You might wonder why Australia even bothered with East Timor. It’s a wretched, seemingly harmless little country. There aren’t any terrorists here. There’s no prospect of some future Timorese army ever threatening Australia. Why invest a billion dollars and a thousand troops in an open-ended “stabilization operation,” when the stakes seem so low?
South of Timor, in the Timor Sea that separates the island from Australia, lie a handful of oil fields worth more than $20 billion to whichever government claims them. Technically, by U.N. standards, most of the fields lie in Timorese territorial waters. Australia doesn’t recognize the U.N. standard and has grabbed more than half for itself. Of course, Canberra puts a happy spin on this, according to a February statement from Foreign Minister Alexander Downer:
The International Unitisation Agreement (IUA) and the Certain Maritime Arrangements in the Timor Sea (CMATS) Treaty together provide stable legal and fiscal regimes for the exploration and exploitation of petroleum resources in the Timor Sea between Australia and East Timor to the benefit of both countries. CMATS puts on hold the Parties’ claims to jurisdiction and maritime boundaries in the Timor Sea for 50 years. Australia has agreed to share equally with East Timor the upstream revenues from the Greater Sunrise reservoirs, a move which will help underpin the economic independence of our neighbor.
As a consolation, Canberra is offering $40 million annually in aid on top of $400 million already appropriated. Chump change, right? But before you rush to condemn Australia for “stealing” Timor’s oil, consider that sometimes a massive injection of oil money is actually bad for developing countries. According to Professor Vafa Ghazavi from the University of Sydney, a sudden flush of cash sometimes just loads the pockets of corrupt officials and sparks fighting between the haves and have-nots:
The “resource curse” has plagued many resource-rich societies, intensifying economic stagnation, conflict, income inequalities, and political suppression. This is a complex phenomenon with diverse factors operating in each case. In oil-dependent Nigeria, for instance, a lack of transparency and endemic corruption (both private and public) has prevented billions of dollars being spent on development. Despite the generation of significant oil revenues since the late 1950s – about $350 billion between 1965 and 2000 alone – the vast majority of the population lives in poverty with life expectancy in 2003 averaging 43.4 years. It is unsurprising, then, that the poor distribution of natural resource wealth in Nigeria has also triggered divisive social tensions. Looking beyond oil, diamonds in Sierra Leone fuelled a rapacious civil war and state collapse, undercutting any potential for economic or social progress. Although possessing abundant natural resource wealth, Sierra Leone currently has a Human Development Index (HDI) ranking of 176, the second lowest of all countries listed by the United Nations Development Program.
Sure enough, despite several billion in oil revenue in recent years, East Timor still hasn’t begun any serious rebuilding from the 1999 war that saw it break away from Indonesia – much less is there any major development aimed at elevating the country from its present Third World status, according to the International Monetary Fund:
The economy remains fragile. Unemployment is high, 40 per cent of the population lives below the poverty line, and social indicators are poor. Human capital remains scarce, physical infrastructure inadequate and financing opportunities limited.
For the time being, it might actually be better for Timor to rely on foreign aid – which usually comes with big strings attached and with a lot of bureaucratic oversight, thus minimizing the effects of corruption – than to just go it alone with big wads of petrodollars.
“The pace and quality of economic development will depend on Timor-Leste’s ability to manage its new oil/gas wealth effectively,” the IMF reports. And that management would probably benefit from strong relationships with developed countries whose accounting is transparent and whose leaders aren’t siphoning oil royalties into their personal bank accounts.
In fact, the most encouraging development for Timor’s economic future is the government’s establishment of a “savings account” for oil revenue in 2005. The Petroleum Fund, which now totals more than a billion dollars, is aligned with the U.K.-based Extractive Industries Transparency Initiative, according to Professor Ghazavi:
Endorsed by some twenty countries, EITI represents a broad coalition of governments who recognize the need for effective management of natural resource revenues to achieve sustainable development and poverty reduction. Bringing together in dialogue a diverse range of actors, including governments, companies, multilateral organizations, and civil society, the Initiative has been able to outline a set of “criteria” which EITI-supporting countries are expected to implement.
Of course, Timor did not have to share its oil fields with Australia in order to sign onto EITI. But do you think the Timorese government, which the IMF described as having a “legacy of corruption,” would have bothered with EITI if not for Australia’s influence? Even at the cost of potentially billions of dollars in oil revenue ceded to Australia, joint exploitation of Timor’s oil might be worth it for this struggling country.