11

Economic policies

The essential point above all is that exchange rate policy, budget policy, minimum wages policy and many other things were in there together. Newcomers to Papua New Guinea often have difficulty in understanding one or other aspect of our policies, particularly in regard to the exchange rate. The beginning of wisdom for them is to grasp that the policies must be seen as a whole.

—Prime Minister Julius Chan (1982, 11)

11.1 Introduction

It would be a mistake to think we can find a close correlation over the four periods between variations in growth performance and variations in policies and institutions. The previous chapter brought out the critical importance of both commodity prices and the responsiveness of the government resource take to commodity prices as critical short-term drivers of growth (10.12). Nevertheless, both policies and institutions clearly also matter for economic growth, and they are the subject of these last two chapters.

Economic policies show as much variation in PNG’s post-independence years as economic outcomes. In this book, we have tried to bring new insights and challenge some of the orthodoxies regarding the history of economic policymaking in PNG since independence. This chapter integrates our findings over the four periods in relation to the economic policies of PNG’s post-independence journey. It examines macroeconomic, including fiscal, policies; the rise and fall of the Washington Consensus; the large changes in resource sector policies; the persistent but restrained use of industrial policy; the contentious and ultimately too-difficult issue of land policy; the benign neglect of the informal economy, which has come to the country’s rescue; and the retreat from equality.

11.2 Macroeconomic policy challenges

Overall, PNG has not yet been able to find a durable macroeconomic policy stance to support both growth and stability.

The seventies and eighties are often presented as a golden age from the perspective of macroeconomic stability (Chand and Yala 2005). Macroeconomic outcomes were indeed largely positive in these early years. However, this period was also one in which macroeconomic problems were being stored up for the future. First, low growth itself made it harder to support macroeconomic stability. As the self-styled ‘revolutionary’ (expansionary) budget of 1993 showed (4.4.1), slow growth meant that there were no prizes for being responsible and generated pressure to do something different, even if irresponsible. Second, declining foreign exchange reserves through the seventies and eighties meant that it would be increasingly difficult to avoid a balance of payments crisis and/or a devaluation. Foreign exchange reserves were four or five months of imports up to 1980, but fell to three months by 1981, and only two months by 1988 (Figure B22).

The macroeconomic instability of the nineties (4.4.1) is often explained in terms of high deficits, but the greater reliance on domestic financing and the reduction in foreign aid, especially in the form of budget support, were also important contributory factors. In addition, there was less margin for error given the low level of foreign exchange reserves with which the period started. Monetary policy, which had helped manage demand in the eighties, became ineffective in the nineties. Declining confidence did not help either. Given all this, and kina convertibility, it is not surprising that there were two balance of payments crises in the nineties.

The Achilles heel of the boom period was fiscal policy (6.3.1). The abolition of the Mineral Resources Stabilisation Fund (MRSF) in 1999 was understandable but unfortunate (4.4.3). In hindsight, it would have been better to leave the MRSF in place. Even wiping out its balance and starting again under the same rules would have been better than abolishing the MRSF altogether. The absence of the MRSF meant that there was no mechanism in place to put aside the massive influx in resource revenues that occurred in the earlier years of the boom. Rather, excess funds were put into short-term trust funds, already earmarked for expenditure in particular sectors. Most was spent as early as 2009, and by the time the bust came very little was left in the trust funds (Figure B30). To make matters worse, the government started to borrow heavily in 2013, before the boom had ended.

While it was inevitable that a bust would follow the boom, it is harder to explain why the bust lasted as long as it did. We have explained this in terms of an array of negative factors and costly policy choices (8.3 and 9.1), in particular the introduction of foreign exchange rationing.

Looking at the last half century as a whole, there have been five major changes in fiscal and macroeconomic settings since independence.

First, the exchange rate regime moved from fixed (or at least a no-devaluation stance) to pegged over the eighties (2.3.3), to floating in 1994 (4.4.2) and then back to pegged two decades later in 2014 (8.3.1).

Second, currency convertibility on the current account was the bedrock of economic policy from independence, but was abandoned in 2014 in favour of rationing foreign exchange (8.3.1 and 9.3).

Third, wage indexation (in the formal sector, and full or substantial) was present from independence to 1992 (3.1.2) but abandoned thereafter with the deregulation of the urban labour market (5.1.1). Today, adjusting for inflation, the urban minimum wage is less than one-third of its value at independence, adjusting for inflation, and no longer out of line with comparator countries (Howes, Mambon and Samof 2022) (Figure B18).

Fourth, there have been two major changes in fiscal policy. The use of convertibility as a fiscal constraint was discarded in 2014 and replaced, unsuccessfully, by legislative constraints on borrowing (8.3.3). Also, PNG went into independence with a mechanism, the MRSF, to smooth and save resource revenues (2.3.1), but scrapped it in 1999 due to fiscal stress (4.4.3). Despite repeated efforts, including legislation in 2012 and then again 2015 for a sovereign wealth fund (SWF), a successor mechanism has not been made operational (7.1.3).

Fifth, monetary policy instruments have become ineffective due to the emergence of excess liquidity (4.4.4). With commercial banks holding up to a quarter of their deposits with the central bank or in cash, there is no need for them to borrow from the latter. The minimum liquid asset ratio (MLAR) had worked in the eighties to tighten or loosen monetary policy (2.3.2), but it lost its potency as banks turned to government bonds (4.4.4), thereby exceeding whatever level the MLAR was set at. The Kina Facility Rate, introduced at the turn of the century—is ineffectual due to excess liquidity (8.3.4).

