AUSTEO (AUSTRALIAN EYES ONLY) REPORT: EXCERPT NO. 1

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Australian Delegation Brief Prepared for the July 11, 1997 Forum Economic Ministers' Meeting in Cairns, Australia

SOUTH PACIFIC: POLITICAL ECONOMY

Economic problems are mounting in the South Pacific but reform is being frustrated by leaders' anxiety about its political costs and uncertainty about its benefits.

Pacific island countries have become more conscious of their vulnerabilities as the optimism of independence has faded. Their circumstances and performance vary, but their growth rates have been low. Mismanagement is hurting, with the Solomon Islands, Nauru and the Cook Islands on the brink of insolvency. Five Forum countries are engaged with Asian Development Bank or World Bank adjustment programs.

Underlying problems are not easing - low growth, weak private sectors, high Government spending, low education and skill levels, rapid population growth and rising expectations. The subsistence sector has long supported most islanders and provides a cushion against failure in the modern sector, but it also is under increasing strain.

Global strategic change is leaving the islands more exposed and struggling to hold the attention of external donors as international interest slackens. They find it difficult to tap into the dynamism of Asia and fear being left behind. Many also fear the consequences of environment change - especially the atoll states. Island leaders want economic independence and rising incomes for their countries. Many of them sense that this requires them to reform economic policy and government administration; they realize they cannot sustain large and inefficient public sectors and that the private sector has to play a bigger role. Many also accept that donors expect them to reform and are increasingly impatient.

But progress has been patchy at best and they have generally shirked hard decisions on reform because they fear its personal, political and financial costs. Many of them are overwhelmed by the task, fearing that it will lead to a fall in living standards. They doubt they have the skills needed to make the public sector more efficient, even if the political will existed.

Public sector reform is difficult because government has been the main agency of development and formal sector employment and is the milch cow for political survival. Colonial powers and donors promoted large public sectors through giving priority to providing public services - education, infrastructure and health - to raise living standards. Access to government jobs, contracts and licenses helps satisfy Leaders' kinship and local obligations. So cutting the public sector and introducing transparency and accountability bear directly on political survival; they also threaten many Leaders' financial interests. It is only now that a general sense of crisis is taking hold in the region that Leaders' are seriously looking at reform.

Governments have little confidence in their private sectors' ability to generate jobs and growth. They fear that their private sectors cannot compete and that liberalization will lead to a loss of economic and political control to foreigners. Many are worried that encouraging private enterprise and open trade and investment will damage customs and social cohesion. Many have neglected agriculture or failed to provide adequate services to it; they have lost sight of its crucial role in raising incomes and preserving social stability. And they balk at reforming land management regimes, despise mounting pressure on available land, because land issues are extremely sensitive at the grass-roots.

Island economic ministers need reassurance and support if they are to persevere and reform. They will be looking especially for sympathy with the political difficulties structural adjustment poses for them and strategies for selling it politically. Island governments have had plentiful advice from foreign experts in the past, but often not in a form that they can readily grasp and translate into a political program. They are critically short of basic management and accounting skills need to translate budgets into action on the ground.

The most promising approach with island ministers would be to emphasize the returns from successful reform in better basic education, health, transport and rural extension services. That should appeal to leaders' political instincts and should help to defuse NGO suspicion - as the World Bank has found in explaining its program in PNG. NGOs which emphasize services rather than political agitation are often more effective than governments and could be useful allies in improving governance; the churches in particular carry weight at the grass-roots.

Pacific leaders will continue to flirt with easy solutions to their economic problems, especially quick-fix easy-money schemes and over-exploitation of natural resources. They will find it hard to stop asking others to solve their problems, so they will continue to push for more aid, new trade preferences and easier labor access. Used to ambitious but unrealized development plans, they may balk at settling for modest but achievable objectives. But if our message on economic reform is kept simple - and we emphasize its potential benefits for their prosperity and the preservation of their separate identities - economic ministers will find it easier to convince their colleagues to press on with it.

Island ministers will respond best to an approach that they see as helpful rather than hectoring, especially one that emphasizes:

It will help for them to hear the experiences of other island governments which have grappled with reform issues, such as Samoa, the Cook Islands and the Federated States of Micronesia.

Island ministers would also respond well to an Australian approach which acknowledges that the islands have differing needs and capacities and that each requires a tailored approach for which it feels a sense of ownership. Despite their problems in common, the islands are very diverse - ranging from the resource rich Melanesian states to the resource poor micro states of Polynesia and Micronesia. And there are big differences within these broad ethnographic categories - between PNG and the rest, between the smaller and bigger states, and so on.

The Melanesian states have the greatest potential but are also the most at risk of breakdown and the greatest policy challenge for Australia. Wastage of resources is highest in the Melanesia countries which are also politically vulnerable because of their highly segmented and turbulent social bases. These countries are behind the rest of the Pacific on almost all social indicators and lack the social cohesion and migration outlets of Polynesia and Micronesia, which have so far provided them with a cushion against economic adversity.

TOMORROW: COOK ISLANDS

"Cook Islands is in economic free fall after facing near bankruptcy."

 

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