economic cost of human capital loss from fiji: implications for sustainable development

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Economic Cost of Human Capital Loss fiom Fiji: Implicutions for Sustuinuble Development’ Mahendra Reddy Manoranjan Mohanty Vijay Naidu University of the South Pacijc Small island nations in the South Pacific are facing a serious problem of loss of human capital. The loss of skilled and qualified ersonnel from the small pool is causing a major setback in terms o I! providing the technical expertise to forge ahead with reform programs that these economies are undertaking. Fiji’s policymakers are increasingly con- fronting this issue, because the nation has experienced a massive outflow of skilled labor following the political instability in 1987. While there is an outflow of skilled labor, the country is also losing a large amount of financial capital. The extent of the outflow has yet to be measured due to lack of a methodology. This study advances a methodology to mea- sure the loss to the economy arising out of human capital loss in a small island economy. The quest for development emerged in the international arena after 1945 to rebuild economies following World War IT and to develop colonies and emergent post-colonial societies. During the following three decades, the preoccupation with economic growth resulted in visible damage to the en- vironment. Concern about the environmental costs of human activities led to the notion of “sustainable development.” Development, in contrast to economic growth, is a broader concept that takes into account the socio- economic and political dimensions of the population. For development to improve the socioeconomic, political and environmental aspects of the gen- eral population over a period of time, it must fulfill certain sustainability criteria. Sachs (1999) lists these criteria as follows: social sustainability and its corollary, cultural sustainability; ecological sustainability (conservation of the capital of nature), supple- ‘An earlier version of this paper was presented at the 5th International Conference of the Asia Pacific Migration Research Network (APMRN), September 2426,2002 at the Naviti Resort Coral Coast, Fiji. 0 2004 by the Center for Migration Studies of New York. All rights reserved. 0 197-9 183/04/3804.0 148 IMR Volume 38 Number 4 (Winter 2004):1447-1461 1447

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Page 1: Economic Cost of Human Capital Loss from Fiji: Implications for Sustainable Development

Economic Cost of Human Capital Loss fiom Fiji: Implicutions for Sustuinuble Development’ Mahendra Reddy Manoranjan Mohanty Vijay Naidu University of the South Pacijc

Small island nations in the South Pacific are facing a serious problem of loss of human capital. The loss of skilled and qualified ersonnel from the small pool is causing a major setback in terms o I! providing the technical expertise to forge ahead with reform programs that these economies are undertaking. Fiji’s policymakers are increasingly con- fronting this issue, because the nation has experienced a massive outflow of skilled labor following the political instability in 1987. While there is an outflow of skilled labor, the country is also losing a large amount of financial capital. The extent of the outflow has yet to be measured due to lack of a methodology. This study advances a methodology to mea- sure the loss to the economy arising out of human capital loss in a small island economy.

The quest for development emerged in the international arena after 1945 to rebuild economies following World War IT and to develop colonies and emergent post-colonial societies. During the following three decades, the preoccupation with economic growth resulted in visible damage to the en- vironment. Concern about the environmental costs of human activities led to the notion of “sustainable development.” Development, in contrast to economic growth, is a broader concept that takes into account the socio- economic and political dimensions of the population. For development to improve the socioeconomic, political and environmental aspects of the gen- eral population over a period of time, it must fulfill certain sustainability criteria. Sachs (1999) lists these criteria as follows:

social sustainability and its corollary, cultural sustainability; ecological sustainability (conservation of the capital of nature), supple-

‘An earlier version of this paper was presented at the 5th International Conference of the Asia Pacific Migration Research Network (APMRN), September 2 4 2 6 , 2 0 0 2 at the Naviti Resort Coral Coast, Fiji.

0 2004 by the Center for Migration Studies of New York. All rights reserved. 0 197-9 183/04/3804.0 148

IMR Volume 38 Number 4 (Winter 2004):1447-1461 1447

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mented by environmental and territorial sustainability, the former rela- tive to the resilience of natural ecosystems used as “sinks,” the latter evaluating the spatial distribution of human activities and the rural- urban configurations; economic sustainability taken in its broad meaning of the efficiency of economic systems (institutions, policies and rules of functioning) to ensure continuous, socially equitable, quantitative and qualitative progress; last, but not least, political sustainability that provides a satisfying overall framework for national and international governance.

