Growth and Resilience Pacific Islands Systematic Country Diagnostic Update Kiribati, Republic of Marshall Islands, Federated States of Micronesia, Nauru, Palau, Samoa, Tonga, Tuvalu, Vanuatu January 2023 © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 20 19 18 17 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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The World Bank therefore does not warrant that the use of any third- party–owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. ISBN (paper): — ISBN (electronic): — DOI: — Cover photo: © istockphoto/shalamov Cover design: Florencia Micheltorena. Library of Congress Cataloging-in-Publication Data has not yet been requested. SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Contents Executive Summary 8 1. Introduction 18 Regional context 19 Challenges today and in the coming years—PIC-9 SCD Update 20 2. Developments in growth and poverty reduction since the 2016 SCD 27 3. Fundamental constraints facing the small Pacific Island economies 33 Constraints of smallness, remoteness and internal dispersion 34 Constraints of fragility, high vulnerability to disasters, and climate change 38 4. Addressing constraints: pathways and priorities 44 Pathway 1: Increasing economic opportunities 45 Pathway 2: Maximizing human capital and its economic returns 61 Pathway 3: Building resilient incomes and livelihoods 76 Fundamental Enablers: Strengthening governance and the business environment 86 5. Development priorities for today and the future 104 Prioritization Step 1: Applying the prioritization criteria to key issues identified in the SCD Update 106 Prioritization Step 2: Identification of country and regional priorities 107 Annexes Annex 1: Supplementary tables and figures 115 Annex 2: Analytical work used for SCD Update 130 Figures Figure 1: Grants disbursed by official donors as percent of GDP, average 2011-20 21 Figure 2: Donor share of disbursed grants, average 2011-20 21 Figure 3: Moving Forward—From constraints to achieving the twin goals 22 Figure 4: GDP growth in most PIC-9 countries increased between 2010-2019 … 29 Figure 5:… but COVID-19 has been a large negative shock on growth 29 Figure 6: Poverty is higher in RMI than comparator upper-middle income countries and lower in Kiribati and Vanuatu than comparator lower-middle income countries 30 Figure 7: Many households lack access to at least some basic services, particularly in Vanuatu and Kiribati 30 Figure 8: Spatial poverty ($3.20-line) for selected countries 31 Figure 9: Spatial distribution of the poor ($3.20) for selected countries 31 Figure 10: Projected poverty trends 2016-20, selected countries 32 1 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 11: The PIC-9 countries are among the smallest and most remote countries in the world … 35 Figure 12:…and among the most internally dispersed 36 Figure 13: Growth over the last two decades has been largely driven by services 36 Figure 14: Share of employment outside the formal sector 36 Figure 15: Tourist arrivals have increased in most PIC-9 countries in the last two decades … 36 Figure 16: … and along wi th agriculture, fishing and forestry, tourism forms a large share of PIC-9 economies 36 Figure 17: The PIC-9 countries have relatively high volatility in government revenues … 37 Figure 18:…and high volatility in spending 37 Figure 19: Import dependence is among highest in the world 37 Figure 20: Gross debt levels vary across the PIC-9 37 Figure 21: Aid flows by country, 2010-2020 (as % of GDP) 38 Figure 22: Occurrence of disasters in PIC-9 Countries has increased 42 Figure 23: COVID-19’s impact on tourism and travel (T&T) in the PICs and other SIDS 47 Figure 24: In-country travel expenditure by tourist arrivals, 2008-2018 48 Figure 25: Migrants and remittances 54 Figure 26: Mobile phone coverage is still low compared to other countries… 57 Figure 27: … as is internet coverage 57 Figure 28: The South Pacific lags in Internet connectivity, especially fixed broadband 58 Figure 29: The adoption of digital technologies trails world averages in the South Pacific 59 Figure 30: PIC-9—Human Capital Index scores, 2020 61 Figure 31: Maternal Mortality Ratio (per 100,000 live births, 2010-2017) 62 Figure 32: Universal Health Coverage Service Coverage Index point change (2010 to 2019) 63 Figure 33: Universal Health Coverage Service Coverage Sub-Index—PIC-9 average (2010 to 2019) 63 Figure 34: Obesity increased over the last decade… 64 Figure 35:…and diabetes prevalence increased even faster 64 Figure 36: Stunting improving but remains stubbornly high in some PIC-9 countries 64 Figure 37: Total Net Enrolment (TNER) at the primary and lower secondary age is lower in FSC countries 67 Figure 38: Total NET Enrollment Rate (TNER) of upper-secondary aged population is lagging 68 Figure 39: Harmonized test scores also lag regional and comparator averages 69 Figure 40: There is a limited wealth gap in foundational numeracy skills 69 Figure 41: Women are much less likely to work than men in all PIC-9 countries… 72 Figure 42:…and much more likely to work in COVID-19 affected sectors such as retail and tourism 72 Figure 43: PIC-9 women’s political participation is among the world’s lowest in, with little progress between 2016 and 2021 74 Figure 44: Prevalence of physical or sexual intimatepatner violence among ever-partnered women in PIC-9 75 Figure 45: Prevalence of non- partner sexual violence in PIC-9 75 Figure 46: Informal social assistance (given/received) by quintile as a share of mean household consumption 79 Figure 47: Social assistance Spending as a percentage of GDP, latest available data before the pandemic 80 Figure 48: Coverage and adequacy of social insurance for total population and poorest quintile 81 Figure 49: Net FDI inflows are low 87 Figure 50: Governance indicators show some modest improvements (2015-2020) 87 Figure 51: Digital and sustainable trade facilitation (2021) 89 Figure 52: PIC-9 fiscal balances, 2015-2020 95 Figure 53: Average domestic revenue-to-GDP ratio, 2015-2020 97 Figure 54: PIC-9 revenue mix. 2015-2020 97 Figure 55: PIC-9 public expenditures, 2015-2020 97 Figure 56: PIC-9 current expenditure mix, 2015-2020 97 Figure 57: PIC-9 external public debt (2020) 98 Figure 58: Statistical Performance Index (2016–2019) for PICs with SPI data available 102 Figure A-1: Potential coverage with delivered vaccines, partial, full and additional dose coverage (of total population), 3 May 2022 121 2 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure A-2: Shipping liner connectivity for Pacific Island Countries (Index, 100 is maximum in Q1 2006) 122 Figure A-3: Much of the population often not living on the main island 122 Figure A-4: Total aid flows to the PIC-9, 2009-2019 (as % of GDP) 122 Figure A-5: The PIC-9 countries have a relatively higher prevalence of overweight adults… 123 Figure A-6: …which translates into a higher pr evalence of diabetes among adults 123 Figure A-7: Poverty rates ($3.20 line) are considerably lower for households whose head has tertiary education 123 Figure A-8: Gross enrollment ratio in early childhood education is less than half in a number of countries 123 Figure A-9: Individuals with more education are more likely to have wage employment Share of people aged 20 to 60 who are employed for a wage by highest level of education 124 Figure A-10: Primary and Secondary Completion Rate 125 Figure A-11: Expected years of schooling is between structural and aspirational peers in most PIC-9 countries, except RMI and Vanuatu 125 Figure A-12: Girls are besting boys in Tonga upper secondary exams (pass rates in 2020 at the upper secondary level by gender and grade) 126 Figure A-13: Many students fail to achieve a minimum proficiency level in reading at the end o f grade 6, particularly boys 127 Figure A-14: Population-weighted average distances to nearest secondary school (km) are farther on outer islands—prohibitively so in Tuvalu and RMI 127 Figure A-15: Share of STEM occupations in men and women’s employment in PIC-9 128 Figure A-16: Youth unemployment rates (ages 15-24) in PIC-9 128 Figure A-17: Mobile phone coverage 128 Figure A-18: Internet access 128 Figure A-19: Projected fiscal balances (after grants and trust fund flows) as a percent of GDP 130 Figure A-20: Framework of the microsimulation 134 Figure A-21: Modeling process 135 Figure A-22: COVID-19 stimulus in the PIC-9 137 Tables Table ES1: Summary of key underlying characteristics by PIC-9 country 12 Table ES2: Country-specific development priority solution areas 14 Table 1: Summary of key underlying characteristics by PIC-9 country 23 Table 2: Average annual losses due to disasters as a percentage of GDP 42 Table 3: Uneven tourism growth rates across the PIC-9 before COVID-19 46 Table 4: Potential impact of VDS reforms on revenues 52 Table 5: PICs’ access to key labor mobility schemes 53 Table 6: Key agriculture-related characteristics of PIC-9 countries 83 Table 7: Evolution of the risk of distress in the PIC-9 countries 99 Table 8: Development priorities and solution areas 107 Table 9: Country-specific development priority solution areas 110 Table A-1: PIC-8 SCD Prioritization of solution areas 115 Table A-2: PIC-8 SCD Country specificity of very high priority solution areas 118 Table A-3: Selected indicators for PIC-9 120 Table A-4: Early reading assessments in Pacific Island countries show well less than half of students can read properly 126 Table A-5: Provident funds in the studied Pacific countries 129 Table A-6: Fiscal projection scenarios 132 Table A-7: Feasibility filter 133 Table A-8 Key assumptions and limitations in the macro-micro simulations approach 136 Table A-9: Summary of key fiscal measures to support households and firms in the PIC-9 138 3 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Acknowledgments This Systematic Country Diagnostic Update was prepared by a team consisting of: David Gould (Task Team Leader, Program Leader, EEADR); Matthew Wai-Poi (Task Team Leader, Lead Economist (EEAPV); Anna Robinson (Economist, EEAM2); Andrew Blackman (Senior Economist, EEAM2); Demet Kaya (Senior Economist, EEAM2); Ruth Nikijuluw (Economist, EEAM2); Tuimasi Ulu (Research Analyst, EEAM2); Vishesh Agarwal (Research Analyst, EEAM2); Kristen Himelein (Senior Economist, EEAPV); Taufik Indrakesuma (Economist, EEAPV); Darian Naidoo (Economist, EEAPV); Chris Hoy (Young Professional, EEAPV); Shohei Nakamura (Economist, EEAPV); Ruth Llovet (Young Professional, ELCPV); Virginia Horscroft (Senior Public Sector Specialist, EEAG2); Juliana Weingaertner (ET Consultant, EEAG2); Robert Gilfoyle (Senior Financial Management Specialist, EEAG2); Bonnie Sirois (Senior (Financial Management Specialist, EEAG2); Michael Osborne (Senior Procurement Specialist, EEAR2); Donna Andrews (Senior Public Sector Specialist, EPSPA); Chris Miller (Senior Private Sector Specialist, EEAF2); Jessie McComb (ET Consultant, ETIMT); Antoine Coste (Economist, EEAF2); Katia D’Hulster (Lead Financial Sector Specialist, EEAF2); Dara Lengkong (Senior Financial Sector Specialist, EEAF2); John Plevin (Financial Sector Specialist, EFNRF); Rebecca Last (Operations Officer, CEAA1); Donna Chung (Senior Program Officer, GTFS1); Sara Batmanglich (Senior Operations Officer, GTFS1); Patrick Barron (Adviser, GTFS1); Indira Konjhodzic (Lead Operations Officer, GTFS1); Lindsey Jones (ET Consultant, GTFS1); Bianca Adam (Senior Operations Officer, GTFS1); James Neumann (Senior Counsel, IDD05); Sharada Srinivasan (Digital Development Specialist, IDD01); Giorgia Demarchi (Senior Social Development Specialist, SEAS1); Sonya Woo (Senior Social Development Specialist, SEAS1); Dimitria Gavalyugova (Consultant, SEAS1); Rebekah Ramsay (Social Development Specialist, SEAS1); Kari Hurt (Senior Operations Officer, HEAHN); Susan Ivatts (Senior Health Specialist, HEAHN); Lars Sondergaard (Lead Economist, HEAED); Ryoko Tomita (Senior Education Specialist, HEAED); Maude Ruest A. (Consultant, HEAHN); Wayne Irava (Health Specialist, HEAHN); Carol Atieno Obure (Health Economist, HEAHN); Mesulame R. Namedre (Consultant, HEAHN); Robert J. Flanagan (Consultant, HEAHN); Matthew Dornan (Senior Economist, HEASP); Sandor Karascony (Senior Economist, HEASP); Kirstie Petrou (ET Consultant, HEASP); Kenia Parsons (Social Protection Specialist, HEASP); Habiba Gitay (Senior Climate Change Specialist, SEAU1); Artessa Saldivar-Sali (Senior Municipal Engineer, SEAU1); Mitsunori Motohashi (Senior Energy Specialist, IEAD1), Satoshi Ogita (Senior Transport Specialist, IEAT1); Daniel Street (Senior Country Officer, CEAOP) Elizabeth Pechan (Country Officer, CEAOP); Amy Luinstra (Senior Country Officer, CEGGB); Shabnam Hameed (Operations Officer, CEGGB); Subrata Barman (Operations Officer, CN4UP); Bernardo Contri (Operations Officer, CN4UP); Deva De Silva (Resident Representative CEAOP), Milissa Day (Senior Country Officer, CEAOP); Toufiq Ahmed (Operations Officer, EACNF); and Michelle Lee (Program Assistant, EACNF). Overall guidance and supervision provided by Stephen Ndegwa (Country Director, EACNF), Lars Christian Moller (Practice Manager, EEAM2), Rinku Murgai (Practice Manager, EEAPV), Fily Sissoko (Practice Manager, EEAG2), Cecile Niang (Practice Manager, EEAF2), Nabila Assaf (Manager, GTFS1). The team is grateful for the support of Paul Vallely (Operations Manager, EACNF), Degi Young (Resident Representative, EACNF), Lasse Melgaard (Resident Representative, EACFF), Annette Leith (Resident Representative, EACSB), Fei Deng, Program Leader, IEADR), Aneesa Arur (Acting Program Leader, HEAHN), Ruchira Kumar (Senior Economist, CAPCE), and Eugeniu Croitor (Risk Management Officer, MIGEC). Peer reviewers were Tobias Haque (Lead Economist, ESAMU), Sam Freije-Rodriguez, Sandu Kojocaru, Kamer Ozdemir, Kamira Saleh, Liliana Do Couto Sousa, Senior Economist (EAEPV) and Stephen Howes, Director, Development Policy Centre (Australian National University). Regional Vice Presidents: Manuela V. Ferro (IBRD) Alfonso Garcia Mora (IFC) Hiroshi Matano (MIGA) Country Director: Stephen N. Ndegwa Regional Director: Hassan Zaman Practice Managers: Lars Christian Moller, Rinku Murgai Task Team Leaders: David Gould, Matthew Wai-Poi 4 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Acronyms AML/CFT Anti-Money Laundering and Countering IMF International Monetary Fund Financing of Terrorism IT Information Technology APTC Australian Pacific Training Coalition IPCC Intergovernmental Panel on ASP Adaptive Social Protection Climate Change CARES Coronavirus Aid, Relief, and Economic IUU Illegal, Unreported, and Unregulated Security kWh kilowatt-hour Cat DDO Catastrophe Deferred Drawdown Option KIR Kiribati CCA Climate Change Adaptation KYC Know Your Client CIT Corporate Income Tax LMICs Lower Middle-Income Countries CLRW Come Let’s Read and Write MAFF Ministry of Agriculture and Food, COFA Compact of Free Association Forestry and Fisheries CPA Citizen Participatory Audit MBs Megabytes CROP Council of Regional Organizations MCS Monitoring, Control, and Surveillance in the Pacific MPO World Travel and Tourism Council DAI Digital Adoption Index MSMEs Consumer Price Index DRF Disaster Risk Finance MTDS Medium-Term Debt Strategies DRM Disaster Risk Management MTI Macroeconomics, Trade, and Investment DSA Debt Sustainability Analysis NCDs Non-Communicable Diseases DSF Debt Sustainability Framework NGOs Nongovernment Organizations EAP East Asia and Pacific NRU Nauru ECE Early Childhood Education NSO National Statistics Office ECP Economic Citizenship Program ODA Overseas Development Assistance EEZs Exclusive Economic Zones OECD Organisation for Economic Co-operation EHCI Early Human Capability Index and Development EM-DAT Emergency Events Database PACs Public Accounts Committees ENSO El Nino Southern Oscillation PACER Pacific Agreement on Closer Economic EU European Union Relations FCS Fragile And Conflicted Situations PAE Party Allowable Effort FDI Foreign Direct Investment PALM Pacific Australia Labour Mobility FFA Forum Fisheries Agency PATA Pacific Asia Travel Association FSM Federated States of Micronesia PCRAFI Pacific Catastrophe Risk Assessment GBs Gigabytes and Financing Initiative GBV Gender-Based Violence PFM Public Financial Management GDP Gross Domestic Product PGS Participatory Guarantee System GEF Global Environment Facility PIC Pacific Island Countries GRID Green Resilient and Inclusive Development PIC-9 Nine Small Pacific Island Countries HACCP Hazard Analysis Critical Control Point PIF Pacific Island Forum HCI Human Capital Index PIT personal income tax HIES Household Income Expenditure Survey PILNA Pacific Island Literacy and Numeracy HLO High Level Outcome Assessment ICT Information, Communication PLW Palau and Technology PNAU Parties to the Nauru Agreement IDs Identifications PNG Papua New Guinea IFC International Finance Corporation RMI Republic of Marshall Islands 5 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE RRA Risk and Resilience Assessments TUV Tuvalu RSE Recognized Seasonal Employer TVET Technical and vocational training SA Social Assistance UHC Universal Health Coverage SAI Supreme Audit Institutions UMIC Upper-Middle Income Countries SAIDI System Average Interruption Duration UN United Nations Index UNCAC United Nations Convention against SCD Systematic Country Diagnostic Corruption SDG Sustainable Development Goal UNICEF United Nations Children’s Fund SIDS Small Island Developing States UNWTO United Nations World Tourism Organization SME Small to Medium Enterprise US United States SOE State-Owned Enterprise VAT Value Added Tax SPI Statistical Performance Index VDS Vessel Day Scheme SPS Sanitary and Phytosanitary VUT Vanuatu STEM Science, Technology, Engineering, WB World Bank and Mathematics WCPFC Western and Central Pacific Fisheries SWAS Seasonal Worker Superannuation Commission Administration Service WCPO Western and Central Pacific Ocean SWF Sovereign Wealth Fund WDI World Development Indicators SWP Seasonal Worker Programme WEO World Economic Outlook TC Tropical Cyclone WGII IPCC Working Group II TFA Trade Facilitation Agreement WHO World Health Organization TFIs Trade Facilitation Indicators WSM Samoa TON Tonga WTTC World Travel & Tourism Council TSS Temporary Skill Shortage 6 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE EXECUTIVE SUMMARY 7 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE T he Systematic Country Diagnostic (SCD) economic and disaster risks. These challenges translate covers a group of nine small Pacific Island into a common set of macroeconomic outcomes nearly Countries (PIC-9)—Kiribati, Marshall Islands, all PIC-9 countries suffer from high public spending, the Federated States of Micronesia, Nauru, large trade deficits relative to the size of the economies, Palau, Samoa, Tonga, Tuvalu, and Vanuatu. The heavy reliance on external flows (such as foreign aid document updates the previous SCD, completed in and/or remittances) to fund the deficits, and elevated 2016, and assesses the emerging challenges arising risks of debt distress due to low debt-carrying capacity. from the COVID-19 pandemic and increasing climate change risks. It refreshes the pathways identified in the Another consequence of the Pacific Islands’ earlier SCD to reflect underlying structural constraints economic geography further hampers development— as well as emerging impediments to development now frequent and intense natural disasters, further in the foreground; the pathways to development are: exacerbated by climate change. The Pacific Islands 1) increased economic opportunities; 2) maximizing have a very high exposure and vulnerability to the human capital and its economic returns; and 3) building impacts of climate change on land, marine, and water more resilient incomes and livelihoods. As the PIC-9 resources and climate-sensitive livelihoods. Increased SCD Update shows, while each country is unique, there sea levels and storm surges threaten to exacerbate are common challenges across the region. Moreover, coastal inundation, cause shorelines to retreat, and development priorities cannot be viewed in isolation— increase saltwater intrusion into freshwater aquifers they are largely interconnected, with progress in one and potable water. Environmental risks impede the area depending on progress in many others. accumulation of productive infrastructure, put pressure on fiscal balances, and shift attention and resources Small, remote islands with internally dispersed from other fundamental development activities. populations form an economic geography that imposes structural constraints on both the private The combination of distance and dispersion raises and public sectors. The PIC-9 countries consist of the cost of delivering public services, particularly small islands scattered across a vast expanse of health care and education. High transportation costs the Pacific Ocean—for example, Kiribati has a mere make imported inputs, including medical equipment and 120,000 people spread over tiny islands that span a supplies, more expensive. Moreover, skill shortages in marine area as large as India. Economies of scale are the local labor market constrain effective public service limited, and costs associated with imports, transport delivery. Given these unique Pacific characteristics, and logistics are high. The PIC-9 countries are largely governments must decide the range of services offered left with a narrow set of key economic activities— in each region. They must also decide to whom these tourism, fishing, and agriculture. The limited economic services will be provided, how they will be provided, diversity means increasing vulnerability to external and how they will be funded. Making these decisions 8 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE will often involve difficult tradeoffs between equity, Along with greater development needs has come efficiency, and other objectives. greater development partner support—a situation that presents benefits as well as challenges. Australia, Recent events have made some of these New Zealand, China, Japan, the EU, the United States, development challenges more pressing and others and other bilateral and multilateral partners have more nuanced. By imposing travel restrictions and promised increased financial and technical support to other measures, most PIC-9 countries managed the region on top of already substantial flows. Given to delay COVID-19 infections until the start of 2022. the inherent challenges the Pacific region faces, aid Postponing infections did not prevent widespread is expected to be an ongoing and increasing source of disruption in the PIC-9 economy, with tourism- finance. Grants to the Pacific grew over 7.8 percent dependent countries suffering the greatest blow. annually from 2011-20. The Pacific region is among the The pandemic’s economic toll, in addition to the highest recipients of grant aid as a share of GDP among inflation spikes seen since Russia's invasion of other small island developing states and lower middle- Ukraine, pointed to the need for broadening income countries. economic opportunities. COVID-19 also highlighted the Pacific region’s vulnerability to future external shocks—those related to health as well as those Increasing Economic Opportunities related to the global impacts of economic shocks and climate change. Better service delivery will be key Enhancing economic opportunities starts with to improving the readiness to respond to unforeseen industries already making significant contributions events that disrupt the regional economy. to PIC-9 economies—tourism and fishing. Tourism is likely to remain a key driver of economic growth and With PIC-9 countries needing to jumpstart source of livelihoods. As the industry recovers from growth, COVID-19 and greater disaster risks have the pandemic, the challenge will be to reset tourism demonstrated the importance of connectivity and positively, focusing on the goal of building a sustainable, building resilient economies. Limited physical and inclusive, and resilient sector. Demand will be key. digital connectivity between countries, population Investments in marketing, promotion, and product centers, and outer islands are key constraints that development will need to be paired with those in digital slow expansion into potential new areas of economic transformation at the government, destination, and activity as well as limit access to global knowledge. business levels. Countries getting a large share of Resilience can help broaden the economic base and their incomes from ocean fisheries fared much better mitigate the economic and human costs of unexpected during the pandemic. The system of tuna-fishing economic and health shocks and natural disasters. It permits serves as a model for cooperation among PIC- can be built through risk reduction; financial and fiscal 9 countries. They could further increase the permits’ buffers; and improvements in the business climate, value by extending fishing rights over larger areas or labor mobility, education, health, and social protection longer times and by making the permits transferable mechanisms. Addressing connectivity and resilience are among purchasers. Estimates of potential added complements to structural reforms and investments revenue range from 1 percent to 8 percent. designed to improve access to markets, jobs, and critical public services. With limited domestic opportunities, international labor mobility is an important path for delivering The PIC-9 SCD Update complements “2050 significant and pro-poor benefits in PIC-9 countries. Strategy for the Blue Pacific Continent.” Through Working overseas confers benefits to migrants, their the Pacific Island Forum (PIF), Pacific leaders have households, communities, and sending and receiving recognized that building a strong and resilient region countries. In the PIC-9 countries, remittances are is critical for sustainable development. Pacific leaders a significant income source that helps bring many are now developing their “2050 Strategy for the Blue households out of poverty. During COVID-19 migrant Pacific Continent,” which focuses on the need to ensure remittances provided much needed financial support collective action on social, cultural, environmental, and to the region, despite travel restrictions. With economic integrity. Many of the elements of this PIC-9 borders reopening, sending countries could expand SCD Update complement thematic areas set forth in opportunities by targeting the skill enhancement the 2050 Strategy. 9 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE required under existing schemes and focusing on new gains in the use of existing resources. In education as destinations, such as Canada and Korea. Australia in health care, PIC-9 spending is high by international and New Zealand now mostly recruit skilled labor for standards. Even so, poor learning outcomes remain a permanent migration, but greater openness to all forms significant challenge. Expanding and improving early of potential PIC-9 migration would be a boon to sending childhood education is one key area identified that will and receiving countries. give students a better grounding in fundamentals like reading. Programs to enhance teaching skills across all Digital transformation holds great promise for grade levels are showing good results. PICs. Considering the Pacific Islands’ small, dispersed populations and vast distances, the shift to digital has As the Pacific Islands look for additional sources significant potential to reduce transaction costs, create of future job creation, it will be critical to ensure jobs, support innovation, and expand access to services women can take advantage of such employment and markets. Fixed broadband networks are critical opportunities. Women are less likely to have formal for stable, high-capacity data transactions—such as jobs than men, with detrimental effects for both online education, e-commerce, video streaming, and women’s welfare and the economy. Instead, women are enterprise use. Increased public sector investments more likely to take informal jobs, often in subsistence in digital connectivity infrastructure—particularly agriculture and petty trading occupations that are middle- and last-mile fiber optic networks—are critical lower paid and make them more vulnerable. Improving to PICs overcoming the “tyranny of distance.” The focus women’s labor market prospects will require favorable needs to be on reducing the digital divide by expanding legal and policy environments, reducing barriers and international connectivity and local broadband vulnerabilities that inhibit work, and encouraging services to outer islands and remote communities. education in skills relevant to the job market. PIC- However, infrastructure alone won’t be enough. The 9 countries suffer from high gender-based violence, PIC-9 counties also need to prioritize support for the and gains in women’s employment with effective legal development and adoption of whole government and support systems will support greater safety and digital strategies focused on laying the foundations for empowerment. priority digital public services, such as for education and healthcare. They also need to accelerate work on enabling legal and regulatory frameworks for digital Building more resilient incomes and services and removing barriers to inclusion. livelihoods Maximizing human capital and its Emergency preparedness and response systems need strengthening to ensure greater resilience to economic returns ongoing and future risks. Progress is needed in three key areas: 1) development of disaster and financial risk Access to basic health and education is management policies, with planning tied to contingent fundamental to improving human development and financing; 2) facilitating the market for other disaster livelihood opportunities, increasing productivity risk financing products (including insurance) to meet and potential for labor mobility, and responds to the emergency needs of households, private sector, resilience challenges. By international standards, PIC- and governments; and 3) strengthening policies and 9 health budgets receive a high share of government legislation linked to climate resilient investments. resources, in part due to their small size and geographic Climate smart investments could include resilient constraints. However, the region still faces serious infrastructure and climate informed settlement policies health challenges—for example, persistently high and management plans. Social protection to mitigate incidences of chronic non-communicable diseases the impact of shocks would benefit from adaptive (NCDs) like diabetes. Health outcomes could be approaches that reduce reliance on informal safety improved through allocative efficiency that directs nets in favor of universal systems that are responsive more to preventative measures, such as policies that to shocks and protect vulnerable households. Key encourage the availability of and access to healthy features include early warning systems, long-term foods. In strengthening health financing, the largest financing, and the digital tools for scale and speedy source of future investment is likely to be efficiency response. 10 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Agriculture and coastal fisheries play important roles also linked to failures in meeting goals, poor budgetary in providing employment, meeting the subsistence outcomes, and inadequate service delivery. Deficits and needs of the poor, and mitigating economic shocks. debt are potential problems that are likely to flare up in However, a lack of income diversification means times of economic shocks. More effective PFM systems households are extremely vulnerable to shocks in with a combination of greater transparency, increased agriculture itself (e.g., droughts, floods, and tropical capacity among finance, accounting, and procurement cyclones) as well as to long-term changes to agricultural staff, and professional auditing procedures would and fishery productivity due to the cumulative effects improve public sector efficiency and decision making. of climate change. Tourism might hold the key to The path to sustainable public finances lies through more resilient farming and fishing industries. Tourists increasing domestic revenue, improving the efficiency typically want to eat local but demand high quality, of spending, and strengthening the rules and capacity making tourism sectors a substantial potential market for managing liabilities and sovereign wealth funds. for locally grown produce, marine products, and value- Current and accurate data are fundamental to good added niche products. At present, most food consumed governance, including PFM. The PIC-9 nations’ common by Pacific Island tourists is imported. Agritourism economic geography creates opportunities to explore based on organic production systems and extensive cooperation in the increasingly important data realm— and largely pristine coastal and marine resources may for example, sharing regional best practices. Innovative help to support both resilient food supplies as well as approaches can help to overcome specific challenges. boost the tourism sector. For example, in PICs as elsewhere, phone surveys have been used to monitor shocks’ socioeconomic impacts in The COVID-19 pandemic and exposure to natural a cost-effective and timely way. disaster risks has clearly demonstrated the vulnerability of PIC-9 economies’ heavy reliance PIC-9 countries are highly dependent on external on a narrow base of economic activities. While the assistance, and recent geopolitical dynamics add current economic structure can continue to produce another layer of complexity to the existing fragility modest future growth, events since 2019 have laid context. In the past five years, the Pacific has become bare the importance of greater economic diversification the focus of more intense strategic competition and resilience to shocks. The region will benefit from a among geopolitical players. Given this and the inherent more dynamic private sector that attracts investment, challenges the Pacific region faces, aid is expected to be as well as trades, innovates, and produces goods an ongoing and increasing source of finance. Heightened and services with greater productivity than today. competition for influence in the region may lead to a Strategies to improve the business climate should greater abundance of bilateral development assistance, include reducing the regulations that increase the cost which will require enhanced coordination and capacity of starting and operating a business, rethinking land- to absorb resources and greater monitoring and use and planning policies that stifle urban growth, using evaluation to ensure development impact. A less governance reforms and digital tools to lower the cost benign impact may be increased policy uncertainty as of trade, and developing financial market infrastructure established alliances are challenged. and new financial products. The PIC-9 development priorities cannot be viewed in isolation—they are largely interconnected, with Fundamental enablers: strengthening progress in one area depending on progress in governance and the business many others. Tourism and agricultural resilience are closely linked. Good governance and stable environment public finance underpin all aspects of increased economic opportunities, maximizing human capital Public sectors play a larger role in the PIC-9 and its economic returns and building more resilient economies than in most other developing economies, incomes and livelihoods. In turn, connectivity and the magnifying the importance of good governance and digital transformation are essential for handling the stable public finances. Weaknesses in governance and information and data needed for better governance— public financial management (PFM) systems undermine plus global marketing for tourism, greater labor the efficient and effective use of resources. They are mobility, better health care and education outcomes, 11 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table ES1: Summary of key underlying characteristics by PIC-9 country Country Distance Smallness Reliance Reliance Income Human Dependence Dependence Risk of to (popula- on wage on aid (GNI Capital on Tourism on Fishing Debt markets tion)1 remittances flows per Index4 (Percent of License Distress7 (km)1 (Percent of (Percent capita, GDP)5 revenues GDP)2 of GDP)3 US$)1 (Percent of GDP)6 Kiribati 12,321 119,000 8 42 2,960 0.49 5 62 High RMI 12,057 39,000 13 37 4,940 0.42 12 20 High FSM 11,750 115,000 6 32 3,950 0.51 18 17 High Nauru 12,250 11,000 5 32 11,000 0.51 1 31 High Palau 11,027 18,000 1 12 14,390 0.59 38 3 High Samoa 12,776 198,000 25 15 4,050 0.55 25 0 High Tonga 13,153 106,000 39 22 5,190 0.53 11 0 High Tuvalu 12,774 12,000 10 92 5,820 0.45 6 56 High Vanuatu 12,796 307,000 10 14 3,190 0.45 23 0.3 Medium KEY: Importance High Medium Moderate Notes: (1) See Table A-3; (2) See Figure 25; (3) See Figure 1; (4) See Figure 30; (5) See Table 3; (6) WDI and National Budgets, average FY18-FY21; (7) See Table 7. and adaptive social protection systems. The many interconnections underline the importance of whole Summing-up regional and country government digital approaches that bring a wide range priorities of programs and systems into a single digital universe. Investments in digital infrastructure will be needed to The SCD Update concludes with an analysis that develop secure government networks and data centers, prioritizes the key issues and constraints within a cloud processing systems, secure data exchanges framework that recognizes the differences among between systems and shared services. the PIC-9 countries. The aim of this country-by- country review of priority areas is to identify those A common economic geography means the PIC-9 solution areas that promise to yield the highest impacts countries share many of the same challenges; it also on the World Bank’s support to countries to achieve the provides the basis common approaches in meeting twin goals of reducing poverty and promoting shared some of them. The Pacific Island countries increased prosperity with a manageable number of high priorities. revenues from tuna fishing through collaboration under Prioritization is carried out in a two-step process. the Parties to the Nauru Agreement. The success has led The first step reviews the main issues identified in to few other significant cooperative ventures. Regional the SCD against a set of prioritization criteria: direct cooperation mechanisms like the Pacific Island Forum, impact on the sustainable twin goals; connection to working under regional and global agreements, can help other priorities (spillovers—indirect impact on goals); coordinate efforts to facilitate development on shared urgency given COVID-19, disasters risk, and climate challenges under their new “2050 Strategy for the Blue change; time horizon (immediacy of impact); evidence Pacific Continent.” These efforts at greater regional base; and feasibility. The step second applies the first cooperation and integration not only depend on policy considerations to each of the nine countries to review collaboration, but also on having sufficient, comparable, the country-specific relevance of high priority issues. and credible economic data as a base for dialogue. The aim is to limit the number of high priority issues for 12 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE each country to those most important with respect to others. However, all countries will need to pay close making progress toward the twin goals. attention to financial risk mitigation measures and revenue mobilization, including those in the US The PIC-9 countries face common issues, but each Compact. Renegotiation of the agreement will likely country faces unique challenges shaped by their imply more fiscal independence. characteristics. Each country’s key characteristics • Among the other common high priorities are and risks to help determine the most pertinent better health care (particularly addressing NCDs), development priorities are summarized in Table 1. Many improving quality of education, greater women’s of the underlying constraints and their consequences formal employment and empowerment, and are common across the region, but variation in their improving the investment climate. country characteristics will lead to different emphasis on development priorities. These characteristics, the The region and country-specific high-priority solution similarities and differences within the region, include: areas are summarized below (Table 2), taking into consideration these country characteristics. The • Nearly all countries are extremely remote, meaning regional solutions identified in the first prioritization high transport costs and the need for greater step are represented by the rows of the table while investments in digital connectivity and services; the columns indicate the relative importance of each • Nauru, Palau, and Tuvalu have extremely small solution to each country. Greater priority on tourism, populations, which limits their capacity for private for example, focuses on countries where tourism is sector opportunities and increases the size of the currently high and/or there is potential for future public sector as a share of the economy. All three growth. Expanding opportunities in oceanic fishing is countries suffer from smallness and challenges in particularly relevant to those PIC-9 countries in The providing services; Western and Central Pacific Ocean accounting for • Nauru, Palau, and Vanuatu are highly dependent more than 25 percent of global tuna catch. Oceanic on services, particularly tourism. Nauru is a special fishing and many other priorities benefit from regional case because its economy is nearly completely action or coordination. For example, options to increase dependent on its Regional Processing Centre, oceanic fishing revenues, outlined earlier in the report, funded under a memorandum of understanding require coordination among Parties to the Nauru with Australia. Tourism economies will need to pay Agreement (PNA). New technology offers the hope of special attention to strengthening health services cheaper and more frequent data to support evidence- as well as looking to diversify economically, both based policymaking in the region and monitoring within the tourism industry and by creating linkages of household welfare and policy outcomes; pilots in to agriculture and other sectors; one country, such as High Frequency Phone Surveys • All economies are susceptible to disasters and used during the COVID-19 pandemic, can determine climate change, but due to underlying vulnerabilities how to apply new methods within the region and be Tonga and Vanuatu will need to make disaster risk extended to other countries, while economies of scale management an immediate top priority. Moreover, in design, development and procurement could reduce all maritime economy sectors that depend on costs further. Emergency preparedness and response natural resources face threats that impact their systems need strengthening at the country and resilience. Growth of those sectors requires efforts to regional level to ensure greater resilience to ongoing improve environmental sustainability and resilience and future risks. This will involve improvements in legal to climate change; and institutional frameworks, equipment, personnel, • Fiscal sustainability and risk of debt distress is a information management, and facilities. concern for all countries, albeit for some more than 13 14 Table ES2: Country-specific development priority solution areas FSM RMI PLW KIR NRU TUV WSM TON VUT Pathway 1: Increasing Economic Opportunities Revitalize Revitalize tourism after Potential to Potential to tourism after Revitalize and Modest Modest COVID-19 Modest Modest Modest expand high- expand high- COVID-19 realize sustainable opportunities opportunities is critical opportunities opportunities opportunities value tourism value tourism is critical tourism for tourism for tourism this large for tourism for tourism for tourism and diversify and diversify this large economic income income economic sector sector SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE + Current Potential Potential modest Potential for increase Potential for increase Potential revenue but for increase in public for increase Expand in public to increase Potential for Potential for Potential for potential in public revenue in public opportunities in revenue revenue base higher income higher income higher income to expand revenue and (catch and revenue and oceanic fishing (fees) and as tourism source source source through more indirect fees) and more indirect more indirect has slowed industrial revenue indirect revenue revenue longline revenue sector High High Modest Low High High migration, Low migration, migration, migration but Increasing migration migration but very Potential migration but Enhance but modest important important income and and small for greater important labor mobility contribution contributor contributor importance important important contributor income contribution opportunities to national national to higher with greater contribution contribution to national opportunities to national income with income with national potential to national to national income with income little growth little growth income income income little growth Connectivity Connectivity Connectivity Connectivity needed Fixed Connectivity needed for needed for needed for for public Fixed Fixed Fixed broadband needed for Improve digital public. Fixed public. Fixed public. Fixed services. broadband broadband broadband modest public. Fixed connectivity and broadband broadband broadband Fixed low as well low as well low as well as well broadband services in private low as well low as well low as well broadband as access as access as access as access low modest and public sectors as access as access as access low as well to mobile to mobile to mobile to mobile mobile to mobile to mobile to mobile as access broadband broadband broadband broadband broadband broadband broadband broadband to mobile broadband Table ES2: Country-specific development priority solution areas (continue) FSM RMI PLW KIR NRU TUV WSM TON VUT Pathway 2: Maximizing human capital and its economic returns Extended Extended Educational COVID-19 COVID-19 Low Low outcomes Extended Low closures closures enrollment. enrollment. on par COVID-19 enrollment Quality of Improve quality Low revsed revsed Quality of Quality of with peers. closures and quality education of education and enrollment. progress. progress. education education Improvements revsed of education low and need increase access Quality of Quality of Quality of low and need low and need needed progress. low and need for early to secondary and education education education for early for early in access Quality of for early childhood higher education low. low and need low and need childhood childhood to early education childhood education. for early for early education. education. childhood low. education. childhood childhood education education. education. Strengthen health Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; systems to improve increasing increasing increasing stable NCD stable NCD increasing soaring NCD soaring NCD falling NCD coverage and NCD NCD NCD prevalence, prevalence, NCD prevalence prevalence prevalence resilience prevalence prevalence prevalence but still high but still high prevalence High GBV; High Very high High GBV; low female High High GBV. Very high Increase women’s GBV; high Average GBV; GBV; greater Very low labor force High GBV; GBV; high Average level GBV; greater paid employment COVID-19 modest level COVID-19 levels of participation, Low levels of COVID-19 of female COVID-19 and reduce gender- employment of female employment female high female l paid employment labor force employment based violence impact from employment. impact from labor force COVID-19 employment. impact participation. impact low base low base participation. employment impact Pathway 3: Resilient Incomes and Livelihoods + High High High Heightened Heightened Heightened Heightened Heightened Heightened disaster risk. disaster risk. disaster risk. Strengthen climate awareness awareness awareness awareness awareness awareness Heightened Heightened Heightened and disaster risk of climate of climate of climate of climate of climate of climate awareness awareness awareness policies and build change and change and change and change and change and change and of climate of climate of climate resilient systems disaster risks disaster risks disaster risks disaster risks disaster risks disaster risks change change change impacts impacts impacts SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE 15 16 Table ES2: Country-specific development priority solution areas (continue) FSM RMI PLW KIR NRU TUV WSM TON VUT Pathway 3: Building Resilient Incomes and Livelihoods Heightened Heightened awareness of awareness of importance Heightened Heightened Heightened importance Heightened Heightened Heightened Heightened of Adaptive awareness of awareness of awareness of of Adaptive awareness of awareness of awareness of awareness of Develop adaptive Social importance importance importance Social importance importance importance importance social protection Protection. of Adaptive of Adaptive of Adaptive Protection of Adaptive of Adaptive of Adaptive of Adaptive systems Broaden Social Social Social Broaden Social Social Social Social Pacific’s first SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Protection Protection Protection Support Protection Protection Protection Protection conditional Fund to the cash transfer Unemployed program Modest Modest Modest High High High Agriculture Agriculture Agriculture Agriculture Agriculture Agriculture opportunities Need for opportunities High Ag- opportunities. employment employment employment Agriculture riculture for small- for small- for small- Coastal diversifica- employment, scale scale scale fisheries tion. High-lev- particularly operators. operators. operators. important Modest Strengthen resilient el of under- in coconut. Modest risk Modest risk Modest risk Coastal opportunities Coastal agriculture and contributor to nourishment. Need for di- mitigation mitigation mitigation employment fisheries in Agriculture fisheries fisheries for small- Coastal versification. and and and and important and coastal important for scale operators fisheries Coastal extension extension extension nourishment. for small fisheries small-scale important fisheries services. services. services. Modest risk source of operators and important operators Coastal Coastal Coastal mitigation nutrition. tourism source of and nutrition. fisheries fisheries fisheries and nutrition. important important important extension source of source of source of services nutrition. nutrition. nutrition. Fundamental Enablers: Strengthening Governance and the Business Environment Infra- Infra- Infra- Infra- Infra- Infra- structure structure Economic structure structure structure structure Medium and weak and weak diversifica- and weak Modest and weak and weak and weak Enhance economic opportunities business business tion can be business opportunities business business business infrastructure and improving in- environment environment improved by environment for enhancing environment environment environment investment climate frastructure hamper al- hamper al- enhancing hamper al- private sector hamper al- hamper al- hamper al- under GRID and narrow ready limited ready limited business envi- ready limited growth ready limited ready limited ready limited private sector private sector private sector ronment private sector private sector private sector private sector opportunities opportunities opportunities opportunities opportunities opportunities Table ES2: Country-specific development priority solution areas (continue) FSM RMI PLW KIR NRU TUV WSM TON VUT Fundamental Enablers: Strengthening Governance and the Business Environment External External External External Improve public capacity capacity External capacity External capacity External External External revenue and building building capacity building capacity building capacity capacity capacity expenditure critical but critical but building critical but building critical but building building building management delayed due delayed due critical delayed due critical delayed due critical critical critical to COVID-19 to COVID-19 to COVID-19 to COVID-19 Moderate external High risk of High High public High risk public debt debt distress High risk of vulnerability Ensure High risk of High risk of debt levels; High risk of of debt and reliant risk but debt distress to external macroeconomic, debt distress debt distress significant debt distress distress and on revenues strong non- and relatively shocks. fiscal, and debt and revenue and revenue 2020 deficit and revenue increasing from the tax revenues large external Moderate sustainability uncertainty uncertainty and revenue uncertainty debt service Regional and large debt risk of debt uncertainty in 2024 Processing reserves distress Centre + Potential Potential Potential Potential Potential Potential Potential Potential Potential to fill to fill to fill to fill to fill to fill to fill to fill to fill Explore information information information information information information information information information technologies gaps gaps gaps gaps gaps gaps gaps gaps gaps to fill data and with non- with non- with non- with non- with non- with non- with non- with non- with non- knowledge gaps traditional traditional traditional traditional traditional traditional traditional traditional traditional data data data data data data data data data Importance High Medium Moderate High priority from 2016 High regional priority + SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE 17 1 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE CHAPTER INTRODUCTION 18 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Regional context with transport and logistics, and challenging business environments. Another consequence of the region’s economic geography is the high cost of living. It is one In the years prior to the COVID-19 crisis, slow factor impeding public service delivery, for example. and varied socio-economic progress characterized Climate change and disaster risks also impede the the group of nine small Pacific Island Countries accumulation of productive infrastructure, put pressure (PIC-9)—Kiribati, Marshall Islands (RMI), the on fiscal balances, and shift attention from other Federated States of Micronesia (FSM), Nauru, fundamental development activities. These challenges Palau, Samoa, Tonga, Tuvalu, and Vanuatu. These translate into a common set of macroeconomic nations are quite literally a “sea of islands,” as Pacific outcomes, including high public spending, large external scholar Epeli Hau’ofa famously described them.1 The imbalances, heavy reliance on external flows (such as first Systematic Country Diagnostic (SCD) for the foreign aid and/or remittances), and elevated risks of small PIC-8 countries (the current PIC-9 less Nauru), debt distress. completed in 2016, identified economic geography (extreme remoteness, small and dispersed populations) Given these challenges, the 2016 SCD identified and exposure to shocks as key structural constraints high-priority solutions to end extreme poverty to growth. This means the small PIC countries lack and boost shared prosperity in the region. Based economies of scale and face large transport costs that on several criteria—including the impacts on the twin prevents them from following the East Asian model of goals, time horizon, evidence base, and feasibility—three economic development based on manufacturing- and “pathways” to growth and shared prosperity emerged export-led growth. with a set of “fundamental enablers” for strengthening governance and the business environment. The Economic geography and exposure to risks will pathways included: 1) fully exploiting the limited set continue to determine economic activities as of economic opportunities; 2) enhancing access to well as development policies and investments. employment opportunities and public services; and Small and internally dispersed populations and 3) protecting incomes and livelihoods. In total, the remoteness limit the PIC-9 countries to a narrow set of 2016 SCD identified 18 areas of priority development economic activities—fishing, tourism, and agriculture. options relevant to the region, with varying degrees of Manufacturing sectors tend to be quite small at less applicability depending on each country’s economic than 15 percent of GDP for all the economies—primarily geography and initial conditions (Table A-1 and Table due to a lack of economies of scale, high costs associated A-2 in Annex). 1 Hau’ofa, Epeli. “Our Sea of Islands.” The Contemporary Pacific, vol. 6, no. 1, University of Hawai’i Press, 1994, pp. 148–61, http://www. jstor.org/stable/23701593. 