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Why is Timor-Leste still unable to diversify its economy?

The Diplomat - March 1, 2021

Joao da Cruz Cardoso – Timor-Leste, like many other countries, has experienced considerable economic hardship due to the COVID-19 pandemic. However, the country's economy was fragile long before the pandemic and will likely continue to face challenges for the foreseeable future. Over the years, Timor-Leste has been advised to prioritize and take concrete actions to improve the number of its productive sectors, which are fundamental in order to diversify the economy away from a heavy reliance on oil revenues.

The economic development programs of the VIII Constitutional Government, which took office in 2018, emphasize empowerment of the productive sectors around essential industries including agriculture and tourism, in order to diversify the economy. Meanwhile, non-governmental organizations (NGOs), development partners, and other experts have pointed out the risks of being overly dependent on oil and the need for economic diversification to ensure more sustainable development. Despite all the warnings, however, Timor-Leste's economy remains heavily dependent on the revenues generated from the oil and gas sector while progress in diversifying the economy has been slow. Given this trend, what are the main underlying obstacles?

Diversifying the economy of a country takes time and it is a highly complex endeavor. However, in Timor-Leste's context, a few factors stand out. The first is the political discord that has derailed the country away from long-term investments. Starting from the crisis of 2006, Timor-Leste has grappled with political disharmony, which is self-evident when one considers the fact that the country has had six different governments in the last 15 years (2006 to 2021). Consequently, the country is forced to take measures of a short-term nature to ensure the solidity of governance, rather than formulating strategies for long-term strategic investments. When the VIII Constitutional Government was formed in 2018, current Prime Minister Taur Matan Ruak famously claimed to be leading a three-wheel government given that it lacked a full cabinet. Last year, however, FRETILIN replaced the National Congress for Reconstruction of Timor-Leste (CNRT) as part of the ruling coalition to continue the mandate of the VIII Constitutional Government, which brought the three-wheel saga to an end. Nonetheless, the stability of the coalition government will remain in question at least until the next election in 2023. As such, the government cannot really exercise its role in developing comprehensive programs and critically assess budget distribution towards sectors that can contribute to long-term development, partly out of fears that this will precipitate the collapse of the coalition government.

Second, there appears to be a lack of consensus among the two largest political parties, CNRT and FRETILIN, on the national priorities for economic development. Although development in Timor-Leste has been guided by the Strategic Development Plan (SDP), CNRT and FRETILIN are still at odds regarding the mechanisms to materialize programs such as the Southern Coast or Tasi Mane Project, which is an integral part of the national economic development strategies.

This lack of agreement from the main two ruling parties hinders the continued implementation of initiatives. Therefore, political parties need to have open and in-depth discussions about the viability of key economic development strategies in order to formulate national programs that are acceptable for all, and persist through changes in government administrations.

Third, there is a lack of political incentive, at least in the short term, to develop the non-oil sectors of the economy. So far, oil money has enabled Timor-Leste to finance large infrastructure projects relatively quickly, as illustrated by the construction of a highway along the south coast and the Tibar Bay Port in the north coast. Easy money from oil allows governments to create flashy infrastructure projects that showcase its achievements. To put it briefly, large infrastructure projects make the works of the government visible to the people, and may contribute to the reelection of ruling parties.

Consequently, the non-oil sectors are neglected as they do not serve short-term interest of the ruling political parties; they are very much under-developed, meaning that it takes a lot of time before the sectors can reach maturity; and there is no guarantee that they can generate similar amount of revenues to the oil and gas sector. Given these realities, there is the need for political shift in regards to development and courage from the leaders to invest significantly in the non-oil sectors.

It is unfortunate that the oil sector appears to have limited Timor-Leste's vision for development. While the country is entitled to take advantage of its oil resources, it should also take the opportunity afforded by the oil revenues to develop non-oil sectors. This is simply because the non-oil sectors will provide critical support necessary to sustain the country's economy once the oil reserves dry up. Regardless of contrasting opinions, Timor-Leste is at the brink of missing out on the window of opportunity afforded by the oil money because revenue from oil production is going to end soon, but in the meantime, the non-oil sectors are still very far away from being fully developed.

In August 2020, the government of Timor-Leste released an Economic Recovery Plan (ERP) Report, which elaborates measures to minimize further stagnation of economic activities due to COVID-19, and allow the economy to recover over the medium to long term. Besides proposing improvement of productive sectors to diversify the economy, the ERP underlines human development as the epicenter of economic policy, and therefore, it recommends improving education as a core long-term strategy for economic development.

This recommendation further shows that, while it is necessary to improve conditions of the productive sectors, human capital is the pivotal catalyst for a country to achieve its quest for sustainable development. And having experienced the economic impact of a collapse in oil prices, Timor-Leste fully understands the level of the menace that can be caused by oil dependency. Therefore, it is time for Timor-Leste to sort out its political differences, find the courage necessary to establish a consensus on strategies to develop the country's productive sectors, and get its act together to improve the quality of the country's human resources. All these are necessary if the country is to break the shackles of oil dependency and build a more diverse and sustainable economy.

[Joao da Cruz Cardoso is an independent researcher. He is an alumnus of the University of Illinois at Urbana Champaign/Fulbright and the University of Hawai'i at Hilo/USTL/EWC. This view expressed is his own and does not represent the institution where he currently works.]

Source: https://thediplomat.com/2021/03/why-is-timor-leste-still-unable-to-diversify-its-economy