The future of foreign aid in PNG after 25 years of successes or failures?

The future of foreign aid in PNG after 25 years of successes or failures?

Christopher Taylor Hnanguie
Christopher Taylor Hnanguie

October 16th, 2002, 3:00 am #1

THE FUTURE OF FOREIGN AID IN PAPUA NEW GUINEA
AFTER 25 YEARS OF SUCCESSES OR FAILURES?

By

Christopher Taylor Hnanguie



INTRODUCTION

After over 25 years of political independence, Papua New Guinea (PNG) continues to receive a high volume of foreign aid for her socioeconomic development. The purposes and worth of that spending remain issues of debate by observers. The debate is intensified by a rather disappointing socioeconomic development record since 1975 and has led donors to call for its elimination or wholesale reform. But is aid to blame for the disappointing record? How effective has foreign aid been in PNG? What would be the future of foreign aid in PNG after 25 years of experiences? Could it be improved or should it be done away with?

This chapter attempts to shed light on some of these profound questions and especially with regard to the question on ‘the future of foreign aid in PNG’. It begins by examining the nature and flow of foreign aid so as to establish the context for analysing the future of foreign aid in PNG. It then attempts a cursory evaluation of the successes and failures of aid in the country over the last 25 years and draws some conclusive recommendations on its future in PNG. The article is an mere overview of this multifacet subject, complicated by limited reliable data. Hence, it is based largely on the experiences of the author on the subject.

FOREIGN AID TO PAPUA NEW GUINEA

Official Development Assistance (ODA), commonly known as development assistance/cooperation or foreign aid is provided by member countries of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). Foreign aid is provided for various reasons including that of the donor county's strategic, economic, political and ideological priorities and historical or cultural links. For aid receiving countries like PNG, aid is an important source of capital to complement the shortages of domestic resources necessary for social and economic development. It has at times been a determining factor in their development processes.

The main aid donors to PNG are: Japan, Australia, Germany, USA, China, New Zealand, Korea, the World Bank group, the Asian Development Bank, the European Union, the United Nations systems, International Fund for Agricultural Development, Commonwealth Fund for Technical Cooperation and Kuwait Development Fund. PNG receives the following types of aid: (i) Direct Budgetary Support Grants; (ii) Program or Project Grants; (iii) Micro-project Grants; (iv) Concessional Loans; (v) Technical Assistance; and (vi) Ad-Hoc Aid. All these types of aid have their own terms and conditions.

Papua New Guinea’s foreign aid policy states that all aid should be directed towards preparation and implementation of priority programs and projects of the Government. In the absence of any strategic national development plans, the Government’s Public Investment Program guided by the Medium Term Development Strategy (1997 – 2002) continues to be the main vehicle to channel foreign aid towards priority programs. The net disbursements from all sources to PNG increased in 2000 to K520 million from K280 million in 1975, which is an increase of over 50 percent. It peaked in the early 1990s and declined in absolute terms in 1999. The net disbursements from DAC countries to PNG have grown at an average rate of 3 percent per annum between 1975 and 2000. Figure 1 shows the average flow of foreign aid over a five-year period between 1975 and 2000 and projections for 2005. The steady growth of foreign aid to PNG has and will depend on the continued commitments by the donors and improvements to Papua New Guinea’s capacity to efficiently implement projects and programs.

Figure 1: Average Foreign Aid Disbursement to PNG (Million Kina in nominal values)


Source: Government of Papua New Guinea Budget books 1980, 1985, 1990, 1995, 2000 and 2001.
Notes : The substantial increase in bilateral aid is due to the shift from Australian budget support to project aid.
Projections for 2005 is based on annual averages and macroeconomic forecasts.


THE FUTURE OF FOREIGN AID IN PAPUA NEW GUINEA

One of the common arguments posed by Papua New Guinea’s donors is that foreign aid to the country is no longer necessary because of the dramatic increase in private capital flows from the developed countries to the developing world. In this argument, aid was justified until recently to palliate the failure of private capital to flow to the developing world. In 2000 the International Monetary Fund (IMF) reported that net private capital flows to developing countries totaled some US$120 billion, up from an annual average of US$3 billion as recently as 1990. Private flows are now much more important than public aid flows (which in 2000 totaled just under US$60 billion). In this situation, these donors assert that, why provide aid at all to PNG? Does it not simply allow incumbent governments to maintain inefficient economic policies?

These arguments hold some truth, especially for middle income and upper middle income countries. It is hard to justify aid to any country in which counter-productive policies are preventing economic growth, and economic rationale alone clearly does not justify providing large amounts of aid to relatively rich countries that already receive significant private flows. However, this argument is too generic and overemphasized to apply to PNG and there are two good reasons for this.

First is that, private capital has been almost entirely directed to either extremely large economies like China, or middle income countries like Thailand. Private capital flows are heavily concentrated in a few countries, and some flows are volatile. A surge in the late 1970s receded after the onset of the debt crisis in 1982. Another big rush occurred in the mid-1990s, but with the financial crises rocking East Asia in 1997 foreign investment dropped sharply. The flow of private money to the developing world fell by $80 billion between 1996 and 2000. In any event, private flows continue to go to a small number of (mostly) middle-income countries. In 2000, 26 countries received 95 percent of private investment; the rest went to the other 140 developing countries.

In a typical lower middle-income country like PNG, foreign aid remains far and away the primary source of external finance. With the exception of the mining and petroleum sector, the country has not been able to attract significant private capital in recent years. Perhaps, as the country emerges from its difficult economic mismanagement, its vast economic potential and resources would attract significant private capital, and so proponents could then push for elimination of foreign aid. But that maybe for sometime yet. Meantime, aid remains one of Papua New Guinea’s major revenue flows, providing about a quarter or comprising about 30 percent of total Government revenue every year. Table 1 below shows the composition of aid in Papua New Guinea’s annual budgets between 1975 and 2000. A significant portion of grant aid is not reflected in Table 1, as it is not provided through the Government’s budgetary system. Hence, for the foreseeable future, PNG will rely on public money for her external capital requirements. At some instances, it is true, private capital has been driven away by certain governmental practices and counter-productive economic policies and the law and order situation.






Table 1: Average Composition of Foreign Aid in Annual Budgets, 1975 – 2000
(Million Kina in nominal values)

Source 1975 - 1979 1980 - 1984 1985 - 1989 1990 - 1994 1995 - 1999 2000 - 2004*

I. Domestic
Internal Revenue 400 520 650 760 1,050 1,700
Domestic Borrowing 100 90 110 160 210 315
Subtotal 500 610 760 920 1,260 2,015
II. Foreign Aid**
Australian Budget Support 180 220 200 190 210 0
Project Grants na na 3 11 175 430
Concessional Borrowing (Loans) 50 60 50 120 130 150
Commercial Borrowing (Loans) 10 20 50 290 210 180
Subtotal 240 300 303 611 725 760
Total Revenue 740 910 1,063 1,531 1,985 2,775

Foreign Aid as % of
Total Revenue 32% 33% 29% 40% 37% 27%
Australian Budget Support as %
of Total Revenue 24% 24% 19% 12% 11% 0%
Project Grants as % of
Total Revenue na na .28% .72% 9% 16%
Concessional Loans as % of
of Total Revenue 7% 7% 5% 8% 7% 5%
Commercial Loans as % of
Total Revenue 1% 2% 5% 19% 11% 7%

Source : Estimates of Revenue and Expenditure, Government of Papua New Guinea Budget books 1980, 1985, 1990, 1995 and 2001.
Notes : Figures refer to average for the period; * Projections based on annual averages and macroeconomic forecasts; </i> A significant
portion of grant aid is not reflected, as it is not provided through the Government’s budgetary system.

However, the Morauta Government in 2001 has implemented difficult reform programs amidst strong domestic opposition under the guidance of the World Bank and the IMF and can now boast of market-friendly economic policies, and yet investment is been kept away by many of the characteristic features of a lower middle-income economy: small consumer markets, poor physical and communications infrastructure, an ill-trained labor force, law and order and uncertainty about future stability. Nor has PNG benefited substantially from the dramatic expansion of trade generated by trade liberalization, most recently under the aegis of the World Trade Organization. Papua New Guinea's share of trade continues to decline and was insignificant in 2000. Indeed, the evidence suggests that PNG may prove to be a big loser, with its share of trade further declining if present trends continue.

Second, Papua New Guinea's development needs remain enormous. Close to two thirds of the country’s population continues to live below the poverty line, as measured by the World Bank. On average, 90 percent of the rural population lives below the poverty line. Despite the progress made over the last 25 years in the areas of health and education, PNG remains behind other Asia-Pacific countries and further back in the world. Only 60 percent of school age children are in primary school compared with full enrollment in most of the countries in Asia-Pacific. Infant mortality has been cut by a third in the last 25 years but, at some 90 per thousand, remain more than twice-prevailing levels in Asia-Pacific.

