1. Question 5;
a) Discuss in the context of MIRA13 model for PICs and argue why it may no 13e sustaina13le in the long run. (10
Marks)
PICs differ greatly in their land area, levels of population, population density, and size of their
economies as measured by the magnitude of their GDP. For most Pacific island countries, free
trade in physical goods provides them with little economic gain because of the high transport
costs and the natural imperfection of their local markets in the exchange of imported and
exported goods.
MIRAB shows That is as economies relying on overseas migration (MI) which in turn generates
remittances (R) for their residents and foreign aid (A) used to support their government
bureaucracies (B). The Mirab model is particularly apt for small PICs associated with NZ
because of the freedom of entry of their residents to NZ. Eg: Samoa and Tonga. Unlike citizens
of Fiji, Kiribati, Solomon Islands and Tuvalu and PNG who did not have easy migration access
out of their country. However, even for many of these countries, such as Kiribati and Tuvalu,
remittances were important, remittances from their merchant seamen working on overseas
vessels. Also, remittances have increased in importance for Fiji as many Indo-Fijians are
migrating abroad. With growing globalisation, the migration and remittance component of the
MIRAB model has increased in relative importance for many PICs. Furthermore, aid has become
more conditional in Australia’s case on the recipients promoting good governance. Thus,
Australia has intervened directly in the Solomon Islands to secure law and order and in PNG,
Australia is involved in reform of PNG’s police force with a view to eliminating corruption.
The Washington consensus that economic growth is likely to be most rapid when the
government sector is small and the management of economies is left mainly to free market
forces, including global market forces. Bodies such as the IMF and the World Bank have
consistently subscribed to this view in recent times.
However, this view has its limitations, particularly as far as small island Pacific countries are
concerned. Market transaction costs reduce the economic value of market extension. This is
especially so because they are vulnerable to natural monopolies in their own markets. Often
the Washington consensus is supported by the assertion that government expenditure and
investment crowds out private investment. However, there is scant evidence that public
investment is a strong substitute for private investment. In particular, public investment in
infrastructure can be highly complementary with private investment.
While, in the past, many PICs economies have been well characterised as MIRAB economies,
the aid component of this characterisation appears to have become of reduced importance,
This reduction in aid is a consequence of the globally dominant view, reflected in the
Washington Consensus, that economic liberalism, privatisation and globalisation are the keys to
overcoming economic disadvantage. Making MIRAB models unstainable in the long run.

2. b) How can PICs succed in todays global market market and development path towards Free trade. Discuss with
reference to PICTA & PACER.
Free traders argue that the Pacific will benefit from cheaper imports, increased investment and
improvements in efficiency of Pacific business and service suppliers. Free trade requires all
countries to open their doors to every other country’s products in return for removing
protections of their own. Binding and enforceable free trade agreements are designed to lock
governments into that approach and can impose penalties on their exports if they break the
rules.
If PICs are to succeed in todays competitive global market they need to embrace globalisation
by joining the WTO and negotiating regional free trade agreements. PICs, suffer great
economic disadvantages that cannot be eliminated by most processes involved in globalisation,
even though some globalisation processes can be of economic benefit to them. Pics experience
high costs in the transport of goods. Their costs of importing and exporting goods are further
increased because of extended periods required for storing their imports and exports because
of the infrequency of their shipping and air transport. Scale economies also are often lost in
international transport because smaller sized vessels are more economic than the large vessels
which ply between major economies. Furthermore, market competition is frequently lacking in
international transport to remote island communities so that monopoly charges may apply to
such transport.
Instead we can encourage free trade amongst countries within our region. PACER is not a free
trade agreement, but an ‘economic and trade cooperation’ agreement that includes; Australia
and NZ . Competition from imports will force local firms to become more efficient. If Islands
have to stop producing what they can’t produce as efficiently as other countries they can
refocus their resources on what they can produce better than any other country.
(known as their ‘comparative advantage’) It is a better use of the world’s scarce resources for
the Islands to import food and goods that are produced more efficiently and cheaply than locals
can produce them. The cost of business closures and job losses is outweighed by benefits to
consumers, because foreign food and goods will be cheaper once tariffs have been removed.
The cost of business closures and job losses is outweighed by benefits to consumers. Tariff cuts
force governments to raise revenue in ways that don’t disrupt trade.,
PICTA came into force for trade of goods in 2003. All parties must allow goods from other PICTA
members to enter without restriction, by a certain date. That means no tariffs, no quotas
limiting the amount of a good that can be imported and no import licenses that require
permission to import goods. So long as a nation remains a party to PICTA, it can only lower its
tariffs and restrictions on other Islands’ goods; it can’t increase them. Once they have reached

