Insights and Analysis

Oil in Timor-Leste – A Kick-Start or a Kick-Back?

February 22, 2012

By Silas Everett

There is so much said about the adverse effects of extractive industries on social, economic, and political development in fragile states. However, in Timor-Leste, the truly ominous signs of the “oil curse” have not befallen the country.

As Bob Brown, the leader of Australian Greens Party, famously stated in 2003, “It’s the one resource that can give East Timor the kick-start it needs.”

In fact, since Timor-Leste started spending its oil windfalls in earnest five years ago, the poverty rate appears to have fallen by almost 10 percent, outbreaks of social conflict have all but stopped, and several state institutions have at least started to resemble their counterparts in developed countries.

Children Playing in Front of Mural Promoting Tour-de-Timor Cycle Race

Since Timor-Leste started spending its oil windfalls five years ago, the nation has seen positive steps in development. However, some are concerned that unless the current course is changed, only the elite will benefit from oil revenues. Photo: United Nations Photo.

Undoubtedly such positive feelings have bolstered forward thinking on development. It has been two years now since Prime Minister Xanana Gusmão emerged from two months of virtual isolation with a 20-year vision for the country’s development. He visited all of the country’s 65 sub-districts to present his plan. His presentation was replete with pictures of international airports, petrochemical plants, and national highways, and prompted lively discussion among throngs of citizens who gathered late into the night.

But how far and how deep does this vision for development run?  For many of the country’s elite, oil so far appears to be a sugar bowl. But, the dawning reality suggests that without a significant course correction, oil may end up being the country’s poison chalice.

Before Timor-Leste concluded negotiations in 2005 with Australia over distribution of oil revenues in the Timor gap (the boundary between Australia and Indonesia in the Timor-Leste area), state expenditures had only grown to $70 million per year. Today, Timor-Leste collects over $275 million per month on average in oil revenue and, guided by the global Extractive Industry Transparency Initiative, puts the proceeds into a petroleum fund which stands at almost $10 billion.

This year’s state budget calls for $1.763 billion to be drawn from the oil fund, which is hundreds of millions beyond the estimated sustained income of the fund. Official predictions show these oil reserves drawing down within 15 years, to be offset by domestic revenue growth. Yet today’s domestic revenues account for less than 5 percent of the state budget. How the domestic economy will achieve the required double digit growth remains unclear. Furthermore, what’s to say future governments won’t raid the fund completely? Without capable regulatory institutions, fiscal restraint rests in the hands of the country’s influential elite, who must negotiate the division of power among themselves in order to maintain stability.

However, these “political settlements” in fragile petro-states are inherently unstable, since the contest over who controls the oil is zero-sum, with few of the win-win solutions found in more dynamic economies, and the volatility in the price of oil itself can change the spoils of winning overnight.

One might conclude that a tighter focus on strengthening institutions is then the way to go. Yet macro-economic trends of oil dependent states show that “barrel-for-barrel” oil has a negative impact on democracy and the formation of democratic institutions.

In 2003, current President Jose Ramos Horta warned: “Our administration is generally very weak. If we were to have hundreds of millions in oil and gas money now, it does not necessarily mean it would be well-managed.”  He estimated it would take the country three years before the institutions would be ready to handle large spending increases.

While the timeframe may look overly optimistic in retrospect, the president’s remarks express a rational conservatism all but absent in the final tally of the country’s budget debates. Proponents of budget increases hold that Timor-Leste, unlike rich countries like Norway, fundamentally lacks the human and physical infrastructure to develop, which requires a proportionally higher rate of spending.

While repeatedly warned by civil society groups such as La’o Hamutuk, few political leaders in Timor-Leste show signs of concern over the risks of “spillover” – even in the face of a budget that has grown 245 percent since 2006. Instead, it is exactly this exuberance and sense of “abundance” that perpetuates ineffective policies and allows them to persist considerably longer than in less resource-rich countries.

In Timor-Leste, the number of part-time and full-time civil servants employed by the state has grown from 18,518 in 2008 to 27,000 in 2010. Civil servant salaries have increased by 33 percent from 2008 to 2010. Procurement now accounts for 70 percent of state budget expenditure, while the minimum requirements for regulation of procurement have been weakened. A new legislative framework for procurement is underway, but, in the meantime, there remains a lack of strong enforcement and oversight bodies, and ample coordination and transparency to at least ensure a process of learning by doing.

The rapid growth in Dili is impressive. Residents experience traffic jams and see new construction on the main boulevards on a daily basis. Yet, digging deeper, there are signs that the culture of abundance is beginning to take root in a society facing pervasive poverty.

A new class of elites is emerging amid widening gaps in social status. Inexplicable wealth, such as Humvees and housing developments in Dili, is more likely to have an impact on public satisfaction in the state than its bulging civil service, weak service delivery, or poorly implemented construction projects.

As the country moves ahead in the elections this year – the first round of presidential elections to be held March 17 and the parliamentary elections assumed to take place at the end of June – the durability of the current political settlement remains very much to be seen. The forces that keep Timor-Leste’s abundance from becoming a curse may rest in the values forged during the national struggle for independence. “Akontabilidade” is a word that is heard on the lips of many, from veterans and victims of the war for independence to the clergy of the Catholic church of which over 95 percent of Timorese affiliated.

Existing weaknesses in the state institutions may be written off as “growing pains” of an evolving bureaucracy rather than the more permanent disease of corruption and patronage. However, prudence suggests that in order to avoid the “kick back” oil brings, the current political settlement will require careful reconfiguration in order to fix the systemic problems of oil dependency.

While the country’s current level of peace and stability is a considerable achievement in itself, it’s now time for power holders to regroup and aggressively promote a medium-term development strategy that caps future state spending, holds state institutions accountable for performance, and continues the country on the road toward poverty reduction and broad-based prosperity.

Ultimately, as national elections draw ever closer, the tough question Timorese leaders must ask themselves is: Who is currently “in the tent” and who shouldn’t be in here?

Silas Everett is The Asia Foundation’s country representative in Timor-Leste. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

1 Comment

  1. Timor-Leste is a new country in Asia and two nations opositions Indonesia and Australia but we like to created the peace and stability to create the economic development all the sectors to be defended our human right, education and culture in these new era globalization and want to doing good cooperation with other country to be provide human resource those new country for the future.

    Special for the presidential election on;17/03/2012 – 2017, will bring a peaceful
    because together good everything will easy.

    thank you and big regard.*** ***

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