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Speech at the launch of the report Solomon Islands: rebuilding an island economy: Sheraton Hotel, Brisbane: 20 July 2004.



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Speech

20 July 2004

Solomon Islands: Rebuilding an Island Economy

A Speech at the launch of the report Solomon Islands: Rebuilding an Island

Economy

Sheraton Hotel, 20 July 2004 Brisbane

Introduction

Distinguished guests, ladies and gentlemen.

It gives me great pleasure to welcome you here to launch my department's new report,

Solomon Islands: Rebuilding an Island Economy.

Let me welcome here tonight the Solomon Islands' High Commissioner, His Excellency Mr Milner Tozaka.

Today's launch provides a good opportunity to highlight what has been achieved in Solomon Islands and to discuss some of the possible challenges which may face the Solomon Islands' economy in the future.

As you may be aware, this coming weekend is the first anniversary of the Regional Assistance Mission to Solomon Islands arrival in Solomon Islands.

One year ago, Solomon Islands was a very different place compared to today.

The most immediate problem was the absence of law and order...

...armed militia and rogue elements of the police force largely able to operate at will, including extorting money from government.

Government provision of basic services

suffered.

Many government institutions had become almost totally ineffective or even worked to the detriment of government.

Schools and hospitals lacked funds to purchase essential equipment...

...public servants were not being paid on time...

...and government departments often lacked even basic equipment.

These factors contributed to a severe economic decline - indeed it is startling to be reminded that by the end of 2002, the Solomon Islands' economy had contracted for the fourth year in a row, shrinking by around 24 per cent since 1998.

While government was struggling to maintain control, businesses were struggling to survive.

Businesses carrying out work for government were not being paid...

...and limited infrastructure and utilities were proving inadequate and costly.

The domestic market began to collapse and, with interest rates rising, local companies found themselves unable to afford the credit needed to keep their businesses operating.

The Solomon Islands Government recognised that it was unable to address these complex economic and governance problems facing the nation...

...and the Prime Minister of Solomon Islands, Sir Allan Kemakeza, approached Australia for direct assistance.

With the support of the Solomon Islands Parliament and the Pacific Islands Forum, the Australian-led Regional Assistance Mission to Solomon Islands, or RAMSI, was Australia's response to this call for help.

Although Australia had long been a significant aid donor in the Pacific, the mission envisaged for RAMSI represented a more direct approach to that tried previously.

And it has been a successful mission.

RAMSI has re-established law and order...

...removing more than 3700 weapons from circulation and arresting a number of militants.

In discussing possible Australian assistance with Prime Minister Kemakeza prior to the development of RAMSI, we both agreed that improved law and order was an essential precondition for economic recovery...

...but we also agreed there would be little point in helping to strengthen civil order if it was not accompanied by practical steps to stabilise government finances and revive the economy.

The Solomon Islands Government and RAMSI have worked hard to begin the process of economic recovery...

...and it is gratifying to report that much has been achieved in a relatively short time.

RAMSI has brought stability back to the government's finances and helped deliver a

credible 2004 Budget.

And Government revenue has increased significantly, with the Government beginning the long process of repaying its debts.

The Governor of the Central Bank of Solomon Islands, Rick Hou, estimated that the economy grew, in real terms, by around 5.8 per cent in 2003.

This is a remarkable achievement given the severe decline prior to 2003.

But the difficult process of tackling the long-term development and economic challenges in Solomon Islands is just beginning.

Many further reforms are needed if the positive results of the first year are to be built into long-term sustainable growth...

...and Australia, through RAMSI, is well placed to continue to assist Solomon Islands with its reform agenda.

So just what are the ongoing challenges?

Public Sector Reform and Recovery

The first is continuing to improve the capacity of Solomon Islands Government institutions.

Poor governance has played a significant role in ethnic conflicts and economic contraction throughout Solomon Islands.

Australian experts have been heavily involved in restoring stability to government finances.

These experts, many from Australian government departments, have not just been there to do the work...but to advise and train staff.

Improving accountability of government is also a key focus for Australian experts.

Solomon Islands has more institutions intended to enforce accountability than many other Pacific States...

...but corruption has still flourished.

Strengthening these institutions is therefore

an important part of the recovery process.

Australia's assistance in the Pacific has increasingly shifted to issues of governance as we realise the importance of this for development.

But we recognise that good governance is just one of the necessary steps for economic growth.

