Transcript How Poor is Papua New Guinea?

HOW POOR IS PAPUA
NEW GUINEA?
HOW RICH COULD IT
BE?
Tim Curtin
SSGM, RSPAS
The Australian National University
e-mail: [email protected]
Complete paper will shortly be posted on my website:
www.timcurtin.com
Acknowledgments
The author thanks Michael Bourke, Colin Filer, Robin Hide,
David Lea, and Luca Tacconi for comments on earlier drafts
with the usual disclaimers
This paper has been drawn from two chapters in a forthcoming
book by Tim Curtin and David R Lea,
Land, Law and Economic Development in Papua New Guinea.
Abstract
1. Corrections of common perceptions of PNG’s
allegedly poor economic performance – growth has
been faster and GDP per capita is higher than often
appreciated, whilst even macro economic
management has resulted in a stronger Kina in 2004
vis a vis 1964 than of any sub-Saharan African
currency including Botswana.
2. Claims that 37% of Papua New Guineans live below
the poverty line are questioned, but it is true that
nearly all would have to be considered poor by
Australian standards, and are certainly not as rich as
they could be if their main natural resource was
developed as it should be.
1. How poor is Papua New Guinea?
PNG’s GDP in 2003 was K11.6 billion or US$3.3 billion or
US$606 per capita. That exceeds the World Bank’s poverty minimum
of US$1 per person per day, at US$1.66. But PNG clearly is poor, and
these data are somewhat overstated as they refer to GDP. National
income data as such are not available, and GNP is usually less than
GDP. But the 2000 Census as we will see seems to have seriously
over-counted the population, resulting in under-stated per capita GDP.
Most recent commentators (e.g. Chand, Hughes) stress the
country’s apparently slow economic growth rate, with GDP per head
allegedly growing no faster than the population, said to be increasing
at 2.66 per cent a year. There has indeed been a bad patch until
recently, but over the whole period since 1974/5, i.e. since
Independence, GDP per head has grown by 3.5% ABOVE the
population growth rate, to A$933, or between A$4,500 and A$5,500
per average household, which is well below Australia’s A$40,000.
PNG’s growth faster than Australia’s since 1975
Ironically, Papua New Guinea’s 3.5 per cent growth
of per capita GDP since 1974/5 has actually been faster
than Australia’s, which managed only 2.5 per cent p.a.
over the same period. With population growth at the
official rate of 2.66% p.a. PNG’s growth of total GDP
has been 6.16% p.a. since 1975. But as noted later,
population growth was seriously overstated by the 2000
Census, and the real rate is closer to 2.3% p.a. (implying
somewhat slower overall GDP growth of 5.8% p.a.).
That may well surprise Helen Hughes, since even
growth of 5.8% p.a. sustained for nearly 30 years is not
far below the 7% she has implied would be desirable but
impossible without drastic reform of land tenure.
Comparative GDP Growth Rates
GDP
GDP Growth 1974/5-2003
A$
1974/75
2003
Australia
67,105 200,739.00
3.91
Papua New Guinea
1,004
5,031.48
5.76
GDP per cap GDP per cap
A$
1974/75
2003
Australia
4,970.74 10,027.00
2.51
Papua New Guinea
347.51
929.54
3.51
Valuing today’s income at 1983 (or 1900)
prices is unhelpful
The much worse performance reported by the Government itself in
its annual budget is yet another example of its foot shooting: it uses
a GDP series that begins only in 1983 (an exceptionally good year)
and uses various price deflators to express current GDP in real
terms at 1983 prices. That is a largely meaningless statistic;
expressed in 1900 prices today’s average incomes in Australia
would not sound good. My data are in current prices turned into A$
at the current exchange rate – and give a much better impression of
the real purchasing power of current incomes in PNG, especially as
in 1975 PNG’s Kina was still at par with the Australian dollar while
today the Kina/A$ exchange rate is broadly market determined and
thereby reflects relative prices (as it did not in 1983).
