Comments

Thanks very much Chris and Linda for a great read. I was interested to see that 'M&E' was discussed in a separate blog to 'L'. Along this vein, and in your experience/s, what can incentivise donors and providers to better link the evaluative techniques you outline to learning processes and (ideally) real-time adjustments in programming (i.e. activities, budgets, choice of partners etc etc)?

I think David has well encapsulated the challenge of economists convincing business people why there should be a devaluation in PNG. A devaluation has many vocal losers and silent winners – a common challenge for better public policy. For an exchange rate is simply a price, and any movement of a price has winners and losers. I expect that many of the people that David mixes with will stand to lose significantly from a devaluation, and this will lead to actual divestment and loss of jobs for those firms. In particular, businesses primarily involved in importing foreign goods (or simple transformation of imported goods) will be clear losers (assuming they’ve been able to get around current foreign exchange shortages). So David has covered the situation facing many hard-working businesses reliant on imports, and sets out reasons for why many doubt there are business opportunities for more PNG-based production. Other losers, and this was a particular political challenge for the Kina devaluation in the early 2000s, are the urban poor who will face higher prices on items such as imported rice. Losers will also be expat employees paid in foreign currencies, and politicians who want to move their Kina overseas to buy a house in Cairns or Singapore. However, there will also be significant winners – such as rural women bringing coffee and cocoa to the factory gate for export. Indeed, with over 2 million people in households with 40-60 per cent of their cash income coming from coffee, they would stand to immediately have an increase in their Kina incomes. A 25% devaluation means the Kina income from their bag of coffee immediately increases by 25%. Indeed, a 25% devaluation is equivalent to a 25% export subsidy for all local PNG production. This would be expected to have incentive effects for more exports - and studies indicate farmers are responsive to higher prices. If PNG had maintained its agriculture production per capita as at the time of Independence, then agriculture exports would be over K3 billion higher than currently. In addition, the farmers of Central Province would be more likely able to sell their locally grown produce relative to imported agricultural products in the supermarkets of Port Moresby as a devaluation is actually equivalent to a very effective, non-discriminatory tariff on all imports. Tuna manufacturers would immediately have a reduction in their costs relative to producers in the Philippines. Indeed, a 25% devaluation immediately removes 25% of the cost disadvantages faced by firms in PNG due to the higher costs of security, energy, telecommunication, transport and labour. Overall, businesses reliant mainly on PNG goods, services and labour will be winners from devaluation. Businesses mainly reliant on imports will be losers. In general, the rural population will benefit as they are cash crop exporters as well as subsistence providers. Many in urban areas will not stand to gain increased export income but will face higher costs of food and imported consumer items. Getting the balance right between winners and losers is a real challenge, as is the best way to make the adjustment. This may require some direct compensation measures for the losers – such as a temporary rice subsidy or price controls. However, all indications are that the exchange rate is not at the right price. In 2014, the foreign exchange shortages were predicted by myself and others once the central bank moved the exchange rate away from market fundamentals with an extraordinary 15% appreciation in early July 2014 despite declining commodity prices. This prediction also covered the likely impact of such over-valuation in pushing over 100,000 Papua New Guineans into poverty. The only long-term solution for foreign exchange shortages is to get the price right. Even the ANZ Bank says so – so its not just the IMF and academics and all the international credit ratings agencies. The risks to even importing businesses also should not be over-stated as businesspeople in PNG are resourceful and resilient. After allowing for inflation differences between countries (so the Real Effective Exchange Rate), even a 25% devaluation will move the exchange rate back to levels equivalent to the levels of 2004 to 2007. These were times when many businesses were finding new investment opportunities, formal sector employment was growing, and the non-resource sector had a growth rate of around 5%. So even a 25% devaluation would simply be returning to a level when times were much better for importing businesses than current conditions! Congratulations to Stephen for publishing David’s counterarguments. This reflects healthy debate and discussion which unfortunately is in decline in PNG.

Hello Father Hezel. I've read most of your work and am not surprised with your perspective given your long standing record in Micronesia. It is not surprising that your views are somewhat pessimistic to the average optimist given the nature of pragmatism in Pacific Islands. However, it is also important to be positive and not really dwell in a fatalistic outlook, for human dignity plays a huge role in performance and it is my firm belief that Pacific Islanders have yet to fully decolonize their mind in order to pursue independently a way of thinking that would dignify them to perform at their peak. This has yet to be done and even consultants at large including ADB and World Bank find most of their loans not performing as well as they should because the Pacific populations under the loan are not implementing as expected by ADB/World Bank consultants. It is difficult to steer away a population from their cultural norms and common laws/precedents given their habits and it is a difficult mindset to change. However, it works both ways for it is not decolonizing the mind of the colonized that we have to worry about but also decolonizing the mind of the colonizer to have a fairer share in decision making especially when development is highly dependent on the people developing themselves hence it should be catered towards their end and not necessarily towards what we believe that end should be. I love your work and hope that you continue in your quest in assisting Pacific Islanders, Micronesians especially, in truly discovering a deeper sense of self that is pure, uninfluenced, and independently created to think freely on what success really means through their first thoughts on what they entail as people.

Totally agree with you Ian, that is why we point to attempts to, and the need to, simplify language, processes and data collection. At the same we also need to recognise that there needs to be adequate support for, and resourcing of, local actors, researchers and agencies in helping to answer some difficult questions.

