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Opinions expressed in the case studies and any errors or omissions therein are the responsibility of their authors and not of the editors of this volume or of the institutions with which they are affiliated. The authors of the case studies wish to disassociate the institutions with which they are associated from opinions expressed in the case studies and from any errors or omission therein.

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> Introduction

ON THIS PAGE: 
> I. The problem in context
> II. The local and external players and their roles
> III. Challenges faced and the outcomes
> Sugar
> The garment sector
> Alternative opportunities for the future
> IV. Lessons for others: Fiji’s approach to loss of preferences

I. The problem in context    back to top

This case study of Fiji explores the way in which its government and people are preparing to deal with the expected end of preferential trading relationships, and is based largely on interviews conducted in Fiji over several days in August 2004. In March 1997 the WTO Secretariat published its report of Fiji’s first review under the Trade Policy Review Mechanism (TPRM).(1) Paragraph 37 of the report’s summary observations provides a good starting point for the current study. It reads, in part:

Fiji’s economy depends heavily on sugar, tourism and clothing. The need to lessen the dependence on the sugar industry may become more urgent as Fiji’s preferential status in its sugar export markets is eroded in the long term. Similarly, the clothing sector, also facing an erosion of preferential access, could require efficiency gains to remain competitive. Diversification of the economy will, however, require attention to the problem of shortages of professional and technical personnel that have resulted from the high rates of emigration over the past decade.(2)

What has happened in Fiji since 1997 to facilitate diversification of the economy away from reliance on preference-dependent sectors and what policies and strategies are being pursued to this end? Can this small island nation adapt its workforce and economy to cope with the challenges of the early twenty-first century? Fiji’s successful adaptation to change would be important to both the country and the region, while failure would probably have grave consequences.

II. The local and external players and their roles    back to top

Fiji’s political and economic relations with the countries affording it preferences for its exported goods — mainly Australia, New Zealand and the European Union (EU) — have long been key to the islands’ prospects for success. As a sign that Fiji’s relations with the EU are more significant than its need to participate in the WTO, Fiji maintains an embassy in Brussels that — as a part-time responsibility — looks after developments in Geneva. Decisions made in Canberra, Brussels and Wellington are critically important to policy-makers in Suva. This is a tough position to be in, and one would expect that it would encourage Fijians to co-operate with each other as a way of promoting a common cause.

The government and the state-owned sugar company have traditionally played a central role in Fiji’s economic development. The government’s Native Land Trust Board and the Fijians it represents is another central actor. Foreign investors are also important, particularly in the garment sector, where they dominate the ownership of the industry. The government and private-sector outside investors should be working together.

However, even a few days on the islands are sufficient to give an outside observer the impression that politics have deeply divided key local players. The role played in Fiji’s affairs by these local actors will hopefully be apparent in the section that follows. In many cases the local players seem to have permitted their disagreements with fellow Fijians to guide their actions in ways that are unlikely to advance what some would imagine should be commonly shared goals.

III. Challenges faced and the outcomes    back to top

Fiji’s trade and economic prospects are heavily dependent on developments in a few key economic sectors. The challenges faced in these sectors, current policies and likely prospects are explored below.

Sugar    back to top

The sugar sector of the global economy is undoubtedly one of the most distorted, given the plethora of production and export subsidies and extremely restrictive access barriers complicating sales to the world’s major sugar-consuming markets. Tragically, sugar is also a commodity that many developing countries have come to depend upon as a mainstay of their local economy and as a principal source of export earnings.

At present, the sugar sector in Fiji is central to the overall wellbeing of the national economy. The industry contributes 7%(3) of the country’s GDP, and generates between $250 million and $300 million in revenue each year.(4) The sugar industry directly employs some 35, 000 people, while around 220, 000 people — including farmers, cane cutters, truck drivers and mill workers — depend directly or indirectly on the sugar sector for their livelihoods. In international trade terms, sugar is the country’s second most important export, after garments.

