menuStruggle, Reform, Boom and Bust
5
A decade of reform
The high level of wages has contributed to low levels of investment, high levels of unemployment, growing disparity between urban and rural living standards, urban migration, and to reduced international competitiveness of the economy … The Minimum Wages Board handed down its determination in August 1992. The Board took a firm position on the need for radical change … The determination recommends deregulation of all wages above the minimum, a uniform minimum wage for new employees … set at the current level of the rural minimum wage … discontinuation of the practice of automatic indexation … and future variations of minimum wages to be determined by employer–employee negotiations, based on productivity and capacity to pay … The Board has … set the necessary base for private sector investment, economic and employment growth, reduction in the cost structure and increased competitiveness of the economy.
—From the 1993 PNG Budget (Department of Treasury 1992, 18–19)
Today’s decision to float the Kina is undoubtedly the most important economic decision made by any Government since independence.
—Prime Minister Julius Chan, 4 October 1994 (cited in Chan 2010, 221)
There is a lot of energy in our people, which yields income and wealth when it is given a chance. We will give Papua New Guineans their chance by removing the many barriers to small-scale business through more effective government or through privatisation.
—Prime Minister Mekere Morauta, 14 July 1999, from his ‘date with destiny’ acceptance speech (Morauta 2021)
5.1 Economic reforms
The nineties, while characterised by economic volatility and mismanagement, was also a decade of economic reform. This reform was in part driven by the three structural adjustment programs the country entered into during this period with multilateral donors at strikingly regular intervals: in 1990, 1995 and 2000. All three were preceded by fiscal crises, and so, not surprisingly, all had fiscal stabilisation front and centre. And, in all three, fiscal stabilisation was achieved, though the related emphasis on public sector retrenchment proved ineffectual.
Apart from the common theme of fiscal adjustment, each economic reform episode had its own distinctive areas of focus. In the early nineties, the emphasis was on wage deregulation and investment promotion. In the mid-nineties, the exchange rate was floated, other liberalising reforms were promoted, and, surprisingly, forestry reform took centre stage. The economic reforms of 1999 to 2002 were the most comprehensive of all, and covered, beside fiscal reform, privatisation, financial sector reform and the empowering of the central bank.
This section details the major economic reforms of the decade, in the early, mid and late nineties, respectively, and assesses the contribution of the various donor-backed structural adjustment programs.1 The focus is on structural reforms. Fiscal, monetary and exchange rate policies were covered in the previous chapter (4.4), and political and governance reforms are covered in the next section of this chapter (5.2).
5.1.1 Early nineties
The keynote reform of the early nineties was wage deregulation. The urban minimum wage had been rapidly increased in the run-up to independence (3.1.1). Economists agreed that it was too high, but a regime of wage indexation imported from Australia prevented inflation from substantially eroding the minimum wage’s real value. In 1992, a decisive break with the past was made when the urban and rural minimum wages were unified at the level of the latter—only 37 per cent of the former—and the policy of indexation was abolished (Figure B18). These reforms effectively deregulated the urban labour market. Wages were not immediately cut (except for new workers; existing workers were grandfathered) but fell in real terms, as they were not adjusted in line with inflation (Levantis 1997). The next significant increase in the minimum wage was not until 2005.2 Unfortunately, this radical reform did not induce the expected growth in employment. Too much else was going wrong with the economy for a strong supply-side response to emerge.
Also in 1992, PNG established the Investment Promotion Authority (IPA) to replace the National Investment and Development Authority (NIDA). The difference between the two entities is suggested by their names. NIDA had exercised ‘tight control and cumbersome approval procedures’ (World Bank 1991 89), and had presided over a foreign investment regulatory regime in which long delays were the norm (3.1.2). IPA was meant to be friendlier to foreign investors, and more streamlined. IPA continues in existence to this day and has a largely positive reputation. Around the same time, the Small Business Development Corporation and the Industrial Centres Development Corporation were created; their subsequent existence has been less edifying.
Forestry policy and reform were headline issues throughout the nineties (see Filer, Dubash and Kalit 2000; and Bird et al. 2007 for overviews). Customary owners of forested land were allowed to interact directly with developers under the Forestry Private Dealings Act of 1974. The Barnett Inquiry into forestry found extensive corruption (2.2.2), and that Act was repealed in 1991 and replaced by a new forestry policy and Forestry Act. In the same year, the Papua New Guinea Forest Authority was established. The aims of these reforms were to centralise the control of licensing to reduce sweetheart deals with well-connected elites and to ensure sustainability and a higher return to PNG from its tropical forests—the third largest in the world.
Most logging is in coastal areas. When the Highlands prime minister Wingti returned to power in 1992, he put a non-coastal, reforming minister in charge of forestry. Plans were put in place to increase log export taxes, reduce logging and increase domestic processing. In 1994, the government contracted the Swiss company Societé Generale de Surveillance to monitor all log exports from PNG. Claims of underpricing remain to this day, but the organisation continues to work in the PNG forestry sector, a bright spot in a perpetually troubled sector.
5.1.2 Mid-nineties
Despite it being one of several areas of activity for the World Bank in the early nineties, no-one would have anticipated that forestry would become such a central issue in the relationship between the PNG government and its multilateral financiers. But the World Bank was becoming increasingly interested in both governance and the environment, and increasingly susceptible to the influence of Western non-government organisations (NGOs). Measures such as further increases in log export taxes and reduced logging were made conditions of the World Bank’s 1995 support program to PNG, delivered in response to the 1994 balance of payments crisis (4.4.2). These measures were highly controversial with politicians, many of whom were involved in the logging industry themselves: while the aim of the reforms of the early nineties had been to do away with sweetheart deals, in fact they had merely switched the fora in, and mechanisms by which, such deals were negotiated. In 1994, the pro-reform forestry minister mentioned earlier was replaced by one whose electorate accounted for nearly half the country’s log exports (Filer, Dubash and Kalit 2000, 29). Forestry became a major sticking point and reason for delay in the World Bank’s adjustment loan. A key bone of contention was whether politicians could appoint members to the Forest Authority. In the end, the politicians prevailed, though tax rates were increased.
