assessing performance and policy in a resource-dependent...
TRANSCRIPT
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Assessing performance and policy in a resource-dependent
economy: the case of PNG
Prof. Stephen Howes
Development Policy Centre
Australian National University
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PNG is one of the world’s most resource-dependent economies: in the top 10.
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Congo, Rep. Iraq Equatorial Guinea Mauritania Saudi Arabia Angola Gabon Azerbaijan Mongolia PNG
Resource rents as a % of GDP, 2011
Average value of resource rents for 144 countries: 7.1%. Value for PNG: 29.9%. Source: World Databank
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Structure
• Assessing performance in a resource-dependent economy.
• Assessing policy in a resource-dependent economy: lessons from international experience
• Assessing policy: applying the framework to PNG
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Assessing performance in a resource-dependent economy
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The more resource-dependent the economy, the worse growth is as a welfare indicator • GDP doesn’t include the depletion (depreciation) of natural
resources.
• For a resource-rich economy, economic growth can simply represent a running down of the natural asset base • Cf a pensioner consuming their superannuation funds.
• What will happen when the funds/resources run out?
• A key challenge for a resource dependent economy is to replace natural resources by physical assets and human capital.
• If this happens, the economic growth will be sustainable, and the economy will become less resource-dependent.
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Genuine savings
• We can measure the sustainability of a resource-dependent economy by examining its genuine savings
National savings (investments in physical capital)
+ Investment in human capital (education)
- Resource depletion.
- How does PNG fare on this indicator?
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PNG’s genuine savings are often negative.
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90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
% o
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Year Net savings & education Natural capital depletion
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Assessing policy in a resource-dependent economy: lessons from international experience
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Why do some resource rich economies succeed and others fail? • What is the difference between
Norway on the one hand and Angola on the other?
• Rents to Riches (2011) from the World Bank argues that successful resource-rich economies have two features in common: • They can make credible long-term
commitments: they are able to generate benefits for the future.
• They are politically inclusive: they are able to generate benefits for all
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The “Resource to Rents” story
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Where does PNG fit in?
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Inclusiveness
Intertemporal credibility
Papua New Guinea
The PNG challenge
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Assessing policy: applying the framework to PNG
SWF
Ok Tedi/SDP
The development spending surge
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Sovereign Wealth Fund
• Adopted at end of 2011 as Organic Law.
• But did not follow correct procedure, so legislation is not binding.
• Since then, no progress on implementation
• No submission of revised bill.
• Oil Search loan uses LNG dividends intended for SWF, thus calling into question the entire SWF endeavour.
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Inclusiveness
Intertemporal credibility
Papua New Guinea
SWF (up to 2012)
Applying the framework: SWF
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Inclusiveness
Intertemporal credibility
Papua New Guinea
SWF (up to 2012)
SWF (post 2012)
Applying the framework: SWF cont.
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Ok Tedi nationalization and SDP dispute
• OK Tedi was majority-owned by SDP, a Singapore-registered trust.
• But PNG Government took control, without compensation
• PNG Government also trying to take control of SDP’s other assets.
• As a result all of SDP projects have come to a halt.
• Ok Tedi profitability and tax revenue have declined sharply
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Inclusiveness
Intertemporal credibility
Papua New Guinea
Applying the framework: Ok Tedi and SDP
Ok Tedi/SDP dispute
Ok Tedi/SDP dispute
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Surge in development spending
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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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Development spending
Excl supplementary budgets and trust funds Supplementary budgets and trust funds
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The development budget is a bigger share of the budget than ever
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Ratio of development to total spending
Excl supplementary budgets and trust funds Supplementary budgets and trust funds
Note: Years where there is no red line are ones where there were no supplementary or trust fund allocations
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The share of development spending in PNG is very large by international standards
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Malaysia SolomonIslands
Kenya Tanzania India Rwanda PNG
Ratio of development to total budget expenditure
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High level of development spending sounds good, but … • Heavy reliance on deficit financing.
• Squeezing of recurrent spending.
• Often low quality of spend: no capacity to spend so much development budget.
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High fiscal deficits
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Deficit/GDP (%)
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There is no LNG revenue surge on the way
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Revenue (million kina, 2012 prices) Revenue/GDP
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Squeezing of service delivery budget
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Since 1999, adjusting for inflation, recurrent budget has grown on average at 3.5% a year, but development budget on average at 9.9% a year.
In 2014, no increases, e.g, for school education, or road maintenance.
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Lack of capacity to spend the development budget
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aid funded
provincial
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Inclusiveness
Intertemporal credibility
Papua New Guinea
More asset investment
Squeeze on service delivery funds and maintenance; low quality of spend
Applying the framework: surge in development spending
More asset investment
Deficit financing
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Conclusion
• PNG is a very resource dependent economy.
• Growth is not a good indicator of welfare for such an economy, and the focus should also be on genuine savings, which has often been negative for PNG.
• International experience shows that turning resource rents into riches requires intertemporal credibility and development inclusiveness.
• PNG’s track record on intertemporal credibility is low, and inclusiveness remains a challenge.
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Policy recommendations
• This international framework can be used to assess recent PNG policy development
• Using the framework gives rise to a number of policy recommendations: • Resurrection of SWF.
• Seek compromise with SDP.
• Limit borrowing.
• Protect service delivery funding, and prioritize relative to development spending.
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And finally, a lesson for all countries
“Successful countries owe a lot to an environment in which all ideas, good and bad, are exposed to review and vigorous debate.”
The Growth Commission, 2008.
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Thank you
www.devpolicy.org