19 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Since the 2016 PIC-8 SCD, new challenges and health shocks and disasters. It can be built have arisen due to the COVID-19 pandemic and through risk reduction; financial and fiscal buffers; and increasing awareness of disaster risks. As a response improvements in the business climate, labor mobility, to COVID-19, closed or highly restricted borders education, health, and social protection mechanisms stopped travel from other countries, which caused (Box A-1). dramatic economic impacts on the tourism-dependent economies (most prominently Palau and Vanuatu The PIC-9 SCD Update complements “2050 but also Samoa and Tonga) and affected progress on Strategy for the Blue Pacific Continent.” Through infrastructure projects and technical support as well as the Pacific Island Forum (PIF), Pacific leaders have stretched fiscal balances. This was compounded by the recognized that building a strong and resilient region devastation from two Category 3+ tropical cyclones (TC is critical for sustainable development. Pacific leaders Harold and Yasa) in 2020 and the Hunga Tonga-Hunga are now developing their “2050 Strategy for the Blue Ha’apai volcano eruption that severely impacted Tonga Pacific Continent,” which focuses on the need to ensure in January 2022.2 These events are expected to leave collective action on social, cultural, environmental, and behind adverse economic impacts for some years. economic integrity. Many of the elements of this PIC-9 SCD Update complement thematic areas set forth in Challenges today and in the coming the 2050 Strategy including: 1) political leadership and regionalism; 2) resources and economic development; years—PIC-9 SCD Update 3) climate change; 4) oceans and natural environment; 5) people centered development; and 6) technology and The persistence of underlying structural weaknesses connectivity. means the development challenges set out in the 2016 SCD remain relevant, although recent developments Along with greater development needs has come have made some priorities more pressing and others greater development partner support—a situation more nuanced. The COVID-19 pandemic, strict border that presents benefits as well as challenges. Australia, restrictions, absence of tourism, and heightened New Zealand, China, Japan, the EU, the United States, awareness of risks due to climate change require Pacific and other bilateral and multilateral partners have countries to re-double their efforts on long-standing promised increased financial and technical support to development challenges. These include strengthening the region on top of already substantial flows. Given social protection mechanisms to mitigate the impact of the inherent challenges the Pacific region faces, aid economic shocks on households and better managing is expected to be an ongoing and increasing source of the financial and physical impact of disasters through finance. Grants to the Pacific grew over 7.8 percent policies and investments. annually from 2011-20 (see Figure A-4 in annex). The Pacific region is among the highest recipients of As PIC-9 countries pivot their growth strategies, grant aid as a share of GDP among other small island COVID-19 and greater disaster risks have developing states (SIDs) and other lower middle-income demonstrated the importance of connectivity and countries (LMICs, see Figure 1). Figure 2 shows the building resilient economies. Enhancing connectivity largest contributors (as a share of the total): Australia and resilience are complements to structural reforms (29 percent), US (21 percent), Japan (13 percent), New and investments designed to improve access to markets, Zealand (10 percent), China (10 percent), the World jobs, and critical public services. Limited physical and Bank (7 percent), the European Union (3 percent), Asia digital connectivity between countries, population Development Bank (2 percent), and others (6 percent).3 centers, and outer islands are key constraints that slow Heightened geopolitical competition for strategic expansion into new areas of potential economic activity influence in the region may lead to a greater abundance as well as limit access to global knowledge. Resilience of bilateral development assistance, which will require can help broaden the economic base and mitigate the enhanced coordination and capacity to absorb economic and human costs of unexpected economic resources and greater monitoring and evaluation to 2 Other tropical cyclones that have hit the region since 2017 include TC Gita, Hola, Oma, Pola, and Tino. See section “Disasters and climate change” for more detail on the increasing trend in climate-related disasters. 3 China’s average share only covers the share for those countries reporting data (FSM, Samoa, Tonga, and Vanuatu). 20 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 1: Grants disbursed by o icial donors as Figure 2: Donor share of disbursed grants, percent of GDP, average 2011-20 average 2011-20 100% Tuvalu Kiribati 80% RMI FSM 60% Nauru Tonga 40% Samoa Vanuatu 20% Palau LMICs 0% Kiribati RMI FSM Nauru Palau Samoa Tonga Tuvalu Vanuatu SIDS 0 20 40 60 80 100 Grants, as % of GDP EU Institutions Australia ADB Japan New Zealand WB US China Source: Author’s calculations based on OECD Statistics and Lowy Pacific AidMap Database. Notes: Grants include the grant component of official lending according to the OECD’s ODA definition. Data available for Chinese grants is only available for FSM, Samoa, Tonga and Vanuatu. ensure development impact.4 A less benign impact may populations, and remoteness from global markets; be increased policy uncertainty as established alliances and 2) high vulnerability to climate-related and other are challenged. disaster risks. Box 1 depicts the structure of this Update and the embedded “theory of change.” This PIC-9 SCD Update will focus on three pathways to address existing and emerging challenges in The identified priorities are based on prior analytical achieving four High-Level Outcomes (HLOs). With a work as well as new research completed for this SCD starting point of 2016 SCD’s pathways to development, Update. Since the 2016 SCD report, several studies this PIC-9 SCD Update refreshes the pathways to and technical assistance projects, have identified reflect underlying structural challenges as well as critical development issues for the Pacific countries. emerging challenges now in the foreground: 1) expanding These include regular Debt Sustainability Analyses, economic opportunities; 2) maximizing human capital Business Pulse Surveys, Poverty Assessments (RMI, and its economic returns; and 3) building resilient Kiribati, Vanuatu), Public Expenditure Reviews and incomes and livelihoods. Four HLOs that are expected Country Economic Memorandum (RMI, Vanuatu), and to be achieved through the pathways include: 1) higher Health Financing Systems Assessments (Kiribati, household incomes and economic opportunities; 2) Vanuatu), Regional Studies (including Pacific Possible, improved quality and equity of education and health Archipelagic Economies, and others), the International services; 3) enhanced access to digital infrastructure Finance Corporation (IFC) Pacific Strategy, Pacific Risk and services; and 4) greater access and use of risk and Resilience Assessments (RRA), and the Pacific reduction and risk management tools for resilience. In Gender Employment Gap. The new research focuses addition, this SCD Update will address cross-cutting on such topics as COVID-19’s impact and threats from fundamental enablers to achieving the HLOs by climate change and other disasters. This Update uses focusing on strengthening governance and the business this information to help define the critical development environment. The fundamental constraints that impact priorities to meet the twin goals of reducing poverty all the development priorities and ultimately the HLOs and increasing shared prosperity for the small island of the Pacific economies include: 1) small size, dispersed nations of the Pacific. 4 Australia announced its “Pacific Step-up” at the Pacific Island Forum an in 2016 and New Zealand launched its “Pacific Reset” in 2018. China, Japan and the United States have all recently announced increased support to the Pacific region. Australia remained the biggest contributor to the Pacific, followed by New Zealand, Japan and China (Lowy Institute). 21 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 3: Moving Forward—From constraints to achieving the twin goals Twin Goals: Poverty reduction and shared prosperity HLO 1 HLO 2 HLO 3 HLO 4 High Level Outcomes Higher household Improved quality and Enhanced access to Greater access and incomes and equity of education physical and digital use of risk management economic and health infrastructure and tools for resilience opportunities services Pathways Increased economic Maximizing human capital Resilient incomes and opportunities and its economic returns livelihoods Revitalize and realize sustainable tourism Improve quality of education Strengthen climate and disaster and increase access to risk management tools and secondary and higher education policies Expanding economic opportunities in oceanic fishing Enhance labor mobility Strengthen health systems to Develop adaptive social protection opportunities improve coverage, quality, and systems resilience Priorities Improve digital Increase women’s paid connectivity and employment and Reduce Resilient small-scale farming and services in private and gender-based violence coastal fisheries public sectors Fundamental Enablers: Strengthening governance and the business environment Enhance economic Improve public Ensure macro, Explore technologies infrastructure and revenue and fiscal and debt to fill data and investment climate expenditure sustainability knowledge gaps under GRID management Constraints Small size, dispersed population, High vulnerability to climete.related and and remoteness from markets other disasters risks 22 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE The SCD Update develops this set of regional and characterization of regional commonalities and country development solutions through a process heterogeneity, Table 1 presents a heat-map of key of prioritization, itself grounded in the region’s characteristics that shape development priorities in fundamental constraints and recent developments. each country. Key common characteristics have already The report first reviews recent developments in been mentioned. All the Pacific countries are dispersed economic growth and poverty reduction since the 2016 from each other and distant from major markets and SCD (Section B); the pre-pandemic patterns are also all face substantial risk of debt distress, primarily due examined to illuminate the extent to which the region to low debt-caring capacity characterized by narrow was, or was not, making progress before COVID-19 economic bases and vulnerability to shocks (economic struck. The region’s fundamental constraints are and natural disasters). The substantial amount of revisited in Section C in light of COVID-19 and the heterogeneity across countries cannot be overlooked. growing awareness of climate change threats. Section Populations range from a high of 307,000 in Vanuatu D explores each pathway in more depth (its progress to a low of about 11,000 in Nauru. GNI per capita ranges to date, the impact of COVID-19, climate change, and from US$14,390 in Palau to US$2,960 in Kiribati. Palau disaster risks where salient) and sets forth development and Nauru are highly dependent on services (tourism in priorities. Section E completes this movement from Palau and an Australian Regional Processing Center for constraints to pathways to development priorities asylum seeker claims and irregular migration in Nauru). both the regional and country levels by applying Some PIC-9 countries are less reliant than others on prioritization criteria in the light of country-specific remittances.5 In contrast, Samoa has lower income, constraints. is much more reliant on aid and remittances and is subject to greater disaster risks. As will be described The PIC-9 region faces common issues, but each under the pathways and priorities section in this PIC- country faces unique development priorities 9 SCD update, development solutions will need to be shaped by their characteristics. To view a broad tailored to each country’s unique context. Table 1: Summary of key underlying characteristics by PIC-9 country Country Distance Smallness Reliance Reliance Income Human Dependence Dependence Risk of to (popula- on wage on aid (GNI Capital on Tourism on Fishing Debt markets tion)1 remittances flows per Index4 (Percent of License Distress7 (km)1 (Percent of (Percent capita, GDP)5 revenues GDP)2 of GDP)3 US$)1 (Percent of GDP)6 Kiribati 12,321 119,000 8 42 2,960 0.49 5 62 High RMI 12,057 39,000 13 37 4,940 0.42 12 20 High FSM 11,750 115,000 6 32 3,950 0.51 18 17 High Nauru 12,250 11,000 5 32 11,000 0.51 1 31 High Palau 11,027 18,000 1 12 14,390 0.59 38 3 High Samoa 12,776 198,000 25 15 4,050 0.55 25 0 High Tonga 13,153 106,000 39 22 5,190 0.53 11 0 High Tuvalu 12,774 12,000 10 92 5,820 0.45 6 56 High Vanuatu 12,796 307,000 10 14 3,190 0.45 23 0.3 Medium KEY: Importance High Medium Moderate Notes: (1) See Table A-3; (2) See Figure 25; (3) See Figure 1; (4) See Figure 30; (5) See Table 3; (6) WDI and National Budgets, average FY18-FY21; (7) See Table 7. 5 The memorandum of understanding between Nauru and Australia can be found at: https://www.dfat.gov.au/sites/default/files/ mou-nauru-enduring-regional-processing-capability-sep-2021.pdf 23 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Box 1: Progress made since the 2016 PIC-8 SCD and what’s new in the PIC-9 SCD Update The fundamental development challenges remain largely unchanged since the 2016 PIC-8 SCD (PIC-9, less Nauru). What has changed is the higher priority given to the importance of building resilience due to COVID-19 and greater awareness of disaster risks and climate change. This box highlights the 2016 PIC-8 SCD development priorities, notes how they have been modified in this PIC-9 SCD Update, and summarizes progress made since 2016. The main text offers a deeper discussion of development progress since 2016 along with the discussion of development priorities. The PICs felt the economic impacts of COVID-19 more profoundly than perhaps any other region in the world. Due to justified fears of weak health systems and the high prevalence of health comorbidities, the PIC-9 countries moved rapidly to prevent community transmission by closing their borders to travel. When COVID-19 vaccinations became available and eased the threat of severe illness, a rapid opening to international travel was still not viable because most PICs were slow in vaccine uptake and health systems remained weak. The past two years brought a sharp contraction in economic output. The combination of COVID-19 and tropical cyclones and other disasters—they did not pause during the pandemic—battered many of the small island Pacific nations and caused the region and development partners to step-back and reconsider development priorities. PIC-9 experience since 2020 has led to a greater appreciation of the need for building economic resilience. This has implications across nearly all development priorities described in this Update. Building resilient economies does not appear overnight. They are an inherent part of a longer-term development agenda. As this document will show, the push toward greater resilience manifests itself not only in giving greater weight to some new priorities, such as digital services and adaptive social protection, but also in redoubling efforts on previously identified priorities. This includes putting a greater focus on revitalizing tourism under the “new normal” of constrained travel; building a more diversified private sector; expanding health services to better respond to emergencies; enhancing macro, fiscal, and debt sustainability; improving climate resilient development though adaptation; and boosting financial resilience. The lack of adequate data for planning and monitoring progress is also reflected in a new priority. PIC-9 SCD Updates to the PIC-8 SCD Unchanged Fundamental Constraints: 1. Small size, dispersed population, and remoteness from markets 2. High vulnerability to climate-related and other disaster risks PIC-9 SCD Update Modifications and development status since the 2016 PIC-8 SCD Priorities Priorities PIC-8 SCD Pathway 1: Fully Pathway 1: Economic opportunities remain limited but greater emphasis exploiting the limited Increased is now placed on opportunities for economic diversification set of economic economic within constraints. opportunities opportunities Sector needs to recover from COVID-19 and move toward a “new normal” by focusing on high-value vs. volume tourism Revitalize and and strengthening linkages with other sectors. Although Expand tourism realize sustainable many tourism strategies prior to COVID-19 focused on high- tourism value sustainable tourism, they were overly ambitious and did not achieve goals. 24 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Box 1: continue PIC-9 SCD Updates to the PIC-8 SCD (continue) Unchanged Fundamental Constraints: 1. Small size, dispersed population, and remoteness from markets 2. High vulnerability to climate-related and other disaster risks PIC-9 SCD Update Modifications and development status since the 2016 PIC-8 SCD Priorities Priorities PIC-8 SCD Pathway 1: continue Fishing revenue increased substantially since 2016 with regional cooperation, providing large windfalls for many Expanding economic Increase fisheries countries. Avenues for additional revenue, including across the opportunities in oceanic revenue value chain, remain untapped in oceanic fishing; the money fishing could fund needed investments in human capital and other development priorities. This priority moved to Pathway 3 as “Resilient small-scale Increase incomes farming and coastal fisheries.” Agriculture and coastal fishing from agriculture and Moved are critical for economic resilience of the poor. Progress has coastal fishing been modest. There are opportunities for growth via linkages with tourism but resilience/livelihoods is highest benefit. Unchanged with greater focus on additional benefits for income resilience, knowledge transfers, and need for regional Enhance labor mobility cooperation between host and home countries. Little progress opportunities since 2016, but new host country initiatives have been put forward for debate and approval. Expand labor mobility This priority reflects potential for greater digital connectivity/ opportunities services to: (i) provide economic opportunities that mitigate New: Improve digital distance and (ii) enable delivery of private and public services connectivity and in a more cost-effective manner. Progress has been made services in private and on backbone infrastructure for broadband connectivity, but public sectors middle to last-mile connectivity is lacking. Improving digital services will rely on completing connectivity. Pathway 2: Pathway 2: Enhancing access Maximizing human Modified description to better capture focus on human capital to employment capital and its development. opportunities and economic returns public services Improve quality of Retained priority with an additional focus on quality. While Close education and education and increase enrollment has shown some progress and is in-line with skill gaps access to secondary international benchmarks, educational quality remains well and higher education below benchmarks particularly for PIC-9 FCS countries. Close other gaps in Priority merged within other priorities, including education, Absorbed public service delivery health, governance, and other sectors Expanded to broader systems focus and recognizes the likely Strengthen health frequency of health shocks. Incidence of NCDs deteriorated systems to improve since 2016 and COVID-19 compounded problems. Health Prevent NCDs coverage, quality, and objectives need to be integrated with other development resilience priorities, including agriculture, education, disaster risk mitigation, etc. 25 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Box 1: continue PIC-9 SCD Updates to the PIC-8 SCD (continue) Unchanged Fundamental Constraints: 1. Small size, dispersed population, and remoteness from markets 2. High vulnerability to climate-related and other disaster risks PIC-9 SCD Update Modifications and development status since the 2016 PIC-8 SCD Priorities Priorities PIC-8 SCD Pathway 2: continue Increase women’s Retained with an additional focus on utilizing women’s Stop gender-based paid employment and human capital through labor force participation and the role violence reduce gender-based economic empowerment plays in reducing violence. violence Pathway 3: Protecting Pathway 3: Resilient incomes and incomes and Retained with emphasis on resilience livelihoods livelihoods Strengthen climate Retained with boarder emphasis on multi-hazard and and disaster risk socially inclusive risk mitigation tools (health and disasters). management tools and Modest progress has been made on disaster risk strategies. policies New: Develop adaptive COVID has shown the limitations of informal safety Strengthen disaster social protection nets in the face of covariate shocks; development of risk preparedness systems complementary formal system needed Climate change and enhanced environmental threats mean Moved: Resilient small- these sectors—important for subsistence livelihoods—need scale farming and greater attention. Little progress has been made. Potential coastal fisheries for greater links to tourism. Fundamental Fundamental Enablers: Enablers: Strengthening Strengthening Retained governance and the governance and the business environment business environment Enhance infrastructure Maintain and and investment Broadens focus to investment climate and emphasizes develop economic climate under Green GRID. Little progress has been made since 2016. infrastructure Resilient Inclusive Development (GRID) Improve public Improve public revenue Broadens focus to include both revenues and expenditures expenditure and expenditure due to fiscal pressures. Varied progress across countries management management since 2016 with heightened importance since COVID-19. Retained with emphasis on the critical challenges of Ensure macro, fiscal sustainability post-COVID-19. All countries face greater Ensure macroeconomic and debt sustainability fiscal and debt sustainability pressures. Modest policy stability and progress since 2016. sustainability New: Explore Ongoing data gaps are a critical challenge for policy making. technologies to fill data New data and technology offer opportunities improve and knowledge gaps development outcomes 26 2 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE CHAPTER DEVELOPMENTS IN GROWTH AND POVERTY REDUCTION SINCE THE 2016 SCD 27 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE I n the nine years prior to the COVID-19 pandemic, the pandemic. Prices for imported commodities rose in most PIC-9 countries were showing an upward 2021 due to supply chain disruptions and accelerating trend in economic growth. This contrasts with inflation in advanced countries—and further structural and aspirational peers, which saw increased with Russia's invasion of Ukraine. growth decline over this period. All PIC-9 countries except Vanuatu and Samoa saw growth increase Poverty in the Pacific region is generally lower than (Figure 4). For Vanuatu, the latter decade ‘s growth was the lower-middle income country (LMIC) average, but only slightly lower than the first decade’s; in Samoa, considerably higher than the upper-middle income growth slowed substantially in the latter decade average (UMIC).6 PIC-9 poverty levels and trends are due to health shocks (a measles outbreak) and fiscal difficult to assess due to data limitations in the region. consolidation. Nauru had exceptionally high growth New data are available for only three PIC-9 countries— due to Regional Processing Center arrangements with estimates from the past three years for Kiribati, RMI, Australia. COVID-19 meant severe growth shocks to all and Vanuatu. The rest of the countries’ most recent countries, with tourism-dependent Palau and Vanuatu data are from seven or more years ago.7 The countries particularly hard hit (Figure 5). in the region straddle the LMIC (FSM, Kiribati, Samoa, Vanuatu) and UMIC (RMI, Tonga, and Tuvalu, with Nauru The pace of the region’s recovery and its future shape and Palau as upper middle income countries) divide, so come with high degrees of uncertainty. Tourism, poverty rates at the $3.20 a day line for LMICs and agriculture, and fishing are expected to continue to be $5.50 for upper-middle income countries UMICs are important sources of private sector jobs and income. relevant, along with the international averages at these While tourism is likely to remain a key economic driver lines (Figure 6). Of the three countries with recent data, for a number of PICs and a source of livelihood for their poverty is still low at the $3.20 line in RMI (6.5 percent) populations in the long run, the return to a “new normal” but higher in Kiribati (16.2 percent) and higher still in may take some time. Tourism overall provides higher Vanuatu (32.4 percent). Except for RMI, the countries paying jobs, although agriculture and coastal fishing are below the LMIC average of 47.8 percent but far have served as a safety-valve to absorb workers during above the UMIC average of 6.4 percent. Over half 6 PIC-9 poverty levels and trends are difficult to assess due to lack of good data, drawing upon recent surveys and analytical work, are available for three countries. New data have been recently collected in RMI, Kiribati, and Vanuatu (Llovet Montanes, R. and S. Nakamura (2022). World Bank, forthcoming). They represent an improvement since the 2016 SCD, although the lack of data for the other countries serves as a reminder that data gaps are still a key issue in the region. Moreover, the new surveys are not easily comparable to previous ones, further highlighting the region’s data issues. New work done for this report enables estimation of poverty trends from 2016 until COVID as well as the impact of the crisis itself. 7 Samoa had a survey in 2018 which the government uses to measure poverty with the national poverty line. However, the World Bank does not report international poverty based on the 2018 HIES data due to methodological differences to international standards in the construction of the consumption aggregate. 28 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE the population lives in economic insecurity under the methods. The rest of this section focuses just on the $5.50 UMIC line in Kiribati and Vanuatu; even in RMI, countries with recent data. the $5.50 poverty rate is 27 percent. The new surveys show extreme poverty ($1.90 per capita per day) is Many households lack access to at least some basic nearly non-existent in RMI and Kiribati and under 10 services, particularly in Vanuatu and Kiribati. Figure percent in Vanuatu. Simulated poverty trends suggest 7 shows the percentage of the population considered a modest to stagnant pre-COVID poverty reduction deprived based on lack access to education, water, (discussed below). Additional data would improve our sanitation, and electricity. Eighteen percent of people understanding of PIC-9 poverty in the region. The data in RMI and 11 percent in Samoa are deprived on one of deficits reinforce the importance of ongoing statistical these dimensions, but less than 3 percent are deprived modernization and expanded support for statistical on two dimensions and almost none on more than two. capacity-building and innovative data collection Many more in Kiribati (42 percent) and Vanuatu (50 Figure 4: GDP growth in most PIC-9 countries increased between 2010-2019 … 12 10 Real GDP growth 8 6 4 2 0 FSM KIR NRU PLW RMI TON TUV VUT SAM Aspirational peers SIDS Structural peers 2000-2009 2000-2009 Average 2010-2019 2010-2019 Average Figure 5:… but COVID-19 has been a large negative shock on growth. 10 5 Real GDP growth 0 -5 -10 -15 -20 FSM KIR NRU PLW RMI TON TUV VUT SAM Aspirational peers SIDS Structural peers 2014-2019 2020 2021-2026 Source: World Development Indicators (WDI) and World Bank Macro Poverty Outlook (MPO) Spring 2022. 2014-2016 data are from the World Development Indicators. 2017-2019 data are from the World Bank Spring 2022 MPO. Data for Nauru are only available from 2005 onwards and for Palau from 2001 onwards. Projections from 2022-2026 are from the World Bank Spring MPO and the October 2021 IMF World Economic Outlook (WEO). FSM is Federated States of Micronesia, KIR is Kiribati, NRU is Nauru, PLW is Palau, RMI is Republic of Marshall Islands, TON is Tonga, TUV is Tuvalu, VUT is Vanuatu and WSM is Samoa. Aspirational peers: Antigua and Barbuda, Fiji, Grenada, Mauritius, Seychelles, St. Kitts and Nevis, St. Lucia, Trinidad and Tobago. Structural peers: Bahamas, Barbados, Belize, Cabo Verde, Comoros, Dominica, Guinea-Bissau, Guyana, Jamaica, Sao Tome and Principe, Solomon Islands, St. Vincent and the Grenadines, Suriname, Timor-Leste. 29 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE percent) are deprived on at least one dimension, and and private gifts. Urban workers are typically the rates of deprivation on two dimensions are also employed in services, but agriculture is often the high—26 percent in Vanuatu and 21 percent in Kiribati. largest employment sector in rural areas and on outer islands, except in tourism-heavy countries like Palau There are spatial disparities in welfare between and Vanuatu (World Bank, forthcoming). One-quarter main and outer islands and between rural and to one-third of households in Kiribati and Vanuatu urban areas on main islands. Measured at the $3.20- receive remittances, rising to around half in RMI, with line, poverty rates are highest on outer islands in all little variation across richer and poorer households. countries with recent data, reaching nearly 50 percent Around half of households in Vanuatu and almost all in Vanuatu (Figure 8). However, poverty is not confined residents of Kiribati and RMI receive gifts (accounting to outer islands. Urban poverty rates are the lowest on for 5 to 15 percent of income). Government transfers are main islands in all countries, but Vanuatu’s main island common in RMI and Kiribati as well.8 Taken together, rural poverty rate is 26 percent, closer to the outer money from remittances, gifts, and government islands rate than the main island urban rate. The outer transfers accounts for one-quarter to one-third of total islands have thinner populations, so the main islands income for households across the income distribution still have significant numbers of poor, even with lower in Kiribati and RMI but only 10 to 16 percent in Vanuatu poverty rates (Figure 9). In RMI and Kiribati, most of (where very few receive government assistance). the poor inhabit outer islands, but main island urban residents make up 30 percent of the poor in RMI and The COVID-19 crisis caused a severe economic 40 percent in Kiribati. In Vanuatu, one of five poor contraction in the region, especially in countries people are rural residents on the main island. Rural highly dependent on international tourism arrivals. and outer islands residents are also far more likely to By travel restrictions and other measures, most PIC-9 be deprived on non-monetary dimensions (World Bank, countries managed to delay COVID-19 infections until forthcoming). the start of 2022. Community transmission began to occur in Kiribati, Tonga, Palau, and Vanuatu at the Most households rely on non-wage income, including start of 2022 (see Box A-1 in annex for more details). subsistence agriculture, remittances, public support, Postponing infection did not prevent widespread Figure 6: Poverty is higher in RMI than comparator Figure 7: Many households lack access to at least some upper-middle income countries and lower in Kiribati basic services, particularly in Vanuatu and Kiribati and Vanuatu than comparator lower-middle income countries 80 60 60 50 Percent Percent 40 40 30 20 20 0 Samoa (2013* ) Vanuatu (2019 ) FSM (2013) Nauru (2012) 10 RMI (2019 ) Tonga (2015) Kiribati ( 2019) Tuvalu ( 2010) UMIC LMIC 0 RMI Kiribati Vanuatu Samoa 1 deprivation 2 deprivations $1.90 $3.20 $5.50 3 deprivations 4 deprivations Source: Household Income and Expenditure Surveys for 2019, World Bank Pacific Island Poverty Assessment, forthcoming. WDI for all other country-years. Notes: Vanuatu (Feb 2019-Jan 2020), Kiribati (Apr 2019-Mar 2020) and RMI (Jul 2019-Jun 2020). The international poverty line is $1.90 a day for lower income countries; $3.20 for lower-middle income countries; $5.50 for upper-middle income countries. Multidimensional poverty indicators are: 1) education access; 2) access to water; 3) access to sanitation; and 4) access to electricity. 8 The relatively flat incidence of assistance across quintiles suggests that government transfers are not well-targeted. 30 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 8: Spatial poverty ($3.20-line) Figure 9: Spatial distribution of the poor ($3.20) for selected countries for selected countries 60 100 50 80 40 60 30 Percent Percent 40 20 20 10 0 0 RMI Kiribati Vanuatu RMI Kiribati Vanuatu Outer islands Rural main island Urban main island Outer islands Rural main island Urban main island Source: Household Income and Expenditure Surveys, World Bank Pacific Island Poverty Assessment, forthcoming. disruption in the PIC-9 economy due to border closings assistance provided only a small degree of mitigation. and domestic lockdowns. Data aren’t available on Kiribati had a quite different experience. Poverty would the impact of these policies on poverty rates in have continued to fall with no COVID. The unmitigated 2020, the first year of the pandemic. In such cases, impact of COVID would have only seen a small increase microsimulations based on macro trends can be used in poverty in a country buoyed by real GDP growth to estimate changes in poverty and the effects of policy and a positive contribution from non-tourism services. actions (see Annex 2.2). Finally, the large government response reduced poverty an additional 4.1 points from the Business as Usual Microsimulations of poverty trends with and case. without policy interventions indicate the importance of stimulus packages on poverty outcomes. PIC- COVID-19 interrupted the region’s slow progress in 9 governments undertook significant fiscal stimulus economic growth and poverty reduction, progress measures to mitigate the economic impact of the that was not equally shared. In many senses, the pre- pandemic with varying size and focus of spending, COVID-19 period was one of slow but uneven progress and poverty reduction impacts (See Annex 2.3 on PIC- for the region. Growth in the 2010s averaged less than 9 fiscal measures in response to COVID-19). For RMI, 4 percent—an improvement from the 2000s. Although Kiribati, and Vanuatu (countries with recent data) data constraints prevent a clear regional picture, the modelled estimates indicate poverty fell in 2019, the apparent modest gains in poverty reduction are the last full year before COVID-19. The pandemic’s consistent with the slow economic growth. The region’s economic impacts left poverty 5.2 percentage points poverty rates are generally above the LMIC average but higher than it would have been in tourism-dependent significantly lower than that of UMICs. There are strong Vanuatu (Figure 10). This includes a small degree of spatial disparities in poverty rates within countries— mitigation from the government’s social assistance between main islands and outer islands and urban response, without which poverty would have been 37.5 centers and rural peripheries. The (lack of) access to key percent instead of 37.2 percent. The RMI estimates services follows a similar pattern. COVID-19 upended produce a somewhat smaller increase in poverty—2.2 this decade of modest gains. How the region approaches points, lowered 0.5 points because of social assistance the recovery process will determine how quickly it can mitigation. The Business as Usual scenario assumes resume its previous plodding trajectory and whether away the COVID-19 pandemic. In both countries, progress can be accelerated. The challenges are poverty would have continued its 2016-2019 downward substantial; the fundamental constraints facing the trend. The pandemic was only too real, and poverty region before the pandemic remain. They are reviewed increased in both countries. At the same time, social next. 31 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 10: Projected poverty trends 2016-20, selected countries Panel A: Vanuatu Panel B: RMI Panel C: Kiribati 40 35 25 35 30 20 30 25 25 15 Percent 20 Percent Percent 20 15 10 15 10 10 5 5 5 0 0 0 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Business as Usual Business as Usual Business as Usual COVID without response COVID without response COVID without response COVID with response COVID with response COVID with response Note: Llovet Montanes and Nakamura (2022) based on Household Expenditure and Income Surveys, macroeconomic data, and authors’ simulations. 32 3 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE CHAPTER FUNDAMENTAL CONSTRAINTS FACING THE SMALL PACIFIC ISLAND ECONOMIES 33 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Constraints of smallness, remoteness lives on the main islands in Kiribati, Vanuatu, FSM, and RMI. At the opposite extreme are Tonga, Samoa, and and internal dispersion Nauru, with more than two-thirds of their populations living on main islands (Figure A-2). Given the high costs The PIC-9 countries are among the smallest countries of delivering public services to remote islands, the PIC- in the world and are extremely remote from major 9 countries remain dependent on foreign assistance to markets, which increases costs of production and provide adequate public services, particularly health international trade (Figure 11). By itself, smallness and education. Even with such assistance, persistent does not preclude countries from pursuing economies gaps in service provision remain. For the private sector, of scale because firms can export to larger markets. these gaps add to the cost of production and reduce When small size combines with remoteness, however, productivity. The lack of sufficient human resources to the costs of international trade become prohibitively cover outer islands adds a non-monetary constraint to expensive and reduce firm productivity. Together, service delivery. these geographic constraints produce an acute lack of competition among a few international shipping PIC-9 geography means both a narrow economic lines (Figure A-2), which limits the scope for the kind base and high exposure to external shocks. Given of manufacturing-led, export-oriented growth strategy the small size and distance to markets, manufacturing pursued by small East Asian countries. This has only sectors tend to be quite small—less than 15 percent been exacerbated by the COVID-19 pandemic and the of GDP for all the economies. In addition, the PIC-9 supply-chain disruptions.9 countries have narrow economic bases, with a large proportion of the private sector economy concentrated The PIC-9 countries have some of the most in agriculture, fishing, and services, particularly tourism. internally dispersed populations in the world adding Palau and Nauru are dominated by their service sectors to the costs of international trade and contributing (Palau, tourism; Nauru, Regional Processing Center). to the high cost of public service delivery (Figure Kiribati, Tuvalu, and RMI are small atoll nations and 12). For example, Kiribati has a mere 120,000 people more dependent on fisheries than agriculture. Samoa, spread over tiny islands that span a marine area as Vanuatu, and Tonga are all larger Pacific Island large as India. Less than 35 percent the population economies, and they have relatively more agriculture. 9 Figure A - 1 shows the Pacific’s low level of shipping liner connectivity compared to the rest of the world. The World Bank’s Aggregated Logistic Performance Index (LPI) 2012¬18, which combines the four most recent LPI editions, ranked Papua New Guinea 144th of 167 economies worldwide for the ease of trade logistics; the Solomon Island was at 112th and Fiji 134tj. The PIC-9 countries are not included in the rankings but would likely be even lower. Additional factors significantly influencing logistics and shipping costs include low trade volumes; imbalanced trading, with import volumes far in excess of export volumes; and variations in port facility funding and preventative maintenance capabilities. 34 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 11: The PIC-9 countries are among the smallest Figure 12:…and among the most internally dispersed and most remote countries in the world … 1 16000 Dispersion ajusted populations parsity Average distance to market (km) 0.9 Mongolia 14000 0.8 Russian Federation (square km per persion) 0.7 Kazahastan 12000 0.6 Australia 0.5 10000 0.4 Mauritania 0.3 Fiji 8000 0.2 Cuba 0.1 6000 0 10k 10k 10m 100m 1b Pacific Island Countries Log population Caribbean SIDS Other Countries All countries Caribean PIC-9 Indian Ocean Other Pacific Source: Achepleagic Economies (2021). The undiversified nature of the economies means the workers; it is just under a third in Kiribati and a fifth PIC-9 countries have a limited set of available economic in RMI (Figure 14). While data are scarce, pre-COVID-19 opportunities, increasing their vulnerability to external figures for Kiribati, RMI, and Vanuatu suggest 10 to 20 economic and disaster risks. percent of the working-age population was employed in the formal sector. Among these formal workers, Given geography, services have been the largest some 30 to 75 percent are in the public sector.11 The contributor to growth across the region. The trend public sector’s share of formal employment is typically largely reflects tourism and related activities (hotels large in small economies; however, providing additional and restaurants), but services growth has also been scope for modest expansion in formal private sector strong in non-tourism dependent economies (Figure employment can provide a much-needed boost to 13). In Kiribati, for example, services growth is largely productivity and growth. attributed to transport and storage, communications, and real estate services. Vanuatu benefits greatly from Economic drivers of long-run growth have varied tourism, but it also saw increasing revenues since 2015 across countries. The countries more reliant on tourism from providing citizenship to large investors seeking saw modest but steady increases in tourist arrivals visa-free entry into the EU and other benefits.10 Next from 2010 through 2019, particularly Samoa, Tonga, largest after services comes the combined contribution and Vanuatu (Figure 15). Tourism reliance was most from agriculture, fishing, and forestry, followed by pronounced in Palau and Samoa (Figure 16). Despite construction and industry and public administration. Vanuatu’s high level of tourism, its relatively large size In Tuvalu, one of the least-populous PIC-9 countries, allows for a more diversified economy (among a narrow the largest non-services sectors supporting growth are base), including agriculture, fishing, and forestry. The public administration and construction, which together remaining PIC-9 economies depend much more on equal the services’ contribution to growth. coastal fishing and agriculture, sectors with modest labor market formality and productivity. In RMI, for Informal employment remains high, and the public example, overall labor productivity has been nearly sector dominates much of the formal labor force. In unchanged for the past two decades, with only small a number of countries, informality ranges from around increases in recent years attributed to private sector half (Samoa) to two-thirds (Tonga and Vanuatu) of all employment.12 10 Visa-free EU entry was restricted in 2022, creating uncertainty in future revenues for this large revenue source—12 percent of GDP in 2021. 11 World Bank (2014) “Wellbeing from the Work in Pacific Island Countries. 12 World Bank (2021), Republic of Marshall Islands Country Economic Memorandum and Public Expenditure Review. 35 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 13: Growth over the last two decades has been Figure 14: Share of employment outside largely driven by services the formal sector 3.5% 80 3.0% 2.5% 60 2.0% Percent 1.5% 40 1.0% 0.5% 20 0.0% -0.5% 0 FSM KIR RMI PLW TON TUV VUT SAM Kiribati RMI Samoa Tonga Vanuatu Agriculture, fishing and forestry Public Admin. National Male Female Services Construction and industry Total Source: National Statistics Offices and World Bank. Annualized Source: Kiribati (2019 HIES); RMI (2019 HIES); Samoa (2017 LFS); GDP growth based on factor prices (2010-2019). Tonga (2018 LFS); Vanuatu (2019 HIES). Figure 15: Tourist arrivals have increased in most Figure 16: … and along with agriculture, fishing and PIC-9 countries in the last two decades … forestry, tourism forms a large share of PIC-9 economies. 60 200,000 Share of GDP (%) 40 Tourist arrivals 100,000 20 0 0 FSM KIR NUR PLW RMI TON TUV VUT WSM FSM KIR NUR PLW RMI TON TUV VUT WSM 2010 2019 Agriculture, fishing and forestry Tourism Source: World Development Indicators. With narrow economic bases, reliance on imports, and line (FSM, RMI, and Palau). Many of their expenditures dependance on aid, PIC-9 countries face inherently are paid through an agreement with the US government high volatility in government revenues (Figure 17). under the Compact of Free Association (COFA) and not Lack of fiscal buffers constrains countercyclical fiscal subject to own-revenue volatility. policy and contributes to an expenditure volatility that creates macroeconomic challenges (Figure 18). The high Two factors largely drive revenue cycles among volatility in government revenues and expenditures is the PIC-9: post-disaster reconstruction and donor- driven by the PIC-9 countries’ small open economies, funded projects. Rather than being underpinned by a exposure to terms of trade shocks, high vulnerability standard business cycle, PIC-9 economies are often to disasters, and aid (Figure 17). Only three PIC-9 driven by a “natural-disaster cycle” and an “aid cycle.”13 countries have revenue volatility below the global trend The “natural-disaster cycle” begins when a disaster 13 PIC-9 PER, World Bank, forthcoming. 36 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 17: The PIC-9 countries have relatively high Figure 18:…and high volatility in spending volatility in government revenues … 0.6 (% of GDP), 2010-2020 (% of GDP), 2010-2020 Volatility in reveneues Volatility in spending 0.4 0.4 NRU NRU KIR VUT TUV VUT 0.2 0.2 KIR TUV WSM TON TON PLW FSM RMI FSM RMI PLW 0.0 Upper WSM Upper Low income Low-middle -middle High income 0.0 Low income Low-middle -middle High income income income income income 250 500 1046 4096 12695 50000 250 500 1046 4096 12695 50000 GNI per capita, 2020 (US$) GNI per capita, 2020 (US$) Source: IMF WEO. Notes: Figures shows Coefficient of Variation for government revenues and spending. Figure 19: Import dependence is among highest Figure 20: Gross debt levels vary across the PIC-9 in the world 50 60 NRU WSM VUT TON 40 Trade balance 0 Gross debt (% of GDP) (% of GDP) VUT WSM RMI PLW FSM 20 KIR -50 RMI TUV TON NRU FSM TUV KIR Upper 0 Upper Low income Low-middle -middle High income Low income Low-middle -middle High income -100 income income income income 250 500 1046 4096 12695 50000 250 500 1046 4096 12695 50000 GNI per capita, 2020 (US$) GNI per capita, 2020 (US$) Source: World Development Indicators and IMF WEO. strikes, causing widespread damage and economic funded infrastructure projects.14 The unprecedented losses that precipitate a sharp economic contraction, increase in grants to address the health, economic and large revenue losses, and spending pressures to address social impacts of COVID-19 being the most vivid recent post-disaster relief efforts. This is followed by a gradual example (see Annex 2.3), along with additional grants process of reconstruction and recovery that boosts to support the recovery from the volcanic eruption and growth over the following two to five years, depending tsunami in Tonga in January 2022. on the severity of the disaster. This recovery phase is generally financed to a large degree by public spending The small island Pacific IDA countries are all rated and additional development partner grants. With the at moderate to high risk of debt distress due to projected increase in intensity of disasters in the Pacific, narrow economic bases and exposure to disasters— these economic and social swings are expected to widen. two factors that weaken fiscal buffers and imply a The second key driver of PIC-9 economies is donor- low debt-carrying capacity. Public debt in the Pacific 14 See Duncan (2016) for further details on the aid cycle among PICs. 37 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 21: Aid flows by country, 2010-2020 (as % of GDP) Vanuatu Tuvalu Tonga Samoa RMI Palau Nauru Kiribati FSM 0% 20% 40% 60% 80% 100% 120% 140% Disbursed Committed Source: World Bank and Lowy Institue Pacific Aid Map. varies substantially by country, but it is lower for countries that benefit more from large fishing revenues Constraints of fragility, high than services—FSM, Kiribati, RMI, and Tuvalu, (Figure vulnerability to disasters, and climate 20). Nearly all debt is from official creditors offering highly concessional rates or grant terms. change15 Given low-debt carrying capacity and high economic vulnerability, PIC-9 countries receive significant Fragility aid flows in the form of concessional loans and grants from multilateral organizations (e.g., Asian Institutional and social fragility continue to Development Bank and the World Bank) as well constrain the PIC-9’s full development potential, as bilateral finance from such governments as although these countries have not experienced an Australia, China, Japan, New Zealand, and the elevated risk of violence and conflict. In FY2022, United States. Between 2010-2020, aid averaging the WBG classifies four PIC-9 countries as “high-level 30 percent of the region’s GDP was committed and 25 institutional and social fragile situations”—FSM, RMI, percent of GDP was disbursed (Figure A-3). Large gaps and Tuvalu.16 Some countries, especially those with separate PIC-9 countries in amounts received. Tuvalu smaller populations, experience greater difficulty in had the largest aid flows in 2010-2020, with more than transitioning out of these ongoing fragility challenges 130 percent of GDP committed and 93 percent of GDP due in part to their thin institutional capacity. The disbursed (Figure 21). Palau, a higher-income country, 2017 Regional Risk and Resilience Assessment (RRA) received the lowest aid disbursement at 13.7 percent for the PIC-9 identified the region’s key sources of of GDP. Aid disbursements to other (non-PIC) low- fragility: extreme geography and limited economic income countries during the period averaged about 6.6 viability; thin institutional capacity, governance, and percent of GDP, suggesting the size of aid flows to the capture; vulnerability to exogeneous shocks, including Pacific were comparatively high, reflecting in part the climate change, disasters, and global economic shocks; economies’ smallness and vulnerability to shocks. urbanization; youth unemployment; and gender-based 15 Portions of this section were adapted from Climate Risk Profile: The Pacific Region (2020), The World Bank Group and Asian Development Bank. 16 The high institutional and social fragility category includes a range of countries with deep institutional crises, very poor transparency and government accountability, or weak institutional capacity. These issues are sometimes compounded by threats posed by climate change. The WBG identifies countries with high institutional and social fragility based on public indicators that measure the quality of policy and institutions as well as specific manifestations of fragility. The three PICs are classified as fragile states due to revised CPIA scores below 3.0. 38 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE violence. The past four years have seen only limited Harold for Vanuatu and the 2019 Measles Outbreak in progress in systematically addressing some of these Samoa).19 fragility drivers, partly because COVID-19 diverted public institutions’ attention and resources from other More than political changes or electoral cycles, long-term development priorities. Throughout the COVID-19 has been disruptive to policy reforms and/ COVID-19 crisis, the PIC-9’s vulnerability to external or development activities. The pandemic exaggerated economic environments created significant impacts the PIC-9’s protracted shortage of domestic technical on their economies. However, their extreme geography experts and project managers and diverted public allowed their governments to mitigate COVID-19 institutions’ attention and resources from other community transmission, until recently, through strict development priorities. As a result, the COVID-19 crisis border controls. The international travel restrictions has stalled technical assistance activities supporting and closed national borders made limited human policy reform, delayed institutional capacity building, resources and thin administrative capacity more and halted infrastructure projects. visible. The COVID-19 pandemic itself, independent of other factors, has not resulted in the eruption of social Overall lack of transparency tends to be triggered unrest or localized, community-level violence in the PIC- in part by fragile governance, limited opportunities 9 countries. for public participation, and lack of civil society involvement. According to the recent Transparency In the past four years, these nine countries have International Corruption Barometer, perceptions of managed their electoral transitions relatively the severity of government corruption vary across the smoothly, although some countries faced political PIC-9 region—from a high of 80 percent in FSM to 45 stalemate and fluidity. Overall, the 2017 Regional percent in Samoa. The majority (55 percent) across RRA gave the PIC-9 good scores in terms of electoral the Pacific think corruption is getting worse.20 At the politics, and no significant change has been observed same time, citizens in several PICs have confidence in this regard.17 In 2021, Samoa and Vanuatu—the two in their countries’ integrity systems,21 and a number most populous of the nine countries—experienced brief of high-profile investigations give substance to this periods of political instability (an election outcome perception. The capacity of courts, statutory bodies, dispute in Samoa and a vote of no confidence in and media to monitor and respond to corruption is Vanuatu). In the end, these tensions were resolved mixed. Media diversity, freedom of the press, and through democratic institutional procedures. The investigative journalism are fragile across the region.22 overall trend of voters casting ballots based on local, Public perception of government anti-corruption efforts familial, or community affiliations and loyalties remains also varies, with PIC-9 anti-corruption systems facing unchanged.18 However, more prominent national issues capacity deficiencies and institutional challenges. Tonga arose in many recent elections—foreign relations, ratified the UN Convention against Corruption (UNCAC) including high-profile development projects and in 2020; now, all PIC-9 countries have ratified the commercial ventures, as well as government responses signature global anti-corruption framework, indicating to COVID-19 and other recent disasters (e.g., Cyclone sufficient political will to improve anti-corruption 17 Freedom in the World: The Global Expansion of Authoritarian Rule. Freedom House. Washington DC. 2022. https://freedomhouse. org/sites/default/files/2022-02/FIW_2022_PDF_Booklet_Digital_Final_Web.pdf. 18 In the Transparency International-issued Global Corruption Barometer 2021, approximately 58 percent of respondents from FSM and 45 percent from Kiribati reported being offered bribes in exchange for votes in the past five years. The percentages of respondents with similar experiences were much lower in Vanuatu (25 percent), Samoa (11 percent), and Tonga (3 percent). Transparency International has not yet released data from RMI, Nauru, and Palau. 19 What political crises in Vanuatu and Samoa tell us about their past and future by Terence Wood. August 26, 2021. https://devpolicy. org/vanuatu-samoa-politics-past-future-20210826/. 20 The percentage of people who think government corruption increased in the past 12 months varies across the five countries with available data. According to the Transparency International-issued Global Corruption Barometer for 2021, FSM (80 percent), and Vanuatu (73 percent), are above the Pacific average of 61 percent; Tonga (61 percent) meets the average, and Kiribati (51 percent), and Samoa (41 percent) are below it. 21 An indicator is percentage of people who think their government is doing badly vs. well in tackling corruption. Vanuatu (65 percent), Samoa (6 percent), and Kiribati (83 percent) are above the Pacific average in terms of thinking their governments are doing a good job in tackling corruption issues. These countries also have high-profile cases of politicians and elites being prosecuted on corruption charges. 