The Centre for Independent Studies
No 33 - 7 May 2003
Re-colonisation in any
form is not a solution. Pacific problems can only be tackled in the
Pacific. The first step toward reversing stagnation and falling incomes is
the recognition that excess of population over income growth means serious
trouble. No amount of muddling through will fix this fundamental
disequilibrium. Pacific societies have to adopt policies that establish
secure, free economic environments that deal with economic rents and make
growth possible.
The Australian stance most
likely to be effective would be to suspend all aid and thus to provide the
catalyst for change. Withdrawing US aid turned Taiwan and South Korea into
economic ‘tigers’, but it would be a harsh step for the Pacific.
A softer alternative,
still taking into account the potentially damaging effect of aid, would be
to insist on the principle of mutual obligation in Australian aid to the
Pacific. At present, Pacific states regard aid as part of their government
revenues. They spend aid on consumption. That is why roads, electric
power, telecommunications, schools and health centres are deteriorating.
Responsibility to Australian taxpayers demands that this practice must
end. Australian aid funds must be removed from Pacific island budgets
where they encourage waste and corruption. Aid should only be spent on
mutually agreed development projects and programmes designed and monitored
by teams nominated by the sovereign recipients and donors. Funds should
only be disbursed on the evidence of met targets and audited expenditures.
Without such changes, Australian aid will continue to damage the
Pacific.
Experience shows that Australia
cannot rely on the IMF, the World Bank and the Asian Development Bank for
the conditionality that was supposed to make aid effective. These
organisations have their own internal agendas that have failed to
stimulate growth and have led the Pacific into debt. Loans have also been
spent on consumption and are hence unsustainable. For greater aid
efficiency and effectiveness, Australia should move funds from
multilateral to bilateral aid.
Migration to Australia
is already taking place from the Pacific. Increasing awareness of
migration possibilities to Australia could assist the Pacific. But
migration must be under the same conditions as for other immigrants to
avoid the creation of welfare dependent ghettoes of Pacific immigrants in
Australian cities. Emigration to Australia would increase remittances,
savings and skills, and some migrants would return and start
businesses.
The Department of
Foreign Affairs and AusAID, with inputs from the Treasury and the
Department of Defence, should take responsibility for strategic knowledge
and programming of Australia ’s relationship with the Pacific to help the
Pacific to reverse current trends and move forward. AusAID needs to be
empowered to put mutual obligation into practice. The time for a
well-informed public debate on aid to the Pacific to support policy change
is long overdue.
1. INTRODUCTION
At independence, Pacific
peoples hoped for high standards of living in education, health and
longevity as well as material comforts. But increased living standards
have only been realised by the misapplication and misappropriation of aid
and resource funds by political and bureaucratic elites and their business
cronies. Redistribution has taken place, but from the majority of Pacific
islanders to these elites. The living standards of Pacific peoples have
stagnated and even fallen. In Papua New Guinea , Solomon Islands and
Vanuatu , bare nutrition, no schools or health services, are leading to
the spread of malaria, tuberculosis and HIV/AIDS. Women have always been,
and are, the workers of the Pacific, yet they bear the brunt of emerging
deprivation and insecurity in villages and towns. Many men are unemployed
in urban areas and most are underemployed in villages. Deep
dissatisfaction has inevitably followed, erupting in a culture of arms and
violence.
The Economist recently asked whether the Solomon Islands qualifies as the Pacific’s first failed state, conscious that instability is also endemic in Bougainville and the Papua New Guinea Southern Highlands and looms elsewhere. 1
Australia’s security is
threatened by the passage of drugs, arms and ultimately, terror and the
flight of large numbers of economic refugees. Across the Torres Strait,
Papua New Guinea ’s population is expected to rise to some 10 million by
2025. Unless there is a sharp change of direction in Papua New Guinea ,
the prospect not merely of a failed state, but of a rogue state (like
those of Amin, Mobutu, Bokassa and Mugabe in Africa), cannot be lightly
dismissed.
Economic theory
showed, albeit counter-intuitively, that protection hurts employment, and
enabled Australia to adopt reforms that have made us economically strong.
Economic theory, again counter-intuitively, shows that the economic rents
associated with aid impede the growth of developing countries. Aid
policies have to counter the negative effects of aid rents if compassion
and economics are not to be in conflict.
The Pacific is not
unique. The combination of high mineral rents with large aid flows damaged
a number of developing countries in Latin America. Aid and mineral rents
have created havoc in some 30 sub-Saharan states. Lessons must be learned
from those countries, like Chile in Latin America (after many
vicissitudes) and Botswana and Mauritius in sub-Saharan Africa, which have
adopted policies that have led to positive growth and development.
Botswana has shown that traditional tribal societies can grow strongly.
Mauritius , with a similar ethnic heritage to that of Fiji , has
prospered. Thirty years ago, Botswana and Mauritius had lower per capita
incomes than Papua New Guinea and Fiji ; today they have, respectively,
more than twice the per capita income of the two Pacific
countries.
The large flows of aid
to the Pacific, together with mineral, timber and fishing rents, have not
resulted in rapid growth, but have led to stagnation and decline by
permitting counterproductive policies to persist.
2. PACIFIC OVERVIEW
Despite their distinct
Polynesian, Melanesian and Micronesian origins, different colonial
experiences, varying sizes and resource endowments, the island states of
the South Pacific have many common characteristics. The colonial era left
19 national entities, ranging in size from a population of 5.2 million in
Papua New Guinea to 1,000 in Tokelau. They do not include
Population and income
growth
Pacific data are weak. The
attempt to build up a database for the Pacific was unfortunately abandoned
in 1994. 2
The longest and most consistent data series are those compiled by the
World Bank’s Development Data Group in
Within the overall
similarities of Pacific societies and economies, there are, of course,
wide differences, just as there are differences in small countries. Each
Swiss Canton regards itself as having unique geographic, cultural and
economic characteristics, including different languages and dialects,
albeit within the broad Swiss federation of 7 million people—that is,
roughly the same population size as the Pacific’s 7.7 million
people.
