People's Charter. Pillar 5 and Chapter 6 State of the Nation Report on Economic Growth: For Discussion

The text of each Pillar of the draft People's Charter (and its more detailed attendant State of the Nation report chapter) is published for discussion each week.To read  the text and discussion on earlier Pillars, type Pillar 1, etc, in the Search facility in the left sidebar.    


Since this Pillar and chapter were published, a number of events have occurred which have made some of their aims difficult, if not impossible to achieve, at least in the short term. These include the Global Recession and drying up of investment, two devastating hurricanes and a major flood, the boycott of Fiji in many international fora, the imposition of sanctions, and the withdrawn of foreign aid and major problems in the sugar industry.  Some observers have also blamed the policies of the Fiji government.  


The intended time-frame for the implementation of each Pillar should  be considered. It was not expected all would be achieved immediately or even in the short-term. Some goals would take much longer. The Charter mentions 2020 and in another place over 40 years.

In reading and commenting on Pillar 5, I invite readers to critically and fairly consider the steps government has taken towards achieving the Charter aims; to give credit where credit is due, to criticise where needed, but most of all to write with realistic and helpful suggestions on what could and can be done, or done better. 

People's Charter, Pillar 5. 

Achieving Economic Growth while Ensuring Sustainability

Critical Problems and Issues:

• Fiji’s economy has been performing far below its potential. There is a need to build confidence and raise investment levels.
• The Government plays an over dominant role in the economy with politicians and officials second guessing the business decisions of private sector entrepreneurs.
• (through investment approvals, planning approvals, price control approvals) rather than in planning and implementing their own primary responsibilities, especially in the provision of basic public services.
• Fiji’s infrastructure has seriously deteriorated and in some areas is close to collapse.
• Deficiencies persist in the business and institutional environment which impede access to assets and increase transaction costs.

The Way Forward:

The following key measures and actions must be taken with due priority and urgency [For the detailed recommendations and proposed implementation actions, see the Report on the State of the Nation and the Economy, Chapter 6, at the end of Pillar 5.]

• Ensure that government provides an enabling environment and plays its part in supporting and facilitating and catalyzing private sector-led growth.
• Enhance cooperation and partnerships between government, the private sector, and civil society.
• Maintain macroeconomic stability through sound, consistent and progressive policies.
• Ensure the principles of fiscal responsibility in the Financial Management Act 2004 are binding upon the Government.
• Enhance the National Strategy for the development of micro, small, and medium enterprises; and improve access to micro finance at affordable rates.
• Enhance export orientation through diversification, value-addition and appropriate policies and incentives.
• Strengthen the financial services sector through establishment of (i) a Financial Services Commission; and (ii) a Capital Markets Master Plan.
• Modernise, and make more relevant, the legal framework of the commercial sector.
• Upgrade, provide and maintain infrastructure essential for enhancing both economic activity and the basic quality of life.
• Increase food security through the revitalisation of the agriculture and marine sectors.
• Strengthen institutional capacity for environmental management.
• Promote sustainable management and utilization of natural resources i.e. forestry, marine, water and minerals.

FIJI: THE STATE OF THE NATION AND THE ECONOMY

EXECUTIVE SUMMARY

Chapter 6: Growing the Economy

Employment provides the quickest route out of poverty but the economy has proved itself unable to generate the increase in the number of jobs needed to employ those leaving school each year, let alone the additional jobs needed to reduce the incidence of poverty in Fiji.

There are many reasons for the poor performance of Fiji’s economy over recent decades. The persistence of political instability, particularly in the wake of the coups, incidents of inter-communal violence, erosion of confidence and increasing crime exacerbated the country’s economic problems. Investors, both local and foreign, seek stability and certainty because these reduce the risks of their investment decisions. Political instability scares investors away. This, in turn, is one of the reasons why Fiji’s economic growth rate is so low: there has not been enough capital investment to generate the new jobs needed by the growing number of school leavers and the large numbers of unemployed who are seeking employment.

Improving productivity (i.e. producing more with less) is central to the growth process. In Fiji, productivity has not been improving. It is easier to raise productivity if the investment rate is high. But investment levels in recent years, of between 1416 percent of GDP, have been well below the average levels of 22 percent in the 1970s and 25 percent in the years before the 1987 coup.

The economic growth rate in Fiji has been in long term decline since Independence – and the rate of decline is getting faster. This situation is reflected in declining real incomes, increased lay-offs, and wage cuts.

