# Brunei Darussalam's Economic Transition in a Shifting Global Asia

Ahmed Khalid, Bruno Jetin

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Ahmed Khalid, Bruno Jetin. Brunei Darussalam's Economic Transition in a Shifting Global Asia. Springer Nature Singapore, 23, 2025, Asia in Transition, Bruno Jetin, 978-981-97-6926-1. 10.1007/978-981-97-6926-1 halshs-04965913

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Distributed under a Creative Commons Attribution 4.0 International License
Ahmed M. Khalid

Bruno Jetin *Editors*

Brunei Darussalam's
Economic Transition
in a Shifting Global
Asia

ubd INSTITUTE OF ASIAN STUDIES

OPEN ACCESS

<figure><img src="image_2.png" /></figure>

Springer
Asia in Transition

Volume 23

**Editor-in-Chief**

Bruno Jetin, Université Sorbonne Paris Nord, Paris, France

**Series Editors**

Paul J. Carnegie, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

<figure><img src="image_3.png" /></figure>

Rommel A. Curaming, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

Bernard Formoso, Université Paul-Valéry Montpellier 3, Montpellier, France

Kathrina Mohd Daud, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

Liam C. Kelley, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

<figure><img src="image_4.png" /></figure>

Victor T. King, University of Leeds, Leeds, United Kingdom

Magne Knudsen, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

Koh Sin Yee, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

Marc Lautier, Université de Rennes 2, Rennes, France

Lian Kwen Fee, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

Dominik M. Müller, University of Erlangen-Nuremberg, Erlangen, Germany

Noor Hasharina Haji Hassan, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

Jonathan Rigg, University of Bristol, Bristol, United Kingdom
This book series, indexed in Scopus, is an initiative in conjunction with Springer under the auspices of the Universiti Brunei Darussalam – Institute of Asian Studies (http://ias.ubd.edu.bn/). It addresses the interplay of local, national, regional and global influences in Southeast, South and East Asia and the processes of translation and exchange across boundaries and borders. The series explores a variety of disciplinary and interdisciplinary perspectives.

### Submission and Peer Review:

Proposal submissions are to be sent to the Springer Publishing Editor Alex Westcott Campbell: alexandra.campbell@springernature.com using the Book Proposal Form available in the sidebar. All proposals will undergo peer review by the editorial board members. If accepted, the final manuscript will be peer reviewed internally by the editorial board as well as externally (single blind) by Springer ahead of acceptance and publication.
Ahmed M. Khalid · Bruno Jetin
Editors

Brunei Darussalam's
Economic Transition
in a Shifting Global Asia

<figure><img src="image_5.png" /></figure>

INSTITUTE OF
ASIAN STUDIES

<figure><img src="image_6.png" /></figure>

Springer
Editors

Ahmed M. Khalid

Department of Economics

Lahore University of Management Sciences

Lahore, Pakistan

UBD School of Business and Economics

Universiti Brunei Darussalam

Gadong, Brunei Darussalam

Bruno Jetin

Faculty of Law,

Politics and Social Sciences

Université Sorbonne Paris Nord

Paris, France

<figure><img src="image_7.png" /></figure>

ISSN 2364-8252

Asia in Transition

ISBN 978-981-97-6925-4

https://doi.org/10.1007/978-981-97-6926-1

ISSN 2364-8260 (electronic)

ISBN 978-981-97-6926-1 (eBook)

© The Editor(s) (if applicable) and The Author(s) 2025. This book is an open access publication.

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Acknowledgements

First and foremost, we would like to thank all chapter authors for sharing their expert opinions and analysis on Brunei Darussalam's economic and business environment and its transition towards development. This book project would not have been possible without their contributions. Our sincere appreciation goes to two anonymous referees for their insightful feedback. We also extend our gratitude to the excellent editorial service provided by Gareth Richards, Eryn Tan and Rivaa Ubrani of Impress Creative and Editorial, Malaysia. Finally, we would like to acknowledge partial financial support provided by Universiti Brunei Darussalam under a faculty research grant for this book project.

Gadong, Brunei Darussalam
October 2024

Ahmed M. Khalid
Bruno Jetin
# Contents

1 **Introduction: Brunei Darussalam's Economy—Transition towards Development** 1
Ahmed M. Khalid and Bruno Jetin

## Part I Brunei Darussalam's Economic Growth in a Shifting Asia

2 **Brunei Darussalam's Economic Diversification Drive: An Assessment of the Socioeconomic and Geopolitical Issues and Challenges. Overcoming Path Dependence?** 21
Hafiizh Hashim, Stephen C. Druce, and Abdul Hai Julay

3 **Natural Resource Rents and Economic Development: Evidence from Brunei Darussalam** 39
Ly Slesman

4 **Demographic Trends, Employment and Diversification in Brunei Darussalam: An International Perspective** 69
Bruno Jetin

5 **Financial Sector Development in Brunei Darussalam: Trends, Prospects and Challenges** 95
Biswa Nath Bhattacharyay