PNG’s current GDP at 1983 prices implies
higher current GDP in US$
Using the “real” GDP at 1983 prices implies that its conversion
to US$ or A$ should be done at the 1983 Kina exchange rates,
and this produces the unreal result that PNG’s GDP in 2003
was US$4.24 billion, while its current prices GDP in 2003 of
K12.6 billion converts to only US$3.55 billion at the current
US$/Kina exchange rate (a non-trivial difference of 19%). One
implication could be that the Kina is currently under-valued but
more likely is that it was over-valued in 1983. The reality for
Papua New Guineans in 2003 was that their Kina would buy
only US$0.28, and not US$1.14 as in 1983.
PNG has done better than many claim but could still do
much better
Thus although PNG has done better than many will
admit, the outcome is still average incomes that are far
from satisfactory, and well below both its own potential
and the performance of countries to the north like
Malaysia (with its similar colonial history and natural
resources).
Also clearly average incomes conceal dispersion, with
many of course having below the average. But is it true
as Chand, Hughes, and Gibson have claimed that as
many as 37% of Papua New Guineans are not merely
living below the average but in real poverty?
Is it true that 37% are below the poverty line?
1.
2.
3.
4.
This claim derives from the 1996 Household Survey conducted by
John Gibson and Scott Rozelle for the National Planning Office and
funded by the World Bank et al. Their approach was:
Define a basket of foods that would yield a daily calorie intake of
2,200 per adult equivalent (AE) (with only children aged 6 and below
counted as 0.5 of an adult, and all above 6 counted as adults);
Price that basket, with estimates ranging from K543 p.a. in the NCD
to K288 and K307 in the Highlands, with a national average of K300
for food only, or K400 including non-foods; and calculate how many
households reported cash value of food consumption not sufficient to
achieve the basket yielding 2,200 calories per AE (see Table 1).
In addition to a “food only poverty line” of K302, G&R also defined
upper (K461) & lower poverty (K399) lines (including non-foods).
“37.5% of the PNG population live in households where the real
value of (total) consumption is below the upper poverty line” (K461)
(G&R 1998, p.57) But cf. Gibson 2000: “40% below 2000 cal per
day”
Table 1
Scaled poverty line food baskets, national average quantities
Kcal
Price
NCD
Ave grams
Kcal
per AE p.d.
NCD
Cost
per AE per day
per kg
(edible portions)
t/kg
K/AE/pd
Sweet Potato
665
1144
639
69
0.46
Cassava
70
1295
78
54
0.04
Taro
183
1117
171
101
0.18
Yam
58
1140
53
73
0.04
Banana
302
1165
228
84
0.25
Sago
119
3313
395
120
0.14
Coconut
103
3837
256
40
0.04
Rice
23
3830
90
93
0.02
Lamb & mutton
1
3780
5
340
0.00
Pork
7
3290
18
400
0.03
Chicken
1
2040
2
460
0.00
Other meat
13
2480
17
380
0.05
Fish
5
1398
5
295
0.01
Sugar cane
131
678
89
47
0.06
Other fresh fruit
24
433
8
132
0.03
Peanut
1
5516
6
326
0.00
Aibika
38
350
7
131
0.05
Other veg. & nuts
157
521
60
80
0.13
Potato
1
750
0
120
0.00
Betel nut
17
1100
7
623
0.11
Flour
2
3433
8
97
0.00
Tinned meat
1
1921
1
647
0.01
Tinned fish
2
1820
4
414
0.01
Milk
0
4924
0
1049
Sugar
2
3935
7
158
0.00
Bread
1
2370
3
221
0.00
Biscuits
1
3674
3
381
0.00
Dripping
1
8741
7
500
0.01
Other
33
Totals
2200
1.70
Totals, per annum, Kina
620.13
Gibson & Rozelle K p.a.
543
t
The Gibson-Rozelle Poverty Head Count
“The estimated incidence of poverty at the lower
poverty line is 30.2%.” For example, 25 per cent of
households spent only K258 (real) p.a. on consumption, of
which food took up 67%, yielding 1955 calories per AE. In
total “over a sixth (c. 17%) of the population have total
consumption valued at less than the cost of the food poverty
line basket”, and “it would be necessary to transfer K250m.
p.a. to poor households to raise them to the upper poverty
line”. But Gibson (2000) provides quite different data
showing both higher consumption of high calorie foods and
more overall “food poverty” (40% consuming less than
2000 calories per day) (whilst saying that he used the same
survey “data”).