Unfortunately, most of these changes have been in the wrong direction. Wage deregulation is the honourable exception: it has made the economy more flexible and macroeconomic management easier. Whether moving to a floating exchange rate was a good idea can be debated. The loss of monetary policy effectiveness is obviously unfortunate. And trying to manage the economy without any sort of savings or smoothing mechanism is surely mistaken in an economy as volatile as PNG.

The biggest mistake was the abandonment of current account convertibility. Very few countries ration foreign exchange in relation to current account transactions. Why did PNG turn to rationing in 2014 and persist with it for so long? There are a variety of reasons (8.3.1), but the most fundamental is that foreign exchange rationing seemed to guarantee PNG macroeconomic stability (no balance of payments crisis, limited depreciation, moderate inflation). Given that monetary policy had become ineffective, and that fiscal discipline could not be assumed, this was an attractive proposition. No-one wanted a repeat of the nineties. However, while rationing has succeeded in bringing about stability, the price has been too high in terms of foregone growth and development. Moreover, the minimisation of depreciation by rationing is why the real exchange rate is back at its eighties’ level. It was overvalued then (2.3.3), and it is overvalued now.

The challenge for PNG macroeconomic policy is to support stability without sacrificing growth. For this, currency convertibility needs to be reintroduced. It will not be easy to restore confidence in the kina. But PNG signed up to convertibility when it joined the IMF in 1975 (under article VIII of the IMF’s articles of agreement). The Bank of Papua New Guinea (BPNG), which manages the exchange rate regime, should be constrained by this international commitment, as it was up to 2000.

Reintroducing convertibility would be good for growth but would add to risk. It would put the onus back on the politicians to limit borrowing to avoid a balance of payments crisis. This threat did not work in the nineties, but it is a risk that must be taken. No country has become prosperous under a regime of foreign exchange rationing. Trade and foreign investment are both critical to PNG and neither will flourish (apart from large, ring-fenced resource projects) until convertibility is reintroduced. While the next boom may make foreign exchange rationing unnecessary for some time, unless there is a strong commitment to convertibility, rationing is likely to reappear in the next bust.

Reintroducing a savings or smoothing mechanism at this stage is purely a matter of political will, since the necessary legislation has long been in place, sitting idle. However, one can question whether a separate SWF, held apart from BPNG reserves, is sensible, or would only add to risk. An alternative would be to bring back the MRSF, which was held as part of the central bank’s reserves.

The problem of monetary policy ineffectiveness will not be easy to solve, given the non-competitive nature of PNG’s banking sector and high spreads. One solution, favoured by the IMF (2023), is to remunerate deposits held at the central bank using the policy rate. However, apart from the cost, this would make banks even more reluctant to lend. A more structural, but also more difficult, solution is to increase the demand for loans by reducing interest rates and/or improving the investment climate.

Finally, whatever policy reforms follow, there is a need to re-establish credibility. Throughout the period of the quiet bust, the existence of foreign exchange rationing was frequently denied by the central bank, and the exchange rate was still often said to be floating, where clearly it was not. While recent bank statements are much franker (Howes 2023), central bank credibility was harmed as a result. Government credibility has also been damaged by non-implementation of its 2015 SWF legislation. Macroeconomic policy credibility and predictability would be helped if government and its agencies abided by existing rules and communicated transparently.

11.3 The rise and fall of the Washington Consensus

Papua New Guinea went to independence with a highly regulated economy and unrealistically high growth expectations (3.1.1). Growth performance disappointed, but there was little by way of economic reform in the eighties with the important exception of the deregulation of the financial sector (3.1.2).

The nineties was a period of radical reform, with the slashing of the country’s minimum wage, price liberalisation, the introduction of a less regulated regime for foreign investment, tariff reductions, some privatisation and financial sector reform (5.1).

Some of these reforms were homegrown. Others reflected external pressures. All of them were consistent with the ‘Washington Consensus’ thinking that dominated globally in the nineties (Williamson 1990). The Washington Consensus emphasised privatisation, liberalisation, foreign investment and deregulation: exactly the sorts of reforms that PNG pursued over the nineties.

Over time, however, support for the Washington Consensus has lost ground in PNG. In the third and fourth periods, there was less economic reform in general, and what there was was nationalistic and interventionist in nature. Privatisation has been replaced as a reform objective by an expansion in the scope and number of state-owned enterprises, and a push to give these enterprises a more active role in the resource sector in particular (11.4). As part of this nationalistic policy turn, there has also recently been more support for the protection of domestic businesses, whether by expanded reservation lists or by increased tariffs (9.1.2 and 9.1.3).

The Washington Consensus also emphasised the importance of ‘competitive exchange rates’ (Williamson 1990), something endorsed by subsequent consensus growth ‘recipes’ (Commission on Growth and Development 2008). PNG’s shift to foreign exchange rationing (8.3.1) and consequent exchange rate overvaluation is another rejection of the Washington Consensus.

A variety of factors explain the demise of the Washington Consensus in PNG. Support for it has fallen worldwide. The rise of China and other Asian economies has led many to conclude, rightly or wrongly, that free markets are overrated. This has been the case in PNG, where many point to Malaysia, in particular, as the role model that PNG should emulate.

