
arrangement with the Solomon Islands through the Regional Assistance Mission to
the Solomon Islands. There is a common police culture in the Pacific. With
these shared aspects of policing, the Pacific region, and especially countries
in Melanesia, can focus their efforts on law enforcement co-operation. One can
understand why the Solomon Islands justified its security co-operation with China,
given its dissatisfaction with the Australian RAMSI arrangement and now seeking
to diversify its security interests. (Patrick Kaiku, 2022). The RAMSI
arrangement allowed Australian personnel and their surrogates to have a
parallel economic market system. In Honiara, for example, this meant that there
were shopping centres where consumers purchased items and services using
Australian currency. RAMSI had no provisions for basic infrastructure
development. It was purely a security arrangement that mainly employed
Australian citizens.
For
Fiji, the last two years 2020 – 2021 had been extremely challenging for
the Fijian economy. Fiji’s ability to rapidly fully vaccinate over 90 percent
of its adult population had enabled the Government to gradually ease COVID-19
restrictions and ultimately reopen borders for international travel from 01
December 2021.
A
new report by the World Bank notes that Fiji was the strongest performing
Pacific economy in 2022, buoyed by a rebounding tourism sector, GDP growth
increased to an estimated 15.1 percent in 2022. Fiji is forecast to continue a
stable growth trajectory and see inflation fall as low as 2 per cent through
2023, yet output is expected to remain below 2019 levels until 2024.”
(Sanjeshni Kumar 2023)
Import
and export trade between China and Fiji in 2020 was US$346 million, an increase
of 63.8 per cent. China imported US$23.62m worth of goods from Fiji. Despite
the significant impact of COVID-19 on global trade, bilateral economic and
trade cooperation between Fiji and China remained stable.
Papua New Guinea’s economy was projected to grow by four percent in 2022, driven largely
by growth in the extractives sector. PNG’s economy returned to positive growth
of one percent in 2021 after contracting by 3.5 percent in 2020. In 2022, the
extractive sector
was projected to be the main driver of GDP growth – an estimated four percent –
driven by the planned reopening of the Porgera gold mine. The overall
medium-term growth in PNG is likely to be impacted by higher global
uncertainty. PNG is expected to face considerable challenges from the COVID-19
pandemic, despite PNG’s economic output not being as severely impacted as in
many other East Asian and Pacific economies. PNG’s extremely low level of
vaccination – one of the lowest rates in the world – means COVID-19 outbreaks
put significant strain on an already-stretched public health system and pose
both a risk of higher loss of life and a negative impact on domestic economic
activity. While local agricultural production continued unabated through the
pandemic, PNG’s overall GDP growth has lagged behind global and regional
averages, with performance further constrained by falling gold and liquefied
natural gas (LNG) production. A sound fiscal consolidation strategy – one
focused on mobilizing domestic revenue to decrease the medium-term fiscal
deficit – is important for PNG to navigate while also prioritizing improvements
to the delivery of public services. (World Bank, 2022).
The
bulk of Vanuatu's population lives in rural areas where subsistence
farming, fishing and production of cash crops such as kava, coconut and cocoa
are the main sources of livelihood. Exports are dominated by agricultural
products, particularly kava, coconut products, beef and cocoa. Vanuatu's
economic growth has been driven largely by tourism and construction. Before
2020, tourism and tourism-related services sectors (wholesale and retail trade,
hotels and restaurants, and transport and communication) accounted for
approximately 40 per cent of GDP and one third of people in formal employment. Vanuatu
is the largest source of Australia’s labour mobility scheme workers (7,000 in
2021-2022). (DFAT, 2023)
Vanuatu’s economic freedom score is
62.1, making its economy the 70th freest in the 2023 Index. Improvements in the
investment and business climate are needed to generate more broadly based
economic expansion. The unwillingness to undertake institutional reforms
continues to slow the development of a dynamic private sector. Vanuatu has
taken steps to integrate its economy more thoroughly into the global
marketplace. Vanuatu’s property
rights score; its judicial effectiveness score; and its government integrity
score are all above the world average. The individual and corporate tax rates
are 0 percent. The tax burden equals 14.2 percent of GDP. Starting a business
remains time-consuming, but there is no minimum capital requirement. Labour
codes are rigid and outmoded, and the formal labour market is not fully
developed. Monetary stability has been relatively well maintained despite
inflationary pressures. The trade-weighted average tariff rate is 12.7 percent,
and non-tariff barriers distort trade flows. Inadequate infrastructure and
heavy state involvement deter long-term investment. Access to financing remains
poor with formal banking services available only to a limited number of rural
adults. (Heritage.org, 2023).
