source: www.makingitmagazine.net

From aid dependence to resource revenue

By Making It on 17 March, 2011

Also: Interview with His Excellency José Ramos-Horta, President of Timor-Leste

***

When Timor-Leste became independent in May 2002, the country faced enormous social and economic development challenges. In late 1999, between the referendum for independence and the arrival of international peacekeepers, an estimated 75% of the population was displaced and nearly 70% of all buildings, homes, and schools were destroyed by an orchestrated campaign of violence carried out by militia groups.

The fledgling country struggled to rebuild infrastructure, stabilize the economy, and establish strong government institutions, and Gross Domestic Product (GDP) per capita was among the lowest in the world. However, since 2005, Timor-Leste has gone from aid dependence to resource-derived wealth, with the production of petroleum in the Timor Sea between Timor-Leste and Australia providing the government with much needed revenue to drive economic recovery and address pressing needs.

Location of Timor-Leste

In 2005, there were the first signs of a modest economic recovery, with real GDP growing by 2.3%, but in 2006 the economy contracted again following widespread social and political unrest. The economy then bounced back strongly, reaching 7% GDP growth in 2007 and 12.8% in 2008. Petroleum-related revenue nearly doubled in 2008 to US$2.4bn (compared to total non-oil GDP of US$499m) and represented about 95% of total government income. Thanks to booming oil and gas revenues, Timor-Leste was relatively untroubled by the 2008-09 global economic crisis. High levels of public spending meant that the economy was insulated from the worst of the crisis – GDP grew by 7.5% in 2009, and by 8% in 2010.

One of the government’s main policy achievements has been the establishment of a petroleum fund, set up in 2005 with the aim of helping to safeguard the country’s economic prospects when oil and gas reserves run out. The fund, an “international best practice” savings programme, is integrated into the budget, with inflows and outflows subject to parliamentary approval. At the end of September 2010, the Petroleum Fund’s balance stood at US$6.6bn.

Timor-Leste is primarily a low-productivity agricultural economy. Agriculture accounts for about a third of the economy, and also provides the vast majority of jobs – around 90% of the one million-strong population rely on agriculture and the subsistence economy for their livelihoods. According to the Economist Intelligence Unit, the agricultural sector is in dire need of substantial new investment, particularly in the coffee industry, which is the country’s leading non-oil and gas export earner, and is likely to remain so for some time. Investment in replanting, infrastructure, transport, and marketing is needed to increase yields and reduce costs. Only around one-third of the 10,000 tons of coffee produced each year is suitably processed for sale in the niche market for high-quality organic coffee. Only around one-third again of that fraction is actually sold, owing to a paucity of buyers. While the most important cash crop is coffee, there is potential to develop other crops, such as cocoa, cashew nuts, and vanilla.

Supporters of Ramos-Horta shout slogans during the 2007 presidential election campaign | Photo: Reuters

Industry remains undeveloped, with manufacturing making a very small contribution to GDP. The potential for development in the near future is limited by low skill levels and poor transport links. Most manufacturing is small-scale, with the most active areas being cloth-weaving and furniture-making.

There is some potential for the country to develop as a tourist destination, particularly in terms of the niche market of ecotourism. The landscape retains areas of unspoilt natural beauty, and there are pristine beaches and extensive marine life. There are only a few hotels and resorts, but there is interest in developing tourism facilities. However, prices in the tourism sector are relatively high, and concerns about security endure.

Timor-Leste’s main development challenge is to use the revenue generated from oil and gas production to develop the human and physical capital needed to promote and sustain growth in the non-oil economy, and thereby help absorb a rapidly growing labour force. Despite substantial reconstruction and real GDP growth over recent years, Timor-Leste is still the poorest country in Asia, and half of the population lives below the poverty line.

*

“We are working to diversify our economy”

Making It interview with His Excellency President José Ramos-Horta

***

Timor-Leste has come a long way since achieving independence in 2002, and has made great strides in terms of establishing itself and providing for its citizens. Recent economic data suggests that, in many ways, the economy is continuing to perform well. How has Timor-Leste succeeded in making this progress?

The robust economic growth that Timor-Leste has posted since 2007-8 stems primarily from heavy investments on the part of the government in public infrastructure, but also in cash transfers to the poorest, the elderly, widows, the handicapped, and veterans of the resistance struggle. We have also invested significantly in the purchase of tractors and other equipment for the agricultural sector, and we are trying to improve seedlings, expand areas of farmland, and improve productivity per hectare. So, as a result, the economy has expanded, and we have had double-digit growth for the past three to four years.

What can other countries learn from Timor-Leste’s development experience?

Unfortunately, I cannot say that we stand as a model of development for other countries because we still have numerous challenges facing us. We have had setbacks in the past. And we are uniquely privileged in that we have a significant cash flow from oil and gas revenues. So, we are able to finance 100% of our budget needs on our own. We are not dependent on external budgetary support. In this regard, we are very fortunate. We are in a unique situation in that, soon after independence in 2002, we began to receive significant revenues from oil and gas.