It should also be admitted that, as in many other countries (World Bank 2005), growth did not increase in PNG after the introduction of Washington Consensus reforms. Some of the reforms may not have been suitable for PNG since, without competition, liberalisation can be counterproductive. Consider the financial sector. Its deregulation came as early as the eighties, but interest spreads in PNG are now among the highest in the world (4.3.3). Has financial sector deregulation actually helped PNG? Or does the sector need to be re-regulated? There is no guarantee that regulation would be a success, but the experience of the financial sector and the concentrated nature of several sectors of the PNG economy should give us pause before automatically supporting deregulation in the PNG context. Moreover, even if and when the reforms were suitable, their impact was undermined by other deviations from the Washington Consensus playbook (e.g. poor macroeconomic management) or by factors beyond it, such as increasing crime. The reforms delivered in the nineties, such as tariff and indirect tax reforms, were not the most important for the quality of the PNG investment climate. Other institutional constraints are far more binding on growth (12.2) but more difficult for politicians to act on. Understandably, PNG’s politicians look for levers to pull that are within their reach. Constraints such as high levels of crime and a poorly functioning land market are difficult, so far too difficult, for government to address, but the drag on growth they result in leads to solutions being sought elsewhere—in recent years, through economic nationalism.

Finally, it seems likely that a more interventionist approach is attractive to PNG’s politicians, given their weak ideological allegiances, and their many business links and aspirations. It also no doubt seems reasonable to PNG’s politicians to blame excessive external influence if not exploitation for their country’s economic woes. This helps explain why, in this sense, the noughties was a return to the days of independence, when there was also a strong mood of economic nationalism (3.1.1).

11.4 Resource policy—big changes and questions

The resource sector is the best documented part of the PNG economy, with the written record including fascinating accounts of individual mines by those involved with them, including Panguna (Quodling 1991), Ok Tedi (Jackson 1993) and Mount Kare (Henton and Flower 2007).

In fact, the resource sector often gets too much attention; however, there is no denying its growing importance. Resource sector policy has undergone four major changes.

First, the emphasis at independence on maximising the yield of resource projects for the central government has given way to a policy of maximising the yield for PNG more broadly, defined to include the central government, the provincial government and landowners (4.3.2). This reflects the lesson learnt that, while, by law, subsoil assets belong to the state, in practice, the consent of landowners and other local stakeholders is required for any resource project to commence and continue.

The share expected to go to the provincial government and especially landowners has grown manyfold. Royalties, which are split between these two groups, have increased; corporate tax can now be spent locally through income tax credits; provincial and local infrastructure grants are also expected as part of project negotiations; the provincial government and landowners are now also expected to be equity owners, with minimum equity stakes granted free of charge, and potentially more available at cost; and landowners are given preferential employment and business opportunities.

The changes are dramatic. Landowners only got royalties worth 0.06 per cent of sales from PNG’s first mine; now they typically get 1 per cent of sales in royalties, a 16-fold increase. When Bougainville leader Paul Lapun tried to secure that first modest amount in royalties from Panguna back in 1966, his amendment was defeated the first time it was put to the House of Assembly on the grounds that, in the word of one senior administrator, it was ‘parochial and relate[d] to the importance of the village and tribe, but disregard[ed] the importance of the country’ (Woolford 1976, 32). Things looked very different once the power of landowners to disrupt mining operations became clear.

This policy shift has worked well in preventing any mines being shut down by landowners after the first, Panguna. There is a convincing argument that the closure of Panguna was not:

‘uniquely Bougainvillian’, but should at most be regarded as an extreme case of a recurrent problem in the relationship between mining communities, landowning communities, and the remarkably fragmented and disorganised ‘state’ of Papua New Guinea. (Filer 1992, 116)

If so, then avoiding ‘another Panguna’ is no mean feat.

At the same time, it is also an expensive policy for the central government. One study showed that in 2009 the Porgera gold mine paid PGK59 million to landowners in dividends, royalties and compensation, almost one-third of the PGK200 million to the central government in various taxes (Johnson 2012).

Moreover, how much benefit this greater sharing has been to the provincial governments and landowners who have been the recipients of it is a matter for debate. Local communities benefit from infrastructure, the provision of health services and employment opportunities. At the same time, the changes can be disruptive. Project areas attract migrants, whose arrival can further boost the local economy, but also give rise to social tensions. Landowner companies operate as sub-contractors to resource companies. Some do well and have expanded their operations, while others have major governance problems.

Benefits are normally distributed very unequally, which has:

created a sharp conflict amongst the haves and have-nots. While compensation funds have led to an increase in consumption, individuals have made little provision for the future, such as investing in their children’s education, and collective living standards have not improved. (World Bank 2004, 21)

They are also often wasted, with royalties commonly used:

to settle outstanding debts, incurred as a consequence of their taking on new wives and having to pay bridal wealth, or having pigs slaughtered on ‘credit’ for bridal or mortuary feasts or traditional compensation purposes. (Koyama 2004, 25)

The same critic (Koyama 2004) points to the intensive and wasteful dissipation of rents through litigation and leadership contestation, and the unlawful and unfair sharing of benefits, often shrouded in a lack of transparency. Mako (2023) writes about the ‘local resource curse’ in relation to the Porgera gold mine. An earlier study on the same mine found ‘the impact of large amounts of cash, especially in the form of compensation payments, had a negative impact on women’ (Filer 1999, 6) and noted local women’s concerns around ‘a breakdown in law and order (especially the increase in rape and police violence)’ (Bonnell 1999, 53). Porgera has experienced a ‘“new polygamy”, whereby the number of wives a man may marry appears to have increased exponentially’ (Johnson 2010, 20). One estimate is that 60–70 per cent of Porgera men have more than one wife, with ‘many having between 3 and 6 wives, plus a few with 16+’ (Johnson 2010, 20).

There was a move in the context of the PNG LNG project to give landowner benefits to individuals rather than groups (as is done for the Ok Tedi project). While this would certainly have improved the equity of royalty distribution, Filer (2019b, 47) recalls that neither the government nor the developers were prepared to invest in the census required, and, moreover, that the proposal:

did not appeal to the more idealistic national stakeholders, especially members of the legal fraternity, who thought it would undermine the integrity of customary social groups, and was equally unappealing to those ‘prominent leaders’ who wanted to control the distribution of landowner benefits.

