Roxane de Waegh, Lucas Watt and Greg Watt
You get exactly whats on the tin for Bertram’s (2018) article, Why does the Cook Islands Still Need Overseas Aid? He asks, in a context where the private sector revolving around tourism is booming (at least prior to COVID-19), why would the Cook Islands require large amounts of Overseas Development Aid (ODA)? In 2018, the Cook Islands received close to 80 million dollars worth of grant aid. Bertram (2018) attributes the need for overseas aid on austerity measures that were enforced onto the Cook Islands in the structural readjustment period of the 1990s. Specifically, the Cook Islands were forced into a policy by the New Zealand government and the Asian Development Bank in 1998 whereby tax revenue should not exceed 25% of Gross Domestic Product (GDP). This has left the Cook Islands with a very small revenue pool to draw upon to service its expenses which consistently stand at 40% of GDP. Overseas aid is currently relied upon to service this gap in national revenue and expenses which limits what the Cook Island’s can do fiscally, as well as limits their general national autonomy. In this review we explore some thoughts which Bertram’s (2018) article has inspired.
Roxane de Waegh further explains the more intricate economic context of reliance in the Cook Islands detailed in Bertram’s article. Drawing from Klein (2007) she then argues that globally, external donors often take advantage of adverse economic contexts in developing countries to impose neo-liberal economic policies that undermine their national sovereignties. She argues that this shock doctrine is equally applied to The Cook Islands.
Lucas Watt discusses how rapid growth in the Cook Islands tourism industry has necessitated many infrastructural improvements which requires substantial capital to fund. With such a limited tax revenue pool however, the Cook Islands has been forced to rely upon overseas development aid to fund such infrastructural development. From this context of overseas dependence and severe national fiscal restriction; he asks whether infrastructural equity is, or can be, achieved. The simple answer is no, however there are some important caveats to explore, particularly the Cook Island’s economic position and revenue streams in relation to other Pacific countries.
Greg Watt similarly explores who gains the disproportional share of the benefits from overseas development aid in the Cook Islands context. He argues that the economic benefits of overseas development aid directed towards increasing the capacity of the Cook Islands to host more and more overseas tourists does not trickle down to Cook Island residents. Rather, these benefits are appropriated by expatriate tourism operators who may be transferring a whopping 37% of the Cook Island’s GDP out of the country to their home countries.
The Secret Role of Donors and Creditors – Roxane de Waegh
Bertram (2018) explains why the Cook Island’s public finance sector is still dependent on overseas development aid by identifying four key issues:
- The private sector accounts for all the substantial savings indicated by the balance of payments statistics.
- The government is unable to capture a share of those savings by taxation because of the Manila Agreement ceiling on tax revenue (a policy put in place after the mid 1990s economic crisis).
- The present level of government expenditure cannot be sustained without aid unless the Manila Agreement limits are abandoned and taxes are increased.
- Overseas development aid functions as a subsidy to Cook Island taxpayers, whose free-rider status is sheltered by keeping the total tax take within the Manila Agreement fiscal constraints.
Essentially, Bertram (2018) argues the reason why the Cook Islands are still dependent on aid money can be traced back to a meeting in Manila, in late 1998, where in exchange for the writing-off of half of its debt, the Cook Islands government agreed to accept voluntary but binding limits of its budget (Wichman, 2008), namely:
- Tax revenue should not exceed 25 percent of GDP.
- Public sector wages and salaries should be capped at 44 percent of total revenue, falling to 40 percent over time.
- Debt servicing should not exceed 5 percent of total revenue.
- The overall budget deficit should not exceed 2 percent of GDP; and
- Net debt should not exceed 35 percent of GDP.