Moreover, partially because of the political instability and economic mismanagement, and partially because of a typically small economy trapped by its own poverty, PNG is simply not capable of meeting all of its development needs from its own resources. The Wingti and Chan governments, for example, routinely devoted close to a quarter of their total expenditures on education and yet PNG still has an adult literacy rate of less than 55 percent, while only 75 percent of school age children are in primary school. In many provinces, the density of the road network is less than five percent of the levels in Australia and other developed Asia-Pacific economies, yet the cost of maintaining existing roads is larger than the country's total transportation budget. The evidence overwhelmingly suggests that the private sector will not provide much help for overcoming these problems, which will remain the responsibility of the Government for some time yet.

With economic growth, in time PNG will be able to finance these developmental expenditures out of her own revenues. Thailand, once one of Asia's largest per capita recipients of aid, sustained one of the fastest growth rates in the developing world during the 1970s and can today finance nearly all of its ambitious development programs from its own funds. The country is being graduated out of aid by most donors, including the ADB. Thailand can today attract private capital on its own. But for most Asian and Pacific countries including PNG, foreign aid remains necessary if they are to break out of poverty.

Successes of Foreign Aid in Papua New Guinea

Given the relatively large volume of foreign aid since 1975, how effective has this aid been in the development efforts of PNG? The answer depends on what aid was intended to achieve. As a tool of transferring resources, the results have been mixed. As a project funding gap filler, the answer would be positive. When aid was primarily intended to bridge the gap between the country’s investment target and domestic savings, it did help to bridge that gap, in gross terms. An externally derived resource, aid also bridged the foreign exchange gap. Alongside many disappointments, aid has financed many development projects and programs which achieved very high internal rates of return, including schools, clinics, health posts, bridges, roads, capacity building and training programs.

The egregious failures of foreign aid usually get the headlines. Indeed, much aid has been ineffectual in economic terms, not least because it has often been given for reasons that had little to do with economic development. During much of the post-independence period, PNG was the leading recipient of Australian aid; in retrospect, it should not be surprising that aid so obviously given for historical reasons would prove ineffective at promoting economic growth and poverty alleviation. Fortunately, this type of aid appears to be gradually phasing out. In any event, the egregious cases tend to obscure the fact that aid to PNG is behind many important achievements over the past two decades. Indeed, the results of many individual aid efforts are unmistakable across the country: roads and bridges have been constructed, schools and hospitals built, institutions established, and thousands of Papua New Guineans sent abroad for scientific and technical training.

In the health sector, aid can claim much of the credit not only for infrastructures such as the Port Moresby General Hospital, but for the eradication of endemic diseases such as smallpox and polio. The dramatic decline in fertility in some provinces can be directly linked to the population programs of donors, notably the United Nations. The critical battle now being waged against AIDS is almost entirely funded by foreign aid. Characteristically, aid is not only helping to finance the establishment of new health institutions, the training of personnel and the development of public awareness campaigns to spearhead this battle, but it was also at the forefront of the initial effort to convince sometimes reticent incumbent governments of the very need for public action.

In the agricultural sector, aid was largely instrumental in establishing the network of research and extension programs that plays an important role in the widespread development and dissemination of high yield tree crop varieties, now a key component of the national tree crop system. In the transport and infrastructure sector, aid has contributed immensely to building or upgrading major roads and bridges including portions of the Hiritano and the Okuk highways. Many of the key sectors in the country have experienced the use of foreign aid. From agriculture, livestock, fishery, education, health, water supplies, finances, transport and socioeconomic infrastructures to institutional capacity building and training. Thanks in part to aid the social impact of the 1998 tsunami in Aitape was not too severe; Kokopo sprouted from the volcanic eruptions in 1996 from the reallocation of aid funds; Bougainville is being rebuilt from the ruins of civil war in 2000 from donor assistance.

There is thus simply no denying that aid can be credited for much of ‘what works’ in PNG. At the same time, aid has undeniably been less successful at promoting sustained economic growth across the country. Many of aid's achievements during the 1980s and 1990s were negated by the counter-productive economic policies of successive governments. Since the early 1990s, the donors, led in particular by the World Bank, have been assisting successive governments to undertake economic policy reform, in order to reduce heavy-handed government intervention in the economy and create policies that are friendly to the private sector. Progress on reform has been slow and halting. Powerful interests have mobilized to defend the old policies, despite their dismal economic legacy. Nonetheless, after almost three decades of effort, enormous progress has been made on policy reform. Aid has helped convinced the Government to implement realistic exchange rates, improved monetary policies and widespread deregulation and price liberalization. Much remains to be done, notably in the areas of privatization and institutional reform, but the donor-led reform process has helped transform the policy environment in PNG.

Failures of Foreign Aid in Papua New Guinea

Over the 25-year period, even those seemingly positive achievements started to be put to test. Indeed, resorting to project rehabilitation and structural adjustment programs in the 1990s is an adequate testimony to this conclusion. With the onset of structural adjustments, the goals of aid became a lot more blurred and the effectiveness of aid much more complicated to evaluate.

Foreign aid in PNG between 1975 and 2000 has seen more failures than successes. The Asian Development Bank’s 1998 Country Assistance Plan reported that of the 16 ADB assisted projects that have been evaluated only five were rated as generally successful. The World Bank summarized the performance of the 30 projects it undertook since it began operation in PNG in 1968 and concluded that projects evaluated between 1968 and 1978 had a failure rate of 22 percent. But, the failure rate of projects completed after 1978 rose to a disappointing 60 percent. The large failure rate of aid from these two multilateral donors is largely attributed to the lack of counterpart funding and economic mismanagement by the Government.

A number of factors have undermined aid effectiveness in PNG. First, aid was not effective when the principle objectives of the donor were not Papua New Guinea’s economic development. Aid which was motivated by commercial or foreign policy motives inside the donor country have often not served well the interest of the local economy. The problem in each case is that non-economic motives have led to aid activities that were not tailored to the specific needs and capacities of PNG. Similarly, it is evident that the socioeconomic and political environments in PNG have critically affected aid effectiveness. Aid has been successful in an environment of macro-economic stability, characterized by low inflation, predictable and sustainable policies, and secure property rights. The quality of the economic environment depended largely on the policies and stability of successive governments.

The ability of the Government to integrate aid into its own coherent development strategy and management has been critical to the success of aid. Donors can never fully compensate for the absence of an effective government with an appropriate budgeting and planning process. Most of the recurring problems of aid in PNG have their origin in breakdowns in these governmental functions. Thus, for example, the common failure to sustain projects after the end of donor resources is typically due to the failure to budget for recurrent expenditures in advance. Similarly, the failure of aid coordination, leading to overlapping, contradictory, and redundant aid activities, is typically a consequence of the failure of the Government to integrate these activities within coherent national development budgeting and planning exercises.

Several factors have particularly affected the ability of successive governments to adequately manage aid resources. First, the low capacities of many national institutions account for the majority of difficulties during the project cycle. While the level of education and training available in the civil service has improved over the years, the ability of public bodies to implement aid projects effectively remains very limited. These abilities vary enormously across the country, but in general, most national public organizations especially government departments are rarely capable of implementing more than simple administrative tasks; typically, they possess limited analytical capacity to design or critically evaluate aid activities. As a result, aid projects that did not involve complex procedures and intensive administrative oversight have been less taxing of the Government's limited managerial capacities and thus more successful. Similarly, aid activities have been successful in programs or projects where there were a few clear objectives that were easily assimilated by Government officials and enjoyed the support and commitment of the top leadership.

Second, high administrative turnover and economic mismanagement in PNG has had a devastating impact on Government capacity and thus on aid effectiveness. Economic mismanagement has pushed successive governments to reduce various recurrent expenditures and over time led to reduced governmental effectiveness. For example, public service salaries is less than a tenth of its level of 20 years ago in real terms, pulled down by the combination of sustained high inflation and the Government's almost permanent fiscal crunch. At such wage levels, staff turnover is extremely high, particularly at skilled positions, while corruption, nepotism, moonlighting, and absenteeism is rife. This has resulted in the Government’s diminishing capacity to manage its aid resources effectively (Hnanguie, 1996).

In addition, the chronic political infighting and instability over the years have institutionalized a kind of crisis management, in which long-term development planning and careful budgeting are replaced by ad hoc gap filling, continuous negotiation with external creditors and the increased politicization of revenue allocation. Over time, sound management practices are eroded and public corruption increases. Continual under-spending on maintenance and various other recurrent expenditures eventually prevents public organizations from functioning effectively. Starved of resources and left to their own devices, individual public managers or politicians lobby on their own for foreign aid to meet pressing emergency needs rather than to address longer-term development problems.

