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PORTSIDE  September 2011, Week 1

PORTSIDE September 2011, Week 1

Subject:

Timor's Oil: Blessing or Curse?

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Date:

Mon, 5 Sep 2011 02:13:11 -0400

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Timor's Oil: Blessing or Curse?
By Guteriano Neves
Foreign Policy in Focus
August 26, 2011
http://www.fpif.org/articles/timors_oil_blessing_or_curse

Oil has different meanings for different societies. For
developed societies like the United States, Japan, and
Western Europe, oil is like an addictive drug that
people only want more and more of. It enables them to go
everywhere. It helps them cook and regulate the
temperature of their dwellings. Without oil, people in
these societies couldn't sustain their way of life. For
these reasons, many countries go to war for the sake of
securing access to oil.

However, oil has different significance for developing
countries whose economies heavily depend on exporting
oil and gas. When oil was discovered in their territory,
it was their expectation that oil exports would help to
boost their domestic economy through creating jobs,
improving human resources, developing the non-oil
economy, building infrastructure, and funding other
social services. But this has rarely come to pass.

Most countries in the global south that depend on oil
have discovered that oil comes with disaster, civil war,
foreign intervention, human rights violations,
authoritarian regimes, environmental degradation,
corruption, social inequality, and endemic poverty.
Chad, Nigeria, Angola, Ecuador, and Iraq are only a few
of the countries to learn this difficult lesson. Peter
Maas in his book Crude: The Violent Twilight Oil
elegantly put it this way, "one of the ironies of oil-
rich countries is that most are not rich, that their oil
brings trouble rather than prosperity." Christian Aid,
in its report Fuelling Poverty: Oil War and Corruption,
found that at the global level, the oil economy is
irrelevant to poor people, who have no access to
electricity or to cars, and whose fuel comes not from
oil but from wood. As Nnimmo Bassey, a Nigerian poet and
current president of Friends of the Earth International,
once wrote, "We thought it was oil, but it was blood."

Timor's Oil

The situation is even more complex in post-conflict
countries like Timor-Leste (TL). Indonesia, which
occupied TL illegally for decades, signed most of the
oil deals with oil companies like ConocoPhilips and
Woodside. When TL won its independence in 2002, it had
no freedom to make its own decision about its natural
resources. Much of the revenue, which should have
belonged to Timor-Leste, was already flowing to
Australia and Indonesia.

Moreover, TL's non-oil economic sectors remains very
poor, and sturdy public institutions aren't in place.
Those that are in place are still fragile, and law
enforcement is weak. This means that the risk of
corruption involving high officials and oil companies is
very high given the weak oversight mechanisms. High
dependency on oil is leading Timor-Leste to what
scholars call a rentier economy, in which the state
generates its revenues not from taxing its citizens but
merely from extracting oil. This in turn undermines the
state's relationship with its citizens, and citizens are
less likely to demand accountability from their
officials.

After the Indonesian military destroyed the country, the
Timorese were left in a state of disarray. Around 80
percent of infrastructures were destroyed, public
administration was in collapse, 50 percent of the
population was illiterate, and other social and economic
problems proliferated as well. Billions of dollars spent
by the international community in the form of foreign
aid did not lift up the country's economy.

In this circumstance, Timor-Leste might have initially
been considered blessed in discovering a small reserve
of oil. If used wisely, this small reserve could boost
Timor-Leste's economy. Such a resource could also help
non-oil sectors, primarily agriculture, as well as
social services such as education and health. TL's Prime
Minister, Xanana Gusmao, summed up these expectations in
a 2009 speech, declaring that if TL's petroleum is
wisely and transparently managed, "it will allow us, as
a sovereign nation, to use our own resources to improve
our infrastructure, invest in health and education and
grow our economy so that we can build our country and
provide a brighter future for our children."

These expectations are not far-fetched, given TL's small
population. Nevertheless, until now, these dreams are
still far away. Timor-Leste is obviously following a
familiar pattern in which oil does not lead to economic
development. Rather than a blessing, it has increasingly
become a curse.

The Petroleum Fund's Successes

The government of Timor-Leste has tried to a certain
extent to ensure that the country would not follow the
same pattern as other developing countries. In 2005,
TL's legislative body unanimously voted to establish a
Petroleum Fund Law. This law, modeled on Norway's
pension fund model, is the cornerstone of TL's petroleum
revenues management. TL's petroleum fund was established
on principles like intergenerational equity,
transparency, and accountability, and it was designed to
provide fiscal stability for the government. To
guarantee inter-generational equity, the fund set
guidelines for the government not to spend all of the
money as it came in or when oil prices were high. This
law also established several measures for transparency
through quarterly performance reports, annual reports,
and audits. Finally, this law also defined the roles and
responsibilities of public institutions like parliament,
government, the central bank, and civil society
organizations. Former Prime Minister Mari Alkatiri
affirmed that "good management of petroleum revenues,
sustained economic growth, alleviating of poverty, and a
stable political future are essential parts of this
law."

