Some estimates suggest Papua New Guinea economy could double in size from the LNG project within the space of a few years. Will this growth deliver for the poor?

By LAURENCE CHANDY

WITHIN a matter of months, the Government of Papua New Guinea expects to sign a deal with ExxonMobil to export Liquified Natural Gas (LNG), in what promises to be the single largest investment in the nation’s history.

Once operational, the project will generate around K9bn in exports each year –– equivalent in value to 80 percent of all the country’s exports today.

One indisputable effect of the project will be to boost the country’s growth rate. Some estimates suggest the economy could double in size within the space of a few years.
However, this growth will only deliver for the poor if the additional income it generates works its way around the economy. Unfortunately for Papua New Guinea, its economy suffers from the equivalent of bad circulation.

Limited financial development means that income is less readily recycled, and a rugged geography combined with low levels of infrastructure means transactions tend to occur locally.

The poor experience this most acutely. Many are dangerously isolated and rely on bartering in place of cash.
There are three types of players who determine how money is circulated within the economy through their use of income. The first is companies. Their income is either paid out to shareholders or reinvested. In PNG, foreign companies dominate, so either choice is likely to result in income going abroad, far from the country’s poor.

In the case of the LNG project, around 60 percent of pre-tax income generated directly from the project may immediately be repatriated overseas.
Another player is individuals. Their consumption of goods in local markets and willingness to lend and share money among kith and kin enable more income to reach the poor.
The LNG project will produce a curious set of immediate beneficiaries. Lucky landowners, numbering in the tens of thousands, will find themselves in the possession of a winning lottery ticket.
Local employees, numbering far fewer, will receive more modest compensation. In fact, the project itself will hire fewer local staff than a single tuna cannery.

The final player is the PNG government. Its income is ostensibly meant for public services and interventions targeted at the poor. In practice, however, public services have limited reach and are of poor quality, while direct poverty interventions are few and far between.
When the LNG project commences, the government will find itself playing a gatekeeper role for almost all the income pumped into the PNG economy.

This will test its ability not only to direct its expenditure well, but to manage the macroeconomic effects of large capital inflows, which have the potential to wreak havoc with the country’s prices.
There are two strategies for increasing the “poverty dividend” from the LNG project. The Papua New Guinea government needs to pursue both simultaneously.

The first is to incorporate the poor into the rest of the economy. Two years ago, the Jamaica-based mobile phone company, Digicel, entered the PNG market, and by extending coverage to previously unserviced areas, helped connect poor communities with the economy in both a figurative and literal sense.

The Papua New Guinea government can bring about the same effect by extending the reach of the country’s transport infrastructure, financed through the LNG project’s revenues.
The second strategy is to promote an alternative growth pattern in which the poor can more meaningfully participate. This would require a greater role for Papua New Guinea’s non-mining sectors, which employ the majority of the country’s workforce.

The competitiveness of these sectors is undermined by excessive transport, security and utility costs – costs which few outside the mining sector can bear.

These costs can be brought down through targeted investments and improved policies.
Another way to alter the pattern of growth is through investing in education. Such a strategy would see the LNG project substitute the country’s natural capital for human and physical capital – a worthwhile exchange.

Prime Minister Sir Michael Somare has implied that the LNG project can finally put the country on the right track, allowing him to call time on a premiership that has bridged four parliaments and four decades.
Whether his expectations will be fulfilled depends on his government’s ability to recast the relationship between poverty and growth, so that the project brings about the reduction in poverty PNG so badly needs.

Laurence Chandy is a research associate at the Wolfensohn Centre for Development, Brookings Institution and the author of a Lowy Institute Analysis paper, ‘Linking growth with poverty reduction in Papua New Guinea’. The National Research Institute is hosting the PNG launch of this paper today at the National Research Institute conference centre. (Using a new analytical framework, the paper explains why the poverty dividend from growth is often small and also looks at what can be done to increase it. This discussion is timely in the context of the highly anticipated LNG project, and its expected economic benefits.)

This article was published with permission from National Research Institute of Papua New Guinea. NRI website can be accessed at www.nri.org.pg

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pelesmangi  - Build a Railway Around the country   |2009-10-31 00:48:13 I agree with the writer regarding investment in transport Infrastructure. I think the government should seriously look at setting up a railway around the country to reduce transportation costs. Recently a group of farmers lost thousands of kina worth of vegetable from the Highlands which went bad during shipment from lae. Railway will help our farmers in moving goods cheaply around the country. Reply 0   0

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