Land was another controversial issue in the mid-nineties and in the PNG–World Bank relationship. The PNG government had long supported the idea of the registration of customary land, but the only action on this, beyond legislative drafting (Kalinoe and Kiris 2010, 30), had been at the provincial level (3.1.5). The World Bank and Australia had funded a Land Mobilisation Program starting in 1989 to progress the issue. Little headway had been made. To stimulate action, it was proposed that a condition regarding land registration be included in the 1995 structural adjustment loan. The draft condition—‘Complete framework legislation for customary land registration. Complete registration in East New Britain and East Sepik’—was leaked (Filer, Dubash and Kalit 2000, 32). While the approach suggested was consistent with longstanding government policy, the leaked condition met with a violent reaction from NGOs, students and some politicians, who contended that the World Bank was trying to undermine customary ownership and privatise PNG land. The condition was dropped, and this reform once again stalled, not to be picked up for another decade (7.1.4). In fact, there were violent protests against land reform not only in the mid-nineties but also in 2001, when four students were fatally shot during a protest against privatisation and land reforms, even though the latter was not actually part of the Morauta reform program.3
Ironically though, this controversy over land reform did not stop the government reforming the Land Act in 1996 to further clarify the lease-leaseback arrangement, which dates back to the seventies (3.1.5), and which allows landowners to lease their land provided that the government acts as an intermediary. This reform had little immediate impact, but underpinned a massive land grab the next decade (7.1.4).
Liberalisation was foreshadowed in the early nineties, but more vigorously pursued in the mid-nineties. Reforms included removing goods from the price control regime and pruning back the reserved list (the list of economic activities from which foreign investment was barred). Trade opening was also a major theme, with PNG joining the World Trade Organization in 1996. As the World Bank (1995a, 9–10) reported, the government was committed to:
Replace quantitative restrictions and import bans by prohibitive tariff rates for cement, canned fish, and beef/lamb, fresh fruits and vegetables, remove other non-tariff barriers on imports, and lower such duty rates to internationally acceptable levels over a five-year period.
It was no coincidence that cement was the first in this list. In 1993, the government had provided protection to a new high-cost cement factory in the form of an import ban, alongside other support (Laveil 2019a). The World Bank (1995a, 10) also persuaded the PNG government to undertake a study on tariffs and indirect taxes. This in turn lead to a 1997 White Paper on the tariff reform program, and, as discussed below, to substantial tariff reductions in the late nineties and over the next decade, as well as the introduction in 1999 of a value-added tax.
5.1.3 Late nineties and early 2000s
The reforms of the late nineties and early 2000s were PNG’s most comprehensive ever. While Bill Skate is mainly remembered now for his scandals, he was also, in his own way, a reformer. His main economic legacy is the introduction of a value-added tax (VAT) in 1999, called the general sales tax (GST), which remains in place to this day. This 10 per cent tax was introduced in place of both a general import tariff and the provincial sales tax, and replaced the decentralised collection of the latter by a revenue-sharing system that excluded imports. To circumvent a successful appeal to the Supreme Court by Governor of Morobe Luther Wenge in 2002, the VAT was renamed the GST, and the provinces were guaranteed 60 per cent of proceeds.4
Skate’s reform efforts were otherwise consumed by the chaos of his reign, and it was left to his successor, Mekere Morauta, PNG’s famous reforming prime minister, to ring the changes. Morauta’s ‘date with destiny’ acceptance speech (Morauta 2021), delivered on the floor of parliament on 14 July 1999, outlined his reform agenda, which he proceeded to implement over the next three years with no fewer than 150 pieces of legislation (Morris 2021a, 2021b).
Perhaps most significantly of all, Morauta changed the legislation governing PNG’s central bank. The Bank of Papua New Guinea had come under immense political pressure in the late nineties (three governors in four months at one stage)5 and its role had been reduced primarily to one of financing the government deficit (Figure B35). The 2000 Central Bank Act made deficit financing by BPNG illegal and gave it a mandate to focus exclusively on controlling inflation. The Act it replaced had given the central bank much vaguer objectives and had capped, rather than banned, deficit financing (though the caps had been greatly exceeded over the nineties). The new Act also gave responsibility for both monetary policy and financial sector regulation to a single person, the governor, who could be neither directed nor easily sacked, in contrast to the earlier Act that had given those responsibilities to a politically appointed board. Discretion over the board’s appointment was largely removed by making most positions representative (e.g. of the churches, business and unions). These were some of the most radical reforms PNG has seen. They brought first benefits (6.3.2), but then costs (8.3.4).
Morauta’s reforms also transformed PNG’s financial sector (Biggs 2007). A new Banking and Financing Institutions Act strengthened bank supervision. Superannuation was a particular reform focus. The National Provident Fund, which managed the retirement funds of private sector employees, had been wracked by scandals in the late nineties, and was loss-making. A commission of inquiry was established, headed by Tos Barnett who had headed the forestry inquiry (2.2.2). Its report (GoPNG 2002) implicated future prime minister Peter O’Neill in one of the scams, though charges against him were later dropped. The National Provident Fund (Financial Reconstruction) Act 2000 wrote down member accounts and provided temporary government support. The Superannuation (General Provisions) Act 2000 set down governance standards for the future, for example, banning governments from appointing members to superannuation fund boards, and put the super funds under BPNG prudential supervision. These reforms transformed the NPF, renamed Nasfund, which has been very profitable ever since, and which has retained its position as effectively PNG’s monopoly superannuation fund for employees other than public servants. (The superannuation of public servants is managed by Nambawan Super, which is also regulated by BPNG.)6
Morauta privatised PNG’s largest bank, the Papua New Guinea Banking Corporation, which had a market share of 60 per cent and was on the verge of bankruptcy. It was sold to, and amalgamated with, the national, private and much smaller Bank of the South Pacific (BSP). The sale was highly controversial at the time and led to a commission of inquiry. However, BSP, which began as a subsidiary of the National Australia Bank and was sold to local investors in 1993, has gone on to become the country’s biggest and most successful bank by far.