22 Dickey, L. et al. (2019). Mapping the Information Environment in the Pacific Island Countries: Disruptors, Deficits, and Decisions. Arlington, VA: CAN. 39 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE systems. However, significant challenges remain due Audit Initiative, Pacific Trade and Invest, and the to capacity constraints. Some countries have anti- Parties to the Nauru Agreement (PNA) on regional corruption commissions, but their effectiveness is fisheries. Pacific nations have also been prominent as disputed.23 an effective diplomatic bloc in international climate negotiations.26 The regional solutions that have worked Because of the PIC-9’s high dependence on external best have supported very clear needs recognized by assistance, recent geopolitical dynamics add all members, suggesting the importance of clear, another layer of complexity to the existing fragility problem-based approaches to developing potential context. In the past five years, the Pacific has become new mechanisms. the focus of more intense strategic competition among geopolitical players. To date, there are few signs The increasing frequency and intensity of disasters within the PIC-9 to suggest these evolving geopolitical due to climate change further exacerbates the dynamics have produced highly divisive internal and fragility of marine and land ecosystems. In addition conflicts. However, local populations express concerns to pressures exerted by climate change and unmanaged about the role of foreign commercial investors and urbanization, customary land is threatened by a lack certain high-profile infrastructure projects. More of robust frameworks for equitably managing land and important, geopolitical dynamics are changing the marine/coastal transactions. The pressure to release nature of development assistance, with aid being communally held land for foreign investment, large- perceived as a more explicit foreign policy tool.24 This scale infrastructure development, and commercial has often entailed a shift away from donor focus on agriculture exacerbates competing claims over land development outcomes that are scaled to support local and weakens the ability of traditional governance capacity to more performative displays that emphasize systems to resolve them effectively. Traditional land the amount of funds committed. and natural resource management are complex issues that now needs to evolve to accommodate new The promise and challenge of regionalism in economic pressures and climate challenges. Deep sea supporting PIC-9 development remain. Successes mining and decisions on access to marine resources such as the Parties to Nauru Agreement combined are also emerging as concerns in some countries and with the threatened withdrawal of the five Micronesian highlights potential social and environmental risks members from the Pacific Islands Forum (PIF) and the (especially for biodiversity). University of the South Pacific’s drawn-out governance controversies illustrate both the promise and challenge Disasters and climate change of regionalism. Many smaller PIC-9 countries rely on a vibrant Pacific regionalism to function well, particularly The Pacific region is widely regarded as a hotspot in relation to the specialist/technical expertise and for both natural hazard exposure and climate change programs available through the Council of Regional risk. According to the probabilistic risk assessments Organizations in the Pacific (CROP). In the past two of the Pacific Catastrophe Risk Assessment and years, the effectiveness of these agencies’ operations Financing Initiative (PCRAFI), tropical cyclones, has been tested by COVID-19 travel bans. Taking earthquakes, and tsunami cause an annual average a broader view, regional solutions have had limited loss of US$284 million, or 1.7 percent of regional GDP.27 success to date—with some notable and important Impacts can be substantially larger for severe events— exceptions, and the recent withdrawal of Micronesia’s even though they are infrequent. The Pacific region has threat to exit from the PIF.25 Regional coordination’s a 50 percent chance of facing annual disaster losses successes in the Pacific include the Pacific Regional exceeding US$1.3 billion in any 50-year period. PICs are 23 A case in point is Tonga, where an anti-corruption commission established in 2008 has not effectively investigated cases. 24 COVID-19 Has Exposed Need for a Better Way in Pacific Aid, Hilda Heine and Thom Woodroofe. https://asiasociety.org/policy- institute/covid-19-has-exposed-need-better-way-pacific-aid. 25 https://www.theguardian.com/world/2022/jun/08/pacific-leaders-reach-crucial-deal-to-restore-political-unity-as-chinas- interest-in-region-accelerates 26 Carter, George (2016). Establishing a Pacific voice in the climate change negotiations. In Greg Fry and Sandra Tarte, (eds). The New Pacific Diplomacy. Canberra: ANU Press, pp. 205–220; Fry, Greg (2019). Framing the Islands: Power and Diplomatic Agency in Pacific Regionalism. Canberra: ANU Press. 27 This includes the wider Pacific region, not just the PIC-9 countries. 40 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE at risk for some of the world’s largest annual disaster volcanic and composite islands can be highly exposed losses, with average annual losses of 6.6 percent of to geological hazards arising from earthquakes and GDP for Vanuatu and 4.4 percent for Tonga (compared volcanic eruptions. Table 2 includes estimates of the a global average of 0.5 percent of GDP in the decade up share of each nation’s islands facing high or very high to 2010).28 levels of geomorphic sensitivity resulting from physical properties and location. Pacific Islands Countries are also amongst those most prone to compound risk. For PIC-9 countries, Annual financial losses are high in all PIC-9 nations for oftentimes an individual shock—such as a tropical which limited Emergency Events Database (EM-DAT) cyclone, pest outbreak, or volcanic eruption—is amplified data are available, with Vanuatu, Tonga, Palau, and by existing stressors and lead to cascading effects that FSM faring the worst. Historically, reliable data on the have broader implications for development outcomes. frequency and intensity of hazards and the populations In a recent study, a comparison of two compound exposed to them have been underestimated.30 Cyclone events in Vanuatu showed that major compounding Pam, a Category 5 tropical cyclone, struck Vanuatu in effects were found for sectors related to agriculture; 2015, killing 11 people, destroying or damaging more housing; and water, sanitation, and hygiene.29 Transport than 17,000 buildings, and displacing 65,000 people. and tourism sectors were badly affected, but with Estimated economic damages associated with the differing long-term effects. Challenges to connectivity incident were roughly equal to 64 percent of GDP. within and outside the country are exacerbated by Recent years have seen other Pacific islands struck compound events and the ability to absorb multiple by cyclones of record-setting magnitude, including shocks depend on how long connectivity issues are cyclones Winston (2016) and Gita (2018). In absolute disrupted. Compound events deepen economic damage terms, lost years of life are higher in the more populous if there is underlying institutional fragilities. islands of Vanuatu and Samoa. Across the region, an estimated 50 percent of these losses derive from The overall frequency of disasters shows an upward cyclone impacts, 20 percent from droughts, and 15 trend since at least the 1980s (Figure 22). Exposure percent each from floods and earthquakes. to natural hazards is significantly influenced by each island’s geological properties and geographic position. The Pacific Islands have very high exposure and This is sometimes called “geomorphic sensitivity.” vulnerability to the impacts of climate change on Most Pacific nations contain many islands with land, marine, and water resources and climate- many different characteristics, and geomorphic sensitive livelihoods. The Sixth Assessment Report sensitivity can vary significantly both between and of the Intergovernmental Panel on Climate Change within nations. In general, the sensitivity created by (IPCC)31 expects a continuation throughout the 21st an island’s characteristics tends to be highest in reef century of warming ocean acidification and marine islands (Tuvalu, RMI, and Kiribati) and low-elevation heatwaves, which together affect coral reefs and limestone islands. It tends to be lowest in volcanic contribute to coral bleaching. Increased sea levels and and composite islands (Vanuatu). On the other hand, storm surges will exacerbate coastal inundation, cause 28 https://ourworldindata.org/natural-disasters 29 Global Crisis Risk Platform (Forthcoming). Unpacking Compounding Risks in Pacific Islands Countries: A Case Study of Interacting Climate and Covid-related Threats in Vanuatu was conducted as an input to the Risk and Resilience Assessment for PIC9. These two compound events for Vanuatu include: 1) 2015-2016’s TC Pam and an El Nino-induced drought; and 2) 2020’s COVID-19 and TC Harold. 30 A sample of 116 EM-DAT-reported disasters, for example, contains only 51 with estimates on damages. Furthermore, it has been reported that EM-DAT data “greatly underestimates the burden of disasters on the Pacific Islands” because damage and loss assessments for all events are not conducted. The EM-DAT reports include damages to economic assets, but they do not account for economic opportunity costs (e.g., losses due to service disruptions like blackouts) and lost productivity. As data collection improves, the true potential scale of these losses is emerging. See, for example, the United Nations, Economic and Social Commission for Asia and the Pacific (ESCAP) (2020). The Disaster Riskscape across the Pacific Small Island Developing States: Key Takeaways for Stakeholders. ST/ESCAP/2880. URL: https://www.unescap.org/sites/default/files/IDD-APDR-Subreport-Pacific-SIDS.pdf. 31 IPCC Sixth Assessment Report (AR6) - Working Group (WG) I; Regional Fact Sheet, Small Islands - https://www.ipcc.ch/report/ ar6/wg1/downloads/factsheets/IPCC_AR6_WGI_Regional_Fact_Sheet_Small_Islands.pdf). The report notes that “constructing climate information for small Islands is challenging due to lack of observations and high-resolution climate projections, as well as the representation and understanding of key modes of variability and their interplay with trends.” This is exacerbated for the PICs because they are widely dispersed in a large ocean. 41 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 22: Occurrence of disasters in PIC-9 Countries has increased 8 7 Number of Natural Disasters 6 5 4 3 2 1 0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Total ocurrence of natural disasters-PIC-9s Total ocurrence of natural disasters-PIC-9s (3 yrmoving average) Source: EM-DAT data. Note: Disasters include droughts, earthquakes, floods, landslides, mass movements, storms, volcanic activity, wildfires and extreme temperatures. Table 2: Average annual losses due to disasters as a percentage of GDP Figure annual Average in 22: Occurrence of disasters PIC-9 losses Countries Average annual losses Estimated total life years Nation (% GDP) (US$ per capita) lost (1990-2012) has increased Kiribati 4 50 14,000 RMI 4 150 18,000 8 FSM 10 300 40,000 7 Number of Natural Disasters Nauru n.a. n.a. n.a. 6 Palau 12 1,200 9,000 5 Samoa 5 200 300,000 4 Tonga 18 700 70,000 3 Tuvalu 4 150 34,000 2 Vanuatu 21 600 100,000 1 Source: UNESCAP (2019) and Noy (2016). Note: Includes the losses from tsunami, floods, earthquakes, drought and tropical cyclones. 0 Average annual losses per capita are rounded to the nearest US$ 50. 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Total ocurrence of natural disasters-9PICs Total ocurrence shorelines to retreat, disasters-9PICs of naturalsaltwater and increase intrusion The distribution and abundance of tuna species, (3 yrmoving average) into freshwater aquifers and potable water. Most PIC- a critical income source for many PICs, is also Source: EM-DAT data 9 countries Note: Disasterswill face include more intense droughts, but floods, generally earthquakes, fewer landslides, influenced by climate drivers like ENSO and the tropical mass cyclones; movements, volcanic nations however, storms, in central activity, wildfires north and extreme Pacific Decadal Oscillation. During ENSO episodes temperatures. Pacific (e.g., RMI) could experience increased frequency. (with time scales of two to seven years),33 tuna are The IPCC Summary for Policymakers32 also concludes mostly caught farther to the west and fishing efforts that heavy precipitation and associated riverine and decrease in the central Pacific. As a result, ENSO and coastal flooding events will grow more intense and its strength determine where national and foreign frequent and that the region’s mean climate and fleets fish, and the total license fees each PIC receives extremes are likely to be amplified by El Nino Southern through foreign fleet access, transshipment, and Oscillation (ENSO). licensing. Access to information on ocean and fisheries 32 IPCC AR6 WGI Summary for Policy Makers (SPM) - https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM_ final.pdf. 33 IPCC AR6 Glossary of Terms - https://www.ipcc.ch/site/assets/uploads/2018/11/sr15_glossary.pdf 42 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE forecasting due to climate change impacts on future with Pacific Islands particularly vulnerable to worsening fishing opportunities is a critical decision-making tool health conditions36 due to their limited land availability, for the PICs, but this information is increasingly difficult low lying atolls, reliance on coastal environments, to forecast. and population pressures. Direct impacts on human life are compounded by indirect health threats linked These changes are also disproportionately driving to extreme weather events, increasing air and sea displacement in island nations like the PIC-9.34 temperatures, and risks to clean water and food The IPCC Working Group II (WGII) report concludes security. These include heat-related illness and stress, that ecosystem-based adaptation, such as protecting vector- and water-borne diseases, respiratory illnesses, and rehabilitating coastal wetlands and riverine poor nutrition, mental health stresses, and a variety vegetation, will slow the losses to floods and shoreline of other disorders.37 As will be further discussed below erosion—at least until the rate of sea level rise exceeds under the “strengthening health systems to improve the ecosystems’ adaptive capacity. In addition, such coverage and resilience” development priority, PIC-9 adaptive measures can be cost-effective and combined countries already have the world’s highest burden of with infrastructure solutions, especially in urban areas. chronic noncommunicable diseases (NCDs), and the They also provide an opportunity to put the WB’s Green NCD epidemic is likely to accelerate with increasingly Resilient and Inclusive Development (GRID) framework sedentary behaviors due to heat and a growing reliance into action through adoption of green infrastructure on imported processed foods of high kilojoule content design/build projects that offer participatory and but poor quality. Natural disasters and other shocks are inclusive ways to contribute to resilient outcomes (as also associated with increases in gender-based violence in WB-supported projects in Kiribati, Samoa, and RMI). (GBV).38 Climate change risks will rise rapidly by mid-century, Sea-level rise poses a serious threat to Pacific posing an existential threat to the PIC-9 nations and nations’ food and water security due to potential affecting cities, settlement, and infrastructure.35 For salinization of crops and potable water sources. human populations, residents of the PIC-9 countries Many PIC-9 residents face challenges in accessing included, potential exposure to a 100-year coastal basic services that ensure clean water, hygiene, and flood is projected to increase by about 20 percent adequate treatment and disposal of waste, increasing if global mean sea level rises 0.15 meters relative to the risk of deadly yet preventable diseases.39 Reduced 2020 levels; the exposed population doubles at a 0.75 access to clean water not only impacts health directly meter rise in mean sea level. Costs for maintenance but also compounds the impact on agricultural land and reconstruction of urban infrastructure, including and traditional crop production, leading to the higher buildings, will also increase. PIC-9 nations will have to reliance on expensive and unhealthy imported foods. initiate combined and sequenced measures—including Rising sea levels increase flooding and erosion of protection and relocation—to minimize losing hard- coastal dumpsites (common in low lying, small PICs), earned development gains. causing increased pollution. Vulnerability to a broad spectrum of human health risks related to climate change is accelerating in the PICs. Some consider climate change to be today’s greatest threat to human health and development, 34 IPCC AR6 WGII SPM - https://report.ipcc.ch/ar6wg2/pdf/IPCC_AR6_WGII_SummaryForPolicymakers.pdf. 35 For reference, See WGII of IPCC 6AR, footnote 13. 36 https://www.internationalaffairs.org.au/climate-change-and-public-health-in-the-pacific/. 37 McIver, L. et al. (2016). Health Impacts of Climate Change in Pacific Island Countries: A Regional Assessment of Vulnerabilities and Adaptation Priorities. Environmental Health Perspectives, 124(11), 1707–1714. URL: https://www.ncbi.nlm.nih.gov/pmc/articles/ PMC5089897/. 38 In Tonga, for example, COVID worsened sexual harassment and GBV. The Tonga Women and Children Crisis Centre recorded a 54 percent increase in the number of cases in 2020 (World Bank 2022, Second Resilience Development Financing, Supplemental Financing, Report No: PGD4996DPO). The country’s recent volcanic eruption also led to spikes in GBV (https://www.abc.net.au/ news/2022-04-17/how-disasters-tonga-hunga-tonga-haapai-volcano-impact-women/100989638). 39 https://www.unicef.org/pacificislands/press-releases/pacific-thousands-people-will-still-lack-access-safe-water-sanitation-and- hygiene. 43 4 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE CHAPTER ADDRESSING CONSTRAINTS: PATHWAYS AND PRIORITIES 44 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE A s the PIC-9 region looks to recover from particularly relevant to the PIC-9’s efforts to improve the COVID-19 pandemic and raise its economic growth and shared prosperity. These development trajectory, it will need development priorities were first identified in the 2016 to address previously acknowledged SCD, but they have been updated and nuanced to fundamental challenges as well as emerging meet new challenges facing the region. They include: challenges associate with climate change and other 1) revitalizing and realizing sustainable tourism; 2) disaster risks. As already noted, economic growth and expanding economic opportunities in oceanic fisheries; poverty reduction were slow and uneven before the 3) enhancing labor mobility opportunities; and 4) pandemic. The region faces the immutable challenges improving digital connectivity and services in private of small size, dispersed populations, remoteness, and public sectors. Under this pathway, the common and high vulnerability to climate change-related and theme is expanding opportunities for the limited areas other disasters. The consequent lack of economic available for higher incomes and commercial activity diversification, vulnerability to macro and fiscal shocks, in the Pacific. The key linkage between this pathway and high risk of debt distress, slowed development and its associated development priorities is enhancing progress in many dimensions. While the Pacific’s employment and incomes, but the priorities also have reliance on external aid is unlikely to disappear soon connections to the other pathways that follow in this and increasing geopolitical strategic competition may Update. For example, improving digital connectivity and offer both opportunities as well as new challenges, the services not only provides avenues for new employment identified development pathways and priorities may opportunities and income gains but also plays a role help improve the PIC-9 region’s likelihood of reaching the supporting education and health under Pathway 2. twin goals of reducing property and enhancing shared Each development priority that follows begins with a prosperity. The following sections detail each of the description of its importance to PIC-9 development and development pathways and associated development current challenges; it then proceeds, under the heading priorities to achieve the high-level objectives and of “The Way Forward,” to policy and investment options ultimately the twin goals as shown in Figure 3. for maximizing future development. Pathway 1: Increasing economic 1. Revitalize and realize sustainable tourism opportunities COVID-19 and Pacific Tourism To reach their economic potential, the PIC- 9 countries require greater opportunities for Prior to COVID-19, tourism was an important employment and growth. Pathway 1—“increased source of PIC’s foreign exchange, employment, and economic opportunities”—identifies four critical areas economic growth, but benefits and growth were 45 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE uneven. Countries such as Palau, Vanuatu, and Samoa in tourism’s modern history, with Asia, the Pacific, and were able to capture more revenue as destinations SIDS hit especially hard (Figure 23).42 Severe travel with stronger market penetration and air connectivity restrictions and small domestic markets meant the (Table 3). However, growth in these countries had either PIC-9 has had a deeper loss of tourism revenues and plateaued or reversed in the five years prior to COVID. contribution to GDP than other SIDS. This impact Younger and more remote countries experienced continued: in 2021, the Asia Pacific region had the stronger overall growth during this time, albeit from a slowest recovery among global regions. The crisis had low base, and still struggled to extract value from the dramatic economic and social impacts on firms and sector. workers that rely on tourism, and these losses were only partly offset by relief measures adopted by some COVID-19 reversed a large portion of tourism’s governments.43 Pacific Asia Travel Association (PATA) direct poverty reduction benefits through dramatic forecasts anticipate arrivals to the Pacific recovering to losses in formal employment. In the context of weak pre-COVID levels by 2023 at the earliest and post-2024 private sectors, tourism serves as a key source of jobs at the latest.44 UNWTO research supports this, with and income for Pacific Islanders, including women and experts anticipating the recovery of Asia Pacific tourism youth. It is one of the few sectors that offers formal arrivals will not occur until 2024 or later (compared to employment opportunities and associated benefits 2023 for other regions).45 to low and medium-skilled workers. Pre-pandemic, tourism directly employed an estimated 34,619 people Historically, tourism jobs offered economic security across the PIC-9, with Palau, Vanuatu, Samoa, and in the Pacific, but COVID-19 impacts created an Tonga having the largest share of tourism workers.40 employment crisis that drove many of the sector’s WTTC estimated that the impacts of COVID-19 reduced workers into poverty. While responsible for less than 10 tourism jobs by 29.7 percent in Vanuatu, 27.2 percent in percent of employment, the tourism sector sustained Tonga, and 22.8 percent in Kiribati between 2019 and income and employment shocks that were the main 2020.41 transmission channels for COVID-19’s impacts on poverty. At the $5.50 per capita threshold, tourism The pandemic halted progress toward sustainable accounted for nearly 30 percent of the national poverty tourism development, with Pacific countries faring increase in Vanuatu (1.5 points of the 5.4 percentage- worse than other small island developing states point increase) and nearly 60 percent of the increase (SIDS). The COVID-19 pandemic was the worst crisis in Kiribati (0.9 points out of 1.6 points). At the $3.20 Table 3: Uneven tourism growth rates across the PIC-9 before COVID-19 Country Tourism Contribution to GDP (%) CAGR 2009-2014 (%) CAGR 2014-2019 (%) Kiribati 5.1 -4.3 17.5 Vanuatu 22.6 1.3 1.8 Samoa 24.5 0.4 3.6 Tonga 11.1 -2.5 6.6 Palau 38.0 9.4 -5.5 FSM 17.7 -4.8 -10.7 RMI 9.5 -0.5 4.2 Tuvalu 5.6 -0.8 15.8 SPTO (2019) Annual Tourist Arrivals. Notes: No data for Nauru. CAGR=Compound annual growth rate 40 SPTO (2018) Annual Tourist Arrivals Review. 41 WTTC (2021). Economic Impact Reports. Retrieved from https://wttc.org/Research/Economic-Impact. 42 World Bank (2020). From Containment to Recovery: Economic Update for East Asia and the Pacific, October 2020. Washington, DC: The World Bank Group. 43 UNWTO (2020) Tourism in SIDS: the challenge of sustaining livelihoods in times of COVID-19. UNWTO Briefing Note - Tourism and COVID-19, Issue 2, Madrid: United Nations World Tourism Organization. 44 PATA (2022). Asia Pacific Visitor Forecasts 2022-2024: Executive Summary. 45 “Tourism grows 4% in 2021 but remains fair below pre-pandemic levels” (UNWTO, 18 January 2022). 46 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 23: COVID-19’s impact on tourism and travel (T&T) in the PICs and other SIDS COM DMA MDV MUS SAM KNA GRD TON PNG BRB BHS TUV ATG VCT SYC CPV CLA PUL STP SLB KIR FJI -0% -10% -20% -30% -40% -50% -60% -70% -80% -90% -100% Change in international visitor spend in 2020 Change in T&T´s GDP share in 2020 Source: WTTC, SPTO. poverty line, lower rates of impacts in both countries Tourism businesses extended COVID-19- were found. When assessing poverty impacts of tourism caused “hibernation” will impact destination While limited data make it difficult to draw conclusions, competitiveness and recovery timelines. In the this implies that tourism offers greater economic pandemic’s early days, a survey in Samoa found that mobility above the lower threshold of poverty—i.e., from 70 percent of businesses did not expect to survive vulnerability to economic security.46 over the next two months.47 Most of the shuttered businesses across the PIC-9 are MSMEs, vulnerable Pre-COVID, the ability of the local workforce to to the crisis because of their lack of internal safety provide high-quality labor varied among countries, nets and limited support from governments. Tourism with more mature destinations benefiting from MSMEs play an important role in distributing benefits anchor business like airlines and international across the economy and creating authentic experiences hotels that provide in-house training. The Pacific aligned with market demand. These MSMEs now face Tourism industry is largely staffed by locals paid above uncertainty in resuming business because they have minimum-wage incomes, particularly in low and medium limited capital to fix unmaintained infrastructure, hire skilled jobs. However, the industry requires a range of back workers, reacquire assets, and reestablish local workers, including those with high skill level in aviation, supply linkages. These challenges, paired with their management, and culinary specialties and vocational greater flexibility to pivot to new industries, may mean skills in maintenance, spas, and reception. Countries that some tourism MSMEs will not return, even when with anchor private sector companies, like airlines aggregate demand recovers. A loss of MSMEs will create and internationally branded hotels, have an inherent a lack of diversity in service and product offerings, competitive advantage in developing skills, meaning undermining the tourism sector’s value, limiting its more mid and upper management jobs can be filled by poverty alleviation benefits, and impacting its ability to local workers rather than expatriates. These companies support local supply chains. supplement skills development through in-house training, exposure to business practices, and career development opportunities. Workforce development is The Way Forward important in the context of transferrable skills, where Most of the PIC-9 aim to grow more inclusive, tourism workers with higher skill levels are able to sustainable, and higher-value tourism, a strategy transition to other sectors during a crisis and support they sometimes struggle to achieve. Each PIC-9 overall economic diversification. 46 Due to limited data, this analysis does not take in account tourism’s spill-over effects into agriculture, manufacturing, and non- tourism services like retail, where the greater poverty alleviation benefits from tourism may be captured. 47 UNESCAP. Micro, Small and Medium-sized Enterprises Access to Finance in Samoa: COVID-10 Supplementary Report and Recommendations. 2020. 47 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 24: In-country travel expenditure by tourist arrivals, 2008-2018 $3,000 $2,500 Expenditure per Arrival US$ $2,000 $1,500 $1,000 $500 $0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 KIRIBATI MARSHALL ISLANDS PALAU SAMOA VANUATU TONGA FSM Source: UNWTO. country has launched or updated a strategic tourism is a need to take a whole government approach in plan; seven of them are current. The most common tourism policy and priority-setting; tourism ministries theme expressed across the frameworks is the goal should be involved in critical decision-making on issues of environmental and social sustainability, with all but that impact the sector, and partner ministries should Nauru noting it as a key factor to tourism development. be held accountable for fulfilling their tourism-related Eight of the PIC-9 plans identify increased tourism responsibilities. This will require providing tourism yields and contribution to GDP as a development goal, ministries with the resources needed to lead the and most target increasing revenue per arrivals while implementation of detailed, actionable, and consistent decreasing pressure on the environment and society. tourism strategies. Despite this strategic vision, almost all countries made little or no progress on increasing tourism expenditure To rebuild the positive economic impacts of pre- per arrival over the past decade, and most countries COVID-19 Pacific tourism, supply and demand side continue to use arrivals numbers as a primary indicator constraints need to be addressed in coordination of tourism success (Figure 24). and guided by quality data and statistics. PICs have a competitive advantage in the tourism sector because In the recovery period, PIC-9 countries will need they combine world-class natural assets, unique cultural targeted and realistic strategies, a robust whole- experiences, foundational tourism infrastructure, and of-government approach, and stronger institutional pre-existing services skills. The challenge will be to reset capacity to deliver on a vision of sustainable, high- tourism positively, focusing on building a sustainable, value tourism. Many of the tourism strategies and inclusive, and resilient sector. This will depend on policies are idealistic, lack sustainability mainstreaming, dedicated and practical roadmaps for reopening contain contradictory priorities, and lack measurement and investment in sustainable and resilient tourism systems. The latter continues to be a challenge despite infrastructure and businesses that consider both past efforts to define and collect data on tourism demand and supply constraints. Demand initiatives sustainability indicators. The governance challenges (promotion) will be insufficient if supply constraints include mismatches in regulatory purview for tourism- exist (e.g., lack of air capacity, safety personnel, hotels, related regulations, unspecific regulatory reforms, tour operators, etc.)—particularly after a long period of and under-provisioning of public good investments hibernation. All actions need to be supported by robust in skills development and marketing. For example, tourism data systems that facilitate sustainability tourism ministries often do not have regulatory and recovery monitoring. Without a dedicated focus purview over zoning, licensing, marine regulations, on critical investments, tourism’s positive impact on and immigration, all of which can significantly impact the broader economy—including receipts, employment, tourism’s competitiveness. Underlying these challenges and positive spillover benefits—may be lower than 48 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE pre-pandemic projections and the sector may be less offered by digital technology, however, they must go inclusive. beyond investments in digital marketing and leverage back-end business service software, innovate in Reaping tourism’s long-term benefits will require product development integration, and create customer market diversification through targeted marketing engagement systems. This can have broader economy- and product development paired with consistent, level spillovers, supporting economic diversification transparent communication. Many PICs were already within tourism and into other technology-driven focused on higher value, niche markets and creating sectors. From a government perspective, strong more sustainable tourism industries, and the pandemic leadership and a strategy for digital transformation created a catalyst for a renewed focus on these efforts. is critical, including demonstrating a clear return on Pre-COVID-19, per person average expenditure per digital investments, creating systems for equitable data trip varied but was relatively low—US$1,142 in Samoa sharing, implementing competition policies to better in 2018 and US$943 in Palau in 2017.48 According to govern e-platforms, supporting digital innovation, and World Bank market research, market segments with a building digital capacity inside government. greater focus on nature-based and sustainable tourism are also the highest spending. Sustainability is of Combating the climate crisis will require integrated increasing importance to consumers, with 75 percent planning for investments in resilient infrastructure of respondents saying a country’s focus on sustainable and essential services that serve both local living is important or very important in a destination populations and tourists. Much of the Pacific’s tourism selection. Travelers across markets now also place a assets are in fragile coastal ecosystems increasingly higher premium on a destinations’ healthcare systems at risk to disasters and rising sea levels. The region is and hygiene and seek certainty on travel restrictions.49 also facing challenges in managing the marine plastics By supporting high value markets through diversified inflow stemming from Southeast Asia and the fisheries marketing and increased connectivity, the PIC-9 can industry. While Pacific tourism does not significantly use their limited air capacity to stimulate stronger contribute to global carbon emissions, it must act to economic growth from tourism. To attract higher mitigate the risks of climate change’s impacts on the value tourists, PICs’ governments and industries will environment. This will require investments in resilient need to invest in marketing, product development, tourism, tourism-related infrastructure, and essential worker training, travel logistics, and transparent, services based on integrated planning to understand consistent communication. Diversification toward more future demand from both local populations and tourists. sustainable, high-value markets should be paired with These investments will need to be paired with programs source market diversification to reduce overreliance on to support and incentivize tourism businesses to invest regional markets and vulnerabilities to country specific in circular economy practices, resource efficiency, and shocks in the future. resilient business-level infrastructure. All of this will need to be underpinned by sustainability monitoring Deeper digital integration across businesses, with clear standards, sufficient data collection destinations, and governments is needed to spark resources, and the analytical capacity to transform the digital revolution in the Pacific and increase yield data into recommendations. from the sector. Investments in marketing and product development need to be paired with investments in PIC-9 countries have an opportunity to leverage the digital transformation at the government, destination, reopening of international tourism to “reimagine and business levels. The pandemic has put pressure on tourism,” address its structural issues, and rebuild the tourism industry to harness digital technologies competitiveness in a “new normal.”51 This would mean and data in a context where more transactions are building a sector with more emphasis on resilience, done online and travelers seek more information and inclusiveness, innovation, and sustainability. Most flexibility.50 For firms to achieve productivity increases Pacific countries have already created strategies and 48 UNWTO Country Basic Indicators. 49 World Bank (2022) Small Island Developing States Travel Consumer Research (unpublished draft). 50 McKinsey (2020). “Reimagining the $9 trillion tourism economy—what will it take?” McKinsey. August 5. https://www.mckinsey. com/industries/travel-logistics-and-infrastructure/our-insights/reimagining-the-9-trillion-tourism-economy-what-will-it-take. 51 World Bank (2020). From Containment to Recovery: Economic Update for East Asia and the Pacific, October 2020. Washington, DC: The World Bank Group. 49 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE set visions toward a sustainable and high value tourism the Forum Fisheries Agency (FFA),55 license and access industry. However, continued challenges and limited fee revenues for tuna fishing increased from around progress over the past decade have demonstrated US$150 million in 2010, when PNA approved the VDS, the importance of broader views on tourism and to above US$550 million in 2019.56 Average license complementary business climate improvements in and access fee revenues over the 2017-2019 period transforming the sector and PIC economies. Ensuring amounted to US$510 million, and US$296 million went the maximum benefits of tourism and its broader to the PIC-9 countries.57 For the PIC -9 countries, the economic spillovers for the whole economy means estimated average annual access fees for the 2015- prioritizing investment-friendly and tourism-related 2018 period accounted for around 45 percent of all strategic actions within regulatory reforms across government revenues. The range goes from 9 percent PIC governments. Taken together these actions will for Palau to 71 percent for Kiribati.58 Revenue gains have not only stimulate tourism but also open countries been driven by higher rates of return from the purse- to broader private sector development and economic seine fishery (not catch amounts). In 2011, for example, diversification. access fee revenue equated to around 6 percent of the value of the catch taken in FFA members’ waters. Since 2015, the rate of return has been around 20 percent. 2. Expanding economic opportunities in oceanic Nonetheless, opportunities exist to enhance revenues fisheries from the VDS scheme and to extend it to long-line vessels. Oceanic fisheries are one of the PIC-9’s most valuable resources, allowing the region to supply The Way Forward much of the world’s tuna. For many PICs, oceanic fisheries are important as a primary source of exports Reforms that provide greater flexibility and and national revenue. The Western and Central Pacific transferability of VDS fishing days would make the Ocean (WCPO) is the most important area globally for access right more valuable for fishing companies, tuna fisheries, accounting for more than 50 percent potentially increasing government revenues. Such of global catch.52 The PIC-9 countries supply half of reforms to consider would comprise: that (about 25 percent of global catch). Most of the region’s catch is exported (an estimated 3 percent of i. Increasing “pooling”: Pooling involves multiple PNA the PIC-9’s catch is locally processed),53 and the global members jointly selling a portion of their VDS days supply chain is heavily dependent on the region’s tuna. and allowing the purchasing vessel to use these Enhanced regional oceanic fisheries management days in any of their exclusive economic zones (EEZs). efforts can provide larger public revenues on top of Pooled VDS days thus expand the space over which already significant fisheries income for many PICs, current access rights apply, increasing their value. and opportunities for links to domestic markets could PNA members began experimenting with pooling provide for greater food security in the region. in recent years, learning several lessons and seeing encouraging results. Most notably, prices for pooled The oceanic fisheries are well managed, with major days were much higher than the VDS minimum of stocks being in good health. The eight countries and US$8,000/day. Rents could be further increased by: one territory.54 that formed the Parties to the Nauru (i) expanding the number of VDS days sold via pooling Agreement (PNA) operate a Vessel Day Scheme (VDS) mechanisms; and (ii) using regional cooperation to to collectively limit fishing days and sell them to increase the number of EEZs to which pooled days operators of purse-seine vessels. Among members of apply. 52 https://atuna.com/pages/world-tuna-catches-by-species. 53 FFA and SPC, 2020. Tuna Fishery Report Card 2020 [Leaflet]. Honiara, Solomon Islands: Fisheries Forum Agency and Noumea, New Caledonia: Pacific Community. 5 p. and World Bank team’s calculation. 54 FSM, Kiribati, RMI, Nauru, Palau, Papua New Guinea, Solomon Islands, and Tuvalu, plus Tokelau Territory. 55 FFA’s 17 Pacific Island members are Australia, Cook Islands, FSM, Fiji, Kiribati, RMI, Nauru, New Zealand, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu. 56 FFA and SPC, 2020. Ibid. 57 Barange, M. et al., eds. 2018. “Impacts of climate change on fisheries and aquaculture: synthesis of current knowledge, adaptation and mitigation options.” FAO Fisheries and Aquaculture Technical Paper No. 627. Rome, FAO. p 628. 58 Bell et al. (2021). Ibid. 50 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE ii. Extending the duration of tuna fishing rights are unexplored. Improved fishery governance remains beyond one year: PNA members could collectively vital to ensure resource sustainability and achievement or individually extend the “life” of a VDS day—the of the PICs’ broader development objectives while duration during which the fishing right can be utilized. maintaining the value of fishing days sold through VDS From one year (VDS days currently expire at the end and harnessing benefits the industry delivers to the of each calendar year), the term may be elongated national economies. In an illustration of the importance to three, five, or even 10 years (in the long term). of regional cooperation and national implementation, This is currently under discussion in the regional significant investments to strengthen Monitoring, discourse to capitalize the VDS allocations.59 Control, and Surveillance (MCS) have reduced illegal, iii. Allowing transferability of tuna fishing rights unreported, and unregulated (IUU) fishing in the WCPO between authorized users: In practice, this involves by one-third.62 However, IUU fishing remains one of permitting exchange of VDS days on a secondary the greatest challenges. The FFA estimated IUU losses market. Theory and empirical research indicate at 192,200 tons, or 6.5 percent of the total Western that transferability between fishing companies and Central Pacific Fisheries Commission’s (WCPFC) increases a fishery’s overall revenues by creating a Convention Area catch. In revenue terms, it amounts to market mechanism to ensure marginal benefits are a loss of US$333.5 million.63 Addressing IUU and related realized.60 It allows users to restructure in response governance challenges requires a better understanding to changes in technology, markets, resource of public expenditures and decision-making processes, conditions, and the environment—thus making improved transparency, and continued commitment access rights more valuable. to supporting fisheries management, further strengthening MCS, and reducing IUU. MCS is essential The potential for increasing oceanic fishing revenues but expensive, and opportunities exist to increase is substantial. Table 4 shows the potential impact of efficiency and performance. these reforms on revenues for the six PIC-9 countries. For FSM, increases in the average VDS prices would There are opportunities to bolster domestic food generate and additional US$9 to US$31 million, security by enhancing linkages to oceanic fisheries. equivalent to 2 to 8 percent of GDP. For Kiribati, the Despite healthy stocks, the contribution of oceanic potential upside is even higher given the country’s fisheries to the PICs’ domestic economies and food larger Party Allowable Effort61 (PAE) allocation, with supply is limited. Changing that starts with a better reforms expected to increase revenues by US$8 to understanding of the constraints and opportunities US$47 million, equivalent to 4 to 24 percent of GDP. for increasing domestic landings and developing the Despite a smaller PAE allocation, RMI revenues are domestic market. The issues include exploration of expected to increase by between US$12 to US$23 regional approaches and economies of scale. This is million, equivalent to 5 to 10 percent of GDP. Nauru, especially relevant during the post-COVID-19 recovery Palau, and Tuvalu are already well above the current to reduce pressure on coastal fisheries and reduce minimum price of US$8,000 for their VDS days, so the dependence on imported food products. Limited analysis finds no substantial gains for these countries. sanitary and phytosanitary (SPS) facilities for tuna Even so, these countries can be expected to gain to the exports and trained staff to comply with SPS measures extent they can retain a premium over and above a are key constraints for tapping to the potential from the higher base price. oceanic fisheries value chains. Given weak capacity in many countries to undertake these activities, exploring A strong governance framework remains essential, and regional approaches to achieve economies of scale opportunities to address sector underdevelopment would be important. 59 See for example, https://www.pnatuna.com/content/pnao-gears-vds-expansion-business-plan-development-2019 and http:// pacifictuna.org/pna-officials-prepare-for-big-agenda-in-palau/. 60 See Aquora et al. (2020) for a detailed discussion of the opportunities, risks, and legal requirements for transferability. 61 Within the VDS, a Total Allowable Effort (TAE) in fishing days is determined for each year, and each PNA country receives a PAE. 62 MRAG Asia Pacific 2021. The Quantification of Illegal, Unreported and Unregulated (IUU) Fishing in the Pacific Islands Region – a 2020 Update. D. Souter, J. Lowe, C. Dixon, J. Potts, R. Banks, and F. Blaha, authors; and “Media Summary.” https://sustainpacfish.org/ observers-compliance-resources/. 63 MRAG Asia Pacific 2021. Ibid. 51 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table 4: Potential impact of VDS reforms on revenues Revenue Potential additional revenue Potential additional revenue PAE (US$ million) (% of GDP) without Country allocation reforms Lower Upper Lower Upper (days) (US$ million) estimate estimate estimate estimate FSM 6,135 71 9 31 2% 8% Kiribati 11,187 137 8 47 4% 24% Marshall Islands 3,292 31 12 23 5% 10% Nauru 2,292 38 -8 0 -7% 0% Palau 510 8 -1 0 -1% 0% Tuvalu 1,764 30 -7 -1 -14% -1% PIC-9 countries 25,180 315 12 100 1% 8% Source: World Bank, forthcoming, PIC-9 Public Expenditure Review. Tuna’s contribution to national food security is The 2016 SCD notes the benefits of international limited, and food loss and waste in domestic seafood migration to migrants, their households, communities, value chains need to be addressed. Increasing the and sending countries. Remittances are a significant quantity of tuna and bycatch species entering domestic income source that helps lift many households out of markets has high potential to fill an impending supply poverty; countries with the highest remittance rates, shortfall in fish from coastal fisheries and maintain PIC like Samoa and Tonga, also have some of the region’s food security. This could be achieved by onshoring from best development outcomes. Remittances have been the oceanic industrial fisheries and the development shown to finance essential consumption (World Bank of small-scale fisheries for capturing nearshore tuna 2021) and reduce income inequality (World Bank 2006). resources. While onshoring of bycatch species offers Recent data show that poorer households are just as some merit for development, problems with food likely to receive remittances as richer households—and hygiene, food processing, and food preservation will these transfers often represent a greater share of income need to be overcome. The problem is not restricted to for them (World Bank, forthcoming). Remittances have bycatch processing. Food loss and waste is also high also supported macroeconomic stability. In Tonga, in domestic fisheries. In addition, seafood value chains for example, they were a key countervailing force to face deficiencies in domestic cold storage and limited the negative impacts of COVID border closures and skills and facilities for seafood fish preservation in disasters in FY20-21. The increase in remittances was remote areas. While the cost of fuel and electricity unprecedented, rising from 29 percent of GDP in FY20 remain high, micro preservation technologies (e.g., to almost 40 percent in FY21 (estimated). Extending micro-canning) and fish drying and smoking provide backward in time, Samoa, Tonga, and Tuvalu all saw low-energy, low-cost options to preserve fish and significantly higher remittances in 2020 than in 2016 extend shelf life. Before pilot trials are considered, (Figure 25). however, potential investments in small-scale value chains will require a robust analysis of social, technical, Migration generally has a beneficial impact on cultural, and economic barriers. human capital development, with income earned overseas facilitating human capital investment. 3. Enhance labor mobility opportunities In Tonga, for instance, remittances have had positive impacts on both school attendance and post-secondary With limited domestic opportunities, international education attainment (World Bank 2006). At the same labor mobility is an important path for delivering time, migration opportunities can create an incentive significant and pro-poor benefits in PIC-9 countries. to invest in human capital.64 Moreover, when both 64 Satish Chand and Michael Clemens (2008) Skilled Emigration and Skill Creation: A Quasi-Experiment. Available at SSRN: https:// ssrn.com/abstract=1299135 or http://dx.doi.org/10.2139/ssrn.1299135 52 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE low-skilled and skilled migrants return, they transfer remittances to reduce foreign exchange and other knowledge and skills to their compatriots.65 fees provide opportunities for lower cost remitting pathways to select groups of migrants.66 These services Countries with better access to migration channels include Tonga’s pilot Ave Pa’anga Pau program that and labor mobility opportunities tend to send more offers lower fees for remittances sent from Australia67 people and receive more remittances. Compacts of and New Zealand’s Seasonal Worker Superannuation Free Association with the US grant three northern Pacific Administration Service (SWSAS). Migrant households Island states (RMI, FSM, and Palau) free movement of also encounter social costs, particularly with temporary their citizens into the US. Most other countries rely on migration schemes. Temporary circular migration, various quota-based visa and seasonal, temporary, and while providing much needed income, can increase vocational worker schemes that allow migration into the risk of eroding family structures and lead to the Australia, New Zealand, and the US (Table 5). fragmentation of social networks and stress. Women in particular are often reluctant to participate in labor Several factors constrain the benefits of labor mobility schemes when they have young children at mobility—notably the upfront cost, remittance home (World Bank, forthcoming).68 At the national level, fees and social costs. The upfront costs of relocation some concerns arise about the loss of human capital, can be significant and pose a barrier for poorer with PIC-9 nations’ emigration rates for workers with households. For particularly remote countries like tertiary educations particularly high. This is a key Kiribati and Tuvalu, administrative costs and airfares consideration for the tourism industry, where shortages can be prohibitively high for average households, let of qualified local labor impact service delivery and costs. alone the poorest ones. High fees for remitting money At the same time, evidence suggests that migration have historically undermined the net benefits of labor opportunities are a significant factor in the decision to migration; however, recent innovations that aggregates gain tertiary education in the first place.69 Table 5: PICs’ access to key labor mobility schemes RMI FSM PLW TON WSM KIR VUT TUV NRU Australia SWP Yes Yes Yes Yes Yes Yes PLS Yes Yes Yes Yes Yes Yes New Zealand RSE Yes Yes Yes Yes Yes Yes Samoan Quota Yes PAC Yes Yes Yes United States CFA Yes Yes Yes H-2A Yes Yes Yes Yes Notes: SWP: Seasonal Worker Program; PLS: Pacific Labor Scheme (in April 2022 SWP and PLS were consolidated into Pacific Australia Labour Mobility scheme or PALM); RSE: Recognized Seasonal Employer; PAC: Pacific Access Category; CFA: Compact of Free Association; H-2A: temporary agriculture visa. 65 John Gibson and David McKenzie (2010) The Economic Consequences of “Brain Drain” of the Best and Brightest: Microeconomic Evidence from Five Countries. Policy Research working paper WPS 5394. World Bank. https://openknowledge.worldbank.org/ handle/10986/3878 66 https://devpolicy.org/supporting-nzs-seasonal-workers-to-remit-and-save-20210324-1/. 67 https://www.lowyinstitute.org/the-interpreter/bang-buck-getting-most-out-pacific-islander-remittances. 68 A study is currently underway on the Gendered and Social Impacts of Labor Mobility, examining enablers and barriers to female participation in labor mobility programs, and impacts of temporary labor migration on female migrants, their partners, families and communities. Data has been collected and are being analyzed, with the study expected to be published later in 2022. 69 Gibson and McKenzie, ibid. 53 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 25: Migrants and remittances livelihood benefits associated with migration. These benefits include improved living standards through, for example, access to such labor-saving household items 60 45 as washing machines and greater financial security 40 from savings. In addition, most women report acquiring Migrants as % of population 50 Remittances as % of GDP 35 personal attributes ranging from job-specific skills 40 30 such as packing and grading fruit, English language 25 30 ability, time and financial management skills, and 20 leadership. Many women also report improvements in 20 15 10 confidence and self-esteem as a result of temporary 10 labor migration (World Bank, forthcoming). While 5 0 0 their participation has increased over time, women Kiribati RMI FSM Palau Samoa Tonga Tuvalu Vanuatu continue to represent only a small portion of total migrants. In FY20-19, prior to the COVID-19 pandemic, Migrants Remittances (2020)* Remittances (2016) women accounted for approximately 10 percent of visa grants in New Zealand’s RSE scheme and 18 percent in Source: World Bank. *Latest available data for Tuvalu is 2019. Australia’s SWP. Low participation rates are linked to a variety of factors—employer preferences, language One barrier to Pacific Island countries benefiting barriers, lack of finance, the physical nature of seasonal from international labor migration is the relatively horticultural employment, family commitments, access low skill levels of PIC workers and the focus on to information about the schemes, concerns over skilled migration in Australia and New Zealand. personal safety, and wider community perceptions Figure With the 25: Migrants exception andofremittances the Pacific Australia Labour about labor migration not being appropriate for women. Mobility (PALM) and Recognized Seasonal Employer An initiative in Tonga has shown some promise in (RSE) temporary labor migration schemes, migration increasing the rate of women preparing to migrate (see frameworks 60 in Australia and New Zealand mostly later section on gender and employment). 