T.K. Jayaraman* Fiji National University Nasinu Campus, Fiji Islands. Chee-Keong Choong University Tunku Abdul Rahman Kampar, Perak, Malaysia

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1 Which is more effecive for romoing economic growh in Pacific island Counries: aid, remiances or foreign direc invesmen? An emirical sudy of Fiji T.K. Jayaraman* Fiji Naional Universiy Nasinu Camus, Fiji Islands Chee-Keong Choong Universiy Tunku Abdul Rahman Kamar, Perak, Malaysia Markand Bha The Universiy of he Pacific Suva, Fiji Islands Absrac The 4 Pacific island counries (PICs) are well known for heir deendency on aid inflows o sulemen heir domesic savings since heir indeendence in he second half he 20 h cenury. As domesic markes are oo small, foreign direc invesmen exclusively in roducion for domesic consumion has been leas aracive. Mos of FDI inflows have been in ourism relaed secor aciviies including resor develomen and hoels. Furher, in recen years PICs are emerging as he leading reciiens of remiances from increasing number of islanders working overseas on emorary work-ermis as well as ermanen residens. This aer seeks o assess he relaive effeciveness of aid, remiances and FDI inflows on growh by aking u Fiji as a case sudy. The choice of he counry for sudy is dicaed by he availabiliy of daa series ( ) on a consisen basis. The findings are remiances have roved o be he mos effecive of hree sources of inflows sulemening domesic savings and romoing economic growh. Keywords: Foreign aid, remiances, foreign direc invesmen, Fiji, Coinegraion * Corresonding auhor. kjayaraman@yahoo.com P a g e

2 . Inroducion Pacific island counries (PICs), since heir oliical indeendence in he 970s, have been among he world s larges reciien counries of official develomen assisance (ODA), oularly known as aid. In he lae 990s, he focus of aid by donor counries, alhough rimarily dicaed by geooliical ineress and secondarily influenced by humaniarian consideraions, underwen a change. The donors began o cu down aid for budgeary suor bu direced i more owards growh enhancing hysical infrasrucure, such as ors, jeies and rural roads. In recen years, noably from he early 2000s, seadily rising inward remiances sen by migran islanders residing and working in Ausralia, New Zealand and Unied Saes and Euroe, have exceeded aid inflows, boh exressed as ercenages of GDP, o PICs. On he oher hand, annual foreign direc invesmen (FDI) inflows have been less and flucuaing. The annual FDI inflows o PICs were confined o ourism secor, in aricular wih reference o hoel and resor faciliies, as roducion relaed invesmens were no aracive because of smallness of domesic markes. While here are many sudies examining he roles of various rivae caial inflows such as sudies on aid (World Bank, 993; Gounder, 200; Jayaraman and Choong, 2006a; Jayaraman and Ward, 2006; Chen and Singh, 204); sudies on remiances (Prakash and Gounder, 2009; Jayaraman e al., 2009, 200, 20) and sudies on FDI (Gani, 999; Jayaraman and Choong, 2006b; Jayaraman and Singh, 2007). However, here has been no single sudy on he relaive effeciveness of aid, remiances and FDI, aken all ogeher. The objecive of his aer is o fill he ga by underaking a case sudy of Fiji over a eriod of 33 years ( ). The res of he aer is organized as follows: he nex secion II reviews he rends in annual flows of aid, remiances and FDI; secion III gives a brief background of rends in he flows of aid, remiances Fiji s economy, which is he focus of our sudy; secion IV describes he emirical model and daa sources; Secion V discusses he resuls; and Secion VI concludes wih some olicy imlicaions. II. Aid, Remiances and FDI inflows in he Pacific Aid o PICs, which was urely in erms of bilaeral grans from donor counries, esecially from heir as colonial rulers, assised he reciien counries in financing recurren exendiures such as wages and salaries and oher housekeeing exendiures. Wih he end of he Cold War in he The 4 Pacific island counries (PICs) are: Cook Islands, Fiji, Kiribai, Reublic of Marshall Islands, Federaed Saes of Micronesia, Nauru, Niue, Palau, Paua New Guinea (PNG), Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuau. Among he 4 PICs, PNG is an oulier as is land, oulaion, naural resources wih oil and naural gas and oher minerals lace he counry far ahead of he oher 3 counries in erms of high growh oenial. Hence our sudy leaves ou PNG from he sudy focus. 2 P a g e

