Market Remoteness in the Pacific

This post may state the obvious but I thought it interesting to see the hard data on just how economically remote the Pacific is compared to the rest of the world.  A 2007 article in the Pacific Economic Bulletin by Professor John Gibson of the University of Waikoto looks at the reality of distance for small island countries in the Pacific. This factor, Gibson says, is not often accounted for by some serious economists who analyse causes of economic growth in small countries:

“Many Pacific island economies have not achieved sustained economic growth. Indeed, Sampson (2005) finds that after controlling for OECD membership and whether a country is an oil exporter, the Pacific states grew more slowly than countries in any other region of the world over 1995–2003. This was despite high per capita inflows of external finance in the form of both overseas aid and remittances. Consequently, many experts are critical of this apparently poor performance, placing the blame on poor institutions (Chand 2001), aid inflows (Hughes 2003), bad policy settings (Chand 2003; Gosarevski, Hughes and Windybank 2004), and especially governance failures (Duncan 2005). At least some of this slow growth may be due to geography.”

 Taking a look at geography, the table below shows that on all measures of economic distance, Pacific islands are some of the most remote in the world, far more so than the Caribbean, which is included for comparison. Two measures of economic proximity are used: one weighted by GDP in which proximity to rich countries decreases remoteness more than proximity to poor countries and one which weights the rank by population: proximity to more populous countries decreases remoteness. The table lists the average rank for the countries in

 each sub-region (Micronesia, Polynesia or Melanesia) or region (Pacific Islands, Caribbean), out of 210 countries: the higher the number, the more remote the country.  On this measure Polynesia and Melanesia in particular are extremely remote and Pacific Islands as a whole are far more remote than countries in the Caribbean.

study by Azmat Gani at the University of the South Pacific, published in the journal of International Trade Law and Policy, concluded that distance poses a major barrier to trade with the US.

Surprisingly, the Gibson study mentioned above finds – using cross-country econometric analysis – that remoteness according to Gibson’s measure was not important, but that the reduction over in economic remoteness as measured in the table actually increased growth:

“The results show that the Pacific island countries are some of the most economically remote in the world. However, they have become potentially less remote in recent years as world economic activity has shifted towards the Pacific. In a cross-country growth equation the reduction in remoteness emerges as the more important factor. Therefore, the addition of geographical factors to a standard growth model makes the growth performance in the Pacific appear even slower than expected. This result is in contrast to many discussions in the region that assume spatial remoteness is a major impediment to growth in the Pacific.”

However the author qualifies the “contrary” findings by saying that transport costs – in my view a fundamental factor in economic distance, were not factored into his measure of remoteness: flight costs, for instance, were more expensive in this region than in the Caribbean.

One interesting implication for SPC and integrated regional approaches to boosting economic growth, the study finds, is that growth of one Pacific island country depends significantly on that of the others, and that studies of the causes of economic growth tend to give biased results due to this ignored phenomenon, which he terms “spatial autocorrelation”. 

This effect, Gibson says, is significant, and when this is accounted for, the hypothesis that growth in the Pacific is no lower than for other countries is not rejected.

The article concludes:

“it seems that it is hard for a country to have strong growth performance if it is surrounded by countries that are growing slowly. The policy initiatives needed to break this negative interaction within the Pacific region are the subject of future research, but at least some of the results reported here are suggestive of where such interventions might be directed. To the extent that a less competitive business environment creates frictions to growth, these may best be seen as a regional rather than a country-specific problem,since slower growth also adversely affects neighbours.”

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