The second major change in resource policy has been the alternate tightening and relaxing of the fiscal regime. It was tightened in the run-up to independence through the renegotiation of the Bougainville Panguna mine agreement, when the resource rental or super-profits tax was introduced (2.2.3). But it was then relaxed just before the boom began, including by abolishing the super-profits tax (4.3.2), and then tightened once the boom had ended, including by reintroducing the same tax (9.1.4).

The decline in resource revenues during the bust (8.3.2) has led many to conclude that PNG’s resource revenue regime is too lax. But the analysis has not yet been undertaken to fully explain this trend. A comprehensive review concluded that mining tax rates are comparable with those of other countries (Bogan et al. 2014). Despite PNG belonging to the Extractive Transparency Industries Initiative, which publishes annual reports on revenue flows from various resource projects to the government, there remains, for many projects, a lack of transparency about the ratio of taxes to profits (2.2.3).

Third, PNG has always favoured taking a minority equity share in large resource projects. The policy has pros and cons, the main pro being that it makes the state a beneficiary of any tax minimisation; the main con being the risks involved and the difficulty of raising the funds. The policy has been pursued haphazardly, with stakes being sold over the nineties in response to fiscal stress or to finance stakes in other projects. The change in this area has been the push in the last two periods to create national champions: state-owned companies that will not only hold minority stakes in existing resource projects but also accumulate revenue to hold minority, or even majority, stakes in future projects, and potentially operate those projects or decide who will (7.1.3 and 9.1.4). This reflects growing resource nationalism, a trend that began in the nineties (4.3.2) and has intensified each decade since. Given governance weaknesses, it is a high-risk strategy.

Fourth and last, resource sector policy has become more complex and uncertain. Proposals circulate, with strong political backing, to fundamentally alter the policy regime by handing ownership of all subsoil assets to landowners (7.1.4), and to move away from a profit-sharing to a production-sharing set up (9.1.4). The distribution of benefits from any one resource project between central government, provincial government and landowners is ultimately the outcome of negotiations. Negotiations are extensive, and projects are more likely to end up in the courts. PNG was rated the fifth from the bottom in terms of its resource sector policy climate according to a recent global survey of resource companies (Mejía and Aliakbari 2022).

Overall, resource sector policy can be judged a success in terms of the growth rate of the sector (above 5 per cent per year on average—Table 10.3), but a failure set against the sensible goal at independence to support large resource projects ‘not for any direct benefit they can bring, but for the financial support that they can provide for progress towards other national goals’ (2.2.3). For the post-independence era as a whole, the government has obtained much less financial support from the resource sector than from the non-resource sector. Moreover, the resource sector is actually slightly less heavily taxed than the non-resource sector: for the post-independence period, the ratio of resource revenue to resource sector output is, on average, 91 per cent of the ratio of (own) non-resource revenue to non-resource output (Table 10.10).¹

PNG is certainly unusual in this regard. The IMF defines a country as resource rich if it derives at least 20 per cent of either its exports or of government revenue (excluding aid) from the resource sector (Thomas and Trevino 2013). PNG is one of the most resource-rich countries in the world on the former criterion (Table 10.4), but not resource rich at all on the latter criterion (with resource revenue only contributing, on average, 16 per cent of own revenue). This book has suggested several reasons why the PNG government is unable to derive more revenue from the resource sector, including a greater share for other national stakeholders (provincial governments and landowners), and, recently, retention of dividends off-budget by national champions. However, these arguments fall well short of a full explanation. Finding one is a matter of urgency, as the facts need to be settled before current resource sector policy is either maintained or jettisoned. Greater transparency will be required from companies to relate tax paid to profits and to understand why, when the former is low, taxable profits are not higher.

11.5 Downstream processing and import substitution—pursued in moderation

Getting the PNG economy more engaged with downstream processing—oil refining, tuna canning, timber milling—has been an objective since independence, as has import substitution (sugar, rice and cement). These are natural goals for a commodity exporter, but difficult ones to realise. We have discussed the main individual initiatives in earlier chapters and now conclude our treatment of this topic with some general remarks.

First, this is an area in which rhetoric has outstripped policy. PNG has repeatedly threatened/promised to ban the exports of unprocessed logs, but has never followed through, instead constantly extending self-imposed deadlines (9.1.3). Various projects to grow rice, and to ban or limit rice imports, have been proposed but not actually implemented. That realism has prevailed is good, but it has been at a cost to credibility.

Second, where the rhetoric has been accompanied by policy, results have largely been modest. The most successful downstream processing effort in terms of employment has been tuna processing (canning), but this has been by the government effectively paying the equivalent of the sector’s wage bill (9.1.3). It would be hard to endorse such an extravagant policy. In other cases, results have been disappointing. Despite granting a 10-year ban on sugar imports to pioneer domestic producer Ramu Sugar in the 1980s (2.2.2), PNG now imports about half its sugar. The Napa Napa oil refinery commenced production in 2004, with the intention of giving it a monopoly, but PNG in fact imports a significant share of its refined oil needs (ICCC 2016).

A range of natural difficulties has hindered the promotion of downstream processing: for example, a high diversity of trees makes timber processing more difficult and indigenous sugar diseases have threatened commercial sugar production. More systemic problems have also had an impact, including the high cost of doing business in PNG, and, in recent years, the overvalued exchange rate and difficulties of getting hold of foreign exchange for projects that are reliant on foreign inputs.

