Chapter 3
Structural impediments to economic growth
3.1
Pacific island countries are a diverse collection of sovereign states
with notably different characteristics. Each has its own unique history,
terrain, ecology, natural endowments and political, social and economic
structures. Despite their differences, they share a large geographical area and
face similar constraints in achieving sustainable development.[1]
This chapter explores the major structural impediments to economic growth in
Pacific island countries, including size, natural resources, remoteness and
susceptibility to natural hazards.
Population
3.2
For many decades, international bodies have recognised that small
countries, such as the Pacific island countries, face particular difficulties
in developing a sustainable and growing economy.[2]
Indeed, economists have long recognised that these small states are among the
most economically vulnerable and disadvantaged countries in the world.[3]
3.3
Although population sizes vary in Pacific island countries, they
nonetheless are relatively small. PNG dwarfs the other countries with a
population of 6,331,000; Fiji has a population of 839,000, Solomon Islands,
496,000; Vanuatu, 226,000; Samoa, 187,000; Tonga, 100,000; and Kiribati,
95,000. At the other end of the scale, the Cook Islands has a population of
13,000; Tuvalu, 11,000; Nauru, 10,000; and Niue, only 2,000.[4]
3.4
These small populations limit domestic demand for products and services,
which means that local industries do not have the opportunities to benefit from
economies of scale.[5]
Thus, with their comparatively higher per capita cost of producing a good or
service, Pacific island countries are not well placed to compete against larger
economies that produce greater volumes of goods and services at lower prices.[6]
It also means that Pacific island countries have less resources to devote to
research and development and the employment of up-to-date technologies, which
are expensive but vital to a modern economy. Because of their small
populations, Pacific island countries also have problems broadening their
economic base. For example, a recent IMF working paper suggested that 'a small
population, coupled with a limited domestic market, makes it difficult to diversify
into manufacturing activities'.[7]
3.5
With their small populations, Pacific island countries also experience
difficulties developing the human capacity necessary to support and sustain a
growing, competitive economy. If they are to sustain economic growth and
compete effectively in a global market, they need to have capable economic,
financial and project managers, accountants, entrepreneurs, engineers,
scientists, technicians, tradespeople and skilled labourers. They also need
trained personnel in specialised areas such as quarantine, food safety and
animal and plant health as well as trade negotiators.[8]
Throughout this report, the committee refers to human capacity constraints in
all sectors of the economies of Pacific island countries.
3.6
Their size and low-key presence on the international stage also affects
their ability to secure investment. The Governor of the Reserve Bank of Fiji
acknowledged that attracting foreign investment was not easy for small nations
like Fiji facing strong competition from more developed countries endeavouring
'to entice the same investment dollar that we are chasing'. He stated, 'We are
the "small fish" in a very big sea' which 'makes our task even
harder'.[9]
Land mass
3.7
Pacific island countries are not only small in population but also in
land mass, with many comprising numerous small islands often spread over a wide
expanse of ocean.[10]
PNG covers almost 463,000 square kilometres; the Solomon Islands over 28,000;
Fiji, 18,270; Vanuatu, 12,200; and Samoa almost 3,000. Kiribati, which consists
of 33 islands scattered north and south of the Equator, is only 811 square
kilometres; Tonga, 650; Tuvalu, 26; and Nauru a bare 21 square kilometres.[11]
To place these sizes in context, PNG is just less than half the size of South
Australia (984,318 square kilometres) while Nauru is approximately 0.1 times
the size of the Australian Capital Territory (2,395 square kilometres).
Natural endowments
3.8
In large measure, the economic development opportunities for Pacific
island countries rest on the natural resources at their disposal.[12]
But, with few natural endowments, many Pacific island countries do not have the
scope to develop industry and grow employment beyond the tourism sector,
fisheries and small scale agriculture.[13]
Although a number of the smaller countries, such as the Cook Islands, Tonga and
Samoa, have some fertile land, they rely significantly on their marine
resources. A recent analysis found that limited resources can prevent Pacific
island countries from achieving the '"critical mass" of inputs to
make a production operation economically viable'. It gave the following
example:
...a small island may not have the capacity to bear enough
fruit crops to produce the quantity required to justify a fruit juice bottling
operation. Resource limitations in the FICs [Forum island countries] are
compounded by scarce supply of qualified workers and technological inputs that contribute
to value-added production. Limitations on market expansion contribute to a
reliance of FICs on the export of primary goods or the prevalence of cottage
industry as opposed to developing value added through full scale industrial
production.[14]
3.9
As another example, Professor Ron Duncan noted that most Pacific
developing member countries do not have 'a high absorption capacity for waste'.