The sugar industry has benefited significantly over the years from access to the EU’s preferential trade regime for sugar. Under the arrangement, the EU pays prices substantially above world market price levels for imports of sugar from specified ACP(5) countries — up to three times the world price —with about half of the preferential import quota allocated to Mauritius and the rest divided among sixteen other ACP suppliers. Although the programme is quite complicated in its operation, its bottom line effects are easy to understand. At the time of writing, the world market price for raw sugar stood at around 35 cents a kilogramme; the cost of sugar production in Fiji amounts to about 42 cents a kilogramme. Roughly 48% of Fiji’s annual sugar production is exported to the EU at a price nearly three times the world price level, about 25% of production is consumed locally and the rest is exported mainly to the world market at a price that reflects a significant loss relative to the cost of production. Already, these statistics reveal a fragile situation — but additional internal and external dynamics are combining to make the picture even more dire.

Within the EU, changes are being debated to sugar policy that, if implemented, would drastically cut the price paid for preferential sugar imports from ACP countries. The scheme, as it has existed up to now, is collapsing in part under the weight of dramatically increased imports of sugar into the EU from least developed countries under the ‘Everything But Arms’ (EBA) preference arrangement. None could have anticipated nor imagined how quickly EBA sugar suppliers could ramp up their production. Reportedly, sales of EBA sugar into the EU from countries such as Sudan, Bangladesh, Mozambique and Zambia have reached a level of around 1.8 million tons in just over two years. On top of this, the WTO case brought against the EU sugar regime by Brazil, Australia and Thailand could require the EU to cut the intervention price for sugar by up to 40%. A final external factor to take into account is competition from Brazil. Officials in both Fiji and Mauritius have told the author that Brazilian sugar suppliers are probably unique in being able to sell on the world market at world prices and still make a profit — although there are allegations of heavy subsidies to the industry in that country. Moreover, Brazil’s sugar-producing capacity is reportedly growing rapidly, further exacerbating competitive pressure on suppliers such as Fiji.

Against this rather bleak global picture, how is Fiji preparing for the likely end of preferences for its sugar exports? By all accounts, the situation of the industry is bad and getting worse. Rather than working hard to make the industry more competitive in an effort to remain in the sugar business, the government, farmers and the sugar industry all appear to be working at cross-purposes. Ross McDonald, the chairman of the board of the Fiji Sugar Corporation, has been quoted as saying, ‘My observations are that generally all the stakeholders are pulling in their own direction.’(6)

Looking at the current situation in Fiji’s sugar industry, an outside observer could be tempted to reach the conclusion that an unconscious decision has been made to abandon the industry even before the end of the EU’s preference scheme. A critical problem is that of land tenure. Some 87% of the land in Fiji is owned by ethnic Fijian extended families and managed by the Native Land Trust Board (NLTB), and most of the farmland devoted to sugar cultivation was leased, mainly to Indo-Fijians, for thirty-year periods under the provisions of the Agriculture Landlord and Tenants Act of 1976. Those leases, the bulk of which have evidently expired over the past three to four years, are not being renewed. The Indo-Fijians are leaving farms and the ethnic Fijians are evidently not taking up sugar farming in their place. Consequently, sugar production has fallen dramatically as land is taken out of production.

A further problem, not unrelated to the land tenure issue, is the fact that farmers have allowed many fields to degrade to the point where some landholdings have supplied as many as twenty ratoon crops.(7) Part of the reason for this can be ascribed to the reluctance of farmers to invest in new plantings when they expect to leave the land. Another fact that cannot be ignored is that the Fiji Sugar Corporation pays farmers for the weight of cane delivered to the mills, with no regard to the cane’s sugar content. Sugar mills in Fiji are antiquated and have benefited from very little investment over the years. Bagasse, the by-product of sugar-cane processing, which in Mauritius is used to power electricity production in specially configured plants, goes to waste in Fiji because the electricity company and the sugar company cannot agree on the price to be paid for the bagasse. Finally, despite the millions of tons of sugar it has exported to the EU at intervention price levels over the years, the Fiji Sugar Corporation is reportedly insolvent and remains in business only through government grants and guaranteed loans. In these circumstances, it has clearly not been in a position to undertake the kind of product development research and marketing activities that have characterized the Mauritian sugar industry.

