1.2 Timor-Leste’s economy: Oil, poverty and lack of economic diversification

When Timor-Leste became the world’s newest nation in 2002, it faced the task of building the country from scratch – including “inventing its government, economy and laws.” A local NGO writes:

Since 2005, revenues from large deposits of oil and natural gas under the Timor Sea have allowed the government to invest in infrastructure and improve basic service provision. This resulted in a significant drop in child mortality and increases in the years of schooling as well as per-capita income. And yet, the fundamental economic structure remains largely unchanged and embodies the perils of small island developing nations. According to the UN, they are constrained by a small resource base, which deprives them of economies of scale; small domestic markets and heavy dependence on a few remote markets for import and export; vulnerability to irregular international transport volumes; the high costs of energy, transportation, communication and servicing; and, as a result, few profitable business opportunities. Furthermore, only 15% of Timor-Leste’s mountainous terrain is cultivatable.10 

There is an urgent need to find ways to diversify state revenue and generate sustainable income opportunities for poor and vulnerable households through the private sector:

Timor-Leste is one of the world’s most oil-dependent countries, but oil funds are likely to run out within the next ten years.

More than 90% of the country’s state revenues come from oil and gas. 11  Of the country’s 2015 budget of USD 1.6 billion, 1.3 billion was withdrawn from the Petroleum Fund.12  At current spending rates, oil funds are projected to be depleted by 2025.13 

There are only limited signs of economic diversification.

While non-oil GDP is currently growing at about 5% a year – the highest rate in the Pacific region 14  - this is largely driven by infrastructure projects financed by the Petroleum Fund, and not by productive growth in agriculture, services or manufacturing.15  Even though oil and gas revenues initially helped to deliver a peace dividend to the population, they now clearly risk turning into a ‘resource curse’.

Most Timorese still rely on subsistence or small-scale agriculture and poverty is widespread.

According to data from the latest Survey of Living Standards 41.8% of Timorese live below the national poverty line of approximately $1.59 per day and 30.3% live below the international poverty rate of $1.90 per day. 16  There is widespread agreement that the situation may be even more severe. Almost 70% of the population could be suffering from ‘multidimensional poverty’, that is, severe deprivation across measures of health, education and living standards (based on 2010 data),17  and more may be vulnerable to poverty. And yet, subsidised imports undermine commercial incentives in agriculture – as do government hand-outs of rice and other staples, and direct procurement from farmers above market prices. High labour costs – partly due to the veterans’ pensions (given to those who resisted the Indonesian occupation) and a low population density – make it difficult to hire labour and expand production.

More than half of Timor-Leste’s population is under 17 and will need jobs soon.

Timor-Leste’s population has more than doubled in the last 35 years. The growth rate was 15.51% between 2004 and 2010, and 9.46% from 2010 to 2015 18  – so a large number of young adults will be looking for income sources by 2025 when the oil funds are projected to run out.19  The population of 1.2 million is largely rural-based, but it is most concentrated in the capital Dili, with 234,000 people.20  Data from 2010 suggest that urban population growth may be twice as high as rural growth.21 

population under 17th years old in timor leste need-jobs

Access to incomes, jobs and services in both urban and rural areas will, therefore, be vital to consolidate hard-won stability and achieve a more prosperous future. World Development Report 2011 found that post-conflict countries take 15 to 30 years to transition out of fragility and to build resilience,22  which confirms that Timor-Leste is still in a critical phase for defining its development pathway. While higher per capita incomes have been linked with a lower conflict risk,23  poverty can be a prime motivator in unrest and civil war. 24  Negative economic shocks, as could happen once the oil and gas run out, further increase the risk of conflict.25 

And yet, observers note that “too little is being done to plan for a post-oil economy.”26  Initial business activity largely responded to the UN presence, but there has been a lack of strategic support for private investment. As a result of unclear and incomplete legislation and insufficient personnel capacity,27  Timor-Leste was ranked 172 out of 189 places in the 2016 World Bank Doing Business Index.28  Most aid programmes have mainly focused on humanitarian aid, state-building and direct service delivery to the poor, instead of economic development. Critics argue that “aid in Timor-Leste has had little impact on the local economy...and long-term vision.”29