45 provide opportunities to skilled workers. As a result, 40 Migrants as % of population Remittances as % of GDP 50 access to migration pathways is rare for PIC residents, International labor mobility was disrupted by 35the particularly 40 those from the Melanesian states (excluding COVID-19 pandemic. The suspension of international 30 Fiji), and the average migrant worker tends to be highly travel put migration on hold for most of 2020, leaving 25 30 skilled. By contrast, diaspora groups with access to thousands of workers stranded in host countries 20and preferential 20 migration pathways, such as those from many others unable to arrive (World Bank, 2021). 15 Polynesia living in the US, Australia, and New Zealand, Significant employment and income losses 10 were tend10 to have low education levels, reflecting access for observed among Pacific migrant workers in Australia 5 low-skilled 0 groups. While a positive in terms of poverty and New Zealand. The pandemic led to an estimated 0 alleviation, such migration Kiribati RMI is not without FSM challenges, Palau worker Samoa shortfall of roughly Tonga 26,000 jobs Tuvalu in Australia.71 Vanuatu with migrants from these countries more reliant Migrants on low- Remittances Remittances (2020)* also fell Remittances in both frequency and quantity, (2016) skilled and casual jobs. They are at higher risk of job and although the extent of the reduction was much smaller Source: World income lossesBank. than*Latest available the general data for Tuvalu population is 2019. in the case of than expected (4.3 percent in October 2020). an economic downturn. During the COVID-19 pandemic, Pacific migrant workers were more heavily hit by the Despite travel restrictions and COVID-19’s impacts economic fallout of social distancing measures.70 on employment, migrants played a key role in supporting income resilience. The pandemic impacted For women, temporary labor migration can the earnings of RSE and SWP workers; by mid-2020, enhance living standards and skills, but women’s 69 percent of seasonal workers reported earnings were participation in the labor migration schemes lower than during January-February 2020. Female remains low. Women who participate in labor mobility workers faced larger earnings losses than males and schemes emphasize the substantial financial and reported an average reduction 16 hours per week, 70 World Bank (2021). Pacific Labor Mobility, Migration and Remittances in Times of COVID-19: Final report. Available here. 71 https://ausveg.com.au/media-releases/ey-report-demonstrates-26000-worker-shortage-that-will-cripple-fruit-and-vegetable- industries/. 54 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE compared to nine for men. This was likely due to temporary migration schemes in new destinations, such women’s greater employment in packing houses, which as Canada and Korea, could be targeted. As parts of were more severely impacted by social distancing Asia prosper and age, opportunities for low skilled work requirements and COVID-19 supply chain issues are likely to increase in the long run. PIC-9 countries than the outdoor work generally undertaken by male with young populations can position themselves to take seasonal workers. Despite this, survey data indicate advantage of the employment opportunities this will workers continued to send remittances to support create. Korea and Japan already operate migrant labor families at home even when suffering reduced income: programs, which to date primarily focus on originating 41 percent of workers whose earnings decreased either countries in Southeast and South Asia. maintained or increased their remittances. The workers’ households used remittances to finance essential Support can be provided to help workers find consumption, including food (91 percent of households), overseas employment. As already noted, migration school fees and other educational expenses (51 percent), pathways to Australia and New Zealand primarily and healthcare (19 percent) (World Bank 2021). focus on recruiting skilled migrants. Providing training that targets host countries’ skilled and semi- Attention should be given to increasing opportunities skilled employment needs would expand migration to participate in seasonal migration schemes opportunities and potentially broaden visa eligibility for and expanding access to permanent migration PIC-9 migrants. Australia’s Temporary Skill Shortage opportunities. Australia and New Zealand, the two (TSS) and New Zealand’s Essential Skills programs key destinations for seasonal workers from the award visas using occupational skills lists. Aligning South Pacific, restarted their temporary migration training with these lists and ensuring courses offered in programs in late 2020, and the number of new arrivals PICs meet recognized standards would ensure greater in Australia has been growing rapidly.72 Demand for employability in destination countries. The services temporary migrant workers in the two countries’ of the Australian Pacific Training Coalition (APTC) agriculture sectors remains strong. It is likely to stay facilitate links with Australian employer and could robust for the foreseeable future because backpackers improve employment outcomes for graduates. and international students, a major source of seasonal workers, have largely left due to the pandemic and are The COVID-19 pandemic has highlighted the unlikely to return in large numbers in the short term. important role Pacific Islanders play in supporting If anything, the COVID-19 pandemic highlighted the many essential industries in Australia and New important role that Pacific migrant workers play in Zealand. About half of all SWP (43 percent) and RSE many essential industries in Australia and New Zealand. (57 percent) employers surveyed by the World Bank With the election of a new government, Australia has reported experiencing at least one month of labor seen an enhanced commitment to meeting workforce shortages between March and August 2020 (World needs in regional areas using existing Pacific labor Bank, 2021). Demand for these workers remained mobility schemes, as well as the announcement of a strong, and 98 percent of employers wanted to employ new permanent visa category for Pacific islanders. Such seasonal workers from the Pacific/Timor-Leste again. initiatives serve to both improve development outcomes Nonetheless, employers faced challenges in recruiting for Pacific islanders and develop a sustainable supply workers and navigating changes to the schemes. of labor in agriculture and other industries that face They highlighted the need for (i) timely and consistent chronic worker shortages in Australia and New Zealand. guidelines related to visa and redeployment conditions; (ii) facilitation of communication with sending countries’ The Way Forward governments to recruit workers; (iii) transparent and fast processes to apply for recruitment approvals; Labor mobility opportunities could be expanded by (iv) stronger government-led programs to help match focusing on new destinations and targeting existing workers with job opportunities; (v) help for workers, schemes more effectively. The large Pacific diaspora households, and communities in the reintegration of in the US could help facilitate migration to the US, and seasonal workers into community and domestic labor 72 In April 2022, the Seasonal Worker Programme and Pacific Labour Scheme were consolidated as the Pacific Australia Labour Mobility (PALM) scheme. The merger aims to provide a more streamlined and flexible process for employers and workers. Further details are available at: https://www.palmscheme.gov.au/. 55 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE market (including access to finance to support SME growth for people who face social or physical mobility development); and (vi) secondary and post-secondary barriers that limit their participation in the economy. training that aligns with demands from receiving Across the PICs, efforts to increase digital access and countries (such as nursing, hospitality, aged care, etc. promote the productive use of digital technologies need in Australia and New Zealand) These are all issues that to accelerate. COVID-19 has deepened the Pacific’s PIC-9 government can help address with a view toward appreciation that filling the digital gap has a multitude enhancing overseas employment opportunities for their of spillover benefits, not only by improving economic citizens. opportunities, but also in improving public services, including through remote learning and health services to complement locally provided services. This will 4. Improve digital connectivity and services in require substantial investment throughout the digital value chain and in the following dimensions of the digital private and public sectors economy: infrastructure, public platforms, financial services, education, health, and entrepreneurship. Digital transformation holds great promise for PICs. Considering the small, dispersed populations and vast distances across the Pacific, the shift to digital Improving digital connectivity has significant potential to reduce transaction costs, create jobs, support innovation, and expand access to An important theme of the 2016 SCD was how services and markets. The countries recognize digital liberalization of telecom markets and investments technologies play an important role in promoting in submarine cables can provide new opportunities inclusion, improving public service delivery, creating for the PIC-9 to overcome the “tyranny of distance” jobs, and stimulating the economy. PICs have already through a focus on knowledge products. While some started to benefit from the digitalization of their countries have made progress, market liberalization economies, societies, and governments, but progress continues to be a work in progress. PIC-9 countries are is slow and, in many respects, the full game-changing proceeding at different rates, with many experiencing potential of digitalization in the region remains high costs, poor service quality, and intermittent untapped. Over the next decade, digital technologies access (if any). These issues are particularly acute on will provide the opportunity to transform how people, outer islands and in remote communities. Mobile phone businesses, governments, and markets interact, coverage and internet access have improved in the last transact, work, learn, and function. two decades (Figure A-14 and Figure A-15 in annex) however, they remain low by world standards (Figure Even after the past decade’s considerable progress 26 and Figure 27). Increasing the number of internet in increasing digital connectivity, PIC-9 access users directly connected to fiber-optic broadband levels are uneven and remain poor relative to other networks (middle and last mile) is essential to realizing developing countries. The Pacific region has made the benefits of substantial investments in international significant progress in expanding internet access, with submarine cables across PIC-9 countries over the past nearly all countries recording higher compound average decade. growth in access rates than the world average between 2007 and 2017.73 However, many barriers remain Addressing the “digital divide” remains a critical to harnessing the development outcomes of digital priority in the PICs. Substantial investment is needed technologies. The relatively low levels of availability of to achieve universal broadband internet access. This high-speed broadband services, combined with poor will require increased public sector support for middle- affordability, reliability, and usability, are critical binding and last-mile fiber optic networks and the expansion constraints affecting public administration, public of international connectivity and mobile broadband sector service delivery, and economic development. infrastructure for outer island and remote communities. These limitations hinder progress across a broad range PICs need to address issues around affordability— of other social development priorities, including climate the price of connecting is prohibitive for some users. mitigation/adaptation, gender equity, and inclusive Work also needs to be done on usability—demand-side 73 2017 is the most recent data available from ITU and WDI indicators. 56 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 26: Mobile phone coverage is still low compared Figure 27: … as is internet coverage to other countries… Mobile cellular subscriptions 300 (per 100 peopple) (% of population) 80 Internet acces 200 NRU PLW TON TUV 100 VUT NRU 40 WSM FSM RMI TUV VUT WSM KIR TON RMI FSM Upper KIR 0 Upper Low income Low-middle -middle High income 0 Low income Low-middle -middle High income income income income income 250 500 1046 4096 12695 50000 250 500 1046 4096 12695 50000 Source: WDI. Notes: Data for latest year available. Data missing for PLW. factors, such as lack of digital literacy, skills, and other access to social media and video streaming increases capabilities74 to use the internet, or a lack of content. the estimated minimum amount of data needed is Policies to attract and support private investments around six gigabytes (GBs) per month per user. Beyond for the upgrade and rollout of digital infrastructure supporting increased volume of data transactions, are essential, which includes investments in fiber fixed broadband networks support stable, high-quality networks (e.g., submarine cable systems and terrestrial connections with greater speeds, enhancing the overall fiber networks) and next generation mobile networks end-user experience. Of course, reaching the middle- (e.g., 5G). PICs need to invest in demand-side policies to last-mile connections for the PIC-9 is a long-term and programs to enhance digital skills and increase challenge and the cost-benefit tradeoff should be affordability, especially for the poorest in the region. considered in determining which technologies to adopt. Other barriers that may exacerbate an underlying inequality of opportunity also need to be addressed, Improving digital services such as gender. Digitalization and the rollout of digital services is Fixed broadband coverage remains a particular transforming “analog” sectors around the world, challenge to delivering higher productivity digital such as healthcare, education, financial services, dividends, and substantial new investments in and agriculture. It is improving the delivery of social middle- and last-mile fiber optic networks are protection programs for those in need, creating new essential to improving end-user internet connections jobs, and expanding financial inclusion. Digital solutions across all PICs. Fixed broadband networks are critical can increase the quality of government services and for stable, high-capacity data transactions—such as enhance accountability by providing new channels for online education, e-commerce, video streaming, and public engagement that make government services enterprise use. These networks are particularly limited more citizen-centered and reduce opportunities in PICs (Figure 28) and, where available, are poor in for corruption. Digital technologies also foster quality. Closing the fixed broadband coverage gap is vital entrepreneurship, catalyze private sector innovation, to the region’s development. At least 660 megabytes and unlock new economic opportunities for businesses (MBs) of data per user per month is needed to carry by creating new markets and reducing barriers to new out basic online activities, including learning, shopping, entrants. The pandemic demonstrated the remarkable and accessing public services, health services and ability of digital technologies and services to contribute news. Expanding the list of online activities to include to economic and social resilience, but it also exposed 74 Digital capabilities usually refer to acquired knowledge that equips people to live, learn, and work in a digital society. 57 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 28: The South Pacific lags in Internet connectivity, especially fixed broadband Internet Connectivity Indicators 100 80 60 40 20 0 Kiribati Marshall FSM Nauru Samoa Tonga Tuvalu Vanuatu World Islands Mobile-cellular subscriptions per 100 Fixed broadband per 100 people Active mobile broadband per 100 people Source: ITU, 2020. a growing digital divide and its grave implications for subindices. Low levels of digital adoption restrict the social inclusion. PICs need to pay close attention to PICs’ ability to move online, for example, by trading ensuring digital services are introduced in a trusted and through e-commerce, making digital payments, inclusive manner. implementing paperless government transactions, and transferring social protection support through digital Across all PICs, very low maturity characterizes the payments. environment for digital services, which are hindered by deficiencies in connectivity, secure and resilient Progress toward digital government, fintech, local hosting, and uptake of offshore secure cloud and other services has been slow, hampered by services. Improved digital services will require building large inefficiencies and siloed approaches. PICs all digital government systems as basic horizontal face major challenges to achieving successful and infrastructure. Public and private sector service sustainable whole government approaches to digital providers can then build their applications and software transformation. Some PICs have digitized segments on top of the common or shared public platforms. This of their government systems, such as business design is essential for delivering economies of scale, registrations, land records, or IDs (Tonga, Vanuatu). agility, integration, and interoperability for the delivery However, these digital systems are functioning without of increasingly responsive and sophisticated services. interoperable data and IT systems. Efficiency gains are This can be done, for example, through “digital stacks” hampered by deficits in information and document that link digital IDs, trusted and secured data sharing, sharing and shared platforms that link services across and digital payment systems as rails that enable ministries, departments, and agencies. Other PICs lag cashless, paperless, and remote transactions. Access in entering the digital world. In several countries, digital to this kind of enabling digital infrastructure will be identification systems, data sharing and exchange essential to grow the digital share of PIC production and layers, and digital government service platforms simply export baskets. don’t exist; in other countries, they are in the early stages of design and implementation (Kiribati, Samoa, Poor digital connectivity and lack of digital services Tonga, FSM, RMI, and Vanuatu). A robust, inclusive, and are reflected in the PICs’ low levels of digital interoperable foundational digital identification system adoption. The World Bank Digital Adoption Index (DAI) that enables secure authentication and verification of and its subindices on people, government, and business parties to online transactions is critical for coordinated indicate the region trails world averages when it comes digital government services. Social assistance and cash to digital adoption (Figure 29). Mauritius, another small transfer programs, for instance, can be implemented island state, performs above world average in all three more quickly and easily by building the registration 58 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 29: The adoption of digital technologies trails world averages in the South Pacific Digital adoption index, differences with world averages 0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.5 Fiji Kiribati PNG Samoa Solomon Tonga Tuvalu Vanuatu Mauritius Islands Digital Adoption Index DAI People Sub-index DAI Business Sub-index DAI Government Sub-index Source: World Bank (2018). process on top of a digital identification system (to platforms provide an opportunity to unleash the verify the applicants) and their eligibility determination benefits of using and reusing information.77 However, on a data-exchange layer (to cross-check relevant digital technologies may foster discrimination toward databases for inclusion and exclusion criteria). marginalized groups, spread misinformation, and exacerbate fragility and violence. Lower levels of Most firms are using some digital technology, but digital literacy in Pacific populations also increase connectivity and logistics keep them from realizing vulnerability to exploitation through digital channels, the full productive potential of these tools. A World such as phishing or scam emails. Governments’ lack Bank survey of seven Pacific countries found that more of digital security skills combine with legacy security than 80 percent of firms in every market used some in government information systems to increase the digital technology for business purposes, including risk of exposing sensitive data. Within governments, social media for marketing.75 These firms, however, nascent cybersecurity agencies are helping to address made less than 20 percent of sales online. According to these issues and improve digital security literacy within the firms, the top constraints to selling online include populations. Greater capacity will be needed. poor or expensive e-commerce-related logistics and poor connectivity and IT backbone. According to a Inclusion and accessibility remain challenges study by Kovena, a payment infrastructure provider for despite progress on the overall digitalization of hospitality transactions, Pacific Island hotels pay 211 government services in the region. Barriers include percent more for international transactions than hotels lack of reliability and affordability of broadband in other regions and 54 precent of hotels surveyed in internet access, device affordability, and digital literacy, the Pacific do not offer credit or debit card payments at particularly for members of vulnerable groups. Gender the time of booking.76 gaps have also been observed in accessing and using digital public platforms.78 The COVID-19 pandemic has The increasing use of data provide many underscored the importance of promoting inclusion opportunities for improved government and service as well as the opportunities that have been lost due delivery; they also create new risks. Digital public to digital divides. Other key gaps include uneven 75 World Bank Digital Economy Survey, 2020. 76 Kovena, Pacific Island Hotel Insights 2022: Payments in Accommodation, 2022. 77 As envisioned in the recommendations of the 2021 World Data Report on Data for Better Lives (in particular, “new social contract for data”). 78 Latest Multiple Indicator Cluster Survey findings reveal gender gaps in internet use in Samoa (2020), Tonga (2019), and Tuvalu (2020). 59 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE adoption and implementation of enabling legal and systems, digital skills training, and entrepreneurship regulatory frameworks for digital economy and online development programs to support digital literacy and service delivery, including e-transactions and customer access to services. protection. Development outcomes remain unrealized when large groups of people are excluded from accessing PICS also need to accelerate work on enabling legal and using digital public platforms. and regulatory frameworks for digital services and removing barriers to inclusion. The range of laws to The Way Forward be addressed includes data protection, cybersecurity, cybercrime, e-transactions, and consumer protection. Increased public sector investments in digital Ensuring these laws and regulations are implemented connectivity infrastructure—particularly middle- effectively will require institutional development and last-mile fiber optic networks—are critical to and capacity building. Other key parts of building PICs overcoming the “tyranny of distance.” The focus trust in the digital future is strengthened capacity in needs to be on reducing the digital divide by expanding mitigating and responding to cybersecurity threats as international connectivity and local broadband services well as promoting cybersecurity awareness in Pacific to outer islands and remote communities. The resilience populations. The push on digital skills and literacy of digital infrastructure to climate events and other programs is especially important for promoting external shocks also needs to be improved. This will inclusive access to services, particularly for women, require public sector investments supporting increased girls, and vulnerable and marginalized communities. network redundancy (e.g., second submarine cable systems) and removing single points of failure. Openness and transparency in how such technologies are deployed, combined with a robust The legal and regulatory frameworks and institutions data protection and cybersecurity regimes, are keys need further strengthening to promote competition, to maintaining confidence and trust and mitigating encourage new private sector-led investment, risks. Across the region, work is just beginning on the and promote the long-term interests of users. The legal and regulatory frameworks for data protection accessibility and inclusion agenda is also a fundamental and cybersecurity as well as the institutions responsible part of the digital connectivity agenda. Interventions for setting rules for data processing and ensuring are needed to ensure that more people, particularly the sufficient oversight. The frameworks and institutions most vulnerable, are included and able to access digital are both crucial foundations for the creation and uptake connectivity services. The introduction of “cyber safe” of digital public platforms. Data protection safeguards programs and digital literacy programs to promote to strengthen privacy and prevent misuse of personal access and use by marginalized groups, including data are key for fostering trust in and supporting the women, girls, and the elderly, will play key roles. inclusive adoption of digital services. Research shows that the risks of harmful digital communications PICs need to prioritize support for the development are a barrier to the access and use of technology by and adoption of whole government digital strategies women and girls in some PIC-9 countries.79 While some focused on laying the foundations priority digital strategies on cybersecurity and cybercrime laws have public services in such areas as education and been adopted,80 implementation and technical capacity healthcare. This requires new investments in digital are largely lacking across the PIC-9. infrastructure, including secure government networks and data centers and cloud processing systems to help with disaster recovery/business continuity in the Pathway 2: Maximizing human capital event of an emergency or climate disaster. PICs also and its economic returns need to develop interoperability frameworks to enable secure data exchanges between systems and build PIC-9 countries’ human capital outcomes lag UMIC shared services. Other key enablers include robust, and regional averages. According to the World Bank’s inclusive, and interoperable foundational digital ID Human Capital Index (HCI), the average child born 79 Third, A. et al. 2020. Online Safety in the Pacific: A report on a Living Lab in Kiribati, Papua New Guinea, and Solomon Islands. Sydney. Child Fund Australia, Plan International Australia, and Western Sydney University. 80 Kiribati adopted its Cybercrime Law in January 2021. 60 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE today in the PIC-9 countries will be only 50 percent81 of “The Way Forward,” with policy and investment as productive when grown up, compared to a scenario options for maximizing future development. assuming optimal health and education (Figure 30). The PIC-9 average is above the LMIC average of 48 percent The Pacific’s extremely dispersed geography makes but below the regional average of 52 percent, and only delivering health and education services particularly Palau exceeds the UMIC average of 56 percent. challenging and involves unique tradeoffs. All public services face high costs due to smallness and Pathway 2—“maximizing human capital and its remoteness, and skill shortages in the local labor market economic returns”—identifies three areas for further constrain effective service delivery. These improving this critical development challenge. challenges are intensified on outer islands and other These include: 1) improving educational quality and isolated regions, where populations are themselves increasing access to secondary and higher education; remote from the capital or smaller regional hubs.82 2) strengthening health systems to improve coverage, Governments’ face decisions in the range of services quality, and resilience; and 3) increasing women’s paid that should be offered in each region, to whom these employment and reducing gender-based violence. services will be provided, how they will be provided, and Access to basic health and education is critical how they will be funded. Making these decisions often to improving human development and livelihood involve complex tradeoffs between equity, efficiency, opportunities, increasing the returns from other sectors and other objectives because outer island interventions and remittances from labor migration, and responding typically carry much higher costs per beneficiary than to economic shocks. Investments and policies that those on less remote and more densely populated promote human capital and reduce gender-based islands. For example, delivering complex clinical care on violence make it easier for people to move toward a permanent basis across small, remote, and dispersed employment and contribute directly to improved livings populations is typically very costly because capacity standards. It is also fundamental to citizens’ sense of must be sustained on an ongoing basis even if patients state presence, security, and their belonging to a larger only rarely need them—so the facilities are often entity. These investments are also less vulnerable underutilized. Likewise, many outer islands’ populations to risks from disasters and climate change. As for all may be too small to use teachers and classrooms the “pathways” identified in this PIC-9 SCD Update, efficiently at a secondary school. It could be more cost- each development priority that follows begins with a effective to provide certain services in a central location description of its importance to PIC-9 development and and have people travel for access, rather than providing current challenges; it then proceeds, under the heading them in proximity to local populations.83 Figure 30: PIC-9—Human Capital Index scores, 2020 0.59 0.55 0.56 0.52 0.53 0.49 0.50 0.51 0.51 0.45 0.48 0.45 0.42 RMI TUV VUT LMIC KIR PIC-9 FSM NRU EAP TON WSM UMIC PLW Source: Human Capital Index database and author calculations. Note: East Asia Pacific (EAP) excludes high income countries. 81 Scores are for 2020. Stunting data is only available for RMI, Samoa, Tonga, and Vanuatu. 82 Utz, Robert, ed. (2021). Archipelagic Economies: Spatial Economic Development in the Pacific. Washington, DC: World Bank. 83 Utz, Robert, ed. (2021). Archipelagic Economies: Spatial Economic Development in the Pacific—Synthesis Report. 61 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE 1. Strengthen health systems to improve coverage, Figure 31: Maternal Mortality Ratio (per 100,000 live quality, and resilience births, 2010-2017) 120 The PIC-9 countries have to date managed to avoid 110 the large direct health impacts initially feared from COVID-19, but uncertainty remains as the pandemic 100 has brought into focus the fragility of public health 90 and healthcare delivery systems. PIC-9 countries 80 were largely able to avoid COVID-19 for much of global 70 pandemic due to stringent international border control 60 measures. This provided time for preparedness efforts 50 centered on strengthening COVID-19-specific systems (e.g., vaccinations and digitalized surveillance). Limited 40 2010 2017 international travel in early 2022 placed a strain Kiribati FSM Carribean Small States Vanuatu on PIC-9 containment measures, resulting in large- Pacific Islands Small States SDG Tonga Samoa scale community transmission that overwhelmed health systems in countries where high NCDs burdens Source: WB WDI and WHO GHO. Note: SDG 3.1 2030 Target. leave populations at high-risk of serious illness from COVID-19. Most of the PIC-9 countries have required shown, enhancing connectivity (physical and digital) substantial ongoing assistance to meet the pandemic’s during emergencies is critical. immediate and longer-term impacts and are working toward more resilient and effective systems for the Prior to the pandemic, the region has made some future,84 with a focus on disease outbreaks, primary progress on the health Sustainable Development healthcare foundations and greater complex clinical Goal (SDG), but Universal Health Coverage (UHC) has service capacity. Beyond the challenge of increased seen minimal improvements. The 2019 UHC Service pandemic preparedness, many key issues remain from Coverage Index suggests poor progress compared with the previous SCD, most of them likely exacerbated by other countries at similar income levels (Figure 32). the pandemic. PIC-9 countries will need to accelerate progress for all service coverage indicators to reach good health Some health services and outcomes have and wellbeing (SDG 3) targets by 2030. Since 2010, deteriorated during the pandemic, although country- SDG 3 Improvements were driven by reductions in specific data remains limited. Kiribati and Tonga have maternal and child deaths (Figure 31),87 although the seen a decrease in access to certain services,85 while the subindex on reproductive, maternal, neonatal, and disruption to sexual reproductive health services could child health shows very little progress over the same lead to additional deaths and unintended pregnancies period (Figure 32).88 The reported coverage of routine in a number of countries.86 Several PIC-9 countries ran childhood immunizations is high, but recent vaccine- out of some routine medicines and supplies due to global preventable disease outbreaks and population surveys disruptions in pharmaceuticals production and shipping. conducted in the region cast doubt on those rates. The PIC-9 region relies on medical visiting teams and/or Tuberculosis remains a concern, with the hardest-hit overseas medical referral for more complex clinical care countries showing only modest improvement since needs; countries such as Kiribati, Tuvalu, and Tonga 2000.89 More effective and early-stage management had to forego many of these services. As COVID-19 has of infectious and chronic diseases is needed, including 84 October 2021 Pacific Heads of Health paper: Leveraging the COVID-19 pandemic to build sustainable systems and advance Universal Health Coverage. 85 Kiribati reported a drop in tuberculosis case notification rates, while Tonga reported a decrease in post-natal care visits in the first half of 2020. 86 Socio-economic Impact of COVID19 in the Pacific by the Joint UN action in response to the UN Secretary General COVID19 preparedness and response in Tonga, Kiribati, Samoa, RMI, and Tuvalu (not yet publicly available). 87 United Nations. Asia and the Pacific SDG Progress Report. 2021. 88 The UHC sub-index on reproductive, maternal, neonatal and child health tracks performance on family planning, antenatal care visits, child immunization and care seeking behavior for child pneumonia. 89 Ibid. 62 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE comprehensive mental health interventions. Return of deaths attributed to diabetes.91 Most countries are to pre-COVID trends will only partly redress needed off-track for meeting global NCD targets and related improvements. SDGs,92 and their already low UHC Services Coverage subindex for NCDs dropped five points between 2010 Obesity and diabetes are major problems, with and 2019. NCDs now account for around 75 percent eight PIC-9 nations among the 10 most overweight of deaths in the Pacific and are a major threat to countries globally and three among the top five health, sustainable development, and economic globally for age-adjusted comparative diabetes grown. Patients with certain chronic illnesses, such prevalence in adults (see Figure A-5 and Figure as diabetes and cardiovascular disease, are at higher A-6 in annex). The non-communicable disease risk than other patients of developing a severe (NCD) epidemic noted in 2016 SCD is worsening, form of COVID-19 or dying.93 Non-fatal outcomes and improvements in service availability have been of NCDs, including limb amputations are common minimal. COVID-19 compounded the situation by and affect livelihoods, with Pacific health systems causing disruptions of NCD management due to offering limited rehabilitation support. Across the postponements of screening programs, cancellations PIC-9 countries, NCDs caused an average 67 percent of planned treatments, and shortages of essential of the Disability Adjusted Life Years94 lost due to medicines.90 Obesity rates in all nine countries have morbidity and premature mortality for the working increased in the past decade (Figure 34) and diabetes age population95—a huge loss of residents’ most is rising in most of them (Figure 35). Available data productive years. Overall, efforts on NCD prevention show that, across PIC-9, women are at significantly and management need to be escalated to match the higher risk of being obese and have a higher number growing tide of the NCD epidemic.96 Figure 32: Universal Health Coverage Service Coverage Figure 33: Universal Health Coverage Service Coverage Index point change (2010 to 2019) Sub-Index—PIC-9 average (2010 to 2019) 16 80 14 70 12 60 10 50 8 40 6 30 4 2 20 0 10 -2 0 Reproductive, Infectious Non- Service FSM Tonga Samoa Vanuatu Tuvalu RMI Kiribati Nauru Palau UMIC LMIC Western Pacific South East Asia maternal, neonatal disease communicable capacity and child health diseases and access 2010 2015 2019 Source: Global Health Observatory Data Repository. Note: Green Source: Tracking UHC 2021 Global Monitoring Report. denotes LMIC countries and blue UMIC countries. All PIC-9 countries grew less than other countries with similar levels of income between 2010 and 2019. 90 October 2021 Pacific Heads of Health paper Progress on Implementation of the Pacific NCD Roadmap Monitored through the Pacific MANA Dashboard. 91 Latest national estimates from WHO Global Health Observatory. 92 Ibid. 93 Ikoloski, Z., Alqunaibet, A.M., Alfawaz, R.A. et al. Covid-19 and non-communicable diseases: evidence from a systematic literature review. BMC Public Health 21, 1068 (2021). 94 Institute for Health Metrics and Evaluation. Disability Adjusted Life Years refer to aggregated healthy years of time lost at the population level because of disease related morbidity and premature mortality. Data are for 2019 (latest available). 95 Between 15 and 49 years old (72 percent for females, 62 percent for males). 96 This includes strengthening multi-sectoral responses to the NCD crisis with more detailed monitoring of the Pacific NCD Roadmap. 63 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Health conditions related to over-nutrition coexist adult health, and adult earnings (Box A-2). In addition, 9 with maladies related to under-nutrition—a double percent of the Pacific region’s children under-age 5 are burden. In PIC-9 countries, the percentage of children affected by wasting—low weight for height.98 under 5 years old affected by stunting—low height for weight—declined 4.5 percentage points from 2000 to Meaningful progress on UHC requires good quality 2020.97 However, stunting rates remain high in several health systems and services; in the PIC-9 nations, PIC-9 nations (Figure 36), a major concern because many of the systems for producing quality child malnutrition is correlated with obesity in later life health services are lacking and routine quality and a key predictor of worse educational attainment, measurement is not done. Substandard care wastes Figure 34: Obesity increased over the last decade… Figure 35:…and diabetes prevalence increased even faster Prevalence of overweight among adults, 30 BMI >= 25 (age-standarized) (%) (% of population ages 20 to 79) 75 Diabetes prevalence 20 50 10 25 0 0 FSM KIR NRU PLW RMI TON TUV VUT WSM FSM KIR NRU PLW RMI TON TUV VUT WSM 2000 2016 2011 2021 Source: WHO Global Health Observatory. Notes: Data for latest Source: WDI. Notes: Latest year for which data is available. year available is 2016. Obesity is defined as a Body Mass Index (BMI) greater than or equal to 30. Figure 36: Stunting improving but remains stubbornly high in some PIC-9 countries 50 Percent of under-fives stunted 40 30 20 10 0 KIR MHL NRU PLW VUT TON TUV FSM WSM 2000 2020 Source: World Development indicators. Notes: Latest year for which data is available (no data available in Palau and FSM). 97 While most PIC-9 nations reported a downward trend in the two decades, Samoa and Vanuatu reported increases in the share of under-5 children affected by stunting. 98 UNICEF/WHO/WBG Joint Child Malnutrition Estimates 2021. https://www.who.int/data/gho/data/themes/topics/joint-child- malnutrition-estimates-unicef-who-wb?id=402. 64 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE significant resources and damages human capital can be leveraged to address gaps in health workers and productivity. The pandemic has reinforced the through telemedicine and mobile-medicine options. fundamental importance of adequate quality of care Use of digital tools can also facilitate quality of care, for health security and providing effective frontline including measuring outcomes through real-time services. Most of the PIC-9 countries are at initial information systems. stages of improving health systems and service quality, and they have even more limited data or assessments While strengthening health systems, some PIC-9 for measuring quality. countries need to target primary and secondary prevention of NCDs as well as maintain a focus on The Way Forward the lagging agenda of early child health. All PIC-9 countries require a focus on primary prevention and To support health resilience (including emergency multi-sectoral approaches for addressing NCDs—e.g., preparedness) and to advance UHC goals, certain increasing taxation on tobacco, sugar-sweetened “no regret” investments in health systems will beverages, and highly processed foods containing improve health outcomes and make better use of excess salt and fats as well as more nutritional health resources. These include strengthening disease education for children. Another important aspect is surveillance; developing basic quality of care through behavioral change communications. The effort also better core infection prevention and control and health requires adapting primary healthcare to integrate waste management policies and practices; improving NCD prevention, detection, and routine management, supply chain management systems for pharmaceuticals including effective coordination to higher levels of care and medical supplies; expanding limited laboratory for prevention of complications. In certain countries, and radiology diagnostic and treatment services; additional effort is required on lagging agendas of child strengthening primary healthcare with a focus health and nutrition through a focus on cost-effective on preventive services and health promotion; and interventions for quality ante-natal care, safe delivery, developing community engagement networks for post-natal care, immunization, and child-wellness addressing NCD prevention and management of NCDs visits. to reduce illness and death. As the COVID-19 pandemic has shown, vital hospital service capabilities that need Addressing health sector management challenges to be established or further strengthened.99 Where will require stronger information foundations, possible, digital tools can be leveraged to help overcome capacities for utilizing information, increased gaps—for instance, the use of telemedicine to provide accountability, and better coordination mechanisms. access to human resources or guide diagnosis and Informed policies, plans, and leadership that lead to treatment. Given the frequency of adverse weather- more equitable, efficient, and accountable service related events, health service delivery systems also provision will require timely, accurate, and complete need to be further strengthened against potential risks information. Greater investment is needed in health through contingency and emergency plans and, where information systems as well as using the information. possible, backup systems. The COVID-19 pandemic has reinforced the adage that “health is everyone’s business.” Current governance Much more attention is needed on the three key mechanisms need to be strengthened to nurture a quality domains: foundations, processes of care, and health system that understands the importance of joint quality impacts.100 In the PIC-9, like most countries, action across sectors and stakeholders (particularly staffing is the largest component of health service citizens) in improving health outcomes. The onus is delivery and central to being able to provide quality on the health ministries, supported by the finance public healthcare services. Access to health workers ministries, to coordinate, plan, and systematically with the necessary mix of skills available across each track the various contributions to the health sector for country, not just in the main urban center(s), remains better resource allocation decisions in line with national a major challenge for improving UHC across the PIC-9 priorities. region. While not a complete replacement, digital tools 99 Including hospitals with skilled health workers who can provide quality emergency and intensive clinical care in routine or surge capacities. 100 Lancet Global Health Commission on High Quality Health Systems in the SDG Era. 65 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE In strengthening health financing, the largest against annual workplans and budget implementation. source of future investment is likely to be efficiency The pandemic further aggravated the situation. Being gains in the use of existing resources. Pre-pandemic able to respond to health emergencies requires timely government spending on health as a share of total and quality health information systems—for example, public spending was high compared to countries with digitized individualized health and immunization similar income levels, and allocations so far have registers and pharmaceutical and vaccine logistics been maintained or increased. The fiscal pressures of systems. COVID-19 make it unlikely that additional resources will be redirected to health,101 so gains in efficiency will be important. However, but governance and management 2. Improve quality of education and increase are weak across the region, with limited routine oversight access to secondary and higher education of how resources are allocated and used.102 Domestic and overseas medical referral schemes reduce financial Education is widely recognized as a strong driver and geographical barriers to accessing higher levels of of economic opportunity in the PIC-9 countries. clinical care, but much improvement is needed in the Many higher paying jobs are in the skilled services management of both referral pathways.103 High-cost sector (e.g., public sector and tourism), and typically areas such as overseas referrals and improved supply require technical or higher education. The returns to chain management of pharmaceuticals and medical outward migration, moreover, are tightly linked to supplies could open some fiscal space for increased migrating workers’ educational levels. Not surprisingly, spending on other health priorities. Health outcomes more years of schooling and better paying jobs are could be improved through allocative efficiency that strongly associated with lower poverty. In RMI, Kiribati, directs more resources to both primary and secondary and especially Vanuatu and Samoa, poverty rates in prevention,104 a strategy that can help address the households headed by someone with tertiary education growing burden of NCDs. The productivity of healthcare are much lower than for households headed by someone workers could be upgraded through an appropriate skill with only primary education (Figure A-7 in annex). For mix among health workers and balanced distribution Vanuatu and Samoa, poverty rates are three to five of staff, complemented by digital tools and improved times higher for those with only primary education than technical efficiency (i.e., better use of standard operating for those with tertiary education. Moreover, access to procedures for quality of care and use of “best buys” for wage employment (Figure A-9 in annex), which is key priority service needs). to evading poverty, clearly rises with education levels— for both men and women. The economic returns of In this resource-constrained environment, it is vocational and tertiary education appear especially increasingly important for health ministries to have large. Despite the significant benefits to more schooling, access to, and use, all available data.105 The PIC forums only a small minority of youths complete vocational or reached a consensus that health information is vital tertiary education. for informing planning and decision-making; however, health information is either non-existent, outdated, In some PICs, COVID-19 had an impact on school incomplete, or questionable. Where available, digital education in 2022, much later than other regions health information systems are often fragmented and of the world—except for FSM, which shut down not interoperable, although several PIC-9 nations are its schools 2020 and 2021. In all countries except improving or implementing new health information FSM, schools were shut down for only two to four systems.106 Many countries do not hold regular weeks between March 2020 and December 2021.107 management meetings to monitor health outcomes FSM schools fully or partly closed for 24 weeks, more 101 Development partners continue to provide significant support to the health sector, but much of that is provided off-system (particularly for COVID-19), making it hard to track. 102 This refers to the range of money, people, infrastructure, equipment, and supplies available to health managers. 103 In particular, the overseas referral schemes come at a substantial public cost for a small number of patients. 104 Primary prevention refers to intervening before health effects occur. Secondary prevention refers to screening to identify diseases in the earliest stages—i.e., before the onset of signs and symptoms. 105 Including finance, health, human resource, service availability, etc. 106 Including Palau, Kiribati, Tonga, and Samoa. 107 Source: https://data.humdata.org/dataset/global-school-closures-covid19 66 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE than half a school year. On the other hand, however, and FSM. Enrollment in Palau is above 70 percent.109 some PICs such as Tonga and Kiribati were affected Enrollment110 of primary- and lower-secondary by COVID-19 in 2022. In Tonga, schools closed for four aged children is largely in line with international months from the beginning of February to the end of benchmarks—above 90 percent in non-FCS countries, May 2022. In Kiribati, schools were closed from late with FCS countries except Kiribati lagging the others February to late May 2022. In addition, COVID-19 was a (Figure 37). By upper secondary, enrollment falls major disruption for PIC students studying or planning below international benchmarks in most countries but to study abroad because they were unable to travel. particularly FCS ones and Nauru (Figure 38). In countries not classified as fragile and conflicted Low secondary school enrollments and very low situations (FCS), enrollment is broadly in line with completion rates mean expected years of schooling international benchmarks until upper secondary are lower than regional averages. For countries level, when it begins to fall behind; FCS countries trail where data are available, the transition rate to upper- benchmarks, while Nauru lags UMIC comparators. secondary school is very low and dropout rates for those Except in Kiribati and Tuvalu, enrollment in critically who get there are very high (Figure A-9 in annex).111 important early childhood education (ECE) is still very Consequently, expected years of schooling are similar far from becoming universal. At one end, Kiribati and to or higher than structural peers but clearly below the Tuvalu have well-established systems that enroll more East Asia and Pacific average and aspirational peers than 80 percent of their ECE students (Figure A-8 in (Figure A-10 in annex), with expected years clearly annex). At the other end, four countries enroll less than below average in Vanuatu and RMI. Given the delay half of their ECE students—Tonga, RMI108, Samoa, between changes in school participation and changes Figure 37: Total Net Enrolment (TNER) at the primary and lower secondary age is lower in FSC countries 100 Total Net Enrollment rates 90 80 70 60 50 40 30 20 10 0 PLWº NRU+ MHL* FSM TUV KIR WSM TON VUT Structural Aspiracional Upper middle High inc. FCS Non-FCS Peers Primary Lower sec Source: National sources (Vanuatu, Nauru, Micronesia), MICS (Tuvalu, Samoa, Tonga, Kiribati). Palau are estimates from the last census 2017. Note: The official RMI data is very likely underestimated because the last census showed demographic projections were overestimated. Nauru does not distinguish between lower and upper secondary and only reports secondary enrollment rates. Structural peers are Comoros, Dominican Republic, Saint Vincent and the Grenadines, Timor-Leste. Aspirational peers are Antigua and Barbuda, Fiji, Grenada, Mauritius, Saint Kitts and Nevis, Saint Lucia, Seychelles. TNER measures the fraction of children in school at any level among the theoretical age range for a given level of school. This means, for example, TNER in lower secondary includes all lower-secondary age students who participate in ECE, primary, lower secondary, upper secondary, and post-secondary. 108 The ECE enrollment rate cannot be ascertained in the Marshall Islands because the underlying population has almost certainly dropped dramatically in the past decade, trumping demographic projections. The 2021 census results are pending. 109 In Palau, the most recent census was done in 2012 and current demographic projections might be optimistic given the trends witnessed in other countries. Enrollment rates are therefore likely underestimated. The latest definitive survey estimates from middle-income countries are pending. 110 We are using total net enrollment rate (TNER), which measures the fraction of children in school at any level among the theoretical age range for a given level of school. 111 Secondary education completion rate is measured as the gross intake ratio to the last grade of secondary education. It is calculated as the number of new entrants in the last grade of secondary education, regardless of age, divided by the population at the entrance age for the last grade of secondary education. 