Finding a way to sustainable economics - The Papua New Guinean experience Case Study Click on the following links for further information about this case study: Teacher's Notes Student Activities Introduction With a landmass of some 462, 800 square kilometers, Papua New Guinea (PNG) is by far the largest and most culturally diverse country in the South Pacific. More than 700 languages are spoken among a population of 4.6 million people. In 1998, PNG's estimated GNP per capita income was around $US 890 ($AUD 1,524). This ranks it as a lower middle-income country but this is not reflected in social indicators which are similar to those of a least developed country. PNG ranks 133rd out of 174 countries on the United Nations' Development Programme's (UNDP) human development index. This is below all of its Pacific neighbours. Almost one in 12 children still die before the age of five and the maternal mortality rate of 370 is one of the highest in the Pacific. The economy Social and economic development in PNG is challenging, given the country's difficult topography, limited infrastructure and low level of human resource development. PNG is endowed with an extraordinary variety of unique land and marine ecosystems. More than five percent of the world's biodiversity is found in PNG. The sustainable use and protection of these natural resources, which are of global significance, have attracted worldwide interest in recent years. However, it is the means by which this diversity can be harnessed that needs to be addressed if PNG is to maximise utility from its natural endowments and ensure a sustainable future. Economic growth over the past two decades of 1.3 per cent has not translated into significant and broad-based social development. Key social indicators have shown little or no improvement in recent years and compare unfavourably with those of similar developing countries. PNG's economy includes a 'modern' formal economy and a large informal economy where subsistence farming accounts for the bulk of economic activity. The formal sector provides a rather narrow employment base, consisting of workers engaged in mineral production, a relatively small manufacturing sector, public sector employees and service industries including finance, construction, transportation and utilities. The bulk of the population is engaged in the informal sector, although migration to major city centres in the past decade has contributed to urban unemployment and many associated social problems.   While a large proportion of PNG's population is based in the informal sector, relying on subsistence farming activities to generate household income, excess produce is often sold at the market place. Papua New Guinea's economic growth in recent years has been characterised by a heavy reliance on commodity exports from the mining and petroleum sectors. These sectors are particularly important as the primary contribution to foreign exchange and government revenue (funding around 20 per cent of government revenue). The mining and petroleum sectors account for around 70 per cent of Papua New Guinea's export revenue (compared to 22 per cent from agriculture). Over 85 per cent of Papua New Guinea's population depend upon agriculture, forestry or fishing for their livelihood. The commercial arm of the agricultural and forestry sectors is geared towards servicing overseas markets, with coffee, palm oil, cocoa, copra and unprocessed logs being the most important exports. The PNG economy was adversely affected by the Asian financial crisis and the 1997/98 drought. These events contributed to a sharp contraction in economic activity in 1998 and had a number of consequences: The kina and foreign reserves fell to their lowest levels for some time Interest rates and inflation remained high in 1999 After a brief recovery in late 1999, the kina slid back to record low levels in early 2000. Along with these contractions, problems with budget management and a slump in private sector confidence led to a deteriorating economic environment. The severity of the downturn forced the PNG Government to seek external assistance to correct the slide in the economy. Immediately following his election as Prime Minister in July 1999, Sir Mekere Morauta announced a program of major economic reforms. These included: A commitment to re-engagement with the International Monetary Fund (IMF) and the World Bank New revenue measures, including increased luxury taxes, log export taxes, and some slow-down in components of development spending A structural reform program aiming at strengthening the capabilities of public institutions; financial and budget stability; public sector reform; and removing the obstacles to economic growth including continued tariff reform and a privatisation program. The IMF's financial assistance of $US 115 million (AUD$197 million) in March 2000 was provided through a Stand-By Arrangement (SBA), which is designed to deal with short-term balance of payments problems of a temporary or cyclical nature and must be repaid within 14 months. Key elements of the program include an underlying balanced budget for 2000, strengthening the financial system and improvements in the management of the public sector. In June 2000, the World Bank Board approved