HOW POOR IS PAPUA NEW GUINEA? HOW RICH COULD IT BE? Tim Curtin SSGM, RSPAS The Australian National University e-mail: email@example.com Complete paper will shortly be posted on my website: www.timcurtin.com. Acknowledgments.
HOW POOR IS PAPUA NEW GUINEA?
HOW RICH COULD IT BE?
The Australian National University
Complete paper will shortly be posted on my website:
The author thanks Michael Bourke, Colin Filer, Robin Hide, David Lea, and Luca Tacconi for comments on earlier drafts with the usual disclaimers
This paper has been drawn from two chapters in a forthcoming book by Tim Curtin and David R Lea,
Land, Law and Economic Development in Papua New Guinea.
PNG’s GDP in 2003 was K11.6 billion or US$3.3 billion or US$606 per capita. That exceeds the World Bank’s poverty minimum of US$1 per person per day, at US$1.66. But PNG clearly is poor, and these data are somewhat overstated as they refer to GDP. National income data as such are not available, and GNP is usually less than GDP. But the 2000 Census as we will see seems to have seriously over-counted the population, resulting in under-stated per capita GDP.
Most recent commentators (e.g. Chand, Hughes) stress the country’s apparently slow economic growth rate, with GDP per head allegedly growing no faster than the population, said to be increasing at 2.66 per cent a year. There has indeed been a bad patch until recently, but over the whole period since 1974/5, i.e. since Independence, GDP per head has grown by 3.5% ABOVE the population growth rate, to A$933, or between A$4,500 and A$5,500 per average household, which is well below Australia’s A$40,000.
Ironically, Papua New Guinea’s 3.5 per cent growth of per capita GDP since 1974/5 has actually been faster than Australia’s, which managed only 2.5 per cent p.a. over the same period. With population growth at the official rate of 2.66% p.a. PNG’s growth of total GDP has been 6.16% p.a. since 1975. But as noted later, population growth was seriously overstated by the 2000 Census, and the real rate is closer to 2.3% p.a. (implying somewhat slower overall GDP growth of 5.8% p.a.). That may well surprise Helen Hughes, since even growth of 5.8% p.a. sustained for nearly 30 years is not far below the 7% she has implied would be desirable but impossible without drastic reform of land tenure.
The much worse performance reported by the Government itself in its annual budget is yet another example of its foot shooting: it uses a GDP series that begins only in 1983 (an exceptionally good year) and uses various price deflators to express current GDP in real terms at 1983 prices. That is a largely meaningless statistic; expressed in 1900 prices today’s average incomes in Australia would not sound good. My data are in current prices turned into A$ at the current exchange rate – and give a much better impression of the real purchasing power of current incomes in PNG, especially as in 1975 PNG’s Kina was still at par with the Australian dollar while today the Kina/A$ exchange rate is broadly market determined and thereby reflects relative prices (as it did not in 1983).
Using the “real” GDP at 1983 prices implies that its conversion to US$ or A$ should be done at the 1983 Kina exchange rates, and this produces the unreal result that PNG’s GDP in 2003 was US$4.24 billion, while its current prices GDP in 2003 of K12.6 billion converts to only US$3.55 billion at the current US$/Kina exchange rate (a non-trivial difference of 19%). One implication could be that the Kina is currently under-valued but more likely is that it was over-valued in 1983. The reality for Papua New Guineans in 2003 was that their Kina would buy only US$0.28, and not US$1.14 as in 1983.
Thus although PNG has done better than many will admit, the outcome is still average incomes that are far from satisfactory, and well below both its own potential and the performance of countries to the north like Malaysia (with its similar colonial history and natural resources).
Also clearly average incomes conceal dispersion, with many of course having below the average. But is it true as Chand, Hughes, and Gibson have claimed that as many as 37% of Papua New Guineans are not merely living below the average but in real poverty?
