05 February 2015

It takes more than money to achieve development:

Lessons from and for Timor-Leste

Last October, the UN Economic and Social Council for Asia-Pacific (ESCAP) held a regional meeting on Financing Graduation Gaps of Asia‐Pacific Least Developed Countries in Bangladesh. At that meeting, Charles Scheiner from La'o Hamutuk led a discussion on ways to improve development based on Timor-Leste’s experience.

The UN calculates Least Developed Country (LDC) status from a combination of statistics: per capita Gross National Income, Human Assets Index (HAI: malnutrition, child mortality, literacy, school enrollment) and Economic Vulnerability Index (EVI: size, remoteness, economic diversity, agricultural stability, natural disasters, import dependency). Compared with other LDCs in the region, Timor-Leste scores high on GNI (due to oil and gas income), but our Human Assets Index is the second-worst (only Afghanistan is lower), while our EVI is about average, far from graduation requirements. However, many other Asia-Pacific LDCs have stronger human assets and less vulnerable economies, even though their governments have less cash.

The UN allows countries to emerge (“graduate”) out of LDC status if their income is very high, even if their EVI and HAI remain poor, a path being followed by Equatorial Guinea. This pattern represents a failure to utilize financial resources for public benefit. In fact, Timor-Leste may graduate from LDC status in a few years based on income alone, even though it will still fail the other two indicators.

The ESCAP conference included about 75 people from LDCs across the region -- Afghanistan, Bangladesh, Bhutan, Cambodia, Kiribati, Lao PDR, Myanmar, Nepal, Solomon Islands, Timor-Leste and Tuvalu. The organizers invited Charles Scheiner as a resource person to discuss non-financial aspects of emerging from Least Developed status: what can be learned from Timor-Leste’s difficulties in improving its HAI and EVI, in spite of having large oil revenues? The following is adapted from his presentation (also PDF). Although it was prepared for people from other countries, it may also be useful for those with new responsibilities in Timor-Leste’s restructured government.

Basic Facts about Timor-Leste

  • Timor-Leste restored its independence in 2002, after decades of war and centuries of foreign rule.
  • Oil and gas income is three-fourths of its economy and 93% of state revenues.
  • Its non-oil GDP grew rapidly from 2008 to 2012.
  • It has saved $16 billion in its Sovereign Wealth Fund (called the Petroleum Fund).
  • The oil fields could run out in six years, and the Petroleum Fund six years after that.
  • Its 1.2 million people are still among the poorest in the region, and most of them are less than 17 years old.
  • More than half of Timor-Leste’s people live in poverty, and the percentage is rising.
  • Two-thirds of people live in rural areas, largely by subsistence farming.
  • Poor sanitation and malnutrition are endemic.
  • About 1,200 Timorese children under 5 years old die from preventable conditions every year … 20 times more than people of all ages who die from physical violence.

Petroleum Dependency

  • Petroleum GDP in 2012                              $4,309 million (78%)
    Non-oil GDP in 2012                                    $1,246 million (22%)
       Productive sectors (agriculture & manufacturing)    $ 247 million (4%)
  • Projected state revenues in 2015    $2,530 million
    $  2,290 million (91%) will be from oil (including $916 million investment return)
    $     170 million ( 7%) will be from non-petroleum sources
    $       70 million ( 3%) will be borrowed from international lenders
  • 2015 State Budget    $1,570 million
    $ 1,328 million (85%) will come from the Petroleum Fund in 2015.
    $      72 million ( 4%) more is from the Petroleum Fund in the past and future.
  • Petroleum “income” goes to the government, not to the people.
  • State activities, paid for with oil money, comprise about half of the “non-oil” economy, because some of this money circulates in the local economy.
  • Balance of trade for goods in 2014: $526 million imports, $14 million non-oil exports (95% coffee)
Oil income peaked in 2012, dropping 15% in 2013 and 42% further in 2014.
Only South Sudan, Libya (and Equatorial Guinea?) are more dependent on oil and gas exports than Timor-Leste.

