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Timor – challenges for the new government – Part 1

Summary:
The citizens of Timor-Leste went to the polls on Saturday in an effort to elect a government. The reports last night indicate that Xanana Gusmao’s Party, in a three-party coalition Parliamentary Majority Alliance (AMP, which includes Taur Matan Ruak’s group) have toppled the incumbent Fretilin leadership. At the last election (July 2017), the Fretilin Party led by Mari Alkatiri was able to form minority government (with Democratic Party support) after a third party (KHUNTO) pulled out. A stalemate emerged. Some commentators called it a ‘constitutional crisis’, in that, the minority government could not function effectively. After some years of stable politics, Timor-Leste has been going through a period of political volatility as a new generation of politicians enter the scene and replace

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The citizens of Timor-Leste went to the polls on Saturday in an effort to elect a government. The reports last night indicate that Xanana Gusmao’s Party, in a three-party coalition Parliamentary Majority Alliance (AMP, which includes Taur Matan Ruak’s group) have toppled the incumbent Fretilin leadership. At the last election (July 2017), the Fretilin Party led by Mari Alkatiri was able to form minority government (with Democratic Party support) after a third party (KHUNTO) pulled out. A stalemate emerged. Some commentators called it a ‘constitutional crisis’, in that, the minority government could not function effectively. After some years of stable politics, Timor-Leste has been going through a period of political volatility as a new generation of politicians enter the scene and replace the older stagers who were dominant at the formation of this tiny island state in 2002. I won’t go into the politics of the election battle but both major parties promised to fast-track economic development to make some dent into a growing poverty problem. This is a country that has been enduring decades of foreign occupation and before that more than 250 years of colonial servitude. The latter (Portugal) imposed Catholicism on the people while the former (Indonesia) spat-the-dummy when they were finally forced out in 1999 and destroyed vital public and private infrastructure as they marched back across the border.

Introduction

After shedding Indonesians, the next exploiters to line up (apart from the shocking treatment Australia has handed out over territorial borders) was the international multilateral institutions (IMF, the World Bank, and the UN) – the usual suspects – who made sure that economic policy would stay within tight neoliberal parameters and prevent the new independent government from creating an effective development path.

For background on the way in which the people of Timor-Leste were abused by the Portuguese, the Indonesians, Australia – the book by James Dunn (1983) – Timor: A People Betrayed – is worth reading.

The Australian government, anxious to appease Indonesia, also betrayed our own citizens, over the murder by Indonesian troops of five journalists working for Australian media at Balibo (Timor) in 1975 and the deliberately cover-up that followed. The Australian government is still refusing to release documents relating to that incident.

The movie Balibo is worth watching in that regard.

The Australian government knew in advance that the Indonesians were going to ‘re-colonise’ Timor – that is, brutally invade it – in October 1975, just a month before the invasion. We abandoned a people who had nurtured our own soldiers during the Pacific fight against the Japanese during the Second World War.

When the journalists were murdered by the Indonesians in 1975, the Australian government knew what had happened but maintained in official statements to all Australians that they were officially “missing”.

It is one of many examples of our national shame.

Falling into line with the IMF and World Bank – anti-development

When Timor-Leste finally achieved independence they fell into the neoliberal hands of the IMF and the World Bank.

The choice to adopt the US dollar as its currency and to impose strict fiscal rules on how it could utilise its massive Petroleum fund has meant that economic development has been retarded and poverty rates have increased.

Things could have been very different if the government had have adopted their own currency and utilised their petroleum resources differently.

And, looking ahead, Timor-Leste could deliver much better outcomes for its 1.2 million citizens if they abandoned dollarisation and realised that the nation needs a lot of upfront public investment in order to develop the physical and human infrastructure.

And to achieve that, the Government would have to kick out the bevy of international officials and consultants who continue to preach the neoliberal austerity bias.

In the lead up to the election, the international press was quoting a so-called “independent policy analyst” who also happens to be a postgraduate student at an Australian university, as saying (Source):

Everyone in Timor Leste has been talking about economic diversification and a focus on agriculture, but it is still unclear what they are going to do about it …

You have to spend less and deliver more – that is the hard task the future government will have to face.

That is the problem. The nation has been taken over by this austerity mindset couched in claims that “its main oil and gas fields will run dry by 2022 and it will go bankrupt by 2027”.

It will certainly go bankrupt if its natural resource revenue runs out and it continues to use a foreign currency.

In January 2018 then the Institute of Business (IOB) in Timor-Leste, which is a private for profit education provider in Dili hosted a workshop which considered whether Timor-Leste should have its own currency.