“The estimated incidence of poverty at the lower poverty line is 30.2%.” For example, 25 per cent of households spent only K258 (real) p.a. on consumption, of which food took up 67%, yielding 1955 calories per AE. In total “over a sixth (c. 17%) of the population have total consumption valued at less than the cost of the food poverty line basket”, and “it would be necessary to transfer K250m. p.a. to poor households to raise them to the upper poverty line”. But Gibson (2000) provides quite different data showing both higher consumption of high calorie foods and more overall “food poverty” (40% consuming less than 2000 calories per day) (whilst saying that he used the same survey “data”).
Other problems with Gibson-Rozelle include their valuation of production of food for own consumption using market wholesale prices. These must exaggerate the cost of food for most rural households. In addition it would appear from estimates by Michael Bourke that Gibson and Rozelle seriously under-state the amount of domestic food production in Papua New Guinea (see Table 2). Bourke’s data would nearly double implied calorie intakes. Moreover the Hanson-Allen-Bourke-McCarthy Handbook estimates 113,800 or 2.8 per cent of the rural population "strongly disadvantaged“ or “poorest of the poor” (including non-food consumption). The next category are also poor or "moderately disadvantaged“ at 15.6 % of the rural population. These seem more plausible than Gibson-Rozelle’s.
Sources: Gibson & Rozelle 1998; Bourke and Vlasaak, 2004
“The total production of all energy foods in PNG is 4,517,000 tonnes. This is equivalent to the food energy from 1,187,500 tonnes of rice. That amount of rice had a wholesale value of K2.73 billion”.
However food production worth K2.7 billion is still only about US$0.4 per person per day, so this implies real consumption not nearly as good as implied by Bourke – and even that amount is not cash in hand and so does not provide for school fees etc. Bourke’s estimates further illustrate the conflict between the views of those who consider that PNG does well enough without structural economic reforms such as land titling and those of us who believe it could do much better.
According to the census of 2000 the total PNG population had grown to 5.17 million from 2.98 m. in 1980. The implied growth rate for the period 1980-2000 is 2.66% per year.
Unfortunately, the 2000 Census showed 45,000 more persons aged 20-39 than had been aged 0-19 in 1980 (see Fig.1) . Thus either the 0-19 age-group was under-reported in 1980 or the 20-39 age-group was over-reported in 2003. Whichever, either GDP per capita in the 1975-1980 period was over-stated, or GDP per capita in 2000 and since has been under-stated, with the result that growth of per capita incomes is under-stated in each case. Using some data on survival rates computed by Geoff Hayes, I produce in Fig.2 an adjusted 1980 census figure of 3.25 million instead of 2.98 million, resulting in lower GDP per head then – and faster growth since!
1. Correcting the 1980 population to match the 2000 Census has the effect of reducing the population growth rate since 1980 from 2.66 per cent to 2.32 per cent (which is consistent with the growth rates estimated by both the 1980 and 1990 censuses) – and that in turn increases the implied growth rate of per capita GDP as we saw earlier. (See Figs. 1 and 2 for a corrected 1980 census).
2. At the adjusted growth rate, the population will not reach 6 million until 2011, not 2006 as it would with the 2.66% rate. This has some planning implications.
Helen Hughes proposes economic reforms that "could put Papua New Guinea on an annual growth path of 7 per cent a year that would double its GDP every decade" (2004, 1). That is certainly not an unreasonable ambition, since as I argue PNG’s economy has already managed at least 5.8% since 1975, and such rates have been and are being achieved by many countries in South-east Asia, including Malaysia, Singapore, Thailand and China.
But the ambition seems unlikely to be attained if all of Hughes' advice is followed, as she advises against relying on development both of mineral resources such as the gas to Queensland project, because she says such projects "create only economic rents that provide revenues for a swollen government and public services" (so no more teachers and health workers?), and timber, because of the "depredations of timber exporting companies" (2004, 2-3).
