Growth, Confidence, Poverty Reduction: Realistic Targets

Economic Growth, Investment, Confidence and Poverty Reduction in Fiji: Semi-rational Exuberance

Neelesh Gounder*

School of Economics, University of the South Pacific

Email: neelesh.gounder@usp.ac.fj

Biman Chand Prasad

School of Economics, University of the South Pacific

Email: prasad_bc@usp.ac.fj

Paper prepared for Fiji Economy Update 2013, 20 August, 2013, Holiday Inn, Suva, FIJI.

This version last updated: 27 August, 2013. Corresponding author: Neelesh Gounder.

Economic Growth, Investment, Confidence and Poverty Reduction in Fiji: Semi-rational Exuberance?

1. Introduction

The positive news is that the Fijian economy seems to be have made a sustained recovery since 2011 after the impact of the economic fallout from the December 2006 coup. However, the recovery may not be as much as what is being forecasted by the Reserve Bank of Fiji. The annual growth rate of GDP is forecasted to grow by 3.2 percent this year after recording an average annual growth rate of just 0.5 percent for the period 2007-2012. This period includes two bouts of contractions in output in 2007 and 2009 equal to 0.9 percent and 1.3 percent respectively. While some of the contributing factors to this period of negative and low growth episode could also be attributed to the spike in food and fuel prices in 2008 and the global economic crisis in 2009, the major contributor has been the static as well as the dynamic consequences of the 2006 coup. Therefore, it is too early to rejoice the last three years of modest recovery as much more in terms of structural reforms, policy- reorientation and restoration of macroeconomic confidence in the economy will be needed to sustain the economic recovery and move beyond 3% growth rate in the economy.

The immediate economic effect of the 2006 coup was reminiscent of a political instability and a crisis of confidence. Two months after the coup, the Reserve Bank of Fiji noted that around 3000 jobs had been lost, mainly due to the decline in the tourism industry and the closure of the gold mine. At the same time, the Fiji Employers Federation reported a survey showing an increase in redundancies, reduced hours of work and temporary unemployment. The signs of tough economic times ahead were evident and the challenge for the interim regime in 2007 was to devise strategies to achieve a quick economic recovery and increase the level of investor confidence in the economy.

Despite the macroeconomic policies and reforms post 2006, the interim regime lacked a consistent political strategy towards democracy which has acted as a continued source of drag on the level of confidence in the economy. Boosting confidence towards achieving higher growth rates has mostly remained elusive. Prasad (2010) has argued that the basic cause of sluggish economic recovery and low growth from 2007 to 2009 was mainly tied to the perceived political instability and uncertainty about future economic policies. In 2012 the economy has now been estimated to have grown by 2.2 percent, slightly lower than the earlier forecast of 2.5 percent. Growth forecast for 2013 has now been optimistically revised from 2.7 percent announced in the 2013 National Budget. The key impetus towards the upward revision is stated as higher levels of private sector and public sector (including statutory corporations) investment which is estimated to reach 28 per cent of GDP in 2013 (Reserve Bank of Fiji, 2013). With this, the short term outlook for Fiji is positive, but given the small size of the economy, the precise shape of the forecast will be subject on the timing with which ongoing and planned investment projects come on stream.

This aim of this paper is to provide a current update and outlook of the Fijian economy. However, a discussion of the current survey needs to consider the immediate past reforms, policies and outcomes. The paper thus while focusing on 2013 and beyond ties the discussion to the recovery and growth of Fijian economy since the 2006 coup. The balance of the paper is organized as follows. Section 2 will assess the macroeconomic policies and achievements during the period 2007-2013. The focus of the analysis and discussion will be on GDP growth, poverty, investment and fiscal policy and monetary policy responses and outcomes. Section 3 provides a discussion on the challenges ahead towards sustaining growth both in the short and long term. Within this broad theme, the section will also attempt to benchmark the constraints to job creation and growth and propose some possible strategies and targeted reforms to remove these barriers to promote growth. Section 4 provides concluding remarks.

2. Policies and Progress: 2007 – 2013

2.1 GDP Growth and Sectoral Prospects

The overall growth performance in Fiji over the past two decades has been sluggish and unstable. While growth rates averaged around 4 per cent during the 1971 – 1986 period, it has averaged 2.45 per cent from 2001 – 2005 (Figure 1). The average annual growth rate from 2006 – 2012 is 0.7 percent and has been volatile with two bouts of negative growth in 2007 and 2009. The economy improved slightly in 2010 and 2011 with positive growth of 0.1 percent and 1.9 percent respectively. With expected growth rate of 3.2 percent in 2013, 2.5 percent in 2014 and 2.4 per cent in 2015, the short to medium term outlook is positive.

