Labor Peace Plan: ticking the economic box

Penny Wong, Australia’s new foreign minister, has made a quick trip to the Pacific Islands region in her first week in office. Wong’s intentions appear to be twofold: to counterbalance Chinese Foreign Minister Wang Yi’s eight-nation Pacific tour, also this week, and to prove to the region – from the outset – that relations with the leaders of the islands of the Pacific are a priority for the Labor government. As she said in a speech Thursday in Suva, “we will work with you to make our Pacific family even stronger.”

During the election campaign, Labor released their ‘Plan for a Stronger Peaceful Family’, which drew a positive response. It takes the previous administration’s Pacific Step-up – a foreign policy priority aimed at strengthening ties with the Pacific – and intensifies it further. It also appears to be responding to a decade of calls from Pacific policy experts for a new approach, such as introducing family-related migration routes to Australia from the Pacific.

The Labor Party’s “Pacific Plan” ticks a lot of boxes. But there are also some that are not controlled. And one of them is essential to the security of the region: economic growth.

Economic growth is considered in the Pacific Plan as one of the many outcomes of the government’s proposed aid projects (which have yet to be defined). It is not a central policy objective that will help build a “stronger Pacific family”. There is also no explicit wording identifying economic growth as a key strategy for building regional strength. Rather, it is implicit in labor mobility policies. It is a problem. Economic growth should be an unambiguous part of Australia’s Pacific strategy, not least because economic strength acts as a bulwark against China’s easier path to the Pacific: competitive lending.

Research shows that there would be more benefits to the Pacific region than those provided by Australia’s annual aid contribution, if only 1% of the Pacific population worked permanently in Australia.

The research estimates that due to the pandemic, Pacific island nations risk losing a decade of development. On top of this, the growing youth population is putting pressure on labor markets across the Pacific, where opportunities for economic diversification are limited. Remittances – money sent home – are increasingly becoming a dominant and essential feature of the national incomes of Pacific island nations.

Almost two-fifths of Tonga’s gross domestic product (GDP) and one-sixth of Samoa’s GDP are fueled by remittances. In both countries, about four out of five households receive remittances. This dependency is not unique to Tonga and Samoa; Across the Pacific, remittances are helping households survive closed borders and disasters that continue to devastate dozens of communities.

Australia’s labor mobility programs and permanent migration to the country have the potential to contribute the most to economic development in the Pacific, as living and working in Australia provides the opportunity to send money home . Research shows that there would be more benefits to the Pacific region than those provided by Australia’s annual aid contribution, if only 1% of the Pacific population worked permanently in Australia.

There is no doubt that remittances can bring immense economic benefits to the region. But the cost of sending remittances in the Australia-Pacific corridor is consistently high, even after years of policies designed by the Australian government and Pacific central banks that have tried to reduce them. Tens of millions of US dollars per Pacific country per year are levied on fees. These are millions that could be injected into struggling economies each year, and directly into households, if remittance costs were reduced.

Electronic banking in rural PNG (DFAT/Flickr)

Tackling the costs of remittances is difficult, but there are options at hand.

The first is to increase competition by dismantling exclusive contracts that prevent most transfer operators from accessing the most popular transfer method: depositing cash at Australian post offices. Exclusive contracts limit competition, leaving consistently high fees (in some cases in the Australia-Pacific Corridor up to 17% of the nominated amount). Higher fees allow the dominant firm to operate a large network of agents in remittance corridors with relatively low overall monetary value, but the competition will reassure the market that its price is not inflated.

High remittance prices are complicated by a lack of market transparency. Transfer operators can take advantage of hidden fees or exchange rate hikes without the knowledge of the sender. The low digital literacy of Australia’s Pacific Islander diaspora compounds the problem, although Send MoneyPeacefula price comparison website, is an excellent government initiative to meet the challenge.

The Australian Competition and Consumer Commission (ACCC) may require transfer providers to show upfront fees and exchange rate markups. It can also target ‘debanking’, an uncompetitive practice aimed at preventing private companies from using the banking system because of their faster transfers and inexpensive and transparent fees.

Banks aren’t always the bad guys. The Tongan Development Bank has a pilot program, ‘Ave Pa’anga Pau, which offers low-cost transfers from Australia to Tonga at around 4.5%. Users must purchase digital vouchers instead of depositing cash (the preferred method). For people living in one of Tonga’s 36 inhabited islands, emergency access to digital finance may prove challenging, but it could be replicated in other Pacific countries if the results are positive.

Currently, Pacific Central Banks are establishing a regional Know Your Customer (KYC) facility for due diligence and anti-money laundering processes. This will help streamline identification processes for people with limited access to personal identity documents.

But central banks can do more, like administer the Australia-Pacific remittances corridor as part of their daily currency transfers and absorb administrative costs into the foreign aid budget.

Tackling the cost of remittances is a challenge. But the benefits far outweigh the effort required to think creatively and be bold in financial reform. And given all the rhetoric about strengthening the Pacific – from both sides of government – reducing the cost of remittances for the tens of thousands of Pacific Islanders who will migrate to Australia under its new categories Pacific visas could be the centerpiece of government policy.