Peace Corps Videos

Friday, November 30, 2007

Business in Tonga

I've wanted to write about business in Tonga for some time, but it has been hard for me to get a handle on exactly how business is done here. So far, my exposure to businesses has been limited to very small Tongan businesses and those run by Palangi (Foreigners). My exposure has also been somewhat controlled by the Peace Corps in that my exposure to the Tongan businesses has primarily been those who have or want to have some kind of relationship with the Peace Corps.

Once I begin my permanent job working with the Tonga Development Bank and later when I get started with the Vava'u Chamber of Commerce, I'm sure my perceptions will change as will my understanding of how business gets done here.

I won't spend a lot of time talking about the Palangi owned businesses because for the most part, they seem to operate like any business in the United States or elsewhere, EXCEPT they have to be licensed by the Government and those businesses must be on a list of businesses that are allowed to be owned by non-Tongans. I've met the owners of two businesses who are living here on two year visas and they have both invested significantly in their business. If someone in the government decides not to renew their visas or their business license, they are out of business. It seems to be understood that you don't want to "piss off" the wrong person if you are an outsider as you may find yourself out of business.

The Tongan owned businesses are fascinating. For the most part, profit is not a motivating factor. I've spent the past two weeks working with some small businesses and almost none of them were tracking their profits. Some tracked their sales, but none could tell you how much money they were making or even if they were making money. Business is pretty much all-cash. If you run a store, you pay for the goods when they are delivered out of your cash on hand. We found one business with about TOP$300 dollars in cash stored in candy jars under the counter. And if you figure that the employees at this store make just TOP$50 dollars a week (six days) that's a lot of money to have sitting around. The reason is because they did not have a way to get to the bank to deposit it. (In case you are wondering, TOP$50.00 is about $25.00 US, which is what they get for a full week of work.) They don't worry much about theft here and yes, they leave the money inside the store in the candy jars when the store is closed.

Even the bank operates on a principal of trust. I have been to the bank twice and withdrawn money without ever showing an ID. All I had to do was give them my name and they handed me the cash. I finally got an ATM card this week and when I went into the bank to pick it up, I was given both the card and the PIN without having to show ID. Now, to put it in perspective, they do know most of their customers and I doubt they have many Americans who come in and want to withdraw money, as most wouldn't even have an account at the bank.

There is little regulation of business here and almost no tax structure. Price fixing is apparently perfectly legal. For example, we were told that there are four bakeries here on Vava'u and they all sell bread for the same price. Apparently they are all happy with how much business they are getting, so they got together and agreed to all sell the bread for the same price. The guy who told us this said "In Tonga, it's a free market; you can set your own prices". We found that funny since in the US we would call it collusion, it would probably violate anti-trust laws and it would certainly not be considered a free market.

Not only can you fix prices, but on some goods, the amount of profit you can make is fixed by the government. I don't know exactly what goods this rule applies to, but your profit on the regulated goods is limited to no more than a 15% mark-up. That means if it costs you $1.00, the most you can charge is $1.15.

When it comes to tax loopholes, Tonga has one so big it is amazing it exists. There is a 15% VAT charged on all goods in Tonga, but you have to sell TOP$100,000.00 annually for this to apply to you. Want to avoid paying this? Just open a second business. If one business is doing better than the other, just start funneling money from the good business to the bad to keep under the limit. If you are grossing TOP$250,000, just have three businesses and make sure none make more than TOP$100,000 each and you don't pay the 15% tax. You can even use the same bank account and co-mingle the funds. And get this? You keep the books and you report how much you earn to the Government. Then they tell you how much tax to pay. As one business owner told me, "You just have to know how to keep the books".


In addition to the business tax, there is an income tax here, but it only applies to people who make more than TOP$617 per month which excludes many people. The bottom line is that many businesses and residents pay no taxes and from what I've seen, no real structure to enforce the laws that do exist.

So you might ask, if this is the case, why don't a lot of businesses locate here? Mainly because foreigners can't own land, they can only lease it. That's one of the primary reasons I believe there are no International companies located in Tonga. And as mentioned above, only certain businesses are allowed to be owned by non-Tongans. This policy meant that for many years that Tongan owned companies could pretty much do as these please. Stores often kept irregular hours and if something were out of stock Tongans just did without it. Customer Service as we know it in America didn't really exist.

Now here is where it gets really interesting. A few years ago, the former King sold passports to some Chinese citizens. Once they paid for the passports, they were Tongan residents and were allowed to own any kind of business. While the passport selling quickly stopped after a huge International outrage, the Chinese who bought the passports are still here and they operate thriving businesses. They keep regular hours; they buy their goods in bulk and have cheaper prices. In just about any town in the Kingdom, the best stocked store is likely to be owned by Chinese. This has caused many Tongan owned businesses to suffer and now those that survive often find they are buying their goods from the Chinese just so they can stay in business and compete. As you might imagine, this has led to some resentment towards the Chinese.

Here's where the Peace Corps comes in. I see the role of the business volunteers as helping the Tongan businesses compete and grow, not just against the Chinese but everywhere. In one store we visited, we showed the managers of the store how to keep better books. The next day, we went back and they had re-done their records for the past day, not only doing it the way we had suggested, but actually taking our suggestion and making it better. Just one store and just one day, but if they keep it up, I believe it will help them better manage their business in the future. I doubt everyone will be as receptive but the women at this store were very smart and seemed to immediately grasp the importance of better record keeping.

***Other News***

This is my last post from Vava'u, at least for a while. On Tuesday I will be saying good-bye to my wonderful host family as we are returning to the main island of Tongatapu to complete our training. We'll be staying at a guest house in Nuku'alofa until we are sworn in as volunteers on December 12th. After that, we all will go to our assigned posts, except for me. I will be staying on the main island for approximately three months before coming to my permanent job here in Vava'u. Right now, I don't have a place to live. I might be staying with another volunteer during my three months or I may get my own place. It is not finalized yet. (My housing here in Vava'u is not finalized either.) I did get more information about what I will be doing during my first three months. The Tonga Development Bank is looking for assistance on launching a new web-site and they also want some help with developing Radio and TV advertisements. Both sound pretty interesting to me. I'll also be learning skills to bring back to the Vava'u branch.

It's now been two months since I left my Florida home and in some ways, it seems like such a long time ago, but I think that is because we have had so much information thrown at us in those two months. I couldn't even begin to count the number of new people I've met, I've learned to speak very basically in a new language and I've had a lot of fun along the way too. The time in training has gone by quickly (except for two really bad sessions) and the Peace Corps staff here is truly amazing. I really feel like all the staff really works hard to make sure that each of us will be successful volunteers. There is a very supportive atmosphere here and I think it will really pay off for all of us. After spending almost a year going through the very long and tedious Peace Corps application process, it was refreshing to come here and find so many committed people. Having said that, I'm tired of training and ready to begin my work as a volunteer.

***Notes***

This has nothing to do with Tonga or the Peace Corps, but my college alma mater, West Virginia University may play for the National Championship for only the second time in school history. Hopefully they will beat Pittsburgh this weekend and make it to the big game. Go Mountaineers!!

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