Third, certain donor practices have contributed to weakening government development management capacities. The proliferation of donors and donor projects taxes existing Government capacities. There are about 20 official donors and over 60 distinct projects. These totals do not even include non-governmental organizations (NGO) aid, often fragmented over dozens of small organizations. About 15 NGOs are officially registered with the Government, including several international NGOs. While donors have increased informal coordination at the country level, little progress has been achieved on consolidating or harmonizing project accounting, procurement, or evaluation procedures.

Pressed by the need to achieve quick results, donor agencies have often sought alternatives to the arduous and long-term task of developing the central government's management capacities. They have for example exercised control over the identification, design, and evaluation of projects to compensate for the limited ability of the Government to undertake these critical functions. Many aid projects continue to be designed with little or no local input. Donors have fielded long-term expatriate experts to man projects, rather than rely on local expertise. As a result, there are still between 2,000 and 5,000 foreign experts in PNG, even though their salaries are often equivalent to those of several hundred civil servants. More pernicious yet, donors have too often tried to bypass central government institutions entirely, first by setting up stand-alone project structures in the 1980s and 1990s, and today increasingly by turning to civil society and the NGO sector to implement their projects.

These donor practices have undermined capacity development, because Government institutions are often marginalized in the aid process. For example, only two percent of all projects in the mainly donor-funded Public Investment Program have ever been formally evaluated by the Government. Valuable opportunities to gain experience designing and evaluating projects in order to ‘learn by doing’ are lost; more seriously, such practices erode the Government's sense of ‘ownership’ over projects, and lessen the likelihood that the Government will develop a long-term financial commitment to the project. The higher levels of aid effectiveness can be explained by the Government's insistence on integrating all aid within its own budgeting and planning and where the Government was willing to turn down aid resources that did not fit into its own development priorities.

The plethora of organizations involved in aid activities defies adequate coordination by the Government. In the health sector alone, the official donors are currently funding no fewer than five stand-alone projects outside of the Department of Health. Often, these independent structures are more efficient than the Government at delivering short-term results; they may be cheaper, closer to the population, and less bureaucratic. But bypassing the central government leads to predictable results in the longer term: projects are less likely to be sustained after the end of donor support, there is a haphazard and fragmented quality to policy implementation and, starved of resources, government institutions suffer further decline in skills and capacity. Empirical evidence suggests that NGOs can be extremely cost-effective service providers, but that it is a mistake to believe they can replace the central government across a wide array of public goods.

CONCLUSIONS AND RECOMMENDATIONS

Papua New Guinea continues to face many economic problems, including mounting external debt burden, declining exports revenue, economic stagnation, and Government dominance of key economic activities. The difficulties facing the majority of Papua New Guineans are enormous. Among other things, they lack access to many services crucial to a quality of life. For instance, 4 million people - more than 85 percent of the national population - have no access to electricity, about 3.5 million do not have proper sanitation facilities, and some 3 million have limited access to basic services (Hnanguie, 1997: 7).

Foreign aid, although helpful particularly for the poorer provinces, is not adequate in accelerating Papua New Guinea’s economic development. This kind of international resource flow is largely governed by factors outside Papua New Guinea’s control; it is highly fluctuating; it is inadequate; and it is often being mismanaged. It should also be observed that much of the foreign aid is directed towards the ordinary activities of the public sector and/or for humanitarian purposes. Little, if any, of the aid is utilized for the development of the private sector, or for the establishment of institutions for entrepreunership support. In addition, aid is mainly ‘tied’ in that it is allocated by donor countries to specific sector, project or purpose in the country. Put differently, PNG is normally incapable of influencing the allocation of much of the financing among her developmental programs, or among other critical needs. The shift in the Australian aid from budget support to project support for instance, has already shown signs of the Government losing all control over the allocation and utilization of the only aid share it once had direct influence.

Recommendations for Improving Aid Effectiveness in Future

Given the successes and failures of foreign aid over the past 25 years, let us focus on several measures that could help to improve the capacity of the Government to manage its aid resources effectively in future. First, donors have to start taking this issue more seriously and stop trying to bypass the central government. The widespread belief of both free-market economists and NGOs that government is the problem and not part of the solution has become a self-fulfilling prophecy. In fact, far from undermining the private sector, a limited but effective government is needed to enable a vibrant civil society and strong business sector. It is the best means to foster both economic growth and poverty alleviation. Donors must devote greater attention and resources to help build the capacity of the Government to effectively manage aid, even as they encourage the central government to retrench from nonessential functions.

This entails more support to the policy, planning, and evaluation divisions of key Government departments including the Department of Finance & Planning, as well as to central budgeting activities. Perhaps more important, it entails a greater respect for the integrity of the national budgeting and investment planning processes of government during the aid cycle. Donors should assist the Government to develop her five-year rolling development plans and medium term investment strategies to set the road map and increase the coherence of government development efforts. Basing their aid on the Medium Term Development Strategy (MTDS) has seen a lack of focus and coherence in their operations. Donors should ensure that aid activities are explicitly integrated into these processes, so that the long-term recurrent expenditure implications of aid are formally planned, budgeted and accounted for.

Second, donors should give preferences to a government that demonstrates commitment to improve its management of aid. Current efforts to promote performance-based allocation of aid should be continued and deepened. It is important to establish clear incentives to the Government to improve its capacity to manage aid resources. With poorly performing governments, foreign aid should be refocused onto the non-governmental sector and the meeting of basic needs and human capital investments.

In this context, donors must allow the Government to play a larger role in the design, management, and evaluation of aid activities. Rather than ‘pushing’ aid and seeking short-term results, donors should rather help the Government formulate its own preferences and act upon them, even if this means lower aid levels in the short run. Encouraging the decentralization process, privatization, and the growth of civil society are all appropriate and desirable, but donors should not view them as substitutes for central government institutions.

Third, the World Bank and IMF's economic stabilization and adjustment efforts should be supported. Achieving macro-economic stability is a prerequisite for the effective use of public resources, including foreign aid. Progress on such issues as poverty reduction and child welfare will not be sustained in the absence of steady growth and healthy public finances. There is thus no alternative to the sometimes quite painful reforms advocated by the international financial institutions, which have gained valuable experience at reform implementation. At the same time, more attention should be devoted to enhancing local capacities in provinces undergoing economic reform to ensure that they are not eroded by the fiscal crisis. Wholesale reform of the public service may be prohibitively expensive in the short run, but the donors can and should begin to upgrade key parts of the civil service right away, most notably those involved in economic policymaking like the Department of Finance & Planning.

Fourth, donor coordination efforts should be refocused. It is a peculiar irony of aid today that donors do not coordinate their individual aid coordination efforts. Groups like the Development Assistance Committee, Consultative Group Meetings or the National Development Forums are useful avenues for donors to engage in dialogue with each other and to harmonize their policies and procedures. They should be reinforced. At the country level, however, the Government should be empowered to coordinate all aid activities and donor-directed forums such as the Roundtables or the Consultative Group meetings need to be progressively downgraded.

The donors can, however, undertake a number of measures at the country level to facilitate Government coordination efforts. For instance, donors should consider specialization in a few sectoral and sub-sectoral areas, in which they have a comparative advantage. The resulting decrease in the number of donors present in any one area would facilitate governmental coordination and thus increase effectiveness. Similarly, the World Bank or the ADB should be identified as a “lead donor” and charged with conducting the policy dialogue with the Government and establishing the broad policy framework within which other donors would plan their activities. This would free the Government from the current burden of engaging in policy dialogue with some 20 different donors. Given their unparalleled policy analysis capacities, the World Bank or the ADB are uniquely qualified to play this role.


<i>Selected Bibliography and References

Asian Development Bank, June 1998, Country Assistance Plan for Papua New Guinea, ADB Manila.

Asian Development Bank, Asian Development Outlook, 1999 and 2000, ADB Manila.

Department of Finance & Planning, Annual Budget books (1980, 1985, 1990, 1995, 2000 and 2001), Government of Papua New Guinea.

Foreign Aid Management Review of Papua New Guinea, 1998, ADB TA No.3011 – PNG, ADB Manila and Government of Papua New Guinea.

Hnanguie, Christopher T., 2001, “Defining Indicators for Measuring Development Impact”, Country Strategy and Plans for Bangladesh, Nepal and Sri Lanka, PW1, ADB Manila.

Hnanguie, Christopher T., 2000, “Economic and Financial Analyses of Capital Investments: Strategies and Techniques of International Financial Institutions and Multinational Corporations”, Master in Business Economics, Thesis, University of Asia - Pacific.

Hnanguie, Christopher T., 1997, “The Impact of Foreign Aid on Papua New Guinea’s Economic Development,” Economic Briefing Papers, Department of Finance & Planning, Government of Papua New Guinea.

Hnanguie, Christopher T., 1997, “Questioning Development Impact: Papua New Guinea Why So Rich Yet So Poor?” Discussion Papers, Department of Finance & Planning, Government of Papua New Guinea.