Hear, hear! So happy to read the alternate view put succinctly at last. The arguments for devaluation are filled with theoretical maybes, somewhere down the track, that might benefit the big end of town and might trickle down. As David points out, environmental factors in PNG from security to transport to available skills, land etc. make those outcomes less assured than in more developed economies. To say the least. What is guaranteed, though, is that immediately the cost of many, many, things will increase substantially. The cost to build houses - or anything. The cost to feed your urban family. Transport costs. Equipment, spare parts, fertilizer etc. One small positive of the FX issue is that local companies should be able to sell more of their product. Supermarket shelves seem to have more local products that before. For obvious reasons. If only the billions of current export income could be bought onshore for a while.

David, I appreciate your contribution. This is definitely a debate PNG needs to have. But I have to ask you: By your argument why stop at not devaluing the Kina? Why, if a strong Kina is such a good thing, not appreciate it and go for parity with the US dollar? This is the logical implication of your argument, and it shows its weakness. I won't repeat all the arguments for a devaluation here. Suffice it to say that the real exchange rate in PNG today is the same rate that prevailed about five years ago at the height of the economic and resource boom. This makes no sense. The economy is paying the price for the government's refusal to allow the exchange rate to adjust. Finally, I don't think I said business confidence is high. Business confidence has been undermined by the management of the the excess demand for Kina by a complex, expensive, and confidence-sapping system of rationing - a system needed because of a refusal to allow a real depreciation. Regards, Stephen

An interesting blog. This could end up very very complex which most countries would be unable to sustain without extensive consultancy support - which is dangerous

Joseph, By private developers, I mean both domestic and foreign. Many of the weak environment concerns rule against both. However, FDI can be better placed as it may arrive with capital, skilled labour as one of the fixed costs, a proven investment plan, current technology and market access. In addition, governments too often try to counter their bad investment environment with special concessions to attract FDI. On the other hand, domestic investors often have to face the extra challenge of acceptance in the close-knit societies of the PICs. All in all the real challenge in tourism, as other PIC economic development is one of market supply, rather than market demand. These concerns have to be worked through the political economy of the PICs where governments historically expect to directly engage, where state capitalism offers additional political gain and where a more liberal investment climate is politically risky. Short-term donors and associated consultancies consistently compound the problem by ignoring the cross-cutting political economy, institutional and governance constraints and demand quick, “silver bullet”, technical solutions that may impress donor and recipient capitals but ignore common capacity, including institutional capacity constraints. The deficits in institutions and poor governance you refer to, and the overall political economy of both recipient and donor perpetuate the PIC dependence on migration, remittances, aid and bureaucracy (“MIRAB”) and greatly lessen the probability, but the possibility of tourism and other economic development.

Brilliant stuff, Bruce - as usual.

Good points Steve. I know of your work in the area. When you say private developers I assume you refer to foreign investors? Indeed, the risk premium related to investing PICs is much higher than elsewhere and requires addressing. The deficits in institutions and poor governance is indeed a major constraint - in tourism and in development more broadly. There is a gulf between what the right policies and institutions are in theory and what has been able to be deployed in practice - not just in tourism. Is the problem that initiatives are poorly designed and that modes of development that have proven to be unsuccessful and benign are persisting? Or is it always convenient to point the finger at local institutions? Must the donors and multilateral institutions take some responsibility for this? Do the historical legacies have anything to do with this? PICS have competitiveness deficits as compared to SE Asian countries - can this be overcome? Access and air travel costs are comparatively very high but there seems little that can be done about this because of the binding constraints. Nevertheless, tourism is one of the comparative advantages that PICs have but if the expectations are to reach the heights of Bali or Thailand, they are probably unrealistic.

Indeed you raise many valid points - too impractical to offer a detailed discussion here. however, it has to be said that what happens in PICs is characteristic of the situation in other developing countries around the globe. FDI is a big driver of tourism development and consequently economic leakages are inevitable. In the absence of FDI, tourism product development would be stunted and the destination will be adrift from the global tourism supply chain. You are right that in general, Managers tend to be expatriates - there are many reasons for this. Some companies prefer expatriate managers for skills and experience based reasons, others do it because where the majority of employees are drawn from the same communities, having a manager with familial links can create enormous operational challenges. Tourism jobs tend to inherently low skilled and low paid around the globe. In many respects tourism is a reflection of globalisation and as geographer Stephen Britton argues, tourism takes PICs into a situation they have little control over. You are generally right in that the impacts of tourism are rarely of concern to the traveller -hedonism characterises much travel - the responsible tourism movement is trying to change this. Alas, out of mind out of sight - Bali is a case in point. The broader question is if not tourism, what then? Economic diversification for small island countries is immensely challenging. Donors and multilateral organisations are trying to change this but the constraints are so intractable. There is no easy fix and the inequalities and injustices evident in tourism in PICs are commonplace elsewhere. Not that this is a convenient excuse, it is the inescapable reality.

Sure tourism is labour intensive but mostly developers come from richer nation's investors and very little of the money spent remains in the local community. I recently visited Samoa and spoke to other tourists when I realised that so many of the locals are paid a pittance by their own standards. Why allow investors when the money just keeps on leaving the country? Most of the senior employees in the hotels weren't local workers. The local workers got the low paid low skilled jobs and there isn't much of a career path or even a job skills path. It's not that holidays in the Pacific are cheap - it's just the mindset that the impact on the local community and the environment is not a concern to the happy holiday maker. Where is the ethical arguments about investing in the PIC and the benefits to the host country?