Second, Papua New Guinea's development needs remain enormous. Close to two
thirds of the country’s population continues to live below the poverty line, as measured by the
World Bank. On average, 90 percent of the rural population lives below the poverty line.
Despite the progress made over the last 25 years in the areas of health and education, PNG
remains behind other Asia-Pacific countries and further back in the world. Only 60 percent of
school age children are in primary school compared with full enrollment in most of the
countries in Asia-Pacific. Infant mortality has been cut by a third in the last 25 years but, at
some 90 per thousand, remain more than twice-prevailing levels in Asia-Pacific.
Moreover, partially because of the political instability and economic mismanagement,
and partially because of a typically small economy trapped by its own poverty, PNG is simply
not capable of meeting all of its development needs from its own resources. The Wingti and
Chan governments, for example, routinely devoted close to a quarter of their total
expenditures on education and yet PNG still has an adult literacy rate of less than 55 percent,
while only 75 percent of school age children are in primary school. In many provinces, the
density of the road network is less than five percent of the levels in Australia and other
developed Asia-Pacific economies, yet the cost of maintaining existing roads is larger than the
country's total transportation budget.
The evidence overwhelmingly suggests that the private
sector will not provide much help for overcoming these problems, which will remain the
responsibility of the Government for some time yet.
With economic growth, in time PNG will be able to finance these developmental
expenditures out of her own revenues. Thailand, once one of Asia's largest per capita
recipients of aid, sustained one of the fastest growth rates in the developing world during the
1970s and can today finance nearly all of its ambitious development programs from its own
funds. The country is being graduated out of aid by most donors, including the ADB. Thailand
can today attract private capital on its own. But for most Asian and Pacific countries including
PNG, foreign aid remains necessary if they are to break out of poverty.
Successes of Foreign Aid in Papua New Guinea
Given the relatively large volume of foreign aid since 1975, how effective has this aid
been in the development efforts of PNG? The answer depends on what aid was intended to
achieve. As a tool of transferring resources, the results have been mixed. As a project funding
gap filler, the answer would be positive. When aid was primarily intended to bridge the gap
between the country’s investment target and domestic savings, it did help to bridge that gap,
in gross terms. An externally derived resource, aid also bridged the foreign exchange gap.
Alongside many disappointments, aid has financed many development projects and programs
which achieved very high internal rates of return, including schools, clinics, health posts,
bridges, roads, capacity building and training programs.
The egregious failures of foreign aid usually get the headlines. Indeed, much aid has
been ineffectual in economic terms, not least because it has often been given for reasons that
had little to do with economic development. During much of the post-independence period,
PNG was the leading recipient of Australian aid; in retrospect, it should not be surprising that
aid so obviously given for historical reasons would prove ineffective at promoting economic
growth and poverty alleviation. Fortunately, this type of aid appears to be gradually phasing
out. In any event, the egregious cases tend to obscure the fact that aid to PNG is behind many
important achievements over the past two decades. Indeed, the results of many individual aid
efforts are unmistakable across the country: roads and bridges have been constructed, schools
and hospitals built, institutions established, and thousands of Papua New Guineans sent
abroad for scientific and technical training.
In the health sector, aid can claim much of the credit not only for infrastructures such
as the Port Moresby General Hospital, but for the eradication of endemic diseases such as
smallpox and polio. The dramatic decline in fertility in some provinces can be directly linked
to the population programs of donors, notably the United Nations. The critical battle now
being waged against AIDS is almost entirely funded by foreign aid. Characteristically, aid is
not only helping to finance the establishment of new health institutions, the training of
personnel and the development of public awareness campaigns to spearhead this battle, but it
was also at the forefront of the initial effort to convince sometimes reticent incumbent
governments of the very need for public action.
