Development Challenges in a Poor Pacific Economy: The Case of Papua New Guinea

Abstract

TIEWED IN THE CONTEXT OF CONTEMPORARY DEVELOPING COUNTRIES, Papua New Guinea (PNG) is something of a paradox. Assessed according to some macroeconomic indicators, such as inflation, investment and exchange rate stability, the performance of the PNG economy since independence presents an encouraging picture in comparison to many economies in other parts of the developing world. In 1989-90 the PNG government responded to the twin challenges posed by a sharp decline in the commodity terms of trade, and the closure of the Panguna mine on the island of Bougainville with a package of adjustment measures including a net reduction of K80 million in government expenditure to be achieved partly by pruning back the size of the public service, a tight monetary policy, wage restraint which amounted to cutting real wages for many workers in the public sector and a ten percent devaluation of the kina.1 Partly as a result of these measures and partly because of expanded production in other mining projects, GDP growth accelerated dramatically to over nine percent in 1991 and almost 12 percent in 1992. In 1993, preliminary estimates indicate that GDP grew at 14.4 percent.2 Thus the picture presented in the early 1990s was of an economy adjusting successfully to several major shocks which seriously affected both the government budget and the balance of payments. But recent evidence indicates that the success of the early 1990s will not be sustainable.