FIJI’S FUTURE: PROSPERITY THROUGH PEOPLE AND PRODUCTIVITY BACKGROUND REPORT Fiji Country Economic Memorandum 2025 FIJI COUNTRY ECONOMIC MEMORANDUM 1 © 2025 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Fiji’s Future: Prosperity through People and Productivity. © World Bank.” Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202- 522-2625; e-mail: pubrights@worldbank.org. 2 FIJI COUNTRY ECONOMIC MEMORANDUM Table of Contents Acknowledgments 10 Abbreviations 13 15 Chapter 1 Understanding The Current And Future Drivers Of Growth 1.1 Fiji has maintained upper middle-income status since 2014 but its potential growth is trending down 17 1.2 Achieving Fiji’s aspiration to become a high-income country will mean ambitious reforms 37 1.3 Policy priorities: Tapping into the economic dividends 49 51 Chapter 2 Seeking Stability 2.1 Volatility is built into Fiji’s economy 52 2.2 Macroeconomic policies have magnified 69 rather than reduced volatility 2.3 Policy priorities: Smoothing volatility 71 and building stability 75 Chapter 3 Raising Productivity 3.1 Fiji’s private sector will be key to achieving 76 sustained productivity gains 3.2 Fiji’s business environment does not 86 always favor the most productive firms 3.3 State ownership is pervasive in Fiji’s economy 93 3.4 Policy priorities: Creating a conducive 99 environment for business 103 Chapter 4 Enhancing Human Capital 4.1 Introduction 105 4.2 Under-investment in people’s health is 108 preventing Fiji from reaching its full potential 4.3 Skills development has been impaired by 114 low-quality education and a shortage of market-responsive vocational training 4.4 Economic growth is constrained by Fiji’s 118 ability to fully harness its talent 4.5 Policy priorities: Unlocking growth 125 by maximizing human capital Annexes 128 References 146 Boxes Box 1.1 Transforming Fiji’s agriculture sector to enhance growth, food security, and resilience Box 2.1 Analysis of sectoral growth volatility in Fiji Using an Error Correction Model to understand the short-run dynamics of Fiji’s Box 2.2 economy Box 2.3 Fiscal rules: Objectives, types, and examples Box 3.1 Fiji Water: Putting Fiji on the global map Box 3.2 Reforms to Fiji’s administrative processes Box 3.3 The Energy Fiji Limited Experience Box 3.4 Fiji: Land Leases and Investment Box 4.1 Resolving gender barriers to promote healthy and productive lives for Fijian women Tables Table 1.1 Moderate and Ambitious Reform Targets Table 2.1 Correlation between real GDP and sectors and among sectors for surges slumps Table 2.2 Multi-year slump and surge episodes Table 2.3 Summary of fiscal rule types and examples Table 4.1 Lifestyle factors are among the main drivers of disability in Fiji Table 4.2 Temporary labor migration to Australia and New Zealand Table A.1 Overview of benchmarking criteria and country application Table A.2 Summary of Assumptions for the Business-as-Usual Baseline Scenario Table A.3 Baseline TFP drivers for Fiji (value as of 2019) Table A.4 Fiscal rule frameworks among Fiji’s peer countries Table A.5 Exchange arrangements and exchange restrictions in Fiji and peers Table A.6 Descriptive statistics of the primary variables used in the analysis Table A.7 Entry and exit rates Table A.8 Correlation between age, participation in the global market with outcome variable Table A.9 Employment share and share of skilled jobs by industry 4 FIJI COUNTRY ECONOMIC MEMORANDUM Figures Figure 1.1 Fiji has lived through coups, crises, and cyclones in the past 30 years while oscillating between lower and upper middle-income status… Figure 1.2 …resulting in a volatile economic growth pattern during 1989-2023 Figure 1.3 Fiji’s per capita growth had caught up to that of structural peers in 2017 Figure 1.4 The impact of COVID-19 has left per capita GDP at a par with its structural peers Figure 1.5 Services increasingly dominate Fiji’s economy Figure 1.6 The drivers of growth have shifted from investment to government and household consumption Figure 1.7 Relative consumption growth in lower-income households has been stronger in Fiji Figure 1.8 Low educational atainment is the most prevalent non-monetary dimension of poverty Figure 1.9 Fiji’s growth mostly outperformed its potential until COVID-19 Figure 1.10 Capital and labor have made a declining contribution to growth while the contribution of TFP has turned positive Figure 1.11 Total investment in Fiji has long been below its peers Figure 1.12 Fiji’s rate of return to capital stock is increasing at a slower pace than capital accumulation Figure 1.13 Fiji’s population growth has slowed due to falling birth rates and outward migration Figure 1.14 The growth in the share of the population of working age has tapered off Figure 1.15 Growth in Fiji’s working-age population lags behind that of its peers Figure 1.16 Women’s labor force participation rates are low, while men’s are declining Figure 1.17 Average TFP growth has improved in recent years Figure 1.18 Fiji’s TFP has lagged its aspirational peers Figure 1.19 Fiji has made improvements in all the key determinants of TFP growth... Figure 1.20 ...but Fiji lags its peers in productive capacity Figure 1.21 Fiji lags on key drivers of productive capacity Figure 1.22 Average growth in human capital is half the rate it was in the 1990s Figure 1.23 Adult survival rates in Fiji are low compared to its upper middle-income peers in the region... Figure 1.24 … as is its quality of education Figure 1.25 Fiji’s real GDP growth rate will slow under the baseline scenario... Figure 1.26 ... as will GDP per capita growth Figure 1.27 Productivity, population growth, and capital deepening will be the main drivers of baseline growth Figure 1.28 Declining returns on investment, demographics, and human capital will drive the deceleration in growth rates FIJI COUNTRY ECONOMIC MEMORANDUM 5 Figure 1.29 Both the moderate and ambitious scenarios would deliver an initial boost to GDP growth Figure 1.30 GNI per capita would reach the threshold for high-income status by 2042 under the ambitious scenario Figure 1.31 Decomposition of GDP growth under the moderate reform scenario Figure 1.32 Decomposition of GDP growth under the ambitious reform scenario Figure 1.33 Contribution of each factor to incremental GDP growth under the moderate reform scenario Figure 1.34 Contribution of each factor to incremental GDP growth under the ambitious reform scenario Figure 1.35 Poverty rates will fall under all scenarios Figure 1.36 A global high-emission scenario could see temperatures rise in Fiji by over 0.7C by 2050... Figure 1.37 …causing an annual loss of up to 6 percentage points of GDP Figure 1.38 Loss of productivity due to climate change would reduce per capita incomes under all scenarios, 2026–50 annual average Figure 1.39 The impact of climate change could delay Fiji reaching high-income status under the ambitious scenario Figure 2.1 Fiji has seen alternating periods of strong and weak growth... Figure 2.2 … and two spikes in GDP growth volatility Figure 2.3 Real GDP growth volatility is significantly above average for the region... Figure 2.4 … and higher than for most of Fiji’s structural peers Figure 2.5 Output volatility has almost doubled Figure 2.6 Final consumption volatility is significantly higher than for GDP Figure 2.7 Natural disasters can cause significant amounts of economic damage Figure 2.8 Tourism-related sectors are among the most volatile Figure 2.9 Tourism is growing but vulnerable to external shocks Figure 2.10 Sugar cane production remains important for overall output but productivity is falling Figure 2.11 Slumps and surges are more pronounced for individual sectors than the economy as a whole Figure 2.12 Export share by trade partner Figure 2.13 Fiji’s exports have become increasingly concentrated Figure 2.14 Fiji’s output is closely linked to that of its trading partners Figure 2.15 Foreign direct investment has also been very volatile 6 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 2.16 ECM Long-run estimation of the drivers of Fiji’s GDP growth Figure 2.17 ECM Short-run estimation of the drivers of Fiji’s GDP growth Figure 2.18 Budget expenditure has also been volatile Figure 2.19 Fiji has run persistent fiscal deficits for the past 30 years Figure 2.20 Public debt spiked sharply during COVID-19 Figure 2.21 Fiji’s debt has risen faster than most of its peers Figure 2.22 Fiji’s currency has remained fairly stable against the US dollar Figure 2.23 Interest rates have gradually reduced since the 1990s Figure 2.24 Credit growth has been very volatile Figure 2.25 Inflation has largely stabilized since 2000 Figure 2.26 Inflation in Fiji is lower than its peers Figure 2.27 Fiji’s real effective exchange rate has been gradually depreciating Figure 2.28 Procyclical policies are common in Fiji and its peers Figure 2.29 Fiji: Procyclicality of macroeconomic policies Figure 3.1 Productivity gains have not kept up with increasing employment among Fiji’s firms Figure 3.2 Firms are three times more likely to be importers than exporters Figure 3.3 Fiji’s mineral water exports have increased exponentially over the last two decades Figure 3.4 The Herfindahl-Hirschman Index (HHI) shows market concentration has increased slightly after an initial fall Figure 3.5 Less productive firms are generally being weeded out, but new entrants are not as productive as incumbents Figure 3.6 Inefficient allocation of resources among firms is dampening productivity growth Figure 3.7 There is a positive correlation between aggregate productivity and resource reallocation Figure 3.8 Rebounding productivity has come from within-firm improvements and the exit of less productive firms Figure 3.9 Fiji’s business regulatory environment lags most of its peers (1=low to 6=high), 2022 Figure 3.10 Fiji has enjoyed greater annual gains from trade than Mauritius (1995–2021) Figure 3.11 Fiji’s has seen a large increase in the number of imported products and varieties (1995–2021) Figure 3.12 Fiji’s logistics performance lags both its aspirational and structural peers Figure 3.13 Fiji’s shipping connectivity could be improved FIJI COUNTRY ECONOMIC MEMORANDUM 7 Figure 3.14 Trade in services in Fiji is moderately restricted Figure 3.15 Less than half of Fiji’s Businesses of State would be classified as SOEs Figure 3.16 Fiji’s state footprint extends to a wide range of sectors Figure 3.17 Compared with peers, Fiji’s BOS domestic revenues make up a relatively substantial share of GDP... Figure 3.18 …and its state presence extends into a relatively significant share of markets Figure 3.19 More than half of BOS firms are indirectly owned Figure 3.20 The state presence in competitive sectors seems to have little justification in terms of revenue or employment Figure 3.21 Among competitive sectors, tourism and telecoms have the most BOSs... Figure 3.22 …while among partially contestable sectors, finance and broadcasting are the most affected Figure 3.23 A small share of BOSs are loss-making, but the full picture is not known Figure 4.1 People of working age make up an increasing share of the population Figure 4.2 Fiji’s fertility rate has been falling steadily in recent decades Figure 4.3 Fiji faces a rising share in elderly population Figure 4.4 Fiji underperforms in life expectancy Figure 4.5 Fiji’s Human Capital Index and components Figure 4.6 The gap between healthy and overall life expectancy has increased Figure 4.7 Fiji has one of the highest shares of premature deaths from non-communicable diseases in the world Figure 4.8 Fiji is facing a rising burden from non-communicable diseases Figure 4.9 Vacancies mean the number of public sector skilled health workers do not meet SDG thresholds Figure 4.10 Fiji experienced an exodus of skilled health workers from the public health sector in 2022–23... Figure 4.11 …but most of these have remained in Fiji rather than going abroad Figure 4.12 Pre-school gross enrollment is consistently low across households of all income levels Figure 4.13 Returns to education are high, especially for completing lower secondary education Figure 4.14 Skills mismatches have worsened, with both under-education and over-education common Figure 4.15 One in five workers with secondary education still engage in unskilled jobs 8 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 4.16 The gap between healthy and overall life expectancy is wider among women Figure 4.17 Women now make up most of Fiji’s current and future doctors Figure 4.18 Blinder-Oaxaca decomposition of the gender wage gap Figure 4.19 Fiji’s female labor force participation rates are among the lowest of its peers Figure 4.20 Gender gaps in labor market outcomes tend to narrow when workers are more educated Figure A.1 Fiji’s human capital growth rate to 2050 Figure A.2 Fiji’s public investment to GDP ratio to 2050 Figure A.3 Fiji’s private investment to GDP ratio to 2050 Figure A.4 Fiji’s total factor productivity growth to 2050 Figure A.5 Fiji’s labor force participation rates to 2050 Figure A.6 Fiji’s working age to total population ratio Figure A.7 Adjusted for what they actually learn, children in Fiji can expect to receive only seven years of schooling Figure A.8 Only about half of students who start upper secondary education reach the final year Figure A.9 Educational attainment is highly unequal across income groups Figure A.10 Women are more likely to engage in skilled occupations than men FIJI COUNTRY ECONOMIC MEMORANDUM 9 Acknowledgments The World Bank greatly appreciates the close collaboration with the Government of Fiji (the Ministry of Finance, Strategic Planning, National Development and Statistics, and the Reserve Bank of Fiji, in particular) in the preparation of this report. The team would like to express appreciation for the firm-level data provided by the Fiji Revenue and Customs Service. The report was prepared by a team led by Mehwish Ashraf (Senior Economist, EEAM2), Alvaro Gonzalez (Lead Economist, EEAF2) and Angella Faith Montfaucon (Senior Economist, EECM2). It draws upon the following background notes and papers commissioned for the study: 1. Montfaucon, Angella Faith, Steven Pennings, Federico Fiuratti, and Guido Damonte. “Fiji’s Long- Term Growth: Drivers and Reform Options for Achieving Development Goals.” 2. Montfaucon, Angella Faith, and Victor Kidake Senelwa. “Determinants of Services Exports from Fiji.” 3. Montfaucon, Angella Faith, and Victor Kidake Senelwa. “Drivers of Fiji’s Productivity Growth.” 4. Melamud, Ariel. “Understanding Growth Volatility in Fiji - An Application of Error Correction Model.” 5. Doarest, Aufa, and Alvaro Gonzalez. “Growth, Competition and Reallocation Dynamics of Fijian Firms.” 6. Krishna, Victor, Branesh Prakash, Apenisa Tuicakau, Rigamoto Motufaga, and Vrinda Jogia. “The Fijian Exchange Rate: Determining the Movement and Sustainability of the Fixed Exchange Rate Regime.” The team is presented in the tables below: Chapters Team members Angella Faith Montfaucon (lead author), Steven 1. Understanding the Current and Pennings, Federico Fiuratti, Johanna Fajardo-Gonzalez, Future Drivers of Growth Animesh Shrivastava 2. Seeking Stability Ariel Melamud (lead author), Angella Faith Montfaucon Alvaro Gonzalez (lead author), Aufa Doarest, Matheus Bueno, Mehwish Ashraf, Francis Ralambotsiferana 3. Boosting Productivity Ratsimbazafy, Paul Phumpiu Chang, Angella Faith Montfaucon, Tuimasi Radravu Ulu, Socrates Kraido Majune Dung Doan (lead author), Kebede Feda, Margareta Norris Harrit, Taufik Indrakesuma, Saleshni Lalji, 4. Enhancing Human Capital Mesulame Ratu Namedre, Caroline Mary Sage, Julia Smolyar, Thomas Walker 10 FIJI COUNTRY ECONOMIC MEMORANDUM Boxes Team members Box 1.1: Transforming Fiji’s agriculture sector to enhance growth, food security, and Animesh Shrivastava resilience Box 2.1: Analysis of sectoral growth volatility Alvaro Gonzalez, Ou Nie in Fiji Box 2.2: Using an Error Correction Model to understand the short-run dynamics of Fiji’s Ariel Melamud economy Box 2.3: Fiscal rules: Objectives, types, and Ariel Melamud examples Box 3.1: Fiji Water: Putting Fiji on the global Tuimasi Radravu Ulu map Box 3.2: Reforms to Fiji’s administrative Virginia Horscroft, Christopher David Miller processes Box 3.3: The Energy Fiji Limited Experience Krishnan Nair Box 3.2: Land Leases and Investment Stamatis Kotouzas Box 4.1: Resolving gender barriers to promote Dung Doan, Margareta Norris Harrit, Taufik healthy and productive life for Fijian women Indrakesuma, Mesulame Ratu Namedre Box 4.2: Temporary labor migration to Australia Dung Doan and New Zealand Overall guidance was provided by Stephen N. Ndegwa (Division Director, EACNF), Lalita M. Moorty (Regional Practice Director, EEADR), Lars Christian Moller (Practice Manager, EEAM2), Cecile Thioro Niang (Practice Manager, EECF1) and Stefano Mocci (WBG Country Manager, EACFF). This report benefited from useful comments by David M. Gould (ex-Program Leader, EEADR), Ekaterine T. Vashakmadze (Senior Economist, EEAM2) and Ruslan Piontkivsky (Lead Country Economist and Program Leader, ESADR), Mariem Malouche (Senior Economist, EECF2) as well as from Asya Akhlaque (Practice Manager, ETIIC), Cristian Aedo (Practice Manager, HEAED), Graciela Miralles Murciego (Senior Economist, ETIMT), Judith Green (WBG Country Manager, CEAMA), Rinku Murgai (Practice Manager, EAEPV) and Ronald Upenyu Mutasa (Practice Manager, HEAH1). The team would like to thank Ishan B. Nath (Economist, Federal Reserve Bank of San Francisco) and Mehdi Raissi (Resident Representative, MCDDG, International Monetary Fund) for sharing estimates of GDP losses from climate change as well as Hector Pollitt (Senior Economist, EEAM2) for comments on climate and growth modelling and results. The report benefited from excellent research and analytical support from Tuimasi Radravu Ulu (Research Analyst, EEAM2), Victor Kidake Senelwa (Consultant, EEAM2), and Guido Damonte (Temporary, DECMG). The team appreciates valuable contribution by Matheus Bueno (Economist, EAWM2) in his role as co-Task Team Leader at the Concept stage and Marie Christine Apedo Amah (Senior Economist, EMNF1) in the post-Decision Review stage and the finalization of the report. FIJI COUNTRY ECONOMIC MEMORANDUM 11 The peer reviewers were Ekaterina Vostroknutova (Lead Economist, EMFJG), Ergys Islamaj (Senior Economist, EAPCE), Gonzalo J. Varela (Lead Economist and Program Leader, EEADR), and Samer Naji Matta (Senior Economist, EAWM2). Bridgette Hogan and Nika Asasi (both Team Assistant, EAPCF), Claudia Palic (ET Temporary, EAPCF), and Keleti Tikotani (ET Temporary, EACFF) provided excellent administrative and operational assistance. Sally Hinchcliffe (Consultant, EEAM2) edited the report. Hamish Wyatt (Senior External Affairs Officer, ECREA) and Vika Waradi (External Affairs Analyst, EACFF) provided support on communications and dissemination. Greenhouse Studio designed the report. 12 FIJI COUNTRY ECONOMIC MEMORANDUM Abbreviations AI Artificial intelligence BBR Budget balance rule BOS Business of the State BPO Business process outsourcing CPIA Country Policy and Institutional Assessment DALY Disability-adjusted life year DR Debt rule DSA Debt Sustainability Analysis EAP East Asia and the Pacific ECE Early childhood education ECM Error Correction Model EFL Energy Fiji Limited ER Expenditure rule EU European Union FBOS Fiji Bureau of Statistics FCCC Fijian Competition and Consumer Commission FDI Foreign direct investment FRCS Fiji Revenue and Customs Service GDP Gross domestic product GNI Gross national income HCI Human Capital Index HHI Herfindahl-Hirschman Index HIC High-income country HIES Household Income and Expenditure Survey ICT Information and communications technology ILO International Labour Organization IMF International Monetary Fund IPP Independent power producer iTLTB iTaukei Land Trust Board LFP Labor force participation LPI Logistics Performance Index LSCI Liner Shipping Connectivity Index FIJI COUNTRY ECONOMIC MEMORANDUM 13 LTGM Long-Term Growth Model LTGM-HC LTGM Human Capital Extension LTGM-PC LTGM Public Capital Extension LTGM-TFP LTGM Total Factor Productivity Extension MHMS Ministry of Health and Medical Services MPK Marginal product of capital MSME Micro, small, and medium enterprise NCD Non-communicable disease NDP National Development Plan OOP Out-of-pocket PALM Pacific Australia Labor Mobility PEFA Public Expenditure and Financial Accountability PIC Pacific Island Country PISA Programme for International Student Assessment PPP Purchasing power parity ppt Percentage point PWT Penn World Table R&D Research and development RBF Reserve Bank of Fiji RCP Representative Concentration Pathway SDG Sustainable Development Goal SOE State-owned enterprise STRI Services Trade Restrictions Index TC Tropical cyclone TFP Total factor productivity TVET Technical and vocational education and training UMIC Upper middle-income country UNCTAD United Nations Conference on Trade and Development VAT Value-added tax WB World Bank WDI World Development Indicators WEO World Economic Outlook WHO World Health Organization WTO World Trade Organization 14 FIJI COUNTRY ECONOMIC MEMORANDUM Understanding Chapter 1 the current and future drivers of growth Fiji has weathered a long history of economic shocks and, with a decade of political stability behind it, has ambitions to become a high-income country. Past policies have supported its transition to an upper middle- income country, driven by capital deepening, population growth and improvements to human capital, and increased total factor productivity (TFP) in recent years. Services, and particularly tourism, have become the engine of the economy, with services accounting for roughly 80 percent of total output growth in the past 30 years. But Fiji now faces demographic headwinds with the potential of an aging population and a declining share of working-age adults, combined with a changing climate that could have a long-term impact on investment and labor productivity. Sticking to business-as-usual will not deliver the growth it needs; achieving its ambition will mean ambitious reforms targeting TFP growth and human capital development through increased investment, health and education policies, and greater labor force participation, especially among women. Summary Past policies, and a decade of political stability, have fostered a period of strong and inclusive growth. Fiji has encountered challenges in its growth trajectory since gaining independence in 1970. However, it achieved upper middle-income country (UMIC) status in 2014. Over the past decade, growth has accelerated, interrupted only by natural disasters and COVID-19. This growth coincided with the country’s re-engagement with the international community following the first successful democratic elections held in 2014. As Fiji has evolved into a leading tourism destination, the services sector has overtaken agriculture and manufacturing to become the primary driver of the economy. Rising prosperity has been largely inclusive, with earnings from tourism and construction, increasing public sector wages, and remittances boosting consumption. Between 2000 and 2015, growth among lower-income households outpaced the national average. Yet, Fiji’s potential growth has trended down over the past three decades as both physical and human capital accumulation have decelerated. Capital deepening has served as the primary long- term growth driver. However, increased investment has resulted in diminishing rates of return, indicating a decline in the quality of public spending in recent years. Additionally, population growth is decelerating. While the share of the working-age population expanded by approximately 12 percent between 1991 and 2022, this growth is now slowing, while the population aged 65 and older continues to increase steadily. Labor force participation (LFP) rates were below 60 percent in 2021, with the rate for women stagnating at 40 percent, the lowest among Fiji’s peers. After decades of underperformance, total factor productivity (TFP) has emerged as a key driver of recent growth, averaging 0.8 percent per year during 2013–2019, compared to 0.3 percent during 1991–2012. FIJI COUNTRY ECONOMIC MEMORANDUM 15 Fiji’s ambition now is to become a high-income country (HIC), pursuing a more inclusive growth and achieving significant poverty reduction. The National Development Plan (NDP) targets a four-fold increase in per capita income by 2050, as well as eliminating poverty. Achieving this will mean doubling its historical growth rate to 4–5 percent of GDP per year. Without major reforms, Fiji will not achieve the sustained rapid growth it needs to meet this target. Under a “business-as-usual” baseline scenario, the World Bank’s Long-Term Growth Model predicts gross domestic product (GDP) growth rates will slowly fall, averaging 2.9 percent over 2024–50, reducing per capita growth to 2.3 percent. Under this scenario, growth will mostly be driven by TFP growth, capital deepening, and population growth. Over 60 percent of the forecast declining growth rate would be due to forecasted declines in the marginal product of capital. The next main contributors would be demographics and slowing human capital growth. An ambitious package of reforms could see Fiji reach its goal by 2042. Under an ambitious scenario aimed at boosting the key drivers of growth to levels comparable to regional HICs, average real GDP growth is predicted to increase to 5.7 percent over 2024–50. A moderate scenario would see average real GDP growth of 4.1 percent annually. Under both scenarios, GDP growth would mainly be driven by increases in TFP, with the effect amplified over time by capital accumulation. The largest boost to incremental growth in the long term would come from reforms targeting human capital improvement— particularly increasing adult survival rates and improving the quality of education. Reforms to increase public and private investment and improve its quality (i.e., the Infrastructure Efficiency Index) would make a notable impact on incremental growth. 1. These reforms would also substantially reduce poverty rates and inequality. Fiji’s poverty rates would fall from 47 percent in 2025 to 13 percent in 2050 under the business-as-usual scenario, 5 percent under the moderate scenario and 1 percent under the ambitious one closer to the NDP target of eliminating poverty by 2050. Climate change will significantly impact long-term growth. Projections indicate that Fiji could face an annual GDP loss ranging from 2.5 to 6 percentage points (ppts) over 2024-50 under a high-emissions global scenario, and 0.9–3.0 ppts under a more realistic medium-emissions scenario. Climate change will dampen the positive effects of both the ambitious and moderate reform scenarios, through loss of productivity reducing per capita incomes. 16 FIJI COUNTRY ECONOMIC MEMORANDUM Accelerating Fiji’s growth will mean promoting investment, boosting private sector productivity, and focusing on labor, education, and health reforms. Supported by sustained efforts to maintain macroeconomic stability, and complemented by climate adaptation, Fiji has the potential to achieve its development goals in an inclusive way. 1.1 Fiji has maintained upper middle-income status since 2014, but its potential growth is trending down 1. Fiji is a small island nation in the South Pacific Ocean with the second largest economy among the Pacific Island Countries (PICs). It has an area of 18,000 square kilometers spread over 330 islands, of which about 110 are inhabited. Most of its 900,000 people live on two large islands, Viti Levu and Vanua Levu. Fiji is also one of the remotest countries in the world—New Zealand is 2,000km away, Australia 3,000, and the United States 5,000. Its economy is second only to Papua New Guinea in the region, with substantial services and manufacturing sectors. It is a hub for re- exports to the rest of the Pacific (World Bank 2017a). 2. Fiji’s economic history is closely tied to two main types of shocks: natural and political (Figure 1.1). Fiji is on a tropical cyclone (TC) belt, and on average one cyclone passes through Fijian waters each year.1 The country has also experienced three coups d’état, in 1987, 2000, and 2006. However, it has been politically stable since 2014 with three successful elections held so far. 3. This chapter analyzes Fiji’s growth performance and potential and identifies the constraints to achieving its development goals. The analysis considers Fiji’s economic development from 1989 to 2022, where data permit, relative to structural and aspirational peers (see Annex A).2 It first analyzes historical and current trends, drivers, and constraints to growth and then examines the pathways for future growth and suggests policy priorities for achieving sustainable and resilient long-term growth. 4. Fiji has experienced a mixed growth trajectory since independence. In the 1970s and early 1980s, Fiji was considered a role model of development for other PICs, demonstrating steady improvement in social development and public sector efficacy and effectiveness (ADB 2015). The recession that followed the political turmoil of 1987 quickly erased the limited gains in income it had achieved thus far (World Bank 1995). Between 1989 and 2010, real GDP growth averaged 2.4 percent, or 1.6 percent per capita, during this period of political instability (Figure 1.2). 5. Fiji started seeing an acceleration in the last decade, interrupted only by natural disasters and COVID-19. From 2010, Fiji’s economy has turned around, with growth averaging 3.7 percent, or 3.5 percent per capita, as the country re-engaged with the international community following the democratic election in 2014 (IFC 2022). Tourism surged, with visitor arrivals rising from 542,000 in 2009 to about 900,000 in 2019 and accounting for 23.2 percent of GDP and 30 percent of employment (see Chapter 2 for more details). However, COVID-19 coincided with three TCs, causing an economic recession of unprecedented scale (Figure 1.2), with the economy contracting cumulatively by 21.9 percent during 2020–21—the fourth worst globally (World Bank 2023a). The country has since recovered fully, with a cumulative growth of 31.5 percent in 2022–24, driven by tourist arrivals exceeding pre-pandemic levels. 1 Most recently, TC Rae (Category 2) entered Fiji waters in February 2025. 2 Structural peers are Belize, Jamaica, Tonga, and Samoa. Aspirational peers are Barbados, Maldives, St. Lucia, and Mauritius. These were differentiated based on levels of development (GDP per capita). Other criteria are a) similar major revealed comparative advantage (tourism receipts); b) size of internal market (population), as it influences scale and diversification opportunities; and c) access to foreign markets. FIJI COUNTRY ECONOMIC MEMORANDUM 17 Figure 1.1: Fiji has lived through coups, crises, and cyclones in the past 30 years while oscillating between lower and upper middle-income status… Source: World Bank (WB) staff illustration. 6. A growth spurt in the last decade helped Fiji close the gap with its peers (Figure 1.3). Fiji was a lower middle-income country until 2008. It first became an upper middle-income country in 2009 but reverted to lower middle-income status in 2012 (ADB 2015; Figure 1.1). During 2013–19, real GDP per capita continued to increase, surpassing Fiji’s structural peers, partly aided by slower population growth. In 2014, Fiji’s gross national income (GNI) reached US$4,750 per capita, and it returned to the UMIC bracket. As of 2021, the impact of COVID-19 meant Fiji’s GNI had fallen slightly to US$4,500 per capita, and its GDP per capita was at a par with structural peers (Figure 1.4). 18 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 1.2: … resulting in a volatile economic growth pattern during 1989-2023. (Real GDP growth in percent) Figure 1.2: ... resulting in a volatile economic growth pattern during 1989-2023. (Real GDP growth in percent) 25.0 Election 20.0 COVID-19 Election Election Election Constitutional Crisis 15.0 Election followed by Election Election coup 10.0 Election 5.0 - 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 (5.0) (10.0) TC Kina Coup GFC TC Evans TC Winston (15.0) TC Tomas (20.0) TC Keni Source: World Development Indicators (WDI). 1.1.1. Services, and particularly tourism, have become the main engine of growth 7. The sectors driving economic growth have changed from agriculture and manufacturing in the 1980s and 1990s, to services in 2010s. Between 1990 and 2022, real value added in services grew by 2.4 percent per year on average, compared to 2 percent in manufacturing and 0.9 percent in agriculture. As a result, services expanded from 71 percent of GDP in the 1991–99 period to 77 percent during 2013–19, while agriculture’s share declined from 13 to 8 percent, and industry’s stayed stable at around 16 percent (Figure 1.5). This was primarily due to declines in the sugar and garment sectors following the erosion of two trade preference agreements: the South Pacific Regional Trade and Economic Cooperation Agreement with the European Union (EU), Australia, and New Zealand; and the Multi Fiber Agreement with the United States. As a result, over the last 30 years, roughly 80 percent of total output growth has come from services. 8. Fiji has become the leading tourism destination in the region, as well as a regional hub. Fiji attracts more than 40 percent of all international arrivals to the PICs and has become one of the 20 most tourism-dependent countries in the world.3 Tourism-related industries were the fastest expanding services sectors between 1991 and 2019: restaurants and accommodation grew by 4 percent on average per year, transport and communications by 3.6 percent, and electricity and water by 6.2 percent, while the construction industry grew by 4.4 percent. Fiji has also become a maritime hub for other PICs (Tuvalu, Samoa, and Tonga), which largely depend on transshipment via Fiji for their trade. Re-exports increased around seven-fold from 2000 to 2012 as a result, after which they remained relatively stable until 2022. 3 Source: World Development Indicators (WDI) based on 2019 tourism receipts to exports and to GDP data. FIJI COUNTRY ECONOMIC MEMORANDUM 19 Figure 1.3: Fiji’s per capita growth had caught up to that of structural peers in 2017 Figure 1.3: Fiji’s per capita growth had caught up to that (GDP peers in in per capita of structural constant 2015 US$; index: 1989=100) 2017 (GDP per capita in constant 2015 US$; index: 1989=100) 260 240 220 200 180 160 140 120 100 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Fiji Structural Peers Aspirational Peers Figure 1.4: The impact of COVID-19 has left per capita GDP at par with its structural peers (GDP Figure 1.4: The impact per capita of COVID-19 in has left constant per capita GDP2015 US$) at a par with its structural peers (GDP per capita in constant 2015 US$) 14000 12000 10000 8000 6000 4000 2000 0 1991-2022 1991-1999 2000-2012 2013-2019 2020-2022 Fiji Structural Peers Aspirational Peers Source: WDI. 20 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 1.5: Services increasingly dominate Fiji’s economy (Gross value added as percent of GDP in constant prices) Figure 1.6: The drivers of growth have shifted from investment to government and household consumption (Contribution to GDP in constant prices, percent) Source: WB staff calculations based on Fiji Bureau of Statistics (FBOS) data. Note: NPISH = nonprofit institution serving households. 9. Sugar production once dominated Fiji’s agricultural output, but the loss of international markets has shrunk the sector. On independence, in 1970, sugar accounted for 13.5 percent of Fiji’s GDP, 27 percent of employment, and 34 percent of exports. Today, it accounts for only 1.2 percent of GDP, 4 percent of employment, and 5 percent of exports. Between the late 1990s and about 2010, Fiji’s sugar exports were granted preferential access to the EU, allowing them to fetch prices well above those in international markets. For example, sugar producers in Fiji were getting US$369 per ton in 2000, compared to a world price of US$199 per ton. Since 2009, the price premium for Fiji’s sugar has been withdrawn although government support for producers remains (see Box 1.1). Consequently, the area under sugarcane has declined from 45,000 hectares (ha) in 2000 to 34,000 ha in 2021. Some, but not all, of this land has been taken up to produce fresh fruits and vegetables. There has also been a shift towards poultry and livestock production, which has grown rapidly— increasing by over 50 percent between 2010 and 2021. FIJI COUNTRY ECONOMIC MEMORANDUM 21 10. The manufacturing sector in Fiji was built during the 1970s and grew rapidly in the late 1980s and the 1990s. This was accompanied by the development of the export-oriented garment industry, driven by preferential trade agreements. The Government encouraged foreign direct investment (FDI) in the industry through tax-free factories. Since 2000, the garment industry has rapidly declined as trade preferences and tax concessions were phased out. Political instability contributed to declining investment and the departure of entrepreneurs, leaving the industry struggling. The loss of competitiveness against cheaper and more productive manufacturing workers in Asia also hurt the industry (World Bank 2017a). The garment companies that remain in operation have had to reorient themselves and the sector now caters primarily to the high-value, low-volume segment. In the mid- 1990s, mineral water emerged as a sunrise sector under the leadership of a single company and has since become one of Fiji’s key exports (ADB 2015; Box 3.1). 11. Fiji’s GDP growth drivers have shifted from investment to domestic demand in recent years. Expansionary investment, largely in public infrastructure, initially underpinned the increase in output. During 1991–99, GDP growth was mainly driven by investment, which was responsible for an estimated 63 percent of the total (Figure 1.6). FDI, especially in the tourism sector, has shown impressive growth since 1980s, but political instability and a small domestic economy have limited manufacturing-related investments (Makun 2018). Investments have thus been increasingly directed toward non-tradable sectors with limited spillovers to overall productivity growth. By 2013–19, investments were contributing negatively to growth while government and household consumption took the central role. 12. Earnings from tourism and construction, rising public sector wages, and remittances finance most of the private consumption. Remittances accounted for 4 percent of GDP during 1993–2019, mostly from Australia, Canada, New Zealand, the United Kingdom, and the United States. Seasonal work in Australia and New Zealand is also popular, especially for rural Fijians (IOM 2019). 13. Net exports contributed only marginally to growth, mainly due to domestic demand, as exports have largely been used to fund imports. Export performance remained modest while the rapid increase in domestic demand drove a surge in imports. Net exports contributed 8 percent to the change in total GDP in the 1991–99 period, before decreasing to 6 percent during 2000– 12, and turning negative in 2013–19 (Figure 1.6). During 2020–22, net exports made an oversized contribution to GDP, mainly due to COVID-19 dampening imports. Box 1.1: Transforming Fiji’s agriculture sector to enhance growth, food security, and resilience4 Fiji’s agriculture sector continues to be held back by support for the sugar sector. Following the loss of Fiji’s preferential access to international markets for its sugar exports in 2009, the Government of Fiji stepped in to maintain returns to sugar farmers through a mix of duties, taxes, and subsidies even as the sector’s contribution to GDP fell to 1 percent.2 As a result, a disproportionately large share of resources remain tied up in sugar production and processing. This imposes economic costs by tying up labor, investment, and human capital, curbing other sectors and curtailing more productive activities within the agriculture sector. Similarly, continued high levels of protection for dairy and beef producers limit the expansion of the more dynamic poultry producers. Failure to adjust to changing competitiveness and market conditions has distorted production, leading to a growing reliance on food imports. Increased urbanization, higher incomes, and growing tourism have resulted in changing consumer demand with a larger proportion of disposable income going to fruits, vegetables, livestock products, and cereals. 4 For a sector deep dive on agri-logistics see IFC (2022). 5 Sugar subsidies averaged 1 percent of GDP over 2018–21 (World Bank 2023a). 