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Fiji the Failing State

April 23, 2009

Fiji: The Flailing State
Lowy Institute Policy Brief
April 2009Fiji: The Flailing State

What is the problem?

Fiji President Iloilo’s abrogation of the 1997 constitution has
entrenched a military dictatorship in Australia’s backyard. Commodore
Voreqe Bainimarama’s dominant leadership of the interim government and
his exclusion of dissenting voices will exacerbate and accelerate
economic decline in Fiji and cause unprecedented hardship to Fiji’s
population. The economic implications threaten the whole Pacific
Islands region and challenge Australia’s capacity to demonstrate
regional leadership.
What should be done?

Australia’s response to developments in Fiji must differentiate
between political responses – which need to be strong and unambiguous
– and economic responses, which need to take into account the rapidly
deteriorating economic situation in Fiji and the impact of Fiji’s
economic collapse and the global financial crisis on the wider Pacific
Islands region. The Australian government should work with the
international financial institutions to develop a package of
assistance for the region. In addition, a second-track process of
dialogue should be established between Australian and Fiji private
sector representatives and the international financial institutions to
build bilateral confidence and plan for future financial assistance
for Fiji which links assistance to measurable reforms by the interim
government.

JENNY HAYWARD-JONES
Program Director
The Myer Foundation Melanesia
Program at the Lowy Institute
Policy Brief
Fiji: The Flailing State

The political situation
Fiji’s President Ratu Josefa Iloilovatu Uluivuda announced on 10 April
2009 that he had abrogated Fiji’s 1997 constitution, appointed himself
head of state, revoked the appointment of all judicial officers and
would direct an interim government to hold parliamentary elections by
September 2014. The President’s announcement followed a Court of
Appeal judgement on 9 April which ruled that Commodore Voreqe
Bainimarama’s December 2006 coup was illegal and directed the
President to appoint an independent third person to lead an interim
government and call for fresh elections under the 1997 constitution.

On 11 April, President Iloilo reappointed Bainimarama as interim Prime
Minister, who subsequently imposed strict censorship on the media,
deported Australian journalist Sean Dorney, arrested a number of
opponents and removed the Reserve Bank Governor, Savenaca Narube.

The President’s decision and Bainimarama’s actions have entrenched a
new political and economic reality for Fiji and a military
dictatorship in Australia’s backyard. The developments in Fiji have
attracted international condemnation, including most loudly from
Australia and New Zealand. Fiji is likely to be suspended from the
Pacific Islands Forum and the Commonwealth.

Australia, having employed almost every manoeuvre from the diplomatic
playbook on responding to coups to no avail, nevertheless must
continue to protest against developments in Fiji and isolate the
interim government.

Australia has to send a clear message to Commodore Bainimarama that
his actions are not only unacceptable politically but have serious
economic implications that go beyond Fiji. The economies of a number
of Pacific Island countries will feel the consequences of his actions.
The Australian government, in concert with Pacific Island governments,
will need to develop a strategy to pressure Fiji’s interim government
to deliver on its responsibilities to its people and its partners in
the region. Bainimarama’s moves have severely limited Fiji’s capacity
to respond to the global financial crisis and deliver on its regional
responsibilities.

Politically, Australia cannot reward Fiji’s interim government for
Commodore Bainimarama’s actions. Rather it should use its economic
influence to apply pressure to stabilise Fiji’s economy and prevent a
meltdown and the ensuing regional contagion.
Economic consequences
Fiji’s economy, once a leader in the Pacific Islands region, has been
hit by a triple whammy of the loss of business confidence following
the December 2006 coup, the impact of the global financial crisis on
demand for Fiji tourism and exports, and devastating floods in January
2009. Tourism, wholesale and retail trade, hotels and restaurants,
manufacturing, agriculture (including sugar), forestry and fisheries
sectors, have all slumped and further decline is predicted in the
finance, insurance, real estate and business services sector. 1
Private sector losses from the floods alone are estimated at over
US$160 million. 2

