Sources of economic growth in South Pacific small-island economies : Fiji and Tonga

Abstract

This study explores the growth experience of the small-island economies of the South Pacific, using Fiji and Tonga as case studies. The starting point is the traditional neoclassical growth-accounting framework but this is extended to capture the contributions of increases in factor inputs and factor productivity to economic growth. The growth contribution of improvements in the quality of labour is quantified and the relative contribution of net national saving and net capital inflows to domestic capital accumulation and economic growth are estimated. Most of the time-series data required for a sources of growth study are unavailable so that appropriate methodologies had to be developed to estimate annual series for the relevant variables. The conventional 'perpetual inventory method' for capital stock estimates is modified into a methodology that is deemed appropriate, theoretically sound and reasonably practical for generating the required series of aggregate net capital stock and fixed capital consumption. Fiji and Tonga, typically of the islands, experienced moderate growth in domestic output but whereas Tonga's growth in total factor productivity was positive, Fiji's was negative. In Fiji, the growth contribution of increases in capital stock was smaller than the contribution of increased labour, whereas in Tonga, the growth contribution of increases in capital stock was larger than the labour contribution. Net national saving contributed relatively more than net capital inflow to net investment, and thus to economic growth in Fiji; in Tonga the opposite was the case. Tonga’s domestic saving has long been negative, but the inflow of current transfers, especially private remittances, contributed to high national saving. Improvements in the quality of the labour force in the two economies were small. Educational improvements contributed more to improvements in the quality of the labour force and thus economic growth than improvements in health. The marginal product of capital is higher in Fiji than in Tonga and so was the average product of labour until 1985. Tonga has been more capital-intensive than Fiji since the 1970s. The trend of capital-labour ratios in Fiji showed a change from capital-intensive towards more labour-intensive production in the 1980s. The low and even negative growth of total factor productivity in the two island economies may be partly explained by the failure of economic policy to create an environment for efficient production. The two island economies were highly protected and regulated with Fiji attempting to become a centrally planned economy with industrialization behind tariff and non tariff barriers as its main objective. Entrepreneurs thus could not operate effectively. The two island economies both have the problems of smallness including exposure to similar severe external shocks and constraints. Their different economic performances tend to support the view that domestic economic policies are the main determinant of economic development. Show more