Hughes goes on to show how Papua New Guinea's merchandise exports per capita at US$324 in 2002 are a small fraction of those of Botswana and Malaysia.Hughes then mocks the Somare government's attempts to revive growth of mineral resource exports but forgets that Botswana's exports are much more dominated by minerals than PNG’s, whilst Malaysia's include a significant contribution from logging, rejected by Hughes and the World Bank. Although log and sawn timber exports are now less than 2 per cent of Malaysia's total exports, they were ten times larger than Papua New Guinea's in 2002, and Malaysia's total exports of logs, sawn timber, wood products, pulp and paper, rubber and products amounted to a staggering US$8.8 billion in 2002, compared with just over US$200 million by Papua New Guinea - yet the World Bank advises Papua New Guinea against development of forestry.
Helen Hughes advocates land tenure reform and massive expansion of the oil palm plantation sector as the drivers of her 7% p.a. growth rate target, and claims that oil palm exports could grow at 30 per cent a year and replace oil and mining as the country's biggest exports.
Michael Bourke has demonstrated the improbability of this being feasible with the following data:
The [average] FOB value of crude oil and minerals in 2001, 2002 and 2003 was K5155.4 million The [average] FOB price for palm oil for this period was K1095/tonne. Production of palm oil is about 3 tonnes per hectare of planted oil palm. PNG exports of palm oil in 2003 were 326,900 tonnes. Hence PNG would need to produce 4,700,000 tonnes of palm oil to totally replace crude oil and minerals [from over 1.5 million hectares compared with the present 108,000 hectares].
Source: R.M Bourke, RMAP Seminar, August 2004
If anything Mike Bourke was too kind to Hughes - his demolition would have been complete if he had noticed that her projected growth rate for Papua New Guinea's oil palm exports would within 15 years imply output greater than total world consumption - and as a result a collapse in the world price. By then the area under oil palm would have to be over 7 million hectares, even more implausible than the 1.5 million hectares in Bourke’s analysis.
Ironically the primary industry that really could replace the minerals is that which already covers most of the country's landmass, namely its forests. Exports of forest products, mainly 2 million cubic metres of logs already contributed K415.8 million (5.3 per cent) to total exports of K7.79 billion in 2003, compared with palm oil's K421.3m.
But forest products exports would not have been as large if the World Bank’s export tax system had not been partly circumvented by transfer pricing and if the Bank had succeeded in its demands that the government should close the Vailala and Wawoi Guavi projects (in Gulf and Western Provinces respectively) as part of its undeclared but obvious intention of terminating all logging in Papua New Guinea, even when as at Wawoi the logs are processed into veneer and plywood for export.
Sweden, unimpeded by the World Bank, has been logging at rates of up to 70 million cubic metres a year for the last decade, 35 times more than Papua New Guinea with its much larger forested area (369,000 sq.km., compare Sweden's 244,000 sq.km.). Moreover Sweden's forestry industry adheres to the Standards for Forest Certification, which require retention of a proportion of the forested area for reasons of bio-diversity and sets the limit of 70 mn. m3 to the potential annual cut of 100 mn. m3 p.a. to ensure sustainability.
Were Papua New Guinea to attain Sweden's level of output, and there is no reason why it could not, given its equal - possibly superior - suitability for softwood pine forestry, then its logging exports could be worth K13 billion, nearly double total exports in 2003, and which would therefore much more than compensate for the projected decline in mineral exports after 2010.
New Zealand is another country that owes much of its high standard of living to development of forestry resources, with annual production of 2.5 million cubic metres of sawn timber and 15.6 million cubic metres of roundwood that was used in the production of 2 million tonnes of wood pulp and paper a year in the 1990s. Thus New Zealand's logging produced nearly ten times as much as Papua New Guinea's in the 1990s, but from a forested area that is only 7 per cent of its (smaller) total land area.
In 1993 26,750 persons were engaged in timber related industries - about three times more than in the whole of Papua New Guinea's mining industry. New Zealand's exports of forest products (excluding newsprint) contributed ten per cent of its total exports in 2002, and amounted to NZ$3.5 billion (about K6.6 billion, more than Papua New Guinea's total exports in 2002).