Third, while their benefits have often disappointed, the costs of these industrial policies have also been contained by the liberalisation of the nineties, which reduced tariffs across the board, and by adoption of a pragmatic approach. To take the two examples given above: the ban on imports that protected Ramu Sugar for a decade has been replaced by a much more modest 30 per cent tariff (ICCC 2019a); and when the Napa Napa oil refinery first ran into production difficulties in 2007, the 30-year import ban on refined oil products that protected it was set aside (ICCC 2019b).

Industrial policy was not mentioned in the original Washington Consensus document. The use of such policies might be said to run contrary to the emphasis of the Consensus on liberalisation and deregulation. One might equally argue, however, that the Consensus allows for some industrial policy, as long as it is not excessive. In any case, there is no doubt the commendable goals of more downstream processing and manufacturing will continue to be pursued in PNG. Hopefully, the country’s pragmatic approach will continue to contain the costs of such policies. For, without better fundamentals, the objective of diversifying the economy away from the resource sector will make little progress.

11.6 The land stalemate

Expensive, difficult and insecure access to land has been recognised as an important constraint on growth since independence (3.1.5). In 1984, Finance Minister John Kaputin (1984, 12) referred to it as a major but not insurmountable constraint to growth. Subsequent events have proved him right on the first point, but wrong on the second.

Property rights are stronger in relation to land that has been alienated from its traditionally customary ownership, but such land is scarce and therefore expensive, its administration often inept and corrupt, and its ownership still subject to claims from customary owners (Filer 2014). Some argue that customary land arrangements are conducive to smallholder agricultural growth.² However, at least outside of smallholder agriculture, there is no debate that reforms to customary land are necessary to promote development. Filer (2019a, 84) writes of the ‘incompatibility of customary social institutions with the operation of a capitalist economy that includes a land market’.

Major disagreement exists in relation to the type of reforms that are needed. Cooter (1991) classified the possible reforms into various types. The first are collective in nature: these aim to facilitate the commercial transaction of group-owned land. Cooter calls this a ‘socialist fantasy’ arguing that clans cannot be organised into legal structures. The second are individualistic in nature and aim to replace group (customary) by individual (freehold) ownership. Cooter call this a ‘capitalist fantasy’ and writes that ‘freehold ownership goes against custom and usage in PNG to such an extent that conversion inevitably creates misunderstandings and disputes’ (Cooter 1991, 780).

The PNG government, supported by a number of PNG and Australian consultants and academics (Fingleton 2004; Yala 2010b), has pursued the collective approach. Two variants of this have been attempted: the lease-leaseback approach (from the seventies, see 3.1.5) and voluntary customary land registration (from the noughties, see 9.1.5). Neither has been successful. The former was abused and suspended, and the latter has been little used. Neither has unlocked financing for landowners.

The individualistic approach has been supported by a small number of mainly Australian economists on the grounds that it is the only known basis for development (Gosarevski, Hughes and Windybank 2004). It has been tried in PNG through the longstanding Land (Tenure Conversion) Act, but this approach was written off as a failure by the colonial administration even before independence (Fingleton 1981, 214) and has hardly been used since. Even if it is conceded that, in customary society, use rights often rest with households (Lea 2023), given what Filer (2014, 82) calls ‘the national ideology of landownership’, a constituent part of which is that ‘customary groups of landowners are the basic building blocks of national society’, it is simply unrealistic to expect the individualist approach to land reform to succeed.³

Cooter recommended a third, case law approach that would involve relying on decisions under the Land Disputes Settlement Act with the aim of allowing:

customary law to evolve and produce its own answer to the question of ownership. Under this proposal, Parliament would remain neutral on the question of individual vs. clan ownership. Instead of a centralized decision, land courts would let custom take its course and enforce the changes that evolve. (Cooter 1991, 792)

Unfortunately, this approach, even if viable at the time it was suggested, is no longer credible. While many land disputes come to courts, and the courts play a useful, clarificatory role, for example, in denying customary claims to alienated land, PNG’s land dispute mediation and settlement system has weakened since independence (Oliver and Fingleton 2008). It ‘has become orphaned by the institutional ambiguities surrounding the devolution of functions to the provinces and subsequent reforms to national departments and agencies’ (Allen and Monson 2014, 3).

Land reform is, therefore, at a stalemate. The growth of the informal land market has been noted by commentators since at least the eighties (3.1.5), and, for the foreseeable future, informal land transactions will dominate in PNG.

Port Moresby’s settlement population is estimated to have grown twice as fast as the city’s overall population (Chand and Yala 2008, 91), and roughly equal numbers are now estimated to live in suburbs and settlements. Surveys in the noughties showed that settlements were:

full of entrepreneurial activity. Services available ranged from tucker shops, billiard tables, hairdressing services, repair shops and trade stores to illegal activities such as bootlegging. Permanent structures, some with septic toilets, television antennae and electricity generators, were discovered as was a commercial complex valued by the proprietor at K300,000 built on land with no formal title in the name of the investor. For the most part, settlements were accessible only to residents—strangers were not welcome within them. (Chand and Yala 2008, 94)

Of course, there are concerns, as in any informal market, with the integrity of these transactions:

In some circumstances, the buyers or tenants cannot be sure that what they have purchased or rented is in fact customary land, and if it is, whether it has not already been informally sold or leased to someone else. (Filer 2019a, 83)

Rooney (2017) gives a fascinating case study that is instructive of the complexities involved.

Given the lack of security that informal land transactions provide, and their word-of-mouth nature, it is not surprising that individual settlements tend to be dominated by particular ethnic (tribal) groups (Chand and Yala 2005; Rooney 2017). This cannot be good for social integration. Already, ethnic conflict is no longer an exclusively rural phenomenon.