Thus, environmental considerations will always limit manufacturing.[15]
3.10
As a consequence, exports tend to be confined to a small range of goods
and commodities while imports of food and energy are important. Because they
have less diversified economies and specialise in fewer activities,
fluctuations in export and import prices can have a significant effect on their
economies. For example, Tonga's export base is narrow and it depends
substantially on imports, mostly food and fuel, which makes 'the trade balance
highly vulnerable to major external price shocks'.[16]
Vanuatu, with relatively few commodity exports, also has limited opportunities
to grow its economic base.
3.11
The smaller island countries, including Kiribati, Palau and Tuvalu,
which are made up of low-lying coral atolls and lack substantial renewable
resources, have even less scope to diversify their economies and are extremely
susceptible to economic shocks. Tokelau and Tuvalu in particular have poor
soils and scarce water supplies.[17]
For example, Tuvalu consists of nine low lying and narrow coral atolls with no
streams or rivers, and groundwater is not potable.[18]
3.12
Kiribati also has few natural resources which limit its opportunities to
expand its production base. The country relies 'heavily on licence fees from
distant water fishing nations' and remittances from its citizens employed
abroad, mainly as seamen.[19]
The small island of Nauru has a 'reasonably fertile ring of soil containing
coconut palms, pandanus trees, and indigenous hardwoods which encloses a
phosphate centre'. It has a narrow economic base, with phosphate production the
only significant domestic economic activity.[20]
But, once dependent on its phosphate reserves for income, Nauru has near
exhausted all its land-based resources. According to the ADB, the intensive
mining since 1906 using strip-mining methods has left 'the central 90% of Nauru
a wasteland that threatens the country's limited remaining land resources'.[21]
It concluded:
There is, however, no obvious alternative to phosphate mining
as a means of creating gross domestic product (GDP). National income will be
heavily reliant on external sources. Pelagic fish are abundant in Nauru’s EEZ, and revenues can be expected from fishing licenses issued to several deepwater
fishing nations. But this is inherently volatile revenue that is difficult to
predict.[22]
3.13
Lacking natural geographic advantages, these island countries have few
opportunities for import substitution or export diversification and need to
import most essential goods. Indeed, Mr Reginald Hodgson, Australia Pacific
Islands Business Council, noted that some of the tiny atoll islands with
virtually no natural resources are 'never going to create a sustainable group
of industries'.[23]
The majority of the resources of the Pacific island countries, particularly
those of these small islands and atolls, are found in their vast maritime zones
with few other opportunities for sustainable economic development. They are
also highly dependent on aid.[24]
The Australia Pacific Island Business Council advised the committee that some
of these countries 'are unlikely to ever achieve a level of economic growth and
business development which would make them economically independent of
development assistance'.[25]
Pacific island countries with rich
natural resources
3.14
A few Pacific island countries, however, are endowed with rich natural
resources. They tend to be larger, have rich volcanic soils, running water and
some exploitable mineral reserves. For example, PNG has an export-centred,
capital-intensive minerals sector which is a key driver of economic
development. Its accelerated economic growth in large measure stems from the
'flow-through of high prices for export commodities, which allowed for a rise
in both government and household spending, and stimulated investment'.[26]
A recent survey found:
Mineral revenues in 2007 were more than five times higher
than in 2002, driving a near doubling of total government receipts and
facilitating an increase in total expenditure and net lending of more than 80
per cent.[27]
3.15
Solomon Islands similarly enjoys the economic benefits deriving from its
natural resources. In large part, its recent strong economic performance was
achieved through the logging industry which increased production by 25 per
cent. Unfortunately, accordingly to the ADB, 'years of unsustainable logging
and the anticipated depletion of natural forests by 2013 are projected to force
a decline in logging rates from 2009'.[28]
The bank forecasts that GDP growth will reach 8.0 per cent, with log exports
expected to increase by over 10 per cent in 2008, fish by nearly 30 per cent,
palm oil production by 40 per cent and copra by 30 per cent.[29]
3.16
Fiji, one of the largest and most developed economies in the region, is
rich in forest, mineral and fish resources. The ADB noted that 70 per cent of
the labour force depends on subsistence agriculture, tourism, sugar, clothing,
copra, gold, silver, lumber and cottage industries.
