Introduction

1. ECONOMIC INTEGRATION OF THE PACIFICISLAND COUNTRIEST.K. JayaramanUniversity of the South PacificFiji Islands

2. Introduction • Five decades ago: Creation of the European Community • European regionalism: “concept of an area without frontiers” Single European Act (1986), • Emergence of ASEAN in the 1970s • US, Canada and Mexico: North American Free Trade Agreement (NAFTA) in the 1990s. • Regional integration is no longer among the equals

3. Net welfare losses due to preferential trading arrangements • Welfare losses arise from trade diversion • Losses from preferential concession to a partner results in replacing imports from the cheapest source with expensive imports from the partner country might be greater than gains from trade creation. • Preferential Free Trading Arrangement (PFTA): Among equals or unequals • bad in principle as it is less optimal than multilateral free trade

4. WTO compatible PFTAs: Now in vogue among small countries • Small sized countries with similar products and less diverse in economic structures: more competitive than complementary in nature • Lower net welfare losses as trade diversion possibilities would be much less. • Culturally similar small countries: mobilize, nurture and exercise their collective market power • Harmonise various policies including tax policies and product standards • Trade diversion risks would be minimized • If the number of countries is small, a cooperative solution is more likely

5. Growing from a handful in the 1970s to numbering at 14 in the new Millennium, • Pacific island countries (PICs): 8 million, • 14 Pacific island countries: Cook Islands, Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, Vanuatu & Two developed countries: Aus & NZ • Inter Govt organisation: Pacific Islands Forum (the Forum): 1971 • Objective: promote cooperation among PICs in trade & economic development.

6. Integration efforts in Europe: 50 Years : Grand vision of the leaders like Jean Monnet and Robert Schuman for a United States of Europe without each country having to surrender their sovereignty. • The first set of steps in Europe: Free trade in coal and steel • Establishing the European Coal and Steel Community, • A customs union with free trade amongst the members but a common tariff against the rest of the world. • With increased mobility in labour and capital: customs union became a common market, followed by other developments in monetary integration

7. Perceivable economic gains: motivating forces for countries to come together • A single economic space, without barriers. • Gains: larger economies of scale in production & distribution, • A single economic space: Attracts investment from overseas for producing goods for an assured regional market without any trade and customs restrictions. • Achieved by dismantling all barriers to trade in goods and services and promoting unhindered mobility of all factors of production, including labour and capital.

8. A comparative study on PICs & the Caribbean islands: Two regions did not command the range of information and skills needed for success in production for the international market, • Small domestic markets • The best endowed among the island countries in the two regions have strengths in some areas and weaknesses in others. • Requisite skills reside more with government than with the private sector • Need for pooling human resources so as to make available a wider range of skills, achieve synergies from the interaction of individuals and attract retention of the highly skilled personnel from whom a single country might not afford sufficient challenge or scope

9. Caribbean Region • First Initiative: Caribbean Free Trade Area (CARIFTA) 1968 • Treaty at Chaguramas in 1973: For establishing a Caribbean Community and Common Market (CARICOM) • Further amendments in 1973: For forming CARICOM Single Market and Economy (CSME). • Moving Target Date: Original Target date set as January 1, 2006, • now revised to as between 2010-2005 • CSME: WTO compliant: to serve as platform for entering into Free Trade Area of the Americas (FTAA)

10. CSME • Five Pillars : (i) free movement of capital; (ii) free movement of goods, services and people; (iii) common trade and commercial policy; (iv) harmonization of economic, fiscal and monetary policies; and (v) common currency • Significant steps taken: Regional Insititutions: Institutional & Legal Framework by establishing the Caribbean Court of Justice (CCJ) for the region as a whole: Ensuring legal certainty in the CSME. • CCJ was to interpret and apply the Revised Treaty of Chaguaramas. • Caribbean Development Bank • Other CSME institutions: A Standards organization • a conciliation commission, a regional securities body, a regional intellectual property rights offices and a regional development fund.