Is there a coherent sugar strategy for the future? If so, it is not apparent according to the views of people who should know. The government is watching very closely the debates in Brussels and hoping to hang on to whatever benefits it can for as long as possible. Even if sugar production in Fiji has declined dramatically in recent years, it will be years before there can be a wholesale changeover to alternative agricultural production.

Luke Ratuvuki, the chief executive of the Ministry of Agriculture, Sugar and Land Resettlement, observed that there are many other crops that can be successfully cultivated in place of sugar, but the transition will take some time. Fruits, maize, rice and vegetables are all possible, but the government is interested in ensuring that there is value added through local processing and this will require substantial amounts of (mainly foreign) investment. Cut flowers might be another option, but transportation apparently poses problems. Exporting cut flowers to rich overseas markets requires reliable and reasonably priced air transport. According to Ratuvuki,(8) Air Pacific — which is practically the monopoly international air service to Fiji — typically has its cargo space booked out long ahead of time and charges rates which would make cut flower shipments non-competitive.

If the NLTB’s policy of systematically terminating leases of agricultural land to non-ethnic Fijians was designed to have produced economic and social benefits for the indigenous community as part of a government ‘blueprint’ launched four years ago, that policy seems to have failed spectacularly. According to an article in the Fiji Times,(9) a recently issued Asian Development Bank report found that the Fijian population in squatter settlements had increased dramatically, with 5, 295 Fijian squatter households in the Central Division compared with 3, 377 Indian squatter households. In what some dismissed as a highly partisan reaction to the report, the Labour Party’s leader in the Fijian parliament, Mahendra Chaudry, was quoted in the newspaper article as saying that ‘the notion of landless Fijians is preposterously ironic, given the fact that about 90% of land in Fiji is owned by Fijians’.

The garment sector    back to top

The garment-producing sector is the most important industrial sector in Fiji today and can generally trace its origins to a combination of domestic incentives, the existence of the global scheme of allocated trade for textiles and apparel under the GATT’s Multifibre Arrangement and the WTO successor arrangement, and special preferential trading arrangements put in place by Australia and New Zealand under the South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA). Most of Fiji’s garment factories are foreign-owned and many depend upon preferential access for their continued profitability. In the 1990s the production and export of garments grew rapidly, but in recent years the industry has been hit by three factors that could well threaten its long-term viability.

A first major problem concerns the impending end of quota arrangements under the WTO’s Agreement on Textiles and Clothing (ATC). Faced with the potential closure of many foreign-owned plants that were established in the country solely to take advantage of Fiji’s quota in developed country markets, the government in Suva has had to consider its position in the WTO. According to Isikeli Mataitoga,(10) chief executive officer of the Ministry of Foreign Affairs and External Trade, the government is attempting to address this problem by joining with other textile and apparel exporting countries in the so-called ‘Istanbul Consensus Group’ to seek a three-year extension of the restrictive trading arrangements under the WTO.

Such an extension is likely to be problematic. In any event, far more important to the future of the garment industry in Fiji is the SPARTECA arrangement and preferential access to the Australian market. As the original SPARTECA scheme drew to a close in 1999, Fiji lobbied Australia for a new scheme that would include relaxed rules of origin for certain categories of products. A new SPARTECA-wide scheme was agreed and ready for implementation when the 2000 coup in Fiji put everything on hold, leaving the industry in limbo for some time and hitting many producers very hard. The arrest of the coup leader and the installation of an interim government allowed the new preferential arrangements to go into effect, but with a termination date of end-2004.

In July 2004, just months before the termination date, Australian Prime Minister John Howard agreed (on the fringes of a South Pacific Forum meeting in Apia, Samoa) to an extension of the treatment. According to Mark Halabe,(11) managing director of Mark One Apparel, the Howard government’s agreement to extend preferential treatment to imports of garments from Fiji is a success story of government working with industry in Fiji. He also gives credit to lobbying assistance from the Australian textiles, clothing and footwear (TCF) industry and his Australian buyers who helped to convince the government in Canberra that the preference scheme should be extended.

