By – Guteriano Neves
On 18 and 19 of September 2013, Ministry of Finance of Timor-Leste, together with International Monetary Fund organized an International Conference on Economic Diversification in Dili. This is a critical issue for Timor-Leste, given its excessive dependence on the Petroleum Revenues, and other economic symptoms associated with it. This conference, at a certain level, indicates that the issue of economic diversification becomes an urgent issue and has received high-level attention. Prime Minister in his speech indicates it as he said “It is our intention – and our unrelenting focus – to wisely use our natural resource wealth to develop a diversified economy and build our beloved nation for all our people.”
The conference brought economic experts and policy practitioners from various countries to discuss the usual issue on how to diversify Timor-Leste’s economy, and create conditions for inclusive and sustainable growth. Most of the issues discussed are not new, at least, at the level of public policy discussion in Timor-Leste. Issues like Dutch Disease, inequality, trade imbalance, structural transformation in the economy, and regional integration have been discussed in Timor-Leste on various occasions. There is no clear policy prescription or remedy for Timor-Leste from this conference. The most important thing is that each country has its own strategy that works in certain context; but might not work in certain context. Sometimes, the principle of “Trial and Errors” is applied. But this has to be done through proper planning and evaluation mechanism to examine public policies. During the discussions, many experiences have focused on how to increase export through various policy instruments. In Timor-Leste, at least, at this point of time, what is more important is how to develop production base at the domestic level to reduce capital flight from the country.
Timor-Leste: Petroleum Rich or Petroleum Dependent?
The conference draws from the lessons that many natural rich countries in the end get trapped into poverty, low economic growth, high inequality, therefore, development is not inclusive. It is globally accepted that rich in non-renewable resources such as oil, mine, and gas turn out to be curse rather than blessing. Therefore, the question always emerges on how to diversify the economy and achieve sustainable and economic growth. Although it sounds simple on paper, but historically, it has not been so. Still, many countries fail to navigate through it.
In the context of Timor-Leste, the question is “Is Timor-Leste really a resource-rich country?” This might sound like an ignorant question, but is a critical question to avoid being opiated by the current perception. If we go back to the last Timor-Leste’s Development Partners Meeting in June 2013, the Representative of the World Bank in Timor-Leste already reminded us that Timor-Leste is not a natural resource rich country, in terms of its oil reserve.
It is also confirmed by the GNI Per capita and GDP per capita. In terms of GNI Per capita, in 2011, Timor-Leste’s GNI per capita was US$4,288, and US$2,927 is from petroleum. So, with petroleum, we are an upper middle income country. Other Upper Middle Income countries such as Oman which its GNI per capita was US$19,120 or Malaysia’s GNI Per capita in 2012 was US$9,800. In terms of GDP Per capita, Timor’s total GDP Per capita in 2011 was US$5,176, and US$4,169 is from Petroleum. Compare it with the same countries where Oman’s GDP per capita in 2011 was US$27,015, or Malaysia’s GDP Per capita US$17,143. So, based on known reserves, compare Timor’s GDP per capita and GNI per capita with other upper middle income countries – Timor-Leste’s oil reserve is still way lower than other Middle Income countries.
Thinking that Timor-Leste is an oil-rich country also has detrimental effect for the policy-making in this country. There is a tendency among policy-makers or politicians in the mineral dependent countries and rentier economy that since petroleum sector provides a lot of revenues, they ignore to think creatively on how to develop non oil economy and extracting revenues from domestic economy. This at the end undermine commitment to diversify economy itself. For the society as a whole, having an attitude that this is an oil-rich country will raise a lot of expectations, while ignoring the challenges lie ahead.
The fact that Timor-Leste is dependent on the Petroleum sector is not due to rich in natural resources, but mainly due to the fact that other non-oil economy sectors are not developed yet. It is true that there might be other reserves yet to be found. But. better public policy should be based on what is already known and not based on what is yet to be known.
Economic Diversification: Why is it Important for Timor?
Economic diversification in Timor-Leste is critical. It is critical because of many reasons. Firstly, economically, it is not healthy for any country in the world to depend excessively on a single commodity. It puts that country into a vulnerable position. Worse situation is dependence on the petroleum. It is non-renewable. Once it is exploited, the wealth will decrease until the point where it is depleted. Its price in the international market is unpredictable. There is a saying among the petroleum economists that “if someone tells you about tomorrow’s oil price in the international market, it is simply a lie.”
Secondly, Timor-Leste’s natural resource is very limited. Timor-Leste is not Saudi Arabia, nor Nigeria. Current known reserves will last through this generation. Even with Petroleum Fund Reserve that it has, if it continues to increase public spending as the trend has been in the last three years, it is more likely to be exhausted faster than expected.
