Table of Contents
The responsibility for economic policy making was transferred from Canberra to Port Moresby and from expatriate Australians to the locals at an accelerating pace from 1951 to 1973. The chief minister and prime minister-in-waiting noted that ‘after April 1972 the elected representatives in the House of Assembly felt that they were in reality the government. We began to initiate policy’ (Somare 2001, 16). This chapter shows that the period preceding independence and a decade and half after independence saw responsible economic policy making. During this era of hope, policymakers were in control of the fiscal position and on track to see rapid development. This was not to last for long, with the state losing control of its budget, prices, and the exchange rate by the early 1990s. Some of the lost ground was recovered from late 1999 to 2001, but a lot remains to be achieved.
The shift of responsibility for economic policy making from Canberra to Port Moresby was such that by 1972 the Chief Minister’s Office, together with the Department of Finance, had close to full autonomy in charting the economic course for the nation. Well before attaining self-government on 1 December 1973, the processes of law making and appropriation of money for public purposes in the Territories were undertaken locally by a legislature, the majority of whose members were elected by the local population. Full independence was acquired on 16 September 1975 when Australia transferred its final responsibilities for defence and external relations (see World Bank 1965; Garnaut 1981).
Australia achieved its goal of a peaceful and amicable transfer of power and responsibility for policymaking to Port Moresby and institutions created at independence achieved the desired objective of ensuring responsible economic policy making. However, the virtuous effects of good governance on responsible economic policy making began to unravel around the early 1990s, and particularly following the Bougainville crisis, leading to repeated economic crises.
The success of the shift of responsibility for economic policy making was due to good planning and methodical implementation by the then colonial administration. The hand-over of power and responsibility for policy making took place on time and in a peaceful, amicable, and orderly fashion (World Bank 1978, 5). In a series of lectures, the options for increased autonomy for the territories were aired by four distinguished academics from the Australian National University (ANU). These lectures, subsequently published as Bettison, Fisk, West and Crawford (1962) provide an excellent account of the thinking that was put into preparing Papua New Guinea for self-rule.[2]
Amongst the several achievements of the early years of self-government, two that stand out in terms of relevance for the current period are the conduct of the 1968 elections and the institutional arrangements put in place for fiscal prudence. On the former, the World Bank (1978, 22) noted that the 1968 election was an ‘organizational marvel with voter registration being close to complete with two-thirds registered having voted’. On the latter, pressures for responsible budgeting were created following self-rule by new institutions and procedures established for this very purpose. The outcome was a constant dialogue between the respective ministries and departments. Expenditure requests and program proposals by agency heads were channelled through the Central Planning Office (CPO), which acted as the secretariat to a sub-committee of cabinet, namely the National Planning Committee. These freshly established institutions and procedures, and the accompanying by-product of documents, ensured control over expenditures and hence of the budget. They also served as the mechanism to inform and educate stakeholders about the nation’s overall fiscal position and the linkages between programs and the national policy goals of the government.
Other features of the initial conditions included a cadre of well-qualified graduates from the University of Papua New Guinea who took the helm of political leadership during the transfer of responsibility for policy making from Canberra to Port Moresby. The church, together with a significant number of senior expatriate administrative staff, provided much needed support during this transition, though decision making rested fully within the hands of local leaders. These achievements were consistent with West’s preferred strategy of preparing Papua New Guinea for independence as announced a decade earlier:
If, by a change of emphasis in policy, a Papuan elite were to be given every opportunity within the next ten years for education and experience, when the time came for Australia to transfer sovereignty, to hand over power to that Legislative Council the Minister has seen as the sovereign body, I think we would have every reason to be hopeful that an independent state would willingly establish a special relationship, in terms of defence, economic aid, and diplomatic representation, with Australia. (Bettison, Fisk, West and Crawford 1962, 58).
In its thirty years of independence Papua New Guinea has maintained a special (cordial if not always warm) relationship with Australia.
Papua New Guinea achieved the initial successes in economic management by well considered and responsible action by its leaders, many of whom remain active some three decades later. Garnaut (1981, 172), for example, notes that: ‘The ideas that were important to the evolution of a satisfactory framework for economic policy making had been around Port Moresby for some time and had been discussed at length by Chan, Morauta and their advisers’. Mekere Morauta took office as the first Papua New Guinean secretary of Finance in late 1973 and played a significant role in seeing that fiscal discipline was maintained during those early years of self-governance. In these early years, the General Financial and Economic Policy Division (GFEP) of the Ministry of Finance, headed by a first assistant secretary (FAS), had a critical role in formulation of economic policy.[3] A Budget Priorities Committee (BPC) established systems for identification and enforcement of long-term budget priorities. According to Garnaut (1981, 172), by the second half of 1976 the major elements of ‘an internally consistent macro-economic strategy’ had fallen into place.
The World Bank (1978, 5) was highly complimentary of Papua New Guinea’s policy making at independence, noting that:
In the four years after its elections, the Somare government showed an impressive ability to deal with the young country’s financial, economic, and political problems. An effective set of institutions for economic and financial management has been created. These include a strong ministry of finance that has developed a tight system of budget controls, operating through a budget priorities committee; a planning office; and a central bank that, with International Monetary Fund assistance, has organized a set of international accounts.
