Chapter 1. Economic Growth in the Pacific Island Countries—Challenges, Constraints, and Policy Responses
- Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
- Published Date:
- April 2016
- Roger P. Kronenberg and Hoe Ee Khor
Economic growth among the Pacific island countries (PICs) has lagged most peer groups for more than a decade. This chapter provides an overview of the policy issues and challenges faced by these countries, and discusses the factors that have contributed to the low rates of economic growth in the region. It seeks to identify policies that could help raise growth performance in a way that is both inclusive and sustainable. The countries examined are Fiji, Kiribati, the Marshall Islands, Micronesia, Palau, Papua New Guinea, Samoa, the Solomon Islands, Timor-Leste, Tonga, Tuvalu, and Vanuatu. All are IMF members.
The picture that emerges is that the below-par growth performance of PICs can be partly explained by the region’s unique characteristics. But policies also matter.
The Economic Setting
PICs seem stuck on a low-growth path (see Chapter 6). During the 10 years preceding the global financial crisis, real GDP growth in these countries averaged just 2 percent a year, considerably lower than in the countries of the Eastern Caribbean Currency Union (4 percent), other small states (4½ percent), and Asia’s low-income countries (7 percent) (Figure 1.1). Real average income per capita in PICs has increased by less than 10 percent since 1990, compared with 40 percent in the Eastern Caribbean, 25 percent in the group of all small states, and about 150 percent in Asia’s emerging market economies. PIC growth in the 2000s was the lowest in four decades. As of 2013 average gross national income per capita in PICs was just one-third that of the Caribbean countries. The PICs’ recovery from the global financial crisis has also generally lagged Asia’s low-income countries and emerging market economies. Meanwhile, differences in growth performance among PICs have widened over the past decade, with the natural-resource-rich countries (Papua New Guinea, the Solomon Islands, Timor-Leste) generally outperforming the others, particularly since 2008 (Figure 1.2).
Figure 1.1Growth Performance: Pacific Island Countries and Selected Comparators
Source: IMF, World Economic Outlook database.
Note: LICs = low-income countries; PICs = Pacific island countries.
Figure 1.2Growth Performance among Pacific Island Countries
Source: IMF, World Economic Outlook database.
Note: LICs = low-income countries; PICs = Pacific island countries.
The below-par growth performance can be partly explained by the region’s unusual geographic, demographic, climatic, and other characteristics. These include:
Small populations and small internal markets that result in diseconomies of scale and high fixed costs of production.
Extreme geographic dispersion and isolation, implying low connectivity.
Vulnerability to natural disasters and climate change, including cyclones, droughts, and rising sea levels.
Narrow production and exports bases due to smallness and therefore lack of economies of scale.
Depletion or unsustainable exploitation of natural resources, including forestry products, minerals, energy resources, and marine resources.
In addition to the effects of these physical characteristics, growth in some PICs has been further constrained by policy-related factors, such as:
Weak macroeconomic policy frameworks, which led at times to unsustainable exploitation of natural resources.
Capacity constraints, including weak policy implementation capacity.
Limited financial depth.
Laws and customs that limit the flexibility of product and factor markets (for example, land tenure).
High levels of public debt (Samoa, Tonga, Tuvalu).
High dependence on foreign aid; for example, microstates reliant on Compacts of Free Association with the United States (Marshall Islands, Micronesia, Palau); and remittances (Samoa, Tonga, Tuvalu).
Political economy factors such as periods of political instability or lack of security (including, at various times, Fiji, Papua New Guinea, the Solomon Islands, Timor-Leste, and Tonga), which hamper investment and the development of sound institutions.
While there is broad agreement about the factors that have contributed to slow growth in PICs, it is less obvious how policymakers can overcome these constraints. Small domestic markets, remote locations, and poor natural resource endowments do not lend themselves to quick or easy solutions. Even so, policies do affect economic outcomes in broadly predictable ways, and even the smallest countries can achieve higher economic performance with the right policy mix, good governance, and a skilled labor force.
There is scope for PICs to strengthen the policy environment and improve growth performance. However, to do so, their governments need to put in place policies that foster macroeconomic stability and debt sustainability, build institutions through reforms, strengthen confidence in the policy framework, promote the development of financial markets, improve the business environment, and address rigidities in product and factor markets to attract foreign direct investment. Another challenge is to find the right balance between the need to build fiscal buffers to enhance resilience and the need to fund development spending.
