Why The Islands Need To Free Up The Private Sector

Economic growth is lagging behind population growth. Migrants are flocking to towns in search of non-existent jobs. Poverty is a growing problem.

These are not images usually associated with the Pacific Islands. The palm-lined beaches and endless blue skies of tourism brochures are a reality in the Pacific. But another reality‹one that touches most Pacific Islanders‹describes a group of remote, small, often young states struggling with deepening social and economic challenges as they search for their place in the global economy.

Securing that place will require a strong private sector. No country has ever produced sustainable economic growth without the lead of the private sector. Pacific governments must recognise this reality and free the private sector to create new opportunities for their people, especially the youth.

Case for change

The case for change is obvious and urgent. Pacific Islands economies have under performed for decades. Per capita GDP growth has been less than 1% a year since the mid-1970s, putting increasing pressure on government budgets and social services. Even in the healthier Pacific economies, gross capital formation has been below levels in sub-Saharan Africa.

This stagnation is taking an obvious toll on the region. Recent poverty analyses by the Asian Development Bank suggest that on average one in four households in the region is at or below the national poverty line. The number is higher in Micronesian and Melanesian countries, where political instability and weak institutions are more prevalent.

This disappointing performance is occurring despite relatively high public investment rates and generous aid flows. Between 1995 and 1999, per capita international aid to the Pacific Islands totalled $220, compared with $34 per head in the Caribbean and $22 in sub-Saharan Africa.

Future not bright

And the future is not bright. The declining investment in physical capital is paired with falling investment in human capital. Youth unemployment is rising and has hit 50% in some countries, enrollment in secondary education is often below 50% and dropout rates are climbing. In most Pacific islands, technical or vocational training is not available.

What's gone wrong?

It is often noted that small markets, remoteness and susceptibility to natural disasters make business in the Pacific Islands difficult. This is true. But other small, remote island nations have overcome these challenges. Mauritius and, to some extent, Samoa prove that small, remote countries can deliver prosperity to their people. In fact, international development statistics suggest that small states, on average, yield higher economic growth rates than other developing countries.

In the Pacific, size and location have had a powerful impact on policy decisions in recent years. The belief that the state must play a dominant role in the economy to combat the challenges of small markets and remoteness has led to widespread state ownership of business, pervasive involvement in the economy, and suspicion of foreigner investors. Rather than ameliorating the geographic realities, these policy decisions have exacerbated the problems.

The economies in the region are characterised by weak public sector supervision and management, inadequate or non-existent land markets, ineffective secured transactions frameworks that prevent the use of collateral, poor legal and investment policy environments, and large state-owned enterprise sectors. The result in two crucial industries, telecommunications and transport, is services that are among the most expensive in the world.

While the region's location is inescapable, government-imposed inefficiencies are not. The creation of vibrant economies requires that Pacific governments provide an environment that minimizes the cost of doing business and encourages dynamism and entrepreneurship. Urgent action is needed to reduce the role of the state in the economy, to strengthen property rights for moveable property and land, to strengthen financial systems, and to lessen the cost and improve the provision of infrastructure.

The goal

The goal is not to support specific industries or companies. It is to develop well-functioning social and economic institutions necessary to promote the transfer of skills, technology and finance. These institutions must be governed by a set of policies, incentives and conditions that ensure businesses and entrepreneurs are rewarded for innovative, competitive and productive work. When this happens the rewards will flow through economies in terms of increased investment, faster economic growth, and job creation, leading to a better quality of life for Pacific Islanders.

Putting the private sector at the heart of Pacific economies will require difficult choices. These choices must be made if the region is to reduce poverty and create opportunities. Sensitive issues of land tenure, culture, control of resources and quality of governance will need to be addressed honestly and transparently.

It will take courage to reduce the role of the state in the economy. It will take leadership and political will to ensure these issues are not presented as excuses for inaction. If opportunities are seized boldly, the rewards could be enormous.

€ Jeremy Hovland is Director General of the Pacific Department of the Asian Development Bank.