Norms v. minima
There are several other problems with the Gibson-Rozelle
statements and methodology:
(1) defining poverty by fixing food consumption of 2,200 calories
per day per AE as the minimum implies that one is not merely
“poor” but suffering from malnutrition. Not even the FAO
defines 2,200 per day as a minimum rather than simply a norm:
its poverty minimum averages 1,800 depending on region;
(2) the basic fallacy is that most Papua New Guineans are
subsistence farmers who are free to grow as much as they need
to eat so it is reasonable to assume they mostly succeed and
cannot be deemed to be living in “food poverty”.
Definition of Poverty Minimum Calories per day
1. Even 1,800 as a minimum is questionable, as I suspect there are some
even in this room do not eat much more than that. Perhaps we are all
poor? In fact physiologists (v. Svedberg 2002) have revised the basic
metabolic rate (BMR) for the tropics down by 10%, implying a norm
of 2,000 calories and a revised FAO minimum of less than 1,700.
2. The Gibson-Rozelle data show that even the poorest 25% only just
fell below the corrected norm of 2,000 and were well above the
minimum 1,700 per day. (The average G-R calories per AE for the
total population in 1996 were 2,974).
t 2000 (Food Security for PNG) shows male
3. Yamauchi in Bourke et al.
calorie consumption of up to 3.600 in Southern Highlands and
Gibson in that volume shows a higher 45% proportion of rice
consumption in food baskets (with its very high calorie content) than
Gibson and Rozelle (1998). That was to be expected as in 1996 rice
was by far the cheapest source of calories. Bourke (2004) shows that
is no longer true but clearly G&R’s budgets understated rice calories
consumed in 1996 and hence over-stated calorie deficits.
Valuing Subsistence Production
Other problems with Gibson-Rozelle include their valuation
of production of food for own consumption using market wholesale
prices. These must exaggerate
the cost of food for most rural
t
households. In addition it would appear from estimates by Michael
Bourke that Gibson and Rozelle seriously under-state the amount of
domestic food production in Papua New Guinea (see Table 2).
Bourke’s data would nearly double implied calorie intakes. Moreover
the Hanson-Allen-Bourke-McCarthy Handbook estimates 113,800 or
2.8 per cent of the rural population "strongly disadvantaged“ or
“poorest of the poor” (including non-food consumption). The next
category are also poor or "moderately disadvantaged“ at 15.6 % of
the rural population. These seem more plausible than GibsonRozelle’s.
Table 2
Estimates of food production 1996 and 2000
Quantities, 1000 t.
Values, K mn., 1996 prices
G & R 1996 Bourke 2000 G & R 1996 Bourke 2000
Sweet Potato
1286
2872
290
647.65
Banana
413
436
150
158.35
Yams
143
273
47
89.73
Cassava
124
272
32
70.19
Taro
314
456
97
140.87
Coconut
195
101
30
15.54
Sago
95
83
26
22.72
Potato
10
19
5
9.50
Total
2580
4512
677
1,154.55
Sources: Gibson & Rozelle 1998; Bourke and Vlasaak, 2004
Mike Bourke’s estimated value of staple food
production 2000
“The total production of all energy foods in PNG is 4,517,000 tonnes.
This is equivalent to the food energy from 1,187,500 tonnes of rice.
That amount of rice had a wholesale value of K2.73 billion”.
However food production worth K2.7 billion is still only about
US$0.4 per person per day, so this implies real consumption not
nearly as good as implied by Bourke – and even that amount is not
cash in hand and so does not provide for school fees etc. Bourke’s
estimates further illustrate the conflict between the views of those
who consider that PNG does well enough without structural economic
reforms such as land titling and those of us who believe it could do
much better.
The 2000 Census – more people alive than were
ever born
According to the census of 2000 the total PNG population had
grown to 5.17 million from 2.98 m. in 1980. The implied growth
rate for the period 1980-2000 is 2.66% per year.
