Question

Essay

Identify and explain some of the factors hindering sustainable economic growth in Pacific Island Countries (PIC’s). Also explain the theoretical insights which the Keynesian and Neo – classical growth theorists have to offer for raising growth rates of PIC’s.

Answer 1

1. Federated States of Micronesia

It can be seen that the growth spurt from 1988 to 1993 largely coincided with the implementation of funding. There was a focus in the use of the aid funds on modernising infrastructure; as well, the public sector was expanded through increased civil service employment and higher wages, and the launch of several loss‐making SOEs (involved in coconut processing, fisheries and the pepper industry)—all of which made it difficult for the establishment and expansion of the private sector.

2. Republic of the Marshall Islands

Two short periods of good growth, 1982 to 1984 and 1986 to 1988, were interrupted by a sharp recession in 1985. The other good growth period is 1992 to 1995. A negative growth period, 1996 to 1999, is also identified. The very negative growth period reflected not only the cuts in government expenditure and employment made under the ADB's Policy Reform Program, but was also because of the poor performance of the agriculture and fishing sectors.

3. Palau

The poor growth experienced in most years throughout the period 1997 to 2003 was due to a series of events, many of which were related to the fact that Palau tourism has been heavily dependent upon the fast‐growing countries of East Asia, viz. the Asian financial crisis of 1997–98, the 9/11 terrorist attack in New York in 2000 and the SARS scare in 2003.

4. Kiribati

Efforts to promote agriculture, manufacturing and tourism were unsuccessful. Hence, at independence, coinciding with the loss of phosphate exports, economic prospects were bleak.

5. Tuvalu

The most that can be concluded is that the sources of growth in Tuvalu have been mostly in the form of external funds of one kind or other—including aid—accruing to the government, and that these revenue flows are highly variable. Private sector activity remains very small and cannot drive growth in its present state.

6. Tonga

A cyclone in 1982 damaged coconut and banana trees. However, construction activity stimulated by damage repair and funded by aid and insurance payments lifted economic growth. The Industrial Development Incentives Act 1978 led in the early 1980s to growth in manufacturing of products such as food and beverages, furniture and joinery and construction materials.

Keynesian models assume frictions in markets. Prices don't adjust quickly to shifts in demand or supply, so any shock the market will show up in relatively large shifts in quantities. Prices are relatively inflexible, quantities are relatively flexible. This can result in an improvement in an already sinked economy

Neoclassical models assume much the opposite. Markets have few frictions, and prices adjust quickly and simply, meaning quantities don't change when there's a shock to supply or demand. Prices are flexible, quantities aren't. This theory would help bridge the gap in GDP