22 FIJI COUNTRY ECONOMIC MEMORANDUM The failure of the agriculture sector to take advantage of these opportunities has contributed to increasingly adverse agriculture trade balance. Net exports of food and agricultural products have consistently fallen, turning negative in 2008. Pork is the only livestock product in which Fiji has a net positive trade balance. Moreover, agriculture is likely to be severely impacted by climate change. Recent extreme weather events have shown that agricultural incomes are highly vulnerable, as are rural infrastructure and dwellings. Land lost to sea-level rise will doubly affect agriculture: directly, as land becomes uncultivable, for example due to salinization, and indirectly, as agricultural land is converted to residential or industrial use. As agro-ecological conditions change, agriculture needs to adapt. Simple low-cost options that improve productivity and increase resilience to climate change include mulching and multiple cropping, and improved farmer education. Longer-term solutions could include building agricultural systems that will be resilient to events such as short periods of floods or droughts, saline intrusion, temperature extremes, erosion, altered patterns of pests and diseases, and changes in growing seasons. Other solutions will involve more substantial and sustained investments, such as the development of new climate-smart crop varieties at the regional or national level; higher design standards for agricultural assets (such as storage sheds and livestock shelters) to help reduce storm damage; or insurance mechanisms to address residual risks that require considerable government involvement, including premium subsidies, and product development and loss assessment. Some strategic shifts are needed in the agriculture sector. Production patterns need to be determined by consumer demand and market opportunities and protective trade and market support practices need to be curbed. This will strengthen the incentives to use the available resources more efficiently, raising productivity and incomes. It will also stimulate the use of technology suitably adapted to local conditions, enhancing the resilience of production systems so they can ensure food and nutrition security in the face of natural disasters. Agricultural growth, food security and climate resilience can be enhanced through a two-pronged strategy: 1. Market-oriented production, capitalizing on demand for high-value fresh foods, as well as traditional root crops, from a growing urban population in the region and from the tourism industry: • Domestic production is viable and desirable. High-value fruits and vegetables are largely imported from Australia and New Zealand. Transport and packaging costs are high, logistics are complicated, losses from spoilage and wastage are substantial, and the use of plastic and paper packaging creates solid waste. Small-scale local production of high-value products needs to be further promoted. Maldives has demonstrated that well-managed local production is economically and financially feasible. • In the short to medium term, the best potential is for the production of fresh vegetables and leafy products under protected conditions. Protected production is highly suited to the conditions in Fiji. Efficient and low-cost technologies are available off-the-shelf, the payback period for such investments is quick, and essential inputs such as seeds and fertilizers are available. Moreover, such facilities can be designed to withstand TCs and other extreme events. • Shorter supply chains and local production would have positive environmental impacts. Protected production facilities minimize the use of fresh water as well as polluting inputs such as fertilizers. Local production would facilitate the reuse of packing material, reducing solid waste, particularly of plastic—an ever-growing problem in Fiji. FIJI COUNTRY ECONOMIC MEMORANDUM 23 • Fiji also has a strong competitive advantage over other PICs in the production of various traditional foods. Fiji’s better soils and more manageable water resources make it competitive in the production of traditional root crops such as dalo, yaqona, and cassava. Current cultivation practices involve traditional low-input, low-output production techniques and there is substantial potential to enhance primary production and processing. 2. “Right-sizing” the sugar sector into a smaller, more sustainable, and green sugar industry: • The sugar sector faces several inter-connected challenges which have diverse roots: technical, institutional, geographic, agro-climatic, and policy-induced as well as external factors (a slump in global demand and the rise of more competitive producers). There is, therefore, an urgent need to develop and implement a reform program that fixes the structural problems in the sugar economy and lays the foundation for more sustainable growth while addressing external pressures and climate change. • Upgrading and “greening” the sugar sector will involve a set of targeted initiatives. The objectives would be to consolidate production in the more productive areas/farms, enhance yield, promote diversification (e.g., very high polarization sugar), and lower costs. This will involve customized interventions, ranging from profiling existing farms (with associated exit and migration plans or diversification plans); improved research, extension and modern inputs; incentivizing improvements to cane quality through appropriate payment systems; and more effective harvesting and transport systems. Fiji could benefit from the experience of Mauritius which has restructured its sugar industry. The Government can play a catalytic role in aligning objectives, strengthening incentives, and creating an enabling environment for Fiji’s agriculture sector. This will include a review and revision of the current policy framework to improve alignment between policy goals and instruments to obtain better development outcomes. It will also entail a reassessment and re-purposing of public expenditures. Most of the current public expenditure takes the form of subsidizing private goods—e.g., fertilizers and herbicides— and offering minimum price support. These distort technical as well as allocative efficiency. Following international good practice, it would be better to redirect expenditure into productive public goods such as research, innovation, and extension and rural transport/ logistics that stimulate the rural economy.6 6 See Chapter 5 (Viability of Sugar Industry Support) in the 2023 Fiji Public Expenditure Review (World Bank 2023a) for a detailed analysis. 24 FIJI COUNTRY ECONOMIC MEMORANDUM 1.1.2. Growth has been pro-poor 14. Overall GDP grew more rapidly than household consumption, but growth has broadly favored low-income households. Fiji’s GDP grew more rapidly than household consumption between 2000 and 2015. While the annualized growth rate of real GDP per capita was 1.6 percent, the annualized growth rate of mean household consumption per capita was 0.8 percent. Figure 1.7 shows that lower- income populations increased their consumption at a faster pace than the average and median Fijian since 2008. The 2000–15 period can be largely characterized as pro-poor, with the most substantial gains realized by those at the lower end of the income distribution. Figure consumption Figure 1.7: Relative 1.7: Relative consumption growth growth in lower-income in lower-income households has been stronger in Fiji households has been stronger in Fiji (Annualized (Annualized ofconsumption growthof growth per capita consumption per capita,inpercent) percent) 2.0 1.87 1.63 1.40 1.5 1.12 1.0 0.82 0.79 0.69 0.5 0.76 0.0 -0.48 -0.5 -1.0 2002-2008 2008-2013 2002-2013 Bottom 40 Median Mean Source: WB staff calculations using the Global Monitoring Database and the World Economic Outlook. Consumption data for Fiji come from the Household Income and Expenditure Surveys (HIES). Note: The figure presents annualized growth rates of consumption per capita expressed in 2017 purchasing power parity (PPP) terms for the bottom 40 percent of the population, the median, and the mean of the population. FIJI COUNTRY ECONOMIC MEMORANDUM 25 Figure 1.8: Low educational attainment is the most prevalent non-monetary dimension of poverty (Share of people living in deprived households in percent) Education enrollment Primary education attainment 25.3 Secondary education attainment 65.9 Improved sources of drinking water Improved sanitation facilities Access to electricity 0 50 100 2008 2013 2019 2021 Source: WB staff calculations based on data on deprivation in access to services and schooling include Multiple Indicator Cluster Survey for 2021, and the HIES for 2008, 2013, and 2019. Note: Estimates are based on harmonized definitions of deprivation. The data reported refer to the share of people living in households deprived according to each indicator. No data = not available. 1/Primary education attainment: no adult (15+) has completed primary education; 2/Secondary education attainment: no adult (15+) has completed secondary education; 3/Educational enrollment: at least one school-age child up to the (equivalent) age of grade 8 is not enrolled in school; 4/Drinking water: no access to limited-standard drinking water; 5/Sanitation: no access to limited-standard sanitation; 6/Electricity: no access to electricity. 15. While most indicators of multidimensional poverty are low and on a declining trend, adult educational attainment presents a significant challenge. Fiji’s overall incidence of multidimensional poverty is 1.6 percent.7 While slightly higher than Tonga (0.4), Samoa (1.3), and Marshall Islands (1.1), this is far below Solomon Islands (41.9) and Vanuatu (19.9). Fiji’s score is mainly due to widespread access to services such as sources of drinking water and sanitation facilities, as well as primary school-age attendance rates. However, 66 percent of Fijians live in households where no adult has a secondary education, a rate which has increased over time, from 25 percent in 2008 (Figure 1.8). This limits the earning potential of lower-income groups, posing a substantial barrier to overcoming poverty in both monetary terms and its broader socio-economic aspects. 7 The multidimensional poverty measurement is calculated based on WB harmonization of the most recent HIES (see Figure 1.8 for source details). It uses the following deprivation indicators: a) monetary poverty: a household is deprived if income or expenditure, in 2017 PPP terms, is less than US$2.15 per person per day; b) educational attainment: a household is deprived if no adult (grade 9 equivalent age or older) has completed primary education; c) educational enrollment: a household is deprived if at least one school-age child up to the (equivalent) age of grade 8 is not enrolled in school; d) electricity: a household is deprived if it does not have access to electricity; e) sanitation: a household is deprived if it does not have access to limited- standard sanitation; and f) drinking water: a household is deprived of drinking water if it does not have access to limited- standard drinking water. 26 FIJI COUNTRY ECONOMIC MEMORANDUM 1.1.3 Fiji’s potential growth has slowed as physical and human capital accumulation have decelerated 16. Although actual growth has outperformed it in recent years, Fiji’s potential growth has trended down during the past three decades and further slowed in the years running up to the pandemic. Fiji’s growth was 0.2 ppts above potential during 1991–2019 (Figure 1.9), driven by strong but decelerating growth in physical and human capital and more recent growth in TFP. Capital grew by 8.1 percent in the 1990s but only by 3.7 percent in the 2000s and 3.0 percent in the mid-2010s (Figure 1.10). Similarly, human capital growth slowed from 2.7 percent in the 1990s, to 2.2 percent in the 2000s, and only 0.1 percent in mid-2010s. These contributed to the downward trend in potential GDP. Labor’s contribution has been limited, turning negative in the last decade. The output losses from COVID-19 exacerbated the slowdown in the contribution from labor (both in quality and quantity from learning and job losses) and capital accumulation and has led to growth falling to 0.6 ppts below potential. Investment and Capital 17. Capital deepening has been the main long-term driver of growth, although investment levels have been below peers. Domestic savings increased from 10.1 percent of GDP in 1989 to 18.1 percent of GDP in 2019, while FDI more than doubled from 2.6 percent of GDP to 5.9 percent during the same period. In the last decade, Fiji has been able to attract greater levels of FDI than its structural peers, closer to those of its aspirational peers. Yet, even with these sizeable FDI flows, capital formation in Fiji has mainly been domestically sourced, with domestic investment twice that of structural peers and at par with aspirational peers. This notwithstanding, total investment averaged 17 percent of GDP during 1989–2019, below the Growth Commission’s benchmark of 25 percent of GDP and below its peers on average over the last decade (Figure 1.11). 18. Fiji has historically enjoyed good provision of infrastructure (Table A.3) supported by increased public expenditure and sophisticated public governance. Private investment has remained consistently high, averaging 13.6 percent of GDP over the past decade. In contrast, public investment has averaged 4.9 percent during the same period. Nonetheless, Fiji saw an increase of capital outlays from 6–8 percent of GDP during 2009–13 to 10 percent of GDP on average since 2014. The bulk of this capital expenditure is allocated to infrastructure. Moreover, Fiji’s lower levels of reliance on official development assistance compared to its regional peers reflects a high degree of public infrastructure expenditure sophistication. 19. However, it lacks a sound public investment management system to effectively and efficiently allocate resources. Recent years have seen a progressive deterioration of the quality of capital spending in Fiji—in terms of strategic and framework-driven planning and expenditure allocation— exacerbated by COVID-19. As capital spending increased, budget execution issues became more pronounced. Other challenges include a lack of a strategic planning framework to inform investment priorities, limited coordination between government entities, weak substantive appraisals, and lacking systematic maintenance allocations. In 2020, the International Monetary Fund’s (IMF) Public Expenditure and Financial Accountability (PEFA) assessment downgraded Fiji’s ranking for public investment and institutional capacity (World Bank 2023a). 20. These challenges have slowed down the rates of return to capital stock (Figure 1.12). This fall partly suggests that Fiji lacks a “whole-of-life” approach to investment planning that integrates maintenance funding.8 For instance, more than half of Fiji’s capital expenditure on transport is expected to continue to be used to remedy maintenance backlogs, leaving limited budget space for new capital investments. This is exacerbated by Fiji’s vulnerability to natural disasters, with the resulting asset replacement costs and economic losses estimated to be as much as 5–10 times annual GDP (World Bank 2023a). 8 Each dollar spent on preventive maintenance could save five in future infrastructure reconstruction. FIJI COUNTRY ECONOMIC MEMORANDUM 27 21. The 2023 Public Investment and Management Assessment evaluated planning and allocation functions in Fiji and highlighted four priority areas: national and sectoral planning, project appraisal, maintenance funding, and project selection (World Bank 2023a). Work on three priorities has started. In April 2023, GoF has institutionalized the appraisal process for projects worth FJD 500,000 and above using publicly available standard assessment criteria under the Public Sector Investment Programme Guidelines. This project appraisal and selection process is being rolled out through the budget in a phased manner. In May 2023, the GoF also published its National Infrastructure Investment Plan shortlisting 31 investment-ready, priority projects across road, energy, water, air, port, and urban sectors valued at USD1.8 billion (31.5 percent of GDP). However, Fiji lacks a standard methodology for maintenance of infrastructure projects and does not systematically account for maintenance costs in budgets to prolong the life of assets. Demographics and Labor 22. Population growth is expected to continue to slow. After growing by an average of 0.7 percent between 1991 and 2012, the population growth rate fell to only 0.09 percent per year during 2013–19 and has dipped into decline (Figure 1.13). The 1991–2021 average is 0.5 percent. Slowing population growth is common among developing economies as they progress towards becoming high-income ones. This population trend is expected to persist: fertility rates have declined from 3.4 to 2.5 live births per woman over 1991–2021 while net migration (the difference between the number of people entering a country and the number leaving) is negative. Although net migration has improved, it is expected to remain in negative territory through 2050. 23. The share of working-age adults (age 15–64) in the population lags Fiji’s peers. Falling fertility rates mean the proportion of Fiji’s population aged 0 to 14 has declined steadily, falling 10.3 ppts between 1991 and 2022 (Figure 1.14). While the share of the population who are working age has grown by approximately 12 percent during the same period, this increase has tapered off and Fiji is behind both structural and aspirational peers on this measure (Figure 1.15). At the same time, the population aged 65 and over has grown consistently, with an average annual increase of 2.8 percent between 2000 and 2022. Lower birth rates and increased life expectancy mean Fiji faces the potential of an aging population and a declining working-age population, a situation common to many economies transitioning to high-income status. 24. Fiji has a notable gender gap in its labor force participation rates. Overall LFP has declined slightly from 60.9 percent in 1991 to 60 percent in 2019 and 59.1 percent in 2021, despite a slight increase in the working-age population (Figure 1.16). After increasing slightly from the 1991–99 average of 60.6 to the 2000–12 average of 61.0 percent, there has been a steady decline in participation, mainly among men. Women’s LFP rates have remained stagnant, despite some improvements between 2013 and 2019. Fiji lags its aspirational peers, structural peers, and high-income countries in East Asia and the Pacific (EAP) (see Chapter 4 for more details). 25. Relatively low female labor force participation is constraining growth and misallocating a large share of talent. Labor’s contribution to growth is determined by population growth, changing age profiles, and LFP. With a wide working-age base, Fiji could benefit from future population growth, with population expected to peak only around 2060. Yet, with the lowest female LFP rate among its peers, at around 40 percent, Fiji risks losing out on a large share of its additional labor. Those women who do work are more likely to be engaged in informal work, as discussed in Chapter 4. 28 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 1.9: Fiji’s growth mostly outperformed its potential until COVID-19 Growth rates in percent Figure 1.10: Capital and labor have made a declining contribution to growth while the contribution of TFP has turned positive Figure 1.10: Capital and labor have made a declining contribution to (Compound annual growth rates in percent) growth while the contribution of TFP has turned positive 8.5 8.0 7.5 7.0 8.1 6.5 6.0 5.5 5.0 Capital Stock (α * gK) Compound Annual Growth Rates 4.5 4.9 4.0 3.7 3.0 3.5 Labor ((1-α) * gL*) 3.0 2.5 2.0 1.9 0.8 Human Capital per Labor ((1-α) * gh) 1.5 1.2 1.9 1.0 1.4 0.5 0.8 0.6 Total Factor Productivity (gA) 0.3 0.0 -0.6 -0.5 -1.3 -1.5 -1.0 -1.5 -2.7 -2.0 -2.5 -3.0 2.5 3.4 1.6 3.4 -3.5 1991-2019 1991-1999 2000-2012 2013-2019 Source: WB staff calculations based on FBOS data. FIJI COUNTRY ECONOMIC MEMORANDUM 29 Figure 1.11: Figure Total 1.11: investment Total investment in Fiji has in Fiji longbeen been has long below below itsits peers peers (Investment as percent of GDP) (Investment as percent of GDP) 108 Investment to GDP Index: 1989 = 100 107 106 105 104 103 102 101 100 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Fiji Structural Peers Aspirational Peers Source: WB staff calculations. Data for Fiji from the Government; data for peers from Penn World Table (PWT) 10. Note: Structural peers only include Belize due to data availability. Figure 1.12: Fiji’s rate of return to capital stock is increasing at a slower pace than capital accumulation 45.0 10.0 40.0 35.0 8.0 30.0 6.0 Percent Billions 25.0 20.0 4.0 15.0 10.0 2.0 5.0 - - 1991 1992 1993 1994 1995 1996 2003 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Rates of Return to Capital (LHS) Estimated Capital Stock (constant 2020 US$, RHS) Linear (rates of Return to Capital (LHS)) Linear (Estimated Capital Stock (constant 2020 US$, RHS)) Source: WB staff calculations based on IMF data. 30 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 1.13: Fiji’s population growth has slowed due to falling birth rates and outward migration 4 0 3 -5 2 -1 1 -1 0 -2 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 -1 -2 Population Growth Rate (% LHS) Total Fertility rate (live births per women, LHS) Net Migration Rate (per 1,000 population, RHS) Figure 1.14: The growth in the share of the population of working age has tapered off Share of total population in percent Figure 1.15: Growth in Fiji’s working-age population lags behind that of its peers (Population ages 15-64: index: 1989 = 100) FIJI COUNTRY ECONOMIC MEMORANDUM 31 Figure 1.16: Women’s labor force participation rates are low, while men’s are declining (Labor force participation rates in percent of population ages 15 and above) Source: WB staff calculations based on WDI data. Total Factor Productivity 26. After underperforming for decades, productivity has become a key driver of recent growth. TFP has significantly improved from the low average growth (around 0.3 percent) during 1991–2012, more than doubling in 2013–19 to an average of 0.8 percent (Figure 1.17). The period of low growth came during the winding down of the preferential trade agreements that had benefited garment and sugar exports. Productivity has increased substantially in agriculture and industry, but much less so in services as less productive workers shifted to the services sector. Political instability and the lack of a conducive environment for the private sector translated into the negative contribution of TFP to growth between 1991 and 2012. This improved in the mid-2010s as the political environment became more stable, but Fiji lags its aspirational peers on TFP growth (Figure 1.18). 27. There have been improvements in the key drivers of TFP growth in recent years, mainly in institutions and infrastructure. There are five determinants of potential TFP growth: innovation, education, market efficiency, infrastructure, and institutions (Kim and Loayza 2019). In recent years, Fiji has seen significant improvement in all aspects (Figure 1.19), but most markedly in infrastructure, mainly mobile subscriptions, roads, and electricity; and institutions, mainly government effectiveness and the rule of law. Public infrastructure can provide timely and cost-effective access to markets, workplaces, and knowledge and information sources and can improve the returns on private capital and labor, increasing their impact on economic growth. Institutions can promote social and economic stability, provide a safe living and working environment, defend property rights, and safeguard basic civil rights. The environment and policies that public institutions provide have a large, fundamental impact on economic development (North 1990; Acemoglu, Johnson, and Robinson 2004). 28. Over time, education and innovation have also greatly improved, though Fiji still underperforms in both. On education, this has mainly been due to improvements in secondary school education completion rates. However, large numbers of adults still lack a secondary education, as discussed above, and education quality still lags peers as discussed in the human capital subsection below. Innovation has also improved, although it remains in negative territory, and market efficiency has increased but remains relatively low. See Kim and Loayza (2019) for details of the measures used in each index, and the values for Fiji’s performance in selected indicators. 29. Despite these improvements, Fiji lags its peers on productive capacity, underperforming in innovation and human capital. Productive capacity measures the productive resources, 32 FIJI COUNTRY ECONOMIC MEMORANDUM entrepreneurial capabilities, and production linkages which together determine a country’s capacity to produce goods and services and enable it to grow and develop.9 While Fiji’s capacity has improved over time, the country lags its peers (Figure 1.20). Historical evidence suggests that innovation is a key determinant of Fiji’s TFP, increasing TFP in the long run (Kidake and Montfaucon n.d.). Thus, low levels of innovation have meant limited gains to growth. Human capital allows innovation potential to be translated into productive realities. Education can affect how developing countries adopt new technologies through trade, with a positive impact on TFP (Miller and Upadhyay 2000). Despite improvements in Programme for International Student Assessment (PISA) scores and secondary school completion rates, tertiary completion rates and government expenditure on education have declined in recent years (Kidake and Montfaucon n.d.). Consequently, Fiji is lagging peers on information and communications technology (ICT) and human capital (Figure 1.21). 30. Another factor holding back Fiji’s productive potential may be the limited improvement in market efficiencies (Figure 1.17). While there have been improvements in financial markets, those for both goods and labor have regressed (see Chapter 3 for more details). Figure 1.17: Average TFP growth has improved in recent years (y/y in percent) Source: WB staff calculations using PWT 10 data. 9 Definition from the United Nations Conference on Trade and Development (UNCTAD). FIJI COUNTRY ECONOMIC MEMORANDUM 33 Figure 1.18: Fiji’s TFP has lagged its aspirational peers (TFP index: 1989 = 100) Figure 1.19: Figure Fiji 1.19: has Fiji hasmade made improvements rovements in allin imp all the the key determinants of TFP growth… key determinants of TFPgrowth... (TFP determinants in index value) 0.8 0.6 0.4 Index value 0.2 0 -0.2 -0.4 2000-2012 2013-2019 -0.6 Overall index Innovation Education Market Infrastructure Institutions efficiency Figure 1.20: …but Fiji lags its peers in productive capacity Figure 1.20:...but Fiji lags its peers in productive capacity (Productive capacity index) 55 Productive Capacity Index 50 45 40 35 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Fiji Structural Peers Aspirational Peers Source: WB staff calculations using LTGM-TFP extension and United Nations Conference on Trade and Development (UNCTAD) data. 34 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 1.21: Fiji lags on key drivers of productive capacity Figure 1.21: onproductive Fiji lagsof (Drivers productive in key drivers ofcapacity capacity index value) 80 70 60 Index value 50 40 30 20 10 0 Human Capital Natural Capital Energy Transport ICT Institutions Fiji Structural Peers Aspirational Peers Source: WB staff calculations using UNCTAD data. Human Capital 31. Poor health and education outcomes, and skills gaps, are holding Fiji’s development back. Human capital per worker is associated with output growth due to both its direct contribution and through improvements to TFP (Bronzini and Piselli 2009; Erosa, Koreshkova, and Restuccia 2010). Fiji’s human capital grew by an average of 0.8 percent a year between 1980 to 2019, but the rate has slowed: it was around 1 percent in the 1990s but only 0.4 percent in the last decade (Figure 1.22). Fijians born in 2020 are expected to be half as productive over their working lives as they could have been if they had full access to education and health. Except for stunting rates, Fiji is below most UMICs in EAP on all the components of the Human Capital Index (HCI). These include adult survival rates (Figure 1.23), and the quantity and quality of education (Figure 1.24). Despite recent improvements in enrolment rates, Fiji has one of the lowest learning-adjusted years of schooling among its peers, at 7 years. 32. Gaps in human capital development have direct implications for Fiji’s economy. The supply of skills is becoming disconnected from the demand, with Fiji having one of the lowest shares of secondary students enrolled in technical and vocational programs, at 1 percent.10 Fiji has the lowest life expectancy across all peers, the highest infant mortality rates, and one of the highest shares of premature deaths from non-communicable diseases (NCDs; see Chapter 4 for more details). Faced with limited economic and educational opportunities at home and a history of political instability, many Fijians chose to move abroad, further aggravating the country’s skills gaps.11 10 UNESCO Institute for Statistics. Accessed from World Bank Gender Data portal https://genderdata.worldbank.org/indicators/ se-sec-enrl-vo-zs/?gender=total. 11 The first coup d’état in 1987 caused an exodus of 5,000–6,000 skilled Indo-Fijian workers a year. In the 18 months following the second coup d’état in 2000, around 1,000 people left each month—most of them professionals and business owners. This emigration was further exacerbated by the third coup in 2006 (World Bank 2017a). FIJI COUNTRY ECONOMIC MEMORANDUM 35 Figure 1.22: Average growth in human capital is half the rate it was in the 1990s (Average Figure 1.22: Average growth growth in human rate capital in is half thepercent) rate it was in the 1990s 1.2 1.0 0.8 Percent 0.6 0.4 0.2 0.0 1991-1999 2000-2012 2013-2019 Figure 1.23: Adult survival rates in Fiji are low compared to its upper middle-income peers in the region... Figure 1.23: Adult survival rates in Fiji are low compared to its upper middle-income peers in the region.. 9 75th pctl- EAP HI 50th pctl- EAP HI Fiji, 2020 8 25th pctl- EAP HI 7 Country Rank 6 5 4 3 2 Distriibution of EAP UMI Distriibution of EAP HI 1 0 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1 Adult Survival Rates Figure 1.24: … as is its quality of education Figure 1.24: ... as is its quality of education 9 50TH pctl- EAP HI 8 25th pctl- EAP HI 7 Fiji, 2020 50th pctl- Country rank 6 EAP UMI Distribution of 5 EAP HI 4 3 Distribution of EAP HI 2 1 0 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 Quality of Education Source: WB Human Capital Index data. Note: EAP = East Asia and the Pacific; UMI = upper middle-income; HI = high income. 36 FIJI COUNTRY ECONOMIC MEMORANDUM 1.2. Achieving Fiji’s aspiration to become a high-income country will mean ambitious reforms 33. Fiji aspires to become a high-income country. Its National Development Plan (NDP) 2025-2029, “Empowering the People of Fiji through Unity,” targets a four-fold increase in per capita income by 2050. In 2022, GNI per capita (using the Atlas method) was US$5,840, so a four-fold increase would reach US$22,200 in 2050,12 making Fiji an HIC.13 This is consistent with a sustained annual real GDP growth averaging 4-5 percent, investment levels of 20 percent of GDP, and inflation of below 3 percent. Achieving this would require a) doubling the historical growth rate and adding one-tenth more to the recent growth spurt over the next 26 years; and b) increasing investment by one-tenth. 34. The transition to a high-income country will require strong private sector productivity growth and skills gains. Past policies have facilitated capital accumulation, built human capital, and enabled private sector productivity to catch up in recent years. These have supported Fiji’s transition to an upper middle-income country. This pattern of growth and convergence based on the accumulation of input factors—capital and labor—has been shared by many middle-income countries around the world. Yet only a few have managed the transition to high-income status, reflecting the diminishing returns to factor accumulation as countries become richer. Those that have succeeded have done so on the back of gains in productivity/efficiency, innovation, and human capital. 35. Increasing Fiji’s potential growth will require continued economic reforms. A stable political environment and policy certainty, alongside reforms to foster a more favorable business climate, would help attract private and foreign investment and improve competitiveness. Reducing the cost of doing business could be complemented by improving the availability of skilled workers, particularly enhancing female LFP rates. In addition, investing in human capital, including via more training, and better quality education and health care services, could help counter the waning contribution of physical labor to potential growth. Diversifying the sources of growth and strengthening climate resilience would also help cushion the economy from external and natural disaster shocks. The sections that follow consider Fiji’s likely growth trajectories under a number of policy and climate scenarios. 1.2.1. Under business-as-usual, Fiji’s growth will gradually decelerate 36. The World Bank’s Long-Term Growth Model (LTGM) provides a set of simulations using different economic, social, and demographic scenarios for each growth driver.14 Under the business-as-usual baseline scenario, the LTGM combines assumptions about growth fundamentals to generate a trajectory for GDP and GDP per capita growth over the next 26 years, assuming that recent historical trends continue without major shocks or reforms. The assumptions relate to the standard drivers of growth: TFP, human capital, investment (infrastructure and other investment including private), and demographics (population growth, working-age population growth, and LFP). The analysis uses the LTGM—Public Capital Extension (LTGM-PC) as the base model, which allows for private and public investment to have different effects on growth (Devadas and Pennings 2019). Annex B elaborates on the baseline assumptions used in the LTGM-PC simulations for Fiji. 37. The LTGM-PC comes with advantages and caveats. The LTGM is simple, transparent, and used in many growth diagnostics at the World Bank. However, for simplicity, the model treats future paths for growth drivers as exogeneous which limits the scope of interactions between different growth drivers. For instance, it abstracts from the effects of financing of public investment. If such investment is financed through distortionary taxation, this will act as a drag on growth in many cases, unless it can Fiji’s NDP gives the 2015 figure as in a GDP per capita target of FJD terms. We use the same increase (i.e., four-fold) but use 12 GNI per capita in USD as appropriate. 13 According to the World Bank, countries with a GNI per capita above US$12,695 in 2021-22, as measured at Atlas exchange rates, are categorized as high-income countries. Countries with an income above US$4,096 but below US$12,695 are classified as upper middle-income countries. The minimum required to be classified high income in the FY25 update by World Bank is US$14,005. 14 Loayza and Pennings (2022) provide details of the model and its extensions, which are also available at https://www.worldbank. org/en/research/brief/LTGM. Annex B details the assumptions used. FIJI COUNTRY ECONOMIC MEMORANDUM 37 be financed by reducing unproductive expenditure elsewhere. To address these shortcomings, there are various plugins to the model that address the problem of TFP growth and human capital being exogenous by unpacking the deeper determinants of TFP growth (LTGM-TFP) and human capital (LTGM-HC) respectively. The model has also been enhanced to respond to criticisms in several ways, add functionality, and enhance realism without sacrificing simplicity. 38. Without structural reforms, Fiji’s GDP and GDP per capita growth rates will slowly fall. Under the baseline scenario, GDP growth falls from 3.5 percent in 2026 to 2.3 percent in 2050 (Figure 1.25) and GDP per capita growth to 2.0 percent (Figure 1.26). Over the entire period, real GDP will grow by an average of 2.9 percent per year and GDP per capita by 2.3 percent. Both are slightly higher than the 25-year average before COVID-19 (2.3 percent for GDP and 1.8 percent for GDP per capita). Baseline Growth Decomposition and Understanding the Decline in Growth 39. Under the business-as-usual scenario, growth will mainly be driven by productivity growth. Several counterfactual growth simulations were performed to show the contribution of each driver. These highlighted that over half of GDP growth in the long run would be driven by TFP growth (1.5 ppts) followed by capital deepening (0.5 ppts) and population growth (0.6 ppts) (Figure 1.27). Over time, demographic changes mean the contribution of population and working-age population will decline. Because today’s new workers are better educated than the old workers moving to retirement, the average human capital of the workforce will increase over time—despite no increase in children’s schooling—leading to a positive human capital growth. However, as the educational attainment of the overall workforce increases over time, the boost from higher-skilled young workers will shrink, leading to a slowdown in human capital growth.15 40. Over 60 percent of the decline in GDP growth rate is due to increases in capital and the resulting decline in the marginal product of capital (MPK). Baseline simulations show that increases in the ratio of private capital to output contribute to a 0.64 ppt drop in GDP growth (46 percent of the total fall in growth to 2050), while for public capital, i.e., infrastructure, the figure is 0.20 ppt (15 percent) driven by declining MPK and increasing losses due to capital depreciation (Figure 1.28). This is consistent with the historical trends for Fiji’s potential growth depicted in Figure 1.10, where capital accumulation’s contribution to growth declined by 5 ppts between the 1991–99 and 2013–19 periods. This also aligns with the literature (Loayza and Pennings 2022) that finds investment-led growth is unsustainable in the long run.16 When investment drives growth, the rising capital-to-output ratio implies new investment becomes less effective, i.e., less GDP growth from increased investment (from a high base). Instead, sustainable growth requires broad-based growth fundamentals, such as improvements in TFP or human capital. Indeed, the interaction between TFP and investment means that TFP growth increases MPK, preventing the efficiency of investment from declining too sharply over time. 41. The next largest contribution to the fall in GDP growth will come from demographic factors. Slowing population growth and a levelling off of the share of the working-age population together contribute to 27 percent of the decline in real GDP growth. Although net migration rates are expected to improve, they are likely to remain negative, and Fiji’s population growth is expected to have halved between 2022 and 2025. As LFP rates are not expected to change materially from the current position, they are forecast to have a negative but trivial effect of -0.01 ppt. 15 Note that the human capital index applied to growth in the LTGM-HC does not include child survival rates. These are usually close to 1, and do not have a direct effect on growth as children under 5 do not work. 16 However, Fiji’s ratio is below Growth Commission’s benchmark of 25 percent for a sustainable investment-to-GDP rate. 38 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 1.25: Fiji’s real GDP growth rate will slow under the baseline scenario… (Real GDP growth in percent) Figure 1.26: ... as will GDP per capita growth (Real GDP per capita growth in percent) Figure 1.27: Productivity, population growth, and capital deepening will be the main drivers of baseline growth (Contribution to GDP growth in percent; baseline) FIJI COUNTRY ECONOMIC MEMORANDUM 39 Figure 1.28: Declining returns on investment, demographics, and human capital will drive the deceleration in growth rates (Contribution to fall in GDP growth in percent; baseline) Human Capital growth 12% Population growth 16% Private K/Y 46% WATP growth 11% Public K/Y 15% Source: WB staff estimates from LTGM-PC. Note: Private K/Y = private capital as a share of GDP; Public K/Y = public capital as a share of GDP; WATP = working age to total population ratio; TFP = total factor productivity. 1.2.2 Ambitious reforms to boost key growth drivers could see Fiji reach high-income status17 42. Achieving the Government’s ambitious goals will require significant acceleration in economic growth, stemming from reforms that provide significant boost to growth drivers. This analysis considers two scenarios, each combining a set of reforms to boost growth drivers: moderate and ambitious. The target for each growth driver within the scenarios is based on structural, aspirational, regional, or income peers as appropriate (Table 1.1). As such, the effect of each reform on growth depends on a) how sensitive growth in Fiji is to the specific growth driver; and b) how far Fiji is from the selected target. This section considers the individual reforms one by one and then aggregates them to present the overall effect of a holistic reform package. The combined reforms are mutually reinforcing and tend to complement each other, thus resulting in the strongest growth trajectory. 