Spotlight on Domestic Markets

This item was first published in the Vanuatu Daily Post on June 16th, 2017

There has been a lot of commentary in relation to PACER Plus recently. The two most useful items that I read were by Matthew Dornan and Dan Gay.

Both Matt and Dan made reference to the impact of PACER Plus on domestic markets. They both identified that fears that big multi-national companies were going to set up in places like Vanuatu and crowd out local business are largely unfounded. The domestic markets in most of the relevant Pacific island countries are too small to be attractive to big businesses. There are very few opportunities to generate sufficient return in order to justify the set-up costs that would be involved.

On the other side of the coin, Dan commented that the likelihood the PACER Plus agreement would lead to increased foreign investment was exaggerated. Again, he puts forward the small size of the domestic markets of Pacific island countries as a major barrier to increasing investment of that type.

 The role of domestic markets in increasing economic development in the Pacific island region is often overlooked. It certainly does not receive as much attention as it should, with much more thinking and energy being directed to increasing export opportunities and activities.

I am not disagreeing that domestic markets in the Pacific island region are small. But whilst that is true, we also need to remember that these markets are (or should be) easier to access. Also, in a number of cases, they are growing. As populations in countries like Vanuatu and Solomon Islands grow, the domestic markets expand in terms of absolute numbers.

As Pacific island countries become more urbanised and a greater proportion of the population participates in the formal or cash economy, the domestic markets for food items and other products of the rural, agricultural economy increases. This results from people in urban areas having reduced access to gardens and/or less time to prepare traditional foods. If they are able to buy local produce in towns as supplied by farmers in rural areas, there is less need to rely on imported, processed foodstuffs.

New approaches to health and food security, such as the Slow Food movement can also lead to increased demand for locally sourced produce.

Another aspect of how domestic markets in Pacific island countries are growing is the impact of participation in seasonal labour schemes. Whether it is for personal, business or community projects this is an emerging sector of the domestic market that is looking to purchase locally developed goods and services.

In some countries (e.g. Vanuatu, Fiji, Cook Islands) there is a particular subset of the domestic market for agricultural and cultural products, which is the tourism sector. I think of this as a ‘visiting domestic’ market.

In Vanuatu, we have already seen some really important steps taken to increase the linkages between local producers and the tourism industry. There are some really important lessons to learn from the experience of those that have made progress in this area so that more people can get involved.

 Whether it is food crops supplied to hotels, resorts and restaurants, handicrafts or niche value-added products that can be sold as souvenirs, there are opportunities to grow the yield from this ‘visiting domestic’ market.

I was talking recently with someone about how countries in the Pacific can make the most of the opportunities presented by the growing number of wealthy Chinese tourists looking for new destinations.

Part of maximising these opportunities is having a good understanding of what this market’s expectations are likely to be. We discussed the importance of local produce as part of the offering to this demographic. They will be looking forward to eating great food cooked with organically grown, locally sourced produce. There is plenty we can do to put us in a good position to get the most out of the opportunities this type of expansion of tourism may bring.

More needs to be done to improve linkages between primary producers and purchasers within this sector, notably hotels, resorts and restaurants. For producers, they need to have confidence that increasing or diversifying production will lead to greater returns. In other words, they need to feel comfortable that there is actually a market for their goods. They also need access to reliable infrastructure and transport links in order to move their products to market reliably and at reasonable cost.

For purchasers, key concerns are assuring regularity of supply both in terms of quantity and quality. This means that opportunities for establishing aggregators exist and can be further explored and developed.

I am aware that there are already many activities underway that address some of the points I have raised. I’m looking forward to seeing how these and other things develop in the future.

Photo credit: cruisetimetables.com

 

Impact Investing – is it the next big thing?

This item was first published in the Vanuatu Daily Post on April 28th, 2017

A recent news item revealed that Tanna Coffee was to benefit from a sizeable investment facilitated by The Difference Incubator (TDi). TDi are brokers for impact investors.

Impact investing is well established in other parts of the world. But it is a relatively new concept in the Pacific island region. It’s something that we are likely to hear more about. It is an area of focus for Pacific Islands Trade and Invest. They are looking at ways to increase this type of investment in our part of the world.

So it’s worth finding out a bit more about what impact investing is. How does it work? What are the opportunities this form of investment provides to business in Vanuatu and elsewhere in the Pacific island region? What are the risks involved?

Impact investing is similar to venture capital investment, in terms of where in the business cycle it is most likely to be introduced. The main difference is that impact investors want to see a return that is more than just profit. They are looking to work with businesses that can deliver positive social impacts as well as a financial return.

These social impacts could include environmental protection, improved service delivery in relation to health or education or better livelihood opportunities (including jobs) for previously marginalised groups. Impact investors expect to make a profit but they may be prepared to accept a lower rate of return in exchange for beneficial social impacts. They will expect businesses to be able to measure the impacts of what they do with the investment and report accordingly.

The methods of investment used by impact investors are pretty standard. They are looking to lend money to businesses (to be repaid with interest). Or they are prepared to buy a share of a business, giving them some control and a return by way of a dividend or a share of the profit.