Unfortunately, the 2000 Census showed 45,000 more persons
aged 20-39 than had been aged 0-19 in 1980 (see Fig.1) . Thus
either the 0-19 age-group was under-reported in 1980 or the 2039 age-group was over-reported in 2003. Whichever, either GDP
per capita in the 1975-1980 period was over-stated, or GDP per
capita in 2000 and since has been under-stated, with the result
that growth of per capita incomes is under-stated in each case.
Using some data on survival rates computed by Geoff Hayes, I
produce in Fig.2 an adjusted 1980 census figure of 3.25 million
instead of 2.98 million, resulting in lower GDP per head then –
and faster growth since!
Corrected population growth rate
1. Correcting the 1980 population to match the 2000 Census
has the effect of reducing the population growth rate since
1980 from 2.66 per cent to 2.32 per cent (which is consistent
with the growth rates estimated by both the 1980 and 1990
censuses) – and that in turn increases the implied growth
rate of per capita GDP as we saw earlier. (See Figs. 1 and 2
for a corrected 1980 census).
2. At the adjusted growth rate, the population will not reach
6 million until 2011, not 2006 as it would with the 2.66%
rate. This has some planning implications.
Fig.1 Population in 1990 and 2000 by 1980 agegroups
Fig. 1 Population by age-group in 1980
1980
1990
2000
500000
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
0-4 in
1980
5-9
10-14
15-19
20-24
25-29
30-34
35-39
Age Group in 1980
40-44
45-49
50-54
55-59
60-64
65-69
Fig.2 Population in 1980 adjusted to age-groups in
2000
Fig.2 Adjusted 1980 Census and actual 2000
Adjusted 1980
2000
600,000.00
500,000.00
400,000.00
300,000.00
200,000.00
100,000.00
0-4 in
1980
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
Age-Groups in 1980
45-49
50-54
55-59
60-64
65-69
70+
2. How rich could PNG be?
Helen Hughes proposes economic reforms that "could put
Papua New Guinea on an annual growth path of 7 per cent a year that
would double its GDP every decade" (2004, 1). That is certainly not an
unreasonable ambition, since as I argue PNG’s economy has already
managed at least 5.8% since 1975, and such rates have been and are
being achieved by many countries in South-east Asia, including
Malaysia, Singapore, Thailand and China.
But the ambition seems unlikely to be attained if all of Hughes'
advice is followed, as she advises against relying on development both
of mineral resources such as the gas to Queensland project, because
she says such projects "create only economic rents that provide
revenues for a swollen government and public services" (so no more
teachers and health workers?), and timber, because of the
"depredations of timber exporting companies" (2004, 2-3).
Invidious comparisons
PNG v Botswana and Malaysia
Hughes goes on to show how Papua New Guinea's
merchandise exports per capita at US$324 in 2002 are a small fraction
of those of Botswana and Malaysia.Hughes then mocks the Somare
government's attempts to revive growth of mineral resource exports
but forgets that Botswana's exports are much more dominated by
minerals than PNG’s, whilst Malaysia's include a significant
contribution from logging, rejected by Hughes and the World Bank.
Although log and sawn timber exports are now less than 2 per
cent of Malaysia's total exports, they were ten times larger than Papua
New Guinea's in 2002, and Malaysia's total exports of logs, sawn
timber, wood products, pulp and paper, rubber and products amounted
to a staggering US$8.8 billion in 2002, compared with just over
US$200 million by Papua New Guinea - yet the World Bank advises
Papua New Guinea against development of forestry.
Can oil palm replace mineral exports?
Helen Hughes advocates land tenure reform
and massive expansion of the oil palm plantation
sector as the drivers of her 7% p.a. growth rate target,
and claims that oil palm exports could grow at 30 per
cent a year and replace oil and mining as the country's
biggest exports.
Michael Bourke has demonstrated the
improbability of this being feasible with the following
data:
Mike Bourke’s refutation of Helen Hughes
The [average] FOB value of crude oil and minerals in 2001,
2002 and 2003 was K5155.4 million The [average] FOB
price for palm oil for this period was K1095/tonne.
Production of palm oil is about 3 tonnes per hectare of
planted oil palm. PNG exports of palm oil in 2003 were
326,900 tonnes. Hence PNG would need to produce
4,700,000 tonnes of palm oil to totally replace crude oil and
minerals [from over 1.5 million hectares compared with the
present 108,000 hectares].
