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Can East Timor dodge the 'resource curse'?

Despite oil and gas riches, signs of wealth remain scarce in the impoverished country.

Last Modified: 01 Nov 2013 10:51
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Ninety-five percent of East Timor's budget derives from oil and gas revenues [Pei Ting Wong/Al Jazeera]

Dili, East Timor - The 2014 budget unveiled last week by tiny East Timor is a $1.5bn spending plan funded almost exclusively - 95 percent - by lucrative oil and gas revenues. One of the fastest-growing budgets in the world in recent years, it ballooned from $64m in 2004 to $604m in 2009.

That the budget depends on a single, finite resource that could be depleted in a generation has some worrying the country may fall victim to the same "resource curse" that has seen other developing countries lose their wealth to inexperience, mismanagement and corruption.

"Given how much money has poured through the country, and given how much money the government has access to, it's fairly depressing," said Anna Powles, an academic researcher who worked in East Timor for eight years as an adviser to the government and several non-government organisations.

East Timor is one of the most oil-dependent countries in the world, according to the International Monetary Fund. The country's non-oil industries, such as organic coffee and tourism, generate a fraction of the amount as the oil does.

A trust fund for petroleum revenues, modelled on Norway's conservative sovereign wealth fund, is now worth close to $14bn. Although no more than 3 percent of the fund was meant to be withdrawn in any given year, it has been overdrawn regularly in recent times.

"It's an enormous concern," said Powles, now a lecturer at the Centre for Defence and Security Studies at the University of New South Wales. "The whole rationale for setting it up using the Norwegian system was to ensure there was sustainability. It's not enormously surprising that it's been tapped into to the degree that it has been."

The 2014 budget calls for taking $903m from the petroleum fund, while the 3 percent sustainability cap would limit that withdrawal to $632m.

The 'resource curse'

Economists, academics, and government watchdogs also warn that the country needs to invest more heavily in education, health care, and other investments in human capital. Government expenditure on education and health are below accepted international norms, according to the Asia Foundation, with poverty, hunger, and illiteracy rates among the highest in the world. Last week, the Global Hunger Index ranked East Timor 75th out of 78 countries, worse than it has placed in recent years.

"The challenge for East Timor is to avoid the resource curse and enjoy the resource blessing," said David Bloom, an economist at the Harvard School of Public Health who specialises in global development. "That requires it to channel its oil revenues into human capital development - in particular, into improving the health, education, and skills of the population."

The government has been harshly criticised for not doing enough about social and economic inequality while spending lavishly on government ministers, and on perks such as lifetime salaries for members of parliament. A lack of transparency on government spending, critics say, invites mismanagement, collusion and corruption.

A spokesman for Prime Minister Xanana Gusmao did not respond to requests for comment, and partner organisations often avoid directly criticising the government. Hans Beck, the acting World Bank country manager for East Timor, said only: "The government is candid about the huge challenges the country faces and is looking for solutions."

While the World Bank says post-conflict countries take between 15 and 30 years to become stable - East Timor became independent in 2002 after years of fighting with Indonesia - citizens like Charles Scheiner of the fiscal watchdog group La'o Hamutuk worry that petroleum resources and revenues could be depleted within that period.

"The prospect that the Petroleum Fund could be gone in a decade underscores the urgency to develop East Timor's non-oil economy, increase domestic revenue, and use public funds wisely," Scheiner said. "If we don't invest this nonrenewable resource wealth in our people and in productive sectors of the economy - health, education and agriculture - we will have nothing when the petroleum runs out, which could be in half a generation."

Tensions with Australia

The importance of offshore petroleum is prompting East Timorese officials to revisit revenue-sharing arrangements with Australia. The two countries are engaged in a high-stakes battle over maritime boundaries in the resource-rish waters that separate them, along with industry players with their own set of bottom-line interests.

Australia currently takes about 40 percent of the revenues from oil and gas fields in the Timor Sea. But because these fields are closer to East Timor than to any other country, the resources should belong to East Timor under international law, according to La'o Hamutuk.

The latest wrinkle in the ongoing dispute with Australia involves a pending arbitration hearing over a 2006 revenue-sharing agreement on oil and gas exploitation. East Timorese officials, including Prime Minister Xanana Gusmao and Oil Minister Alfredo Pires, have said publicly in recent months that they believe Australia took advantage of its relatively inexperienced leaders, still reeling from the aftereffects of a long war and desperate to secure revenue sources. They also charge that Australia's secret services illegally obtained information and bugged East Timor government offices during negotiations that led up to the agreement. 

The agreement between the two countries stipulated that oil and gas revenues from the Greater Sunrise field in the Timor Sea - one of the biggest in the region - should be shared equally between them. Permanent maritime boundaries between Australia and East Timor have yet to be settled.

"This is important for us. This is a small country and these are big resources," said Pires in a recent interview. "We need to know exactly what is ours and what should be ours, and get most of it to improve the lives and well-being of the people. And we have enough experience and knowledge to decide what is best for us."

Canberra has not directly addressed the spying charges. Asked for comment, Paul Wilson of Australia's Department of Foreign Affairs and Trade responded in an email, "Australia negotiated the Timor Sea treaty framework in good faith".

A date has yet to be set for the arbitration hearing. Some see East Timor's spying accusation, and the legal fight it has triggered, as a distraction.

"Australia's past dealings with oil and gas is an original sin that, for many Timorese, no amount of development assistance tendered subsequently will ever truly absolve," said Gordon Peake, author of Beloved Land, a recently published book on East Timor. "I am not sure of the cost-benefit of revisiting old agreements. In doing so the only guarantee is lots of lawyers' fees."

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