User:Risopatron

Lessons Learned for Poverty Reduction from the United Nations Peace Building Operation in East Timor. (*) Carlos R. Risopatron. UNOTIL Economic Advisor at the Prime Minister's Office, email: carlos.risopatron@gmail.com phone: 670 7287973.

Executive Summary.

As UNOTIL mission is coming to an end, and Timorese authority starts poverty reduction programs in the districts, lessons for future UN peace building missions are identified in this paper. Main lessons learned on poverty reduction are as follows: (i). if economic growth and poverty reduction is an objective during the peace building process, then the importance of economic openness and public investment in the productive sectors cannot be underestimated; (ii). Nutrition situation of the population must be monitored early in a peace building process, and the most vulnerable groups must be targeted and included in the design of the operation; (iii). if the country is poor, a rural development program must be designed early in the peace building operation, as a basic requirement for increasing food productivity, reducing extreme poverty in the short term and aid-dependency in the medium term. (iv). population policy must focus in early census and surveys for decision making on socioeconomic issues, and information must be delivered and disseminated on time at all levels, in particular, information on family planning issues, population access to paid labor force and extreme poverty hot spots. (v). in small economies, the peace keeping exit strategy will reduce local economic activity, therefore some compensation measures must be agreed and implemented with donors, governments, international private sector and NGOs, before the implementation of the UN peacekeeping downsizing process.

1. Poverty reduction means rural development in poor post conflict countries like Timor Leste.

Between 2000 and 2006 UN and Timorese administration expenditure priority was strongly concentrated in education, public sector management and health care. The second group of priorities was power, transport and internal security. Food production (agriculture, fisheries and forestry), water supply, environment and housing are part of the third group, or marginal priorities, therefore is not a coincidence that poverty is increasing at the same time that human development indicators are improving, as recent UNDP reports reveal.

A feed labor force will require less health expenditures, therefore local food production and rural development can be more important than other priorities in the short term. Food productivity is the most important determinant of economic growth when you compare poor countries with positive and negative rates of economic growth. Poor countries that started with high cereal yields per hectare, and that used high levels of fertilizer inputs per hectare, are the ones that tended to experience more economic growth and early poverty reduction. Countries that began with very low cereal yields per hectare, and that used low levels of fertilizer inputs per hectare are the poor countries that tended to experience economic decline.

Timor Leste’s fertility and infant mortality rates in 2006 are similar to those in Sub Saharan countries in 1980, but current adult literacy rates are better than East Asia in 1980. The biggest difference between Asia and Africa is that Asia has had high and rising food production per capita between 1980 and now. The Asian countryside is densely populated, with an extensive road network that can carry fertilizers to the farms and farms output to the markets. In Asia farmers use fertilizers and irrigation and food yields are high. This performance has provided a platform for Asia’s extraordinary economic growth since 1980.

In low income countries like Timor Leste, the poverty trap is mainly a rural phenomenon of peasant farmers, caught in a spiral of rising populations and stagnant or falling food production per person. Increasing farm food crop productivity is a critical aspect of a poverty reduction strategy for Timor Leste. Food production in Timor Leste is the most important private economic activity (discounting government, donors and energy production): farm foods crops are valued over US$ 66 millions a year according to 2003 national accounts. Timor Leste farm food crops value is a good indicator of rural welfare: the value of food crops has been declining between 2001 and 2004, mainly for climate changes, nevertheless there is a strong recovery in 2005.

Timor Leste impoverished farmers could increase the food yields per hectare and quickly end chronic hunger. The poverty reduction strategy must focus in fertilizers, improved agriculture technology, green manures and cover crops, water harvesting, small scale irrigation and improved seeds. A road network interconnecting the districts is the first step. A village truck and storage facilities would allow the villages to sell the grain over the course of months getting more favorable prices. Electricity could be made available to selected districts using a cost effective method (coal power plants and/or non fossil technologies). Safe drinking water and sanitation, investments in basic health and education in most critical districts are a complement for a poverty reduction strategy.

2. Food production and food independency cannot be underestimated in a post conflict situation.

If a peace building operation is coming after a peacekeeping operation, there is a probability that people be unable to feed by themselves> Therefore there is a priority to sustain at least the most vulnerable groups in the most affected regions; it is never too early to fulfill this very difficult objective and the political consequences of not delivering are unpredictable.

