Papula New Guinea iSo11 Its Economnic Situation Public Disclosure Authorized and Prospects for Developmnent A World Bank Country Economic Report I#.:...::-.-- Public Disclosure Authorized L D",' !/ - g-^7- , ; 6' ~ C <rX t , , t , ,' .. .N Public Disclosure Authorized Public Disclosure Authorized Papua New Guinea Its Economic Situation and Prospects for Development A WORLD BANK COUNTRY ECONOMIC REPORT IBRD 13234 DECEMBER1977 142f ISO6I. 1540 Ianus Papua New Gutinea New Ireland Proviricial West Sepik r ! botundaries - Provincial boundaries .jEast Sepik t - Territorial boundarn 0 a r./ck S e a iliternational bouldlaries -Madang -- Weste|n / Wes t NorthN/ Solomons 4N,ew Britain (Formtw~rl, oigainvdie) j 13 i ~Sout ern s5iby)\j\X Highlandigh lds , orobe I East New Britain .7 T/ f~~~~- 1X 1 - ------ > NAh iormnerly Papua) - 1 ,C ! i Gul~Gf krthern/Ioirtuxa Milne Bay D 50 100 150 20025 S ,Miks i ~Central -< a0 50 100 15,0 20,0 250 300 S e a-c>q< Kilomters : N ..11r 9oddophaoffrn pfylqfBroe9N flm^te Ssoorr ,anooflyiz hel" ,eNeCsJd taS r4I9l o't,o*/o tz l-rdt 7holJ 1420 149h 150, IS Papua New Guinea Its Economic Situation and Prospects for Development REPORT OF A MISSION SENT TO PAPUA NEW GUINEA BY THE WORLD BANK CHIEF OF MISSION AND PRINCIPAL AUTHOR GEORGE B. BALDWIN WITH THE ASSISTANCE OF SWADESH R. BOSE ALICE C. GALENSON PAUL C. MOULIN The World Bank : Washington, D.C. Copyright © 1978 by the International Bank for Reconstruction and Development / The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved. Manufactured in the United States of America. The views and interpretations in this book are those of the authors and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. Librariy of Congress Cataloging in Publication Data Balclwin, Ccorge Benedict. Papua New Guinea, its economic situation and prospects for development. (World Bank country economic report) 1. Papua New Guinea-Economic conditions. 2. Papua New Guinea-Economic policy. Inter- national Bank for Beconstrtiction and Development. II. Title. III. Series: World Bamnk country economic reports. Fl-C687. P3B323 330.9'95'3 77-17242 ISBN 0-8018-2091-X Foreword T ISIS IS THE I' 'R TEENTH IN THE CURRENT SERIES OF World Bank country Teconomic reports, all of which are listed on the following page. They are published, in response to a desire expressed by scholars and practitioners in the field of economic and social development, to aid and encourage research and the interchange of knowledge. Economic reports on borrowing countries are prepared regularly by the Bank in support of its own operations. These surveys provide a basis for discussions with the governments and for decisions on Bank policy and operations. Many of these reports are also used by the governments themseives as an aid to their economic planning and by consortia and consultative groups of governments and in- stitutions providing assistance in development. All Bank country re- ports are subject to the agreement of-and several have been published by-the governments concerned. HOLLIS CHENERY Vice Presidentfor Develrpment Policy The World Bank Washington, D.C. December 1977 u WORLD BANK COUNTRY ECONOMIC REPORTS Published for the Bank by The Johns Hopl'Ans University Press Korea: Problems and Issues in a Rapidly Growing Economy Kenya: Into the Second Decade Yugoslavia: Development with Decentralization Nigeria: Options for Long-Term Development Economic Growth of Colombia Published by the World Bank Papua New Guinea: Its Economic Situation and Prospects for De- velopment The Philippines: Prioritiesand Prospects for Development Lesotho: A Development Challenge Turkey: Prospects and Problems of an Expanding Economy Senegal: Tradition, Diversification, and Economic Development (also published in French) Chad: Development Potential and Constraints (also published in French as Le Developpement du Tchad: Possibilites et Limites) CurrentEconomic Position and Prospects of Peru CurrentEconomic Position and Prospects of Ecuador Employment in Trinidad and Tobago vi Contents List of Tables x Preface xii Acronyms xv SECTION I. Background 1. Introduction and Summary 3 2. A Sketch of Papua New Guinea 13 The Land 13 The People 15 History and Political Development 19 The Australian Legacy 27 3. The Changing Structure of the Economy 30 The Private Sector 30 Government Policies 32 Domestic Product and Expenditure 33 Distribution of Income 35 Sectoral Origin of Production and Incomes 37 SECTION II. Development Policy and Oujtlook 4. Goals for Internal Development 64 The Governnment's Development Goals 65 Possible Size of aDevelopmentPlan 69 Program Emphases 72 The Measurement of Development Progress 79 vii viii CONTENTS 5. The Role of ForeignInvestment 80 Basic Principles Underlying Government Policy 80 Policy iimplementation 82 Prospects for Additional Foreign Investment 86 SECTION III. Prospects for Self-Reliance 6. Public Revenues and Expenditures 91 Recent Growth of Revenues and Expenditures 93 Sources of Domestic Revenue 95 Australian Assistance 