ARTICLE:  MacroEconomist analytic review of 25 years of foreign aid to PNG in Papua New Guinea Books Useful Articles & Information
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THE FUTURE OF FOREIGN AID IN PAPUA NEW GUINEA
AFTER 25 YEARS OF SUCCESSES OR FAILURES?

By

 

Christopher Taylor Hnanguie, macroeconomist Footnote

[Republished in http://www.pngbuai.com Papua New Guinea Books Useful Articles & Information - PNG research level articles on the web 2003/11/07 with permission of author]

 

INTRODUCTION

 

After over 25 years of political independence, Papua New Guinea (PNG) continues to receive a high volume of foreign aid for her socioeconomic development. The purposes and worth of that spending remain issues of debate by observers. The debate is intensified by a rather disappointing socioeconomic development record since 1975 and has led donors to call for its elimination or wholesale reform. But is aid to blame for the disappointing record? How effective has foreign aid been in PNG? What would be the future of foreign aid in PNG after 25 years of experiences? Could it be improved or should it be done away with?

 

This chapter attempts to shed light on some of these profound questions and especially with regard to the question on ‘the future of foreign aid in PNG’. It begins by examining the nature and flow of foreign aid so as to establish the context for analysing the future of foreign aid in PNG. It then attempts a cursory evaluation of the successes and failures of aid in the country over the last 25 years and draws some conclusive recommendations on its future in PNG. The article is an mere overview of this multifacet subject, Footnote complicated by limited reliable data. Hence, it is based largely on the experiences of the author on the subject.

 

FOREIGN AID TO PAPUA NEW GUINEA

 

Official Development Assistance (ODA), commonly known as development assistance/cooperation or foreign aid is provided by member countries of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). Foreign aid is provided for various reasons Footnote including that of the donor county's strategic, economic, political and ideological priorities and historical or cultural links. For aid receiving countries like PNG, aid is an important source of capital to complement the shortages of domestic resources necessary for social and economic development. It has at times been a determining factor in their development processes.

 

The main aid donors to PNG are: Japan, Australia, Germany, USA, China, New Zealand, Korea, the World Bank group, the Asian Development Bank, the European Union, the United Nations systems, International Fund for Agricultural Development, Commonwealth Fund for Technical Cooperation and Kuwait Development Fund. PNG receives the following types of aid: (i) Direct Budgetary Support Grants; (ii) Program or Project Grants; (iii) Micro-project Grants; (iv) Concessional Loans; (v) Technical Assistance; and (vi) Ad-Hoc Aid. All these types of aid have their own terms and conditions.

 

Papua New Guinea’s foreign aid policy states that all aid should be directed towards preparation and implementation of priority programs and projects of the Government. In the absence of any strategic national development plans, the Government’s Public Investment Program guided by the Medium Term Development Strategy (1997 – 2002) continues to be the main vehicle to channel foreign aid towards priority programs. The net disbursements from all sources to PNG increased in 2000 to K520 million from K280 million in 1975, which is an increase of over 50 percent. It peaked in the early 1990s and declined in absolute terms in 1999. The net disbursements from DAC countries to PNG have grown at an average rate of 3 percent per annum between 1975 and 2000. Footnote Figure 1 shows the average flow of foreign aid over a five-year period between 1975 and 2000 and projections for 2005.  The steady growth of foreign aid to PNG has and will depend on the continued commitments by the donors and improvements to Papua New Guinea’s capacity to efficiently implement projects and programs.

 

 

Fig 1 - Average foreign aid disbursement in PNG - millions kina in nominal values

 

Source: Government of Papua New Guinea Budget books 1980, 1985, 1990, 1995, 2000 and 2001.

Notes : The substantial increase in bilateral aid is due to the shift from Australian budget support to project aid.

              Projections for 2005 is based on annual averages and macroeconomic forecasts.

  

THE FUTURE OF FOREIGN AID IN PAPUA NEW GUNIEA

 

One of the common arguments posed by Papua New Guinea’s donors is that foreign aid to the country is no longer necessary because of the dramatic increase in private capital flows from the developed countries to the developing world. In this argument, aid was justified until recently to palliate the failure of private capital to flow to the developing world. In 2000 the International Monetary Fund (IMF) reported that net private capital flows to developing countries totaled some US$120 billion, up from an annual average of US$3 billion as recently as 1990. Footnote Private flows are now much more important than public aid flows (which in 2000 totaled just under US$60 billion). In this situation, these donors assert that, why provide aid at all to PNG? Does it not simply allow incumbent governments to maintain inefficient economic policies?

