,~~~~~~~~~~~~~fi 00 oa~~ A WORLD BANK COUNTRY STUDY Enhancing the Role of Government in the Pacific Island Economies The World Bank Washington, D.C. Copyright © 1998 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing October 1998 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. Map illustration by Karen Siatras, Meadows Design Office Inc., Washington, D.C. (www.mdomedia.com). ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data Enhancing the role of government in the Pacific Island economies. p. cm. - (A World Bank country study) Includes bibliographical references. ISBN 0-8213-4351-3 1. Islands of the Pacific-Economic policy. 2. Islands of the Pacific-Social policy. 3. Government spending policy-Islands of the Pacific. 4. Finance, Public-Islands of the Pacific- Accounting. 5. Total quality management in government-Islands of the Pacific. I. World Bank. II. Series. HC681.E545 1998 338.99-dc2l 98-45139 CIP - 111 - CONTENTS Page No. Abstract .................... vi Acknowledgments .................... vii Acronyms and Abbreviations .................... viii Currency Equivalents .................... ix Executive Summary .................... xi 1. Overview ..............................................................1I Introduction .............................................................I Economic Performance ..............................................................1 The East Asian Financial Crisis .......................................... ....................4 Rekindling Growth ..............................................................5 2. The Scope of Government: Focusing on Essential Public Activities ...............................7 Structure and Size of Government ..............................................................7 Recent Policy Initiatives to Reform the Public Sector ........................................................9 Focusing on Core Functions of Government ............................................................. 11 Stable, Credible, and Non-Distortionary Economic Policies ............................................ 12 Law and Property Rights ............................................................. 14 Enhancing Private Sector Growth: A Supportive Role for Government in Key Areas .... 16 Improving Governance: Reducing Administrative Discretion and Improving Public Accountability ............................................................. 19 3. Enhancing the Effectiveness of Public Expenditures: Spending Patterns and Policies ............................................................................ . ..... ................ 23 Balancing the Economic Composition of Expenditure .23 Public Expenditure Reform: Easier Said than Done .26 Improving Intrasectoral Expenditure: Health, Education and Infrastructure .26 Conclusions .32 4. Planning and Budgeting for More Effective Spending .33 Signposts on the Path to Reform .33 The Traditional Budget System: The Standard Against which Reforms Should be Measured .33 Characteristics of Well-Performing Budgets .35 Performance-Oriented Budgeting: Potential for Improvement but Not a Panacea . 36 Program Formats and Performance Measures .36 Making Budgets in a Medium-Term Framework .37 Broad-Banding and Decentralization of Spending Authority .37 Strengthening the PSIP .38 Directions for Budgetary Reform .39 - iv - Page No. Annex 1: Count ry Profiles ................................................................. 45 Fiji ................................................................. 46 Kiribati ................................................................. 50 Federated States of Micronesia ................................................................. 53 Marshall Islands ................................................................. 56 Republic of Palau ................................................................. 59 Samoa ................................................................. 62 Solomon Islands ................................................................. 66 Tonga ................................................................. 70 Vanuatu ................................................................. 74 Annex 2: Budgeting in the Pacific Member Countries - From Cash Management to Output Management ................................................................. 77 Annex 3: The Structure and Size of the Public Sector in the PMCs ............................................. 88 Annex 4: Participatory Development: The Challenge of Inclusion .................... ........................ 103 Annex 5: The State of the Environment in the PMCs ................................................................. 110 Annex 6: Relationship between Foreign Aid and Government Expenditure ..............................l II Statistical Appendix on Public Finance .................................................................1 113 Bibliography ................................................................. 119 Map: IBRD 29631 -v List of Tables Page No. 1.1 GDP Growth, 1987-97 ................................................2 1.2 Marginal Efficiency of Investment ................................................ .4 2.1 As Aid Flows Increase So Does Government Expenditure ................................................9 2.2 PMC Government Resources, Expenditure, Deficits and Growth .................................... 12 2.3 Government Overall Balance, Including Grants ................................................ 13 2.4 Public Debt Indicators, 1995-96 ................................................ 13 3.1 Economic Composition of Government Expenditure in PMCs, 1995 .............................. 24 3.2 Government Current Expenditure on Health, 1990-96 ................................................ 27 3.3 Government Expenditure on Education, 1990-96 ................................................ 29 List of Figures 1.1 Average Growth Performance, 1985-1995 .................................................2 1.2 Achieving Sustainable Development ................................................. . . 6 4.1 State of Reforms in Selected PMCs ................................................ 40 List of Boxes 1.1 Pacific Islands -The Stylized Facts ..........................3 2.1 Building Capability-Addressing Governance Issues ...................................................... 21 4.1 Strengthening Budgeting through a Medium-Term Expenditure Framework .................. 37 List of Charts Chart 2.1: Government Expenditure in Low and Middle Income Economies .7 Chart 2.2: The Government Wage and Salary Bill in Low and Middle Income Economies .8 Chart 4.1: Aid per Capita in 107 Low and Middle Income Countries .44 - vi - ABSTRACT This report discusses how the Pacific Islands development agenda could be put into practice by improving the effectiveness of government activities in nine Pacific Island countries that are members of the World Bank (PMCs)-Fiji, Kiribati, Federated States of Micronesia, Marshall Islands, Republic of Palau, Samoa, Solomon Islands, Tonga and Vanuatu. The report analyzes the scope of government in the PMCs, their spending patterns and priorities, and the budgetary processes that give rise to spending choices. It is structured along three interlinking themes about enhancing the role of government: (i) to focus on core functions, match government tasks to its capacity, and to improve public sector accountability; (ii) to raise the efficiency of public sector spending through policies designed to quicken the pace of economic growth and reduce poverty; and (iii) to implement planning and budgetary procedures within the framework of a medium-term development horizon and to improve processes of public spending, including those programs financed through external aid. The report also includes nine country profiles. - vii - ACKNOWLEDGMENTS The World Bank wishes to express its appreciation to all member Governments, bilateral donor agencies, the Asian Development Bank, the Forum Secretariat, the International Monetary Fund, the United Nations Development Programme, the East- West Center, University of Hawaii, the Bank of Hawaii, and several research organizations, non-governmental organizations and individuals for their cooperation in preparing this report. The World Bank acknowledges, in particular, the valuable support for the study provided by the Australian Agency for International Development (AusAID). This report was prepared by a team led by Hilarian Codippily, based on the field work carried out in late 1997. The core team included John Fallon (role of government), Hjordis Bierman (public finance), Geoffrey Dixon (planning and budgeting), Craig Sugden (structure and size of government), Lawrence Salmen and Caroline Robb (participatory development), and Peter Osei (country profiles). Navitalai Naisoro, Kolone Vaai, assisted by Maiava Peteru, and Joshua Levene were responsible for the participatory assessment surveys conducted in Fiji, Samoa and Tonga. This report has benefited from major contributions by Richard Newfarmer and Michael Stevens, who was also a Peer Reviewer. Other Peer Reviewers were Vinay Swaroop, Hansjorg Elshorst, and Aubrey Williams. The report also benefited from the comments of Elizabeth Brouwer, Sofia Bettencourt, Stuart Whitehead, Wei Ding, Roland Kyle Peters, Sylvia Ting, and research assistance from Vargha Azad. The report was prepared with guidance from Klaus Rohland. Bonita Brindley provided editorial advice and Ana Rivas and Andrea Doering assisted in the final stages of document processing. Lily Tsang provided administrative support and coordinated the processing of the report. - viii - ACRONYMS AND ABBREVIATIONS ADB Asian Development Bank A$ = Australian Dollar ALTA Agricultural Landlords and Tenants Act AusAID Australian Agency for International Development CDF Commodity Development Framework CEM Country Economic Memorandum CRP Comprehensive Reform Programs DB Development Budget EDI Economic Development Institute EEZ Exclusive Economic Zone FEA Fiji Electricity Authority FSM = Federated States of Micronesia GDI - Gross Domestic Investment GDP Gross Domestic Product IMF International Monetary Fund ICOR = Incremental Capital-Output Ratio NBF National Bank of Fiji NGO Non-Government Organization NLTB Native Land Trust Board PMC Pacific Island Member Country PNG Papua New Guinea PSIP Public Sector Investment Program PUB Public Utility Board RER Regional Economic Report RERF Revenue Equalization Reserve Fund RMI Republic of Marshall Islands SI$ Solomon Islands Dollar SPRIEP South Pacific Regional Environment Programme UNDP United Nations Development Programme US United States IJS$ United States Dollar VAT Valued Added Tax Vice President: Jean-Michel Severino Director: Klaus Rohland, EACNI Sector Manager: Masahiro Kawai, EASPR Task Manager: Hilarian Codippily, EASPR - ix- CURRENCY EQUIVALENTS FEDERATED STATES OF MICRONESIA (FSM) (The U.S. Dollar is the official currency of exchange) FISCAL YEAR October I - September 30 FIJI Annual Averages 1994 F$1.00 = US$0.68 1995 F$1.00=US$0.71 1996 F$1.00=US$0.71 1997 F$1.00 =US$0.69 FISCAL YEAR January I - December 31 KIRIBATI Annual Averages (The Australian Dollar is the official currency and main medium of exchange) 1994 A$1.00 = US$0.73 1995 A$1.00= US$0.74 1996 A$1.00= US$0.78 1997 A$ 1.00= US$0.74 FISCAL YEAR January I - December 31 MARSHALL ISLANDS (The U.S. Dollar is the official currency of exchange) FISCAL YEAR October 1 - September 30 SAMOA Annual Averages 1994 Tala 1.00 = US$0.39 1995 Tala 1.00 = US$0.40 1996 Tala 1.00=US$0.41 1997 Tala 1.00 = US$0.39 FISCAL YEAR July I - June 30 SOLOMON ISLANDS Annual Averages 1994 SI$ 1.00 = US$0.30 1995 SI$ 1.00 = US$0.29 1996 SI$1.00= US$0.28 1997 SI$1.00 = US$0.27 FISCAL YEAR January 1 to December 31 TONGA Annual Averages 1994 T$1.00=US$0.76 1995 T$1.00 = US$0.79 1996 T$1.00 = US$0.81 1997 T$1.00 = US$0.79 FISCAL YEAR July 1 - June 30 VANUATU Annual Averages 1994 VtlOO = US$0.86 1995 VtlOO = US$0.89 1996 VtlOO = US$0.90 1997 VtlOO = US$0.90 FISCAL YEAR January 1 - December 31 EXECUTI VE SUMMAR Y Pacific Island governments are increasingly unusually high. The results of large aware that state-led growth, based upon high government have not been encouraging in levels of public investment and financed promoting economic growth and with aid flows, has not substantially development. The civil service is extensive, increased per capita incomes. or quality of but has limited professional skills; budget life. The East Asian financial crisis has and regulatory institutions and processes are added to the sense of malaise in the Pacific. inadequate, service levels are falling, and Although the full impact of the East Asian revenues are declining. In addition to financial crisis on the Pacific Island Member providing core public services, PMC Countries (PMCs) is not yet known. it governments are involved in utilities, appears to be pushing them intp recession. development finance, commercial credit, Building a more resilient economAic base has and overseas trade. Also, aid results have become a matter of political urgency. been ambiguous in the PMCs. An analysis of the relationship between total government Economic Performance. In the PMCs, per expenditures, aid inflows, and GNP per capita real GDP growth has been much capita reveals a strong correlation between lower than in other island economies in the high levels of total government expenditure Caribbean, African, or Indian Oceans. and high levels of aid flows. Although the PMCs had invested about 29 percent of GDP in their economies during To compensate for skill shortages, agencies the 1 980s, economic growth clung have taken to overstaffing with persistently to around 2 percent per year. underqualified personnel, and governments GDP growth improved slightly to 3.1 have spent heavily on overseas training and percent per year in 1992-96, but the overall have relied on outside technical assistance. returns to investment remains low. Average The public sector commands most of the economic growth rates appear to have available resources and makes it difficult for turned sharply negative since the onset of the weak private sector to find and exploit the East Asian financial crisis. The Pacific new sources of growth. Islands need to diversify their production bases and export markets as well as exercise Recent Policy Initiatives. Several countries greater prudential supervision over their are in tile process of implementing respective financial sectors. To do this, the Comprehensive Reform Programs (CRPs). governments must invest more efficiently The Federated States of Micronesia, the and use their scarce resources more Marshall Islands, and Vanuatu have all been effectively. An effective development implementing wide-ranging economic partnership between the state and civil policy and public sector reform programs society would form the basis for private with assistance from the Asian Development initiatives and encourage stakeholders to Bank (ADB). There are some countries, undertake a wider range of social and such as the Solomon Islands, where capacity economic activities. to formulate program priorities and strategies and to develop multi-year public Size of Government. In the PMCs, sector investment programs is weak. govemment is larger than it is in almost all other comparable countries. Further, public The Report. This report discusses how the expenditure as a proportion of GDP is Pacific Islands development agenda could - xii - be put into practice, and it emphasizes three Governments' main tasks are to ensure that interlinking themes about enhancing the role these core functions are in place. Activities of government: should be fundamental to achieving economic development; and the government * to focus on core functions; match should be involved only if there are no the governments' tasks to their efficient alternative providers. Basic capacities, and to improve public education, health care, and physical sector accountability; infrastructure are the highest priorities to improve living standards for the widest * to raise the efficiency of public group of poor people, and to lay the sector spending through policies foundations for sustained, broad-based designed to quicken the pace of income growth. Public security, effective economic growth and reduce governance. non-distortionary economic poverty; and policies, and sound environmental policies are also essential. * to implement planning and In the recent past, most PMC governments budgetary procedures within the have maintained a generally prudent framework of a medium-termn devope ho a ndi to macroeconomic environment. However, improve processes of public fiscal slippages have begun to appear in improve processes of public some of the PMCs, and in combination with spending, including those programs high inflation rates could threaten macro- financed through extemnal aid. economic stability. Restoring fiscal balance through better public expenditure manage- Focusing on Core Functions of ment and improved revenue collection is Government. Each PMC must select its key. Of equal importance is the need to core functions depending on its specific improve the incentive framework for stable circumstances and vision of the future. and predictable tax and trade tariff regimes, However, there is convincing evidence that market-oriented labor policies, and governments generally can best enhance prudential regulation and governance economic and social welfare by arrangements for the financial sector. Steps concentrating on the following core in this direction have been already initiated, functions: such as lowering import tariffs in some PMCs and actions to deal with the financial * provide a stable macroeconomic crisis of the National Bank of Fiji. But more environment that sets the right needs to be done to improve the investment incentives for efficient economic climate. activity; As regards to institutional infrastructure, the * provide the institutional infra- law and order situation in the PMCs structure, such as property rights, fortunately presents no major problems for peace, law and order, and rules, to economic development. The main encourage efficient long-term impediment seems to be access to land use investment; within the customary land tenure system enshrined in the respective constitutions of * alleviate poverty by providing basic the PMCs. The issue is not one of changing education, health care, and physical the land tenure system, but using land for infrastructure; and productive purposes through better land- leasing mechanisms. With the exception of * protect the environment. - xiii - Fiji. the PMCs have yet to develop Public E.rpenditure. PMCs suffer from institutional mechanisms for land leasing. two imbalances in the economic composition of expenditure: the first is The PMCs have made much headway in between recurrent and investment building the social and physical expenditure. and the second is between the infrastructure needed for development. wage and non-wage components of Their focus should shift to improving recurrent expenditure. For example, in preventive health, basic education, and asset 1995, current expenditure exceeded 67 maintenance, especially in infrastructure. percent of total expenditure in most PMCs, Knowledge management and efficient use of and went up to 88 percent in Fiji. Most of information technologies to enhance this expenditure went to the government's traditional activities and generate new own wage bill or supported the wage bill in information-based activities have the other government entities. potential for new economic opportunities. The imbalance between operations and Enhancing Private Sector Growtlh. maintenance and other current expenditure Presentiv, the government markets is difficult to assess in the aggregate, but is agricultural goods and operates fishing likely to be high. Underprovisioning for fleets, mines, plantations, timber mills, operations and maintenance is a chronic aviation services, and hotels, plus engages in problem that undermines development a wide range of other quasi-commercial effectiveness in the Pacific Islands. The activities. As a result, the private sector is situation stands to be perpetuated when constrained because it cannot compete with donors extend grant funds to replace or underpriced government services. Other rehabilitate whatever has fallen apart for serious impediments to private enterprise want of maintenance. Very often, the are limited access to land and credit, and development budget is more sensitive to the cumbersome investment approval processes. availability of donor funds than it is to the PMC governments have begun to address exigencies of fiscal adjustment. some of these issues, but there is more to be done-such as establishing labor policies The optimal composition of government that are market-oriented and improving expenditure will differ in each country, prudential supervision of the financial sector depending on the activities and the relative to prevent banking crises. costs of inputs. Evidence shows that high levels of current expenditure are a drag on To Intprove Governance, greater openness growth, especialiv when an excessive share and public scrutiny of budgetary processes, of current expenditure goes toward the wage public accounts, loan agreements, bill or subsidies. guarantees, public sector contracts, and audits are prerequisites. Governments must PMC governments are committed to reduce tariffs and make them more uniform, improving the development effectiveness of eliminate exemptions and special treatment expenditure, and they should carry out the of selected industries, and minimize reforms they have announced-streamlining discretionary power. Foreign investment government, public enterprises, and the civil approval processes need to be transparent; service. This should be assisted by better and the judiciary and other regulatory planning, project preparation, and bodies of government, such as the assessment and selection in the initial Ombudsman and Auditor General, context of a medium-term public sector strengthened. investment program (PSIP). The annual - xiv - development budgets drawn from the PSIP and cost recovery is insufficient. should be derived from government policies Governments can improve the contribution and priorities, should be designed to of infrastructure to growth by managing the complement and support govemment's sector on commercial principles, and current and planned service levels, and concentrating its resources in those areas should be well integrated with the recurrent with the highest social returns and large budget. externalities. When it divests of infrastructure, it must create regulations to If government reduces the size of the civil ensure that a public monopoly is not service, the balance will improve between replaced by a private one. Such a the wage bill, other current expenditure, and replacement would merely restrict output development expenditure. The civil service and increase price and profits. should move to more flexibility in its hiring practice, and adopt a performance-oriented Planning and Budgeting. Well-functioning remuneration system. A more cost-effective planning and budgetary systems are central input combination should be reinforced by to the performance of government and the the performance/output budget systems achievement of economic reform goals. The which are now being put in place by some budget and associated planning systems PMCs. vary widely among the PMCs. Like most developing countries, the PMCs have relied Improving Intrasectoral Expenditure, upon a traditional, centralized budget especially on health, education, and system. But the emergence of fiscal infrastructure, requires strong alignment deficits, and the realization that some with policies and priorities. In the health traditional sources of funding may be sector, government resources are disappearing, has led the PMC govemments concentrated on expensive curative and to examine how their budget systems can hospital services in urban areas, while better support their development goals. preventive services and access to health care in rural areas are poor or non-existent. This The traditional budget system has several is at odds with governments' policy to advantages: it is straightforward, robust, and alleviate poverty. Greater participation by facilitates the control of spending. local community groups offers a cost- Nevertheless, there are many disadvantages, effective means of public health outreach. including a strong bias towards maintaining In the education sector, the challenge for the status quo. The development most of the PMCs is to greatly improve the effectiveness of public expenditure is quantity and quality of education within hampered in the PMCs by the way the budgetary constraints. The government recurrent and development budgets have should provide quality universal primary evolved and are separately prepared. Dual education using the most cost-effective input budgets emerged around the time of combination-possibly a mix of private and independence as a practical way of public education. managing the growing volume of aid financing, and the political desire of Despite the importance and scale of public governments to pursue a strategy of investment in infrastructure, access to basic government-led development. The recurrent public services remains limited in most of expenditure requirements of investments are the PMCs and service provision is low. not rigorously estimated when projects are Existing assets are not maintained and the prepared; this in turn, leads to inadequate allocations for operations are inadequate; provision for expenditures and unsustainable departments and agencies are overstaffed investments. - xv - Furthernore, institutional responsibilities Performance-oriented budgets generally are typically divided, which exaggerates group closely related activities into existing problems with prioritization and programs to allow managers flexibility planning; projects are not integrated with the within the 'broad-band' of line items to government's policies and priorities or the manage their human and financial resources current budget. Governments lack the and achieve a specified outcome in the most capacity for project preparation, and cost-effective manner. However, a note of consequently, they rely on donors for caution is in order. Devolving authority to technical assistance. This results in the lower levels to facilitate better use of development budget being largely driven by resources can work only if there is sufficient the donors' priorities. managerial capacitv. This has not been the case in many of the PMCs. A useful way of looking at a country's budget system is to assess its effectiveness at three levels. The first level is4the capacity Full implementation of performnance- of the budget to articulate and fulfill the oriented budgeting holds the potential to government's aggregate fiscal objectives. improve the productivity of public The second level of effective budgeting is expenditure in the PMCs, but it is a complex the budget capacity to allocate resources undertaking. To be successful, both central based on strategic priorities. The third level, and line agency managers must acquire operational efficiency and effectiveness, is resource management skills, and there must the budget's ability to support the delivery be major improvements in the cost of programs and projects. accounting systems. If resource management is devolved before these Traditional line-item budget systems can conditions are met, productivity could achieve operational efficiency and decline. Performnance-oriented budgeting effectiveness if the country has a well- also needs to be an integral part of a broader motivated public service, and if the budget program of public management reforn, is buttressed by departmental reporting and which encourages a culture of perfornance. evaluation systems. Performance-oriented Changing budget rules alone will do little to budget systems have a greater potential for improve performance, and may simply be operational efficiency, but need to be part of disruptive. If government intends to a broader set of incentives for good outsource. staff capacity in procurement and performance. Budget change alone will not contract management often requires achieve improved performance. strengthening. Performnance-oriented reforms often require The economies of the Pacific Islands are that the annual budget be prepared within a heavily dependent on foreign aid, which medium-term framework. A Medium-Term comprises a large proportion of their GDP. Expenditure Framework (MTEF) helps If not properly used and embedded in the improve performance, particularly at the country's own set of priorities, aid can be an first two levels, but also, indirectly, at the impediment to sustainable growth. Donors third level. An MTEF can be an essential are responding to this criticism and the planning tool to help countries rein in the ADB's current strategy for the Pacific functions of government and ensure that suggests that any interventions must involve resources are concentrated on priority significant policy reform or capacity programs. It makes the cost of policies building and address key factors transparent over time and enables programs contributing to economic growth. to be compared with the available resources. 1. OVERVIEW INTRODUCTION Pacific Island governments are increasingly sector to generate sustained economic aware that state-led growth, based upon high growth, and include greater consultation levels of public investment and financed with community groups and the private with aid flows, has not produced rapid sector.2 increases in per capita incomes. Even though public investment has been ECONOMiCPERFORMANCE substantial, growth has been disappointing. To make matters worse, the East Asian During the 1980s, the PMCs had invested an financial crisis appears to be pushing the average of 29 percent of GDP in their islands into recession, underscoring the economies, but economic growth remained urgency of building a more resilient stubbornly low at 2 percent a year. economic base. l Investments were made in low-return projects, such as public buildings, or even in In response to these economic problems, loss-making enterprises. In general, governments have initiated strategies to investments were managed ineffectively. improve the effectiveness of government State-led development has been activities. This report discusses how the disappointing in terms of sustainable Pacific Islands development agenda could economic growth, and in the PMCs, per be put into practice. It seeks to inform that capita real GDP growth has been much agenda by analyzing the scope of lower than in the Caribbean, African, and government in the PMCs, their spending Indian Ocean islands (see figure 1.1). patterns and priorities, and finally, the budgetary processes that give rise to The 1990s brought only a few spending choices. The Action Plan issued at improvements. The PMCs averaged a the Forum Economic Ministers' meeting growth rate of 3.1 percent during 1992-96, emphasized strategies for economic reform although this is mainly due to Fiji which that would strengthen government service accounts for 62 percent of the total GDP of delivery, improve the welfare of low-income the PMCs. Growth was also nudged up by groups, enhance the capacity of the private the major recovery in domestic production in Samoa after the cyclone devastations of The nine Pacific Island Member Countries (PMCs) 1990-92 (see table 1.1), and by covered in this report are Fiji, Kiribati, Federated unsustainable logging rates in the Solomon States of Micronesia, Marshall Islands, Palau, Samoa, Solomon Islands, Tonga and Vanuatu. The coverage 2 At the Forum Economic Ministers' meeting of July in the main text excludes Palau which became a 1997, the five sessions covered were economic policy member in December 1997, but a separate country reform processes, institutional reform, investment profile is presented in Annex 1. policy, tariff policy, and multilateral trade agreements. -2- Islands. The PMCs' gross investment Despite a slight improvement in the averaged 21 percent of GDP. Growth productivity of investment during the performance has been weak compared with 1990s3, the overall marginal efficiency of islands outside the region. The Caribbean investment remains low. The average islands have enjoyed per capita GDP growth incremental capital-output ratio (ICOR) is rates nearly twice that of the Pacific Islands, 7.2 for the PMCs as a whole, 12 percent less and even African islands have outperformed efficient than the average for all low-income the Pacific Islands. countries4 (Table 1.2). If Fiji is excluded, the remaining countries are less than 50 Figure 1.1: Average Growth Performance, percent efficient. High ICORs or low 1985-95 retums to investment are associated with (in percent per annum) those PMCs that have larger shares of government expenditure. The implicit ICORs are highest in Kiribati, Tonga, Figure 1.1 Vanuatu, FSM, and the Marshall Islands and on the average, represent low returns to 6 |gg>U|ggk investment. These countries also have 5 1 Paii Is. relatively high shares of government 4 1 Pacific Is. expenditure to GDP (see Chapter 3). 3 M Caribbean a/ 2 E3Africa & Indian Ocean 0 -n a/ Selected island economies Source: World Bank Table 1.1: GDP Growth, 1987-97 (in percent per annum) Average 1992 1993 1994 1995 1996 Est. Average 1987-91 1997 1992-97 Fiji 2.4 4.9 2.2 3.9 2.1 3.1 -1.8 2.5 FSM 4A4 -1.2 5.7 1.4 1.0 1.0 -1.0 1.2 Kiribati 2.9 -1.6 1.0 1.7 3.3 1.9 3.0 1.6 Marshall Islands 4.4 0.1 4.1 2.8 3.7 -2.5 -10.0 -0.3 Solomon Islands 3.2 9.5 2.0 5.2 7.0 3.5 -1.0 4.4 Tonga 1.2 0.3 3.8 5.9 2.3 -0.4 -1.6 1.7 Vanuatu 2.8 -0.7 4.4 2.6 3.2 3.0 3.0 2.6 Samoa -1.8 -0.2 4.1 -6.5 9.6 5.9 2.5 2.6 Average 2.4 3.7 2.8 3.3 3.0 2.7 -1.3 2.4 Source: World Bank Reports; IMF Recent Economic Development (various issues), ADB Report (April 1998). Note: The above table does not reflect data which became available after May 1998. 3With the exception of Fiji, national accounts data remain poor in most PMCs. Excludes India and China. -3- Box 1.1: Pacific Islands - The Stylized Facts The total land area of the PMCs, dispersed among hundreds of small islands and atolls, is only 63,802 square kilometers -equivalent to twice the size of Belgium. However, the total sea area controlled through exclusive economic zone (EEZ) agreements exceeds the land area of the United States of America or Canada. The total population of the PMCs is approximately 1.8 million, with Fiji accounting for 43 percent and the Marshall Islands accounting for only 3 percent of the total. The population growth rate has been relatively high, averaging 1.9 percent for the group. The PMCs possess unique oceanographic features and agronomic and climatic conditions. Despite limited land mass, the natural resource base includes vast fisheries and other marine resources, forests, arable land and minerals. There is considerable tourism potential. Rich cultural traditions including the extended family system, customary land ownership, and benefit sharing practices have endowed their populations with a relatively safe and secure lifestyle. By world standards, the average life expectancy in the range of 60 to 70 years is favorable. However, the countries face formidable development challenges. Like other small island economies, development is constrained by small internal markets, a narrow production base, high unit costs of infrastructure, and vulnerability to external shocks and natural disasters. Large external markets are far away, unlike the Caribbean islands that enjoy proximity to the large, high-income American markets, and the Indian Ocean island countries that are relatively close to the large European Union markets. The fragmented land mass and dispersed population frustrates transport and communications industries even among the small internal markets of each PMC. The PMCs are quite diverse. They differ in ethnic composition from the Micronesian countries located in the North Pacific to the Polynesian and Melanesian countries located in the South Pacific. Their geographical terrain varies from atoll countries such as the Marshall Islands and Kiribati, to volcanic ones such as Vanuatu. The land and sea areas of the PMCs also differ considerably (see the table below). Fiji is the most developed country with a total GDP of US$2 billion. The distinctions between government workers and those in the non-government sector are not as clear- cut as they are in larger economies. Thus, public servants may also be employed in the private sector, or may be church or community leaders after working hours - an asset which could create greater synergy amongst the sectors. Comparative Indicators Population Population Land Area Sea Area GDP GNP Life Infant ('000) Growth (km2) ('000km2) 1995 Per Capita Expectancy Mortality 1995 Rate (US$ mill.) 1995 at Birth (p.a.) (1985-95) US$ (years)a/ ('000 births) Pacific Fiji 790 1.07 18,272 1,146 1,999 2,440 72 21 FSM 107 2.21 705 2,500 216 2,010 63 32 Kiribati 80 1.97 810 3,550 48 920 58 55 Marshall 56 3.99 181 1,942 103 1,670b/ 61 63 Islands Solomon 375 3.19 27,990 1,500 327 910 63 41 Islands Tonga 104 0.91 720 543 165 1,630 69 18 Vanuatu 169 2.72 12,190 680 238 1,200 64 41 Samoa 165 0.49 2,934 130 155 1,120 68 22 a! 1992 or most recent estimate b/ GDP per capita -4- Table 1.2: Marginal Efficiency of Investment GDP Growth GDI Implicit % % GDP ICOR 1992-96 1992-96 Fiji 2.7 15.3 5.6 FSM 1.6 22.0 13.8 Kiribati 1.3 26.5 20.4 Marshall Islands 2.4 32.1 13.8 Solomon Islands 6.0 31.0 5.2 Tonga 1.9 28.0 14.7 Vanuatu 2.5 35.0 14.0 Samoa 2.4 30.0 12.5 Weighted Average 2.9 21.0 7.2 Unweighted Average 2.6 27.5 12.5 Source: Data provided by the authorities and IMF Staff estimates. THEEASTASIANFINANCIAL CRISIS yield-output has swung to almost zero production thus far in 1998. The export The East Asian financial crisis has begun to price has plummeted from about US$120 hurt the PMCs. Average economic growth per cu. meter to less than US$65 per cu. rates appear to have turned sharply negative meter-a price that the industry finds (table 1.1). Each country will be affected by unprofitable to carry out logging, although the degree to which it has developed trade, they are still meeting some export orders investment, tourism, and aid linkages with from the stockpile. The real sector depends the East Asian economies in crisis. There heavily on the multiplier effects of the would also be secondary effects arising logging industry such as transport and from the impact of the crisis upon Australia trading, feeder activities, and input supplies. and New Zealand, the PMCs' traditional In 1998, real GDP may decline by as much trading partners. The Solomon Islands will as 10 to 12 percent. be deeply affected because of its strong and direct trade links with Japan and Korea. Relative to other PMCs, the Fiji economy is Fiji and Vanuatu are less influenced by more diversified and, hence, potentially direct links, but the indirect effects could be more resilient to external shocks; even so, significant. In the other PMCs with the East Asian crisis has begun to take a relatively weak links with East Asian severe toll. Tourist earnings have declined economies, the impact is small or because there are fewer visitors and there negligible.5 has been a drop in potential investment. Secondary effects are likely to be more In the Solomon Islands, the impact of the significant because Australia and New East Asian crisis arises from the collapse of Zealand are Fiji's major trading partners and the log export markets in Korea and Japan. together they account for 40 percent of Fiji's Log exports had accounted for roughly half merchandise exports. Consequently, Fiji's of export earnings and one third of exports face a potential decline as the Asian government revenues in the mid-1990s. crisis may result in slower growth in these From a peak of 811,000 cubic meters of countries, and as competition increases from logging in 1996-three times the sustainable Asian economies that have devalued their currencies. These changes combined with the effects of El Nifno will likely result in a 5See Asian Development Bank, Impact of the Asian decline of real GDP of the order of 1 percent Financial Crisis on PMDC Economies, Final Report, in 1998. In the case of Vanuatu, beef April 1998. -5- exports to Papua New Guinea and Solomon opportunities from obligations to a Islands will drop, timber exports to Korea traditional society. Unless the Islands will decline, and tourist arrivals from achieve moderate sustainable economic Australia and New Zealand will diminish, growth, further improvements in the quality but the overall loss to the economy is of life may not be possible. Change is all the expected to be moderate. The North Pacific more essential because of vulnerability to Islands are also likely to suffer from lower external shocks and rising demands for export prices for high grade fish to Japan modern goods and services, especially from and lower prices for copra and seaweed. the younger generations. However, the overall impact is likely to be small. To rekindle economic growth, the PMCs must invest more efficiently. This, in turn, The full impact of the East Asian crisis upon requires that the public sector use its scarce the PMCs is not yet known, but the resources more effectively. Presently, the emerging situation underlines the need for public share of total investment is high, but the Pacific Islands to further diversify their improvements to economic performance can production base and export markets and only occur if these investments have a exercise greater prudential supervision over higher pay-off. In addition, government their respective financial sectors. In activities influence private performance December 1997, the Solomon Islands through regulation, tariffs, and macro- devalued its currency to help restore policy; government activities also need to competitive advantage, and in January 1998, be more focused and strategic. Improving Fiji did the same. The Solomon Islands has the efficiency of government expenditures also embarked upon a major structural would be facilitated by an effective adjustment program, supported by both development partnership between the state bilateral and multilateral financing and the civil society. This would provide institutions. the private sector with incentives to save and invest in the productive sectors, and REKINDLiNG GROWTH contribute to output and employment, while other stakeholders undertake a wider range Establishing the conditions for recovery of social and economic activities. first, followed by more rapid sustained growth, will be essential to alleviate poverty. This report seeks to build upon the findings Although life is safe and secure in the of previous Bank reports. The Pacific Pacific Islands, the quality of life is deficient Islands report of 1995 discussed how the in some respects. For example, even in Fiji, PMCs can enter the twenty-first century on with a per capita income of US$ 2,470 a more resilient economic base. It suggested (1996), an estimated one in four people live two broad approaches: first, to diversify the below the poverty line. In Kiribati, life economic base into tourism and services; expectancy is low at 58 years, health and and second, to obtain higher returns from sanitation standards are extremely poor, the sustainable development and management water is unsafe, and public health services of fisheries and forestry resources. The are poor. In the Solomon Islands, malaria is public expenditure reviews conducted in endemic and is the chief cause of selected PMCs during 1996-97 examined absenteeism in schools and the work place. ways in which the development MIeanwhile, in Samoa there are indications effectiveness of public expenditure might be of a social conflict between raised improved. expectations of youth brought about by modernization forces, and blocked -6- The report's leitmotif is structured broadly framework of a medium-term along three interlinked themes about development horizon, in order to "enhancing the role of government" by: improve processes of public spending, including those programs * focusing the government on core financed through external aid. functions, matching its choice of tasks with its capacity, and The above themes are closely interwoven improving public sector account- (figure 1.2). While government focus on core functions will be essential to improve * raising the efficiency of public the organizational efficiency of service sector spending through policies delivery, effective performance of these designed to quicken the pace of services will depend primarily on improved economic growth and reduce public resource allocation. In turn, effective poverty; and public resource allocation will depend on improving the process of planning and * implementing planning and budgeting within a medium-term budgetary procedures, within the framework. Figure 1.2 Achlieving Sustainable Developmcnt Instrutments Targes ., =_ GS a~~~~~~~~~~~~~~~~ -7 - 2. THE SCOPE OF GO VERNMENT: FOCUSING ON ESSENTIAL PUBLIC ACTIVITIES STRUCTURE AND SIZE OF GOVERNMENT Consequently, government has expanded and, over the