Lessons learned from Timor-Leste’s experience

Lesson 1: Sustainability is the right of future generations.

  • Development is an ongoing process, not a project which comes to an end.
  • Non-renewable or over-exploited resources will inevitably be used up, and must be replaced by something else.
  • This requires thinking and planning for much longer than a consultant’s contract, project timetable or electoral cycle.
  • Saving petroleum revenues helps, but they may not last beyond one generation.
  • Investment is not the same as spending – it must produce a tangible economic or social return in the future.
  • Infrastructure must be maintained after it is built, and the full life-cycle costs of maintenance, operation and debt service should be analyzed and budgeted before a project is approved. Timely maintenance is cheaper than repeated rebuilding.
  • Borrowing, whether through loans or implicitly through Public-Private Partnerships, can undercut sustainability if repayments are higher than return or persist longer than income or the project’s earnings.

Lesson 2: Planning is essential.

  • Planning should be long-term, both for overall development and for individual projects. It should be based on technical, social and financial considerations and viability, not politicians’ agendas or promoters’ suggestions.
  • Infrastructure projects should provide real benefits for people. They should be the appropriate size to meet reasonable forecasts of future needs.
  • Just because something is feasible doesn’t mean it’s the best or right thing to do.
  • Be creative and flexible– if a proposal turns out to be misguided, change it.
  • Don’t let a single sector or proponent distort decision-making and priorities – if you only have a hammer, everything looks like a nail.
  • Use 21st-century technology – decentralized, renewable and sustainable. Learn from others’ experiences, not by repeating their history or mistakes.
  • If plans and promises are not actually carried out, people will feel betrayed and disappointed.
Planning should be based on data.
  • Accurate, timely information is essential – even on uncomfortable topics like poverty or policy weaknesses.
  • Don’t believe your own advertising – decisions should be based on facts, not on claims or dreams.
  • When data for past years is incorrect, apparent improvements or trends may be illusory.
  • Data should be meaningful: names on a school enrollment list are not the same as children actually learning.
  • A country is composed of human beings, not dollars, and so is an economy. Measures like GNI and GDP show how a wealthy few are doing, and don’t reflect the lives of the impoverished majority.

Lesson 3: Recognize the context.

  • Legacies from past conflict and oppression, including autocracy, trauma, impunity and inexperience, must be addressed. They will not disappear by themselves.
  • Citizens and leaders in a new nation don’t trust that the “Rule of Law,” will always protect the weak from arbitrary power, including from the state. They need to be shown, not just told.
  • Initial progress from a very low base (“ground zero”) is not too hard, but doesn’t go very far toward achieving people’s rights.
  • Citizens became strong during difficult times; consider them your greatest resource.

Lesson 4: Achieve sovereignty and diversification.

  • An economy cannot stand on one leg. Petroleum will not be replaced by one single sector, but many.  Eco-tourism, small industries, agriculture and food processing can provide jobs, income and basic needs.
  • People have to eat before they can spend, and farming should prioritize local nutrition over export crops. Food and economic sovereignty are as important as political sovereignty.
  • Local production should substitute for imports, which provides competitive advantages as well as survival when imports are unaffordable. Reducing imports by 20% has the same effect on the trade deficit as increasing non-oil exports by 600%, and is a lot easier.
  • Tariffs or subsidies may be needed to help develop local production, just as they were in industrialized countries.
  • The most important infrastructure is not glamorous. Rural roads, neighborhood primary schools, decentralized renewable electricity, health clinics and local water supply and sanitation will improve people’s lives much more than costly megaprojects.

Lesson 5: Prioritize human resources.

