Economic Development in Papua New Guinea
Economic Development in Papua New Guinea: A Review of the New Orthodoxy
Following Papua New Guinea's independence in 1975, cautious optimism prevailed regarding its economic development prospects. The government prioritized welfare, relegating economic growth to a secondary role, assuming the continuation of high growth rates from the prior decade. However, the early 1980s brought harsh economic realities: poor growth rates, falling commodity prices, rising unemployment, and increasing foreign debt.
A new economic orthodoxy emerged, emphasizing economic growth, efficiency, and comparative advantage over welfare goals. The underlying philosophy suggests that promoting economic growth is crucial for improving living standards. The government identified manufacturing as a key sector for growth, aiming to reduce unemployment and address balance of payments issues. A 1983 White Paper on Industrial Development noted manufacturing's limited contribution to GDP (10%) and formal employment, proposing measures for expansion.
Raymond Goodman and Helen Hughes express pessimism about manufacturing growth in the short to medium term, citing constraints such as:
A small and fragmented market
Skills shortage
Land acquisition difficulties
Inadequate infrastructure
High transport costs
Low labor productivity
High labor costs
The last point is particularly contentious. Wages are higher than in Southeast Asia, while productivity lags behind East Asia. Hughes argues that real labor costs are comparable to those of higher-income industrial countries. Both books suggest reducing real wages to enhance industrial competitiveness. However, the necessary extent of wage reduction remains unclear, and addressing other constraints is crucial for successful industrialization. The impact of wage reductions on workers' living standards and the potential political consequences are not considered.
The cost of living in urban Papua New Guinea is high, with the Port Moresby minimum wage potentially below the level required to meet minimum family-subsistence needs. Implementing wage-lowering policies could lead to labor-capital and labor-state conflicts.
The White Paper anticipates manufacturing expansion through incentives and protection. Hughes is skeptical, arguing that incentives can lead to inefficient industries. She critiques import substitution, citing higher consumer costs, problems for export industries, and worsened income distribution. She also questions export-oriented industrialization, suggesting that sound industries should not require subsidies. Hughes advocates for an open economy and market rules, but the reviewer questions why Papua New Guinea should pioneer in eschewing protection and incentives when they are prevalent globally.
Political considerations often lead to compromises in policy implementation. If employment creation is prioritized, Papua New Guinea might sacrifice manufacturing efficiency through protectionary measures. Hughes neglects the political dimension and differing viewpoints. The secretary of the Department of Industrial Development acknowledges the protection given to infant industries in successful newly industrialized countries. However, there is agreement that structural constraints must be addressed for Papua New Guinea to industrialize.
Mineral exploitation is presented as an alternative for economic growth, fiscal self-reliance, and employment. Hughes raises concerns about the