The events of 10 to 14 April, and in particular the removal of the
respected Reserve Bank
Governor, will destroy what is left of business confidence and deter
potential foreign investors. Fiji faced a serious liquidity crisis
even before 10 April; the negative outlook for the economy will be
dramatically worse as a result of the actions of President Iloilo and
Commodore Bainimarama.
The Reserve Bank of Fiji had just forecast a contraction of the
economy by 0.3 per cent in 2009. 3 This follows very low growth of
just 0.2 per cent in 2008 and a contraction of 6.6 per cent in 2007.
Exports are projected to decline by 12.2 per cent in 2009. Investment
in 2009 is estimated to fall to about 13 per cent of GDP, down from an
estimated 15 per cent of GDP in 2008. 4

Official foreign reserves at the end of February 2009 were FJ$674
million, equivalent to around 2.7 months of goods imports. 5 The very
real risk that the abrogation of the constitution will worsen the
liquidity situation was recognised by the Reserve Bank of Fiji’s
introduction of measures to tighten exchange controls on 14 April in
order to protect foreign reserves. 6

Fiji’s interim government announced a 50 per cent cut to the
operations of all public sector agencies on 30 March. Reductions of
this magnitude will translate into job losses and cuts to essential
service delivery. The public sector in Fiji employs some 52,000
people. Tourism, which contributes 20 per cent of Fiji’s GDP and
provides 10,000 jobs, is already under threat from the softening
demand caused by the global financial crisis. An estimated 540,000
tourists visited Fiji in 2008 (43 per cent of whom were Australians).
7 Heavy discounting has meant that even though tourist arrival numbers
were high, revenue derived from tourism had been low for some time and
many resorts have been operating at a loss. Fiji tourism may suffer
further from the negative images of public emergency rule being
broadcast on Australian and New Zealand television screens and from
heightened government travel warnings.

Social consequences
The relative calm in Fiji since the 2006 coup and the lack of obvious
public protest following the President’s abrogation of the
constitution suggest there is little likelihood of a violent uprising.
Many prominent citizens of Fiji attribute the apparent apathy in the
country to fear of repercussions from the security forces rather than
acceptance of the political realities. 8
However, the possibility of civil unrest, particularly when job losses
and service delivery decline increasingly hurt families, cannot be
ruled out. The introduction of formal censorship on 11 April and
action by the security forces against opponents of the interim
government will make it more difficult for opposition to be voiced and
will cause significant frustration in society.

The Fiji Bureau of Statistics estimates the average incidence of
poverty across Fiji at 35 per cent. 9 Poverty is found in urban
squatter settlements and also in rural areas. 10 While poverty in Fiji
has traditionally been manifested by low incomes, inadequate housing,
and poor access to health and education services, rather than hunger,
the liquidity crisis and rising unemployment in 2009 will put
increasing pressure on family incomes and the cost of living. As 51
per cent of Fiji’s population live in urban areas, the option to
resort to subsistence lifestyles is not available to all. A
humanitarian crisis requiring food aid to the poor cannot be ruled
out.

Regional fallout
Fiji’s political crisis is indeed grave but the economic crisis
already hurting Fiji citizens also has serious implications for the
Pacific Islands region and therefore for Australia. The full effects
of the global financial crisis on the region are yet to be realised
and the ripple effect of the deterioration of the Fiji economy on the
wider region is difficult to predict with accuracy. However, Fiji’s
importance as a regional economic hub means what happens in Fiji
matters to the region.
It is unlikely that many countries in the region, linked to Fiji
through vital transport, trade and education services, will be able to
afford to suspend their relationships with Fiji for a prolonged
period. Some leaders in the region have reportedly already expressed
concern that Fiji’s suspension from the Pacific Islands Forum could be
harmful to their own economies. 11

Australia’s own efforts to launch PACER Plus trade negotiations in the
region require the participation of Fiji in order to be successful. In
responding to the crisis, Australia will need to be sensitive to the
economic needs of the region and find a way of persuading Fiji’s
interim government to deliver on its regional economic
responsibilities.