3. zero, the government can’t reintroduce them. PICTA has the potential to create economic and
social instability. The agreement allows governments to introduce some temporary measures in
economic emergencies (such as balance of payments), to protect local industries that risk being
swamped by a rush of imports and to protect health, environment, morals, natural treasures or
address food shortages. But those exceptions are temporary and limited in the form they can
take.
They do not allow governments to depart from the agreement because of social impacts or
labour, gender, indigenous and other human rights. If governments are unable to respond by
reimposing tariffs and they cut governmentre spending instead, they risk creating worse social
unrest and political instability. Loans from the Asian Development Bank (ADB) and aid from
Australia and NZ are likely to be conditional on the Islands continuing with these policies.
C) Discuss Problems and prospects of PICs in dealing with the new environmental and climate change issues.
The islands of the Pacific are vulnerable to climate change and rising sea level. Pacific Islands
have a high ratio of shoreline to land area they are highly susceptible to damage from rising sea
levels. Furthermore, (PICs) generally have a narrow economic base focused on primary
production, are located in a highly dynamic ocean-atmosphere interface, have limited
ecological carrying capacity, are scattered over a vast ocean area, and have rapid rural urban
migration to centres situated on the coastal margin, then PICs would indeed seem to be
physically vulnerable to CC. Of all Pacific Island Countries, the four atoll states of
Kiribati, the Marshall Islands, Tokelau and Tuvalu are particularly vulnerable as their fresh water
reserves are limited to a shallow subsurface lens which is susceptible to depletion in drought
and susceptible to contamination from salt water. Further, the height of atolls above sea-level
rarely exceeds 2 meters, which makes them highly susceptible to wave damage. The particular
vulnerability of these atoll states raises the possibility of the first extinction of a sovereign state
due to environmental change.
It has been argued that sea level rise is a mid- to long-term problem for Pacific Island Countries,
and that the more immediate problem is the impact of enhanced climatic variability (for
example
stronger hurricanes and storm surges and more frequent and severe droughts) on island
systems already stressed by unsustainable development. Both climatic variability and sea-level
rise threaten the habitability and sovereignty of Pacific Islands, however the focus has been
largely on sea-level aspects and as a consequence the issue of climate impacts has not received
the research and policy attention it deserves.
Pessimism should not prevail, as there are good reasons to think that even the atoll states can
adapt providing they achieve a high level of systemic sustainability. The critical issue is that to
persist in the face of CC, PICs need to achieve a degree of
sustainability probably unprecedented in any modern state, in a biophysical and economic
environment which in many respects allows little room for error, and in a very short space of
time (they have a much shorter window of opportunity for change than larger and wealthier
states). This is the real policy challenge of what is called ‘adaption.

4. More generally, while development has a strong tendency to undermine ecosystem resilience,
the wealth it confers paradoxically tends to enhance resilience,
At the broader regional scale there is a scope for designing and implementing a polycentric
organisational structure (a Pacific Island climate change administrative system) with three not
necessarily hierarchically related levels: 1) regional - 2) national - 3) local. The purpose of such a
system would be to involve as many people as possible in various activities related to CC.
At the local level governing bodies based on the suitable administrative unit (most likely the
village) could be established. Designing such a system should take account of existing
organisations and linkages, and should identify key people. As well as being a prerequisite for
resilience in its own right, the proposed administrative system would be invaluable for a
number of specific tasks related to adaptation: it could provide official nodes for supporting and
organising research in localities; it could provide clear lines of communication vertically - and
with the development of regular forums - horizontally; it could provide a framework for
monitoring changes and communicating findings which covers all social and all inhabited
ecological spaces; it could provide channels and
nodes for community education and awareness raising; it can bring a wide array of people into
an integrated system, and so help foster the development of human resources.
In sum, these proposed broad policy goals aim to develop systems of purposeful exchange
between informed social groups living in a social-ecological context characterised by a fair level
of resource saving, a high degree of sensitivity to change, a capacity to learn, and a capacity to
change. They have strong resonance with existing calls for capacity building, disaster planning,
education, and human development, however it is important to stress the interdependence of
these things as a requirement for coping with CC & ASLR. These goals are not merely steps
towards adaptation, but are indeed the key ingredients of resilience and adaptation proper; in
this sense capacity building is implementation.
Question 4:
a) Agricultural development in smaller PICs: (2 marks)
Agriculture remains the backbone of the Pacific Island economies: it is the main source of
livelihood for the population as well as a major export earner. The “islands geographical
smallness and remoteness of the Pacific Island countries has hindered their economic
development in the world economy. Their smallness constitutes a major constraint in that the
limited land available for agricultural activities produces little for local consumption and sale to
the domestic and export markets. Access to finance for agricultural development is also very
limited and traditional production methods are still being used. The remote location of the
Pacific Island countries from the international markets results in high transportation
costs for exports, and high distribution and marketing costs. This results in Pacific Island
exporters becoming mainly price takers in the international markets.
Vulnerability to external shocks in the world markets greatly affects agriculture exports and the
worst hit are people in the rural areas, where most of the agricultural activities take place. High
vulnerability to natural disasters such as cyclones, droughts and rising sea level complemented
by increasing pests and diseases have significantly slowed down economic growth of most of
these economies, cutting their level of development back by 10 years.

