PNG: some reform suggestions
The first post in this two-part series argued that the incipient recovery underway in PNG in 2018 had faltered, and that economic growth had once again slowed. I don’t think this conclusion would be a surprise to many, including not to PNG’s new Prime Minister, James Marape, who, straight after his election to office, described the PNG economy as “bleeding and struggling”. Indeed, the economy has been struggling for some time now. Formal sector employment has fallen every year since 2013, by 2018 by a cumulative 10%. That’s very worrying news in a country with rapid population growth.
The first, and indeed the reform being emphasised by the Marape administration itself, is to fix governance. No one can argue against the proposition that PNG, its people and its economy would benefit from less corruption and stronger law and order. Since that already seems to be the priority of the new government, no more needs to be said.
My second, much more controversial, suggestion is to devalue the exchange rate. This remains a controversial proposition in PNG, where the Kina was allowed to float up during the boom but has not been allowed to adjust afterwards. Whatever nominal depreciation there has been in recent years has just sufficed to compensate for PNG’s higher inflation. In real terms, which is what counts, the exchange rate is still at boom levels. The contrast with Australia, as shown in the graph below, is instructive. In Australia too, the real exchange rate floated up during its boom, but there has been significant real depreciation since. Not so in PNG. Until there …read more