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The World Bank Group in Papua New Guinea, 2008-23

Chapter 1 | Background and Country Context

This Country Program Evaluation assesses the development effectiveness of the World Bank Group’s support to Papua New Guinea between fiscal year (FY)08 and FY22. The assessment covers World Bank and International Finance Corporation (IFC) support over three country strategy periods as guided by the Country Assistance Strategy (CAS) for FY08–11, the Country Partnership Strategy (CPS) for FY13–16, and the Country Partnership Framework (CPF) for FY19–23. The assessment period starts after an interruption in World Bank lending and breakdown in World Bank–client relations in the mid-2000s caused mainly by noncompliance with legal covenants and national forest legislation within a forestry sector loan (World Bank 2005). The Bank Group was a relatively small but important donor throughout the evaluation period because of its multilateral nature. The World Bank contributed an average of 9 percent of total official development assistance over the evaluation period, and the Australian government and the Asian Development Bank together contributed about 70 percent.

Country Context

Papua New Guinea has an abundant resource endowment of oil and mineral wealth, but this wealth has not translated into significant welfare gains for most citizens. Papua New Guinea is the 10th most resource-dependent economy in the world (Howes et al. 2019). Resource sector development—including associated infrastructure spending—and high commodity prices have enabled an average annual GDP growth of 5 percent between 2005 and 2019. Yet this high average annual growth masks extreme macroeconomic and fiscal volatility that, coupled with weak fiscal management, has led to equally volatile public spending on social programs and service delivery. This has affected poor rural citizens disproportionately, especially women. No current measures of monetary poverty are available, but it is estimated that about three-quarters of the population live in multidimensional poverty. Although Papua New Guinea has abundant natural capital, it has low human capital. According to the World Bank’s Human Capital Index, a child born in 2020 can expect to achieve only 43 percent of their potential productivity. Stunted growth in children under five years is the fourth highest globally (World Bank 2021a).

Papua New Guinea’s political fragmentation, diverse sociocultural political economy, and dependence on extractives have contributed to intense competition among political elites, political instability, and institutional weakness. Papua New Guinea has been a democracy since independence in 1975. However, large resource rents have reinforced a form of “competitive clientelism.” Extractive rents enable powerful interests to dominate funding decisions in the electoral process, including those linked to capital budget allocations. Elites and other vested interests demand rents and other economic concessions in exchange for political support. This—together with unstable parties and a lack of coherent political agendas—has led to political fragmentation and limited expenditure focus and control. Votes of no confidence are a major mechanism driving the fragmentation of parliament. As a result, long-term policy making is difficult, and the interests of large portions of the population remain unserved. The resulting environment of weak institutions and weak enforcement of law and order thus facilitates the proliferation of corruption and rent-seeking behavior.

Declining governance also poses risks for sound policy making. Papua New Guinea’s Country Policy and Institutional Assessment scores have shown a steady decline over the past decade. Most indicators have deteriorated, but the decline is especially pronounced in cluster D: Public Sector Management and Institutions, indicating an overall deterioration in governance quality. This is driven, for example, by the fact that the auditor general’s office is financially dependent on the Department of Treasury while its audits are often delayed. Increasing debt distress, the current monetary policy, and election violence have depressed the Country Policy and Institutional Assessment scores even more. Weaknesses in the independence of the auditor general and the overall governance deterioration pose increasing risks for budget support financing.

Severe data limitations also undermine policy, planning, and effective targeting. Many statistical indicators considered standard in other parts of the world are either not prepared or are produced so irregularly or with poor quality that their usefulness is limited. The World Bank’s 2018 Systematic Country Diagnostic (SCD) highlighted the National Statistical Office’s insufficient resources and technical capacity to carry out a comprehensive program of national statistics, citing outdated or nonexistent censuses, household, and other survey data and the lack of timely macroeconomic data. During the evaluation period, the United Nations (UN) recalculated the population size, drawing previous population estimates into question. A 2020 national estimation based on growth rates using Papua New Guinea’s 2011 census (itself considered unreliable) estimated the population at 8.9 million people. A UN Population Fund exercise conducted in 2022 using Earth observation data suggested that the population is approximately 12 million—a 33 percent increase over a decade. These data deficiencies have resulted in significant gaps in the understanding of average living standards and other welfare estimates, complicating efforts to deliver services effectively to those who need them the most.

Nonextractive Growth

Nonextractive growth is critical for achieving sustainable development gains, but it represents a declining share of GDP, and underinvestment in nonextractive sectors is severe. From an average annual rate of 6.2 percent between 2008 and 2012, nonresource real GDP growth averaged just 1.8 percent between 2013 and 2019 and 1.9 percent between 2019 and 2022 during and after the global pandemic (IMF 2022). This performance is associated with low levels of investment in the nonresource sector and a weak link between the resource and nonresource sectors. The resource sector’s enclave nature means that a boom in resources does not necessarily translate into growth in the nonresource sector. Overvaluation of the currency (the kina) and the significant state-owned enterprise (SOE) sector that crowds out the private sector while delivering poor services and accumulating debt have also undermined nonextractive growth (IMF 2022). Key labor-intensive sectors with potential to drive nonextractive growth include agriculture and agribusiness and fisheries, among others.