Despite these downsides, given the impasse that land reform has come to, there is simply no alternative to reliance on informal land markets, especially for housing. These markets were given a boost by the boom, which greatly increased both employment opportunities and property prices (6.2.2). A survey in Port Moresby by Gouy et al. (2010) of advertised property prices in 2010 found the average lease to be PGK9,300 per month. While rents were significantly lower in the cheapest of the three formal or suburban zones studied (at PGK2,900), they were much cheaper outside of the formal sector, in a settlement (either on customary land or on alienated land without title) where average rent was only PGK326.⁴ The almost tenfold difference between settlement and cheap formal sector accommodation is striking, and explains the demand for settlement land.

That said, there are some things informal transactions cannot do. The Markham-Ramu valley is estimated to have 405,000 hectares of arable land. Only 59,000 hectares is given over to commercial farming and another 16,000 hectares is used by smallholders (IFC 2021), leaving 330,000 hectares of land suitable for agriculture unfarmed. Most of the valley is grass, as it has been for centuries. There are various constraints to the region’s development, but the biggest is the difficulty of securing and retaining access to land for commercial agriculture. An earlier estimate for the country as a whole is that, of the 11.8 million hectares of land suitable for cultivation, only 3 million hectares is ‘actually currently in the food production cycle (that is, land currently in food production plus vegetation regrowth)’ (Saunders 1993, 11). The difficulties of registering customary land for commercial use are illustrated by Schwoerer (2022), while the difficulties of running a business on land that was once customarily owned are readily apparent in the book on the Ramu Sugar project by Errington and Gewertz (2004).

There is no easy way forward. Commendable efforts continue to bring customary land into the formal market. However, weak and under-resourced land administration—‘corrupt, inefficient and dysfunctional’ (Yala 2010a, 3)—is a binding constraint, its weakness evident from the early 1980s.⁵ Voluntary land registration and the lease-leaseback schemes would have worked better with a stronger bureaucracy. But bad governance trumps good policy.

11.7 The informal economy—benign neglect

The importance of informal or unregulated ways of doing business to PNG’s land markets is evident from the previous section. If land transactions were only made in accordance with the law, urban land markets would cease to exist for all but the best resourced. It is not only land markets where PNG’s informal economy has come to the rescue. The percentage of the employed population in wage employment (a proxy for the formal sector) fell from 15.1 per cent in 1980 to 11.3 per cent in 2011 (NSO 2015, 60), the year of the last census, and in urban areas from 85.5 per cent to 53.4 per cent. By 2011, 32 per cent of urban households were engaged in the sale of buai (betel nut) or mustard (the two go together), and 29 per cent in the sale of fresh or cooked food (NSO 2015, 75)—the two leading informal activities. There is also evidence that, unlike pre-deregulation (McGavin 1991), some informal workers now earn more than some wage earners (Samof 2023).

PNG’s informal economy is still relatively weak compared to its Asian neighbours or even many African countries: one example is the lack of a widespread black market for foreign exchange. Nevertheless, any evaluation of the informal economy today has to take into account its inauspicious beginnings and the many challenges it has faced.

At independence the informal economy was virtually non-existent outside of agriculture. Various factors account for this, including subsistence affluence (2.2.4), the absence of trading prior to colonisation, and the negative attitude to urbanisation on the part of the coloniser and, subsequently, PNG’s elite (Conroy 2020). Outside of agriculture, urban centres are needed for the informal economy to flourish. But in PNG, urban centres were meant to be areas for formal employment only, as places not to settle but only to take up wage labour, intended for men, not their families (11.8).

Another barrier to the informal economy at independence was the excessive level of regulation the economy was subject to under Australian standards (3.1.3). The regulatory impulse persists to this day with periodic bans in Port Moresby and other cities on buai, cooked food and street sales (Wenogo 2022; Mirr 2022); daily harassment by police and city rangers (Kavan 2010, 358); and new regulatory architectures, such as embodied in the 2004 Informal Sector Development and Control Act. In the end, however, attempts at regulation and control are typically short lived and ineffectual. This is one benefit of the state being weak: wrongheaded initiatives are no more likely to succeed than well-justified ones. While there are legitimate concerns around health and hygiene, people have to make a living. There is no safety net to fall back on, and voters deprived of their livelihoods are unlikely to re-elect their incumbent MP. Finally, there is also, and opposing the regulatory impulse, a contrary tradition in PNG going back to the pre-independence Faber Report and the Eight-Point Plan that is much more positively inclined to informal economic activity (3.1.1; Conroy 2020). This tradition has led to little by way of positive support for the informal economy, but it has encouraged a disposition on the part of the state of benign neglect towards it, and that has supported its growth.

The informal economy has also benefited from expatriate participation. Many immigrants from mainland China, who have arrived in large numbers over the last two decades (9.2.6), have become small traders, operating outside the formal sector, some even running ‘kai bars’ (small takeaway food bars), even though these are on the reserved list for nationals (Chin 2024, 88).

Of course, the informal economy is held back by the same policy constraints of weak law and order and poor infrastructure that afflict the formal economy. Why the former has grown faster than the latter is an interesting question. In the case of land, the formal path is simply closed. Informal enterprises pay no corporate tax and their employees pay no income tax: both are relatively high in PNG by world standards. Goods sold in the informal market attract no sales tax. The advantages of joining the formal economy to get a respectable international profile are also minimal in PNG given that exporting is almost exclusively the domain of commodity producers. It may also be that the more robust growth of the informal economy reflects its low starting point at independence and that the informal economy suits PNG’s conditions and culture.