An advantage of this type of investment for Vanuatu and other countries in our region is that this is new money to address local challenges. There are individual investors that work in this way. But increasingly, arrangements of this type are managed through investment funds. This provides an increased level of stability of finance flows.

This type of investment is growing globally. Last year The Age reported that in 2015 a total of AU$15.2 billion was put into impact investing across the world. This was up from AU$14.3 billion the year before. The Pacific island region is a new market for those who manage this type of investing and provides fresh opportunities.

There are some reasons to be cautious. This type of investing is likely to have the most impact if it can be applied to the Small and Medium Enterprise (SME) sector. However, this sector is one where risks are often high and profits are low.

Often businesses in this sector need a lot of support before they are ready to absorb external investment of this type (or any type). One of the key aspects of this type of investment is how the agreed beneficial social impacts are to be measured and reported. This can be challenging for small businesses and if they have to get outside assistance that will come at a cost.

Pacific Islands Trade and Invest are working in this area to position our region as an emerging market for this type of investment. One of the most important things they need to do is educate these investors and their representatives about our region. These investors come with little or no knowledge of Pacific island economics, politics and culture. They need good advice about all of these plus the different legal and regulatory structures that apply across the region.

Businesses that hope to benefit from this type of investment also need to learn. They need to understand what impact investing is and what it is not. For example, it is not aid and it is not a grant. They also need to make sure that their systems and processes are right in order to monitor and report on social impacts in addition to profit and loss.

Governments and policy makers have a role to play. First of all, they need to decide whether this form of investment is one they wish to encourage. If it is, they need to ensure that the regulatory structures and policy settings do not create barriers to impact investors.

The Tanna Coffee investment is the second in our region to have been facilitated by Pacific Islands Trade and Invest. The first was in Solomon Islands, with Kokonut Pacific. As more of these investments are negotiated and then implemented, we will need to invest in learning about them. There will be important experiences to be shared with businesses and investors. This will inform how this type of support for private sector growth can work well in our region.

It may not be the next big thing but it will likely play its part.

Photo credit: netimpact.org

 

The kava konundrum

 

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This item was first published in the Vanuatu Daily Post on March 24th, 2017

Discussions about kava are endlessly fascinating. There are always new things to learn about how it is grown, how it is prepared, and various rules and protocols around how it should be served and consumed.

Many of these conversations operate at the micro-level but increasingly we need to look at some of the macro issues that are relevant in this area.

Kava is something of a touchstone when it comes to many areas of public policy and the debates that surround them. Earlier in the year, I referenced issues about kava quality to illustrate the importance of law enforcement rather than simply more law enactment. During several discussions about the pros and cons of introducing income tax, a number of people raised with me the question of how (if at all) it would affect kava growers. I’ve been in numerous discussions about inter-island shipping where the ability of kava growers to get produce to market is a key consideration.

And in the aftermath of Cyclone Pam in 2015 when the disaster response experts were trying to work out how to get relief supplies to rural communities, one of the best pieces of advice they received was ‘follow the kava’.

It seems to me that we are at something of a kava crossroads. There are a number of new factors at play that mean the economic potential of kava, particularly as an export crop, is being given additional attention.

We are already seeing an increased demand from overseas markets and there is potentially more to come. Recent reports have documented an increase in Fiji importation of Vanuatu kava to plug holes in their supply caused by the impacts of Cyclone Winston in 2016. We have also heard that kava is becoming increasingly popular in the USA, and importers from that country are busy establishing supply chains with our growers. Although we have yet to see any impact from the revocation of the import ban on purchases from within the European Union, it is likely that this will become part of the picture in the short to medium term.

And now that Australia has removed its import restrictions in relation to kava for research and medicinal purposes, we can expect to see an increased demand from there as well.

We are in a demand-rich environment and this brings many opportunities. But there are downsides. Some of them are already becoming apparent and we can expect to see more evidence of them in the future. The Kava Strategy 2016-2025 does not address these impacts. They are missing from the macro conversations but they are very significant for those that are caught up in them.

Whilst the Kava Strategy makes numerous references to the existence of the domestic kava market and its relationship with exporting, one thing it does not do is discuss the negative impacts on the domestic market that increased export demand can create.

The result of high demand is that the price goes up. In relation to kava, this is compounded by supply constraints, which is pushing up the price even more.

This is good news for sellers. It is manageable news for those who are buying to value add and then export as they are selling a premium product and their markets are buoyant.

But what about people who rely on money they make selling kava in the bars of Port Vila or Luganville? If they own the whole value chain from garden to shell and their kava bar is on their own land, they are fine. For as long as they want to continue to supply the domestic retail market they will be able to do so. If they decide to close down their retail operation and focus on exporting, it will be a decision they make for themselves.

But for some, other people are making decisions that affect their ability to sustain their livelihoods.

If a kava seller is renting a stall at someone else’s kava bar and buying green kava in town, it is hard to see how they are making anything other than a loss.

