If govt is serious about pensions, don’t forget informal economy
23 August 2014
WHILE the PNG LNG project will remain as one of PNG’s greatest achievements, the biggest question facing the government centres on its ability to transfer the huge revenue inflows to the bulk of the population.
This is a major challenge given that PNG does not have the systems and infrastructure to support the direct transfer of monetary benefits to its citizens.
Therefore, the government’s move to introduce a national identification system and a social protection policy including a pension scheme can be seen as concrete steps towards achieving equitable wealth distribution.
Regular population data collection and updating has been a great challenge and it is hoped that the national identification system will ensure that real time data is available to support the planning process.
In addition, only a small proportion of PNG’s total population is employed within the formal sector therefore using the taxation system - specifically income tax - to spread benefits will only reach 15-20% of Papua New Guineans.
While the PNG Sustainable Development Program was set-up by the government to manage and take care of mine-impacted landowners in Western Province and also provide funds for community projects in other areas of PNG, over the years investment by government on key developments such as roads, health and education has not yielded much tangible benefit to the majority of PNG’s people.
As a result PNG has suffered greatly and most of its services and infrastructure are in a diabolical state. This has contributed to many social problems such as poor maternal health, public hygiene issues and high rates of school drop-outs in rural areas.
Such scenarios warrant a new approach to delivering benefits to the people derived from government investments including in big resource projects.
For their part, financial institutions led by the Central bank of PNG have been gradually improving their operations to make them friendlier to the people. It is hoped that this will improve the payment system in PNG.
A major strategy for improving both the delivery of financial services and service delivery in general needs to focus on nurturing the growth of the informal economy.
This is by far the largest sector in the PNG economy and yet the most neglected.
A key problem with the informal economy is the lack of understanding by government and segments of the general population of its role in shaping the socio-economic dimension.
For instance, in the absence government-funded social protection, the informal economy has been the “safety net” supporting the most vulnerable segment of the population.
The informal economy also has an interesting feature most people don’t recognize. Not only does it act as a form of social protection but most importantly it enables productivity. It is a social protection mechanism that makes people to work for their money.
As a result, it produces outputs that can be consumed at individual and family level at reasonable cost. Making a living in the informal economy is always a major challenge and people who are involved in it should not be viewed by government and general populous as “lazy”.
The informal economy has another important function and that is its ability to transfer wealth in a fair way to the bulk of the population it supports.
Regardless of one’s circumstances, the informal economy does not discriminate when it comes to income generationand distribution. There is a strong case for the government to undertake a nationwide stocktake on the types of informal economic activities and the segment of the population are involved in them.
This will enable the size of the informal economy to be compared to the whole economy of PNG.
While it is commendable for the government to explore the idea of introducing a pension scheme, the fact is that not all who are considered vulnerable will be included in the initial phase of the project.
Resource constraints, especially to do with the availability of adequate funds, are major factors that will limit the pension funds’ outreach. It looks certain that most of the funds will come from the proceeds of PNG LNG given that the PNG tax base is still narrow.
If that is the case, recent projections that the government will not be able to generate its revenue from the project within the expected timeframe could mean that the pension scheme will be delayed accordingly.
In addition, the efficiency of the payment system will also determine its outreach. At the moment this is a work in progress in most rural areas of the country which are stillbeyond the reach of financial institutions.
Although the advances in mobile technology has allowed banking to be done electronically, the lack of facilities such as ATMs to convert electronic transfers to “physical cash” still remain a big problem in most parts of PNG.
Therefore, in the interim, it looks as though the bulk of the vulnerable segment of the population will have to fend for themselves until such time as they are brought into the scheme.
It will also be interesting to see how poorer economic times will affect the government’s ability to maintain this scheme. Will it cut back on the amount disbursed or will it temporarily halt the roll out of the scheme until the economy picks up again?
Even in a booming economy, the rise in inflation may force the government to adjust the amount disbursed to assist in maintaining some level of consistency in the purchasing power of the targeted population. Otherwise the pension will not be sufficient to allow beneficiaries to buy the basic necessities of life.
