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Oil and water: natural resources and Timor-Leste's development challenges



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December 18, 2013

Oil and water: natural resources and Timor-Leste’s development challenges By Cameron Hill

Image source: Department of Foreign Affairs and Trade

Ongoing international arbitration proceedings arising from allegations of Australian espionage during the 2004 negotiations over the Certain Maritime Arrangements in the Timor Sea (CMATS) Treaty with Timor-Leste have highlighted the latter’s dependence on petroleum revenues to finance its future development. Less well-known are the concerns that have been raised about the long-term sustainability of these revenues and what this means for Timor-Leste’s broader development and stability challenges.

At the Australian National University’s inaugural ‘Timor-Leste Update’ in November 2013, the non-government organisation La’o Hamutuk (‘walking together’) presented detailed analysis of the revenues and expenditures associated with the country’s US$14 billion dollar Petroleum Fund. This analysis, based on the Timor Government’s own figures, shows that more than three quarters of Timor-Leste’s GDP comes from the petroleum sector and that this sector comprises around 93% of state revenues. This makes Timor-Leste one of the most petroleum dependent countries in the world.

Source: La’o Hamutuk

Significantly, its analysis also shows that the non-petroleum and non-state sectors of Timor-Leste’s economy are not growing, despite the fact that these sectors employ the vast majority of its 600,000 strong workforce. The petroleum sector makes up only around 0.1% of total employment, with the public sector and government employment programs, which are largely funded from petroleum revenues, making up around 13%.

Source: La’o Hamutuk

La'o Hamutuk's analysis forecasts that, even if the contested Greater Sunrise field goes ahead, Timor-Leste’s petroleum revenue will drop significantly in the first half of the next decade, placing enormous pressure on the budget and social programs unless alternative sources of economic activity are fostered.

Source: La’o Hamutuk

All of this means that there some very hard choices ahead for the government of Timor-Leste, regardless of the outcome of the current arbitration process. La’o Hamutuk has criticised the government for using the bulk of petroleum revenues for large infrastructure projects instead of focusing on basic education and rural development to support more sustainable employment and growth. The full presentation can be viewed here.

The ANU’s Development Policy Centre noted in its recent submission to the inquiry by the Joint Standing Committee on Foreign Affairs, Defence and Trade into Australia’s relationship with Timor-Leste that youth unemployment remains one of the country's biggest development challenges: According to the latest (2010) Census, the unemployment rate among adults is 16.7% in urban areas. Unemployment is higher among young people, 37% of the 20-24 year labour force and 40% of the 15-19 year labour force is unemployed, though it should be noted that only a minority of the population in these age groups is actually in the labour force (the rest are at school): the size of the labour force in the 20-24 year age category is 37% and for the 15-19 category just 12%. In summary, youth unemployment rates are very high, and unemployment rates more generally are high, especially in urban areas. Bear in mind that in Timor-Leste there is no social security safety net, so unemployment is an expensive proposition: many more likely face underemployment as the working poor.

In a post-conflict setting, this has important consequences for stability. As the International Crisis Group stated in a recent report, Timor-Leste ‘likely has a very limited window of opportunity during which to make investments—both political and financial—that might mitigate the still real risks of an eventual return to conflict’.

Australia is Timor-Leste’s largest bilateral development partner, with Official Development Assistance (ODA) totaling around $1 billion over the period 2001-02 to 2012-13.

Source: Department of Foreign Affairs and Trade

Australia’s assistance includes support for employment programs, as well as efforts to improve agricultural productivity and public financial management.

With the withdrawal of Australian and international stabilisation forces in 2012, Australia’s development and policing assistance programs are at the forefront of international efforts to help Timor-Leste consolidate sustainable growth and stability. The Development Policy Centre has recommended that Australia’s aid include more of a focus on helping Timorese youth take advantage of international labour mobility opportunities.

It is not clear at this stage whether Australia’s development and policing assistance will be affected by the Government’s decision to significantly reduce overall aid spending over the forward estimates, or by the allegations that Australia’s aid program was used as a cover for espionage during the 2004 CMATS negotiations. The Office of National Assessments Open Source Centre contains a translated local newspaper article which reports that on 11 December Timor’s Parliament passed a resolution calling for all Australian bilateral aid programs to be reviewed in the wake of the espionage allegations.

The Australian Government has disputed the allegations but will not comment further on them.