Despite data difficulties, the
gap between population and income growth for the Pacific as a whole and
for most Pacific states has been evident for years (Table 2). The Jackson
Committee’s review of Australian aid drew attention to it in 1984. 3
Ten studies, headed Pacific 2010 by the National Centre for
Development Studies in the early 1990s, followed by seminars throughout
the Pacific, pointed to the high economic and social costs of population
exceeding economic growth. 4
Pacific governments and aid agencies did not respond by re-examining their
policies.
The lack of growth in most of
the Pacific states is not warranted by their geographic situation, natural
endowments, or cultural diversities. All Pacific states are economically
viable. They would all be able to reach high living standards, like those
of Australia and other industrial countries, without aid, if they chose
economic and political policies appropriate to their size and level of
development.
Papua New Guinea and Fiji are
large enough to govern themselves independently if they adopt government
structures appropriate to their populations of 5 million and nearly 1
million people respectively, if they engage modestly in international
affairs and if they opt for pro-growth policies.
In the medium sized
Pacific states, government would have to be tailored to the needs of
populations of 100,000 to 500,000 (the size of a small to medium city in
industrial countries) to enjoy economic and hence true independence. That
such small entities were not joined in a federation at independence is a
persistent and high cost legacy of colonialism. The colonial powers as
late as the 1960s and 1970s (and to date in French Polynesia and
Limitations of
government and international representation and federation are even more
essential for very small states, with populations of less than 50,000
people. The smaller islands are not even the size of a suburb in
industrial countries. Their path to real independence means giving up
illusions of power and concentrating on good living standards. They should
follow the example of Norfolk Island that, without aid, has a per capita
income nearly twice that of Australia. 5
Notes: (NA) data not available or vary by
more than 25 per cent among sources.
(1) 1980-2000;
(2) 1981-2000; (3) 1983-2000; (4) 1973-2000; (5) 1968-2000; (6)
1967-2000;(7)1979-2000
(8)Purchasing power
parity for the Pacific is not derived directly but from econometric
estimates based on ‘like’ countries; it is only applicable to urban, not
to subsistence rural areas. The high purchasing parity per capita incomes
for French Polynesia and New Caledonia reflect the high salaries of the
French ‘metros’ employed in the public service.
Source: Compiled from
World Bank data, except for Cook Islands, Wallis and Futuna,
Is there poverty in the
Pacific? National, and hence
international, social indicators are so subject to political manipulation
that they are even less reliable than population and income data,
fluctuating unrealistically from year to year and among sources. 7
Although the UN, the
World Bank and the Asian Development Bank have devoted hundreds of
consultants’ hours and thousands of pages to defining poverty in the
Pacific, they have not produced a coherent series of social indicators. A
careful qualitative approach that takes into account the low quality of
the available data is required for a realistic assessment of Pacific
living standards.
The work of women in
traditional agriculture has thus far kept up with population growth so
that ‘absolute poverty’ in the sense of the hunger that afflicts (as a
result of rule by rogue governments) perhaps 35 million people, mainly in
sub-Saharan Africa, is not yet present in the Pacific. The suggestion that
an income of less than US$1 a day indicates ‘poverty’ in the Pacific
insults the hard working women who provide food for villages. 8
But a high proportion of villagers lack access to education and health. A
maternal death ratio of 370 per 100,000 live births in Papua New Guinea
and 274 per 100,000 live births in the Federated Micronesian States are
among the highest in the world. They indicate a total absence of health
services. For the other states where women are at risk, reliable figures
are not even available. Access to primary education, at 2 to 3 years of
schooling for girls and not much more for boys, equally ranks among the
worst in the world. In villages where transport is poor and deteriorating,
and in areas succumbing to warlordism and crime, there is little cash
income and thus few manufactured goods. The people are denied almost all
the opportunities that the 21st century offers. Girls and women who do the
bulk of the work are, in particular, most disadvantaged by the lack of
education opportunities and the failure of governments to provide health
services. In urban areas high
unemployment is making too many people dependent on too few earnings and
sharply limiting the consumption of manufactured goods. Thus the Pacific
is a much larger market for second-hand than for new clothes. Because the
penetration of radio and television is very limited, Pacific islanders
remain isolated from the world even in urban shanty towns.
Although there is not
widespread hunger in the Pacific, standards of living are thus
unconscionably and unnecessarily low and falling. Some disabled and
elderly people and families headed by single mothers are already on the
edge of hunger in the towns. If growth does not accelerate and population
continues to increase, limits of traditional agriculture will be reached
and hunger, as well as the other indicators of poverty, will emerge on a
broad scale. In Papua New Guinea, the
Solomon Islands and Vanuatu, life expectancy has risen from between 40 and
50 years in the 1970s to around 60 years in 2000 (Table 3). In Micronesian
and Polynesian states, where colonial regimes introduced better malaria
control, elementary health and education services in urban areas,
expectation of life was around 60 years by 1970. Life expectancy also
increased by perhaps 10 years during the last 30 years, mostly during the
early years of independence before health and education services began to
decline. But fertility rates and infant mortality are still high, and
maternal mortality, where figures are available, is stratospheric. Health
indicators for the Pacific are more akin to the failed states of
sub-Saharan Africa than to developing East Asian countries that had lower
per capita incomes in the 1970s than the Pacific states. Australian
indicators show the long distance Pacific states have to travel if they
are to provide their peoples with the benefits of high living
standards. Education enrolment suggesting
full primary participation is unreliable for Papua New Guinea , Solomon
Islands and Vanuatu , where rural schools have fallen down and teachers do
not attend schools because they cannot find secure accommodation. The
threat of rape is so great that many girls cannot go to school and women
teachers are afraid to work in the countryside. Figures on years of
schooling, only available for Papua New Guinea , indicate an average of
3.3 years for boys and 2.4 years for girls. With typical inconsistency,
the World Bank reports that 64% of boys and 53% of girls complete primary
education. But literacy rates are said to have fallen from 36% to 29% for
men and from a higher 52% to 43% for women from 1990 to 2000. On the same
page, the expected years of schooling are stated to be 9 for men and 8 for
women. 9
The low quality of education is a serious problem. Elites send their
children to boarding schools in Australia and New Zealand
. New problems are
emerging. High sugar and fat urban diets and alcoholism associated with
underemployment are leading to a rising incidence of diabetes, heart,
kidney and liver disease. Youths seeking a life in urban areas often have
to return to their villages. The lack of health services means that
HIV/AIDS is spreading rapidly. (1) 1987; (2)
1973 Source: World Bank,
Asian Development Bank and CIA Factbook.
