Papua New Guinea’s economic freedom
Score is 53.5, making its economy the 126th freest in the 2010 Index. Its score has decreased by 1.3 points from last year, mainly as a result of lower scores in monetary freedom and government spending. Papua New Guinea is ranked 25th out of 41 countries in the Asia–Pacific region, and its overall score is lower than the world and regional averages.
The Papua New Guinean economy scores relatively well in trade freedom, primarily because of low tariff barriers. The overall entrepreneurial environment has long suffered from macroeconomic instability, volatile economic growth, and low investment. Inconsistent government policies, weak property rights, poor infrastructure, lack of competition, and the dominant role of the state in the economy have contributed to the lack of economic development and widespread poverty across the country.
Private-sector growth has been minimal because of structural constraints. The government intrudes in many aspects of the economy through state ownership and regulation, raising the costs of conducting entrepreneurial activity and discouraging the development of a strong private sector. The lack of market competition has resulted in a number of highly inefficient state monopolies in key sectors of the economy.
Background Back to the top
Papua New Guinea is a democratic country with an extraordinarily diverse population of nearly 7 million people speaking hundreds of languages. The vast majority of its people depend on subsistence hunting or agriculture for their livelihood, and the formal economy is dominated by the mining of rich deposits of gold, copper, oil, and natural gas. Ongoing problems include corruption, election irregularities, weak governance, and crime.
Business Freedom59.1 Back to the top
The overall freedom to start, operate, and close a business is constrained by Papua New Guinea’s regulatory environment. Starting a business takes an average of 56 days, compared to the world average of 35 days. Obtaining a business license requires 24 procedures, compared to the world average of 18, and about the world average of 218 days.
Trade Freedom86.2 Back to the top
Papua New Guinea’s weighted average tariff rate was 1.9 percent in 2008. Some high tariffs, import and export bans and restrictions, import permits, import and export taxes, inefficient customs administration, limitations on trade infrastructure and capacity, and corruption add to the cost of trade. Ten points were deducted from Papua New Guinea’s trade freedom score to account for non-tariff barriers.
Fiscal Freedom65.0 Back to the top
Papua New Guinea has high taxes. The top income tax rate is 42 percent, and the top corporate tax rate is 30 percent (48 percent for non-resident companies). Other taxes include a value-added tax (VAT), a tax on interest, and an excise tax on fuel. In the most recent year, overall tax revenue as a percentage of GDP was 28.9 percent.
Government Spending63.3 Back to the top
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 35.0 percent of GDP.
Monetary Freedom72.6 Back to the top
Inflation has increased dramatically, averaging 7.6 percent between 2006 and 2008. Price controls are in effect for a number of consumer goods, mainly food products, although these are scheduled to be phased out. Ten points were deducted from Papua New Guinea’s monetary freedom score to adjust for measures that distort domestic prices.
Investment Freedom35.0 Back to the top
Foreign investment is screened and requires government approval. Only foreign enterprises need to be certified, but all companies must be registered with the government. Certain sectors of the economy are reserved for domestic investors. Investment-related rules and regulations are non-transparent and burdensome. Foreign investors are expected to employ locals where the expertise is available and are encouraged to train locals to fill positions held by expatriates. Other deterrents to investment include weak enforcement of contracts, corruption, crime, inadequate infrastructure, and underdeveloped private markets. Foreign exchange and capital transactions face various documentation requirements and government approvals. Ninety-seven percent of land is communally owned, but foreign investors may lease land.
Financial Freedom30.0 Back to the top
The financial system, dominated by banking, is not conducive to supporting investment and entrepreneurship. Although bank lending has expanded considerably in recent years, the system remains shallow and poorly developed. Financial intermediation varies across the country, and a large portion of the population does not use the formal banking sector. The high cost of financing and limited access to financial services impede development of the private sector. Papua New Guinea’s commercial banking sector has five major banks that have become more competitive as a result of privatization and mergers. Bank South Pacific accounts for over 50 percent of the sector’s total assets. Short-term financing dominates bank lending, and credit to the private sector accounts for about 20 percent of GDP. Capital markets remain underdeveloped.
Property Rights20.0 Back to the top
Land is held communally, and traditional communities do not recognize a permanent transfer of ownership when land is sold. The laws have provisions for extensive rights for women in dealing with family, marriage, and property disputes, but women generally are still treated as inferiors. The idea of intellectual property rights is a fairly new concept in Papua New Guinea.
Freedom From Corruption20.0 Back to the top
Corruption is perceived as pervasive. Papua New Guinea ranks 151st out of 179 countries in Transparency International’s Corruption Perceptions Index for 2008. Corruption at all levels of government is a serious problem because of weak public institutions, lack of transparency, a lack of law and order, land tenure concerns that stifle investment, politicization of the bureaucracy, and the use of public resources to meet traditional clan obligations. Charges were filed in two cases of high-level corruption involving senior government officials in 2008, but at year’s end, no investigation reports on either case had been released.
Labor Freedom83.3 Back to the top
Papua New Guinea’s labor regulations are flexible, but the formal labor market is not fully developed. The non-salary cost of employing a worker is low, and dismissing an employee is relatively straightforward.
Source:Papua New Guinea