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Boosting the domestic economy is the key to increasing PNG growth

The creation of the PNG LNG project highlights the next major challenge facing Papua New Guinea: how to grow the non-mining sectors. Economist Dan Gay says growing domestic demand, the internet and service industries can help overcome inherent problems.

Whatever the Pacific’s been doing until now, it hasn’t been working. Overall economic growth in Papua New Guinea, leaving aside the LNG project, has been lacklustre. And the same applies in other Pacific states.

World Bank data shows that in 1980, just after most countries became independent, merchandise trade in Pacific Island small states was 88.8% of GDP.

Twenty-two years later, in 2012, it had actually fallen to 76.5%. In the rest of the world, it rose from 35.2% to 50% of GDP over the same period.

Main challenges
The main challenges are transport costs, including shipping both internationally and domestically, as well as energy, finance, infrastructure and costs resulting from a lack of domestic competition.

Low formal employment is a challenge, as are the tyranny of distance, a lack of economies of scale, geographic fragmentation and isolation.
Policymakers had imagined that trade agreements would somehow automatically solve all the Pacific’s trade problems.

Currently Pacific exports comprise about the same proportion of GDP as in 1989, roughly the start of the liberalisation period, manifested in the signing of trade agreements.

Clearly trade agreements haven’t much boosted either trade or exports.
The Pacific is borrowing an inappropriate trade model from elsewhere, and needs to use a much more development-focused model, which is tailored to its own ends.

Boosting production
I don’t think there’s much scope for intra-regional goods trade. The Pacific island countries aren’t going to sell much fish or coconuts to each other.

To boost productive capacity you need an activist government (and donor community) capable of stimulating capital accumulation, technological progress and structural change through policy.

This is what happened in almost all other successful developing economies, with and South Korea and Japan being the prime examples.

They were able to export their way to success partly because they built such a big domestic engine, not just via the increasing penetration of international markets. The issue of boosting domestic demand has been neglected in the Pacific, with too much faith placed in demand from overseas.

Service industries
The one bright spot for trade in the Pacific is in services.
Principally this means tourism but other areas are emerging too, like the export of labour.

My calculations, using World Bank data, show that average trade in services from the Pacific island states has risen from 39.2% of GDP in 2005 to 50.0% in 2012.

The Melanesian Spearhead Group trade in services agreement is an example. There is provision for nurses and others to bypass the normal immigration and work permit rules.

In my view, the Internet represents a huge and until now under-exploited opportunity for services trade in the region. It doesn’t matter where you are in the world. It addresses many the problems of the islands, like distance, smallness and fragmentation.

And certain countries in the region have good education and skills, the kind of things that could be sold online.

Business process outsourcing and call centres, even things like engineering, education and architectural services can all be potentially traded online.

The Pacific needs to develop a trade and economic development model that suits its own circumstances.

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