This study addresses various economic issues pertaining to the development process of Brunei Darussalam. The unfavourable performance of the Brunei Darussalam economy in the last two decades has increased the government's concern about the future growth and development of this oil-based Sultanate. This study makes a contribution to the debate by applying empirical methods to analyse issues relating to the sustainable growth and development of Brunei Darussalam.
The study represents the first attempt to model formally the Brunei Darussalam economy. Partial equilibrium (time series) and economy-wide (i.e., input-output and general equilibrium) models are constructed and used to simulate the effects of government policy and external shocks on major macroeconomic variables. The study also examines the problems of industrial development in Brunei Darussalam. Problems related to the Dutch disease, the issue of rentier state and some non-economic factors are discussed.
The results of the simultaneous equations model confirm the fact that the oil sector is an enclave sector with few linkages with the other sectors of the economy. Tests of cointegration and causality suggest that government expenditure has no significant short-run impact on sectoral value added. Short-run multipliers for charged and ordinary expenditure (similar to current expenditure) are -1.9 and 0.33, respectively, and 1.38 for development expenditure. The long-run multipliers are all over 2.0, with development expenditure having the greatest impact. The Granger causality tests show that government expenditure increases value added in only a few service industries.
These results are reinforced by the input-output (I-O) analysis. Based on the size of the impact multipliers, it is concluded that the service sectors provide more income and output opportunities for the local economy. In terms of employment creation, labour-intensive sectors show better prospects. A major contribution of this study is the development of an input-output table for Brunei Darussalam. This table is also utilised for the general equilibrium analysis. A computable general equilibrium (CGE) model consisting of 12 commodities, 12 industries, the government sector, household and an export sector is constructed as part of this research. The model is used to conduct four counterfactual simulations. These simulations are: a 5 percent increase in government consumption expenditure; a 5 percent reduction in real wages; a 10 percent increase in oil and gas exports; and a 10 percent devaluation of the Brunei dollar. The results show that increase in government expenditure has 'Dutch Disease' characteristics. It reduces Brunei's international competitiveness and creates a trade deficit. A reduction in real wages has a beneficial effect on the economy through the reduction of resource costs. Increase in oil and gas exports, while beneficial to the economy, has also typical Dutch Disease characteristics. The agricultural and import-competing sectors decline as the oil sector draws resources away from them. A devaluation policy has mixed results. Real output, exports and aggregate employment increase. However, some service (non-tradable) industries are adversely affected.
The major policy implication of the modelling exercise is that the nature of government spending is very important for economic growth. Increase in investment expenditure has been shown to be more productive than mere increase in current expenditure. In terms of government expenditure targeting, the 1-0 analysis suggests that the government should concentrate on the service industries. The CGE analysis suggests that government must endeavour to reduce real resource costs, remove structural distortions and take measures to make the economy more competitive.
In order to achieve sustainable development, Brunei should avoid living off its capital base. The oil rent must be reinvested in other forms of productive capital. While prospects for expanding forestry and fisheries are limited, there is the potential for developing tourism resources. There are good prospects for developing the services sector. However, for this goal to be achievable, there is a need to upgrade the infrastructure roads, ports, telecommunications, and finance and banking services. There is also the need to develop Brunei's human resources. For balanced growth, there is the need to develop more skill levels in the technical and vocational areas.