The
Solomon Islands’
economic freedom score is 56.9, making its economy the 106th freest in the 2023
Index. Economic dynamism and development remain stifled by serious deficiencies
that include poor governance and an inefficient public sector. Underdeveloped
legal and physical infrastructure discourages the emergence of a vibrant
private sector. With few new enterprises to generate jobs, most employment
remains in the agricultural sector. The business environment has been
marginally improved by the implementation of a simplified registration process.
Uneven enforcement of existing laws continues to undermine the regulatory
process. The labour market is underdeveloped, and informal labour activity
remains substantial. Monetary stability is weak. (Heritage.org, 2023)
Melanesia New Voices: Investing in the Next
Generation
An insightful conference called “Melanesia
New Voices: Investing in the Next Generation”, brought together 25 emerging
leaders – five each from Fiji, New Caledonia, Papua New Guinea, Solomon Islands
and Vanuatu – to discuss common challenges, their hopes for the future of their
region and opportunities for cooperation. Young Melanesian leaders believed
that infrastructure development to enable people to take advantage of
innovative technology needed to rank highly on the priorities of Melanesian nations. Melanesian nations have narrow economic
bases. Solomon Islands, for example,
relies on logging for 60 per cent of its income, which is not sustainable. Revenue from the few other commodities that
are traded is not sufficient to replace revenue from logging. Innovation is needed to widen the economic
base. High transport costs, high utility costs and poor connectivity are the
main challenges to doing business. These
barriers do not allow a manufacturing sector to develop fully or to effectively
compete regionally. The region needs to
look at different business models, niche products, and developing “cottage
industries”. The aquaculture sector has
potential as it offers opportunities for villages to generate income and
complements their traditional ways of life. Some young leaders noted the
difficulties of accessing credit from commercial banks in Melanesia. Commercial
banks would not take equity risks on debt and with an 80 per cent failure rate for
small businesses, did not issue loans to start-up businesses. Although the record of development banks in
the region was mixed, they offer good options to support business development. Governments, however, should be finding more
ways to provide equity for small business development. (Lowyinstitute.org,
2023).
Polynesia
is a region with over one thousand islands scattered over the central and
southern Pacific Ocean. Polynesia refers to islands within a triangle with its
corners at the Hawaiian Islands, New Zealand, and Easter Island. Polynesia
includes Tonga, Tuvalu and Samoa, and two self-governing entities namely Cook
Islands and Niue There are five territories administered by other nations that
have Polynesian links. They are New Caledonia, French Polynesia, Wallis & Futuna
and Tokelau.
Most
Polynesian nations acquire their income from foreign aid and remittances. A few
have income that is sourced from tourism. Some have innovative ways of
attaining national income; Tuvalu gets royalties from its '.tv' internet
top-level domain name. The Cook Islands' make money from postage stamp sales.
French Polynesia exports cultured pearls. New Caledonia has rich deposits of
nickel, chromite, and iron ore. (NewWorldEncyclopedia, 2023).