These strict binding limits did allow for a dramatic reduction in debt, which had accumulated to 140 percent of GDP in 1998, and by 2005 dropped below 40 percent. However, this dramatic reduction can also be attributed to the rapid growth of GDP, which was mostly driven by the exponential development of the tourism industry. As the tourism industry continued to rapidly grow, as did the demand for constant investments in infrastructure. Sewage pollution of the Muri lagoon, an overflowing landfill, deteriorating roads, shortcomings in water supply, the need for improvements in Rarotonga’s port and airport, and the unavoidable costs of repairing cyclone damage and improving cyclone protection al meant that capital works could not be deferred indefinitely. By 2015, as these works gathered momentum, government spending rose back above 40 per cent of GDP, while tax revenue remained capped at 25 per cent (Bertram, 2018). Yet, the government could not borrow more than 5 per cent of their GDP or collect more than 25% of GDP in tax revenue due to the 1998 Manila Agreement. The Cook Island government could only use non-tax operating revenue to match the rising demand for infrastructure as tourist numbers rose – and this capital budget of non-tax revenue amounted to only 2-3 per cent of GDP (Bertram, 2018). Without the ability to raise taxes or borrow money, the Cook Island government had to once again depend on external overseas development aid to make up for its revenue shortfall.
Bertram’s analysis comes full circle when we come to understand that the 1998 Manila Agreement creditors – New Zealand and the Asia Development Bank – are also the ongoing aid donors. If the creditors, turned donors, were to relax the 25 per cent ceiling on tax revenue, and ease the limits on public sector and debt servicing, this would represent a major step towards fiscal sustainability for the Cook Islands Government (Bertram, 2018). Most donors, however, pay lip service to the notion of sustainable development in which the need for aid is supposed to wither away as the economy grows (Bertram, 2018). In contrast to the widely held notion that aid provides the basis for self-sustaining growth, which in turn enables escape from aid dependence, here the need for increased aid has been the consequence, not the cause, for rapid growth (Bertram, 2018).
A key reason for the rising need for overseas aid is that the Cook Islands government is barred from using either taxes or borrowing to fund increased spending, under a fiscal austerity package agreed with New Zealand and the Asian Development bank in 1998 – and is still in force 20 years later (Bertram, 2018). Such a situation, in which government is starved of resources while a buoyant private sector overflows with economic surplus, has been characterized as private opulence and public squalor (Galbraith, 1958). In addition to identifying the resurgence of these historical economic terms, there is also a more relevant pattern being observed here known as the Shock-Doctrine (Klein, 2007). Naomi Klein, in her book The Shock Doctrine, documented neoliberal elites’ strategic use of catastrophic events to impose their favoured policies, such as privatisation and shrinking the state sector, on devastated communities (Klein, 2007). It is quite thought-provoking to recognise that when the Cook Islands hit a massive debt shock in the mid-1990s, the terms of the bailout included permanent caps on public service employment, government net debt and debt service, and a set 25 per cent of GDP on tax revenues – the definition of a neoliberal austerity package.
We must now all pay close attention to the actions, and perceived roles, of donors and creditors around the world as the global economic crises attributed to the Covid-19 pandemic will undoubtedly widen the gap between the rich and the poor. Bertram (2018), Galbraith (1958), and Klein (2007) have illustrated the lasting impact of externally imposed austerity policies on marginalized communities, and the distasteful practice of taking advantage of communities while they are too traumatized to resist external influences. We must now ask ourselves – what is the role of donors and creditors during catastrophic events? What are they incentivized by– and what is in it for them? Donors and creditors crave and seek a reliance upon external aid, while hiding under the notion of sustainable development and the benevolent nature of overseas aid. After all, if donors truly supported and aspired self-sustaining growth for their recipient, and were successful in achieving this goal, there would no longer be a need for their services, and they would seize to exist. A desire to exist, and be needed, is as strong of an incentive as any.
Infrastructural Equity in a Context of Severe Fiscal Restriction – Lucas Watt
In our previous review, Greg Watt made the very astute argument that the equitable distribution of infrastructure requires considering both the infrastructural needs/rights of the local population and the limited capacities of Oceanic governments to spend revenue on infrastructural projects. While reading this Bertram (2018) article, with our previous review clear in my mind, I was immediately drawn to the infrastructural needs/rights of the Cook Island residents in a context of fiscal restrictions imposed upon the Cook Island’s government which was briefly explained in the introduction and in Roxane’s section above. In this review of Bertram (2018), I explore whether the infrastructural projects funded by overseas development aid in this context of fiscal restriction in the Cook Islands has resulted in infrastructural (in)equity.
Bertram (2018) identifies in the opening paragraphs that sustained economic growth driven by the tourism sector has necessitated infrastructural improvements to keep up with tourism led growth.
