PACIFIC ISLANDS FORUM SECRETARIAT 1 PIFS(17)JEOD/JEMD.Background C JOINT DIALOGUE OF ECONOMIC OFFICIALS/MINISTERS, PRIVATE SECTOR & CIVIL SOCIETY ORGANISATIONS Suva, Fiji 4 & 6 April 2017 Options for Stronger Linkages with Asia Purpose To recommend regional initiatives to strengthen economic cooperation with leading Asian economies (especially, China). Key Issues 2. The Asia Pacific region has become the growth engine of the world economy and has benefited from the trends underlying globalisation, such as flows of foreign direct investment, access to knowledge and innovation, open markets for trade in goods and services and rapid technological progress. Asian economic growth has been built upon the foundation of prevailing regional peace, security and stability offered by regional and multilateral cooperation. Despite the financial crisis in the Atlantic economies in the past decade, and associated uncertainty and disruption in the major industrialised economies, emerging and developing Asian economies continue to make relatively strong progress. 3. In line with strong economic performance, major Asian economies are taking a greater leadership role in global economic governance that may influence a broader focus in multilateral and regional economic cooperation towards the needs of other developing regions and nations. New financial institutions such as the Asian Infrastructure Investment Bank and China s Silk Road Fund are dedicated to supporting development projects that will foster regional and inter-regional economic integration. 4. The major Asian economies offer significant market opportunities for the Pacific Island economies if traditional constraints such as limited respective knowledge and understanding, and investment in new infrastructure and value chain connectivity to reduce the distance and cost of economic cooperation are addressed. As developed economies continue to have slow economic growth and exhibit increasing inward focus, greater engagement with the rising Asian economies can be an important hedging strategy for FICs economic development. 5. Central to this new economic landscape is China, which has now become the largest economy in the world, measured by purchasing power parity, and if it continues its economic growth trajectory,
it will become the largest economy on all measures in the next few years. It is already the world s largest trading economy. China alone accounts for more than a quarter of global growth. After decades of double digit growth, China is now seeking to gradually slow its growth to a more sustainable new normal of around 6 per cent per annum while it transitions from an investment and export-led development model to a more diversified economy driven by domestic demand and services. China has amassed large stocks of under-utilised capital and significant expertise and capabilities that can assist development in the region. China will seek to play more of a leadership role in fostering trade, investment and development commensurate with its status as a leading economy. Because of its scale and its strategy to reach out to build trade, investment and tourism value chains along a 21st Century Maritime Silk Road, this paper focuses on China, its opportunities and challenges for the Pacific Islands to connect to the global centre of growth. 6. Chinese communities have built links to the Pacific region over centuries, with three waves of engagement. First, relatively small numbers travelled out from South China and settled across the Pacific, developing trading and retail businesses. In the last decade or so, as the Chinese Government adopted a go global economic strategy, large State Owned Enterprises invested in major resource industries in countries such as Australia and Papua New Guinea and trade has increased with a number of FICs, particularly in resources, fish products and timber. At the same time, the Chinese Government has extended development aid and concessional loans to Pacific Island Countries and has supported the construction of vital infrastructure, and education and capacity building support. The third wave is just beginning, as emerging private sector businesses from China look for more diversified opportunities across the region and as China s outbound tourism grows. 7. FICs need to develop economic development strategies to take advantage of the Asian region s (and in particular China s) new financing capabilities, aid, infrastructure and other investment as well as growing demand for tourism destinations and the resources of our region. Investment in infrastructure for connectivity including air, sea and communications links, is likely to foster regional tourism and trade benefits. 8. China s Belt and Road Initiative is a regional development opportunity and not solely a bilateral opportunity. It builds upon the historic Silk Road and the Chinese Government concept of Belt and Road cooperation with partner nations has been developed not only within economic parameters, but encompassing a broad, socio-economic framework utilising the language of peace, cooperation, openness, inclusiveness, mutual learning and mutual benefit that is relevant to entire regions encompassed in its numerous belts and roads. It is also founded on the need for people to people relationships and understanding, in order to foster economic interaction and cooperation. 9. The tangible economic focus of the Belt and Road Initiative is primarily building infrastructure, connectivity, trade and investment across the land belts and sea roads to Europe, South and South East Asia. Guangdong Province has been tasked by the Chinese Government to take 2
a special leading role in building the 21st Century Maritime Silk Road to the FICs and recent maps of the Belt and Road initiative have begun to include the South Pacific. Nevertheless, identifying mutually beneficial infrastructure and connectivity projects will not happen passively on the part of the FICs and are unlikely to result in significant real projects of relevance to the Pacific Islands as a whole if China takes a one size fits all approach. 10. Chinese financial institutions are much more familiar with large scale projects above US$1 billion in value and require rates of return well beyond the realistic scope of most FICs. It has proved difficult for the China Development Bank, which was tasked to seek economic cooperation projects following President Xi Jinping s visit to the Pacific in 2014, to identify bankable projects at scale and with an adequate rate of return. If the FICs aim to benefit from infrastructure and connectivity projects with Belt and Road finance, it will be necessary to proactively present regionally appropriate, well-prepared economic development projects and seek innovative and blended financing opportunities, in some cases leveraging aid from regional development partners. The Belt and Road concept stresses capacity cooperation and the Chinese Government has for example expressed an interest in cooperating with existing regional development partners such as Australia and New Zealand to deliver projects in the FICs, which is an area that could be explored. 