[Table 1: Fiji Economic Growth, 1970 – 2007 omitted. Difficult to copy.]

There are other factors that weakened the pace of economic growth, in addition to the points made above. The key among these other factors include a major property rights problem relating to the availability of leasehold land, the lack of investment in infrastructure, incompatible and inconsistent policies in some areas, and a weak legal environment for business. Many of these latter issues raise questions about the role of the Government in the economy. In the view of many people, the Government is over dominant in the economy; i.e. it should reconsider its role if it wishes to achieve stronger growth, greater equity, and sustainability.

Clarifying the Roles of Government, the Private Sector, and Civil Society

Each of these three ‘domains of governance’ has an inherent comparative advantage in undertaking certain types of activity because of the different institutional arrangements in each domain. Each should focus on what it does best.

The Government’s involvement in the economy should focus first, on the provision of

public goods, which by their nature cannot be supplied by anyone else. It is clear that at present the demand for basic utilities such as water, sewerage, electricity, telecommunications and other infrastructure (such as roads, ports and airports) is not being satisfactorily met. In particular, people living in remote rural areas and the outer islands are disadvantaged and need special attention in terms of infrastructure, skills development and access to financial services.

Second, the Government should look closely at the reasons why markets may not always work and/or how market mechanisms can be improved. If market failures can be fixed other types of Government intervention — such as stultifying regulation or Government ownership of enterprises — may not be required. High quality regulation can minimise transaction costs. The Government should seriously consider divesting itself of those entities that would be better managed by the private sector. The proceeds from their sale would be better utilised in health, education or infrastructure investment, i.e. accelerating investment in those public goods that only the Government can and should supply.

Maintaining macroeconomic stability is another important role for the Government because it increases the predictability of economic conditions and hence helps to minimize personal and business risk. To maintain fiscal discipline, the NCBBF recommends the adoption of a new ‘fiscal rule’: that additional borrowing for extra Government expenditure should only be allowed if the returns are robustly estimated,

have little uncertainty and allow the Government to recoup its investment over time.

Second, NCBBF recommends that the principles of fiscal responsibility (which are

incorporated in Fiji’s Financial Management Act) should be made more binding on the Government. Third, NCBBF argues that the Government should maintain a progressive, broad-based but simple tax system with some incentives in strategic areas to encourage greater investment.

Entrepreneurial freedom would be greater if businesses had full and free access to foreign exchange and the more sophisticated financial products available in international financial markets. The current foreign exchange control rules make this impossible. However, the current monetary and exchange rate regime cannot be changed in the near future. Change will only be possible when Fiji has restored strong economic fundamentals and developed deeper financial markets. In the longer term – provided these preconditions are met – it may be possible to move towards a more flexible exchange rate regime. In the meantime, national initiatives such as the National Export Strategy and the promotion of education — both formal and non-formal— must be boosted to help support the country’s balance of payments and structural adjustment to make the economy stronger and more resilient.

Finally, Government is responsible for the specification and protection of property rights and maintaining an equitable income distribution and equality of access to basic services such as education, health and housing. It must also ensure gender equity and the maintenance of other basic human rights, and ensure inter-generational equity and environmental sustainability.

The role of the private sector is to engage in entrepreneurial activities with a view to maximising profits, but also thereby creating incomes and jobs through productive employment so that people are able to improve their living standards. This process operates through increasing specialisation and the expansion of markets, including opening the economy to external trade and investment. Entrepreneurial activity is at the heart of this process. Entrepreneurs need an enabling business environment, which includes:

i. macroeconomic stability – because increasing the predictability of the economic environment reduces personal and business risk;

ii. a legal and regulatory environment that enforces legal contracts and allows entrepreneurs access to all the assets they need to manage their businesses successfully. (In Fiji this requires, among other things, the computerisation ofthe Registries.); and

iii. predictable and stable tax laws to ensure that profits are not unfairly expropriated.

A robust network of civil society organisations (often referred to as ‘social capital’) strengthens the resilience and capabilities of society. A country with strong civil society organisations is better placed to stimulate and sustain more rapid economic and social development. This is because civic networks and norms institutionalise social interaction and foster norms of social reciprocity and trust. In short, it encourages collaborative behaviour in society. Civic society organisations also provide checks and balances to the power of the Government and private sector; they have an important role in collecting and disseminating information that is useful to society but which no one else is collecting; they help empower the powerless and give a voice to the voiceless; and churches and other religious organisations in particular, have a major role to play in protecting and strengthening cultural and religious values and beliefs.