The World Food Program reports a severe situation of food insecurity in March 2006 in the western side of Timor Leste: Oecussi, Bobonaro and Covalima. Food insecurity is moderate in the central districts of Liquica, Ermera, Ainaro, Manufahi, Aileu, Manatuto and Dili. Food insecurity risks are low in eastern Timor Leste districts of Viqueque, Baucau and Lautem. The increasing gap between loromunu (western districts) and lorosae (eastern districts) represents an internal security threat that must be addressed to avoid a probable scenario where population expectations may not be met and could result in conflict.

Subsistence activities in Timor are defined as fishing and farming for self consumption. Farming and fishing for self consumption is the main economic activity of the population outside Dili. Main groups of people in subsistence are located in Baucau and Ermera. A second group is in Bobonaro, Viqueque, Ainaro and Oecussi.

Households are close to 195.000 and growing in 2006. One of each five household is headed by female. There are about 37.000 cases where extreme poverty must be heavily concentrated. Districts with high infant mortality rates have high fertility rates as well: in the districts where infants die in large numbers, households tend to have many more children.

More than half of the rural schools have no water and 20% have no latrines in March 2006. In the remote highlands of Timor Leste, children walk long distances to school, are hungry during class and have limited concentration. Piped systems don’t work in the dry season: diarrhea and skin diseases among children are the consequences. Irregular student’s attendance is due to sickness, harvest or market days and absence of teachers. Current response to the school feeding situation will cover not more than 36% of enrolled primary school children in September 2006, and is expected to cover just 61, 5% in September 2007. Uncovered demand for primary school feeding will remain over 38.5% of enrolled primary school children in September 2007.

3. Invest in productive sectors for economic growth during the peace building operation.

Current government and donor’s expenditures are close to 216 million dollars in fiscal year 2004 - 2005 or 234 dollars per capita. Mean annual combined sources expenditures were over US$ 202 million a year between 2001 and 2005 (donors and government). In Timor Leste, the financial effort was concentrated in basic services, infrastructure and governance. Expenditures in the productive sectors clearly underperformed in the last five years, as a consequence the non oil gross domestic product is not growing as desired in a peace building operation.

Public investment programs remain at very low levels in 2006: public employees and the banking authority are the main beneficiaries of public policy. Government budget execution is still very low: FY04 75% of cash. This expenditure execution is most pronounced for capital spending (transport, communications and public works): FY04 29% of cash, and weak in key good and services spending: education 29%, development and environment 33% (FY04). Districts only holding small accounts rather than funds for supporting national programs and local service delivery.

Recent July-December 2005/06 Treasury Report shows that government expenditures performance remains very weak as of early 2006. Low expenditures performance looks generalized in the first half of FY2005/06, with the exception of salaries and wages.

The July-December 2005/06 Treasury report reveals expenditures distribution more concentrated in goods and services, salaries and wages than in capital expenditures. FY2005/06 shows all areas of government expenditures underperforming in the first two quarters. How large is the amount of resources committed and not expended in the same year, in previous four fiscal years? The trend of accounts payable at the end of each fiscal year is growing, from US$ 10.6 million to US$ 19.5 million in the last four years.

Investment plans call for a significant increase in annual infrastructure and basic services expenditures between 2006 and 2010. The structure of government spending is not expected to change dramatically, except by an increase in infrastructure expenses and the relative reduction of governance, production and security expenses.

Currently (2006), combined capital spending is declining by design and implementation bottlenecks of capital development programs. Donors funded spending is decreasing as government expenditure (CFET appropriations) starts to take off as % of total expenditures.

Donor’s recurrent expenditures have been frozen in the last 3 years; at the same time donor’s capital expenditures show a contraction. Government recurrent expenditures show a slow increase, but CFET capital expenditures shows signs of stagnation. As donors expenditures are shrinking, CFET capital expenditures are strengthened, but from a very low base.

Timor Leste government is open to international trade and free market economy for foreign trade activities, nevertheless trade policy is spread between different ministries, and government budget relies on trading taxes. Custom duties 2004/05: just US$ 17 million (51% of non petroleum revenue).

