International Trade and Economic Development in Papua-New Guinea

International Trade and Economic Development in Papua- New Guinea

There is reason for believing that the growth of international trade was important in the development of the United Kingdom, and Japan.’ Some importance is thus attached to examining the possible contribution of foreign trade to currently developing countries. This paper seeks to systematize existing theory in relation to the experience in Papua-New Guinea.

I Papua-New Guinea has undergone a pattern of advancement

similar to other colonial regions: early development occurred in sectors which were initially attractive t o the outside world whereas other areas remained in their traditional state. Development has thus com- prised the grafting of an “economic” framework on an existing traditional substructure. In earlier years this dual economy was domina- ted by the non-indigenous plantation and mining “export” sector, in which the production of copra, rubber, and gold waa of primary importance. Recent years, however, have seen the demise of gold mining and growth in the production of timber and reconstituted wood. There has also been some agricultural diversification associated with the introduction of coffee in the highlands, and cocoa on the coastal fringes, especially in the Gazelle Peninsula. Peanuts are important in the Markham Valley, and beginnings have been made with cattle and fishing. These changes have been accompanied by the increasing participation of indigenes in cash production particularly in coffee and cocoa. In 1961 it was estimated that there were about 250,000 cash croppers out of a total of 600,000 adult males?

1 Phyllis Deane and W. A. Cole, British Economic Growth 1688-1959 (Cam- bridge University Press, London, lW), pp. 309-12; Isoshi Asahi, Thp Secret of Japan’s Trade Expansion (International Association of Japan, Tokyo, 1934), pp. 8-11, 117.

2P. M. C. Hasluck, “The Economic Development of Papua-New Guinea”, Australian Outlook, April 1962, p. 10.

274

JUNE, 1966 TRADE AND: DEVELOPMENT IN PAPUA-NEW GUINEA 275 It would appear, then, that the non-indigenous export sector has

been partly responsible for infusing development within the indigenous sector. This is evident in the expanding fringe of indigenous export production, and a h in the appearance, within the domestic sector, of the nucleus of a market structure due to economies of scale in such primary production as copra and timber, and to the needs of wage earners for purchases of consumption goods. Nevertheless, the development ethos remains overwhelmingly primary, and the monetary sector consists almost entirely of international transactions : in 1959-60 total trade formed 94 per cent of total cash in~orne.~

The extent of Papua-New Guinea’s specialization, therefore, demands some appraisal of export strategy, and of international trade as a vehicle for inducing further change in a developing economy.

I1 Given the random combination of resources, tastes and technology

in a previously isolated country, it is not surprising that there should be an imbalance between factor endowment and the proportions in which factors are employed in production. Other writers have re- ferred to this condition as structural disequilibrium,’ a situation in which the distribution of capital stock and other complementary factors does not permit the best use of resources. For this reason, Ricar- dian and Ohlin-Heckscher theories (both of which assume full employment) are not entirely relevant to international trade in developing countries where, moreover, there is less concern with movements along a given production-possibilities curve than with outward shifts in the curve itself.

International trade may thus improve the quality of labour through transmitting skills and techniques, and it may also secure increases of income by creating new investment opportunities. This in turn could bring into use hitherto unemployed factors of production from the subsistence sector, either in industries supplying inputs to export production, or in industries utilizing the output of export industries. These processes will be termed “backward linkage” and “forward linkage” effe~ts .~ Ideally the process is cumulative, and increases in productivity and income are continually interacting and re- acting upon one another so that additional amounts of capital yield increasing returns.

This does not imply that development in Papua-New Guinea, o r in any lesser developed countries, proceeds in this way. Despite the likelihood in such an economy of increasing returns from export, produc-

3R. C. White, ‘Social Accounts of the Monetary Sector of the Territory of Papua and New Guinea, 1956-7 to 1960-1’, New Guinea Research Unit Bulletin No. 3.

4 H. B. Chenery and P. G. Clark, Interindustry Economics (John Wiley, New York, 1959), p. 280.

6Albert 0. Hirschman, The Strategy of Economic Development (Yale Uni- versity Press, New Haven, 1958), p. 100.

276 THE ECONOMIC RECOED JUNE

tion, capital has not flowed automatically into Papua-New Guinea, but has tended to leave the country at least since the mid-1950sP This apparent paradox may be explained by prevailing social and institutional factors or lack of essential supporting activities. Instead, foreign entrepreneurs have invested in more immediately profitable activities.

It will be important, therefore, in Section 111, to examine the repercussions of export industries .upon the development of the domestic sector. Section IV will be concerned with the growth of a domestic market, and Section V offers some general comments about long-term development prospects.

I11 ( i ) Agriculture

The striking feature of plantation agriculture in Papua-New Guinea is its dependence on large amounts of unskilled indigenous labour and relatively small S ~ O M ~ S of highly skilled imported 1abour.l The low demand for skilled labour by plantations suggests that it is costly to induce a supply of such labour from the Territory’s people. Tree crops, moreover, which axe climatically suited to the Territory, require much unskilled labour, 80 that her comparative advantage Lies in activities where labour skills are low and where the overall labour input is high.8 Whilst these conditions have provided little opportunity for indigenes to acquire improved production techniques, by 1961 approximately 250,000 workers had acquired the knowledge to establish their own small export units. The increasing output, however, which has come from indigenous enterprise* is a result of larger numbers turning to cash production, rather than to increased output

BDuring 195960, capital outtlflow probably approached f7.7rn.. and during the following year some f2.7m.; R C. White, ?p. cit, pp: 7 9 9 .

‘As at 30 June 1961, numbers employed In plantattons in Papua-New Guinea were 1,146 maagers, or owner-managers, and 40,534 indigenes hired either on a “casual” or “agreement“ basis ; Annual Reports, Papua and New Guinea.