years, supported by generous In most of the Pacific Island Member infusions of foreign aid, activities broadened Countries, government is larger than to include public enterprises engaged in virtually all other countries at similar stages production, marketing, and trading. As of development. Public expenditures government grew, it failed to create many constitute an unusually large share of GDP. new opportunities for the private sector. The civil service is large, but has limited Through lack of alternatives, govemment skills; budget and regulatory institutions and has become the 'default' employer of skilled processes are weak; service levels are and educated workers. Today this swollen declining; and revenues become more public sector is in acute danger of sinking difficult to raise. In most of the PMCs, the under its own weight. private sector is small, or functions poorly. Chart 2.1: Government Expenditure in Low and Middle Income Economies a 100 - Kiribati 'Marshall Islands 80 - FSM Ra(io of general government expenditure 60 ' Samoa to GDP 6ao (per cent) * oo ' Tonga - Solomn Islands 40 t - Vanuatu Fijt 20 4 0 1,000 2,000 3,000 4,000 5,000 GNP per capita (US$) a The ratio of expenditure to GDP for the PMCs is for either 1995 or 1996 (as outlinrd in Annex 3), the ratio for Caribbean countries is an estimate for 1994, and the ratio for other developing countries is for 1995. The estimates of GNP per capita are for 1995 and are derived using the Altias method (except for the FSM and the Marshall Islands which are GDP per capita in 1994). Sources: Annex 1, World Bank 1997a, World Bank 1996a, AusAID 1997. -8 - Today, the PMC governments are engaged servants than the eight PMCs. Not in a wide range of economic activities, such surprisingly, aid flows, which finance both as utilities, development finance, recurrent and development expenditure, also commercial credit, and overseas trade. They contributed to the size of government. The market agricultural goods and operate relationship of total government fishing fleets, mines, plantations, timber expenditures with aid inflows and GNP per mills, aviation services, hotels, and a wide capita was analyzed and the results show a Chart 2.2: The Government Wage and Salary Bill in Low and Middle Income Economies a 30 -r FSM Kiribabi 20 * Marshall Islands Rabo ot general govemment wages and w Tonga salaries to GDP (per cent) , *Ftij Solomon * Vanuatu 10 t Islands Samoa . ,:5 IF r 0 1,000 2,000 3,000 4,000 5,000 GNP per capita (US$) a The ratio of wage and salary expenditure to GDP for the PMCs is for either 1995 or 1996 (as outlined in Annex 3), the ratio for Caribbean countries is for either 1993 or 1994 (except for Trinidad and Tobago which is 1992), and the ratio for other developing countries is based on the average for 1991 to 1995. The estimates of GNP per capita are for 1995 and are derived using the Atlas method (except for the FSM and the Marshall Islands which are GDP per capita in 1994). range of other quasi-commercial activities strong correlation between total government (see Annex 3). expenditure and aid flows (see Annex 6). Chart 2.1 presents the ratio of general Based on this analysis, table 2.1 below government expenditure to GDP for 62 low shows the average predicted value of and middle income countries for which data government spending associated with a are available. With the exception of Fiji, the particular level of aid and GNP per capita. ratios for PMCs are much above average, and Kiribati, the Marshall Islands, and FSM The range of activities carried out by "lead" the group. The picture is even more government is wide, considering the startling when considering the level of shortages of technical and managerial government wages and salaries as a share of resources. As a result, limited skills are GDP for the same 62 countries. As shown spread too thinly resulting in sub-standard in Chart 2.2, few countries allocate performance. Governments have responded significantly more of GDP to paying civil to this situation by overstaffing agencies with partially-qualified personnel, spending business. The objective is to suggest ways of heavily on overseas training, and relying on reducing the scope of government outside technical assistance to fill gaps. In intervention while supporting private some services, technical assistance has activities. It concludes with a discussion of become an almost permanent feature of ways to improve governance and public government. Meanwhile, the few qualified public servants tend to be heavily over- burdened, and this is not sustainable. Table 2.1: As Aid Flows Increase So Does Government Expenditure GNP per Capita (US dollars) 700 1000 1300 1600 1900 2200 2500 Grants/GDP Total Expenditure/GDP (%)0 10 55.3 51.4 47.5 43.6 39.7 35.8 31.9 20 68.1 64.2 60.3 56.4 52.5 48.6 44.7 30 80.9 77.0 73.1 69.2 65.3 61.4 57.5 40 93.7 89.8 85.9 82.0 78.1 74.2 70.3 50 106.5 102.6 98.7 94.8 90.9 87.0 83.1 Source: Annex 6, Equation 1. PMC governments also recognize the accountability. The next chapter analyzes dilemma of a dominant public sector and a public expenditures. thin, under-developed private sector. Governments are increasingly aware that the RECENT POLICY INITIATIVES TO private sector and other stakeholders should REFORM THE PUBLIC SECTOR play a greater role in achieving sustainable economic growth and development, but it is the public sector that has access to the Fiji has an impressive array of frameworks financial and technical resources needed to and principles and was successful in undertake complex tasks. It is difficult for developing and implementing a broad- the private sector to find and exploit new ranging reform program for several years sources of growth when the public sector following the 1987 military coups. Fiji has already established footholds in the key implemented a policy package focused on commercial segments of the economy. making the economy more outward oriented, more in tune with market forces, and less dependent on government. The governments of the region influence Snifican progesw mn reng their economies through several channels: Sinfctprgeswsmdineuig theiroeconomies through several channels: protection against imports and an ambitious marocation omicapitalthrolicy regulation program of privatization and corporatization allocation of capital through the financial waunetk.Th Gormntls was undertaken. The Government also system, and public spending. This chapter, amended labor laws to help make labor after reviewing recent reformn initiatives, markets more flexible and introduced a examines recent macroeconomic policies value added tax (VAT). However, Fiji has and selected regulatory policies affecting -10- made limited progress in reducing the size units to work closely with community of government. groups in the development process. Planning units in the Ministries of Education, Health, Agriculture, Forestry and In 1993, the Fiji Government outlined its Fisheries, and Public Works are also being policies and strategies in Opportunities for strengthened. This should help clarify the Growth. Many of the priorities in that role of government at the sectoral level document remain relevant to Fiji. A recent established for economic policies, fiscal report on strategic planning prepared for the policies and public sector reform, and Fiji Government argued for a central role for human resource development. Several government in terms of three core functions. countries are in the process of implementing Key features of the report were that Fiji Comprehensive Reform Programs (CRPs). should develop an enabling legal The, Federated States of Micronesia, the framework, sound market-oriented Marshall Islands and Vanuatu have all been economic policies, strong human resources, implementing wide ranging economic policy carefully appraised public investment and public sector reform programs with programs, and better access by the assistance from the ADB. economically weak to opportunities and social services. The program in Vanuatu is very ambitious: it identifies over 120 activities and some 50 In the 1997 and 1998 Fiji budgets, priority legislative reform items. The CRP has been has been given to primary and secondary underway since early 1997. It features education, preventive health, roads and renewing the institutions of governance, bridges, and agricultural development. The redefining a role for the public sector, emphasis on basic education, preventive improving public sector efficiency, health, and infrastructure in support of encouraging private sector led growth, and private sector development fits well with improving equity (ADB 1997c). Good core functions. Agricultural development is governance is considered a prerequisite to considered in more detail later in this all the reforms. Important proposals include chapter. clarifying legally the roles of ministers, their political advisers and the public service; The Fiji government is trying to ensure that improving parliamentary procedures; there is maximum cooperation and enhancing the capacity and independence of coordination among ministries, that the judiciary; removing political collective decisions are based on sound interference; and developing a performance- analysis, that scarce technical resources are oriented culture. The role of the public better utilized, and that there is a more sector is being redefined to avoid transparent policymaking process with government involvement in commercial participation from the private sector and activities. Important objectives are to Non-Government Organizations (NGOs). establish a stable, non-distortionary, Four consultative committees have been business-friendly environment and to devote established: economic policies; fiscal more resources to education and to provide policies and public sector reform; human and maintain infrastructure. resource development and social policies; and the primary sector and infrastructure. The Vanuatu CRP was formulated through The committees will include NGOs, unions, an extensive nation-wide consultative and business groups, and the council of chiefs. participatory process. To maintain continued Fiji has also established regional planning ownership of the program and ensure effective implementation, it will be as a result of public sector reforms to find important to continue consultation and new opportunities in the private sector. participation from all sectors of the community. FOCUSING ON CORE FUNCTIONS OF GOVERNMENT In some countries, capacity is weak both to formulate program priorities and strategies Of course, it is the prerogative of each PMC and to develop multi-year public sector to define its core functions as these depend investment programs. The Solomon Islands on specific country circumstances and a has been experiencing a fiscal crisis for the vision of the future. But as a general rule, previous several years, exacerbated now by governments can best enhance economic the East Asian financial crisis. It is and social welfare by concentrating on the developing a structural reform program following fundamental, or core functions: under a new coalition government of five political groups. Many of the problems in * provision of a stable macroeconomic the Solomon Islands result from poor environment that sets the right governance outcomes. Formal institutions incentives for efficient economic for good governance have existed for a long activity; time, but many of these seem to be readily bypassed and independent enforcement does * provision of an institutional infra- not occur. structure, such as property rights, peace, law and order, and rules, to encourage The Solomon Islands reform program has efficient long-term investment; established two task forces to focus on economic reform and public sector reform * alleviation of poverty by providing basic (Solomon Islands Government 1997). The education, health care, and economically economic reform component recognizes that viable physical infrastructure required the highest priority must be given to fiscal for economic activity; and stability. In relation to structural policies, the priority issues include trade and investment * protection of the environment. liberalization. The framework document recognizes that the reform program will Two criteria are helpful when considering require "ownership" by the people and that whether an activity is a core function. First, wide ranging and regular consultation and it must be determined whether the activity briefings are needed. The intentions and is fundamental to achieving economic approach expressed in the framework development. And second, it must be document are similar to features of the determined whether it is likely that the Vanuatu CRP. activity will not be provided or will be underprovided if the government does not In terms of equity, the policies and actions provide or coordinate it. The government of PMC governments reconfirm their itself does not have to undertake all core commitment to assist disadvantaged groups functions, but it should ensure that they take and isolated communities. The provision of place. basic education and health services and subsidized transport are common means of These core functions are directly relevant assisting isolated communities. not only for supporting market-oriented Governments also have the responsibility activity. Basic education, health care, and for helping people who are made redundant physical infrastructure are the highest - 12 - priority to improve living standards for the situation has worsened in 1995-96. At the widest group of poor people, as well as lay same time, the PMCs recorded an average the foundations for sustained, broad-based inflation rate of 5.4 percent during 1992-96 income growth. (Public expenditures for (see Annex I for- country-specific inflation these are discussed in the next chapter). rates), which was double the world inflation Public security, effective governance, non- rate during the same period. The overall distortionary economic policies, and sound effect has been a weakening of the environmental policies are also essential to respective currencies. The combined effect directly improve the welfare of the poor. of fiscal slippage and high inflation rates is The key task is to ensure that fundamental the risk of macroeconomic instability, which or core functions are in place. Once this has the PMC governments need to address. been achieved, more attention can be focused on a range of other specific Experience has shown that large and economic and social problems. persistent fiscal deficits that are financed through seigniorage lead to macroeconomic STABLE, CREDIBLE, AND NON- instability and that high government current DISTORTIONARYECONOMICPOLICIES expenditure is not conducive to economic growth. This is because macroeconomic MACROECONOMIC STABILITY. Ensuring a stability is a precondition for private stable macroeconomic regime and a entrepreneurs to produce goods for domestic consistent, non-distortionary approach to all and external markets at predictable costs and Table 2.2: PMC Government Resources, Expenditure, Deficits and Growth (In percent of GDP) Av. Govt. Av. Govt. Av. Govt. Av. External Av. Govt. Balance Expenditure Expenditure Revenue Grants, incl. Grants 1985-89 1990-95 1990-95 1990-95 1990-95 Kiribati 84.6 100.6 79.4 39.3 17.8 Marshall Islands 11 62.1 98.1 31.8 55.2 -11.9 FSM 1/ 83.0 89.8 29.7 59.7 -2.0 Samoa 52.5 70.1 41.8 13.4 -11.8 Solomon Islands 38.7 53.1 28.9 14.6 -7.4 Tonga 1/ 45.8 43.4 26.3 14.6 -3.8 Vanuatu 53.9 39.4 23.8 14.6 -3.5 Fiji 28.0 28.4 26.5 0.3 -1.6 Source: World Bank Regional Economic Reports, Public Expenditure Reviews and Country Economic Memoranda; IMF Staff Reports and Recent Economic Developments. 1/ Fiscal year data are recorded in the calendar year in which the fiscal year ends. economic policies is one of the core at the required quality. In some cases, such functions of government. Most PMCs have as the Cook Islands, Federated States of espoused such policies, but practices and Micronesia, and the Marshall Islands, outcomes vary from the ideal standard. difficult decisions have been taken to reduce Several PMCs have had a budgetary crisis. public expenditure; the Solomon Islands is Large fiscal deficits are a problem in Fiji, developing proposals for a structural the Federated States of Micronesia, the adjustment program. Privatization and Marshall Islands and the Solomon Islands various forms of commercialization are also (tables 2.2 to 2.4). Moreover, the fiscal underway in most PMCs, although progress - 13 - Table 2.3: Government Overall Balance, including Grants (In percent of GDP) Av. 85-89 1990 1991 1992 1993 1994 1995 1996 Fiji -3.1 0.3 -1.4 -3.0 -3.4 -1.5 -0.5 -4.7 Kiribati -1.5 -7.2 -1.4 34.2 43.1 24.6 13.2 -7.2 FSM 16.8 3.8 -8.0 -5.3 -3.3 -0.6 1.6 - Marshall 7.0 1.8 -6.8 -26.3 -14.0 -13.5 -12.5 - Islands Samoa 3.3 -1.1 -9.9 -16.5 -22.0 -11.5 -9.6 1.9 Solomon -7.7 -6.9 -13.3 -7.2 -7.9 -6.6 -2.4 -4.0 Islands Tonga -0.6 -7.3 -10.1 -6.6 1.8 2.5 -3.2 -3.9 Vanuatu -2.3 -10.1 -1.6 -3.3 -1.4 -3.0 -1.6 - Source: Statistical Appendix on Public Finance. Table 2.4: Public Debt Indicators, 1995-96 Government External Debt Service Expenditure on Interest Debt (in % of (in % of Exports of (in % of Current GDP) Goods and Services) Government Expenditure) Fiji 40.6 4.71" 12.0/ Kiribati 13.2 5/ 0.2 0.3 FSM 55.4 4/ 18.3 4' 3.6 Marshall 118.23/ 43.8 10.1 Islands Samoa 95.2 3/ 9.6 3.6 Solomon 61.5' 9.7Ž' 13.9 Islands Tonga 45.9 16.2 ... Vanuatu 18.73/ 0.6'/ 2.6 Source: World Bank Regional Economic Reports, Public Expenditure Reviews and Country Economic Memoranda; IMF Staff Reports and Recent Economic Developments. 1/ As of end of 1995. 2/ Actual 1996. 3/ Extemal public debt only as of 1996. 4/ Extemal debt only, as of the end of 1994/95. 5/ Extemal debt only, as of 1996. has generally been slow. If all PMCs are to valorem rates of 10 to 40 percent. These secure a better economic future, they must tariffs have had protective effects for some commit to sustaining a disciplined fiscal import-competing activities and have raised approach, reducing government current the cost structure of the economy, expenditure, and reducing government consequently, reducing the competitiveness involvement in commercial activities. of exports. However, in many PMCs the effects of other factors such as locational TARIFFS. To encourage investment that will disadvantages, high reservation wages, a contribute the maximum to the economy, high real exchange rate underwritten by governments must develop and implement generous aid, remittances, and in some policies that use economic resources cases, resource rents, may well have been efficiently. Most PMCs have relatively high more important constraints on international tariffs, ranging from effective nominal ad competitiveness. An exception has been Fiji -14 - where a sizable import-competing sector lending in the Solomon Islands. In most developed behind the protective effect of PMCs, including Fiji, the private sector is high tariffs. Tariffs have since been reduced disturbed by the lack of an investor-friendly substantially, helping to create a more policy climate. efficient manufacturing sector. However, the sugar, clothing, and tuna industries in Fiji; LAWANDPROPERTYRIGHTS the motor vehicle harness wiring factory in Effective property rights have three basic Samoa; and the tuna industry in the characteristics: public security and Solomon Islands have relied heavily on protection from theft; protection from preferential access to developed country arbitrary govemrment actions, ranging from markets and their risk is that their long-term unexpected and ad hoc changes in security is not underwritten by a uepce n dhccagsi fundamental comparative advantage, regulations and taxes to outright corruption; and a fair, independent and predictable FOREIGN INVESTMfENT. The main judiciary. A fully efficient property rights protective policy in the PMCs relates to system requires additional demanding restrictions on foreign investment and conditions that involve complete and toreign business activities. There are still exclusive specification and effective fmoreignt buinessactivities.nal ee are stlcy enforcement of all entitlements and no important institutional and policy restrictions on transferability of property impediments such as access to land or rihstohe. lengthy approval processes to a healthy flow rights to others. of foreign investment. The private sector of A common feature of PMCs is the tradition most PMCs is weak or dominated and A comary fore of land ishe ad constrained by the size and role of the public of customary forms of land ownership and sector. Yet most people wish to improve kinship traditions of sharing resources. their standard of living through better Traditional land tenure ensures that all opportunities in the cash economy. This family and clan members have access to suggests that governments should help land; strong kinship bonds and customs establish conditions to attract more foreign encourage traditional sharing of economic investment to PMCs. Greater foreign wealth. This tradition of sharing also serves involvement and direct investment in PMCs to validate rights to common property. In would be the best way of upgrading and some cases customary legal systems still integrating PMC economies into world coexist with formal legal systems. markets (ADB 1997b). Governments could Customary legal systems allocate rights help remove all formal barriers to foreign according to status in society, roles, age, and investment and could establish conditions gender. In contrast, the modern cash and institutions that clearly define and economy entails a legal system that protect property rights. recognizes individual rights, gender equality, and individual ownership of Policy credibility is essential to foster the property. private sector confidence required to develop the investment and financial The above arrangements have served PMCs sectors. Recently, the fiscal crisis in the well to avoid absolute poverty and they are Solomon Islands caused the government to an informal social security mechanism. renege on interest obligations. This will However, they also constrain market-based dampen the future willingness of private activity by reducing the incentive to work financial institutions to hold government hard, save and engage in entrepreneurial bonds and will increase risk premiums on all activity. Cultural preservation is an - 15 - important value in the PMCs and most reopen negotiations if they consider the governments are keen to support it. The key leaseholder is doing well. Land held under issue is not one of changing the land tenure customary tenure cannot normally be system per se, but of unlocking land tied up collateralised for securing a loan. This in unproductive uses because of inflexible retards investment and the development of a rules governing its ownership and use. This capital market. For foreign investors, lack of involves improving land leasing security of tenure is the major constraint to mechanisms through greater community investment, especially large-scale participation (see also Annex 4). investment. Secure tenure requires that rights are clearly specified and enforced. Land issues in the PMCs present a major There are numerous examples of attacks and challenge for development. In Fiji, 83 threats on tourist resorts that highlight the percent of land is owned by indigenous problem. t Fijians and cannot be bought or sold. In Samoa, 84 percent of the land area is held In this respect, there may be scope for under customary ownership and cannot be selective reforms or arrangements that bought or sold except to the government for facilitate access to land where there is public purposes. A limited amount of substantial demand for economic use. freehold land can only be bought or sold by Effective administrative arrangements can Samoan citizens. In Kiribati, land can be be developed by the government to provide bought and sold by I-Kiribati but only with a sound leasing system and effective the approval of the Land Court. In Vanuatu, mechanisms to resolve disputes. Govern- almost all land is under custom except for ments must also develop more secure public land in Port Vila and Luganville. property rights for foreign investors. One Long-term leases can be obtained, but these option that may be worth considering is are vulnerable to challenge and some form of regional insurance or renegotiation. Very little land has been multilateral investment guarantee formally registered in the Solomon Islands arrangements to protect foreign investors and Vanuatu, and registration is far from from breaches of leases, attacks, damage complete in Micronesia. Freehold land and seizure of their assets. cannot be bought or sold in the Cook Islands, Federated States of Micronesia, In Fiji there are major problems with the Tonga and Tuvalu. Generally, customary expiry and renewal of sugar land leases. land is more important in rural communities, There are 5,345 leases due to expire in while formal law usually dominates land 1997-2005, and 3,384 in 2000-2001. Native under intense use (ADB 1996b, 1997b). Land Trust Board (NLTB) surveys clearly Customary systems of land tenure do not indicated that most landowners want the provide formal ownership but a system of land back to grow sugar themselves. If this access to land, often involving multiple use. happens many Fiji-Indians will be displaced. All land rights are in a constant but slow The NLTB is developing proposals for more process of renegotiation according to the flexible leases, including rolling leases over relative needs and powers of various from 5 to 30 years. individuals and groups. Development of customary land is sometimes frustrated by numerous disputes over ownership. Once land is leased, l Relevant examples are the incidents at Anuha resort customary owners can often unilaterally in Solomon Islands, the resorts off Lautoka in Fiji, and at Mulifanaua resort in Samoa. - 16- In Fiji, constitutional uncertainty has also requirements are cases in point for contributed to lack of investor confidence government. They are justified because of (Economic Insights 1995). Although this excessive transactions costs and lack of has been formally addressed, there are still property rights for individuals. Generally, reservations about the effectiveness of the marketing is best left to the private sector, constitution and the government's ability to but there can be a role for a commercially ease cultural tensions. If the government can oriented government organization which resolve the sugar land lease problem, it could help small holders to sell their goods would improve investor perceptions of the in large markets so they could overcome political and constitutional environment. transactions costs and avoid market power problems. It is important to ensure that the ENHANCING PRivA TE SECTOR GROWTH: quality of agricultural products is adequate, A SUPPORTIVEROLEFOR GOVERNMENT particularly for exports. Rather than INKEYAREAS undertake this function, government should ensure that such a system is in place; for LABOR mARKETS. The main labor market example, by empowering industry issues in PMCs relate to the associations to set and enforce quality underemployment of labor in the economy standards (see World Bank RER 1993). as a whole, and the unproductive use of labor in the public sector. A focus on basic Many of the PMC governments undertake education and health care will improve the these functions but with varying degrees of supply side of the labor market, but job success depending on focus and capability. growth will depend on the extent to which Often PMCs extend themselves the government is able to foster private unnecessarily and get directly involved in development. Policies that focus on commercial production and marketing. undertaking the core functions of Recent experiences in Fiji highlight the government and attracting significant issue. The Government did not consider foreign investment offer the best prospects. agricultural development to be a priority in Governments also need to ensure that labor the 1997 budget in Fiji, but subsequently markets are flexible and that firms have the developed an initiative known as the ability to hire and dismiss or reallocate Commodity Development Framework workers easily and that pay is determined by (CDF). The CDF includes a range of market forces. Reforms to reduce the functions. It includes core functions such as involvement of government in commercial providing infrastructure, plus other activities and ensure that pay reflects functions that aim to address market performance are critical.2 failures. The CDF may have many valuable aspects but there is no convincing, analytical AGRICULTURE. Governments can improve or empirical rationale for the government to the agricultural sector performance through be directly involved in production and many activities. Applied research to commercial investment in agriculture in Fiji. improve yields and identify new varieties and extension services to disseminate FORESTRY. There is an important role for information about new varieties, technology government in the forestry sector because transfer and implementing quarantine property rights are poorly defined, there are adverse environmental externalities, and a weak information system. Forest resources 2 For a detailed discussion, see Asian Development need to be managed to take appropriate Bank, Domestic Resource Mobilization and Economic account of current and future generations. Growth in the PDMCS, 1997. -17- Governments must make appropriate Experience has shown that policies with institutional arrangements so that royalties significant discretionary components run the and tax revenues are adequately collected, risk of corruption and inefficient felling and regeneration practices are investment.3 undertaken, and landowners understand their rights, responsibilities and options with TOURISM. Hitherto, tourism growth in the respect to logging. In the Solomon Islands, PMCs has fallen short of the rate for Asia a main concern is that extraction rates have and the Pacific Region as a whole. This been highly excessive, which may reflect ad sector has considerable potential to hoc approaches to issuing licenses, the contribute to broad-based economic domination of powerful interest groups and development and to generate many jobs. weak enforcement capacity. Many of the The key is to encourage large-scale foreign problems relate to wider governance issues investment. Where there is market potential, that can only be addressed with significant foreign investors' main problems are access political commitment and capability (see to land, enforcement of contracts, freedom World Bank RER 1995). to repatriate capital and selling ownership FISHERIES. Direct government involvement rights. Other important considerations are the freedom to use foreign labor and the low in the fisheries sector has not been cotofbrarti poedes Th . . ................costs of bureaucratic procedures. The successful in the PMCs. This is an area situation in Vanuatu highlights the issue. To where private sector-led development would realize its potential as a tourist destination, it be more beneficial to the countries, given needs large-scale investment in resorts and the kind of flexibility in operations required. infrastructure. Although governments have The government's role should be to develop - gu n and enforce conservation policy, to collect reogni the nee forisubstant investment they are ambivalent about and disseminate information on fish foreign investment and, therefore, resources and harvests, to negotiate and demonstrate a marked reluctance to change enforce access fees for foreign vessels and foreign investment policy (see World Bank to encourage shore-based fishing activities. RER 1995, ADB 1996b). Experience elsewhere has shown that it is best to avoid direct equity investments or direct involvement in production and PUBLICENTERPRISES. Many countries have marketing (see World Bank RER 1995). developed commercialization and privatization programs, but progress has INDUSTRY. The development of industry in been slow. The efficiency of the public PMCs is generally difficult and slow. Often enterprise sector is an important determinant the government has reached beyond its of business competitiveness through its role capacity in attempting to develop industry in supplying infrastructure inputs and a and business. The most effective approach is range of goods and services. Effective to ensure that the basic requirements of privatization is difficult to achieve in PMCs. secure property rights, non-distortionary and This reflects a lack of understanding of the stable economic policies, and basic benefits of private incentives in a infrastructure are in place. More specific interventions, such as supporting business 3 See Foreign Investment Advisory Service, Pacific by providing information, advice and Island Country Foreign Policies: A Further training, can be beneficial if they are Assessment of Transparency, a Background paper at provided on an equal opportunity basis and the FEMM, July 1997. See also, South Pacific Forum focused on the basic business needs. Secretariat, Foreign Investment Climate in South Pacific Forum Countries, August 1995. -18- competitive environment, weak business and environmental standards are met. In the entrepreneurial skills and motivation, slow PMCs, the major environmental problems economic growth, small domestic capital tend to be caused by land clearing for markets and resistance to foreign ownership. agriculture, in-shore fishing or waste When public ownership is retained, attempts disposal. The solutions to these problems at corporatization have generally focused on often rest with the local community and the changing the legal status of entities, paying role of governments is to educate the insufficient attention to issues such as community to improve their own setting clear and non-conflicting objectives environmental management. Governments and establishing effective accountability also provide the physical infrastructure systems. Fiji has developed a state-of-the-art required for waste management and the public enterprise policy framework and is institutions required to oversee high risk planning to review and develop a more commercial activities such as logging, and appropriate competition framework for all monitor environmental conditions (see economic activities. However, lack of Annex 4 and World Bank RER 1993). resources to manage the reforms is a key problem. The workload on the public sector TELECOMMUNICATIONS AND KNOWLEDGE would diminish greatly over time if MANAGEMENT. Access to relevant significant privatization could be achieved. information and knowledge is essential to The development of adjustment packages to integrate the Pacific Islands into the global manage the transition for displaced workers economy. In the twenty-first century, the and a willingness to facilitate more foreign global market will be linked electronically, investment are crucial for making real and commodities will be cheap and trade progress. Also, in the case of public utilities, will be global. Even now, trends in privatization needs to be accompanied by an international competitiveness clearly effective regulatory framework to ensure indicate how knowledge and information pricing, coverage and quality issues are contribute to enhance the value added in adequately covered. traditional activities such as agriculture, small-scale manufacturing and tourism. FINANCIAL MARKETS. Various market They generate new production and support failures emanating from information opportunities based on activities such as problems can lead to gaps in credit data entry, remote secretarial services, availability and a significant risk of engineering design, and trade facilitation. In instability in the solvency of the financial addition, using information technologies system. However, government must ensure effectively will be crucial to rapidly improve that any intervention to address such the delivery of educational services, training problems is effective and provides a net and health services, and other government benefit to society. Effective governance services. More importantly, the PMCs need arrangements for government-owned to position themselves for niche markets in financial institutions is particularly new information-based industries which will important. The failure of the National Bank be the engines of wealth and prosperity into of Fiji highlights this problem (World Bank the next century.4 RER 1993). Some initiatives have already been made; ENViRONMENT. Governments are best for example, Fiji is considering improving suited to dealing with environmental problems through licensing or approval 4 See also Michio Kaku, "Visions: How Science will systems and monitoring to ensure Revolutionize the 21st Century," 1997. - 19- telecommunications infrastructure or ensure availability of trained personnel, developing new information applications. A institutions and processes involved in systematic analysis was recently undertaken the generating, dissemination and use of how effectively Pacific Island countries of information; and are exploiting the potential of the to identify and foster applications to a information revolution and what specific wide range of economic and social policy measures countries should consider activities.5 to boost their competitiveness by using knowledge and information. The analysis IMPROVING GOVERNANCE: REDUCING indicated that the main strengths the PMCs ADMINISTRATiVE DISCRETION AND could build upon are their small and IMPROVINGPUBLICACCOUNTABILITY manageable populations, generally high At its broadest level, govemance refers to literacy and significant international links the authority, control and management and their location between major markets in futhority,econtr and manisms the Pacific rim. But the chief constraints functions of government, and mechanisms are:(a) hortomins ofinvetmen and to ensure the accountability of government are: (a) shortcomings of investment and and its officials. While the power of the state expndiastrture, onak telgeommuniatis faffords the flexibility to contribute to infrastructure, weak arrangements for economic development, it also carries the collecting and structuring inforantion to risks of arbitrary behavior that could enhance economic opportunities and constrain economic and social welfare. Box participation; (b) low level of computer use coutlin some key go ce pre.cBox and the high cost of Internet access and lack 2.1 outlines some key governance principles and he hgh ost f Iternt acessand ack for most formal democratic situations. of financial resources; and (c) lack of a national vision and strategy for promoting improved access to and use of the Effective goverment intervention must be information and knowledge throughout motivated by a broadly agreed set of goals these economies and societies. that seek to improve overall welfare. IHowever, often government intervention Inter-country experience suggests mahlseilitretrusta r information-intensive industries and related may help special interest groups hat are investments will flow into centers of lobbying for special incentives and efficiency which are largely characterized preferences. If capacity is limited, by up-to-date infrastructure and trained dascretionary powers can result in an ad hoc personnel. In this regard, PMC policy approach to policy and regulations or makers need to focus on the following inter- possible corruption, which severely related layers of the knowledge economy for damages growt and development. In the policy development and activity flows: Pacific Islands, there are two more complicating factors. First, in many small to improve telecommunications and Pacific societies, applying sanctions to individuals who underperform runs against mitting, andretrieving information, and societal norms and this can significantly thereby, improve service delivery weaken public accountability. Second, through greater sharing of information accountability through formal democratic across agencies; 5 See World Bank, Pacific Islands Knowledge * to identify data which could be used for Assessment (1998/99), based on reports by SMEC production purposes by the public and International Pty. Ltd. Insearch Ltd., University of private sectors, and help establish a Technology, Sydney and Carl Bro a/s, Informatics. stronger public-private relationship; to - 20 - institutions is weakened by the lack of opportunities for corruption. Tendering public information about the performance of procedures should be open and truly their elected officials. competitive; there should be transparent and reliable regulatory and performance Corruption is not endemic in the Pacific monitoring to support privatization and Islands, but there have been problems in commercialization. Also, there should be some countries. Officials have been processes to promote transparency and vulnerable to "get-rich-quick" operators. ensure accountability, credible law There have been scams that have involved enforcement, and an effective judiciary. the loss of public funds and there have been allegations of corruption. Other forms of Most Pacific Island countries have governance failure arise in customs, logging developed measures to counteract corruption activities, foreign investment approval, and improve governance. The formal system tendering procedures, govest ment-owned of governance and accountability is banks and public pension funds. In some reflected in a range of legislation including cases, it is not corruption, but poor the constitution, public finance and audit guidelines, weak management and acts, standing orders of parliament, financial inadequate skills that preclude good regulations, public service regulations and governance. In other cases, cultural factors other formal arrangements. can facilitate the acceptance of corrupt behavior of political leaders. Accountability measures continue to be improved. Several countries now have Addressing the above requires introducing leadership codes in place. In response to policies and establishing mechanisms that serious financial difficulties, the Cook reduce or eliminate the scope for monopoly- Islands has demonstrated a strong, commit- type power and discretionary behavior at the ment to government transparency and political and administrative level, and create accountability. In particular, it has adopted a an appropriate balance between fiscal responsibility system along the lines accountability and flexibility.6 An of that in place in New Zealand. This will economic policy regime that minimizes help ensure public scrutiny of economic and distortions and exemptions will reduce the fiscal information and plans. Several scope for officials to favor particular countries are taking steps to improve budget individuals or firms. There should be low, procedures and introduce output or relatively uniform tariffs, and minimal performance-oriented budgeting, although specific industry assistance; exclusive they are concerned about their capacity to licenses should be avoided. Reforms to implement such sophisticated systems. In enhance political, administrative and 1998, the Fiji Government will introduce economic competition can also be helpful. performance contracts for chief executives However, privatization and of departments. A state-of-the-art public commercialization processes can also bring 6 A sharp and useful analytical perspective has been provided by Klitgaard (1996) who uses the equation C (corruption) = M (monopoly) + D (discretion) - A (accountability). The monopoly component can refer to any situation where the government or an official has the power to make a decision and those who are directly affected do not have an effective (competitive) alternative. -21 - Box 2.1: Building Capability - Addressing Governance Issues Development experience has shown that there is no uniquely superior form of governance. However, some common principles have emerged: . Legislative, executive and judicial arms of government should be independent of one another. * There should be a strong, independent judiciary. * The administrative arm of government should be capable of providing independent technical advice. * There should be a system of rules, processes and mechanisms that restrain corrupt behavior, ensure transparency and provide feedback to the government as a whole. Normally, to be effective, the separation of powers needs to be formally incorporated. Formal separation of powers enhances confidence that the rules that constrain coercive power will remain stable. However, even if powers are formally separated, political leaders may not face effective checks and balances on their actions. The formal separation of powers must be complemented by other rules and mechanisms to ensure effective governance. One of the most important components of an effective system of governance is a strong, independent judiciary. The judiciary must rule on the legality of the actions of the legislative and the executive arms of government. This is not possible where the legislature has the power to ovefride or circumvent the decisions of the judiciary, for example, by arbitrarily changing judges o relying on customary