Timor Leste human development index value used to be between the Ruanda and Benin index values and now (2006) is improving over Angola, Guinea Bissau and Mozambique values. Nevertheless current government and donors budget allocation are not enough to reduce the poverty gap: a 6% economic growth a year is the minimum required for achieving the Millennium Objectives, and trade liberalization plus massive private infrastructure investments looks to be the only sustainable policy to achieve the necessary rate of economic growth.

To reduce poverty, Timor Leste must improve its trading position as long as trade promotes growth and growth promotes poverty reduction. Bilateral trade agreements with Indonesia and Australia would lower economic costs for the private sector. Bilateral cooperation and managing cross boundary resources will benefit the Timor Leste economy. Services improvement and job creation in the border districts will deliver benefits to ordinary people were poverty is more concentrated.

Some action points to improve Timor Leste trade flows are: follow up with Indonesia on trade agreement raised in July 2005, initiate discussions with Australian Government about a possible free trade agreement, implement a value added tax base and reduce reliance on trading tax base, establish government working group on ASEAN membership application and train diplomats based overseas as investment and export promoters, creating a IT network between them.

4. Population policy is a critical factor for peace building in poor countries.

In late November 2005, Timor Leste line ministers agreed that conditional monetary transfers or income subsidies were not acceptable instruments for poverty reduction, given the historical experience with Indonesian subsidies and characteristics of the local population. Nevertheless, there is agreement between line ministries policy makers that current fertility rates represent a serious threat to the Timor Leste process of sustainable economic development. As they clearly stated to the Donors, Timor Leste policy makers are aware of a strong relationship between a lower fertility rates, economic growth and poverty reduction.

Timor Leste policy makers are right: global economic data analysis shows that lower fertility reduces poverty. Household survey data for developing and transitional economies are used to estimate the effect of fertility (crude birth-rate net of infant deaths) on private consumption, poverty incidence and intensity. Cross-national regressions indicate that higher fertility increases poverty both by retarding economic growth and by skewing distribution against the poor. Two sets of policies can be identified as growth-promoting: ‘openness’ - reduction of market distortions and other barriers, especially against international trade and investment - and “creation of infrastructures”, human mass health and education and physical capital. Such policies may not perform well in particular cases due to civil violence, institutional failure, obstructed foreign markets, or remoteness.

Asian economies have experienced steady income growth accompanied by sharply falling fertility and mortality rates in recent decades. But the reaction of poverty indicators to economic growth shows considerable variation: in India (1958-91) agricultural growth substantially reduced poverty, but industrial growth did not [Datt and Ravallion 1996]. In much of East Asia (China, Thailand, Malaysia), inequality grew in the 1980s to such an extent that poverty reduction stalled, despite quite rapid growth and increasing economic openness [Lipton and de Haan 1997]. Even processes of growth led by increased openness and mass education appear to leave behind groups of hard-core, uneducated poor, unable to leave ill-favored jobs or regions. Such groups enjoy little, if any, of either the growth impact or the distributive impact on poverty.

Fertility rate reductions in capitalist countries are associated with lower interest rates and growing wages in the economy. The key finding is that the observed fall in the relative price of capital can account for more than 60% of the fall in fertility, and over 50% of the increase in income per capita in European countries occurred during the demographic transition. Additional research shows that technological change or the reduction in mortality cannot account for the fall in fertility. As the population over 15 years old with paid labor is only 13.4%, Timor Leste cannot be defined yet as a monetary economy: changes in interest rates and wages are not expected to impact fertility rates in the short term.

Demographic transition to replacement rate is effective in half the world. Each mother is raising one daughter to “replace” her in the next generation. Western Europe demographic transition took a century. The transition among developing countries has occurred in just a few decades. In Bangladesh the fertility rate fell from 6.6 in 1975 to 3.1 in 2000. In Iran, following the Islamic revolution and the massive entrance of females to secondary education, the reduction was even faster, from 6.7 in 1980 to 2.6 in 2000.In both cases the boom in girls’ literacy and paid female labor translated rapidly into a desire for fewer children.

In early stages of development the economy is in a development trap where child labor is abundant, fertility is high and output per capita is low (Timor Leste). Technological progress, however, increases gradually the wage differential between parental and child labor, thereby inducing parents to substitute child education for child labor and reduce fertility. The economy takes-off to a sustained growth steady-state equilibrium where child labor is abolished and fertility is lower. Prohibition of child labor expedites the transition process and generates the basis for a reduction of fertility rates and an increase of the human capital.

