Economic: Gabal

We welcome your constructive feedback:(Right-click, "Open in new tab") Africa • Caucasus • Europe • Pacific • WEG • Force Structures

Using the DATE • TC 7-101 Exercise Design • Download

DATE Pacific > Gabal > Economic: Gabal ←You are here

Throughout most of the 19^th and 20^th Century, the economy on Gabal predominantly focused first on timber logging and then chromite mining, with the export of molave lumber and chromium providing the nation’s only income, apart from overseas investment. Industrial focus gradually shifted towards chromite mining as molave forests were clearcut. Revenues obtained from the exportation of these products, combined with a relatively small population, made Gabal one of the wealthiest nations in the world in terms of gross domestic product per capita. In the latter part of the 20^th Century, mining produced about 2 million tons of high-grade chromite each year. Once these reserves were exhausted, however, the economy collapsed, and Gabal has since struggled to recover. The Gabal government first attempted to become an offshore banking center—essentially, the Pacific equivalent to Caribbean offshore banking. Allegations of money laundering and transnational criminal connections, however, resulted in the entire Gabal banking sector closing. This forced Gabal to seek alternate revenue streams. A twenty-year span of excessive spending and bad investments led to the economic classification of the nation as a fragile state. The Gabal government invested initial surpluses of $1.05 billion from the timber and chromite industries to provide income when the resources ran out. By law, the government could not access these funds for 15 years, at which time the expected value would be over $4 trillion. An audit of the Gabal Royalties Trust Fund recently revealed that 85% of that investment was lost through corruption and bad investments. Meanwhile, signs of past prosperity are all over the islands—unmaintained cars left to rust, restaurants in disrepair or closed. Gabalians who formerly had no worries about importing luxurious food or clothing now live on about $80 a week.

Gabal has a mixed market economy. A predominantly free market economy exists at the local level, but the state centrally directs most of the national and international economic decisions. This is especially noticeable in the state-owned fishing and tourism enterprises that make up a significant portion of the economy. Combined, these enterprises contribute half of the GDP and a third of employment. However, governance of these enterprises is inconsistent and rife with tribal cronyism.

The diversification of the Gabal economy following the banking experiment debacle resulted in two surges to the Gabal economy. First, Gabal refocused on exploiting natural resources. This included surveying the islands for secondary deposits of chromite and issuing licenses to fish in its territorial waters to international conglomerates. With improved regional coordination and strong global market conditions, fisheries revenue has more than tripled in the last five years and now accounts for about 30% of domestic revenue. By contrast, chromite mining became an increasingly marginal source of income, primary deposits were depleted and deep mining of secondary deposits has yet to begin, due to uncertainty regarding both quantity and location in tribally protected lands. Second, Gabal saw some success expanding its tourism sector, marketing itself as a premier dive destination due to the number of WWII wrecks offshore. Combined with economic diversification and boosted by strong aid flows, these actions returned the Gabalian economy to growth, expanding by as much as 17.3% per year for the last five years. While there has been a significant improvement in the country’s overall economy, economic growth remains erratic, and the issues of inequality and distribution of wealth remain an ongoing concern.

Table of Economic Data

Measure	Data	Remarks (if applicable)
Nominal GDP	$350 million
PPP/Capita	$7854.80	Purchasing Power Parity
Real GDP Growth Rate	2.8%	Five-year average is 19.1%
LFPR	64.0%
Unemployment	23.0%
Poverty	24.0%	Percent below poverty line
Net FDI	$293 million	Entirely inbound
Budget	$522 million revenue $468 million expenditures	Revenue includes international aid
Public Debt	88.5% of GDP
Inflation	-1.3%	14.5% over last decade
Value of Exports	$246.64 million
Value of Imports	$646.20 million

By sector, 93.7% of the GDP comes from services and 6.3% from industry. There is no significant GDP input from the agricultural sector. By component, 71.8% of GDP is from consumer spending, 50.5% from government spending, 20.8% from investment, while net exports decrease GDP by 43.1%. Because Gabal uses the currency of South Torbia, global economic factors outside their control are the major macroeconomic drivers of inflation. However, local factors also influence the Gabal markets. High unemployment and low income have generated low demand across the islands, creating a major deflationary trend. However, rapidly rising food prices offsets this trend.

