Dani Rodrik and others have observed that there is no convincing evidence of a positive relationship between trade openness and increased growth and that other factors, particularly so-called ‘institutional’ factors, are important in whether removing trade restrictions leads to faster growth. Seen as particularly important are secure property rights and impartial enforcement of contracts, and enforcement of regulations to ensure effective competition.

The extensive tariff reform undertaken by PNG in the 1990s should have led to increased import-substituting production and exports, if there were no other constraints. But there was little response.

The lack of response cannot be blamed on ‘market access’, as through South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA) and the Australia-PNG Trade Agreement PNG has free access to its large, rich neighbour. Through its membership of the WTO, PNG has virtually free access to the other major developed country markets. So it appears to be a ‘market entry’ problem rather than a market access problem; although quarantine barriers do present obstacles to exports of fresh agricultural products.

We have seen the impact of internal ‘binding constraints’ in PNG over the years. The floating of the kina in 1994—in effect, the removal of the ‘hard kina’ policy, with its inbuilt bias against exports—should have resulted in an expansion of exports. But there was no explosion of exports as a result.

As is obvious to anyone familiar with PNG, entrepreneurship is not a constraint. Willingness to invest if the opportunities are available is also not a constraint, as witnessed by the investment of recent years in the high-priced, domestic urban real estate market. This market, based on freehold land, has probably been where much of the resource revenue has been invested—as well as real estate markets in Cairns and the Gold Coast. But this has done little for sustained economic growth in PNG.

Secure access to land, the high cost and unreliability of utilities such as power and water, and law and order threats to personal and physical security have been other possible constraints highlighted in business surveys undertaken over the years. The concept of industrial parks was intended to mitigate, if not overcome these problems, by providing secure access to land, reduced costs of utilities, and personal and physical security. But judging by the lack of success of the industrial park in Lae, this has not been the solution for small business.

As demonstrated in the World Bank/IFC Doing Business surveys, the regulatory framework facing business can be improved. Focusing on those regulations that will lead to improved competition should be the Government’s objective, rather than regulations that basically act to inhibit business.

The widespread lack of access to finance due to the absence of a mechanism for making custom land a securitizable asset accepted as collateral by commercial banks has been a major binding constraint. Hopefully, that problem will be overcome with the implementation of the recently passed land legislation. We wait with keen anticipation to see if the commercial banks will accept long-term leases of custom land as collateral.

High internal costs of transport are other inhibiting factors. Hopefully, the resort hotel market will expand as the result of the recent introduction of competition in international airline services; but will we see the same lack of response by the farming community to the growth of this market as we do in Fiji, where they import most of the food supplied to the 650,000 odd tourists each year? The problems appear to be lack of continuity of supply and inadequate quality. Both problems would appear amenable to improvements in transport systems and in farming systems and product quality from improved research and supply chains; but these problems have persisted over many years (see my piece here [pdf]).

The recent development of the tourism industry in several Pacific island countries (Cook Islands, Samoa, and Vanuatu)—and over the longer term in Fiji—illustrates how the ‘package’ of institutional factors can be got right in order to develop this particular export industry. Long-term leases of custom land and equitable contracts with the landowners have provided security of land property rights for investors. Law and order concerns about personal security have been overcome by the resorts themselves providing comprehensive security. But most importantly, the development of these markets has been stimulated by the opening of international airlines services. Hopefully, PNG can benefit in the same way from its recent opening of international airline services and with the new land legislation providing secure long-term access to custom land.