Papua New Guinea is not independent of corruption
PNG's 41st Independence Day - A Reflection

PNG’s economic history: a failure to deliver to the people

Paul Flanagan 2

PAUL FLANAGAN | Edited extracts

TODAY is Papua New Guinea’s 41st anniversary of Independence, so I will reflect on some aspects of its economic history.

The PNG economy, after allowing for inflation, is 3.3 times larger than in 1975. Many people doubted that this would be possible at the time of Independence given the challenges and uncertainties facing the new country.

This growth is probably clearest in Port Moresby – it is a much more modern city with freeways, flyovers, luxury hotels, traffic jams, pollution, large shopping complexes and many taller buildings downtown.

This in part reflects the strong urban bias of PNG’s economic policies.

For PNG, almost all of this real growth can be accounted for from population increase. Since Independence, the population has risen from 2.9 million to an estimated 7.6 million. For every Papua New Guinean at the time of independence, there are now 2.6 people.

The number of people in the formal sector has more than doubled according to Bank PNG business surveys.

While jobs growth is positive (a 2.1 times increase from 1978-2014), it is disappointing that it has not even kept up with population (a 2.6 times increase). In other words, the share of working-age people getting jobs in the formal economy has been falling. This is not inclusive growth.

PNG is described as a resource dependent economy. This is unusual terminology as the non-resource sector has accounted for between a high of 93% of the economy (in 1984) and its lowest share of 70% (in 2006).

The resource sector has had very limited impact on the vast majority of people and this impact is highly variable.

The start of production from the Kutubu oil fields and new mines in the early 1990s led to massive increases in GDP of around 36% between 1991 and 1994 (even larger than the 25% increase in 2014 and 2015 driven by the commencement of the PNG LNG project). However, by 1994, PNG had fallen into recession. 

And, since 2015, history is repeating itself as PNG has probably fallen into recession again after the promise of rivers of resource revenues led to poor fiscal, monetary and structural policies.

A better measure of economic performance is to focus on non-resource GDP which grew very slowly for the first two decades from 1980. Over the late 2000s, there was more rapid growth, but this had slowed by 2010.

An even better measure of economic performance is to use per capita figures – how much income is available per person. This trended down through both the 1980s and 1990s.

The sharpest decline was related to the economic crisis of the late 1990s. A pattern of recovery slowly commenced from 2005, but this has flattened out since 2012 and is now in serious decline.

By 2015, using a five-year average, incomes are 4% lower than they were in 1980 and the drop in real incomes is larger if the comparison is made between 1980 and 2015 – a drop of 8%. On this key measure of economic well-being, real incomes in PNG have gone backwards. And emerging data for 2016 indicates this is getting worse.

This is very disappointing, and a long way from the aspirations of people at the time of Independence. It is also a long way from future aspirations shown in Vision 2050. Why is this so?

PNG’s greatest curse flows from the intersection of nature’s resource gifts and economics.

The “resource curse” has and continues to destroy many economies. A cure was tried in PNG (through the Mineral Resource Stabilisation Fund – a better model than the current flawed Sovereign Wealth Fund model), but the combination of corruption, poor politics and poor economic policy means the resource curse remains the greatest burden hindering real development.

The resource curse underpinned the Bougainville civil war and still risks fracturing the PNG state where there are daily newspaper reports of landowners being unhappy with their share of resource benefits.

In a slow and insidious way, the resource curse impacts on the exchange rate, paralysing opportunities for integrating PNG into the Asian century.

PNG’s greatest policy mistake since Independence has been too much focus on natural resources (such as LNG, gold or logging) rather than people resources.

Focusing development efforts around people, such as support for smallholder agriculture or encouraging the informal sector, tends to lead to a pattern of development with more widespread and inclusive benefits.

Focusing on natural resources has tended to create a dualistic economy with development benefits captured by few.

I am saddened when I read comments in PNG lamenting the decline of the kina relative to the US dollar since a peak was reached in 2013.

A “weak” kina is considered a source of national shame. As an economist I know this is a stupid argument but more profoundly for PNG’s development it is a dangerous argument.

For the over two million people who earn most of their income from cash cropping, a “strong” kina is bad news as it means they get less kina for every bag of coffee or cocoa that they sell.

What is known as a “strong” kina is in fact very bad for all exports and trade competing industries such as agriculture, fisheries, tourism and small business. However, for a public servant in Port Moresby, a “strong” kina means that a bag of rice or a new digital TV becomes less expensive.

A “strong” kina also has social implications. It creates a strong incentive for people to leave the cash cropping opportunities in rural areas and move to an urban area in search of a formal sector wage.

It has strong gender impacts as it undermines the value of the work of women in domestic agriculture.

It increases the incentives for Papua New Guineans to send their money overseas either for property investments in Cairns or to send their children to school overseas. It hinders foreign investment in PNG by making it more expensive relative to other destinations.

This one price, the exchange rate, has very powerful impacts on nearly all aspects of development.

There is widespread and growing concern in PNG about a decline in the quality of government service delivery, although the experience differs between provinces and even sectors (for example, education appears to be doing better than health).

Amongst these many complaints, there are some mitigating factors. Even maintaining basic service delivery was going to be a challenge given the very large increases in population requiring massive increases in teachers and classrooms and medical staff.

A rarely mentioned fact is that the real level of government expenditure per person has decreased since independence. Real expenditure per person has dropped from K1,873 to K1,851. So a slight decline in services could be expected even if there had been no increase in corruption or decrease in the ability of institutions to deliver.

