Solomon Islands: Country Economic Memorandum Unlocking New Sources of Economic Growth July 2024 2 Solomon Islands: Country Economic Memorandum Acknowledgement: The team would like to acknowledge and thank all those who provided input to this analysis. Lodewijk Smets and Reshika Singh managed the task. The lead authors for Chapter 1 and 2 are Lodewijk Smets and Lachlan McDonald. Chris Miller led Chapter 3, with key inputs from Rebecca Monson, John Cox, Joseph Foukona, Joyce Onguglo, Rida Furrukh, Stamatis Kotouzas (Land), Mohammed Audah (Labour Market Skills), Seruwaia Cagilaba (IMF) (Finance), Renee Berthome (Energy), and Reshika Singh. Lodewijk Smets led Chapter 4, with key inputs from Son Thanh Vo, Mark Johnston, Allan Tobalbal (Agriculture), Xavier Vincent, Lachlan McDonald (Fisheries), Becky Last, Shihab Azhar, Smiley Giobauta, Eldine Devesi (Tourism), Dung Doan, Vincenzo Vinci, Roman Merga (IMF) (Labour Mobility), and Reshika Singh. Shohei Nakamura, Ryoko Sato, Alice Calder, Giorgia Demarchi, Blair Lapres, Rida Furrukh, Steven Pennings, Federico Fiuratti, Rajesh Rohatgi, Hassan Noura, Sandra Murray, Serkan Altin, and Bridgette Hogan provided valuable analytical inputs and support. The team is grateful to the government for their cooperation in providing data and feedback and to key development partners in Solomon Islands for their support. Specific thanks goes out to Selwyn Takana (MoFT) who acted as the CEM focal point, and to the Solomon Islands National Statistics Office for sharing the census data and supporting the business survey. The team would also like to thank Lalita Moorty, Lars Moller, Steve Ndegwa, Paul Vallely, David Gould, and Annette Leith for providing overall guidance as well as the peer reviewers for useful feedback and suggestions. Angela Takats edited the report and Greenhouse Studio provided graphic design services. © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Solomon Islands: Country Economic Memorandum Unlocking New Sources of Economic Growth. ©World Bank.” Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: Neil Nuia/World Bank Cover design: Greenhouse Studio Solomon Islands: Country Economic Memorandum 3 Contents List of Figures 06 List of Tables 08 List of Boxes 09 Acronyms 10 Executive Summary 12 1. Solomon Islands Growth Performance: Trends, Outlook, and Key Constraints 23 1.1. Country Context ..................................................................................................................... 24 1.2. Characteristics of Economic Growth........................................................................................ 25 .........................................................................................................................................................................25 1.2.1. Historical Trends. 1.2.2. Growth Decomposition. ...........................................................................................................................................................31 1.2.3. Other Salient Aspects. ..............................................................................................................................................................32 1.3. Growth Outlook....................................................................................................................... 34 1.4. Key Constraints....................................................................................................................... 39 2. Overcoming Economic Geography Constraints in Solomon Islands 41 2.1. A Snapshot of Economic Geography in Solomon Islands............................................................ 42 2.2. Transport Connectivity and Economic Geography..................................................................... 44 2.2.1. The National Transport Network.........................................................................................................................................44 2.2.2. Transport Connectivity Challenges...................................................................................................................................46 2.2.3. Transport Connectivity and Economic Activity...........................................................................................................49 2.3. Digital Connectivity and Economic Geography.......................................................................... 52 2.3.1. Digital Connectivity...................................................................................................................................................................52 2.3.2. Digital Connectivity Challenges..........................................................................................................................................53 2.3.3. Digital Connectivity and Economic Activity..................................................................................................................56 2.4. The Honiara Urban Area........................................................................................................... 58 2.5. Policy Recommendations for Improved Spatial Development.................................................... 61 3. Boosting Private Sector Development 65 3.1. Snapshot of the Private Sector................................................................................................. 66 3.2. Constraints to Private Sector Development.............................................................................. 75 3.2.1. Land Use.........................................................................................................................................................................................76 3.2.2. Labor Market Skills....................................................................................................................................................................81 3.2.3. Access to Finance......................................................................................................................................................................86 3.2.4. Energy...............................................................................................................................................................................................90 3.3. Policy Recommendations......................................................................................................... 94 4 Solomon Islands: Country Economic Memorandum 4. Unlocking New Sectoral Sources of Economic Growth 98 4.1. Agriculture.............................................................................................................................. 98 4.1.1. Context.............................................................................................................................................................................................99 4.1.2. Opportunities and Challenges.............................................................................................................................................106 4.1.3. Recommendations.....................................................................................................................................................................111 4.2. Fisheries................................................................................................................................. 112 4.2.1. Context.............................................................................................................................................................................................112 4.2.2. Opportunities and Challenges.............................................................................................................................................115 4.2.3. Recommendations.....................................................................................................................................................................118 4.3. Tourism................................................................................................................................... 119 4.3.1. Context.............................................................................................................................................................................................119 4.3.2. Opportunities and Challenges.............................................................................................................................................121 4.3.3. Recommendations.....................................................................................................................................................................123 4.4. Labor Mobility and Migration................................................................................................... 124 4.4.1. Context.........................................................................................................................................................................................................124 4.4.2. Opportunities and Challenges.........................................................................................................................................................127 4.4.3. Recommendations.................................................................................................................................................................................130 References 131 Annex 136 Benchmarking Solomon Islands Against its Peers............................................................................ 136 Solomon Islands Long-Term Growth Model....................................................................................... 136 CEM Topics and Drivers of Growth................................................................................................... 138 CEM 2.0 Approach.......................................................................................................................... 139 Key Constraints to Economic Growth............................................................................................... 140 Solomon Islands Aviation Network................................................................................................... 142 Connectivity Regression Analyses.................................................................................................... 144 Land Registration and Land Recording in Solomon Islands............................................................... 146 Summary of RSE and PALM............................................................................................................. 148 Tourism Investment and Comparisons............................................................................................. 149 Solomon Islands: Country Economic Memorandum 5 List of Figures Figure 1: CPIA public sector management and institutions cluster average (1=low to 6=high) 25 Figure 2: Solomon Islands GDP annual percent change 26 Figure 3: Solomon Islands annual growth rates 27 Figure 4: Solomon Islands vs. comparators: Contributions to growth 2011–2021 27 Figure 5: GDP per capita relative to peers 28 Figure 6: Growth relative to aspirational peers (=1) 29 Figure 7: Annual contribution to total GDP growth 31 Figure 8: Sectoral contribution to GDP (share of total) 32 Figure 9: Sectoral composition of work, 2009-2019 (percentage of workers) 33 Figure 10: Value-add per worker by sector 33 Figure 11: Long-term growth trajectory, business-as-usual scenario 37 Figure 12: Long-term growth trajectory, reform scenarios 38 Figure 13: Ward-level population 43 Figure 14: Stylized map of the transport network in Solomon Islands 46 Figure 15: Roads and roads accessibility 48 Figure 16: Individuals using the internet 53 Figure 17: Ward-level internet usage (proportion of population 15+ using internet) 55 Figure 18: Digital and financial inclusion* (2019) 57 Figure 19: Urban population average annual growth rate (2009–2019) 59 Figure 20: Honiara population total 60 Figure 21: Breakdown of formal enterprises by location 66 Figure 22: Solomon Islands’ service exports thousand US$ (2005–2022) 67 Figure 23: Share of firms applying technology across business functions 69 Figure 24: Share of employees with capability/education 69 Figure 25: Nominal exports (US$ million) 70 Figure 26: Solomon Islands’ trade balance, 2005–2022 71 Figure 27: Solomon Islands’ service import composition (2022) 71 Figure 28: Solomon Islands’ service export composition (2022) 72 Figure 29: Average foreign direct investment, net inflows, percentage of GDP (2013–2024) 73 Figure 30: Total number of new registrations per sector (Jan 2018–Jun 2023) 74 6 Solomon Islands: Country Economic Memorandum Figure 31: Total number of new registrations per country (Jan 2018–Jun 2023) 75 Figure 32: Share of firms identifying each issue as an obstacle to their business 75 (percent of respondents) Figure 33: Geographical distribution of customary and non-customary land 77 Figure 34: Educational attainment and economic development 82 Figure 35: Human Capital Index 82 Figure 36: Ten summary facts on key issues facing Solomon Islands’ education system 83 Figure 37: Expected years of schooling 84 Figure 38: Share of over and under-education in the workforce 85 Figure 39: Summary of human capital and economic growth projections 86 Figure 40: Number of deposit accounts with commercial banks per 1,000 adults 87 Figure 41: Outstanding SME loans with commercial banks (percentage of GDP, 2022) 87 Figure 42: Loans and advances by sector (US$ millions), 1H20-1H23 88 Figure 43: Volume and value of digital banking transactions in Solomon Islands and 89 Samoa, 2018–2022 Figure 44: Outstanding loans and deposits from commercial banks as share of GDP, 2022 90 Figure 45: Solomon Power operation sites 91 Figure 46: Access to electricity, percentage of population (2012–2020 average) 92 Figure 47: Electricity tariffs for commercial users 93 Figure 48: Crop production and sale, by province 102 Figure 49: Main source of income from crop sales 103 Figure 50: Main agricultural exports 105 Figure 51: Main source of income from fishing 113 Figure 52: Export destinations for tuna (2020) 114 Figure 53: Key tourism areas in Solomon Islands 121 Figure 54: Type of economic activities by gender, 2019 125 Figure 55: Estimated formal job creation and labor market entrants 126 Figure 56: Stock of emigrants 129 Figure A.1: Constraints according to the Hausmann-Rodrik-Velasco (2005) framework 140 Figure A.2: Solomon Islands key indicators 142 Figure A.3: Connectedness at the ward-level 144 Figure A.4: ADB-financed wharf investments 145 Solomon Islands: Country Economic Memorandum 7 List of Tables Table 1: Recommendations table 22 Table 2: Medium-term economic outlook 36 Table 3: Linear regression results transport connectivity 51 Table 4: Difference-in-differences regression results of wharf investment 51 Table 5: Connectivity factors, digitalization initiatives, and legal coverage in 54 Solomon Islands Table 6: Enterprise size 67 Table 7: Foreign direct investment inflows by country and volume 74 Table 8: Land types and registration processes 78 Table 9: Crop production in Solomon Islands 101 Table 10: Yield gaps for main commodities 104 Table 11: Production cost of canned fish across Solomon Islands and other 116 countries in EAP Table 12: Income premium of temporary labor mobility schemes 128 Table A.1: Link between CEM topics and drivers of growth 139 Table A.2: The guiding questions 140 Table A.3: Constraints identified in the literature 141 Table A.4: Domestic transportation prices from Honiara to major provincial 143 destinations as of August 2023 Table A.5: Land registration and acquisition under Division 1 of the Lands and 146 Titles Act Table A.6: Land recording under Customary Land Records Act 147 Table A.7: Summary of RSE and PALM 148 Table A.8: Tourism investment incentives 149 Table A.9: Tourism investment process 150 Table A.10: Tourism sector – Comparison with aspirational peer (Fiji) 151 8 Solomon Islands: Country Economic Memorandum List of Boxes Box 1: Fragility, conflict, and violence: The impact on economic growth 30 Box 2: Land solutions: Guadalcanal Plains Palm Oil Limited – Outgrowers 80 Association – Tina River Hydro Box 3: Constraints in the agricultural value chain 109 Box 4: Russell Islands Plantation Estate Limited (RIPEL) 110 Box 5: Tourism development and land-related constraints in Solomon Islands 123 Solomon Islands: Country Economic Memorandum 9 Acronyms GDP Gross Domestic Product ADB Asian Development Bank GER Gross Enrolment Rate ASR Adult Survival Rates GFCF Gross Fixed Capital CBRM Community-Based Formation Resources Management GNI Gross National Income CBSI Central Bank of Solomon Islands GPPOL Guadalcanal Plains Palm Oil Ltd CEM Country Economic Memorandum HACCP Hazard Analysis and Critical CIEWS Climate Information and Early Warning Systems HCI Human Capital Index CLPE Customary Land Perpetual HIES Household Income and Estate Expenditure Survey CP Control Points ICT Information and Communications CPIA Country Policy and Technology Institutional Assessment IMF International Monetary CPSD Country Private Sector Fund Diagnostic IPP independent power CRB Coconut Rhinoceros producer Beetle IUU illegal, unreported, and EAP East Asia and Pacific unregulated EEZ exclusive economic zone kW kilowatts EYS expected years of kWh kilowatt hour schooling LAYS Learning-Adjusted Years of FADs fish aggregating devices Schooling FDI foreign direct investment LDA Livestock Development FSS Franchise Shipping Authority Scheme 10 Solomon Islands: Country Economic Memorandum LMA Loka Mamata Association PPA Power Purchase Agreement LMU Labour Management Unit PPP Purchasing Power Parity LTGM Long Term Growth Model PRIF Pacific Regional MCILI Ministry of Commerce, Infrastructure Facility Industry, Labour and Immigration RSE Recognized Seasonal Employer MEHRD Ministry of Education, Human Resource RTCs Rural Training Centres Development SBD Solomon Islands Dollar MFMR Ministry of Fisheries and Marine Resources SCD Systematic Country Diagnostic MHMS Ministry of Health and Medical Services SINSO Solomon Islands National Statistics Office MMERE Ministry of Mines, Energy and Rural Electrification SME small and medium-sized enterprises MSMEs micro, small, and medium enterprises TFP Total Factor Productivity MW megawatts TVET Technical and Vocational Education and Training NBPOL New Britain Palm Oil Limited UN United Nations NCDs Non-communicable UNCTAD United Nations Conference diseases on Trade and Development NDS National Development WCPFC Western and Central Pacific Strategy Fisheries Commission NER Net Enrolment Rate WCPO Western and Central Pacific Ocean NRH National Referral Hospital PALM Pacific Australia Labour Mobility PICs Pacific Islands Countries Solomon Islands: Country Economic Memorandum 11 12 Solomon Islands: Country Economic Memorandum Executive Summary ABSTRACT: A Country Economic Memorandum (CEM) is a diagnostic instrument to analyze key constraints to growth, support policy dialogue with the government, and inform engagement with different stakeholders. During February 2023 and March 2024, a CEM was conducted for Solomon Islands, titled ‘Solomon Islands: Country Economic Memorandum – Unlocking New Sources of Economic Growth’. The CEM examines key barriers to sustainable economic development, with a focus on challenges of economic geography, obstacles to private sector activity, and constraints in four key sectors with high growth potential (i.e., agriculture, fisheries, tourism, and labor mobility). The CEM provides actionable policy recommendations to help overcome the identified barriers and unlock new sources of economic growth. Context 1. Solomon Islands is a small, remote archipelago However, the Tensions2 and slowing growth that faces a unique set of development in the last decade have caused the gap in per challenges, characterized by its economic capita incomes to persist. Notably, by 2022, geography and limited state capacity. A Solomon Islands had still not bridged the gap population of 721,000, dispersed across 90 created by the Tensions, with per capita incomes inhabited islands, complicates public service 5 percentage points lower than 1999 levels. delivery and makes the provision of infrastructure Additionally, Solomon Islands had no convergence disproportionally costly. A small domestic in per capita incomes with its peer countries. By economy, internal division, and remoteness from 2022, per capita income was less than one-fifth of large export markets limit private sector activity the level of aspirational peers, having been closer and international trade. Furthermore natural to one-third of per capita income pre-Tensions. disasters and the impacts of climate change pose 3. The country’s historical growth driver, the a continuous threat to sustainable development. logging sector, is in rapid decline, stressing the Finally, limited state capacity tends to constrain urgent need to unlock new sources of growth. the design and implementation of effective Solomon Islands has a long history in logging, public policies, resulting in large development dating back to pre-independence. At its peak in gaps. To illustrate, in 2022, Solomon Islands was 2016, 3 million cubic meters of round logs were ranked 156th out of 193 countries on the Human harvested, accounting for 22 percent of GDP, Development Index. 70 percent of goods exports, and 19 percent of 2. Economic growth in Solomon Islands has been domestic revenue. After years of unsustainable slow and volatile, contributing to a widening extraction, the sector is now in long-term decline gap in per capita incomes compared to peer as reserves of sizable logs have largely been countries. For much of its history, economic depleted. In 2022, log production dropped to growth in Solomon Islands has been volatile, 1.6 million cubic meters, a halving of output in driven by developments in the primary sector. In merely seven years. Solomon Islands therefore 1999, the level of per capita income in Solomon faces a pressing need to find new sources of Islands was 28 percent lower than the average economic growth to offset the decline in forestry. of lower-middle-income countries and broadly Outside logging, however, most other sectors are equivalent to the average of its structural peers.1 underdeveloped. 1 Structural peers are Comoros, Kiribati, Micronesia, Samoa, Timor-Leste, and Vanuatu – selected based on economic and geographic characteristics. Aspirational peers are Fiji, Grenada, and Maldives – countries that have reached a higher level of economic development. 2 The ‘Tensions’ is a term given to a period of civil unrest in the late 1990s in which inequities in resource distribution and economic opportunities sparked conflict between provincial ethnic groups. 14 Solomon Islands: Country Economic Memorandum 4. Without reform, Solomon Islands is unlikely Adding to these challenges is the country’s to achieve upper-middle-income status by transport network, which currently is below 2050. Assuming historical growth fundamentals standard, with poor quality roads and maritime continue, GDP growth will average 3.2 percent infrastructure, irregular shipping services, and over the period 2024–2050, yielding a gross congestion at key connectivity points. While national income (GNI) per capita of US$3,160 digitalization has the potential to overcome by 2050, well below the upper-middle-income certain geographic challenges, only 17.5 percent threshold of US$4,465. In this scenario, the of the 12+ population has access to the internet country benefits neither from large productivity in Solomon Islands. Furthermore, internet access gains nor from sizeable investment accelerations. is geographically concentrated and distinctively It is clear that without sustained reform and gendered, with males having systematically tapping into new sources of growth, Solomon higher access rates than females. Due to the Islands will not achieve the growth objective laid country’s geography, expanding high-quality out in the National Development Strategy 2016– internet coverage is costly. 2035 (NDS), i.e., 5 percent GDP growth by 2025 and 7 percent by 2030 and beyond. 7. Furthermore, the rapid but uncontrolled migration to Honiara has delivered few 5. On the other hand, a comprehensive reform economic benefits. While Solomon Islands effort could provide a significant boost to long- remains a predominantly rural country, its pace term economic development. Opportunities of urbanization has been among the fastest in exist to address economic geography the world. The annualized urbanization rate over constraints through digitalization, improved 2009–2019 was 5.8 percent, more than double transport connectivity, and better urban compared to lower-middle-income countries. planning. Furthermore, enhancing the business Much of this growth occurred in Honiara, with a environment may stimulate private sector doubling in the city’s population between 2009 investment, especially in tourism, agriculture, and and 2019. While urbanization generally is a driver fisheries. A focus on educating the workforce and of growth through non-farm job creation and a deeper engagement in temporary labor mobility agglomeration externalities, in Solomon Islands it programs may generate the skills needed for the has led to increased urban unemployment and a private sector to thrive. A reform effort targeting lack of structural transformation. A key reason for these growth drivers would provide a significant the limited ability of Honiara to effectively absorb boost to long-term economic development internal migrants is that the city government (through increased total factor productivity, lacks many foundational tools for effective urban human capital, and private investment). In an planning and service delivery. ambitious reform scenario, Solomon Islands would reach upper-middle-income status by 2040. 8. Overcoming economic geography constraints may spur spatial development in Solomon Overcoming Economic Islands. Results from analyzing the 2019 census indicate that improved transport connectivity Geography Challenges is associated with a shift from subsistence farming to income-earning activities. Relatedly, 6. A challenging economic geography, amplified improving last-mile transport connections (e.g., by limited transport and digital connectivity, is community jetties and marketplaces) has been constraining economic activity. Solomon Islands shown to create scale at provincial transport faces three types of geographical challenges: hubs, resulting in increased economic activity. It remoteness from large export markets; a is important to note that transport investments small and dispersed population; and transport in rural areas can have unintended negative difficulties due to ruggedness and adverse consequences if the enabling environment for maritime conditions. These characteristics private sector development does not exist. make it difficult to realize economies of scale That is, analysis for this report shows that and make it costly to move goods, people, wharf investments in rural areas have increased capital, and information within the country. Solomon Islands: Country Economic Memorandum 15 outward migration (to overcrowded Honiara), Stimulating Private Sector without any significant uplift in non-farm production, indicative of so-called ‘straw effects’.3 Development In terms of digitalization, findings indicate a 10. The formal private sector is heavily positive association between digitalization, concentrated in and around Honiara. Of the employment, and poverty reduction. Furthermore, estimated 2,071 registered businesses in the digitalization can also support financial inclusion, country, more than 85 percent are based in the the provision of information services, facilitate nation’s capital, followed by the Western Province remittance flows, and reduce gender disparities. and Malaita Province (6 percent and 4 percent, 9. To benefit from agglomeration economies and respectively). In rural regions, the number of improve transport and digital connectivity, formal enterprises decreases drastically, pointing several investments are needed, including in towards the prevalence of sizable informal state capacity. Honiara, as the leading area, business activity. Micro enterprises comprise has the potential to drive economic growth. This the majority of businesses, with approximately will require strengthening land administration 80 percent of enterprises having fewer than five systems, upgrading essential services, increasing employees. local revenue mobilization, and adequate urban 11. The sectoral composition of the economy has planning. There is also a need to address both remained remarkably steady over the past ten demand and supply side constraints to facilitate years. In 2022, the primary sector accounted for job creation in the capital. Upskilling the labor 28 percent of GDP, virtually unchanged compared force will require public intervention, but some to 2013. A relatively small, commercialized aspects may be addressed at the firm level. agriculture sector sits alongside subsistence Additionally, strategic public investments in production, which is dominated by an export- provincial urban centers could generate economic oriented forestry industry, though it also includes benefits and reduce migration push factors. The the harvesting of plantation crops and fishing. The binding nature of economic geography constraints industry sector is fairly limited, accounting for in Solomon Islands means there is a rationale 15 percent of GDP. Mining, food processing, and for improvements in transport connectivity (in a construction are the main industrial activities. climate-resilient manner). It is recommended to Urban-based government workers support the implement an infrastructure condition survey, service-based economy – comprising 57 percent improve the existing road network, create scale of GDP – mainly in urban areas like Honiara. in inter-island shipping, and revisit the Franchise Retail, transport, financial intermediation, public Shipping Scheme. More generally, transport administration, and real estate are the largest sector reforms are needed to achieve long-term service sub-sectors. Tourism is currently limited, sustainability. Finally, it is critical to enhance the despite an abundance of exquisite natural capital. availability and affordability of digital connections by providing 4G technology, continuing to expand 12. The business environment imposes high coverage, updating the legal framework, and regulatory compliance costs on businesses potentially tapping into innovations in satellite which contributes to widespread informality. connectivity. Given the positive externalities The government has made progress in recent associated with digital connectivity and binding years beginning to digitalize service delivery – equity constraints, public intervention will be including in areas such as business registration, required. tax reporting, and trade – but most processes still require physical payments and submission of at least some hard documents. More than 3 ‘Straw effects’ of infrastructure occur when newly available connectivity options lead to (uncontrolled) migration to more developed locations instead of rural development (Ono and Asano, 2005). 16 Solomon Islands: Country Economic Memorandum 80 percent of respondents in a World Bank both large and small – that have succeeded with Firm Survey conducted for this study identified innovative land approaches. Learning from these digitalization of government to business services, experiences and scaling up the success stories improved access to finance, and reducing the can help boost value-added economic growth cost and complexity of complying with business while working in parallel on long-term reforms. It environment regulations as reforms that would is important to note, however, that institutional reduce informality. strengthening and complementary reforms are needed for land reforms to generate economic 13. Several constraints explain the limited benefits. structural transformation and are preventing an acceleration of private sector led growth, 15. Investing in skills for the workforce has including land use, labor market skills, access significant potential to boost productivity and to finance, and affordable energy. The Firm economic outcomes. This could be addressed by Survey indicates that key constraints to private great prioritization of initiatives that increase the sector development – identified by both domestic overall education level of the workforce, such as and foreign enterprises – include difficulties in improving access to, and the quality of, primary obtaining land, limited skills in the labor market, and secondary education, vocational training, restricted access to finance, and the high cost teaching quality – and a focus on first language of electricity. Around 80 percent of the land learning. Additional steps to upskill the workforce in Solomon Islands is unrecorded customary include implementing adult education and training land, making access to land, and the ability to programs at the firm level, encouraging the exchange it, severely limited. With respect to development of formal employment opportunities skills, Solomon Islands is among lower-middle- to reduce reliance on the informal sector, and income countries with the highest share of aligning educational investments with broader workers being under-educated for the jobs they economic development plans to ensure that hold, at 54 percent. Private sector development the education system supports the country’s is also hindered by limited access to finance, due economic goals and supplies the necessary to both supply and demand side factors. Finally, human capital for key sectors. energy prices are amongst the highest in the world, while access to grid-connected electricity 16. Policy and structural reforms are needed in Solomon Islands remains low. to improve access to finance for firms in Solomon Islands. Credit growth for businesses 14. Increasing the use of land for economic activity – particularly small and micro enterprises that may unlock investment but will require long constitute the vast majority of businesses by term reform and close collaboration among number – is constrained by several factors stakeholders. Strengthening land administration including high collateral requirements without an systems, including the development of an ability to pledge land as collateral, limited credit electronic cadastral survey system, would information, and the lack of financial literacy greatly improve the efficiency and reliability of among enterprise owners. As a result, interest acquiring land use rights. In addition, recording rate spreads remain large (around 10 percent), customary land (where supported by communal well above Pacific Island averages. Policymakers owners), the creation of a new customary can play a role in addressing barriers to land title, and bringing down the cost of land credit growth by expanding financial market registration would facilitate the use of land for infrastructure such as payment systems and the economic development. Furthermore, effective credit registry, improving digital connectivity and dispute settlement systems are indispensable digital financial literacy, and supporting reforms for resolving land disputes. The government can related to the enforcement of contracts. also consider transferring underutilized public land to private agents. While addressing these constraints will require sustained policy reform, there are good examples of individual projects – Solomon Islands: Country Economic Memorandum 17 17. The transition to renewable energy represents connectivity challenges, limited access to an opportunity to improve the business finance and information, skills gaps, and a environment and the regulatory framework business environment that is not conducive to of the energy sector. While most generating investment. Addressing key constraints – through capacity in Solomon Islands is from diesel-fueled digitalization, mechanization, infrastructure power generation, efforts have been made to investment, skills building, and policy reform – switch to renewables. Furthermore, there is may unlock private investment, raise productivity growing interest in Independent Power Producer and human capital, and thus drive economic (IPP) projects, own-use solar systems, and growth going forward. Additionally, temporary mini-grids, which could help alleviate challenges labor mobility programs and long-term migration with access to and cost of power. The lack of an may absorb the current slack in the labor market effective regulatory framework and economic and provide several economic gains. However, geography constraints prevent these initiatives action is needed to mitigate negative impacts from coming to fruition. Putting these in place of these programs, including the need to build a would increase transparency and predictability strong educational system. for businesses and help facilitate more inward investment. Relatedly, reforms are needed to Agriculture restructure tariffs, update fees and charges, and Agriculture influences the lives and livelihoods 20. improve energy sector regulation. An independent of the vast majority of the population of regulator is critical to the process of unbundling Solomon Islands. About 84 percent of the sector, where the participation of IPPs is households grow crops, with 37 percent of managed effectively through a power purchasing households indicating crop sales as their main agreement. source of income. The sector – representing 17 percent of GDP in 2020 – consists mainly of 18. Furthermore, expanding Solomon Islands’ smallholder (subsistence or semi-commercial) service sector could help improve farmers and a small commercial sector that competitiveness across the whole economy. The focuses on palm oil production and livestock service sector is relatively large, accounting for raising. Large spatial variation exists in terms of 40 percent of employment. Wholesale and retail crop production and dependence on agriculture trade are the largest contributors to the service for income generation. Gender disparities also sector, followed by government services and exist, with men producing and selling more cash transport. International trade in services is also crops, and women concentrating on staple sizable, equal to 18 percent of GDP. This includes crops. Palm oil, coconut products (copra, crude travel and tourism, though revenues from these copra oil, and virgin coconut oil), and cocoa are activities have not been as robust for Solomon the primary goods exported, while the country Islands as other PICs. Further reducing barriers to imports a variety of food products, ranging from trade in critical services such as transportation, rice to poultry/meat. logistics, freight handling, and finance would help improve the competitiveness of the wider 21. Several opportunities exist to expand the economy and mitigate some of the costs agricultural sector. With large yield gaps, associated with geographic remoteness. significant potential exists to increase domestic supply, which would increase consumer surplus Unlocking New Sources of and allow for more export opportunities. Next, Sectoral Growth apart from the existing export commodities, the domestic market could consider import 19. Overcoming economic geography challenges substitutions for a number of goods, with upside and private sector constraints may generate potential in the poultry market. Furthermore, a growth dividend in agriculture, fisheries, given the country’s economic geography, tourism, and labor mobility programs. These downstream processing may add value for sectors have high growth potential (World Bank, perishable goods and export crops. Finally, 2017), but face several constraints, including potential exists to re-develop vanilla farming in 18 Solomon Islands: Country Economic Memorandum certain locations – especially in the Guadalcanal Fisheries plains where climatic conditions are favorable – Similar to agriculture, fisheries play a crucial 24. and also introduce other high-value spices such role for Solomon Islanders. Small-scale fisheries as nutmeg. make a vital contribution to food security and income generation. Approximately 47 percent of To reap those opportunities, numerous 22. households engage in fishing activities, which are constraints need to be addressed. Farmers have integral to providing a low-cost, highly nutritious limited access to finance and insurance products, protein source. Generally, fishing serves as a reducing working capital and farm investment. complementary livelihood activity for three- Limited infrastructure and information causes quarters of fishing households, though there value chains to break down and increases is considerable spatial variation in the extent cost, which puts farmers at a competitive to which fishing is a primary income source. disadvantage. A lack of mechanization and Alongside the subsistence fishing sector sits intermittent availability of input supplies affects commercial fishing that includes relatively agricultural productivity. Quality assurance, food small domestic coastal fishing and aquaculture safety, market access, and unpredictable supply sectors, as well as a larger and more lucrative further limits the opportunity to expand export oceanic fishing sector, in which larger foreign markets. Disease burden, the rhinoceros beetle, and domestic vessels catch tuna at an industrial and climate change pose additional challenges, scale in Solomon Islands’ waters. There is only while low aspirations and limited skills hold limited domestic involvement in the tuna industry, back growth at the farm level. So far, extension with incomes mostly limited to access fees and services have proved ineffective to address these revenue generated from the small share of the constraints. total catch that is processed onshore. Modernizing the agricultural sector combined 23. 25. The combination of favorable endowments and with measures to raise aspirations could lead established practices means there are growth to a substantial growth dividend. Currently, opportunities in the fisheries sector. Linking smallholders are using only basic hand tools small-scale fisheries with growing urban markets to farm, which makes their work arduous and presents opportunities for sustainable and demotivates them from putting in more effort. inclusive growth and for enhancing food security. Context-specific mechanization, modern The large and fertile Western and Central Pacific production technologies, and cost-effective Ocean (WCPO), which holds the largest tuna measures to raise aspirations would increase fisheries globally, positions the country to derive both productivity and motivation. Estimates additional revenue from sales of fishing access suggest this could result in a 4.3 percent of GDP and the further onshoring of tuna processing growth dividend. As far as possible, the private and ancillary activities. Effective regional sector should take the lead in modernizing management of the shared marine resource the sector, with appropriate public support. means that the four main tuna species caught in Furthermore, with digital connectivity set to the WCPO (skipjack, yellowfin tuna, bigeye tuna, expand, using Information and Communication and albacore) are all considered healthy and Technology (ICT) more actively can support sustainable, and none are considered overfished. technology adoption, improve decision making, reduce information asymmetries, and even However, the sector faces several constraints 26. address financing constraints. Finally, to to growth. Small-scale fisheries are generally transform the agricultural sector, both public and inefficient, with limited application of capital and private investment needs to increase. limited extension support. Irregular transport and weaknesses in post-harvest practices – including a lack of a robust cold chain from the point of capture to the point of sale, leads to high spoilage rates and precludes access to higher-value Solomon Islands: Country Economic Memorandum 19 markets domestically and internationally. An 2020 due to the COVID-19 pandemic. In 2023, unfavorable business environment further limits visitor arrivals recovered to 26,030, which is growth and investment in the sector. Climate well above 2022 levels, but below the 2019 variability and illegal, unreported, and unregulated peak. Business and travel for other purposes (IUU) fishing activities also present challenges to have long dominated arrivals. Across all arrivals, the productivity and sustainability of fisheries. Australia continues to dominate market share at Weaknesses in monitoring and surveillance 33 percent in 2023, followed by other PICS, the capabilities exacerbate these challenges. United States, and New Zealand. 27. To support growth in the fisheries sector, 29. With significant historical, natural, and cultural a holistic approach that focuses on the assets, Solomon Islands has the opportunity to constraints of producers and environmental develop niche markets. While Solomon Islands challenges is needed. Investments should has the natural capital to develop mass market address post-harvest challenges and improve models, global competition in these markets is connectivity, as well as enhance information eroding profit margins, making it less desirable. dissemination and port/ freight handling. For Fortunately, alternative tourism segments exist, instance, a robust and efficient cold chain that which could better suit the natural, cultural, is able to eliminate spoilage could generate a and historical endowments of the country. For 1.1 percent of GDP growth dividend by 2028. example, tourism destinations targeting historical Investments and pilots must be based on diving enthusiasts are differentiated from mass detailed pre-feasibility studies and assessments market segments, allowing destinations to better of existing capabilities. Additionally, any push appropriate value. These differentiated tourism for commercialization must not be damaging to segments also tend to be less sensitive to subsistence needs. ICT can play an important connectivity and safety concerns. Crucially, they role in resource management. Better information also involve smaller accommodation providers dissemination can also benefit fishers by that are less vertically integrated than mass broadening the reach of extension services, market segments. sharing critical market intelligence – and providing opportunities for information and To reap these opportunities, there is a need 30. knowledge exchanges, training, mentoring, and to build tourism infrastructure, facilitate collaboration. Adaptive management measures the ease of doing business, and improve and early warning systems are also essential to governance in the tourism sector. It is critical to address climate-related challenges and depletion develop the necessary transport infrastructure, of resources. tourism accommodation and other tourism facilities, without infringing on land rights and Tourism environmental sustainability. Doing so may generate a 1 percent of GDP growth dividend in Despite globally recognized potential, the 28. the medium term. In addition, there is a need to tourism sector in Solomon Islands remains in improve the business environment, including land its nascent stages. Solomon Islands is a pristine use, access to finance, and skill development. archipelago with an abundance of natural, Investment in the sector should be facilitated cultural, and historical attributes. It boasts the through incentives and partnerships between the largest saltwater lagoon in the world (Marovo government, local communities, and the private Lagoon), was a key battleground in the Pacific sector. A designated focal point for investor Theatre of World War II, and offers some of assistance would strengthen linkages and the best scuba diving globally. Despite this accountability within and across agencies. Finally, potential, the tourism sector in Solomon Islands the establishment of tourism satellite accounts is underdeveloped. In 2019, it represented 10 and studies to better understand global and percent of GDP, which dropped to 3.5 percent in local travel trends would help in making informed investment decisions in the sector. 