The PNG Economy and the Risk of “Dutch Disease”
“For years, the country’s economic situation had seemed hopeless. Abundantly endowed with minerals and oil and gas deposits, it has nonetheless swung from booms to busts and back again. Its politics are hopelessly corrupt. The central government, far from being an effective regulator, serves mostly as a handmaiden to a powerful group of oligarchs, making it that much easier for the rich to get richer. And as the oil and mineral barons party on, the rest of the country suffers.”
Does that scenario sound familiar? It really could apply to any number of economies around the world today, particularly the economies of developing nations endowed with precious natural resources. PNG is one of those countries.
In September, I blogged about PNG’s economic revival, a renaissance driven by surging commodity prices and bolstered by considerable improvements in macroeconomic and fiscal management. Recently, the Asain Development Bank announced in its latest Pacific series that “PNG’s commodity price boom is over” – bad news for PNG because of a number of reasons.
The obvious downfall here is that the government will lose out on revenues and export earnings due to a number of mining operations slowing down their production. Another more sinister threat is the very real possibility of PNG contracting Dutch Disease.
Simply put, Dutch Disease is the economic theory that an increase in revenues from natural resources (exploitation) will de-industrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive. The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s.
Despite the revenue windfall the new discovery brought, the Netherlands experienced a drastic decline in economic growth. This economic paradox has since been recognised as the situation in which a booming sector adversely affects the performance of other sectors of an economy, and in particular, the non-booming tradable sector.
The threat Dutch Disease poses on the PNG economy is very real – particularly to our fledgling manufacturing sector which will be systematically suffocated.
Dutch Disease is hard to diagnose but as they say, prevention is the best medicine. And yes – PNG is no exception.
By implementing basic economical fundamentals including sound monetary policy, open trading and investment regimes, and enforcing laws against corruption, the PNG Government can establish methods in cushioning our economy from the drawback of our commodities. Governance is the key issue here.
Another point that the PNG Government will do well to take notice of, is to use our natural resources to make our key industries more efficient and productive and to achieve this by using and encouraging economic reforms.