Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No. 116491-FJ SYSTEMATIC COUNTRY DIAGNOSTIC 2017 REPUBLIC OF FIJI Republic of Fiji Systematic Country Diagnostic Report No. 116491-FJ © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorse- ment or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: ymgerman. View of the city centre of Suva, the capital city of Fiji. Cover design: Shepherd, Incorporated Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi 1. Poverty Reduction and Shared Prosperity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Shared Prosperity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Drivers of Poverty Reduction and Shared Prosperity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2. Determinants of Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Patterns of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Drivers of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Financing of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Drivers of Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3. Building on Opportunities and Strengths. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Government’s Vision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Pacific Possible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Achieving Fiji’s Vision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4. Pathway I. Stronger Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Why Is Investment Low?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Why Are Exports Weak? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Why Is Employment Low?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Policies to Accelerate Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 5. Pathway II. Better Access to Services by All. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Economic Mobility and Inequality in Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Connective Infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Financial Inclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Gender Inequality and Violence Against Women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Policies to Improve Access to Services for All. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 6. Pathway III. Building Resilience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Climate Resilience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Fiscal Resilience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Protecting the Vulnerable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Policies to Build Resilience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63  iii 7. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Policy Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Cross-Cutting Priority: Strengthening Institutional Capacity of the Public Sector. . . . . . . . . . . . . 67 Knowledge Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Boxes 2.1 Fiji’s Growth History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.2 Land Tenure in Fiji. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.1 Fiji’s Ambition to Be a Regional Hub. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.1 Promoting SME in Fiji. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.1 Causes of NCDs in Fiji. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.2 An Overview of the Health Care System in Fiji. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.3 Costs of Remittances in Fiji. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.4 Uneven Progress on Gender Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 6.1 The Fiji National Provident Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Figures 1.1 Poverty Rates, US$3.10 a Day Poverty Line, 2014 or Latest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Recent Poverty Rates in Fiji. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Changes in Poverty (US$3.10/day). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Economic Mobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.5 Poverty Maps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.6 Growth Incidence Curves, 2002–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.7 Remittance Receipts by Consumption Quintile: Percentage of Population. . . . . . . . . . . . . . . . . 7 1.8 Changes in Poverty Rate, 2002–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 Economic Growth, 1970–2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2 Decomposition of Growth by Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.3 Evolution of Employment by Subsector, 1990–2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.4 Contribution to Growth by Demand, 1970–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.5 Investment to GDP Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.6 Trade Balances, 1991–2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.7 Growth Accounting, 1970–2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.8 Saving and Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.9 Saving by Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 2.10 Financing of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.11 Annual Aid Flows, Average 2006–15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.12 Changes in Terms of Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.13 Real Effective Exchange Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1 Most Important Constraints Reported by Firms in Enterprise Survey. . . . . . . . . . . . . . . . . . . . 27 4.2 Doing Business in Fiji, 2012 vs. 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.3 Cross-Country Comparison of Main Indicators of Access to Finance. . . . . . . . . . . . . . . . . . . . 29 4.4 Goods Export Diagnostics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 iv Contents  4.5 Product Space Map of Fiji’s Exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.6 Service Export Diagnostics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4.7 Trading across Borders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.8 Number of Jobs Created from 2000 to 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.9 Population by Age and Sex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.10 Schooling in Population. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 5.1 Economic Mobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 5.2 Human Opportunity Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 5.3 Education Attainment of Boys and Girls Ages 15 or Less in 2008. . . . . . . . . . . . . . . . . . . . . . . . 41 5.4 Composition of Education Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.5 Level of Education and Health Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.6 Decomposition of Inequality in Opportunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5.7 Beneficiaries of Government Education Budget, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.8 Beneficiaries of Government Education-Related Subsidies, 2015. . . . . . . . . . . . . . . . . . . . . . . . 43 5.9 Distribution of Health Care Benefit: Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5.10 Distribution of Benefit of Public Rental Board Subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.11 Access to Financial Services by Bottom 40 Percent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.12 Account at a Financial Institution by Gender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 6.1 Building Exposure in Fiji (in 2010 US$). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.2 Average Annual Losses Due to Cyclones and Earthquakes (in 2010 US$). . . . . . . . . . . . . . . . . 54 6.3 Sources of Rural Household Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.4 Breakdown of Agribusiness Incomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.5 Tax Revenue, Average 2010–14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.6 General Government Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.7 Evolution of Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.8 Operating Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.9 Stochastic Projections of the Deficit and Debt, 2016–21. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6.10 Sources of Post-Disaster Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6.11 Coverage of Cash Transfers in Selected Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 6.12 Adequacy of Cash Transfers in Selected Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 6.13 Expenditure of Cyclone Winston Top-up Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 7.1 Indicators of Governance, Selected Countries, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Tables E.1 Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvi 1.1 Profile of the Poor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.2 Poverty by Division. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Gini Coefficient Measure of Inequality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 Sugarcane Productivity in Selected Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1 Obstacles to Growth as Reported by Firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.2 Efficiency of Land Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.3 Quality of Land Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.4 Minimum Wages and Paid Leave. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.5 Wage Regulation Orders: Minimum Wage and Core Conditions. . . . . . . . . . . . . . . . . . . . . . . . 37 5.1 Government Housing Subsidies, 2016/17. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Contents v 5.2 Financial Inclusion by Division. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 6.1 Planning Authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.2 State-Owned Enterprises, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 6.3 Major Interventions after Cyclone Winston. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7.1 Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 vi Contents  Acknowledgments This report was prepared by Mizuho Kida, The team would like to thank the peer review- Imogen Halstead, Deva De Silva, Daniel Street, ers, Gallina Andronova Vincelette (Practice and Paul Barbour, with contributions from Manager, GMF12), Julio Revilla (Lead Economist, Gayatri Acharya, Donna Andrews, Maude GMF02 and SCD advisory group), and Jennifer Archambault, Tijen Arin, Natasha Beschorner, Keller (Lead Economist, GMFDR). Jesse Doyle, Fook Chuan Eng, Simone Esler, The team worked under the guidance of Robert Gilfoyle, Dao Harrison, Deni Jordi, Victoria Kwakwa (Regional Vice President), Andres Garcia, Wayne Irava, Oleksiy Ivaschenko, Michel Kerf (Country Director), Ndiame Diop Susan Lynette Ivatts, Dhawal Jhamb, Miguel (Practice Manager, MFM), Salman Zaidi Angel Jorge, Kamleshwar Khelawan, Jonathon (Practice Manager, POV), Thomas James Jacobs Kirkby, Ying Li, Brenna Moore, Isabel Neto, Dina (Country Manager, IFC), and Robert Utz Nicholas, Kofi Nouve, Anthony Obeyesekere, (Program Leader, CMU). John Perrottet, Jim Reichert, Benjamin Sikuri, Venkatesh Sundararaman, Anuja Utz, John Vivian, Binh Thanh Vu, Anis Wan, and Judy Yang.  vii Abbreviations ADB Asian Development Bank DFAT Australia Department of Foreign Affairs and Trade DTF Distance to Frontier EU European Union FDI Foreign Direct Investment FNPF Fiji National Provident Fund FSC Fiji Sugar Corporation GDP Gross Domestic Product HIES Household Income and Expenditure Survey ICT Information and Communication Technology IFC International Finance Corporation IMF International Monetary Fund MDG Millennium Development Goal NCD Non-communicable Disease NPL Nonperforming Loan OECD Organisation for Economic Co-operation and Development PCRAFI Pacific Catastrophe Risk Assessment and Financing Initiative PPP Public-private Partnership RCA Revealed Comparative Advantage SCD Systematic Country Diagnostic SME Small and Medium Enterprise SOE State Owned Enterprise TFP Total Factor Productivity UN United Nations UNDP United Nations Development Program WDI World Development Indicators WHO World Health Organization WTO World Trade Organization  ix Executive Summary Fiji is a small island nation in the South Pacific The 2014 election was a turning point for Ocean with a population of 870,000. It has an Fiji in many respects. First, the current govern- area of 18,000 square kilometers spread over 330 ment was elected with an outright majority and islands, of which about 110 are inhabited. Most strong cross-ethnic support. Second, the election of the population lives on two large islands, Viti saw a genuine political debate, with citizens Levu and Vanua Levu. Fiji is also one of the offered a choice between different visions for the remotest countries in the world—New Zealand is future (Frankel 2014). Third, the election, which 2,000 km away, Australia 3,000, and the United was declared free and fair by international States 5,000. observers, paved the way for Fiji’s re-engagement Nevertheless, Fiji has one of the most with development partners and created a better sophisticated economies among the Pacific environment for private investment. Fiji was Islands. The economy is the second largest in the readmitted to the Commonwealth and Pacific Pacific after Papua New Guinea, and it is the Islands Forum, and Australia and New Zealand most industrially advanced, with substantial ser- lifted sanctions. The World Bank Board approved vices and manufacturing sectors. It is a hub for the new Country Engagement Note in June 2015, re-exports to the rest of the Pacific. It is also together with a US$50 million investment loan somewhat unusual in the Pacific in that it has for a road project—the first IBRD lending in developed a major tourism industry, which now 23 years. attracts over 750,000 tourists a year and contrib- Fiji can build on its relatively strong institu- utes about 38 percent of gross domestic product tions to deliver faster growth and shared pros- (GDP). perity. It benefits from a disciplined and Fiji has not, however, realized its full eco- well-educated civil service and pays for about nomic potential. Since independence from the 80  percent of its spending out of tax revenue. United Kingdom in 1970, real GDP growth has While other Pacific Island countries such as averaged 2.8  percent a year, or 1.6  percent per Papua New Guinea and the Solomon Islands capita. One problem has been the frequency of have relied on capacity supplementation, Fiji has natural disasters. Fiji is on a tropical cyclone belt, recruited domestic and international experts for and on average, one cyclone passes through the public service on performance contracts and Fijian waters each year. Last year’s Cyclone paid for them without donor support. According Winston caused damage of F$2 billion, or to traditional global indicators of governance, 25 percent of GDP. With climate change, losses of Fiji ranks relatively high on political stability and 2.5 percent of GDP are expected every year and control of corruption. It has also shown it can losses of 20  percent every 50 years. Another develop and put in place significant reforms problem has been intermittent political crises. quickly when necessary and adopt appropriate Since independence, the country has experi- policies for the country. enced three coups d’état, in 1987, 2000, and 2006. There are two main ethnic groups in the Poverty and Shared Prosperity ­ country—the indigenous majority, iTaukei, and Extreme poverty is rare in Fiji. According to the Indo-Fijians, the descendants of indentured World Bank’s measures, 2.3 percent of the popu- laborers brought from India by the British to lation live in extreme poverty (less than US$1.40 work on sugarcane plantations—and political a day), and 15.1 percent live in poverty (less than leaders in the past tended to exploit ethnicity to US$3.10 a day)—among the lowest rates in increase political support. the Pacific but similar to those in other Executive Summary xi upper-middle-income countries. According to be achieved by boosting private and public national estimates of poverty, 2.5 percent of the investment, exploiting new export opportunities, population live below the food poverty line (an and creating higher productivity jobs. Alongside equivalent of extreme poverty in Fiji), and as strong growth, reducing inequality and redress- much as 34 percent live below the national basic ing rural-urban imbalances are seen as para- needs poverty line. The latter, thus, roughly cor- mount. Fiji also wants to become a regional hub, responds to the bottom 40 percent in Fiji. for example in aviation, shipping, and informa- Economic growth in the past decade has also tion and communication technology (ICT). been inclusive. Between 2002 and 2013, the real The World Bank’s report Pacific Possible per capita consumption of the bottom 40 percent sets out several ideas for accelerating growth in grew faster than that of the average household, Fiji by 2040. Areas of opportunities include and this was true in both rural and urban areas. tourism, migration, fisheries, deep sea mining, The success of the bottom 40 percent emerged as and the knowledge economy. For example, in a result of particularly high consumption growth tourism, Fiji can expand the high-end resorts in the very bottom of the distribution. market, and capitalize on aging in Australia and Growth, however, has been slow. Since inde- New Zealand by developing long-stay facilities pendence, it has averaged 2.8 percent a year, or for retirees. In migration, Fiji can seek to estab- 1.6 percent a year per capita. This low growth is lish a caregiver program with Australia and largely attributable to low investment, weak New Zealand that would recruit Fijians to pro- exports, and low-productivity jobs. Since inde- vide residential care to the elderly. The develop- pendence, structural shifts from agriculture to ment of ICT has the potential to generate sizeable industries and services have failed to make much economic dividends—through productivity impact on aggregate productivity, implying that gains, skilled employment, and expansion of the reallocation of workers and capital from agri- ­knowledge-intensive industries—especially given culture to industry and services did not make Fiji’s diaspora of skilled entrepreneurs. them more productive. Over the same period, While Fiji has great potential, success can- average total factor productivity growth was also not be taken for granted. Achieving the govern- zero. In addition, growth has been volatile, espe- ment’s goal of doubling per capita income by cially in earlier decades, when agriculture 2035 will require annual GDP growth of about accounted for a larger share of GDP. 5  percent. This is substantially higher than Fiji Nevertheless, poverty has declined. How did has managed in the last four and a half decades. this happen despite low growth and low-­ It is also higher than the estimated long-term productivity gains? First, the declining impor- potential growth rate of 3.8  percent. Taking tance of agriculture in the incomes of the bottom advantage of the opportunities set out above and 40 percent reduced the volatility of their incomes. achieving higher growth will require concerted Second, urbanization diversified their sources of efforts in a number of interrelated areas. income. Third, there was an expansion of low- This Systematic Country Diagnostic (SCD) skilled jobs in traditional services sectors such as identifies three pathways: transport and hospitality. This helped absorb i. Stronger growth workers from the declining sugar and garment ii. Better access to services by all industries. Finally, remittances have risen, fur- iii. Building resilience. ther protecting the poor from domestic shocks. These three pathways should be supported by The government plans to build on its cross-cutting efforts to improve governance, that achievements in poverty reduction and shared is, to improve policy and the institutional capac- prosperity. The national development plan is to ity of the public sector to accelerate progress double real per capita income by 2035. This is to toward the twin goals. xii Executive Summary Pathways to Poverty Reduction raising compliance costs, especially for small and Shared Prosperity businesses. The first pathway is generating stronger To clear the pathway, Fiji could revamp its growth. Growth in the past has been inclusive, growth model. but low. To accelerate progress toward the twin • Low investment. Traditionally, the government goals, therefore, Fiji needs to accelerate growth has encouraged private investment either by while making sure that it remains inclusive. At investing itself or by providing an elaborate present, there are several obstacles in the path- system of incentives. Instead, the government way to stronger growth. They include low invest- could accelerate structural reforms to address ment, weak exports, and low-productivity jobs. a broader competitiveness agenda that would • Low investment. Political instability has been help reduce red tape and time spent dealing the constraint most often cited by firms. with multiple approval procedures. To reduce Together with crimes, theft, and disorder, policy uncertainty and compliance costs, the which were important to small firms, this sug- government could undertake more careful gests that investors’ concerns about their abil- analysis of the costs and benefits of proposed ity to appropriate the returns to investment policies before they are introduced and sys- have been a major cause of low investment. tematic monitoring of their impacts after they Firms of all sizes also identified low produc- are introduced, both in consultation with tivity of labor as a constraint, but the concern stakeholders. was more frequently voiced by larger firms, • Weak exports. Strengthening exports requires foreign-owned firms, and exporting firms, changing the traditional model of relying on suggesting that low productivity of labor is a trade preferences, which have failed to create potentially binding constraint on foreign lasting competitiveness. Instead, the govern- direct investment (FDI). Frequent changes in ment could continue to invest in connective policies also increase uncertainty and compli- infrastructure. Although there is not much ance costs. Fiji can do about its smallness and remote- • Weak exports. The main challenge is to diver- ness, it can reduce the red tape that is making sify into higher-value exports, but Fiji’s trade across its borders costlier. exports—dominated by food and raw • Low-productivity jobs. These above reforms ­ materials—­ have shown little sign of diversifi- aimed at increasing private investment and cation. Fiji’s fixed exchange rate and rising exports should help to create more productive remittances do not appear to be significant jobs. At the same time, the government could causes of noncompetitiveness. But the costs of encourage hiring by reviewing and simplify- trade are higher for Fiji than for leading export ing the complex system of labor market regu- nations in East Asia. lations and employment incentives, again in • Low-productivity jobs. On the supply side, consultation with stakeholders. despite favorable demographic developments, The second pathway is better access to ser- the emigration of skilled labor has accelerated. vices for all. Although poverty and inequality On the demand side, the long-standing issue have fallen, with accelerating migration from of finding and retaining skilled workers may rural to urban areas, urban poverty has risen, have discouraged the creation of skill-­ and visible signs of inequalities are increasing, intensive businesses. Labor market mismatch especially with the expansion of squatter settle- also plays a role. Cumbersome and frequent ments. In addition to closing the remaining changes in labor regulations may also be rural-urban gaps in infrastructure and access to Executive Summary xiii public services, the government thus faces the dropout rates in secondary school by continu- challenge of improving services for the growing ing with the “Matua” program, which helps urban population, in education, health, infra- people who have dropped out of school to structure, and housing. return. This is a priority because of the impor- tance of education in employment outcomes. • Education. Achievements in education have • Health. In health, the government could been remarkable. Early education has been increase spending on programs that are better successfully introduced throughout the coun- targeted at the bottom 40 percent. It could also try. Most students complete school, and continue to explore opportunities to involve achievement does not vary much with gender the private sector, investigating further the or with the circumstances of the household international evidence on the cost of hospital the child is born into. service delivery under private and public pro- • Health. Outcomes have been less impressive in vision and carefully monitoring the results of health. Although 75 percent of the population its planned project to introduce private man- report having access to health services, the agement of a hospital, particularly the fiscal poor have limited access to higher quality ser- costs of subsidizing services for poor patients. vices. Health care costs are also high relative to • Infrastructure. In infrastructure, there is also incomes for all income levels, and aggregate greater scope for private sector participation. health outcomes are poor. The government has already pursued this • Infrastructure. Although the majority of the option in ports and electricity. Making further population has access to improved water and progress would require updating and strength- sanitation, there remains a large rural-urban ening the existing framework for public-­ divide in access to electricity, reflecting the private partnerships (PPPs), formulating new challenge of difficult terrain, sparsely popu- regulatory standards, reviewing regulated lated areas, and widely scattered islands. prices and competition policy, and building Access to the Internet is also unevenly distrib- regulatory capacity in relevant government uted across the country, with almost no house- agencies. holds having access in the Eastern and • Housing. In housing, the government could Northern Divisions. The high costs of services help expand access to affordable housing in such as broadband may also be putting the several ways. For example, to reduce building bottom 40 percent at a disadvantage. costs, the housing authorities could pilot • Housing. In urban areas, housing shortages are smaller, standardized houses that could be becoming extreme. In addition, as Fiji is sus- produced on a large scale with prefabricated ceptible to cyclones and flooding, more resil- materials through a public-private partner- ient homes are a priority. Challenges include ship. To extend mortgage loans to low-income high building costs, outdated urban planning, households, the government could work with the limited reach of housing finance, public prospective mortgage lenders to better target housing agencies with conflicting objectives, mortgage-linked subsidies. and inadequately targeted housing subsidies. The third pathway is building resilience. Fiji Several things can be done to improve ser- is one of the countries in the world that is most vices to the poor. affected by natural disasters such as cyclones, • Education. In education, where progress has floods, earthquakes, and tsunamis. As a result, it been relatively good, the government could incurs average annual losses of about 2 percent of help maintain quality by targeting spending to GDP. These losses add to environmental pres- rural and remote schools that are costly to sures, constrain productive investments, and run. It could also continue to address the high delay improvements in service delivery. And xiv Executive Summary  because of a lack of savings, credit, and insur- withdraw some of their savings from the Fiji ance, the poor suffer most from the shocks. To National Provident Fund to rebuild their respond to the shocks, the government must houses. However, the Provident Fund only maintain fiscal flexibility and buffers. However, covers the formal sector, so most of the poor rising expenditure and frequent disasters have were not helped by this measure. eroded fiscal space, while rising costs of subsi- dies and wage bills have increased expenditure Cross-Cutting Theme: Improve rigidities. In addition, there are contingent risks Policy and Institutional Capacity related to state-owned enterprises (SOEs). Several things can be done to build to Achieve Shared Prosperity resilience. Fiji has a disciplined and well-educated civil service. It has shown it can develop and put in • Climate resilience. To strengthen urban resil- place significant reforms quickly when necessary ience, the government could assess the disas- and work with development partners to adopt ter resilience of critical public infrastructure appropriate