Consumerism. Where does PNG’s money go?

BY PAUL OATES

MANY PEOPLE HAVE commented on the seeming conundrum that, although PNG is rich in resources, many of its people are relatively poor in material goods and services.

So where does the money go? Some feel it’s just a case of national and international theft. Others are amazed at how hard PNG works for just small returns.

Let’s examine some possible causes.

Firstly, PNG’s rich natural resources must be extracted and processed. Mineral deposits in their natural state are not worth anything and must be smelted and turned into consumer products.

The riches of the ocean and soil must first be caught or farmed and then processed before being able to be consumed. Forests must be cut down in order to be made into furniture and other consumable items.

Given the proviso that PNG’s resources must first be processed in order to be turned into saleable products, how much of this processing and manufacturing takes place in PNG? How many PNGians actually own or have a majority ownership of the processing and manufacturing plants?

Secondly, PNG is not alone in exporting her resources. Australia and many other countries also export raw materials and primary products to many countries. The difference seems to be that Australia obtains significant benefits from these exports.

As a very minor primary producer, however, these benefits do not extend to most Australian farmers and the ability of multinational companies and huge retailers to control the price of products is a sore point.

Lastly, given Australia’s relatively small manufacturing base and local markets, many consumer items have to be imported. The virtual selling out of Australian controlled commodity producers has been increasing over the last decade.

One reason given for this asset sale are that we are part of a global economy, yet the undeniable fact is that many iconic Australian companies have been sold to international buyers.

PNG however had no real manufacturing base to begin with and no large industry involving the production of most of the desirable material goods. Motor vehicles, TVs, mobile phones, computers and all the things the younger generation puts an inestimable value on must all be imported and paid for from the currency obtained from the export of natural resources.

So when the next person asks where their country’s riches have gone, have them look at their lifestyle, what they are spending their money on and who owns the company that produced the item.

Comments

[Bernard Yegiora]

Very true Barbara!

[Barbara Short]

I wonder if MD lives in PNG. He/she sounds like a person who could write a regular "Comment on the PNG Economy" for one of the PNG newspapers.

MD seems to have a good grasp of the subject of Economics and the PNG economy, and could probably write about the big economic questions facing the PNG people in easily understood sentences so senior high school students and other educated PNG people could understand.

For example, he/she could explain the law of comparative advantage in a simple way so all could understand.

When commenting on current problems, e.g., who should own the minerals under the soil, he/she would need to give both sides of the argument and give suggestions as to which side would be the better option for the benefit of the country as a whole.

[Francis Hualupmomi]

Barbara - I admire your comment. PNG needs more commentators in not only economics but all fields to provide daily information about different issues influenced by both internal and external factors affecting the policy domain.

The world is changing rapidly with knowledge growing each day. We're living in a knowledge-based economy.

[M D]

Whether people in a country are poor or rich is dependent not only on resource exports, as the author asserts. In fact, the primary determinant of income per capita (a fairly good measure of how much you can buy) is labour productivity.

In PNG, which is a developing country, physical and human capital (skill) per worker is low, and labour productivity is thus low. In Australia, on the other hand, labour productivity is high, leading to higher income per capita.

Australia's manufacturing base has fallen for two reasons. Firstly, the relative price of services is rising (Baumol effect), as it is in all countries, meaning resources are shifting into services and out of manufacturing. This is happening in all developed countries - in most now the share of services in GDP is above 70%.

Secondly, specialisation due to trade (Australia is specialising according to comparative advantage). Australia imports manufactures as a result of this specialisation and this creates gains from trade which will (on average) make everyone better off.

The restructuring of the Australian economy (smaller manufacturing sector, larger services sector, larger mining sector) is a result of resources shifting in response to relative price changes.

As for PNG, development via the route of industrialisation seems unlikely any time soon. The resources boom (LNG) will make manufacturing in PNG less competitive. In addition, wages are high relative to productivity (PNG does not have a comparative advantage in manufacturing), and infrastructure is poor.

As the first commentator notes, the price of commodities (energy, metals etc) has risen relative to manufactures. This is in part because of the resources boom (increased demand from China etc), but also because of technological progress in manufactures, which drives down prices of these goods.

Finally, the purchase of mobile phones, cars, computers etc (import of technology intensive goods) can lead to higher productivity which can lead to new sectors in which a country can compete against other.

Trade can create new opportunities for trade. Think about the gains in efficiency in PNG due to the wide adoption of mobile phones as an example.
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We thank MD for this informative comment and invite him/her to append a name in future - KJ

[Barbara Short]

Good point, Paul. I wonder how PNG's terms of trade are these days, i.e., the prices PNG receives for exports compared to the prices it pays for imports.

Australian's terms of trade used to be very bad for many years but we are now experiencing a wonderful period, e.g., it doesn't cost as much coal to buy a TV as it used to!

Back in the 1970s and 1980s there was a UPNG economics lecturer who wrote excellent weekly articles for the 'Post-Courier' to help the PNG readers understand what was happening to PNG from an economic point of view.
I wonder if this is still happening.

Back in the 1970s, many PNG parliamentarians didn't have much understanding of how the modern economy worked. PNG was running short of capital and it was agreed that it should borrow from the World Bank.

One older parliamentarian, who I will not name, got up and said in Pidgin how he did not understand anything about this World Bank but he knew Burns Philp had plenty of money and he suggested the government should borrow from BPs!

I'm sure the average member of parliament is now better educated but it appears there are still some who haven't got a clue as to how a modern economy runs.

The PNG people do not have to have a degree in Economics to understand how a modern western economy works but they do need to have all the economic terms explained to them.

There needs to be economic writers for the national newspapers who will explain what is going on in a simple way so the average PNG person can understand.