Source: R.M Bourke, RMAP Seminar, August 2004
The Helen Hughes projection of 30% p.a. growth of
oil palm would mean PNG supplying total world
consumption in 15 years
If anything Mike Bourke was too kind to Hughes his demolition would have been complete if he had noticed
that her projected growth rate for Papua New Guinea's oil
palm exports would within 15 years imply output greater
than total world consumption - and as a result a collapse in
the world price. By then the area under oil palm would have
to be over 7 million hectares, even more implausible than
the 1.5 million hectares in Bourke’s analysis.
Realistically only forestry can replace mineral
exports and enable PNG to attain the Hughes 7%
growth rate
Ironically the primary industry that really could replace the minerals
is that which already covers most of the country's landmass, namely
its forests. Exports of forest products, mainly 2 million cubic metres
of logs already contributed K415.8 million (5.3 per cent) to total
exports of K7.79 billion in 2003, compared with palm oil's K421.3m.
But forest products exports would not have been as large if the World
Bank’s export tax system had not been partly circumvented by
transfer pricing and if the Bank had succeeded in its demands that the
government should close the Vailala and Wawoi Guavi projects (in
Gulf and Western Provinces respectively) as part of its undeclared
but obvious intention of terminating all logging in Papua New
Guinea, even when as at Wawoi the logs are processed into veneer
and plywood for export.
Forestry in Sweden shows PNG the way
Sweden, unimpeded by the World Bank, has been logging at
rates of up to 70 million cubic metres a year for the last decade, 35
times more than Papua New Guinea with its much larger forested area
(369,000 sq.km., compare Sweden's 244,000 sq.km.). Moreover
Sweden's forestry industry adheres to the Standards for Forest
Certification, which require retention of a proportion of the forested
area for reasons of bio-diversity and sets the limit of 70 mn. m3 to the
potential annual cut of 100 mn. m3 p.a. to ensure sustainability.
Were Papua New Guinea to attain Sweden's level of output, and
there is no reason why it could not, given its equal - possibly superior suitability for softwood pine forestry, then its logging exports could be
worth K13 billion, nearly double total exports in 2003, and which
would therefore much more than compensate for the projected decline
in mineral exports after 2010.
New Zealand’s forest products exports exceed
PNG’s total exports
New Zealand is another country that owes much of its high
standard of living to development of forestry resources, with
annual production of 2.5 million cubic metres of sawn timber and
15.6 million cubic metres of roundwood that was used in the
production of 2 million tonnes of wood pulp and paper a year in
the 1990s. Thus New Zealand's logging produced nearly ten times
as much as Papua New Guinea's in the 1990s, but from a forested
area that is only 7 per cent of its (smaller) total land area.
In 1993 26,750 persons were engaged in timber related
industries - about three times more than in the whole of Papua
New Guinea's mining industry. New Zealand's exports of forest
products (excluding newsprint) contributed ten per cent of its total
exports in 2002, and amounted to NZ$3.5 billion (about K6.6
billion, more than Papua New Guinea's total exports in 2002).
Fletcher Forests exports more than twice as much logs as
PNG from only 162,000 hectares
A recent New Zealand case study provides yet more evidence of
Papua New Guinea's failure to develop its forestry resources to
their full potential. A plantation including the Kaingaroa Forest
near Mount Maunganui acquired by then Fletcher Challenge
Forests was projected to yield log sales of 4.5 million cubic
metres of radiata pine and other species in 2004, and a further 0.8
million cu. metres of manufactured timber products, all this from
162,173 hectares, or about 5 per cent of Papua New Guinea's
forested area. The log sales alone were projected to be worth
NZ$427.5 million, about A$388 million or K947 million,
compared with Papua New Guinea's total log exports worth K370
million in 2003.
Logging vs processing: a false dichotomy
Colin Filer has documented the repeated efforts of the
Papua New Guinea government to engineer replacement of log
exports by processed timber products, as urged by the Barnett
Inquiry.
