Fears for stability as Pacific hit by economic tsunami

CANBERRA - Australia and New Zealand are bracing for more trouble in the region as the global economic crisis bites deeply into the Pacific.

Foreign Affairs documents released with Tuesday night's Budget show increasing Australian concern at a region that remains a key security and development focus for Canberra.

Its international development assistance report said that New Zealand, the World Bank and Asian Development Bank were working with Australia to closely monitor the impact of the crisis in the island states and prepare tailored policies and financial aid.

"It is in Australia's interest to help build strong, stable nations in our region," Foreign Minister Stephen Smith said.

Canberra has regularly expressed concern at poverty, corruption and other threats to a region that anchors the eastern tip of the "arc of instability" extending across its northern rim, and at the potential for failing states to become bases for terrorism and transnational crime.

Australia is also worried that existing competition for influence in the region - notably by China and Taiwan - could undermine its influence.

The possibility of Fiji turning to China following sanctions by Australia and New Zealand, and its expulsion from the Pacific Islands Forum, has also set alarm bells ringing.

The Foreign Affairs Department's development assistance Budget paper warned that the global recession would have a significant impact on Papua New Guinea and other Pacific Island countries.

While the degree of impact would vary, all would be hit by some combination of reduced earnings from tourism, remittances and commodity exports, and by cuts to income from national trust fund and national provident fund investments.

Budgets would need to be cut to avoid unsustainable deficits and balance of payments problems.

Unless new spending priorities were set, education, health, infrastructure and other key services would be hit.

Australia is already intending to target its assistance to "vulnerable groups" and programmes to maintain basic health and education services, and generate employment.

Tuesday's Budget increased assistance to PNG and the Pacific to just over A$1 billion ($1.26 billion) in 2009-10, linking aid to new measures of government performance and accountability, and to the islands' response to the measures.

Targets include areas such as the quality of government spending, the proportion of their budgets aimed at development priorities, the integrity of public accountability systems and the effectiveness of revenue collection.

Canberra also hopes to this year negotiate more "Pacific partnerships for development" - an initiative by Prime Minister Kevin Rudd's Labor Government to sign up island states to a set of shared goals.

Partnerships have so far been signed with PNG, Samoa, Solomon Islands and Kiribati under a programme that in Tuesday's Budget was allocated A$3.8 million over two years.

The funding will also cover moves to negotiate a comprehensive trade and economic agreement between Australia, New Zealand and the island states.

Australia's commitment to East Timor - where about 650 troops lead the International Stabilisation Force - will be continued with funding of A$213.8 million, and almost A$30 million has been provided for the 110-strong military contingent in the Solomons.

The Budget also gave the Australian Federal Police A$438.8 million for its work in developing a new police force for the Solomons.