Tonga began its private sector reforms in 2009 passing a new companies act, simplifying the process for starting a business and working to improve the efficiency of its State-owned enterprises.
The Asian Development Bank has just released its first private sector assessment for Tonga in five years.
It's author, Dr Paul Holden, says Tonga has made very substantial progress.
Presenter: Jemima Garrett
Speaker:Dr Paul Holden, economic advisor to the ADB's Pacific Private Sector Development Initiative
HOLDEN: In certain aspects it has been one of the leading reformers in the Pacific. The reforms that you mention, in particular have been very positive. In addition subsequent to the discussion of the findings of the private sector assessment the Tongan government has completely revamped its business licensing act which we had identified as one of the main constraints to businesses there and this is all extremely positive.
GARRETT: If progress has been so good, why is Tonga's economy still struggling more than many others in the Pacific to generate jobs and growth?
HOLDEN: Very good question, Jemima. Tonga is an economy that is among the most reliant on remittance anywhere in the world. Prior to the economic crisis remittances constituted significantly more than 30% of GDP. When the crisis struck these remittances declined precipitously and we estimate there was a shock to the economy equivalent of somewhere between 3% and 5% of GDP, which is a huge amount. And it particularly impacts demand and so, as a result, businesses in Tonga are struggling quite severely to finance their cash flow and to generate sufficient demand to survive.
GARRETT You say a new round of reform is needed. What are you recommending exactly?
HOLDEN: We are recommending a number of things. Firstly, we suggest that further progress needs to be made on State-owned enterprises. They are good performers on a comparative basis in the Pacific but much more needs to be done. State-owned enterprises tend to be inefficient and a drag on the growth of the economy.
GARRETT: Which ones would you nominate there particularly?
HOLDEN: Well, Jemima I don't really want to be drawn into that if you don't mind because I am privy to some confidential information in terms of the performance of some of these enterprises but one of the things we recommend is that they reduce the cost of diesel fuel by increasing the size of their fuel storage capacity. One problem is that ships that carry large amounts of fuel can't get into the harbour so it has to be transhipped, which greatly raises the cost of fuel. We recommend that there be a reallocation of resources away from salaries and wages in the public sector and towards things like road maintenance. We see great potential in the expansion of the agricultural sector but, right now, there are various constraints that are holding it back because of interventions on the part of the government and we are looking at encouraging them to eliminate some of these constraints. We are not especially thrilled at the fact that the government is getting back into the airline business.
GARRETT: How much of a problem is that?
HOLDEN: Basically governments are not good at running businesses. We that time and again, not only in the Pacific, but in other parts of the world. There was a private operator that was beginning to turn its operations into a profit and the accession of the government airline has, in fact, forced the private operator to say they are leaving the business. This is a small market. Exactly what happens will remain to be seen but we feel this is a retrograde move.
GARRETT: Tonga's economy has been doing it tough for more than a decade now. Will it really be possible to lift growth to reasonable levels, especially when the government has problems like the airline problem and others?
HOLDEN: Well, I want to emphasise overall that the government has been very reformist. I mean it has done good things and it has made substantial progress in removing constraints to doing business. Furthermore, I should also emphasise that reforms of the nature that have occurred do take time to come to fruition. What is needed now is some bold vision for increasing investment and making sure that the investment environment is stable. You know, ADB through the Private Sector Development Initiative is committed to helping the government and we see reasons for optimism simply because of this long history of reform that has gone on. In the long run we are quite optimistic about the potential for the Tongan economy. We realise that still substantial adjustments have to be made to the remittances which don't seem to be coming back. This is a permanent shock and loss to the economy which will have to be overcome.