Economic policy choices for rural development in Papua New Guinea

• Ministry for Finance and Planning, Papua New Guinea

Papua New Guinea (PNG) depends heavily on agriculture, forestry and fisheries for employment (>70% of the labour force) and income (>30% of GNP). While growth of the rural sectors is vital for improving living standards in PNG, their performance since Independence (1975) has been disappointing.

The PNG Government has requested ACIAR support for this project to:

. independently assess the country's economic, trade and investment policies;
. review existing macro-economic management and public expenditure planning;
. develop a planning model; and
. review current strategies for agriculture, forestry and fisheries.

The research will be carried out by staff of the Department of Economics, Research School of Pacific Studies, Australian National University (ANU), in collaboration with PNG Government officers.

The commissioned organisation defines three key ingredients for improving the performance of rural activities:

. economic and trade policies to provide price stability and a relative prices structure consistent with agricultural development;
. provision of resources for improving rural infrastructure; and
. strategies aimed at improving the efficiency of the rural sectors.

While the project will focus on the first two ingredients, which are closely interlinked, the research team will also work on the third aspect, in direct consultation with the PNG Government.

The team will carry out a detailed analysis of the effects of changes in economic policy on parameters such as inflation, current account balance and employment. This in turn will provide a basis for setting up macro- economic measures to achieve a sustainable balance of payments, full employment, price stability, and a structure of relative prices that provides adequate and appropriate incentives for economically efficient rural development.

The collaborators will assess the costs imposed on rural sectors by protection of inefficient industries, particularly in the manufacturing sector, and analyse the economic impact of existing major resource-based projects. They will also look at the positive impact that resource-based projects can have on rural development if a significant share of the revenue they generate is allocated to improving rural infrastructure. The project will enhance PNG's planning capacity by developing a practical, dynamic model of the economy that will incorporate essential intersectoral linkages.

The ANU economics team is well qualified to undertake the project. Besides having appropriate academic qualifications and experience in other developing countries and Australia, it has been involved in economic research and policy-making in PNG since the early 1970s. Officers of the PNG Department of Finance and Planning will be involved at the data-gathering and model development stages, and will be responsible for implementing subsequent policy changes. The Australian collaborators will also work closely with the PNG Department of Agriculture and Livestock, and other institutions involved in promoting rural activities.

Most of the statistical analysis and modelling work will be done in Canberra, and PNG Government economists will visit Canberra to work with the ANU team. A series of workshops to be held in PNG will give PNG policy-makers opportunities to contribute to the development of each component and review draft findings. This will facilitate familiarity with, and eventual application of, the findings. The project leaders will maintain close contact with other economists working on PNG, both in Australia and with the World Bank and the Asian Development Bank.

The main benefits of the project to the PNG economy will flow from:

. optimisation of the macro-economic policy framework to promote rural development;
. promotion of a more open trade policy;
. a clearer understanding of potential positive linkages between natural-resource-based projects and agriculture; and
. strengthening the forecasting and planning mechanisms for effective deployment of additional resources.

The PNG Government believes that policy improvements could add 2-3% to the growth of the economy. Such an improvement in PNG's economic growth would benefit Australia's trade position with PNG. Australia would also gain indirectly through PNG's reduced dependence on Australian aid.