Agriculture is the backbone of the nonextractive economy, but the sector is underperforming severely amid high and persistent rates of malnutrition and stunted growth in children. Agriculture accounts for about 22 percent of the nation’s GDP and 26 percent of its exports (World Bank 2022b). Eighty percent of the population live in rural areas, and farming supports approximately 85 percent of the rural population (World Bank 2022b). This includes a large smallholder population that relies on a mix of cash crops and subsistence farming for food and income. Coffee production has been the most important part of the rural economy, accounting for 30 percent of the labor force and providing income for more than 2 million people. It is also a key source of government revenue. Yet underinvestment in production (for example, replanting, pruning, and pest management), processing, and market access have undermined the productivity of key commodities: coffee, cocoa, and coconut (Benny et al. 2022). For oil palm (Papua New Guinea’s largest cash crop), inefficiencies are mainly associated with institutional issues and a need to ensure that local communities surrounding the oil palm plantations benefit. Staple food crop production, which is critical for poverty reduction, has received less attention from both the government and donors, despite high and persistent rates of malnutrition and stunted growth in children. There has been very little investment to help farmers bring traditional staple crops to market, including support for services, storage, processing, and transport facilities. Customary land challenges (97 percent of all land is customary) and lack of access to credit also constrain the sector.1

Poor infrastructure, low access to electricity, limited access to finance, and tenure challenges (for land-based activities) constrain private sector development. The limited reach and poor condition of Papua New Guinea’s road network isolate large swaths of the population from markets, income, and services, imposing significant costs on the economy (DOWH 2018). In addition, the high costs of domestic air and sea freight shipping allow international trade to outcompete domestic trade. These factors, together with poor export capacity, constrain farmers’ ability to get products to domestic and international markets. Papua New Guinea’s mobile phone and internet penetration has been increasing because of investments in telecommunication infrastructure,2 but users pay some of the highest costs in the world because of the nature of the telecommunications market (one company holds a 92 percent market share).3 Furthermore, a notable urban to rural access divide remains.4 Limited access to financial services is one of the primary constraints to the growth of micro, small, and medium enterprises (MSMEs) in the nonextractive sectors. Less than 30 percent of Papua New Guinea’s 49,000 small and medium enterprises (SMEs) operating in the wholesale, retail, agriculture, tourism, and fisheries industries and only 20 percent of the entire population have access to formal financial services. Women especially are excluded from these services. A lack of competition among the country’s few banks leads to risk aversion, with negative implications for lending to SMEs (World Bank 2019b).5 Nonbank financial institutions (for example, microfinance institutions) also lack the capacity to provide financing to MSMEs.

The SOE sector that accounts for several productive sectors is a major source of inefficiency in the economy. Papua New Guinea has 12 SOEs, many of which are leading firms in markets such as power, water, telecommunications, and transport. Performance is poor across the SOEs and has been in a steady decline since 2015, making the country’s SOEs, along with those of the Solomon Islands, the least productive in the Pacific region. The poor performance is caused by weak governance that negatively affects management and oversight, limited technical capacities, and political interference—all of which result in expensive, inefficient, and low-quality service provision and hinder competition. The state of SOEs severely restricts the government’s ability to prioritize expenditures for areas such as education, health, and security because they are highly indebted and in tax arrears (SOE debt has grown to represent a contingent liability), exposing the government to fiscal risk and the periodic need to provide capital injections.

Gender Inequality and Gender-Based Violence

Systemic gender inequality constrains women’s economic, political, and social empowerment and is a key barrier to sustainable and inclusive growth. As emphasized in the SCD, women’s limited access to economic opportunities, endowments (such as education and health), and voice and agency threaten the country’s long-term growth prospects. Women are more likely to be heads of households, but they are not marrying later, having children later, or having fewer children. Access to contraception has improved, but it remains very low, and women are no more likely to receive antenatal care now than they were 20 years ago (Howes and Pillai 2022). Legal impediments and deeply entrenched social norms prevent women from accessing economic opportunities, many of which are at a distance from home or within professions considered the preserve of men. Significant barriers to women’s political participation are evident in the limited number of women in formal leadership positions.

Extremely high levels of gender-based violence (GBV) perpetuate barriers to full economic participation. Papua New Guinea has one of the highest rates of GBV globally. About two-thirds of women have experienced GBV, 50 percent have experienced sexual assault, and half of all reported rape victims are younger than 15 years old (Kalebe 2020; LRC 1992; World Bank 2018a). Many women remain violently subordinated in family and wider social contexts. Power imbalances affect the overall economic health, governance, and resilience of the country by limiting women’s economic, political, and civic participation. In addition, high levels of sexual violence against men and children undermine development outcomes further. Although several law and policy reforms in the past decade have made some progress in supporting women, significant work remains to address entrenched sociocultural norms.