There was significant trade liberalisation, with the 1997 White Paper (5.1.2) converted in 1999 into a tariff reduction program (TRP) (Scollay 2007; Laveil 2019a). A general import tariff of 10 per cent was abolished, replaced by the new GST. Tariffs were left in place only for goods that were or, it was judged, could be produced in PNG. The TRP divided the remaining tariffs into three groups—intermediate, protective and prohibitive with rates of 30, 40 and 55 per cent. The upper limit itself replaced various tariffs of as high as 100 per cent. A tariff reduction schedule was put in place to 2006, by which time the three tariffs were to be just 15, 25 and 40 per cent. Although controversial, the reduction schedule was largely adhered to, and, in fact, continued beyond 2006 (Scollay 2007, 15; Laveil 2019a; Section 7.1.2).
In 1999, the Pioneer Industries Act, which had provided tax holidays and other incentives for new entrants, was abolished.
Morauta also oversaw the exit of BHP from Ok Tedi. That mine’s dumping of waste into the Fly River was causing environmental damage (2.2.3). Eventually, BHP, the majority owner, was taken to court in Australia in 1994 and successfully sued (Banks and Ballard 1997). BHP wanted out, but the PNG government could not afford to see a second mine closed (after Panguna’s closure at the end of 1988). BHP was not willing to gift its shares to the PNG government due to concerns around corruption. The deal struck in 2003 involved the creation of an independent foundation, registered in Singapore, the Sustainable Development Program (SDP). In return for a guarantee of immunity from further litigation, BHP transferred its Ok Tedi shares to SDP to manage on behalf of the people of Western Province and PNG as a whole. The deal only lasted a decade (7.1.3), but the mine was kept open and became fundamental to the boom of the next decade (6.2.1). Waste management practices at the mine were improved.
Forestry was once again an area of reform. There was further haggling and tension with the World Bank, but Morauta restored the logging tax increases put in place in the mid-nineties that had been subsequently reduced.
Finally, an area of effort rather than success. Privatisation had been on the agenda since the early nineties, but the main steps actually taken during the decade had been to corporatise rather than sell state-owned enterprises (SOEs).7 This had not worked. The quality of services continued to deteriorate, and the underlying problems of corruption and mismanagement remained. Manning (2000, 97) commented that many politicians still saw ‘the operation of statutory institutions as their personal fiefdoms to be exploited to the utmost’, and that:
because governments change so often, and ministers even more often, the appointees are seldom left on a board for longer than one year and, therefore, have no chance to develop a knowledge of the workings of the organisation. (Manning 2000, 98)
Garnaut (2000, 35) noted that:
the increased autonomy, through corporatisation, of virtually all government business enterprises in the mid 1990s was associated with expansion of the scope for directors and senior executives to use the businesses as avenues for personal enrichment.
It was for good reason, therefore, that Morauta put privatisation at the top of his reform agenda. In 1999, the Privatisation Act came into law. This committed the government to sell off its SOEs and established a Privatisation Commission. Then, in 2002, all companies were put under a holding company, the Independent Public Business Corporation (IPBC) to ready them for sale. Actual privatisation, however, proved harder to achieve, and the sale of the government bank to BSP was the only major success of this broader policy, which lacked popular support and was technically complex given the monopoly positions many of the state-owned companies had and the cross-subsidies embedded in their operations.8
The IBPC had little success in improving SOE governance. Of more lasting value was Morauta’s creation of the Independent Consumer & Competition Commission (ICCC), an economy-wide regulator and competition watchdog. The ICCC had the futile task of regulating public sector utilities (Manoka and Rodrigues 2013) but proved its value a few years later with the vital role it played in liberalising the mobile phone sector (7.1.1).
The government did, over the course of the nineties, sell its minority stake in various resource projects (e.g. the Kutubu oil field and the Lihir and Porgera gold mines) held by Orogen Minerals. In 1995, the government sold 49 per cent of Orogen (4.3.2); in 1999, Morauta sold the rest, to Oil Search. While this was, technically speaking, a privatisation, it made no difference to the operation of the resource projects, which were already majority private-owned. The first sale swapped an expected future stream of revenue flows for funds today in order to reduce fiscal stress; the second swapped a minority stake in various PNG resource projects for a share in a PNG oil company, Oil Search.
5.1.4 The three structural adjustment programs
We should not make the mistake of assuming that all the reforms of the nineties were imposed on PNG from the outside. Some were clearly homegrown. The exchange rate was floated in 1994, before the World Bank–sponsored economic reform program of 1995 (approved by the Bank in August 1995). Other far-reaching reforms—such as the introduction of the GST (5.1.3) and the reform of provincial governments (5.2.4)—were also undertaken with little or no donor support at all. But nor should we discount the role of foreign pressure, which was clearly influential in many reforms, and decisive in some.
Table 5.1 provides a summary of the three structural adjustment programs of the nineties. The table focuses on World Bank support, since its reform programs were the most comprehensive, but the IMF also had its own reform and funding agreements with the PNG government. Australia and Japan provided additional funding for all three programs, the EU did for two, and the Asian Development Bank supported the reforms of the early nineties.
These loans have largely been judged unsuccessful. The World Bank’s (1995b) own evaluation of its 1990 adjustment loan rated it unsatisfactory. An academic review of the 1995 loan concluded that it was ‘an abysmal disappointment’ (Barcham 2002, 210). The 2000 loan was the most successful, but even it was only partially successful relative to its objectives.
Reforms were undermined by the instability of the decade. The World Bank review of the 1990 loan complained that ‘reforms did not take root. Although the loan supported a successful short-term stabilisation operation, it did not initiate the expected extended process of economic reform’ (World Bank 1995b, iv). It was not that politicians were necessarily against the reforms that these adjustment programs promoted. Rather, they had other, competing agendas—mostly staying in power, but also protecting vested interests. These were often given greater weight than the demands of reform.
One can certainly criticise the behaviour of the multilaterals. They failed to recognise that they would only be turned to during a crisis, that the windows for reform would be brief, and that they needed to be realistic in their goals and opportunistic in their approach. Reform conditions became more ambitious over time. Especially in the mid- and late nineties, the World Bank imposed conditions that were politically unrealistic and that the PNG government could not deliver on. Examples include the forestry industry discussed above, in which too many prominent politicians were engaged for reforms to be sustained, as well as public sector retrenchment (5.2.2), electorate funding (5.2.4) and anti-corruption reforms in the early 2000s (ABC News 2002). On land, the World Bank’s engagement, however slight, set the cause of reform back at least a decade.
