BER,Ppt4.ppt

Media and Journalism ModuleBusiness and Economics For Reporters

4. Contemporary economic history

BER,Ppt4.ppt

This week’s lesson

• Specific issues in South Pacific economic history • Historic economic forces shaping the region.

• Contemporary economic history of the Pacific region

• Role of particular activities:• Development assistance• Preferential Trade agreements• Investment and Tourism Climate• Remittances

BER,Ppt4.ppt

World income distribution

http://www.tear.org.au/resources/harambee/053/page.php?pagenum=2

BER,Ppt4.ppt

Contemporary history

BER,Ppt4.ppt

Economic climate of the Pacific

• Important studies undertaken by World Bank

• Defining Features of Pacific Island Countries (PIC) – major report in 2005 - analysis of the key economic issues in the region • Fiji• Federated States of Micronesia• Kiribati• Marshall Islands• Palau• Samoa• Solomon Islands• Tonga• Vanuatu

A lot of the following information comes directly from this report

BER,Ppt4.ppt

Communally focused cultural norms

• Pacific indigenous cultures have remained strong

• Continue to play a large part in national life and exert considerable influence over national policies and decision making

• Influence asset ownership, economic mobility, and overall governance outcomes

BER,Ppt4.ppt

Communally focused cultural norms

• The existence of a defining sense of family, clan, and ethnic identity manifests itself in two significant ways: • social networks defined by clan, and family relations have done much to alleviate the harshest effects of poverty due to access to communally owned land for subsistence agriculture, as well as to provide support to the needy in the community

• the primacy of the community places social barriers against the development of a culture of aggressive private entrepreneurship• all successes (and failures) are viewed as belonging to the family or clan

• cultural standards mean that there is generally widespread support for the involvement of the public sector in many economic activities that in other countries would be regarded as solely in the sphere of private activity

BER,Ppt4.ppt

Land

• An asset that identifies family, clan and lineage• valued for what it symbolizes, as well as the

subsistence and livelihood it provides• Strength – reduces real destitution in the Pacific• Weakness - barrier to mobilizing investment as

communally owned land is generally unavailable as collateral for lending activities

• For example, a black pearl trader in Raratonga wanted to expand his business. He needed a loan of a relatively large amount of cash in order to purchase and process more pearls. Despite being a successful and well regarded businessman, the banks refused to lend him money as he could not provide ‘collateral’ or security against the loan. In the Cook Islands, and other parts of the Pacific, the land is not owned by the individual. In western societies the bank uses the borrowers property as collateral so that if the borrower cannot repay the loan the bank sells the property and recoups its money.

BER,Ppt4.ppt

Land

• High incidence of disputes over land ownership (especially in the Melanesian states)• increases the risk facing investors considering leasing arrangements

• or makes the land open to exploitation in the absence of clear ownership rights (e.g., illegal logging)

BER,Ppt4.ppt

Susceptibility to Natural Disasters

• Vulnerable to extreme weather events• E.g. cyclones, tsunamis • potential impact is increasing as the islands’ vulnerability rises:• growing urbanization• degradation of coastal ecosystems• concentration of infrastructure on fragile coastal areas.

• Climate change and the expected rise in sea levels

• In low- lying islands (such as Kiribati, Marshall Islands, and other atolls), inundation due to storm surges leading to loss of assets and salinisation of groundwater sources

• Climate change could also cause more intense cyclones and droughts, prompt the failure of subsistence crops and fisheries, and intensify the spread of infectious diseases

BER,Ppt4.ppt

Reliance on Natural Resources

• Highly dependent on natural resources for their livelihood

• Resource management a critical factor in economic development

• The majority of the population depend on agriculture and fishing to supplement incomes

BER,Ppt4.ppt

Reliance on Natural Resources

• Some islands also have significant mineral resources, and many have commercially exploitable forest and fishery resources

• One of the key challenges is the development of cooperation and transparency in the exploitation of resources

• The richest tuna fishing grounds in the world in the South Pacific• despite the large exclusive economic zones controlled by many of the PICs, fishing rights are leased out to foreign fishing companies at terms that are not favorable to the Pacific

• Access fees represent significant components of government revenue for some of the PICs:• Kiribati - 47 percent• FSM - 25 percent

BER,Ppt4.ppt

Aid Dependence

• PIC economies are generally dependent on official aid flows – exception is Fiji

• Legacy of the decolonization process:• partly a reflection of international recognition of the problems facing small island states

• partly related to donors’ strategic interests in the region

• Aid levels significantly higher than income-levels

• Most aid provided by bilateral donors• Largest donors - last five years:

• United States - North Pacific• Japan• Australia - Melanesia and Polynesia• European Union (EU)

• New Zealand - Polynesia

BER,Ppt4.ppt

Pacific Regional Strategy

• In 2005 World Bank Pacific Regional Strategy[1] indicated the way forward:• PIC’s face similar development challenges today despite notable differences in history, culture, and endowments

• Lack of economic growth in the face of growing populations:• contributed to rising unemployment and hardship in the region

• even countries with positive growth unable to fully translate this into adequate job creation and poverty reduction

• over 50 percent of the region’s population under age 24

• steady rural-to-urban migration• erosion of traditional systems of social support• need to deal with the issue of youth unemployment and its associated social problems

• [1] Pacific Regional Strategy, FY2006-2009

http://www.developmenteducation.ie/issues/hunger.php

BER,Ppt4.ppt

Pacific Regional Strategy

• World Bank regional strategy focuses on:• creating an environment conducive to generating sustainable

economic growth and employment• recognizing that small populations and marked remoteness of

the PICs pose significant development challenges to this region

• a regional framework within which country-specific objectives and expected results can be specifically defined

• recognizing that the depth and composition of country-specific assistance will evolve with national priorities, institutional capacity for reform, and the strength of mutual dialogue

• The region is relatively aid abundant - bilateral donors filling resource gaps generously

• Growing concerns about the poor development record of the Pacific and its implications for the region – i.e. aid effectiveness

• Need for policy dialogue and global knowledge products that facilitate better use of these resources and effectively address the development challenges facing the region

BER,Ppt4.ppt

Development assistance

BER,Ppt4.ppt

Development assistance

• The small island nations of the South Pacific are among:• the poorest• most highly militarised• least economically secure • least democratically secure

• Hence many countries provide development assistance in the region• Australia:

• strong interest in stability and economic viability in the South Pacific• largest provider of development assistance • major trade and investment partner• works closely with New Zealand in the South Pacific

• Canada:• a significant source of development assistance

• United States• March 2007 pledged to increase its funding from the $190million provided

in 2006• mainly to the Federated States of Micronesia, the Republic of the

Marshall Islands, and Palau• also participating in the Millennium Challenge Corporation (MCC) • working with Vanuatu on an assistance compact totalling over $65 million• continue to work with MCC to develop programs tailored to the needs of

smaller nations

BER,Ppt4.ppt

ForumSec – the Pacific Islands Forum

• Founded in August 1971• Comprises 16 independent and self-governing states in the Pacific

• Region’s premier political and economic policy organisation

• Forum Leaders meet annually to develop collective responses to regional issues

BER,Ppt4.ppt

ForumSec – the Pacific Islands Forum

• The Forum’s membership:• original seven founding members - Australia, Cook Islands, Fiji, Nauru, New Zealand, Tonga and Western Samoa

• Now also- Federated States of Micronesia, Kiribati, Niue, Republic of the Marshall Islands, Palau, Papua New Guinea, Solomon Islands, Tuvalu and Vanuatu

• New Caledonia and French Polynesia, previously Forum Observers, were granted Associate Membership in 2006.

• Current Forum Observers include Tokelau (2005), Wallis and Futuna (2006), the Commonwealth (2006) and the Asia Development Bank (2006), with Timor Leste as Special Observer (2002)

BER,Ppt4.ppt

ForumSec Pacific Plan (2006-2008)

• The Forum’s priorities for economic growth - Pacific Plan (2006-2008) include:• Expansion of market for trade in goods:

• South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA)

• Pacific Island Countries Trade Agreement (PICTA)• Pacific Agreement on Closer Economic Relations (PACER)

• with non-Forum trading partners

• Integration of trade in services• Pacific Island Countries Trade Agreement (PICTA)• Economic Partnerships Agreement (EPA)

• Implementation of the Regional Trade Facilitation Programme (RTFP)

BER,Ppt4.ppt

ForumSec Pacific Plan (2006-2008)

• Investigation of the potential impacts under the Pacific Agreement on Closer Economic Relations (PACER) of a move towards a comprehensive framework for trade (including services) and economic cooperation between Australia, New Zealand and the Forum Island Countries

• Intensified development of proposals or strategies for regional bulk purchasing, storage and distribution of petroleum

• Implementation of the Forum Principles on Regional Transport Services (FPRTS)• including development of Pacific Aviation Safety Office (PASO)

• ntensify focus on enhancing shipping services for Smaller Island States

• Intensified implementation of a regional digital strategy for improving information and communication technology

• Support of private sector mechanisms including through the Pacific Islands Private Sector Organisation (PIPSO).