arrangements that can dominate at an informal level. The judiciary also helps resolve contractual disputes, clarify legal ambiguities and enforce compliance of the general public. Hence, it must have the resources and the support of othe branches of govemment to ensure compliance-However, general development experience suggests that independence and fairness are the most important characteristics of a strong judiciary. There are various mechanisms that can be used to improve public sector and public enterprise perfornance that involve a careful balance between accountability and flexibility. Performance agreements, budgets transparency, clear and consistent objectives, independent monitoring and reporting, and other means of transmitting the objectives and performance of the public secto to the community are all important. External mechanisms can strengthen govemance. There could be extraterritorial adjudication to underpin the domestic judicial system, or agreements with donors involving policy conditionality to provide accountability. enterprise reform framework is already in parent public reporting system to make them place and there are plans to review the accountable for their decisions. This is a competition policy framework for both the problem especially in foreign investment public and private sectors. approval. Some governments have agreed to make investment guidelines more In customs departments, generally there is transparent, but discretionary, monopoly- potential for bribery if officials have type power often still exists and foreign discretion over valuation, if duty rates are investors have no effective means of high, and if there are wide variations for ensuring accountability. Such situations similar goods and specific exemptions. leave room for corruption. If there is no However, most Pacific Island countries are transparent public reporting system, moving to a harmonized system and discretionary power should be removed. strengthening customs departments, which will reduce the scope for corruption Governance weaknesses that affect financial problems and errors. Improved procedures institutions and public enterprises can be include using data base systems that contain particularly serious because of the burden information on unit values, requirements to they place on the budget if they fail. For check export documentation from exporting example, the failure of the National Bank of countries, and greater ability to supervise Fiji and Polynesian Airlines in Samoa have computer entries. Nevertheless, fines and placed significant demands on those penalties for bribery are still too low to country's budgets. Provisions that restrict remove the incentives for bribery. pension funds to local investments provide Politicians have discretionary powers to too much temptation for corruption, grant exemptions from taxes and duties and particularly property investments. These and to approve licenses, but there is no trans- other examples have suggested the need to - 22 - improve regulatory and performance sector contracts and audits; monitoring for government and business enterprises. More generally, the Auditor * progressive reduction and a movement General, Ombudsman Offices, the Judiciary toward uniformity of tariffs, and and other entities with monitoring removal of exemptions of special responsibilities must be independent or have treatment of specific industries, so as to independent reporting requirements and minimize discretionary power; adequate fiscally protected resources. * greater transparency in foreign In sum, improving governance would investment approval processes; and require: strengthening of the judiciary and other * greater openness and public scrutiny of regulatory bodies of government (e.g. budgetary processes, public accounts, Ombudsman, Auditor General) to deal loan agreements, guarantees, public with instances of corruption. - 23 - 3. ENHANCING THE EFFECTIVENESS OF PUBLIC EXPENDITURES: SPENDING PA TTERNS AND POLICIES Enlarging the scope of the public sector government more cost-effective and clearing produced some improvements in health, the way for the private sector to be the education and other social sectors in the engine of economic growth. But despite Pacific Island Member Countries. But good intentions, implementation of reforms inefficient and overextended governments has been delayed or watered down in most came under pressure beginning in the mid- of the PMCs. 1980s. Governments had become large and ungainly and were blamed for the If private sector-led growth is to succeed, disappointing average growth performance reforms must lead to public expenditure and people's continuing poor quality of life patterns consistent with macroeconomic in some of the PMCs. Low growth stability and an environment conducive to hampered the governments' abilities to raise efficient private economic activity. As revenues. Fiscal deficits needed to be discussed in Chapter 2, the state can contained and macroeconomic stability improve the development effectiveness of maintained. Government could not improve public expenditure by limiting the scope of services, and in some cases, could not even its activities to its capacity. However, maintain them at the previous level. concentrating public resources in core Expenditures were cut to restrain the deficit, functions by itself does not guarantee but in an ad hoc manner, aggravated development effectiveness. Spending existing spending inefficiencies. policies also must be carefully balanced and coordinated. Kiribati has the highest ratio of government expenditure to GDP and its public BALANCING THE ECONOMIC enterprises dominate all economic activity. COMPOSITION OF EXPENDITURE It was the first country to officially recognize that extensive public sector In all of the PMCs there are two imbalances ownership and management was in the economic composition of expenditure: constraining development. In 1987, Kiribati the first is between recurrent and investment announced an official policy of divestment. expenditure, and the second is between the Since then, most of the PMCs, except for the wage and nonwage components of recurrent Federated States of Micronesia and the expenditure. Both of these imbalances Marshall Islands, have announced policies impede growth and development. For of comprehensive public sector reform. example, when there is a shortfall in the They intend to streamline the civil service, government's resources for current divest public enterprises and concentrate on expenditure, fiscal adjustment often cuts core areas. The goal is to improve development expenditure creating an development effectiveness by making imbalancebetweenthem. When the civil - 24 - service wage bill is very large, existing and maintenance expenditure. government services and new asset accumulation are jeopardized because The extent of the shortfall and the imbalance operations and maintenance allocations are between operations and maintenance and inadequate. other current expenditure is difficult to assess in the aggregate. Each sector, In 1995, current expenditure exceeded 67 subsector, or activity within each country percent of total expenditure in all PMCs has a different stock of capital and different except Tonga and Vanuatu. In the operations and maintenance requirements. Federated States of Micronesia (FSM) it was Recorded budgetary subsidies and equity over 83 percent, and in Fiji, current transfers do not capture the full amount of expenditure soared to 88 percent of total government resources used to support expenditure. Most of it went directly to the inefficient public sector activities. The governments' own wage bill, and statutory authorities and public enterprises indirectly-in the form of grants, subsidies often receive significant indirect subsidies, and transfers-it often supported the wage such as tax exemptions or donor-funded bill in other government entities such as grants and these are unlikely to be reflected public enterprises. This curtailed operations in the budget. Table 3. 1: Economic Composition of Government Expenditure in PMCs, 1995 (In percent of GDP) Wages Interest Other Total Development Exp. Total Current Current including Net Expenditure Lending Fiji 11.4 3.1 9.0 23.5 3.1 26.6 Kiribati 26.0 0.2 42.5 68.7 24.3 93.0 FSM 29.4 2.3 33.0 64.7 13.6 78.3 Marshall 21.5 5.9 31.3 58.7 28.5 87.2 Islands Samoa 11.7 1.3 17.8 30.8 38.3 69.1 Solomon 10.9 4.1 14.2 29.2 14.4 43.6 Islands Tonga 12.2 ... ... 23.1 23.5 46.6 Vanuatu 11.9 0.7 13.7 26.3 12.8 39.1 Source: World Bank Regional Economic Reviews, Public Expenditure Reviews, and Country Economic Memoranda; IMF staff reports and Recent Economic Development Reports. - 25 - In Kiribati, according to government development budget consists of equity figures, budgetary subsidies to public injections into faltering public enterprises. enterprises are 3 percent of GDP, excluding tax exemptions. But total government The effect of budget tightening on support of public enterprises in 1996 is government investment is most pronounced estimated to be closer to 7 percent of GDP. in Fiji. In the early 1980s, central government development expenditure was 8 to 9 percent of GDP, but by 1990 fiscal A government grant to Air Kiribati in 1997 adjustment had reduced this to 4 to 4.5 has pushed this figure to 10 percent of GDP. percent, and by 1995, development In Fiji, the government injected an average expenditure had dropped to 3 percent of F$25 million per year into public annually, a level which is generally enterprises between 1992 and 1996 in the considered too low to sustain the form of grants, loans and capital. The government's strategy of private sector-led Government of Fiji has had a meager return growth. on some investments and its share of public enterprise losses has averaged $13 million Meanwhile, Fiji's current expenditure per year between 1994 and 1996. These remains relatively unchanged at about 23 resources-around 1.5 percent of GDP- percent of GDP. Among the other PMCs, have alternative uses that could yield much due to external grant funding, the higher returns. development budget is more sensitive to the availability of donor funds than it is to the Underprovisioning for operations and exigencies of fiscal adjustment. Fiji's 1996- maintenance is a chronic problem. 97 development budget exemplifies the Governments opt for a popular means of reason that returns on development cutting expenditure, such as postponing expenditure remain low in the PMCs. The operations and maintenance over an Government of Fiji provided funds to bail unpopular onie, such as reducing the wage out depositors of NBF and to increase the bill or raising user charges. Donors provide budget for agriculture; neither of these an inadvertent endorsement of this short- budgetary allocations is likely to result in sighted approach by extending grant funds high growth. to replace or rehabilitate whatever has fallen apart for want of maintenance. Donors must Evidence shows that high levels of current accept considerable responsibility for this expenditure are a drag on growth, especially because they consistently reinforce the when excessive share of current expenditure government's tendency to procrastinate on goes to the wage bill or for subsidies.l The difficult political decisions required to drag effect on growth is also more balance current and development pronounced when the public sector expenditure. As long as donors persist in constitutes a large part of the economy, and this behavior, it makes no sense for the the wage bill is large relative to GDP. The government to save money by cutting jobs larger the wage bill relative to the economy, or raising user fees. But these actions would the larger the proportion of economic be beneficial in the longer term. resources which may be inefficiently employed. In the PMCs, the average This explains, in part, the low contribution government wage bill for 1990-95 ranged of investment to growth in the PMCs. Another part of the puzzle may be that, in I Of course, some types of current expenditure, such several countries, a large share of the as teachers' salaries, may actually raise development effectiveness. - 26 - from 10 percent of GDP in Tonga to 30 IMPROVING INTRASECTORAL EXPENDI- percent in FSM. This type of expenditure TURE: HEALTH, EDUCATIONANDINFRA- typically crowds out operations and STRUCTURE maintenance; services deteriorate for lack of supplies; public assets deteriorate for lack HEALTH. Virtually all health care in the of maintenance; and the return to PMCs is provided and financed by investments is far lower than expected. government with substantial donor assistance. Although health indicators have PUBLIC EXPENDITURE REFORM: improved in the PMCs over the past 20 EASIER SAID THAN DONE years, the health care system suffers from several problems. On average, PMC To improve the development effectiveness government spending on health in the 1990s of expenditure, PMC governments must has been well above health spending for carry out the reforms they have countries at similar income levels. Most of announced-streamlining government, the PMC governments' health expenditures public enterprise and the civil service. Fiji is experienced substantial changes over the in the process of reform, but opposition period.2 By 1996, health expenditure was from the civil service unions delays the between 10 and 17 percent of current reforms somewhat. The Solomon Islands, expenditure (table 3.2). Samoa and Vanuatu have announced their intention to undertake reforms. There is a sustained bias toward curative care, hospital-provided preventive care and Improving the quality of development primary care. This makes the health care expenditure will require better planning, system less cost effective. For example, in project preparation, assessment and Kiribati, most diseases are preventable and selection, in the initial context of a medium- the official policy is to emphasize primary term Public Sector Investment Program and preventive care. Nevertheless, in the (PSIP) (see Chapter 4). The annual recurrent budget for 1997, curative services development budgets drawn from the PSIP take up 76.5 percent of the total recurrent should be derived from government policies budget. In Tonga, the hospital share of the and priorities; should be designed to health budget is 60 percent. In Fiji, about complement and support government's 50 percent of the Ministry of Health's current and planned service levels, and budget is for urban hospitals, about 15 per should be well integrated with the recurrent cent for drugs and supplies, and only 2 budget. percent for public health services. If government reduces the size of the civil User charges for health services are service, the balance between the wage bill, inadequate-and aggravate the lack of cost other current expenditure and development effectiveness. In Kiribati, there is a small expenditure will improve. The civil service charge for beds in a private ward in the main and its remuneration must become more hospital. In Vanuatu, user charges have flexible in hiring practices and a been eliminated. In Samoa there is a low performance-oriented reward system should fee schedule for curative services. Cost be adopted. 2 Information on total government health spending was not available for this report for most PMC countries. The analysis therefore relies on statistics on governments' current expenditure for health. - 27 - recovery in the PMCs' health systems is pharmaceuticals and supplies make up only estimated at between 0.5 and 4 percent.3 12 percent of the budget; in Samoa, the Table 3.2: Government Current Expenditure on Health, figures are 54 and 19 percent. In the 1990-96 hospitals, health care suffers from poorly Country Percent of Current Percent of GDP maintained equipment. There is little Govt. Expenditure integration between the current and the Av. 1996 Av. 1996 development budget. As a result, many 1990-95 1990-95 Fiji 1 9.9 12.5 .2,8 3.8 preventive programs, which governments FKSrMba2 16. 17.0 90 107 have declared top-priorities, are funded by Marshall Islands 10.8 10.6 6.6 6.2 donors through the development budget. 3' Samoa4/ 14.3 15.8 2.7 4.1 This is the case in the Solomon Islands' Solomon Islands 11.0 10.2 ... 2.9 bednet program for malaria prevention. 2/ Tonga I/ 12.4 13.3 3.9 4.2 Meanwhile, national governments continue Vaniuatu 3/ 10.5 10.4 2.3 2.2 to concentrate their scarce resources on Source: World Bank Public Expenditure Review Country Economic much higher cost curative services. Memoranda and Regional Economic Reports; I1F Recent Economic Development Reports and data provided by the authorities. Despite heavy government expenditures, 1/ Total health expenditure in percent of total govenmment expenditure. basic health care needs m all the PMC are 2/ Estimated, based on World Bank CEM 1993. Solomon Islands for largely unmet. But in this area, the social 1996 is actual. 3! Statistics in 1996 column is actual for 1995. returns are the highest, and government 4/ Net of VAT. involvement is crucial in public and preventive care, especially in rural parts of Government resources are concentrated on the country. expensive curative and hospital services in cities, and prevention; access to health care Government should not provide or finance in rural areas is poor or non-existent. This is all health care. The challenge for at odds with the Government's policy to governments is to concentrate resources in a alleviate poverty. In Tonga, for example, cost-effective way: on public goods (see only about 13 percent of the health budget is Chapter 2) and basic services that will directed toward rural areas. In the Solomon benefit the poor and that have the highest Islands, the Ministry of Health provides social returns including high externalities. only a small portion of the budget for To do this, governments should establish preventive and promotive programs.4 goals, a strategy to reach them, and plan to Preventive programs for the most common implement the strategy based on the best disease in Solomon Islands-malaria-is input combinations. Governments should largely dependent on donor funding. scale back their direct responsibilities in other aspects of health care. Most of the health budget goes to salaries, resulting in shortages of medical supplies Public health and preventive care require a and, thus, resulting in no provision for different focus in each country accordingto maintenance. For example, in Vanuatu, their health status. For example, in Kiribati, salaries absorb 68 percent, while public health education in sanitation is most necessary; in Tonga lifestyle-related 3 See World Bank: Pacific Island Economies: diseases are at the forefront; whereas in Towards Efficient and Sustainable Growth, Vol. I Solomon Islands, public health education (1993). could help bring malaria under control at 4 Solomon Islands, Ministry of Health and Medical low cost by educating the population about Services: The Comprehensive Review of Health Services Report (March 1996). - 28 - the benefit of properly maintained bednets.5 Governments and donors should work Greater participation by local community together to ensure that health projects groups offers a cost-effective means of funded through the development budget not public health dissemination. In Samoa, for only support government priorities, but are example, 60 percent of those surveyed in a integrated with and complement current pilot study stated that they acquired health expenditure. Project evaluation should be knowledge through their peers and strengthened to ensure that investment acquaintances (see Annex 4). Thus, the projects are based on established priorities, challenge is to meaningfully include local screened, and undergo thorough project leaders in public health campaigns. preparation process, followed up by stronger monitoring and control by the PMC The budget allocation between wages, govermments. supplies, maintenance and investment should be guided by cost/benefit EDUCATION. The institutional arrangements considerations which will achieve the and financing for education vary among the objective at the lowest cost. PMCs and there are many combinations of public and private participation and funding. For example, government might reduce its In general, the government is either the sole direct involvement by regulating or or principal provider of primary education; permitting private management or even secondary education is often dominated by ownership of health care facilities by private schools, many of which are run by physicians, NGOs and church groups, even religious organizations. In-country in core government activities. In the 1997 vocational and tertiary education is also budget, Fiji reduced health sector costs by provided and mainly funded by the PMC contracting out cleaning services, governments. External education is funded transportation, catering, and laundry, among by scholarships, frequently with donor other services. assistance. For example, in Fiji, most primary and secondary schools are private, Other savings can be realized by increasing and teachers are paid primarily by cost recovery, especially in tertiary curative government. In FSM, secondary schools are services which are relatively high cost and government-owned. offer fewer benefits to society. Fiji has plans to increase cost recovery, but the initial cost Like health care expenditure, PMCs' recovery rate will be only an estimated 2.5 government expenditure on education varies percent of the health budget. among the countries; there have been significant changes over the 1990s. The PMC Governments should also Kiribati's education expenditure, already encourage increased use of health insurance, high relative to GDP, has been increasing initially limited to coverage of major steadily, with a relatively constant share of illnesses. So far, the Marshall Islands has a the current expenditure. In Fiji, Solomon Social Security Health Insurance, and Fiji Islands and the Marshall Islands, the fiscal has a fledgling private health insurance, but adjustnent in the 1990s resulted in a decline establishing user charges for medical in education expenditure relative to GDP. In services will provide incentives for health Fiji, in 1995 salaries accounted for 78 insurance in other PMCs. percent of expenditure in the sector, maintenance and operations for 0.5 percent S See World Bank, Kiribati: Public Expenditure and textbooks, supplies and materials for 2.9 Review 1997; Tonga, Public Expenditure Review percent. In Tonga, the latter provision was 1997; Comprehensive Health Sector Review. 1.5 percent. - 29 - Table 3.3 summarizes PMC government Increasing access has exacerbated the expenditure on education, relative to GDP inferior quality of education. Student drop- and to current expenditure. By international out and repeat rates have increased and standards, most of the PMCs have higher elevated the already high cost of education. levels of expenditure on education relative By the time students graduate from primary to GDP. Furthermore, education in the PMC school, they are several years behind same- countries tends to be expensive because of age students in industrial countries In Fiji, the high cost of internal transport arising FSM, Marshall Islands and Samoa, only from the fragmentation of the land mass of about half of the students who finish each island nation. The question whether primary school go on to secondary the present basic education system (primary education and in the rest of the PMCs, the and junior secondary schools) is developing numbers are much lower, ranging from 17 the skills appropriate to the formal and percent in Vanuatu to 7 percent in Kiribati. subsistence economies of the island-states has not yet been conclusively addressed. The key to improved development effectiveness of education expenditure is to Educational outcomes in all the PMCs focus government resources on activities except Tonga are poor in developing with the highest social returns and required skills, but especially so since externalities. Providing quality universal education accounts for more than a quarter primary education using the most cost of public expenditure when government, effective input combination-possibly a mix donor and private financing are taken into of private and public education comes first. account. In many of the PMCs, access to Primary education has high social returns. education is limited. Primary education is Children find it .difficult to catch up with not compulsory, except for Tonga, Fiji and educational achievement later. Unless there the Marshall Islands. Recently, in most is good primary education, further schooling Table 3.3: Government Expenditure on Education, 1990-96 In percent of current In percent of GDP govt. expenditure Av. 1996 Av. 1996 1990-95 1990-95 Fiji " 19.4 14.3 5.5 4.4 Kiribati 20.4 20.9 11.2 13.2 FSM ......... Marshall Islands 2' 14.8 16.6 11.0 9.7 Samoa 18.2 17.5 5.2 4.5 Solomon Islands 17.0 14.6 5.3 4.2 Tonga 18.7 18.3 9.8 9.8 Vanuatu 2 22.2 23.2 4.9 5.0 Source: World Bank Regional Economic Reviews, Public Expenditure Reviews, and Country Economic Memoranda; IMF staff reports and Recent Economic Development Reports. I/ Total education expenditure in percent of total government expenditure.; 2/ For Marshall Islands and Vanuatu, shares in 1996 column are 1995 actuals; 3/ Average for 1990-93. PMCs, access to primary education has is likely to yield low returns, as experience increased rapidly, but there are insufficient in the PMCs confirms. Also, returns to qualified teachers, textbooks, and schools. - 30 - education are especially high at the primary and donors should also refrain from level because universal basic literacy yields establishing or funding educational large externalities. Educating girls, for institutions outside these activities since example, is linked to better health for such funding will preempt resources to core women and their children, and lower fertility activities. In particular, the establishment of rates6 national universities should be avoided in the PMCs, as they would divert and absorb At the same time, the governments should resources which should be allocated to basic ensure that post-primary students, who now education. swell enrollments in primary schools in Fiji, Vanuatu and the Solomon Islands, have These recommendations would dramatically access to continuing education. Recently, reconfigure intrasectoral distribution of the pressure of these post-primary students education expenditure directing most has led to the sharp increase in community funding for primary education. For example, day schools in the Solomon Islands. Since in Fiji and Tonga, only 40 percent of current financial, material, and human resources expenditure in education goes to primary vary among the PMCs, the optimum strategy education and about 30 percent goes to for primary and post primary education will secondary education in Fiji, and 22 percent differ for each country. Where government to secondary education in Tonga. In resources are very limited, post-primary Tonga's 1994/95 budget, one third of the students might be accommodated by total education budget was for development expanding secondary education through expenditure owing to donor-funded partnerships with church groups and the scholarships for training abroad. private sector which are already heavily involved in secondary education in most PHYSICAL INFRASTRUCTURE. In the PMCs, PMCs. If the government subsidized roads, sea defenses, air and seaports, and existing or new private secondary schools it utilities, have been provided and paid for by would be more cost-effective than the public sector, with extensive donor establishing government-funded secondary support. Infrastructure services are almost schools as cost recovery of private schools entirely publicly financed. The institutional is high. In Kiribati, the planned expansion of arrangements vary among the PMCs, but government involvement in secondary generally, the government includes education has left uncertain the future role investment in the sector as part of the of the churches in the sector which seems development budget. Service is provided inconsistent with improving cost- partly by government ministries or effectiveness of education expenditure. departments, and partly by non-financial public enterprises, such as the Fiji Students who pursue tertiary education are Electricity Authority (FEA) in Fiji and the likely to earn higher incomes later. But cost Public Utilities Board (PUB) in Kiribati. In recovery mechanisms are virtually addition to investments in the sector, nonexistent in the PMCs and should be government expenditure includes the developed as is being done in Fiji. Instead operating and maintenance costs for of funding post-secondary training abroad, services such as current - operations, government and donor assistance should be subsidies and equity injections which may channeled to the government's core be included on the government's capital activities in basic education. Government account as part of its net lending. - Public investment in infrastructure has been 6 World Development Report 1997. heavy, including equity injections to State- - 31 - owned enterprises. In Tonga, an average of Kiribati, there is a de facto government 43 percent of overall development policy of deferred maintenance such that expenditure has supported infrastructure maintenance allocations are a fraction of since 1980. In Samoa, the infrastructure required amounts because, based on share of development expenditure has been experience, governments expect that donors even higher at about 45 percent-equivalent will eventually rehabilitate or replace assets. to an average of about 15 percent of GDP since 1991. In part this is due to the damage In the PMCs, there are many examples of caused by cyclones in 1990 and 1991. In public entities which impede growth and Fiji, between 1990 and 1995, the average development, rather than support it. share of infrastructure in government capital Infrastructure is no exception. The expenditure was 44 percent. management is inefficient, the staff is too large, and public pricing policy does not Despite the importance and scale of public reflect costs. Limited resources and lack of investment in the sector, access to basic incentives constrain the entities' ability to public services remains limited in most of undertake needed maintenance or expand the PMCs and service provision is poor. In capacity to improve both access and quality Tonga, telecommunications are seriously of services. As a result, the entities become inadequate, water supply is a major a drain on the government budget. development constraint, and power outages are frequent. In Kiribati, the Public Utility In the early 1990s, the Fiji Electricity Board (PUB) covers essentially only part of Authority (FEA) was an example of such an Tarawa, and even in this limited area there entity. FEA operations have since been are frequent power problems, breakdowns commercialized and the energy sector in Fiji and outages; water delivery is sporadic and is about to be deregulated which will permit water quality is questionable; and the independent power providers. This should sewerage system is in constant need of encourage competition and reduce cost. Fiji repair. Telecommunications services exist is also planning to commercialize the only in Tarawa. Government's Water and Sewerage Department soon. The government is These problems exist and persist because tendering some road maintenance and existing assets suffer from lack of construction to the private sector to increase maintenance and inadequate allocations for its cost-effectiveness. operations. This leads to low yield on prior investments and insufficient funds for new The PMCs must provide more and better investment to expand services. Many service to support private sector interrelated factors contribute to the development. Governments have generally situation. Departments and agencies are recognized the need to improve efficiency, overstaffed, cost recovery policies are but they have been slow to implement inadequate, and there are no funds for changes because of political considerations maintenance. In Kiribati, the Public Utility and difficulties in reducing the work-force Board's tariffs have not changed since 1990, and raising user charges. Providing adequate except that the water charge was rescinded maintenance and recovering this cost is also in 1996, when the service collapsed. complicated by donors' preference for Sewerage disposal is provided free of funding rehabilitation and construction charge. In Solomon Islands, the few paved works. Because most of these funds are roads, including the main road through grants, expensive rehabilitation work is Honiara, are disintegrating because they are made available at no cost. As long as donors not being maintained. In Samoa and in are willing to hand out funds, no rational - 32 - government would choose to spend its own monopolies in power generation and resources on maintenance. telecommunications, the PMCs' size makes monopolistic behavior more easily International experience suggests that the attainable. PMCs can improve the contribution of infrastructure to growth by managing the CONCLUSIONS sector on commercial principles in an environment of direct or indirect PMC governments can improve the competition. Government can greatly development effectiveness of expenditure by improve the development effectiveness of narrowing the range of their responsibilities its expenditure in the area by concentrating in key areas and providing the services in its resources in those areas with the highest the most cost-effective way. As a result, social returns and large externalities and public sector reform should focus providing the environment for private sector government expenditure on public goods or participation in the infrastructure sector on services in health, education, and commercial principles. Direct private or infrastructure which reduce or alleviate public sector involvement can be managed poverty, and deliver high externalities and on commercial terms with cost recovery high rates of social return. Reforms should (including agreed support from government also aim to improve the cost effectiveness of where such support is necessary to establish government services by providing the most commercial operations) set at a level cost-effective input combination, including sufficient to cover their cost, including an high quality investments and efficient adequate return on assets. operation and maintenance. To accomplish this, governments must adopt a medium- When the PMCs divest components of the term budgetary frame-work and grant more infrastructure sector, they must create freedom to spending agencies; they must regulations to ensure that a public monopoly also ensure that managers have sufficient is not replaced by a private one. This would budgeting and resource management skills merely restrict output and increase price and to be held accountable for their decisions. profits. Although recent advances in technology have reduced the natural - 33 - 4. PLANNINGAND BUDGETING FOR MORE EFFECTIVE SPENDING SIGNPOSTS ON THE PA TH TO REFORM Well-functioning planning and budgetary have yet to begin. Fiji is the most advanced systems are central to the performance of in implementing performance-oriented government and the achievement of budgeting, and has a clear agenda for further economic reform goals. Like most change. Others, such as Kiribati, Tonga, and developing countries, the PMCs have relied Samoa still have major hurdles to overcome upon a traditional, centralized budget on their paths to reform. The Solomon system. But the emergence of fiscal deficits, Islands and Vanuatu have recognized a need and the realization that some traditional to change to a budget system which sources of funding may be disappearing, emphasizes accountability for results. The have led the PMC governments to examine Solomon Islands is operating under a how their budget systems can better support traditional budget system, but the their development goals. accounting, information and control systems have broken down, rendering the budget As a result, some of the PMCs are now ineffective. considering budgetary reform while others are at different stages of implementing This chapter discusses some of the issues variants of output or performance budgeting, involved in budget reform, and provides which, for the purpose of this chapter, are some pointers for the next steps of budget grouped under the term "performance- reform in the PMCs. oriented budgeting."l A few of the PMCs THE TRADITIONAL BUDGET SYSTEM: THE 1 A performance budget is usually associated with a STANDARD AGAINST WHICH REFORMS budget classification that divides proposed SHOULD BE MEASURED expenditures into activities within each organization, and into a set of workload measures that relate the activity performed to its cost. The traditional budget system found in the Performance budgeting allows the budget to be Solomon Islands and many other PMCs has built, not incrementally (as in traditional line-item budgeting), but on the basis of anticipated workload. budgets in the form of performance information Managers could arrive at a budget by simply output levels or targets. multiplying the cost of a unit of output by the number of units needed in the next year. The bottom-up Output budgeting is most often associated with the approach of performance budgeting, however, is New Zealand public management reforms of the expansionary unless it is constrained by strong top- 1980s and 1990s, which are built around contractual down control of aggregate ceilings, and tradeoffs are relationships between ministries as purchasers of made between program output levels. Performance goods and services, and departments as providers. budgeting was developed in the United States in the Appropriation in the budget are for outputs, and in 1950s, and continues to be used by a number of city providing those outputs, departments have governments in that country. Elements of performance considerable flexibility in the use of inputs, subject to budgeting can be found in some developing country rigorous financial and output reporting. - 34 - two distinctive features. The first is that the budgetary funds in achieving government budget is assembled and implemented on a priorities.2 Against this background, it is line-item basis. The second is its dual understandable that the PMCs have been structure. In line-item budgeting, core exploring ways in which budgeting systems ministries dominate budget preparation, and can be better adapted to meeting the during the budget year, spending ministries challenges posed by rekindling economic have only limited authority to move funds growth and re-orienting government. between items within the same heads and sub-heads. The traditional budget system A second characteristic of traditional focuses on the cost of inputs-expenditures budgeting in developing countries is a dual on wages, travel, purchases, maintenance, structure: the division of the budget into two investments and so forth-and whether parts. Dual budgets emerged around the budgetary expenditures match budgetary time of independence as a practical way of allocations. In most cases, the results-or managing the growing volume of aid outputs-of budgetary expenditures are not financing and the political desire of evaluated as part of the formal budget governments to pursue a strategy of process. The advantages of line-item government-led development. The budgeting are that the strong central control development effectiveness of public and limited line agency discretion minimizes expenditure is hampered in the PMCs by the the potential for line agency overspending, way the recurrent and the development avoids capricious and inconsistent decision- budgets have evolved and are separately making, and reduces the risks of corruption. prepared.3 The recurrent expenditure It is also straightforward and robust, and requirements of investments are not facilitates the control of spending. rigorously estimated when projects are prepared, and thus the affordability of the However, there are many disadvantages. programs of which they are a part over the Strong central control weakens incentives longer term is not properly considered. This for line agencies to reduce spending on line leads to inadequate provision for items already in the budget in order to fund expenditures in subsequent budgets, and new priorities with the savings; it unsustainable investment decisions. The encourages line agencies to dispense funds development budget often does not include rather than plan for their optimal use and it investment activities required to sustain reduces line agency capacity to implement services specified by the government's internal reallocations. Budgeting also policies and priorities. Institutional typically becomes incremental -last year's responsibilities are typically divided. For allocation is the floor on which this year's budget is constructed. As a result, a bias develops in the budget toward the status quo 2 Countries with traditional budget systems may still develops in t is det towaresere sting evaluate results either by separate monitoring and in that it is easier to preserve existing evaluation units, or by requiring department heads to activities than it is to fund new ones. publish an annual report on their department's Likewise, it is easier to postpone outlays not activities. yet in the budget than it is to reduce the scale of current activities; it is easier to 3 In all PMCs which still maintain separate recurrent withhold budgetary discretion from agency and development budgets, the recurrent budget withhold budgetar discretio frincludes domestically funded expenditures of line managers than it is to develop their recurrent nature, while the development budget capacity to exercise this freedom; and it is includes all externally funded expenditures, regardless easier to monitor input costs and budgetary of their nature, and a small amount of domestic expenditures against allocations, than it is to funding of development expenditure. Thus, although monitor the efficiency and effectiveness of the development budget appears at first glance to be an investment budget, in reality it is an aid budget. -35 - example, in the Solomon Islands, the budget to achieve the targets, on the revenue Ministry of Finance prepares and monitors and particularly on the expenditure side, the recurrent budget, and the Ministry of and, of course, for the overall fiscal balance National Planning and Development is critical to macroeconomic stability. Line- prepares and monitors the development item budgets, with their emphasis on central budget. Each budget is submitted separately control, often do well at controlling to Parliament and little effort is made to spending within fiscal targets. Decentralized integrate the two. budget systems, which give managers more flexibility in the use of resources, carry high Furthermore, there are problems with risks unless they are accompanied by strong prioritization, planning, and technical financial reporting based on sound preparation of development expenditures accounting systems. that have hampered effectiveness. For example, projects are not integrated with the The second level of effective budgeting is government's policies and priorities or the the budget's capacity to allocate resources current budget; and virtually no central or based on strategic priorities. This means line agency has the capacity for project prioritizing competing claims on scarce preparation. Instead, the government relies resources. Prioritization is fundamentally a on donors for technical assistance to prepare political process. The challenge is to and appraise projects, and to fund most of structure institutional arrangements to both the development budget. As a result, the inform and force tradeoffs between development budget is largely driven by alternative policy programs and projects, donors because government priorities are within a hard budget constraint. Line-item not well-established. One way to regain budgets, being incremental, are generally control over such projects is to prepare a poor at reflecting strategic priorities, Public Sector Investment Program (PSIP), although if they are linked to a strong but this requires the government to adhere to national planning process, this can be the discipline of a PSIP in making annual counteracted. Budgets that focus on results budgets and in negotiating external aid. In have the potential of being more effective. the Solomon Islands, for example, there However, dual budget systems that have have been several unsuccessful efforts to separate development budgets derived from improve the development budget by a PSIP and are driven by high aid flows can establishing a three year PSIP from which be fiscally dynamic over time, leading to well-prepared and prioritized projects can be budgetary failure at the first level. drawn. The third level is operational efficiency and CHARACTERISTICS OF WELL- effectiveness, i.e. whether the budget PERFORMING BUDGETS supports the delivery of programs and projects. This requires both human and A useful way of looking at a country's financial