Royal University of Phnom Penh

Institute of Foreign Languages

Department of International Studies

Written Assignment First Draft

Topic:

Will Brunei’s Economic Growth Slow and Perhaps Even Reverse under the
Weight of Oil Depletion?

IS408: International Economic Development

Lecturer: Roth Vathana

Class: E4.1

Group 5:

Tann Kanya

Hosann Rojeth

Ly Hakseng

Ream Phyrobish

Sada Akaravid

Academic Year: 2020 – 2021

 Table of Contents

I. Introduction…………………………………………………………....................1

II. Literature Review..................................................................................................2

III. Research Methodology..........................................................................................3

IV. The Impact of Oil on Brunei’s Economy and Well-being..................................4

V. The Future of Brunei’s Economy under oil depletion........................................7

VI. Policies Recommendations................................................................................... 9

VII. Conclusion...........................................................................................................10

References
 I. Introduction

Resource depletion refers to the depletion of raw materials within a country and it is usually
divided into two such as renewable and nonrenewable resources. Thus, resource depletion occurs
when renewable or nonrenewable natural resources are rarely consumed faster than they can
recover (Resource Center, 2021). In this regard, it could have a risk for depleted resources such
as trees, fishing, fuel consumption and oil. Brunei is well-known for its enormous natural gas and
oil reserves, which have fueled the country’s economic development with over 85 years (BSP,
2015). However, Brunei will face resource depletion since this country cannot remain as oil
dependent country permanently. Meanwhile, the GDP of Brunei has declined over the past two
years which decreased 2.3% in 2014. As a result, Brunei’s oil and gas exports, which accounted
for 78 percent of government revenue, have decreased significantly (Nikkei Asia, 2015). In
addition, economic growth of Brunei relies on oil and gas as its backbone. However, such
reserves which account for an important portion of Brunei’s GDP is likely to decrease and run
out within the next twenty years that push Brunei to diversify its economy (Maelzer, 2018).
Recently, Brunei still depends on oil exports, yet Brunei also faces the problem of dependence
on oil because Brunei’s import has been very slow in recent years. Brunei can no longer rely on
oil as a major backbone sector anymore. Brunei has so concentrated on promoting its tourism
through ecotourism, which attracts natural enthusiasts in Brunei’s unique science and beauty
region. Aside from the backbone industry of oil, Brunei is searching for international investment
in other areas. As a consequence, Brunei’s share of total foreign investment increased from 2%
in 2012 to 32% in 2015 (The ASEAN Post, 2018).

In this research studies, we aim to explore whether the depletion of oil will affect Brunei’s
economic growth, and also evaluate the impact and the importance of oil on Brunei’s economy
and well-being. By digging deep into that, the paper is able to tell what would happen to
Brunei’s economy under the weight of oil depletion? In the meantime, we will seek to
understand whether Brunei will take an opportunity to implement a variety of policies to improve
its economic growth and deal with future oil shortages.

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 II. Literature Review

Brunei is blessed with natural resources and a strong governmental system in support of
environmental conservation and sustainable development. However, due to the continuous
pursuit of natural resources for economic progress, Brunei should never be an exception from the
subject of natural resource degradation. Roberts and Cook (2016) in their research on “BRUNEI
DARUSSALAM: Challenging Stability” found that the rich oil resource country has faced the
inevitable economic slump during the phase of 2015/16, and is expecting to worsen over time as
the government policies seeking ways to adapt to the “new normal” of the contemporary
economy. Geopolitical Intelligence Service (2018) has also addressed Brunei’s strategic way to
diversify its economy as its oil and natural gas reserves near depletion, which specifies how
Brunei will overcome resource depletion in the future.

According to many studies, the relationship between natural resources and the quality of
political institutions indicates the significant role of what institution can accomplish to avoid
resource depletion (Wick, 2009; Van der Ploeg, 2011). Moreover, Cabrales and Hauk (2011) in
their study on the relations between the institution and natural resources concluded that the
decision of institution whether what makes economic success or degradation can be seen in
theoretical and quantitative evidence. Backing up to what Cabrales and Hauk had to say, authors
like Venables (2016) used the data of developed and developing countries over a decade and
concluded that good political institutions can eradicate the resulting resource depletion effect. In
alignment with the relations of government and resource, (Businesswire, 2013) appreciated the
attempt of Brunei on diversifying its economic system and open for foreign direct investment up
to 40% of the total economy in non-energy sectors. According to Thomas (2019), Brunei’s afford
to develop self-sufficiency in food industries vividly shows the willingness to find alternative
ways to ease the resource depletion. The sultanate is aiming to reach its rice self-sufficiency
target of 30,000 tons annually.