BER,Ppt4.ppt

Secretariat of the Pacific Community (SPC)

• Based in Noumea, New Caledonia• Established in 1947 as the South Pacific Commission

• Oldest regional organisation in the South Pacific

• Australia was a founding member, along with New Zealand, the United States and France

• Brings together 22 Pacific island states and territories with major metropolitan donors in the region

BER,Ppt4.ppt

Secretariat of the Pacific Community (SPC)

• Important technical advisory role:• Agriculture• marine resources• Health• socio-economic programs• statistical services• community education• provides training, information exchanges, consultancy services and research

• The secretariat's priorities:• supporting its island members with the technical assistance and skills necessary for sustainable development

• involves both building and supplementing the capacity of members in a range of key economic and social sectors, including land resources, marine resources, social resources, and information and communications.

BER,Ppt4.ppt

Pacific Enterprise Development Facility (PEDF)

• Objective for the Pacific:• stimulate investment growth focusing on key industry

sectors:• Micro finance• Tourism• Agribusiness

• Selected programs targeted at providing:• investment support• improving access to markets• capacity-building through training are planned

• Aims to encourage the development of Small and Medium Enterprises (SMEs)

• Major focus:• improving access of SMEs to financial services• working with commercial banks, credit unions• establish the Pacific's first funds manager in Samoa

BER,Ppt4.ppt

Foreign Investment Advisory Service (FIAS)

• Joint venture between the International Finance Corporation and the World Bank

• Help developing countries structure laws, promotional strategies, and institutional arrangements to stimulate foreign direct investment

• Office in Sydney, Australia

BER,Ppt4.ppt

Foreign Investment Advisory Service (FIAS)

• Advice on promoting a better environment for investment and business development• An example is the preparation of amendments to investment legislation in the Solomon Islands, which are likely to improve the climate for private sector development

• Strategic Directions 2005-07 paper highlights the evolving global context for its operations:• greater competition among developing countries for Foreign Direct Investment and improved commitment to reform from some governments

• Increased demand for micro-economic focused advisory services and implementation support

BER,Ppt4.ppt

Pacific Financial Technical Assistance Centre (PFTAC)

• Based in Suva• Focuses on economic management issues including revenue, public service management, financial sector supervision and economic statistics.

• Established in 1993 to provide technical advice and capacity building to 15 PICs.

• Operated by the IMF in consultation with the governments of the PICs and donors

BER,Ppt4.ppt

AusAID/World Bank Pacific Facility

• Australian initiative:• support World Bank in the region• funds a range of appraisal and design activities

• supports economic and sector studies •World Bank's Regional Economic Report 2002

• specialist technical assistance•Kiribati - financial sector regulation

BER,Ppt4.ppt

Break

BER,Ppt4.ppt

Preferential Trade Agreements

BER,Ppt4.ppt

Preferential Trade Agreements

• Role of Preferential Trade Agreements in the economic development of the Pacific.

• The three main Preferential Trade agreements are: • SPARTECA - Australia and New Zealand • LOME IV - European Union • GSP - USA, Canada, Japan and other ‘Preference giving’ countries.

• We’ll discuss these in some detail

BER,Ppt4.ppt

SPARTECA - Australia, New Zealand

• SPARTECA = South Pacific Regional Trade and Economic Cooperation Agreement

• Operates between Australia, New Zealand and the South Pacific Forum Island Countries (FIC)

• Came into force in 1981 and runs on a preferential non-reciprocal basis

BER,Ppt4.ppt

SPARTECA - Australia, New Zealand

• New Zealand : provides duty free and unrestricted access to all products originating in the FICs

• Australia : allows duty free and unrestricted entry to all FIC products except for sugar

• Goods exported to Australia and New Zealand must meet the Rules of Origin classify items as originating in an FIC if these are: • the unmanufactured raw products of the FIC, or • manufactured goods where:

• the last manufacturing process undertaken in an FIC• at least 50% of the ex-factory or works cost of the goods must be made up of material and/or labour input by or of the FIC

• Fiji has made extensive use of SPARTECA with the textile, clothing and footwear manufacturing. The raw material is bought into the country and converted to clothes. Fiji’s contribution is the labour required to cut, sew and pack the item ready for the market.

