No corner of the world has escaped the oil crisis caused by repeated closures of the Strait of Hormuz, but few economies are as exposed as the smaller, import-dependent Pacific Island countries (PICs). Sitting at the end of some of the world’s longest and thinnest supply lines, they import nearly every drop of fuel they burn, and their incomes depend largely on the growth of distant partners.
A 2012 International Monetary Fund (IMF) work found that PICs are tied to the Australian, U.S., and New Zealand economies over the long run. Updating that analysis shows that these anchors remain important across the region: When a large partner’s growth slows, PIC growth tends to slow with it. Oil price shocks remain the sharper threat: A 50 percent increase in the real oil price is associated with GDP losses of up to 4 percent in the hardest-hit economies, before accounting for any effect from slower partner growth. Dependence on partners and acute sensitivity to fuel prices leave these small, undiversified economies doubly exposed, straining their fiscal buffers and deepening reliance on outside powers just as the United States, its allies, and China compete for influence across the region. Without greater external support for energy supplies and government budgets, these countries face slower economic growth, and with it a weaker position from which to negotiate the terms of outside assistance.
PICs Still Move with Their Largest Partners
Pacific Island economies are among the most open and least diversified in the world. They are import-dependent and export a narrow range of goods and services—tourism, fisheries, minerals, and agricultural commodities—to a handful of foreign markets. Australia, New Zealand, and the United States sit at the end of most of those channels, and World Bank assessments link swings in Pacific Island growth to labor demand, tourist arrivals, and remittance flows originating in those economies. This structure makes PICs unusually sensitive to global shocks.
The aforementioned 2012 IMF study provides guidance on measuring how tightly each island’s economy is anchored to its main economic partner. The same framework can then be applied to trace how different oil price scenarios affect each Pacific Island.
Australia is the natural anchor for most PICs, as it is the dominant source of tourists, remittances, and investment; the United States anchors the Compact of Free Association states (the Federated States of Micronesia, the Marshall Islands, and Palau); and New Zealand anchors Tonga and Samoa. For the purposes of this analysis, Niue and the Cook Islands were excluded because their free association with New Zealand places them outside standard PIC datasets. Naoero (formerly Nauru) was also excluded because reliable GDP data is unavailable before 2004.
The updated statistical analysis indicates that PICs remain closely linked to larger partner economies, but not to the same degree everywhere, as shown in Figure 1. The evidence is strongest for the Federated States of Micronesia, Samoa and Tonga, while several other economies show moderate evidence: Fiji, Papua New Guinea, Vanuatu, Tuvalu, the Marshall Islands and Palau. Only the Solomon Islands and Kiribati show limited evidence, and even there the estimated long-run elasticities sit within the same range as the rest of the sample.
