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.

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~ by Tavurvur on November 27, 2008.

6 Responses to “The PNG Economy and the Risk of “Dutch Disease””

  1. T,

    I am doing some private research work into this area looking particularly at PNG’s mining sector, development and resource conflicts – in an attempt to see if PNG’s story validates the resource curse thesis or not.

    In the broader sense of the argument one can say that PNG falls under the category of resource curse countries where there is an inverse relationship between our richly endowed natural resources and the country’s poor economic growth.

    However, I believe the resource curse thesis and Dutch disease as a major causal factor, does not entirely explain the PNG context. For instance, resource conflicts are not necessary conflicts concerning distribution of resource rents but also around issues of land which has a lot of cosmological significance to the indigenous people. This can be seen in the Ok Tedi and Bougainville mines where the environmental degradation caused by mining activities were factors that significantly contributed to the conflicts and not necessarily the distribution of resource rents as one of the prime factors attributed by resource curse scholars and researchers.

    Anyways, I hope further discussions by other interested contributors will enlighten me more in this area.

  2. Thanks T and Solo, certainly enlightening for me. Never heard of this disease before. Guess that’s what they said about AIDS until it actually hit us…

    I’m not an economist, but what do you guys make of the Trust that all the PNG LNG money will be going into?

  3. Thanks Manu, T did a very good explanation of the Dutch disease.

    The Dutch disease phenomenon is when a country concentrates heavily in the resource sectors (e.g. mining) during a period of resource boom and neglects other vitally important sectors such as manufacturing and agriculture – the backbone of the PNG economy. The revenues from natural resource exports damages a nation’s productive economic sectors by causing an increase of the real exchange rate and thus making tradable sectors, notably agriculture and manufacturing, less competitive in the world markets.

    One can see certain characteristics of the Dutch disease taking foothold in our economy particularly when our government is not providing an enabling environment for our manufacturing industry to flourish. The industries face innumerable challenges ranging from inaccessible roads in transporting goods to high electricity costs and security issues. What has the govt done to cushion these catastrophic conditions faced by the manufacturing industry? NOTHING!

    We should by now be processing our raw commodities, minerals, vegetables, and cash crops into end products or processed manufactured commodities for export. Why are we still exporting our minerals and other products to be processed offshore and importing our own resources as manufactured end products?

    I still don’t understand if our government has any VISION and priority at all…

  4. […] first time I ever heard the term ‘Dutch Disease‘ was from Tavuvur’s enlightening post on the matter. The idea essentially being that when mining and petroleum industries are in boom, […]

  5. I for one have never heard of the Dutch Disease but been aware of it now i really think that the government should by all means avoid it.why can’t the government just investment more in the already existing industries rather than start a new one.

  6. That’s a fair point Jacquie. I think the Government has found itself in a hard place in boosting the economy but simultaneously ensuring that its initiative do not endanger the PNG industries. Currently, at the rate we’re going, we may just find ourselves up a creek without any paddles.

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