Will LNG project deliver?

IT cost in excess of two weeks and K10 million for the Government and landowner representatives to reach an agreement on the Benefits Sharing Agreement in Kokopo earlier this year. The LNG project is tipped to be the largest project to be ever undertaken in PNG. It is projected to generate significant financial benefits for all the stakeholders – the affected landowners, provincial and national governments and the foreign investors.
But will the LNG bonanza lead to sustained economic growth and development in Papua New Guinea? The past does not provide much reason for hope. One could be excused for not noticing the impact of past resource booms on economic growth and development since independence. Figure 1 shows a time plot of the growth rate of GDP per capita and its trend over time. Further, emphasis is placed on understanding the impact, if any of the past two resource booms on growth in per capita income.
GDP per capita, which accounts for growth in population, and its rate of growth, are a better reflection of the average income of the country’s residents. GDP is total income generated by both citizens and non-citizen individuals and businesses. Obviously, as an average measure, the per capita GDP says nothing about the distribution of this income. But, in the absence of measures of what is happening to income inequality, it is the best indicator we have.
Figure 1 shows that economic growth in PNG has been eratic. The high spikes during the early 1990s depict the first resources boom. This is the time when Porgera, Misima, Ok Tedi and Kutubu were in production. The second resources boom started in 2002 and was led by the increased demand for raw materials by China and India, until the Global Financial Crisis, triggered by the US-subprime mortgage crash last year
It is widely known that PNG got itself into a financial crisis in 1994, which led to the floating of the kina. The years that followed were very difficult for PNG, until the second resources boom, starting in 2002.
Macroeconomic mismanagement of the first resources boom was not repeated during the second resources boom. PNG appears to have learnt from the first boom and managed to avoid creating another self-inflicted crisis during the second boom. What will happen during the LNG project led boom remains to be seen.
The microeconomic story of the welfare of individual citizens is rather depressing, as depicted by the trend line in the graph. This line depicts a clear downward trend. This implies that, over time, the average Papua New Guinean has become poorer. During the peak of the first resources boom, the trend line became negative and has since remained in negative territory, including during the second resources boom.
The average Papua New Guinean was much poorer in 2006 than in 1960! No doubt some Papua New Guineans became better off during this period; but this only means that other people did even worse than is implied by average per capita income.
What will the story be, if we plotted Figure 1 using the Gross National Product (GNP) on per capita terms? GNP is the income that accrues only to citizens after foreigners’ earnings by way of wages and profits has been deducted from GDP. This is left as an exercise for interested readers.
The data analysed above shows that the last two resources booms – those of the early 1990s and 2002-08 – have not improved the welfare of the average Papua New Guinean. Some serious thinking has to be done to ensure the benefits of the LNG bonanza outlive the current generation.

* Dr Charles Yala is a research fellow at the University of New South Wales in Australia and research associate with the National Research Institute.