Timor Leste women are largely poor and share a high pattern of fertility in the range of 7.4 to 8 children per women, depending on where they live. Most remarkably, Timor Leste fertility rates appears to be rising in recent years as women start childbearing early and move quickly to multiple child families. Fertility probably has been growing between 2003 and 2005 as there was a very strong desire to have more children between married females. The ideal family size for married women was 5.7 in 2003. Younger women are having their first birth earlier than did previous generations.The age of marriage is falling in Timor Leste, opposite to the global trend. Causes are cessation of hostilities, nation building and low enrolments of teenage girls in the school system. Early teenager pregnancy is not the norm, even in married females, but late teenager pregnancy is frequent.

The end of hostilities has motivated young people to build large families in an early stage of their lives. Secondary education and income growth both are powerful forces to reduce fertility rates in Timor Leste. Secondary education for all may reduce 1 child per woman. There is a difference of at least one child between poorer and richer females. Female access to paid labor force may reduce another child per woman. Family incomes and secondary education will reduce significantly reproductive behavior in Timor Leste households.

Marriage is a process rather than a single event in Timor Leste. Formation of families in Timor Leste displays a pattern of stages of marriage: according to current laws, according to religion, and according to traditions agreed by the families of the parties. Most of married women have had a church wedding, but a large proportion of couples are living in unions where the belis (payments) had not been resolved. The pattern is to move from customary union to church wedding once the bride price had been resolved. Mass weddings with a state financed reception can solve longstanding disagreements about the belis obligations. Households becoming richer and gaining electricity have fewer children, but the only way fertility falls is when key behaviors change. The most important behavioral changes are in contraceptive use and sexual relations, shaped by the institutions of marriage in Timor Leste.

Married women reported a low level of understanding of the range of contraceptive methods taken for granted in Asia and the Pacific. More than religion or costs of contraceptives, fear of side effects, desire for more children and a lack of knowledge, are main reasons of females not using contraception: there is potential need for more information and services?

Demand for information and services for fertility control increases with women’s age in Timor Leste. Women over 25 years old are potential users. The major constraint on contraceptive use is lack of knowledge and supply of methods rather than lack of demand on the part of mothers.

The main recommendations for poverty reduction using population policy are as follows: target sectoral policies for female secondary education and female access to paid labor force to reduce fertility rates, implement a national strategy on family planning, focused in public information campaigns and wide supply of alternative contraceptive methods, promote legislation and enforcement of child labor abolition, mainly in rural areas to reduce fertility rates, define a priority for the creation of infrastructures in rural areas to increase agriculture productivity, reducing rural fertility and poverty (power, roads and water).

5. The economic impact of the UN exit strategy must be appraised and compensated.

Macroeconomic management is outstanding in Timor Leste. The Timorese government has shown strong leadership in prudent macroeconomic management, focused on the legal framework for petroleum production and revenues. The government will be able to fund a sizable budget in perpetuity. The accumulating balance will safeguard provision of public services in the future. Currently 90% of public revenues come from Joint Petroleum Development Area and petroleum is the most prominent source of economic growth. Nevertheless imports and per capita GDP are declining as public and private investment show signs of stagnation.

The main bottleneck to attract private investment are huge and in the middle term the country must solve some critical issues before a sustainable foreign investment process can be achieved, some restrictions are the following: lack of domestic demand by households, high levels of taxation for new investors, the most costly electric supply in the world (diesel), no access to electricity by rural populations, access to electricity limited in districts, low water quality and primitive sewage systems, road network in poor condition and inexistent between most of the districts, commercial air transport too expensive, telecommunication market is a non competitive monopoly and mobile phone network is still patchy in rural areas.

Non oil production is decreasing as international peacekeeping and cooperation presence downsizes. As a result poverty is increasing in 2005 and 2006: per capita income is decreasing and population growth remains highest in the world (3.2 %). The main reasons are a rapidly expanding population, sluggish economic growth and rising inequality. Income inequality is growing between Dili and the districts: 86% of poor people live in rural areas and poverty is highest in farmers (49%). Starvation of rice and corn takes 4 months/year in the rural areas. Poverty is worse in the highlands (central and western districts) than in the least mountainous east districts.