head in each occupation and the growth of demand for
wage labour) that influence changes in the composition of population are derived in three further submodels, whose
function is summarised by links shown on the left-hand side of Diagram 3.1. For these sub-models, the economy of Papua New Guinea is subdivided into a number of sectors distinguished in the preceding chapter. In most studies, the sectoral division of an economy is based on the types of commodities produced, as, for example, the classification adopted in the inter-industry study by Parker (1973).^
However, since the present study is primarily concerned
with the effect of economic growth on incomes and employment in rural and urban areas, the sectoral division is based on the location of economic activities, the use of labour and capital in production and the distribution of income. The characteristics of the sectors of the economy considered by the present model are summarised in Table 3.1, and
discussed in more detail below.
One consequence of adopting the present basis of subdivision is that each sector, and especially the
industrial sectors, includes the production of a wide range of commodities. The interrelationships of sectors producing similar commodities, in particular the
determination of intermediate demands, are based on a
Table 3.1i Sectors of Production
Sector Location Determination of Production Factors of Production
1 Subsistence Rural Output related to the number
of participants in rural workforce. Production per head may remain constant, or decline as rural monetary sector production increases.
No wage labour is used, and output is not limited by the stock of capital purchased from outside the subsistence sector.
2 Smallholder production Rural
of food crops for the domestic market
3 Smallholder production Rural
of cash crops for export
Output is determined by the accumulation of capital; the supply of land and (self-employed) labour is adjusted to the rate of production.
4 Plantations, producing cash crops for export
Urban* Output is determined by a c.e.s. production function of labour and capital. A fixed amount of land is allocated to
plantations.
5 Natural resource based projects
Urban* The scale and timing of individual projects are subject to government decisions. 6 Rural small-scale industry 7 Urban small-scale industry Rura 1 Urban
Output determined by the accumulation of capital; income is shared among all (self-employed) participants.
fl Modern industry Urban Production determined by
total demand for the domestic production of industrial products, less the output of small-scale industry (sectors 6 and 7).
9 Government services Urban* Provision of education and
infrastructure are determined by government policy.
The capital/output ratio declines, reflecting improvements in productivity due to changes in educational composition and the provision of infrastructure by the government. No wage labour is used; capital is financed from rural savings, supplemented by government lending.
Capital-labour ratios are determined from relative factor prices; both factor/ output ratios decline with
improvements in productivity due to the provision of infrastructure by the government.
Capital and wage labour are used in fixed proportions to output. Investment may be financed by government or
from overseas. As in sectors 2 and 3, except that capital in either of sectors 6 and 7 is financed from savings of self-employed in the corresponding locations. Capital and labour
requirements are determined by a c.e.s. production function. Factor/output ratios vary with relative factor prices and improvements in productivity.
The employment of public servants and the purchase of goods and services from the industrial sectors (sectors 5 to 7) is derived from proportions set by government policy. 1 According to the classification by location adopted in this study, all population outside
condensed version of the input-output table for 1970.
The present version of the model could be extended to allow for a larger number of commodities, as has been done in
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a number of other economic demographic models. The subsistence sector
In this study, the subsistence sector is
defined to be the production of goods and services (such as staple foods and housing) in villages to meet village needs, without reliance on wage labour or equipment
purchased from outside. This differs from the usual definition which is mainly based on whether goods are
bought or sold for money. By the definition adopted here, it is therefore possible that part of the output of the subsistence sector might be exchanged for money within the villages, and that this proportion may increase over time.
Subsistence incomes per worker in the rural
areas are taken into account in the economic factors which determine fertility, migration and consumption patterns projected by other submodels. Subsistence income per head may be assumed to remain constant, or to fall as monetary
income per head increases over the projection period.
1 See Parker (1973) p.63. The condensed version used in the present study is shown in Table 9, Appendix 1: the proportions of intermediate goods to total production are assumed to remain constant over the projection period.
Agriculture
Agricultural production in the monetary sector is classified into plantations producing export crops, and smallholders producing food crops for domestic markets as well as export crops. Papua New Guinea's production of any export crop is small in comparison to world markets, so it is assumed that all output can be sold at exogenously determined prices. Moreover, only a small proportion of non-subsistence food requirements are currently supplied from domestic sources, so it is assumed that the growth of the agricultural sectors is determined solely by supply constraints.^
As a corollary of the present government policy of promoting domestically owned small-scale activities,
it is assumed that no new land will be made available for plantations after independence. In addition, it is assumed
that there will be no further net investment, so the stock of capital will remain constant from 1976. The growth
of production is determined from the stock of capital using a constant elasticity of substitution production function, which allows for changes in factor/output ratios in response to changes in wage rates set by government policy, and
improvements in productivity of labour and capital due to the provision of infrastructure by the government.
As no wage labour is used and incomes are shared among all participants in the smallholder sectors producing food and export crops, it is assumed that the supply of
The production of food for domestic markets outside villages is ultimately limited by demand; if this
limit is reached, the model provides for a transfer of resources from food crop to export crop production. 1
labour is adjusted to production. Land is not an overall constraint (see Section 2.2), therefore output of rural smallholders is assumed to depend only on the accumulation of working capital from savings out of rural incomes,
supplemented by government lending. Allowance is made for a gradual improvement in productivity due to the provision of infrastructure and improvements in the educational
composition of the rural workforce.
Major natural resource based projects
The dramatic impact of the Bougainville copper mining project on the economy of Papua New Guinea was
outlined in the preceding chapter. Additional major projects that may be launched in the near future include
timber exporting operations, the harnessing of hydroelectric power for export-oriented industries as well as mining
projects similar to the Bougainville project.
The model is designed to explore the effects of decisions concerning the scale and timing of individual major projects, the acquisition of government ownership
during the construction phase and the taxation of profits during the production phase of each project.
Industrial sectors
Commodities other than agricultural products and the output of the major projects have been amalgamated into a single commodity group: 'industrial goods and
services'. As in the case of agriculture, the model
distinguishes small-scale sectors relying on self-employed labour, and a modern sector employing wage labour in
conjunction with capital.
The long-term growth of total production by domestic industry is determined from the growth of demand from consumption by indigenous and expatriate residents,
government expenditure, exports and investment demand and intermediate demands associated with the growth of
production in the several sectors of the economy.
Currently, less than two-thirds total demand for industrial goods and services is met by domestic production. It
is assumed that this proportion will increase slowly over a long-term period as the provision of infrastructure is
improved, and the increasing size of the market makes it profitable to produce an increasing range of industrial products within Papua New Guinea.
The growth of the small-scale industrial sectors is derived from the accumulation of savings of past
earnings. As in the smallholder agricultural sectors, allowance is made for improvements in productivity linked to the provision of education and infrastructure by the government. Government policy is assumed to ensure that the growth of these sectors is not limited by lack of demand. Consequently, the planned growth of production in modern industry is determined as the difference between total domestic demand and the output of the small-scale
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