One New Way to Boost Timor-Leste’s Economy

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One New Way to Boost Timor-Leste’s Economy

With the appointment of a new premier, the country should look at the policy as an option for managing its economy.

One New Way to Boost Timor-Leste’s Economy

Protesters holding a protest banner chant slogans as they march towards the Australian Embassy building in Jakarta, Indonesia, Thursday, March 24, 2016. Dozens of people staged the rally supporting East Timor in the dispute over oil and gas revenue-sharing between the countries.(AP Photo/Dita Alangkara)

Credit: AP Photo

Now that Timor-Leste has a stable government and a new prime minister after almost of year of political uncertainty, attention will hopefully be turned to the economy and, specifically, its diversification.

Prime Minister Jose Maria de Vasconcelos, better known as Taur Matan Ruak, was sworn in this week. He has spent years arguing against the economic program of his predecessors who, he says, favored rising state budgets and significant investment on frivolous megaprojects with money that could have been spent on economic diversification and social programs for the poor.

Much of this comes down to the question of what politicians are to do with the country’s sovereign wealth fund, which collects revenue from the numerous gas fields surrounding the country. Capital in the fund now stands at $16.85 billion, according to the most recent official report.

Some say the government is spending this money recklessly, using more and more of it to pay for needless vanity projects. Economists argue that the fund could be depleted within the next decade if things don’t change. Others, however, contest that while the government should use money from the fund, they must use it more wisely.

One possible solution that hasn’t gained much traction in Timor-Leste, though it arguably should, is Universal Basic Income (UBI), a hot topic globally at the moment. An article about Timor-Leste and UBI appeared in the Basic Income Studies journal in 2010, written by three academics, David Casassas, Daniel Raventós and Julie Wark. Not much has been said about it since, though.

A very basic definition of UBI is as a single monthly payment from the government to everyone in society. This is regardless of wealth or employment status, and is supposed to cover the basic costs of running a household, so housing and food. More detailed explanations can be found elsewhere.

In their paper, Casassas, Raventós, and Wark walk through a few scenarios. Bear in mind they use Timor-Leste’s population figure from 2010, roughly 100,000 fewer people than today, so costs are slightly higher nowadays. One example they give is a UBI of $30 per person per month, so $360 per year. This, they calculate, would cost the government $432 million per year.

A second scenario uses $30 per month for everyone aged above 16 years old, and $15 for those younger. This would cost $324 million per year. A third option, of $20 per month (or $0.60 per day) for the entire population, would cost just $288 million per year. They write of the latter:

With a [UBI] of $20, a poor family with 6 dependents would receive a guaranteed monthly income of $160 or $1,920 per year. In a hamlet of, let’s say 20 similar families, this [UBI] would bring in $3,200 per month or $38,400 per year, a figure which gives an idea of what this income flow might mean for small communities like those in East Timor.

A UBI of $30 per person per month for all age groups, based on today’s population, would now cost the state roughly $468 million per year. Such a UBI for a household of 6 people (the UN recently estimated the average household size in Timor-Leste to be 5.8 people) would mean it receives a guaranteed payment of $180 per month, or $2,160 per year.

Consider where the money could come from. At present, Timor-Leste’s sovereign wealth fund has about $16.85 billion remaining in it. This is likely to be boosted considerably if extraction begins in the Greater Sunrise gas fields. Negotiations have taken years, mainly over maritime divisions between Timor-Leste and Australia, though progress was made in March when the two countries signed a treaty on these boundaries.

Still, an important decision has yet to be made on where to process the oil and gas, which could be worth between $30 and $50 billion, depending on oil prices. Timor-Leste has argued for it to be done onshore at a site in the south, while Australia and the Greater Sunrise oil companies propose offshore or in northern Australia, which is the easier and quicker option.

The new treaty provides an incentive for Timor-Leste: If production is conducted offshore or in Australia, Timor-Leste will get 80 percent of the revenue. If it’s done in Timor-Leste, it will only get 70 percent percent This extra 10 percent could equate to roughly $3.5 billion, according to reports. Alone, that would be able to support a UBI of $30 per month for a trial period of at least seven years.

How about what’s left in the wealth fund? Of course not all of it will be available since a good proportion is currently used to pay for rising state budgets – and its purpose is to be saved for future generations. We will have to see if the newly formed government will reverse the trend of increased budgets.

But let’s imagine that a quarter of the current fund ($4.2 billion) is put aside to pay for UBI. That would be able to support a basic income of $30 per month for just under nine years. If the revenue from the Greater Sunrise project is added, a UBI of $30 per month could be funded for 20 years, if not more.

Other revenue options are additionally available, meaning not everything has to come from the wealth fund. One could be to reform the taxation system so the wealthy pay more towards UBI. Another could be a raise in excise taxes. Moreover, money would be saved by trimming current social programs. The logic of UBI is that, if it works, in the long run it creates more taxpayers who replenish the fund, as well as an improved economy.

Numerous countries and states across the world are now experimenting with forms of UBI, including India and Taiwan. But one close example for Timor-Leste would be the American state of Alaska which, through its oil-driven Alaska Permanent Fund, pays an annual dividend to all its inhabitants, except those imprisoned.

One revolutionary approach could be, in cases where it is possible, for the money to be paid directly to the matriarch of the household. This approach would have the effect of ensuring the monthly dividend goes to supporting gender equality and, just as important, is spent wisely.

But arguably the greatest benefit of UBI is that it assists Timor-Leste’s economic transition. For years, economists have advised it to diversify its economy: to produce more food domestically, embrace technical training, and boost small enterprises. One problem, however, is that such transition means workers often have to acquire new skills. But retraining can mean leaving employment for a number of months. For the poor or, even, precarious middle-class, this is prohibitive since it means they could face months without an income. But with a UBI of $30 per month, a family of four would receive the same as the current minimum wage, $115 per month, even if the breadwinner isn’t in employment – and presumably is out learning new skills.

The aforementioned academics note that UBI “is not a panacea that would solve all the social and economic problems” of Timor-Leste. But it would make it easier for economic diversification and to “spread opportunities for people to participate in productive activities.” It is a policy that a progressive-minded politician, like newly-inaugurated Ruak, should at least consider.