The Bank went on to note the successful introduction of the kina, approval of a set of principles to govern development policy and foreign investment, and the publishing of investment priorities by the National Investment and Development Authority (NIDA). These achievements were indeed remarkable, particularly at the inception of a new nation state and given limited resources. The Bank qualified its highly favourable assessment by stating that ‘no one can say how sturdy or fragile Papua New Guinea’s policy or administration will prove to be, but the short-run record provides strong grounds for optimism and few for anxiety’ (ibid.). At independence, Australian assistance accounted for between 40 and 45 per cent of the local budget and some 45 to 50 per cent of the foreign exchange requirements. The World Bank, then, had ‘reasonable grounds’ to believe that this dependence on Australian aid ‘might end entirely within the next 20 to 25 years’ (ibid., 6).
The state of public infrastructure and social service delivery at independence was good, relative to that of recent years and in comparison to the state of the economy at independence. A World Bank mission to Papua New Guinea in 1975, just before independence observed that:
The strikingly primitive state of much of the economy and society contrasts with the surprisingly well-developed status of the central government and many of its services. Education and health care and some of the country’s infrastructure — harbours, electricity supply, telecommunications, and air services — are comparatively advanced (World Bank 1978, 5).
A sharp turnaround in the fiscal position of the state, loss of budgetary control, and widespread allegations of misappropriation of public funds thus give cause for concern; it requires explanation how such good preparatory work leading to an initial phase of responsible policy making could come unstuck over a decade later.[4]
In December 1972, the Somare Government announced its development goals in the form of the Eight Aims of the national government (see Fitzpatrick 1985; World Bank 1978, 66).
The Eight Aims subsequently became the basis for the Five National Goals and Directive Principles included in the preamble to the constitution. These aims and directive principles reflected the government’s concerns for equitable and sustainable growth, for the use of natural resources to benefit the wider community, and for protection of the environment. The World Bank in its 1976 economic mission to Papua New Guinea suggested two further goals: to raise the country’s fiscal viability,[5] and to achieve a gradual reorientation of the economy to costs and standards that could be sustained within the country’s resources. These latter two goals complement those of self-reliance in that they encompass notions of sustainability.
The third National Goal and Directive Principle of the preamble to the constitution is ‘for Papua New Guinea to be politically and economically independent, and our economy basically self-reliant’.
This goal encapsulates themes of localization and national sovereignty. Further, sub-paragraph 4 envisions ‘citizens and government bodies to have control of the bulk of economic enterprise and production’, while sub-paragraph 5 stipulates strict control of foreign investment. Sub-paragraph 6 mandates ‘the state to take effective measures to control and actively participate in the national economy, and in particular to control major enterprises engaged in the exploitation of natural resources’. Sub-paragraph 8 warns against entering agreements on foreign assistance that ‘imperil[s] our self-reliance and self-respect’ or exposes the nation to dependence on and/or influence of ‘any country, investor, lender or donor’.
There was also a clear recognition that resource exploitation would be the core strategy for economic development. The architects of the constitution were cognizant of the policy challenges posed by such a strategy: the fourth national goal and directive principle states:
We declare our fourth goal to be for Papua New Guinea’s natural resources and environment to be conserved and used for the collective benefit of us all, and be replenished for the benefit of future generations.
Sub-paragraph (1) within this goal calls for ‘wise use to be made of our natural resources and the environment in and on the land or seabed, in the sea, under the land, and in the air, in the interests of our development and in trust for future generations’. It is difficult to argue that policies implemented since independence have delivered on these goals.
The overriding concerns of the first Somare government were ‘Independence, national unity, and politically cohesive national government’ (Garnaut 1981, 163). These concerns were addressed with only limited success, and have remained high in the priorities of all subsequent governments. A combination of fiscal, monetary, trade, and incomes policies has been employed in economic management, as considered below.
[1] Helpful comments from Ron Duncan, Ross Garnaut, Ron May and Peter McCawley are acknowledged with the usual disclaimer.
[2] ANU’s active involvement with policy making in Papua New Guinea dates back to 1953 when Oskar Spate, Cyril Belshaw, and Trevor Swan were commissioned by the Australian government ‘to investigate the economic structure of the Territory with a view to suggesting gaps in knowledge’ (Terrell 2000, 1). Since then a string of ANU academics, including Sir John Crawford, Professor Peter Drysdale, Dr Andrew Elek, Professor E. Fisk, Professor Ross Garnaut and Dr Ron May have been involved in the design and implementation of policy in Papua New Guinea.
[3] Ross Garnaut took up the FAS position in April 1975.
[4] Garnaut (2000, 35) claims that ‘by 1999, Papua New Guinea had become a kleptocratic state’, a statement highlighting the damning state of governance (and policy making) in the country.
[5] This was to be measured by an increase in self-reliance, the last being defined as the proportion of the government’s total budgetary expenditure financed from domestic resources and foreign loans.