Civil society organisations also need an enabling environment that allows them to operate freely. This enabling environment requires legislation and regulations that guarantee the right of free association; an agreed mechanism for the participation of NGOs in decision making and in the implementation of decisions taken; and financial support from the State and private sector.

There are many situations where much more can be achieved with the limited resources available to the country if the three main sectors – Government, private sector and civil society – cooperate to build public assets and deliver services. The NCBBF supports the implementation of the public private partnership initiative being considered by Government and also encourages the Government and civil society organisations to cooperate on the design and delivery of Government services.

The NCBBF noted with concern that Fiji’s environment is being steadily degraded. At one level this presents a daunting challenge to the under-resourced Department of Environment, which is now beginning to enforce the 2005 Environment Management Act. A sensible response here would be to transform the Department of Environment into an independent statutory organisation to strengthen its management and enforcement capability. At another level, however, the degradation of the environment is not just a problem for the Government — it is a problem for every citizen of Fiji and warrants a concerted, nationwide effort to engage everyone in the country to cooperate in conservingFiji’s environment for future generations.

Development of the Resource Based Sectors

With the exception of mineral water, examination of the performance of the resource-based (RB) sectors reveals a decade of under-performance. The sectors have been hindered by poor management, inconsistent and essentially passive support from Government, the general lack of supportive infrastructure, and the difficulty in accessing capital to develop. In addition, the institutional environments, including the legislative and policy frameworks in which the RB sectors operate, need an overhaul to make them compatible with modern business practices, protect resource sustainability, and facilitate economic development.

In a globalised world, the RB sectors have proven to be slow adapters in embracing necessary reforms critical to weathering the wave of international competition. The sugar industry is a classic example in which long overdue steps needed to reform the industry are only now being implemented. For other agricultural sectors, the major challenge is to overcome traditional attitudes and demonstrate that significant income can be generated from farming. This challenge requires increasing the awareness of modern profitable agriculture techniques including post-harvest handling and marketing. Related to this is the need to mitigate the lack of awareness in business management techniques as it relates to farming at all levels.

The role of Government in the activities of the RB sectors has also contributed to their current predicament. The heavy involvement of Government in initiatives such as marketing of agricultural produce through institutions such as the Agricultural Marketing Authority (AMA) has unfairly undermined the private sector in its markets. On the other hand, the lack of Government initiative in regard to the rising operational costs of the domestic fishing industry could result in its collapse. In light of the decades of stagnation, a more active involvement by Government is necessary to rejuvenate the mining sector. An additional area in which Government’s support has been lacking or ineffective has been in human resource development and the promotion of value-adding.

Over and above these constraints, the landowners are calling for more meaningful participation in the development of their resources. Sustainable mechanisms for resource owners’ participation therefore need to be developed. This development should begin with the administration of native land. Recognising land as a factor of production, it is essential that efficient mechanisms exist to make land available to potential users, those who are willing to pay for its use at a rate set by the market and not an administered or legislated rate.

Against the backdrop of these challenges, the NCBBF was unanimous in stating that continuing with the status quo would only lead to further deterioration of the economy. Breaking out of this cycle requires radical measures and a strong political will to move away from embedded political and economic positions.

The NCBBF endorsed the following 15 recommendations:

1. The sugar industry should be incentive driven, beginning with the introduction of the cane quality payment system.

2. The Government should take immediate and meaningful steps, beginning with the delivery of funds to the Ministries and supported by appropriate incentives, to focus more on the development of non-sugar agriculture sectors and industries (fisheries, forestry and value-adding).

3. The Government should exhaustively reconsider the discriminatory manner in which duties and levies are being imposed solely on the domestic fishing fleets while foreign vessels operate under no such imposition.

4. The Government should ensure a level playing field in the treatment of local investors and businesses and not be biased in the concessions it grants to foreign investors.

5. That common legislation for the administration of all agricultural land be adopted (to include management of native, crown and freehold land) under the framework of NLTA; any meritorious aspects of ALTA should be retained.

6. Greater flexibility in the tenure of leases issued should be ensured so that they are sector specific and take account of the unique needs of each sector.

7. The NLTB (in partnership with Government) should put in place an initiativeto encourage villages to better utilise their  unleased land under reserve. The Government should provide support through appropriate infrastructure such as roads.