Figure 1: GDP Growth (1996 – 2014)

One of the major factors that the forecast growth rate for this year and next takes into account is the level of total investment, which is expected to take investment to 28 percent of GDP in 2013. The 2013 forecast is thus strongly dependent upon how much of new investment is realized. The other major factor for the upward revision of the 2013 forecast has been given as positive contributions expected from all sectors of economy except mining and quarrying. While the key sectors of the economy are tourism, sugar, garments and fisheries, it is expected that top performers will be the wholesale & retail trade; construction; and transport, storage sectors & communication. These top performing sectors are particularly worth noting as these are not the largest sectors of the economy, neither in terms of GDP contribution nor employment generation. Nonetheless, it should be noted that the base weights of wholesale & retail trade and transport, storage and communication activities contributing to the growth forecast are amongst the highest of all base weights. Earlier forecast for wholesale & retail, construction and transport, storage & communication were 1.4 percent, 5.4 percent and 1.7 percent respectively. Thus small changes in growth forecast for the sectors associated with higher weights would contribute significantly to overall growth forecast. The total weights for the three activities of wholesale & retail, construction and transport, storage & communication add to 30.9. The first quarter sales and services income of wholesale and retail trade has shown an increase of 6.8 percent over the same quarter in 2012 and provides support to the high forecast for 2013. The real sectors that are expected to lead growth this year are manufacturing and agriculture.

Primary production of agricultural products such sugarcane, copra, paddy rice and ginger have all shown reduced production levels in 2011 compared to 2007. In 2013 the agriculture sector is predicted to grow by 7.6 percent with sugar and market gardening and horticulture leading growth. Sugarcane, the most important agribusiness was forecasted to grow by 20 percent this year compared to 2012. Sugar output is forecasted to rise by 30 percent in 2013 behind recent government reforms such as changes in legislation, restructure of FSC, capital upgrading of mills and establishment of an industry taskforce. The Fiji Sugar Corporation has set a target of 1.9 million tonnes for 2013. However, an important stakeholder in the industry, the Fiji Sugar Cane Growers Association (FCGA), predicts sugarcane production to be around 1.3 million to 1.4 million tonnes. FCGA further argues that areas that hinder the growth of the industry are mill inefficiencies, land tenure and rising cost of cane production, harvesting and delivery.

Production of processed primary industry products in the manufacturing industry such as sugar, coconut oil and butter were lower in 2011 than the 2007 production levels. The products that showed an increase in 2011 compared to 2007 included sharps, flour, saw log and stock feed. While sugar production declined by 3 percent in 2012 from previous year, it is expected that it will increase by 30 percent this year compared to 2012. However, this large increase expected this year is in doubt due to the constraints listed previously. The other key activity driving manufacturing this year includes food products and beverages & tobacco.

There is no particular reference to tourism in the context of the revised 2013 growth forecast. The first quarterly data shows signs of a slowing tourism industry and corresponds with the aggregate annual performance of the industry in 2012 where visitor arrivals were lower than expected. Total guest nights by country of residence, hotel receipts by area and average paid employment in hotels, resorts and lodgings are all down during the first quarter of 2013 compared to the same period last year. In particular, earnings from tourism from the major source markets of Australia and New Zealand decreased in March quarter of 2013 by 9.7 percent and 1 percent respectively when to compared to the same quarter last year. Overall, tourism earnings are down by 3.3 percent compared to March quarter of 2012. The performance of the sector this year would essentially be dependent upon earnings during the second half of the year when the industry is expected to perform better than other quarters.

2.2 Poverty

There has been a massive reduction in poverty around the world in the last decade. However, the same cannot be said for Fiji. The rate of poverty at independence in 1970 was 7 per cent. Since then it has increased almost four fold and currently stands at around 32 per cent. Both the incidence and the severity of poverty increased between the three Household Income and Expenditure Surveys (HIES); with levels of 15 percent in 1977, 25 percent in 1990-1991, and 34 percent in 2002-2003 (Chand, 2007). Results from the 2008-2009 survey shows poverty has slightly decreased but is still above 30 per cent. Desegregating poverty changes into rural and urban areas shows that while there is reduction in urban poverty from 28 percent to 19 percent between the two surveys, rural poverty has increased from 40 percent to 43 percent.

Given the level of economic growth since 2008, depressed wages and salaries, high inflation due to global fuel and food prices, lack of employment creation in the formal sector and devaluation, the impact on poverty is likely to be higher. Based on this it would not be an exaggeration to state that poverty level in Fiji is now around 40%. In fact some unofficial estimates put poverty level to about 45 percent and could be reaching 50% (Howes, 2013).

It is apparent that economic growth over time and development related policies have not had the intended consequence of reducing poverty. It is beyond doubt that Fiji’s economic performance has been relatively poor. With a tumultuous political history, it has been constantly difficult to sustain growth rates required to make a significant dent on poverty and standards of living. It has also been argued that previous governments’ ethnicity based redistribution policies have played a part in contributing to increasing household poverty (Chand, 2007). The rise in poverty and loss of real household welfare has increased the demand for social safety nets. Realizing the situation, the government responded with a variety of social security and welfare measures. The overall success of the programs on the impact of poverty reduction is mixed (Kaitani, 2007).