BER,Ppt4.ppt

ACP-EEC Convention of Lome IV

• Agreement between the 10 member states of Africa, Caribbean and Pacific (ACP) and the European Union

• LOME IV permits products ‘originating’ in the ACP states to be exported to the European Union free of customs duty and other similar charges and not subject to any quantitative restrictions

• Product coverage• Subject to a number of restrictions:

• special arrangements for imports of agricultural products • safeguard mechanisms exist to protect domestic manufacturers from serious injury from preferential imports

• Rules of origin• Only products originating in the ACP states qualify for the preferential arrangements:• Products `wholly obtained' in one or more ACP states• A product “sufficiently Worked or Processed” e.g. yarn converted to fabric for production of garments

BER,Ppt4.ppt

GSP - USA, Canada, Japan and Other ‘Preference Giving’ Developing Countries

• GSP - Generalised System of Preferences:• industrialised nations grant preferential treatment to imports from developing countries

• markets are Australia, Austria, Bulgaria, Canada, Czech Republic, Slovakia, Finland, Hungary, Japan, New Zealand, Norway, Poland, Sweden, Switzerland, United States, and the countries of the former Soviet Union

• beneficiary countries do not have to grant similar or reciprocal preferences to donor countries

• The concessions provide preferential access to most developing countries in the form of duty-free entry or reductions from most favoured nation rates of duty, or a combination of both

BER,Ppt4.ppt

GSP - USA, Canada, Japan and Other ‘Preference Giving’ Developing Countries

• Concessions and the terms which govern them differ from country to country.

• Product coverage• products covered include a range of specified industrial manufacturers and semi-manufacturers and specified agricultural products

• Safeguard mechanisms exist to prevent injury to local manufacturers of products covered under GSP

• take the form of quantitative limitations or removal of GSP benefits for specific products

BER,Ppt4.ppt

Key regional economic issues

BER,Ppt4.ppt

Tourism

• Fastest growing industry in the world• Second largest sector in terms of size• Growth in tourism to the South Pacific has averaged 3.4 percent per annum for this Millennium.

• Tourism receipts exceeded $US 1 billion in 2003

• Leading foreign exchange earner in most South Pacific islands

• Generates substantial incomes for the majority of countries within the region.

• Tourism provides a substantial part of GDP• Major source of employment and income in the region

BER,Ppt4.ppt

Tourism

• Provides between 15 – 20% of formal employment in several South Pacific countries• Fiji - tourism provides approximately 100,000 jobs

directly and indirectly• Tourism identified as a key sector for future economic

growth and the provision of employment• At regional level it is identified as a priority sector

for development and for the alleviation of poverty• In many Pacific countries, tourism provides a

sustainable alternative to resource extraction• All the countries and territories within the Pacific

region have recognised the future importance of tourism development

• Tourism generates substantial incomes for the majority of countries within the region

• Tourism dominates the economies of the Cook Islands and Palau and generates a substantial part of GDP in Fiji, French Polynesia, New Caledonia, Samoa and Vanuatu

BER,Ppt4.ppt

South Pacific Tourism Organisation (SPTO)

• SPTO is the inter-governmental organisation for the tourism sector in the South Pacific

• Full member countries include:• The Cook Islands• Fiji• French Polynesia• Kiribati• New Caledonia• Niue• Papua New Guinea• People's Republic of China• Samoa• Solomon Islands• Tonga• Tuvalu• Vanuatu• Private sector members include over 200 of the major

tourism operators in the region.

BER,Ppt4.ppt

South Pacific Tourism Organisation (SPTO)

• SPTO aims to “to be an internationally dynamic and leading tourism organisation in the development of public and private sector tourism businesses in the South Pacific”

• The member nations characterised by several key features: • small populations• limited resource base, including natural and human resources and capital

• remoteness from the major world markets • None of the SPTO member countries are industrialised nations - level of economic development varies widely

BER,Ppt4.ppt

Investment

• Growing determination in many Pacific countries to move towards a much greater degree of economic self-sufficiency

• Awareness of the need to attract increased foreign investment• not been an easy task• desired results not been achieved• need to safeguard traditional lifestyles and customs• preserve the natural environment

• These needs have had to be balanced against desires for greater self-sufficiency, increased employment opportunities and the other social benefits of greater economic activity such as improved education and health systems.

BER,Ppt4.ppt

Investment

• Many countries seek to maximise the benefits of overseas investment

• Strong preference for new investments that: • create employment• reduce the cost of imports• increase export earnings• result in increased skill levels among local workers

• otherwise contribute positively to economic development

• conserve the environment and cultural heritage

BER,Ppt4.ppt

Foreign investment

• Most PIC governments have policies supportive of foreign investment:• growing desire for economic self-sufficiency• need to support worthwhile social objectives including increased

employment• Offer incentives to new investors

• vary markedly between each country• a number of countries process of revising their investment

policies.• Relatively few areas of economic activity which are not open

to overseas investors. • In PNG for example, several activities restricted to foreign

investment, including: • land transportation• manufacture, wholesale and retail sale of handicraft and

artefacts; coffee and copra production and export• small-scale alluvial gold mining• coastal fishing (within a distance of five kilometres of the

shoreline); • Most Pacific countries have legislation and regulations

governing the formation of overseas companies and other business entities

BER,Ppt4.ppt

Labour and industrial relations

• Wages and salaries low compared with the developed and industrialised countries

• Higher than in most of the developing Asian countries such as China, Vietnam and Indonesia

• Within the region most countries experience:• shortage of semi-skilled and skilled workers and

experienced business managers• Many overseas investors required to provide training for

local workers - strongly favoured by most Pacific Island governments.