Papua New Guinea
Australia ’s nearest neighbour
is a small economy in global terms, on the way to becoming medium sized
with a population of 5.2 million projected to reach 10 million in 2025.
Its mainland is the second largest island in the world (after Greenland).
It is rugged (like much of Switzerland ) and population density is low.
Some 700 to 800 languages are spoken but Pidgin and English are lingua
francas, making for a greater possibility of national cohesion than
would two or three major language divisions. Rich mineral deposits
added large annual inflows to aid so that, if appropriate policies had
been adopted, Papua New Guinea could have become a rapidly developing
country. Instead, Papua New Guinea ’s economic stagnation is evident
(Chart 1). Per capita income only increased from A$1,200 in 1970 to
A$1,340 in 1999 (in A$1998). 10
The value of the kina has fallen sharply. At best, social and economic
infrastructure is deteriorating, and more commonly, collapsing. The Lae-Mt
Hagen highway is in many places a goat track terrorised by robbers. No
road links Port Moresby and Lae. Mining and timber are in decline.
Agricultural exports are growing very slowly. The private sector is
dominated by expatriate investors. Fiji , paradoxically, had the
good fortune of only modest mineral and timber resources, so that it did
not have to struggle against the negative impact of aid and mineral rents.
But under the Lomé arrangement, Fiji sugar had privileged access to high
price EEC-EU sugar markets. The consequent economic rents were garnered by
indigenous Fijian landowners on whose land Fijian Indians grew sugar. The
tribal chiefs appropriated, consumed and wasted the rent incomes. Their
savings and investment have been negligible. Sugar’s future has been
crippled by the lack of long term leases. Many frugal sugar farmers
educated their children and saved and invested in businesses that form the
core of the urban private sector. Fiji ’s growth has been modest,
increasing in the 1990s when a clothing export industry was able to
develop because the Rabuka coup suspended the (Indian Fijian) trade
unions’ domination of the labour market. Tourism was also stimulated by
the loosening of the labour market. Even very modest economic growth led
to falling population growth. But urban unemployment is still estimated to
be 20%. With a semi-feudal indigenous Fijian society pitting itself
against Fijian Indians, lack of economic progress has made Fiji
susceptible to military coups and uneasy political stand-offs that
discourage investment. Discouraged by political discrimination, many
Fijian Indians have emigrated. Solomon Islands, with a
population of nearly 500,000, after 30 years of independence has ceased to
function as a state. Welfare and statist policies encouraged waste and
corruption. Communal land ownership deterred agricultural development. The
exploitation of the Solomon Islands ’ timber resources by a small elite
led to large scale corruption. There were no jobs for the rapidly growing
population so that society disintegrated into violence and
chaos. The French colonies are
governed as territories of metropolitan France . Their high per capita
incomes reflect salaries of the French public servants who enjoy rotations
in the Pacific at the expense of French taxpayers. Discussion of Kanak
independence has been put off for at least 10 years in With nearly 200,000 people,
Vanuatu has a heavy government burden complicated by the colonial history
of the British-French Condominium (known in the Pacific as the Pandemonium
for its grossly inefficient bilingual administration) which imposed dual
legal, government and education structures, together with two foreign
languages—French and English—on top of the local Bislama, (in itself a
second language for the ne Vanuatu) on this small state. Much of the aid
to Vanuatu is spent on these inappropriate remnants of colonialism, not
least on ensuring that all official documents are translated into French
and English. Vanuatu has created an off shore financial centre that is
dependent on the employment of expatriates. By adding to unduly high wages
in the public sector and the effect of aid in appreciating the exchange
rate, other business, exports and hence employment are stalled. The gains
from the financial centre accrue to the same groups as the rents from aid,
leaving people in the countryside without education and other services and
infrastructure. Samoa and Tonga are similar
traditional agricultural economies. Each has small and inefficient formal
sectors producing for the domestic market, but each also has successful
small, export-oriented agricultural and manufacturing production.
Emigration to New Zealand , to Australia via New Zealand and via
These three Pacific states have
benefited, in different ways, from marine phosphate deposits.
Nauru , initially a German
colony, in 1918 became a United Kingdom , New Zealand and
Kiribati ’s remittances from
its phosphate workers on Tuvalu has benefited from the
remittances of its phosphate workers. Tuvalu did not receive any revenues
from phosphate, but has converted much of its aid into a long term Trust
Fund to support its social services. The former American colonies
are best characterised as drowning in aid. The total population of the
four groups is 260,000, but individually they range from 20,000 people in
Palau to 118,000 for the Federated States of Micronesia . Beautiful,
pristine islands have been turned into rubbish tips covered with discarded
beer cans as productive traditional agricultural societies became welfare
dependents. Many islanders emigrate to the United States to escape waste
and corruption at home. The The lack of cooperation in the
Pacific dates back to the conflict policies of the colonial powers that
cut up the Pacific into their ‘possessions’ in the 19th century. The
islands are still slaves of their colonial past. They have ignored the
benefits of joining together to share costs of government and
international representation and of free trade in goods and services,
capital and labour. The two regional organisations—The Pacific Community
headquartered in French speaking The Pacific is so well endowed
naturally that its traditional material lifestyles were envied by the
first European explorers as akin to paradise. Idealised views of the
‘noble savage’, however, ignore claustrophobia and endemic violence,
including cannibalism. Besides gardens and orchards, the region also had
stands of tropical timber, ample marine resources and in some islands,
minerals. Traditionally, men cut down trees and fenced gardens, hunted and
protected their villages. The societies were polygamous, with several
wives needed to work gardens. Leisure was ample, particularly for men.
They enjoyed even greater leisure once modern tools were applied to the
making of gardens, hunting was replaced by imported sources of protein and
tribal fighting was contained by the colonial administrations. Pressures
that made for the ‘Puritan ethic’ of work, saving and investment in less
favourable climates were absent.