20 Solomon Islands: Country Economic Memorandum Labor Mobility and Migration However, various challenges have been 33. identified with labor mobility schemes, and 31. New entrants to the labor market exceed the long-term migration may have negative effects. number of formal jobs created, resulting in The increasing outflows of workers has raised a large share of Solomon Islanders engaging concerns over brain drain, (low-skilled) labor in low-productivity work. Solomon Islands shortages, and a related reduction in the working- has a young and growing labor force, with an age population. For Solomon Islands, estimates average of nearly 9,000 new workers entering suggest the working-age population may reduce the labor market each year. On the other hand, up to 5 percent by 2040 due to long-term formal job opportunities in Solomon Islands emigration, which could negatively impact GDP are limited and confined largely to the public growth. Other challenges relate to temporary sector. Estimates show that only about 2,100 migrant workers’ welfare and behavior in host formal jobs are created each year, well below countries. Absence from home increases the the number of new entrants to the labor market. workload of remaining family members, especially As a result, a large share of workers engage in women, and affects a gendered division of labor. low-productivity subsistence farming and unpaid There are also reports of marital breakdowns, family work, especially among women and youth, suspicions of infidelity, and adverse outcomes and increasingly so in urban areas. Furthermore, for children. In addition, adverse perceptions and workers in Solomon Islands are not adequately gossip regarding returned female migrants are protected when they lose their job. not uncommon. Temporary labor mobility programs and long- 32. To harness the benefits of labor mobility and 34. term migration may absorb the slack in the long-term migration, a strong educational labor market, providing several economic system, training, and improved governance are gains. Until recently, Solomon Islands did not needed. As the demand for workers expands actively engage in two important regional labor to include higher-skilled professions, the mobility programs,4 neither did the country government will need to invest in better-quality hold a large stock of long-term emigrants. primary and secondary education, including However, participation in the temporary mobility increasing teaching quality, a focus on first schemes has dramatically increased, while language, and improved parental support. emigration accelerated, absorbing the slack Furthermore, the development benefits of in the labor market. These developments may long-term migration depend on a high-quality bring significant economic benefits in terms of education system. But even low-skilled workers increased remittance flows and skill building. need training to succeed in the overseas job Evidence indicates that remittances are used market, including in soft skills, basic literacy, to finance essential household consumption financial management, awareness of cultural and contribute to meeting education expenses. norms, and proper workplace conduct. Next to Remittances are also associated with increased training, measures are needed to mitigate the entrepreneurship. Furthermore, participation in negative impacts of labor mobility programs, seasonal worker programs may improve farming including health insurance arrangements and techniques, organizational skills, and financial family support services. This will require building management, while long-term emigration can capacity in the government’s Labour Management assist with knowledge transfers, government Unit (LMU). Next, developing a strategic approach accountability, and increased incentives to obtain to emigration will help in reaping the benefits from higher education. long-term migration. Finally, Solomon Islands would benefit from building a social protection and jobs system.  4 New Zealand’s Recognized Seasonal Employer (RSE) scheme and Australia’s Pacific Australia Labour Mobility (PALM) program. Solomon Islands: Country Economic Memorandum 21 Table 1: Recommendations table To overcome economic geography constraints: Priority recommendations: • Transport connectivity: Upgrade existing road network (MT); Create scale in inter-island shipping (MT) • Digital connectivity: Expand coverage and affordability of internet access (MT–LT) • Urban planning: Invest in provincial urban centers and strengthen planning (ST–MT); Improve local revenue mobilization (MT) Secondary recommendations • Transport connectivity: Revisit the Franchise Shipping Scheme (ST) • Urban planning: Strengthen land administration systems (ST–MT); Upgrade essential urban services (MT) To stimulate private sector investment: Priority recommendations: • Increase competition in the service sector (ST–MT) • Develop a new customary land title and bring down registration costs (ST–MT) • Support private sector involvement in the energy sector, including an independent regulator (MT) • Expand financial market infrastructure (MT) Secondary recommendations: • Revise electricity fees and charges (ST) • Introduce a single window and electronic payments (MT) • Strengthen TVET training (MT) To unlock new sectoral sources of economic growth: Priority recommendations: • Agriculture: Invest in mechanization (ST–MT); Raise aspirations (ST–MT) • Fisheries: Invest in post-harvest facilities (MT) • Tourism: Improve tourism governance (ST); Build tourism infrastructure (MT) • Labor mobility and migration: Manage negative impacts (ST); Invest in better quality education (LT) Secondary recommendations: • Agriculture: Use ICT to support technology adoption and access to finance (ST–MT) • Fisheries: Improve information dissemination (ST–MT); Develop adaptive management systems (MT) • Tourism: Facilitate the ease of doing business (MT) • Labor mobility and migration: Implement training programs (ST); Strengthen government capacity (ST); Develop social protection (MT–LT) Note: ST = short-term action (1–2 years), MT = medium-term action (3–5 years), LT = long-term action (5+ years). 22 Solomon Islands: Country Economic Memorandum 1. Solomon Islands Growth Performance: Trends, Outlook, and Key Constraints Solomon Islands: Country Economic Memorandum 23 1.1. Country Context 35. Solomon Islands is a lower-middle-income 37. Furthermore, natural disasters – which are country with a low level of human development. likely to worsen with climate change – pose a The country’s per capita GDP (purchasing power continuous threat to sustainable development. parity [PPP]) was US$2,211 in 2022, well below Due to its location in the South Pacific tropical the average of the Pacific Island Countries (PICs). cyclone basin and the Pacific Ring of Fire, Low incomes are also reflected in the country’s Solomon Islands is regularly buffeted by the low Human Development Index, which ranked effects of cyclones, heavy rainfall, earthquakes, 156th out of 193 countries in 2022. This compares volcanoes, and occasional tsunamis. to a ranking of 104 for Fiji, an aspirational peer Furthermore, the economic and humanitarian for Solomon Islands. Notwithstanding some costs of natural disasters are expected to improvement since the turn of the century, the escalate with climate change, which is adversely Human Capital Index (HCI) for Solomon Islands affecting the country through increased remains in the bottom 20 percent of countries temperatures, intensity of rainfall, storm surges, worldwide: a child born today is only expected tropical cyclones, and sea level rise. The Pacific to achieve 42 percent of their full potential. Catastrophe Risk Assessment and Financing According to the 2012/13 Household Income Initiative estimated in 2015 that over the next 50 and Expenditure Survey (HIES), 61 percent of the years, Solomon Islands should expect average population was considered poor (based on the annualized losses equivalent to 1.6 percent of lower-middle-income poverty line of US$3.65 2017 GDP due to climatic events. PPP per person per day). A recent study indicates large reductions in multi-dimensional poverty Compounding these disadvantages are limited 38. between 2009 and 2019 (World Bank, 2024), but state capacity and political economy dynamics the COVID-19 pandemic may have reversed that which constrain the implementation of effective trend. public policies (World Bank, 2018). The quality of public sector management and institutions in A challenging economic geography plays a 36. Solomon Islands is lower than most structural key role in shaping these outcomes. Solomon and aspirational peers (Figure 1).5 In part, this Islands is the fifth most remote country in the reflects the limited technical capacity of the world from large markets, being more remote bureaucracy (Haque, 2013), though it also than the average of the PICs. The population of reflects the prevailing political economy dynamics 721,000 people is dispersed over an estimated that elevate interest groups over bureaucratic 90 inhabited islands, stretching across 1.6 million strengthening (Besley and Persson, 2011). The square kilometers of ocean. Around 75 percent combination of limited state reach, fragmented of the population lives in rural areas, mainly in localized identities, and the value of resource smaller villages with an estimated 50 percent rents create an incentive for personalized forms under the age of 20. The small and dispersed of political leadership to flourish. Indeed, the style nature of Solomon Islands’ population makes of leadership in which Members of Parliament it difficult and expensive for the government to focus on securing resources for local constituents provide quality public services and infrastructure rather than focus on building state capability, is outside of urban areas. Additionally, a small characteristic of Melanesian countries. domestic economy, internal dispersion, and remoteness from large export markets limits private sector development and international trade (World Bank, 1984; World Bank, 2010; World Bank, 2017; World Bank, 2018; International Growth Center, 2024). 5 See the annex for details on selection of structural and aspirational peers. 24 Solomon Islands: Country Economic Memorandum Figure 1: CPIA public sector management and institutions cluster average (1=low to 6=high) Comoros Solomon Islands Timor-Leste Micronesia Vanuatu Kiribati Samoa Aspirational peer average Lower middle income Pacific Island small states 0 1 2 3 4 5 Source: WDI. 39. These interconnected development challenges 1.2. Characteristics of are the drivers of Solomon Islands’ institutional and social fragility. These dynamics have Economic Growth contributed to violent events, resulting in damage to property and the loss of lives. The most notable 1.2.1. Historical Trends manifestation of this was the period of civil unrest For much of its history, economic growth in 40. in the late 1990s known as the ‘Tensions’, in which Solomon Islands has been volatile, driven by inequities in resource distribution and economic developments in the primary sector (Figure opportunities sparked conflict between provincial 2). GDP growth over the period 1981–2021 ethnic groups. The conflict wrought considerable averaged 2.5 percent. The standard deviation human and economic destruction, with around of growth in Solomon Islands over that period 200 dead and many thousands displaced. It also reached 4.9 percent, significantly higher than the caused a severe disruption to economic activity, average for lower-middle-income countries (1.9 as fighting destroyed capital stock, foreign percent). In the early 1980s, an influx of logging investors left on mass, and major governmental companies from Asia, alongside the opening up institutions were rendered virtually inoperable. of customary land, led to a take-off in logging The mobilization of an international peacekeeping activities (Wairiu, 2007).6 In the 1990s, the growth force in 2003 formally brought an end to open pattern was heavily influenced by cyclical factors hostilities. that affected agricultural exports. The 1997 Asian Financial Crisis severely reduced demand for log exports and caused growth to contract. Subsequently, the Tensions caused a 23 percent decline in economic activity. A period of strong and broad-based growth occurred between 2003 6 Until this point, larger-scale commercial logging, which had been happening since the 1960s, had only occurred on government-owned and leased land. Solomon Islands: Country Economic Memorandum 25 and 2010 as the country rebuilt from the civil war. with renewed civil unrest, and the impacts of Between 2010 and 2019, growth averaged 4.2 Russia’s invasion of Ukraine, caused a sharp percent. In the first half of the decade, favorable decline in output between 2020 and 2022, with commodity prices, strong demand for timber, and the economy contracting by 8.3 percent over the reopening of the Gold Ridge mine supported the period 2020–2022. Growth rebounded to 1.9 growth. However, a combination of adverse percent in 2023 after a 4.1 percent contraction in shocks, including declining commodity prices, 2022. The upturn was fueled by the hosting of the electoral unrest, and a spate of natural disasters Pacific Games and substantial investments in the caused growth to decline in the second half of energy and transport sectors. the decade. The COVID-19 pandemic, combined Figure 2: Solomon Islands GDP annual percent change Historical peak in 15 int'l log prices Gold Ridge mine opens Peak in COVID-19 log pdn 10 5 Percentage change 0 2000 2003 2004 2005 2006 2008 2009 2002 2020 2022 2007 1990 1983 1984 1985 1986 1988 1989 1993 1994 1995 1996 1998 1999 2001 2010 2014 2016 2018 2019 1982 1992 2012 2021 2013 2015 1987 1997 2017 1981 1991 2011 -5 Logging shifted from Cyclones Pam; -10 Asian Racquel government-owned to Financial customary land Crisis - -15 "Tensions" El Nino; Honiara floods Gold Ridge closes -20 GDP growth Potential GDP growth Source: World Bank. Note: The Hodrick-Prescott (HP) filter is a statistical technique used to produce a smoothed measure of real GDP. The HP filter is calculated until year 2100 and smoothed at 100. Deviations from the smoothed curve would represent temporary deviations from the country’s GDP growth potential. 41. The weakening growth trend since 2011 perspective, the level of capital investment has coincided with a steady decline in productivity been insufficient to replace the depreciation of and the country’s estimated potential growth the existing capital stock, which is likely to have rate. During the post-Tensions recovery, further undermined labor productivity and limited investments in new productive capacity caused potential growth. Additionally, with employment potential output to gradually return to near continuing to grow over the past ten years, the its pre-Tensions level, peaking at 4.2 percent lack of investment is likely to have diminished the in 2010. Since then, however, there has been capital/labor ratio – limiting the productivity of a steady decline in the pace of potential GDP each worker on average, as well as contributing growth (Figure 3). Prior to the pandemic, potential to waning Total Factor Productivity (TFP) growth growth dropped to 1.5 percent in 2019, while (Figure 3). Indeed, in 2019, Solomon Islands had through the pandemic period it weakened further, a much lower capital/labor ratio than its peers. falling to 0.9 percent in 2022. From an input The upshot is that growth in Solomon Islands 26 Solomon Islands: Country Economic Memorandum has been more heavily dependent on growth in with little impetus from either the capital stock the labor force, and less on capital accumulation or productivity. This stands in contrast to peers, than peers (Figure 4). Much of the growth since where growth of the capital stock in particular has 2011 has been driven by expanding employment, provided a boost to growth. Figure 3: Solomon Islands annual growth rates % % 10 10 8 8 6 6 4 4 Instantaneous estimated TFP growth 2 2 Output growth Trend TFP growth 0 0 -2 -2 -4 -4 -6 -6 2006 2008 2010 2012 2014 2016 2018 2020 Source: World Bank. Note: Instantaneous TFP is calculated as a Solow residual. Trend TFP is HP-filtered Instantaneous TFP. The HP filter is calculated until year 2100 and smoothed at 100. Figure 4: Solomon Islands vs. comparators: Contributions to growth 2011–2021 15 Growth rate (percentage points) 10 5 Total factor productivity 0 Labor -5 Capital stock -10 -15 Solomon Comoros Kiribati Timor-Leste Vanuatu Islands Source: World Bank. Note: GDP and gross fixed capital formation are measured in constant LCU, based on data from Macro-Poverty Outlook. Solomon Islands: Country Economic Memorandum 27 The net result is that growth has been slower, on 42. value-add activities. The intensive extraction of average, than all structural peers over the past logs, which has proceeded at an unsustainable decade, leading to a growing gap in per capita pace since the early 1980s, has been systemically incomes. In 1999, the level of per capita income important to the economy for some time.7 Despite in Solomon Islands was 28 percent lower than the high production costs, logging has been a viable average of lower-middle-income countries and industry in Solomon Islands for several decades broadly equivalent to the average of its structural due to the elevated rents it generates. Logging peers. However, incomes markedly diverged companies are major employers of local labor, between Solomon Islands and its peers during the responsible for around 5,000 jobs, albeit almost Tensions. Subsequent slow growth has caused exclusively for men (World Bank, 2018). Timber the gap in per capita incomes to persist (Figure (mostly unprocessed round logs with little value- 5). Notably, by 2022, Solomon Islands had still add) dominates exports, accounting for around not bridged the gap created by the Tensions, with two-thirds of the value of all goods exported real per capita incomes still 5 percentage points between 2017 and 2020 – a much higher export lower than the 1999 level. Additionally, Solomon concentration than all structural peers as well as Islands had no convergence in per capita incomes regional and income-group averages. Fueled by with its aspirational peers (Figure 6). By 2022, per strong international (mainly Chinese) demand and capita income was less than one-fifth of the level a largely unregulated industry, log production has of aspirational peers, having been closer to one- grown rapidly, resulting in accelerating depletion third of per capita income pre-Tensions. (with annual production up to ten times the estimated sustainable harvest). Increasing log In addition, a very narrow and concentrated 43. production has also fueled a sharp rise in natural production and export base, focused on logging, resource rents as a share of GDP, from 5 percent is a key driver of economic volatility. There in 2000 to 19 percent in 2020 – a rate well above has been limited structural economic change in structural peers as well as regional and income- Solomon Islands since its independence around group averages. 40 years ago, with a dominance of largely low- Figure 5: GDP per capita relative to peers PPP, constant 2017 international $ Source: World Bank Development Indicators. 7 Commercial logging dates back to at least the 1960s, when five foreign companies carried out logging operations. In 1966, around 30,000 cubic meters of logs were exported (World Bank, 1969). Log production peaked in 2016, at 3 million cubic meters. The estimated sustainable harvest is estimated between 250,000 and 300,000 cubic meters per year. 28 Solomon Islands: Country Economic Memorandum Figure 6: Growth relative to aspirational peers (=1) GDP per capita (PPP, constant 2017 international $) 0 Source: World Bank Development Indicators. Other sources of economic volatility are an 44. beyond logging and mining, as well as more inherently risky natural environment and the effective urbanization, will help better distribute risk of social instability. Solomon Islands is one the benefits of growth and reduce the future risk of the most vulnerable countries in the world to of social instability. natural disasters and climate change impacts (World Risk Index, 2021). Reducing the impact 45. With logging now in long-term decline, Solomon and volatility associated with these risks calls Islands needs to find new sources of growth. The for long-term planning to embed mitigation and logging industry is expected to decline sharply adaption into a wide range of economic and social during the next decade given the unsustainable policy issues (e.g., climate-resilient infrastructure, nature of past activities. In 2022, log production networks, and business models). A further driver reached 1.6 million cubic meters, down from 3 of volatility is the extent of social instability, which million cubic meters in 2016. Reserves of large in turn is linked to horizontal inequity. Identity logs have been rapidly depleted, leaving mostly and politics in Solomon Islands are hyper-local. smaller logs for which there is less external Yet the prevailing economic geography barriers, demand. Solomon Islands thus faces a pressing including poor connective infrastructure, limit the need for new sources of growth to offset the reach of the state and markets to certain areas decline in logging. Outside logging, most other of the country (and not others). This gives rise sectors remain underdeveloped. Tourism services to an urban-centric model of economic activity have remained limited, while the industry and governance, and means that the benefits sector plays a minor role. Manufacturing and of growth are not broadly shared, with some construction are relatively small, while mining islands and ethnic groups getting better access is presently limited to a few isolated pockets to opportunities than others. This horizontal of the country, despite considerable natural inequity has historically bred enmity and conflict, resource endowments. It is therefore important and was a key trigger for the Tensions as well to investigate the key constaints to economic as civil unrest during the COVID-19 pandemic. activity and understand better which sectors can Stronger and more diversified economic growth drive future growth. Solomon Islands: Country Economic Memorandum 29 Box. 1 Fragility, conflict, and violence: The impact on economic growth Fragility, conflict, and violence (FCV) create significant barriers to sustainable development, which is intricately linked with issues of poverty, governance, and economic growth. The global landscape of FCV has significantly deteriorated over the past three decades, particularly affecting low- and middle-income countries (World Bank, 2020). By 2030, approximately 59 percent of the world’s extreme poor will be living in FCV-affected countries (World Bank, 2023). These dynamics pose serious threats to livelihoods, disrupt economic opportunities, and weaken core state functions. Solomon Islands continues to experience a significant level of institutional and social fragility. In the country, interconnected drivers of fragility include: (1) dependence on resource extraction dominated by elites; (2) low state capacity; (3) unresolved ethnic and regional disparities; (4) heightened geopolitical competition; and (5) vulnerability to external shocks and climate variability. These factors weaken social cohesion and undermine public trust, particularly in remote areas. The country's fragility became starkly evident during the November 2021 unrest, a violent outbreak rooted in deep-seated institutional and social vulnerabilities, demonstrating the ease with which previous development gains can be reversed. The value of physical damage from the riots was estimated at 7 percent of GDP. In addition, the disruption to retail and manufacturing activity in Honiara increased unemployment and reduced growth by 0.3 percentage points in 2021, with knock- on effects in 2022. FCV has both short- and long-term negative impacts on economic growth, exacerbating macroeconomic stability, investment opportunities, and overall economic activity. Conflict and violence disrupt essential services such as education and health care, resulting in the long-term depletion of human capital. Research shows that FCV leads to reduced investment, infrastructure damage, market disruptions, and human capital flight (de Groot et al., 2022; Collier, 2003). Using global panel data from 1970 to 2014, de Groot et al. (2022) estimate that various dimensions of conflicts reduce GDP growth by an average of 0.9 percent during conflict years. Additionally, Zonda et al. (2024) suggest that violent episodes significantly lower the output levels of Sub- Saharan African countries by approximately 17–20 percentage points. From the institutional perspective, Pompe and Turkewitz (2022) emphasize that weak governance structures, corruption, and the absence of the rule of law in FCV-affected states erode investor confidence, hinder entrepreneurship, and impede overall economic development. Violent conflicts also have negative consequences at the micro level. Research reveals a disproportionate rise in extreme poverty rates in FCV-affected nations, particularly evident in regions like Africa and Asia where widespread violence leads to the breakdown of essential service provision and undermines fundamental state functions (George et al., 2020; Verwimp et al., 2019; Baird, 2011). These challenges exacerbate poverty, trapping vulnerable communities in cycles of deprivation, marked by issues like food insecurity and domestic violence (Muriuki et al., 2023). Boege (2022) has linked climate change with violent conflict in the Pacific, suggesting that localized conflicts and scattered violence, such as domestic violence against women and children, are prevalent in many Pacific countries like Solomon Islands and Papua New Guinea, often intertwined with the social impacts of climate change. 30 Solomon Islands: Country Economic Memorandum 1.2.2. Growth Decomposition Commensurate with the growth in spending, there was strong demand for goods imports which From the expenditure side, growth has been 46. subtracted from growth in periods when imports mainly driven by consumption, with investment outpaced exports. After the Tensions, investment and net exports playing a much smaller role returned to address pressing development needs (Figure 7). The influx of external funding – but has subsided since 2011. Between 2015 and especially in the wake of the Tensions – helped 2020, gross fixed capital formation averaged 12.3 underpin rapid growth in domestic demand. percent of GDP, substantially below the average Public and private consumption rose strongly, for lower-middle-income countries.8 The level of which helped fuel rapid growth in services investment has been insufficient to replace the (particularly wholesale and retail trade and public depreciation of the existing capital stock, which is administration) and the agriculture sectors. likely to have undermined potential growth. Figure 7: Annual contribution to total GDP growth 30 25 20 Growth rate (percentage points) 15 Consumption 10 5 Investment 0 Net exports -5 -10 GDP growth -15 -20 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2011 Source: World Bank. Note: Based on data from MPO, Gross Domestic Product (GDP) and expenditure are measured in constant LCU. 47. From the production side, there has been and largely uncommercialized, providing the rural little change in the composition of economic population with food security and livelihoods. activity over the past decade. The structure of A relatively small, commercialized agriculture the economy has remained remarkably stable sector sits alongside subsistence production, between 2012 and 2021 (Figure 8). In 2022, the which is dominated by an export-oriented forestry primary sector accounted for 27.8 percent of industry,9 but it also includes the harvesting of GDP. Most agricultural production is small-scale plantation crops and a well-established oceanic 8 Over the period 2016–2020, the average GFCF for lower-middle-income countries was 27 percent. The total value of capital assets in Solomon Islands is estimated to have declined from around 202 percent of GDP in 2011 to a low of around 180 percent of GDP in 2019, before picking up again to 188 percent by 2021. While the capital stock measured as a share of GDP is broadly comparable with structural peers (for which data are available), the much smaller economy of Solomon Islands means that in per capita terms, the capital stock is considerably smaller. 9 At its peak in 2016, 3 million cubic meters of round logs were harvested, accounting for 22 percent of GDP, 70 percent of goods exports, and 19 percent of domestic revenue. Solomon Islands: Country Economic Memorandum 31 fishing sector. The industry sector is fairly limited, is expected to contribute to GDP and exports. accounting for 15.2 percent of GDP. Mining, Urban-based government workers support the food processing, and construction are the main service-based economy – comprising 57.1 percent industrial activities. Mining is presently limited of GDP – mainly in urban areas like Honiara. to a few isolated pockets of the country, despite Retail, transport, financial intermediation, public considerable natural resource endowments.10 administration, and real estate are the largest In 2022, the Gold Ridge mine reopened, which service sub-sectors. Tourism is currently limited, despite an abundance of exquisite natural capital. Figure 8: Sectoral contribution to GDP (share of total) 100 90 80 70 60 50 40 30 20 10 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Agriculture Industry Services Source: World Bank. 1.2.3 Other Salient Aspects engaged in (low-productivity) agriculture has substantially increased, from 11 percent in 2009 Relatedly, employment remained fairly stable, 48. to 25 percent in 2019. These trends are also resulting in little labor productivity dividend. reflected in limited increases in labor productivity Nationwide, 50 percent of workers are employed – measured as total output per worker, which in agriculture, while 40 percent are employed is an average annual rate of only 0.6 percent. in services, and only 10 percent in the industry Productivity growth was undermined by a drop in sector. In rural areas, the percentage of workers industry sector labor productivity, which declined engaged in the primary sector is higher at 68 by 2.1 percent per year on average between 2013 percent. Figure 9 also shows there has been and 2019 (Figure 10). Somewhat offsetting the little change in the sectoral composition of impact of the decline of the industry sector were employment in the past decade, reflective of the small gains in productivity in both the services lack of structural transformation. Remarkably, and agriculture sectors (0.3 percent and 1.2 however, in urban areas the share of workers percent on average, respectively). 10 See ‘Solomon Islands Public Expenditure Review’ for a detailed analysis of the mining sector, including the governance challenges it faces (World Bank, 2022). 32 Solomon Islands: Country Economic Memorandum Figure 9: Sectoral composition of work, 2009-2019 (percentage of workers) 100% 90% 24% 30% 80% 40% 45% 48% 70% 7% 73% 62% 77% 69% 66% 12% 60% 10% 50% 14% 15% 40% 68% 58% 30% 14% 50% 13% 18% 20% 41% 38% 17% 16% 10% 25% 18% 16% 11% 8% 0% 2009 2019 2009 2019 2009 2019 2009 2019 2009 2019 National Urban Honiara urban area Other urban Rural Services Industry Agriculture Source: World Bank (2024) based on ILO definition of labor. Note: Honiara Urban Area includes the urban population in Honiara and Guadalcanal Province. Figure 10: Value-add per worker by sector 8,000 Constant 2015 USD per worker 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Agriculture Industry Services 2013 2017 2019 Source: World Bank. Note: Value-add is measured as Gross Domestic Product (GDP) in constant 2015 USD. Solomon Islands: Country Economic Memorandum 33 49. The narrow production base implies a large 51. The mining sector has the potential to drive dependence on trade, which is hampered by growth in the medium term, but governance an overvalued exchange rate. For the most challenges need to be addressed. After the part, the country is a net importer of goods; closure of the Gold Ridge mine in 2014, mining most consumer and capital goods are imported, activity came to a standstill, contributing less with the largest goods imports being fuel, food, than 0.5 percent of GDP. However, in the second machinery, and manufactured goods. On the half of 2022, gold production from Gold Ridge brief occasions that Solomon Islands has been restarted, while two nickel projects have also a net exporter of goods, this has been driven commenced operations. Total nickel deposits by extraordinarily high logging exports, which are estimated at 180 million tonnes of nickel is unlikely to be repeated. The negative trade mineralization (0.7–1 percent Ni), which is valued balance tends to more than offset surpluses on at US$43 billion (2,500 percent of GDP). Nickel transfers and contributes to persistent current ranks higher in exportable metal value than gold account deficits. In recent years, this has been and bauxite, making it the most precious mineral exacerbated by an overvalued real effective in the country. For a sustainable mining sector exchange rate. This approach suggests an to flourish, however, important governance overvaluation of 8.5 percent (IMF, 2023), which challenges need to be addressed, including potentially weighs further on growth. land use and regulatory capacity at central and provincial levels (see World Bank (2022) for a 1.3. Growth Outlook detailed analysis of the sector). 50. During 2024–2026, growth is expected to The current account deficit is projected to 52. average 3 percent. The economy is projected to remain substantial, averaging 9.3 percent of continue its recovery in 2024 with a 2.8 percent GDP over the period of 2024–2026. This is growth in real GDP, boosted by several large primarily driven by high import demand related infrastructure projects in the transport and to infrastructure investments and a projected energy sectors and services growth (Table 2). decline in logging exports. The trade deficit is The services sector is also expected to support also projected to improve in the medium term growth in the medium term, followed by the but remains substantial due to limited export construction sector. An uptick in the country’s growth and high import demand. Foreign Direct labor mobility program is expected to contribute Investment (FDI) inflows are projected to increase to growth through remittances and knowledge steadily, supported by envisioned investment flows (Chapter 4). The projected decrease in reforms. Official foreign reserves are expected logging activity will contribute to a lower growth to decline to 7 months of imports by 2026, which in the primary sector. Subdued global economic is still within the upper reserve adequacy range conditions and a growth slowdown in China may of 3 to 7.5 months assessed by the IMF (Table 2). further reduce demand for logs. In the longer That said, the country relies heavily on capital term, the tourism sector, which accounted for transfers to finance sustained current account around 10 percent of GDP pre-COVID-19, has the deficits, which increases external vulnerability. potential to become a significant growth driver The fiscal deficit is projected to decline over the 53. (Chapter 4). Tighter monetary policy, combined medium term, keeping the rise of public debt with a decline in commodity prices, is expected to in check. After reaching 4.2 percent of GDP in contribute to a gradual deceleration of inflation in 2023, the fiscal deficit is projected to decline over Solomon Islands to just over 3 percent by 2025. the medium term, reaching 3.3 percent of GDP in 2026 (Table 2). This partly reflects declining recurrent expenditure and the normalization 34 Solomon Islands: Country Economic Memorandum of development grants after the pandemic and deteriorated socioeconomic conditions. In post-Pacific Games.11 Revenue and grants are addition, subdued growth in China may reduce expected to stabilize at around 31.2 percent demand for commodity exports, in particular of GDP (2024–2026), below the pre-pandemic demand for logs, with negative impacts on period due to lower logging revenue donor grants. growth, the current account balance, as well Public spending is expected to consolidate as government finances. Fiscal risks have also and stabilize at 34.9 percent of GDP over the increased; Solomon Islands faces significant fiscal medium term (2024–2026), in line with pre-COVID liquidity challenges stemming from the current averages. Public debt is projected to rise to 27.2 low level of the government’s cash balance and percent of GDP in 2026 – below the government’s rising fiscal risks including the mismanagement of threshold of 35 percent, keeping Solomon Islands infrastructure projects. The country also remains at a moderate risk of debt distress (World Bank/ highly susceptible to climate-related risks. These IMF, 2023). However, with uncertainty around the risks can have far-reaching consequences, economic outlook, debt sustainability needs to including damage to infrastructure and disruption be anchored by a prudent policy to rebuild fiscal of key economic sectors such as agriculture and buffers, while creating fiscal space for meeting fishing. The 2024 general elections increased development spending needs through stronger the risk of political instability, accompanied by revenue mobilization measures and expenditure economic uncertainty. On the upside, economic rationalization. recovery in major trading partners could lead to stronger demand for Solomon Islands’ exports. Macroeconomic risks are tilted to the downside. 54. Furthermore, the pace of recovery in the tourism The COVID-19 pandemic had a severe impact sector and increased participation in regional on the economy and exacerbated pre-existing labor mobility programs may bring economic weaknesses. The 2021 social unrest, the 2022 benefits, while the acceleration in infrastructure lockdown, and the commodity price shock investment could spur a stronger recovery. related to Russia’s invasion of Ukraine further In 2023, Solomon Islands organized the Pacific Games, a continental multi-sport event held every four years among athletes from 11 Oceania. The total budget for the 2023 Pacific Games was around 17 percent of GDP, of which 11 percent was used on infrastructure spending. The Games were mostly funded through off-budget grants by bilateral donors, channeled through the National Hosting Authority and the Games Organizing Committee. Solomon Islands: Country Economic Memorandum 35 Table 2: Medium-term economic outlook 2020 2021 2022 2023 2024 2025 2026 Real economy Annual percent change and sectoral contribution to growth Real GDP growth -3.4 -0.6 -4.1 1.9 2.8 3.1 3.0 Agriculture -1.2 -0.3 -3.6 0.0 0.4 0.5 0.5 Industry -0.6 0.4 0.0 0.8 1.0 1.0 0.9 Services -1.6 -0.7 -0.5 1.1 1.4 1.6 1.6 Consumer prices (period averages) 3.0 -0.1 5.5 4.7 3.7 3.3 3.3 Public sector finances Percent of GDP, unless otherwise indicated Revenues and grants 33.4 31.2 32.6 28.8 30.8 31.4 31.3 Expenditure 36.0 34.8 36.8 33.0 35.3 34.8 34.6 Overall fiscal balance -2.5 -3.6 -4.1 -4.2 -4.5 -3.4 -3.3 Public debt 13.5 15.4 16.9 20.1 23.5 25.6 27.2 of which external debt 9.9 9.5 11.2 13.8 14.9 15.9 15.4 Balance of payments Percent of GDP, unless otherwise indicated Current account balance -1.6 -5.1 -13.3 -12.7 -10.2 -9.8 -7.9 Exports 27.9 26.8 24.4 29.5 27.2 25.8 25.0 Imports 36.2 40.1 45.4 48.0 44.4 42.4 39.6 Overall balance (BoP) 4.8 2.5 -0.4 -5.0 -1.6 -2.5 -0.8 Gross official foreign reserves (US$, million) 660.6 694.5 641.0 560.7 541.7 498.9 485.5 In months of next years’ imports 12.8 11.5 9.5 8.4 8.0 7.4 7.0 Memorandum items: Nominal GDP (US$, million) 1,536 1,545 1,596 1,691 1,808 1,921 2,039 Credit to private sector (annual % change) 0.3 -0.4 0.8 2.0 3.5 5.0 5.0 Exchange rate (SI$/US$, period average) 8.2 8.0 8.2 . . . . Source: World Bank. 36 Solomon Islands: Country Economic Memorandum 55. In the long-term, Solomon Islands will not reach growth from 2.2 percent in 2024 to 1.6 percent upper-middle-income status without sustained in 2050 (see more detail on the long term growth reform. In a business-as-usual scenario, model in the annex). It is clear that without assuming historical growth fundamentals sustained reform, the country will not achieve continue, modeling suggests that Solomon the growth objective laid out in the National Islands’ per capita GNI will reach US$3,160 Development Strategy (NDS) 2016–2035 by 2050, well below the upper-middle-income (sustained and inclusive economic growth is threshold of US$4,465 (Figure 11). This reflects one of the five NDS objectives, i.e., 5 percent average GDP growth of 3.2 percent over the GDP growth by 2025 and 7 percent by 2030 and period 2024–2050 and a decline in population beyond).12 Figure 11: Long-term growth trajectory, business-as-usual scenario GNI PC Atlas Method (2022 USD) 4000 WDI 2000 LMI threshold ($1,136) Baseline UMI threshold ($4,465) 1000 500 2000 2010 2020 2030 2040 2050 Year Note: Past valies obtained iterating backwords using WDI GDP PC growth rate for 2021 and 2020, and WDI GNI growth rate before 2020. Source: Authors’ own calculations. 56. However, opportunities exist to increase total productivity.13 Furthermore, improving the factor productivity, attract private investment, business environment may stimulate private and augment human capital – unlocking new sector investment (Chapter 3), with upside sources of economic growth. Digitalization, potential in the tourism sector, fisheries, improved transport connectivity, better urban and agriculture (Chapter 4). Finally, a focus planning (Chapter 2), and land reform (Chapter on educating the workforce and a deeper 3) could enhance resource allocation, assist engagement in regional labor mobility programs with technology adoption, and lead to efficiency may generate the skills needed for the private gains – especially in agriculture and fisheries sector to thrive (Chapters 3 and 4). (Chapter 4). All of this will increase total factor 12 To achieve the growth objective, the NDS recommends improving private sector development and investment; expanding connectivity infrastructure (including ICT); focusing on the primary and resource sectors; and strengthening land governance. This CEM provides analysis and policy recommendations on all these topics. 13 In a Solow growth model, total factor productivity measures the portion of growth not explained by growth in capital or labor. Put differently, rising productivity can be defined as rising output while keeping capital and labor constant. It reflects technology adoption and the efficiency at which resources are allocated. This, in turn, is determined by a whole range of factors, including cultural attributes, institutional quality, policies, and the functioning of goods and factor markets (Acemoglu, 2010). See the annex for a formal growth model incorporating these elements and a table linking the topics analyzed in the CEM with the main growth drivers. Solomon Islands: Country Economic Memorandum 37 57. A comprehensive reform effort targeting these the period 2024–2050 and Solomon Islands fundamental growth drivers would provide would reach upper-middle-income status by a significant boost to long-term economic 2040 (Figure 12). In a moderate reform scenario, development. With an ambitious reform effort mostly targeting the median of lower-middle- to lift TFP growth to the 75th percentile of lower- income countries for key variables,15 growth and lower-middle-income countries, private would accelerate to 5 percent of GDP by 2030 investment to the median of lower-middle-income and Solomon Islands would reach upper-middle- countries, and human capital to the 75th percentile income status by 2049 (Figure 12). In this of lower-middle-income countries14 – economic scenario, GDP growth would average 4.7 percent growth would reach 7 percent by 2030, meeting over the period 2024–2050. the NDS targets. Furthermore, in this scenario GDP growth would average 6.4 percent over Figure 12: Long-term growth trajectory, reform scenarios 56. GNI PC Atlas Method (2022 USD) 4000 Baseline All Ambitious Reforms 2000 LMI threshold ($1,136) All Moderate Reforms 1000 UMI threshold ($4,465) 500 2020 2030 2040 2050 YEAR Source: Authors’ own calculations. In the ambitious reform scenario, TFP growth increases from 0.5 ppts to 1.7 ppts by 2029 and private investment increases from 9 14 percent to 18 percent of GDP by 2029. In terms of human capital growth, the expected years of schooling reach 12 years, test scores reach the 75th percentile for lower-middle-income countries (0.66), and the percentage of stunted children under five reaches 17 percent – boosting human capital growth by 1.27 percentage points by 2050. In the moderate reform scenario, TFP growth increases from 0.5 ppts to 0.9 ppts by 2029 and private investment increases from 9 15 percent to 14 percent of GDP by 2029. In terms of human capital growth, the expected years of schooling reach 10.5 years, test scores reach the 50th percentile for lower-middle-income countries (0.62), and the percentage of stunted children under five reaches 25 percent – boosting human capital growth by 0.65 percentage points by 2050. 38 Solomon Islands: Country Economic Memorandum 1.4. Key Constraints development. Private sector growth opportunities are largely confined to industries that can Key constraints would need to be addressed, 58. generate rents sufficient to outweigh the higher including a challenging economic geography, costs of production that result from the small size ineffective urbanization, an unfavorable of the domestic market, high costs of transport business environment, and limited government for all traded items, and susceptibility to natural effectiveness.16 First, a testing economic disasters. These are predominantly natural geography stemming from a combination resource-based industries or industries catering of remoteness to large markets, population to niche markets. dispersion, and low density presents a fundamental challenge to economic development. Recent rapid but low-quality urbanization is 60. Second, rapid but low-quality urbanization is an increasing constraint to growth, especially leading to overcrowding and swamping the of urban service sectors. Growth in the urban benefits of agglomeration. Third, the private population has averaged 4.7 percent per year sector in Solomon Islands is faced with an over the past 20 years, the 16th fastest in the elevated cost of doing business, caused by a world, and the fastest among its structural peers myriad of factors. Fourth, the abovementioned as well as regional and income-group averages. constraints are further compounded by the The capital Honiara has been the chief recipient limited capcity of the government and political of urban migrants, with the population doubling institutions which is hampering effective in the past 10 years. This rapid urbanization has policymaking. not translated into economic growth, however, with the costs of overcrowding, poor urban 59. A fundamental underlying driver of economic infrastructure, and periodic civil unrest swamping challenges in Solomon Islands is an unfavorable the benefits of agglomeration. Key issues include economic geography. It arises from a three- poor basic infrastructure (transport, energy, dimensional challenge of remoteness from digital) as well as poor urban infrastructure large export markets, internal dispersion of the (sanitation, waste collection, and law population, and a lack of population density. enforcement; petty crime is a growing problem). Solomon Islands is the fifth most remote country The slow pace of economic growth also means in the world from large markets, as measured by there is insufficient demand for labor to absorb GDP-weighted distance – being more remote than the influx of migrants. the average of PICs and lower middle-income- countries. In addition, the country exhibits a 61. A high cost of doing business in Solomon high degree of internal dispersion. Its territory Islands is a systematic barrier to private sector consists of nearly 1,000 islands with a total development. Several obstacles hinder private land area less than half the size of Tasmania in sector activity. First, the lack of access to, and Australia, scattered across a vast area of ocean. ineffective use of, land is a key constraint. Notable The population is scattered across 90 islands, issues include difficulties establishing boundaries, making Solomon Islands less densely populated unclear lines of succession, abuse, and lack of (and more rural) than peers and lower-middle- proper consultation with customary landholding income countries. This unfavorable economic groups. Second, utility costs are high and well geography raises production costs, constrains above regional peers, with electricity tariffs the reach of infrastructure, and inhibits public among the highest in the world. Third, a lack of sector service delivery as well as private sector access to, and high cost of, finance is another key The constraints were identified drawing on the CEM 2.0 approach, the Hausmann, Rodrik, Velasco (2005) growth diagnostic framework, 16 a review of the literature, consultations with senior government officials, and a brainstorming meeting with the country team. The relative distance from the economic development frontier was used to help validate, quantify, and rank the relative size of the economic constraints (see the annex for more detail). Solomon Islands: Country Economic Memorandum 39 obstacle to private sector activity, partly due to a that fall disproportionately on women, high rates lack of verifiable collateral. Fourth, trading across of gender-based violence, and limited female borders is costly and time-consuming, with leadership and political representation. Closing severe restrictions on trade in maritime transport these labor participation gaps would result in services. Finally, firms also report having a hard sizeable growth dividends (Pennings, 2022). time finding job-ready workers, especially in urban areas. These constraints are further compounded 64. by low state capacity and ineffective political Multiple challenges in the education system are 62. institutions. Solomon Islands has consistently resulting in labor market shortages. In Solomon performed poorly on government effectiveness Islands, nearly one-in-five children are over age and regulatory quality, being in the bottom 20 for their current education level. The issue is percent of all countries since the Tensions. more pronounced in secondary education, where This reflects limited technical capacity of the the national average of over age students rises bureaucracy (Haque, 2013), but also political to 44 percent. This is largely attributed to high markets and norms that are not conducive to repetition rates in the early years of education. effective policymaking (Besley and Persson, Furthermore, the expected years of schooling 2011; Besley, 2020; Enke, 2019; World Bank, in Solomon Islands is one of the lowest globally, 2018). In part, this explains why the country at only 8.3 years due to high dropout rates. For has made limited progress in overcoming the example, only 10 percent of children who enroll in abovementioned constraints to economic the education system complete senior secondary development. education, and a mere 4 percent reach the pre- tertiary preparatory year. As a result, Solomon 65. In the remainder of this report, key constraints Islands is among middle-income-countries with will be analyzed, and the insights applied to the highest share of under-educated workers, at four potential growth sectors. Chapter 2 will 54 percent. identify opportunities to help overcome economic geography by strengthening both transport and Inequalities in economic opportunity between 63. digital connectivity and improving the quality of men and women also limit growth potential. urbanization. Chapter 3 will analyze the binding Although labor force participation is similar constraints to private sector activity, focusing on for men and women, existing gaps are largely land use, the high costs of doing business, and driven by differences in the type of employment, competition and regulation in the services sector. with women concentrated in informal and low- Finally, Chapter 4 will apply those insights to productivity work. These inequalities are then discuss growth opportunities in four key sectors: exacerbated by social norms of family obligation agriculture; fisheries; tourism; and labor mobility and migration.17 The selection of the growth sectors builds on the findings of the ‘Pacific Possible’ report (World Bank, 2017), which highlighted these 17 sectors as having substantial growth potential. Furthermore, the selection of the sectors was informed and validated by dialogue with government counterparts. 