policies for the country. and the cost of upgrades. It could also update However, it continues to face a number of the urban plan to ensure risk sensitive land cross-cutting governance challenges. Improve­ use, review the building code to ensure it is ments could be made in at least four areas. First, appropriate for Fiji, and better enforce both of the legal and regulatory framework could be them. To strengthen rural resilience, the gov- updated to encourage investment and private ernment could review the adequacy of sec- participation in service delivery. Second, better toral policies in the resource-intensive sectors coordination across government agencies under such as agriculture, mining, tourism, and fish- a more unified strategy would facilitate effective eries. It could strengthen enforcement of policy implementation and better service deliv- existing regulations and safeguards to ensure ery. Third, the public administration should environmental sustainability and make sure involve more delegation and accountability for that zoning for coastal areas, river banks, and decisions. Fourth, improving transparency and wetlands is sensitive to risks. Finally, it could participation in policy formulation by busi- explore ways to engage citizens to improve nesses, citizens, and community service organi- warnings and responses to disasters. zations would support more cooperative and • Fiscal resilience. Improving fiscal resilience inclusive social and economic outcomes. involves expanding the tax base by consolidat- ing the extensive system of tax exemptions Priorities and incentives. On the expenditure side, it involves better targeting of subsidies to create This report has identified many constraints and fiscal space and reduce rigidities. Contingent many possible policy solutions. But not every- liabilities need to be monitored and reduced. thing can be done at once: priorities need to be To insure against catastrophic risk, the gov- selected. In selecting the priorities, this SCD uses ernment could further explore alternative ex three main criteria. The first is whether a policy is ante financing instruments. a precondition for making progress in pursuing • Social protection. Not everyone can be pro- other policies. The second is whether a policy is tected ex ante. There must also be a system to expected to have positive spillovers across differ- protect the most vulnerable after disasters. ent domains (e.g., growth, equity, resilience). The After Cyclone Winston, the government third is whether a policy is feasible, that is, whether experimented with cash transfers based on the it can be implemented in the medium term given existing social protection system. The most cost, capacity, and political feasibility. effective intervention was allowing people to The resulting priorities are shown in Table E.1. Executive Summary xv Table E.1  Priorities 1. Improving the •• Reduce policy uncertainty business •• Reduce red tape and the complexity of incentives environment •• Create a stronger legal and regulatory framework for boosting private sector participation •• Communicate better and consult more with businesses and civil society 2. Investing in •• Improve the quality of urban housing and essential public infrastructure urban •• Update the urban plan to ensure risk-sensitive land use resilience •• Update the building code to ensure it is appropriate for Fiji and enforced •• Explore ways to expand insurance coverage 3. Safeguarding •• Develop medium-term fiscal consolidation plan fiscal •• Expand revenue base by reviewing the system of tax exemptions and incentives sustainability •• Reduce rigidities in expenditure by consolidating fragmented subsidy programs •• Better monitor and manage contingent liabilities and catastrophic risks 4. Expanding •• Increase spending on health services targeted to the bottom 40 percent access to •• Make extra effort to serve rural areas and remote islands quality health care •• Partner with the private sector to serve the poor •• Monitor the cost of hospital service delivery under private and public provision 5. Expanding public investment and encourage private participation in infrastructure to •• Continue access to enhance economy-wide competitiveness connective •• Make extra effort to serve rural areas and remote islands infrastructure xvi Executive Summary  Chapter 1 Poverty Reduction and Shared Prosperity Poverty increased, from 26 to 30 percent. The increase may be partially explained by rural to urban Fiji is an upper-middle-income country with a migration, but this is unlikely to be the full story. correspondingly low level of extreme poverty. Even if all those who migrated in 2008–13 were In 2013, the rate of extreme poverty was poor, this would not fully account for the increase 2.3  percent according to the international pov- in the headcount of the urban poor, suggesting erty line of US$1.90 a day and 15.1 percent at that there has been a genuine rise in poverty in US$3.10 a day (both in 2011 purchasing power urban areas. parity). Although this is lower than in most Poverty reduction has been less pronounced countries in the region (Figure 1.1), it is broadly than in other countries. The small decrease in in line with what would be expected given Fiji’s the overall poverty rate in Fiji stands out when per capita income. Based on the national con- compared with the experience of faster growing sumption based poverty lines, the rate of “food” East Asia, where poverty rates have declined at a poverty (which is considered extreme poverty in much faster pace (though from a considerably Fiji) was 2.5 percent, and the rate of “basic needs” higher base) (Figure 1.3  Changes in poverty poverty was 34 percent.1 The group of basic (US$3.10/day)). Estimates of socioeconomic needs poor therefore roughly corresponds to the mobility based on synthetic panels also show bottom 40 percent in Fiji. that, between 2002 and 2008, 6 percent of the The rate of poverty has been declining population moved out of poverty and 4 percent (Figure 1.2). Between 2002 and 2013, according fell into poverty, while between 2008 and 2013, to the consumption-based “basic needs” poverty 4  percent of people moved out of poverty and line, the rate of poverty fell from 40 to 34 percent. 7 percent fell into poverty (Figure 1.4).2 Between 2002 and 2008, urban poverty fell from There are substantial differences between 35 to 26 percent, while rural poverty remained the poor and the non-poor in their human cap- stubbornly high, at about 44 percent. Between ital, employment status, and household char- 2008 and 2013, however, rural poverty fell faster, acteristics. A profile of the poor according to the from 44 to 38 percent, while urban poverty Figure 1.1  Poverty Rates, US$3.10 a Day Figure 1.2  Recent Poverty Rates in Fiji Poverty Line, 2014 or Latest 40 50 30 Percent 40 20 Percent 30 10 20 0 10 2002/3 2008/9 2013/14 0 $3.10/day $1.90/day M nd Sa ia Vi oa m C ji am na Ki ia ilip ati Va es do tu La sia R Fi PD s d na In a Ph rib n la m hi ay ne bo nu pi Consumption basic needs poverty ai et al o Th Income basic needs poverty C Source: World Development Indicators (WDI) and Fiji Bureau of Source: World Development Indicators (WDI) and Fiji Bureau of Statistics. Statistics. Poverty Reduction and Shared Prosperity 1 Figure 1.3  Changes in Poverty (US$3.10/day) Lao PDR Indonesia Philippines Cambodia China Fiji Vietnam Malaysia Thailand 0 10 20 30 40 50 60 70 80 2002 2014 Note: Years are for 2002 or 2014 or nearest years available. Figure 1.4  Economic Mobility 2002/03–2008/09 2008/09–2013/14 100 100 Percent of households Percent of households 80 45 47 80 53 52 54 51 60 0 60 0 8 4 0 0 7 1 6 5 0 40 40 4 20 46 47 42 20 43 46 38 0 0 Rural Urban National Rural Urban National Chronically poor Escaped poverty Chronically poor Escaped poverty Fell into poverty Not poor Fell into poverty Not poor Source: World Bank staff estimates based on the World Bank poverty harmonized database and Household Income and Expenditure Survey (HIES). consumption based basic needs national poverty Household composition is also noticeably dif- line is presented in Table 1.1. ferent between the poor and non-poor, with the poor living in larger households, with • Female-headed households are less likely to be more dependents. poor. However, there is heterogeneity among • On average, heads of households who are poor these households. For example, some are have less schooling than the average house- female headed because their spouses are hold. However, perhaps related to improving working overseas and have access to remit- conditions in rural areas, education of the tances; others are headed by single women heads of households is no longer strongly cor- who do not have access to other sources of related with poverty. income except their wages. • Households are less likely to be poor when the • The rate of poverty among households headed head is employed. But because heads of poor by 60–64 year olds is more than twice that of households are rarely unemployed (less than households headed by 25–29 year olds. 2 Poverty Reduction and Shared Prosperity Table 1.1  Profile of the Poor Poverty headcount rate Distribution of the poor Distribution of population 2002/03 2008/09 2013/14 2002/03 2008/09 2013/14 2002/03 2008/09 2013/14 Gender of the household head Male 38.8 35.5 33.6 87.0 88.7 83.9 89.2 88.0 85.1 Female 47.8 33.0 36.7 13.0 11.3 16.1 10.8 12.0 14.9 Age of the household head 15–19 0.0 0.0 11.2 0.0 0.0 0.1 0.1 0.0 0.2 20–24 27.9 13.9 22.9 1.0 0.3 0.8 1.4 0.7 1.3 25–29 31.5 31.1 20.0 3.9 4.1 2.7 5.0 4.7 4.6 30–34 35.9 27.4 25.7 8.9 6.8 6.3 9.9 8.7 8.4 35–39 35.3 32.4 28.9 13.8 11.5 9.6 15.6 12.4 11.3 40–44 40.2 33.8 32.8 16.9 13.6 11.6 16.8 14.2 12.1 45–49 38.1 37.4 35.0 13.3 17.5 15.0 13.9 16.5 14.6 50–54 41.2 31.1 37.7 12.4 11.1 15.8 12.0 12.6 14.3 55–59 36.7 36.5 34.4 8.0 11.7 11.7 8.7 11.3 11.6 60–64 50.8 40.2 41.0 8.4 7.4 10.8 6.6 6.5 8.9 65+ 52.1 45.6 41.3 13.3 16.0 15.5 10.2 12.4 12.7 Education of the household head None 51.9 45.1 32.6 9.6 4.0 3.4 7.3 3.2 3.5 Primary 50.1 51.8 46.1 22.2 21.7 22.9 17.6 14.8 16.9 Secondary 40.6 37.4 35.9 64.9 69.0 66.8 63.5 64.9 63.4 Postsecondary 11.7 22.8 56.5 3.4 1.4 0.1 11.6 2.2 0.0 Cert. or dip. — 10.9 18.1 — 3.6 5.2 — 11.6 9.8 Higher — 2.2 8.5 — 0.2 1.6 — 3.3 6.3 Ethnicity of the household head Fijian 41.7 37.1 38.9 57.3 62.6 69.8 54.7 59.4 61.1 Indian 37.8 33.7 26.7 38.9 33.2 27.5 41.0 34.8 35.0 Other 34.0 25.3 23.4 3.7 4.2 2.7 4.4 5.8 4.0 Household size 1 10.2 2.2 0.5 0.1 0.1 0.0 0.5 0.9 0.9 2 14.1 11.7 7.4 1.3 1.7 1.2 3.8 5.2 5.6 3 19.9 19.6 13.9 4.5 6.1 4.6 9.0 10.9 11.3 4 25.1 23.9 22.1 10.4 11.2 11.4 16.4 16.5 17.6 5 36.7 30.6 32.4 18.7 15.9 16.5 20.3 18.4 17.3 6 41.9 40.4 38.6 17.8 18.2 18.3 16.9 15.9 16.1 7 46.5 42.6 43.5 14.9 14.6 14.6 12.7 12.1 11.5 8+ 63.0 56.2 57.4 32.3 32.2 33.3 20.4 20.1 19.8 Presence of children None <15 yr. 27.0 24.2 22.2 13.9 16.5 17.4 20.4 24.0 26.7 Some <15 yr. 43.1 38.7 38.4 86.1 83.5 82.6 79.6 76.0 73.3 Presence of older household members None 65+ 38.0 32.7 31.8 79.2 74.4 73.9 82.8 80.1 79.2 Some 65+ 48.3 45.4 42.8 20.8 25.6 26.1 17.2 19.9 20.8 Total 39.8 35.2 34.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: World Bank staff estimates based on HIES. Poverty Reduction and Shared Prosperity 3 1  percent in the sample), the activity type of tourist hotels, experienced the fastest decline in household heads is a better indicator of pov- poverty. Importantly, though, a quarter of the erty than their employment status. The poor poor still live in the Northern Division, where are more likely to be self-employed or engaged the poverty rate is close to 50 percent. Access to in unpaid or community work. Data on the services and connectivity also differs across space sector of employment are not yet available (more on this in Chapter 5). from the latest survey. In the 2008 survey, poor households were more likely to be employed in agriculture, but, given the faster decline in Shared Prosperity poverty in rural areas and the marked increase Poverty reduction has been paired with shared in poverty in urban areas, the pattern observed prosperity.4 Between 2002 and 2013, the per in 2008 is likely to have evolved. capita consumption of the bottom 40 percent There are also differences in the prevalence grew faster, at 1.2 percent a year, than that of the of poverty across space. Poverty rates are high- population median, which grew at 0.6 percent a est in the Northern Division and lowest in the year (Figure 1.6). This pattern of inclusive Central Division (Table 1.2). However, with growth was observed in both inter-survey peri- migration from rural areas to urban areas, the ods (2002–08 and 2008–13) and in both urban spatial disparity in rates of poverty is declining. and rural areas. The success of the bottom Consistent with the rising rate of poverty in 40  percent emerged as a result of particularly urban areas, the rate of poverty has significantly high consumption growth in the very bottom of increased in the Central Division, which includes the distribution, which also reduced extreme the capital, Suva. The poverty map from 2008 poverty. highlighted pockets of deep poverty in the Inequality has also declined in recent years. Central Division, including in squatter settle- The Gini coefficient decreased to 38.3 in 2013, ments (Figure 1.5). Although the poverty rate from 42.8 in 2008 and 39.6 in 2002.5 The increase overall remains low in the Central Division, in the Gini coefficient between 2002 and 2008 more than a third of the poor now live in this reflected the rise in inequality between rural and area. Meanwhile, the rate of poverty has declined urban areas and within urban areas (Table 1.3). in the less populated Northern and Western The decrease between 2008 and 2013 reflects Divisions. In particular, the Western Division, reductions in inequality both between rural and which includes the sugar belt, Nadi, and many urban areas and within urban areas. Table 1.2  Poverty by Division Poverty headcount rate Distribution of the poor Distribution of population 2002/03 2008/09 2013/14 2002/03 2008/09 2013/14 2002/03 2008/09 2013/14 Urban 34.5 26.2 29.9 39.1 36.8 44.7 45.1 49.4 50.8 Rural 44.1 44.0 38.3 60.9 63.2 55.3 54.9 50.6 49.2 Geographical division Central 28.9 23.4 28.6 29.8 26.4 35.7 41.0 39.8 42.5 Eastern 35.0 33.0 37.1 5.1 5.1 5.1 5.7 5.4 4.7 Northern 57.6 53.5 49.2 24.8 26.3 23.0 17.1 17.3 15.9 Western 44.4 39.7 33.4 40.4 42.3 36.3 36.1 37.5 36.9 Total 39.8 35.2 34.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: World Bank staff estimates based on HIES. 4 Poverty Reduction and Shared Prosperity Figure 1.5  Poverty Maps Poverty Headcount Rate at the Tikina3 Level Distribution of the Poor at the Tikina Level as a Proportion of Total Poor Source: World Bank (2011) based on 2007 census and 2008/09 HIES. Poverty Reduction and Shared Prosperity 5 Figure 1.6  Growth Incidence Curves, 2002–13 Period 1 Period 2 Total Period (2002/03–2008/09) (2008/09–2013/14) (2002/03–2013/14) 10 5 Total Average annualized growth (percent) 0 –5 10 5 Urban 0 –5 10 5 Rural 0 –5 0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100 Percentile in the distribution Source: World Bank staff estimates based on HIES. Note: The Growth Incidence Curve plots the annualized growth rate of per capita consumption for every percentile of the consumption distribution between two points in time. Period 1 corresponds to the first inter-household survey period (between 2002/3 and 2008/9), and Period 2 corresponds to the second inter-household survey period (between 2008/9 and 20013/14). Total period corresponds to the decade between the 2002/3 and 2013/14 surveys. Grey lines are confidence intervals. TaBle 1.3  Gini Coefficient Measure of Inequality 2002/03 2008/09 2013/14 Total 39.6 42.8 38.3 —Urban 38.9 43.1 38.2 —Rural 36.6 33.7 32.8 Urban/rural breakdown Within-group inequality 18.7 19.9 18.2 Between-group inequality 11.3 16.7 12.4 Overlap  9.7  6.3  7.7 Source: World Bank staff estimates based on HIES. Drivers of Poverty Reduction synthetic panels show that 76 percent of people who moved out of poverty between 2002 and and Shared Prosperity 2008 were living in households headed by wage earners, compared to 66 percent of those who Contributions of Labor Income remained poor. Between 2008 and 2013, and Remittances 48 percent of people who moved out of poverty Employment and labor income have played an were living in households headed by someone important role in poverty reduction, though self-employed, compared to 42 percent among the nature of this role has changed over time. those who remained poor.6 Estimates of socioeconomic mobility based on 6 Poverty Reduction and Shared Prosperity Figure 1.7  Remittance Receipts by Consumption Quintile: Percentage of Population International remittances Domestic remittances 30 30 Percentage of Percentage of population population 20 20 10 10 0 0 Quintile 1 2 3 4 Quintile 5 Quintile 1 2 3 4 Quintile 5 (lowest) (highest) (lowest) (highest) 2002/03 2008/09 2013/14 2002/03 2008/09 2013/14 Source: World Bank staff estimates, Fiji Bureau of Statistics. Remittances have made an important con- Figure 1.8  Changes in Poverty Rate, tribution to welfare across all quintiles. They 2002–13 were received by 24 percent of people in the bot- 6.0 tom quintile and 31 percent of people in the top 4.0 quintile (Figure 1.7). In all quintiles, more people Percentage points 2.0 3.9 receive overseas remittances than domestic 0.0 2.5 remittances, but the proportion receiving over- –2.0 –3.7 –5.4 seas remittances increases with income. About –4.0 –7.0 –2.3 28 percent of people in the top quintile receive –6.0 overseas remittances, while only 18 percent of –8.0 2002–08 2008–13 2002–13 those in the bottom quintile do. In contrast, 5  percent of the top quintile receive domestic Growth Redistribution remittances, compared to 9 percent of the bot- Source: World Bank staff estimates based on the World Bank poverty harmonized database and HIES. tom quintile. story. Before 2008, growth was strongly poverty Contribution of Growth and Inequality reducing, but the accompanying increases in Economic growth was the main driver of pov- inequality reduced growth’s poverty-reducing erty reduction. Specifically, growth in per capita impact. After 2008, the growth was negative, consumption accounted for 62 percent of the which increased poverty; however, inequality poverty reduction between 2002 and 2013 declined as welfare converged, and the reduction (Figure 1.8).7 The remaining 38 percent was in inequality explained much of the poverty explained by a decline in inequality. The inter- reduction that took place in this period. survey periods, however, tell a more complex Notes 1. The food poverty line is estimated by calculating absence of panel data. The technique relies on the cost of meeting a given caloric energy require- strong and weak assumptions to generate upper- ment in Fiji. Basic needs poverty adds to this the and ­lower-bound estimates of economic mobility. cost of obtaining other basic items consumed by The upper-bound estimates are likely to over- households close to the food poverty line. state the extent of economic mobility, while the 2. The analysis of economic mobility in and out lower-bound estimates always understate mobil- ­ of poverty is based on synthetic panel data con- ity, except in the extreme case that prediction structed as in Dang et al. (2011). This technique errors are perfectly positively autocorrelated. The is applied to three household surveys in the true estimate of the extent of mobility is generally Poverty Reduction and Shared Prosperity 7 between the upper-bound and lower-bound esti- spatial differences in food prices across rural and mates. Lower-bound estimates are reported here, urban areas (but not for any differences in non- which are conservative estimates of economic food prices) and reflects an adult-equalized aggre- mobility. gate, which assumes a child below 15 years has half 3. Fiji is divided administratively into four divisions, the consumption needs of an adult. Both inequal- which are further subdivided into fourteen prov- ity measures have traced similar trajectories over inces. Tikina is a subunit of a province. time. The poverty assessments report a Gini coef- 4. Following the approach used to construct interna- ficient of 38.2 in 2002, 41.1 in 2008, and 36.4 in tionally comparable shared prosperity statistics, as 2013. published in the WDI, shared prosperity is ana- 6. Lower-bound estimates using synthetic panels lyzed here using mean per capita consumption constructed as in Dang et al. (2011). The patterns measured at 2011 Purchasing Power Parity, and were similar for the upper-bound estimates. so growth is adjusted for inflation. The underlying 7. The estimates are based on a Datt-Ravallion consumption aggregate makes no adjustment for decomposition of changes in poverty between spatial differences in the cost of living. 2002 and 2013, and in the subperiods 2002–08 5. This Gini coefficient is based on nominal per and 2008–13. Total change in poverty in each capita consumption (with no adjustment for period is decomposed into two key components: spatial differences in prices) and is the inequal- contribution of higher mean consumption, hold- ity statistic reported in the World Bank’s poverty ing constant the distribution of consumption and shared prosperity databases. It is slightly (“growth”), and contribution of shifts in distribu- higher than an alternative Gini statistic reported tion of consumption, holding constant the level in poverty assessments for Fiji, which are based of mean consumption (“redistribution”). See Datt on a consumption distribution which adjusts for and Ravallion (1992) for details. 8 Poverty Reduction and Shared Prosperity Chapter 2 Determinants of Economic Growth Patterns of Growth roughly 65 percent of total output growth came from services (Figure 2.2). Since independence in 1970, Fiji has under- Within services, tourism-related industries gone difficult structural changes, both eco- expanded the fastest. Specifically, wholesale nomic and political (Box 2.1). As a result, its and retail trade, restaurants and accommoda- growth has been low and volatile (Figure 2.1). tion, and transport and communications Between 1970 and 2015, real GDP grew at an recorded the highest growth. The government average of 2.8 percent a year. Per capita income sector also expanded strongly, with the increas- grew at an average of 1.3 percent a year. When ing developmental role of the government after viewed against this background, achieving a independence. reduction in extreme poverty has been a credit- In contrast, the share of agriculture in GDP able performance. has declined steadily, largely reflecting the decline of sugar. The agriculture sector largely consists of sugar, coconut, tobacco, and some Drivers of Growth emerging export crops such as kava, ginger, spices, and tropical fruits. There is also some Decomposition by Sector livestock and subsistence farming. The decline in Since independence, services have been the agriculture started soon after independence main drivers of growth. Between 1970 and 2015, (World Bank 1977). At independence, sugar real value added in services grew on average by accounted for 13.5 percent of GDP, 27 percent of 3.6 percent per year, compared to 2.5 percent in employment, and 34 percent of exports. Today, it industry and 1.3 percent in agriculture. As a accounts for only 1.2 percent of GDP, 4 percent result, services’ share in GDP expanded from 52 of employment, and 5 percent of exports. to 71 percent, while agriculture’s declined from The sugar sector is heavily dependent on 25 to 11 percent and industry’s from 22 to preferential access to the European Union 19 percent. This means that over the last 45 years, (EU). And the erosion of the preference has Figure 2.1  Economic Growth, 1970–2015 15 Post-independence Stabilization Stagnation Growth boom and bust interrupted by and the global acceleration the second coups financial crisis 10 Percent 5 0 –5 1987 coups 2000 2006 coups coups –10 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: ADB (2014). Determinants of Economic Growth 9 Box 2.1  Fiji’s Growth History Fiji’s post-independence growth history can be divided into four periods. Boom and bust (1970‒87). The first period was characterized by a post-independence boom followed by a secular growth decline. The annual growth rate averaged 9 percent in the first 3 years, helped by favor- able sugar prices, growing tourism, and large public investment. Like many developing countries after independence, Fiji pursued import substitution. But growth became more volatile and began to decline, to 2 percent in the late 1970s and 1.5 percent in the early 1980s, reflecting, among other things, bad weather, falling sugar prices, and an overvalued exchange rate. Weaker growth meant lower government revenue, but the government borrowed rather than reigning in public expenditure. In 1986, faced with increasing levels of foreign debt, the government began to shift its strategy from import substitution to export promotion. The first coup d’état in 1987 caused large output losses (−7 percent) and large declines in investment (−25 percent). Inflation shot up, investment fell further, and there was an exodus of skilled Indo-Fijian workers, of 5,000–6,000 a year (Duncan and Nakagawa 2014). Stabilization interrupted by the second coup (1988–2000). The economy rebounded strongly in 1988–89, and the average growth rate recovered to about 3 percent in the following decade. By the mid-1990s, inflation eased to below 1 percent. But investment failed to recover because of lack of confidence (IMF 1995). Growth was interrupted by the second coup d’état in 2000. During the following 18 months, around 1,000 people left each month—most of them professionals and business owners. The government used generous economic incentives, especially tax-related incentives, to encourage private investment, but failed to gain traction. Stagnation (2001‒10). The third period was characterized by economic stagnation. The emigration, loss of confidence, and strained international relations were exacerbated by the third coup in 2006. Tourism was hit first, as visitors from Australia and New Zealand (more than half of the arrivals) declined as their respective governments issued travel warnings. Several large developments of tourist resorts were aban- doned or scaled back. At the same time, the garment industry was hit by the expiration of preferential trade agreements. Many foreign-owned garment factories were closed and employment dropped. The global financial crisis that began in 2008 affected Fiji mainly through reduced exports and remittances. Output contracted in 2009 by 1.4 percent. Tourism avoided the worst, however, owing to recovering arrivals from Australia and New Zealand. Declining oil prices following the crisis also softened the blow to the real sector. Growth acceleration (2011‒present). The most recent period has seen an acceleration in growth inter- rupted by bad weather. Growth recovered from the global financial crisis, reaching about 3 percent in 2010‒11 (the highest rate since the 2006 coup). Cyclone Evan hit in 2012, one of the worst in Fiji’s history, slowing growth by damaging sugar output (−7.1 percent) and tourist arrivals (−2.5 percent). Growth recovered to about 5 percent in 2013‒14, supported by tax cuts, low interest rates, and increased govern- ment spending. Following the democratic election in September 2014, growth was 4.7 percent in 2015, spurred by rising confidence, stronger visitor arrivals, and private and public investment. In 2016, growth was again disrupted, by Cyclone Winston, the biggest in Fiji’s history, but is expected to recover to 3–4 percent in the next few years. 10 Determinants of Economic Growth Figure 2.2  Decomposition of Growth by Sector Percentage points Agriculture 0.2 Industry 0.5 Services, etc. 2.1 0.0 0.5 1.0 1.5 2.0 2.5 Source: WDI and World Bank staff estimates. Note: Sectoral growth rates are weighted by sectoral shares. Percentage points add up to total GDP growth rate for the period. driven the sector’s decline. Under the Sugar 20–30  percent below the efficiency frontier Protocol (1975–2008), the EU purchased a spec- (Haszler et al. 2010). The productivity of cane ified quantity of sugar from Fiji each year at farmers in Fiji is also well below that of some guaranteed prices that were several times higher of the other sugar producers (Table 2.1). than world prices. In 1996, the World Trade • The costs of cane harvesting are high. Cane is Organization (WTO) ruled that the EU sugar cut and loaded by hand onto portable carts, policy did not comply with international trade which are then transported to collection rules. Since then, the Sugar Protocol has there- points on a rail network, or loaded onto trucks fore been gradually phased out and the guaran- for cartage by road to mills. Often, labor is teed prices have been declining. Today, under the hired for this purpose, but during the cutting bilateral trade agreement with the EU, Fiji con- season cane cutters are scarce and expensive tinues to enjoy quota-free, duty-free access to the according to farmers, even though the work is EU market and benefits from the premium of EU arduous and cutters’ annual income is gener- prices over world prices. However, in October ally well below any definition of the family 2017, the preference is finally coming to an end. poverty line (Government of Fiji 2006, quoted The EU will eliminate production quotas within in Mahadevan 2008). the EU, which will bring the prices in the EU • Fiji’s sugar mills are also inefficient. All four closer to the world prices. mills, which are owned by the Fiji Sugar Fiji’s land tenure system (Box 2.2) is often Corporation (FSC), have been operating at a blamed for the decline of sugar, but several loss in most years. The mills are old, over- other forces are also responsible. In fact, declin- staffed, and expensive to run and maintain. ing investment in sugar largely reflects a rational They have frequent break downs, creating response by farmers to the elimination of problems for farmers: “there is little incentive preferences. for farmers to improve their efficiency if fac- tors not within their control are going to have • Low productivity by growers, the high cost of an adverse impact on their profit” (Mahadevan cane farming, and mill inefficiencies combine 2008). Although the government has spent to make the industry very cost inefficient millions of dollars restructuring the sugar (Oxfam 2005). “A significant level of ineffi- industry and has guaranteed loans raised by ciency exists at the farm level” (Reddy and the FSC to upgrade transport and milling Yanagida 1999; see also Narayan 2004; Haszler infrastructure, there has been little improve- et al. 2010). The majority of commercial sug- ment in the efficiency of the mills. This year, arcane farmers in Fiji are operating at one of the mills is being closed, because the Determinants of Economic Growth 11 Box 2.2  Land Tenure in Fiji Land in Fiji is mostly held as customary land. About 87 percent of the country’s total area is iTaukei land—owned or reserved for indigenous Fijians. Most of this land is collectively owned by the traditional clans and cannot be sold. However, it can be leased for 30 years for agricultural use and up to 99 years for residential, commercial, and industrial uses. The iTaukei Land Trust Board currently manages 35,586 leases, most of them for agricultural and residential use. Some have argued that customary tenure harms growth and that it should be replaced by individual freehold tenure. However, given the Pacific people’s attachment to customary ownership, others suggest that the best way to create secure land tenure is to create a system of long-term leases within the custom- ary system (Duncan and Nakagawa 2014). Fiji’s long-term leases have supported a large sugar industry as well as a large and growing tourism industry. Unfortunately, the system came into disrepute in the wake of the 2000 coup because of the polit- icization of the renewal of land leases to sugarcane farmers, who were mostly Indo-Fijians. Before the May 1999 election, 90 percent of the expiring 30-year leases (negotiated under the 1969 Agricultural Landlord and Tenant Act) had been renewed. After the election, however, the renewal of leases became “political football” between the new government, which was dominated by the Indo-Fijian labor party and which threatened land reform, and landowners, who retaliated by not renewing leases (McCarthy 2007). Is customary land tenure a binding constraint on growth and shared prosperity in Fiji? The dispute and the ensuing decline in the sugar industry have often been blamed on the lease system. Declining investment by leasehold farmers could, however, reflect a rational response to the looming expiration of the EU sugar subsidy, low global sugar prices, and opportunities in other crops. Moreover, the main con- straints on investment may not be the nature of land tenure per se, but political instability, poorly enforced contracts, and inefficient dispute resolution. For example, a study has shown that, other things being equal, economic incentives for investment under leasehold and freehold tenure are equivalent if contracts are well enforced. “If the land remains productive, the lease will be renewed indefinitely and therefore its economic value will be the same as it would be under individualized freehold. If the rights under leasehold and freehold are equally enforceable under law there is essentially very little, if any, dif- ference in value between the two” (Lightfoot 2005, 24). Even if the lease is nonrenewable, if it is suffi- ciently long, the economic incentives for investment are much the same. For example, at a 10 percent discount rate, a 30-year lease is worth about 94 percent freehold value (Lightfoot 2005, 24). Customary land rights could play an important role in shared prosperity, but evidence is missing in Fiji. In some countries, customary land tenure appears to help reduce poverty and increase shared pros- perity (e.g., by providing secure livelihood or social protection to rural communities), but in others, it has a negative impact (e.g., by exacerbating gender disadvantages in asset holdings, access to finance, or intra-household bargaining power). There appears to be no empirical research on the impact of the land tenure system on poverty and shared prosperity in Fiji. Table 2.1  Sugarcane Productivity in Selected Countries Productivity Productivity differential Tons of cane/ (tons/acre) (Fiji—country) tons of sugar Fiji (1997–2001) 19.6 —  9.6 Mauritius (1997–98) 31.9 12.3  9.2 Queensland (1999–2001) 35.4 15.8 13.9 Hawaii (1997–99) 43.8 24.2  7.9 Louisiana State, United States (1999) 31.3 11.7 11.0 Source: Reddy 2003. 12 Determinants of Economic Growth FSC could not afford to “throw good money government encouraged FDI in the garment after bad.”1 industry with tax-free factories. Since 2000, the • With migration from rural to urban areas, the garment industry has rapidly declined as trade younger generation is moving away from the preferences and tax concessions have been sugar sector and looking for opportunities in phased out. With continuing political instability, the cities with more pay or less hard labor. As and ensuing declines in investment and outflows a result, “[m]ost of Fiji’s 12,000 sugar cane of entrepreneurs, the industry continued to farmers are over 50 years old.” “Definitely the struggle. The loss of competitiveness against sugar industry is in trouble because when this cheaper and more productive manufacturing generation’s time goes away in about five or workers in Asia also hurt the industry. ten years’ time and they become old, then Services were the main drivers of job cre- what will happen is that there will be nobody ation, absorbing labor from agriculture and to work in the farm. There is lots of land left industry. Between 1990 and 2011 (years for over here which is being unused.”2 which there are comparable data on employment • Although it is sometimes said that 200,000 by sector), services accounted for 79 percent of people are dependent on the sugar industry, growth in employment. Reliance on services for that is probably no longer the case. A better job creation has only intensified in recent years. estimate is 90,000 or fewer.3 During the 1990s, services accounted for 72 percent of growth in employment, and in the Manufacturing began to shrink in the early new millennium, 96 percent. 2000s with the erosion of trade preferences. Its The creation of jobs in services has contrib- decline largely reflects the decline of sugar pro- uted to shared prosperity. Detailed data are not cessing and the loss of preferences by the gar- available, but it appears that expansion of low- ment sector. The manufacturing sector in Fiji skilled jobs in traditional services (e.g., trans- was built during the years of import substitution port, wholesale, retail, and restaurants) played an in the 1970s and grew rapidly in the late 1980s important role, helping absorb many of the low- and the 1990s with development of the skilled workers from agriculture and the garment export-oriented garment industry. Growth of the industry (Figure 2.3). By contrast, the expansion garment industry was, in turn, driven by prefer- of skilled jobs in modern services (e.g., informa- ential trade agreements with Australia and New tion technology, finance, insurance, and real Zealand (the South Pacific Regional Trade and estate) played a less important role. Economic Cooperation Agreement) and with the United States (the Multi Fiber Agreement). The Figure 2.3  Evolution of Employment by Subsector, 1990–2011 100 80 Traditional services 60 Percent Public administration 40 Modern services 20 Industry Agriculture 0 1990 1996 1998 2000 2004 2006 2009 2011 Source: Fiji Bureau of Statistics. Determinants of Economic Growth 13 Decomposition by Components diversify their sources of income, were likely key of Aggregate Demand to poverty reduction during this period. Investment contributed less to growth, On the expenditure side, consumption was the accounting for 17 percent of the total between main driver of growth. Public and private con- 1970 and 2015 (Figure 2.4). Its contribution was sumption together explained over 80 percent of also more erratic across subperiods, reflecting total output growth between 1970 and 2015 turbulent economic and political history. After (Figure 2.4). Private consumption explained the first coup in 1986, it rebounded strongly as 74 percent while public consumption explained the garment industry took advantage of tax 17  percent. Private consumption grew strongly incentives and preferential access to Australia, in the post-independence boom, helped by New Zealand, and the United States. With the increasing employment from rapidly expanding expiration of preferences and tax concessions, tourism and construction sectors as well as rising precipitated by another coup in 2000, FDI fell to public sector employment and wages. It contin- nearly zero. In the past five years, however, ued to grow strongly in the late 1980s and the investment has contributed strongly to growth 1990s, likely reflecting growing employment in because of renewed political stability and strong the garment sector. Consumption remained public investment in infrastructure. resilient during the period of slow growth, beset Fiji needs more investment to accelerate by the coups, food and commodity price shocks, growth. In the last five years, its investment rate and the global financial crisis, because it was sup- was 18 percent, lower than its peers (Figure 2.5). ported by rising remittances from the diaspora. The Commission of Growth and Development Growing remittances, by helping the poor (2008) concluded that an investment rate of Figure 2.4  Contribution to Growth by Demand, 1970–2016 Percentage points Private consumption 1.9 Government consumption 0.4 Investment 0.4 Net exports –0.2 –0.5 0.0 0.5 1.0 1.5 2.0 By subperiod (percentage point) Period 1 Period 2 Period 3 Period 4 1970–1987 1988–2000 2001–2010 2011–2015 Private consumption 2.4 3.0 1.2 3.0 Government consumption 0.8 0.5 0.1 0.9 Investment 0.5 1.2 0.7 2.0 Net exports 0.2 –0.9 –0.4 –0.4 0 0 –0.0 0.5 0 5 0 5 0 5 –0.0 0.5 0 5 5 0 5 –0 0 0.5 0 5 0 5 0 5 –0 0 0.5 0 5 0 5 0 5 0 3. 3. . 0. 1. 1. 2. 2. . 0. 1. 2. 2. . . 0. 1. 1. 2. 2. . . 0. 1. 1. 2. 2. 1. –1 –1 –1 –1 Annual GDP Growth 3.6 2.9 1.6 4.3 Source: WDI and World Bank staff estimates. Note: Expenditure growth rates are weighted by their average shares in total expenditure evaluated at the midpoint between the beginning and end of the period. 14 Determinants of Economic Growth 25 percent of GDP or higher was common among likely driven by erosion of traditional exports the high-growth countries of post-World War II. such as sugar and garments, as well as rising Empirical literature also tends to confirm that import demand from growing consumption and investment has determined how fast economies investment. can grow. Trade in services fared better, because of Net exports failed to contribute positively tourism and Fiji’s position as a transport hub to growth. From 1970 to 2015, they reduced (Box 3.1). Visitor arrivals have grown substan- growth by 0.8 percentage points on average. The tially in recent years—mostly from Australia and negative contribution persisted in each sub- New Zealand but increasingly from China and period, suggesting a structural issue rather than a India—helped by more regular air services. cyclical one (Figure 2.4). Growing surpluses in trade in services, however, Fiji’s trade deficit is large and has widened have not been enough to offset the widening gap over time. The weak external performance between exports and imports of goods (Figure 2.6). reflects a growing deficit in merchandize trade, Figure 2.5  Investment to GDP Ratio Average 2011–15 30 20 Percent 28.5 25.0 24.7 23.3 10 18.4 0 High growth Global Middle Small Fiji economies benchmark* income states Sources: WDI; *Growth Commission 2008. Figure 2.6  Trade Balances, 1991–2014 30 20 Percent of GDP 10 0 –10 –20 –30 –40 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2011 Goods balance Service balance Source: WDI. Determinants of Economic Growth 15 Decomposition by Factors skilled workers and entrepreneurs. In the most of Production recent period (2011–15), however, TFP growth has turned positive and has been the main driver Growth accounting finds that there has been of growth. little productivity growth. The structural shifts in the economy are often associated with increases in aggregate productivity, as both capi- tal and labor move from lower to higher produc- Financing of Growth tivity sectors attracted by higher returns. Fiji has traditionally run a current account def- However, the result from growth accounting sug- icit, which widened in the late 1990s because of gests that this was not the case for Fiji. In the last a rapid decline in gross domestic saving four and a half decades, average growth in total (Figure 2.8). The decline in saving was, in turn, factor productivity (TFP) was zero. Instead, eco- driven by a decline in private saving, possibly nomic growth has relied heavily on the accumu- reflecting the growing political instability and lation of factors of production (Figure 2.7). the emigration of high-income earners during Looking at growth accounting by sub- the period (Figure 2.9). period, the story that emerges is consistent The widening gap between saving and with the foregoing discussion. During 1970–87, investment has been largely financed by non- TFP growth was at its lowest (Figure 2.7). debt-creating flows (Figure 2.10). FDI inflows Following the dismantling of the import substi- reached their highest in the last decade, averag- tution policies, it turned positive during 1988– ing 9 percent of GDP and financing 53 percent of 2000, but it fell into negative territory again total domestic investment.4 Remittance inflows during 2001–10, perhaps reflecting increasing also began to rise strongly since 2000, averaging political instability and the shocks from the 5 percent of GDP in the last decade, and financ- global financial crisis. Notably, this period also ing 7 percent of domestic private consumption. saw the lowest contribution of human capital to Portfolio flows, consisting of equity, bond, growth, possibly as a result of the emigration of and cross-border bank lending, have not been Figure 2.7  Growth Accounting, 1970–2015 Contribution of different factors of production to economic growth 8 1.1 Percentage points 6 0.9 0.8 4.0 0.7 4 0.2 2.3 2.7 1.8 2.4 0.8 2 1.5 1.7 2.4 2.4 1.0 1.4 0 0.0 –0.9 –0.4 –2 1970–2015 1970–1987 1988–2000 2001–2010 2011–2015 Total factor productivity Capital stock Labor Human capital Source: WDI and World Bank staff estimates. 16 Determinants of Economic Growth Figure 2.8  Saving and Investment Figure 2.9  Saving by Sector 40 40 30 Percent of GDP 30 Percent of GDP Investment 20 20 10 Saving 10 0 –10 0 Current account balance –20 –10 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Source: WDI and World Bank staff calculations. Gross domestic savings Private Public Source: WDI and World Bank staff calculations. Figure 2.10  Financing of Growth 500 400 300 US$ million 200 100 0 –100 2000 2005 2010 2015 FDI (net) Remittance (gross) Portfolio flow (net) Office flow (net) Source: International Monetary Fund (IMF) Balance of Payment Database. an important source of financing. Cross-border and 2015, Fiji received about 1 percent of GDP in bank lending is minimal. Bond flows are also aid each year, compared to an average of 3 percent small, as local issuance is largely limited to the for upper-middle-income countries, 9 percent government and there is virtually no secondary for small states, and 20 percent for Pacific Island market trading of these bonds. Equity flows are countries (Figure 2.11). External borrowing also also small given the small size of Fiji’s South remains relatively low. External debt at the end of Pacific Stock Exchange, with little or no trading. 2016 was 14 percent of GDP, consisting of Similarly, official flows have played a lim- 46 percent bilateral, 33 percent commercial, and ited role in financing growth. Between 2006 21 percent multilateral debt. Determinants of Economic Growth 17 Figure 2.11  Annual Aid Flows, Average 2006–15 20 20 16 15 Percent 10 10 9 9 8 5 4 4 3 2 1 1 0 Pacific East Asia Small Middle Upper Fiji and states income middle Pacific income Percent of GDP Percent of GNI Source: WDI. Drivers of Volatility magnitude of the volatility of sugar production, possible flow-on effects to the rest of the econ- One of the key features of Fiji’s growth has omy, and the fact that sugarcane production is a been its volatility. The swings in annual growth proxy for broader weather-related shocks likely ranged from −7 to 13 percent (Figure 2.1). explain the result. Extending the sample period Furthermore, the volatility is higher than in peer to 2015 shows that the influence of agriculture countries, even than in the small states and on growth has been roughly halved. Instead, Pacific Island countries. annual fluctuations in visitor arrivals (not Volatility is harmful for growth as well as included in the original study by Moring and poverty reduction. It not only reduces output in Williams 2000) emerges as the main driver of the short run but could also reduce potential volatility. Because the volatility of visitor arrivals growth in the long run (Aizenman and Pinto is less extreme, the shift from agriculture to tour- 2004). Frequent shocks can also weaken shared ism has reduced aggregate volatility. prosperity as the poor often suffer dispropor- The same empirical approach shows that tionately during downturns, for example, because shocks in major trading partners have an they have less diversified assets, less secure jobs, immediate but smaller impact. On average, a or less access to insurance. The decline in volatil- 1  percentage point increase in the real growth ity, which may have resulted from the decline of rate of trading partners increases Fiji’s growth agriculture and the rise of service, may therefore rate in the short run by around 1/10th of a per- help explain Fiji’s success in reducing poverty. centage point. Empirical analyses of the determinants of Although the external sector plays an growth volatility in Fiji support this hypothe- important role, terms of trade and exchange sis. Moring and Williams (2000) investigated rate shocks do not appear to explain volatility. output growth in Fiji during 1975–98, using the Because Fiji is an open economy and its nominal error correction framework. They found that in exchange rate is pegged, large terms of trade the short run more than half of the volatility in stocks are expected to cause pronounced swings output was explained by the volatility in sugar- in domestic income. The terms of trade have cane production (a proxy for more general agri- moved quite sharply at times in response to shifts cultural shocks). The outsized influence of in the world prices of Fiji’s major commodity agriculture is surprising—after all, it accounted exports (Figure 2.12). However, according to the for less than 15 percent of GDP in the mid-1970s analyses, they have not had a significant influ- even if sugar manufacturing is included. The ence on volatility. Similarly, the real effective 18 Determinants of Economic Growth Figure 2.12  Changes in Terms of Trade Figure 2.13  Real Effective Exchange Rate 30 180 Index (2010 = 100) 20 160 10 140 Percent 0 120 –10 100 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 –20 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Source: WDI. Source: WDI. exchange rate has had a limited influence. Indeed, relationship between Fiji’s output and that of it has been very stable in Fiji, with the exception trading partners, with an estimated long-run of occasional sharp devaluations (Figure 2.13). elasticity of 0.44, meaning that a 1 percentage The analyses suggest that the primary channels point increase in trading partners’ income has of influence of international shocks have been led to a 0.44 percentage point increase in Fiji’s output linkages through trade and investment— output. Adjustment was relatively quick. Thus, agriculture, tourism, and, more generally, the result points to the possible gains to be made through trading partner growth—rather than from building closer trade and investment links prices. with the faster growing economies of Asia. The influence of domestic policies on vola- How did Fiji reduce poverty despite low tility appears to have been limited. The effect of growth and low productivity gains? The analy- monetary policy on output may have been weak ses in Chapter 1 showed Fiji has managed to because the pegged exchange rate constrains the reduce poverty and that growth has been inclu- Reserve Bank of Fiji’s capacity to conduct inde- sive. In both urban and rural areas, the per pendent monetary policy. There is some evi- capita consumption of the bottom 40 percent dence of a negative relationship between real grew faster than the average, and especially short-term interest rates and economic growth strong growth at the very bottom of the distri- (as expected), but it is not the dominant influ- bution helped reduce extreme poverty. How did ence on volatility. Similarly, fiscal policy does not Fiji manage this? The analyses in this chapter appear to have a strong influence on volatility provides several clues. First, the declining despite sizeable swings in the government’s fiscal importance of agriculture in the incomes of the balance. However, political uncertainty in the bottom 40 percent reduced the volatility of their 1980s and 2000s is likely to have contributed to incomes. Second, urbanization diversified their volatility, although its impact is harder to sources of income. Both of these factors may quantify. have helped them maintain growth in their con- While the analyses focused on explaining sumption. Third, there was an expansion of volatility, they also show the importance of low-skilled jobs in traditional services sectors Fiji’s trading partners’ growth for Fiji’s long- such as transport and hospitality. This helped run growth. The error correction model used in absorb workers from the declining sugar and the analyses is useful for estimating both short- garment industries. Finally, remittances have run and long-run influences on output growth in risen, further protecting the poor from domes- Fiji. The results show that there was a stable tic shocks. Determinants of Economic Growth 19 Notes 1. FSC chairman, Mr. Vishnu Mohan, quoted in these workers. The dependency ratio in 2015 (the the Fiji Sun, at http://fijisun.com.fj/2017/03/28/ ratio of the population aged 0–14 or 65 or older to penang-mill-will-be-closed-for-good/ the population aged 15–64) was 0.5285. Using this 2. The General Secretary of Fiji Cane Growers ratio gives an estimate of the population depen- Association, quoted at http://www.radionz.co.nz/ dent on the sugar industry of 28,059 (18,357  × international/pacific-news/277011/fiji-sugar- [1 + 0.5285]). Alternatively, one can use the typ- industry-in-trouble-without-young-people ical household size in Fiji. According to the 2014 3. According to the Fiji Bureau of Statistics, there census, the median household size in Fiji was 4.9. were 14,804 registered farmers in 2014, of whom, Counting all other family members as dependents 12,632 were active. In 2013, there were also 3,725 gives an estimate of the population dependent on people working in sugar processing. In addition, the sugar industry of 89,949 (18,357 × 4.9). there are up to 2,000 employees in the FSC at peak 4. There is no disaggregated data in Fiji on FDI by season (FSC 2015). In total, this makes 18,357 sector or, on a systematic basis, FDI inflows by workers directly employed in the industry. Other source country. people are, of course, dependent on the incomes of 20 Determinants of Economic Growth Chapter 3 Building on Opportunities and Strengths Government’s Vision the fundamentals of sustainable economic growth. This encompasses the development of The government aims to double Fiji’s per capita sustainable cities, reinvigorating the rural econ- income by 2035. It is in the process of finalizing omy, protecting the environment, expanding a National Development Plan for 2016−35 that trade, and supporting the expansion of tourism sets out a vision for growth and shared prosper- and ICT. Recognizing that long-run growth will ity. The plan has drawn on consultations with require more than business as usual, it envisions people around the country, including civil soci- transforming Fiji into a regional hub, leveraging ety and business leaders, to capture their collec- its location, connectivity, and human capital tive aspirations for what a better future looks like. (Box 3.1). The second strategy is to focus on It establishes a set of 20-year targets for achieving essential services. This encompasses improving the vision. The goal of doubling real per capita access to education, health, sanitation, and hous- income by 2035 requires an annual GDP growth ing. Efforts under both strategies are to be sup- of about 5 percent or about 3.5 percent per capita. ported by improvements in the policy and Other targets include reducing poverty and institutional environment. This encompasses inequality, redressing rural-urban gaps, lowering implementing appropriate macroeconomic poli- public debt, and creating more jobs. cies and accelerating structural reforms. The government has two strategies for meeting these targets. The first is to establish Box 3.1  Fiji’s Ambition to Be a Regional Hub Fiji’s vision to become a regional hub is part of its long-run strategy. A clear picture of what a successful hub might look like and in which specific activities is yet to fully emerge, but it could involve the follow- ing elements. Finance. Prime Minister Bainimarama has announced a plan to develop Fiji into a Pacific financial cen- ter. The country’s fledgling South Pacific Stock Exchange has just 18 listed companies, including local telecommunications and food companies. To raise the profile of the exchange, a 10 percent corporate tax rate for companies that list there has been promised. Aviation. Fiji’s central location in the South Pacific makes it an ideal hub for flights to other Pacific islands. Fiji Airways, the national airline, serves 48 destinations in 13 countries around the Pacific. Destinations include Australia, Hong Kong SAR China, New Zealand, Singapore, and the United States, as well as Kiribati, Samoa, the Solomon Islands, Tonga, Tuvalu, and Vanuatu. Fiji’s main international air- port, in Nadi, is being upgraded. Tourism. Because of the better connectivity, Fiji receives almost 40 percent of all visitors to the Pacific, positioning it as the ideal tourism hub of the region. To increase the economic benefit of tourism, the government is looking to achieve higher yield per visitor and increase the spread of tourism across the country, as well as maintaining visitor arrivals from the traditional markets of Australia and New Zealand. (continued) Building on Opportunities and Strengths 21 Box 3.1  Fiji’s Ambition to Be a Regional Hub (continued) Shipping. Fiji is well placed to serve as a transshipment hub for smaller Pacific countries. At present, how- ever, Fiji’s ports are struggling to cope with local demand. Fiji’s Ship Owners and Agency Association chairman, Jeffrey Lin, has said Fiji was “unattractive” as a hub because of inefficient cargo handling, cargo disruptions, and increasing costs. “When I talk about expanding the port facility, I am speaking about how disruption to cargo loading and unloading adds to costs,” Lin said. “Cruise liners have priority of berth and this means that if a cargo vessel is being unloaded or loaded, it has to vacate the berth for the cruise liner.” Lin says that this puts Fiji at a competitive disadvantage relative to countries such as Samoa and Papua New Guinea (Chaundary 2015). International organizations. Prime Minister Bainimarama has expressed Fiji’s desire to take a leading role in multilateral forums to advance the interests of the Pacific nations (Delaibatiki 2015). The country already hosts the Pacific Islands Forum Secretariat, the Pacific Islands Development Forum Secretariat, the Pacific Community, and the regional offices of the EU, the World Bank, the United Nations, and the Asian Development Bank (ADB). This year, it will hold the Presidency of COP 23. In 2020, it will host the annual meeting of the ADB. Re-exports. Permanent Secretary for Industry and Trade, Shaheen Ali, has urged the motor industry to capitalize on Fiji as a hub rather than just opening a showroom in Fiji: “We need to capitalize on our many advantages as a country, like having better skills, better infrastructure and better connectivity in the region . . . Some Fijian companies are exporting to our island neighbors. What is limiting Asco Motors from doing the same, and becoming the supplier of Toyota Vehicles, not just in Fiji, but in the region?” (Ministry of Industry, Trade, and Tourism 2013). ICT. Fiji is already a hub for international submarine cables, with three landing in Fiji: one from Tonga, one from Vanuatu, and the Southern Cross Cable, which connects Sydney to Honolulu with a spur to Suva. Fiji liberalized its telecom market in 2008, which resulted in substantial increases in coverage and access and the lowest wholesale Internet prices in the region. Fiji has the region’s only 4G mobile net- work. Basic mobile coverage is nearly universal, at 89.5 percent. Fiji has an emerging ICT-enabled ser- vices and business process outsourcing industry. It won the 2014 European Outsourcing Association’s Offshoring Destination of the Year Award, which acknowledges operators that have most successfully serviced European outsourcing markets. Education and training. Fiji is already a hub for tertiary education in the Pacific Islands. It hosts the main campus of the region’s only transnational institute of higher learning, the University of the South Pacific and the Fiji National University, which includes the only medical school in the Pacific. The University of the South Pacific is owned by the governments of 12 Pacific Island countries and has campuses in each of them. The Pacific Theological College and the Fiji Institute of Technology excel in training leaders and professionals of the region. Pacific Possible Tourism. The most important regional opportunities for tourism are the Chinese visitor Pacific Possible (World Bank 2017a) charts five market, regional cruise ships, the high-end opportunities that could enable small Pacific resorts market, and capitalizing on population Island countries to accelerate shared prosperity aging in origin markets by developing long-stay by 2040. These opportunities are identified by opportunities for retirees. Given Fiji’s small size taking into account the countries’ common phys- and limited capacity to serve mass markets, ical and geographical challenges. The five oppor- boosting spending per tourist is crucial. By tunities are tourism, fisheries, labor mobility, improving health care to international standards, deep sea mining, and the knowledge economy. Fiji would be better placed to take advantage of 22 Building on Opportunities and Strengths the long-stay retiree market. By exploiting these zone, sulfide resources have been identified. opportunities, Fiji could gain 500,000 additional Exploration licenses have been issued by the gov- international visitors each year, an additional ernment. However, it is said that the resources 57,000 jobs, and an additional US$190 million in could not be commercialized until the 2030s. But government revenue by 2040. there is little independent research, so it is impos- Fisheries. The seas surrounding the Pacific sible to estimate the impact of these opportuni- Island countries are endowed with valuable tuna ties on growth, employment, or government resources. Some 34 percent of the world’s annual revenue. The report recommends adopting a tuna catch is supplied from the exclusive eco- precautionary principle in the management of nomic zones of Pacific Island countries. Better deep sea minerals. management of these resources and stronger Knowledge economy. The knowledge econ- regional cooperation (e.g., to prevent overfish- omy encompasses education and training, ICT ing) could create major benefits for Pacific Island infrastructure, and innovation systems. In the countries. But about 90 percent of the expected region, Fiji is best placed to take advantage of benefits would be captured by Kiribati, Nauru, opportunities in these areas, given its high levels Tuvalu, Papua New Guinea, the Solomon Islands, of human capital, supporting ICT infrastructure, and the Federated States of Micronesia. Fiji could and its diaspora of skilled workers and entrepre- expect to gain only US$6.5 million a year. neurs. By boosting investment in these areas, Fiji Labor mobility. For many small Pacific Island could generate sizeable economic dividends, cre- countries, the most important opportunities for ating an additional 30,000 jobs and 10 percent labor mobility are expansion of low- and higher per capita income by 2040. medium-skilled migration to Australia, New ­ Zealand, and the Republic of Korea. For Fiji, along with a few others with a relatively skilled labor force, the expansion of skilled migrant Achieving Fiji’s Vision visas could be further explored. Given the already While Fiji has great potential, success cannot large number of skilled caregivers overseas, Fiji be taken for granted. could, for example, explore establishing a formal To meet the ambitious target of doubling caregiver program that would regularly recruit per capita income by 2035, Fiji must substan- skilled Fijians to provide residential care to the tially increase its growth rate. In the short to elderly in Australia and New Zealand. By exploit- medium term, adding capital and labor can stim- ing these opportunities, Fiji could expect to gain ulate growth. The investment to GDP ratio, additional seasonal employment of 3,800 to which was below 20 percent of GDP in 2015, is 7,600 by 2040. However, concerns about the eco- targeted to rise to 25 percent by 2035 in the nomic impact of brain drain and the social National Development Plan. At the same time, impact of absentee spouses and parents needs to there is potential to increase employment oppor- be addressed. tunities, given that a portion of Fiji’s labor force is Deep-sea mining. Most Pacific Island coun- unemployed or underemployed. But per capita tries have few subsoil resources that can be income growth in the longer run can only be sus- extracted onshore. But there may be undersea tained through productivity growth, for exam- resources in their large exclusive economic zones. ple, by attracting FDI, increasing exports, and Their proximity to the tectonic ring of fire pro- creating more and better jobs for highly skilled vides the right conditions for the buildup of min- workers. eral deposits. With improvements in sea-bed To achieve further poverty reduction and mining technologies, the costs of extraction are shared prosperity, Fiji faces a new set of chal- declining. Fiji, in particular, has a number of lenges. The poverty reduction agenda now opportunities. Within its exclusive economic largely revolves around reducing rising urban Building on Opportunities and Strengths 23 poverty. At the same time, the gaps in access to adapting to and mitigating climate change, essential services, especially in remote areas, reducing the impact of exogenous shocks by need to be addressed to reduce chronic rural building buffers and increasing flexibility, and poverty. Enhancing the prosperity of the bottom protecting the most vulnerable through well-­ 40 percent rests in large part on the implementa- targeted social protection. tion of reforms to transform the economy to a The SCD sets out three pathways to achiev- more private sector-led and productivity-led ing the vision by taking hold of the growth path and creating better, more produc- opportunities: tive jobs that move people out of the informal • Accelerating inclusive growth sector and permanently out of poverty. • Ensuring access to services by all In addition, Fiji needs to ensure that devel- • Building resilience. opment is sustainable. This will require 24 Building on Opportunities and Strengths Chapter 4 Pathway I. Stronger Growth The analysis in the preceding chapters shows that ask the firms.1 There have been two firm surveys growth has been inclusive, but low. To accelerate in Fiji, the SME Business Survey (2003) and the progress toward the twin goals, therefore, Fiji Enterprise Survey (2009), but unfortunately needs to accelerate growth while making sure nothing more recent. The top five constraints that it remains inclusive. The analysis in that the firms identified in these surveys are Chapter  2 points to three key constraints on summarized in Table 4.1. growth: low investment, weak exports, and low Political stability was identified as a top productivity of jobs (see Drivers of Growth). constraint in both surveys, perhaps not surpris- ingly because the surveys were done three years Why Is Investment Low? after coups. Concerns about crime, theft, and dis- order also ranked high among the concerns of Fiji’s investment rate, at 18 percent of GDP, is small firms. These results suggest that concerns unlikely to be enough to achieve the govern- about the appropriability of returns to investment ment’s indicative growth target (see Chapter 3). have been a major cause of low investment in Fiji. A rule of thumb, admittedly approximate, indi- Labor regulation, lack of skills, and low cates that achieving a long-run GDP growth rate productivity of labor were also among the top of 5 percent requires gross capital formation of at concerns for firms of all sizes. Productivity least 25 percent of GDP, of which 50 percent or complaints increased with firm size: the more should be private. Enterprise Survey found that this was among the The low investment rate could have many top constraints for 9 percent of small firms, causes, and the problem is to identify the most 20 percent of medium-size firms, and 26 percent important. This matters, because not all potential of large firms. The SME Business Survey found constraints can be addressed at the same time. To that productivity was among the top constraints find the most important constraints, both percep- for 30 percent of micro firms and 95 percent of tion data and objective measures are considered. medium-size firms. As the complaints were more frequently voiced by larger firms, foreign-owned Perception Data firms, and exporting firms, the quality of labor The most direct approach to identifying the may have been an important impediment to binding constraints to private investment is to attracting FDI. Table 4.1  Obstacles to Growth as Reported by Firms Enterprise Survey (2009) Large firms Medium firms Small firms SME Survey (2003) Political instability Political instability Political instability Finding, retaining staff Labor regulations Access to finance Tax rates Productivity of staff Inadequately educated Labor regulations Crime, theft, and disorder Lack of customers workforce Access to land Inadequately educated Labor regulations Government stability workforce Crime, theft, and disorder Practices of the informal Practices of the informal Inefficiencies in the sector sector production process Source: World Bank Group. Pathway I. Stronger Growth 25 Access to finance did not appear to be a promotion of small and medium enterprises major issue. (SMEs) as one of its goals and is seeking ways to strengthen the support framework (Box 4.1). • The SME Business Survey paid particular attention to the survey respondents’ ability to Neither access to land nor government reg- access capital. The findings were striking. Fiji ulations featured among the most pressing was the only country in the region where constraints (Figure 4.1). However, given the working capital was not among the most com- uncertainty regarding perception data and their mon problems. The proportion of Fiji firms vintage, these issues are investigated in the fol- relying on friends and family savings was also lowing section with objective data. the lowest in the region. Commercial bank loans were provided to 22 percent of firms at Cross-Country Benchmarking start-up. About 65 percent of the respondents and Other Objective Measures received loans, overdrafts, or revolving facili- The second approach to identifying constraints ties from banks; 32 percent of the respondents on investment is to look at objective data, includ- did not apply for the loan; and only 4 percent ing benchmarking Fiji against its peers. of those who had applied did not get a loan. Fiji’s investment climate has not kept up • The Enterprise Survey also did not find access with reforms in other countries (Figure 4.2). to finance to be a constraint for either small or Fiji’s best rank in Doing Business was 62, achieved large firms (Figure 4.1). For medium-size in 2010. Since then, it has dropped every year firms, however, 14 percent reported access to and its rank in 2017 is 97.3 The drop was mostly finance as a major constraint. A closer look at because other countries were improving their the survey data suggests that to some extent business environment, not because Fiji was get- this reflected greater demand for investment ting worse. But there were some exceptions. For finance among the medium-size firms.2 example, starting a business now takes 11 steps More information is needed on the effi- instead of 8 in 2010, registering a property takes ciency and equity of finance to cater for start- 69 days instead of 68 in 2010, and paying taxes ups, small businesses, and businesses owned by takes 38 payments and 247 hours a year instead women. The government has identified of 33 payments and 212 hours in 2010. Last year, Box 4.1  Promoting SME in Fiji The government wants to create a more consistent and coherent policy to support SMEs. It provides a considerable amount of support to SMEs through tax incentives and small grants, but the support is delivered through various sectoral ministries and agencies without an overall understanding of the full package of assistance, whether there is any duplication, or whether it is effective. Some assistance, for example, is provided by the Ministry of Industry, Trade, and Transport through small grants to entrepre- neurs, some through the Ministry of Agriculture to the agriculture sector, and some to women entrepre- neurs through other programs. The government’s plan is to create a coordinating agency for SMEs that will plan, develop, and deliver assistance to SMEs. It would coordinate with sectoral agencies and be guided by a council chaired by the Prime Minister. The government will also review the assistance currently available to SMEs and develop an SME master plan. Part of this process will involve more research on SMEs in Fiji, including developing a database of SMEs in Fiji. To the extent that data exists already, it is scattered across different agencies. A committee is developing legislation for the SME agency. International Finance Corporation (IFC) is helping review the draft SME law and the terms of reference for the agency. 26 Pathway I. Stronger Growth Figure 4.1  Most Important Constraints Reported by Firms in Enterprise Survey Percent of firms surveyed (number of employees in parentheses) Small (5–19) Political instability Tax rates Crime, theft and disorder Labor regulations Practices of the informal sector Customs and trade regulations Corruption Access to finance Electricity Transportation Tax administration Inadequately educated workforce Courts Business licensing and permits Access to land 0 10 20 30 40 50 Medium (20–99) Political instability Access to finance Labor regulations Inadequately educated workforce Practices of the informal sector Crime, theft and disorder Electricity Business licensing and permits Tax rates Access to land Transportation Tax administration Customs and trade regulations Courts Corruption 0 10 20 30 40 50 Large (100+) Political instability Labor regulations Inadequately educated workforce Access to land Crime, theft and disorder Electricity Customs and trade regulations Tax rates Transportation Tax administration Practices of the informal sector Courts Corruption Business licensing and permits Access to finance 0 10 20 30 40 50 Source: Enterprise Survey (2009). Pathway I. Stronger Growth 27 Figure 4.2  Doing Business in Fiji, 2012 vs. 2017 a. Fiji has slipped in the ranking . . . b. . . . and distance to frontier has increased DTF Compared to 2010 Ranking Compared to 2012 Starting a Business Starting a Business 100 0 Resolving 80 Dealing with Resolving 50 Dealing with insolvency 60 construction permits insolvency construction permits 40 100 Enforcing Getting electricity Enforcing 150 Getting electricity 20 contracts 0 contracts 200 Trading across Registering Trading across Registering borders property borders property Paying taxes Getting credit Paying taxes Getting credit Protecting minority Protecting minority investors investors 2012 2017 2012 2017 Note: DTF = Distance to frontier. DTF ranges from 100 to 0, with 100 representing the best performance. Closer to the center is worse performance. Where dark blue is visible, performance has worsened. c. Most economies made starting business easier . . . but Fiji made it harder Start-up procedures Time (days) OECD OECD East Asia & East Asia & Pacific Pacific Pacific Pacific Islands Islands Fiji Fiji 0 2 4 6 8 10 0 10 20 30 40 50 2012 2017 2012 2017 Source: World Bank 2017b. Fiji decided to close the credit bureau, which policy in recent years were made with limited according to Doing Business made it more diffi- public consultation and have added to a sense of cult to access finance, and this decision has uncertainty among the business community pushed Fiji’s ranking on getting credit down (ADB 2012). from 78 to 157. The recent banking sector indicators show Frequent changes in policies also increases general improvements in access to credit. uncertainty and compliance costs. Frequent Credit to the private sector has increased at changes in the tax system do not help create an double-digit rates since 2013 (Reserve Bank of ­ investment-friendly environment. Investors are Fiji 2016b). It grew fastest for construction, min- attracted by simple, stable, and predictable tax ing, agriculture, transport, and private individu- systems that are administered efficiently and als. Together, these sectors accounted for transparently. However, between 2014 and 2017, two-thirds of the growth. Credit for manufactur- the tax system in Fiji has undergone 32 reforms.4 ing and services also grew strongly, albeit at These changes have mostly increased the com- slower rates. The sector-wide composition of plexity of the tax system. More generally, busi- loans and advances of the commercial banks in nesses find it difficult to predict the evolution of 2016 shows that total business advances public policy in Fiji. Many reforms in business accounted for 62  percent of total loan assets, 28 Pathway I. Stronger Growth households for 28 percent, and the public sector outstanding loans with commercial banks as a for 9 percent. On December 31, 2016, the ratios share of GDP, another indicator of access to of interest margin to gross income and of trading finance, is higher in Fiji, suggesting that Fiji is income to total income were 54.6 percent and more successful in getting credit to businesses 17.8, respectively, largely unchanged since 2011. (Figure 4.3b). However, there is some evidence The combined interest spread for commercial that access to finance is concentrated among banks was 3.6 percent, a slight decline from fewer businesses. Loan accounts per 1,000 adults 4 percent in 2011. Nonperforming loans (NPLs) are 178, similar to the average for the region but continue to be low, at 1 percent of total assets. lower than for upper-middle-income countries Cross-country indicators of access to (Figure 4.3c). This suggests that fewer businesses finance also place Fiji ahead of its neighbors, obtain loans from commercial banks. Indeed, but access could be rationed among fewer compared with other developing countries, Fiji firms. In particular, domestic credit to the pri- provides less access to commercial bank loans for vate sector as a share of GDP, the main aggregate a given amount of credit (Figure 4.3d). indicator of access to finance, is higher in Fiji Few cross-country indicators exist for access than in its peers (Figure 4.3a). In addition, to land for commercial use. But Doing Business Figure 4.3  Cross-Country Comparison of Main Indicators of Access to Finance a. Domestic credit to private sector b. Deposits and loans with commercial banks 100 80 Percent of GDP 84 63 Percent of GDP 80 60 53 65 60 40 40 20 20 0 Fiji East Asia Upper Small Pacific 0 & Pacific middle states Islands Fiji East Asia Upper Small Pacific income & Pacific middle states Islands income Outstanding deposits with commercial banks Outstanding loans with commercial banks Domestic credit to private sector Domestic credit to private sector by banks c. Deposits and loans with commercial banks d. Less access to bank loans for the same amount of credit 1,500 1,389 1,000 Bank borrowers per 1,000 adults, 2015 Per 1,000 adults 800 1,000 600 500 400 178 200 0 Fiji East Asia Upper Small Pacific 0 & Pacific middle states Islands 0 50 100 150 income Bank credit to the private sector/GDP Deposit accounts with commercial banks per 1,000 adults Loan accounts with commercial banks per 1,000 adults Source: IMF Financial Assessment Surveys 2017 and World Bank staff estimates. Pathway I. Stronger Growth 29 Table 4.2  Efficiency of Land Administration Table 4.3  Quality of Land Administration East East Fiji Pacific OECD Fiji Pacific OECD Asia Asia Procedures  4 5 5 5 Quality of the land 20 16 9 23 (number) administration index Time (days) 69 50 124 22 Reliability 4 4 2 7 Cost (% of property  3 4 5 4 value) Transparency 2 3 2 4 Quality of the land 19.5 16.6 8.5 22.7 Coverage 8 4 2 6 administration index Dispute resolution 6 6 4 6 (0–30) Equal access 0.0 −0.1 −0.3 0.0 Source: World Bank 2017b. Only high-income OECD countries are included. Source: World Bank 2017b. Only high-income OECD countries are included. provides some quantitative and qualitative infor- efficient. For example, the government has set up mation. According to these indicators, access to a land bank through which land owners can land does not stand out as especially problematic allow the government to on-lease their land at in Fiji. Based on cost and the number of proce- market rates. The government has also extended dures, Fiji’s land administration is relatively effi- the maximum lease period to 99 years for busi- cient: Fiji outperforms the average country in the nesses. There is much that can be improved in Pacific, in East Asia, and even in the Organisation the performance of land administration in Fiji for Economic Co-operation and Development even without a wholesale change in the custom- (OECD) (Table 4.2). Based on time, Fiji falls ary land tenure system. behind East Asia and the OECD, although it is well ahead of the Pacific. Specifically, in Fiji, it takes 69 days to complete a transfer of title, with Why Are Exports Weak? the final settlement at the Registrar of Titles Office taking up to 60 days, compared to 4.5 days As a small, open economy, Fiji is well aware in Australia and just 1 day in New Zealand. Based that a strong export performance is a prerequi- on quality of land administration, Fiji also does site for reaching robust, sustained, and shared not do badly: it is well ahead of the average in the growth. But its export performance has been Pacific and in East Asia and only a little behind weaker than that of its peers. Strong export per- the OECD (Table 4.3). One difficulty in Fiji, formance does not simply mean high export however, is transparency: statistics about land growth: increased diversification from low value transactions are not made available to the public, added to higher value-added exports would and the procedures involved in property transac- reduce export volatility and raise the growth-­ tions, the service standards, and the fee schedule enhancing potential of trade. Even on this score, for land registry services are not easily accessible. Fiji has not done so well. Its export basket has There are also no mechanisms in place for filing shown little sign of diversification. Analysis of a complaint. disaggregated trade data shows that food and raw Major changes in the customary land tenure materials still dominate Fiji’s merchandise system are unlikely given the political sensitiv- exports (Figure 4.4a). The technology content of ity. In addition to political risk, distributional the exports has decreased slightly, with the disap- consequences of land reform are not well stud- pearance of garments exports (Figure 4.4b). ied, although poverty is becoming more preva- There is a slight decline in concentration of lent among iTaukei households, who are the exports but this may simply reflect the decline of communal landowners. The government’s sugar (Figure 4.4c). More importantly, the cur- approach is to make the lease system more rent structure of exports and its underlying 30 Pathway I. Stronger Growth Figure 4.4  Goods Export Diagnostics a. Sectoral composition b. Technology composition 100 100 80 80 Percent Percent 60 60 40 40 20 20 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2005 2007 2009 2012 2014 Ores and metals Food exports Primary products Medium tech Manufactures Agricultural raw materials Resourced based High tech Low tech c. Largest products exported d. Herfindahl indexes 100 0.5 0.2 80 0.4 Percent Percent 60 0.3 0.1 40 0.2 20 0.1 0.0 0.0 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 1990 1993 2001 2004 2007 2010 2013 Export Partners Export goods (RHS) Twenty largest Five largest Import Partners Ten largest Sugarcane Sources: United Nations (UN) Comtrade database and World Bank staff estimates. Note: Technology classification of export is based on Lall (2000). Herfindahl index ranges from 1/N to 1, where N is the number of trading partners. The higher the value, the more concentrated (less diversified) the exports. capability set does not provide a good basis for a Fiji, like many other small developing states, future rapid structural transformation. The maintains a fixed exchange rate. The question “product space” depicted in Figure 4.5 describes of whether the fixed exchange rate has contrib- the network of relatedness between globally uted to its weak export performance has been traded products. Red and blue markers plot what debated (e.g., IMF 2013). Under fixed exchange Fiji currently exports, both traditionally (“clas- rates, the real exchange rate usually becomes too sics”) and more recently (“emerging”). Most of high over time as domestic inflation exceeds Fiji’s exports are in a very disconnected part of inflation in trading partners. In Fiji, in particular, the product space. According to the theory, this frequent natural disasters and terms of trade suggests that the set of inputs and skills used to shocks can quickly lead to inflation and reduce produce current exports (“the capability set”) competitiveness. While a study by the Reserve could not easily translate into other areas of spe- Bank of Fiji (2016a) has shown that the most cialization. It would involve very long jumps. recent devaluation, in 2009, was associated with Services exports have fared better than a marked improvement in the trade balance that goods exports but have also failed to improve year, a more recent study by the IMF found it dif- sophistication. An analysis of disaggregated ficult to establish the impact of nominal devalua- trade data on services shows that Fiji’s service tions in the long run (Gottschalk et al. 2016). export sophistication has failed to keep pace with Fiji has enjoyed growing remittances, raising other East Asian countries, suggesting that Fiji the question of Dutch disease. Such an exogenous has not maximized the growth potential of its inflow of foreign exchange, in the absence of cen- services export (Figure 4.6).5 tral bank interventions, can lead to an appreciation Pathway I. Stronger Growth 31 Figure 4.5  Product Space Map of Fiji’s Exports Classics Emerging Sources: Hidalgo et al. (2007), UN Comtrade database, and World Bank staff estimates. Note: Both “classics” and “emerging” are products that Fiji exports with revealed comparative advantage (RCA), that is, the product’s value share in Fiji’s exports exceeds the product’s value share in global trade. “Classics” are products that Fiji exports with RCA since 1998. “Emerging” are products that Fiji exports with RCA in the last five years but not earlier. of the currency, a deterioration of competitiveness, few years. The rationale, according to the authors, and a fall in net exports. Yet, there is no empirical is that remittances are channeled to productive evidence that remittances in Fiji have led to real investment and boost domestic capacity, which appreciation in the long run (Prakash and Mala puts little to no pressure on the domestic exchange 2016). Furthermore, in the short run, there is some rate to appreciate. Waqabaca (2000) also argues evidence of depreciation of the real exchange rate that Fiji has a reasonably well-developed financial after a positive shock in remittances, which dissi- system that helps channel household funds into pates by gradual appreciation over the following investment opportunities. 