The foundation of a growth-enhancing policy strategy must start with a credible macro-fiscal framework that sets clear, achievable targets for a sustainable medium-term debt position. Here, one of the biggest challenges is striking the right balance between policy rules that can help anchor confidence and policy flexibility to enable the authorities to respond to unanticipated macro-critical shocks, including natural disasters, which can be severe in PICs. For countries with significant natural resource endowments, such as Papua New Guinea, the Solomon Islands, and Timor-Leste, the fiscal framework and minerals taxation regime should facilitate the transformation of nonrenewable underground and undersea wealth into income-generating wealth through investments in domestic infrastructure, human capital, and a diversified, low-risk portfolio of foreign financial assets.
The challenges of doing so should not be underestimated, particularly in countries where technical capacity and the ability of the economy to absorb higher levels of development spending may be very limited. Development programs therefore need to be scaled up in line with capacity improvement to ensure effective use of resources. Governments and central banks also need to hold adequate international reserves for precautionary purposes. Although it is an important form of protection, self-insurance in itself is not enough and needs to be complemented by international safety nets and pooling of risks through regional arrangements (see Chapter 5). Other key policy elements include:
Monetary and exchange rate arrangements that facilitate the maintenance of low inflation, ensure competitiveness, and promote adjustment to large terms-of-trade swings or supply shocks in a manner consistent with a country’s institutional and administrative capacity.
Developing sound financial institutions capable of mobilizing savings and channeling them to productive investments.
Policies to address structural rigidities in land tenure systems. These rigidities reduce the efficiency of land use by placing constraints on the ability to transfer ownership of land, using land for loan collateral, and putting land to nontraditional uses.
Regional arrangements to mitigate the diseconomies of scale, enhance competition, protect and promote regional interests, and allow greater specialization in areas of comparative advantage.
Closer trade and investment linkages with fast-growing partners, including Australia, New Zealand, and east Asia’s rapidly growing economies.
Challenges and Constraints to Growth
Small Populations and Remote Locations
With the exception of Papua New Guinea (population: 7.2 million), the PICs and Timor-Leste are small states.1 Of these, seven (Kiribati, Marshall Islands, Micronesia, Palau, Samoa, Tonga, Tuvalu) can be classified as microstates, with populations under 200,000.
Small populations limit market size and can affect growth and income levels through their impact on competition, the diversity of labor market skills, diversification of production, and the ability to achieve economies of scale in producing public services ranging from health care to financial supervision and tax administration. Most PICs also have very small land areas, although the maritime areas within their exclusive economic zones (EEZs) can be very large (Figure 1.3).
Figure 1.3Pacific Island Countries: Exclusive Economic Zones and Land Mass
Source: Sea Around Us database.
Note: EEZ = exclusive economic zone.
PICs are also among the most remote countries in the world. Distances to even their closest neighbors—Australia, New Zealand, and countries in east Asia—are measured in hundreds, if not thousands, of kilometers. While advances in telecommunications technology have reduced some of the costs of remoteness, PICs have, on the whole, been slow in introducing and adding capacity in new technologies. Indeed, it could even be argued that technological advances have left PICs even more commercially isolated from the major centers of global economic activity than before, since there is now less need for modern aircraft and ships to call at PICs for refueling or resupply.
Trade among PICs is also constrained by geography. In the same way that they are far from large markets, the distances separating PICs from each other are also considerable, and there are few complementarities in their production structures to encourage trade among them. Even domestic commerce can be constrained by remoteness. Micronesia, for example, comprises 65 inhabited islands in four separately governed states. Kiribati’s 21 inhabited islands have a total area of just 811 square kilometers in an EEZ covering some 3.4 million square kilometers of ocean, and two of the country’s three island chains have no air services. Even in Papua New Guinea, the most populous PIC and the one with the largest land area, transportation between different parts of the country can be extremely difficult because of the rugged terrain and limited road infrastructure.