2.3 Investment

Investment is critically important not only to Fiji’s economic recovery but also to sustaining long term economic growth. Pre 2006 data shows that the average annual level of total investment between 2001 and 2005 has been around 18.5 per cent of GDP. The management of the macroeconomy over the last two decades has clearly not fostered a climate conducive to a higher level of investment. Additionally, according to a report by ADB (2005), high interest rates (7-8%) and low levels of credit to the private sector (around 16% of GDP) are among factors that have hampered financial sector’s ability to finance investment and encourage savings in the past. The lowest level of total investment in post 2006 was recorded in 2010 when it was estimated to be 14 percent (government = 5.5 percent, statutory bodies & public enterprises = 5 percent and private sector = 3.5 percent) of GDP. In 2013 it is expected that total investment will surpass the target of 25 percent of GDP to peak around 28.2 percent (government sector = 5 percent, statutory bodies & public enterprises = 10.2 percent and private sector = 13 percent) of GDP. This level of investment would be a significant achievement and thus provide the stimulus needed to spur growth in the medium term as well sustaining long term growth.

Foreign direct investment, which is an important component of private sector investment, plays a substantial role towards growth. Figure 2 provides overall FDI implemented¹ in Fiji from 2008 – 2012. While the lowest level post 2006 was recorded in 2009, FDI had increased to F$748m by 2011. The reduction of investment in 2009 could have been due to administrative requirements such Foreign Investment Regulation and increase in registration fees.

Figure 2: FDI implemented (2008 – 2012)

Source: Reserve Bank of Fiji/Fiji Bureau of Statistics

Data from Investment Fiji included number of projects, total employment generated and the value of FDI. Total FDI implemented, between years 2008 to 2012 is shown in Figure 3. FDI implemented in 2009 was F$857.6m but has decreased in 2012 to F$31.75m². In fact FDI implemented has not been more than F$152 m for any year from 2009 to 2012. This is a huge decline compared to 2009 and it is important for policy makers to figure out and analyze the reasons for the low levels of FDI implementation. It should be noted that proposed FDI in 2011 was F$466m and in 2010 was F$592m. However, in 2011, only F$151m has been actually implemented. This is another cause for concern for the government and policy makers. While a high volume is registered each year, only a small proportion is implemented later.

Figure 3: Total FDI implemented (2008 – 2012)

Source: Investment Fiji

The importance of FDI in creating jobs in the short term is a particularly significant indicator of FDI impact as well as efficiency. At the same time, it should be recognized that FDI can provide larger benefits and impact on GDP in the long run. The total FDI implemented and the number of jobs created between years 2008 to 2012 is shown in Figure 4 on next page. As indicated, there seems to be no simple correlation between the two values for each year. For instance, in 2009 666 jobs were created from F$145m worth of FDI while 634 were created from just F$53.8m in 2010. Thus there is some indication from the job created impact regarding the quality and efficiency of FDI. Nonetheless, it should be noted that the long term effects should also be considered to properly account for the quality of FDI.

Figure 4: Total FDI implemented (F$m) and number of jobs created (2008 – 2012)

Source: Investment Fiji

Further, the quality of FDI could also be checked against the dollar value of FDI required to create one job. Figure 5 on next page provides average value of FDI needed to create one job. In 2012, from the FDI implemented, it required F$434m to create one job. This is an average value of all projects implemented and would also be dependent upon the type of project and the industry FDI is implemented. The quality and employment effect of FDI has been extensively discussed in the literature. There is country specific and cross country empirical evidence that argue that FDI is supposed to be of higher quality if it is export oriented, transfers foreign technologies to the host country and induces economic spillovers benefiting local enterprises and workers.

Figure 5: Average value of FDI per job created (2008 – 2012)

Source: calculated from data provided by Investment Fiji

2.4 Fiscal Policy Responses

Since 2007 the Bainimarama government has used fiscal policy tools to deal with the declining economy and to cushion the impact of global economic prices. First, it had increased the Value Added Tax to from 12.5 percent to 15%. This was largely done to increase government’s revenue base. Total revenue in 2013 is forecasted to be F$2108.4m against total expenditure of F$2327.4m. This equates to a net deficit of F$219m, which is equivalent to 2.8 percent of GDP.

The reduction in income tax and company tax in the 2013 budget was designed to spur consumption activity and according to the Reserve Bank of Fiji, consumption activity has increased in the last two quarters. In fact, they point out that vehicle sales have been very buoyant. While this may be a short-term activity because of increase in disposable income for the middle class and low interest and no deposit policy for vehicle loans from lending institutions in the long-term this will not contribute to sustained economic growth. The burden of taxation is heavy on the low income families as VAT was increased from 12.5% to 15%. As indicated in Table 1, about 70% of the revenue comes from indirect tax collection. The 2013 budget was no doubt a bold budget and has built on the direction set by the 2012 budget.