Suva is home to the secretariat of the Pacific Islands Forum and a
number of other important regional institutions. The main campus of
the University of the South Pacific, serving up to 10,000 students
from twelve Pacific Island nations, is in Suva. Fiji is also home to
the regional offices of a large number of international organisations
and nongovernment organisations, which use Suva as a base for their
regional operations. The restrictions on free speech and assembly
imposed by Commodore Bainimarama and Fiji’s economic decline will make
the operations of regional organisations more difficult.

Fiji is also an aviation hub for the region. A number of airlines
provide international services through Nadi airport, including Qantas,
Air Pacific, Air New Zealand, Korean Airlines, and a number of Pacific
Islands airlines. 12 Air Pacific, which has been serving the Pacific
region since the 1940s, operates services to Australia, New Zealand,
Samoa, Tonga, Vanuatu, Solomon Islands, Kiribati, Tuvalu, Hong Kong
and the United States. The micro states of Kiribati and Tuvalu rely on
Fiji based airlines and flight connections, which transport not only
passengers but essential goods.

Fiji’s ports are an important crossroads for shipping services between
North America, Asia, Australia, New Zealand and the island states.

Fiji’s two biggest towns, Suva and Lautoka, have important
trans-shipment ports for the Pacific Islands region. Fiji was due to
be the hub of the Pacific Islands Forum’s proposed bulk oil purchasing
initiative, designed to mitigate the negative effect of high oil
prices on the region. This initiative will be more difficult to
implement without Fiji. 13

Implications for Australia
The crisis precipitated by events in Fiji has provided the Rudd
government with its most significant foreign policy challenge in the
region to date. Ongoing instability in Fiji has reputational
consequences for Australia’s political leadership in the region. The
United States and European Union look to Australia to solve problems
in the South Pacific. The Rudd government came to power promising to
improve Australia’s relations with the Pacific. Australia is hosting
the Pacific Islands Forum leaders’ summit in Cairns in August 2009 and
will then take over the chair of the Forum for a year. A failure to
deal effectively with the serious domestic and regional effects of the
crisis in Fiji, however complex the policy challenge it poses, will
harm the Australian government’s regional standing.

Australia rightly abhors the political leadership of countries like
Myanmar, North Korea and Zimbabwe, and shares the concerns of the
international community about the lack of human rights and level of
poverty in these countries. The Australian government lacks the
leverage to improve the situation in any of these countries. Our
people-to-people links, trade and investment in the three countries
are minimal. Canberra relies on like-minded governments with greater
influence to push for changes in Myanmar, North Korea and Zimbabwe.
Now the onus is reversed. In the case of Fiji, the international
community looks to Australia to exploit its deep connections with Fiji
and exert influence for change.

Fiji, following difficulties in its diplomatic relationships with
Australia and New Zealand, has been pursuing a ‘look north’ policy,
courting investment and aid from China. China has provided loans for
major hydroelectric and highway projects and is perceived by to be a
friendly partner because of its uncritical approach to the interim
government.

Australia’s deep connections with Fiji, however, mean it remains the
dominant foreign influence in Fiji. Australia is by far the largest
investor in Fiji, with the value of total investment estimated at up
to A$2 billion. 14 Australian investors in Fiji range across a number
of sectors, including banking, financial, insurance and legal
services, tourism, transport, logistics and manufacturing. Three of
Australia’s four major banks – ANZ, Westpac and Commonwealth
(Colonial) – dominate the Fiji market. Australian insurance companies
with a presence in Fiji include Queensland Insurance (Fiji) Ltd (QBE),
Fiji Care Insurance Ltd, AON, Marsh Ltd and Tower Insurance. 15 The
partnership between Air Pacific, Fiji’s national airline and Qantas is
the most enduring in the Pacific. 16 Qantas owns 46 per cent of Air
Pacific, with the government of Fiji holding 51 per cent.