resources commensurate with the budget system is to assess its effectiveness tasks to be performed. It requires clarity in at three levels. The first level is the capacity those tasks, authority to pursue the purpose of the budget to articulate and fuilfill the and undertake the task, and accountability government's aggregate fiscal objectives, for the use of that authority. Traditional line- Ministries of finance, working with the item budget systems can achieve operational central bank, typically establish a fiscal efficiency and effectiveness if the country framework within which budgets can be has a well-motivated public service, and the framed and monitored. The capacity of the budget is buttressed by departmental - 36 - reporting and evaluation systems. Without knowing the full cost of programs, including these accompaniments, traditional line-item investment and the use of capital in order to budgeting provides weak incentives for get "value for money." In this regard, Fiji operational efficiency and effectiveness- has taken the lead to unify the development although it may encourage economy. budget and the recurrent budget, and to Performance-oriented budget systems have introduce accrual accounting. a greater potential for operational efficiency, but need to be part of a broader set of PROGRAM FORMA TSAND PERFORMANCE incentives for good performance. Budget MEASURES change alone will not achieve improved performance, a reality overlooked by many Fully fledged program budgeting was one of of the earlier attempts by developing the principal public management exports countries to build budgets on the basis of from industrialized to developing countries workloads. in the 1960s and 1970s. It involves reorganizing the budget around policies and PERFORMANCE-ORIENTED BUDGETING: the resources needed to implement them-a POTENTIAL FOR IMPROVEMENTBUTNOT departure from traditional budgeting based A PANACEA on organizational structure. It was an attempt to budget by making choices among Countries which have sought to move competing policies, informed by estimates beyond traditional line-item budgeting with of the economic costs and benefits of the objective of improving performance policies and programs. In turn, this implied have taken steps such as: (1) recasting the outcome measurement systems. Program budget into a program structure; (2) budgeting never really succeeded in developing performance measures and industrial countries, and failed dismally in incorporating them into the budget developing countries. This was partly due to document; (3) preparing a medium-term the lack of information available to budgetary framework; (4) strengthening policymakers on program outcomes, but financial management systems, and in some mostly because program budgeting requires cases, adopting partial or full accrual a high degree of political commitment to its accounting; (5) creating 'broad-banded' internal discipline. Budgets are primarily categories for expenditures; and (6) political documents, not exercises in devolving discretionary spending to line economic cost/benefit analysis. ministries. They have also sought to link planning and budgeting more closely, either Since then, a growing number of by strengthening the PSIP and its role in the governments have pursued a less ambitious preparation of the development budget, or, form of program budgeting, in which in some cases, abolishing the dual budget departmental budgets are cast in program structure and integrating both current and format to aid transparency and policy investment spending into a unitary budget choice, but no attempt is made to make document prepared under the direction of a cost/benefit analysis of policies and single budgetary authority. programs the central tool of budget preparation. Several of these main features of budgetary reform are present-in varying degrees- Budgets in program format aid transparency. among the PMCs. Reform emphasizes They also may facilitate the introduction of outputs and performance, as well as output targets and performance measure- -37 - ment indicators to the budget document, likelihood that adjustments in the bottom bridging the gap between program and line will be made by choice rather than performance budgeting. Therefore, being forced by external circumstances; it governments may convert budgets to provides a longer time frame for the program format as one of the steps in agenciesto reprioritize resources and plan moving toward a more performance- adjustments; it helps the government to oriented system of budgeting. Some PMCs better integrate the annual budget with its have done this. Box 4.1: Strengthening Budgeting through a Medium-Term Expenditure Framework Resource allocation is about choice and, as such, is fundarnentally political. The challenge is to design institutional arrangements that encourage strategic policymaking based on affordability, foster more cost-effective performance, and create an environment where public service providers have greater predictability and can thus plan for the medium term. The central coordinating role of the budget has been weakened in many countries because it has been delinked from policymaking and planning. The result has often been budgets that are unrealistic or have little relation to expressed strategic priorities. A Medium-Term Expenditure Framework is an institutional device that formally and transparently tries to link policy, planning and budgeting. If used well, it enhances the capacity of government to maintain aggregate fiscal discipline while prioritizing (and, if needed, reallocating) resources to reflect changing strategic priorities. An MTEF imposes the following "rules of the game": . an aggregate budget constraint defines what overall envelope of resources is available; * policy proposals must compete with one another-both as ideas and for funding over the medium term, and what is demanded must be reconciled with what is affordable; * proposals for policies and projects must be accompanied by cost and results information over the medium term; and * evaluation influences resource allocation decisions and provides information to drive improvements in the quality of service delivery. Evidence from both OECD countries and a growing number of developing countries that have introduced MTEFs shows that institutional reforms along these lines can contribute to fiscal discipline, better allocation of resources, and improved service delivery. MAKING BUDGETS IN A MEDIUM-TERM medium-term development plan; and it FRAMEWORK enables individual spending proposals to be evaluated on the basis of their life cycle Performance-oriented reforms often require budget impact. By making the cost of that the annual budget is prepared within a policies transparent over time, and by medium-term framework. A Medium-Term enabling them to be compared with the Expenditure Framework (MTEF) helps available resources, an MTEF can be an improve performance, particularly at the essential planning tool to help countries rein first two levels, but also, indirectly, at the in the functions of government and ensure third level. An MTEF makes the medium- that resources are concentrated on priority term consequences of running budget programs. deficits more transparent; it increases the -38 - BROAD-BANDING AND DECENTRALI- requires strong financial reporting systems ZATIONOFSPENDINGAUTHORITY and well-entrenched accounting capacity. In the experience of other countries which have Budget reform may also entail changes successfully decentralized budgeting, which improve the performance of budgets reforms in financial management have been in regard to their optimal efficiency and a critical prior step. effectiveness. Performance-oriented budgets generally group closely related activities STRENGTHENING THE PSIP into programs that contribute to a common policy objective. The aim is to allow The PSIP has become a standard planning managers flexibility within the 'broad-band' tool for a dual budget system in many of line items to manage their human and developing countries. However, over the financial resources and achieve a specified years, some concerns have been raised about outcome in the most cost-effective manner. the effects of PSIPs on budgeting over time where there are large volumes of external In fact, the benefits of performance-oriented aid, a characteristic of development budgets budgeting may not be forthcoming if in the PMCs. A weakness of the traditional departments and agencies are restricted in PSIP model is that it can give an the discretionary power they have over expansionary bias to government resources. Devolution of authority enables expenditures. Insufficient attention is paid to line agencies to select the most efficient and the financial costs the government will have effective means of using existing resources; to bear once external support has ended. it also allows them to respond more rapidly The costs of operating the project as a to changes such as shortcomings in program program must then be borne from local delivery or shifts in the program revenues through the recurrent budget. environment. There are four "golden rules" for the However, a note of caution is in order. sustainable operation of a PSIP/DB model Devolving authority to lower levels to of budget planning and preparation which facilitate better use of resources can work practitioners have sought to follow. The first only if there is sufficient managerial is that there should be limits on the overall capacity. This has not been the case in many size of the PSIP. Assuming a fairly even of the PMCs. Managerial and accounting spread of projects across government systems shortcomings have led to problems ministries, the PSIP should typically be no in implementing budgetary reform in both more than one-quarter to one-third of the Kiribati and Samoa. In Kiribati, the move to recurrent budget, otherwise the recurrent performance-oriented budgeting led initially expenditures arising from completed to sharp expenditure increases, and other investment projects in future years may problems resulting from limited under- overwhelm the recurrent budget. The second standing of the system. It was difficult to is that projects entering the PSIP must define outputs, and both the central and the generally pass an economic viability test, line ministries' staff lacked training, cost such as a threshold economic rate of return. information, and financial management The third is that the incremental budgetary skills. In Samoa, line ministries had only recurrent costs should be estimated as limited information and understanding of the accurately as possible, and related to the reform process which curtailed participation underlying budgetary capacity of the in the budgetary process. Greater delegation sponsoring department. The fourth rule, of spending authority to managers also violated in many developing countries outside the Pacific Region, is that economic -39 - policies should be pursued that foster the public expenditures, and in particular growth of the government's revenue base. If external financing. these rules are violated and aid flows are large, a vicious circle ensues-government However, PSIPs are absent in budgeting commitments and staffing expand, provision systems of the main OECD countries, which for operating costs decline, as do civil also have unitary rather than dual budgets. service salaries. There are signs of this Eventually, the PMCs may want to consider happening in the PMCs. Ultimately, the unifying their present dual structures, development budget becomes an aid budget, thereby forcing departments' investment and donor "projects" become programs of current spending demands to compete with investment rehabilitation and current one another against a single hard budget support, and the true investment component constraint. of the budget falls. In this way, perversely, a PSIP/DB model, if not controlled in the face DIRECTIONS FOR BUDGETARYREFORM of high aid flows, over time may lead to levels of public investment below what is Fiji and Samoa are the only countries among required for sustainable growth. the PMCs which have adopted a medium- term budget framework, including budget Efforts to strengthen the PSIP across the estimates. Fiji and Kiribati have made developing world have increasingly focused progress in their budget estimates for 1997 on re-asserting the basics of good PSIP including, for the first time, output targets management, as reflected in these rules. and activity descriptions. However, neither While it is clearly not possible to estimate has completed the transformation to the economic rate of return of all projects, performance budgeting. In Fiji, program and the role of economic analysis is now defined activity costing is still mostly in line-item more as a test of the viability of form. In Kiribati, output specification and controversial large projects, and as a measurable indicators need further work, mechanism to facilitate choice between and the budget supplement presents the similar alternatives within a sector. There is detailed inputs in the traditional way which greater recognition that projects should be means that managers continue to operate selected against a range of criteria, both much the same as they did under the economic and non-economic, and in traditional budget system. Performance- particular, the chosen role of the oriented budgets have been adopted in government in the sector. There is also principle by Fiji, Samoa and Kiribati while greater emphasis on the recurrent budget as Tonga has just begun the process. Fiji now the starting point. The development budget presents a unified budget consisting of should consist of the capital budget, so to programs and activities and is introducing speak, plus program-related spending in the accrual accounting. However, Fiji's budget recurrent budget, putting policy and remains heavily input-oriented. Formally, programs first. And related to this is the Samoa also uses a unified budget, and is recognition that the PSIP and both parts of considering the introduction of accrual the budget should be integrated in some sort accounting. In Kiribati, the output budget of MTEF. In this way the PSIP is becoming format has been introduced, but without the less of an economic planner's interpretation full integration of the development budget, of what should constitute public investment, and the accounting systeim is still on a cash and more of a tool to manage basis. - 40 - Figure 4.1: State of Reforms in Selected PMCs Current Budget Reform Status Suggested Steps to Progress on Budget Reform Fiji In Place: Unified budget: programs and activities include both recurrent and capital expenditure. Input-oriented budget, with some output Focus on sharpening output targets. orientation from 1997. Increased focus on output targets from 1998. Train managers in financial and policy skills. Medium- term, 3-year framework for the budget for each activity and program. Broad banding of line items in the budget. Corporate Planning. Accrual accounting piloted in 4 ministries. Implement full accrual accounting in the long term. Training of senior public sector executives in Initiate performance contracts for middle management skills and close work with management. spending agencies in need of capability building. Scheduled for 1998: Performance agreement and 5-year contracts with each Permanent Secretary. Greater freedom for Permanent Secretaries to decide on resources in their agencies, including delegation of power by Public Service Commission to allow agency heads to appoint staff up to middle management level. Kiribati In Place: Output budget introduced formally. Improve cost and accounting systems. Training in output budget preparation and Train staff in both the central and the line development of key performance indicators. agencies to improve financial and policy management skills. Improvements in the Financial Management System. Focus on measurable indicators and output targets. Scheduled for 1998: Establish consequences of noncompliance Linking of the capital and recurrent with output targets, or alternatively introduce expenditure in the output budget format. performance contracts. Develop the budget in a medium-term framework. - 41 - Fully integrate the current and development budget in the context of the medium-term framework. Phase in devolution of procurement, payment and payroll processes from the Treasury to the line agencies. Samoa In Place: Output budget introduced fonnally. Train central and line agency staff in the new budget system. Integration of current and capital expenditure Begin to broad-band detailed line item input by output. specification after staff training in financial management. Medium-term budget framework. Accounting system has been redesigned. Focus on improving measurable indicators and output targets. Introduce corporate planning to link line agency priorities with overall government priorities and policies. Introduce perfornance contracts, including rewards/sanctions for performance. Improve cost and accounting system. Full implementation of performance- Staff in both Samoa and Kiribati require oriented budgeting holds the potential to more training to understand the new system, improve the productivity of public much less implement it. In Kiribati, lack of expenditure in the PMCs, but it is a very knowledge about costs led to a 30 percent complex undertaking. To be successful, both increase in recurrent expenditure in the first central and line agency managers must year of the performance budget, rather than acquire resource management skills, and a hoped-for reduction. Also, staff found it there must be major improvements in the difficult to quantify outputs or measure cost accounting systems. If resource performance. When corrective action management is devolved before these became necessary, the process of conditions are met, productivity could implementing performance budgeting decline. It also needs to be an integral part became little more than a formality. In Fiji, of a broader program of public management the budget is unified in the sense that reform, which encourages a culture of budgeted programs and activities include performance. Changing budget rules alone both recurrent and capital components. will do little to improve performance, and Despite this, low public investment may simply be disruptive. If government expenditure persists, in part because overall intends to outsource, staff capacity in expenditure must be restrained, and in part procurement and contract management because managers lack autonomy to make capacity often requires strengthening. personnel decisions, and staff lack the skills to develop "bankable" investment projects. -42 - In Fiji, although current and development central and line agencies lack the skills to do expenditure have been integrated within this, improving the quality of projects would programs and activities, so far this has not require significant training and external triggered a needed increase in public technical assistance. investments, even in core areas. There are several problems: lack of capacity to All public investment activities included in formulate and prepare projects, lack of the budget should be strictly derived from flexibility in personnel management, and a government policies and priorities. PMC tight overall budget constraint. governments need to ensure that the spending agencies' investment proposals are For PMCs as a whole, strengthening the justified by priorities and current activities, local evaluation and monitoring capacity for and that they are well prepared technically policies, programs and projects will enhance and financially sound. A quality check is the longer-term prospects because good essential because line agency staff in policies and practices are homegrown rather virtually all of the countries, as well as than externally imposed. It would also agency staff in some of the countries, lack ensure that local circumstances are skills to prepare, justify and appraise incorporated in policies and projects. projects. If the investment component of a AID EFFECTIVENESS. The economies of development activity creates an Pacific Islands are heavily dependent on unsustainable burden on future recurrent foreign aid which comprises a large expenditure, the investment should be scaled proportion of GDP in most Pacific Island back, and the recurrent component of the economies. Preferential market access activity should be re-evaluated and possibly provides additional support. The state scaled back, until a sustainable combination dominates the economy, as it must allocate of recurrent and development expenditure is resources to manage, implement and reached. Fiji is the only PMC which maintain aid-funded projects. Foreign aid includes the estimated future recurrent cost can also work against reforms because it of investment in its forward budget. provides a comfortable cushion against the However, any positive effects this might sharp reform pressures that result from have had on the budget have been masked economic adversity. Aid has not always by recent cuts in operations and been effective in creating a good growth maintenance caused by other factors. performance. Major issues to be clarified are: the level of aid, the composition of aid To improve the quality of investments programs, local evaluation, implementation included in the budget under the traditional and monitoring capacity, coordination of aid budget system or in a stage of adopting a proposals and donor coordination. performance-oriented system, PMCs should institute a three-year rolling PSIP. At a This perspective suggests that current aid minimum, governments should compile core level increases would be counter-productive area projects in a PSIP, and require that all unless there were significant changes in its core area projects included in the annual composition and mode of delivery. The budget must come from the PSIP. This Asian Development Bank's current strategy would provide time to analyze and assess for the Pacific (ADB 1996) recognizes this. projects before they are included in the Their strategy suggests that any annual budget. Samoa has recently adopted interventions involve significant policy this model for the PSIP in its three-year reform or capacity building and address key Forward Estimate Framework. Since both factors contributing to economic growth. - 43 - Other donors can complement this strategy Countries with more limited capacity should by supporting and developing government limit priority development sectors and functions that adhere to the economic and manage the coordination process to improve social fundamentals. Institutional reforms to aid effectiveness. improve governance, define and protect property rights and liberalize foreign Overall, budget reform can be a central investment are priorities. Funding element in a broader set of measures aimed adjustment programs linked to public sector at making the government more reform is also important. performance-oriented. In short, the budget can do a great deal to improve performance, The coordination capacity of PMCs is but cannot alone bring about change. It generally very weak and donor coordination needs to be supported by sustained top level is also not very effective. All departments in commitment backed up by training and PMCs need a clear understanding of technical assistance to strengthening resource availability and the government's technical and management capacity. To development strategy. Programs need to be achieve PMC governments' objectives of re- prioritized within a sound economic orienting inter and intra-sectoral allocations framework and PMCs must develop their of expenditures and implementing the own capacity to set priorities and comprehensive reform programs many communicate them to donors. Aid would be states have adopted, policy planning and efficiently used and distortion of domestic budgeting need to be closely linked. Critical policies minimized if government's to the outcome will be the adoption and expenditure programs enabled the development of medium-term expenditure government to invite donors to identify and frameworks. fund sections of the program which may be of interest to them.4 4 See Siwatibau (1997, p. 62). - 44 - Chart 4.1: Aid per Capita in 107 Low and Middle Income Countries a 800 - * Marshall Islands 700 - 600 500 4 FSM 4 Tonga Aid per capita30 (US$) 300 Sa a Vanuatu 200 * Kiribati * d . d Solomon Islands 100 * - Fiji U Elm B, U~~~~~E 04 E E m 0 1,000 2,000 3,000 4,000 5,000 GNP per capita (US$) a The aid per capita figure is based on the level of aid in 1994. The estimates of GNP per capita are mostly for 1994 and are derived using the Atlas method (except for the FSM and the Marshall Islands which are GDP per capita). Sources: World Bank 1997a, World Bank 1996b, AusAID 1997. - 45 - ANNEX 1 COUNTRY PROFILES - 46 - COUNTRY PROFILES FIJI Population: 803,000 (1996) GDP: US$2,126 million (1996) GNP Per Capita: US$2,470 (1996) Introduction With a population of 803,000 and a GNP emerging as a significant new industry. Fiji per capita of US$2,470 in 1996, Fiji is the has achieved a high level of human resource most developed of the Pacific Island development as reflected in a life economies. The country is endowed with expectancy of 72 years, infant mortality of abundant natural resources, including 22 per thousand, and literacy over 90 timber, minerals, and fisheries resources. percent. However, economic performance Tourism and sugar have been the mainstay during the recent past has been rather poor of the economy with garment manufacturing as elaborated below. Recent Economic Developments Following the political events of 1987 and recent years, total investment is about half the consequent economic setback, the Fiji the level attained during the early 1980s. Government embarked on implementing a This, in turn, has contributed to low comprehensive set of stabilization and economic growth. The new constitution structural reform measures aimed at which came into effect in July 1998 is a restoring macroeconomic stability and major achievement and will set a better improving the long-term growth prospects political platform for future economic of the economy. While the initial economic growth for Fiji. However, the favorable response to the program was favorable impact of the new constitution on the (GDP grew by over 8 percent during 1989- economy has yet to be fully realized. 90), delayed and mixed implementation of key structural elements of the reform During 1994-95, significant progress was program led to a generally disappointing made in maintaining macroeconomic growth performance during the early 1990s. stability: real GDP increased by 3.9 percent Economic growth turned negative in 1991, in 1994 reflecting strong performance in the and, for the period 1991-95 as a whole, sugar and tourism sectors, but slowed averaged only 2.5 percent. A combination considerably to 2.1 percent in 1995, as of factors, principally the delay in weather-related factors depressed constitutional reform to ensure an equitable agricultural output, particularly sugar representation of the ethnic groups, the production. The fiscal deficit reflected delay in extending the agricultural land greater public sector wage restraint, a leases due to expire shortly, and the decline in cyclone rehabilitation slowness in implementing the remaining expenditures in 1993, as well as an structural reforms have led to depressed improvement in VAT compliance and investment levels. At 12 percent of GDP in collection as it narrowed considerably to 1.5 - 47 - percent of GDP in 1994, down from 3.4 reaching a deficit equivalent to 4.7 percent percent of GDP a year earlier. A marginal of GDP (at market prices) by year's end. deficit equivalent to 0.5 percent of GDP was This deterioration largely stemmed from recorded in 1995, owing to the strong transfer payments to State-guaranteed expansion in income tax receipts and in part depositors of the National Bank of Fiji due to slow implementation of public (NBF), which became insolvent. To address investment projects. Consumer inflation the insolvency crisis, the Government decelerated to under 1 percent in 1994, announced a major restructuring effort in down from over 5 percent in 1993, and mid-1996 designed to streamline the remained low in 1995 as credit policies were operations of the bank at a cost of about tightened. F$200 million (7 percent of GDP). The rising level of public debt (at 40.7 percent of In 1996, real output growth recovered to an GDP in 1996 or 63.5 percent of GDP estimated 3 percent, boosted by favorable including the domestic debt of public developments in the tourism and sugar enterprises) has also compounded Fiji's sectors. Inflation rose to 3 percent, and the fiscal problems. fiscal balance deteriorated considerably, FIJI: KEY MACRO INDICATORS, 1992-96 1992 1993 1994 1995 1996 Indicator Levels (US$ million) GDP (atcurrent prices) 1541 1640 1811 1999 2126 Govt. Revenues 401 - 424 477 523 530 Govt. Expenditures 447 481 503 520 636 Govt. Budget Deficit (-) -46 -57 -26 3 -106 Exports (fob) 349 368 485 520 641 Imports (fob) 539 653 721 761 838 Current Account Balance (after 10 -84 -69 -26 67 grants) Gross Reserves 320 271 275 348 427 Macro Balances (% GDP) Budget Deficit (-) -3.0 -3.4 -1.5 -0.5 -4.7 External Current Account Balance 0.7 -5.1 -3.8 -1.3 3.1 Foreign Public Debt 14.7 12.2 10.1 8.7 7.6 Domestic Public Debt (Central Govt.) 27.5 29.0 29.9 29.4 33.0 Memo Items (% p.a.) GDP growth (1989 factor cost) 4.9 2.2 3.9 2.1 3.1 Consumer Inflation (%) 4.9 5.2 0.6 2.2 3.1 Terms of Trade (1990=100) 97.5 100.2 102.3 102.3 99.7 Reserves (mo. imports, fob) 7.1 5.0 4.6 5.5 6.1 Source: IMF Staff Reports, 08/96; Data provided by Fiji authorities. - 48 - Despite strong tourist activity in the first climate continues to be dampened by half of the year, economic performance in uncertainty surrounding the future of land 1997 was weak as domestic demand leases expiring in the short term, procedural remained sluggish. Uncertainties in the constraints, and public service attitudes sugar sector continued to weaken business which regulate rather than facilitate private confidence. Weak international commodity sector development. As long as these prices, particularly for gold, as well as concerns persist, policy reforms directed at depressed sugar output as a result of adverse stimulating investment will have limited weather, also negatively impacted economic impact. Growth prospects will remain poor performance. Real GDP growth was unless there is a stronger commitment to estimated at -1.8 percent for the year. stable and sound social and economic Consumer inflation eased to under 2 percent policies. by the middle of the year from a high of over 4 percent during the early months of Curbing Public Sector Wage Growth. the year. Inflationary pressures remained Central government current expenditures low for the rest of the year with continued continue to be disproportionately large, exchange rate stability and low inflation in amounting to 85 to 90 percent of total Fiji's trading partners. expenditure, while development expenditures are low and declining. The Key Policy Issues public sector wage bill currently accounts for almost half of recurrent expenditures, Resolving the NBF Financial Crisis. The while funds for purchases of goods and losses of the NBF have been larger than services, and operations and maintenance anticipated. Consequently, government have 'been curtailed, with the sharpest cuts expenditures, the fiscal deficit, and public concentrated in operations and maintenance. debt levels have risen significantly above These large imbalances in aggregate originally targeted levels for both 1996 and expenditure point to a problem of low 1997. A successful resolution of the development effectiveness, including low financial crisis without endangering productivity of government workers, macroeconomic stability will be essential for insufficient investment to provide essential the revival of investor confidence. support for private sector-led growth, and inadequate provision for maintenance and Resolving Policy Uncertainty. Although operation of existing government assets, there have been recent constitutional with consequent reduction in the return to reforms, the issue of expiration of land government investment. The present leases continues to cloud the economic strategy to reach a balanced budget by the environment. A speedy resolution of the year 2000 through yearly reductions in uncertainty surrounding agricultural land expenditures of non-core ministries is likely leases, particularly sugarcane land leases, to result in increased inefficiencies if are of priority for economic and social expenditure cuts are made in nonwage development. recurrent and development outlays. Controlling civil service wage levels and the Restoring Investment. Economic growth size of the public wage bill is key to in Fiji remains at around 2.5 percent per influencing the overall competitiveness of year, reflecting in large part the low the economy as well as fiscal and investment rate in the economy of about 12 macroeconomic stability. to 14 percent of GDP. Although recent constitutional reforms have been an Public Enterprise Reform and important step forward, the investment Privatization. Fiji has taken some - 49 - important steps in public sector refonn in Government Objectives and Policies: three areas: (a) civil service reform which Promoting Economic and Social Well- involves a movement towards contract being of Fijians employment and greater flexibility in hiring and firing of staff; (b) public enterprise The Government's priority goals over the reforms through corporatization as a first next two years are detailed in the document step; and (c) financial management reform, "Preparing for the 1997 Budget, Action essentially on planning and budgeting. Now, April, 1996." These are summarized While there is a comprehensive public as follows: (i) sustained real economic enterprise reform program in place, some growth to ensure poverty alleviation; (ii) a problems persist, including implementation sustainable government financial position, capacity and adjustment issues for workers. preferably with a balanced budget and manageable debt levels; (iii) growing levels Restructuring Sugar. With the gradual of employment (formal and informal) in the erosion of preferential sugar prices, Fiji will economy intended to ensure employment no longer be able to enjoy the benefits from rates of at least 95 percent of the total labor the subsidized sugar prices it currently force; (iv) improvements in the well-being receives under the Sugar Protocol of the of rural communities with rural incomes Lome Convention. Uncertainty in the sugar increasing to an average of at least F$175 industry has also been compounded in per week and reductions in poverty levels to recent years by the finalization of the review levels below those established in the of land leases under ALTA. As farmers 1990/91 Household Income and Expenditure have been uncertain about their future, they Survey; (v) improving health for Fiji's have been hesitant to invest in their farms in population as indicated by life expectancy at the fear that their leases may not be birth of at least 75 years by 2000; and (iv) renewed. Another direct consequence of continuing improvements in the level of this uncertainty has been the increasing education of Fiji's people to a point where reluctance of lending institutions to lend the combination of primary and secondary money to farmers for capital investment. school enrollment ratios in the country are at Given the importance of the sugar subsector least 88 percent. To achieve these in the Fiji economy, the need to resolve the objectives, the Government intends to move issue is critical. Recent efforts to improve quickly in the following policy areas: (i) efficiency in the industry include an improve operational efficiency and reduce agreement to pay sugar prices in line with the size of government; (ii) secure property quality rather than quantity of cane. The Fiji rights for every citizen; (iii) improve the Sugar Commission is also seeking operation of domestic markets; and (iv) government funding of F$125 million- over broaden external trading opportunities. five years to upgrade milling and transport infrastructure so as to improve productivity. - 50 - KIIBATI Population: 81,600 (1996) GDP: US$55 million (1996) GNP Per Capita: US$870 (1996) Introduction development record has been rather poor. With a GNP per capita of US$870 in 1996, While real GDP growth per capita has been Kiribati is in the category of low income negative for many years, there has been countries. The bulk of the population is some social progress, as indicated by the employed in the subsistence sector with increase in life expectancy from 51 years in formal employment being dominated by the the late 1970s to 57 years in 1985-90, and a public sector, which accounts for 95 percent decline in the infant mortality rate from 82 of gross investment and almost half of GDP. to 65 per 1,000 over the same period, as The private sector is small and well as an improvement in the primary underdeveloped. Although the natural school enrollment rate from 76 percent to 85 environment and infertile soil constrain percent for the six to nine year cohort. agricultural development, the nation These results reflect the Government's possesses abundant ocean resources, emphasis on health and education principally fish, seaweed, and manganese. expenditures over the years. But these Kiribati also obtains large inflows of income social indicators compare unfavorably with from abroad in the form of earnings from those achieved by other Pacific Island the Revenue Equalization Reserve Fund Countries. (RERF), fishing licenses issued to foreign fleets, and remittances from natives working After 1980, when mining operations ceased overseas in shipping and mining. Official to be the main economic activity, economic development assistance is also an important growth has been slow and erratic, reflecting element of the economy, having financed a the vulnerability of the country's main large public sector and contributed to a export commodities (copra and marine relatively underdeveloped private sector. products) to price and environmental shocks. After negative real per capita Recent Economic Developments growth rates during 1979-94, real GDP grew by an estimated 3 percent in 1995, largely Since its independence in 1979, Kiribati has driven by expansionary fiscal policies. Real achieved a solid record of financial stability, GDP growth is estimated to be less than 2 notwithstanding a limited range of economic percent in 1996, reflecting a decline in copra assets. This is reflected in overall budget production and fishing activities. Inflation surpluses in several years, relatively small has remained low at 4 percent in 1995, and deficits in other years, and a steady rise in negligible in 1996, owing to the use of the external reserves to around nine years of Australian dollar as national currency, and import cover. However, Kiribati's resistance to price increases for goods and services provided by public enterprises. - 51 - KIRIBATI: KEY MACRO INDICATORS, 1992-96 1992 1993 1994 1995 1996 Indicator Levels (US$ million) GDP (at current prices) 33.7 32.8 39.9 47.8 54.6 Govt. Revenues 51.4 46.9 47.9 50.9 43.8 Govt. Expenditures 39.9 32.6 38.0 44.5 47.7 Govt. Budget Deficit(-) 11.5 14.2 9.9 6.4 -3.9 Exports (fob) 4.8 3.5 5.3 7.4 5.8 Imports (fob) 37.1 27.8 26.4 35.2 37.4 Current Account Balance 3.5 5.2 13.0 5.3 -2.3 (after grants) Gross Reserves 223 266 283 308 330 Macro Balances (% GDP) Budget Deficit (-) 34.2 43.1 24.6 13.2 -7.2 External Current Account 10.5 15.7 32.5 11.0 -4.3 Balance Memo Items (% p.a.) GDP growth -1.6 1.0 1.7 3.3 1.9 Consumer Inflation (%) 4.0 6.1 5.3 3.6 -0.6 Reserves (yr. imports, fob) 6.4 9.6 10.1 8.7 8.7 Source: IMF Staff Reports, 05/97. In 1997, growth is estimated to be zero or toward private sector-led growth. The negative as a result of reduced government Government needs to pursue a more vibrant expenditures and a 45 percent fall in copra higher growth development strategy based production. Inflation rose to 2.2 percent, on a progressive right-sizing of the public and the underlying budget balance sector, and focus resources on core (excluding earnings on external assets) functions of government to gradually allow registered a significant surplus reflecting an increasing role for the private sector, abnormally high fishing license fees.- To church groups, non-government organiza- sustain growth, more concrete policies and ions and other stakeholders in the economy. actions are needed to encourage the The role of the private sector needs to be development of the private sector and enhanced through improvements in the trade reduce the size of the public sector. and tax regimes and the regulatory environment. Key Development Issues Improving Effectiveness of Government Achieving Higher Sustainable Growth. Expenditure. A restructuring of While an expansionary fiscal stance will government to emphasize its core functions stimulate the economy, albeit temporarily, should not only aim at shifting aggregate there is an urgent need for economic expenditures toward the core sectors of restructuring to re-orient the economy government, but should also focus on - 52 - changes in expenditure within sectors to divestment strategy to one of truly improve the efficiency of expenditure and commercializing operations of most public support government objectives. Non-wage enterprises while retaining them in the expenditures, especially operations and public sector. Divestment was considered to maintenance, should receive greater priority. be a possibility at a later stage. While in 1995, two public enterprises were liquidated Public Sector Reform. Up to late 1994, and successor companies were established government policy had emphasized the (also fully government-owned) in effect the importance of privatizing public enterprises Government has maintained control of most which dominate activity in virtually all of the public enterprises through their sectors of the economy. Until the early boards and supervising ministries. So far 1 990s, government subsidies to the there has been little success in truly enterprises were progressively reduced to commercializing any of the public enterprise encourage increased efficiency. However, operations, although feasibility studies of little progress was made in truly commercializing the postal operations and commercializing them. As most of the the philatelic office are being carried out. In enterprises continued to perform poorly view of the many years of unsuccessfully without significant changes in management commercializing the public enterprises, and and practices, they were also a drain on the considering the high cost to both the budget budget, both in terms of revenue forgone and the economy of maintaining inefficient and in terms of direct and indirect enterprises, the Government should government support such as subsidies, net reconsider its strategy and undertake a lending and government guarantees for bank program of divestment to let the market overdrafts. The Government which produce more efficient companies. assumed office in late 1994 changed the - 53 - FEDERATED STATES OF MICRONESIA Population: 110,000 (1996) GDP: US$226 million (1996) GNP Per Capita: US$2,050 (1996) Introduction were completed. The disappointing performance of economic activity in recent The Federated States of Micronesia has a years is largely attributable to sluggish narrow production base comprising activity in tourism, fisheries and agriculture, primarily subsistence farming, and reef and particularly copra, the main cash crop, deep-sea fishing. Manufacturing and other owing in part to an aging tree stock. The industrial activities constitute only a very poor state of public finances has also small component of GDP. The dominant adversely affected business activity in recent sector and the largest employer is the public years. Consumer inflation, based on price sector, accounting for over 75 percent of trends in the United States and Marshall GDP. As a small island economy, Islands because of the lack of compilation of development is constrained by the dispersal price indexes in the country, remained of the land mass, shortages of skilled labor, moderate at around 4 percent per year high wages and remoteness from markets. during 1994-96, down slightly from rates Social development indicators lag behind recorded during the previous two years. those of other Pacific Island countries, despite a comparatively high per capita The national government continues to income estimated at around US$2,050 in subsidize copra production through the 1996. Coconut Development Authority, which handles the purchase and export of copra. Recent Economic Developments Some diversification of agricultural production has occurred into pepper, Economic performance has been poor in bananas, betel nuts, and citrus products. recent years, characterized by low real Tourism activity continues to be limited to output growth, fiscal deficits and large niche markets, including ecotourism and external debt. Moreover, the country faces a shipwreck diving in the Chuuk and Yap difficult adjustment period over the next states. Growth remains hampered by the several years as U.S. Compact assistance is lack of infrastructure and distance from scheduled to be eliminated by 2001. Also, potential markets, while the development of because of the limited role of monetary resorts is hindered by the complex land policy due to the use of the U.S. dollar as tenure system and environmental concerns. legal tender, the burden of adjustment must Activity in the garment sector has not fall on fiscal policy. expanded in recent years. Both the national and state governments recognize the Real GDP grew by an average of only 1 potential role of foreign investment in percent per year during 1994-96, expanding and diversifying the productive substantially lower than an estimated growth base. A number of incentives are available of nearly 6 percent attained in 1993, when to attract foreign direct investment, fishing activity increased considerably and including duty-free access to the U.S. several major public investment projects market for most products. Foreign direct -54 - investment exemptions are offered only for estimated US$17 million in domestic exports. There are no (tax) exemptions payments arrears were accumulated, from income tax, gross revenue taxes, and particularly by the state government of import duties. The FSM intends to consider Chuuk.