Hnanguie, Christopher T., 1992, “The Political Economy of Foreign Aid in Economic Development,” Master in International Political Economy, Thesis, Victoria University.

International Monetary Fund, 2000, World Economic and Financial Surveys, Washington DC.

National Planning Office, 1997, Medium Term Development Strategy: A Bridge into the 21st Century, Government of Papua New Guinea.

“Moving the Poverty Agenda Forward”, 2001, ADB Newsletter, ADB Manila.

Office of International Development Assistance, 1994, Report on Foreign Aid 1993, Department of Finance & Planning, Government of Papua New Guinea.

World Bank, 1998, PNG Country Portfolio Performance Review, Washington DC.



The Author: Christopher Taylor Hnanguie, a Programs Economist (Macroeconomist) with the Asian Development Bank (ADB).



Last edited by wantokz1 on October 18th, 2002, 8:48 am, edited 1 time in total.
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anon
anon

October 16th, 2002, 3:40 am #2

for whom have you written this report? is this report being submitted to the png government and for the organizations that provide aid for PNG. Will this report have a impact on png government and how aid will be used in the future.
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Chris
Chris

October 16th, 2002, 4:04 am #3



Thankyou for the inquiry on the article "The Future of Foreign Aid in PNG: After 25 Years of Success or Failures?". To address your query, the article was written as a chapter to a book soon to be published by the ANU. The objective of the book is to gauge views of young PNGans on how they perceive various aspects of development in PNG - I was asked to write a chapter on foreign aid. As it is a mere article it is not directed at the official circles either in the PNG Govt or concerned aid donors, but hopefully it will be read by these parties when the book is published in November 2002. I hope the brief review of the subject can be read by decision makers for a better future aid management in PNG.

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anon.
anon.

October 16th, 2002, 5:43 am #4

thank you for your reply and I certainly hope the review on the subject can be read by decision makers for a better future aid management in PNG. You say "brief" however the review is very complex and I will have to read it many times to absorb all the information. all the best with your future.

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c.w
c.w

October 24th, 2002, 11:00 pm #5

THE FUTURE OF FOREIGN AID IN PAPUA NEW GUINEA
AFTER 25 YEARS OF SUCCESSES OR FAILURES?

By

Christopher Taylor Hnanguie



INTRODUCTION

After over 25 years of political independence, Papua New Guinea (PNG) continues to receive a high volume of foreign aid for her socioeconomic development. The purposes and worth of that spending remain issues of debate by observers. The debate is intensified by a rather disappointing socioeconomic development record since 1975 and has led donors to call for its elimination or wholesale reform. But is aid to blame for the disappointing record? How effective has foreign aid been in PNG? What would be the future of foreign aid in PNG after 25 years of experiences? Could it be improved or should it be done away with?

This chapter attempts to shed light on some of these profound questions and especially with regard to the question on ‘the future of foreign aid in PNG’. It begins by examining the nature and flow of foreign aid so as to establish the context for analysing the future of foreign aid in PNG. It then attempts a cursory evaluation of the successes and failures of aid in the country over the last 25 years and draws some conclusive recommendations on its future in PNG. The article is an mere overview of this multifacet subject, complicated by limited reliable data. Hence, it is based largely on the experiences of the author on the subject.

FOREIGN AID TO PAPUA NEW GUINEA

Official Development Assistance (ODA), commonly known as development assistance/cooperation or foreign aid is provided by member countries of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). Foreign aid is provided for various reasons including that of the donor county's strategic, economic, political and ideological priorities and historical or cultural links. For aid receiving countries like PNG, aid is an important source of capital to complement the shortages of domestic resources necessary for social and economic development. It has at times been a determining factor in their development processes.

The main aid donors to PNG are: Japan, Australia, Germany, USA, China, New Zealand, Korea, the World Bank group, the Asian Development Bank, the European Union, the United Nations systems, International Fund for Agricultural Development, Commonwealth Fund for Technical Cooperation and Kuwait Development Fund. PNG receives the following types of aid: (i) Direct Budgetary Support Grants; (ii) Program or Project Grants; (iii) Micro-project Grants; (iv) Concessional Loans; (v) Technical Assistance; and (vi) Ad-Hoc Aid. All these types of aid have their own terms and conditions.

Papua New Guinea’s foreign aid policy states that all aid should be directed towards preparation and implementation of priority programs and projects of the Government. In the absence of any strategic national development plans, the Government’s Public Investment Program guided by the Medium Term Development Strategy (1997 – 2002) continues to be the main vehicle to channel foreign aid towards priority programs. The net disbursements from all sources to PNG increased in 2000 to K520 million from K280 million in 1975, which is an increase of over 50 percent. It peaked in the early 1990s and declined in absolute terms in 1999. The net disbursements from DAC countries to PNG have grown at an average rate of 3 percent per annum between 1975 and 2000. Figure 1 shows the average flow of foreign aid over a five-year period between 1975 and 2000 and projections for 2005. The steady growth of foreign aid to PNG has and will depend on the continued commitments by the donors and improvements to Papua New Guinea’s capacity to efficiently implement projects and programs.

Figure 1: Average Foreign Aid Disbursement to PNG (Million Kina in nominal values)


Source: Government of Papua New Guinea Budget books 1980, 1985, 1990, 1995, 2000 and 2001.
Notes : The substantial increase in bilateral aid is due to the shift from Australian budget support to project aid.
Projections for 2005 is based on annual averages and macroeconomic forecasts.


THE FUTURE OF FOREIGN AID IN PAPUA NEW GUINEA

One of the common arguments posed by Papua New Guinea’s donors is that foreign aid to the country is no longer necessary because of the dramatic increase in private capital flows from the developed countries to the developing world. In this argument, aid was justified until recently to palliate the failure of private capital to flow to the developing world. In 2000 the International Monetary Fund (IMF) reported that net private capital flows to developing countries totaled some US$120 billion, up from an annual average of US$3 billion as recently as 1990. Private flows are now much more important than public aid flows (which in 2000 totaled just under US$60 billion). In this situation, these donors assert that, why provide aid at all to PNG? Does it not simply allow incumbent governments to maintain inefficient economic policies?

These arguments hold some truth, especially for middle income and upper middle income countries. It is hard to justify aid to any country in which counter-productive policies are preventing economic growth, and economic rationale alone clearly does not justify providing large amounts of aid to relatively rich countries that already receive significant private flows. However, this argument is too generic and overemphasized to apply to PNG and there are two good reasons for this.

First is that, private capital has been almost entirely directed to either extremely large economies like China, or middle income countries like Thailand. Private capital flows are heavily concentrated in a few countries, and some flows are volatile. A surge in the late 1970s receded after the onset of the debt crisis in 1982. Another big rush occurred in the mid-1990s, but with the financial crises rocking East Asia in 1997 foreign investment dropped sharply. The flow of private money to the developing world fell by $80 billion between 1996 and 2000. In any event, private flows continue to go to a small number of (mostly) middle-income countries. In 2000, 26 countries received 95 percent of private investment; the rest went to the other 140 developing countries.

In a typical lower middle-income country like PNG, foreign aid remains far and away the primary source of external finance. With the exception of the mining and petroleum sector, the country has not been able to attract significant private capital in recent years. Perhaps, as the country emerges from its difficult economic mismanagement, its vast economic potential and resources would attract significant private capital, and so proponents could then push for elimination of foreign aid. But that maybe for sometime yet. Meantime, aid remains one of Papua New Guinea’s major revenue flows, providing about a quarter or comprising about 30 percent of total Government revenue every year. Table 1 below shows the composition of aid in Papua New Guinea’s annual budgets between 1975 and 2000. A significant portion of grant aid is not reflected in Table 1, as it is not provided through the Government’s budgetary system. Hence, for the foreseeable future, PNG will rely on public money for her external capital requirements. At some instances, it is true, private capital has been driven away by certain governmental practices and counter-productive economic policies and the law and order situation.






Table 1: Average Composition of Foreign Aid in Annual Budgets, 1975 – 2000
(Million Kina in nominal values)

Source 1975 - 1979 1980 - 1984 1985 - 1989 1990 - 1994 1995 - 1999 2000 - 2004*

I. Domestic
Internal Revenue 400 520 650 760 1,050 1,700
Domestic Borrowing 100 90 110 160 210 315
Subtotal 500 610 760 920 1,260 2,015
II. Foreign Aid**
Australian Budget Support 180 220 200 190 210 0
Project Grants na na 3 11 175 430
Concessional Borrowing (Loans) 50 60 50 120 130 150
Commercial Borrowing (Loans) 10 20 50 290 210 180
Subtotal 240 300 303 611 725 760
Total Revenue 740 910 1,063 1,531 1,985 2,775

Foreign Aid as % of
Total Revenue 32% 33% 29% 40% 37% 27%
Australian Budget Support as %
of Total Revenue 24% 24% 19% 12% 11% 0%
Project Grants as % of
Total Revenue na na .28% .72% 9% 16%
Concessional Loans as % of
of Total Revenue 7% 7% 5% 8% 7% 5%
Commercial Loans as % of
Total Revenue 1% 2% 5% 19% 11% 7%

Source : Estimates of Revenue and Expenditure, Government of Papua New Guinea Budget books 1980, 1985, 1990, 1995 and 2001.
Notes : Figures refer to average for the period; * Projections based on annual averages and macroeconomic forecasts; </i> A significant
portion of grant aid is not reflected, as it is not provided through the Government’s budgetary system.