3.17
But even Pacific island countries rich in mineral resources, forests,
and fertile soils have an export base that is narrow and dominated by primary
products and natural resources. They remain highly dependent on subsistence agriculture
and fishing.[30]
For example, the IMF observed:
The range of Papua New Guinea’s exports is limited and has
been relatively unchanged over the years. Exports consist mainly of
commodities, including minerals and fuel, wood products, and agricultural
products. Other areas, such as manufactured products, contribute little.[31]
Proximity to major markets
3.18
The remoteness of Pacific island countries is also an inherent obstacle
to economic growth as it renders the import and export of goods and services
more difficult and costly, further compounding the problems created by their
size and natural resources.[32]
A report of the UN Secretary-General noted that 70 per cent of the populations
of Pacific small island developing states do not have access to modern energy
services and that, as a group, they pay between 200 and 300 per cent 'above
global market prices for fossil fuel'. It noted that physical dispersion makes
access to markets for trade more expensive.[33]
3.19
The aviation industry highlights the problems for economic development
caused by isolation and small populations. Pacific island countries require
safe, secure and reliable aviation services for their economic wellbeing and
growth.[34]
Qantas informed the committee, however, that due in part to thin passenger and
cargo traffic volumes, which restrict demand for air travel in any one state
(with the exception of PNG):
Regional air travel remains expensive in local terms, with
schedules infrequent and often unreliable.[35]
3.20
The Department of Infrastructure, Transport, Regional Development and
Local Government noted the recent entry of low-cost carriers, which had led to
some reduction in airfares and increases in passenger traffic. It concluded,
however, that:
...the sector continues to face challenges typical of remote
and regional services, including servicing a number of non-commercially viable
routes to smaller states.[36]
3.21
As noted already, Pacific island countries struggle to compete for
attention in overseas markets. They are in a contest with states that are larger,
have much greater political and economic clout and are better resourced. The
remoteness of Pacific island countries magnifies their difficulties and adds to
the enormous challenges of establishing their presence in a globalised world.[37]
One commentator observed that smaller states are often 'just specs in a vast
ocean, making their way in the current tide of global economic development'.
She was of the view that:
As the world’s major economies move towards greater trade and
economic integration, many smaller, less developed economies are at risk of
being left behind.[38]
3.22
Clearly, Pacific island countries, with their low bargaining position
and higher fixed costs of production, especially for the transportation of
goods or materials, are at a distinct disadvantage compared to other larger
states that enjoy economies of scale and are closer to major markets.
Natural disasters and climate change
3.23
Many Pacific island countries are subjected to periodic disruption to
economic activity and in some cases widespread devastation from natural
disasters.[39]
Their small size, remoteness and lack of diversity in their economic base make
them particularly vulnerable to the effects of weather extremes, including
cyclones, earthquakes, floods and droughts.[40]
Agriculture, fishing, tourism and mining, the mainstay sectors of their
economies, are particularly disrupted by natural disasters. Cyclones, which are
especially damaging to low-lying atoll islets, are the most prominent and
wide-spread natural disaster in the Pacific.
3.24
According to a 2006 study by the World Bank, since 1950 natural
disasters have affected more than 3.4 million people and caused 1,747 reported
fatalities in the Pacific islands region, excluding PNG. It recorded:
Cyclones accounted for 76 per cent of the reported disasters
from 1950–2004, followed by earthquakes, droughts and floods. The average
cyclone damage during this period was US$75.7 million in real 2004 value.
