[SCMP Column] Resource Curse

April 30, 2016

If you want evidence of the “commodities curse”, look no further than Port Moresby, the raggle-taggle capital of Papua New Guinea.
Of course, the curse is not PNG’s problem alone – the global collapse in price of so many key commodities is creating wrenching challenges in economies ranging from Venezuela, Peru and Brazil to Mozambique, Indonesia and Russia – but PNG lays out the challenges in stark and basic terms.

After a week in Port Moresby for meetings of the APEC Business Advisory Council, two sentiments sum up the mood of the local business community: they are putting on a brave face, and they are praying for the pain to end soon.

For most of our lifetimes, Papua New Guinea has lived at the primitive and exotic margins of most of our consciousness. With a population of barely 8 million people, it is the mountain forest home to more than 1000 tribes and over 800 distinct tribal languages. Until not too long ago, most contact between neighbouring tribes was to engage blood-thirsty combat. That legacy lives on, making even Port Moresby a place to stay alert. As a one-time student of social anthropology, this was for me home for studies of exotic communities like the Trobriand Islanders. Its only trade was in the exotic spices that spurred bloody conflict three centuries ago between the trading fleets of Holland, Spain and England. As the poorest of APEC’s 21 member economies, it has always been a keen reminder of the challenges we are lucky not to have in more developed parts of Asia.

But over the past five years, the mood in the country has changed. As US$19 billion of investment by Exxon Mobil has poured in to access and export natural gas, so funds have suddenly become available for infrastructure, schools, hospitals and other basic infrastructure that many luckier economies take for granted. But then oil and gas prices crashed in the summer of 2014, at a time when the government had budgets based on oil prices at $90 a barrel. Today government has spending plans based on the hope of oil prices at $52. As revenues have slumped by more than 20%, so government spending has been slashed from 30% of GDP to 23% of GDP. Spending on schools has been cut by 23%, and on health by 40%. It is difficult to be sure how reliably civil servants or police are being paid. The budget deficit in 2015 exploded to around US$1 billion.

As if the oil price collapse was not enough, droughts linked with El Nino have savaged the farm sector, including the remote subsistence tribal farmers that populate most of the country’s impenetrable mountain interior. The exact scale of this impact is not clearly known.
From being one of the region’s fastest growing economies – the Exxon Mobil investments lifted annual growth above 13% a year – growth has slumped to between 2-3%. At least it has stayed positive. But as a result of this savage reversal, efforts to raise US$1 billion in the international bond markets had to be abandoned late last year. Now it is seeking US$300m emergency lending from the International Finance Corporation to help service debts which amount to 10% of government spending.

PNG’s pain is a pain being similarly felt across those all parts of the world that rely on the export of raw materials, most painfully oil and gas. Countries ranging from Mozambique, Nigeria and Kazakhstan to Brazil, Venezuela and Peru are reporting similar – and in some cases more severe challenges – as commodity prices languish.

In nearby Indonesia, growth has crashed to just 5%, and the reforming government of President Joko Widodo faces similarly haunting challenges. Prices have not just collapsed for natural gas, but also for key export crops like palm oil and rubber. Provinces like Sumatra and Kalimantan, where so many mines and plantations are based, are struggling to keep GDP growth positive. In Peru, this year’s host for APEC with hotly-contested presidential elections currently in progress, exports of copper and other key metals have slumped by over 14% in value terms. More brave faces. More prayers for early recovery.

But of course, the clearest lesson is that heavily reliance on commodity exports is as much a curse as a boon to any economy. It seems everywhere to lull governments into a false sense of complacency. Where governments build most of their revenues out of taxes on commodity exports (like in Nigeria, Venezuela or Russia), it seems to breed corrupt infrastructure, and when revenues fall, it has a direct and immediate impact on all areas of government spending. It seems to be widely linked with under-developed manufacturing, stifled entrepreneurship, a poorly developed and inefficient services economy, and low levels of economic productivity.

For governments trapped by the “commodities curse”, the lessons are clear: in the long term, you have to diversify – which means unflinching commitment to raising education and skills standards; in the short term, it means trying to diversify the commodities you rely on, and improving the value-added in farm and mineral production. For example, in Papua New Guinea, prices for cocoa, coffee and sugar are all strongly up since 2011 (again because of shortages linked to El Nino). Export earnings for such products have remained mercifully steady.

The other critical long term priority is to build the country’s infrastructure, and to drive structural reforms that simplify regulations, encourage foreign investment and foster the development of efficient and competitive services economies. For economies like PNG, this is particularly important in areas like transport logistics, the internet infrastructure, and financial sector liberalization. But as one senior government official noted at our ABAC meeting: “Every government in the region is strongly committed to structural reform – except between elections.”

Meanwhile, we see lots of brave faces, and hear lots of prayers for early recovery. So it is troubling that such prayers may go unanswered for quite a long time to come.
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