Papua and New Guinea - Current economic position and prospects (Vol. 1 of 3) : Main report

RESTRICTED EAP8 Vol. 1 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be pub!ished nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF THE TERRITORY OF PAPUA AND NEW GUINEA (in three volumes) VOLUME I MAIN REPORT September 3, 1969 East Asia and Pacific Department  CURRENCY EQUIVALENTS US$1. 00 = 0. 8929 Australian dollar $A 1.0 US$1. 12 $A 1,000,000 = US$1,120,000 UNITS Timber: the volume unit used is the super foot (su. ft.) which is the equivalent of 144 cubic inches; plywood and veneer sheet.s are recorded in square feet of specified thickness (3/16th or 1/16th of an inch).  This report was written by a Mission which visited the Territory of Papua and New Guinea in March of 1969. The Mission was composed of Messrs.Shu-Chin Yang (Chief), Guenter H. Reif, 0. S. Kamanu (Economists), and Joao Jose Vieira (Agricultural Economist). Mr. Orville J. McDiarmid was also with the Mission for part of the time.  VOLUI4E I MA IN REPORT Table of Contents Page No. BASIC DATA SUM14ARY AND CONCLUSIONS ..........*...............................v.. i - vii I. INTRODUCTION ................................ 1 II. GROWTH OF PRODUCTION A. Structure and Growth of the Economy .......4............ B. The Primary Sector ...... .****.*.***.e******.***e** 6 C. The Secondary Industry 8..........*......**.e****** 8 D. Transport and Other Services ......... ................. 14 III. EXTERNIAL TRADE AND PAYMENTS A. The Overall Picture ...............*.*. 17 B. Exports ..... ........... .. ....... *.........*.* 18 C. Imports and Services .......- 20 D. Transfers and Capital Movements .......*-&so*.......... 20' IV. CAPITAL FORMATION AND RESOURCE DEVEOPMNT A. Capital Formation ... 06-6... ... .. 22 B. Pattern of Public Expenditures: Capital and Current .......................... ............... 23 C. The Development of Human Resources 27 D. Land Development ..29 V. FINANCnJIG OF DEVELOPMENT A. Public Revenue and External Finance ................ 32 B. Money, Banking and Prices . . . ..... ......... .... ... 38 VI. PROSPECTS OF GROWTH - THE FIVE-YEAR DEVELOPMENT PROGRAM, 1968/69 - 1972/73 A. Objectives, Growth Rate and Investment ................ 43 B. The Development of the Sectors .........44a*.......... 4 C. Allocation of Public Expenditure ..............*.... 51  -2- ^_Page No. VII. FIANECIAL REQUIEMENTS AID CREDF^ORTHIENSS A. Financing of Administration Expenditure ** *..........* 54 B. Trade Prospects and External Gap ............... 55 C. Creditworthiness ................................ 59 MAP VOLUME II: ANNEXES Annex I Agriculture, Livestock, Forestry and Fisheries Annex II Transportation Annex III Population, Manpower and Education VOLUME III: STATISTICAL APPENDIX  BASIC DATA (FY = July 1 - June 30) Area: 183,540 sq. miles Population: June 1968 2,348,753 of which: non-indigenous 40,432 Rate of growth (1960-68) indigenous 2.4% per year Population density (per sq. mi.) 12 Political Status: The Trust Territory of New Guinea and the Australian Territory of Papua are administered by Australia as an administrative unit known as the Territory of Papua and New Guinea. Gross National Product: at Current Market Prices (1966/67) Monetized sector $A201 million Non-monetized sector $A196 million Total $A397 million Anmnal Rate of Grcqth: Average 1960/61 - 1965/66 (Real GNP at factor cost): Monetized sector 12.8% Non-monetized sector: 2o4% Whole Economy 6.1% 1966/67 (GNP at current market prices): Monetized sector 16.6% Non-monetized sector 1.9% Whole Economy 8.8% Per Capita GNP (rough estimate) Indigenes UV -''5' Non-In igenes US$L,J90 Gross National Product Monetized Sector, at Factor Cost, 1965/66: $A181 million of which: Agriculture, livestock, forestry and fisheries 33% Mining and quarrying 1% Manufacturing and construction 16% Transport and communication 8% Trade 13% Other services 29%  Percent of GNP at Current Market Prices Merietized Sector (1965/66): Gross investment 51.0% Gross National Savings 3.7% Import surplus of goods and services 47.3% Government current revenues from local resources 20.0% Money and Credit ($A thousand): Annual rate of increase 1967/68 1962/63-1967/68 Major Trading Banks Deposits 34.7 16.5% Loans and Advances 18.t 22.7% Savings Banks Deposits 32.9 15.3% Government Finance ($A million): 1967/68 1968/69 1968/69 EsT T (Actual) Territorial Administration Receipts: 133.8 152.5 149.6 of which: Internal Revenue 47.8 53.7 55. Borrowing 8.4 11.5 7.2 Commonwealth Grant 77.6 87.3 87.3 Expenditures: 133.8 152.5 149.5 of which: Current 89.1 1000 n. a. Capital 44.7 51.9 n.a. Local Government Councils Revenues 2.06 n.a. Expenditures 2.06 n.a. Direct Expenditure (net) of Commonwealth Departments and Instrumentalities 32.1 24.1  Balance of Payments ($A million): Average Annual Rate of increase 1966/67 1961/62-1966/67 Exports 45.0 10.8% Imports 113.0 19.7% Net Invisibles - 35.0 14.2% Balance on Goods and Services -102.0 -23.1% Total Transfers (net) 109.0 19.9% Commodity concentration of exports, 1967/68 (coconut products, coffee, and cocoa) 80% of total export value Australian Economic Assistance 1967/68 1968/69 ($A million): (estimated) Grant to Administration Budget 77.6 87.3 Direct Expenditures (net) by Commonwealth Departments (excl. military expenditure) 14.0 12.0 Public External Debt (US$ million): Debt repayable in Australian Currency, end of 1968 22.3  1/ SUMMARY AND CONCLUSIONS General 1. Since the visit of the 1967 Bank Economic Mission, some impor- tant economic and political events have occured. In 1968, the Territory's first official Development Program (1968/69 - 1972/73) got underway. The 1968 elections to the House of Assembly resulted in a considerably enlarged indigenous representation. The appointment, for the first time, of in- digenous ministerial members who form a majority on the Administrator's Executive Council represents a further step towards the Territory's self- government. 2. The Territory is at an early stage of develcpment. The majority of the 2.3 million indigenous inhabitants still live rather primitively, with considerable cultural and ethnic fragmentation. Illiteracy and lack of skills and education are great handicaps to- their participation in public administration and economic and social development. The Territory is heavily dependent on Australian Government financial assistance, Aus- tralian private capital, and personnel. 3. The economy is based essentially on primary production. It in- cludes an exceptionally large non-monetized sector from which a majority of the population derives most of its basic necessities of life. In 1966, only 18 percent of the indigenous work force were fully integrated in the monetized economy. The per capita GNP of the indigenous population is very roughly estimated at around US$ 100 equivalent, while that of the 40,OO0 expatriates is estimated at about US$ 4,OO0 per annum. This is not a fair measure of comparative real incomes since the transfer to the indigenous sector from the expatriate sector is larger than in most coun- tries. Annual natural growth of the indigenous population, currently around 2.4 percent, is expected to increase to 2.8 percent in 1971/76. Family planning measures have been started on a small scale by the Administration. 4. The monetized sector of the economy, accounting for about 60 percent of GNP, has grown in real terms at over 10 percent per annum in the last 15 years or so, This includes an element reflecting the general monetization of the "subsistence" sector. Subsistence population per se may have grown at less than 3 percent per annum. Total annual growth in GNP has probably been about 5 percent, with some acceleration during the last 5 - 6 years. 5. In the monetized sector, agriculture, livestock and fisheries accounted for one-third of GNP in 1965/66, while manufacturing - mostly simple processing of primary products - contributed only 7 percent. 1/ Except where sources are specifically noted, projections and estimates made in this report in connection with the analysis of the development program are based on internal working papers of the Australian Govern- ment departments and do not have any official status.  - ii - Transportation and communication, as well as commerce and finance, largely cater to foreign trade. Administration and professional services, largely performed by expatriates, contributed 23 percent to GNP. The Development of the Sectors 6. The primary sector, supplying the bulk of the needs of the in- digenes, particularly food, provides the major share of export earnings and engages nearly all self-employed indigenes and over 50 percent of the indigenous labor force that participates in the monetized sector. Coconut, cocoa, and rubber are the major commercial crops raised princi- pally on expatriate plantations. The value of commercial crops, after being somewhat stagnant for two or three years, rose considerably in 1967/68, chiefly because of improvements in the world market. Increased production has, in general, been the result of expansions of areas under planting, averaging 5 percent per annum; average yields for most crops having remained about the same in recent years. No significant changes have occured as yet in traditional subsistence agriculture, although in- digenous cultivators are increasingly interested in growing other crops, particularly coffee and tea. Tea, a fast developing new crop in the Highlands, has made impressive gains, with reasonable market prospects due to high quality and competitive costs of production. Oil palm - another new crop - has had a good start, with plantings begun in 1967 in New Britain. 7. A new industry - the production of beef cattle - suggested by the 1963 Bank Survey Mission, has been making a slow start due to diffi- culties in obtaining imports of breeders from Australia and in acquiring suitable land. Ihe Administration partly subsidizes import costs, and the new Papua and New Guinea Development Bank is making livestock loans with cattle as collateral. 8. The traditional land tenure system, under which land is commu- nally owned by clans and tribes, has been an obstacle to the commercial utilization of the land. It has often prevented indigenes from using land as collateral for barnc financing. Transformation to individual land titles has been time-consuming and difficult. The Mission feels that steps should be taken to insure faster land utilization, e.g. land holding cooperatives, land use instead of land ownership titles, etc. Consider- ation is being given to this. 9. 'he relatively small manufacturing sector has been growing rapidly. Most manufacturing activities still process primary products, largely for export. The main constraints are: a small domestic market, inadequate industrial sites, and the shortage of skilled labor. Indi- genous participation in manufacturing above the level of hired labor is still very meager. A study is needed to suggest small-scale industries suitable for indigenous management.  - iii - 10. The Administration has provided incentives to attract pri- vate capital, especially from overseas, to invest in manufacturing. In addition to the traditional low income tax level (only half of the Australian rate), a five-year holiday for qualified "pioneer" industries is granterl. Some processed agricultural products from the Territory enjoy special .preferences in the Australian market. Legislation was recently in- troduced providing for a Tariff Advisory Committee; up to the present, advice on tariff protection has been provided by an ad hoc committee. 11. The discovery of large copper ore deposits on Bougainville Island may turn into a major breakthrough in the Territory's economic development. Proven deposits are in the order of 700-800 million tons, with annual average production over the first ten years at 150,000 tons of copper in concentrate and 500,000 ounces of gold. Preliminary long- term supply contracts with Japanese copper smelters have been concluded. The initial investment by Bougainville Copper Pty will be about $A 300 million. Gross exports from the project may be nearly $A 100 million a year, with net export earnings of about $A 10 million during the tax holiday period and $A 30 million immediately thereafter. 12. Power generation increased at about 15 percent per annum over the last two or three years. Per capita consumption rose from 22 Kwh in 1963/64 to 42 Kwh in 1967/68. Power development is now concentrated on hydro-power, with the planned Upper Ramu Power Scheme as the core project; it would, after completion, secure the power supply for an economically vital area in Northeastern New Guinea. 