17 This section focuses on long-term growth trends and poverty and omits the discussions on near-term growth and poverty prospects more suited for macro monitoring such as the Government’s Medium-term Fiscal Strategy and the WB’s Macro Poverty Outlook (MPO). 40 FIJI COUNTRY ECONOMIC MEMORANDUM Table 1.1: Moderate and ambitious reform targets Moderate Ambitious Baseline Comment Comment Scenario Scenario 22.75% of Investment 20.5% of GDP 25% of GDP GDP Public 5% of GDP 6% of GDP 7% of GDP 16.75% of 50th percentile 50th percentile Private 15.5% of GDP 18% of GDP GDP UMIC HIC Infrastructure 75th percentile 90th percentile 0.73 0.81 0.88 Efficiency Index UMIC UMIC Between 75th 75th percentile TFP growth 0.73% 0.90% 1.3% and 90th HIC percentile HIC Human capital 0.35-0.07% 0.35-0.77% LTGM-HC 0.35-1.38% LTGM-HC growth Expected 25th percentile 50th percentile 11.33 years 13.08 years 13.36 years schooling EAP HIC EAP HIC Quality of 25th percentile 50th percentile 0.61 0.7 0.86 education EAP HIC EAP HIC Adult survival 25th percentile 50th percentile 0.78 0.93 0.93 rates EAP HIC EAP HIC Not stunted 50th percentile 75th percentile 0.91 0.92 0.94 rates EAP HIC EAP HIC Labor force participation Male 77.6% 77.6% 77.6% Level of Female 40.2% 44.0% Level of Samoa 50.0% Mauritius Source: WB staff estimates based on LTGM. Note: EAP HIC average for human capital includes China. All assume targets are reached by 2030 except for human capital which uses 2040 as it takes 20 years to join the workforce. Policy Scenarios Growth Decomposition 43. EFiji will likely reach high-income status by 2050 with moderate reforms but could accelerate its transition under an ambitious reform scenario.Under the ambitious scenario, the combined effect would result in the average GDP growth rate for 2024–50 rising from a baseline of 2.9 percent to 5.7 percent (Figure 1.27), with GNI per capita exceeding the high-income threshold by 2042 (Figure 1.30). In contrast, the moderate scenario would generate average growth of 4.1 percent in real GDP. By 2050, Fiji would reach HIC status under the moderate scenario.18 However, Fiji could accelerate its transition to HIC status within the next two decades under the ambitious scenario. Achieving the NDP’s growth targets is unlikely, but anything less than the ambitious scenario would mean compromising Fiji’s HIC status considering the impact of climate change and disasters. Under both scenarios, GDP growth gradually slows down in the last 10 years of the projection horizon. 44. Under both scenarios, GDP growth would be mainly driven by productivity. A decomposition of growth in both scenarios shows that the biggest contributor is higher TFP, accounting for 45 percent of real GDP growth in the moderate and 48 percent in the ambitious scenario (Figure 1.31 and Figure 1.32). This is followed by human capital reforms (20 percent in the moderate and 25 percent in the ambitious scenario), primarily due to increased quality of education and better adult survival rates 18 The moderate scenario mirrors the Government of Fiji’s Vision 2050. FIJI COUNTRY ECONOMIC MEMORANDUM 41 (the probability that a 15-year-old will reach their 60th birthday) in the long term. Investment (both public and private) contributed another 15 percent in the moderate scenario and 9 percent in the ambitious one. The lower contribution in the ambitious scenario accounts for the fact that increased investment (from a high base) generates less GDP growth after Fiji converges to the investment- to-GDP benchmark of 25 percent by 2030.19 While demographics initially boost growth, the effect tapers off in the long run in both scenarios. The contribution of female LFP increases from zero in the baseline to 3 percent under the moderate scenario and 6 percent under the ambitious one. 45. Among the growth drivers in the reform packages, the largest boost to incremental growth would come from reforms targeting human capital, delivering rising growth over time. In the long term, incremental growth would be mostly driven by improvements to human capital (40 percent boost to growth in the moderate scenario and 33 percent of the additional growth in the ambitious scenario). Education reforms are expected to have a greater impact on growth towards the end of the period since the full benefit will only be felt once the new, better educated, generation of students have entered the labor market. The combined human capital reforms are projected to boost GDP growth by 0.45 ppt in the moderate scenario, and 0.88 ppt in the ambitious one over the period to 2050 (Figure 1.33 and Figure 1.34). It should be noted that these estimates do not include the indirect effect of improved health on education and hence growth. 46. Not only would productivity improvements boost growth in the medium term, but the effect would also be amplified over time through capital accumulation. In the 2030s, the moderate productivity-enhancing reforms are forecast to boost GDP growth by 0.27 ppt and the ambitious ones by 0.97 ppt. That mostly represents the direct effect of greater TFP on growth. Over the longer run, however, increased TFP will also lead to more investment, which is assumed to be a fixed share of income, and those investments will be more productive, as TFP increases MPK. By the 2040s, as these indirect effects begin to be felt, the incremental growth generated by TFP reaches 0.29 ppts under the moderate scenario and 1.08 ppts under the ambitious one (Figure 1.33 and Figure 1.34). Increasing the share of investment by 2.25 ppts under the moderate scenario and 4.5 ppts under the ambitious one is forecast to boost GDP growth by 0.35 ppt and 0.67 ppt respectively.20 The impact is strongest early on but diminishes significantly over time due to declining marginal returns to capital. 47. Reforms to increase female labor force participation would make sustained contribution to incremental growth. Under the moderate scenario, the boost to growth would be close to 0.10 ppt (Figure 1.33). Under the ambitious scenario, the expansion of the workforce due to increased LFP would boost growth by 0.24 ppt (Figure 1.34). 19 The impact multiplier for investment is estimated at 0.14 and grows over time, to be 0.76 percent higher after 5 years (Alichi 2019). 20 The contribution of private investment to growth is lower in moderate reform scenario because private capital increase relative to GDP is lower than in baseline, given other factors play a more important role to boost GDP than private capital. Under ambitious reform scenario, the private capital increase relative to GDP by 2030 is much higher than in baseline. However, the contribution of public investment to growth is double that of private investment under the moderate scenario. Under the ambitious scenario, the contribution of public investment to growth, despite increasing relative to baseline, is lower than that of private investment. The contribution of investment to growth under both scenarios also accounts for the improvement in the Infrastructure Efficiency Index. 42 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 1.29: Both the moderate and ambitious scenarios would deliver an initial boost to GDP growth (Real GDP growth in percent) Figure 1.30: GNI per capita would reach the threshold for high-income status by 2042 under the ambitious scenario (GNI per capita in US$) HIC status by 2042 ................................................... Figure 1.31: Decomposition of GDP growth under the moderate reform scenario (Contribution to GDP growth in percent; moderate reform scenario) Human Capital 0.5% 0.9% 0.8% Private K/Y 0.5% 0.9% 0.3% 0.3% 0.2% 0.3% Public K/Y 0.3% 0.2% 0.3% TFP 1.7% 1.8% 1.8% Population 1.8% WATP 0.7% 0.6% 0.6% 0.4% LFP 0.1% 0.1% 0.2% 0.2% 0.1% 0.1% 2024-50 2024-30 2031-40 2041-50 GDP FIJI COUNTRY ECONOMIC MEMORANDUM 43 Figure 1.32: Decomposition of GDP growth under the ambitious reform scenario (Contribution to GDP growth in percent; ambitious reform scenario) Human Capital Private K/Y 1.7% 1.4% 1.6% 0.7% Public K/Y 0.2% 0.2% 0.4% 0.2% 0.2% 0.3% 0.2% 0.4% TFP 2.8% 2.6% 2.3% 2.8% Population WATP 0.7% 0.6% 0.6% 0.1% 0.2% 0.2% 0.4% LFP 0.3% 0.3% 0.1% GDP 2024-50 2024-30 2031-40 2041-50 Figure 1.33: Contribution of each factor to incremental GDP growth under the moderate reform scenario (Contribution to incremental GDP growth in percent; moderate reform scenario) 5.0% 4.5% 0.08% 0.26% 0.09% 4.0% 0.48% 0.09% 0.06% 0.21% 0.07% 0.25% 0.63% 0.10% 3.5% 0.32% 0.18% 0.10% 0.27% 0.62% 3.0% 0.22% 0.62% 0.15% 0.29% 2.5% 0.13% 0.30% 0.10% 2.0% 1.5% 1.0% 0.5% 0.0% 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 Baseline Private Investment Public Investment TFP HC LFP IEI 44 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 1.34: Contribution of each factor to incremental GDP growth under the ambitious reform scenario (Contribution to incremental GDP growth in percent; ambitious reform scenario) 5.0% 4.5% 4.0% 0.22% 3.5% 0.24% 0.26% 0.49% 0.94% 1.26% 1.25% 0.27% 3.0% 2024-50 2024-30 2031-40 2041-50 0.76% 1.21% 0.90% 1.17% 2.5% 0.34% 0.98% 0.62% 0.34% 1.04% 2.0% 0.42% 0.28% 1.08% 0.26% 1.23% 1.5% 0.19% 1.0% 0.5% 0.0% 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 Baseline Private Investment Public Investment HC LFP IEI Source: WB staff estimates based on LTGM-PC. Note: Private K = private capital; Public K = public capital; WATP = working age to total population ratio; TFP = total factor productivity; HC = human capital; LFP = labor force participation; IEI = Infrastructure Efficiency Index. 1.2.3. Reforms to boost growth would substantially reduce poverty rates 48. One of the most important ways to reduce poverty is through faster economic growth and Fiji is on track to achieve this in the coming years. Fiji’s poverty rate escalated to nearly 70 percent at the height of the COVID-19 pandemic, against the UMIC poverty line of US$6.85 per day in 2017 PPP. However, medium-term estimates suggest Fiji reverted to the pre-pandemic rate of around 52 percent in 2023. The poverty module, which is built into the standard LTGM, helps to calculate the effect of economic growth on poverty reduction in the long term. 49. While poverty rates are expected to more than halve by 2038 in the baseline scenario, the Government’s target to eliminate poverty rate by 2050 would only be reached under the ambitious scenario.21 Fiji’s poverty rates will fall by 33 ppts under the business-as-usual scenario from 47 percent in 2025 to 13 percent by 2050, to 5 percent under the moderate scenario and 1 percent under the ambitious one (Figure 1.35).22 Thus, ambitious reforms would not only ensure higher and faster growth, but also pro-poor growth. Estimates show that upper middle-income poverty would fall by 41 percent between 2025 and 2050 under the moderate scenario and 45 percent under the ambitious one. Thus, only in the ambitious scenario would poverty be almost eliminated by 2050. 21 The Government’s target is based on national poverty line, while these estimates, consistent with other WB estimates such as in the MPO, are based on the UMIC poverty line. 22 Assuming the country’s income distribution remains unchanged (i.e., a constant Gini coefficient of 0.31 sourced from WDI). FIJI COUNTRY ECONOMIC MEMORANDUM 45 Figure 1.35: Poverty rates will fall under all scenarios (Upper middle-income poverty rate in percent; US$6.85 in 2017 PPP) 20 13% 10 5% 0 1% -10 -20 -30 -40 -37% -50 -45% -60 -49% Poverty Headcount in 2050 Source: WB staff estimates from LTGM-PC Poverty Module. 1.2.4. Climate change will have a substantial impact on long-term growth 50. Climate change could affect the level of output and the economy’s ability to grow in the long term. Global temperatures have increased in the past half century and extreme weather events are becoming more frequent and severe. Much of the literature focuses on the impacts of climate change on economic production. Chapter 2 further explores the impact on climate events of the volatility of growth. In addition, climate change could affect long-term growth, for example by reducing investment and labor productivity in many sectors of the economy. The estimates are non-linear, with the effects depending on the country’s initial temperature; as a country that already experiences high temperatures, Fiji could be particularly vulnerable. 51. Global warming is expected to reduce Fiji’s future income over the next decades. Estimates from Nath et al. (2023) suggest warming could reduce Fiji’s future annual income by at least 4.5 ppts a year by 2050, although measures to adapt to a changing climate could halve the impact. Figure 1.36 shows scientific projections of country-level population-weighted average temperature change for Fiji.24 The projections imply that, between 2024 and 2050, temperatures will increase by 0.77◦C in the pessimistic global high-emissions scenario (Representative Concentration Pathway, RCP 8.5) and by 0.39◦C in the global medium-emissions scenario (RCP 4.5), which still fails to meet the Paris Agreement target.25 The medium scenario may be the most realistic, because most countries are not meeting their Paris goals but are making efforts to reduce emissions. The growth effect projections suggest that Fiji will lose between 2.5 and just over 6 ppts of GDP annually by 2050 in the pessimistic scenario and 0.9 to 3.0 ppts in the medium scenario between 2024 and 2050, due to warming (Figure 1.37). 23 These assumptions imply that the Government will pursue declines in inequality through other measures outside of the model and demonstrate the shared prosperity from growth-inducing reforms within the model if inequality is reduced at the same time. 24 Burke, Hsiang and Miguel (2015). These country-level projections for end-of-century warming and assume a linear increase in temperature from 2010 to 2099. 25 Representative Concentration Pathways are scenarios of greenhouse gas concentrations by the Intergovernmental Panel on Climate Change (IPCC). RCP 4.5 a medium emissions scenario is where countries implement their Nationally Determined Contributions, there is slow technological change, low use of carbon dioxide removal and average warming is 2.5 degrees Celsius by 2100. RCP 8.5 is an unmitigated scenario in which emissions continue to rise throughout the 21st century, with no policy reactions and current policies continue. 46 FIJI COUNTRY ECONOMIC MEMORANDUM 52. Without mitigation and adaptation, climate change would mean lower incomes per capita than otherwise by 2050. The high-emissions scenario could mean significant losses of 4 percent of annual GDP could be expected by 2050. Climate change would therefore dampen the positive effects of both the ambitious and moderate scenarios discussed above (Figure 1.38). Fiji’s journey to high- income status will also be delayed but only by a year (Figure 1.39), noting that these estimates are likely lower. It should be noted, however, that the impacts will not be as smooth as the model implies. Thus, the year when high-income status was reached might depend on when there is an additional storm or climate event. The negative effects of climate change increase over time as temperatures increase. Climate action will not entirely offset any negative climate impacts but lessen them, as demonstrated by the two emissions scenarios. Figure 1.36: A global high-emission scenario could see temperatures rise in Fiji by over 0.7C by 2050… Figure 1.36: A global high-emission scenario could see temperatures rise in Fiji by over 0.7C (Population-weighted by 2050 country ... temperature in degree Celsius) 25.2 25.0 24.8 24.6 24.4 Degrees Celcius 24.2 24.0 23.8 RCP emissions High 8.5 Population-Weighted (RCP 8.5) Country Temperature 23.6 Population-Weighted RCP 4.5 emissions Medium (RCP 4.5)Country Temperature 23.4 23.2 23.0 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Note: Population-weighted temperature accounts for the distribution of the human population over the surface. Figure 1.37: …causing an annual loss of up to 6 percentage points of GDP (Annual loss in real GDP growth in percent) High emission (RCP 8.5) Medium emissions (RCP 4.5) FIJI COUNTRY ECONOMIC MEMORANDUM 47 Figure 1.38: Loss of productivity due to climate change would reduce per capita incomes under all scenarios, 2026–50 annual average (GNI per capita in US$) Medium emissions (RCP 4.5) High emissions (RCP 8.5) Baseline Moderate Figure 1.39: The impact of climate change could delay Fiji reaching high-income status under the ambitious scenario (GNI per capita in US$) High-Income No Climate Scenario High emissions Medium emissions Source: WB staff estimates based on Nath et al. (2023). 48 FIJI COUNTRY ECONOMIC MEMORANDUM 1.3. Policy priorities: Tapping into the economic dividends 53. Accelerating Fiji’s growth will mean promoting investment and boosting private sector productivity. The two policy scenarios described above suggest that removing regulatory and governance barriers to private investment and expansion, combined with addressing non-competitive market conditions, also have great potential to spur growth. This, together with a more enabling environment for R&D and innovation, and provision of quality infrastructure could help boost TFP growth and bring Fiji closer to its development objectives. In addition to increasing public investment and implementing public investment management reforms that integrate funding for maintenance, the GoF could adopt policies that promote private investment. These include embarking on tax simplification covering eligibility, reporting, and payment; and reviewing and rationalizing the long and growing list of somewhat distortionary tax exemptions and incentives (World Bank 2023a). 54. It will also mean focusing on labor, education, and health reforms. Reforms aimed at improving the quality of education and adult survival rates would have a strong impact on human capital and GDP growth. These need to be combined with redoubled efforts to enroll more children in school and keep them in education as long as possible, paying particular attention on the transition between education levels.26 55. Advancing Fiji’s climate plans can help enhance its resilience to climate shocks and safeguard economic stability. That will boost Fiji’s economic strength, by making it less vulnerable to shocks, diversifying its energy sources, and reducing volatile fuel imports. Given the significant financing and capacity constraints, proper prioritization is critical to accelerating the implementation of Fiji’s National Adaptation Plan and Low Emission Development Strategy (IMF 2024b). 56. Supported by sustained efforts to maintain macroeconomic stability, and complemented by climate adaptation, Fiji has the potential to achieve its development goals in an inclusive way. The impact of reforms may be reduced if they are not implemented in a growth-friendly environment. Supportive macroeconomic policy will amplify the benefit of reforms by enhancing their impact (more details in Chapter 2). Additionally, repeated adverse weather events may continue to erode hard-won stability and encourage policymakers to think beyond the short term. Climate policies will help to ensure that the benefits of the reforms are fully realized, while policies to enable shared prosperity would ensure growth is lifting more people out of poverty. 26 These reforms were also validated for their growth impact using the World Bank’s Growth Ambition and Structural Reforms Tool. FIJI COUNTRY ECONOMIC MEMORANDUM 49 50 FIJI COUNTRY ECONOMIC MEMORANDUM SEEKING Chapter 2 STABILITY With exports increasingly concentrated on tourism, and high levels of exposure to extreme weather, volatility is built into Fiji’s economy. Tropical cyclones and other natural disasters already cause losses averaging 1.3 percent of GDP per year, with peaks of almost 15 percent. Volatility spiked during the COVID-19 pandemic, when visitor numbers crashed; the economy contracted by a cumulative 21.9 percent in 2020–21 before rebounding. Public expenditure has also been highly volatile, with Fiji experiencing one of the fastest increases in public debt globally during the pandemic. Volatility in consumption is higher than for overall output, suggesting macroeconomic policy is driving some of the volatility. Fiji’s fiscal and monetary policies have tended to be procyclical, exacerbating rather than dampening the business cycle. The policy framework could be strengthened by adopting a fiscal responsibility framework with simple and transparent rules to alleviate debt sustainability concerns and enable countercyclical fiscal responses. Summary Climate change, recurrent crises, and economic concentration are all factors contributing to output volatility, which can, in turn, hinder growth. Fiji’s output volatility is higher than other Pacific Island Countries (PICs) and double the average for upper middle-income countries (UMICs). Volatility is also rising: the standard deviation of GDP growth almost doubled from 3.3 percent in 1991–2006 to 6.5 percent in 2007–22. Fiji’s susceptibility to extreme weather events is significant, a concern that is expected to escalate with a warming climate. Natural disasters have resulted in annual average losses of 1.3 percent of gross domestic product (GDP), with tropical cyclone (TC) Winston causing damage amounting to nearly 15 percent in 2016. Tourism also drives growth volatility as it now directly and indirectly accounts for almost half of goods and services exports—leaving Fiji’s economic cycle strongly tied to that of its trading partners. While Fiji’s economy exhibits inherent volatility, its macroeconomic policies have also tended to exacerbate rather than mitigate it. Consumption volatility, heavily influenced by macroeconomic policies, is 50 percent higher than that for output. This volatility is compounded by the policy landscape, with Fiji’s fiscal, monetary, and exchange rate policies all exhibiting a lack of responsiveness to economic fluctuations. Government expenditure tends to be procyclical, failing to create fiscal buffers during economic expansions or tap reserves and boost spending during contractions. Monetary policy has also followed a procyclical pattern, characterized by higher lending and deposit rates during economic downturns. Due to the pegged exchange rate policy, exchange rates have not acted as shock absorbers. The frequent use of countercyclical adjustments to capital flow measures instead of addressing the underlying macroeconomic challenges is likely to diminish Fiji’s long-term attractiveness to investors. FIJI COUNTRY ECONOMIC MEMORANDUM 51 Reducing volatility and increasing stability will require sound countercyclical policies aimed at smoothing consumption rather than production. This will involve reinforcing the fiscal institutional framework to strengthen fiscal responsibility. Simple and transparent fiscal rules, combined with an escape clause to permit rapid responses to natural disasters, and strengthened public oversight, will create a strong link with fiscal sustainability while encouraging a countercyclical policy stance. It could be complemented with the building up and annual replenishment of a natural disaster reserve fund and improving the targeting of social safety nets which act as automatic stabilizers. 2.1. Volatility is built into Fiji’s economy 2.1.1. Fiji is experiencing high and rising economic volatility 57. Fiji’s growth has displayed notable volatility.27 Real GDP growth in Fiji has been slow, averaging around 1.7 percent per year in the period 1990–2022, although if the pandemic period is excluded, it rises to nearly 2.7 percent. The pattern of growth has been volatile, with alternating periods of strong and weak growth (Figure 2.1). Two phases of growth stand out. The first runs from 1990 until 2006, when there were two coups d’état; the second from 2009 to 2019, when there was institutional normalization, until the pandemic hit. As Figure 2.2 shows, there have been two spikes in volatility.28 The first came at the end of the 1990s, possibly due to the economic turmoil surrounding the 2000 coup d’état. The second, in 2020–21, was due to the pandemic. If both spikes are excluded, the standard deviation of the real growth rate has largely been below 2 percent. 27 This chapter uses economic, output, and growth volatility interchangeably. Volatility is defined as one standard deviation. 28 The cycle component of the GDP series estimated by the Hodrick-Prescott filter covaries with the GDP growth rate. Therefore, it seems reasonable to employ GDP growth as the response variable for assessing output volatility (Melamud n.d.). 52 FIJI COUNTRY ECONOMIC MEMORANDUM 58. Fiji’s economic growth volatility is high for the region and rising. It is significantly above average for PICs and double that of UMICs (Figure 2.3). Since 1990, Fiji has seen relatively high volatility in growth compared to its aspirational and structural peers, although less than Maldives, St. Lucia, and Belize, countries which are similarly dependent on tourism and exposed to weather-related shocks (Figure 2.4). Over 1990–2022, the standard deviation of Fiji’s GDP growth averaged 5 percent, compared to an average of 6.4 percent for its aspirational peers and 3.8 percent for structural peers. If the COVID-19 years of 2020–21 are excluded, these figures fall to 2.9 percent for Fiji, 3.7 percent for its aspirational peers and 3.1 percent for structural peers. However, volatility is rising overall: the standard deviation of GDP growth in Fiji almost doubled from 3.3 percent in 1991–2006 to 6.5 percent in 2007–22 (Figure 2.5).29 Although this increase was less steep than in Jamaica, St. Lucia, and Mauritius, and the global economy, it was more than in the PICs and other peers. 59. GDP growth volatility was greater for consumption than for output. Fiji’s volatility in aggregate consumption growth is particularly striking, exceeding all but Belize and Maldives (Figure 2.6). Volatility in consumption is more troubling than in production, as macroeconomic policies can significantly influence the former. Aguiar and Gopinath (2007) find that in emerging markets, consumption volatility should exceed income volatility over the course of the economic cycle by 40 percent, compared to a ratio of a little less than one for developed markets.30 The standard deviation of consumption growth in Fiji has been 7.5 percent in the last three decades, 50 percent higher than for GDP growth (Figure 2.6). This was also the case for structural peers but not for aspirational peers and the UMIC average, where volatility for both GDP and consumption were similar. Consumption volatility in Fiji is partially explained by the high volatility in remittances inflows: level and real growth standard deviation was 5.4 percent and 19.6 of GDP percent on average between 2001 and 2022, respectively. A positive correlation coefficient of 0.12 is estimated between real growth in consumption and remittance inflows during 2001–21. Figure 2.1: Fiji has seen alternating periods of strong and weak growth… (Log of GDP) Real GDP Trend 29 With the economy contracting by a cumulative 21.9 percent during 2020–21—the fourth worst globally (World Bank 2023a). The country has, nonetheless, fully recovered from the pandemic, with a cumulative of 31.5 percent for 2022-24 driven by tourist arrivals exceeding pre-pandemic levels. 30 Such “excess” volatility is perfectly consistent with optimizing consumers and the income process, which includes the differential impact of monetary policies on interest rates and credit growth in developed markets compared to emerging markets. FIJI COUNTRY ECONOMIC MEMORANDUM 53 Figure 2.2: …and two spikes in GDP growth volatility (Standard deviation of GDP growth rate in percent) Figure 2.3: Real GDP growth volatility is significantly above average for the region… Figure 2.3:Real GDP gnificantly growth volatility is si (Standard deviation of GDP growth rate in percent) above average for the region ... 20.0 15.0 10.0 5.0 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 -5.0 -10.0 -15.0 -20.0 Fiji Pacific Island small states Upper middle-income Figure 2.4: …and higher than for most of Fiji’s structural peers (Standard deviation of GDP growth rate in percent, 1990-2022) 12 10 GDP Standard Deviation (1990-2022) 8 6 4 2 0 W M Ba U Fi Sa Be To Ja M Pa St pp al or ji au .L n m rb m l ci ize di ga ld er ai rit fic oa ad uc ve ca iu m os ia Is s s id la dl nd e- sm in co al m ls e ta te s 54 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 2.5: Output volatility has almost doubled (Standard deviation of GDP growth rate in percent) 16 Maldives 14 12 10 8 St. Lucia Fiji 2002-2007 6 Belize Mauritius Barbados 4 Pacific Island Samoa Jamaica small states Tonga 2 World Upper middle-income 0 0 2 4 6 8 10 12 14 16 1991-2006 Figure 2.6: Final consumption volatility is significantly higher than for GDP (Standard deviation in percent, 1991-2022) 14 Maldives 12 Belize 10 Final consumption 8 Fiji 6 Jamaica Tonga Barbados 4 Mauritius Samoa 2 Upper middle-income 0 0 2 4 6 8 10 12 GDP Source: World Bank (WB) calculations based on International Monetary Fund (IMF) and World Development Indicators (WDI). Note: Structural peers are in blue and aspirational peers in green in Figure 2.4 - 2.6. FIJI COUNTRY ECONOMIC MEMORANDUM 55 2.1.2. Climate, crises, and (economic) concentration all increase volatility 60. Fiji is highly vulnerable to extreme weather events and climate change which strongly affect the economy. Natural disasters such as TCs and floods have caused losses of 1.3 percent of GDP per year on average to the economy in the last 30 years, with peaks of 11.4 percent in 1993 after TC Kina and 14.8 percent in 2016 after TC Winston (Figure 2.7).31 Fiji’s rapid growth in the early 1990s was partly driven by reconstruction work after TC Kina and TC Gavin in 1997. In the period that followed, Fiji suffered three further severe cyclones: TC Ami in 2003, TC Mick in 2009, and TC Evans in 2012, causing total damage of 1.9, 2.5, and 2.9 percent of GDP and keeping economic growth low. In 2020–21 the economy was hit hard by the impacts of three TCs on top of COVID-19. 61. Intermittent political crises have been another source of volatility. During 1991–2012, on the back of political instability, real GDP growth averaged 1.9 percent or 1.1 percent per capita, with a standard deviation of 3 percent. From 2013 to 2019, Fiji’s economy turned around with growth averaging 3.1 percent or 2.9 percent per capita, with a standard deviation of 2.2 percent, as the country re-engaged with the international community following the democratic election in 2014 (IFC 2022). An Error Correction Model (ECM), assessing the role of political stability in growth, found that Fiji enjoyed higher average growth rates after political stability was achieved in 2009, until the pandemic in 2020 (Melamud n.d.). Figure 2.7: Natural disasters can cause significant amounts of economic damage Figure 2.7: Natural disasters can cause significant amounts of economic damage 16 6 14 GDP) of GDP) 5 12 4 (Percent of Episodes 10 Cost(Percent 8 3 6 2 Total Cost 4 1 Total 2 0 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2022 Total Damages Episodes Source: WB calculations based on EM-DAT (https://www.emdat.be) and IMF. 31 Total costs were 15.6 percent of GDP in the 1990s (from 7 episodes), 7.1 percent in the 2000s (13 episodes), and 19.3 percent in the 2010s (11 episodes). 56 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 2.8: Tourism-related sectors are among the most volatile Figure 2.8: Tourism-related sectors are among the most (Standard volatile deviation of sectoral growth in percent, 1991-2022) Growth Volatility by Sector 80 70 60 50 40 30 20 10 0 Mining and Quarrying Transport & Storage Accomm. & Food Construction AFF Manufacturing Wholesale & Retail Other industries Electricity & water Source: WB calculations based on WDI and IMF. Note: 1/ Red bars denote tourism-related sectors. 2/ AFF: Agriculture, fisheries, and forestry. Figure 2.9: Tourism is growing but vulnerable to external shocks Figure 2.9: Tourism is growing but vulnerable to external shocks 14 Tourism arrivals 1,000,000 900,000 12 800,000 10 700,000 600,000 8 500,000 6 400,000 4 300,000 200,000 2 100,000 0 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2011 Arrivals Average Length of Stay (days) Figure 2.10: Sugar cane production remains important for overall output but productivity is falling (Annual Figure 2.10: Sugar cane production production tonnes in for remains important per hectares) overall output but productivity is falling Sugar cane production 70 Annual production per hectare 60 50 40 30 20 10 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Source: WB calculations based on Reserve Bank of Fiji (RBF) data. FIJI COUNTRY ECONOMIC MEMORANDUM 57 62. Some sectors are more volatile than the overall economy. Aggregate GDP volatility is strongly and significantly correlated with volatility in individual sectors in most cases, as Box 2.1 shows. Mining and quarrying is the most volatile sector, but its total value added is low.32 Of the remaining sectors, transport and storage far exceeded the volatility of the rest, with a standard deviation of growth of 61 percent during 1990–2021 (Figure 2.8). It was followed by electricity and water, accommodation and food, and construction, all strongly linked to tourism activity. In contrast, agriculture, a very volatile sector in most countries, showed relatively lower volatility in Fiji. This is likely linked to its geographical and production diversity.33 ECM results show that crop production also plays a role in volatility: using sugar cane production (Figure 2.10) as a proxy for agricultural output, an increase in production of 6.5 tonnes per hectare (the sample standard deviation) increases output growth overall by nearly two-thirds of one percent (Box 2.2). 63. Tourism drives much of Fiji’s growth volatility, but also remains the lifeline of the economy. By 2019, tourism accounted for 23.2 percent of Fiji’s GDP and 30 percent of employment (World Bank 2024). Value added in tourism-linked services has grown consistently over the last three decades: visitor arrivals grew by 47.2 percent in the 1990s, 84 percent in the 2000s, and 42 percent in the 2010s (Figure 2.9). The average length of stay rose from 8.5 days in 1992–2003 to 9.5 days in 2004– 15 and 11.6 days in 2016–22. It was 10.3 days in 2023. As a result, any disruption in tourism causes a ripple effect across the economy, particularly affecting related industries. The ECM estimates that a 10 percent increase in tourist arrivals would increase Fiji’s short-run output growth rate by around 0.8 percent (Box 2.2). Box 2.1: Analysis of sectoral growth volatility in Fiji Analysis of Fiji’s surges and slumps, defined as instances where the output growth rate is above or below one standard deviation of the mean growth rate, shows that output surges are positively correlated across sectors. However, this positive correlation is only statistically and economically significant for some sector pairs, such as electricity and water with agriculture, wholesale with manufacturing, and transport with mining and quarrying. Aggregate GDP surges are strongly and significantly correlated with surges in sectoral output in most cases, except for construction and electricity. The patterns of correlation across sectors are slightly different for slumps, although positive and significant correlations between sectors can still be found for several sector pairs. Slumps in aggregate GDP are strongly and significantly correlated with slumps in sectoral output in about half of sectors (Table 2.1). Table 2.1: Correlation between real GDP and sectors and among sectors for surges and slumps 32 The mining sector grew by an annual average of 4.1 percent in 1991–99, -50.9 percent in 2000–09 and -1.7 percent in 2010–19. The sector’s volatility could be explained due to changes in ownership, the deed with the Government, and fluctuating international gold prices. 33 The agriculture sector largely consists of sugar, coconut, tobacco, and some emerging export crops such as kava, ginger, spices, and tropical fruits. There is also some livestock and subsistence farming (World Bank 2017). 58 FIJI COUNTRY ECONOMIC MEMORANDUM In most cases, slumps and surges in both GDP and sectoral output growth are short lived, lasting no more than two years, and in most cases only one year. There were two slumps in overall real GDP growth, in 1997–98 and 2020–21, with no multi-year surges during the entire sample period (Table 2.2). Individual sectors have more multi-year slumps than surges, with the majority experiencing two-year slumps. Only the construction and electricity and water sectors saw any two-year surges, while the wholesale sector experienced three two-year slumps, more than any other sector. To assess the severity of slumps and surges for both real GDP growth and each sector, the average growth rate is calculated, and the difference between the average and mean growth rate determined (Figure 2.11). On average, slumps and surges are milder for real GDP than for individual sectors. Surge episodes saw growth rates 0.6 percentage points (ppts) higher than the mean growth rate, while slumps saw growth rates 0.8 ppts lower than the mean. Individual sectors experienced much larger slumps (15.6 ppts for mining and 4.3 ppts for accommodation) and surges (9.9 percentage points for transport, 3.8 ppts for electricity, and 3.4 ppts for mining) compared to the mean growth rate. Table 2.2: Multi-year slump and surge episodes Growth Slumps and Surges with More than One Year Duration Slump Surge Real GDP Growth 2020,2021. ... Agriculture 1997, 1998; ... 2008, 2009. ... Mining and quarrying 2007, 2008. ... Construction 2020, 2021. 1991, 1992. Electricity and water ... 2017, 2018. Wholesale 2005, 2006; ... 2008, 2009; ... 2020, 2021. ... Accomodation 2020, 2021. ... Others 2020, 2021. ... FIJI COUNTRY ECONOMIC MEMORANDUM 59 Figure 2.11: Slumps and surges are more pronounced for individual sectors than the Figure as economy whole aSlumps 2.11: and surges are more pronounced for individual sectors than the economy as a whole (Standard deviation in percent) 10 5 0 Percent -5 -10 Slump Real GDP slump Surge Real GDP surge -15 M Tr Ac Ag C O El W M in -20 on an th an ec co in ho ric er st g sp tri m uf ul le s le re g n g n er s ru d an er rin io in tio ci or m ac tu sa sa an tu at c ty ct ry th od d re ta tio rta tu tu le ul w le ru ar qu O tio n an s rin at ric ac n ho d po od io st qu n io ar d an g fo dat Ag uf W on ns n w ry an d ty an at i C a o an ng ci M Tr m er d tri m g Fo in ec co od in El Ac M Source: Gonzalez (2024). 64. Fiji’s concentration in sectors with high levels of exposure to climate change is exacerbating its volatility. Like agriculture, tourism is incredibly vulnerable to climatic events. Considering the effect of temperature alone, one simulation suggests that climate change may reduce tourism revenues in Fiji by 18 percent by 2030 (IFC 2022). Losses can also be higher in the sector: while TC Harold affected a similar proportion of tourism and non-tourism businesses, tourism businesses suffered five times the financial losses of non-tourism businesses (IFC 2020). 65. Greater export concentration also contributed to the rise in growth volatility. Annual earnings from tourism grew from US$329 million (20 percent of GDP) in 1992 to US$2,065 million (38 percent of GDP) in 2019 and directly and indirectly account for almost half of Fiji’s goods and services exports. Sugar and garments, which together made up 56 percent of total goods exports in 2000 fell to 14 percent in 2022, while the shares of gold, fish, and timber remained stable. Meanwhile, mineral water rose from 1 to 26 percent of goods exports (Box 3.1), further contributing to export concentration, and other products increased from 22 to 41 percent. The level of export concentration, measured by the Herfindahl-Hirschman Index (HHI), has increased from an average of 0.194 during 2001–15 to 0.241 in 2016–21 (Figure 2.13). A limited export base increases the risk of international demand shocks causing large swings in export volumes and terms of trade. In contrast, greater diversification means that the country effectively has implicit and explicit international insurance schemes. Haddad et al. (2013) find that trade openness reduces output volatility in countries with a more diversified export base. Figure 2.12: Export share by trade partner (Share of total exports in percent) Source: Fiji Bureau of Statistics). 