11. CSME (Contd) • Progress so far: Creation of CCJ • Enacting the Treaty of Chaguaramas into domestic law by 12 members of the CARICOM • Setting up national standards bodies • Gradual removal of unauthorized import duties & non-tariff barriers; • Removal of restrictions to provisions of services & mobility of skilled labour; Introduction of CARICOM passport by member countries; • Accreditation of institutions • Agreement on transference of security benefits • Free movement and integration of capital markets • Harmonization of laws • Signing of intra-regional double taxation agreements • Common external policies, sectoral programmes & support services

12. CSME (contd) • Toward single currency: Convergence Criteria: • The prospective member must have • (i) maintained an unchanged US dollar value of its currency for at least 36 consecutive months; • (ii) maintained a minimum of foreign exchange reserves equivalent to three months of imports, for at least 12 consecutive months; and • (iii) recorded a ratio of external debt service ratio to exports of goods and services of no more than 15%

13. CSME (contd) • All initiatives came from within the Caribbean • No any external goading or push • All innovations were homegrown • CARICOM membership:open only to Caribbean countries • Major powers outside the region: No say • Sense of ownership of reforms by members • A great strength in terms of legitimacy in pushing the integration idea thus far.

14. Regional Integration in the Pacific • Former rulers took the lead in integration efforts • Aus and NZ: Founding Members of the South Pacific Islands Forum in 1971 • Aus and NZ: Bearing major portion of the costs • Pre-dating the Forum: South Pacific Commission (1947): Now known Pacific Community (PC): expanded to include the US Trust Territories: Marshall Islands, Micronesia and Palau in mid 1990s. • SPC: set up by six colonial powers: Aus, France, NZ, Netherlands, UK, USA • SPC: located in Noumea, New Caledonia assists all Forum island countries, non-independent US Trust Territories and French and the UK possessions, including the smallest island Pitcairn (46 people!); providing technical advice, training, and dissemination of information in social, economic and cultural fields.

15. Pacific Region • Functions of the Forum: Similar to CARICOM Secretariat • Servicing the PIC governments; • Coordinating regional approaches in areas of common economic interest; • Overseeing areas of functional cooperation • Acting as the focal point for a range of associated institutions. • Absent from list of functions: issues of a single market & common currency.

16. Pacific Region (contd) • 34-year old history: Toward regional integration: five distinct phases • (i) 1971-1975: comprehensive regional integration; • (ii) 1975-1980: sectoral integration; • (iii) 1981-1985: regional security; • (iv) 1985-1990: collective diplomacy; • (v) 1991-2000: harmonization of national policies; and • (vi) 2001 and onwards to the present: new regionalism. • Early years: Main focus: comprehensive regional integration • Reasons: incapable of economies of scale manufacturing operations in: Purchase of essential items such as fuel and medicines. Running national shipping lines, Setting up university Development bank

17. Pacific Region (contd) • PICs: No notable manufacturing, demand for shipping services, great enthusiasm for Comp.Intgeration • Attention: sectoral integration: Second Half of the 1970s. • University of the South Pacific & Air Pacific • Disillusionment: Fiji gained more • Nauru, Samoa, SI, Tonga & Vanuatu, while retaining the shares in Air Pacific, set up their own national airlines • Also rumblings about USP located in Fiji • Samoa went ahead: own National University of Samoa. • During 2000 coup in Fiji: enrolled at USP had to return. • Solomon Islands: desire to set up university of their own

18. Pacific Integration (contd) • Sectoral integration: no progress beyond USP & Pacific Forum Shipping Lines • Sectoral integration required substantial outlays • PICs were not prepared to sacrifice their autonomy • Did not prefer them ocated in well-off PICs such as Fiji. • Sectoral integration: Replaced by a more practical approach of collective diplomacy in many soft areas of cooperation, where conflicts were less likely. • Lome negotiations: with EC in the 1980s • Law of the Sea Negotiations • Environmental protection :the Rio Conference