Table 1: Summary of cash flow statement: receipts (F$m)

	2011	2012	2013
Direct taxes	478.8	496	433.8
Indirect taxes	1068.4	1186.6	1365.2
Fees, Fines and Charges	100	80.8	86.8
Grant in Aid	6.8	18.0	16.6
Dividends from Investments	32.2	42.1	38.3
Reimbursements & Recoveries	17.4	10.7	11.0
Other Revenue & Surpluses	56.2	29.7	27.3
Total Operating Receipts	1759.7	1864	1978.9

The emphasis of the budget on capital expenditure and a focus on improving roads throughout the country is a bold step. The deterioration in the infrastructure in the last 25 years has been phenomenal and it has become one of the binding constraints for investment in Fiji apart from the sustained political uncertainty. The infrastructure deficit has to be addressed and the increase in the deficit to 2.8% in 2013 budget to address infrastructure bottle-necks is not necessarily worrisome immediately. If the spending on roads and other infrastructure is managed well and improved in the next two years, then we would be setting up a very good foundation for growth beyond 2014, especially if promised elections are held.

However, the total debt level has to be scrutinized carefully so that it does not become unsustainable. The present debt level will have to be gradually brought down in the next few years so that there is enough fiscal space to counter any global risks emanating from the global economic slowdown (Table 2). The government will also have to be careful about its contingent liabilities and ensure that its investments in government owned companies and shares in others are managed properly and in an open and transparent manner.

Table 2: Total government debt stock (F$m)

	2009	2010	2011	2012
Domestic Debt	2605.0	2834.7	2734.4	2744.8
External Debt	527.2	548.5	832.1	1024.0
Total Debt	3132.2	3383.2	3566.5	3768.8
Debt (% of GDP)	54.7	54.7	53.0	51.5
Domestic/Total Debt Ratio	83.2	83.8	76.7	73.0
External/Total Debt ratio	16.8	16.2	23.3	27.0

There are other positive aspects of the budget where expenditure on health, education, social welfare, pension for those over 70 years etc. is going to have a positive impact on improving the quality of life of people. The health sector particularly needs urgent attention and we hope that the increase in the budget is used to improve the conditions of the hospitals around Fiji and the services it provides.

2.5 Monetary Policy

The Reserve Bank of Fiji performs the standard central banking functions, with core objectives of price stability and maintenance of an adequate level of foreign reserves. With five commercial banks and one development bank, Fiji has the widest range of financial institutions in Pacific Island countries. Overall monetary discipline has been well maintained by the RBF; thereby avoiding a deeper crisis of the kind that often takes place in politically unstable economies. The RBF’s instrument of monetary policy to target price stability since 1997 has been bank interest rate whereas the exchange rate and capital controls are used to ensure an adequate level of foreign reserves.

The overnight policy rate (OPR), which was first implemented in May 2010, was reduced in October 2011 from 1.5 percent to 0.5 percent. The RBF outlined the reason for this by stating that “…with our monetary policy objectives stable against a subdued domestic growth outlook into the medium term…” (Reserve Bank of Fiji, 2011). It was a decision in the right direction as monetary policy had to play a more stimulating role to ensure that low interest rates are sustained to provide boost to economic activity. Since then, the OPR has remained at 0.5 per cent. Thus the RBF has continued to use an expansionary monetary policy in order to keep interest rates low to support economic growth. The impact on interest rates has worked well so far as bank lending rates have continued to fall, particularly after November 2011. The ability of OPR to fully influence interest rates may become challenging as banks funding structure and costs change. This is, however, unlikely in the near future as bank funding in Fiji is sourced domestically. The OPR was initially set at 3 per cent in May 2010 when the market based monetary framework was implemented.

It had been customary in Fiji to maintain reserves to cover at least 6 months of merchandise imports. However, this had dropped to 5.7 months of import cover in 2004 and by December 2006 fell further to 3.3 months of import cover. Total foreign reserves as at December 2006 stood at F$823m. Interest rates and capital controls were heightened following the coup to relieve the pressure on foreign reserves. The RBF argued that these measures were to ensure that reserves are safeguarded under the situation prevalent during that time. In line with outlook in other indicators for 2013, foreign reserves have increased to a comfortable level of around F$1767m as at July 2013 which is sufficient to cover 5.1 months of imports of goods and non-factors services. Inflation has been falling since 2012 and is expected to remain low at around 3 per cent this year in line with declining international food and fuel prices.

