Skip to content
Advertisements

Pacific islands: Market access alone won’t boost trade

July 17, 2014

A blog I wrote for the Lowy Institute for International Policy:

Solomon Islands last week became the first country to receive approval to export timber to Australia under new guidelines on the legality of logging products. The move secures the $4 million market in sawn timber exports to Australia, an industry which employs at least a thousand workers.

It’s good news, but the move shouldn’t be read as a boost to Solomon Islands’s flagging trade balance, still less a prop to its shaky economy. Logging in the Solomons is in terminal decline and timber sales to Australia remain less than 1% of total exports. Forestry fueled the economy since independence in 1978. So many logs have been felled that there are few viable areas of natural forest left to exploit. Plantations remain a small part of production.

Like many Pacific island countries Solomon Islands has spent decades liberalising its own economy and securing overseas market access for products like timber.

The country is a member of the World Trade Organisation, party to three regional trade agreements and has duty-free and quota-free entry to China, Europe and the US. Australia and New Zealand, the region’s biggest trading partners, also grant tariff and quota-free access. Efforts are underway to reduce quarantine barriers. Under PACER Plus, the trade agreement currently under discussion between Australia and the Pacific Island Forum countries, little remains left to liberalise.

All this emphasis on market access (both inward and outward) hasn’t benefited trade as much as it was supposed to.

Over the past 30 years Pacific island merchandise trade has fallen as a proportion of economic output, according to World Bank data. During the same period exports of goods and services from the Pacific islands rose more slowly than the world average. In some of the most enthusiastic regional liberalisers, like Solomon Islands, exports of goods and services even formed a progressively shrinking share of economic output.

It may seem like a no-brainer, but much of the reason for this underperformance is that Pacific island countries simply can’t produce enough. However much other countries want Pacific island goods, the Pacific just can’t make things for those markets in adequate quantity, consistency or quality.

When I worked in the Vanuatu Department of Trade, a colleague came back from a trade fair in Japan saying that a potential buyer loved Tanna Coffee and wanted 20 containers per month. Great, my friend replied, but 20 containers was total national production in a good year.

That story is typical: across the region, formal work forces are too small, countries too distant and fragmented, and production until now too volatile to fulfil the demand that exists for Pacific products. It’s a bit like trying to fill a bathtub with a thimble.

But this doesn’t mean the islands should give up on trade. Instead of concentrating relentlessly on opening up to foreign markets, much more should be done to boost domestic productive capacity. Use a bucket, not a thimble.

Economists define productive capacity as the resources, entrepreneurial capabilities and production linkages which together determine the ability of a country to produce goods and services and enable it to grow and develop. Productive capacity deals more with the national economy than with foreign markets, although the two are linked.*

The productive engine develops via capital accumulation, technological progress and structural change. Clearly these processes have been weak in most of the Pacific island countries.

Rates of capital accumulation are very low, partly due to the small size of the formal economy in many countries but also as a result of low savings rates and the underdevelopment of financial services, which mean that savings are not converted into investment. Technological progress has been limited or non-existent. Structural change (the rate at which agricultural productivity has risen and manufacturing and services have supplanted agriculture) is similarly slow. Melanesia’s economies in particular remain dominated by large subsistence sectors.

Roads, ports, bridges and wharves in many parts of the Pacific are among the poorest in the world, and this in countries which depend critically on transport. Tertiary, vocational and higher education need to improve if the region is to produce higher value-added goods and services. Low levels of labour productivity and widespread underemployment are among the key causes both of the weakness of productive capacity, and, more importantly, of persistent poverty.

It’s about time the Pacific island countries and development partners stopped putting all their faith in market access and started attending to the more complex task of developing and diversifying the domestic economic engine. Trade can boost development, but only if the islands have enough to sell.

 

—————————————————————————————————————————————————–

Photo by Flickr user Tony Morris.

*As well as the 2006 UNCTAD Least Developed Countries report this perspective draws analytically on works including Albert Hirschmann (1958) The Strategy of Economic Development. Yale University Press, New Haven, Conn.; Michal Kalecki (1969) Theory of economic dynamics, New York: Augustus M. Kelley; Nicholas Kaldor (1967) Strategic Factors in Economic Development Cornell University Press, Ithaca, New York; Jose Antonio Ocampo (2005) (ed.) Beyond Reforms: Structural Dynamics and Macroeconomic Vulnerability, Stanford Economics and Finance, Stanford University Press and the World Bank, Washington DC.

Advertisements
5 Comments leave one →
  1. July 21, 2014 12:03 am

    amen…Dan, the relationship between capacity, volume, productivity and most of all people in small islands states, remains intimate, tender…and volatile…I heard some time ago, “the Market is dead. Long live Marketing”…and for small islands states market access is only a small fraction of the production equation. Enjoying your posts immensely, thank you.

  2. July 21, 2014 8:18 am

    Thanks for the generous comments, Andreas. It’s funny that more people don’t recognise the importance of the production side of the equation, but after so much time spent securing market access with so little to show for it I suspect that it’s almost become impossible to ignore supply issues.

  3. July 21, 2014 10:30 am

    Thank you Dan for the words, …this type of thinking is not always explored in policy, let alone in the value chain mapping, either by the private sector…thus it often has a skewed investment priority and blames failure on the “local work force”…nor the Public sector …for it must identify that local responsibilities are high on the non-delivery agenda…and that itself takes mature management. However it seems the secret is out of the bag…there is a new wave of Melanesion entrepreneurship (at least in Vanuatu)…technology is on the side of the bold… and the food insecurity paradigm is forcing the private sector rethink, rate of return on investment vs the risk of non supply….exciting times indeed…fingers crossed…#gameonsir

  4. Wesley permalink
    July 30, 2014 9:42 pm

    Perhaps the Australian government’s recently announced Aid-for-Trade increase could be directed toward developing ‘supply side capacity’ instead of waste-of-time-and-money trade agreements? For discussion see: Morgan W. 2014. ‘Trade negotiations and regional economic integration in the Pacific Islands Forum’, Asia and the Pacific Policy Studies. Australian National University, Canberra. http://onlinelibrary.wiley.com/enhanced/doi/10.1002/app5.34

Trackbacks

  1. Thimbles, buckets and taps | Emergent Economics

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: