Growing importance of intraregional trade, investment flows and growth triangles

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Trade within the Asian region is growing more rapidly than trade with the rest of the world; the share of intraregional trade grew from 30 percent in 1986 to 40 percent in 1992. Trade between China and the rest of the world expanded particularly fast. China's imports surged by more than 25 percent in each of the last two years and a growing share of these imports came from other Pacific economies which are increasingly dependent on China. In fact, China is considered to be the main engine of growth in the Asia and Pacific region.

In part, the growth of intraregional trade has been aided by the lingering recession (since 1990) and growing unemployment, which has given rise to stronger protectionist tendencies in industrial countries. The recent conclusion of the Uruguay Round of GATT negotiations is expected to remove some of these barriers.

Nevertheless, there is concern about the possible internalization of trade in Europe and North America following progress in economic integration within the EC and the North American Free Trade Agreement (NAFTA). Despite recent diversification in trade flows, the Asia and the Pacific region still sells one-third to one-half of its total exports to these two regions.

For the past decade, the region has received an increasing volume of capital inflows, comprising foreign direct investment (FDI) and long- and medium-term credit. Recently, these capital flows have grown rapidly. Two factors contributing to the increase in FDI are the continuing recession in developed countries and the impressive growth record, stability and market-oriented reforms in Asian economies. The AsDB estimates that capital inflows averaged $36 billion annually during 1989-92 compared with $20.5 billion during the preceding four years. Between 1987 and 1992, FDI inflows increased by 27 percent annually. In the past, capital inflows were largely concentrated in Southeast Asia. Today, they are increasingly directed towards China, which attracted $11 billion in 1992, and India which attracted $5 billion of foreign capital flows in 1993.

The emergence of the so-called growth triangles is the other major development towards greater regional economic integration. Growth triangles link geographically contiguous areas and evolve in response to opportunities for exploiting national complementarities of natural resources, capital and labour. While a number of intergovernmental arrangements for regional cooperation and trade, such as the Association of Southeast Asian Nations (ASEAN), the South Asian Association for Regional Cooperation (SAARC), and South Asian Free Trade Agreement (SAFTA), are still grappling with the design of a workable system, the informal arrangement of growth triangles is rapidly multiplying in the region. This approach is more outward-oriented than trade blocs which focus on enhancing trade within the bloc. Successful examples of growth triangles are the China Economic Area, linking southern China, Hong Kong and Taiwan Province of China, and the Southern Growth Triangle, linking Singapore, Johore State in Malaysia and the island of Batam in Indonesia.

Implications of the Uruguay Round Agreement for Asian agriculture

Although the Uruguay Round Agreement of GATT does not come into force until mid-1995 and many of its provisions will become operational gradually over the next decade, the signing of the Final Act has generated a great deal of interest among Asian farmers. The net effect of GATT's provisions for agriculture has not been systematically analysed for most countries; in some countries, farmer lobbies and interest groups are expressing strong opinions. For example, some farmers' groups feel that the provision on the Total Aggregate Measurement of Support (Total AMS) would reduce subsidies on fertilizers, water and power and that seed prices may increase if farmers are forbidden to sell seeds covered by intellectual property protection.

In Asian countries, wheat products, meat, fruit and vegetables are being substituted for rice because of rising incomes and growing urbanization. The result is a lower per caput demand for rice throughout the region but an increased demand for higher-quality rice varieties. Demand for feedgrains and oilmeals are expected to increase, with consequent changes in relative prices. One implication of the Uruguay Round Agreement for Asian countries is to step up investment for improving production technology and marketing as well as processing infrastructure to facilitate crop diversification induced by changing consumption patterns in line with the countries' dynamic comparative advantage.

Growth, poverty alleviation and regional development

Sustained economic growth and specific government policy measures have significantly reduced both the proportion and absolute numbers of poor in the region. Yet almost three-quarters of the more than one billion poor people in the world live in Asia; of these, nearly 500 million live in absolute poverty. Therefore, poverty alleviation continues to be a priority and is likely to remain so for many years.

Poverty is generally concentrated in remote rural and resource-poor areas that have poor access to social services and infrastructure. Progress in productivity and, therefore, land-saving technology has mainly accrued to rice and wheat. Thus, regions unsuited for intensive rice or wheat cultivation have tended to lag behind. Large-scale rural poverty is concentrated in regions of poor agricultural performance.

Even in countries with high growth records, uneven regional development has led to severe income disparity and pockets of chronic rural poverty. Inland regions, especially in the northwest of China, the outer islands of Indonesia and the Philippines and the region outside Bangkok in Thailand, are examples of areas identified by the respective governments for special development efforts.

Asian governments continue to implement specific programmes for improving infrastructure, developing the skills of target populations, providing investment incentives, assisting rural enterprise development, creating export processing zones and engaging in integrated development programmes in underdeveloped regions to counter spatial biases induced by macroeconomic and sectoral policies. For example, poverty alleviation measures in India include rural wage employment programmes during the lean agricultural season, integrated rural development programmes and land reform efforts. Bangladesh has feeding programmes for vulnerable groups, special cooperatives for promoting income-generating activities for the poor, food-aided infrastructural development programmes and special credit and skill training programmes for small farmers. It is increasingly apparent that these programmes must be complemented by adequate attention to technological improvement in crops grown in the targeted regions.


Economic overview

The tremendous economic transformations that have taken place in China over the past 15 years have attracted worldwide attention. Economic reform, modernization and opening to the outside world has been accompanied by buoyant economic activity. After having expanded at annual rates of nearly 10 percent during the 1980s, the national economy entered a period of austerity from 1989 to 1991 but accelerated to a growth rate of more than 13 percent in both 1992 and 1993 - among the highest rates in the world. Nevertheless, current levels of per caput income $318 in 1990 at current prices - still place China among the low-income developing countries.

As economic growth has accelerated, major changes in the economic structure have occurred. Output and employment structures have shifted in favour of industry and services. The industrial sector, which only accounted for 36 percent of GDP and 10 percent of employment in 1970, increased these shares to about 55 percent and 22 percent, respectively, in 1990. Conversely, the share of agriculture fell from 47 to 23 percent of GDP and from 81 to 60 percent of employment during the same period. The industrial sector continues to lead economic expansion. Its growth was estimated to be nearly 21 percent in 1993, albeit with wide performance differentials between the dynamic east coast provinces and those in the poorer west and centre. Growth of value added in agriculture has lagged (about 4 percent in both 1992 and 1993) and, consequently, the economic importance of the sector has further declined.

Rapid growth in recent years was fuelled by massive investments, particularly in the industrial sector, facilitated by a relaxed monetary policy and rapid growth in money supply. (Fixed investment grew by more than 60 percent in the first half of 1993.) Concurrent signs indicated that this course was unsustainable and the economy was being stretched to its limits. Transportation bottlenecks, shortages in energy and several key industrial raw materials and accelerating inflation (from 8.6 percent in 1992 to 14.5 in 1993) all pointed to excess demand pressure and the need for tighter monetary policies and financial discipline.

Buoyant domestic demand also caused the trade balance to turn negative in 1993, for the first time since 1989. Import demand sharply increased and export growth slowed as exportable capital and consumer goods were absorbed by the domestic market. Significant liberalization measures related to China's application to rejoin GATT also contributed to strong import growth.

Increasingly restrictive monetary policies and major financial sector reforms are expected in the coming years. Inevitably, these measures will slow growth, although expectations are for still robust rates of 9 to 10 percent in 1994 and 1995. Underlying positive expectations are favourable supply responses to the ongoing reforms, large inflows of FDI, a strong external account position and high levels of foreign exchange reserves.

Despite such optimistic expectations, several fundamental problems remain to be solved. Foremost is the population problem. Demographic growth, with a current annual rate of about 1.3 percent (1.5 during 1980-1990), is still relatively high considering the very large base of more than 1.2 billion. Despite active population control regulations, family planning policies - particularly in rural areas - have encountered major obstacles, in some cases arising from government action itself.

Other issues are the long-term sustainability of high levels of growth as well as the ability to achieve it through a balanced combination of intensive practices - raising factor productivity - and extensive practices-allowing the absorption of the vast and expanding labour supply. An important factor affecting the future pace of growth is the ability to push state-owned enterprises, especially the larger ones, into the market economy so as to increase their vitality and efficiency.

Despite rapid growth, and to a certain extent because of it, income and living standard disparities have widened between rural and urban areas, coastal and inland provinces, favoured economic and development zones and zones with little access to public support and market opportunities. A major challenge facing the government is to prevent a further accentuation of regional and intersectoral disparities. Consolidating a socialist market economy requires converting a liberal economic system that fosters private initiative while preventing social inequities, speculation and corruption.

China's agricultural sector in transition

In the late 1970s, China's policy-makers initiated a series of rural sector reforms aimed at overcoming the country's sluggish agricultural growth. Despite three decades of emphasis on food self-sufficiency and impressive achievements in health and education, policy-makers were dissatisfied with the rural sector's inability to improve the quantity, quality and variety of agricultural production. For more than 30 years, the rural sector required increasing levels of state investment to generate growth, but there was little improvement in productivity. In fact, agricultural productivity stagnated or even fell in some years. Per caput cereal production increased by only 14 percent between 1952 and 1978, while food production barely kept ahead of population growth. Moreover, the country had been a net cereal importer for over one-quarter of a century.

Although the 1978 reform measures were focused on raising agricultural production by providing farmers with improved price and income incentives, they were quickly followed by a complete restructuring of China's agricultural sector. In less than five years, policy changes shifted the control of resources and production from the collective farming system to a household-based farming system. The role of direct state planning in agricultural production was replaced with markets and prices. By the early 1980s, the government had dismantled the commune system, embraced the household responsibility system (HRS) and allowed prices and markets to help determine input use and production decisions.

This shift from central planning to a market-oriented agricultural sector not only profoundly reshaped the role of the state in agriculture, but it also resulted in remarkable improvements in productivity, rural incomes and well-being. For example, since the 1978 reforms, the agricultural sector has grown at an average annual rate of nearly 6 percent, one of the highest in the world and twice the growth rate of the 1953-1978 period. The real value of China's agricultural output has more than doubled since 1978. More important, rural per caput income increased rapidly, reducing by two-thirds the number of people living in absolute poverty. The most rapid increases in rural per caput income occurred between 1979 and 1984 when it averaged a 15 percent increase per year.

The initial rural reforms. Prior to the 1978 reforms, China's central government planned and directed the country's economic activity. The state established annual economic plans for industry and agriculture and assigned production targets to industrial and agricultural enterprises.

The state was also responsible for providing enterprises with the necessary inputs to meet targets and for procuring and distributing the outputs. For example, the government imposed a compulsory procurement policy, obliging agricultural households to sell their produce at government-set prices. The government then rationed items, including cereals, edible oils, pork, sugar and cotton cloth, to urban residents. At one point, the government rationed more than 100 items to urban residents.

Rural People's Communes carried out the central plan's rural assigned activities. The communes were both government bodies and compulsory cooperatives that implemented state directives and managed small scale enterprises and shops. A typical commune consisted of ten to 15 production brigades, which were subdivided into about ten production teams of 20 to 30 households each. The average commune included about 5000 households with 4000 ha of cultivated land.

Production brigades allocated each team's production and procurement quotas and managed primary schools, health clinics and small non-farm retail shops. Production teams organized agricultural activities and maintained accounting and income distribution systems. Payments to workers were based on a work point formula. The teams also controlled property rights to land and assets.

China's commune system achieved most of the goals for which it was established. The communes constructed and operated rural infrastructure (irrigation facilities, transportation networks, etc.), organized and managed economic and social welfare services (including health care and education) and maintained food self-sufficiency for the rural sector.

Initially, the reforms of 1978 aimed to build on this well-developed physical and human infrastructure by using price incentives to increase overall production. Preliminary measures relaxed central government control over sown area and raised procurement prices by more than 20 percent for cereals, 15 percent for cotton, 25 percent for oilseeds and 25 percent for pigs. In addition, they raised premium prices for above-quota sales by 50 percent and reduced input prices by 10 percent.

Reorganizing the production unit. As a further incentive, the government allowed production teams to experiment with a variety of payment systems, on the condition that the commune's collective ownership and management structure be maintained. Some teams chose to link pay to the type of work; others tied it to the amount of time worked, the type of land or the amount of final output. A group of farmers in Anhui Province adopted what came to be the most successful payment system. Known as "Da Baogan" or "Baogan Dao Hu" (meaning the contracting of all activities to the household), this system divided up the production team's land, assets and quota among individual households. After fulfilling the quota obligations and paying a specified portion of output or revenue to the production team as a tax for community purposes, each household could keep or dispose of surplus production as it wished. This system later became known as the HRS.

At first, the government did not support the HRS, insisting that the production teams remain the basic management unit and that they maintain collective ownership of land and assets. However, it did promote the HRS as an effective measure in the poorer remote and mountainous regions.

In 1982, the government allowed the HRS to become the dominant rural institution for agricultural production in China. Households established fixed-term land-use contracts with production teams. Initial contracts granted land rights for three to five years; by the late 1980s, contracts were extended to 15-year periods; and by 1993 they stretched to 30 years. Households also contracted with production teams to fulfil state procurement quotas and to pay various taxes.

By the end of 1983, 200 million family farms had adopted the HRS and more than 50000 communes had been eliminated. During this same period, the government introduced two additional policy changes: first, in 1983 households were permitted to exchange and employ labour for farm work; and, second, the subleasing of land to other households for compensation was sanctioned in 1984. These two reforms aimed at increasing on-farm investment by improving the functioning of land and labour markets.

Product market reforms. Prior to the 1978 reforms, the Chinese Government classified farm products into three categories. The first category, which included cereals, oil-bearing crops and cotton, was subject to "tong gou", or unified procurement: the government was the sole buyer through the compulsory quota system. Production quotas and targets and procurement prices were fixed for three- to five-year periods. Above-quota deliveries were compulsory, but received a 20 to 30 percent price premium. These goods could not be sold on the free market.

The second category included meat, aquatic products, tobacco, tea, silk and sugar and was subject to "pai gou", or imposed purchase: the government set compulsory procurement quotas and prices but permitted free market sales of surpluses. There were no compulsory quotas for goods in the third category, which consisted of vegetables, fruit and some industrial crops. However, government agencies set prices and controlled interregional trade within the country; producers could trade only in local markets.

In the early 1980s, additional market-oriented reforms had legalized wholesale markets and allowed free market trade in cereals (provided the procurement quota was fulfilled). The government gradually reduced the quantity of items covered by procurement quotas and reformed the rural supply and marketing cooperative system. These policy changes fostered farmer-owned marketing enterprises, including both private cooperatives and individual businesses. In the early 1990s, private marketing enterprises reached 3.7 million and employed around 14 million people.

These enterprises purchased farm products from traders in local markets or directly from farmers and then processed, transported or sold them in large wholesale markets. in many cases, they competed with government purchasing agencies (the reformed rural supply cooperatives). By the end of 1993, Chinese farmers sold about 85 percent of their agricultural products in private sector trades at market prices.

By the mid-1980s, non-agricultural goods also moved progressively out of the mandatory plan and private distribution systems, and market channels gradually expanded. The government introduced "dual track" pricing for industrial goods in 1985 (permitting output above target levels to be sold on the free market) and began phasing out procurement pricing in the late 1980s. In 1980, 90 percent of industrial goods were allocated under the central plan; by 1994, the proportion of industrial goods under state planning declined to less than 10 percent. In addition, the number of consumer goods administered by government agencies, including basic food items, declined from 274 in 1978 to 14 in early 1994.

Rural reforms and agricultural development

The real gross value of agricultural output more than doubled during the 1980s and was accompanied by substantial diversification and increased productivity. For example, between 1979 and 1985, land area planted to cereals declined by 6 percent and crop cultivation's share in agricultural employment declined from 93 percent to 70 percent, as farmers shifted resources and labour to more profitable farm activities such as fruit and vegetables. The total agricultural labour force declined from more than 70 percent of total population in 1979 to 58 percent in 1993, but agriculture's share of national income remained at 33 percent.

Nevertheless, this reallocation of resources did not decrease output. The availability of cereals increased from 305 kg per caput in 1978 to 400 kg in 1984. Total cereal production increased from 304.8 million tonnes in 1978 to 456.4 million tonnes in 1993, a 50 percent increase. Over the past 15 years, yields in cereals, cotton and oilseeds increased by 3.5 percent per year. Increased inputs accounted for most of these productivity gains - chemical fertilizer use tripled and the number of small tractors quadrupled.

Livestock production, fisheries, forestry and other non-crop activities expanded even more rapidly. Over the past 15 years, livestock and fisheries output increased by 10 percent per year, forestry production by 5 percent and other "sideline" activities by 15 percent. Even though the value of crop output increased by more than 4 percent per year, the share of crops in the total value of agricultural output decreased from 77 to 60 percent. Livestock production's share increased from 14 percent to 26 percent of total output. The relative liberalization of livestock markets and rapid income growth have caused meat production and consumption to expand more rapidly than all other agricultural products. During the 1980s, per caput consumption of pork increased by 200 percent, poultry by 440 percent and eggs by 290 percent.

However, this rapid economic growth and transition to a market-oriented economy has been accompanied by periods of high inflation and macroeconomic imbalances. The government introduced several austerity programmes to curb inflation and cool down the overheating economy during the last half of the 1980s. Consequently, in 1989 and 1990, the rate of growth in real GNP declined to about half the average annual rate experienced during the first years of reform,

In addition, the benefits of growth have not been evenly distributed. For example, strong rural sector growth played an important role in bringing down poverty levels during the first half of the 1980s, but a subsequent slow-down in agricultural growth after 1985 coincided with the stagnation of poverty levels. The number of rural poor declined from 260 million in 1978 to 100 million in 1990 (or from 33 percent of the rural population to around 12 percent). However, during 1985-1990, the incidence of rural poverty remained roughly constant.

In 1978, most of the poor resided in areas where rapid productivity pins were feasible through an increased use of farm inputs and hybrid seeds. By 1985, however, China's remaining poor were concentrated in the less productive rain-fed areas. While some increases in productivity were achieved in these resource-poor areas, available evidence suggests that the pins in agricultural growth were largely offset by population growth.

Ironically, the dramatic increase in cereal availability in the early 1980s led to a second round of policy reforms that adversely affected many farmers. The record-breaking cereal and cotton harvest of 1984 produced a serious fiscal problem for the central government because it was still committed to purchasing, at relatively high prices compared with consumer prices, all above-quota cereal production from farmers. While the government had raised retail prices on pork, fish and eggs to compensate for increased procurement prices, the retail prices for basic necessities such as cereals and edible oils were not increased. Thus, food subsidies increased from 8 percent of the state budget in 1979 to 25 percent in 1984. This represented an unsupportable financial burden for a country seeking to allocate more investment to the industrial sector.

To reduce this burden, the government converted the 30-year-old procurement system into a "contract purchase" system, eliminating mandatory quotas for cotton in 1984 and for cereals in 1985. The new system established unified prices equal to the weighted average of the quota and above-quota prices at the 1984 level. In addition, it set lower quotas for cotton purchases, raised the cost of input items such as diesel and fertilizers and reduced state investments in agriculture. Lower prices for cereals and cotton reduced both area planted and input use: cereal production decreased by 7 percent in 1985 and cotton by 34 percent.

Rural enterprise development and agriculture

After the commune system had dissolved, the government permitted townships to inherit the administrative functions and property of the communes and villages to assume the functions and property of brigades. These township and village enterprises (TVEs) soon began operating as collective enterprises, producing a variety of goods and services, many of which provided inputs to farmers. Meanwhile, privately owned rural enterprises developed quickly.

In the mid-1980s, when the government began addressing the fiscal problems caused by food subsidies and cereal procurement, a series of policy reforms focused on TVEs and urban industrial enterprises. These included a system of retainable profits, the right to sell above-plan output on the free market and the permission to hire labour (and allowing farmers to work off the farm). The government further encouraged TVEs with tax exemptions and subsidized credit. However, the TVEs expanded beyond all expectations. Between 1978 and 1993, TVE output increased at annual rate of 21 percent, and employment by 12 percent. In 1978, WE output accounted for only 35 percent of agricultural output but, by the early 1990s, the ratio had increased to approximately 200 percent. Between 1978 and 1993, the number of TVEs increased from 1.5 million to 20.8 million, creating nearly 80 million jobs for peasants who were said to be "leaving the land but not the countryside".

TVEs have had mixed effects on the agricultural sector. For instance, in the first years; after the reforms, TVEs contributed to agricultural growth by providing inputs, technical services and improved infrastructure in the community. They also created employment, absorbed surplus labour, increased rural incomes and narrowed the gap between rural and urban sectors. However, the drawback was that TVEs provided higher investment returns than agriculture while competing for the same resources; as a result, farmers and the state gradually began investing more of their new savings in TVEs and less in agriculture. This has had negative effects on agricultural production and created a new income gap between agricultural work and rural industry.

Moreover, throughout the 1980s, while TVE production for urban and export markets increased, the production of agricultural inputs declined: nitrogen fertilizer by 27 percent and farm machinery by 50 percent. Many farmers were forced to travel long distances to purchase these inputs in cities, thereby raising production costs and lowering farm income, which further reduced incentives to invest in agriculture.

As agricultural price incentives were reduced in 1984 and cereal production slackened, the declining profitability of agriculture induced many farmers to invest most of their new savings and labour in these TVEs. By 1993, TVEs' total outstanding loans with the rural credit cooperatives amounted to Y 147.2 billion, while their total deposits amounted to only Y 30.2 billion. At the same time, farmer households' deposits and outstanding loans amounted to Y 286.7 and Y 75.9 billion, respectively. The TVEs had extracted Y 117 billion from the farming sector, an amount roughly equal to 30 percent of the value of total fixed production assets owned by farm households at the end of 1992.

Farmers' investment in agricultural assets as a percentage of their savings decreased from 25 percent in the early 1980s to less than 6 percent in the early 1990s. Likewise, state investment in agriculture fell from 10 percent of the national total during the last half of the 1970s to 3.3 percent during the last half of the 1980s. On average, capital investment in agriculture by the state and farmers together was only 30 percent of the TVE investment between 1985 and 1990. Recent evidence suggests that insufficient farming investment and a weak infrastructure are beginning to limit growth. For instance, irrigated land remains close to the 1979 level and 25 percent of the country's reservoirs are shrinking because of sedimentation and erosion.

TVEs create additional problems for the agricultural sector. For instance, unlike urban enterprises, which attract entire families, TVEs tend to draw the best educated and most able workers from families, leaving less productive household members on the farm. Finally, TVEs are not subject to the same environmental legislation as urban industries and they are degrading agricultural land and irrigation water in many areas.

Future directions in farm organization and agriculture

In 1994, only seven agricultural products were still subject to some type of government control. Price controls on cereals and edible oils were relaxed in mid-1993 and futures markets were introduced for cereals. The central government has announced that administrative controls on cereals and oilseeds will be completely removed by 1996.

As retail price controls are lifted and the rationing system is phased out, urban residents are buying more and more staple foods on the free market. By June 1993, only three provinces (Tibet, Hainan and Gansu) retained the longstanding system of cereal rationing, under which urban residents are entitled to purchase low-priced cereals with coupons. In all the other provinces, cereal coupons have been eliminated arid workers given partial compensation in the form of additional wage supplements.

These changes will continue to place numerous pressures on China's agricultural sector throughout the 1990s. High income growth combined with further reductions in basic consumer subsidies will continue to alter food consumption patterns. The higher income elasticities for livestock and feedgrains imply that demand for these commodities will increase faster than for rice. Demand for better-quality wheat, fruit, vegetables and japonica rice also appears to be rising.

Likewise, production supports for cereals will affect incentive structures and farmers' decisions about -what to plant. In addition, future agricultural sector growth and improvements in cereal production depend on policy changes regarding investment policy, labour and population migration, property rights and further reforms of cereal production, marketing and storage systems. For example, an important concern facing China's policy-makers is the fragmentation of farmland. When households became independent producers in the early 1980s, a typical farm included four or five parcels scattered in different locations, suitable for different uses and totalling about 0.5 ha. Production incentives increased, but scale economies were lost. Some production teams attempted to consolidate landholdings, but total size was not affected. Moreover, attempts at consolidation often resulted in a conflict of interests among households. Other farmers lack confidence in the long-term land and asset leases.

China's policy-makers are currently discussing measures to further reform farm institutions by allowing the free migration of labour and population, both between regions and from rural to urban areas. The purpose is to encourage some households to leave the land, which would allow others to consolidate holdings and improve efficiency. One barrier is the resident registration system, which assigns a different legal status to rural and urban inhabitants and restricts where individuals can live and work. The government introduced a proposal to reform this system in March 1994.

A second issue is the confusing legal status of landownership and property rights. in the early 1980s, farmers signed contracts with the production team, which represented the formal owner of land and assets. However, the government retained the right to change the time length of land leases. in most rural areas today, the current land tenure concerns are the security, length, transferability and "marketability' of land leases
(and the implications for long-term investments). One recent experiment divided all the land in a village into two categories: one for distribution among existing members perpetually and the other for open bidding. Landownership remains a sensitive issue and a practical problem that will persist in the years to come.


The Pacific island nations include a wide range of economies, landforms, resource endowments and population densities. The countries in the subregion face a number of common constraints, however, including small domestic markets, a narrow resource and production base, relatively high unit costs of infrastructure, a heavy dependence on external trade and vulnerability to external shocks and disasters. in addition, the Pacific Islands lack proximity to a large, high-income market (unlike the Caribbean islands).

Economic growth tends to be erratic, with long-term growth rates just keeping pace with population growth. GNP per caput ranges from $1830 in Fiji to $560 in the Solomon Islands. Social indicators generally compare favourably with developing countries at the same or higher levels of income. The countries have relatively rich natural endowments, a high ratio of land per person and vast areas of ocean containing significant mineral and fishery potential. The average sea area is more than 24 times that in the Caribbean.

Over the years, the Pacific Island countries have taken advantage of large consessional aid flows, workers' remittances and a natural resource base that is favourable for subsistence living. Absolute poverty is low but relative poverty is still a problem in the Solomon islands and Vanuatu. Recent food self-sufficiency rate indicators demonstrate high levels for all countries, ranging from 95 percent in Papua New Guinea to 145 percent in Vanuatu.

Per caput income has stagnated since the early 1980s and average population growth rates remain above 2 percent. This low economic growth and stagnation despite high levels of foreign resource inflows and high rates of investment is often referred to as the "Pacific paradox". Owing to limitations of monetary policy in small, open economies with relatively high levels of external grants and workers remittances, fiscal policy is the main macro policy instrument. The most recent common development strategy is to seek export opportunities and efficient import substitutes to promote their domestic economies.

Agriculture, fisheries and forestry are three of the most important activities identified as holding promise for future development (tourism and small-scale manufacturing are two others). Agriculture is the largest employer in the region and is dominated by a combination of semi-subsistence root crops and garden vegetables and by the production of copra, cocoa, sugar and coffee for export. Failing and unstable prices of traditional export crops have stimulated producers to diversify into nontraditional products such as squash, vanilla, melons, coconut cream and range-fed beef for export markets.

Even though sea rights are very large, little domestic investment has gone to the fisheries sector. In the past, leasing fishing rights to foreign ships has been preferred to encouraging indigenous fisheries capacity. More recently, however, many governments have promoted linkages between foreign fisheries and the fledgling domestic industry. The domestic fisheries will need to improve local skills, expand collection and marketing facilities, reserve sections of their economic zones for local fishing communities and provide adequate incentives - fiscal, financial and infrastructural.

The environment in the Pacific Islands is fragile and is coming under stress from various sources and types of degradation. These environmental concerns are emerging as the most important feature in long-term development strategies because of the high degree of economic and cultural dependence on the natural environment. While none of these environmental issues are unique to the Pacific Islands, most are exacerbated by small, low land masses dispersed over part of the world's largest ocean, resulting in vulnerability to rises in sea level, a high degree of ecosystem and species diversity and vulnerability to natural disasters.

Environmental issues that are common across the region include: the impacts of population growth on urban water supply and sewage; degraded watersheds from forestry practices and related deforestation; threats to coastal and atoll aquifers; marine pollution from nutrient contamination (deforestation, sewage and land clearing); land degradation from erosion and soil compaction; loss of biodiversity; and high sea driftnet fishing and overharvesting of marine resources.

Latin America and the Caribbean

Regional overview

In accordance with the widely adopted market-oriented economic principles, most countries in Latin America and the Caribbean have advanced further in the process of deregulation, privatization and external opening of their economies. These policies have continued to make inroads into the longstanding problems of high inflation and external account and fiscal imbalances. Inflationary pressures have slowed, in some cases dramatically. External indebtedness, still a major impediment to full recovery, has nevertheless abated somewhat thanks to debt restructuring and reduction measures as well as the general decline in interest rates since the early 1990s. The new climate of confidence created by improved economic prospects and external openness have given rise to large inflows of private capital. Regional integration has gained significant momentum, a remarkable feature of the current process being a greater openness of regional trading arrangements vis--vis "outsiders".

These achievements are not exempt from dark areas and uncertainties, however. Economic growth rates did accelerate markedly in most countries during the 1990s, but only a few achieved significant gains in per caput terms. Regional GDP growth in 1993 was still substantial at 3.2 percent (excluding Brazil, 2.6 percent) although well below the annual average of nearly 5 percent for the two previous years. Inflation fell to single-digit levels in Argentina, Bolivia and Mexico and also fell considerably in previously hyperinflationary economies such as Peru and Nicaragua. However, the inflation rate exceeded 2200 percent in Brazil, which was a destabilizing influence throughout the region. The regional current account deficit increased considerably in 1993 (to 2.5 percent of GDP, compared with about 1 percent in the early 1990s), the trade balance having turned negative for the second consecutive year since the outbreak of the crisis in the early 1980s. The large inflows of capital to economies that are notoriously vulnerable to inflation have created "new generation' problems of economic management. Faced with the necessity to counter an excessive liquidity buildup, governments have operated monetary (and to a lesser extent fiscal) adjustments, a general effect of which being higher interest rates. At the same time, foreign exchange policies have continued to be implemented as instruments for internal stabilization, the result being a progressive overvaluation of national currencies in many countries, which has negatively affected their external competitiveness.


Last but not least, major efforts remain to be made in broadening the base of economic recovery and extending its benefits to the large segments of society who continue to live in situations of extreme poverty. Structural adjustment has at long last begun yielding growth and stabilization dividends and may have set the basis for more stable and sustained patterns of growth in many countries. Nevertheless, market-oriented reform has yet to prove its effectiveness in creating the conditions for a more equitable resource and welfare distribution in the region. The economic recovery provides an opportunity for governments to turn their priorities away from day-today problems of crisis management to more structural concerns, including those in the social sphere.

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