Grant aid has been the key to funding the steep increase in government spending since 2010, as a massive programme of infrastructure investment has been rolled out. The need for this investment is clear enough. It arose largely from the way in which rapid tourism-led economic growth, running ahead of public sector investment, put pressure on the pre-existing infrastructure – water supply, wastewater and solid waste disposal, roads, port works, telecommunications (Bertram, 2018, pg 44).
Bertram has identified that much of the capital needed to pay for infrastructural development has come from overseas aid due to limits on their tax revenue pool. This is indicated in Figure 1 below (Bertram, 2018, pg 45).
Specifically some of the infrastructural projects occurring in the Cook Islands are on the water supply network in Rarotonga funded by an unorthodox co-operative multilateral aid project by New Zealand and China with an estimated cost of NZ$60 million (Dornan and Brant , 2015; Zhang, 2015). The Manatua cable that links the Cook Islands to high speed internet, was funded by the New Zealand government at the cost of NZ$15 million. New Zealand has also contributed towards broader tourism sector support through grant funding arrangements (GFA). This includes “destination development” which includes funding major facilities, attractions, and venues; although this type of spending is relative small in comparison to other infrastructural projects.
These infrastructural improvements are directed towards sustaining the tourism sector growth rather than catering to the needs of the local population specifically. Yet these infrastructural projects could also potentially benefit the local population simultaneously. Bertram (2018) does provide some analysis that can be used to assess whether infrastructural equity is achieved here. From a purely economic perspective it would seem that infrastructural equity is not achieved as the benefits of infrastructural development seems to be disproportionately appropriated by expatriate tourist operators and not local populations. Figure 9 below for instance shows that government expenditure and overseas development aid has resulted in substantial general increases in GDP per capita in the Cook Islands, yet when just considering GDP per capita of indigenous Rarotongan residents, these figures lag behind. Despite this, the GDP per capita of Rarotongan residents has still risen moderately despite being at a lower rate then the general GDP per capita rate.
The benefits of infrastructural projects cannot be based on economic metrics alone however, especially when infrastructural development and increases in GDP per capita cannot be correlated directly. It is clear that overseas aid contributes to other areas other than infrastructural development. At best this economic data provides clues not objective answers on infrastructural equity. Furthermore, a more complete answer would also consider more quality of life metrics of infrastructure on local populations in addition to economic metrics. Perhaps these infrastructural improvements have improved local quality of life to the extent that they offset a potential differential in economic benefits resulting from tourist-centric infrastructural development. Yet, as Bertram (2018) clearly indicates, these infrastructural improvements were specifically implemented to keep pace with the needs of the tourism sector, not to improve local quality of life.
What also needs to be asked, is the above differentiation between these GDP per capita figures justifiable in a context of severe fiscal restriction? It would seem that the Cook Islands have limited autonomy to decide what infrastructural projects they can allocate overseas obtained funding towards. With no scope to invest in infrastructural projects using their own nationally generated tax revenue, infrastructural development directed towards the tourism industry which foreign donors push for is what the Cook Islands must accept. While the economic outcomes of infrastructural directed overseas aid point towards infrastructural inequity, should the moderate gains in the GDP per capita of Rarotongan residents be praised not disparaged in this context of severe fiscal restriction? How do these moderate gains compare with other Oceanic nations with less or different restrictions? Many other Pacific nations have very limited revenue streams for different reasons, and subsequently have to be equally creative with their fiscal policies. Where does the Cook Islands sit in comparison?
Even if we could claim infrastructural equity is achieved within the fixed parameters of fiscal restriction in the Cook Islands; accepting these parameters as fixed would not be tenable. Bertram (2018) makes the clear argument that these fiscal restrictions are obsolete and should be renegotiated according to current context. True infrastructural equity in the Cook Islands can only be fully conceived by dismantling the fiscal restrictions that may be prohibiting the well being of local populations being the primary objective of overseas development aid and infrastructural projects. Liberating the Cook Islands of these fiscal restrictions would in theory allow a more appropriate re-balancing of overseas development aid between the tourist sector and local well-being. Yet removing these restrictions may also undermine the premise from which the Cook Islands receives aid, and subsequently may cause overseas aid to dry up, at least from New Zealand and the Asian Development Bank. As the Bertram (2018) article indicates however this would likely be an overall net positive as it would foster Cook Island economic self reliance whereby they could better gather and use tax revenue for their own infrastructural projects.