• Some governments have measures that provide minimum requirements for employees:• Wages• working conditions• retirement benefits

• Pacific - Trade unions do not exist in all countries but they are not prohibited in any of the countries

BER,Ppt4.ppt

Remittances

• Funds sent between countries usually by family members or migrants

• Why are they important for the Pacific?• Migration is very significant in Pacific island states - response to uneven economic and social development

• The role of remittances extremely significant in the economies of many Pacific countries:• migrants’ remittances a significant part of disposable income especially in Samoa, Tonga, Cook Islands, Kiribati and Tuvalu.

• Remittances are bi-directional • Remittances:

• respond to an implicit social contract• contribute to human capital formation• can be seen as a form of intergenerational transfer

BER,Ppt4.ppt

Remittances

• Remittances in the Pacific currently continue at high levels for very long periods

• Second generation migrants are likely to send smaller amounts only on demand

• Economists believe remittances have contributed to development:• meet real needs especially on smaller islands, in remote

regions, and in independent states. Remittances have tended to go

• Used for consumption, including house construction• Increasingly directed towards investment• Create human capital for future migration

• Few signs of remittance decay with length of absence from the home country

• Increasingly significant motivating factor for migrants to remit is the accumulation of assets and investments at home

BER,Ppt4.ppt

National Budget

• A statement of the financial allocation (expenditure) of the anticipated revenue collection to the country’s services:• Health• schools• public service• police etc.

• Budget is balanced if the revenues and expenditures are equal• A budget shortfall, or deficit, arises if expenditures exceed revenues

• A budget surplus exists if revenues are greater than expenditures

• Governments publish copies of the budget annually

BER,Ppt4.ppt

Government revenue shortfall

• For most of the PICs the issue of a shortfall in government revenue is serious• geographic isolation• few resources• and a small population make for struggling economies dependent on aid

BER,Ppt4.ppt

Government revenue shortfall

• Niue example:• government expenditures regularly exceed revenues• shortfall is made up by critically needed grants from New

Zealand• used to pay wages to public employees• Niue has been forced to decrease government expenditures by reducing the public service by almost half.

• Tonga example:• dependent on external aid and remittances from Tongan

communities overseas to offset its trade deficit• tourism is the second-largest source of hard currency

earnings following remittances• government emphasizing the development of the private

sector• encouragement of investment• committing increased funds for health and education

• major issues facing the government • high unemployment among the young• continuing upturn in inflation• pressures for democratic reform• rising civil service expenditures

BER,Ppt4.ppt

Government revenue shortfall

• Solomon Islands example:• chequered economic history and the 2007 tsunami will put

even more pressure on its economy• prior to the arrival of the Regional Assistance Mission

to the Solomon Islands (RAMSI):• severe ethnic violence• the closing of key businesses• empty government treasury• culminated in economic collapse• RAMSI has enabled a return to law and order, a new period of economic stability, and modest growth as the economy rebuilds

• Fiji’s example:• National Budget for 2007 predicts a $100,726 shortfall

between revenue and expenditure• when payments required to service debts are added - the

gross deficit is closer to $400,000• In order to mitigate this, the government is indicating

that at 5% salary reduction for public servants will be required

BER,Ppt4.ppt

ClosureThe important thing is not to stop

questioning. Albert Einstein

BER,Ppt4.ppt

Summary

• Analysis from the World Bank - economic picture of the Pacific Island region

• Role of development assistance• key organisations and agencies operating in the region.

• Role of the tourism industry• Investment and some of the issues concerning foreign investment

• Role of labour and industrial relations in the region

• A phenomenon nearly unique to the Pacific economies - dependence on remittances

BER,Ppt4.ppt

Coming up!

• Big issues in the world’s economy and some key concepts:• Globalisation

•what it is•how it came about•what is driving further globalisation today

• Other topics include:• Role of multi national companies• Environmental considerations• Consumer protection

BER,Ppt4.ppt

A stamp duty as low as 0.005% on sterling could raise over £2 billion for international development

http://peopleandplanet.org/treataidsnow/briefing/fillingthefundinggap/