Lacking that theology, New Zealand's Fletcher
Challenge Forests sold 3.5 million cu.metres of logs in 2000,
and only 0.6 million cu.metres of manufactured products,
directing more than half of its logs to processors in Japan,
Korea, and other industrial countries, while less than half was
taken up by industry in New Zealand.
Domestic processing for export requires intimate and
exact knowledge of the requirements of final consumers in
importing countries. Owners of forests in PNG should not
expect to acquire that knowledge.
If PNG exported logs pro rata with Fletcher, they would
be worth double total mineral exports in 2003.
Those log exports by Fletcher Challenge Forests in 2000 earned US$88.8
million from sales of 1.48 million cubic metres of log sales grown on just
its directly owned 110,000 hectares.
If Papua New Guinea produced as much pro rata from only 5 million
hectares of its total forest area of over 35 million hectares, its log exports
would be 67 mn m3 worth US$4 billion (@US$60/m3), or K13.5 billion,
more than double its actual mineral exports of K5.9 bn. in 2003.
Not only that, the wages earned would be K1 bn (@K15/m3 according to
PNGFA), more than 50% more than total wage income in PNG in 2000.
Feasibility of commercialized tropical timber
production in PNG
Now if Papua New Guinea chose to follow the example of
countries like Malaysia, Sweden, and New Zealand by exploiting its
largest resource to its full potential, we must ask (1) would such
massive commercial forestry be feasible in PNG’s tropical climate
using native species, and (2) what would need to be done to begin that
process?
Using yield data from the Silvicultural Manual for the Solomon
Islands, planting logged areas at a rate of 100,000 hectares a year, with
a rotation of 30 years, by 2035 it would be possible to harvest 100,000
hectares a year, which at a conservative yield of 250 cu.metres per
hectare generates timber of 25 million cu. metres a year, worth US$2.5
billion at $100 per cu.metre – and US$5 mn at the price Malaysia gets
today for its Kwila. That exceeds Papua New Guinea's mineral exports
in 2003, and would use only 3 million hectares of the up to 30 million
potentially available for plantations. Logging old growth at 100,000
ha. p.a to make way for planting provides working capital.
Barnett Report and the Forestry Act
The first step to be taken before commercialization of PNG
forestry could be possible would have to be repealing the 1991
Forestry Act, and reverting substantially to the legislation previously
in place. The 1991 Act grew out of what in retrospect seems the halfbaked Barnett Report, with its exhausting “exposure” of alleged
depredations by foreign logging companies.
On close inspection much of Barnett's evidence of transfer
pricing was false, mainly because he failed to allow for freight costs
when comparing log import prices in Japan with export prices in
Papua New Guinea. As shown in Fig.3, Malaysian and Papua New
Guinean log export prices tracked each other’s very closely in the
1980s and showed the same difference from import prices.
Fig. 3 Japan’s log imports from Malaysia and PNG
Fig.5.1
Japan's log import prices (cif) and export prices (fob) of Malaysia & Papua New Guinea
Japan's imports
PNG's exports
Malaysia's exports
300
Price in US$ per cubic metre
250
200
150
100
50
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Source: FAO Forest Products Yearbook
1991
1992
1993
1994
1995
1996
Barnett and the bureaucracy
The second major problem with the Barnett Report was
its author’s failure to see that most of the abuses he uncovered flowed
directly from the incompetence of the government’s bureaucracy,
including the Tax Office. A classic and representative example is the
government’s fixing of a Minimum Export Price, which was intended
to deal with the supposed problem of transfer pricing. But the MEP
was deliberately fixed below prevailing average prices so as not to
discourage exports of inferior logs, and then never varied, so it came to
be regarded by exporters not as a minimum but as the acceptable (to
government) going rate for log exports. Instead of learning the lesson
that a bureaucracy cannot be trusted, Barnett, eagerly aped by the
World Bank, successfully urged replacement of the Forest Department
by the Forest Authority, with even less accountability than before, and
with full powers to nationalize the entire forestry industry.
Tenure, taxation, and sustainable forestry
Barnett’s biggest failing was his inability to grasp that if the
log exporters were granted long term and secure leases, then they
would be much more likely to undertake either sustainable logging of
natural forest or replacement of logged out areas with new planting.