13. Land transportation is still a most serious bottleneck in the Territory, although combined public sector expenditures in the transport sector has increased at about 18 percent per annum, with a large and increasing share going to road transport. The first part of a UNDP- financed transport survey, of which the Bank is the executing agency, has been completed, outlining for the first time a co-ordinated transport development program for the Territory. On the basis of this survey, the Territory plans to submit some projects for external financing. External Trade and Payments 14. Because of rather stagnant exports in the few years up to 1966/ 67 and some increase in investment, the Territory's chronic deficit on goods and services account has been growing rather rapidly. In 1967/68, although the deficit rose only moderately, the absolute amount was $A 110 million. Exports still pay far less than one-half of imports. Australian Government grants and Australian Government's direct expenditure in the  - iv - Territory finance the deficit, thus largely determining the level of public spending consistent with financial stability. In addition, there appears to be in recent years a sizeable and increasing net inflow of Australian private capital for direct investment in the Territory. 15. In the long run, export trade has been a prime mover of the economy, increasing between 1960/61 and 1967/68 at an annual rate of 11 percent. The growth of 29 percent in 1967/68 was phenomenal, when all major exports performed remarkably well, except rubber. However, exports are still concentrated on a few primary products such as coco- nut products (36 percent), coffee (24 percent), and cocoa (20 percent). Diversification has been progressing well, with new items such as tea, timber and plywood, and pyrethrum and passionfruit emerging promisingly. 16. Imports have expanded at about 16 percent per annum in recent years, with .0 percent of the total consisting of capital goods and related items to sustain the high investment activity. In addition, consumer goods imports kept on rising with the increasing demand from the indigenes and the high-income expatriate community. Participation by Indigenes 17. The need has grown for a more active role by the indigenes in economic activities and in government; but a satisfactory rate of in- crease in indigenous participation will depend to a large extent on how rapidly their education and training can be improved. The Administration has intensified its efforts for "indigenization" of the public service and the private sector. 18. The Mission welcomes the initiation by the Administration of the Indigenous Training Incentive Scheme which provides subsidies to employers who train the indigenes as apprentices and as skilled labor. The estab- lishment of the Business Advisory Service to assist indigenes in setting up businesses is another step in the right direction. The Mission welcomes the considerable emphasis given to secondary, technical and vocational schools, particularly after 1965, which follows the suggestion of the 1963 Bank Survey Mission. Capital Formation and Public Expenditures 19. Gross investment in the non-monetized sector is roughly estima- ted at about 20 percent of non-monetized GNP. It consists largely of local community investments. In the monetized sector, capital formation, depending heavily on capital inflow, has increased at around 23 percent per annum in recent years. Total investment in the monetized sector in  - v - 1965/66 amounted to $A 82 million, or 50 percent of monetized GNP. The highrate of public investment (32 percent of monetized GNP) was partly due to Australian defense expenditures in the Territory and partly to heavy Administration investment in infrastructure. 20. A large portion of the Administration's current expenditures also serve development purposes, e.g. education, road maintenance, etc. The Administration expenditure, amounting to $A 118 million in 1966/67, was equivalent to about 60 percent of the monetized sector's GNP. In 1967/68, expenditures increased to a total of $A 134 million, of which one-third were capital outlays. In addition, Australian Commonwealth Departments and Instrumentalities spent $A 32 million in the Territory. 21. There has been a noticeable shift in the pattern of expenditures towards more capital expenditures since 196a/65. IWith capital outlays, emphasis on economic infrastructure, particularly on transportation, was substantially increased, while capital investments in social services and education were given lower priorities. Financing 22. Australian financial aid is still the most important source of financing the Territory's development. Internal public revenue has been rising fast, but in the last two years still covered only 36 percent of total and 53 percent of current Administration expenditures. The budget deficit increased from $A 62 million in 1964/65 to $A 86 million in 1967/68 and $A 94 millioni in 1968/69. The deficit has been almost entirely covered by Australian Government grants not tied to specific pur- poses. Ihe magnitude is determined each year after an appraisal of avail- able local resources, In addition, the Territory has raised some funds through borrowing in the Territory and in Australia. 23. Tax revenue amounted to 13 percent of the monetized and 7 per- cent of total GNP. A major portion of tax revenue comes from the ex- patriates. The indigenes, in addition to paying some tax to the central Administration, also make cash payments to local Government Councils and labor contributions for community facilities. The tax system is simple, with income tax and import duties being the main revenue sources, The rates are generally low to induce foreign (mainly Australian) capital and expertise. 24. The Territory's monetary and banking system is essentially an ex- tension of that of Australia. Monetary autonomy seems, at present, pre- mature. All commercial banking institutions are branches of Australian in- stitutes and still do not maintain separate accounts of transactions between  - vi - Australia and the Territory. The Mission feels that such separation of accounts, at least on an aggregated basis for all financial institutions operating in the Territory, is important to understand the Territory's monetary and credit situation. In its commendable program of educating and guiding the indigenes in monetary matters, the Reserve Bank of Australia has continued to build up savings clubs and loan societies. They, and the Development Bank, are so far the only local financial in- stitutions in the Territory. 25. The Papua and New Guinea Development Bank, set up in 1967, has expanded its lending program impressively to a total of $A 7.7 million at the end of June 1969. However, most lending has so far been to ex- patriates. By establishing branch offices in the country, reducing collateral requirements, etc., the Bank's management attempts to expand lending to the indigenes. The Development Program 26. The development program for 1968/69 - 1972/73 aims primarily at the expansion of production, with the maximum participation of the indi- genous people. For planning purposes it covers only the monetized sector, whose real GNP is projected to grow at an annual rate of 10-11 percent during the program period, as compared with 12 percent achieved earlier. The average growth rate for the whole economy is likely to be 5 - 6 per- cent per annum, which will approximate the same asthat achieved during 1961 - 1966. The possible impact of the Bougainville copper discoveries has not been included in the program. 27. The present high investment rate in the monetized sector is to be maintained, with total investment in the sector estimated at $A 83C million for the five-year period. About 46 percent will be public invest- ment. Private investment, excluding new plantings, is to increase by about $A 10 million per annum. Substantial new private investments are expected to take place in mining, commercial crops, forestry, cattle, fisheries and manufacturing. In the public sector, great emphasis is placed on the development of transport, power, and secondary education, followed by agriculture. The Mission endorses this strategy. Public expenditures on agriculture should, however, be higher, and some emphasis be given to the increase of yields. Financial Requirements 28. Ifith the commitment of the House of Assembly to increased finan- cial self-reliance, Administration revenue is expected to grow more rapidly than GNP. But even so, by 1972/73 internal revenue is to finance only 37 percent of Administration expenditure, with a resulting budget gap of  - vii - $A 631D million for the five-year period. 29. In view of the expected larger increase in imports than exports, the external gap is also likely to increase and is estimated at almost $A 570 million for the program period. Since the public sector's deficit. is larger than the total resource gap, the support of the budget will be crucial. For the 1968/69 budget, the Australian Government has al- ready agreed to finance almost 90 percent of the deficit, with the re- mainder to be financed by borrowings. Even assuming that the Australian grant is to increase somewhat in absolute amount, and that borrowings in the Territory and Australia will be about $A 10 million per annufm, the gap left for financing from other external sources is expected to be about $A 4 - 5 million a year. However, in case additional foreign funds should be available, the development of the economy can absorb more than that indicated by the residual gap, perhaps up to the order of $A 10 million a year, since a number of worthwhile projects were not included in the Plan because of the limited prospects of such fund availability. Creditworthiness 30. The Territory - a separate political entity under Australian administration, but heading towards independence - qualifies for IDA assistance on grounds of low per capita income, improved economic per- formance, a still very low level of saving, and its lack of debt ser- vicing capacity if deprived of Australian Government aid. The Territory itself is not creditworthy for Bank loans. However, Bank lending for suitable projects in the Territory would be valuable for the successful implementation of the Program, and would be acceptable in view of Australials large financial support and guarantee. Considering the current strength and good prospects of the Australian ecomnmy, there can be no doubt that Australia is creditworthy.  I INTRODUCTION 1. Since the visit of the 1967 Bank Economic Mission, some important political, social, and economic developments have taken place, including the advancement of internal self-government and the proclamation of the Territory's first development program. However, as the Territory is so undeveloped and confronted with various formid- able problems it cannot be expected that these advances will bring any easy and quick solutions toward self-sustained growth. The Territory is still heavily dependent on external, mainly Australian, capital and know-how and Australian Government assistance, and this is likely to continue for a long time to come. 2. In her role as UN Trustee for New Guinea and as the metropolitan power for Papua, Australia is committed to eventual self-government or independence of the Territory. This however does not rule out a conti- nuing association with Australia, the form of which remains open to mutual agreement. The 1968 election of the members of the House of Assembly, the second in the Territory's history, is regarded as a further step towards self-government. The electoral ordinance provides for universal suffrage. About two-thirds of the voting age population went to the polls and local representation in the new legislature has been increased considerably with 64 out of the total of 84 elected members being indigenes.l/ To provide increased participation by elected members in the executive government of the Territory a system of Ministerial Members was introduced in 1968. Seven elected members (including one expatriate) were appointed Ministe- rial Members by the Australian Minister of External Territories upon recommendation by the House. They are concurrently members of the Administrator's Executive Council, the Territory's main decision making body, and represent, their departments before the House. In addition, eight elected indigenous members were appointed Assistant Ministerial Members. 3. The legislative powers of the House are limited. Foreign policy and defense are the responsibility of Australia. Ordinances passed by the House require the assent of the Administrator or, in certain cases, of the Governor-General of Australia. The annual budget of the Administration is subject to approval by the House, but no appropriation of Territory funds may be passed unless the appropriation has in the same session been recommended by message of the Administrator to the House. The budget support received from Australia is a key element in the budget and the responsibility for determining broad policy issues continues to rest, as laid down in the Papua and New Guinea Act, with the Australian Commonwealth Government from whom the Administrator receives instructions. 1/ The House totals 94 members, all of whom are directly elected except 10 official members appointed by the Administrator.  - 2 - The process of nation-building in the Territory has been slow. qTe extremely fragmented traditional social structure, as manifested by the fact that about 700 different languages and dialects are spoken by the 2.3 million inhabitants, the tribes reflect considerable cultural differences, and the rugged topography and other natural barriers resul- ting from the archipelago nature of the Territory hinder communications and thus preserve strong tribal and regional loyalties. However, the spread of education, the increasing use of English and Pidgin as common languages, the development of common political and educational institu- tions that bring the elite together, and increasing mobility due to the improvements in transportation are factors prompting national unity. Local Government Councils, now covering almost 85 percent of the popula- tion, provide education in political responsibility and exercise certain political and economic functions. 1/ 5. The Territory still includes a large non-monetized sector whose share in the economy is declining but from which a large majority of the indigenes still derive nearly all their necessities of life. According to the 1966 Population Census, of the total indigenous work force of 1.26 million persons, only 18 percent were fully integrated into the monetized economy, while 46 percent were still entirely in the non-monetized sector. The rest was categorized as belonging to the transitional sector, i.e. they work, in varying degrees, both in the non-monetized and in the monetized economy. 6. The monetized sector of the economy is based largely on eport-orientated plantation agriculture and on Government operations and services. Mining and manufacturing have so far been relatively unimportant. Ihe monetized economy and the higher echelons of the administration are still predominantly in the hands of the expatriates. Lack of training and education has been a serious obstacle for indigenous participation. She Administration has in recent years stepped up its efforts to promote "localization" in both the public and private sectors. 7. The preparation in 1968 of the Five-Year Development Program (1968/69 - 1972/73) following on a program for the previous five-year period recommended by the 1963 Bank Mission, and its approval by the House of Assembly provided the Territory for the first time with an of- ficially sanctioned framework for economic development. The Program calls for a total Administration expenditure of nearly $Al,000 million during the five-year period, and a progressive increase of the Territory's 1/ The non-monetized sector is also often referred to as the "subsistence sector" in economic literature on the Territory. The subsistence sector is described as "devoted primarily to the cultivation of sub- sistence foods, supported by some livestock production, construction of tribal housing and some community projects". "Subsistence pro- duction" is defined as "that part of the product of economic activity that is directly consumed by the producers themselves, without re- ference to the market mechanism". (Zmudki, National Income Estimates for the Territory).  financial self-reliance, However, the financial support frcm Australia during the plan period is still expected to be quite substantial and in this connection, the endorsement of the Program by the Australian Government is particularly important. 8. Recognizing that economic development is basic to the elevation of the living standards of the people and the achievement of self-govern- merit, the key objectives of the Program are the building up of the capacity of the people of the Territory to develop and manage their owVn enter- prises and also the provision of greater opportunities for employment both in private industries and in adr,ministration. The program, however, covers only the monetized sector, for lhicAh a fairly high grouth rate is planned. This will, of course, bring more indigenes into the market economy and raise their income, but no detailed assessment of such impact has been made. 9. The Territory's planning unit is currently attem.pting to dis- aggregate the program to the level of the 18 administrative districts. Also, the Program may have to be amended to reflect the effects of the recent discoveries of large copper ore deposits on Bougainville Island, which is likely in a few years to increase substantially the Territoryis export and public revenues.  II GROVITH IN PRO0UCTIGN A. Structure and Growth of the Economy 10. The monetized part of the Territory of Papua and New Guinea has growm fairly rapidly and in 1965/66 unofficial estimates indicate that about 60 percent of gross national expenditure involved monetary transactions. Including the effect of drawing more of the indigenous labor force into the monetary sector in the fifteen years ending mid- 1966, the gross national product of the monetary sector in real terms had grown at a rate of over 10 percent per annum. On the other hand, some rough estimates show the gross national product of the rest of the economy in real terms increased only 2.7 percent per annum. For the economy as a whole, the gross national product in real terms had risen at a rate of almost 5 percent per annum during this period, with a more rapid growth of around 6 percent per annum in the last five to six years. 1lo More and more indigenous producers have some money income from the sale of cash crops, etc., but the amounts are still relatively small and often irregular. In many developing countries, part of the rural area does not use money extensively. The difference is that in Papua and New Guinea this part of the economy is exceptionally large and consists of many isolated closed economies separated by topographical barriers and great distances. Table 1 Growth and Structure of Gross National Product at 1966 Prices (year ending June 30) Whole Monetized Non-monetized Economy Sector Sector Annual Growth Rate (%) 1951-1960 4.8 10.1 2.8 1961-1966 6.1 12.8 2.4 1950-1966 4.9 lo.5 2.7 Share (%) 1950 100 19 81 1956 100 26 74 1961 100 31 69 1966 100 43 57 Source: Dr. W.R. Zmudzki, "National Income Estimates for the Territory of Papua and New Guinea, 1949/50-1965/66", Canberra, June 1967.  12. The still relatively large non-monetized portion of the economy indicates that much of the Territory is still in a very early stage of development. For the great majority of the indigenous people, the most basic part of their economic activities takes place without market exchange involving money. The monetary transactions were introduced to the Territory through foreign trade with the Europeans. While indigenous cash croppers are supplying increasingly sizeable amounts of copra, coffee,and cocoa beans, etc. for export, the bulk of major export commodities is still supplied by the plantations in which,pre- dominantly,expatriates have invested. In the monetary sector, gross national product originating from agriculture, livestock, forestry and fisheries amounted to one-third of the total in 1965/66. Manufacturing industry plays a much smaller role, accounting for only 7 percent of monetary GNPo Mining is presently minimal. Moreover, many of the manufacturing activities are simple processing of primary products, e.g. sawmilling, coconut oil pressing, etc. The basic infrastructure facilities like transportation, communication,and storage are largely catering to foreign trade. This has also been the case with commerce and finance which together contributed 14 percent to the monetized GNP. 13. Almost the entire upper echelon and a substantial portion of the intermediate class of public administration and professional services such as doctors, teachers, lawryers, etc. are rendered by the Australians. Owing chiefly to the high income of such expatriate personnel, these public and professional services contributed about 23 percent of GNP of the monetized sector. 14. During 1960/61-1965/66, the public and professional services sector, the manufacturing, and the construction industry had expanded more rapidly than other sectors, while the primary production sector was slower than the average. As a result the share of the primary production sector decreased from 43 percent of the monetary GNP in 1960/61 to 33 percent in 1965/66. 15. During 1962/63 and 1966/67, the number of indigenous workers movinm into wage employment increased from approximately 76,800 to 100,900 or at an annual rate of increase of 7 percent. During 1961/62 and 1966/67, wages. and salaries of indigenous employees in the monetary sector increased by 10 percent per annum and net income of indigenous cash croppers by an even higher rate of 19 percent per annum, indicating the transfer from the non-monetized to the monetized economy. 16. It is clear that bringing more of the indigenes into the monetary economy raises their income quite rapidly. In 1966/67, the ratio of the money income of the indigenes to the gross income of the non-monetized sector (net income figures are not available) was about 1 to 3 as compared with 1 to 4.8 in 1961/62, and its ratio to total monetary income of the economy was about 1 to 2.6. However, these ratios are likely to underestimate the importance of the money income of the indigenes because some statistically undetermined amount of supplements to aages and salaries is not included in the income of the indigenous employees.  D. The PimarySc_ector-I/ 17. The Territory's economy is based essentially on land resources and primary production. Agriculture, and to a much lesser extent live- stock, forestry and fisheries, supply the bulk of the needs of the indigenous population, particularly food, and at te.e same time provide the major share of foreign exchange earnings. The sector engages nearly all self-employed indigenes and more than half of the people employed in the monetary sector. With quite ample supply of land, the sector also offers large scope for development. Agriculture 18. No significant changes have yet occurred in the traditional production for subsistence, mainly of local root food crops under a system of bush and grassland cultivation in fallow and shifts, in which the vast majority of the indigenous farmers is eng-aged. But evidently indigenous cultivators are increasingly interested in growing other crops. They are producing small amounts of peanuts, rice, sugarcane, bananas, etc. for both home consumption and market sales. 19. Value of production of commercial crops as indicated by their export value appeared somewhat stagnant for two or three years but increased considerably in 1967/68 (a 29 percent increase over the previous year in foreign exchange earnings from agricultural crops). The increase is duo partly to the improvement of world market prices for the Territoryts major exports such as copra and cocoa and partly to the increase in production. In general, the increase in production has been due mainly to the expansion of areas under planting, as average yield for most crops has remained more or less the same in recent years. From mid-1963 to mid-1967, total area under planting increased at a rate of over 5 percent per annum, with the increase of the acreage under in- digenous control higher than the average. The indigenous farmers appar- ently responded quite readily to the good export prospects of coffee, cocoa, and tea. 20. However, for coffee, the large number of young trees planted in recent years will soon be mature and raise coffee production to exceed coffee consumption in both the Territory and Australia and an export quota may be applied under the International Coffee Agreement. Unless coffee exports to "new" markets not covered by the export quota can be expanded, future growth in coffee production is likely to slow down. The problem with cocoa has been plant diseases and pests, from which the Territory's cocoa industry has just recovered. Research for developing immune or resistant types of trees and wider use of pesticides 1/ For more detail, see Annex I on "Agriculture, Livestock, Forestry and Fisheries".  - 7 - should be energetically made. Apparently, the Territory's tea has very good market prospects because of its high quality and competitive costs of production, and further expansion of production is expected. A major problem is the development of suitable land for tea planting which is under active study by the Administration. Pyrethrum and passionfruit are two minor export crops whose production has shown gains in recent years. Here the prices paid to the growers by the processing plants, the capacity of the plants, and transport facilities are important factors affecting production. 21. Another new crop which has had a good start and indications of favorable prospects is oil palm. Oil palm planting began in 1967 and IDA financing in the Cape Hoskins area of W4est New Britain was provided in 1969. Planting of the 3,000 acres estate and 4,,000 acres smallholder settlement blocks should be completed by 1971. By March 1969, about 1,5O0 acres in the estate and 1,132 acres by 283 smallholder settlers, had alreadu' been planted. The establishment of an oil processing plant in the estate is well advanced and should start operation in mid-1971. The Administrat-oi is now preparing for further expansion to about 20,000 acres. 