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5 Brunei's fund of wealth and
scandal By Geoffrey C Gunn
The use and potential misuse of sovereign
wealth funds in Asia has been newsworthy of late,
especially because of their size and high profile
investments. China - and possibly Japan as well -
look to parlay their government-owned investment
vehicles.
With its small population base,
and vast reserves of oil and natural gas, the
small Southeast Asian nation of Brunei Darussalam,
located on the north-eastern side of the island of
Borneo, has been able to lever its economy into
providing an enviable standard of living for its
population and mega-billions for its ruling royal
family. But just as Brunei reaps the rewards of
windfall profits generated by historically high
oil prices, so it joins the ranks of holders of
sovereign wealth, currently under
increasing scrutiny owing
to their opaque corporate governance structure and
general secrecy.
While, unlike such
foreign exchange surplus countries as Singapore,
Brunei has distinguished itself through its
portfolio investments, not all of them sound.
Brunei also shares the external vulnerabilities of
oil producer states. This article seeks to
structurally examine these vulnerabilities with
specific reference to the dynastic crisis of
2001-2002 and sequels. It also seeks to explain
how the Brunei Sultanate recovered from this
crisis, handsomely adding to the royal fortunes,
without, however, precluding future crisis and
even collapse whether from domestic (dynastic) or
external shocks.
Identified by analysts as
conforming to, variously, an economic rentier
state model [1], or suffering from "Dutch disease
effects" [2], the former British protectorate of
Brunei Darussalam, has a small population base
(374,000 in 2007), and vast - albeit finite -
reserves of oil and natural gas. As mentioned,
Brunei has been able to improve the standard of
living for its population and has generated
billions for its rulers, led by Sultan Hassanal
Bolkiah, along with a network of close non-royal
collaborators.
The vulnerability of
resource rich economies The notion that
states based upon external sources of income are
substantially different from states based upon
domestic taxation was first proposed with
reference to a number of oil-exporting Middle
Eastern countries. Academic Beblawi Hazem [3] has
drawn a distinction between a rentier state,
rentier economy, and rentier mentality. Rentier
economies become problematical, in this theory,
when a rentier mentality prevails insofar as the
work-reward causation is broken and reward or
wealth is not related to work and risk taking.
Rentier economies are by definition extroverted,
forming high-tech enclaves disconnected from the
domestic economy both in terms of inputs,
employment and outputs.
So-called Dutch
disease effects, derived from studies of the
economic impact of hydrocarbon revenues in the
Netherlands in the 1960s, are said to derive from
a bloated public sector and the rise of
non-productive social expenditure.
The
"Dutch disease" has been used by economists to
explain the deindustrialization of an economy as a
result of the discovery of a natural resource.
Typically, in this analysis, the discovery raises
the value of the country’s currency making
manufactured goods less competitive and
encouraging imports to rise. In any case, unlike
Holland in the 1960s and the UK in the 1970s,
Brunei obviously lacks a manufacturing base.
Deindustrialization has never been the issue. Nor
has its currency greatly risen.
Other
economists have discussed a "resource curse
thesis" or the costs associated with a booming
mineral sector based on the observation that so
many countries that have struck it rich with
natural resources have ended up a decade or so
later in great trouble. In this view, natural
resource rich countries are subject to a boom-bust
cycle with associated political instability
arising from income differentials and unequal
access to wealth. The ability to escape the
"resource curse" has also given way to a small
literature, some espousing neo-liberal/public
choice or behavioralist perspectives, others
seeking explanations in "social forces" in favor
of capitalist development in conjunction with a
favorable external environment such as in
Suharto’s Indonesia. [4] I will expand upon a
version of the "rentier state" model, especially
since, unlike the Dutch disease description or
"curse" metaphor, the rentier state analysis seeks
to answer the crucial (and, in Brunei Darussalam,
virtually taboo question) of who gets what, why,
and how?
However theorized, the problem
becomes one of expanding the skill base of the
population, stimulating the private sector,
diversifying the economy, especially through
creation of downstream activities, achieving
transparency in national accounting, and reining
in unbridled consumerism by the super rich.
To add a slightly philosophical note, we
could say that, for Bruneians, to consume is to be
modern. In other words, Bruneians express their
modernity through extravagant consumption
patterns. Such behavior is hardly confined to the
Bruneian nouveau riche but, in the context of a
steeply hierarchical and status-driven society, it
well describes their reality. As role models, the
Brunei royal family have promulgated a veritable
consumer goods fetishism both at home, through
ostentatious displays of wealth, and globally
extending to the collection of a vast array of
"trophy" and other assets, such as would merit the
description of a "trophy capitalist" economy.