Participation in the Global Financial System

IMF/World Bank/International Development Aid

Last year, Gabal received $205 million in net total Official Developmental Aid. The government of South Torbia also gave $140 million in international aid—equal to nearly 40% of the $350 million GDP in Gabal. Other international and regional charitable and economic development organizations provide aid to Gabal. For the last two decades, Gabal borrowed money as part of its post-chromite diversification strategy. Gabal has been mostly a Western-leaning nation in terms of trade and support. Last year, the Government of South Torbia provided a $17 million grant co-financing the Fiscal Sustainability Reform Program; South Torbia contributed nearly $90 million over the last 10 years towards Gabal’s economic security. With its desperate economic situation, Gabal also reached out to Olvana, who provided a $21 million interest-free loan to help support unspecified economic and technical projects between the two countries. Last year, Gabal became the 189^th country to join the World Bank Group, making the nation eligible for financial support from World Bank-administered trust funds. The World Bank has thus far disbursed approximately $10 million to Gabal for improvements to agriculture, fishing, and forestry.

Foreign Direct Investment

The Gabal Agency Corporation is a state-owned enterprise that encourages foreign investment through international financial services. It also assists with the registration of holding and trading companies and in obtaining various governmental and insurance licenses. While the government does not impose any limitations that could potentially limit FDI, neither does it have any particular draws. Last year the inflow of foreign direct investment surpassed just over $293 million.

Sanctions

While there are currently no major economic sanctions against Gabal, during the country’s efforts to become an offshore banking center, a group of major US banks instituted a ban on dollar transactions with Gabal until they received the necessary reassurances about banking procedures. This resulted in the closure of the entire Gabal banking structure.

Charity

While Gabal itself has no indigenous charities, a number of global and regional charities based elsewhere operate in the country or on behalf of the nation’s inhabitants. Most of these are human rights and legal organizations from South Torbia, focused on nutrition and poverty.

Economic Activity

The microstate economic structure of Gabal and lack of diversified natural resources means that Gabal suffers from a very volatile growth rate. Even with efforts to expand revenue sources, growth over the last ten years ranged from an annual high of 36.5% to a low of -20.0%. Periods of recovery reflect progress in restoring chromite exports, growth in services, and the gradual absorption of a refugee community into the local workforce. A high decline in GDP, however, resulted from a suspension of mining and decline in tourism following Super Typhoon Haima storm damage to the nation’s air and seaport facilities. Although mining depleted the primary reserves of chromite, ongoing efforts seek to extract a deeper layer. These secondary deposits may last another 30 years. Often, the amount of international aid Gabal receives directly affects economic growth. This aid, in turn, varies based on the political climate within either Gabal or the donating nations.

Economic Actors

Gabal is highly dependent on foreign aid. Western nations provided budgetary support in decreasing amounts since independence, phasing it out completely some 15 years ago in favor of project development investment. Gabal’s economic growth heavily relies on commodity exports from the mining sector. Despite its enclave nature, the mining sector has a major impact on the Gabal economy, through its contribution to foreign exchange and government revenue. After four decades of independence, the future leaders of Gabal face both optimism and pessimism. A growing middle class produced a number of talented emerging leaders committed to changing the weak development trajectory of their country. They face a complex set of challenges: weak governance, a failing health system, a mediocre national education system, continuing reliance on the extractives industry, and the unrealized potential of subsistence agriculture.

Trade

The Gabal Cooperative Society, a government agency, conducts most of the nation's retail trade. The country is almost completely dependent on imported goods.

Commercial Trade

Primary imports include foodstuffs, refined petroleum (diesel), prefabricated buildings, large construction vehicles, cars, and poultry meat. Importation occurs from Australia (56%), Olvana (7%), US (2%), EU (1%), OPEC Nations (0.5%), South Torbia (0.3%), Belesia (0.2%), rest of the Pacific Region (21%), and the rest of the world (12%). Exports are primarily chromite, and to a much lesser extent, scrap metal and garments. Exportation occurs mostly to Australia (47%), the EU (10%), US (2%), OPEC Nations (0.5%) , South Torbia (0.5%), Olvana (0.3%), Belesia (0.2%), rest of the Pacific Region (36%) and the rest of the world (3.5%).