Development implies a change
from traditional to modern societies. Such change has both costs and
benefits. In the Pacific these costs are particularly marked by the loss
of leisure. The costs of change are only worthwhile if they are
compensated by higher personal security, personal freedom, better
education, health and longevity, higher incomes to buy manufactured goods
and a richer social and cultural life. The slower the transition and the
smaller its rewards, the more are societies likely to cling to (idealised)
traditional ways despite all their costs. Without evidently rising
benefits, the costs of change erupt into violence and crime.
As the Pacific became a
laboratory for anthropologists, the idealised views of Pacific societies
came into prominence.16
Overpopulation that from time to time pushed people off from island shores
in search of new lands to settle, but more often to drown at sea, was
ignored. So was the claustrophobia and violence to which it led in many
small societies. The treatment of women as chattels in polygamous
societies was airbrushed out of the poignant palm fringed vignettes of
island life. For many missionaries, modern life was thought to bring
nothing but unfortunate temptations. Imperceptibly, anthropologists,
sociologists and geographers moved from describing Pacific societies to
prescribing for them.17
Roseate views of traditional life became dominant and were adopted as
realistic and accurate by Pacific leaders. It was a short step to argue
that traditional social institutions could be maintained without change
and yet deliver the modern education, health, jobs and incomes that
Pacific islanders, like people everywhere, want. No evident effort was needed to
obtain the goods that missionaries and colonial administrations brought to
the islands. Local inhabitants soon learned to enjoy new foods and other
consumer goods, but a lack of connection between work, income and
consumption led to various forms of ‘cargo cult’ in colonial times. These
were strengthened by the air drops of food and blankets during World War
II. Cargo cult expectations became a serious problem, notably in the
Solomon Islands , but they were present throughout the Pacific.
Cargo cults were fed
by resentment in the colonial period. Expatriate families did not have to
work hard to enjoy high standards of living while local people worked in
gardens, on plantations and as domestic servants. Cargo cult expectations
were readily translated into dependence on aid flows. In the Pacific there
did not seem to be any conflict between dependence on aid and national
independence. A culture of mendicancy, no less debilitating at the level
of the political state than the cargo cult was for individuals, thus
permeates the Pacific. Treating aid funds contributed by Australian (and
other) taxpayers as components of national revenues to be spent largely on
consumption, seems natural to Pacific governments. The notion that
Australian taxpayers have the right to oversee how their taxes are spent
is regarded as bizarre in the Pacific. Communal land ownership and
clan loyalty provide security and ensure that in traditional societies
noone goes hungry. Most of the Pacific has been stalled at the communal
stage of development, though feudalism has emerged in the role of chiefs
in Fiji and royalty and barons in Tonga . Communal land
ownership has held back indigenous entrepreneurship in the Pacific as it
has everywhere in the world. The very considerable literature on land
issues, starting with an Asian Development Bank sponsored survey of South
Pacific agriculture in 1979, failed to ask whether economic growth and
development on the basis of communal ownership was possible. There was no
attention to how the transition from communal to individual property
rights might be Changing from communal
to individual property rights undoubtedly has costs for some individuals.
Some will benefit more than others. But experience worldwide shows that
where the transition from communal to personal property rights takes place
in an open society, the benefits to the lowest income households that
emerge from the process are far greater than those of standing still.
Taiwan and Thailand are examples of positive transitions to individual
rural property rights that led to rapid growth. Not one country in the
world has developed on the basis of communal land ownership. Scandinavian
aid agencies failed miserably when they tried to introduce co-operative
farming as a transition to private property rights in Tanzania . Incomes
fell steeply in the wake of their efforts. The extraction of
timber from communal lands in the Pacific led to exploitation by foreign
firms and monumental corruption, with little return to the landowners or
the nation, and without replanting to sustain yields. In the Solomon
Islands , combined village and political corruption was a major factor in
the collapse of civil society.20 Clan loyalty,
admirable in traditional societies, is inappropriate for a high income
modern society. It reduces the costs of unemployment and underemployment
in stagnating Pacific societies by creating an informal welfare network,
but at very high cost. Clan loyalty makes it impossible for individuals to
save and invest. Women with jobs in The failure to explain
the high costs of communal ownership in the Pacific has maintained
political opposition to land surveys and the allocation of individual land
rights. When the Morauta Government initiated land tenure reform, it was
sabotaged by its own Government members who mounted protests in the
streets. The initiative had to be withdrawn.
Pacific Islanders who want to
cling to communal land ownership rather than command individual property
rights have every right to make that choice. They have to accept, however,
that their living standards will not rise, and that the present levels of
male underemployment, alcoholism and crime, will increase. Young men will
continue to drift in and out of urban areas, spreading HIV/AIDS. There is
no reason, moreover, for Australian or any other taxpayers, to underwrite
such choices with aid. The violence that was endemic
in Pacific societies was held at bay during the colonial era by the
imposition of security, and probably more importantly, by rising living
standards. The growth of crime and civil unrest that has followed high
unemployment and underemployment since independence is well documented.21
Apart from open warlordism in In Fiji , the
Solomon Islands , and Papua New Guinea , groups bent on rebellion,
intimidation, and profit have treated state-owned armouries as gun
supermarkets, taking weapons when needed. Direct impacts of
armed conflict include death and injury, violation of human rights and
international humanitarian law and forced displacement . . . Indirect
impacts . . . include declining access to basic entitlements such as
health and education, long term trauma and disruption, in particular to
the prospects of an entire generation of young people, damage to social
and economic infrastructure, and declining levels of investment,
economic productivity and self sufficiency.22 Women and children
are the main victims. Maxine Pitts found: ‘Sexual and other aggressive
attacks on women and children are frequent, vicious and violent in Papua
New Guinea ’23
and violence against women is widespread in the
Pacific. Making bloated governments the
main source of income and resource rents has made corruption rife
throughout the Pacific. High levels of corruption among the political and
bureaucratic elites and their business associates in the Pacific have been
documented. They are constantly covered in the Pacific press although
corruption is so common that even large scandals scarcely merit a day’s