32 Pathway I. Stronger Growth Figure 4.6  Service Export Diagnostics a. Composition of service export b. Export and re-export 100 1.6 80 1.2 US$ billion Percent 60 0.8 40 0.4 20 0 0.0 2005 2007 2009 2011 2013 2005 2008 2011 2014 Exports Re-export Computer and communications Transport Insurance and financial Travel c. Re-export by destination d. Sophistication of service export 600 15,000 service exports 500 14,000 EXPY for US$ million 400 13,000 300 200 12,000 100 11,000 0 6.5 7 7.5 8 8.5 9 2005 2008 2011 2014 Areas, nes China USA Log of GDP per capita Bunkers Japan Pacific Islands China Indonesia Malaysia Australia Singapore India Sri Lanka Fiji Sources: UN Comtrade database and World Bank staff estimates. Fiji’s policy makers have recognized that awards. There are impediments to the repatria- FDI can play a positive role in promoting tion of dividends and profits. And, in contrast to export diversification and sophistication. It standard international practice, confiscation of can help by creating foreign demand, enabling the assets of an investor is possible, not only if the deeper understanding of foreign preferences, investors commit crimes but also if they breach and creating spillovers that raise quality stan- conditions of their investment certificate. dards. It can also play a positive role in export The costs of trade are high in Fiji. The small promotion, as foreign companies can help inte- size of shipments and long distance from the grate Fiji into the global economy by easing markets will always put Fiji at a cost disadvantage access to foreign markets and including local against leading exporters of East Asia. The fre- enterprises in global production chains. But quent natural disasters also increase the costs of attracting FDI has been difficult, and Fiji has trade and insurance premiums. But Fiji can attracted much less than its comparators. A improve the quality of trade and transport-­ recent analysis of FDI, including a survey of related services. There has been an improvement would-be investors, identified that the existing in Fiji’s ranking in the Logistic Performance tax incentives are not effective and a broader Index—from 144 in 2010 to 136 in 2016. The competitiveness agenda is required. improvement in performance has been driven by A recent review of the investment law and improvements in customs clearance (e.g., speed, associated legislation has identified a number simplicity and predictability of formalities), trade of shortcomings. The arbitration law does not and transport-related infrastructure (e.g., ports, provide for the recognition of overseas arbitral railroads, roads, information technology), and Pathway I. Stronger Growth 33 Figure 4.7  Trading across Borders a. Time to export and import b. Time to export and import 250 180 Border compliance in hours Documentary compliance 200 120 in hours 150 100 60 50 56 34 56 42 0 0 Fiji Quintile 1 2 3 4 Quintile 5 Fiji Quintile 1 2 3 4 Quintile 5 (best) (worst) (best) (worst) Export Import Export Import c. Cost to export and import d. Cost to export and import 1200 500 Documentary compliance in US$ Border compliance in US$ 400 800 300 200 400 320 317 100 76 58 0 0 Fiji Quintile 1 2 3 4 Quintile 5 Fiji Quintile 1 2 3 4 Quintile 5 (best) (worst) (best) (worst) Export Import Export Import Source: World Bank 2017b. ability to track and trace consignments. However, determined without transparency and are poorly the country has suffered setbacks in ease of communicated to traders. arranging cost competitive international ship- ments and the timeliness of shipments in reach- ing destinations. At a ranking of 136, Fiji is still Why Is Employment Low? well behind its peers in upper-middle-­ income countries. With official unemployment of about 8 There are also several non-infrastructure percent, one of the main concerns in the coun- factors that constrain trade. Trading across bor- try is underemployment. The question is ders in Fiji is made costlier by red tape—money whether the problems are on the demand side, and time spent on border compliance is greater on the supply side, or in a mismatch of supply in Fiji than in its peers, although they do not and demand. stand out as exceptionally high in a global con- text (Figure 4.7). Observers also suggest that fre- Are There Problems of Demand? quent changes in import tariffs, customs duties, Job growth has taken place in relatively low and price controls affect the costs and uncer- wage sectors. Employment has grown at tainty of trade. These changes are often 2 percent a year since 2000, in line with what one 34 Pathway I. Stronger Growth could expect given the low economic growth plaint was more frequently voiced among (with a growth elasticity of employment of 0.7). foreign-owned firms, exporting firms, and those ­ Average earnings have increased a little and job operating in the manufacturing sector. growth has taken place in relatively low wage There is anecdotal evidence that vacancy sectors (Figure 4.8). In the last decade and a half, rates in skilled positions are being filled with the sectors that increased employment the most delays and difficulties. While information on the were retail and hospitality, which created about vacancy rates in the private sector is not readily 12,500 additional jobs, and construction, which available, information for the public sector sug- added about 8,500 jobs. Over 8,000 jobs in man- gests that vacancies for doctors, engineers, IT spe- ufacturing were lost following the 2000 coup and cialists, and other skilled and technical positions the expiration of the various trade preferences. are filled with difficulty. Reflecting shortages of Among higher wage sectors, the only significant specialized skills, a recently completed compen- areas of growth were financial services (2,400 sation survey—a benchmarking of salary levels of jobs) and the public administration (6,700 jobs). more than 140 civil service positions against com- At the same time, firms are finding it diffi- ­ ector—suggested parable positions in the private s cult to find and retain skilled workers. Both larger gaps among accountants, engineers, statis- labor regulation and inadequately educated ticians, surveyors, and medical professionals, workforce ranked high among the most impor- where private sector counterparts typically com- tant constraints. Complaints about labor regula- mand much higher salaries. tion were higher among the smaller firms, while complaints about lack of skills and productivity Are There Problems of Supply? of workers increased with size. The Enterprise Survey (2009) found that 9 percent of the small The supply side of the labor market has bene- firms, 20 percent of the medium-size firms, and fited from positive trends in demography, 26 percent of the large firms surveyed com- human capital, and the labor force. The share of plained about “inadequately educated work- working age population is rising (Figure 4.9), the force.” The SME Business Survey (2003) found rate of labor force participation is rising, and the that 30 percent of the micro firms and 95 percent educational attainment of the population is ris- of the medium-size firms found productivity of ing (Figure 4.10). staff as the most important constraints. The com- Set against these positive trends, Fiji has experienced strong emigration over the past quarter century, particularly among skilled Figure 4.8  Number of Jobs Created from workers. It has one of the largest pools of highly 2000 to 2014 educated migrant workers in OECD countries. While they have contributed to growing remit- 100 tances, the emigration of highly educated and 80 Public services skilled workers represents a brain drain, sub- Business & financial services tracting from current and future productivity 60 Transport growth in the country. There is some interna- Percent 40 Retail & hospitality tional evidence that rising remittances may Construction reduce labor force participation, for example by 20 Utilities raising reservation wages and requiring women Mining 0 to care for the extended family of migrant Agriculture Manufacturing spouses. At the same time, the emigration of –20 highly educated workers could encourage young Source: World Bank staff estimates based on Fiji Bureau of Statistics employment statistics. people to get more education in the hope Pathway I. Stronger Growth 35 Figure 4.9  Population by Age and Sex Figure 4.10  Schooling in Population Age 100 Tertiary complete 75+ Tertiary incomplete 65–69 80 55–59 Secondary complete 45–49 60 35–39 Secondary incomplete 40 25–29 Primary complete 15–19 Primary incomplete 20 5–9 No education –10.0 –5.0 0.0 5.0 10.0 0 1985 1990 1995 2000 2005 2010 Share of population Sources: WDI and Barro-Lee Educational Attainment Data. Female Male Sources: WDI and Barro-Lee Educational Attainment Data. of finding better jobs abroad. There is, however, ture sector said that most graduates were little empirical evidence on the general equilib- theory-based and lacked practical experience, ­ rium impact of emigration, remittances, and while those in the hospitality sector said that labor market outcomes in Fiji. jobseekers lacked housekeeping and cooking skills (ADB 2015). Are There Problems of Mismatch? Excessive or cumbersome regulations could Labor market mismatch—the gaps between increase labor market frictions and mismatch. skills demanded and skills supplied—could Well-designed regulations play a key role in pro- result in lower labor productivity. In Fiji, there tecting equity and promoting efficiency in labor is some evidence that there is a mismatch markets, but firm-level surveys in Fiji identified between the career aspirations of young people labor market regulations as among the most and human resource needs (ADB 2015, Nilan important constraints (Figure 4.1). Smaller firms, et  al. 2006). Also, school leavers are said to be in particular, were more likely to find it difficult returning to their villages and settlements with- or costly to comply with these regulations. A out jobs because they had been focused on recent study by the ADB (2015) finds that Fiji has securing white collar jobs, but could not get relatively stringent labor market regulations them (ADB 2015, Cavu et al. 2009). In addition, compared with other Pacific Island countries a survey of employers by the Fiji National (Table 4.4). University during 2013–14 revealed that many The national minimum wage was raised were dissatisfied with skills and attitudes of job from F$2.00 to F$2.32 an hour in July 2015, seekers. For example, employers in the agricul- and there is a campaign to raise it to F$4.00 an Table 4.4  Minimum Wages and Paid Leave US$/hour and days/year Fiji Solomon Islands Samoa Australia New Zealand Adult minimum wage 1.00 0.56 1.01 13.80 11.03 Sick, personal, or career leave 10 10 10 5 Bereavement or compassionate leave 3 2 3 Annual leave 10 15 10 28 20 Public holidays 10 11 12 ~12 11 Source: ADB 2015. 36 Pathway I. Stronger Growth Table 4.5  Wage Regulation Orders: Minimum Wage and Core Conditions Industry Hourly rates (F$) Weekly hours Other minimum terms and conditions Building, civil and 1.51–2.49 45 Overtime, meal allowance, bereavement leave, electrical engineering subsistence allowance, attendance money Hotel and catering 1.36–1.57 48 Rest day, split shifts, overtime, night shift, meal allowance, bereavement leave Garment industry 0.90–1.07 45 Overtime, meal allowance, bereavement leave Manufacturing 1.51 48 Shift work, rest day, overtime, meal allowance, bereavement leave, night allowance Mining and quarrying 1.34–2.17 45–48 Rest day, out-station allowance, meal allowance, overtime, bereavement leave Printing trades 1.30–1.57 45–48 Overtime, meal allowance, other allowance, bereavement leave Sawmilling and logging 1.74–2.59 45–48 Rest day, subsistence allowance, meal allowance, overtime, bereavement leave Security service 1.20 45–48 Overtime, bereavement leave, meal allowance, transportation provided Wholesale and retail trade 1.36–1.72 45–48 Overtime, meal allowance, subsistence allowance, bereavement leave Road transportation 1.20–1.70 48 Split shift, rostered day off, overtime, subsistence allowance, meal allowance, bereavement leave Source: ADB 2015. hour. In addition to the national minimum wage, To strengthen investment, traditionally, the there are many other, industry-specific mini- government has relied on investing by itself or mum wages and conditions (Table 4.5). The gov- by providing an elaborate system of incentives. ernment also provides (and frequently modifies) Instead, the government could accelerate struc- employment incentives aimed at promoting tural reforms. To reduce policy uncertainty and employment among certain groups. For example, compliance costs, the government could under- this year it has introduced the following deduc- take more careful analysis of the costs and bene- tions: 200 percent for salaries and wages paid to fits of proposed policies before they are first-time employees for the first 12 months of introduced and systematic monitoring of their employment (previously 150 percent), 200 impacts after they are introduced, both in con- percent for salaries and wages paid to students, sultation with stakeholders. Access to land did 150 percent for employees’ education fees, and not feature as an important constraint in the firm 300 percent for salaries and wages paid to dis- surveys but existing literature often cites its neg- abled persons—all “subject to certain condi- ative impact on investment. Cross-country tions.” While they may be well intended, the ­ comparison of costs and efficiency of land detailed nature of the regulations, and their administration suggests that much can be seemingly frequent and sudden changes, raise improved in the performance of land adminis- costs of compliance and increase policy tration in Fiji even without a wholesale change in uncertainty. the customary land tenure system. Strengthening exports requires changing the traditional model of relying on trade pref- erences, which have failed to create lasting com- Policies to Accelerate Growth petitiveness. Instead, the government could To achieve stronger growth, Fiji needs to revamp continue to invest in transport and telecommu- its growth model. nications infrastructure. Although there is not Pathway I. Stronger Growth 37 much Fiji can do about its size and distance from Further, the government could amend the cur- the market, which places it at disadvantage com- rent investment law to bring it in line with good pared to leading exporters in East Asia, it can practice while recognizing national policy reduce the red tape that is making trade across its objectives. borders costlier. To attract FDI, the government To create more productive jobs, these could accelerate structural reforms to reduce reforms to increase private investment and costs and improve the business climate, as dis- exports should help. At the same time, the gov- cussed earlier. In addition, it could review and ernment could encourage hiring by reviewing consolidate the complex system of exemptions and simplifying the complex system of labor and incentives, which is making the tax system in market regulations and employment incentives, Fiji less, and not more, attractive to investors. again in consultation with stakeholders. Notes 1. Can perception data provide useful information 3. Country rankings in 2010 and 2017 are not strictly on the main constraints on the private sector and comparable because of differences in the number be used to prioritize reforms? Clarke (2010) uses of countries studied in the report (183 economies a natural experiment in South Africa to inves- in the 2010 report; 190 economies in the 2017 tigate these questions. When the World Bank’s report). For a comparison over time, the report 2007–08 Enterprise Survey was being carried out, provides an alternative measure, the Distance to a major electricity crisis hit South Africa. The Frontier (DTF), which shows the absolute distance crisis resulted in many more managers saying to the best performance on each Doing Business that power was a serious constraint on enterprise indicator. Somewhat confusingly, the higher the operations—the share rose from about 10 percent ­ DTF score, the better the performance: the DTF of managers before the crisis to close to 50 percent score ranges from 100 to 0, with 100 represent- after the crisis. But it also resulted in greater con- ing the best performance and 0 the worst perfor- cern about most other areas of the investment mance. Based on the DTF, between 2010 and 2017, climate—including taxation, regulation, and other ­ Fiji’s performance deteriorated from 68 to 60. kinds of infrastructure unrelated to the crisis. This 4. The changes include introduction of new taxes, suggests that managers do not fully compartmen- introduction or elimination of exemptions and talize their responses. Moreover, the changes were incentives, and legislative changes. Changes in large enough to suggest that cross-time compari- tax rates or customs and import charges were not sons of perception are difficult. counted. 2. About 56 percent of the firms had access to bank 5. To formalize the notion of sophistication, a mea- loans or lines of credit; 56 percent also used bank sure of export sophistication (EXPY) is con- loans to finance, on average, 35 percent of their structed using the framework developed in investment; 46 percent of the respondents said Hausmann, Hwang, and Rodrik (2007). Roughly they did not need a bank loan to finance their speaking, EXPY is a weighted average of the per investment; and the medium-size firms reported capita income levels of countries that are compet- using equity to finance, on average, 12 percent of itively exporting similar services. An increase in investment. These figures together suggest that EXPY results if Fiji is increasingly exporting those the medium-size firms that already use bank loans services that are also being exported by higher wanted to increase the size of the loans to finance income countries, which is taken to imply that investment but found it difficult. Excess demand Fiji’s service export is becoming more sophisti- was also reflected in the required collateral as pro- cated or more growth enhancing. portion of loans, which were higher than those required for loans to smaller firms. 38 Pathway I. Stronger Growth Chapter 5 Pathway II. Better Access to Services by All Economic Mobility and still a gap in access to some essential public ser- vices between rural and urban areas. Economic Inequality in Opportunities mobility also appears to be weakening: the analy- Although poverty and inequality have been fall- sis of economic mobility suggested that about ing, signs of inequality are rising, which could 6  percent of the poor were upwardly mobile become a source of tension and threaten economic between 2002 and 2008 and about 4  percent and social stability. Urban poverty and visible between 2008 and 2016 (Figure  5.1). This could signs of inequality are increasing with the expan- intensify discontent and social tensions. sion of squatter settlements. Meanwhile, there is Furthermore, inequality in opportunity in access Figure 5.1  Economic Mobility Intra-generational mobility, 2002–08 100 80 households Percent of 60 40 20 0 Population No education Primary education Secondary Tertiary Rural Urban I-Taukei Indo Fijian Male head Female head Wage Employer Self-employed Unpaid Not married Married Household size 1 2 3 4 5 6+ Age of head 25–34 35–44 45–54 55–64 Intra-generational mobility, 2008–13 100 80 households Percent of 60 40 20 0 Population No education Primary education Secondary Tertiary Rural Urban I-Taukei Indo Fijian Male head Female head Wage Employer Self-employed Unpaid Not married Married Household size 1 2 3 4 5 6+ Age of head 25–34 35–44 45–54 55–64 Chronic Downward Upward Non-poor Source: World Bank staff estimates based on the World Bank poverty harmonized database and HIES. Note: Results shown are the lower-bound estimates, which are conservative estimates of economic mobility. See also Chapter 1, Figure 1.4. Economic mobility, and the associated footnote. Pathway II. Better Access to Services by All 39 Figure 5.2  Human Opportunity Index 100 80 60 94.3 99.5 97.9 90.0 88.5 87.4 82.7 12.2 80.9 40 11.4 20 37.3 28.0 0 Pre-school Primary, Primary, Lower Car Internet Electricity Improved Improved Mobile not complete secondary, sanitation water complete complete Dissimilarity Index HOI Penalty Source: World Bank staff estimates based on HIES 2013/14. Note: The Human Opportunity Index measures how individual circumstances such as gender, region, and education of household head affect a child’s access to basic opportunities such as water, education, electricity, and sanitation. It is an estimate of how far a society is from universal access and how equitably access is distributed across individuals. The opportunities are examined among those ages 15 or less to reduce selection bias and to determine if children have similar chances and access to services in life. to services, where they exist, could widen inequal- rate to the last grade of primary school in Fiji ities and reduce economic mobility in the future increased for boys and girls to 98 and 96 percent, (Figure 5.2). respectively, from 82 and 91 percent. Between 2011 and 2015, the basic literacy and numeracy of school children in years 4, 6, and 8 also improved. Finally, between 2010 and 2014, ­ student-teacher Education ratios improved from 27 to 25 in primary schools Fiji enjoys almost universal primary education. and from 16 to 14 in secondary schools. The net primary enrollment rate is 96.8 percent, One of the remaining challenges is reducing well above the Pacific average of 86.4  percent. the school dropout rate. Educational enrollment The net enrollment rate in secondary education begins to fall in the upper secondary and tertiary is 80.3 percent, the highest in the Pacific. Broad education age groups. Inequality begins to access to education has helped reduce the youth emerge in the lower secondary completion rate literacy rate to 99.5  percent, which is above the (Figure 5.2). Careful examination reveals that average for upper-middle-income countries and differences in completion rates are explained by for East Asia and the Pacific. the education of the household head (Figure 5.6). There is little inequality in opportunities to The income of the households, their urban or access basic education (Figure 5.2). Early educa- rural location, and the gender of the child also tion is established throughout the country among contribute to the differences. In rural and mari- children in both rural and urban areas. There is time schools, long travel time, poor transport very little difference in educational attainment, infrastructure, and lack of reliable supply of water and virtually all children between the ages of 6 and electricity for schools contribute to regional and 12 are enrolled (Figure 5.3). differences in completion rates. The quality of education appears to have Ensuring equal opportunity for education been improving. Fiji does not participate in is an important policy objective of the govern- internationally comparable studies such as the ment. Public spending on education has Program for International Student Assessment increased significantly in recent years, rising (PISA). But available within country indicators of from F$252 million in 2011 to F$467 million in education quality suggest improvement. For 2015. In addition, there are a number of subsidies example, between 2000 and 2012, the survival programs, including free buses, school meals, 40 Pathway II. Better Access to Services by All Figure 5.3  Education Attainment of Boys and Girls Ages 15 or Less in 2008 100 4 4 4 4 18 19 21 20 80 60 40 38 36 39 40 6 5 5 5 20 32 33 34 32 0 Boys Girls Boys Girls Rural Urban No education Completed lower secondary Pre-school Completed primary Primary not completed Source: World Bank staff estimates based on HIES 2008/09. and scholarships and student loans for tertiary Public spending on education has been pro- education. As a share of total government expen- poor. The benefits have generally been progres- diture, spending on education has remained sively distributed (Figure 5.7 and Figure 5.8). around 15 percent. As a share of GDP, it has risen Although equally available to all income groups, from 6 to 8 percent, and spending per capita for free education, school meals, and transport sub- the population under age 25 has more than dou- sidies have benefited the poor more. University bled, from F$618 to F$1,253. grants and scholarship schemes are less pro-poor The composition of education spending is because students who attend universities are similar to that of other countries in the region mostly from richer households. (Figure 5.4). Although Fiji appears to spend less The government has implemented specific on secondary education, this is misleading initiatives to reduce dropout rates and improve because it spends more on education overall rural schools. To reduce dropout rates, the gov- (Figure 5.5) so that its spending on secondary ernment has started the “Matua” program, pro- education as a share of GDP is similar to that of viding continuing education for students who other countries. The larger share of “unallocated” have dropped out of schools for various rea- in Fiji possibly reflects the higher overhead of sons—such as living in a rural area or getting serving a smaller, dispersed population. pregnant—to complete formal schooling. To Figure 5.4  Composition of Education Figure 5.5  Level of Education and Health Spending Spending 40 6.0 education spending Percent of GDP Percent of total 30 4.0 20 2.0 10 0 0.0 East Asia Small Middle Upper Fiji East Asia Small Middle Upper Fiji and states income middle and states income middle Pacific income Pacific income Primary share Tertiary share Education Health Secondary share Unallocated Source: WDI. Source: WDI. Pathway II. Better Access to Services by All 41 Figure 5.6  Decomposition of Inequality in Opportunity Varlist 1: region, urban, gender (child) 100 20.1 26.6 29.4 80 41.9 54.9 45.9 51.2 64.6 60 74.2 74.6 33.3 61.8 59.1 40 56.0 52.4 44.6 47.1 20 37.3 35.3 25.7 25.3 18.1 14.3 0 Varlist 2: household head gender, age, education, income 100 14.0 14.9 14.2 80 36.4 33.0 19.1 7.2 51.0 49.4 49.1 49.9 62.7 32.6 6.3 60 35.4 13.0 40 74.0 18.1 59.6 62.5 20 8.7 48.6 43.5 35.7 41.2 33.2 19.4 25.4 0 Varlist 3: all variables 100 7.6 12.1 11.3 15.0 16.1 21.0 12.2 80 17.7 35.2 10.9 14.8 18.4 23.7 38.1 40.3 60 34.2 24.9 41.1 40.1 10.7 21.9 41.6 40 14.1 43.6 16.3 14.9 34.2 26.6 15.6 47.2 20 35.9 27.8 20.1 33.0 25.0 17.1 13.7 15.3 9.7 0 Pre-school Primary, Primary, Lower Car Internet Electricity Improved Improved Mobile not complete secondary, sanitation water complete complete Region Urban or Rural Gender (Child) Income (HH) Young (Head) Male (Head) Education (Head) Source: World Bank staff estimates based on HIES 2013/14. Note: The results show the Shapley decomposition of the dissimilarity indexes shown in Figure 5.2. Each color block represents the marginal contribution of a child’s circumstance (e.g., gender, region, and education of household head) to the dissimilarity in the child’s access to basic opportunities (e.g., education and electricity). increase access to education in remote areas, the materials and experienced teachers. To improve government has introduced distance learning the quality of teaching throughout the country, and flexible learning in nine primary and eight the government is providing an allowance to secondary schools. The programs help both stu- encourage teachers to go to rural and maritime dents and teachers get access to curriculum areas. 