From Matangi Tonga Magazine Vol. 17, no. 3, November 2002.

By Pesi Fonua.

Tonga’s membership with the WTO is seen as a bench-mark for the success of the government’s Economic Reform Program, that was officially launched in April this year. This economic reform is aimed at energising Tongan industries, offering more employment opportunities, and producing quality products to compete in the world market.

Only when Tonga has become an active trading nation, can it be said that the country has recovered from the stagnation that it has suffered during the past few years.

Tonga will be accepted as member of the WTO after we reform our economy and comply with all WTO membership requirements, which include our participation in Global Free Trade and the introduction of Zero Tariffs. These two requirements are confronting Tonga with the biggest challenge that it has ever faced in a century, because Free Trade means we will be flooded with cheaper imported goods, and this will further exasperate our foreign trade deficit, which currently stands at about $97 million each year. Zero Tariffs also mean that government will lose its main source of revenue, in the Custom Duties it collects, which annually contribute about 45 per cent of all government revenue.

Tax reform

The government’s plan on a new source of revenue to replace Tariffs will be presented in the form of a Bill for Tax Reform Legislation, which ‘Aisake Eke, the Secretary for Finance, said would be tabled to Parliament in July 2003, and possibly come into force some time in 2004. Tax reform is the pillar of the Government’s Economic Reform Program, and it is the last piece of legislation in the reform program to be presented to the House to meet the WTO membership requirements, and most probably will be the one that has the most impact on people’s lives.

The conviction is that when Tonga becomes a member of the WTO, we will have better access to the world market, and thereby increase our trade and employment opportunities.  More exotic products will be available in our stores and the prices of these goods will be cheaper, because of the Zero Tariffs.

Competitive

It sounds very simple, but a Free Trade World means that a country has to be prepared to be competitive all the time in order to maintain the lion’s-share of their niche markets. Being part of the Global Economy has been described as a situation where we must wake up every day and be ready to compete.

Competition is going to be the name of the game, and the theory is that under WTO there will be a level playing field, with the WTO as the referee. For a developing country, like Tonga, the competition will be tough, because if we decide to become a member of the WTO soon after implementing our reform program, naturally things will not have been fine-tuned and we will struggle to cope.

World market

The Secretary for the Ministry of Labour Commerce and Industries, Paulo Kautoke, said that the principle of WTO is for countries to exploit, “their comparative advantages. A leading producer of a particular product should be able to market his product world wide.” Paulo believed that Tonga should exploit the areas where it has comparative advantages, such as in Agriculture, Fisheries and Tourism. He pointed out that genetically modified crops were the technique that had been adopted by commercial farmers world-wide for the mass production of food stuff, but, “in turn, it raises the value of organic crops, so we must put emphasis on organic farming. We have very fertile soil, and an enormous area of clean water, which is abundant with fish; and we have a holiday destination that is steeped in history. We have natural beauty, which can not be found anywhere else in the world. If we forget about import substitution and allow in cheaper goods, we can focus our attention on the exploiting of these areas where we have an advantage.” Paulo believes that these three industries are the definite way for us to take advantage of our membership in the WTO and to play an active role in the Global Economy.  

Membership

Paulo was convinced that Tonga had no other option but to become a member of the WTO, because the WTO set up the rules for world trade, and any country that was outside of it would not have the right to complain about unfair trade practices. He believed that Tonga’s trade interests would be better protected if Tonga became a member of the WTO. “If a country puts in place any trade restrictions against us, which we feel are not fair, we can appeal to the WTO, which in turn will affirm that the reason for the restriction is relevant.” Paulo said that this was different from what is happening now when our trading partners may introduce trade restrictions and we had no choice but to comply. “But we should not rush into the WTO, there is no urgency, what is most important is for us to be ready. We should take our own pace, and make sure that we are strengthening our trading position each step of the way.

Business forum

“Government has to fine tune its approach to the current reform program that is taking place. The way it is being done now is that government informs the private sector of what they are going to do, instead of the private sector participating in the decision making, and having their input considered.” Paulo believed that we should have a Business Forum where government and the private sector could agree on what they should focus on and get done in a particular year. “The private sector normally has a vested interest, but once they sit down and discuss the matter over, then they could agree on what they should do.”

Long list

Paulo had a long list of legislation that he would like Tonga to have in place and put into operation before it becomes a member of the WTO.

“Intellectual Property is something that we have to look at, so is a Competition Act, similar to the Trust Laws in the USA to deal with situation where competition does not reduce the price of services and goods.