8 Calculation of labour coefficients in plantation industries is difficult because labour employed on coffee and cocoa plantations is also devoted to maintaining unproductive and immature oreas. In addition, where cocoa and coconuts are interplanted it is difficult to determine employment realistically as between the two industries. I t is therefore considered most convenient to view the rubber industry. In 1960-61 labour units cmployed per fA1,OOO output were 5.191 (Over- sea Trade Bulletin, 1960-61; Annual Report, Pap- 1960-61; Cnvru of the C m - fnonwealth 30th June 1961, Bulletin No. 16, Commonwealth Bureau of Census and Statistics, Canberra). This coefficient scans to compare favourably with that of the rubber industry in west Africa where, in 1950, with much higher rubber prices, labour units employed per fA1,OOO output were 9.24 (United Africa Com- pany, Statbtical und Economic RNiew, March 1951, p. 13). A similar coefficient for tobacco farming in Rhodesia was 4.224 in 1960 (private communication, Federal Ministry of Agriculture).

9Between 195455 and 1960-61. the increase in indigenous cocoa production was from 5,600 c w t to 38,400 cwt or from approximately 25 per cent to 30 per cent of the Territory‘s total production. Similarly in the case of coffee, the increase was from 360 cwt. to 14,!?20 cwt.. or from approximately 16 per cent to 30 per cent total production. Indigenous increases in copra production were from 19,800 tons to 26,510 tons or from 20 per cent to 25 per cent of the total ; Annual Reports, Papua and New Guinea.

1966 TRADE AND DEVEZIOPMEINT IN PAPUA-NEW GUINEA 277

per head. Given the inhibiting social and institutional characteristics of the traditional domestic sector, few natives have been able to acquire the entrepreneurial skill to establish a plantation themselves. Thus without considerably more training and capital, large increases in indigenous income per head are not imminent.1°

The capital inputs required for the plantation economy have had more favourable repercussions on local industries, as these inputs comprise such items as bricks, cement, timber, wire fencing, etc. In so far as bricks and timber are concerned, it has been possible fo r backward linkages to develop within the Territory. The presence of a fired brick factory at Goroka is probably related to high transportation costs in flying such a bulky and heavy commodity into the highlands in the absence of an all-weather road to the coast; and the development of sawmilling may be seen, not only as a response to input needs of export industries, but also a means of utilizing an existing output more efficiently (see below). In both these industries the skilled labour re- quirement is not high, and it is possible for small units t o operate nearly as efficiently as larger concerns.

The extent to which outputs of agricultural industries lend themselves to employment as inputs in other industries depends not only upon the nature of the output, but upon factors such as the availability of skills and service inputs (transport, etc.). Where outputs of forward Linkages coincide with domestic consumption, their presence is favoured; where this is not so, their feasibility depends upon the degree to which industrialized countries have accepted imports of a partly processed commodity.

In some instances, processing is an inseparable part of reducing raw materials to a form acceptable to the user; for example, the drying and smoking of rubber. More significant, however, are activities which carry processing stages further towards final consumption than minimally acceptable t o the user. In agriculture the most important forward linkages relate to the copra industry. During inter- war years, desiccated coconut was manufactured in the Territory but has now ceased to be irnportaflt.'l Coconut oil and copra oil cake and meal (as a by-product) are at present extracted at W. R. Carpenter's mill in Rabaul. During 1961-62, this represented about 21 per cent of the value of secondary production in Papua-New Guinea.12

Table I shows that the intake of the expressing mill comprises about 30 per cent of the Territory's total copra production. The out-

10 See R E. Baldwin, "Patterns of Trade and Development in Newly Settled Regions", Manchester School of Economic and Social Studies, Vol. XXIV, May 1956, p. 170.

"The manufacture of desiccated coconut began in the twenties in a small factory at Madang (AnnwI Report, New Guinea, 1928-29, p. 61). During post-war years, production reached a peak of 1,469 tons in 1951-52 (Annual Reports, Papua and New Guinea) but finally ceased in 1954-55. The jute bags in which the product left the factory were suspected foci of typhoid bacteria,

12 Production Bulletin No. 4, Part II, Secondary Industries, Bureau of Statis- tics, Konedobu. D

278 THE ECONOMIC RECORD

T B L E I

Volume of Copra Processed Locally

JUNE

Total Production (a) Intake of expressing

mill (b) . . ..

~~

Tons

105,157 - 39,003 -

I .

Source : (a) Annual Reports, Papua and New Guinea (b) Records, Copra Marketing Board, Port Moresby.

Tons

106,491

32,289

put of the mill has been approximately 10,OOO tons of copra oil cake and meal, and 20,000 tons of copra oil.

The circumstances which led to processing copra in Rabaul also helped in promoting considerable economies of scale in copra production itself, especially in the Gazelle Peninsda. Here the Germans had established roads, an important service input.13 This not only facilitated opening up fertile alluvial soils in the district to plantation development, but also enabled many indigenous producers to be brought within the money economy.

Today one-half of the Territory’s copra originates within a 150 mile radius of Rabaul. Much of the factory’s requirements, however, is shipped from Bougainville and New Ireland, so that Rabaul’s central position in relation to major copra producing areas, together with its deep-water harbour, favoured its waterfront as a site for the necessary plant. An e5cient communication network from the highly productive Gazelle Peninsula thus services the industry with a large proportion of inputs and, where these are insufficient for capacity requirements, vessels from other sources Offload at the factory. Although copra oil is not consumed domestically, outputs are stored at minimum cogt on the wharf.

The fact that it has been possible for the Territory to obtain this forward linkage thus derives partly from the significant economies in handling inputs and outputs from locating the mill at Rabaul.14

The entire output of the mill is at present exported, but the nature of the output suggests further forward linkages-for example the manufacture of soap,15 and at a later stage margarine. It is also likely that copra oil cake and meal could be used as a stockfeed for the cattle industry (see below).

l3 It is interesting to note Administrator Murray’s attitude towards the German road-making programme; he went as far as to question its economic significance, and suggested that German roads were “of an ornamental rather than economic nature”; Report of the Royal Commission on Gewnu‘n Nru, Guinea, p. 66.