In the agricultural sector, aid was largely instrumental in establishing the network of
research and extension programs that plays an important role in the widespread development
and dissemination of high yield tree crop varieties, now a key component of the national tree
crop system. In the transport and infrastructure sector, aid has contributed immensely to
building or upgrading major roads and bridges including portions of the Hiritano and the
Okuk highways. Many of the key sectors in the country have experienced the use of foreign
aid. From agriculture, livestock, fishery, education, health, water supplies, finances, transport
and socioeconomic infrastructures to institutional capacity building and training. Thanks in
part to aid the social impact of the 1998 tsunami in Aitape was not too severe; Kokopo
sprouted from the volcanic eruptions in 1996 from the reallocation of aid funds; Bougainville
is being rebuilt from the ruins of civil war in 2000 from donor assistance.
There is thus simply no denying that aid can be credited for much of ‘what works’ in
PNG. At the same time, aid has undeniably been less successful at promoting sustained
economic growth across the country. Many of aid's achievements during the 1980s and 1990s
were negated by the counter-productive economic policies of successive governments. Since
the early 1990s, the donors, led in particular by the World Bank, have been assisting
successive governments to undertake economic policy reform, in order to reduce heavy-handed government intervention in the economy and create policies that are friendly to the
private sector. Progress on reform has been slow and halting. Powerful interests have
mobilized to defend the old policies,
despite their dismal economic legacy. Nonetheless, after
almost three decades of effort, enormous progress has been made on policy reform. Aid has
helped convinced the Government to implement realistic exchange rates, improved monetary
policies and widespread deregulation and price liberalization. Much remains to be done,
notably in the areas of privatization and institutional reform, but the donor-led reform process
has helped transform the policy environment in PNG.
Failures of Foreign Aid in Papua New Guinea
Over the 25-year period, even those seemingly positive achievements started to be put
to test. Indeed, resorting to project rehabilitation and structural adjustment programs in the
1990s is an adequate testimony to this conclusion. With the onset of structural adjustments,
the goals of aid became a lot more blurred and the effectiveness of aid much more
complicated to evaluate.
Foreign aid in PNG between 1975 and 2000 has seen more failures than successes.
The Asian Development Bank’s 1998 Country Assistance Plan
reported that of the 16 ADB
assisted projects that have been evaluated only five were rated as generally successful. The World Bank
summarized the performance of the 30 projects it undertook since it began operation in PNG in 1968 and
concluded that projects evaluated between 1968 and 1978 had a failure rate of 22 percent. But, the failure rate of
projects completed after 1978 rose to a disappointing 60 percent. The large failure rate of aid from these two
multilateral donors is largely attributed to the lack of counterpart funding and economic mismanagement by the
A number of factors have undermined aid effectiveness in PNG. First, aid was not
effective when the principle objectives of the donor were not Papua New Guinea’s economic
development. Aid which was motivated by commercial or foreign policy motives inside the
donor country have often not served well the interest of the local economy. The problem in
each case is that non-economic motives have led to aid activities that were not tailored to the
specific needs and capacities of PNG. Similarly, it is evident that the socioeconomic and
political environments in PNG have critically affected aid effectiveness. Aid has been
successful in an environment of macro-economic stability, characterized by low inflation,
predictable and sustainable policies, and secure property rights. The quality of the economic
environment depended largely on the policies and stability of successive governments.
The ability of the Government to integrate aid into its own coherent development
strategy and management has been critical to the success of aid. Donors can never fully
compensate for the absence of an effective government with an appropriate budgeting and
planning process. Most of the recurring problems of aid in PNG have their origin in
breakdowns in these governmental functions. Thus, for example, the common failure to
sustain projects after the end of donor resources is typically due to the failure to budget for
recurrent expenditures in advance. Similarly, the failure of aid coordination, leading to
overlapping, contradictory, and redundant aid activities, is typically a consequence of the
failure of the Government to integrate these activities within coherent national development
budgeting and planning exercises.
