New book details 50 years of PNG economic volatility

Economists from the University of Papua New Guinea (UPNG) and the Australian National University (ANU) have published an assessment of PNG's economy over its first 50 years.

The book looks at the highs and lows of a mostly turbulent economy, and published to coincide with the country's Golden Jubilee celebrations in September.

RNZ Pacific spoke with the one of the writers, Stphen Howes, director of the ANU's Development Policy Centre.

(This transcript has been edited for brevity and clarity.)

Don Wiseman: Five years of effort by the University of Papua New Guinea and the Australian National University, and you've produced this economic tome looking back over 50 years of PNG economic development, the first 50 years, Struggle, Reform, Boom and Bust, the profound wake up call for PNG.

Stephen Howes: A lot's happened in the last 50 years, and you mentioned the title of the book, Struggle, Reform, Boom and Bust. And that's a nod to the four periods that we divide the post independence half century into.

The first period is one of struggle. PNG went to independence with very high hopes and expectations, but it was quickly realised things were going to actually be a lot more difficult. It was a period of struggle. There was relative stability over the 70s and 80s, but that all changed in the 90s, which was a decade of great volatility, crisis, mini booms and busts, but also of reform.

I think by then, people realised things had to change, and the crisis, or series of crises, gave them an opportunity to bring about reform. In fact, remarkably, in that decade, PNG had three structural reform programs with the IMF (International Monetary Fund), and did a lot of reform to the economy. And partly because of that reform, but mainly because of increased commodity prices, the economy really took off in the 2000s which is the period of economic boom.

The third period, with China's expansion commodity prices rose, resource revenue went up, the economy did really well, and growth accelerated, jobs were created. But that all ended in the early 2010s when commodity prices fell again. The last period has been one of economic bust.

It's been a quiet bust, because the economy has been managed and foreign exchange has been protected to avoid a balance of payments crisis. But nevertheless, it's been one of very slow economic growth and declining employment.

So those are the four periods, a lot has happened over that half century. But if you step back and look at the economy, things have picked up a bit in the last couple of years: commodity prices have really jumped up, especially oil prices with Russia's invasion of Ukraine. And PNG, as a commodity exporter, is very sensitive. The economy is very sensitive to commodity prices.

But if you step back, from an economic point of view, you'd have to say the economy struggled. PNG is being characterised, we don't find negative per capita growth over the first 50 years. But it's very low. It's just marginally above above zero.

I think you'd have to say, on average, or overall, the economic performance has been pretty disappointing.

DW: Yes, well, Ian Ling-Stuckey, the Treasurer, he formally introduced the book, and he said in his introduction, you had been far too kind to PNG, that the situation was, as he saw it, far worse now. He talked about how back in 1975 net GDP was twice what it is now, and he laid out what he saw as a pathway to getting back to there and going beyond that point.

SH: That's right. We're a group of academics from ANU and UPNG, so we're delighted to have the Treasurer launch our book. It was interesting that he and his team did their own analysis. They use slightly different assumptions or variables, I guess.

You have to adjust for inflation over time, when you're doing these comparisons, and we use the GDP deflator. Whereas, in fact, he used the CPI, the Consumer Price Index, and that happens to be somewhat higher. So if you use a higher price index, you're going to get a lower growth. And also, there's a lot of uncertainty about what PNG's population actually is, and therefore what its population growth rate has been.

We used a more conservative estimate of population growth. So depending on the assumptions that you use, obviously you get different results. And whereas we find very low economic growth per person, by his analysis you actually have negative growth per person over this post independence period. But I think the message is the same. It's still disappointing.

If you look at it, whether you compare it to expectations at Independence, or you compare it to other countries, whether or not it's actually negative, it's definitely much too low.

DW: PNG has always been included in those countries affected by the "resource curse". Is that still as prevalent now as it was?

SH: That's definitely one topic that we cover. As well as looking at the four periods, we have three concluding chapters where we do an overall assessment of PNGs performance, and then we look at its policies. Then the final chapter, we look at its institutions

One of the things we try to do in this book, apart from update the story, because the last economic history of PNG had been written about 20 years ago, we wanted to update that, but we also wanted to bring in an institutional lens.

First of all, PNG is not an easy economy to manage. It's a small economy. It's become so resource dependent. It's so reliant on commodity prices, and commodity prices are so unpredictable. So it is a very volatile economy. It's not an easy job to be the Treasurer of PNG. I think that's the first aspect in which we see the influence of the resource sector.