The World Bank has been the main culprit because its mindset in
Papua New Guinea has always been that the forests are a nonrenewable resource that can only be preserved by a zero logging
option.
In that it has been brilliantly successful, as shown by the 2004
Forestry Review produced by the experts it provided to the Forest
Authority, which shows how the revenue regime it made a condition
of its SAPs has made log exporting financially non-viable (unless
serious transfer pricing is engaged in on a scale far beyond anything
Tos Barnett uncovered).
The World Bank’s revenue system
The export tax system imposed by the World Bank operates is a
levy that is more than proportionate with rising prices of log exports
above a very low level. Now all economics tells us
(1) that sales taxes like GST should be levied at a flat percentage
rate, as with the 10% GST, and
(2) that export taxes are not very clever.
Indeed most GST systems exempt exports entirely, because
everywhere except PNG they are thought to be worth encouraging. The
World Bank knows this, but excuses its progressive export tax on the
grounds that the PNG Tax Office was not capable of collecting corporate
taxes from the log exporters. A simpler solution to that problem would
have been to use the US$1 million the Bank spends on consultants in the
Forest Authority to provide the same number of tax auditors. Even just
one would be enough to see to it that Rimbunan Hijao paid its due taxes
on its c.80% share of total log exports.
Effective rate of the log export tax
The effective rate of the log export tax is easily as much as
110 per cent of normal profits, for a normal gross profit margin on
sales value of $100 could be 30%, but the log tax rises to over 30%
of sales value when prices rise above K100 per m3.
That explains why declared log prices have fallen since the
Bank’s tax came in from as much as $170 per cu.metre in 1996 to
as low as US$70, with a consequent loss of foreign exchange
earnings as well as tax proceeds far below what they would be in a
more honest system, based on corporate tax at PNG’s current rate
of 25 per cent for non-mining profits.
Table 3 Logging costs and taxes 1997 and 2003
PNGFP 97
Forest Rev 2004
US$/m3 US$/m3
K/m3
Interest on machinery
6.00
Depreciation
9.24 12.90
43.00
Fuel and oil
11.08
8.36
27.86
R&M inc tyres
10.79
8.46
28.21
Wages
4.99
4.50
15.00
Overheads
4.89
3.75
12.50
Head Office
14.89 10.71
35.71
Royalty
20.15
7.80
26.00
Export Tax (36% of fob in 1997)
58.90 15.90
53.00
Stevedoring
3.00
6.43
21.43
Total
143.93 78.81
262.71
Ave fob price
145.00 55.80
186.00
PNG Timber Prices September 2004 (per ITTO)
Papua New Guinea
In September 2004, PNG exported a total volume of 208,591 cubic
metres of logs. Exports by log grade were 83% saw/veneer grade
(173,876 cubic metres) at an average price of US$63.30 FOB per
cubic metre. Some 11 % was of low grade logs (23,290 cubic
metres) at an average price of US$37.88 per cubic metre and 2 %
was plantation terminalia sp logs (3500 cubic metres) with a price of
US$35-50. A further 4 % was plantation group 2 species Eucalyptus deglupta logs at a price range US$36-US$58. The saw
logs included Kwila at US$90 per cu.metre; that month peninsular
Malaysia exported Merbau (i.e. Kwila) at US$215-200. The
Kwiladifference isUS$90
forgone foreign exchange directly attributable to the
World Bank’s imposed log export tax regime, amounting to about
US$10 million per month on the Kwila alone, or US$120 mn. p.a.,
rather more than the World Bank’s ludicrous supposed compensatory
US$17 m loan.
Tenure and Finance
Previous seminars (by Mike Bourke amongst others) have
argued against Helen Hughes’ view that land titling is the sine qua
non for accelerated economic development, since there is no need
for Papua New Guinea to move from customary or communal
land tenure to individual freehold registered title, because Papua
New Guinean “landowners”
(1) already enjoy individual usufruct rights, and
(2) have no need of agricultural credit.
That may well be true if one sees Papua New Guineans as
forever basically subsistence food cultivators albeit with some for
cash production (Coffee, cocoa, vanilla). But the plethora of
dubious transactions between “landowners” and foreign logging
companies arose largely because the former were not able to raise
on their own account the capital needed to embark on commercial
forestry.