3 lae 980s, he rioriies of he advanced counries changed as hey aimed a rehabiliaion of he Eas Euroean saes. The downward rend in ODA o PICs began in he 990s. Wih ha, aid focus oo changed as emhasis was laid on growh enhancing invesmens in hysical infrasrucure. Consequenly, aid for budgeary suor declined subsanially, wih some donor counries esecially he Unied Kingdom disconinuing aid for recurring exendiures. Fiji, being more develoed wih significan skilled human resources and manufacuring base, has been radiionally receiving leas aid in erms of ercenages of GDP (Table ). Among he res, Solomon Islands has been he highes reciien of aid, mos of which has been from Ausralia as ar of rehabiliaion relief following he ehnic rios of he early 2000s and disruion in rouine civil adminisraion under Regional Assisance Mission o Solomon Islands (RAMSI) mouned by Ausralia and New Zealand. Table : PICs: Aid (ercen of GDP): Year Fiji Samoa Solomon Islands Tonga Vanuau (ave) (ave) (ave) (ave) Source: World Bank (204). There has been a rolonged, and sill coninuing, debae abou he role of exernal aid in romoing economic growh and develomen in PICs. The debae on aid effeciveness began in full earnes wih World Bank s sudy (993) in six volumes on PICs. The sudy described he erformance of PICs oor, calling i as a Pacific Paradox: oor growh in he mids of leniful aid, since PICs fared badly when comared o he similarly laced island counries in he Caribbean and Indian Ocean regions. Criics from he leading donor counries followed he World Bank sudy wih severe indicmen of aid wasage. Hughes (2003) led he criics by observing aid had failed PICs since he aid moneys were sen on governmen consumion; and furher bilaeral agencies did no have any condiionaliies aached o heir aid rogrammes and roer monioring of use of aid for he uroses i was inended, unlike in he case of loans and oher modes of assisance from inernaional funding agencies such as he World Bank and Asian Develomen Bank. Following hese criicisms, donor counries led by Ausralia which is he larges aid giver o PICs inroduced changes in he modaliies of aid delivery and monioring of aid uilizaion as well as coordinaion wih a view o reduce dulicaion of aid. Wih eriodical changes in governmens in donor counries, olicies also have also undergone major ransformaion adjusing o emerging 3 P a g e

4 securiy concerns in he Souh Pacific wih new layers led by China as a major ower in Asia and he Pacific (Claxon 205). In 204, Ausralia abolished he nearly fory year old Ausralian Inernaional Aid Agency (AusAID), merging is funcions wih he Dearmen of Foreign Affairs and Trade. The avowed urose was o suor Ausralian foreign and rade olicy in ursui of is naional ineress However, indicaions were clear ha aid would be scaled down he saemen ha is geograhic rioriy will be he Indo-Pacific region, esecially he Souh Pacific and Souh Eas Asia (Doolan, 203). The cus ever o he Ausralian aid rogram came ino effec in December 204. I is aniciaed would coninue o Howes and Pryke (204) esimaed aid would 33 ercen less han i was relaive o he revious governmen s final year of aid sending, (204). Ausralia has been he larges aid giver for many PICs. Is aid in erms of he GDPs of resecive PICS ranges from Nauru: 65 ercen, Paua New Guinea: 60 ercen; Vanuau: 40 ercen; Fiji: 30 ercen; Solomon Islands: 27 ercen; Samoa: 20 ercen; Tonga: 8 ercen. The cus in Ausralian aid are feared o have serious imlicaions for all he aid reciien counries in he Pacific (Wood, 205), as mos of he aid has been in recen years in growh enhancing areas, such as healh and educaion rojecs, which have long gesaion eriods. Remiances in he Pacific While aid inflows have been declining for one reason or anoher, he oher form of unrequied ransfer of resources is remiances. These ransfers have become seady and growing during he las wo decades. I has been noed by several sudies including World Bank (2006) and Browne and Mikeshima (2007). They have highlighed he growing oenial of emorary migraion schemes for unskilled ciizens of small remoe islands, which were inroduced in lae 2000s, as an exerimenal measure in resec of a few PICs. These schemes now cover major PICs, including Fiji which are execed o be muually beneficial as here was a serious shorage of suly of labour o work on orchards in Ausralia and New Zealand. Remiances have been found o be a boon for households in Pacific islands as elsewhere since hey have been sulemening disosable incomes of he reciien families (Chami and Fullenkam, 203). They are sen on consumion of clohing, food, medicine and sheler. They have also enabled hem o inves in educaion and healh care, besides invesmens in semi durable goods. They were also a suor o some families o underake simle food rocessing microenerrises such as ickles, chuney and condimens for local markes, since hey found ou remiances are a source of funding new roducion ooruniies for commercial uroses. As remiances relaxed credi consrains imosed by undeveloed financial secor, governmens realized immense oenial of remiances in riggering enrereneurial effors and are now encouraging financial insiuions o hel in channeling remiance inflows hrough formal banking channels. Banks have resonded in urn by oening more branches in urban as well as new branches in rural areas and inroducing mobile banking in inaccessible areas. These effors are execed o faciliae enhanced financial develomen by realizing greaer economies of scale in financial inermediaion. Table 2 shows Samoa and Tonga are he larges reciiens of remiances as ercen of GDP. 4 P a g e

