Comments

Hi David, thanks for the contribution to this vital debate. Though I do respectfully disagree with your argument. At some level, when discussing exchange rate policy - you are trading off who gets to live in poverty – which is a nasty situation to be in. But anyway, here goes. I concur with Stephen’s comment - if we take the arguments outlined at face value then BPNG should make the exchange rate as high as possible. But given that no country on earth does this, and most intuitively know that this wouldn’t be a great idea. As such, the argument put forth seems to lack the acknowledgement of the trade off at play (where is the discussion about rural dwellers and exporters?) – which is the key factor in choosing actual value for the exchange rate – rather than just outlining an argument for “UP”, or “DOWN”. If the exchange rate shouldn’t be set as high as possible, then in the absence of quantitative analysis – the choice of rate has to ultimately be informed by individual experience, logical argument and/or anecdotes. Logic can’t tell you exactly what the exchange rate should be, - the argument in the blog is no doubt set out logically, but there is no figure suggested – nor could there be. That leaves individual experience and anecdotes - which while is valuable to an extent – is surely insufficient. It also makes sense that people living in Port Moresby would have much more contact with the anecdotes of urban dwellers, and less with those of rural dwellers. I also raise a query about the effect on employment. FX shortages don’t just happen now and then, they are directly a result of managing the exchange rate. Business says that FX shortages (caused by propping up the Kina) are the key impediment to business – if this is not behind the 5 year decline in employment, what is? There was an initial effect from the end of the LNG Project construction, however that finished in 2014, the decline in resource prices also occurred in 2014 and have stabilised or increased since then. Yet the argument seems to be that devaluation of the Kina would harm employment. Both these things can’t be the case.

The Liberal Party in Australia needs to shore up its voter support base come the next general elections. The political signals in the recent gallop done by ABC Australia indicate a changing variation to how well the Liberal Party has performed on a range of issues across the Asia-Pacific region. Is the Australian Liberal Party in need of a "political Jesus Christ" at this time, given the pendulum in international relations continues to change? The answer is yes.

I think that from the perspective of political economic development analysis, Prime Minister Morrison's elevation following the Liberal Party's caucaus vote in which political power-brokers selected Morrison rather than Julie Bishop as the Liberal's next leader was to shore up grass-root support among its members in most suburban area's throughout Australia. The internal political chessboard has been constantly changing because of the divisions in opinion within the Australian political space over asylum issues, Australia-Pacific seasonal worker schemes, Australian aid to the Pacific, West Papua, regional trading blocks such as the Melanesian Spearhead Group (MSG), and China's growing commercial and economic penetration of the Pacific, climate change and the United States' so-called "pivot" to the region. Most of these issues require considerable re-evaluation to ensure that greater consensus is reached among Pacific island nation states prior to any mutually beneficial decision being reached in the region. At the moment, there is a lack of active and consistent engagement by Australia in the South Pacific region because its focus is heavily focused on other regions of the world such as Asia, with special focus on China.

I have greatly appreciated the 3 blogs on adaptive aid programming. As expressed in my earlier comment on Richard Curtain’s blog (A new perspective on aid delivery, August 21, 2018) and based on over 4 decades as a development practitioner, I am a convert to the cause. So much for what I might agree with, it is the practical implementation of such a programming of aid that I see as the real cause for concern. You reference a number of helpful examples. However, in my experience, adaptive approaches are vastly overwhelmed by the prior donor focus on short-term financial and technical fixes and the somewhat arrogant, heavily predetermined direction of assistance in the case of the majority of aid programs. Such repeatedly wasteful and failed approaches to aid are compounded by the consistent turnover of both donor and recipient staff and leadership and the prior focus on annual budgets. Unfortunately, the overall environment is not conducive to adaptive aid programming. Can adaptive aid programming expand beyond the realms of academia and the occasional donor commitment?

Bravo Yasmine, you've always had a voice and thank you for using yours to help me find and amplify mine and now your other sistas in Vanuatu.

Thanks Andrea and Lisa for a great article. You make an excellent case that learning partnerships can (and should) play a critical and varied role in programming - in particular to keep focus on the 'wicked' development problems and long-term change. In your opinion/s, how can we best incentivise this sort of change in an industry where donors may focus on (and reward) short-term, output level results that are easier to track and communicate to domestic constituencies?

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