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Pacific Islands

Briefing Notes for the Launch in Suva, March 2008

Pacific Island economies experienced more modest growth amid uncertainties

  • The island developing countries of the Pacific experienced modest growth in contrast to Asia’s robust economic expansion. The region’s growth was led by Melanesia ahead of Micronesia or Polynesia.
  • The coup in Fiji in December 2006 created uncertainty, leading to declining tourist arrivals, worker layoffs, a fall in the wholesale and retail trades and a freeze on private-sector investment projects.
  • Papua New Guinea continued to benefit from mineral and petroleum prices, which have been rising since 2003. The economic boom has spilled into the non-mining sector, which includes retail, construction, agriculture, forestry and fisheries.
  • Real gross domestic product (GDP) growth in the Solomon Islands was strong over 2007, due to increased logging and log exports. But logging is taking place at an estimated rate of five times the sustainable level and set to impact on growth from any decline in this sector. Vanuatu’s growth rate has consistently exceeded its annual population growth rate, as construction and tourism-related services expand to meet growing demand from new tourist arrivals. But small-scale agriculture still supports two thirds of the island’s people.
  • Kiribati remains heavily dependent on income in the form of fees for fishing licences. In Nauru real gross domestic product (GDP) growth rose in 2006 as a result of investments in phosphate mining infrastructure. But negative growth is expected in 2007 and 2008. In Palau, real GDP is projected to have grown strongly as tourism grows and as externally funded infrastructure projects are implemented.
  • In Samoa the tourism and construction sectors reported growth, buoyed in part by the hosting of the Thirteenth South Pacific Games, held in September 2007. Samoans living abroad sent home remittances equal to a quarter of gross domestic product.
  • In Tonga the GDP growth was projected to fall in 2007, following a fire caused by civil unrest in Nuku’alofa in November 2006 and severely damaged the business district. Both commerce and tourism fell sharply over the year.

Difficult times for exports meant trade deficits

  • The Pacific countries continued to face trade deficits as imports of goods to Pacific countries often exceed exports due to their small-sized economies and a narrow production base. Papua New Guinea is among the few countries enjoying a trade surplus.
  • Commercial relationships are also being brought into line with World Trade Organization (WTO) rules and Economic Partnership Agreements that are being negotiated with the European Union. Countries in the Pacific are also discussing looking at ways to ensure free trade with Australia and New Zealand.

Political conditions affect economic growth in the Pacific

  • The role of the private sector as a driver of economic growth is expected to occur only if investors are confident of a stable macroeconomic environment. Political uncertainties in the Solomon Islands (April 2006), Tonga (November 2006) and Fiji (December 2006) can inhibit long-term economic growth. To encourage private investment, some Pacific island countries are recommended to address governance issues – in particular accountability – and to strengthen the legislative and regulatory environment by way of the rule of law.
  • Improving service quality is another urgent issue to raise investment in Pacific island countries. Most Pacific island countries have public monopolies in water and electricity supplies and port and inter-islands shipping services. The public and semi-public utilities (and other monopolies) are backed by government fiscal support. Even so, their services are often considered inconsistent and come at high cost. To ensure utilities are more efficient, international donors and development agencies have called for the privatization or international private participation in the sector. However, such measures are yet to be introduced in most of the region’s countries.

Tourism, telecommunications and agriculture could drive future growth

  • Pacific developing countries could enhance growth through development in tourism, agriculture and telecommunications. Over recent years tourism has led growth in several Pacific island countries, highlighted by Fiji’s well-developed tourism sector. Tourism-related economic activity is becoming more important for other countries in the region, largely a result of the liberalization of international air services in the Pacific.
  • A liberalized Pacific telecommunications market may also lower service costs and mitigate the effects of geographic isolation. Both Papua New Guinea and Samoa have introduced competition into the mobile telephone market that has led to a significant fall in prices. Such a move could create efficiencies for sectors dependent on these services, such as tourism and agriculture. A lowering in the region’s telecommunication costs could open the way for some countries to develop viable industries in the information and communication technology sectors.

Fast-growing labour markets, limited employment prospects

  • Population growth in the Pacific is expected to remain high for the foreseeable future, apart from those countries with significant emigration. The high growth is expected to place more pressure on fragile ecosystems and limited availability of land, as well as on infrastructure such as water supply and the public services of education and health care. Also there is expected to be greater difficulty for the growing number of young and educated people with aspirations beyond village-based and family-oriented agriculture and fishing to find employment.
    • These problems are of particular concern in the more populous countries of Melanesia, which, unlike most Micronesian and Polynesian countries and territories, do not enjoy historical migration outlets to other countries.
  • The labour force in most Pacific island developing economies has a large unskilled component, due to the dual nature of labour markets in the region. Most rural employment is informal or based on subsistence production and cash cropping. Formal sector employment, concentrated in urban areas, is dominated by the public sector. In the larger economies, there is also substantial formal and informal employment in the private sector. The informal sector, often ignored, absorbs the unemployed and many of whom migrate from the rural agricultural sector.
  • Papua New Guinea became the only Pacific island developing country to apply legislation recognizing the contribution of the informal sector to employment growth when it adopted the Informal Sector Development and Control Act in 2004.
  • The urban-rural distribution of employment varies widely across the region. In Papua New Guinea, where the majority of the population is engaged in subsistence agriculture and small-scale cash cropping in the informal sector, some 90% of the 2.3 million workers are employed in rural areas. In contrast, in Fiji over half of those employed are in urban areas.
  • Women are also underrepresented in formal employment, except for occupations regarded as traditional for women. They are important in informal and cash-cropping activities in many countries. There has been a lack of serious attention to gender issues in the labour market which has often resulted in low labour force participation among women.
  • With 45% of the population in the 15-24 age group the labour force in most Pacific island developing countries is young. Unemployment in this age group is widespread, and many youths are underemployed in subsistence work or the informal sector. In Solomon Islands and Vanuatu, youth unemployment is especially acute. In Fiji, 16,000 school graduates enter the labour market each year. Because opportunities for formal employment are limited, most have no choice but to join the informal sector.
  • The migration of skilled workers for permanent or temporary work overseas has also been a common feature of some Pacific island developing countries. Although generally leading to a greater inflow of remittances, such practices also reduce the pool of human resources.
  • Many workers from Fiji, the Federated States of Micronesia, the Marshall Islands, Palau, Samoa and Tonga have used bilateral and preferential channels to migrate to such countries as Australia, New Zealand and the United States of America. Citizens of Kiribati and Tuvalu have a long-standing tradition of working overseas as seamen. Remittances now account for a high proportion of the gross national income in these countries.
  • Formal sector employment prospects are low owing to the moderate economic growth expected A 20% increase in employment in Fiji between 2004 and 2015 is possible if tourism growth continues. But in the smaller countries, such as the Federated States of Micronesia and the Marshall Islands, the prospects for employment growth remain weak to uncertain. Public sector employment is not likely to grow much further against a backdrop of declining aid and public sector reforms, while private sector activity is limited. Formal sector employment growth will continue to be slow in Papua New Guinea, Solomon Islands and Vanuatu. Without substantial improvements in the investment environment in these countries, the prospects for private sector growth will remain slight.
  • Governments need to promote efficient labour markets. Legislation for labour and employment needs to be reviewed and updated to respond to changing macroeconomic and business conditions.