THE Cook Islands is a small country in the South Pacific comprising 15 small islands, and where the majority live on the island of Rarotonga. It’s a country that many people describe as a paradise. But it is not without its problems. Tiny, isolated economies have unique challenges, for which they need to evaluate their unique strengths, to come up with unique solutions.
One of the country’s most pressing issues has been its population decline which began decades earlier, but hastened in 1996 after economic reforms forced the government to make painful cuts to public sector jobs. This amounted to a crisis in the labor market which triggered an exodus of citizens looking for work, which further compounded the economic decline.
Tourism quickly stepped in to take the reins of the economy thereafter, which saw impressive growth figures in the years leading up to 2020, peaking at over 170,000 visitors in 2019, and contributing to more than 2/3rds of the country’s GDP and 1/3rd of its employment.
This came to a screeching halt in 2020, when Covid restrictions imposed barriers to much of the world’s travel, and rattled the economies of tourism-dependent countries. The Cook Islands were certainly no exception.
While the effects of mass tourism have always been controversial, this crisis shined a light on its importance as an economic lifeline, the danger of relying on a single sector, and the opportunities to carve out a new path.
The solutions proposed in this paper fall into four broad categories:
Production-Led Economy— where growth in domestic supply precedes growth in domestic demand & land speculation, in order to increase purchasing power without inflationary pressure.
Population Growth Revival — using a combination of fiscal incentives and immigration reform.
Solvency Streamlining— achieving results with policymaking while reducing & minimizing costs to the public sector.
Fairness & Opportunity — providing equal opportunity by granting citizens universal access to a share in the economy, investment capital, land, and an expansion of individual choices, while eliminating taxation of earned incomes.
Opportunity in crisis
The same pandemic that battered the Cook Islands’ economy also brought with it the rapid rise of remote working. It solidified a growing culture of digital nomads, generally highly skilled, adventurous workers, drifting around the world searching for a paradise to call home. In the past decade, many have relocated to other parts of the Pacific, small islands in Thailand, the Philippines, and Indonesia.
The typical profile of such workers includes software developers working for Silicon Valley firms earning a salary in hard currency, and those trying to build their own online startups. Large numbers of the entrepreneurs relocated abroad specifically to take advantage of funding programs (e.g. the founders of Slidebean moved to participate in Startup Chile).
While venture funding has reached new highs in recent years, and thousands of investment funds are emerging, startup funding has sharply reversed course in 2022 as funds started to retreat in the face of interest rate hikes. There are now a great number of entrepreneurs looking to found and grow their digital business, but are facing an uphill battle. In parallel, the Cook Islands faces its own issues with financing, with relatively high interest rates compared with its New Zealand counterparts. A solution for one might be a solution for both.
South Pacific startup pipeline
The concept for a startup pipeline in the Cook Islands is for a highly focused and efficient pipeline for new businesses, from registration to launch to seed funding to IPO or to a swift & relatively painless bankruptcy for the businesses that fail.
The concept can be announced in advance with the launch of a landing page website and press release, with the goal of soliciting feedback from potential newcomers to the islands. It might even be possible to host a competition for ideas on how to tailor the program, and a competition on addressing local issues (e.g. digitizing government processes, improving agricultural yields, energy supplies) using their innovations.
Such a pipeline would lead people in the following path:
1) Immigrate to the Cook Islands if not already a resident
2) Register business / set up Cook Islands HQ
3) Open business accounts
4) Continue to gain traction
5) Include the Cook Islands as part of the served market (optional but encouraged)
6) Fundraising and rapid scale (e.g. seed / venture / series abc)
7) IPO (optional)
8) Present opportunities to use technology to address the Cook Islands economic challenges
The first half of the pipeline could be managed in a single, simple step. Business registration should anyway be possible to perform online and complete within 1 minute (including VAT number registration). A simple form submitted online should simultaneously apply the user for a startup visa, company registration, and have the option to share the registration with the new Cook Islands Venture Community.