Fragility, Violence, and Disaster Risks

A complex set of fragility, violence, and disaster drivers and risks undermines inclusive and sustainable development in Papua New Guinea. As identified by the SCD and featured in the CPF for FY19–23 (extended to FY24 per the Performance and Learning Review recommendation), compounding and interrelated risks involving the interplay between different forms of violence, conflict, disasters, institutional fragility, and governance limit human capital development and constrain investment and growth severely. In the country’s rural, resource-enclave, and urban settings, ethnic identities also emerge as fault lines for violence. Modern politics brings together neotraditional patronage and wider, modern political boundaries that set clan against clan and village against village, undermining cooperation and sustained service delivery. Although intertribal conflict has decreased overall in many regions, interpersonal violence remains high and by some metrics higher than at the start of the evaluation period (IHME 2019).6

The Autonomous Region of Bougainville (the site of Papua New Guinea’s longest standing conflict) also exhibits high levels of fragility as it seeks to achieve full independence. The Country Program Evaluation covers a period that included postconflict activities and an independence referendum for the island of Bougainville. A separatist conflict in the resource-rich region took place between 1989 and 1999 and left 20,000 people dead. The conflict was triggered over grievances associated with a large-scale mining operation (the Panguna copper mine that at one point accounted for over 45 percent of export earnings and 17 percent of government revenues). An influx of workers from other provinces, severe environmental damage, displacement of local communities, and limited local benefits triggered conflict in the region. In 2019, Bougainville mounted a referendum that resulted in a vote for independence, and the parties now aim to decide on its future political status between 2025 and 2027. The 2018 SCD and the 2019 CPF point to the risks associated with the region’s political status. Most critically, Bougainville is unlikely to achieve fiscal self-reliance without a return to mining.

Located in the active Pacific Ring of Fire, Papua New Guinea also faces very high natural disaster risks, which it is ill-equipped to mitigate. The country ranks highest in population exposed to severe volcanic risk and is among the highest in the percentage of its population exposed to earthquakes (GFDRR 2015). Climate change exacerbates the frequency, magnitude, and intensity of natural hazards. Disaster risks can also exacerbate preexisting political grievances, as became apparent in 2018, when slow disaster relief after an earthquake prompted violence. Together with the diverse social traditions of the hundreds of distinct tribal groups, this creates a deeply complex web of conflict, crime, and violence drivers and disaster risks.

Evaluation Approach

The evaluation assesses the relevance and effectiveness of Bank Group engagement in Papua New Guinea over time and focuses particularly on three key development themes. After assessing the evolution and performance of the Bank Group’s country strategy and portfolio, the evaluation drills down on those development themes that the external literature and the 2018 SCD identified as binding constraints to growth and poverty reduction. The three themes are lack of investment in Papua New Guinea’s nonextractive sectors and their poor performance (chapter 4); the economic exclusion of women and GBV issues associated with it (chapter 5); and unmitigated disaster, violence, and conflict risks (chapter 6). Chapter 7 presents lessons to inform the next CPF. Three questions were used to guide the evaluation. The first explores the extent to which the Bank Group adapted its engagement in line with key constraints, including in relation to key development partners, changes in country context, and lessons from experience. The second focuses on results and explanatory factors (lessons from experience), answered by applying a gender lens where relevant. The third question explores the extent to which the Bank Group successfully identified and addressed conflict, violence, and disaster risks.

  1. Approximately 97 percent of land in Papua New Guinea is held by its traditional owners under customary principles of landownership. The rules of the customary land tenure system vary from place to place (FAO 2019).
  2. Total internet penetration was 1 percent in 2008, 11.2 percent in 2017, and 32 percent in 2021, per the World Bank Data Portal, information and communication technology indicators database.
  3. According to the International Telecommunication Union DataHub, in 2021, Papua New Guinea consumers paid 19 percent of their monthly income for 2 gigabytes of 3G data versus the world average of 1.3 percent. Papua New Guineans’ information and communication technology costs exceed those of users in Afghanistan, Haiti, and Somalia. For more information, see the DataHub at https://datahub.itu.int.
  4. cording to the International Telecommunication Union, in 2021, about 41 percent of urban residents used the internet at least once that year, compared with 11.35 percent of rural residents.
  5. Although retail banking has grown in recent years, the number of commercial bank branches in Papua New Guinea per 100,000 is 1.5—the lowest globally and lower than other countries affected by fragility, conflict, and violence, such as Afghanistan and Haiti.
  6. See also “Papua New Guinea,” Uppsala Conflict Data Program (database), Uppsala University, Uppsala, Sweden (accessed October 2, 2023), https://ucdp.uu.se/country/910.