Another distinguishing feature post 2006 to support the economy was the devaluation of the Fiji dollar. The devaluation of the dollar in 2009 did not provide substantial benefits to the exports sector and agricultural sector as expected although it did provide the government some time to achieve further reforms (Mahadevan, 2009; Prasad, 2010). Tourism sector, however, has benefitted from the devaluation as it has been credited to have contributed to an increase in tourists arriving from Australia and New Zealand. Nonetheless, it seems that one industry has benefitted while increasing costs for firms in other sectors and households. In fact, the real sector which has the potential for creating employment has not benefited from the devaluation of the Fiji dollar. There are several sources through which devaluation could reduce welfare as a real devaluation is usually an unfavorable supply shock. Firstly, as it leads to a rise in the real price of foreign goods. Also, while devaluation will raise output in export and import competing sectors, others sectors are likely to be negatively impacted. Thus there is a sectoral shock that brings about a relocation of labour and other inputs among sectors. Further, depreciation is likely to contribute to inflation because workers purchase foreign goods. This raises the cost of living and if wages do not increase, household welfare is reduced. It is, however, difficult to measure the costs and benefits of the 2009 devaluation for the economy as a whole.

3. Challenges Ahead

Developing a growth strategy requires understanding of the binding constraints towards economic activity and deriving policy priorities to promote growth (Rodrik, 2007). Growth strategies could be several; secured property rights, good quality political institutions, rule of law, market oriented incentives and sound monetary and fiscal policy. Instead of outlining and discussing a long list of possible reforms, this section will aim to prioritize the binding constraints that require a sense of priority for the policy makers. We begin by asking if the economy is underperforming and is in need of reform, what are the market imperfections and distortions. These imperfections and distortions are crucial to understanding why the economy’s resources keep the economy below its achievable productivity frontier. In this section, we outline and discuss the binding constraints that pose impediments to higher growth.

3.1. Investment, Productivity Growth and Job Creation

Job creation is arguably one of the main challenges for Fiji. Improvements in human welfare and sustained poverty reduction cannot be achieved without a substantial increase in employment. Productive employment is an important source of income security. To generate employment at the required scale, Fiji will have to achieve sustained and inclusive growth, which in turn critically depends on supportive macroeconomic environment. Private sector expansion and structural transformation, which are at the core of a dynamic growth process, requires quality investments. Lack of quality private investment has been a long problem in Fiji. It is well known that investment, particularly FDI, is a crucial driver of productivity externalities and economic growth. Apart from supplying capital, foreign direct investment can be a source of valuable technology and know-how as well as creating linkages with domestic firms that can provide the stimulus to jumpstart the economy.

Section 2.3 raised some concerns about the low implementation of registered FDI projects and the employment effect of FDI in Fiji. Focusing primarily at the effects of FDI on the level of job creation, it is possible to isolate circumstances under which it has a significant positive effect. Firstly, the employment effect is likely to be substantial if FDI is concentrated in labour intensive industries. Second, FDI can lead to increased employment amongst domestic firms through strong backward or forward linkages. The local firm impact could also arise from spillovers as a result of training by foreign investors or technology transfer. Apart from focusing on employment, FDI quality could also be judged by the effect of a unit of FDI on economic growth. Empirical literature on Fiji in this area does not exist. International empirical evidence from cross country studies show that growth effect of FDI increases when accounted for the quality of FDI (Alfaro and Charlton, 2009). Alfaro and Charlton (2009) also argue that the effect of a unit of FDI on growth depends on many different country and project characteristics; financial development and human capital are important channels through which FDI can affect growth.

Attracting private investment also requires creating an environment conducive to providing higher private expected return on investment. Therefore productivity growth should also be part of the main agenda towards sustaining long term growth. The story about job creation is tied together with quality investment and productivity growth. In the long term, the growth in per capita incomes and living standards depend largely on productivity growth. Productivity growth over time is dependent upon the development and adoption of new technologies and how efficiently resources are organized in the production process. For domestic firms in Fiji, technological improvements may be acquired from overseas or developed locally through innovation. In both cases, firms will need to undertake investment to purchase capital goods and knowledge to achieve productivity gains.

Focusing on job creation, it is also important to find out key obstacles constraining private sector growth. To further understand the impediments to business expansion and job creation, it is vital to understand factors that businesses consider obstacles. In order to gather evidence and improve our understanding of the issues that prevent businesses from growing, hiring more people and increasing revenue, the School of Economics conducted a survey of 98 business owners/managers/senior executives. While the survey was not a fully representative sample of businesses in Fiji, the results do provide qualitative insight into the key factors that constrain private sector growth. The respondents are spread over three industries; 46 percent in retail, 30 percent in manufacturing and the remainder in hospitality (hotels and restaurants). The survey was conducted in Suva and greater Suva area from 22^nd July to 2^nd August, 2013. Three questions were asked in the survey. Question one asked to name the top issues that hinder you from increasing your revenues and growing your business more. In question two businesses were asked to name what the government can do to help your business grow and make more profit. Question three asked to provide the main obstacle for business when trying to hire new employees.

Results from question one are summarized in Figure 6. Businesses in Fiji have identified the macroeconomy (economic growth, inflation, etc.) (34 percent), political climate & uncertainty (17 percent) and high cost to operate (26 percent) as the top three obstacles towards increasing revenues and expanding the business. The top obstacles identified are not surprising as the Fijian economy has been underperforming and the macroeconomic management has been an issue.