Several factors have particularly affected the ability of successive governments to
adequately manage aid resources. First, the low capacities of many national institutions
account for the majority of difficulties during the project cycle. While the level of education
and training available in the civil service has improved over the years, the ability of public
bodies to implement aid projects effectively remains very limited. These abilities vary
enormously across the country, but in general, most national public organizations especially
government departments are rarely capable of implementing more than simple administrative
tasks; typically, they possess limited analytical capacity to design or critically evaluate aid
activities. As a result, aid projects that did not involve complex procedures and intensive
administrative oversight have been less taxing of the Government's limited managerial
capacities and thus more successful. Similarly, aid activities have been successful in programs
or projects where there were a few clear objectives that were easily assimilated by
Government officials and enjoyed the support and commitment of the top leadership.
Second, high administrative turnover and economic mismanagement in PNG has had a
devastating impact on Government capacity and thus on aid effectiveness. Economic
mismanagement has pushed successive governments to reduce various recurrent expenditures
and over time led to reduced governmental effectiveness. For example, public service salaries
is less than a tenth of its level of 20 years ago in real terms, pulled down by the combination
of sustained high inflation and the Government's almost permanent fiscal crunch. At such
wage levels, staff turnover is extremely high, particularly at skilled positions, while
corruption, nepotism, moonlighting, and absenteeism is rife. This has resulted in the
Government’s diminishing capacity to manage its aid resources effectively (Hnanguie, 1996).
In addition, the chronic political infighting and instability over the years have
institutionalized a kind of crisis management, in which long-term development planning and
careful budgeting are replaced by ad hoc gap filling, continuous negotiation with external
creditors and the increased politicization of revenue allocation. Over time, sound management
practices are eroded and public corruption increases. Continual under-spending on
maintenance and various other recurrent expenditures eventually prevents public
organizations from functioning effectively. Starved of resources and left to their own devices,
individual public managers or politicians lobby on their own for foreign aid to meet pressing
emergency needs rather than to address longer-term development problems.
Third, certain donor practices have contributed to weakening government
development management capacities. The proliferation of donors and donor projects taxes
existing Government capacities. There are about 20 official donors and over 60 distinct
projects. These totals do not even include non-governmental organizations (NGO) aid, often
fragmented over dozens of small organizations. About 15 NGOs are officially registered with
the Government, including several international NGOs. While donors have increased informal
coordination at the country level, little progress has been achieved on consolidating or
harmonizing project accounting, procurement, or evaluation procedures.
Pressed by the need to achieve quick results, donor agencies have often sought
alternatives to the arduous and long-term task of developing the central government's
management capacities. They have for example exercised control over the identification,
design, and evaluation of projects to compensate for the limited ability of the Government to
undertake these critical functions. Many aid projects continue to be designed with little or no
local input. Donors have fielded long-term expatriate experts to man projects, rather than rely
on local expertise. As a result, there are still between 2,000 and 5,000 foreign experts in PNG,
even though their salaries are often equivalent to those of several hundred civil servants. More
pernicious yet, donors have too often tried to bypass central government institutions entirely,
first by setting up stand-alone project structures in the 1980s and 1990s, and today
increasingly by turning to civil society and the NGO sector to implement their projects.
These donor practices have undermined capacity development, because Government
institutions are often marginalized in the aid process. For example, only two percent of all
projects in the mainly donor-funded Public Investment Program have ever been formally
evaluated by the Government. Valuable opportunities to gain experience designing and
evaluating projects in order to ‘learn by doing’ are lost; more seriously, such practices erode
the Government's sense of ‘ownership’ over projects, and lessen the likelihood that the
Government will develop a long-term financial commitment to the project. The higher levels
of aid effectiveness can be explained by the Government's insistence on integrating all aid
within its own budgeting and planning and where the Government was willing to turn down
aid resources that did not fit into its own development priorities.