That is before kava bar owners start increasing the rent they charge for stalls to counter the reduction in the number of available tenants. Why are there fewer tenants? Because the combination of reduced supply and higher price means they have decided it is no longer economic to sell kava.

And then there are those who sell the VT20 at kava bars, most of whom are women. If kava bars close, because they can’t make money, these stallholders have reduced opportunity to make money whether as their primary source of cash or to supplement other activities.

These activities are key components of the informal and semi-formal economy. They are part of how a large number of people in urban areas support themselves and their families. If these opportunities were to be reduced or removed altogether, it is not clear what is available in their place.

A conundrum indeed – one I look forward to discussing further over kava when I’m in town this weekend!

 

Listen carefully or risk killing the golden goose

This item was first published in the Vanuatu Daily Post on February 24th, 2017

The opportunities that labour mobility schemes like the RSE (New Zealand) and SWP (Australia) present are many and varied.

These schemes have already contributed to significant livelihood improvements for individuals, families and communities in Vanuatu and other Pacific island countries.

After a very slow start, the Australian Seasonal Workers’ Program is building significant momentum. Influential people at the Development Policy Centre and the World Bank are using terms like ‘triple win’ and predicting increased income to the tune of $10 billion by 2040 across the region if these schemes are expanded and developed.

It’s very exciting and it means there is a lot to talk about. But there is a danger that this conversation is becoming one-dimensional. Some voices are not being heard. They are the ones that are asking awkward questions or raising concerns about the overall impacts of these schemes, good bad and indifferent.

Some of these questions were raised during a ‘Coffee and Controversy’ discussion during last year. It was a really good conversation, and identified a number of issues that continue to apply and need to be dealt with robustly so that the potential that these schemes present can be fully realised.

One of the issues is the rate of female participation in the schemes. It currently stands at 13% and this makes the ‘development’ people in places like the Development Policy Centre and the World Bank very twitchy indeed.

Their argument is one of gender equity: women should have the opportunity to earn money overseas just as men do. During our ‘Coffee and Controversy’ discussion we learned that the Vanuatu government had made a policy decision of not actively recruiting women in the interests of social cohesion.

This is a very important tension that requires careful investigation and discussion with all of the relevant stakeholders. It is a complex issue that cannot be swept away with a ‘because gender’ type slogan.

Another tension that arises is the impact that these schemes has on the domestic labour market and the costs to business that this incurs. When we discussed this on ‘Coffee and Controversy’ it was suggested that businesses needed to develop more flexible employment structures.

This would allow staff to spend periods of time ‘picking apples’ and then return to their jobs in Vanuatu, many of which are skilled labour positions. I followed this up with a couple of employers who were affected by this.

They reported that they had tried to put in place this sort of flexible scheme but hadn’t been able to come up with something that accommodated everyone’s needs. We need to look at this aspect more carefully and learn more about how this type of employment fits into our wider economy.

More recently, we’ve heard from chiefs who are worried that because young people are spending long periods of time each year working overseas, they are not learning enough about their culture.

They are missing custom ceremonies and not acquiring the skills to be able to conduct them in the future. Given that the new national development plan Vanuatu 2030 places culture as the bedrock of our future, there needs to be a space in which these concerns can be aired, interrogated and (hopefully) resolved.

And in amongst this there is a gap in the research. In very broad terms, the research falls into two categories. There is the research done by economists. It is all about how many people are earning how much money and how this will affect things like gross domestic product in sending and receiving countries. There is the research done by anthropologists.

It is more focused on documenting the stories of people and communities and how participation in these schemes affects their way of life. What’s missing is an objective assessment of the total impacts of these schemes, including economic gains, social costs, community impacts and perceptions, inclusiveness (or otherwise) and what this means for future policy making.

There are some very important questions that need to be examined meaningfully sooner rather than later.

But the appetite to take them on seems to be missing. In an exchange with a colleague at the Development Policy Centre, i raised this as an issue. I was met with the response that what was more important was expanding the schemes and getting more people from the bigger Pacific island countries (Solomon Islands and Papua New Guinea) involved.

This seems like a very risky strategy to me. Vanuatu is considered to be a star performer in the region (the other is Tonga), and there are multiple conversations going on here about how these schemes operate now and what people hope for the future. So now is exactly the time to interrogate these issues and others to ensure that this golden goose can be fattened for longevity, not killed off in the rush for a quick result.

 

Pacific Perspectives in 2016

This item was first published on the East Asia Forum on January 6th, 2017

Authored jointly with Matthew Dornan

2016 was a big year for Pacific politics. Vanuatu and Nauru held elections — each in the context of significant concerns about governance. Censorship, deportation of the chief justice and arrests of opposition MPs have led to a serious decline in the credibility of democracy in Nauru in recent years. In Vanuatu, the election this year followed 14 members of parliament having been jailed for corruption in 2015.

Fiji’s international profile reached new highs when it assumed the presidency of the UN General Assembly. But domestically there were concerns raised about detention of opposition figures, a sudden cabinet reshuffle and the impacts of retrospective land legislation.

