Posted by: nativeiowan | July 10, 2009

Speech for Australian/ Solomons Business Forum 10 July 09

I thank all involved for the honour of being here today. The SICCI is the voice of the Private Sector in Solomon Islands. With over 100 members we like to think we have our finger on the economic pulse of the Country.

The Solomon Islands Economy

There is much discussion in the Solomons right now that revolves around what comes “next” for our economy. Of course, Logging is no longer the future of the islands. There is much talk of mining, fishing, tourism or… something else that is required to fill the void that the fall in logging based revenues is creating.

As a “least developed country” the Solomons is both ahead and behind other countries in the Pacific region. Ahead in that, as I like to think, there are opportunities galore in the Solomons. Behind in that recent trends, occurrences and mishaps have made investing in our lovely island homeland difficult, at best.

Allow me to briefly review three main impediments the Solomons as a whole and investors in general currently face.

1st : The Cost of Doing Business in the Solomons is prohibitively high…

*   Failing or nonexistent infrastructure means the cost of all commodities increase disproportionately every time they are handled or moved.

*   Of course the Security Issues we live with in the Solomons costs all companies extra. All business houses must hire, train and retain large numbers of expensive security guards… in my company one half of our 100 employees are security personnel. It is my view that our “Security Problems” will not go away quietly. 50% of our population is under the age of 25. If we do not develop a mechanism to engage, educate, employ and recognise this growing population the situation will not get better.

*   The failing, obsolete and poorly maintained public services cost all users too much. Currently a unit of electricity costs us USD fifty cents. This is in comparison to USD fifteen cents for an average unit here in Australia. There is a distinct need to get the SOE’s in the Solomons operating properly. This need is immediate if not over due.

2nd : Land tenure in the Solomons is a difficult and sensitive issue…

*   Over 80% of our land is held under a “Customary Land System”. If you want to come and develop a new enterprise – outside the urban setting – you’ll have to deal with Customary Land owners. This can be time consuming, costly and, for the newly initiated, quite daunting.

*   Add to this: The National Lands Registry is poorly managed, susceptible to corrupt influences, and, sadly, has not received the attention, money or care that is required to make this system work in a modern society. I wish to comment here that “without security of tenure of Land” there can be little or no honest investment. We must get this right before we move forward.

3rd : The tax regimen in the Solomons does not attract investment…

*   There has been a propensity for successive Governments to view the Private Sector as their very own “cash-cow”. When the Central Government needs more revenue… they target the Private Sector. They raised the Goods Tax from 8 to 10%. Then to 15%. This is a negative trend and simply is not sustainable. The tax regimen we currently live under is actually pushing business away. We live under a system of taxes on taxes. Sorta’ makes me wonder why or how we’d think investors would even consider the Solomons as a viable option.

*   It is this onerous if not draconian tax regime that forces doors of graft and corruption open. A fair and professionally implemented tax system will mean a broader tax base, easier regulation, better compliance and, in the long run, more revenue.

I know, it all sounds pretty negative. I can guess that many here today are asking themselves… “if it’s all that bad why is he still there?”…

The simple answer is that… Things have not always been this way. In the 80s corruption was nonexistent. Taxes were reasonable. The lifestyle was the best our planet offered. And, ladies and gentlemen, the Solomons is Home.

OK, We’ve had the negative, where’s the positive… there has to be a positive somewhere…

What does the Solomons have that can be the tool or tools we all put our hand to? The tool we can use to start digging our way out of the problems we are in?

*   Of course our idyllic island lifestyle is a marketable entity. Tourism can be “a savour” for us. But we need to solve many problems before we can “bank” on tourism.

*   There is no doubt that mining is viable in the islands. There is no doubt that there “is gold in them thar hills”. But, are we ready to move in that direction? Do we need to solve some associated issues before we move full speed into mining?

*   Agricultural Business offers a positive opportunity. At present there is an abundance of unexploited land in the Solomons. It may make sense for us to focus on the agriculture sector. Growth in agriculture will benefit the rural areas, where most of the population live. We already have a strong agricultural base. Agriculture will also create the required jobs that will encourage people to stay in the rural areas, rather than move into town to look for work.

*   Manufacturing, in contrast to agriculture, mining and fisheries, is very attractive as it enjoys increasing returns to scale.  As you manufacture in greater numbers your costs decrease. It is obviously premature to talk about Solomon Islands developing high tech industries at this point in time. However, at the very least the government must plan for greater manufacturing and industry in the economy. Looking at international experience, it is the manufacturing sector that pushes wages up. Something we need in the Solomons.

*   One last thought on Manufacturing: Manufacturing has the potential to absorb educated and skilled labour. In agriculture the majority of the jobs are unskilled. If a country educates its citizens without having the jobs available the inevitable consequence is “brain drain”. A situation where the country’s most skilled people move to other countries to find gainful employemnt. This is a problem we currently face. It is not acceptable to suggest that the Solomon Islands simply does not educate its population. It is also undesirable to spend valuable and limited resources on training people when they are likely to leave.

So we do have a few, limited options or opportunities. The only problem with relying on agriculture and raw materials export is that the result will be a low wage economy, little technological progress and a pattern of exporting raw materials and importing manufactured goods.

Protection versus Free Trade

Historically countries have protected industries that they recognise as desirable. They do this by setting high import duties for those goods that they wish to produce themselves. This gives any national business an advantage in the domestic market.

In the case of the Solomon Islands the domestic markets are small. With only 15% of our population living in urban centres the demand for goods that can be produced locally is small. Unlike other developing countries, even if a company is protected from foreign competition, we may never have enough local demand to become ultimately successful.

However, there are two reasons for contemplating protectionist strategies. Firstly, having an advantage in the domestic market may make the difference between a firm being profitable or not. The fact that jobs in manufacturing generally have higher wages is a good reason to desire a manufacturing sector. The question has to be asked whether, in opposition to comparative advantage theory, it is better to protect an inefficient manufacturing sector than to have no manufacturing sector at all.

PACER

My discussion on protectionistic opportunities logically leads us to PACER… The Australian government has stressed that the PACER negotiations will be conducted with a view toward development rather than an effort to capitalise on potential markets. If this is the case then PACER could be a better development tool than 10 years worth of aid.

I believe that the Solomons must be allowed and encouraged to protect those industries that are beneficial. That is to say those industries that have: increasing returns to scale, encourage innovation, are as high tech as possible, utilize inputs that are locally sourced, offer high wage levels, and/ or produce synergies and experience high growth.

However, all of this is insufficient to develop our country’s economy to its full potential. The Solomon Islands needs to have a long-term economic development plan. We need to be building infrastructure that encourages investment of the right or desired type. I have said this many times before… The SIG should not stimulate business development and growth through handing out grants. Build the infrastructure required and let the Private Sector manage the rest.

It would though seem that the PACER negotiations could well compel the Solomon Islands Government to start thinking of a long-term economic development strategy.

The Solomon Islands government really must start thinking in the long term. The Government and Private Sector must cooperate and share a positive forward focus. We will not develop unless we have carefully thought out plans, and combine them with the will to see such plans through to completion, despite any and all difficulties.

Again, one and all I very much appreciate the time granted today to the Solomon Islands Chamber of Commerce and Industries.

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