40 Solomon Islands: Country Economic Memorandum 2. Overcoming Economic Geography Constraints in Solomon Islands Solomon Islands: Country Economic Memorandum 41 A defining characteristic of Solomon Islands is 66. endowments, such as logging, which generate the country’s challenging economic geography. sufficient rents to offset the high production Pacific Island states, including Solomon Islands, costs. face a three-dimensional geographic challenge (World Bank, 2009). First is the isolation from This chapter updates and extends the analysis 68. large export markets; according to a metric of economic geography in Solomon Islands. developed by UNCTAD, Solomon Islands is the Section 2.1 provides a snapshot of economic fifth most remote country in the world from geography in Solomon Islands and examines centers of economic activity on account of how it shapes the spatial distribution of the its isolation from international shipping and economy. Section 2.2 provides an overview of aviation networks. Second is the extreme internal transport connectivity in Solomon Islands and dispersion, with the relatively small population its relationship with economic activity. Section of 721,000 spread across a vast archipelago of 2.3 analyzes digital connectivity, while section nearly one thousand islands, atolls, and cays in 2.4 focuses on the Honiara Urban Area given its around 1.6 million square kilometers of ocean. central importance to the economic prospects of Third is the extreme difficulty of traversing across the country. Section 2.5 concludes with a suite the country, with tracts of ocean, plus steep of recommendations to overcome the specific and rugged terrain dividing communities. This economic geography challenges identified in the high degree of fragmentation is reflected in the chapter. considerable ethnolinguistic diversity, with more than 80 separate languages spoken throughout 2.1. A Snapshot of Economic the country, plus hundreds of dialects and the Geography in Solomon Islands fiercely localized identities based on kinship and language (World Bank, 2017). 69. While Solomon Islands’ population is widely scattered across the country’s fragmented 67. Numerous studies have identified how landmass, it is concentrated in certain places geography constrains economic growth in (Figure 13). It is estimated that 90 islands in Solomon Islands (World Bank, 2010, 2021; Solomon Islands archipelago are inhabited. Most Utz, 2021). The small and dispersed population of the population, however, is concentrated on of Solomon Islands constrains the size of the the six main islands: Choiseul, New Georgia, local market and makes it challenging to realize Santa Isabel, Guadalcanal, Malaita and Makira. economies of scale in non-traded goods and Collectively, these six islands account for 72 services. Large distances between populations, percent of the country’s territorial landmass compounded by poor transport and a high degree and 84 percent of the population. Two islands, of exposure to natural disasters, make it costly however, stand out: Guadalcanal and Malaita, to move goods, people, capital, and information which have 34 percent of the total landmass and within the country. In addition to constraining 64 percent of the population. Sixty percent of economic growth, these challenges have led the population lives away from the main island to spatially uneven development. Employment of Guadalcanal. This is a much higher rate than opportunities, public services, and infrastructure other Pacific Island Countries (PICs), which tend are strongly biased toward urban areas. In to have a combination of highly concentrated contrast, economic activity in most other places urban areas and smaller outer islands (Utz, 2021). remains highly concentrated in low-productivity primary production and the exploitation of natural 42 Solomon Islands: Country Economic Memorandum Figure 13: Ward-level population PAPUA NEW GUINEA CHOISEUL SOUTH PA C IF IC M A L A I T A Choiseul OCEAN Shortland I s. Vaghena Vella Lavella Kolombangara This map was produced by the Map Design Unit of The World Bank. WESTERN ISABEL Dai The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any Ranongga endorsement or acceptance of such boundaries. IBRD 47597 | New Georgia OCTOBER 2023 New Georgia Santa Isabel Group San Jorge Rendova Vangunu Malaita Tetepare Nggatokae MALAITA CENTRAL Florida Is. Russell Is. WARD LEVEL POPULATION 2019: ≤2218 HONIARA Maramasike 2219–4331 4332–7453 Guadalcanal 7,454–12,445 So 12,446–33,018 lo m Ulawa on GUADALC ANAL Sea Duff Is. MAKIRAULAWA Reef Is. Tinakula TEM O TU San Cristobal Nendo Tikopia Bellona San Utupua RENNELLBELL ta C ruz Isla nds Vanikolo Rennell Source: World Bank based on 2019 Census. 70. The key locus of population density in Solomon involving wholesale and retail trade, banking, Islands is the capital city, Honiara. Located accommodation, cafes and restaurants, real on the sheltered northern coast of the island estate, and professional services. Additionally, of Guadalcanal, Honiara is the country’s hub of Honiara is a hub of essential service provision, employment and government administration and accounting for most of the country’s connections the main international gateway for passengers to the electricity grid, all sewerage connections, and goods. The twelve wards of the Honiara City and most 4G connections. Honiara is also the Council are home to 129,569 people. There are site of the country’s main hospital, the National two peri-urban wards adjacent to Honiara (Tandai Referral Hospital (NRH), and the premier and Malango – both in Guadalcanal Province) education institutions, including technical and which, if included, take the population up to vocational training institutes. 187,274 (26 percent of the total population). The concentration of most government administrative 71. Outside of Honiara, a few smaller pockets functions in Honiara has impacts on the of urban density exist, mainly in Malaita and distribution of economic activity and service Western Province. This includes the secondary delivery. The public sector is a major employer, cities of Auki, Gizo, and Nora, as well as the and these urban-based workers support a provincial capitals of Malaita and Western thriving service-based economy in urban areas, Province. Noro is the location of the country’s Solomon Islands: Country Economic Memorandum 43 other international deepwater port, mainly serving or inflicting damage/loss of more than 3 percent the fishing and processing operations of the of GDP (IMF, 2018). The costs of natural disasters nearby SolTuna cannery. Each of these secondary are only likely to escalate with climate change. cities is small, having only between 5–7 percent of Honiara’s population and much less density per 2.2. Transport Connectivity square meter. However, similar to Honiara, each city has connections to the electricity grid and and Economic Geography access to the 4G network. They are also the sites 74. This section provides an overview of of most provincial hospitals and high schools. connectivity in Solomon Islands and its Employment rates among the 12+ population relationship with economic activity. Section 2.2.1 within these cities are also comparable to includes a stylized map of the national transport Honiara. network in Solomon Islands and assesses the connectedness of wards to the capital Honiara. 72. Most of Solomon Islands’ population, however, Section 2.2.2 highlights the connectivity resides in rural areas. The rural share of the challenges the country currently faces, while population (74 percent) is broadly equivalent to Section 2.2.3 examines the relationship between structural peers, though much higher than the transport connectivity and economic activity. average of Pacific Island States (61 percent) and lower-middle-income countries (57 percent). 2.2.1. The National Transport Network Importantly, rural areas are not homogenous: 75. In Solomon Islands, Honiara sits at the center substantial differences exist between the peri- of a nationwide hub and spoke system of urban areas adjacent to Honiara – where rates maritime and aviation networks. Honiara Port of employment and subsistence production are at Point Cruz handles around 90 percent of similar to smaller urban areas – compared to the country’s international freight movements, areas that are more rural, where there are lower excluding logging. The port has dedicated rates of employment, higher rates of agricultural facilities for processing international container production, and lower use of digital services. shipping and bulk commodities (such as copra) Moreover, distinctions can also be drawn between and for handling bulk liquids such as fuels and rural areas situated on or around the double palm oil. Adjacent to the international port is chain of main islands and those that are much the domestic wharf, with 12 jetties providing more remote from other population centers (i.e., all the available berthing facilities for domestic in Temotu, and Rennell and Bellona Provinces, vessels. These wharves service the inter-island Ontong Java and Shortland Islands). network of passenger and cargo ships and are the main transshipment location for domestic 73. Most urban and rural settlements are in coastal goods heading for export and imports (most areas, which increases climate vulnerability. All capital and consumer goods and fuels). Honiara urban areas are coastal, and on most islands, is also the primary aviation hub, up until recently households tend to cluster in small coastal the sole international gateway. In 2019, Honiara villages. The notable exceptions are Guadalcanal airport handled nearly 90 percent of all domestic and Malaita, which have some inland settlements passenger movements, according to data from on relatively flat land. While coastal settlements Solomon Airlines (see the annex for more detail facilitate maritime trade and travel, it also helps on the country’s aviation network). to explain why Solomon Islands is among the most vulnerable countries in the world to the 76. The secondary cities of Auki, Gizo, and Noro effects of natural disasters. In any year, there are the main provincial nodes in the domestic is a 14 percent probability of a natural disaster transport system. These cities are relatively well affecting more than 5 percent of the population connected to Honiara by trunk maritime and aviation routes (Figure 14). Near-daily scheduled 44 Solomon Islands: Country Economic Memorandum shipping services for passengers and/or freight Makira, which receive, at best, monthly shipping operate between Honiara and each of these services; as well as communities on main islands cities.18 Auki and Gizo have dedicated passenger that can only access the nearest transport hub vessels, with the route to Auki also serviced by with considerable difficulty. a fast passenger boat, while shipping between Honiara and Noro is mainly freight. Critically, 79. Filling the gaps in connectivity across much each route also traverses relatively protected of the country is a thriving network of small- waters, which helps contain operating costs. Port scale maritime services. The general lack infrastructure at these provincial hubs can handle of road connectivity within islands means passengers and break bulk and deck cargo with many communities in Solomon Islands cannot ramps to facilitate front-loading landing craft and effectively move around via overland routes. enable ‘roll on, roll off’ cargo handling. Honiara Accordingly, smaller boats with outboard motors and Noro are the only ports capable of handling – ‘banana boats’ and dinghies – are the only containerized cargo, though this is only used for feasible transport option for traveling relatively international shipping and not at the respective small distances between islands and along domestic wharves. coastlines. Small boats function as the last mile of transportation, moving consumer durables, 77. A network of roads also link some inland wards capital goods, food, and people between where to these provincial transport hubs as well as most people live and the nearest market and/or Honiara. Solomon Islands has a road network of transshipment hub. They are a highly versatile around 1,500 km – the third largest in the Pacific form of transport, operating on a charter basis. behind Papua New Guinea and Vanuatu – and They can also navigate shallow waters and 440 bridges. Three-quarters of the existing road fringing reefs where communities are located network (useable and unusable) is in Guadalcanal, and can be piloted to land on beachheads and at Malaita, Western Province, and Honiara. In community jetties. Boats can carry up to 600 kg, addition to town roads in urban areas in these or 8–10 people at a time; loading and unloading is provinces, arterial roads link areas of relative relatively quick (10–20 minutes). population density in rural areas to the respective urban hub (and to the inter-island shipping Since 2010, a subsidy scheme known as the 80. network): in Guadalcanal, in the east and west of Franchise Shipping Scheme (FSS) has helped Honiara via the Kukum Highway; and in Malaita to improve connectivity of the most remote and along the northeast coast of the island.19 hard-to-reach areas. With development partner support, the Solomon Islands Government has 78. Much of the country, however, has poor established a subsidy scheme to incentivize transport connectivity with Honiara. Of the 183 private shipping operators to deliver passenger wards in Solomon Islands, 114 (representing and freight services on eight specified routes more than two-fifths of the population) have poor (Figure 14). Previously, these routes were transport connectivity. These wards, which are considered commercially unviable and thus effectively isolated from the inter-island shipping received only ad hoc services and special network, include the farthest reaches of the charters. Operators were chosen using a archipelago: Temotu, Rennell and Bellona, and national competitive bidding process involving Shortland Islands; difficult-to-reach locations, a single-stage, two-envelope system. Bidders such as the weather coasts of Guadalcanal and are obligated to submit documents that set out Communities situated along trunk shipping routes are also relatively well connected with Honiara. On longer routes, such as between 18 Honiara and Western Province, inter-island shipping vessels make stops at selected wharves enroute to their destination. Additionally, some wards not directly connected to the inter-island shipping and road networks are considered moderately connected because of their proximity. Populations in certain locations can access Honiara directly, or a major provincial hub, with moderate effort. Roads have also been constructed to Atori, on the west coast of Malaita, and Huahui south from Auki, though at the time of writing 19 these were in poor condition. The Solomon Islands Roads and Aviation Project (2019–2024) is providing the routine maintenance and regravelling for 17 km of North Road between the Auki Gwaunaru’u Airfield turnoff and Dala, and 21 km of East Road between Dala and the midpoint of East Road to Atori. These road sections are mostly in good condition.  Solomon Islands: Country Economic Memorandum 45 expected costs and revenues and the proposed to stop at multiple call points in remote subsidy needed over the contract period. Winning destinations), plus measures of the inward bidders were awarded two-year, output-based tonnage of copra, number of passengers, and contracts with subsidies tied to performance – reliability and safety of the vessels. this included providing, at a minimum, monthly services on designated routes (with requirements Figure 14: Stylized map of the transport network in Solomon Islands To Asia Roncador Reef PAPUA INTERNATIONAL ROUTES NEW 156°E Choiseul Bay CHOISEUL TRUNK ROUTES GUINEA Taro Island Choiseul SOUT H PACIF IC To MINOR ROUTES Ontong Java OCEAN FRANCHISE ROUTES Shortland I MALAITA s. DISCONTINUED FRANCHISE ROUTES Vaghena ISABEL MAJOR FLIGHT ROUTES Suavanao MAJOR ROADS Vella Lavella AIRPORTS Kolombangara Dai PROVINCE CAPITALS Ranongga Fera/Maringe 8°S Gizo Ramata Santa Isabel NATIONAL CAPITAL Noro Sikaiana New Georgia Buala INTERNATIONAL BOUNDARIES New Georgia Munda Group Seghe Rendova Vangunu San Jorge Auki Atoifi Tetepare Nggatokae CENTRAL Florida Is. Tulagi Malaita WESTERN Russell Is. To Sikaiana Solomon Sea Maramasike HONIARA Apio Mt. Makarakomburu (2,447 m) Ulawa Duff Is. 10°S Guadalcanal Reef Is. GUADALCANAL M A K I R A — Tinakula A Cruz/ U L A WSanta To Temotu Nendo TEMOTU Graciosa Bay Kirakira Lata Utupua Santa Cruz Anuta To International Santa Ana Islands SOLOMON Markets RENNELL AND San Cristobal Vanikolo Fatutaka ISLANDS BELLONA Tikopia Bellona Rennell This map was produced by the Map Design Unit of The World Bank. Tigoa The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any Rennell IBRD 47432 | AUGUST 2023 endorsement or acceptance of such boundaries. 2.2.2. Transport Connectivity Challenges information and knowledge to be diffused and connects people with markets and public services 81. Internal connectivity is a crucial enabler of without physically moving locations. economic growth, insofar as it shapes the extent of spatial integration within countries At the core of the connectivity challenge in 82. (World Bank, 2009). While population dispersion Solomon Islands is diseconomies of scale (World is a valuable proxy for remoteness in Solomon Bank, 2023a). Passengers and cargo are shipped Islands, it does not account for the idiosyncrasies around the country using a privately owned fleet of transporting goods and people around the of around 90 small and timeworn merchant boats country. For instance, the Weather Coast on the (passenger, passenger/cargo, cargo, and landing southern coast of Guadalcanal is relatively close craft). In addition to high operating costs on a to Honiara – measured by the Euclidean distance, per-unit basis, unbalanced demand means boats but by land it is completely disconnected from that are full when they depart from Honiara often the capital. The region relies entirely on (irregular) embark on return journeys partially empty. These shipping for trade and transport from Honiara, cost disadvantages are most acute on longer with boats required to navigate the fierce trips across the open ocean and more indirect Solomon Sea. Dispersion also does not account routes to smaller communities (such as those for the extent of digital connectivity, which allows serviced by the FSS). However, even on the trunk 46 Solomon Islands: Country Economic Memorandum and minor routes, operators face challenges in provinces in terms of their functioning wharf-to- remaining commercially viable. The high costs population ratio. The island of Makira is notable and low operating margins provide little incentive for currently not having a single operational to invest in additional capacity and quality, which wharf for its population of 46,000.22 When ships further constrains growth. These poor operating cannot berth at wharves, transfers of passengers returns may help explain the occasional use of and cargo must instead occur via mid-water public sector funds to cover capital costs of exchange, which heightens user costs and vessels.20 risks. It also means that when seas are rough, communities are effectively isolated from inter- Critically, poor shipping services mean that 83. island shipping. inter-island connectivity can be much worse than shipping schedules indicate. While some 85. The small-scale maritime sector is unregulated locations are better serviced than others, moving and carries risks. Small boats can be easily people and goods across the country – even overloaded and are vulnerable in rough seas. In to notionally well-connected wards – remains many places, there are no designated spots for extremely challenging. Overall, the market for berthing, which means pilots attempt dangerous domestic shipping is thin. Trunk routes have beach landings. This can endanger passengers more boats than more minor routes, reflecting and cargo. Indeed, Solomon Islands Maritime the additional demand, though the market is far Administration indicated that banana boats are from competitive. Minor routes may only have the focus of most search and rescue cases in the one or two operators. Last-minute cancellations maritime sector. In Honiara, the only designated are common, and both shipping and aviation landing zone for banana boats is an area of gently services are known to prioritize more lucrative sloping beach to the west of Point Cruz – located cargo, leaving passengers behind. The generally some distance from Honiara Central Market poor condition of the inter-island fleet also means and the other side of the Port – which squeezes that boats are regularly out of service for ongoing producer margins with goods subsequently repairs, which further limits supply and causes needing to be loaded on trucks of various sizes, interruptions to schedules. Boats are increasingly or busses and taxis after landing (Georgeou et al., being withdrawn from service for being non- 2019). compliant with safety regulations. Consistent with international experience of 86. Additionally, connectivity is adversely affected 84. franchise shipping schemes, Solomon Islands’ by the poor quality of maritime infrastructure. FSS had been plagued with challenges. According to data from the Ministry of Throughout the project, significant difficulties Infrastructure Development, there are 91 marine were faced in the tendering process. On several structures spread around the country (wharves, of the longer and more challenging routes there jetties, anchorages), with 44 wharves capable was very little interest in tendering for the route. of berthing the inter-island shipping fleet. At the core of the matter has been the variability However, just 60 percent of these wharves were of returns: review of the FSS routes found that deemed operable, with the rest requiring major even after subsidies, operators may face a loss. rehabilitation and even reconstruction.21 Isabel, Even on routes where contracting was completed, Western, and Choiseul are the best-served operator’s non-performance plus vessel accidents On some routes, there are also boats operating that have been purchased by individual Members of Parliament using their 20 Constituency Development Funding. The ownership structure of these boats is unclear, though anecdotally some find their way into private hands, meaning that the capital costs of some privately operated boats in the marketplace are likely to have been subsidized by public money. Notably, the information on wharf conditions is dated, with the most recent survey done between 2010–2013. Accordingly, the rate of 21 wharf inoperability may be even higher today due to the government’s systematic underinvestment in climate resilience and effective maintenance (World Bank, 2022). It is important to note that the construction of provincial wharves is planned at Kira Kira in Makira-Ulawa Province and Ahanga in 22 Rennell and Bellona Province. Solomon Islands: Country Economic Memorandum 47 and vessel damage meant that many initial where there tends to be only one jetty, these contracts were also terminated before they issues are not so acute, though wrecks and other expired. These contracts were retendered – often debris can block access to wharves. attracting no (acceptable) bids. By 2023, only five of the eight routes were operational. On land, poor quality roads and drainage 88. increase the costs of transport. Only 12 percent 87. Congestion at Honiara’s domestic wharf of the overall road network is sealed and is also inhibits the functioning of the inter- mostly located in urban areas and nearby natural island shipping network. The configuration resource extraction enclaves (PRIF, 2021). of the Honiara domestic wharf, with twelve Overall, only 15 percent of the road network narrowly spaced multi-functional jetties is in fair-to-good condition, and 67 percent in creates considerable congestion and hazards maintainable condition, while the rest requires around the jetty area when numerous vessels substantial rehabilitation to become maintainable are simultaneously berthed. Dilapidated and (ADB, 2021). The result is that an estimated 24 makeshift fenders and mooring bollards also percent of the rural population lives within 2 km create safety risks for boats, passengers, and of an all-weather road, among the lowest rate of cargo. A lack of designated cargo handling areas access in the world (Figure 15). Such limited road at the wharf means that various goods (including connectivity clearly constrains economic activity. fuels, building materials, bags of copra, and For instance, one study in Madagascar found that perishable food) are haphazardly delivered and agricultural yields are up to 50 percent lower for set down on the roadway, creating blockages on isolated areas, in part explained due to increased the only point of access in and out of the area. transportation costs (Stifel and Minten, 2009; The mix of passengers, taxis, and commercial see Berg et al., 2017 for a review of the literature). traffic in the roadway makes the area even further Additionally, the road and bridge network is highly congested and unsafe. The roadway itself is susceptible to natural hazards. For instance, unsealed. Critically, access to the roadway is via a recent flood that destroyed a bridge south Commonwealth Avenue, the sole point of entry of Auki effectively severed the connectivity of from the city center to the international terminal communities beyond the bridge to urban hubs at Point Cruz, and a significant choke point for and the inter-island shipping network. traffic flow in the city. At provincial wharves, Figure 15: Roads and roads accessibility 1 0.9 0.8 0.7 Rural Access Index 0.6 0.5 0.4 0.3 Solomon Islands 0.2 0.1 0 0 20 40 60 80 100 120 Metres of road per capita Source: RAI. 48 Solomon Islands: Country Economic Memorandum 2.2.3. Transport Connectivity and which is predominantly destined for canning, in refrigerated brine, which keeps produce Economic Activity stable over long sea journeys. In agriculture, 89. Transport links presently shape the spatial commercialized production and smallholder cash distribution of production. Pockets of crop production typically involves goods that have commercialized private sector activity relatively limited spoilage while producers wait concentrate around connectivity. For instance, for ships to arrive (e.g., cut logs, coconut, cocoa, the SolTuna cannery has a direct link with betelnut). international markets via the containerized 91. Improved transport connectivity can spur shipping yard at Noro, the palm oil factory in new markets for perishable goods. Any growth Guadalcanal Plains is well connected to Honiara from increased food sales to urban markets by road, and the Ranadi industrial estate is is likely to preference nearby communities, linked with the port through Kukum Highway. given their cost advantages over more distant Furthermore, a small cottage industry of communities and the challenge of transporting businesses involved in manufacturing and selling perishables long distances. This is particularly end-use consumer products relies on domestic true for widely produced staples, for which the aviation and shipping to sell to consumers in market is relatively competitive. Yet more regular Honiara and the tourism market.23 Sellers of transport links to urban areas allow trade in perishable food in Honiara tend to be located perishable goods that would not be possible near the city and with good transport links. A with more intermittent services. This is already study of Honiara Central Market showed that the evident in Honiara Central Market, where the main supply origins of staple foods were East notable exceptions to the localized produce are Guadalcanal and West Guadalcanal, as well as sellers of higher-value melons and pineapples, smaller nearby islands, such as Savo Island and which originate from well-connected areas in Nggela Islands in Central Province (Georgeou et Malaita, and good quality fish, which is regularly al., 2019). Most produce travels by a combination transported in coolers with ice on ships traveling of small boats and roads. from Western Province. Some prized marine 90. Primary production, critical to rural economic foods such as lobster and shellfish, which development, is hampered by ineffective command larger margins, arrive by plane from transport links. A vibrant smallholder agriculture outer provinces such as Isabel and Temotu. and fisheries sector has important potential as Thus, with better connectivity, communities a sustainable and inclusive source of growth may be better able to capitalize on intra-country and livelihood support that fits with Solomon comparative advantages while at the same Islands’ existing comparative advantage (World time widening the choice set available for urban Bank, 2017). Yet much of the primary sector consumers. is presently waning, dominated by small-scale Production and onshore processing of non- 92. and uncommercialized production of food plus perishable goods will also hinge on whether cash crops that are sold in small lots due to goods can be efficiently moved through the the infrequent and irregular nature of domestic inter-island shipping networks. The cannery shipping. Producers face little incentive to look operations at Noro provide a clear example of beyond local markets and commercialize or invest the potential of provincial development when in new capacity, capital, and scale to move up the connectivity settings are correct. The nearby value chains. As a result, the existing drivers of containerized port streamlines links between primary production are those that can withstand the factory and export markets, and growth the infrequent and irregular nature of domestic in the cannery’s operations has acted as a shipping. Commercial fisheries hold their catch, stimulus for the more-than-doubling of industrial One notable example is SolAgro, which harvests and processes ngali nuts in Western Province before transporting various finished food 23 products to Honiara and select international markets for sale. Solomon Islands: Country Economic Memorandum 49 and agricultural jobs in the town during the safety of passengers and goods, reduced travel intercensal period. In contrast, the 2017 Solomon time and boat damage. Notably, the investments Islands National Agricultural Survey showed that in the jetties can be directly linked to increased in major areas of cash crop production (Western economic activity – particularly by women – in and Malaita Provinces), producers could not local markets. This includes encouraging new translate harvests into sales, with transport market participants, with 15 percent of sellers barriers and high rates of spoilage as key factors. indicating they had not sold goods anywhere Moreover, poor post-harvest handling of cash before the investments. Investments have also crops, including a lack of proper storage while in crowded in sellers from other markets (while transit and at waypoints, plus unreliable shipping this is trade diversion, it nonetheless increases schedules, mean that agricultural goods are scale at the hub). Of those already selling at the susceptible to spoilage and only ever reach the markets, around 60 percent stated they were less lucrative bulk trade market. Accordingly, coming to market more and staying longer, 48 the development of new, higher-value markets, percent said they were selling a more diversified such as the ones being considered – kava, array of goods, and 41 percent indicated they dried seaweed, spices, and virgin coconut oil – were selling more than before. will also require an ecosystem of downstream agribusiness (transport, traders, warehouses, and At the community level, transport connectivity 94. processors) that link producers with international is correlated with a shift from subsistence to markets while maintaining quality and minimizing income-earning activities. Linear regression spoilage. New commercial developments, such analysis of 2019 census data shows that well- as the proposed tuna cannery at Bina in Malaita, connected wards had a 5 percent higher share of will also require streamlined links to export the 12+ population involved in either wage income markets – directly or via the containerized or agricultural production for cash – a proxy international ports in either Honiara or Noro – to for economic activity – compared with poorly be commercially viable. connected communities, with the difference statistically significant (Table 3).24 In urban wards Improving last-mile transport connectivity 93. the population is also more likely to be engaged has been shown to create scale at transport in income earning activities. On the flip side, hubs and promote economic activity. The well-connected wards had a lower share of the construction and refurbishment of community population predominantly involved in subsistence jetties and marketplaces in provincial centers activities, with statistically significant differences. of density can encourage market concentration Moderately-connected wards also experienced and growth. Survey data indicate that such a faster transition from subsistence to income investments in Noro, Gizo, and Munda resulted earning in the intercensal period (2009–2019). In in increased economic activity for nearly half of these wards, the share of the population involved all boat operators surveyed. Key to the increased in subsistence declined by 4 percentage points activity is increased safety and convenience and the share of the population earning income and reduced operator costs. By providing a increased by 0.9 percentage points, relative to functioning, safe, and convenient alternative to poorly connected wards, with the differences risky shore-based landings, jetties improved the statistically significant in each case (results available upon request). 24 This analysis involved regressing ward-level dependent variables (income earning and subsistence) on a constant, plus ward level remoteness (which incorporates both geographic distance from population centres and community size) and dummy variables for well- connected wards, moderately-connected wards, urban wards, and the location of functioning airports. Well-connected wards are those situated on trunk shipping routes or with good road connection to such a location. It also includes wards with good overland connections to Honiara. Moderately-connected wards are situated on minor shipping routes, or access to Honiara is only possible with a small boat or a longer overland journey (see the annex for more information). 50 Solomon Islands: Country Economic Memorandum Table 3: Linear regression results transport connectivity [95% Y: Income earning Coefficient Robust std. err. t P>t interval] conf. Remoteness 0.0008597 0.0104857 0.08 0.939 -0.02825 0.029973 Well connected 5.114953 2.010084 2.54 0.064 -0.46593 10.69584 Moderately connected 1.25632 2.449554 0.51 0.635 -5.54473 8.057372 Urban 11.07562 1.947279 5.69 0.005 5.669106 16.48213 Airport 1.165883 2.393438 0.49 0.652 -5.47937 7.811134 Constant 20.99414 4.482695 4.68 0.009 8.548186 33.4401 Observations 171 R-squared 0.10 Source: Authors’ own calculations based on 2019 census. See the annex for more detail on model and data. 95. Yet transport investments in rural areas can much higher rates of out-migration across have unintended negative consequences if the intercensal period than untreated wards. the enabling environment for private sector Moreover, treated communities experienced development does not exist. For instance, so- increases in multidimensional poverty. Critically, called “straw effects” of infrastructure occur there was no significant uplift in formal when newly available connectivity options lead employment and non-farm production due to the to (uncontrolled) migration to more developed investments. The results suggest that the non- locations instead of rural development (Ono and poor used the additional connectivity benefits Asano, 2005).25 Evidence from a difference-in- afforded by functioning wharves to relocate, most differences analysis of twelve donor-supported likely to the overcrowded urban hub, Honiara. wharf refurbishments completed in rural While there may have been some positive impacts communities across 2014–2016 points to such on growth from labor mobility at a macro level, straw effects (Table 4 and the annex for more the departure of potentially the most productive detail). Using ward-level data from two census individuals is likely to have deleteriously impacted periods (2009 and 2019), the difference-in- rural communities and undermined growth differences analysis shows that communities that potential. received these wharf investments experienced Table 4: Difference-in-differences regression results of wharf investment Y: Impact of wharf investments Poverty + Population - Income earning 0 Non-farm production 0 Source: Authors’ calculation based on 2009 and 2019 census. Note: See the annex for more details on the model and data. 25 The inference is that just as a straw allows juice to be sucked out of a glass, newly built transport infrastructure that causes a decline in trade costs may lead to an increase in core population at the expense of the hinterland (Krugman, 1991; Puga, 1999; Fujita et al., 1999; Ottaviano and Thisse, 2004). For example, Faber (2014) and Baum-Snow et al. (2020) find that the development of new highways in China adversely affected hinterlands. Solomon Islands: Country Economic Memorandum 51 Connectivity is also an important factor in 96. in the country are now via prepaid mobile phones. tourism development, though other underlying Accordingly, digital connectivity is correlated with constraints must also be addressed (Coste et the penetration of mobile phones and the amount al., 2023). Currently, tourism in Solomon Islands of mobile internet subscribers. Data from the is small in scale and concentrated in and around Telecommunications Commission of Solomon the World Heritage-nominated Marovo Lagoon Islands indicate that mobile phone penetration in Western Province and Honiara. While there has risen rapidly over the past decade, from are many aspects of tourism development – around 20 percent in 2010 to 62 percent in 2021, including governance, policy and management, as mobile subscriptions increased nearly four- the ecosystem of tourism service providers, fold. Additionally, the share of mobiles subscribed availability of skills, land access, and safety – the to internet services has increased from 7 percent tourism sector relies on passengers connecting to 38 percent in the same timeframe. However, through the aviation network. Increasing tourism with overall digital mobile penetration around will, therefore, need to occur in lockstep with 23 percent, the extent of internet connectivity increasing aviation capacity and reliability – remains small compared with most structural particularly on routes to Western Province. peers, with 17.5 percent of the 12+ population Investments in rehabilitating the airport at using mobile/cell phones to access the internet Munda mean that visitors can now fly directly into (Figure 16). Western Province. Also critical to the sector’s growth is ensuring key regional airports can The introduction of the undersea fiber optic 98. handle larger planes and are resilient to inclement internet cable supports connectivity by weather. To that end, investments in sealing improving overall functionality and unblocking and lengthening the runways to make them all- bottlenecks. The Coral Sea Cable was declared weather and capable of landing the larger Dash-8 ready for service on February 1, 2020. It aircraft at Seghe and Choiseul Bay airports are links Sydney and Honiara and then passes to well-targeted at promoting growth. The upgrading three provincial nodes (Noro, Auki, and Taro), of the Santa Cruz (Lata) Airfield runway in Temotu which has reduced the reliance on satellite Province is scheduled to commence in the second connections and has substantially widened the half of 2024. country’s bandwidth capacity (from 2Gbps to 6Gbps). According to the Telecommunications 2.3. Digital Connectivity and Commission, the increased capacity has helped eliminate rationing on the bandwidth and Economic Geography supported volumetric wholesale pricing. This has 2.3.1. Digital Connectivity led to substantial falls in prices: Telekom retail cost of data (measured as SBD/MB) declined 97. Digital connectivity in Solomon Islands depends by 40 percent between 2020 and 2021 – having heavily on data connectivity from mobile already fallen by 93 percent between 2016 and phones, which is still to reach most of the 2020. To enhance resilience and reduce the population. Apart from some businesses which threat of single cable outage, Solomon Islands is still use landlines, almost all internet connections planning the deployment of a second cable. 52 Solomon Islands: Country Economic Memorandum Figure 16: Individuals using the internet Percent of population; latest available year* Aspirational peer average 62.9 Kiribati 38.0 Micronesia 35.3 Samoa 33.6 Structural peers Timor-Leste 29.1 Vanuatu 25.7 Solomon Islands 17.5 Comoros 8.5 Structural peer average 25.0 Lower middle income 45.0 Pacific Island small states 39.2 0 20 40 60 80 Source: Solomon Islands 2019 Census; WDI. Note: *Solomon Islands = 2019 (expressed as % of population 12+); Cambodia, Vanuatu, Papua New Guinea, Pacific Island Small States average = 2017; Fiji = 2018; Benin, Cabo Verde, Honduras, and Lower middle-income average = 2020. 99. The Solomon Islands Government is making new 25 percent by 4G; these are the lowest rates investments in tower infrastructure to broaden of 3G and 4G coverage in the Pacific (United digital connectivity. Against a backdrop of slow Nations, 2023). The geographic concentration private sector expansion of towers, an expected of digital infrastructure is a key reason for the 161 new mobile phone towers will be constructed. low coverage rates: 4G towers are limited to The aim is to provide up to 75 percent of the Honiara and larger provincial centers. The 3G population with access to 3G and 4G services. network has also grown slowly despite the According to the Ministry of Communications government’s policy to phase out 2G towers for and Aviation, the selection of the tower sites 3G. The abovementioned investments by the was based on the location of digital deserts plus Solomon Islands Government may help speed population densities. Ownership of the towers will up this transition. Despite recent price falls, remain with the government, though access will internet access is still costly by international be leased to private operators. standards: a 2GB data-only package costs around 9 percent of GNI per capita – well above 2.3.2. Digital Connectivity Challenges the UN Broadband Commission's estimate for affordability of 2 percent. A key factor for 100. The absence of last mile connections leads this is limited competition. There are only two to limited coverage and high costs. Access major providers of mobile telecommunications to high-quality digital connectivity is limited. services, with only one able to provide According to data from the Telecommunications meaningful coverage in areas outside of cities. Commission of Solomon Islands, around 205 With new capacity, increased competition in live towers nationwide provide 2G, 3G, and the mobile telecommunications market has the 4G LTE networks. While this provides nearly potential to improve quality and reduce prices, 95 percent of the population with mobile as was the case in Papua New Guinea, with the coverage, most connections are 2G. Only 45 entry of Vodafone in 2021 leading to a sharp fall percent of the population is covered by 3G and in retail prices. Solomon Islands: Country Economic Memorandum 53 101. Accessibility issues are reflected in the spatial the rest of the province (7 percent). All wards and gender distribution of internet use. The recorded some internet use, indicating that no greatest mobile/cell phone use for accessing individual ward was a digital desert. However, the internet among the 12+ population was in it is understood that large areas of the country the wards of Honiara, with 43 percent of people remain without digital connectivity, particularly aged 12+ using the internet (Figure 17). The in rural areas. Notably, access to the internet internet use rate in Honiara was almost twice as in Solomon Islands is distinctly gendered, with high as the next province, Rennell and Bellona every ward of the country, save for two, having (24 percent). The lowest internet usage rates a greater proportion of males using the internet were in Makira and Temotu (4–5 percent). In than females, with the average difference Guadalcanal, there was a noticeable difference nationwide of 4.7 percentage points and in some between the peri-urban wards (23 percent) and places, such as Rennell and Bellona being more than 20 percentage points. Table 5: Connectivity factors, digitalization initiatives, and legal coverage in Solomon Islands Connectivity Factors International Submarine Cable International Submarine Cable Redundancy Middle Mile Fiber Optic Network Last Mile Fiber Optic Network Meets Affordability Targets Outer Islands Broadband Connectivity Digitalization Initiatives Comprehensive Digital Strategy Integrated Payment Systems Digital Identification (ID) Core Government Services Online Legal and Regulatory Coverage Digital Identity E-signatures Data Protection Cyber-security Payments Systems Act Digital Payments & Transactions 2022 National Numbering Plan 2016; National Radiofrequency Telecom Spectrum Band Plan 2009; Telecommunications Act 2009 Consumer Protection Act Consumer protection 1996 Money Laundering and AML/CTF Proceeds of Crime Act 2002 Source: World Bank (2024). 