Polynesian
economic development is intertwined with climate change issues that deeply
affects them. Leaders from American Samoa, Samoa, Tokelau, Tonga, Tuvalu and
Wallis and Futuna had met to discuss the impacts of climate change in
Polynesia. They produced a declaration addressing the impacts of climate
change, carbon emission reductions, climate change displacement and security,
climate change finance, the marine environment, and regional initiatives. On
the impacts of climate change, leaders expressed deep concern on the risks to
small islands, including marine ecosystem impacts, sea level rise and extreme
weather events. Leaders noted that these risks threaten the survival of island
communities, particularly those living on coral atolls. They stated with alarm
that current global efforts to combat climate change are insufficient to secure
the 1.5 degree Celsius limit. They look forward to the completion of the Paris
Agreement Implementation Guidelines, noting there should be “a complete package
on the implementation of all elements of the Paris Agreement” and should
including financial aspects of ‘Loss and Damage’. (“Loss and damage” is a
general term used in UN climate negotiations to refer to the consequences of
climate change that go beyond what people can adapt to, or when options exist
but a community doesn’t have the resources to access or utilize them. Developed
countries agreed at the COP27 UN climate summit in 2022 to create a fund for
addressing losses and damages to vulnerable nations. (Preety Bhandari, et-al,
2022)
On
climate change finance, Polynesian leaders noted with concern the costs of
climate change-related severe weather events that cause devastation and loss of
lives in the region and welcome the Task Force of the Pacific Island Climate
Change Insurance Facility (PICCIF) and encourage it to accelerate its work.
They further encourage eligible Polynesian nations to develop Green Climate
Fund (GCF) Country Programmes while also respecting the principle of leaving no
one behind. (Sdg.iisd 2018).
Due
to Tuvalu’s geographic isolation, growth accelerated to 1.5% in 2021 as the
country remained free from COVID-19. Capital expenditures almost doubled,
offsetting low consumption—that led tax revenues to decline by a fifth. Business
travel and remittances are projected to return to pre-pandemic levels as
international borders gradually open. GDP is forecast to grow by 3.0% in 2023.
The fiscal surplus narrowed from the equivalent of 8.7% of GDP in 2020 to 5.4%
in 2021. As expenditures dropped by 13% and revenues fell, the government noted
a fiscal deficit equal to 9.7% of GDP in 2022. The 27.6% growth in expenditures
outweigh the projected 10.6% rise in revenues. (ARIC, 2022)
It
is noted that China is one of Tonga’s development partners and they have signed
twenty economic and technical agreements over the last 24 years. In 2022 China
provided heavy machinery, worth TOP $26 million and customs inspection
equipment, of TOP $30 million (Cao Xiaolin, 2022)
French
Polynesia
has very strong relations with China. In November 2019, Edouard Fritch, the President
said that French Polynesia was part of
China’s Belt and Road Initiative: “It is therefore by the common interest shown
by Chinese private investors that China has chosen to place French Polynesia on
the Silk Road.” French Polynesia, like other island states or territories,
seeks to develop its own balance of power. It has a strategic maritime space of
118 islands between Asia and America, covering an EEZ of nearly 4.5 million
square kilometres. Its southern position also makes the territory suitable for
all types of space observation and modern forms of connectivity (aerial,
extra-atmospheric, navigation, telecommunications). The Polynesian government
sees in China a conduit for economic growth that no other player can offer it.
(Paco Milhiet, June 23, 2022)
Samoa’s economic performance
in the year up to June 2022 amounted to SAT$1.85 billion (real GDP), which was
6 percent lower than the twelve months to June 2021. This marks three
consecutive years of negative growth. The recession in the Samoan economy
started with the Measles Outbreak in December 2019 which was followed by the
COVID-19 pandemic in March 2020 right up to June 2022. The international border
lockdown resulted in a substantial economic loss of SAT$234 million. Russia’s conflict
with Ukraine further drove up imported prices like fuel and gas culminating in
Samoa’s inflation rate of 11.3 percent at the end of October 2022.
The
huge drop in tourism earnings was outweighed by the pickup in remittances as
well as a substantive increase in seasonal workers’ income. Samoa also received
large inflows of aid grant funds for its COVID-19 Response and general budget
support funds from Australia, New Zealand, the People's Republic of China and
Japan.
