NUKU’ALOFA, Tonga — There’s an idea in development that where private capital exceeds public capital, regions do well. Why? Without private investment, countries are without enough equipment to enable productive labor—plain and simple. Private investors often see potential in such countries because the dearth of capital should lead to high returns, in theory. But too often inadequate governments and crippling policies have deterred investors, who as a group have by and large remained skeptical toward the efficacy of recent governmental reforms in developing countries. Take Tonga for example. Despite some successful reforms, the Friendly Islands have seemed anything but friendly to foreign investors in past years.
This small country comprised of three groups of islands lies in the South Pacific Ocean some 1,000 miles from New Zealand, whose proximity gives the country a vital role in Tonga’s continued development. And develop Tonga has: the country has been making good progress toward meeting the Millennium Development Goal commitments. The country has effectually reduced absolute poverty and educated a large portion of the population, as evinced by a 98 percent literacy rate. In 2013, the World Bank changed the country’s income classification from lower middle income to upper middle income. Health standards are for the most part good as well.
However, many problems threaten to undo these improvements. Notwithstanding the boosted income classification, Tonga has struggled economically. The country depends on aid and remittance flows, the latter of which decreased in the wake of the global financial crisis. Despite this decrease, aid and remittances continued through 2012 to offset an overall trade deficit, leading to a balance of payments surplus. Refined petroleum accounts for 20 percent of Tonga’s imports though, and the combination of increasing fuel prices and decreasing remittance flows plagues the country. Moreover, economic sectors like agriculture and fisheries have experienced a severe reduction in output. From all this, the Asian Development Bank concluded that “nurturing private-sector-led growth is essential” in helping the country develop, which would ensure that poverty stays low and education stays high.
So what are the incentives for investors to consider Tonga?
Incentives have admittedly been few in the past decade. Entrepreneurs faced onerous business licensing regulations, commercial law was far from comprehensive, hampering lenders, and acquiring land proved difficult, with Tonga ranking 146 out of 188 countries in ease of registering property, according to a World Bank assessment.
These facts will discourage investors of course, but Tonga is making sincere efforts to reform. Obtaining a business license takes about two days now, whereas it took 30 in 2007. Tonga has an electronic company registry now, lending more organization to the legal framework. A commission now exists for inquiring into land-related issues, and leasing by landowners living abroad is helping people make use of hitherto neglected land.
In addition, the government completed a plan in 2010 to develop the country’s infrastructure over the following five years. Succeeding accomplishments, such as the rebuilding of Nuku’alofa’s commercial district after it was destroyed in protest, demonstrate the country’s current political stability. Political corruption is a common deterrent to foreign investment; however, note that Tonga has achieved marked improvements in its control of corruption, according to the World Bank. Lastly, to mitigate its oil-import dependency, Tonga, with the help of New Zealand, has been switching over to renewable energies.
Thus, while investors have reason for caution, they should watch for developments in Tonga that might quickly make the country a smart place to invest. The economic climate in Tonga still needs to improve, but even in 2014 the World Bank ranked the country in the top 30 percent of 189 economies for ease of doing business within its borders.
– Ryan Yanke
Sources: World Bank, Tonga Chamber of Commerce and Industry, Observatory of Economic Complexity, Tonganz, New Zealand Aid Programme, UNICEF, Asian Development Bank 1, Asian Development Bank 2, Doing Business 1, Doing Business 2, The Bottom Billion by Paul Collier