60 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 2.13: Fiji’s exports have become increasingly concentrated (Herfindahl-Hirschman Index) 0.3200 0.3000 0.2800 0.2600 0.2400 0.2200 0.2000 0.1800 0.1600 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: WB calculations based on Fiji Bureau of Statistics (FBOS). Figure 2.14: Fiji’s output is closely linked to that of its trading partners (Real GDP; index: 2015 = 100) Source: WDI. Figure 2.15: Foreign direct investment has also been very volatile Figure 2.15: Foreign direct investment has also been very volatile (Foreign direct investment, net inflows in percent of GDP) Foreign Direct Investment 20 15 10 Percent of GDP 5 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 -5 -10 Source: WB calculations based on WDI. FIJI COUNTRY ECONOMIC MEMORANDUM 61 66. Fiji’s economic cycle is strongly tied to those of its trading partners. There is strong empirical support for robust output linkages between Fiji and its main trading partners. The long-term coefficient on its partners’ GDP is slightly above one, which means that over the past decades, Fiji’s output has moved nearly one-to-one with that of its trading partners (Figure 2.14). Furthermore, a one percent increase in the growth rate of its trading partners increases Fiji’s growth rate in the short run by almost 0.8 percent. This close relationship underlines the importance of commercial and financial openness to Fiji’s growth. Swings in foreign direct investment (FDI) appear to be linked to Fiji’s output growth (Figure 2.15), although the impact is small (Box 2.2). Box 2.2: Using an Error Correction Model to understand the short-run dynamics of Fiji’s economy The Error Correction Model (ECM) is a statistical tool used in econometrics to analyze the long-term relationship between variables that are believed to be cointegrated. Cointegration implies that the analyzed series share a common long-term trend. In simple terms, it helps model and correct for situations where variables tend to move together in the long run. The model can help understand the short-term changes that result from deviations from the long- term relationship. The analysis tested the long-term relationship between Fiji’s GDP and that of its trading partners. The GDP of Fiji’s trading partners was constructed as a weighted average of the GDP of Australia, Japan, New Zealand, the United Kingdom, and the United States, with the weights reflecting the share of Fiji’s exports to these countries. The variables considered to assess the short-run dynamics of Fiji’s GDP are: • Tourist arrivals per year (Source: RBF) • Sugar cane production per hectare (Source: RBF) • Net inflows of foreign direct investment as a percentage of GDP (Source: WDI) • Lending interest rate (Source: WDI) • Real interest rate (Source: WDI) • Real effective exchange rate (Source: WDI) • Nominal official exchange rate (Source: WDI) • Government deficit as a percentage of GDP (Source: IMF) The analysis found that Fiji’s GDP has a stable and strong relationship with its trading partners’ GDP. As a small and open economy, Fiji’s GDP strongly depends on its trading partners’ economic activity (Figure 2.16). In the short run, the main shocks affecting output growth are supply shocks (tourist arrivals and agricultural production) (Figure 2.17). On the demand side, the most relevant policy shock is fiscal policy (fiscal deficit). The impact of the real and nominal exchange rate and of the interest rate was found not to be statistically significant. In other words, these variables do not exert a discernible influence on Fiji’s GDP growth. 62 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 2.16: ECM Long-run estimation of the drivers of Fiji’s GDP growth 0.5 0.4 Lagged Foreign GDP;0.357 0.3 0.2 0.1 0 -0.1 -0.2 Lagged GDP;- -0.3 0.303 -0.4 -0.5 Figure 2.17: ECM Short-run estimation of the drivers of Fiji’s GDP growth 1.1 0.9 0.7 0.5 Foreign GDP;0.786 0.3 Tourist arrivals; 0.08 Sugar cane 0.1 production; 0.001 -0.1 Foreign Direct Government deficit; Investment; -0.002 0.004 -0.3 -0.5 Source: WDI. The variables are all significant at 1%, 5%, and 10% levels of significance. 2.1.3 A volatile economy makes for a challenging policy landscape 67. Macroeconomic volatility has been accompanied by volatile public expenditure. Public spending has been twice as volatile as GDP, with a real growth standard deviation of 8.9 percent between 1992 and 2022. For some expenditure categories, such as use of goods and services and public investments (net acquisition of non-financial assets) the swings between years are even more pronounced, with double-digit changes more of a rule than an exception (Figure 2.18). The real growth standard deviation reached 16.5 percent for goods and services and 33.3 percent for public investment. 68. Volatility makes the task of government budget planning and execution more challenging. Together with other weaknesses in public financial management, volatility contributes to high levels of variance between approved and actual spending. The Public Expenditure and Financial Accountability (PEFA) assessment in 2019 gave Fiji weak scores for macroeconomic and fiscal forecasting (C+ on a FIJI COUNTRY ECONOMIC MEMORANDUM 63 scale from A to D, where A is best), fiscal strategy (C+), and medium-term perspective in expenditure budgeting (D+)34 during 2017–19, a period when Fiji suffered no major shocks, unlike 2016 and 2020–21 (World Bank 2023a). 69. Macroeconomic stability has been further challenged by persistent fiscal deficits and recently by high public debt. Fiji has seen consistent fiscal deficits in the last three decades, averaging 5.3 percent of GDP in the 1990s, 7.3 percent in the 2000s, 3.7 percent of GDP in 2011–19, and reaching 10 percent of GDP in 2020–22 (Figure 2.19). An increase in the fiscal deficit of 1 percentage point was found to reduce short-run growth by almost 0.5 percent owing to the potential response of the private sector (Box 2.2). World Bank calculations based on a Pearson correlation matrix show that consumption is negatively correlated with fiscal deficit and investment. On the other hand, investment and fiscal deficit are positively and weakly correlated. Therefore, expansionary fiscal policies may boost investment, crowding out consumption. It is plausible to expect that the overall effect could be contractionary since consumption represents around 70 percent of GDP. Additionally, fiscal deficit is positively correlated with real exchange rate: expansionary fiscal policy also leads to real appreciation, reducing net exports and limiting output growth.35 Public debt fluctuated between 35 and 50 percent of GDP between 1991 and 2019, but during COVID-19, Fiji saw the sixth largest buildup in public debt across the globe—amounting to 41 percent of GDP (Figure 2.20 and 2.21) (World Bank 2023a).36,37 A high public debt burden could negatively affect capital accumulation and economic growth in the country by increasing long-term interest rates and reducing investor confidence. The 2024 World Bank Debt Sustainability Analysis assessed that debt will remain sustainable if the Government continues with fiscal consolidation. Figure 2.18: Budget expenditure has also been volatile (y/y in percent) Figure 2.18: Budget expenditure has also been volatile 200 Budget Expenditure 150 100 50 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 -50 -100 Use of goods and services Net acquisition of non-financial assets Total expenditure Source: WB calculations based on the IMF World Economic Outlook (WEO-IMF). 34 With scores of D for medium-term expenditure ceilings, the alignment of strategic plans and medium-term budgets, and consistency of budgets with previous year’s estimates. 35 A previous study did not find a stable relationship between fiscal policy and economic growth: Despite sizeable swings in the government’s fiscal position over the past few decades, there is no evidence of contemporaneous or lagged correlation between the general government fiscal balance (as a ratio of GDP) or its broad components (revenues and expenditures) and output growth. This does not mean fiscal policy is impotent. It does, however, suggest that the effects of any change in policy may be conditional on the response of the private sector. This response may vary depending on the stage of the cycle and the perceived ‘appropriateness’ of the policy actions (Williams and Morling 2000, pp. 26-27; own emphasis). 36 Many peers face serious debt challenges. In mid-2022, Maldives and Mauritius were at high risk of debt distress (https://www. imf.org/external/Pubs/ft/dsa/DSAlist.pdf). 37 The channels through which government debt could have an impact on the economic growth rate are: a) private savings; b) public investment; c) total factor productivity (TFP); and d) sovereign long-term nominal and real interest rates (Checherita and Rother 2010). 64 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 2.19: Fiji has run persistent fiscal deficits for the past 30 years (Fiscal deficit in percent of GDP) Figure 2.19: Fiji has run persistent fiscal deficits for the past 30 years 40 30 20 % of GDP 10 0 -10 -20 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 Overall balance Revenue Expenditure Figure 2.20: Public debt spiked sharply during COVID-19 (Public Figure 2.20: Public debt spiked debt sharply in percent during of GDP) COVID-19 100 Public debt 90 80 70 % of GDP 60 50 40 30 20 10 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Domestic External Total Figure 2.21: Fiji’s debt has risen faster than most of its peers (Gross public debt in percent of GDP) 140 120 100 80 60 40 20 0 Fiji Belize Jamaica Tonga Samoa Barbados Maldives St. Lucia Mauritius 2001 2019 2022 Source: WB calculations based on the IMF World Economic Outlook (WEO-IMF). FIJI COUNTRY ECONOMIC MEMORANDUM 65 70. The two objectives of monetary policy in Fiji are ensuring price stability and maintaining a stable level of foreign reserves. The Reserve Bank of Fiji (RBF) seeks to maintain average inflation rates at around 3 percent and foreign reserves at a level sufficient to cover at least 4–5 months of imports. The RBF’s key policy instrument is the setting of the Overnight Policy Rate (RBF 2024). It also conducts open market operations by buying/selling its own securities (known as RBF notes) to alter the reserve supply in the banking system. Finally, several exchange rate restrictions and capital flow measures are in force to safeguard exchange rate stability and maintain foreign reserves. 71. The managed exchange rate policy has contributed to stabilizing prices. Fiji’s exchange rate has been pegged to an annually revised weighted basket of its trading partners’ currencies since 1975.38 The Fijian dollar has remained stable against the US dollar since 1990, apart from during the Asian financial crisis of 1998 and the global financial crisis of 2009, when it fell by 20 percent on both occasions (Figure 2.22). Inflation has stabilized from 8.2 percent in 1990 to an average of 3.4 percent in the 2000s and 3.2 percent in the 2010s (Figure 2.25 and Figure 2.26). As with other tourism-dependent peers, such as Belize and St. Lucia, Fiji’s real effective exchange rate has been gradually depreciating: by 6.9 percent in the 2000s, 4.7 percent during 2010–19 and 2.8 percent during COVID-19 (Figure 2.27). Real depreciation could improve Fiji’s trade competitiveness by increasing industrial exports, but these make up only a small share of the economy. 72. Since 2001, monetary policy has been more accommodative. Amid high levels of liquidity, the RBF gradually reduced interest rates from over 10 percent in the 1990s to close to 7 percent in the 2000s and below 6 percent in the 2010s, to encourage investment (Figure 2.23). However, these interest rate reductions were not successful. According to the ECM, changes in neither the nominal exchange rate nor the lending interest rate seem to affect output growth in the short or long term (see Box 2.2).39 This may be because investors place higher priority on good governance, effective property rights, and macroeconomic stability than on investment incentives and low interest rates (Rodrik 1991; Le 2004; Rao and Singh 2006). 73. However, the accommodative monetary policy stance has put pressure on the exchange rate and may lead to higher inflation. The banking system is highly liquid and reserves have risen from US$372 million in 1990–2009 to over US$1,500 million in 2021–22 due to the largely unsterilized influx of external financing (IMF 2023b). High liquidity levels have helped keep interest rates at near historic lows amidst rising rates elsewhere (Figure 2.25). Although the near-term outlook for inflation and the exchange rate remains stable, there are risks of inflationary pressures, especially from strengthening domestic demand and the closing output gap. Moreover, the effects of import prices may come with lags given Fiji’s high level of price controls (more details in Chapter 3). 74. Price and exchange rate stability have been achieved at the cost of an overvalued currency. The Fijian dollar is overvalued (IMF 2023b). In the wake of accommodative monetary policies, the RBF persistently infused liquidity in the interbank foreign exchange market. However, as its foreign exchange supply could only partially meet the excess demand, the RBF embraced several capital control measures which kept currency depreciation in check but distorted the fundamentals of a competitive and stable currency. The overvaluation has persisted (excluding the 1998 and 2009 devaluations) due to restrictions on access to foreign exchange, leading to various distortions. The RBF defends its current exchange rate practices, arguing that a large depreciation would only lead to a higher inflation without encouraging a significant supply-side response from the non-tourism sector (RBF 2024). However, some empirical studies show that the exchange rate can play an effective role in inducing non-traditional export growth, export diversification, and an improved trade balance (Rodrik 2008; Rapetti, Skott, and Razmi 2012). Comprising the Australian dollar (AUD), New Zealand dollar (NZD), United States dollar (USD), Japanese Yen (JPY), and the 38 Euro (EUR). 39 The real interest rate does not appear to affect output growth either. 66 FIJI COUNTRY ECONOMIC MEMORANDUM 75. A pegged exchange rate coupled with monetary policy autonomy, following the policy trilemma, increases Fiji’s dependency on capital flow measures. Within its policy mandate of price and foreign reserve stabilization, the RBF maintains a stable exchange rate, uses its monetary policy (interest rate) to promote economic growth, and controls capital mobility during economic cycles. The frequent use of countercyclical adjustments of capital flow measures suggests that they are being used instead of the macroeconomic adjustment that is needed. Limited capital mobility and a foreign exchange reserve level near the threshold imply that monetary policy is losing some of its effectiveness for macroeconomic stabilization, and that the exchange rate cannot absorb external shocks. As a result, the burden of adjustment falls upon fiscal policy, but Fiji currently does not have enough fiscal space to respond to the shocks its economy is vulnerable to. Capital flow measures can reduce access to international financial markets, limit domestic financial sector development, and create a parallel foreign exchange market. Frequent use can also reduce the country’s long-term attractiveness to investors. In general, it can lead to misallocation of resources. Figure 2.22: Fiji’s currency has remained fairly stable against the US dollar 2.5 Official exchange rate: LCU per US$. period average 2 1.5 1 0.5 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Figure 2.23: Interest rates have gradually reduced since the 1990s Figure 2.23:Interest rates h Percent ave gradually reduced since the 1990s Lending interest rate (%) 14 12 10 8 6 4 2 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 FIJI COUNTRY ECONOMIC MEMORANDUM 67 Figure 2.24: Credit growth has been very volatile Percent Figure 2.24:Credit growth has beenvery volatile 50.0 40.0 30.0 20.0 10.0 0.0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2011 -10.0 -20.0 GDP growth Credit growth Figure 2.25: Inflation has largely stabilized since 2000 Percent Figure 2.25: Inflation has largely stabilized since 2000 15 Inflation and Real interest rate 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2011 -5 -10 Inflation Real interest rate Figure 2.26: Inflation in Fiji is lower than its peers Annual average (in percent) Figure 2.26: Inflation in Fiji is lower than its peers 25 20 Annual average (in %) 15 10 5 0 Fiji Belize Jamaica Tonga Samoa Barbados Maldives St. Lucia Mauritius 1990 2000 2010 2022 68 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 2.27: Fiji’s real effective exchange rate has been gradually depreciating (Annual average; index: 2010 = 100) 140 130 Annual average (2010=100) 120 110 100 90 80 70 60 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Fiji Belize Samoa St. Lucia Source: WB calculations based on data from RBF, WDI. Note: A decline in the exchange rate indicates a depreciation. 2.2. Macroeconomic policies have magnified rather than reduced volatility 76. Fiji’s macroeconomic policies have tended to amplify cyclicality. As discussed above, high consumption volatility relative to GDP growth volatility suggests that, as is expected in emerging markets (Aguiar and Gopinath, 2007), macroeconomic policies and financial markets have not been effective at smoothing income shocks, exacerbated in Fiji’s case by the positive correlation between remittances and consumption. Moreover, the fact that both non-tourism and tourism activities experienced volatility reinforces the argument that policies may have magnified the impact of external shocks. Fiji’s fiscal, monetary, and external policies have not smoothed business cycles: during both boom and bust years, its macroeconomic policies have moved broadly in the same direction and by the same magnitude (Figure 2.29). Taken together, Fiji’s fiscal, monetary, and exchange rate policies have been procyclical or neutral and therefore unable to smooth the economy’s volatility in consumption and output. 2.2.1. Fiscal policies have not smoothed the business cycle 77. The fiscal policy response to economic cycles has been procyclical, exacerbating volatility. The fiscal balance has slightly worsened during busts (-1.5 percent of GDP), as increases in public spending (+2.2 percent of GDP) were coupled with lower increases in revenue (+0.7 percent of GDP) (Figure 2.29). As the fiscal deficit was at similar levels during booms and busts, so too was public debt (49.4 percent of GDP compared to 49.6 percent). 78. Total expenditure has been more procyclical than Fiji’s peers. The correlation between the cyclical component of GDP and total expenditure and fiscal deficit respectively, calculated through an empirical test using the Hodrick-Prescott filter for 1992–2022, shows that procyclicality is common among Fiji and its peers (Figure 2.28). The correlation coefficient for total expenditure was +0.345 for Fiji, indicating a procyclical relationship; Fiji is second only to Maldives in this measure. Although also strongly procyclical, the correlation for Fiji’s fiscal deficit was slightly below the peers’ average. Fiji’s peers do not use countercyclical fiscal rules, but Australia and New Zealand do, contributing to macroeconomic stability (see Table A.4 in Annex D). FIJI COUNTRY ECONOMIC MEMORANDUM 69 Figure 2.28: Procyclical policies are common in Fiji and its peers Source: WB calculations based on data from WEO-IMF. Note: Expenditure data are not available for Mauritius. Figure 2.29: Fiji: Procyclicality of macroeconomic policies Figure 2.29: Fiji: Procyclicality of macroeconomic policies 60 40 20 0 -20 -40 -60 Trade balance-to-GDP /3 Current account balance-to- Net intervention-to-GDP Budget balance Depreciation rate /2 Revenue Lending rate /1 Expenditure Deposit rate /1 Credit growth Debt Inflation GDP /1 Panel A: Monetary policy (%) Panel B: Fiscal (% of GDP) Panel C: External sector (%) Boom Bust Source: WB calculations based on WEO-IMF, WDI, RBF and FBOS. Note: Boom years (based on GDP growth of 3% or more): 1992, 1994, 1996, 1999, 2002, 2004, 2010, 2013–15, 2017–18, 2022). Bust years: 1993, 1995, 1997-98, 2000–01, 2003, 2005–09, 2011–12, 2016, 2019–21. Coverage: 1/ 2001–22; 2/ 2002–22; and 3/ 2006–22. 70 FIJI COUNTRY ECONOMIC MEMORANDUM 2.2.2. Monetary and exchange rate policies have also been insensitive to business cycles 79. The financial sector’s credit response to economic cycles has also been procyclical and contributes to growth volatility, although it is likely endogenously determined and not entirely driven by policy choices. Most of the indicators have moved in the same direction irrespective of booms and busts although the magnitude over the cycles does seem to be materially different (Figure 2.29). For instance, credit grew slightly more in booms (3.1 percent) than in busts (2.4 percent) but despite volatility over the last 30 years, has tended to be procyclical to GDP growth.40 Lending and deposit rates were higher during bust years (7.2 and 3.5 percent) than in boom years (6.4 and 2.5 percent). However, the banking sector has been profitable, well capitalized (well above the minimum regulatory requirement of 12 percent), liquid, and its exposure to sovereign debt appears manageable (less than 5 percent of total assets). 80. Exchange rate policy has been insensitive to business cycles but helped avoid depletion of foreign reserves. On the external sector, current account and trade balances, as a share of GDP, were similar during bust and boom years (7.6 and 43.3 percent during bust years compared with 9.4 and 41.2 percent during booms). The Fijian dollar stayed constant on average during busts and depreciated by only 0.3 percent during booms. Foreign reserve accumulation was not related to the economic cycle as the RBF made similar net interventions during busts (1.1 percent of GDP) and booms (1.2 percent of GDP). There are good reasons why the RBF may wish to limit exchange rate fluctuations, due to an elevated level of dollar-denominated external debt, and the price elasticity of tourism exports to changes in the Fijian dollar. 81. Most of Fiji’s peers have a managed exchange rate regime, pegging their currency to the US dollar. Only Jamaica has a floating system. Fiji, Belize, and St. Lucia have exchange rate systems that use the most capital controls. Some peers waive controls on commercial and financial credits (see Table A.5 in Annex D). 2.3. Policy priorities: Smoothing volatility and building stability 82. Fiji’s macroeconomic management improved during 2022–23. Two consecutive years of budget deficit reduction have improved its fiscal stance, from 11.7 percent of GDP in 2021 to 4.6 percent in 2023. This has led to the public debt-to-GDP ratio falling from 92.8 percent of GDP in 2021 to 81.5 percent in 2023. The drop in the fiscal deficit was driven by an under-execution of capital spending and the wage bill, and by strong revenue collection.41 Further fiscal consolidation is needed to put debt on a clearly downward trajectory, thereby rebuilding fiscal buffers (World Bank 2023a). The 2024 DSA assessed Fiji’s risk of debt distress as moderate, under a fiscal consolidation scenario bringing the primary balance from 0.5 percent of GDP deficit in 2023 to 0.5 percent surplus in the medium and long-term. 83. However, policy improvements are needed. Fiji’s fiscal, monetary, and exchange rate policies have been ineffective in mitigating macroeconomic volatility due to its increasing dependence on the tourism sector. Accordingly, the main thrust of the policy recommendations that follow is on sound macroeconomic policies aimed at smoothing consumption rather than production. The correlation coefficient between the cyclical components of GDP and credit growth measured by the Hodrick-Prescott filter 40 was 0.235 during 1990–2022. 41 In 2022, the Government was able to roll back the COVID-19 fiscal support package. In February 2023, it tabled the first Medium-term Fiscal Strategy to the Parliament. The FY23 Budget realigned the corporate tax rate to 20 percent, raised vehicle duties, placed strict controls on public wages, and reduced operating subsidies and capital expenditures. The FY24 Budget provided further bold measures to improve revenue generation, including increasing rates for value-added tax (VAT), corporate income tax, airport departure tax, water resource tax, and other duties and excises. FIJI COUNTRY ECONOMIC MEMORANDUM 71 2.3.1. Instilling a fiscal responsibility framework 84. Reinforce the fiscal institutional framework with fiscal responsibility. Revise the 2004 Public Finance Management Act to introduce a fiscal anchor, fiscal rules, and a fiscal council to strengthen public oversight and accountability: • Establish simple and transparent fiscal rules. These are more convenient for countries like Fiji than more sophisticated options favoring countercyclical fiscal stances which require high levels of institutional and technical capacity. A combination of a primary expenditure rule and a debt anchor42 replicates the countercyclical effects of a structural balance rule while preserving the strong link with fiscal sustainability (Box 2.3). Together with accurate revenue projections, this can be translated into overall or primary balance targets. • Include an escape clause to permit a rapid response to natural disasters, triggered only with Parliamentary approval. The clause could predefine a clear list of major events or shocks that could have a serious adverse impact on public finances and specify measurable conditions for triggering the clause, such as declines in projected GDP or fiscal revenues from previous estimates. The escape clause could primarily be used for the primary expenditure rule (or the budget balance rule), but not for the debt anchor, which already has a 10-percentage point margin built in to provide flexibility in achieving the targeted debt-to-GDP ratio. • Insert an automatic correction mechanism that can be triggered by substantial cumulative deviations from the target. Once the cumulative deviations exceed a prespecified threshold, additional fiscal adjustment would be required in future years to bring fiscal performance back in line with the rules. • Constitute an independent fiscal council with a mandate to produce unbiased projections and evaluate compliance with fiscal rules. This would enhance transparency and accountability and buttress the credibility of the framework. The Minister of Finance could be required to explain deviations from the fiscal rules in a mid-term budget review in Parliament and outline corrective steps.43 A public-private forum to monitor and comment on the conduct of fiscal policy could further strengthen public awareness and consensus regarding fiscal policy goals. • Accommodate the building up and annual replenishment of a natural disaster reserve fund and disbursements from the fund to cover for losses and damages from natural disasters.44 This fund and climate action proposed in Chapter 1 will contribute to smoothing the impact of natural disaster events on macroeconomic volatility. Given the role of the automatic stabilizers in stabilizing the economy and smoothing the business cycle, the GoF could improve social safety nets and their targeting. A workplan on the latter has already been approved and is being implemented. 42 Adopt a maximum debt limit of 80 percent of GDP, with a debt target of below 70 percent of GDP (benchmark for Market Access Countries like Fiji under the WB DSA framework), ensuring a high probability of debt remaining below limit even when negative shocks occur over the medium term. 43 The Government could do so in its annual submission of the Medium-term Fiscal Strategy to the Parliament before the budget preparation. 44 Fiji maintains a contingency fund for disaster response, but annual budget allocations are nominal (e.g., FJD 1 million for FY23-FY24). 72 FIJI COUNTRY ECONOMIC MEMORANDUM Box 2.3: Fiscal rules: Objectives, types, and examples Well-designed fiscal rules and supportive fiscal frameworks are essential elements of a transparent, predictable, and sustainable fiscal policy that anchors the economy and dampens economic fluctuations. Fiscal responsibility laws, fiscal rules, and escape clauses can make fiscal policy more predictable, enhancing the Government’s overall policy credibility, which in turn can facilitate access to financial markets and increase its ability to leverage those markets to support macroeconomic stabilization. The primary objective of fiscal rules is ensuring debt sustainability and output stabilization. By imposing numerical norms on debt levels, fiscal balances, or other key fiscal aggregates, fiscal rules lessen the deficit bias and reinforce the commitment of policymakers to debt sustainability. Fiscal rules can also help stabilize economic fluctuations by enabling a-cyclical or countercyclical fiscal responses, mitigating fluctuations in output and consumption associated with business cycles. Operational fiscal rules differ according to the type of budgetary aggregate that they seek to constrain and have different advantages and drawbacks (Table 2 3). The design of a rule-based fiscal policy framework should address the need for short-term economic stabilization and ensure fiscal sustainability over the long term. • Debt rules, such as a ceiling on the debt-to-GDP ratio or a debt brake mechanism, safeguard fiscal solvency by linking fiscal stances to debt sustainability over the medium term. However, they are not typically effective as operational fiscal rules, because policy changes tend to take longer than the annual budget horizon to affect debt dynamics, and they lack macroeconomic countercyclical properties. • Budget balance rules, such as a ceiling on the overall budget deficit, are easy to monitor and implement and can support debt sustainability. However, they do not have macroeconomic stabilization properties and tend to lead to procyclical fiscal policy. • Structural budget balance rules account for economic shocks and allow automatic stabilizers to operate. While these augment the economic stabilization role of fiscal policy, inherent uncertainties in estimating the output gap make these rules difficult to implement, monitor, and communicate. • Expenditure rules, such as a ceiling on nominal expenditure growth, are operationally simple and provide clear guidance on how to adjust the fiscal stance over time. Expenditure rules aim to control the size of government and have positive effects on output smoothing, as they make spending a-cyclical. They can be made even more countercyclical by excluding automatic stabilizer spending categories (such as unemployment insurance) from caps on spending growth. By making government spending a-cyclical, they have positive effects on debt sustainability during upturns but deteriorating effects on fiscal balances during downturns. Therefore, expenditure rules have no clear effects on fiscal sustainability unless combined with a debt rule or budget balance rule. Although a single rule offers simplicity, many countries use a combination of different fiscal rules to address specific aspects for fiscal policy. As every fiscal rule has advantages and weaknesses, it is common to bring together the key elements of various fiscal rules in a fiscal responsibility framework. About 80 percent of the countries implementing rule- based fiscal policies use a combination of two or more fiscal rules— aiming to provide a medium-term anchor for fiscal policy and one (or multiple) operational target(s) on key fiscal aggregates (Table A.4 in Annex D). FIJI COUNTRY ECONOMIC MEMORANDUM 73 Table 1.1: Summary of fiscal rule types and examples Rules Definition Pros (+) Cons (-) Examples Expenditure rules Limit total/primary/ Clear operational Not linked to debt Namibia: public (ERs) current spending, guidance; steer the sustainability as expenditure levels either by putting size of government; no constraints on below 33 percent a ceiling on its allow for economic revenue side; could of GDP. Peru: real (nominal or real) stabilization; easy to lead to changes in growth of current growth, or on the communicate and composition; may expenditure ceiling of ratio to GDP. monitor. reduce incentive to 4 percent. mobilize revenues. Budget balance Constrain the size Clear operational Could be procyclical; Indonesia, Israel: rules (BBRs) of the (recurrent, guidance; easy to could lead to changes overall deficit of 3 primary, overall) communicate and in composition; percent of GDP. deficit and thereby monitor; closely could be affected by control the linked to debt developments outside evolution of the sustainability. government control debt ratio. (e.g., a major economic downturn). Debt rules (DRs) Set an explicit Linked to debt No clear operational Liberia, Poland: debt limit (anchor) on sustainability; easy guidance as policy ceiling of 60 percent the stock of public to communicate and impact on debt limit of GDP. debt. monitor. is not immediate; rules could be met via Kosovo: debt ceiling temporary measures of 40 percent of (e.g., below-the-line GDP. transactions); can be procyclical; debt could be affected by developments outside government control. Floor on capital Set an explicit Protect and promote Lower incentives for Peru and Costa expenditure floor on public public investment. cost-benefit analysis; Rica: ceiling on investment. favors creative current expenditure accounting and combined with a the reclassification ceiling on total of unproductive expenditure. expenditures as investment; excessive borrowing and risks to debt sustainability. Structural balance Account for the Countercyclical; Need to estimate the Sweden: surplus of 1 rules business cycle and linked to debt structural balance; percent of GDP over set up structural sustainability. difficult to compute and the cycle. budget balance monitor. target. Revenue rules Set ceilings or Can improve revenue Not linked to debt Kenya: maintain floors on revenues, performance; steers sustainability as revenues at 21–22 or determine government size; no constraints on percent of GDP. use of windfall clear operational expenditure side; no France: determine ex revenues. guidance; easy to economic stabilization ante the allocation of communicate and feature (can be higher-than-expected monitor. procyclical). tax revenues. 74 FIJI COUNTRY ECONOMIC MEMORANDUM RAISING Chapter 3 PRODUCTIVITY In recent decades, much of Fiji’s productivity growth has been due to its structural transformation, as its workforce switched from agriculture and industry to services, and particularly tourism. As the services sector matures, future productivity gains will have to come from increased efficiency and innovation among Fiji’s businesses. Younger firms, and those engaging in international trade, appear to perform better, but the market may not be effectively allocating resources such as labor and capital to the most efficient firms. Recent reforms have improved Fiji’s business environment, but the playing field is still by no means level, with price controls and restrictions on foreign entries. The state has a substantial footprint in the economy, including many Businesses of the State, which are active even in competitive sectors where there seems little justification for their presence. Strengthening the business environment to facilitate competition and investment and expanding access to infrastructure and markets will be key to addressing the constraints Fiji’s businesses face. Summary Fiji’s structural transformation from an agricultural economy to a largely services-based one has brought about gains in productivity, but these have stagnated. Detailed, firm-level data show that private sector employment has risen in the past few years, but labor productivity has not kept pace. Fiji’s older, larger firms have proved less productive than smaller, newer ones. Although the market has proved effective at weeding out the least productive firms, it is failing to attract highly productive entrants, hindering overall efficiency. Resources are being misallocated, rather than flowing towards the most productive firms. These dynamics have put a significant brake on productivity growth. Fiji’s business environment does not always favor the most productive firms. Recent reforms have been impressive, streamlining registration and licensing processes, but the regulatory environment still poses challenges for businesses, especially foreign entrants. Nor does it offer a level playing field for all firms. Fiji’s state footprint is also relatively large. Directly or indirectly, it has interests in 59 Businesses of the State (B0Ss), including 25 state-owned enterprises (SOEs). These operate across a wide range of markets, including in competitive sectors where there seems to be little justification for state ownership, such as hotels and restaurants. As a small archipelagic nation, Fiji’s open economy is hindered by high trade costs and barriers to competition. Trade has played a key role in its economy and is associated with notable welfare gains for businesses and consumers. Despite this, Fiji has one of the highest import tariff rates among its peers. Trade is also hampered by poor logistics and limited shipping connectivity, although Fiji does serve as a regional transshipment hub for its South Pacific neighbors. Fiji’s services sector remains moderately restricted, with professional, finance, and communications services being the most restricted. Widespread price controls and barriers to foreign entry distort competition. FIJI COUNTRY ECONOMIC MEMORANDUM 75 Boosting productivity will mean creating a conducive environment for business to facilitate trade, competition, and private investment. Regulatory reforms will need to be developed using effective public-private dialogue and their implementation carefully sequenced. Private investment would be boosted through inward investment policies designed to foster competition and increase value-addition. Meanwhile the Government could reduce the cost and time of border clearances to facilitate trade. A thorough review of state-owned businesses would help to ensure that they are not stifling competition and that there is an economic rationale for their continued market presence. Input market challenges could be addressed, and market linkages created through provision of high-quality infrastructure to support domestic value added especially in agriculture. 3.1. Fiji’s private sector will be key to achieving sustained productivity gains 3.1.1. The impact of the structural transformation on productivity is fading 85. Fiji has seen gains in labor productivity, primarily driven by a shift in the workforce away from agriculture, but this impact has likely plateaued. Between 1991 and 2019, the agricultural workforce contracted by half, and the industrial workforce by one-third. Labor productivity within the services sector was nearly two to three times the levels in agriculture and industry in the early 1990s, so this shift significantly contributed to the overall rise in aggregate labor productivity. As the services sector matures, the economy will struggle to maintain the level of productivity growth this transition achieved. In the last two decades, labor productivity growth in the services sector has levelled off, notably falling behind benchmarks set by peers. This poses a significant constraint, especially now that the structure of the economy is predominantly service-based. 76 FIJI COUNTRY ECONOMIC MEMORANDUM 86. As Fiji charts its course towards sustained economic growth, it will need to enhance the performance of the private sector. More specifically, addressing the challenge of productivity in the services sector will be pivotal to its sustained and diversified economic advancement. With the impact of any further structural transformation expected to diminish, productivity growth now depends on enhancing the efficiency of firms. 87. The performance of individual firms can shed light on the factors supporting or challenging Fiji’s productivity growth. Based on data from the Fiji Revenue and Customs Service (FRCS), the analysis looks at trends in the productivity of private-sector firms and the underlying factors behind them. It then considers the impact of market dynamics on overall productivity, whether through firms entering and exiting the economy, or the allocation of resources among businesses.45 3.1.2. Nimble new firms with an international outlook could drive private sector growth Private sector employment is rising but labor productivity has not kept pace 88. Firms’ performance improved during 2016–22, despite the COVID-19 pandemic. The analysis uses value-added tax (VAT) payments from the FRCS data as a proxy for performance (see Annex E). Based on this proxy, average real value added exhibited sluggish growth from 2016 to 2019 but maintained a degree of stability. The COVID-19 pandemic disrupted this pattern, causing a decline in average value added per firm from FJD 79,167 in 2019 to FJD 59,107 in 2021. However, the rebound in 2022 propelled average value added to FJD 95,463, exceeding pre-pandemic levels (Figure 3.1). 