The speakers at that workshop all agreed that “it is too soon for Timor-Leste to implement a national currency”.

The so-called Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk) published its summary of the workshop (March 16, 2018) – 18 Years Later: Should Timor Drop the U.S. Dollar? and claimed:

In the case of Timor-Leste, national institutions have not yet proven that they can resist the temptation to print more money during economic hard times …

The biggest risk is the potential use of cheap and quick fixes for the economy – such as printing money to reduce a budget deficit or providing credit to banks – which could have devastating impacts on inflation and exchange rates in the future.

Using the U.S. dollar protects countries from macroeconomic crises such as hyperinflation, which can result from dangerous monetary policy decisions, such as uncontrolled printing of money.

In the same article, La’o Hamutuk chose to reinforce its message with this cartoon.

Yes, the Zimbabwe hyperinflation story … again.

Timor – challenges for the new government – Part 1

La’o Hamutuk failed to source the cartoon but it was originally published by a cartoonist who works for the the US organisation ‘Americans for Limited Government’, which regularly rails against public employment, trade unions, fiscal deficits, China, public healthcare and education, regulations protecting workers, and all the rest of it.

They have a campaign they call ‘BuildWallNow.org’, which publishes opinions such as:

Our wall should have 2 wire fences and a minefield in between the fences. We should also have Gun Towers in strategic areas along the wall. Our gun towers should be equipped with machine guns, missiles , rockets, and plenty of grenades too. Our new Gun Tower officers should have the legal authority to kill any man , woman, or child attempting to enter our country illegally!

Crazy stuff. Extreme neoliberalism.

La’o Hamutuk claims it “provides non partisan analysis” but fails badly when it seeks to supplement its arguments with the worst propaganda that is available on the Internet.

Its assertions about what would happen if Timor-Leste was to introduce its own currency are drawn from the same extremist literature that they promote on their WWW site (without attribution).

Such organisations should be disregarded in any serious discussions of economic development in Timor-Leste.

At the same workshop, the The Minister of Planning and Finance in the outgoing government spun the usual IMF line when he addressed the January workshop (Source).

The following claims were made:

1. “critical factor is ensuring the independence of the central bank in conducting monetary policy” –

Please read – Censorship, the central bank independence ruse and Groupthink (February 19, 2018) and The sham of central bank independence (December 23, 2014) – for more discussion of that idea.

2. “Fiscal discipline, sustainability of public finances, structural reforms to ensure competitiveness and flexibility of the economy are basic requirements”.

And what is fiscal discipline according to the outgoing Minister of Planning and Finance?

Well, as you might suspect:

… fiscal discipline requires an appropriate architecture for the management of fiscal risk. Fiscal Responsibility Laws, Fiscal Rules and Fiscal Councils are the three pillars usually recommended … A robust fiscal rule is urgently needed and should probably be enshrined in Law … lower the deficit …

The usual IMF austerity straitjacket which has been shown on countless occasions to be inflexible, undemocratic and generates disastrous pro-cyclical policy interventions which exacerbate negative non-government spending cycles.

3. “The quality of public services, the reach of the social programs and the promotion of development require adequate and sustainable funding of Government”.

The Timor-Leste is financially constrained because it uses the US dollar as the currency.

But with its own currency, such a financial constraint would be lifted and the Minister’s statement would become erroneous.

4. “Sound and efficient public finance management will require the enforcement of the principle of cost recovery to ensure the sustainability and quality of services of utilities”.

Neoliberal userpays!

The claim is not supported by the evidence from other nations. Cost recovery, user pays etc deliver sub-optimal usage and when coupled with privatisation of essential services (energy, transport, water) result in inefficient, price-gouging.

The new government of Timor-Leste must decide which ‘public goods’ they wish to provide and then eschew any notion that they have to generate ‘market’ returns via ‘cost recovery’.

A vastly improved public transport system, provided free to the user, would, for example, reduce the reliance on imported cars.

In Part 2, I will consider these issues in more depth.

The resource curse

My mainstream colleagues claim that Timor-Leste has to escape the so-called – Resource Curse – which posits that “countries with an abundance of natural resources (like fossil fuels and certain minerals), tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources.”

The sort of pitiful narratives about this so-called problem extent to claiming that these nations are like “lottery winners who struggle to manage the complex side-effects of newfound wealth”.

There are claims that nations with massive natural resource wealth just squander it or use up all the available resources in exploiting the natural wealth.

Timor-Leste has hundreds of thousands of idle workers who could be brought into productive use – something like 70 per cent of those below 30 years of age are unemployed.

