Staying Afloat: The Future of the Melanesian Economies

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Staying Afloat: The Future of the Melanesian Economies

“Aid dependency, resource dependency, and natural disasters remain huge challenges for the region.”

Staying Afloat: The Future of the Melanesian Economies

Vanuatu after Cyclone Pam

Credit: Graham Crumb/Imagicity.com

Securing long-term economic viability remains a challenge for the Melanesian states, with geographic isolation, climate change, natural disasters, and aid dependency presenting significant problems for these relatively young countries.

Vanuatu has a population of 270,000 and a GDP of $771 million. Designing an economy that is capable of supporting some 83 islands who mainly practice subsistence farming is a great challenge for the Vanuatu government. Conservative estimates affix tourism as the source of 40 percent of Vanuatu’s total GDP, and the nation receives another AUD$60 million (US$45 million) from Australia, its largest aid donor. Cyclone Pam in March 2015 had a severe impact on the Vanuatu economy; 90 percent of the crops were lost, and it brought an estimated financial toll of $520 million.

Vanuatu is ranked as the ninth most tourism-dependent country in the world. Political instability and the sensational cancellation of flights by international carriers due to the poor condition of the runway at Vanuatu’s main airport have taken their toll on the tourism industry, which is set to suffer a significant decline in 2016. Whilst Vanuatu is heavily investing in renewable energy and the construction industry is growing steadily, there remains significant inequality in the country, with much of the wealth going to foreign companies.

Meanwhile, the Solomon Islands has been propped up by Australian aid for the last decade to the tune of over AUD$2 billion thanks to the Regional Assistance Mission to Solomon Islands (RAMSI) occupation. RAMSI has largely restored security in the islands following intense ethnic conflict in the early 2000s, but there is still a substantial degree of political instability and a high turnover rate of prime ministers. With a population of 622,000 and a GDP of $1.2 billion, the economy is largely based on farming and fishing, with 75 percent of citizens working within these sectors. With Australia winding down its presence in the country, surviving will require significant diversification of the Solomons’ economy. Long term growth remains elusive, and the Solomon Islands remains the second most aid dependent country in the world, just after Liberia.

Next up is Fiji, with a population just under one million, and a GDP of $4.5 billion. The arrival of Cyclone Winston in early 2016 — the largest cyclone to ever hit the southern hemisphere — hit Fiji hard, inflicting a total damage at around $1.9 billion and leaving 40,000 homes destroyed and 44 people dead. The financial impacts will continue to be felt for some time, with sugar production decreasing by 31 percent, a huge blow for the industry described as the “bedrock” of the Fijian economy.

Nonetheless, the economy is still predicted to grow 2.4 percent in 2016, recording positive growth for its seventh consecutive year despite the effects of Winston. This can partially be attributed to government subsidization of the agricultural industry, plus a high import tariff protection rate of 32 percent. With low inflation rates, a reconstruction boom, and a solid tourism industry, Fiji should be able to pull through 2016 with positive growth, but its economy remains vulnerable to future natural disasters and foreign competition.

Whilst it is regarded as one of the more developed Pacific nations, the Fiji economy still largely revolves around fisheries, forestry, and subsistence agriculture. The number one source of income is tourism — constituting some 35 percent of the entire economy — whilst the second largest source is mining. Fiji’s Vatukoula mine has been operating as one of the major gold producers in the Pacific region for over 90 years, and has recently attracted the attention of Chinese investors, with DRK Energy Co now owning 30 percent of the mine. Meanwhile, the Australian gold mining company Newscrest has bought out 70 percent of a billion-dollar mining venture in the Namosi region, which contains significant gold and copper deposits and is anticipated to become operational in the next few years, despite the protests of indigenous landowners.

Finally, with 6.6 million people and a GDP of $18 billion, Papua New Guinea is the largest Melanesian nation in both economic and population terms. The PNG economy is largely based on its extractive industries and rich mineral deposits, which has left the country extremely vulnerable to downturns in global commodity markets.

PNG’s economic plans formerly revolved around the $19 billion Exxon Mobil LNG project, but the economy was badly hit by the drop in global oil prices in 2014. The impact was made all the worse by the fact that PNG is one of the most natural-resource dependent countries in the world. With 80 percent of citizens still in the subsistence agriculture industry, investment in human capital has been sorely lacking in PNG, with successive governments focusing most attention on the extractive industries.

PNG was originally predicted to be the fastest growing economy in the world for last year, with a GDP growth rate of 15 percent projected in early 2015. This optimism would be short-lived. The O’Neill administration had been running on steep budget deficits for some time, resulting in a steep downturn in growth projections for 2015 (the country ended the year with 9 percent growth). This saw the adoption of drastic austerity measures, including savage cuts of 30 percent to administration, infrastructure, education, and transport. PNG must urgently pay back its debts; any further drops in credit rating could well cripple the country into the next decade.

PNG is currently facing a dire shortage in foreign exchange, highlighting the fact that international money markets are increasingly regarding PNG as a risk. Whilst the government are maintaining a cool façade, this cash flow crisis is prompting many to speculate that PNG is on its way to bankruptcy. Meanwhile, no attempts seem to be underway to undo PNG’s pronounced dependency on mining, with the Chinese-backed, $1.6 billion Ramu Nickel mine re-opening this week under controversial circumstances. The immediate way forward for PNG probably lies in more spending financed by extensive new loans, although it is difficult to see where these lenders will emerge from.

The Melanesian states struggle in general with attracting private investment and creating investor confidence. Aid dependency, resource dependency, and natural disasters remain huge challenges for the region. All four of the countries are continue to receiving significant aid from Australia. Whilst Australia is by far the lead donor in each country, they are also receiving increased attention from China, whose Pacific Islands pivot is causing concern in Washington and Canberra. China’s aid and investment focus on the Pacific looks set to change the future of infrastructure and development in the region in a major way.

However, all the development assistance in the world will not cure Melanesia of its resource “curse,” and crafting a sustainable growth model for the 21st century looks set to be the key conundrum facing Vanuatu, the Solomon Islands, Fiji, and Papua New Guinea. The question as to what is keeping Melanesia afloat is only going to become more important in the ensuing years. It is an issue that desperately needs to be addressed before pundits too hastily seek to condemn increased Chinese or Japanese investment in Melanesia, particularly in light of continued cuts to the Australian aid budget. As the effects of climate change become more severe, and controversy grows over the slash-and-burn tactics of the extractive industries, the Melanesian states had best start searching in earnest for alternative solutions.

Sally Andrews is a New Colombo Plan Scholar and the 2015-2016 New Colombo Plan Indonesia Fellow. She is a Director of the West Papuan Development Company and the 2016 Indo-Pacific Fellow for Young Australians in International Affairs.