42 Pathway II. Better Access to Services by All Figure 5.7  Beneficiaries of Government Figure 5.8  Beneficiaries of Government Education Budget, 2015 Education-Related Subsidies, 2015 100 100 80 80 Percent Percent 60 60 40 40 20 20 0 0 Primary Secondary Tertiary Free bus fare Free University education education education for children education scholarship q1 (lowest) q2 q3 q4 q5 (highest) q1 (lowest) q2 q3 q4 q5 (highest) Source: World Bank staff estimates based on HIES 2013/14. Source: World Bank staff estimates based on HIES 2013/14. Health report having access to health services (Asante et al. 2017). The country has a good network of In health, Fiji has largely failed to meet the health facilities—nursing stations, health cen- Millennium Development Goals (MDGs). At ters, and subdivisional hospitals—that provide the same time, as the country has become richer, primary and secondary care (Box 5.2). Divisional non-communicable diseases (NCDs) have and specialized hospitals provide a range of ser- become widespread. About 82 percent of deaths vices at the tertiary level. There are 1,726 inpa- in Fiji are due to NCDs, 10 percent due to com- tient beds in Fiji—a ratio of about 2 beds per municable diseases, and the remaining 8 percent 1,000 people. Recent reforms to decentralize out- due to other causes (Box 5.1). patient services from divisional hospitals to The government is the primary provider of health centers is believed to have further health care and access to health care is wide- increased access to services. spread. About 75 percent of the population Box 5.1  Causes of NCDs in Fiji Fiji has a high prevalence of NCDs, or “illnesses and injuries that are not communicable or infectious in nature” but are “related to lifestyle factors.” They encompass conditions such as “preventable blindness, asthma, environmental and inherited cancers, mental health disorders, as well as injuries, drowning, and other related accidents” (Ministry of Health and Medical Services 2014a). In 2015, NCDs accounted for 84 percent of total deaths in Fiji, compared to an average of 72 percent in the East Asia and Pacific region and 76 percent in the upper-middle-income countries. The three most prevalent NCDs in Fiji are ischemic heart disease (hardening of the arteries), diabetes, and stroke. The leading risk factors for NCDs are obesity, poor diet, and high blood sugar (Global Burden of Disease 2013). According to the NCD STEPS surveys of the World Health Organization (WHO), the frequency of risk factors increased between 2002 and 2011. For example, obesity has increased from 24 to 32 percent of the population surveyed and those with high blood glucose from 20 to 30 percent. The Ministry of Health and Medical Services’ NCD Strategic Plan 2015−19 aims to continue its focus on prevention and to strengthen preventative care at grassroots levels. For example, the Plan discusses pro- moting awareness, counselling, and early detection through better training and appropriate tools at the levels of community health workers, nursing stations, health centers, and specialized outpatient services. Pathway II. Better Access to Services by All 43 Box 5.2  An Overview of the Health Care System in Fiji Primary health care services are delivered through a network of 98 nursing stations, 84 health centers, and 19 subdivisional hospitals (Asante et al. 2017). Nursing stations are the first point of contact with the formal health system for rural people. Each of the country’s four administrative divisions (Central, Northern, Western, and Eastern) has at least 20 functional nursing stations. A nursing station is typically staffed by one registered nurse and caters for between 100 and 5,000 people. They deliver the most basic of health services, including maternal and child health care and family planning. Health centers, in con- trast, are staffed by either a doctor or a nurse practitioner. The number of staff ranges from 2 to 20 and they usually serve between 3,500 people in rural areas and 10,000 in urban areas. Health centers provide comprehensive primary health care and also serve as the first level of referral for nursing stations. Secondary health care begins in subdivisional hospitals but more complex cases are referred to the three divisional and two specialized hospitals which provide secondary and tertiary-level care. There are about 130 private general practitioner clinics that provide services to complement those pro- vided by the public sector. These clinics are largely day clinics and provide general outpatient services. Public spending on health has increased of centers is the most pro-poor, with the poorest late but falls well below the levels of Fiji’s peers. quintile receiving 61 percent of the benefits and It has increased from F$150 million in 2011 to the richest quintile only 2 percent (Figure 5.9). F$267 million in 2015 (3.9 percent of GDP)— Unlike nursing stations, health centers and hos- lower as a share of GDP than the averages for pital outpatient and inpatient services appear to East Asia and the Pacific (4.8 percent), small be used by all Fijians: the poorest and richest states (4.6 percent), and upper-middle-income quintiles receive almost equal benefits. Public countries (4.2 percent) (Figure 5.5). In terms of spending on private hospitals and clinics the composition of current spending, in 2014, accounts for less than 7 percent of spending. The hospitals received 64 percent of the total, and distribution of the benefits from this spending is nursing stations and health centers—which strongly pro-rich (Figure 5.9). The richest quin- are used more heavily by the bottom tile received over 37 percent of the benefits of 40 percent—15 percent (Ministry of Health and private general practitioner clinics and 41 percent Medical Services 2014b). In terms of the types of of the benefits of private hospital outpatient ser- services provided, curative care accounted for vices. The bottom 20 percent received less than 42 percent of current spending, while preventa- 1 percent and 2 percent, respectively, of the ben- tive care accounted for 33 percent. Spending on efits of these services. Private hospitals were not preventative care has expanded significantly in used at all by the poorest quintile. recent years, consistent with the government’s Although overall spending on health has NCD strategy (Box 5.1). Within preventative been pro-poor, there is scope for increasing care, information, education, and counselling spending on health services that are better tar- programs accounted for the largest share of the geted at the bottom 40 percent. As mentioned spending, followed by monitoring and early dis- earlier, 64 percent of government spending for ease detection, all of which are important ele- health was on hospital services, compared to ments of the strategy. 15  percent on nursing stations and health Public spending on health has been pro- centers. poor. In total, the bottom 40 percent receives To expand coverage of health services and 43 percent of the benefits. Spending on nursing improve health outcomes, the government is 44 Pathway II. Better Access to Services by All Figure 5.9  Distribution of Health Care Benefit: Public Sector 100 80 Percent 60 40 20 0 Nursing Health Hospital Hospital GP/clinic Hospital Hospital station center outpatient inpatient outpatient inpatient Public sector Private sector q1 (lowest) q2 q3 q4 q5 (highest) Source: Asante et al. 2017. considering contracting out health services to There are four main drivers of the growth of the private sector. The experience of other squatter settlements: developing countries with such policies has been • Accelerating migration from rural to urban mixed. In some countries, the experience has area. Greater Suva accommodates about been positive: the private sector has been more 244,000 people, or 57 percent of the total efficient and responsive to patient needs than the urban population, and is growing at 1.7 percent public sector because of market competition. In a year, which is more than double the national others, it involved trade-offs: outsourcing population growth rate. Urban infrastructure resulted in inequalities in access to health care, is unable to keep up with growing demand. because the poor were unable to pay for private • House price inflation. According to the services. Additional research may be needed to Housing Authority, the lowest possible price provide sound policy advice in this area. Such for a two-bedroom 60 m2 house is F$82,000. research needs to be based on up-to-date infor- This is too expensive for 65 percent of the mation comparing the costs of service delivery urban population. The supply of homes at this under private and public hospitals. Information price on the market is also scarce. Even the on the distribution of access to hospital services Housing Authority, with social obligations, in the population by income and geography will only sets aside 5 percent of its lots and units in also be needed to provide the baseline. this price range. • High construction costs. The challenges include the use of expensive construction materials, a Housing shortage of skilled labor, and a slow and com- Fiji has a housing crisis in urban areas, which is plex process of obtaining land leases and con- reflected in the growth of squatter settlements. struction permits. In addition, the annual The latest estimates suggest that 9 percent of the cyclone season, which lasts from November to total population and 16 percent of the urban April, brings heavy rain and frequent floods, population live in such settlements, most of them especially in Greater Suva, limiting the pro- in Greater Suva. The majority of the houses in ductive construction period. these settlements are made of used timber and • The limited reach of housing finance. corrugated iron and are densely packed. They are Commercial mortgage lenders typically lend vulnerable to fires, flooding, and landslides. F$100,000–200,000, thus serving only house- Improper planning is a common feature of the holds in the top income quartile. The com- settlements (Nemaia 2011). mercial mortgage rate is about 7 percent a Pathway II. Better Access to Services by All 45 year, which is reasonable relative to the annual The assessment of government spending on inflation rate of around 4 percent, but lenders housing highlights two issues: are not interested in going “down market” • The first is insufficient targeting of public given the higher risk of serving lower-income housing spending and subsidies. Around households. The government-owned Housing 40 percent of the housing budget in 2016/17 Authority provides mortgages to low- to has been used to support the First Time Home ­ middle-income households, but loan perfor- Buyer program, which provides a subsidy of mance has been poor. While commercial F$10,000 to buy land or F$5,000 to buy a mortgage lenders’ NPLs have been around home. This is a significant subsidy, which is 3 percent of the total, the Housing Authority’s likely to benefit high-income households. rate in 2011 was 39 percent. In 2015, the rate Similarly, the F$500,000 transfer to the was down to 14 percent because of a govern- Housing Authority to write off its NPLs was ment subsidy to allow the Authority to write likely regressive (Table 5.1). off bad loans. • The second is the conflicting objectives of the Keenly aware of the needs, the government two government agencies responsible for has been implementing numerous subsidy pro- housing. The Housing Authority has a man- grams to expand access to adequate and afford- date to develop affordable homes and provide able housing. In FY2016/17, the budget for affordable home loans to low-income custom- public housing was F$25 million. The ers. The Public Rental Board has a mandate to medium-term projections show an increase to ­ provide affordable rental housing and subsi- around F$30 million. In addition, the govern- dize rent for households with an annual ment has given loan guarantees and soft loans, income below F$10,000. As SOEs, both agen- including a guarantee of a F$50 million loan cies are expected to make a profit. To meet its from China Exim Bank to the Housing Authority profitability objective, the Housing Authority in 2010 for the development of 1,500 residential has targeted households with an annual land lots, a guarantee of a F$20 million loan from income of more than F$50,000. For instance, China Exim Bank to the Public Rental Board in in its Valelevu Center project in which it is 2010 for the construction of 208 rental units, and developing 900 lots, only 50 are for lower-­ a soft loan of F$25 million from the Reserve income segments. Similarly, the Public Rental Bank of Fiji to the Housing Authority in 2010 for Board’s efforts to increase profits are leading housing mortgage lending. to an upward drift in the incomes of its target renters (Figure 5.10). Table 5.1  Government Housing Subsidies, 2016/17 De facto income targeting Program Share of housing subsidy (%) High-mid income First-time home buyer  40 High-low income Housing authority  22 Low income Squatter upgrading  23 Low income Lagi Lagi development   8 Low income Public rental board   4 Special needs HART   2 Total 100 Source: Government of Fiji Budget Estimates 2016/17. 46 Pathway II. Better Access to Services by All Figure 5.10  Distribution of Benefit of Public Rental Board Subsidies 1,000 0 273–42 273 273 273 273 –315 –583 –643 –778 –1,460 F$ –1,000 –856 –917 –1,051 –2,000 –1,734 –3,000 q1 (lowest) q2 q3 q4 q5 (highest) Public expenditure Household expenditure, average rent paid Net benefit Source: World Bank staff estimates based on HIES 2013/14. Connective Infrastructure location (Figure 5.6). In access to electricity, the rural-urban divide is particularly acute, but Access to basic infrastructure in Fiji is good household income also has a larger contribution compared to that of its peers. The majority of to inequality, perhaps because wealthier house- the population has access to improved water and holds can afford generators in locations that lack sanitation (see Figure 5.2). A relatively large electrical connections. Finally, access to the share of the population also has access to the Internet is unevenly distributed across the coun- Internet. Far fewer Fijians, however, have access try. Almost no households have access to the to electricity, reflecting the challenge of difficult Internet in the Eastern Division or the Northern terrain, sparsely populated areas, and widely Division. The high costs of services such as scattered islands. broadband may also be putting the bottom Global evidence on social mobility shows 40 percent at a disadvantage. that less-connected municipalities and islands With donor support, the government has are often those with the highest levels of pov- rapidly increased investment in connective erty. This was true in Fiji for the period 2002–08 infrastructure. Capital transfers to the Fiji Road when households living in urban areas were Authority and the Fiji Electricity Authority more much more likely to have escaped poverty. than doubled between 2010 and 2016. Fiji has During 2008–13, perhaps related to improving also invested in the trans-Pacific ICT cable conditions in rural areas (or a deteriorating situ- connection. ation in urban areas), escaping poverty was more The efficiency of spending could be likely in rural areas.1 improved. With regard to roads, the backlog of There are specific challenges of connectivity investment is large, and the government has not in more isolated rural areas. The analysis of the made adequate provision for maintenance, Human Opportunity Index shows that while repeating past mistakes. The execution rate is inequality in access to improved water and sani- also low, in part because of bad weather. With tation across groups is small, the remaining regard to electricity, the government has sought inequality is explained by the households’ to improve services by arranging private Pathway II. Better Access to Services by All 47 participation in the Fiji Electricity Authority for developed financial market among the Pacific some time now, but it has not yet succeeded, in Islands. There are 12 commercial bank branches part because of lack of agreement on community per 100,000 households, which is above the aver- service obligations. To boost ICT investment and age in the East Asia and Pacific region but less expand related services and employment, the gov- than in Samoa or Tonga. The vast majority of the ernment has provided tax and customs incentives, adult population report using financial services, including the development of free trade zones. and most of them use formal financial services. There is scope for the private sector to play About 50 percent of the bottom 40  percent use a greater role in infrastructure investment. formal financial services (Figure  5.11). This This could help accelerate the delivery of new achievement is in part a result of government projects using private sector skills and finance policy. Since 2011, the government has started and allow the government to use its scarce transferring social welfare b­ enefit payments to resources where they are most needed. Achieving approximately 22,000 beneficiaries using elec- this will require updating and strengthening the tronic transfers to no-fee bank accounts. In addi- public-private partnership framework, formulat- tion to reducing processing costs, duplicates, and ing regulatory standards, reviewing the price- fraudulent claims, the initiative gave free bank setting function of the Commerce Commission, accounts to previously unbanked welfare reviewing and strengthening the competition recipients. policy framework, and building regulatory The challenge is to bridge the geographic capacity in government agencies. and gender divides. About 40 percent of the population in the Eastern Division do not have access to formal financial services (Table 5.2). Financial Inclusion About 12 percent of rural administrative units do Fiji performs well in financial inclusion of the not have any formal financial access point. bottom 40 percent. It has the largest and most Gender disparities are also significant in Fiji: Figure 5.11  Access to Financial Services by Bottom 40 Percent Fiji 43% 6% 12% 39% Samoa 21% 10% 17% 52% Solomon Islands 10% 5% 39% 46% 0 10 20 30 40 50 60 70 80 90 100 Percent Banked Other formal Informal only Excluded Source: Reserve Bank of Fiji 2016c. Table 5.2  Financial Inclusion by Division Percent of population Central Western Northern Eastern Total Banked 67 58 51 41 60 Other formal 4 4 4 2 4 Informal only 5 5 25 16 9 Excluded 23 32 21 40 27 Total 100 100 100 100 100 Source: Reserve Bank of Fiji 2016c. 48 Pathway II. Better Access to Services by All Figure 5.12  Account at a Financial Institution by Gender Percent of population aged 15+ Total Male Female 0 10 20 30 40 50 60 70 80 Fiji Samoa Solomon Islands Source: Pacific Financial Inclusion Program 2016. women are 16 percentage points less likely to Reducing the costs of sending and receiving have a bank account than men (Figure 5.12). remittances could make a big difference to the The government invests strongly in finan- bottom 40 percent. Remittances are important cial literacy. Recognizing the importance of for entire distribution of income, but they financial literacy to make progress on financial account for a greater share of income for poorer inclusion, since 2011, the government has imple- households, especially in rural areas (Chapter 1). mented a number of initiatives to strengthen The costs of international remittances continue financial literacy among children and adults. to be high (Box 5.3) and could rise because of These include the integration of financial educa- tighter regulations against money laundering tion in the school curriculum from class 1 to and the financing of terrorism (Alwazir et al. form 6; the launch of financial literacy radio pro- 2017). Domestic remittances require a conve- grams in English, Fijian, and Hindi; and adult nient, secure mechanism that accommodates literacy outreach programs to rural communities high-frequency, low-value transfers. At present, provided by licensed financial institutions. about 51 percent of people surveyed use the post Box 5.3  Costs of Remittances in Fiji Personal foreign remittances are a significant source of support for Fijians and mostly originate from Australia, New Zealand, the United States, and Fijians serving as United Nations peacekeepers. This offi- cial figure may underestimate the actual volume as it is still common for Fijians to carry money home personally or to send it through friends and relatives. Official personal foreign remittances equate to nearly F$250 per person a year or F$100 a month per household. There are a number of remittance pro- viders, including all the major banks and international remittances companies, such as MoneyGram and Western Union. The fees charged by these providers range from 9 to 35 percent, with an average of close to 18 percent. It can take anywhere from one hour to five days to receive remittances and there is no apparent link between the cost and the speed of service. Low-volume transfer business is dominated by Post Fiji, which transfers approximately F$5 million per month domestically. The cost of a Post Fiji trans- fer starts at F$3 and increases according to the amount transferred. It is likely that the average cost falls between 3 and 7 percent of the value of the transfer. Source: Pacific Financial Inclusion Program 2009. Pathway II. Better Access to Services by All 49 office for domestic transfers, even though this is formal justice system is also more difficult, so more expensive than using mobile money, which rural women frequently rely on traditional is used by only 3 percent of the people surveyed. justice, which promotes reconciliation rather Improving access to the Internet in rural areas than protection or punishment. Women in rural could reduce the cost of receiving remittances. areas are also less aware of the services that are available and how to access them. However, there have been efforts to train rural health workers Gender Inequality and Violence and the police to provide coordinated services to victims of gender-based violence. Against Women Women in Fiji have unequal access to economic opportunities and public services, and they Policies to Improve Access suffer violence and abuse (Box 5.4). According to the survey by the Fiji Women’s Crisis Center in to Services for All 2011, 64 percent of women who have been There are several opportunities for improving involved in an intimate relationship reported access to services. experiencing physical or sexual violence by their In education, the government could help husband or partner. The rate of non-partner vio- maintain quality by targeting spending to rural lence against women or girls is also high, at and remote schools that are costly to run. It 31  percent. A study found that 43 women are could also continue to address the dropout rates injured every day as a result of domestic violence, in secondary education by continuing with the 1 of whom will become permanently disabled, 10 Matua program, which helps people who have will lose consciousness, and 16 will need medical dropped out of school to return, by expanding it attention. According to one estimate, the direct to strategically located and relevant secondary and indirect costs of violence against women in schools. This matters because of the importance Fiji is F$136 million, or 7 percent of GDP (DFAT of education in employment outcomes. 2015). In health, the government could continue Several services protect and support women to explore opportunities to involve the private who are subject to abuse, discrimination, or sector. The governments of many developing violence. These are primarily coordinated by the countries have implemented or are considering Fiji Women’s Crisis Center, which, for nearly policies of contracting out health services to the 30  years, has been providing crisis counselling private sector, with mixed results. The propo- and referrals to legal, medical, and support ser- nents of this trend argue that the private sector vices for women and children who are survivors has been more efficient and responsive to patient of violence. Crisis and emergency shelters are needs because of market competition. Others, concentrated in urban centers and are often run however, have highlighted inequalities in access by civil service organizations, such as Medical to health care resulting from the inability of the Services Pacific and Empower Pacific, or faith- poor to pay for private services. The government based organizations, such as the Salvation Army could further investigate the cost of hospital ser- and Pacific Counselling and Social Services. vice delivery under private and public provision Relevant public health services are available in and carefully monitor the results of its planned some urban areas. project to introduce private management of a But women in rural areas have limited hospital, particularly the fiscal costs of subsidiz- access to these services. Women living in these ing services for poor patients. areas, such as the Eastern Division, continue to In infrastructure, there is also scope for the have limited to relevant services. For example, private sector to play a greater role. The govern- police posts are harder to reach. Access to the ment has already pursued private participation in 50 Pathway II. Better Access to Services by All Box 5.4  Uneven Progress on Gender Equity The Gender Inequality Index of the United Nations Development Program (UNDP) reflects g ­ ender- based inequalities in three dimensions: reproductive health, empowerment, and economic activity. Fiji scores 0.418 in the 2014 index and ranks 87 of 188 countries, better than, for example, Samoa (97) and Tonga (148). According to the World Economic Forum (2015), Fiji scores 0.65 in the Gender Gap Index and ranks 121 of 145 countries. Its ranking has been declining since 2009. In terms of the subindexes, Fiji ranks the lowest (129) in women’s economic participation and opportunity. Reproductive health. According to the 2015 Pacific Regional MDGs Tracking Report, maternal mortality rates in Fiji are among the lowest in the Pacific at 19.1 per 100,000 live births. Almost 100 percent of deliveries in Fiji are attended by skilled attendants, reflecting broad coverage of public health services. Women in rural areas and outer islands are more isolated from maternal and infant health services, but the Ministry of Women, Children, and Poverty Alleviation has a food voucher program to encourage rural women to attend rural health clinics regularly for prenatal and postnatal assessments. Fiji’s total fer- tility rate declined from 3.1 in 2000 to 2.6 in 2013. However, the use of contraceptives was low at 38.4 percent in 2013. The fertility rate for women ages 15–19 was 44 per 1,000 live births in 2013, sug- gesting that teenage pregnancy is a significant issue. Health. Women in Fiji have a longer life expectancy than men (73 years compared with 67 years), but both groups are increasingly susceptible to NCDs and related disabilities. According to the WHO, obesity is a common issue: 41 percent of females were categorized as being obese as compared to 20 percent of men. The proportion of deaths among those ages 15–49 years due to NCDs increased for women, from 65 percent to 72 percent between 1995 and 2010, while it remained the same for men, at 64 percent. Education. Fiji has effectively achieved gender parity in education at the primary level. In 2014, the net primary enrollment rate was 97 percent and 96 percent for boys and girls, respectively. Meanwhile, at the secondary level, the net enrollment rate is higher for females, at 88 percent, relative to 79 percent for males. Policies and programs to address literacy and gender disparity are specified in various policy doc- uments of the Ministry of Education. The Ministry of Education’s Sector Strategic Development Plan 2012–2014 also targets an increase in women’s leadership positions in schools. Labor force participation. Fiji has a relatively low rate of female labor force participation for its income. It is 47 percent, compared to 82 percent for men (ADB 2015). However, Fiji has relatively generous mater- nity leave. It is the only Pacific Island country offering three months leave. Women’s earnings remain sig- nificantly lower than men’s. Young women, in particular, have a high unemployment rate. Women make up 74 percent of unpaid home workers, and at least according to a 2005 analysis, work 26–31 percent more hours than men in total due to their household responsibilities, despite working fewer hours in paid employment. The legal marital property regime in Fiji does include a recognition of nonmonetary contri- butions to the household. Gender-based violence. According to a survey conducted by the Fiji Women’s Crisis Center in 2011, of women who have been involved in intimate relationships, 64 percent reported experiencing physical or sexual violence by a husband or an intimate partner. The rate of non-partner violence against women or girls is also high: 31 percent reported an experience of physical or sexual violence since the age of 15 by someone other than intimate partners or husbands. Voice and agency. Women’s participation in politics has been increasing. The Political Parties decree of 2013 required 5 percent of candidates to be women. In 2014, out of the 248 candidates approved by the Fijian Elections Office, 41 were