AT a recent seminar Paul Holden of the US-based Enterprise Research Institute raised the question as to why Pacific Island nations have a “miserable” economic track record.
Over the past decade, he noted, Pacific Island economies grew by an average of 1.7% annually compared with average growth of 5.1% for all developing countries monitored by the Word Bank.
With a per capita income growth of 10%, as has been the case in China, average incomes within a population doubles in about seven years.
Holden told an ADB-sponsored seminar for Pacific Island journalists that poor private sector development had been one reason for this “miserable” performance and he suggested that public and private sector reform was vital for rapid growth.
He debunked the idea that among the key reasons for slow growth were the common notions that Pacific Island nations were too small or that remoteness was another major hindrance.
There were many cases of small economies and remote island nations where growth has been good and per capita incomes high, among them Jamaica, Ireland and Iceland.
Part of the problem in the Pacific, he said, was that governments were often the largest employers and owned a lot of businesses, acting as a deterrent to foreign investment.
“Governments are spectacularly bad at running business. They stop anyone competing,” he said, refuting the oft-promoted government notion that the virtues of competition were over-rated because “competition was always good for consumers”.
Holden noted that his book, Swimming Against the Tide? – An Assessment of the Private Sector in the Pacific, had turned this argument on its head.
It showed that the dominant role of government, especially in transport and communication, were holding back business development because in a globalised world, efficient communication and travel were critical.
Various studies, he said, had shown that foreign investment brings in new expertise with every skilled foreign worker generating between seven and 20 jobs in developing countries.
However, a big shift has occurred in the last five years and there is wider recognition within the Pacific that private sector development is critical for economic growth.
Holden said it was clear there were “no magic bullets” in terms of policies that would underpin growth in all circumstances with Samoa held out as an example of a Pacific Island nation that has seen significant growth as a result of reform.
With the assistance of the ADB, Samoa’s ministry of public works underwent a private partnership programme (PPP) in 2002 under which it was restructured and downsized.
Its 500-strong employees were given four options – stay with government with some jobs transferred to other departments; go to other enterprises to which government jobs would be outsourced; encouragement to form companies that would receive three years of support or the option of a severance package.
This has created four or five companies that are thriving with an additional 150 staff, while some 270 employees took severance packages. Some of the latter created new businesses as well.
“The productivity of the ministry has increased six-fold and there are only 80 employees left,” noted Laure Davy, ADB’s senior private sector development expert.
Following the Asian economic crisis of 1997, it has becoming more widely accepted that there are “no magic bullets” for development, as Holden puts it.
Papers on this have been discussed by various bodies and, indeed, a previous column had discussed these changes in a series of papers produced recently by the International Monetary Fund.
More recently this was canvassed in an ‘Asian Development Review’ article, “Development Lessons for Asia from non-Asian countries” which discussed the “collapse of the Washington Consensus” and promoted, “policy creativity instead of rules of thumb”.
The paper published in ADR Vol 23 No 1 last year by Dani Rodick, professor of international political economy at the John F. Kennedy School of Government, Harvard University.
Those familiar with the Asian economic success stories will be aware of concepts such as the “flying geese formation” with Japan as the leading example for a gaggle of imitators that have also grown rapidly.
In fact, there have always been as many variations to the success stories as individual nations because, in a dynamic world with diverse resource endowments, it is unlikely that one model would work perfectly elsewhere.
Japan built a host of world scale companies within various industrial sectors on the basis of a highly protected domestic market way back in the 1950s and 1960s in a pattern that no other Asian nation has since fully copied.
There are also many government-owned companies in Asia that have done exceptionally well in helping buttress national economic development.
We need only cite the cases of Singapore Airlines and Sembawang Shipyard in Singapore and Pohang Iron and Steel in South Korea.
In contrast to Japan, most of those known as newly industrialising economies based much of their growth on incredible export performances engineered to varying degrees by foreign investment.
Yet other countries such as Indonesia, Malaysia and Thailand built their successes on large inflows of foreign investment into their manufacturing sectors, while ensuring strong growth in agricultural cash crops such as rubber and palm oil.
Certainly there are no “magic bullets” for Pacific Island economies, but most could do with reforms attractive to foreign – and domestic – investors in varied sectors of the economy and for many tourism could be a significant generator of growth.