While developing countries are becoming more mindful of the salient dimensions of these criteria, new issues keep cropping up as the forces of globalization reach their shores. Some of those issues are:

reduction in the size and of the role of the state; opening up of economies and the reduction and elimination of barriers to trade and investment; a shift towards market-led growth; and migration from developing countries.

The Asian Development Bank (ADB), the International Monetary Fund (IMF), and the World Bank have actively promoted economic reforms in the South Pacific region. This has been in response to the poor economic performance accompanied by increasing levels of unemployment, corruption and rent-seeking, high levels of borrowing and debt, and lack of investment and savings. While the full impact of these reforms on economic growth and development are yet to be seen, migration is another issue that is being faced by small Pacific Island countries.

Migration is a significant factor in the socioeconomic transformation of developing countries. Migration of people endowed with high levels of ‘human capital’ is seen to be beneficial, and it helps in economic growth and development in many countries of the developing world. This applies to labor surplus South, East and Southeast Asian nations such as, e.g., Bangla- desh, China, India and the Philippines.

Skilled human resources comprising professionals, trades people and entrepreneurial labor is critical human capital for economic growth and sustainable development. Human capital is not only a means of production but also its end (Sen, 1997: 195 1). Both human capital and economic growth reinforce one another. Human capital accumulation increases the productive capacity, which in turn leads to positive rates of return and thus develop-

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ment. Brain drain reduces the growth rate of the effective human capital that remains in the economy and hence generates a permanent reduction of per capita growth in the home country (Beine et al., 1999:603).

While the outflow of professional and skilled migrants is seen as con- ducive to development in some of the larger countries of Asia, in the smaller states of Oceania it is regarded as detrimental to sustainable development in the longer term. The outflow of human capital resources and the develop- ment nexus are critical in these small countries where human resources are very limited and the demand for skilled manpower exceeds supply. The migration issues, particularly the outflow of human capital and loss of skilled people, is one of the major concerns in Fiji in the post-independence era. Many small island countries in the pacific region, such as Tonga and Samoa, for example, have gained to some extent by the outflow of their human capital resources. In 1992, the total recorded remittances to Tonga and Western Samoa were $27.2 and $43.4 million, respectively (Brown and Foster, 1995). The outflow has helped to bring economic growth and pros- perity to these ‘MIRAB economies’ (Bertram and Watters, 1985), as remit- tances from relatives abroad have been the largest foreign exchange earner. Unlike Samoa and Tonga and other developing nations, Fiji loses more through outflow of its human capital resources than it gains, as the level of remittances by emigrants is relatively insignificant. Forsyth, in his study, found that there were large net negative flows of remittances in 1990 (For- syth, 199 1 :37-44).

This article attempts to throw light on the contemporary trends and patterns, causes and economic costs of loss of human capital resources from Fiji and their potential impacts on the quest for sustainable development.

TENDS AND PATTERNS

Fiji witnessed waves of outflow of skilled citizens, largely professionals, including architects, engineers, accountants, teachers and medical profes- sionals after the military coups and political upheaval of 1987, which con- tinued through the 1990s and accelerated after the coup of May, 2000 (Mohanty, 2001). The loss of human capital resources was substantial dur- ing the last fifteen years. The official statistics indicate that about 76,000 Fijian citizens migrated, with an annual average of more than 5,000 people between 1987 and 2001 (Mohanty, 2002). Unofficial independent sources estimate the aggregate figure to be more than 100,000 for the period as a whole (Bedford, 1989; Chetty and Prasad, 1993). Of the total official out-

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flow, over 67,000 or nearly 89 percent were Indo-Fijian. Another 6.5 per- cent were indigenous Fijian, and 4.8 percent belonged to other ethnic groups. The annual average emigration of people from Fiji has been increas- ing over the years since the coup in 1987. The average number was 4,900 during the period 1987-99. In 2000, the aggregate number was over 5,200 and further accelerated to 6,300 in 2001. Fiji lost about 9,000 professional, technical and related workers during 1987-2001 (Table 1).