Thirdly, it is critical because Timor’s experiences in the last five years teach us that despite “double digit economic growth,” it does not lead to poverty reduction. Only few people are benefited, and the rest are not. Various accounts have already tried to explain that. Among them are: public spending led growth, trickle-down effect, characteristics of private sector growth, negative growth of agriculture sector, heavy emphasis on physical infrastructure, and Dutch Disease. Timor-Leste’s economic growth bear resemblance to other rentier states where people who are benefited from this growth are those who directly connected to public sector; either as politician, working as public employee, or those who get the contracts from the government. For these reasons, private sector activities are very centralized in Dili. Therefore, the expectation is that if economy is diversified, it will involve more people in the economic activities, and more people will share the growth.
Fourth, economic diversification is also a key to job creation. Timor-Leste has high population growth rate, and around 70% of the population are below the age of 30. But oil industry is a capital intensive industry and not a labor intensive ones. As the Director of the Asia and Pacific Department of IMF stated, “Natural Resources sectors in themselves typically employ very few people, and that the resource is exhaustible.” Timor-Leste’s current employment structure bears similarities to other rentier economy in other countries. In countries where oil industry takes place on shore, other sectors tend to connect directly or indirectly with the oil industry. In Timor, since oil industry does not take place in Timor, public sector functions as intermediary between oil revenues and the rest of the economy. Thus, employment in public sector is relatively high compare to other sectors, and agriculture sector to greater extent is disconnected from the rest of the economy. Since the growing of the private sector so far is dependent on the recycle of petro dollars, and since Timor’s natural resources is limited, diversification is very critical. Under this condition, Timor-Leste is facing a difficult situation. Population is growing, numbers of people enter into job market every year is growing, but current absorption capacity of local economy is very limited.
Get back to the Basic
The discussion so far, especially during this conference, has been on how to diversify economy through industrial policy that is oriented toward export. So the issue now is how Timor-Leste can become competitive in the regional and international market. Policy prescriptions tend to focus more on regional context, and less attention is given to domestic context. While export-oriented policy is good to close huge trade deficit that Timor-Leste is facing and also to earn more foreign currency, it is more important to look at the domestic market as the point of departure, particularly in the context of Timor-Leste.
At present, Timor-Leste does not have a production base. The Government policy has been to inject the capital to improve purchasing power. It is expected that while purchasing power is improved, the demand will rise, and the domestic market will respond to the supply side. Yet, unexpected side of it is that although demand does increase, what happens is that imported goods and services increase. Last year alone, Timor-Leste imported around $670 million and exported only $31 million. It does not include service sector, and goods that are smuggled illegally. Therefore much of the capital injected into domestic market flew from the country.
If Timor-Leste imports many things, it means that there is an available domestic market that Timor-Leste needs to focus on first. Moreover, if there are much capital that flew from the country, why don’t we focus on keeping the capital first, instead of thinking of earning from others? Take an example of bottled drinking water. Many public institutions consume imported water. Why does Timor-Leste not produce it? Or fruit juice is another example. If Timor-Leste imports it, why doesn’t Timor produce it domestically? Export-oriented policy will address this strategy through increasing trade. But to think simply can Timor-Leste reduce the capital flight by producing what it can for the domestic consumption? Closing trade deficit does not necessarily mean through exporting more, but it also can be done through producing what we can produce. Water, salt, fruit juice, plates, and many basic needs that Timor should have been able to produce.
There are other factors that relates to export-oriented policy. If Timor-Leste focuses on products to export, the question is where the inputs will be from? So far, most of basic needs are imported. Even if there is Foreign Direct Investment on certain industry, it needs to purchase some small inputs domestically. If it is not generated in Timor-Leste, it will push further negative trade balance. Moreover, if the inputs for the production are not domestically generated, such industry will not have wider trickle-down effect. It can create an “enclave zone” where the industry is not connected to the other economic sectors. Therefore, even with the expansion industrial sector, if it is not integrated into the wider economy, it will not be an inclusive growth.
The point is that it is important to get into the basic. Agriculture should be the basis for it. Historically, many countries when they started; agriculture became the basis for the development.
Economic diversification is critical for sustainable and inclusive growth in Timor-Leste. No one contends that and this conference was based on that. The question is how are we going forward from now? From my point of view, we have get to the basics. Thinking of domestic market should be the point of departure. There are many things that Timor-Leste can produce domestically for domestic consumption. This will build the strong foundation for bigger industry and have wider trickle-down effect economically.