I am also not convinced that the tap of overseas development aid would be shut off to the Cook Islands either. Over the last decade there is intense aid competition between many different donors in the Pacific that doesn’t seem to be slowing. It is clear in my mind that removing the fiscal restrictions imposed on the Cook Islands can only allow the nation to better achieve infrastructural equity.
As a final point of contention to include here is how do we apply infrastructural equity across all of the Cook Islands and not just the main island of Rarotonga. It is evident that most of the overseas development aid applied to infrastructure occurs on Rarotonga as that is specifically where tourists visit. Should we therefore expect that rural Cook Islands experience the greatest proportion of infrastructural inequity? I believe the concept of infrastructural equity is a useful concept to work with, and this Bertram (2018) article has provided some strong reference points for thinking about how it could be used.
Distortional Economics, what is the cost and who benefits? – Greg Watt
Based on a financial assessment of macro-economic considerations, Bertram (2018) provides an incisive economic summary of the Cook Islands. Bertram carefully uses statistical data to highlight the negative impacts of donor institutions on an otherwise thriving Pacific economy. The article could have provided greater commentary and more concise assertions. As the research was carried out under contract to the Cook Islands Government and the New Zealand Ministry of Foreign Affairs (MFAT), such discourse may not have been possible. MFAT’s country evaluation (Smith, 2015), states that its strategy has been to consolidate donor aid, highlighting a decrease in “its activity levels significantly since 2011” (Smith, 2015, p. 14). This would purportedly signal that MFAT’s role alongside the New Zealand Government has successfully diminished. However, Bertram has produced statistics showing that while aid/transfers had decreased to relatively low levels from 1996-2010, these had again ballooned during the period 2011-2015. One is left to reason that MFAT’s strategy has much more to do with imposing a strong neoliberal perspective within the Cook Islands. This is consistent with an economy “with big private sector surpluses alongside a government struggling to fund its operations” (Bertram, 2018, p. 52).
It would appear that the continuing financial constraints placed on the Cook Islands Government are designed to incentivize privatized productivity and to discourage public productivity. MFAT has a stated policy of “improving the enabling environment for private sector development” (Smith, 2015, p. 5). Further, the historical events still appear to influence MFAT’s relationship with the Cook Islands where analysis of fiduciary risk was still rated as being moderate (Smith, 2015, p. 12), despite a current account surplus of 30% of GDP in 2013 rising to 37% of GDP in 2016 (Bertram, 2018, p. 50). Continuation of financial constraints is consistent with restricting the public sector, regardless of socio-economic considerations.
A significant question arises regarding the benefit of tourism to the Cook Island population. Tourism appears to be universally touted as the saviour of developing countries (Butts, 1995), and particularly SIDS countries that possess little other resources. The introduction of tourism as a development strategy in the global south comes with complex political, economic and social implications which have been vocalized for some decades. As early as 1985, Hong warned that in many underdeveloped nations, projected prosperity “turned sour, and many have awakened to the fact that tourism is a more subtle and dangerous form of exploitation and dominance” (Hong, 1985, p. 30).
Increases in GDP are used to justify tourism development, but its use is a broad brush, and the actual picture is often hidden in the detail:
“Bald figures on tourism’s contribution to GDP do not, in themselves, indicate who actually benefits from tourism. How monies received from tourism are distributed across a given population depends on numerous factors, including the various output multipliers and the element of leakage from the economy” (Harrison & Prasad, 2013, p. 749).
There is no doubt that, on paper, tourism has added economic prosperity to the Cook Islands. This appears to endorse New Zealand’s continuance with its financial constraints, neo-liberal sanctions, and Overseas Development Aid (ODA) delivery. In this regard, there is an overarching reliance on GDP measurement (Smith, 2015). While its evaluations look at social aspects, these are kept separate from economic considerations enabling positive attributes to be lauded without relativity between economic and social parameters. MFAT’s position envisages the private sector taking over and providing many public service functions and infrastructural development. There is an implicit assumption that the private sector would organize to fulfill this role. In fact, the private sector has not done this, nor has it sought to establish a structure to manage this. The primary function of private enterprises is to generate and return profits to their investors. While tourism has resulted in a considerable surplus in its balance of payments position, it appears that much has been shifted offshore (Bertram, 2018).