Figure 6: Top three issues that hinder businesses from growing and increasing revenue

High costs to operate (excluding wages) are not entirely reclusive. Common costs identified by businesses include electricity rates, city council charges and rental. It is worth noting that electricity rates have increased by over 100 percent since 2003. The third top obstacle identified by businesses was political climate and uncertainty. As noted earlier and discussed in next section, the current uncertain political climate has been a continued source of drag towards achieving higher growth rates and businesses identify it as an obstacle towards expanding.

The top three responses to question two are shown in Figure 7. Businesses (32 percent) have stated that managing the economy better should be a priority for the government to ensure that businesses grow and make more profit. The other issue that businesses have expressed about what they would like government to do include ensuring political stability & certainty and increasing access to finance. Question two responses are in line with issues identified in Question one as key obstacles.

Figure 7: What can Government do to help businesses grow and make more profit?

The presence of uncertainty about the macroeconomic situation and political climate reflects that fact that, despite the recent recovery and growth, businesses are concerned about GDP growth, government debt and inflation and the potential impact on sufficient demand.

Question three pursued the main obstacles businesses face when hiring new employees (Figure 8). Businesses identified candidates lacking job experience and candidate lacking job readiness as the top obstacles. Part of the reason why this is the case is that the rate of migration of skilled people in the last three decades from Fiji has continued unabated. The average job experience time needed for many of the technical and professional people to migrate is between 3-4 years. Lack of comparatively well page jobs in the formal sector is also the reason for early experienced people to migrate from Fiji or look for temporary employment elsewhere in the region and beyond. While this may not be bad in the short to medium term as we can increase our remittances, in the long-term the shortage and lack of readily available skilled labour will reduce the level of investment and reduce labour productivity in the key sectors of the economy.

Figure 8: Main obstacles when trying to hire new employees

In summary, the results of the survey shows that there is no simple solution to creating jobs; it requires Fiji to build the basics necessary for a strong economy and a robust private sector. The actions that businesses expect the government to take closely mirrors their rankings on the most important barriers. For instance, managing the economy by ensuring economic growth, keeping costs of doing business down and providing political stability should be key goals towards a job creation strategy.

3.2. Political Certainty and Confidence

There is no doubt that in the last twenty 26 years, Fiji’s economic and social progress has been squandered away as a result of political uncertainty due to military coups. It is appropriate that policy makers, politicians, donors and international organizations do not gloss over this reality in Fiji. The damage to the economy in the last 26 years has been phenomenal and this has been reflected in the increasing levels of poverty since 1987. Fiji has been often compared to Mauritius and sometimes with Singapore. These are appropriate comparisons as Fiji has the potential to be the Mauritius and Singapore of the Pacific. The key difference with these two countries and Fiji is that Fiji chose the path of political instability and both Singapore and Mauritius went for political stability and democracy.

The 2006 military coup has unleashed a series of reforms and much of it has not been debated seriously. However, the Bainimarama government deserves some credit for ‘cleaning up’ some of the economic constraints and providing incentives for investment in some of key sectors of the economy. However, instead of also cleaning up the political constraints, it has muddied the political landscape and has created more uncertainty then certainty and a lack of confidence in the economy.

When the Bainimarama government announced the Ghai Commission to develop a new Constitution, there was a return to a sense of optimism and the likelihood of political stability and confidence. However, when the Ghai Commission’s draft Constitution was rejected and replaced with the Government’s 2013 draft, the sense of optimism evaporated very quickly. The citizens of Fiji and the international community was still waiting for the final draft of the proposed Constitution and how they react to the new Constitution will determine the level of confidence that we may be able to restore in the country.

Despite the detour that the Bainimarama government took on the process of arriving at a new Constitution, the open commitment to having the election in 2014 is a big plus and as it is maintaining the positive the expectations of investors. Whatever the debate on the proposed new Constitution after it is implemented, it is important that we proceed with the elections in a transparent and open manner to restore further confidence in the economy and the country.

3.3. Trade Liberalization Agenda

The trade liberalization agenda in Fiji began in 1987. It was mainly a response to economic growth that had slowed by 1986 despite favourable economic performance for a decade following independence, mainly due to the distortions and rigidities of inward looking policies (WTO, 1997). The 1987 coup added a further major shock to the economy as investor confidence deteriorated, tourism earnings plummeted and there was an emigration of skilled labour. It was evident that major policy changes were required to generate and sustain growth. As a result, the government’s policy direction took a major turn and market oriented outward looking strategy became a key agenda for growth and development. Key components relating to trade liberalization attempts included reductions of tariffs, removal of licensing requirement for imports, and withdrawal of subsidies on several primary products. Diversification into export categories with significant value added became another major objective. It was clear that export oriented growth was needed to transform the production structure so that manufacturing was oriented towards the international market. The trade liberalization process adopted in 1987 was part of a broader open door policy created by the government to increase capital inflow, exports and employment, and stimulate investment (Reserve Bank of Fiji, 1993).