Droughts affected the highest number of people per event, while tsunamis caused
the highest number of fatalities per event.[41]
3.25
A recent UN study noted that these extreme weather events impose serious
constraints on development in the islands, so much so that some Pacific island
countries seem to be in a 'constant mode of recovery'.[42]
Fiji and Vanuatu reported the highest number of disasters between 1950–2004 (38
and 37 respectively).[43]
Samoa is also highly susceptible to devastating storms and droughts.[44]
Table
3.1: Estimated economic and social impact of disasters in selected Pacific
island countries (1950-2004)
|
Country |
No. Disasters reported |
Total reported losses in
2004 (US$m) |
Average population
affected (%) |
Average impact on GDP (%) |
|
|
|
|
In disaster years |
In all years |
In disaster years |
In all years |
|
Fiji |
38 |
$1,174.6 |
10.8 |
5.1 |
7.7 |
2.7 |
|
Samoa |
12 |
$743.4 |
42.2 |
6.1 |
45.6 |
6.6 |
|
Vanuatu |
37 |
$384.4 |
15.5 |
4.5 |
30.0 |
4.4 |
|
Tonga |
16 |
$171.1 |
42.0 |
5.3 |
14.2 |
1.8 |
|
Guam |
11 |
$3,056.3 |
3.7 |
0.5 |
N/a |
N/a |
Sources: EM-DAT: the OFDA/CRED International Disaster Database for 1950-2004 data, adjusted by SOPAC (2005) for 1994-2005
data. GDP and population estimates from World Development Indicators, IMF and
US Census Bureau. All economic data are converted to 2004 values.[45]
Recent disasters
3.26
Recent natural disasters include Cyclone Heta in January 2004 and the
subsequent drought that ruined Samoa's agriculture.[46]
Only weeks later, the category 3 Cyclone Ivy struck the island chain of Vanuatu causing significant damage to crops and houses. During a month of intense cyclone
activity in 2005, the Cook Islands encountered a sequence of tropical cyclones—Cyclone
Meena, Cyclone Nancy, Cyclone Olaf and Cyclone Percy.
3.27
On 2 April 2007, an earthquake and tsunami hit Western Solomon Islands
affecting 36,500 people, with 52 people confirmed dead and about 6,300 houses
damaged or destroyed across 304 communities.[47]
Cyclone Gene, which hit Fiji in January 2008, damaged agriculture, including
sugar, and lowered tourism earnings, causing an estimated $5 million in damages
excluding the cost to rural water supply.[48]
In December 2008, tens of thousands of people along the northern coast of PNG were displaced by a combination of king tides, high seas and two tropical depressions in the
Pacific.[49]
A month later, parts of Fiji were inundated by flood water causing extensive
damage. According to Mr Francis Yourn, Australia Fiji Business Council, Fiji
suffered 'a $100 million hit' on its economy from these floods.[50]
More recently, the tsunami that struck Samoa and Tonga claimed over 140 lives,
injured many more and devastated villages along the south-east coast of Samoa,
destroying 20 of them completely.[51]
Climate change
3.28
In 1994, the Global Conference on the Sustainable Development of Small
Island Developing States raised the alarm about the particular vulnerability of
Pacific island countries in the face of climate variability and sea level rise.
It noted:
As their population, agricultural land and infrastructure
tend to be concentrated in the coastal zone, any rise in sea level will have
significant and profound effects on their economies and living conditions; the
very survival of certain low-lying countries will be threatened.[52]
3.29
Since that time, numerous other studies have continued to highlight the
danger posed to the economies of Pacific island countries by rising sea levels.