What are the main challenges facing the country as it strives to achieve sustainable development?

In order to achieve the Millennium Development Goals, and lift off towards a different level of development of our country – from Least Developed Country to middle-income country status – we have a long way to go, and we will have to invest hundreds of millions of dollars in building infrastructure, and invest more in education and health care over the next 20 years. The difficulties and challenges that we face are in terms of human resources – we do not have enough qualified people or well-functioning institutions that deliver services or execute the budget in a just, efficient manner.

Central to the future prosperity of Timor-Leste will be its success in maximizing the long-term benefits from the exploitation of its natural resources. In the context of the oft-remarked upon ‘resource curse’, what can other developing countries with significant natural resources learn from Timor-Leste’s experience?

Timor-Leste is a member of the Extractive Industries Transparency Initiative – the EITI – which brings together mineral-rich countries, oil and other resource companies, as well as civil society. We are very proud and pleased that Timor-Leste has been classified by the EITI as number one in Asia – with the best performance, the best record in terms of the management of our petroleum resources – and is only the third country in the world to have been granted EITI compliance. So, we will continue our prudent and transparent use of our oil and gas revenues in order to support the sustainable development of the country with absolute integrity and transparency.

Are there moves to try and diversify the economy, and in particular to strengthen the country’s productive capacity?

We are certainly very aware of the risks of Timor-Leste, or any country, being dependent on a single export commodity – in our case, oil and gas, although it provides us with considerable revenues. Our Petroleum Fund account is now over US$7bn, making Timor-Leste, in nominal per capita terms, way above the Least Developed Country level. We are working to diversify our economy, firstly by greater investment in agriculture to ensure food security in the next five to ten years. We are also investing heavily in infrastructure, such as a better road network, and a new port and airport, as well as in power and telecommunications. These are the foundations for a modern, diversified economy.

If we want to seriously explore the tourism industry, we first have to be able to address the problems of transportation and communications, as well as problems of public health, such as reducing the level of malaria, dengue fever, and other illnesses. It would not be wise, and it could be even politically incorrect, to develop tourism that would coexist, side-by-side, with extreme poverty, malaria and dengue fever. These things are simply irreconcilable. So, as much as we want to develop tourism – and some efforts are already underway – before we have a proper tourism industry, we first have to resolve issues of public health, such as cleaning up our cities, and reducing the instances of malaria and dengue fever. And we have to address the problem of a clean water supply, as well as the more obvious issue of reliable and cheap energy for the whole country.

Like many other LDCs, Timor-Leste has a young and fast-growing population. What future can this segment of the population expect in terms of economic opportunities?

Photo: Bazuki Muhammad/Reuters

One of the greatest challenges facing the government – and one of its top priorities – is investing in education. The current government has already shown its commitment to the youth and their education by increasing support in terms of scholarships in the areas of science and technology, public administration, and business management, so that our youth can pursue their studies in Timor-Leste or overseas. We are providing dozens of scholarships to our students to study in Australia and elsewhere. We have more than 100 students in the Philippines, and close to 800 students studying medicine in Cuba and Timor-Leste itself. These are the guarantee that, in the future, Timor-Leste will have a highly-educated young population that will be able to compete regionally and internationally.

The Fourth United Nations Conference on Least Developed Countries (LDC-IV) will take place in Turkey in May. As a Least Developed Country itself, what outcomes will Timor-Leste be pressing for?

I attended the Millennium Development Goals Summit in New York in September 2010, and I have to say that I was thoroughly disappointed with the outcome because no real, concrete, specific commitments came out of that summit on the part of the developed countries and multilateral institutions by way of living up to, or catching up with, the past pledges by the rich to provide development assistance to poorer countries. In New York, all the leaders of the industrialized countries acknowledged their failure in not delivering the aid that they had pledged. I heard many of them acknowledge this failure on their part, and I also heard that, in spite of the international financial crisis, the rich countries would not penalize the poorer countries by reducing development assistance. This is what we heard. We all heard it in New York, as far as their pledges were concerned. However, soon after the spotlights of the media were turned off, almost every developed country began to reduce overseas development assistance!

So, I am not having any illusions that, at the Fourth LDC conference in Turkey, we will see anything different from past United Nations-sponsored meetings. I am not even planning to attend because we have attended dozens of international conferences, all over the world. We pay a lot of money for travel, expenses, and hotels – then, what is the real outcome? I don’t believe that, in Turkey, we will have a better outcome than in previous international conferences on international development.

***

• José Ramos-Horta was elected President of Timor-Leste in 2007. Previously he had served as Prime Minister and Minister of Defence between July 2006 and May 2007, and as Minister of Foreign Affairs from 2002 to 2006. In 1996, he was awarded the Nobel Peace Prize, together with Bishop Carlos Belo, for their work towards a just and peaceful solution to the conflict in Timor-Leste.