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Will Timor-Leste avoid the resource curse?

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7 February 2012 16:13

Gordon Peake is a Visiting Fellow at the State, Society and Governance in Melanesia Program, Australian National University. He is in Timor-Leste doing research for a book.

As I described in my earlier post, Dili is a gold-rush town, and the Timorese Government is spending big with even bigger plans for the future. But does Timor-Leste risk sliding into the problems faced by other countries that struck it rich through the good luck of possessing natural resources, only to find themselves beset later by a range of adverse effects?

The problems include rampant corruption, inflation, inequality, cronyism, a slide into indebtedness, a failure to focus on building up other parts of the economy, and prestige projects over-burdening stocks of human capital needed to run an effective government.

This blight is called the 'resource curse' and there are many sombre examples from other small and fledgling states where the mix of young institutions and resource abundance resembles Timor-Leste. The end result is often a steep decline in living standards over the long term. Will Timor-Leste squander the money instead of stewarding it wisely for future generations? Or will it be an exception to the rule, like Norway, often cited as a model for avoiding a fall into the resource trap?

Advisers to the Timorese Government I interviewed in the course of book research downplay the effects of resource-revenue dependence. Refutations are delivered passionately and with the wave of a hand.

Yes, Timor-Leste is using its resources, but what is the alternative: keep the oil and gas in the ground and rack up debts to world financial institutions and other countries? After all, Timor-Leste's only other significant export is the $30 million annual yield from coffee estates. Doom-mongers say there will be no money for future generations but how do you even get to the future if you do not invest in today? And yes, there is a heavy emphasis on infrastructure but how does one develop other capabilities without good transport connections? An anti-corruption commission is dealing with allegations of graft and financial chicanery.

All is going well, say the advisers. They know what they are doing, and foreign naysayers don't know what they are talking about.

Not so fast, says the NGO La'o Hamutuk (Walking Together), a think tank run by a collection of former activists who campaigned for Timorese independence. The NGO is widely respected for the quality of its information, research, analysis and comment on socio-economic issues and it is often the only organisation writing on issues such as the national budget. 

La'o Hamutuk's analysis is the statistical equivalent of a cold shower. Timor-Leste, they say, is a resource state without many resources. The Government's budget is dependent on oil and gas but that is not necessarily an indication that there are deep reserves; there is just so little other economic activity.

Timor-Leste's likely reserves are actually quite small. Timor-Leste is currently the most resource-revenue dependent country in the world, but the reserves will provide less than $2/person/day income for the next few decades. And they could run out before today's babies finish high school. Unless disagreements with the oil companies over the Greater Sunrise field are resolved, Timor's oil revenues could cease just twelve years from now.

Spending big is leading to high levels of inflation – 14%, according to last year's statistics – which hits the poor hardest. Last week, the IMF warned that the steep rise in cost of basic goods and services had the potential to buckle and warp Timor-Leste's economic growth.

In spending big now, the Government is eating into the capital of the petroleum fund, originally set up to protect against oil price fluctuations and save some of the country's non-renewable resource birthright for future generations. Other sectors – including education, health and agriculture – are ignored so when the pump runs dry, there won't be anything to replace the oil. 

Electioneering for the presidential campaign has not yet officially begun. The candidates and their parties are still shadowboxing in meetings held throughout the country and manifestos will not be released until the official start of the campaign in early March. Much of the current rhetoric consists of satisfyingly vague exhortations with little obvious policy differences between candidates. What will they say about the economic health and future of the country they want to lead?

Photo by Flickr user Alex Castro.

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