Whatever the reason, we should be grateful that the regulatory impulse, though not extinguished, has been kept in check with regards to the informal economy, and that a de facto policy of benign neglect has, in general, prevailed. In many ways, the informal economy has come to PNG’s rescue. Without it, the country’s overall economic performance would have been much worse.

11.8 The retreat from equality

Equality was an extremely important rhetorical principle at independence (3.1.1). The Eight-Point Plan PNG took to independence promised a ‘more equal distribution of economic benefits including a move toward equalising incomes’ and ‘a rapid increase in the equal and active participation of women in both the economy and social activity’. Most egalitarians argue for the reduction rather than the elimination of inequality. But, around the time of independence in PNG, a utopian egalitarianism prevailed, at least rhetorically. As Deputy Prime Minister Paias Wingti put it in 1981 at one of the annual Waigani Seminars:

As we promised in our election campaign, we are determined to eliminate all imbalances. Let’s face it, there are still many in our society. They include rural versus urban, educated versus illiterate, rich versus poor. None of them is healthy, and the gaps between them must be narrowed and finally removed. (Wingti 1985, 16–17)⁶

In subsequent decades, equality has featured much less prominently in government policy statements. The current prime minister likes to talk of creating a nation in which ‘no-one is left behind’. However, growth and employment have become the priority, rather than, as Finance Minister Julius Chan graphically put it in 1992, ‘the ramblings and wafflings from self-proclaimed philosophers who continue to want everyone to be equal’ (Chan 1992, 24). The 2009 Vision 2050 aspiration is for a ‘smart, wise, fair, healthy and happy society by 2050’ that is ‘wealthy and safe’. ‘Fair’ is a long way from ‘equal’. There is virtually no formal social safety net. Whereas Somare in 1974 undertook to restrict the building of new hospitals in urban areas to ‘give priority to the neglected rural areas’ (Somare 1974, 14); now, even though rural health care has deteriorated, the government wants to build ‘modern world class’ hospitals in all 22 provinces (PNG Facts 2020).

Meanwhile, if we look at the data, PNG is now one of the most unequal countries in the Asia-Pacific region (ADB 2012b). The official measure for the Gini coefficient is 41.9 per cent, based on a 2009 survey (World Bank Group n.d.-b). Ironically, donors, who once worried that PNG was placing too much emphasis on equity, now ask the government to reduce inequality (ADB 2012b).

PNG’s high level of inequality is not hard to explain. Its resource dependency (ratio of resource sector to GDP) is one of the highest in the world (Howes and Leng 2023), but its official urban share of 14 per cent makes it the least urbanised country in the world (10.2). Together, these facts make PNG one of the most dualistic countries in the world.

On urbanisation, there is a strand in PNG policy that goes back to well before independence that has wanted to minimise rural–urban migration or ‘urban drift’ as it is called. The desire to keep as many as possible in the countryside was shared by both PNG’s colonial ruler and by the PNG elite. Australia wanted to ‘secure village life’ (from the title of MacWilliam 2013) and was ‘hostile to the emergence of a committed indigenous urban workforce’ (Conroy 2023, 5). In 1969, the House of Assembly passed a motion portraying ‘urbanisation as a threat to village life and as a cause of unemployment’, and asking the administration ‘to reintroduce restrictions on movements to towns except where employment was assured or for short visits’ (cited in MacWilliam 2013, 213). There were similar motions in 1964, 1971 and 1973 (Conroy 2023, 243). Vagrancy was a crime under colonial role. The Vagrancy Act of 1977 made it a crime once again, but was ruled unconstitutional (3.2.5). Official attitudes have remained unchanged. In 1991, Finance Minister Paul Pora said: ‘Our young people must realise the importance and opportunities of working on the land and avoid the temptation to drift to the cities where high expectations have only led to disappointment and despair’ (Pora 1991, 46). In 2023, Prime Minster James Marape told the youth of PNG: ‘Do not come to Port Moresby or Lae’ (PNG Facts 2023).⁷ PNG’s success at restraining urban drift—as indicated by its very low urban share—is the result neither of this sort of official discouragement nor of improved rural living conditions but rather of a lack of urban opportunity.

We lack the data to say whether inequality has increased in PNG. However, it is hard to believe that it has decreased. Gewertz and Errington (1999) documented the growing differentiation between an ‘elite middle class’ (those in waged jobs) and the ‘grass roots’ majority (those in rural areas and in urban settlements). With the fall in the minimum wage (Figure B18), Cox (2014) has argued that there is now a third class, the ‘working poor’ who are waged but nevertheless struggling.

Even in the early days, the commitment to equality was more rhetorical than substantive. In particular, the large increases to the urban minimum wage in the run-up to independence were sharply at odds with such a commitment (3.1.1). From this same perspective, the sharp reduction in the urban minimum wage over the nineties (5.1.1 and Figure B18) must be regarded as a victory for national equity. However, the recent overvaluation of the exchange rate (8.3.1), like a high minimum wage, is a form of urban bias, as it benefits urban dwellers (food purchasers) and disadvantages rural ones (food producers).

Government expenditure can promote or undermine equality. There has always been a focus on rural development since independence (3.1.4). And since most members of parliament serve rural constituencies, the growth in MP funding (Figure A1) is to the benefit of rural areas. Nevertheless, the assessment that ‘the actual allocation of resources remains heavily biased toward urban areas’ (McKillop, Bourke and Kambori 2009, 59) continues to be reasonable, and perhaps inevitable, given limited budget spending capacity and the demands of urban areas for roads, policing and basic services.