However, the Morauta Government in 2001 has implemented difficult reform programs amidst strong domestic opposition under the guidance of the World Bank and the IMF and can now boast of market-friendly economic policies, and yet investment is been kept away by many of the characteristic features of a lower middle-income economy: small consumer markets, poor physical and communications infrastructure, an ill-trained labor force, law and order and uncertainty about future stability. Nor has PNG benefited substantially from the dramatic expansion of trade generated by trade liberalization, most recently under the aegis of the World Trade Organization. Papua New Guinea's share of trade continues to decline and was insignificant in 2000. Indeed, the evidence suggests that PNG may prove to be a big loser, with its share of trade further declining if present trends continue.

Second, Papua New Guinea's development needs remain enormous. Close to two thirds of the country’s population continues to live below the poverty line, as measured by the World Bank. On average, 90 percent of the rural population lives below the poverty line. Despite the progress made over the last 25 years in the areas of health and education, PNG remains behind other Asia-Pacific countries and further back in the world. Only 60 percent of school age children are in primary school compared with full enrollment in most of the countries in Asia-Pacific. Infant mortality has been cut by a third in the last 25 years but, at some 90 per thousand, remain more than twice-prevailing levels in Asia-Pacific.

Moreover, partially because of the political instability and economic mismanagement, and partially because of a typically small economy trapped by its own poverty, PNG is simply not capable of meeting all of its development needs from its own resources. The Wingti and Chan governments, for example, routinely devoted close to a quarter of their total expenditures on education and yet PNG still has an adult literacy rate of less than 55 percent, while only 75 percent of school age children are in primary school. In many provinces, the density of the road network is less than five percent of the levels in Australia and other developed Asia-Pacific economies, yet the cost of maintaining existing roads is larger than the country's total transportation budget. The evidence overwhelmingly suggests that the private sector will not provide much help for overcoming these problems, which will remain the responsibility of the Government for some time yet.

With economic growth, in time PNG will be able to finance these developmental expenditures out of her own revenues. Thailand, once one of Asia's largest per capita recipients of aid, sustained one of the fastest growth rates in the developing world during the 1970s and can today finance nearly all of its ambitious development programs from its own funds. The country is being graduated out of aid by most donors, including the ADB. Thailand can today attract private capital on its own. But for most Asian and Pacific countries including PNG, foreign aid remains necessary if they are to break out of poverty.

Successes of Foreign Aid in Papua New Guinea

Given the relatively large volume of foreign aid since 1975, how effective has this aid been in the development efforts of PNG? The answer depends on what aid was intended to achieve. As a tool of transferring resources, the results have been mixed. As a project funding gap filler, the answer would be positive. When aid was primarily intended to bridge the gap between the country’s investment target and domestic savings, it did help to bridge that gap, in gross terms. An externally derived resource, aid also bridged the foreign exchange gap. Alongside many disappointments, aid has financed many development projects and programs which achieved very high internal rates of return, including schools, clinics, health posts, bridges, roads, capacity building and training programs.

The egregious failures of foreign aid usually get the headlines. Indeed, much aid has been ineffectual in economic terms, not least because it has often been given for reasons that had little to do with economic development. During much of the post-independence period, PNG was the leading recipient of Australian aid; in retrospect, it should not be surprising that aid so obviously given for historical reasons would prove ineffective at promoting economic growth and poverty alleviation. Fortunately, this type of aid appears to be gradually phasing out. In any event, the egregious cases tend to obscure the fact that aid to PNG is behind many important achievements over the past two decades. Indeed, the results of many individual aid efforts are unmistakable across the country: roads and bridges have been constructed, schools and hospitals built, institutions established, and thousands of Papua New Guineans sent abroad for scientific and technical training.

In the health sector, aid can claim much of the credit not only for infrastructures such as the Port Moresby General Hospital, but for the eradication of endemic diseases such as smallpox and polio. The dramatic decline in fertility in some provinces can be directly linked to the population programs of donors, notably the United Nations. The critical battle now being waged against AIDS is almost entirely funded by foreign aid. Characteristically, aid is not only helping to finance the establishment of new health institutions, the training of personnel and the development of public awareness campaigns to spearhead this battle, but it was also at the forefront of the initial effort to convince sometimes reticent incumbent governments of the very need for public action.

In the agricultural sector, aid was largely instrumental in establishing the network of research and extension programs that plays an important role in the widespread development and dissemination of high yield tree crop varieties, now a key component of the national tree crop system. In the transport and infrastructure sector, aid has contributed immensely to building or upgrading major roads and bridges including portions of the Hiritano and the Okuk highways. Many of the key sectors in the country have experienced the use of foreign aid. From agriculture, livestock, fishery, education, health, water supplies, finances, transport and socioeconomic infrastructures to institutional capacity building and training. Thanks in part to aid the social impact of the 1998 tsunami in Aitape was not too severe; Kokopo sprouted from the volcanic eruptions in 1996 from the reallocation of aid funds; Bougainville is being rebuilt from the ruins of civil war in 2000 from donor assistance.

There is thus simply no denying that aid can be credited for much of ‘what works’ in PNG. At the same time, aid has undeniably been less successful at promoting sustained economic growth across the country. Many of aid's achievements during the 1980s and 1990s were negated by the counter-productive economic policies of successive governments. Since the early 1990s, the donors, led in particular by the World Bank, have been assisting successive governments to undertake economic policy reform, in order to reduce heavy-handed government intervention in the economy and create policies that are friendly to the private sector. Progress on reform has been slow and halting. Powerful interests have mobilized to defend the old policies, despite their dismal economic legacy. Nonetheless, after almost three decades of effort, enormous progress has been made on policy reform. Aid has helped convinced the Government to implement realistic exchange rates, improved monetary policies and widespread deregulation and price liberalization. Much remains to be done, notably in the areas of privatization and institutional reform, but the donor-led reform process has helped transform the policy environment in PNG.

Failures of Foreign Aid in Papua New Guinea

Over the 25-year period, even those seemingly positive achievements started to be put to test. Indeed, resorting to project rehabilitation and structural adjustment programs in the 1990s is an adequate testimony to this conclusion. With the onset of structural adjustments, the goals of aid became a lot more blurred and the effectiveness of aid much more complicated to evaluate.

Foreign aid in PNG between 1975 and 2000 has seen more failures than successes. The Asian Development Bank’s 1998 Country Assistance Plan reported that of the 16 ADB assisted projects that have been evaluated only five were rated as generally successful. The World Bank summarized the performance of the 30 projects it undertook since it began operation in PNG in 1968 and concluded that projects evaluated between 1968 and 1978 had a failure rate of 22 percent. But, the failure rate of projects completed after 1978 rose to a disappointing 60 percent. The large failure rate of aid from these two multilateral donors is largely attributed to the lack of counterpart funding and economic mismanagement by the Government.

A number of factors have undermined aid effectiveness in PNG. First, aid was not effective when the principle objectives of the donor were not Papua New Guinea’s economic development. Aid which was motivated by commercial or foreign policy motives inside the donor country have often not served well the interest of the local economy. The problem in each case is that non-economic motives have led to aid activities that were not tailored to the specific needs and capacities of PNG. Similarly, it is evident that the socioeconomic and political environments in PNG have critically affected aid effectiveness. Aid has been successful in an environment of macro-economic stability, characterized by low inflation, predictable and sustainable policies, and secure property rights. The quality of the economic environment depended largely on the policies and stability of successive governments.

The ability of the Government to integrate aid into its own coherent development strategy and management has been critical to the success of aid. Donors can never fully compensate for the absence of an effective government with an appropriate budgeting and planning process. Most of the recurring problems of aid in PNG have their origin in breakdowns in these governmental functions. Thus, for example, the common failure to sustain projects after the end of donor resources is typically due to the failure to budget for recurrent expenditures in advance. Similarly, the failure of aid coordination, leading to overlapping, contradictory, and redundant aid activities, is typically a consequence of the failure of the Government to integrate these activities within coherent national development budgeting and planning exercises.