5. Market access is a common problem for small island economies; these countries strain to meet
the many requirements (especially the non-tariff requirements) of the international markets,
and in most cases supply capacity constraints clearly limit access to these markets.
Furthermore, existing preferential market access arrangements have been substantially
reduced, leading Pacific Island exports to lose their competitiveness and market shares in the
international markets. Institutional capacity to strengthen agricultural development is also very
limited, as are the financial resources available in most Pacific island economies.
The commitments by Pacific Island economies to integration into the multilateral trading
system has implications for the future of these economies, given their susceptibility to natural
and economic catastrophes.
In Fiji, agriculture is organized more along commercial lines, although the subsistence
sector remains important. Large-scale agriculture comprises mainly of palm oil, coconut,
sugarcane, cocoa and coffee plantations, and beef cattle. Typical constraints faced by
producers include a shortage of labour, poor quality and availability of planting material,
a lack of efficient pest control and monitoring programmes, high post-harvest losses, poor
animal health and high cost of purchased feed, and weaknesses in both domestic and
export marketing.
b) Lack of skills in PICs as a growth and development constraints.(2 Marks)
PICs face the challenge of responding to the employment and training needs of their growing
and young workforces. Lack of employment opportunities in the formal sector are paramount
and economic opportunities are limited in most PIC economies. Consequently, unemployment
rates are high, particularly for youth and women, and the majority of the workforce has limited
access to skills development and is active in the informal economy (Duncan et al. 2009, ADB,
2007). It is likely that there will be a continuing shortage of employment opportunities in the
formal sector and therefore, employment alternatives (self-employment, enterprise
development etc.) needs to be seriously considered. Further, out- emigration of skilled workers
is expected to further increase in the years to come. This will create an ongoing need for
training in particular sectors as a consequence of skilled labour shortages in sending countries.
Consequently, training systems need to be flexible to meet market requirements. While
progress has been made and emphasis has been put on improvement of the delivery, relevance
and effectiveness of TVET systems, most of the countries still struggle with skills mismatch,
forecasting and standard setting. Further, the question of equity and access for the above
mentioned groups remains a major challenge. A meager 5-10% of the workforce has had access
to vocational training, which is a serious concern for the region. With some exceptions,
employability of trainees has also been a concern. Geographical access due to distance
between islands are additional challenges, while youth in general and from poor income groups

