Australian Financial Review Aug 7 2002
Rowan Callick, Asia-Pacific Editor

As Papua New Guinea's founding father Michael Somare takes up the reins again, the lessons of failure are becoming starkly clear in the neighbouring Solomon Islands: reduced sovereignty.

The International Monetary Fund is next week sending a team to the Solomons to negotiate a rescue package in its role as lender-of-last-resort.

Part of the package is to replace the local currency with the Australian dollar, Solomon Islands Finance Minister Laurie Chan said yesterday.

The country is effectively bankrupt, with hospital staff, teachers and other public servants unpaid for months. Exports have collapsed, and the Government has depended for survival on loans from Taiwan, which it recognises diplomatically.

Meanwhile, in Port Moresby Sir Michael is not rushing to appoint his permanent Cabinet - an interim skeleton ministry is in place. Constitutional changes put in place by his predecessor Mekere Morauta are likely to keep him in power for the unprecedented full five-year term of the Parliament.

He said on being elected: "The Government's main agenda will be to create political stability to allow economic reform to take place."

Near the top of his immediate priorities is to draft a mini-budget to rein in spending that, the central bank has warned, is propelling the country into a financial crisis.

He will axe the Government's payment of school fees introduced at the start of 2002 and he will probably amalgamate some government departments.

He will put privatisations on hold as controversy continues over the sale of PNG Telikom to its Fiji equivalent in the final days of the Morauta Government, and he will try to get the country's main economic artery, the Highlands highway, fully open again.

The option of an international bail-out is not available, since PNG has not long received the final draw-downs from a $500 million structural adjustment program that began to be negotiated when Sir Mekere became Prime Minister three years ago.

Australia, which provides $350 million aid annually, gave PNG an additional $133 million long-term loan as its contribution to the program.

The importers and exporters who effectively dictate the kina rate have given a guarded vote of confidence in the third Somare administration, edging it to a one-month high of US25.35¢.

The emerging structure of the new government will help determine whether such confidence is retained.

Much of PNG's beleaguered business world is looking to Sir Michael to take on the role of statesman and chairman of the board, relying on the intelligence and integrity of his key ministers.

The alternative is to become a hands-on chief executive tempted to micro-manage an enterprise confronted with too many crises for even "the Chief" to tackle at a time.

Sir Michael indicated in his first speech back as Prime Minister that he would take the former course: "I do not profess to be an economist, lawyer or accountant. My role is to facilitate, encourage, and use the best expertise on the floor of this Parliament to bring PNG forward."

Those few ministers who are set to make the transition from the Morauta to the Somare administrations - led by Moi Avei - will be helping Sir Michael learn lessons from Sir Mekere's political downfall.

Sir Mekere had ideal qualifications to run the country in hard times. But his Achilles heel in the bearpit of PNG public life was his distaste for the numbers game, for the backroom dealmaking.

He is probably the best economist PNG has produced. He was managing director of the state's commercial bank, governor of the central bank, and a successful businessman.

Much of the success of Sir Michael's first term as Chief Minister and Prime Minister, from 1972-80, came from the conservative administration of the economy by a team that included Australians such as Ross Garnaut; and was led by Sir Mekere as Finance Secretary.

Sir Michael's second term, from 1982-85, was more adventurous economically and also less successful, and his later return to the Cabinet under Sir Mekere ended bitterly last year, when he was accused of disloyalty.

I have followed Rowan Callicks expert articles on economics and politics of SP island countries like PNG for some years now and find that they attract good reading but lack a good understanding of economics. Such that he finds that he still has to do it to attract good audience even if there is little or no substance in the fundamentals of economics in these island economies.

For this particular article, the message is there for the author to get across but he did not make it clear. How is Solomon Islands problems related to PNG?

He then goes off the track which has nothing to do with the supposed message of the article. For instance "Sir Michael is not ruhing to appoint his permamnent cabinet....". This statement lacks understanding of the process of Government formation in PNG. I leave it to the author to find out what that simple process is. His statement implies that Sir Michael should have appointed or hurry up to appoint a full cabinet. Is that the usual process?

His understanding of economic mechanics is poor. For instance he says "The importers and exporters who effectively dictate the kina rate have given a guarded vote of confidence in the third Somare administration, edging it to a one-month high of US25.35 cents."
Exporters and importers are at the opposite end of the markets. I leave it to the author again, to find out what caused the US dollar value of the Kina to go up to that rate.

All in all, a poor hastily written article mixing economics with politics, just to put something out in time with the formation of the Somare Government in Port Moresby.