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Pacific island countries are highly vulnerable to various natural disasters which are destructive, unpredictable and occur frequently. The frequency and scale of these shocks heightens the importance of medium-term economic and fiscal planning to minimize the adverse impact of disasters on economic development. This paper identifies the intensity of natural disasters for each country in the Pacific based on the distribution of damage and population affected by disasters, and estimates the impact of disasters on economic growth and international trade using a panel regression. The results show that “severe” disasters have a significant and negative impact on economic growth and lead to a deterioration of the fiscal and trade balance. We also find that the negative impact on growth is stronger for more intense disasters. Going further this paper proposes a simple and consistent method to adjust IMF staff’s economic projections and debt sustainability analysis for disaster shocks for the Pacific islands. Better incorporating the economic impact of natural disasters in the medium- and long-term economic planning would help policy makers improve fiscal policy decisions and to be better adapted and prepared for natural disasters.
Ms. Patrizia Tumbarello, Ezequiel Cabezon, and Mr. Yiqun Wu
The small states of the Asia and Pacific region face unique challenges in raising their growth potential and living standards relative to other small states due to their small populations, geographical isolation and dispersion, narrow export and production bases, exposure to shocks, and heavy reliance on aid. Higher fixed government costs, low access to credit by the private sector, and capacity constraints are also key challenges. The econometric analysis confirms that the Pacific Island Countries (PICs) have underperformed relative to their peers over the last 20 years. Although these countries often face more limited policy tools, policies do matter and can further help build resilience and raise potential growth, as evidenced in the recent business cycle. The Asia and Pacific small states should continue rebuilding buffers and improve the composition of public spending in order to foster inclusive growth. Regional solutions should also continue to be pursued.
This chapter discusses the changes that have taken place in the underlying structural relationships determining government expenditures between 1975 and 1986. The paper describes the methodological problems in analyzing the determinants of government expenditure patterns, and the issues involved in making cross-country expenditure comparisons, and the problems confronting country economists in assessing a country's expenditure profile. The Tait-Heller study concluded that the international expenditure comparison (IEC) framework provided a “starting point” for analysis. In many respects, this conclusion would still appear valid; if anything, the issues associated with using the IEC indices have become more rather than less complex. Data limitations also pose a limiting factor on the usefulness of an analysis of the IEC indices of a country, and even more strongly suggest its use only as complementary to more detailed sectoral and economic analyses of expenditure profiles. The results for the developing countries in the European region are almost identical to those observed in Africa, with the key exception being an increased priority for expenditure on social security and welfare and a decline in the priority attached to education.
The small states of the Asia and Pacific region face unique challenges in raising their growth potential and living standards. These countries are particularly vulnerable because of their small populations, geographical isolation and dispersion, narrow export and production bases, lack of economies of scale, limited access to international capital markets, exposure to shocks (including climate change), and heavy reliance on aid. In providing public services, they face higher fixed government costs relative to other states because public services must be provided regardless of their small population size. Low access to credit by the private sector is an impediment to inclusive growth. Capacity constraints are another key challenge. The small states also face more limited policy tools. Five out of 13 countries do not have a central bank and the scope for diversifying their economies is narrow. Given their large development needs, fiscal policies have been, at times, pro-cyclical. Within the Asia-Pacific small states group, the micro states are subject to more vulnerability and macroeconomic volatility than the rest of the Asia-Pacific small states.
This 2007 Article IV Consultation highlights that real GDP growth of Solomon Islands rose to an estimated 6 percent in 2006, driven by fish, palm oil production, and services. However, it is expected to ease to 5½ percent in 2007, as a further escalation in logging will be likely offset by lower growth of fish and traditional crops. With the natural forest expected to be depleted within the next few years, structural reforms are necessary to generate higher sustainable growth, raise living standards, and reduce the economy’s vulnerability to shocks.
The 2008 Article IV Consultation with Solomon Islands discusses an economic outlook that hinges critically on developing nonlogging sources of growth and exports to offset the expected decline in logging activity. The country remains beset with poor infrastructure, land ownership issues, a shortage of skilled labor, and unreliable and costly basic services. Executive Directors recommended that the central bank seek to develop financial markets further and make greater use of interest rate mechanisms of monetary control. To avoid placing undue burden on monetary policy, fiscal policy needs to play a supportive role.