The plethora of organizations involved in aid activities defies adequate coordination
by the Government. In the health sector alone, the official donors are currently funding no
fewer than five stand-alone projects outside of the Department of Health. Often, these
independent structures are more efficient than the Government at delivering short-term
results; they may be cheaper, closer to the population, and less bureaucratic. But bypassing
the central government leads to predictable results in the longer term: projects are less likely
to be sustained after the end of donor support, there is a haphazard and fragmented quality to
policy implementation and, starved of resources, government institutions suffer further
decline in skills and capacity. Empirical evidence suggests that NGOs can be extremely cost-effective service providers, but that it is a mistake to believe they can replace the central
government across a wide array of public goods.
CONCLUSIONS AND RECOMMENDATIONS
Papua New Guinea continues to face many economic problems, including mounting
external debt burden, declining exports revenue, economic stagnation, and Government
dominance of key economic activities. The difficulties facing the majority of Papua New
Guineans are enormous. Among other things, they lack access to many services crucial to a
quality of life. For instance, 4 million people - more than 85 percent of the national population
- have no access to electricity, about 3.5 million do not have proper sanitation facilities, and
some 3 million have limited access to basic services (Hnanguie, 1997: 7).
Foreign aid, although helpful particularly for the poorer provinces, is not adequate in
accelerating Papua New Guinea’s economic development. This kind of international resource
flow is largely governed by factors outside Papua New Guinea’s control; it is highly
fluctuating; it is inadequate; and it is often being mismanaged. It should also be observed that
much of the foreign aid is directed towards the ordinary activities of the public sector and/or
for humanitarian purposes. Little, if any, of the aid is utilized for the development of the
private sector, or for the establishment of institutions for entrepreunership support. In
addition, aid is mainly ‘tied’ in that it is allocated by donor countries to specific sector, project
or purpose in the country. Put differently, PNG is normally incapable of influencing the
allocation of much of the financing among her developmental programs, or among other
critical needs. The shift in the Australian aid from budget support to project support for
instance, has already shown signs of the Government losing all control over the allocation and
utilization of the only aid share it once had direct influence.
Recommendations for Improving Aid Effectiveness in Future
Given the successes and failures of foreign aid over the past 25 years, let us focus on
several measures that could help to improve the capacity of the Government to manage its aid
resources effectively in future. First, donors have to start taking this issue more seriously and
stop trying to bypass the central government. The widespread belief of both free-market
economists and NGOs that government is the problem and not part of the solution has become
a self-fulfilling prophecy. In fact, far from undermining the private sector, a limited but
effective government is needed to enable a vibrant civil society and strong business sector. It
is the best means to foster both economic growth and poverty alleviation. Donors must devote
greater attention and resources to help build the capacity of the Government to effectively
manage aid, even as they encourage the central government to retrench from nonessential
This entails more support to the policy, planning, and evaluation divisions of key
Government departments including the Department of Finance & Planning, as well as to
central budgeting activities. Perhaps more important, it entails a greater respect for the
integrity of the national budgeting and investment planning processes of government during
the aid cycle. Donors should assist the Government to develop her five-year rolling
development plans and medium term investment strategies to set the road map and increase
the coherence of government development efforts. Basing their aid on the Medium Term
Development Strategy (MTDS) has seen a lack of focus and coherence in their operations.
Donors should ensure that aid activities are explicitly integrated into these processes, so that
the long-term recurrent expenditure implications of aid are formally planned, budgeted and
Second, donors should give preferences to a government that demonstrates
commitment to improve its management of aid.
Current efforts to promote performance-based allocation of aid should be continued and deepened. It is important to establish clear
incentives to the Government to improve its capacity to manage aid resources. With poorly
performing governments, foreign aid should be refocused onto the non-governmental sector
and the meeting of basic needs and human capital investments.
In this context, donors must allow the Government to play a larger role in the design,
management, and evaluation of aid activities. Rather than ‘pushing’ aid and seeking short-term results, donors should rather help the Government formulate its own preferences and act
upon them, even if this means lower aid levels in the short run. Encouraging the
decentralization process, privatization, and the growth of civil society are all appropriate and
desirable, but donors should not view them as substitutes for central government institutions.