For skilled digital nomads who are working remotely for foreign firms, the process should be equally simple. Uploading personal details online along with a job contract should be enough to be considered for a digital nomad visa.
With regards to fundraising, the Cook Islands would likely need to partner with outside venture firms and exchanges, to set up offices. The regulatory environment may need to be adjusted to make the Cook Islands attractive for such operations.
With a new pool of technical talent residing in the Cook Islands, the opportunity would then present itself to utilize these skills for more local purposes. If a team of programmers and engineers can volunteer some time to, say, automate some aspect of public administration, tax collection, improve crop yields, provide energy solutions, etc., then perhaps they can be rewarded with non-monetary rewards such as media recognition, awards, or potentially even citizenship.
Specific policy proposals
While the idea to turn the Cook Islands into a digital nomad and startup funnel is a potential pathway to reversing years of population decline, population growth is only one foundational pillar to material economic improvements for the islands.
If the Cook Islands are to have a prosperous future, the incentive system in Cook Islands needs to be radically shifted towards productive activity, and ensure that the growth that is generated is broad-based with widespread access to opportunities. The following reform package would ensure that this is the case.
• Introduction of 2 New Visas — The introduction of a Digital Nomad Visa would be a well-timed play to capture this relatively new opportunity. By creating a simplified online process to apply and to enable these workers to open bank accounts at local institutions, the Cook Islands could see an influx of reliable, stable hard currency inflows. The introduction of a Startup Visa as part of a larger Startup Pipeline package, would allow founders to use the Cook Islands as a base for their business activities and fundraising, and potentially put the country on the map as the most successful (per-capita) entrepreneurial state. After arriving in the Cook Islands, these skilled workers could then be introduced to possibilities for applying their technical expertise to the islands’ unique challenges.
• Attract Venture Network — There are thousands of venture capital firms worldwide with excess funds to invest. By advertising a comprehensive program where talent, an attractive tax & regulatory environment, and avenues for fundraising are to be taken care of, it may be possible to partner with some VC firms. Building such a program where the talent funnel, banking, VCs, and IPO advisory services are all part of a streamlined package, can mean a thriving startup scene with an increase in technical talent in the Cook Islands. This network would also be helping founders who want to IPO to do so.
• Financial Sector Reform — A small domestic market is often easy to monopolize, to the detriment of consumers. In the case of small business, this can also mean to the detriment of borrowers. While borrowing for consumption does little to improve the long-term prospects of an economy, healthy borrowing at reasonable interest rates to build & grow business is a necessary option for business expansion. Again, as with raising funds through equity, more lending options can help add additional commercial activity on the Cook Islands, increasing competition and consumer choice. The Cook Islands can create sector-specific banks (sectoral banks), owned by the sectors they represent, as well as credit unions. For example:
• Homebuilding & Construction Bank
• Agriculture Bank
• Technology Bank
• Manufacturing Bank
• Handicrafts & Heritage Products Bank
• Grocers, Markets, & Restaurants Bank
• Retail Bank
• Resource Extraction Bank
• Infrastructure Bank
• Energy Bank
• Exports & Tourism Bank
• Rarotonga Credit Union
• Outer Islands Credit Union
These banks can be entirely or mainly digital to minimize costs, but the important aspect would be that they would be entirely owned equally by the businesses of the sectors they represent, or in the case of the credit unions, the residents. The banks could have a secondary function in terms of providing advice or training in their specific sectors, and representing the interests of the sector. It would present an opportunity to reduce the cost of capital for productive enterprise. Finally, it would be part of a move towards a production-led economy that prioritizes production over land speculation & consumption, and shifts the Cook Islands’ current account into a healthy surplus. These banks could be capitalized by attaching to a stream of VAT revenue, thereby diverting consumption resources towards investment, and then utilizing funds for publicly available sector-specific jobs training and business investment.