14 Private communication, Manager, Coconut Products Ltd., Rabaul. 16The Minister of Territories has declared that he is willing to otTer any

protection necessary to prospective soap manufacturers ; Administration Press Statement No. 34, Port Moresby, 10 May 1961.

1966 TRADE AN0 DEVELOPMENT IN PAPUA-NEW GUIXE.4 279

The repercussions of the oil extraction industry upon the quality of indigenous labour are, in the long run, likely to be favourable. The actual manufacturing process is highly capital-intensive,16 and the labour input in ancillary activities is fairly high.lT In time, it will probably become cheaper to substitute indigenes for imported labour in semi-skilled and skilled positions in branches of the industry associated with servicing equipment, and also in clerical work.

(ii) Mining and Forestry It will be convenient to examine together the repercussions of

mining and timber industries upon the rest of the economy; for much development in timber has been closely linked to mining.

As dredging accounts for most mining operations, capital-in- tensity is much higher than in the plantation sector.'* The skill component of labour is also higher.lg Initially, however, it was not thought profitable to substitute local unskilled labour f o r skilled labour, or to use specialized capital equipment on a scale that would employ a large amount of unskilled labour per unit value of output. Skilled workers have, in consequence, been recruited from Australia. The demise of gold mining has been especially unfortunate as the training opportunities it might have offered indigenes were probably favourable. Its diminishing operations have prevented long views, thus costs of training indigenes for positions of higher skill have not decreased as much as they might have.2O

Although most skilled labour remains non-indigenous, here too some indigenes have established individual export units by panning for alluvial gold, mainly in the Sepik.'l

16In 1960-61, the number of labour units employed per fA1,000 output was 0.042 ; Records, Coconut Products Ltd., Oversea Trade Bulletins.

17Excluding clerical staff, figures for employment in the industry as a t 30 April 1963 were as follows: 102 indigenes (approximately 30 of whom were en- gaged in stevedoring activities, the remainder were employed in stores, main- tenance, and transport, etc.) and 10 Europeans (4 shift bosses, 2 engineers, 1 mechanic, 1 native supervisor, 1 chemist, and 1 storekeeper). Records, Coconut Products Ltd.

18 Labour units employed in the mining sector per fA1,000 output were 1.775 in in 1960-61 (Annuof Reports, Papua and New Guinea). Examples of similar coefficients for extractive industries in other countries are: 0.343 for the copper industry in Northern Rhodesia in 1955 (Central Statistical Office, Cennrs of Zn- dustrial Production, 1956-7, Salisbury) : and 0.756 for iron ore production in India in I959 (Tata Industries, Statistical Outline of India: 1959, Bombay, 1959, p. 13).

m In 1960-61 the ratio of non-indigenous skilled and semi-skilled labour to indigenous labour employed in the Territory's mining industry was 1 :4, which com- pares with a similar ratio of 1:35 in the case of the plantation economy as a whole ; Annual Reports, Papua and New Guinea.

2o In the post-war period, however, figures suggest some indigenes have passed into semi-skilled positions. Over the period 1953-54 to 1960-61, the ratio of non-indigenous to indigenous employees decreased from 1 :3 to 1 :4; Annual Re- ports, Papua and New Guinea: Census of the Commonzuealth, 30th June 1961, BuIZetin No. 16, Commonwealth Bureau of Census and Statistics, Canberra.

21 During the period 1954-55 to 1961-62, indigenous production rose from 917 fine oz., or 1 per cent of total production, to 5,668 fine oz., forming roughly 13 per cent of the total gold production : Annual Reports, Papua and New Guinea.

280 THE ECONOMIC RECORD JUNE

In the case of the Territory’s timber resources, utilization of capital-intensive techniques in log-felling has depended on the scale of operations in any given area. Although timber is the Territory’s most abundant resource, rudimentary communications limit utilization of reserves.22 Where economies of scale in felling have justified use of advanced techniques, opportunities for indigenes to acquire new skills have been favourable. Generally, however, lack of pure stands and inaccessibility have prevented utilization on a scale that would use labour with a high semi-skill component.?5 Felling operations on a scale favouring these techniques are confhed to the Bulolo Valley, where there are stands of relatively homogeneous pine.a4 It seems that wide dispersion of large-scale felling waits upon planned stands attaining a merchantable age.

The really important secondary repercussions which have resulted from timber and mining have been twofold. First, the backward service W a g e s due to mining have indirectly led to the establishment of the Bulolo plywood industry. Table I1 shows that the intake of the plywood mill and veneer peeler plants comprises about 40 per cent of the total timber cut. Secondly, logging operations have directly facilitated the widespread dispersion of sawmills, which receive approximately 55 per cent of the log-cut. It will be convenient to discuss these repercussions separately.

Rarely has mere knowledge of a resource in the Territory spon- taneously led to its exploitation. At Bulolo, for example, there are large pine stands, well suited to the manufacture of plywood, and certainly suggestive of a forward linkage, yet there is Little indication that the substantial investment required in plant would necessarily have taken place, at the time, but for the essential backward linkages already induced by the pre-existing mining industry. In effect, it WBS possible for the timber resources to provide a forward linkage as a result of cheaper inputs already produced by the mining industry. Whilst the nature of capital inputs as between the mining and plywood industries diEers, there is an af6nity between the labour, materials, and the service content of inputs. Each of these industries requires engineers, fitters and turners, and facilities for servicing capital equipment. In addition these industries require transport

22 It is estimated that roughly 70 per cent of the land is under forest; Annual Reports, Papua and New Guinea. Mid-mountain typ“ lying between an altitude of 1,500 ft. and 7,000 ft. represent the greatest potenttd. Access to such timber is particularly difficult.

W During 1961-62, native landowners delivered just over 3rn. superficial feet of log timber to private sawmills; L. W. Huston, ‘‘Forestry Development in Papua and New Guinea”, Australian Tem‘torirr, Department of Territories, November 1962, p. 4. Native use of timber is at present confined largely to small round timbers and sapplings in houses. Pit-sawing of logs is quite mmmon.