attention. Expatriates play a major role in transferring the gains of
corruption abroad. Pacific legal systems are not operating and corrupt
practices are not prosecuted. Frank Senge Kolma, writing in The
National 24
pointed to eight Papua New Guinea reports that ‘unveiled a litany of
corrupt practices, bribery, fraud, and mismanagement, flaunting of power
and flouting of laws, rules and regulations. The Auditor-general’s Office
and Ombudsman Commission have regularly been decrying corrupt practices in
their annual reports. In many instances, important leaders of Government
have been referred to answer charges before leadership tribunals and many
have lost their offices as a result. However, none have gone to jail for
their crimes. The common person sees the law chasing after him to rob him
of his freedom while leaving the larger rascal free to rob him of
everything else.’ When thieves who steal
from the public purse are not pursued, small criminals are encouraged in
their depredations. Papua New Guinea is by no means unique. Fiji ’s
National Bank of Fiji scandal was followed by corruption probes into the
Customs Department, the Companies Office, the Registrar General’s
Department, the Housing Authority, the Agriculture Department and the
Public Works Department.25
Corruption is endemic in Vanuatu . In Samoa, a notorious report of the
Controller and Chief Auditor, Sua Rimoni Ah Chong, was repressed. The
circumstances surrounding the murder of a Cabinet Minister have never been
cleared up.26 Nostalgia for the colonial era
is emerging in the Pacific as well as among old Pacific hands in Australia
and New Zealand . It is misplaced. Colonial administration was almost
entirely carried out by expatriates. Kiaps, other local
administrators and Christian Missions treated local populations as
children. Roads, airfields, ports, water and electricity serviced urban
areas where expatriates lived. Production and productivity were neglected
except for expatriate plantations. Australian trading firms dominated
wholesale and retail trade. Social infrastructure was minimal. Education
was the biggest failing. In the Anglophone colonies, pidgin was
regarded as a good enough language for islanders. Society was colonial. As
late as 1963, when the Anglican (indigenous) Bishop of the Solomon Islands
visited the capital, he had to stay in the official residence because the
Honiara ‘blackbirders’ hotel (immortalised by Somerset Maugham) still only
accepted white guests. In Port Moresby, the waiters (called ‘boys’) were
thought so incapable of remembering the names of such exotic breakfast
dishes as bacon and eggs that customers ordered each dish by numbers.
The prospects for
independence were long denied (as they still are in the French colonies)
so that when independence came to the Pacific as a result of global
anti-colonisation agitation, Pacific populations were unprepared for it.
Unpreparedness was a major cause of the difficulties the Pacific has
encountered. Reaching backwards towards re-colonisation was unrealistic
and untenable then, and is even more unrealistic now, as the Australian
Government clearly recognises.27
Welfare-statist policies and
institutions that characterised post-World War II England, France ,
Australia and New Zealand were imposed on the Pacific in the last days of
colonialism in the name of equity. Redistribution was put ahead of
production, most clearly in Papua New Guinea’s 1972 ‘Eight Aims’,28
which ignored that there was nothing to distribute until production and
productivity increased. The other Pacific states followed the same
policies. In Fiji , planning was regarded as so central to economic policy
that the production of chickens and eggs was ‘planned’ for 20 years ahead.
In New Zealand’s colonial Western Samoa, public health services in urban
areas entitled the high income urban population not only to free health
for themselves and their families, but also for their pets. Cats and dogs
were de-sexed at the public expense. The health service did not, of
course, stretch to the indigenous countryside. The social and
physical infrastructure throughout the Pacific is still based on 1950s
concepts. Town planning in In the 1960s and 1970s
Australian welfare-statist advisors promoted policies for the Pacific that
New Zealand and Australia had to transform to stop falling behind the rest
of the world. The public ownership of utilities—electricity,
telecommunications, ports and airlines—was an essential component of
welfare-statist policies. It was not recognised that air and shipping
services could be obtained more economically on contract than by national
ownership, notably for small economies. Excessive wage and manning
policies were universal. Public enterprises became sources of corruption
as well as inefficiency. They meant high costs of inputs into private
production, notably of exports, and high costs, directly and indirectly
for consumers, limiting already small markets. Continuing losses of
publicly owned enterprises—Air Nuigini, for example has not been in the
black for even one year of its operations and Air Nauru lost $40 million a
year—undermined budgets throughout the Pacific. When it finally became
evident that publicly owned enterprises were crippling budgets in Papua
New Guinea , the Morauta Government attempted privatisation. It was
thwarted on all sides. The public enterprises it tried to corporatise or
privatise were so run down that they were worthless. Because the public
sector had crowded out the private sector, there were very few local
private buyers. The public service employees in inefficient public
enterprises were able to combine with politicians benefiting from the
mismanagement of public enterprises to prevent privatisation.
The colonial administrations
copied zoning, trading and industrial regulations into the Pacific. This
has crippled the evolution of an informal sector critical to development
in rapidly growing countries. Personal services such as hairdressing,
washing and dry cleaning have been limited by regulations designed to keep
the streets clear in Inappropriate trade policies
(following Australia and New Zealand of the 1960s) are a core problem in
the Pacific. Critically, economic advisors failed to recognise the costs
that appreciation of the exchange rate as a result of aid and resource
rents created for non-mineral exports and for import substitution.29
Mineral, timber and fishing rents could carry the appreciation of exchange
rates, but high exchange rate policies exacerbated market appreciation,
dragging down the export of agricultural products and hindering
manufacturing for the domestic market. Many of the Pacific’s expatriate
advisors were unaware of the importance of labour intensive employment,
not merely to put the underemployed and unemployed to work, but also to
create skills on the job and to stimulate savings, entrepreneurship and
indigenous investment. Skill creation is still regarded as something that
governments should do.30
The Pacific economies
are so small that they were of necessity fairly open at independence, but
UN advisors supported protection for import substitutions. In spite of the
natural protection afforded by distance, high wages and input costs meant
that Pacific firms could not compete internationally in producing building
materials, consumer goods such as furniture and canned fish and beef. High
tariffs were therefore introduced and are still around 40% and
anti-dumping is used to limit imports further.31 Beer appears to be the
principal domestic manufactured product that is competitive. Because
protection fosters capital intensive choice of techniques, expatriates and
expatriate firms from industrial countries dominate the modern economy in
the Pacific.