22. The most important commercial crop of the Territory is copra; the value of production of this crop amounts to almost one-half of the total value of production of all commercial crops. In recent years, new plant- ings by indigenes have increased far more rapidly than those by the ex-- patriate plantations where high labor cost and difficulties in obtaining laborers were allegedly the major constraints. Better spacing of trees and more use of the right types of fertilizer may improve the yield and efforts in these directions should be intensified. 23. Rubber has shown a comparatively high output per unit of land area among the major crops and rubber acreage has increased steadily. However, owing to the declining world market price, earnings from rubber h!5.oe been Stagnant since 1960. The Administration has not encouraged rubber pro- duction as much as other crops, but indigenous rubber plantings (although ur<- important in total rubber acreage) are rising rapidly, presumably because it, certain areas there are no alternative cash crops than can be grown. Livestock 24. The development of the beef cattle industry has so far been much slower than that recommended by the first Bank Mission. The increase in cattle population from mid-1964 to mid-1967 was only a little over one-half of the recommended target. The main reasons for the shortfalls are difficulties in obtaining imports of breeders from Australia, in acquiring suitable land for expansion and establishment of cattle ranches. The Administration subsidizes the import costs and the Papua and New Guinea Development Bank is making livestock loans with cattl,  - 8 - as collateral. But land development and i-ts release by the indigenes tribes still pose problems. In recent years, the indigenes hlave shown more interest in cattle industry and indeed the indigenous herds have increased at a faster rate than the non-indigenous, although the average size of the indigenous ranges is much smaller and perhaps also less economical. Forestry 25. Stimulated by exports and domestic building and construction, production of logs increased by 90 percent in the last five years. The Admini.stration has offered new concessions and hired consultants to ad- vise onthe development of the timber industry, but up to early 1969, no agreements on new concessions had been reached. Lack of species uniformity and inaccessibility pose serious constraints for the large- scale exploitation of timber resources. In addition, Indonesia has re-emerged as an economical timber source, while the Territory is still little known outside the region as a timber supplier. The Administration has identified certain areas as promising, e.g. the Vanimo area on the northern coast of New Guinea and the Gogol area near Madang; and promotion of exploitation will be concentrated in these areas. Fisheries 26. The development of fisheries is nearly all in private hands. Private companies are engaging specialists to study the catch and behavior of cray fish, barramundi and praTwns. They are a'so studying fish resources. C. The Secondary Industry Manufacturing 27. The manufacturing sector contributed only 7 percent of the product of the monetary sector in 1965/66, or roughly 4 percent of GNP for the economy as a whole. Limited by the small and fragmented local marlcet, manufacturing production units are generally too small and scattered to enjoy any economies of scale. In 1966/67, out of 479 factories, 333 employed 20 persons or less. The shortage of skilled labor is another constraint. 28. However, in recent years, along with increased monetization, higher per capita income and improvement in transportation and communication, the market for domestic manufactured products is growing. The Administration has adopted measures to provide various incentives to industry. The manufacturing sector including processing for exports has been groaing rapidly, with its net output increasing annually at about 20 percent and employment at 14 percent during the five year period ending mid-1967. Total net output in the sector amounted to $A25 million  and total employment to 11,000 in 1966/67. The number of factories increased from 278 to 479..l/ 29. The major manufacturing activities still process primary products largely for export; for example, the plywood mill at Bulolo (?4orobe District), the coconut oil and copra by-products plant at Rabaul and the newly-established desiccated coconut factory at Kokopo (both in New Britain), and the pyrethrum extraction plant and the tea factory in Mount Hagen in the Highlands. The development of such industries, which export higher value processed products in substitution for raw products, tends to create more employment and income in the Territory, save export freights, and earn higher export proceeds. Its further development should be encouraged. At present some of these industries enjoy special preferences in the Australian market, e.g. plywood is granted a duty- free quota of 16 million square feet, passionfruit juice and pulp a duty- free quota of up to 60,000 gallons, and desiccated coconut duty-free entry withou.t any quota limit. An extension of the preferential treat- ment of the Territory's manufactured products in the Australian market will encouzage fur-ther development of these industries in the Territory. 30. Industries catering to the local market remain numerically predominant. These include breweries, furniture making, assembly of electrical appliances, the production of cigarettes and twist tobacco, concrete products, drums, industrial gases, fiberglass products, nails and othler wire products, packaging and paper products, paints, metal frames and other building materials, printing and small shipbuilding. These industries are either naturally shielded from competing imports by high transportation costs, as in the case of beer, building materials and furniture, or have an advantage by their proximity to local markets as in the case of printing and construction of small vessels for coastal shipping. Most of them depend on imported materials. 31. During 1961/62-1966/67, the fastest gro.wing group in the manufacturing sector was "food, drink and tobacco", which more than quadrupled its net ou.tpu.t within a period of five years,owing chiefly to the rapid expansion of brewng; the slowest was "sawmills and joineries", which less than doubled, while the engineering industry and all others grew at more or less the average speed of the whole sector, increasing 2.5 times. The most important individual industries are motor vehicle repair (including motor body building), sawmills and plywood mills, and beverages (particularly beer), in that order. Industries currently being established or in the planning stage include glassworks, a paper packaging plant, a new brewery, a motor vehicle assemply plant, and a tire retreading plant. 1/ All the increases in production, eriiployment and establishments are some- what exaggerated by the inclu.sion in the 1966/67 statistics data of 61 factories which operated prior to June 30, 1966, but submitted their returns for the first time in 1966/67.  - 10 - 32. Indigenous participation in manufacturing industries above the level of hired labor is apparently very small. In 1966/67, out of 879 managerial and clerical staff in the manufacturing sector, there were only 174 indigenes, probably mostly clerks. More than 85 percent of factory workers are indigenes but the absolute number is still small. 33. There are, however, numerous small cottage and handicraft industries outside the modern manufacturing sector making articles ranging from traditional village wood carvings, basket work, pottery and tapa cloth to native building materials, furniture, wool weaving, etc. The total value of production is estimated at a-lost $A450,000. 1iany of these activities have brouglht the indigenes into the cash economy-, especially those making native curios and artifacts for the tourists. With the Administration's promotion, sales of cottage and handicraft industries appeared to rise. Industrial Policies 34. The development of manufacturing industries has depended primari2y oni private enterprises, particularly Australian. It is a declared policy of the Territory to encourage private capital from overseas, as evidenced by the Development Capital Guarantee Declaration passed in September 1966 by the Territory House of Assembly. The low income tax of the Territory is an additional advantage. All companies, public and private, pay income tax at the rate of 225 percent of taxable income, which is about half the Australian rate. Moreover, the 1965 pioneer industry legislation grants complete exemption from Territory income tax to companies engaged in approved new pioneer industries / for a period of five years beginning from the date on which the enterprise first enters commercial production. Dividends paid from the incane of such companies during this period are also exempt from Territory income tax. Since the scheme was inaugurated 22 enterprises, in operation or under construction with a total investment of almost $A4 million, have been granted pioneer status. Among the categories of industries with a pioneer status are the extraction of pyrethrum, metal fabrication, flour milling, the manufacture of industrial gases, soap, cement and cement roofing tiles, clothing, packaging and paper products, electrical machinery, glass and glass products, footwear of all materials, and miscellaneous chemical products. 1/ Pioneer status is granted to industries with a minimum investment of $A10,000 which have satisfactory prospects of being established on a permanent and economic basis within a reasonable period, which will offer opportunities for employment in the Territory, and which will use, wherever practicable, local raw materials and other resources in the Territory. Such an industry, except where its production is wholly for export, must also be of a kind that is not already being conducted on a ccmmercial scale in the Territory or where the existing domestic suppliers are not able to fill the demands of the local market.  - l L - 35. While traditionally tariffs were designed for revenus with a single-column (non-preferential) schedule, certain local manufacturing industries have been accorded tariff protection with rates ranging up to 35 percent ad valorem. In early 1969, a bill authorizing the Administra- tion to set up a statutory Tariff Advisory Committee was passed in the House of Assembly. The Committee is empowered to inquire into applica- tions for protection and make recommendations for protection by tariffs or other means, including subsidies, bounties and import restrictions. 36. In this connection, recently the Australian export incentive scheme has been amended to strengthen further the incentives through several tax rebates, adjustments and other measures. These changes will increase the competitiveness of Australian exports in the Territory as well as other markets. The Committee will wish to take account of thes'. measures in framing an appropriate tariff for the Territory. 37. Other problems of industrial development in the TerritorY include difficulties in acquiring industrial sites in urban areas, indigenous participation in investment and management, and technical and skill training for the indigenes. These will be discussed in the next Chapter. Mining 38. At present mining, contributing only 1 percent to the GNP of the monetized sector, is not important in the Territory's economy. Gold mining, once promising, is no longer a significant operation. Its output has declined sharply in recent years because of the depleted reserves. Small-scale gold mining is still an important source of cash income for about 4,000 independent indigenous miners who accounted for about 27 percent of the total gold production in 1967. 39. In recent years there has been an increase in mineral and oil prospecting in the Territory, spurred apparently by the boom in mineral explorations in Australia. The Administration has followed a policy of actively encouraging prospecting activities. Incentives available to prospectors include lower tax rates than in Australia, some specified tax exemptions for mining companies, and Australian Government subsidi5es to active petroleum exploration companies. In addition, the Australian Commonwealth Bureau of Mineral Resources provides geological services. Having mapped about 25 percent of the Territory and carrying out regional geological surveys, the Bureau has indicated that certain areas of the Territory have the right geological structure for such minerals as copper', nickel, petroleum and phsophates. Of these, only copper has been found in commercial quantities. 40. Several oil companies are engaged in the search for petroleum and prospects are considered favorable. The British Petroleum/Oil Search group of companies has discovered four gas fields in remote inland areas, too inaccessible to be developed economically.  - 12 - 41. Recently Phillips Australian Oil Company discovered an offshore gas field, which is considered to have good prospects for economic ex- ploitation although it has not yet been proven. 