Comments

Thanks Tony. You raise a number of good points. I agree that the debt/GDP ratio considered on its own is potentially misleading, particularly in the medium term. Revenue raising capability is clearly an important consideration – as can be seen in the fact that Samoa has managed to accommodate a large debt (well over 50 percent of GDP last time I checked) – and is lacking in Vanuatu. I wouldn’t go so far as to say that debt to GDP is merely academic, though (and I say that as an academic!) It still features prominently in budget documents and the article IV reports. Debt to GDP is useful as an indicator of the government’s ability to repay debt over the long-term, as the government can widen its revenue base in the future (and in the case of Vanuatu, the government should really expand its revenue base in the long-term). The long-term implications of these loans are important, given that they are of a 30-40 year duration. Other indicators have their own problems, of course, which are partly due to how they are reported in the budget. The budget forward estimates include data on debt servicing, but only to 2017. We chose not to use them, as they don’t provide any information on the loans now being taken out, given that these loans include grace periods that extend beyond 2017 (and so are not reflected in debt servicing forecasts). Thanks again. Matt

Hi Stuart, Good to hear from you, and thanks for this contribution. I don't have a problem with the government spending more on aid for growth or trade, as long as it is well-spent. PNG is in desperate need of many things, as you point out, but one of them is employment creation, which is presumably what aid for trade would aim at. I do want to take exception with your praise of the free health policy. As our extensive field-based research has shown (under the PEPE project with NRI), free health is only going to make a bad system worse. See <a href="https://devpolicy.org/financing-health-facilities-and-the-free-health-policy-in-png-challenges-and-risks-part-2-20140715/" rel="nofollow">this blog</a> and the report on which it is based. I noticed that the World Bank in its recent East Asia and Pacific Update also praised PNG's free health policy. It's a pity when policy judgments are made ignoring the available evidence. Regards, Stephen

The Lukautim Pikinini (Child Protection) Act was passed in 2007 and revised in 2009. This contemporary, rights-based legislation focuses Government priority on the prevention of child abuse and neglect through the strengthening of community child protection mechanisms. The violation of child rights is a child protection risk that warrants a statutory response. The Australian Government would do well to assist PNG with implementation of the Act, a very challenging and difficult task. Australia can make a huge difference to assisting PNG with the prevention of diseases like diarrhoea which is a major killer of children under 5 years, through the development of water and sanitation programs including the elimination of open defecation as is practised throughout PNG. As Stuart Schaefer says, no child should die from preventable illnesses, especially when there are simple and low-cost solutions that can help. Eliminating open defecation must be central to our development efforts.

Thanks for an interesting article on the challenges Vanuatu faces following cyclone Pam, which are very real. I am not sure though that debt to GDP is a useful metric in relation to the stress that Vanuatu is likely to face over the medium term. Debt to GDP as a metric for debt stress assumes that government revenues are responsive to nominal GDP. If the taxation system is not responsive to growth, or worse is declining relative to GDP, then debt to GDP becomes a bit academic. Something like debt servicing or interest relative to domestic revenues would be a better metric for Vanuatu.

Tony, thanks for the comment. I think we’re broadly in agreement. Construction activity (which is largely aid-funded) has driven economic growth in Vanuatu for years, so we would also want the government to ensure that there was no ‘gap’ in between construction projects. That is a consideration at any time in Vanuatu, but an especially important one in the aftermath of the cyclone (and in the next year or so). That is why we acknowledge the need to consider the impact on the private sector in our post. I also agree with your points on the importance of the tourism industry. And the three projects you mention are ones that we would also argue in favour of, given strong concessional elements and grant finance, and the likelihood that these project will be able to incorporate a reconstruction element. I don’t think it necessarily follows that all projects in the pipeline must be implemented, though. As argued above, there are good fiscal reasons for not proceeding with all projects in the pipeline, especially where they involve substantial borrowing on less concessional terms and are less advanced. If postponing a future project enables the government to borrow funds for reconstruction activities, the net result would not necessarily be a decline in economic activity, but rather a shift in employment/investment from the construction project to another (re)construction activity. Admittedly, all of these decisions are plagued by many uncertainties, which means the government has a very difficult task ahead. Thanks again for your thoughts.

Hi Paul, Thanks so much for the interesting insight provided on the PNG's 2014 Final Budget Outcome. The medium term fiscal strategy has not been adhered to and this is so worrying for PNG. The most challenging part for the government is the huge fiscal deficit which stood at 9% of GDP.