89. Employment in firms has increased remarkably but likely reflects formal sector growth only. Employment has followed a different trajectory to value added (Figure 3.1). After falling slightly between 2016 and 2018, it started to rise from 2018 onwards. This resulted in remarkable employment growth of 95 percent between 2016 and 2022, translating to a (simple) average annual growth rate of 15.9 percent.46 This is substantially higher than the figures from the Fiji Bureau of Statistics (FBOS), which reports employment growth of 2.5 percent during 2016–17, 1.1 percent during 2017–18, and 1.9 percent during 2018–19.47 This difference likely stems from limitations in the VAT data, which underestimate employment in informal or unregistered businesses; the data used here also reflect the post-COVID recovery period. 90. The relationship between value added and employment depicts a complex pattern of changes in labor productivity between 2016 and 2022. From 2016 to 2018, sluggish value-added growth was offset by declining labor demand, resulting in a positive trend in labor productivity (Figure 3.1). However, the employment resurgence in 2019, without a commensurate increase in output, caused a dip in labor productivity. The COVID-19 pandemic exacerbated this decline, pushing productivity to its lowest point in 2021. Value added recovered as employment growth moderated in 2022, resulting in an improvement in labor productivity. International trade offers an opportunity to improve productivity and competitiveness 91. International markets offer immense potential for growth for firms that can navigate them. Imports provide Fijian businesses with access to a wider range of inputs and intermediate goods at competitive prices, potentially fostering innovation and improving product quality. This access is particularly valuable for small island economies with limited domestic resources. It allows them to integrate into global value chains, creating new opportunities and fostering knowledge transfer through 45 The analysis includes all firms in the agriculture, industry, and services sectors that paid value-added tax between 2016 and 2022. Note that the data do not differentiate between self-employed firms and others. 46 Log employment growth between 2016 and 2022 is 45 percent. This is equivalent to level employment growth of 95 percent. 47 June-to-June; y/y (see https://www.statsfiji.gov.fj/statistics/social-statistics/employment-statistics44. html?highlight=WyJlbXBsb3ltZW50Il0=). FIJI COUNTRY ECONOMIC MEMORANDUM 77 exposure to international best practices, potentially leading to domestic productivity improvements. Firms engaging in international markets would be expected to improve productivity through learning from their global partners (De Loecker and Warzynski 2012) and because of their exposure to competition from world markets.48 92. International trade has a positive effect on firms’ performance. As would be expected from the literature, firm-level performance analysis shows that participating in international markets positively affects employment and value added among firms in Fiji (see Table A.6 in Annex E). Importing firms enjoyed a remarkable 24.8 percent increase in employment during 2016–22, and a 31.3 percent jump in value added over the same period. Meanwhile exporting firms showed a respectable 11.3 percent increase in employment and a 14.3 percent increase in value added. 93. However, international trade seems to have less encouraging impacts on productivity. Despite the increases in employment and value added, there is no significant difference in labor productivity between firms that import or export and firms that do not. This might be due to the method used to calculate productivity, which factors in both value added and labor. The increased value added may have been offset by the accompanying rise in labor, masking any true productivity gains. 94. Fijian firms primarily engage with international markets through imports rather than exports. Over 30 percent of firms in Fiji were importing goods in the period 2016–22, albeit on a declining scale, suggesting a significant reliance on the international market for inputs and intermediate goods (Figure 3.2). In comparison, exporters make up less than one-third of that share, with fewer than 10 percent of firms exporting goods. The relatively modest export volume can be attributed, at least in part, to the country’s small economy and resource constraints. 95. Excessive reliance on imports can contribute to volatility. Dependence on imports can leave businesses vulnerable to external shocks such as price fluctuations, supply chain disruptions, or trade wars, significantly affecting their operations. Dependence on imports can also limit how much of the value chain is captured domestically, hindering job creation and economic diversification and potentially jeopardizing long-term sustainable growth. 96. Import-induced volatility can be mitigated by better export performance. Increased exports offer a powerful shield against external shocks and can unlock sustainable and resilient growth. The demands of global competition can also act as a powerful catalyst for innovation. As Fijian firms strive to create more and higher-quality, competitive exports, they are likely to invest in research and development (R&D), leading to improved products and processes. This would not only benefit their export performance but also improve their domestic offerings, further enhancing their competitiveness and contribution to broader economic development. One notable example of an international Fijian success has been Fiji Water (Box 3.1). 48 For more recent empirical evidence, see Amiti et al. (2023), Chen et al. (2021), Bloom et al. (2020), and Fernandes et al. (2019). 78 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 3.1: Productivity gains have not kept up with increasing employment among Fiji’s firms 10 3 9 2 8 1 7 6 0 2016 2017 2018 2019 2020 2021 2022 Value Added (in log) - left LHS (in FJD) (in FJD) Left (in FJD/worker) Labor Productivity (in log) - LHS RHS (in number of worker) Employment (in log) - Right Figure 3.2: Firms are three times more likely to be importers than exporters Share Figure 3.2: Firms are three totallikely of more times firms be percent to in importers than exporters 50 40 Perentage 30 Percent 20 10 0 2016 2017 2018 2019 2020 2021 2022 Importer Exporter Source: World Bank (WB) staff calculations based on Fiji Revenue and Customs Service (FRCS) data. FIJI COUNTRY ECONOMIC MEMORANDUM 79 Box 3.1: Fiji Water: Putting Fiji on the global map Background Fiji Water was founded in 1996 and the facility was constructed in 1997 close to the water source at the Yaqara Valley of Viti Levu. The original name was Natural Waters of Viti Limited. An American conglomerate, The Wonderful Company, bought the company in 2004 and redirected its focus and investment into marketing the new Fiji Water globally.49 The company strategically tapped into the expanding prestige beverage market, leading to a surge in international recognition and popularity of the brand. Its success was supported by growing concerns about the quality of tap water, preference for healthy lifestyles, and increased awareness about staying hydrated on the go. Raising environmental sustainability concerns Fiji Water has been scrutinized by environmentalists. The mineral water is pumped from an underground aquifer, bottled in its uniquely rectangular prism-shaped container, and packaged for distribution. The supply chain, from the extraction of water from the renewable source to its delivery, shipped around the world, leaves a large carbon footprint. The facility operates 24 hours a day and requires a consistent electricity supply, a demand that cannot be feasibly met by the domestic energy supplier. Consequently, the factory is supported by three large diesel generators.50 The bottles are made from recyclable polyethylene terephthalate (PET) plastic and the company produces millions per day, requiring extensive imports of plastic. The company is aligning with environment sustainability by using recycled plastic for its bottles, investing in packaging innovations and plastic reduction, partnering with local communities to plant new trees and forest conservation, and developing recycling initiatives. However, the generators have not been converted to a cleaner energy source such as hydro or renewable. Becoming a major export Fiji Water rapidly established itself in the market. Despite existing competitors such as Nestle’s Pure Life, France’s Evian, Coca Cola’s Dasani, and PepsiCo’s Aquafina dominating the mineral water market, Fiji Water managed to establish itself within a decade.51 Fiji Water has overtaken Evian in America and acquired wider acceptance as a status symbol among celebrities from movie stars and models to American presidents.52 Fiji Water also dominates the domestic mineral water industry and water exports. Its share of domestic exports rose from a mere 1 percent in 2000 to over 25 percent within only two decades. Mineral water exports overall shot up from the same base as garments and overtook Fiji’s traditional export commodities, gold and sugar, over a decade ago (Figure 3.3). Due to its loyal consumer base and steady trade supply routes, the production and exports of mineral water swiftly recovered from the pandemic and exceeded 2019 levels in 2021. This demonstrates the sector’s resilience and is the reason Fiji Water’s export values are now in their own realm relative to other export commodities. 49 GoFiji website, “The History of the Famous Fiji Water”. https://gofiji.net/the-history-of-the-famous-fiji-water/. 50 Fiji Budget Vacations, “Fiji Water”. https://www.fiji-budget-vacations.com/fiji-water.html. Martin Roll website, “Fiji Water: The Exotic Water Brand”. https://martinroll.com/resources/articles/branding/fiji- 51 water-exotic-water-brand/. 52 BizVibe website, “Top 10 Water Bottle Companies in the World 2020”. https://blog.bizvibe.com/blog/top-water- bottle-companies. 80 FIJI COUNTRY ECONOMIC MEMORANDUM Upskilling workers and creating local value-chains In addition to assisting communities through education funds, the Fiji Water facility employs about 500 staff, including villagers from surrounding areas, with attractive pay packages. Most are introduced into a modern factory setting akin to those in developed countries and trained to operate technologically advanced equipment, which supports their career paths. The company also provides opportunities to local companies by outsourcing the carrying handles for the product’s six-packs, cardboard boxes, engineering services, landscaping, security, and a bus system.53 The resulting dividends, encapsulating increased tourism and growth, job creation, and business opportunities, is Fiji Water boldly stamping the name ‘Fiji’ on the global map. Figure 3.3: Fiji’s mineral water exports have increased exponentially over the last two decades 30.0 26.3 25.0 20.0 (% to Exports) 15.0 10.0 5.0 1.0 0.0 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020(r) 2021(p) 2022(p) Sugar Gold Garments Mineral Water Source: WB staff calculations based on Reserve Bank of Fiji (RBF) data Fiji’s more established firms are proving less productive 97. On average, older firms demonstrate lower labor productivity than younger firms. Firm-level analysis reveals that while older firms employ more workers, this does not translate into proportionally higher value added. This negative correlation between firm age and labor productivity implies that maturity and size alone do not guarantee efficiency or prosperity, raising significant questions about the operational effectiveness of established firms. 98. As Fijian firms age and grow, their returns appear to diminish. Both these findings—the negative relationship between firm age and performance and between firm age and labor productivity— could be attributed to diminishing returns associated with firm size. Older firms’ ability to generate proportionally higher value added might be impeded by inefficiencies, bureaucratic structures, or slower innovation cycles. This aligns with the economic theory that mature firms can face challenges in adapting to technological changes and maintaining competitiveness (Bartelsman, Scarpetta, and Schivardi 2003; Coad and Rao 2008). 53 GoFiji website, “The History of the Famous Fiji Water”. https://gofiji.net/the-history-of-the-famous-fiji-water/. FIJI COUNTRY ECONOMIC MEMORANDUM 81 99. The findings also suggest that older, larger firms may face less competition. Well-established firms, enjoying market dominance may not be under the same competitive pressures as their younger counterparts. In the absence of such robust pressure, older firms may lack sufficient incentive to increase productivity and streamline operations, contributing to inefficiency and worsening the negative relationship between workforce size and value added. Data limitations in Fiji mean these findings cannot be fully explained, underscoring the need for further research.54 3.1.3. Limited market dynamism may be holding Fiji’s private sector back Less productive firms are exiting the market, but new entrants are not outperforming incumbents 100. Markets in Fiji showed limited dynamism between 2016 and 2022. The Herfindahl-Hirschman Index (HHI),55 a measure of market concentration, initially fell between 2016 and 2018 (Figure 3.4), suggesting more firms were acquiring market share. However, it rose slightly from 2019 onwards, as entry rates fell below exit rates, leading to increased market concentration. COVID-19 significantly accelerated these trends, with the fall in entry rates accelerating in 2020 due to low demand and economic uncertainty. Overall, exit rates climbed from 9 percent in 2017 to 18 percent in 2022. Intriguingly, despite falling entry rates, competition initially increased between 2017 and 2019, with the HHI declining from 0.06 in 2017 to 0.04 in 2019. However, COVID-19 reversed this trend and the HHI rose slightly in 2020 and 2021 but remained below 2017 levels. The pandemic’s uneven impact across sectors contributed to this. While tourism firms suffered immensely, others, such as retail, might have seen milder effects. 101. Firms exiting the market tend to be less productive than incumbents but so do market entrants. Throughout the period, the firms leaving the market consistently displayed lower average productivity than those entering or remaining (Figure 3.5). This figure shows normalized levels of productivity, on a scale from 1 to 10. It then maps average productivity of entrants, exiting firms and incumbents, and as whisker plot to mark the 95 percent confidence interval for these estimates. Figure 3.5 also shows that entrants’ average productivity was slightly below that of incumbents. This raises questions about the ability of Fiji’s economy to attract high-performing entrants. Efficient competition hinges on new firms entering the market with productivity levels that rival or surpass existing firms. If new entrants are less efficient, they may exert less competitive pressure on incumbents. In such a scenario, established firms might be less motivated to increase their productivity or innovation, reducing the overall dynamism of the market. Eventually, such stunted competition may impede economic growth, limit consumer choices, and slow the pace of technological advance, hindering the market’s ability to adapt and thrive. 102. These differences in productivity levels among entrants, incumbents, and exiting firms carry implications for market dynamics. They play a crucial role in shaping the competition landscape, affecting innovation and efficiency within sectors. Differences in productivity could contribute to shifts in market concentration, affecting resource allocation and investment decisions. 54 This could potentially include analyses of organizational structures, technology adoption, and innovation efforts across firms of different ages and in different industries. The HHI is interpreted in the following way: HHI < 0.15: a highly competitive market; HHI 0.15 - 0.25: a moderately concentrated 55 market; and HHI > 0.25: a highly concentrated market. 82 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 3.4: The Herfindahl-Hirschman Index (HHI) shows market concentration has increased slightly after an initial Figure fallHerfindahl-Hirschman Index (HHI) shows market concentration has 3.4: The increased slightly after an initial fall 0.25 0.06 0.05 0.2 0.04 0.15 0.03 HHI Percent 0.1 0.02 0.05 0.01 0 0 2017 2018 2019 2020 2021 Entry Rate LHS Exit Rate LHS HHI RHS Figure 3.5: Less productive firms are generally being weeded out, but new entrants are not as productive as incumbents (Normalized productivity; scale: 1 = 10) Figure 3.5: Less productive firms are generally being weeded out, but new entrants are not as productive as incumbents 10 9 8 7 6 5 4 3 2 1 0 Entry Exit 2017 Incumbent Entry Exit 2018 Incumbent Entry Exit 2019 Incumbent Entry Exit 2020 Incumbent Entry Exit 2021 Incumbent 2017 2018 2019 2020 2021 Source: WB staff calculations based on FRCS data. Misallocation of resources acts as a significant barrier to overall productivity growth 103. Productivity decomposition provides a granular picture of the drivers of firm productivity. Two decomposition methods are used to examine the factors shaping aggregate productivity growth. Static decomposition separates productivity gains into two components: within-firm (incumbents improving) and reallocation (resources, such as workers and capital, shifting between firms). Dynamic decomposition incorporates the contribution from entrants, exits, and incumbents (as firms are born, die, and survive) to explain changes in productivity.56 A healthy economy will combine strong within-firm growth with efficient reallocation and vice versa. 104. The static decomposition of Fiji’s aggregate productivity growth during 2016–22 shows signs of resource misallocation in the economy, hindering overall efficiency. Aggregate productivity, which is the annual weighted average of labor productivity,57 grew slightly between 2016 and 2018, followed by a decline in 2019 that continued until 2021 (Figure 3.6). The 6 percent increase in 2022 marks Fiji’s post-pandemic recovery. Notably, aggregate labor productivity remained consistently high throughout the period, exceeding FJD 5 of value added per worker (in natural logarithm). 56 The static decomposition is based on Olley and Pakes (1996). The dynamic decomposition is based on Melitz and Polanec (2015). 57 Value added divided by number of workers in natural logarithm. FIJI COUNTRY ECONOMIC MEMORANDUM 83 Although incumbent firms were experiencing productivity growth, the reallocation component remained negative throughout the period, reaching a low of -30.6 percent in 2020. This means capital and labor were attracted away from more productive firms and towards less efficient players, dragging down overall productivity. Although the pandemic initially exacerbated this misallocation, the recovery phase brought a slight improvement, although reallocation was still negative in 2022. 105. A notable share of productivity growth can be attributed to the reallocation of resources across firms. The static decomposition shows a positive correlation between aggregate productivity and the share of aggregate productivity comprised of the reallocation component (Figure 3.7). This implies that, if misallocation eases, and resources move from less productive firms to more productive ones, there will be a visible uptick in aggregate productivity. This correlation underscores the significance of judicious resource reallocation on enhancing economic productivity at a broader scale. The positive association aligns with established economic literature, which underscores the pivotal role of resource allocation in explaining productivity differentials across firms, shaping the overall economic landscape, and driving sustained economic growth (Hsieh and Klenow 2009). 106. The dynamic decomposition also finds that resource misallocation is acting as a significant drag on overall efficiency in Fiji. The analysis shows positive contributions from within-firm improvements and firm exits (low-quality firms leaving the market). Initially, aggregate productivity declined by -21 percent during 2016–17, despite improvements within existing firms (16 percent) and positive contributions from firm exits (4 percent). This was due to a significant misallocation of resources (-37 percent) away from more productive firms, impeding overall efficiency. Aggregate productivity declined further between 2018 and 2019 (-76 percent). This was driven by declining productivity among incumbents (-63 percent) and continued misallocation of resources (-16 percent). Although there were minor positive contributions from new entrants (3.5 percent), and the impact of firm exits (5 percent), they could not offset these negative effects (Figure 3.9). 107. Aggregate productivity turned around during the post-pandemic recovery. Productivity worsened slightly (-2 percent) during COVID-19 (2020–21). Despite the positive impact of firm exits (39 percent), the within-firm component among incumbents fell significantly (31 percent), suggesting the pandemic disproportionately affected the efficiency of existing firms. However, 2022 brought a 52 percent increase in aggregate productivity. This rebound was primarily driven by the improved performance of existing firms and positive reallocation among incumbents. Figure 3.6: Inefficient Figure allocation 3.6: Inefficient of allocation of resources resources among among firms is dampening firms is dampening productivity growth productivity growth 0.0% 7.60 -5.0% 7.40 -10.0% 7.20 Percentage Percent of aggregate -15.0% FJD 7.00 productivity -20.0% 6.80 -25.0% 6.60 -30.0% -35.0% 6.40 2016 2017 2018 2019 2020 2021 2022 Reallocation (% of aggregate) - Left Axis Reallocation LHS Aggregate Productivity Aggregate - Right Axis Productivity LHS Source: WB staff calculations based on FRCS data. 84 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 3.7: There is a positive correlation between aggregate productivity and resource reallocation Figure 3.8: Rebounding productivity has come from within-firm improvements and the exit of less productive firms Productivity in FJD per worker Figure 3.8: Rebounding productivity has come from within firm improvements and the exit of less productive firms 0.60 0.60 0.52 0.30 0.30 FJD/worker FJD/worker - - (0.21) (0.02) (0.30) (0.30) (0.60) (0.76) (0.60) (0.90) (0.90) 2016-2017 2018-2019 2020-2021 2021-2022 Incumbent Within Incumbent Reallocation Entry Exit RHS Axis Aggregate Productivity Changes - Right Source: WB staff calculations based on FRCS data. Figure 3.9: Fiji’s business regulatory environment lags most of its peers (2022 CPIA score; 1 = low to 6 = high) 4.0 3.5 3.0 2.5 CPIA scroe 2.0 1.5 1.0 0.5 0.0 Maldives Samoa St. Lucia Upper middle Fiji Tonga Pacific island income small states Source: Country Policy and Institutional Assessment (CPIA) scores based on WDI. FIJI COUNTRY ECONOMIC MEMORANDUM 85 108. There are several important implications from the results of the dynamic analysis. First, throughout most of the period, misallocation of resources, particularly within existing firms, acted as a significant brake on overall productivity growth. The economy could do better at channeling resources towards more productive firms. Second, new entrants had a consistently negative impact on productivity across all periods, suggesting Fiji's economy was struggling to attract high- performing new businesses. Third, the contribution of firms leaving the market was consistently positive in all periods, signifying that less productive firms were being successfully weeded out. This aligns with earlier findings on the quality of firms entering and exiting the economy and underscores the importance of mechanisms to facilitate the efficient exit of unproductive firms. Finally, COVID-19 served as a stress test, exposing the vulnerability of existing firms and their lack of resilience. 3.2. Fiji’s business environment does not always favor the most productive firms 3.2.1. Recent reforms have improved the business environment, but challenges remain 109. Fiji's business environment influences its firms’ composition, growth, and market presence. A costly and opaque business environment can impede market efficiency and reduce productivity. The limited market dynamism and misallocation of resources to less productive firms discussed in the previous section are closely connected to such aspects of the business environment. 110. Fiji’s business environment poses challenges for businesses. In the World Bank’s 2022 Country Policy and Institutional Assessment (CPIA),58 Fiji scored lower than all structural and aspirational peers except Tonga on the business regulatory environment rating, despite recent improvements (Figure 3.9). 111. Recent reforms have been impressive. For example, Fiji has introduced platforms enabling online registration of firms and tax identifications, and streamlined licensing processes, addressing long- standing bureaucratic hurdles for new businesses and investment projects (Box 3.2). The Companies Act was enacted in 2015. The Investment Act 2021, which replaced the Foreign Investment Act 1999, provides a broader range of treatment and protection guarantees for foreign investors. The Act dropped the Foreign Investor Registration Certificate application, and consolidated reporting obligations on foreign and domestic investors, among other regulatory reforms. Fiji has finalized the Access to Business Funding Bill and is currently amending the Bankruptcy Bill. This legislation will facilitate the entry and exit of micro, small, and medium enterprises (MSMEs). 112. However, issues remain with the legal and regulatory framework. The investment regulations require various Ministerial waivers or approvals which delay the implementation of simple projects and frustrate investors. There is still much duplication among regulators. Obtaining company tax and superannuation certificates for both start-up and annual re-registrations remains an arduous process. Business owners often hire lawyers and accountants to register their firms, further increasing the cost of doing business. Fiji’s investor visa and work permits scheme is still complex and ambiguous and considerable discretion is placed on public officials. Poor government service provision, especially in areas outside of the capital and other urban centers creates time consuming delays and often requires businesses to make costly trips to Suva. 113. Impediments to the entry and operations of foreign enterprises remain, hindering private investment. Fiji's private capital stood at 149 percent of GDP in 2019, in line with structural peers but short of aspirational peers. Despite the Investment Act 2021, foreign firms must deal with stringent 58 The World Bank does a CPIA for all its borrowing countries. It uses 16 criteria, grouped into four clusters: a) economic management; b) structural policies; c) policies for social inclusion and equity; and d) public sector management and institutions. These reflect a balance between capturing the key factors that foster pro-poor growth and poverty alleviation, without overly burdening the evaluation process. Ratings for each of the criteria reflect a variety of indicators, observations, and judgments. They focus on the quality of each country’s current policies and institutions. 86 FIJI COUNTRY ECONOMIC MEMORANDUM regulations, worsened by capital flow measures (see Chapter 2 for more details). These constraints have made it harder for Fiji to attract efficiency-seeking investments.59 Such investments benefit an economy by lowering production costs for businesses, fostering innovation through knowledge transfer, and creating jobs. A focus on optimizing resource use and knowledge sharing fuels long- term economic growth and integration into global markets (IFC 2022). 114. Widespread price controls distort competition within the domestic market. Fiji established the Fijian Competition and Consumer Commission (FCCC) in 2010. In 2020, it introduced the Competition and Consumer Protection Policy Statement, and is currently finalizing a Competition and Consumer Bill. However, one-third of the Fijian consumption basket falls under price controls, even in ostensibly competitive sectors such as bakeries, pharmacies, and agricultural products. These controls not only weaken essential price signals that guide resource allocation efficiently but also impose significant transaction costs, which are particularly burdensome for MSMEs (IFC 2022). 115. Poor implementation of regulations stems from poor consultation. Although a task force called the Investment Facilitation Committee, comprising relevant stakeholders and agencies, has been established to address issues on business regulatory environment, reforms have been uneven as they are often undertaken in silos. This lack of interagency coordination spills over to the private sector, who feel they are occasionally excluded from important business policy dialogues. While the current Government advocates for an inclusive public policy dialogue, such as the National Economic and Education Summits and the Fiscal Review Committee in 2023, effective public- private sector consultation mechanisms on changes to the business regulatory climate are needed. Box 3.2: Reforms to Fiji’s administrative processes Fiji has embarked on reforms to reduce the burden that regulations and administrative processes place on businesses, building on past reforms. It introduced an integrated online system for company registration, digitalFIJI in 2019 and abolished the business license regime in 2020 to eliminate duplication. It also encourages voluntary compliance to reduce the administrative burden of filing and paying taxes and introduced the Gold Card for “priority and privileged services” for tax-compliant companies in 2012. Emphasizing the importance the Government places on these reforms, the Supplement to the 2023–2024 Budget Address stated: Government recognizes investment is critical for creating jobs, boosting productivity, and improving social and economic well-being. It is committed to promote Fiji as an attractive investment destination for both local and foreign investors with business friendly and conducive environment (Ministry of Finance: Economic and Fiscal Update, p. 12). The Government’s businessNOW initiative, previously bizFIJI, has built a single online platform offering access to all the permits needed to start a business or to obtain a construction permit.60 Through a combination of business process re-engineering, digitization, and coordination via the single online platform, the time required to obtain these 59 In 2018, just 1 percent of foreign direct investment (FDI) projects in Fiji pursued efficiency-seeking objectives, compared to over 30 percent in Singapore and nearly 20 percent in Malaysia (IFC 2022). 60 See https://www.businessnow.gov.fj/. FIJI COUNTRY ECONOMIC MEMORANDUM 87 permits is expected to fall from 71 days to 14 days. The platform will also provide the requisite information about each of the processes, with checklists of requirements and specific timeframes for processing. In addition, it will provide investors with information about investment incentives. Reforms to the permits needed to start a business are now being completed. These permits involve eight different authorities. The extension to cover building permits is expected to be completed in 2025, when the platform will provide access to 25 e-services involving 16 different authorities. Thereafter, the platform will be able to bring additional authorities on board, further streamlining and digitizing business-related permits and services. These reforms are expected to benefit micro, small, and medium enterprises (MSMEs) and female-headed businesses. Such businesses tend to be disproportionately affected by complex and time-consuming regulatory and administrative processes. Due to limited staff and lack of in-house compliance expertise, MSMEs struggle with complex procedures, leading to confusion, errors, and delays. The transparent provision of information about these processes, and administrative simplification to reduce their complexity, timeframes, and cost burden, is particularly important for such businesses. The Government has revised regulations to make it easier to do business in Fiji. For example, it has introduced multi-year certification for businesses, replacing the need for annual renewals. This will ease the burden on businesses and free up government resources to focus on higher-risk areas. The Government has also adopted a risk-based approach to inspections. At present, all businesses—irrespective of size or risk profile—require annual occupational health and safety compliance inspections involving the National Occupational Health and Safety Service and the National Fire Service. However, there are insufficient resources to cover these inspections in a timely manner, leading to significant delays that affect downstream licenses. Businesses also often bear the cost of transport and other logistics to bring the inspectors to their place of business. Under the reforms, inspection resources will focus on high-risk businesses, based on the sector of activity, as defined in Schedule II of the Regulations. These will receive greater scrutiny than the thinly stretched inspection services can currently provide. For lower-risk businesses, mandatory upfront inspection has been replaced by self-certification and surprise inspections. Related administrative processes will also be digitized. 3.2.2. A level playing field and lower trading costs will help create a more open economy 116. As a small archipelagic nation, trade plays a key role in Fiji’s economy and is associated with notable welfare gains. Trade makes up a significant 69 percent of GDP, with 44 percent of firms’ inputs sourced from overseas. The increase in imports has coincided with increased variety, resulting in notable welfare gains for both businesses and consumers. Consumers and producers benefit from having a greater variety of final goods or intermediate inputs. Consumers also benefit from lower unit costs of imports, leading to welfare gains. Access to more varied imports may also enhance the productivity of domestic firms. The impact of such welfare gains in Fiji has been estimated to have totaled 3.4 percent of GDP or 0.13 percent per year between 1995 and 2021 (Battogtvor et al. 2024). This is higher than the benefit to Mauritius over the same period, estimated at 2.8 percent of GDP or 0.10 percent annually (Figure 3.10). This stems partly from a significant increase in the number of products and their variety since Fiji joined the World Trade Organization (WTO) in 1996 (Figure 3.11). 88 FIJI COUNTRY ECONOMIC MEMORANDUM 117. Lowering trade costs and improving logistics will be crucial if Fiji wants to enjoy the benefits of an open economy. The World Bank’s Logistics Performance Index (LPI) is key to assessing a country’s efficiency in this area.61 Although Fiji has made recent strides in enhancing trade facilitation, its logistics performance lags both aspirational and structural peers across a comprehensive range of indicators (Figure 3.12). This increases trade costs, particularly given the country’s geographical remoteness, resulting in higher costs for both imports and exports. Moreover, despite its reliance on global trade and potential gains, Fiji has one of the highest import tariff rates among its peers and has entered less tariff agreement than its peers. Its effective applied weighted average tariff is 16 percent—nearly four times the level in 2010 and Fiji has 18 tariff agreements in place as of 2020 compared to 32 in Mauritius. These elevated costs curtail foreign competition and diminish the competitiveness of domestic enterprises. 118. Fiji’s shipping connectivity is held back by a combination of high trade costs and geographical isolation. The Linear Shipping Connectivity Index (LSCI)62 gauges countries’ integration into global shipping networks. In 2019, Fiji achieved a moderate LSCI score of 9.66, suggesting a similar level of connections to global maritime trade networks as other PICs (Figure 3.13). Fiji experiences fewer calls at its ports than its regional peers, potentially limiting export and import options and increasing costs. Connections to major trade hubs might involve transshipment through other ports, introducing both time and cost to trade routes. Lower container volumes could lead to less frequent shipping calls and higher per-unit shipping costs. Nevertheless, Fiji’s LSCI score surpasses that of several island nations, underscoring its strengths. Its strategic location in the South Pacific positions Figure 3.10: Fiji has enjoyed greater annual gains from trade than Mauritius (1995–2021) 44 43 0.10 0.13 Mauritius Fiji Import (percent of GDP) Gains from Variety (percent of GDP) Source: WB staff calculations from Battogtvor et al. (2024). Note: Estimates were only available for Mauritius among Fiji’s peers. 61 The LPI compiles perceptions of a country’s logistics based on efficiency of customs clearance process, quality of trade- and transport-related infrastructure, ease of arranging competitively priced shipments, quality of logistics services, ability to track and trace consignments, and frequency with which shipments reach the consignee within the scheduled time. The index ranges from 1 to 5, with a higher score representing better performance. 62 Developed and computed by UNCTAD, the LSCI is based on the number of ships, container-carrying capacity, maximum vessel size, number of services, the number of country-pairs with a direct connection, and the presence of companies deploying container ships in a country’s ports. The methodology involves normalizing each country’s value for these components against their respective maximum values in the first quarter of 2006, resulting in an average index. This average is then compared to the maximum average of Q1 2006 and multiplied by 100. The LSCI’s quarterly series, initiated in 2020, is an updated assessment of countries’ connectivity to global shipping networks, with the index set at 100 for the nation boasting the highest average in the inaugural quarter of 2006. See UNCTADSTAT htp://unctadstat.unctad.org/wds/TableViewer/tableView.aspx?ReportId=13321. FIJI COUNTRY ECONOMIC MEMORANDUM 89 Figure 3.11: Fiji has enjoyed greater annual gains from trade than Mauritius (1995–2021) 4500 10.0 4000 9.0 Number of Products in 8.0 3500 Average Number of Varities in a year 7.0 3000 6.0 a Year 2500 5.0 2000 4.0 1500 3.0 1000 2.0 500 1.0 0 0.0 2011 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Number of products Average number of varieties Note: HS-6 = Harmonized System 6-digit Figure 3.12: Fiji’s logistics performance lags both its aspirational and structural peers Logistic Performance Index, 2022 Fiji Structural peer Aspirational peer Overall LPI 4 3 Infrastructure Quality Tracking and Tracing 2 1 0 Logistics Quality and Timeliness Competence Efficiency of Clearance International Shipments Source: LPI. 90 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 3.13: Fiji’s shipping connectivity could be improved (Linear Shipping Connectivity Index, 2021) 35 30 25 20 15 10 5 - Jamaica Mauritius Fiji Samoa Tonga Belize Maldives Barbados St. Lucia Source: UNCTAD. Figure 3.14: Trade in services in Fiji is moderately restricted Figure 3.14: Trade in services in Fiji is moderately restricted (Services Trade Restrictions; 100 = Most Restrictive) Services Trade Restrictions Index 50 45 40 (100=Most Restrictive) 35 30 STRI 25 20 15 10 5 0 Communication Transport Tourism Health Distribution Construction Finance Professional Average Computer Source: WB and Pacific Community STRI database based on WTO and WB (2023). FIJI COUNTRY ECONOMIC MEMORANDUM 91 3.2.3. Fiji is a net exporter of services, but the services sector is moderately restricted 119. Services are at the core of Fiji’s value addition, employment, and exports. The services sector has accounted for over half of the total value addition to GDP since 1998. The sector has employed roughly 58 percent of the labor force since the early 1990s. Moreover, Fiji is a net exporter of services. The value of its services exports has been more than twice that of imports since 2010, except during COVID-19 (2020–21), when imports surpassed exports. More than 50 percent of the total value of goods and services exports since the mid-2000s has been in services, standing at 56 percent in 2022. In contrast, services have accounted for only around 24 percent in the value of total goods and services imports, signaling the limited role they play in Fiji’s import basket. 120. Traditional services (transport and travel) dominate international trade. Transport and travel made up 94 percent of Fiji’s services exports and 75 percent of imports in 2022, indicating that its services basket is highly concentrated.63 Fiji also trades in other commercial services such as computing and communications (amounting to 5 percent of commercial services exports on average and 18 percent of imports during 2010–19), and insurance and financial services (0.4 percent of commercial service exports and 7 percent of imports during 2010–19) in recent years. These services saw notable increases in 2020 and 2021: exports of computing and communications services grew by 21 percent on average and imports by 27 percent, while exports of insurance and financial services grew by an average of 1 percent and imports by 10 percent. This was due to the growing demand for digital trading during the COVID-19 lockdown. 