It is clear that symptoms of infrastructural inadequacies were displayed for some considerable time but were not acted upon. The 2017 visitor Survey (NZTRI, 2017) revealed that public services, facilities and infrastructure were considered the least appealing aspects, followed closely by rubbish and natural environmental care. The condition of roads, public transport, internet and signage were notable aspects raised by tourists. Promoting and allowing over-tourism without considering environmental aspects has been a significant failure of tourism policy and incumbent strategies. While rubbish and general environmental care have been a concern, overtaking this has been the pollution and algal proliferation of Muri Lagoon (NZTRI, 2017, p. 29). The overreaching of sewage and water systems at tourism hotspots such as Muri Lagoon have been major consequences of tourism.
A simple evaluation of population statistics provides ample warning of a looming social and environmental crisis. The resident Cook Island population peaked at 21,000 in 1970 and has declined to an estimated 10,000 Cook Island nationals and around 1,700 expatriates in 2016 (Bertram, 2018). Over the past decade, tourism has experienced dramatic growth, primarily centred around particular coastal areas of the main island of Rarotonga. In 2016, annual tourist arrivals were numbered 146,474, increasing to 161,362 in 2017, an increase of over 10% (SPTO, 2017, p. 3). However, a seasonal distribution occurs with peak arrivals of over 16,000 visitors in July for both 2016 and 2017 years (Ministry of Finance and Economic Management, 2017). Seasonal volumes of similar proportions occurred from the beginning of June through to the end of October. Length of stay varied but averaged 8.8 days/visitor (NZTRI, 2017, p. 7), amounting to around 140,800 visitor-days each of these months. Assuming tourist numbers arrive and depart uniformly, then on any day, approximately 4,700 tourists can be expected, blowing out the island population from 11,700 to 16,400, an increase of 40%. However, this figure underestimates the impact of tourism flows, as most tourists congregate around tourism hotspots such as Muri lagoon. While tourist infrastructures can be expected to cope with small increases over short periods, it is clear that the manifested volumes over five months would overreach infrastructural capacities.
Two crucial aspects are relevant; firstly, how the income from tourism is spread across Cook Island residents; secondly, the corresponding cost of providing sustainable infrastructures to cater to increased tourist inflows.
In the first instance, it is clear that using GDP figures is insufficient and disguises any trickle-down effects, as they average the benefits across all residents. A better measure is the Gross National Income (GNI) which Bertram shows to be significantly less than GDP, where the tourism earnings “have not translated to corresponding rising incomes for local residents as a whole” (Bertram, 2018, p. 54). In fact, “in 2016 some economic actors were transferring savings equivalent to 37% of GDP out of the economy” and that “the unaccounted for offshore savings have been in the private sector” (Bertram, 2018, p. 56). While Bertram is unable to make such assertions, it is logical that monies transferred out of the Country are from expatriate owners and managers. While some may be to service debt, it is unlikely to account for the excessive sum being transferred. Distortions in the distribution of wealth in Pacific Island countries (PICs) reported by others, where hospitality workers are not well paid by international standards, along with the fact that expatriates “undoubtedly receive better pay than local employees”(Harrison & Prasad, 2013, p. 751).
In the second instance, normal economic policies would assign an adequate portion of government revenues to strengthen infrastructure. Bertram shows that monetary inflows from tourism are sufficient for strategies to be put in place for this to occur. However, the continued financial constraints placed on Cook Island governance inhibit increased tax take, and public borrowing (Bertram, 2018). This, in part, explains the delayed and ad hoc response to the infrastructural crisis that has occurred. The fact that the New Zealand government has had to step up as a donor in such schemes as the Te Mato Vai infrastructure project is bewildering.
It can only be concluded that the continuance of fiscal restrictions on the Cook Islands benefits only the minority expatriate hospitality owners and management who have been able to gain considerable financial advantage. Economic equity has not been distributed to the resident population, which has, in turn, resorted to subsequent migration to New Zealand. Presently, only around 10,000 resident Cook Islanders, out of over 100,000 remain. Unless steps are taken to rectify the situation, a total displacement of the indigenous population becomes a possibility.
TransOcean is a European Research Council (ERC) Starting Grant project
References
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