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Wednesday, October 22, 2008

Economics, Earthquakes, Parties and Castration

OK, I admit, that's kind of a weird headline.  But those are four things that have happened in the past week here in Tonga.

I'll talk about castration first, since that's the probably the one that jumps out at you.   As you may know, I recently adopted a dog who belonged to a Peace Corps volunteer who completed his service.  "Solitia" is two years old, great with people but a bit aggressive towards other male dogs.   He's never been fixed.   Part of the  reason is that there are no veterinarians in Vava'u and there is only one vet in the entire Kingdom of Tonga.

Last weekend, I heard that a vet from America and her husband were on a yacht visiting Vava'u.  That's how the coconut wireless works.  I met her husband on Saturday and I can thank our unreliable electricity for the meeting.   We've been without electricity several times recently, the longest was on Saturday when it was out for about five hours.  It's gotten very hot again and it was pretty miserable with no fan running in the house.   I decided to head down to a local restaurant that is on the water to sip a few beers and enjoy the ocean breeze until the power came back.

That's where I bumped into Ben, the vet's husband, who told me his wife would probably be happy to fix my dog for me and already had plans to fix another dog next week.    Today, I took "Solitia" to have it done and I watched.  It's the first time I've watched an operation take place and it was interesting to see Shawn, the vet, work. "Solitia" was knocked out the entire time.   He's now recovering.  

I first heard about the vet at a party at my house on Friday night.  We gathered to say so long to Sarah Kate, the first member of Group 72 to complete her service.  


Sarah Kate has spent the last two years living in Hunga, a small village on an outer island.  She is the only American in her village and it took a long boat ride for her to get into the main island here in Vava'u.  While I think we all have different challenges in Peace Corps, I think Sarah Kate had more than most.  It's not easy living in a place with no electricity, running water or easy
 communication to the outside world.  However, she made the most of it and I know her villagers are going to miss her, as will all of us.  

It was a big gathering, probably the most people I have ever had in my house including a bunch of the Peace Corps staff who are here in Vava'u training the new group of volunteers, Group 74.

I had a chance this week to meet  with 10 of those new trainees this week.  I worked with the trainees who will be in the Peace Corps business program  on both Tuesday and Wednesday and am looking forward to getting to know them and the other members of their group.  

During my first session with them, we discussed the Tongan economy and the way business gets done in Tonga.  I gave them all an article I recently saw online which I thought did a good job of explaining some of the issues here in Tonga.  (I've pasted the text of that article at the end of this post.)

Finally, there was the earthquake on Sunday.   It hit the main island of Nuku'alofa and I happened to be on the phone with my friend Scot when it happened.  He does a good job of describing it on his blog.

I never felt much, but James was sitting in the yard with our landlord when it hit and said he could feel a slight vibration on the ground.   We're about 150 miles North of Nuku'alofa so we didn't have the same strength.  I guess it made the news in the US because my Mom's cousins, Howard and Gloria, immediately send me an e-mail to make sure I was okay.   It's nice to have people checking on you.

So now you know, it's been a week of Economics, Earthquakes, Parties and Castration.  Now perhaps that headline doesn't seem so weird after all.  It's just my life for the past seven days.

***Tongan Economy***

Here's the article from Matangi Tonga Online about the economy that I mentioned above.

Low productivity cripples Tonga's economy
16 Oct 2008, 13:03

Nuku'alofa, Tonga:

TONGA'S No. 1 economic problem is that it cannot provide employment for its growing population, including the estimated 2000 school leavers who annually join the work force, according to an Asian Development Bank report that looks at why Tonga's economy is not achieving its potential.

Released in Nuku'alofa on October 8 the report notes that the failure of the Tongan economy to provide jobs for its growing population has resulted in many educated and skilled Tongans taking high-paying jobs outside the country.

The report called 'Transforming Tonga: A Private Sector Assessment', makes a frank assessment of why Tonga's economy is underperforming and identifies constraints on investment and growth. It points to an over-sized, under productive but over paid civil service as well as unfair competition from loss-making state-owned enterprises that are eating up revenues that could have been better spent on health and education. The report also states that there is no apparent justification for the high power prices - which are the highest in the Pacific by a large margin.

Migration

There are now more Tongans living abroad than there are in Tonga and that is a major loss of human resources for the country as Tonga is trying to build up its economy and have some control of its destiny, the report notes. Today there are about 44% of the expatriate Tongan population living in New Zealand, 32% in the USA, and 19% in Australia.

Migration, however, has some benefits; it has kept the population stable, at about 100,000 and brings in remittances, which account for 40% of the Gross Domestic Product. The remittances partially fund Tonga's trade deficit and increase the per capita GDP, that in 2006 was 50% higher than in 1990. It is now $US2000, which works out to about $US5 per person per day, but the authors of the report believe that "with Tonga's benign living conditions, fertile land, and abundant sea, it means that there is almost no extreme poverty in Tonga."

But many Pacific Island countries at the same level of development as Tonga have had higher growth rates. "Samoa, for example, grew at 4% per year over the same period. If Tonga had grown at that rate, per capita GDP would be 30% higher than it is now. . . . So it appears that Tonga's economy has been performing well below its potential."

Despite the push for Tonga to develop its economy in order to provide employment for its growing population, Tonga's reliance on foreign aid and remittances continues, even more so now with a seasonal work scheme with New Zealand, and a similar scheme with Australia scheduled to start before the end of the year. It is yet to be seen but it is anticipated that the returning seasonal workers would try and push up the labour rate in Tonga.