Vulnerability to Natural Disasters and Climate Change
Climate, geography, geology, and weak infrastructure leave PICs exposed and vulnerable to natural disasters. Natural disasters have included major cyclones (Fiji, Samoa, Tonga, Vanuatu), tsunamis (Samoa, the Solomon Islands), severe drought (Marshall Islands, Tuvalu), flooding (the Solomon Islands), and volcanic eruption (Papua New Guinea). And then there is the looming existential threat to some low-lying coral island countries (Kiribati, Marshall Islands, Tuvalu) posed by rising sea levels from climate change. Faced with this bleak prospect, the government of Kiribati has bought land in Fiji and asked Australia and New Zealand to open their borders to immigrants from Kiribati in anticipation of a possible evacuation of the islands.
Natural Resources and Tourism
The natural resource endowments of PICs span a huge range. In Timor-Leste, for example, oil and natural gas account for about 80 percent of GDP and 90 percent of government revenue, making the economy highly dependent on energy prices and the exploration of new fields. The country needs to successfully diversify its currently narrow economic base. Natural resources, including gas, oil, copper, and gold, also play a very important role in Papua New Guinea’s economy. A large-scale liquefied natural gas development was successfully completed in 2014 and production is expected to continue for about 20 years. Gold was once an important export for Fiji and the Solomon Islands, with the latter also having untapped reserves of nickel and bauxite. In contrast, some other PICs, including some of the smallest, have no commercially exploitable mineral wealth, relatively little arable land, and precarious supplies of fresh water.
The sustainable management of natural resource wealth can present huge policy challenges for low-income countries. Unlike most other forms of economic activity, the extraction of energy and mineral resources can occur only once. For sustainable and inclusive growth to take place after the exhaustion of mineral wealth, these countries must set aside a portion of mining sector income for investment in income-generating assets for the future. Good examples include Kiribati, which has built up a significant sovereign wealth fund from its phosphate deposits, and Timor-Leste, which has also built up a sizable sovereign wealth fund from its energy exports since 2005.
Several PICs have important forestry and agricultural sectors, but the resource base in some of them has been depleted by unsustainable rates of harvesting. Forestry remains an important export sector for the Solomon Islands, for example, though the country faces unsustainable rates of logging that will lead to rapid depletion of logging stocks. Sugar production in Fiji has been declining for many years because of the phasing out of trade preferences in Europe, low crop yields, the inefficiency of its manufacturing plant, and the emigration of growers. Recent restructuring efforts have partially reversed this trend. Samoa, Tonga, and Vanuatu are producers of agricultural commodities, including root crops, copra, and coconut oil. The small atoll islands of Micronesia have very little in the way of onshore natural resources, including arable land.
The Pacific islands occupy some of the world’s richest fishing waters, but managing these resources has been a major challenge. The EEZs claimed by the eight parties to the Nauru Agreement Concerning Cooperation in the Management of Fisheries of Common Interest cover some 14.3 million square kilometers—roughly 1½ times the size of China or the United States—and account for 25–30 percent of the world’s tuna supply (Figure 1.4).2 Foreign vessels operating under licensing arrangements account for more than 80 percent of the total catch in the EEZs of PICs, and monitoring their activities across such large swathes of ocean presents major logistical challenges for these countries.
Figure 1.4Parties to the Nauru Agreement: Share of Global Tuna Catch
Sources: Western and Central Pacific Fisheries Commission (WCPFC), Tuna Fishery Yearbook (2012); and WCPFC estimates as of July 2014.
Note: The parties to the Nauru Agreement Concerning Cooperation in the Management of Fisheries of Common Interest are Kiribati, Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, the Solomon Islands, and Tuvalu.
The natural beauty and rich cultural heritage of the Pacific islands are enormous assets for the tourism industry. In the tourism-based economies (Fiji, Palau, Samoa, Vanuatu), tourism receipts on average account for about 30 percent of GDP—in Palau the share is 58 percent—compared to 19 percent in the Caribbean small states (Figure 1.5). In the other Pacific countries, tourism is still in relatively early stages of development, but the potential is large for niche activities such as diving and ecotourism.
Figure 1.5Tourism-Intensive Pacific Island Countries: Tourism Receipts
Source: IMF staff estimates.
Despite having these critical components, developing a sustainable tourism industry poses significant challenges for policymakers in the region. In infrastructure this requires sufficient guest accommodations, airports able to handle long-haul aircraft, and airlines interested in providing a service. The large, up-front costs of building this infrastructure can create considerable sequencing problems for small, remote countries, as there is a natural desire on the part of investors to want other infrastructure components in place before committing their resources. While it is clearly in the interest of policymakers to try to coordinate policies and investment decisions, the difficulty of the task is substantial—and the history of tourism development in the Pacific has numerous examples of very costly failures. Fragile environmental conditions and free-ridership issues add to the challenges and complexity of developing tourism in the region.