The World Bank and IMF reform programs were always going to be controversial. However, because they were overly ambitious, they became more controversial than they should or could have been, both with politicians and with various aspects of civil society. We have already mentioned protests and deaths. The World Bank’s stance on forestry led to a major failing out between it and the PNG government. Wesley-Smith (1997) details the ‘extraordinary standoff’ between Chan’s government and the World Bank in 1995 and 1996, with a visiting mission asked to leave in early 1996 and some non-forestry taxes temporarily raised in September 1996 in a PNG attempt to ‘go it alone’ (Dorney 1998, 146–7), all before the World Bank’s funds were finally released in 1997. The tensions lasted through the next decade. Even the reforming Morauta government had a rocky relationship with the World Bank. In February 2001, his government expelled its representative, Australian economist Daniel Weise, accusing him of overreach (Saipan Tribune 2001).
All that said, viewed from a longer-term perspective, and considering the lack of economic reforms in other decades, the three adjustment operations in fact seem highly successful. The financing they provided was critical. One reason Skate came unstuck is that he hired the former World Bank country economist for PNG, Pirouz Hamidian-Rad, as his adviser. Under World Bank rules, this was a conflict of interest and made PNG ineligible for loans. Skate’s desperation for funding led him to pursue commercial options; when that failed, he decided to switch allegiances from China to Taiwan and the controversy around that contributed to his toppling. More fundamentally, there was a mood for reform, and the multilateral institutions were right to try to take advantage of that.
Table 5.1: The three structural adjustment programs of the nineties
|
Name World Bank loan |
Years (starting at month of loan approval) |
Also supported by |
Amount |
Key reform areas |
Sources |
|---|---|---|---|---|---|
|
Structural Adjustment Loan |
June 1990 to 1991 |
ADB, EU, Japan, Australia and IMF |
World Bank: $50m in two tranches: $25m released in October 1990 and $23m in December 1991, with $2m in technical assistance. Two IMF stand-by agreements valued at about $35m each. Supported by $290m over 1989–91 from ADB, EU, Japan and Australia. |
|
IMF (1992); Lodewijks Enahoro and Argyrous (1991); World Bank (1990, 1995b). |
|
Economic Recovery Program Loan |
August 1995 to 1997 |
Japan, Australia and IMF |
World Bank: two $25 million tranches: first released in 1995, second in 1997. IMF stand-by agreement valued at about $111m. Supported by $45m from Japan, $50m from Australia. |
|
Barcham (2002); IMF (1996); Proctor (1996); World Bank (1995a). |
|
Governance Promotion Adjustment Loan |
May 2000 to 2001 |
Japan, Australia EU, and IMF |
World Bank: three tranches: $35m on board approval, $20m first tranche; $35m second tranche. IMF stand-by agreement valued at about $115m in four tranches. Supported by $180m from Australia, Japan and EU. |
|
Filer, Dubash and Kalit (2000); IMF (2000); Weise (2002); World Bank (2000, 2002). |
Notes: Tranche information is not available for the 1990–93 and 1995–97 IMF stand-by agreements. Currency is USD.
5.2 Politics and governance
In 1989, the first references to PNG as a ‘weak’ or ‘fragile’ state appeared (see Hegarty [1989] for what appears to be the first analysis, and Ketan [2000] for a comprehensive historiographical survey).9 PNG expert Ron May ([1997] 2001b) was perhaps the first to explain PNG’s disappointing economic performance in terms of its governance rather than other more strictly economic factors.
May drew on the work of two scholars. Nigerian academic Peter Ekeh (1975, 91) had argued for the existence in post-colonial African countries of ‘two publics instead of one public, as in the West’. The two publics or public realms were, first, ‘primordial’ or pre-colonial, and, second, ‘civic’ or colonial. The elite belonged to both, but their primary allegiance was to the former, and this undermined the latter. Since it was seen as ‘legitimate to rob the civic public in order to strengthen the primordial public’ (Ekeh 1975, 108), the state was made weak through the rise of corruption and patronage. May ([1997] 2001b) argued that that Ekeh’s theory applied as well to PNG as it did to post-colonial Africa.
May’s (1998) treatment of the work of Joel Migdal (1988) is more complex, but PNG is, in Migdal’s framework, a classic case of a strong but fragmented society, co-existing alongside a weak state, where the fragmented nature of social power makes the state weak.10
These were pioneering analytical contributions. On the ground, governance continued to deteriorate. Trends and patterns in politics established in the first period of independence continued. Public services deteriorated and public sector retrenchment failed. Corruption and crime grew. Decentralisation policies were radically changed.
5.2.1 Politics
The Sandline affair of 1997 has been described as PNG’s ‘story of the decade’ (Dorney 1998, 224) and the country’s ‘most serious political crisis’ since independence (May, Regan and Dinnen 1997, 3). The very fact that three books were almost immediately written about it (the above two and O’Callaghan 1999) speaks to the interest it sparked. However, while Sandline had major and surprisingly positive implications for the resolution of conflict on Bougainville (5.2.4), it had surprisingly little lasting effect at the national level. The decision by the army chief Jerry Singirok to change his position in February 1997 from supporting to opposing the hiring of UK mercenaries (from the UK Sandline company) to attack the Bougainville rebels certainly posed a major challenge to the idea of civilian rule. Singirok not only successfully instigated a mission to expel the mercenaries but also called on PNG’s top political leadership to stand down. However, he pulled back from that latter demand and, while Prime Minister Julius Chan did resign in response to the public anger that followed the military action, he did so only for a few months while a commission of inquiry proceeded to clear him of allegations of corruption related to the deal. In summary, although it looked like Sandline might be giving the army more political power, it did not. A coup today is as unthinkable as it was before Sandline.