5 Table 2: PICs: Remiances (ercen of GDP): Year Fiji Samoa Solomon is. Tonga Vanuau (ave) (ave) (ave) (ave) Source: World Develomen Indicaors (204). Foreign direc invesmen Since PICs financial and caial markes are undeveloed and domesic invesmen aciviies are small, caial inflows have no been remarkable. Furher, here are considerable insiuional and srucural rigidiies in facor markes as well, which have been aribued o cusomary land enure, resricing availabiliy of land, which have been a deerren o land based invesmen rojecs. Furher, we find ineres rae differenials have no layed any role. There are no financial asses which have emerged o be subsiuable and aracive enough from overseas invesors oin of view. Furhermore, ineres raes in PICs are found o be non-resonsive in he shor run o shifs in suly and demand. Prices do no adjus o equilibrae he demand for and suly of he limied financial asses, and mos of he adjusmen falls on quaniies raher han on rices. In hese circumsances, ineres rae seings do no lay any role in eiher aracing or deerring shor erm flows and hence moneary olicy has limied scoe for influencing shor erm caial inflows (Morling and Singh, 2006). The PICs have been increasingly areciaive of he fac ha in he ligh of he declining aid inflows, i would be more ruden o lace emhasis on FDI inflows, which have been acknowledged as he mos consrucive of all flows for he emerging markes. Above all, FDI inflows are less volaile and less rone o sudden wihdrawal due o shifs in senimen unlike ho moneys. The FDI inflows romoe economic develomen hrough he ransfer of new echnology and sillover efficiency only when suored by a high degree of absorive caaciy in erms of human caial and suorive rade regime in he reciien counry as oined ou by (Balasubramanyam e al., 996; Borenszein e al., 998; Xu, 2000; Kohaiboon, 2003). The erm FDI would normally refer o subsanial equiy sake and effecive conrol of enerrises. However, in he conex of growing services secor in develoing counries, a broader definiion seems o have been emerging. This now refers o non-equiy ariciaion by foreigners by way of licensing, franchising, join venures wih limied equiy ariciaion and R&D cooeraion (de Mello, 997). Hisorical ies wih he Unied Kingdom, Ausralia and New Zealand have largely influenced FDI flows o PICs in some secific areas. Mos of he FDI 5 P a g e

6 inflows o PICs in he as were rimarily of he naural resource exloiing ye: he former Ausralian owned Colonial Sugar Refinery (CSR), a lanaion venure in he 9 h cenury becoming a successful exor oriened invesmen and resor hoels; alm oil and cocoa lanaions in he Solomon islands in he 960s owned by Briish ineress, and una fisheries and canning by Jaanese invesors in he 980s and he cale ranches on Sano island of Vanuau, sulying beef exors o Jaan and Euroe. These naural resource based FDI inflows were laer on followed in he 980s by FDI in exororiened, labour inensive garmens and oher indusries due o deliberae olicies (Jayaraman and Choong, 2005; Gani, 999). Aside from agriculure-based indusries, he sun-sea-surf linked ourism aciviies induced in recen imes by subsanial FDI inflows from well- known inernaional resor-hoel chains. The hird ye of invesmen, known as marke seeking, was mainly limied o reail rade, as he oulaions of PICs were small. These included reailers including Burns Phil and Careners of Ausralia, which se u suermarke chains. In he early 990s, Jaanese invesors showed ineres in seing u exor-oriened ye of invesmens in ligh indusries. The Yazaki auomobile wiring harness lan in Samoa is a leading examle, which exored is roducs o car assembling lans in Jaan and Ausralia. The newly indusrialised counries such as Korea, Malaysia and Singaore also enered he scene. Their ineress are confined o he services secor. 6 P a g e Table 3: PICs: FDI Inflows (ercen of GDP) Year Fiji Samoa Solomon Tonga Vanuau Islands (average) (average) (average) (average) Source: World Bank (204). Table 3 resens ne FDI inflows o five PICs. In he earlier years, flows of FDI o Vanuau remained seady, unlike in he case of Fiji, where hey were negaive during some years. The aaren reason behind Vanuau being he leading reciien of FDI flows has been he very high degree of oenness of is economy, associaed wih is ure ax haven saus, since here is no direc axaion of any kind on local residens, ciizens or exariaes. Fiji wih is relaively a larger endowmen of skilled human resources and is new invesor friendly ax olicies and incenives since 20 have been aracing larger FDI inflows which is refleced in he rising ercenages. In more recen years, regional inegraion effors by PICs have offered ooruniies