A recent New Zealand case study provides yet more evidence of Papua New Guinea's failure to develop its forestry resources to their full potential. A plantation including the Kaingaroa Forest near Mount Maunganui acquired by then Fletcher Challenge Forests was projected to yield log sales of 4.5 million cubic metres of radiata pine and other species in 2004, and a further 0.8 million cu. metres of manufactured timber products, all this from 162,173 hectares, or about 5 per cent of Papua New Guinea's forested area. The log sales alone were projected to be worth NZ$427.5 million, about A$388 million or K947 million, compared with Papua New Guinea's total log exports worth K370 million in 2003.
Colin Filer has documented the repeated efforts of the Papua New Guinea government to engineer replacement of log exports by processed timber products, as urged by the Barnett Inquiry.
Lacking that theology, New Zealand's Fletcher Challenge Forests sold 3.5 million cu.metres of logs in 2000, and only 0.6 million cu.metres of manufactured products, directing more than half of its logs to processors in Japan, Korea, and other industrial countries, while less than half was taken up by industry in New Zealand.
Domestic processing for export requires intimate and exact knowledge of the requirements of final consumers in importing countries. Owners of forests in PNG should not expect to acquire that knowledge.
Those log exports by Fletcher Challenge Forests in 2000 earned US$88.8 million from sales of 1.48 million cubic metres of log sales grown on just its directly owned 110,000 hectares.
If Papua New Guinea produced as much pro rata from only 5 million hectares of its total forest area of over 35 million hectares, its log exports would be 67 mn m3 worth US$4 billion (@US$60/m3), or K13.5 billion, more than double its actual mineral exports of K5.9 bn. in 2003.
Not only that, the wages earned would be K1 bn (@K15/m3 according to PNGFA), more than 50% more than total wage income in PNG in 2000.
Now if Papua New Guinea chose to follow the example of countries like Malaysia, Sweden, and New Zealand by exploiting its largest resource to its full potential, we must ask (1) would such massive commercial forestry be feasible in PNG’s tropical climate using native species, and (2) what would need to be done to begin that process?
Using yield data from the Silvicultural Manual for the Solomon Islands, planting logged areas at a rate of 100,000 hectares a year, with a rotation of 30 years, by 2035 it would be possible to harvest 100,000 hectares a year, which at a conservative yield of 250 cu.metres per hectare generates timber of 25 million cu. metres a year, worth US$2.5 billion at $100 per cu.metre – and US$5 mn at the price Malaysia gets today for its Kwila. That exceeds Papua New Guinea's mineral exports in 2003, and would use only 3 million hectares of the up to 30 million potentially available for plantations. Logging old growth at 100,000 ha. p.a to make way for planting provides working capital.
The first step to be taken before commercialization of PNG forestry could be possible would have to be repealing the 1991 Forestry Act, and reverting substantially to the legislation previously in place. The 1991 Act grew out of what in retrospect seems the half-baked Barnett Report, with its exhausting “exposure” of alleged depredations by foreign logging companies.
On close inspection much of Barnett's evidence of transfer pricing was false, mainly because he failed to allow for freight costs when comparing log import prices in Japan with export prices in Papua New Guinea. As shown in Fig.3, Malaysian and Papua New Guinean log export prices tracked each other’s very closely in the 1980s and showed the same difference from import prices.
The second major problem with the Barnett Report was its author’s failure to see that most of the abuses he uncovered flowed directly from the incompetence of the government’s bureaucracy, including the Tax Office. A classic and representative example is the government’s fixing of a Minimum Export Price, which was intended to deal with the supposed problem of transfer pricing. But the MEP was deliberately fixed below prevailing average prices so as not to discourage exports of inferior logs, and then never varied, so it came to be regarded by exporters not as a minimum but as the acceptable (to government) going rate for log exports. Instead of learning the lesson that a bureaucracy cannot be trusted, Barnett, eagerly aped by the World Bank, successfully urged replacement of the Forest Department by the Forest Authority, with even less accountability than before, and with full powers to nationalize the entire forestry industry.
Barnett’s biggest failing was his inability to grasp that if the log exporters were granted long term and secure leases, then they would be much more likely to undertake either sustainable logging of natural forest or replacement of logged out areas with new planting. The World Bank has been the main culprit because its mindset in Papua New Guinea has always been that the forests are a non-renewable resource that can only be preserved by a zero logging option.
