Author: Aaron Batten

There are many reasons to be optimistic about the PNG economy over the coming years. Its relative insulation from the global financial crisis combined with substantial savings still remaining in trust from the commodity boom period leave it well placed to sustain moderate rates of economic growth. This growth will build on the considerable macroeconomic improvements made in recent years particularly in terms of employment creation and business confidence. Optimism is further buoyed by the prospect of new investment in a range of extractive industries – especially the upcoming LNG project.

Certainly, dangers to the relative sense of macroeconomic stability exist. The government is having difficulty reigning in expenditures in light of reduced domestic revenues. This has raised concerns about a return to sustained budget deficits between when the trust accounts run out and the LNG revenues start to flow. The final few years of the commodity boom period also saw a considerable growth in the types of wasteful expenditure patterns that have plagued past governments – in particular large increases in salaries and wages and the emergence of increasing numbers of special interest projects. This, in turn, has limited the growth in funding to core development priorities like health and education.

Perhaps the most important challenge facing the PNG Government however, to ensure future growth leads to widespread wealth creation, is that it must begin to make further progress in improving the conditions for  new and existing business enterprises and to competition amongst them.

PNG still ranks as the least friendly and most costly business environment in Melanesia and far behind other regional competitors in East Asia.

Law and order issues as well as land access constraints contribute to this situation. But it is also a result of sustained government policies related to the regulatory environment which have created a web of trade tariffs, tax concessions and operating subsidies criss-crossing all aspects of the PNG business environment.

Without correcting these distortions productivity growth is likely to remain sluggish and upcoming resource extractions have the potential to lead to the types of concentrated, poorly distributed, economic growth of the past.

Reducing the cost of goods and services in PNG is also closely linked to the direct burden which government bureaucracy places on private sector activity. Perhaps somewhat surprisingly, PNG actually compares quite favorably in terms of the fees and license charges which it imposes on business activities. The reason it ranks so poorly on cross country comparisons of regulatory performance relates the large number of procedures and the lengthy time delays which occur when carrying out these procedures. Addressing these institutional constraints to business activity should thus be at the forefront of the microeconomic reform agenda.

Trade facilitation can also play a key focus for reducing the costs of goods and services in PNG. One avenue which deserves much more attention over the coming years is the expansion of trade routes with Asian markets. In particular, tapping into Indonesia through the land border with West Papua offers a potentially vibrant source of trade. The low cost business inputs and services which these markets offer could dramatically lower the cost of goods in PNG, stimulating new business activity and a more internationally competitive private sector.

Whichever avenue the PNG Government choses to take, it is clear that the net welfare gains from unilateral trade liberalizations and regulatory reforms are enormous. The dilemma facing the government  is whether the benefits are worth bearing against the political cost of overcoming the numerous vested interests which the policies in place now have created.

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This entry was posted on Monday, July 6th, 2009 at 9:00 pm and is filed under Papua New Guinea. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.