7 o manufacuring indusries in Ausralia and New Zealand for locaing heir unis in Fiji for roducing consumer goods for he Souh Pacific region, as evenual eliminaion of rade ariffs and quaniaive resricions firs by Melanesian Searhead Grou of PNG, Fiji, Solomon Islands and Vanuau is likely o generae freer rade han oherwise ossible. III. Fiji s Economy Fiji amongs he 4 PICs is he only counry which is classified an uer middle income counry. Is er caia is $ 4375, while he oher PICs are classified as low income counries, wih er caia incomes below he hreshold level a US$ 025. Seleced key indicaors are resened in Table 4. Table 4: Fiji: Seleced Key Indicaors Land Area (Sq.km.'000) 8,270 Poulaion in 000 (203) 88 Per Caia GDP (US$) Curren rices (203) 4,375 Aid Per Caia in US$ (202) 8.2 Aid as ercenage of GDP (202) 2.7 Human Develomen Ranking (203) 88/87 Annual Average Growh Rae (%) (2009-3).9 Annual Average Inflaion (%) (2009-3) 4.8 Overall Budge Balance (% of GDP )(2009-3) -7.4 Curren Accoun Balance (% of GDP) (2009-3) -6.0 Source: World Bank (204). Fiji: Aid inflows, inward remiances and FDI inflows Fiji has been radiionally he leas reciien of aid amongs PICs. Is relaively broad based ax sysem as well a significanly large manufacuring secor has enabled Fiji o deend much less on aid. In more recen imes aid has decreased, as he meroolian counries had imosed sancion sand reduced aid flows following he miliary cous of 2000 and The coninued isolaion of he counry by donors since 2006 has conribued o decreasing annual aid flows o Fiji. On he oher hand increased migraion over he las wo decades of skilled eole, iniially insigaed by he wo miliary cous of 987, and by coninued uncerainies in oliical environmen afer 2006 cou, led o rise in remiances. In regard o FDI, desie iniial reacions o miliary cou in 2006 had adverse effecs, mauriy shown by inerim governmen in inroducing reforms all around including ax reforms and adoion of a more invesor friendly olicies wih a low cororae income ax rae and effors o bring back democraic framework and resoraion of sabiliy culminaing a new consiuion and fresh elecions encouraged flows of FDI in mineral and ourism secors (see Tables 5 and 6). 7 P a g e

8 Table 5: rovides daa on aid, remiances and FDI inflows o Fiji for he years ( ) Caial sock er Period/year caia (consan US$) Aid er caia (consan US$) REM er caia (consan US$) FDI er caia (consan US$) (ave) 7, (ave) 8, (ave) 9, (ave) 0, , , , Source: World Bank (204). Table 6: Fiji: Per caia GDP Growh Rae, and aid, remiances and FDI (% GDP) Aid (ercen of GDP) REM Period / year Growh Rae (ercen of GDP) (ercen of GDP) (ave) (ave) (ave) (ave) Source: World Bank (204). FDI (ercen of GDP) IV. Modeling, Daa and Mehodology The objecive of he sudy is o assess and comare he conribuions of foreign aid, remiances and FDI o economic growh of Fiji during a 33-year eriod ( ) and evaluae which one of he hree has emerged o be mos effecive. The emirical invesigaion herefore seeks o es he hyohesis ha aid, remiances and FDI are osiively associaed wih economic aciviies and growh in GDP. Model Our choice of he model sems from he Cobb-Douglas roducion funcion, along he lines emloyed by Luinel e al. (2008) and Rao e al. (2008) wih consan reurns and Hicks neural echnical rogress. y A k < < () 8 P a g e 0

9 where y = er caia ouu; A= sock of echnology; k = caial sock er caia; The Solow model assumes ha he evoluion of echnology is given by gt A A0e (2) where A 0 is he iniial sock of knowledge and T is ime. I is also lausible o assume ha: A f aid, rem, fdi ) (3) where ( aid = aid inflows in consan US dollars er caia rem = inward remiances in consan US dollars er caia fdi = foreign direc invesmen in consan US dollars er caia We ener aid, rem and fdi as shif variables ino he roducion funcion, noing labour and caial as fundamenal and condiioning variables exlaining growh: The Cobb-Douglas roducion is modified as gt y ( A 0 e aid rem fdi ) k (4) The model for esimaion uroses is wrien as follows: Ly 0 Lk 2Laid 3Lrem 4Lfdi mdumm e (5) where Ly is naural logarihmic real gross domesic roduc er caia (in US dollars in 2005 rices); Lk is naural logarihmic real caial sock er caia (in US dollars in 2005 rices); Laid indicaes naural logarihmic official develomen assisance er caia(in US dollars in 2005 rices); Lrem is naural logarihmic remiances er caia (in US dollars in 2005 rices); Lfdi is naural logarihmic foreign direc invesmen inflows er caia (in US dollars in 2005 rices); dum m is a marix of dummy variables o caure effecs of shocks cous and devaluaions of 988, 999 and 2009; and e is he random error erm. 9 P a g e