6. in particular, then women and people with disabilities are particularly excluded. Further, the
design of vocational training systems fails to provide adequate re-entry opportunities for older
students and rarely responds to the training needs (further education) of workers later in
c. Why are CbA important for projects and policy implementation in developing countries like PICs( 2 Marks)
In the Pacific, the use of cost-benefit analysis to support the design and assessment of projects
isstill relatively new. Ten years ago, examples of cost-benefit analysis were hard to find.
CBA can be a useful tool and its main strength is its explicit and rigorous ccounting of those
gains and losses that can be effectively monetized, and in so doing, making decisions more
transparent. CBA is a framework that supports coherent and systematic decision-making and
provides a common yardstick with a money metric against which to measure projects (Kopp et
al., 1997). However, CBA has to be seen as a guide to decision-making and leading to an
approximation of preferences of society rather than an expression of the exact economic value
of a given investment. CBA and economic efficiency considerations should not be sole criterion
for evaluating policies. They should rather be part of a larger decision-making framework
incorporating social, economic and cultural considerations.
D) How can input & output tables be useful in policy making:
Input-Output tables offer the most detailed portrait of an economy. They enable a detailed
analysis of the process of production and the use of goods and services (products) and the
income generated in that production. The strength of Input-Output analysis is that it can
address both direct and indirect effects reflecting complex linkages within a national economy.
International Input-Output (IIO) tables integrate official national accounts and bilateral trade
statistics into a consistent framework which also reflects interdependencies between
economies. The tables are more complex than most other statistics and their compilation is
challenging. But the benefits are large in many ways despite the required efforts.
In fact, Input-Output statistics are at the core of all Computable General Equilibrium (CGE)
models, an advanced analytical tool widely employed to quantify the expected outcome of
policy change
E) PICs are faced with crumbling infrastructure:
F) Education & training policies:
Question 3:
c) Low investment levels, lack of democracy increases risk and
uncertainty causing output volatility and lower growth. Convergence between the economies
is observed though at a slow pace. Economic vulnerability shows a negative effect originating
from the shocks. Vulnerability tends to slow down the growth rates of the island nations and
also reduces the speed of convergence between economies at different levels of development.
To overcome output volatility and economic vulnerability the results support that in a stable

7. political environment foreign aid contributes positively to economic vulnerability, output
volatility and growth. The results provide a means to address those problems. The steady state
growth is affected by such vulnerability that would reduce welfare of the fragile group.
Vulnerability tends to slow down the growth rates of the island nations and also reduces the
speed of convergence between economies at different levels of development. To address the
problems of overcoming output volatility and economic vulnerability external assistance has
been the means that island nations have relied on. To measure the effectiveness of aid where
islands face external shocks the results for addressing volatility and vulnerability provide
evidence that stable political environment and
good governance are necessary where aid contributes positively to mitigate the effects of
external shocks and output volatility. The results indicate a positive relationship between aid
and growth in the Pacific. Foreign aid also provides the necessary resources for government
expenditure, investment and human capital that tend to assist the effects of poor economic
performance, reduces output volatility and economic vulnerability. The policy makers have to
note that there is a potential to enhance economic growth and achieve some level of
selfsufficiency, but that will depend on a number of preconditions being fulfilled, where good
governance has to prevail to recover from poor economic performance and external shocks,
sound macroeconomic management and policies to release the initiatives as foreign aid
speeds up growth enhancement by overcoming external shocks and return to stability.
1.Lewis 2 sector model:
The 2 sector model show a capitalist sector "that part of the economy which uses reproducible
capital and pays capitalists thereof". The use of capital is controlled by the capitalists, who hire
the services of labour. It includes manufacturing, plantations, mines etc. The capitalist sector
may be private or public.
and The Subsistence /traditional Sector The per head output is comparatively lower in this
sector and this is because it is not fructified with capital. The "Dual Sector Model" is a theory of
development in which surplus labor from traditional agricultural sector is transferred to the
modern industrial sector whose growth over time absorbs the surplus labor, promotes
industrialization and stimulates sustained development.
In the model, the subsistence sector -low wages, abundance of labour, and low productivity
through a labour intensive production process. In contrast, the capitalist manufacturing sector
is defined by higher wage rates ,higher marginal productivity, and a demand for more workers.
Also, the capitalist sector is assumed to use a production process that is capital intensive, so
investment and capital formation in the manufacturing sector are possible over time as
capitalists' profits are reinvested in the capital stock. Improvement in the marginal productivity
of labour in the agricultural sector is assumed to be a low priority as the hypothetical
developing nation's investment is going towards the physical capital stock in the manufacturing
sector.
Relationship between the two sectors.