Halabe is an Australian national whose garment factory, located in a tax-free factory zone fifteen minutes’ drive from Suva, employs about 600 people — mostly indigenous Fijians. On the day of the author’s visit to the plant, the production line was focused on work shirts and vests, most of which incorporated reflective safety materials. State-of-the-art computerized fabric mapping and cutting machines ensure rapid and accurate cutting of shirt parts and an efficient use of fabric. Other high-tech equipment sews pockets and flaps onto the shirts in seconds, supplementing the work of employees at industrial sewing machines.

Halabe is of the view that while extension of the WTO ATC quotas may or may not benefit some segments of the Fijian garment sector, the seven-year extension of preferential treatment in the Australian market will set up a situation where some segments of the industry will be well positioned to survive over the longer term in a non-preferential environment. Part of the reason for this optimism is that the new seven-year preference arrangement for Fiji is thought likely to be related in its operation to the Australian government’s Strategic Industry Plan that incorporates important incentives for the use of productivity enhancing equipment. In addition, Halabe hopes that several million dollars might be made available to the garment industry in Fiji to fund training and assist in recapitalization of production facilities.

Today, Fiji’s garment sector employs some 14, 000 people, with garment exports exceeding the value of sugar exports (although the statistics collected by the government in Suva evidently mask the importance of the sector by subsuming textiles and clothing statistics within a broader category of ‘manufacturing’). After China, Fiji is the second most important supplier of garments to the Australian market, with a market share of about 6%. Where will the industry be in seven years’ time, when the preferential regime expires?

In Halabe’s view, the industry has a long-term future even without a preference in the Australian market. Although he readily admits that the Fijian industry will never be able to compete with Chinese suppliers on price, he considers that there are other factors that will keep Fiji in the Australian market. Chief among these is the fact that Fijian manufacturers will be more responsive to the needs of their customers in the relatively small Australian market than is likely to be the case with Chinese producers who concentrate on realizing economies of scale through massive production runs aimed at far larger markets in the United States, Japan and Europe. The Fijian industry on the other hand has a long history of relationships with Australian buyers and will be able to supply quality garments, on time and at a stable price. In seven years’ time it is likely that continued differential labour costs will see the migration to Fiji of most garment manufacturing now taking place in Australia.

Alternative opportunities for the future    back to top

Naturally enough, Fiji’s economic and trade prospects for the future are not limited to sugar and garment production; a number of other alternatives present themselves. In recent years, mining — mainly for gold — has accounted for as much as 3% of GDP, but a combination of technical difficulties in production and wide swings in the world price for gold have undermined the sector’s viability. Fiji is the location of the world’s largest mature mahogany plantation and the country is poised to benefit from the harvesting of this renewable resource. Exploitation of the mahogany plantation has reportedly been delayed by political infighting over how the revenue from the timber should be shared. The author was told by more than one interviewee that tensions over this question contributed to the impetus for the 2000 coup.

According to Luke Ratuvuki, the commercial fishing sector has grown rapidly in recent years and holds great promise for the future. The industry specializes in fresh and chilled tuna, as well as canned tuna. The canned product is exported mainly to the United States and EU countries, while substantial quantities of sashimi-grade tuna are exported to Japan. Fiji has acted to retain a certain amount of the exploitation of this sector for locals by limiting foreign fishing fleets to set quantities.

Tom Vuetilovoni, Fiji’s Minister for Commerce, Business Development and Investment, is quick to point out that Fiji has some important success stories. Fiji Water, a locally bottled mineral water, has benefited from effective marketing to become the second-ranked mineral water in the lucrative US market. He notes that the fact that the Southern Cross cable passes through Fiji on its way from Australia and New Zealand to the United States creates important opportunities for Fiji as a regional centre of information communications technology (ICT) activities. ANZ Bank, for example, has located a significant call centre in Fiji.