Two-way merchandise trade between Fiji and Australia was worth A$502
million in 2007-2008. Australia is the second-largest merchandise
import market for Fiji, with Australia holding a 22.8 per cent share
of the market. Two-way services trade totaled A$994 million in
2007-2008, with Fiji holding the lion’s share of $831 million, thanks
to the popularity of holidays in Fiji amongst Australians. 17

It is worth noting that previous delays from Canberra in addressing
incipient crises in the Pacific Islands region have come at a cost.
Australia could have intervened in Solomon Islands when ethnic
conflicts, land disputes and signs of a break-down in law and order
began in 1999. The delay in developing an appropriate response while
the situation deteriorated and law and order broke down completely
meant the policy response required and eventually implemented became
much more complex and expensive, costing the Australian government
over $1 billion in expenditure on the Regional Assistance Mission to
Solomon Islands.
Policy recommendations to prevent economic meltdown
The impact of the global financial crisis has created new imperatives
for domestic economic policy, and for international economic
cooperation. Governments all over the world have introduced radical
policies to bolster their own economies and agreed to boost
cooperation with other governments in unprecedented ways.

The Australian government will be under pressure from regional leaders
at the Pacific Islands Forum leaders’ summit to assist the region to
respond to the global financial crisis and the fallout from Fiji’s
economic crisis. Prime Minister Rudd, as the host, will want to be
seen to be generous and inclusive. An offer of financial assistance to
the region which included Fiji would be understood and appreciated by
the region and justifiable on humanitarian rather than political
grounds.

Policy recommendation 1: Australia should work with the international
financial institutions to develop a flexible package of assistance for
the region.
For example, a coordinated contingent credit line provided by the IMF,
ADB and World Bank could be facilitated by Australia and New Zealand
and made available to the region – to be drawn on by countries
affected by the global financial crisis or by the crisis in Fiji. The
credit facility should also be open to Fiji on a conditional basis;
this would commit the interim government to reforms.

Policy recommendation 2: The Australian government will need to relax
its principled opposition to lending by international financial
institutions to Fiji.
Direct bilateral engagement on economic assistance is unlikely to be
palatable to Australia. The international financial institutions – the
IMF, World Bank and Asian Development Bank – are best placed to offer
the necessary financial assistance to Fiji as they are able to engage
as non-political actors. Financial assistance by these institutions to
Fiji can effectively be undertaken only with the tacit approval of
Canberra and Wellington. With proper conditionality, the discipline
imposed by the international financial institutions will put pressure
on the interim government, not reward it.

Policy recommendation 3: Australia should work with other like-minded
countries to encourage China to channel any further financial
assistance to Fiji through the international financial institutions.
The Fiji interim government is likely to request further assistance
from China to help it respond to its liquidity crisis. China should be
convinced to direct this assistance through the international
financial institutions, consistent with the commitments it made at the
G-20 meeting in London on 2 April on delivering resources to
developing countries through the international financial institutions,
18 rather than bilaterally. This would send an important signal to
Fiji’s interim government that its only option was to deal with the
international financial institutions and adopt the disciplines they
recommend. The Australian government’s engagement with China on Fiji
would be broadly consistent with its ongoing dialogue with China on
the importance of transparency and accountability in the delivery of
aid to the Pacific Islands region.

