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LESSONS:

Economic Restructuring Program (Loan 1466-COO[SF])

sector: Public Sector Management | country: Cook Islands

An important lesson to be learned is the time required for the effective implementation of a wide-ranging reform program such as adopted in the Cook Islands. The original design envisaged that the reforms would be completed within the timeframe of the Economic Restructuring Program (ERP) itself, i.e., within 3 years. This was unrealistic. While the fiscal and macroeconomic stabilization was achieved within the period, the more far-reaching structural reforms were only partially completed. Coupled with the short timeframe, the lack of follow-up support by ADB may be responsible for the loss of reform momentum the Cook Islands is currently experiencing. ADB’s country program included long-term technical assistance (TA) policy support for the Ministry of Finance and Economic Management (MFEM), but it is only now that reactivating the delayed third-phase TA is considered. While political instability has contributed to the current lack of direction in policy, the failure to provide and sustain expert advice and capacity building to maintain the reform momentum has also been an important factor.

At the policy level, the ERP clearly demonstrates that the introduction of valued-added tax (VAT) can be successfully achieved in the small island economies of the Pacific, provided there is sufficient planning and preparation. This has long been a question open to debate. The imposition of a simple regime with one unified rate, and limited number of VAT-registered taxpayers, supported through capacity building, has provided the model. The introduction of a modern tax regime of income taxes coupled with a broad-based consumption tax has provided a buoyant and non- distortionary environment for private sector development.

The Cook Islands provides another case of uncertainty affecting the future use of output- based budgeting and performance management. Introduced 5 years ago, the New Zealand system is currently used for little more than reformatting of the budget. The system has contributed to the lack of attention devoted to fiscal management and the basic costs of providing public services. Nevertheless, most public servants, in the Cook Islands as elsewhere in the Pacific, remain convinced that this is the right direction to move. Significantly more resources and capacity building would be needed if this conviction is to become anything more than a distant ideal.

Other lessons learned from the implementation of the ERP highlight (i) the importance of effective coordination with key external aid agencies at the early stage of design; (ii) an overall vision of how the public sector should look and perform in the long term, an associated set of goals and means, and an implementation plan with a timetable; (iii) the use of simple solutions rather than sophisticated and resource-intensive tools and systems; and (iv) detailed specification of outputs, and key performance indicators to measure outputs and impacts.

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