Third, the World Bank and IMF's economic stabilization and adjustment efforts should
be supported. Achieving macro-economic stability is a prerequisite for the effective use of
public resources, including foreign aid. Progress on such issues as poverty reduction and child
welfare will not be sustained in the absence of steady growth and healthy public finances.
There is thus no alternative to the sometimes quite painful reforms advocated by the
international financial institutions, which have gained valuable experience at reform
implementation. At the same time, more attention should be devoted to enhancing local
capacities in provinces undergoing economic reform to ensure that they are not eroded by the
fiscal crisis. Wholesale reform of the public service may be prohibitively expensive in the
short run, but the donors can and should begin to upgrade key parts of the civil service right
away, most notably those involved in economic policymaking like the Department of Finance
Fourth, donor coordination efforts should be refocused. It is a peculiar irony of aid
today that donors do not coordinate their individual aid coordination efforts. Groups like the
Development Assistance Committee, Consultative Group Meetings or the National
Development Forums are useful avenues for donors to engage in dialogue with each other and
to harmonize their policies and procedures. They should be reinforced. At the country level,
however, the Government should be empowered to coordinate all aid activities and donor-directed forums such as the Roundtables or the Consultative Group meetings need to be
The donors can, however, undertake a number of measures at the country level to
facilitate Government coordination efforts. For instance, donors should consider
specialization in a few sectoral and sub-sectoral areas, in which they have a comparative
advantage. The resulting decrease in the number of donors present in any one area would
facilitate governmental coordination and thus increase effectiveness. Similarly, the World
Bank or the ADB should be identified as a “lead donor” and charged with conducting the
policy dialogue with the Government and establishing the broad policy framework within
which other donors would plan their activities. This would free the Government from the
current burden of engaging in policy dialogue with some 20 different donors. Given their
unparalleled policy analysis capacities, the World Bank or the ADB are uniquely qualified to
play this role.
Selected Bibliography and References
Asian Development Bank, June 1998, Country Assistance Plan for Papua New Guinea, ADB
Asian Development Bank, Asian Development Outlook, 1999 and 2000, ADB Manila.
Department of Finance & Planning, Annual Budget books (1980, 1985, 1990, 1995, 2000 and
2001), Government of Papua New Guinea.
Foreign Aid Management Review of Papua New Guinea, 1998, ADB TA No.3011 – PNG,
ADB Manila and Government of Papua New Guinea.
Hnanguie, Christopher T., 2001, “Defining Indicators for Measuring Development Impact”,
Country Strategy and Plans for Bangladesh, Nepal and Sri Lanka, PW1, ADB Manila.
Hnanguie, Christopher T., 2000, “Economic and Financial Analyses of Capital Investments:
Strategies and Techniques of International Financial Institutions and Multinational
Corporations”, Master in Business Economics, Thesis, University of Asia - Pacific.
Hnanguie, Christopher T., 1997, “The Impact of Foreign Aid on Papua New Guinea’s
Economic Development,” Economic Briefing Papers, Department of Finance &
Planning, Government of Papua New Guinea.
Hnanguie, Christopher T., 1997, “Questioning Development Impact: Papua New Guinea Why
So Rich Yet So Poor?” Discussion Papers, Department of Finance & Planning,
Government of Papua New Guinea.
Hnanguie, Christopher T., 1992, “The Political Economy of Foreign Aid in Economic
Development,” Master in International Political Economy, Thesis, Victoria University.
International Monetary Fund, 2000, World Economic and Financial Surveys, Washington DC.
National Planning Office, 1997, Medium Term Development Strategy: A Bridge into the 21st
Century, Government of Papua New Guinea.
“Moving the Poverty Agenda Forward”, 2001, ADB Newsletter, ADB Manila.
Office of International Development Assistance, 1994, Report on Foreign Aid 1993,
Department of Finance & Planning, Government of Papua New Guinea.