42. There are also several major international companies currently engaged in mineral prospecting activities. The most important develop- ment is the proving of hutge deposits of low grade copper ore by Conzinc Riotinto of Australia Limited (C.R.A.) on the island of Bougainville. Diamond drilling has established a reserve of 700-800 million tons of copper bearing ore. consisting of 0.47 percent copper. An engineering feasibility study of the project is in progress and is due to be finished soon. The Bougainville Copper Proprietary Limited, the operating company1 is expected to make the decision to proceed during the latter half of 1969. If the company goes ahead, production will start in late 1972. 43. The total initial outlay for the development of the copper is estimated at about $A300 million. Under the terms of the Agreement with the Bougainville Copper Proprietary Limited, the Administration has the option of purchasing 20 percent of the nominal value of the Company's share capital. The Administration has announced that the option will be exercised provided the project has reasonable prospects for profitable operation. In late July, the Company signed a credit agreement with the Bank of America and the Commonwealth Trading Bank of Australia. The Bank of America is acting as lead bank for two syndicates of British, European and Canadian banks and financial institutions who will make available to Bougainville Copper loans up to US$246.4 million in Eurodollars. Out of this total amount, US$92.4 million will be dGposited with the Commonwealth Trading Bank which, acting as lead bank for a consortium of Australian trading banks, will make an Australian currency loan of an equivalent amount to Bougainville Copper. 44. Current estimates envisage an average annual production of 150,000 tons of copper in concentrate and 500,000 ounces of gold over the first ten years. Marketing of the copper is not expected to pose any major problems. In February 1969, the operating company reached an agreement with seven Japanese copper smelters on a letter of intent, contingent on further feasibility studies, to supply 80,000 tons of copper concentrate a year over the first ten years commecing 1972, and 30,000 tons a year for the subsequent five years. Gross value of this agreement at current copper prices is about $Al,000 million and represents about one-half of the expected production. The Company has recently also signed letters of intent with a German firm for the sale of 52,500 tons of contained copper per annum and with a Spanish firm for 15,000 tons per annum. 45. Proceeds from the project will add $AlOO million gross a year to the Territory's export earnings. During the tax holiday period this will produce net foreign exchange income of about $AlO million and $A30 million thereafter during the period before the loan is repaid. The copper mine will also provide employment opportunities for over 2,000 indigenous people, many of whom will receive technical training. Under the terms of the Agreement between the Company and the Administrat:Li.  - 13 - thc Corpany is required "so far as is reasonably and economically prd-ot5.cable", bo use and train labor available in the Territory. 46. Other real benefits from the project are the provision of roads, a port near Kieta, a wide range of services (e.g. power, water supply, health, etc.) and a large cash market for local produce. Power 47. The Territory's total installed electric power capacity is estimated at only around 50 MW. However, power generation has been expanding rapidly in recent years. Excluding minor private and Admi- nistration plants, power generation increased at about 15 percent per annum in 1966/67 and 1967/68. Per capita power generation rose from 35 Kwh in 1963/64 to 54 Kwh in 1967/68. 48. Almost the entire increase in the power supply came from the generating system of the Electricity Commission which assumed its full powers and responsibilities beginning July 1, 1963, in providing electricity supplies in nine major towns. During 1963/64-1967/68, the generating capacity of the Commission increased from 16.1 MW to 34.2 MW and its power supply doubled. Its share in total power generation (ex- cluding that from minor plants) is about three-quarters. 49e The Electricity Commission's market pattern has been changing, with the share of salos to households declining from 48 percent of total sales in 1963/64 to 38 percent in 1967/68. The major urban centers (Port Moresby, Lae, Madang and Rabaul), use about 92 percent of the total energy produced by the Commission. 50. In recent years, the average cost of power of the Commission has slightly decreased from 4.36 Australian cents per Kwh in 1963/64 to 4.17 Australian cents in 1967/68, owing partly to the general decrease in the price of fuel oil and its transport costs. 51. The Territory, with its many rivers and heavy rainfall, has a great natural potential for hydro-power development. Fossil fuel resources for thermal power generation, on the other hand, have been lacking, apart from some natural gas deposits in the Gulf District. Nevertheless, diesel generation, based on costly imported fuel, is still an important power source, due to the widely scattered demand pattern. The use of diesel oil is particularly expensive in the more remote stations due to the high transport costs. However, emphasis is on hydro-power development. In 1967/68, about 40 percent of the Commission's power generation was derived from diesel and 60 percent from hydro-power, as compared with 50-50 inj9&5/66. 52. During the 1963/64-1967/68 period, the Electricity Commission invested $A14.4 million. The most important project was the construction of Stage I of the Rouna No. 2 Hydro Station at the Laloki River, serving Port Moresby, which, since its commissioning in 1968, added 18 MW capacity to power supply in the Port Moresby area.l/ Stage II of Rouna No. 2, stil under construction, will soon add another 12 M{, increasing total capacity of the Rouna complex to 35.5 MW. D/ Rouna No. 1 was commissioned in 1957 with a 3 MW capacity and extended to 5.5 I'1W by 1961.  - 14 - D. Transport and Other Services Transport X 53. The Territory is i'airly well serviced by ocean and coastal shipping. In recent years t,raffic has grown at more than 11 percent annually in cargo handled by major ports and around 17 percent annually in internal and international air passenger traffic and in registered road vehicles. The combined public expenditures in the transport sector incurred by the Territory Administration and the Australian Government has increased at about 18 percent per annum. A large and increasing share of this expenditure goes to road transport which accounted for 58 percent of the total in the 1968/69 budget. The great bulk of expenditures on airports and aerodromes is met by the Australian Gcvern- ment. 54. A transport survey carried out by a consultant, financed by the UNDP, with the Bank as executing agency, is near completion. It will serve as a base to determine a detailed transport development program within the framework of the Five-Year Plan. 55. In ocean shipping in volume terms the import surplus is rising as total cargo unloaded at the Territory's major ports was 2.3 times the total cargo loaded in 1967/68, as compared with 1.6 times in 1962/63. Too many calls are made for rather small volumes of goods, but the servicing of coastal shipping routes by ocean vessels recently dropped substantially, while service by coastal vessels increased correspondingly. Some port improvements have recently been made in Kieta (New Britain), Niadang, and Rabaul. Meanwhile, a Harbors Board was established which will eventually be responsible for all port management, planning and develop- ment. Further improvement in port facilities is urgently needed. 56. In air transport, the number of airports and aerodromes had :ncreased in five years from 256 to 395 by the end of June 1968. Almost every town or aiministrative station of any size now has a landing field. However, with the improvement of road transport, small strips, wherever they prove to be no longer justifiable, should be closed and others should be brought up to higher standards to accommodate larger and more modern aircraft. This tends to reduce the cost of air transport. 57. The recent opening of the international air service from Sydney to Hong Kong/M4anila via Port Moresby and the introduction of jet planes on the Australia-Territory routes have boosted considerably tourist traffic to the Territory. Future growth in international air traffic would require better facilities, and upgrading of the major airports, with perhaps another additional international air link in Lae. 5. EThe latest inventory of roads gives a total length of roads in the Territory of about 7,4314 miles of public road, of which only 1,031 . For details, see Appendix II  miles can carry medium to heavy traffic in non-urban areas. These roads do not constitute an interconnected road system and many roads are impassable during the rainy season. During the last three years there have been improvements and upgradings of the Lae-Mount Hagen road, progress in work on a road from Popondetta to Kokoda in Papua, and extension of the road from Wewak to Maprik in the Sepik District. Telecommunications 59. The number of telephone exchanges operated by the Posts and Telegraphs Department has increased from 21 in 1964 to 31 in 1968, and the number of subscribers has risen 12 percent. Subscribers outside the service area of telephone exchanges are served by high frequency (HF) and very high frequency (VHF) radio systems. There has been a tendency for the quality of telephone services provided, especially on long distance lines, to deteriorate because of the overburden on the existing facilities in meeting the rapidly expanding demand. 59 (a). An IBRD loan of US$ 7 million was made in June 1968 for the development of telecommunications in the Territory and work on the pro- posed improvements is already under way. A new crossbar telephone ex- change with a capacity of 800 lines has already been put into operation at Madang and another one has been installed in Boroko. A high-quality VHF link between Lae and Madang was installed in late 1968. Tourism 60. With its scenic beauty and the unique way of life of its indigenous population, Papua and New Guinea has potential for a profitable tourist industry. In recent years tourism has grown rapidly, with the number of tourists visiting the Territory increased from about ll,O0 in 1964/65 to about 20,000 in 1967/68.1/ This trend seems to be accelerating. 61. There .were 23,630 tourists in 1968/69, estimated to spend $A8.3 million in the Territory. However, only about half this amoumt will be a net proceed to the economy, because a sizeable proportion of goods required for servicing the tourists has to be imported. 62. With new international air links now opening up the Territory and the promotional activities of the Tourist Board created in 1966, the volume of tourist traffic to the Territory is expected to increase significantly'during the next five years. But the greatest constraint on the expansion of the tourist industry is the rate at which hotel accommodations can be provided. Nevertheless, substantial gains have been registered in both the quantity and quality of hotel accommodations. 1/ "Tourists" are defined as non-resident persons travelling for a perind6 of 24 hours or more in the Territory, including persons travelli I<-, e business purposes.  - 16 - There is also the constraint imposed by inadequate road transport facilities and very high air fare rates. The possibility of establishing concessionary internal excursion air fare rates-in connection with international air travel as an incentive to tourists may be worth exploring. 63. Tourism in the Territory currently provides employment directly for over 2,000 persons. Like other spheres of activity, indigenous participation in the tourist industry is at present marginal, but the potential is substantial.  - 17 - III EXTERNAL TRADE AND PAITENTS A. The Overall Picture 64. Owing chiefly to the persistent expansion of imports and net service payments, the large deficit on the Territory's goods and services account continued to grow. The rate of increase was particularly rapid in the few years up to 1966/67 when the level of exports remained rather stagnant. Thanks to the substantial rise in export earnings, the deficit in 1967/68 is estimated to increase only moderately, possibly by less than 10 percent. However, the absolute amount, estimated at t\15 million, continues to be very large. Moreover, as exports still only pay one-half of imports,the depehdence of the Territory for capital inflow for economic growth remains unchanged in absolute thought or little less in relative terms% 65. Australian Government grants and Australian Government's direct expenditure in the Territory provide chiiefly the financing of the deficit. Data on private capital movements are too scanty to complete the capital accounts picture, but there appears to be sizeable inflow of Australian nrivate capital for direct investmernt in the Territory. Table 2 Balan n-eoTPayments (in (year ending June 0J) 1964/65 1965/66 1966/67 1967/6&i Nierchandise expcrts, f.o.b. 43 44 46 59 lMerchandise imports, f.o.b. -77 -99 -113 -l3b Balance -34 -55 - 67 - 7S Net Services -27 -34 35 4 Balance of goods and services -61 -89 -102 -1a- Private Transfers 1 2 3 4 Australian Comionwealth expenditures 15 38 38 32 Australian Grant to the Territory Administration 56 62 70 78 Total Transfers and Grant 72 102 1ll 1l4 a/ ission estimates Source: Statistical Appendix.  - 18 - B. Exports 66. Export trade is a prime mover of the Territory's economy but its ro'e will naturally decline as domestically oriented economic activity increases. The total value of exports of domestic products as a proportion of GNP of the monetary sector was over 28 percent in the early sixties, and about 23 percent in 1966/67. During 1960/61 and 1967/68, exports increased at an annual average rate of 11 percent. 67, Exports are concentrated on a few primary products, although there has been substantial progress in diversification within the limited field of agricultural and forestry products, especially in the last ten years or so. Copra and copra products which, as a group accounted for two-thirds of the total Territory export value in 1950/51, dropped con- tinuously to slightly over one-third in 1967/68. Similarly, the share of gold and rubber fell substantially. On the other hand, exports of coffee beans, cocoa beans and timber and plywood, etc., which were either non- existent or negligible in 1950/51, rose sharply since then. New export items, promising though still unimportant, are tea, palm oii, pyrethrum ancd passionfruit. Table 3 Commodity Composition of Exports of Domestic Produce (in percentage; value in f.o.b. $A million) Percentage Value 1950/51 1960/61 1967/68 196T/68 Copra and copra products 67 54 36 21.4 Coffee beans 0 8 24 1h.3 Cocoa beans 1 12 20 11.8 Rubber 10 9 3 2.0 Timber, plywoods and veneer sheets 0 8 9 5.1 Gold 18 5 1 0.8 Others 4 h 5 3.1 Total Territorial Produce a/ 100 100 100 Total value 15.4 28.5 58.9 58.9 a/ Totals do not always add up because of rounding. 68. The world price of copra and coconut products showed wide fluctuations caused mainly by the fluctuations in world supply. As eyprtr prices have moved in general inversely with export quantity, the exporc value of the Territory's copra products has exhibited a steadily  - 19 - rising trend. In 1967/68, a sharp rise of about 30 percent of copra pr_ce with a slight increase in export quantity - an unusual parallel between price and quantity movements - brought about a 35 percent increase in the export value of copra and coconut products, as compared with a 2L percent drop in 1966/67. 69. The sharpest rising export trend was registered by coffee. Since 1960/61, its export value has been rising steadily at 30 percent per annum, due to a similar rapid increase in the export quantity. Cocoa export value also rose quite rapidly at an annual average rate of 20 percent? with however a sharp setback in 1965/66 when the new low world price occurred simultaneously with a reduction in output because of plant diseases, The resuming rising trend of production and the subsequent price recovery brought about a 23 percent increase in the export value in 1967/68. 70. The export volume of rubber showed a steadily rising trend, but the falling world price kept the export value from rising. In fact, in 1967/68, a new low rubber price coupled with a slight decrease in volume caused a drop of almost 20 percent in the export value of rubber. 71. The export trend of timber, plywood and veneer sheets is less spectacular. In the early sixties, while exports of timber increased, exports of plywood and veneer sheets decreased. It was anly in the last 2 or 3 years that exports of both increased; the combined value rose markedly by 20 percent in 1966/67 and 15 percent in 1967/68. 72. On the whole, the growth in value of exports somewhat flattened during 1965/66 and 1966/67,owing chiefly to the setback in cocoa exports in 1965/66 and falling exports of copra and coconut products in 1966/67. In 1967/68, all major exports performed remarkably well, except rubber and gold, with a result that total export value increased by 29 percent as compared with only 5 percent increase in the two preceding years. In July- December 1968, total export value increased further and was 13 percent over the corresponding period in 1967. As the commodity export pattern of the Territory becomes increasingly diversified, and price fluctuations of the individual export commodities are different, the fluctuations of total export value tend to be milder. 73. The Territory's export markets also continued to diversify. Although Australia remains the Territory's main market followed by the United Kingdam, the shares of these two countries in the Territory's total exports, however, continued to decline: for Australia from one-half in 1960/61 to 42 percent in 1967/68 and for the United Kingdom from one-third to 29 percent. On the other hand, the share of the non-British Common- wealth countries continued to increase and reached 28 percent of the total in 1967/68 (as compared with 15 percent in 1960/61), with 8 percent for the U.S.A., and 7 percent each for the Federal Republic of Germany and Japan. The Territory continues to enjoy special tariff preferences in Australia including unlimited duty-free imports of coffee beans, rubber, peanuts and most types of timber as well as substantial duty-free quotas of plywood aii.:c  - 20 - Pnssonfr.it. Furthermore, no duty free rubber imports frni' otlhc sc.rcro are permitted unless all the Territory's production has been sold. C. Imports and Services 74. The Territory, particularly its monetary sector, relies heavily on imports. Excluding those for re-exports, imports amounted to almost 60 pei- cent of the GNP of the monetary sector in 1966/67. 75. The rate of import e,cpansion has been consistently rapid. During 1960/61 and 1967/68, total value of all imports, excluding imports for re- exports, increased at an annual rate of 15.7 percent, which is appreciab'y higher than the growth rate of GNP of the monetary sector and that of exporto. 76. The commodity pattern of imports reflects clearly the structure cf the Territory's economy. With practically no capital goods industry and only a very small light manufacturing industry, the Territory imports most of such needs from abroad. About 40 percent of the total imports in 1967/68 were metals, metal manufactures, machinery and transport equipment. Such imi-. ports are of crucial importance in capital formation and the build-up of pro- ductive capacity in the Territory. About 27 percent of total imports are manufactured consumer goods, including clothing and textiles, and 21 percent are food items. Parts of these imports are high quality or luxury items, such as fre,h meat, dairy produce, fruit and vegetables, and other non-food articles for the consumption of the non-indigenes, and parts are consumption goods relatively lately introduced for the consumption of the indigenes, suchn as rice, refined sugar, canned fish, textiles, made clothing, footwear, etc, The latter group of consumption goods has played an important role as an in- centive or inducement for the indigenes to increase production and exchange. The import pattern has remained fairly stable in the post-war years, except that the share of food imports has been noticeably reduced and that of tran,- port equipment (largely automobile) imports considerably increased. 77. In recent years the sources of imports have become more diversified. The shares of Australia, the United Kingdom and, indeed, the British Common- wealth countries as a whole, continued to decrease, while those of the U.S.A, Japan and the non-Commonwealth countries as a whole increased corresponding3ly~ 78. The Territory's current receipts from invisibles are rather small, totalling $A 18 million in 1966/67. The largest item is tourism, followed by transport services rendered to transit ships and aircrafts. On the other hand, the Territory pays sizeable amounts for transport services and travel abroad, including the frequent leaves of the expatriates as well as remit- tances of interest and dividends. The deficit on services account, amountirg to $A 35 million in 1966/67, remained at about the same level as in 1965/66, but 30 percent higher than the level two or three years ago. It is expected to increase further in the coming years. D. Transfers and Capital Movements 79. The two large items of official transfers, namely Australian Commonwealth expenditures in the Territory and the Australian Government  - 21 - ,grant to the Territory's Administration, together have in recent yeIrs been more than enough to finance the deficit on the Territory's recorded goods and services account. The former, incurred largely for defense pulr- poses, has fluctuated quite widely; the latter has, however, consistently increased to fill simultaneously the budget gap as well as the remaining payments gap. The total amount of both increased fairly rapidly from $A 64 million in 1963/64 to $A 110 mi'lion in 1967/68. Excluding defense expenditure, the total increased from $A 58 million in 1963/64 to $A 90 million in 1967/68, indicating the widening resource gap. This reflec'us inter alia, the increase in development expenditures coupled with a small rise in domestic savings and sluggishness of exports. 80. Private external investment also comes almost entirely from Australia. Recent statistics slhow that the capital inflow of private Aus- tralian Companies (including reinvested earnings) increased fairly rapidly from about $A 13 million in 1965/66 to $A 19 million in 1967.68, of which $A 5 million was reinvestment of profits. Meanwhile, there are also out- flows of capital from the Territory to Australia which are estimated at $A 4 million in 1967/68, resulting in a net inflow of Australian private capital of $A 15 million. Outward payments of distributed income on private capital investment to Australia is estimated at $A 3.6 million, while re- ceipts appear to be less than $A 1 million. The impressive increase in private capital inflow in recent years reflects the confidence in the Terri- tory regained after the settlement of the West Irian crisis in 1962/63 and the Administration's determined policy of encouraging the inflow of exter- nal private capital for participating in the Territory's development. 81. Ihe Bureau of Statistics is endeavouring to improve statistics on external capital investment of the Territory. Table 4 Flow of Private Companies' Investment between Australia and Papua and New Guinea (n million TAT) (year ending June 30) ].965/66 1966/67 1967/68 Inflow of Private Australian Investment to T.PoN.G. 12.56 15.87 19.14 Retained profits 1.88 2.09 5-14 Other direct investment 9.1h 12.08 12.17 Portfolio investment 1.54 1.70 1.83 Outflow of Private Investment from TOP.N.Go to Australia n.a. 3.63 3.93 Direct investment and retained profits 0.21 -0.07 0.39 Portfolio Investment n.a. 3.70 3.54 Net Capital Inflow n.a. 12.24 15.21 Source: Department of External Territories.  - 22 - IV CAPITAL FOMAION AN) RESO0URCE 5LQMN 82. In promoting the growth of an economy at such an early stage as the 'rerritory:s, the development of human and natural resources to make labor and land readily available is as important as physical capital formation. Such development involves substantial amounts of current expenditure in addition to capital expenditure, particularly from the government, in the fields of education, land survey, mineral explora- tion, etc. This chapter will deal with the pattern of public expendi- ture and the development of human and land resources, after a general discussion of capital formation in the Territory. A. Capital Formation 83. Rough estimates show that in the non-monetized sector, the proportion of gross investment to gross national product is approximately 20 percent. Investment in this sector generally does not involve much monetary transactions. Labor is available at low opportunity cost, in most cases at the cost of sacrificing some of the abundant leisure time. What is mostly needed to make use of the underemployed labor for capital formation is incentive and orgarnization. Whenever the project captures the indigenes' interest and imagination, and there exist suitable arrange- ments or institutions to organize labor, surplus labor can be directly transformed into capital construction with some help of tools and skills. Both investment and t'saving't (in the sense of using labor not to produce consumption goods) occur in one act without any assistance of the mone- tary mechanism. It is estimnated that about three-quarters of gross capital formation in the subsistence sector were community investment, which consists of village and tribal works, voluntary Local Council works, district roads, landing fields and other public works, as well as mission and church buildings, gardens and works. The rest was private investment, including replacement and maintenance of indigenous agriculture. Judging from the high investment rate, it appears that this sector cQntains a very substantial potential of capital formation, and its realization does not necessarily involve muchl sacrifice of consumption. 