GDP and non-resource GDP

For any country, Gross Domestic Product or GDP is one of the most important economic variables. However, PNG has become over time one of the most resource-dependent economies in the world. For resource-dependent economies, GDP can be a misleading indicator of national economic activity, since a large proportion of the benefits from large resource projects typically flows offshore. Ideally, one would measure Gross National Income (GNI), that is, the economic activity of PNG nationals. However, GNI is no longer reliably measured in PNG. An alternative is to measure non-resource GDP, which is GDP minus the output of the resources sector. The rationale of this is not that the resources sector should be ignored, but rather that its benefits to PNG largely accrue in the stimulus it provides to the non-resource sector via tax and royalty payments.

Our GDP current-price series starts in 1976. It includes total GDP and, from 1980, value added in the resources, agriculture and manufacturing sectors. Non-resource GDP is simply GDP minus value added in the resources sector (the latter we sometimes refer to as ‘resource GDP’). The constant price or real series cover the same variables, measured in 2013 prices, but sectoral data in constant prices is only available from 1983.

The GDP series from 2006 onwards was rebased in 2016 (National Statistical Office [NSO], 2019). The new series puts GDP some 50 per cent bigger in 2006 than in the old series. No explanation was ever provided for this massive increase; a comparison of the old and the new data reveals large increases in mining value added (an increase of 72 per cent in 2006), wholesale and retail trade (186 per cent), transport, storage and construction (172 per cent), finance, real estate and business services (419 per cent), and community social and personal services (135 per cent). Agriculture (which includes forestry and fishing) and construction are virtually unchanged (–2 per cent), and petroleum (–16 per cent), manufacturing (–38 per cent) and utilities (–24 per cent) fall. We have integrated the two series to develop a single series from 1976.

PNG has become increasingly resource dependent over time. The ratio of resource to total GDP increased from around 10 per cent in 1980 to 15 per cent in the late 1980s. Although it fell back to 10 per cent with the closure of the Panguna mine on Bougainville in 1989, it grew over the 1990s with the commencement of oil production and the opening of a number of mines. Subsequently, the ratio has moved up and down with resource prices. Since the commencement of PNG liquefied natural gas (LNG) exports in 2014, the country’s resource dependency has reached an all-time high of 28 per cent in 2018.

Data notes on GDP variables

The figure below shows the share of agriculture, forestry and fishing as well as manufacturing in non-resource GDP, again at current prices. The share of the former rises and that of the latter falls, both mildly. Agriculture includes the production of commodities, the production of crops for domestic sale and subsistence production. The latter two variables are not measured, but rather increased annually in the national accounts in line with population growth, which is surely inaccurate.

The deflators that convert from current- to constant-price GDP are shown below, which, for convenience, sets them all equal to 1 in 1983. The resource deflator lies above the non-resource deflator with the GDP deflator by definition in the middle. The consumer price index (CPI) is also shown. It grows far more quickly, ending 60 per cent above the GDP deflator. As we will see, the choice of deflator is significant when assessing PNG’s economic performance over time.

The separation of the two aggregate indices (CPI and the non-resource deflator) mainly occurs between 1994 and 2004, a period of rapid depreciation. The separation in the 1990s may reflect that, during this period, internationally tradeable goods (such as food) experienced more inflation than non-tradeable goods, which is what one would expect given the real wage flexibility that was evident in the PNG economy from the early 1990s onwards and the high rate of depreciation in that decade. A report from the mid-1990s commented that ‘the recent devaluation of the exchange rate has produced a substantial reduction in real wages’ (AusAID, 1996, p. 41). It is also plausible that the CPI puts a higher weight on tradeable goods than the GDP deflator. For example, government services, which are largely non-tradeable, are an important part of GDP but do not feature in the CPI. This combination of factors would explain why CPI increased more than the GDP deflator in the 1990s.

This discrepancy between the GDP deflator and the CPI index raises the question of which deflator to use when. To get a consistent measure of output over time, we should use the GDP deflator. However, if we want to use GDP as a proxy for average living standards, then we should utilise the CPI index. We indicate in the notes to each relevant figure which deflator is used.

This next table shows real GDP growth from 1977 onwards, using the GDP deflator. Key moments in the country’s economic history are indicated.

Annual real GDP growth (%), 1977 to 2020

The figure below shows GDP per capita and non-resource GDP per capita, using both the relevant GDP deflator and the CPI index. Both variables show an overall positive trend using the GDP and non-resource GDP deflator, respectively, but both show a decline if CPI is used as the deflator. Using the GDP deflators, average growth rates for the period 1983–2019 are 1.1 per cent and 0.7 per cent for GDP and non-resource GDP per capita, respectively; using CPI, annual average growth for the same period is –0.1 per cent and –0.7 per cent, respectively. Whether PNG is better off today in terms of GDP or non-resource GDP per capita depends most of all on an assessment of inflation in the 1990s. Using the non-resource GDP deflator, PNG ended the decade with a non-resource GDP per capita 10 per cent higher than it started it. Using the CPI, PNG ended that period about 15 per cent worse off by the same measure.

The trajectory of non-resource GDP per capita can be used to demarcate four distinct periods in PNG’s post-independence economic history. The first to 1988 is a period of stability but also stagnation (with average growth from 1983 to 1988 of -1.3 per cent per annum). The second, from 1989 to 2003, is a period of economic instability – with interspersed periods of positive and negative growth cancelling themselves out (average of –0.0 per cent). The third is a long boom from 2004 to 2013, briefly interrupted by the Global Financial Crisis (average of 2.8 per cent). Finally, the current period from 2014 is one of negative per capita growth, a bust following the boom (average of –1.1 per cent).

Data notes on GDP variables

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