New Caledonia experienced volatility as it approaches the conclusion of the Noumea Accords process, at which point the population will vote on independence from France.

Economic developments have generally been less exciting, with the exception of PNG where the collapse of commodity prices has contributed to a budget crisis. Pacific island countries recorded modest economic growth averaging almost 3 per cent in 2016 — an improvement on their 2015 performance. Growth rates were volatile in many states, and remittances, aid and income from tourism and fisheries were the most important sources of revenue.

Natural disasters again had significant economic impacts. A number of countries suffered serious droughts, with deaths from famine reported in PNG. In February, Cyclone Winston struck Fiji, causing damage valued at F$2.85 billion (approximately US$1.35 billion) — equivalent to almost 30 per cent of GDP. There were 43 lives were lost and 3360 houses were destroyed. The category four cyclone occurred less than one year after Cyclone Pam (a category five storm) hit Vanuatu, causing damage equivalent to 64 per cent of the country’s GDP.

Pacific island countries continued their prominent advocacy on climate change. The Pacific Small Island Developing States group was a key driver of the 1.5 degree warming target agreed at the COP 21 summit in Paris in late 2015. On the back of this agreement, Pacific island governments pushed in 2016 for the incorporation of ‘loss and damage’ into the international climate change architecture.

They also advocated for better access to adaptation funding — advocacy that led to donor support for accessing the Green Climate Fund (GCF), and which contributed to an innovative strategy that will see Pacific micro-states submit a joint funding proposal to the GCF. Next year, Fiji will co-chair the Conference of the Parties (COP 23) to the UN Framework Convention on Climate Change in Bonn in November, and will be co-president of the United Nations oceans conference in New York in June.

Tuna fisheries also featured prominently in 2016. The eight Pacific island members of the Parties to the Nauru Agreement — who collectively supply half the world’s skipjack tuna — continue to benefit from their establishment of a vessel day scheme, which is a cartel-like arrangement that has led to dramatic increases in revenue for PNA members. In 2016, licensing revenues received by PNA members were around US$400 million, compared to revenues in 2010 of US$64 million.

This success has influenced other agreements. The US-South Pacific Fisheries Treaty collapsed in February when Pacific island countries refused to continue providing US-flagged vessels with access to tuna at discounted prices. Pacific nations and the United States agreed upon a seven-year agreement to replace the existing treaty in December, which better reflects higher prices for accessing tuna fisheries. Pacific island countries also pushed back against proposals made at the Western and Central Pacific Fisheries Commission by the European Union and United States, which would have weakened the vessel day scheme.

Regionally, negotiations for the Pacific Agreement on Closer Economic Relations (PACER Plus) trade agreement between Pacific island countries and Australia and New Zealand proceeded with mixed success. Papua New Guinea announced in August that it would withdraw from the process, and Fiji made a similar statement before deciding to re-join negotiations. Concerns about infant industry protection and most-favoured nation status drove these decisions. This potentially leaves the two biggest island economies outside the treaty.

On a positive note, the expansion of labour mobility opportunities to Pacific islanders in Australia and New Zealand has generated significant goodwill in the region. Remittances were a key source of income for households affected by recent cyclones in both Fiji and Vanuatu.

Political tensions continue to affect regional cooperation in other areas. The dispute is ongoing between Fiji and the Pacific Islands Forum — the region’s pre-eminent political body — with Fiji’s leader maintaining his refusal to attend leaders’ meetings. Fijian Prime Minister Bainimarama has said he will attend meetings only when Australia and New Zealand withdraw from the Forum.

Instead, this year’s Forum Leaders’ meeting saw a decision to expand the group by granting full membership status to French Polynesia and New Caledonia — a move that appears to cement France as an established and future Pacific power, and reflects a shift (back) to security as the primary concern of the regional order. It remains to be seen what this will mean for the future of the Pacific Islands Forum, and for (currently lukewarm) Fijian relations with Australia and New Zealand.

Matthew Dornan (Twitter: @mattdornan) is Deputy Director of the Development Policy Centre, and Tess Newton Cain (Twitter: @CainTess) is a Visiting Fellow at the Development Policy Centre, The Australian National University.

This article is part of an EAF special feature series on 2016 in review and the year ahead.

 

Pacific islands thinking & doing – August 2016

During August I finalised a piece of research commissioned by the Pacific Islands Forum Secretariat to inform their work around enhancing the interface between regional and sub-regional organisations. This reflects my own interest in Pacific regionalism and sub-regionalism and the growing importance of this topic for Pacific politicians and policy makers. Whilst it is largely the case that local and national issues dominate the agenda in Port Vila, Honiara and our other capital cities, there are key conversations that require our leaders to adopt a sub-regional or regional perspective. This will be to the forefront over the next week or so as our leaders meet in Pohnpei for the 47th Pacific Islands Forum Leaders’ meeting.