10 Daa We uilize he daa series of caial sock of Fiji in consan rices released from Penn Tables (Universiy of Groningen 205). Since we do no have daa on labour formally emloyed, we use oulaion as a roxy, he assumion being ha formal labour and oulaion move in he same roorion. All he oher daa series are sourced are sourced from World Develomen Indicaors (World Bank, 205). Full daa series emloyed in he sudy are rovided in Aendix V. Resuls and inerreaions Uni roo ess are alied o level and firs difference of each series. There are wo differen yes of uni roo ess used, namely Phillis and Perron (988) uni roo rocedure and Ng and Perron (200) modified he Phillis-Perron s (PP) Z ess. The saisics of he ess are reored in Table 7, which show ha all series are non-saionary a level, exce FDI series as indicaed by PP es. However, hese variables are found saionary afer firs differencing, ha is, hey are inegraed of order one. Table 7: Resuls of Uni Roo Tess Variables in logs PP Tes Ng and Perron Tes, MZa Level (Consan wih Trend) Firs Difference (Consan wihou Trend) Level (Consan wih Trend) Firs Difference (Consan wihou Trend) Ly ** ** Lk ** ** Lrem ** ** Laid ** ** Lfdi ** ** ** Noe: The PP criical value a 5% level is 2.96 and 3.56 for consan wihou rend and consan wih rend regressions, resecively. These criical values are based on Mckinnon. The oimal lag is seleced on he basis of Akaike Informaion Crierion (AIC). The Ng and Perron criical value is based on Ng and Perron (200) criical value and he oimal lag is seleced based on Secral GLS-derended AR based on SIC. The null hyohesis of he es is: a series has a uni roo. The aserisk ** denoes he rejecion of he null hyohesis a he 5% level of significance. The figures in brackes denoe number of lags. 0 P a g e

11 The sudy examines he exisence of a long run relaionshi beween ouu, caia, foreign aid, remiances and FDI by alying bounds es or auoregression disribued lag (ARDL) model roosed be Pesaran e al. (200). Bound es wih ARDL framework has a few advanages: (i) i allows esing for he exisence of a coinegraing relaionshi beween variables in levels irresecive of wheher he underlying regressors are I(0) or I() (Pesaran and Shin, 999; Pesaran e al., 200); (ii) i is considered more aroriae han he Johansen-Juselius mulivariae aroach for esing he long run relaionshi amongs variables when he daa are of a small samle size (Mah, 2000; Tang and Nair, 2002) 3 ; (iii) Pesaran and Shin (999) show ha esimaors of he shor-run arameers are consisen and he esimaors of long-run arameers are suer-consisen in small samle sizes. Therefore, ARDL model has become increasingly oular in recen years and we begin he emirical analysis wih his rocedure. The ARDL equaions are given as follows: Ly 0 Ly 2Lk 3Laid 4Lrem 5Lfdi 6D 7D2 i Ly i i i0 Lk 2i i i0 Laid 3i i i0 Lrem 4i i i0 Lfdi 5i TREND i 8 (7) Lk 20 2Ly 22Lk 23Laid 24Lrem 25Lfdi 26D 27D2 i0 Ly 2i i i Lk 22i i i0 Laid 23i i i0 Lrem 24i i i0 Lfdi 25i TREND i 28 2 (8) Laid i0 30 3Ly 32Lk 33Laid 34Lrem 35Lfdi 36D 37D2 Ly 3i i i0 Lk 32i i i Laid 33i i i0 Lrem 34i i i0 Lfdi 35i TREND i 38 3 Lrem i0 40 4Ly 42Lk 43Laid 44Lrem 45Lfdi 46D 47D2 Ly 4i i i0 Lk 42i i i0 Laid 43i i i Lrem 44i i i0 Lfdi 45i i 4 (9) TREND 48 (0) Lfdi 50 5Ly 52Lk 53Laid 54Lrem 55Lfdi 56D 57D2 i0 Ly 5i i i0 Lk 52i i i0 Laid 53i i i0 Lrem 54i i i Lfdi 55i TREND i 58 5 P a g e ()

