by Inge Detlefsen, Catherine Sapiro and Claire Schwartz

For full report click here.

The tsunami that hit the Republic of Maldives on December 26, 2004 caused widespread destruction, including significant damage to Maldives' two primary industries - tourism and fisheries. Since that time, international organizations and the Government of Maldives (GoM) have been working overtime to channel aid into reconstruction efforts. While the speed and dedication with which stakeholders have reacted to this catastrophe are commendable, the urgency of the situation has left little time to evaluate the long-term needs of Maldives before projects are begun.

This paper argues that it is necessary to ask whether simply rebuilding what has been lost is in the best interests of future economic growth and stability in Maldives. It concludes that the answer is "no." The fisheries sector, especially, has limited potential for sustainable growth. From this point, the question becomes "what industries would best promote economic development and stability?"

To identify better investments, we initially evaluate the preexisting problems with the Maldivian economy, which are twofold. First, significant income and standard of living disparities exist between the capital, Malé, and the outer atolls. Second, the country is extremely vulnerable to exogenous shocks, both to the economy and the environment. In addition, new investments have to contend with serious barriers to growth. Specifically, Maldives' geographical remoteness and dispersion, resource poverty, and shortage of skilled labor limit the potential of many industries.

To address Maldives' weaknesses, we lay out twelve goals. These goals, as follow, provide a framework for our appraisal of successful industries in other small island and South Asian countries for their suitability in Maldives. A "good" investment should tackle as many of these goals as possible.

• To increase the availability of income generating activities on the outer atolls, thereby reducing income disparities between Malé and the islands and decreasing the incentive for overcrowding in Malé.
• To expand Maldives' economic base within the bounds of its comparative advantages and natural resources.
• To limit environmental degradation.
• To encourage economic activities that make use of Maldives' isolation and its access to resort populations; and to encourage small-scale activities that do not rely on economies of scale.
• To encourage activities with foreign exchange earning potential to finance imports.
• To match the skills of native Maldivians to available employment opportunities.
• To reduce vulnerability to external shocks by diversifying tourist arrivals.
• To use tourism to create incentives against environmentally damaging activities.
• To create linkages between the tourism sector and local labor.
• To diversify fish exports toward high-price fish.
• To provide alternatives to overexploitation.
• To reduce dependence on the E.U. market.

From our analysis of the problems confronting Maldives, we come to the overall conclusion that past development strategies have overemphasized economic diversification. Maldives should diversify within its strongest sectors, rather than promoting completely new industries. Successful development strategies will build on Maldives' natural endowments and emphasize marginal changes to the sectors that have flourished in the past, including tourism, fisheries and agriculture. We suggest four industries that fit this criterion and meet many of the goals listed above:

In addition, we recommend the following for PRODEPINE II:

• Aquaculture, which will allow Maldives to utilize local resources, make use of preexisting knowledge and infrastructure, diversify into higher value fish than those naturally available in Maldives, operate on variable scales and create outer atoll employment;
• Orchid production, which benefits Maldives because orchids can be grown in variable scales, can be produced on the outer atolls, and utilizes the existing infrastructure;
• Adventure tourism, which can create links with the local population and build on the local infrastructure; and
• Handicrafts, which will channel tourist dollars directly to natives, operate on variable scales, create female employment, and utilize local resources.

Since our recommendations all require financing, this paper concludes with options to increase the availability of funds to both GoM and individual entrepreneurs. To encourage new industries, Maldives should:

• Modify microcredit programs to more effectively target the poor and women;
• Acquire loans from international lending organizations;
• Maximize access fees for foreign fishing companies and commit new revenue to a dedicated trust fund; and
• Attract more foreign direct investment.