Policy recommendation 4: Australia should establish a second-track
process of dialogue
with Fiji to build confidence and plan for future financial assistance.
Any assistance to Fiji poses a risk that it will signal acceptance of
the interim government. Financial assistance in such a difficult
economic environment and without sufficient commitment from the
interim government may well be ineffective. Australia will need to
manage the risks to any assistance very carefully. One potentially
useful means of managing this risk would be to establish a
second-track process to prepare a path for financial assistance. A
second-track process could be presented as helping further to
marginalise the interim government while supporting and empowering
civil society in Fiji. A carefully structured dialogue between
Australian and Fiji economic experts, banks, businesses and NGOs, with
the participation of the international financial institutions and with
a conduit back to respective governments, would help to build
confidence following the recent significant shocks to the economy.
Such a dialogue, which would focus on the immediate economic
challenges, could devise modalities for a package of financial
assistance that would appeal to the interim government and put
pressure on it to make the necessary economic and political reforms.

Policy recommendation 5: Australia needs to move quickly to safeguard
its economic relationship with Fiji and protect Australian
investments.
Fiji’s interim government has not yet sought to nationalise private
investments, seize private land or deny foreign investors the right to
repatriate profits. While there is no precedent for such action in
Fiji, the Reserve Bank of Fiji has announced measures that will slow
down the process of repatriating profits and give it capacity to defer
the process if the foreign exchange situation deteriorates.

Conclusion
Australia has deeper links with Fiji than any other country or
international organisation. Australia’s people-to-people and
business-tobusiness relationships with Fiji, built up over more than a
century, need to endure. They impose on both Australian and Fiji
authorities a duty of care to protect the bilateral relationship for
future generations.

How Australia reacts to Fiji’s economic crisis will be remembered by
the people of Fiji and the region. If Australia stands aside, no
matter how rightly principled its approach to illegal developments in
Fiji and how well understood its approach is in educated circles in
Suva, it will be sending an important and enduring signal about the
limits of Australia’s interests in its neighbourhood. Much – including
much beyond Fiji – now rests on the strength, creativity and wisdom of
Canberra’s response.

NOTES
1 Reserve Bank of Fiji, Revised economic projections, 9 April 2009.
2 Asian Development Bank, Asian development outlook 2009: rebalancing
Asia’s growth, March 2009, p 240.
3 Reserve Bank of Fiji, Revised economic projections, 9 April 2009.
4 Reserve Bank of Fiji, Economic review, March 2009.
5 Ibid.
6 Reserve Bank of Fiji, Reserve Bank of Fiji announces policy changes
to exchange controls.
Press release, 14 April 2009.
7 Republic of Fiji Ministry of Finance and National Planning, Raising
economic growth and alleviating poverty. Economic and fiscal update:
supplement to the 2009 Budget Address. 2008, p129.
8 Jenny Hayward-Jones, Interviews conducted with prominent citizens in
Fiji during the week of 16 to 20 February 2009.
9 Fiji Islands Bureau of Statistics. Poverty indicators, 2009:
http://www.statsfiji.gov.fj/Social/poverty_indicators.htm.
10 Asian Development Bank, Asian development outlook 2009: rebalancing
Asia’s growth, p 271.
11 Samisoni Pareti, Forum leaders issues Fiji an ultimatum. Islands
Business, February 2009.
12 Fiji Trade and Investment Bureau. Investing in Fiji:
communications, 2009: http://www.ftib.org.fj/fijicommunications.cfm.
13 Pareti, Forum leaders issues Fiji an ultimatum.
14 Australia-Fiji Business Council, Estimate of Australian investment
in Fiji. Personal communication to author, 2009.
15 Australian Department of Foreign Affairs and Trade. Republic of the
Fiji Islands country brief, 2008:
http://www.dfat.gov.au/geo/fiji/fiji_brief.html.
16 Australian Agency for International Development. Pacific economic
survey 2008: connecting the region, 2008:
http://www.pacificsurvey.org/UserFiles/file/Pacific%20Economic%20Survey08.pdf.
17 Australian Department of Foreign Affairs and Trade. Fiji fact
sheet. 2009: http://www.dfat.gov.au/geo/fs/fiji.pdf.
18 G20 meeting London. Declaration on delivering resources through the
international financial institutions, 2009:
http://www.g20.org/Documents/Fin_Deps_IFI_Annex_Draft_02_04_09_-__1615_Clean.pdf.
ABOUT THE AUTHOR
Jenny Hayward-Jones is Program Director of The Myer Foundation
Melanesia Program at the
Lowy Institute. Prior to joining the Lowy Institute Jenny was an
officer in the Department of
Foreign Affairs and Trade for thirteen years, serving in the
Australian missions in Vanuatu and Turkey, where she was Deputy Head
of Mission from 2004 to 2007. She worked as Policy Adviser to the
Special Coordinator of the Regional Assistance Mission to Solomon
Islands from its inception in July 2003 and in 2004 and was a member
of the election monitoring team in Solomon Islands in 2001. Jenny
holds a BA (Hons) in political science from Macquarie University and a
Masters degree in International Relations from Monash University; her
Masters thesis focused on governance and political change in Vanuatu.
Tel: +61 2 8238 9037
jhayward-jones@lowyinstitute.org