TABLE 1 OUT-FLOW OF CITIZENS FROM FIJI, 1987-2001

Annual Total Year Fijians Indo-Fijians Others Total average Professionals"

1987-99 3,926 57,159 3,124 64,209 4,939 6,869 2000 468 4,568 239 5,275 5,275 83 1 200 1 51 1 5,550 255 6,316 6,316 977 Total 4,905 67,277 3,618 75,800 5,510 8,677

Source: M. Mohanrv, 2002, based on Fiii Bureau of Statistics. Note: alncludes professional, technical and related workers

The two key human capital sectors, i.e., education and health, have both been greatly affected due to the continued loss of professionals. Teach- ers are the single-most common professional group leaving Fiji. Of the total number of professionals, teachers accounted for about 31 percent, and ar- chitects, engineers and related technicians nearly 2 1 percent between 1987 and 1999. An average of about 164 teachers left Fiji every year during this period. There also has been a loss on average of nearly 69 medical, dental, veterinary and related workers annually. More than 500 professionals left Fiji annually during this time (see Table 2).

TABLE 2 EMIGRATION OF PROFEsSlONAL AND TECHNICAL CATEGORY, 1987-1999

Total Loss Annual Average Category 1987-99 % Loss 1987-99

Architects" 1,439 20.9 110.7 Accountants 1,065 15.5 81.9 Teachers 2,125 30.9 163.5 MedicaJ Workersb 893 13.0 68.7 Others 1,347 19.6 103.6 Total 6,869 100.0 528.0 Source: M. Mohantv. 2002. based on Fiii Bureau of Statistics, ~~~ ,. ,

Notes: "Includes architects, engineers and related technicians. bIncludes medical, dental, veterinary and related workers.

In terms of gender, female migrants dominate the migratory process in Fiji. During the period 1987-1996, female migrants constituted over 52 percent of the total Indo-Fijian emigrants. Professional emigration was,

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however, male dominated, the proportions of male and female professional emigrants being 64 percent and 36 percent respectively during this period (Mohanty, 2001:60).

In 1997, a great majority of the emigrants, accounting for about 95 percent of the total, entered into four countries - Australia (31%), New Zealand (20%), the United States (33%) and Canada (10%). Canada, a traditional receiving country for Fijian migrants, received more than half of all Fijian emigrants during the mid-1 970s. In 1980, about two thirds of Fiji’s total emigrants were received by Canada and the United States combined and another 29 percent by Australia and New Zealand. Since 1987, this trend has reversed and Australia and New Zealand have been the major destinations for emigrants from Fiji (Mohanty, 200 1 :63).

The migratory stream shows about 15 percent of the total citizen migrants are professionals. However, the skill loss seems to be much higher than the recorded data. The dominant category recorded in the data is nonclassifiable workers, which constitute about 58 percent of the total emi- grants. A definitional problem exists in the emigration data (Connell, 1987; Chetty and Prasad, 1993; Bedford, 1989; Mohanty, 2001; Naidu and Pillay, 2001). Chetty and Prasad (1993:3) have argued that there is a serious conceptual problem in measuring migration in Fiji. Bedford has also noted that the data “greatly understates the extent of population loss to Fiji since the first coup” (Bedford, 1989:143). The loss of professionals and skilled workers from Fiji is alarming. The trend is similar for all ethnic group categories. Naidu and Pillay noted that proportionate to the numbers of professional and skilled ethnic Fijians, ethnic Fijian emigrants constitute a serious loss of such personnel. Similar remarks can be made for “other” categories (Naidu and Pillay, 200 1).

CA USES OF MIGRA TION A range of push and pull factors are at work in the emigration process in Fiji. These factors can be broadly classified into economic, political and socio- economic factors, which can also be traced over time (Figure I).

Socioeconomic Factors

Migration is not a new phenomenon to Fiji. However, what is new is the rate of emigration. The traditional emigration of skilled and qualified people from Fiji was primarily based on unequal wages and salaries across borders. Fiji’s wage rates and salaries are much lower than what is offered for similar positions in the Pacific Rim destination countries. An increase in income

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level and higher standard of living and better social and economic oppor- tunities such as education, health, and job opportunities in metropolitan countries such as Australia, New Zealand, Canada and United States are some of the pull factors that influence migration decisions. These had been the most important factors for emigration from Fiji prior to 1987. The migration of workers also led to migration of families.