Several factors have particularly affected the ability of successive governments to adequately manage aid resources. First, the low capacities of many national institutions account for the majority of difficulties during the project cycle. While the level of education and training available in the civil service has improved over the years, the ability of public bodies to implement aid projects effectively remains very limited. These abilities vary enormously across the country, but in general, most national public organizations especially government departments are rarely capable of implementing more than simple administrative tasks; typically, they possess limited analytical capacity to design or critically evaluate aid activities. As a result, aid projects that did not involve complex procedures and intensive administrative oversight have been less taxing of the Government's limited managerial capacities and thus more successful. Similarly, aid activities have been successful in programs or projects where there were a few clear objectives that were easily assimilated by Government officials and enjoyed the support and commitment of the top leadership.

Second, high administrative turnover and economic mismanagement in PNG has had a devastating impact on Government capacity and thus on aid effectiveness. Economic mismanagement has pushed successive governments to reduce various recurrent expenditures and over time led to reduced governmental effectiveness. For example, public service salaries is less than a tenth of its level of 20 years ago in real terms, pulled down by the combination of sustained high inflation and the Government's almost permanent fiscal crunch. At such wage levels, staff turnover is extremely high, particularly at skilled positions, while corruption, nepotism, moonlighting, and absenteeism is rife. This has resulted in the Government’s diminishing capacity to manage its aid resources effectively (Hnanguie, 1996).

In addition, the chronic political infighting and instability over the years have institutionalized a kind of crisis management, in which long-term development planning and careful budgeting are replaced by ad hoc gap filling, continuous negotiation with external creditors and the increased politicization of revenue allocation. Over time, sound management practices are eroded and public corruption increases. Continual under-spending on maintenance and various other recurrent expenditures eventually prevents public organizations from functioning effectively. Starved of resources and left to their own devices, individual public managers or politicians lobby on their own for foreign aid to meet pressing emergency needs rather than to address longer-term development problems.

Third, certain donor practices have contributed to weakening government development management capacities. The proliferation of donors and donor projects taxes existing Government capacities. There are about 20 official donors and over 60 distinct projects. These totals do not even include non-governmental organizations (NGO) aid, often fragmented over dozens of small organizations. About 15 NGOs are officially registered with the Government, including several international NGOs. While donors have increased informal coordination at the country level, little progress has been achieved on consolidating or harmonizing project accounting, procurement, or evaluation procedures.

Pressed by the need to achieve quick results, donor agencies have often sought alternatives to the arduous and long-term task of developing the central government's management capacities. They have for example exercised control over the identification, design, and evaluation of projects to compensate for the limited ability of the Government to undertake these critical functions. Many aid projects continue to be designed with little or no local input. Donors have fielded long-term expatriate experts to man projects, rather than rely on local expertise. As a result, there are still between 2,000 and 5,000 foreign experts in PNG, even though their salaries are often equivalent to those of several hundred civil servants. More pernicious yet, donors have too often tried to bypass central government institutions entirely, first by setting up stand-alone project structures in the 1980s and 1990s, and today increasingly by turning to civil society and the NGO sector to implement their projects.

These donor practices have undermined capacity development, because Government institutions are often marginalized in the aid process. For example, only two percent of all projects in the mainly donor-funded Public Investment Program have ever been formally evaluated by the Government. Valuable opportunities to gain experience designing and evaluating projects in order to ‘learn by doing’ are lost; more seriously, such practices erode the Government's sense of ‘ownership’ over projects, and lessen the likelihood that the Government will develop a long-term financial commitment to the project. The higher levels of aid effectiveness can be explained by the Government's insistence on integrating all aid within its own budgeting and planning and where the Government was willing to turn down aid resources that did not fit into its own development priorities.

The plethora of organizations involved in aid activities defies adequate coordination by the Government. In the health sector alone, the official donors are currently funding no fewer than five stand-alone projects outside of the Department of Health. Often, these independent structures are more efficient than the Government at delivering short-term results; they may be cheaper, closer to the population, and less bureaucratic. But bypassing the central government leads to predictable results in the longer term: projects are less likely to be sustained after the end of donor support, there is a haphazard and fragmented quality to policy implementation and, starved of resources, government institutions suffer further decline in skills and capacity. Empirical evidence suggests that NGOs can be extremely cost-effective service providers, but that it is a mistake to believe they can replace the central government across a wide array of public goods.

CONCLUSIONS AND RECOMMENDATIONS

Papua New Guinea continues to face many economic problems, including mounting external debt burden, declining exports revenue, economic stagnation, and Government dominance of key economic activities. The difficulties facing the majority of Papua New Guineans are enormous. Among other things, they lack access to many services crucial to a quality of life. For instance, 4 million people - more than 85 percent of the national population - have no access to electricity, about 3.5 million do not have proper sanitation facilities, and some 3 million have limited access to basic services (Hnanguie, 1997: 7).

Foreign aid, although helpful particularly for the poorer provinces, is not adequate in accelerating Papua New Guinea’s economic development. This kind of international resource flow is largely governed by factors outside Papua New Guinea’s control; it is highly fluctuating; it is inadequate; and it is often being mismanaged. It should also be observed that much of the foreign aid is directed towards the ordinary activities of the public sector and/or for humanitarian purposes. Little, if any, of the aid is utilized for the development of the private sector, or for the establishment of institutions for entrepreunership support. In addition, aid is mainly ‘tied’ in that it is allocated by donor countries to specific sector, project or purpose in the country. Put differently, PNG is normally incapable of influencing the allocation of much of the financing among her developmental programs, or among other critical needs. The shift in the Australian aid from budget support to project support for instance, has already shown signs of the Government losing all control over the allocation and utilization of the only aid share it once had direct influence.

Recommendations for Improving Aid Effectiveness in Future

Given the successes and failures of foreign aid over the past 25 years, let us focus on several measures that could help to improve the capacity of the Government to manage its aid resources effectively in future. First, donors have to start taking this issue more seriously and stop trying to bypass the central government. The widespread belief of both free-market economists and NGOs that government is the problem and not part of the solution has become a self-fulfilling prophecy. In fact, far from undermining the private sector, a limited but effective government is needed to enable a vibrant civil society and strong business sector. It is the best means to foster both economic growth and poverty alleviation. Donors must devote greater attention and resources to help build the capacity of the Government to effectively manage aid, even as they encourage the central government to retrench from nonessential functions.

This entails more support to the policy, planning, and evaluation divisions of key Government departments including the Department of Finance & Planning, as well as to central budgeting activities. Perhaps more important, it entails a greater respect for the integrity of the national budgeting and investment planning processes of government during the aid cycle. Donors should assist the Government to develop her five-year rolling development plans and medium term investment strategies to set the road map and increase the coherence of government development efforts. Basing their aid on the Medium Term Development Strategy (MTDS) has seen a lack of focus and coherence in their operations. Donors should ensure that aid activities are explicitly integrated into these processes, so that the long-term recurrent expenditure implications of aid are formally planned, budgeted and accounted for.

Second, donors should give preferences to a government that demonstrates commitment to improve its management of aid. Current efforts to promote performance-based allocation of aid should be continued and deepened. It is important to establish clear incentives to the Government to improve its capacity to manage aid resources. With poorly performing governments, foreign aid should be refocused onto the non-governmental sector and the meeting of basic needs and human capital investments.

In this context, donors must allow the Government to play a larger role in the design, management, and evaluation of aid activities. Rather than ‘pushing’ aid and seeking short-term results, donors should rather help the Government formulate its own preferences and act upon them, even if this means lower aid levels in the short run. Encouraging the decentralization process, privatization, and the growth of civil society are all appropriate and desirable, but donors should not view them as substitutes for central government institutions.

Third, the World Bank and IMF's economic stabilization and adjustment efforts should be supported. Achieving macro-economic stability is a prerequisite for the effective use of public resources, including foreign aid. Progress on such issues as poverty reduction and child welfare will not be sustained in the absence of steady growth and healthy public finances. There is thus no alternative to the sometimes quite painful reforms advocated by the international financial institutions, which have gained valuable experience at reform implementation. At the same time, more attention should be devoted to enhancing local capacities in provinces undergoing economic reform to ensure that they are not eroded by the fiscal crisis. Wholesale reform of the public service may be prohibitively expensive in the short run, but the donors can and should begin to upgrade key parts of the civil service right away, most notably those involved in economic policymaking like the Department of Finance & Planning.

Fourth, donor coordination efforts should be refocused. It is a peculiar irony of aid today that donors do not coordinate their individual aid coordination efforts. Groups like the Development Assistance Committee, Consultative Group Meetings or the National Development Forums are useful avenues for donors to engage in dialogue with each other and to harmonize their policies and procedures. They should be reinforced. At the country level, however, the Government should be empowered to coordinate all aid activities and donor-directed forums such as the Roundtables or the Consultative Group meetings need to be progressively downgraded.