12 There are wo ses in examining he relaionshi beween Ly, Lk, Laid, Lrem and Lfdi. Firs, we esimae Equaions (7) o () by ordinary leas squares echniques. Second, he exisence of a long-run relaionshi can be raced by imosing a resricion on all esimaed coefficiens of lagged level variables equaing o zero. Hence, bounds es is based on he F-saisics (or Wald saisics) wih he null hyohesis of no coinegraion ( H0 : i i2 i3 i4 i5 0) agains is alernaive hyohesis of a long-run coinegraion relaionshi ( H 0 ). : i i2 i3 i4 i5 The findings of he bounds es are reored in Table 8. The resuls confirm he exisence of a long run relaionshi amongs he variables when real ouu (Ly) is se as he deenden variable. The comued F-saisic is 4.902, which is greaer han he uer criical values rovided by Pesaran, e al (200) and Narayan (2005) a % significance level. Hence, he null hyohesis of no coinegraion is rejeced for his equaion. However, he resecive comued F- saisics in he equaions wih oher variables as deenden variables are found no saisically significan even a 0% significance level. Thus, here is only one coinegraion equaion. Table 8: Resuls of Bound Tess Deenden Variable Comued F-saisic Ly 4.902*** Lk.063 Lrem Laid.26 Lfdi Pesaran, e al. (200) a Narayan (2005) b Criical Value Lower bound value Uer bound value Lower bound value Uer bound value er cen er cen er cen a Criical values are obained from Pesaran e al. (200), Table CI(iii) Case III: Unresriced inerce and no rend, b Criical values are obained from Narayan (2005), Table case III: unresriced inerce and no rend,. 0. *, ** and *** indicae significance a 0%, 5% and % levels, resecively. 2 P a g e

13 Having confirmed he exisence of a long-run relaionshi beween real ouu, caia, foreign aid, remiances and FDI, we now roceed o esimae he long run equaion by using he auoregressive disribued lag model (ARDL). As i was found ha he rend variable was no significanly differen from zero, i was droed from he esimaion rocedure. The long-run equaion is: Ly = 4.38** Lk ** Laid *** Lrem *** Lfdi *** (2.644) (2.57) (2.033) (7.668) (3.276) D *** D2*** Trend (2) (6.6) (8.653) (.790) ** and *** indicae significance a 5% and % levels resecively. Figures in arenheses reresening calculaed values. The esimaed coefficiens of logs of caia, foreign aid, remiances and FDI are osiively associaed wih deenden variable, Ly. They are also found saisically significan a eiher 5 ercen or ercen significance level. The coefficien of log of er caia caial sock is osiive and is also saisically significan a 5 ercen level. The magniude of he coefficien of log of er caia caial sock, which denoing he rofis share, is which is consisen wih he sylized value of one hird. For he dummy variables, i is obvious ha he cou could reard he economic erformance as i leads o insabiliy in macroeconomic condiions. On he oher hand, he devaluaion sraegy causes a osiive and significan effec on ou. The rend variable is found o be osiive, bu i is no significan. Wih a view o comaring he marginal effec of hese hree caial inflows on er caia ouu we uilize he coefficiens, which are also esimaed elasiciies 2. We find imac of remiance effec on real ouu is 4.57 is higher han hose of foreign aid and FDI.666. This suggess ha he remiance has relaively a higher osiive effec on he economic develomen. 2 y y e x i x 3 P a g e i where y is he real ouu while x i are here yes of caial inflows (i = aid, remiance and FDI). This formula is able o measure he marginal effec of hese caial inflows on er caia ouu, as follows: Marginal effec of remiances on er caia ouu : US$ US$99.56 Marginal effec of aid in resec y: US$ US$.28 Marginal effec of fdi in resec y: US$ US$43.93

14 A number of diagnosic ess such as Jacque-Bera normaliy es, serial correlaion LM es, heeroskedasiciy ARCH es, and Ramsey RESET mis-secificaion es were alied o Equaion (4). This equaion erforms reasonably well as he disurbance erms are normally disribued and serially uncorrelaed wih homoscedasiciy of residuals, confirming he model has a correc funcional form. Besides, he CUSUM and CUSUM of Squares lo show ha he arameers of he model are sable over ime 3. Since here is coinegraion beween he variables, we roceed o conduc Granger causaliy ess. Resuls are shown in Table 9. The resuls have confirmed he exisence of long run unidirecional relaionshi. The linkage runs only from er caia caial sock, er caia aid, er caia remiances and er caia FDI o er caia ouu, since he error-correcion erm (ECT) has a correc sign and is saisically significan a % level in he equaion wih er caia ouu as deenden variable. In conras, ECT is no significan in oher equaions. Table 9: Granger Causaliy Tess Deenden Variable F-saisics ly lk lrem laid lfdi ECT (saisics) ly * 2.98* 5.46*** 4.56** *** (-2.645) lk 2.887* ** 2.888* (-0.54) lrem 4.495** * 2.227* (-0.885) laid (-.58) lfdi 2.300* 4.56** * (-0.35) Noe: *, ** and *** indicae significance a 0%, 5% and % levels, resecively. Figures in arenheses are - saisics. 3 These resuls are no reored in order o conserve sace. However, he resuls are available uon reques. 4 P a g e

