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Effective Aid to the Pacific

Big Challenges in Small States

by Simon Feeny

by Simon Feeny

The Pacific region covers Melanesia, Polynesia, and Micronesia. Its developing countries and territories include the Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, Vanuatu, and Wallis and Futuna. Although important differences exist, Pacific countries are generally characterized by political instability, large inefficient public sectors, large informal sectors, ethnic tensions, and a vulnerability to external shocks such as natural disasters and falls in the prices of their key exports. Although some Pacific countries are rich in mineral resources, they are primarily reliant on agriculture and fishing for income and employment. Development in Pacific countries is constrained by their geographic remoteness, and the small size of their domestic markets. Recently, there has been a renewed interest from the international community in the Pacific region, due to the poor performance of a number of coun- tries and concerns over regional security and stability. Questions have been raised regarding whether foreign aid to the region has been effective and how to make it more effective in the future. This article offers answers to these questions.

Pacific Countries are Large Recipients of Foreign Aid

Pacific countries receive the highest amounts of per capita aid in the world. Most aid has been bilateral from Australia, Japan, France, and New Zealand. The majority of aid flows have been provided in the form of grants with a large component provided as technical assistance. In 2002, Pacific countries received an average of over US$700 of aid per capita and aid flows accounted for an average of 20 per cent of countries Gross National Income (GNI). These figures are very high in comparison to other regions in the world (see Table 1).​

angle2005-1_img6.jpgYet Pacific Countries Have Experienced a Mixed Record of Development

Despite receiving large amounts of foreign aid, Pacific countries have failed to prosper. While there have been some important improvements in some measures of well-being, real per capita incomes in some Pacific countries have fallen in recent years and poverty and inequality have increased. This makes the achievement of the Millennium Development Goals (MDGs) in the region particularly challenging. Melanesian countries have fared particularly poorly. Recent deterioration of living standards has been most acute in the Solomon Islands and in Papua New Guinea. These two countries are now commonly referred to as fragile states. However, the World Bank's Country Policy and Institutional Assessment (CPIA) ratings indicate that at least another three countries could be classified as fragile states. These countries are Kiribati, Tonga, and Vanuatu, each of which belong to the bottom two quintiles of the ratings. CPIA ratings for other Pacific countries are not available but many of them have experienced similar problems.

Recent Aid Initiatives

Providing aid to the Pacific highlights many of the challenges donors face when engaging with fragile states throughout the world. When there are serious doubts over the capacity of recipient public sectors to manage aid inflows effectively, alternative mechanisms for providing aid can be used. Foreign aid can also be used to strengthen the capacity of public sectors. The difficulties experienced by some Pacific countries have led to unique responses from Australia. Civil and political unrest in the Solomon Islands led to the Regional Assistance Mission to the Solomon Islands (RAMSI) in 2003. The Mission, led by Australia, includes the personnel from ten countries positioned in the Solomon Islands to restore peace and security and stabilize government finances. Further, in 2004, the Enhanced Co-operation Program (ECP) in Papua New Guinea led to a number of Australian public servants taking positions in various government departments to help strengthen law and order and improve the level of economic and public sector management. Although it is too soon to effectively evaluate the effectiveness of such interventions, and the ECP's future is uncertain given recent challenges in the Papua New Guinea Supreme Court, these interventions are likely to provide important lessons for other donors when engaging with fragile states.

Has Foreign Aid Been Effective? 

For some commentators, the associa- tion between poor growth rates and high levels of foreign aid has been enough to conclude that aid has been ineffective in the Pacific. Some commentators have gone further suggesting that aid has been part of the region's problems rather than the solution. However, evaluating aid effectiveness is more complex than examining simple associations. Pacific countries have experienced poor economic growth rates for a number of reasons. When evaluating the impact of foreign aid it is important control for these other factors and this is the role of empirical aid effectiveness research. 