54 Solomon Islands: Country Economic Memorandum 102. Gaps remain in establishing the legal and Proceeds of Crime Act 2002 and there framework for digitalization. Solomon Islands is active legal and regulatory enforcement of currently has no legislation which deals with this area by the Central Bank, gaps remain cybercrime or cybersecurity (Table 5). The rise towards compliance to Financial Action Task in cyber threats, from hacking and identity Force recommendations.26 Also digital identity, theft to data breaches and financial fraud, e-signatures, and data protection remain largely underscores the crucial need for comprehensive unregulated. Furthermore, enforcing digital cybersecurity frameworks. While Solomon standards and policies has proven difficult, in Islands has enacted the Money Laundering part due to resourcing challenges. Figure 17: Ward-level internet usage (proportion of population 15+ using internet) PAPUA NEW GUINEA CHOISEUL SOUTH PA C I F I C M A L A I T A Choiseul OCEAN Shortland I s. Vaghena Vella Lavella Kolombangara This map was produced by the Map Design Unit of The World Bank. WESTERN ISABEL Dai The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any Ranongga endorsement or acceptance of such boundaries. IBRD 47599 | New Georgia OCTOBER 2023 New Georgia Santa Isabel Group San Jorge Rendova Vangunu Malaita Tetepare Nggatokae MALAITA CENTRAL Florida Is. PROPORTION OF POPULATION Russell Is. 15+ USING INTERNET %: ≤4.54 HONIARA Maramasike 4.55–10.13 10.14–18.41 Guadalcanal 18.42–33.33 So ≥33.34 lo m Ulawa on GUAD AL C ANAL NO DATA Sea Duff Is. MAKIRAULAWA Reef Is. Tinakula T E M OT U San Cristobal Nendo Tikopia Bellona San Utupua RENNELLBELL ta C ruz Isla nds Vanikolo Rennell 26 With respect to its anti-money laundering/counter terrorism financing compliance, the last MER was conducted in 2019 where it was found that Solomon Islands was deemed compliant for four, largely compliant for eight, and partially compliant for 17 Financial Action Task Force recommendations. As at 2019, Solomon Islands was listed as non-compliant in relation to 11 recommendations. Solomon Islands: Country Economic Memorandum 55 2.3.3. Digital Connectivity and decline in the proportion of the population producing agriculture for sale and a 0.5 percent Economic Activity decline in the proportion involved in subsistence 103. Digitalization has the potential to better production. Moreover, digital connectivity integrate leading and lagging regions and is linked to lower rates of multidimensional improve the functioning of markets. There is poverty. However, the effect is small, with a 10 strong international evidence that the expansion percent increase in connectivity associated of digital technologies reduces the costs of with a 0.05 percent decline in the poverty index obtaining information, speeds up the diffusion within wards (results available upon request). of knowledge about market conditions, and 105. Further, improved digitization can support enables consumers and producers to connect financial inclusion by allowing more individuals at low cost (Foster et al., 2023). Moreover, to engage with banking services. At present, digital connectivity influences private sector Solomon Islands trails well behind aspirant development by enhancing firm productivity and country Fiji in most financial inclusion employment, promoting business-to-consumer indicators, with only around one-quarter of the links, and facilitating government-to-business population having a bank account. Women are service delivery (United Nations, 2023). ICT disadvantaged for various reasons including also shapes market efficiency, reducing the limited formal literacy, a lack of proper price dispersion of agricultural products – documentation, distrust of formal institutions, especially the perishable ones that cannot be and persistent beliefs that men should have stored (Foster et al., 2023). Additionally, digital the final say (UNCDF, 2021). These barriers are connectivity can promote online/remote work likely even more substantial in remote areas opportunities, potentially benefiting both urban where overall literacy is poorer and there is little and rural areas. Online working – sometimes experience of such institutions. Digital literacy described as ‘telemigration’ – has not yet been a programs should be expanded to increase feature in the Pacific (World Bank, 2023b). equitable access to digital resources and 104. At the community level, digitization is opportunities. Census data show that for both correlated with higher employment and men and women, digital connectivity is highly reduced poverty. Linear regression analysis correlated with the use of financial services and of 2019 census data shows that a 1 percent financial inclusion at the ward level. New fintech increase in the proportion of the community models such as digital wallets EziPei, iumiCash, using the internet via cellular connections is and the youSave app (a voluntary saving scheme associated with a 0.77 percent increase in the designed especially for the self-employed) are proportion involved in non-farm employment helping to overcome remoteness by allowing nationwide (with the rate increasing to 0.90 essential banking functions to be undertaken percent in the wards outside of Honiara), electronically. Accelerating the rollout of digital with the coefficient statistically significant services should enable more people to access in each case. Notably, the increase in non- these features. farm employment appears to have come at the expense of involvement in small-scale agriculture, with a 1 percent increase in connectivity associated with a 0.1 percent 56 Solomon Islands: Country Economic Memorandum Figure 18: Digital and financial inclusion* (2019) 90 80 70 % Financial inclusion 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 % Using internet Male Female Source: World Bank based 2019 Census. Note: *Use of financial services (banking, credit union, microfinance, and savings groups) in the past three months 106. Digital connectivity is a key way to address assist migrants in circumventing costly and the skills and knowledge disparities that drive cumbersome over-the-counter money transfer gender gaps in employment opportunities operators when sending money home.27 More and economic outcomes, particularly in rural timely and regular remittances may help make areas. Online skills training and job coaching can participation in seasonal worker programs target the types of skills suitable for available easier on participants and their families left at jobs, and make these services available to home; rather than waiting to bring cash home women for whom household responsibilities upon their return, workers can make regular and safety concerns make travel to places of payments and support families from abroad education more challenging. For women in rural (Hamel, 2009). and remote areas in particular, digital provision of training is extremely valuable. Government 108. Enhanced digital connectivity with appropriate programs, aimed at improving agricultural digital strategies can also improve the production and pest control skills, experience responsiveness of governments. The difficulties reaching women in these areas dispersion of population makes it challenging and find a potential lack of knowledge around for governments to provide adequate levels of business ideas such as the cost of producing public services. Digital records and payment goods, market value of goods, and risk (World systems can facilitate improved targeting and Bank, 2019). implementation of government payments. In a move to enable the increased use of electronic 107. The benefits of fintech also extend to payments, the Solomon Islands Government remittances. The youSave program and enacted the National Payment Systems Act other digital payment platforms can also 2022. This is a key step the government has Because of the underdeveloped nature of many Pacific financial systems, sending money home to relatives can be very costly for 27 diaspora communities, with commissions averaging 10 percent of the transaction amount (United Nations, 2023). Solomon Islands: Country Economic Memorandum 57 undertaken in collaboration with the Central 110. Internal migration has been an important driver Bank of Solomon Islands to increase access of Honiara’s population growth. Spatial shifts to affordable digital payment services, reduce of populations are a feature of Solomon Islands, reliance on cash, and drive broad-based with around 7 percent of the total population financial inclusion across the country where relocating from provinces in the past five years. many adults do not have access to a bank Honiara was one of the few places in the country account. This development is also set to where there was a positive net migration rate, benefit small businesses by making everyday with the twelve wards of Honiara City Council banking transactions easier. Local governance recording a net migration rate 39 people per could potentially benefit through better 1,000 population (World Bank, 2024).29 However, capacity for information sharing, streamlined this pales in comparison with the migratory communications between government agencies, inflows to the two adjacent peri-urban wards and improved monitoring. Indeed, the innovative around the city (Tandai and Malango), which had use of mobile phone networks has helped a combined net migration rate of 186 people enhance fishery surveillance in remote areas per 1,000 population – nearly five times as fast and transmit the findings to authorities.28 This as Honiara. Overall, migration to the broader not only helps compile information on market Honiara Urban Area (which accounts for the conditions and prices but can also help protect peri-urban area) accounted for around half the country’s fisheries from poaching. The of the people who migrated across provinces Ministry of Fisheries and Marine Resources also between 2014 and 2019. Indeed, recent migrants leverages satellite and broadband connectivity accounted for 14.9 percent of the population of to implement real-time electronic monitoring the broader Honiara Urban Area in 2019, which of fishing activities at sea. It could also help is well above the national average (7.1 percent). establish robust digital identification platforms. Another notable feature of the migration patterns was the net outflow of residents from 2.4. The Honiara Urban Area provincial towns to Honiara Urban Area, with Noro in Western Province the notable exception. 109. An important dynamic has been the rapid This reveals a general pattern of rural residents concentration of the population in and around migrating to both Honiara Urban Area and the capital city. While Solomon Islands remains provincial towns, and from provincial towns to a predominantly rural country, its pace of Honiara Urban Area, likely in search of better urbanization has been among the fastest in the economic opportunities and access to services. world, with an annualized urbanization rate of 5.8 percent over the ten years to 2019, more 111. In addition to the push and pull of economic than double compared to structural peers and drivers, migration to the Honiara Urban lower-middle-income countries (Figure 19). Much Area is being accelerated by climate change. of this growth has occurred in Honiara. Since Solomon Islanders have used temporary and before Independence, Honiara’s population permanent migration between geographic hubs growth has been significantly above the national for generations to relieve population pressure in average (SIG, 2009). The result has been a more small islands, atolls, and other environmentally than 10-fold increase in the city’s population precarious places. Exposure to natural hazards since 1970 and a doubling between 2009 and has, therefore, been one of a mix of economic 2019 (Figure 20) – growing more than twice and social drivers for migration. Importantly, the national average rate (7.2 percent per year, migration is not necessarily fixed; much compared with 3.4 percent). migration is short-term or circular to capitalize A notable example is the USAID funded Hapi Fis, Hapi Pipol! (Happy Fish, Happy People!) project. 28 29 Net migration rate calculated as the difference between the number of people entering and leaving a province (ward) per 1,000 individuals in the period 2014–2019. 58 Solomon Islands: Country Economic Memorandum on economic opportunities with the expectation What is more, there has been a sharp increase of returning home. Increasingly, climate change in agricultural jobs in Honiara Urban Area. The is accelerating this dynamic through the effects largely informal agricultural sector accounted of sudden onset shocks that displace residents, for about 40 percent of the overall job growth and via slower onset changes that progressively in the Honiara Urban Area between 2009 and undermine the livability of homelands and, thus, 2019. As a result, there has been a notable their resilience to shocks. shift in urban employment towards agriculture, increasing from 11 percent in 2009 to 25 percent 112. Critically, rapid urbanization has delivered in 2019. Female workers were 16 percent more relatively few economic benefits. While likely to be working in the agricultural sector urbanization has been a driver of growth than male workers, while recent migrants through the creation of non-farm jobs and only have a slightly higher likelihood of being agglomeration externalities for most countries, employed in agricultural jobs (1 percent higher). in Solomon Islands urbanization has not led to The difference becomes more pronounced when a structural shift in employment. Between 2009 comparing poor workers, with a 3.2 percent and 2019, the sectoral composition of workers higher probability. in agriculture has increased at the national level. Figure 19: Urban population average annual growth rate (2009–2019) Aspirational peer average 2.3 Solomon Islands 5.8 Kiribati 3.3 Structural Peers Timor-Leste 3.1 Vanuatu 2.9 Comoros 2.5 Micronesia, Fed. Sts. 0.5 Samoa - 0.2 Structural peer average 2.4 Lower middle income 2.7 Pacific Island small states 1.8 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Percentage point Source: Solomon Islands Census; World Bank Development Indicators. Solomon Islands: Country Economic Memorandum 59 Figure 20: Honiara population total 140 127 120 100 Thousands 80 65 60 49 40 30 20 15 12 0 1970 1976 1986 1999 2009 2019 Source: SINSO. 113. Another key implication of the rapid growth the existing infrastructure is old and outdated. in urban populations is a rise in urban Roads have become more congested due to unemployment as the pace of urban growth has increased population and vehicle ownership, outstretched job creation in the formal sector steeply sloping terrain, and a lack of investment (World Bank, 2024). The unemployment rate in and maintenance. Severe traffic bottlenecks the Honiara Urban Area was nearly 8 percent are common, and floods occasionally inundate in 2019, much higher than 4 percent in 2009. sections of major roads. There is also a lack At the ward level, areas that have experienced of people-centered urban amenities, with few a rapid population increase due to migration recreational facilities and limited pedestrian also experienced a corresponding rise in walkways. unemployment rates, indicating a link between migration and unemployment. Recent migrants 115. A key reason for the limited ability of Honiara to the Honiara Urban Area are more likely to be to effectively absorb internal migrants is that unemployed after controlling for key observable the city government lacks many foundational characteristics. tools for effective urban planning and service delivery. Existing plans are dated and not risk- 114. Critical urban infrastructure and essential informed, and enforcement mechanisms and services have not kept pace with the capacity are weak. A key challenge is the lack burgeoning urban population, especially in of effective inter-jurisdictional coordination and informal settlements. Electricity services are resourcing. Mandates and responsibilities are subject to regular and lengthy interruptions, shared by several national, provincial, and city as system diesel generators fail to cope with entities (the latter for Honiara City only), but growing peak loads on the Honiara grid (PRIF, there are no adequate systems for information 2021). Essential urban infrastructure and sharing and integrated planning. Decision- services, including solid waste management, making is heavily top-down, with limited piped water, storm drainage, and street lighting outreach and engagement with communities. are provided only to certain parts of the city, Moreover, outdated legislation and policies with service quality having deteriorated over hamper the planning and financing of services time due to minimal maintenance. There is no across urban boundaries (such as between centralized sewerage system in Honiara, and Honiara City and Guadalcanal Province). 60 Solomon Islands: Country Economic Memorandum 116. Additionally, there are major challenges in the congestion costs and promote efficient use of urban land administration system. Roughly resources.31 For instance, public investments 80 percent of land in Solomon Islands is held in infrastructure that promote the safe and through customary tenure. The country's land efficient circulation of people and goods around registry is outdated. The provinces and city the city are paramount. The Honiara City Council councils utilize the records and valuations of will be a key stakeholder in this respect. Finally, the Ministry of Housing Lands and Survey. The there is a need to address both demand-side cadastral mapping system is largely manual and supply-side constraints to facilitate job and not yet digitized. Paper records are not creation in the capital. On the demand side, it is protected from (climate) hazards. Overall, land important to improve the business environment, administration and management services, and while on the supply side, there is a need to revenue collection are hampered by system address the lack of skills among the labor force. inefficiencies. Especially in the dynamic, While upskilling will require public intervention, informal, and rapidly urbanizing context, it some aspects may be addressed at the firm is challenging to understand who owns what level (Chapter 3). property and the type, value, or location of built assets. In Honiara City, only 8,000 of an 118. Additionally, investments in provincial urban estimated 18,000 properties are recorded.30 The centers may generate economic benefits and most current land valuation exercise was carried reduce migration push factors. Only 10 percent out in 2010. The inefficiencies have knock-on of the country’s urban growth between 2009 effects on revenue collection (and thus service and 2019 occurred outside of Honiara, with delivery), planning, informality and tenure many individuals leaving these towns for the security, and the investment environment. capital (World Bank, forthcoming). However, as indicated above, targeted investments in 2.5. Policy Recommendations provincial urban centers can create scale and promote economic activity. The development of for Improved Spatial provincial towns could also reduce the influx of Development migrants into Honiara and improve the capacity to accommodate the inflow of migrants from the 117. To benefit from agglomeration economies, outer islands. It will be important to calibrate there is a need to invest in Honiara. Economic the investments to the local context and aim growth and prosperity tend to concentrate to overcome the structural barriers that inhibit spatially in leading regions (World Bank, 2009). local economic development and growth. In such regions, the clustering of populations Furthermore, limitations in the capacity of urban and production leads to economies of scale, areas to absorb migrants could increase the risk specialization, and exchange of knowledge for conflict between established populations and and technology. Additionally, the density of new arrivals. population and producers lowers the unit cost of service delivery and infrastructure. 119. Outer island development, however, involves Honiara, as the leading area in Solomon Islands, a complex trade-off between efficiency and has the potential to drive economic growth. other social objectives. Economic returns to However, this requires strengthening land- investments in physical capital tend to be low administration systems, upgrading essential – or even negative – for many activities in the services, increasing local revenue mobilization outer islands. Moreover, such interventions and adequate urban planning to reduce have a high opportunity cost in terms of forgone lower-cost interventions on the more densely Despite the population of Honiara having increased by some 65,000 people between 2009 and 2019, only 1,087 residential approvals 30 were issued in total by Honiara Town Council between 2010 and 2019. A useful starting point for urban planning is the Greater Honiara Urban Development Strategy and Action Plan which is a coherent 31 roadmap for the broader Honiara urban area – a key foundation for developing an urban master plan. It should also help improve coordination between government agencies and development partners, which are likely to be key financiers of urban renewal projects. Solomon Islands: Country Economic Memorandum 61 populated main islands. Accordingly, the scope with good direct connections to Honiara. for successful spatially targeted activities Precedence is given to maintenance and that promote growth and living standards is rehabilitation before greenfield investments. severely constrained in most outer islands. As Following any rehabilitation works, adequate a result, where spatially targeted policies are funding must be provisioned for maintenance implemented to promote rural economic growth, (World Bank, 2022). More generally, transport they should be aimed at exploiting carefully sector reforms are needed to achieve long-term studied comparative advantage and economic sustainability, including the separation of the potential – especially concerning agriculture, policy and implementation function. tourism, and extractive industries – rather than by a desire to try to equalize economic 121. In line with the National Transport Plan (2017– opportunities across islands.32 However, 2036),33 the following recommendations can be spatially targeted investments may be needed considered to improve connectivity: given the country’s socioeconomic and ethno- • Undertake an updated survey on the linguistic divisions. Furthermore, investments in condition of existing infrastructure. human capital – health and education services – Currently, the government has dated should be available to all populations, regardless estimates of the condition of roads and of location. At the margin, improved service wharves, while a large share of existing delivery in rural locations should reduce push infrastructure has no data. Therefore, a factors driving urban migration (World Bank, comprehensive condition survey of all the 2017). domestic wharf and ramp structures, roads, 120. The binding nature of economic geography and airfields should be undertaken in order constraints in Solomon Islands means there is to effectively prioritize investments. a clear rationale for improvements in transport • Develop an asset management strategy. connectivity. International evidence from a The government needs to develop a proper wide range of studies shows that investments in asset management policy, an inventory of transport infrastructure in developing countries assets, a model for asset deterioration, have promoted growth by enabling the flow guidelines on financing (e.g., Asset of production factors from low productivity Management Fund), measures to enhance to high productivity. The upsides of improved capacity of the local construction industry, market access include greater rural employment and empowered agency to implement annual and consumption, reduced poverty, and even asset management programs. reduced push migration factors (Foster et al., 2023; Berg et al., 2017). Effective targeting of • Upgrade the domestic port at Honiara, investments will be essential. The substantial possibly in conjunction with the relocation opportunity costs of capital investments and of the international terminal. The port at high maintenance intensity mean it is neither Honiara is the hub of the entire inter-island feasible nor desirable to provide all communities shipping network. However, the wharf infrastructure and surrounding roadway facilities are not fit for purpose, with rehabilitation and possibly even replacement needed. Spatially targeted interventions should generally not be used as an instrument for income redistribution (World Bank, 2009). 32 33 Notably, the National Transport Plan provides a longlist of around 250 separate investments in wharves, roads, and airfields as an idealized list of a 20-year investment program. This feeds into the five-year Medium-Term Transport Action Plan (2017–2021). It provides a comprehensive and costed assessment of the various transport investment options. The 25 top-ranked projects, including rehabilitation and new projects, were qualitatively assessed for their impact on growth and provincial equity without explicit reference to growth projections. Some investments are already the subject of donor-funded investment programs. 62 Solomon Islands: Country Economic Memorandum • Invest in a multi-purpose containerized • Create scale in inter-island shipping transport yard in Malaita. Presently, by reducing frictions at the last mile of containerized transport is only available connectivity. Improving the speed, safety, at the publicly owned international ports and quality of the small-scale maritime in Honiara and Noro. However, there are sector is necessary for promoting rural several reasons why a third container port economic development and building the located in or around Auki may be worthwhile. required scale at key ports to encourage First, Malaita is the home to the largest growth in the inter-island shipping network. population and is a significant producer of Jetties near key transshipment locations cash crops destined for export. Second, and markets should be targeted, as they a containerized port in Malaita would also are critical to the effective functioning serve as a key transshipment area for the of the small-scale maritime sector. The eastern part of the country and potentially dysfunctional jetty alongside Honiara alleviate some demands on the port at Central Market would appear to be a strong Honiara. Third, as with the SolTuna cannery candidate for refurbishment, provided it can in Noro, a nearby container port will facilitate be developed as an all-weather berth. the proposed new tuna cannery operation at Bina Harbour. • Revisit the Franchise Shipping Scheme (FSS). The FSS may not have a large • Improve existing road connections impact on growth, but there is a legitimate to essential port infrastructure and public interest in being able to maintain (disconnected) pockets of density. Roads some connectivity to the outer islands. To and bridges broaden the reach of the inter- ensure that the FSS operates effectively, it island transport network by directly linking will be important to improve the way that inland areas and places where reliable franchising arrangements are tendered out shipping services cannot be provided to the and the way in which new entrants can be inter-island shipping network. Apart from facilitated to enter the market. Experience opening markets to additional producers from other franchise schemes indicates and consumers, road connectivity has that reviewing the contracting process for clear efficiency benefits for consolidating franchising, the applied performance criteria and moving larger loads to and from (and their enforcement), and the setting and wharves. Investments should first target financing of subsidies will be important for the rehabilitation of the existing network, success. prioritizing links between urban areas and rural centers of density and economic growth 122. Unlike transportation, digital connectivity potential. Rehabilitation and construction should be universal, with the most significant of roads may also be justifiable to connect benefits potentially accruing to the most populated areas of the country that are disadvantaged in the community, including otherwise disconnected due to rough seas, women. For instance, with better access to like the Guadalcanal Weather Coast or the market information, smallholder producers northern coast of Makira. can make faster and more informed choices about how best to allocate their land and time and respond more quickly to fluctuations in commodity prices.34 Additionally, better telecommunications connectivity offers the 34 Melanesian smallholder production has generally been shown to be highly price elastic. Solomon Islands: Country Economic Memorandum 63 prospect of a faster diffusion of modern opportunity to connect to the internet agricultural knowledge and techniques. without any connectivity to terrestrial However, expanded access comes with risks of telecommunications towers, which may be deforestation which will need to be managed. As an option in digital deserts. women are more likely than men to be involved in subsistence agriculture and less likely to have • There is a need for further regulatory access to digital services, investments in digital reforms and enhancing enforcement. infrastructure that facilitate a transition from The legal and regulatory coverage is subsistence toward income-earning activities adequate in the telecom, digital payment should support women’s economic participation. and transactions, consumer protection, Given the positive externalities associated and anti-money laundering/counter with digital connectivity and binding economic terrorism financing space, while digital geography and equity constraints, public identity, e-signatures, data protection, and intervention will be required. cyber-security remain largely unregulated. Improvements in the regulatory environment 123. It is therefore critical to improve the availability need to be complemented with adequate of digital connections, its affordability, and resourcing and building capacity for the regulatory framework. The following implementation and enforcement. recommendations can be considered: 124. Finally, improving connectivity is not an end, • Transition towers to 3G and 4G. Essential there must be a holistic approach to spatial to broadening digital connectivity is that economic development. In the same way that connections are functional: consumers economic geography is one of an interlocking need quality internet connections capable of set of binding constraints on growth, transport handling modern websites and video. To that and digital connectivity alone are insufficient end, it is essential that towers continue to be for stimulating growth and development. transitioned from outdated 2G technology to Consequently, investments in improving access 3G, and ultimately 4G. The new government to transportation and digital networks should telecommunications towers should assist in be considered part of a broader strategy for accelerating this transition. spatial development, involving policies and programs appropriately calibrated to the local • Expand coverage competitively. There context to overcome the structural barriers must be a focus on linking users to digital that inhibit economic development, including networks, a stated goal of the National climate change considerations. In the absence Development Strategy (2016–2023). A key of access to credit, public goods and services, barrier to overcome is cost, partly inflated and effective downstream functions that by a lack of competition, particularly in rural incentivize and support value-add activities, areas. Therefore, the use of government- there is a risk that the purported benefits of built towers in rural areas must be offered to investments will not be realized. For instance, both major telecommunications operators digital development relies on users having and any new entrants into the market via a devices and reliable power to use them, plus the leasing agreement. requisite digital literacy. United Nations (2023) notes that structured learning to enhance digital • Innovations in satellite internet connectivity literacy across populations – including women, may be an option for the hardest-to- people living in rural areas, and marginalized reach areas. Starlink satellites offer an communities – will be vital to building inclusive digital economies. 64 Solomon Islands: Country Economic Memorandum 3. Boosting Private Sector Development Solomon Islands: Country Economic Memorandum 65 3.1. Snapshot of the Private Sector 125. As of December 2022, there were 2,071 that 85 percent of formal businesses are operational registered enterprises in the concentrated in and around Honiara, followed private sector in Solomon Islands. The by Western Province and Malaita with a large Solomon Islands National Statistics Office gap (6 percent and 4 percent, respectively). In (SINSO) maintains a record of formal rural regions, the number of formal enterprises businesses across multiple economic sectors decreases drastically. and geographical locations. Their data show Figure 21: Breakdown of formal enterprises by location 1% 1% 1% 1% 1% 1% 1% 6% 4% Central Province Guadacanal Province Honiara Malaita Province Temotu Province Western Province Choiseul Province Isabel Province Makira/Ulawa Province 85% Renell & Bellona Province Source: SINSO Business Registry. 126. The concentration of formal firms in Honiara 127. The service sector in Solomon Islands is is a function both of rapid urbanization as relatively large for a country at its stage of well as the better access to infrastructure development, accounting for 49 percent of and services. As highlighted in the previous GDP and 26 percent of employment as of chapter, the considerable challenges and 2020. Travel and tourism have comprised the costs associated with providing infrastructure majority of the country’s service exports. While and services to dispersed populations across significant for the country, revenues from these divided territories has led to a concentration of activities have not been as robust for Solomon formal enterprises in Honiara (Solomon Islands Islands compared to other PICs, suggesting a Government, 2023a). The sectoral composition relatively weak competitive advantage. While of these enterprises is heavily focused on revenues predictably collapsed during the services, with 32 percent in wholesale and retail COVID-19 global pandemic, they have also been trade, 46 percent in other services, 14 percent slow to recover following the reopening of the in manufacturing and construction, and 8 country’s borders in 2022. percent in agriculture. 66 Solomon Islands: Country Economic Memorandum Figure 22: Solomon Islands’ service exports thousand US$ (2005–2022) 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Transport Travel Government goods and services All other commercial services Source: International Trade Centre. 128. Across all sectors, micro enterprises are by 22 percent to total household income and far the largest in number followed by small-, representing 28 percent of employment large-, and medium-sized enterprises. Micro, income. The predominant business activity for small, and medium enterprises (MSMEs) play MSMEs across all provinces is small-scale retail a vital role in Solomon Islands, contributing trade (Solomon Islands Government, 2023a). Table 6: Enterprise size Size of the enterprise Number of employees Percentage of enterprises Micro 1-5 80% Small 6-25 10% Medium 26-50 4% Large >50 6% Source: SINSO Business Registry. 129. Informality is widespread in Solomon Islands, of furniture. In 2017, the informal sector as is the case with most developing countries accounted for 30.4 percent of GDP (SINSO, around the world. Informality is spread 2020) and almost 80 percent of the country’s across all economic sectors but particularly working population aged 15 years and over concentrated in rural agriculture. In addition, (ADB, 2016). The scope of informality may have in and around Honiara, there are several increased following the COVID-19 pandemic. informal markets housing unregistered family- The Solomon Islands National Statistics Office owned firms engaged in wholesale and retail is currently working to update the estimated trade, and basic services such as small motor scale of informality. vehicle repair shops and the manufacturing Solomon Islands: Country Economic Memorandum 67 130. The government has developed a National registration with the Company Haus can now Formalization Action Plan aimed at addressing be lodged online but the payment must still be informality. The plan aligns with Solomon made in person with the Ministry of Finance Islands National Development Strategy and and Treasury, and then the receipt of payment builds on various government initiatives that delivered in person to the Company Haus. integrate business development for small Procedures in other areas such as business enterprises with their formalization. It identifies licensing, paying taxes, and trading across financial inclusion and digitalization as the borders have seen similar limited digitalization. key drivers of transition to formality.35 These Still, 43 percent of firms in the survey identified priorities were validated in the World Bank business licensing and permits as an obstacle Firm Survey conducted for this report, which to their business. asked businesses about reforms that would encourage formalization. More than 80 percent 132. At the firm level, most companies are making of respondents identified digitalization of use of some technology and structured services between government and businesses, management practices. Firm adoption of improved access to finance, and reducing the digital technology and structured management cost and complexity of complying with business practices has been empirically shown to environment regulations as priority reforms. increase total factor productivity (Paula et al., 2020). While there is not comparable data for 131. The business environment is improving Solomon Islands to benchmark technology through digitalization but remains adoption and managerial practices with burdensome. Starting a business involves structural or aspirational peers, the World company registration, obtaining a tax Bank Firm Survey provides some country data. identification number, and obtaining operating More than 96 percent of firms report using licenses. Foreign investors also need to technology for one or more business functions, obtain a foreign investment certificate and with the highest share in administration and many businesses will also need to register as sales. At the same time, more than 66 percent employers with the provident fund and obtain do not make sales online for reasons ranging sector specific licenses and permits. The from a lack of need for online sales to the high Company Haus and Solomon Islands Trade costs and fees associated with processing Portal maintain up-to-date information on the payments online. With regard to managerial processes, fees, and contact information for practices, 88 percent of firms report monitoring each requirement. In addition, some parts of key performance indicators, with 41 percent these processes can now be partially completed tracking four or more indicators. More than online. For instance, applications for business two-thirds of firms (69 percent) set sales targets. https://www.ilo.org/empent/areas/ef/WCMS_888182/lang--en/index.htm#:~:text=The%20National%20Formalization%20Action%20 35 Plan,Solomon%20Islands%20National%20Development%20Strategy. 68 Solomon Islands: Country Economic Memorandum Figure 23: Share of firms applying technology across business functions 60% 50% 40% 30% 20% 10% 0% Source: World Bank Firm Survey. 133. While the capabilities of the workforce vary and technical qualifications for their staff. across firms, education and skills are a Nonetheless, the lack of qualified labor is one of significant constraint. Firm survey data show a the most significant constraints for businesses. large spread in the share of employees with key Solomon Islands is also among the top of competencies such as literacy and computer lower-middle- income countries for the share of skills, as well as with the level of educational workers being under-educated for the jobs they attainment (Figure 24). Anecdotal feedback hold. Section 3.2.2 covers labor market skills in from firms and associations indicates that more detail. many enterprises invest in upgrading skills Figure 24: Share of employees with capability/education 120% 100% 80% Read and write Use a computer 60% Can do business accounting Completed vocational training 40% Completed secondary education Completed a college degree 20% 0% Source: World Bank Firm Survey. Solomon Islands: Country Economic Memorandum 69 134. Solomon Islands exports are heavily Trade partners are similarly concentrated concentrated both in products and destination with more than 50 percent of total exports markets. While merchandise exports from going to China (including more than 80 Solomon Islands have grown consistently percent of timber exports) and Italy, India, since 2004, this is almost entirely driven by and Australia accounting for the majority of the forestry industry with wood and wood the remainder. The Hirschman Herfindahl products growing from US$34 million in Market Concentration Index – a measure of the export value in 2004 to more than US$370 dispersion of trade value across an exporter's million in 2022. During this time, meat and fish partners – shows Solomon Islands is more exports grew more slowly, reaching an average concentrated than any structural or aspirational annual value of just over US$100 million. peer aside from Kiribati. Figure 25: Nominal exports (US$ million) 800 700 600 500 400 300 200 100 0 04 05 06 08 09 20 22 07 10 14 16 18 19 12 21 13 15 17 11 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Other Meat and fish Minerals Wood and wood products Source: International Trade Center Data. 2018–2022 reflects mirror data. 135. Exports exhibit limited competitiveness in 136. International trade in services is also sizable, foreign markets. While the number of products equal to 18 percent of GDP. This includes exported from Solomon Islands and the number service exports (4 percent) and imports (14 of export destinations has grown over time, few percent). While Solomon Islands is a net new products or destinations exhibit sustained importer of services, this is not necessarily growth, and many products exit their export to the detriment of growth: imports are often markets within three years of initial entry. In just as crucial to growth as exports in order addition, the complexity and specialization of to broaden value creation within an economy. the export basket is low, reflecting a reliance on For instance, import of financial services can semi-processed, low value-add exports. help reduce the cost of capital for domestic businesses. Yet, despite the presence of net service imports into the economy, there is likely much room for further efficiency enhancement in these markets. 70 Solomon Islands: Country Economic Memorandum Figure 26: Solomon Islands’ trade balance, 2005–2022 800,000 600,000 400,000 200,000 0 -200,000 -400,000 -600,000 -800,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Merchandise exports Merchandise imports Service exports Service imports Net merchandise trade Net service trade Net overall trade Source: International Trade Center. Figure 27: Solomon Islands’ service import composition (2022) Transport Insurance and pension Teleco, computer, and IT Government goods and services Travel Financial services Other business services Construction Chargers for use of IP Personal, cultural, and rec. Source: UNCTAD. Solomon Islands: Country Economic Memorandum 71 Figure 28: Solomon Islands’ service export composition (2022) Transport Insurance and pension Teleco, computer, and IT Government goods and services Travel Financial services Other business services Construction Charges for use of IP Personal, cultural, and rec. Source: UNCTAD. 137. Service market competition and efficiency equivalent to one-third of GDP, so high shipping in Solomon Islands are constrained by a costs have a very immediate impact on firm variety of factors which increase cost and competitiveness and household expenditure. reduce competitiveness. Competition is Yet there are a number of horizontal and constrained both by intrinsic factors, including vertical restrictions that increase the cost of the limited scale of the internal market and shipping. These include the Exchange Control remoteness, as well as by policy choices. For Act (Foreign Exchange) Regulations of 1977, instance, maritime cargo handling services which imposes a US$30,000 transaction limit (i.e., port operation) are the exclusive domain on money transfers to foreign service providers. of the state-owned Solomon Islands Ports This indirectly affects shipping companies by Authority which also acts as the regulatory limiting firms to the charter of other domestic authority, infrastructure owner, and operator vessels (i.e., those of competitors), or foreign of maritime cargo handling services for the ones with limited cargo capacity. As a result, country’s two international terminals. Greater increases in demand for freight services can competition could help reduce port charges, result in significant price spikes for customers. which – in Solomon Islands – are among Similarly, the Shipping Act of 1998 bans the highest in the region. Efficiency is also foreign-owned companies from establishing constrained by more complex restrictions and branches in Solomon Islands or registering their regulations. World Bank analysis on service vessels under the national flag. It also imposes trade restrictions highlights how these barriers significant requirements for the employment to trade can increase costs across the private of Solomon nationals on domestically flagged sector. For instance, imported merchandise is ships. These restrictions add significant costs or deter entry by new firms, particularly those with foreign investment. 72 Solomon Islands: Country Economic Memorandum 138. Solomon Islands consistently attracts around transportation services, small scale timber 2 percent of GDP on average in inward foreign milling, and food stalls or small cafes working direct investment (FDI). This level of inward FDI in spaces under 25 square meters. While the is consistent with structural peers while also act contains good practice provisions such as being less volatile year-to-year than most peers. a requirement for regular review, regional and The Foreign Investment Act in Solomon Islands global evidence has shown that reserve lists establishes requirements for foreign investors can be abused to artificially restrict foreign and sets out economic activities that are competition. Foreign businesses are also reserved for domestic businesses. There are required to obtain an annual foreign investment 14 reserved economic activities, mostly aimed certificate to operate in the country. at protecting very small business activities such as roadside stalls, fixed bus route Figure 29: Average foreign direct investment, net inflows, percentage of GDP (2013–2024) 14 Standard deviation in yearly inflows 12 6 Net inflows (% of GDP) 10 8 4 6 4 2 2 0 0 Comoros Fiji Kiribati Grenada Maldives Micronesia Samoa Timor-Leste Vanuatu Solomon Islands Average inflows 2013-2022 Standard deviation of inflows Source: World Bank. 139. A breakdown of FDI since 2018 shows by Australia with 78, Malaysia with 60, and retail and wholesale trade as the largest Bangladesh with 54 registrations. Honiara is receiving sector and China as the largest the most popular destination for FDI coming originating market. Retail and wholesale into Solomon Islands with 74 percent of the trade top the chart with 105 registrations, new registrations being made in the capital followed by professional services with 43. In since 2018. Guadalcanal follows with 19 percent Solomon Islands, China registers the highest of the registrations, Western Province with 3 number of foreign investors with a total of percent, Malaita with 1 percent. Trailing behind 191 registrations since 2018. It is followed are all the other provinces with almost non- existent foreign direct investment.36 36 Data from Ministry of Commerce, Industry, Labour and Immigration. Solomon Islands: Country Economic Memorandum 73 Table 7: Foreign direct investment inflows by country and volume Year Total New Registration Total Investment SI$ 2018 203 [58 China, 20 Australia, 125 other] $438,098,305.00 2019 118 [48 China, 23 Australia, 47 other] $525,620,241.00 2020 66 [27 China, 11 Australia, 28 other] $540,247,500.00 2021 42 [12 China, 12 Australia, 18 other] $415,409,300.00 2022 63 [29 China, 8 Australia, 26 other] $693,423,986.00 2023 35 [17 China, 4 Australia, 14 other] $422,797,139.75 Total 527 $3,035,596,471.75 Source: Ministry of Commerce, Industry, Labour and Immigration. Figure 30: Total number of new registrations per sector (Jan 2018–Jun 2023) 120 105 100 80 60 43 40 38 34 27 21 18 20 20 14 12 12 12 10 1 4 1 2 2 1 0 n y es th t s ns re n g s te m g g e er n le or rie tr ga in tio rin in nc io tio sa is ltu ta l th ic io ea s sp r in ut ur na he te tu c ca re rv es d le O at u M H ru ib an an To ho ic ca ac Fo se Fi s ic u al tr st Fi Ed gr Tr un uf il w is Re t& al on O A D an m & on en C om il M si ta nm es C Re of ai rt Pr te En Source: Ministry of Commerce, Industry, Labour and Immigration. 74 Solomon Islands: Country Economic Memorandum Figure 31: Total number of new registrations per country (Jan 2018–Jun 2023) 250 191 200 150 100 78 60 54 50 11 10 12 16 11 15 17 8 4 6 0 a G ia ia a re SA d ji na an ng sh es ad Fi re an PN s al o in de iw Ko hi ay U an Ko ap tr al pp C Ta la us al C Ze g ng ng ili on M A Si Ph ew Ba H N Source: Ministry of Commerce, Industry, Labour and Immigration. 