Military Exports/Imports

Gabal does not have a significantly sized military nor any military hardware production capacity. As Gabal has not tailored its military towards conducting offensive nor defensive operations of any scale, importation of weapons is extremely limited, mainly periodic replacement of small arms. Gabal has no corporate involvement in the defense industry.

Economic Diversity

The current business environment in Gabal is one of stability with little expected shift, either positive or negative, in practices or demographics. Like GDP, the labor force is predominantly in the services sector (78.7%), nearly equally split between the tourism industry and government work. The industrial sector employs 15.3% of the work force, almost exclusively in chromite mining, while 6.0% of the population works in agriculture. Gabal does not have a national stock exchange.

Energy Sector

Gabal imports 100% of its energy needs. It has no exploitable oil, natural gas, or coal reserves. The government desires to transition to solar power in order to reduce the burden on the state budget as well as household finances.

Natural Resources

Gabal has few domestic resources and virtually all consumer products are imported. While the islands possess multiple bays, harbors, anchorages, and lagoons, none is large or deep enough for a port capable of deep-water operations. With the exception of Coron Island, industrial pollution contaminates much of the inland water. Gabal has no proven reserves of oil, natural gas, coal, or refining capacity. At one time, Busuanga held a significant number of molave (vitex parviflora) forests, but the government largely harvested the remaining stands for export immediately following World War II. The only economically significant natural resources remaining are chromite and fish, particularly tuna. Earnings from the export of chromium remain an important source of income as recently prospectors discovered deeper secondary chromite reserves. However, the extraction of these reserves requires considerable investment. The government hoped to develop a local fishing industry and formed the Gabal Fishing Corporation forty years ago; however, the fishing industry averaged an annual income of only about $67,000. The rehabilitation of mined land and the replacement of income from the chromite and timber industries are serious long-term problems. Since the nation does not have the resources to develop a viable fishing fleet, the government has instead opted to sell its fishing rights to other nations. Revenue from fishing licenses presents some challenges, as revenues can be difficult to predict from year to year. The ability to sustain revenues at reasonable levels in the long run depends on factors such as global market conditions and the continued success of regional fisheries cooperation. Combined with reliance on chromite market prices, the government of Gabal must carefully manage these additional revenues given their finite and uncertain nature. Apart from the importation of bottled water, desalination and rainwater tanks are the two main water sources supplying households in Gabal. The main desalination plant, as well as the rain and water tanks, provide for 35% and 59% of households, respectively. A large proportion (64%) of those in the top 20% income bracket rely on rain and own water tanks compared to other sources of water (only 24%). On the other hand, 83% of households in the bottom third for income rely on a dated desalinization plant as their main water source supply. Lower income/expenditure households rarely use their own water tanks due to the high cost. However, the desalinization plant, constructed during the heyday of chromite mining, is now operating well under peak capacity due to a lack of maintenance, and water from this source carry increasing levels of potentially toxic materials.

Agriculture and Forestry

The only commercially viable fertile areas on the islands are primarily in the lowlands of Culion Island, where rice, corn, and sugarcane are grown. Commercial and subsistence farming combined are insufficient to meet domestic demand, and the nation must import a significant quantity of foodstuffs. The combination of slash-and-burn agricultural processes and continuous mining of chromite left many portions of the islands unsuitable for farming. Mining contamination and nutrient depletion from destructive farming practices made large portions of available arable land sub-optimal for agricultural productivity at anything above the subsistence level. The government is attempting to address these issues. The Agriculture Development Fund of Gabal provides a mechanism for small grants and micro-credit for the development of commercial and agricultural activities in the country, intended to encourage alternate farming methods. For example, a poultry farm started operation last year with a budget of $18,200, produced total sales of $127,750. These efforts pale in comparison to the needs of either the economy or the nation’s populace, however. While portions of the islands remain forested, none are suitable for commercial timber operations. The government is attempting to re-grow its rain forests for both commercial and ecological reasons.