Two major constraints

The sluggish growth rate of the Tongan economy has been identified by the ADB report to have been caused by two fundamental constraints: an over-sized, under productive but over paid civil service; and state owned companies, which were over patronised by government to the point where there is an uneven playing field for commercial competition with the private sector. These two phenomenon have scared away investors. 

The Tonga government has 17 state-owned enterprises (SOE) or Public Enterprises, and is therefore a large investor in the commercial sector of the kingdom. It has also been found that government provides services at a loss or below the level of an economic-risk adjusted return on its assets. This is because government, in effect, provides free or heavily subsidized capital to these enterprises.

The government has $TOP111.5 million ($37 million in loans, $74.5 million in equity) invested in the 17 enterprises that it owns.

The most recent financial statements of these SOE show that their combined profits are equivalent to only 4.8% of the total assets owned by the state. Taking into account that SOE assets add up to 45% of Tonga's GDP, the poor return reresents foregone revenues that could have been used to improve health and education services.

Value destroyed

Only four of the 17 SOEs earned profits. During the eight years from 1999 to 2006, cumulative net profits were $15.9 million, or $2 million per year, representing a very poor return from investment. 

A recent analysis of the profitability of SOE's in Tonga by the
ADB, found that the economic value destroyed by SOEs between 2002 and 2006 was T$34 million, almost exactly 50% of the spending on education over the same period.

The only SOEs that earn profits were Leiola Duty Free (now privatized), the Tongan Communications Corporation, and the Tongan Development Bank.

Low productivity chronic problem

Because the SOEs crowd out competition from the private sector, underperforming SOEs also perpetuate low productivity, "which is a chronic problem in Tonga". Crowding out occurs because the private sector is not likely to want to engage in activities where SOEs are receiving subsidized capital, states the report 

A recent example is the investigation by the Tonga Water Board (TWB) of the possibility of setting up a water-bottling operation. "Currently TWB is operating at a loss. The private sector will certainly be crowded out of that market if the government allows TWB to invest in water bottling. Keep in mind that its existing operations are losing money and TWB
is not required to achieve a return that fully compensates for the risks it is taking on existing and new investments."

Recommendation

The introduction by government of the Public Enterprise Act in 2002 was hailed as a definitive move by government to embrace privatization. The Act however fails to stipulate that Public Enterprises must operate as successful businesses, meaning that it should be profitable in a way that is comparable to businesses in the private sector.

The report recommends that Tonga would be well served by the government's freeing up underperforming capital and then using it for new public services, such as health and education. Selling these low-yielding assets to private operators would not only raise revenue for investment in infrastructure, but also increase the growth rate. 

"Newly privatized enterprises would probably treat existing customers better- to retain them before seeking to expand. They would be under pressure to obtain a commercial return on their investment."

Downsizing did not work

The government however has announced its intention to reduce the presence of the state in the economy through downsizing, contracting out, and privatization, and a Ministry of Public Enterprises has been established. 

But the Tonga government's attempt at downsizing the civil service by contracting out jobs, and privatizing some of its ministries in an effort to encourage economic growth did not work out as it was envisaged. 

In many ministries there are not enough staff members with the knowledge and the skills for the work that needs to be done. Following the general strike and the 60/70/80 salary rise in 2005 government no longer could afford to pay so many civil servants, and a further employment cuts are planned.

Highest power prices unjustified

The privatizing of public enterprises has not worked out either and these services were either dropping in quality or becoming very expensive. The cost of electricity in Tonga has been reported as the highest in the Pacific region despite the fact that it is subsidised by government.

The report stresses that If Tonga had reliable electricity, it would be possible for offices, hotels, and shops to avoid the expense of installing backup generators.

"Over 80% of the population of Tonga has electricity, which compares favorably with other countries in the region, especially in light of Tonga's geography. The demand for electricity has been growing rapidly. Over the past three years, growth has exceeded 6% annually. The cost of power in Tonga is the highest in the Pacific region by a large margin, even though the power supplier receives government subsidies. There is no apparent justification for the high power prices."

Introducing competition into the electricity market is recommended as a way to bring down the very high electricity prices. 

"We recommend that before returning the operation to private hands, the government restructure the power sector in a way that brings competition to generation, transmission, and distribution."

Two economic shocks

As Tonga was trying to find a way to boost the development of its economy the general strike by the civil servants and their 60/70/80 salary rise in 2005, and the destruction of the Nuku'alofa Central Business District in 2006 has been regarded as "two economic shocks for Tonga".

Top on the priority list to restore the confidence of investors in the government and the economy is to rebuild Nuku'alofa. Reconstruction work will start in November and it will take three to four years to be completed.

Low growth

The report concludes that unless both the investment rate and the amount of foreign direct investment can be raised, Tonga's growth rate will continue to be low. "The productivity of labor, which has declined over the last 10 years, will remain low. Productivity is disappointing despite Tonga having the best-educated population of the Pacific Island economies.

"When Tongans emigrate, they immediately earn much higher wages and salaries than they do in Tonga. This suggests that the cause of low productivity lies not in the workforce, but in factors that limit its ability to produce. These factors constitute constraints on growth and are the focus of this report."

The report 'Transforming Tonga: A Private Sector Assessment' was written by Paul Holden and Chris Russell, under the supervision of Winfried Wicklein, Asian Development Bank (ADB), Pacific Liaison and Coordination Office, Sydney, Australia. Terry Reid contributed to the chapter on rationalizing commercial laws and regulations. The report was funded by the Private Sector Development Initiative, an ADB regional technical assistance project cofinanced by the Australian Agency for International Development.

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