AUSTEO (AUSTRALIAN EYES ONLY) REPORT: EXCERPT NO. 2

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

COOK ISLANDS

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

As a coral island micro-state, the Cook Islands has little land, poor soil and few other resources. It depends on New Zealand aid and remittances to maintain relatively high living standards. Free association with New Zealand gives its citizens New Zealand passports and hence access to the New Zealand labor market --and indirectly to Australia. Migration also relieves population pressures, with more islanders living abroad than at home.

In the Cook Islands, mismanagement, fiscal profligacy and a financial scam bankrupted the government and forced it to accept a drastic adjustment program in 1996, sponsored by New Zealand and the Asian Development Bank. Westpac, in its role as central banker, and other commercial banks refused the government further credit and obliged it to revert to New Zealand currency. Prime Minister Henry, whose extravagance brought on the crisis, is making a virtue of necessity and claiming credit for reform. But the economy is in free-fall.

Public sector numbers have been cut by two-thirds and salaries have been cut by 65 percent since March 1996, when the public sector accounted for half the formal work force, and the private sector is yet to take up the slack. And government debt of over US$100 million exceeds GDP. A plan to repay debts by selling assets has made little progress because some large tourism assets are encumbered, and investors still see the Cook Islands as a high risk. After falling by 5.7 percent in 1995 and 5.4 percent in 1996, a decline in GNP of 16 percent is expected this year, as the full effects of the contraction in the government sector are felt.

The insolvency in the Cook Islands has been useful in forcing New Zealand into a tougher line on reform in the Pacific and moderating its tendency to indulge islanders. Wellington faces the unpalatable fact that dual citizenship transfers dependencies' problems to New Zealand; for example, 500 more New Zealand passports were issued to Cook Islanders in the year to November 1996 than the previous years. Many of those migrants go on to Australia, providing a cushion for New Zealand as well as the Cooks.

Cook Islands want to negotiate new aid terms with New Zealand, which gives them more independence; one idea is a trust fund. However, for now, Cook Islands is in no position to bargain with New Zealand or other donors and will have to knuckle under to reform.

Forum Economic Ministers' Meeting Policy Agenda

Public sector reform: This is well advanced: public service numbers have been reduced by two-thirds. Government commercial activities have been reorganized on business principles or shifted to the private sector, a statutory requirement for balanced budgets has been introduced, and an independent committee of review of public finance has been set up to ensure accountability and transparency. However, Government solvency still rests on the Cook Islands' ability to sell more of its assets to fund NZ$2.1 million of this year's fiscal outlays and to clear arrears.

Private sector development: Authorities are currently revising income and company tax rates and introducing a VAT, to improve the incentive structure of the tax regime. With the Government focused on fiscal consolidation, it has not yet produced a sectoral strategy for economic recovery, although privatization of Government enterprises will stimulate the private sector.

Tariff reform: The Cook Islands plan to remove import levies as soon as the revenue flows from the introduction of a VAT are sufficient to compensate for the loss of revenue from trade taxes.

SIR GEOFFREY HENRY

Prime Minister of the Cook Islands since February 1989 (also Attorney General, Minister for Finance and Economic Management, Arts and Culture, and Police)

Henry has taken the Cook Islands to the brink of economic catastrophe, but his position as prime minister is secure for the time being. The opposition is weak and no-one in his government is able to oust him. Indeed, Henry quashed a potential challenge in 1996, even as the extent of the Cooks' economic problems became apparent. He has a comfortable majority in parliament and an election is not due for two years.

Aged 55, Henry is articulate and hard-working, but he is boastful and vain --having spent heavily on grandiose monuments-- and can irritate others. He likes to see himself as a regional statesman, but his views carry little weight with other island leaders, even in Polynesia.

CRISIS MANAGEMENT

Henry's patronage politics and his attempts to boost the Cooks' economy and promote infrastructure development with heavy borrowing and dodgy financial schemes --such as last year's letters of guarantee scandal--.have caught up with him. The Cook Islands is virtually bankrupt, with little money and no access to further credit.

Henry has been forced into radical economic restructuring, taking over a new ministry of finance and economic management, slashing the public service by two-thirds, selling public enterprises and closing overseas posts --including in Canberra and Sydney. He now promotes himself as an exponent of reform --which he initially poo-pooed-- and will want to make his mark as Chair of the 1997 Forum. But the economy will go deeper into recession before improving, and Henry will keep his eyes open for easy options.

TENSE RELATIONS

With huge troubles at home, Henry is more dependent than ever on continuing access to New Zealand for Cook Islands' education and employment. Already strained on the issue of the Cooks' constitutional ties with New Zealand, relations have been further irritated with Wellington's tough response to the economic crisis and to Henry's defiance over the Cooks' tax haven --which has attracted some shady characters. New Zealand has lost patience and is moving to project aid from untied budget support.

In the late 1980s, Henry cultivated Australia and France in his efforts to dilute New Zealand influence --partly due to his dislike of Lange. He is still pro-French --although his ambivalence over the status of French Polynesia worries Paris and could cause ripples at the Forum. He has had shady associations in Australia and his nominee as honorary Consul in 1983 was rejected on character grounds.

BACKGROUND

Henry is a member of the Cooks' dominant clan. Cousin of the late Albert Henry --the Cooks' leader at independence-- he entered politics in 1965 and has held senior positions since 1972. He has been leader of the Cook Islands party since Albert Henry's death in 1981 and was prime minister briefly in 1983.

Henry was born in the Cook Islands in November 1940. Mostly educated in New Zealand, he obtained a Bachelor of Arts and dropped out of a law degree. Married to Louisa, he has five surviving children. (A son, Geoffrey, Jr., drowned in early 1995.) Henry played rugby when younger, but now plays golf and tennis. He is interested in film, reading and drama, and in reviving Polynesian culture, especially through dance. He has been drinking heavily as the pressure of the economic crisis has mounted.

TOMORROW: FIJI

"Prospects for economic recovery and reform are looking up with signs of compromise on the constitution."

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