To tax

or not to tax

By Dr Roman Grynberg

Over the past few years AusAID has published what are occasionally some very interesting well

thought out consultancy reports

on the Pacific Islands region.

The Pacific region, if not being well studied, is certainly consulted to death.

Much to the embarrassment of the many Pacific Islanders in the region is the world’s highest per capita recipient of aid.

However, what is not so widely known and understood is that 50 per cent of what the OECD calls Official Development Assistance or ODA is going to the Pacific Islanders also includes the cost of the gag gle of technical advisors and consultants (‘the lap-top brigade’) that have been the stock in trade of the aid business in the Pacific Islands region.

Most conservative estimates of aid to the Pacific suggest that over half the total ODA going to the region is in the form of consultancy reports and technical assis tance.

One of the most recent and certainly controversial reports on Melanesia has been published by AusAID and the policy advice, if not the economics, has been a good measure of what value for money the Australian taxpayer, leave alone the over consulted Pacific Islander, is getting from AusAID and its consultants. Professor R.

Duncan, the author of the report, docu ments what is already well-known about

the unsustainable rates of logging occur ring throughout Melanesia and in particu lar in the Solomon Islands and PNG.

The main area of the good professor’s report is not sustainability but the horren dous trade malpractice that has seen sever al dozen largely Malaysian, Korean and Japanese logging firms destroying PNG, Solomons and Vanuatu and paying virtual ly no company taxes in the process.

The odd things is that all this has already been well documented ever since the famous Barnett Inquiry into the Forest industry in PNG in 1988.

Last year the government in PNG recognised how limited its capacity was for the management of the forestry sector and has handed over the regulation of exports to the Swiss company Society General de Surveillance.

In the past few years AusAID has moved into the Solomon Islands and through the Timber Control Unit (TCU) has done an excellent job in helping the Solomon Islands government to try to con trol trade malpractice. The TCU has also found evidence of widespread trade mal practice. But again all this is well known.

What is at least slightly novel is Professor Duncan’s main policy conclu sion. He calls for the governments of the region to reconsider “log export bans and government support for timber process ing”. Professor Duncan goes on to say: “Timber processing activities should be self supporting, not subsidised by landowners which would be the case if log exports are banned or even when export duties are charged on log exports.

Export taxes and export bans push domestic prices for logs below world prices and basically force log owners to subsidise log processors. Such policies devalue the forest when forest conser vation demands that forests be made more valuable ... If timber processing is not profitable paying world prices for logs, it makes no economic sense to subsidise it in order to create jobs”

It is hard to imagine how one could it get it so wrong. In PNG one of the main reasons the government wishes to pursue

down-stream processing and keeping high

export taxes had little to do with a desire for down-steam processing, per se. The

malpractice in the logging industry exists

because the forestry and customs officers who police it are badly trained, poorly

paid, widely dispersed and subject to

bribery and corruption.

This, Justice Barnett most adequately documented without a $50,000 consultan cy fee. In the late 1980 s in PNG all you had to do to get customs or forestry offi cers to allow a shipment of what was labelled “mixed quality logs” but which was really furniture quality rosewood and

taun was to pay 100 kina bribe and a cou ple of crates of beer. High export taxes in PNG were never meant to induce process ing. Even at rates of export tax of 40 per cent plus for the best species there is still almost no substantial processing of timber in Melanesia. The only exception has been Vanuatu with its tiny resource which process all its timber for export.

These high export taxes were meant to raise revenue in PNG and Solomon Islands and not to stimulate down-stream process ing. This was necessary because both in the Solomon Islands and PNG the govern ments get almost no company tax at all from the forestry sector because the log ging companies are virtually all into trans fer pricing, mis-identifying species and

undermeasuring logs. Export taxes are the

only revenue that the state would get.

The export bans, which Professor Duncan opposes, may create jobs through down-stream processing but the reason for bans is not the big bad bogie man of ‘pro tectionism’ being sent to suck the compet itive juices out of the Melanesian logging industry but rather because of the needs of the region’s anaemic customs services.

The real policy reason for bans is that log exports are geographically dispersed over scores of islands and isolated loca tions and hence require a level of policing and administrative efficiency not possible in poor developing countries like those found in Melanesia.

Processing those logs into even flitches or sawn timber, because it would happen in only a few places and because sawn tim ber is more difficult to mis-measure or mis-identify, would make policing easier and landowners may actually receive more money if the timber is processed and trade abuse decreased or eliminated.

Professor Duncan argues that if we lower export taxes this increases the value of the forest to the owner who then will conserve the forest because it will be more valuable to its owners. That’s not correct.

First if you lower the export tax in such a situation of bilateral monopoly transfer prices then the exporter will simply pock et the benefit. These are not competitive

log prices.

Second, the forests of Melanesian are not a renewable resource but a non-renew able one, because the policy makers, dri ven by greed, bribery and corruption, and the landowners, driven by poverty, treat them as such. And as is well-known in economics if you increase the current price of a non-renewable resource you acceler ate its depletion not conserve it.

Third, this advice completely overlooks the real politic of logging in Melanesia it is the corrupt policy-maker and logging company that drive the pace of log mining or extraction not the landowner. A

Daniel Kaidavu, Devoy clan

leader, Silovuti,

West New Britain, PNG Daniel is a 2 Kina man.

That is the share of royalties he receives every six months from the logging compa ny which has been harvesting his people’s land. Daniel is a classic example of villager expectation gone wrong. The logging company signed

Peter Solness/Wildlight

a contract to work these forests at Silovuti in 1982. The forests have been drastically depleted. As the land continues to become degraded by logging, and the forests cannot deliver the same sort of sustenance, communities will ultimately become more cash dependent, drawing unskilled villagers into the major commercial centres looking for work. This is already causing major social unrest in Papua New Guinea.