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FORUM ECONOMIC MINISTERS’ MEETING Rarotonga, Cook Islands 27-28 October 2009



The attached report titled Surviving the global recession: strengthening economic growth and resilience in the Pacific, prepared jointly by the Commonwealth of Australia and the New Zealand Government, provides an update on the Global Economic Crisis, and highlights policy actions needed to facilitate economic growth in Forum Island Countries (FICs). The briefing paper draws from the report, relevant meeting outcomes, and statements delivered on the issue since the last FEMM. For discussion.

BRIEFING PAPER UPDATE ON THE GLOBAL ECONOMIC CRISIS [PIFS(09)FEMC.03] Purpose The briefing paper provides an update on the Global Economic Crisis, and highlights policy responses needed to facilitate economic growth in Forum Island Countries (FICs). For discussion. Background 2. At the 2008 FEMM, Ministers noted the very serious negative impact that the global economic crisis will have on regional growth prospects. While the FIC banking system has successfully weathered the most immediate effects of the financial crisis, the region is far from immune from the effects of the unfolding global economic crisis. 3. Ministers noted the presentation by the International Financial Institutions that highlighted likely impacts of the economic crisis on FICs, which include: ƒ the adverse impact on trust funds, and superannuation schemes; ƒ the adverse impact on export prices for commodities; ƒ the difficulty in accessing capital; and ƒ pass through effects on the economy from the expected slowdown in tourism and decline in remittances. 4. Ministers noted some possible mitigation measures, which include, consolidating fiscal positions, easing monetary policy (where appropriate), and reinvigorating structural reform. 5. At their August 2009 meeting, Forum Leaders acknowledged the substantive contribution of the joint Australia and New Zealand report titled “Surviving the global recession: strengthening economic growth and resilience in the Pacific,” which highlighted the need for strengthened development coordination in the region to promote effective response to the global recession. The joint study (attached) assessed the implications of the global economic downturn on the Pacific Islands, and identified and proposed policy options on how effectively the region could respond to the global recession. 6. The Forum Economic Ministers are meeting at a time when, the global economy has experienced a deep recession, characterised by lower demand, output and employment. The global economy is expected to contract by 1.4 per cent in 2009. 1 All Forum Island Countries (FICs) have not been spared by its fall-out, as major markets of


Asian Development Outlook 2009 Update (ADO Update), 22 September 2009.


the Pacific region (Japan, the United States of America, Australia and New Zealand) are all experiencing or forecast to experience negative growth in 2009. Issues Impact of the global economic recession 7. Besides lower economic growth, the collective impact on the FICs through major transmission channels is likely to be low income - for both families and national governments - which is likely to limit the governments’ ability to provide basic services, create jobs, and support vital infrastructure, and families will have reduced access to basic goods and services. These have the potential to increase poverty levels among vulnerable groups like women and children and the urban poor, and worsen social outcomes thereby undoing the recent progress made by FICs towards achievement of National and Millennium Development Goals. 2 8. The global recession is also exposing underlying structural weaknesses in many FICs, exacerbating the impacts of the economic downturn, thereby constraining their abilities to effectively respond to the impacts of the recession. Responding to global economic crisis 9. Responding to the global recession requires coordinated action. In the Pacific action will need to be well-coordinated between FICs and core development partners. Within the context of the global response, each FIC’s national policy response must reflect its own circumstances. 10. Economic Ministers have recognised the importance of addressing domestic factors 3 , especially structural weaknesses, governance, macroeconomic management, public sector efficiency, improved delivery of social services and public infrastructure to realise improved growth performance, and also to help weather impact of external economic shocks, like the current global financial crisis, on domestic economies. 11. The attached report proposes four pillars of FIC policy response to the global economic recession, and promote economic recovery, which include: a. safeguarding macroeconomic stability, principally through fiscal adjustment; b. strengthening budgetary management, protecting core services (particularly health, education and infrastructure), and targeted programs to assist the most vulnerable; c. continuing support for reforms to improve competitiveness and create a stronger platform for resilient private sector-led growth and broad-based economic development; and


Protecting Pacific Island Children and Women During Economic and Food Crisis, prepared by UNDP and UNICEF, July 2009 3 1997-2008 Forum Economic Ministers’ Action Plans.