- In addition, domestic revenues fell the introduction of a broad-based and progress in reducing current expenditure consumption tax with excises on selected was limited. In 1995/96, the consolidated items. However, the investment approval budget deficit was estimated at 2 percent of process is cumbersome as both the national GDP, a substantial deterioration from the and state govemments must ratify each two preceding years. The formulation of a project. The weak legal infrastructure and consistent national fiscal policy continues to limitations on land ownership and use also be hindered by the structure of relations constitute impediments to potential between the national and state authorities. investors. While the national government has the responsibility for policy coordination, the The consolidated budgetary position of the state authorities have a high degree of government has remained weak despite autonomy in the implementation of lower capital spending. Although the budgetary policies. In recent months, overall consolidated fiscal position of the though, there has been a proposal to form an Government swung from a deficit of 0.5 FSM-wide Tax Authority to consolidate the percent of GDP in 1993/94 to a surplus of national, state and local tax administration 1.6 percent of GDP in 1994/95, an efforts. FSM: KEY MACRO INDICATORS, 1991192-95196 1991/92 1992/93 1993/94 1994/95 1995/96 Indicator Levels (US$ million) GDP (at current prices) 174.1 195.0 205.5 215.8 226.4 Govt. Revenues 155.5 162.7 166.2 172.5 169.4 Govt. Expenditures 164.8 169.0 167.3 169.1 173.4 Govt. Budget Deficit(-) -9.3 -6.3 -1.1 3.4 -4.0 Exports (fob) 21.0 28.1 66.3 69.6 73.1 Imports (fob) 123.4 137.2 160.0 164.5 167.6 Current Account Balance (after 2.3 -2.1 13.4 15.4 8.6 grants) Gross Reserves a/ 65.1 68.0 50.2 40.0 30.8 Macro Balances (% GDP) Budget Deficit (-) -5.3 -3.3 -0.6 1.6 -1.8 External Current Account Balance 1.3 -1.1 6.5 7.1 3.8 Foreign Public Debt 66.6 70.1 62.7 55.4 49.6 Memo Items (% p.a.) GDP growth -1.2 5.7 1.4 1.0 1.0 Consumer Inflation (%) 5.0 6.0 4.0 4.0 4.0 Terms of Trade (% change) Reserves (mo. imports, fob) 6.3 5.9 3.8 2.9 2.2 a/ Government financial holdings. Source: IMF Staff Reports, 07/96. -55 - Corresponding to the weak fiscal position, the competitive environment for the attraction of external current account deficit (excluding foreign investment. There were some reforms grants) has remained high at around 50 percent made to the taxation system as well, notably the of GDP in recent years despite higher fish enactment of a new Customs Act of 1997, exports. The deficit is estimated to have designed to increase customs revenues declined only marginally to 47 percent of GDP appreciably in the future. Good progress has in 1995/96. External debt, comprising also been made in financial sector reform, with government and government-guaranteed debt IMF technical assistance, including some continues to be high. At the end of the 1994/95 liberalization in interest rates. fiscal year, external debt outstanding stood at 55 percent of GDP, with substantial amounts on Key Development Issues commercial terms. External debt service amounted to the equivalent of 18 percent of Strengthening Public Finances. While the exports of goods and services. Government Government has responded in- the past to financial holdings had been progressively drawn declining external grants partly by resorting to down to less than three months of imports, about external commercial borrowing against future half the ratio attained three years before. At the Compact funds, as well drawdown of end of the 1995/96 fiscal year, government cash government cash holdings, the strategy is clearly reserves were estimated to have dropped further not sustainable. As the Compact assistance is to the equivalent of two months of imports. being phased out, there is an urgent need for wide-ranging fiscal adjustment measures Government Objectives and Policies including increased domestic resource mobilization and reduced public expenditures to Consistent with IMF recommendations, the curb consumption and lessen dependence on Government has formulated a structural reform imports. program which has been under implementation since 1995. The program aims at restoring Promoting Private Sector Growth. Private macroeconomic stability and promoting sector development of agriculture, fisheries and sustainable growth and external viability in the tourism is crucial to promoting external post-Compact era. The proposed strategy of viability. Growth of the private sector would promoting private sector activity and require the upgrading of labor skills, a consistent downsizing of the public sector was endorsed by regulatory framework, reform of the land tenure the national economic summit held in November system, continued simplification of foreign 1995, and by the donor community during the investment policy, a more efficient financial first Consultative Group meeting organized by system as well as further reforms to the taxation the Asian Development Bank in December system. To support expansion of the productive 1995. Considerable progress has been made base, including manufacturing and the tourist under the reform program during the past two sector, adequate infrastructure and services are years, particularly the recent National needed. The investment program would need to Government Restructuring that has contributed focus on development of social and economic to downsizing of the public sector, a major goal infrastructure to support private sector activity. of the economic reform effort. In the area of A comprehensive reform of the education private sector development, foreign investment system is also essential to provide education and policy has been simplified through the skills training more relevant to the needs of the enactment of a new Foreign Investment Act country. aimed at streamlining the foreign investment approval process, devolving most discretionary powers to the states and creating a more - 56 - MARSHALL ISLANDS Population: 58,000 (1996) GDP: US$108 million (1996) GNP Per Capita: US$1,860 (1996) Introduction The Marshall Islands has a narrow production Real GDP growth averaged less than 3 percent base consisting primarily of coconut harvesting per year during the early 1990s. However, and processing, subsistence farming and deep increased foreign investment in fisheries as well sea fishing. The government sector dominates as increased activity in the copra industry the economy, accounting for almost half of boosted economic growth to nearly 4 percent in fornal employment. As a small island 1995. Real output is estimated to have declined economy, economic growth is constrained by by nearly 3 percent in 1996, reflecting mainly the dispersal of atolls, shortages of skilled labor, recessionary conditions in the fishing industry as high wages and remoteness from markets. foreign investment declined, as well as reduced Social development indicators lag behind those copra output in response to unfavorable prices. of other Pacific Island countries, despite a Consumer inflation rose to 7 percent in 1995, up comparatively high per capita income estimated from 5 percent in 1993. This reflected mainly at around US$1,860 in 1996. higher prices for household supplies and clothing on account of reduced competition in Recent Economic Developments the retail sector as major retail outlet closed. Inflationary pressures are estimated to have Economic performance has been disappointing moderated to 4 percent in 1996. in recent years, characterized by low real output growth, unsustainable fiscal deficits, a weak The fiscal deficit was estimated at 2 percent of balance of payments and large external debts. GDP in 1995/96, substantially down from an The Government has exhausted its financial average of 13 percent of GDP recorded during holdings and borrowing capacity. The public the previous three years when capital sector remains overstaffed and inefficient, while expenditures expanded considerably on account there are only few job opportunities in the of increased spending on education, private sector. The country is now in the infrastructure and other public investment process of adjusting to the decline of assistance projects. Recurrent expenditures, particularly from the U.S. under the Compact of Free the wage and salary bill, were also high during Association, which requires substantial fiscal the period as controls on recruitment were not adjustment. Reform programs have been strictly enforced. The improvement in the designed and initial measures have been taken budgetary situation for the 1995/96 fiscal year which have already led to improvements in the was largely attributable to revenue-raising fiscal position. However, there remains an measures and cuts in current spending urgent need to continue the implementation of introduced in a supplementary budget during the required reforms in order to reach March 1996. Development expenditures were sustainable and self-reliant growth before 2001 also lower in 1996 despite construction of a when Compact assistance will terminate. government-owned hotel in that year. - 57 - The deficits of the early 1990s, financed largely to have declined to 118 percent of GDP in by borrowing against future Compact revenues, 1995/96 as government refrained from new have led to rising external debt and debt service commercial borrowing; however, the debt levels as well as exhaustion of government service burden remained high. The external financial holdings. At the end of the 1994/95 current account deficit (excluding grants), which fiscal year, external debt outstanding, mostly on has been unusually large at around 60 percent of commercial terms, stood at 138 percent of GDP, GDP, reflecting strong import demand and large while the debt service ratio amounted to 42 interest payments, declined to 50 percent of percent of exports of goods and services during GDP in 1996 as import demand weakened. the year. External debt outstanding is estimated MARSHALL ISLANDS: KEY MACRO INDICATORS, 1991192-95196 1991/92 1992/93 1993/94 1994/95 1995/96 Indicator Levels (US$ million) GDP (at current prices) 77.8 85.2 92.7 102.6 108.4 Govt. Revenues 67.2 72.9 70.9 76.7 74.9 Govt. Expenditures 87.7 84.9 83.4 89.4 76.8 Govt. Budget Deficit (-) -20.5 -12.0 -12.5 -12.7 -1.9 Exports (fob) 9.6 7.9 14.8 17.0 17.5 Imports (cif) 60.5 61.3 68.1 73.9 71.8 Current Account Balance (after -0.2 -1.0 0.0 -6.2 1.3 grants) Gross Reserves a/ 29.3 28.9 37.9 12.9 0.4 Macro Balances (% GDP) Budget Deficit (-) -26.3 -14.1 -13.5 -12.4 -1.8 External Current Account -0.3 -1.2 0.0 -6.0 1.2 Balance Foreign Public Debt 138.2 143.5 165.0 137.7 118.2 Memo Items (% p.a.) GDP growth 0.1 4.1 2.8 3.7 -2.5 Consumer Inflation (%) 10.3 5.0 5.6 7.3 4.0 Reserves (mo. imports, cif) 5.8 5.7 6.7 2.1 0.1 a/ Government financial holdings. Source: IMF Staff Reports, 07/96. Government Objectives and Policies Policy Reform Program (PRP), a comprehensive reform program, aimed at The Marshall Islands faces an extremely restoring macroeconomic stability, difficult adjustment period over the next downsizing the public sector and promoting several years because of the phased private sector growth. Donors endorsed the reduction of the United States Compact reform program during the first Consultative assistance and its scheduled elimination in Group Meeting held in December 1995 2000/01. In recognition of the daunting task under the sponsorship of the Asian ahead, the Government has prepared a Development Bank. Under the Public - 58 - Sector Reform Program, the main Promoting Private Sector Growth. In line component of the PRP, considerable with the Government's reform program, progress has been made since its adoption there is the need for a massive fiscal in 1996, albeit there has been some slippage adjustment, much of it front-loaded, to in timetables for meeting specific generate overall fiscal surpluses necessary conditions; also, the pace of reform has to meet debt service obligations and rebuild slowed. The main progress made includes a government financial holdings. This 25 percent reduction in civil service staff strategy should help to secure a significant since January 1996; other important reform fall in the external current account deficit measures announced in the FY98 budget through a steady increase in public sector include continued reduction in staff of the savings, while permitting a higher public service to meet agreed targets, investment necessary to support private termination of subsidies to Air Marshall sector development. Growth of the private Islands and continued public sector wage sector would require a more efficient freeze, a second tranche release condition to financial system, a consistent regulatory the ADB program loan. Also notable is the framework, reform of the land tenure rationalization of the tariff structure during system, and simplification of foreign FY96, simplification of the payments investment policy. To support expansion of system and amalgamation of ministries to the productive base, including minimize duplication of services and reduce manufacturing and the tourist sector, the range of services provided by the adequate infrastructure and services are Government. Various other reforms are also needed. The investment program would at different stages of implementation, need to focus on development of social and including the introduction of a performance- economic infrastructure to support private based budgeting system, the introduction of sector activity. Private sector development a broad-based consumption tax (value added should focus more on providing support for tax) as well as measures to privatize public small entrepreneurs and traders. enterprises. Key Development Issues Other Reform Measures. As the Compact assistance is being phased out, other fiscal Promoting a Higher and Sustainable adjustment measures should include Level of Growth. In view of declining per increased domestic resource mobilization capita real output, there is an urgent need to and reduced public expenditures to curb intensify implementation efforts under the consumption and lessen dependence on reform program to achieve a higher and imports. Also requiring attention is the sustainable real output growth. U.S. downsizing of the public sector workforce, financial assistance provided under the reduction in wages, amalgamation of Compact and intended to provide the Ministries and a continued reduction in necessary resources to create the subsidies to public enterprises, particularly infrastructure and institutions required for Air Marshall Islands. There is also the need the Marshall Islands to function as a fully to discontinue and further contract out a independent state has met with little success. number of functions currently undertaken by Clearly, past policy failures need to be the Government. addressed and advantage taken of future aid to improve economic performance. - 59 - REPUBLIC OF PALAU Population: 18,125 (1996) Est. GDP: US$145 million (1996) GDP Per Capita: US$8,000 (1996) Introduction markets, vulnerability to natural hazards and other natural handicaps, as well as lack of The Republic of Palau became a member of the professional skills and poor infrastructure. IMF and World Bank Group effective December However, the rich marine resources of Palau, as 16, 1997. The country, consisting of more than well as its unspoiled natural beauty, offer the 200 islands, was part of the Trust Territory of country opportunities for further growth and the Pacific administered by the United States development. The population is highly following World War II, until it became a self- urbanized with easy access to basic services and governing republic in 1980. In October 1994, a employment. The Government continues to be Compact of Free Association signed with the the largest employer, although its share of total United States in 1982 (later amended in 1986) employment declined to 30 percent in 1995, became effective, rendering the Republic of down from 38 percent in 1990, while the share Palau a sovereign state. Under the terms of the of other service sectors increased from 37 Compact, the United States agreed to provide percent to 46 percent over the same period. economic assistance and benefits to Palau over a 15-year period in the amount of US$500 million, Recent Economic Developments adjusted for inflation. The economy is estimated to have grown Besides a large public sector, the economy has a substantially after independence in 1994 largely narrow production base, consisting primarily of due to strong tourist arrivals as well as the fishing and tourism, albeit in recent years the inflow of Compact funds which has fueled production base has benefited from foreign strong growth in consumption activity over time. direct investment inflows as well as foreign At over 60,000 visitors in 1996, tourist and labor. The services sector dominates the business arrivals was about three and a half economy, accounting for around 80 percent of times the country's population during that year. GDP in 1996. The industrial sector, rather Nominal GDP expanded at an average rate of small, constituted 11 percent of GDP while nearly 13 percent per year over the 1991/92 to agriculture (including fisheries) and the 1995/96 period notwithstanding moderate subsistence sector (comprising subsistence declines during the early 1990s when fishcatch agriculture and inshore fishing) contributed 7 dropped and construction activity stalled, in part percent and 2 percent of GDP respectively in due to weak project implementation capacity. 1996. Although no systematic price information is currently available, consumer price inflation is As a small island state, the development considered to have increased during 1990-96 as constraints faced by Palau are akin to those import prices in the U.S. its main trading found in other Pacific Island countries. These partner, rose and the U.S. dollar depreciated include remoteness from major external over the period, raising import prices of non-US sourced goods. - 60 - REPUBLIC OF PALAU: KEY MACRO INDICATORS, 1991192-95/96 1991/92 1992/93 1993/94 1994/95 1995/96 Indicator Levels (US$ million) GDP (at current prices) 82.5 75.9 88.9 117.6 145.1 Govt. Revenues 47.5 49.4 49.6 168.1 67.2 Govt. Expenditures 50.5 46.6 50.4 67.6 75.1 Govt. Budget Deficit (-) -3.0 2.8 -0.8 100.5 -7.9 Exports (fob) 26.9 17.7 12.6 13.9 14.3 Imports (fob) 38.1 42.2 44.2 60.4 72.4 Current Account Balance 16.2 4.8 5.4 71.8 23.3 (after grants) Macro Balances (% GDP) Budget Deficit (-) -3.6 3.7 -0.9 85.5 -5.4 External CurrentAccount 19.6 6.3 6.1 61.1 16.1 Balance Memo Items (% p.a.) Nominal GDP growth -1.7 -8.0 17.2 32.2 23.4 Source: IMF Staff Report, 07/97. After averaging a deficit of over 1 percent before declining slightly to 40 percent of of GDP during the early 1990s, the overall GDP in 1995/96. On an annual average fiscal balance (including grants), swung into basis, the fiscal deficit (excluding grants) a substantial surplus in the mid-1990s, averaged 40 percent of GDP over the 1990- registering the equivalent of about 91 96 period. percent of GDP in 1994/95. The substantial improvement in the budgetary position The external sector has been characterized during 1994/95 largely stemmed from a by a narrow export base (consisting surge in compact grants which were primarily of fish exports, mainly high-grade estimated to have increased nearly five-fold fresh tuna), heavy reliance on imports, compared to previous years, owing to front- substantial earnings from tourism and large loading. The overall fiscal position shifted foreign assistance, mainly U.S. Compact into a deficit of about 5.4 percent of GDP in funds. Owing to rising tourism receipts in 1995/96 as compact funds declined as recent years as well as sizable inflows of scheduled and development expenditures compact grants, the external current account increased sharply as delayed capital projects has been in surplus, rising to 61 percent of were implemented. Excluding grants, GDP in 1994/95, up from 6 percent of GDP however, the budgetary position was in in 1992/93, but dropping off to 16 percent of substantial deficit during the 1990s and GDP in 1995/96, the average level attained rising. At the end of 1994/95, the fiscal at the beginning of the 1990s. The deficit stood at 47 percent of GDP, up 10 unusually large surplus in 1995/96 was percentage points from three years earlier, mainly accounted for by the front-loading of - 61 - Compact grants. The overall external size of government; and (iii) identification balance, reflecting mainly changes in the of financing strategies, including tax reform, financial holdings of the Government to offset the decline in U.S. assistance over (excluding Compact Section 21 1(f) Trust time. Within the framework of the Master Fund) has generally been in deficit except in Plan, a five-year Development Plan for 1995/96, when it recorded a large surplus 1994/95 to 1998/99 was also adopted with amounting to US$96 million partly due to a specific emphasis on infrastructure and large inflow of grants received for capital other capital outlays. improvement. Palau's external reserves, which include unspent Compact funds Key Development Issues earmarked for capital improvement projects, as well as the Trust Fund for use in Developing the Productive Capacity of financing future current expenditures of the the Economy. Over the coming years, as national government, stood at SDR 163 Compact funds are programmed to decline, million (US$234 million) at the end of the key challenge facing the Government is December 1996, equivalent to about 19 to develop the productive capacity of the months of total imports of goods and economy and to make successful transition services. from a subsistence to a market-based economy. Accordingly, the Government's A source of vulnerability to which Palau approved National Master Development will have to adjust in recent times is the East Plan that sets forth strategies for the pursuit Asian financial crisis. With about 85 of sustained economic and social percent of estimated tourists and business development over a 25-year period, augurs visitors originating from Asian countries, well for the future. foreign exchange receipts are likely to be adversely affected, leading to a possibly Strengthening Public Finances. The weaker external position. Government's fiscal strategy over the medium term should aim at strengthening Government Objectives and Policies the country's financial holdings rather than borrowing against future Compact funds. In anticipation of the cessation of U.S. Toward this end, the Government should Compact assistance by 2009, the adhere to its intentions to pursue wide- Government approved, in 1996, a National ranging fiscal reforms including broadening Master Plan which sets forth the framework the existing limited tax base. and policies for the pursuit of sustained economic and social development over a 25- Other Issues. In line with the objectives of year period. The main long-term the Master Plan, there is the need to development objectives of the Master Plan accelerate private sector development in are summarized as follows: (i) a substantial order to promote external viability. As the shift in economic activity from the public Compact assistance is being phased out, sector to the private sector aimed at other fiscal adjustment measures should increasing productivity and efficiency of include increased domestic resource resource use; (ii) strengthening of mobilization and reduced public Government institutions to improve expenditures to curb consumption and coordination of decisionmaking processes lessen dependence on imports. while, at the same time, reducing the relative - 62 - SAMOA Population: 167,100 (1996) GDP: US$175 million (1996) GNP Per Capita: US$1,200 (1996) Introduction In spite of the low growth of output, the country now enjoys a healthy international reserve With a GNP per capita of US$1,200 in 1996, the position, a moderate rate of inflation, and a Samoan economy has long been characterized relatively stable exchange rate. Macroeconomic by low productivity , low growth and adominanstability has been achieved, inter alia, through by blo spctity lot growt an ta domnan sharply shrinking the fiscal deficit, rebuilding million economy (1996 estimate) is in private sector confidence, maintaining political subsistence form Primary sectors (including stability and continuity in government subsistence form.ultPrimfrysetors (ncuingeri administration. The fiscal balance swung from a subsistence agriculture, forestry and fisheries)3eii qiaetto2 ecn fGPi account for 40 percent of 1996 GDP, while the 19293(t teq peak to ta per.io seconary ectos (mnufacurin, inustr and 1992/93 (at the peak of the rehabilitation period) secondary sectors (manufacturing, industry and to a surplus of 1.9 percent of GDP in 1995/96, construction), and services sector (excluding dumanytthcopeinfccle-ltd govemmnt) ech fo aboutone-furth; due mainly to the completion of cyclone-related government) each for about one-fourth; rehabilitation projects, which were financed by government services accounted for 11 percent ofrocsinlbroin.TeGvrmn' GDP. The economy is open with total trade coesinlbrwng ThGvmet' (god The serc s) aopnwith total traen overall deficit target for 1996/97 is projected at (goods and services) accounting for 115 percent 3preto D,t efnne oeyb of GD in 996.The ajorcashcrop are 3 percent of GDP, to be financed solely by cofonGDP inro 1996. Theoa. mjrahcpae foreign loans. Monetary policy was relaxed coconut, taro and cocoa. during 1995, a time of marked increase in credit. Inflation declined from 18 percent in 1994 to 1 percent in 1995, reflecting improved food F gthe adverse economic shocks of the supply (including small recovery in taro Following 19 when the economy was hit by two production), before accelerating to 7.5 percent in early 1990s when the economy was hit by two. severe cyclones, economic performance has 1996; non-food inflation continues to be a improved considerably during the mid-i1990s, relatively modest 3 percent. Gross official reflecting a recovery in agricultural production, reserves have averaged over 6 months of import reconstruction of infrastructure following the cover during the past five years. cyclones, rebounding of tourism, and a tight The return of the Government in April 1996 has fiscal stance. Real GDP increased by about 10 stabilized political uncertainties and set the stage percent in 1995 and by a further 6 percent in for a vigorous implementation of public sector 1996 to reach its pre-cyclone level of 1989. reform and privatization, which the Government With population growth rate of 0.6 percent per initiated in the early 1990s. In spite of favorable year (net of migration), this represents a total of social indicators, the economy remains 4.3 percent fall in per capita income between structurally weak and highly dependent on 1989 and 1996. foreign aid remittances from expatriate Samoans. - 63 - SAMOA: KEY MACRO INDICATORS, 1992-96 1992 1993 1994 1995 1996 Indicator Levels (US$ million) GDP (at current prices) 119.7 121.3 136.9 155.0 175.3 Govt. Revenues 64.6 71.9 70.3 87.9 103.3 Govt. Expenditures 83.7 98.0 85.3 102.0 100.2 Govt. Budget Deficit (-) -19.1 -26.1 -15.0 -14.1 3.1 Exports (fob) 5.8 6.4 3.5 8.8 10.1 Imports (cif) 110.1 102.7 80.1 92.2 99.0 Current Account Balance -25.4 -31.0 5.8 9.4 15.6 (after grants) Gross Reserves 56.9 47.9 47.0 47.8 56.8 Macro Balances (% GDP) Budget Deficit (-) -16.5 -22.0 -11.5 -9.6 1.9 External Current Account -21.2 -25.6 4.2 6.1 8.9 Balance (after grants) Foreign Public Debt 98.5 159.8 114.6 110.0 95.2 Memo Items (% p.a.) GDP growth -0.2 4.1 -6.5 9.6 5.9 Consumer Inflation (%) 8.5 1.7 18.4 1.0 7.5 Terms of Trade (% change) 6.8 10.5 -18.3 -10.6 -0.1 Reserves (mo. imports, cif) 6.2 5.6 7.0 6.2 6.9 Source: IMF Recent Economic Developments, 03/97; World Bank DRS. Key Development Issues central element of the public sector reform is the implementation of the performance Public Sector Reform. The Government budgeting framework. During 1995-96, has formulated a comprehensive public- performance budgeting was implemented in sector reform programn aimed at improving the Departments of Agriculture, Public the efficiency of the public sector and fiscal Works and Treasury. For the 1996/97 fiscal management. The main elements of the year, the new framework was extended to all reform strategy include commitments to (i) departments. The new focus on outputs reduce the relative role of the public sector necessitated the integration of the old and withdraw from certain services that recurrent and development budgets, and could be more efficiently carried out by the accounting systems were recast to account private sector; (ii) reform the financial for the costs incurred in production of system through the establishment of a outputs. Outputs are classified according to performance budgeting framework and the whether they are delivered and controlled phased devolution of accounting functions by the same departnent, provided by a third to line agencies; and (iii) enhance the party or transacted on behalf of the state. management of line agency personnel Full implementation of the reform program through the delegation of human resource will take several years because of the need operational functions to line agencies. The for extensive personnel training and - 64 - institutional retooling. Efforts to refine and necessary to improve the performance of expand the output budgeting system will state enterprises. concentrate on (i) establishing management and budget plans for all on-budget agencies Addressing Financial Sector early in the fiscal year; (ii) reducing the Liberalization. The existing system of number of outputs and simplifying the direct instruments creates distortions in the associated cost structure; and (iii) financial market. Plans for moving to a developing rolling three-year estimates of system of indirect controls have been in specific outputs for long-term planning. place for some time and considerable The public sector reform program, along progress has been made in establishing the with stable financial policies, should preconditions for a successful transition, contribute increasingly to private capital particularly with respect to a stable formation. macroeconomic environment and consolidating the fiscal position. While the Improving Private Sector Development. process needs to be carefully managed, The Government recognizes the centrality of efforts could now be intensified to carry out the private sector as the engine of economic the transition during the course of 1998. growth, and it is increasingly forging a development partnership between public and Other Reforms. Land reforms, agricultural private sectors in pursuing private sector diversification, rationalization of industrial development. Given the relatively low share incentives, and streamlining of investment of private investment in the past and the procedures are required if Samoa is to need to progressively improve the role of become more competitive. the private sector for accelerating economic growth, the Government has intensified its Government Policies and Objectives efforts in this area. In early 1996, the Government clarified and articulated its For several years now, the Government has approach towards the private sector and declared its commitment to promoting the economic development through a private sector as the engine of economic "Statement of Economic Strategy: A New growth. To this end, it has withdrawn from Partnership." In particular, progress has some activities altogether; important public been made recently on reducing and services have been contracted out to private streamlining import tariffs, privatization of businesses; state-owned enterprises have public enterprises, and on the adoption of been wholly or partially privatized; deep APEC non-binding conditions. cuts have been made to public expenditure; and a forceful start has been made to Privatization. The principal feature of the reforming the fiscal system. The Government's private sector development Government is also committed to forging an strategy is the privatization of state-owned effective partnership with the private sector enterprises in order to raise efficiency and and other stakeholders. In that regard, the productivity while reducing the size and Government intends to work towards the presence of government in the economy. creation of a "level playing field" on which Considerable progress has been made in businesses can compete on equal terms with formulating a privatization strategy and in one another, with foreign competitors and improving the poor performance of State with the public sector in its role as a supplier owned enterprises. The Government needs of goods and services. Measures to promote to focus its efforts on divestitures slated for growth in the private sector will center on 1996/97 and to take other measures as the creation of a less regulated economic environment; continuing reform of the fiscal -65 - system, which will increasingly incorporate the 1998/99 budget a comprehensive incentives to investment without the need package of fiscal reforms focusing for discretionary intervention; the sale of particularly in the areas of tariff and taxation shares in state-owned enterprises (primarily reform. These reforms, which include major to citizens); and determined efforts to make reductions to import duties and excises, and and more available for productive use.In further cuts to income tax, are intended to May 1998, the Government announced in complete the taxation reform process begun five years ago. - 66 - SOLOMON ISLANDS Population: 386,700 (1996) GDP: US$363 million (1996) GNP Per Capita: US$960 (1996) Introduction weaknesses in the financial system and delayed the onset of a severe crisis. Real With a GNP per capita of US$960 in 1996, GDP slowed considerably to an estimated the Solomon Islands economy is dominated 3.5 percent in 1996, down from a high by export-oriented production involving tree growth of over 7 percent in 1995. The crop plantations, commercial fishing and slowdown in the economy in 1996 is in part logging; a large public services sector; and a attributable to a weak agricultural sector subsistence agricultural sector that provides caused by adverse weather, depressed fish the main source of livelihood for a vast catch and output of key agricultural majority of the population. Foreign aid commodities, mainly copra, coconut oil, inflows have, until recently, averaged about palm oil and cocoa. A moderate 20 percent of GDP annually; nonetheless, improvement in log shipments in 1996 in improvement in social and economic response to favorable prices was insufficient conditions has been slow. to offset the unfavorable developments in the other agricultural sub-sectors. The real Recent Economic Developments GDP is estimated to have declined by about I percent in 1997. The economy of Solomon Islands is experiencing an unprecedented financial After declining from over 14 percent crisis characterized by mounting domestic (annual average percentage change) in early and external debt service arrears, falling 1996, to 7 percent in early 1997, consumer revenues and high expenditures, and an inflation (Honiara Retail Price Index) has over-exposed financial sector that threatens edged higher over 1997 reaching nearly 9 the economic and financial stability of the percent by -mid-year. Inflationary pressures country. The problem is compounded by an remained higher than the country's trading unsustainable rate of deforestation, falling partners through the rest of 1997, resulting social indicators, deteriorating physical in continued downward pressure on the infrastructure, and a bloated public sector. exchange rate or further losses in In recent months, a collapse in the prices of competitiveness. The Solomon Islands log exports amidst accumulation of unsold dollar was devalued by 20 percent in inventories (since late 1997) has brought December 1997, reversing the earlier felling to a standstill. appreciation of the real effective exchange rate. Fueled by intensive exploitation of forest resources, in part due to soaring Increased logging revenues combined with international timber prices, real GDP growth expenditure restraint, shrank the fiscal averaged more than 6 percent per year deficit to about 2.4 percent of GDP in 1995 during 1992-95, considerably higher than from the equivalent of over 13 percent of rates achieved in earlier years. This has, GDP in 1991. However, continued however, masked deep underlying government borrowing from the domestic - 67 - banking system resulted in a significant The external reserve position improved in accumulation of external and domestic 1996, having deteriorated steadily during arrears as legal limits of such borrowing 1992-95. This development mainly reflects were reached. The fiscal deficit has improvements in the current account due to increased further since 1995 as a result of a higher log export receipts and high net sharp downturn in revenue reflecting a capital inflows from official as well as decline in commodity prices and more private sources. Foreign exchange reserves subdued domestic demand conditions after increased to SI$ 110 million at end- 1996, up the completion of a number of major sharply from SI$52 million at end-1995. construction projects. With budget control However, by end-December 1997, gross and reporting completely lacking, overly official reserves had dwindled to SI$98 optimistic projections diluting transparency million (equivalent to about 2.6 months of and continuing difficulties in raising import cover), as the financial crisis offshore and domestic funds, a substantial deepened. further build-up in arrears has occured. By end-December 1997, total govemment outstanding arrears amounted to an estimated SI$192 million. SOLOMON ISLANDS: KEY MACRO INDICATORS, 1992-96 1992 1993 1994 1995 1996 Indicator Levels (US$ million) GDP (at current prices) 209.0 260.2 295.5 327.2 362.6 Govt. Revenues 105.6 107.4 139.1 128.3 148.6 Govt. Expenditures 120.7 127.7 155.3 145.8 168.4 Govt. Budget Deficit (-) -15.1 -20.3 -16.3 -17.5 -19.8 Exports (fob) 102.9 129.1 143.7 168.3 162.4 Imports (cif) 111.5 136.9 142.2 154.5 151.5 Current Account Balance (after -8.1 -7.4 -2.2 9.3 4.9 grants) Gross Reserves 22 19 17 15 32 Macro Balances (% GDP) Budget Deficit (-) -7.2 -7.9 -6.6 -2.4 -4.0 External Current Account Balance -3.9 -2.8 -0.7 2.8 1.4 Foreign Public Debt 44.1 35.9 33.0 30.7 27.3 Domestic Public Debt (Central 31.3 30.5 32.0 30.8 27.2 Govt.) Memo Items (% p.a.) GDP growth 9.5 2.0 5.2 7.0 3.5 Consumer Inflation(%) 10.7 9.2 13.3 9.6 11.8 Terms of Trade (% change) 3.1 49.4 9.6 -13.2 7.8 Reserves (mo. imports, fob) 2.3 1.7 1.4 1.2 2.6 Source: Data provided by Solomon Islands authorities; IMF Staff Reports, 03/98; Staff estimates. - 68 - Key Development Issues timber harvesting. Measures to be considered include halting new logging Improving Financial Management. licenses as well as phasing out export tax Financial mismanagement resulting in large exemptions. The Government's initiative to fiscal deficits and high debt levels, has been cancel all remissions and exemptions the main cause of substantial macro- effective November 10, 1997, is laudable economic imbalance and financial instability and should be built upon by reviewing all in recent years, particularly since 1995. other exemptions granted by the Foreign Despite substantial growth in government Investment Board over the medium term. revenue between 1991-96, averaging around The already weak export price monitoring 18 percent per annum, similar growth rates system for log exports has collapsed in public expenditure resulted in fiscal following imposition of austerity measures deficits amounting to around SI$340 million earlier in 1997. Re-establishment of a in total over these years. The vast majority working price monotoring system should be of government expenditure over this period a priority as it would significantly was on recurrent spending, while around 95 strengthen revenue collection from the percent of the deficit has been financed from forestry sector. the domestic banking system and the National Provident Fund, and, in more Civil Service Reform and the Wage Bill. recent times, through the build-up of arrears. After years of rapid growth in public Debt service costs have increased by around employment, the Government is confronted 15 percent per annum over these years. with a severe financial crisis and is hard Addressing the high fiscal imbalances is the pressed to even pay its employees, let alone key to promoting a more sustainable pattern provide resources for goods and services. In of social and economic development. line with the rise in the number of civil servants, the wage bill has claimed on Improving Forest Management. Since average about 40 percent of total recurrent 1992, developments in the forestry sector budgetary resources over the past three have been driven by a rapid increase in the years and has crippled government finances rate of exploitation-log exports increased 85 to the extent that service delivery has percent to about 550,000 cu. meters. Since stagnated in many areas and deteriorated in then, timber exports have increased at over some, such as maintenance of physical 10 percent in volume terms each year and infrastructure particularly in rural areas. To are estimated to have been about 811,000 address the present financial difficulties, it is cu. meters in 1996. The level of cut imperative that the wage bill is brought associated with these export levels is under control in the short run through a unsustainable relative to Solomon Islands reduction in allowances and abolishing endowment of forest resources. A 1993 vacant positions. Over the medium term, forest inventory placed the sustainable level the Government would need to implement a of cut at about 300,000 cu. meters per year. well-designed civil service reform program Thus, the rate of logging during the past five based on the following priciples: (i) a clear years has been double what sustainable definition of the core functions of practice would warrant and it is estimated government-namely provision of basic that at these rates of harvesting, the services, ensuring national security and Solomon Islands will deplete its forest maintaining law and order; (ii) identification resources within 10 to 15 years. Clearly, and removal of duplicate functions and urgent action is required to drastically privatization of those areas where the reduce the present unsustainable rate of private sector could be an efficient agent; - 69 - (iii) corporatization of certain functions to Solomon Islands has been poor with no improve accountability, enhance dividends being paid to the Government in productivity and rationalize staffing and 1997. All enterprises in the corporation's operations; and (iv) reduction of numbers portfolio need to be evaluated and business through removal of over-aged and plans established for loss-making ones unauthorized employees. The Govern- including privatization options. ment's stated policy intention to reduce the number of government ministries from 16 to Government Objectives and Policies. 