Dr. Satish Chand



A journalist from Samoa asked me at a recent meeting as to what I thought were the likely consequences of the global financial crisis on the region. My advice – quick and cruel—was for her to read ISLANDS BUSINESS. Surprisingly, she had! And she then bounced back with several more searching questions.
So what are the likely responses of the on-going financial crisis? When are the effects likely to taper off? How can islanders ameliorate the adverse effects of the global recession? These are hard questions, but those that do deserve answers.
There is some positive news on the crisis. The Australian economy grew, albeit, by 0.4 percent in the March quarter of 2009. It had not slip into reverse as widely anticipated. This means that Australia has, at least for the time being and in technical terms, dodged a recession. This has to be good news for the region.
There is other good news too. Our banks have remained sound. And much of this has been due to good luck rather than sound policies. It is the latter that now needs urgent attention.
Rippling effects
The impact of the global recession on the region is being felt via four channels.
First, the demand for exports from the islands is falling. In some cases, this is witnessed via lower volumes and depressed prices of commodity exports. Thus, net commodity exporters such as Papua New Guinea and Solomon Islands are feeling the pinch. Net commodity importers such as Kiribati and RMI have gained from the depressed commodity prices. Their fuel import bills, for example, have fallen from the highs of a year ago.
Second, the depressed demand for service exports, tourism in particular, has had an adverse effect on the balance of payments. Cook Islands, Fiji, Samoa, and Vanuatu are the most vulnerable to the above. Worryingly still, the fall may as yet to have bottomed out. Fiji is faced with the double whammy of security concerns at home and recessionary fears in source destinations.
Third, remittance income is falling and likely to worsen as employment conditions deteriorate in Australia, New Zealand, and the US—nations that host most of the workers from the region.
Unemployment rate in Australia as of April 2009 had reached 5.4 percent while the corresponding figure for the US was 8.9 percent.
Tonga, Samoa, Fiji, and Vanuatu are vulnerable to losses in remittance receipts. Cherelle Jackson, my journalist friend from Samoa, on being pointed out the above, posited that people would continue to remit from their ‘dole’—this being their unemployment benefit.
Unlikely I think and for two good reasons: (i) unemployment benefits leave little spare change to remit home; and, (ii) increased unemployment in Australia, New Zealand, and the US will mean a drying up of job opportunities for new migrants. In fact migrant intake into Australia has already been slashed due to the economic slowdown.
Fourth, foreign source of finance, particularly to fund budget deficits, is quickly drying up. The last is made doubly difficult for nations such as Tuvalu and Kiribati that rely on their earnings from Trust Funds invested offshore.
Economic reforms
and their prospects
The region may have evaded the worst effects of the global credit crunch (see Cover Story of the October 2008 issue of ISLANDS BUSINESS). This, however, is not a reason for complacency on economic reforms that were initiated pre-crisis.
A major worry for the region is that many of the reforms initiated a year ago have been put on hold. A number of Pacific islands governments were in the process of corporatisation and/or privatisation of enterprises under state ownership and control. Many of these reforms were long overdue. Murmurs are now being heard from several quarters of a halt and in some cases the reversal of these reforms. This would be a mistake. Several of these enterprises have been a drain on the public purse.
Many Pacific islands governments were in the process of deregulation, thus allowing for greater competition in the local economy. The benefits of these reforms in terms of lower prices paid for telecommunications and aviation were being witnessed in several places. A halt to these reforms will hurt ordinary consumers. Let me give you a specific example. I recently paid less than A$1000 for a return air ticket from Canberra to Port Moresby. I paid for my meal on the flight, but then saved another grand at a minimum when compared to what I used to pay the past decade and a half!
While still on PNG, what shocked me even more were the international telecommunications costs. I call family in Canberra while abroad. Skype has been my new saviour recently. Per minute calls to PNG were A$1.04. This is as high as I have ever paid for a long while now.
Table 1 provides Skype call costs to fixed lines in countries within the Pacific islands and some comparator nations. It ignores costs, often significant, of broadband access to the local telecommunications infrastructure. Calling someone in the Cook Islands via Skype costs A$1.12 per minute, the same as Costa Rica. Alternatively, calling Samoa costs 51 cents per minute while the corresponding figure for American Samoa next-door is 13 cents.
Financial sector reforms
Calling Zimbabwe, a country in crisis, is cheaper than doing the same to any country within the Pacific islands. On my count one half of all the countries with call costs in excess of A$1 per minute lie within the Pacific!
Why these exorbitant charges? The answer is simple. The bulk of the costs for calls on Skype are domestic. That is, it is domestic charges that explain much of the variation in call costs across countries. One would expect smaller nations to have higher charges due to their lack of scale, but this cannot be all. Otherwise, why would Skype changes between Samoa and American Samoa differ by a factor of nearly 4?
Part of the answer lies in the lack of competition in local markets. And often then not, regulation is the reason for the absence of such competition. Many of the nations that recently deregulated their telecommunications sectors are already seeing the benefits in terms of access and pricing.
The case for divestment of State Owned Enterprises and deregulation so as to induce competition in the domestic markets are as compelling as ever. It would be a grave error for islands governments to relax on the above.
Sound banking sector is leading to complacency with reforms to the financial sector. Most of the banks in the region are foreign owned. The majority of the banks are Australian subsidiaries. And Australian banks have come largely unscathed in this crisis. But this is no reason for complacency.
The source of the crisis was easy credit in the US. The problem within the island-pacific for much of history has been the very opposite. Obtaining credit, particularly for someone without an impeccable credit history and a string of ‘bankable’ assets, has been close to impossible. I, for example, could never get a credit card—even during my tenure as an academic at the University of the South Pacific. The challenge, therefore, is one of enabling improved access to credit rather than restraining the above.
It is a mistake to believe that access to credit will be improved simply by legislating for the above. This has been the tact adopted by at least some of the regulators.
Credit is hard to come-by because contracts are difficult to enforce and collateral hard to reposes. A bank manager once told me that he had many land leases in his draw on defaulted loans. Taking possession of the properties, he told me, was beyond the possible. Another manager in a separate Pacific capital and of a different bank relayed to me a story of a truck being bought with a bank loan. The borrower had defaulted but taking possession of the truck was simply not possible. The truck had been shipped to another island. And anyone going there to get the truck would be risking his head, the manger told me. The islanders were known to be rough. This was not hard for me to understand. The real conundrum for the manager, he informed me, was as to how to explain this to his bosses in Melbourne.
Don’t worry, be happy
In sum, it is too early to call the end of the global financial crisis. Even if having bottomed out, the recovery is likely to be slow and a ‘hard slog’.
Islands governments would do well to continue with their reforms in order to put their economies in shape to benefit from a rebound in global growth. And yes, be happy with what you have in the meantime. Hope the bele/ibika and cassava/manioc are already delivering.