The
Samoan economy has been in a prolonged recession for 30 months and it is
important to support the recovery of local businesses and employment
opportunities, especially for those who have struggled during the pandemic. From
the experiences of other small Pacific island nations, targeted fiscal
assistance to the most vulnerable can provide some relief from the high cost of
living while an expansionary monetary policy stance can ensure funds are
available for the private sector and Government, supporting the Samoan economy
recovery path from the COVID pandemic. (CBS,2022)
The
economic recovery from the COVID-19 pandemic in tourism-dependent Polynesian nations
will be slow, with continued support needed to allow the private sector to
drive future economic growth. The economies of the Cook Islands, Niue, Samoa,
and Tonga declined in 2021 with economic contraction and fiscal deficits
deepening. In the Cook Islands, the economy contracted by 5.9% in 2020, on
account of reduced income from tourism—which accounted for 61% of GDP in
2019—falling to zero since April 2021. In Tonga, the twin shocks of Tropical
Cyclone Harold and COVID-19 restrictions saw the economy weaken by 0.5 percent
(ADB, 2022).
4: Economic Developments in the Micronesian Group
Heritage.org
reports that poor governance and a lack of commitment to structural reform
continue to discourage economic development in Micronesia. Long-standing
problems include poor management of public finance and underdeveloped regulatory
frameworks. The weak rule of law and poor enforcement of property rights have
driven many people into the informal sector.
The
Micronesia Group comprise of nations in the western Pacific Ocean. Micronesia
has more than 600 islands and islets in the Caroline Islands archipelago and is
divided along cultural and language lines into the states of Yap, Chuuk,
Pohnpei, and Kosrae. The capital is Palikir, on the island of Pohnpei. To the
west of the Federated States of Micronesia lies the Republic of Palau, also in
the Caroline archipelago, and to the east is the Republic of the Marshall
Islands. These two nations, together with the Commonwealth of the Northern
Mariana Islands and the Federated States of Micronesia, were administered by
the United States as the Trust Territory of the Pacific Islands from 1947 to
1986.
Due
to their smallness and isolation, Micronesia experiences huge obstacles to
growth due to its geographic isolation, small population, capacity constraints,
and susceptibility to natural hazards.
Micronesia’s
economy is dependent on fisheries and development aid, including funds it
receives under its Compact of Free Association with the United States. These
funds have been decreasing since 2004. The Micronesian economy was greatly
affected by border closures connected to the COVID-19 pandemic.
The
World Bank supported Kiribati and Marshall Islands, for example, to improve
sustainable ocean-based livelihoods. Training was provided to build the capacity
of observers and debriefers for sustainable oceanic resources management and 21
coastal communities received support to establish community fisheries
management plans. Long-term tensions like climate change, population growth,
shocks caused by the COVID-19 pandemic, cyclones, and other disasters are
impacting lives across Micronesia. These stresses drive the need for action to
preserve and protect ocean resources, fisheries, coastal and marine habitats,
and the people whose livelihoods depend on them. The Western and Central Pacific Ocean is the
most important region globally for tuna fisheries, accounting for around 60
percent of the global catch. Across countries in this area, economic benefit
from oceanic tuna license fees amounted to US$492.5 million per year,
representing more than 30 percent of government revenue. Coastal fisheries are
an important source of income, nutrition and food for fifty percent of households
in Micronesia. Coastal fisheries are critical to the cultural and fiscal value
at the national level, contributing an estimated 49 percent of the overall
fisheries input to GDP, highlighting the significance of these fisheries to the
Micronesian way of life. Better management of oceanic and coastal fisheries is important
for generating export earnings and public revenues from fishing license fees.
Greater income improves livelihoods and food security, and leads to improved
diets. The World Bank expects Micronesia and the Pacific to sustainably exploit
the available economic opportunities through expanding markets for oceanic and
coastal fisheries and trialing of new technologies such as electronic
monitoring and reporting systems (World Bank, 2022).