World Bank, 1998, PNG Country Portfolio Performance Review, Washington DC.
The Author: Christopher Taylor Hnanguie - click to return to beginning of article
Christopher Taylor Hnanguie is a Programs Economist (Macroeconomist) with the Asian
Development Bank (ADB). In January 1998 at age 29, Mr. Hnanguie became the first
young economist from the Pacific region and the first Papua New Guinean to be
employed by the ADB or by any international development finance institution as a
member of its regular professional staff cadre. Based in the Philippines, Mr. Hnanguie has
worked extensively throughout the Asia-Pacific region including in Pakistan, Bangladesh,
Thailand, Indonesia, Malaysia, Myanmar, Philippines, Nepal, Sri Lanka, China, Laos,
Cambodia, Vietnam, Maldives, Solomon Islands, Vanuatu, Fiji, Samoa and PNG.
Mr. Hnanguie's specialty is in Macroeconomic Analysis and Development Intervention Strategy Formulation
and Planning. He is trained in various technical aspects of Development Cooperation including in Country
Macroeconomic Analysis; Development Intervention Strategy Formulation and Planning; Program and Project
Planning and Appraisal; Sector Review and Analysis; Economic and Financial Analysis; Social and
Environmental Impact Assessment; and Program/Project Management and Evaluation of various sectors. Mr.
Hnanguie was assigned to all major operational departments of ADB including with the Pacific Operations
Office; Economic Analysis and Research Division; the Post-Evaluation Office; the Water Supply & Urban
Development Division; Programming Department (West) and the Mekong Department’s Country Strategy and
Besides ADB, Mr. Hnanguie has also received specialized technical training on the operations, policies and
procedures of a number of international development finance institutions including the World Bank group, the
International Monetary Fund, the European Union, Japan Bank for International Cooperation and the United
Nations development system (UNDP, UNCTAD, UNFPA, UNICHEF, ESCAP) between 1994 and 1997. He
has also received technical trainings from the Australian Agency for International Development (AusAID) and
the Japan International Cooperation Agency (JICA).
Prior to joining the ADB in January 1998, Mr. Hnanguie held senior positions with the Government of PNG,
including as Principal Adviser on Development Cooperation and Senior Programs Officer on Technical &
Economic Cooperation among Developing Countries (TCDC/ECDC) with the Department of Finance &
Planning from 1994 to 1997. He was responsible for monitoring and analyzing the international economic
trends; evaluating the operational strategies/policies of donors and international financial institutions; and
advising government on the appropriate means and approach for PNG’s development cooperation with aid
donors including in negotiations for program and project financing and co-financing. He was also responsible
for Planning, Programming and Coordination of external resources into the Government’s budgetary and
Apart from a brief stint with the University of PNG’s Institute of Distance & Continuing Education as acting
Coordinator and Tutor in the Social Sciences in 1993, Mr. Hnanguie also served with the Department of
Foreign Affairs & Trade in 1994 as a Foreign Service Officer. A trained Foreign Service diplomat, Mr.
Hnanguie has officially represented PNG in various international forums throughout Asia, Pacific and Europe
including as Technical Adviser on Development Cooperation matters to many government delegations.
Educated in New Zealand, the Philippines and PNG, Mr. Hnanguie holds a Masters degree in Business
Economics (MBE) from the School of Economics, University of Asia-Pacific; a Master of Business
Administration (MBA) from the joint Asian Development Bank and Ateneo University MBA program; a
Masters degree in International Political Economy (MA) from Victoria University; and a BA in Economics &
Political Science from the University of PNG. His academic interests are in the fields of Macroeconomics,
Business and Development Economics, Development Cooperation, Development Finance and International
Political Economy. He has written several articles and contributed to a number of international journals on
various aspects in these fields.
This article has been republished in www.pngbuai.com with permission from the author in November 07, 2003
Copyright ©2003 Christopher T. Hnanquie
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