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IMF Survey: Sheer Distance a Factor as Pacific Islands Seek to Boost Growth

March 21, 2012

• Samoa event to discuss building resilience, fostering inclusive growth
• Many Pacific island countries still to regain pre–global crisis income levels
• More integration with region brings benefits, raises vulnerability to shocks

When hundreds of islands are scattered across vast stretches of ocean, sheer distance becomes a factor that affects economic growth.

Boat is unloaded on Nui Island, Tuvalu. Any sharp downturn in global economy would reduce demand for Pacific island region’s exports (photo: Newscom)

Related Links

• Watch the video
• Pacific conference website
• Tuvalu is IMF’s newest member
• Inflation and Pacific islands

CONFERENCE ON THE PACIFIC

The nations comprising the Pacific islands must address the impact of their remoteness and other unique economic issues as they seek to regain income levels prevailing before the global economic crisis.

Other elements affect the Pacific islands in particular, such as small populations, narrow production and export bases, and limited economies of scale. When these additional factors are also considered, they make up a set of economic hurdles arising from the islands’ special circumstances and location.

The IMF is organizing jointly with the government of Samoa a high-level conference on the Pacific in Apia, Samoa, on March 23. The conference will discuss how to build resilience against shocks and foster inclusive growth in a region that, although geographically remote, has felt the impact of the global economic crisis.

About 120 participants are expected at the conference, including policymakers from 10 Pacific island nations and representatives from regional development partners, international organizations, academia, and the private sector.

In an interview, IMF Deputy Managing Director Min Zhu talks about the policy priorities for the Pacific, the IMF’s role in the region, and what he hopes will come out of the conference.

IMF Survey online: How has the Pacific been doing in the face of the crisis in Europe and elsewhere and what are the vulnerabilities?

Min Zhu: Many Pacific island countries are still to reach the income levels seen before the crisis and poverty has increased in some communities. Growth in the Pacific islands has been quite low over the last decade or so, averaging just 2 percent a year.

By comparison, other low-income countries in Asia have shown growth of about 6 percent, while other small states have grown by at least 4½ percent. Further afield in Eastern Caribbean Currency Union countries, which face some comparable challenges, growth has been 4 percent. Yet, strong linkages with resilient Australia and emerging Asia has helped during the global economic crisis compared to the Caribbean islands which rely on heavily on the U.S. economy.

Direct exposure to Europe is quite limited. The global spillovers occur mainly through Australia, New Zealand, and emerging Asia. The Pacific islands countries have, in general, greatly benefited from trade and financial integration. But this has also left them more open to economic shocks.

Any sharp downturn in the global economy would reduce demand for the region’s exports and slow down inflows of investment and remittances. It would also put downward pressure on tourist arrivals, and decrease the value of assets invested offshore of the Pacific islands with large trust funds such as Kiribati, Marshall Islands, Micronesia, Palau and Timor Leste.

IMF Survey online: What are the main challenges facing the Pacific island countries?

Min Zhu: There is great diversity across the Pacific islands—in terms of culture and economic structure—but they all face challenges. These include narrow production and export bases, limited economies of scale, a lack of diversification, and high fixed costs of government given the small size of the population. But most are also vulnerable states that depend heavily on aid to finance their internal and external imbalances. So it is also important to focus on policies and understand these issues.

Climate change is another significant issue for atoll islands—Kiribati, Tuvalu, and the Marshall Islands. Even in non-atoll islands—such as the Solomon Islands and Samoa—increasing sea levels have already begun to affect rural incomes.

Remoteness poses an additional constraint. Transportation costs are far greater when hundreds of islands are scattered across vast stretches of ocean. The Pacific islands are particularly vulnerable to global commodity price shocks.

IMF Survey online: The conference is highlighting inclusive growth – what does this mean and how should it come about in the Pacific?

Min Zhu: In short, inclusive growth creates jobs for more people, and shares the benefits more widely. This is important for achieving stability in the long run. The small Pacific island countries must broaden the base of growth and to ensure that growth is indeed more inclusive.

Growth among the commodity exporters has been fast, but a key issue is to make sure earnings benefit the rest of the economy—in the form of jobs created in other sectors. For example, in the Solomon Islands, the government is passing a tax regime to raise its mineral revenue. It is also planning reforms of mining legislation that will improve the investment climate and attract more foreign direct investment.

Also, improving access to credit for the private sector is a way to make growth more inclusive. This will be discussed more during the conference.

IMF Survey online: The conference title mentions building resilience—what are the priorities here?

Min Zhu: The first priority is that when growth is solid and external conditions are favorable, to rein in deficits and shore up reserves. In this way a country could build a cushion for the bad times. The second priority is to strengthen social safety nets, so that in times of crisis support can reach the most vulnerable quickly and efficiently.

There is also a need to increase spending on critical infrastructure, health, and education to increase potential growth. Structural reforms are also important to raise competitiveness and attract foreign investment.

IMF Survey online: What is the IMF’s role in assisting the Pacific?

Min Zhu: Although the IMF does not directly fund development projects, it does provide financial resources to its members when they face difficulties in meeting payment obligations to foreign countries. For example, the IMF provided $9 million emergency assistance to Samoa to help its recovery and reconstruction effort after a devastating tsunami hit the country in 2009.

Our ongoing program with Solomon Islands has helped the country restore macroeconomic stability, rebuild its foreign reserves, and stabilize the economy. This has occurred thanks to the strong commitment of the authorities to implement structural reforms, including in the tax system.

We have also strengthened our relationship in the region—for example we now have a regional resident representative office for Pacific island countries based in Suva, Fiji. This brings our policy advice closer to the countries on a more regular and timely basis. We have also established a new Pacific island unit at the IMF that oversees our work in the region.

Technical assistance and capacity building is a key part of our job, addressing such areas as public financial management, monetary policy operations and bank regulation, and building institutional foundations for sound policymaking. The Pacific Financial Technical Assistance Center has been providing technical assistance and training to Pacific Island countries for almost 20 years, funded by the IMF and development partners.

Both the resident representative office and the regional center are currently increasing their staff to provide better services to Pacific island countries. At the same time, IMF headquarters in Washington has also devoted more resources to Pacific island countries, as shown by the recent establishment of a Pacific island unit.

We also continue to work closely with other international institutions, including the World Bank and the Asian Development Bank. The vice presidents for both institutions are attending the conference.

IMF Survey online: What do you hope the outcomes of the conference will be?

Min Zhu: Besides discussing the challenges faced by small states in the Pacific in the current global economic outlook, participants will talk about how the IMF can better tailor our work—whether through our policy advice, lending instruments, or technical assistance, to assist them better.

The IMF is committed to this deeper, more fruitful dialogue with the Pacific islands and other small states. At this conference we listen to the voices of the Pacific and our partners and learn more about the issues these countries face, so that we can ultimately understand their needs and better serve our members.