84. In the monetized sector, the rate of increase of gross capital formation, at 23 percent per annum at current prices, was much higher than the GNP growth rate, depending heavily on capital inflow. The increase of gross capital formation was particularly rapid after 1963/64, when confidence had been restored after the uneasiness about the Indone- sian take-over in West Irian had begun to subside. Private investment in fixed capital formation doubled in the next two years, and public investment continued to expand. In 1965/66, the latter reached $A52 million and the former $A30 million; the combined total amounted to more thar. 50 percent of GNP of the monetary sector. The high rate of public investment was partly due to the Australian Government's defense expendi- ture in the Territory, and partly to the Administrationts heavy investment  - 23 - in infrastructure which is urgently needed at this early stage of deve- lopment of the Territory with its unique physical and social conditions. 85. Among private investments in fixed capital formation, the lar- gest item has been machinery and equipment, followed by transport equip- ment; the combined amount of these two groups occupied more than one-half of the total in 1967/68e Investment in oil and mineral prospecting accelerated further in 1967/68 and doubled the amount in the previous year, due mainly to copper prospecting in Bougainville. Urban non-dwell- ing construction - another major item of capital formation - has been in- creasing steadily in recent years, but private investment in rural cons- truction and building in the monetary sector was comparatively small. B. Pattern of Public Expenditures: Capital and Current 86. The development of the Territory's econonW depends to a large extent on Government spending, particularly its development expenditure. During 1960/61 - 1966/67, total expenditure of the Territory Administra- tion increased at an annual rate of over 17 percent, which is appreciably higher than the growth rate of ONP in the monetary sector, and much higher than that of the whole economy. The Administration expenditure amounting to A120 million in 1966/67 was equivalent to about 60 percent of the GNP in the monetary sector, and 30 percent of the total GNP, in- cluding the subsistence sector, as compared with corresponding figures of 44 percent and 17 percent in 1960/61. In 1967/68 total expenditures increased further by about 13 percent, and in 1968/69 'another 10 percent. In addition, Australian Commonwealth Departments and Instru- mentalities also spend directly in the Territory; in 1967/68, such expenditure amounted to $A32 million (net).1/ 87. There has been a distinct change since 1964/65 in the alloca- tion of the Adninistration's expenditures between current and capital categories and among the various items within each category. Since 196h/65, the annual rate of increase of current expenditure has slowed doln, while that of capital expenditure speeded up. Consequently, the share of capital expenditure increased from 28 percent in 1960/61 - 1963/64 to about 33 percent during 1964/65 - 1967/68. This change, and some other shifts in emphasis of public expenditure to be described below, reflect an important reorientation in the Territory's development policy which followed largely the recomimendations of the first Bank Mission. Capital Expenditures 88. During 1964/65 - 1967/68, public capital expenditure for economic infrastructure was substantially increased, while capital invest- ment in social services and education was de-emphasized. The shift in investiient policy was particularly evident in transportation, where in- vestments rose from $A7.3 million in 1960/61 - 1963/64 to $A21.1 million 1/ lfet expenditure is expenditure minus a small amount of revenues collected by these Commonwealth institutions in the Territory.  - 24 - in. 196th/65 - 1967/68, increasing its share in total Administration invest- ment from 11 to 17 percent. Almost four-fiftha of these irnvestments were for road and bridge construction, the rest was divided up among air-- ports, ports, and coastal shippilng. Similarly, power investment rose 2.6 times, increasing its share in total investments to almost 9 percent, and investments in water supply and sewerage - an increasing task with the build-up of larger towns - trebled. Capital investments in agricul- ture, fishery and forestry and in opening land and surveying of land and mines more than trebled, and their combined share in the total rose from 4.2 percent to 7.1 percent. 89. On the other hand, capital investments in housing, health and education, accounting for 44 percent of total capital outlays of the Administration in 1960/61 - 1963/64, fell to 29 percent of the total in 1967/68. Although the absolute amount of capital expenditures in the field of education doubled, and government housing rose by more than one- half over the preceeding four-year period, their individual shares fell, particularly housing. The relatively smaller rise in investment in housing was partly due to a significant slowdown of further expansion of expatriate housing after a certain saturation point in supply had been reached. Investments in public health decreased in absolute terms, owing to the drastic reduction in the expansion of health facilities in the Territory, as investments in this sector had already reached a comparative7r 4igh level. 90. Govermnent capital expenditure included also capital provisions of $Al million in 1966/67 and $A2.5 million in 1967/68 to the Papua and New Guinea Development Bank. Another $A2.7 million was earmarked for this purpose in the 1968/69 budget. 91. The 1968/69 budget indicates no essential change in the invest- ment pattern as compared to the 1964/65 - 1967/68 period, except that investments in agriculture have been considerably stepped up. Invest- inents in power were relatively low, reflecting an intermediate phase be- fore the initiation of new projects (e.g. the Rouna and Upper Ramu Schemes). Current Expenditures 92. In recent years the pattern of the Administration's current expenditure has shown a change towards more emphasis on social and eco- nomic development, although the traditional law and order type expendi- ture is still fairly substantial. Current expenditure for general adni- nistration as a percent of total current outlays declined from 40 percent during 1960/61 - 1963/6b to 34 percent during 1964/65 - 1967/68, and further to 32 percent in the 1968/69 budget, while the share of current expenditure on social and economic services increased correspondingly. 93. In the latter category, current expenditure for education  - 25 - showed a particularly sharp rise of five times and accounted for one- fifth of total current expenditures in the 1968/69 budget. This reflec+so the great emphasis placed by the Administration on promoting primary and) more lately, secondary and tertiary education of the indigenes. For example, the number of teachers on Government payroll rose from 1,570 in 1963 to 2,910 in 1968. Subsidies to mission schools now account for about 10 percent of current education expenditure. The increase in cur- rent health expenditures was however much slower. 94. In economic sectors, current expenditures increased noticeably in transportation, especially as a result of expanded road maintenance and improved services for coastal shipping. Outlays for Government ser- vices in the various fields of primary production also rose substantialJ;Y in recent years. An important factor has been the increase in the staff of the Department of Agriculture, and in the Land, Surveys, and Mines Department as a result of the initiation of more agricultural development programs and expanded extension services, the attempt to accelerate the opening up of land resources, and more intensive geological exploration of the Territory. Similarly, Government current expenditures for trade and industry have risen quite sharply in the last two or three years, which include outlays for the newly established Business Advisory Servic i 95. In the Territory's current expenditures, the share of salaries and wages has been very high. In the years 1964/65 through 1968/69 it has been constantly at almost one-half of current outlays. One of the reasons has been the increase in the number of civil servants, which is inevitable with the scope of Government activity continuously widening. Ari important cost-raising factor has, however, also been the employment of expatriates in Government in the absence of qualified indigenes. Thes3 expatriate staff members receive salaries comparable to Australian rates and have to be induced by high fringe benefits, including special leave, housing, travel and education allowances, increasing total personnel cost far beyond the figures for salary and wage payments. This is par- ticularly true where special housing projects with considerable infra- structure had to be built to accommodate expatriate staff. The number of local Government employees has been increasing but, by mid-1908, the ratio of expatriates to local Government personnel was still 1:3. Indi- genous staff members receive the same basic salaries as the expatriate staff members, but without allowances and fringe benefits. However, even with the relatively high real income, it is felt increasingly difficult to retain existing expatriate staff and to recruit new one. But in almost all fields of development, the availability of qualified staff is crucial for success, particularly in the Territory where the disseminat-L.n of basic knowledge, simple skills and ways of organizing and doing thing;- is as important as investment in physical capital formation.  Table 5 Territory Administration Expenditure (Percent Distribution) 1960/61 - 1963/64 1964/65 - 1967/68 1968/69 (Estimate) Current Capital Total Current Capital Total Current Capital Total General Administration 40.4 7.9 31.1 34.5 5.2 25.0 32.5 -3.0 20.7 Social Services 31.3 45.9 35.4 33.4 32.3 33.0 34.9 29.6 33.1 (Education) (13.9) (11.7) (13.3) (17.6) (10.0) (15.1) (19.6) (10.4)(16.5) (Health) (15.5) (8.7) (13.6) (13.8) (2.5) (10.2) (13.0) (2.9)(10.0) (Housing) ( - ) (23.4) (6.6) ( .0) (16.6) (5-4) ( .O) (14.0) (4.7) Economic Overheads 13.0 23.2 15.9 12.9 32.4 19.2 12.7 30.0 18.5 (Transportation) (6.5) (11.0) (7.7) (7.8) (17.3) (10-9) (7.6) (17-3)(1008) (Power) (2.4) (7.3) (3.8) (1.3) (8.8) (3-7) (1.1) (5.1) (2.4) Direct Production Sectors 12.1 4.2 9.8 11.9 7.3 10.4 12.9 8.8 11.5 (Agriculture, Stock Fisheries & Forestry) (7.1) (1.9) (5.6) (7.7) (3.6) (6.4) (8.4) (4.7) (7.2) (Land, Survey & Mines) (2.5) (2.4) (2.4) (2.1) (3.5) (2.6) (2.1) (3-7) (2.6) (Trade and Industry) (2.3) ( - ) (1.6) (2.1) ( - ) (1.4) (2.3) ( - ) (1.5) Others 3.2 18.8 7.8 7.3 22.8 12.4 7.0 34.6 16.2 Total Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total Annual Average Amount(in $A million) 42 16 58 76 36 112 104 52 156 (Index) (100) (10C) 100) (181) (225) (193) (248) (325) (269) Source: Territory of Papizi zni Newv Crui-neR, iear,ury.  - 27 - Australian Government Expenditures 96. The Australian Commonwealth Government and some of its agencies incur direct expenditure in the Territory, largely for defense and civil 2viation. The total amount has fluctuated quite widely, with a sharp rise in 1965/66 and a substantial reduction in the 1968/69 budget, totalling net $A24.4 million, or roughly 16 percent of the total Terri- tory Administration expenditure. Of the total amunt in 1968/69, $A12.4 million was budgeted for defense, and $A10.4 million for civil aviation. C. The Development of Human Resources 97. The extremely low level of literacy and education, the rather primitive habits in diet, health and attitude towards work, and the pre- valence of malaria, tuberculosis, parasite diseases, etc. in several parts of the Territory have greatly handicapped the supply of labor in quality, although there apparently exists substantial under-employment in the sub- sistence sector. For future development, especially in the long run, the improvement of human resources will be an important basic element. A satisfactory rate of increase in the active participation of indigenes in economic activities will depend to a large extent on how rapidly their c.ducation, training and health can be enhanced. 98. It is estimated that the indigenous population totalled 2.28 million by mid-1968, rising at a rate of 2.4 percent per annum. With .urther reduction in the death rate, the population growth rate may rise to 2.8 percent per annum during 1971 - 1976. The proportion of younger age will correspondingly rise above the 1966 ratio of 43 percent of the t.otal population. Fanily planning measures have been started on a very small scale. Ihe increasing high ratio of the young to total population will certainly add rapidly to the educational, housing and other require- ments and claim heavily on the Territory's resources. 99. The latest census shows a total indigenous labor force at 1.26 -nillion in 1966, of which, about 46 percent were in the subsistence sector. ;I census of employers shows that the largest group of indigenous employ- mrent (excluding self-employed) were private agriculture (mainly plantation t'orkers) and the public sector. Very few of them are above the level of 'i red unskilled labor. 