2.1 This stand was estimated to comprise approximately 5OOm. superficial feet of pine timber of the hoop and klinkii varieties, contained in an area of about 55,000 acres; Resources of Papiu, and New Guinea, Vol. I., Department of National Development, Canberra, 1951, p. 107.

1966 TRADE AND DEVELOPMENT IN PAPCA-NEW GUINEA 281 TABLE 11

Utilization of Timber Cutr

5 3 . 1 - 1 . 4 3

29 .1 54

23 .2 43

I 1957-58

m % m % ---- 64.6 - 1.4 2

38.5 60

21.7 35

Total log harvest (a) . . .. ported) (b) . . .. ..

Intake of sawmills (c) .. Unprocessed material (logs ex-

Intake of veneer peeler plant and plywood mill . . . . ..

-- 50.9

1 . 2 21.4

22 .3

. % -

3 54

43

m

50-5

0-8 27.2

22.5

-

g:rtPsr.oduction* I ,;:; 1 ap:: 1 f;:: Exports as a o/o of

production

1959-60 1 1960-61

;::

* In superficial feet (Hoopus measure). Source: (a) Annual Reports, Papua and New Guinea.

(b) Oversea Trade Bulletins. (c) Annual Reports, Papua and New Guinea, show production of sawn

timber. The above estimate is based on the assumption of an average rate of recovery of 72 per cent for softwoods and 61 per cent for hardwoods ; Records, Department of Forests, Port Moresby.

facilities to bring them within reach of a and also sufEcient supplies of poweP-inputs which by themselves are usually difficult to supply. The fact that these investments had already been under- taken, and that an abundance of a suitable natural resource was available in proximity, strongly favoured a plywood industry.

.As with the copra oil extraction industry, resource and location factors were responsible for this forward linkage. Table I11 shows that only a small proportion of production finds a market in the Territory,

TABLE I11

Production and Exports of Plywood

I 195859 I 1959-60 I 1960.61 I 1961-62

282 THE ECONOYIC RECORD JUNE

Once again, as with oil expressing, the process is highly capitali~ed,”~ and opportunities for training labour are considerable.28

Further secondary repercussions have become apparent. In 1958, a separate veneer peeler plant was established at Lae in order to cater directly for the Bulolo factory. Although about 12 per cent of the veneer production is exported, the major part is absorbed in the production of plywood a t Bulolo.

TABLE I V La.e Factory, Veneer Production and Exports

~ ~~

mas9

2.4 0.3f

12 I Production* Exports* Exports as a % of

total production

1959-M) 1960-6 1

47.4 47.1 6.8 4.6

14 10

* Million sq. ft., ?&” basis. t5’7m. sa. ft. battery veneer were also exported in-this year, from the plant

at Bulolo, whiih was then moved to the Lac factory. Source : Annual Reports, New Guinea; Oversea Trade Bulletins.

Criteria such 8s economies of scale and the availability of labour skills are not necessarily of great importance in promoting forward linkages such as sawmilling. The very nature of the unprocessed commodity, in view of its bulkiness and its low value/weight ratio, lends itself to processing on site. The industry has also been favoured by a high degree of domestic utilization in private constructional outlays and public works.= In fact, as is shown in Table V, most sawn timber is utilized within the Territory, and only one-fifth of production is exported. Imports are coIlfined to quality types not locally available. To all intents and purposes, then, the Territory is self-suBcient in regard to sawn timber.

The development of Papua-New Guinea’s timber resomces can thus be seen as following two separate sequences of forward linkage: exploitation of logs has led to veneer peeler plants, and thence to plywood manufacture. Markets permitting, there is considerable technical scope for establishing further peeler plants. Capital requirements are not high, and such plants can be shifted to areas of felling with minimum inconvenience. The manufacture of plywood using local veneer is

27The labour coefficient per L41,OM) output in 1960-61 was 0.297; Oversea Trade Bulletin; Records, Commonwealth New Guinea Timbers.

aaThe total employment in the industry as at 10 March 1963 was 347, comprising 48 Europeans and 299 indigenes. Some difficulty in marketing has since, however, caused lay-offs. No skilled or semi-skilled positions were occupied by indigenes as at May 1963 ; Records, Commonwealth New Guinea Timbers.

2aSawmilling received much fillip during World War I1 when over 81m. superficial feet of sawn timber were produced by the armed services. At its height the military operation was producing at an annual rate of 4Om. superficial fee t -a rate which remains unsurpassed. The wartime operation probably did much to prove hitherto untried species.

1966 TRADE AN% DEVELOPMENT IN PAPUA-NEW GUINEA 283 TABLE V

Production, Imports and Exports of Sawn Timber

16.8 0.4

2

Total sawn* Total exports* Total exports as a ”/.

of total sawn timber

Total imports* Total domestic

consumption* Total imports as a %

of total domestic consumption

17.9 4.8

27

1958-59 I 1959-60 I 1960-61

0- 1

16.5

1

0.2

13.3

2

23.9 3 .4

14

0.2

20.7

1

* Million superficial feet. Source: Annual Reports, Papua and New Guinea; Oversea Trade Bulletins.

the logical continuation of the sequence, and there are indications that opportunities for processing axe available; at present the rate of recovery on pine logs in the plywood industry is about 66 per cent.30 Maximum eBciency, therefore, in utilizing raw materials would seem to require further processes, using as an input that part of the log-cut unsuited to manufacturing plywood. The immediate possibility seems a fibreboard plant and, at some time in the future, wood-pulping could also prove attractive.

Sawmilling, as a less complex sequence, has provided a useful avenue of employment for indigenes, and for initiating them into the money economy as wage earners. As an output, sawn timber has led directly to the establishment of a small furniture and joinery works in Rabaul. As demand continues to expand (see below), opportunities fo r duplicating this activity appear favourable; capital outlay is not extensive, and plant size is not of prime consideration.