Industry

The only industries on Gabal are chromite mining and fishing. All chromite mining is under the purview of the Gabal Chromium Corporation, a statutory corporation responsible to the Prime minister in his capacity as minister for island development and industry. High-grade molave timber and chromite ore were the only notable natural resources of Gabal, its only export commodities, and the basis of the Gabal economy. The Gabal Chromium Corporation, who quickly bought out the logging industry once surveyors discovered the extent of chromite on the island, was the nation's primary producer, employer, and exporter. During the heyday of chromite mining, Gabal also had refining capability to produce high-carbon ferrochromium. However, with the reduction of raw ore mining and concerns over carbon monoxide production, the Gabal Chromium Corporation ships all ore off island for processing. Beyond this, Gabal does not possess any indigenous manufacturing capability. Much of Gabal’s revenue from fishing comes from selling fishing rights in Gabalian waters to other international fishing concerns. The domestic fishing industry consists mainly of trolling for tuna with small outboard-powered boats.

Services/Other

Although services are the largest segment of the Gabal economy, in terms of both contribution to GDP and percentage of labor force, the sector remains vastly underdeveloped. Almost half of the service sector is comprised of government workers in what is mostly a bloated, unproductive bureaucracy. Approximately 45% belong to a growing tourism sector, which has the potential for growth, but suffers from marketing issues. The remainder of the services sector is a disparate mix of media, transportation, and health care.

Banking and Finance

Public Finance

Gabal has no central bank, nor any domestic commercial banks. The international banking community blacklisted the country almost twenty years ago because of concerns that it had become a base for money laundering. The government closed the Bank of Gabal ten years ago, and revoked the licenses of hundreds of Gabal-registered banks. Since then, the country operated as a cash economy, using the South Torbian yog for currency. The South Torbian government regularly flies bags of currency from Manila to Gabal to bolster currency supplies and pay government workers and residents. Gabalians sometimes resort to tactics like burying their savings to protect them from thieves. Like many Pacific island nations, foreign-owned commercial banks dominate the banking system. Last year, the Gabal government scouted out a prospective commercial bank willing to come to Gabal. They chose a South Torbian bank that had a successful community bank model in South Torbia, where locally owned franchises operate in small towns with the bank's support. Residents attempting to withdraw cash deposits held in bank accounts offshore frequently drain the nation’s only two cash machines.

Taxation

Two years ago, Gabal imposed an income tax for the first time, with high-income earners—those making more than $8000 monthly—paying a flat rate of 10%. Additionally, Business Tax Act Number 31 imposes a 10% withholding tax on all payments of insurance premiums, except for life insurance, made to a nonresident insurer that does not have a permanent establishment in Gabal. The government also established the Gabal Revenue Office, headed by a new Deputy Secretary for Revenue under the Department of Finance. The Revenue Office will attempt to improve revenue collection from import duties, and license fees, as it will have an enhanced capacity to enforce existing fee collection mechanisms spread across several Departments. Gabal imposes major customs duties and levies on the small expatriate population. Corporate tax rates vary widely, with state-owned enterprises paying no corporate tax, private businesses owing 15% and foreign investments paying 44%. Gabal does not impose a VAT on food products, but has recently increased rates up to 15% on luxury items.

Financial Policy

Attempting to balance the budget is the top fiscal priority of Gabal’s government. This remains an area of struggle for Gabal, as they attempt to balance inconsistent and often declining revenue streams with maintaining government spending to essential priority areas.

Inflation

Gabal suffers from an extremely volatile inflation rate. Its reliance on imported food and exported minerals means that global market fluctuations greatly affect prices on the islands. In the last decade, inflation rates have been as high as 22%, while last year overall prices dropped nearly 1.5%, even as global food prices climbed. A lack of predictability further added to both the government’s inability to implement appropriate fiscal policy, as well as the overall dissatisfaction of the populace.

Currency Reserves

Although most Asian economies recovered from slumps following a major regional financial crisis twenty years ago, Gabal suffered from depressed global mineral prices devaluing its chromium exports. Estimates of minerals in exploration expenditures dropped by one-third after only two years. The resulting lower foreign exchange earnings, capital flight, general government mismanagement and a dangerous decrease in foreign currency reserves.

Public Liabilities/Debt

Poor managerial decisions resulted in a budget deficit of 13.41% of GDP, virtually bankrupting the country. Future efforts will likely focus on ensuring that the government delivers essential public services while continuing efforts to increase and diversify the revenue base. The primary source of public debt covering the budget deficit is loans from other Pacific nations.