Political and Social Stability
Political and social stability are important catalysts for investment, sustainable economic growth, and inclusive development. Yang and others (Chapter 4) find that political stability has had an overall positive impact on the growth performance of the PIC region compared with other small states, but individual country experiences have differed sharply. Broadly speaking, the smaller Polynesian and Micronesian countries have experienced greater political stability than the larger Melanesian countries, which also happen to be the ones with greater endowments of natural resource wealth.
Recent political developments in the region have been quite encouraging. Timor-Leste, which experienced severe civil strife in recent decades, has successfully held democratic elections and is making significant progress in rebuilding national institutions and strengthening governance. With domestic security restored, the government was able to complete the withdrawal of the United Nations-sponsored multinational police force in 2012. Similarly, the regional police force requested by the Solomon Islands to help restore order following a period of social unrest has started to gradually wind down as the situation is normalized. Fiji, which had been ruled by a military junta since 2006, adopted a new constitution in 2013 and held a general election in September 2014. The successful transition to a democratic government has generated tremendous interest among foreign investors and is likely to lead to higher foreign investment.
Policy Responses to Strengthen Growth Potential
PICs have been significantly disadvantaged by their small populations, remote locations, weak administrative capacities, and limited arsenal of policy instruments. But what can the authorities do to secure a more prosperous and stable future? The chapters in this book suggest there is scope for policies to reduce the vulnerabilities of PICs and strengthen growth potential. Success will depend, to a large extent, on the ability of the authorities to put in place medium-term macrofiscal frameworks, sound monetary and exchange rate policies, and structural reforms to improve the business environment, investment climate, and flexibility of markets. And to do this while finding new ways to turn the region’s unique resources and environment to its own greater advantage.
Macro-Fiscal Frameworks and Sovereign Wealth Funds
Fiscal policy serves multiple purposes in PICs. It must be designed to meet countries’ highest priorities for infrastructure, human capital formation, and the provision of public services, which is made more costly and difficult by their small size, remote location, and limited scope for a high level of labor force specialization. Fiscal policy must also be sustainable, which is particularly important and difficult in countries that are heavily dependent on exhaustible natural resources. The tax system should be as neutral and nondistortionary as possible, while also being administratively enforceable and not imposing excessive compliance costs. And the fiscal regime must establish the right balance between fiscal anchors, which generate confidence and predictability in the economic environment for domestic residents and foreign investors, and providing the authorities with adequate discretion to respond flexibly to unanticipated shocks or new opportunities.
Given the vulnerability to large shocks and revenue volatility, fiscal policy in the PICs should be grounded in a credible medium-term macro-fiscal framework (see Chapter 10). Fiscal frameworks for resource-rich PICs like Timor-Leste and Papua New Guinea recognize the importance of investing a significant share of their natural resource revenue in productive assets that can continue to generate a stream of income indefinitely after mineral or energy resources have been depleted. However, only five of the PICs have adopted a multiyear budget framework to help smooth the expenditure path over the medium term.
The appropriate policy response to a negative shock depends in part on the individual country’s fiscal space (see Chapter 6). While Papua New Guinea, the Solomon Islands, and Vanuatu still have fiscal space, the scope for countercyclical policies is more limited in those countries with high public debt (Marshall Islands, Samoa, Tonga, Tuvalu).
A critical issue for policymakers in resource-rich, low-income countries is how resource revenues should be used to promote sustainable growth. Traditionally, the emphasis was on setting aside a significant proportion of extractive resource revenues for the international reserves of the central bank. The revenues were typically invested in highly rated liquid financial assets, such as the government securities of reserve currency countries, which could generate steady, safe, and predictable streams of income, while providing a precautionary buffer to negative shocks.
In recent years, with yields on such instruments becoming very low and often negative in real terms, greater attention has turned to sovereign wealth funds and the need to maintain a broader, more balanced portfolio of international assets, including equities and other alternative assets, with the objective of improving investment returns while containing overall risk. The sovereign wealth funds of Kiribati and Timor-Leste, for example, are mandated to invest in diversified portfolios of bonds and equities. To assist the Timorese authorities in achieving these objectives, the government has retained the services of major international investment advisors to manage the portfolio of its fund, subject to the government’s prudent and transparent investment guidelines.