10 needs to be pursued in the context of a comprehensive civil service reform The Government is intending to undertake a program. Policy and Structural Reform Program aimed at addressing the present financial Public Enterprise Reform. Public difficulties while restructuring the economy enterprises and statutory authorities number to achieve sustainable and broad-based over 30 in the Solomon Islands and economic growth. The required structure contribute significantly to GDP. However, and decisionmaking committes have been despite significarnt capital investment over established to build consensus and support past decades, overall returns to the amongst various stakeholders, including Government have been negligible and Parliament, Government Caucus, Cabinet, services are generally poor. Statutory the public sector, the private sector, trade Authorities, which number over 20, have unions, civil society, and the donor constituted a substantial drain on public community. The organizational structure, as finances. The Government needs to well as a broad reform agenda focusing on formulate a strategy to reduce its role in macro and micro economic policies to many of these areas, improve service achieve stability and enhance productivity delivery and increase cost recovery. and competitiveness, including public sector Priorities should be the Ports Authority, reform to reduce the Government's Electricity Authority, Commodity Export involvement in economic activities and Marketing Authority and the Livestock promote private sector-led growth, has been Development Authority. In the case of developed and presented in a government enterprises, there is a clear need for document entitled, "Framework of Policy evaluation and restructuring. The per- and Structural Reform Programme." formance of the Investment Corporation of - 70 - TONGA Population: 106,000 (1996) GDP: US$178 million (1996) GNP Per Capita: US$1,640 (1996) Introduction turned negative in the subsequent year. The With a per capita income of US$1,640 in sluggish performance of economic activity 1996, the Kingdom of Tonga ranks among in recent years is largely attributable to poor the lower middle income group of performance of the squash industry which developing nations. The economy is has been adversely affected in recent times dominated by agriculture and services. by diseases, marketing problems, soil Agriculture accounts for 37 percent of GDP depletion, shortage of crop financing and and consists mainly of production of growing foreign competition. From 4,000 domestic food crops and a narrow range of metric tons in 1989/90, squash production cash crops (copra, squash, vanilla, and and exports, which had risen to 18,000 melons). Services account for nearly 50 metric tons by 1993/94, dropped sharply to percent of GDP, of which about one third is 9,000 tons in 1995/96. The 1995/96 crop government activity in one form or another. was also adversely affected by a severe drought as well as quota restrictions. The Tonga has achieved commendable social export quota, which had been unpopular progress as reflected by a life expectancy of with growers, was abolished in advance of 69 years (1995) and a literacy rate of almost the 1996/97 planting season. Nonetheless, 100 percent (in the Tongan language), affected by diseases, the 1996/97 harvest among the highest in the region. Tonga's was only about 10,000 tons, while prices favorable physical environment, and rich were about half the 1995/96 level. cultural traditions, including the extended family systems, land ownership, and the role Reflecting movements in squash exports, of the churches, have endowed the Tonga's traditionally large trade deficit population with a safe and secure lifestyle. began to widen in 1993/94 as squash exports However, further improvements in the declined, while imports, fueled by quality of life may not be possible without expansionary financial policies, continued to sustainable economic growth and rise. Consequently, the external current corresponding increases in government account balance swung into substantial revenues. Budget constraints may force cuts deficit by the mid-1990s compared to in expenditures. Eventually, social progress surpluses achieved during the early 1990s. made to date may suffer erosion unless The current account deficit averaged nearly adequate resources are maintained through 6 percent of GDP during 1993/94 to sustainable economic growth. 1994/95 and improved a bit in 1995/96 as imports declined. Gross external reserves Recent Economic Developments fell sharply to 4.8 months of import cover by end-1995/96 compared to a level of 8 After years of expansion in the early 1990s months in 1992/93. This sharp decline when economic growth was largely fueled largely reflects a massive expansion of by booming squash exports, real GDP domestic credit to the private sector by as growth slowed considerably in 1994/95 and much as 38 percent in 1994/95, with the -71 - entry of two new commercial banks. fiscal balance swung from a surplus of However, credit expansion had moderated to nearly 3 percent of GDP in 1993/94 to a 10 percent in 1995/96 following tighter deficit of 1 percent of GDP in 1995/96. monetary policy. Contributing to the deficit was also an expansion in development expenditures After recovering from a period of large brought on by large aid-financed projects in deficits during the late 1980s and early infrastructure, particularly power 1990s, fiscal policy again turned development and road upgrading. The expansionary in 1993/94. The recurrent 1996/97 budget restrained recurrent surplus, which had reached 4 percent of expenditures to the 1995/96 level but GDP in 1993/94, declined to 2.5 percent of envisaged a further increase in development GDP in 1995/96, stemming largely from a expenditures. The deficit is estimated at 10 percent cost of living adjustment to about 6 percent of GDP. government wages in 1995/96. The overall TONGA: KEY MACRO INDICATORS, 1991192 to 1995/96 1991/92 1992/93 1993/94 1994/95 1995/96 Indicator Levels (US$ million) GDP (at current prices) 140.1 145.0 151.9 164.8 177.9 Govt. Revenues 53.6 61.5 65.4 75.9 75.2 Govt. Expenditures 62.7 58.5 58.2 77.0 77.0 Govt. Budget Deficit (-) -9.1 2.9 7.2 -1.1 -1.8 Exports (fob) 16.6 11.9 16.1 14.0 13.6 Imports (fob) 48.0 50.8 54.5 69.8 62.0 Current Account Balance (after 3.8 3.0 -8.0 -9.8 -4.7 grants) Gross Reserves 29.6 35.6 31.5 25.7 25.0 Macro Balances (% GDP) Budget Deficit (-) -6.6 1.8 2.8 -3.2 -1.0 External Current Account Balance 2.7 2.1 -5.3 -5.9 -2.6 Foreign Public Debt 36.3 35.9 34.0 38.1 33.6 Domestic Public Debt (Central Govt.) 10.1 12.5 7.4 7.1 6.6 Memo Items (% p.a.) GDP growth 0.3 3.8 5.9 2.3 -0.4 Consumer Inflation (%) 8.7 3.1 2.4 0.3 2.8 Terms of Trade (% change) Reserves (mo. imports, fob) 7.4 8.4 6.9 4.4 4.8 Source: IMF Staff Reports, 01/97; Data provided by Tongan authorities. Consumer inflation has been trending import prices and a drought. Following downwards in recent years compared to the fiscal restraint, inflation declined to under 1 early 1990s when inflation soared to around percent in 1994/95 despite the acceleration 10 percent as a result of the expansionary in credit, the impact of which was mainly fiscal stance, large wage increases, high felt in the external sector. Inflationary -72 - pressures are estimated to have picked up Public Sector Reform and Privatization. moderately during 1995/96. With a public service of 4,195 employees in FY 95/96, the size of the wage bill Government Objectives amounted to an estimated 54 percent of total current expenditures. As a result, nonwage The declared objective of the budget for expenditures have suffered, given the limits FY95/96 was to build on three pillars: (i) of the resource envelope. Specifically, the keeping public spending levels in line with allocation for operations and maintenance available resources, implying restraint in the has contracted to an estimated 7 percent of wages bill in particular; (ii) reduction of the the total, with adverse consequences for role of the Government in commercial asset maintenance. Likewise, funds activities; and (iii) a focus on improving the available for the purchase of goods and efficiency of the public sector rather than services has also contracted. Also, at the increasing the already heavy tax burden, aggregate level, the existence of a large falling essentially on external trade and a number of public enterprises places a heavy narrow domestic tax base. Similarly, the burden on public finances. In this regard, overriding objective in the FY96/97 budget the Government should consider, as a first is to control public spending by limiting step, privatizing commercial activities of recurrent outlays, including the relatively low strategic value that would be rationalization of the civil service and efficiently managed by the private sector. maintenance of an open and competitive Thus, a need exists for a progressive right- economy. The Government intends to sizing of the public sector, with public revise the tax structure to make it more expenditures and public enterprises focused equitable, simple, efficient and market- on core areas and leaving other activities to oriented. the private sector, church groups and nongovernment organizations. Plans to Key Development Issues privatize public enterprises and/or commercialize provision of public service Restoring Economic Growth. With the need to be revitalized to enable the recent downturn in the economy and Government to concentrate better on its growing unemployment, particularly among priority areas where it has comparative the youth, there is an urgent need for the advantage. Churches and NGOs should be Government to pursue a higher growth encouraged to carry on and further develop development strategy based on a progressive their service provision roles in the social and right-sizing of the public sector and a other sectors, since it would be more cost gradually increasing role for the private effective for the Government to provide sector. A key issue is the ability of the additional support to these organizations private sector to generate adequate jobs for a rather than duplicate their efforts. growing labor force, as well as exports to offset potential declines in aid and Improving Effectiveness of Public remittances. Export growth in particular Expenditure. Fiscal constraints and the requires high priority, and calls for changing role of the state imply a need to concerted efforts in agricultural reconsider inter-sector investment priorities diversification, fisheries, tourism and intra-sector priorities to improve the development, and encouragement of other development effectiveness of public manufactured exports. Such a strategy is spending. There is considerable scope for attainable since Tonga does not suffer from improving the development effectiveness of major macroeconomic imbalances. intra-sectoral priorities. Education should be refocused to better meet the skill - 73 - demands in the economy. Also, rather than curative care. This calls for more spending government funds on expanding expenditures on cleaner water supply, public physical facilities, and thus duplicating the health programs, health education and efforts of non-government organizations, public awareness campaigns. In agriculture, such funds could be better spent on allocations for research and extension improving the quality of education by the services could be increased progressively development of curricula and teaching through savings elsewhere in the sector. In materials, supply of text books and teacher infrastructure, greater focus needs to be training. In health, greater priority needs to given to rehabilitation and operations and be given to preventive vis-A-vis costly maintenance while new investment requires more careful scrutinizing to ensure that priority is given to projects which maximize social benefits. - 74 - VANUATU Population: 173,000 (1996) GDP: US$252 million (1996) GNP Per Capita: US$1,290 (1996) Introduction agriculture, especially copra and cocoa, receipts from tourism and growth in The economy of Vanuatu is dualistic with construction activities. Copra, the main about 80 percent of the population engaged agricultural product, continued to expand as in subsistence or small scale agriculture, trees recovered from the cyclones of 1992 primarily copra, cocoa, and beef production. while cocoa production recovered from a The formal economy is dominated by severe drought in 1994. Construction output services, including government, tourism and in 1995 was strengthened by the an offshore financial center. Vanuatu faces construction of several public investment a variety of geographical constraints to projects including the Law School of the economic development including University of the South Pacific and the vulnerability to external shocks, remoteness hydro-dam project in Luganville. from major markets and large distances from constituent islands. While poverty is Consumer inflation, on an annual average limited, development has been focused on basis, slowed from 2.7 percent in 1994 to urban centers-particularly Port Vila- 1.7 percent in 1995, broadly in line with resulting in increasing regional income Vanuatu's major trading partners. Despite inequality and growing rural-urban the introduction of a new turnover tax, the migration. Vanuatu has strong economic decline in inflation in 1995 was largely potential in agriculture, forestry and tourism. attributable to a significant reduction in External aid has been generous by import tariffs and a sharp decrease in rents international standards, yet growth has been as new dwelling units increased in response slow and uneven. to a housing loan scheme introduced by the National Provident Fund. Inflationary Recent Economic Developments pressures remained low in 1996. Vanuatu has maintained macroeconomic The external position has remained stability throughout the 1990s with an favorable in recent years, as higher annual inflation rate averaging 3 to 4 international copra prices boosted export percent, gross international reserves earnings while tourism receipts grew equivalent to 7 to 8 months of imports, and a steadily. The current account deficit low debt service ratio. However, real per narrowed from nearly 6 percent of GDP in capita income has stagnated despite 1994 to 4 percent in 1995 and remained low generous amounts of foreign assistance, and in 1996. Gross external reserves have the disparity in living standards between the averaged about seven months of import formal and subsistence sectors remains cover since 1994, marginally down from an wide. import cover of eight months attained at end- 1993. The economy grew at 3.2 percent in 1995 and by a further estimated 3 percent in 1996, The overall fiscal deficit narrowed to under reflecting increased earnings from 2 percent of GDP in 1995, down from 3 -75 - percent of GDP in 1994, due in part to lower little over 2 percent of GDP. Given the development expenditures. However, with emphasis on tourism as a potential high- increased development outlays relating to growth sector, airport upgrading has become some airport upgrading activities, the deficit a strong development expenditure priority in is estimated to have widened in 1996 to a recent years. VANUATU: KEY MACRO INDICATORS, 1992-96 1992 1993 1994 1995 1996 Indicator Levels (US$ million) GDP (at current prices) 190.0 195.6 214.4 238.3 252.4 Govt. Revenues 71.8 66.4 79.7 89.3 94.4 Govt. Expenditures 78.2 69.0 86.2 93.1 99.8 Govt. Budget Deficit (-) -6.4 -2.6 -6.5 -3.8 -5.4 Exports (fob) 23.6 22.7 25.0 28.3 30.2 Imports (fob) 68.3 65.8 74.6 80.0 86.4 Current Account Balance (after -4.3 -6.2 -12.1 -9.8 -11.5 grants) Gross Reserves 41.8 45.7 43.6 48.3 51.3 Macro Balances (% GDP) Budget Deficit (-) -3.4 -1.3 -3.0 -1.6 -2.1 External Current Account Balance -2.3 -3.2 -5.6 -4.1 -4.6 Foreign Public Debt 21.3 21.7 21.7 20.2 18.7 Memo Items (% p.a.) GDP growth -0.7 4.4 2.6 3.2 3.0 Gross Investment/GDP (%) 28.6 27.8 28.8 31.0 Consumer Inflation (%) 4.1 1.7 2.7 1.7 2.5 Terms of Trade (% change) 22.2 -15.1 36.5 12.7 -0.8 Reserves (mo. imports, fob) 7.3 8.3 7.0 7.2 7.1 Source: IMF Staff Reports, 05/96. Government Objectives to implementing the reforms articulated under the CRP, with wide participation from In view of the developmental challenges civil society. facing the country, the Government, in collaboration with the Asian Development Key Development Issues Bank, has recently formulated a Comprehensive Reform Program (CRP) Strengthening Public Finances. Although aimed at attaining sustainable economic macroeconomic events remain favorable, growth, improving public sector fiscal control was weak under previous management and ensuring good governance. administrations. Determined efforts are At a recent Consultative Group Meeting needed to bring the recurrent budget into held in Noumea late July 1997, the balance through strict control over the wage Government expressed strong commitment bill and the supplementary appropriation - 76 - process, while strengthening the revenue private sector development, and economic effort through tax reforms as foreign grants diversification including improvements in are likely to decline over the medium term. the efficiency of the public sector, and The new Government has improved physical and social infrastructure. budgetary control and a strong fiscal Diversification in the agricultural sector, position is expected within two years. new investment in industry and growth in tourism and other service sectors is much- Improving Economic Growth. In view of needed to broaden the economic base and the stagnation of per capita incomes, reduce vulnerability to change in the economic growth needs to be enhanced. external environment, as well as improve the Structural reforms, private sector growth prospects of the economy. The development, and fiscal consolidation are Government needs to sustain essential to improving the growth prospects implementation efforts under the CRP in of the economy over the medium term. order to address, inter alia, structural Concerted efforts are needed to promote impediments to growth. - 77 - ANNEX2 Page 1 of 11 BUDGETING IN THE PACIFIC MEMBER COUNTRIES- FROM CASHM4NA GEMENT TO OUTPUT MANAGEMENT A central theme of this Regional Economic simultaneously increasing the development- Report is the dominant role of government in promoting component of that spending is likely most sectors of the member economies. to be an important step towards realizing current However state-led growth has not fulfilled development aspirations. aspirations for growth in incomes per head. There is a clear need to improve the However, the successful achievement of this development effectiveness of public twin budget objective poses a daunting expenditure. challenge for budgeting processes, even for A particular cause for concern in many member developed countries with sophisticated countries is the domination of government budgeting systems. The dilemma of how to downsize government while simultaneously spending by recurrent outlays. This has been at insingdvelment exeitane the expense of public investment in growth- inreaso ing dvarous ways: bpivtization promoing ifrastuctur and ther resolved in various ways: by privatization, propmo infrastucy r and othr. corporatization, and outsourcing. A further 'development-friendly' expenditur*s. solution is the improvement in budgeting A large component of budget outlays in the processes. This Annex addresses some of the PMCs reflects long-standing programs which options available to PMCs attempting to may not directly address the current reallocate public sector resources to development priorities of the member development-reinforcing activities while goveloments. The combination of large simultaneously reducing the overall size of government spending and low spending on government. development-related activities is likely to be a significant cause of the slow pace of CENTRAL CONTROL VERSUSALLOCATIVE development in the region.! Achieving a FLEXIBILITY reduction in total government spending while Traditional approaches to budget management are characterized by separate appropriations of 'A 'development-friendly' budget therefore typically: funds for what is sometimes a bewildering variety of line items. These cover agency * contributes to reducing the overall share of running costs (split into numerous components government in economic activity, lowering the ranging from postage expenses to wages) and financial burden government places on private program costs (split by program and activity enterprise, while at the same time within program). This line item-intensive * increases government investment on infrastructure, approach to budgeting is intended to increase the education, health and other high priority areas which transparency of the uses made of funds by will assist the development process. program departments, and to strengthen central -78 - ANNEX 2 Page 2 of 11 agency control of each component of their might be funded by reduced funding of other spending. Detailed line item budgeting also activities (funding reallocations) rather than reduces the likelihood of under-spending or additional funding from the budget. Internal over-spending of appropriations by enabling prioritizing decisions are pre-empted by the central agencies to monitor how much is spent in existence of multiple line items which prescribe each area or activity. in detail how the program agency is to spend the envelope of funds made available to it.2 Developing countries, including the PMCs, have typically adopted a traditional, line item- The role of line agencies tends towards that of intensive approach to budgeting. This approach an agency for dispensing funds rather than is particularly relevant to the budgeting task in planning for their optimal use. developing countries since it provides maximum control by central agencies over spending which Highly centralized budget processes are also in many cases is undertaken by program likely to reduce line agency capacity to agencies with relatively undeveloped financial implement such internal reallocations. management skills and systems. Scope for Significant financial and resource management inconsistent decisionmaking and corrupt skills are often required at the agency level in behavior is minimized, while central control order to re-assign resources internally. over the total level of spending is maximized. Activities already in the budget, such as the wages of permanent public sector employees, However, traditional systems of budgeting are difficult to avoid, and staff reallocation which emphasize strong central control over the encounters geographical, organizational and fine detail of program agency spending can also human resource management barriers. However, build inflexibility into budget processes. Such the development of broader resource budgeting systems may reduce the management skills is inhibited when the primary responsiveness of program agencies to changing role of spending agencies is to dispense funds in budget priorities by restricting their ability to predetermined ways rather than to manage redirect funding from existing line items to new broader envelopes of resources in a flexible activities. The price paid for strong control of manner. spending from the center is likely to be weaker incentives for program agencies to fund new The result is likely to be something of a bias in spending priorities by reducing spending on line highly centralized budget processes towards the items already in the budget. The following preservation of activities which already have a section discusses some possible reasons for this. place in the budget, at the expense of those which do not. From the perspective of a program TRADITIONAL BUDGETING AND LINE agency with a limited internal skill base, AGENCY COMPETENCIES reducing the scale of programs already in the budget (for which line items are established) A side effect of traditional, line item-intensive may be a much harder option to handle than budgeting is that have a postponement of outlays not already in the seducedneedtdevelpthendinghgeniebudget (and to which resources have not yet reduced need to develop the in-house financial been committed). and policy analysis skills required to allocate resources between their various divisions and activities. Highly prescriptive budgets inhibit agency capacity to identify options for redirecting spending between its various 2 A qualification is where scope exists for transfer of activities-which line items are cost-effective resources by virement approved by the Finance Ministry. and which are not, or where new spending needs - 79 - ANNEX2 Page 3 of 11 When requested to reduce their total spending, remain major deficiencies in the financial and for example, program agencies with poorly policy analysis skills of program agencies. As in developed financial and management skills may the other PMCs, the tendency for budgets find it easier to delay new capital projects or involving large numbers of centrally approved postpone repairs and maintenance not yet line items has tended to reduce the incentive for provided for in the budget than to propose program agencies to develop internal capacity to resource transfers from existing line items for analyze priorities and internally re-direct which tenured staff, often with narrow skills, resources in response to changing budget would have to be re-deployed to other areas of objectives. the agency. This weakness in financial and policy analysis Reflecting this, traditional line item-intensive skills of program agencies has several effects. budgeting has some drawbacks in circumstances One is lack of technical capability on the part of where faster development will require such agencies to implement development reductions in total movement spending projects in any number. Program agencies are combined with increased outlays on reluctant to propose more investment projects development promoting infrastructure and for consideration in the annual budget process maintenance. The strength of traditional than they feel they have the capacity to manage. budgeting, with its strong emphasis on central This hesitancy occurs because of global public control, lies in the delivery of established sector staff ceilings applying in Fiji and each patterns of government spending rather than agency's first and foremost need to cover the managing reallocations within those patterns in wage costs of existing programs. response to the newly emerging development priorities. The complex nature of the policy goal In addition, many of the new spending proposals for PMC governments (lower aggregate prepared by program agencies in the course of spending combined with increased spending on the Fijian budget process are regarded by the development-reinforcing activities) may central agencies as not being 'bankable' due to therefore be best served by more flexible budget shortcomings in the standard of policy analysis processes than those relying on strong central and project justification. This reflects the control via large numbers of line items. existence of many unfilled positions in the planning units of key departments and lack of Re-tuning of budget processes to the challenges skills and experience of existing staff. of more rapid development is therefore a potentially important step towards breaking Restricted capacity for reallocating resources from the region's 'big government/low within spending agencies, combined with the development' malaise. ceiling on total spending implied by Fiji's target of a balanced budget by the year 2000, results in FliJ'SEXPERIENCE a tendency for the postponement of new infrastructure investment and other In Fiji, as in the other PMCs, the share of public 'development-friendly' activities in favor of investment in GDP is low. The evidence continued high levels of recurrent spending on suggests that this is in part associated with activities with an established place in the budget. institutional shortcomings in program agencies. Overall deficit reduction objectives and resource ivnstitutiona shorertcormingsn progm agenrcies. management inflexibility at the agency level Even in Fiji, where reform of budget processes combine to edge out new infrastructure and has proceeded furthest among the PMCs, there related spending, and the budget system - 80 - ANNEX 2 Page 4 of 11 becomes an impediment to the increase in run ahead of financial and policy competence in development sought by the Government.3 those agencies. However, the development of capacity to re-prioritize and reallocate resources A central challenge for budgeting systems in the within line agencies is unlikely to develop in PMCs is, therefore, to reallocate funds within isolation from devolution to them of more agencies from historically inherited programs to responsibility for making internal resource development reinforcing activities. This entails a allocation decisions. transition from programs with high and generally unavoidable wage costs to programs The dilemma for the PMCs is how to strike a in which infrastructure and maintenance balance between maintaining centralized budget spending provides a better environment for control in order to curb the growth of 'big development. In the past, this has been government' on the one hand, and providing a postponed when the agency budget is under catalyst (in the form of increased line agency pressure from the center. discretion in the use of resources) for development of the financial and policy skills THE CONTENTS OF THIS ANNEX needed for budget flexibility on the other. The capacity to increase spending in those areas Budget processes capable of achieving greater supporting development while simultaneously internal flexibility in spending and a capacity for reducing the bottom line deficit is a benchmark re-prioritization between appropriations are not of a budget process which is 'development- currently a feature of budgeting in the PMCs. friendly.' Capacity for internal allocative flexibility needs to b strngtened itis iporant hat The central focus of this Annex Is on two to be strengthened; it is important that budgeting tools which may help resolve this management freedoms regarding the disposition dilemma in the PMCs. These tools are a of budget funds be devolved from Finance medium-term framework for the budget, and Ministries to spending agencies in order to devolution of management freedoms to program permit them to undertake more flexible, goal agencies. Taken together, these two budgeting focused management. tools can contribute to the growth of financial However, it is equally important for devolution and policy autonomy in program agencies while of managerial freedoms to avoid running ahead minimizing counterproductive loss of control of the internal financial management and policy from the center. capabilities of spending agencies in the member These budget tools are part of the public sector countries. A precondition of devolution is that, reform packages in a number of countries. from the outset program agencies should be able Among the PMCs, Fiji has grappled most to re-prioritize and reallocate the broader pools vigorously with the problem of combining of resources available to them in a competent allocative flexibility with overall budget control. manner if the waste of resources is to be A far-reaching public sector reform program was initiated some years ago and momentum is Unfortunately, this leads to a sequencing currently high. This Annex, therefore, takes Fiji problem. Devolving of responsibility for as a case study in the use of the two tools. managing funds to program agencies should not BUDGET TOOL 1. A MEDIUM-TERM BUDGET 3Alternatively, if government spending does expand in FRAMEWORK support of growth and social goals, this may be at the expense of overall deficit management and the public Budgeting in a medium-term framework has a sector grows in total size (budget augmentation is variety of meanings. However, a common substituted for budget reprioritization.) - 81 - ANNEX2 Page 5 of 11 element is the extension of the estimates of updates of the forward estimates.5 This then outlays for each line item in the annual budget becomes the baseline budget. Added to this is a for an additional year or more. These out-year new policy not already included in the forward estimates are norrnally rolled forward by one estimates. New policy costings are negotiated year with each new annual budget. The first out- between the line agency and the Ministry of year figures then become the baseline for next Finance for both budget year and out-years, with year's budget without being subjected to as full the out-year figures being added to the forward a review process as is associated with a estimates. budgeting system which is restricted to a one- year time frame. Forward estimates-based budgeting can help to rectify the imbalance between recurrent and In some systems (for example the Australian) capital spending which characterizes the PMCs, the first out-year figures flow automatically into as well as the tendency to provide insufficient the next year's budget without further revision funds for the operation and maintenance of (except for technical adjustment for inflation completed projects. It may contribute in a etc.). In other systems of forward estimates- number of ways. based budgeting, such as that of Fiji, the forward estimates for the coming budget year are First, it is easier for new development- reviewed in the early stage of the budget process promoting expenditures to find a place in a as a matter of course. That review focuses three-year budget cycle than in a single-year particularly on whether capital projects are cycle because the availability of funds is less of proceeding as planned and whether some a constraint on budget planning for the out-years deferral or acceleration in spending on the of a three-year cycle. The multi-year budget forward estimates figure is desirable for specific cycle establishes a time frame (the period of the projects. rolling forward estimates) and a formal budgeting framework (the forward estimates In the case of Fiji, the budget has been prepared themselves) within which program agencies in a three-year rolling forward estimates- have to identify the reallocations from existing framework for an extended period of time. budget items required to fund new development- Budget estimates for ongoing capital projects promoting expenditures written into the forward and operating costs are based on the sum already estimates. It provides a formal framework within contained in the forward estimates, adjusted for which program agencies can plan the re- technical factors and reviewed for prioritization of budget outlays. appropriateness.4 Forward estimates of operating costs are also reviewed by the Second, a medium-term budgeting framework Ministry of Finance. Early in the budget allows additional lead time between process, a paper goes to the Budget and Aid incorporating a project in the budget cycle and Coordinating Committee seeking approval of the project commencement. This provides line agencies with time for detailed project appraisal and project design work, rather than the ad hoc justification for new spending proposals frequently resorted to by agencies due to the 4 Capital projects which are already underway are re- prioritized by the Ministry of Planning and Ministry of Finance (in conjunction with the implementing agency) on S The Budget and Aid Coordinating Committee is chaired the basis of operational reports on the state of progress on by the Permanent Seeretary of Finance and includes the the project. Projects which have been ongoing for three Permanent Secretaries of the Public Service Commission, years are subject to more formal review, in which the National Planning and (on aid issues) Foreign Affairs. current achievement is compared with the original proposal. -82 - ANNEX 2 Page 6 of 11 pressures of an annual budget process. The budget (with its large share of recurrent result is likely to be an improvement in the spending) over the development plan is likely to quality of investment proposals put forward by be a factor contributing to the Pacific region's program agencies. dilemma of 'over-size government' combined with deficient development expenditures. Third, a medium-term budgeting framework Adoption of a multi-year framework for also lightens the work load in the actual budget budgeting propels the budget process beyond the process, contributing to a better quality process. annual ritual in which development expenditures This is because the out-year components of the are determined as a residual after meeting capital budget can be examined after the current existing program commitments historically budget year component has been completed, embedded in successive annual budgets. allowing better screening of projects being considered for inclusion in the forward Why should this be so? The medium-term estimates. budgeting framework encourages a strategic focus on resources which can be mobilized from Fourth, a medium-term budgeting framework within spending agencies themselves, whereas can assist the integration of aid-funded projects in a purely annual budget context, the focus with the overall allocation of budget resources. tends to be on the funds which can be obtained Better coordination of donor priorities with the from outside the agency. overall development strategy and opportunities for growth is sought by the Fiji Government. The three-year time frame for the budget cycle therefore allows the reallocation of funds Fifth, an important benefit from the use of a between existing and new activities to be medium-term budgeting framework relates to formally structured into the budget decision future spending on operations and maintenance. making process itself. This increases the In the case where each budget is treated as a likelihood of agencies responding to the separate annual 'event' the implications of government's medium-term development current decisions to fund development projects priorities by redirection of resources within the for future spending on operations and overall targets for public spending. Over the maintenance can be overlooked. However, in a medium-term budgeting cycle, existing program medium-term budgeting framework, these future commitments can become variables rather than spending commitments should be included in the constraints. The longer cycle, therefore, affords forward estimates when the project itself is a formal framework for downsizing total introduced to the budget. spending while increasing spending on development-friendly activities. Sixth, budgeting within a multi-year term framework rather than on a year by year basis encourages the Government to prepare medium- Fli'S EXPERIENCE term targets for the overall level of budget The Fijian Goverment's multi-year budget spending and deficit. This imposes a discipline sTeg pI ovesnme o the scopef on annual budgeting and a consistency check on strategy provides an example of the scope for each annual budget against the Government's reallocating resources towards development medium-term fiscal objectives. priorities within a medium-term budgeting framework. The Fijian Government has However, perhaps the main advantage of the use announced an objective of restoring the budget of a forward estimate-based budget cycle is that deficit to balance by the year 2000. To this end it provides a framework for integrating the it has imposed a ceiling on new public sector medium-term development plan with the annual employment and a target reduction of 5,000 cash budget. The dominance of the annual - 83 - ANNEX 2 Page 7 of 11 persons by 1999. This constrains bids for BUDGET TOOL.2. DEVOLUTIONOF additional resourcing by line agencies. MANAGEMENT FREEDOMS FROM CENTRAL To achieve a balanced budget by 2000 line TOPROGRAAGENCIES agencies other than those responsible for The first budgeting reform discussed above- infrastructure, education, health and agriculture establishment of a medium-term budgeting (the four core contributors to the development framework-helps make decisions to re- strategy) are to receive virtually no funds for prioritize the use of existing resources, a more new policy. Moreover they are required to pay a common feature of the budget decisionmaking 1.5 percent efficiency dividend in the budgets process. The second area of budget reform, for 1997, 1998 and 1999. A later cabinet which is discussed in the present section, decision requires an additional 1 percent to be involves devolution of greater management paid in 1998, 2 per cent in 1999 and 3 per cent freedoms to program agencies than under the in 2000. The four core agencies, on the other current, highly centralized, budgeting hand, have been given increases in funding in arrangements of the PMCs. the forward estimates which are linked to GDP. What is meant by decentralized budgeting? This medium-term budget strategy effectively Rather than central agencies prescribing in great forces the new development-focused spending detail the uses to which running costs and by the core ministries to be funded by program costs are to be put by program agencies reallocations from the non-core ministries over (by bringing down budgets composed of large the next three years. As a result, the commitment numbers of highly detailed line items), greater to a balanced budget by the year 2000 is freedom is given to program agencies reconciled with increased spending on themselves to allocate funds between their development-friendly activities. A further various activities. Line items are 'broad banded' element of reallocation within non-core and agencies are authorized to apportion funds ministries themselves is achieved by the within the bands according to the most cost- requirement that their annual efficiency dividend effective means they can identify for meeting be at the expense of line items for operating the Government's priorities. costs rather than capital items in those agencies.6 This has two major advantages. First, it allows those with the detailed knowledge of how programs are operating to shift administrative and program funds between spending categories in pursuit of best value for money. Moreover, waste associated with end of year 'spend-ups' in 6 A shortcoming of the arrangement is that there is no . . pressure on the core ministries themselves to divert funds each of the former, narrower, appropriation is from the less cost-effective activities that exist in their own minimized. Additional resources can be swung portfolio. In this regard, the identification of core behind activities encountering problems or ministries is a blunter weapon for reallocating budget delays or for which the Government indicates a resources than a similar budgeting approach based on the high priority. identification of core activities rather than ministries. It is also worth noting that the integration of development The second advantage is that line agencies will plan and annual budget is not complete in Fiji, since there need to develop their ability to make internal is not currently a medium-term rolling set of capital expenditure estimates incorporating new investment resource allocation decisions not required under projects. Such estimates were prepared in 1994 for the key traditional line item intensive budgeting. In sectors of infrastructure, health and education and updated response to the need to prioritize their own use in 1995. However they have been discontinued due to the of resources, they will be under pressure to claims made on technical personnel by the annual budget. -84 - ANNEX 2 Page 8 of 11 develop the technical capacity for internal practices. A line department which is granted budgeting and policy analysis. A central greater freedom of financial management, but in resource-coordinating function is likely to which the senior executive has failed to develop emerge in the program agency for this purpose. internal resource allocation skills, may suffer Monitoring of the resources used by internal from inefficient splits of broad-banded divisions of the agency, together with the results appropriations between its various activities. generated by each division's activity, becomes Where resource management is weak, the routine for this group in the course of deciding distribution of funding between its constituent how broader envelopes of resources allocated to divisions may reflect the internal politics of the the agency are to be distributed between its agency, or the perpetuation of historic shares, constituent parts. rather than the cost-effectiveness of their various claims on funding. Within-agency performance monitoring is likely to apply both to the use made of funding for In this circumstance, the devolution of financial running costs (which in the extreme case are freedoms may reinforce (rather than modify) the received by the agency as single appropriation) existing tendency for over-large outlays on as well as program appropriations. Such personnel and wages and under-spending on the information is normally not generated under capital and O&M side of the budget (which is traditional, line item-intensive budgeting. Even able to be postponed). if it were to be available within the line agency, it is unlikely to be made available to central The depth of financial and policy management finance ministries in the course of developing skills in PMC program agencies is clearly the detailed spending splits under traditional limited at the present stage of development in budgeting processes. the region. For example, in Fiji each of the core ministries now has its own planning unit. Once program agencies have developed an However, ability to fill positions in the planning ability to identify their less cost-effective units with experienced policy analysts is limited, activities, it is easier for governments to make and lack of policy analysis skills seem