Point of View
Asahi Evening News
Kunio Saito
Director, IMF Regional Office for Asia and the Pacific
March 16, 1999

Reform is in the air. Japan is in the midst of it, focusing on the financial sector. So are many Asian countries that were affected by the recent crisis. Although not so well-known, Pacific island countries are also earnestly implementing structural reform.

To help expedite reform in the Pacific, the International Monetary Fund recently hosted a conference in Apia, the capital of Samoa. Finance ministers and senior officials of 13 Pacific island countries attended (see table). Donor representatives, including from Japan International Cooperation Agency, also participated.

Contrary to the misconceived notions of some outsiders, the Pacific is not a carefree tropical Paradise. In reality, Pacific island countries face two major problems. First, they are small. The population of a typical Pacific island country is often smaller than that of a municipality in other parts of the world. Exceptions are Papua New Guinea (with 4.5 million people), Fiji (800,000), and the Solomon Islands (400,000). Second, the island countries are also far away from major markets and from each other. These problems of being too small and too distant are being alleviated through better transportation and communication, with resultant integration into the global system.

Pacific island countries also face structural problems and, hence, the need for reform. Typically, these countries have a large public sector that operates inefficiently and is financially weak. Deficits are largely financed by external aid, which may not last, especially at the present levels. Some countries also depend for a large part of their revenues on royalties from mining, forestry, and fishing, which have been declining because of the need to protect resources and the environment. Change is needed, therefore, to set up a smaller and more efficient public sector, which can be sustained with domestic revenues. This requires promoting simultaneously a larger and stronger private sector. The ultimate goal of reform in Pacific island countries is to establish a more diversified economy that is less dependent on external aid.

The scope and urgency of reform varies between countries. Among the resource rich countries, the Solomon Islands has one of the most ambitious reform agendas. Over the last several years, extensive logging has helped to raise GDP, exports, and budgetary receipts. But the government has now decided to slow logging to protect forestry resources and the environment, and to implement the necessary, albeit painful, economic restructuring. Papua New Guinea has also been moving to diversify its economy away from its large mining and forestry sectors and to reduce budgetary dependence on these sectors. An interesting case is Nauru and Kiribati, which inherited large funds generated from phosphate mining when the mines were closed some decades ago. Nauru spent the income from these funds, while Kiribati reinvested it to enlarge the funds. Notwithstanding these differences, both countries face similar challenges to streamlining their relatively large public sectors and promoting private businesses.

There is an urgent need for reform in Micronesia and Marshall Islands. Within a few years, the large U.S. aid that has sustained these economies for decades will be terminated. They must make the difficult transition to a more self-sustained economy. Reform is also urgently needed in countries that are facing economic problems including Papua New Guinea, Fiji, and Vanuatu. There are some Pacific island countries such as Samoa, which have continuously implementing reform moves, thus avoiding major economic problems and diversifying their economy. Samoa now has an automobile parts assembly plant that employs more than 1,000 workers. These countries too must continue reform because this is the very reason that they have been successful.

As Pacific island countries proceed with reform, their commitment is strong, as expressed by their leaders at the recent conference in Apia. The conference also provided an opportunity to identify the formidable challenges reform efforts entail, especially in institution building and manpower training. To continue reform, Pacific island countries need support from the international community, including Japan.