• Observe Parallel Currency Developments — The Cook Islands may consider the introduction of a parallel local currency to distribute the benefits of monetary seigniorage more directly to its producers & consumers, and to mitigate the risks of losing access to remittances. The Marshall Islands had been experiencing risks pertaining to its reliance on a single monetary & financial system and introduced the SOV as legal tender to ensure the continuity of its economy (remittances in particular). The creation of such a currency in the Cook Islands could have ownership of the project divided evenly between citizens, the treasury, and the sectoral banks & credit unions so that seigniorage accrues to the financial wellbeing of citizens, fiscal health, and economic output. The SOV for example uses the k-percent rule to apply a fixed rate of annual growth to the money supply (of 4%). The Cook Islands could apply such a policy, where the money supply growth is channeled into producers, consumers, and the treasury as described. While the Cook Islands has been fortunate to share the benefits of New Zealand’s sensibly managed Reserve Bank, contingency planning and observation of monetary developments in other island nations may be worthwhile.
• Tax Reform — At present, the Cook Islands has a tax regime that distorts behavior in a way that may not be in the interests of its citizens and residents. A study was published more than 20 years ago about issues with absentee landlords in the Cook Islands, yet the tax structure still incentivizes land speculation at the expense of labor and enterprise. The top income tax rate is 30%, and corporations are taxed at 20 and 28% for resident and non-resident companies respectively, whereas land is not taxed at all.
The Cook Islands are in need of production-led tax reform. This would mean eliminating payroll / personal income taxes and all income taxes on resident companies. A shrinking labor force cannot be made to shoulder the burden of the country’s financing needs (income tax), as rates would have to continue to rise on fewer people each year. In their place should be a tax on the unimproved value of land (land value tax – in contrast to a property tax), an increase in the VAT rate (with targeted exemptions if necessary), a tax on short-term capital gains (to prevent hot money inflows), and perhaps pollution.
The cumulative effect of these tax reforms will be a sharp improvement in the current account as the country’s resources are reallocated, away from land & consumption and towards production & investment. The incentive to retain, grow, or relocate business operations within the Cook Islands would be maximized, and the cost of tax collection would be reduced.
A land value tax has the added benefits of recouping the cost of infrastructure investments (as land values rise disproportionately compared to the cost of investment), and of being one of the few taxes that can be levied without creating deadweight loss. Finally a land value tax cannot be evaded as long as there is a functioning land registry, as it is levied on the assessed value of the underlying land and the land owner in the registry.
• Ease of Doing Business — The process of registering a business (and obtaining the share and bank account in its associated sectoral bank) should be as simple as submitting an online form within a few minutes. Regulations including zoning and occupational licensing should be minimized and streamlined to the greatest extent possible (of course while protecting the environment), and if needed, replaced with taxes (e.g. on pollution). This should be done with the aim of making the Cook Islands the premiere business environment in the Pacific. This can be solidified with a bill of economic rights.
• Universal Savings & Investment Accounts — All Cook Islands citizens will need universal savings and investment accounts if they are to be part of the economic expansion. Accounts will be needed not only for being able to borrow, save, and invest, but also to receive cash dividends that will come out of the reforms. The Cook Islands National Superannuation Fund or CINSF may be a useful tool to administer these accounts, though the current programs are specific to pensions rather than offering the flexibility to more freely save, spend, and invest dividend payments from the revenue streams discussed below.
• Turning Tax Rates Negative Using Cash Payments — With the LVT implemented and the rate of VAT increased to compensate for the removal of other taxes, the question becomes how to utilize these funds. The key to production-led growth would be to allocate some of these funds away from consumption & land and towards labor and capital. This can be accomplished while extending financial security to the entire population.
The Cook Islands has an extensive series of conditional welfare benefits, from pensions to child benefits to power subsidies and so on. By turning all Cook Islands citizens into partial-owners / shareholders of public revenue streams, these programs can be replaced with 3 forms of direct cash transfers: a universal dividend, a universal wage supplement (increasing based on amount earned, up to the median income), and a savings & investment supplement. By applying the universal dividend from birth, this can also mean strong support for the birth rate.
