Tiruvalangadu K. Jayaraman

Are the Pacific Islands ready for a currency union? An empirical study of degree of economic convergence

Abstract During the 2003 Annual meeting of Pacific Forum leaders from the 16 member states (14 Pacific Islands and two advanced countries in the region, namely Australia and New Zealand) held in Auckland, an idea of a single currency for the region was mooted. The single currency was indicated to be the Australia dollar. The success of any efforts for achieving such a form of integration depends on the degree of economic convergence of national economies. There are two aspects of convergence: nominal and real. They cover exchange rates, growth rates and inflation rates. Unless there is a high degree of convergence in these spheres, the costs of any premature integration could be disastrous. The objective of this paper is to investigate whether there exists any case at present for a currency union. The paper undertakes an empirical investigation, reports the results and presents some conclusions.

Aid and Economic Growth in Pacific Island Countries: An Empirical Study of Aid Effectiveness in Fiji

Pacific island countries (PICs), ever since their independence during the second half of the last century, have been among the world’s top ten recipients of official development assistance (ODA) on a per capita basis. Until the mid 1990s, most of them were receiving aid from their erstwhile colonial masters for budgetary support. With the introduction of reforms in ODA delivery in the late 1990s with focus on program and project-tied aid, it was expected that aid would directly facilitate creation of much-needed growth enhancing infrastructures, physical as well as social, since domestic savings were found to be insufficient to finance them. However, continued stagnation in some PICs and deterioration in some others have been causing concerns. This paper seeks to examine the effectiveness of aid by undertaking a case study of Fiji, which has a longer time series data needed for econometric investigation. Based on the study’s findings, the paper lists some policy conclusions relevant to the region.

Role of remittances in small Pacific Island economies: an empirical study of Fiji

In the context of the ongoing current global economic downturn, mobilisation of foreign exchange earnings has assumed considerable importance. By adopting an augmented Solow model approach, this paper examines the long-run growth effects of Fijis inward remittances during a three-decade period (1979-2008). The study finds that remittances have had a positive and significant effect on economic activities. This paper also discusses some important policy implications arising out of the study findings.

Role of Remittances in Economic Growth in Pacific Island Countries: A Study of Samoa

Remittances have been a great support to Pacific island countries (PICs). Aside from providing additions to domestic savings and, hence, real resources, they have been one of the major sources of foreign exchange earnings. In the context of falling exports and limited options to diversify their exports, inward remittances have assumed greater importance. This paper examines the nexus between growth and remittances in Samoa.

Regional Economic Integration in the Pacific: An Empirical Study

Abstract The Pacific Islands Forum, the regional organization comprising 14 Pacific Island countries (PICs), Australia and New Zealand is committed to strengthen regional cooperation and integration. This paper examines progress in real and financial integration in the region. Utilizing the methodology based on international parity conditions: purchasing power parity and uncovered interest parity, the study concludes that while PICs’ integration amongst themselves and with Australia and New Zealand, is relatively advanced with respect to goods and services, the financial market integration remains incomplete. The policy implication is impact of further liberalization is likely to be substantial on financial markets.

Dollarization of the South Pacific Island Countries: Results of a Preliminary Study

This paper examines the case for adopting the Australian dollar as a common currency among the island countries in the South Pacific. The proposal of a single currency was informally floated by Australia at the Pacific Forum Leaders Meeting in Auckland, in August 2003. The Pacific Forum consists of 14 developing island countries and the developed countries in the region, namely, Australia and New Zealand. In early 2003, a committee of the Australian Senate recommended adoption of a single currency as a possible remedy to meet the deteriorating economic situations in the Pacific island countries, arising out of poor fiscal discipline and failure to effectively use external aid inflows. Successful adoption of a single currency with either a new currency or an existing currency of a dominant partner in trade and development requires the fulfillment of various prerequirements, which are well known as optimum currency area conditions. The paper assesses the feasibility of the proposal in the light of these conditions and concludes that the time for adoption has not yet arrived.

Foreign direct investment in the South Pacific Island Countries: a case study of Fiji

The South Pacific region has been lagging behind in growth in comparison to similarly placed island countries in the Caribbean and Indian Ocean regions. This paper, which undertakes an empirical study, establishes that the rate of growth, market size, openness policy and real exchange rate are crucial determinants of foreign direct investment (FDI) inflows into Fiji. Further, the Granger noncausality test based on Vector Error Correction Model shows that there is a bi-directional causal linkage between FDI and economic growth. The conclusion is that Fiji should adopt an appropriate policy environment for encouraging the growth inducing FDI inflows.

Monetary policy transmission in an undeveloped South Pacific Island country: a case study of Samoa

Amongst the South Pacifics least developed small island countries, Samoa has emerged as a successful economy. Its achievements of low inflation and high growth rates have been due to sustained fiscal adjustment programmes and appropriate monetary policy measures. This paper undertakes an empirical study of transmission mechanism of monetary policy by adopting a VAR approach and using quarterly data over a 17-year period (1990-2006). The study findings are that money and exchange rate channels are important channels in transmitting monetary impulses to Samoas output.

Exchange market pressure in a small Pacific Island country: a study of Fiji: 1975-2005

Purpose - Under the fixed exchange rate regime Fijis currency, which is pegged to a basket of currencies of its major trading partners, has been experiencing severe pressures. The purpose of this paper is to study annual exchange market pressure (EMP) over a 31-year (1975-2005) period and attempt to determine the factors behind EMP. Design/methodology/approach - The paper employs the autoregressive distributed lag (ARDL) bounds testing procedure, which is applied to a multivariate model covering four variables, namely EMP in index numbers, and budget deficit, domestic credit to private sector and external debt, all the three expressed as percentages of gross domestic product. Additionally, an uncertainty variable is added to the regression analysis with a view to finding out whether political uncertainty has been responsible for speculative attacks on currency. Existence of a cointegration vector is then investigated. It is then followed by Granger-causality tests in an error-correction model with view to exploring the short- and long-term relationships between the variables. Findings - The study findings are: there existed a long-run relationship between EMP and budget deficit, domestic credit to private sector, external debt and political uncertainty; and EMP was positively related to budget deficit, domestic credit to private sector and external debt as well as speculative pressures exercised by political uncertainty. Originality/value - The empirical study on EMP in the South Pacific Island countries and in Fiji in particular is the first of its kind. The paper is expected to promote further interest in the studies of currencies of small island countries.

Equilibrium real exchange rate in Fiji: an empirical study

Given the fact that Fiji has a very narrow range of exportable commodities with a high degree of dependence on tourism earnings, maintenance of a competitive real exchange rate is of utmost importance. This paper undertakes an empirical analysis of Fijis real exchange rate, by estimating long-run equilibrium real exchange rate and examining the short-run dynamics of real exchange rates and detection of possible misalignment. Empirical investigation shows that there has been no large, persistent instance of misalignment of Fijis Real Effective Exchange Rate (REER).