100, Efforts have been made by the Administration to increase indi- genous participation in economic activities and in the public service. In the public service, recruitments of expatriates have lately been limited only to those on temporary contracts, not on permanent civil service basis. The Public Service Commissioner has been replaced by a Public Service Board ith indigenous participation, aiming at promoting more active recruitment of indigenes. 101. In the field of employment in private expatriate business, the ''.ssion welcomes the Administration's initiation of the Indigenouis Tr-ir-  - 28 - Qentive Scheme. Under the Scheme the Administration intends to provide; subsidies to employers for training apprentices to meet part of the cost of apprenticeships and permits subsidies to sponsors of full-time students at educational institutions and participants of approved short-term formal courses of vocational and industrial training. 102. The Administration also established the Business Advisory Ser- vice, with offices in six towns, to advise and assist the indigenes in establishing and conductihg businesses. However, the offices are seriously understaffed and poorly equipped. The Mission feels that the Staff of the Service should be greatly expanded and better supplied with required equipment. To overcome difficulties in recruiting permanent advisory staff, the Aclministration might try to hire retired,. technically qualified persons. In addition, arrangemenis for training in basic industrial skills should also be carried out, perhaps by the establishment of small skill training centers for indigenes lacking educational qualifications for vocational and technical schools, to acquire a wide range of indus- trial skills. A comprehensive study of industrial possibilities for indigenes should also be carried out, to provide more concrete guidance to the indigenes for entering into suitable industries. 103. A more basic and long-run means of advancing the living of the indigenous population is, of course, education. TTith increasingly heavy expenditures on education, indigenous school enrollments have recentl j1 increased rapidly. During 1960-68, enrollment in Primary "T" schools- rose by 1.3 times, and enrollment in secondary schools by 6.5 times, although the ratio of school attendance of school age children was. still low, being, in mid-1966, 46 percent for primary schools and 7 - 8 percent for secondary, technical and vocational schools. The considerable empha- sis on the expansion of secondary, technical and vocational schools, par- ticularly after 1965, follows closely and rightly the recommendation of the first Bank Mission. The Administration continues to subsidize mission schools, which are still important in the Territory's education system, especially at the primary level. lo4. The Mission was impressed with the recent progress in tertiary education. The University of Papua and New Guinea and the Lae Institute of Higher Technical Education were both inaugurated in 1967. 1With the six other tertiary educational institutions, these institutions will, in due course, produce personnel with rather advanced levels of edu- cation to fill the higher echelons in the public service, the educational system and such professional fields as engineering, agriculture, medicine, as well as in business. However, there appears to be a need for better coordination among the tertiary educational institutions, in order to avoid duplication, to ensure more economical use of faculty and other resources, and to apply a unified policy of granting degrees and diplomas. 1/ Primary "T" schools follow a curriculum especially designed for the Territory and are attended by indigenous children.  - 29 - D. Land Development 105. On the average, the man/land ratio in the Territory is com- paratively low: the density of population in mid-1966 was only 12 persons pel square mile. In certain Histricts, however, the population density is sub- stantially higher, - e.g. 60 in the Chimbu District, 40 in the Eastern Highlands District, and 30 both in the Southern and Western High- lands Districts. For the Territory as a whole, the availability of land for agricultural development is not a problem now, and is not likely to be one for many years, both for indigenous and non-indigenous agriculture. With the exception of the Chimbu District and a few other areas in the Highlands, most indigenous groups have not approached, much less exceeded, the carrying capacity of the land which they now occupy. Also, much useful land is still uncultivated. On the non-indigenous side, as far as land resources are concerned it appears that there is substantial scope for agricultural expansion, considering the rather large area of unused land already under ' Administration and expatriate control, both under freehold and leasehold. At the end of March 1967 (latest year for which details of land tenure are available), 45 percent of the total area in rural holdings were not being utilized. Apparently there is no lack of land limiting the expansion of coconut, cocoa and rubber. 106. Of the total agricultural land not owned by the indigenes, the Administration owned and leased 638 thousand acres by the end of March 1967, or 62 percent of the total. Of this total about 83 percent are leased to the private sector other than missions. The Administration's acquisition of land to be made available for new leases since March 1966 (including the portion already contracted for 1968/69) amounted to 497 thousand acres, which was in excess of the area needed to meet agricul- tural planting targets for the period of March 1966 to lvlarch 1969 (90 thousand acres). Even if no further land is purchased after mid-1969, it is estimated that the "bank"1 of utilizable agricultural land held by the Government will last for the next five years or So. 107. The agricultural land problems which exist in the Territory are basically of two kinds, First, the institutional problem of ownership which has handicapped commercial utilization of the land and the securing of bank credit for agriculture. The second is the physical development of the land to make it suitable for cultivation and livestock. In the non- indigenous sector the .first problem manifests itself mainly in the diffi- culties in securing additional land in particuiar areas where there are disputes among indigenous groups claiming ownership, and therefore title to the land is not clear, or in areas where the native owners are not willing to sell to the potential users. 4n example of the latter is the difficulty in obtaining land in areas suitable for cattle raising. In the indigenous sector, the problems arise from the conflict between the practices of traditional group use rights to land under the system of shifting subsistence cultivation, and the different practices imposed by permanent tree crop commercial agriculture to which the indigenes are increasingly devoting themselves. To encourage fuller land utilization and development, the Administration has taken action to introduce a system  - 30 - of land holding, providirng for secure ind-ividuaa titles under the Land Tenure ConversiorL Ordinance. Given the tradi.ti onal group re' ationships to the land, the title conversion process lhas been slow, al-though it is encouraging that in the most recent years there has been an increasing number of individual indigenous farms that have taken up blocks of Admi- nistration land and have been granted formal leasehold tenures. But the overall conversion process should still be considerably accelerated. 'I'hiw is recognized as essential in order to raise indigenorts comyrf3rcial agr- culture to better levels of performance if the goal of increasing indige- nous participation in the cash economy is to be achievred. 108. In view of the local tradition, the conversion into individua' land titles tends to take a long time. As this should notQ handicap agricultural development at the same time, the IA ssicn feels that expe- dients or intermediate steps should be sought to circur;vent these diffi- culties. For instance, agricultural cooperatives co-uld be o.ganized among the members of a clan even without clear indiviJaal 1cnd titles (land holding cooperatives). If this can be done, thase cooperatives would then be able to borrow money from the financial institutions to finance improvement of their land. Secondly, titles for using the land rather than titles of owning the land could be established among the members of the clan for a sufficiently long period to make the financial institutions accept such titles as collateral to borrow. Thirdly, the Administration could offer an option to a clan to trust (but not alienate) the land to the Administration, and the Administration in turn could lease the land to the individuals for utilization, accompanied by Admi- nistrative assistance in developing the land. After a certain period of time, when the members of the cla, are anxious and agree among themselves on acquiring individual land: titles, the Administration would return the land to them. 109. Regarding the physical development of land, the drainage of the Waghi Valley for possible tea planting and the building of roads in the potential timber areas in Vanimo and Gogol are the obvious examples. 'These schemes have not reached the cost-benefit analysis stage. Perhaps the district planning being carried out by the Administration in Port Moresby together with the District Offices will provide more information -for further examination. 110. Industrial land is particularly short in the Rabaul and Lae area, followed by other major towns. As the urban areas are rapidly deve- loping, it might be advisable to reserve well in advance suitable indus- trial sites in any urban planning. The idea of establishing industrial estates, as done in many other developing countries, is worth considering. 111. The high cost of land and building in urban areas is presently already a serious handicap to potential indigenous small businessmen. To deal with this problem, the Administration is planning to set up a Business Promotion and Small Industries Center at Port M4oresby as a pilot project.  - 31 - A similar center is being contemplated for Lae. The centers will provide temporary low rent industrial premises for newly started indigenous snmal:-7- scale enterprises which, when later firmly established, will themselves have to find their own premises elsewhere.  - 32 - V. FINMNCIG OF DEVELOMMNT 112. The lack of reliable data on savings and external capital move- ,ients makes it difficult to establish a comprehensive picture of the financing of development in the Territory. However, it is clear that the Australian Government's grant is perhaps the single most important source of financing the Territoryts development. In addition, the CommOrinwealth Government also incurs substantial amounts of expenditures in the Territory (see Chapter III). 113. The Australian camoercial banks and business firm8 generally do not maintain separate accounts of business transactions for Australia on the one hand and for the Territory on the other, and therefore there are no reliable data to show a clear picture of private capital movements. How- ever, it is likely that there is a net outflow of bank deposits and ex- patriate remittances from the Territory to Australia, and a net inflow of private direct investment from Australia to the Territory. 114. Efforts to mobilize indigenous savings have been made, but the anount of savings placed in modern financial institutions is still small. oome local investments in the subsistence sector, of course, do not rely on the financial mechanism and consist mainly of direct investment of labor. TUnless net export incore can be increased substantially, e.g. through earr- ~ngs from the expected large copper exports, the development of the Territory will have to rely continuously on the lustralian GoveThment's grant and ilustralian private capital. A. Public Rtevenue and External Finance Revenues "LL5 The large subsistence sector and the early stage of development of the Territory are reflected in the low level of domestic public revenue. On the other hand, as analyzed earlier, the enormous requirements for de- delopnent have necessitated much larger public expenditures, and therefore resulted in a proportionately large budget deficit. In the last two years it covered 36 percent of the Administration's total expenditures, or 53 percent of current expenditure. Efforts to increase revenue have con- tanuously been made and, in fact, total internal revenue has increased at an annual rate of 16 percent since 1960/61, faster than the growth of G1Un in the monetary sector. In 1966/67 internal revenue totalling $A42.5 mrilion was equal to 21 percent of GNP in the monetized sector, or 11 percent of GNP of the whole economy. In the same year, tax revenue ainounted to 13 percent of the GNJP in the monetized sector and 7 percent of total GNP. 116. Tax revenue accounts for about three-fourths of total internal