The
Asian Development Bank (ADB) has provided 66 public sector loans, grants, and
technical aid amounting to $187.8 million to the FSM. Cumulative loan and grant
support to the FSM totalled $98.4 million. Financing was from regular and
concessional ordinary capital resources, ADB’s current state portfolio in the
FSM includes 2 loans and 9 grants worth $75.3 million. In Micronesia, the ADB
focuses on building resilience against economic shocks, delivering sustainable
services, and promoting inclusive and sustainable growth. It introduced greater
flexibility in procurement and contracting; and more emphasis on gender
equality. In 2021, ADB committed a $5 million grant to help prepare a
sustainable road investment project suitable for financing in 2023 or 2024. ADB
also committed additional financing of $4 million grant for a renewable energy
project, which will finance supplemental management and operations assistance
to Pohnpei Utilities Corporation. ADB has provided $21.5 million in grant
assistance for the FSM’s COVID-19 response and $6 million for disaster
contingent financing for early recovery and reconstruction following natural
hazards or health emergencies. A $14 million health and livelihood program
helped mitigate COVID-19 impacts on health, tourism, and social protection. (Asian
Development Bank 12/3/2023)
Digital
Economy
In
small and isolated Pacific regions like Micronesia, digital technologies and
e-commerce can improve livelihoods by increasing trade across sectors and
industries. Individuals and groups running small businesses can access new
markets, reduce transaction costs, encourage financial inclusion and increase exports.
Small markets and population sizes also make Micronesia less attractive for
international investment. The cultural and language diversity also poses a problem
to developing local online content. The Pacific Digital Economy Programme,
jointly administered by UNCDF, UNCTAD and UNDP supports the development of
inclusive digital economies in the Micronesian nations of the Federated States
of Micronesia, Kiribati and the Republic of the Marshall Island (UNCTAD, 2023).
China
Trade with Micronesia
In
December 2022, China exported $1.84M and imported $4.08k from Micronesia,
resulting in a positive trade balance of $1.83M. Between December 2021 and
December 2022 the exports of China have increased by $737k (66.9%) from $1.1M
to $1.84M, while imports decreased by $-191k (-97.9%) from $195k to $4.08k.
In
December 2022, the top exports of China to Micronesia were Prefabricated
Buildings ($312k), Toilet Paper ($220k), Plastic Housewares ($110k), Sanitary
towels (pads) ($105k), and Coated Flat-Rolled Iron ($94.1k). In December 2022
the top imports of China from Micronesia were Non-fillet Frozen Fish ($71.2k),
Commodities not elsewhere specified ($257), and Low-voltage Protection
Equipment ($92).OEC,2023.
Chinese
Ambassador to Micronesia Huang Zheng (Huang) noted that China and Micronesia
signed the Memorandum of Understanding on jointly building the "Belt and
Road" in 2018, and now China has become an important trading partner with
the country. It is the fourth-largest destination for exports and source of
imports for Micronesia. In 2021, overall bilateral trade volume increased by
24.2 percent year-on-year. China has long insisted on providing economic and
technical assistance without any political conditions, and has implemented many
key assistance projects, including roads, bridges, schools, government
buildings, sports venues and agricultural demonstration parks, while providing
material assistance in the form of aircraft, ships, vehicles, cultural and
sports equipment. China has also provided training for hundreds of Micronesian
people in various fields. Since the outbreak of the COVID-19 pandemic, China
has provided several batches of epidemic prevention materials and cash
assistance to Micronesia, and assisted with the construction of 30 sets of
quarantine booths. (Yin Yeping 2022)
5
- Summary
The
Pacific region comprises of hundreds of islands spread out over an area
equivalent to 15% of the earth’s surface. There is great diversity; Fiji for
example is the largest country (excluding PNG) with a population of over 980,000,
to Tuvalu and Nauru, with populations of about 11,000 each. Kiribati is one of
the most remote and geographically dispersed countries in the world, consisting
of 33 coral atolls spread over 3.5 million square kilometres of ocean. Pacific
Island nations have large natural resources. They have unique linguistic and
cultural diversity. They are working to develop digital connectivity and trade
in goods and services with external markets.