The success and economic benefits of the trade liberalization process is well documented. The increasing export orientation does not simply reflect the process of growth and transformation, but also the shift in trade policy pursued by the government. This change in strategy pointed out two issues about the path of trade policy. Firstly, it recognized the limitations and failure of the more inward-oriented strategy as pursued in the past. Secondly, it demonstrated the urgent need to reduce the dependence on primary commodities for foreign exchange earnings and employment opportunities. Overall the priority was to develop an efficient open economy to promote export led growth. The policy change from import substitution to trade liberalization, nevertheless, was imminent and marked a dramatic overhaul of the country’s long held objective of national self-reliance.

Today tariffs continue to be the key instrument for trade policy as well as providing a source of tax revenue. More recently, there have been signs of some reversals of the trade liberalization agenda. The average MFN tariff in 2009 was 11.3% and has risen since 2003 when it was 8.4%. Though the 2009 average rate is below the 1996 rate (12.4%), there are indications of trade policy reversal. This is mainly due to pressures from domestic industries (FAO, 2003; WTO, 2009). In the 2013 fiscal year, fiscal duty has been increased from 15 percent to 32 per cent on liquid milk, powdered milk, yoghurt and cheese. This increase in duty on liquid milk and milk products is probably one of the most regressive trade policies that the Bainimarama government may have adopted since coming to power. Not only it sold the government controlled Rewa Dairy Company to a private company but it additionally it has created a condition where this private company is likely to make millions of dollars at the expense of poor consumers in Fiji. Fiji still imports more that 70% of liquid milk and milk products and it is unlikely that new company will be able to promote milk production in the short to medium term to reduce the imports significantly. This means that most of the milk will continue to be imported and consumers in Fiji will continue to pay very high prices for imported milk and milk products. There will be little interest for this private company to increase milk production as it will be able to import liquid milk duty free and convert them to other milk products and sell them at domestically at a very high price.

It is critically important for the Fijian government to continue with the trade liberalization that began in the 1980s. A reversal of trade policy in this area will not provide support to a broad based economic growth. Fiji’s experience from the past suggests that it cannot go back to an inward-oriented strategy by providing protection to domestic firms in order to encourage production and employment. The potato example is strongly relevant in the case against an inward oriented strategy such as the import substitution policy.

The benefits of liberalization are now well documented in the literature. Dornbusch (1992) provides several channels through which trade liberalization could bring benefits to developing countries: improved resource allocation in line with social marginal costs and benefits; access to better technologies, inputs and intermediate goods; an economy better able to take advantage of economies of scale and scope; greater domestic consumption; availability of favourable growth externalities, like the transfer of know-how; and a shakeup of industry that may create a Schumpeterian environment especially conducive to growth. Trade restrictions will end up restricting growth and produce a loss of real income. This will go on as long as the economy is protected. The argument that protection will protect jobs is not supported by the empirical literature. While protection, in the short run, may help jobs in the protected industry than it otherwise would be, it does not mean that protectionist measures can increase the total volume of employment in the economy. In fact empirical evidence from around the world argues that it would be to the contrary. While costs such as job losses are likely from import competition, the solution to this is not trade restriction but other policies to help workers adjust. Empirical research on Fiji (Gounder, 2013; Asafu-Adjaye and Mahadevan, 2009; Asafu-Adjaye, 2007) related to trade liberalization and growth provides evidence that non-discriminatory trade and gradual unilateral liberalization remains the best option for Fiji in order to maximise welfare.

3.4. Ease of doing business

The government has to carefully and seriously consider the issue of cost of doing business. The School of Economics survey shows that cost of doing business in Fiji is one of the key issues for businesses. The government should be cautious about over regulation in the economy. It should not burden small and medium enterprises with the same volume of paper work and costs of registering and compliance to regulations. The 2013 World Bank report, Doing Business 2013, shows that Fiji’s rankings on starting a business, number of procedures for starting a business and numbers of days to register a business have all increased in 2013 compared to 2012. These suggest that compared to other economies, bottlenecks for starting a business have increased in Fiji. The aggregate ranking on the ease of doing business for Fiji in 2013 is 60 out of 185. It should be noted that Samoa is ranked 57 on the same index.

4. Concluding Remarks

Higher growth rates have mostly remained elusive despite well-intended policies of the government post 2006. More recently, the positive growth rates of 2012 and 2013 seems to be showing signs of an economy maintaining a path towards sustaining positive growth in the short to medium term. However, a lot hinges on the political situation leading up to the national elections in 2014. Credible national elections and a stable political climate are important for future economic performance and sustaining growth in the long term. In the meantime ensuring strong and stable consumption through raising household incomes to sustain growth should be a priority alongside greater incentives to promote investments toward agriculture, services and reforms for increased efficiency of investment.