3.2. Constraints to Private to land, crime, licensing procedures, access to finance, practices of competitors, and high Sector Development costs for transportation. When asked about the single greatest obstacle, firms cited taxes (34 140. Businesses face a number of constraints to percent) followed by the availability and cost of market entry and growth. The World Bank electricity (19 percent) and then the availability Firm Survey found that more than 90 percent of other infrastructure (8 percent). These of businesses identified access to credit as a results are broadly consistent with the most constraint to growth, followed by corruption (81 recent World Bank Enterprise Survey (2015). In percent), the availability and cost of electricity the remaining part of this section we discuss (78 percent), and taxes (73 percent). Other four key constraints in more detail: land, skills, factors viewed as obstacles include access access to credit, and energy costs. Figure 32: Share of firms identifying each issue as an obstacle to their business (percent of respondents) Corruption Transportation of materials or people Labor legislation Obtaining business licenses and permits Difficulty in obtaning land Access or supply of raw materials, inputs or fuels Lack of qualified labor The smallness of the market (not being able to reafh new customers) Crimes, robberies and violence Practice of competitors Access to credit Availability of other infrastructure (water, roads, sewerage, etc) Afailability and cost of electricty Taxes 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: World Bank Firm Survey (2024). Solomon Islands: Country Economic Memorandum 75 3.2.1. Land Use people access land through a wide range of relationships, not only patrilineal and/or 141. Access to land and the ability to exchange it matrilineal descent (McDougall, 2020). Land are important for economic growth, private tenure in Solomon Islands should therefore be sector development, and poverty reduction understood both in terms of biological descent (World Bank, 2003). Land is a key asset and kinship, as well as emplaced stories and that provides the basis for economic activity oral histories that are fundamental to people’s and livelihoods, especially for the rural poor. identity. As a predominantly rural society, Secure land rights – not necessarily formal land also provides a crucial role in housing, titles – increase investment and provide food security, income generation, and social households with better access to credit. cohesion. Furthermore, the transfer of land rights tends to improve allocative efficiency towards more 143. The land tenure system in the country is productive producers. For instance, land heavily influenced by its colonial history. In laws to improve tenancy security increased pre-colonial times, all land in Solomon Islands agricultural productivity in India (Banerjee et was held under customary tenure. However, al., 2002). Relatedly, the introduction of private during the British protectorate era (1893–1978), property rights in Vietnam increased economic land laws were enacted to create private land activity (as measured by increased nighttime and public land. Customary land was deemed light intensity) (Ho, 2021). Important to note vacant – at times inappropriately so – and was that land rights need to be administered and granted to individuals and business entities enforced by institutions that have both legal (Foukona, 2017).37 Prior to independence, backing and social legitimacy, in a cost-effective amended legislation converted freehold and way. To maximize economic and social benefits, longer leases held by foreigners into fixed-term particular attention needs to be paid to women, estate leases of 75 years, while the state held who are typically disadvantaged (World Bank, the perpetual estate title. After independence, 2003). the new Constitution restricted land ownership and holdings by foreigners, and protected the 142. In Solomon Islands, land serves as the cultural interests of customary landowners, ensuring foundation of social and economic life. Across customary land transactions complied with the the country, people identify their connections rules of custom. to each other and to particular places through stories of their ancestors. These oral histories are strongly connected to land and sea and may encompass vast areas of land, often into neighboring territories. This gives land tenure a strong cultural dimension. Furthermore, 37 Initially, British subjects acquired land through direct negotiations with landowners (or the people they assumed to be landowners), and from the 1880s they could forward the deed of sale documents to the Western Pacific High Commission in Fiji, which would register those documents as evidence of land claims. Ongoing concerns about land alienation led to the introduction of the Solomons Islands Land Regulation 1914. This prohibited the sale of land to foreigners. The idea of land being ‘waste’ or ‘vacant’ has been widely criticized, reflecting a Eurocentric view of land use. Furthermore, much of the land that was deemed vacant was acquired after minimal investigation into its use or claims over it. 76 Solomon Islands: Country Economic Memorandum 144. The current land law and administration from the holder of the perpetual estate. At the in Solomon Islands is built on two tenure moment, 8 percent of land is used as public systems: customary and non-customary land and 5 percent of land is being leased for land.38 The Constitution refers to the categories commercial, residential, or other purposes of customary and non-customary land and (Table 8). Next to non-customary land, more provides that only Solomon Islanders may hold than 80 percent of land is held under customary a perpetual interest in land. The state holds tenure (Figure 33). The Constitution recognizes the perpetual estate in most non-customary customary law as a general source of law while land and may give perpetual or fixed-term the Lands and Titles Act specifies that the estates of a maximum of 75 years to private manner of holding, occupying, using, enjoying, individuals and entities, including churches and disposing of customary land is determined and businesses. Titleholders may (sub-)lease by ‘customary usage’. the land or sell the title, subject to approval Figure 33: Geographical distribution of customary and non-customary land Source: Ministry of Lands. Note: Red: Surveyed and registered land; Yellow: Surveyed, but not registered customary land; Green: Non- surveyed customary land. 38 For more detail on land tenure in Solomon Islands, see Foukona (2017). For a summary of land tenure regimes, including the extent of land registration, as well as key debates and challenges across the region, see AusAID (2008). Solomon Islands: Country Economic Memorandum 77 145. Land registration is relatively limited disincentive for engaging in land registration. in Solomon Islands due to governance Finally, registering land is a costly affair, with challenges, legitimacy concerns, and limited costs reaching up to SI$1 million. Even when returns. The registration of customary land becomes registered, the legislation does land allows it to be purchased or leased by not set out provisions for land governance – the government, in principle expanding its e.g., regulations to identify membership of a economic use.39 However, land registration and landholding group – nor minimum standards acquisition in Solomon Islands is uncommon. for external stakeholders to engage with Key reasons include the limited reach of the landholding groups. Furthermore, past land state, lack of state legitimacy and trust, strong registration efforts have often disadvantaged informal institutions and cultural traditions, women and make land prone to elite capture. To and challenges in identifying boundaries and date, land registration has rarely delivered the landowners (Foukona, 2007). Furthermore, legal certainty and tenure security needed for numerous problems with maintaining the economic development (Allen, 2008; Platteau, land register – land records are not always 1996; World Bank, 2003). updated and may be inaccurate – provide a Table 8: Land types and registration processes A popular rather than strictly legal term that refers to land that has ceased to be customary land, typically (but not always) land that was transferred to non-Indigenous interests during Alienated land the colonial period. Some of this land may have returned to the customary claimants, but may still be considered alienated land. In a legal sense, refers to land that has always been held in accordance with customary usage Customary and not transacted under the colonial regime. In popular parlance it sometimes refers to land land that is informally, or in practice, regulated by custom. The process for recording boundaries and interests in customary land, but not proceeding to Land recording registration, set out in the Customary Land Records Act [Cap 132]. The process of registering boundaries and interests in the central land register set out in the Land Land and Titles Act [Cap 133] which may occur via systematic settlement (Part IV) or pur- registration chase or lease of customary land through agreement or compulsory acquisition (Part V). Land held under lease. This can only be done via the national or provincial government, which Leasehold land holds the perpetual estate and leases it to others as fixed term estates. Land vested as perpetual estate in the Commissioner of Lands and held in trust for the benefit Public land of the Solomon Islands Government. Source: Ministry of Commerce, Industry, Labour and Immigration. 39 See the annex for more detail on the land acquisition process in Solomon Islands. An alternative system of recording customary interests exists under the Customary Land Records Act. The Act provides that any landholding group or person who claims to hold a ‘primary right’ to land may apply to the Land Record Office to have that right and the boundaries of the land recorded. See the annex for more detail on customary land recording. 78 Solomon Islands: Country Economic Memorandum 146. In Solomon Islands, customary land faces arise during land recording and registration challenges in supporting economic activity. processes. Land disputes are often contests Customary land is essential for the smallholder over material resources, but they also involve cash cropping sector, which is vibrant and debates about the meanings attached to critical to livelihoods across Solomon Islands, land and the identities of people. Unresolved as well as central to the formation of more disputes reduce tenure security and land value-add agricultural processing (Allen, 2008; productivity, which is further exacerbated by see also Chapter 4). Customary landholders weak state capacity and limited legitimacy. For face challenges in increasing the value add of instance, a study from Uganda showed that their own production, in part due to limited unresolved land conflict reduced agricultural access to finance, which is in turn exacerbated output up to 11 percent, disproportionally by the inability to collateralize customary affecting women (Deininger and Castagnini, land. Larger investment projects often require 2006). Resolving land tenure and use conflicts collaboration across multiple customary with land (on alienated land) can be complex landholding groups, which can lead to higher and time consuming, with few legal precedents complexity and project risk in structuring a to secure final land rights.41 Finally, weaknesses common approach to access land and its in the planning code and poor coverage of use. Relatedly, (non-resource) investors may utilities also undermine land as an input to be reluctant to develop and invest in non- economic activity. registered customary land – due to tenure insecurity – and would rather have a registered 148. However, promising examples of large land- interest in land (through fixed-term estates or based investments that involve a mix of leases). As such, a large share of customary customary and alienated land could serve as land remains ‘locked’ for investment and guides for future investment. These include development. national projects such as the Guadalcanal Plains Palm Oil Ltd (GPPOL) plantation and the 147. Alienated land is not free from challenges. Tina River Hydro Project. Both projects involve Alienated land includes the most economically deep contact between small kin groups, and a viable land in the country, though there is range of larger institutional actors, including increasing pressure on urban land to satisfy government departments, political bodies, both residential and commercial needs and national leadership. Even where large (Williams, 2011). Furthermore, while alienated investments are fully operating on alienated land offers a clearer structure through long- land, customary landowners may continue term lease for use by commercial entities, to make various claims to land that has been investors still face uncertainty in the time registered, and have ongoing, legally-recognized and process needed to secure a lease. Next, interests in the surrounding customary land. land disputes regarding alienated land are not The case studies highlighted in Box 2 could uncommon as original landholding groups make serve as examples for how investments could claims to return alienated land.40 Disputes also address land use issues in their projects. Current land disputes often have long histories that stretch back to the colonial period. For example, disputes over the boundaries of 40 Honiara town land, or large commercial holdings such as those held by RIPEL (Box 4), are grounded in debates about the legitimacy of colonial land transactions (Foukona, 2015; Monson, 2023). Disputes over customary land must be referred to the local chiefs or other traditional leaders in the locality for adjudication according 41 to custom before they can be referred to the courts. If the matter is not resolved using traditional means, it can be referred to the Local Court. Decisions of Local Courts may be appealed to the Customary Land Appeal Court, and both of these courts apply customary law. Disputes arising from the process of land registration follow the adjudication system. Decisions of a land acquisition officer may be appealed to the Magistrates Court, with a further and final right of appeal to the High Court. The higher courts regularly refer matters of custom back to the chiefs. This process means that disputes over land can cycle through the courts for many years. Solomon Islands: Country Economic Memorandum 79 Box 2: Land solutions: Guadalcanal Plains Palm Oil Limited – Outgrowers Association – Tina River Hydro The Guadalcanal Plains Palm Oil Limited (GPPOL) project emerged out of the civil unrest on Guadalcanal (1998–2003) and is administered through a mix of formal regulation and customary principles. GPPOL began its oil palm operation in 2005 following an agreement between New Britain Palm Oil Limited, the Solomon Islands Government, the Guadalcanal Province, and the Guadalcanal Plains landholding groups. Plantation Leasing Under the agreement, formerly alienated lands were split into 58 parcels and returned to the five land groups (mamata) on a fixed term (with the perpetual estate remaining with the Commissioner of Lands). The history of land registration and ownership arrangements varies amongst the parcels, with differing degrees of consensus within owner groups on the propriety of trustee and ownership arrangements. These mamata own 20 percent of the shares in GPPOL via a landholding company with representation of all five mamata. This investment yields cash benefits (land rental and royalties) to landowners on behalf of the company. GPPOL is responsible for the plantation production and management operation. It pays land rental on a quarterly basis and royalties monthly. Based on this company-landowner configuration, the landowners had three income streams from oil palm development on their land: annual dividends; land rentals; and 10 percent of the value of the fresh fruit bundle of the palm oil harvested each month (50 percent to the land association account and 50 percent to an investment fund). Outgrowers Association The Guadalcanal Outgrowers Association is an example of a different land ownership structure working with GPPOL. The Outgrowers Association operates on land that is registered, and comprises both customary and alienated land, under a variety of individual and family control arrangements. The perpetual title is held by landowners via the Loka Mamata Association. Since 2005, the Association has not leased the land to GPPOL under the plantation leasing model. As a result, members do not receive rental or royalty payments for their registered land. However, the outgrowers – through the Association – have an arrangement with GPPOL to sell palm fruit directly to the company. The Association is responsible for organizing all plantation maintenance and harvesting by contracting GPPOL workers or others on a cash or food barter basis. Individual outgrowers, on land managed by the Association, have control over the oil palm production and selling because they are not bound by the GPPOL palm oil organization arrangement with Guadalcanal Plains Resources Development Association. They are a diverse group of actors with exposure to service and retail sectors as well as cocoa, coconut, and livestock small holdings. They are involved as occasional producers of palm oil who sell it through an agreement with GPPOL or channel the producing and selling of their palm oil through the Association. They have the option to utilize their land (registered or customary land) for other development activities, not just palm oil – such as cocoa, coconut, or other cash cropping activities (Solomon Islands Government, 2017; Roughan et al., 2010). 80 Solomon Islands: Country Economic Memorandum Tina River Hydro Project A second national project is the Tina River Hydro project, located on registered land. It is another development model introduced to progress a major contemporary renewable energy project. In an attempt to strengthen land tenure security, the government used three instruments: Part V Division 2 of the long-term agreement to acquire the customary land; a Memorandum of Understanding signed with several parties; and a land record using the process under the Customary Land Records Act. These instruments provided the legal basis for mobilizing the land for the national project while recognizing that customary landholders should not ‘lose’ their land. Such recognition has been the basis for project plans and negotiations with those tribes whose land would be acquired, for an equitable arrangement that will provide the best basis for ongoing social stability and support of the project. The productive life of a hydro project is in excess of 100 years, so social stability and support are key. The Tina River Hydro project developed a unique arrangement for co-ownership of the land. The perpetual estate of the land acquired for the project is held by the Tina Core Land Company which would have 50 percent ownership by the government on behalf of Solomon Islanders, and 50 percent by the tribes whose land would be acquired. The tribes would hold these shares via tribal companies, not trustees, and the tribes would have one director each on the board of the Tina Core Land Company. The Tina Core Land Company then would lease the land to the international hydropower developer (project company) for the duration of their contract to operate the power station (approximately 30 years). The project company is owned jointly by the developer (51 percent) and the Tina Core Land Company (49 percent). After 30 years the developer would relinquish its 51 percent share to the Tina Core Land Company. This would mean the government and landowners would become sole owners of the plant, which will sell wholesale electricity to the Solomon Islands Electricity Authority. This is a model of landowner partnerships, with an emphasis on benefit sharing based on the concept of build, own, operate, and transfer (PHCG, 2015; Solomon Islands Government, 2017; Solomon Islands Government, 2017a; Kabutaulaka, 2019). 3.2.2. Labor Market Skills foreign and domestic investment, as investors seek talent pools for their businesses, and 149. Quality education and human capital form achieve higher levels of economic development the backbone of a thriving private sector, (Figure 34). For instance, Gennaioli et al., (2013) fostering innovation, attracting investment, use subnational level data across 110 countries and contributing to overall economic growth and find that educational attainment is the and social well-being. Human capital, which most important predictor of regional economic includes skills, knowledge, and experience, is performance. They also show that the human a key driver of economic growth – particularly capital of entrepreneurs plays an important role for higher productivity and innovation-oriented in explaining productivity differences across sectors, contributing to a more efficient and firms (see Rossi (2020) for a recent review of competitive private sector. Countries with the literature). higher levels of human capital attract more Solomon Islands: Country Economic Memorandum 81 Figure 34: Educational attainment and economic development 16 Average years of schooling (2020) 14 12 10 SLB 8 6 4 2 0 7 8 9 10 11 12 13 Log GDP per worker (2021 PPP$) Year = 2021 Source: World Bank Development Indicators; Barro and Lee (2015); Our World in Data 150. A child born today in Solomon Islands will peers. While the HCI score of Solomon Islands attain 42 percent of their potential human is nearly 90 percent of the average of its capital by their 18th birthday. The Human structural peers, additional investment towards Capital Index (HCI) is a composite score that health and education policy would close the combines health and education outcomes to gap towards Fiji and other structural peers. As benchmark human capital formation globally will be shown, the majority of the current gap and is often used as an overarching assessment can be explained by the high upper secondary of the status of human development policies. dropout rate, implying that policies towards Figure 35 compares the HCI score of Solomon ensuring enrolment in the final years of basic Islands against structural and aspirational education would at least achieve parity with regional HCI leaders. Figure 35: Human Capital Index Fiji Grenada Average aspirational peers Solomon Islands Comoros Samoa Timor-Leste Micronesia, Fed. Sts. Vanuatu Kiribati Average structural peers - 0.10 0.20 0.30 0.40 0.50 0.60 Source: World Bank. 82 Solomon Islands: Country Economic Memorandum 151. The education system in Solomon Islands in less densely populated provinces. While is grappling with multiple challenges, primary education enrolment rates are high, particularly with respect to over age students with a gross enrolment rate (GER) exceeding and declining enrolment rates. Figure 36 100 percent, it reflects the inclusion of over presents ten summary facts on key issues age children. When considering only age- facing Solomon Islands’ education system appropriate children, the net enrolment rate starting from early childhood education to (NER) falls to 77 percent. As students advance labor market entry. Data reveals that nearly through the education system, enrolment one-in-five children are over age for their rates decline sharply, particularly in junior current education level. The issue is more secondary years, where the GER is 68 percent, pronounced in secondary education, where and the NER is just under 20 percent. In the national average of over age students senior secondary years, the gap between GER rises to 44 percent. This is largely attributed and NER narrows, but this is largely due to a to high repetition rates in the early years of significant number of students dropping out of education, and the problem is especially severe the system. Figure 36: Ten summary facts on key issues facing Solomon Islands’ education system EARLY YEARS SECONDARY POST- LABOUR EDUCATION EDUCATION SECONDARY MARKET EDUCATION OUTCOMES Fact 1: Many Fact 3: Placement Fact 6: There are Fact 9: More than children are exams determine roughly 4,000 70% of the labor overage at the progress in the students in market is engaged primary level (20%) system academic tertiary in informal and the secondary - Fact 4: 9 out of 10 programs activities level (50%) children dropout Fact 7: Over 40% Fact 10: More Fact 2: Learning before completing of total education than half of outcomes in the secondary spending is on workers are early years have education the scholarship undereducated for improved but are Fact 5: Public program their role below aspirational schools only offer Fact 8: The peers an academic majority of TVET is secondary track in non-formal and in rural areas Source: World Bank Development Indicators; Barro and Lee (2015); Our World in Data 152. The expected years of schooling (EYS) in development. In addition, only 10 percent of Solomon Islands is one of the lowest globally, children who enroll in the education system at only 8.3 years and the dropout rate is also complete senior secondary education, and concerning. The EYS is nearly five years less a mere 4 percent reach the pre-tertiary than the leading aspirational peer country preparatory year. Geographical disparities in (Figure 37) and places Solomon Islands in survival rates are evident, with some provinces the bottom decile of global comparators. The producing no senior secondary graduates, and low EYS has significant implications for the many students who remain in the system by the country’s HCI, which is a critical measure end of year 12 are from Honiara, underscoring for understanding the potential impact the deep inequalities in educational provision of education policy reforms on economic across Solomon Islands. Solomon Islands: Country Economic Memorandum 83 Figure 37: Expected years of schooling 14 12 10 Years of schooling 8 13.1 6 12.5 12.2 11.8 11.3 11.2 10.1 4 8.3 8.2 2 0 Grenada Maldives Samoa FSM Fiji Kiribati Vanatu Solomon Comoros Islands Source: World Bank. 153. Despite allocating a significant portion of its Solomon Islands is among those with the budget to education, which is higher than most highest share of workers being under- structural and aspirational peer countries, educated for the jobs they hold at 54 percent challenges persist. Approximately 33 percent (Figure 38). An inefficient Technical and of the annual budget and 12 percent of GDP is Vocational Education and Training (TVET) spent on the sector. Education financing favors sector contributes to this result. The lack tertiary education, with a disproportionate of information and oversight of the Rural amount of spending per student at this Training Centres (RTCs) presents a significant level compared to primary education. This challenge for the development of the TVET prioritization is evident in the per-student sector, especially for students who have expenditure, which is substantially higher for dropped out of the formal education system tertiary education. Tertiary spending is more and are not engaged in the labor market. The than twice that of primary, even though the high percentage of workers who are under- number of primary students is 32 times greater educated for their jobs, the lack of training than those in universities. A large portion of programs offered by businesses, and the tertiary education funding goes to scholarships, disparities in educational attainment between managed by the Solomon Islands Tertiary genders all point to systemic issues that could Education and Skills Authority, with detailed hinder economic growth and development. opportunities for post-graduate students The fact that there is no meaningful difference (World Bank, 2022). in education levels between employed and unemployed individuals suggests that the 154. With multiple challenges in the education education system may not be aligned with the system, the labor market in Solomon Islands needs of the labor market, which could be a is also struggling, particularly in terms of disincentive for individuals to pursue further education and skills development. Among education and skills development. lower-middle-income countries globally, 84 Solomon Islands: Country Economic Memorandum Figure 38: Share of over and under-education in the workforce Percentage of workforce overeducated (positive numbers) or undereducated (negative numbers) 30 21 20 17 16 13 16 12 10 7 3 0 -13 -10 -28 -35 -30 -20 -43 -30 -64 -54 -54 -40 -50 -60 -70 Maldives Comoros Solomon Lower East Asia Upper-middle Kiribati Fiji Islands Middle and Pacific Income Income Overeducated share Undereducated share Source: World Bank Development Indicators; Barro and Lee (2015); Our World in Data. 155. There is a significant educational mismatch 156. Scenario analysis suggests that undertaking in the workforce. This situation is exacerbated reforms to tackle the challenges highlighted by the concentration of advanced education above could significantly impact human opportunities among a limited number of capital formation and economic growth. Three individuals through scholarship programs, scenarios were conducted with varying degrees which may not be the most efficient use of of reform by 2035, focusing on two key factors: educational funding (World Bank, 2022). The years of schooling and quality of education. high rate of undereducation in the workforce The moderate scenario increases years of suggests that the current investment in schooling to 11.8 and test scores to 450, tertiary education scholarships may not be while the ambitious scenario aims for 12 years addressing the broader educational needs of schooling and test scores of 500. These of the population. With a large portion of the changes could lead to human capital growth labor force engaged in informal activities, a rates of 1.4 to 1.7 percent by 2050, from a near- comprehensive approach to education and zero baseline, and boost GDP growth rates by training is necessary to support a diverse and 0.8 to 1.1 percentage points (Figure 39). The inclusive labor market. Informal work often assumptions are conservative, focusing solely lacks the protections and benefits of formal on education reforms and projecting benefits employment, and workers in the informal sector up to 2050, suggesting that the actual impact may not have the necessary education or skills could be even greater with broader, sustained to transition to formal employment or to adapt reforms across various sectors. to changing labor market demands. Solomon Islands: Country Economic Memorandum 85 Figure 39: Summary of human capital and economic growth projections HC growth (% change) Real GDP Annual growth (% change) 5 1.5 4 3 1 2 0.5 1 0 0 2020 2030 2040 2050 2020 2030 2040 2050 YEAR YEAR Baseline Moderate Scenario Ambitious Scenario Source: Authors’ own calculation. 3.2.3 Access to Finance a positive impact on economic growth and that improving digital financial inclusion in payments 157. Studies suggest that greater financial is found to increase annual economic growth by development, including through digitization, up to 2.2 percentage points. can boost economic growth. Several studies point to the importance of financial 158. However, financial inclusion and depth in development for economic growth. Levine Solomon Islands remain limited. The 2019 (2005) and Popov (2018) show a positive and Census showed that only 30 percent of the total significant relationship between financial population in Solomon Islands have at least depth measures and long run growth. Sahay one account in a financial institution, of which et al. (2015) find that financial inclusion has 35 percent are within the banking sector.42 By a significant impact on growth, above and deposit accounts per thousand adults, Solomon beyond the impact of financial depth. Relatedly, Islands ranks behind structural peers Samoa Loukoianova et al. (2018) conclude there are and Vanuatu, but ahead of Comoros, Kiribati, considerable growth benefits from financial and Micronesia (Figure 40). Access to formal inclusion, with the largest gains for low-income banking services such as commercial bank and developing countries. Interestingly, the branches and ATMs in Solomon Islands remains study also found that broader access to well below other Pacific Islands countries (IMF technology in Pacific Island countries led to Financial Access Survey 2023). Financial sector greater financial inclusion. McKinsey (2016) depth, as measured by commercial banks’ claims that digital finance, including mobile outstanding loans as a share of GDP, was also money and mobile banking, could increase GDP lower than Pacific Island countries like Fiji, of emerging economies by 6 percent. Khera et Samoa, and Marshall Islands. al. (2021) find that digital financial inclusion has 42 In Solomon Islands, commercial banks account for about 60 percent of financial assets. The country’s commercial banking system consists of four firms: ANZ (a large international player from Australia), Bank South Pacific (privately-owned from PNG), Pan Oceanic Bank (locally incorporated in 2014 with Sri Lankan shareholders), and BRED Bank (French-owned and operating since 2017). In addition, the National Provident Fund is a systematically important financial institution, accounting for 34 percent of total assets of the financial sector, and a large share of its assets held as deposits in the banking system. 86 Solomon Islands: Country Economic Memorandum Figure 40: Number of deposit accounts with commercial banks per 1,000 adults 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Solomon Comoros Kiribati Micronesia Samoa Vanuatu Fiji Grenada Maldives Islands (2021) (2013) (2021) Structural Peers Aspirational Peers Source: IMF Financial Access Survey 2023. 159. The limited size of Solomon Islands’ banking and financial reporting. Limited creditor rights sector also means that access to finance by due to poor enforcement mechanisms present the private sector is limited. Credit growth is further challenges. As a result, interest rate largely constrained by two factors: weaknesses spreads remain large (around 10 percent), well in collateral frameworks and banks’ difficulty in above Pacific Island averages. Banks have assessing counterparty risk (ADB, 2019). The also complained that commercially viable former relates to the prevalence of customary projects are few and that single-borrower land practices, which limit the use of land as limits constrain their ability to lend to large, collateral, especially in rural areas, while the creditworthy corporates.43 latter stems from a lack of reliable credit data Figure 41: Outstanding SME loans with commercial banks (percentage of GDP, 2022) 20.0% 16.0% 12.0% 8.0% 4.0% 0.0% Solomon Comoros Kiribati Micronesia Samoa Vanuatu Fiji Islands (2021) (2013) (2021) Structural Peers Aspirational Peers Source: IMF Financial Access Survey 2023. 43 Commercial banks are prohibited from having a single borrower account for more than 10 percent of their outstanding loan book. Solomon Islands: Country Economic Memorandum 87 160. Loans to individuals and to the distribution/transport sector have dominated issuance for commercial banks in recent years. This dynamic of concentration may exist due to a lack of demand for loan capital in some cases, but could also relate to businesses’ difficulty in obtaining collateral. Lending to the fisheries industry is almost non-existent, registering at just US$7 million since the first half of 2020. Figure 42: Loans and advances by sector (US$ millions), 1H20-1H23 $250 $235 $219 $226 $213 $200 $186 $184 $182 $150 $100 $50 $0 1H20 2H20 1H21 2H21 1H22 2H22 1H23 Personal Distribution Forestry Communication Manufacturing Fishing Source: CBSI. 161. The Solomon Islands National Provident Fund electricity is a persistent challenge, which in also plays a significant role in the country’s turn limits internet availability (at less than 50 financial sector. While commercial banks percent, Solomon Islands’ internet access rates together hold US$814 million on their balance are among the lowest in the region). sheets, the Fund has an asset base of US$474 million – including US$100 million of bank 163. However, there are signs that growing deposits. The Fund is the only mandatory adoption of digital technologies could ease savings scheme for formal employees; over supply constraints and facilitate access to 55,000 informal sector employees also financial services. Both the volume and value participate through the voluntary youSave of mobile and internet banking transactions in program. Contributions are invested to meet Solomon Islands has risen steadily since 2018 future withdrawal needs. However, of the Fund’s (Figure 43), though both lag in growth behind US$393 million in investments, 87 percent is structural peers like Samoa. It is likely that invested domestically, including US$198 million the trend towards digitalization will continue, in the equity of unlisted companies. especially following the recent introduction in 2023 of M-Selen, a mobile money service 162. Several factors may have contributed offered by telecommunication services provider to limited financial inclusion in Solomon Our Telekom that allows customers to send Islands. On the supply side, geography and and receive money through their mobile infrastructure are obstacles: most financial phone. M-Selen is expected to improve access service providers are concentrated around to financial services in rural areas, where the capital city, Honiara, which limits financial penetration remains particularly limited. access to the rural population. Access to 88 Solomon Islands: Country Economic Memorandum Figure 43: Volume and value of digital banking transactions in Solomon Islands and Samoa, 2018–2022 800 6.00 700 5.00 600 4.00 500 400 3.00 300 2.00 200 1.00 100 - 0.00 2018 2019 2020 2021 2022 Samoa - # transaction per 1000 adults (lhs) Samoa - value of transaction as % of GDP (rhs) Solomon Islands - # transaction per 1000 adults (lhs) Solomon Islands - value of the transaction as % GDP (rhs) Source: IMF Financial Access Survey 2023. 164. Gender gaps in financial inclusion are present. 165. On the demand side, Solomon Islanders’ In both rural and urban settings, men have frequent lack of reliable sources of income greater access to formal financial services than also discourage use of financial services. In women, irrespective of age, education level, the 2019 Census, nearly 80 percent of Solomon income, and employment status. A recent study Islanders without a deposit account did not found that digital financial literacy in Solomon earn a regular income, either from wages, Islands is significantly lower among women, salaries, or remittances. This informality – particularly rural women, and adults with lower coupled with the country’s relatively limited levels of education and income (UNCDF, 2023). service-sector growth – means that bank However, gender gaps in financial inclusion deposits as a share of GDP are low relative to remained wide regardless of access to financial other structural peers (Figure 44). literacy training or distance to nearest access point. Solomon Islands: Country Economic Memorandum 89 Figure 44: Outstanding loans and deposits from commercial banks as share of GDP, 2022 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Solomon Compros Kiribati Micronesia Samoa Timor-Leste Vanuatu Fiji Grenada Maldives Islands (2021) (2013) (2021) Structural Peers Aspirational Peers Deposits Loans Source: IMF Financial Access Survey 2023. 3.2.4 Energy 167. In Solomon Islands, Solomon Power is responsible for electric power generation, 166. Access to affordable and reliable energy transmission, and distribution to all urban and is crucial for attracting investment and rural provincial centers. Solomon Power was expanding economic activity. High costs for established through the Electricity Act 1969 electricity, limited access, and poor reliability as the national, state-owned utility.44 The retail can be significant challenges for the private tariff is nationally uniform and is regulated sector to operate profitably and may discourage by The Ministry of Mines, Energy and Rural both domestic and foreign investment. Electrification. The Ministry is responsible Research bears this out. In the case of EU, for legal and regulatory development and it was found that a 10 percent increase in supervision of the utility. Since an independent electricity prices decreases FDI by as much as regulatory authority does not exist, Solomon 0.4 of GDP (Bartekova and Ziesemer, 2019). Power is given the authority to issue licenses Energy constraints can also act as a deterrent to entities who wish to generate and distribute to investment in power-intensive industries, electricity (which may create a conflict of which often include higher productivity interest). The Honiara electricity system is manufacturing and service subsectors, thereby the largest grid in Solomon Islands, supplying biasing growth towards more labor-intensive Honiara and at least nine other town centers sectors (Ravago et al., 2019). High energy around the capital (Figure 45). The grid is prices are one of the reasons why gold smelting supplied almost exclusively through diesel is not taking place in Solomon Islands, despite generators, with the majority of the electricity the reopening of the Gold Ridge mine. The supply coming from the power station at economic implications of unplanned power Lungga. Peak demand on the Honiara grid outages are also significant. For instance, in 2022 was 15.5 megawatts and the annual a study focusing on Africa found that a one energy produced was 97.3 gigawatt hours, percent increase in power outages could making up about 89 percent of the total energy reduce long-run GDP per capita by 2.9 percent consumption in Solomon Islands. (Andersen and Dalgaard, 2015). Solomon Power was close to insolvency in 2010, mainly due to the long-term civil unrest, rising oil prices, and unsustainable debt levels. 44 However, following a restructuring of the company and its finances, its financial performance has been improving. Solomon Power is now financially stable, has substantial cash reserves, and has been making a profit since 2010. Solomon Power has generated average net profits of SI$80 million between 2017–2021, accumulated cash reserves and, as of 2021, held only SI$18 million in interest-bearing debt. 90 Solomon Islands: Country Economic Memorandum Figure 45: Solomon Power operation sites Source: Solomon Islands RAA, 2024, IRENA. 168. Private investment in the energy sector supply require a license from Solomon Power, remains limited, due to regulatory constraints, need to be synchronized with the grid, and meet a non-conducive business environment, certain terms and conditions. Despite interest and economic geography challenges. from large commercial customers, large, own- Investment in the sector as an independent use (solar) projects have not taken off. Finally, power producer (IPP)45 requires many steps developers could also invest in off-grid systems including: business registration, land access, that are not connected to the Solomon Power and acquisition – which have been reported as grid, so-called mini-grids, but this also requires major constraints;46 the development of social a retail and generation license from Solomon and environmental assessments; the granting Power.47 Furthermore, the country’s economic of a license to connect, generate, and sell geography severely limits the commercial electricity; procurement and project approval; viability of privately operated mini-grids (IFC, and agreement on commercial terms (IFC, 2021). 2021). Due to the lack of a proper regulatory framework, the few IPP agreements that exist 169. Access to grid-connected electricity in are currently managed on a case-by-case basis. Solomon Islands remains low and uneven. Next to IPPs, residential, commercial, and The unique geographical characteristics and industrial customers can invest in solar capacity dispersed population of Solomon Islands for their own use. Customers who install more present significant challenges with respect than 50 kilowatts (kW) of generation for self- to the electricity sector. The generally small 45 An IPP is considered a private investor that develops generation capacity and sells it to the utility. 46 For instance, Solomon Power aimed to develop the Fiu River hydro plant, funded by the ADB (capacity of 750 kW). However, due to a land dispute, the project was canceled. The Ministry of Mines, Energy and Rural Electrification, with the assistance of Solomon Power, has identified 35 priority mini-grid 47 opportunities. The Ministry and Solomon Power recognize their limited capacity to develop all these projects quickly and are therefore open to private sector involvement. Solomon Islands: Country Economic Memorandum 91 and dispersed market for electricity increases several provincial urban areas (Figure 45), rural generation and supply costs, posing financial access to grid connections is only 3 percent constraints on the sector. According to the of households. Increasing rural communities’ 2019 Census, only around 15 percent of the access to grid electricity is constrained by total population has access to electricity long distances and difficult topography, high supplied by Solomon Power. Grid connections connection costs, and limited finance for grid are mainly concentrated in Honiara, though expansion (IRENA, 2024). In the absence of the are not comprehensive, with the access grid, many rural areas depend on small off-grid rate around 64 percent. Relatedly, about 50 electricity systems – mainly diesel generators percent of urban households have electricity – to power homes, clinics, and schools, though access, the majority from the Honiara grid. some solar and wind systems are also used. While Solomon Power operates outstations in Figure 46: Access to electricity, percentage of population (2012–2020 average) 120 120 100 100 80 80 60 60 40 40 20 20 0 0 tu te e os ji i e s oa e at M Fi nd m m m es ua or m rib FS co co co la -L Sa om n Ki Is in in in Va or C on w h e m dl ig Lo m Ti H id lo m So er w Lo Total population Rural population Urban population Source: World Development Indicators 170. Solomon Islands has the highest electricity penetration, excess capacity of diesel plants, tariffs in the Pacific, while the supply of power low production efficiency, and the lack of an is hindered by unplanned outages. Electricity independent regulator all contribute to high tariffs in Solomon Islands are the highest in electricity tariffs. Furthermore, unplanned the Pacific and among the highest in the world, outages are concerning (as they affect business with an average retail electricity tariff of US$0.8 investment decisions and operations). These per kilowatt-hour (kWh),48 more than twice the outages are caused by a number of factors, regional average of US$0.29 per kWh (Figure including natural disasters, adverse climatic 47). The high reliance on imported fossil fuels conditions, and an inefficient maintenance for diesel generators, low renewable energy regime. 48 There are three domestic consumption blocks: Domestic <50 kWh; Domestic 50 – 200 kWh; Domestic >200 kWh. Electricity is purchased in blocks, with typically the lowest total energy charge applied to the lowest consumption block and the highest charge applies to the largest consumption block. There is a spread of +/- 1 SBD between the three consumption blocks. In February 2024, the middle- block domestic tariff was US$0.84, while the commercial tariff stood at US$0.77. 92 Solomon Islands: Country Economic Memorandum Figure 47: Electricity tariffs for commercial users $0.90 $0.85 $0.79 $0.68 $0.66 $0.53 $0.54 $0.52 $0.52 $0.48 $0.49 $0.49 $0.47 $0.45 $0.42 $0.41 $0.41 $0.42 $0.40 $0.40 $0.40 $0.41 $0.39 $0.39 $0.33 $0.31 $0.28 $0.29 $0.24 $0.23 $0.19 $0.00 Cook FSM Fiji Kiribati Nauru Niue Palau PNG RMI Samoa Solomon Tonga Tuvalu Vanuatu Islands Islands 2012 2018-2019 Source: PRIF (2021). 171. The lack of affordable and reliable power is from the current 1 MW installed capacity and a major constraint on business. The 2015 the installation of an additional 220 kilowatts Enterprise Survey indicated that most firms of rooftop solar at Ranadi. This was in addition – mainly located in urban areas – invested in to Solomon Power and Tina Hydropower diesel generators as backup due to electricity Limited signing the Power Purchase Agreement outages. Approximately 90 percent of the firms and associated commercial agreements for surveyed had experienced electrical outages. the Tina River Hydropower Project, a 15 MW The reliance on diesel makes generation costs hydropower facility near Honiara. Collectively, expensive for households and businesses, and these investments would increase the share of also disadvantages those who live further from renewable energy generation on the Honiara Honiara where the cost of diesel is higher. In grid to over 70 percent. the 2024 World Bank Firm Survey, more than 70 percent of enterprises cited the availability 173. Potential exists for solar resource generation and cost of electricity as a constraint to their as well as hydro, which can be exploited business. further to reduce the cost of power generation. The government maintains a 172. Solomon Power has made some progress database of over 100 potential hydropower in its efforts to switch to renewables. Since sites with over 300 MW of generation potential, 2016, the utility has converted eight out of its yet only a handful are close to load centers. ten outstation operations to solar diesel hybrid Wind power could also be viable in Solomon systems with battery storage. It also developed Islands, but further technical assessment and two new mini-grid renewable hybrid systems, country-wide mapping are needed. Solar is a a new one at Seghe (Image 1), and refurbished proven renewable energy resource in Solomon an existing grid at Taro. In 2018, Solomon Islands, but large-scale solar power requires Power’s board approved the extension of the appropriate and sufficient land, i.e., 1 MW of Henderson solar array to 3 megawatts (MW) ground mounted solar requires in the order of one hectare of land. Solomon Islands: Country Economic Memorandum 93 3.3 Policy Recommendations 176. Targeted activities related to investment and export promotion could complement wider business environment reform. There is Cutting Red Tape and Improving Service significant empirical evidence that investment Delivery for Businesses promotion can influence FDI inflows, and 174. There is excellent potential to build on that export promotion can improve firm business environment reforms and cut red performance as measured by sales, value tape. The government has made progress in add, and exports. While Solomon Islands has moving some parts of service delivery online, existing investment and export promotion but these reforms are undermined by gaps divisions under the Ministry of Commerce, where steps still need to be done in person. Industries, Labour, and Immigration, these Improving the national payment system to divisions are very small and they perform a allow for online payments of all fees to the range of investment and regulatory functions. A government would make a big difference, functional review could be carried out to identify particularly to smaller businesses, rural which services and products would have the businesses, and businesses that frequently biggest impact on FDI and trade outcomes and trade across borders. In addition, improving then to define the most effective way to deliver coordination among government agencies these services. In the survey of firms, one-third to seamlessly deliver services to businesses of businesses who are not exporting cited a could enable a one-stop-shop or single window lack of knowledge about demand in foreign approach to regulatory compliance. markets as a reason they are not exporting. This suggests that more targeted export 175. Reforms to increase competition can help promotion and export market development attract investment, reduce costs for key activities could facilitate more firms to export. service inputs, and incentivize firms to However, it should be emphasized that such increase productivity. Service sector inputs activities do not substitute for an efficient and to competitiveness are particularly important predictable business environment and without in areas such as transportation services, underlying reforms, promotion alone is unlikely financial services, and quality services related to significantly impact trade or investment to exporting (testing, packaging, etc.). Many outcomes. of these services are constrained by either regulatory barriers limiting investment, Increasing Confidence in Land Markets particularly foreign investment, or by the 177. To improve the economic use of customary presence of state-owned enterprises. The land, it is recommended that progress is made World Bank has conducted an audit of service in recording customary land and creating trade restrictions in Solomon Islands that a customary land title. Currently, the large could serve as the basis for potential reforms. majority of customary land is unrecorded, Beyond the service sector reforms, the Foreign limiting its economic use and potential Investment Act contains a set of 14 reserved benefits from land-based development for activities where foreign investors cannot enter customary landholders. As a first step, efforts the market. Most of these relate to business need to be made to increase the recording of activities at the micro level that are important customary land, which provides the basis for to household income generation, but the list legal recognition. This requires strengthening should be carefully assessed for the potential land administration systems, including the impact on competition in these areas. Reducing development of an electronic cadastral survey these barriers to trade and investment would system. Rather than registering customary land bring direct benefits at the sectoral level, as that has been recorded, efforts are currently well as indirect benefits through reduced costs ongoing to create a new customary land title, for inputs to other businesses. in the form of a Customary Land Perpetual 94 Solomon Islands: Country Economic Memorandum Estate (CLPE) to the landowning group (rather 180. Effective dispute settlement mechanisms than individuals purportedly representing the and functional customary justice systems group).49 Such a land title would minimize the are needed to solve land disputes. While risk of misappropriation and fraud, while at the dispute mechanisms exist, resolving land same time making customary land available for disputes in Solomon Islands is time consuming economic development, including subdivision, and costly. Relatedly, the functioning grants of profit, leases, bank charges, and of local courts is hampered by a lack of rights of way. financial resources. Furthermore, justice systems may be dominated by local power 178. The government can consider transferring holders – mostly senior men – which could underutilized public land to private agents lead to discrimination and elite capture. To and scale up innovative land use approaches. resolve (longstanding) disputes, there is a While in principle state ownership of land need to strengthen alternative land dispute does not preclude efficient allocation – settlement mechanisms, including simplifying lengthy procedures, limited state capacity, administration. Failing to do so may stymie and commitment problems can increase investment and negatively affect long-term tenure insecurity, reduce investment, and development (Kasanga and Kotey, 2001). pose obstacles to productive land use (World Where customary institutions continue to Bank, 2003). The government could therefore enjoy sufficient legitimacy, they should be used consider inventorying state lands, devising a to resolve land disputes as they operate at a state land asset strategy, and then transferring lower cost and at closer proximity than judicial underutilized public land to private agents. This dispute resolution (World Bank, 2003). In is particularly relevant for peri-urban areas addition to using local institutions, enhancing where rural-urban migration has increased the public’s knowledge of law and custom, and the demand for land substantially (Chapter 2). access to information, will be key for effective This could be done by auctioning off land to the dispute resolution. highest bidder (Deininger et al., 2023), barring any equity concerns. In parallel, the government Strengthening Skills in the Workforce can build on the innovative approaches developed for GPPOL and Tina River and 181. By reallocating education investments, facilitate replication in other investment Solomon Islands could reduce the educational opportunities. mismatch in the workforce and foster a more robust and adaptable economy. To tackle this, 179. To ensure the success of land reform a multifaceted approach could be considered, and productive use of (customary) including: (1) expanding access to quality land, institutional strengthening and primary and secondary education to raise the complementary reforms are needed. Improving baseline education level; (2) strengthening the effectiveness of institutions to enforce vocational education and training (TVET) to land rights and facilitate land transactions provide skills that are in demand in the labor will boost the economic benefits of reform. market; (3) implementing adult education This should include bringing down the costs and training programs at the firm level to of land registration. Land registration should upskill the current workforce; (4) encouraging be coupled with broader rural and urban the development of formal employment development programs. Although land is the opportunities to reduce reliance on the informal most significant asset to low income earners, sector; and (5) integrating education policy with property rights need to be combined with other economic planning to ensure that the education complementary inputs, especially access to system supports the country’s economic goals credit and skills. and supplies the necessary human capital for key sectors. 