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Saturday, 5 December 2015

Papua New Guinea: failing to develop or developing to fail?

Lecture given on 4 December at the Cairns Institute, James Cook University.

Dr. Albert Schram, Vice Chancellor
Papua New Guinea University of Technology

On twitter the link to the powerpoint presentation: "PNG: failing to develop, or developing to fail?" Neither: long-term trends are positive http://bit.ly/1Nvx9ZG"


Introduction

Papua New Guinea is a poster child for failure to develop since independence in 1975, and is one of only a handful of countries that failed in achieving a single of the 8 Millenium Development Goals in 2015.

Today, PNG's state institutions are still extractive and exclusive in nature. State institutions merely benefited the elites and their extended families. More than anything else, this explains why over the last decade none of the resource rents have contributed to better outcomes in health and education.

State  institutions are weak in terms of service delivery to the population, but strong when protecting the interest of those in power. When something needs to be done to help the poor, a swift response is usually lacking. However, if powerful interests are at stake, then drastic and effective action is taken quickly.

While failing to improve health and education outcomes, paradoxically PNG has been showing projection double digit growth of the economy (Gross Domestic Product GDP). For a while the country even had the highest projected growth rate in the world, before the consequences of the fall in resource prices became clear. For next year, some growth predictions are below 5%, and real growth (accounting for population growth) is negative.

Currently, nobody knows whether the foreign currency reserves in the Central Bank are indeed equivalent to 9 months of imports, because so many warrants are still waiting to be processed. Social unrest is starting to show, with major disturbance in Lae in the week of 9 November.

For 2016, macro economic instability and social unrest remain a risk, with the constitutional limit on borrowing reached, a projected budget deficit of over 5%, and the population feeling the pinch of reduced government spending. The efforts to stabilize the Kina by restricting export of foreign currency since June 2014 have failed (currency rationing). De facto the Kina is now on a crawling peg system devaluing at a rate of about 15% per year.

Not everything in PNG however is doom and gloom. Some social scientist, by focusing on the topical and idiosyncratic, have lost sigh of the broader picture. The long term scenario, is much more positive, as I will argue below. First, we will examine some implications for PNG historical and future growth paths, derived from old fashioned economic growth accounting harking back to the work of the late Prof. Angus Maddison, who sadly passed on in 2010.

Secondly, we will assess whether stronger and more inclusive institutions are likely to develop in the coming decades. Without more inclusive institutions, economic development would merely create conditions for stagnation later on. Finally, we will discuss some implications for the research agenda, and the focus of international aid programs.

The Middle Income Trap

In order to understand the economy of developing countries, the dual nature of the economy with a large informal sector - in the presence of extractive, exclusive, and weak state institutions - is key. The absence or small size of all resource markets - labour, goods and financial - must also be taken into account, and is another common characteristics of developing countries. In the map below the minute size of financial markets in the tropics can be seen.

Financial markets don't like the tropics

The informal economy of PNG, in which over 80% of the population operate and which provides food to most of the population, is by definition not fully captured by the GDP statistics. It is at the same time the major source of resilience of the economy, but also the major impediment to development. Admittedly, because of the large size of the informal economy GDP is a far from perfect measure to assess the performance of developing countries' economies, it is nevertheless the best we have. The limitations of using GDP as a true measure of income are clearly understood.

Recently, Angus Maddison's growth accounting framework was used by Felipe, Kumar and Galope (ADB Economics Working Paper series, #421, November 2014) to examine the so-called  “middle income trap”. According to a viewpoint espoused by some policy makers, certain countries are unable to move from a low-cost to a high-value economy, making it difficult for them to compete with both low-income and high-income countries. The rise of technology in manufacturing requires "grey collar" or "knowledge workers"' for higher value-added products that enable economies to avoid the middle-income trap (Asian Development Bank 2015). Developing countries can accelerate this transition by creating more knowledge workers, and improving technological innovation system. This generally requires a large investment in universities and in research.

There is no accepted definition of the “middle income trap” in the literature. As FKG show there is no empirical evidence to show that countries do not advance in terms of real GDP per capita (in PPP terms). Instead, what distinguished economies in their transition from low to high income category is fast versus slow transitions. The middle income trap debate therefore boils down to the standard question in growth theory: why some economies grow faster than others.

A typical economy takes about 55 years to graduate from a lower-middle income ($2,000-$7,250 GDP per capita) to a upper middle income ($7,250 to $11,750 GDP per capita). For these international and inter-temporal comparison 1990 Purchasing Price Parity data are utilized, following Maddison. The duration of this transition corresponds to a average benchmark growth rate of GDP per capita of about 2.4% per year.

Likewise a typical economy takes about 15 years to transition from a upper-middle income to a high income category (over $11,750 GDP per capita), corresponding to a 3.3% benchmark growth rate in GDP per capita. For practical purposes, GDP per capita growth rate is the GDP growth rate minus the population growth rate.

What is noteworthy in the growth empirics is that since 1950 the transitions from lower to upper middle income shortened from a median of 64 years before 1950 to 28 years after 1950. We can assume that with the new wave of technological innovation, this transition can be even shorter provided effective policies are implemented. In particular, the opportunities offered by a “green economy” in which jobs are created in newly created industrial and service industries.