Then on policy, PNG struggled with a overvalued exchange rate, and it is a high cost economy. Everyone realises that the resource sector is only one reason why it's a high cost economy, but it is, it is one of the reasons.

Then on the institutional side, I don't think the resource sector is the only reason PNG faces institutional problems that it does. But the resource sector is now so important, almost a third of the economy, that makes the government very important, because these resource sector projects are ring fenced.

The benefits to the people have to flow through the government, through tax revenue and dividends. If the government's weak, you're just not going to experience those benefits. And so people often talk about corruption as a problem in PNG, but, I've worked a lot on Asia. I've seen very corrupt governments actually do pretty well in terms of economic growth in Asia, if you think about a country like Indonesia or Bangladesh, and probably one factor that makes corruption a more serious problem here is just the importance of the government.

The more important the resource sector, the more important the government is, and the higher cost any government weakness, such as corruption, is going to be realised.

So, I don't think the resource curse is the only issue that PNG is facing, but it definitely is part of the story.

DW: All right, from this point on, what needs to happen first, to improve things?

SH: What we've done is a history book. Our main contribution is to update the analysis that was almost 20 years old and to perhaps provide a deeper understanding. It's not a policy report. We do in the section on economic policies, have a few recommendations.

If you go back to when PNG became independent, it had a sovereign wealth fund. It was one of the first countries in the world. Unfortunately, that sovereign wealth fund got abolished in the late 90s, just before the resource boom came around. It's one of the ironies of PNG history. Right now, there is no sovereign wealth fund. There's one that's been legislated for, but it's not being implemented.

For any country experiencing the volatility at the level PNG does, you really need to have some sort of mechanism for smoothing your revenue. That's what a sovereign wealth fund will do. So that would be one recommendation.

Then a second recommendation we emphasise again, it's interesting to take a historical perspective. From Independence up to 2014, PNG had what we call current account convertibility, which meant that if you were an importer and you had to pay your supplier in dollars, you could convert your kina for dollars automatically.

But in 2014, when the bust came about, and PNG wanted to avoid a balance of payments crisis, they walked away. The central bank walked away from that policy of convertibility and introduced a decade of foreign exchange rationing, originally as a short term measure, but it's taken a long time to unwind that, and now we credit the government for actually trying to act on this.

The FX (foreign exchange) rationing problem has been reduced, but there's no guarantee it won't happen again. I think they're just letting against FX rationing, ensuring that isn't repeated, because that was a real policy own goal.

We have a few policy recommendations, but on the deeper issues, which is the final chapter of the court around institutions, here we raise the difficulties caused by the nature of PNG politics.

Politics in PNG is very local. It's not party based. It's also very precarious. A lot of MPs lose their seat. It's very intense. There's many, many candidates, constant jostling for power, and in some places, it's quite violent. We argue in one way, this is good for the nation, because everyone's committed to parliament. Everyone's committed to the Westminster system.

You're not going to see a coup or a civil war in PNG. That's a very positive thing, both for democracy but also for economic growth, because it does bring about some basic stability. But at the same time, it's probably not a good environment for policy making, because the national interest tends to get sidelined and these more local sometimes business interests of politicians get more importance than that than they should.

Tthere's a whole political dimension to the economic performance of PNG. Then there's also a security dimension. Obviously, there are law and order problems, parts of the country aren't safe, especially for women, and there are also real issues around security of property rights. And so that insecurity is bad in itself, but also bad for economic development.

These political and security institutional problems are what we argue sort of underlies the poor economic growth and the weakening state in PNG. Obviously, there's no easy solution. We certainly don't have one, but what we see as our role is to put forward these ideas, generate discussion and debate.

We were delighted when the Treasurer came and launched the book and gave his own view that it's a wake up call. If the book does lead to that kind of reflection, discussion and debate, then we've done our job.

DW: Yes, in fact he talks about looking ahead another 25 years, and talks about growth in the non-resource sector of up to seven percent by the end of that period. Do you think that's possible?

SH: Certainly possible. It's quite unpredictable. That's one point about PNG.

No one anticipated the economic boom when it happened. It came as a complete surprise. So I think, in a sense, anything's possible. And of course, as Treasurer, he needs to do his best. That's his job; to put in place policies to accelerate economic growth. That's the job of the policymaker and the politician, is to come up with solutions.

Our job is to put forward the analysis and generate that discussion, reflection and debate.