The Pacific islands have
adopted the creed of the IMF, the World Bank and the Asian Development
Bank that foreign investment equals development. They seek it eagerly with
tax holiday subsidies. But foreign investment only has positive returns
for a country if it is invested in competitive production for the domestic
market or for exports. Foreign investment in minerals has led to
internationally competitive production and exports. But high tariffs have
created 20 year old ‘infants’ that cost the balance of payments more than
they save.32
Corruption and crime even deter
foreign investment in minerals. Mineral exploration is down. Some foreign
investment is still going into the exploitation of timber, but because of
corruption, on shockingly bad terms.
Minerals (gold, copper, silver,
petroleum, nickel and phosphate), timber, agricultural products (coffee,
cocoa, copra, palm oil, rubber, tea, vanilla and vegetables) and fish (or
the sale of fishing rights) are the principal Pacific exports. Clothing
from Fiji and some small manufacturing exports from Tonga and Samoa are
the sole labour intensive manufactures, although unemployment and
underemployment cry out for such industries. Increasing the
processing of their raw materials is a Pacific obsession. Petroleum
refineries and other so called ‘value adding’ proposals abound. But
processing tends to be highly capital and technology intensive. If it is
not undertaken efficiently and on a large enough scale to be
internationally competitive, it will erode the resource rents earned in
the primary stages of mining, timber extraction and fishing, as many
developing countries have found to their cost. Pacific countries have
Most Favoured Nation (MFN) access to world markets, so that membership of
the World Trade Organization (WTO) only has formal significance. Because
the GATT/WTO exempted developing countries from its reciprocity and tariff
reduction obligations, it is of little use in persuading domestic interest
groups of the value of free trade. Most of the Pacific countries are also
individual members of APEC, essentially a political organisation that does
not bring reciprocal trade benefits. Considerable scarce resources are
spent on trade representation by Pacific countries. But trade requires
business, not government, salesmen. World trade markets are not in Europe
or America but on the internet. The Pacific countries are wasting their
slim resources, with the encouragement of donors, on trade offices that
have nothing to sell. Pacific countries are
the so called ‘beneficiaries’ of three preferential trade arrangements.
Giving developing countries the General Scheme of Preferences (GSP) was an
United Nations Conference on Trade and Development (UNCTAD) proposal. It
was accepted by industrial countries embarrassed by their high tariffs and
quantitative restrictions on labour intensive products of interest to
developing countries.33
Fiji clothing exports benefit from the United States
GSP. The EEC-EU, in
addition to its GSP scheme, introduced the Lomé preferential tariffs (with
aid components for primary product trade fluctuations) for its previous
colonial dependencies in Africa, the Caribbean and the Pacific (ACP
states). Privileged quota access at a high price to the EEC-EU’s heavily
protected sugar market was the principal benefit for the Pacific. Fiji ’s
clothing also has privileged access, but the Lomé rules of origin have
made it difficult to exploit. Access to the EEC-EU markets for fish was
found to be exploitative and damaging to Pacific fisheries because of the
complexity of the Lomé rules of origin and ownership of fishing vessels.34 Australia (with New Zealand )
increased the scope of its Australian Scheme of Preferences with the South
Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA)
that, with the exception of sugar, gives the Pacific duty free access to
Australian markets. Its principal impact has been the encouragement of
Australian investors in the Fiji clothing industry and the establishment
of the motor vehicle electric harness plant by a Japanese investor in
Samoa. Preferential tariffs
for developing countries always seemed dubious, with importers in
industrial countries being the principal beneficiaries. They appeared to
be attractive while industrial country tariffs were high, but they
encouraged investment that became uncompetitive when tariffs fell. This is
a current problem for the Fiji clothing industry. Recent research has
reinforced previous doubts about the value of preferential schemes for
developing countries by finding that preferences delayed developing
countries’ trade liberalisation reforms.35
Australian and New Zealand
trade unions had the best of intentions when they gave their Pacific
brothers their unique labour market regulation systems. But both countries
have substantially reformed their own labour market regulations and in
both countries there is a lively debate about further reforms. The 1960s
‘industrial relations club’ tripartite organisation of governments,
employers and employees was even more inappropriate to developing
economies than it has been for Australia and New Zealand, but in the
Pacific it persists, crippling employment creation. Wage and salary levels
and working conditions within the Australasian industrial relations
framework were not related to productivity levels of undeveloped
economies. Basic wage determinations were introduced in colonial times.
When Australian advisors became involved in remuneration determinations
for indigenous public servants in Papua New Guinea in the 1970s,36
basic wages were supplemented by wage loadings and working conditions
based on colonial rates of pay that compensated expatriates for short
terms of employment and absence from their home countries. Privileges such
as housing and home leave were loaded on to Pacific administrative costs
and continue to this day. Shift work and weekend rates, sick leave,
holiday and long service leave were awarded and spread to the private
sector. These on-costs not only raised the cost of production, but also
introduced inflexibility. Pacific ports typically worked eight hour days
and five day weeks whether ships were in port or not. The rents associated
with mineral development enabled high remuneration to be negotiated in
mines (with additional education, health and housing benefits), placing
additional wage pressures on the private sector and strengthening
arguments for high protection. As fringe benefit on-costs amount to 40% of
earnings (much as in Australia ), tinkering with basic wages in the 1990s
had little impact on the relationship between productivity and earnings.
Inappropriate
industrial relations are replicated throughout the Pacific.37
Inexorable market based currency devaluations indicate the overvaluation
of remuneration in relation to productivity, but they have not been able
to affect the structures of high labour costs.
The inappropriateness of
industrial relations is illustrated every day. When a It would be
interesting to see whether the two Papua New Guinea public and private
sector trade unions would be prepared to support, or at least shut their
eyes to, the introduction of measures that would enable labour intensive
export industries in Some progress in
agricultural output could be expected in the Pacific with improvements in
infrastructure and security, at least to supply local food demand. But the
difficulties of transforming communal into individual land ownership are
so great that urban employment solutions are likely to be more successful
in the short to medium term than agricultural ones. Most of the Pacific islands
(with the encouragement of the IMF) have opted for a full structure of
monetary as well as fiscal policy, including independent currencies
managed by central banks. While Papua New Guinea and Fiji have the
economies of scale to make independent monetary policy viable, it is
doubtful whether central banks are economic for smaller economies. Some of
the very small islands have opted for the use of United States ,
Australian or New Zealand dollars. This means that they have to maintain
prudent fiscal policies—that is, tax collections that meet expenditures—to
ensure price stability. Dollarisation (using a foreign currency) is not an
option for economies that are fiscally imprudent and where unions are so
strong that wages are inflexible, as Argentina demonstrated. The tying of
the Pacific franc to a French franc at an overvalued rate is a major cause
of economic stagnation in the French Pacific as it is in West
Africa. Given the present
state of the Pacific economies, a common Pacific currency is some time
away. Real reforms in all Pacific economies, followed by at least a decade
of fiscal prudence and monetary stability with solid economic growth,
would be necessary before any form of Pacific currency, or one joined to
the Australian and/or New Zealand dollars, would be feasible.
