Timor-Leste is the youngest nation in Southeast Asia and, according to the Freedom House Index and V-Dem, it is also the most democratic.
Born from a quarter-century of Indonesian occupation that killed roughly a third of the population, the country restored independence in 2002 and immediately faced a question that has undone far wealthier states: how to manage sudden resource wealth without destroying the institutions needed to govern it.
In 2005, Timor-Leste established a Petroleum Fund modelled on Norway’s sovereign wealth framework. Oil and gas revenues were deposited, invested internationally, and subject to an estimated sustainable income rule limiting annual withdrawals. The fund grew to over 19 billion USD. Democratic transitions continued. Institutions survived a serious political crisis in 2006. Unlike Venezuela, where oil wealth was captured by a politicised state, and unlike Chad, where an externally designed framework collapsed against domestic realities, Timor-Leste appeared to represent the rare case where institutional sequencing worked.
But the Petroleum Fund is now in decline. The oil fields that built it have stopped producing. Greater Sunrise, the country’s last major gas prospect, remains unresolved. And the economy has not diversified. The question is no longer whether institutions can manage resource wealth, but whether they can survive without it.
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A Fund Under Pressure
The Petroleum Fund was designed to convert a finite resource into a permanent income stream: save revenues, invest internationally, and withdraw only the estimated sustainable income each year to fund the state budget.
Charles Scheiner, researcher at La’o Hamutuk, an independent Dili-based institute that monitors the fund and state finances, explains that this framework has not held: “The idea that they would only take a sustainable amount of money out of the petroleum fund has been followed. Lately they’ve been taking two or three times the sustainable level every year.”
Favourable equity markets have partially masked the impact, keeping the balance roughly stable in recent years. But this reflects market conditions, not fiscal discipline. If markets decline or spending continues to rise, the fund could be depleted within a decade.
The dependency is severe as fund transfers finance roughly 80% of the state budget. Approximately half of GDP derives directly or indirectly from petroleum wealth, because government salaries and contracts recirculate through the domestic economy. When the money runs out, the consequences reach far beyond public services.
Guteriano Neves, Timorese researcher and political economist, explains the political logic behind the overspending. When Timor-Leste gained independence, there was virtually no formal non-oil economy; political leaders (many of them resistance figures with deep popular legitimacy) faced enormous pressure to deliver the benefits of independence quickly. The availability of petroleum revenues made large-scale spending politically irresistible: subsidies for veterans and the elderly, which began around 2008 as part of what was known as a “buying peace” strategy after the 2006 crisis, have grown from roughly 30–40 million USD to reach now 180 USDper year for the veterans, equivalent to around 5% of non-oil GDP. These programmes alleviated real suffering, but they also consolidated political support in ways that are now difficult to reverse.
Now, the Bayu-Undan field ceased production in June 2025 and Timor-Leste is, as Scheiner puts it, “an investment-dependent country, not an oil-dependent country.” This creates a distinct variant of the resource curse: not classic Dutch Disease, but what Scheiner describes as a closure of opportunity space where resource wealth absorbs political attention, crowds out investment in agriculture and local industry, and makes diversification seem unnecessary while the fund still has a balance.
Democracy as the fundamental difference
If the economic picture is precarious, the political story is genuinely remarkable, and it is the reason Timor-Leste’s trajectory differs fundamentally from Venezuela’s or Chad’s.
Dr. Geoffrey Swenson, a political scientist who has studied Timor-Leste’s state-building extensively, frames the country as a democratic success story that has been systematically underestimated: “Timor Leste didn’t get the political resource curse, in my view, because, first of all, there were political parties that actually committed to democracy. It’s acceptable for a political party to lose because they all have a deep legitimacy stemming from the independence movement.”
The experience of successive occupations (Portuguese, Japanese, Indonesian) produced a political class that understood dictatorship and consciously rejected it. The struggle for independence was a struggle for self-determination, not for one party’s control.
Timing also mattered; when Timor-Leste designed its petroleum system in 2005, it could learn from the failures of other oil-dependent states. The Petroleum Fund, the sustainable income rule, the international investment mandate were conscious institutional choices.
As Terry Karl argued in the first article of this trilogy, Norway succeeded because it built institutions before discovering oil and Timor-Leste came close to that sequence: it built democratic institutions during the independence struggle and designed petroleum governance before the largest revenues arrived.
Neves agrees that the petroleum fund mitigated the worst risks by preventing the government from spending all revenues within a single fiscal year and preserving a financial buffer that still exists today. But he identifies a dynamic that the institutional framework could not contain: the temptation of oil money, combined with public pressure and political incentives, drove spending to levels that now place Timor-Leste among the highest in the world for public expenditure relative to GDP.
Public infrastructures were destroyed due to Indonesian orchestrated violence after 1999 referendum while the Public Administration framework collapsed due to Indonesian withdrawal.
Therefore, petroleum-funded infrastructure and social programmes alleviated tensions and reinforced democratic legitimacy in the short term but created dependencies that are now difficult to reverse. The governance framework has weakened incrementally: the government stopped publishing long-term spending projections, consistently exceeds the sustainable income threshold, and transparency in procurement, particularly in the energy sector, has come under scrutiny. This is not the institutional collapse of Venezuela or the governance vacuum of Chad but it is a gradual erosion: a slow drift from the disciplined framework that originally set Timor-Leste apart.