(iii) Fishing and Cattle In view of the infancy of these industries, little can be said about

their potentialities f o r training labour. Present utilization of flsh resources is almost entirely within the subsistence and of the 20,200 head of cattle in the Territory as at 31 March 1961 only 320 were owned by indigenes.= The development of a beef cattle iu- dustry will be time-consuming as it involves breeding cattle specially suited to local climatic conditions.33

30 Records, Department of Forests, Port Moresby. 31 Total fish production approximates 10,ooO tons per year, of which slightly

under 20 per cent is “traded“; J. van der Meulen, Fish Marketing in Papua and New Guinea (University of New England, Amidale, 1%2), p. 8.

32 Annual Reports, Papua and New Guinea 39 See J. L. Anderson, “The Development of a Cattle Industry in the Territory

of Papua and New Guinea”, Papua New Guineo Agricultural Journal, March 1963, pp. 134-6.

284 THE ECONOMIC RECOBD JUNE

The failure of the Territory’s other industries to communicate suf6cient entrepreneurial skill has, in so far as cattle is concerned, partly been responsible for non-indigenous enterprise once again taking the lead. Nevertheless, it must be noted that the initial pre- dominance of imported labour in this industry is important in that the creation of a resource, especially suited to the Territory’s environ- ment, requires highly specialized skills. Moreover, the introduction of indigenes to commercial livestock could prove a long-term sociological problem owing to the absence of a traditional association with animals as large as cattle. It seems, however, that if a lesson can be drawn from the history of the plantation economy, it is that indigenes should acquire some sophistication in techniques as early as possible in the development of an industry. If not, the pattern becomes esablished whereby an industry tends to remain dependent upon large inputs of unskilled, unwerentiated labour, with the concomitant of relatively low per capita incomes (see below).

It seems, then, that adequate provision should soon be made for launching fishing and cattle industries with indigenous participation on a larger scale, at least in skilled or semi-skilled positions if not at the entrepreneurial level. This appears particularly true of hhing, where natives operate with primitive equipment and would probably be at a loss to compete successfully in the local market with any capitalized European enterprise.

Hitherto development both in fishing and cattle has been greatly handicapped by lack of service inputs. The recent provision of an abattoir in Lae, however, will not only prove an important adjunct to the cattle industry but, with the possibility of excess freezing capacity and the likelihood of suitable fish resources, it may also stimulate fisheries off the Lae coast.

Previously, in order to market beef, it had been neces98p4r for individual producers to provide their own killing floor. This hampered the growth of a cattle industry and was also wasteful of by-products and offal. If output proves large enough, by-products could provide scope for a range of forward linkages-for instance, the tanning of hides and skins, the manufacture of blood and bone fertilizer, and the boiling down of offal for dripping and tallow. None of these activities would require large amount8 of capital, and there is no reason why a small production unit could not operate on a reasonably eBcient basis.

Consideration has recently focused on the possibility of establishing a canning industry, as both canned meat and fish have become prominent on the list of imports. And since it would mean more self- s ac i ency in producing food, this alone might be regarded as s d c i e n t to warrant establishing an industry within the Territory. Canning, moreover, is well adaptable to smaller operational plants not requiring large amounts of capital.

1966 TRADE AND DEVELOPMENT IN PAPUA-NEW GUINEA 285

(iv) Public Works Though largely artificial in nature, this programme constitutes a

significant feature of the economy. Public works can be treated as an industry having inputs of capital materials and labour, and producing services which are inputs for primary and secondary industries. In this section we consider only backward linkage effects of public works on economic development through their own demands for inputs.

In the fkst place, public works have provided an additional avenue of employment for urbanized indigenes. The provision of ap- prenticeships wil l probably lead eventually to a fairly large number of indigenes becoming skilled tradesmen?* Moreover, where public works have involved constructional outlays, it has often proved feasible to produce locally certain material inputs. Capital works projects have, in fact, created the main market for the Territory’s locally produced sawn timber. There is also a paint factory in Port Moresby, processing for final use cellulose imported from Australia ; and also at Port Moresby, a f h n manufacturing concrete building materials, such as pipes and

In addition, it has sometimes been possible to utilize Territory plywood for interior panelling.

There are large differences in the level of technology between the different productive sectors of Papua-New Guinea. Where very small export units have been established, production is based upon a state of technology that hardly differs from pure subsistence. In other industries, where forward Linkages have been possible through resource and location factors, productive methods embody some of the most advanced techniques known. These industries, however, are relatively unimportant as avenues of employment. Moreover, at the moment the general tendency is to utilize imported labour for positions requiring high skills since, in terms of labour that can be trained to perform skill-requiring tasks, the supply price is considered much greater in Papua-New Guinea than in Australia.

Table VI shows that, of the 325,875 natives absorbed o r partially absorbed into the money economy at 30 June, 1961, only 75,875 were in the wage sector. In spite of the fact that numbers in the wage sector rose by about 9,500 between 1954 and 1961, the greater proportion of the money economy (comprising those 250,000 self-employed cash croppers) depended on relatively backward methods. Furthermore, there were still some 270,000 adult males uncommitted to cash production.

34Native Apprenticeship Ordinance l951-1960. As at 30 June 1961, 50 indigenes had obtained trade certificates since the inception of the scheme; Annual Reports, Papua and New Guinea.

aSFigures for employment as at 30 June 1962, in the concrete building materials and the paint industries were 61 and 16 respectively ; Records, Department of Trade and Industry, Port Moresby.


1,381

JUNE

-- 44.310

T ~ L E VI Indigenous and Non-indigenous Inhabitants Employed

30 June 1954 and 30 June 1961

Primary production and mining. . . . . .

General manufacturing, building and construc- tion, transport, commerce. hotels, etc. . .

Professional activities, re- ligions, social welfare. health, education . .

Public authority n.e.i. (including police) . .

Total work force in wage sector .. . . . .

