Investments are critical for faster growth

Clearly an improved investment climate is critical to Papua New Guinea’s prospects for faster economic growth, as has been brought home in a landmark study by the IMF’s Ebrima Faal.

Mr Faal has been able to pinpoint investment levels needed to generate economic growth at 5 per cent or even 7 per cent. In the short to medium term, these targets seem out of reach of the national government, which is presently not even trying to attain such targets.

This means that despite superficial signs of increased prosperity - more cars on the roads and greatly increased construction activity - many people will have to cope with grinding poverty for many years to come.

Increased investments do part of the job in terms of economic growth. Another essential ingredient is productivity, the key factor that has been driving the US and Australian economies in recent years.

What is somewhat scary from Mr Faal’s analysis of economic data since 1960 is that productivity levels have not improved at all since independence. At present no public authority pays any attention to this issue.

The lackof investment and increased productivity accounts for the fact per capita incomes in PNG today are about 50 per cent less than they were at the time of Independence.

Despite being a bearer of bad news, the IMF report is important because it shows the way forward by providing goalposts for government planners to aim at.

Two other recent articles, published in The National, provide important analysis about why the economic situation has been so dismal for a country with such immense natural wealth.

The more important of these is by Professor Oskar Kurer, from the Institute of Economics at the Friedrich Alexander University of Erlangen-Nuremberg. Professor Kurer studied PNG’s economic performance as a visiting fellow at the Asia Pacific School of Economics and Government at the Australian National University in Canberra.

Writing in the Pacific Economic Bulletin he explained that the PNG economy had done well in the decade from 1965 because the Australian colonial administration had followed an earlier World Bank prescription for export-led growth.

These policies got derailed after Independence because the ruling Pangu Pati adopted the findings of another landmark report that gave priority to the redistribution of wealth rather than the pursuit of optimum economic growth.

This was neatly captured in the title of Professor Kurer’s article: “The Papua New Guinea malaise: from redistributive politics to a failing state”.

While the fast growing Asian economies were aiming for double digit growth levels, PNG became mired in sharing a “cake” that was becoming relatively smaller.

After 30 years of independence, no lessons have been learned. We can witness even today politicians who give cash handouts and the squandering of millions of kina paid out in royalties.

These are some of the reasons why private and public investment has been totally inadequate and show no signs of growing to levels needed to ensure modest growth rates of more than 5 per cent annually.

The Somare Government has made investment in mining and oil much more welcome. As we all know, mining and oil can generate increased export income and government taxes but will not create much employment.

The third article, the lead item in the Pacific Economic Bulletin, suggests that without substantial microeconomic reforms, the recent period of stability and growth “will disappear into thin air”.

The article is by Charles Yala, of the National Research Institute, and Ron Duncan, executive director of the Pacific Institute of Advanced Studies in Development and Governance at the University of South Pacific in Suva.

Poorly run and mismanaged public utilities continue to inhibit the flow of foreign direct investments into PNG and are a key contributor to the high-cost environment facing all businesses.

As one major corporate investor told the recent Australia-PNG business forum in Cairns, companies like his could do something to fix up bad roads but there was little they could do about telecommunications.

Most businesses are also forced to rely on expensive diesel generators to keep their operations going amid the many blackouts and brownouts that occur.

Like Messrs Yala and Duncan, many analysts are concerned that even though the economy has been well managed by the present government, little has been done to progress reforms of the previous Morauta Government, particularly in financial services.

This paper was critical of tariff protection but much has been done in recent years to greatly reduce tariff levels and high tariffs only persist in a few areas such as protection for the sugar industry.

Although it is true that macroeconomic reforms have been successfully attained after several periods of economic instability, this is clearly another factor that inhibits investment and growth.

Sensible macroeconomic policies are just as critical in providing a stable environment attractive to investors who would certainly prefer not to face volatile inflation and interest rates not to mention unpredictable exchange rates.