Transition to Non-Oil Economy in Timor-Leste
24 Nov 2016 by Knut Ostby
Knut Ostby, UN Resident Coordinator and UNDP Resident Representative, Timor-Leste
Timor-Leste’s development since achieving independence in 2002 is quite remarkable for such a young country. The Human Development Report 2015 indicated that the country’s Human Development Index was above the average for the Medium Human Development group of countries, and the World Development Report 2011 suggested that the country has achieved in 10 years the level of stability that normally should be expected to take 15-20 years. Peace has been maintained since 2008, institutions have been created, government capacity has been strengthened, major infrastructure projects have been rolled out and encouraging results are being attained across numerous sectors.
The country has also developed an ambitious vision through its Strategic Development Plan to become an upper-middle-income economy by 2030, and ongoing efforts are being deployed to transform this vision into reality. Furthermore, the government of Timor-Leste has shown its commitment to achieve the Sustainable Development Goals (SDGs). It is part of 10 nation group championing the implementation of the 2030 SDGs and has established a national working group.
Timor-Leste has also shown its strong leadership and engagement in the regional and international scenes. Through the g7+ initiative, Timor-Leste is an active driver for South-South cooperation with fragile states. The country has also been an active driver for approval of the New Deal, and of SDG Goal #16 on peace and justice. Timor-Leste acceded to the Rotating Presidency of the Community of Portuguese Speaking Countries (CPLP) for two years, and participated as an observer in the Pacific States Forum. In 2011 Timor-Leste applied for full membership in the Association of Southeast Asian Nations (ASEAN), a regional association comprised of 10-member states committed to economic growth, peace and stability.
However, Timor-Leste’s economy is largely dependent on oil revenues from a Petroleum Fund with accumulated assets of US$16 billion, approximately three times the GDP. Whereas, non-oil GDP represents only about 10-12% of domestic revenue, and the oil production are expected to be depleted by 2021. Furthermore, Timor-Leste faces numerous development challenges. Among them, food insecurity, malnutrition and poverty remain widespread; and too many people lack access to basic services such as health, education and justice. The economy remains dependent on revenues from finite petroleum resources, and there is broad agreement that diversification of the economy is needed.
The importance of Overseas Development Assistance (ODA) in Timor-Leste has dropped significantly compared to the early years after restoration of independence. According to OECD/DAC, the ODA in 2012 represented only about 5.8% of the Gross National Income (GNI). This means that most development activities in the country are financed by the Government itself, and mostly from the income generated by the petroleum sector. Given the rapidly declining production from existing oil fields, there is a limited time window for use of the oil income for development investments, and hence development actions must be strategic and cost-effective.
There are ongoing efforts to develop a stronger non-oil economy through investments in infrastructure, encouragement for development of private sector enterprises, and steps towards more inclusive development include conditional cash transfer, village and district development programmes, as well as a planned deconcentration of public services. Moreover, the recent Industrial Policy of Timor-Leste signals that Timor-Leste gives priority to the transformation and diversification of the Timorese economy, with private sector growth and more job creation, improved access to finance, and development of agriculture, mining tourism, and manufacturing sector.
So what can be done to accelerate economic diversification and achievement of an inclusive and sustainable human development and counter the risks of the “resource curse”?
While successful local infrastructure initiatives are already in motion, there may be a need for a more comprehensive and inclusive approach to ensure that rural communities can fully participate in the country’s development. The private sector will need to play a significant role in fostering growth and job creation alongside the direct development initiatives of the Government. Timor-Leste therefore urgently needs to develop its private sector, diversify its economy and attract investors to the country. This implies creating an enabling environment for private investment through adequate legal and regulatory frameworks to ensure good governance, transparent public institutions and the rule of law.
It is important to keep in mind that the private sector is not only big corporations and investors. A large share of the private sector consists of farmers and other individuals who are engaged in income generating activities and often operate in the informal sector. Therefore, development actions need to prioritize local communities, not only to reduce inequalities but also to harness the great potential that lies in people’s own ownership of their development. Furthermore, with 60% of the population under the age of 25, Timor-Leste is blessed with a large portion young people, who if educated, skilled and employed, will play a critical role in the inclusive and sustainable development of this country. Therefore, development interventions should be focused on education, skills development, employment, and entrepreneurship, and youth should be engaged as the drivers, not merely as the recipients of development.
One approach with great potential is social entrepreneurship. This focuses on linking communities with business opportunities to foster local development, rather than engaging in business activities solely for monetary profit. Of course, to be viable, social businesses also need to yield a positive return, but the difference is that business choices are made to benefit local communities rather than distant shareholders. Social business projects can create employment and sustainable incomes, thereby engaging larger portions of the population in the formal economy and creating sustainable inclusive markets. The first step is to change the mindset of the community particularly youth from job seekers to job creators. As most of the Timorese people are farmers, social business development in agriculture sector is a great start as bringing youth to work in this sector will help accelerate economic growth. Furthermore, a culture of innovation and critical thinking should be promoted for youth to identify social problems and transform them in to business opportunities. This could contribute to much needed inclusive and diversified economic development in Timor-Leste.
Although ODA to Timor-Leste is decreasing, the international community still has an important responsibility to support the country’s path towards sustainable human development. Coordinated and focused support from development partners is needed to help the Government push forward in key priority areas, and to build its capacity to fully deliver on all aspects of its development programmes.
At the July Timor-Leste Development Partners Meeting (TLDPM), under the theme “Financing for Sustainable Development in Timor-Leste", the need for enhanced partnership among development partners, private sectors as well as among line ministries, was highlighted. Among other things, the government of Timor-Leste launched its SDGs priority areas and discussed strategies to achieve the priority areas by 2030. The SDGs priority areas for 2017 include SDG 2 on No Hunger, SDG 3 on Good Health and Well-being, SDG 4 on Quality Education, SDG 5 on Gender Equality, SDG 6 on Clean Water and Sanitation, and SDG 9 on Infrastructure, Industry, and Innovation.
Indeed, strengthened coordination, strategic planning and budgeting aligned with the overarching goals and vision of the Strategic Development Plan, and with the SDGs, is needed not only from Government but also from development partners. As development partners, we need to ensure that our programmes are addressing the national priorities, and are updated based on current needs. We should provide focused, selective and demand-driven capacity development support; improve knowledge sharing and learn from our best practices and failures; and continuously align our work with the country’s overarching development goals.
To conclude, let me congratulate the Government of Timor-Leste for its string of recent development achievements at the national, regional and global levels, and highlight the exciting development opportunities ahead, including potential membership of the Association of South East Asian Nations. Development partners need to help the Government bring these opportunities to bear through focused, inclusive and sustainable actions. Let me repeat what the Government said in July: We need an attitude of “halo ohin” – do it today!