I also collaborated with my friends at PACMAS to deliver a 3 day workshop for journalists in Vanuatu. The focus was on court reporting and coverage of legal issues more generally. The workshop gave us a space in which we could look at how media professionals can contribute to this very important aspect of public debate in our country. It coincided with a very high profile case in the Supreme Court in which a number of men were tried for a number of charges arising out of the alleged assault of a young woman further to her having posted comments on Facebook that were critical of the behaviour of taxi drivers. The workshop was very well received and we are now working towards delivering something similar in Solomon Islands.

PACMAS workshop in Vanuatu on 'Media and the Law'

PACMAS workshop in Vanuatu on ‘Media and the Law’

During August, my family and I visited Tanna, an island in the south of Vanuatu. My work tends to be very urban-focused so it’s always good to spend even a short time in rural areas. After all, that is where the majority of Pacific island people live.

In rural Tanna 5 litres of diesel costs AU$14.30

In rural Tanna 5 litres of diesel costs AU$14.30

I often meet people whoa re new to working in the region who express their surprise and horror about how much it costs to get things done in places like Tanna. This photo provides a small but telling example of why that is.

An ongoing project I am part of is working with a team from Palladium to develop an integrated thematic roadmap to guide the future work of Pacific Women. We are focusing on the particular area of women’s economic empowerment. I am contributing by way of analysis of the particular context of Pacific economics and the realities faced by women and men in terms of employment, financial inclusion and business opportunities.

On Coffee and Controversy, I joined in discussions about the development of cruise ship tourism in Vanuatu, a ‘pick and mix‘ of things, and tourism more generally.

For the Devpolicy blog, I met with Dalsie Baniala for ‘Pacific Conversations‘. We discussed some really important and interesting things relating to the importance of regulation for telecommunications in Vanuatu and across the Pacific island region more generally.

As we move into September this is a key time for thinking about how to document this year’s activities and share learning and impact with others. Investing in this contributes to the important activity of knowledge sharing and brokering in and for our region.


 

Tourism and economic diversification in Vanuatu

This item was first published by Tess Newton Cain & Matthew Dornan on June 16th, 2015 on Devpolicy

Vanuatu’s formal economy is dominated by the tourism industry. Tourism is estimated to contribute 65 percent of Vanuatu’s Gross Domestic Product, directly and indirectly, with the growth of tourism supported by Vanuatu’s second most important contributor to the formal sector, construction. Together, tourism and construction activity have driven economic growth in Vanuatu over the last decade. However, this growth has not benefitted ni-Vanuatu equally, with development centred in Vanuatu’s most populous island, Efate. Few tourists venture outside of Port Vila, and few infrastructure projects are focused on development of rural areas. Within Port Vila, the benefits of growth have also not been distributed equally, with much of the medium and larger business segments of the private sector in Vanuatu consisting of foreign-owned businesses.

It is unsurprising in this context that a ‘national conversation’ about the importance of economic growth that is more inclusive and sustainable should take place. This conversation had commenced prior to the passage of Cyclone Pam and now continues to be pursued with increased vigour given the storm’s impacts, and a perception that Vanuatu is at a ‘crossroads’ with the commencement of reconstruction. A key focus of the discussion has been on the development of sectors other than tourism, which is often framed in terms of economic diversification. Arguments in favour of diversification, such as those in this popular article that featured in The Conversation, point to Vanuatu’s ‘disproportionate dependence on tourism’, which is said to both make it vulnerable to economic shocks and to limit the extent to which growth is inclusive.

One of the problems with these conversations is that the terms ‘diversification’ and ‘self-sufficiency’ are not clearly defined, and as a result, are often used inappropriately. Diversification is the opposite of specialisation. It involves doing (or holding) more things, or in the context of this debate, expanding other economic sectors in Vanuatu at the expense of tourism. Does this make sense in Vanuatu?

Before proceeding, it is worth noting that there is a lot to be said for specialisation. Indeed, the specialisation of occupations forms the foundation of modern capitalism (as discussed in Adam Smith’s Wealth of Nations), which for all its faults, has resulted in higher living standards around the world. The proportion of the world’s population that lives in absolute poverty has never been lower.

At a national level, specialisation enables a country to focus its economic activity in areas where it performs well or has a ‘comparative advantage’ (drawing on Ricardo). This is especially important in a small country. Attempts to produce everything, or even most things, are not only impossible, but are harmful to the economy as a whole as they inevitably involve taking resources away from well-performing areas (such as tourism) in order to subsidise poorly performing areas.

This is not to say that countries should not explore economic opportunities or better ways of doing things. Doing so is key to increasing productivity, which in turn, provides the basis for sustainable increases in living standards. [Furthermore, despite the frequent (mis)use of the theory of comparative advantage to argue against any industry policy, comparative advantage is a static concept, meaning it looks only at current productivity levels and says little about how a country can increase productivity in the future.]

