Sometime last week when I or rather my guest blogger posted an entry about the good and bad news of Brunei's B$15.9 billion GDP, someone emailed me a long question about the economy. I was quite intrigued by the question partly because there is an element of (economic) naive-ity, and there is also an element of politics in it. So I asked my guest blogger to look at the question and draft a short reply. A long reply is obvious but given the constraint of space, a short reply may have to suffice. The question and the answer and hopefully we all learn something from this:-
--- Question ---
I've looked at some Brunei stats a couple of years back, and found that the figures do not look as promising as they are, esp. with the GDP. Henceforth, I cant help but I want to email you if you can enlighten me on the economic situation in Brunei.
I'm not an economist, but I cant help coming to the "conclusion" that growth in GDP is not promising which may misled the public (??). As I dont have the BEB Vol.4 with me, I'm using my judgment based on the 2003 Statistical Yearbook. What I seem to derive from the figures was that huge chunk of the GDP were from the Mining industry (oil and gas) and community, social and personal services (which I understand are govt's activities). Now, doesnt that reflect the fact that our economy is still wholly driven by Govt's policies and the oil and gas industry? Additionally, FDI into Brunei up to 2000 were mainly from Netherlands and UK in the Mining industry (oil and gas, i presume). That's another indication of oil-injected funds into the country. Other than that, no prominent FDI emerged for other sectors.
Growth rate of 1.6% as per your entry... Is it right for me to say that besides the oil and gas (which drove GDP up), our economy is in fact a "deprived state"? The private sector is driven by Govt's projects and the oil and gas's downstream projects... It appears quite frightening that our private sector is not growing.. Am i right? Can you enlighten me on this matter? I'm interested on your thoughts, or your friend's who wrote that entry.
Just last week, my cousin asked me. Is Brunei a free market? I was left speechless. My answer was "it's a monarchical state". I was unable to elaborate further. Monarchy, yes, but from a political stand point. From the Economics dictionary, the state-run agencies would make Brunei sound like a communist country, yet again, it's not. But free competition is limited in the country. Maybe you can help me out here?
--- Answer ---
I would certainly caution you from concluding that "..growth in GDP is not promising.." for two reasons. First, because the future GDP is not determined by past data. Rather, it is determined by policies and the underlying economic dynamics (such as productivity). Second, because Brunei's "hinterlands" (ie, Indonesia, Singapore, Malaysia) are also experiencing slow growth. There is also an element of interdependence when it comes to growth -- especially in this globalised world.
Your observation that Brunei economy is oil dependent is correct. And for various reasons, Brunei has not been able to move (decisively) away from oil. Although the oil sector now "only" accounts for around 55-60% of the economy (down from around 75% in the last 20 years), the non-oil economy is pretty much a "derivative" of government activities (which are essentially funded by oil receipts). The government budget remains the main (and only) vehicle driving Brunei's economy. So, when the fiscal pump-priming weakened, the economy got weakened too. This is what happened between 2000-2005 when many development projects were not implemented or seriously delayed.
Your question as to why private sector has not grown is a big one. There is no simple answer to that. Partly, it is due to the lack of so-called "scale economies". (Brunei is very small in terms of population, hence its domestic demand). And partly is due institutional reasons.
On the "free market" thing, I wonder how much "free market" can we have when the size of our domestic demand is very small. We can ask ourselves a question: how many companies would be interested to enter a market with only around 100 thousand households? And when there is only few companies "daring" to operate in such small market, wouldn't it be natural to expect that the outcome is "oligopolistic market"?
However, if your question refers to: whether there are "barriers to entry" (be they formal or informal) such that businesses people are free to compete in Brunei market, then the answer may be different. But I personally think there is no formal barrier to entry in Brunei's market.
photo credit: leongfm, www.trekearth.com