In that it has been brilliantly successful, as shown by the 2004 Forestry Review produced by the experts it provided to the Forest Authority, which shows how the revenue regime it made a condition of its SAPs has made log exporting financially non-viable (unless serious transfer pricing is engaged in on a scale far beyond anything Tos Barnett uncovered).
The export tax system imposed by the World Bank operates is a levy that is more than proportionate with rising prices of log exports above a very low level. Now all economics tells us
(1) that sales taxes like GST should be levied at a flat percentage rate, as with the 10% GST, and
(2) that export taxes are not very clever.
Indeed most GST systems exempt exports entirely, because everywhere except PNG they are thought to be worth encouraging. The World Bank knows this, but excuses its progressive export tax on the grounds that the PNG Tax Office was not capable of collecting corporate taxes from the log exporters. A simpler solution to that problem would have been to use the US$1 million the Bank spends on consultants in the Forest Authority to provide the same number of tax auditors. Even just one would be enough to see to it that Rimbunan Hijao paid its due taxes on its c.80% share of total log exports.
The effective rate of the log export tax is easily as much as 110 per cent of normal profits, for a normal gross profit margin on sales value of $100 could be 30%, but the log tax rises to over 30% of sales value when prices rise above K100 per m3.
That explains why declared log prices have fallen since the Bank’s tax came in from as much as $170 per cu.metre in 1996 to as low as US$70, with a consequent loss of foreign exchange earnings as well as tax proceeds far below what they would be in a more honest system, based on corporate tax at PNG’s current rate of 25 per cent for non-mining profits.
Papua New Guinea
In September 2004, PNG exported a total volume of 208,591 cubic metres of logs. Exports by log grade were 83% saw/veneer grade (173,876 cubic metres) at an average price of US$63.30 FOB per cubic metre. Some 11 % was of low grade logs (23,290 cubic metres) at an average price of US$37.88 per cubic metre and 2 % was plantation terminalia sp logs (3500 cubic metres) with a price of US$35-50. A further 4 % was plantation group 2 species - Eucalyptus deglupta logs at a price range US$36-US$58. The saw logs included Kwila at US$90 per cu.metre; that month peninsular Malaysia exported Merbau (i.e. Kwila) at US$215-200.The difference is forgone foreign exchange directly attributable to the World Bank’s imposed log export tax regime, amounting to about US$10 million per month on the Kwila alone, or US$120 mn. p.a., rather more than the World Bank’s ludicrous supposed compensatory US$17 m loan.
Previous seminars (by Mike Bourke amongst others) have argued against Helen Hughes’ view that land titling is the sine qua non for accelerated economic development, since there is no need for Papua New Guinea to move from customary or communal land tenure to individual freehold registered title, because Papua New Guinean “landowners”
(1) already enjoy individual usufruct rights, and
(2) have no need of agricultural credit.
That may well be true if one sees Papua New Guineans as forever basically subsistence food cultivators albeit with some for cash production (Coffee, cocoa, vanilla). But the plethora of dubious transactions between “landowners” and foreign logging companies arose largely because the former were not able to raise on their own account the capital needed to embark on commercial forestry.
Why is it that my demonstration today that Papua New Guinea's forest resource has the capacity to yield much more than the total income the country currently derives from mineral exports is so politically incorrect that the income generating potential of forests could not be spelt out in the World Bank’s loan appraisal or in the Ausaid/ANU Rural Development Handbook (Hanson, Allen, Bourke and McCarthy)? Gross export value per hectare of forestry was as much as US$36,000 in 1997 (Source: PNGFP), and from coffee only US$1,642.(2003 data: timber US$13,950, coffee US$520).
Not one of the many fine full-colour maps of each province's subsistence agriculture and land potential shows either the topography or the extent of forested areas. Both are surely critical for assessing the scope for yet more subsistence agriculture, and especially for determining the trade-offs between forestry activities and agriculture when both compete for the same land. Perhaps a future second edition could address this by including forest location maps as for Sandaun here?