Greater macroeconomic stability and an improving business environment would also be important for creating a solid base for medium term economic growth. The forecast for 2013 is strongly dependent upon how much of new foreign investment is realized and the real sectors such as sugar industry perform as per expectations. Given the performance of the real sectors such as agriculture, manufacturing and less than expected visitor arrivals in the first quarter of the year, the revised forecast of 3.2% growth rate is overly optimistic. It would have been reasonable if they had stuck to the original forecast of 2.7%.

The government should continue with the structural reform and further liberalize the telecommunications market. There is further room to bring down the cost of telecommunication and mobile charges generally. This would help boost the services sector and we could attract more and better back office operations in Fiji. Government’s policy towards rejuvenating the agricultural sector and its focus on food security is commendable. There are tangible steps that it has taken to do that. However, it should not deviate from the overall thrust of its economic policy which emphasizes an export oriented growth strategy. We should carefully analyse the comparative advantages we have in different sectors such as agriculture, services and promote those export sectors. The policy of import substitution has not worked in Fiji in the past and is unlikely to work in the future. Therefore, it is imperative that government does not focus on import-substitution like what it has done to the dairy industry. For agriculture, the investment should be in agricultural infrastructure, strengthening of technical assistance and extension and research services for farmers and where appropriate target input subsidies for incentivizing the farmers.

REFERENCES

Alfaro, L. and Charlton, A. (2009), “Intra-industry Foreign Direct Investment”, American Economic Review, American Economic Association, Vol. 99, No. 5, pp. 2096-2119.

Asafu-Adjaye, J. (2007), “Liberalising trade in the agriculture sector of a small island state: The case of Fiji”, The World Economy, Vol. 30, No. 10, pp. 1550-1567.

Asafu-Adjaye, J. and Mahadevan, R. (2009), “Regional trade agreements versus global trade liberalization: Implications for a small island developing state”, The World Economy, Vol. 32, No. 3, pp. 509-529.

Asian Development Bank (2005), Private Sector Assessment for Fiji Islands: Promise Unfulfilled, Pacific Liaison and Coordination Office, ADB, Sydney.

Chand, S. (2007), “Swim or sink: the predicament of the Fiji economy”, Pacific Economic Bulletin, Vol. 22, No. 2, pp. 1-21.

Dornbusch, R. (1992), “The case for trade liberalization in developing countries”, Journal of Economic Perspectives, Vol. 6, No. 1, pp. 69-85.

Food Agriculture Organisation (2003), ‘Fiji,’ Report prepared by A McGregor, Trade Development Office, Suva.

Gounder, N. (2013), “Trade liberalization and poverty in Fiji: A computable general equilibrium – microsimulation analysis”, Unpublished PhD Thesis, Department of Economics, Griffith Business School, Griffith University, Australia.

Howes, S. (2013), “Poverty in Fiji approaching 50%”, http://devpolicy.org/in-brief/poverty-in-fiji-approaching-50-20130704-3/http://devpolicy.org/in-brief/poverty-in-fiji-approaching-50-20130, 4 July, 2013.

Kaitani, M. (2007), “Social Welfare and Poverty Alleviation Programs in Fiji: Are they Pro-poor?’ Fijian Studies, Vol. 5, No. 2, pp. 263-273.

Prasad, B. C. (2010), “Global crisis, domestic crisis and crisis of confidence: which way forward for Fiji?”, Pacific Economic Bulletin, Vol. 25, No. 2, pp. 1-24.

Reserve Bank of Fiji (1993), “The Tax Free Factory/Tax Free Zone scheme in Fiji”, Pacific Economic Bulletin, Vol. 8, No. 1, pp. 27-34.

Reserve Bank of Fiji (2013), “Statement by the chairman of the macroeconomic policy committee and governor of the Reserve Bank of Fiji”, Press Release No. 21/2013, Reserve Bank of Fiji, Suva.

Rodrik, D. (2007), One Economics, Many Recipies, Princeton University Press, Princeton.

World Bank (2013), Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises, World Bank Group, Washington, DC.

World Trade Organisation (1997), Trade Policy Review Fiji: Report by the Secretariat, World Trade Organization, Geneva.

World Trade Organisation (2009), Trade Policy Review Fiji: Report by the Secretariat, World Trade Organization, Geneva.

1 FDI data for this section was mostly sourced from Investment Fiji which included number of projects, total employment generated and the value of FDI (both proposed and implemented) for the years 2008 – 2012. The Reserve Bank of Fiji and Fiji Islands Bureau of Statistics publications shows different values of FDI. Thus readers should apply caution when referring to FDI figures from this section as it is difficult to reconcile the different sources. In particular, FDI figures provided by Investment Fiji are likely to be underestimated due to definition and measurement reasons.

2 For 2012, the value is for the first quarter only.