“We also have to look at our statistics, at how the department classifies remittances. At the moment it is left for the person at the bank to make the decision. Money is transferred over, as payment for the sales of a container of manioke, but the person at the bank who would not bother to trace the source of the funds would put it down as foreign remittance. There are also remittances in kind and there is no banking transfer. These figures should be sorted out so that we know exactly where we are, then our planning is easier and clearer.” Statistics with regards to foreign currencies brought in by tourists and the actual number of bona fide tourists who were visiting the country were also statistics that must be clarified, he said.

Despite the tall list of things, which have yet to be done before we can enter the world playing field of trade, Tonga has made giant progress in a number of areas. With regards to the Information Technology, before the year 2000 every secondary school in Tonga had established a computer studies program. The move to allow two telephone providers to compete, has resulted in a drop in the rate for international calls from over $3 a minute to 70 seniti per minute, and is an impetus for the use of IT. Starting also in September this year was the establishment of village computer centers, the first at Kolovai.

Debate

Meanwhile legislation is still being processed through the House in order for Tonga to meet its WTO membership requirements. By early October the House was still debating a Bill for a Foreign Investment Act.

The process of getting Tonga to become a competitive trading country is never going to be smooth. A Bill for the Amendment of the Sunday Law, which is a part of a drive to allow essential services, such as airlines to be able to land in Tonga on Sundays to connect with world-wide international services, was thrown out by the House because of widely-held religious conviction that it may bring a curse to the country.

Paulo said that the most important piece of legislation yet to be tabled into Parliament was the Tax Reform Legislation. “The Tax Reform, which is prepared by the Ministry of Finance will deal with the issue of how government will replace its main source of revenue, Custom Duties.” About 45 per cent of the government’s revenue comes from Custom Duties, and Paulo said that under the WTO Tonga’s custom duties would be slowly reduced to zero over a period of eight years.

The issue of Custom Duties reduction remains a major concern for a number of Forum island countries, which are facing the same problem of losing their major source of revenue, and over the years Free Trade Agreements have been introduced with the objective of getting these countries accustomed to the concept of Free Trade, and to give them time to find a new source of revenue to replace Custom Duties.

Paulo said that while government was looking for a new source of revenue it should at the same time cut its expenditure. The Tonga government spends 53 seniti of every pa‘anga it earns on the salaries of the public servants. “The problem is because of the size of the public service, which must be reduced.”

The Tongan government, in a way, is cornered by the unemployment issue. Under its reform program it has to downsize the public service, which really means putting people out of work. The privatisation program, on the other hand is not creating new jobs as hoped, and when faced with an economic downturn and higher costs private companies are laying off workers, as happened during the privatisation of the government’s Tonga Telecommunications Corporation, and the Tonga Electric Power Boar d recently.

Solutions

Paulo Kautoke sincerely believed that organic farming, fisheries and tourism were the main industries that would offer the solution to our economic problems, and that while we were developing these industries the education should be geared to providing the supporting services that are needed to keep the community running.

The setting up of an infrastructure to market and to package our agricultural and fisheries products remained another challenge. The two most important elements that we have to take into consideration is how to keep our fisheries and agricultural products fresh and delivered to the market place at the right time.

Paulo said that a new but expensive technique, Dry Freeze, was needed to remain competitive in the market now. “Our manioke, is facing stiff competition from Fijian kasava at the moment in New Zealand and Australia, because the Fijian kasava is dry-freezed and remains fresh, whereas ours loses its freshness. The Korean venture to turn squash and other root crops to powder at the Small Industry Centre came to a halt, because they also need the same technology.”

Paulo believed that if we were able to keep our produce fresh, over a long period of time, we would then be able to compete and fetch a better price in the market place. “For example, if we can store our squash and then release it to the market when we know that we can fetch a better price, we will be able to earn more.”  

But the difficulty, he said, was that it was virtually impossible for Tongans to preserve the freshness of our produce locally because of the high cost of electricity and fuel. “So we have to find ways to deal with these problems.” Paulo said that only government could invest in establishing such an expensive facility, possibly in an overseas country where the power was cheaper. “The facility may belong to government but it is for the use of the private sector.”

The initiative by government to establish a market in Pago Pago for Tongan produce was a determined and a definite move by government, “but since the market had been established it was now time for the private sector to use the facility.”

Meanwhile, the Director of Tonga Trade, Va‘inga Palu, said that following the success of Pago Pago, they were looking at establishing a similar market in Auckland, New Zealand for Tongan produce.