Is Papua New Guinea better understood as two economies rather than one? Two economists examine the complexity of the country’s position.
Work on Misima Island. Credit: Kingston Resources
It has been reported that in 2017, Papua New Guinea had the world’s second highest current account surplus to GDP (25 per cent), behind Macau.
But Paul Barker, Executive Director of the Institute of National Affairs, notes that this has not translated into solid economic and social development, sound fiscal conditions or balanced budgets.
He calls it ‘PNG’s recurring paradox’, whereby there is a strong trade surplus in goods, and trade is a high proportion of overall economic activity, but this does not translate into job creation or strong inflows of foreign exchange.
The Institute of National Affairs’ Paul Barker
‘PNG has become more of a dual economy. It is an unusual creation and a very big challenge to manage it.’
Barker notes that tax revenue is also ‘stagnant’. In 2010, revenue from mining and petroleum corporate taxes constituted 20 per cent of the government’s revenue. By 2016, the contribution was down to less than two per cent of revenue.
‘We really aren’t seeing any benefit from our dominant resources sector. We are not getting any foreign exchange despite this vast positive current account and not getting tax revenue either.
‘It is a very strange economy. And the lack of foreign exchange also means that other overseas businesses are not able to pay for goods and services offshore.’
Scrutiny
Barker says that resource projects should be scrutinised to see if they will prove beneficial to the wider economy; that there is a genuine mutual interest. ‘You do need a capability to negotiate those resource projects. Successive generations of those resource projects have become more concessional.
‘Then you need the capacity to oversee them as well. There is no CEO who is getting a bonus for paying more tax than they have to. They have an army of accountants to make sure they are operating within the letter of the law.
‘People and businesses who are associated with extractive industries become very rich, while there is no wealth transfer or improvement in livelihood for the vast majority of people and businesses.’
‘Maybe holding off on them, or timing them right, or negotiating more firmly might help PNG.’
Barker acknowledges that going ahead with resources projects does boost business confidence ‘even if they are not nearly as beneficial as they might be to provide that stimulus.’
Dutch disease
Michael Kingston
A slightly different perspective is provided by economist Michael Kingston, Chief Executive of Lae-based manufacturer K K Kingston. He believes the problem is not so much an imbalance between the traded sector and the rest of the economy. Rather, it is so-called Dutch disease: an economic phenomenon (detected in Holland in the 1960s when there was a large gas discovery) whereby rapid development of the natural resources sector crowds out investment into other industry sectors.
‘I agree that there are two economies in PNG. To me, this is the curse of resource abundance. If you look at every country that has been endowed with substantial natural resources, you see the same effect.’
Kingston says Dutch disease tends to create a very high Gini coefficient (a statistical measure of distribution generally used to gauge inequality; the higher the rating, the greater the inequality).
‘We see that here in PNG. People and businesses who are associated with extractive industries become very rich, while there is no wealth transfer or improvement in livelihood for the vast majority of people and businesses.
‘I agree that there are two economies in PNG. To me, this is the curse of resource abundance. If you look at every country that has been endowed with substantial natural resources, you see the same effect.’
‘There are very few countries that have done a good job of using the windfall income from extractive industries to better the entire economy. One example is Norway, where government policy was used to put the nation’s share of the windfall income into a sovereign wealth fund and then reinvest that money into other sectors of the economy. At the same time, they enacted a number of policies that were designed to strengthen non-extractive industries.’
PNG has its own longstanding plans for a sovereign wealth fund. Kingston warns that just setting up a sovereign wealth fund is insufficient, however. It also has to be well managed:
‘We have seen recently with scandals in Malaysia how the wealth can be captured in sovereign wealth funds and misappropriated and misused.’
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It is an old myth that PNG has two sectors to its political economy. Instead there is one political economy, with 80 per cent or so of the population deliberately tied into the countryside producing and consuming commodities at a range of usually low living standards. The term the Dutch disease was coined to explain the effects of oil production on a country already industrialised and urban. It is completely inapplicable for PNG where there has been deliberate government policy since the late 1960s to block urbanisation and manufacturing industrialisation. The result is a large part of the population trapped in rural poverty, poorly educated with little in the way of industrial skills, a heavy reliance on imported consumer goods and skilled labour. Part of the policy which has been so devastating has been to argue for the prioritising of primary over secondary and tertiary education, as if primary schooling can ever reach high standards without tertiary trained teachers.
The PNG political economy continues to be imprisoned by a combination of anti-urban bias and reactionary ruralism, ignoring the over-whelming historical evidence that higher living standards, productivity increases etc are everywhere else a product of state policies that promote urbanisation and urban industrialisation.To take one example, China has not achieved its much vaunted raising of so many people out of poverty by locking the population in the countryside. It now has over 50% of the population urban with the aim to make this 80%, on par with the USA, Germany, the UK and other industrial countries, before too long.
I could say more and will in my forthcoming book on PNG and Independence.