67 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 38: Total NET Enrollment Rate (TNER) of destined to fail. The most recent Pacific Island Literacy upper-secondary aged population is lagging and Numeracy Assessment (PILNA) round (2018) shows a disconcertingly large share of students struggling to reach even a minimum proficiency level in reading after 100 six years of primary education (Figure A-11 in annex). On 90 average, 63 percent of sixth-grade students in PIC-9 80 70 countries achieved reading minimum proficiency—low, 60 50 but up from less than 50 percent in 2012. The average 40 masks considerable variation: in Palau, virtually all 30 20 students reach the minimum proficiency level; in Tuvalu 10 and Tonga, only 47 percent of students do. As a result of 0 these learning deficiencies, harmonized test scores for RMI* FSM TUV WSM TON VUT KIR Structural Aspiracional Upper middle 15-year-olds in the Pacific lag regional and international comparators, except in Palau (Figure 39). FCS Non-FCS Peers Girls are outperforming boys, yet they are less likely Source: UNESCO UIS, downloaded on November 1, 2021, MICS and to get formal jobs, leading to a massive waste of national sources. RMI rates are likely underestimated. Note: human capital. In all countries, female enrollment Structural peers are Comoros, Dominican Republic, Saint Vincent and learning outperforms boys, with the gender gaps and the Grenadines, Timor-Leste. Aspirational peers are Antigua and Barbuda, Fiji, Grenada, Mauritius, Saint Kitts and Nevis, Saint widening over the education cycle. At the upper- Lucia, Seychelles. TNER includes all upper-secondary age students secondary level, girls’ enrollment rates exceed those of who are in all levels of education (i.e., ECE, primary, lower and upper secondary, and post-secondary) boys by 18 percentage points in Kiribati, 19 points in Tonga, and 23 points in Tuvalu.113 The percent of male students completing the secondary level is only 21 in expected years of schooling, human capital is likely percent in Kiribati, 40 percent in Samoa, 23 percent in to decline in coming years in Nauru and Tuvalu but Tonga, and 18 percent in Tuvalu (Figure A-9 in annex). increase sharply in Vanuatu and Samoa. In Tonga, girls outperform boys in all secondary-level exams (Figure A-11 in annex), while literary proficiency The main education challenge in the PIC-9 region is across the region shows significant gender parity issues that too little learning takes place during the years (Figure A-12 in annex).114 Most students who do not pass of schooling. The recent Early Human Capability Index the exams either repeat or drop out of school; PILNA (eHCI) has shown that even children who went to pre- results and enrollment rates show a similar pattern— primary school have eHCI scores below 70 percent.112 girls outperforming boys. Gains associated with ECE are diverse among the four countries surveyed but particularly small in Tuvalu Poorer students tend to learn less than richer ones, and Tonga (see annex). Parental stimulation of young passing on poverty from one generation to the children through songs and stories and early exposure next. The gap in enrollment rates between the richest to books could be a limiting factor in the region. Early 60 percent of households and the poorest 40 percent Grade Reading Assessments (covering children in grades were 24 percentage points in Tuvalu to 27 points in 1-3) and UNICEF’s Foundational Learning Modules Tonga. Where data exist—in Samoa, Kiribati, Tuvalu, (focusing on children aged 7-14) indicate only a fraction and Tonga—students from wealthier households are of students acquire foundational reading and numeracy more likely to develop foundational numeracy skills skills. In most countries, less than half of children can than their peers from poorer households (Figure 40). read a simple short story and understand most or all Gaps across socio-economic groups are relatively small of it by age of 14 (Table A-4). When students fail to from an international perspective. With education master reading in early grades, all further learning is playing a key role in acquiring better paying jobs, the 112 The Early Human Capability Index (eHCI) is a holistic measure intended to capture early child development across diverse cultures and contexts. It has been developed with a focus on the key aspects of child development in 3- to 5-year-olds that predict future capabilities. 113 According to UNICEF MICS reports for these three countries: Kiribati, 2018-2019; Tonga 2019, and Tuvalu 2019-2020. 114 There are three high-stakes upper-secondary exams—at the ends of grades 11, 12, and 13. The Ministry of Education and Training (MET) recently announced the grade 11 exam will be abolished. 68 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 39: Harmonized test scores also lag regional and limited Figure 40: There is aof underperformance wealth poorer in foundational gap implies children the risk comparator averages numeracy skills of remaining or becoming poor is being passed on from one generation to the next. 500 463 126 Several 70% factors explain poor learning outcomes, 450 411 375 386 370 380 412 369 but lack of quality teaching is at the center 60% 400 348 60% 346 347 350 of the challenge. Analytical work is thin 52% on the 48% 300 50% determinants of Pacific learning outcomes, but a few 250 40% 40% 200 common themes emerge from existing studies. First, 40% 150 32% 32% 100 teachers and school leaders, 31% the two most important 30% 50 agents driving 23% 22% 22%outcomes, suffer from a lack learning 0 20%support of 17% and monitoring. Rapid improvements in PLW NRU FSM TUV RMI WSM TON KIR VUT Small States Aspiracional Structural student 10% learning are possible when such support is provided to teachers—for example, in the form of 0% scriptedSamoa Kiribati lessons plans. 115 At the secondary Tonga Tuvalu level in High inc. FCS Non-FCS Peers Top 80% appears RMI, the problem to be Share of a shortage children agedof qualified 7-14 Bottom teachers: about 3020%percentwithoffundational secondary numeracy skillsare teachers Source: Patrinos and Angrist, 2018, 2020 update of the Global unqualified Source: UNICEF or uncertified. MICS reports Second, too few from Kiribati students (2018-19), are Tuvalu Database on Education Quality. Note: The database harmonizes scores across major international student achievement testing (2019-20),to learning Samoa read(2019-2020), (2019) and Tonga language. in their vernacular Analysis programs. Results are measured in equivalent units of the of Foundational Learning Assessments shows that international assessment called Trends in International Mathematics and Science Study (TIMSS), where 300 is minimal students taught in vernacular language are more likely attainment and 625 is advanced attainment. Most recent to end up mastering numeracy and literacy, not only estimates as of 2019 are used. Structural peers are Comoros, Dominican Republic, Saint Vincent and the Grenadines, in their own language but in the official language of Timor-Leste. Aspirational peers are Antigua and Barbuda, Fiji, instruction as well.116 Third, the curriculum review in Grenada, Mauritius, Saint Kitts and Nevis, Saint Lucia, Seychelles. Tonga found substantial inconsistencies in the range and types of learning outcomes for core subjects and misalignment with assessments; in addition, teachers regional and Figure 40: There is a limited wealth gap in foundational were not using student-centered approaches in class. numeracy skills Fifth, there is a lack of teaching materials to support classroom learning, especially in vernacular languages. Finally, assessment is not being used effectively to 70% monitor teaching and learning, nor is it used to make 126 412 369 60% 60% school adjustments.117 In countries like Samoa, frequent 52% 48% summary assessments with unrealistic expectations 50% 40% 40% may even undermine children’s motivation. High-stakes 40% exams also impede teenagers’ enrollment in upper 32% 31% 32% 30% secondary schools in Tonga, especially boys. 23% 22% 22% 20% 17% Several knowledge gaps make it hard to pinpoint the Small States Aspiracional Structural 10% underlying causes of poor performance. First, evidence 0% is scarce on the extent to which teachers master the Samoa Kiribati Tuvalu Tonga content they are teaching. Second, information is also Peers Top 80% Share of children aged 7-14 missing from classroom observations documenting Bottom 20% with fundational numeracy skills the extent to which teachers are deploying effective te of the Global base harmonizes Source: UNICEF MICS reports from Kiribati (2018-19), Tuvalu teaching practices. Third, the underlying causes of evement testing (2019-20), Samoa (2019-2020), and Tonga (2019) students dropping out are not well-understood. nt units of the n International 300 is minimal t. Most recent 115 See Macdonald and Vu (2018) for evidence from Papua New Guinea. A one-year experiment in Samoa has shown that targeting rs are Comoros, teacher training along with additional learning materials in vernacular language can boost pupils’ basic numeracy and literacy. he Grenadines, 116 In most countries, secondary education is predominantly delivered in either English or French (in part of Vanuatu) and teaching nd Barbuda, Fiji, switches progressively from the vernacular language at the end of primary. ucia, Seychelles. 117 EQAP (2016), Pacific Benchmarking for Education Results 69 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Upper secondary’s low enrollment is likely worsened TVET is underfunded, and the sector is fragmented by by too few upper secondary schools and poor unclear pathways between courses, especially those learning outcomes in primary schools. The lack of offered at secondary and post-secondary levels. TVET close-by facilities is likely an impediment to school is also commonly supply-driven. Labor force data are enrollment. Upper secondary schools tend to be larger inadequate in most PIC-9 countries, constraining the and located in urban centers or concentrated on main ability of TVET stakeholders to identify investment islands; for example, the nearest secondary school is priorities and limiting the effectiveness of planning in four kilometers or less in the capital or main island of the sector. As a result, many PIC-9 employers complain Tuvalu, Kiribati, RMI and Vanuatu but around seven about the relevance and quality of training programs, kilometers in the outer islands of Kiribati and Vanuatu, and employers turn to recruiting foreign workers in 74km in RMI and 140km in Tuvalu (Figure A-13). In many occupations. This ultimately raises the cost of several countries, upper secondary is not only farther doing business, especially in the tourism industry. Labor away but also more costly, with many students having market statistics show clearly, however, that vocational to board. With most students failing upper secondary training improves the chances for employment in the exams, this increases the opportunity cost of staying formal sector—for both men and women. in school for a quite uncertain payoff. Moreover, the poor learning outcomes in primary grades imply that The Way Forward relatively few students acquire the foundational skills needed for onward study. The region has a number of priorities for education. To start with, student outcomes could be strengthened PIC-9 public education spending is high by through expanded ECE. Globally and in the PICs, the international standards, largely because smallness evidence is clear and overwhelming on the benefits of raises per student spending (or unit costs). The ECE: children ages 3 to 5 who participate in ECE become higher unit costs are explained by relatively low student- better learners once in school. During 2013-2014, for teacher ratios due to the high dispersion of students instance, communities in Tonga received support to set and relatively small schools.118 Administrative overhead up and run playgroups aimed at improving caregiver- is another size-related factor in high unit costs. Full- child interaction at home and ultimately improve fledged education ministries, with all their relevant children’s readiness for school. A rigorous impact functions,119 need to be sustained on a small pool of evaluation found that being in a treatment community students. In FCS countries especially, out-migrations positively affected readiness for learning among are depleting schools; however, consolidation would children of mothers without high school educations.121 be challenging because travel distances to school may ECE expansion would require additional funding in already constrain participation. In most PICs, both countries where it remains expensive—for example, education statistics and budget data are not detailed Tonga, Samoa, or Tuvalu. However, additional spending and transparent enough to serve as guides to tackling would translate into better society-wide returns on inefficiencies and allocating resources.120 other education investments by lowering dropout rates and improving learning outcomes. ECE has also been Technical and vocational training (TVET) and linked to broader benefits for families and society, such workplace skills development are also generally as increased women’s participation in the labor force, weak in PIC-9 countries, impacting the employment lower participation rates in government assistance or of semi-skilled workers. In many countries, a welfare programs, reduced criminality, and greater civic widespread perception holds that TVET is for students participation. Greater access to ECE allows mothers to who fail academically, a view reinforced by separating spend some of their time pursuing gainful activities secondary school students into academic and non- in local labor markets. To improve quality, ECE should academic groups (academic streaming). In most PICs, be strengthened with more qualified teachers and 118 Samoa and Nauru are the only countries where student spending is below what could be expected at their level of development. 119 For instance: curriculum, assessment, teachers’ appraisal and training, data collection and analysis, monitoring of the system, administration, etc. 120 A detailed analysis is available in the forthcoming PER. 121 Macdonald, Kevin Alan David; Brinkman, Sally Anne; Jarvie, Wendy; Machuca-Sierra, Myrna; Mcdonall, Kristen Andrew; Messaoud- Galusi, Souhila; Tapueluelu, Siosiana; Vu, Binh Thanh (2018). Intervening at Home and Then at School: A Randomized Evaluation of Two Approaches to Improve Early Educational Outcomes in Tonga (English). Policy Research Working Paper WPS8682, Washington, D.C.: World Bank Group. 70 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE exposure to teaching and learning materials in the points lower for women than men among those 15 years vernacular language. and older (Figure 41). Women are more likely to work in informal and home-based jobs, often in subsistence Improving the quality of teaching is key to improving agriculture and petty trading occupations that leave students’ learning. Mounting evidence from the PICs them lower paid and more vulnerable. The sectors with shows the importance of improving teaching practices. relatively high participation of women workers include For instance, Tonga’s Come Let’s Read and Write tourism and retail—the latter itself often indirectly (CLRW) program provided first- and second-grade driven by tourism and hospitality (Figure 41). Both teachers with training, instructional materials, and were deeply affected by the pandemic’s economic coaching on a new method to teach reading, reinforced consequences, exposing women to job and income by learning resources for their students. After two losses. They were often not reached by government years, the proportion of second-grade students who programs targeting formal workers. Despite women’s could read increased from 18 percent to 29 percent. equal or higher educational attainment across most of And, as mentioned above, clear evidence points to the region, youth unemployment rates (ages 15 to 24) faster learning when reading is taught in vernacular are significantly higher for young women in six out of languages. the nine countries. This results not only from significant mismatches between women’s qualifications and Trials may test the usefulness of targeted programs available job opportunities but also from social and to improve participation and relevance for school gender norms determining the acceptability of jobs for and training after lower secondary. Such programs women or men. Women hold only about 10 percent of could encourage teenagers to remain in school, offering all STEM occupations (typically better paid), reflecting different incentives for boys and girls (who do not face their lower education enrolment in STEM fields.124 In the same issues). This approach could include opening general, women are less likely to end up with formal jobs; of schools and training centers closer to settlements. compared to men with similar demographic profiles, the Vocational and tertiary education and training likelihood of formal employment for women aged 20 to programs could be expanded to narrow the technical 60 with upper-level educations is 64 percent in RMI, 56 and behavioral skills gap for job‐seeking youth and percent Samoa, 33 percent in Kiribati, and 55 percent link with private sector associations to ensure training in Tonga. In Vanuatu, however, women with at least relevancy. some upper secondary education are more likely to hold wage jobs. 3. Increase women’s paid employment and reduce Legal and institutional barriers, linked to childcare gender-based violence and access to inputs, prevent progress in women’s access to employment and entrepreneurship. Women are less likely to do paid work than men, with Low levels of childcare provision and national detrimental effects for women’s welfare and the labor laws’ limited maternity protections sustain economy. Women were also disproportionately exposed a sizeable motherhood penalty for women’s labor to COVID-19 employment shocks, suggesting economic force participation. These constraints may prevent vulnerability. New research finds that long-run122 GDP per women from balancing the trade-off between work capita would be an average of 22 percent higher for the and household responsibilities in ways that can Pacific Islands if women matched men in employment support engagement in paid work. Across the PIC- rates and job types.123 Even before COVID-19, labor force 9 countries, gender gaps in labor force participation participation in the Pacific Islands was 23 percentage are consistently higher among men and women with 122 Defined as between 15 to 30 years (approximately a generation). 123 Based on Pennings, Steven. 2022. The Gender Employment Gap Index (GEGI): A Simple Measure of the Economic Gains from Closing Gender Employment Gaps, with an Application to the Pacific Islands. World Bank Policy Research Working Paper. The paper was commissioned under the World Bank Pacific Gender Equality Program. The full GEGI measure reported here also considers the types of employment women and men engage in, estimating gains as gender gaps in “better employment” (i.e., non-agricultural workers and employers) and “other employment” (i.e., subsistence/family agriculture, small-scale traders, and landless agricultural laborers). 124 In 2021, women represented close to 60 percent of tertiary graduates at the National University of Samoa—but only about 35 percent of graduates with science and technical education degrees. In the 2015-2016 academic year, women accounted for the majority of graduates (54 percent) at the College of Micronesia); they were only 26 percent of students graduating with STEM associate degrees and certificates. Sources: National University of Samoa Annual Report (2021) and FSM JEMCO Education Indicators (2016). 71 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 41: Women are much less likely to work than men Figure 42:…and much more likely to work in COVID-19 in all PIC-9 countries… a ected sectors such as retail and tourism 90 60 80 50 70 40 LFP in percent 60 30 Percent 50 40 20 30 10 20 10 0 Male Male Male Male Male Male Male Male Male Female Female Female Female Female Female Female Female Female 0 Vanuatu Kiribati Nauru Palau Tuvalu FSM RMI Tonga Samoa Nauru Palau Tuvalu FSM RMI Tonga Samoa Vanuatu Kiribati Male Female Accommodation and food Transport Retail EAP Average: male EAP Average: female Travel agencies Recreation Source: ILOSTAT latest national survey estimates. Notes: Tourism includes accommodation and food, transportation, travel agencies and recreation. Transportation services drive men’s relatively high engagement in the tourism sector. young children (below age 6),125 and three-quarters of Gender-based violence (GBV) levels continue to women outside the labor force in Samoa report unpaid be among the world’s highest, complicating a lack domestic work and care as their main activity.126 At the of women’s full contribution to building strong same time, five of the seven PIC-9 countries included in economies. Among women ages 15-49 who were the World Bank’s 2021 Women Business and the Law ever married in Kiribati, over half have been subject (WBL) Report have a Parenthood Index. score of zero to physical or sexual violence by an intimate partner; (out of 100).127 No country in the Pacific offered the the lowest prevalence is about 30 percent in Tuvalu recommended 14 weeks of government-administered and Palau (Figure 44).131 This compares to a global paid maternity leave, nor any parental leave.128 Only average of 27 percent according to latest WHO data. Samoa had provisions for any paid paternity leave. In the PIC-9 region there are no clear indications of Similarly, legal provisions and social norms contribute progress in recent years, although data comparable to land and fixed asset ownership inequality. Women over time are scarce. Based on recent global and EAP also do not have equal ownership rights to immovable research, the risk of GBV increased as a consequence property in six of the seven PIC-9 countries included in of COVID-19’s economic pressures on households and the 2021 WBL Report. This limits women’s access to restrictions on movement. The Tonga Women and finance and their ability to start, grow, and formalize Children Crisis Centre recorded a 54 percent increase their businesses.129 PIC-9 women hold only about a third in the number of cases from 2019 to 2020, while of managerial positions, with lower shares of female Samoa had a 150 percent increase in GBV helpline leaders in politics (Box 2) and large enterprises.130 calls132 Recent Multiple Indicator Cluster Surveys from 125 ILOSTAT, latest national survey estimates from Samoa, Kiribati, FSM, and RMI. 126 Labor Force Survey. 2017. 127 The Parenthood Index reflects availability, length, and government administration of paid maternity leave, availability and length of paternity and parental leave, and protections against dismissal of pregnant workers. 128 While labor laws in most Pacific countries have some maternity leave provisions, they usually fall short of 14 weeks’ paid leave (e.g., 6 weeks in Samoa, 12 weeks in Vanuatu and Kiribati) and are all employer-administered. 129 Asian Development Bank. 2018. Women and Business in the Pacific. 130 ILOSTAT latest national survey estimates and Pacific Private Development Initiative. 2021. Leadership Matters: Benchmarking Women in Business Leadership in the Pacific. 131 See also World Bank (2017). Rethinking Fragility in the Pacific: Risk and Resilience Assessment for Federated States of Micronesia, Republic of Marshall Islands, Independent state of Samoa, Kingdom of Tonga, Palau, Tuvalu, Kiribati, Vanuatu, and Nauru (PIC-9). Unpublished. 132 UN Women. 2020. Across the Pacific region, crisis centers respond to increased cases of violence against women amid Covid-19. June 11, 2020. Available at: https://asiapacific.unwomen.org/en/news-and-events/stories/2020/06/across-the-pacific-region- crisis-centres-respond-to-increased-cases-of-violence 72 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Tonga, Samoa, Kiribati, and Tuvalu show that, despite Business and the Law, 2022). Other recent initiatives the existence of domestic violence laws across PIC-9 include Tonga’s 2021 policy to tackle harassment at countries, women rarely make reports by using formal the workplace—but only for the public sector. Violence channels133. Already limited services (referral and against women is pernicious and has negative effects response, shelters), however, have indicated they are on both human and economic development. In the coming under increased strain. Non-partner violence Solomon Islands134 and Fiji,135 recent International is also widespread (Figure 45). Since 2017, Kiribati Finance Corporation case studies with private sector has had a national law that addresses harassment at partners point to the economic cost of GBV related to the workplace, becoming the second PIC-9 country the absenteeism and reduced productivity of workers. after Samoa put such provisions in place (Women, 133 Tonga MICS (2019), Kiribati MICS (2018), Samoa MICS (2020), Tuvalu MICS (2020). 134 IFC. 2019. The Impact of Domestic and Sexual Violence on the Workplace in Solomon Islands. 135 IFC. 2019. The Business Case for Workplace Responses to Domestic and Sexual Violence in Fiji. 73 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Box 2: Women’s political participation Representation of women in PIC-9 countries’ national parliaments only increased from 5.7 percent in 2016 to 6 percent in 2021;a meanwhile, the share of women in legislatures increased from 20 percent to 22 percent the rest of lower- and upper-middle income EAP (Figure 43). The pattern is mirrored at the subnational level, where traditional structures prevent women from actively participating in local governance. In Kiribati, women represent less than 5 percent of island councilors,b while in Samoa women hold less than 10 percent of Matai titles, limiting their membership in village councils.b This pattern leaves women out of important decisions, such as community land development, natural resource management, and climate adaptation. Women are missing opportunities to incorporate their knowledge in managing climate change and address their heightened vulnerability to disasters.c Nonetheless, recognizing the importance of women’s voices, a number of PIC-9 countries (Samoa, Tuvalu, Vanuatu) have started to incorporate principles of gender equality in national disaster and adaptation plans and policies, with focus on women’s participation in decision-making. While these are not sufficient to overcome these structural barriers to women’s participation in decision-making, they generate a positive momentum for women’s empowerment.d Figure 43: PIC-9 women’s political participation is among the world’s lowest in, with little progress between 2016 and 2021 30 25 Percent female MPs 20 13.8 15 10.5 10 9.8 9.1 10 7.4 6.9 6.5 6.7 6.7 6.3 6.1 5.3 5 0 0 0 0 0 0 Nauru Samoa* Tonga Palau Kiribati Tuvalu RMI FSM Vanuatu PIC-9 % Female: 2016 % Female: 2021 EAP (LMIC and UMIC): 2016 EAP (LMIC and UMIC): 2021 * Since 2013, Samoa has a minimum 10% quota for female MPs Source: Inter-Parliamentary Union, Parline Database and data archive. a. Beijing Platform for Action +25. 2019. Kiribati National Review. b. Samoa Ministry of Women and Community Development. 2015. Women Matai and Leadership Survey. c. Pacific Women Shaping Pacific Development.2021. Thematic Brief. Women and Climate Change in the Pacific. d. Collins, Jessica (2022) A few remarkable wins for Pacific women in local politics. The Interpreter. https://www.lowyinstitute.org/ the-interpreter/few-remarkable-wins-pacific-women-local-politics. 74 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 44: Prevalence of physical or sexual intimate- Figure 45: Prevalence of non- partner sexual violence patner violence among ever-partnered women in PIC-9 in PIC-9 60 50 50 40 40 30 Percent Percent 30 20 20 10 10 0 0 Kiribati Vanuatu Nauru Samoa Tuvalu RMI Tonga FSM Palau Nauru* Vanuatu Palau* RMI* Samoa Tuvalu Kiribati FSM* Tonga Intimate-partner physical and/or sexual violence: lifetime Lifetime non-partner sexual violence Intimate-partner physical and/or sexual violence: past 12 months Global average Global average: lifetime physical and/or sexual IPV Global average: physical and/or sexual IPV in past 12 months Source: WHO Global Database on the Prevalence of Violence * Estimate for the population of women aged 15-64 (remaining Against Women 2018. data for women 15-49). Source: UN EVAW Database; Tuvalu 2020 MICS. The Way Forward equal rights to ownership of immovable property. These measures would strengthen the enabling environment A supportive legal and policy environment is a for employees and entrepreneurs, making it more critical step toward facilitating women’s economic feasible, safer, and more rewarding to engage in the empowerment. Global evidence shows critical links labor market. In addition to strengthening the legal between gender equality under the law and positive environment, adequate focus and resources will be labor market outcomes for women, including labor force needed to ensure the laws are implemented effectively. participation, vulnerability to unemployment, and wage Equalizing women’s voice in households and society, inequalities.136 Policies and legislation that eliminate for example by increasing representation of women in barriers to women getting hired and remaining employed decision-making roles, can support these processes. at critical points (e.g., marriage, childbearing)—if they While informal institutions, including social norms, will so prefer—is a necessary step toward reducing gender continue to mediate access to employment, equality in employment gaps across all sectors of the economy. legal provisions is a critical first step to enable progress. Reducing the trade-offs between parenthood and paid work has been shown to impact female labor force It will remain crucial to tailor sector strategies participation and employment outcomes—even as and programs to support employment creation social norms may continue to prescribe women’s primary and access to economic benefits in ways that care responsibility in the household. This involves the address different barriers and vulnerabilities for introduction of government-administered paid parental women and men. When it comes to strategies and leave and labor-law provisions against the dismissal of interventions, adequate engagement of women in pregnant workers, as well as promoting affordable and consultations, decision-making, and planning is one high-quality childcare services. Other important legal action area for ensuring programs are designed in changes to support equal opportunities in accessing ways that address their needs. Youth employment and and retaining paid jobs among women include provisions integrated economic development programs in Papua against employment and pay discrimination, sexual New Guinea and Solomon Islands offer lessons on how harassment at the workplace, and denying women to engage young women in paid employment. Targeted 136 For the most recent research on the links between legal reform and positive outcomes for women’s economic empowerment, see World Bank. 2022. Women, Business and the Law 2022. Washington, DC: World Bank. 75 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE outreach and information activities (which may be open The need continues for urgent action to promote to men as well as women) and tailored training and economic opportunities and a safe workplace for skills development interventions are critical to enabling women while enacting and implementing effective women to seize opportunities to participate in labor GBV prevention interventions and strengthening markets.137 These need to consider informal institutions, response services. First, comprehensive legislation that including social norms and gender stereotypes, and be addresses GBV and sexual harassment in the workplace adapted to local contexts. The same approaches apply needs to be in place, effectively implemented, and given at a sectoral level as well, for example in tourism, which adequate resources. Most PIC-9 countries’ legislation employs a large share of working women. Opportunities does not adequately address sexual harassment,139 and to support women’s work in the sector may include: definitions of domestic violence do not always include promoting female active participation in consultations emotional, psychosocial, or economic violence.140 and decision-making for national tourism policies and Second, prevention activities and service provision for development strategies; adopting policy and legislative survivors of violence have benefitted from extraordinary frameworks to protect workers from exploitation and investments and support by donors and non- harassment; developing targeted outreach and skills governmental organizations, but they need to be taken development programs; support female entrepreneurs to scale. Third, a consistent effort of engaging men and in the sector, with a focus on niche sectors such boys (for instance, through SBCC, counseling or male as cultural and creative tourism, through targeted advocacy) in interventions targeting GBV is crucial for business skills and credit access programs. a sustainable transformation of harmful gender norms. Finally, prevention and response interventions need to Promoting the acquisition of relevant skills and be complemented by carefully designed interventions education sought after in labor markets, including that support women’s economic empowerment. These STEM training, can be transformational in enabling can enable survivors to secure independent incomes, women to access more and better paid jobs. As often a key factor in reducing survivors’ economic previously discussed, young women tend to have better dependence on perpetrators and improving resilience to education outcomes than young men, but these do not violence. translate in better employment outcomes. Addressing the social norms around what fields and jobs are appropriate for women will take a long time, but efforts Pathway 3: Building resilient incomes could start early (Figure A-15 in annex). A recent World and livelihoods Bank study makes the case for “addressing biases in learning materials, engaging parents, encouraging PIC-9 countries are highly exposed to adverse participation in STEM-related extracurricular activities, natural and external economic shocks with featuring role models, and promoting partnerships potential to cause damage that affects economies, with the private sector.”138 In the meantime, short- people, and the environment and undermines long- term results can be achieved through targeted term development agendas. As noted in Section campaigns and outreach activities to encourage C (Fundamental Constraints), the Pacific is widely women to pursue STEM education and careers, or to recognized as one of the most exposed regions to both inform them about job opportunities in non-traditional natural hazards and climate change risk. The countries sectors through mentorship and traineeship programs. face multiple risks due to their small, open economies Several transport and infrastructure sector actors, and disaster risks made worse by the effects of climate including the Department of Transportation in FSM, are change. As the impacts of global climate change and introducing measures to improve women’s access to periodic economic and disaster shocks continue to selected technical and professional jobs. escalate as was recognized in the COP27 Conference in 137 A good example is Tonga’s 2020 Labor Mobility Policy. The policy’s medium-term action plan (2020-2024) includes developing 1) information campaigns and community outreach to encourage recruitment from outer islands, 2) selection criteria that encourage greater participation by females and vulnerable households, and 3) pre-departure and reintegration programs tailored for women and youths participating in seasonal worker programs that support further training and career development. Latest available data indicates women represented 45 percent of participants in pre-departure migrant pools in 2022, up from 32 percent in 2019. 138 https://www.worldbank.org/en/topic/gender/publication/the-equality-equation-advancing-the-participation-of-women-and-girls- in-stem. 139 OECD, 2016, EAP SIGI Report. 140 In Papua New Guinea, for example. 76 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE 2022, so too will the need to invest in resilience. Pathway pooling risks across countries. In the absence of easy 3—“resilient incomes and livelihoods”—identifies three access to debt and well-functioning insurance markets, key priorities for improving this critical development a large proportion of the economic losses stemming challenge: 1) strengthening climate and disaster from adverse natural events is borne by governments risk management tools and policies; 2) developing and households. While donor financing and remittances adaptative social protection systems; and 3) building help mitigate the initial liquidity challenges, additional resilient small-scale farming and coastal fisheries. financial tools are needed to meet the economic and social costs of disasters. 1. Strengthen climate and disaster risk policies and Making key development sectors climate and build resilient systems disaster resilient is essential. Post-disaster assessments of needs after major cyclones show that PIC-9 countries face multiple hazards—flooding infrastructure, agriculture, and ecosystems tend to due to cyclones, storm surge, seasonal drought and be heavily damaged or destroyed during disasters.142 heavy rainfall, and coastal erosion, all aggravated An urgent priority is developing and enforcing resilient by the effects of sea-level rise and climate change. standards for roads and buildings (e.g., through building As the impacts of climate change, sea-level rise, and permits). Based on risk and vulnerability assessments, disasters continue to escalate, so too will the need to PIC-9 countries need to develop spatially based plans to invest in resilience. A shift to more transformational inform development consent and guide the placement measures141 will likely be needed in the short, medium, of critical infrastructure (e.g., water pipelines, and long terms. These measures may include a suite electricity powerlines and substations, major public of contingency financing instruments, investments to builds) away from high-risk zones. Such plans must assess risk and vulnerability, policy reforms to include draw on technical and analytical work, digital elevation climate and disaster risks in development strategies, models, and medium-long term climate-related risk and efforts to make investments climate and disaster assessments. resilient, particularly in infrastructure and agriculture. The costs for such adaptation measures may be orders The Way Forward of magnitude greater than traditional investments. For atoll countries, adaptation measures applicable Given the common challenges PICs face and the to various settlement types—major urban centers, increasing variability of impacts from climate- intermediate centers, and outer atolls—should be related hazards, governments need to further developed based on sea-level rise hazard analysis, strengthen and harmonize policies, strategies, and settlement patterns, and demographic projections regulations for effective disaster risk management (DRM), disaster risk finance (DRF) and climate For PICs, a critical concern is securing access to change adaptation (CCA). Increasingly, PIC short-term immediate financing for emergency governments are developing strategies and investing in responses and maintenance of essential government institutional capacity to better manage the economic services until additional resources become available. and social implications of disasters as well as the more Governments face an implicit contingent liability long-term impacts of climate change on society and to provide emergency responses to households fiscal space. Some PICs have accessed multiple disaster and businesses impacted by disasters and other risk instruments to provide immediate liquidity in the emergencies However, their small size, limited borrowing aftermath of disasters, such as sovereign insurance capacity, and limited access to international insurance or contingent financing instruments (i.e., the World markets restrict PICs in their options for raising quick Bank’s Catastrophe Deferred Drawdown Option (Cat liquidity at the onset of a crisis. Low insurance take-up DDO). They have also accessed climate financing from is related to high fixed costs associated with providing such sources as the Global Environment Facility (GEF) insurance to small markets and the inability to spread and the Green Climate Fund. Nonetheless, significant risk over a large territory, necessitating the need for challenges remain in strengthening national policy 141 According to the glossary of the IPCC Special Report on the impacts of global warming of 1.5°C (IPCC 2018), transformational adaptation changes the fundamental attributes of a socio-ecological system in anticipation of climate change and its impacts. 142 Examples include PDNA after Tropical Cyclone (TC) Evan in Samoa (2012), TC Pam in Vanuatu (2015) TC Winston in Fiji (2016) 77 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE and regulatory frameworks, particularly in effectively approaches. The transformational long-term measures coordinating various efforts within countries and linking could include raising land, reclaiming land, and them to development plans. relocation to other (raised) islands. Ecosystem-based approaches require long-term management plans. Enhancing climate and disaster resilience is still in its Examples include plans for major catchments and early stages in the Pacific. Emergency preparedness coastal areas prone to erosion. Incorporating actions and response systems need strengthening to ensure such as restoration, rehabilitation, and conservation to greater resilience to ongoing and future risks. This reduce land degradation can improve the climate and will involve improvements in legal and institutional disaster resilience of these catchments and coastal frameworks, equipment, personnel, information areas while delivering livelihood and economic benefits management, and facilities. The main areas of focus to countries and communities. These measures can should be: 1) strong integration between disaster also contribute to decreasing the risks and impacts of management, health, and other ministries through a floods and soil erosion. multi-hazard and socially inclusive approach to risk management; 2) flexibility to manage immediate- 2. Develop adaptive social protection systems and short-term responses to disasters and health emergencies; and 3) disaster risk financing mechanisms Social protection systems that promote economic to support recoveries and mitigate fiscal and financial resilience in the PIC-9 countries are still nascent costs. Investments will need to consider multiple factors and rely on informal safety nets, with a strong ethos affecting the efficiency and effectiveness of emergency of resource-sharing through traditional networks. preparedness and response systems, such as resource Although the COVID-19 economic shock has focused management, national-provincial coordination, service greater attention on the importance of national social and equipment quality and standards, and community/ protection schemes, PIC-9 countries have very limited end-user needs. Developing standard operating formal safety nets beyond those provided by traditional procedures, training programs, exercises, and drills will pensions. Vanuatu has no national social assistance be crucially important. program, while Tonga, Samoa, and Kiribati maintain categorical programs targeting the elderly or persons Enhanced understanding of risk is an important with disabilities. In recent years, Tonga implemented element in support for decision-making, product the Pacific’s first conditional cash transfer program, development, resilience, and response planning. Risk targeting poor families with secondary school students. modelling, data, and communication must be further Kiribati rolled out the Support Fund to the Unemployed, developed to guide PICs’ disaster risk management a large program to support unemployed working-age and financing. This includes an understanding of the adults. Kiribati and RMI run copra subsidy programs vulnerability to and potential (probabilistic) impacts to support outer island communities. These utilize of disasters. Such inputs are key to shaping policies, significant fiscal resources but are arguably ineffective. planning, responses, resilient investments as well as In the PIC-9 countries, traditional networks based on decisions on accessing disaster relief funds. Achieving a variety of linkages—such as blood relations, village, a better understanding of risk will require investments language, and other customs—remain at the core of in technical programs to develop risk data within each social systems, with gift-exchange relationships that PIC-9 country as well as regional knowledge-sharing are reciprocal in nature serving as a source of informal and coordination of policies around disaster risk.143 social protection. The adaptation pathways should include short- Informal protection systems are prone to several term and long-term measures to prepare for weaknesses, including correlated risk and a lack of potential scenarios for high and extreme sea-level access among the marginalized. The arrangements rise. Short-term options could draw on engineering are particularly ineffective in addressing repeated measures, potentially combined with ecosystem-based and aggregate shocks that affect entire communities, Climate change involves risk (known probabilities of adverse climate outcomes) and uncertainty (unknown future and non- 143 quantifiable outcomes). Here we are only describing climate change risks based on prior history of weather outcomes and modeled predictions. But under uncertainty outcomes are unknown. This distinction is important because uncertain shocks of climate change are unknown and make sufficient insurance and mitigation infeasible even if some risks are insurable and can be mitigated. 78 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 46: Informal social assistance (given/received) by quintile as a share of mean household consumption 6 4 2 Percent 0 -2 -4 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Vanuatu RMI Kiribati Given Received Net Receipt Source: World Bank Staff analysis based on the following data sources: Vanuatu: HIES2019; RMI: HIES2019-2020; Kiribati: HIES2019. Note: Values are normalized using mean household consumption in each country to ensure comparability. regions, and countries—as COVID-19 has demonstrated. countries introduced new SA measures as a response In some cases, network obligations have the potential to the pandemic, but the programs were generally to exert pressure for the poor to give even when they are temporary. Pre-COVID data suggest that most PIC-9 not able to do so. The distributional impact of informal countries spend 0.5 percent of GDP or less (where data social assistance differs among PIC-9 countries, is available) on SA, well below both regional and global although households tend to receive more than they averages (Figure 47). FSM and Vanuatu did not operate give because of the high impact of remittances. formal SA programs pre-pandemic; Tonga spent less than 0.4 percent of GDP. Only Samoa and Kiribati While informal assistance is somewhat progressive, have significant SA spending of more than 1 percent of the benefit levels are low and likely inadequate GDP—in line with the EAP average yet still below the to provide a proper safety net. Among poorer world average of 1.5 percent. In these and other PIC- households, “contributions” to the informal networks 9 countries, such support is often poorly targeted, tend to be lower than the benefits (Figure 46). Benefit with universal elderly and disability pensions provided levels, including international remittances, are low in without poverty or needs-based targeting. RMI, Kiribati, and especially Vanuatu; none attain the 10 percent level of adequacy normally required for The combination of heavy reliance on informal social assistance transfers to be considered effective safety nets and a lack of ongoing social protection in alleviating poverty and mitigating vulnerability. in and Adaptive Social Protection (ASP) systems limits the inadequacies rise greater concerns in the absence assistance to affected households during shocks. As of strong formal social assistance. Although data are previously noted, reliance on informal social protection patchy, these findings are likely to apply in other PIC-9 leaves many households unprotected when a shock countries, suggesting informal safety nets that: 1) are strikes a wide area—such as a disaster or an economy- insufficient for the task of protecting poor households; wide shock (World Bank, 2020). The widespread nature 2) are driven by international remittances (countries of such shocks means very few people in the informal with lower remittances are likely to see lower value network have the ability to help to others at times transfers); and 3) can be regressive, with high income when help is most needed. While being hardest hit households receiving more in absolute terms, even during shocks, the poor benefit less from informal social when accounting for higher levels of giving. protection. Formal social assistance (SA) is nascent in most ASP systems aim to respond to these challenges by PIC-9 countries and insufficient to mitigate the building resilience among vulnerable households to limitations of informal social protection. PIC-9 help them prepare for, cope, and adapt to shocks. 79 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 47: Social assistance Spending as a percentage Contributory social security schemes and provident of GDP, latest available data before the pandemic funds are more widespread than social assistance in the PIC-9 region, with most countries having in 1.60% place a government-mandated pension system for formal sector workers. As with other EAP countries 1.40% (Figure 48), it has been difficult to cover informal sector 1.20% workers, even if mandatory contributions are required. 1.00% This is reflected in significant differences in coverage 0.80% rates between the overall population and the poorest 0.60% quintile, the group most likely to work informally. In 0.40% addition, contribution rates at retirement in many 0.20% countries may be relatively low, reflecting the tendency to move in and out of formal jobs as well as relatively 0.00% FSM Vanuatu Tonga Samoa Kiribati EAP World low retirement ages in many PIC-9 countries. For countries with defined benefit schemes and available Source: World Bank (2020). “Diverse Paths. The Dynamic evolution data (Kiribati and RMI), pension adequacy is below of social protection in Asia and the Pacific.” Washington D.C. the EAP average. In some countries, benefit adequacy of provident funds has been an issue, with low returns They also aim to reduce the propensity of households on investment (in the North Pacific). Kiribati, RMI, and to resort to negative coping strategies in response to FSM offer defined-benefit schemes. Only Kiribati seems shocks. ASPs rely on the existence of formal safety to face serious sustainability challenges after the two nets, and a key limitation of PIC-9 countries’ fiscal others enacted parametric reforms (see Table A-5 in responses to COVID-19 has been the limited existence annex). of social protection systems that could provide support, including the absence of formal systems for identifying Although some provident funds have provisions for poor and vulnerable households (e.g., social registries). In early withdrawal, these schemes have not generally addition, limited digital payment systems and reduced been a source of benefits in the case of shocks. service delivery capacity are factors that influence There is undoubtedly a tradeoff between the adequacy governments’ ability to quickly channel resources to of retirement benefits on the one hand and the flexibility those in need during times of crisis. for early withdrawal on the other. The experience of the recent COVID-9 pandemic suggests that contributory Some PIC-9 countries do have labor market social security schemes and provident funds may need programs aimed at unemployed youth populations, to consider providing limited benefits to those most but these programs are usually small-scale and adversely affected by shocks. fragmented. Employment intermediation services aimed at connecting jobseekers with employers are The pandemic has significantly focused PIC-9 either entirely absent or limited in scale and quality policymakers’ attention on formal social protection (World Bank, 2020). The programs’ engagement with programs, used in many countries to mitigate the employers has historically been weak, limiting the impacts of the COVID shock. Remoteness helped many value of services provided. Publicly funded employment PIC-9 countries avoid a surge in COVID infections, but service providers in a number of countries focus on their economies where nevertheless hit hard, prompting small-scale training, with no or weak evaluation of a range of actions to support workers and households. the impacts of such programs. Employment services Kiribati, FSM, and Palau introduced unemployment that support labor mobility are more significant in key support programs; FSM introduced one-off cash sending countries, although are typically managed transfers and food support programs; Tonga introduced separately from domestic employment intermediation. top-up payments for existing social protection Even in these cases, public investment is limited beneficiaries; and Vanuatu introduced a wage-subsidy when compared to the scale of employment under program (Gentilini et al., 2021). Little evidence from low- and semi-skilled labor mobility programs, with household surveys is yet available, but simulations such agencies typically dependent on resources from show that these programs significantly mitigated the development partners (Figure A-16 in annex). impact of COVID on poverty and vulnerability among 80 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 48: Coverage and adequacy of social insurance for total population and poorest quintile (a) Coverage of social insurance (b) Adequacy of social insurance 60.0 60.0 50.0 50.0 beneficiary household % of total welfare of 40.0 40.0 % coverage 30.0 30.0 20.0 20.0 10.0 10.0 0.0 0.0 Kiribati RMI Vanuatu East Asia Kiribati Marshall East Asia & & Pacific Islands Pacific Título del eje Total SI pop Total SI Q1 Total pop Q1 Source: World Bank Staff analysis based on the following data sources: Vanuatu: HIES2019; RMI: HIES2019-2020; Kiribati: HIES2019. PIC-9 households. Recent simulations suggest that ASP programs are shown to have sustained, positive the pandemic-related social protection expansions impacts and can also serve as a training tool for reduced poverty by 0.5 percentage points in RMI early warning information. Recent impact evaluations and 0.3 percentage points in Vanuatu (World Bank, provide evidence of ASP programs’ usefulness as a forthcoming). The success of these interventions could social protection tool in PIC-9 countries. The evaluations be used as steppingstones toward the building of more show adaptive programs have significant and sustained durable formal social protection systems in PIC-9 positive impacts on household savings, creditworthiness, nations. and debt reduction.144 ASP systems can also exhibit innovative features that allow them to contribute to the The PIC-9 countries COVID response is part of a broader level of disaster preparedness among households. global trend towards ASP systems. PIC-9 countries For example, the Climate Change and Disaster Risk have historically relied on informal networks and Management Training in Tonga in 2020 provided early humanitarian responses to deal with emergency warning information and guidance to households situations, such as disasters. As a response to the benefitting from the conditional cash transfer program. increasing severity and frequency of tropical cyclones, and following the COVID pandemic, there is now a In addition to mitigating poverty and vulnerability, greater focus on ASP systems to support the poor formal social protection systems can have and vulnerable and bolster households’ resilience. The transformative long-term impacts in fostering main ASP design features are: 1) establishing programs gender equality, building human capital, and helping that invest in risk-informed targeting approaches to households graduate out of poverty. These benefits identify vulnerable households; 2) collecting data and are especially important for children. The gains can information to assess risk before and after shocks and be achieved though: 1) linking social protection with linking social programs to early warning systems; 3) human capital investments, such as education and securing long-term financing by estimating the cost child nutrition: 2) focusing on programs with productive of responding to shocks; and 4) coordinating across inclusion components: 3) bringing in alternative sources sectors and building partnerships. ASP systems provide of livelihood diversification; and 4) reducing the reliance a more formally established mechanism of dealing with on livelihoods at risk of shocks. Still nascent in PIC-9 disaster-induced shocks than ad-hoc humanitarian countries, a transformational focus holds potential in assistance. the medium to long term. 144 Andrews and Hsiao, and Ralston 2018; Bastagli et al 2016; Hidrobo et al 2018; Ulrichs and Slater 2016 cited in Bowen et al. 2020. 