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East Timor's Resource Curse?

By Lee J. M. Seymour

Far Eastern Economic Review
November 30, 2000

In October, delegates from Australia and the United Nations Transitional Administration in East Timor, or UNTAET, sat down to negotiate the division of oil-and-gas revenues from the Timor Sea. About the same time, East Timor received its first royalties from offshore oil exploitation--for now, a modest $3 million that could, by the end of the decade, exceed $150 million.

Offshore oil-and-gas reserves are widely regarded as the new state's salvation. Development agencies that expected to be permanently engaged in East Timor now see it as a prospective model of self-sustaining, small-state development. Amid such optimism, however, there has been a lack of attention paid to the paradoxical danger that, rather than being a blessing, oil revenues are a potential curse on the fledgling country's development prospects.

Resource abundance and dependence are consistently and persuasively associated with low levels of economic and human development, the aggravation of social tensions, poor governance and an increased likelihood of conflict. The perils of the resource curse are by no means inevitable. But if East Timor is to avoid the fate of countless other "resource-blessed" states (think of Angola, Equatorial Guinea and Venezuela among others) the current nation-building exercise must give thought to the myriad challenges presented by the coming oil boom.

To understand the dangers ahead, consider the hazards of oil-dependent development and resource abundance. The economics are simple, if counter-intuitive. "Dutch disease" is the diagnosis development economists give to an all too familiar set of symptoms: rapid capital inflows appreciate the exchange rate, erode the competitiveness of industries subject to international competition, promote current-account deficits, accelerate inflation, distort investment and link the economy to volatile commodity markets. Thus, rather than generating prosperity, booming resource revenues can have the perverse effect of stunting broad-based, sustainable development.

Narrow, oil-led growth also tends to exacerbate social cleavages. Resource dependence often generates income inequality. Thus, such resource-rich communities almost invariably have lower levels of social capital. Rising expectations for the better days of "black gold" are seldom met.

In politics, the corrupting effects of rentier economics perverts governance as elites succumb to paternalism. Even where intentions remain pure and structures exist to promote the transparent use of revenues, public pressures link government spending to the highest commodity prices. When these fall, governments run deficits and incur mounting debt. Perhaps most worrying is research from the World Bank linking resource dependence to violent conflict. States dependent on commodity exports with large numbers of unemployed young males and low levels of education--all prominent in East Timor--are especially conflict-prone.

Can Timor escape the resource curse? There are no clear answers. It is insulated against some risks. The use of the U.S. dollar rules out currency appreciation. A devastated infrastructure and low-levels of human capital imply that the economy can absorb high rates of productive investment. Also, agriculture is set for a strong recovery and, along with tourism, will support economic diversification. But ominously, ethno-religious and cross-border tensions are high. Factionalism, sometimes violent, stunts the development of a pacific civil society and a strong opposition. Understandably, Timorese have high expectations for improvements in their daily lives that may not be immediately met. Indeed, UNTAET wisely is imposing fiscal austerity to safeguard against unsustainable spending patterns.

Despite these ambiguities, Timor's capacity to manage the risks can be enhanced by explicitly framing policies with coming challenges in mind. Long-term planning must begin to determine the allocation of future surplus. Emphasis should be placed on a stabilization fund to guard against commodity-price volatility, support for the private sector, as well as investments with high social returns, particularly those in human capital and infrastructure. Even more important than prudent economic management is support for democratic, transparent and accountable governance. Capacity-building in public administration, promotion of the rule of law, entrenchment of norms against corruption and support for a robust civil society are all imperative. Yet outsiders can only do so much. When power officially is transferred next year, it is the Timorese who will determine whether or not the country's offshore resources prove a blessing or a curse. May we wish them well.

The writer is a researcher with the Ottawa-based North-South Institute's Conflict and Human Security Programme.

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