Self-employed persons in cashproduction . .

l-

40,191

15.988

7,612

2.566

66,357

f

I-

3,133

3,006

13,868

-

10,873

8,596 -- 89,743

250,OOD

1954

N0n- indigenes

1,567

4.864

1.707

2,153

10.281

-

Total

41,758

20.842

9.319

4.719

76,638

t

42,929

19,616

7.740

5,590

75,875

!50,000

1961

6,348 25,964 I

* Includes those in government employment not covered by the Public Service

t Not available.

Source: Annual Rekorts, Papua and New Guinea, Cenncs of the Commoir- uealth, Census Bidletin No. 16, Commonwealth Bureau of Census and Statistics, Canberrz

Ordinance.

The nature of Papua-New Quinea’s export activities and the linkage effects which these have made possible, in combination with a social structure whose qualities are at some variance with the requirements of a money economy, do not appear, therefore, to have induced very much in the way of more advanced methods of production. As a result, per capita incomes have not risen greatly. Shand estimates that for the year 1959-60 family incomes of the 250,000 cash croppers were in the region of €14, giving an income per head of about f3/10/-.ae Evidence, however, shows that incomes are much higher in areas where there has been a longer history of cash cropping, or where more sophisticated production techniques have been adopted. A regional study of the Tolai peoples in the Gazelle Peninsula area, for instance, suggested that in 1959 per capita incomes were about €25.37 Family incomes of indigenes employed in manufacturing, commerce,

86 R T. Shand, “The Development of Cash Cropping in Papua-New Guinea”, paper deiivered a t the Annual Conference of the Australian Agricultural Eco- nomics Society, February 1963, p. 24.

37 T. S. Epstein, “European Contact and Tolai Economic Development”, Eco- nomic Development and Cultural Change, April 1%3, p. 307.

1966 TRBDE AND DEVELOPMENT IN PAPUA-NEW QUINEA 287

and activities other than those of primary production (and government) were about €58/4/- in 1960-61, giving a per capita income of about €19/8/-.38

Over the period 1950-51 to 1960-61, total native cash income in terms of current prices increased from fA.4m. to Ell.9m. (see Appendix). This substantial increase seems to derive almost entirely from sheer growth in numbers of individual export units.s9 During the same period, the money value of native surplus primary production, over and above subsistence, rose from €0*7m. to €3.lm., o r from 5 per cent to 8 per cent of the total Territory income.

In money terms, the non-indigenous sector still retains the dominant role. Fisk suggests a non-indigenous per capita income in the region of E1,000 for the year 1959-1960.‘O The discrepancy between non-indigenous income and prevailing income levels can, of course, be explained in the higher return necessary to attract skilled and highly specialist labour.“ Furthermore, it has been the Territory’s relatively high absorption of skilled labour during recent years that has made increases in non-indigenous income outstrip those in native income. In the period 1950-51 to 1960-61, non-indigenous private and corporate income rose from 67 to 71’ per cent of total Territory income (see Appendix).

The increases which have occurred in both indigenous and non- indigenous income, over the period as a whole, mean that demand in- fluences have affected the economy. During the period 1950-51 to 1960- 61, total personal consumption expenditure, measured at current prices, rose from €9-7m. to €24.5m. (Appendix). In most cases, however, these demand repercussions have not led to manufacturing within the Territory. It has been the failure to acquire the necessary industrial labour skills within the export sector which has enabled foreign producers to retain their markets within the Territory. The result is that consumer demand has largely been reflected in the pattern and growth of imports. In 1947-48 imports were valued a t S.Om., compared with an annual average of about E24.8m. during the years 1959-60 to 1961-62?*

Those particular secondary activities in Papua-New Guinea which may be related to demand repercussions are, therefore, confined

38 See Appendix and Table VI ; the average family size was assumed to be three.

39It may also be noted that there were several increases in the prescribed minimum wage during this period. This increased in October 1960 from 15/- to 25/- per month, and again in January 1961 to 30/- per month in the first year of employment, and 357- thereafter. Issues of rations and clothing are also prescribed: Labour Ordinance, 1958-61.

40 E. K. Fisk, “The Economy of Papua-New Guinea”, in The Independence of Papun-New Guinea(Angus and Robertson, Sydney, l W ) , p. 28.

41 Non-indigenous plantation holders do not enter the argument since their earnings are determined not by productivity in these crops, but by the return on capital.

42 Oversea Trade Bulletins, Bureau of Statistics, Konedobu.

2aa THE ECONOMIC RECORD JUNE

mainly to industries where the manufacturing process is relatively simple, or where only processing is required to bring a good to the stage of fbd consumption. These comprise the manufacture of twist tobacco and tailor-made cigarettes (from imported leaf), baELing and biscuit making, brewing and the manufacture of aerated waters. Dur- ing 1961-62 these industries formed some 15 per cent of the value of the Territory’s secondary prod~ction.’~ Other activities for which demand repercussions have been responsible constitute the ‘ ‘residen- tiary” tppe of industry, such as garages and workshops carrying out repairs to imported consumer durables. During the same year the servicing function of these industries represented about 29 per cent of the value of secondary p r~duc t ion?~ As their activities must be carried out on the spot, such industries have a natural protection, and wi l l tend to expand freely in approximate proportions to the growth in urban income.

Repercussions of h a l demand are also related to the distribution of income. The low per capita income of the native, together with the high income-elasticity of demand for simple, cheap consumer goods, mean that a large proportion of the income of the native is consumed. Whereas in the case of a European, the proportion of income spent on consumer goods, in which the Territory might conceivably possess a comparative advantage, is likely to be relatively small and, moreover, income-in el as ti^.'^ Trends in the Territory’s imports seem to conlirm this. Although the majority of S.I.T.C. groupings in the import has tended to maintain relatively constant proportions of the to ta l value of imports, there have been significant changes in the importance of “miscellaneous manufactured articles”, a grouping largely comprising durable and semi-durable goods of a luxury and semi-luxury nature. In pre-war years this grouping formed roughly 2 per cent per annm of total imports, yet between 1947-48 and 1961-62 it rose from 9.3 to 13.8 per cent.’? This can probably be attributed to the growth in non-indigenous income. In the manufacture of these types of good requiring expensive machinery and special skills, the Territory would clearly be at a comparative disadvantage. On the other hand, the indigenes’ high income-elasticity of demand for simple consumer

43Production Bulletin No . 4, Part ZZ, Secondary Industries, Bureau of Sta- tist ics, Konedobu.