81 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE In addition, social protection has the potential health information systems, all linked via foundational to promote gender equality and empower women ID systems). The long-term perspective involves and girls. Social protection programs can contribute facilitating the development of social protection to a range of gender equality outcomes by explicitly information system solutions and social registries. responding to the differentiated needs, risks, and opportunities of women and girls, alongside those The expansion of formal social protection should of men and boys, to tackle gender inequality’s root build on existing systems and strengths. For outer causes. Evidence has shown that social protection islands and rural locations, where community cohesion measures, including cash transfers, are promising tools is generally stronger and informal social protection to improve women’s basic consumption, socioeconomic may be more important, new interventions should take status, agency, mental and physical health, and school advantage of these formal or informal structures. This outcomes for girls. When carefully designed, especially can be done, for example, by using community-based if matched by awareness raising campaigns and SBCC targeting approaches or locally led implementation activities, social protection programs can address mechanisms. In some contexts, poverty-based intimate partner violence145. Social protection programs targeting may not always be the most appropriate can contribute to women’s economic empowerment assistance modality. Efforts should also focus on through increased income; financial inclusion (through reducing fragmentation and integrating/coordinating access to digital payments); employment (through wage various elements of social protection. Where available, labor, training/skills development); asset ownership social protection systems should establish linkages— (through access to economic resources); strengthened in terms of policies, procedures, and IT/data—with risk management (through access to credit and activation, employment support, skills development savings); and enhanced agency (through higher control and public works programs already in place. This will over resources and decision-making within households). help establish a pathway for welfare graduation. Such measures could be phased in using a more targeted The Way Forward approaches, initially focusing on certain groups (e.g., women, youth, outer island residents) and establishing PIC-9 countries have much to gain through strong M&E to ensure learning from evidence prior to expansion of ASP systems. Universal social protection future scale-up. ensures people have access to social protection when needed at different points in the life cycle and as their circumstances change. It is a worthy aspiration, 3. Resilient agriculture and coastal fisheries for consistent with SDG 1.3: “Implement nationally small scale operators appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial Agriculture and coastal fisheries play important coverage of the poor and the vulnerable.” roles in providing for the subsistence needs of the poor. Subsistence makes up over half of all labor income Achieving this goal should be done in ways for the poorest 40 percent in Vanuatu and those living appropriate to local contexts. A focus on ASP systems on the outer islands of Samoa. In comparison, it is a that are responsive to shocks and protect vulnerable third for those living in rural areas on Samoa’s main households is critical given the PIC-9 region’s exposure island (World Bank, forthcoming). Subsistence income to disasters and external economic shocks. Expanding may be a “last resort” for those unable to access better coverage is necessary to achieve the objectives. Social jobs, but it is largely resilient to non-agricultural shocks, protection systems also need to be scalable, ensuring such as commodity price fluctuations, economic crises, that they are affordable in a PIC-9 context while being and the COVID-19 border restrictions. However, a lack of responsive to the needs of the population. This requires income diversification means households are extremely a multifaceted approach, with new systems leveraging vulnerable to shocks to agriculture itself (e.g., droughts, digital government infrastructure already in place floods, and tropical cyclones) as well as to long-term (such as birth registries, tax registries, education and changes to agricultural and fishery productivity due By reducing households’ financial stress or addressing gender norms (e.g. through incorporating Social and Behavior Change 145 Communication approaches). See: Botea, Ioana; Coudouel, Aline; Heinemann, Alessandra; Kuttner, Stephanie. 2021. Safety First : How to Leverage Social Safety Nets to Prevent Gender Based Violence. Washington, DC: World Bank 82 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE to the cumulative effects of climate change and lands and the inability to use land titles as collateral anthropogenic impacts on fisheries (overexploitation for credit). External impediments include barriers to and pollution). overseas market access and ensuring compliance certificates to meet importing countries biosecurity, Agriculture is modest share of GDP but a greater sanitary and phytosanitary measures (SPS), and food contribution to employment. Agriculture as a share safety standards/requirements (e.g., HACCP). of GDP ranges from under 10 percent in Samoa to just over 25 percent in Kiribati. The sector’s shares of For atoll countries in particular, poor soil quality total employment range from one-quarter to over one- and scarce water resources limit the scope for half (Table 6). Coastal fishing provides a large share of commercial agriculture. The soil structure is usually protein consumed by the poor, while offshore fishing shallow, alkaline, and low in organic matter content, serves as a major export and source of government making the land a major limitation on diverse agricultural revenues for FSM, RMI, Kiribati, and Tuvalu. At the same production. Where PIC-9 export commodities exist, their time, public infrastructure, extension services, and risk expansion is constrained by the land-tenure system, mitigation support are modest, contributing to low inadequate basic infrastructure, skills shortages, lack productivity. Farms are small and narrowly focused on of investment, and a poor business environment. In root crops (taro, kava) and coconut. addition, difficulties in consolidating small land plots to economically viable farms reduce the scope for large- Despite its contribution to employment, agriculture scale commercial agriculture. has not been overly successful at exporting due to geography and weak business enabling environments. Outreach capacity of extension services is weak The high costs of trade and logistics and lack of and limited. Numerous studies of Pacific rural advisory economies of scale that arise from the PIC-9 geography services have documented challenges that impact the are immutable constraints for agricultural exports. ability to deliver effective services to rural communities. Other impediments to the development of significant They include the limited capacity of extension services, exports include weak institutional capacity and poor institutional and budgetary constraints, poor enabling business enabling environments (including communal policies, limited coordination between actors in rural Table 6: Key agriculture-related characteristics of PIC-9 countries Share of Share of Agriculture Prevalence of Agriculture employment in Average Undernourishment Value-Added in Total Employment Farm Size Key Exports (2017-2019)a GDP (2018) (2019) ha % % % Offshore fish, Betel nut, FSM 24.2a 52.4b - 0.08f Kava, cooked reef fish, live coral Kiribati 26a 29c 3.0 0.2-0.8g Fish, coconut oil RMI 13.6 a - 34.8 k - Fish, coconut oil Samoa 8.2 30.4a <2.5 3.6h Fish, taro, coconut oil Fresh and chilled Tonga 17.7 24.2a 2.2k 2.6h vegetables, fish, Tuvalu 17.9a - 10.0k - Copra Kava, Copra, coconut oil, Vanuatu 19.8a 55.8a 9.8 0.08j beef, cocoa, timber Sources: a/ Agriculture, Fisheries & Forestry category, FAO Statistical Pocket Book - World Food and Agriculture, 2020; b/ FSM Census 2010; c/ ADB 2019; f/ FSM Integrated Agriculture Census 2016; g/ IFAD 2014, Kiribati Outer Island Food and Water Project, Design Completion Report; h/ FAO 2016, The Number, Size, and Distribution of Farms, Smallholder Farms, and Family Farms Worldwide; i/ Ceased in 2002 (Tuvalu Agriculture Sector Plan 2016-2023); j/ GoV 2008, Census of Agriculture 2007; k/Stunting, Global Nutrition Report 2017 https://globalnutritionreport.org/resources/nutrition-profiles/oceania/ 83 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE advisory services, poor linkages between research and services; access roads and other basic infrastructure; extension, and a lack of information systems.146 In and water supplies.150 Tonga, for example, some export businesses decided to fund their own product-specific grower outreach High vulnerability to disasters and observed climate extension and crop production input services under the changes further reduces the production capacity Ministry of Agriculture and Food, Forestry and Fisheries and potential investments in the agricultural sector. (MAFFF). However, the MAFFF has not been able to Pacific islands are extremely vulnerable to climate respond to such overtures and recognizes its inability change. Tropical cyclones (increasing in frequency to provide full services to farmers, consistent with its and intensity), irregular rainfall patterns, flooding in charter, due to limited resources. At least 67 percent low-lying and coastal areas, saline intrusion, coastal of its budget is committed to salary and staff costs.147 erosion, and increased rates of coral bleaching mean In Vanuatu, staff costs made up close to 70 percent of unstable levels of food production and higher demand. operational funds, limiting its ability to reach remote This will affect diet and income-generating activities farmers, supply extension materials, and provide the for communities and economies—in essence, the food management and supervision needed to operate as an security of the Pacific Islands.151 The low-lying atolls effective service.148 of Kiribati, RMI, and Tuvalu currently face significant risks associated with climate change. Extremely low Constraints limit the capacity to expand livestock elevations (e.g., RMI and Tuvalu are two to three meters production. Sixty-five percent of rural households raise above mean sea level) make sea-level rise a direct threat subsistence and commercial livestock, making these to lives, assets, livelihoods, and ecosystem capacity.152 animals an integral part of Pacific farming systems.149 The major livestock producers among the PIC countries Coastal fishing incomes are small in all PICs but include Samoa, Tonga, and Vanuatu. Livestock provide crucial for local livelihoods, food security, and rural households with many important benefits, dietary health. Coastal fisheries are an important including consumption of meat, milk, and other animal source of consumption and food security for the proteins, income flows and capital reserves, social poor—and a tourist attraction in some places. Women status, weed control for a range of crops, transport, are particularly dependent on coastal fisheries, which and draught power. Prices for livestock products are provide 50 percent of coastal households with their less variable than for commercial crops, and production first or second source of income. Fish accounts for 50 is less adversely affected by drought, cyclones, percent to 90 percent of animal protein in the PICs’ pests, and diseases. Pacific livestock subsectors are national diets,153 compared to the global average of 17 predominantly smallholder based. These may be percent.154 Subsistence fishing accounts for about 70 subsistence, partly commercial, or highly commercial percent of the Pacific Islands’ coastal fish production.155 in managing livestock. While livestock production is In addition, coastal fishing provides some export- fundamental for Pacific food security, attempts to oriented products (e.g., bêche-de-mer, aquarium fish, improve the enabling environment have flagged. Much and trochus) while adding significant social, cultural, of the challenge is simply due to the high costs of and recreational value and, possibly, government non- importing quality feed, but the livestock industry also tax revenue in some cases. faces inadequacies in support infrastructure (such as HACCP-certified slaughtering facilities); veterinary 146 The Pacific Islands Extension Strategy, Strategic Priorities In Agricultural Extension And Rural Advisory Services In The Pacific (2017-2027), Secretariat of the Pacific Community 2017. 147 Tonga Agriculture Sector Plan 2016-2020, Ministry of Agriculture and Food, Forestry and Fisheries. 148 Review of Vanuatu Extension Services, Greer Consulting Services, 2008. 149 Accelerating Action on Food Security and Nutrition in Pacific Small Island Developing States, FAO Regional Conference For Asia And The Pacific, March 2018. 150 Consolidated Responses for the PAFPNet Discussion for the month of April 2015 Date: 07/04/2015-27/04/2015. “Livestock Production in the Changing Environment of Pacific Islanders.” 151 Factsheet: Pacific Climate Change, SPREP Factsheet No. PF-003, First Published 2005; revised August 2008. 152 Te Kaniva, Tuvalu National Climate Change Policy 2012–2021, Ministry of Foreign Affairs, Trade, Tourism, Environment and Labour. 153 Bell, Johann & Kronen, Mecki & Vunisea, Aliti & Nash, Warwick & Keeble, Gregory & Demmke, Andreas & Pontifex, Scott & Andréfouët, Serge. 2009. “Planning the use of fish for food security in the Pacific. Marine Policy.” 33. Pp. 64-76. 10.1016/j.marpol.2008.04.002. 154 FAO. 2018. “The State of World Fisheries and Aquaculture 2018 - Meeting the sustainable development goals.” Rome, 210 p. 155 FAO. 2002. “Regional Information on Pacific Island Fisheries”. Rome. 84 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE The Way Forward Agritourism has potential for small-scale entrepreneurs in the Pacific, fostering a more The PIC-9 agricultural sector would benefit from community-inclusive model of tourism development. efforts to expand and diversify domestic food Food and beverages, crafts, cosmetics, flowers, supply chains. Establishing farmers groups, promoting ornamentals, and essential oils are all local products collective marketing, and encouraging contract- with strong potential for supporting growth in the farming agreements could help coordinate inclusive agribusiness sector, especially among women. Many supply chains and provide more income opportunities PICs are ideally placed to take advantage of agritourism for small-scale farmers.156 This would include linking into based on organic production systems, especially given the tourism sector through a demand-led approach and their extensive and largely pristine coastal and marine nurturing select niche and cash crops where possible. resources. In addition, policy reforms and sustained long-term investments will be needed. In remote rural locations, Affordable risk management tools, investment in improving poorly developed roads and transportation rural infrastructure, and ensuring efficient sector systems would reduce production costs and give small support systems are critical. As previously noted, farmers greater incentive to invest in niche products. Pacific Island agricultural production is increasingly Producing high-value agriculture produces for tourism adversely affected by climate change. For coastal and niche export markets would also require quality communities, the effects of erosion, increased certifications (such as organic and Good Agricultural saltwater contamination of groundwater and Practices) that are costly and difficult acquire. estuaries, cyclone and storm surges, heat stress, and Governments should provide platforms for collaboration drought may undermine food production, individually that allow small farmers to overcome these costs.157 or in combination. Climate change impacts cannot be reversed in the near-term, but governments can take Developing high-end, niche tourism may provide steps to build resilience. Climate resilient infrastructure avenues for growth and resilience for small- is one avenue—for example, elevated access roads. scale farmers. Tourists typically want to eat local Another, done in Kiribati, involves planting of mangroves but demand high quality, making tourism sectors a near coastal areas to protect against erosion and substantial potential market for locally grown produce, improve sustainable fisheries. seafood, and packaged value-added products. At present, about 50 percent of food consumed by Pacific Crop and livelihood diversification is another Island tourists is imported (this varies across countries means to improve resilience. Traditionally, Pacific with the less food secure countries needing to import Island communities grew multiple crops, gaining some more). IFC studies in Vanuatu and Fiji identified key resilience in food supply because not all crops were elements to improving linkages between tourism and affected by the same hazards, such as droughts or agriculture: (i) networking between decision-makers in cyclones. Repeated government attempts to develop hotels and local producers; (ii) consistency of supply; (iii) monocultural cash crops—such as copra, coffee, quality assurance of products; and (iv) high food safety and sugar cane—can be reversed in many places standards.158 On improving standards, in addition to to strengthen the diversity and intensity of local Good Agricultural Practices certification, producers production. The effects of these changes would reduce can enter the Participatory Guarantee System (PGS), dependence on imported food products, increase food a decentralized organic farming system that enables supply resilience, and reduce household vulnerabilities smallholder farmers/growers to have their produces rooted in low incomes and high food prices. The changes certified in a low-cost and participatory way. These would also support a “nutrition transition” away from products in turn can contribute to the value of the unhealthy sugary/salty packaged foods and toward tourist’s experience.159 a greater variety of local foods, potentially lowering rates of obesity and cardiovascular disease. In Pacific 156 Family Farming in the Pacific Islands Countries Challenges and opportunities, FAO 2018. 157 Family Farming in the Pacific Islands Countries Challenges and opportunities, FAO 2018. 158 IFC (2018) From the Farm to the Tourist’s Table. 159 Pacific 2020, Challenges and Opportunities for Growth, Commonwealth of Australia, 2006. 85 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Island economies, trying to replicate the large-scale timely and comprehensive economic and poverty agriculture observed in large and more affluent industrial information. The COVID-19 pandemic has raised societies has undermined the resilience associated with the prominence of these challenges as tight budget traditional agricultural systems and failed to deliver the constraints now require greater efficiency in spending resilient agricultural and food systems suited for small and more targeted interventions to assist in recovery island economies.160 and achieve sustainable development outcomes. The four “fundamental enablers” discussed in this section Restoring coastal fisheries and ecosystems will are cross-cutting themes for the PIC-9 countries and require investment in better management and influence all the development pathways and priorities conservation. Measures to address over-exploitation previously described. These include: 1) enhancing and ecosystem degradation should include adjusting economic infrastructure and investment climate under fishing pressures, conserving key habitats, and green, resilient, and inclusive development (GRID); 2) diversifying livelihoods and employment options to improving public revenue and expenditure management; pull people away from fisheries. Reducing fishing 3) ensuring macro, fiscal, and debt sustainability; pressure will allow fish stocks to recover or be used and 4) filling knowledge gaps. Governance indicators in a more sustainable manner that enhances fishery reveal persistent weaknesses overall in regulatory productivity. Best practices include supporting quality, coupled with capacity constraints and low community-based management, reducing total fishing performance in public financial management. Public days, and facilitating diversification of livelihoods and sectors play a larger role in the PIC-9 economies than in employment with cash-transfers during stock recovery most other developing economies, magnifying the need and transitions to alternative livelihoods. If current for efficient revenue and expenditure management. trends continue, expected maximum catch potential Policy and regulatory barriers to both domestic and may fall 20 percent by 2050 and 50 percent by 2100. foreign investment hamper not only local SMEs but The projected declines are due to environmental also foreign direct investment that can support change; decreased production linked to climate tourism and other potential unexploited (albeit limited) change, ecosystem degradation and pollution; and the economic opportunities. Macroeconomic, fiscal, and increasing gap between recommended fish consumption debt sustainability are critical to supporting public and sustainable harvests. Increased government and private investments, while filling knowledge gaps attention and funding are needed to improve analysis in economic and poverty indicators in a timely manner on sustainability and awareness of the true socio- is critical for developing economic strategies as well economic contribution of coastal fisheries. Institutions, as monitoring and evaluating ongoing development policies, and planning need to be enhanced. While initiatives. aquaculture has previously been proposed to replenish stocks, it has been constrained by a lack of long-term investment capital and technical/commercial capacity. 1. Enhance economic infrastructure and investment Aquaculture is unlikely to be fiscally viable if large climate under GRID ongoing government support is required, although more research is needed to determine the conditions for The private sector faced particularly difficult aquaculture development. structural and policy challenges due to COVID-19.   Closing borders in response to pandemic played an Fundamental Enablers: Strengthening important role in slowing COVID-19 transmission, but private sector activity, particularly tourism and travel- governance and the business dependent businesses, came to a near standstill. Firms environment in these sectors faced unprecedented shocks that affected them simultaneously through 1) falling demand, 2) reduced input supply, 3) tightening credit conditions PIC-9 countries suffer from fragile governance and and a liquidity crunch, and 4) rising uncertainty. Surveys low institutional capacity; poor business climate of the Pacific private sector conducted during the and gaps in economic infrastructure; high risks in pandemic by Pacific Trade and Invest found more than a macro, fiscal, and debt sustainability; and a lack of 160 Connell, J and Lowitt, K, 2020, “Food Security in Small Island States,” Springer Nature Singapore Pte Ltd. 2020. 86 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE quarter of businesses either temporarily or permanently costs associated with red tape and administrative closed, and the vast majority of remaining firms moved burdens, and challenges with governance and dispute to partial operations with reduced staff/hours. By late resolution. The Worldwide Governance Indicators November 2021, firms’ top priorities for supporting for the key private sector enabling dimensions of their businesses through the recovery included access regulatory quality, government effectiveness, rule to finance, diversifying business production, improving of law, and control of corruption generally reflect logistics and destination markets, and improving modest improvement between 2015 and 2020 (Figure e-commerce capabilities. 50). However, the governance indicators also reveal persistent weaknesses overall in regulatory quality, Most PIC-9 countries struggled to attract coupled with some low performers in other dimensions. investment before the pandemic, with business A stronger national business environment is also critical environment constraints compounding intrinsic for investments by local SMEs, which will ultimately be size and geographic challenges. Domestic capital the PICs’ primary generators of job creation during the market mobilization has been limited because of COVID recovery. narrow economic opportunities and underdeveloped financial institutions. PIC countries have often relied on National spatial planning policies often seek to limit foreign investment to drive growth industries. However, urban growth and reduce agglomeration benefits. FDI inflows between 2016 and 2020 ranged between Although some larger Pacific countries (e.g., Fiji, not 0.37 percent and 1.08 percent of GDP in four of the six a PIC-9 country) attempt to provide serviced land for countries reporting data, well behind regional averages lower-income groups, the majority of PIC-9 countries and under a third of the average for their income groups have outdated land-administration systems that are (Figure 49). Only Palau and Vanuatu have succeeded in time-consuming and costly. For example, it can take 3.5 attracting higher levels of FDI, primarily in tourism. years to register land in Kiribati, discouraging business development and encouraging households to seek less The intrinsic challenges can explain much of prohibitive arrangements rooted in local customary the low investment levels; however, persistently arrangements away from urban centers. Static zoning weak investment growth suggests the lack of plans, overly generous setbacks, and restrictive floor- a predictable, low-cost business environment area ratios or building-height limits further contribute remains a significant contributing factor. The to inefficient use of scarce land, forcing up land and deficiencies include burdensome regulations governing building prices within formal town boundaries. In foreign investment, restrictions on investment addition, disaster risk-reduction strategies tend to focus into some activities, difficulties in accessing land, on “no-build” zones rather than proactively assessing Figure 49: Net FDI inflows are low Figure 50: Governance indicators show some modest improvements (2015-2020) 2016-2020 Average FDI, Net Inflows Regulatory quality Government effectiveness 9.27 100 80 WSM Global 5 60 Improvement WSM percentile VUT 2015 FSM Improvement 40 TON 4 Low income average TON KIR PLW % of GDP PLW TUV FSM 20 NRU 3 Global KIR RMI VUT High income average 0 percentile NRU RMITUV 2 2020 20 NRU NRU 1 40 TONFSM RMI TON PLW RMI TUV KIR 0 60 TUV PLW VUT WSM Palau Kiribati Marshal Islands Samoa Tonga Tuvalu Vanuatu East Asia & Pacific Pacific island small states WSM VUT KIR FSM 80 100 100 80 60 40 20 0 20 40 60 80 100 Rule of law Control of corruption Source: International Monetary Fund, International Financial Statis- Source: WBG Worldwide Governance Indicators. Note: Percentile tics and Balance of Payments databases, World Bank, International rank from 0 (worst performance) to 100 (best performance). Debt Statistics, and World Bank and OECD GDP estimates. 87 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE and encouraging opportunities to build on safe land. systems, limit the commercial viability of providing Underinvestment in trunk infrastructure is a missed correspondent banking services. opportunity for guiding settlement to less hazardous areas. After the 2012 tsunami in Samoa, for example, An additional challenge for the private sector is the government-built roads and installed water lines to high cost of trading, both on the policy front and provide access land away from the coastline. cost of transport. As indicated in the 2020 World Development Report,161 improving the business The PIC-9 countries have underdeveloped financial and investment climate through enhanced trade systems, limiting private sector growth. Banking connectivity can help mitigate some of the challenges products and services remain relatively narrow and of remoteness and facilitate participation in global traditional in scope, being largely confined to deposit value chains. Unilateral regulatory reforms to improve taking, unsecured personal loans, mortgage-based trade facilitation include modernizing customs systems lending, trade finance, and payment facilities. In most and harmonizing customs rules and procedures, such PIC-9 countries, a significant portion of the population as implementing effective risk management systems; has limited access to bank accounts, although mobile replacing paper-based documentation with electronic money operators are becoming more commonplace. based documentation; and improving transparency Only two PIC-9 countries make reports through the through trade information portals and single windows. Financial Access Survey, and recent data show that access to mobile money accounts was 614 per 1,000 Despite some progress in reforms over the past adults in Samoa and 697 in Tonga. Firms also face decade, the PIC-9 underperform in terms of trade challenges in access to finance—in particular, micro, facilitation. The OECD’s latest Trade Facilitation small, and medium enterprises. With capital markets Indicators (TFIs)162 confirm that PIC-9 trade facilitation remaining highly undeveloped and FDI inflows low, firms is below the highest world standard and the EAP largely rely on retained earnings and domestic borrowing. average in all areas. Reforms that likely would produce Among the countries reporting data, Vanuatu leads the the greatest benefit are in the areas of reduced trade PIC-9 in bank-provided domestic credit to the private formalities (simplification of procedures), automation sector at 61.9 percent of GDP. Samoa follows at 53.4 of border processes, governance and impartiality, percent, Tonga at 38.8 percent, and FSM at 22 percent. information availability, involvement of the trade Insurance companies operate in most of the countries community, advance rulings, and fees and charges. but have a very low share of financial system assets. A In 2021, the United Nations carried out a worldwide significant proportion of the population has no or only assessment on implementation of trade facilitation very limited insurance coverage. and paperless trade measures, including those of the World Trade Organization (WTO) Trade Facilitation Improving payment system services remains a Agreement (TFA).163 It showed that the Pacific was the challenge. Although gradually improving, payment worst performing region, with an average score of 40 systems in the region remain weak. Some countries still percent, well below the global average (65 percent), use clearing and settlement systems based on manual East and Southeast Asia (75 percent), small island operations, although Samoa and Vanuatu intend to developing states (50 percent), and least-developed complete implementation of modern payment systems countries (48 percent). Data for the PIC-9 and a few infrastructure soon. Another important challenge is the regional comparators (Figure 51) shows the greatest decline in correspondent banking relationships, posing a gaps in areas related to automation and digitization of risk to economies heavily dependent upon international trade information and procedures, both within national payments via tourism and remittances. For the small governments as well as between trading partners. PIC-9 markets, the high costs of complying with anti- money laundering and countering financing of terrorism Most PIC-9 countries have struggled to move (AML/CFT) regulations, along with limited supervisory beyond commodity exports. While this is primarily capacity and underdeveloped Know Your Client (KYC) due to intrinsic characteristics of the Pacific, it is 161 https://www.worldbank.org/en/publication/wdr2020. 162 OECD Trade Facilitation Indicators (TFIs): https://www.oecd.org/trade/topics/trade-facilitation/. 163 https://www.untfsurvey.org/world. 88 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE exacerbated by a lack of investment and technology facilitation infrastructure as well as logistics and adoption, low levels of financial intermediation, and quality infrastructure. Improving the quality and high trade costs. Most export-oriented goods produced efficiency of infrastructure is also an important priority. in the region rely on primary agricultural products. For instance, efficient energy infrastructure is needed The problem is compounded by trade barriers, small not only to power private sector operations but also market disadvantages, and the region’s connectivity to reduce reliance on fuel imports and decarbonize the constraints—a combination that limits firms’ ability economy. Decarbonization (particularly in energy and transport systems) is important for many of the to grow from economies of scale. This underscores PIC-9 countries’ investment climate due to dependency the need for physical infrastructure (including roads on volatile and costly fossil fuel imports. and ports), smarter logistical capacity, and modern technologies to facilitate economical trade in high-value Due to their small, remote, and internally merchandise markets. To complement physical market dispersed populations, PIC-9 countries’ access to access, it will be important to build the communications energy for business and households is low, and digital infrastructure for virtual market access so unreliable, and costly. High and volatile that firms can quickly and reliably connect to product electricity prices combined with unreliable power markets and buyers. In this way, digital dividends can supplies is detrimental to business environment and the be leveraged through trade connectivity. livelihoods of the PIC-9 population. For some countries, the cost of fuel imports can reach as high as 25 percent Gaps in key infrastructure increase costs and of GDP during periods of high global energy prices. vulnerability. Lack of high-quality infrastructure This is particularly worrisome as the global reduces the resilience needed to cope with the frequent recovery from COVID-19 adds to demand and Russia's disasters and shocks that pose constant threats to invasion of Ukraine puts additional upward pressure on livelihoods and economic growth. Traditional growth energy prices. The situation is expected to worsen sectors such as tourism, agriculture, and fishing in coming years. Energy access is low in Vanuatu and continue to face binding constraints in transportation FSM (and outer islands in most other PIC-9 and energy infrastructure while emerging opportunities countries), with only about two-thirds of the in services will depend upon improved access to digital population having access to modern energy services.164 The System Average Interruption infrastructure. Increasing export competitiveness Duration Index (SAIDI), which measures the average and diversification, a key policy priority across the duration of supply interruptions experienced by region, requires improvements to hard and soft trade each customer, indicates the reliability of electricity Figure 51: Digital and sustainable trade facilitation (2021) Vanuatu 70.97% Fiji 49.46% Tonga 48.39% Solomon Islands 47.31% Papua New Guinea 44.09% Tuvalu 44.09% Samoa 36.56% Palau 31.18% Micronesia (Fed. States of) 26.88% Kiribati 22.58% Nauru 19.35% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% Transparency Formalities Institutional Arrangement and Cooperation Properless Trade Cross-Border Paperless Trade Source: UN Global Survey on Digital and Sustainable Trade Facilitation 2021. 164 Pacific Region Infrastructure Facility (2021) “Pacific Infrastructure Performance Indicators 2021” available at: https://www.theprif. org/document/regional/infrastructure-performance/pacific-infrastructure-performance-indicators-2021 89 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE supply is uneven across the PIC countries. For example, foreign investment with legislative initiatives to reduce the average duration of energy interruptions were 1,991 number of activities restricted or reserved for domestic minutes in Nauru and 863 minutes in FSM (Kosrae) in investors only. 2020. The target for Pacific utilities is disruptions for less than 200 minutes.165 Ensuring access to reliable Improved national spatial planning policies will power is a key priority in the PIC-9 countries. enhance agglomeration benefits. Comprehensive planning, strengthened land administration, and The Way Forward investments in municipal infrastructure and services are needed to accommodate urban growth and reap The COVID-19 pandemic and exposure to disaster its economic benefits. Dynamic zoning plans and more risks has clearly demonstrated the vulnerability flexible building codes (that do not increase disaster of PIC-9 economies’ heavy reliance on a narrow vulnerability) would contribute to the efficient use base of economic activities. While the current of scarce land, lower land and building costs within economic structure can continue to produce modest urban boundaries, and deliver agglomeration benefits future growth, events since 2019 have laid bare the for a greater number of SMEs. In addition, proactive importance of greater economic diversification and investments in trunk infrastructure will shift the focus resilience to shocks. Moving toward, broader economic of risk-reduction away from disaster-prone locations bases and greater resilience will largely depend upon by encouraging more building on safer land. cultivating a more dynamic private sector that attracts investment, trades, innovates, and produces goods and Trade in goods and services can be increased through services with greater productivity than today. Beyond national reforms and intra-regional coordination core investments in education, health, macroeconomic to expand access to markets. Integrating with the stability, and other public goods covered elsewhere world economy through trade and global value chains in the PIC-9 SCD Update, the region’s governments helps drive economic growth and reduce poverty. Trade can move toward these goals by focusing on several facilitation practices across the PIC-9 underperform priorities to enhance growth under green, resilient, and regional and income group peers, particularly in areas inclusive development. related to automation of procedures, data sharing, harmonization with global standards, and governance. Regulations and institutional capacities that These challenges can be addressed by combining facilitate entrepreneurship and investment should be process and governance reforms with digitalization strengthened. A regulatory environment characterized and greater industry coordination. At the same by low compliance costs and high predictability is time, increased investment in domestic logistics essential to fostering entrepreneurship, competition, infrastructure and services can reduce the cost of trade and investment. Progress has been made in the past and improve the competitiveness of agriculture and decade, but many opportunities still exist for PIC- other industries. Regional cooperation mechanisms like 9 countries to improve business regulations. On the the Pacific Island Forum, working within regional and institutional side, a shift in mandate from a singular global trade agreements, can help coordinate these focus on enforcement to a service provision approach reforms to maximize their benefits (Box 3). The PIC-9 backed up by risk-based supervision has the potential to countries’ trade potential is not limited to goods; the improve compliance while increasing the predictability region could expand trade in services as well. Expanding and quality of the regulatory environment. Digitalization service sector trade will depend upon national reforms can play an important role in reducing the time and to boost competition in key service sectors and cost involved in starting and operating a business intra-regional coordination in such areas as mutual while at the same time improving transparency. recognition arrangements. In addition, these economies would benefit from attracting greater foreign direct investment and the Developing financial market infrastructure and new technology and knowledge transfers that accompany financial products will improve access to finance it. Structural reform can be facilitated by opening to and build resilience. PIC-9 financial markets are largely Pacific Power Association (2021) “Pacific Power Utilities Benchmarking Report 2020” available at: https://www.ppa.org.fj/wp- 165 content/uploads/2021/11/Benchmarking-Report-for-PIC-Utilities-Financial-year-2020v1.pdf. 90 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE underdeveloped, lacking key financial infrastructures network that can withstand myriad price and supply of and products. Firms, particularly SMEs, lack the capital shocks. In this regard, concerted efforts are needed to they need for to enter markets and expand, and many reduce fossil fuel dependency, facilitate the transition individuals are still excluded from formal financial to sustainable energy, and make power more affordable services. Improving access to finance will require and reliable. Achieving these objectives will require countries to maintain financial sector stability while targeted investments in renewable energy as well as investing in the financial infrastructure to efficiently gradual reductions in implicit and explicit subsidies assess risk and allocate capital. The infrastructure to fossil fuel suppliers. They only serve to increase includes credit bureaus, collateral registries, and dependence on fossil fuels and discourage investments digital identification and payment systems. Financial and private sector participation in energy alternatives. products such as insurance and de-risking products will also be important to firms, households, and governments, particularly in the context of disaster 2. Improve public revenue and expenditure risks. The rapid increase in utilization of mobile money management solutions demonstrates the potential for digitalization to increase access to financial services while boosting Public sectors play a larger role in the PIC-9 competition to lower costs for consumers. Improving economies than in most other developing economies, financial market infrastructure and introducing new magnifying the need for efficient revenue and financial products will also play a key role in enabling expenditure management. Gaps in public service e-commerce and complementing trade reforms to delivery and improving infrastructure are closely expand potential markets for PIC-9 firms. tied to weaknesses in public financial management (PFM). When combined with fragile governance, PFM Addressing gaps in infrastructure access will lower weaknesses adversely affect the efficient and effective both the cost of doing business and the carbon use of resources (including financing). They are also footprint of production. One the most significant linked to the failure to meet goals, poor budgetary barriers firms face across the PIC-9 region is access outcomes, and inadequate service delivery, whether to affordable and reliable infrastructure, particularly directly (e.g., delayed release of funds) or indirectly (e.g., in transportation (shipping) and energy. In addition to the lack of suitable data to inform budget allocation). being a key input for firms, energy infrastructure is In sectors like health, PFM is further hindered by the central to decarbonization in a region heavily reliant lack of transparency around budget and expenditures, on fuel imports. While the PIC-9 countries’ population with a lot of funding provided off-system (increasingly and spatial profiles can pose unique challenges to so with COVID-19). Additional difficulties arise from the infrastructure investment, the region is beginning proliferation of complicated systems and processes for to implement innovative public private partnership accessing and spending external funds. PFM weaknesses models to leverage private finance in addressing also increase the potential for misappropriation of key infrastructure gaps, including renewable energy money and other assets. generation. More work needs to be done to improve the regulatory environment for such investments and to World Bank fiduciary assessments have identified prioritize public infrastructure spending. weaknesses in country PFM systems, fostered by weak capacity within governments to effectively Reliable and affordable supplies of energy are crucial carry out PFM. These adversely impact the for business development in many PIC-9 countries. accountability, effectiveness, and efficiency of spending, Fossil fuel imports represent a significant portion the capacity for budget scrutiny, and the transparency of GDP for some PIC-9 countries. High and volatile of public spending. COVID-19 has further exacerbated international energy prices translate into high costs in this situation. The pandemic created a greater need for the PIC-9 region, where retail electricity tariffs in some transparency and accountability over public spending countries reach US70 cents per kilowatt-hour (kWh), in an increasingly constrained fiscal space; at the same among the highest in the world.166 Frequent disasters time, it further limited PFM capacity due to the closing underscore the importance of building a resilient energy of country borders and some government offices. The 166 PRIF (2021). 91 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Box 3: Improving regional coordination Intra-regional coordination is critical for the PIC-9 nations. To respond to the resource and capacity challenges involved in all areas of development, the 18 Pacific Island Forum (PIF) countries, with support from the PIF Secretariat and development partners, are advancing a multi-year strategy of regional actions—the 2050 Blue Pacific Continent Strategy—that will target many critical development challenges important to region. Regional action means that an activity one country would undertake on its own, relying on its own resources, is undertaken instead by members of the group using collective resources. Regional action may take various forms. At one end are activities that require a high degree of integration among participating countries, such as regional laws binding on all countries or establishment of regional administrations or institutions that perform functions that would otherwise fall to national authorities. At the other end are looser modes of regional coordination and cooperation, such as voluntary regional arrangements and regional consultative mechanisms. For individual countries, the primary benefit of regional action is time and cost savings compared to national implementation; in fact, joining together may even obviate the need for a national implementation. A key example using regional actions is the Pacific Regional Trade Facilitation Strategy that targets the TFA’s trade facilitation provisions, PACER Plus, and other complementary agreements that countries have identified as priorities in requiring implementation support. This strategy gives weight to those trade facilitation measures that will further the PIF’s Aid-for-Trade initiatives on e-commerce and quality infrastructure. Upon its completion and formal endorsement by PIF trade officials and ministers, envisaged before the end of 2022, implementation of the strategy will commence, coordinated by the PIF Secretariat, with support from PIF donors and partners. impact was particularly evident in the small atoll nations governments’ ability to mobilize external skilled of FSM, RMI, Kiribati, and Tuvalu—all classified as fragile resources and shifted priorities to urgent economic states. They experienced high turnover of qualified staff and social impacts of the pandemic. In other cases, (creating greater dependency on external consultants) PFM reforms driven by global good practices are overly due to their limited economic opportunities. In RMI, for ambitious and do not consider the available capacity example, the global pandemic led to a lengthy delay in and resources of PIC-9 governments, setting countries completing the latest government financial statements, up to fail.167 Knowledge transfers and development adding urgency to the ongoing demand for greater of local expertise are needed to sustain reforms, and transparency through improved access to budget and proposed reforms need to be context-appropriate and procurement processes and regular reporting on the fit for the intended purposes. A challenge, however, is use of public resources. that the PIC-9 countries’ public sectors suffer from thin capacity, especially in areas that require technical PIC-9 countries have developed PFM roadmaps expertise, leading to inadequate macroeconomic and to strengthen systems and establish reform public expenditure management. Lack of PFM capacity priorities but they have little institutional capacity is often more evident at subnational and sector levels. to implement these reforms and rely on external Staff turnover is high and specialized technical skills are expertise financed by donor funding. In some cases, in short supply, meaning that bottlenecks are common the reform programs have stalled in recent years due and institutional knowledge is difficult to build up and to the COVID-19 restrictions, which have reduced retain. 167 T.A. Haque et al. (2015). Capacity Constraints and Public Financial Management in Small Pacific Island Countries. Asia & the Pacific Policy Studies. 2(3): 609-622. 92 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Budget processes are weakly linked to national for the money. They also create a risk that fraud development agendas, which results in prioritization may threaten the effectiveness of key development of spending on programs that are regressive and objectives or weaken service delivery. lack transparency.  Often there is no medium-term expenditure framework to support the allocation of Many fiscal documents are not publicly available. resources to politically agreed development priorities. There has been a decline in the availability of timely Budget estimates have lacked credibility, particularly information on government websites, contributing to those for revenues. Budget consultation timeframes a sense of reduced PFM transparency. In recent years, can be tight, limiting the participation of line ministries there has been a widespread lag in publishing audited and spending units, and political-level inputs can be financial statements for general government budgets, added late in the process, resulting in major last- The delays are often accompanied by increases in the minute adjustments to allocations. Frequent use of number of issues raised by auditors and correlated to supplementary budgets, virements, and contingency the COVID-19 restrictions that diverted management warrants reduces the credibility of the budget process, focus and impacted the availability of technical poses risks to governments’ ability to achieve fiscal resources. targets, and results in a significant administrative burden. There is a need for greater transparency and External audit and scrutiny are lacking. The supreme accountability in budget planning and execution to audit Institutions in each country lack adequate budget ensure a broader more-informed conversation regarding resources and face difficulties in retaining qualified and how scarce public resources are allocated (and utilized) trained staff. The tabling of audit reports in Parliaments in the context of competing policy priorities. are subject to delays; so are reviews of the reports by the public accounts committees (PACs). Government Internal control frameworks are not well- instability leads to high turnover in membership of documented, understood, or applied. A sound internal PACs, and support staff available to PAC members control environment is required to mitigate PFM risks is usually limited. Follow up of audit findings and and prevent dissemination of inaccurate financial recommendations is also limited. Organizations information and misuse of funds. Regulations to support such as Transparency International have found that PFM laws are often out of date or non-existent, and key corruption and abuse of office are serious problems in PFM processes are inadequately documented and lack public institutions.  An important step toward reform sufficient guidance. Several areas need strengthening is enactment of anti-corruption legislation, including of internal controls: clearance of advance and suspense whistleblower protections and the establishment of accounts; payroll/HR system reconciliations; bank well-funded and empowered anti-corruption agencies. reconciliations; control over non-financial assets (particularly relevant for COVID-19-related medical Public spending improvements can be hampered by equipment and supplies); weak commitment controls institutional arrangements that support various and contract management leading to payment arrears; kinds of clientelism. Governments dominated by and underutilization of built-in controls available from small and unstable political parties can lead to more modern financial management information systems.  personalized allocation of resources.168 In regions Internal audit functions are often under-resourced and where the presence of the central government is lack effective operating frameworks. limited, institutional arrangements blending modern and traditional elements can emerge as local leaders Transparency and accountability of procurement step up to fill the vacuum created by the state. The is weak. Delayed procurement and contract retreat of the state may create strong incentives for implementation, tender failure, and poor value for local leaders to act as patrons and service deliverers, money spent creates risks that government funds are seeking control of public funds for subnational not being used for intended purposes, not properly development despite well founded concerns about accounted for, and/or do not deliver intended value the efficiency and equity of such arrangements.169 168 Utz, Robert (ed.). 2021. Archipelagic Economies: Spatial Economic Development in the Pacific – Synthesis Report. Washington, DC: World Bank. 169 Ibid. 93 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE The Way Forward is underway to: 1) identify PFM constraints in Papua New Guinea (PNG) and the PIC-9 countries that hinder The way governments respond to citizens’ needs transparency and accountability and 2) develop could be improved. Centralized decisions do not always recommendations to address these constraints. This consider local demand, especially on outer islands analysis will be completed in RMI in FY2022 before where the reach and presence of the state is limited. In being completed in additional PIC-9 countries. regions dominated by extractive industries, commercial interests with well-established political connections in PIC-9 governments need to manage key sources central locations can easily outweigh local voices.170 In of fiscal risks through increasing transparency this case, mechanisms could be established to enable and maintaining adequate frameworks to handle feedback from citizens to reach decision-makers contingent liabilities, including government responsible for resource allocation and service delivery. guarantees and state-owned enterprise (SOE) However, citizens may lack the capacity to engage liabilities. The IMF’s fiscal transparency code provides meaningfully and negotiate changes with government guidelines on the publication of fiscal-risk information, counterparts. Enhancing the ability of citizens to voice specifically guarantees. It requires specific risks to their needs on specific issues can lead to more informed public finances to be regularly monitored, disclosed, and policy design, better spending decisions, and greater managed. For SOE management, best practices should trust in governments. be adopted, including legislative frameworks that define ownership and management responsibilities. In There are further opportunities for empowering addition, a published ownership policy supporting the citizens to hold their governments accountable legislative framework should lay out the rationale for for the use of public resources. Measures that rely governance arrangements. National airlines, which on civic engagement can be used to complement and account for a large share of PIC-9 SOEs and fiscal risk, reinforce conventional mechanisms of accountability. should be managed through adequate government- These include participatory budgeting, public approved strategies, which include borrowing and expenditure tracking, monitoring of public service investments plans, anticipated new leases, and proposed delivery, independent media, public commissions, guarantees. Sustainable Development Financing Policy and citizen advisory boards.171 Accountability could has supported the development of on-lending policies in be strengthened, for example, through better access Samoa and government guarantee policies in Tonga and to—and effective use of—information. In some small Samoa. These policies will help improve the monitoring island countries, resource management is kept out of and management of outstanding and new applications public and even parliamentary scrutiny. Supreme Audit for on-lending and government guarantees. Finally, all Institutions (SAIs) could play a role in this endeavor SOEs, including national airlines, should publish clear by using citizen participatory audits (CPAs) and and timely budgets of inflows and outflows, ideally as collaboration with non-state actors. In other cases, an annex to the budget that includes a justification for efforts may need to focus on putting in place freedom budget support (e.g., via a cost-benefit analysis). of information legislation, tackling the weak political incentives to disclose, or strengthening the technical Strengthening the institutional capacity to execute capacity of the public sector to record, manage, and governments’ PFM functions and implement reforms disseminate relevant data. is key to improving public revenue and expenditure management and overcoming constraints to Civil society actors and their allies across the transparency and accountability. Increased Pacific have called for greater transparency and attention and resources to support the monitoring and accountability, particularly in light of the COVID-19 implementation of countries’ PFM Reform Roadmaps is response. Small Island countries are especially at risk needed. Strategies are needed to build and retain pools of misuse of funds, either by intent or error, because of qualified finance, accounting, and procurement staff national laws, institutions, and practices are often members to handle governments’ PFM functions— poorly enforced and monitored. A World Bank analysis through education, training, and professional development. 