Subsidies

The Gabal Utilities Corporation receives the majority of its revenue from the Government, which allows it to offer highly subsidized electricity and water rates. When it was still in business, Air Gabal received an unusual type of subsidy, in that the Government of Gabal purchased aircraft and supplied them to the airline effectively at no cost. The government also subsidizes many imports, so that food and other necessities are available at nominal cost.

Private Banking

Banking System

Over the last two decades, Gabal attempted to supplement its dwindling timber and chromite revenues by becoming an offshore banking tax haven, similar to certain Caribbean nations. At one point, there were over 400 registered offshore “banks.” Any individual could start a bank in Gabal with a one-time investment of $25,000. These banks were not financial institutions in the traditional sense, but rather, were virtual locations where electronic funds could pass through or reside essentially tax-free, with a post office box for paperwork. Although this initially brought modest economic success to the island, the country was eventually labeled by the G-7 as one of the world’s “uncooperative nations” in the fight against money laundering by narcotics traffickers and organized crime figures. The country was described as offering an open invitation to financial crime. The Organization for Economic Cooperation and Development alleged that transnational criminal organizations and drug cartels circulated billions of dollars through these banks, providing a cover for money laundering operations on a massive scale. The European Central Bank identified Gabal as the main center for the laundering of 70 to 80 billion US dollars originating from Eastern European, Latin American and Asian crime syndicates. Under global pressure, Gabal closed these banks and brought its banking laws into line with international standards. However, in the face of an expected ban on internet gambling in some western nations, online gambling companies may look to relocate to various Asian nations, including Gabal.

Informal Finance

The  informal  savings  and  credit market in Gabal consists  mainly  of relatively localized credit and savings transactions of money, real goods and labor services among members of extended families, clans and tribes, friends and relatives and trade store owners. In addition, informal savings and credit groups generally found among rural women extend credit. An emerging source of credit in Busuanga is the semi-professional moneylender. Although such moneylenders do not yet appear to be operating outside the Capital, there is evidence of a growing class of semi-professional moneylenders who combine moneylending with their usual occupational activities in the urban sector. These urban moneylenders provide very short-term loans, mainly for persons whom they know well. Often, this form of financial intermediation is the only financing available to the majority of Gabalians. Even in locations in which deposit and transaction services are available, many formal financial institutions do not provide credit services to lower income households, who must borrow from informal sources.

Employment Status

Underemployment remains a significant problem for Gabal. When chromite reserves exhausted, unemployment reached a high point of 90%, and the school system collapsed almost entirely. Currently, even though a high percentage (64%) of the Gabal population aged 15 and older were economically active in the labor force, only a relatively small proportion (47%) people received a regular paid income, 58% of males and 35% of females. The Gabal government is the country’s largest employer, with workers in public administration, education, and transportation. The largest private employer is the Gabal Chromium Corporation, which employs both Gabalians and about 3,000 overseas workers, primarily Olvanese and Belesians. Generally, the non-Gabalian employees tend to be those in higher-skill sets. Employment in the tourism industry is growing due to a boom in construction activity, the presence of numerous foreign contractors and service providers, significant local employment at elevated wages, increased air passenger traffic, and higher demand for imported supplies. However, this industry is seasonal. Unemployment still hovers around 23% – 21% of males and 26% of females. The working-age population will increase substantially during the next years. Both the private and public sectors need to absorb an increasing number of job seekers in the future and are encouraged to collaborate in developing innovative strategies that will promote economic diversification and growth.