Surprisingly little empirical research has focused on evaluating aid effectiveness in the region. Pacific countries are often excluded from the analyses of previous aid effectiveness studies, examining the impact of foreign aid on economic growth, due to the paucity of their data. Although it is clear that foreign Table 1: Aid to the Pacific, 2002 Region Average Aid per capita $US Average Aid as a % of GNI Africa 82 13 Asia 51 8 Americas 71 3 Europe 81 5 Pacific 701 20 Source OECD International Development Statistics Online Database 2005 aid to the Pacific has not been a resounding success, it is heartening that the few studies investigating the issue indicate that foreign aid has been effective at increasing economic growth in selected Pacific countries. This evidence suggests that foreign aid has not contributed to the poor economic performance of these countries and that their growth rates would have been lower in the absence of aid.

Issues When Evaluating Aid Effectiveness in the Pacific 

The finding that foreign aid spurs economic growth in the Pacific is encouraging. However, it is often asserted that the relationship between economic growth and poverty reduction in Pacific countries is weak. This is because the benefits of economic growth often don't reach those in isolated rural areas. The importance of sustained economic growth in the region should not be understated. But, since poverty reduction and the achievement of the MDGs are the central objectives of international donors these are the yardsticks that should be used for evaluating aid effectiveness. Unfortunately, poor data availability often prevents such an exercise.

However, recent research evaluating the impact of aid to Melanesian countries has attempted to move the emphasis of aid effectiveness placed on economic growth. The research finds that although foreign aid has been associated with higher overall economic (GDP) growth, aid has had no impact on agricultural GDP growth. Since the majority of people in the Pacific (and in many other developing countries) live in rural areas, reliant on agriculture for their livelihoods, increases in agricultural GDP are more likely to be associated with improvements in well-being. Anecdotally this finding is not too surprising. Although some aid projects in Melanesia have a rural focus, the vast majority of aid projects are national in nature and based in urban areas. Although the rural sector could benefit from such projects, and from economic growth in general, there is a strong case for more targeting of foreign aid to the rural areas of the Pacific. Providing greater assistance to those in rural areas will reduce the rising tide of rural-urban migration, reduce vulnerability to external shocks and stem increasing levels of inequality. Removing the emphasis from economic growth to agricultural growth is potentially important for evaluating aid effectiveness since it can provide greater insights into the impact of foreign aid on poverty.

There are a number of important reasons why evaluating aid effective- ness in the Pacific is particularly difficult. The first is that the availability and reliability of data for Pacific countries creates problems for empirical research and makes accurate tracking of development progress difficult. Second, a large proportion of foreign aid provided to the Pacific is in the form of technical assistance projects aimed at improving governance. Improving governance is currently the focus of aid donors in the Pacific. Examples of aid activities include improving law and order, strengthening institu- tions, and reform of the public sector. Such projects are designed to impact on long-term development and their effects are therefore very hard to capture empirically. Studies commonly evaluate the impact of aid on economic growth in the short term. Similar arguments apply to aid projects in the health and education sectors. The benefits from such projects are likely to take many years to have substantial impacts and their effectiveness should not therefore be assessed using conventional methods. 

Conclusion

Pacific countries have been large recipients of foreign aid yet some have experienced recent economic and social decline. Some Pacific countries are referred to as fragile states and provide a big challenge for foreign aid donors. Despite the poor economic record of many countries in the Pacific, there are some encouraging signs that foreign aid has been effective at spurring economic growth. The current emphasis of aid donors to the Pacific is to improve the level of governance. Evaluating aid of this nature is difficult since its beneficial impacts may take years to materialize. Further, while it is true that good governance is crucial for development, improving governance is difficult and will take time. With only ten years left to achieve the MDGs in the region, short-term poverty reduction and improvements in well-being must also be priorities. Greater targeting of aid to those in the rural and agricultural sectors will assist with these goals.

Simon Feeny is a Lecturer at RMIT University, Melbourne, Australia. He was previously a Postdoctoral Research Fellow, sponsored by the Australian Agency for International Development (AusAID). He is also a former WIDER intern.

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