44 Ibid. 45 For instance it has been shown that the savings ratio for top income groups

in underdeveloped countries is much higher than in developed countries; S. Kuz- nets, “Quantitative Aspects of the Economic Growth of Nations: Distribution of Income by Size”, Economic Development and Cultural Change, January 1963, Part 11, p. 29.

4eImportS are recorded in the Ovqsea Trade Bulletins- according to the Standard International Trade Classification (S.I.T.C.) pattern of ten major groupings, namely : food ; beverages and tobacco ; crude materials, inedible ; mineral fuels etc. ; oils and fats ; chemicals ; manufactured goods, chiefly by material ; machinery and transport equipment ; miscellaneous manufactured articles ; miscellaneous transactions and commodities.

*T Ozersea Trade Bulktim, Bureau of Statistics, Konedobu.

1966 TRADE AND DEVELOPMENT IN PAPUA-NEW GUINEA 289

goods has caused large increases in imports of processed food such as tinned fish and meat, and items of clothing and footwear.48

In order to facilitate the necessary economies of scale in those activities for which Papua-New Guinea might have a comparative advantage, increases in indigenous income are therefore likely to be more fruitful. Thus the need for the native to acquire skills and increases in productivity becomes all the more crucial.

V The growth of income, then, has hitherto led to a large increase

in activities connected with the purchase of goods rather than to their manufacture. International trade, rather than acting as a vehicle for transmitting higher skills and external economies mithin the domestic sector, has thus tended to be a vehicle for the continued transfer of external economies to the Territory’s overseas supplier^.'^

The need for a better balance between manufacturing and primary industry is indisputable. As to how this balance should be most fruitfully accomplished in developing countries, and at what stage of their development, there has been much disagreement.60 Nevertheless, it is the marked deficiency of domestic capital in Papua-New Guinea which greatly hinders the development of the domestic sector and the extensive diversscation in manufacturing. Furthermore, mere presence of capital in the form of the Commonwealth grant is a poor substitute for the growth of productive capital associated with the dispersion of higher skills.61 Nor are indigenous savings merely needed for training labour and helping it acquire technical skills ; the problem has deeper ramifications which, in great measure, relate to harnessing any potential for development within a subsistence and semi-subsistence economy.

Historical evidence indicates that industrial and agrarian revolu- tions usually occur together.62 Papua-New Guinea, however, is merely

48 Ibid. Between 195849 and 1961-62, imports of canned fish rose from 5 . h . lb. to 11.4m. lb. Increases of the Territory’s dependence upon imports of processed food perhaps indicate a premature upgrading of diets. In the prescribed ration scale for plantation wage labour, canned meat or fish are specified ration issues as al- ternative sources of protein ; Native Employment Ordinance 195860, 4th Schedule, Part I, Item 3.

49 If, in addition, price effects are taken into account, the picture becomes more unfavourable. After 1955-56, movements in the terms of trade were for the most part against the Territory, and between 1954-55 and 1961-62, when there were large increases in export production, the export price index fell from 175 to 132; International Trade in the Economic Development of Papuu-Nav Guinea, writer’s unpublished thesis, University of New England, Armidale, January IW,

50 See, for example, Raul Prebisch, “Commercial Policy in the Underdeveloped Countries”, American Economic Rm’nv, Vol. XLIX, May 1959, pp. 251-73 ; and G. Haberler, International Trade and Economic Development, Cairo Lectures, 1959, pp. 28-33.

61 A. Lewis, “Economic Development with Unlimited Supplies of Labour”, Manchester School of Economic and Social Studies, Vol. XXII, b1ay 1954, p. 153.

52 See, for example, J. H. Clapham, An Economic History of Modern Britoin 1820-1850. Second edition (Cambridge University Press, London, 1959), pp. 15-27, 98-132.

pp. 127-34.

290 THE ECONOMIC RECORD JUNE

at the threshold of accomplishing an agricultural revolution, and it is agricultural improvement within the indigenous community that probably represents the key to the Territory’s ultimate sustained growth. By Asian standards Papua-New Guinea could not be regarded as an overpopulated country, and a substantial potential must exist within the Territory’s pure subsistence units. This potential is a perfect re- flection of Adam Smith’s “vent for surplus” model. It has been suggested that the application of only very small amounts of capital would increase productive capacity by about 35 per cent per unit.53 Where land is abundant, it is likely that there is considerable potential in semi-subsistence units. The impact of modern medicine, however, especially if cash cropping provides for further rises in living standards, can be expected to make population pressure a serious problem.w In regions where this is already beginning to appear, notably amongst the Chimbu people in the highland^^^ it seems that, in the not too distant future, increases in output wi l l require considerable investment, possibly in the form of land resettlement.66 The writings of many economists, especially those who support the so-called doctrine of balanced growth, would suggest that opportunity costs of such a venture are excessive, and that industrialization on the basis of dis- guised unemployment could be a short cut to sustained growthP’ Nevertheless, a helter-skelter policy of industrialization could only have a mythical significance for Papua-New Guinea. Not only would limitations of domestic capital inhibit this course, but other factors must be taken into account. Broadly speaking the problems are three- fold.

First, the adoption of an urban life by a large section of the rural population would probably conflict with the maximization of welfare. Any crowding of unsophisticated peasants into urban slums, which can easily develop, involves a marked deterioration in their living conditions and efficiency as workers. A profusion of inefficient industries would also occur, requiring high levels of protection and em- ploying sub-optimal techniques so as to provide avenues of employ- n?ent.J8

53 E. K. Fisk, ‘Planning in a Primitive Economy: Special Problems of Papua and New Guinea’, Economic Record, Vol. 38, December 1962, p. 476.