In fact, the elections following Sandline—far from being the moment at which, as Singirok put it at the time, in his national radio address of 17 March, ‘we the ordinary people, together as a nation, can actually change the system for the benefit of the common people which successive governments have let down for many years’ (Singirok 1997, 215)—showed how little national events matter in PNG’s electoral processes, and how resilient and resistant to change PNG politics are. Although Chan lost his seat, the two main parties in power before Sandline, Pangu and the People’s Progress Party, were returned to power (in a coalition with the People’s National Congress, Bill Skate’s party) after the 1997 elections. And the deputy prime minister, Chris Havieta, the man whose reputation suffered the most as a result of Sandline, not only kept his seat but also his position as deputy. Three independent members of parliament were elected in 1997 on an anti-corruption platform, but all three joined the government they had so virulently opposed during their campaigning once it had been returned after the elections.11
More broadly, politics in the nineties continued along the lines established in the eighties (3.2.1). The number of candidates continued to grow, reaching an average of 26 per electorate in 2002 (compared to eight in 1977, see Table A2). About half of all MPs were replaced at each election, except in 2002 when it was three-quarters, a record; parties continued to be weak and small—no party won more than a fifth of the seats at general elections (Table A2); and no prime minister lasted a full term (Table A1).
Politics also continued to grow more violent. Of the Western Highlands, it was said ‘that violence is becoming more and more an expected part of political activity’ (Strathern 1993, 56). May and Anere (2013, 11) wrote of the 2002 elections that they were:
marked by inaccurate—often grossly inaccurate—electoral rolls, widespread voting irregularities and manipulation (sometimes by electoral officials), intimidation of voters, hijacking of ballot boxes, and violence among rival candidates and their supporters and in a few instances against polling officials. There were a number of election-related deaths … The problems were concentrated in the volatile highlands provinces, but were not confined to the highlands.
Votes of no confidence were, by the nineties, an established feature of political life. Rabbie Namaliu, who himself became prime minister in 1988 as a result of one of them, faced down eight attempts in three years (Standish 2007, 148). To avoid them, prime ministers would suspend parliament for long periods of time. Morauta adjourned parliament from December 2000 to July 2001.
PNG’s politicians changed the rules of the game to increase political stability. In 1991, the initial grace period during which votes of no confidence are not allowed was extended via constitutional amendment from six to 18 months after government formation (May 2003a, 5).12
A more comprehensive approach to political reform was taken at the end of the decade by Morauta, who introduced the Organic Law on the Integrity of Political Parties and Candidates (OLIPPAC). This amended the constitution to strengthen the party system by making it more difficult for MPs to leave their party and illegal for them to vote against the position of their party on major issues. OLIPPAC was passed unanimously in December 2000, and was described by Morauta as ‘the most significant reform since the Constitution was adopted at independence’ (cited in Baker 2005, 102).
The Morauta government also amended the Organic Law on National and Local-Level Government Elections to replace the country’s first-past-the-post electoral system by one of limited preferential voting. The aim was to ensure that successful election candidates had a broader base of popular support (May and Anere 2013).13
Morauta’s political reforms, for all their promise, had little lasting impact, at least along the lines intended (7.2.1). Major parts of OLIPPAC were ruled unconstitutional in 2010 by PNG’s Supreme Court (Kabuni et al. 2022), and, despite much longer prime ministerial tenures this century than last, neither piece of legislation seems to have changed the underlying dynamics of PNG politics, either at the electorate or the national level (Okole 2012).
5.2.2 Public services
There was a ‘progressive decline in the quality and delivery of government services’ during the nineties (Dinnen 1998, 51). Former prime minister Rabbie Namaliu (1995, 62) commented that:
many of our people are worse off in terms of basic services and facilities than they were at independence. The rundown in basic services, such as health care and rural roads, is not only a tragedy, it is totally inexcusable.
The nineties was a bad decade for service delivery, partly because of a continuation of the negative governance trends seen in the previous period (3.2.2), and partly because of fiscal retrenchment (4.4.3). Government spending on recurrent goods and services—such as purchases of drugs and petrol—was slashed. As Figure 5.1 shows, after adjusting for inflation, such spending fell by two-thirds over the nineties on a per person basis.
Figure 5.1: Government recurrent goods and services per person, 1989–2022 (kina, constant prices)
Note: Salaries (excluding statutory authorities), interest and development spending are subtracted from total expenditure.
Source: PNG Economic Database.
Public sector retrenchment was a catchcry of the nineties, but not something that was successfully pursued. An initial target of the first structural adjustment loan was retrenchment of 3 per cent of the public service (Stein 1992, 26). The second structural adjustment loan of 1995 required the retrenchment of 7.5 per cent of the public service. The Skate government announced that 7,500 positions would be cut. After Morauta came to power, the target was 6,500–7,000 redundancies (World Bank 2000, 3).
These retrenchments simply did not happen. To the contrary, public service employment, which had been flat in the eighties, grew over the course of the nineties from 50,300 in 1990 to 60,500 in 1995 and 77,800 in 2002 (Figure B16). Looking back, BPNG (2007, 62) concluded wistfully that ‘it appears that this nagging reform will never be implemented successfully or effectively’. Retrenching staff is a drastic step. Soldiers mutinied when Morauta undertook to reduce their numbers from 4,150 to 1,900 (Chin 2002, 150–1). This was an extreme case, but others threatened with job loss could make less drastic but nevertheless credible threats of violence.
While the number of government staff increased over the nineties,14 PNG has never had a large public sector relative to the population (Curtin 2000), and the ratio of the public service to the population was still lower in the early 2000s than at independence.
