Abstract
Among the 14 Pacific Island countries (PICs), only Papua New Guinea has fossil fuel resources. None of the remaining 13 PICs has any energy sources. Consequently, all the 13 PICs are totally dependent on oil imports for their economic activities. Recent surges and volatility in oil prices have had serious economic re-percussions on economic growth. Since PICs have limited foreign exchange earning capacities, as they have very narrow range of exports and are highly dependent on foreign aid, high oil prices in recent months have seriously tested their economic resilience. This paper applies the recently developed panel analysis procedures to five major PICs, namely Fiji, Samoa, Solomon islands, Tonga and Vanuatu with a view to assess the impact of oil price on economic growth. The findings are that oil price, economic growth and international reserve are cointegrated. The study findings are that although in the long run there is no long run causality relationship between these variables, in the short run the causality linkage runs from oil prices and interna-tional reserve to economic growth. The paper concludes with a brief discussion on policy options.
Highlights
During an eight-year period (2000-2007), oil prices increased three-fold
In the context of inadequate database in Pacific Island countries (PICs), our modeling strategy for panel analysis has been constrained to be simple and the number of variables minimum, Since all the five PICs under study are oil-dependent, affecting eco- nomic activities ranging from subsistence agriculture and fishing to tourism, it is hypothesized that rise in oil price has a negative impact on growth
While data series on real GDP and foreign exchange reserves are drawn from Asian Development Bank [7] and United Nations Economic and Social Commission for Asia and Pacific [2], data series on oil price in United States (US) dollar per barrel are sourced from International Energy Annual
Summary
During an eight-year period (2000-2007), oil prices increased three-fold. From early January 2008, there were further increases in oil price, which reached the record level in mid 2008 at US$145 per barrel. The commodity price boom, since the beginning of the decade with oil price rising along with gold price doubling and copper prices increasing four fold, has been a big boon to PNG, in terms of improvement in terms of trade as well as resultant rise in its export earnings (Australian Agency for International Development, [1]). As all small PICs share many commonalities in terms of limited resource and export bases, we propose a panel data analysis for five PICs, namely Fiji, Samoa, the Solomon Islands, Tonga and Vanuatu in respect of which we have consistent time series of data (World Bank [6], Asian Development Bank [7]) from early 1980s, for conducting the empirical investigation. The fourth section contains the summary and listing some conclusions with policy implications
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