49 Creating such a land title would require an amendment of the Land and Titles Act and the development of regulations to establish the governance framework. This includes guidance on how to define the landowning group, collaboration with the relevant Houses of Chiefs, consent and benefit sharing rules, and dispute settlement mechanisms. Specific attention should be dedicated to female representation Solomon Islands: Country Economic Memorandum 95 182. To enhance the TVET sector and provide related to the enforcement of contracts, as better opportunities for students, a deeper well as facilitating access to information that understanding of the RTCs is indeed could be used to create a credit profile of a essential. This would involve: (1) conducting potential borrower. The establishment of a an inventory of all RTCs to verify the total credit bureau in 2015 marked an important number and their geographic distribution; (2) step in this process. Sector stakeholders can evaluating the infrastructure and resources of build on this success by ensuring both the each RTC to identify what improvements are integrity and availability of transaction data and needed; (3) gathering comprehensive data on credit histories captured by databases. This is student enrolment, demographics, and the especially important as the country’s collateral programs offered at RTCs; and (4) assessing gap is unlikely to be addressed anytime soon. the accessibility of RTCs for students in rural and remote areas. Such an assessment would 185. Improving financial inclusion can also support, not only help in understanding the current and serve to strengthen, the depth of the landscape of vocational education in Solomon banking sector. While digital technologies can Islands but also in planning and implementing be a driver of this effort, the government needs effective strategies to strengthen the TVET to do more to address infrastructure gaps that sector, making it more inclusive and aligned constrain access and use of online services. with the labor market demands. Moreover, authorities should continue their efforts to improve digital financial literacy, 183. Additionally, there is a need to invest in particularly among women, rural populations, teaching quality, parental support, and and citizens with low levels of education and/or focusing on first language education (World income. Greater collection of financial inclusion Bank, 2024). Research has shown that teaching data is also likely to provide insights on where quality is a significant predictor of education efforts are most needed. outcomes, also in East Asia and the Pacific (World Bank, 2023). Strengthening the quality 186. Implementing the National Payments Systems and effectiveness of teaching in the region will Act of 2022 and expanding payment system require action on three levels: selecting more infrastructure will be a key priority. The high effective teachers; strengthening teachers’ cost of payments and lack of ability to process subject knowledge and skills; and incentivizing payments for government services online teacher effort. Actions to reach improved imposes a significant friction to expanding teacher quality include: the establishment of a ecommerce, government service delivery, merit-based system; targeted instruction and and digitalization in firms. Key modules of the the use of EdTech; and measures to reduce payment system are expected to launch in teacher absenteeism. Improved teacher the first half of 2024 and work is ongoing to quality may also assist in bringing down the draft regulations for the Act. Ensuring these high drop-out rates, while parental support reforms are fully implemented and the payment and involvement has been proven to improve system is used by public and private entities educational outcomes. Finally, teaching in the will be an important priority in improving the first language tends to improve educational business environment. Strengthening consumer quality and academic improvement (Bender et protection frameworks and data privacy laws al., 2005). to allow safe use of digital financial services should also be considered. The development Expanding Access to Finance of a national ID system could also support this 184. Policy and structural reforms are needed to effort by strengthening financial institution improve access to finance in Solomon Islands. integrity. Policymakers can play a role in addressing barriers to credit growth by supporting reforms 96 Solomon Islands: Country Economic Memorandum Improving Energy Affordability and Second, the amendment allows the Ministry of Mines, Energy and Rural Electrification to Reliability set the tariff based on the recommendation 187. Private investment, both domestic and of the Director of Energy – instead of the foreign, is needed to catalyze Solomon utility – after consultation with relevant Islands’ transition to renewable energy and stakeholders. The amendment thus promotes help lower electricity costs. Currently, private greater independence and transparency in the investment in the energy sector is limited, due tariff setting process as a first step toward to regulatory constraints, a non-conducive independent regulation in the energy sector. business environment, and economic However, continued reforms are needed to geography challenges. While some challenges further lower electricity tariffs, including are immutable (e.g., the country’s geography), the development of a new Energy Sector it is paramount to improve the enabling Bill, a revision of the Tariff Regulations, and environment for private sector involvement in measures to improve governance and capacity the sector, both for IPPs and own-use solar. at Solomon Power. An important aspect is the This will require regulatory action on several establishment of an independent regulator fronts, including the finalization and adoption – critical to the process of unbundling the of a grid code, the establishment of standard sector – where the participation of IPPs is net metering terms and conditions, and the managed effectively through power purchasing removal of the demand charge for non-regular agreements (IRENA, 2024). The regulatory customers. At the same time, the grid needs function should have clear mandates, to be upgraded to allow for the integration of administrative processes, and procedures. renewable energy onto the system (so that Improving the nexus between renewable non-renewable energy production is aligned energy and critical sectors would help with with renewable production, which, in the private sector development, improve lives case of solar, peaks during daytime hours). and livelihoods, and promote sustainable Furthermore, there is a need to develop development. These reforms would provide technical expertise to install and maintain own- flexibility to develop new business models to use solar systems and information campaigns decarbonize Solomon Islands’ electricity sector to build local demand. Finally, as mentioned and reduce dependency on fossil fuels to deliver above, addressing land constraints and access sustainable and affordable energy, together to finance are also needed for increased with supporting the government to meet its investment in the sector. climate commitments and SDG Goal 7. 188. It is recommended to continue the process of legislative reform in the energy sector, including the establishment of an independent regulator. Realizing energy sector challenges, the government is starting to engage in legislative reform. In 2023, it amended the Electricity Act to support the expansion of renewable energy in Solomon Islands.50 The amendment adjusts the definition of installation to include any electricity generation equipment. As such, it clarifies the regulatory 50 ambiguity on the development and installation of renewable energy generation in Solomon Islands. Solomon Islands: Country Economic Memorandum 97 4. Unlocking New Sectoral Sources of Economic Growth 98 Solomon Islands: Country Economic Memorandum 189. This chapter examines growth opportunities 4.1 Agriculture across four key sectors, in light of the constraints identified in Chapters 2 and 3. 4.1.1 Context The four key sectors are agriculture, fisheries, 191. Agriculture influences the lives and livelihoods tourism, and labor mobility. Agriculture and of the vast majority of the population of fisheries are key sectors for the economy, Solomon Islands. Ninety-two percent of the representing 24.1 percent of GDP and total population is, at least partially, involved employing the large majority of the country’s in agricultural activities. About 84 percent of workforce (primary sector employs 68 percent households grow crops – mostly cash crops of the workforce). While tourism and labor such as vegetables, betelnut or coconut, with mobility programs are currently still developing, 37 percent of households indicating crop both sectors have the potential to support sales as their main source of income (SINSO, growth, including the external accounts, 2023). Relatedly, the primary sector employs and compensate for the decline in logging.51 68 percent of all workers (81 percent the rural However, to reap those growth opportunities, areas). Forty percent of the country’s land mass substantial constraints need to be overcome, – around 1.1 million hectares – is designated including infrastructure and transport for agricultural holdings, of which 53 percent connectivity, capital deepening, technology use, is used for production.52 However, most of the land access, access to finance, energy costs, agricultural land holdings are concentrated skills gaps, and information deficits. in three provinces: Guadalcanal, Malaita, and Makira, which account for 70 percent of the 190. Addressing key constraints in these sectors total (SINSO, 2019). may unlock investment, raise productivity and human capital, and thus drive economic 192. The agricultural sector, consisting mostly growth going forward. Digitalization can of smallholder farming, accounted for support technology adoption, information 16.6 percent of GDP in 2020.53 The share provision, and raise aspirations in agriculture of agriculture has been relatively stable, and fisheries, while enhanced connectivity indicative of limited structural transformation. infrastructure may improve the functioning Furthermore, the contribution of agriculture of markets. Mechanizing agriculture and to GDP in Solomon Islands is much higher investments in cold chains has the potential compared to its structural and aspirational to improve both the quantity and quality of peers. The sector is characterized by three agricultural produce. Facilitating the ease of types of systems: (1) smallholder subsistence doing business – including access to finance, agriculture with occasional excess sales, land reform, and energy prices – may increase (2) semi-commercial smallholders with investment in those sectors (with concrete subsistence food production and deliberate prospects in fisheries). Labor mobility programs and migration have the potential to increase skills and stimulate cross-border knowledge flows (even though these programs are not without risks). The World Bank’s ‘Pacific Possible’ report also highlighted these sectors as having substantial growth potential (World Bank, 2017). 51 Furthermore, the selection of the sectors was informed and validated by dialogue with government counterparts. 52 Of the 1.1 million hectares, 53 percent is used for agriculture production, including 20 percent for annual crops, 16 percent for perennial crops, 8 percent for home gardens, and 5 percent for livestock yards. Twenty percent of the agricultural land holdings are unused, while 15 percent are classified as residential buildings, and 10 percent classified as other. 53 However, the widespread prevalence of non-monetary production means that the true macroeconomic contribution of primary production may well be underestimated. Solomon Islands: Country Economic Memorandum 99 market production, and (3) a small commercial accounting for more than two-thirds of the sector, including plantations.54 Except for a sales income. Sixty-five percent of all livestock palm oil plantation and a few poultry and pig are poultry, followed by pigs (32 percent), goats units near Honiara, all agricultural production (2 percent), and a limited number of cows and is smallholder farming, predominantly located horses (less than 1 percent). Poultry includes in rural areas.55 Production is used to sustain village chickens, broilers, layers, and ducks. livelihoods, provide food security, or as a All the broiler and layer stock originate from source of income. The importance of food crop imported fertile eggs, incubated in Honiara and production was evident during the COVID-19 sold to farmers as day-old chicks. Broilers and pandemic, when many people residing in layers are fed imported formulated feeds which Honiara returned to their home provinces to are very expensive. Twenty-five percent of grow food. households own pigs; they perform important customary functions and are considered a sign 193. Smallholder agriculture in Solomon Islands is a of wealth. The bulk of the pigs are kept in small family affair, with distinct gender differences. numbers by smallholder farmers in rural areas All family members are involved in some form and fed on local feeds. The demand for pigs of agriculture, including children. However, outstrips supply, resulting in pork imports. Only the farm population is aging, and it has proven a limited number of households keep cattle, difficult to engage youth in the agriculture despite several attempts at rehabilitating the sector (FAO, 2020). It is important to note cattle stock. there are pronounced gender differences in the roles performed, with men taking care of 195. The lack of a functioning abattoir in Solomon land clearing and women responsible for food Islands forces many outlets to import meat. In crop production. Men are also more involved in 1977, the Livestock Development Authority was the selling of high-value cash crops, and hence established to promote livestock development. often control the income generated from these During its prime time, the Authority ran an activities, while women tend to market low- abattoir for cattle, pigs and poultry, a chicken value cash crops such as fruit, vegetables, and hatchery, and cattle and pig breeding and root crops. Furthermore, decisions on land use distribution facilities. These operations are often made by men, even in communities closed in 1999 due to the Tensions and never where land ownership is matrilineal. Access to reopened. Since the closure of the Livestock extension services is also tilted towards men. Development Authority abattoir in 1999 all 194. An estimated 47 percent of households raise poultry, pigs, and cattle slaughtered for market livestock, predominantly poultry. Practically all consumption have been ‘backyard slaughtered’ the livestock is raised by smallholder farmers, or ‘bush-killed’, without any proper meat with a few semi-commercial and commercial inspections. As a result, many meat outlets, farms around Honiara as the exception. In hotels, and restaurants prefer to import meat 2017, the livestock sold was valued at US$6.9 than risking the locally produced products. million (0.5 percent of 2017 GDP), with pigs 54 Guadalcanal Plains Palm Oil Limited is the only major employer of agricultural workers in the country. It employs about 1,500 workers, of which 60 percent are male. Apart from the Guadalcanal Plains Palm Oil Ltd, some family operations will engage groups for certain activities (land clearing, weeding, pruning, harvesting) as required. As a corollary, there is very limited formal employment in the agricultural sector. 55 In the rural areas, 68 percent of workers are engaged in the primary sector, while in the urban areas the share of agricultural workers drops to 25 percent (World Bank, 2024). Relatedly, 75 percent of all rural households are smallholder farmers, either subsistence or semi-commercial. 100 Solomon Islands: Country Economic Memorandum 196. Coconut, tubers, and root crops are the and betelnut. In 2017, betelnut production was major agricultural products. In 2017, a total valued at US$12.6 million, coming in second of 53,884 tonnes of produce was harvested after coconut; it plays an important role in – 90 percent from ten major crops (Table serving the domestic market. Cocoa was valued 9). Coconut accounted for 33 percent of at US$12.1 million (0.8 percent of GDP). The the weight, corresponding to a crop value of majority of households grow sweet potato (70 US$24 million (1.6 percent of GDP). Root and percent), cassava (67 percent), and bananas tuber crops (sweet potato, cassava, pana, (54 percent). Thirty-four percent of households taro, yam, and kongkong taro) accounted for grow coconut and about 15 percent grow 43 percent of the crops harvested, with sweet betelnut and cocoa. Most crops are grown for potato and cassava valued at US$13 million a combination of subsistence use and market (0.9 percent of GDP). Other important crops production. Notable exceptions are oil palm and include cocoa, slippery cabbage, bananas, cocoa, which are exclusively sold for marketing/ exporting purposes. Table 9: Crop production in Solomon Islands Crop Quantity harvested Weight (tonnes) Propotion of total harvest Total 53,884 Coconut 17,816 33% Pana 6,713 12% Sweet potato 4,855 9% Cassava 3,507 7% Cocoa 3,437 6% Taro 3,422 6% Yam 3,034 6% Cabbage 2,762 5% Kongkong taro 1,709 3% Banana 1,069 2% All other crops 5,562 10% Source: Report on National Agricultural Survey 2017, Solomon Islands National Statistics Office, 2019. Solomon Islands: Country Economic Memorandum 101 197. Large provincial variation exists in terms of crop production and crop marketing. Malaita had the highest crop production in 2017 (16,613 tonnes) and accounted for 31 percent of the total production (Figure 48). Western province came in second with 18 percent (9,770 tonnes), while Central and Guadalcanal provinces both accounted for 12 percent of total production (6,526 and 6,474 tonnes, respectively). Despite the large production in Malaita, the Western province produced the largest volume of cash crops (5,266 tonnes sold), followed by Guadalcanal (4,590 tonnes sold). The proximity of sizeable fresh produce markets in Honiara, Gizo, Munda, and Noro partly explains this pattern. The value of the produce sold from Guadalcanal province reached US$15.6 million in 2017, accounting for 35 percent of the value of all crops sold and nearly twice the value sold from Malaita. Figure 48: Crop production and sale, by province 18,000 16,000 14,000 12,000 10,000 8,000 6,000 Tonnes 4,000 2,000 - a rn al al el ira l u ra na eu at ot ab tr an ia te lo ak is al m en on es lc Is el ho M M Te C da lB H W C ua el nn G Re Quantity Produced Quantity Sold Source: Report on National Agricultural Survey 2017, Solomon Islands National Statistics Office, 2019. 198. Similarly, there is large spatial variation in Interestingly, in Rennell and Bellona, households households’ dependence on agriculture as count on handicraft sales and other activities the main source of income. The majority of as important sources of income. While the households in the Guadalcanal Weather Coast, general trends are clear, there is notable intra- East Guadalcanal, North Malaita, Central provincial variation in terms of main economic Province, Makira, and Temotu rely on crop activities. For example, in the eastern wards of sales as their main source of income. There Makira the majority of the households engage is substantial variation in the type of cash in fishing rather than agriculture while the crops grown. For instance, noni production northern wards of Isabel are involved in tobacco is concentrated in Guadalcanal, while kava production. is mostly produced in Makira and Malaita. In contrast, in Western Province, Isabel and Choiseul households tend to rely on other income generation activities, mostly fishing. 102 Solomon Islands: Country Economic Memorandum Figure 49: Main source of income from crop sales PAPUA NEW GUINEA CHOISEUL S OUT H PA CI F I C M A L A I T A Choiseul OCE A N Shortland I s. Vaghena Vella Lavella Kolombangara This map was produced by the Map Design Unit of The World Bank. ISABEL Dai The boundaries, colors, denominations and any other information WESTERN shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any Ranongga endorsement or acceptance of such boundaries. IBRD 47809 | New Georgia FEBRUARY 2024 New Georgia Santa Isabel Group San Jorge Rendova Vangunu Malaita Tetepare Nggatokae MALAITA CENTRAL Florida Is. PROPORTION OF HOUSEHOLDS WITH SALE OF Russell Is. CROPS AS THE MAIN SOURCE OF INCOME %: ≤11.36 HONIARA Maramasike 11.37–33.44 33.45–47.25 Guadalcanal 47.26–62.58 So ≥62.59 lo m Ulawa on G U ADALC ANAL NO DATA Sea Duff Is. MAKIRAULAWA Reef Is. Tinakula San Cristobal Nendo Tikopia Bellona San Utupua ta C ruz RENNELLBELL Isla nds Vanikolo Rennell Source: Own calculations based on 2019 census. 199. Yield gaps in Solomon Islands are very large, and pawpaw, crop yields are only 0.3 and 0.1 suggestive of substantial inefficiencies in the percent of full potential, respectively. Various sector. The harvested crop yield for commonly reasons explain the large yield gaps, including grown crops – kilograms harvested relative disease burden, poor farm management, lack to the area cropped - is much lower than the of harvesting, senile trees, limited pruning, expected yield (Table 10).56 For instance, the adverse climatic conditions, suboptimal yield for coconut was only one-third of what spacing, and missing price information (Section would be expected if best agronomic practices 4.1.2). are followed. For other crops like banana 56 The expected yield values reflect the theoretical yields produced if best practices are followed under normal environmental conditions. The expected yield values are derived from the Solomon Islands Crop Farmers Manual unless otherwise stated (Ministry of Agriculture and Livestock, 2015). Solomon Islands: Country Economic Memorandum 103 Table 10: Yield gaps for main commodities Area of crop Quantity Expected Expected Actual harvest Crop yield Crop harvested harvested yield* production as percent of (kg/ha) (ha) (tonnes) (tonnes/ha) (tonnes) potential Coconut 35,985 17,816 495 1.5 53,978 33.0% Betelnut 6,875 420 61 3.8 25,780* 1.6% Cocoa 13,109 3,437 262 2.5 32,771 10.5% Sweet potato 37,735 4,855 129 10.0 377,353 1.3% Cassava 15,083 3,507 232 10.0 150,834 2.3% Banana 12,773 1,069 84 25.0 319,320 0.3% Taro 7,911 3,422 433 12.0 94,926 3.6% Slippery 37,617 2,762 73 8.0 300,934* 0.9% cabbage Yam 3,256 3,034 932 10.0 32,564* 9.3% Peanut 11,784 290 25 2.5 29,459 1.0% Pana 2,704 6,713 2,482 10.0 27,041* 24.8% Kongkong taro 415 1,709 4,119 12.0 4,978 34.3% Pawpaw 3,471 237 68 60.0 208,245 0.1% Eggplant 195 177 905 20.0 3,905 4.5% Source: Report on National Agricultural Survey 2017, Solomon Islands National Statistics Office, 2019. Note: Expected production sourced from Solomon Islands Crop Farmers Manual, Ministry of Agriculture and Livestock 2015 unless otherwise stated (*) 200. Coconut, betelnut, and cocoa are the main 201. Palm oil, coconut products, and cocoa are income crops for farmers. Although root the primary exports goods. The value of and tuber crops accounted for 43 percent of agricultural exports totaled US$68.8 million the weight harvested, the value of coconut in 2022 (4.3 percent of GDP). Palm oil is by (US$12.4 million) sold in 2017 was higher than far the largest agricultural export commodity, the value of root and tuber crops sold (US$8.9 accounting for 65 percent of agricultural million). Coconut accounted for 28 percent of exports and valued at US$46.6 million in the value of all crops sold in 2017. The value of 2022 (2.9 percent of GDP). 57Around 90 betelnut sold was US$8.2 million, similar to that percent of the palm oil is exported to Europe of all root and tuber crops combined, indicating (Netherlands, UK, and Switzerland). Coconut the importance of betelnut in Solomon Islands’ products – copra, crude copra oil, and virgin economy. The value of cocoa sold amounted to coconut oil – accounted for about 22 percent US$7.2 million. of the agricultural exports and were valued at US$15 million in 2022. Copra is predominantly exported to the Philippines, while coconut oil There is currently one palm oil estate in Solomon Islands – Guadalcanal Plains Palm Oil Limited, the only large-scale agricultural 57 operation in the country with about 9,000 hectares of oil palms and 400 smallholder outgrowers. 104 Solomon Islands: Country Economic Memorandum is mainly exported to Europe (Netherlands, require relatively small quantities of high-quality Switzerland, UK and Belgium). Cocoa is beans, at a premium price.58 There has been a the third major agricultural export good, concerted effort to grow the boutique market, contributing 16 percent of agricultural exports but several constraints limited its expansion, and worth about US$7.4 million in 2022. including transport costs – both domestic and Most of the cocoa from Solomon Islands is international, and quality and volume issues. exported to Malaysia, into the lower value bulk Finally, there is a small amount of downstream market. However, about 50 tonnes of cocoa as cocoa processing, producing cocoa powder, sold to the boutique market, that focuses on cocoa nibs, and chocolate for the domestic specialized, bean-to-bar chocolate makers that market and for export to New Zealand. Figure 50: Main agricultural exports Value of agricultural exports 80 70.7 68.6 70 57.6 Exports (US$ million) 60 50 47.8 42.1 40 30 20 10 0 2018 2019 2020 2021 2022 Total Palm oil Coconut products Cocoa Kava Source: CBSI. 202. Commodity exporters in Solomon Islands 203. Solomon Islands imports a variety of food are mostly family-owned SMEs with limited products. Food imports were valued at US$130 resources and working capital. This includes million (8 percent of GDP), almost double the exporters of copra, other coconut products, value of agricultural exports. The value of cocoa, kava, root crops, and noni. Palm oil, unprocessed agricultural products imported and a couple of copra and cocoa exporters are has been increasing, reaching about US$78.4 larger, foreign owned groups. The majority of million in 2018. Rice imports constitute the cocoa exporters all sell to the same bulk market biggest share (55 percent), followed by poultry buyer, Holland Commodities, who consolidates meat (17 percent), wheat and maize (8 percent), and sells the beans to the international cocoa coffee, tea, and spices (6 percent), milk and grinders. Currently, 17 cocoa exporters and egg products (5 percent), beef (4 percent), and four copra exporters are registered with the pork (1 percent). Dietary changes, a preference Solomon Islands Commodity Export Marketing for non-perishable items, and relative price Authority. There is a high turnover of exporters changes have been driving this trend. Increased – especially cocoa exporters, with the majority consumption of less nutritious foods has been functioning for less than 5 years. linked with the rise of non-communicable diseases in the country, especially in the urban areas. 58 The boutique price is on average 42 percent higher than the bulk price. Solomon Islands: Country Economic Memorandum 105 4.1.2. Opportunities and Challenges Developing the backward linkages of the poultry market by locally producing livestock 204. Increasing domestic supply would lower the feed would provide an opportunity to use by- domestic price and allow for more export products such as copra meal, fishmeal, cassava opportunities. Currently, the domestic price peelings, and fruit and vegetable waste – again of many agricultural goods is higher than the reducing import needs. Even pests like giant export price. For example, the price of cassava African snails and coconut rhinoceros beetle in the local market is generally between larvae could be harvested as a protein source SI$10–15 per kg of fresh of tubers. However, for pig and poultry feed. to be competitive for export, the price for fresh cassava would have to be in the range 207. Downstream processing may add value, of SI$2–4 per kg of fresh tubers. Augmenting especially for perishable goods and export production and/or addressing other cost crops. Due to the country’s economic factors may increase overall consumer surplus geography, the lack of a cold chain, and and open up new export markets. The large irregular shipping – downstream processing yield gaps for many agricultural goods – e.g., offers an opportunity to convert perishable cassava farmers currently produce only 2.3 goods into stable products, while concurrently percent of the expected yield – suggest there is adding value and facilitating transport. The ample scope to do so. longer shelf life of processed foods also increases export potential. Examples include 205. Potential exists to export agricultural goods producing flour from root crops, turning banana to other Pacific Island countries (and beyond). and breadfruit into dried fruits, and the milling As a number of Pacific countries have high of nuts and spices. Most villages in Solomon food import needs, an opportunity exists to Islands have women who sell buns and ring- establish trade links with those countries. For cakes using flour from imported wheat. This instance, negotiations are ongoing to establish flour could be substituted with flour produced protocols for the export of agricultural products in the village from locally grown root-crops or to Kiribati. Approval has already been obtained breadfruit using appropriate machines and for the export of frozen taro and cassava to the technologies. Similarly, there is an opportunity country, but transport links and the high cost to add value to traditional export crops, of freight still need to be addressed. Recently including the production of downstream trade links have been established to export coconut products (cooking oil, virgin coconut processed noni juice to the United States. In oil, coconut flour, coconut cream, and cosmetic January 2024, a 40-tonne shipment left for Los products). Angeles, with noni drink exports expected to rise in the future. 208. The development of vanilla and other high- value spices can be considered. During the 206. Import substitution opportunities exist. early 2000s, when vanilla prices were close Apart from the existing export commodities, to historical highs, Solomon Islands’ farmers the domestic market could consider import started growing vanilla for exportation. substitution for a number of goods that However, when world prices dropped, the Solomon Islands currently imports. For vanilla trade was abandoned. Nevertheless, instance, the development of a poultry market, potential exists to re-develop vanilla farming focusing on broiler and egg production, would in certain locations – especially in the improve self-sufficiency and reduce import Guadalcanal plains where climatic conditions needs. In that value chain, imported livestock are favorable – and also introduce other high- feed accounts for 65 to 75 percent of livestock value spices such as nutmeg. operation costs, especially for pigs and poultry. 106 Solomon Islands: Country Economic Memorandum 209. To reap those opportunities, several 211. Lack of adequate infrastructure and constraints need to be addressed. Farmers coordination failures increase costs for all have limited access to finance and insurance participants in the value chain. As discussed products, reducing working capital and in Chapter 2, limited connectivity and poor farm investment. Lacking infrastructure transport infrastructure severely constrain the and missing information cause value chains movement of agricultural goods and increase to break down and increase costs, which cost. For example, total freight charges for puts farmers at a competitive disadvantage. copra – for both land and sea transport – A lack of mechanization and intermittent amount to 35 percent of the sales price. availability of input supplies affects agricultural Furthermore, the lack of storage facilities productivity. Quality assurance, food safety, at ports of call, the absence of a proper market access, and predictable supply further cold chain, and a shortage of post-harvest limit opportunities to expand export markets. packaging degrades product quality. Next, a Disease burden, the rhinoceros beetle, and high wharf and delays in loading and unloading climate change pose additional challenges. Low commodities in Honiara further reduces aspirations and limited skills hold back growth profitability. Unreliable shipping schedules, at the farm level. So far, extension services a lack of communication (on the volumes of have proved ineffective to address those produce to be shipped), and slow loading constraints. Finally, a challenging business complicate coordination along the value chain.60 environment restricts private investment in the Finally, the absence of a formal marketing sector. system creates frictions in the functioning of agricultural markets. Anecdotal evidence 210. Access to finance and insurance are restricted suggests that collusion and peer pressure for the large majority of farmers, reducing among middlemen is leading to rent seeking working capital and limiting investment. behavior at main marketplaces. Commercial banks require a fixed security, a 3-year cash flow history, and a business 212. Missing information complicates decision plan before extending a loan. Furthermore, making and technology adoption at the farm interest rates range from 13 to 17 percent, level. Farmers need updates on weather making bank borrowing very restrictive for forecasts, prices, and market demand in the average smallholder farmer, especially order to make informed decisions about as (customary) land often cannot be used as agricultural activities (Fafchamps and Minten, collateral.59 As a result, only 0.5 percent of 2012). Furthermore, information provision all agricultural households accessed credit to and communication can also support finance agricultural activities (SINSO, 2019). technology adoption, i.e., recommended input Furthermore, traditional insurance instruments use and efficient agronomic practices (Van are not available to the majority of farmers in Campenhout, 2021). However, no regular the country. As a result, agricultural households market or price information is available to lack the necessary working capital and risk- farmers. Similarly, there are no accurate sharing instruments needed for commercial weather forecasts provided, while technology production, which is holding back farm growth adoption remains limited. This makes it difficult (Karlan et al., 2014). 59 Next to commercial lenders, a number of alternatives exist. The Development Bank of Solomon Islands is a financing institution that was re-established in 2018 to facilitate the development of rural areas. It has more favorable lending conditions than commercial banks, but still requires a financial report and two-year cash flow projections. The MSME Business Loan Guarantee Scheme jointly initiated by the Ministry of Commerce, Industry, Labour and Immigration and Ministry of Finance and Treasury provides financial support for the extension of capital to businesses in rural areas. Finally, credit unions and savings clubs provide financial services to rural households that do not have access to formal financial institutions. 60 According to the Central Bank, irregular inter-island shipping was one of the main contributing factors for reduced coca production in 2022. Anecdotal evidence from cocoa and copra traders indicates it is not uncommon for them to wait three to four months for a ship to transport their produce to exporters in Honiara. To bridge this period, traders have to invest in storage which reduces demand (as they are financially constrained). In response, farmers stop harvesting, causing the value chain to break down. Solomon Islands: Country Economic Memorandum 107 for farmers to plan and adjust their activities. 214. Quality assurance, food safety, market access, Limited digital connectivity is an important and predictable supply limit the opportunity reason why information does not diffuse to rural to expand export markets. There is a clear areas, where most smallholder farmers are ambition to further develop export markets for based (Chapter 2). agricultural commodities. However, a number of factors make it difficult to achieve this 213. A lack of mechanization and intermittent objective. First, export markets generally have availability of input supplies affects specific requirements for imported produce, agricultural productivity. All agricultural with high-quality standards. Farmers and processing and production equipment is exporters often lack the quality assurance currently imported. This adds cost, limits mechanisms to meet external demand.61 after-sales service, and increases the risk Second, food testing and the enforcement of buying low-quality goods. The resulting of food safety standards – such as Hazard limited mechanization – most farming is done Analysis and Critical Control Points (HACCP) manually with only a few basic tools – reduces standards – are limited as the country does productivity and decreases the motivation to not have an operational food safety lab (the engage in laborious work. With only 1 percent Ministry of Health is currently developing one). of agricultural households applying irrigation, Third, biosecurity issues – e.g., fruit flies – 2 percent using pesticides, and 4 percent further limit access to importing markets.62 employing inorganic fertilizers – the use of Fourth, most export markets require a regular modern production technologies is very limited supply of a reasonable volume of product to be (SINSO, 2019). Solomon Islands’ farmers viable, which has been difficult to achieve. For depend on foreign input supplies, which can instance, China will only import a minimum of lead to breakdowns in the value chain. For 10 containers of cassava per month, a volume instance, a shortage in the production of Solomon Islands has not been able to produce fertilized eggs in New Zealand resulted in (despite efforts to establish that trade link). hatcheries in Honiara not being able to meet the demand for chickens. For instance, coconut exports to Brisbane ceased as the exporter could not meet the size range requirements imposed by the 61 Australian market. 62 Important to note that the Ministry of Agriculture and Livestock is in the process of installing an experimental sized vapor heat treatment unit in Honiara to help develop export protocols for fruits and vegetables. 108 Solomon Islands: Country Economic Memorandum Box. 3 Constraints in the agricultural value chain Cocoa fermentation A cocoa fermentory owner on the Weather Coast in Makira buys wet cocoa beans from smallholder farmers to ferment and dry. It takes about 10 days to ferment and dry the cocoa beans. The dried beans are then shipped to a buyer in Honiara. Depending on the timing of the next ship it may be over 1 month before the cocoa arrives in Honiara. Then it will then take up to two weeks for the fermentory owner to be paid and receive the money in Makira. So, overall, it can take up to two months for the fementory to receive payment, which is the financing the owner needs to make their next purchase from farmers. Due to liquidity constraints, a lack of working capital, the need to pay the cocoa beans in cash, and limited connectivity – the fermentory works on a start-stop basis, operating at 25 percent capacity. As a result, farmers may lose crops, especially when other wet bean buyers are not operating in the market. Taro farming A Taro farmer in Temotu Province produces about 30 bags (weighing 50 kg each) of taro two to three times a year for the Honiara market. The transport costs are considerable – 25 percent of turnover: SI$400–600 for the truck to Lata (capital of Temotu province), SI$70 per bag of freight, SI$2,000 for return boat tickets, and truck hire from the wharf in Honiara to the market, which is SI$300-500. Additionally, daily market fees in Honiara are SI$37, which is a substantial cost, given it takes two to three weeks to sell all the taro. As a result, the price per bag in Honiara is about SI$700 (if sold in Lata, that would be about SI$250). Additionally, if the ship is delayed, which regularly happens, part of the produce will rot and be lost, which can reach up to 40 percent of the gross output. 215. Disease burden, the coconut rhinoceros lead to more unpredictable weather patterns beetle, and climate change pose additional and increased sea water intrusion, which all challenges for agricultural development. negatively affect agricultural production. Incidence of black pod disease and pests like rats and parrots affect cocoa production. High 216. Low aspirations and limited skills hold back mortality rates (40 to 60 percent) for broiler farm growth. Rural households in Solomon and layer chickens, supposedly caused by Islands earn income through multiple activities, the infectious bursal disease, is affecting the including farming, fishing, logging, weaving, poultry industry. The rhinoceros beetle is a etc. Although rural households might own significant threat to coconut, palm oil, and plantations and livestock, often they are not other commodities like betel nut. The beetle fully committed to farming operations as they causes widespread destruction of coconut and place a higher value on community, tribal, oil palm production by damaging the trees, social, and religious obligations. Furthermore, risking a reduction in coconut production by the price elasticity of agricultural supply in 50 percent.63 The increase in temperature Solomon Islands is high and households tend to caused by climate change will increase the stop farming when subsistence needs are met. incidence of pests and diseases. Furthermore, Relatedly, farmers do not consider themselves climate change is also expected to increase the as entrepreneurs and expect governments intensity (and frequency) of natural disasters, to sustain their businesses. Such (socially The Ministry of Agriculture and Livestock has a coconut rhinoceros beetle response plan in place, supported by the New Zealand 63 Government. Solomon Islands: Country Economic Memorandum 109 determined) aspirations and expectations limited state capacity, and availability of may lead to underinvestment, poverty traps, funding are the main contributing factors for and sustained inequality (Genicot and Ray, the low coverage. Furthermore, the extension 2017; La Ferrera, 2019). Finally, farmers and services provided proved ineffective due to a others in the agricultural value chain tend to be lack of up-to-date extension information, poor undereducated and have limited knowledge of accountability, and limited qualified personnel financial literacy, business management, and at the Ministry (Kama, 2021). efficient agronomic practices. 218. Finally, a high cost of doing business has 217. So far, extension services have proved resulted in limited investment in the sector. ineffective to address those constraints. The Challenges in land use, expropriation risk, Ministry of Agriculture and Livestock is the elevated cost of finance, high utility prices, main provider of support services to farmers.64 difficulties in trading within and across borders, According to the 2017 Agricultural Survey, only and institutional uncertainty all limit investment 4 percent of agricultural households received in the agriculture sector. As a result, the extension services, with around half of these country lacks a sizeable agribusiness market, receiving support from the government, one- with foreign investors missing. A high-profile quarter from non-governmental organizations, and unresolved industrial dispute continues to and the remaining quarter from private sector dissuade foreign investors from participating in extension. The country’s economic geography, the sector (Box 4). Box. 4 Russell Islands Plantation Estate Limited (RIPEL) In 1995, RIPEL purchased a plantation in Central Province (Russell Islands) from Levers Pacific Plantations Ltd. The shareholder structure involved multiple parties: landowners (25 percent), the Commodity Export Marketing Authority (20 percent), Central Province (20 percent), RIPEL employees (20 percent) and private investors (15 percent). At the time, RIPEL was the biggest plantation in Solomon Islands and one of the main contributors to Solomon Islands’ economy. It consisted of around 4,500 hectares of coconut and a further 800 hectares of cocoa. RIPEL employed 800–900 people, and women made up around 45 percent of the workforce. The plantation was producing 400–600 tonnes of copra per month and around 200 tonnes of cocoa per year. However, in 2004 RIPEL faced an industrial dispute related to land rights, including a strike by its employees, which has not been resolved until this day. This has resulted in a rapid depreciation of the capital (mill, storage sheds, wharf, offices houses, workshops, etc.) and a complete neglect of the plantation. 