Opting for alternative arrangement in place of physical cash, such as distribution of food stamps, is not feasible given the remoteness of most PNG communities.
The informal economy on the other hand will always remain a viable “safety net” regardless of changes in the economic cycle or level of technology.
In the face of economic recession it still provides opportunities for the unemployed to generate income while, during better times, it provide people with the opportunity to supplement their incomes to maintain real purchasing power.
The informal economy should be supported by the government to absorb any spillover effects created by changes in the economy impacting on the proposed social protection scheme. That means, at the minimum, the government should be ready and willing to support those pensioners willing to take up informal economic activities to supplement the government hand-outs through the scheme.
It is high time that the PNG government ensured that major projects, especially those in the extractive industry, developed synergies with the informal economy.
Downstream processing has been an idea much talked about and yet nothing constructive is happening apart from contracts being awarded to local landowner companies to run catering and transport businesses.
It is only supply chains linked to the informal economy that will encourage participants to explore moving into the SME sector.
It is important that a social protection policy recognise and support the informal economy as a “market driven social protection mechanism”.
The unique thing about the informal economy in PNG is that it is essentially made up of family units and not necessarily driven by individuals as is often the case in most advanced economies around the world.
This does provide the government a big opportunity to utilise the informal economy through the supply chain or downstream processing model to distribute the nation’s wealth far and wide to cover as many people as possible.
Busa Wenogo is an economist and Senior Project Officer with the Consultative Implementation and Monitoring Council. He specialises in the informal economy of PNG
Busa, what the government should do and what it actually does often seem to be two very different things.
It may not require an economist at Treasury to tell us that every government since Independence has squandered the wealth of this nation.
As for the pension, I remain skeptical that even an electronic system will function well.
Do I have a better idea? Yes, forget the pension, try fixing social services for access to health and housing, support programmes alongside those by church organisations (e.g. Missionary Aviation Fellowship) and NGO's (e.g. World Vision), improve statistics and information on rural poverty to identify households in need as opposed to individuals, develop location specific plans to address poverty.
My assumption is that the government is serious about addressing poverty and not just spreading the manure.
Posted by: Michael Dom | 26 September 2014 at 06:51 AM
Michael, this is a government that is willing to hand down budget deficit eventhough it is now becoming very clear by the minute that the LNG revenue will not be enough to support all its spending programs.
This could explain the reason why the government is now looking at more LNGs in PNG. It is simply turning out to be race for development versus maintaining its level of popularity.
However, the saddest thing is that this is aided by a rapid resource extraction policy facilitated by the government's plan to invite more foreign direct investment by making more exploration and drilling licenses available.
The informal economy and agriculture, where the bulk of the people are, will wait for another 5 years or a decade or never to get some form of recognition.
This is no secret when our government is willing to roll-out red carpets for giant mineral, gas or oil extraction companies.
Our agriculture sector is still in a mess and, although the new Minister seems to be a progressive thinker, there is still much to be desired so far given that some of the policies being proposed thus far looks certain to work for the interest of certain foreign entities.
Unfortunately, it is the prerogative of the government of the day to decide what kind of direction it wants to take in leading this nation.
Economically speaking this government is the most pro Keynesian government that I have ever seen since probably the early post independence days.
Some guy at the Treasury Department needs to do a comparative analysis on the budget spending on a government by government basis to compare the current government's spending to the previous government on an average basis (assuming revenues from the LNG Project is held constant).
While at it they should also determine whether the Medium Term Fiscal Strategy and the Medium Term Debt Strategy has been adhered to.
They should also try to do a comparative analysis on the number of conditional and unconditional loans domestic and international, that this government has signed compared to other governments.
My gut feeling tells me that we have already gone past the required level of debt/GDP ratio.
For the pension scheme, as I have stated in the blog, it looks likely that the bulk of the funds will be coming from the LNG proceeds given that PNG has a very small formal sector/tax base.