Political Factors Following the military coups in 1987, another dimension to migration was added, that of insecurity and political instability. The gross maldistribution of land ownership, lack of land tenure security, ethnic tensions and political instability have been the dominant push factors in the emigration of citizens from Fiji. An empirical study on migration of professionals from Fiji to New Zealand showed that political instability in Fiji, rather than demand for professionals in New Zealand, seemed to be a motivating factor behind the emigration of professionals (Gani and Ward, 1995). Naidu, in her study on professional emigration from Fiji, especially of doctors, found that the poor working conditions and political and economic insecurities were the major contributing factors to professional emigration (Naidu, 1997). The military coups saw large numbers of people, particularly Indo-Fijians, leaving to settle abroad (Chetty and Prasad, 1993; Bedford, 1989; Naidu and Pillay, 2001).

The effects of the 1987 military coups and the resulting political instability and insecurity began to subside with the promulgation of a new constitution in 1997. However, following the general election of 1999 and the May 2000 putsch, political instability seriously escalated in the country. Expiration of land leases further compounded this factor. The leases began to expire in 1997 but peaked in 2000-2001 (Appendices A and B).

A schematic diagram showing the predominant factors affecting emi- gration from Fiji and the progressive increase in the annual average number of migrants in different phases of migration is presented in Figure I.

A study carried out by Naidu and Reddy (2002) found that 42 percent of the sugarcane farmers do not wish to renew their leases (Appendix C). They expressed their desire to take lump sum payouts and move out of agriculture altogether. This will have serious implications for Fiji’s agricul- tural sector, arising particularly from a shortage of skilled labor. The ability of the urban sector to cope with the demands for housing, water and other amenities will also be affected by the inflow of immigrants from rural areas. Furthermore, those who are skilled and qualified or have relatives abroad can use the lump-sum payout to migrate.

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Figure I. Factors Mecting Migration horn Fiji

Prior to 1987 (1978-86: 2,300 migrants per year)

Higher wage rates and living standards in metropolitan countries and a sense of impending political instability

v 1987 to 1999

(4,900 migrants per year) Higher wage rates and living standards in metropolitan countries and a sense of impending Political instability and insecurity due to military coups

~~ ~~

Post -1999 (5,800 migrants per year)

Higher wage rates and living standards in metropolitan countries Political instability and insecurity from May 2000 events Nonresolution of expiring land leases and displacement of fanners.

Impact on F+ii Economy

The loss of human capital resources has had serious consequences for the society and economy of Fiji. Naidu ( I 997) pointed out that “. . . the loss of thousands of skilled and professional citizens has severely weakened Fiji’s administrative, financial, legal, social, .political and economic institutions.” Given the difficulty in estimating the loss of labor as a result of migration (Taylor, 1999), there is hardly any literature on the subject. The Fiji Em- ployment and Development Mission Report noted that to assess the costs of human capital loss, two types of costs have to be estimated: first, the op- portunity cost of the resources spent on education and training and second, the foregone production resulting from the migrants’ removal from the

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economy (Bienefeld, 1984). In some cases, these costs can be extremely high. The costs of migration can be high where the (marginal) cost of education is high, where the worker’s lifetime income stream is high, and where a particular person’s work would not be done at all in their absence (Bienefeld, 1 984: 5 ) .

Economic Cost of Human Capital Loss

An estimation of economic cost can be made with some degree of accuracy. The costs of human capital resource loss may include:

the public funds spent on education and training of migrants in ac- quiring knowledge and skills; loss of financial capital flow with the migrants, particularly the capital and productive assets lost through business migration; costs of recruiting expatriate professionals with high wages and all other cumulative direct and indirect costs (if this done at a significant level); and income lost after migration.

Public expense for education and health is computed by multiplying the number emigrated by the per capita expenditure on these two items. The training and development component is estimated by multiplying the num- ber of professionals who received this assistance by an average expenditure of $10,000 on tertiary qualifications. It is assumed that, on an average, 50 percent received government assistance. The financial capital outflow data was obtained from the Reserve Bank database (see Figure 11).