One area where there has been at least some progress is in relation to equality between men and women. A study of PNG’s schools and health facilities found that:

In 2002, only 13 per cent of primary school principals were females. In 2012, it was 27 per cent, more than double. The number of female teachers also increased sharply: from 27 to 55 per cent. (Howes et al. 2014)

Women are active participants in PNG’s informal economy, which is where the great majority of nationals work. For example, the share of market vendors who are women has increased and is now above 80 per cent (Sharp, Busse and Bourke 2022). This progress notwithstanding, PNG is still a long way from equal participation, with limited contraception access (10.2) and violence against women providing two of the most insurmountable barriers. On the latter, PNG has the sixth-highest rate of intimate partner violence in the world (Table 10.14). The share of women in a polygynous relationship grew from 14 per cent in 1996 to 18 per cent in 2016–18 (Pandey and Howes 2022, 179). Women who earn more than their husband are at increased risk of violence (Smith 2024). PNG’s very low level of political representation—depending on the parliamentary term, either the lowest in the world, or one of the lowest—both reflects the country’s extreme level of gender disparity and helps perpetuate it.

11.9 Conclusion

When thinking about economic policy in Papua New Guinea, the question naturally arises as to whether the country suffers from the resource curse, that is, whether its resource endowments have actually hindered rather than helped development. While it is impossible to say whether PNG would be better off without its subsoil assets, one can certainly say that its endowments have been, at best, a mixed blessing. In the next chapter, we look at how resource dependency might be linked to weak institutions (12.4). Economic symptoms of a resource curse, sometimes called Dutch disease, include an overvalued exchange rate and a high-cost economy, both of which have certainly been in evidence in independent PNG (3.1.3 and 7.3). That said, it would be a mistake to reduce the PNG economic story to one of the resource curse; things are much more complex than that.

Managing the PNG economy is an intrinsically difficult task for (at least) five reasons. First, as a small, open, resource-dependent economy, the PNG economy is prone to numerous shocks, which makes forward planning very difficult. A boom was anticipated in the early eighties, but did not eventuate at all (2.2.1). The boom of the early nineties was much shorter than expected. The long boom of the noughties was completely unexpected, as was the bust of the tens. Second, the economy is highly monopolistic, which has the implication that standard liberalising policies may not be welfare improving. Deregulation may backfire due to limited competition. Third, even sensible policies have risks. Currency non-convertibility is very damaging for growth and encourages fiscal profligacy. It would be sensible to reintroduce convertibility, yet such a reform may, if it does not induce adequate fiscal discipline, lead to a balance of payments crisis, as it did, twice, in the nineties. Fourth, economic reforms may have a limited return because other constraints are binding and cannot be addressed, such as insecurity. Fifth, some of the reforms needed are technically demanding. One can smooth resource revenue to government using a formula, but PNG also gets a revenue boost from the construction of resource projects, and these non-resource-revenue booms are much difficult to smooth. Everyone knows that land reforms are important, but no-one knows which land reforms will work.

Moreover, managing the PNG economy is more difficult now than at independence, for another two reasons. First, stability seems to have become the most important organising economic principle in PNG. Instability hurts confidence but, looking back on PNG’s history (and international experience), more stability means less reform. Second, there is a lack of consensus around economic reform. There is a reaction against policies and reforms supported in the nineties, with less support for Washington Consensus–type reforms, and more for nationalistic policies. At the same time, the stalling of various reform proposals in recent years, for example to greatly expand the reservation list, and to rewrite the country’s resource policies, shows that there is much disagreement about the direction the country should take. The result is often drift.

Thus there are many difficulties for any would-be Papua New Guinean reformer, but nevertheless reform is needed. We have already indicated our priorities for macroeconomic reform: a return to currency convertibility on the current account, the reintroduction of a revenue smoothing mechanism and the restoration of credibility. On the microeconomic front, policies that promote competition and market entry should be encouraged, but regulatory approaches should not be discarded without careful analysis and may need to be introduced where competition is weak. Clampdowns on the informal economy should be avoided. A better understanding is urgently needed of the failure of the national government to accrue more revenue from the resource sector. And there should be a return to the emphasis at independence on equality, including gender equality, with a special focus on improving the country’s appalling vaccination and nutrition indicators (Table 10.14).

These reforms are needed for higher growth and better development. Whether or not they will be undertaken depends on deeper institutional factors, to which we now turn.

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1. 1 Income tax from the resource sector is excluded from the government resource take as our interest is in how much resource profits are taxed.

2. 2 For the two sides of this argument, see Bourke (2005a) and Holzknecht (2003), on one side, and Curtin (2003) on the other.

3. 3 Freehold titles acquired through the land tenure conversion process are also largely unbankable (Kimas 2010, 35).

4. 4 Settlements were not surveyed, so this figure is based on ‘anecdotal evidence from the real estate agents’ surveyed (Gouy et al. 2010, 18).

5. 5 ‘It is unfortunate that the Department of Lands is administratively weak. Its weakness seems to be due at least in part to shortages of staff, inexperience, lack of training and the fact that the procedures which must be followed are in many cases cumbersome. The department has a large backlog of transactions waiting to be processed, and its inefficiency is further reflected in long delays in completing transactions or failure to complete them at all’ (Goodman, Lepani and Morawetz 1985, 122).

6. 6 Wingti goes on to a long discussion on the importance of gender equality.

7. 7 When commercial advertising was first introduced onto radio by the National Broadcasting Commission, ‘this was limited to urban areas as it was feared that commercials would raise the expectations of rural people by showing them the ‘bright lights’ of the towns’ (Goodman et al. 1985, 163).