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Timor-Leste: Breaking free from temptation of easy money

The Interpreter - July 7, 2023

Guteriano Neves – A successful 21 May election in Timor-Leste saw the smooth and peaceful transition of power to a new government led by Xanana Gusmao – new, in the sense of being newly sworn in, but consisting of several old political figures such as Gusmao himself, Francisco Kalbuadi, Bendito Freitas, Mariano Sabino and Dulce Soares, to name a few.

Still, peaceful elections and power transition are signs of democratic consolidation and a general acceptance of the "rules of the game". For Timor-Leste, this is a point of celebration. Fernanda Lay has also become the first woman to be elected as Speaker of the House, promising a different dynamic in the parliament under her leadership, while the two opposition parties FRETILIN and KHUNTO have pledged to be a "constructive opposition" for the next five years.

All this augurs well for what is still Southeast Asia's youngest nation.

And as with democracies the world over, the expectation is that the party (in this case a coalition) that forms government will translate electoral promises into policy and programs that will benefit wider society through the provision of public goods and services.

Central to the electoral promises of the Gusmao government is completing the ambitious oil and gas processing project on the south coast known as Tasi Mane. The project itself is defined in Timor-Leste's Strategic Development Plan as consisting of a supply base, refinery, petrochemical industry and LNG plant. In his inaugural speech, Gusmao pledged to "initiate the process of the South Coast Development" as well as exploration of the offshore Greater Sunrise gas field within the first year of his government, alongside other priorities including decentralisation and the establishment of a supreme court.

But, among various expectations, one of the most important tasks for the newly formed government is restoring a sense of certainty and trust in political institutions. Political uncertainty has been a hallmark of the country since 2017, carrying with it economic implications, too. Some degree of consensus needs to be reached among a broad spectrum of the society – including political parties – about what amounts to a sustainable level of public spending to ensure adequate investment in health, education, and economic diversification in the non-oil sector.

Timor-Leste continues to depend on the transfers from its sovereign petroleum fund as the main source of budget financing. Despite more than a decade of talk about the need for diversification, macro-economic indicators haven't shifted. The public sector continues to dominate Timor-Leste's economy, and economic growth depends on public spending. The non-oil GDP growth rate is lower than other countries in Southeast Asia. Timor-Leste has the lowest labour force participation rate in Asia, so creating jobs is crucial. Agriculture and tourism, two sectors that are regularly touted as part of economic diversification, have not shown strong indicators of growth in terms of exports or productivity.

But a balance is needed between immediate needs and longer-term fiscal sustainability. While the size of bureaucracy and its cost need to be rationalised, public investment in critical infrastructure projects such as the national airport and the rollout of fibre optic networks will continue to be needed. Public investment in rural roads and irrigation can also generate short-term jobs and stimulate the local economy, as well as facilitating economic productivity in rural areas.

In this, improving the quality of human capital through health and education are essential for Timor-Leste to be competitive in regional and international markets. Simplifying private sector investment through reform of land law, business licensing processes, and strengthening the judiciary, particularly to enforce contracts, will all help.

These are all big challenges without easy answers. But for Timor-Leste to take the next step and capitalise on its rightful pride in democratic institutions, the government must find a way.

Over the past 15 years, access to easy money from oil and gas has affected the way society is governed – even to a certain degree leaving the country addicted. While the reliance on resources extraction offers fiscal space for Timor-Leste to grow as a nation, it has also provided policymakers a comfort zone allowing them to resort to throwing money at problems. A heavy reliance on public spending as the instrument to generate growth leads to inefficiencies, crowds out the private sector, and puts the incentive on consumption more than production – what economists call "Dutch disease" or in other contexts, the "resource curse". In the meantime, many structural issues such as poverty, malnutrition, low productivity and an inefficient bureaucracy cannot be addressed by simple cash hand-outs.

Timor-Leste is at a critical moment in the trajectory of its development. Tackling these development issues requires the Gusmao-led government to shift away from a development approach that relies too much on money from petroleum.

Source: https://www.lowyinstitute.org/the-interpreter/timor-leste-breaking-free-temptation-easy-mone