But there are benefits to focusing on activities in which a country does or could perform well. Conversely, there are costs associated with focusing on too many economic activities – i.e., diversifying – and costs associated with focusing on economic activities where a country does not perform well.It is important to bear such arguments in mind in this ‘national conversation’, given calls to explore development of manufacturing, industrial zones, deep-sea mining, and various activities in which it is clear Vanuatu cannot compete in international markets. Despite calls for Vanuatu to diversify, the country’s ‘natural’ comparative advantage in tourism is obvious, given its beautiful climate, scenery, enduring kastom, and proximity to major tourism markets.

There are two key arguments that have been used to support the case for diversification in Vanuatu, neither of which is without problems.

Proponents have argued for diversification on the grounds of risk reduction, pointing to the ‘acute vulnerability of tourism-dependent economies’ when making the case for diversification into other industries. The problem with this argument is that it assumes that diversification will reduce risk. But the alternatives in Vanuatu to which proponents of diversification point are also ‘high risk’ activities. Agricultural exports are subject to the whims of quarantine policy in Australia and New Zealand, which is influenced by small and highly organised domestic agricultural lobby groups. Agricultural production that is tied to the tourism industry will have no impact on the risks of a downturn in tourist arrivals (although it is worthwhile pursuing for other reasons). Diversification into agriculture also does nothing to address the risks associated with natural disasters: agriculture is as prone to cyclone-related damage as is the tourism industry. Other potential industries, such as the offshore financial centre, are also ‘high risk’, albeit in a different sense (just look at the extreme case of Nauru, whose offshore financial banks were used to launder money in the early 2000s, subsequently leading to international sanctions).

That is not to say that there are no opportunities for risk reduction. One clear economic opportunity that can reduce exposure to downturns in tourism (and is also resistant to natural disasters) is labour mobility. There is scope to build on Vanuatu’s positive experience [pdf] with labour mobility, including its success under the RSE scheme in New Zealand. Since the passage of Cyclone Pam, ni-Vanuatu people have demonstrated a sustained and increased willingness to take up opportunities to work overseas to generate funds for rebuilding and livelihood maintenance. However, the pursuit of labour mobility opportunities also requires appropriate support to ensure that it does not undermine the resilience of sending communities.

The second argument in favour of diversification is that other economic activities are needed to support inclusive growth and to benefit rural Vanuatu. This argument holds more weight. However, the assumptions here are that (a) tourism cannot be made more inclusive, and (b) other economic activities are more inclusive. Neither assumption is necessarily true. Just look at the non-inclusive growth driven by the resources sector in PNG (would deep sea mining in Vanuatu be any different?), or the more positive experience of Samoa, which demonstrates that tourism can result in inclusive growth.

In our view, advocating economic diversification in Vanuatu is a distraction from the more important goal of making economic growth more inclusive. This should certainly entail developing Vanuatu’s economic opportunities in select areas, such as through the pursuit of labour mobility opportunities, and the production of low yield, high value crops like coffee, honey, chocolate, vanilla and coconut oil. However, it should also involve making tourism more inclusive, through better links between tourism and agriculture (the supply of agricultural goods to resorts and hotels is an obvious starting point). There is great potential for the expansion of tourism to areas outside of Port Vila (through, for example improving domestic air transport links). It has long been a concern that the tourism sector is too Port Vila-centric (including in the oft-cited case of cruise ship [pdf] visits). There are signs that the importance of these approaches are increasingly recognised by government (e.g. through increased budgetary allocations to productive sectors such as agriculture) and development partners (e.g. through support for marketing of ni-Vanuatu properties and tourism products).

The fact is that tourism will remain central to Vanuatu’s economic future. It is Vanuatu’s most important source of foreign exchange, providing a means by which Vanuatu can pay for its imports, and thereby can achieve a level of self-sufficiency of which many other small Pacific island countries are no doubt envious. The government is right to explore new economic opportunities, as well as looking at ways to make the tourism industry more inclusive. An economic strategy aimed specifically at reducing Vanuatu’s reliance on tourism, however, is not the answer.

 

Vanuatu after Cyclone Pam: how will reconstruction be financed?

 

This item was first published by Matthew Dornan & Tess Newton Cain on Devpolicy on May 7th, 2015.

Vanuatu is currently faced with the daunting task of reconstruction in the wake of one of the strongest cyclones to ever hit the country. An earlier post noted that reconstruction will be expensive, and argued that the most important question for the Vanuatu Government in the coming years will be how to finance that reconstruction. That challenge will be the focus of this blog post.

Estimates of the damage caused by Cyclone Pam are still being undertaken. In the meantime, we can look at other disasters in the region for guidance. In the case of Cyclone Evan in 2012, the damage in Samoa was estimated at 30 percent of GDP. This is likely to be an underestimate in the case of Cyclone Pam, which impacted most provinces in Vanuatu. Nevertheless, if we use 30 percent of GDP as a guide, a similar impact in Vanuatu would equate to damage of $248 million USD, or 26,601.7 million vatu (an amount equivalent to 140 percent of annual government revenue).

