The small island-state of Timor-Leste exemplifies the challenge of resource-based development for a poor country well-endowed with a valuable natural resource. Timor-Leste, which gained its independence in 2002, has accumulated $13 billion in its petroleum fund in less than a decade. Some of the largest multinational oil companies are operating in the country, and the revenues continue to flow. And yet, while Timor-Leste has seen very notable improvements in its development indicators in the past few years, it continues to face a massive challenge of converting financial wealth into economic development. There are also heated debates about how to spend the oil revenues, or whether to spend them at all as opposed to accumulating them in an overseas fund.
Oil wealth by itself does not end a poor country’s problems. Timor-Leste’s malnutrition and stunting rates remain among the highest in the world. The electricity grids are incomplete. Many roads are in disrepair. The education system is in need of massive upgrading, and many of those seeking higher degrees now go to Indonesia or elsewhere to get them. The government is committed to transforming its economy into that of a middle-income country in a short time. In 2011, it produced a 20-year strategic development plan that laid out the priorities for public investment in a number of key sectors. While Timor-Leste has made and continues to make great progress in its development trajectory, the country illustrates the basic fact that resource-based development is extremely challenging, even for a small, democratic and financially well-resourced country.
At the core of economic development for a poor country is a successful strategy for multidimensional capital accumulation: human capital, infrastructure capital, business capital, natural capital, and technological capital. One obvious complication is that these various types of capital are complementary: The benefit of one depends on the presence of the others. A government shouldn’t focus first on roads and then on schools, for example. Without roads, it may be impossible for children to get to school. Without education, the economic benefit of roads may be very small.