MANILA — The economy of the Pacific subregion is likely to slow down 2% between 2005 and 2007 according to the Manila-based Asian Development Bank.

In its annual publication “Asian Development Outlook 2005 ” the bank stressed the importance of governments in the region implementing “structural reforms necessary to stimulate private sector development.” The slowdown is a reflection of the deceleration in the growth of major economies worldwide.

Inflation meanwhile is expected to range between 3.4% and 4% in the subregion in the medium term.

According to the report political uncertainty continues to be a concern in a number of the member countries “and corruption and poor governance remain as major obstacles to improving development outcomes in the subregion. The development of physical infrastructure and the creation of an effective legal and regulatory environment for business remain a major challenge.”

Stephen Pollard principal economist of the Pacific Department of ADB told the Journal “The region struggles to grow and develop over time … it is really a picture of underperformance. With a background of general decline the region is faced with the burgeoning growth of a young population and increasing concerns over some of the social indicators. “

Pollard said with an increasing young population and urbanization and youth unemployment “There are some indicators that are not so good in terms of increasing crime; some incidences in some countries of suicides including youth suicides modern health problems diabetes and such. This is coming out of the best of a faltering growth record ” he said.

While modest growth is projected in most countries in the subregion a major growth slowdown is expected in Fiji Islands the subregion’s second largest economy.

The drag on the islands’ economy will be mainly due to the anticipated closure in garment factories owing to the loss of preferential export quotas to the United States which were lifted Jan. 1 as well as the sluggishness of the sugar industry. As such Fiji’s economy is projected to be cut in half from the growth rates it had been accustomed to. Last year its gross domestic product grew by 3.8%.

With the continued reduction in output from its mining and logging industries Papua New Guinea the sub-region’s largest economy is projected to post an average growth rate of 2.4% per annum. The economy grew by 2.6% in 2004.

The agriculture and oil and gas sectors are seen keeping PNG’s economy going amid the structural policy and economic reforms implemented by the government. The slightly slower growth is due to the continued depletion of output in the mining and logging industries.

In the Republic of the Marshall Islands economic growth will be largely dependent on public sector investments. Action is being taken by the government to reopen a tuna processing plant that helped keep the economy afloat.

Asked about the obstacles to growth in the subregion Pollard said it was basically a problem of governance and creating the proper environment for investments.

“I think we’re coming to understand that it is not primarily the lack of money nor is it primarily the lack of technology or skills. It’s organization and management for a more productive modern state with a more productive and competitive private sector and fundamental requirements for money to yield for transfers of technology or skills. It is not to say that these economies do not need finance but that finance will yield so much more with strong improvements to private market development and to public sector management.”

A number of the countries in the sub-region has been receiving substantial bilateral support from the United States Australia New Zealand and Taiwan. Multilateral aid is mainly from the ADB. Some member-economies such as Tuvalu Kiribati the Marshall Islands and the Federated States of Micronesia also have established trust funds to invest in major growth economies like the United States the proceeds of which provide budgetary support for the government.

Last year aggregate GDP growth of the subregion was unchanged at an estimated 2.6% with increases in GDP ranging from 1.5% for Timor-Leste to 4.6% for the Solomon Islands. Meanwhile the economies of the Federated States of Micronesia the Marshall Islands and Tuvalu contracted due to the reduction in public sector investment.

Tourism became a main driver of most economies across the subregion due to the lower airfares and increasing competition among airlines in several routes.

Along with tourism construction also helped boost the economies of Cook Islands Fiji Samoa and Vanuatu. Tourism and construction are expected to drive Palau’s economic growth in 2005-2007 at an average of 2% per annum.

However the FSM expects a contraction in the tourism industry due to the lack of competitive airline services. This has resulted in high airfares compared to other countries in the subregion.

The pullout of Aloha Air and the Outrigger hotel chain from its one location in the Marshalls was also expected to put more pressure on its tourism industry.

Agriculture forestry and fisheries helped keep the Solomon Islands’ economy booming although concern has been raised on the rapid pace of harvesting of forestry products which is seen unsustainable in the long term.

“Primary production also led a mild acceleration of growth in Vanuatu and contributed to a pickup in growth in the Fiji Islands ” the report said.

As for PNG the agriculture and mining sectors expanded at an average of 3% “but the oil and gas subsector contracted significantly because of the depletion of oil reserves.” Because of this growth slowed down to 2.6% last year from 2.8% in 2003.

However the recovery in international capital markets “improved returns for the long-established Kiribati and Tuvalu trust funds and for the newly established trust funds” in FSM and the Marshalls the report said.

Pollard’s prescription for growth in the region? “It is to turn the attention to developing a modern state. What I hope the Pacific will find is its own consensus of what works and that is in turn based on what has been proven working for centuries for private and commercial development and for more productive performance for public sector performance and what is established good governance. That is something the ADB is trying to do for the Pacific (economies) to help them find a consensus (on how to grow their economies and sustain that growth).”

Specifically governments should improve access to quality public services create an environment for the private sector to expand and create jobs and improve their standards of governance.

Member-countries of the Pacific subregion are the Cook Islands Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Palau Papua New Guinea Samoa Solomon Islands Timor-Leste Tonga Tuvalu and Vanuatu.

The ADO now in its 17th issue is the flagship publication of the Manila-based development bank. It is published annually along with a mid-term economic outlook. Aside from the report the bank’s respective country departments also regularly publish individual country reports sectoral studies and the like. MBJ