Do Foreign Aid and Remittance Inflows Hurt Competitiveness of Exports of Pacific Island Countries? An Empirical Study of Fiji

Foreign aid and remittance inflows have been playing major roles in the economic growth and development of Pacific island countries (PICs). However, the relationship between these international capital inflows and export competitiveness of PICs has not been adequately studied. It is generally held that such capital transfers tend to hurt exports, a phenomenon known as Dutch disease. The objective of this paper is to examine the validity of the Dutch disease hypothesis in PICs with a case study of Fiji. Employing the bounds testing procedure, this empirical study reveals that inflows of both foreign aid and remittances have been contributing to the appreciation of Fiji’s currency. The study establishes the validity of the Dutch disease hypothesis as far as Fiji is concerned. Keywords: Foreign aids, remittances, export competitiveness, cointegration, Granger causality tes

Role of remittances in India's economic growth

India has been among the top ten remittance recipient countries in the world since the 1970s. In the context of the ongoing worldwide recession and uncertain export prospects, mobilisation of foreign exchange earnings has assumed greater importance. Given the intensification of financial sector development together with relatively stable capital inflows (FDI and ODA) and the efforts towards formalising the channels of remittance inflows, we find that remittances and the interaction between remittances and financial sector development have had a positive and significant effect on growth over the last four decades (1970–2009). In the light of these findings, it is proposed that the proactive policy measures in India should continue for encouraging remittance inflows for long-term growth and development

Impact of global growth fluctuations on India: an empirical study

The article examines how growth fluctuations in major trading partner countries of the world have affected the Indian economy since its liberalization from the mid 1990s. This empirical study confirms that domestic output of India was strongly influenced by global shocks. The findings are not surprising as India’s trade and financial integration with the rest of the world has been on the rise

Impact of exchange rate changes on domestic inflation: a study of a small Pacific Island economy

This paper investigates the effect of changes in exchange rate on consumer price level, in Fiji, known as exchange rate pass-through during a thirty year period (1982-2009). Specifically, three time periods are focused on: the pre-coup years (1982-1986); post coup years (1987-2009); and full time period (1982-2009). Monthly data on consumer price index, nominal exchange rate, monetary aggregate and interest rate are utilized. The study results show that the degree of exchange rate pass-through to domestic price was relatively low during the entire sample period at 0.183. It was 0.453 and 0.373 for the pre and post coups periods. Regardless of the sample periods under study, the monetary aggregate, as a variable plays a pivotal in stabilizing the price level

Implications of excess liquidity in Fiji’s banking system: an empirical study

The reasons behind the frequent occurrences of excess liquidity, especially in the recent months since 2007, are well known and documented. They include low investor confidence following the military coups and related political uncertainties with their lingering effects for a while. What are unknown and not studied in detail are the long term effects of excess liquidity on various key economic variables. Utilizing the VAR methodology, this paper examines the effects of excess liquidity on loans, lending rate, exchange rate and price level. The findings are that excess liquidity is a major component of forecast variation in loans, exchange rate and lending rate

Monetary policy transmission in Pacific Island countries: a study of Tonga

Tonga’s monetary authority, National Reserve Bank of Tonga (NRBT) is entrusted with the responsibility of managing Tonga’s monetary system and exchange rate stability. This paper undertakes an empirical study of monetary policies pursued by NRBT with specific focus on the transmission mechanism of monetary policy in Tonga. As the annual data time series cover only a short-period (1981-2008), we resort to bounds testing approach. The study findings show that monetary aggregate in Tonga is more important than short term interest rate as a channel in transmitting impulses from the monetary sector to the real sector

Credit boom in Fiji: too much of a good thing? An impact analysis

Since 2001, Fiji has been witnessing strong growth in domestic credit for a continuous period of four years. Besides contributing to Fiji's economic recovery and increasing gross domestic product, the credit boom resulted in deteriorating annual trade balances. Examining the relationship between domestic credit, economic growth and trade balance, this paper finds the presence of a long-run relationship flowing from domestic credit to economic growth but not vice versa. Besides, there is a strong evidence of a bi-directional short-run causality between the variables, which suggests that domestic credit not only promotes economic growth, but also affects trade balance

Pacific Island countries in the globalized world: a study of macroeconomic interdependence and regional integration

In the context of globalization and development, and in particular the complex interactions between them, the Pacific Island Countries (PICs), once considered remote and untouched by sophisticated financial sector instruments, are now deeply affected by the second and third waves of the world-wide recession following the financial and banking crises in the industrialized countries. Consequent decline in economic activities in the advanced countries caused a general slow-down in all PICs. With the exception of Papua New Guinea, the PICs have narrow resource bases and limited export earning capabilities. Further, they are heavily dependent on imports ranging from food and fuel to machinery and manufactured goods. Global economic downturn has resulted in decrease in tourism earnings and inward remittances, which are the main sources of foreign exchange earnings. Thus, the economic crisis has brought into sharp focus the topic of macroeconomic interdependence of PICs for further examination, as part of regional economic integration. This paper deals with six major countries in the South Pacific region, viz., Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu. Adopting a vector autoregressive (VAR) methodology, the study shows that there is strong evidence of country-specific shock affecting the variability of outputs in all PICs in the short-run. In the long run, it is found that the global output shock represented by the USA output shock is the most important shock followed by regional shocks. However, the quick and early recovery of Australia has re-established the case of regional economic integration with Australia and New Zealand. This has been the goal of Pacific Plan endorsed by the inter governmental organization consisting of PICs, and Australia and New Zealand

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