LOWY INSTITUTE FOR INTERNATIONAL POLICY
31 Bligh Street
Sydney NSW 2000
Tel: +61 2 8238 9000
Fax: +612 8238 9005
http://www.lowyinstitute.org
POLICY BRIEF
April 2009

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4 Comments leave one →
  1. Mark Manning permalink
    April 23, 2009 2:03 AM

    I’m sorry , but tell us something we don’t already know !

  2. Corruption Fighter permalink
    April 23, 2009 4:57 AM

    Have been trying to catch up with everything going up on the blogs and have just noticed this prediction by RFN from 16th April:

    “Frank has plans to close Australia and NZ High Comms
    April 16, 2009

    We can reveal here that Frank has plans to close the Australian and New Zealand High Commissions if he sees it fit.

    These insiders say Frank will also adopt tougher actions on the two countries by zeroing in on its Fiji offices, if they apply stricter
    sanctions or lobby for the termination of RFMF’s current peacekeeping contract with the UN.

    While it may sound ridiculous to us sane people, we must always remember that we are dealing with madness here which makes his plans stupid but possible – he’s actions thus far has proved just that!”

    Has anyone got any ideas as to why Frank hasn’t gone ahead. It’s been one week since the RFN post appeared. Or has Frank finally realized that by kicking out the NZ and Ozzie ambassadors would the best way to completely kill off the tourist industry?

    As far as the peacekeepers issue is concerned he can’t pin anything on Australia and New Zealand because it sure looks like the UN Security council is making up its own mind and the Kiwis or the Ozzies haven’t got a seat on the Security Council.

  3. Fiji Democracy Now permalink
    April 23, 2009 5:40 AM

    Thanks @ SWM for posting this excellent analysis of Fiji’s current sorry state.

    The censorship of our mainstream media makes it all the more important for Freedom Bloggers like SWM to provide as much news and information about Fiji as possible, not just for our own people, but for supporters of democracy around the world.

    In regard to censorship, our great fear is that the dictator and his clique will use it to cloak their acquisition of prime assets, including land, which is easy for them when they are ruling by decree.

    Let’s face it, after abrogating the constitution and setting up their illegal, totalitarian regime, there is nothing to stop them from enriching themselves simply by issuing a decree that says “this now belongs to so-and-so.”

    The writing is on the wall. You only have to look at the activities since the coup of the extended family of the dictator’s wife to know that illegality is in their blood.

    And don’t expect Adolf Sayed-Khaiyum to waste any time in enriching himself by manipulating the law and by writing up decrees for the puppet president that will favour his interests and those of his business associates.

    It is sad but true. The illegal dictatorship of Fiji is already well down the path that Burma has taken, where those in power have trampled on the population to maintain power and make themselves very rich in the process.

  4. Karl Williams permalink
    April 23, 2009 6:22 AM

    I agree Mark!

    Go to another thread, “President calls for a Coalition of the Willing” etc by Tui Savu for a breath of fresh air and some decisive action.

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