Timor's Oil: Blessing or Curse?

By Guteriano Neves 

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.