The loss to the economy arising from the migration of a productive worker is calculated by using the discounted value of the output foregone over the period in which the worker is not replaced. The maximum replace- ment period could be the remaining working lifespan, which is estimated by subtracting the age of the migrant at migration from the average retirement age. The annual income foregone, multiplied by the number of work years lost will yield the total income foregone which must be discounted using a suitable discount rate. This, of course, assumes that the individual’s annual income remains the same throughout the remaining period. A simple for- mula to compute the present value (PV) of the income foregone is as follows:

(:)[ -A] Output Loss from the Economy = S

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where S is the annual income foregone; r is the chosen rate of discount and t is the working lifespan lost as the result of migration. Due to varying levels of income for migrants, the average annual income is proxied by the per capita income.

Figure 11. Emigrants Transfer and Legacies from Fiji, 1994-2001

Data Source: Reserve Bank of Fiji

The analysis presented in Table 3 reveals that, in the short run, Fiji loses, on an average, F$44.5 million due to migration every year. Taking a conservative scenario of replacement (see Appendix D), given a high level of unemployment and availability of expatriates, the output loss is estimated to be F$60.3 million. These estimates are the direct impact on the economy. However, the contributions of these migrants to the economy would have also arisen from the multiplier effect of the income that is lost out of the country, which is not included in the analysis given that the level of the impact is not very clear.

The F$44.5 million is equivalent to 4.7 percent of the Fijian govern- ment’s overall revenue, which is a very large figure for a small country like Fiji. Losing such an amount every year will have serious implications for investment and government finances. The outflow of professional and skilled people from Fiji also leads to serious impediments for sustained growth and development. It creates a vacuum in the system, adversely affecting the process of development. The gaps created by the emigrant skilled workers are mostly

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TABLE 3 ECONOMIC COST OF HUMAN CAPITAL Loss

Item F$ Immediate Loss

Education and health expenditure on migrants (per capica education and health expenditure of $388.33) 5,510 x $388.33 $2,139,698.30

scholarships (on the basis of 50% of the professionals at a cost of $10,000) 264 x $10,000 $2,640,000.00

Emigrant’s Transfers and Legacies $39,766,250.00 Immediate Loss $44,545,948.30

Developmenc and training expenditure

Output Loss Income foregone due to migration

Annual average number of emigrants Annual income foregone per person (S) $4,000.00 Rate of discount (r) 0.05 Replacemenr period (t years) (varies, see Appendix D) Present value of income foregone

5,510

Output loss arising from migration Source: Based on data obtained from various sources - Reserve Bank of Fiji, 2002, Ministry of Education and Ministry of Health, Annual Reports.

60,300,000

filled by less efficient workers resulting in the reduction of labor productivity and consequently a reduction in economic growth and development.

The quality of health care services is declining rapidly due to the outflow of medical professionals, including physicians, dentists, nurses and related medical workers. The number of medical personnel such as doctors, dentists and nurses in the pool has been dwindling. Medical personnel and population ratios are high and show an increasing trend over the years, cg., the doctor-to-population ratio increased from 1 : 1,929 in 1997 to 1 :2,978 in 1999 (Mohanty, 2002:365). Similarly, there was one nurse for every 453 people in 1997, which increased to 523 in 1999. The migration of teachers, nurses and engineers has severely affected educational standards, health services and public utilities such as water supply (Naidu, Vasta and Hawksley, 2001).

There are, however, a few positive impacts of emigration in Fiji. Emi- gration may be seen as a ‘safety valve’ in a situation where the supply of

TABLE 4 TRENDS IN STOCK OF MEDICAL PERSONNEL AND THEIR POPULATION RATIOS IN FIJI, 1997-1999

Medical Personnel Medical Personnel: Population Ratios Year Doctor Dentist Nurse Doctor Dentist Nurse

1997 409 36 1,742 1,929 21,917 453 1998 252 33 1,576 3,167 24,182 506 1999 27 1 32 1,543 2,978 25,218 523 Source: M. Mohanry, 2002, based on Fiji Bureau of Statistics, Facts and Figures, 1998-2000.

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formal jobs has fallen short of the demand for fresh entrants to the labor force. With 17,000 new job seekers each year and only 1,500-2,000 new employment opportunities, migrants leave behind vacant positions for younger people to fill. This obviously does not apply to senior management- level personnel, nor to those such as doctors and engineers, who require lengthy formal training.