to be a the decision to fund new development activities constraint on the development of new policy by cutting existing spending rather than by proposals, even in core agencies such as the increasing budget outlays. The necessary Department of Health. spending cuts can be allocated within each spending agency to those of its activities, the This presents a 'chicken and egg' problem. contraction of which causes least damage to the Financial and policy analysis skills are likely to Government's other political and social develop at the line agency level only in response objectives. to a more devolved decision making environment and a need to make significant resource allocation decisions within the agency. THE 'CHICKENAND THE EGG' However, central coordinating agencies are reluctant to devolve resource management A prerequisite of greater financial management reedosant tosesklls res alreanace freedoms for line agencies is the following. It is . . . ' vitally important for spending agencies to have in line agencies. developed in the early stages of the budget The Fijian budget reforms throw some light on reform process a core of financial and how this circularity might be resolved. Increased management skills sufficient to ensure that their performance consciousness on the part of increased managerial prerogative leads to more program agencies, together with the deepening cost-effective budget outcomes, rather than of their financial and policy analysis skills, is a bureaucratic empire building or corrupt central element of the budget reforms in Fiji. -85 - ANNEX2 Page 9 of 11 However, a Management Effectiveness Review A further important development in this context in 1994 suggested that the management of is the training of senior public sector executives program agencies was unclear about the goals it in management skills appropriate to their new, was pursuing in its day-to-day activities. more devolved, operating environment. In Fiji, the Public Service Commission is working to Several steps have been taken to address this develop senior executive training in program problem. From 1998, each permanent secretary agencies. The Ministry of Planning is also is to have a performance agreement and five- addressing this problem by working closely with year contract, together with greater freedom to spending agencies and seconding staff to make decisions about the use of resources in his agencies in need of capacity building. or her agency. This includes delegation of power. by the Public Service Commission from 1998 to A significant step towards recognizing the role allow agency heads to appoint staff up to middle of Fijian line agencies in managing outputs as management level.7 well as inputs was taken in the 1997 budget papers. These papers included a set of activity One important complementary reform has been descriptions alongside budget items for the first the introduction of corporate planning in each time. These descriptions are input or workload agency. This provides a link between the orientated rather than output or outcome national priorities for government spending and orientated. However, they are an important first the internal prioritization of resource use by step towards the more transparent acceptance of each program agency. responsibility on the part of line agencies for the deliverables associated with each of their budget Afutro closelyoreate dopments the appropriations. Inputs are no longer to be made introduction of performance contracts for middle available to an agency without reference to the management. It is intended that the performance outputs and outcomes expected in retu. This agreements should clearly reflect the focuses spending agencies on why money is agoernment's prporitieps asd roveflete inlthe being given to them to spend (and on what it is agency's corporate plans and government policy to be spent). It is intended that the 1998 activity descriptions will have an increased emphasis on Performance contracts are a highly effective output targets. This is an initial step in device for ensuring that the day-to-day activities upgrading departmental information systems of middle management reflect to the maximum beyond cash management to output possible extent the current priorities of the management. Government. They also allow retrospective assessment (in the course of periodic review enhance ment onlaudi offie sessions with supervisors) of how far the functioni of the extensin off individual manager has been effective in audctivi.Tie beyon los to e ioncld translating the Government's current priorities outputioutme eectshofln sgec snding. throuh hi or hr acieveents urin the output/outcome effects of line agency spending. througheo thi working hear.achievementsduriWhile cash flows are audited against the appropriations defining the uses for which the cash is made available, performance auditing 7 . .. . . ~~~~~~~~involves assessing the results of the spending 7 Creation of new positions will remain the prerogative of ast the reason s mi the funds the Public Service Commission. However, a second stage against the reasons for making the funds of the reform is to devolve this function when performance available. This move from cash to performance is established for the first stage. auditing is a logical counterpart to the emerging -86 - ANNEX2 Page 10 of 11 responsibility of line agencies for output existing activities) by internally reprioritizing management as well as cash management. spending, rather than adopting the 'soft option' of a request for additional funding from the Finally, as a long-termn goal, an accrual budget. Recent Fijian experience emphasizes the accounting framework is to be introduced in Fiji importance of commitment at the political level to enable the full resource cost of activities to be in order to make reprioritization an effective identified by the spending agencies. This is alternative to budget augmentation. If line currently being piloted in four departments.8 agencies are able to appeal directly to the Cabinet for exemption from the requirement for WILL PROGRAMAGEN0CIESRE-PRIORITIZE internal reallocation, the advantages of the THEIR SPENDING? system in ensuring budget discipline will rapidly erode. A case in point is the Fijian Commodity Public sector budgeting in the PMCs is Development Framework, for which spending characterized by short planning horizons and was approved in 1997 outside the normnal budget limited capacity to re-prioritize spending in process for what was then a non-priority pursuit of current development objectives. These department, and which is likely to make the defects are in part attributable to lack of achievement of the target of a balanced budget resource and policy management skills in by the year 2000 difficult. program agencies-skills which are slow to develop where spending splits are dictated in Cross fertilization of budgeting skills from great detail by central agencies. However, tight finance to program ministries has a particularly central control of spending is unlikely to be important role to play in increasing technical relinquished until the skill base in program capacity in the latter. However, there is a further agencies itself improves, sequencing problem here. In many member countries the scope for central agency This Annex has discussed two budgeting tools- fertilization of financial and policy skills in the multi-period budgeting and decentralized program agencies is limited by shortages of the financial management-which might help to cut same skills in the central agencies themselves. through this dilemma. Once the capacity of Even in Fiji, where budget reform has proceeded program agencies to re-prioritize their activities furthest, there are multiple vacancies in the has improved, a solution to the broader Ministry of Planning, and that agency is itself in challenge of reducing the size of movement need of a capacity-building program to match its while increasing spending on development- vigorous promotion of development.9 In some of related activities is within reach. the smaller PMCs, the first priority is to reinforce the generic budgeting skills of the Political will is still required to force line Finance Ministries themselves. agencies to fund new activities (or extensions to 8 A further issue in Fiji is that shortage of financial and 9 Budgeting reform such as that underway in Fiji also policy analysis skills is exacerbated by the large number of Buires ren cordinat between the al ministries and agencies (in excess of fifty) which means reires exell e nt coordination between the central mmlstrles~ ~ ~ ~ ~ ~ ~ ~~~~coriatn dearmet themselves Copeato betweenffy)w hmen that scarce policy analysis and development skills are very the Public Service Commission and the Ministry of thinly spread. Some rationalization of administrative Finance has improved since 1994 in response to the zero structures into larger units, better able to support viable staff growth policy introduced then, and the need to policy analysis and development capability, may be an staffigrowthisolichintroneedspen, authe n to important precondition for spending agencies developing budgeti The Ministries of Fnew spending authorized in the the skill base necessary for their role in re-prioritizing bde.TeMnsre fFnneadPann lowr ttie spending. base necessary for theirroleinre-prioritizingtogether closely, although there may be scope for improved spending. cooperation in vetting investment proposals emerging from program agencies. -87- ANNEX2 Page 11 of 11 External pressure for reform of budget processes organization of regional budget workshops for in circumstances where central agencies officials from central coordinating agencies.l1 themselves have not yet established the depth of Such training should preferably focus on middle modem budgeting skills is as likely to slow the level finance officials, particularly desk officers development process as to speed it up. It is with ongoing contact with spending agencies. essential for finance officers to understand the However, senior staff would need to be involved purpose of budget process reforms being made to ensure that the content of such courses is in their country if their role in transfer of closely linked to the particular reforms financial and policy management skills to envisaged by the central coordinating agencies. spending agencies is to be effective. In some It is likely that assistance by international member countries, the first stage of reform agencies in building human resource skills in the should be the boosting of the skills of the central central coordinating ministries will have a agencies themselves. substantial leverage effect on skill acquisition in the public sector as a whole. In this regard there may be a substantial leverage effect from the funding and 10 An example is the course in budgeting practice piloted by the Economic Development Institute of the World Bank in Singapore in September 1997. -88 - ANNEX 3 Page 1 of 15 THE STRUCTURE AND SIZE OF THE PUBLIC SECTOR IN THE PMCS Al THE STRUCTURE OF THE PUBLIC departments or agencies (see Table A3.2). A SECTOR total of 31 separate budget-supported agencies are identified in the Fiji budget, while there are Despite their small size, the PMCs have adopted 2 noeo h mle Ms iiai(e reasnabl coplexgovmmen strctues, ith 21 in one of the smaller PMCs, Kiribati (see reasonably complex government structures, with TbeA.) h ag ubro gnisi most oeratig at east to levls of Table A3.1). The large number of agencies is motoprtigatlas wolveso characterized by the duplication of basic government. Fiji, the Solomon Islands, the .arative f i the framenation of. Marshall Islands and Kiribati operate national thenski e ancoo rationtproblem and local governments. The local government becau se o th coprdmnation of system, which is mainly concerned with the functons. provision of basic services such as waste disposal and local roads, can be extensive. For The ministries/departments are broadly similar example, in Fiji, there are two city councils, nine across the PMCs. As illustrated by the list of town councils, 12 rural local authorities and 14 ...acrosst aMs asolutatedcby thesteo Fijian, Tongan and Samoan agencies presented provincial councils. In FSM and the Solomon in Tables A3.2 and A3.3, there are normally Islands, state governments operate as well as separate agriculture, forestry and fishing national and local level governments. Traditional governmentn departments and an industry agency focused on Importantrol beng perhaps stronges in processing activities. The health, education and defense portfolios tend to account for around a Samoa and Tonga where only one level of third of civil servants. The infrastructure-based formal government operates (see Table A3. 1). agencies of transport and public works also tend to be large employers. One reason for the large The PMCs are noted for the large number of nme faece ntePC sta h govemmnt agnciesthey uppor. For number of agencies in the PMCs is that the government agencies they support. For .various administrative tasks of goverment (e.g. example,sin Fijisthe anizatotrutr auditing, revenue collection) tend to be split into separate ministries or departments. Table A3.1: Organizational Characteristics of PMC Governments Fiji Solomon Vanuatu Samoa FSM Tonga Marshall Kiribati Islands Islands Levels of government 2 3 2 1 3 1 2 2 Number of separate budget- 31 25 n.a. 28 n.a. 28 n.a. 21 supported agencies Number of public enterprises 30 7 13 21 32 20 11 26 n.a. not available. a That is, enterprises either 100 percent or majority government-owned. Sources: PMC authorities. -89 - ANNEX 3 Page 2 of 15 Most PMCs support a generous number of Vanuatu and the Marshall Islands supporting the public enterprises. The highest number of lowest number of public enterprises (see Table enterprises occurs in FSM, a result of A3.1). The size and composition of the public duplication by the four state governments (e.g. enterprise sector in the PMCs is referred to of the utilities). There are 32 enterprises recorded below. in FSM and 30 in Fiji, with the Solomon Islands, Table A3.2: The Ministries and Departments of Fiji Ministry/Department Ministry/Department I Office of the Prime Minister 8 Ministry of Information, Women and Culture Office of the President Information, Technology and Computing Services Cabinet Office Services Public Service Commission Women and Culture Elections Office Fiji Museum Ombudsman's Office National Archives Parliament of Fiji (Legislature) Fiji Arts Council District Administration 9 Ministry of Labor and Industrial Relations Multi-Ethnic Affairs Arbitration Tribunal 2 Ministry of Education and Technology 10 Ministry of National Planning 3 Attomey General Bureau of Statistics Law Reform Commission 11 Ministry of Youth, Employment Opportunities Central Liquor Board and Sports Cinematography Censorship Board 12 Ministry of Local Govemment and Environment Hotel Licensing Board Environment 4 Ministry of Finance Town and Country Planning Treasury Local Government Customs and Excise Housing Govemment Supplies 13 Ministry of Health Information, Technology and Computing 14 Ministry of Commerce, Industry, Cooperatives Services and Public Enterprises Inland Revenue Cooperatives Printing and Stationery Fair Trading 5 Ministry of Justice and Home Affairs 15 Ministry of Lands and Mineral Resources Judicial Lands and Survey Public Prosecutions Mineral Resources Fiji Prison Service 16 Ministry of Agriculture, Fisheries and Forests Social Welfare Agricultural Tribunal Stamp Duties Forestry Administrator General 17 Ministry of Communication, Works and Energy Titles Office Public Works Registrar General Energy Immigration Department Regulatory Unit Fiji Military Forces Marine Fiji Police Force 18 Ministry of Transport and Tourism 6 Ministry of Foreign Affairs and Extemal Trade Road Transport Extemal Trade Tourism 7 Ministry of Fijian Affairs and Agricultural Civil Aviation Lands and Tenants Act (ALTA) Meteorological Services ALTA Native Lands Commission Source: Fiji Public Service Commission. -90- ANNEX 3 Page 3 of 15 Table A3.3: The Ministries and Departments basis that it helps clarify the critical division of of Tonga and Samoa output between the public and private sectors. Reliable data on government consumption in the Tongan Ministry Samoan Department/Ministry PMCs are limited, and instead comparisons are Agriculture Agriculturt presented of current expenditure. Further Audit Attorney General insights are also provided by comparing the Central Planning Audit level of general government employment and Civil Aviation Broadcasting the wage and salary bill. Crown Law Customs Customs Education Table A3.4 presents measures of the size of the Education Foreign Affairs general goverment sector based on the ratio of Finance Health Fisheries Internal Affairs government expenditure to GDP. In broad Foreign Affairs Inland Revenue terms, the greater the sophistication of the PMC Government Store Justice economy, the smaller the relative size of Governor, Ha'apai Legislative government. Hence, Fiji, Vanuatu, the Solomon Health Lands and Environment Islands and Samoa have the smallest general Inland Revenue Lands and Title government sectors. The heavily aid-dependent Justice Ministry of Transport countries with poorly developed private sectors Labor, Commerce and Industry Ministry of Youth, Sports and -the Marshall Islands, Kiribati and FSM-are Lands Culture Marine and Ports Prime Minister's Office shown as havig markedly larger general Palace Office Post Office government sectors. Over the past five years, Police Police and Prison these more heavily governed PMCs have made Post Office Public Service Commission some progress in reducing the size of general Prime Minister's Office Public Works govemment. However, their ratio of Printing Statistics Prison Trade Commerce and Industry government expenditure to GDP is still very Sales tax Treasury high. Statistics Women's Affairs Tonga Visitor's Bureau The most recent estimates of total general Treasury government expenditure to GDP range from 34 Public Works to 87 percent. The ratio of current expenditure Sources: Tonga Office of Establishments, Samoa Department to GDP is estimated to be in the range of 28 to of Finance. 63 percent, with the wages and salaries bill of general government accounting between 11 to A2 THE SIZE OF THE GENERAL 29 percent of GDP. GOVERNMENTSECTOR For the purposes of assessing the size of the Chart A3.1 shows the split of expenditure in public sector, this Annex distinguishes between Fiji's general government sector among the the general government sector and the public three components-the national government, enterprise sector. General government is local government and the noncommercial defined to include national, state and local statutory bodies. The national government is governments and those statutory authorities shown to dominate expenditure, a feature of all without a commercial focus. PMCs except for the FSM. In the FSM, the State Governments are the main service The most commonly used measure of the size of providers and collectively are much larger than government is the ratio of total government the National Government. expenditure to GDP. The 1997 World Development Report focused on comparisons of the level of government consumption on the -91 - ANNEX 3 Page 4 of 15 Table A3.4: Expenditure on general government in the PMCs General government expenditure as a share of GDP (percent) Fiji a Solomon Vanuatu b Samoa a FSM a Tonga a Marshall Kiribati b Islands b Islands b Most recent estimate - total expenditure 34 45 39 57 78 51 87 87 - current expenditure 28 29 26 31 62 28 59 63 - wages and salaries 13 11 12 11 29 15 22 26 Average over the previous five years - total expenditure 33 53 39 67 82 50 99 99 - current expenditure 29 33 27 36 65 28 73 60 - wages and salaries 14 13 12 12 29 15 23 24 a The most recent estimate is for the year 1996, with the average being for the period 1992 to 1996. b The most recent estimate is for the year 1995, with the average being for the period 1991 to 1995. 1995 estimates are used when the latest available GDP figure is for 1995. Sources: PMC authorities, IMF Recent Economic Developments. theless, even in the Solomon Islands, it is An implication of high ratios of government etimated that one in four formal employees is a expenditure to GDP is the small size of the civil servant. private sector in the PMCs. This is a result of a range of factors controlled by the PMCs, such as Chart A3.1: General government crowding out by the public sector, but it also expenditure on wages and salaries in Fiji arises because of factors outside their control. These factors include natural impediments to cost of transport. When looking at ratios of expenditure to GDP, the conclusion that government is big could have more to do with the small size of the private sector than a genuinely excessive government. Alternative measures of the size of government are presented in Table A5 based on the level of general government employment. Within the Local go group of PMCs, FSM still stands out as being lo/. very heavily governed. It is estimated that for Ed ofggald m w siil99 every 1,000 residents (of all ages), 90 are employed in general govermment. The Sources: Preliminary data supplied by the Fiji Bureau of Governments of the Marshall Islands and Statistics. Kiribati are not as dominant as is suggested by Because of a lack of data, international the ratios of expenditure to GDP. The comparisons of the size of government must rely employment measure suggests Tonga is one of on the ratio of central government expenditure the more heavily governend PMCs, while the to GDP. In the body of this report, comparisons Solomon Islands is shown as probably having are presented of the size of government in 62 the smallest general government sector. Never- -92- ANNEX 3 Page 5 of 15 low and middle income countries. Government However, this is not evident from the data. The expenditure in the PMCs stood out as being Cook Islands, with a population of only 20,000, unusually high, with the PMCs providing the has a lower ratio of central government three highest ratios of expenditure to GDP. The expenditure to GDP than four of the PMCs. picture was even more startling when the level Comparisons with the Caribbean countries are of government wages and salaries as a share of also revealing. The Caribbean countries share GDP was considered. While these international with the PMCs small populations and a broadly comparisons should be seen as indicative only similar structure of government (although because of the many measurement problems, average incomes are higher in the Caribbean). they clearly point to the presence of large Ratios of expenditure to GDP for the PMCs and governments in the PMCs. the Caribbean countries are shown in Charts A2 to A4. The size of government is fairly steady It may be argued that this conclusion is the across the Caribbean countries and the less result of comparing the PMCs with much larger extreme PMCs. This suggests that a small countries. Larger countries may realize population does not necessarily demand a economies in government as they may be able to relatively large government. spread a 'fixed cost' of establishing government over a wide range of activities. In contrast, in The comparisons with the Caribbean countries countries with small populations the fixed cost also lend support to the conclusion that govern- of government may lead to relatively large ments in the PMCs tend to be large governments. Table A3.5: Employment by general government in the PMCs General government employment (most recent estimate) a Fiji Solomon Vanuatu Samoa FSM Tonga Marshall Islands Kiribati Islands Best estimate of persons employed 31,943 9,585 5,286 6,409 9,413 5,203 2,189 3,574 Employment per 1,000 residents 40 25 31 39 90 53 39 46 Share of labor force II n.a. n.a. n.a. 36 n.a. n.a. n.a. (percent) Share of formal workforce (percent) 29 29 n.a. 27 n.a. 40 25 51 n.a. not available. a Most estimates are for 1995 or 1996. Sources: PMC authorities, Consultants' estimates. 93 - ANNEX 3 Page 6 of 15 Chart A3.2: Central government expenditure in the PMCs and the Caribbean' Marshalil Islands 60 F . Kiribati 40- 00 co I Tonga a Samoa r_ Va' uat Solomon Islands Fiji to 20-V ... t ° } 2 0 200 400 600 800 1,000 Population ('000 persons) a The ratio of expenditure to GDP for the PMCs is for either 1995 or 1996 while the ratio for Caribbean countries is an estimate for 1994. The Caribbean countries included are Antigua, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, St. Kitts -Nevis, St. Lucia, St. Vincent and Suriname. The population estimates are for either 1994 or 1995. Expenditure in the FSM includes state govemment expenditure. Sources: PMC authorities, IMF Recent Economic Developments, World Bank 1997a, World Bank 1996a, AusAID 1997. Chart A3.3: Central government current expenditure in the PMCs and the Caribbean a M .a.shalil Islands s* FSM 60 * - tKiribti i X 40- 5o ein Tong a *Samoa ; a:s . s Vs Solomon Islands - Fiji _ x 20 u 200 400 600 800 1,000 Population ('000 persons) a The ratio of current expenditure to GDP for the PMCs is for either 1995 or 1996 while the ratio for Caribbean countries is an estimate for 1994. The Caribbean countries included are Antigua, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, St. Kitts-Nevis, St. Lucia, St. Vincent and Suriname. The population estimates are for either 1994 or 1995. Expenditure in the FSM includes state govemment expenditure. Sources: PMC authorities, IMF Recent Economic Developments, World Bank 1997a, World Bank 1996a, AusAID 1997. 94 ANNEX 3 Page 7 of 15 Chart A3.4: Central government expenditure on wages and salaries in the PMCs and the Caribbean a 30 a FSM * Kiribati E2 .' . Vanuatu *FJ o c 10-*Sao * * o Ma l *sSolomon Islands 0 200 400 600 800 1,000 Population ('000 persons) a The ratio ofwage and salary expenditure to GDP for the PMCs is for either 1995 or 1996 while the ratio for Caribbean countries is for either 1994 or 1993, exccpt for Trinidad and Tobago which is for 1992. The Caribbcan countries included are Antigua, Baharnas, Barbados, Belize, Dominica, Grenada, St. Kitts-Nevis, St. Lucia, St. Vincent and Suriname. The population estimates are for either 1994 or 1995. Expenditure in the FSM includes state government expenditure. Sources: PMC authorities, IMF Recent Economic developments, World Bank 1997a, World Bank 1996a, AusAID 1997. A useful insight into what is driving the size of A3 THE SIZE AND COMPOSITION OFTHE PMC governments can be gained by comparing PUBLIC ENTERPRISE SECTOR the level of aid per capita and the amount spent TbeA. umrzsteivleeto on civil servants for each resident. Chart A3.5 PMCl publi enterprises inhaea inoflvementomy presents the comparison, which suggests a noMCapulic senterpristestinableas Thathes thosem positive relationship between the availability of noream factiit redlyoen ascne tobe comptitionhose aid funds and the money spent on civil servantsarsofctvyredlopnocmeiinad (with Fiji being the only PMC where this private sector involvement. The table highlights relationship is not evident). Hence the the widespread involvement in resource-based internationally high level of aid to the PMCs industries (e.g. agriculture, fishing, electricity), clearly tends to finance large governments by in transport (shipping and air transport), in the intemational standards. ~~utilities and in the finance sector. A number of the PMC public enterprises also have a significant involvement in manufacturing, trade and tourism. -95 - ANNEX 3 Page 8 of 15 Chart A3.5: Aid and the expenditure on wages and salaries in the PMCs a 600 TFSM (US$ per spent per resident) 500 Civil service wages and salaries per capita 400 Marshall Islands m 300 U Fiji U Tonga 200 2 KiTibati * Vanuatu * Sanioa 100 U * Solomon Islands 0 200 400 600 800 Aid per capita (US$s per resident) a Most estimates of wages and salaries are for 1995 or 1996. The aid per capita figures are for 1995. Sources: Data supplied by PMC authorities, Consultants' estimates, AusAID 1997. Table A3.6: Readily contestable activities of public enterprises a Activity Fiji Solomon Vanuatu Samoa FSM Tonga Marshall Kiribati Islands Islands Resource-ba.sed industries Livestock/dair- y m n Sugar Other agriculturT Fishing Forestr, K Quarrying El Ma-fnucluring and rrude Food products - Government supplies and printing Retail/wholesale E U E K U Urtsias. Electricity Telecommunications a S Broadcasting EI E - Tratn spo r Shipping Air transport ;c El Finance Commercial banking Other finance Tomn usm Hotels Tour activities a That is, activities engaged by government-controlled enterprises that could be readily undertaken by the private sector. b Other than the provision of a Development Bank. -96- ANNEX 3 Page 9 of 15 Fiji has the best data on the operation of its middle income economies, Asia and the Latin public enterprises. Preliminary public sector American and Caribbean region. It is closer to accounts available for 1990-95 provide an that seen in countries of a lower income, such as estimate of value-added for financial and in Sub-Saharan Africa. While such comparisons nonfinancial public enterprises. In 1990, the need to be treated with caution because of value-added of nonfinancial enterprises potential weaknesses with the data, they do point amounted to 12 percent of GDP, but it had risen to a relatively large public enterprise sector in to 24 percent by 1995. Financial enterprises Fiji. contributed a further 3 percent of GDP in both years. An estimate is also shown of the share of GDP accounted for by public enterprises in FSM. International comparisons of the public FSM public enterprises are shown as accounting enterprise sector are made difficult by a shortage for a fairly typical share of GDP. However, it is of data and potential differences in the way the important to realize that aid is very high in FSM sector is measured (e.g. in defining what and injects a considerable amount of income via constitutes a public enterprise). Indicative government. Hence, a very large general comparisons with other developing countries are government sector leads to a small public presented in Chart A3.6. The share of GDP enterprise sector when ratios to GDP are accounted for by Fiji's public enterprises is considered. significantly higher than the average or other Chart A3.6: The importance of nonfinancial public enterprises a 18 I Developing economies by Developing economies by 16 income region 14 Share 1 2 of GDP (per. 10 cent) -4 Fiji FSM Low Middle Latin Sub- Asia income income America Saharan and the Afiica Caribbean a The figure for Fiji is an average for 1990-95 while the figure for FSM is an average for 1994-95. The group averages are estimates of the unweighted average for 1986-91. The definitions used in preparing the data may vary between countries and thus the data may not be directly comparable. Sources: Preliminary data from the Fiji Bureau of Statistics, World Bank 1995, EMAPT 1997. 97 ANNEX 3 Page 10 of 15 The size of the FSM public enterprise is made sector in Samoa, Tonga and Kiribati is relatively clearer in Table A3.7. The table summarizes larger than Fiji. Comparisons of employment public enterprise employment in the PMCs, and with other developing countries point to large suggests that the Fijian and FSM public public enterprise sectors by international enterprise sectors are similar in size. By these standards (see Table A3.8) employment measures, the public enterprise Table A3.7: Employment by public enterprises in selected PMCs Public enterprise employment (most recent estimate) Fiji Samoa FSM Tonga Kiribati Best estimate of persons employed 12,198 2,893 1,479 1,702 1,824 Employment per 1,000 residents 15 18 14 17 23 Share of workforce (percent) 4 n.a. 6 n.a. n.a. Share of paid workforce (percent) 11 12 n.a. 13 26 Sources: PMC Authorities Table A3.8: International comparisons of public enterprise employment Selected PMCs Share of paid Other developing Share of paid workforce workforce countries (percent) b (percent) a Fiji 11 Low-income 16 economies Samoa 12 Middle-income 6 economies Tonga 13 Latin America and 2 the Caribbean Kiribati c 26 Africa 22 Asia 3 a The data for the PMCs are the most recent estimate, usually 1994 or later. b The group averages are estimates of the unweighted average for 1986-91. The definitions used in preparing the data may vary between countries and thus the data may not be directly comparable with the PMC data. c Includes employment in financial enterprises. Sources: Unpublished data from the Fiji Bureau of Statistics, World Bank 1995. Tables A3.9 to A3.16 provide a detailed list of public enterprises in the PMCs. Data on employment are also provided where available. -98 - ANNEX 3 Page 11 of 15 Readings to Table 43.9 Table A3.9: Public enterprises in Fiji neadinotoTable _______________ ______________ ______________n.a. not available Enterprise Employees a In 1994, 1,385 persons were employed in Fiji Posts and in 1994 Telecommunications Ltd., which was subsequently separated into (persons) Post Fiji Ltd. and Telecom Fiji Ltd. Fully government-owned b A holding company for five agricultural-based companies. c Shipping charter company. Post Fiji Ltd. 1,385 d A provider of housing finance. Telecom Fiji Ltd. n.a. e The manager of the assets of the collapsed Bank of Fiji. National Trading Corporation Ltd. b f Ports management, stevedoring and cargo handling. g Excluding enterprises for which employment numbers are unavailable Rewa Rice Ltd. 44 and companies with a minority govemment shareholding. Unit Trust of Fiji (Management) Ltd. 2 Source: Fiji authorities. Yaqara Pastoral Company Ltd. 35 Viti Corps Company Ltd. n.a. Table A3.10: Public enterprises in the Partially government- owned Solomon Islands Majority shareholding Air Pacific Ltd. 601 Enterprise Fiji Intemational Telecommunication 101 Ltd. Fiji Pine Ltd. 780 Fully government-owned a Fiji Sugar Corporation Ltd. 3,100 Solomon Island Printers Ltd. Pacific Fishing Company Ltd. 1,000 Solomon Islands National Shipping Services Ltd. Minority shareholding Sasape Marina Ltd. Air Fiji Ltd. 134 Solomon Airlines Ltd. Fiji Reinsurance Company Ltd. 9 Pacific Forum Line Ltd. c 64 Partially government-owned Shipbuilding (Fiji) Ltd. n.a. Majority-owned Commercial statutory bodies Solomon Taiyo Ltd. b Civil Aviation Authority of Fiji 771 Solomon Telekom Co. Ltd. Fiji Broadcasting Commission 140 Development Bank of Solomon Islands Fiji Electricity Authority 1,200 Fiji Meat Industry Board 73 Minority owned Housing Authority d 240 Solomon Islands Plantation Ltd. National Bank of Fiji Asset 616 Kolombangara Forestry and Plantation Ltd. Management Bank ' Air Pacific Ltd. National Bank of Fiji n.a. Pacific Forum Line Ltd. Ports Authority of Fiji ' 221 Public Rental Board n.a. Other commercially orientated government agencies a This list excludes known commercially or.ented Drainage and Irrigation Department 32 departments such as post, civil aviation and government Govemment Handicraft Center 5 supplies. Govemment Printing and Stationary 135 b Classified as part of the agriculture and fishing sector. Department Source: Solomon Islands authorities. Govemment Supplies Department 226 Marine Fleet Section 517 Public Works Department 963 Forestry Department-Hardwood n.a. Plantations Public Trustee n.a. Meteorological Service n.a. Sub-total s 12,198 -99- ANNEX 3 Page 12 of 15 Table A3.11: Public enterprises in Table A3.12: Public enterprises in Samoa Vanuatu Enterprise Employees in 1996 Enterprise (persons) Fully government-owned Accident Compensation Board 16 Fully government-ownedAiprAuhit20 Development Bank of Vanuatu Airport Authority 202 Port Vila Fisheries Ltd. Agriculture Stores Corporation 67 South Pacific Fishing Company Ltd. Development Bank of Western Samoa 124 Air Vanuatu (Operations) Ltd. Electric Power Corporation 469 Vanuatu Internal Air Services (Vanair) Ltd. Housing Corporation a 14 National Bank of Vanuatu MV Forum Samoa b 26 Vanuatu Holdings Ltd. National Provident Fund c 123 Polynesian Airlines (Holding) Ltd. d 0 Partially government-owned Polynesian Ltd. 355 Majority-owned Samoa Land Corporation e 15 Vanuatu Abattoirs Ltd. Samoa Shipping Services f 124 Metenesfi Estates Ltd. Special Projects Development Corporation g 80 Tour Vanuatu Ltd. Televise Samoa Propriety Ltd. 21 Western Samoa Water Authority 166 Minority-owned Western Samoa Life Assurance Corporation 45 Telecom Vanuatu Ltd. Western Samoa Shipping Corporation 105 Bel-Mol Cattle Western Samoa Trust Estates Corporation h 229 Ifira Wharf and Stevedoring Ltd. Partially government-owned Ifira General Services Ltd. Majority-owned Western Samoa Breweries132 Union Electrique Du Vanuatu Ltd. Wester Samoa Breweries Minority-owned Air Pacific n.a. Statutory corporations National Housing Corporation BOC-Samoa/ Samoa Industrial Gases 16 Vanuatu National Provident Fund Brugger Industries Ltd. i 12 Vanuatu Broadcasting and Television Corporation Computer Services Ltd. 26 Hellaby's Samoa Ltd. i 24 National Pacific Insurance 14 Source: Vanuatu authorities. Pacific Forum Line n.a. Reading to Table A3. 12 Rothmans Tobacco Company Ltd. 42 n.a. not available Samoa Forest Corporation 103 a A provider of housing finance. Samoa Iron and Steel Fabrication Ltd. 12 b A cargo shipping vessel. Other commercially orientated government agencies c Superannuation fund and provider of business and home Broadcasting Department 24 loans. d The holding company of the airline, Polynesian Ltd. Post and Telecom Department 307 e Involved in the sale/lease of former West Samoa Trust Sub-total k 2,644 Estates Corporation land. f Involved in ports management, stevedoring and cargo handling. k Excluding enterprises for which employment numbers are g Activities include quarrying, the production of concrete unavailable and companies with a minority government blocks and dredging. shareholding. h Activities include cattle and copra production. Source: Samoan authorities. i Involved in general maintenance and engineering. j A producer of processed meat products. -100- ANNEX3 Page 13 of 15 Table A3.13: Public enterprises in FSM Table A3.14: Public enterprises in Tonga Employees Enterprise Employees (persons) a (persons) a National Government Fully government-owned Bank of FSM 76 International Dateline Hotel Ltd. 106 FSM Development Bank 39 Post Office Department 47 FSM Telecommunications Corp. 140 Royal Tongan Airline Ltd. 85 Micronesian Longline Fishing Corp. 5 Tonga Broadcasting Commission 65 National Fishing Corporation 150 Chronicle (newspaper) 12 Pacific Island Airfreight 9 Tonga Electric Power Board 329 FSM Post Office 32 Tonga Investment Ltd. 95 FSM Coconut Development Authority 3 - Frisco n.a. Chuuk State - Home Gas n.a. Chuuk Coconut Authority 4 - Pili Quarry n.a. Chuuk Department of Transportation: Ports 14 - Palm Soap n.a. Chuuk Public Utility Corporation 95 - Pacific Warehouse Co. Ltd. n.a. Chuuk Housing Authority 15 - Primary Produce n.a. Kosrae State Government Tonga Telecommunication Commission 287 Kosrae Broadcast Station 5 Tonga Water Board 120 Kosrae Department of Transport and 8 Tonga Development Bank 154 Utility/Ports Tonga Timber Ltd. 77 Kosrae Department of Transport and 2 Utility/Water Kosrae Utility Authority 33 Partially government-owned Pacific Tuna Industries 25 Majority shareholding Micronesian Petroleum Corp. Charity Foundation Trust Ltd. n.a. Pohnpei State Government Duty Free Shops Ltd. 22 Pohnpei Broiler Project 5 Sea Star Fishing Company Ltd. 76 Pohnpei Economic Development Authority 70 Shipping Company of Polynesia Ltd. 183 Pohnpei Fisheries Corp. 72 Pohnpei Port Authority 35 Minority shareholding Pohnpei Utility Corp. Electricity 120 Air Pacific Ltd. n.a. Pohnpei Utility Corp. Wtr/Sewer 62 Bank of Tonga n.a. Pohnpei Transport Authority 195 International Finance Corporation n.a. Pohnpei Housing Authority 13 Pacific Forum Line Ltd. n.a. Caroline Fisheries Corporation 58 Royal Beer Company Ltd. n.a. Yap State Government Yap Fishing Authority 31 Sub-total b 1,702 Yap Transportation Authority 17 Yap State Public Service Corp. 87 n.a. not available a Latest estimate, mostly 1995. Yap Purse Seining Corp. 33 b Excluding enterprises for which employment Yap Fishing Corp. n.a. numbers are unavailable and companies with a Sub-total b 1,453 minority government shareholding. n.a. not available Source: Tongan authorities. a Latest estimate, mostly 1995. b Excluding enterprises for which employment numbers are unavailable and companies with a minority government shareholding. Source: EMPAT 1997. -101- ANNEX3 Page 14 of 15 Table A3.15: Public enterprises in the implement the framework of this report must Marshall Islands aim to divest itself of many of its public enterprises. Enterprise Table A3.16: Public enterprises in Kiribati Pacific Dairy Plant Marshalls Energy Company Enterprise Air Marshall Islands Majuro Water and Sewer Company Bank of Kiribati Ltd. WSZO Radio Station Development Bank of Kiribati National Shipping Agency Kiribati Insurance Corporation Tobolar Copra Processing Kiribati Provident Fund Post Office Public Utility Board National Telecommunications Authority Solar Energy Company Ltd. Kwajalein Enterprises Air Kiribati Ltd. Bank of Marshall Islands Kiribati Shipping Services Ltd. Telecom Services Kiribati Ltd. Source: Marshall Islands authorities Telecom Kiribati Ltd. Kiribati Broadcasting and Publications Authority A4 IMPLICATIONS Kiribati Housing Corporation Amms Co. Ltd. a One of the key contributions of this report is a Ams Co. Ltd. a clarification of how the PMCs can improve the AbaK arkoo Trading Ltd. b Kirimati Marine Exports Ltd. a quality of their government. This Annex Bobotin Kiribati Ltd. a provides support for the view that the PMC Kiribati Oil Co. Ltd. b public sectors tend to be unusually large. The Te Mautari Co. Ltd. C extensive involvement of government in the Atoll Seaweed Co. Ltd. economy is an important reason why public Tarawa Biscuits Co. Ltd. sector reform should be pursued-even small Betio Shipyard Ltd. improvements in the quality of government may Otintaai Hotel Ltd. have a substantial effect on social welfare, Captain Cook Hotel Ltd. perhaps more so than in most other countries. Kiribati Supplies Co. Ltd. b Atoll Motor Marine Services Company Ltd. b Certainly, the extensive government Kiribati Marine Export Ltd. c involvement in business is incompatible with the framework for government presented in this a Classified as part of the transport and communication sector. report. The collapse of the Bank of Fiji, the b Involved in trading activities (e.g. retailing, wholesaling). dismal financial performance of many public c Fishing-based operation. fishing operations in the region, and the large Source: Kiribati authorities. bailout required of Polynesia Airlines are A PMC politician or public servant immersed in obvious examples of the downside of the demands of government may lose sight of government involvement in business. The the appropriate size of the public sector. But it typical result of extensive government is important to keep in mind that other countries involvement is the crowding out of a wide have found ways to run smaller public sectors. spectrum of private sector activity and weak Hence calls to reconsider the size of the public growth. Considerable resources are allocated to sector in the PMCs are not academic, they are non-core activities and ultimately this must be at well-founded on the experience of other the expense of the highest priorities of developing countries. governments. A PMC government seeking to -102- ANNEX 3 Page 15 of 15 This is not to trivialize the challenge of reform. REFERENCES Significant hurdles exist, such as the social costs of right-sizing. But international experience suggests that smaller, more effective EMPAT (Economic Management Policy governments and the associated reorientation Advisory Team) 1997, Public Enterprise- from government to private activity is critical to Reform, Prepared for the Government of the development. FSM, Draft, April. (Note that the following was not included in the References provided with Chapter 2) -103 - ANNEX 4 Page 1 of 7 PAR TICIPA TORYDEVELOPMENT: THE CHALLENGE OF INCLUSION Participation, similar to most aspects of inclusion is to ensure that other stakeholders development, takes on a special meaning in the play a supportive role in core functions, carry context of the PMCs. The Pacific Island out commercial activities, and perform a myriad societies are undergoing a process of of other tasks that can enrich people's lives. modernization which juxtaposes rapidly increasing expectations-brought on by recent Participation by the private sector and other access to mass communication, particularly stakeholders is now clearly regarded as a vital tele ision-upon centuries of traditional culture. component of economic development. As the While many of their perceived needs used to be 1997 World Development Report concludes - met via the traditional channels of village chief "Governments are more effective when they or, in the small urban areas, local government, listen to businesses and citizens and work in new demands for higher standards of living have partnership with them in deciding and made these established lines of authority implementing policy." The logic behind this increasingly less able to respond in ways assertion is self-evident. When