64 The Ministry of Commerce, Industry, Labour and Immigration is mandated to assist with the commercialization, downstream processing, and marketing of agricultural products while the Commodity Export Marketing Authority is a state-owned enterprise to promote agricultural exports. Other relevant ministries include the Ministry of Health and Medical Services which is responsible for food safety, the Ministry of Environment, Climate Change, Disaster Management and Meteorology which works to improve climate change preparedness and response, the Ministry of Education and Human Resources Development which is responsible for the agricultural curriculum in schools, and the Solomon Islands Tertiary Education and Skills Authority which facilitates tertiary education and vocational skills in the field of agriculture, including through rural training centers. 110 Solomon Islands: Country Economic Memorandum 4.1.3 Recommendations shown that short videos are effective in supporting technology adoption and increasing 219. The sector needs to be modernized with agricultural yields. A study in Uganda found appropriate technologies and tools. Currently, that reported maize yields were 10 percent smallholders are farming using only basic higher for households that were shown a short hand tools which makes their work arduous extension video (Van Campenhout et al., 2021). and demotivates them from putting in more These households were also more likely to apply effort. For example, it takes 36 working recommended practices and use fertilizer. days for the harvesting and processing of 1 ICT tools can also be used to disseminate tonne of dried copra (leaving aside plantation share prices, market information, and weather management and cleaning). Labor-saving conditions – thus enhancing market efficiency tools such as motorized transport, firewood, (Van Campenhout, 2022).65 and mechanized de-husking equipment would greatly assist in reducing manual labor. 221. Effort must be made to increase youth Mechanization would both increase productivity participation, raise aspirations, and build and motivation and is expected to result in skills. The development of the agricultural increased crop yields (Pingali, 2010). However, sector needs to take a holistic approach effective mechanization solutions need be and ensure continued youth participation custom-designed for smallholders, including in the sector. Developing a youth profile by equipment that is culturally fit-for purpose, understanding the nature and conditions under robust, low cost, and easy to maintain due which youth (dis)engage in agriculture is an to availability of spare parts (Adekunle et al., important first step. Stimulating peer-to-peer 2016; World Bank, 2023). Furthermore, there learning and awareness campaigns about the is a need to increase the usage of modern opportunities in agriculture can further solidify input supplies (e.g., agro-chemical inputs) and youth involvement in the sector (World Bank, farming technologies (e.g., irrigation), which 2023). As indicated, low aspirations and a could substantially increase farm performance dependence on government holds back farming (Aihounton and Christiaensen, 2024). As far growth. However, low-cost interventions may as possible, the private sector should take the be able to raise aspirations and increase lead in modernizing the sector, with appropriate agricultural production. For instance, a study financing mechanisms (e.g., leasing) (DIE, in Ethiopia has shown that exposing farmers 2017). Finally, regulation is required to avoid to a one-hour documentary about success in environmental damage due to deforestation or agribusiness increased long term investment unsustainable farming methods. and effort in agriculture. Interestingly, those households also increased investment in 220. Using ICT more actively can have substantial children’s education (Bernard et al., 2023). gains. Currently, the majority of smallholder However, care should be taken that raised farmers rely on information by word-of-mouth aspirations do not lead to frustration, crowd (colloquially known as ‘coconut news’) or radio out other preferences or jeopardize livelihoods broadcasting; the national broadcaster is a (Genicot and Ray, 2020). good source of information. However, the information transmitted is often limited or 222. Modernizing the agricultural sector combined even biased. With the telecommunications with measures to raise aspirations could network set to expand, it is recommended lead to a substantial growth dividend. Given that ICT is used to share knowledge, reduce the large yield gaps in the sector, significant information asymmetries, and provide virtual potential exists to grow agricultural output. extension services. For instance, it has been 65 Important to note that ICT is not a panacea, as information can be biased or ignored, especially when persistent beliefs are involved (Smets, 2020; Van Campenhout, 2022). Solomon Islands: Country Economic Memorandum 111 Estimates suggest that an effort to support 4.2.Fisheries modernization – through enhanced up-take of modern inputs, irrigation, and mechanization 4.2.1.Context – combined with cost-effective measures to 224. Small-scale fisheries are an essential source raise aspirations and effort could increase of food security and income generation for a agricultural output by 26 percent in the medium large share of Solomon Islanders. Communities term, resulting in a 4.3 percent of GDP growth across the country leverage rich coastal dividend.66 This would require both public and habitats, extensive coral reefs and lagoons, private action. Furthermore, the provision of and inland networks in freshwater streams information (through ICT) along the value chain and rivers to harvest diverse finfish species, could further increase efficiency and lead to nearshore pelagic fish, and invertebrates. even greater growth impacts. Fishing involves a combination of techniques, such as spear fishing, shallow-water hand-lining 223. To transform the agricultural sector, public from dugout canoes, and netting. Harvesting and private investment needs to increase. of invertebrates gleaned from intertidal and The government’s spending on the agricultural subtidal areas is extensive, may exceed finfish sector dropped from US$6.7 million (0.5 harvesting, and is often undertaken by women. percent of GDP) in 2017 to an average of US$2 The 2019 Census indicates that 47 percent of million over the period 2018–2022 (0.1 percent households were involved in fishing activities. of GDP). In contrast, the budget required to For most, fishing serves as a complementary implement the Agriculture Sector Growth and livelihood activity, providing a relatively low- Investment Plan 2021–2030, which focuses cost, highly nutritious source of protein on export promotion and import substitution, and generating occasional income through amounts to US$322 million over a 10-year market sales. However, one-quarter of fishing period (of which 30 percent is recurrent households, or one out of eleven households, budget and 70 percent is capital investment). specializes in fishing as a key source of income Therefore, without a substantial increase in (World Bank, 2024). targeted public financing, it is unlikely that agricultural transformation will be achieved. To 225. Similar to agriculture, there is spatial variation achieve scale in agriculture, however, private in households’ dependence on fishing as investments are also needed. It is therefore the primary source of income (Figure 51). important to reduce the cost of doing business Notwithstanding the considerable ward-level and address the binding constraints to private variation in the reliance of households on sector development in the sector (transport, fishing income, there is distinct geographical cost of finance, elevated utility prices, dealing clustering in the extent to which households with government, trade facilitation, etc.) nominate fishing as a primary income source, (Chapter 3). Additionally, a revival of agricultural including the northern part of Isabel, the cooperatives may increase scale and spur southeastern part of Choiseul, around Marovo economic activity in the agricultural sector. Lagoon in Western Province, and the east coast of Malaita. 66 The estimates are based on a Cobb-Douglas production function with constant returns to scale, with the output elasticity of capital equal to 0.4 and the output elasticity of labor equal to 0.6. The model assumes a 50 percent increase in the capital stock – which is conservative given the low levels of capital in the sector – through enhanced up-take of modern inputs, irrigation, and mechanization and a 10 percent increase in effective labor through an aspirations program (corresponding to the estimates of Bernard et al., 2023). 112 Solomon Islands: Country Economic Memorandum 226. The economic contribution of the fishing tuna sector is an important source of income, sector is estimated to be around 6 percent export earnings, and public revenue for the of GDP (Gillett and Fong, 2023). While country. According to data from the Forum widespread, limited information is available on Fisheries Agency, US$193 million worth of tuna the macroeconomic contribution of informal was caught in national waters during the period coastal subsistence fisheries. The best 2019–2021 (US$79 million in 2021; 5.1 percent estimate is that informal fisheries contribute of GDP). The national fleet tuna catch – either around three-quarters of all sector value-add, inside or outside national waters – during this with harvest levels between 17,500 and 33,600 period is estimated at US$112 million (Gillett tonnes annually.67 The commercial fishing and Fong, 2023). Export revenues from tuna sector is relatively small, accounting for one- products were US$80 million (to Europe and quarter of the sector’s value-add. It involves Asia, see Figure 52); revenue from fishery oceanic fishing undertaken on an industrial access and license fees was US$34 million. The scale by larger foreign and domestic (chartered) tuna sector also employed 3,425 people, mainly vessels in Solomon Islands’ vast maritime zone, in fishing and onshore processing activities. catching mainly tuna. Despite its small size, the Figure 51: Main source of income from fishing PAPUA NEW GUINEA CHOISEUL SO U TH PACIFIC M A L A I T A Choiseul O CEAN Shortland I s. Vaghena Vella Lavella Kolombangara This map was produced by the Map Design Unit of The World Bank. WESTERN ISABEL Dai The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any Ranongga endorsement or acceptance of such boundaries. IBRD 47810 | New Georgia FEBRUARY 2024 New Georgia Santa Isabel Group San Jorge Rendova Vangunu Malaita Tetepare Nggatokae MALAITA CENTRAL Florida Is. PROPORTION OF HOUSEHOLDS WITH SALE OF Russell Is. FISH AS THE MAIN SOURCE OF INCOME %: ≤5.64 HONIARA Maramasike 5.65–13.05 13.06–23.03 Guadalcanal 23.04–40.01 So ≥40.02 lo m Ulawa on GUADALCANAL NO DATA Sea Duff Is. MAKIRAULAWA Reef Is. Tinakula San Cristobal Nendo Tikopia Bellona San Utupua ta C ruz RENNELLBELL Isla nds Vanikolo Rennell 67 Solomon Islands National Fisheries Policy 2019–2029: A policy for the conservation, management, development, and sustainable use of the fisheries and aquatic resources of Solomon Islands/Ministry of Fisheries and Marine Resources. Similar to agriculture, the prevalence of non-monetary production in fisheries means that the actual macroeconomic contribution of fishing may well be underestimated. Solomon Islands: Country Economic Memorandum 113 227. There is, however, only limited domestic is therefore largely limited to access fees involvement in the tuna industry. Of the 179 paid to fish in Solomon Islands’ EEZ, which vessels licensed to operate in national waters represent around 20 percent of its ex-vessel in 2021, 134 were foreign vessels licensed value. SolTuna Limited, located in Noro in to operate only in the exclusive economic Western Province, is presently the only zone (EEZ), the balance probably consists of domestic tuna processing operation comprising chartered vessels (or foreign locally-based a cannery, loining, and cold storage facility. It vessels). Additionally, most of the 109,000 obtains its product from the National Fisheries tonnes of tuna caught within Solomon Islands’ Development Ltd based in Noro, the only waters in 2022 were processed outside of domestic tuna fishing operation. Solomon Islands. Income from these operations Figure 52: Export destinations for tuna (2020) Panel A: Preserved tuna Panel B: Frozen tuna Italy United States of America Philippines Spain Thailand 3.55% 22.25% Fiji Malaysia Japan 80.25% 13.24% 64.63% 2.84% 7.85% 2.73% Source: Atlas of Economic Complexity. 228. A smaller commercial coastal fisheries and 229. Women are heavily involved in fisheries, aquaculture sector also exists. Coastal both formally and informally, but inequalities commercial fisheries focus on demersal fish, persist. A government report from 2020 stated nearshore pelagic fish, invertebrates consumed that 67 percent of SolTuna’s 1800 workers were within the country, and those destined for women, however, turnover and absenteeism export. Notwithstanding limited monitoring, the (often due to safety concerns around fisheries) 2021 estimate reported that the commercial and sex segregation in the types of roles catch is around 5,000 tonnes and worth performed has resulted in low productivity and around US$9 million. Currently, commercial profitability (Solomon Islands Government, aquaculture is limited to seaweed production, 2020; Krushelnytska, 2016). As in agriculture, which Gillett and Fong (2023) reports women catch fish for subsistence purposes reached 3,150 tonnes in 2021. Research and too but are much less likely than men to have development is ongoing into the larger scale any say in the management of local fisheries farming of sea cucumbers and tilapia, which are (Gomese et al., 2020). currently only produced at a small scale. 114 Solomon Islands: Country Economic Memorandum 4.2.2.Opportunities and Challenges Province) are being prepared. The Bina Harbour Tuna Processing Plant is expected 230. Linking small-scale fisheries with urban to generate up to US$40 million in foreign markets presents an opportunity for direct investment and an annual revenue sustainable and inclusive growth. Currently, stream for the government of US$3.5 million. agricultural production, including fisheries, However, without complementary investments is not keeping pace with population growth, in nearby transport infrastructure, including a and Solomon Islands, like many PICs, is a net containerized port akin to that in Noro (Chapter food importer. Solomon Islands is one of the 2) to streamline links between the factory and PICs where shortfalls in food fish production the export markets, the full potential benefit are projected to be most serious – estimated of the cannery operations may not be realized. to be around 8000 tonnes per year by 2035.68 Relatedly, as Solomon Islands is competing An expanding and maturing domestic market, with other countries for fish processing, there particularly in urban areas, thus offers fishers is a need to improve the business environment, an opportunity to increase sales of locally including more affordable energy prices and produced food. The government has recognized more efficient port and freight handling (Table the importance of small-scale fisheries in this 11 and Chapter 3).70 regard, reiterating its commitment to improving and strengthening their contribution to food 232. Enhancing the contribution of domestically security and socioeconomic benefits (Solomon harvested and processed fish and displacing Islands Government, 2023). Funds in the 2023 imports may promote food security. Imported budget that have been earmarked include proteins such as tinned fish/meat are often boosting production of hatchery-raised sea highly processed and underpin Solomon cucumber and juveniles for fish restocking, Islands’ ‘triple burden of malnutrition’, in which rehabilitating infrastructure to support persistent undernutrition and micronutrient the development of rural fish markets, and deficiencies coexist with a growing burden reviewing ongoing finfish market supply from of obesity and related non-communicable provinces to urban centers such as Honiara. diseases. Increasing consumption of fresh fish offers a range of benefits, including highly 231. Further domiciliation and domestication bioavailable micronutrients, high-quality of the tuna sector should provide greater protein, and essential fatty acids. Additionally, value and support growth. Of the estimated households’ continued high reliance on value of US$193 million of tuna caught in imported foods also provides a direct conduit to Solomon Islands’ waters across 2019–2021, global food and agriculture market disruptions, only around US$62 million are captured resulting in rapid transmission of price shocks, domestically through access fees and onshore even to the country’s most remote corners processing and handling. Further investments (Feeny and McDonald, 2016). in onshore facilities could increase the quantities of tuna landed and processed and add a further US$1,000 per tonne in processing revenue.69 The government intends to develop the onshoring of the tuna fishery further. Feasibility studies for constructing a new processing plant in Bina Harbour (Malaita 68 Diversifying the use of tuna to improve food security and public health in Pacific Island countries and territories. 69 Assumptions are that whole round tuna have a value of US$1,000 per tonne and processed tuna a value of US$2,000 per tonne. 70 Note that Solomon Islands is currently internationally competitive due to its preferential trade access to the EU. With Least Developed Country graduation set to take place in 2027, tariffs and duties may be imposed, which could have substantial implications for fishing exports. Solomon Islands: Country Economic Memorandum 115 Table 11: Production cost of canned fish across Solomon Islands and other countries in EAP Direct cost Solomon Papua New Thailand Philippines (per kg of fish 2022 US$) Islands Guinea Labour 0.04 0.06 0.05 0.10 Electricity 0.22 0.02 0.04 0.11 Fuel 0.35 0.09 0.03 0.29 Water 0.20 0.03 0.00 0.11 Freight to Europe 0.28 0.15 0.15 0.29 Other production costs 3.17 3.19 3.16 3.34 Total production cost 4.26 3.54 3.43 4.24 EU tariff 0% 24% 24% 0% Total production cost with tariff 4.26 4.39 4.25 4.24 Source: EY (2023). Note: Electricity and freight charges are discussed in Chapter 3. The high fuel cost for Solomon Islands is relat- ed to demurrage and pipeline charges, port operating costs, government duties, and the country’s limited fuel storage capacity. 233. Favorable marine endowments also mean production potential to alternative fisheries that Solomon Islands can derive significant further offshore with higher production additional revenue from offshore fisheries. potential.72 Among the benefits of anchored Solomon Islands has access to one of the most fish aggregating devices is that they make extensive and most fertile offshore fishing tuna resources more accessible to domestic grounds. The WCPO contains the largest tuna small-scale fishing fleets, which can then fisheries in the world, accounting for around 55 be harvested for sale in domestic markets. percent of global tuna catch in 2021. Critically, However, relocating efforts are not without effective regional management of this vital risks to the safety of fishing vessels and crews. common resource has helped ensure the Reducing risks can be accomplished through sustainability of fish production.71 improvement of sea safety regimes, which includes enhancing the safety characteristics 234. Developing a domestic small-scale tuna of boats, making personal safety equipment fisheries sector could be one of the solutions available, and training/certifying crew in fishing for addressing the fish shortfall. One of the operations. success stories in the fishing sector in recent years has been the development of small- 235. However, much of the domestic fishing scale fishing around anchored fish aggregating sector remains small in scale and inefficient, devices, which transfer shallow-water fishing with limited application of capital and efforts on resources with limited remaining limited extension support. Limited data is 71 Solomon Islands is a signatory to a variety of multilateral conservation and management agreements, including the Conservation and Management Measures established by the Western and Central Pacific Fisheries Commission and the Harmonized Minimum Terms and Conditions of the Forum Fisheries Agency, which is a vital tool for regulating fishing access by foreign fishing vessels. Solomon Islands is also a member of the Parties to the Nauru Agreement, which controls around 50 percent of the global supply of skipjack tuna. The result is that the four main tuna species caught in the WCPO (skipjack, yellowfin tuna, bigeye tuna, and albacore) are considered healthy and sustainable, none are considered overfished, and no overfishing occurs. 72 It is important to note that fish aggregating devices in the region have a short life expectancy (~12 months) and contribute to ocean pollution. Therefore, fish aggregating device programs require measures to address the downside risks, such as life span and environmental impact. 116 Solomon Islands: Country Economic Memorandum available on the small-scale fisheries sector, 237. Climatic variability presents a significant particularly inland fisheries, including value challenge for the fisheries sector. Under chains and distribution channels to market global warming scenarios (Representative outlets. Analysis from the 2017 Solomon Concentration Pathway 8.5 and 4.5),73 models Islands Survey indicates that capital and skill forecast that tuna catches in Solomon Islands’ are drivers of labor productivity in fishing. waters could decline by as much as 26.1 and The lack of extension services also limits the 8.7 percent, respectively, by 2025, and access potential for information dissemination about revenues between US$10.8 and US$3.6 updated harvesting and processing practices, million. With a long-term climate-induced sharing of critical market intelligence, as eastward shift of key tuna stocks, Solomon well as opportunities for information and Islands must adapt its oceanic fisheries and knowledge exchanges, training, mentoring, and onshore processing infrastructure to minimize collaboration. the economic impacts such changes may have. Other climate drivers also shape the 236. Weaknesses in post-harvest practices distribution and abundance of tuna species. undermine the commercial value of small- During the La Niña events (every three to seven scale fisheries. Irregular transport services years), tuna are mostly caught further to the and the absence of a robust cold chain from west, and fishing efforts decrease in the central the point of capture to the point of sale are Pacific. During El Niño events, revenues from major limiting factors for transporting fresh access fees in Solomon Islands decline as seafood from remote communities to urban fishing operators negotiate access to countries markets. Poor handling and improper storage whose waters are further to the east. By 2100 and transportation conditions can lead to food- a decline of 20–50 percent in production of borne disease and impair the product's safety, demersal fish and 10–20 percent in production quality, and nutritional value. No information is of invertebrates in PICs is forecasted as a result available on current levels of spoilage in small- of degradation of coral reefs.74 scale fisheries in Solomon Islands. However, the United Nations Food and Agriculture 238. Over-exploitation of fishing resources and Organization reports that it can be as high IUU fishing also pose significant threats as 30 percent in small-scale fisheries. These to the sector. A paucity of data on small- challenges are problematic for the sector, scale fishing leads to uncertainty about especially since fish and seafood products stock status, increased risk of overfishing, are highly perishable and freshness is the key and resource depletion. However, there is driver of their commercial value. Additionally, increasing recognition that the depletion of temperature-controlled supply chains are fisheries resources associated with growing required in high-value domestic niche markets populations and pollution, combined with the (e.g., hotels, restaurants) and export markets. effects of climate change, is a major challenge Mismatches of market power between that can seriously harm coastal and riverine producers and intermediaries can also erode communities’ food security, health, and the producer surplus accruing to communities. livelihoods. IUU fishing is also a challenge. In While intermediaries are often regarded as 2020, the Forum Fisheries Agency reported that capturing most of the value-add elements in the annual volume of harvested or transshipped fish products to the detriment of fishers, they products involving IUU activity in Pacific tuna also assume high risks in bringing these fragile fisheries for 2017–2019 was 192,186 tonnes, products to markets. with an ex-vessel value of US$333.5 million. 73 A Representative Concentration Pathway is a greenhouse gas (GHG) concentration trajectory adopted by the Intergovernmental Panel on Climate Change. The pathways are labelled after a possible range of radiative forcing values in the year 2100. The higher values mean higher GHG emissions and therefore higher global temperatures and more pronounced effects of climate change. 74 Adapted from Bell, Johnson, and Hobday (2011). Solomon Islands: Country Economic Memorandum 117 With anticipated reductions in tuna abundance by reducing spoilage. This, in turn, would due to climate change, the success of the increase the sale of fish and other marine tuna fisheries hinges on effective national and products to urban and other markets via an regional conservation and management efforts. upscaled inter-island shipping network. If Accordingly, the need to eliminate IUU fishing the cold chain boosts immediate production with improved monitoring, control, surveillance, capacity in the informal fisheries by around and enforcement remains paramount. 20 percent through reduced spoilage, the fisheries sector could generate a 1.1 percent of 4.2.3. Recommendations GDP growth dividend by 2028 (compared to a 239. Investments and policies to promote baseline without a cold chain).76 Growth impacts commercial fisheries and growth in domestic could be greater if investments also facilitated production must be well-targeted and a shift toward higher quality produce and entry balance the challenges of overexploitation into niche export markets. The introduction and the impacts on subsistence. Greater of a cold chain is likely to require partnerships fish commercialization requires investments between the public and private sector. Cold in addressing the shortfall of robust cold storage requires ice making and/or cold storage chains and infrastructure and know-how for plants and reliable power. Given the constraints receiving, handling, and processing catches to private sector development in rural areas, – and selling and distributing quality fish. these facilities will likely require initial public Additionally, there is a need to improve the investment. To maximize impact, investments overall business environment, including energy should be strategically located at key ports and prices and utility costs, as well as port and waystations on the interisland shipping network freight handling (Chapter 3).75 Investments near known fishing communities. However, and pilots should be carefully identified based also crucial is that private shipping vessels on detailed pre-feasibility studies to ensure are equipped to carry temperature-sensitive they represent value for money. Additionally, products for extended periods of time. the adverse impacts of the development of commercial fisheries on subsistence fishers’ 241. A coastal fisheries information management access to fish should be minimized to protect system would help improve the effectiveness food security and nutrition. Better monitoring of resource management of coastal fisheries. and surveillance to provide greater certainty An information system would focus on about stock status and resource exploitation collecting and analyzing data on fishers, are key to balancing the imperatives of income fish workers, fishing vessels, and fisheries and food. Effectively migrating fishing efforts infrastructure (with priority given to the use from depleted and vulnerable areas to species of existing censuses, the Household Income and areas that are not overfished would also and Expenditure Survey, and similar surveys). support this agenda. The data captured would underpin any coastal fisheries licensing and registration system. It 240. Investments in post-harvest facilities could would also be beneficial from the perspective enhance the growth of domestic fisheries. of planning, budgeting, and evaluation by Investments in a robust cold chain from the facilitating assessments of stock status, point of capture to the point of sale should activity, and efficiency (catch per unit effort) in support growth in the informal fisheries sector 75 For instance, freight costs to and from Noro are nearly four-times more costly relative to Jakarta, indicating that ocean freight is disproportionally expensive compared to competitors in the fisheries industry (EY, 2023). See Chapter 3 for more detail. 76 For the baseline estimates, the fisheries sector expands at 2021–2022 trend growth, reaching 6.7 percent of GDP by 2028. The introduction of a cold chain is assumed to eliminate spoilage, which is estimated at 20 percent (SINSO, 2019). Investment in the informal fisheries sector is estimated to generate growth multipliers, resulting in a fisheries sector accounting for 7.8 percent of GDP by 2028, thus boosting growth by 1.1 percent of GDP. 118 Solomon Islands: Country Economic Memorandum different parts of the country. Better monitoring management measures and adjust them. The would also support improved allocative absence of capacity to monitor and surveil efficiency of investments by providing a better coastal fisheries in scattered communities understanding of spatial and socioeconomic requires finding an alternative model to central dimensions of fishing and its local importance government command and control. Community- and viability as a growth prospect. Based Resources Management and sentinel fisheries (where fishers agree to collect 242. Technology has an important role to play scientific data) offer some opportunities to in resource management and productivity. manage coastal fisheries more effectively, but it Effectively supporting remote fisheries will also will take time to build capacity in communities require access to and use of ICT that provides and responsible stewardship of resources. data and information services in near real-time. ICT can facilitate data capture – improving 244. The imperative of conservation may require local monitoring and enforcement capacity imposing restrictions on the extent of fishing and supporting resource management, such activities. This may require restrictions as Community-Based Resources Management, regarding the type and amount of fishing and any fisheries licensing and registration gear used, the number and size of fishing systems. ICT can also facilitate access boats, fishing grounds (spatial and temporal to new markets by enhancing producers’ closure), or the number of participants in knowledge of seafood distribution channels, the fishery. Experience has shown that such building business-to-business relationships, measures are often difficult to accept by and creating a new alliance between fishers fishers unless displaced fishers can access to jointly manage resources and extract alternative fisheries and if, in the longer term, greater producer surplus. Critically, ICT can no alternative sources of livelihoods are also amplify the reach of extension services developed to absorb excess fishing labor. Social and training, opening the door to essential protection interventions could be integrated learning and upskilling (e.g., on preservation with community-based fisheries management techniques), innovation, and greater resilience measures to provide livelihood support for all in fishing communities, including women to mitigate the negative impact of fishing and youth. restrictions. 243. Additionally, to avoid the threats associated with early onset resource depletion, the 4.3. Tourism Ministry of Fisheries and Marine Resources will need to implement adaptive management 4.3.1. Context measures. The future of both the oceanic 245. Despite globally recognized potential, the and coastal fisheries sectors requires an tourism sector in Solomon Islands remains understanding of how much fish can be in its nascent stages. Solomon Islands is a sustainably harvested – taking into account pristine archipelago with an abundance of the impact of climate variability and change natural, cultural, and historical attributes. on fishery productivity, robust enforcement For instance, it boasts the largest saltwater to ensure that fishers will comply with lagoon in the world (Marovo Lagoon), was a key management measures and reduce their battleground in the Pacific Theatre of World participation in illegal activity, and diligent War II, and offers some of the best scuba monitoring to measure the impact of Solomon Islands: Country Economic Memorandum 119 diving globally with remarkable marine life. Two contributing factor to rising tourist arrivals. international airports are located in key tourism Business and travel for other purposes have areas (i.e., Honiara and Munda) (Figure 53). long dominated arrivals, registering a combined The airports offer access with a direct flight 49 percent in 2019. Holiday travel reached 28 from Brisbane taking three hours, and flights percent in 2019. Across all arrivals, Australia from New Zealand – via Vanuatu – taking just continued to dominate market share at 33 under five hours.77 Its closeness to Fiji, PNG, percent in 2023, followed by other PICs, the and Vanuatu provides opportunities for long- United States, and New Zealand. haul visitors to these countries to extend their holidays with a stop-over in Solomon Islands.78 246. Key tourism activities include snorkeling Despite this potential, the tourism sector in and diving, culture and history, and natural Solomon Islands is underdeveloped. In 2019, it attractions or eco-tourism. In line with its represented 10 percent of GDP, which dropped comparative advantage, the top activities for to 3.5 percent 2020.79 In 2022, tourism- leisure arrivals in Solomon Islands include: related employment (direct and indirect jobs (1) water-based activities (visiting the beach, from tourism and other interlinked sectors) swimming, snorkeling, and diving); (2) cultural was estimated at 23,894 or 7 percent of the interactions (visiting local markets, villages, total workforce. The country’s international battle sites, and museums); (3) land-based tourism arrivals are lower compared to its touring (going to restaurants or bars and PIC peers. In Fiji, tourism surged, with visitor sightseeing); and (4) shopping (for local crafts, arrivals rising from 542,000 in 2009 to about produce, and art). Survey research indicates 900,000 in 2019, contributing 23.2 percent these activities receive a high satisfaction of GDP and 30 percent of employment. While score of more than four out of five (except for Fiji’s arrivals surpassed pre-COVID-19 levels restaurants and bars, museums, and shopping in December 2022, Solomon Islands’ arrivals for art). The least appealing aspects cited were approximately half of December 2019 for Solomon Islands include the environment levels (see the annex for a detailed comparison and rubbish, infrastructure, and cost. With between Fiji and Solomon Islands). In 2023, visitors spending on average US$1,465 per visitor arrivals recovered to 26,030, which is person per trip, based on an average length well above 2022 levels, but below the 2019 of stay of 9.6 nights, they are seeking better peak of 28,930 visitors. The Pacific Games, value for money. Meeting visitor expectations held in November 2023, were an important would require quality product development, enabling infrastructure development, and better environmental management. 77 Close proximity to Australia and New Zealand offers potential to access a portion of outbound travel markets of 9.5 million and 3.1 million trips per year, respectively. 78 However, this opportunity has not yet been realized due to infrequent and sometimes unreliable flight schedules, lack of alignment of the value propositions and target market segments for each country, and the high cost of Solomon Islands relative to the perceived value of products offered (niche experiences such as diving being the exception). 79 Little is documented about tourism pre-independence, but the island nation saw visitor numbers grow to 15,800 in 1998 for business and leisure travel, with the latter driven by the scuba diving and Word War II history segments. In 1999, Solomon Islands faced the start of an extended period of civil unrest, known as the Tensions that disrupted international leisure tourism until 2003. It took 10 years to return to pre-crisis levels, and despite a decline with further riots in 2014, arrivals grew overall until 2019, when 28,907 visitors were recorded. In 2019, the country’s accommodation inventory stood at 2,000 rooms in 181 properties, none of which are international or regional brands along with a reported 20 local tour operator businesses (SPTO, 2019; ADB, 2021). 120 Solomon Islands: Country Economic Memorandum Figure 53: Key tourism areas in Solomon Islands Source: IFC (2023). 4.3.2 Opportunities and Challenges targeting historical diving enthusiasts are 247. With significant historical, natural, and differentiated from mass market segments, cultural assets, Solomon Islands has allowing destinations to better appropriate the opportunity to further develop niche value. These differentiated tourism segments markets. There is a tendency in the Pacific also tend to be less sensitive to connectivity region towards the development of mass and safety concerns. Crucially, they also involve market tourism segments, i.e., ‘sun and sand’ smaller accommodation providers that are tourism. Such mass market models focus less vertically integrated than mass market on all-inclusive resorts and large volumes segments. of visitors. While Solomon Islands has the natural capital to develop mass market models, 248. Developing the tourism sector would create global competition in these markets is eroding formal employment for women in Solomon appropriable margins, making it less desirable Islands, but gender gaps that undermine (World Bank, 2023). Yet, alternative tourism female participation in the sector would need segments exist, which could better suit the to be addressed. Compared to other sectors, natural, cultural, and historical endowments of employment in tourism tends to employ men the country. For example, tourism destinations and women in more equal proportions. Given Solomon Islands: Country Economic Memorandum 121 the high sector-segregation present in many kickstarted efforts to realize the province’s long- PICs, the opportunities in hospitality and stated tourism potential. A weekly international retail that tourism creates are particularly flight from Australia to Munda commenced in valuable for women who otherwise face limited 2019, and financial and technical assistance for opportunities for paid employment (World Bank, the province’s SME accommodation providers 2023c). However, current employment in the was provided. While progress was disrupted sector, in Fiji for example, is often concentrated by COVID-19, the Brisbane-Munda flight in low- and medium-skilled occupations and the was reinstated in January 2024. However, it risks of gender-based violence towards women remains a challenge for the airline (Solomon remain challenges that constrain women’s Airlines) to reach commercial viability given low productivity. As such, developments to the passenger numbers, in part due to the shortage tourism industry should be mindful of these of international-quality accommodation once challenges and be accompanied by measures to tourists arrive in Western Province. avoid exacerbating existing gender inequalities. 250. Weak tourism governance and a costly 249. Despite some recent headways, substantial business environment hamper the further gaps remain in the country’s tourism development of the sector. The Tourism infrastructure. Solomon Islands had Division of the Ministry of Culture and Tourism approximately 180 accommodation properties is responsible for tourism development and (2,000 rooms) available in 2019 – more than investment, while Invest Solomons supports half were in or around the capital, Honiara. It tourism investment in a regulatory and hosted several business-oriented medium- to coordination role. Nonetheless, a lack of human large-size hotels at various quality levels, none and financial capacity in these institutions limit of which were internationally branded. Other their effectiveness in attracting and facilitating tourism destinations in outer provinces offered tourism development. Identifying land for smaller, typically more rustic accommodations. tourism investment continues to be a key In comparison, Fiji has a total of 421 licensed constraint (Box 5 and Chapter 3), but efforts are accommodation providers with a combined underway to address this.80 Moreover, disputes inventory of over 12,000 rooms. Inadequate between lessees, titleholders, and host and prohibitively expensive domestic transport communities can arise even after entering in a (see also the annex on the domestic aviation land agreement, and agreements sometimes network), inadequate and costly ICT and energy risk being broken or changed without notice. supplies, combined with a limited supply of Complexities around business registration also market-ready tourism businesses hinders pose an issue (see the annex for an overview of the growth potential of the sector. Relatedly, the tourism investment process), including high a lack of waste management and sanitation licensing fees, especially for business licenses facilities limits tourism growth and leads to issued by provincial governments. Uneven pollution on beaches and reefs. Private-sector enforcement of business licenses, with no investment in two international standard hotels ability or capacity to check compliance, further in the capital in 2009 and 2015 responded to complicates tourism development. Other business market demand. In addition, donor constraints include access to finance, limited and public investments in Munda as a tourism engagement by international investors and hub – including an upgrading of the airport – operators, and a low success rate in engaging local communities in the sector. 80 Between 2017–2021, International Finance Corporation – working closely with the government, development partners and the private sector – conducted a Western Province Tourism Investment Needs Assessment which identified 39 specific investment needs and confirmed that a lack of investable sites remains a key constraint. To address this, a site selection methodology was developed and implemented by International Finance Corporation and the Ministry of Culture and Tourism. This resulted in a portfolio of approximately 70 sites in Western Province that were identified as having high tourism development potential. 122 Solomon Islands: Country Economic Memorandum Box. 5 Tourism development and land-related constraints in Solomon Islands Sea Sound Resort Sea Sound Resort is a tourist resort that started operation in late 2010. It was established near the Gwaunaru Airport, Malaita Province. The resort is on a coastal stretch of land owned by the Kwaruiasi/Biranakwao tribe. There is no clear articulation regarding who the members of this tribe are, and what rights they have to the land. The land comprises 10,579 hectares and is registered as a perpetual estate (Parcel No. 15-005-1 LR 60). It has been subject to disputes regarding who has ownership rights over land. The resort is owned by Helen Kofana, who is from Gwaunaru’u village and is married to a Chinese entrepreneur. The Chinese entrepreneur is responsible for providing the capital for establishing and operating the resort. Mrs Kofana was advised by the Malaita Provincial Government tourist officer to consult the landowning tribe and obtain a consent letter from the registered joint individuals to use the land for a tourist resort. When the tourist officer saw a copy of the consent letter, a provincial business license was issued and Mrs Kofana was advised to proceed with the resort operation. However, it was not clear whether the signatories to the consent letter were those registered as the owners of the perpetual estate (Parcel No. 15-005-1 LR 60) and representatives of the landowning group. Neither was it clear whether the consent letter constituted a mutual agreement between joint owners, members of the landowning group, and the investor. In effect, a ruling from the High Court indicated that the consent letter was not sufficient to create a binding agreement between her and those who have an interest in the land to ensure there is sustained security that is free from disputes (Roughan et al., 2010). 4.3.3. Recommendations and land use – including maintaining a social 251. To expand development into niche tourism license with the communities, access to segments, Solomon Islands needs to build finance, and skills development (Chapter 3). physical assets and facilitate the ease Investment in the sector should be encouraged of doing business. It is critical to develop through incentives and partnerships between necessary transport infrastructure, tourism the government, local communities, and the accommodation, and other tourism facilities. private sector.81 Investment in the sector can This also includes marine and terrestrial also be facilitated by simplifying the investment biodiversity conservation efforts to preserve process and more targeted investment the country’s exquisite natural assets. The promotion activities.82 Currently, activities development of the tourism sector should are ongoing to identify investable tourism not infringe on land rights and should respect sites in the Western Province, Guadalcanal, environmental sustainability. In addition, there and Central Province (IFC, 2023), in line with is a need to improve the business environment 81 In 2017, the Ministry of Culture and Tourism launched a range of incentives to attract tourism investment, ranging from tax holidays to import duty exemptions. See the annex for an overview. Furthermore, the Ministry has established a Tourism Grant to support local start- ups in the tourism sector. Estimations suggest that the successful implementation of these reforms could generate a 1 percent of GDP growth dividend by 2028. This reflects a 7.4 growth rate in tourist arrivals for 2025–2026 and an 8.3 percent growth rate over the period 2027–2028. 82 See the annex for an overview of the process to register a foreign investment in Solomon Islands’ tourism sector. Solomon Islands: Country Economic Memorandum 123 the National Tourism Development Strategy, Solomon Islands’ stakeholders to be supported the Guadalcanal Tourism Development Plan to access and utilize information on global 2023–2032, and the Central Islands Culture travel trends and how these can be maximized and Tourism Policy 2018–2022. to be more competitive in the niche market segments of adventure tourism such as diving, 252. A designated focal point for investor historical, or nature-based travel. assistance would strengthen linkages and accountability within and across agencies. This would help facilitate tourism investment and ensure that tourism considerations are 4.4. Labor Mobility and integrated into major infrastructure projects Migration like ports and airports. Targeted technical assistance is also crucial to build capacity 4.4.1. Context within the Ministry of Tourism and the 254. Solomon Islands has a young and growing Ministry of Commerce, Industry, Labour, and labor force. Between 2015 and 2022, the Immigration – enhancing their ability to attract labor force is estimated to have grown from and support tourism investments. To empower approximately 307,000 to 369,000 workers, investors and landowners, it is important to with an average of nearly 9,000 new workers identify and document engagement models that entering the market each year. The working-age clarify the process of negotiating commercial population, i.e. those aged 15–64 years old, has agreements for tourism investments.83 been steadily increasing from 52 percent of the total population in 1990 to 59 percent in 2019. 253. To better understand the tourism sector, While this proportion is roughly on par with tourism satellite accounts and further structural and aspirational peers, the country is analytical work are needed. Tourism satellite still expected to enjoy a favorable demographic accounts currently only exists for Fiji and PNG structure in the medium term. in the Pacific. Measuring tourism’s economic impact and having more detailed data of the 255. Overall, unemployment is low, with impact on skilled jobs, tourism receipts, labor moderate gender differences. The labor force force participation, direct tourism employment, participation rate was 62.7 percent in 2019 entrepreneurship, and poverty reduction according to the latest Population and Housing in vulnerable groups would be beneficial to Census, roughly comparable to structural and Solomon Islands and would set the foundation aspirational peers. The national unemployment for government policymaking in the sector. rate stood at 5.3 percent, according to data Improving the collection, analysis, and from the 2019 Census. Unemployment was dissemination of tourism industry data is also moderately higher among those aged 25–34, at vital. This data, encompassing both supply and 7.2 percent, whereas the unemployment rate for demand metrics for domestic and international youth (15–24 years old) and older workers (35– visitors, can inform investment decisions for 44) amounted to 5.3 percent and 5.2 percent, local SMEs, which typically lack the resources respectively. Interestingly, gender gaps in labor for extensive research, as well as for potential market participation and employment appear foreign investors. Relatedly, there is a need for 83 Under its ‘Accessing Land for Tourism Investment Activity’, the International Financing Corporation is delivering a program of investment promotion activities, leveraging its work and outputs from Western Province, and replicating this process in the Central and Guadalcanal Provinces. It is working through this activity with the Ministry of Culture and Tourism, Invest Solomons, and a Tourism Investment Task Force to conduct investor outreach and take to market the sites identified by stakeholders as the highest potential. Currently, the priority sites identified are in Western Province, however the final selection may also include sites in Isabel, Guadalcanal, and Central. 