54 Ibid.. p. 470. 5s P. Brown and H. C. Brookfield, “Chimbu Land and Society”, Oceania, Sep-

tember 1959, pp. 25-27. 8eP. M. C. Hasluck, op. cit, p. 14. 57 See, for example, G. Myrdal, Rick L a d and Poor (Harper, New York,

1957), p. 97; also R Nurksc, Problems of Capital Formation in Underdevc1o)ed Cwntn’es (Basil Blachell, Oxfor$ 1955,, pp. 37-8,

58There is a limit to the minmum size at which modern machinery is manufactured. This form of indivisibility has been c ~ t e d as one of the specific factors accounting for increasing returns; s . e H. W. Arndt, “External Economiu in Eco- nomic Growth”, Economic Record, Vol. XXXI, November 1955, p. 199. He goes on to quote Joan Robinson: “It is impossible for an mdustry to equip itself to produce one unit of a commodity without immediately providing a capacity to produce more than one unit.” Capacity utiliration, however, presupposes the dispersion of market economies on a scale precisely of the magnitude that is likely to be absent from Papua-New Guinea in the first place.

1966 T R D E DEVELOPMENT I N PAPUA-NEW OUINEd 291

Second, indigenes leaving agriculture for urban areas would not take with them a supply of food. Not only would this denude the land of its most able-bodied young men (the supply of whom is not unlimited), and thereby occasion a decrease in agricultural production generally, but it would also imply a large urban-based population whose food requirements could be met only by increased imports. The greatest comparative advantage of an underdeveloped country wodd seem to be the production of its food; thus measures for increasing self-sufficiency in food should be an important prerequisite for in- dus t r ia l i~a t ion .~~

Third, premature industrialization, in SO f a r as it might reduce agricultural output generally, could only have the effect of reducing exports. Papua-New Guinea has special reason to maximize her exports, since these determine her ability to import. Imports are needed, inter dia, to promote her manufactures.

The creation of an efficient agricultural framework will, of neces- sity, prove gradual. Agricultural development may understandably be hampered by the indigenes’ resistance to innovation, and just how fa r it will go towards laying the foundation for self-generating growth in the nest ten, or even fifteen, years cannot a t present be answered. The investment which land resettlement schemes are likely to involve is fa r beyond the Territory’s own savingss0 and, if implemented, would increase dependence upon outside capital. In addition, there is a time- lag between the application of capital and its ultimate impact upon the agricultural growth. But during this period there will be aome “leavening” which will raise rationality among indigenes and, once manufacturing starts to develop more extensively in urban areas, migration from rural areas could supply the appropriate labour force. By this time, however, the output of indigenes remaining in the countryside will not be lowered since they will be substituting technology for migrating workers. Truly vigorous secondary development in the domestic sector, therefore, waits upon a “leavening effect” in the export sector.

Univ emit y of A iic kland D. L.~ADLEZ

59 Stephen Enke, “Food Constraints in Industrial Development in Poor Coun- tries’’, Southern Economic Jorrtnrrl, Vol. XXVII, April 1961, pp. 293-7. See also V. D. Wickizer “The Smallholder in Tropical Export Crop Production, Food Research Institute Studies, Stanford University, February 1960, pp. 96-7.

80 In the long term, Mr. Hasluck regarded resettlement as involving some 250,OOO indigenes at an investment of approximately f5,000 per head; op. cit., p. 15.


APPEiNDIX

PRIVATE INCOME BND OUTLBY Years ended 30 June

(f'fw

INCOME N a t i v e Income Primary enterprises: wages and keep . . Primary enterprises: native surplus . .

Commercial enterprises: wages and keep . . Public authority: wages and keep Defence forces : pay allowances . . .. ..

Domestic service . . . . .. Misslons .. .. .. .. Total native income . . .. .. European Labour Income Primary enterprises . . .. .. Public authorities . . .. .. Defence forces . . .. . . .. Missions .. .. .. .. Commercial enterprises . . .. Total European labour income

Private European Surplus

. .

F'rimary enterprises . . .. .. Commercial enterprises . . .. Total private European surplus . . TOT.4L INCOME .. .. . . OUTLAY Personal Consumption Expenditure Domestic service . . .. . . External personal expenditure . . Commercial purchases . . . .

.. I .

..

.. . . . .. .. .. ..

.. ..

. .

..

..

..

.. Total personal consumption expenditure . . Gross Savings (plus net external interest

Direct Taxation Personal tax and native local g o d . council

Income tax: individual . . . . ..

Total direct tavation . . .. .. . . TOTAL OUTLAY . . .. .. ..

charges) . . . . . .. .. ..

.. . . .. tax . . . . . . Income tax: companies . . .. ..

1950-5 1

1,810 690

1,190 n.a. 390 300 n.a.

4,380

1,060 2,310

n.a. 290

1,560

5,220

2,190 1,600

3.790

13,390 - 300

1,350 8.000

9,650

3.740

- - - -

13,390

1966-51

3,276 1,984 1.322 102 626 387 248

7,846

2,991 4,438 101 634

6.203

13,367

1,786 4.680

6,466

27,678 - 387

2,030 14,630

17,047

10.580

51 - - 51

27,678

JUNE, 1966

1958-59

3,127 3,056 1,938 100 594 399 252

9,466

2,182 6,016 111 860

5,611

15,380

2,628 5,760

8,388

33,234

399 2,575 16,927

19,901

13,080

253 - - 253

33,234

1960-61

3,867 3,127 3.043 143 851 ,544 380

~~

11,965

2,814 8,046 184

1,092 6,678

18,714

2,441 6,140

8,581

39,250

544 3,265 20.735

24,544

12,073

285 1,226 1,222

2,633

39,250

Source: For the year 1950-51, T. W. Swan, unpublished research on the social accounts of Papua-New Guinea, Australian National University. Other years, R. C. White, op. cit.

Documents

International Trade and Economic Development in Papua-New Guinea