Resource-rich Pacific economies thrive while others lag

The Pacific’s resource-rich economies of Papua New Guinea (PNG) and Timor-Leste will continue to expand strongly this year as commodity prices remain firm but growth in the rest of the region is set to remain subdued, says the new issue of the Asian Development Bank’s (ADB’s) Pacific Economic Monitor.
The report, released today, projects growth in the Pacific region will reach 6.4 per cent in 2011 before moderating to 5.5 per cent in 2012. The petroleum exporting economies of PNG and Timor-Leste are expected to grow by 8.5 per cent and 10 per cent respectively, boosted by the high international price of petroleum, and increased investment and employment associated with the construction phase of resource extraction. ADB predicts growth of 7.5 per cent in 2011 in Solomon Islands, driven by increased logging and the resumption of gold mining in the country.
The 11 other Pacific economies – Cook Islands, Fiji Islands, Federated States of Micronesia, Kiribati, Nauru, Marshall Islands, Palau, Samoa, Tonga, Tuvalu, and Vanuatu – are expected to experience much lower GDP growth, at 1.5 per cent in 2011 and 1.9 per cent in 2012.
“The long term growth outlook for the Pacific region as a whole is very modest. If this trend continues, the region risks falling further behind the dynamic economies of developing Asia, resulting in a widening gap in incomes in the two regions,” said Robert Wihtol, director general of ADB’s Pacific Department. “To avoid this scenario, Pacific governments need to focus on the core functions of good government—investing in infrastructure, improving education and providing an enabling business environment that will encourage investment.”
The July issue of the report raises inflation projections for 2011, due to the sharp rise in commodity prices. It warns that high inflation rates in Fiji, PNG, and Timor-Leste are of particular concern. For the region as a whole, inflation is expected at 8.4 per cent in 2011, but will ease to 5.9 per cent in 2012 as commodity prices stabilise.
The report notes that the smaller, more remote and heavily import dependent Pacific economies, such as those in the northern Pacific, are particularly sensitive to rising international food and fuel prices and are expected to be hit hard by inflation. The depreciation of most regional currencies against the US dollar adds to inflationary pressure across the region.
The ADB report assesses long-term growth prospects in the Pacific region. This assessment shows that Pacific economies can achieve modest growth in incomes in the long term assuming reasonable improvements in the efficiency of their resource use. Two groups of Pacific economies are emerging—those benefiting from their natural resources and those who are not.
To manage price volatility, the ADB report recommends developing safety nets to ensure that the poor in Pacific countries have access to food when prices become unaffordable, diversifying the agricultural base, and exploring alternative energy sources.
The report also presents an analysis of fiscal adjustment in Samoa and Tonga during the recent economic crisis. ADB helped these countries weather the crisis by providing budget support grants that ensured the continuation of essential public services amidst sharp declines in government revenues.