women, representing 16 percent, an increase of 4 percentage points over the 2006 elections. After the 2014 elections, women made up 8 of 50 members of Parliament. As a pro- portion of the total, this is an improvement over 2006, when they made up 8 of 71. The new Speaker of Parliament is a woman, and there are two female ministers in the current cabinet. Pathway II. Better Access to Services by All 51 ports and electricity. Continued public invest- prospective mortgage lenders to better target ment and more private participation in infra- mortgage-linked subsidies. To increase the sup- structure provision could increase investment ply of affordable rental housing, the Public Rental and economy-wide competitiveness. Encouraging Board could shift from the building of rental greater private sector participation in infrastruc- units to management and maintenance of the ture will require updating and strengthening the units on behalf of private investors, while the framework for public-private partnerships, for- government could provide capital subsidies to mulating new regulatory standards, reviewing encourage the private supply. the price-setting function of the Commerce In gender-based violence, effective protec- Commission, reviewing and strengthening com- tion of women requires greater outreach and petition policy, and building regulatory capacity stronger awareness programs. This would rein- within relevant government agencies. force women’s rights to get help and stop the vio- In housing, the government could improve lence. Frontline service providers need to be access to housing in three ways. To reduce effectively trained to respond sensitively so that building costs, the housing authorities could women are encouraged to seek help. Emergency pilot smaller, standardized houses that could be accommodation for women escaping violence produced on a large scale with prefabricated needs to be expanded, in urban and, especially, materials through a public-private partnership. rural areas. Frontline service providers should be To extend mortgage services to low-income better resourced to increase capacity. households, the government could work with Note 1. One caveat of this analysis is that it was assumed question have migrated, this would show up as that households’ characteristics stay the same upward mobility within a rural area rather than as across the synthetic panel, which also included a result of migration. urban-rural residence. If the households in 52 Pathway II. Better Access to Services by All Chapter 6 Pathway III. Building Resilience Climate Resilience to live in squatter settlements. In addition, lim- ited enforcement of land use regulations and Fiji depends on natural resources for its criti- poor construction practices have led to the pro- cal industries. Tourism is the single largest liferation of settlements in increasingly steep industry in Fiji, accounting for 38 percent of slopes or along river protection areas in the GDP and 48 percent of total exports. While agri- peripheries of the main cities. culture has declined in importance, subsistence The concentration of population and criti- agriculture, forestry, and fisheries remain as cal infrastructure in cities also increases the important sources of rural livelihood. Ensuring concentration of risk (Figure 6.1). Exposure is environmental sustainability is therefore impor- highest in Suva, at US$3.6 billion, Naitasiri, at tant for inclusive growth. US$2.7 billion, and Nadi, at US$2.3 billion. As a Climate change poses a major threat to sus- result of concentrated infrastructure and invest- tainability of development. Natural disasters ments, the average annual economic losses due are the most tangible aspect of climate change. to cyclones are also highest in these areas Each year, natural disasters cause an average loss (Figure 6.2). Suva had the highest average annual of about 1.8 percent of GDP (EM-DAT data- losses at US$9.6 million, while Naitasiri and Nadi base). With climate change, the annual average had average annual losses of US$5.4 million and loss from cyclones alone is expected to increase US$5.9 million, respectively. to 2.5 percent of GDP and as much as a loss of Only a small portion of the economic losses 23 percent every 50 years (PCRAFI 2015). These of disasters is covered by insurance. Public losses add to fiscal pressures and constrain infrastructure has limited insurance coverage, wealth accumulation, lowering potential growth. leading to delayed reconstruction efforts after A study of the effects of 6,700 cyclones on long- disasters. For the private infrastructure, the com- run economic growth found that they perma- mercial sector is said to be better insured. nently lower income relative to the pre-cyclone Residential property, however, is largely unin- trend (Hsiang and Jina 2014). Natural disasters sured, possibly because of a lack of understand- also harm shared prosperity because they hit the ing or an expectation of government assistance bottom 40 percent the hardest, who tend to have in case of natural disasters. Moreover, many less diversified assets, less secure jobs, and less dwellings are not compliant with the building access to insurance. code, which prevents them from getting insur- ance. Because of expensive construction costs, How Resilient Are Fiji’s Cities? people choose to build their dwellings them- Largely unplanned urbanization has exacer- selves or to hire cheaper, unlicensed builders. bated environmental challenges and the impact Squatter settlements are excluded from insur- of disasters. Between the 1996 and 2014 cen- ance for the same reasons. suses, the average annual growth rate of the As a result, most losses are absorbed by the urban population was 1.1 percent a year, com- government, which predominantly finances pared to 0.1 percent for the rural population or post-disaster losses by increasing public debt. 0.5 percent for the population as a whole. Limited With tighter fiscal situations, this approach may urban planning and high poverty in urban areas no longer be sustainable in the future (see the fol- has caused around 16 percent of urban dwellers lowing section). Pathway III. Building Resilience 53 Figure 6.1  Building Exposure in Fiji (in 2010 US$) 465,929–75,256,000 75,256,001–214,930,700 214,930,701–618,014,560 618,014,561–1,711,186,050 1,711,186,051–3,640,675,480 Source: World Bank staff estimates based on http://pcrafi.sopac.org/. Figure 6.2  Average Annual Losses Due to Cyclones and Earthquakes (in 2010 US$) 3,217–253,344 253,345–717,248 717,249–1,648,744 1,648,745–3,132,282 3,132,283–9,562,613 Source: World Bank staff estimates based on http://pcrafi.sopac.org/. 54 Pathway III. Building Resilience Building urban resilience requires addi- poor maintenance and service delivery. tional government actions in three key areas. Community response is not well utilized either. There is more than adequate capacity at • Infrastructure. To insure against disaster risks, community levels to respond to natural disas- the government needs to first assess the disas- ters (People’s Community Network and UN ter resilience of critical public infrastructure, Habitat 2016). Even within squatter settle- develop upgrade plans, and cost them. ments, there is generally some form of active Planned infrastructure investments and community organization that can mobilize to reconstruction projects should also aim to meet needs during emergencies. However, incorporate resilience and adaptation in the community responses are usually weaker and design. To expand private insurance, the gov- insufficient in larger towns and cities. For ernment needs to encourage compliance to example, in Lami (part of Greater Suva), there building standards and enforce appropriate is no formal evacuation strategy. In February, land use. It also needs to continue exploring when there was a tsunami warning in Suva, ways to expand appropriate risk insurance workers and residents took to cars to evacuate, products, for example, by subsidizing premi- causing massive traffic jams, even along the ums for low-income households or providing coast. universal coverage financed by special taxes. • Urban planning. Modern urban planning is missing. The urban plan for Suva, for exam- How Resilient Are Fiji’s Rural Areas? ple, was developed in 1978. The Fiji National Building Code was first commissioned in Fiji depends on natural resources to a greater 1990, and there have been no significant extent than many other middle income coun- updates since then. Fiji has long pursued ad tries. Tourism contributes 38 percent of GDP hoc policies and initiatives to address post-­ and depends on tropical rainforests, white sandy disaster recovery for buildings, rather than a beaches, coral reefs, marine life, and clear blue comprehensive update of building codes as a waters. While agriculture has declined in impor- preventative measure. tance, it contributes about 8.7 percent of GDP, • Governance. Planning authority is fragmented forestry and fisheries contribute an additional across a number of agencies with varying 1.5 percent of GDP, and mining contributes jurisdictions and levels of authority, and a about 0.8 percent of GDP. In total, over 50 percent platform for coordination is lacking of GDP is dependent on natural resources. (Table  6.1). This leads not only to uncoordi- Natural resources are important for the nated and unintegrated planning but also to livelihood of the rural population. Even with Table 6.1  Planning Authorities Authorities Main roles Environment, Infrastructure and Transport Coordinate urban planning, management, and growth in urban areas and oversee the squatter settlement upgrading programs Fiji Roads Authority, Water Authority of Fiji, and Main government agencies responsible for the management of Fiji Electricity Authority national and municipal infrastructure Town councils Prepare planning but their authority usually does not extend to peri-urban areas outside of defined town boundaries Local area advisory authorities Govern building and development of peri-urban areas Central Board of Health Oversee the local area advisory authorities in their tasks iTaukei Lands Trust Board Manage and administer native landholdings Source: World Bank staff report. Pathway III. Building Resilience 55 Figure 6.3  Sources of Rural Household mangroves and coral reefs provide habitats for Income fish and protect rural communities from cyclones. Forests contribute to agriculture by 100 controlling erosion and the flow of water and 80 44 39 39 36 36 thus mitigate damage from floods. However, the use of some of these resources Percent 60 18 23 40 15 21 29 is not sustainable. Coastal fisheries are poorly 23 25 25 26 regulated and overexploited. Illegal fishing is 20 24 18 prominent in the high-value coastal fisheries, 17 16 15 10 0 1 2 3 4 5 such as bêche de mer. Given the projected popu- (Lowest) (Highest) lation growth and the decline of the coastal fish- Subsistence Agribusiness eries due to overfishing, it is likely that Fiji will Wages and salaries Other income not produce enough fish to meet its needs in the Source: World Bank staff estimates based on HIES 2013/14. future. Native forests are being depleted because of deforestation driven primarily by conversion to commercial agricultural crops such as taro, Figure 6.4  Breakdown of Agribusiness kava, and ginger. They are also being degraded Incomes by unregulated logging and to a lesser extent by forest fires, firewood collection, and the spread 100 7 4 4 4 2 of invasive species. 3 3 4 5 5 Building rural resilience requires that the 80 government develop an integrated set of policies 59 56 60 66 64 to address the drivers of natural resource degra- Percent 66 40 dation. This requires (a) reviewing the consistency 17 21 29 of sectoral policies, notably in agriculture, mining, 20 10 15 12 tourism, and fisheries, to eliminate perverse incen- 11 11 12 8 0 1 2 3 4 5 tives that lead to conversion or degradation of for- (Lowest) (Highest) ests, including mangroves; (b) strengthening the Fisheries Sugar Other crops enforcement of regulations, such as the forest har- Livestock Handicrafts vesting code, and promoting good agricultural Source: World Bank staff estimates based on HIES 2013/14. practices to guide agricultural intensification; and (c) expanding afforestation and reforestation programs. To safeguard coastal fisheries, the increasing urbanization, about 48 percent of the government needs to establish and enforce a population still live in rural areas, and 38 percent ­ community-based fishery management system, of them live below the basic needs poverty line including for high-value nearshore resources such (Chapter 1). The rural bottom 40 percent derive as bêche de mer. The focus on management of 40 percent of their incomes from subsistence or aquaculture needs to shift toward the control of commercial agriculture (Figure 6.3 and environmental impacts rather than the promotion Figure 6.4). Even for the higher quintiles, subsis- of expansion. The government should also invest tence agriculture remains an important source of in a system to effectively monitor trends. livelihood, contributing around 10–15 percent of income (Figure 6.3). In addition to contributing directly to rural livelihood, the natural resources increase the Fiscal Resilience resilience of the rural community. Healthy To rise to the development challenges identi- coastal and nearshore marine ecosystems such as fied and protect the vulnerable from frequent 56 Pathway III. Building Resilience Figure 6.5  Tax Revenue, Average 2010–14 Figure 6.6  General Government Balance Percent of GDP Percent of GDP –0.5 –1.1 23 –2.2 17 14 13 –3.5 11 –4.2 –4.6 –4.7 Fiji Small World Upper East Asia & –5.6 states middle Pacific –5.9 income 2010 2011 2012 2013 2014 2015 2016p 2017p 2018p Source: World Bank staff estimates based on WDI and Government of Fiji Budget Estimates. Source: World Bank staff estimates based on WDI and Government of Fiji Budget Estimates. shocks, the government must build fiscal six-fold in nominal terms, followed by current space. In recent years, however, rising expendi- spending on education and health, which rose by ture and frequent natural disasters have eroded 164 and 148 percent, respectively—consistent fiscal space. Resources available to the govern- with the government’s development strategy. ment are relatively high. Tax revenue is about Subsidies and transfers also expanded as a share 23 percent of GDP, higher than in peer countries of current expenditure, from around 21 percent (Figure 6.5). Nevertheless, the fiscal deficit has to 23 percent (Figure 6.8). increased and averaged 4.5 percent of GDP in the Meanwhile, rigidities in expenditure have last three years (Figure 6.6). increased, which exacerbates the impact of Between 2011 and 2015, public expenditure external shocks. About 84 percent of current doubled in nominal terms, from F$1.7 billion spending is in difficult-to-cut categories, such as to F$3.3 billion, or from 27 percent to 35 percent interest, pensions, subsidies and transfers, and of GDP (Figure 6.7). The increase was led by salaries and wage (Figure 6.8). Moreover, civil capital spending on infrastructure, which rose service compensation reviews, which are based Figure 6.7  Evolution of Spending Figure 6.8  Operating Spending 21 Percentage of GDP 21 19 18 20 90 operating expenditure 20 21 15 14 21 20 17 19 18 18 70 3 3 3 2 2 3 Percent of 21 21 22 24 23 23 50 14 14 15 30 11 12 44 40 42 41 44 45 7 8 8 10 5 0 2010 2011 2012 2013 2014 2015 2016p 2017p 2018p 2010 2011 2012 2013 2014 2015 Wages and salaries Pensions Operating expenditure Capital expenditure Subsidies and transfers Interest Source: Government of Fiji Budget Estimates. Source: Government of Fiji Budget Estimates. Pathway III. Building Resilience 57 on comparisons of civil servants’ salaries with the cost of a global bond maturing in 2020—the private sector salaries, are expected to result in a only commercial external debt—which has a large increase in civil service pay in 2017/18. coupon rate of 6.7 percent, while multilateral and Together with likely increases in spending pres- bilateral loans have much lower rates and those sures as the country prepares for an election in from the Exim Bank of China are fixed at 2018, planned fiscal consolidation will be 2  percent. The government plans to keep debt difficult. below 50 percent of GDP and to reduce exposure Building fiscal resilience also requires keep- to exchange rate shocks by expanding domestic ing government debt at a sustainable level. The sources of funding, with a target domestic to debt was 46 percent of GDP at end-2016. While external debt ratio of 70:30. there is no immediate risk to debt sustainability, Keeping debt on a sustainable path requires the recent increases in debt mean that measures fiscal adjustment. A fiscal sustainability analy- need to be taken to keep it on a sustainable tra- sis, focusing on the next five years, suggests that jectory. To reduce currency risk, the government if current spending and growth trends were to has largely relied on issuing domestic bonds. continue, the deficit would widen to 6.2 percent However, interest rates on domestic bonds are of GDP and government debt would rise to relatively expensive, and the Fiji National 63.5 percent of GDP by 2021. If debt is to be kept Provident Fund (FNPF) remains the main buyer, below 50 percent of GDP, the government will holding over 60 percent (Box 6.1). There is no have to make a significant fiscal adjustment in secondary market for domestic government the next five years.1 Financing risks are expected bonds, making price discovery harder. External to peak in 2020 due to the maturing of the borrowing represents a small share of the total US$200 million global bond. and is largely tied to capital spending. The aver- Building fiscal resilience also requires that age cost of the external financing is increased by the government manage contingent liabilities. Box 6.1  The Fiji National Provident Fund The FNPF is the largest investor in Fiji and also the main holder of domestic government bonds. It is the only retirement fund that is mandated by law to collect pension contributions in both the public and pri- vate sectors. Contributions are 16 percent of salaries, with both employee and employer contributing 8 percent. The target investment return to the members is currently 8 percent a year. The board members of the FNPF are appointed by the Minister of Economy (Fiji National Provident Fund Decree 2011). In 2016, its portfolio size was about F$5 billion. It had a net contribution inflow of F$170 million and investment income of F$330 million (FNPF 2016). The FNPF considers itself too large to invest only in Fiji and has been gradually diversifying internation- ally. In practice, its investment opportunities are limited as there are tight restrictions on overseas invest- ment (IMF 2014). There are some direct commercial lending operations as well as substantial equity investment from the government’s privatization programs. The FNPF has held up to 80 percent of the government’s domestic bonds, but this has dropped to 60 percent, because of competing bids from insurance companies and, to a lesser extent, banks. The liquidity stemming from the easy monetary stance has resulted in lower interest rates in the past several years, with the 15-year bond recently being issued at around 7 percent. The FNPF also holds about a third of the government’s international bonds, issued in 2015 at 6.6 percent. 58 Pathway III. Building Resilience One important source of such liabilities is the government were estimated at F$2.8 billion, or government’s portfolio of SOEs (Table 6.2). The 31 percent of GDP at the end of 2015 (2016/17 total guaranteed debt of the SOEs (explicit con- Budget Supplement), mostly represented by the tingent liabilities) was estimated at F$825 mil- pension liabilities of the FNPF. lion, equivalent to 9 percent of GDP. The total To build resilience, the government must contingent liabilities (explicit and implicit) of the also manage catastrophic fiscal risks related to Table 6.2  State-owned Enterprises, 2015 Ownership Guarantee (June Notes (%) 2014) F$ million Wholly owned commercial companies Airports Fiji Airports on remote islands subsidized by 100 government Fiji Broadcasting Two of six radio stations produced under 100  20.1 contract with government Fiji Development Bank Development bank 100 174.3 Fiji Hardwood Mahogany forestry 100  14.0 Fiji Public Trustee Estate and trust manager 100 Food Processors Food exporter 100 Post Fiji Has universal service obligation 100 Rewa Rice Rice miller and marketer Unit Trust of Fiji Intended to promote capital markets 100 Viti Corp Business training 100 Yaqara Pastoral Cattle breeding and farming 100 Commercial statutory authorities Biosecurity Authority 100 Civil Aviation Authority 100 Fiji Electricity Authority Provides subsidized power to rural and remote 100 338.4 areas Fiji Meats Industry Board Housing Authority 100  79.8 Public Rental Board 100 Water Authority of Fiji 100 Majority-owned companies Air Pacific Owns main airline, Fiji Airways 51.0 Air Terminal Services — 51.0 Copra Millers Producer of coconut oil and copra meal 96.0 Fiji Pine Sawmill and chip plant operator 99.8   4.5 Fiji Ports The FNPF also owns 39% 41.0  16.5 Fiji Sugar Corporation Monopoly sugar miller 68.0 156.2 Pacific Fishing Company Cannery 99.8   3.2 Minority-owned companies Amalgamated Telecom Owns only landline company and one of two 34.6 Holdings mobile companies Pacific Forum Line Commercial shipping 23.0 Sources: Ministry of Finance, Economic and Fiscal Update: Supplement to the 2015 Budget Address (Tables 5.1 and 5.11), November 2014. (Note: The Economic and Fiscal Update for the 2016 budget does not update this information.) WTO (2016); websites of Fiji Ports. Pathway III. Building Resilience 59 Figure 6.9  Stochastic Projections of the Deficit and Debt, 2016–21 0% 120% –5% 1% 99% 5% 100% 95% 10% 90% 25% 80% 75% –10% 50% 50% 75% 60% 25% 90% 10% –15% 95% 5% 99% 40% 1% –20% 20% 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 Deficit to GDP Debt to GDP Source: World Bank staff estimates. natural disasters. It is possible to make a rough 25 percent chance that debt will be more than estimate of these risks using the previously men- 66 percent of GDP. With the possibility of more tioned data on possible future GDP losses from than one natural disaster hitting the country, cyclones (PCRAFI 2015) and adding a stochastic there is a 25 percent chance that debt will be simulation to the fiscal sustainability analysis.2 higher than 97 percent of GDP by 2021. Using this approach, the fan chart in Figure 6.9 Several instruments are available for man- shows percentiles of the probability distribution aging catastrophic risks. Figure 6.10 identifies of projected government debt. The 50th per- some of them and indicates the speed with which centile forecast is depicted by the light-colored they provide funds. Donor support post‐disaster dotted line. In 2018, for instance, the 50th per- is uncertain and depends on the generosity of the centile value corresponds to a ratio of public debt international community. The government can to GDP of 63 percent. This means that there is a set aside reserves, but their amount is limited by 50 percent chance that public debt is higher than other pressing needs. Contingent credit can pro- 63 percent of GDP, instead of the 55 percent pro- vide governments with additional financial jected under the baseline of no natural disaster. capacity in the aftermath of a disaster, but its The 75th percentile value suggests that there is a amount is constrained by the borrowing capacity Figure 6.10  Sources of Post-Disaster Financing Relief phase Recovery phase Reconstruction phase (1–3 months) (3–9 months) (over 9 months) Post-disaster financing Donor assistance (relief) Budget reallocation Domestic credit External credit Donor assistance (reconstruction) Tax increase Ex-ante financing Budget contingencies Reserve fund Contingent debt facility Parametric industry CAT-Bonds Traditional insurance Source: Ghesquiere and Mahul 2010. 60 Pathway III. Building Resilience of the country. The costs of instruments also vary. 65 who do not have public pensions; and food Grants do not have a financial cost but are often vouchers, which are provided to the recipients of reallocated from other projects and may have an the preceding programs. In terms of both cover- opportunity cost. Reserves are generally held in age and adequacy, Fiji’s cash transfer programs short‐term assets; their cost is the difference perform reasonably well compared to those of between the returns on long-term investments other countries in the region (Figure 6.11 and and the returns on short‐term investments. Unless Figure 6.12). they affect the credit rating of a government, the In the aftermath of Cyclone Winston, the cost of emergency loans is reflected in the interest government implemented its first climate-­ rate applied. Finally, governments have recently contingent social protection program. Recog­ taken a closer look at instruments available in the nizing that natural disasters can harm poor financial markets such as traditional insurance families and reverse gains in poverty reduction, and parametric insurance (e.g., catastrophic the government decided to give top-up payments bonds). Some countries, such as Mexico, have to the beneficiaries of the main social protection recently ventured into the use of catastrophe programs. The 23,000 or so households covered bonds (or CAT-Bonds) to cover specific needs. by the Poverty Benefit Scheme were paid a lump Nevertheless, the use of parametric insurance sum of F$600; the 3,300 households covered by remains a relatively expensive proposition for the Care and Protection Allowance and the governments, and their use has remained limited. 17,200 pensioners covered by the Social Pension Scheme received F$300. This was equivalent to three months of regular benefits. The total cost of the top-up payments was F$345 million. Protecting the Vulnerable Prioritizing speed and efficiency, the govern- Fiji has a relatively well-developed social pro- ment gave top-up payments to all beneficiaries tection system. It consists of four main pro- whether or not they were in the cyclone-affected grams: the Poverty Benefit Scheme, which is areas. Channeling the assistance through the targeted at the bottom 10 percent; the Care and existing safety net meant that it went to the poor Protection Allowance, which is targeted at house- and reached them efficiently. holds with vulnerable children; the Social Three months after the cyclone, with the Pension Scheme, which is targeted at people over help of the World Bank, the government Figure 6.11  Coverage of Cash Transfers in Selected Countries Percentage of population covered Sri Lanka Vietnam Pakistan Timor-Leste Fiji PNG Thailand Nepal Tonga 0 2 4 6 8 10 12 14 16 18 20 Source: World Bank Atlas of Social Protection Indicators of Resilience and Equity 2016. Note: PNG = Papua New Guinea. Pathway III. Building Resilience 61 Figure 6.12  Adequacy of Cash Transfers in Selected Countries Benefits as percent of household consumption Mongolia Pakistan Fiji Sri Lanka Vietnam Philippines Malaysia Nepal PNG 0 1 2 3 4 5 6 7 8 9 10 Source: World Bank Atlas of Social Protection Indicators of Resilience and Equity 2016. Note: PNG = Papua New Guinea. evaluated the impact of this initiative. The cyclone, the beneficiaries of the top-ups under evaluation found a number of positive results. the Poverty Benefit Scheme were more likely to First, the benefits reached the recipients in time report having recovered from the cyclone.3 to meet urgent needs: the top-up transfers were More generally, the experience with the made one month after the cyclone hit and, within post-Winston interventions highlights a few four weeks, the majority of the recipients had key lessons. The first is the importance of sav- spent them. Second, most of the benefits were ings as a buffer against shocks. Nine days after spent on essential items, with food and materials Cyclone Winston, the government allowed to repair dwelling being the most common items affected members of the FNPF to withdraw (Figure 6.13). Less than 1 percent was spent on F$1,000 for immediate expenses and up to kava, alcohol, or cigarettes. Third, the recipients F$5,000 for approved housing repairs. This was recovered faster than those who are just above subsequently extended to members who were the benefit thresholds and who therefore did not not directly affected by the cyclone but who receive social assistance. Three months after the wished to help their family in affected areas. The Figure 6.13  Expenditure of Cyclone Winston Top-up Payments Percentage of top-up assistance spent Food Repair Clothing/school supplies Medical Household goods/furniture/products Repay debts/saving/contribution Kava/alcohol/cigarettes 0 10 20 30 Sources: Fiji Bureau of Statistics; World Bank Cyclone Winston Impact Evaluation. 