8. A National Land Register should be set up which would incorporate information on all lands in Fiji irrespective of ownership. The Register can be used as an important management and planning tool to move towards a solution for allocating land based on optimal returns.

9. Legislative backing should be provided for the National Land Use Policy adopted by Government in 2002.

10. The Government should focus more strongly on creating an enabling environment for the private sector.

11. A long term Strategy or ‘Road Map’ for the mining sector should be formulated, which captures a more active role for Government in realising the goal of more mines sustainably operating in the country.

12. Adequate resourcing of the Mineral Resource Department (particularly its technical capacity) should be ensured so that it can effectively carry out its functions to support the development of the mining sector.

13. The Mining Act review should be completed as a matter of urgency.

14. A ‘Compact’ or a binding agreement should be formalised between the Economic Sector Ministries with central agencies (Ministry of Finance in particular) operating within the Financial Management Act 2004 and other PSC guidelines. The ‘Compact’ would set out flexible parameters in which the Economic Sector Ministries can work to progress major development projects.

15. The National Planning Office should be more closely involved in decisions regarding resource allocation in order to maintain a strategic planning perspective in the management of Fiji’s economy beyond the budgetary cycles. This involvement would then ensure that funding decisions are guided by national development requirements and not reduced to an accounting decision.

Development of the Financial Services Sector

A well functioning financial services sector is essential for sustained economic development, particularly for a small island economy such as Fiji. The NCBBF concludes that the financial sector as a whole is well placed to support growth and poverty reduction in the real sector. The fact that the faster rate of growth in the real economy that had been hoped for has not materialised cannot be attributed to any fundamental problems arising from the financial services sector. It is instead, a function of the political instability created by the repeated coups which have created a climate of uncertainty and fear, together with other deficiencies in public policy such as incompatible and inconsistent policies, the lack of investment in infrastructure, the property rights problem and a weak legal environment for business.

However, performance and the relative state of development within different parts of the financial sector vary. The banks provide a world class banking system in the sense that just about everything that can be done overseas in terms of banking services can be done in Fiji. On the other hand, the bond market — a basic foundation stone for a more sophisticated financial system — is relatively under developed. A solution to this problem requires major changes to the current arrangements for managing the FNPF’s investment portfolio and diversifying its investments, i.e. by splitting up the management of the FNPF’s investment portfolio. This step is essential to promoting an effective secondary market for Government bonds as a first step towards increasing the depth and liquidity of Fiji’s money market. This is the highest priority for reform in the sector.

Improvements to the more effective operation of the bond market will also be greatly facilitated if the Finance Ministry publishes an annual programme for bond auctions. This in turn will require an improvement in the Finance Ministry’s ability to forecast its cash flows and the Reserve Bank’s ability to forecast liquidity conditions. An annual programme will provide time for the market to prepare and for investors to set funds aside. This programme should ensure that Government bond issues are marketed widely and that small investors have an opportunity to purchase bonds.

In addition, the NCBBF agrees that the growth of the capital market would be boosted considerably if the Government committed to the principle, where practicable and appropriate, of listing Public Enterprises on the Stock Exchange.

The NCBBF also agrees that the superannuation industry should be deregulated and noted that the Reserve Bank has already initiated a study of the different ways in which deregulation might be achieved.

The NCBBF agreed that the role of the Capitals Markets Development Authority (CMDA) in supervising capital markets, be re-examined to ensure that there is no conflict of interest that might compromise the accountability of the Authority for this aspect of its mandate. It also suggested that the Authority change its name to reflect its role as a Securities Commission.

While prudential supervision of the banks and other entities currently supervised by the Reserve Bank is adequate, the NCBBF is concerned by the inadequate arrangements for the prudential supervision of credit unions and other non-regulated/ supervised entities.

Adequate prudential supervision arrangements are needed to cover the latter group.

More adequate resourcing is required for all the agencies engaged in prudential supervision activities.

It is important to decide upon a strategic direction for micro, small and medium enterprise development and make arrangements for the promotion of rural banking and school banking initiatives, in addition to those being done by current commercial banks.

All such enterprises should be able to access financial services suitable for their needs and inculcate the savings habit in our population. Key topics like saving, investing and banking should be included in the school curriculum for both primary and secondary schools.

Finally, the NCBBF recommends further work to ensure that there are adequate mechanisms for protecting consumers and addressing consumer complaints.