Subject: ST/Bruce Gale: Timor Leste's 'Resource Curse' Stands In Way Of Success

via Joyo

The Straits Times (Singapore)

Thursday, May 6, 2010

'Resource Curse' Stands In Way Of Success

Bruce Gale, Senior Writer

COULD Timor Leste become the surprise success story of the decade, eclipsing even China in terms of economic growth?

Professor Jeffrey Sachs, special adviser to the United Nations secretary-general, believes that the impoverished country is on the brink of an economic boom. 'I want to make a prediction right here - you can hold me to it,' he told his audience at Dili's national university in late March. 'Timor Leste will grow faster between 2010 and 2020, economically...than China.'

Timor Leste could certainly do with some tangible growth. Despite a UN- led economic development effort that has seen an estimated US$8.8 billion (S$12 billion) - about US$8,000 per person - poured into Timor Leste since the vote for independence from Indonesia in 1999, the country remains poor. Data from the International Monetary Fund, the World Food Programme and the World Bank all agree: Timor Leste is about as bad as it gets. The country ranks near the bottom of the UN's human development index. Nearly half its population is illiterate, and 40 per cent of its working-age men are unemployed.

And things seem to be getting worse. According to the World Bank, between 2001 and 2007, the number of Timorese living in poverty rose nearly 14 per cent to about 522,000, or roughly half the population.

The strategy urged upon the government by Prof Sachs, who teaches at Columbia University, is simple. The economist told his audience that things could be very different if the government injected oil and gas revenues - currently amounting to about US$5 billion - directly into the economy. Such spending, he said, should be focused on investment in human capital and infrastructure. It should also develop sectors such as tourism and agriculture. Currently, most of the government's oil revenues are held in the form of US bonds in conformity with laws to ensure fiscal responsibility.

Speaking to international donors early last month, Timor Leste Prime Minister Xanana Gusmao seemed determined to follow Prof Sachs' advice. Denouncing the previous policy of saving money derived from the country's limited oil and gas reserves, he declared: 'The people do not need cash in American banks to help pay American deficits.' Mr Gusmao, a former independence fighter, did not give details of his government's spending plans, but he did refer to the need for more money to be spent on basic infrastructure, education, health - and 'assistance to the most vulnerable ones'.

In theory, higher government spending should have a more direct impact on the economy than the UN-led development effort. This is because much of the foreign aid the country has received in recent years has actually been spent on foreign security forces, consultants and administrators. One humanitarian group - the Peace Dividend Trust - has estimated that as little as 5 per cent of the UN mission's budget trickled into Timor Leste's economy between 2004 and 2007.

To be effective, however, increased spending requires a strong government capable of ensuring that the money is channelled in the right direction. Without that, the nation could fall victim to a phenomenon known as the 'resource curse', in which corrupt elites siphon off the wealth generated by resources and the nation as a whole becomes poorer and less democratic. Because oil money also frees a country from dependence on international aid, international efforts at institution building are also likely to fail. This theory is often used to explain disappointing levels of economic development in many African countries, notably Nigeria (oil) and the Congo (gemstones).

Timor Leste seems like another candidate. Its economy is one of the most petroleum-dependent in the world. And it could become even more so in the coming years once a dispute with Australia over the development of the Greater Sunrise gas field is settled.

Meanwhile, political and social stability remains fragile. In early 2006, fighting between rival army and police factions toppled the government and left dozens dead. And in February 2008, President Jose Ramos-Horta was nearly killed by rebel gunmen in an ambush. The police are widely believed to be involved in gang rivalries, and a huge backlog of cases in the courts has encouraged vigilante justice.

The interim UN administration has rightly been credited with preventing the country from becoming a failed state. But its example is not necessarily worth emulating. High-level Timorese government officials complained to the Associated Press late last year that huge sums had been wasted on overlapping projects, donor rivalry, mismanagement and corruption.

While Prof Sachs' proposal seems logical, the example of many other similarly positioned countries suggests that the increased spending will need to be carried out with care. Earlier policies, which required the government to conserve its oil wealth by spending no more than 3 per cent of its petroleum revenue each year, made a lot of sense too.

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