Implications of growth accounting for PNG: failing to develop?

Let's now focus on PNG development: is it failing to develop? In the economic sense, certainly not. Its growth performance seems to have changed remarkably over the past 10 years, with average per capita growth over 5% despite the mining boom and bust cycles.

PNG Growth Rates (GPD per capita)

PNG GDP per capita level (PPP)
A full economic history of PNG still needs to be written, but the publicly available data can be used to paint the big picture. The table below shows that if macro-economic crises can be avoided, and PNG can keep population growth below 3% and average GDP growth above 5%, by 2050-2070 PNG could indeed be an upper middle income country, subject to many caveats. In particular, inequality needs to be addressed and revenue from mining needs to be invested in health and education to improve the lackluster outcomes. Vision 2050 is not necessarily a pipe dream, but its realisation hinges on the effective delivery of state services to the population, and the improvement of developmental outcomes.

PNG can achieve Vision 2050

We can conclude PNG is not failing to develop economically, although much can be done to accelerate growth and produce more widely shared outcomes in terms of improvement of health and educational outcomes.

The transition to more inclusive institutions: PNG developing to fail?

In their book "Why Nations Fail" by Daron Acemoglu and James A. Robinson argue that institutional failure due to corruption of the political system, rather than lack of knowledge about effective development policies are the root cause of poverty and lack of development. The cornerstone of aid - the idea that "technical assistance" will contribute to development - is therefore a fallacy. It is not ignorance but self interest of the political elites which holds back a country's development.

With this viewpoint they echo Che Guevara, who was poking fun at the Kennedy's Alliance for Progress at the Conference of Organization of American States in Punta del Este in 1961, calling it an effort to establish a "latrinocracy". Building more latrines and classrooms will not bring development, because political realities are ignored.

It can be said that PNG would be developing to fail, if it were unable to make the transition from extractive institutions benefiting the few, to more inclusive institutions benefiting the many. Although it is too early to say, it must be noted that there are is no evidence that PNG is moving decisively into the direction of an autocratic regime. For 40 years elections have been held regularly, and the population is used to its democratic freedoms. Admittedly, the election process is far from perfect, and few are willing an able to stand up for constitutional freedoms and human rights. But then again, what else is new?

A free press is necessary to assure elected leaders are held accountable. Although press freedom has diminished somewhat over the last decade, lively social media debates about issues of public interest draw tens of thousands participants. It will be hard to stop this, apart from switching off the internet. Although civil society movements have found out their social media activities are closely monitored by the government, the benefits of being able to rally people around issues and organizing them through their mobile phones far outweigh the costs.

More Focused Foreign Aid



For a country so dependent on foreign, mostly Australian aid, a relevant question to ask is how aid can contribute to an accelerated and smoother transition? Can anything be done or is PNG only temporarily developing and will fail later? If aid could focus on strengthening fundamental state institutions that are necessary for a successful market economy – law, justice and police sector, tax authority, property rights and land registration – and a vibrant democracy – solid institution overseeing the elections -, it would contribute in a structural manner to a smoother transition of the country to a upper-middle income country with more inclusive institutions.

The recently published UN Sustainable Development Goal provide an opportunity to promote more use of renewable energy, and creating circular economies in which waste streams are better utilised. Currently, it seems aid is dispersed into an endless series of small projects, each of which espouses noble intentions, but lacks a solid basis to ensure sustainability, broad impact, and a real contribution to development.

A More Comprehensive Research Agenda for the Pacific

Since today we are meeting a the Cairns Institute, we can ask ourselves how a more focused and widely shared research agenda can contribute to accelerated development in PNG and the Pacific?

We feel that currently by focusing on the topical, the larger picture has been obscured. Putting the economic history on firmer statistical ground, and better understanding the drivers of economic growth and estimating possible growth paths would help to paint a more realistic image of societies in the Pacific. Encouraging PhD students to study topics in development economics and economic history, would help to address this.

Final Remarks

The way forward for PNG will probably need to include a higher degree of civil activism catalysed by social media. It will need to put fundamental items such as taxation and land reform, improvement of voter registration and the electoral process back on the political agenda. Resource should be freed to make much more substantial investments in primary, secondary and tertiary education and the health care system. At the moment, none of this seems to be in the books, but this could quickly and dramatically change

From outside, what can we do to help? First, a more focused research agenda which takes into account economic basis of long-term development, would support more evidence based decision making, and professionalisation of the civil service. Secondly, aid agencies should continue to focus on keeping fundamental items on the national agenda, in particular, issues that national politicians are not eager to address, such as land reform, and creating a voting registration system. Aid agencies should focus themselves on making structural interventions that create the basic conditions for successful market economy and more inclusive institutions.

Meanwhile, Papua New Guineans themselves hold active debates on public issues in the social media, and have broadened understanding of the opportunities offered by embracing sustainable development and green economy concepts. People will demand the State to get out of their way, and perform effectively. More than anything else, democratic forces will hopefully contribute to create the conditions for a more sustained economic performance, and more effective service delivery by state institutions.


22 comments:

  1. Informative and insightful...a must read for all Papua New Guineans, aid donors countries and interested observers. Shouldn't Australia stand back and review its aid program to PNG when 80% of the population hardly benefits from the aid money?

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