Credit and agricultural development
Michael Bourke and Ron May are no doubt correct that with
their present modes of production Papua New Guineans have
no need to avail themselves of the many billions of dollars in
the banking system that would be available to those with
secure and negotiable title (leasehold not freehold). But what
if
(1) Some individuals sought to increase their own holdings, as is
necessary if one wishes to move towards more capital
intensive modes of production?
(2) Why would it be wrong for them to invest in say irrigation
equipment or tractors – or utes and other transport?
(3) Would it also be wrong for them to embark on commercial
forestry through their own ILGs, requiring large purchases of
machinery (bulldozers etc), with financing available if
secured against leases?
The World Bank’ Forestry & Conservation Loan
The World Bank is about to conclude a Forestry and Conservation
Loan Agreement with PNG for US$17 million with the following
main components. The Bank claims that its Loan will generate a rate
of return of 21 per cent p.a. – but has not invited subscriptions…!
Could somebody explain how such a return would arise from the
project’s main components:
•
•
Landowner Forest Decision-Making. Allocating US$6.4 million
(more than a third of the loan) for workshops "to make landowners
better equipped to make critical forestry management decisions”.
Conservation Trust Fund (CTF). Pressing other donors to subscribe
US$5 million in addition to a grant of US$10 million from the GEF
for funding forest reserves designed to protect bio-diversity from
logging by supporting landowners who pursue conservation land use
options other than logging.
World Bank’s PNG Forestry Loan (cont.)
3. Sustainable Forest Management. Control over "destructive forest
logging operations will be improved" with emphasis on
"minimizing environmental impacts of production forestry and
ensuring it maximally contributes development", by using US$7.26
million of the project loan to fund the Government's Forest
Authority (FA) to undertake (i) improved forest operations,
inspection and monitoring; (ii) forest management planning; and
(iii) post-harvest forest management, regeneration, and plantation
development.
4. Environmental Assessment and Monitoring. Provision of US$4.68
million for "technical assistance" to the government's Office for
Environment and Conservation.
If investing in bureaucracies could make us rich with the claimed yield
of 21%, the ASX has much to learn from the World Bank, not
mention the ANU super fund!
Forestry and Rural Development
Why is it that my demonstration today that Papua New Guinea's
forest resource has the capacity to yield much more than the total income
the country currently derives from mineral exports is so politically
incorrect that the income generating potential of forests could not be
spelt out in the World Bank’s loan appraisal or in the Ausaid/ANU Rural
Development Handbook (Hanson, Allen, Bourke and McCarthy)? Gross
export value per hectare of forestry was as much as US$36,000 in 1997
(Source: PNGFP), and from coffee only US$1,642.(2003 data: timber
US$13,950, coffee US$520).
Not one of the many fine full-colour maps of each province's
subsistence agriculture and land potential shows either the topography or
the extent of forested areas. Both are surely critical for assessing the
scope for yet more subsistence agriculture, and especially for
determining the trade-offs between forestry activities and agriculture
when both compete for the same land. Perhaps a future second edition
could address this by including forest location maps as for Sandaun here?
Rural development in Sandaun Province
Forestry in Sandaun
Inaccessible forestry
The Way Forward
1. Repeal of the Forestry Act 1991 and its replacement with new
legislation to provide for (i) public tenders of timber rights
exclusively by ILGs re-registered as public companies with special
voting rights for landowner shareholders and (ii) auctioning of logs
offered for export by the public companies in (i).
2. Cancel all taxation of log exports, and increase staffing of the
Internal Revenue Commission to undertake annual tax audits of all
firms engaged in forestry to ensure payment of corporate taxes.
3. World Bank to be asked to redesign its proposed Forestry and
Conservation project loan of US$17 million to contribute to the
establishment costs of at least five plantations matched by equal
numbers of arboreta in areas of exceptional bio-diversity.
4. The above is just a beginning but recognizes the potential for
commercialized forestry to secure the needed transformation
demonstrated in my first section of the economic prospects of the
people of Papua New Guinea.