ACADEMICS, government policy makers and businessmen from the region recently gathered in Suva and reviewed economic trends in Pacific island countries.
The event, sponsored by Asian Development Bank in conjunction with Australian National University and the University of the South Pacific, also explored future options for growth and development.
One of the topics of perennial interest is the role of foreign aid in growth and development in Pacific island countries.
Aid is considered in economics as unrequited or unreciprocated transfers of resources supplementing domestic savings for helping less developed countries to overcome their capital shortages.
In a 1970 resolution of the United Nations developed countries pledged that they should transfer at least 0.7% of their gross domestic products each year to less developed countries, a target re-affirmed from time to time over the years in many international agreements.
The subject of aid effectiveness has evoked greater attention in recent times due to a major policy shift by Australia.
It all began in 2014 with the abolition of the 40 year old Australian international aid agency (AusAID), its functions merged with the Department of Foreign Affairs and Trade.
The purpose was to support Australian foreign and trade policy. However, Pacific island countries were comforted when it was clarified that the geographic priority for aid would be the Indo-Pacific region, especially the South Pacific.
Australia has been the largest aid giver for many Pacific island countries.
Its aid in terms of the GDPs of respective countries ranges from Nauru 65%, Papua New Guinea 60%; Vanuatu 40%; Fiji 30%; Solomon Islands 27%; Samoa 20%; Tonga 18%.
Cuts in Australian aid were feared to have serious implications for all aid recipient countries, since most of the aid in recent years has been in growth enhancing areas such as health and education, which have long gestation periods.
Pacific island countries continue to be among the top recipients of foreign aid but Vanuatu has been traditionally an attractive destination of foreign direct investment, which is influenced purely by profit motive.
With no direct taxation of any kind and no exchange controls and with additional attraction of being a tax haven, foreign direct investment inflows were into agricultural projects such as cattle ranches and plantations in initial years and later in tourism industry.
Until the mid-2000s, Vanuatu was the top recipient of foreign direct investment inflows (11% of GDP) followed by Fiji (4%).
In recent times, Vanuatu was pushed to third position with 5% after Solomon Islands (17%) and Fiji (11%).
Research by academics at the University of the South Pacific has come to the conclusion that foreign direct investment, which facilitates transfer of technology and managerial skills through training, had a positive and significant effect on growth, whereas aid did not have any significant impact on output.
It is apparent that aid inflows were either spent on consumption or ineffectively utilised, giving rise to fears expressed by the late Professor Helen Hughes and others in regard to effectiveness of aid to Pacific island countries.
The policy implications of the study are not new. They only confirm that while aid inflows are largely to government and other official agencies, effective use of aid needs improved policy framework and better governance measures.
The options are clear. Governments in Pacific island countries will do well to continue the present set of investor friendly incentives and attractive business environment.
Dr Jayaraman is a professor at the Fiji National University’s School of Economics, Banking and Finance, Nasinu Campus. His website is www.tkjayaraman.com