The problem was not too many public servants, but their low productivity. Statutory agencies proliferated, but often only made things worse as they added to the number of entities that were inadequately funded and frequently abused their autonomy. In agriculture, various corporations and statutory authorities (the Oil Palm Industry Corporation, the Cocoa and Coconut Research Institute, the Coffee Industry Corporation, the National Agricultural Research Institute and the National Agricultural Quarantine Inspection Agency) were created soon after independence, at which time the Department of Agriculture and Livestock (DAL) had sole governmental responsibility for the sector:
The supposition was that, when new organizations were formed to take on functions formerly performed by DAL, they would take on most of the resources formerly used by DAL for those functions and that DAL would have cost reductions similar to the cost of the new organizations … This expectation was not born out in practice. In common with other areas of institutional change in Papua New Guinea, weak public administration meant that the changes were never implemented as intended. With a strong nostalgia for the past, DAL actively lobbied to retain its staff and budget, despite the transfer of functions out of the department … By retaining large numbers of staff without useful functions, DAL has become an aimless organization with low staff morale. Motivated, skilled staff have sought opportunities elsewhere, leaving the ‘time servers’ to fill the numbers. (McKillop, Bourke and Kambori 2009, 68)
The politicisation of the public service was a growing problem. Over the late eighties and nineties, ‘personal connections started to become more significant determinants of who occupied seats on boards of public authorities or filled the higher departmental positions’ (Turner and Kavanamur 2009, 13). The behaviour of the Skate government of the late nineties was particularly egregious in this regard. It replaced:
many competent and experienced senior officials with its own less qualified political clients … By early 1999 few departmental heads had held their jobs for more than a year and observers described a climate of fear in the bureaucracy. (Standish 1999, n.p.)
Take the Bank of Papua New Guinea as an example. Its first governor was Henry ToRobert, who served an astonishing two decades, from 1973 to 1993, before he was fired (Chan 2016, 136). But then, between 1993 and 1999, there were four governors, with three in 1998 alone.15 Likewise, ‘the telecommunications company had five chief executives between 1996 and 1999, and the postal service three between 1997 and 1999’ (Garnaut 2000, 35).
By the time Morauta came to power at the end of the nineties, he was convinced that the politicisation of senior appointments needed to be restrained. This did not mean returning the Public Services Commission (PSC) to its former pre-1986 glory when it had responsibility for all public service appointments (3.2.2), but it did mean giving it a much bigger say in the appointment of the heads of departmental and statutory authorities so that politicians had to follow a highly prescriptive and bureaucratic process, including choosing from a shortlist prepared by the PSC. Morauta himself ran out of time to push through the required constitutional changes but they were completed by Somare in 2003 (Bizhan and Howes 2024).
5.2.3 Corruption
Concerns about widening corruption in the nineties broadened into what was seen as a crisis of governance. Even leaders perceived as relatively clean saw their reputations tarnished. Rabbie Namaliu as prime minister made cash payments to MPs who had been stood down from the ministry in order to retain their loyalty (Saffu 1998f, 489–90). Disturbing allegations were made in parliament in relation to Paias Wingti when he was prime minister (Wesley-Smith 1995, 365). Julius Chan, who had been accused in the eighties of self-dealing in relation to a share placement (Dorney 1991, 216–17),16 was accused in 1994 of gross impropriety in relation to a property purchase in Cairns (PNGi 2019). The Sandline affair also greatly damaged Chan’s reputation. Subsequent inquiries found evidence against his colleagues, but not against Chan himself, of corrupt dealing. But the invitation to mercenaries to enter PNG came to be seen more broadly as symptomatic of governance gone badly wrong.
Bill Skate took the reputation of the political class to a new low when he was taped discussing political bribes and boasting about a gangland killing (Standish 1999). A video from the same period showed Skate’s party deputy having sex with an underage girl. An Australian investigator, initially asked to investigate fraud in the nation’s capital, ended up fleeing the country for his life (Standish 1999).
Corruption took on a much higher public profile. The governor-general at the time, Wiwa Korowi, bemoaned in 1995 that corruption had become ‘deeply rooted’ (Dinnen 1995b). At the height of the Sandline affair, he took the extraordinary step of placing a newspaper ad warning that PNG ‘will be destroyed by … greed, corruption, nepotism, malice, selfishness and manipulation’ (Walton 2016). A religious movement, brukim scru (bend the knee), led by the same governor-general appealed for divine intervention to improve the quality of PNG’s political leadership (Eves 2008). The NGOs that took on the World Bank over economic reform also campaigned against corruption (Walton 2016). Future prime minister Mekere Morauta made his famous assessment that corruption in PNG was both ‘systematic and systemic’. It had, he said, ‘invaded the whole process of policy making and decision making. It has drowned the whole system’ (Vatsikopoulos 1995).
Financial scams were also all too common. Bank of Papua New Guinea Governor Loi Bakani later reminisced about how, at the turn of the century, ‘“pyramid schemes” (scams) … were growing like mushrooms after the first rain’ (Bakani 2010, 2). Efforts were made with donor support to counter corruption through this period, especially through improved public financial management. Morauta’s was the only government to launch an effective assault, and some of his reforms have had a lasting impact, especially in the financial sector (5.1.3). But Morauta was only prime minister for less than three years.
5.2.4 Decentralisation and Bougainville
An overhaul of sub-national governance was one of the biggest reforms of the nineties (Howes, Sause and Ugyel 2022). By the late eighties, the decision made just after independence to create elected provincial premiers and assemblies (3.2.4) had come to be viewed, at least by national MPs, as a mistake. A series of inquiries and reports led to the repealing in 1996 of the 1977 Organic Law on Provincial Governments, and the passing of a new constitutional law: the Organic Law on Provincial Governments and Local-Level Governments. As the new law’s name suggested, it was intended to strengthen local-level government, and it introduced regular elections for them, but its real effect (and intent) was to assert the control of national MPs over provincial governments. It did away with elected provincial representatives and made each province’s regional MP its governor. Provincial assemblies remained but were to be constituted by that province’s MPs and a few other representatives, none of them directly elected.
Such a centralising reform was only possible because it exempted Bougainville, by then bogged down in bloody conflict. It was resisted by leaders from the island provinces of East and West New Britain, Manus and New Ireland, who at one point threatened to secede to form the Federated Melanesian Republic. These provinces were unable to prevent the passage of the new law, but did ensure that an earlier plan to abolish provincial governments altogether was not successful (Mukherjee 2010).
If the new organic law was a victory for provincial MPs (since it made them into provincial governors, and their rivals, the elected premiers, were done away with), the bulk of MPs (the so-called ‘open’ MPs, representing districts) were rewarded over the decade by large increases in funding through the Electoral Development Fund (EDF). This reached PGK100,000 per electorate by 1990, and was tripled to PGK300,000 in 1994 (Figure A1). The EDF was then abolished due to World Bank pressure, but re-emerged in the late nineties, reaching PGK1.5 million in 1999 (Middleton 2000, 56–7). The World Bank again tried to kill off electorate funding in its 2000 round of support. In the end, it had to settle for an agreement around its better governance—with guidelines that were comprehensive in scope, but also comprehensively ignored.
