The performance of the Pacific Island countries (PICs) over the past two decades has been characterized by economic growth rates that are low on average yet extremely volatile. This has been so despite favorable levels of natural and human resources, high levels of public investment and aid, and reasonably prudent economic management – a phenomenon that has been labeled the “Pacific Paradox”. Questions may be posed therefore as to what accounts for this poor performance of the PICs, especially when countries elsewhere of the same size and characteristics have registered impressive growth performance during the same period? Although the inherent structural constraints characterizing the PIC economies have a direct impact on the performance of these economies, one cannot dismiss the more fundamental constraints imposed by the institutional environment in which these countries operate. The purpose of this study was to critically review the economic performance of the PICs with a view to evaluating the possible explanations for the “Pacific Paradox”. The proposition evaluated is that it is not the lack of capital or good policies that constrains the economic growth and development of these island economies, but rather the lack of appropriate institutions and incentives to accumulate and acquire human and physical capital and to make policies effective. Early tests of this proposition across several Pacific island countries indicate that ineffective institutions, leading to contract insecurity, as well as corrupt practices and bureaucratic ineffectiveness account for large reductions in the average rate of growth of national income in these countries. Unless the PICs undertake appropriate institution-building measures with a view to putting in place the conditions necessary for broad-based, sustained economic growth, these island economies will continue to live out the “Pacific Paradox”.
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