170 Ibid. 171 The World Bank (2004) Social Development Working Paper: Social Accountability, An Introduction to the Concept and Emerging 94 Practice. SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Appropriate and effective constitutional/ formal sector employment.172 SOEs are active in most of statutory/legal frameworks are foundational to the key economic sectors, including energy, transport, the independence of SAIs and their ability to information, communication and technology (ICT), effectively carry out their mandates. They should agriculture, and banking. This highlights the strong guarantee the independence of SAI heads; security of link between fiscal and public debt sustainability and tenure for members of the collegial institution; legal broader macroeconomic stability. immunity associated with the regular discharge of duties; a sufficiently broad mandate and complete Fiscal outcomes for much of the PIC-9 region discretion in carrying out SAI functions; unrestricted deteriorated as revenues declined and expenditures access to information; the right and obligation to grew during the COVID-19 pandemic. Overall revenues report on their work; the freedom to decide the fell along with economic growth, and public health and content and timing of audit reports and to publish and social security expenditures grew in response to the disseminate them; the existence of effective follow- pandemic and government stimulus policies (Figure up processes on SAI recommendations; and efficient 52). Average fiscal surpluses almost halved, decreasing operational management. Financial and administrative from 10 percent of GDP between 2015-2019 to 5.4 independence are key aspects of operational percent of GDP in 2020. Tourism-dependent economies, independence. such as Palau and Vanuatu, saw fiscal surpluses turn into deficits as output and revenues contracted sharply 3. Ensure macro, fiscal and debt sustainability while public expenditures for income support grew. In contrast, fiscal surplus increased slightly for some Pacific economies are dominated by the public fishing dependent economies and countries supported sector, which highlights the strong link between by unprecedented levels of development partner fiscal and debt sustainability and the provision grants (e.g., Tonga and Samoa). High remittances of public goods and services. In the Pacific islands, from workers abroad in such countries as RMI, Tonga, limited private sector opportunities due to geographic and Samoa also supported economies and indirectly and size constraints mean that delivery of many core contributed to revenues. Overall, remittances remained goods and services has fallen mainly to the public surprisingly resilient during the crisis, which mitigated sector. In many PICs the public sector accounts for the pandemic’s impact on economic activity and more than 40 percent of GDP and 30-75 percent of government revenues. Figure 52: PIC-9 fiscal balances, 2015-2020 40 30 20 Percent of GDP 10 0 -10 -20 FSM KIR NRU PLW RMI TON TUV VUT WSM PIC-9 Average 2015-2019 2020 Source: WB Macro-Poverty Outlook 2022 and national statistical offices. Figure 52: PIC-9 fiscal balances, 2015-2020 172 World Bank (2014) “Wellbeing from the Work in Pacific Island Countries” and World Bank (2021) “RMI CEM/PER.” 95 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Government revenues in PIC-9 countries are broadly with detrimental effects on its financial sector and in line with small island developing states (SIDS) broader economy. Similarly, RMI’s ship and corporate and middle-income countries (MICs) (Figure 53). The registries carry exposure to reputational risks in the notable outliers are Kiribati, Tuvalu, and FSM, where event of serious environmental or diplomatic incidents, fishing license fees dominate total revenues. Nauru is such as the involvement of an RMI-flagged ship in an oil unique with government revenues dependent on income spill or corporate misgovernance by an RMI-registered from its Regional Processing Centre (RPC), funded by company. In addition, actions or activities relating to Australia. In contrast, PIC-9 countries that do not the registries deemed to be inconsistent with global benefit from high sovereign rents (i.e., fishing revenues norms regarding AML/CFT and tax transparency could and other non-tax revenue sources) have domestic expose RMI to remedies in international forums and/or revenues as a share of GDP below the SIDS average— from bilateral partners. Palau, Vanuatu, Tonga, and Samoa. PIC-9 revenue volatility is broadly in line with comparable country Consumption and sales taxes are important averages, except in Kiribati, Tuvalu, and Nauru. Fishing contributors to revenues in many but not all PIC- license fees and Nauru’s RPC revenues explain the 9 countries (Figure 54). Most countries have made relatively higher revenue volatility in the three countries. good progress in consumption tax reforms over the past decade. Kiribati, for example, introduced a goods Non-tax revenues and grants form a large share and services tax (GST) in 2014, and it has become the of PICs’ revenue mix. Fishing license revenues have largest share of tax revenue (non-tax revenue is still risen exponentially since 2015, particularly in Kiribati, dominated by fishing license fees). With improvements FSM, RMI, and Tuvalu, accounting for approximately a in tax policy and administration in Samoa and Tonga, quarter of total revenues. These countries’ finances are GST collections have also become more important. On also significantly supplemented by development grans the other hand, income taxes play a more prominent role of about one-fifth of revenues. Several PIC-9 countries in FSM, RMI, and Tuvalu. Corporate income tax receipts have also found novel ways to generate additional from investment companies domiciled in FSM have revenues. Vanuatu’s Economic Citizenship Program been the largest contributors of tax revenue. Vanuatu (ECP) has grown substantially since its launch—with stands out due to its dependence on consumption taxes revenues rising from 3.6 billion Vatu (14 percent of and the absence of income taxes. revenues, 4 percent of GDP) in 2016 to 14.4 billion Vatu in 2020 (32 percent of revenues, 14 percent of A sizeable level of forgone revenue is due to tax GDP). In Tuvalu, TV internet domain licensing fees have exemptions in the PICs. For example, the cost of remained steady, averaging AUD$6.9 billion per year Tonga’s VAT exemptions was approximately 30 percent (11 percent of revenues and GDP) between 2016-2020. of tax revenues in the first half of FY2020—half of Other sources of non-tax revenues in the Pacific include it involving fuel concessions and the state-owned fees from registries for ships and corporations in RMI electricity company. Samoa’s SOE exemptions on VAT, and the insurance industry in FSM. excise, import duties, and income taxes is estimated at 2.9 percent of tax revenue.173 While tax exemptions are Non-tax revenues are volatile and have associated designed to encourage investment and provide relief macroeconomic risks. The region’s tuna stocks are to low-income households, the intended consequences expected to decline and move eastward in the upcoming often do not materialize. Moreover, tax exemptions decades due to climate change, significantly impacting have been applied in an ad-hoc manner, often without these countries’ fishing revenues. The EU withdrew sunset clauses or oversight. Furthermore, they are often Vanuatu’s visa waiver benefits for ECP passports issued provided to individual projects and companies along under the program due to questions regarding the with several exemptions being granted through non-tax effectiveness of AML/CTF (Anti-Money Laundering and legislation. Finally, there is limited public reporting of Counter-Terrorism Financing) practices in the country. forgone revenue from tax exemptions; if there is public If these risks are not addressed, further scrutiny of the reporting, it is often in non-budget documents, such as ECP could result in reputational damage to Vanuatu, the revenue administration annual report. 173 IMF (2021). “Pacific Island Countries: Third Review of Tax Reforms (2017-2020).” IMF FAD Technical Report. 96 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE The ratio of current to capital spending remains Revenues in these countries are largely dependent on quite high (Figure 55). This is primarily due PICs domestic activity. In contrast, revenues in countries small size, remoteness, and disbursed populations, with large fishing-license revenues (RMI, FSM, Kiribati which increase the costs of providing services. The and Tuvalu)—or Nauru, with revenue from its unique single largest contributor to current spending is the Regional Processing Centre—are largely independent of public sector wage bill, followed by the cost of public domestic economic activity, enabling these countries goods and services (Figure 56). In Tonga, Vanuatu, and to finance counter-cyclical public spending. Given the Palau, limited fiscal buffers and revenue bases mean PICs’ limited social protection programs, counter- fiscal policy cannot act counter-cyclically to mitigate cyclical spending, where possible, is mostly conducted economic shocks and there is strong correlation through increasing the public sector wage bill and direct between domestic revenues and public expenditures. provision of public goods and services. Figure 53: Average domestic revenue-to-GDP ratio, Figure 54: PIC-9 revenue mix. 2015-2020 2015-2020 200 150 150 100 Percent of GDP 100 50 50 0 0 FSM KIR NRU PLW RMI TON TUV VUT WSM KIR FSM PLW RMI TON TUV VUT WSM 2015-2020 average Small island developing states GST/VAT/Consumption Tax Fishing license fees Middle income countries 2020 Other taxes (including trade taxes) Trust Fund Distributions Other non-tax revenue Taxes on income, Grants profits, capital Figure 55: PIC-9 public expenditures, 2015-2020 Figure 56: PIC-9 current expenditure mix, 2015-2020 120 100 100 80 80 Percent of GDP 60 Percent of GDP 60 40 40 20 20 0 0 FSM KIR NRU PLW RMI TON TUV VUT WSM KIR FSM PLW NRU RMI TON TUV VUT WSM MICS SIDS Wagebill Cost of Goods & Services Current Spending Capital spending Other Expences Interest Payments SIDS Average MICs Average Subsidies, Grants, Current Transfers Source: World Development Indicators and national statistics offices. 97 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE State-owned enterprises, particularly national for PIC-9 countries over the next 20 years.175 Baseline airlines and state-owned banks, pose substantial projections suggest ongoing annual fiscal deficits for fiscal risks to the region, exacerbating the risk Vanuatu, Tonga, Tuvalu, and Nauru—although surpluses of debt distress. The PICs’ national airlines provide are possible under alternative scenarios. In Samoa essential connectivity, but they have poor financial and Kiribati, baseline projections tilt toward wider records and increase governments’ contingent fiscal deficits. The projections also suggest that the liabilities.174 The COVID-19 pandemic has further scheduled expiration of US Compact grants in 2023 will increased government support to airlines, diverting have a significant negative impact on the North Pacific resources from other development needs and further economies—in the absence of alternative financing increasing contingent liability risks to governments. sources. Maintaining current levels of spending hinges A large portion of the region’s state-owned banks are upon continued access to grants and sustained non-licensed development banks outside supervisory (historically) high sovereign rents. Improving human authority, making it a challenge to review balance capital outcomes and building resilience to climate- sheets and manage contingent liabilities. The countries related disasters will require efforts to maximize vary widely in reliance on state-owned banks, with revenue mobilization, along with more efficient and a range of 0.3 percent to 54 percent of total loans better-quality spending in the absence of additional outstanding. Smaller countries like FSM, Palau, and grants. Tuvalu maintain a relatively larger presence of state- owned banks in the economy. While public debt levels remain modest across most of the region, the PIC-9’s narrow and volatile Projections suggest PIC-9 countries are likely to revenue bases mean debt distress risks remain face significant fiscal challenges over the coming elevated. Most PIC-9 external public debt is either 15-20 years, and they have limited capacity to multilateral or bilateral at highly concessional or finance additional spending. Given the region’s high concessional terms. During the COVID-19 pandemic, risk of debt distress and substantial development the external public debt to GDP ratios increased needs, various scenarios for domestic revenues, donor modestly due to declining GDP and increased borrowing grants, government expenditures, and trust-fund flows to cover shortfalls in government revenues, COVID-19- were used to estimate the range of likely fiscal balances related spending, and economic stimulus packages. Figure 57: PIC-9 external public debt (2020) 50% 40% 30% 20% 10% 0% Tuvalu FSM Kiribati Nauru Palau RMI Vanuatu Tonga Samoa Multilateral Bilateral Source: WB calculation based on country reporting 174 This analysis draws on “Managing Fiscal Risks from National Airlines in Pacific Island Countries,” IMF Working Papers, No. 2021/183, IMF, Washington DC and Miles and De Marchi 2021, “Post COVID-19 Pacific Short-term Aviation Strategy—A Scoping Study Consultants” Final Report, PRIF, Sydney. The estimates suggest Pacific airlines and airports will need around $100 million in support to recover from the COVID-19 shock. 175 The scenarios are presented in Annex 2. 98 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table 7: Evolution of the risk of distress in the PIC-9 countries 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Kiribati H H H H H H H H H H RMI n/a n/a H H H H H H H H FSM n/a n/a n/a H H H H H H H Samoa M H H M M H H H H H Tonga H M M M M M H H H H Tuvalu n/a n/a H H H H H H H H Vanuatu L L L M M M M M M M Source: IMF/WB DSA reports. H=High; M=Moderate; L=Low. Nevertheless, the ratios remained at modest levels Given limited access to debt markets and the (Figure 57). From 2019 to 2020, average PIC-9 external volatility of sovereign rents and development public debt decreased slightly from 30.4 percent to financing, increasing domestic revenue mobilization 29.5 percent of GDP—in contrast to the IDA average should be a key foundation in the PIC-9 nation’s which increase from 55 percent to 62 percent over the medium-term revenue strategy. The PIC-9 countries same period. Excluding Tonga and Vanuatu more than lack access to international debt markets, so the 50 percent PIC-9 countries’ debt is from multilateral fiscal envelope is constrained by the taxes they can institutions, primarily the ADB and WB. Despite the collect, sovereign rents, and concessional financing modest debt levels, the IMF/WB Debt Sustainability from development partners. The last two are volatile, Analysis (DSA) puts all PIC-9 countries except Vanuatu so tax collections need to be the foundation of the PIC- at a “high risk” of debt distress (Table 7). Rather than 9 revenue strategies as the region emerges from the high debt to GDP levels, the high-risk classification is COVID-19 crisis. largely driven by the limits on debt-carrying capacity in the DSA baseline from structural growth constraints Low domestic revenues (excluding sovereign rents) in and the impacts of disasters (i.e., by lowering potential several PIC-9 economies reflect sizeable structural growth and increasing fiscal and current account “tax gaps”—the difference between tax collection deficits). Most PICs have ceilings on non-concessional capacity and actual tax revenue. These gaps are due external borrowing as part of domestic legislation to a combination of low compliance, narrow VAT bases, and/or multilateral financial institutions’ concessional low top personal income tax (PIT) rates, and costly financing rules to support debt sustainability.176 Some tax exemptions. In the short term, PIC-9 governments PICs such as Samoa and Tonga have adopted medium- can increase revenues through improved compliance term debt strategies (MTDS) to guide their debt and administration without putting the economic management decisions. recovery at significant risk. The steps include reforms to governance, business strategy, and information The Way Forward technology capabilities through such measures as increased automation, maintenance of accurate of To reduce vulnerability and boost shared prosperity taxpayer registers, and targeted enhanced compliance as the region emerges from the pandemic, PIC- strategies (such as dedicated “large taxpayer units”). 9 governments need to rebuild fiscal buffers and Such efforts can help improve on-time filing, reduce carefully manage fiscal policy to protect long- arrears, and increase collection efficiency. term fiscal and debt sustainability. This will require actions on three fronts: 1) increasing domestic revenue Targeted tax reforms should be considered once mobilization; 2) improving the efficiency of spending; the recovery is underway. VAT reforms should include and 3) strengthening the rules and capacity for expanding the bases, ensuring timely VAT refunds, and managing liabilities and sovereign wealth funds (SWFs). increasing rates in some countries. Top PIT rates in 176 For IDA countries, this is the Sustainable Development Financing Policy (SDFP). The ADB has aligned its policies with the SDFP as well. 99 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE some countries should be increased to improve equity to generate substantial increases in domestic and increase revenue. Corporate income tax (CIT) revenues for several PIC-9 countries. Fishing rates should be reassessed to ensure international revenues related to the Parties to the Nauru Agreement competitiveness and consistency with the international (PNA) Vessel Day Scheme (VDS) for purse-seine tuna trends. Finally, PICs with small business tax exemption vessels represent 8 percent to 75 percent of domestic should consider eliminating them to broaden the tax revenues in Kiribati, Tuvalu, RMI, FSM, Nauru, and base and simplify tax obligations. Introducing and/ Palau. Maximizing the long-term benefits from these or increasing public health and environmental taxes resources is crucial to fiscal sustainability. WB analysis should also be considered. Such efforts can learn from indicates that reforms that provide greater flexibility the successful implementation of measures in Tonga, and transferability of VDS days could lead to an annual Samoa, and Fiji.177 increase in fishery revenues of 8 percent to 24 percent of GDP in FSM, RMI, and Kiribati; higher revenues would Rationalizing tax exemptions is crucial to improving also be expected in Nauru, Palau, and Tuvalu.179 tax collection and supporting efforts to encourage decarbonization and renewable energy. Several On the expenditure side, improving development PIC-9 countries continue to use tax exemptions as outcomes will require efforts to improve the incentives for foreign investment and private sector efficiency and quality of spending rather than development as well as tax relief to specific sectors spending more. This is particularly apt in the education or following disasters. International evidence shows and health sectors that already account for a high that such incentives are largely ineffective and proportion of spending among PIC-9 countries. This extremely costly.178 In some countries, tax exemptions is likely to come from improvements in allocative for imported fuel are providing implicit subsidies for efficiency (i.e., ensuring resources are allocated carbon-intensive electricity production. Rationalizing between alternative uses in ways that maximize such exemptions could deliver significant resources to social wellbeing)—such as between levels of education, finance development priorities while encouraging the curative versus preventative health care, or between switch to renewable energy. However, such reforms the sector wage bill and maintenance budgets.180 There are likely to affect the SOE’s financial positions are also specific instances where technical efficiency and electricity prices. Hence, reforms should be (i.e., ensuring outputs are being produced at the lowest accompanied by comprehensive measures that possible average cost) can be improved. These include consider the financial implications on SOEs and offset reducing the cost of overseas medical referrals for negative impacts on poor and vulnerable households specific treatments, improving procurement practices and MSMEs. Replacing exemptions with community to ensure governments are getting value for money, service obligation contracts between the government and improving the quality of service delivery. Finally, and electricity providers could improve fiscal reforms to expensive quasi-social protection programs transparency and encourage a dialogue about: 1) the in RMI and Kiribati (copra subsidies and unemployment appropriate level of government support for SOEs and income support) could: 1) free up resources to bolster 2) whether government resources could be better spent long-term fiscal sustainability and/or finance other by providing targeted support to vulnerable households development priorities; 2) incentivize behavioral change and businesses. to address other development priorities (such as improving human capital accumulation); and 3) improve In addition, greater regional cooperation in the targeting to ensure the most vulnerable are benefiting management of fishing license fees has the potential from the programs. 177 Health taxes include higher VAT and excise rates on cigarettes, alcohol, and fatty and sugary foods and beverages (see World Bank (2019) Using Taxation to Address Noncommunicable Diseases: Lessons from Tonga. World Bank, Nuku’alofa, Tonga). Environmental taxes include special levies to protect the environment—for example, Palau’s Pristine Paradise Fee and Fiji’s levy (and later ban) on plastic bags. 178 See IMF (2019). “The VAT Experience in LIDCs” in Macroeconomic Developments and Prospects in Low Income Developing Countries—2019, IMF Policy Paper. IMF: Washington, D.C. and IMF (2015) Options for Low Income Countries Effective and Efficient Use of Tax Incentives for Investment. IMF Policy Paper. IMF: Washington, D.C. 179 World Bank (forthcoming). “Public Expenditure Review for Nine Pacific Island Countries.” World Bank: Sydney. 180 For example, public funding for early childhood education (ECE) is low across the region, except in FSM. This is despite extensive evidence that ECE investments in early childhood education deliver higher returns in terms of lifetime earnings and welfare than investments in other levels of education. 100 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Greater spending efficiency is needed to restore options for data-driven approaches to the design fiscal buffers and create space for additional and monitoring of national, regional, and subregional spending to enhance resilience. This includes actions development strategies. At the country level, policy to: 1) reduce the region’s considerable infrastructure makers must consider a range of complex trade-offs gap (estimated to be US$3 billion annually or about 9 regarding service delivery and national investments percent of GDP until 2030);181 and 2) develop context- and must identify priorities in the context of the specific social protection systems with the capacity to challenges they face. At the regional and subregional quickly deliver adaptive social protection in response to levels, development partners attempt to direct limited shocks. budgets to the areas of highest need or toward programs with the largest expected impacts. Efforts at Long-term fiscal and debt sustainability requires greater regional cooperation and integration depend on renewed efforts to strengthen the rules and having sufficient, comparable, and credible information capacity for managing liabilities and SWFs. The PIC- as a base for dialog. 9 countries’ limited debt-carrying capacity reinforces the need for: 1) adhering to highly concessional More and better data are required to explore the borrowing; 2) developing and maintaining medium-term heterogeneity within countries. Important differences fiscal frameworks; 3) developing budget frameworks often arise between the populations living on main to assess proposals that require debt financing and islands and those living on outer islands. Those living prioritizing public investment in resilient infrastructure; on the outer islands typically do not have the same 4) improving fit-for-purpose debt-management access to public services, infrastructure, and economic systems and debt transparency; and 5) enhancing SWF opportunities; they are more vulnerable and more likely management, particularly in FSM, RMI, Palau, Kiribati, to suffer hardships than people living on main islands. Tuvalu, and Nauru. At the same time, moving to main islands does not necessarily improve the quality of life due to higher 4. Explore methods to fill data gaps living costs and reduced access to subsistence farming and fisheries in urban areas. As a result, poverty rates The small Pacific Island countries are often referred are higher in urban areas than in rural areas in some to as a “data desert.” Many countries lag international countries. However, the long gaps between survey norms in the production and dissemination of core rounds and data quality issues within the surveys hinder economic statistics. The deficiencies include data on further analysis of the patterns of poverty between macroeconomic indicators and economic activity; urban and rural areas. the details of budgets and expenditures; household surveys measuring wellbeing and socio-economic More comparable data are also needed to understand characteristics; firm surveys gauging market health poverty challenges in different countries and and dynamics; student enrollment, attendance, identify and monitor regional trends. A lack of central attainment, and school inputs; and key sectors vital coordinating bodies tasked with establishing guidelines to project development. Challenges for statistics for measuring welfare and socio-economic trends has production generally include limited infrastructure led to a lack of comparability over time among countries and technical capacity, lack of adequate funding, and and even within countries. Technical assistance for limited use and re-use of data. More specific to the collections has come from varying sources, including region, countries are hampered by high staff turn-over, regional organizations and bilateral and multilateral thin technical capacity, and high data collection costs development partners. Welfare measurement has been due to vast geographic distances and small populations. similarly outsourced to consultants for analysis. This approach has often left little in terms of documentation, In the context of COVID-19, timely data are which is then often lost by National Statistics Offices more critical than ever for information related to (NSOs), leaving little to guide analysts in later rounds. policy and programming; fiscal pressures present As a result, it is often difficult to use poverty and further risks to adequately resourced and regular welfare statistics to make cross-country comparisons traditional data collection. These deficiencies limit or monitor regional trends. 181 ADB (2017). Meeting Asia’s Infrastructure Needs. Manila: Asian Development Bank. 101 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure 58: Statistical Performance Index (2016–2019) for PICs with SPI data available 70 60 50 40 30 20 10 0 2016 2017 2018 2019 Samoa Vanuatu Solomon Islands Marshall Islands Lower middle income Papua New Guinea Kiribati Micronesia, Fed. Sts. East Asia & Pacific Source: World Bank. The Pacific is a region with substantial gender range of variables. As a result, this process is costlier inequality, but data to help understand the and more time-consuming in the Pacific, and datasets underlying causes are scarce. Various national surveys are often only available—if available at all—several point to a large incidence of violence against women, years after surveys are conducted. with over half of women in Vanuatu, Kiribati, and the RMI experiencing physical and/or sexual violence by NSOs lack the funding to meet the prohibitive costs an intimate partner during their lifetimes. Regional of data collection in the Pacific. Per-interview costs guidelines on questionnaire design and data collection of Pacific data collection are some of the highest in the methodologies to facilitate disaggregated gender world. This is partly due to systemic issues common to analysis are key to understanding the economic and the region, including sparse populations and high travel social impacts of gender inequality and being able to costs due to the island geography. However, these compare countries. Opportunities exist to incorporate issues are compounded by outdated methodologies and time-use modules and questions on agriculture’s labor inefficient use of technology. The systemic challenges distribution. These represent low-cost additions that will remain a significant factor, but there is scope could vastly increase the scope for analysis on gender to substantially reduce costs by integrating proven gaps in employment and household-level constraints to methods from other parts of the world. One example women’s economic empowerment. is switching from diary to recall methods for collecting consumption data. The change can reduce the number Public access to the collected data is another challenge of days at each location, decreasing personnel costs, a facing the region. Data collection is not enough. To significant component of survey budgets. In addition, maximize the benefits of information, it must be made integrating new technology, such as computer- accessible to stakeholders in governments, donor assisted personal interviewing (CAPI), reduces the need communities, academia, nongovernment organizations to print and transport paper questionnaires, which (NGOs), and civil society sectors. Before this can has decreased the costs of data collection in certain occur, NSOs must anonymize datasets to protect the contexts despite the up-front cost of hardware. identities of surveyed households and people. However, anonymization is more complex in countries with small Low statistical capacity is another major challenge and highly dispersed populations because it becomes in addressing data deprivation. According to the World easier to uniquely identify people based on a broader Bank’s Statistical Performance Index182 (SPI), the PIC 182 The SPI framework assesses the maturity and performance of national statistical systems in five key areas, called pillars: data use, data services, data products, data sources, and data infrastructure. 102 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE countries, with the exceptions of Fiji and Samoa, rank conditions, the most impactful approach to promoting below the averages for EAP’s developing countries and regional and national data-driven policies is to empower lower middle-income countries (Figure 58). SPI scores a credible and established regional partner to lead the improved in some PICs between 2016 and 2018—but agenda. they stagnated afterwards. A concerted approach will be needed to improve and sustain statistical Innovative approaches can help to overcome specific performance. challenges. In PICs and elsewhere, phone surveys have been used to monitor shocks’ socio-economic impacts The Way Forward in a cost-effective and timely way. Innovations also include supplementing traditional data sources with Given the shared challenges and small size, PIC-9 non-traditional ones, including alternative data countries need a common approach. Implementing collection methodologies and big data applications. harmonized methods and exploiting economies of There are alternative uses of more traditional data, scale yield benefits in many parts of the world, but the such as administrative information. These innovations approach is particularly crucial in the Pacific context. are expected to pay greater dividends in the Pacific Countries are small and NSO capacity is thin, limiting region than in contexts where traditional approaches the opportunities for domestic initiatives. PICs also have can be more readily adopted. In measuring the impacts many similarities while being distinct compared to other of disasters or the COVID shock on Pacific economies contexts globally. This situation limits the applicability and livelihoods, non-traditional data sources are of importing international best practices without critical for providing close to real-time information careful consideration and customization. However, it about economic activity, employment, food security, can provide immense opportunities for rapid adoption poverty, health, and education. The Pacific Observatory and scale-up within the Pacific region after local best tests and aims to establish such methodologies in the practices are identified and tested. Considering these Pacific. 103 5 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE CHAPTER DEVELOPMENT PRIORITIES FOR TODAY AND THE FUTURE 104 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE A Pacific development priorities follow from uncertainty, regional geostrategic shifts and the consequences of the fundamental increasing disaster risks, how does the PIC-9 SCD constraints in the context of the COVID-19 Update prioritize development solutions? It applies era and increasing risks. To recap, the two the following criteria for prioritizing solutions for fundamental exogenous constraints are: 1) small size, poverty reduction and shared prosperity: dispersed population, and remoteness from markets; and 2) high vulnerability to climate change and disaster • Direct impact on twin goals: The expected risks. In the context of the COVID-19 pandemic, impact on reducing poverty and promoting shared increasing disaster risks, and climate change, the prosperity, with actions more likely to ensure a consequences of the constraints and pathways forward sustainable increase in the welfare of the less well- (described in Section D) include such factors as the lack off given greater weight. We differentiate between of economic opportunities due to the dramatic drop in direct impacts (i.e., actions that lead directly to tourism, low resilience and sustainability in agriculture, improvements in the lives of the poor, such as challenges of labor mobility, low digital connectivity means-tested cash transfers) and indirect impacts and related services, lack of public services, and weak (i.e., actions that facilitate, or are pre-conditions for investment climate. other actions). Our assessment of potential direct impacts of a specific solution would be guided by the Development priorities are inter-related. Gaps in highest rating for direct impacts on the twin goals. quality primary and secondary education, for example, • Connection to other priorities (spillovers— can be filled by enhanced teacher recruitment to indirect impact on goals): The indirect impacts that remote locations but enhanced digital connectivity will help generate direct impacts on the twin goals and services (priorities in themselves) can also help (i.e., increases in government revenue from fishing support education. The linkages between development to facilitate increases in pro-poor expenditures). In priorities in tourism, fisheries, maritime transport, most of the areas, actions are likely to have both and energy provision provide another example. All are direct and indirect impacts. The assessment of linked to expanding national economic opportunities the potential overall impact of a specific solution and access to employment opportunities. In fact, the would be guided by the highest rating—be it direct development prioritized in the PIC-9 SCD complements or indirect impact. It is also important to note that the Pacific Island Forum’s (PIF) recently initiated the we consider primarily the impact of solutions on the “2050 Strategy for the Blue Pacific” and can support twin goals, while impacts on other dimensions of other regional initiatives. poverty and well-being receive lower weight. Given the consequences of the fundamental • Urgency under COVID-19, disasters risk, and constraints in the era of COVID-19, economic climate change: Recognizing that all the Pacific 105 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE countries will be recovering and adjusting to a “new services among countries to reduce costs and share normal” after COVID-19 and are keenly aware of access to highly specialized skills. Successful examples the current and emergent vulnerabilities inherent include tertiary education provided to the region at the in their geography, location, size, and vulnerability University of the South Pacific and various programs to multi-hazard risks. Higher priority will be given sponsored by the Pacific Community. On the private to solutions that address resilience to these risks in sector side, harmonization and streamlining of achieving poverty reduction and shared prosperity. regulatory requirements can play an important role in attracting more private investment, while a subset • Time horizon (immediacy of impact): The of appropriate functions could be outsourced to the timeframe under which the impact can be expected private sector.183 In our prioritization discussion, we to be realized, with priority given to solutions having highlight opportunities and priorities for regional impacts that can be expected more immediately. collaboration and action. • Evidence base: Actions considered to have a Prioritization is carried out in a two-step process. stronger evidence base receive a higher rating. This First, we review the main issues identified in the SCD covers both knowledge on the impacts of particular against the prioritization criteria outlined above. In the constraints or opportunities on advancing the twin second step, we apply this information to each of the goals and knowledge on how to overcome specific nine countries to review the country-specific relevance constraints or realize opportunities. of high priority issues—with the goal of limiting each country’s priority issues to about five. It is important • Feasibility: The likelihood that proposed solutions to note that even though the SCD seeks to use the can be implemented. This criterion considers the best available evidence to support prioritization, strength of possible constraints on implementing the exercise certainly does involve a large degree a solution, such as cost, human and institutional of judgment and remains more art than science. In capacity, and technical complexity (Table A-7) for addition, it is also important to keep in mind that the the feasibility filter used to assess priorities). Our exercise only seeks to identify priorities with respect assessment also includes institutional context, to making progress toward the twin goals. Countries’ stakeholder commitment to reforms, transparency, development strategies typically involve a broader ease of prior implementation of similar reforms set of objectives and policymakers will have to weigh as means to judge the likelihood of implementing the relative importance of the twin goals versus other reforms advancing the twin goals. Policymakers, policy objectives. of course, are best placed to decide on political feasibility. Prioritization Step 1: Applying the For many priority issues, effective solutions require collaboration among two or more PICs or prioritization criteria to key issues collaboration with donor partners. For some issues, identified in the SCD Update solutions can only be achieved through joint action among countries. For example, revenue increases from All the actions set out in the PIC-9 SCD Update the PIC-9’s fishing resources have been possible only aim to support the twin goals, but the prioritization because countries agreed to joint action under the criteria suggest a number of key solution areas. The Parties to the Nauru Agreement. Expanding access process begins with the summarized priorities assessed to overseas employment opportunities requires in the diagnostic and the prioritization assessment collaboration among labor-sending and labor-receiving for each of them. Each entry reflects a priority area countries. Regional collaboration also plays an identified in the SCD Update. These assessments are important role in overcoming scale limitations for both made on an approximate basis for two reasons. First, public and private sector activities. On the public sector each solution area reflects a key set of actions for the side, this entails primarily sharing public functions and PIC-9; in each cluster, however, there may be variations 183 See World Bank (2013) for examples from public financial management: Planning Public Financial Management Reforms in Pacific Island Countries: Guidance Note. Washington, DC. https://openknowledge.worldbank.org/handle/10986/16507 License: CC BY 3. 106 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE between or within countries on specific actions. To country and to limit the overall number of priorities for revitalize and realize sustainable tourism, for instance, each country to the top five or so. This is informed by Vanuatu may focus more on raising the value added of the summary country characteristics shown in Table 1 cruise ship arrivals, and Samoa would be more focused at the start of the report. on air travel. The assessment is made taking this set of actions as a whole and leaves for later consideration The country-specific priority solution areas are the precise planning for future country engagement and summarized in Table 9, which includes all issues from operational work. Second, each assessment is made Table 8 that have very high relevance for at least on the best available information, but there are many one PIC-9 country. It is important to note that regional difficulties inherent in making explicit comparisons solutions are a theme that runs through many of these between disparate reform areas. It is recommended areas. Some areas’ common problems call for regional that each individual assessment not be considered action to identify solutions that can then be rolled independently, and that judgment be used in inferring out at the country level (e.g., revitalizing and realizing a set of priorities from this assessment. sustainable tourism, enhancing availability and use of digital services in the private and public sectors, Prioritization Step 2: Identification of improving the quality of education, increasing access to secondary and higher education, and improving public country and regional priorities revenue and expenditure management). In many other areas, there are gains to be realized from cooperative Based on the assessment of solution areas using solutions—e.g., digital services to bring down costs the prioritization criteria shown in Table 8, this of shared activities like sector regulation, governance step adds information on the relevance of each functions, or financial infrastructure. In a final set of solution area for a particular country to arrive priorities, fully realizing the benefits requires joint at country-specific prioritization. The aim of this solutions or international agreements, most clearly country-by-country review of priority areas is to in regional fisheries and labor migration but also in identify those solution areas that promise to yield supporting tourism marketing in source markets and the highest impacts on the twin goals in a particular disaster risk preparedness solutions. Table 8: Development priorities and solution areas Urgency under Evidence base Connection Time horizon COVID-19, (knowledge Direct impact to other (immediacy of disaster risks, of impacts on Feasibility on twin goals priorities Impact) and climate twin goals and (spillovers) change what to do) Pathway 1: Increased Economic Opportunities Revitalize and realize sustainable tourism Expanding economic opportunity in oceanic fisheries Enhance labor mobility opportunities Improve digital connectivity and services in private and public sectors 107 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table 8: Development priorities and solution areas (continue) Urgency under Evidence base Connection Time horizon Direct COVID-19, (knowledge to other (immediacy of impact on disaster risks, of impacts on Feasibility priorities Impact) twin goals and climate twin goals and (spillovers) change what to do) Pathway 2: Maximizing human capital and its economic returns Improve quality of education and increase access to secondary and higher education Strengthen health systems to improve coverage, quality, and resilience Increase women’s paid employment and reduce gender- based violence Pathway 3: Resilient Incomes and Livelihoods Strengthen climate and disaster risk policies and build resilient systems Develop adaptive social protection systems Strengthen resilient agriculture and fisheries for small- scale operators Fundamental Enablers: Strengthening Governance and the Business Environment Enhance economic infrastructure and investment climate under GRID Improve public revenue and expenditure management Ensure macroeconomic, fiscal, and debt sustainability Explore technologies to fill data and knowledge gaps Importance High Medium Moderate 108 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE The PIC-9 countries face common issues, but each Table 9 highlights the country-specific (and in some country faces unique challenges shaped by their cases region-wide) high-priority solution areas, characteristics. Each country’s key characteristics and taking into consideration country characteristics. risks to help identify the most pertinent development Greater priority on tourism, for example, focuses on priorities. Many of the underlying constraints and countries where tourism is currently high and/or there their consequences are common across the region, but is potential for future growth. Expanding opportunities variation in their country characteristics (as shown in in oceanic fishing is particularly relevant to those PIC- Table 1) will lead to different emphasis on development 9 countries in The Western and Central Pacific Ocean, priorities. These characteristics, the similarities and which accounts for more than 25 percent of global tuna differences within the region, include: catch. Oceanic fishing and many other priorities benefit from regional action or coordination. For example, • Nearly all countries are extremely remote, meaning options to increase oceanic fishing revenues, outlined high transport costs and the need for greater earlier in the report, require coordination among Parties investments in digital connectivity and services; to the Nauru Agreement (PNA). New technology offers • Nauru, Palau, and Tuvalu have extremely small the hope of cheaper and more frequent data to support populations, which limits their capacity for private evidence-based policymaking in the region and monitor sector opportunities and increases the size of the household welfare and policy outcomes. Pilots in one public sector as a share of the economy. All countries country, such as the high-frequency phone surveys suffer from smallness and challenges in providing used during the COVID-19 pandemic, can determine services; how to apply new methods within the region and extend • Nauru, Palau, and Vanuatu are highly dependent them to other countries; economies of scale in design, on services, particularly tourism. Nauru is a special development and procurement could further reduce case because its economy is nearly completely costs. Emergency preparedness and response systems dependent on its Regional Processing Centre, need strengthening at the country and regional level to funded under a memorandum of understanding ensure greater resilience to ongoing and future risks. with Australia. Tourism-economies will need to pay This will involve improvements in legal and institutional special attention to strengthening health services frameworks, equipment, personnel, information as well as looking to diversify economically, both management, and facilities. within the tourism industry and by creating linkages to agriculture and other sectors; There are risks and trade-offs for pursuing a • All economies are susceptible to disasters and development reform agenda that should be considered climate change, but Tonga and Vanuatu will need to in country-specific development strategies. For make disaster risk management an immediate top example, while Palau’s highest priority is to revitalize its priority. Moreover, all maritime economy sectors tourism sector after the COVID-19, another important that depend on natural resources face threats that priority is to widen its revenue base by expanding impact ecosystem resilience, and growth of those opportunities in fishing. Given that ecotourism is a sectors requires efforts to improve environmental key attraction for tourists, expanding fishing will have sustainability and resilience to climate change; to avoid disruption of delicate ecosystems. Similar • Fiscal sustainability and risk of debt distress is a examples can be found across countries and priorities concern for all countries, some more than others. particularly when considering the general need for fiscal However, all countries will need to pay close prudence under tight budget constraints and high risk attention to financial risk mitigation measures of debt distress. and revenue mobilization, including those in the US Compact. Renegotiation of the agreement will likely imply more fiscal independence. 