121. Fiji’s services sector is moderately restricted. Fiji scores an average of 38 on the Services Trade Restrictions Index (STRI), on a scale of 0 (fully open and deregulated) to 100 (completely closed (World Bank 2023b).64 This is near average compared to peers; several PICs have very restrictive service regimes. Fiji’s performance on this index is likely based on the existence of various hidden measures, as services are subject to pervasive behind-the-border regulations, in contrast to goods where restrictions tend to be explicit, e.g., tariffs. While some restrictions may be rooted in legitimate regulatory purposes such as consumer protection, many are put in place to protect incumbent firms that hold some form of domestic market power. 122. Finance, professional, and communications sectors are the most restricted, while construction and computing are the least (Figure 3.14). Restrictions are mainly imposed at the cross-border level (Mode 1) or the establishment of commercial presence (Mode 3) such as subsidiaries and FDI. Entry into Fiji’s construction sector is facilitated by the low levels of restrictions on the presence of natural persons (Mode 4). Low cross-border restrictions facilitate a high level of openness in the computing sector. 123. Demand-side factors are crucial to traditional services exports, while human capital is critical for modern services exports. A World Bank time series analysis (Kidake and Montfaucon n.d.) using autoregressive and distributed lag models for 1980–2021 reveals that global imports of services—a demand-side factor—boosts Fiji’s exports of total and traditional services (travel and transport) by a factor of between 0.06 percent and 0.2 percent. This implies that external shocks are sensitive to the export of Fiji’s highly traded services. Human capital, a supply-side factor, is the most critical for the export of modern services (communications, and insurance and finance), suggesting the importance of skilled labor. The effect of other supply-side factors such as institutional quality, financial development, infrastructure, and exchange rate vary by type of service. Notably, these supply side factors are also critical to broader TFP drivers (see Chapter 1 for details), and thus reforms for productivity growth are likely to benefit the expansion of services trade. 63 Travel services accounted for 55 percent of commercial services exports in 2022, followed by transport services (39 percent). Transport services accounted for 54 percent of commercial services imports in 2022 followed by travel services (22 percent). 64 This score is above 25 (a sector has minor restrictions) but below 50 which is neither minor nor major restriction (e.g., limiting the number of suppliers) according to WB-WTO STRI methodology. 92 FIJI COUNTRY ECONOMIC MEMORANDUM 3.3. State ownership is pervasive in Fiji’s economy 3.3.1. The state footprint in Fiji is larger than its state-owned enterprises 124. As of 2019, the Government owned 59 domestic business entities denoted as Businesses of the State. The World Bank Global Businesses of the State database indicates that the Government held at least a 10 percent shareholding in 59 active businesses, either directly or indirectly.65 This shows that the state’s footprint is larger than would be suggested if only SOEs are considered—of these 59 firms, only 25 (42 percent) would be considered SOEs (Figure 3.15).66 At the sectoral level, none of the eight active businesses owned by the state in the hotel and food service sector would be considered SOEs (Figure 3.16). State ownership extends to seven other sectors, including information and communications, finance, transportation, and manufacturing. 125. Fiji’s state footprint appears larger than its peers. The unconsolidated domestic revenues of Fiji’s BOSs accounted for 19 percent of GDP in 2019 (Figure 3.17), higher than in two structural peers, Samoa (16 percent) and Jamaica (6 percent). However, there are only data on revenues for 47 percent of Fiji’s BOSs, compared to 84 percent for Samoa, and 74 percent for Jamaica.67 The revenue share for Fiji is thus the lower bound of the actual economic size of the state footprint, which might be higher. Fiji’s BOSs also operate across a wide range of markets (34 out of 563 distinct economic activities, or 6 percent), a share only exceeded by Mauritius among its peers (Figure 3.18).68 3.3.2. There is a complex web of state ownership, direct and indirect 127. Fiji’s BOSs are owned in a variety of ways. The Ministry of Communications holds 18, or over 31 percent of the total. Another 12 (20 percent) are linked to the Fiji National Provident Fund. The Ministry of Finance has seven on its books and the Ministry of Agriculture has four. Other notable holdings include the Ministry of Public Enterprises (7 percent, or 4 firms), the Ministry of Tourism and Civil Aviation (5 percent, or 3 firms), and the Ministry of Forestry (5 percent, or 3 firms). Of the 59 BOSs, 32 (54 percent) are indirectly owned, i.e., by another BOS (Figure 3.19). On the one hand, indirect shareholdings increase the likelihood of state-held conglomerates and integrated economic groups. On the other hand, directly owned BOSs are more likely to benefit from state support, such as subsidized loans or direct access to contracts, which would not be available to the private sector. At the sectoral level, this risk of increased fiscal transfer or subsidies is highest in energy and water in Fiji, where all the BOSs are directly owned, but the real estate, transportation, manufacturing, finance, and agriculture sectors are also at risk, with more than half directly owned. 65 When a firm A owns a subsidiary firm B (firm A <- firm B), then firm B is directly owned by firm A. If firm B owns firm C (firm B <- firm C), then firm C is indirectly owned by firm A. 66 SOEs are typically defined as firms directly and majority-owned (50% or more) by the central government. 67 The BOS database captures only unconsolidated domestic operating revenues. Unconsolidated revenues include only the revenues generated by the firm and exclude those of its subsidiaries. Operating revenues include all revenues resulting from a firm’s main operation and exclude extraordinary revenues such as subsidies. 68 Using the 4-digit Nomenclature Génerale des Activités économiques dans les Communautés Européennes (NACE) classification codes FIJI COUNTRY ECONOMIC MEMORANDUM 93 Figure 3.15: Less than Figure half 3.15. of Less Fiji’s than Businesses half of State of Fiji’s Businesses would of State be classified would be classifiedas asSOEs SOEs Number of active businesses: BOS vs traditional SOE 70 59 60 50 40 30 25 20 10 0 Number of SOEs Number of BOS Figure 3.16: . Fiji’s state footprint extends to a wide range of sectors Figure 3.16. Fiji’s state footprint extends to a wide range of sectors Information And Communication Manufacturing Financial And Insurance Activities Accommodation & Food Service Activities Transportation And Storage Agriculture, Forestry And Fishing Real Estate Activities Prof., Scientific & Technical Activities Water Supply; Sewerage, Waste Management Electricity, Gas, Steam And Air Cond. Supply Admin. & Support Service Activities 0 5 10 15 Number of SOEs Number of BOS Figure 3.17: Compared with peers, Fiji’s BOS domestic revenues make up a relatively substantial share of GDP… Unconsolidated domestic Figure 3.17. Compared revenue with peers, of BOSs Fiji’s BOS domestic in percent revenues make up of GDP, 2019 a relatively substantial share of GDP... 60% 50% 40% 30% 20% 10% 0% Fiji (N=59) Maldives (N=70) Mauritius (N=85) Samoa (N=25) Jamaica (N=42) Aspirational peers Structural peers 94 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 3.18: …and its state presence extends into a relatively significant share of markets. Figure 3.18. ... and its state ofextends presence Percent marketsinto a relatively significant share of markets. 9% 8% 7% Percents of markets 6% 5% 4% 3% 2% 1% 0% Fiji Mauritius Maldives Jamaica Samoa Aspirational peers Structural peers Source: WB Global BOS database, 2019. Note: 1/ The data for Fiji are preliminary and subject to change.;2/ SOEs refer to firms that are majority and directly owned by the central government; 3/ Data on revenues are unconsolidated, i.e., they do not include revenues from subsidiaries. Data coverage differs by country. For comparability purposes, only peer countries with coverage like or above that of Fiji are included. Coverage refers to the share (%) of BOSs with data on revenue and is as follows: Fiji (47% of BOSs), Jamaica (74%), Maldives (60%), Mauritius (95%), Samoa (84%). It is strongly advised to compare results for data with similar coverage. N represents the number of BOS firms in each country; 4/ State presence in the market is measured by the number of NACE 4-digit activities with at least 1 BOS presence, out of a total of 563 3.3.3. BOSs are found in sectors where there seems little economic justification for state ownership 128. Fiji’s state presence is the largest in competitive markets where private firms could be more efficient. Traditionally, a state presence is expected, and could be justified, in natural monopoly activities such as the provision of water. However, in Fiji, 40 BOSs (68 percent) operate in competitive sectors (Figure 3.20; see Dall’Olio et al. (2023b) for a taxonomy of sectors). Eight firms operate in the hotels and restaurants sector (Figure 3.21). Another four are in telecommunication activities such as internet services, all of which are part of one conglomerate. Other significant activities include logging and real estate activities. In the partially contestable sectors, the state presence is prominent in radio broadcasting and banking activities, with three entities in each (Figure 3.22). 129. The state’s presence in competitive sectors seems to have little economic justification in terms of revenues and employment. Only 10 percent of the total domestic revenues of Fiji’s BOSs come from those in competitive sectors. In contrast, only 19 percent of BOSs are in partially contestable sectors, but they generate 74 percent of all revenues. Furthermore, BOSs in competitive sectors only employ 30 percent of the total BOS workforce (Figure 3.20). 130. A few BOS firms appear unprofitable, which may further reduce their economic justification. The state, as a shareholder, needs to closely monitor and assess the performance of entities it owns due to the fiscal risks they pose to government budgets (OECD 2015). However, there are no publicly available data on profit or losses for 31 of Fiji’s 59 BOSs (53 percent) as of 2019 (Figure 3.23a), which may complicate monitoring. Among the remaining 28 firms with information on net results, 22 were profitable, generating about US$132 million in total net profit. The remaining six, representing about 10 percent of all BOS, had an aggregate loss of about US$68 million. The sole BOS operating in the water sector registered a loss of US$29 million as of 2019, while 44 percent (or 4 out of 9 firms) of those in the manufacturing sector were not profitable (Figure 3.23b), with a total loss of about US$39 million, 97 percent of which is due to a BOS in sugar manufacturing. The firms operating in the energy and finance activities are primarily profitable while the remaining sectors have too little information to draw a meaningful conclusion on profitability. FIJI COUNTRY ECONOMIC MEMORANDUM 95 131. The Government has undertaken some significant SOE governance reforms. In 2019, it implemented a modernized Public Enterprise Act and Public-Private Partnership Policy. Fiji deregulated the telecommunication sector, incorporated the water and sewage department into the water authority, restructured the sugar corporation, and established the roads authority. It divested 44 percent of Energy Fiji Limited in 2021 (Box 3.3). Figure 3.19: More than half of BOS firms are indirectly owned (Share of total BOSs in percent) Figure 3.19: More than half of BOS firms are indirectly owned Direct Indirect 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Energy Real estate Transportation Manufacturing Finance Agriculture Digital Hospitality Water Other Figure 3.20: The state presence in competitive sectors seems to have little justification in terms of revenue or employment Figure(Distribution of BOSs 3.20: The state presence by taxonomy in competitive seems toin sectors sector percent) have little justification in terms of revenue or employment Distribution of BOSs by taxonomy sector 100% 90% 14% 16% 32% 80% 19% 70% 60% 50% 37% 74% 40% 68% 30% 20% 30% 10% 10% 0% By number of firms By revenues By labor Competitive Partially Contestable Natural Monopoly 96 FIJI COUNTRY ECONOMIC MEMORANDUM Box 3.3: The Energy Fiji Limited Experience The restructuring and corporatization of the Fiji Electricity Authority (FEA), culminating in the formation of Energy Fiji Limited (EFL), represented a transformative process aimed at enhancing Fiji’s energy sector. Initiated in 2016, the restructuring was coordinated by the Ministry of Public Enterprises. The process involved detailed data collection and analysis, enabling strategic planning for EFL’s future. The key goals of this restructuring were to: (i) attract strategic investment by bringing partners who could provide capital investment, and technical and operational experience; (ii) promote citizen ownership, the corporatization process allowed the Government to provide local citizens with an opportunity to become shareholders; and (iii) enhance regulatory oversight and compliance through the Electricity Act 2017. In 2019, EFL’s regulatory functions were transferred to the Fijian Competition and Consumer Commission (FCCC) to oversee tariff setting and consumer protection. Further to these objectives, the corporatization also enabled capital market development, as EFL was listed on the South Pacific Stock Exchange. On April 16, 2018, FEA transitioned into EFL, a public company limited by shares. As part of the corporatization strategy, the Government retained a 75 percent controlling stake, allocated 5 percent of shares to domestic customers, and sold 20 percent to the Fiji National Provident Fund (FNPF) in 2019. Subsequently, in 2021, a strategic consortium from Japan, Sevens Pacific Pte Limited, comprising Chugoku Electric Power Co., Inc. (CEPCO) and Japan Bank for International Cooperation (JBIC), acquired a 44 percent stake in EFL. It is very early stage to realize the benefits of collaboration with CEPCO and JBIC, who plan to invest in expanding renewable energy capacity in line with Fiji’s net-zero carbon emissions target by 2050. While a full stock exchange listing and further renewable infrastructure expansion are yet to be achieved, changes in the regulatory framework have started to take place. To improve governance, an external regulator has been appointed by the Government under the Electricity Act 2017. The Government has also initiated a review of the Electricity Act 2017 to improve EFL’s business performance and operational efficiency and help accelerate energy transition and private sector participation. In this regard, the Government is undertaking a study on legislative and regulatory gap analysis to facilitate transition for Fiji’s energy sector. Findings including recommendations from this study will be presented to the Parliament. FIJI COUNTRY ECONOMIC MEMORANDUM 97 Figure 3.21: Among competitive sectors, tourism and telecoms have the most BOSs… (Number of BOSs) Figure 3.21: Among competitive sectors, tourism and telecoms have the most BOSs... Hotels and similar accommodation Other telecommunications activities Logging Trusts, funds and similar financial entities Rental and operating of own or leased real estate Activities of holding companies Buying and selling of own real estate Building of ships and floating structures Activities of call centres Accounting, bookkeeping and auditing activities; tax consultancy 0 1 2 3 4 5 6 7 8 9 Figure 3.22: …while among partially contestable sectors, finance and broadcasting are the most affected contestableof Figure 3.22: ... while among partially (Number BOSs) sectors, finance and broadcasting are the most affected Radio broadcasting Other monetary intermediation Wireless telecommunications activities Television programming and broadcasting activities Silviculture and other forestry activities Production of electricity Passenger air transport 0 1 2 3 4 98 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 3.23: A small share of BOSs are loss-making, but the full picture is not known Figure 3.23. A small share of BOSs are loss-making, but the full picture is not known a. Distribution of BOSs by performance in percent b. BOS performance by sector in percent Figure 3.23. A small share of BOSs are loss-making, but the full picture is not known a. Distribution of BOSs by performance b. BOS performance by sector BOS with losses BOS with profit Missing profit BOS with losses BOS with profit Missing profit 100% 90% 80% 10% 70% 60% 50% 40% 30% 53% 37% 20% 10% 0% Manufacturing Agriculture Real estate Digital Transportation Finance Energy Hospitality Water Other Source: WB Global BOS database, 2019 Note: 1/ The data for Fiji are preliminary and subject to change; 2/ The unconsolidated revenue data coverage for Fiji is 47 percent (i.e., out of 59 BOS in Fiji, only 47 percent have unconsolidated revenue data); 3/ The labor data coverage is 29 percent. (i.e., 29 percent have unconsolidated labor data); 4/ The profit data coverage for Fiji is 47 percent. Number of firms in each sector: water (1), manufacturing (9), agriculture (6), real estate (4), other (3), digital (12), transportation (7), finance (8), energy (1), and hospitality (8). 132. Fiji's extensive state ownership raises concerns, particularly in competitive sectors where private firms are typically more efficient. Where there are dominant firms in a market segment, they tend to deter new firms capable of introducing innovative practices. Furthermore, the involvement of BOSs in some sectors (telecommunications, manufacturing, fish processing) may exacerbate competitive issues, reinforcing the dominance of incumbents and raising barriers to entry for new participants. Additionally, the lack of profit data for a sizable portion of these businesses hinders evaluation of their financial health. This significant state control in competitive sectors may impede economic growth and warrants a reassessment of state’s role in these sectors.69 3.4. Policy priorities: Creating a conducive environment for business 133. The Government has taken several steps to address some of the business environment constraints. It has set up a Growth Reset Strategy 2023 to capitalize on “quick wins” and conduct “deeper dives” across seven areas including investment, electricity, and land. While these activities seem to be steps in the right direction, expanding the supply of good jobs in Fiji will depend on reforms and structural changes to open more of the economy to more competition, and eventually more exports. These include policies aimed at strengthening the business environment; facilitating trade, investment, and competition; and expanding access to markets, detailed below. 3.4.1. Strengthening the business environment 134. Reform processes to ease business entry have yet to result in improved productivity. A recent surge in business formation has not yet yielded the expected productivity gains or a significant challenge to established players. This suggests that reforms focused solely on making it easier to start a business may not be enough. While these changes likely spurred more self-employed 69 Further analysis, particularly through the application of the Market Competition Policy Analysis Toolkit (MCPAT), could be conducted with a focus on specific industries. This would ensure that BOSs operate on an equal footing with their private counterparts, and that regulations do not limit competition or create barriers to market entry. FIJI COUNTRY ECONOMIC MEMORANDUM 99 individuals to formally register their ventures, these smaller firms could be facing new hurdles to growth. Policymakers may need to shift their focus to broader business environment reforms that address these constraints and unlock the full potential of the recent uptick in entrepreneurship. 135. A well-sequenced reform implementation framework supports efforts to improve the business environment. This means coordinating and synchronizing the implementation of a long list of business regulatory reforms. It will also mean improving inter-government agency coordination and streamlining the overlaps and/or duplications among agencies. The Government will need to engage in regular dialogues seeking input from businesses and addressing their concerns. Experience from other countries such as Malaysia and Singapore have shown that it is crucial to have a small team who can lead the dialogue with critical stakeholders such as donors, the private sector, and line ministries to drive strategy, while having direct connection to the political leaders to compel action. In Fiji’s case The Ministry of Trade, Co-operatives, Small and Medium Enterprises currently plays this role but lacks the political authority to get all agencies on board or the Office of the Prime Minister must take the lead and ownership of strategic development with a dedicated policy team at the helm of it.70 136. Further reforms could aim to tackle constraints to business growth. These include cutting red tape and simplifying processes such as immigration and issuing permits. Firms are able to contest price control decisions made by the FCCC under the Commerce Commission Decree of 2010. The Government could re-examine and gradually reduce price controls while ensuring fair pricing and protecting the poor. 3.4.2. Facilitating trade, investment, and competition 137. As the analysis has found, Fiji’s firms benefit substantially from participating in international markets, implying more facilitation is needed to harness trade, foreign investment, and competition. These will include the following priorities. 138. Reduce cost and time of border clearances. The automation of the clearance process beyond Customs could be improved. A robust risk assessment and management system would enable physical inspections by Fiji Biosecurity Authority to be reduced. 139. Design and implement FDI policies to foster competition and increase value-addition. Investment regulations could be repealed because existing sectoral laws could regulate investments in critical areas. Restrictions in the finance, professional, and communications (services) sectors could be phased out. Fiji joined the Global Forum on Transparency and Exchange of Information for Tax Purposes in November 2023 and plans to join the Inclusive Framework and implement the base erosion and profit sharing (BEPS) minimum standards over 2025–26. These steps will help get Fiji off the EU list of non-cooperative jurisdictions for tax purposes and could promote FDI. 140. Strengthen the competition framework to rationalize the state’s presence in the economy. The reforms could include the following: • Map the full state ownership. Following good governance practice, the Government needs to have a comprehensive record of its portfolio to know what type of firms it owns and in which sectors, how they are performing, etc. The BOS database can be used as a starting point, with missing information such as profits and revenues for some firms filled in. For example, information is missing about the revenues, employment and profits for all Fiji’s BOS firms in the accommodation and food services sectors (i.e., hotels and restaurants). • Introduce a minimum performance target for BOS firms operating in competitive sectors such as hotels and food service activities, financial activities, manufacturing, etc. As a shareholder, the Government has the right to require a certain performance from its entities, especially if they operate in competitive sectors where private firms could enter. 70 The Ministry of Trade, Co-operatives, Small and Medium Enterprises currently plays this role but lacks the political authority to get all agencies on board. 100 FIJI COUNTRY ECONOMIC MEMORANDUM • Regularly monitor the performance of BOS firms, especially those operating in competitive sectors and those that are unprofitable (e.g., in manufacturing and agriculture). Regular publication of audited financial statements would help the Government ensure the return on investment is positive for BOSs operating in competitive sectors. • Ensure competitive neutrality is enforced in competitive sectors. According to competitive neutrality principles, all enterprises are to be subject to the same set of rules, regardless of ownership (public, private, domestic, or foreign) (OECD 2012). In Fiji, for sectors such as hotels and manufacturing, it is important to make sure that BOSs do not enjoy favorable conditions and benefits because of state ownership. Such competitive advantages can increase the risk of the state presence limiting private sector participation in the economy. • Consider restricting the state presence to sectors where there is strong economic rationale. Limit state ownership to firms operating in sectors where state presence is needed, for instance because private firms cannot exist due to market failures or in sectors where BOS contribution to both employment and GDP appears minimal. The Government could divest from or liquidate BOSs that are continuously making losses in sectors viable for private firms. 3.4.3. Expanding access to markets 141. Greater investment is needed to address input market challenges. Infrastructure will remain a priority area for both public and private investment in Fiji for key utilities and other physical connectivity infrastructure. The GoF could consider implementing the following reforms: • Transport: Greater investment in Fiji’s ports needs to be made, which will require significant investment from both the public and private sectors, while roads and vehicle infrastructure needs to be maintained – and such maintenance built into long-term budget forecasts in the planning phase of project design. The Government may consider setting up a dedicated road fund for maintenance. • Energy: Fiji has the potential to expand its renewable energy investment to provide affordable, reliable, and sustainable power to both businesses and the broader public. However, the high risk of natural disasters means great care is needed in the design and implementation of investments. The Government is reviewing the Electricity Act to further promote private participation in renewable energy sources. • Technology: Fiji’s technology sector – though relatively developed compared to Melanesian peers – would benefit from the prioritization of the rollout of optical fiber connections to further generate economic returns from a more connected Fiji (World Bank 2023a). • Land: Address the longstanding issues of lease terms; rent-setting; frequency and quantum of rent review; handling of improvements to land; and transparency of site development approval process following consultations with both lessors and lessees (ADB 2015 Box 3.4). nvestment in processing and transport logistics will also be vital in supporting greater 142. I domestic value-added activities in agriculture. Fiji’s agricultural sector is characterized by an imbalance between production and demand centers of agricultural produce. The population centers are concentrated in the east (Suva) and West (Nadi and Lautoka for tourism) of Viti Levu, while farms are concentrated in the northern parts of Viti Levu and on Vanua Levu, making economies of scale difficult. Robust and well-developed logistics infrastructure is needed to allow agricultural produce to be transported quickly and efficiently. While agricultural logistics solutions are relatively widespread in Viti Levu with several players across the sector (i.e., providers of warehousing and storage, road transportation, sea and air freight cargo services, inland freight forwarders, wholesale and retail food distribution), these players are largely small and informal agri-producers. Together with the private sector, the Government could implement aggregation facilities close to farms providing pre-cooling, conditioning, and value-added services to agricultural producers in Fiji. That will help farmers better supply the tourism and retail sectors, as well as export markets (IFC 2022). FIJI COUNTRY ECONOMIC MEMORANDUM 101 Box 3.4: Land Leases and Investment Fiji’s land tenure system is characterized by the dominance of native land, which constitutes 88 percent of the country’s total area. The iTaukei Land Trust Board (iTLTB) manages this land under a trust arrangement for the benefit of registered land-owning units. Native land in Fiji cannot be sold, making leasing the primary mechanism for private sector development. Leases allow businesses to access and operate on customary land, with the possibility of transferring and selling their lease interests. However, the leasing process can be cumbersome, with concerns about security of tenure and the time it takes to acquire land, which constrains investment and economic growth (Dodd 2012). Improving transparency and land governance is essential to overcoming these challenges and promoting inclusive growth. The iTLTB administers all customary land, providing legal, financial, and lease management services to landowners. While legal ownership remains with the iTaukei landowning units, the iTLTB controls leasing arrangements, often with minimal input from the landowners. Lease agreements, typically based on unimproved capital value (UCV), fail to reflect the true market value, especially for large-scale commercial developments. This outdated method results in lower returns for landowners, raising equity concerns. As leases near expiry, the issue of improvements becomes contentious, with many agreements silent on ownership. Landowners may feel pressured to extend leases at low UCV-based rates, without benefiting from the increased value of their land. This dynamic risks creating perpetual leaseholds that undermine both landowner interests and the original intent of protecting customary land rights (Boydell and Baya 2014). Recent policy reforms aimed at improving land access for investors have generated controversy. The 2010 Land Use Decree introduced the Land Bank, allowing landowning groups to “deposit” land for up to 99 years. This was intended to provide greater security for investors and streamline the leasing process. However, the Land Bank has faced criticism for reducing landowner control, as landowners lose decision-making authority for the duration of the lease and have no legal recourse in disputes (Griswold 2021). Similarly, the 2021 amendment to the iTaukei Land Trust Act, which removed the need for iTLTB consent in cases of mortgages or pledges, has been criticized for reducing landowner oversight. Both reforms have raised concerns about long-term impacts on customary land rights, as reflected in the limited use of the Land Bank compared to iTLTB leasing (Norton and Varani 2024). To strengthen trust and foster inclusive growth, it will be essential to increase transparency and consultation with iTaukei landowners. Fiji is in a favorable position among Pacific Island Countries, with the iTLTB having administered customary land for 70 years and generating sufficient rental income to cover its costs. However, there is a pressing need to improve the capacity of iTLTB staff, particularly in valuing lease interests and understanding the forecasting methods used by developers. Staff should be trained in international best practice, such as the International Valuation Standards, and in assessing the potential impact of development on other land uses, such as fishery rights (iQoliqoli) (Boydell and Baya 2014). Building this expertise will be critical to ensuring fair and equitable long-term benefits for landowners and preserving investors’ confidence in the lease system. 102 FIJI COUNTRY ECONOMIC MEMORANDUM ENHANCING Chapter 4 HUMAN CAPITAL If Fiji is to maximize the benefit from its currently favorable demographics—and avoid the future risk of getting old before it gets rich—it needs to equip its current and future workforce with the health, skills, and opportunities they need to contribute to its growth. Fiji faces a heavy and growing burden of non-communicable diseases (NCDs), which fall disproportionately on women. Although it has achieved near universal basic education, dropout levels are high and the quality is poor; far from being caused by a “brain drain” of skilled workers, the real skill gaps are due to education and training that do not meet market demand. Fiji’s labor market is also wasting the talents of many through under- and unemployment. Persistent gender gaps in labor market outcomes mean wasting a significant proportion of the country’s talent. Building human capital will mean refocusing the health system on prevention and improving both education quality and access. Meanwhile, making full use of the skills of its existing workforce will require improving the functioning of the labor market and encouraging inclusive economic participation. Summary Children born in Fiji today will realize only 51 percent of their productive potential as adults. This puts Fiji in the bottom half of all countries globally and below its peers, according to the World Bank’s Human Capital Index. It is held back by poor learning outcomes and high premature adult disability and mortality rates. If Fiji does not act to equip its workforce with the health, skills, and opportunities they need then as its population ages Fiji, like many Asian countries, will face the risk of getting old before it manages to get rich. A heavy disease burden is limiting workers’ longevity and productivity. Adult survival rates are low: only 78 percent of 15-year-old Fijians are expected to reach age 60, reducing the size of the labor force. Furthermore, 64 percent of deaths from NCDs occurred in the working-age population. Malnutrition in all its forms is storing up problems for the future workforce, with almost 15 percent of children under five either overweight or stunted, which will negatively affect their cognitive development. NCDs impose significant economic costs—estimated at 5 percent of GDP in 2019—through early retirement and disability, high out-of-pocket (OOP) payments diverting household resources from more productive uses such as education, and caregiving responsibilities forcing women out of the workforce. Lifestyle changes, including unhealthy diets and insufficient physical activity, have contributed to this high burden. Fiji’s public health system is not equipped to cope with this burden. FIJI COUNTRY ECONOMIC MEMORANDUM 103 Underinvestment in education means skills gaps are preventing Fijians from realizing their full potential. Two out of three children do not have access to early childhood education (ECE) which not only creates developmental gaps from the outset, but also keeps mothers out of workforce for longer. Although a child can expect to receive 11.3 years of schooling on average, this only amounts to 7 years’ worth of education when adjusted for quality, limiting their basic skills development. Just over half of children who start secondary school make it through to the final year of upper secondary, enabling them to access university, undermining Fiji’s capacity to shift to more knowledge-intensive sectors. Although the Government has taken steps to address the relevance and quality of technical and vocational education and training (TVET), they still fall short of labor market demand. Despite increasing educational attainment among Fiji’s youth, employers consider them lacking the skills and experience they need. Fiji is under-utilizing the talent it has, particularly its women and youth. Women are generally better- educated than their male peers: 40 percent of working-age women have completed secondary school, compared to under 30 percent of men. But only two-fifths of working-age women participate in the labor force, often due to care responsibilities for both children and older people. This is impacting some of Fiji’s potentially most productive workers, as women are relatively more likely to work in high- and medium- skilled employment; indeed, most of Fiji’s current and future doctors are women. Meanwhile employment rates among Fiji’s youth are critically low: nearly 21 percent of 15–24 year-olds were unemployed in 2019 and almost 13 percent were economically inactive, further reducing the size of the potential workforce. This problem is particularly acute among young Fijians who did not complete secondary education. The future of work is changing, offering global opportunities beyond migration. Technological change brings opportunities, with COVID-19 accelerating remote working. This could enable Fiji to expand employment in services such as business process outsourcing without requiring skilled workers to migrate abroad. Properly managed migration can also be a source of “brain gain”, by creating incentives for households to invest in education, whether they leave the country or not. 104 FIJI COUNTRY ECONOMIC MEMORANDUM Maximizing human capital by investing in the health and education of all Fijians, while tackling the barriers to labor force participation will unlock growth. Refocusing the health system on prevention would help tackle NCDs at source and ensure a healthy and productive workforce. Investing in children early, from widening access to ECE upwards will create a sound foundation for building skills. Labor market policies and improved TVET can help close skills gaps, while women could be encouraged into or back into work through greater access to childcare, strengthened maternity leave, and messaging to tackle gender biases. Labor migration can be leveraged as a way of encouraging households to invest in skills, and ensuring returning migrants are integrated back into the local economy. 4.1. Introduction 143. Developing its human capital will be fundamental if Fiji is to capitalize on its currently favorable population demographics and prepare for future population aging. As outlined in Chapter 1, Fiji’s working-age population has been growing, with the ratio of working-age people to dependents—children and the elderly—rising steadily from 1.4 in 1990 to 1.9 in 2021. The growth in the working-age population is forecast to continue to outstrip that of dependents for the foreseeable future (Figure 4.1). However, Fiji is behind both structural and aspirational peers on this measure. Moreover, increases in life expectancy and a declining fertility rate (Figure 4.2), means older people will make up an increasing share of the population (Figure 4.3). Population aging could lead to a situation where Fiji gets old before getting rich—a risk it shares with many Asian nations, including China, Malaysia, Sri Lanka, Thailand, and Vietnam. 144. Fiji will need to equip its current and future workforce with the health, skills, and opportunities they need to compete and contribute to growth. The World Bank’s Long-Term Growth Model (LTGM) discussed in Chapter 1 identified the importance of investment in human capital and increase in labor force participation to expand GDP growth. The main levers are increasing the quality and quantity of education; improved adult survival rates; and increased participation in the labor force, among women. 145. Yet Fiji is facing critical constraints in building and utilizing its human capital. According to the World Bank’s Human Capital Index (HCI), children born in Fiji today will realize only 51 percent of their productive potential as adults,71 putting it in in the bottom half of all countries globally and below its peers. It is particularly held down by poor learning outcomes and high premature adult disability and mortality rates (Figure 4.5). Moreover, the supply of skills is disconnected from the demand, with just 1 percent of students in secondary education enrolled in technical and vocational programs. This chapter looks into how challenges faced by Fiji’s health and education systems have contributed to its slow growth in human capital. It then considers how labor market issues mean that Fiji has failed to capitalize on the talent it has, before identifying potential reforms that would allow it to attain its goal of becoming a high-income country. 