Vuetilovoni admitted that a complicating factor limiting growth in the ICT/Internet sector is the very high price currently charged by Fiji’s monopoly telecommunications company for Internet service provider (ISP) access. This situation is likely to change as the monopoly seeks government approval to realign its cost and pricing structure, which up to now has used high Internet and international connection charges to cross-subsidize cheap local calls. The company is seeking the right to offer different packages, some of which will dramatically lower Internet access charges.

Other services sectors present a mixed picture for Fiji. Not surprisingly, tourism features importantly in the government’s plans for the future. There have also been promising discussions with foreign-based film-makers, many of whom have evidently found Fiji to be a costeffective location.

Brian Singh, chief executive officer for the Ministry of Labour, Industrial Relations and Productivity, admits that one problem Fiji faces in the services sector harks back to the WTO Trade Policy Review’s comment on the shortage of professional and technical personnel. According to Singh, Fiji has no long-term plans for future skills training. The problem of a lack of skilled personnel has become critical in some sectors. In the construction industry, for example, a lack of trained local labour has led to the importation of substantial numbers of construction workers from the Philippines. The construction sector is not the only segment of the economy with a labour shortage. Evidently the growth in the supply of trained local hotel staff has not kept pace with the anticipated expansion of the tourism sector, contributing to concerns that expatriates might need to be hired for catering and catering administration jobs in Fijian hotels and resorts.

Traditionally, Fiji draws most of its overseas tourists from Australia, New Zealand, Japan and the United States, and the sector is very important in terms of its contribution, directly and indirectly, to employment, foreign exchange earnings and the viability of the national carrier, Air Pacific (a major stake in which is held by the Australian airline Qantas). Although exclusive five star and ‘five star plus’ accommodation is available in Fiji, most of the industry’s development to date has been centred on the middle-class Australian and New Zealand tourist markets, which tend to be price-sensitive. In this context, it seems clear that a more competitive and efficient aviation transport sector in the Pacific, able to provide good quality service at reasonable prices will be a key factor in the development of the tourism industry in Fiji and neighbouring islands.

The future of the sector was the focus of discussion at the July 2004 Fiji Tourism Forum. At that meeting, the chief executive of Air Pacific, John Campbell, was reported to have issued a number of warnings about the future prospects for tourism in Fiji.(12) As a strategy for countering competition from ‘no frills’ airlines that were beginning service to Fiji, Air Pacific had cut ticket prices from Australia and New Zealand by up to 30% only to find that its ability to fill its flights was being compromised by a number of negatives in the Fiji hotel and resort sector. According to Campbell, a major problem is that many Fijian hotels are raising their prices for rooms, food and drink, and telephone calls to levels that are threatening to price them out of business. He commented that a lack of quality hotel rooms is also a problem in the market, compounded by the fact that electricity and water supplies are not matching demand, with the consequence of potential ‘brown-outs’ compromising the industry’s ability to provide services of a quality expected by tourists. Campbell also cited infrastructure problems and deficiencies at Nadia and Nausori airports, resulting in long immigration lines and slow baggage delivery as issues that required priority attention if the sector is to grow.

Another issue that has arisen recently to complicate the tourism sector relates to the way in which tourist resorts are financed. As is now commonplace in many tourist locations, developers in Fiji have supplemented their sources of financing by selling units in resort hotels to private investors who are normally expected to turn the unit over to the hotel management in exchange for a share of the income. These private investors, naturally enough, enjoyed benefits and tax breaks similar to the resort developer — benefits the Fijian government proffered in the belief that additional hotel rooms would enhance the prospects for tourist arrivals and spending on the Fijian economy. Things went awry at one major development when it became known that many of the private-sector investors in hotel units were opting to pocket the tax benefits from their investment and then live in the units they had purchased instead of making them available for use by tourists. The government reportedly reacted to this development by suspending the benefits it had previously made available to the private sector investors, effectively ending this form of tourist development financing.

