What the GDP numbers hide – The Edge Review

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Timor Global test plantation in Railaco, August 2011 (Photo: Simon Roughneen)

Timor Global test coffee plantation in Railaco. August 2011 (Photo: Simon Roughneen)

Despite strong growth, East Timor’s economy struggles with income inequality

JAKARTA – Launching a new website to promote tourism in East Timor, the founders of VisitEastTimor.com were right on both counts when they said “the people of Timor are just marvelous and love to welcome foreigners ­since they don’t get that many that often.”

That’s a crying shame, since there aren’t many small countries anywhere as scenic or as embracing as the Democratic Republic of Timor Leste, as East Timor is formally known. But the 12-year-old independent state only received 78,000 visitors in 2013 – a tiny number, but still almost double the 45,000 who came in 2010. To put that in perspective, Indonesia’s neighbouring island of Bali receives between 2 million and 3 million visitors a year on average.

The Bali comparison is often flagged by Timor enthusiasts who are pushing the tiny country as an alternative tourist spot for diving and sun-worshipping. But Catholic East Timor is similar, in other ways, to another Southeast Asian neighbor – Muslim Brunei-Darussalam. The economies of both countries depend dangerously on gas and oil – with energy making up almost 80 per cent of Timorese gross domestic product (GDP) and close to 100 per cent of government revenue.

But East Timor is much poorer than the Sultanate, with annual per capita income – adjusted for purchasing power parity – at just over US$21,000 compared with Brunei’s US$54,800. And while Brunei’s oil and gas will run out sometime in the coming decades, the Sultanate still has vastly more hydrocarbon reserves than East Timor, whose oil and gas could run dry in around 10 years.

But those energy-inflated income statistics must seem like a cruel joke to most East Timorese, with three out of four of them struggling with a subsistence living in the countryside. In fact, East Timor’s case might well highlight the nonsense of extrapolating anything from data on per capita GDP for energy export-dependent countries. The reality in East Timor is that many rural families do not have electricity and 43 per cent of all households do not have access to clean water.

There’s also an annual lean season, when food assistance is sometimes needed, meaning almost 60 per cent of children under five years old are stunted. The United Nations Special Rapporteur on Extreme Poverty and Human Rights, Magdalena Sepúlveda – who is the source for these statistics – reported in late 2011 that “the extent and depth of poverty in Timor-Leste is even more severe than the income poverty statistics (which show almost half the population below the poverty line) suggest.”

While the macro economy – including gas and oil – has been growing at close to or even above double digit figures for the past several years, the East Timor government published figures that show non-oil GDP growing 7.8 per cent in 2012, an election year, with vaguely-explained sectors such as “Information and Communication” growing 19.6 per cent and “Public Administration” up 11 per cent.

Government spending, funded by oil and gas money, of course, seems to account for most of the non-petroleum growth.

It’s not just the government in Dili that is citing such data as signs the country is better off than the plight of its citizens suggests. On July 24, the United Nations Development Program’s annual Human Development Report listed East Timor as a “Medium Development Country” – ranked 128 out 187 countries – up from “Low Development” status, while the World Bank too lists East Timor as a lower middle-income country.

East Timor is parking a portion of its energy earnings in a sovereign wealth fund – meant to “contribute to a wise management of petroleum resources for the benefit of both current and future generations.” With almost US$16 billion in rainy day savings as of March 2014, East Timor has money in the bank (and some in foreign stock markets) for when the oil and gas run out – but will there be enough to tide the country over while it makes the adjustments needed to bolster other possible earners-  such as tourism, coffee, fishing and farming?

Minister of State Agio Pereira – touted as a future prime minister after incumbent Xanana Gusmao steps down – said “Timor-Leste’s Petroleum Fund is growing well and generating good returns that strengthen its sustainability. Our strategy to use the Petroleum Fund to develop critical sectors to support the economic diversification of our nation is a sound one.”

But Dili think tank La’o Hamutuk says current spending plans are skewed, pointing out that agriculture, the sector in which most people work and depend on for a living, will get only 2 per cent of state spending in the coming year. East Timor looks like it faces the same so-called “resource curse” that has blighted other poor energy-dependent former colonies, such as Angola, with attendant rent seeking and prevarication by government over tough policy decisions.

So far, there isn’t much sign of investment coming outside the energy sector. Starbucks might well buy Timorese coffee – another possible growth sector, and the country’s sole export of note outside of oil and gas. But for the most part, the sector does not currently generate much money, with poor, under-equipped and under-trained farmers selling ripe cherries to middlemen and onward out of the country for processing, where the real coffee money is made.

Even the announcement of a new Australian-backed cement factory in Baucau, the second city, which is due to open in 2015, was the subject of a blaze of official publicity. Such is the dearth of these kings of good news business stories in East Timor, where the government has pinned its hopes on a breakthrough in negotiations over an untapped gas field in the Timor Sea and, it hopes, the subsequent building of a liquefied natural gas (LNG) processing plant on the southern Timorese coast.

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