Greater Sunrise, Diversification and Sustainability
The question of what comes next centres on whether Greater Sunrise can provide a second wave of resource income and whether the country can build an economy that does not depend on it.
In November 2025, the Timor-Leste Ministry of Petroleum and Mineral Resources and Woodside Energy signed a Cooperation Agreement to mature a Timor-based LNG concept of approximately 5 million tonnes per annum, with potential first production between 2032 and 2035. The agreement also includes plans for a domestic gas facility and a helium extraction plant, representing the most concrete step forward in years, though it remains a framework for studies and negotiation, not a final investment decision.
Scheiner is sceptical that the project will deliver meaningful income as the capital costs are substantial, the global energy transition introduces long-term demand uncertainty for a 20–30-year project, and despite repeated high-level announcements, investor commitment has not materialised:
“One of the reasons it’s stalled is that nobody wants to invest money in it. The oil industry is a dying industry globally, and a project like Greater Sunrise will operate for 20-30 years — and by that time the world may be serious about climate change.”
Swenson identifies a deeper structural trap: without a compelling economic alternative, Timor-Leste doubles down on oil by default. The result is overinvestment in petroleum-related capacity at the expense of sectors that might build long-term resilience. Tourism faces structural barriers such as remoteness, high costs in a dollarised economy competing with far cheaper neighbours, and inadequate infrastructure.
Neves further explains why diversification has proved so difficult in practice. Petroleum generates multi-billion-dollar revenues in ways that no other sector can replicate, capturing political attention disproportionately. Agriculture remains largely subsistence-based, with low productivity, high climate risk, poor infrastructure, and limited market access. Cheap imported agricultural products from China and Indonesia undercut domestic producers even in the local market.
When policymakers discuss economic diversification, Neves observes, they are often talking about replacing state revenue rather than broader development and on that metric, no alternative comes close to petroleum. The result is a form of policy addiction: oil money offers an easy solution, and the sustained, strategic effort required to build competitive non-oil sectors has not materialised.
Renewable energy is perhaps the starkest missed opportunity. When Indonesia destroyed most infrastructure in 1999, Timor-Leste could have built a decentralised solar system at a fraction of what was actually spent.
Instead, the government invested over 2 billion USD in diesel-fuelled centralised power plants that now cost roughly 100 million USD per year in imported fuel to operate. Scheiner notes that a solar-based system could have been built for about a third of the cost, with no ongoing fuel dependency.
Geopolitically, Timor-Leste’s recent ASEAN accession signals a deliberate effort to diversify strategic relationships. Swenson describes this as rational for a small state: maintaining multiple options and leveraging the moral authority that its independence story continues to generate. But great-power competition constrains these options, particularly Western anxiety about Chinese investment in the Pacific, which limits Timor-Leste’s access to the world’s leading renewable energy technology provider.
Neves sees the ASEAN accession as both opportunity and risk. The potential benefits are real: access to a market of 600 million people, technology transfer and, crucially, the institutional pressure that ASEAN membership imposes. Timor-Leste will be required to standardise legislation, adopt regional economic frameworks, and modernise its regulatory environment, which could help address the institutional constraints that currently make it prohibitively difficult for the private sector to operate. But he warns that Timor-Leste is not remotely competitive with its ASEAN peers: imports already run at around 950 million USD per year plus about 400 million USD in imported services, while exports barely reach 30 million USD; greater market access could widen that gap rather than close it. The risk, as he frames it, is that Timor-Leste ticks the bureaucratic boxes of membership without genuinely analysing the costs and that domestic economic actors are further marginalised in the process.
Outlook: Institutions beyond Oil
Timor-Leste’s story is neither triumph nor failure: it is a test case for whether institutions built under the right conditions can outlast the resource wealth that funded them. The country avoided the political resource curse. Its democracy is real; rooted in collective struggle, maintained through genuine multi-party competition, and recognised internationally.
But democratic institutions alone do not guarantee economic sustainability. The Petroleum Fund was well designed; it has not been well managed. Greater Sunrise may or may not deliver a second windfall and the economy remains dependent on a depleting financial asset with no clear replacement.
Neves’s own assessment is clear: Timor-Leste is still a resource dependent country. Despite the infrastructure that has been built and some improvements in electricity access, basic public services (particularly health and education) remain in poor condition: non-oil GDP has been stagnant for a decade, private-sector employment has not grown meaningfully, and growing corruption and political patronage risk undermining the legitimacy of the democratic institutions that have been Timor-Leste’s greatest achievement. The petroleum fund, he argues, prevented the worst outcomes but the country has nonetheless failed to transform its natural resource wealth into broad-based well-being. Scheiner reinforces this tension: “It’s not the bad management that’s causing the resource curse. It’s the factors of resource dependency that create the bad management that then causes the impacts on the population.”
In Venezuela, resource dependency destroyed institutions from within. In Chad, external actors tried to engineer institutions that could not survive domestic politics. In Timor-Leste, institutions were built genuinely, but dependency has nonetheless narrowed economic options and weakened the discipline meant to protect the future.
The variable across all three cases is not the resource: It is whether governance structures are strong enough, autonomous enough, and far-sighted enough to manage the transition from resource dependence to economic resilience.
For investors, policymakers, and institutions the lesson is clear: governance assessment must be continuous, context-sensitive, and honest about the gap between institutional design and institutional practice. Understanding that gap is not only analytically necessary: it is a responsibility.