Dr Ben Saul, Director, Sydney Centre for International Law, informed the
committee that:
Shoreline erosion, coastal flooding, increasing salinity and
the vulnerability of small islands to rising sea levels and increased severe
weather events compromise their continued habitability, impacting upon
agricultural viability, vital infrastructure and services, tourism (including
coral reefs), the stability of governance, and human settlement.[53]
3.30
Along similar lines, the CSIRO advised the committee that:
Pacific island nations are likely to experience particularly
negative climate change consequences with considerable economic impact. Likely
impacts include temperature rise, rainfall decline, more extreme weather
events, water resource stress (especially for small islands dependent on
freshwater lenses), fishery and marine damage, and agricultural pressure.[54]
3.31
The small coral islands, especially the atoll states (Cook Islands,
Kiribati, Tuvalu, Federated States of Micronesia, the Marshall Islands, Niue
and Nauru), are particularly susceptible to changes in sea levels.[55]
In 2000, a major ministerial conference found that these island states are
among the most vulnerable places on Earth to the adverse impacts of climate
change and sea level rise.[56]
Higher sea levels already threaten Tuvalu's underground water table. According
to Dr Saul, whole-nation displacement is imminent for Kiribati and Tuvalu, largely
as a result of rising sea levels.[57]
3.32
In October 2007, Mr Ludwig Scotty, President of Nauru, stated that
climate change was 'a daunting and overwhelming threat to the economic,
environmental and social well being of island communities'.[58]
As noted by the Department of Climate Change, the likely effects of climate
change have 'the potential to exacerbate existing challenges in Pacific Island
countries particularly in pursuit of sustainable development'.[59]
Overcoming impediments to economic
growth
3.33
Pacific island countries face a number of distinct disadvantages in
developing their economies—small populations and land mass, limited natural
resources, remoteness, including distance from major markets and suppliers, and
exposure to natural disasters. These inherent physical and geographical
limitations cannot be changed and often produce conditions or circumstances
that inhibit the ability of Pacific island countries to develop their
economies. These include:
-
domestic markets with little potential to achieve economies of
scale in both the production and delivery of goods and services—higher per
capita costs of production;
-
limited human resources from which to build capacity in key
economic sectors—air controllers, engineers, scientists, trade negotiators,
public servants, skilled trades people;
-
limited range of natural resources and a high dependence on
subsistence agriculture and fishing, leading to a concentration in exports and
reliance on imports especially of strategic products such as energy and staple
foods, leaving Pacific island countries exposed to the vagaries of the global
market
-
difficulty diversifying into areas such as manufacturing;
-
a small presence on the global stage—Pacific island countries are
competing against states that are larger, have much greater political and
economic clout and are better resourced; their low bargaining position and
higher fixed costs of production places them at a distinct disadvantage when
compared to more developed states, closer to major markets;
-
additional costs and barriers to delivering goods and services to
distant markets that undermine competitiveness in global markets; and
-
damage to the economy from natural disasters (particularly
cyclones) and the effects of climate change.
3.34
The constraining factors of size, limited natural resources, isolation
and natural disasters are beyond the control of Pacific island countries. The
circumstances that flow from these structural impediments, however, are not
fixed. Thus, although difficult, it may be possible for Pacific island
countries to diversify their production base, expand their export markets,
minimise dependency on imports, build human capacity and become more resilient
to the damaging effects of natural disasters.[60]
Indeed, a number of submitters pointed to the poor or lacklustre economic
performance of Pacific island countries and suggested that they are not
fulfilling their potential. For example, Treasury noted that some Pacific
island countries have mineral resources and fishing resources and that there
are opportunities for growth in tourism, agriculture and human capital.[61]
It noted that the issue is how to 'unlock that potential'.[62]
3.35
AusAID was also of the view that Pacific island countries have economic
opportunities which, 'if exploited responsibly and with a long-term view and
the support of the international community, can lead to increased growth and
better development outcomes'.[63]
The Pacific Islands Forum Secretariat also noted that 'faster economic growth
is possible in the region'.[64]
The Hon Natan Teewe MP, Kiribati, told an IMF gathering that to achieve
economic growth, Pacific island countries 'have to take advantage of our
disadvantages'.[65]
3.36
For example, education is vital to unlocking the region's economic
potential and is a factor over which Pacific island countries have control. At
the moment, however, the low level of educational attainment is retarding
economic growth not promoting it. This matter is considered in chapter 10.
Conclusion
3.37
At this stage of the report, the committee has considered the major
structural challenges facing Pacific island countries, such as their size,
remoteness and susceptibility to natural disasters. These characteristics
cannot be changed but they may be managed in ways that ameliorate adverse
consequences for their economies. The committee in the following part of the
report considers measures that Pacific island countries are taking, and could
take, to improve their economic performance in the face of these physical and
structural impediments. It also looks at the assistance that Australia provides
to the region.
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