It should be noted that Pacific countries are
physically far away from the rest of the big markets, have small populations
living across many islands, face many of the worst impacts of climate change,
and are some of the world’s most vulnerable nations to natural disasters. The
2022 eruption of Tonga’s undersea volcano and the ensuing tsunami, for example,
caused over US$90 million in damages and impacted 85 percent of the country’s
population (The World Bank, 2022).
Pacific
Island nations are important economic and trade partners of China. Belt and
Road cooperation MOUs have been signed with all ten nations that have
diplomatic relations with China. Progress has been achieved in areas such as policy
development, infrastructure, trade, financial and people-to-people connectivity.
Two-way trade between China and Pacific nations has continued to expand. From
1992 to 2021, total trade volume between China and Pacific nations grew from US153
million to USD5.3 billion showing an average annual increase of 13% and
expanding by over 30 times in 30 years. By the end of 2021, China’s direct
investment in Pacific nations having diplomatic relations with China had
reached USD 2.72 billion. (FMPRC, 2022)
Small
is awesome!
Small
states in the Pacific and elsewhere are an important component of the global
community. About two-thirds of United Nations members are small nations. They
have certain characteristics due to their smallness. The range of issues they
face is more limited but are no less urgent or intense than that of larger
states.
Small
states in the Pacific are already organised into groups based on cultural,
geographic, political, socio-economic or a combination of these elements. Small
states recognise the valuable role that multilateral diplomacy plays in
enhancing their engagement and amplifying their voices, thus levelling the
playing field. However, they face challenges as the resources needed for
gathering support for their positions may be weaker. Smaller nations can
develop strong voting blocs to advocate their issues or global concerns, for
example on climate change. This can result in innovative solutions being found.
(Diplo, 2023).
This
paper asserts that encouraging small nations to leverage their smallness to
benefit from Economies of scale will enhance their economic growth. This means
that a number of Pacific nations can come together to form an economic union.
The
economic union proposal becomes necessary when contextualised in the status
that small states are exposed to a high degree of economic openness often with
a dependence on strategic imports (particularly food, energy, and industrial
supplies). The context is also seen in a dependence on a narrow range of
exports or services; and susceptibility to external economic shocks.
Consequently, vulnerability is often seen to be a key element in defining them.
In determining a small state’s economic vulnerabilities, key elements include
economic openness and the link between smallness and remoteness, and
connections between smallness and low levels of development. In economic
diplomacy, the resilience that small states have to economic vulnerability and
the way these vulnerabilities affect their bilateral and multilateral economic
diplomacy is important to consider. (Diplo, 2023)
In
the economic union model, regional arrangements provide small states with the
opportunity to insert their economies into larger economic frameworks. Regional
economic integration provides a common platform through which members can
better promote their collective interests with the rest of the international
community and in multilateral arrangements, often advocating for recognition of
their specific challenges. (Diplo, 2023).
Building
synergies in the Pacific to enhance economic growth
It
is noted that in the 50 year history of Pacific regionalism there have been
underlying tensions between Polynesians, Melanesians and Micronesians. Within the
Micronesian region, there have been tensions between Northern and Southern
nations. In Melanesia, there is a perception that Fijians are not genuine
Melanesians and Polynesians are sometimes offended that Fijians are categorised
as Polynesians.
Behind
the friendly smiles and the calm demeanour, there is often an undercurrent of
hostility and resentment. One huge task for technocrats organising regional
leaders meetings is to maintain harmony. Meetings are very friendly affairs
with decisions arrived after consensus. Leaders’ disagreements are handled
before formal meetings are held.