Thinking has also evolved somewhat on domestic investments. In particular, increased attention has been given to the need for low-income, resource-rich countries to invest in domestic infrastructure and human capital to facilitate the diversification of their economies away from minerals or energy extraction. This is so that growth can become more broadly based and sustainable, as natural resource extraction peaks and eventually declines (IMF 2012). At the same time, it is important to recognize that PICs have quite limited absorptive capacity and that pushing too hard to scale up domestic investment can be inflationary and even wasteful, and have adverse consequences for competitiveness.
The economic policy frameworks of Marshall Islands, Micronesia, and Palau are structured around their Compacts of Free Association with the United States. These provide for the disbursement of sector grants by the United States and the establishment of trust funds that have been funded mostly by the United States. The purpose of the trust funds is to contribute to economic advancement and to achieve budgetary self-reliance ahead of the projected expiration in 2023–24 of U.S. grants to these countries. The trust funds are invested in a mix of assets (bonds and equities) and are subject to the oversight of joint committees with U.S. participation. For Marshall Islands and Micronesia, no disbursements from the funds are allowed until 2023. For Palau, the government was allowed to withdraw up to US$5 million annually until 2013, and it can gradually increase maximum annual withdrawals up to US$13 million in 2023 under the proposed new agreement. These three countries have adopted the U.S. dollar as their national currencies, reflecting the importance of the compacts in their policy frameworks as well as their small size. Tuvalu also participates in a large trust fund, which is jointly owned by the Tuvaluan government and several key development partners. The fund can be drawn down only when its value exceeds a benchmark that is indexed to Australia’s consumer price index, and the maximum that can be drawn is the portfolio value in excess of the benchmark.
Monetary and Exchange Rate Arrangements
Monetary policy can help maintain macroeconomic stability and smooth business cycles. However, its effectiveness depends, in part, on the strength of the pass-through of interest rates set by the central bank to bank deposit and lending rates. Gottschalk (Chapter 14) finds that this pass-through is weak in most PICs, which have large amounts of excess liquidity. In addition, the up-front fixed costs of establishing effective monetary policy institutions, instruments, and capacity can be extremely large for very small countries. Therefore, it is not surprising that the smallest PICs have adopted other reserve currencies, either the U.S. dollar or the Australian dollar, as their legal tender.3 Timor-Leste, which is a larger country, also uses the U.S. dollar, partly reflecting the importance of oil and natural gas exports (which are denominated in U.S. dollars) to its economy and its relatively underdeveloped financial markets. However, unlike the other smaller countries using the currencies of larger nations, Timor-Leste has established a central bank, both to supervise local financial institutions and to build research and other central banking capabilities.
Exchange rate flexibility can enhance the effectiveness of monetary policy and facilitate adjustment to economic shocks, particularly in countries subject to large terms-of-trade shifts and other external shocks. However, floating exchange rate regimes require foreign exchange markets that are sufficiently deep and liquid to prevent excessive volatility. Reflecting the small size of their foreign exchange markets, most of the PICs that have their own currencies maintain exchange rates pegged to a basket of foreign currencies (Fiji, Samoa, the Solomon Islands, Tonga, Vanuatu). Papua New Guinea, the country with the largest economy and banking sector in the region and a resource-based economy, is the only PIC with a flexible exchange rate regime.
The exceptionally small size of PICs means that regional initiatives have the potential of generating economies of scale that could not possibly be achieved by individual countries. Regional initiatives also have an important role to play in cases where the actions of one country have externalities—positive or negative—for their neighbors, and in cases where multiple countries may be prone to the same shocks, such as cyclones.
There are success stories of regional cooperation in the Pacific. In education, the University of the South Pacific is a shining example of how regional cooperation can mitigate diseconomies of scale. Fisheries is another area where collective efforts have met with considerable success. Historically, the domestic fishing industry in PICs has suffered from a low number of jobs, poor earnings from employment, and a low impact on poverty alleviation and food security. PICs’ domestic fishing fleets are estimated to account for only about 20 percent of the catch in the waters of their EEZs. The 17-nation Pacific Islands Forum Fisheries Agency (FFA) was established as an advisory body to assist member countries to manage their fishery resources in a sustainable way. Under the Harmonized Minimum Terms and Conditions for Access to FFA Member EEZs by Foreign Fishing Vessels, which has been agreed by all FFA members, foreign fishing vessels operating in the region must identify themselves to the FFA Vessel Monitoring System using an automatic location communicator. In addition, the eight countries that are parties to the Nauru agreement, which are also FFA members, have implemented a Vessel Day Scheme, which apportions the total allocation of fishing days among its members and allows for the purchase and trade of fishing days among the parties. The scheme’s purpose is to constrain catches of tuna species to sustainable levels and increase the rate of return from access fees paid by the Distant-Water Fishing Nations.
