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Most political leaders play up their country’s economic performance. Those on the Cook Islands, a collection of 15 islets spread over 2m square kilometres in the South Pacific, are doing the opposite.
At issue is whether the country of 17,000 people has become wealthy enough to warrant a reassignment by the OECD, a club of mostly rich countries, from upper middle-income to high-income status. The rub is that “graduation” would make it more difficult for the country to claim it qualifies for aid. This amounted to NZ$33m (us$22m) in 2016, or just under 8% of the islands’ GDP. However, New Zealand, the biggest donor country to date, has said it will continue to give an unspecified amount of financial assistance if the Cook Islands graduates.
Henry Puna, the prime minister, has acknowledged that achieving high-income status would be a source of national pride. It would be a first for a Pacific-island state. But he has warned that “premature graduation could have serious implications” for his country. The finance ministry downplays the islands’ impressive average annual growth of around 5% between 2014 and 2016. It noted in a recent press release that “economic growth may not have been as strong as we thought”.
The OECD sorts countries into groups based on their gross national income (GNI) per person. Countries that exceed the high-income threshold, as defined by the World Bank, for three consecutive years are promoted to the list of developed countries. (In 2016 the high-income threshold was $12,236.) The Cook Islands, however, does not produce data for GNI, only for GDP, which does not include net income from abroad. So when the OECD hinted last year that the islands appeared ready for graduation, officials resisted, arguing that they should be granted extra time to compile their own GNI statistics. The OECD set a deadline of early 2019.
The Cook Islands has good reason to worry that the good times may not last. It has lost 12% of its population in the past 12 years, as young people seek greener pastures in New Zealand. (Cook Islanders hold New Zealand citizenship, thanks to their country’s “free association” arrangement with the former colonial master.) Spending by tourists accounts for over 60% of the islands’ economy. Around 80% of the visitors (161,000 of them last year) are from New Zealand and Australia. A recession in one of those countries, or a natural disaster at home, would be an enormous economic blow to the Cook Islands.
Further complicating matters, the Cook Islands, after suffering the effects of profligacy in the mid-1990s, has since imposed on itself some of the world’s toughest fiscal constraints. These state that public debt be kept under 35% of GDP even as tax revenue is capped at 25% of GDP. Yet tax revenue is projected to breach the ceiling this year, and the debt-to-GDP ratio is inching closer to the upper bound. So raising taxes or issuing bonds are unlikely to be realistic alternatives if foreign aid is cut.
Given these challenges, and the reliance of the OECD on countries’ own calculations of their GNI, Cook Islands officials may want to cook the books to avoid crossing the high-income threshold. But Mark Brown, the finance minister, dismisses this possibility. He says that massaging the GNI data “would not be acceptable to the OECD, nor do we believe that it would be in the best interests of the Cook Islands.”
Brown concedes, however, that “a more gradual timeline, of say the early 2020s”, would be preferable for joining the ranks of the rich. That would allow more time for the economy to achieve “self-sufficiency”. One bright spot is the country’s vast seabed mineral deposits. The Cook Islands is reckoned to have up to a sixth of the world’s reserves of cobalt, an element used in batteries and jet engines. But large-scale mining is still a long way off. Well before then the OECD will have made a decision. According to an OECD spokesperson, if a country “meets the criteria for graduation, it cannot refuse graduation.” .
SOURCE: THE ECONOMIST/PACNEWS
Pacific Islands News Association
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