The problem for Timor-Leste has been that the resource wealth has been ‘captured’ by outsiders – advisors, consultants, IMF and UN officials – who have imposed a neoliberal vision on how the resource wealth should be used.

I will have more to say about the resource curse in Part 2.

I last explored these issues while I was doing field work up in the islands between the Australian mainland and Timor-Leste in 2012-14.

Please read my blog post – Timor-Leste – beyond the IMF/World Bank yoke (November 20, 2012) – for more discussion on this point.

The Timor-Leste Strategic Development Plan 2011-2030

In 2011, the Government of Timor-Leste introduced their nation-building plan – Timor Leste Strategic Development Plan 2011-2030 – which aimed to fast-track the development of public infrastructure and human capital development.

We learned that:

The Strategic Development Plan covers three key areas: social capital, infrastructure development and economic
development …

The true wealth of any nation is in the strength of its people. Maximising the overall health, education and quality of life of the Timorese people is central to building a fair and progressive nation.

The following graphic taken from the plan outlines the scope of their ambition back in 2011.

Timor – challenges for the new government – Part 1

In relation to the Strategic Development Plan (SDP), the outgoing Minister for Planning and Finance claimed at the January 2018 Workshop that Timor-Leste has:

… made remarkable progress in the implementation of the SDP.

Due to the low level from which we started, we … decided to frontload expenditures to alleviate poverty, to accelerate the building of human capital, the construction of infrastructures and the expansion of public services. However we are currently in a juncture where we ought to take stock of the challenges ahead and adopt the right policies …

Overarching the new set of policies are the goals of achieving a higher efficiency in the use of public funds and ensuring fiscal sustainability. This will require limiting excessive withdrawals from Petroleum Fund, a better allocation of funds among sectors and linking budget allocations to policies and outputs.

The creeping stranglehold of neoliberal fiscal austerity is taking hold in Timor-Leste, which will subsume the new government unless it takes decisive action to avoid the destructive IMF-style Groupthink.

But an evaluation of the SDP goals relative to the reality in 2018, would lead one to conclude that the Plan has failed.

The outgoing Minister’s claim of remarkable progress belies the facts.

The following graph shows annual real GDP growth for Timor-Leste from 2000 to 2017, which covers the entire span of available data.

Timor – challenges for the new government – Part 1

Real GDP growth fell to -1.8 per cent in 2017 after recording 5.3 per cent in 2016.

Why?

In its – Timor-Leste Economic Report March 2018 – the World Bank admits that this sharp:

Gross domestic product … growth is expected to have fallen sharply in 2017 to a projected -1.8 percent from 5.3 percent the year before. This contraction is driven by a reversal of trend, with government spending contracting in 2017 following years of positive GDP growth driven by rapidly expanding public spending …

Contracting government consumption and investment in 2017 will together exert the biggest drag on GDP growth. Overall public spending fell by 24 percent, and since the value added from government consumption and investment corresponds to 75 percent of GDP, this constitutes a very large adjustment.

The Timor-Leste Ministry of Finance data shows that in 2017, public expenditure fell sharply.

The following graphic comes from the World Bank report cited above and shows the fiscal austerity that was imposed in 2017, as the ‘IMF fiscal sustainability’ narrative started to gain traction.

Spelling errors aside, it is no wonder growth fell sharply in 2017, given that the public sector expenditure comprises around 75 per cent of total Timor-Leste GDP.

Timor – challenges for the new government – Part 1

The World Bank also claimed that “the budget consolidation that occurred in 2017 is a positive development” because it would help move the nation towards fiscal sustainability.

As we will discuss tomorrow, the IMF/World Bank concept of fiscal sustainability is deeply flawed when applied to a nation that issues its own currency.

It is even more blinkered when applied to a nation that has dollarised. Sure enough, if a nation does not have its own currency and uses the US dollar then it has to get US dollars through trade.

In Timor-Leste’s case this is via its petroleum and coffee sales, which are both invoiced in US dollars. A situation could arise where the nation can no longer generate US dollars via its external sector and so government spending would be deeply constrained.

So when the likes of the World Bank are cheering on deep cuts in government spending, which has led to a sharp contraction in real GDP growth, they are doing so in the artificial environment of dollarisation.

Do away with that currency choice, that is, if Timor-Leste adopted its own currency, then the situation changes rather dramatically.

The government of Timor-Leste could purchase goods and services that would be for sale in that currency, such as local agricultural produce, idle labour and run continuous deficits to maintain real growth and development.