The donors can, however, undertake a number of measures at the country level to facilitate Government coordination efforts. For instance, donors should consider specialization in a few sectoral and sub-sectoral areas, in which they have a comparative advantage. The resulting decrease in the number of donors present in any one area would facilitate governmental coordination and thus increase effectiveness. Similarly, the World Bank or the ADB should be identified as a “lead donor” and charged with conducting the policy dialogue with the Government and establishing the broad policy framework within which other donors would plan their activities. This would free the Government from the current burden of engaging in policy dialogue with some 20 different donors. Given their unparalleled policy analysis capacities, the World Bank or the ADB are uniquely qualified to play this role.


<i>Selected Bibliography and References

Asian Development Bank, June 1998, Country Assistance Plan for Papua New Guinea, ADB Manila.

Asian Development Bank, Asian Development Outlook, 1999 and 2000, ADB Manila.

Department of Finance & Planning, Annual Budget books (1980, 1985, 1990, 1995, 2000 and 2001), Government of Papua New Guinea.

Foreign Aid Management Review of Papua New Guinea, 1998, ADB TA No.3011 – PNG, ADB Manila and Government of Papua New Guinea.

Hnanguie, Christopher T., 2001, “Defining Indicators for Measuring Development Impact”, Country Strategy and Plans for Bangladesh, Nepal and Sri Lanka, PW1, ADB Manila.

Hnanguie, Christopher T., 2000, “Economic and Financial Analyses of Capital Investments: Strategies and Techniques of International Financial Institutions and Multinational Corporations”, Master in Business Economics, Thesis, University of Asia - Pacific.

Hnanguie, Christopher T., 1997, “The Impact of Foreign Aid on Papua New Guinea’s Economic Development,” Economic Briefing Papers, Department of Finance & Planning, Government of Papua New Guinea.

Hnanguie, Christopher T., 1997, “Questioning Development Impact: Papua New Guinea Why So Rich Yet So Poor?” Discussion Papers, Department of Finance & Planning, Government of Papua New Guinea.

Hnanguie, Christopher T., 1992, “The Political Economy of Foreign Aid in Economic Development,” Master in International Political Economy, Thesis, Victoria University.

International Monetary Fund, 2000, World Economic and Financial Surveys, Washington DC.

National Planning Office, 1997, Medium Term Development Strategy: A Bridge into the 21st Century, Government of Papua New Guinea.

“Moving the Poverty Agenda Forward”, 2001, ADB Newsletter, ADB Manila.

Office of International Development Assistance, 1994, Report on Foreign Aid 1993, Department of Finance & Planning, Government of Papua New Guinea.

World Bank, 1998, PNG Country Portfolio Performance Review, Washington DC.



The Author: Christopher Taylor Hnanguie, a Programs Economist (Macroeconomist) with the Asian Development Bank (ADB).


I find this article interesting. Following are some of my own views, comments and questions.

1. In general, in my simple layman's understanding, foreign aid is BAD for PNG!
2. Foreign aid is a big business, it is funded and operated by foreign govts, and now increasingly by private donors.
3. The stunning failures of foreign aid, as you indicated in your article (60% failure rate after 1978), are a consequence of several problems. Perhaps, the underlying reason is that foreign donors are funding their own interests - "strategic, economic, political, ideological and historical or cultural links" - and in most, if not all, cases, these interests are not always aligned with the recipient nation's own interests, development needs, and aspirations. For instance, Australia's interest in PNG is perhaps for strategic as well as historical reasons but PNG does not have a perception or share the same strategic interest.
4. Quote: "The dramatic decline in fertility in some provinces can be directly linked to the population programs of donors, notably the United Nations." Japan is increasingly fearful of becoming a minority in Asia and it has increasingly funded population control, especially in The Phillipines. (There are reports that I have read of mothers being forced into family planning and sterilized!) Shall we be skeptical about Japanese govt-funded immunization programs just recently completed a year or so ago and was hailed as a success by all involved, including all PNG govt Health officials, that such a program was not disguised as a fertility control exercise, and therefore the next generation will be forever sterile and not as productive as their fathers are? After all everybody in the region should be concern with the country's birth rate, which is the highest in the world!
5. Quote: "On average, 90 percent of the rural population lives below poverty line." I saw the headline yesterday in one of the PNG dailies that quoted a nun saying "PNG does not have poverty"!!! Poverty is only relative and I am of the view that there are no poor persons in PNG and therefore poverty is NOT there!
6. If there is no poverty in PNG then the linchpin of programs funded by WB, ADB, IMF, etc., especially in poverty-alleviation is a fallacy! Of course, these agencies can define their own version of poverty and therefore justify their continuous peddling of aids to PNG.
7. Foreign aid does NOT strengthen existing institutions (and that is because PNG govt and politicians are bad, after all!) but continues to erode and undermine legitimate govt and govt agencies. If a govt is not in favour with it, the donor can shift their funding to "stand-alone institutions" and NGOs in direct efforts to undermine govt efforts and existing capacity and institutions and consequently the national sovereignty. Foreign donors should also shoulder some of the blame for weakening existing govt capacities! In this regard, foreign aid is bad for PNG!
8. If PNG wants to make great strides in its own development, it should critically look at how foreign aid is utilized in the country. Some of it, the country probably does not need it.
9. With increasing foreign aid, PNG's debt burden grows. There is no respite in store for a next 100 generations unless every person realizes how detrimental/useful foreign aid can become to the country. As they now say in Brazil, Argentina, Mexico and Turkey: "Dollarize the debt, Devalue the local currency, Default on repayments, and Die"!!!! In our own case, PNG borrowed almost US$2 billion since 1977 but since the Kina was devalued in 1994 and with the so-called "floating-exchange" rate mechanism put in place, Kina lost 40% of its value against the US dollar. PNG now has K7 billion debt to repay, which we are told is close to 75% of our GDP!
10. I think such article stirs up some passionate discussions amongst the educated elites and potential and current policy makers.
11. We should dispense our own ideas in an increasing effort to highlight the dilemma of foreign aid and start constructive utilization of such generosity from donors, of course this is a big business and we need to be business-like and not merely dependents and recipients!
12. Start by abolishing the "floating exchange rate" mechanism and adopt the previous Bretten-Woods system (ie. reintroduce the "hard Kina policy)!


clement
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anon
anon

October 25th, 2002, 1:31 am #6

foreign aid is not BAD for png, it is bad management and inappropriate misuse of the funds that has been bad - this has been the downfall of aid projects being developed to the fullest. I was involved in a a very small aid program involving a literacy program for women. All the meetings, discussions, planning and set up of budgets and good intentions and enthusiasm of people involved in the program and how great it was going to be for the women that were going to be part of the literacy program went out the door when funds were misappropriated, and this happened not once but 3 times before the program was cancelled. How disappointing this was for everyone envolved, just because one or 2 people couldn't help themselves and were greedy. I would hate to imagine how much money is misapproriated and lack of good management.

What immunisation program are you talking about that would lead to women being unable to bear children in the future?

Other points I agree with you.
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c.w
c.w

October 26th, 2002, 12:35 pm #7

Your experience highlights the very reason why foreign aid is bad for PNG! It creates dependency-mentality and does not empower people to become self-sufficient! If there was a REAL need to improve women literacy then the women should pay for it with their own money! You have to work hard and earn your living, and I might add, stop living on borrowed money!

One of the biggest reasons PNG has a high failure rate (60% since 1978 as the writer above quoted) is because of people not able to claim ownership of money and projects. It is the very notion of "free-money" that will continuously frustrate all efforts by donors to foster their own interests through their money! You call this bad management and it is part of the problem!

There is enough money in the country to solve most of our problems but we need to find ways to equitably distribute them through each strata of the society and empower the people to become self-reliant.

It is a SHAME for govt to balance its budget with foreign money! And a very big SHAME on you and others for associating with a project based on borrowed money and then completely squandered with nothing to show for!

clement
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anon
anon

October 27th, 2002, 12:49 pm #8



the women that the money was being provided for as part of the literacy program would never ever be able to pay for the opportunity to go to school and the government would never of provided...they were mainly middle aged women with absolutely no way of ever earning an income to pay for such a thing, these were women that wanted very much to learn how to read and write and many walked for 2 days to attend the course.

And I am certainly not ashamed to have been associated with the program. The small amount of money that was provided was for books, stationery, pens and training material. All of the labour was provided on a voluntery basis. Many women went through the program during the short time the money was available and a few of the women now continue to teach other women on a volunteer basis when materials are available, but of course had the money not been taken with the pretext of buying materials many many more women would of had the opportunity.

As far as the money being wasted, it certainly wasn't wasted by me, it was wasted by so called respectable community members whom every one trusted, but that was not the case, they only thought about themselves rather than the women that wanted so much to be able to read and write.
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CTH
CTH

October 27th, 2002, 2:44 pm #9

I find this article interesting. Following are some of my own views, comments and questions.