Long a nation of self-sufficient
agriculturalists and peasant fishermen living in a
favorable ecological niche in the huge tropical
island of Borneo, Brunei has experienced a major
shift away from agriculture during the last three
decades. A rubber plantation economy with pre-war
origins only survived into the 1960s. The overall
trend has been towards loss of food
self-sufficiency including even fish. The one
redeeming grace offered by the exploitation of oil
has been to spare the country from the ravages of
tropical hardwood logging such as has occurred in
neighboring Malaysian states of Sabah and Sarawak
for the worst. The potential of this natural asset
for ecotourism has recently dawned upon Brunei.
The Shell group of companies, which, from
1913, pioneered the search for oil in Brunei and,
from 1929 commenced the exploitation of Brunei's
hydrocarbon resources, made Brunei, upon its full
independence in 1984, one of the richest states in
the world. Notably, however, Brunei is not a
member of the Organization of Petroleum Exporting
Countries (OPEC), and, as a relatively small
producer country, is not officially constrained by
OPEC production quotas.
In any case,
material improvements, including the development
of basic infrastructure, along with public
housing, educational facilities, and medical
services, only began to take effect with the
implementation of a series of five-year National
Development Plans beginning with the of 1953-58
Plan and, as discussed below, continuing with the
Eighth (2001-2005), and Ninth National Development
Plans (2006-2011) with expanded allocations
matching a more sophisticated macro-economic
environment.
Needless to say, the
modernization of the oil industry, the discovery
of new fields, including reserves of gas, along
with the windfall benefits reaped from the first
oil-price hikes of 1973-74, provided the
wherewithal for this expansion. Today, Brunei is
the fourth-largest oil producer in Southeast Asia
[after Indonesia, Malaysia and Vietnam], producing
200,000 barrels per day in the 2000s and currently
in excess of that amount. Even so, with plunging
reserves of oil throughout Southeast Asia, only
Malaysia and Brunei presently produce more oil
than they consume.
Brunei oil
rig As explained below, the steady
dependence of the nation upon the oil industry,
especially exports of crude oil and LPG, to the
neglect not only of traditional agriculture but
also the expansion of downstream industries and
the non-oil and gas sector, has led to its extreme
vulnerability within the global marketplace. In
fact, oil and gas comprise over 96% of Brunei's
exports, suggesting an urgency to match the
rhetoric of diversification with action. While
rentier states typically accumulate reserves
sufficient to buffer their economies, the prudent
management of reserves, as well as their
accountability, as explained below, has not been
the hallmark of Brunei's short experience as an
independent state.
While independent
Brunei has gone as far as to create a cabinet
system of government, it has shown no signs of
reviving its short-lived parliament or openly
tolerating a climate of opposition. While
political parties have surfaced, they exist in
token form only. Rather than offering a political
opening, as in Kuwait, Brunei has wrapped itself
in the cloak of monoculturalism defined as Malay
Islam Beraja (royalty), a "monoloyal" ideological
system that privileges subjects, who comprise some
66% of the population, but excludes many other
categories of the population. The majority of
Chinese, about 15% of the population, are
stateless permanent residents of Brunei. Otherwise
governance in Brunei conforms closely to the
Middle Eastern pattern of dynastic monarchy.
Meeting the test of citizenship in Brunei
is no small matter, as it confers substantial
rewards in what has been dubbed the "Shellfare"
system. Setting aside the royal economy, as
discussed below, the privileges of citizenship
also extend to the economic and welfare sectors as
the state has expanded its social service net to
improve the livelihood of larger numbers of
citizens through improved housing, healthcare,
education and access to privileged civil service
positions. No personal income tax is levied in
Brunei Darussalam.
Simply stated, Brunei's
affluence, measured by consumption patterns and
disposable income, is the envy of its neighbors.
In Brunei, as in other Southeast Asian economies
prior to the Asian financial crisis of 1997, large
numbers of people were prepared to accept
authoritarian blandishments as long as their
rising economic aspirations were met. The
establishment in Brunei does not harp on its
economic legitimacy as did some other regimes
swept away in the crisis; rather, it is taken for
granted.
The oil industry While
the global trend has been for producer countries
to nationalize the oil industry, such as
Indonesia's Pertamina and Malaysia's Petronas, the
industry in Brunei retains its privatized
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