people are perceived as adequate by the island populations. actively engaged in a task, when they feel that it Yet, given the tradition of depending on local is their own and hence have "ownership" of it, chiefs to varying degrees, on issues such as land they are far more apt to garner their energies in allocation, education or environment such a way as to best meet their needs. protection-the paradox of this region is that the Communication is an essential element of people have become somewhat passive in the participation. Government must listen to the pursuit of development. To optimize benefits, people to understand their needs; similarly, people need to become architects of their own people need to be informed of government development. objectives and proposals and technological advances in each sector so that they can know The stakeholders in the PMCs are already how to best operate to their own advantage. For engaged in a variety of activities such as listening, consultation, and participation to be secondary education (the churches), land most effective, all segments of a society must allocation and maintaining law and order (the take part: public and private, formal and Matais in Samoa) or specific social services (the informal. The provision and enhancement of nongovernmental organizations -NGOs). The voice, individual and collective, brings the force objective of this chapter is to focus on the of social capital to bear on development, such question of how to meaningfully include the key that people, as catalyzed actors, are both greater stakeholders in the development process. More contributors and recipients of developmental specifically, how can governments help achieve benefits. sustainable development by harnessing the energies of the other stakeholders, i.e. the Participation can be seen as an institutional private sector, the churches, the NGOs and the issue. The nature and degree of one's local community groups? An important involvement in one's own development depends corollary of government focus on core functions on the formal and informal institutions which is the need to include and catalyze the energies channel voice and provide opportunities for the of the other stakeholders in carrying out the non- realization of one's aspirations. The range of core functions which are essential for institutions which govern participation runs sustainable development. The challenge of from family to community (especially strong in -104 - ANNEX 4 Page 2 of 7 the Pacific Islands), NGOs, the churches, the development (stagnant and growth) for rural modem private sector (which provides areas. A total of 14 communities (three in employment on a larger scale than indigenous Samoa, five in Tonga and six in Fiji) were small businesses) and government. It also selected. Nine communities were rural and five includes the rule of law, regulations concerning urban or, in the case of Fiji, peri-urban. The property rights, gender, inheritance and the like. method used in all areas was conversational Recognizing the complexity of the participation interviewing with individuals. In Fiji and issue and the opaqueness of the institutional Tonga, this was complemented by Participatory fabric of a society from the outside-as well as Rural Appraisal (PRA), a more visual technique the innovative nature of the topic of for eliciting perceptions at the community level, participation as an aspect of development in the particularly with groups. In Fiji and Samoa, countries of the South Pacific-it was thought sampling was done on a systematic basis, with that the best arbiters of the existing level and the individual interviews conducted with 62 and 30 potential for participation would be the people traditional and non-traditional leaders in each themselves, both the leadership and the place, respectively. In Tonga, the PRA sessions population at large. were followed up with interviews and focus groups with community committee leaders, church leaders and town officers. An additional Stakeholders as Agents of Development 45 key informant interviews were conducted in the villages of Samoa. In the Fijian and Tongan A key objective of this report is to underline the surveys approximately 180 and 150 people, importance of fostering an enabling environment respectively, participated in focus groups using for the greater inclusion of this region's PRA methodology. In Tonga, survey work was population in the development process. To limited in reach and time. But it demonstrated better understand first, the ways in which this the potential for doing further work in could be achieved and second, the potential for participatory assessments which could participatory development, three countries, Fiji, contribute to policy formulation in the future. Tonga and Samoa, were selected on a pilot basis. Local interviewers in each of the The interview guide, administered in the three countries assessed people's views on countries, was divided according to the topics of participation in selected issues affecting the concern but also allowed for the free expression quality of their lives: health, education, micro- of other issues felt to be important by the finance, land leasing and environmental people. For the leaders, qualitative, open-ended protection. More generally, people were asked and naturalistic conversational style of to discuss what they felt to be institutional interviewing was chosen as most appropriate for constraints and opportunities for becoming more treating issues of sensitivity in small, closed actively involved with the resolution of their societies; quantification was done where own needs, in a cross-sectoral, generic manner. possible. The PRA exercises gave the The objective was to find out how people could communities the opportunity to analyze their intensify their collaboration with government own problems. Given the limited scale of the and enhance the development process. survey and the novelty of both the methodology and the topic of participation, the findings Methodological Approaches. The populations presented below are to be taken as more of the three island states were broken down by indicative and exploratory than definitive. gender and location (rural/urban). In Tonga and Fiji, the groups were also broken down by age Working with Government. While the groups and further in Fiji, by ethnicity objective of this assessment was to gauge the (indigenous Fijian and Fiji Indian) and pace of potential for participation of the people of the -105 - ANNEX 4 Page 3 of 7 PMCs, government was always envisaged as a in the Participatory Policy Research exercise partner in this quest. Inclusion, in this sense, using PRA. was not just at the level of the people but also implied working with the governments, Health. A problem which appears to be general providing public officials with feedback from to the PMCs is that of the poor, or inadequate, their own populations about how the challenge quality of transmission of public health of development could be shared between public dissemination. The 1994 World Bank report on and private bodies, incorporating those with and health in the PMCs noted that no government in without voice in the system. The Governments the region had introduced policies and programs in Fiji, Tonga and Samoa were supportive of this capable of altering public behavior. This report initiative as they saw the relevance of went on to recommend increased budget participation to their own country's allocations for proactive public health development. And each offered experienced campaigns in the member countries, with the researchers as interviewers. In Fiji and Samoa active involvement of women's committees and these interviewers worked under the leadership traditional healers. The majority of the leaders of local, nongovernmental personnel. In Tonga interviewed in Fiji who responded to this issue this work was coordinated by the Prime (24 of 32) stated that public health dissemination Minister's Office, via elected local government was either poor (five) or needed improvement officials. (24). In Samoa, over half (60 percent) of the key informants stated that they learned what Findings. For the interview guide, the choice of they knew about health through their everyday issues for this participatory inquiry was made on interactions with peers and acquaintances; an a priori basis not altogether in keeping with another 20 percent acquired their health the inductive spirit of the exercise. Not included knowledge during their school years. The were issues which appeared to affect largely the problem in Fiji was largely erratic transmission urban population of Fiji: housing, infrastructure of public health services (overly short and social problems (alcohol and kava abuse, information campaigns, infrequent visits of domestic violence, insecurity, etc.). The PRA public health officials to rural areas). sessions were open-ended to encourage Transmission was often further limited with a communities to express their priorities and to majority of information being in English. gain a deeper understanding of the informal and formal institutional mechanisms used for In Samoa, two problems emerged: the absence making their voices heard. of effective communication regarding health issues from the government, particularly Table 4.1 shows the priorities of the different regarding waste management (sewage) because communities in Fiji: rural Fijian (growth and of its associated health risks and illnesses, and stagnant), rural Fiji Indian, urban Fijian and Fiji suicide, considered to be relatively high. Access Indian and mixed-all divided by gender and, to health services was not considered a problem for the Fijian population, by age as well (the Fiji by most (80 percent) of the persons interviewed Indian population was considered to be more in Samoa, though it was in the larger country of homogeneous across age lines than the Fijian). Fiji, where fully 70 percent of the respondents Nevertheless, despite this caveat regarding the stated that access was poor. Health services in urban population of Fiji, the selected issues- Fiji clearly suffer from an urban bias, with few health, education, micro-finance and land resources and no incentive structure to motivate leasing-were among the most important issues doctors to spend time in rural areas. Again, the of concern for the peoples of all three island- quality of health is seen in markedly different states. Table 4.1 below presents an overview of ways by the residents of Samoa and Fiji. how the six communities ranked their problems Among the former, most are satisfied, while a -106 - ANNEX 4 Page 4 of 7 clear majority in Fiji either rated the quality as motivations for this migration was better poor (40 percent) or as needing improvement education for children, illustrating the high value (44 percent). In Tonga and Fiji one of the main placed on education. messages was that the high cost of medicine restricted poor people's access to health care. Microfinance. As with poor people The people of Fiji, similar to those of many poor everywhere, the people of the PMCs need more areas of the world, also complained of access to finance than they presently have. insufficient health personnel and the "unhelpful Most of the persons interviewed for this attitude" of health workers towards patients. In assessment stated that the private banking Fiji, many doctors are expatriates which system was not responsive to their needs, sometimes leads to communication difficulties. requiring excessive paperwork and collateral for loans, the latter being particularly onerous for Education. The only prevailing critique of the those persons in Fiji who were not landowners, education system that may be said to apply but rather lessees (rural Indians) or squatters across all of the island-states of the South (urban poor). Some of the problems in Pacific is that, for many, the cost is high. In accessing credit in Fiji are illustrated. Women Samoa, this financial burden was supported by felt particularly excluded in Fiji and stated that the people with little complaint due to the high microfinance was usually "men's talk." value they place on education. Nevertheless, Particularly problematic for the Fijians was the most of the people interviewed in all three perceived low willingness of banks to provide countries did feel that a closer collaboration loans for communal projects (sea wall, village between church and state in the provision of flush toilets, etc.) when the Government requires education would lower cost and improve quality, one third of the cost of any communal particularly in secondary schools, and should be improvement to be provided by the village as a matter of policy reforn. The Fijians, again, counterpart to the receipt of public funds. were those who voiced the most complaints Generally, there was a strong widespread feeling about their education system. Close to 90 that the involvement of NGOs in the microcredit percent of the leaders interviewed stated that the area would facilitate the access and delivery of quality of the curriculum and adequacy of finance to the people of these countries. The resources for education was either poor (31 emphasis in many of these societies is on the percent) or needed improvement (58 percent). community as opposed to the individual. People A major message emerging from Tonga and Fiji were, therefore, more in favor of NGOs helping was that the curriculum was criticized as being assess, secure and monitor loans for groups and overly academic, and not providing the communities. Close to two thirds (63 percent) appropriate skills needed for the workplace. of the respondents in Samoa stated that NGOs should be used as conduits or brokers for As with health (above), the rural schools of Fiji monetary loans. They saw the intermediation of appear to also suffer from an urban bias with the NGOs in the area of microcredit as leading poor transport to rural schools and no incentives to faster and simp!er processing of loans, less for qualified teachers to go to rural areas (high collateral requirements and lower interest rates. rents, poor accommodation and isolation were mentioned). The resulting disparity in the Land Leasing. The issue of land leasing is quality of education between rural and urban most resonant in Fiji. In Samoa only 20 percent areas was seen by many as a cause for the of the interviewees stated that they had ever gradual drift of persons from country to city. In been lessees; most Samoans have little both Tonga and, to a greater extent, in Fiji, understanding or interest in leasing, viewing it, people had migrated from the outer islands and dimly, as overly expensive for their limited formed squatter settlements. One of the main means and of possible use only in Apia, the -107 - ANNEX 4 Page 5 of 7 major urban area of the country. In Fiji, on the the active involvement of the area's citizenry in other hand, where leases are widespread and countering these. One fruitful area mentioned as tenuous as regards their security, the issue of a possible target of opportunity for land leasing is a major cause for insecurity and environmental protection in both Fiji and Samoa racial strife-most of the landowners being was tourism, either via eco-tourism or the Fijian, the lessees Fiji Indian. Perhaps the most levying of fees on tourists for environmental important finding of this assessment regarding enhancement activities. This is clearly another land leasing is that the institutional structure set area where the participation of NGOs would be in place by the Fiji Government to resolve land beneficial. leasing issues is not perceived as up to the task by the people of Fiji. The Native Land Trust Effective Participation in Development. The Board (NLTB) is seen as overly bureaucratic, people's voice, as heard in the interviews and unresponsive to the demands of the commercial focus groups conducted during this brief environment; ALTA is seen as too autocratic by assessment in Fiji, Tonga and Samoa, expresses landowners. Land leasing generally appears to a desire for greater involvement in the activities offer the potential for NGO intermediation as which are perceived as affecting their lives, brokers in engaging landowners and lessees in primarily the basic needs of health and constructive dialogue which can resolve issues education and that of increased access to credit on their own terms with more relevance and at reasonable terms. In Fiji, people want to have immediacy than is being done by distant, increased say in the way that land affairs, government agencies. This issue, similar to particularly leasing, is conducted. Environment, microfinance (above) points to the need for while recognized as an issue of importance, is greater participation between the public and not widely seen as a problem or as an area nongovernmental sectors, particularly (re: land) where popular participation can or should come in Fiji. into play. In each of these issues, though to differing degrees, and transcending all of them, Environmental Protection. Of all the issues is a perceived blockage of expression beyond discussed with the people of the islands, the village. Government institutions are seen as environment was the one about which they (a) remote and top-down; traditional village and had the least awareness and (b) saw the least community leadership is seen as authoritarian role for themselves as participants. In Samoa, and far less responsive to individual than to the people did appreciate a certain community needs. These factors are important if responsibility, with the young men protecting participation is to be viewed in the unique the coastal areas and mangroves under the cultural context of the Pacific Islands where the direction of the village chiefs (matai). However, emphasis is on groups as opposed to individuals. in all three countries, there appeared to be little In Tonga, town and district officers often find it concern regarding any spoilage or destruction of difficult to voice the priorities of their the coastal areas. Only 10 percent of the communities to the policy maker because of the Samoans interviewed mentioned the importance top-down communication flow and hierarchical of guarding against the deposit of litter and system of government. In addition, many of the using the beach as alternative lavatories. And in officers have to supplement their incomes and Fiji, the general finding was that most therefore have less time to carry out their roles communities felt there was no environmental as people's representatives. The complex problem at all in their village, despite recorded institutional frameworks exist in villages for all environmental degradation in many parts of the three islands where information can flow country. The general need throughout the PMCs effectively. The opening of effective channels is for greater awareness-building of the threats for voice and participation through the increased to the environment and what might be done by engagement of nongovernmental institutions, as -108 - ANNEX 4 Page 6 of 7 well as strengthening local government, is the poor, often appeared remote. The potential clearly a priority for the sound and sustainable for NGO involvement in building public development of the island states of the South awareness around environmental and health Pacific. concerns, in facilitating access and procedures for microcredit, and in the intermediation of land While it is not the intention of the report to disputes (particularly in Fiji) was one clear prescribe specific measures of policy reform, target of opportunity signaled by this systematic there are certain activities which would follow listening to the people of the South Pacific. naturally from the insights gleaned above. One clear need throughout the PMCs covered in this Beyond the particular findings of the survey survey was for more effective, penetrating conducted in the three PMCs, the emerging public information campaigns. This need was lesson of this work is that there is both a need found to be especially evident in public health and a feasibility of giving voice and enhancing and environmental protection. Similarly, the participation of the peoples of this remote technical expertise and professional guidance in island-studded region. The governments which the basic needs of health and education was were approached concerning their interest in found to be sorely lacking in the rural areas of participation were open and cooperative, aware Fiji; one would expect that this need for more of the developmental importance of this topic. effective outreach would also be felt in the more The people and leaders in villages and towns remote outer islands of many of the PMCs. also showed themselves to be willing Consideration should be given to incentives for interlocutors in this process, giving many hours professionals to spend time in these more remote of their precious time to the individual places as well as to the training of para- interviews and focus group discussions. professionals from these outlying communities who could better serve their own populations Two primary methods of inquiry were chosen, with no need for displacement. beneficiary assessment (BA) and Participatory Rural Appraisal (PRA). Each was found More generally, in each of the countries effective. Others could also be used to gain a surveyed and, throughout the region, there is a fuller understanding of the potential for lack of effective communication between the participatory development. The work presented various centers of leadership. Traditional local here demonstrates that there are ways for these chiefs (matais in Samoa, turagas in Fiji), while island states to draw upon the vast reserves of sometimes also being government officials, energy of their own people and institutions so as seemed as a group to be at odds, (even to develop not only from increased external ties confrontational, in Samoa), with elected but also from within, from the social capital government. The NGO community, which embedded in their own rich cultures as adapted could and should be harnessed to serve the to the needs and opportunities of a modernizing interests of the countries' populations, especially world. -109 - ANNEX 4 Page 7 of 7 Table A4.1: Perceived Rankings Rural Urban Indigenous Fijian Fijian Fiji- Fiji- Indigenous (moderate (low growth) Indian Indian Fijian Mixed growth) I _I Ran M F Y M FY M F M F M F YM F 1 9 9 8 9 5 9 4 9 4 11 4 11 4 11 5 2 4 7 5 4 8 10 9 5 11 11 9 10 9 2 2 3 6 11 10 2 7 11 3 8 11 10 6 9 11 8 8 4 1 8 11 10 11 6 11 10 8 6 11 10 4 9 8 5 7 1 2 8 4 11 9 11 10 5 5 I 9 Key M = Males F = Females Y = Youth 1. Population increase 2. Social problems 3. Crime 4. Land leasing 5. Education 6. Micro finance 7. Environment 8. Health 9. Employment 10. Housing 11. Infrastructure -110- ANNEX5 THE STATE OF THE ENVIRONMENT IN THE PMCS The PMCs are characterized by large sea areas, small populations and little industrial activity. These characteristics help limit and localize water pollution problems and make major air pollution unlikely. Marine resources are generally in good condition, although over-fishing and reef degradation is common near major population centers. The primary environmental problems arise from the small land area combined with an emphasis on agriculture and, for some PMCs, logging. This gives rise to waste management problems in heavily populated areas and land degradation through land clearing. All PMCs face major waste management problems. Solid waste disposal is particularly difficult in the smaller islands due to a shortage or absence of landfill sites. Poor or absent sewerage systems give rise to localized water pollution problems; lagoon areas with poor tidal flushing are the worst affected. Most PMCs see the possibility for sea level rise from climate change as an important long term problem, given the extent of coastal living and in some cases, very low heights above sea level. Table A5.1: A Stock-Take of Environmental Problems Fiji Kiribati FSM Marshall Solomon Tonga Vanuatu Samoa Is. Is. LAND AND SEA Deforestation x x x x x x - agrodeforestation x x x x x Land degradation x x x x x x x x - soil erosion x x x x x x Depletion of oceanic/coastal resources x x x x x x x x offshore migratory fish stocks inshore and lagoon marine resources x x x x x x x x - reef degradation x x x x x x x x -coastal erosion x x x x x x x -mangrove destruction x x x x x x x Marine pollution x x x x x x x x -land-based x x x x x x x x - sea-based x Loss of biodiversity x x x x x x x - loss of species/ecosystems x x x x x x x - lack of protected areas x x x x x FRESH WATER Water quantity x x x Water quality x x x x x x x - surface water x x x x - underground water/freshwater lens x x x AIR AND CLIMATE Air pollution x Climate change/sea level rise x x x x x x x WASTE Waste management x x x x x x x x - solid urban waste x x x x x x x - liquid urban waste x x x x x x x ENERGY REsOURCES x x x x Urban fuelwood shortages x x x x x x SOCIAL/DEMOGRAPHIC ISSUES Population growth x x x x x Health hazard x x x x Poverty x x Note: A x indicates the presence of a significant environment problem. Source: SPREP 1996. ANNEX 6 Page 1 of 2 RELATIONSHIP BETWEEN FOREIGN A)ID AND GOVERNMENT EXPENDITURE Objective: The Pacific Island economies have been amongst the highest recipients of foreign aid in per capita terms. Aid programs have financed both development expenditure as well as current expenditure of governments. The proposed hypothesis is that there is a strong relationship between aid flows and government expenditure. More specifically, the aim of this analysis is to test the following relationships: (i) Total government expenditure as a function of foreign aid and GNP per capita. (ii) Current government expenditure as a function of foreign aid and GNP per capita. Specification of the Model: Equation(1): Y=ao+al Xl +a2X2+ where Y = total government expenditure as a percentage of GDP, X1= aid as a percentage of GDP, X2 = GNP per capita, and E error term, ao = intercept, and a I and a2 are the coefficients. Equation (2): Y =Po+131X I+132X 2+ F where Y = Current expenditure as a percentage of GDP, X1= aid as a percentage of GDP, X2 = GNP per capita, and E = error term, Po= intercept, and P1I and ,B2 are the coefficients. Equation (la): Y= ao+ aI X 1+ a2 X 2+ a3 X3+ s where Y = total government expenditure as a percentage of GDP, X1= aid as a percentage of GDP, X2= GNP per capita, X3 = square of GNP per capita, and £ = error term, ao =intercept, and a 1, a2 and a3 are the coefficients. Equation (2a): Y =Po+PlX1+02X 2+P3X3+E where Y = current expenditure as a percentage of GDP, X1= aid as a percentage of GDP, X2 = GNP per capita, X3 = square of GNP per capita, and E =error term, Po =intercept, and P3I and ,B2 are the coefficients. -112- ANNEX6 Page 2 of 2 Data Set: Pooled time series-cross section data for eight Pacific Islands countries (Fiji, Kiribati, FSM, Marshall Islands, Samoa, Solomon Islands, Tonga, Vanuatu ) during 1990-96. Some data were missing. Total number of observations used was 49. Results: Table 1: Government Expenditure as a Function of Foreign Aid and Per Capita Income Equation Intercept XI X2 X3 Adjusted R2 F Statistic Aid/GDP GNP Per GNP Per Capita Capita Squared (1) 51.60 1.28 -0.013 0.82 107.18 (10.03) (13.89) (-4.09) (2) 20.66 0.89 0.0001 0.74 70.47 (4.93) (11.86) (-0.05) (la) 77.01 1.32 -0.05 1.38xlO-5 0.82 75.68 (5.01) (14.15) (-2.30) (1.75) (2a) 38.40 0.92 -0.03 6.48x10-6 0.75 48.95 (3.04) (11.97) (-1.48) (1.48) Note 1: T- statistics are in parentheses (). Conclusions: (1) The coefficients of X1 are highly significant in all four equations (high T-values), indicative of a strong relationship between government expenditure and aid flows. (2) The coefficients of X2 are highly significant in equations (1) and (la), indicating that as GNP per capita increases total expenditure as a proportion of GDP is likely to decline, with a likely increasing role for the private sector. In equation (2), the coefficient of X2 is not significant, indicative of a weak association between government current expenditure and GNP per capita. (3) The coefficients of X3 are small in equations (la) and (2a), but significant, indicative of a slight non-linear relationship between government expenditure and GNP per capita. (4) The relatively high adjusted R2 and the F Statistic point to a strong explanatory power of the model. - 113 - STATISTICAL APPENDIX ON PUBLIC FINANCE -114- Table 3.1: Central Government Revenue 11 (In percent of GDP) 1985-89 21 1990 1991 1992 1993 1994 1995 1996 Av. 1990-96 Fiji 24.0 28.1 27.4 25.7 25.7 26.1 25.9 25.1 26.5 Kiribab 3/ 46.4 49.3 57.0 94.3 100.9 87.3 87.8 60.9 79.4 FSM 4J 21.5 27.2 30.0 32.2 31.6 29.4 27.9 ... 29.7 Marshall Islands 20.0 32.9 33.6 31.3 33.1 30.1 29.8 ... 31.8 Samoa 40.2 37.3 41.9 42.5 45.6 43.6 39.7 40.7 41.8 Solomon Islands 5/ 23.4 28.5 28.8 33.0 26.7 28.7 28.6 25.5 29.0 Tonga 27.4 27.6 28.9 24.4 25.6 26.0 27.0 25.5 26.3 Vanuatu 25.8 26.5 23.1 23.5 21.5 23.8 24.2 ... 23.8 Source: Official Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda; IMF Staff Reports and Recent Economic Development Reports. 1/ All rabos are for FY ending in specified calendar year. 21 For FSM and Marshall Islands, covers FY 1986-89: for Solomon Islands 1985-88; for Tonga, 1985-88: for Vanuatu 1985-87. 3/ From 1992, includes all revenue acrued to the RERF. 4/ Indudes the General Govemment. 51 From 1990, GDP was revised downward. This accounts for the increase in revenuelGDP rabo. Table 3.2: External Grants to PMC Governments 11 (In percent of GOP) Av. 1985-89 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji 0.9 0.4 0.4 0.3 0.2 0.2 0.2 0.2 0.3 Kirnbab 36.7 4683 38.4 58.3 41.6 32.7 18.4 19.2 39.3 FSM 78.3 76.3 69.8 57.1 51.8 51.4 52 ... 59.7 Marshall Islands 49.1 71.4 60.9 55 52.5 46.3 44.9 ... 55.2 Samoa 15.6 13.2 8.1 13.5 15.3 10.5 19.8 21.7 13.4 Solomon Islands 7.6 5.1 19.4 17.6 14.5 18.4 12.6 12.5 14.6 Tonga 17.8 15.8 10.1 13.7 16.6 14.8 16.4 12.8 14.8 Vanuatu 25.8 17.6 16.6 14.3 12.4 13.4 13.3 ... 14.6 Source: Official Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda: IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1. footnotes 1, 2 and 4. Table 3.3: Government Extemal Borrowfng, Net 11 (in percent of GDP) Av. 1985-89 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji -0.5 -0.5 -1.0 -0.6 -0.5 0.3 -0.1 -0.1 -0.4 Kiribab.... .. .. .. .. ...... FSM -0.2 9.3 52.1 9.9 10.6 -3.8 -4.3 ... 12.3 Marshall Islands 9.3 47.3 54.3 8.2 13.6 23.2 -12.0 ... 22.4 Samoa 2.1 8.7 16.6 11.6 14.3 12.0 3.3 1.3 11.1 Solon on Islands 6.7 6.2 -0.8 2.7 0.4 0.7 1.0 -0.3 1.7 Tonga 2.3 1.9 0.9 1.1 1.4 1.6 3.6 2.2 1.8 Vanuatu 1.5 ... 2.5 3.1 0.3 0.5 0.2 ... 1.1 Source: Official Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda; IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1, 2 and 4. Table 3.4: Government Borrowing From Domestic Banks 11 (In percent of GOP) Av. 198549 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji 0.8 -0.4 1.2 1.2 -0.1 -1.3 -0.3 ... 0.0 Kirbab ... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FSM 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Marshall Islands 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Samoa -6.8 -4.9 -8.7 2.9 7.0 1.0 5.2 -3.8 0.4 Solomon Islands 0.7 2.9 11.9 2.0 4.7 4.7 1.1 ... 4.5 Tonga -1.4 -4.5 0.3 2.7 -2.6 -2.7 -0.1 1.0 -1.2 Vanuatu .13.1 .7.8 -1.5 0.3 0.8 1.2 1.4 ... -0.9 Source: Official Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda; IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1, 2 and 4. -115- Table 3.5: Govemment Borrowing from Douestic Nonbanks 11 (in percent of GDP) Av. 1985-89 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji 2.9 0.6 1.3 2.4 4.1 2.5 0.9 ... 1.9 Kribati 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0.0 FSM ... 0.0 0.0 0.0 0.0 0.0 0.0 0 0.0 Marshall Islands ... ... ... ... .. ... ... ... 0.0 Samoa 1.4 -0.4 3.2 2.0 0.5 -1.2 0.7 0.8 0.8 Solomon Islands 0.3 -2.2 2.0 2.5 2.8 1.3 2.3 ... 1.4 Tonga -0.5 ... ... 2.6 -2.0 -3.7 -3.5 -2.8 -1.1 Vanuatu 1.1 ... 0.5 0.0 0.2 1.4 0.0 ... 0.3 Source: Official Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda; IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1, 2 and 4. Table 3.6: Central Govemment Current Expenditure 11 (In percent of GDP) Av. 1985-89 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiqi 23.0 23.3 23.5 24.5 25.6 23.8 23.5 23.3 24.0 Kiribati 46.8 53.5 56.7 56.2 54.9 56.9 68.7 63.1 57.8 FSM 64.8 62.8 69.9 67.8 66.6 65.8 64.7 ... 66.3 Marshall Islands 48.9 70.1 79,8 81.8 78.4 64.1 58.7 32.7 72.2 Samoa 2/ 21.3 20.5 23.9 42.5 42.4 42.0 30.8 33.7 Solomon Islands 26.1 34.4 38.0 36.0 30.3 31.3 29.2 28.8 33.2 Tonga 24.9 27.8 28.6 25.4 23.8 22.0 23.1 24.1 25.1 Vanuatu 36.1 35.1 28.9 27.9 26.5 26.6 26.3 ... 28.6 Source: Official Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda; IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1, 2 and 4. 2/ Expenditure data were reclassified from 1992, when expendiure previousty reported as domestically financed development expenditure were moved to the current budget. Table 3.7: Government Current Account Balance, Excluding Grants 1/ (In percent of GDP) Av. 1985-89 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji 1.0 4.8 3.9 1.2 0.1 2.3 2.4 2 2.5 Kiribati 1/ -0.4 -4.2 0.3 38.1 460 30.4 19.1 -2.2 21.6 FSM -43.3 -35.6 -39.9 -35.6 -35.0 -36.4 -36.8 ... -36.6 Marshall Islands -28.9 -37.2 -46.2 -50.5 -45.3 -34.0 -28.9 ... -40.4 Samoa21 18.9 16.8 18.0 0.0 3.2 1.6 8.9 8 8.1 Solomon Islands -2.7 -5.9 -9.2 -3.0 -3.6 -2.6 -0.6 -2.3 -4.2 Tonga 2.5 -0 2 -1.7 -1.0 1.8 4.0 3.9 2.5 1.1 Vanuatu -10.3 -8.6 -5.8 -4.4 -5.0 -2.8 -2.1 ... -4.8 Source: Tables 3.1 and 3.6. 11 See table 3.1 footnotes 1, 2 and 4. 1/ From 1992, includes all revenue accrued to RERF., 21 See footnote 1, table 3.6. Table 3.8: Govemment Development Expenditure 11 (In percent of GDP) Av. 1985-89 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji 5.0 4.9 5.7 4.5 3.7 4.0 3.1 7.3 3.5 Kiribati 37.8 49.3 401 62.2 44.5 38.5 24.3 24.2 34.9 FSM 18.2 36 9 37.9 26.8 20.1 15.6 13.6 ... 19.0 Marshall Islands 13.2 32.4 21.5 30.8 21 2 25.8 28.5 ... 21.3 Samoa 2) 31.2 31.1 36.0 30.0 40.5 23.6 38.3 27.8 28.1 Solomon Islands 12.6 6.1 23.5 21.8 188 22.4 14.4 14.2 16.8 Tonga 20.9 22.9 185 19.3 166 16.3 23.5 19.2 15.7 Vanuatu 17 8 19.1 12.4 13.2 8.8 13.6 12.8 ... 101 Source: Otficial Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda; IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1. 2 and 4. 2/ See Tabl 3.6 footnote 1. -116- Table 3.9: Total Govemment Expenditure I1 (In percent of GDP) Av. 1985549 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji 28.0 28.2 29.2 29.0 29.3 27.8 26.6 30.0 28.4 Kiribati 84.6 102.7 96.8 118.4 99.4 95.4 93.0 87.3 100.6 FSM 83.0 99.7 107.8 94.6 86.7 81.4 78.3 ... 89.8 Marshall Islands 62.1 102.5 101.3 112.6 99.6 89.9 87.2 ... 98.1 Samoa 52.5 51.6 59.9 72.5 82.9 65.6 69.1 80.5 70.0 Solomon Islands 38.7 40.5 61.5 57.8 49.1 53.7 43.6 43 53.1 Tonga 45.8 50.7 47.1 44.7 40.4 38.3 46.6 43.3 43.4 Vanuatu 53.9 54.2 41.3 41.1 35.3 40.2 39.1 ... 39.4 Source: Tables 3.6 and 3.8. 1/ See table 3.1 footnotes 1,2 and 4. Table 3.10: Govemment Overall Balance, Including Grants 11 (In percent of GDP) Av. 198549 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji -3.1 0.3 -1.4 -3.0 -3.4 -1.5 -0.5 -0.5 -1.6 Kinbati -1.5 -7.2 -1.4 34.2 43.1 24.6 13.2 13.2 17.8 FSM 16.8 3.8 -8.0 -5.3 -3.3 -0.6 1.6 1.5 -2.0 Marshall Islands 7.0 1.8 -6.8 -26.3 -14.0 -13.5 -12.5 -12.5 -11.9 Samoa 3.3 -1.1 -9.9 -16.5 -22.0 -11.5 -9.6 9.5 -11.8 Solomon Islands -7.7 -6.9 -13.3 -7.2 -7.9 -6.6 -2.4 -2.4 -7.4 Tonga -0.6 -7.3 -10.1 -6.6 1.8 2.5 -3.2 -3.2 -3.8 Vanuatu -2.3 -10.1 -1.6 -3.3 -1.4 -3.0 -1.6 -1.5 -3.5 Source: Tables 3.2 and 3.11. I/ See table 3.1 footnotes 1, 2. 3 and 4. Table 3.11: Govemment Overall Balance, Excluding Grants 1/ (In percent of GDP) Av. 1985-89 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji -4.0 -0.1 -1.8 -3.3 -3.6 -1.7 -0.7 -4.9 -1.9 Kiribabi -38.2 -53.4 -39.7 -24.1 1.5 -8.1 -5.2 -25.4 -21.5 FSM -61.5 -72.5 -77.8 -62.4 -55.1 -52.0 -50.4 ... -61.7 Marshall Islands -42.1 -69.6 -67.7 -81.3 -66.5 -59.8 -57.4 ... -67.1 Samoa -12.3 -14.3 -18.0 -30.0 -37.3 -22.0 -29.4 -19.8 -25.2 Solomon Islands -15.3 -12.0 -32.7 -24.8 -22.4 -25.0 -15.0 -16.5 -22.0 Tonga -18.4 -23.1 -20.2 -20.3 -14.8 -12.3 -19.6 -16.7 -18.4 Vanuatu -28.1 -27.7 -18.2 -17.6 -13.8 -16.4 -14.9 ... -18.1 Source: Tables 3.7 and 3.8. 1/ See table 3.1 footnotes 1, 2, 3 and 4. Table 3.12: Government Expenditure on Wages and Salaries 11 (In percent of GDP) Av. 19654 1990 1991 1992 1993 1994 1995 1996 Av. 1990-96 Fiji 12.2 12.0 12.3 12.3 12.0 11.7 11.4 11.2 12.0 Kiribati 18.6 20.3 22.2 23.2 23.1 21.3 26.0 25.9 22.7 FSM 30.6 30.3 30.3 30.2 29.7 28.4 29.4 ... 29.7 Marshall Islands 15.2 22.5 24.5 24.2 22.8 22.7 21.5 ... 23.0 Samoa 11.0 ... ... 13.0 13.2 13.4 11.7 10.8 8.5 Solomon Islands 12.0 14.6 16.2 14.3 12.5 12.6 10.9 10.8 13.5 Tonga ... ... 12.8 13.2 11.2 11.6 12.2 13 10.2 Vanuatu 15.6 13.1 12.6 12.6 11.9 11.5 11.9 ... 12.3 Source: Official Documents; World Bank Regional Economic Reports. Public Expenditure Review and Country Economic Memoranda: IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1,2 and 4. -117- Table 3.13: Govemment Expenditure on Interest Payments 1/ (in percent of GDP) Av. 1985589 1990 1991 1992 1993 1994 1995 1998 Av. 1990-95 Fiji 3.6 4.1 3.5 3.1 3.0 2.9 3.1 2.9 3.3 Kiribat ... ... ... 0.1 0.1 0.1 0.2 0.2 0.1 FSM 0.0 0.0 0.0 2.8 3.5 2.7 2.3 ... 1.9 Marshall Islands 7.8 9.4 8.2 12.3 12.0 7.1 5.9 ... 9.2 Samoa 2.8 ... ... 1.9 1.7 1.6 1.3 ... 1.1 Solomon Islands 2.2 4.2 5.5 4.3 3.9 4.1 4.1 3 4.3 Tonga .... .. ,. ... ... ... ... 0.0 Vanuatu 1.4 2.3 0.9 1.0 0.8 0.7 0.7 1.1 Source: Official Documents: World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda: IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1, 2 and 4. Table 3.14: Govemment Expenditure on Public AdminIstratIon (In percent of GDP) 1990 1991 1992 1993 1994 1995 1996 Fiji 5.7 5.6 6.0 6.3 5.7 5.6 5.6 Kidbati 16.8 20.3 18.3 18.0 19.5 22.1 21.5 FSM ... ... ... ... ... ... ... Marshall Islands ... ... ... ... ... ... Samoa ... ... 10.0 9.0 9.3 7.3 8.6 Solomon Islands ... ... ... ... ... ... Tonga 13.2 10.6 9.8 8.7 8.1 9.0 9.6 Vanuatu ... 7.7 8.2 8.5 9.7 10.6 ... Table 3.15: Govemment Current Expenditure on Law and Order (In percent of GDP) 1990 1991 1992 1993 1994 1995 1996 Av. 1990-95 Fiji 3.4. 3.3 3.2 2.9 3.0 2.9 2.9 3.1 Kiribati ... -. -. -. ... ... ... ... FSM ... ... ... ... ... ... ..... Marshall Islands ... ... ... ... ... ... ... ... Samoa ... ... 2.1 1.9 1.9 1.6 1.8 1.2 Solomon Islands ... ... ... ... ... Tonga ... 3.0 3.1 2.8 2.7 3.1 3.1 2.4 Vanuatu ... 1.8 1.8 2.0 2.5 2.2 ... 1.7 Source: Official Documents: World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda: IMF Staff Reports and Recent Economic Development Reports. tl See table 3.1 footnotes 1, 2 and 4. Table 3.16: Govemment Current Expenditure on Economic Services (In percent of GDP) 1990 1991 1992 1993 1994 1995 1996 Fiji 4.1 4.4 4.9 4.8 4.1 4.0 3.9 Kiribati 20.4 17.8 17.3 16.5 16.5 20.4 16.0 FSM ... ... ... ... ... ... ... Marshall Islands ... ... ... ... ... ... Samoa ... ... 7.8 6.9 8.0 5.1 5.0 Solomon Islands ... ... ... ... ... ... ... Tonga 5.5 6.1 5.9 5.4 4.9 4.9 5.0 Vanuatu ... 3.7 3.7 3.3 2.6 2.7 ... Source: Official Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda; IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1, 2 and 4. - 118- Table 3.17: Govemment Expenditure on Health (in percent of GDP) 1990 1991 1992 1993 1994 1995 1996 1997 Av. 1990-95 Fiji 21 2.5 2.6 2.9 2.8 2.9 2.7 3.8 3.8 2.8 K'ribat 3/ 7.0 8.5 9.3 8.8 9.8 10.8 10.7 9.0 FSM ..... ... ... ... ... ... -. Marshall Islands 31 ... 11.6 9.5 6.9 5.4 6.2 ... 6.6 Samoa 3/ ... ... 4.2 4.3 4.2 3.7 4.1 4.1 2.7 Solomon Islands 3/ - - ... ... ... 2.9 ... Tonga 4/ 3.3 3.6 4.3 4.1 3.8 4.2 4.2 3.9 Vanuatu 31 ... 2.4 2.4 2.6 2.0 2.2 ... 1.9 Source: Official Documents; World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda; IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1, 2 and 4. 2) Current and capital expenditure on health, social welfare, urban development, housing and environment, youth, employment and sports. 3/ Recurrent health expenditure. 4/ Current and capital expenditure on health. Table 3.18: Govemment Expenditure on Education 11 (in percent of GDP) 1990 1991 1992 1993 1994 1995 1996 1997 Av. 1990-95 Fiji 2/ 5.3 5.6 5.5 5.6 5.5 5.4 4.4 4.4 5.5 Kiribati3/ 9.2 10.1 11.3 11.6 11.0 14.1 13.2 11.2 FSM .... .. ... ... ... ... ... MarshallIslands2/ 14.8 11.8 9.5 9.5 10.6 ... ... 9.4 Samoa ... ... 5.6 5.5 5.4 4.8 4.5 4.4 3.6 Solomon Islands ... ... ... ... ... ... 4.2 ... Tonga 2/ 5.3 7.3 7.9 8.8 8.2 7.3 9.8 7.5 Vanuatu ... 4.6 5.0 4.7 4.9 5.0 ... 4.9 Source: Official Documents: World Bank Regional Economic Reports, Public Expenditure Review and Country Economic Memoranda: IMF Staff Reports and Recent Economic Development Reports. 1/ See table 3.1 footnotes 1, 2 and 4. 21 Current and capital health expenditure. 3/ Recurrent health expenditure. Table 3.19: Govemment Current Expenditure for Infrastructure 11 (In percent of GOP) 1990 1991 1992 1993 1994 1995 1996 Av. 199045 Fiji 2.4 2.7 2.9 2.9 2.4 2.2 2.2 2.9 Kiribabi 6.0 6.4 6.6 7.2 6.9 8.8 7.0 6.9 FSM -. . . . ... ... ... ... Marshall Islands ... 7.2 5.9 5.0 4.3 3.4 ... 4.3 Samoa ... ... 4.8 4.6 5.2 3.1 4.7 2.9 Solomon Islands ... ... ... ... ... ... 0.7 Tonga 3.5 3.8 3.6 3.1 2.9 2.8 2.8 3.2 Vanuatu ... ... ... ... ... -. ... ... 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Schoeffel, P. 1996. Sociocultural Issues and Economic Development in the Pacific Islands, Pacific Studies Series, Asian Development Bank, Manila, Philippines. Solomon Islands Government. 1997. Framework of Policy and Structural Reform Program, Ministry of National Planning and Development and the Prime Minister's Office. SPREP (South Pacific Regional Environment Programme). 1996. State of the Environment Reportingfor the Pacific. - 121 - UNDP (United Nations Development Programme). 1997. Review ofAid Coordination and Management in Fji, RAS/95/800 - Strengthening Aid Coordination and Management Capacity in Pacific Countries. World Bank. 1995a. Bureacrats in Business: The Economics and Politics of Government Ownership Policy Research Report, Washington, D.C. . 1996b. Public Sector Modernization in the Caribbean, Report No. 15185-CRG, Caribbean Division, Country Department III, Latin America and the Caribbean, Washington, D.C. ___________. 1997c. The State in a Changing World, World Development Report, Washington, D.C. . 1997d. Helping Countries Combat Corruption: The Role of the World Bank World Development Report, Washington, D.C. Public Expenditure AusAID. 1994. Papua New Guinea, The Role of Government in Economic Development, Report by Economic Insights Pty. Ltd. Bierman, Hjordis,(Forthcoming) Guidelines for Public Expenditure Review Missions to the Pacific Islands, FY1998, July 1997. Devarajan S., Swaroop, V. and Zou H. The Composition of Public Expenditure and Economic Growth, Forthcoming in the Journal of Monetary Economics. de Melo, Martha. 1988. "Public Investment/Expenditure Reviews: The Bank's Experience." World Bank, Public Economics Division, Country Economics Department, Washington, D.C. International Monetary Fund. Government Financial Statistics: Yearbook. Washington, D.C. Pradhan, Sanjay. 1996. Evaluating Public Spending: A Frameworkfor Public Expenditure Reviews. World Bank Discussion Paper Series #323. Washington, D.C.: World Bank. Pradhan, Sanjay. 1995. Evaluating Broad Allocations of Public Spending: A Methodological and Data Frameworkfor Public Expenditure Reviews. World Bank, Public Economics Division, Policy Research Department, Washington, D.C. World Bank. 1995. "Review of Public Expenditure Work. " Office of the Vice President, Development Economics, Washington, D.C. World Bank. 1996a. Public Sector Modernization in the Caribbean, Report No. 15185-CR4. . 1997b. The Public Expenditure Hand Book. -122- Participation Carvalho, S. and White, H. 1997. Combining the Quantitative and Qualitative Approaches to Poverty Measurement and Analysis: the Practice and the Potential, World Bank Technical Paper No. 366, Washington, D.C. Holland J. and J. Blackburn, eds. 1997. Whose Voice? Participatory Research and Policy Change, Intermediate Technology Group, Rugby. Rietbergen-McCracken, J. and Narayan D. 1997. Participatory Tools and Techniques: A Resource Kitfor Participation and Social Assessments. Washington, D.C.: World Bank. Robb, C. (forthcoming), Is Local Knowledge Legitimate? Influencing Policy Through Participarory Poverty Assessment. Washington, D.C.: World Bank. Salem, C. and Robb, C. (forthcoming), Participation for Portfolio Improvement: From Stakeholder Analysis to a Participation Plan. Washington, D.C.: World Bank. Salmen, Lawrence F. 1987. Listen to the People, A World Bank Publication. . 1995. Beneficiary Assessment: An Approach Described, Environment Department Paper 023, Washington, D.C: World Bank. . 1997. Towards a Listening Bank, A Review of Best Practices and the Efficacy of Beneficiary Assessment. Washington, D.C.: World Bank. World Bank. 1994. The World Bank and Participation, Operations Policy Department, Washington, D.C. World Bank. 1996 Participation Source Book. Distributors of COLOMBIA GERMANY Tel: (525) 624-2800 POLAND Fax: (94 1)432104 Inloenlace Lida. 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