Climate Change Impact and Structural Reforms in Kiribati
KIRIBATI
baseline model developed by Loayza and Pennings (2018) (see Appendix Table 1 for a brief
description) for long-term growth, and then introduces some additional elements: i) a differentiation
of labor market participation by gender; ii) a growth path for factor productivity using scores for
innovation, education, efficiency, infrastructure, and institutions, as in Kim and Loayza (2019); and iii)
a differentiation of capital and investments by public versus private, with an adjustment for quality of
public investment, as in Devadas and Pennings (2018). Kiribati's current policies and current
macroeconomic conditions are used to calibrate a baseline path, and a scenario analysis is
performed to illustrate the quantitative effects of comprehensive structural reforms. Appendix Table
1 provides details on the parameters and input factors used for this study.
6. Two scenarios are analyzed to demonstrate the impact on growth from different
assumptions of the input factors—both human and physical capital and TFP. The baseline
scenario assumes no change from the present data (2020 or latest available), whereas the
comprehensive reform scenario sets ambitious growth goals for human capital, labor market
participation and (public and private) investments, and assumes higher efficiency of public
investments. Under this scenario, Kiribati would gradually move from its current position, close to
the lowest tenth percentile of the low- and middle-income country (LMIC) group, to the
twenty-fifth percentile of the LMICs.
7. The results show that, in the absence of major structural reforms, Kiribati's long-term
growth will hover slightly above 2 percent, while well-targeted development policies could
push it to 4 percent and significantly reduce poverty (Figure 2). This conclusion is based on a
comparison between the baseline and comprehensive reform scenarios. In the latter scenario, the
investment rate increases from 15 percent of GDP in 2020 to 20 percent by 2035 and the labor
participation increases significantly to 60 percent by 2050, alongside a boost to TFP and human
capital. This scenario also allows for slightly higher external debt and FDI to finance some of these
policies. In the baseline scenario, on account of generally low inequality and rising per capita GDP,
the poverty headcount would fall from 30 percent in 2020 to 20 percent by 2050. However, if the
pro-development policies were fully enacted, the poverty rate could fall below 10 percent, and as the
inequality falls slightly, income growth would be slightly higher for the bottom 40 percent income
group than the top incomes.
8.
The scenario outcomes also suggest that higher growth may be easier to achieve
through stimulus to private investments. In Kiribati, where a large part of total capital and
investment is in the form of public sector capital, an increase in the size and efficiency of private
investment will help increase GDP growth and reduce poverty. In addition, an expansion of private
sector investment could lead to higher growth with lower cost: Panel 4 in Figure 2, which shows the
private investment incremental capital to output ratio (ICOR), suggests that less than 1.4 percentage
points of GDP of private investment is needed to increase growth by a percentage point, which is a
fraction of the public investment ICORS (while not shown here, public investment ICORS is estimated
to be 10.6 percentage points of GDP).
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