62 Pathway III. Building Resilience Table 6.3  Major Interventions after Cyclone Winston Program Beneficiary households Duration Budget (F$ million) Social welfare top-up payments  43,897 March–May 2016  19.9 Food Voucher Program  44,169 May–June 2016   4.6 Housing Program  24,664 April 2016–  87.0 Fiji National Provident Fund 170,000 March–April 2016 250.2 Total — — 344.7 Source: ADB 2016. facility was open for 60 days till the end of April their registered mobile phones. Where building 2016. More than 9,000 members were said to materials have been delivered, rebuilding has have withdrawn money during this period and also been slow, because of the lack of carpenters the total payments to have been F$260 million. and other skilled tradespersons and because ben- Even among the low-income households that eficiaries had to pay labor costs. were part of the impact evaluation survey, 15 percent reported benefitting from the special withdrawal allowance. This was by far the largest assistance the government managed to give Policies to Build Resilience affected households (Table 6.3). Several things can be done to build resilience. The experience also reveals that ad hoc ini- tiatives put in place post disaster can encoun- • Climate resilience. To strengthen urban resil- ter unexpected difficulties. For example, the ience, the government could assess the disas- Home for Help initiative gave families having an ter resilience of critical public infrastructure annual income of less than F$50,000 grants of and cost the needed upgrade. It could also F$1,500 to repair partially damaged homes, update the urban plan to ensure risk sensitive F$3,000 for seriously damaged homes, and land use, review the building code to ensure it F$7,000 for destroyed homes. The initiative was is appropriate for Fiji, and better enforce both expected to cost F$184 million by 2018, and the of them. To strengthen rural resilience, the government has spent F$87 million in the first government could review the consistency of year. The initiative took longer than expected to sectoral policies in the resource-incentive sec- be implemented. Eligible beneficiaries were tors such as agriculture, mining, tourism, and required to enroll with the Ministry of Welfare fisheries. It could strengthen enforcement of and to provide a valid ID and other documents to existing regulations and safeguards to ensure confirm home location and eligibility for the environmental sustainability and ensure that program. Beneficiaries received e-cards issued zoning for coastal areas, riverbanks, and wet- by a mobile phone operator, preloaded with the lands is sensitive to risks. Finally, it could approved funds, which could be used at any of 10 explore ways to engage citizens to improve hardware retailers to order from a list of preap- warnings and responses to disasters. proved materials. Delivery of building materials, • Fiscal resilience. Improving fiscal resilience particularly to maritime areas, was subject to involves expanding the tax base by consolidat- unexpected delays. Challenges included shortage ing the extensive system of tax exemptions of building materials, difficulties delivering and incentives. On the expenditure side, it materials to maritime and remote areas, the involves better targeting of subsidies to create reluctance of beneficiaries to accept partial deliv- fiscal space and reduce rigidities. Contingent eries, shortage of carpenters and other trades- liabilities need to be monitored and reduced. people, and inability to contact beneficiaries on To insure against catastrophic risk, the Pathway III. Building Resilience 63 government could further explore alternative on the existing social protection system. One ex ante financing instruments. of the most successful interventions was • Social protection. Not everyone can be pro- allowing people to withdraw some of their tected ex ante. There must also be in place a savings from the FNPF to rebuild their houses. system to protect the most vulnerable after However, the FNPF only covers the formal disasters. After Cyclone Winston, the govern- sector, so most of the poor were not helped by ment experimented with cash transfers based this measure. Notes 1. The analysis draws on the standard intertemporal 3. The evaluation strategy used the regression dis- fiscal sustainability framework (e.g., Ley and Tran continuity design in defining the treatment and 2009). control groups based on the Poverty Benefit 2. The stochastic simulation creates 1,000 alternative Scheme eligibility (poverty score) threshold. The scenarios for the deficit and debt based on random treatment group is the Poverty Benefit Scheme (“stochastic”) shocks to the GDP growth rate gen- recipient households (25 percent below thresh- erated by natural disasters. To calibrate the shock old) in affected areas that have also received the distribution, we used the PCRAFI (2015, Annex 4, top-up benefit. The control group is households in p.5, Table 2) estimates for cyclone risk and associ- affected areas that are not eligible for the Poverty ated costs and modeled them using a lognormal Benefit Scheme, as they are above (but within distribution to reflect the main features of the 25 percent) the threshold (and therefore did not implied distribution (e.g., a sharp lower bound of receive the top-up benefit.) zero, no sharp upper bound, a single mode, and a positive skew). The analysis assumes that the real- izations of natural disasters are independent over time. 64 Pathway III. Building Resilience Chapter 7 Priorities Policy Priorities 1. Improving the Business Environment This report has identified many challenges and many possible policy solutions. But not every- • Precondition. Fiji already has a sizeable private thing can be done at once: priorities need to be sector, but there is also considerable unex- selected. ploited potential to expand it. Creating an effi- In selecting the priorities for shared prosper- cient and up-to-date legal and regulatory ity in Fiji, this SCD uses three main criteria. The framework and providing stable and predict- first is whether a policy is a precondition for able policy environment are preconditions for making progress in pursuing others. The second private sector growth. is whether a policy is expected to have positive • Positive spillovers. Improving the business spillovers across different domains (e.g., growth, environment is expected to generate benefits equity, resilience). The third is whether a policy across the three pathways of growth, equity is feasible, that is, whether it can be implemented and resilience. A sound legal and regulatory in the medium term given cost, capacity, and framework and a simpler and more stable tax political feasibility. system would encourage foreign and domestic The resulting priorities are shown in Table 7.1. investment. Strengthening the framework for The judgements behind the application of these public-private partnerships, reviewing com- criteria are set out in the narrative below. petition policy, and clarifying the community Table 7.1  Priorities 1. Improving the •• Reduce policy uncertainty business •• Reduce red tape and the complexity of incentives environment •• Create a stronger legal and regulatory framework for boosting private sector participation •• Communicate better and consult more with businesses and civil society 2. Investing in urban •• Improve the quality of urban housing and essential public infrastructure resilience •• Update the urban plan to ensure risk-sensitive land use •• Update the building code to ensure it is appropriate for Fiji and enforced •• Explore ways to expand insurance coverage 3. Safeguarding fiscal •• Develop medium-term fiscal consolidation plan sustainability •• Expand revenue base by reviewing the system of tax exemptions and incentives •• Reduce rigidities in expenditure by consolidating fragmented subsidy programs •• Better monitor and manage contingent liabilities and catastrophic risks 4. Expanding access •• Increase spending on health services targeted to the bottom 40 percent to quality health •• Make extra effort to serve rural areas and remote islands care •• Partner with the private sector to serve the poor •• Monitor the cost of hospital service delivery under private and public provision 5. Expanding access •• Continue public investment and encourage private participation in infrastructure to connective to enhance economy-wide competitiveness infrastructure •• Make extra effort to serve rural areas and remote islands Priorities 65 service obligations of SOEs would encourage 3. Safeguarding Fiscal Sustainability private participation in delivery of public ser- • Precondition. Without fiscal sustainability, the vices. Better enforcement of safeguards and government would not be able to make invest- reduced fragmentation of policies in ments to accelerate growth, expand and resource-intensive sectors would improve improve public services, and disaster-proof environmental sustainability. critical infrastructure, or protect the most vul- • Feasibility. Improving the business environ- nerable from shocks. ment is an ongoing effort for any country, • Positive spillovers. Safeguarding fiscal sustain- including Fiji. Fiji has the capacity to intro- ability would have a positive impact on duce significant reform quickly when neces- growth, equity, and resilience. Expanding the sary and to work with development partners revenue base by reviewing and simplifying the to adopt appropriate policies for the country. complex system of tax incentives would The declining Doing Business ranking has improve the investment climate. Reducing received media attention, which creates incen- spending by consolidating the fragmented tives for policy action. The government is public subsidy programs would improve tar- keen to develop its SME sector. geting of spending to the bottom 40 percent. 2. Investing in Urban Resilience Additional fiscal space would allow the gov- ernment to invest in resilience, and respond to • Precondition. Natural disasters can wipe out disasters with emergency spending and social years of investments in infrastructure and protection. progress made in poverty reduction. • Feasibility. After completing the two-year Expansions of squatter settlements have post-Winston reconstruction this fiscal year, increased disaster risk and potential costs. rebuilding fiscal space will be a challenge for • Positive spillovers. Investing in urban resil- the medium term. On revenues, reviewing the ience would have positive spillovers on current system of investment incentives to growth, equity, and resilience. Adaptation of ensure value for money would be the first step. critical public infrastructure, modern urban On expenditures, ongoing effort in determin- planning, and risk-based land use would ing the right mix of public support and private improve investment climate and access to initiatives in improving services such as trans- insurance. Improving quality of urban hous- port, health, and housing would need to con- ing would help reduce vulnerability of the tinue. The likelihood of actions in both is urban poor. These improvements would high, especially with appropriate technical reduce the costs of natural disasters, thereby assistance from the development partners. improving fiscal resilience. • Feasibility. Fiji’s Green Growth Framework 4. Expanding Access to Quality 2015 has made building climate resilience a Health Care national priority. The World Bank climate vul- nerability assessment is expected to provide • Precondition. Health is a value in itself, but it estimates of cost and capacity requirements, also influences economic opportunities and which would help Fiji access external financ- outcomes in terms of productivity, human ing and technical support. With frequent capital, and employment. cyclones and floods during the rainy season • Positive spillovers. Expanding access to quality each year, building climate resilience has health care would help Fiji realize its potential strong political support across the country. as a health hub for the Pacific and thus attract 66 Priorities health tourists and retirees. This would thus Thailand do much worse on these indicators generate positive equity and growth impacts. (Figure 7.1). Fiji also has a disciplined and • Feasibility. The government is embarking on well-educated civil service. It has shown it can the first PPP in health care in the coming year. develop and put in place significant reforms It regards this as an important test case for the quickly when necessary and work with develop- future and, if it is successful, the government ment partners to adopt appropriate policies for plans to do more. With appropriate technical the country. assistance from the development partners, the As Fiji embarks upon the next phase of likelihood of progress is high. growth and development, however, the inter- play between policies and governance will 5. Expanding Access to Connective become even more important. The institutional Infrastructure environment will determine the direction of pol- icy changes and whether they are properly imple- • Precondition. Expanding connective infra- mented. Without strengthening institutional structure is a precondition for private arrangements and capacity, it will be difficult to sector-led growth and reducing inequality of ­ deliver most of the priorities identified in this opportunities. Connective infrastructure is report. This section summarizes the four key also essential to ensure efficient disaster cross-cutting governance challenges that emerge response and post-disaster reconstruction. from the analysis. • Positive spillovers. Continued public invest- ment in connective infrastructure would Legal and Regulatory Framework encourage private investment and enhance economy-wide competitiveness. It would also Modernization of the legal and regulatory help address the remaining gaps in access framework is needed to ensure that it encour- between rural and urban areas and reduce ages investment by the private sector. The cur- inequality of opportunities. rent framework does not reassure investors, and • Feasibility. With tighter fiscal space, the gov- it raises costs. For example, a recent review of the ernment is increasingly exploring ways to investment law and associated legislation has improve efficiency through private participa- identified a number of departures from interna- tion. With appropriate technical assistance tional conventions including in the areas of arbi- from the development partners, the likelihood tration, confiscation, and repatriation of profits. of policy action is high. Considerable red tape exists, and time spent dealing with multiple approval procedures is raising costs of doing business, especially for small firms. Labor market regulation could be Cross-Cutting Priority: simplified to reduce frictions and mismatch. Strengthening Institutional Expanding private sector participation in public service delivery also requires moder­ Capacity of the Public Sector nizing the existing legal and regulatory Some aspects of governance in Fiji are rela- ­framework. There have already been some tively good. For example, on standard global achieve­ments in involving the private sector in indicators of political stability and control of cor- public service delivery, but there is potential for ruption, Fiji ranks at the 60th percentile or better. further gains. The existing public-private part- Other countries in the region, such as Papua New nership framework contains a number of provi- Guinea and Timor-Leste, and China and sions limiting foreign investment, and lacks clear Priorities 67 Figure 7.1  Indicators of Governance, Selected Countries, 2015 Percentile rank Fiji Malaysia Solomon Islands Fiji Malaysia Solomon Islands Vietnam China Timor-Leste Thailand Papua New Guinea Vietnam Indonesia Indonesia China Timor-Leste Thailand Papua New Guinea 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 80 Political stability Control of corruption Malaysia Malaysia Thailand Thailand Indonesia Vietnam China China Papua New Guinea Indonesia Fiji Fiji Vietnam Solomon Islands Timor-Leste Papua New Guinea Timor-Leste Solomon Islands 0 20 40 60 80 0 10 20 30 40 50 60 70 80 Regulatory quality Rule of law Solomon Islands Malaysia Indonesia China Timor-Leste Thailand Papua New Guinea Indonesia Fiji Vietnam Malaysia Fiji Thailand Papua New Guinea Vietnam Solomon Islands China Timor-Leste 0 20 40 60 80 0 10 20 30 40 50 60 70 80 90 Voice and accountablity Government effectiveness 75th to 90th percentile 50th to 75th percentile 30th to 50th percentile 0 to 30th percentile Source: World Bank Worldwide Governance Indicators 2015. guidelines for developing transparent PPP proj- monitor and manage the performance of exter- ects. Expanding private participation in public nal service providers. service delivery would also require reviewing the In some cases, the government may need to price-setting function of the Commerce Com­ be more willing to give up some direct control. mission, reviewing and strengthening the com- In general, the government is concerned about petition policy framework, and building reducing the control of government agencies regulatory capacity in government agencies. over the private sector for fear of losing control Changes are also likely to be required to reflect over the country’s development path. In the the evolving role of government toward a pro- investment law, for example, the government vider of public goods and an enabler of private fears that streamlining the foreign investment sector participation. This will require the separa- registration process or relaxing the confiscation tion of regulation and service delivery, as well as clause will increase the potential for fraudulent the development of institutional capacity to investors to enter Fiji. It also fears that this could 68 Priorities adversely affect local businesses or employees Weak coordination can also lead to difficul- and that the public reaction to misdeeds by for- ties in developing coherent policies. When eign investors will result in a loss of confidence in multiple agencies are involved in developing pol- the government more generally. But more will- icy or designing incentives to achieve a specific ingness to give up some direct control may be policy outcome, it increases the risk that there what is needed to encourage greater participa- will be fragmented or contradictory policy tion by the domestic private sector and attract approaches. For example, in promoting SMEs, foreign investment. the government provides a number of tax incen- Better enforcement of existing regulations tives and small grants, but those are delivered and updating of the planning, risk monitor- through various sectoral ministries and agencies ing, and management frameworks is also without an overall understanding of the full needed to build greater resilience. Currently, package of assistance (see Box 4.1). Improved many ministries have limited capacity to enforce coordination will be needed to facilitate support regulations. This is a significant risk to govern- for integrated policy development across ment as some regulations are designed to avoid government. disasters such as environmental pollution, as well Conflicting mandates are also a challenge as to ensure adherence to building standards, in some cases. For example, in housing, both and health and safety standards. For example, the Housing Authorities and Public Rental Boards Ministry of Local Government, Housing, and are tasked to deliver the public policy objective of Environment is limited in its ability to evaluate improved service delivery to low- and middle-­ environmental impact. Greater resilience, includ- income groups. At the same time, they are ing fiscal resilience, also requires enforcement required to improve their profitability and finan- and regular updating of the existing legislations. cial performance. They are achieving neither. For example, a significant risk to Fiji’s fiscal sus- More generally, the government needs to clarify tainability is the catastrophic risk from natural SOEs’ mandates and establish guidelines for the disasters. Assessment, monitoring, and mitiga- identification, costing, contracting, and financ- tion of this risk is a key action for government, as ing of community service obligations. At the is the monitoring and management of other con- same time, it should strengthen disclosure tingent risks such as the financial performance of requirements with respect to selecting and evalu- SOEs. ating the performance of SOEs tasked with pub- lic service obligations. Coordination across Government Appropriate Delegation and Coordination across government in relation to Accountability for Decisions policies, incentives, and implementation can Public administration reform, which has be improved. The lack of coordination could already begun, should improve delegation and contribute to inconsistent policy, inefficiencies in accountability for performance. A government- resource use, and delays in policy implementa- driven program of civil service reforms began in tion. For example, in housing, many agencies are 2015 following the adoption of a new constitu- involved, some with overlapping responsibilities, tion. While some progress has been made, there including the Housing Authority; the Public continues to be weaknesses in planning, perfor- Rental Board; the iTaukei Land Trust Board; the mance monitoring, performance management, Ministry of Local Government, Housing, and and policy development. Changes in these areas Environment; town councils and rural authori- are needed, including a greater coordination role ties; and the Prime Minister’s informal Settlement for central agencies, to underpin greater institu- Stakeholder Committee. tional performance and efficiency. Priorities 69 Improvements in leadership and manage- Legal requirements for information disclosure ment could improve institutional perfor- are limited, but an Information Bill has been mance. In 2016, all permanent secretaries were introduced to Parliament to establish the right of recruited through an open, merit-based, interna- access to information held by the government tional recruitment process and are now on per- and public agencies. This reform will require sys- formance-based contracts. A competent temic and cultural change within government for leadership cohort below the level of permanent successful implementation. secretaries is needed, however, to allow senior Improving the mechanisms for feedback officers, including ministers and permanent sec- and complaints from the public supports a retaries, to focus on strategic tasks, rather than more cooperative and inclusive approach to being distracted by day-to-day operations. A key service delivery. Encouraging clients to give accountability mechanism for permanent secre- voice to their experiences regarding the quality taries is a performance management framework, and effectiveness of services can support the which is still under development. development of a service-oriented culture. The Capacity development will be needed to existing mechanism for members of the public to support greater private participation in ser- lodge complaints about service delivery is vice delivery. As government seeks to improve through members of Parliament, most com- service delivery through the use of innovative monly through ministers. The Prime Minister, in approaches and greater private participation, particular, receives a large volume of complaints capacity development for civil servants will be through his office. While this mechanism does required to ­ support these new approaches. A enable some individual complaints to be significant improvement in contract manage- addressed, systemic issues are not identified or ment will be essential to ensure that contractual addressed, nor are complaints prioritized based arrangements are beneficial for government on seriousness or need. Any improved com- and achieve cost and service effectiveness. plaints mechanism must be designed to establish While some agencies are already utilizing clear and easy to use mechanisms to lodge com- greater private participation, contract manage- plaints and to incentivize the lodging of com- ment arrangements remain nascent. Similarly, plaints through the established mechanism to an improvement in civil service capacity, includ- maximize effectiveness. ing the ability to better identify, monitor, and mitigate risks, will be needed to underpin the development of more effective regulatory Knowledge Gaps environments. Although there are many analyses of the nature Communication and Consultation and causes of Fiji’s development challenges, this SCD has identified remaining knowledge gaps. Enhancing transparency and participation in The gaps include: policy formulation is important to improve the functioning of the government. The • Poverty profile and poverty map. Although this government has taken steps to improve transpar- SCD has analyzed the main poverty develop- ency and participation by stakeholders in policy ments, a detailed poverty update is missing. formulation, but there is considerable room for An updated poverty map is also not available improvement. For example, the closure of the yet. Given the changes in nature and distribu- credit bureau was made without any consulta- tion of poverty identified in this report, these tions. When such significant policy changes are updates are urgently needed to gain deeper made without stakeholder participation, this can understanding of the drivers of recent changes create a loss of confidence by the private sector. in poverty and inform policy dialogue. 70 Priorities • Growth, investment, and jobs. Fiji’s potential gration has contributed to growing remit- growth rate is important but essentially tances, the loss of highly educated and skilled unknown, and estimating it requires additional workers represents a brain drain. There is research. A breakdown of investment between some international evidence that rising remit- private, government, and public enterprises tances may also reduce labor force participa- has not been possible on a consistent basis due tion, especially among women, but may also to changes in reporting conventions. On jobs, encourage education attainment among young additional research is warranted to better people, especially girls, in the hope of finding understand the labor market dynamics and better jobs abroad. There is, however, little constraints; while the government undertakes empirical evidence on the general equilibrium regular labor force surveys, the empirical anal- impact of emigration, remittances, and labor ysis of the survey data has been limited. market outcomes in Fiji. • Analysis of productivity. Given data con- • Health. To expand coverage of health services straints, it has not been possible to fully under- and improve health outcomes, the govern- stand the productivity challenges in Fiji. ment is considering contracting out health Further efforts are needed to link the macro services to the private sector. The experience information to the micro-level data, such as of other developing countries with such poli- firm and labor force surveys, to identify con- cies has been mixed. Additional research is straints to improving productivity. needed to provide sound policy advice in this • Firm level and informality surveys. The most area. Such research should seek to provide recent firm level survey is from 2008, which is up-to-date information on the costs of, and too old to be a sound basis for rigorous policy access to, health services under private and analysis. A new Enterprise Survey would public provision in Fiji. provide valuable information on a number of ­ • Land. There appears to be no empirical topics, including innovation, investment, research on the impact of the land tenure sys- productivity, export, and job creation. ­ tem on poverty and shared prosperity in Fiji. Additionally, an informal sector survey is In some countries, customary land tenure urgently needed to identify the drivers of appears to be beneficial (e.g., by providing informality, motivations and constraints fac- secure livelihood or social protection to rural ing firms and workers, and potential gains in communities), but in others, it appears to have productivity growth and job creation latent in a negative impact (e.g., by exacerbating gen- the sector. der disadvantages in asset holdings, access to • Migration, remittances, and poverty reduction. finance, or intra-household bargaining More analysis is needed to understand the power). New research could shed light on its costs and benefits of emigration. While emi- impacts in Fiji. Priorities 71 References ADB (Asian Development Bank). 2012. Fiji Country DFAT (Australia Department of Foreign Affairs and Partnership Strategy 2014–18. Trade). 2015. Pacific Women Shaping Pacific ———. 2014. Revitalizing the Fiji Economy. 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