Private Sector Challenges

A robust private sector also is essential for economic recovery and social stability.

And it is the private sector which will increase employment opportunities and sustain long-term growth.

Providing a stable environment for private business is fundamental.

Previous government domination of the Solomon Islands' economy - both through state businesses and regulation - has hindered the development of a robust, broad-based private sector.

The private sector is heavily reliant on commodities.

During the period from 1998 through to 2002, production of most commodities contracted sharply.

Others - such as mining - ceased altogether.

Log exports increased, but to levels so unsustainable that at their current rate, resources will be exhausted within 12 years, if not sooner.

Infrastructure, Utilities and State-Owned Enterprises

The report shows that Solomon Islands comparative advantage is likely to remain in primary production.

And with the majority of the population engaged in subsistence farming, improving their productive capacity and access to markets is likely to be the quickest route to economic growth.

To achieve this, cost-effective utilities, transport and communications infrastructure

will be crucial.

However, in most parts of the country the only infrastructure services available are limited - and often costly - shipping, postal and radio transmission services.

Without access to basic services at reasonable costs, rural populations are isolated from development and businesses are less competitive in global markets.

The report shows that government provision of these services in Solomon Islands has not worked.

And that the private sector can play a much larger role in the provision of such basic goods as electricity and water.

Greater competition in other markets, such as telecommunications and domestic air services, would promote economic growth.

These markets are currently closed to new entrants.

Solomon Islands mobile and Internet costs are some of the highest in the Pacific, while

domestic air services are unreliable at best.

The entrance of smaller market players in these monopoly dominated markets could decrease costs and improve services, improving the competitiveness of domestic production.

And a more robust private sector will also provide more avenues for subsistence farmers to enter the marketplace.

Improving the Business Sector Environment

But to achieve this, further key areas for reform will need to include access to finance, land tenure arrangements, labour market regulations and training and openness to trade and investment.

Addressing access to finance is important.

Currently, there are very limited opportunities for the majority of the population, particularly those outside of the capital, Honiara, to access loans or savings facilities.

A further challenge is the current land tenure arrangements.

Without suitable land tenure arrangements, land cannot be used as collateral for finance and businesses have little incentive for long term developments.

The report suggests that approaches based on formalising land boundaries, streamlining dispute settlement processes and eventually creating a workable land tenure system, are likely to require a commitment over many years...

...but that this must be attempted if development is to succeed.

Businesses continue to face a difficult environment in Solomon Islands, but things are improving.

Solomon Islands continues to have relatively high tariffs, but large tariff reductions have taken place in the last five years.

Continuing the tariff reduction process would further benefit the economy.

The report highlights the cumbersome investment regulations as being an impediment to foreign investment in Solomon Islands.

Approval processes have traditionally been time consuming and non-transparent, further discouraging potential investors.

Data indicates that rather than attracting foreign investment, Solomon Islands has been losing investment in recent years.

Recognising this, the Solomon Islands Government has been consulting with businesses and provincial governments, with the aim of streamlining investment processes and removing outside influence in investment screening.

And investors are beginning to look at Solomon Islands.

Businesses such as Gold Ridge mine and the palm oil producing Solomon Islands Plantation Limited - shut down through the local tensions - have drawn recent interest from investors.

And with stability returned, investment processes improving and the economy recovering, opportunities for Australian exporters, business people and investors are also increasing.

Conclusion

In conclusion, this report shows that RAMSI has provided an opportunity to restart economic growth.

The challenges of access to finance, land tenure reform, and expanding the production base, will require a sustained commitment to reform.

If this commitment can be sustained in the long-term, Solomon Islands has an opportunity, with the advice and assistance of donors, to continue to progress towards prosperity.

Today's EAU report is an important contribution to the understanding of challenges - and the opportunities - - facing the expansion of the Solomon Islands' economy, providing a valuable resource for

business and government alike.

I congratulate Nicholas Coppel and the Department of Foreign Affairs and Trade's Economic Analytical Unit on producing another high quality report.

I thank AusAID for their sponsorship of this report, and BHP Billiton for their generous long-term corporate sponsorship of EAU research.

I would also like to thank the involvement of Mr John Ridgway, the President of the Australia Pacific Islands Business Council, at this launch.

The Australian Government appreciates the work of the business council in building stronger business relationships between Australia and the Pacific.

I commend this report to you.