  • The state is responsible to ensure everyone’s rights to education, housing, health care, and sanitation.
  • Universal quality primary education is essential for developing and improving people’s quality of life, as well as for future employment and economic development.
  • Inadequate nutrition and health care can permanently limit a child’s future.
  • It’s easier to buy an overseas scholarship than to create a university, or to send a sick politician abroad for treatment than to create a good hospital, but quality local facilities will educate and treat far more people.

Lesson 6: Good governance requires attention.

  • Laws should apply to everyone, including officials, state agencies and foreign investors and contractors, especially in areas like procurement, environmental protection, land rights, civil rights and personnel.
  • Transparency is only useful when information is accessible, understood and utilized. Policy debates should be public, including how and why decisions are made.
  • State-owned companies and autonomous agencies are often outside usual lines of authority, and therefore need special attention to transparency, as well as active control and supervision by democratic institutions.
  • Budget execution is not a good measure of government performance -- stealing or wasting money does not deliver public services.
  • Mismanagement and poor decisions can be as damaging as outright corruption.
  • Open, constructive, peaceful political opposition is essential to democracy, providing checks and balances, give and take, and alternative ideas.
  • A free media and vital civil society are necessary to ensure that government keeps its promises and serves the public interest.

Lesson 7: Consult with the public.

  • Listen to people who will be affected by plans or projects, including intended beneficiaries – socialization and promises are not enough. Project implementation must be based on free, prior and informed consent, responding to community concerns, needs and rights. A local sense of ownership is necessary for a project to succeed.
  • Spending priorities should be based on what is best for the public, rather than what makes decision-makers proud, rich or powerful.
  • Citizens, especially marginalized ones, should not be displaced or deprived so that leaders can welcome visiting VIPs. “Family hold back” is not appropriate for a nation.

Lesson 8: Everyone has an equal right to public benefits.

  • It takes effort to overcome discrimination, to ensure that each citizen gets her fair share of resources (aid or oil) that belong equally to everyone. (The dominance of oil revenues in Timor-Leste means that even the rich hardly pay taxes.)
  • The elderly get a dollar a day … unless they’re veterans. But well-connected contractors and politicians get much more.
  • The poor should not receive fewer benefits than the rich. People in rural areas deserve the same quality of services and resources as those in the capital, and their needs are often less costly to satisfy.
  • Policies that would benefit women, children, the disabled, the uneducated, the unwaged and other vulnerable people should not be neglected.
  • “Inclusive growth” can be a euphemism for discredited trickle-down economics: the powerful get fatter and the poor get crumbs. It must not substitute for economic justice and equity.
  • “Buying peace” by rewarding disaffected or insistent constituencies will undermine stability and cohesion in the long term.
  • Airports, highways, and subsidized, centralized electricity address the needs of the wealthy minority and are not used by most people. (In Timor-Leste, the state spends more on electricity than on health care – and very few people have air conditioners or dishwashers. Remote areas are powerless in both senses.)

Lesson 9: Support real people, not theoretical "economics."

  • “Dutch disease” inflation has dropped in Timor-Leste’s dollarized economy, since rapid growth in state spending has slowed. It could be reduced further by increasing local production to reduce the demand for supply-limited imports.
  • GDP growth can indicate gains for a small minority, even as most people get poorer. Median income or assets, or families living below the poverty line, are a better measure of economic health.
  • When most “national income” goes to the state (which saves the bulk of it), GNI does not reflect citizens’ prosperity or the lack thereof.
  • Bangladesh and Nepal have better Human Assets and Economic Vulnerability Index scores than would be expected for their GNI, indicating well-managed policies.
  • Timor-Leste’s high GNI is mainly composed of temporary oil and gas income, and it has not been effectively used to improve its HAI and EVI. As in Equatorial Guinea, oil money can be a curse.
  • If Timor-Leste graduates from Least Developed Country status solely based on its high GNI before 2020, it could be the first country to retroactively fail and re-enter LDC status after the oil and gas runs out in only a few years. Does this make sense?

What's in their future?

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