Can PNG convert growth into development?

But 5 major issues to handle in 2013

Papua New Guinea experienced yet another year of high growth in 2012: GDP growth over the past 10 years has averaged close to 6 percent.

Growth is expected to slow this year, but the medium-term outlook remains positive.

Yet the World Bank’s new country strategy for PNG states that poverty levels ‘have not changed significantly over the last 15 years’. In the capital  Port Moresby, poverty has actually risen over this period.

Many refer to the last decade as one of lost opportunity. Government revenue almost tripled, but there seems to be little to show for it. The recent observations of one PNG researcher, Andrew Anton Mako, are telling:

“I am from a very remote village deep in the Highlands of PNG. In the last 15 years, the single health centre, the primary school which I attended as a boy, an airstrip that brings supplies to the village, and agricultural extension services have all closed down, and shrubs are now growing on a new road which was built in the late 1990s to connect my village to the nearest town. The 10,000 plus people in that part of the country are literally struggling each day.”

How can PNG do a better job of converting growth into development?

There are no easy answers, but five issues will loom large in 2013. First, the new O’Neill-led government has decided to spend big, increasing expenditure by almost 30 percent in the 2013 budget, pushing the deficit from 1 to 7 percent of GDP, and devolving expenditure to lower levels of government.

Effective expenditure is key to improving development prospects, but the new budget strategy is fraught with risk. The projections which return the budget to balance by 2015 assume real cuts to government salaries, which brings their credibility into question, but the bigger issue is whether the large increase in funds will be well spent.

The government also announced in the budget a review of mining taxation. This is particularly welcome because of suspicions that PNG’s mineral projects are riddled with tax exemptions.

Second, 2013 will be an important year for PNG’s new sovereign wealth fund (SWF). Too often, the SWF is seen as the key for PNG to avoid the resource curse. In fact, it’s only one piece of the puzzle, and it remains to be seen whether the SWF will make a positive difference.

With the decline in commodity prices, it now seems unlikely that any funds will flow from government tax revenue into the SWF in the foreseeable future. But dividends from the country’s mega LNG Project also go to the SWF.

Whereas tax revenues were to be saved (in the Stabilisation Fund), the dividends will be spent (through the Development Fund). Yet the legislation to determine spending rules for the Development Fund has not yet been seen.

That’s a real gap, and a risk: depending on design, including fiduciary restraints, the SWF might make things worse than if the dividends were received and spent within the budget, like any other revenue source. Since LNG dividends will start to flow in 2015, the government has to fix this problem soon.

Third, the O’Neill government has been commendably active on corruption. But will we see in 2013 the establishment of an Anti-Corruption Commission, its key election promise?

Fourth, state-owned enterprises continue to be a drag on development rather than an agent for change. Essential services, such as electricity and water, are under state control and are dysfunctional for that reason. As former prime minister Sir Mekere Morauta has suggested, there seems to be a choice in PNG between ownership by the people and services to the people. Unfortunately, despite widespread agreement that the Morauta government’s 2002 privatisation of the PNG Banking Corporation was wildly successful, privatisation remains off the agenda.

While there might not be progress in this area in 2013, there could be regress. Most of PNG’s state-owned enterprises are held by a trust, the Independent Public Business Corporation (IPBC), on behalf of the government.

The Asian Development Bank has recommended that IPBC be converted from a trust to a holding company, and PNG’s minister for state-owned enterprises seems particularly interested in Singapore’s Temasek Holding Company as a potential model.

If the IPBC is corporatised, it is only going to make it easier for the government to develop new enterprises and for state involvement in the economy to grow rather than shrink.

Fifth, gender is a critical issue for PNG, a country where gender-based violence is an epidemic. As a result of last year’s elections, there are now three female members of parliament, up from just one. Three is still a small number, but the increase could be significant. Between them, the three hold the posts of minister, deputy minister and provincial governor. Two are party colleagues of the PNG treasurer, Don Polye. If the three MPs can get support from powerful allies such as Polye, there is at least a possibility that 2013 could be the year in which gender at last gets the attention it deserves in PNG.

Overall, opportunities and risks in PNG are finely balanced. On the positive side, not only is there more revenue and more job creation, but with the passing of the political torch from Somare to a younger generation has come a welcome impatience for change, and a number of promising initiatives. And political stability was regained in PNG last year. But as the Somare era showed, political stability is not sufficient for development in PNG. This year won’t see a turn-around in PNG’s development prospects, but how the government handles the five issues above will go a long way to determining whether it will be a year of development progress or regress.

_Stephen Howes is Professor of Economics and Director of the Development Policy Centre, Crawford School of Public Policy, the Australian National University. The article is from the East Asia Forum: http://www.eastasiaforum.org _


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