71 The Human Capital Index measures the human capital that a child born today can expect to attain by her 18th birthday, given the risks of poor health and poor education prevailing in her country. The HCI brings together measures of different dimensions of human capital: health (child survival, stunting, and adult survival rates) and the quantity and quality of schooling (expected years of schooling and international test scores). Using estimates of the economic returns to education and health, these components are combined into an index that captures the expected productivity of a child born today as a future worker, relative to a benchmark—the same for all countries—of complete education and full health FIJI COUNTRY ECONOMIC MEMORANDUM 105 Figure 4.1: People of working age make up an increasing share of the population 120 0.72 0.68 0.61 0.57 0.55 0.54 0.53 0.52 0.50 0.49 0.47 0.47 0.48 100 2.8 2.8 3.2 3.7 4.2 4.8 5.5 6.5 74 7.9 8.2 9 10.2 80 58.1 59.6 62.1 63.8 64.7 65 65.3 65.8 66.5 67.3 67.9 67.8 67.4 60 40 20 39.1 37.6 34.7 32.5 31.1 30.2 29.2 27.7 26.1 24.8 23.9 23.2 22.4 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 0-14 15-64 65+ Dependency Ratio, RHS Source: United Nations, Department of Economic and Social Affairs, Population Division (2022), World Population Prospects 2022. Figure 4.2: Fiji’s fertility rate has been falling steadily in recent decades 50 50 4.5 4.5 45 45 44 40 40 3.5 3.5 35 35 33 30 30 Births Live Births 2.5 2.5 25 25 Rate Rate 22 Percent 20 20 1,000 Live 1.5 fertility 1.5 Total fertility 15 15 Per 1,000 10 10 11 0.5 0.5 Total 5 5 Per 0 0 0 0 1973 1977 1981 1985 1989 1993 2001 2005 2009 2013 2021 1997 2017 1973 1977 1981 1985 1989 1993 2001 2005 2009 2013 2021 1997 2017 InfanttMortality Infan LHS MortalityRate Rate Fertility Rate Fertility RHS Rate Source: World Development Indicators (WDI). 106 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 4.3: Fiji faces a rising share in elderly population (Share of population ages 60 and above in percent) 16 14 12 10 8 6 4 2 0 2000 2023 2050 60 and above 65 and above Source: UN Population Projections. Figure 4.4: Fiji underperforms in life expectancy Source: WDI. FIJI COUNTRY ECONOMIC MEMORANDUM 107 4.2. Under-investment in people’s health is preventing Fiji from reaching its full potential 4.2.1. A heavy disease burden is limiting Fijian workers’ longevity and productivity 146. Improvement in life expectancy has stalled, potentially shrinking the working-age population. Although Fijians born today are expected to live slightly longer than previous generations, life expectancy remains considerably lower than in its aspirational, structural, and regional peers (Figure 4.4). Adult survival rates are low: only 78 percent of 15-year-old Fijians are expected to live to age 60, significantly less than the East Asia and Pacific (EAP) average of 85 percent (Figure 4.5). Despite making important progress in childhood vaccination rates, infant mortality rates in Fiji have been relatively stagnant since late 1990s, after large gains in the preceding 30 years (Figure 4.2). These trends are compounded by a lack of progress on neonatal mortality. Inadequate nutrition— only 43 percent of Fijian children are exclusively breastfed in the first six months of their life (FBOS 2022b)—and service delivery gaps are among the factors influencing neonatal mortality in Fiji. 147. Healthy life expectancy has also stagnated since 2010. The gap between life expectancy and healthy life expectancy, or the time during which people live in poor health, widened from 7.8 years in 2000 to 8.4 years in 2019 (Figure 4.6). This widening gap impacts Fiji’s future growth and population well-being. At the individual level, the longer people live in poor health, the more costly it will be for their households, and the less time they have to earn a living during their lifespan. At an aggregate level, it directly increases the dependent population, and reduces the share of the working-age population who can contribute to economic activities at any point in time, either because they are in poor health themselves or because they need to care for ill family members. 148. Non-communicable diseases (NCDs) pose challenges for the labor force. Fiji has one of the highest rates of adult mortality in the world due to NCDs among people aged 30 to 70 years.71 About 85 percent of deaths in 2019 were linked to NCDs with 64 percent of these deaths occurring in the working-age population, thus reducing the size and productive potential of the labor force (Figure 4.7).72 The disability-adjusted life years (DALYs)73 lost to NCDs increased by 60 percent during 1990–2019 (Figure 4.8). omen are significantly more affected by NCDs, impacting current and future generations. 149. W Among girls and women of reproductive age (15-49 years), 70 percent are overweight, and 45 percent are obese (FBOS 2022b). Being obese or overweight increases the risk of gestational diabetes and of complications during pregnancy and delivery for both mother and child. Further, poor diversity in the mother’s diet translates to poor dietary diversity and nutrient intake for their children, predisposing them to unhealthy food choices and dietary habits as they grow older. iji is also storing up problems for the future workforce. Among children under 5, 7.7 percent 150. F are overweight or obese, while 7.2 percent have moderate to severe stunting (FBOS 2022b).74 All forms of malnutrition in early childhood are detrimental to cognitive and physical development, leading to problems that will manifest throughout life, in the form of increased frequency and severity of illness, lower learning outcomes and skills development, and premature mortality. One-third of the young adult population have three or more cardiovascular risk factors, such as high body mass index, smoking, hypertension, and elevated blood sugar levels. 72 Based on country vital registration data and modelled estimates. 73 World Health Organization, NCD Data Portal (i) NCD as a proportion of deaths; and (ii) Percentage of deaths occurring under 70 years: https://ncdportal.org/CountryProfile/GHE110/FJI#mor2. 74 DALY is a universal metric allowing different populations and health conditions to be compared across time. DALYs equal the sum of the number of years of life lost plus the number of years lived with disability. One DALY equals one lost year of healthy life. 75 Stunting is defined as having a height-for-age 2 standard deviations below the World Health Organization Child Growth Standards (UNICEF 2023). 108 FIJI COUNTRY ECONOMIC MEMORANDUM 151. The rising burden of NCDs not only claims lives early, but also imposes significant economic costs. This includes direct cost of care, and indirect costs such as employees having to leave the workforce to care for an affected relative. Indirect costs also include employees frequently missing work or underperforming in the workplace because of illness. Early retirement and disability reduce the size of the workforce, while ongoing care due to the chronic nature of NCDs incurs higher OOP payments, draining household budgets and diverting resources from other activities such as investing in the education of the future workforce. Women are particularly hard hit, owing both to higher prevalence of NCD risk factors and their household caregiving responsibilities. Moreover, as elderly Fijians live longer with chronic disease, their ability to provide childcare support diminishes. These costs were estimated to total FJD 591 million or approximately 5 percent of GDP in 2019.76 152. Lifestyle changes, including unhealthy diets and insufficient physical activity, have contributed to the extremely high burden of NCDs and their early onset. As in other PICs, Fijians have increasingly shifted away from traditional diets and food collection methods. Highly processed foods, such as sweetened juices, soft drinks, crackers, noodles, and fried foods, have replaced healthy nutritious foods produced locally such as juicy tropical fruits and green vegetables that are rich in fiber, vitamins, and protein. Two other lifestyle factors—smoking and inadequate physical activity—are also among the top ten contributors to the concerning rise in DALYs in Fiji (Table 4.1). Figure 4.5: Fiji’s Human Capital Index and components Source: World Bank (2020). 76 Ministry of Health and Medical Services (MHMS) and United Nations Development Program (UNDP) Assessment, forthcoming. FIJI COUNTRY ECONOMIC MEMORANDUM 109 Figure 4.6: The gap between healthy and overall life expectancy has increased 70 10 66 9 8.4 62 8.1 8.2 8 7.8 58 7 54 6 50 5 2000 2010 2015 2019 expectancy at birth Life expectancy birth (years) Health Healthy expectan cy at birth y life expectancy birth (years) Gap (years), RHS Gap Source: World Health Organization (WHO) Global Health Observatory. Figure 4.7: Fiji has one of the highest shares of premature deaths from non-communicable diseases in the world 100 Premature Deaths due to NCDs 80 60 Fiji 40 (%) 20 0 0 50000 100000 150000 GDPper (GDP percapita capitaUS$) (I$) countries Othercountries Other Fiji Fiji Aspirational Aspirational Peers Peers Peers StructuralPeers Structural Source: WHO NCD Portal, World Population Prospects 2022 (database). United Nations. 110 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 4.8: Fiji has one of the highest shares of premature deaths from non-communicable diseases in the world (Disability-Adjusted Life Years lost to disease in thousands, Disability-Adjusted Life Years Lost to Disease, 1990- 1990-2019) 2019 400 300 DALYs Lost (in thousands) 200 100 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Commun icable diseases Injuries NCDs Source: Institute for Health Metrics and Evaluation Table 4.1: Lifestyle factors are among the main drivers of disability in Fiji Top ten risks contributing to disability 2009 2019 Change in DALYs per 100,000 people adjusted life years (DALYs) rank rank High fasting plasma glucose 1 1 1,090.2 High body-mass index 2 2 881.0 High blood pressure 3 3 680.5 Dietary risks 4 4 445.5 Tobacco 5 5 202.0 High low-density lipoprotein cholesterol 6 6 157.6 Malnutrition 7 7 -636.3 Air pollution 8 8 -393.0 Kidney disfunction 9 9 220.7 Low physical activity 10 10 113.8 Source: Institute for Health Metrics and Evaluation. 2019 latest data available. Note: Red means an increase in DALYs (lost years of healthy life) between 2009 and 2019, green means a decrease in DALYs in that period. FIJI COUNTRY ECONOMIC MEMORANDUM 111 4.2.2. Fiji’s health system no longer meets the country’s needs 153. Fiji’s public health system has not been effective in stemming the high prevalence of NCDs. Public health services are skewed towards tertiary rather than primary care. More than three- quarters of government health expenditure in 2019 was allocated to hospitals for primary healthcare services rather than more cost-effective facilities, such as health centers and nursing stations. Fiji does not have enough skilled health workers (doctors, nurses, and midwives) in the public sector to cater for current needs and is losing them mostly to the private sector (Figures 4.9–4.11).76,77 154. Rising urbanization will reshape and increase demand for health services. The number of people living in urban areas has grown by 57 percent since 1976 and urban populations are growing by 1.5 percent per year, faster than their rural counterparts (0.7 percent per year) (UN Habitat 2012). Of particular concern is the rapid growth in the population living in urban informal settlements (currently estimated at between 120,000 and 140,000) with limited access to public services, including healthcare, water, and sanitation, and who experience high levels of income and housing insecurity (Fiscal Review Committee 2023; Naidu et al. 2015). This includes climate migrants from within Fiji and other PICs. Provision may need to be tailored, with different solutions for more densely populated urban areas from those in more remote, rural areas, where women and older adults are less likely to have migrated away than younger men. Figure 4.9: Vacancies mean the number of public sector skilled health workers do not meet SDG thresholds (Public sector analysis) 3445 3147 2404 860 912 892 Doctors Nurses Filled positions Needed to reach 1 per 1000 (doc)/ Existing positions 3.45 per 100 (nurses and midwives) 76 A density of 4.45 skilled health workers per 1,000 population is needed to achieve at least 80 percent of universal health coverage targets—the minimum Sustainable Development Goal (SDG) threshold recommended by the World Health Organization (WHO). This threshold is further divided into 1 doctor and 3.45 nurses and midwives per 1,000 population. 77 A qualitative study into nursing job satisfaction in Fiji highlighted unclear promotion pathways, lack of recognition, unsafe working conditions, stress burnout and stigma, and complex roles and responsibilities as some of the reasons for leaving public sector positions (Nawaqaliva 2022). 112 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 4.10: Fiji experienced an exodus of skilled health workers from the public health sector in 2022–23… (Total number of exits) 821 340 172 75 79 90 26 54 63 11 21 2023 2018 2019 2020 2021 2022 2023 2019 2020 2021 2022 Doctors Nurses Source: Ministry of Health and Medical Services (MHMS) administrative employment data (2023) and Fiji Health Sector Review (World Bank 2024). Figure 4.11: … but most of these have remained in Fiji rather than going abroad (Reasons for existing MHMS) 19% 25% No reason given 40% 62% Pursue Further Studies 67% 47% Personal 33% Other Local Employment 13% Migration/Other Employment 17% 17% Opportunity Abroad 3% 5% 2022 2023 2022 2023 Doctors Nurses Source: Ministry of Health and Medical Services (MHMS) administrative employment data (2023) and Fiji Health Sector Review (World Bank 2024 forthcoming). FIJI COUNTRY ECONOMIC MEMORANDUM 113 4.3. Skills development has been impaired by low-quality education and a shortage of market- responsive vocational training 4.3.1. Limitations in early childhood and basic education are hampering further skills development 155. Limited access to early childhood education (ECE) impairs foundational learning. ECE is critical for ensuring school readiness and lifelong learning. Developmental gaps among children who did not attend pre-school emerge as soon as they enter primary school and tend to widen over time, with lifelong effects on learning and income earning outcomes (Hutchison et al. 2014). Yet in Fiji, two out of three children miss this fundamental building block (Figure 4.12). The pre- school gross enrollment rate is low across all income levels, suggesting an access bottleneck. ECE services for the full age cohort of 3–5 year-olds are provided only by the private sector, while government pre-school subsidies for 5-year-olds remain insufficient. With growing urbanization, traditional childcare options and family support structures are increasingly out of reach (IFC 2021). 156. Enhancing access to ECE would yield sizeable direct and indirect economic returns. Global data indicate that each additional dollar invested in high-quality ECE programs yields a return of between US$6 and US$17 (UNICEF 2015). Increased access to affordable ECE would also encourage women to participate in the labor force. This is particularly relevant in Fiji’s context, where female labor force participation is notably low (see Section 4.4.1 below). 157. Despite nearly universal access to basic education, its poor quality is limiting skills formation. As of 2019, net school enrollment rates had reached 93.2 percent at primary level and 85.7 percent at lower secondary. However, Fiji grapples with issues related to the quality, efficiency, and relevance of its education curricula and training programs, which are holding back its human capital potential. Although a child in Fiji who starts school at age 4 can expect to complete 11.3 years of school by the age of 18, this amounts to only 7 years of schooling when adjusted for quality. This is higher than the average for PICs and in line with structural peers but well below the aspirational peers’ averages (Figure A.7 in Annex F). This points to a weak link between schooling and effective learning and, consequently, weak skills formation at foundational levels. 158. Dropout rates are high and completion rates low, especially at the upper secondary level. Since 2013, only 53 percent of students starting Year 9 (for most, the first year of lower secondary level) have successfully passed their Year 12 examination to progress to Year 13, which is a prerequisite for university enrollment (Figure A.8 in Annex F). Completion of secondary and tertiary education is highly unequal across income groups. Only 9.5 percent of working-age adults from the poorest quintile had completed secondary education, and only 2.9 percent tertiary education. Among the richest quintile, the figures are markedly higher at 17.5 percent and 33.1 percent, respectively (Figure A.9 in Annex F). Low rates of upper secondary completion and limited access to higher education undermine the economy’s capacity to shift toward more knowledge- and capital- intensive sectors. Lessons from leading knowledge economies such as Finland and Singapore show that once universal primary completion has been achieved, the focus could shift to strengthening secondary education. Fiji has stalled in its progress towards this goal. 114 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 4.12: Pre-school gross enrollment is consistently low across households of all income levels (Pre-school gross enrollment in percent) 40% 35% 30% 25% 20% 15% 10% 5% 0% Female Male Central Eastern Northern Western Q1 Q2 Q3 Q4 Q5 National Gender Province Wealth Quintile Figure 4.13: Returns to education are high, especially for completing lower secondary education Returns from additional year of schooling All Female Male National 16% 22% 14% Tourism 7% 9% 8% Employment Type Public sector 9% 13% 9% Private sector 14% 20% 13% Sector Agriculture 6% 5% Industry 8% 11% 7% Other services 21% 25% 19% Returns from additional level education Private Incomplete primary 3% 3% 3% Completed primary 19% 17% 21% Completed lower secondary 50% 47% Completed secondary 16% 16% 17% Complted higher 12% 13% 12% Public Incomplete primary 0% 0% 1% Completed primary 2% 0% 4% Completed lower secondary 16% 5% 25% Completed secondary 18% 18% Completed higher 64% 77% 52% Source: World Bank (WB) staff calculations based on Household Income and Expenditure Survey (HIES) 2019. FIJI COUNTRY ECONOMIC MEMORANDUM 115 159. For those who do persist with school, the rewards are high. Each additional year of schooling in Fiji is associated with an estimated 16 percent increase in earnings on average. This rate of return is high by international standards and above the EAP average. Earlier estimates by Montenegro and Patrinos (2014) show rate of returns to schooling ranging from 1.6 percent in Afghanistan to 22.4 percent in Rwanda; the EAP average was 9.4 percent. Returns in Fiji are higher for women (22 percent) and those who work in the non-tourism services sector (21 percent) (Figure 4.13). Workers in the private sector experience larger returns than those in the public sector from each additional year of basic schooling and from completing lower secondary education. In contrast, workers in the public sector see the largest return from completing a post-secondary qualification. This is likely because, typically, public sector jobs require a post-secondary degree. 4.3.2. Skills gaps are preventing Fijians from realizing their full potential 160. Skills gaps have been persistent in Fiji’s labor market in the last two decades, hindering the development of the private sector. Surveys of businesses have consistently shown skills shortages and low labor productivity to be significant concerns for firms of all sizes (World Bank 2017b). The 2009 Enterprise Survey found that low productivity was among the top constraints for 9 percent of small firms, 20 percent of medium-size firms, and 26 percent of large firms. Similarly, the 2003 SME Business Survey found that productivity was one of the top constraints for 30 percent of micro firms and 95 percent of medium-size firms. Larger firms, foreign-owned firms, and exporting firms were all more likely to complain about this issue, suggesting that the quality of labor is likely to be an important impediment to attracting foreign direct investment (FDI). 161. Skills mismatches worsened between 2016 and 2020, pointing to a lack of skilled jobs and misalignment between employers’ needs and what students are taught in school. By 2020, about 46 percent of Fijians were employed in jobs that required skills either below or above their qualifications, with undereducation most common in skilled occupations (managers, professionals, and technicians) and overeducation in elementary occupations (Figure 4.14). Although overall levels of skills mismatches in Fiji are moderate compared to its peers, over-education is relatively high. Notably, the likelihood of engaging in an unskilled job is largely independent of education levels, except for those with tertiary qualification (Figure 4.15). This suggests that those with secondary qualifications face difficulty in finding jobs at their skill level, despite the dominance of semi-skilled jobs in the economy. 162. The Government has made significant progress in skills development over the last two decades, but skills gaps remain. It has tried to address funding shortfalls and quality issues in the technical and vocational education and training (TVET) sector. It has sought to consolidate the sector, merging five standalone post-secondary training providers to create the Fiji National University in 2009. It has also established a Fiji Higher Education Commission and a Fiji Qualifications Framework to improve the quality of education in both the TVET and university sector (United Nations 2016; Maglen et al. 2015). The relevance and quality of training programs still fall short of market demand however, partly reflecting a deficiency in teacher training. For instance, the head of the Fiji Hotel and Tourism Association noted an oversupply of accounting courses and an undersupply of chef training and hotel management courses (Fiji Times 2020). 163. Enrolment rates for many TVET courses are also very low. Only one-third of job seekers reported undertaking vocational training for a job that they aspire to have (FBOS and ILO 2018). This low uptake of vocational training might be due to factors such as the lack of information on qualifications/credentials needed for a job, limited supply of training programs, and inaccessibility of such programs due to location and fees. Inadequate labor force data make it harder for stakeholders to identify investment priorities and limit the effectiveness of planning in the education and training sector (Curtain 2019; Maglen et al. 2015). However, the Government provided 400 apprenticeship grants in 2023 to mitigate labor shortages and plans to increase wages for apprentices. 116 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 4.14: Skills mismatches have worsened, with both under-education and over- education common (Share of under- and over-educated employees in total in percent) Fiji 2020 21% 25% Fiji 2016 13% 21% Elementary occupations Plan t & machine operators Craft & trades Occupati on Ski ll ed agricultur e Services & sales Cl erical Tech nicians and as sociate… Profes sion al Managers Touri sm Other services Sector Industry Agri cul ture -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Over-educated Under-educated Figure 4.15: One in five workers with secondary education still engage in unskilled jobs (Distribution of employees by education and skill levels in percent) 100% 80% 60% 40% 20% 0% Primary Some Completed Completed secondary secondary tertiary Unskilled Semi-skilled Skilled Source: International Labour Organization (ILO) for 2016 data; WB staff calculations based on HIES 2019. FIJI COUNTRY ECONOMIC MEMORANDUM 117 4.4. Economic growth is constrained by Fiji’s ability to fully harness its talent 164. Fiji’s low stock of human capital is a significant brake on its growth potential, but the country is also not effectively employing the human capital it has. Women and youth are underemployed. Lack of quality jobs are preventing Fijian workers from reaching their full economic potential. At the same time, migration and changes to the future of work present opportunities not yet fully exploited. 4.4.1. Large parts of Fiji’s potential workforce are not being effectively utilized 165. The country’s moderate overall unemployment rate masks critically low employment among young workers. Data from the 2019–20 HIES reveal that nearly 21 percent of 15–24 year-olds were unemployed, markedly higher than the 5 percent rate among those aged 25–64 and the national average of 7.4 percent. A large share of youth (12.8 percent) are also inactive, neither pursuing education nor participating in the workforce. There is a strong correlation between youth labor force participation and completion of secondary education. Approximately one-third of young Fijians who have not completed their secondary education are not in employment, education or training, compared to only 11 percent of those who have. Moreover, although younger Fijians are better educated than their older counterparts, employers considered them to lack the job skills and experience businesses need (ILO and ADB 2015). 166. The gap in labor participation rates between the sexes is striking. Only 41.2 percent of women participate in the labor force compared to 79.4 percent of men, a considerably wider gender gap than among Fiji’s peers (Figure 4.19). Fiji’s female LFP rate is also slightly lower than in developing countries with similar levels of GDP per capita (around 50 percent) (World Bank 2019). Although the gaps in labor force participation and employment rates tend to be narrower among better-educated Fijians, they are significant even among those with tertiary degrees (Figure 4.20). 167. Care responsibilities reduce women’s ability to participate in the workforce but have no impact on their male counterparts. LFP rates among women with at least one child are estimated to be 5.1 percentage points (ppts) lower than among those without children, and about 4.6 ppts lower if there is at least one elderly household member (aged 65 or above). The impact appears strongest among women of child-bearing age (25–34 years old), who are also at the prime age for career development. Part of this is likely related to the acute lack of childcare and ECE services discussed above, which prevents the mothers of young children from working. In addition, healthy aging could permit older individuals to provide childcare. Studies from China show that elderly childcare support can translate into increases in workforce participation rates among adult women by 28–43 percent (Du, Dong, and Zhang 2019; Miao et al. 2023; Shen et al. 2016). 168. Within the labor force, women also experience poorer employment outcomes, despite being better educated than their male counterparts. According to the 2019–20 HIES, 40.5 percent of 15-64 year-old women had completed at least secondary school, compared to 28.7 percent of their male peers. Yet the unemployment rate of workers with at least secondary education is slightly higher among women (8.8 percent for women vs. 6.4 percent for men). Among those in employment, men dominate in 19 out of 21 industries regardless of education level. Women earn on average two-thirds of what their male peers earn (Box 4.1). 169. Together, these gender gaps represent an under-utilization of women’s potential and a barrier to productivity and growth. Thanks to their greater educational attainment, women are relatively more likely than men to work in high- and medium-skilled occupations, namely professionals, technicians and associate professionals, clerical support services, and sales workers (Figure A.10 in Annex F). They are also more likely to find employment in the public sector than elsewhere: women account for 46.9 percent of public sector employees but only 32.6 percent of other types of jobs. Yet one in five women with a tertiary degree and more than half (55 percent) of those with secondary education do not participate in the labor force. 118 FIJI COUNTRY ECONOMIC MEMORANDUM Box 4.1: Resolving gender barriers to promote healthy and productive lives for Fijian women Fijian women are disadvantaged across most dimensions of human capital. They consistently experience higher NCD risks and markedly wider gaps between life expectancy and healthy life expectancy than men (Figure 4.16). Despite being better educated than men, women are significantly less likely to participate in the labor market. And when they do work, they will find their male peers with the same experience and qualifications, and in the same industrial sector earn on average 33 percent more than they do. These substantial gender wage gaps are driven by differences in how characteristics are valued. Women in Fiji are more likely than men to have a tertiary education and be employed in services. Based solely on their differences in work experience, education, and employment sector—their “endowment”—Fijian women would earn on average 17 percent more than their male counterparts (Figure 4.18). However, differential yields of these endowment characteristics (i.e., because men and women with the same characteristics are paid differently) result in a 62 percent earning gap in favor of men. This is primarily driven by large gaps in the wages of unskilled men and women, and women’s much lower rate of wage growth as they accumulate work experience. Closing gender wage gaps would provide another incentive to keep women in the labor force, for instance through promoting “equal pay for equal work” and addressing gender biases in recruitment and compensation practices. Fostering a more prominent role for female workers is possible. One example is in the healthcare sector, where women account for a majority of Fiji’s current and future doctors (Figure 4.17). In 2023, 60 percent of registered doctors were female, up from 33 percent in 2007 (although it is unclear whether this included private practitioners). According to data from Fiji National University, women accounted for 6 out of 10 graduates from the Bachelor of Medicine and Surgery between 2015 and 2022, half of the Specialist Masters graduates and 66 percent of interns registered with the Fiji Medical and Dental Secretariat. This aligns with the increasing proportion of female doctors in OECD countries in the last two decades. Figure 4.16: The gap between healthy and overall life expectancy is wider among women (Life expectancy gap by gender in years) 9.4 9.6 9.3 8.9 7.4 Female 7.1 7.2 6.8 Male 2000 2010 2015 2019 Source: WHO Global Health Observatory. FIJI COUNTRY ECONOMIC MEMORANDUM 119 Figure 4.17: Women now make up most of Fiji’s current and future doctors (Distribution by gender in percent) Inter registration (2023) 66 34 Specialist registration 41 59 (2023) Female Male GP registration 56 44 (2023) Doctors 33 67 (2007) 0% 50% 100% Source: Fiji Medical and Dental Secretariat for 2023 data and WHO Global Health Observatory for 2007 data. Figure 4.18: Blinder-Oaxaca78 decomposition of the gender wage gap 0.62 Interactions between endowments and yields 0.33 Due to yields -0.17 Due to endowments -0.12 Total gap Decomposition (men-women) Source: WB staff estimates based on HIES 2019. Enhancing access to health and childcare services is key to empowering women. Increasing the provision of affordable childcare and flexible work schedules could allow more women of prime working age to participate in the workforce. Interventions to raise awareness on nutritional best practices and measures to prevent NCDs would not only promote healthy and productive lives among women but also benefit the next generation through changes in behaviors and earnings of women. 78 The Blinder-Oaxaca decomposition method explains the gap in the means of an outcome variable (e.g., wage) between two groups (e.g., between female and male). The gap is decomposed into the part that is due to group differences in the magnitudes of the determinants of the outcome in question, on the one hand, and group differences in the effects of these determinants, on the other. 120 FIJI COUNTRY ECONOMIC MEMORANDUM Figure 4.19: Fiji’s female labor force participation rates are among the lowest of its peers (Labor force participation rate in percent, population ages 15 and above) Fiji Maldives Samoa Tonga Mauritius Belize Upper middle-… Jamaica St. Lucia Barbados 0 20 40 60 80 100 Female Male Source: WDI. Figure 4.20: Gender gaps in labor market outcomes tend to narrow when workers are more educated (Gender gaps in percentage points) 60 50 Percentage point 40 30 20 10 0 Up to primary Some Secondary Tertiary completion secondary completion completion LFPR Employment Source: WB staff calculations based on HIES 2019. Note: LFPR= Labor force participation rate. Figure shows the gap between men and women. FIJI COUNTRY ECONOMIC MEMORANDUM 121 170. Fijian workers are concentrated in semi-skilled occupations and in a small number of industries. Only 12.2 percent of all jobs in Fiji are skilled occupations (i.e., professionals and managers), whereas about one-fifth are unskilled elementary jobs and two-thirds are semi- skilled. The most important sectors for employment are agriculture, wholesale and retail trade, manufacturing, and household businesses, which account for nearly two-thirds of all employment but less than one-fifth of the skilled jobs. In contrast, the sectors with the greatest concentration of skilled jobs together account for slightly less than 15 percent of all employment (Table A.7 in Annex F), with public administration alone accounting for 7.8 percent. Although this dominance of semi- skilled jobs is to be expected at Fiji’s current development level, the concentration of skilled jobs in the public sector highlights the currently limited capacity in the private sector to generate such jobs. 171. Although Fiji has been gradually formalizing, the informal sector and subsistence agriculture continue to account for a large share of employment, especially in rural areas. As of 2019–20, nearly 40 percent of all workers—61.2 percent in rural areas and 19.4 percent in urban areas—were in informal employment, a modest reduction from 2015–16.79 Subsistence agriculture accounts for 17.8 percent of employment. Employees in the informal sector face difficulties in moving into the formal sector if their previous work experience—and the skills gained as a result—has been informal (World Bank 2007). 172. High levels of informality and unemployment among some groups highlight the need for social protection measures. Fiji has no passive labor market policies such as temporary income support or unemployment benefit, except for the short-term worker protection related to COVID-19.80 Its National Employment Center lacks sufficient staff to provide job matching services, and it is unclear how the volunteer and job matching services lead to securing employment. The Fiji National Provident Fund provides temporary income for unemployed members but has limited reach in the informal sector. The absence of a beneficiary registry limits the targeting efficiency and effectiveness of social programs. The Welfare Graduation Program is supposed to link social assistance beneficiaries with employment or self-employment opportunities but is yet to be rolled out at scale. Fiji is at high risk of disasters, which can affect a large proportion of the population at a time, rendering the traditional (informal) social safety net ineffective. It will therefore be essential to increase Fijians’ resilience, particularly through higher earning capacities, more secure employment, and robust, scalable social assistance that links its beneficiaries to better livelihood opportunities. 4.4.2. The future of work is changing, and Fiji needs to adapt quickly 173. The paradigm for jobs is changing: COVID-19 has accelerated the portability of work and tradability of services, making it easier to boost employment without workers physically relocating. Globally, the pandemic has served as a catalyst to speed up the expansion of digital technology. Mobile and internet penetration, the use of mobile money, and the setting up of electronic payment systems have accelerated significantly. Remote work spiked during COVID-19 and is expected to remain at a higher level than before 2020. E-commerce platforms have increased businesses’ participation in global value chains, improved market access, and lowered transaction costs. This transition opens job opportunities for Fijian workers without the need for physical migration and related concerns about socio-economic impacts and brain drain. 174. This transformation could enable Fiji to expand in-country services for foreigners. Fiji is becoming a business process outsourcing (BPO) hub of the Pacific (Outsource Accelerator 2023), offering a (relatively) skilled and large workforce, modern infrastructure, and a location, stable political environment, and service culture that are attractive to foreign companies.81 But there are further job creation opportunities, including digital education services, healthcare services for foreign 79 According to the Employment and Unemployment Survey 2015–16, nearly half of all those employed – 67.8 percent in rural and 28.9 percent in urban areas – were in informal employment (FBOS and ILO 2018). Fiji’s 2021–22 COVID-19 Economic Response and Recovery Plan included unemployment support for workers affected by 80 COVID-19, social welfare support, and two employment support schemes (Stronger Together and Business Jobs for Nature). 81 For a sector deep dive on BPO, see IFC (2022). 122 FIJI COUNTRY ECONOMIC MEMORANDUM nationals, higher education, and gig work. Migration for retirement is an increasing trend among “global nomads”, driven by factors including the increasing cost of living in advanced countries, tax and financial advantages, and the prospect of a warmer climate. Together with Samoa, Tonga, and Vanuatu, Fiji already offers a retirement program to foreigners, but attracting long-stay retirees will require additional actions, both in the short term and over time. 175. The rapid rise and application of artificial intelligence (AI) poses another set of opportunities and risks. Emerging economies like Fiji are expected to face relatively lower risks from AI but are also less poised to exploit its benefits than advanced economies (IMF 2024a). There are mixed opinions on the likely winners and losers, but countries need to be prepared to adopt AI technologies and to alleviate the potential impacts of the structural change they will bring. If AI strongly complements human labor in certain occupations and the productivity gains from its adoption are sufficiently large, faster growth and increased labor demand could more than compensate for the partial replacement of tasks by AI, and incomes could increase along most of the income distribution. 176. The implications of AI in Fiji should be actively monitored and managed. It has already been adopted in Fiji’s finance and service sectors82 and could transform the business landscape, particularly in hospitality, e-commerce, and BPO. However, AI-powered scams are becoming more sophisticated, as warned by the Director General for Digital Government Transformation, Cybersecurity and Communications (FBC News 2023). To harness AI’s potential, emerging economies like Fiji need to develop the foundational infrastructure it requires and build a digitally skilled labor force. These investments could also support the country’s ability to take advantage of the wider digital transformation. At the same time, social safety nets and reskilling opportunities need to be in place for those workers whose jobs are vulnerable to the adverse impacts of AI. In the longer term, as the country becomes more technologically prepared, it will be critical to invest in AI innovation and integration and develop adequate regulatory frameworks if it is to maximize the benefits from increased AI use (IMF 2024a). 4.4.3. Migration provides important opportunities, but needs careful management 177. Fiji’s labor market is also affected by migration, although the evidence is mixed on how it affects the country’s overall skills stock. The emigration of skilled workers has long been considered a challenge by employers in Fiji, especially in the health and service sector, reducing their incentive to invest in training. Statistics on Fijian entrants under Australia’s Temporary Skills Shortage visa scheme, a well-known pathway to permanent residency and citizenship in Australia, demonstrate this impact (Table 4.2). Almost 40 percent of them were highly skilled, meeting ANZCO Skill Level 1 (equivalent to a bachelor’s degree or higher). Recent anecdotal evidence also points to employers in the tourism industry bringing in foreign workers to provide scarce skills and fill leadership, training, and back-office roles. There have also been reports of nurses emigrating in large numbers, mainly to Australia and New Zealand although only 17 percent of nurses and 3 percent of doctors who left the public health sector said they were leaving to work abroad (Figure 4.11). 