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This is Brunei. With an area of less than 6,000 sq km and a population of 450,000 it is one of
the smallest countries in Asia. But it punches well above its weight in what we can learn from
its unique economic system. Brunei is a welfare state where the government pays for almost
everything. This includes healthcare, education from elementary school to university, subsidised
housing and as if that wasn't enough people don't even need to pay taxes. Thanks to the
development of the petroleum and natural gas industry the small country of Brunei became
one of the richest economies in Southeast Asia. The discovery of oil in a developing economy may
at first sight seem rather beneficial but it also has the potential to be disastrous.
Most oil-rich economies like Brunei have poor growth in the non-resource sectors of the economy,
less democracy and worse development outcomes than countries with fewer natural resources.
They have difficulties diversifying their economies and oil booms naturally lead to
wasteful spending. The combination of these issues has led to the concept of the resource
curse or the paradox of plenty. Countries that are endowed with abundant natural resources can
be compared to lottery winners. You may think that your life would be amazing if you won the
lottery but the reality is that most people who win the lottery end up losing it all because
they are unable to manage their newfound wealth. This is also true for countries.
In this video we will look at Brunei's current situation regarding its dependence on oil and
natural gas, look at some of the unintended consequences of their welfare programs and
what the government is doing to diversify its economy.
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Brunei's economy relies heavily on the exploitation of its oil and gas reserves.
It's the 4th leading oil producer in Southeast Asia and the 9th largest exporter of liquefied
natural gas on the planet. The government of Brunei has made efforts to diversify its economy
and it has certainly made considerable progress. However, in spite of this, the sale of oil and
natural gas still represents 62% of Brunei's GDP and 90% of its total exports. In addition,
Brunei is still less diversified than other resource-rich nations including Indonesia,
Malaysia, and the United Arab Emirates. There are also concerns about future real GDP growth
not keeping up with population growth. Oil production is decreasing and there are uncertainties
about how oil wealth is being invested. The high dependency on oil and natural gas in particular
is alarming for Brunei considering that its reserves are estimated to run out in only 27
years. In Brunei, the state does not need revenues from taxing its citizens. It has more than enough
income from its oil revenues. In fact, it was this income that led to the creation of the
welfare state where almost all the needs of its citizens are currently met. While not having to
pay taxes sounds like a great deal, there can be some unintended consequences for the economy as a
whole. Taxation creates what some economists call a fiscal contract between the state and its
citizens where the citizens hold the state accountable. Unfortunately, there is currently
a participation deficit in most oil-rich countries. So what is a participation deficit? It's basically
a lack of connection between the state and its subjects which disrupts any notion of ownership
of public resources and consequently leads to a lack of citizen engagement. This is therefore a
major challenge in oil-rich countries. The OECD stresses that taxation systems
strengthen state capacities and help to shape accountability relationships between a state
and its people. However, in oil-rich economies, the state does not rely much on revenues collected by
taxing its citizens. It is therefore not held as accountable as states in non-oil economies are.
The existence of a fiscal contract is thus vital for policy recommendations in oil-rich economies.
Studies carried out by the Centre of Global Development show that high levels of oil
income are linked to both low levels of transparency in public budgets and low
efficiency in public spending. That's why you often see oil-rich countries like the
Persian Gulf states investing in extravagant projects with, let's just say, dubious financial
rationale. In the case of Brunei, they invest a significant chunk of their oil revenue into
a sovereign wealth fund that they call the Brunei Investment Agency, which currently has an estimated
$170 billion of assets under management. However, they give almost no disclosure about what they
are invested in and what their historical returns have been. All of this has led economists to
develop models that aim to offset this accountability gap. One of these is the Oil-to-Cash
Initiative, which seeks to protect the social contract between the government and its citizens
by distributing oil rents directly to its people. Through this initiative, the government would
transfer either some or all of the revenue obtained from the extraction of natural resources
to its citizens in regular and transparent payments. These payments would be considered
normal income and would be taxed accordingly. This way, the state would be forced to collect
taxes and pressure for public accountability would increase, thus leading to more responsible
oil wealth management and development-friendly spending. The oil-to-cash model has been
implemented successfully in the oil-rich US state of Alaska. The Alaska Permanent Fund was created
by the citizens of Alaska as a way of saving a share of the state's oil revenues for the needs
of future generations. Oil revenues are used to invest into private entities, stocks, bonds,
infrastructure, and real estate. The returns on these investments are then used to further grow
and finance the fund, which is currently worth more than $54 billion. Unlike the Brunei Investment
Agency, the Alaska Permanent Fund discloses their investments holdings on their website for the
general public to scrutinize. It's probably safe to say that Alaska won't be building its own version
of the line any time soon. The Alaska Permanent Fund division distributes a share of the earnings
to eligible citizens of Alaska in the form of an annual dividend. The entire amount of the
dividend then must be reported as taxable income. The 2022 Permanent Fund Dividend amount was $3,284.
This fund creates a source of renewable revenue in an American state with mainly non-renewable
resources. Even though these non-renewable resources are diminishing, the fund is still
growing, thus helping Alaska achieve intergenerational equality. Besides the creation of a
sovereign wealth fund, the next most important thing for any oil-rich nation to do is diversify
the economy into other industries, as the oil will eventually run dry.
Brunei has carried out numerous efforts to increase economic diversification and reduce
the economy's dependence on the sale of oil and gas. For example, it promotes foreign direct
investment in its economy, and it's actually quite attractive for potential investors.
It has excellent airline connections and telecommunications. In addition,
it has a central location in Southeast Asia and a stable political situation.