The Pacific financial
sectors are weak, reflecting government ownership and intervention in
banking. Until individually owned land can be used as security, banking
will not develop in rural areas. Government ownership of banks,
unreasonable central bank practices and excessive government borrowing for
budget support have crowded out the private financial sector. The World
Bank’s International Finance Corporation (IFC) has added to the ‘crowding
out’ of private sector lending by public sector intervention. Its
subsidised Kula Fund edges out medium to long term private financing
opportunities. The Jackson Committee in 1984
drew attention to the escalation of budget deficits in the Pacific.38
The budget problems of Papua New Guinea were further documented by Ron
Duncan and Ila Temu in 1995.39
Satish Chand has brought the story up to-date showing that the current
direction of policy is not sustainable.40 Haroon Akram Lodhi has drawn attention to Fiji’s escalating budgets.41
Pacific budgets are characterised by persistent and escalating excesses of
expenditure over revenue. None of these deficits have funded investment.
The maintenance of infrastructure has been neglected. The bulk of budgets
are spent on consumption, that is, excessive wages and wasteful practices
of public enterprises, administrative wages and salaries, and purchases of
goods and services (that include substantial corrupt payments). In spite
of aid and resource revenues, Pacific governments habitually budget to
spend more than they collect in total ‘revenues’—including aid—by
borrowing domestically and abroad from official and commercial sources.
Actual expenditures exceed revenues and aid flows by even greater amounts
than annual estimates presented to Parliaments.
The Morauta Government’s
attempts to reform the Papua New Guinea budget were undermined by members
of his uneasy coalition. His moderate reforms were unacceptable to those
whose depredations of the public purse they curtailed. Hence the vigorous
political campaign against him that led to the return of 80 new,
inexperienced members of Parliament. Fiji ’s budget deficit financing
exploded after the Rabuka coup, and again after the May 2000 coup.
Economic reform came into conflict with attempts to subsidise indigenous
Fijians, so that little has been achieved. Escalating budget deficits were
a critical component of the collapse of the Solomon Islands . The costs of
budget waste are evident in Nauru ’s inexcusable squandering of billions
of dollars. Aid donors have
contributed markedly to escalating budget deficits in the Pacific by
permitting their taxpayers’ funding of aid to be considered as ‘revenue’.
42
The international financial organisations also allow concessional loans
(that have to be repaid by Pacific taxpayers) to be considered revenues.
Pacific budgets thus openly recognise that aid is fungible; that is, it
can be spent by governments on their recurrent programmes rather than on
development. Aid funds contribute from 20 per cent of budgets in Papua New
Guinea to 80 per cent of budgets in small states. Budget estimates
generally show lower aid revenues than development expenditures, with
domestic revenue contributions to development expenditures. But actual
recurrent expenditures expand in practice to reduce development
expenditures to negligible shares of actual budgets, accounting for the
lack of infrastructure maintenance and expansion. Removing aid flows from
budgets is essential if Pacific governments are to reform their economies
and hence balance their budgets. Pacific governments show no
awareness of the discrepancy between population and national income growth
and deny that they have serious economic and social problems. They do not
indicate any intention of reforming their economies. Prime Minister
Somare’s recent summing up of Papua New Guinea ’s economic situation,43
his Government’s proposal for an export based recovery plan44
and Joshua Kalinoe’s presentation to an Australian Senate Inquiry,
45
all clearly indicate that no departure from past policies is being
contemplated. The Senate Committee’s questioning could not elicit any
evidence of programming that would lead to Prime Minister Somare’s
export-led recovery. Such fundamental export bottlenecks as communal land
ownership and inappropriate labour regulations were not mentioned. There
was talk of, but no plan for, the rehabilitation and extension of roads
and for the privatisation of public utilities. Corruption was claimed to
be no higher than in other countries, with Pacific governments
cannot alone be blamed for policies that turn them into paupers. At the
side of each sit highly remunerated expatriate advisors putting a spin on
embarrassingly incompetent and inadequate programming for more of the
same.
Only the Pacific peoples can
take charge of their own futures. Even if it means less polished
presentations, they have to start writing their own policy and
administrative papers rather than leaving them to expatriate advisors.
After 25 years of independence many trained professionals are available.
They are not being given the opportunities to work in their own countries.
Many are working abroad. Given the difficult, counterintuitive concepts of
the economic theory of aid and mineral rents, an open discussion in
academia, politics, bureaucracies and media, similar to the debate that
has transformed Australia from a protectionist to an open trading country,
is essential in the Pacific. 6. AID TO THE
PACIFIC
Australia was an early
participant in the Western flow of aid to developing countries.
Sub-Saharan Africa has received the highest aid during the last 30 years,
but its growth has been the slowest, with living standards falling in many
African countries and more than 350 million people living in absolute
poverty.46 Aid appears to be inversely related to growth. Recent research
shows that worldwide aid has not even been effective in countries that
have adopted pro-growth policies.47 Source:
The Development Assistance Committee,
Development Co-operation Reports, 1971-2000, OECD Paris. Aid flows
include official development assistance (including the concessional
elements of loans) from OECD countries,
multilateral organisations and Arab countries. The aid that flows to the
Pacific is termed ‘boomerang’ aid because much of it returns to donor
countries in remuneration for consultants and implementing companies.