In contrast to the growth in electorate funding, that to sub-national governments was squeezed during the nineties due fiscal stress. Sub-national spending fell as a share of total expenditure (excluding interest) from 30 per cent in the eighties to almost 20 per cent in the early 2000s (Gouy n.d.).
The conflict on Bougainville that started in late 1988 continued on and off for a decade, concluding only with the Bougainville Peace Agreement of 1998 (May and Spriggs 1990; Spriggs and Denoon 1992; Regan, Baker and Oppermann 2022). The Panguna mine closed in 1989 and never reopened. In early 1990, all PNG national government staff left the province. The rest of the decade saw thousands of deaths amid various periods of blockade, negotiations and conflict, involving both clashes with the PNG armed forces and between Bougainvilleans, as the insurgency morphed into a civil war, with the PNG military supporting those (the Resistants) opposed to the Bougainville Revolutionary Army (BRA). Some 60,000 Bougainvilleans were displaced out of a population of 150,000; estimates of conflict-related deaths range from 4,000 to 20,000 (Regan 2019). Early attempts at a settlement were ‘successively frustrated either by the extreme misbehaviour of PNG troops or selective assassinations by the BRA’ (Dorney 1998, 45). Governance collapsed and infrastructure was wrecked. ‘Every district office was destroyed and community government buildings in more than thirty locations were burnt down’ (Dorney 1998, 46).
Finally, after almost a decade of unsuccessful negotiations, and, ironically, with the abortion of the Sandline mercenary intervention creating a moment of hope and therefore a more favourable atmosphere for negotiations (Regan 1997, 64), Bill Skate, with international support, negotiated a peace agreement—this controversial prime minister’s leading achievement. Agreements signed in 1998 and 2001 led to the creation of the Autonomous Bougainville Government, which left Bougainville as the only one of PNG’s provinces still to have an elected provincial assembly. Key to that peace agreement was an undertaking that a non-binding referendum on Bougainville’s independence would be held between 2015 and 2020 (9.2.4). This successfully kicked the can down the road, probably the best that could be done in the circumstances.
5.2.5 Law and order
A 1996 survey of businesses turned up the same result as in 1982 (3.2.5), namely that PNG’s ‘law and order problems and the resulting security concerns are having the most adverse impact on the business environment’ (Duncan and Lawson 1997, 1). Two-thirds of the firms surveyed said that the cost of security was a serious problem for them: among the many issues put to them, this was the only one to be placed in this category by more than half of them. The violent activities of raskols (rascal gangs) were a particular worry (Dinnen 1995a). Research showed that criminal activity was well remunerated given weak law enforcement (Levantis 2000a).
In 1995, former prime minister Rabbie Namaliu wrote of ‘an alarming decline in respect for authority, as evidenced by a breakdown in law and order’ (Namaliu 1995, 62–3). Crime was not only a problem in the capital, Port Moresby. It had become so endemic that ‘daily life had lost its reasonability’, according to the middle class of Wewak, the capital of East Sepik (Gewertz and Errington 1999, 105).
Landowners became increasingly militant with their demands for compensation, even in relation to land used to benefit the community, such as schools. These demands were often supported by illegal actions, such as occupations and blockades (Errington and Gewertz 2004, 190–1). This ‘resulted in closed hospitals, schools and airstrips, disrupted road construction programs and water supplies, stimulated violence and slowed the pace of social and economic development’ (Connell 1997, 254). According to Saffu (1992, 337):
In case after case … landowners made hefty compensation demands, backed their demands with threats of violence if not met by a certain date, did indeed resort to the threatened violence, and, in the overwhelming majority of cases, ended up with some compensation and no prosecution for their lawlessness and use of violence.
Tribal violence became more destructive and lethal. Yala (2002, 10) commented:
The destruction of homes, businesses, schools, health centres, all forms of infrastructure, gardens, and economic trees is a typical consequence of tribal warfare, resulting in the wasting of resources and retardation of development. The increased use of modern and high-powered guns is a national problem and virtually every tribe in the Highlands of PNG has access to high-powered arms. Educated elites, including members of the armed forces and external arms traders, are involved in the illegal arms trade.17
Policy responses to crime were ineffectual. Namaliu called a crime summit in 1991, and reintroduced capital punishment in the same year (a penalty that was never enforced, and finally repealed in January 2022). Wingti orchestrated the passage of the Internal Security Act in 1992, which aimed to tackle the problem of violence through a terrorism lens. Chan declared 1996 to be the Year of Law Enforcement. Unrealistic (and unconstitutional) proposals were repeatedly made, but never implemented, to restrict mobility and send people back to the countryside (11.8).
5.3 Conclusion
The nineties were a decade of reform. Important policy changes included wage, price and foreign investment deregulation, the floating of the exchange rate, trade liberalisation, fiscal reform, some privatisation, financial sector reform and the granting of independence to the central bank.
While the reform achievements of the nineties should not be ignored, it is not surprising, given people’s lived experience, that it was the negatives—the crises, the declines and the mismanagement—that dominated perceptions at the end of the decade.
Andrew Anton Mako writes about Kolombi, the town in Enga in the Highlands in which he grew up, connected to the world by an airstrip. He describes how, in 1996, that airstrip was shut down due to a lack of maintenance. After this, government services shut down one after the other as the staff that ran them left and were not replaced: the health centre, the school and the police-post all closed (Mako 2013).
There was also private sector contraction. Banking services became harder to access (4.3.3). The number of newspapers fell from four to two. Talair was a PNG airline that started in 1952 and, at independence, served some 150 domestic destinations. But it ran into hard times in the nineties. Finding it difficult to get work permits for his expatriate staff (given the ongoing localisation drive), suffering from worsening law and order, and no doubt affected by the economic downturn, its founder and owner, Dennis Buchanan, said to be PNG’s largest individual investor at the time, announced his decision to shut his business in 1990 (Dorney 1991). It finally closed in 1993.