11. To identify the significantly scaled projects that will generate Belt and Road support, FICs will need higher levels of communication, relationship-building and understanding between China and the Pacific, to identify what is possible and what is desirable for implementation. Other regions are intensifying their contacts with China and discussing Belt and Road cooperation from a regional perspective. For example, the sixteen nations of Central and Eastern Europe (CEE) have formed a 16+1 group that meets annually with China and is supporting significant Chinese investment in regional projects such as a high speed Belgrade-Budapest railway. A China-CEE Fund has been established that has already invested in a number of industries across the Central and Eastern Europe region. 12. There have been two Meetings of the China-FICs Economic Development and Cooperation Forum, most recently in Guangzhou, capital of Guangdong Province, in 2013. While it was anticipated that this meeting would be held every four years, there is no scheduled third meeting due in part to a slow drawdown of funds by FICs made available by the Chinese Government through the China Development Bank. 13. China is the focus of every region s attention and every country is seeking bilaterally to strengthen trade, investment and tourism links with China. The FICs have diverse and specialised needs and may need to try innovative approaches to gain attention and engagement with decision makers. The appropriate mechanism for engagement may be different from those used by other regions and indeed a regional focus with China is worth exploring. Our efforts must be targeted and a geographic focus is consistent with the geographic focus of China s Belt and Road initiative, which mandates certain provinces to take the lead in different areas of activity. South China is the region 3
with longstanding cultural links to the Pacific and Guangdong Province, as noted above, has been charged by the Chinese Government to take the lead in developing relationships with the Pacific Islands. Guangdong, China s powerhouse economy on the Pearl River Delta and adjacent to Hong Kong, is therefore a good place to start and more intensive engagement to identify practical and feasible projects for economic cooperation. 14. Hence, it is feasible to propose and develop a regional framework that identifies FICs regional priorities for industry development and sustainable development projects and provides guidance to Asian financial institutions and the business sector on appropriate environmental, cultural, best practice business and other principles to be applied in developing regional projects. This would tackle one of the key current constraints, which is a lack of knowledge in the international business environment about Pacific Islands industry development strategies and opportunities. Coordination across the region, including partnerships between Pacific Islands Trade & Invest and national investment promotion agencies, will also help to identify areas in which it is possible to yield scale and broader benefits from connectivity projects such as those likely to be allocated the Belt and Road funding. 15. Similarly, an annual high level exchange of leaders, including business leaders, with Guangdong Province could be looked into. Through such an exchange, it will be easier to strengthen and foster understanding of the FICs needs and priority projects. This more intensive engagement with Southern China should aim to build relationships that over time will lead to business investment outcomes as well as broader international cooperation in educational and cultural exchange. However, to support this increased engagement with China, it is important to develop a network of Pacific researchers in China and for Pacific Islands Trade & Invest to support increased business research linked to economic research in the Pacific, which is an identified area of urgent improvement. 16. Furthermore, it is prudent that Pacific Islands Trade & Invest work with FICs and CROP agencies to develop targeted Asian market strategies to develop and market Pacific Islands tourism and other products, with action plans to address current constraints. One area of strong potential is likely to be the branding opportunity to raise awareness in Chinese and other Asian markets of the unique attributes of the FICs and their products for health, lifestyle and environmental benefits. 17. Another critical area of potential for FICs is to explore, in cooperation with the Asian Infrastructure Investment Bank, the scope for pilot trilateral capacity cooperation projects to leverage development partner finance as well as support the Belt and Road investment to improve connectivity infrastructure in the region. 18. Finally, an important regional platform for engagement with business leaders, including potential investors and partners in Pacific Islands development, is the Sustainable Business Network 4
of the United Nations (UN) Economic and Social Commission for Asia and the Pacific (ESCAP). This is a high-level business group that provides advice to the UNESCAP on economic development and hosts an annual Asia Pacific Business Forum that brings together government and business leaders to engage on key Sustainable Development Goals. The next Asia Pacific Business Forum will be held in Hong Kong in February 2018 and it will be an important platform to engage with business leaders, who will be deliberating on financing development, and to promote a future Asia Pacific Business Forum in the Pacific Islands to bring together financiers, investors and decision makers to discuss financing and implementing Sustainable Development Plans for FICs. 19. This is an opportune time to seize the current window of opportunity for Asia Pacific and, in particular, South-South cooperation in building relationships, understanding, capabilities and platforms for joint projects to support sustainable development. FICs need to find the right partners, and, most importantly, FICs must do so on the Pacific s terms to meet the Pacific s needs. It is acknowledged that most economic engagement will take place on a case-by-case and bilateral basis. Nevertheless, the proposals for regional initiatives to build relationships and understanding are offered in order to address some of the existing constraints in the respective business environments and to support and reinforce the bilateral government to government, business to business and people to people engagement between FICs and Asia. 20. Some of the recommendations are made in relation to China and, in particular, South China, not on an exclusive basis but on a prioritised basis. South China is where the economic, cultural, educational and other connections are strongest and, with investment in relationship building and greater understanding, offer the highest potential for transformation into significant partnerships for mutually beneficial development outcomes. Pacific Islands Forum Secretariat Suva 15 March 2017 5