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Thatcherism, economic ideas and Papua New Guinea

By Sean Jacobs - posted Monday, 13 May 2013

The death of former British Prime Minister Margaret Thatcher has caused a brief moment of pause and reflection throughout the world. Renowned globally for her convictions, Thatcher's economic policies discouraged inflation, introduced flexibility into the labour market, limited state ownership of enterprise and, in doing so, helped banish the cloud of economic malaise that hung over Britain in the 1970s.

The philosophy behind this set of policy ideas – now known as Thatcherism – had clear proponents in intellectual heavyweights like Milton Friedman and, by overlapping with Reagaonomics, resulted in powerful repercussions in economic thinking beyond Britain throughout the 1980s and 1990s. In Papua New Guinea (PNG), the import of similar Thatcher-type ideas into the plans of fiscal policymakers and political leaders, although late and incomplete, is apparent in some of PNG's economic policies. It is worth reflecting briefly on the impact of these ideas in PNG.

The formative years following independence from Australia in 1975, according to economist Ross Garnaut, are known as "a period known for strong financial and economic management in PNG." Low debt to Gross Domestic Product, sensible long-term expenditure planning, judicious borrowing and well-synced aid coordination (with Australia) characterised PNG's fiscal policy up until the 1990s.


Inflation – Thatcher's primary economic concern – was kept stable in PNG by continuing this sensible fiscal policy and what was called 'the hard kina strategy.' The principal instrument of PNG's monetary policy, the 'hard kina strategy' maintained the value of the kina (PNG's currency) against major world currencies until 1994. Although costly, this more or less worked over the period, with inflation being considered "relatively stable" at an average of 5.9 per cent.

Prior to the floating of the kina in 1994, however, fiscal discipline began to unravel through corruption, and reckless borrowing and spending. Together with the depreciation in the value of the kina after 1994, inflation skyrocketed. Between 1995 and 2003, inflation averaged 12.6 per cent, even jumping to 22 per cent in 1998.

Luckily, from 2004, strong offshore demand for resources has rescued PNG's economic situation by providing stable government revenues, a build-up in reserves and a stable exchange rate. Alongside a return to a well-planned fiscal policy, and the realisation of hard-won economic liberalisation measures put in place by Mekere Morauta (Prime Minister from 1999 to 2002), inflation dropped to record lows.

PNG has not only had to suppress inflation through a return to decent fiscal policy but, like in Thatcher's Britain, deal with the overbearing political influence of trade unions. Around independence, PNG adopted centralised wage setting mechanisms (with strong help from Australian union figures), which proved economically and socially disastrous up until 1992 when the policy of minimum wage indexation was abandoned.

Far from its professed objectives of 'social justice', minimum wage laws, by driving up costs of hiring and doing business, resulted in social instability and high urban unemployment in PNG. Rural workers, who were paid artificially much less than their urban counterparts, came to city centres in scores seeking jobs that did not exist.

It took over a decade for the abandonment of wage fixation from when concerns were first raised. In the early 1980s, for example, a number of studies by so-called "neo liberal economists" signalled the problems that wage fixation would bring to the PNG economy, namely that urban wages were set much higher than productivity warranted. Like Britain, curbing union excess and the subsequent introduction of flexibility into PNG's labour market was essential to get business moving again. "Fairness," as another British Prime Minister would famously say, "begins with the chance of a job."


Another key battleground for Thatcher was the privatisation of state-owned enterprises (SOEs). Morauta's Reconstruction and Development Strategy, of which privatisation of SOEs was a central theme, saw a number of privatisations and amalgamations of state assets in the early 2000s. Although many of PNG's commercial statutory authorities – Air Niugini, the Posts and Telecommunications Corporation, and the Harbours Board for example – had been told by government for some time to adopt strictly commercial methods of operation, they had never been exposed to serious market competition.

Morauta deserves great credit for the political courage and vision of his privatisation agenda. Not only did his reforms slice inflation in half, he paid back public debt, gave full independence to the Bank of PNG (PNG's Reserve Bank) and, through the sale of SOEs, put much-needed money back into the public purse. One of the most under-acknowledged success stories of these reforms has been the rise of the communications sector in PNG, which has enhanced competition by inviting new mobile phone carriers (Digicel for example), pushed down prices, expanded network coverage and improved handset ownership, resulting in unprecedented opportunities for the people of PNG.

These brief snippets of PNG's economic journey over the past few decades are examples of where both good and bad ideas matter, especially among policymakers and political leaders. Inflation now hovers at just over 1 per cent, the lessons of labour market rigidity appear to be understood and PNG's SOEs are earmarked for reform or future sale.

However, the lesson of PNG's short economic history appears that, like anywhere else, steady economic progress can easily unravel if fiscal discipline wanes. There is clearly a long way to go for fiscal and political reform in PNG, particularly in the delivery of government services. Armed with similar economic ideas that drove Thatcher's reforms, the PNG government has the capacity to build upon the fiscal progress it has made in the coming years.

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About the Author

Sean Jacobs is a former public servant, political adviser and international aid worker. He currently lives in Brisbane.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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