Thus went the nineties. Public service delivery weakened as funding for goods and services was slashed. Private services reduced as businesses folded. The increasing resource dependency of the economy was a sign that the country was more accommodating of large resource projects than a range of other, diversified economic activities. The financial sector became less supportive of development, with fewer banks and banking agents, less lending, and a larger spread between deposit and lending rates. High inflation and rapid depreciation hurt many, though the depreciation was, it is important to note, good for rural producers and did produce a positive agricultural supply response.
Diagnoses of the eighties had blamed PNG’s poor economic performance on economic problems—high wages and/or an overvalued exchange rate. Then, in the first half of the nineties, the government addressed both these constraints, going:
a long way towards putting in place an economic policy regime that should lead to the development of a much more export-oriented industrial sector, generating many more jobs than in the past. (Duncan and Lawson 1997, 4)
And yet the jobs did not come.
Analysts decided, correctly, that the problem must be governance. The ‘conditions for investment had deteriorated so badly that wage deregulation [and devaluation] on its own was no longer sufficient to reinvigorate private investment’ (Chand and Yala 2005, 12). We have already highlighted Ron May’s early analysis of PNG as a weak state (5.2). The World Bank (1999, 6) wrote at the end of the decade that:
Politics as business and politicized public administration are at the heart of PNG’s governance crisis. Together with poor transparency and accountability, the result has been generally poor economic governance, poor public sector performance, mismanagement and a fertile environment for corrupt practices.
In the early nineties, it was still possible to express ‘cautious optimism about the PNG economy’ (Gupta 1992, 22). But the late nineties and early 2000s was a time of tremendous pessimism. Indeed, there was a sense of imminent collapse. Sandline had been seen as a nadir, but what came after it (the Skate government) was even worse. Morauta’s reforms were admired and appreciated; however, as the currency kept falling, inflation stayed high, real wages fell sharply, business confidence remained elusive and the national mood became increasingly pessimistic. It was perhaps a reflection of widespread hardship that, whereas normally about half of PNG’s MPs lose their seats every election, in 2002, it was three-quarters (Table A2). The author Regis Stella (2003, 17) wrote:
Right now, Papua New Guinea is going through the most contemptible period in our history. The political leadership and apparatus is dominated by infantile politicking with a propensity for greed and improbity. Many of these leaders engross themselves with defrauding and embezzling from state institutions and the national coffers. In the process they prevent equitable prosperity for all.
In the same year, another set of prominent PNG academics commented that:
Media headlines, editorial pieces, letters to the editor, talkback radio shows and casual conversations all point to numerous crises and lament the state of the nation. The common theme is that the nation-state is on the edge of a precipice, facing a complete breakdown. (Kavanamur, Yala and Clement 2003, 1)
A prolonged period of economic expansion must have seemed like the least likely of developments. In fact, it was just around the corner.
1 BPNG (2007, Chapter 6) covers some of the same ground.
2 There was a marginal increase in 1998, and a ruling in favour of a wage increase in 2001, which the Morauta government dismissed (Marshall 2001).
3 Errington and Gewertz (2004, 289) comment that ‘there were widespread rumours that these students were supported by various politicians who, under the guise of populist rhetoric, sought to destabilize the [then] current government and to maintain their own access to the resources of the state-owned enterprises’.
4 Total GST revenue is shown in the budget and then transfers to the provinces of their share are shown as a separate expenditure item.
5 For the details, see footnote 15.
6 In principle, Numbawan Super and Nasfund can compete for clients, but, in practice, virtually no competition occurs.
7 The first Privatisation Committee was established in 1990. In 1995, the government sold 49 per cent of its ownership of Orogen, discussed later in the section. In 1996, it sold its holdings in New Britain Palm Oil.
8 A buyer was selected for the telecom company, but the sale was called off at the last minute.
9 Hugh Tinker’s 1964 article on ‘broken back states’—that is, states that gained independence without preparation or struggle and that became weak almost immediately—was republished in the journal New Guinea and Australia, the Pacific and South-East Asia (Tinker 1967) with an editorial note that it had ‘a direct bearing on possible political developments in New Guinea’. However, this 1967 warning appears to have been forgotten in the optimism of independence.
10 As Migdal (1988, 139) writes: ‘Where societies have been weblike and where social control has been fragmented among numerous organisations states have faced formidable barriers in seeing their policies through.’ See Howes (2024) for further discussion.
11 The three—Father Robert Lak in Western Highlands, Father Louis Ambane in Chimbu and Peti Lafanama in Eastern Highlands—were all associated with the NGO Melsol (Melanesian Solidarity), which campaigned against both World Bank reforms and Sandline (Callick 1997).
12 Another attempt was made more than a decade later (in 2003) to further extend the grace period to three years. That was unsuccessful, but then, another decade later (in 2013), the grace period was extended to two-and-a-half years, only for that extension to be struck down by the courts (7.2.1). At the time of writing, the grace period remains 18 months.
13 Interestingly, in colonial times, PNG had had an optional preferential voting system for elections. It had been replaced by first-past-the-post in order to encourage the development of a two-party system (May 2001a, 3).
14 To what extent this was a deliberate policy decision versus a loss of control over hiring requires further research.
15 Mekere Morauta (July 1993–September 1994), his sacking is explained in Section 4.3.3; Koiari Tarata (September 1994–April 1998); John Vulupindi (April–July 1998); and Morea Vele (July 1998–1999). Wilson Kamit, a beneficiary of the new Central Banking Act, served from 1999 to December 2009.
16 Chan was cleared in the end, but not before the inquiry ‘revealed that 40 other national leaders including ministers, judges, and the Chief Ombudsman himself had received Placer Pacific shares without honoring their constitutional obligation to declare their purchases to the Ombudsman Commission’ (Hegarty 1989, 4).
17 ‘Gun-running from other parts of PNG to the Southern Highlands is financed and facilitated by politicians and civil servants up to the highest levels of the educated elite. Many, and perhaps most, illicit high-powered firearms in the Southern Highlands were deployed by political candidates, sitting MPs, and their supporters to impress and intimidate both rivals and voters’ (Alpers 2005, 24).
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