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Pacific Officials Call for New Development Model for Region

Delegates at the Pacific seminar held on the sidelines of the IMF-World Bank Annual Meetings. The Pacific islands benefit from their proximity to fast growing Asia (photo: IMF)

SEMINAR ON PACIFIC ISLANDS

Pacific Officials Call for New Development Model for Region

IMF Survey

November 7, 2012

  • Pacific ready to capitalize further on links to fast growing Asia
  • Infrastructure key to attracting private sector and foreign investors
  • Partnerships needed to move Pacific from isolation to connectivity

The Pacific’s small island economies need to embrace a new growth model, building on such factors as their proximity to the fast growing Asian region, the need to pool resources, and a strengthened private sector, a seminar in Tokyo heard.

The seminar—on Global Shocks, Near-Term Challenges and Sustainable Growth—held on the sidelines of the IMF-World Bank Annual Meetings in Tokyo, explored how the Pacific islands can enhance their resilience.

Organized as a follow up to a Pacific conference in Samoa in March, the Pacific seminar cohosted by the International Monetary Fund (IMF) and World Bank, gathered finance ministers and central bank heads from 13 Pacific economies, plus representatives of international financing institutions and major development partners.

With much international attention currently focused on Europe, the seminar offered the chance to redirect attention to the challenges faced by small states, said IMF Deputy Managing Director Min Zhu, in his opening remarks.

“We thought that having a joint event at this time would be beneficial, both for our members and also for us in deepening our understanding of the region and increasing synergies in exploring our own comparative advantages,” he said.

“The international institutions and all the stakeholders should work together to bring strong growth in this region. Without growth, it is not possible to achieve fiscal consolidation and rebuild fiscal space,” he added.

Optimism amid risks

With global growth projected at 3.3 percent in 2012 and 3.6 percent in 2013, risks have increased, participants heard. However, with growth in Asia expected to be almost 6 percent in 2013 and almost 7 percent in emerging Asia, there is reason for optimism in the Pacific, said Anoop Singh, Director of the IMF’s Asia and Pacific Department.

“Yes, it’s a difficult global environment,” Singh said. “But the Pacific islands are close to Asia and Asia is a growth leader, and will remain a growth leader. This proximity gives you advantages than other regions do not have.”

While the Pacific’s links with Australia and New Zealand are well established, links with emerging Asia, including China, have also deepened, he pointed out. In the last 10 years, China has become the largest trading partner for some Pacific economies.

But while per capita incomes in East Asia have increased about 650 percent since 1980, incomes in the Pacific have only increased 37 percent, pointed out World Bank Vice-President for Asia and Pacific Pamela Cox.

“As one minister told me this week, ‘you just don’t understand what it’s like to be small’,” she said. “And that is one reason why we continually need to be educated on what it really does mean and how we adapt.”

Participants heard that the challenge is to integrate the Pacific islands’ economies more deeply with the Asian region, building up buffers to resist the shocks that can come with integration while increasing potential growth. The Pacific economies that weathered the 2009 crisis better were those that entered the crisis in a relatively healthy position, participants were told, and had more fiscal space to cope with the global downturn.

Where fiscal space exists, an increase in fiscal spending should be targeted toward priority sectors, including health, education, and infrastructure, said Singh. “If you are able to build fiscal space on both the revenue and the spending side,” he said, “not only will you be able to resist shocks, you’d be able to build infrastructure, and therefore drive private investment into your region and make growth more broad based.”

Impact of commodities

Solomon Islands Minister of Finance, Rick Houenipwela, said many of the small Pacific island countries depend on commodities, whose fluctuating prices have an impact on fiscal space. “We have to have a very fine balance,” he said. “We can’t pursue fiscal space at the expense of providing services. Building up fiscal buffers is something that can be very difficult.”

Due to the uncertain global landscape, the outlook for the Pacific island commodity importers for 2013 is for slow growth of about 2 percent, although it is more favorable for commodity exporters—such as Papua New Guinea, Solomon Islands, and Timor-Leste, participants heard. Growth in these countries is expected to average 5 percent in 2013.

Rising food prices, along with the growth and debt problems spilling over from advanced economies, present the most serious near-term risks for the Pacific, Min Zhu told participants. The IMF’s food price index is up some 20 percent since June, fueled mainly by prices of some key crops affected by weather-related supply disruptions and lower production in some regions.

“Food prices obviously have a fiscal impact because many countries in the Pacific subsidize foods,” Min Zhu said. “When planning next year’s budget, you will probably have to be more careful in taking these factors into consideration.”

To cope with commodity shocks, it is important to improve agriculture infrastructure and support farmers to boost productivity and strengthen food supplies, the Deputy Managing Director said.

Constraints to development

But many faced the challenge of creating a business environment that can attract foreign investors and bring new technology and know-how. In this regard, participants regarded infrastructure development—including in agriculture and fisheries—as a priority, whether through mobilizing domestic sources of funding or assisted by development partners.

“We cannot reap the benefits from tourism if we don’t develop agriculture and fisheries to minimize leakage,” said Tongan Central Bank Governor Siosi Mafi. “These are areas that will create jobs for us and help our small island economy to move forward.”

Participants agreed that the Pacific needs to see a more coordinated approach between development partners in the design of programs, while the Pacific islands themselves needed to pool resources on major infrastructure projects that offer shared benefits, such as marine cables, that can help reduce their isolation.

From isolation to connectivity

“The paradigm of Pacific countries is changing from one of isolation to connectivity,” said Asian Development Bank Deputy Director General for the Pacific Ayumi Konishi. “Projects such as submarine cables like the one we are financing in Solomon Islands and more focus on renewable energy can potentially change the economic landscape of the whole region.”

“We are very small, so we need to seek regional solutions to decrease the costs of providing services: the submarine cable projects and agreements on fisheries are examples,” said Samoa Minister of Finance Faumuina Tiatia Liuga.

“Pacific island countries cannot work in isolation from the rest of the world to address our growth challenges and to pursue our development aspirations,” said Marshall Islands Minister of Finance Dennis Momotaro. “Pioneering with the development community is as important as ownership of the development projects.”

He counseled that given the wide economic and cultural diversity within the Pacific region, care needs to be exercised when prescribing general solutions for the region. “Even in the common similarities between a number of countries, the need for a country-specific approach cannot be understated,” he said. “A one size fits all approach will not work for us collectively.”

Min Zhu called for another high-level conference on the Pacific islands: “We should focus on how to increase potential growth in these islands,” he said. “In the end, growth is the best reliance against external shocks.”


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