109 110 Table 9: Country-specific development priority solution areas FSM RMI PLW KIR NRU TUV WSM TON VUT Pathway 1: Increasing Economic Opportunities Revitalize Revitalize tourism after Potential to Potential to tourism after Revitalize and Modest Modest COVID-19 Modest Modest Modest expand high- expand high- COVID-19 realize sustainable opportunities opportunities is critical opportunities opportunities opportunities value tourism value tourism is critical tourism for tourism for tourism this large for tourism for tourism for tourism and diversify and diversify this large economic income income economic sector sector SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE + Current Potential Potential modest Potential for increase Potential for increase Potential revenue but for increase in public for increase Expand in public to increase Potential for Potential for Potential for potential in public revenue in public opportunities in revenue revenue base higher income higher income higher income to expand revenue and (catch and revenue and oceanic fishing (fees) and as tourism source source source through more indirect fees) and more indirect more indirect has slowed industrial revenue indirect revenue revenue longline revenue sector High High Modest Low High High migration, Low migration, migration, migration but Increasing migration migration but very Potential migration but Enhance but modest important important income and and small for greater important labor mobility contribution contributor contributor importance important important contributor income contribution opportunities to national national to higher with greater contribution contribution to national opportunities to national income with income with national potential to national to national income with income little growth little growth income income income little growth Connectivity Connectivity Connectivity Connectivity needed Fixed Connectivity needed for needed for needed for for public Fixed Fixed Fixed broadband needed for Improve digital public. Fixed public. Fixed public. Fixed services. broadband broadband broadband modest public. Fixed connectivity and broadband broadband broadband Fixed low as well low as well low as well as well broadband services in private low as well low as well low as well broadband as access as access as access as access low modest and public sectors as access as access as access low as well to mobile to mobile to mobile to mobile mobile to mobile to mobile to mobile as access broadband broadband broadband broadband broadband broadband broadband broadband to mobile broadband Table 9: Country-specific development priority solution areas (continue) FSM RMI PLW KIR NRU TUV WSM TON VUT Pathway 2: Maximizing human capital and its economic returns Extended Extended Educational COVID-19 COVID-19 Low Low outcomes Extended Low closures closures enrollment. enrollment. on par COVID-19 enrollment Quality of Improve quality Low revsed revsed Quality of Quality of with peers. closures and quality education of education and enrollment. progress. progress. education education Improvements revsed of education low and need increase access Quality of Quality of Quality of low and need low and need needed progress. low and need for early to secondary and education education education for early for early in access Quality of for early childhood higher education low. low and need low and need childhood childhood to early education childhood education. for early for early education. education. childhood low. education. childhood childhood education education. education. Strengthen health Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; Low UHC; systems to improve increasing increasing increasing stable NCD stable NCD increasing soaring NCD soaring NCD falling NCD coverage and NCD NCD NCD prevalence, prevalence, NCD prevalence prevalence prevalence resilience prevalence prevalence prevalence but still high but still high prevalence High GBV; High Very high High GBV; low female High High GBV. Very high Increase women’s GBV; high Average GBV; GBV; greater Very low labor force High GBV; GBV; high Average level GBV; greater paid employment COVID-19 modest level COVID-19 levels of participation, Low levels of COVID-19 of female COVID-19 and reduce gender- employment of female employment female high female l paid employment labor force employment based violence impact from employment. impact from labor force COVID-19 employment. impact participation. impact low base low base participation. employment impact Pathway 3: Resilient Incomes and Livelihoods + High High High Heightened Heightened Heightened Heightened Heightened Heightened disaster risk. disaster risk. disaster risk. Strengthen climate awareness awareness awareness awareness awareness awareness Heightened Heightened Heightened and disaster risk of climate of climate of climate of climate of climate of climate awareness awareness awareness policies and build change and change and change and change and change and change and of climate of climate of climate resilient systems disaster risks disaster risks disaster risks disaster risks disaster risks disaster risks change change change impacts impacts impacts SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE 111 112 Table 9: Country-specific development priority solution areas (continue) FSM RMI PLW KIR NRU TUV WSM TON VUT Pathway 3: Building Resilient Incomes and Livelihoods Heightened Heightened awareness of awareness of importance Heightened Heightened Heightened importance Heightened Heightened Heightened Heightened of Adaptive awareness of awareness of awareness of of Adaptive awareness of awareness of awareness of awareness of Develop adaptive Social importance importance importance Social importance importance importance importance social protection Protection. of Adaptive of Adaptive of Adaptive Protection of Adaptive of Adaptive of Adaptive of Adaptive systems Broaden Social Social Social Broaden Social Social Social Social Pacific’s first SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Protection Protection Protection Support Protection Protection Protection Protection conditional Fund to the cash transfer Unemployed program Modest Modest Modest High High High Agriculture Agriculture Agriculture Agriculture Agriculture Agriculture opportunities Need for opportunities High Ag- opportunities. employment employment employment Agriculture riculture for small- for small- for small- Coastal diversifica- employment, scale scale scale fisheries tion. High-lev- particularly operators. operators. operators. important Modest Strengthen resilient el of under- in coconut. Modest risk Modest risk Modest risk Coastal opportunities Coastal agriculture and contributor to nourishment. Need for di- mitigation mitigation mitigation employment fisheries in Agriculture fisheries fisheries for small- Coastal versification. and and and and important and coastal important for scale operators fisheries Coastal extension extension extension nourishment. for small fisheries small-scale important fisheries services. services. services. Modest risk source of operators and important operators Coastal Coastal Coastal mitigation nutrition. tourism source of and nutrition. fisheries fisheries fisheries and nutrition. important important important extension source of source of source of services nutrition. nutrition. nutrition. Fundamental Enablers: Strengthening Governance and the Business Environment Infra- Infra- Infra- Infra- Infra- Infra- structure structure Economic structure structure structure structure Medium and weak and weak diversifica- and weak Modest and weak and weak and weak Enhance economic opportunities business business tion can be business opportunities business business business infrastructure and improving in- environment environment improved by environment for enhancing environment environment environment investment climate frastructure hamper al- hamper al- enhancing hamper al- private sector hamper al- hamper al- hamper al- under GRID and narrow ready limited ready limited business envi- ready limited growth ready limited ready limited ready limited private sector private sector private sector ronment private sector private sector private sector private sector opportunities opportunities opportunities opportunities opportunities opportunities Table 9: Country-specific development priority solution areas (continue) FSM RMI PLW KIR NRU TUV WSM TON VUT Fundamental Enablers: Strengthening Governance and the Business Environment External External External External Improve public capacity capacity External capacity External capacity External External External revenue and building building capacity building capacity building capacity capacity capacity expenditure critical but critical but building critical but building critical but building building building management delayed due delayed due critical delayed due critical delayed due critical critical critical to COVID-19 to COVID-19 to COVID-19 to COVID-19 Moderate external High risk of High High public High risk public debt debt distress High risk of vulnerability Ensure High risk of High risk of debt levels; High risk of of debt and reliant risk but debt distress to external macroeconomic, debt distress debt distress significant debt distress distress and on revenues strong non- and relatively shocks. fiscal, and debt and revenue and revenue 2020 deficit and revenue increasing from the tax revenues large external Moderate sustainability uncertainty uncertainty and revenue uncertainty debt service Regional and large debt risk of debt uncertainty in 2024 Processing reserves distress Centre + Potential Potential Potential Potential Potential Potential Potential Potential Potential to fill to fill to fill to fill to fill to fill to fill to fill to fill Explore information information information information information information information information information technologies gaps gaps gaps gaps gaps gaps gaps gaps gaps to fill data and with non- with non- with non- with non- with non- with non- with non- with non- with non- knowledge gaps traditional traditional traditional traditional traditional traditional traditional traditional traditional data data data data data data data data data Importance High Medium Moderate High priority from 2016 High regional priority + SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE 113 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE ANNEXES 114 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE ANNEX 1: Supplementary Tables and Figures Table A-1: PIC-8 SCD Prioritization of solution areas Evidence base Indirect impact Time horizon (knowledge of Direct impact on on twin goals (immediacy of impacts on twin Feasibility twin goals (Source of Impact) goals and what spillovers) to do) Pathway 1: Fully exploiting the limited set of economic opportunities Relatively labor-intensive, Tourism Institutional Regional Fiscal cost including at stimulates a changes experience moderate, low skill levels; broad range and market indicates but regional Expand tourism poverty impact of sectors, development tourism can have solutions require partly depends especially could yield a significant successful on location services, and results in 3 to 5 impact on negotiation of tourism agriculture years livelihoods activities While action Direct impact Via public PNA already PNA already a requires regional Increase limited although revenue boost, operational, successful model agreement, sustainable some scope for major enabler for changes in operation in it could build fisheries revenue domestic job other pathways relatively quick Pacific on success of creation with fiscal costs to implement existing scheme Food systems Investments Lessons from Agriculture important Increase and sector Pacific & PNG reforms can be Majority of for NCD and incomes from reform will take provide evidence slow, difficult poor depend on nutrition agriculture and time, but some of needed and can be agriculture outcomes, food coastal fishing reforms within 5 reforms and impacted by land security and years investment law cost of living Significant Remitted Various Detailed benefit to earnings spent migration routes evidence based Expanded access Expand labor participating in local economy already open. on labor mobility involves trade- mobility households, and support job Improvements in Pacific shows offs for receiving opportunities relatively well creation and could be taken positive impact countries. targeted at poor government up in short run on poor and B40. households. revenues. Pathway 2: Enhancing access to employment opportunities and public services Global and regional Increasing evidence that Quality and Educational Most educational Close education ed. is critical system reforms attainment is opportunities for attainment and skills gaps and linked to costly but, an important both poor and targeted skills between the improved life demand side dimension B40 depend on takes at least poor and the prospects, constraints may of human building human 5-10 years, skills non-poor necessary be more difficult development capital. upgrading can investments and to overcome happen quickly reforms well established Access to Investments in Close other gaps Services support Relatively limited High fiscal cost services key capital, staff, in public service progress in other regional evidence and possible land dimension of and access over delivery pathways in rural services issues poverty 5-10 years 115 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table A-1: PIC-8 SCD Prioritization of solution areas (continue) Evidence base Indirect impact Time horizon (knowledge of Direct impact on on twin goals (immediacy of impacts on twin Feasibility twin goals (Source of Impact) goals and what spillovers) to do) Pathway 2: Enhancing access to employment opportunities and public services Could actually Reduced private Pacific NCD have a net Changes to Improvements and public costs Roadmap positive fiscal behaviors and Prevent NCDs in quality of life free resources sets out clear impact in food availability and productivity for other measures to medium run. will take time pathways take Behavioral change difficult Cultural and Violence reduces Requires shift Limited evidence private nature Direct benefit for women’s ability in cultural Stop gender of effective of problem make large numbers of to participate acceptance, based violence interventions in it difficult to affected women in society or achieved over Pacific context successfully livelihoods time address GBV. Reform Expansion incremental risks fiscal increasing sustainability Provide Largest source benefits with Household social, equitable access of formal staff turnover surveys indicate geographic, and to public sector Relatively limited employment in and improved importance of governance employment PIC8 levels of pathway for poor factors that opportunities educational limit access of attainment of the poor difficult the poor to overcome Pathway 3: Protecting incomes and livelihoods Very high Mainstreaming Emerging Strengthen Many measures Significant fiscal prevalence of supports evidence of what disaster risk feasible within 5 cost, can involve disasters, hit progress on works best in preparedness years land issues poor hardest other pathways Pacific Significant System can Establishment Good evidence Develop social High fiscal cost targeted benefit, be used for of system main globally, Pacific protection in some cases, especially post- other targeted task, feasible in context quite systems cultural aversion disaster programs 5 years unique 116 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table A-1: PIC-8 SCD Prioritization of solution areas (continue) Evidence base Indirect impact Time horizon (knowledge of Direct impact on on twin goals (immediacy of impacts on twin Feasibility twin goals (Source of Impact) goals and what spillovers) to do) Fundamental Enablers: Strengthening governance and the business environment Lowers the costs Investments High fiscal Maintain Key facilitator Significant of distance to throughout cost mitigated & develop of access to investments with markets, and region have by better economic markets and limited capacity connects rural illustrated maintenance, infrastructure services over medium run areas importance land issues Better alignment of public Institutional expenditures Public sector Experience of With political Improve public reform can yield and government effectiveness reform in PIC8 commitment, expenditure substantial policies undercuts nearly shows what reforms are mgmt. results within necessary to all pathways works in context feasible 5years support pursuit of twin goals Ensure Reduce risk of Improved macro- Improved Good evidence Limited capacity macroeconomic shocks that environment governance can on context-fit a constant stability and can have major supports almost yield results over measures for challenge sustainability impact in PIC8 all pathways 5 years PIC8 Livelihoods of the poor depend to a significant Ecosystem Approaches Strong PIC8 Sustainable extent on Critical enablers and land is identified for support, yet natural resource environmental for many a long-term addressing range changes face & land mgmt. services, pathways commitment of risks opposition including agriculture and coastal fishing Generally low Boosting shared Especially New products Limited evidence cost but require Enhance access prosperity by support and systems can on whether joint action by to financial supporting SMEs agriculture and be rolled out in products can banks and land services to grow labor mobility short run work in PIC8 collateralization issues Limited track Difficult process Manage Still relatively Facilitate service Altering existing record of urban of altering urbanization small numbers of provision in land use slow planning in existing urban effectively urban poor urban areas process Pacific infrastructure Improve the Stronger private Mixed results on Support SMEs Selected areas With political business sector can aid impact, given and job creation can be addressed commitment, enabling progress on market access to an extent in short run reform is feasible environment pathways challenge KEY VERY HIGH HIGH MODERATE The rating relates to how conducive the assessment is to an effective solution in each area, so high scores should be viewed positively in all cases. 117 118 Table A-2: PIC-8 SCD Country specificity of very high priority solution areas FSM MHL PLW KIR TUV WSM TON VUT Pathway 1: Fully exploiting the limited set of economic opportunities Need to ensure benefits from large numbers High potential High potential High potential Expand tourism of tourists & destination destination destination environmental impacts managed SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Increase fisheries Large fish Large fish Large fish Large fish Large fish revenue stocks stocks stocks stocks stocks Agricultural Agricultural Agricultural potential potential potential Increase incomes and scope and scope and scope Agricultural from agriculture for increased for increased for increased potential and coastal fishing demand from demand from demand from the tourism the tourism the tourism sector sector sector Currently only Currently only very limited Expand labor Already open Already open Already open very limited Good access to Good access to labor mobility Good access to mobility access to US access to US access to US labor mobility Australia and Australia and and domestic Australia & NZ opportunities labor market labor market labor market and domestic NZ NZ employment opps opps Pathway 2: Enhancing access to employment opportunities and public services Limited Limited Limited Issues with Issues with Issues with Issues with Issues with Close education participation participation participation quality of quality of quality of quality of quality of and skill gaps as well as as well as as well as education education education education education quality issues quality issues quality issues Close other gaps Significant Significant Significant Significant in public service gaps in public gaps in public gaps in public gaps in public delivery service delivery service delivery service delivery service delivery Very high risk Very high risk Very high risk Very high risk Very high risk Very high risk Very high risk Prevent NCDs factors factors factors factors factors factors factors High incidence High incidence High incidence High incidence High incidence Stop gender-based of partner of partner of non-partner of non-partner of partner violence violence violence violence violence violence Table A-2: PIC-8 SCD Country specificity of very high priority solution areas (continue) FSM MHL PLW KIR TUV WSM TON VUT Pathway 3: Protecting incomes and livelihoods Very high Very high Very high Strengthen disaster incidence of incidence of incidence of risk preparedness disasters disasters disasters Fundamental Enablers: Strengthening governance and the business environment Support Support Support Support Support Support Support Maintain & potential for potential for potential for potential for potential for potential for reduced cost develop economic domestic domestic domestic domestic domestic domestic and internal infrastructure economic economic economic economic economic economic movement activity activity activity activity activity activity Significant Significant scope to scope to Improve public improve PEM, improve PEM Significant Significant Significant expenditure declining US declining US scope to scope to scope to management sector grants sector grants improve PEM improve PEM improve PEM require careful require careful adjustments adjustments Transition from Transition from sector grants High High Ensure grants to trust to income from dependence on dependence on Relatively macroeconomic fund income trust fund income from income from high levels of stability and raises concern raises concern trust fund and trust fund and external debt sustainability about fiscal about fiscal fishing fishing cliff cliff Note: Blue shading denotes a solution area is particularly relevant for that country, while green indicates solution areas where regional solutions are most critical. SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE 119 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table A-3: Selected indicators for PIC-9 FSM KIR RMI NRU PLW TON TUV VUT SAM Spatial and situational indicators Population 115,021 119,446 59,194 10,834 18,092 105,697 11,792 307,150 198,410 Pop. growth (%) 0.3 1.7 0.8 0.2 -0.2 0.4 1.1 2.5 0.6 Land area (km2) 700 810 180 21 460 720 30 12,190 2,830 Remoteness (distance to 11,750 12,321 12,057 12,250 11,027 13,153 12,774 12,796 12,776 markets) Inhabited islands 65 21 24 1 8 36 9 72 4 Population density 161 143 325 534 39 143 384 24 69 (pp/km2) Average pop. per 1,770 5,688 2,466 10,834 2,262 2,937 1,310 4,266 49,603 island Fiscal indicators (ratio to GDP) Public spending 72 118 79 134 69 45 129 44 38 Fiscal balance 0.6 3.7 5.0 35.7 -10.9 5.3 5.0 -2.4 6.2 Gross debt 15 21 14 28 31 46 6 46 47 Trust funds 67 409 210 83 -- 0 241 -- 0 Development 10 21 9 -- -- 5 42 -- 4 spending Economic indicators GDP per capita (PPP constant 3,368 2,259 3,932 13,594 15,473 6,347 4,411 2,854 6,417 2017 international dollars) GDP per capita 0.3 0.5 1.0 6.8 1.4 1.3 1.3 0.3 1.9 growth (%) GDP (PPP, constant mil. International 387 270 233 147 280 671 52 877 1273 dollars) Share of agriculture 23 29 20 4 3 17 17 27 10 Share of industry 5 12 14 6 9 15 7 11 15 Share of services 67 63 68 94 80 50 76 62 75 Imports (% GDP) 65 87 69 79 77 62 76 44 51 Exports (% GDP) 24 9 35 20 48 19 11 18 32 Sources: WDI, CEPII, IMF WEO and World Bank staff. Notes: Data for latest year available (2019) except GDP per capita growth and population growth which are 20-year averages; remoteness is measured as the average distance from other economies; gross debt is external only for Palau. 120 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Box A-1: COVID-19 in PIC-9 countries (3 May 2022) PIC-9 countries generally managed to delay the arrival of COVID-19, largely due to swiftly applied border control measures early in the pandemic. This enabled preparedness efforts, including the opportunity to vaccinate eligible residents prior to the inevitable arrival of COVID-19 (with varied success across countries). While Tuvalu remains COVID-free, the first five months of 2022 saw an increase in reported infections and deaths for Kiribati 3,084 (13),170a RMI 17 (0), FSM 7 (0), Nauru 3 (0), Palau 4,610 (6), Samoa 9,592 (19), Tonga 10,452 (11), and Vanuatu 7,512 (13). Palau has fully vaccinated 99 percent of its population with the mandated dosages,b and other PIC-9 nations have reported increasing coverage. Vanuatu (38 percent) is the only PIC-9 country yet to fully vaccinate at least 40 percent of its population. Vaccine demand and uptake have increased since the beginning of the current outbreak. Kiribati has received enough vaccines to cover its population. Vanuatu has received enough vaccines to fully vaccinate nearly 60 percent of its population.c Overall, the PIC-9 countries have enough delivered vaccines to fully vaccinate more than 70 percent of the population. The northern Pacific countries have steady access to US-sourced vaccine doses. The increasing rates of vaccination, along with lessons on broader public health systems—disease surveillance, testing, controls against localized outbreaks—provides the basis for moving from border controls to a new phase managing to live with COVID. Figure A-1: Potential coverage with delivered vaccines, partial, full and additional dose coverage (of total population), 3 May 2022 120% 100% 100% 99% 94% 98% 100% 87% 83% 79% 74% 80% 66% 67% 57% 58% 65% 71% 68% 54% 58% 56% 60% 48% 49% 52% 46% 45% 38% 40% 30% 20% 20% 11% 12% 5% 0% 3% 0% Kiribati Marshall Micronesia Nauru Palau Samoa Tonga Tuvalu Vanuatu Islands Potential total population coverage with delivered vaccines % Fully vaccinated coverage (total population) 70 % Target % Partially vaccinated coverage (total population) Booster/Additional Doses Coverage (total population) 40 % Target Notes: (i) Supply data for Nauru is limited. Additional vaccine supply not highlighted in media reports is not captured; (ii) Tonga is extracting 11 vaccine doses from standard 10-dose vials; (iii) RMI, FSM and Palau have steady access to US sources vaccine doses. a n=cases, ( ) = deaths reported to date. b The required number of doses depends on vaccine type. Kiribati and Tuvalu are deploying vaccines suitable for people 18 years and above. The national vaccine plans have not yet been updated to include regular boosting doses. c Most Pacific Island countries have agreements and ongoing discussions with bilateral partners for vaccine supplies, and doses are delivered when requested. Details of donor-financed or donor-procured vaccines are unclear at this point, including volumes and timelines of delivery. In addition, COVAX vaccine is ongoing with countries like Vanuatu expected to be supplied with more vaccines. Combined bilateral and COVAX sourced doses are expected to increase in response to the recent surge in cases for some PIC-9 countries. 121 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure A-2: Shipping liner connectivity for Pacific Island Countries PIC Liner Connectivity Average Liner Connectivity 14.0 30.0 Liner shipping connectivity index (maximum value in 2006 = 100) 12.0 25.0 10.0 20.0 8.0 15.0 6.0 10.0 4.0 2.0 5.0 0.0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Kiribati Tuvalu Fiji Islands Nauru Vanuatu Average Global Average PICs Papua New Guinea Tonga Palau Samoa Federated States of Micronesia Marshall Islands Source: Analysis of “Liner shipping connectivity index, quarterly Q1 2006 - Q1 2021” data set extract for 12 PICs, UNCTAD, Accessed 10/05/2021. Note: different vertical axis and 2021 data only for Q1. Figure A-3: Much of the population often not living on the main island 100% 90% 80% counry population (%) Percentage of total 70% 60% 50% 40% 30% 20% 10% 0% SOL VAN KIR FSM Marshall TVU Palau Tonga Samoa Fiji Naruru (2009) (2009) (2009) (2010) (2011) (2012) (2004) (2011) (2016) (2014) (2014) % Not on main island % On main island Figure A-4: Total aid flows to the PIC-9, 2009-2019 (as % of GDP) 40% 30% 20% 10% 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Disbursed Average disbursed Committed Average committed Source: Lowy Institue Pacific Aid Map. 122 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure A-5: The PIC-9 countries have a relatively higher Figure A-6: …which translates into a higher prevalence prevalence of overweight adults… of diabetes among adults Prevalence of overweight among adults, RMI NRU 30 RMI (% of population ages 20 to 79) WSM BMI >= 25 (age-standarized) (%) TUV PLW 75 KIR FSM TON Diavetes prevalence KIR VUT 20 TUV PLW 50 TON VUT FSM 10 WSM NRU 25 Upper Upper Low income Low-middle -middle High income 0 Low income Low-middle -middle High income 0 income income income income 250 500 1046 4096 12695 50000 250 500 1046 4096 12695 50000 GNI per capita, 2020 (US$) GNI per capita, 2020 (US$) Source: WHO Global Health Observatory Source: WDI Notes: Data for latest year available is 2016. Notes: Latest year for which data is available Figure A-7: Poverty rates ($3.20 line) are considerably Figure A-8: Gross enrollment ratio in early childhood lower for households whose head has tertiary education education is less than half in a number of countries 50 100% 90% 90% 83% 83% 40 80% 69% 70% 30 60% Percent 50% 46% 44% 41% 20 40% 29% 30% 10 20% 10% 0 0% RMI Kiribati Vanuatu Samoa Vanuatu Tuvalu Palau Nauru Tonga Marshall Islands Samoa Micronesia (Federated States of) Kiribati Primary Secondary Tertiary Source: Household Income and Expenditure Surveys, World Bank Source: UIS reported in EQAP 2021. Note: The graph shows Gross Pacific Island Poverty Assessment, forthcoming. Enrolment in early childhood education, defined as the total enrollment in pre-primary education regardless of age expressed as a percentage of the population of the official age for pre-primary education. 123 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Box A-2: Linkage between undernutrition and adult health outcomesa Poor-quality diets are one of the greatest obstacles to the survival, growth, development, and learning for children today. The stakes are highest in utero and during the first two years of life, when insufficient dietary intake of nutrients can irreversibly harm a child’s rapidly growing body and impair the development of cognitive functions. Foods high in sugar, fat, or salt can set children on the path to unhealthy food preferences, a tendency to be overweight, and diet-related diseases. Stunting is associated with an increased risk of adult obesity. These two forms of malnutrition—over- and under-nutrition—are increasingly occurring together as a double burden, not only in the same population but even in the same household or individual. This double burden affects all countries, rich and poor, and is a particular concern in PIC-9 countries that have high stunting and obesity rates. The consequences are significant and enduring. Early-life undernutrition is an underlying cause associated with an estimated one-third of child deaths. For kids stunted in the first two years of life, the capacities to resist disease, carry out physical work, study, and progress in school are impaired during the course of their lives. Driven by poor diet and nutrition, obesity is an important underlying cause of many NCDs later in life, including high blood pressure, diabetes, cancer, stroke, ischemic heart disease, and acquired disabilities (leading to poor vision and lower-limb amputations). Child malnutrition and stunting can have lifelong economic consequences. The effects on economic prospects can be seen in studies on the effects of stunting carried out in the East Asia Pacific region, and a review of the global evidence identifies a significant wage premium associated with greater adult height. a Roger Shrimpton and Claudia Rokx (2012). The Double Burden of Malnutrition: A Review of Global Evidence. Health, Nutrition and Population Discussion Paper; World Bank, Washington, DC. World Bank (2021). McGovern et al. (2017). A review of the evidence linking child stunting to economic outcomes. Int Journal of Epidemiology. 2017; 46(4):1171-1191. Muhammad HFL. Obesity as the Sequel of Childhood Stunting: Ghrelin and GHSR Gene Polymorphism Explained. Acta Med Indones. 2018 Apr;50(2):159-164. PMID: 29950536. UNICEF. Fed to Fail? The crisis in Children’s diets in early life. 2021 Child Nutrition Report. UNICEF. New York. 2021. Figure A-9: Individuals with more education are more likely to have wage employment Share of people aged 20 to 60 who are employed for a wage by highest level of education 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Men Woman Men Woman Men Woman Men Woman Men Woman Vanuatu RMI Samoa Kiribati Tonga Primary Lower secondary Upper secondary Post secondary education, non tertiary University Source: Latest household expenditure surveys 124 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure A-10: Primary and Secondary Completion Rate Completion Rates 140% 120% 120% 110% 100% 100% 90% 91% 81% 80% 74% 80% 60% 60% 49% 39% 40% 40% 23% 21% 18% 20% 20% 0% Primary Secondary Primary Secondary Primary Secondary Primary Secondary Kiribati Samoa Tonga Tuvalu National Male Female Source: MICS. Figure A-11: Expected years of schooling is between structural and aspirational peers in most PIC-9 countries, except RMI and Vanuatu 14.0 12.2 12.6 11.6 11.8 11.7 11.7 11.4 11.8 12.0 11.2 10.8 10.7 9.4 10.1 10.0 8.0 6.0 4.0 2.0 0.0 PLW NRU FSM KIR TUV RMI WSM TON VUT Small Strct. Aspir. UMIC High income FCS Non-FCS Peers Source: World Bank (2018). Note: “The Human Capital Project”. Structural peers are Comoros, Dominican Republic, Saint Vincent and the Grenadines, Timor-Leste. Aspirational peers are Antigua and Barbuda, Fiji, Grenada, Mauritius, Saint Kitts and Nevis, Saint Lucia, Seychelles. 125 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table A-4: Early reading assessments in Pacific Island countries show well less than half of students can read properly % of students who, after 3 years of schooling, cannot read a single: % of students Word from the who, after 3 years Language of Familiar first sentence in of schooling, are Country or province test in grade3 Letter word an short story considered readersa Vanuatu Francophone French 12 5 7 24 Anglophone English 8 13 10 24 Tonga Tongan 0 1 3 30 Tuvalu Tuvaluan 8 18 14 21 Kiribati Kiribati 2 4 3 27 Samoa Samoan 2 20 20 19 Solomon Island English 1 18 22 33 Papua New Guinea Madangb English 2 6 6 22 East New Britainc English 1 3 12 39 Western Highlandsd English 0 8 11 6 National Capital District e English 2 2 16 11 Sources: World Banik 2010, 2011a, 2011b, 2011€, 2012a. 2012b, 2013. a. Average comprehension at of above 80 percent. b. Average comprehension at 47 percent. c. Average comprehension at 55 percent. d. Average comprehension at 46 percent. e. Average comprehension at 76 percent. Figure A-12: Girls are besting boys in Tonga upper secondary exams (pass rates in 2020 at the upper secondary level by gender and grade) Exam pass rate 2020 90 78 80 70 62.8 57.4 60 46.1 50 34.9 40 23.7 30 20 10 0 TSC yr11 TSC yr12 TSC yr13 Male Female Source: Tonga Ministry of Education and Training 126 Figure A-12: Girls are besting boys in Tonga upper secondary exams (pass rates in 2020 at the upper secondary level by gender and grade) SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure A-13: Many students fail to achieve a minimum proficiency level in reading at the end of grade 6, particularly boys 98% GDI, if above 1, girls outperform boys 100% 1,8 1,6 80% 71% 66% 1,4 64% 61% 57% 1,2 60% 53% 47% 47% 1 0,8 40% 0,6 20% 0,4 0,2 0% 0 Micronesia, Fed. Sts. Marshall Islands, Rep. Kiribati Tuvalu Palau Vanuatu Samoa Nauru Tonga FCS Non-FCS Literacy proficiency Gender parity index Source: Pacific Islands Literacy & Numeracy Assessment 2018, reported in EQAP 2021: The status of Pacific Education, A sector analysis based on internationally comparable statistics. Figure A-14: Population-weighted average distances to nearest secondary school (km) are farther on outer islands—prohibitively so in Tuvalu and RMI 20 139.5 74.7 18 16 14 12 10 8 6 4 2 0 Tuvalu Kiribati RMI Vanuatu Capital Main Island Other Islands Figure A-14: Population-weighted average distances to nearest secondary school (km) are farther on outer islands—prohibitively so in Tuvalu and RMI 20 127 139.5 74.7 18 16 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Figure A-15: Share of STEM occupations in men and Figure A-16: Youth unemployment rates (ages 15-24) women’s employment in PIC-9 in PIC-9 10 50 9 8 40 7 6 30 Percent Percent 5 4 20 3 2 10 1 0 0 Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Male Female Tuvalu Samoa Nauru FSM Kiribati Vanuatu RMI Tonga Nauru Palau Tuvalu FSM RMI Tonga Samoa Vanuatu Kiribati Notes: Latest national estimates from ILOSTAT. STEM Source: ILOSTAT latest national estimates for available countries; occupations are defined as science and engineering professionals Data for RMI from HIES 2019. ILO modelled estimates for EAP and associate professionals + Information and communication averages. professionals and technicians. Zeros represent approximations (categories where there are very few observations Figure A-17: Mobile phone coverage Figure A-18: Internet access 60 Mobile cellular subscriptions 100 (% of population) (per 100 people) Internet access 40 50 20 0 0 FSM KIR NRU PLW RMI TON TUV VUT WSM FSM KIR NRU PLW RMI TON TUV VUT WSM 2005-2010 2015-2020 2011 2017 Source: WDI. Notes: Data for latest year available. Data missing for Palau and Nauru 128 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table A-5: Provident funds in the studied Pacific countries Country Vanuatu Samoa Tonga Tonga Kiribati NRBF RFB (National Institution VNPF SNPF (Retirement Fund KPF Retirement Board) Benefits Fund) Members 24,366 31,744 9,596 4,864 ? Employee 4 7 5 5 7.5 contribution (%) Employer 4 7 7.5 10 7.5 contribution (%) Lump sum and Lump sum and Payout options Lump sum only Lump sum only Lump sum only allocated pension allocated pension Number of 4 3 3 3 1 branches 129 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE ANNEX 2: Analytical work used for SCD Update ANNEX 2.1 Ensure Macro and Fiscal Sustainability Section Fiscal Scenarios Modeled This analysis considers possible trajectories for fiscal flows from 2022 through to 2041 under specific scenarios where sovereign rents, trust-fund drawdowns, grant aid flows, and public expenditures are independently modeled. Combining these scenarios generates a set of trajectories for overall PIC-9 fiscal balance—shown in Figure A-16. Figure A-19: Projected fiscal balances (after grants and trust fund flows) as a percent of GDP Kiribati Republic of Marshall Islands 60 20 40 10 20 0 0 -10 -20 -20 -40 -30 2007 2012 2017 2022 2027 2032 2037 2007 2012 2017 2022 2027 2032 2037 Federated States of Micronesia Nauru 30 60 20 50 10 40 0 30 -10 20 -20 10 -30 0 2007 2012 2017 2022 2027 2032 2037 2007 2012 2017 2022 Palau Samoa 10 10 0 5 -10 0 -20 -5 -30 -10 -40 -15 2007 2012 2017 2022 2007 2012 2017 2022 2027 2032 2037 130 Tonga Tuvalu 30 40 0 5 -10 0 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE -20 -5 -30 -10 -40 -15 Figure A-19: Projected fiscal balances (after grants and trust fund 2007 2012 2017 2022 flows) 2007 as a percent 2012 of GDP 2017 2022 2027 2032 2037 Tonga Kiribati Tuvalu Republic of Marshall Islands 30 60 40 20 20 30 40 10 10 20 20 10 0 0 0 -10 0 -10 -10 -20 -20 -20 -20 -30 -30 -40 -30 2007 2012 2017 2022 2027 2032 2037 2007 2012 2017 2022 2027 2032 2037 2007 2012 2017 2022 2027 2032 2037 2007 2012 2017 2022 2027 2032 2037 Vanuatu 15 Federated States of Micronesia Nauru 30 60 10 20 50 5 10 40 00 30 -10 20 -5 -20 10 -10 -30 2007 2012 2017 2022 2027 2032 2037 0 2007 2012 2017 2022 2027 2032 2037 2007 2012 2017 2022 Source: World Bank staff estimates. Note: The blue line denotes the fiscal balance consistent with baseline revenues, expenditures, and grants. The orange region represents the envelope of fiscal outcomes arising from all scenario shock combinations. Fiscal projections for the trust-fund countries—Kiribati, Tuvalu, FSM, RMI, and Palau—incorporate revenue flows consistent Palau with maintaining current real per Samoa 10 value of the trust fund. The projections are estimated using data from capita the latest Joint WB-IMF LIC-DSA reports, except Palau and Nauru, which are estimated by the World Bank. 10 0 5 “baseline” trajectory for key fiscal flows and overall economic A -10 0 growth—in line with current projections for each PIC—is taken from the recent IMF-World Bank’s Debt Sustainability Framework for Low Income Countries (LIC -20 -5 DSF) and the World Economic Outlook (WEO) October 2021. The trust-fund drawdowns and sovereign-rent -30 projections are not always available in the LIC DSF; if not,-10 estimates provided by the WB staff are used for the baseline. These take into consideration available country data and forecasts as well as in-country discussions with -40 -15 the government 2007 and other stakeholders. 2012 2017 Note that while these 2022 are termed 2007 2012 baseline projections, 2017 2022 2032 are 2027 they in many 2037 cases quite ambitious in terms of assumptions around the PICs’ capacity to mobilize domestic revenue and achieve fiscal consolidation via expenditure restraint. To exclude an outlier impact from the COVID-19 pandemic in 2021, the scenarios modeled on the historical average are based on data through to 2020. The projection starts in 2022 Tonga Tuvalu and30goes through 2041. 40 20 30 For each PIC, the following scenarios for fiscal flows are presented: 20 10 10 • Sovereign 0 rents (only for Kiribati, RMI, FSM, Nauru, Palau, Tuvalu, and Vanuatu) 0 Baseline expenditure-to-GDP projections from the current DSA; • -10 -10 Sovereign rents-to-GDP maintained at the (five-year) historical average; • -20 -20 • Sovereign rents held constant at the (three-year) historical average. -30 -30 2007 2012 2017 2022 2027 2032 2037 2007 2012 2017 2022 2027 2032 2037 Vanuatu 15 131 10 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Trust-fund drawdowns (only for Kiribati, Marshall Islands, Micronesia, and Palau): • Baseline expenditure-to-GDP projections from the current DSA; • Annual disbursements from the trust fund that preserve the current real per capita asset value. Grant aid flows • Baseline expenditure-to-GDP projections from the current DSA; • Grants aid flows-to-GDP maintained at the (five-year) historical average; • Grants aid flow held constant at the (three-year) historical average. Public expenditures • Baseline expenditure-to-GDP projections from the current DSA; Expenditure-to-GDP maintained at the (10-year) historical average. Table A-6: Fiscal projection scenarios Sovereign rents Aid flow Trust fund drawdown Total expenditure Scenario 1 Baseline Baseline Baseline Baseline Scenario 2 Baseline Baseline Baseline Historical Scenario 3 Baseline Baseline Constant TF drawdown Baseline Scenario 4 Baseline Baseline Constant TF drawdown Historical Scenario 5 Baseline Historical Baseline Baseline Scenario 6 Baseline Historical Baseline Historical Scenario 7 Baseline Historical Constant TF drawdown Baseline Scenario 8 Baseline Historical Constant TF drawdown Historical Scenario 9 Baseline Constant aid flows Baseline Baseline Scenario 10 Baseline Constant aid flows Baseline Historical Scenario 11 Baseline Constant aid flows Constant TF drawdown Baseline Scenario 12 Baseline Constant aid flows Constant TF drawdown Historical Scenario 13 Constant rents Baseline Baseline Baseline Scenario 14 Constant rents Baseline Baseline Historical Scenario 15 Constant rents Baseline Constant TF drawdown Baseline Scenario 16 Constant rents Baseline Constant TF drawdown Historical Scenario 17 Constant rents Historical Baseline Baseline Scenario 18 Constant rents Historical Baseline Historical Scenario 19 Constant rents Historical Constant TF drawdown Baseline Scenario 20 Constant rents Historical Constant TF drawdown Historical Scenario 21 Constant rents Constant aid flows Baseline Baseline Scenario 22 Constant rents Constant aid flows Baseline Historical Scenario 23 Constant rents Constant aid flows Constant TF drawdown Baseline Scenario 24 Constant rents Constant aid flows Constant TF drawdown Historical 132 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table A-7: Feasibility filter PIC-9 feasibility filter Sector Assessment: Example Focus area Guiding questions Risk Opportunities Comments Has the development priority been recommended before? If not, proceed to question 3. If so, what were the main 1. Historical implementation barriers (including institutional capacity select low developments and political resistance)? What were the key lessons learned from past attempts to implement the priority? Why is it ‘different’ this time? What could be done better 2. New policy now? Are there any windows of opportunity emerging? medium select environment Are there any new obstacles? Who are the relevant groups affected by the reform? 3. Stakeholder Who stands to win and lose from the initiative? Who are power and high high the key decision makers? interest What could the losers do to block reform? Are those who can make a difference engaged with 4. Leadership the reform? Are key decision makers committed to the select select priority? If not, could they be convinced to support it? Do those in charge of delivering the reform generally complete the tasks they promise? Are they trusted by 5. Credibility select select ‘users’? Are existing policies/regulationsgenerallyfollowed/enforced? Have key decision makers been successful in building and sustaining partnerships with the main stakeholders affected by the intervention? (e.g, formal and informal 6. Coordination institutions). Is there a common understanding among select select those who are in charge of delivering the reform? (e.g., multiple government agencies, civil society, international agencies, private sector) Is there a budget allocation for the priority? Do those in charge of implementation have the skills and resources needed to sustain 7. Resources select select momentum in the reform, including enough staff to implement it? What are the implications of donor involvement? Is the sector susceptible to state capture? Are there signs suggesting that policy formulation o implementation is disproportionately 8. Accountability influenced by a select few individuals or groups? If so, are select high there any efforts to increase independent scrutiny and transparency? Is there an open system to monitor the progress of the reform? Is the public likely to support this intervention? Are beneficiaries of the intervention able to have a voice 9. Inclusiveness in decisions that are likely to affect them? Is there a select select mechanism to facilitate resolution of concerns and grievances? Based on the factors above, what is the likelihood Feasibility that the proposed solution be successfully assesment implemented? 133 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE ANNEX 2.2 Poverty microsimulations The distributional impacts of COVID-19 are estimated as the difference in simulated welfare outcomes in 2020 under two scenarios (Figure A-12). The first, the counterfactual or business-as-usual (BAU) scenario, assumes that 2019-20 real GDP growth follows its pre-COVID trend. The second, the COVID-19 scenario, utilizes the latest sectoral GDP growth projections made available by the Macroeconomics, Trade, and Investment (MTI) Global Practice at the World Bank. The household welfare differences between these two scenarios indicate the distributional impacts of the COVID-19 shock. In addition, the comparison of welfare outcomes between the 2019 baseline scenario and the COVID-19 shock scenario can be used to estimate before-after poverty impacts. Figure A-20: Framework of the microsimulation Business as usual (counterfactual) 2020 Simulated based on real GDP growth using 10-year GDP trend Pre-COVID Difference = COVID-19 impact Baseline 2019 With COVID-19 shock (treatment) 2020 Simulated based on 2019-20 actual real GDP growth available in national accounts data Source: Authors. The macro-micro simulation approach (Figure A-13) follows Bourguignon, Bussolo, and Pereira da Silva (2008), Ferreira et al. (2008), and Olivieri et al. (2014).184 The baseline input micro-data is the official HIES collected in RMI (2019/20), Vanuatu (2019/20), Fiji (2019/20), and Kiribati (2019/20).185 The method essentially takes existing 2019 household surveys as a starting point (baseline year) and uses the macro projections to simulate the consumption distribution in 2020 under different macro scenarios.186 To do so, an occupational choice model is first estimated to simulate changes in labor force status that match the sectoral employment distributions at the macro-level.187 Then, an earnings model is estimated using the standard Mincer equation (for each economic sector and skill level) to simulate labor income changes for those individuals that become unemployed/employed or switch sector. Although labor market changes are the main transmission channel used in the model, changes in international remittances and population growth are also accounted for, and some assumptions regarding non-labor market changes are the main transmission channel used in the model, changes in international remittances and population growth are also accounted for, and some assumptions 184 The macro-micro simulation approach has been applied to various distributional impact analyses of economic crises, such as in the analysis of the economic crisis in Brazil in 2016-17 by Skoufias, Nakamura, and Gukovas (2017). 185 See World Bank (2022) for the details of the surveys and poverty measurement methodologies based on them. 186 The HIES data collection in some countries continued for a few months after the COVID-19 outbreak in early 2020, and the employment and welfare data for some individuals in the sample may already incorporate the impact of the COVID-19 shock. In such cases, the COVID-19 impacts reported in this note may be overestimated. 187 To do so, a multinomial logit model is employed on all working-age individuals, separately for low and high skill levels. Each individual must choose from five alternatives: being inactive, unemployed, or being in one of three economic sectors (agriculture, industry, or services). 134 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE regarding non-labor income made.188 In particular, capital income is assumed to grow at the same rate as real GDP while other non-labor income is constant in real terms at the baseline level (e.g., social transfers). Finally, simulated household income changes are converted to consumption changes based on each household’s income- consumption ratio at the baseline. Poverty rates are estimated based on the simulated household consumption per capita using international poverty lines. The simulation model attempts to replicate macro-changes at the micro-level (i.e., individuals and households in the HIES data). The key macro-level inputs used in the simulations are sectoral GDP, employment, and remittances, all calculated as real changes between 2019 and 2020. Given that employment projections for 2020 are not available in most countries, sector GDP-employment elasticities (estimated from historical data) are applied to the available GDP growth projections to generate changes in employment by sector.189 Although the simulations results already capture price changes as reflected in real GDP growth, household consumption baskets may face different inflation than the general inflation measured by the consumer price index (CPI).190 This possibility is accounted for by adjusting poverty lines for additional inflation (either +1% or +2%) when measuring poverty (see background note for more detail). Figure A-21: Modeling process Baseline Simulation Assessment of impacts Imput HIES 2019 Macro projections Prices Estimate Predict Adjust Change in labor force status Labor force status model Change in real earnings Income and consumption Output Earnings equation Change in non-labor income Remittances Change in remittances Results Population growth Poverty measures Source: Authors’ work based on Olivieri et al. (2014). The simulation results presented in the following sections are based on a three-sector model, which includes agriculture, industry, and services. In addition, given the importance of the tourism sector in the PICs and the fact that it has been one of the hardest hit sectors by the pandemic, we estimate a four-sector model that distinguishes tourism from other services. Tourism GDP and employment trends are calculated based on data from the World Travel and Tourism Council (WTTC) reports. Due to limited data availability, this four-sector model is estimated only for Vanuatu, Fiji, and Kiribati. The macro-microsimulation analysis hinges on various assumptions that impose limitations and caveats for the interpretation of the results. Key assumptions are summarized below. 188 Data on international remittances come from the World Bank KNOMAD team. Population data come from the United National World Population Prospects 2019. 189 Employment trends used for the elasticity calculations come from ILOSTAT/WDI database for Vanuatu, Fiji, and Samoa and from the national account report for RMI. Kiribati’s employment trend is calculated based on the 2006 and 2019/20 HIES. 190 This might occur if there is a difference in food and non-food inflation rates between the baseline and target years. For example, if food inflation has outpaced non-food inflation. 135 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Table A-8 Key assumptions and limitations in the macro-micro simulations approach Category Assumption • The quality of estimations from the model depends on the nature and accuracy of the data underpinning the exercise, such as the macroeconomic projections. In addition, the lack of availability of more disaggregated projections constrains the ability to account for heterogeneity within each sector. • Employment changes between 2019 and 2020 are estimated based on the Macro projections historical elasticities between GDP and employment changes. It assumes a strong assumption that elasticities during the pre-crisis period are applicable to the period with COVID-19 shocks. • Due to the lack of availability of sectoral GDP projections for 2021, the macro- microsimulation only analyzes the very short-term COVID-19 impacts in 2020. It is possible that household welfare deteriorated more in 2021. • The simulation model assumes that the structure of labor markets and household incomes and their relationships with demographics remain constant, not allowing for any changes over time or between scenarios. It is possible that COVID-19 shocks have altered their relationships. Labor market structures • The model assumes that changes in labor market conditions are proportional to the projected change in outputs, based on the estimated past relationship between output and employment. This method implicitly assumes stable relationships between outputs, demand for labor, and labor earnings. The model does not allow for geographic mobility of factors (labor or capital) across time Geographic mobility or scenarios. Thus, all individuals are assumed to remain at their place of origin, even if they experience a change in economic sector or employment status. The model is limited in its ability to account for shifts in relative prices between different sectors of the economy resulting from the shock. Although the poverty impact of shifts in Price effects the price of food relative to other prices is taken into account, other potential sources of price impacts are ignored—for example, the general equilibrium effect of a change in the terms of trade between agriculture and other sectors. To provide poverty projections, household incomes must be converted into consumption Income to consumption using the assumption that a household’s propensity to consume is constant over time and ratios across scenarios. 136 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE ANNEX 2.3 PIC-9 fiscal measures in response to COVID-19191 PIC-9 governments undertook significant fiscal stimulus measures to mitigate the economic impact of the pandemic. On average, the PIC-9 governments spent about 13.2 percent of GDP between January 2020 and September 2021. More than half of the spending, equivalent to 7.6 percent of GDP, was on non-health related measures which included economic support to households and businesses. Spending on health-related measures (5.6 percent of GDP) included spending to boost health infrastructure to support early detection and prevention of COVID-19, ramping up quarantine facilities, providing clinical management of patients, and vaccine rollout. The size of the fiscal measures varied significantly across the PIC-9 but in most cases was above the average for both structural and aspirational peers (Figure 7). The largest fiscal responses—equivalent to 10- 30 percent of GDP—were seen in the smallest PIC-9 countries and in those nations that benefited from elevated fishing revenues prior to the pandemic (Tuvalu, Nauru, RMI, FSM, and Kiribati). Across the Pacific, but particularly in these countries, substantial spending was required for new quarantine facilities, laboratories, cold chain and vaccine storage facilities, medical equipment, and additional staff and overtime. RMI, FSM and Palau also benefited from substantial support via the US Government’s Coronavirus Aid, Relief, and Economic Security (CARES) Act 2020, which provided unemployment payments to affected workers as part of these countries’ COFA with the US (see paragraph 4). However, the unprecedented scale of the economic and fiscal crisis in Palau—with GDP and domestic revenues falling by 20 and 22 percent from FY19 to FY21—meant that the Palauan authorities had much less fiscal space to respond than their COFA neighbors. Spending in Tonga, Samoa, and Vanuatu was relatively lower, but was still equal to or above the average fiscal response in structural and aspirational peer countries. Figure A-22: COVID-19 stimulus in the PIC-9 35 30 25 20 15 10 5 0 Tuvalu RMI Nauru FSM Kiribati Palau Samoa Tonga Vanuatu Aspirational Structural peers peers Health sector Non-health sector Below the line measures Source: IMF Fiscal Monitor, country national budgets and World Bank staff estimates. COVID-19 stimulus to households was largely directed through cash transfers and reduced utility costs, and to businesses through loan forbearance and subsidized loans (Table 2). All the PIC-9 countries except RMI and Nauru introduced some form of cash transfers to support households. All seven governments targeted these cash transfers to vulnerable groups (including the poor, elderly, and beneficiaries of conditional cash transfer programs) and citizens stranded overseas, while in Tuvalu cash payments were made to all adult citizens for two months before targeting was introduced. In RMI, transfers to households were in-kind through the provision of food baskets, fishing gear and farming tools. In Nauru, public works programs were the primary mechanism to support 191 This Annex is taken from the PIC-9 PER, World Bank forthcoming. 137 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE households. Several of the PIC-9 also reduced electricity and water tariffs, lowered regulated prices of essential food items, and waived or subsidized social security contributions. Support to businesses was largely provided through loan forbearance as well as additional loans at subsidized rates. Although there were also several instances of cash injections, tax deferrals and waivers, and loan guarantees. Most measures used existing mechanisms (such as existing loan and cash transfer programs), and previously utilized channels (such as tax relief/deferments, the social security system, and public institutions). However, there were also examples of innovative new mechanisms established in response to the shocks, including wage subsidies and public works programs. Almost all the measures were time-bound (unemployment benefits in Kiribati and higher copra subsidies in RMI and Kiribati are the exceptions). In general, direct cash support to households and firms were very short term (often only a few months). While measures that provided tax relief, payment deferments, and access to credit had much longer horizons (several months to two years). Table A-9: Summary of key fiscal measures to support households and firms in the PIC-9 Category Specific Measure KIR NRU RMI FSM PLW WSM TON TUV VUT Cash-based transfers ü ü ü ü ü ü ü Public Works ü ü Social Assistance In-kind (in-kind/school feeding) ü ü Utility and financial support ü ü ü ü ü ü ü Paid leave/unemployment ü ü ü ü Health insurance support Social Insurance Pensions and disability benefits ü ü Social security contributions ü ü ü ü (waiver/subsidy) Wage subsidy ü ü Activation (training) ü Labor Market Labor regulation assessment Reduced work time subsidy Tax deferrals/relief ü ü ü ü Loan forbearance/relief ü ü ü ü ü ü ü Credit creation / subsidized Firms ü ü ü ü ü loans Cash-based liquidity ü ü ü ü Guarantees ü ü The fiscal packages were financed from a variety of sources including development grants, sovereign rents, reprioritization of spending, cash reserves and domestic and external debt. Most of the PIC-9 (except Palau and Nauru which are high-income countries) received additional grants from development partners such as the World Bank, the IMF, and bilateral partners like Australia, New Zealand, the US and the EU. Samoa, Tonga and Vanuatu also benefited from the Debt Service Suspension Initiative (DSSI) from May 2020 to Dec 2021, which created fiscal space to finance the fiscal response. Development assistance also included donations of vaccines and health equipment from COVAX and bilateral partners. In countries with substantial fishing revenues (Kiribati, RMI, FSM, Tuvalu, Nauru) and other sovereign rents (Tuvalu and Vanuatu), the measures were partially financed by these sovereign rents that remained robust during the pandemic. FSM, RMI and Palau benefited from access to the US Federal Government’s CARES Act and vaccine program. 138 SYSTEMATIC COUNTRY DIAGNOSTIC UPDATE Additional fiscal measures were introduced in 2022 following the Omicron outbreak. Most of the PIC-9 countries managed to avoid domestic COVID-19 outbreaks until 2022. However, cases increased exponentially in the region with domestic outbreaks of the Omicron variant in Kiribati, Palau, and Tonga in early 2022. In response, several of the PIC-9, including these three countries, introduced further fiscal measures to support additional health spending and limited support to households and businesses, utilizing the same mechanisms used in 2020 and 2021. 139