 

These arguments hold some truth, especially for middle income and upper middle income countries. It is hard to justify aid to any country in which counter-productive policies are preventing economic growth, and economic rationale alone clearly does not justify providing large amounts of aid to relatively rich countries that already receive significant private flows. However, this argument is too generic and overemphasized to apply to PNG and there are two good reasons for this.

 

First is that, private capital has been almost entirely directed to either extremely large economies like China, or middle income countries like Thailand. Private capital flows are heavily concentrated in a few countries, and some flows are volatile. A surge in the late 1970s receded after the onset of the debt crisis in 1982. Another big rush occurred in the mid-1990s, but with the financial crises rocking East Asia in 1997 foreign investment dropped sharply. The flow of private money to the developing world fell by $80 billion between 1996 and 2000. In any event, private flows continue to go to a small number of (mostly) middle-income countries. In 2000, 26 countries received 95 percent of private investment; the rest went to the other 140 developing countries. Footnote

 

In a typical lower middle-income country like PNG, foreign aid remains far and away the primary source of external finance. With the exception of the mining and petroleum sector, the country has not been able to attract significant private capital in recent years. Perhaps, as the country emerges from its difficult economic mismanagement, its vast economic potential and resources would attract significant private capital, and so proponents could then push for elimination of foreign aid. But that maybe for sometime yet. Meantime, aid remains one of Papua New Guinea’s major revenue flows, providing about a quarter or comprising about 30 percent of total Government revenue every year. Table 1 below shows the composition of aid in Papua New Guinea’s annual budgets between 1975 and 2000. A significant portion of grant aid is not reflected in Table 1, as it is not provided through the Government’s budgetary system. Hence, for the foreseeable future, PNG will rely on public money for her external capital requirements. At some instances, it is true, private capital has been driven away by certain governmental practices and counter-productive economic policies and the law and order situation.

 

Table 1: Average Composition of Foreign Aid in Annual Budgets, 1975 – 2000

(Million Kina in nominal values)

 

Source

1975 - 1979

1980 - 1984

1985 - 1989

1990 - 1994

1995 - 1999

2000 - 2004*

 

I. Domestic

 

 

 

 

 

 

Internal Revenue

400

520

650

760

1,050

1,700

Domestic Borrowing

100

90

110

160

210

315

Subtotal

500

610

760

920

1,260

2,015

II. Foreign Aid**

 

 

 

 

 

 

Australian Budget Support

180

220

200

190

210

0

Project Grants

na

na

3

11

175

430

Concessional Borrowing (Loans)

50

60

50

120

130

150

Commercial Borrowing (Loans)

10

20

50

290

210

180

Subtotal

240

300

303

611

725

760

Total Revenue

740

910

1,063

1,531

1,985

2,775

 

 

 

 

 

 

 

Foreign Aid as % of

    Total Revenue

32%

33%

29%

40%

37%

27%

Australian Budget Support as %

     of Total Revenue

24%

24%

19%

12%

11%

0%

Project Grants as % of

    Total Revenue

na

na

.28%

.72%

9%

16%

Concessional Loans as % of

     of Total Revenue

7%

7%

5%

8%

7%

5%

Commercial Loans as % of

    Total Revenue

1%

2%

5%

19%

11%

7%

 

Source : Estimates of Revenue and Expenditure, Government of Papua New Guinea Budget books 1980, 1985, 1990, 1995 and 2001.

Notes : Figures refer to average for the period; * Projections based on annual averages and macroeconomic forecasts; ** A significant

                portion of grant aid is not reflected, as it is not provided through the Government’s budgetary system.

 

However, the Morauta Government in 2001 has implemented difficult reform programs amidst strong domestic opposition under the guidance of the World Bank and the IMF and can now boast of market-friendly economic policies, and yet investment is been kept away by many of the characteristic features of a lower middle-income economy: small consumer markets, poor physical and communications infrastructure, an ill-trained labor force, law and order and uncertainty about future stability. Nor has PNG benefited substantially from the dramatic expansion of trade generated by trade liberalization, most recently under the aegis of the World Trade Organization. Papua New Guinea's share of trade continues to decline and was insignificant in 2000. Indeed, the evidence suggests that PNG may prove to be a big loser, with its share of trade further declining if present trends continue.

 

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. Footnote

 

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. Footnote 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 yie