Much of this damage bill will of course be absorbed by households and businesses – only some of which are likely to have had insurance cover. But the Vanuatu government will also fund considerable reconstruction, given the damage to public infrastructure such as schools, health clinics, and government administration buildings. It is also assisting households affected by the disaster. The government has already funded much of the emergency response and initial recovery effort; in its appeal for emergency relief, the government sought $29.4 million USD, and received about half that amount. In its subsequent Humanitarian Action Plan, which will cover three months to the end of July, the government has requested $13.5 million USD.

Revenue raising options are limited. The government is unlikely to increase taxes just when ni-Vanuatu are reconstructing their homes and livelihoods (in fact, it has lowered import duties on certain goods, such as farming tools, seeds and building materials). The same consideration will also restrict its ability to widen the tax base. The establishment of income taxation is a worthy long-term endeavour, but not something that should be pursued in the aftermath of Cyclone Pam. The imposition of a disaster levy, as occurred in response to the Queensland floods in Australia in 2010–11, would adversely affect households hit by the cyclone. (In the case of the Queensland flood levy, the Commonwealth Government was able to transfer resources collected by the tax from non-affected parts of the country to flooded areas – an exercise that is less feasible in Vanuatu given that most of the country was struck by the disaster.)
External funding will therefore be required.

A surge in aid provided in response to Cyclone Pam will cover some reconstruction costs. Australia has announced $15 million AUD in assistance (less than $5 million of which, it appears, will take the form of budgetary assistance), the ADB is giving $5 million USD, and the World Bank a similar figure. The Pacific Disaster Risk Financing and Insurance scheme has also provided $1.9 million USD. This funding has been welcomed by the Vanuatu Government. However, it is grossly inadequate for the task of reconstruction. This is hardly a surprise. As noted previously, experience around the world tells us that increases in development assistance never fully fund reconstruction. Past disasters in Vanuatu (three cyclones in 1985) and Samoa (Cyclone Evan in 2012) have resulted in aid surges of approximately 5 percent of GDP – far below the cost of damage caused by these events.

The Vanuatu Government will need to borrow funds for reconstruction, as did the Samoan Government after Cyclone Evan. It makes sense to do so. Access to finance for reconstruction is an essential element of recovery, and one that influences the severity [pdf] of the economic impacts of a disaster. Cyclone Pam was not like other cyclones that regularly hit Vanuatu. It was a unique event, which one hopes, will not be repeated for some time.

Vanuatu is currently in a sound fiscal position, with public debt of only 21 percent of GDP, well below the 40 percent threshold recommended by the IMF. On the face of it, the Vanuatu Government is therefore in a position to borrow money for reconstruction. However, look more closely and the government’s position is less rosy. It currently has a significant pipeline of infrastructure investments forecast. These projects are to be funded through a combination of grants and concessional loans from donors, and would result in a considerable increase in public debt – forecast to rise to just below the 40 percent threshold identified by the IMF (and this is optimistic, given that it does not account for the economic impacts of Cyclone Pam).

The government will need to reconsider whether infrastructure projects that had been planned prior to Cyclone Pam should proceed. There are strong fiscal grounds for cancelling or postponing, where feasible, given the financial and logistical demands that reconstruction will place on both government and the private sector in Vanuatu. If all of the projects that were planned prior to Cyclone Pam were to proceed, it is difficult to see how the government could fund them in addition to reconstruction without placing itself in a precarious financial situation. The government will be conscious that the more it borrows, the more vulnerable it is to future disasters, whether of an economic or natural variety. The inflow of funds also risks placing upward pressure on the vatu, and the construction activity associated with such projects would exacerbate inflationary pressure caused by reconstruction activity (Samoa experienced this in the wake of Cyclone Evan).

The government must therefore balance the need to finance reconstruction with the long term risks associated with that debt.

However, cancelling projects will also involve costs, and will not always be feasible. Some projects are well-advanced. Construction work has already been tendered, and construction companies have invested in plants and machinery. There is concern in Vanuatu’s private sector that these projects will not proceed, leaving businesses out of pocket. The decision about whether or not to proceed will therefore need to be made cautiously, with a view to the impact on the government budget, private sector, and the economy over the long run.

Where possible, projects should be modified to incorporate reconstruction work. There are some projects where this is clearly possible. The Vanuatu Tourism Infrastructure Project, for example, which includes beautification of the Kalsakau Drive (Port Vila seafront), has been fast-tracked by donors in response to government requests. Rehabilitation will include reconstruction work. This ensures that the project meets the needs of Vanuatu, while also honouring contracts.

The debt implications of projects should also be considered. Many of the infrastructure projects in the planning pipeline involve both concessional loan and grant elements, which makes them attractive even if there is no potential to incorporate reconstruction activities. The Port Vila Urban Development Project is a case in point. The project is estimated to cost $39 million USD, but most of this is being provided as a grant by DFAT – borrowing for the project will involve only $5 million. Debt associated with this particular project is therefore minimal.