To mitigate the disadvantages from small country size and remoteness, much more needs to be done to increase regional cooperation. Air and sea transportation is an area where greater cooperation is urgently needed to reduce the fragmentation of regional networks, which continues to hamper trade and tourism development. On the trade policy front, liberalization under the Pacific Island Countries Trade Agreement was established to deepen regional trade integration and prepare PICs to form a regional free trade agreement—the Pacific Agreement on Closer Economic Relations Plus—with Australia and New Zealand. But progress has been slow and so far has brought only limited and uneven benefits to PICs, though this is not surprising given the similarities of resource endowments among these countries. A key challenge for PICs is to formulate a broad strategy that would enable them to secure greater access for their labor and agricultural products in Australia and New Zealand. At the same time, PICs should increase efforts to tap into Asia’s rapidly growing markets, particularly the tourism market. This calls for greater openness to trade and foreign direct investment across the board, and nondiscriminatory liberalization over time to maximize the benefits of economic integration with both traditional and emerging trade partners.
Other Policy Issues
Making efficient use of their very limited land resources has posed problems for many PICs. Land tenure in most of these countries is typically based on some form of communal land ownership, which can reduce the incentives for making land improvements and other forms of investment, as well as inhibit the development of mortgage-type financial instruments. Land rights issues have been particularly important in some of the resource-rich PICs, where disputes have arisen over the division of natural resource revenues among various parties, including central and local government and groups with competing land ownership claims. In Fiji, for instance, differences between smallholders in the sugar industry, who are mostly descendants of immigrants, and landowners, who are from the indigenous population, have resulted in poor agricultural practices and lack of investment in farms leading to low yields. The recent establishment of the Land Bank is a welcome step toward creating a predictable and stable supply of land with lease for long-term investment.4
The small size of PIC markets has hindered the development of financial and capital markets in the region. With a perceived shortage of bankable projects, many banks (mostly foreign) hold an unusually high share of their deposits in the form of government and central bank securities and excess reserves. They also rely heavily for their income on fee-based services such as foreign exchange transactions, rather than intermediating between domestic savers and potential users of funds. Bank penetration in these countries is also quite low, reflecting the high cost of setting up branches in remote areas. However, with advancements in computer and telecommunications technology, banks in Fiji, Papua New Guinea, and the Solomon Islands are developing mobile-phone-based banking and microfinance, which can facilitate the expansion of banking services to the broader population.
Small size, remote location, high vulnerability to natural disasters, and poor natural resource endowments do not lend themselves to quick or easy fixes. Nevertheless, policies still play a critical role in reducing vulnerability to shocks and mitigating some of the disadvantages of small size and remote location.
Being able to address these constraints effectively will, to a large extent, depend on the authorities’ success in implementing a medium-term macro-fiscal framework appropriate to the particular characteristics of each individual country, and adopting sound monetary and exchange rate policies to maintain low inflation and promote adjustments to external shocks. Addressing these constraints will also depend critically on their success in implementing structural reforms and investments aimed at strengthening institutions and the governance framework, upgrading human capital, building physical infrastructure, and improving the flexibility of labor, capital, and goods markets.
Finally, PICs should cooperate through regional initiatives to strengthen their capacity to harness the region’s natural resources, including the vast marine resources of the Pacific Ocean, for the economic and social development of their populations. And income from these natural resources needs to be invested in income-generating assets for future generations.
Small developing countries/small states have populations of under 1.5 million. See IMF (2014).
The parties to the agreement are Kiribati, Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, the Solomon Islands, and Tuvalu.
Kiribati and Tuvalu use the Australian dollar, given Australia’s importance as a trading partner.
Through a land bank, indigenous landowners can allow the government to use their property for development purposes and on-lease it at market rates.