Aid has failed the Pacific

Per capita income has grown at less than 1% a year in the Pacific during the past 30 years. In some islands it has declined. Population has grown at more than 3% a year. The discrepancy between population and income growth lies at the core of the Pacific’s problems. The little income growth that has taken place has gone to small urban elites, so that village standards of living are deteriorating.

Jobs have not been created so that there is high unemployment in urban areas and even higher underemployment in the villages. Economic stagnation has inevitably led to crime and violence. Australian is not keeping abreast of the Pacific’s problems, allowing aid to add to the region’s difficulties. The Solomon Islands has disintegrated and violence is growing in Papua New Guinea.

Inappropriate economic policies have failed to deal with the hard tasks of development and with the negative effects of aid and mineral income flows. That is why Pacific governments are failing their people.

The Pacific was seen as an earthly paradise by early European explorers. Benign climates, ample food and leisure made for unusually high self-sufficiency standards. The Pacific is rich in agricultural land, timber, fish and minerals and attractive to tourists. All Pacific economies, even the smallest, can achieve high modern standards of living if they adopt policies that fit their size.

Since 1970 the Pacific has received US$50 billion—A$100 billion (in 1998 dollars)—in aid. Australia has been the largest donor. But because aid flows are not earned income, they create economic ‘rents’ that distort economies. Aid flows are fungible. They can be spent on projects and programs of the recipient’s choosing—on consumption rather than investment. Because they bias an economy against the private sector, they undercut employment and growth and lead to corruption. Super-profits from rich mineral deposits similarly create economic rents that also have negative economic effects, leading to public waste. Nauru has thrown away millions of dollars its phosphate earned.

Together aid and minerals have made development difficult worldwide, notably in Africa. Australia had to apply hard-headed economics to its own mineral booms and to reform its protectionist, public ownership and regulation policies. Understanding that aid can have negative effects is essential to assisting the Pacific to growth and development.

Re-colonization in any form is not a solution. Pacific problems can only be tackled in the Pacific. The first step toward reversing stagnation and falling incomes is the recognition that excess of population over income growth means serious trouble. No amount of muddling through will fix this fundamental disequilibrium. Pacific societies have to adopt policies that establish secure, free economic environments that deal with economic rents and make growth possible.

The Australian stance most likely to be effective would be to suspend all aid and thus to provide the catalyst for change. Withdrawing US aid turned Taiwan and South Korea into economic ‘tigers’. It would work in the Pacific, but it would be a harsh step.

A softer alternative would be to insist on the principle of mutual obligation in Australian aid to the Pacific. At present, Pacific states regard aid as part of their revenues. They spend aid on consumption. That is why there is no evidence of new roads, electric power, telecommunications, schools and health centers. Responsibility to Australian taxpayers demands that this practice must end. Australian aid funds must be removed from Pacific Island budgets where they encourage waste and corruption. Aid should only be spent on mutually agreed development projects and programs designed and monitored by teams nominated by the sovereign recipients and donors. Funds should only be disbursed on the evidence of met targets and audited expenditures. Without such changes, Australian aid will continue to damage the Pacific.

Experience shows that Australia cannot rely on the International Monetary Fund, the World Bank and the Asian Development Bank for the conditionality that was supposed to make aid effective.

These international financial institutions have their own internal agendas. They have failed to stimulate growth and have led the Pacific into debt. Loans have been spent on consumption and are hence unsustainable. For greater aid efficiency and effectiveness, Australia should move funds from multilateral to bilateral aid.

Migration to Australia is already taking place from the Pacific. Increasing awareness of migration possibilities to Australia could assist the Pacific. But migration must be under the same conditions as for other immigrants to avoid the creation of welfare dependent ghettoes of Pacific immigrants in Australian cities. Emigration to Australia would increase remittances, savings and skills and some migrants would return and start businesses.

The time for a well-informed public debate on aid to the Pacific to support Australian aid policy change is long overdue.

Emeritus Professor Helen Hughes (Australian National University) is a Senior Fellow at The Centre of Independent Studies. This article is based on Issue Analysis 33 ‘Aid has failed the Pacific’, available on the CIS website, at www.cis.org.au