99 Debt Financing 101 Expenditures 102 Projections of Future Fiscal Viability 105 Critical Areas in Controlling the Growth of Expenditure 107 7. The Balance of Payments 112 Independence and the Balance-of-Payments Problem 112 Policy Orientation 114 Present Structure of the Balance of Payments 116 The Composition of Imports 119 Balance-of-Payments Viability 123 Conclusion 133 8. Postscript 135 Balance of Payments and Adjustments in the Exchange Rate 137 Government Finances 138 Inflation and Incomes Policy 142 Public Service Employment 143 Development Policies 144 1977 Elections 147 APPENDIXES A. NationalIncome Statistics 149 B. AgriculturalProspects 152 Principal Crops 153 Import-Substitution in Food 159 Improving Traditional Agriculture 163 C. Fr-ainceOiokforIndustrial Development 164 Public and Private Sector Investment 165 Sectoral Development 166 D. Second National Investment PrioritiesSchedule 170 E. Petroleum Policy and Legislation 173 F, FinancialPolicy Relating to Major Mining Projects 180 StatisticalAppendix 183 CONTENTS ix Bibliography 221 Maps of Papua New Guinea Provincial Boundaries Frontispiece Major Cities and Transport 12 Figure: Impact of Bougainville Mine on Papua New Guinea's Economy 53 List of Tables 3.1 Expenditure on Gross Domestic Product at Constant Prices, Fiscal Years 1968-74 34 3.2 Distribution of Gross Domestic Product by Industrial Origin, Fiscal Years 1968-72 37 3.3 Work Force in Monetized Activities by Industry, Fiscal Years 1968-76 39 3.4 Employment of Nationals in the Public Service, 1971-75 50 3.5 Summary of Factory Operations, Fiscal Years 1968-74 56 4.1 Possible Size and Financing of a Four-Year Development Plan, Fiscal Years 1978-81 71 6.1 Central Government Finances, Fiscal Years 1968 and 1971-76 92 6.2 Central Government Domestic Revenue, Fiscal Years 1971-76 94 ~5.3 Australian Aid to Papua New Guinea, Fiscal Years 1971-76 100 6.4 Economic Classification of Central Government Expenditures, Fiscal Years 1971-76 103 6.5 Illustrative Projections of the Revenue-Expenditure Gap, Fiscal Years 1977-97 106 7.1 Balance of Payments, Fiscal Years 1971-76 118 7.2 Imports According to End Use, Fiscal Years 1971-75 120 7.3 Value of Imports by Standard International Trade Classification (SITC), Fiscal Years 1971-75 121 7.4 Balance-of-Payments Projections, with and without Copper Contribution, Fiscal Years 1976-85 124 7.5 Export Projections at Current and Constant Prices, Fiscal Years 1976-85 128 7.6 Annual Real Growth Rates of Export Values, Fiscal Years 1976-80, 1981-85, and 1976-85 130 7.7 Debt-Service Projections, Fiscal Years 1976-85 132 8,1 The Market Component of Gross Domestic Product, Fiscal Years 1974-76 135 8,2 Balance of Payments, Fiscal Years 1975-77 136 8.3 Central Government Finances, Fiscal Years 1976-77 139 8A4 Central Government Revenue, Fiscal Years 1976-77 140 x LIST OF TABLES Xi 8.5 Central Government Expenditures, Fiscal Years 1976-77 141 Al Gross Domestic Product, National Income, and National Disposable Income at Current Market Prices, Fiscal Years 1971-75 150 Bi Actual and Projected Volumes of Major Agricultural Export Commodities, Fiscal Years 1969-85 152 B2 Annual New Plantings, 1955-6," and 1969-72 154 B3 Production of Major Export Crops by Papua New Guineans and by Expatriates, Fiscal Year 1973 156 B4 Actual and Projected Export Earnings from Agriculture and Fishery, Fiscal Years 1974-85 158 El Hypothetical Cash Flow from a Small Offshore Oil Field in Papua New Guinea 176 Preface T HE WORLi) BANK, BI:Er :WEN1963 and 1976, sent a number of eco- nomic missions to Papua New Guinea.' This short span of time saw a country that was an economically and politically fragmented, primitive protectorate of Australia evolve-peacefully and amica- bly-into a self-governing and finally independent nation. Although Papua New Guinea has become politically independent of Australia, its economic dependence persists and is likely to do so for se, eral years to come. Nevertheless, the prospects for self- reliance-which is not the same as self-sufficiency-are promising. The analysis of these prospects is the central theme of this book. An important secondary theme, one treated more explicitly in some of the documentary appendixes than in the text, is Papua New Guinea's unusually clear set of development policies, policies that are remarkable for their attempt to reconcile objectives of growth and quality of life. Until Papua New Guinea is able to carry through an economic transformation that will make it fully self-reliant, the country will continue to be highly dependent on external grant aid, which comes primarily from Australia. This dependence is found in (a) Papua New Guinea's continuing reliance on Australia's annual budgetary grant, without which Papua New Guinea's central government bud- get and its balance of payments would not be viable, and (b) the dominant role foreigners (mainly Australians) play in a number of modern activities in the public and private sectors requiring skilled or high-level manpower.