8. The primary relationship between the two sectors is that when the capitalist sector expands, it
extracts or draws labour from the subsistence sector. This causes the output per head of
labourers who move from the subsistence sector to the capitalist sector to increase. Since Lewis
in his model considers overpopulated labour surplus economies he assumes that the supply of
unskilled labour to the capitalist sector is unlimited. This gives rise to the possibility of creating
new industries and expanding existing ones at the existing wage rate. A large portion of the
unlimited supply of labor consists of those who are in disguised unemployment in agriculture
and in other over-manned occupations such as domestic services casual jobs, petty retail
trading. Lewis also accounts for two other factors that cause an increase in the supply of
unskilled labour, they are women in the household and population growth.
.
Solow Model:
One way to understand the relationship between current production, savings activity and the
accumulation of capital is via the Solow Growth model which defines the conditions for the
tendency of different nations to approach an equilibrium (steady-state) level of the capital
stock.
We begin by using an economy-wide production function in Cobb-Douglas form with constant
returns to scale:
Y* = f(L,K) = ALαK 1-α
As a first step, we modify this expression to put it into a form that represents the standard of
living (simply the ratio of output to labor input):
y* = Y*/L = f(1,K/L) = A(K/L)1-α = Ak1-α.
The term 'k' represents the capital/labor ratio better understood as the amount of capital
available per unit of labor input. We would expect that greater amounts of capital per labor-
unit would make that labor more productive and thus raise the living standards within a
particular nation.
Capital is unique in that over time it wears out. This factor input is subject to the effects of
friction, obsolescence and climate such that at some future date it ceases to make a useful
contribution to the production process. This is known as depreciation. The reciprocal of the life-
span of a unit of capital is then defined as the rate of depreciation 'δ'. The implication of this is
that without replacement (via investment expenditure) the capital-labor ratio would naturally
decline over time. In order to maintain this ratio, the required level of investment 'Irequired' (a
flow variable) must be equal to the depreciation in the capital stock:
Irequired = δK

9. It must be noted that with greater amounts of capital in place, greater levels of investment are
required to maintain a particular capital-labor ratio (i.e., the more capital that exists, the more
capital there is to wear out in a given time period).
With growth in the size of the labor force (due to population growth and increasing labor-force
participation rates), additional investment is also necessary to maintain the capital-labor ratio
(K/L) at a particular level. Thus, the level of investment must exceed rate of depreciation by an
amount equal to the growth-rate 'n' in the labor-force:
Irequired = (n + δ)K
or if we divide both sides by 'L'
irequired = (n + δ)k
Investment is possible only if a given country makes resources available for this accumulation of
capital. These resources, known as savings, represent those goods produced in the current time
period not devoted to final private or public consumption. In a closed economy, we could write
the following:
Savings: S = Y* - C - G
S = sY*
where 's' represents the proportion of output not devoted to private consumption 'C' or public
(Government) consumption 'G'. With efficient financial and capital markets, these savings could
then be made available for investment in new capital:
Savings = Irequired
or in per-capita terms:
sy* = (n+δ)k
A "steady-state" level of capital is defined as the above equality and is modeled by the
intersection of 'sy*' (per-capita savings as a proportion of per-capita income) and '(d+n)k' in the
diagram below:

10. Rowstow stages:
Model of economic growth suggesting that all countries pass through a series of stages of
development as their economies grow. US economist Walt Rostow presented this model in
1960 following a mainly European-based study.
Rostow described the first stage of development as traditional society. This is defined as
subsistence economy based mainly on farming with very limited technology or capital to
process raw materials or develop services and industries. Preconditions for take-off, the second
stage, are said to take place when the levels of technology within a country develop and the
development of a transport system encourages trade. During the next stage, take-off,
manufacturing industries grow rapidly, airports, roads, and railways are built, and growth poles
emerge as investment increases. Stage four is termed the drive to maturity during which
growth should be self-sustaining, having spread to all parts of the country, and leading to an
increase in the number and types of industry. During this stage more complex transport
systems and manufacturing expand as transport develops, rapid urbanization occurs, and
traditional industries may decline. In Rostow's final stage, the age of mass consumption, rapid
expansion of tertiary industries occurs alongside a decline in manufacturing.
Romers endorgenous growth:
Romer includes the technical spillovers which are attached with industrialization. Therefore,
this model not only represents endogenous growth but it is closely linked with developing
countries also. Moreover, in Romer's model, just the technological spillovers are considered
ignoring the determinants of savings and the problems of general equilibrium.
According to Romer, the processes of production are derived at the level of a firm or industry.
Each firm individually operates under perfect competition. In this way, this model coincides
with perfect competition, and up till here, this model is close to the assumptions of Solow
model. But Romer deviates Solow when he assumes that the stock of capital in economy (K)
influences the level of output positively at the level of industry. This situation leads to generate
increasing returns at the industry level.
.