TCS Daily

Argentina in the Pacific

By Helen Hughes - April 6, 2004 12:00 AM

The International Monetary Fund has added Papua New Guinea to the list of failing economies it has propped up with sanguine reports that help governments to put off reforms. When countries as a consequence plunge further into trouble, the Fund throws them a life line of credit. That, after all, is how it does business. Meanwhile developing countries' debt grows.

Although Papua New Guinea is a small, remote country of only 5.3 million people, rapid population growth is expected to double its population in the next 20 years. Thirty years of economic stagnation since independence have made Port Moresby's crime rate one of the highest in the world, comparable to Nairobi's. Warfare between Papuan and Highland gangs in Port Moresby presages a scenario like that in Port au Prince. There are no jobs or income opportunities for most young men, while around half of school age children are at school. Malaria is returning, tuberculosis rife and HIV/AIDS is estimated to have infected 40,000 people. The country is awash with arms, drunkenness is prevalent among men and drugs are easily obtainable.

In mid 2003, the Papua New Guinean budget was in crisis despite a good season that boosted agricultural output, and high prices for the country's mineral exports. The country's treasurer, Bart Philemon, complained of a "cash flow crisis" because World Bank and Asian Development Bank loans, that, following past practice, were to be used for recurrent expenditures on wages and salaries, were not forthcoming. A 2003-4 budget was cobbled together by a 2 percent increase in import duties, an increase in stamp duties on commercial transactions, and, against the advice of the Reserve bank, domestic borrowing that raised interest rates and crowded out business. Salaries to teachers and payments to business were delayed.

As the effects of good weather kicked in, payments could be resumed and the Papua New Guinea Reserve Bank was able to declare GNP growth of 2 percent for 2003. With population growth well above 2.5 percent, despite the favorable weather and external markets, this was Papua New Guinea's eighth consecutive year of negative per capita income growth (on World Bank Atlas figures).

Papua New Guinea had a meeting of potential Australian investors coming up. Painstaking research (reported in the current issue of the Pacific Economic Bulletin) indicated the depth and breadth of its critical economic problems. The country called in the International Monetary Fund for a 'consultation' to clean its slate.

It took only ten days -- eating and sleeping behind razor wire -- to persuade the International Monetary Fund that Papua New Guinea had markedly improved its economic management. GDP grew miraculously from the 2 percent announced by the Reserve Bank for 2003 to 2.5 percent, so that per capita income growth was not negative but merely zero. While none of the 10 percent "ghost" public servants (who do not show up for work) had been sacked and there had been no other reforms, the International Monetary Fund found that the 2003-4 budget deficit fell from 6-8 percent to 2 percent of GDP.

Papua New Guinea's parliament has been suspended for 5 months to avoid a no-confidence motion that threatened to remove it from power. The suspension was also handy in delaying negotiations with the Australian government for an enhanced five-year aid program of $2.4 billion that would help to tackle Papua New Guinea's crime and civil disorder and improve economic management, albeit at the cost of accountability to Australian taxpayers. Papua New Guinea hopes that the International Monetary Fund's report will also strengthen it in the negotiations with Australia.

Papua New Guinea's problems have an international dimension. Because of the country's lack of security, the mineral revenues that have hitherto rescued the balance of payments and budgets, are running out. China has been successfully courted for an $800 million nickel/cobalt project. But China will be the sole buyer of the mine's output and so able to squeeze prices. China has no experience of mining in the tropics and a shocking accident record in mines. When the project starts to make a profit, generous tax concessions are to kick in.

Papua New Guinea has been able to neglect economic development because village women produce enough food in gardens and orchards for people to remain reasonably well fed. But with a bleak outlook for government revenues, the need for land reform and labor-intensive industries has become acute, in order to create incomes for the majority of Papua New Guineans and a viable economy based on productive work. The International Monetary Fund made the usual noises about improving governance, but failed to discuss essential economic reforms.

Emeritus Professor Helen Hughes of the Australian National University is a Senior Fellow of the Centre for Independent Studies, Sydney.


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