The above-mentioned studies have shared one particular ideal on the relations of
government and resources management. Particularly, the efforts at diversification in Brunei have
met with limited success so far, despite the country at its near resource depletion. This may be
explained that amid resource depletion, the institutional structure of the country plays an

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 important role in whether the economy would stable or go down the hill. There is a lot we still do
not know how the impact of resource depletion would do to a country’s economy, in particular.
Therefore, further research in the bellowing sections will attentively answer the question.

III. Research Methodology

3.1 Research Design

This research is conducted through causal research study to find the connections of the
phenomena of oil resources in Brunei impacting on its economy, and the welfare of the
population. This research will be focusing on gathering secondary data from journals, articles,
scholarly researches, and extracting data from sources to verify the internal validity of the studies
by providing concrete evidence to find correlations in our findings.

3.2 Data Collection Method

Due to resources constraint with limited time, this research paper will focus on collecting
data or information from World Development Indicators, World Bank, previous research papers,
and extracting data from third-party sources to get our hands on as much data as possible to
provide readers a more holistic view while carefully verifying and checking the credibility and
accuracy on the findings.

3.3 Data Analysis Method

Besides document analysis and data analysis, this paper also aims to use grounded theory to
analyze and describe the existing information in forms of text, data to answer the research
question and carefully describe the phenomena, and draw causal explanations between the
relationship of natural resources and well-being in Brunei.

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 IV. The Impact of Oil on Brunei’s Economy and Well-being

Brunei’s economy is among the highest in the world that generate mostly from its natural
resources stemming from crude petroleum, natural gas exporting to partners such as Japan, South
Korea, Thailand, Malaysia, Singapore, Switzerland (CIA, 2017). By 2019, Brunei total net
export averaged $7B while its top exports are Petroleum Gas generating over $3.23B and Crude
Petroleum generated $2.7B respectively. The figures below represented the amount of export
from the top 2 export products between 2015 and 2019 while leaving some of its production for
personal consumption for industry businesses, SMEs, and electricity for its domestic
consumption. While other sources contributed a certain amount of revenue, its GDP Per Capita
averaged around $28,000-$32,000 between 2015 and 2019 (World Bank, 2020).

Figure 1.1

Source: Asian Development Bank

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Figure 1.2

Source: Asian Development Bank

Through the revenue that Brunei has been consistently generating from its natural
resources. The government of Brunei wasted no time in converting those revenues into social
benefits schemes that allow the population to enjoy stemming from no personal income taxes,
free medical services, and free education till the university level. There is no doubt that Brunei
has the most efficient social welfare scheme among its fellow Southeast Asia countries since its
regime has improved rapidly ever since 1977 with its heavily reliant on natural resources. Since
then, the government of Brunei has used these social development schemes to strengthen its rule,
weakening opposition parties, legitimizing its centrality as the only legitimate government
(Yuda, 2019). While the “absolute monarchy” is an uncommon regime in the current world
politics, the government had no issues adapting to modern practices by having huge expenditures
annually on its social development schemes on education, health, housings.

Figure 1.3

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 Source: Asian Development Bank

4.1 Education

Figure 1.4

Source: World Development Indicators

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Figure 1.5

Source: Asian Development Bank

A significant amount of monetary funds are being invested into social education every
year averaging over 90% of children enrolment out of the entire population in both genders while
also achieving a similar percentage with the literacy rate for adults above 15 in both genders. The
skills that are acquired through the education system helps prepare students and shaping their
career path since the proportion of funds from the government are being distributed through
different channels stemming from training or vocational training to help unskilled workers to be
equipped with specific skills, teaching bilingual languages to prepare for students to become
multilingual for the international market by teaching English and Malay Language while having
school, universities spread throughout across the country (Saim, 2010). While being equipped
with the knowledge, Brunei citizens can participate in the labor force by getting employed in
various sectors agriculture, mining, manufacturing, real estate activities, wholesale, financial,
insurance activities, and many more.

V. The Future of Brunei’s Economy under oil depletion

The above section has illustrated how important natural resources, specifically crude
petroleum and natural gas are to Brunei’s economy. Generating approximately $7 billion in
2019, oil export is the main contributor to Brunei’s high GDP per capita, while also enabling the

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government to provide welfare to the populations. Although oil exports have been the backbone
of Brunei’s economy, this is not the case now. This country has also been facing numerous
challenges regarding global oil prices as well as oil shortage. According to Maelzer (2018), oil
and gas which accounts for Brunei’s two-third of GDP are expected to run out in the next 20
years. Thus, the question is that what would happen to the economic growth of Brunei amidst the
weight of oil depletion?