1. In general, in my simple layman's understanding, foreign aid is BAD for PNG!
2. Foreign aid is a big business, it is funded and operated by foreign govts, and now increasingly by private donors.
3. The stunning failures of foreign aid, as you indicated in your article (60% failure rate after 1978), are a consequence of several problems. Perhaps, the underlying reason is that foreign donors are funding their own interests - "strategic, economic, political, ideological and historical or cultural links" - and in most, if not all, cases, these interests are not always aligned with the recipient nation's own interests, development needs, and aspirations. For instance, Australia's interest in PNG is perhaps for strategic as well as historical reasons but PNG does not have a perception or share the same strategic interest.
4. Quote: "The dramatic decline in fertility in some provinces can be directly linked to the population programs of donors, notably the United Nations." Japan is increasingly fearful of becoming a minority in Asia and it has increasingly funded population control, especially in The Phillipines. (There are reports that I have read of mothers being forced into family planning and sterilized!) Shall we be skeptical about Japanese govt-funded immunization programs just recently completed a year or so ago and was hailed as a success by all involved, including all PNG govt Health officials, that such a program was not disguised as a fertility control exercise, and therefore the next generation will be forever sterile and not as productive as their fathers are? After all everybody in the region should be concern with the country's birth rate, which is the highest in the world!
5. Quote: "On average, 90 percent of the rural population lives below poverty line." I saw the headline yesterday in one of the PNG dailies that quoted a nun saying "PNG does not have poverty"!!! Poverty is only relative and I am of the view that there are no poor persons in PNG and therefore poverty is NOT there!
6. If there is no poverty in PNG then the linchpin of programs funded by WB, ADB, IMF, etc., especially in poverty-alleviation is a fallacy! Of course, these agencies can define their own version of poverty and therefore justify their continuous peddling of aids to PNG.
7. Foreign aid does NOT strengthen existing institutions (and that is because PNG govt and politicians are bad, after all!) but continues to erode and undermine legitimate govt and govt agencies. If a govt is not in favour with it, the donor can shift their funding to "stand-alone institutions" and NGOs in direct efforts to undermine govt efforts and existing capacity and institutions and consequently the national sovereignty. Foreign donors should also shoulder some of the blame for weakening existing govt capacities! In this regard, foreign aid is bad for PNG!
8. If PNG wants to make great strides in its own development, it should critically look at how foreign aid is utilized in the country. Some of it, the country probably does not need it.
9. With increasing foreign aid, PNG's debt burden grows. There is no respite in store for a next 100 generations unless every person realizes how detrimental/useful foreign aid can become to the country. As they now say in Brazil, Argentina, Mexico and Turkey: "Dollarize the debt, Devalue the local currency, Default on repayments, and Die"!!!! In our own case, PNG borrowed almost US$2 billion since 1977 but since the Kina was devalued in 1994 and with the so-called "floating-exchange" rate mechanism put in place, Kina lost 40% of its value against the US dollar. PNG now has K7 billion debt to repay, which we are told is close to 75% of our GDP!
10. I think such article stirs up some passionate discussions amongst the educated elites and potential and current policy makers.
11. We should dispense our own ideas in an increasing effort to highlight the dilemma of foreign aid and start constructive utilization of such generosity from donors, of course this is a big business and we need to be business-like and not merely dependents and recipients!
12. Start by abolishing the "floating exchange rate" mechanism and adopt the previous Bretten-Woods system (ie. reintroduce the "hard Kina policy)!


clement
Clements, thanks for the useful comments. I hope others will participate in the discussions, I am time strapped for now so I shall very briefly touch on some of the issues you raised. The observation of aid is bad for PNG is too big a statement, and may require a book to debate it. However, from the information given in the captioned article, it is suggested that aid in itself is not a bad thing for PNG. If properly managed and effectively utilized aid can provide very tangible positive turnovers and hence a good thing, but it can be a bad thing if it costs the country, eg, in foreign debts. Proper analysis would show that the pluses outweigh the minuses.

The second comment on foreign aid as a big business – though not the subject of this article, but yes foreign aid is indeed a business venture. The third comment regarding the failures of foreign aid, should be read in the context of the donor countries’ aid strategies and policies. In recent years, economic rationale of donors supersedes other considerations. It is not clear what the point is with the quotation in your fourth query. The argument posed by the article is that the alarming high population growth (2.6%) in PNG far outweighs the annual average economic growth rate of –3.3% (last 3yrs). In economic development terms this is bad indication.

With regard to poverty, well yes most of us in PNG continue to deny the fact that we are poor, atleast by internationally accepted standards. PNG is a poor country when measured in nutritional, monetary and generally quality of life terms. If we take PNG’s head-count index which measures the percentage of the total population with incomes falling below internationally accepted poverty line of living below US$1.00 a day, or calculated as the current market price of a basket of foods that satisfies minimum nutritional requirements, plus essential non-food items PNG is poor in almost every aspects. Your point 7 is discussed in the article and point 8 yes I quite agree. Statement in point 9 is not clear. You may wish to be careful with statements in point 12 relating to the reintroduction of the hard kina policy - taking into account the strength of the national economy.

CTH - Author



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c.w
c.w

October 28th, 2002, 11:12 pm #10

There are very few countries in the world (eg. South Korea) that can claim to have good track records in utilization of foreign aids. Unfortunately, PNG does not have such a good track record with utilization of foreign aid to improve all, or most, of its social indicators. Unless, PNG improves its capacity and delivery mechanisms it will continue to squander the foreign aids that it recieves! Thereby plunging itself into further debt. If foreign aid is peddled in the manner it is now, the only logical conclusion, is that PNG will soon, within the next few years, have to default on its loan repayment! This will be bad! PNG should learn from Argentina, Brazil, Mexico and Turkey and start reforming itself pretty fast.

The floating exchange rate mechanism is the evil all countries have inherited as they join WTO. It is suicidal and in PNG, the best way forward is to abolish it. (Italy's parliament recently elecetd to return to the so-called Bretten-Woods system or variant of it). The weak PNG economy may delay this move but policy-makers should endeavour to re-introduce "hard-Kina policy". Since 1994, when "hard-Kina policy" was abolished, the debt sevicing in Kina has risen almost exponentially (from less than K2 billion to over K8 billion now within 8 yrs!!!). The reason is that PNG is dollarizing its debt and at the same time devaluing its Kina, making repayment almost an impossible task! At present PNG's debt servicing is totaling almost 40% of its budget (K1.15 billion debt repayment for the supplementary budget of K3.13 billion by Philemon) and with the govt's revenue contracting by the year, foreign aid will plunge the country further into the depths. By the year's end, and with Kina sliding unabatedly, debt repayment will reach 50% of the govt budget! The only good thing I can see, as a general consequence of all these, is that now I can remit my money to PNG and get a lot more!!!

Poverty is, of course, relative and some of us still believe that it is non-existent in PNG! I live in an industrialized country and the company I work for pays me more money than I would earn in PNG in the same period. But pollution in summer is a big problem; the air I breath during that time is very bad for my lungs; the indicator for UV exposure has gone past its maximum level! I think of the nascent oxygen people in PNG breathe, coming fresh from the natures own biofactories (trees). Can my money buy me the nascent oxygen from home that will clear my lungs? I buy kaukau, potatoes, taro, banana, mangoes, pawpaw, etc from the grocery shop, just because I wanted to maintain my PNG diet. Most of these are rippened on their way to the supermarkets beacuse the producers injected them with hormones. Most, if not all, have been produced with chemicals. Yet these crops and fruits are rippened on the tree and organically produced in PNG and somebody in PNG is eating them. Can my money buy me those tree-rippened and juicy, succulent fruits from PNG? I am scared to drink water from the tap because of the potential for contamination and pollution seeping thru so I buy bottled water, yet the taste of water from home back in PNG taste heavenly. If I wanted a easy meal I could join the queue of obese people at the MacDonald's, KFC, TGI Friday, etc. for a fast food snak-cum-meal! I commute to work in my car, and during the peak hours stranded in the traffic for hours, all the while breathing in the exhaust from other cars. My legs are slowly not supporting my weight and I can not stand nor walk for more than a mile! Who is more poorer, I ask? My father who lives in a small hunt in the village between the springs or the son who, in pursuit of "nutritional, monetary and general quality of life terms", lives in an industrial country and his lungs and health are slowly falling victim to hazards of industries?

It is my first time to hear you raising the issue of fertility control in some province in PNG by UN (in your initial posting). I read Japan govt has funded similar fertility control programs in The Phillippines and I was raising the skepticism that the recently completed national-immunization program in PNG, funded by Japanese govt, may have been done in disguise as a fertility control exercise. Of course, this is my skepticism, and mine alone! There may not be any validity to this!

I am enjoying these discussions and I am learning much from it. Please, if you find some time, educate me on my short-sighted, layman's views and if you can, you might like to initiate discussions on how PNG should better utilize foreign aids, in very specific terms, and how it should graduate out of the dependence thereof.

Thanks.
Clement
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