d. using country-level policy responses as the framework for coordinated assistance from development partners. Development partners are encouraged to prioritise and reposition their support in response to these country requirements. 12. At the annual meetings of the Asian Development Bank (ADB), held in May this year, 13 FICs identified 4 appropriate support measures, which should be based around the following principles: additionality; limit wastage of resources spent on studies and consultancies; front loading of assistance; targeted budget support; and flexible programme funding. 13. With these principles in mind, the 13 FIC members of ADB (PDMCs) proposed the following for the Bank’s consideration: a. project and infrastructure lending on more accessible basis, with an increased grant element; b. budget support in targeted areas, which will implement priorities of PDMCs contained in their national development plans; and c. balance of payment support to help PDMCs - this could be in the form of a dedicated Regional Contingency Fund. Any such Fund will need to be coordinated with other multilateral donors and partners, and should be geared for rapid deployment purposes. 14. Another regional meeting 5 held in June this year provided the opportunity for FICs to outline the initiatives put in place already through national efforts. These interventions underscored the fact that fiscal (and monetary, where appropriate) policies, and structural reforms, remain key policy tools available to governments to help cushion the impact of the global crisis. 15. A number of responses over the short, medium and long term were outlined by the Forum Secretary General in August 2009 6 , and these responses are underpinned by the understanding that the global economic crisis will not be met through one action by one stakeholder. FIC responses must be collective and embody a combination of actions, policies and initiatives that involve national Governments, regional organisations and development partners. Fostering investment and private sector development, and leveraging stronger economic returns from key sectors such as tourism, fisheries, forestry, agriculture, and mining will allow for more broad based, and sustained growth. 16. The following excerpt from the Secretary General’s keynote statement provides some response strategies. In the short-term, policy makers must be especially mindful of


Pacific Developing Member Countries group statement delivered by PNG Treasurer at the 2009 Asian Development Bank, Annual Board of Governors meetings, Bali (www.adb.org) 5 Organised jointly by PFTAC and ADB. 6 Keynote statement delivered by Tuiloma Neroni Slade, Secretary General of the Pacific Islands Forum Secretariat, on Responsibilities for Tackling the Economic Crisis, at the Lowy Institute for International Policy, 3 August 2009


the general social well-being, accentuated political pressures and the importance of partnerships and reform: ƒ

Social well-being: the well-being of communities, and the most vulnerable among them, should be a concern for every Government. We need to ensure there is full commitment to greater social protections and improved basic service delivery in key areas such as education, and basic health care and nutrition. To do less would be a serious compromise, for without an educated and healthy population there cannot be real possibility for sustainability in development; and


Partnerships (governments, development agencies, civil society, and private sector): cannot neglect the opportunities afforded through broader partnerships, especially where it permits for the better management and exploitation of ‘comparative’ strengths. Nor can we ignore the opportunity for reform to enhance the management and accountability of financial and economic systems and other improvement prospects that may be presented through the current crisis, including ways of better enabling the growth of the private sector.

17. Over the medium-term, the need to focus on ensuring better food and energy security, which in many respects, are two critical development issues in the Pacific region: ƒ

Food security: food security in the Pacific is facing new challenges as global markets experience dramatic increases in food prices. The FAO index of food prices rose by 9% in 2006, by 24% in 2007 and by 51% in the first months of 2008 alone. 7 As predominantly net-importers of food staples, FICs remain particularly vulnerable. Ongoing resource commitment and policy focus must be delivered on this matter; and


Energy security: FICs remains a region heavily dependent on fossil fuels and more specifically petroleum products. The geographic size of the region is strikingly disproportionate to the volume it consumes. This is compounded by the ‘spread’ of consumption, consumers of energy more often than not being located in small pockets separated by large distances, and in turn placing high premium on the cost of transportation. Nationally, Governments remain key procurers of petroleum products. Reasons for this are varied, some historical, some driven by interest, some driven by necessity. This has not been helped by the rapid divestment of oil majors from the region over the last five years further reducing competition among suppliers and placing pressure on national coffers. 8 The


www.fao.org Higher oil prices have continued to affect Pacific economies at both macro- and micro levels. A large part of the effects are transmitted through changes in terms of trade. Data from United Nations Centre for Trade and Development (UNCTAD) reveal for the Pacific, and the SIS that do not have large export based manufacturing or a sound commodity export sector, the impact will be pronounced with impacts on gross national income (GNI) of between -4% and -14% for every USD10 per barrel increase in fuel prices. 8


Pacific response to this has begun with the launch of the region’s Bulk Procurement of Petroleum Initiative. 18. For the longer-term, the regional strategy must focus on building resilience through strengthened capacity, better coordination of action, economic integration and improving standards of governance and leadership: ƒ

Capacity: Governments across the region continue to suffer from a lack of capacity in many essential areas. This is an area where the private sector, development partners and more specifically regional organisations, must continue to work with national Governments offering an extension of national capacities and access to regional facilities and services. This is perhaps where regionalism displays its greatest importance and potential, through the pooling of resources to allow for collective responses;


Coordination: the encompassing nature of the crisis puts focus on the need for improved and more effective coordination of national, regional and international resources to achieve more qualitative solutions, which are fit-for-purpose and within sustainable resource envelopes. This is an objective that is neither new nor sought by the Pacific alone. But it is one we have addressed specifically in the Pacific Aid Effectiveness Principles, derived from the Paris Declaration, and which were adopted in Palau in 2007;


Regional trade and integration: with respect to regional trade arrangements, Forum members have long recognised the importance of deepening regional trade and economic integration towards supporting the growth and ultimately improvement of livelihoods in the Pacific; and


Governance: The global economic crisis is not simply an economic phenomenon that can be addressed in vacuo, for the right to development and the expectations of communities are one and the same thing. There is a critical link between democracy and development, and Governments must provide the way and space for all citizens to lead worthwhile lives in freedom and security.

Pacific Islands Forum Secretariat, Suva 28 September 2009


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