Labor Market

The labor structure in Gabal is predominantly male. Nearly all Gabalians in the non-agricultural labor force work in the more populated areas of the islands; 76.1% of those are male. This stems from cultural rather than systemic factors. The Gabal Constitution affords equal rights to women and men, and women fill half of the heads of department positions. There is no real disadvantage in promotion or opportunities, a fact associated with the education system wherein girls have received the majority of merit based scholarships to study abroad. However, traditional social values still exist discouraging women from pursuing careers, and women face great social pressure to marry and raise families. The labor force composition is broken into 6.0% in agriculture, 15.3% in industry, and 79.7% in services. Job growth in the public and private sectors is about equal: both sectors have very small growth. The government is the largest employer in the country, accounting for 38% of the work force. Labor volatility is low as workers tend to stay in the same industry. The working-age population is sufficient to replace vacancies caused by retirees. Wages account for almost three-fourths of household income. The labor force participation rate has slowly grown, from 53% to 64% over the last 10 years. The law sets the minimum age for employment at 17 and the Department of Human Resources and Labor is responsible for enforcing the law. The two only significant employers in the country, the government and the chromite industry, respect the law, while some children under 17 work in small, family-owned businesses. Unemployment remains an issue across the islands. The current unemployment rate is 23.0%, the youth unemployment rate (ages 15-19) is 70%, and unemployment for those aged 20-24 years is 36%. During the off-season, the lack of tourism employment increases the overall unemployment rate to 43.4%, while unemployment rates for the 15-19 and 20-24 age groups jump to 85% and 47% respectively. All told, over 50% of the under 30 population are unemployed and live below the national poverty line. Gabal will have a labor surplus situation for the indefinite future. The opportunity for new jobs is scarce, while the working age population (aged 15–59) will be about will expand by 25% over the next 30 years. Recognizing the inherent problems with unemployed youth, the Gabal government started a program called the Clean and Green Plan. This initiative establishes a dedicated workforce split into small teams assigned designated areas of roadside and adjacent public lands/areas that they will keep clean and green, particularly through planting of new trees and shrubs. The labor force consists of unemployed youth living in or near the area that they will maintain, in order to instill pride in their work and environment. This initiative will provide over 100 part time jobs for currently unemployed youth. However, even those with jobs face poverty conditions. There is no minimum wage for private sector workers, and while the government has a graduated salary system for public service officers and employees, at lower ranges these salaries do not provide a decent standard of living for a worker and family. The nation has income inequality that is very high by global standards for both developing and developed countries, and is among the highest in the Pacific.

Employment and Unemployment

Young people account for almost half the population of Gabal and comprise a large part of the urban poor. Many are uneducated due to their life circumstances and do not have the necessary skills for entry-level jobs. Long-term unemployed young people often find themselves involved in petty crime to support themselves. The World Bank Group’s International Development Association contributes $15 million annually to the Urban Youth Employment Project. This project provides training to improve young peoples’ chances of obtaining jobs. The project is also helping provide short-term jobs to help participants earn an income and gain much-needed employment experience.

Illegal Economic Activity

Widespread corruption is a major impact within the Gabal government related to the handling of funds. While chromite-mining levels are far less than past decades, some wildcat mining does still exist and competition for the mining rights is fierce. An Asian chromium mining company made tens of thousands of dollars in payments of “consultancy fees” to the wife of the Gabal Justice Minister, even though she was not involved in any consultancy work for the company. Additionally, some opposition figures have alleged that the president was demonstrating undue influence on the judiciary. Corruption reaches the very top and is the single biggest cause of the country’s decline since independence. Huge sums of money has disappeared into the pockets of politicians or misspent by successive governments. Despite this, there is very little political will to fight corruption as it permeated at every level of politics and the bureaucracy.

Internally, Gabal has a relatively low crime rate. Petty theft and pickpocketing of tourists constitute the vast majority of crime in the nation. The ethnic Olvanese community, who comprise approximately 5 percent of the population, has been victims of a pattern of petty theft, property damage, and assault. Police attributed most attacks on ethnic Olvanese to economic rather than racial motivations and noted a general trend of theft-related attacks on a few private businesses. Offshore smuggling is lower than in most Pacific Island nations, in part because neighboring nations have either laxer standards or more access to international transportation hubs. This is not to say that smuggling does not exist. The Kumpulan criminal organization conducts smuggling to avoid taxation and runs a significant black market. Many of the least well off financially turn either to Kumpulan or independent smuggling operations to provide basic subsistence.

Population Movement

There is very little immigration or emigration in Gabal. Very few Gabalians work or are permanently resident abroad and the islands do not offer much of a draw to potential expats. In 1964, when heavy chromite mining began in earnest, Western governments offered a plan to resettle the entire Gabal nation to an uninhabited island elsewhere in the Pacific, but abandoned the plan because the Gabalians decided to stay put.