a $US 90 million ($AUD 154 million) Structural Adjustment Loan (SAL) for PNG. This aims to bring about key reforms such as in privatisation, forestry, the civil service (including measures to build its integrity and independence), the financial sector, governance, and in health and education service delivery. Other donors such as Japan and Australia have also provided assistance to overcome PNG's economic crisis. Total assistance is expected to reach US$300 million ($AUD 513 million). On 21 June 2000, the Australian Government provided a long-term loan of $US 80 million ($AUD 137 million) in support of the IMF Standby Arrangement and the World Bank's Structural Adjustment Loan. In addition, Australia will also provide an additional $US 30 million ($AUD 51 million) to assist in meeting PNG's exceptional financing needs in 2000-01. Significantly, progress has been made by the PNG Government on promised reforms, including the development of a framework for the privatisation process, strengthening the financial sector and better transparency and accountability of funds provided at a district level. Among the most significant deterrents to investment in PNG are relatively very high wages and low productivity. The Government has decentralized the wage bargaining process, leaving it to the market, but rates are still out of line with labour productivity and real wages in competing countries. Land tenure issues are also a formidable barrier to investment and many land policies remain complex. Revisiting land compensation claims, many years after settlement have given rise to land disputes and undermined investor confidence in the security of land titles and leaseholds. Peace and law and order are basic necessities for sound economic development. Although reliable data on the effect of crime on the economy are lacking, there is little doubt that high rates of crime have become an important impediment to the country's economic growth. Papua New Guinea's vast forestry resources provide an opportunity for income generation, but they need careful management to avoid unsustainable use and destruction of precious habitat. Spurred by rising world market prices, logging rates have increased dramatically and the total cut is now estimated to be very close to the maximum sustainable yield in many regions. Important reforms, which the Government has adopted, are to raise the share of export revenues accruing to the Government and landowners, establish adequate conservation areas, limit permitted cuts to maximum sustainable yields at project levels, maintain effective external surveillance and forest administration, and encourage efficient downstream processing of forest products. The challenge is to increase the efficiency with which these reforms are introduced.   PNG has some of the most biodiverse forests in the world. Careful management is required to ensure a sustainable use of resources. The human factor Of considerable concern in PNG is that the health advances achieved in the early years after independence do not appear to have been sustained or carried further in the last ten years. Average life expectancy is 57.9 years. Papua New Guinea's disease pattern still resembles that of a 'least developed' tropical country and its fertility rate of 4.6 per cent is high by world standards. The literacy rate stands at around 45 per cent. Papua New Guinea's educational enrolments are among the lowest in Asia. The rate of attrition and dropouts at primary level is exceptionally high at 40 percent. The immediate challenges facing the Government are to expand enrolment in absolute terms and across the country, reduce dropout rates at the primary and secondary levels, and raise achievement levels while maintaining quality standards. Women face particular difficulties in this traditional male-dominated society as their subsistence labour burdens are greater, access to education and health services more limited, and opportunities in the modern sector narrow. Trade The overall balance of payments position in PNG has been rather volatile in recent years. In 1999, PNG had a surplus of 160 million Kina (AUD$ 104 million) compared with deficits of 276 million Kina (AUD$ 276 million) and 123 million Kina (AUD$ 80million) in 1998 and 1997 respectively. Normally a strong surplus in merchandise trade due to PNG's exports of gold, copper, crude oil and agricultural and forestry products is often offset by deficits in the services account which reflects dividends, freight, insurance and interest payments on resource projects. Outlook PNG's economy is highly dependent on international commodity prices and is exposed to large mineral project development cycles. Nevertheless, it is a resource rich country with relatively high income levels. Its main challenge is to combat its poor social indicators, particularly in its remote rural areas in education and health. PNG's future economic performance is poised to improve with a fall in inflation, lower interest rates and increased business confidence. While the Government of PNG has put in place the institutional arrangements for a more effective public sector, the implementation of reforms to achieve these efficiencies will be its real testing ground.   Top © Commonwealth of Australia