What have been the drivers of this decline? Fiscal policy has been loosened with larger deficits – so this isn’t the cause.

Domestic revenue per head has risen by just under 30%– a credible performance given the fall in non-resource GDP per capita since independence.

The primary cause is the significant decline in aid per head. This has dropped dramatically – from around K660 per person to K170 – a real drop in support per capita of 75%. Falling service delivery is strongly linked to the fall in Australian aid.

PNG has enormous potential and opportunities.  This potential has not been delivered to its people. PNG is burdened with too much of its past.

There are still too many remnants of it being a 1975 colony of Australia rather than a modernizing Indo-Pacific nation.

Overall, I remain an optimist about PNG’s future but there are still decades ahead of often painful development choices and learning.

There are many interacting elements that help improve well-being – and the most important ones are not economic. However, if I was to suggest one key change in policy priority it would be to focus on people rather than resources.

The resource focus and subsequent “strong” kina aspirations are yokes on development. This manifests itself through the myth of a “strong” kina. This myth is biased against local exporters, local production and encourages people to invest outside of PNG rather than in PNG.

It is likely a key reason why PNG has missed trade globalisation.

A more competitive price setting with the rest of the world is the easiest policy change to help steer PNG on a better development course. And it will help deal with nationalistic tendencies without imposing more destructive policies such as import bans or inefficient government led monopolies.

May PNG have better policies, better institutions and a more inclusive form of development over the next four decades to better meet the deserved aspirations of its people.

Comments

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Arthur Williams

Paul - Unlike 2008, apparently in Obama's last speech to UN he never mentioned hope. Eight years a long time in politics.

Just been talking to my daughter in PNG on mobile at over £1 a minute she said Daddy don't even think of coming home.

PNG is in a mess and seems to be getting worse...she is one of the millions of subsistence citizens once luckier than many of them have never got past mere daily existence seeing no benefits of he 41 years of Independence that has seen hundreds of billions lost in poor accounting, auditing and by downright evil elites.

God forgive them

Bernard Corden

It is often said that there are three types of economists, ones that can count and ones that can't.

However, Paul Flanagan and Steven Keen are currently the only ones making any sense and actually evaluating the evidence.
________

Two of my favourite economists, Bernie - evidence based and not constricted by (now dodgy) theory - KJ

Hefung Hati

Appreciate the views, much of which are reflective of poor governance since independence. In fact, the whole picture painted here simply implies the issue with PNG's economy lies with the kind of policies it has had over the years and not the resources it has enjoyed over the years. What I don't understand is, was this mess done out of ignorance by policy makers or were they ill-advised?? I hate to leave a room for the reason of "lack of awareness".

Lawrie Cremin

Thanks Paul. An informed view well presented.from my perspective, simply put the revenue from natural resources needs to be directed into developing primary production (and appropriate secondary industry). Natural resources are finite.

Paul Flanagan

Hi - Thanks for all of the "likes" - I'm flattered.

For context, the article is a summary of a longer chapter I've prepared for a possible Monash/ANU book on PNG 40 years after Independence.

So other issues around fiscal performance, institutions, wages, prices, market frameworks, differential gender measures, external trade performance and broader measures of development were not included - for issues of length as well as keeping the publisher happy.

The plan is that the book as a whole will provide a much more comprehensive overview - mainly with PNG voices - on experiences since Independence.

This will cover in more depth issues such as progress with the very important informal sector of the economy as well as key social investments such as education and health.

Let me assure Franklin that I see education as a key part of the "people focus" rather than the "resource focus" for future development (and I do think you'll find a quick reference to education, teachers and classrooms).

And Corney, I agree that a measure of PNG's development must go well beyond formal sector jobs (which cover only 5 to 10 per cent of the workforce). This is why I've also sought to include measures beyond just GDP (a good summary of the limits of GDP measurement are provided in the Stiglitz-Sen-Fitoussi Commission of 2009).

And Alex, I remain in hope. I liked Obama's 2008 comments that he was a "hopemonger" - but things have been pretty mixed since then for the US.

And Peter, I think more comprehensive community to community engagement with PNG would respect our history, even if there is a price tag.

Pasko and others, thanks again.

Corney Korokan Alone

Singular archaic measurements on matters like jobs growth is annoying. What are jobs for in the PNG context?
_________

Cash, spending, economic growth, improved lives and national prosperity, Corney - KJ

Philip Fitzpatrick

The current government (and previous ones) have taken an oppositional stance to anything Paul Flanagan says. The reason they do this is that they don't like the truth and it interferes with their political games and various rorts.

I'm surprised he still bothers but I guess that's his job, preaching to people with their heads buried in the sand.

Franklin Konral

I am surprised that Mr Flanagan seems to see no big value in investing in human resource development through education.

In fact, I don't see education being mentioned at all in this article. Is education so unimportant in determining economic growth?
_________

I think you are looking for too much from a single article, Franklin. Flanagan's survey was taking a whole-economy view over 40 years. I am sure he has much to say about education. Perhaps we can look forward to reading his thoughts in a future article - KJ

Pasko Walter

Best observation on PNG's Economy. The application of such analysis would strengthen our nation's global competence.

Alex Nicolson

Thanks Paul. I cannot share your optimism in the short or medium term and in the long term we are all dead! I see little chance of PNG accepting your excellent policy prescriptions either. Cheers.

Peter Sandery

I don't think Paul has in any way implied or intended this interpretation but I can see some commentators using Paul's connection of the decline in domestic revenue to the decline in Australian aid to therefore call for an increase in such aid to former levels, which by itself would do nothing but exacerbate the problem.

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