15 Furher, he Granger causaliy es resuls confirm ha in he long run, here is a unidirecional linkage running from foreign aid o er caia ouu, er caia caial sock, er caia remiances and er caia FDI; from er caia FDI o er caia remiances and from er caia remiances o er caia caial sock. Furher, i is found ha, exce er caia foreign aid which Granger causes er caia ouu in only one direcion, here is bidirecional causaliy beween er caia ouu and er caia caial sock, er caia ouu and er caia remiances, er caia ouu and er caia FDI. To sum u, emirical resuls confirm he hyohesis ha foreign aid, remiances and FDI conribue significanly o er caia ouu. VI. Conclusions wih Policy Imlicaions The emirical sudy emloying an auoregressive disribued lag (ARDL) wih bounds esing rocedure and using daa series for a 33 year eriod ( ) shows ha aid, remiances and FDI are all osiively associaed wih Fiji s growh. Among he hree, remiances er caia have had he highes marginal imac on growh in er caia ouu, followed by er caia aid and FDI. The conclusions are no surrising considering he fac ha while aid o governmens is well known for is boomerang effecs in ha grans in aid are always ied o imors of goods and services from he benefacor counry; and FDI in eiher manufacuring or service secors including hoels/resors are heavily deenden on imors of machinery and building maerials and ransor equimen as well for consumion goods ranging from oile aer o food and beverages. The leakages are hus heavy and hey affec he size of he mulilier effecs on GDP. On he oher hand, remiances received by families mosly living in rural areas are likely o be sen more on domesic consumion goods and local exendiures such as educaion and healh services, minimizing he leakages. The mulilier effecs of exendiures ou of remiances by reciien families are execed o be much higher. Furher, alhough here are no resuls of longiudinal surveys done on he use of remiances a a micro-level, anecdoal evidence has i ha increasing number of families are now saving ar of heir addiional incomes for invesmen in housing and oher consrucion aciviies as well saring small scale enerrises, as evidenced by a sur in he number of informal business enerrises by rural households. The olicy imlicaions are clear. Aside from increasing domesic demand, remiances do relax credi consrains of reciien families. The governmen will do well o faciliae financial secor develomen for mobilizing savings by secor insiuions in rural areas where a large number of reciien families live. Furher, secial incenive schemes can be launched for encouraging small and medium enerrises which can be linked wih effors of families uilizing he seady inflow of funds from relaives. These incenive schemes can be no only in regard o credi bu also in areas of markeing and raining oenial enrereneurs. 5 P a g e

16 References Balasubramanyam, V.N., Salisu, M. and Sasford, D. (996). Foreign direc invesmen and growh in EP and IS counries. The Economic Journal, 06, Borenszein, E., De Gregorio, J. and Lee, J-W. (998). How does foreign direc invesmen affec economic growh? Journal of Inernaional Economics, 45, Browne, C. and Mineshima, A. ( 2007). Remiances in he Pacific region. Saff Working Paer 07/35, Washingon: IMF. Chami, R. and Fullenkam, C.(203). Beyond he Household, Finance and Develomen, Seember 203: Chen, H. and Singh, B. (204). Foreign Aid and Labor Produciviy in Fiji: An Emirical Invesigaion wihin an Endogenous Producion Framework. Inernaional Journal of Alied Economics,, Claxon, K. (205). No exi: Nex ses o hel romoe Souh Pacific eace and roseriy, Sraegic Insighs, No.87, Canberra: Ausralian Sraegic Policy Insiue. de Mello, L.R. ( 997). Foreign Direc invesmen in Develoing Counries: A Selecive Survey. The Journal of Develomen Sudies, 4(): -34. Doolan, B. (203). Oinion: Fuure of Ausralian Aid under Coaliion governmen. h:// accessed on Ocober Gani, A. (999). Foreign direc invesmen in Fiji. Pacific Economic Bullein, 4, Gounder, R. (200). Aid-Growh Nexus: Emirical Evidence from Fiji. Alied Economics, 33, Howes, S. and Pryde, J. (204). Bigges aid cus. h://devolicy.org/bigges-aid-cus-everroduce-our-leas-generous-aid-budge-ever , accessed on Feb 0, 205. Hughes, H. (2003). Aid has failed he Pacific. Issue Analysis No.33, Sydney: Cenre for Indeenden Sudies. Jayaraman, T.K. and Choong, C.K. (2005). Foreign Direc Invesmen in he Souh Pacific Island Counries: A Case Sudy of Fiji, in World Susainable Develomen Oulook 2005: Global Comeiiveness: A Common Goal in a Digial Sociey, edied by A. Ahmed, Emerald: Bradford, England, Jayaraman, T.K. and Choong, C.K. (2006a). Growh Consrains and Deerminans of a Souh Pacific Island Economy: The Case of Fiji. Global Economic Review, 35(4), Jayaraman, T.K. and Choong, C.K. (2006b). Foreign direc invesmen in he Souh Pacific Island Counries: A case sudy of Fiji. World Review of Enrereneurshi, Managemen and Susainable Develomen, 2, Jayaraman, T.K. and Singh, B. (2007). Imac of FDI on emloymen in Pacific island counries: An emirical sudy of Fiji. Economia Inernazionale, LX, Jayaraman, T.K. and Ward, B. (2006). Aid Effeciveness in a Vulnerable Island Naion: An Emirical Sudy on Aid-Growh Nexus in Vanuau. Asia Pacific Develomen Journal, 3(2), Jayaraman, T.K., Choong, C.K. and Kumar, R. (2009). Role of Remiances in Economic Growh in Pacific Island counries. Persecives on Global Develomen and Technology, 8, Jayaraman, T.K., Choong, C.K. and Kumar, R. (200). Role of Remiances in Tongan Economy. Migraion Leers, (7)2, P a g e