124 Solomon Islands: Country Economic Memorandum moderate. There is only a marginal difference in one-third of employed Solomon Islanders unemployment between the sexes: 5.6 percent aged 12+ engage in subsistence activities that among males and 5.1 among females, although involve producing goods and services for own men are more likely to be employed, resulting consumption, while another 13 percent are in a moderately larger labor force participation unpaid family workers. Relatedly, employment rate (66.1 percent versus 59.1 percent).84 is highly concentrated in the agricultural sector, and to a lesser extent, elementary occupations 256. However, low unemployment masks critical consisting of simple and routine tasks (Figure issues on job quality. Low-productivity 54). High skilled professionals and technicians subsistence and unpaid family work account together account for merely one-tenth of all for a large share of all employment, especially jobs. among women and youth (Figure 54). Almost Figure 54: Type of economic activities by gender, 2019 100% 80% 60% 40% 20% 0% Overall, 12+ Male, 12+ Female,12+ Employee (government) Unpaid family work Employer Employee (NGO/Church) Subsistence Voluntary work Self-employed Employee (private) Producing goods/services for sale Source: World Bank based on 2019 census. 84 Gender differences are more noticeable in terms of the type of employment. Women are more likely to undertake subsistence and unpaid work, more likely to be in unskilled occupations, and much less likely to work in a formal workplace. Solomon Islands: Country Economic Memorandum 125 257. Furthermore, social protection systems in to the labor market (Figure 55). Data from Solomon Islands do not protect employees the 2015 Enterprise Survey also suggest low when they lose their jobs and do not support labor demand – about one-third of surveyed them to find new jobs or develop necessary businesses reported having no vacancy in the skills. The formal social protection system is last two years, largely due to a poor business limited to the National Provident Fund pension environment (Chapter 3). More recent data from scheme, which has 131,000 active members the 2019 census also indicates the small size of who are in formal employment. Since most the formal sector in Solomon Islands. Only 43 women in Solomon Islands are in the informal percent of Solomon Islanders reported working sector, 71 percent of contributions to the in a formal workplace, whereas 55.1 percent scheme are made by men. Most Solomon reported working in a private household. Islanders rely on traditional and informal social safety nets in times of hardship, through the 259. Poor basic education and skills formation wantok system. While traditional and informal have manifested into prominent skills systems continue to play a vital role in Solomon shortages and mismatches. Nearly one- Island communities, it cannot be assumed third of the working age population have not that these systems always function effectively completed primary school and only about 40 and equitably. COVID-19 and recent natural percent completed at least Year 9 of secondary disasters have shown that these traditional education. Solomon Islands is one of the lower- local systems may not have sufficient capacity middle-income countries with the highest share and resources to respond to widespread needs, of under-educated workers at 54 percent. especially during covariate shocks or disasters Relatedly, the vast majority of businesses that affect communities. (94.7 percent) surveyed in the 2015 Enterprise Survey reported that an inadequately educated 258. Formal job opportunities in Solomon Islands workforce is an obstacle to their operation are limited and confined largely to the public – which is also echoed in the 2024 World sector, similar to peers. Estimates show that Bank Firm Survey, with 30.5 percent rating only about 2,100 formal jobs are created each the problem as either a major or very severe year, well below the number of new entrants obstacle. Figure 55: Estimated formal job creation and labor market entrants 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Kiribati PNG Solomon Islands Tonga Vanuatu Annual labor force entrants Annual formal sector jobs created Source: World Bank (2017). 126 Solomon Islands: Country Economic Memorandum 4.4.2. Opportunities and Challenges techniques, organizational skills, financial 260. Temporary labor mobility may absorb some management, and English (World Bank, 2023). of the slack in the labor market, providing Remittances have also cushioned labor-sending several economic benefits. New Zealand’s households against income shocks, as evident Recognised Seasonal Employer (RSE) scheme during the COVID-19 pandemic. and Australia’s Pacific Australia Labour Mobility (PALM) scheme are two key labor mobility 261. As these labor mobility schemes expand, programs in the region (see the annex for more opportunity exists for Solomon Islands to detail). In 2022–2023, approximately 30,300 increase its participation. Up until 2022, workers had found jobs in the PALM scheme Solomon Islands was a small participant in the and another 17,400 in the RSE. Workers in RSE and PALM schemes, with only 0.6 percent these schemes earn significantly more than of the working age population participating, what they might make at home. Earnings, net of making up 7.7 percent of all RSE and PALM deductions from seasonal work, are estimated workers. However, this has changed recently, to exceed potential earnings at home by three with more than 5,500 participants by August to four times in the case of Tongan workers,85 2023.86 Demand from both New Zealand and and nine to ten times among ni-Vanuatu Australia is set to increase going forward: New (World Bank, 2023). Even after subtracting Zealand is considering a new scheme similar living expenses in the host country, seasonal to the semi-skilled PALM stream, whereas workers remit US$390 per month on average, Australia has announced a new pathway for nearly two-times the average earnings in their permanent residency through the Pacific home countries (Table 12). Remittances from Engagement Visa, with PALM workers eligible these schemes finance essential household to enter the ballot. At the same time Samoa, consumption, including food, school fees, and Tonga and Vanuatu – the three major sending health care, and contribute to building human countries – are reviewing their participation capital (World Bank, 2023). Many Pacific in the schemes and considering participation seasonal workers reported that they had caps. These developments open up new acquired useful skills overseas, such as farming opportunities for Solomon Island workers. 85 Workers employed under the RSE and PALM schemes incur several costs, such as airfares to the destination country and health insurance, which are often paid upfront by their employers and gradually deducted from their earnings once they start working. 86 Workers are recruited through one of three pathways: (1) direct recruitment by employers; (2) a government-managed work-ready pool; and (3) four private recruitment agents. The Labour Management Unit administers the government-led labor mobility program, which includes selection, training, and the development of a reintegration framework. The Unit is receiving financial support from DFAT to help with the implementation of the PALM scheme, without which it would be unlikely to cope with the growing workload. Solomon Islands: Country Economic Memorandum 127 Table 12: Income premium of temporary labor mobility schemes Avg. earnings in domestic Avg. amount remitted market (USD/month) (USD/month) Overall 216.9 388.4 SWP 259.1 431.1 Scheme RSE 153.4 322.7 Kiribati 175.8 266.5 Nationality Tonga 393.2 641.9 Vanuatu 115.8 265.3 Male 196.4 375.7 Gender Female 303.7 442.3 Source: World Bank (2021b). Note: In July 2023, the Seasonal Worker Programme (SWP) and the Pacific Labour Scheme were consolidated and streamlined into the PALM scheme. 262. Solomon Islanders are also increasingly census data indicates a positive association considering long-term migration. Currently, between remittances and the likelihood of Solomon Islands has a small stock of emigrants engaging in non-subsistence activities such as – less than 0.1 percent of the population (Figure crop sales and the provision of services (i.e., 56), but the emigration rate has picked up the opening of a canteen). Households receiving significantly after the COVID-19 pandemic. The remittances are also more likely to have a UN projects net immigration to increase at a financial account. Next to the development yearly growth rate of 4.4 percent, reaching 0.5 benefits of remittances, long-term migration percent of the working age population by 2032. can also facilitate knowledge transfer, economic Similar to seasonal worker programs, long-term activity, government accountability – and migration is expected to increase remittance increase incentives to acquire higher education inflows. Estimates suggest that with projected (Gibson and McKenzie, 2011; Fackler et al., emigration flows, per capita remittances may 2020; Bastos and Silva, 2012; World Bank, increase by 32 percent over the next ten years 2023). (Seruwaia et al., 2024). Analysis of the 2019 128 Solomon Islands: Country Economic Memorandum Figure 56: Stock of emigrants 0.3 Emigrants stock over population 0.2 0.1 0 WSM TON FJI FSM SSs TUV NRU KIR PLW VUT SLB PNG MHL 263. It is Important to note that various challenges pay, especially on alcohol, and therefore having have been identified with the labor mobility lower savings on return compared to more schemes in Australia and New Zealand. The family-focused female workers (World Bank, increasing outflows of workers have raised 2018). concerns over brain drain and low-skilled labor shortages across the regions. Localized labor 264. Long-term migration, if not managed well, shortage has been documented in Vanuatu, for can also have negative effects, most notably instance, especially for physically demanding through a reduced working-age population work such as construction or planting and brain drain. Increased net emigration will subsistence gardens, due to men being away reduce the available working-age population. (World Bank, 2023a). Other issues relate to While currently less of a problem due to slack migrant workers’ welfare in host countries in the labor market, large and sustained net – such as excessive salary deductions, emigration flows may have a sizeable impact insufficient health insurance coverage, on the labor market in the long term, especially disagreement with employers, and challenges given the country’s small size. Estimates related to their reintegration upon return. suggest that the working-age population may Negative impacts on labor-sending families drop up to 5 percent by 2040 due to long- and communities are often directly related to term emigration, which would generate wage workers’ absence from home. This increases pressures and reduce total GDP compared to the workload of remaining family members, a counterfactual without emigration. Relatedly, especially women, and affects the gendered given the country’s small size and low level of division of labor. There are also reports of human capital, brain drain (the net emigration marital breakdowns, suspicion of infidelity, of skilled workers whose skills are also needed and adverse outcomes for children such as in the origin country) may be holding back neglect and behavioral problems. In addition, growth and development in Solomon Islands adverse perceptions, moral judgments, and (Kerr and Kerr, 2011). Finally, while remittances gossip regarding returned female migrants are bring many benefits, they also tend to increase common, especially when only a few women imports, reducing net international inflows into from a community participate in the schemes. Solomon Islands. Issues regarding male participation in seasonal work include men sometimes squandering their Solomon Islands: Country Economic Memorandum 129 4.4.3. Recommendations shocks. It is therefore critical to develop a 265. To harness the benefits of labor mobility social protection policy which is adaptive to schemes, training is needed. Even low-skilled shocks. In the short term, the government workers need training to succeed in the may focus on social assistance programs to overseas job market. Workers need a core set protect the vulnerable, which subsequently of foundational and soft skills, including basic can be expanded to include other elements literacy, financial management, awareness of such as unemployment benefits and reskilling different cultural norms in the receiving country, programs. The development of an adaptive and proper workplace conduct. Training should social protection system will require investment also serve to manage expectations around in management information and targeting earnings and potential deductions in the host systems. countries. Experience has shown that workers who are well-prepared in these aspects 268. Finally, there is a need to develop a strategic are more successful, more likely to remain approach to emigration and improve employed overseas, and earn a good reputation governance aspects of migration programs. that leads employers to employ them again When handled well, labor migration can and recruit more workers from their country. benefit origin countries (World Bank, 2023). This underscores the need for investment in Therefore, it is recommended to develop a robust pre-departure and worker readiness strategic approach to emigration, including training programs, to fully prepare those going the development of labor agreements, training overseas. and orientation, a focus on reducing the cost of remittances, and an active return policy. 266. A strong foundational education system is key Furthermore, increased digitalization and a to maximizing the advantages of migration. conducive business environment will allow As the demand for workers expands to include Solomon Islands to fully grasp the development higher-skilled professions,87 the government gains (e.g., knowledge transfer, economic will need to invest in better quality primary and activity) from long-term migration. Similarly, in secondary education. Relatedly, for emigration order to maximize the benefits from seasonal to incentivize education and mitigate brain worker programs, governance aspects need drain effects, a high-quality and affordable to improve, including the implementation of a education system is required. Efforts should reintegration framework (e.g., allowing return be made to improve teacher quality, stimulate workers to withdraw their hosting country learning in the first language, and improve superannuation) and measures to mitigate parental support. Without this, it is unlikely that adverse social impacts such as workshops emigration will boost educational attainment. and family support services. This will require building capacity in the government’s Labor 267. It is recommended to develop a social Management Unit and proper resourcing. protection and jobs system in Solomon Islands. Existing social protection measures are limited and have proven to be inadequate to respond to large scale disasters and These high-skilled professions include aged care and hospitality workers, which require stronger interpersonal skills, literacy, and 87 numeracy. 130 Solomon Islands: Country Economic Memorandum References Acemoglu, D. (2010). Introduction to Modern Economic Growth. 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Stifel, D., and Minten, B. (2008). Isolation and agricultural productivity. Agricultural Economics, 39: 1-15. Sullivan, M. (2007). Recognition of customary land in the Solomon Islands: status, issues and options. Resource Management in Asia-Pacific working paper 66, Research School of Pacific and Asian Studies, Australian National University, Canberra. UNCDF. (2021). PoWER Women's and Girls' Access and Agency Assessment: Solomon Islands. Pacific Financial Inclusion Programme (PFIP). UNCTAD. (2022). Review of Maritime Transport 2022. United Nations conference on trade and development. 134 Solomon Islands: Country Economic Memorandum United Nations. (2023). Digital Economy Report Pacific Edition 2022: Towards Value Creation and Inclusiveness. United Nations Publications New York, New York. Utz, R. (ed.). (2021). Archipelagic Economies: Spatial Economic Development in the Pacific. World Bank, Washington, D.C. Van Campenhout, et al. (2021). 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On the economic costs of political instabilities: a tale of sub- Saharan Africa. Empirical Economics, 66(1), 137-173. Solomon Islands: Country Economic Memorandum 135 Annex Benchmarking Solomon Islands Against its Peers In this study, Solomon Islands’ performance will be benchmarked to: • Structural peers: Comoros, Kiribati, Micronesia, Samoa, Timor-Leste, Vanuatu • Aspirational peers: Fiji, Grenada, Maldives • Aggregates: East Asia and Pacific (EAP); Lower-middle-income countries; and Pacific Islands Countries (PICs). Structural peers have been selected based on the economic and demographic characteristics of the country, employing the following criteria: • Categorized as a lower-middle-income country • Categorized as a small state • A rural population of at least 40 percent of the total population • Value added by the agricultural, fishing, and forestry sector of at least 8 percent of GDP. For aspirational peers, the following criteria were used: • Categorized as an upper-middle-income country • Categorized as a small state • A rural population of at least 25 percent of the total population • Value added by the agricultural, fishing, and forestry sector of at least 5 percent of GDP.   Solomon Islands Long-Term Growth Model The analysis of long-term growth prospects for Solomon Islands uses two extensions of the World Bank’s Long Term Growth Model (LTGM): the public capital extension (LTGM-PC), and the human capital extension (LTGM- HC), which are described in this annex. The LTGM-PC simulates most of the components of GDP but the LTGM- HC provides additional detail on the evolution of human capital. More information about the LTGM is available in Loayza and Pennings (2022). LTGM-PC. The LTGM Public Capital Extension (Pennings and Devadas, 2018) is a neoclassical (supply side) model of potential growth (like the standard LTGM) but allows for the decomposition of physical capital and investment into public and private portions, with the public component including infrastructure investment.88 More specifically, GDP is given by a simple Cobb-Douglas production function: Eq. A1 Where is the total factor productivity (TFP), and Pdenote public and private capital stocks, and is the usefulness of public capital for production. is effective labor used in production, which is decomposed into , human capital per worker and the labor force. The labor force is further decomposed into where is the participation rate, is the working-age population to total population ratio, and is total population. The parameter is the labor share. The stock of public capital follows , where denotes public investment and is the depreciation rate. An analogous expression determines the 88 The LTGM-PC also allows for variation in the efficiency of public investment, though in Solomon Islands’ context we do not utilize this aspect due to missing data. The efficiency of public investment does not affect its growth contribution so long as it is assumed to always have been constant. 136 Solomon Islands: Country Economic Memorandum dynamics of private capital. One can express GDP in per capita terms by dividing Equation A1 by . Public and private investment rates are assumed to be exogenous (as a percentage of GDP). Population projections and demographics come from the UN population division.89 is calculated using the LTGM-HC, which is described further below. To understand the drivers of growth, GDP growth can be expressed as follows (using a log-linear approximation, where denotes the annual growth rate of variable X in period t+1): Eq. A2 In the short and medium terms, TFP growth has the largest effect on growth: a 1 percentage point (ppt) increase in TFP growth leads to an exact 1ppt increase in GDP growth. A 1ppt increase in the growth of human capital, labor force participation, and working-age population increase GDP growth by ppts. Population growth also increases GDP growth by ppts, though reduces GDP per capita growth. The effect of an increase in the public investment rate depends on both the usefulness of public capital for production , as well as the scarcity of public capital, as measured by the public capital-to-output ratio . For example, if =0.17 (as we calibrate for Solomon Islands for essential infrastructure) a 1ppt of GDP increase in the public investment rate raises short-run growth by 0.15ppts per year if =1.14 (close to our initial calibration) but only 0.075ppt if =2.28.90 This means that a public investment-led growth strategy which causes public capital to accumulate faster than GDP will quickly become less effective, unless it is accompanied by other reforms to boost productivity, human capital or participation to mitigate the increase in . The effect of an increase in the private investment share of GDP is analogous but will depend on the private investment share of income adjusted for congestion , as well as the scarcity of private capital, as measured by the private capital-to-output ratio . In our initial calibration, Solomon Islands is short of private capital, with =1.23. Combined with 1- - =0.33, a 1ppt of GDP increase in private investment provides a large 0.27ppts increase in growth, though this effect diminishes as rises due to higher rates of private investment.91 In the long-run, the private capital-to-output ratio and public capital-to-output ratios are roughly constant, and so .92 This means than the effect of all non-capital drivers of growth are amplified because they induce further capital accumulation. As a rule of thumb, a 1ppt increase in TFP growth would boost GDP per capita growth by 1/ ppts, and there would be a one-to-one effect of , or . Note however, that capital adjustment is very slow, and takes several decades to converge. However, the long-run effects are a useful upper bound, and the effects of drivers of growth through our simulation period (2024-2050) will fall in between the ‘direct short-run’ and ‘long-run effect’. 89 Labor force participation rates are assumed constant as they are already high in Solomon Islands. There is no unemployment. 90 The total initial capital-to-output ratio K/Y=2.37 is calculated using the perpetual inventory method. The public K/Y ratio is calculated using historical public investment data (back to 2007 from the MFMOD dataset), and the assumption that public investment was 7% of total expenditure before that (based on the share in 2007). The private K/Y ratio is a residual. 91 The depreciation rate and labor share are missing for Solomon Islands, so we calibrate the labor share =0.5 and total depreciation rate =4.6%, both based on the median of LMI countries from PWT10. The public (infrastructure) depreciation rate is =0.02 (as they are structures), and the residual private depreciation rates =0.07. We also assume TFP growth of 0.5% in the baseline, based on a growth accounting exercise over 2010-19 (taking into account HC). 92 This implies and . Substituting into Eq A2 generates the long run relationship. Solomon Islands: Country Economic Memorandum 137 LTGM-HC. The LTGM human capital extension (LTGM-HC) seeks to provide a detailed analysis of the effect of changes in the different components of the World Bank Human Capital Index (HCI) – schooling quantity, schooling quality (test scores) and health – on the productivity of the workforce .93 But unlike the HCI, the LTGM-HC focuses on dynamics by embodying human capital in individual age cohorts, and tracing how those cohorts move in and out of the workforce. The resulting time series for the human capital of the workforce, h_t (measured in productivity units) is then fed into the LTGM-PC to estimate the effect on economic growth. Specifically, the human capital of cohort of age a at time t takes the same form as the HCI (without child mortality): Eq. A3 Where (LAYS are Learning-adjusted years of schooling and EYS=8.34 are Expected years of schooling, and quality=350/625=0.561) and Adult Survival Rates (ASR)=0.86 and not stunted rates (=0.683) are health measures. =12% is the return to LAYS and analogously =0.65 and =0.35. Historical years of schooling data (for older cohorts) is from Barro and Lee. The human capital of the workforce 20-64 used in production is given by the weighted average of the human capital of individual age cohorts, where is the share of the workforce of that age at time t: Eq. A4 CEM Topics and Drivers of Growth The table below gives a schematic overview of the links between the topics studied in the CEM and the main drivers of a neoclassical growth model. Generally, the direction of causality runs from the CEM topic to the growth driver. For instance, the implementing the CEM recommendations for transport connectivity should increase total factor productivity and public capital (as it is recommended to implement transport projects). Note that total factor productivity is considered a residual growth driver, encompassing many elements, such as cultural attributes, institutional quality, policies, and the functioning of goods and factor markets. 93 Note that the LTGM-HC is currently in beta version, and so is not available yet on the LTGM website. 138 Solomon Islands: Country Economic Memorandum Table A.1: Link between CEM topics and drivers of growth Total Factor Public Capital Private Capital Human Capital Topic Productivity Labor (Lt) (KG) (KP) (ht) (At) Transport * * connectivity Digital * * (*) * connectivity Urbanization * * (*) * Access to * * finance Energy * * * Skills * Land use * * Trade * * * Agriculture * * * * * Fisheries * * * Tourism * * * Labor mobility * * * * Source: Authors. CEM 2.0 Approach The Country Economic Memorandum (CEM) 2.0 approach proposes a framework to conduct a growth diagnostic study. It emphasizes selectivity over comprehensiveness and focuses on the narrower concept of economic growth rather than on wider development. This is also what distinguish the CEM with other core Bank analytical products, such as a Systematic Country Diagnostic (SCD) which emphasizes sustainable and inclusive growth, and a Country Private Sector Diagnostic (CPSD) that focuses on private sector development. CEM 2.0 starts with a Country Scan, a diagnostic exercise intended to guide the CEM team to uncover a country’s growth story better. By addressing 20 general questions, 10 guiding questions at the macro level, and 10 guiding questions at the micro level (Table A.2), a Country Scan can help make a case for the topics that merit in-depth analysis. A Country Scan was conducted for Solomon Islands and is available upon request. It is important to note that not all guiding questions were discussed due to limited availability and quality of the data. Solomon Islands: Country Economic Memorandum 139 Table A.2: The guiding questions General questions A. What is the period of the analysis B. Who are the structural and aspirational peers Macro questions Micro questions Is recent economic growth more due to cyclical or structural factors? What are the firm-level productivity dynamics? What are the characteristics of growth (from the What is the quality of managerial practices? demand and supply sides)? What is the quality and stock of human capital? Is the macro-fiscal framework adequate? What is the quality of ICT capital? Is GDP growth driven by productivity growth? Are firms innovating? Which sectors are driving jobs growth? Are product and service markets competitive? What is the contribution of structural change to a) How open is the country to trade? (b) How open is economic growth? the country to investment? What are the key determinants of growth – domestic How does the legal and regulatory system support vs. external factors? business growth? What is the potential contribution of structural Are financial markets well developed to support reforms to growth? growth? How complex is the economy? What is the stock and quality of infrastructure? What would the Growth Commission say? Key Constraints to Economic Growth Figure A.1 Constraints according to the Hausmann-Rodrik-Velasco (2005) framework Binding constraints framework Contraints to growth, private sector investment & entrepreneurship Low returns to High cost of finance economic activity High, but Low social Low appropriability Poor local declining external returns financing financing Remote economic Rapid but Government Market geography and ineffective failures failures poor connectivity urbanisation High cost of Multi- Poor Low Macro-fiscal Information Poor doing business stakeholder access & human context externalities infrastructure & corruption coordination ineffective capital use of land Low Medium High Very high Lack of access Financial Low sector to credit & acess to credit inability to banking capacity verify collateral Source: Adapted from Hausmann, Rodrik, Velasco (2005). 140 Solomon Islands: Country Economic Memorandum Table A.3: Constraints identified in the literature Publication Key contraints • Land tenure • Low productivity in the primary sector Solomon Islands Country Economic Memorandum – • Infrastructure deficit World Bank (1984) • Low human capital • Population growth • Inter-island connectivity • Economic geography • Limited public sector capacity Solomon Islands Growth Prospects. Constraints and • Infrastructure Policy Priorities – World Bank (2010) • Human capital • Cost and access to finance • Business conditions • Economic geography Pacific Possible – World Bank (2017) • Environmental fragility • Poor governance and limited public sector capacity • Economic geography • Political economy Solomon Islands Systematic Country Diagnostic – • State fragility World Bank (2018) • Urbanization • Land • Economic geography • Limited infrastructureHigh cost of electricity Solomon Islands Growth Assessment – International • Land tenure Growth Centre (2023) • Human capital • State capacity and fragility • Low internet usage Relative Size of the Economic Constraints For each indicator, the absolute percentage deviation from the expected value for Solomon Islands, based on its per capita income levels, was calculated based on a regression for the variable in question versus income per capita for all countries were there was data available. According to this analysis, the constraints with the highest deviation, by far, are those related to unfavorable economic geography, ineffective urbanization and information externalities. Constraints with high deviations are those related to connectivity, access to credit, government effectiveness, and public sector governance. Finally, ‘medium-sized’ constraints relate to human capital and infrastructure. Macro-fiscal constraints were also classified as ‘medium sized’ given that the country’s risk of debt distress and exchange rate valuation compare relatively favorably against structural peers. Solomon Islands: Country Economic Memorandum 141 Figure A.2 Solomon Islands key indicators Absolute percentage deviation from expected value* (SLB value in parentheses) 229% Low deviation 73% 74% Medium deviation 71% High deviation 67% Very high deviation 16% 16% 17% 17% 15% 12% 7% 1% LPI total LPI Human Domestic Spread Registering CPIA Trade Export Urban Articles per Use of Resource score infrasture Capital credit % between property public across concentration growth million (20) internet rents (2.6) score Index GDP lending score (DB) sector mgt borders (0.66%) (01-21) (11.9) (19%) (2.2) (0.42) (32.6%) and deposit (47.4) & score (DB) (4.7%) rate institutions (53.4) (10.2%)** (2.6) Solomon Islands Aviation Network Domestic aviation complements the inter-island shipping network, though high prices mean it remains beyond the reach of most Solomon Islanders. Presently, Solomon Airlines – the only domestic carrier – flies to 24 airports across the country, including one in each provincial capital and places where demand makes the routes economically viable. The network relies on a fleet of small turboprop aircraft, including the Dash-8 (capacity for 30 passengers) and a smaller twin otter (17 passengers).94 Similar to shipping, the busiest sectors are those between Honiara and urban hubs (Gizo, Munda, near Noro, and Auki), accounting for 42 percent of the domestic trips taken in 2019. The main tourism routes are between Honiara and airports in New Georgia (Seghe and Ramata) and Suavanao in Isabel, which operate 4–5 days a week and accounted for 11 percent of passenger traffic in 2019. Overall, the propensity to fly is low by international standards, with high prices likely a key barrier. In 2019, there were only 0.13 flights per person – among the lowest utilization rates in the Pacific – with prices high relative to household incomes and much higher than in neighboring Vanuatu for routes of similar length (World Bank, 2017). A passenger ticket on a flight from Honiara to most provincial cities is around three to five times more expensive than an equivalent boat ride. This makes aviation prohibitively expensive for all but those with the highest propensity to spend and traders of the highest value goods, such as premium seafood, despite the considerable savings in time. 94 Only seven airports have runways that can accommodate the larger Dash-8 plane, which must be at least 900 m in length (the main international airports at Honiara and Munda) smaller and remote airports at Santa Cruz and Lomlom in Temotu; Bellona in Rennell and Bellona, Kiarakira in Makira, and Manaoba in north Malaita. Donor-funded projects are underway to extend the runways in Seghe in Western Province and Choiseul Bay. 142 Solomon Islands: Country Economic Memorandum Table A.4: Domestic transportation prices from Honiara to major provincial destinations as of August 2023* Shipping Aviation Time taken Time taken Destination (province in Price for one Price for one to reach to reach parentheses) passenger passenger destination destination Auki (fast boat) SBD 250 2 hours SBD 1,173.32 20-30mins Auki (slow boat)* SBD 150 9 hours Buala (Isabel) SBD 300 7 hours SBD 1,325.28 40 mins Taro (Choiseul) SBD 600 5 to 7 days SBD 2,421.54 2 hours Kira Kira (Makira) SBD 450 17 hours SBD 1,569.50 45 mins Tulagi (Central) SBD 150 NO FLIGHTS TO DESTINATION Gizo (Western) SBD 600 15 hours SBD 2,036 1 hour 05 mins Noro/Munda (Western) SBD 570 11 hours SBD 1,868 1 hour Lata (Temotu ) SBD 1,000 SBD 3,067 2 hours Tingoa (Rennell & Bellona) SBD 1,568 1 hour Weather Coast Guadalcanal SBD 400- 450 18 hours NO FLIGHTS TO DESTINATION *Reflects best attempts to capture the price of the most direct boat trip, though this involves multiple stops in some instances, such as the Auki slow boat. Source: Staff calculations based on data provided by various transport operators. However, aviation provides somewhat of a lifeline in the most remote areas. A few weekly flights in larger Dash-8 planes service routes between Honiara and the outlying provinces of Rennell and Bellona, and Temotu. While the propensity to fly is higher than the national average (Rennell and Bellona Province: 2.17 trips per year; Temotu: 0.22 trips), the overall scale is still low, implying that aviation cannot offset these areas' structural disadvantages. The combination of weak demand, small planes, and long distances also means that Solomon Airlines faces many of the same diseconomies of scale that affect inter-island shipping.95 According to Solomon Airlines, domestic demand for aviation is growing, given the poor quality of inter-island shipping. The fastest growing routes are also those that are the largest: between Honiara and Munda, Gizo and Choiseul Bay. Extreme weather and land disputes can disrupt aviation schedules. This is particularly true during the cyclone season (Nov–Apr). However, outside these extremes, functioning infrastructure can be rendered inoperable due to its configuration and/or exposure to weather conditions. Within aviation, most provincial airports still lack an all-weather airstrip and have outdated infrastructure and facilities that are poorly maintained and do not meet market expectations. This can lead to long delays in passenger and freight movements and adversely affect tourism flows when weather conditions are poor. Land disputes can also shut down airports; recent examples include the airports of Manaoba in north Malaita and Marau in east Guadalcanal, where flights have been suspended indefinitely due to disputes with local landowners. 95 Smaller twin otter planes, which are the only planes that can land at most provincial airports, must carry fuel for return journeys. This reduces payloads and means that only around half of all seats can be booked for longer journeys (for instance to Choiseul, Makira and Isabel). Flights between Honiara and Lomlom in Temotu, only had 64 percent of the passengers in the return journey to Honiara. On the Honiara-Bellona route it was 90 percent. This bucks the nationwide trend, in which there is typically more passengers flying to Honiara than on the equivalent route out. Solomon Islands: Country Economic Memorandum 143 Connectivity Regression Analyses For the linear regression analyses, the following model was estimated: With y the share of the ward-level 12+ population engaged in income earning activities, X a set of covariates including a constant, a measure for remoteness (the average distance of each ward to all other wards, weighed by population), a set of dummies for connectedness, urban wards and wards with an airport. is a well-behaved error term. Due to the cross-sectional nature of the data and non-random assignment, the interpretation of coefficient estimates should be treated caution. Data and variables are based on the 2019 census. The specification for the difference-in-differences model is the following: With y the outcome variable of interest, D a treatment dummy, T a time period dummy, the difference-in- difference estimator, and a well-behaved error term. The treatment refers to the construction of twelve donor-supported wharf refurbishments completed in rural communities across 2014–2016, financed by the Asian Development Bank (project number 40263-022). Data and variables are at the ward-level and are based on the 2009 and 2019 census. Regression output is available upon request. All non-Honiara wards are categorized according to how well connected they are with Honiara (Figure A3). In each case, connectivity is evaluated in reference to the spatial distribution of necessary connective infrastructure, the quality and regularity of services, costs and safety. Figure A.3 Connectedness at the ward-level 144 Solomon Islands: Country Economic Memorandum • Green = Well connected: Includes wards situated on trunk shipping routes or with good road connection to such a location; also includes wards with good overland connection to Honiara. • Yellow = Moderately connected: Includes wards situated on minor shipping routes, wards where access to Honiara or another well connected ward is possible with a short journey on a small boat; wards with road access to Honiara via a longer overland journey. • White = Poorly connected: Includes wards with, at best, monthly maritime connection with Honiara; and wards where access to a moderately-connected ward is only possible via a longer journey on a small boat or overland. Figure A.4 ADB-financed wharf investments Solomon Islands: Country Economic Memorandum 145 Land Registration and Land Recording in Solomon Islands The most commonly used process for the registration of customary land is set out in the Lands and Titles Act, Part V, Division 1. It includes several steps, which are outlined in the table below. Alternatively, customary land can be registered by settlement (Part IV) or compulsory acquisition (Part V, Division II). Table A.5: Land registration and acquisition under Division 1 of the Lands and Titles Act Land acquisition project proposal applications received from either the National Government or Phase 1 Provincial Assemblies. Land Acquisition Officer (LAO) appointed by either the Commissioner of Lands on behalf of the Phase 2 Government or Provincial Assemblies. LAO with the support of the MLHS Land Unit and Line Ministry or Provincial Assemblies conducts Phase 3 land acquisition following the Land Acquisition Project TOR Step 1 LAO Publish Notice for 1st Hearing to ID landowners and discuss land acquisition subject area Lease land or Step 2 1st Hearing LAO conducts a public hearing Purchase land Step 3 LAO produces an acquisition report outlining the determined landowners of the subject land area If no appeal Move to Step 7 Step 4 90 days appeal period If appeal Go to Magistrate Court (Step 5) If the Magistrate affirms the LAO acquisition Move to Step 7 Magistrate Court determines report and there is no appeal – either affirms or appeal nullifies LAO acquisition If the Magistrate affirms report. the LAO acquisition Step 5 Go to the High Court (Step 6) report and there is an 90 days appeal period – appeal appeal? If the Magistrate nullifies the LAO acquisition Acquisition process ends report High Court decision final Either affirms or overrules Step 6 High Court the Magistrate Court If the High Court affirms LAO decision findings move to Step 7 Cadastral Survey of the Step 7 MLHS Land Unit and Line Ministry assist in this process subject land area Step 8 Vesting Order MLHS Land Unit assists in this process - by preparing VO and a Registration of the subject declaration of trust document Step 9 land area Step 10 Execution of land Lease or Purchase Agreement 146 Solomon Islands: Country Economic Memorandum An alternative process is the recording – rather than the registration – of interests in customary land, as established by the Customary Land Records Act. The different steps of land recording are presented below. Table A.6: Land recording under Customary Land Records Act An area can be declared a recording zone upon request from: (1) the National Government; (2) the Step 1 Public Declaration of Recording Zone Provincial Government; or (3) from three or more landowning groups within the area. Identification and Announcement of Centres identified must be announced through media Step 2 Recording Centres or written notices. Existing land units within the declared recording zones must be declared by landowning groups and Declaration of existing land units within Step 3 their communities at the respective Recording recording zones Centres. The declaration session is to be conducted by the Recording Officer. The application must be on the prescribed form and Application from Land Holding Groups the following must be attached: (1) tribal genealogy; Step 4 claiming ownership of the declared land (2) land boundary (boundary agreement forms units must be jointly signed by parties sharing common boundaries); (3) Land Trust Board. The application must be forwarded to the House of Chiefs (or equivalent) serving the area, for verification Application to be forwarded to House of Step 5 and endorsement before submitting to the Land Chiefs for verification and endorsement Recording Office. Fees if introduced will be paid upon submission of application. The Three Months’ Notice applies only if the application has not gone through stages 1, 2 and 3. Step 6 Three Months’ Notice If the application is disputed the recording process terminates. Documentation and recording of customary land Step 7 Recording begins data, tribal genealogy, survey of land boundaries, and records of established land trust boards. Step 8 Storage of Records Records shall be updated every two years. Source: Sullivan (2007) Solomon Islands: Country Economic Memorandum 147 Summary of RSE and PALM Table A.7: Summary of RSE and PALM 148 Solomon Islands: Country Economic Memorandum Tourism Investment and Comparisons Table A.8: Tourism investment incentives Solomon Islands: Country Economic Memorandum 149 Table A.9: Tourism investment process 150 Solomon Islands: Country Economic Memorandum Table A.10: Tourism sector – Comparison with aspirational peer (Fiji) Indicators Fiji Solomon Islands • Solomon Island is the third largest archipelago in • Stunning palm-fringed the South Pacific with a group of 992 islands white sand beaches • World-class snorkeling and diving (5,750 square • Clear waters kilometers of reefs, a rich diversity of marine life) • Lush rainforests • World war II historical sites, in particular • Vibrant coral reefs, shipwrecks and fallen aircrafts lagoons • Unique cultural heritage-traditional art, Natural attractions • Cultural diversity woodcarvings, music, ancient hillforts, and • State-of-the-art ceremonial skull shrines. conference facilities • Ecotourism-including birdwatching, dense native • Diverse landscape forests, rich biodiversity of flora and fauna, and • Five-star hotels natural features such as the spectacular Lake • World-class snorkeling and Tegano and the Arnavon Community Marine diving Conservation Area and turtle sanctuary • Volume of international visitor arrivals: High (>800,000) • Volume of international visitor arrivals: Varying • Share of leisure tourist: • Share of leisure tourist: Low (<30%) General attributes Large (>55%) • Dominant leisure segment: Marine and adventure • Dominant leisure segment: • Profile as a safe and secure destination: No Couples/family • Profile as a safe and secure destination: Yes • No. of hotels and guest house: 421 (as of December 2023) • No. of hotels and guest house: 259 (as of • No. of International hotels: December 2023), 5% of them are foreign owned 31 • No. international hotel: Nil • 80% of accommodation is Accommodations • No. of rooms: over 1,991 on Viti Levu and 11% found • No. of tourist operators: over 20 (at least 10 are in Yasawa and Mamanuca foreign owned dive business) Island • Occupancy rates (2019): 70-80% • No. of rooms: over 13,000 • Occupancy rates (2023): 90% • Road and other infrastructure quality is good • Well-maintained national parks • More than a dozen golf course • An extensive range of • Road and other infrastructure quality is low restaurants Infrastructure • Sea port: 3 (Honiara, Noro and Gizo) • A wide variety of • Cruise arrivals (2019): 13 accommodation- from budget to five-star, including many large all- inclusive resorts • Cruise arrivals grew significantly after COVID-19 Solomon Islands: Country Economic Memorandum 151 Indicators Fiji Solomon Islands • Key international get way: Nadi International Airport • National airline: Fiji Airways • Key international get way: Honiara International • Connected with over 20 Airport international destinations • National airline: Solomon Airlines Air connectivity • Before COVID 19 Nadi • Connected with 4 international destinations was connected to 26 (Brisbane, Australia; Nadi, Fiji; Port Moresby, international destinations. PNG and Port Vila, Vanuatu) • Fiji Airports also manages • Solomon airlines serves 21 domestic destinations the Nausori International Airport in Suva and the 13 outer-island airports • Fiji has a wide range of tour options, covering land, air, and sea. Tours include island and snorkeling day trips, city tours, scenic flights, Tourism industry day hikes, cultural • Business travelers dominate maturity experiences, and longer dive expeditions • Package holidays to Fiji are commonly sold by international tour operators • Fiji is marketed with the well-known brand “Fiji— Where Happiness Finds • Solomon Islands is branded as “Solomon Is.” You” The brand was promoted in a 2019 campaign, • Tourism Fiji is responsible developed by Tourism Solomons in partnership Marketing and for marketing Fiji as a with Solomon Airlines and the Government of promotion tourism destination Australia • The private sector drives • Tourism Solomons is responsible for marketing Fiji’s tourism industry Solomon Islands as a tourism destination • Fiji has multiple regional tourism and destination marketing organizations • The Ministry of Commerce, Trade, Tourism, and • National Development Strategy 2016-2035 Transport is the lead proposes an ambitious visitor target of 50,000 government agency arrivals by 2025, it does not outline any specific for tourism policy and initiatives, nor substantive plans in relation to planning tourism • Fiji tourism development • Solomon Islands Tourism Recovery Plan 2021- Government support plan 2030 two main objectives: (i) to get the industry and policy • Fijian tourism 2021 back to its 2019 position and (ii) to grow the • Government implemented industry with a target of 100,000 arrivals per many incentives including annum by 2035. Achievement of the ambitious tax free zones and 100,000 visitor target relies on visitor arrivals tax holidays to attract reaching 2019 levels by 2023 investment in the hotel industry during early days 152 Solomon Islands: Country Economic Memorandum 154 Solomon Islands: Country Economic Memorandum