The outgoing Minister for Planning and Finance told the January workshop that there was a need for tight fiscal rules to stop the government spending more than the IMF thinks it should.

He said:

Timor-Leste adopted from the start a strong framework guiding the use of its oil resources and there is an implicit fiscal rule in the governance framework of the Petroleum Fund (PF): the Estimated Sustainable Income (ESI), 3% of the Petroleum Wealth calculated yearly, may be used to finance the Budget.

However, this rule isn’t in place since sizable and increasing excessive withdrawals have been made since 2014 to fund the policy of frontloading of expenditures. Excessive withdrawals have been used not only to finance the construction of infrastructures but also to finance recurrent expenditures. There is currently no constraint to public expenditures and the incentives for the efficient use of public funds are weak. Moreover, following recent trends of excessive withdrawals would lead to a more or less rapid depletion of the resources of the PF.

I will discuss the fiscal situation in more detail in Part 2 tomorrow.

But relating that statement to the evidence, if the Government had constrained its expenditure as suggested and as the IMF has been recommending, then the GDP growth situation, which between 2013-16 was moderate to say the least, would have been much worse.

Even the World Bank acknowledges that the collapse in GDP growth in 2017 was directly due to major cuts in government spending motivated by a misguided (IMF) concept of fiscal sustainability.

A nation cannot develop if it is contracting due to fiscal austerity.

Other indicators are similarly indicative of a failing development strategy in recent years as the conservative forces mount.

According to the World Economic Outlook database, in 2010, Timor-Leste was ranked 116th (out of 192 nations) in terms of Gross domestic product per capita (Purchasing power parity; international dollars).

The figure was 6,623.762 units (Purchasing power parity; international dollars).

By 2016, five-years into the Plan, Timor Leste had slipped to 131st (out of 192 nations) and its had fallen by 9.6 per cent to 5,986.39 units (Purchasing power parity; international dollars).

There are many dimensions of that failure.

The World Bank report (March 2018) shows that:

1. “More than 40 percent of the population is estimated to lack the minimum resources needed to satisfying basic needs”.

2. “30 percent of the population still lives below the … international poverty line”.

3. “half of all children suffer from stunting due to a lack of adequate nutrition, and calorie consumption across the population is very low”.

4. “While all income deciles have seen some growth since 2007, the top decile has also seen the fastest increase in income” – this is a major issue and I will address it in more detail in Part 2.

5. “Chronic malnutrition remains stubbornly high and is amongst the most severe in the world”.

6. “At the root of the persistent social development challenges is chronic poverty that is starkly manifested through high levels of hunger and malnutrition. Poverty, hunger and associated ill-health fundamentally inhibits households from make making investments necessary to access opportunities; good health and adequate education.”

Yet, the World Bank still applauds the fiscal austerity that is killing growth and is also standing in line with the likes of the IMF to place government spending in a straitjacket on the ruse that it will run out of money if it eats into the Petroleum Fund.

On April 3, 2018, the UNDP released its – Timor-Leste National Human Development Report – which showed how far Timor-Leste is from achieving anything like reasonable outcomes.

1. “A majority of young men and women, around 88 percent, experience deprivations in education”.

2. “Youth in Timor-Leste are performing extremely poorly in areas of education, such as literacy … ” etc

3. “youth are not participating in an adequate quality and variety of education, training and skills development opportunities to be able to transit successfully from education to work.”

4. “87 percent of women and 77 percent of men … did not have jobs, and only 46 percent were studying or undergoing training … suggesting that a large share of youth are idle.”

5. “Community vitality … 90 percent deprivation … low levels of perceived security and limited social support.”

6. “The private sector … provides employment to only 5 percent of the workforce”.

Overall, the outgoing government’s strategy has increasingly delivered failed outcomes.

A major shift in policy emphasis if required – towards job creation, decentralised infrastructure development, and more. I will discuss these priorities in Part 2.

Overall, the nation has to escape the yoke of the likes of the IMF and the World Bank and realise that their concepts of fiscal sustainability will leave the nation wallowing in poverty for decades to come.

The Associated Press article (April 16, 2018) – Nobel laureate blasts East Timor’s failure against poverty – reported the former President (Jose Ramos-Horta) as saying:

If I had been a prime minister for 10 years, I would have focused all those 10 years on quality education, on rural development and that means water and sanitation for the people … The study by the U.N. on our social economic indicators, particularly on malnutrition and children’s growth are extremely negative, I’d say total failure over the last 10 years

Conclusion

In Part 2, we will discuss the currency issue, the use of the Petroleum Fund, and the need for widespread public sector job creation (via a Job Guarantee).

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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