IV. Lessons for others: Fiji’s approach to loss of preferences    back to top

Many people would argue that in the world of 2004 the sugar industry is not the industry to pursue as a means of making money. Many of them would also argue that the best course of action for a country in Fiji’s circumstances would be to get out of the industry. Such comments ignore the fact that sugar continues to be a mainstay of the Fijian economy and the country’s most important employer. That said, there can be little doubt that an unhappy combination of political infighting, misdirected policies and a lack of investment in new technologies and infrastructure has put the Fijian sugar industry on a long downhill slide. In the absence of a major turnaround effort, Fiji anyway appears to be on its way out of this industry. As Ross McDonald put it recently, ‘We now have this one window of opportunity and it’s an opportunity we have to take. We have to stop pointing fingers at everybody else and work together to get the industry moving again. The alternative is a disaster, and that’s something we cannot contemplate.’(13) If the Fijian sugar sector is to prepare for the end of preferences, it must face a long and tough internal reform before it can hope to be competitive in world markets.

The outlook is far more optimistic for the garment sector. While it is true that both the government and industry’s first reaction to the end of preferences has been to seek a further extension of special trading arrangements (both in Australia through SPARTECA and in the WTO through association with the Istanbul Consensus group), there are nevertheless reasons to think that Mark Halabe’s vision of Fiji as a cost-competitive niche supplier of quality garments to the Australian market is a real possibility. But that industry needs to remain focused and to take advantage of the time remaining for preferential trade to undertake needed training programmes and investment in technologies contributing to efficiency gains. The Fijian government will likely need to co-operate as well. From the interviews conducted by the author, it seems that many of the garment producers now in Fiji would probably leave if the government implemented its rumoured plans to end the tax-free factory scheme.

Fiji’s failure to deal effectively with skilled labour shortages that were already apparent in 1996 when the WTO Secretariat conducted its trade policy review must be viewed as a serious concern. With the sugar industry in long-term decline and limited opportunities to create employment for Fijians in sectors such as the construction industry and tourism, it makes no sense at all for the country to be importing workers from the Philippines and elsewhere when it could be training its own nationals in these areas.

Political instability has hit Fiji hard in recent years. Many comments were made to the author about the number of companies which saw their businesses undermined or ruined by the events of 2000. Although the country seems to be settling down under the rule of law — something that has been demonstrated this year by the government’s acceptance of the jailing of the Vice Prime Minister — one cannot escape the impression that many serious economic issues are still treated as political footballs in Fiji. Too many stakeholders are still pulling in their own directions instead of co-operating for the common good; this is not preparing Fiji particularly well for the day when its preferential trade arrangements disappear.

NOTES:
1.- WTO Secretariat, Trade Policy Review — Fiji, Document WT/TPR/S/24, 13 March 1997, Geneva: World Trade Organization. back to text
2.- Ibid., p. xiii. back to text
3.- Theodore Levantis, Frank Jotzo and Vivek Tupule, ‘Ending of EU Sugar Trade Preferences, Potential Consequences for Fiji’, ABARE Current Issues 03.2, 2002, p. 2. back to text
4.- Arthur McCutchan, Fiji Business, August 2004, p. 3. back to text
5.- African, Caribbean and Pacific. back to text
6.- McCutchan, Fiji Business, p. 4. back to text
7.- In the first year of a sugar cane crop, stalks of cane are planted in freshly ploughed ground, and when the crop matures the cane is cut and the stump left in the soil. New cane will grow from these stumps, although its quality in terms of sugar content will generally decline with each passing year. Cane grown from stumps of the previous harvest is known as a ‘ratoon’ crop, and experts say that after a maximum of three ratoon crops the stumps should be removed, the ground re-ploughed and new stalks planted. A twentieth-generation ratoon crop would likely produce considerably lower sugar yield. back to text
8.- Interview with the author, 18 Aug. 2004. back to text
9.- Imran Ali, ‘Blueprint Failed’, Fiji Times, 20 August 2004, p. 3. back to text
10.- Interview with the author, 18 Aug. 2004. back to text
11.- Interview with the author, 19 Aug. 2004. back to text
12.- Robert Keith-Reid, ‘Air Pacific Chief Warns Tourism Industry’, Fiji Islands Business, August 2004, p. 13. back to text
13.- McCutchan, Fiji Business, p. 7. back to text
 

* Executive Director, Institute for International Business, Economics and Law, University of Adelaide.