17 Jayaraman, T.K., Choong, C.K. and Kumar, R. (20). Role of Remiances in Small Pacific Island Economies in Fiji: An Emirical Sudy. Inernaional Journal of Economics and Business Research, 3(5), Kohaiboon, A. (2003). Foreign rade regimes and he FDI-growh Nexus: a case sudy of Thailand. The Journal of Develomen Sudies, 40, Luinel, K.B., Khan, M., Aresis, P. and Theodoridis, K. (2008). Financial srucure and economic growh. Journal of Develomen Economics, 86(), Mah, J.S. (995). An analysis of he srucural change in he exchange marke ressure: Korea, Alied Economics Leers, 2, Morling, S. and Singh, J. (998). Moneary olicy and srucure of caial accoun : exeriences of Pacific island counries, Paer resened a he 3 h Pacific Basin Cenral Bank Conference, Los Cabos, Mexico, November, 7- Narayan, P.K. (2005). The saving and invesmen nexus for China: Evidence from coinegraion ess. Alied Economics, 37, Ng, S. and Perron, P. (200). Lag lengh selecion and he consrucion of uni roo ess wih good size and ower. Economerica, 69, Pesaran, M.H. and Shin, Y. (999). An Auoregressive Disribued Lag Modelling Aroach o Coinegraion Analysis, In S. Srom (ed.), Economerics and Economic Theory in he 20 h Cenury: The Ragnar Frisch Cenennial Symosium. Cambridge: Cambridge Universiy Press. Pesaran, M.H., Shin, Y. and Smih, R. (200). Bounds Tesing Aroaches o he Analysis of Level Relaionshis. Journal of Alied Economerics, 6, Phillis, P.C.B. and Perron, P. (988). Tesing for a Uni Roo in Time Series Regression. Biomerika, 75(2), Prakash, N. and Gounder, R. (2009). The Role of Remiances in Financial Develomen in Fiji. Fijian Sudies, 9(2), Rao, B., Tamazian, A., Singh, R. and Vadlamannai, K.C. (2008). Financial develomens and he rae of growh of ouu: an alernaive aroach. MPRA Paer No. 8605, h://mra.ub.uni-muenchen.de/8605/, accessed on February 8, 200 Tang, T.C. and Nair, M. (2002). A coinegraion analysis of Malaysian imor demand funcion: Reassessmen from he bounds es. Alied Economics Leers, 9, Wood, T. (205). Ausralia s billion dollar aid cu. h://devolicy.org/ausralias-billion-dollaraid-cu-where-o-cu-a-billion-dollars-in-a-hurry /, accessed on March 5, 205. World Bank s (993) Pacific Island Economies oward Efficien and Susainable Growh, Volume : An Overview, Washingon D.C.: World Bank. World Bank (2006). A Home and Away: Exanding Job Ooruniies for Pacific Islanders hrough Labor Mobiliy, Sydney and Washingon, D.C.: World Bank. World Bank (204). Word Develomen Indicaors, Washingon, D.C., World Bank. Online, accessed on December 0, 204. Xu, B. (2000). Mulinaional enerrises, echnology diffusion, and hos counry roduciviy growh. Journal of Develomen Economics, 62, P a g e

18 Aendix A. Fiji: GDP and caial sock ( er caia in consan rices) and remiances, aid and FDI ( % of GDP) Period k Aid REM FDI y (% of GDP) (% of GDP) (% of GDP) (ave) (ave) (ave) (ave) B. Fiji: GDP, Caial sock, Aid, Remiances and FDI (er caia consan US dollars) Period y k Aid REM FDI (ave) (ave) (ave) (ave) P a g e

19 C. Fiji: GDP, Caial sock, Aid, Remiances and FDI (er caia consan US dollars) Year GDP (y) Caial sock (k) Aid (aid) Remiances (rem) Ne FDI (fdi ) P a g e