Can the Petroleum Fund Exorcise the Resource Curse from Timor-Leste?

This blog was updated on 27 February 2015

La'o Hamutuk recently circulated a referenced academic paper which describes the resource curse in Timor-Leste and, sadly, concludes that the Petroleum Fund is inadequate to keep the nation from falling into dire poverty in less than 20 years. Read the September 2014 paper on-line or download the February 2015 update of the paper as a PDF. 

Australian National University published a two-page "In Brief" summary of this paper in July 2014, and Timor-Leste's Ministry of Finance issued an eight-page response a few weeks later. We hope they will give similar attention to the completed, updated paper.

Contents

•   Oil swamps the economy.
•   Oil fuels the state machinery.
•   The Sovereign Wealth Fund saves petroleum revenues.
•   Spending grows quickly, but not always wisely.
•   The resource curse has many faces.
•   This petro-state doesn’t have much petrol.
•   There isn't much time.
•   Notes
•   References and bibliography

Abstract

Oil and gas exports provide about 95% of state revenues and three-fourths of GDP, making Timor-Leste one of the most petroleum-dependent countries in the world. Although this fuelled double-digit GDP growth from 2007 through 2011, poverty and inequality are increasing. Current development plans are unlikely to rescue Timor-Leste’s people from the resource curse which distorts planning, governance, decision-making and politics, leading to neglect of non-petroleum investments, especially agriculture and human resources.

Income from exporting non-renewable petroleum wealth is channeled through a Petroleum Fund which contains US$17 billion. Although Timor-Leste’s currently active oil and gas fields may be dry by 2020, many believe that earnings from Petroleum Fund investments will continue to pay for state activities. Unfortunately, La’o Hamutuk’s model shows that the Petroleum Fund may be empty within five years after that.

The prospect that the Petroleum Fund could be gone in a decade underscores the urgency to develop Timor-Leste’s non-oil economy, increase domestic revenue and use public funds wisely. The Petroleum Fund may have created an illusion of economic security that allowed avoiding difficult decisions and challenging tasks.