For
economic development to move to the next level, there is a need for a culture
of transparency and accountability to permeate the Pacific Leaders Forum. The
old ways of making decisions where juicy regional positions are given out
according to a roster based on regional groupings should give way to merit
based selections. Baron Waqa the incoming Secretary General of the Pacific
Forum acquired the position after Micronesian nations threatened to break away
from the Pacific Forum. He is remembered for his authoritarian leadership style
and suppression of democratic rights during his tenure as President of Nauru. Under
Waqa, Nauru had recognised the Russian
Republics. There had also been huge allegations of corruption earning him the
name President Corruption. Waqa who is a supporter of Taiwan had placed 50 Taiwan
‘banners’ in the Conference Centre of a Pacific Forum Meeting and had been
offended when the Chinese delegation had intervened to remind Pacific leaders
of the One China Policy.
Greg
Fry writes that it is important to recall that in the 50-year history of
attempts to build a Pacific political community among the diverse island
societies across Oceania there have been numerous splits and divisions –
between leaders, between sub-regions, between large and small states, and
between resource-rich and resource-poor states. Many of these divisions were
hard-felt and hard-fought, and many of them could have spelt the end of the
regional project. It is still useful to remember why, and how, past Pacific
diplomacy was so effective in creating and maintaining a feeling of inclusion
for each sub-region. The division between sub-regions, and the attendant issues
of respect, balance and inclusion, began with the emergence of Melanesian
sub-regional identity in the late 1970s. Greg Fry noted that when he
interviewed Melanesian leaders about their views on Pacific regionalism in
1975, they said that they felt that the Polynesian leaders looked down on them,
making them feel like second-class citizens in the Pacific regional community.
Fiji identified itself as, and was seen as, Polynesian in the 1970s. After the
1987 coup, it reinvented itself as a Melanesian nation (Greg Fry, 2021).
The
Micronesians did not emerge as a sub-region within Pacific regionalism until
the 1990s following the decolonisation and admission to Forum membership of the
three associated states: Federated States of Micronesia, Marshall Islands, and
Palau. Before this, Nauru, as founding member of the Forum, and Kiribati as a
member since 1979, had not self-identified as part of a Micronesian
sub-grouping. (Greg Fry, 2021)
Australia
and New Zealand who are members of the Pacific islands usually support Melanesia
and Polynesia. Micronesian nations usually ask why, if the French entities could
join the PIF, United States ones such as Guam, American Samoa, and the Commonwealth
of Northern Marianas could not do the same. The assumption was that Australia
and New Zealand did not want them in the PIF as it would dilute the votes of
their “zones of influence.” One of the reasons the PACER Plus Trade Deal has
had pushbacks from larger Pacific nations is because it is overtly designed to
“preserve New Zealand’s and Australia’s position against major competitors from
outside of the region. Micronesia, with its strong ties to the United States
(and Japan) is seen as inconvenient in the order of things. (Cleo Paskal, 10/2/2021).
Need
for regional anti-corruption strategies that actually work!
For
economic development to be accelerated, Pacific nations will need to tackle
corruption issues. The
Global Corruption Barometer Survey 2021 noted that young democracies with rich natural
endowments, frequent natural disasters and relatively small populations
characterise many Pacific Island nations, making them vulnerable to corruption
risks. Yet data about levels and patterns of corruption in the region had
remained frustratingly scarce. The GCB Pacific Survey 2021 recorded for the
first time the perceptions and experiences of corruption among ordinary
citizens from ten Pacific countries and territories. The results reveal high
levels of bribery, sextortion and vote-buying. A majority of respondents feel
corruption is a big problem in both the business sector and government,
particularly among parliamentarians and officials in heads of governments’
offices. It also appears that authorities are failing to properly control
resource extraction companies.
A
third of interviewees across the Pacific think that most or all members of
parliament and staff in heads of government’s offices are involved in
corruption. Less than a fifth of respondents (18 per cent) believe that corrupt
officials frequently face appropriate consequences for their actions. Only 14
per cent feel their government regularly considers them when making decisions.