It is subject to deep analysis when it comes to answering such a question as making fast
assumptions will only generate false claims. In this regard, to claim whether or not the resource
depletion, oil to be specific, would affect Brunei’s economic growth. It is crucial to first
understand the relations between oil and the changes in the country’s economic growth.
According to data from the World Bank in 2011, Brunei's GDP per capita was among the highest
in the world, similar to Saudi Arabia and the United Arab Emirates. However, in 2015 when
global oil prices plunged, Paul Pryce of UPH Analytic revealed that Brunei’s revenue witnessed
a decrease by 70% in 2016. Additionally, it was reported by Brunei’s Department of Economic
Planning and Development that this country recorded a negative growth with a 2.5% GDP
decline. In terms of that, according to the IMF Brunei’s economic growth in 2017 also witnessed
a negative 1.3%. In December of the same year, this state was even listed as one of “Asia’s Five
Weakest Economies by Growth'' in Forbes Magazine (The ASEAN Post, 2018). In this regard, it
is demonstrated that the changes in global oil prices alone have already weakened Brunei’s
economy, and this does not count the fact that this country is also facing oil shortages. According
to the Asian Development Bank, Brunei’s daily oil output has dropped by 40% since 2006
resulted from oil fields running dry and the closure of old maintenance facilities. The ADB also
mentioned that if Brunei continues to solely depend on oil to generate revenues, this country
would face economic downfall (Tan, 2015).

As such, it would be shameful for us to claim that Brunei’s economy would be doing just fine
under the weight of oil depletion. At this stage, Brunei has to realize that it can no longer depend
on oil alone for economic growth and well-being. Song Seng Wu, an economist from CIMB
Singapore once mentioned “Brunei cannot just pump oil to compensate for oil prices, and even if
they did, they would not meet the demand”. Although Brunei has been working hard to diversify

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and improve its economy specifically looking to boost its tourism sector, transferring itself into a
financial hub, and investing in other sectors. Oil exports still contribute significantly to Brunei’s
economic growth; therefore, it is recommended that this country need to make moves to
diversify its economy even before it runs out of oil (The ASEAN Post, 2018).

VI. Policy Recommendations

Although the level of oil and gas has brought Bruneians' living standards to one of the
highest in the world, current predictions indicate that current oil stocks may last only for another
20-30 years. Consequently, the economy must be diversified away from oil and gas, and a much
more sustainable approach should be formulated to ensure long-term sustainability and stability.
Although the government of Brunei has already initiated “Wawasan Brunei 2035” as a long-term
strategy towards developing a sustainable diverse economy, it still bears little fruit (WB, 2035).

Brunei must accept that it is unable to rely on oil forever, particularly at this time and in
the future; therefore, certain policies and reforms require being implemented for the
improvement of the state's economy after an oil spill.

Studies have also classified tourism in Brunei as one of the significant sectors for
potential development in the future (Tisdell, 2002). However, the tourism sector was barely
functioning as an intermediate sector to economic diversification, and the number of tourists was
slightly increasing mainly due to the strict implementation of Syrian Law according to Ahmad
(2014). Moreover, Brunei's tourism sector tends to neglect to understand the concept of tourism
development, called ecotourism, and environmentally friendly practices. This must be resolved
by education and public awareness.

Second, Brunei's government is advised to start focusing on growing the country's

agriculture, fisheries, and aquaculture sectors instead of only relying on oil and gas. Therefore,
the Ministry of Primary Resources and Tourism (MPRT) should work on strengthening
governance structures, optimizing agricultural land use, adopting advanced equipment,
technology and improving export opportunities to maintain Brunei's agriculture and food
products to benefit the economic growth and to achieve of Vision 2035.

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 Third, in driving economic growth, the people have been the most powerful resource in
the world. By many initiatives and policies, Brunei should strongly stress the standard of
education for its people. Skilled, flexible, and creative people with the right mentality can also
produce more value of the assets, who can take advantage of more opportunities. This also
contributes to the stability of human capital in pushing development, as the global economic
environment shifts unexpectedly (MFEB, 2020).

Lastly, Brunei Darussalam is recommended to develop more diverse trade deals and build
good foreign relations with other countries through international organizations. In essence, this
enables local companies to become more active in the international market and to draw potential
future investments. The global economy is evolving rapidly and is integrated with new market
opportunities than ever before. Innovative flows and technological advancement, which lead to
more rapid growth, efficiency, and profitability, are part of international interconnection (MFEB,
2020).

VIII. Conclusion

The potential scenarios for Brunei's economy have been clarified. The lights of the
depletion of oil and gas, and followed by the decrease in GDP. Brunei’s economy is expected to
be weakened in the future. Following the upcoming challenge, the government of Brunei has to
realize that it cannot depend on oil forever. Thus, this country is advised to seek alternative
strategies and approaches to diversify its economy mainly through bolstering the tourism sector
and focusing on embracing good foreign relations and culture with other states. These might be
hard for Brunei at first; however, to maintain the growth of this country it is then must be
implemented as soon as possible.

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