Papua New Guinea is Rapidly Developing Despite Numerous Obstacles

Papua New Guinea’s recent period of exponential growth places this among the world’s most rapidly developing economies.

Between 2005 and 2014, PNG’s economy expanded in a real annual rate of 6.6 percent and earnings per capita reached US$2,081. Development benefitted from macroeconomic stability as well as low volatility in output.  Since 2009, a large amount of investment in the natural resources sector driven that growth.  Support also came from the huge increase in interest in commodities worldwide, particularly in Asian countries.

Yet despite sustained high levels of growth, poverty rates in PNG have not fallen substantially because the benefit of higher income benefits only a relatively small percentage of the population.

For the benefits of the recent development to become more widely distributed, PNG needs further reforms to promote the introduction of its private sector.

The country is one of the world’s most difficult locations to do business. A 2012 study of companies in PNG identified law and order like a major constraint, particularly since business confidence in law enforcement and the judiciary is low. Laptop computer also showed that government–business relationships were weak. PNG also rated poorly in Transparency International’s ratings of perceptions associated with corruption.

Access to finance continues to be an issue in spite of PNG having a broader selection of financial institutions than other Pacific countries, with the possible exception of Fiji. A new law, created with the assistance of the Off-shore Private Sector Development Effort, allowing for business and personal assets apart from real estate pledged as collateral for loans, should enhance the availability of funding for businesses.

The 2012 survey also discovered investment and entrepreneurship were hampered by poor facilities, limited functioning of key government bodies such as the competition expert and the company registry, as well as misdirected government regulation. Nonetheless, the survey results did show an improvement on a 2007 study, particularly with respect to macroeconomic performance as well as political stability.

A danger for those resource-rich developing countries is a trend known as the ‘resource curse’, where nations with abundant natural resources experience worse development outcomes than countries with less resources. For PNG’s economy to achieve the benefits of sustained growth, further, and extensive, policy reforms to promote private field development are required.

Recent government policy statements acknowledge the need for reform, highlighting the importance of enabling the non-public sector to promote growth. However, past policy moves have not always reflected this goal. The state dominates the economic climate well beyond its traditional, broadly accepted role as a supplier of public goods. The toughening of local content guidelines and labour restrictions could damage private investment.

Attempts to improve governance have been ephemeral, losing momentum when they run up against established problems. State-owned enterprises (SOEs) dominate essential sectors of the economy, delivering weak services, particularly in electricity generation. Indeed, a recent cabinet decision anticipates expanding the function of SOEs into other sectors of the economy, contrary to the mentioned policy of promoting the role from the private sector in offering goods and services to the economy.

On surface of these factors, credit is difficult to obtain for all but the largest businesses. The banking sector is actually liquid yet bank success is substantially above the globe average, largely because of the high cost of banking services. A further further complicating factor is the imposition of an exchange rate that appears to be higher than the actual equilibrium rate, resulting in the development of significant arrears in the percentage of foreign exchange.

It is important that PNG does not allow the long-term growth potential of the economy to be wasted. Chile is an example of what is attainable by resource-rich countries. In 1985, the per capita gdp of Chile was just twice those of PNG. Yet by 2013, this had grown to 9 times that of PNG because of Chile’s dedication to reducing the part of the state, opening the actual economy to foreign investment, and using market forces to allocate resources wherever possible. These types of policies are available to PNG with appropriate reforms.

An assessment of PNG’s private sector by the Pacific Private Sector Development Effort has identified the following change priorities:

* reducing the role of the state through privatising state-owned enterprises and utilising public private partnerships

* vigorously implementing the new collateral reform framework to improve access to finance; establishing a sovereign wealth fund to take a position proceeds from the sale of liquefied natural gas to accumulate assets for when resource exports begin to decline

* enhancing the legal and institutional framework with regard to competition to ensure that the economy is competitive

Implementing reforms such as these will play a major part in making certain continued growth in the future as well as in seeing the benefits of that development better distributed throughout PNG’utes economy.

Reforms can secure Papua Brand new Guinea’s growth is republished along with permission from East Asian countries Forum