By removing income taxes and distributing some of the new revenues as cash, net income would be immediately increased. At the same time, the Cook Islands can wind down their existing welfare programs, reducing the cost of governance, and enabling fiscal surpluses.
Sectoral banks can use the funds as they see fit to represent their sector or region, including sector-specific education, venture funding, and reserve capitalization.
On the whole, this is a system that means that for every dollar of value in consumer spending, for every dollar increase in land value as a result of investment, and for every unit of new currency minted, will mean:
• Additional investment in production, thereby increasing supply and lowering prices
• Additional income for workers — raising incomes while keeping labor costs competitive
• Financial security for the entire population — making citizens shareholders in growth
Energy
The Cook Islands also needs to tackle its domestic energy supply issues in order to stop hemorrhaging foreign exchange on imports. The current system leaves consumers and producers with high prices, and puts the country at risk from price fluctuations in world markets and supply disruptions; but it also drains hard currency that could be used for the import of capital goods and technology. Funds invested in energy could pay off with incredible returns on per-capita output and real incomes. The Cook Islands government already recognizes this, and created plans in 2011 to transition to renewable energy.
A next-generation smart grid that allows people to sell their power (e.g. solar) into the grid would provide the right incentives for private entities and individuals (in addition to the government) to add to the national power supply.
Given its geographic position, the Cook Islands may want to evaluate the use of wave power farms, a technology which has been advancing since the first one was constructed 22 years ago. However, as it is still an early emerging area of power generation, the Cook Islands can position itself as a leader in this field by providing the right research & investment environment, and can attract specialized talent in this field.
Demography
While attracting talent, supercharging economic growth, and increasing the birth rate with a universal dividend, are priority measures the Cook Islands can use to increase the size of its labor force, there is one existing tool that can be used with more immediacy. There might be an opportunity for the compression of studies for students who desire to enter job training earlier in life (e.g. through sector-specific schools, trades, or university), before the standard age of secondary school graduation. There may need to be an explicit pathway for some younger students to enter higher education or workforce training, for whom continuing with secondary school may not be the best path. This can expand the number of working years for an individual while providing more options in life, and opportunities to earn a living.
Public services vouchers
To better make use of public services (health insurance, education, employment insurance, etc.), the public can use vouchers (where the money is tied to the individual rather than the institution) to choose the options best for them. This can incentivize lower costs and improved services, and allows the government to maintain a fixed budget to provide them.
Fiscal rules
With the above reforms in aggregate, costs can be minimized and be made mostly tied to revenues. By formalizing fiscal rules so that the government pays down (or does not issue) debt during times of growth, the impact of crises such as in 2020-22 can be minimized. This can help protect consumer and investor confidence, maintain a healthy current account balance (as well as fiscal balance), and provide predictability to the business environment.
Anti-corruption
To ensure the effectiveness and implementation of the proposed reforms, the Cook Islands might consider an independent anti-corruption body with the capacity to enforce its rulings, as a precursor. This may require international cooperation. The Cook Islands can learn from the International Commission against Impunity in Guatemala on how this can be done effectively and where such a program may also need to be adjusted to suit the Cook Islands’ specific needs. Combined with potentially reverting the decision to grant developed country status, such a program may allow for more aid money to enter the country.
Conclusion
The Cook Islands faces a number of immediate risks to its survival; some financial, some economic, logistical, demographic, and environmental. However, the country has many strengths as well, including political stability, independent judiciary, and attractive geography which make it an enticing place for visitors, and potentially investors and residents. With the creation of the right incentive structure through bold economic reforms, along with some shrewd digital marketing to advertise such policies, the Cook Islands can overcome these risks and carve out a rapid yet sustainable path to prosperity.