Formal ‘tying’—that is, insisting that aid is sourced in the donor or
recipient country—is not the cause of this problem. Pacific firms receive
preferences in bidding for bilateral and multilateral contracts. AusAID
has worked to nurture Pacific firms. But the Pacific, 30 years after
independence, has little capacity for aid implementation by local
contractors. France , Australia and the
United States are the current principal aid contributors, with Japan
emerging as a significant donor, particularly where it has fishing
interests (Table 6). The bulk of French aid takes the form of payments to
the French public servants who run Bilateral aid agencies
have annual meetings with Pacific states to discuss requests for aid
(‘shopping lists’), and review the progress of current aid projects and
programmes. The recipient states play off donors against each other to
increase aid volumes, playing on the bilateral donors’ postcolonial
unwillingness to impose efficiency and effectiveness conditions on
recipients lest they be accused of
‘neo-colonialism’. Source: The Development
Assistance Committee, Development Co-operation Report, 2000, OECD
Paris. AusAID has so many problems in
delivering aid to the Pacific that it is difficult to recognise that it is
one of the best of the industrial countries’ bilateral aid agencies and
far superior in efficiency and effectiveness to the multilateral agencies.
AusAID is crippled by two
considerations. It is not permitted to express views about the Pacific
(and other recipient) economies to establish whether a given economic
environment makes it possible for aid to succeed. It is also not permitted
to negotiate so as to compel recipient countries to acknowledge that
Australia has a right to insist that its taxpayers’ funds are spent
efficiently on projects and programmes that will be effective.
AusAID’s best projects and
programmes have thus been in countries like Thailand and Indonesia that
were sharply focused on growth in the 1970s and 1980s. In its Pacific
projects in education, health, water supply, other infrastructure
development and police support it has both hands tied behind its back.
Because recipients have not been obliged to play by rules of mutual
obligation, aid to the Pacific largely remains budget support. For
example, AusAID pays for 85% of road maintenance in Papua New Guinea
. The United Nations Development
Programme (UNDP) manages small but widely distributed multilateral flows,
albeit with frequent visits from the staff of other UN agencies. UN
programmes in the Pacific are not driven by Pacific needs, but by UN
agendas. In the past most of the UN support in the Pacific has been for
welfare and statist economic policies, notably for public investment and
protection for import substitution. Until the 1980s South Asian socialists
and East European central planners were heavily represented among UN
advisors in the Pacific. Socialist outlooks have become more muted, but UN
agencies still cast doubt on the strong relationship between economic
freedom and economic growth.48
UN advice found a warm welcome in the postcolonial Pacific and was also
strongly supported by leading NGOs in Australia . In a democracy everyone
of course has a right to their views, but the majority of Australian
taxpayers in supporting reform at home has voted against the welfare and
statist views that the UN promotes in the Pacific. Pacific bureaucracies
are constantly being visited by UN staff and their contractors.
Conferences, seminars and thousands of pages of reports flourish.49
They are short on analysis and lack reliable data series. Armies of staff
and contractors are occupied in taking up the time of Pacific public
servants who are thus deflected from attending to their responsibilities.
The Pacific has also received
some IMF credits and substantial loans from the World Bank and the Asian
Development Bank. These provide a platform for co-financing and other
loans from bilateral governments, export credits and commercial borrowing.
At the end of 2002, Papua New Guinea was the only Pacific country with an
IMF credit of (US$102 million). Papua New Guinea has received US$1.3
billion from the World Bank (in 1998 US dollars) and a sum of US$800
million from the Asian Development Bank.50
The lack of development of infrastructure and social services casts doubt
on the effectiveness of more than 25 years of development banks’ lending
to the Pacific. In 1992 the World Bank itself concluded that ‘the Bank was
generally unable to make an effective contribution to the development of
the Pacific member countries during most of the 1980s’.51 The IMF, the World
Bank and the Asian Development Bank are still committed to the view, shown
to be erroneous by Peter Bauer 50 years ago, that developing countries
cannot progress without aid to fill their ‘savings gap’ and their ‘foreign
exchange gap’. They have therefore played an important role in the Pacific
in fostering aid dependency. The World Bank initiated a Consultative Group
in 1988 to discuss and coordinate donor activities for Papua New Guinea .
For other Pacific countries mendicancy is more informal. The aim of such
consultations is to maintain aid flows. The IMF and World Bank
economic reports prepared for these and other purposes comment on the
Pacific’s lack of growth, but avoid analysing reasons that would be
unpopular with the aid recipients.52
The IMF and the World Bank took on the responsibility for conditionality
(ensuring that recipient governments follow prudent project, programme and
economic policies so that aid could work) to avoid ‘colonial’
interventions by bilateral donors and to supply economic analysis to other
multilateral organisations to avoid duplication of effort. The Asian
Development Bank has been happy with this arrangement. The IMF and the
World Bank have disagreed from time to time in their policy advice, but
this has not mattered because they did not intend their advice to be taken
seriously. From time to time, when economic management became egregiously
dysfunctional, the IMF and the World Bank have withheld their lending for
a time but they have never terminated it. Without effective conditionality
the international financial organisations’ loans have readily found their
place in Pacific budgets.
The content of the
international financial organisations’ lending programmes to the Pacific
is not impressive. When the IMF, in December 2002, became concerned with
the number of ‘ghosts’ (people with two jobs, dead people and others),
thought to be at least 10% of Papua New Guinea’s public service payroll,
it engaged an Australian contractor to install a payroll system that ‘is
one of the most sophisticated in the world’ at a cost A$13-20 million. The
contractor argued that this would save the PNG government A$45 million a
year by finding and dismissing the ‘ghosts’.53
Hopefully, this contract is funded by a technical assistance grant, for no
payroll system can find and dismiss ‘ghosts’. Only political will can do
so.
The World Bank introduced a
Pacific Regional Strategy in 2000 to overcome past failures.54
In March 2003, eight ongoing projects in Papua New Guinea amounted to
US$206 million. They covered technical assistance for gas development and
two other mining sector ‘strengthening’ grants, forestry and road
maintenance.55
In Fiji, the main projects have covered highway, power,
telecommunications, housing and sugar development; in Samoa roads,
highways, power and telecommunications were targeted; the Tonga
Development Bank received support and in Vanuatu the focus is on
education, housing and agricultural research and extension. These projects
are an improvement on the millions spent on ‘public sector capacity
building’ in the 1990s that had no evident effect on public sector
efficiency (though it filled consultants’ pockets). But it is not clear,
whether, being embedded in recurrent expenditures, they can be implemented
efficien