One of the most significant results was how often ordinary people in the
Pacific directly encounter corruption in their daily lives. Thirty-two per cent
of interviewees recently paid a bribe to receive public services – a higher
rate than any other region surveyed by Transparency International. Bribery
appears to be a problem across a range of government services, from applying
for official government documents to dealing with the police. Only 13 per cent
of those who paid a bribe for a public service reported it. This rises to
around 30 per cent in Fiji and Kiribati. Even more worrying is that 38 per cent
of respondents say they or someone they know have personally experienced
“sextortion”, where a official requests sexual acts in exchange for an
essential government service.
A
majority of people interviewed feel that corruption is a big problem in
business, too. A corruption hotspot appears to be government contracts, which
over two thirds of respondents believe businesses secure through bribes and
connections. Almost half of the people surveyed think there is little control
over companies who extract natural resources, which is of particular concern
given that this is one of the largest industries in the region. The good news
is that over 70 per cent of respondents say that ordinary people can help to
fight corruption. Most Pacific Islanders
support their government’s anti-corruption measures and believe that ordinary
people can help stop corruption. Pacific leaders across the ten countries have
indicated that they are willing to tackle this problem, through public
commitments and national reform efforts. By listening to the voices of Pacific
Islanders themselves about their corruption concerns, governments can make meaningful
reforms and ultimately create a fairer and more sustainable region. (Transparency
International, 2021)
Pacific
Regionalism and Trade
It
is very important that the 18 nations and territories that make up the Pacific re-examine
their notions of what Pacific regionalism means for them. In recent times, the
Pacific Islands Forum has degenerated into an arena where different countries
band together based on their regional affiliations and haggle for everything
from senior positions (with very lucrative salaries) and resources. The
haggling, backroom deals, intrigue, and threats to leave the Forum has resulted
in decisions being made that is not based on merit or transparency but on
expediency to ensure that everyone is kept happy. The main job of technocrats
who run the leaders’ meetings is to make sure that leaders are kept happy, even
if it means generous supplies of drinks during cocktails.
Pacific
regionalism should be based on honest discussions even if loud voices are
raised in disagreement. Leaders should be allowed to talk freely rather than
suppressing their real sentiments for self-serving remarks aimed at keeping
everyone happy. Should there really be a need for divisions based on Micronesia,
Polynesia and Melanesia given that this is a hangover from colonial times? Are
these labels really necessary when we engage the world and need unified voices
in our regional stance especially in climate change, ocean conservation, sustainable
development, and the necessity to ensure Pacific maritime zones and rights are
not affected by rising sea levels?
In
2019, Dame Meg Taylor, then Secretary General of PIF, urged Pacific Island nations
to think “as a collective rather than only considering bilateral gains”. Nevertheless,
driven by their own national interests, individual Pacific Island countries
have taken varied positions. FSM called for a détente and cooperation between
external powers. Palau and the Marshall Islands supported the United States while
countries like Fiji and the Solomon Island try to balance their foreign relations. (Denghua
Zhang & Walter Diamana, 17/12/2021)
Many Pacific
leaders see themselves as leaders first of their own nations (and often of
their political constituencies). This clouds their perceptions of regionalism
as they are more concerned about how much of the regional cake they can take to
satisfy national constituencies. This means that the bulk of regional leaders’
discussions is useless drivel that does not genuinely promote Pacific
regionalism. They need to transcend this street mentality and look at the
bigger picture of supporting regional initiatives even if this might mean less
of the regional cake going into their own nations. Pacific leaders usually come
up with noble sounding regional statements but as soon as they reach their
countries, their priorities are on political survival and the regional rhetoric
gets thrown into the dustheap! Pacific leaders must be visionary in their
demeanour rather than being demagogies and street thugs too preoccupied with
trying to survive in the political minefields.
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