Another positive aspect of emigration is that Fiji’s diaspora abroad provides a growing niche market for the country’s products such as kava, fish and vegetables. It is also expected that many will periodically return as visitors.

The impact of migration on the host country can be illustrated by the following figure:

Figure 111. Migration-Poverty and Development Linkages

& Migration of skilled workers

breakups -Loss of bread winners

export market;

Increasing levels of poverty

Low levels of development implication on sustainable development

PrlvaleSecIor Publlc Secfor Lass of govemmenr

skilled work force funds on health, Low omductivitv educationand and eficiency

. Movementof invcstible funds mediacriw and low

CONCLUSION The loss of skilled manpower from Fiji has had far-reaching social, cultural, economic and political implications, which underpin the very foundations for sustainable development of any country. Small island states, such as Fiji, with limited resources, cannot afford to lose capital at the magnitude of 4.7

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percent of total revenue, particularly when there are no benefits in terms of remittances from those who migrate. The loss of experienced specialist teach- ers, the dominant professional group in the migratory stream, has created a vacuum in the educational system, the basic foundation of the socioeco- nomic development of the country. Apart from the drain in human capital resources consisting of professional and managerial people, a substantial financial capital outflow takes place through emigration. These losses may disintegrate the social and economic fabric of the country and greatly ham- per future development due to a lack of investment funds. This situation makes the process of sustainable economic development more difficult.

The ‘migrant syndrome’ in Fiji has been draining both labor and financial capital from its system, which may inhibit economic growth and greatly jeopardize its process of development. With the outflow of human capital resources, Fiji is not only losing quality personnel, but also the confidence of potential investors for future development.

International migration has many adverse effects - both direct and indirect - on the economy. The gaps created by the emigrant skilled workers have been filled either by less efficient and unskilled/semi-skilled workers, resulting in lowered economic growth and greatly affecting the processes of development. Labor emigration also causes substantial loss of public funds spent on education and training migrants.

The rapid decrease in the number of skilled and professional people on the one hand and increasing demands for economic growth and develop- ment on the other, may put Fiji in a difficult predicament in coming years. The resolution of fundamental problems, such as the land security question, may decrease the current level of Fiji’s professional emigration in the future.

APPENDIX A EXPIRY OF ALL ALTA LEASES, 1997-2024

Year Leases Year Leases Year Leases 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total

134 237

1,594 1,955

458 622 432 600 463 521 652

7.668

2008 2009 2010 201 1 2012 2013 2014 2015 2016 2017 2018

299 278 374 445 419 487 380 784 361 177 254

4.258 , -

Grand Total 13,140 Source: Verification Status Report, Ministry of Agriculture and ALTA, 1997.

2019 2020 202 1 2022 2023 2024 2025 2026 2027 2028

1

306 152 168 135 148 88 85 65 54 13

,214

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APPENDM B PROPORTION OF EXPIRED LESES REISSUED, REISSUED TO SITTING TENANTS FOR CANE AND

RESIDENTIAL LEASES ISSUED IN THE CANE REGION

New Residential No. of Expired New Cane Leases Issued Leases Issued

Expiry Year Cane Leases (to Sitting Tenants) (to Sitting Tenants) 1997 72 67 (36) 23 (8) 1998 157 152 (45) 61 (7) 1999 1,073 861 (350) 297 (83) 2000 1,708 780 (31 1) 132 (26) 200 1 313 155 (141) 15 (50?) Total 3,323 2,015 (883) 297 (174)

Source: NLTB data supplied to the Sugar Industry, 15/3/2002.

APPENDIX C PREFERENCES FOR LUMP-SUM PAYMENT, RESElTLEMENT OR RENnw’AL OP’IlON

Options Response (%)

Lump sum 41.9 Resettlement on 5 acre plot 3.1 Renewing of lease Source: Naidu and Reddy, 2002.

55%

APPENDIX D RATE OF REPLACEMENT AND PRFSENT VALUE OF OUTPUT FOREGONE

Replacement Rate No. of Persons to Replace Outout Loss (F$m) Years Required Present Value of

5 30 40 10 10 5

275.5 1,653 2,204

551 551 275.5

1.1 12.3 24.0 7.8 9.5 5.6

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