Projects that are good candidates for cancellation or postponement are a) those that require the government to borrow considerable funds on less concessional terms, and b) those that are less advanced, or where financiers are willing to amend contracts. One project that fits the first characteristic is the road upgrade in South Tanna and Malekula, which is being funded by China Eximbank. The conditions associated with this loan are not very concessional – interest of 2 percent will be charged over 20 years, with a five year grace period. The loan is also reported to be very large, at $50 million USD (for purposes of comparison, the Lapetasi wharf development is being funded by a Japanese loan of approximately $40 million USD, which will incur an annual interest payment of 0.56 percent and be repaid over 40 years, with a ten year grace period). Outright cancellation is unlikely, given that ground was broken for the project last week, but modification or downsizing could be possible – the second phase of the project, focused on Malekula (which was not so badly affected as other parts of the country), has not yet begun.

The economic impact of a project is also important, of course. Projects that generate economic activity, and thereby increase revenue that the government can use to repay debt, are attractive. However, it is worth stressing that when considering economic impact, a conservative and risk-averse approach is appropriate, given Vanuatu’s exposure to natural disasters and economic (and policy) developments in neighbouring countries.

The Vanuatu Government clearly has some difficult decisions to make as it seeks to ensure that sufficient funding is available for reconstruction. Although public debt is currently low, the government has entered into agreements with development partners and contractors for a range of infrastructure projects. These should be amended to include reconstruction where possible. In some cases, where projects are less advanced and grant finance is minimal, it will make sense to postpone projects (possibly indefinitely). Cancelling or postponing any project will be a painful and contentious exercise. Not doing so will also be painful – in the long-term – as it will limit the government’s ability to borrow funds for reconstruction.

 

How Vanuatu’s culture can contribute to a diversified economy after Cyclone Pam

In a recent item, Joseph Cheer discussed the importance of economic diversification as part of Vanuatu’s long term recovery and future development. He argues (among other things) that Vanuatu’s economy has become too dependent on tourism, that the growth associated with this sector is not as inclusive as it could be and that what we offer tourists is not sufficiently differentiated from other Pacific island destinations to make longer term growth sustainable.

I agree that there is a need for increased economic diversification and Matthew Dornan and I will be looking at this in more detail in the next little while.

But there is one point that I will address here. And my thinking on this has been further informed by a recent article [pdf] by David Throsby in the Asia and the Pacific Policy Studies journal. In this article, Throsby argues that there are opportunities for Pacific island countries to draw on their rich cultural heritage for economic benefits as well as for social ones.

This is an area of policy development that has not been given a great deal of attention historically either by governments or by development partners. But as we seek to ‘build back better’ in Vanuatu, maybe the time has come to look at this issue more closely to identify the opportunities and challenges it presents. This conversation is one that has been underway at some time at the regional level, especially under the auspices of the Human Development Program of the SPC.

discussed some of the aspects of developing cultural economics last year with Dr Elise Huffer who is SPC’s Culture Adviser. Among other things, we talked about why this area of economic development did not seem to receive much attention at the level of government policy. Dr Huffer identified two aspects of what was needed to rectify the national policy deficit. First, there is the need for the ‘cultural sector’ to be more present in discussions that inform and frame national policy, whether through civil society groupings or through the formulation of national cultural policies by governments. Secondly:

is work that’s … having impact at the international level which is also about re-thinking GDP measures, rethinking well-being. And we know that culture in the Pacific is very important in resilience of communities and in people’s daily well-being. But that’s not something that’s measured. It’s not counted. So it tends to sort of drop off the radar when you’re talking about policy, when you’re talking about national budgets, when you’re talking about projects or programs being carried out in countries.

All 3 of these experts agree that for countries such as Vanuatu that have established tourism industries, there are opportunities to develop linkages between the ‘cultural producers’ and what is essentially a domestic export market. There are, it is true, significant risks that need to be identified and managed, including in relation to protection of intellectual property and maintaining cultural integrity.

But, drawing on cultural heritage and its expression whether through traditional means (dances, handicrafts, custom ceremonies) or more modern ones (Fest Napuan) is self-evidently a way of differentiating Vanuatu as a tourist destination.
Here in Vanuatu, we already have a number of ‘dots’ that lend themselves to being further developed and joined up to inform this aspect of economic policy in the future. They include the work that has already been done on the National Sustainable Development Plan during 2014, in which culture features as a pillar of sustainable development, the Tourism Ambassadors program which focuses on promoting locally produced handicrafts for purchase by visitors and the work of ACTIV which creates a supply chain for rural handicraft producers to sell their products to tourists who may not venture beyond Port Vila.

In his article, David Throsby identifies that no Pacific island country is a signatory to the 2005 UN Convention on Cultural Diversity. This, he argues, is a drawback:

Not only does this exclude them from the ongoing discussion on cultural policy development that parties to the Convention participate in, it also means that they cannot access assistance from the International Fund for Cultural Diversity that the Convention has established. In short there is a danger that Pacific island countries may not be able to realise their full potential for linking their cultural and economic development in the future if they are not adequately connection into ongoing policy developments in the international arena (p8).

Taking the step of ratifying the Convention and securing access to funding to assist in developing this aspect of the economy may be a part of how Vanuatu can ‘build back better’ after Cyclone Pam.