82 Examples include Avaia, a Fijian AI Customer Support Bot incepted in 2022, and ThirdRoc, a technology company that specializes in providing credit risk analysis through buy-now-pay-later, API & digital lending offerings. FIJI COUNTRY ECONOMIC MEMORANDUM 123 Table 4.2: Australian temporary resident skilled visas Visas granted to citizens of Fiji (number) Total visas granted (number) Skill Level 1 154 161,125 Skill Level 2 52 33,750 Skill Level 3 179 38,575 Skill Level 4 7 1,422 Skill Level 5 0 159 Unspecified <5 2,843 TOTAL 394 237,874 Source: Australian Department of Home Affairs, 2020 Note: by ANZCO...2019. Include Temporary Skills Shortage visas (subclass 482) and its predecessor, the Temporary Work (Skilled) visa (subclass 457). 178. Countering the risk of “brain drain” is the potential for skilled emigration to create a “brain gain” in migrant-sending countries, by increasing the incentives for education. There is strong evidence to suggest that Fiji’s labor market has benefited from migration, although the impacts on specific occupations inevitably vary. Chand and Clemens (2008) examined the impacts of skilled emigration from Fiji on both the skills base of the economy and education investments from 1986 to 2002–03. They concluded that the adverse impacts had been outweighed by the increased investment in education due to skilled-migration opportunities. In other words, migration from Fiji over the period raised the stock of tertiary educated people in Fiji, net of departures. More recently, Chand and Clemens (2019) found that migration opportunities for accountants in Australia and New Zealand led to an increase in the number of Fijians with accountancy skills who remained in Fiji.83 Experience from neighboring PICs suggest that many skilled migrants return. In Tonga, for instance, just over one-third of the nation’s academic brightest who had migrated after high school were already back working in Tonga by age 35 (Clemens and McKenzie 2009). Remittances from the Fijian diaspora, which form the second largest source of foreign exchange, have also been demonstrated to alleviate poverty, cushion households against shocks, and support household essential expenditure, including on education expenses (World Bank 2021, 2023d), all of which adds to human capital accumulation. Box 4.2: Temporary labor migration to Australia and New Zealand Temporary migration through the labor mobility schemes in Australia and New Zealand has been a growing source of concern in Fiji recently, as it is throughout the region. Fiji has participated in New Zealand’s Recognized Seasonal Employer scheme and Australia’s Pacific Australia Labor Mobility scheme since 2014. More than half of these temporary migrants join the semi-skilled stream of the Australian scheme, exacerbating concerns about an outflow of skills from the country. However, the number of Fijian workers participating in these schemes is much smaller than those emigrating through other channels. Despite considerable growth post-COVID-19, during 2022–23 fewer than 5,000 Fijian workers, or 1.5 percent of the country’s workforce, participated in the schemes (Bedford 2023). The labor mobility schemes have brought net positive impacts, both economic and social, to workers, their households, and communities (World Bank 2023d). Participants earn significantly more than they would at home (World Bank, 2017b, 2023d). A recent survey of migrant workers and households from Kiribati, Tonga, and Vanuatu also 83 Similar net gain in skilled workers has also been observed in the Philippines. The country responded to rising global demand for nurses by allowing the private sector to deliver nursing education programs. As a result, nine nurses were trained for every overseas job available (World Bank 2023f). This pool of available healthcare workers has facilitated growth in the domestic healthcare-related outsourcing and medical tourism industries. Nurses working in Manila now earn twice as much as Filipino nurses in Saudi Arabia (Ang and Tiongson 2023). 124 FIJI COUNTRY ECONOMIC MEMORANDUM suggests that participation in labor mobility schemes generally strengthens family relationships, empowers women, and shifts gender-related norms. About four in five surveyed workers reported improvement in their relationships with their children, and two-third reported improved marital relationships – findings that challenge commonly held assumptions about the impacts of family separation (World Bank 2023d). The recent expansion of these schemes, together with policy reforms by both Australia and New Zealand to improve the welfare of migrant workers, present significant development opportunities for Fiji and other labor-sending PICs. Temporary migration programs can increase national income and skill levels and improve prospects for many Pacific islanders who might otherwise struggle to find good jobs at home. Family accompaniment could also help address the social impacts of prolonged family separation. However, the migration process needs to be managed well, integrated with local labor markets and skills development programs, and treated as part of a broader productive inclusion program that also offers opportunities within Fiji (both to those who do not migrate, and those who return after working overseas). 4.5. Policy priorities: Unlocking growth by maximizing human capital 179. Fiji has made important strides in improving the quality of its human capital in recent decades, but more can be done to unlock its potential for growth. This would involve interventions and policy reforms to refocus the health system on the prevention of NCDs, improve education quality and access, improve labor market, and promote inclusive economic participation. 4.5.1. Refocus the health system towards prevention and improve its resilience 180. Strengthen frontline services to promote health and prevent and manage disease: • Population-level primary prevention needs to focus on promoting healthy lifestyles among children and youth. Initiatives such as the MHMS and Ministry of Education, Heritage and Arts-led revision of the Healthy School Policy and the Healthy Canteens Policy to promote healthy choices and physical activity and restrict the sale of unhealthy food in ECE, primary, and secondary school establishments have the potential to reduce risk factors, assuming they are effectively implemented. There is limited evidence on the promotion of the sustained adoption of healthy behaviors in a Fijian context, so such policies would benefit from a gradual roll out, accompanied by evaluations to direct their course. • Secondary prevention to identify disease in the earliest stages before the onset of symptoms, early initiation of treatment, and effective management to prevent complications can be achieved through a strengthened primary healthcare system with better trained and equipped skilled health workers. 4.5.2. Improve education quality and access 181. Invest in a strong foundation for lifelong learning by expanding access to quality pre- school programs. Increase the provision of public pre-school programs in underserved regions, guaranteeing ECE access for all children. Where public options are not available, explore ways of expanding the provision and affordability of private pre-schools. Set and uphold quality standards for pre-schools to provide a high-quality education that fosters development and readiness for future learning. Invest in pre-school teachers’ professional growth to enhance their teaching abilities and create a nurturing and stimulating learning environment. FIJI COUNTRY ECONOMIC MEMORANDUM 125 182. Create supportive and effective learning environments in primary schools to improve the quality of education and ensure boys’ smooth transition to secondary education. Offer continuing professional development programs to improve teachers’ instructional techniques, classroom management, and insight into child development. Design a curriculum that resonates with students’ experiences and sparks their interest, thereby making education more engaging and relevant. Integrate life skills education to foster critical thinking, problem-solving abilities, and social competencies among students. Implement assessment tools to consistently monitor and evaluate teaching practices and curriculum effectiveness, allowing for timely improvements with feedback from students, parents, and educators. 183. Improve teacher training and address low retention rates in upper secondary school. Gather comprehensive data to understand the causes of low retention rates among boys and to design targeted interventions. Implement strategies to support students’ academic and socio-emotional needs to foster a more engaging school experience and improve retention. Offer continuing professional development for teachers that addresses the specific challenges of upper secondary education, including subject expertise, pedagogy, classroom management, and inclusive education. 4.5.3. Improve functioning of the labor market and inclusive economic participation 184. Strengthen job-matching and skilling programs to help jobseekers secure work. This could start with ensuring adequate staffing and enhancing job matching services provided by the National Employment Center, with a stronger focus on career counseling services through the profiling of job seekers and improved labor market data collection. 185. Establish a Labor Market Information System to address skills mismatches. The system would collect and provide critical data on demand in the job market and the supply of skills or qualifications. It would provide a useful tool for policymakers to inform public investments in education and training and the allocation of foreign work visas, improve the quality and relevance of training curricula, strengthen the engagement of employers in skills development system, help improve career guidance and job matching services, and inform investment in relevant skills at the household and individual levels. A mapping of existing skills stockshas conducted and gaps would be an important first step to inform such a system. To that end, the Government has conducted a national training need survey. 186. Establish passive labor market policies, such as unemployment insurance, which could encompass all employees (including the self-employed and those in the informal sector), and cover training costs associated with upskilling/reskilling, in line with individuals’ career pathways. 187. Improve the relevance of TVET by enhancing linkages between employers and TVET institutions and reviewing and improving curricula to meet changing market demands. Examples include the formation of industrial skills committees and partnerships between TVET institutions and employers to design, review and revise training curricula and deliver internships, on-the-job training, and job placements. Other potential interventions include: • Integrating soft skills training into TVET programs to boost employability, especially in the services sector. • Offering career guidance and counseling at school to help students make informed decisions on course selection and job seeking. • Promoting lifelong learning and upskilling for workers to meet evolving job requirements through short courses and certifications, including recognition of skills acquired in the informal sector. • Promoting TVET accessibility for marginalized groups. • Encouraging public-private partnerships in TVET infrastructure, technology, and faculty development. 126 FIJI COUNTRY ECONOMIC MEMORANDUM 188. Promote labor market participation and formal employment among women. Encouraging more women into work would boost the supply of skilled workers, which is especially needed given the shortages reported by the services sector in recent years. This could include: a) addressing wage gap and messaging to tackle gender biases in recruitment and compensation practices; b) increasing access to affordable childcare; and c) strengthened maternity leave arrangements. Fiji endorsed the Early Childhood Care Services Policy and Regulatory Framework – Guidance Note in 2023 and is developing a Women’s Economic Empowerment National Action Plan. 189. Manage labor migration as part of a broader productive inclusion program that is integrated with local labor markets and skills development programs. This would involve three areas of interventions with a focus on addressing concerns about brain drain and maximizing the potential benefits of migration through the reintegration of returned migrant workers: • Invest in skills training programs tailored to local employers’ needs. The skills gaps in Fiji are driven more by an education and training system that does not meet market demand than a net outflow of skilled workers. Reforms to increase the supply of skills in high demand are vital not only to mitigate the adverse impacts of migration but also to support the development of the national skills base. • Do more to prioritize workers in low-skilled industries for temporary migration opportunities, in situations where their departure from the local labor market will have less impact on local employers. A form of “means testing” could be considered to screen and prioritize those who have the most to gain from overseas employment and ensure that skilled and well-connected workers do not dominate these coveted opportunities. This could be done within the context of a broader economic empowerment program, identifying households in need of employment opportunities and providing them with a focused program of training, financial literacy education, and a stint overseas, followed by support to help them invest their earnings productively when they return. • Encourage and support returned migrants to reintegrate into local market. Given the lack of information on returned migrants, the first step would be research into understanding migrant workers’ needs, incentives, and the barriers to returning and reintegrating economically. This could feed into the development of a national reintegration strategy. Other potential measures to encourage migrants to return could include supporting family goal setting and planning before departure (especially among temporary migrant workers), entrepreneurship training, favorable recruitment arrangements for skilled returned migrants, and fostering linkages between domestic employers and returned migrants. FIJI COUNTRY ECONOMIC MEMORANDUM 127 Annexes Annex A. Period of Analysis and Peer Selection The analysis covers the period after the 1987 coup through to 2022. Because 1988 is a structural break in the CEM 2.0 tool, it starts from the year 1989. There are two further structural breaks in GDP growth during the analysis period: a) in 2012 (for the period between 1991 and 2019); and b) in 1999 (for the period between 1991 and 2012). The analysis has therefore been broken down into the following periods: 1991–99, 2000–12, 2013–19, and, where available, 2020–21/22. Fiji’s peers have been chosen from upper-middle or high-income small island developing states (Table A.1). The criteria used were: • GDP per capita: similarity in levels of development • Population: size of internal market, as it influences scale and diversification opportunities • Tourism receipts: similar major revealed comparative advantage • Island states or continental countries with lower foreign market access.84 Table A.1: Overview of benchmarking criteria and country application International tourism, receipts GDP per capita Country Population, 2019 (percent of total exports), 2019 (US$), 2021 or year in parentheses Fiji 4,647 869,152 51.0 Structural peers Belize 6,228 353,106 41.1 (2017) Jamaica 5,184 2,873,926 57.7 (2017) Tonga 4,426 102,243 50.8 Samoa 3,857 191,664 61.2 Aspirational peers Barbados 17,225 284,659 44.4 (2016) Maldives 10,366 437,400 84.7 St. Lucia 9,414 178,231 88.8 (2018) Mauritius 9,106 1,259,363 38.5 Aggregate comparators Pacific Island small states Upper middle- income countries Source: CEM 2.0 Rstudio / World Bank (2023a). 84 The only exception is Belize given its economic similarities. 128 FIJI COUNTRY ECONOMIC MEMORANDUM Annex B. Assumptions Behind the Business-as-Usual Scenario Future human capital growth is assumed to be 0.35 percent in 2022 and to decline to about 0.07 percent in 2050 based on the growth rate of Fiji’s human capital index in the workforce (Figure A.1). The human capital growth path for the baseline is produced using the LTGM-Human Capital extension.85 Data on the health and education variables are taken from the World Bank’s Human Capital Project. The return to education is assumed to be 12 percent, and the average expected years of schooling to remain the same as that of today’s children, at 11.3 years. Schooling quality is also assumed to remain at its original level of 0.61.86 In the health of the population is measured by adult survival rates (ASRs), which is the probability that a 15-year-old will reach their 60th birthday, and not stunting rates, defined as the fraction of 5-year-olds who are not stunted. In the baseline, we assume that ASRs stay at 0.78 and the not stunted rate stays at 0.91. Investment is assumed to remain at 20.5 percent of GDP, which is the World Economic Outlook (WEO) estimate for 2023–28 and similar to the 10-year trend for 2010–19 of 20.4 percent. Public investment is assumed to amount to 5.0 percent of GDP, and private investment 15.5 percent, based on the World Development Indicators (WDI) (Figure A.2 and Figure A.3). These are close to the Government’s averages for the latest period of the analysis, 2013–19. The efficiency of public investment, as reflected by the Infrastructure Efficiency Index, is best thought of as capturing public capital construction quality. Fiji’s score for this in the LTGM-PC is 0.753. Total factor productivity (TFP) growth has been volatile over time but seemed to have remained positive after 2014 before dipping into negative territory in 2019. This increase in TFP in recent years is in line with growth accounting estimates so the growth rate is assumed to remain at the Penn World Table (PWT) 10-year average for the 2010–19 period at 0.73 percent (Figure A.4). Total and working-age population data come from UN population projections (2022 revision). The labor force participation data come from WDI, with data from the International Labour Organization (ILO) and rates are assumed to remain at the latest levels (Figure A.5). The share of working-age adults in the total population closely follows the population growth (Figure A.6). Figure A.1: Fiji’s human capital growth rate to 2050 1.0% 1.0 0.8% 0.8 0.8 0.6% 0.6 0.4% 0.4 0.2% 0.0% 0.2 2047 1991 1998 2005 2012 2019 2026 2033 2040 Historical Human Capital Growth Rate Baseline Human Capital Growth Rat e Source: WB staff estimates using LTGM-HC. 85 The LTGM-HC plugin combines average years of schooling by age cohort with the quality of education and health components to determine human capital. 86 The quality of education is measured in the units of a global scale of harmonized learning outcomes similar to the scale used in the Trends in International Mathematics and Science Study (TIMSS). A score of 625 corresponds to the high-performance benchmark, while a score of 300 corresponds to the low-performance benchmark equivalent to the minimum benchmarks used in several regional assessments. The table uses the scores divided by 625. FIJI COUNTRY ECONOMIC MEMORANDUM 129 Figure A.2: Fiji’s public investment to GDP ratio to 2050 0.07 7 0.06 6 0.05 5 4 0.04 0.03 3 0.02 2 0.01 1 0 0 2026 1991 1998 2005 2012 2019 2033 2040 2047 Historical Publ ic Inv estment to GDP Ratio Baseline Public Investment to GDP Ratio Figure A.3: Fiji’s private investment to GDP ratio to 2050 0.25 25 0.2 20 15 0.15 10 0.1 0.05 5 0 0 1998 1991 2005 2012 2019 2026 2033 2040 2047 Historical Private Investment to GDP Ratio Baseline Priv ate Investment to GDP Ratio Source: WB staff estimates using LTGM-PC. 130 FIJI COUNTRY ECONOMIC MEMORANDUM Figure A.4: Fiji’s total factor productivity growth to 2050 0.04 0.03 0.02 0.01 0.00 -0.01 -0.02 -0.03 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 203 0 203 2 203 4 203 6 203 8 2040 2042 2044 2046 2048 2050 Historical TFP Growth 3 - year Moving Av g 2010-12 3 - year Moving Av g 2016-18 3 - year Moving Av g 2013 -15 Baseline TFP Growth Figure A.5: Fiji’s labor force participation rates to 2050 100 1 80 0.8 0.6 60 0.4 40 20 0.2 00 1990 1997 2004 2011 2018 2025 2032 2039 2046 Historical Male LFPR Historical Female LFPR Historical Total LFPR Baseline Male LFPR Baseline Female LFP R Baseline Total LFPR Source: WB staff estimates using LTGM-PC. FIJI COUNTRY ECONOMIC MEMORANDUM 131 Figure A.6: Fiji’s working age to total population ratio to 2050 Source: WB staff estimates using LTGM-PC. 87 2% for Structures Default 132 FIJI COUNTRY ECONOMIC MEMORANDUM Table A.2: Summary of assumptions for the business-as-usual baseline scenario Variable Baseline Source/Comments 2019 PWT 10. Note the Total Economy Database Labor share 48.90% labor share interpolated for Fiji is 48 percent for 2021 Depreciation rate (aggregate) 8.10% PWT 10 2019 Capital-to-output ratio 1.62 Perpetual Inventory Method 2019 Private capital-to-output ratio 0.82/14.1% An, Kangur and Papageorgiou (2019)/Default / depreciation rate Public capital-to-output ratio/ 0.80 / 2% An, Kangur and Papageorgiou (2019)/Default depreciation rate87 Human capital growth rate 0.35-0.07% Calculated using the LTGM-HC Extension Calculated using LTGM-TFP - PWT average 2011- TFP growth (2022–50) 0.73% –19 Investment-to-GDP ratio 20.5% WEO 10-year average 2010–19 Public investment-to-GDP WEO 10-year average 2010–19 using WDI public 5.00% ratio investment to total investment ratio Private investment-to-GDP WEO 10-year average 2010–19 using WDI private 15.5% ratio investment to total investment ratio United Nations, Department of Economic and Population growth 2022–50 0.71%-0.32% Social Affairs, Population Division (2022). World Population Prospects 2022, Online Edition. Atlas GNI per capita level $5,270 WDI 2022 Atlas method (current US$) Labor force participation rate Labor force participation rate (% of population 59% (LFPR) ages 15+) (modeled ILO estimate) - Fiji 2022 Labor force participation rate, male (% of male Men 77.6% population ages 15+) (modeled ILO estimate) - Fiji 2022 Labor force participation rate, female (% of female Women 40.2% population ages 15+) (modeled ILO estimate) - Fiji 2022 FIJI COUNTRY ECONOMIC MEMORANDUM 133 Annex C. Measuring the Five Components of Total Factor Productivity Growth Table A.3: Baseline TFP drivers for Fiji (values as of 2019) Sub-indicators of the main determinant index Baseline Innovation R&D expenditure, public and private (% of GDP) 0.45 Number of patents (/100 people) 0.03 Number of scientific and technical journals published (/100 people) 0.02 Education Government expenditure on education (% of GDP) 5.07 Secondary completion rate (% of relevant population) 42.11 Tertiary completion rate (% of population aged 25 and above) 2.99 PISA score, average across math, science, and reading 428.04 Market efficiency Goods market: World Bank Doing Business scores 61.38 Financial market: IMF Financial Development Index 0.21 Labor market: Minimum wage (ratio to value added per worker) 0.46 Severance pay for redundancy dismissal (weeks of salary) 5.33 Women in wage employment in the nonagricultural sector (% of total 36.54 nonagricultural employment) Infrastructure Fixed telephones (per 100 persons) 5.56 Mobile subscriptions (per 100 persons) 112.14 Electricity production (kw per 100 persons) 259,203.81 Paved road (km per 100 persons) 0.28 Access to improved sanitation facilities (% of population) 91.10 Access to improved water source (% of population) 96.20 Sub-indicators of the main determinant index Baseline Institutions Voice and accountability (freedom of expression, citizen’s participation in politics, 0.02 etc.) Control of corruption 0.73 Government effectiveness (the quality of public services and policy 0.81 implementation, etc.) Political stability (the absence of politically motivated violence) 0.78 Regulatory quality (the ability of government to implement regulations promoting 0.05 private sector development) Rule of law (the extent to which citizens have confidence in and abide by laws) -0.51 Source: World Governance Indicators, WDI, WB Doing Business, World Intellectual Property Organization, IMF, UNESCO Institute of Statistics, Pacific Infrastructure Performance Indicators, and Our World in Data. 134 FIJI COUNTRY ECONOMIC MEMORANDUM Annex D. Fiscal Rules and Exchange Arrangements Among Peer Table A.4: Fiscal rule frameworks among Fiji’s peer countries Country BBR DR ER Notes Budget balance rule (since 2010, revised in 2014, 2017): required the Government to reduce the fiscal balance to zero by the end of FY2016, revised in 2014 to end of FY2018. The Government set the primary Jamaica X X deficit at 7 percent of GDP since 2017. Debt rule (since 2010, revised in 2014): required a reduction of total government debt to 100 percent of GDP or less by the end of FY2016, revised in 2014 to 60 percent of GDP or below by FY2025–26. The Fiscal Responsibility Act (2013) included a DR (including guarantees) ceiling of 60 percent of GDP; BBR reduced to 3.5 percent of GDP, as well as primary surplus from 2016 onwards. The Act also imposed Maldives X X limits on short-term government borrowings from the Maldives Monetary Authority, and borrowings since June 2016 could only be used to finance investment projects. Supranational DR (since 1998, revised in 2015 and 2021): As per the regional central bank’s Monetary Council’s decision of a debt target of 60 percent of GDP by 2035. The decision extends the previous Saint Lucia X target date of 2030 announced in 2015, which was extended from an original target date of 2020. BBR (1998–2005): Before the revision in 2006, fiscal benchmarks included a target of overall deficit of 3 percent of GDP. DR (since 2008, revised in 2010, and repealed in 2020): a legally mandated ceiling on debt at 60 percent of GDP until 2017 (initially by 2013 and revised to Mauritius X 2017 in 2010). The debt ceiling was set to 50 percent of GDP since 2018. The authorities repealed the DR during the pandemic. FIJI COUNTRY ECONOMIC MEMORANDUM 135 Country BBR DR ER Notes ER (1985–88; since 2009): Redirect expenditure to quality investment and maintaining fiscal discipline by controlling its share as GDP. From 2009-10, ER committed to keeping real growth to 2 percent per year, conditional on certain budget balance and/or economic outcomes. Revenue rule (1985–88; since 1998): The rules require tax revenues not to rise as a proportion of GDP. Since 1998, the key elements of the fiscal strategy have included supporting revenue growth while maintaining a sustainable tax burden with a cap on tax receipts of 23.9 percent of GDP. BBR (1985–88; since 1998): The rules required a budget deficit reduction in dollar terms in 1985–86 and as a proportion of GDP over the life of the Parliament. The medium-term fiscal strategy is focused on growing Australia X X X the economy to stabilize and reduce debt. Targets were to achieve a budget balance or surpluses over the medium term. From 2017–18 to 2019–20 the strategy was specified as being designed to deliver sustainable budget surpluses building to at least 1 percent of GDP. From 2020–21 the objective was to support growth and to stabilize and reduce debt as a share of GDP by targeting a budget balance over the economic cycle. DR (since 1998): The 1998 Charter underscores the key requirements to improve the government’s net financial worth over the medium term. A legislative limit on the face value of Australian Government Securities on issue was first imposed in 2008. This legislative limit was removed in 2013 and replaced by a requirement on the Treasurer to give a direction as to the maximum face value of Australian Government Securities that may be on issue. BBR (since 1994): the Government is committed to run operating surpluses annually until “prudent” debt levels are achieved. Once these are achieved, on average, total operating expenses should not exceed total operating revenues. The framework also requires the Government to reduce and maintain debt at prudent levels. It also specifies the Government objective to achieve and maintain levels of total net worth that provides a buffer that may impact adversely New Zealand X on total net worth in the future. The debt objective has been a key fiscal anchor. In case of deviation from the principles, the Government needs to specify the reasons. The Public Finance Act requires governments to specify the fiscal indicative targets for 3-year and 10-year objectives, typically as a percentage of GDP. Debt targets is set on net core crown debt at 15–25 percent of GDP in the fiscal strategy for the short term (3-year horizon) and long term (10-year horizon). Source: WB based on the IMF Fiscal Rules Dataset, 1985–2021. https://www.imf.org/external/datamapper/fiscalrules/map/map. htm. Note: BBR: budget balance rule; DR: debt rule; ER: expenditure rule. Belize, Tonga, Samoa, and Barbados do not have fiscal rules. 136 FIJI COUNTRY ECONOMIC MEMORANDUM Table A.5: Exchange arrangements and exchange restrictions in Fiji and peers Fiji Jamaica Belize Samoa Tonga St. Lucia Mauritius Maldives Conventional Conventional Craw-like Stabilized Conventional Currency board Exchange rate peg vis-à-vis peg vis-à-vis Other managed arrangement arrangement Floating peg vis-a-vis vis-à-vis the arrangement a basket of a basket of arrangement 88 vis-à-vis the vis-à-vis the the US dollar US dollar currencies currencies US dollar US dollar Controls on capital transactions as part of the exchange rate arrangement On capital market Yes Yes Yes Yes Yes Yes Yes Yes securities On money market Yes Yes Yes Yes Yes Yes Yes No instruments On collective investment Yes Yes Yes Yes Yes Yes Yes No securities Controls on derivatives and Yes Yes Yes No Yes Yes No No other instruments Commercial credits Yes Yes Yes No No Yes No No Financial credits Yes Yes Yes Yes No Yes No No Guarantees, sureties, and Yes Yes Yes No No Yes No No financial backup facilities Controls on direct Yes Yes Yes Yes Yes Yes Yes Yes investment Controls on liquidation of direct Yes No Yes Yes Yes n.d. No No investment Controls on real Yes No Yes Yes Yes Yes Yes Yes estate transactions Controls on personal capital Yes Yes Yes Yes Yes Yes No Yes transactions Source: World Bank based on IMF (2023a). 88 This category is a residual and is used when the exchange rate arrangement does not meet the criteria for any of the other categories FIJI COUNTRY ECONOMIC MEMORANDUM 137 Annex E. An Analysis of Firm-Level Data in Fiji This analysis draws upon data from the Fiji Revenue and Customs Service (FRCS) for 2016–22, offering insights into the characteristics, international participation, and performance of Fiji’s firms, disaggregated in some cases by sector. These data include information about firm location, registration year, value- added tax (VAT) payments, employment, international market participation, and intermediate inputs. Given data limitations,89 this analysis has adopted VAT as a proxy for firm performance supported by key considerations and a recent paper.90 Table A.5: Fiscal rule frameworks among Fiji’s peer countries VAT payments have decreased, in real terms, from FJD 85,000 in 2016 to FJD 79,700 in 2019. The COVID-19 pandemic (2020–21) exacerbated this drop. VAT The average VAT payments further decreased to FJD 60,600 by 2021 before shooting up to FJD 105,000 in 2022 exhibiting strong post-COVID recovery. The number of firms increased over time between 2016 and 2019. However, the private sector in Fiji has shown decreasing entry rates and increasing exit rates over this period. The entry rate gradually fell from 20.9 percent in 2016 to 13.8 Number of firms percent in 2019 while the exit rate increased from 8.7 percent in 2016 to 14.8 percent in 2019. COVID-19 increased the pressure with the entry rate dropping to 6.95 percent in 2021, and the exit rate increasing to 18.05 percent. After a slight increase in labor productivity between 2016 and 2018, it fell from Labor productivity FJD 8.82 per worker in 2018 to FJD 8.24 per worker in 2019 and further to FJD 7.73 per worker in 2021. There was no significant change in the proportions of exporters and importers Share of exporters between 2016 and 2022. Importers remained between 33 percent and 38 and importers percent during this period while exporters ranged between 8 and 10 percent. 89 There are no data available on capital stock, investments, or the purchase of intermediate inputs. For this reason, it is not possible to estimate TFP or technical efficiency. Furthermore, information on sales/outcomes and materials are not readily available for all firms. 90 The considerations are the following: • Studies have established a strong correlation between VAT payments and a firm’s actual value added, offering a reliable indicator of performance (Nanda and Chari 2014). • VAT tends to underestimate value added. As it is levied on each stage of production and distribution, it captures only a portion of the overall value created. This inherent bias provides a conservative, rather than inflated, estimate of firm performance. It is important to note that while VAT can be a valuable proxy for firm-level performance, it has limitations. VAT can be affected by factors beyond a firm’s control, such as changes in VAT rates or regulations. We know of no changes to VAT during the period of analysis. 138 FIJI COUNTRY ECONOMIC MEMORANDUM Table A.6: Descriptive statistics of the primary variables used in the analysis Mean Std. dev. Min Max VAT (real) 85,051.77 596,185.70 0.04 32,900,000.00 Number of firms 7,095 Labor productivity (in natural 2016 8.53 1.63 (4.27) 15.32 logarithm) Share of exporters 0.10 0.30 - 1.00 Share of importers 0.38 0.49 - 1.00 VAT (real) 83,896.61 507,893.80 - 16,800,000.00 Number of firms 7,735 Labor productivity (in natural 2017 8.65 1.55 (0.00) 14.51 logarithm) Share of exporters 0.10 0.30 - 1.00 Share of importers 0.38 0.49 - 1.00 VAT (real) 83,664.29 509,187.20 - 19,900,000.00 Number of firms 8,270 2018 Labor productivity (in natural logarithm) 8.82 1.57 (0.46) 16.28 Share of exporters 0.09 0.28 - 1.00 Share of importers 0.37 0.48 - 1.00 VAT (real) 79,701.38 472,949.70 0.01 16,100,000.00 Number of firms 8,398 2019 Labor productivity (in natural logarithm) 8.24 1.56 (1.56) 13.66 Share of exporters 0.09 0.28 - 1.00 Share of importers 0.36 0.48 - 1.00 VAT (real) 67,924.81 431,327.70 0.03 16,900,000.00 Number of firms 7,555 2020 Labor productivity (in natural logarithm) 8.17 1.63 (1.65) 14.28 Share of exporters 0.09 0.29 - 1.00 Share of importers 0.34 0.47 - 1.00 VAT (real) 60,642.19 418,826.20 0.01 16,500,000.00 Number of firms 6,904 2021 Labor productivity (in natural logarithm) 7.73 1.74 (6.41) 13.77 Share of exporters 0.08 0.27 - 1.00 Share of importers 0.33 0.47 - 1.00 VAT (real) 105,443.90 597,179.50 0.11 25,900,000.00 Number of firms 6,536 2022 Labor productivity (in natural logarithm) 8.20 1.55 (2.88) 14.53 Share of exporters 0.09 0.29 - 1.00 Share of importers 0.37 0.48 - 1.00 FIJI COUNTRY ECONOMIC MEMORANDUM 139 Table A.7: Entry and exit rates Entry rate (in percent) Exit rate (in percent) 2017 20.9 9.55 2018 16.89 12.1 2019 13.79 15.08 2020 8.5 14.88 2021 6.95 18.05 Table A.8 shows the results of a regression analysis91 examining the relationship between age, participation in the global market (exporter and importer), and various outcome variables (employment, value added, and labor productivity) for firms. Overall, the results suggest that age has a weak positive association with employment and weak negative associations with value added and labor productivity. Firms that engage in exports or imports tend to have higher levels of employment, value added, and labor productivity compared to non-exporting/importing firms, with imports showing a stronger association with all three outcomes. 1. Age: • The correlation coefficient between age and employment is 0.074 and statistically significant. This suggests a weak positive association between age and firm employment. • Age has a negligible correlation (0.003) with value added and a weak negative correlation (-0.062) with labor productivity. Both correlations are statistically significant. 2. Participation in the global market: • Exporters: Compared to non-exporters, firms engaging in exports show a moderately positive association with all three outcome variables (employment: 0.113, value added: 0.143, labor productivity: -0.013). All correlations are statistically significant. • Importers: Compared to non-importers, firms engaging in imports display a stronger positive association with all three outcome variables (employment: 0.248, value added: 0.313, labor productivity: 0.037). All correlations are statistically significant. The R-squared values for each regression are relatively low, ranging from 0.048 to 0.143. This indicates that the included variables explain a limited portion of the variation in the outcome variables. 91 We used the following estimation equation: it is our set of dependent variables. These include employment of firm i at time t, value-added (in log) of firm i at time t and labor productivity of firm i at time t. it is vector of regressors included in the regression. The regressors are age, exporter (dummy variable), importer (dummy variable). We also added sectoral and location dummies in the estimation. While T_t is year dummies, v_i captures firm’s time-invariant fixed effect. 140 FIJI COUNTRY ECONOMIC MEMORANDUM Table A.8: Correlation between age, participation in the global market with outcome variable Labor productivity Employment (log) Value added (log) (log) Age 0.074*** 0.003 -0.062*** (0.004) (0.004) (0.005) Exporter 0.113*** 0.143*** -0.013 (0.024) (0.032) (0.037) Importer 0.248*** 0.313*** 0.037 (0.019) (0.026) (0.031) Constant 0.483*** 8.913*** 9.287*** (0.052) (0.056) (0.082) Observations 24,425 50,827 24,425 R-squared 0.143 0.048 0.112 Number of unique firms 5,572 12,040 5,572 Source: WB staff calculations based on FRCS data. Note: *** p<0.01, ** p<0.05, * p<0.1. Robust standard errors in parentheses. FIJI COUNTRY ECONOMIC MEMORANDUM 141 Annex F. Additional Charts for Chapter 4 Figure A.7: Adjusted for what they actually learn, children in Fiji can expect to receive only seven years of schooling Source: World Bank (2020). 88 We used the following estimation equation: it is our set of dependent variables. These include employment of firm i at time t, value-added (in log) of firm i at time t and labor productivity of firm i at time t. it is vector of regressors included in the regression. The regressors are age, exporter (dummy variable), importer (dummy variable). We also added sectoral and location dummies in the estimation. While T_t is year dummies, v_i captures firm’s time-invariant fixed effect. 142 FIJI COUNTRY ECONOMIC MEMORANDUM Figure A.8: Only about half of students who start upper secondary education reach the final year Source: Chand et al. (2023). Figure A.9: Educational attainment is highly unequal across income groups Compl eted tertiary Share of working-age Compl eted secondary 17.5% population 17.5% 15.9% 33.1% 12.3% 9.5% 13.9% 2.9% 4.1% 6.9% Q1 Q2 Q3 Q4 Q5 Household wealth quintile FIJI COUNTRY ECONOMIC MEMORANDUM 143 Figure A.10: Women are more likely to engage in skilled occupations than men 100% Armed forces occupations 90% Elementary occupations 80% Plant an d machine op erators and assemb l 70% Craft and related trades workers 60% Skilled agricultural, forestry and fis h 50% Services and sales workers 40% Clerical support 30% 20% Techn icians and associate professionals 10% Professional 0% Managers All Male Female Source: WB staff calculations based on HIES 2019. 144 FIJI COUNTRY ECONOMIC MEMORANDUM Table A.9: Employment share and share of skilled jobs by industry Employment share (of employed workers aged Share of skilled ISIC Industry 15–64) jobs within 1-digit industry All Male Female Activities of households as employers or for T 19.3% 16.3% 25.1% 1.4% own use A Agriculture, forestry and fishing 16.8% 22.2% 6.0% 0.7% Wholesale and retail trade; repair of motor G 13.1% 10.2% 18.9% 10.8% vehicles and motorcycles C Manufacturing 12.6% 12.5% 12.8% 6.4% Public administration and defense; O 7.8% 6.2% 10.8% 52.7% compulsory social security H Transportation and storage 7.2% 9.5% 2.6% 5.7% F Construction 4.9% 6.7% 1.4% 8.2% I Accommodation and food service activities 4.8% 3.3% 7.5% 11.1% Administrative and support service N 3.2% 3.2% 3.2% 6.4% activities P Education 1.9% 1.1% 3.3% 76.3% K Financial and insurance activities 1.5% 1.2% 2.3% 17.1% Professional, scientific and technical M 1.5% 1.4% 1.7% 39.9% activities S Other service activities 1.4% 1.5% 1.3% 33.0% J Information and communication 0.9% 0.9% 0.8% 35.7% Q Human health and social work activities 0.9% 0.7% 1.1% 36.9% B Mining, quarrying 0.6% 0.9% 0.1% 4.2% Water supply; sewerage, waste E 0.6% 0.8% 0.2% 12.6% management and remediation activities Electricity, gas, steam and air conditioning D 0.6% 0.7% 0.4% 17.2% supply R Arts, entertainment and recreation 0.3% 0.4% 0.2% 64.2% L Real estate activities 0.2% 0.3% 0.1% 62.9% Activities of extraterritorial organizations U 0.2% 0.2% 0.3% 14.0% and bodies Source: WB staff calculation based on HIES 2019. 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