If it still wants to tap into the Goods & Services and Personal Income Tax to sustain this program that would mean that tax rates will have to increase. If does not want to do that then it will rely on proceeds from big impact project like LNG.
Administratively, experiences in countries like Fiji have shown that physical disbursement of cash to pensioners puts so much pressure and strain on the administration.
However, through electronic disbursement, it will cut down on the administrative costs significantly. So there is evidence to show that it will make the administration efficient in disbursing funds.
Food stamps as I have mentioned are not a viable option given our rugged geographical terrain which has isolated the bulk of our communities.
However, in terms of managing the funds, it is hoped that there are clear and transparent guidelines and processes to ensure that the money does actually reached the needy.
The Government should ensure that it priorities the National Identification Project over other initiatives as I believe it will lay the foundation for other government programs such as pension scheme to bear fruit.
That means of course supporting infrastructure such as electricity, communication, internet, banking services, roads to name a few will have to be in place.
At the base, the village ward recorders who are mandated to update or profile individual person in the village, will play a key role in helping the government to identify potential pensioners. This needs to be backed up by a consistent M & E framework to ensure that there is integrity in the selection process.
Apart from that it should also increase its scope to undertake regular surveys or research to ascertain the impact of the scheme on the lives of the beneficiaries to minimise potential problems that could get out of hand.
Posted by: Busa Jeremiah Wenogo | 25 September 2014 at 03:39 PM
Busa, we may have the kind of government that would give whiskey to a drunk alcoholic by providing pensions to people who have no savings culture.
I still don't believe that a pension system is workable, at least not without the savings culture and the financial literacy you've advocated.
In addition we need a more effective and efficient public service capable of operating the pension system, the much needed accountability of administration, establishing proper citizen registration systems (e.g. our census is not entirely reliable, national ID cards) and determining precise categories of pensioners (e.g. ol lapun na unemployed youth, foreign asylum seekers too, but not fellow Melanesians from West Papua?).
Supporting a national pension may be in line with your arguments for financial inclusion but I sincerely hope the existing systems and processes can be cleaned up before we embark on yet another major government spending program for which the public service or a private company (which costs more money to run) may be ill prepared.
Posted by: Michael Dom | 25 September 2014 at 11:26 AM
Thanks Robert and Michael. In PNG, as I have argued in my blog, given the large size of the informal economy it is important that it is supported so that it can complement or supplement the pension scheme that the government is planning to establish.
The underlying reason for this is to ensure that productivity is not compromised.
By providing money to our people it is also important to ensure that they get to spend the money on what is necessary for their survival and not on unnecessary consumables like alcohol and activities such as gambling and so forth.
There is already clear evidence that we lack the savings culture coupled with poor management and planning skills when it comes to money or finance.
That is why the government needs to support the informal economy so that it can provide these people opportunities for them to be useful and productive and at the same time generate enough to meet their needs.
The government should apart from supporting them given their state of disability (old age, disabled, widow or unemployed) should also focus on empowering them.
Posted by: Busa Jeremiah Wenogo | 25 September 2014 at 09:50 AM
Great article, enjoyed the read... My take is that a pension scheme would play a big part in stimulating economic activity in PNG, especially in rural settings. But are we ready for it?
Funds might be abused, e.g, used up in feeding bad habits like drugs / alcohol like with some Aboriginals of Australia.
I think there is a lot more work to be done up front like you suggested, including a clear demonstration from the PNG government that they are free from corruption so citizens should follow suit with this scheme.
Otherwise, I believe the so called pension scheme or doll is subject to abuse - big time!
Posted by: Robert Muka | 24 August 2014 at 03:37 PM
Trying to do too many things and not succeeding in any is less effective than doing one thing at a time and getting it right.
I am not convinced of the value of a pension, whereas supporting the informal sector is long overdue.
Posted by: Michael Dom | 24 August 2014 at 12:36 PM