However, human capital is also vital to promote the growth of other sectors of the economy.
It is therefore important for the government of Brunei to improve the matching of the education
and skills of its population with the needs required in such industries.
Having an active young population could certainly help in these efforts. However,
according to the International Labour Organization, or ILO,
youth unemployment is a critical issue in Brunei.
The youth unemployment rate rose to 23.4% in 2021, and the ILO highlights that there seems
to be a mismatch between jobseekers' expectations, job opportunities, and employers' skill requirements.
Brunei is a rentier state, since it relies on the external rent derived from selling oil and
natural gas. Studies show that the occupational aspirations of young people in Brunei are
related to the economic conditions of their rentier economy, which in turn leads to a rentier
mentality, where the youth tend to aim towards occupations that are prestigious, stable, and
highly paid. Unemployed people in Brunei share a common set of characteristics. They are young,
they don't possess the necessary professional and vocational skills, and they are only willing
to accept office jobs, ideally in the public sector.
The generous social welfare programs make unemployment more comfortable than in most
countries. Thus, many unemployed youths have the luxury of turning down manual jobs or jobs
in unqualified sectors such as agriculture or manufacturing. These types of jobs are usually
occupied by foreign workers. For these reasons, youth unemployment has remained stubbornly high.
Besides causing structurally high youth unemployment, the desire for high-paid
government jobs also has an unfavourable impact on entrepreneurism.
According to a research study, 67.2% of young Bruneians prefer to work as government employees.
The strong desire to join the public sector acts as a sort of brain drain, whereby the
most talented young Bruneians become civil servants instead of starting small businesses
that could help diversify the economy. It is therefore vital for Brunei to promote
entrepreneurism amongst the younger population, to strengthen other factors of the economy,
and increase its non-oil and gas income.
Let's remember that the current generation of young Bruneians will be the future decision
makers and business leaders when the oil reserves are depleted in the not-so-distant future.
Policies that increase entrepreneurism amongst the youth will be very important in the efforts
to diversify the economy. Improving the business environment has been important for Brunei in its
efforts to promote economic diversification. However, a good business environment doesn't
only need less bureaucracy and better regulations, but also a skilled labour
force with an entrepreneurial mindset. A change in education and labour market
policies is therefore needed for the rentier mentality to actually change.
To achieve this, Brunei can take a look at Norway, and how they've managed to eradicate
the rentier mentality and keep youth unemployment at low rates.
Norway is one of the biggest oil exporters in the world, and yet it has a very diversified
economy and a fair distribution of income. However, unlike Brunei, the Norwegian economy
was already developed when oil reserves were discovered. As previously mentioned, Brunei
had to leapfrog the normal stages of development after oil was discovered, and this led to an
economy that limits the creation of jobs. In Norway, the government prioritised education
as a means to achieve economic diversification and inclusive growth. It actually promoted
entrepreneurial and vocational skills, as well as subjects related to engineering,
science, technology, and mathematics. Entrepreneurship is also highly valued in
Norway. It's clear that it has an economic value. Research shows that entrepreneurs have a vital
function in an economy, as they generate job opportunities, increase competitiveness,
and foster innovation. They also tend to be more satisfied than employees.
Researchers claim that entrepreneurship can be taught and developed through training and
programs. In Norway, entrepreneurship, education, and training are part of the public school
curriculum, and many students prefer to be self-employed instead of holding an organisational
position. Norway also has some of the best working conditions and salaries worldwide,
both for skilled and unskilled workers. Although there is no general minimum wage that applies to
the whole country, there are union-negotiated wages which are set by industry. Workers in
all industries benefit from good job security, extensive vacation time, and of course,
good salaries. For example, workers in construction, agriculture, and cleaning
industries can earn minimum rates, which can range from $16 to $21 per hour.
These rates increase based on skill level, as well as experience.
This all shows that despite being one of the biggest oil exporters in the world,
the rentier mentality in Norway is not common. Of course, we need to stress the fact that the
country had a strong economic base when oil reserves were discovered, however, it can
still serve as an example for Brunei. Countries like Norway prove that the resource curse is
certainly not a destiny.
Now it's time to put Brunei on the economics explained national leaderboard.
Brunei has a GDP of $14 billion, making it one of the smallest economies in the world.
It gets a 2 out of 10.
This GDP is spread out over a very low population of fewer than 500,000 people,
so it has a GDP per capita of $31,722, which is almost three times the global average.
Here it gets a 7 out of 10.
Stability and confidence is benefited from a stable political situation and
relatively liberal policies related to foreign direct investment.
However, with the vast majority of the government's revenue coming from oil and natural gas reserves,
which are expected to run dry within the next three decades,
this creates a tremendous amount of uncertainty, so we can't give Brunei more than a 5 out of 10.
Brunei's GDP is about the same size as it was 15 years ago.
It fluctuates wildly from year to year based on the price of oil.
After normalizing commodity price movements, Brunei has not seen any real growth in more
than a decade, so on this metric it gets a 2 out of 10.
Finally, industry.
Brunei's economy relies heavily on the exploitation of oil and gas reserves.
Despite its efforts to strengthen other sectors of the economy,
the sale of oil and gas still represents 62% of Brunei's GDP and 90% of its total exports.
It's also less diversified than other oil-rich nations,
such as Indonesia and the United Arab Emirates, so it gets a 3 out of 10.
Altogether, that gives Brunei an average score of 3.8 out of 10,
putting it here on the Economics Explained National Leaderboard.
Thanks for watching mate.
Bye.