Parliament approved the law in 2005 in a unanimous vote.
It was considered one of the best petroleum management
laws in the world. Overall, the petroleum fund has
provided a strong foundation for the fiscal stability of
the TL government. As of the end of June 2011, the
petroleum fund balance had reached $8.3 billion, $7.1
billion of it sitting in the U.S. Federal Reserve Bank,
and the rest invested in international equities and
bonds from other governments.

The fund also helped stabilize the economy as a whole.
As the International Monetary Fund observed in its 2010
report, "Driven by higher oil-financed public spending
and a rebound in agriculture from the 2007 drought, non-
oil growth averaged 11 percent during 2007-09. A recent
estimate by the World Bank also shows a decline of
poverty incidence from 50 percent in 2007 to 41 percent
in 2009."

The Fund's Failures

Despite these successes, the petroleum fund has proven
to be insufficient. Timor-Leste's current state of
development possesses certain features of the resource
curse, which even Nuno Rodriquez, a member of the
Petroleum Fund Consultative Council acknowledged in an
interview with the author.

First, there is no indication that Timor-Leste's
dependence on petroleum revenues is lessening, at least
for the near future. From 2005 to 2011, more than 90
percent of the government's revenue came from petroleum.
On the other hand, non-oil revenues during this period
were less than 10 percent, even dropping to 3 percent as
recently as 2007. Every year since 2005, transfers from
the petroleum fund accounted for more than 90 percent of
the government's annual budget. This number will only
increase as the government increases its annual budget.

Second, since TL's independence, investments in
productive sectors have been very low. Despite billions
of dollars in foreign aid and the government's huge
spending over the last several years, the real impact on
the domestic economy has been very small. The country
still imports everything. According to TL's Bank and
Payment Authority's December 2010 report, TL's trade
deficit for goods and services has reached $881.2
million --an increase from $261.1 million in 2008 and
$297.0 million in 2009. TL's Ministry of Finance
recently admitted that 70 percent of government spending
flees the country. Based on this data, the Bank and
Payment Authority warned that "if policy makers fail to
take decisive action to improve budget deficit and
investing productively, by 2030 the current account
deficit will continue increasing and increasing. The
nation could be continuing transferring most of fund
resources and its percentage of GDP annually to
foreigners." This data clearly indicates that the huge
spending of petroleum revenue has not led to the
development of a non-oil sector, not even to substitute
for imported goods.

Third, unemployment, one of the biggest problem facing
post-conflict countries, is a time bomb that can explode
into conflict and civil unrest. The oil industry
traditionally does not produce many jobs because it's a
high-tech industry and mostly requires highly educated
people. Very few Timorese have qualifications for that
kind of work. The situation is even worse in Timor's
case because upstream processing takes place in
Australia, so TL gets little out of the production,
including few of the spin-off effects. Further, since
non-oil sectors remain weak, job opportunities for young
people are few. With TL's fertility rate the highest in
the world, more people keep entering the job market. The
agriculture sector, which employs most Timorese, is
still underdeveloped. The Timorese even have to depend
on imported rice from nearby countries like Vietnam.

Social Disruption

The dark side of the economic growth connected to oil
exports is social inequality. Most economic activity at
present takes place in the capital Dili, whereas the
rural regions are characterized by poor infrastructure.
During the last four years, the government has invested
more than $2 billion dollars to improve rural
infrastructure. But because of poor planning, poor
execution, and lack of oversight and quality control,
the gap between urban and rural Timorese remains.

Many people have left the agriculture sector to try to
find jobs in Dili. Massive government spending benefits
only a small elite in Dili, especially those that get
contracts from the government. However, it has negative
impacts on the majority of people who live outside of
Dili. For those who do not share the benefits, or those
who work in low-paid jobs, the increase in prices,
especially for food, means that economic growth is not a
benefit at all for the vast majority.

The case of Timor-Leste proves once again how petroleum
dependency turns out to be a curse rather than a
blessing. The petroleum fund model, in and of itself a
good idea, cannot solve the complexities that post-
conflict countries like Timor face. "The petroleum fund
is only one mechanism to help achieve good governance,"
says Jose Texeira, a member of the parliament from the
opposition party. "But to avoid the resource curse also
requires a political commitment from all parties."

This article is a summary of the author's 2010 Summer
Research Project, funded by the University of Hawaii at
Manoa. The author is currently working as researcher at
the Timor-Leste's Institute for Reconstruction and
Development, La'o Hamutuk - www.laohamutuk.org.

___________________________________________

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