South Korea and the other so-called Asian tigers were garrison states in the Cold War. That has meant that: 1) And most crucially, Taiwan and South Korea had the policy space to allow land redistribution, which seems to be, in my eyes, a crucial first step. If you look at much of Latin America, there is always some huge and unremitting hostility to the idea of effectual land reform. Not only from the great landowners there, but also by international actors. 2) They had easy access to US markets, and were able to insert themselves into the international supply chain. On the broad topic, we should not ignore the challenges of the governing situation. It's much easier to govern smaller entities like Taiwan or Singapore than it is Indonesia. Give small countries with at least rudimentary management capacity huge amounts of money, and they can go all Sim City on you. Nigeria, otoh, does not benefit from the oil wealth as much as the United Arab Emirates, because the managerial tasks are simply overwhelming. Governance has to be improved first, there. Lastly, a lot of how wealth brings about better governance when it comes to Western countries, is simply about internal bargains about less domestic elite predation if the upper middle classes support imperial projects.

t’s not difficult to identify the counterparts of Van Leur’s peddlers in modern-day west New Guinea. But what of his dominant group, concerned not so much with trade as with ‘war, booty and political tribute’? Could Van Leur possibly have foreseen the circumstances of modern Indonesia’s Papuan provinces, rich in tropical timber, fisheries and mineral resources, and governed since 1963 by an administration top-heavy with senior military figures who commit the public resources of the Indonesian state to the cause of private enrichment?

It's a good question Terence! I don't have an answer though. It does make you wonder which countries Australians think should have their aid allocations cut? I thought Indonesia would be a prime target, but perhaps it does show that when it comes to specifics people are more timid? Perhaps people have misconceptions that we give aid to China or other larger economies and that should be reduced? Perhaps they balk more at the idea of multilateral aid (i.e. to the UN) rather than aid Australia delivers itself bilaterally? Perhaps the frequent trips that Australians make to SE Asia, including Indonesia (particularly Bali), means there is more support for aid to those countries? There's so many questions! The Australian public seems rather fickle, yet this survey seems to show they are much less retaliatory than some of the media coverage in recent weeks would have you think. I guess it does provide some further backing to previous surveys showing that Australians <a href="https://devpolicy.org/in-brief/75-of-australians-think-poverty-reduction-most-important-for-aid-lowy-poll-20140604/" rel="nofollow">think aid should be predominantly about poverty alleviation</a> rather than foreign policy objectives.

Thanks Ashlee, Here's a puzzle: does this mean, given that it appears Australians are somewhat supportive of aid cuts more generally, that they want Indonesia spared at the expense of the rest of the world, or does the finding suggest that Australians are supportive of cuts in the most general sense, but the moment they are confronted with specifics they baulk? Terence

Hello, Given that the majority of economic growth in 2014 was due, almost exclusively to construction and projects funded by development partners, I would suggest that delays to pipeline projects must be avoided. The ADB is forecasting a contraction, but its figures are based on the continuation of existing projects. Any scenario where major projects are placed on hold or stopped altogether would then result in a much greater domestic contraction than currently predicted.The generation of economic activity that results from major projects must not be underestimated for the long-term good of the Vanuatu economy and is in the interests of everybody. Whether good or bad, tourism still makes up a massive slice of GDP (or exports depending upon how its measured). The research clearly shows that a decline in tourism is largely due to declining infrastructure and major projects such as the Vanuatu Tourism Infrastructure Project and the Port Vila Urban Development Project must proceed at full pace to recover tourist numbers and provide employment and stimulate commercial activity. In addition to these projects, the Vanuatu Interisland Shipping Support Project must not be further delayed as this project shines above all the others in the analysis for improved domestic and export growth. The reasoning behind all of these projects is solid, so the decision to divert any funds or activities from these critical projects needs to be seriously measured against the longer term outcomes. Politically, its a no-win scenario but I believe that a larger vision is required to determine the greater good. I'm hoping that donor groups also support this view.

Anyone who does analysis or predictions based on the World Bank's $1.25 2005 PPP line inherits all of the flaws that go into that measure. One question is whether the line as such is drawn at a plausible level. That is, does it makes sense to say that a person on $1.26 2005 PPP is out of extreme poverty. It does not. One way to see this is to understand the method for setting the line. The World Bank simply averages the poverty lines of the world's poorest countries. Another way to see this is to see what development outcome are like at the poverty line. David Woodward's work on this problem is the best out there: http://www.neweconomics.org/publications/entry/how-poor-is-poor . A second question is what goes into making conversions between years and across currencies. Currently, the prices of all goods consumed are used to adjust for inflation and to convert to the base currency. This implausibly makes some goods that are totally out of the reach of poor people, such as flat screen tvs, relevant to determining poverty levels. It also thereby under-weights the effect price changes for goods which make up a larger portion of the budgets of the worst off, such as basic foodstuffs.