19. Pacific Region (Contd) • Cold War Days : concerns of Aus& NZ to contain Soviet influences- Kiribati granting the Soviet Union legal access to fishing in Kiribati waters • similar overtures by Vanuatu • Resentment in PICs against Aus & NZ’s having own diplomatic relations with the Soviet Union • Foreign policies of PICs: dictated by the metropolitan states • Late 1980s: shift in the approach of Australia: “Constructive Commitment”. • Emphasizing partnership rather than an agency of the western interests

20. Melanesian Spearhead Group • 1990s: Melanesian countries (Fiji, PNG, SI and VAN): Forged a trading bloc by signing MSG Trade Agreement for free trade in select goods. • No common secretariat to oversee implementation of MSG Trade Agreement, progress remained slow. • MSG countries took time to prepare a list of agreed items, instead of drawing a negative list, which would have been simpler. • Under MSG Trade Agreement, Fiji & PNG: Trade surpluses with SI & VAN • SI & VAN suspended free trade in early 2002 & re-imposed trade restrictions on imports from Fiji and PNG.

21. Emergence of “Neo Liberalism” • Wider acceptance of Washington Consensus of fiscal and monetary restraints, financial sector liberalisation and public sector reforms • Reforms by the World Bank and the IMF • Paved way for Aus & NZ tie them into bilateral assistance programs • ADB’ s structural adjustment reform programmes • Participation by Aus in pub. sector reforms & Fin Mgmt through TAs • Aus. consultants implemented the donor-led agenda funded by ADB Privatization Investment promotion Tariff reforms Comprehensive Reform Programme (CRP) in VAN

22. “Neo Liberalism” (contd) • Change in Govt in VAN : Discontinued Reform Process • Frustration and disappointment reform progress • Terror attack of 9/11 of 2001 on the United States • New Tasks: Australia to make the Pacific safer • Ethnic rife and civil disorder in the Solomon Islands • Center for Independent Studies: Studies calling some PICs as “ failed states” • Ineffective use of aid • Diversion for personal gains Corruption and Wastage

23. Another Push toward Integration • Aus. Senate Committee (2003): Set up a Pacific Economic & Political Community along the lines of EU. • A common currency: Aus $: For fiscal and monetary discipline. • Economic discipline: growth, social progress and better governance • Forum Leaders Meeting in Auckland in August 200 • Challenges from increased globalization • Phased discontinuance by EU of pref. treatment for PIC exports • End of Sugar Protocol for Fiji’s sugar exports by end of 2007 • PICs to re-structure their export industries for competing with the rest of the world for access to EU markets. • Cotonou Agreement to be replaced

24. Another Push toward Integration (Contd) • New agreement: Economic Partnership Agreement (EPA) • Condition: PICs promote reg. integration on MSG lines. • Access to Aus: South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) • Becoming less significant: Aus. tariffs on garments & coconut cream from cheaper sources were also being reduced • Rising competition from the competitor economies • PICs: need for restructuring & increasing bargaining position. Individually unable to attract FDI in the immediate past, • PICs: Collectively offer an assured regional market of 8 million. • Necessitated by the EU offer of new EPA PICs signed Pacific Island Countries Trade Agreement (PICTA) for ushering in a free trade area (FTA) among the 14 PICs by 2010.

25. PICTA & PACER • Nervous PICS: Immediate removal of barriers: Adverse impact on local consumer good industries and on government finances of due to loss of tariff revenue. • PICs: Decided to keep Aus & NZ of FTA • PICTA as a stepping-stone for an eventual closer relationship including free trade in goods & services & mobility of labour with two advanced Forum members • Aus & NZ: successful in getting PICs signing Pacific Agreement on Closer Economic Relations (PACER) • PACER : PICs to start negotiations with Aus & New Zealand by April 2011. • PACER covers only goods and there is no obligation on any PICs to extend negotiations beyond trade in goods.

26. PACER • Free trade in goods with Aus & NZ : impose far higher adjustment costs than the EPAs with EU as trade Aus & NZ is much higher than with EU. • Among the two, Australia is the more dominant partner. • Revenue loss from the abolition of tariffs on imports from Aus & NZ has to be replaced by VAT • Vanuatu: has to consider introducing direct taxation • Only way open: Prolong the period of non-triggering PACER negotiations by avoiding free trade in goods and denying access to EU until 2011

27. PACER & PICTA • Mere opening of negotiations with EU for concluding EPA would trigger PACER • PICTA may not ultimately give enough “breathing space” to PICs, as PACER negotiations will have to commence sooner than contemplated • A more drastic remedy suggested by some would be to withdraw from PACER: Disastrous soution • Practical solution: Enter into a FTA with Aus & NZ right away, despite revenue loss and higher adjustment costs involved • Expected losses would much less now than adjusting after 2011, assuming PACER is not triggered until then.

28. PACER • During the interim period, production capability built in consumer goods industries in biscuits, beer or cigarettes, for increased trade exclusively among PICs would be rendered useless when free trade eventually commences with Aus & NZ, as all consumer industries in PICs would be wiped out. • One suggestion is : Negotiations with Aus and NZ under PACER • As a “price” PICS should seek relaxation of immigration restrictions for skilled labour from PICs in Aus and NZ & limited annual intake of unskilled farm labour with temporary work permits to meet shortages

29. Another Move • Group of Eminent Persons appointed by Forum: a Pacific Vision. • April 2004 & Dec 2005: Pacific Plan: • The Pacific Plan: Four pillars Economic growth; Sustainable development; Good governance and Security • Economic growth integrate trade in services temporary movement of labour in PICTA/PACER negotiations create bulk purchasing capacity for essential items: fuel & medicines Inclusion of trade in services indicates the willingness of PICs to consider deeper integration, of course for “a price”. • The ball is back in the court of Aus & NZ : relaxation in immigration laws.

30. The other items have been familiar ones. • Part of heavy involvement of Aus & NZ in the region: • Provision of experts in financial management, public sector reforms and strengthening legal machinery, all contributing to better governance and sustainable development; • Provision of Regional Assistance Mission to Solomon Islands (RAMSI) to improve law and order in the ethnically divided nation.

31. Summary & Conclusions • Caribbean: More integrated than Pacific region. • Commitments on CSME have been extensive • Progress considerable progress of CSME Freer trade despite obstacles Exclusion of some agri. Products & quotas • Significant progress: Trade in labour services • Free movement for graduates • Media & sportspersons, musicians, artists

32. Summary & Conclusions (contd) • Slow Progress in the Pacific: • No serious commitment of Caribbean kind • CSME is totally CARICOM driven: No outside prodding • Pacific region Pacific Plan : influenced by Aus & NZ Concerns of regional security and stability.

33. Summary & Conclusions(contd) • “ What is in it for me?”: Haunting question from small PICs. • Perceptions of small countries: Regional integration benefits major countries • Failure of regional airline & poor performance of Regional Pacific Forum Shipping Lines • MSG Trade Agreement benefited bigger PICs. • All PICs feel: regional integration moves were in the interest of Aus & NZ

34. Way Ahead • Aus & NZ: Did the right thing: stepped aside & allowed PICs for separate trade agreement aiming at FTA amongst themselves by 2010. • Most appropriate again if Aus & NZ do not rush into negotiations with PICS, although legally they can do so if PICs in their negotiations for EPA trigger PACER earlier than 2011

35. Way Ahead (contd) • Foster trade amongst PICS themselves • Both Aus & NZ will do well to let that happen. • Negotiations for PACER after 2011. • Meanwhile, Aus & NZ provide special access to temporary work permits for unskilled farm labour to work on their farms. • Gestures help in confidence building.

36. Final Word • Single market and single currency: Advanced concepts • PICs are not ready yet.