6 **Examining Brunei Darussalam's Exports amid Developments in Global Value Chains** 127
Angelo Jose B. Lumba, Mahinthan Joseph Mariasingham, and Arushi Gupta

7 **Exploring Brunei Darussalam's Trade Dynamics: Leveraging ASEAN Plus Three and beyond from Its Production Base** 155
Pang Wei Loon
## Part II The Transition of Brunei Darussalam's Economy

8 **Meeting the Skills Demands of Employers in Brunei Darussalam: Where Do the Youth Stand?** 183
Adilah Hisa, M. Muzamil Naqshbandi, and Fadzliwati Mohiddin

9 **Exploring the Potential of Community-based Agritourism in Brunei Darussalam** 199
Wei Lee Chin and Siti Fatimahwati Pehin Dato Musa

10 **Cross-border Tourism between Brunei Darussalam and Sarawak, Malaysia** 219
Wei Lee Chin

11 **Fuelling the Brunei Darussalam Economy: Opportunities for Islamic Financial Services** 237
Hairul Azrin Besar

12 **Challenges and Opportunities of Digital Marketplaces in Brunei Darussalam** 251
Mohammad Nabil Almunawar and Mohammad Alif Azizi Abdullah

13 **The Role of Financial Literacy on Retirement Preparedness in Brunei Darussalam** 271
Pg Md Hasnol Alwee Pg Hj Md Salleh and Roslee Baha

## Part III Managing the Public Sector

14 **Leading through Performance Management in the Brunei Darussalam Public Sector** 297
Thuraya Farhana Said

15 **Operational Excellence through Managing Values in the Brunei Darussalam Public Sector** 327
Mahani Hamdan

16 **Understanding Employee Involvement and Participation in Brunei Darussalam: A Public Sector Organisation Undergoing Change** 349
Wardah Azimah Sumardi

17 **Conclusion: Moving Forward** 365
Ahmed M. Khalid and Bruno Jetin

**Glossary of Non-English Terms** 377

**Index** 379
# Editors and Contributors

## About the Editors

**Ahmed M. Khalid** is Visiting Professor at the Department of Economics, Lahore University of Management Sciences, Pakistan. He is also an Adjunct Professor and former Dean of UBD School of Business and Economics, Universiti Brunei Darussalam. He holds a PhD in economics from Johns Hopkins University, USA. He previously worked at Bond Business School, Bond University, Australia, and the National University of Singapore. He has considerable experience of working as a consultant with the World Bank and as an adviser to the Ministry of Planning Development and Special Initiatives, Pakistan, as well as visiting appointments at various academic and research institutions. He is the editor-in-chief of *Journal of Business and Economic Analysis* and associate editor of *The Singapore Economic Review* and member of the editorial boards of several regional and international journals. His publications include four books, several refereed journal articles, chapters in books and numerous consultancy/project reports, technical reports, working papers and conference papers. His most recent publication, as coeditor, is *Economic integration among D-8 Muslim countries* (2023).

**Bruno Jetin** is currently an Associate Professor at the Faculty of Law, Politics and Social Sciences, Université Sorbonne Paris Nord, France, and he holds a PhD in economics from the same university. He was previously an Associate Professor and former Director of the Institute of Asian Studies, Universiti Brunei Darussalam. His current work focuses on the geopolitics of electric batteries, corruption and foreign direct investment, income distribution and growth in Asia, and the Belt and Road Initiative. His recent publications include: Wage-led demand as a rebalancing strategy for economic growth in China. *Journal of Post Keynesian Economics* 43(3) (2020, with Luis Reyes-Ortiz); Electric batteries and critical materials dependency: A geopolitical analysis of the USA and the European Union. *International Journal of Automotive Technology and Management* 23(4) (2023); and, The effect of corruption on foreign direct investment at the regional level: Positive or negative relationship? In
*Corruption and illegality in Asian investment arbitration*, ed. Nobumichi Teramura, Luke Nottage and Bruno Jetin (2024, with Jamel Saadaoui and Haingo Ratiarison).

**Contributors**

**Abdul Hai Julay** Academy of Brunei Studies, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Adilah Hisa** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Biswa Nath Bhattacharyay** Faculty of Economics and Business, Lambung Mangkurat University, Banjarmasin, Indonesia

**Wei Lee Chin** Faculty of Arts and Social Sciences, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Stephen C. Druce** Academy of Brunei Studies, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Fadzliwati Mohiddin** School of Business, Universiti Teknologi Brunei, Gadong, Brunei Darussalam

**Arushi Gupta** Asian Development Bank, Manila, Philippines

**Hafiizh Hashim** Academy of Brunei Studies, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Hairul Azrin Besar** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Angelo Jose B. Lumba** Asian Development Bank, Manila, Philippines

**M. Muzamil Naqshbandi** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Mahani Hamdan** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Mahinthan Joseph Mariasingham** Asian Development Bank, Manila, Philippines

**Mohammad Alif Azizi Abdullah** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Mohammad Nabil Almunawar** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Pang Wei Loon** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam
**Pg Md Hasnol Alwee Pg Hj Md Salleh** UBD School of Business and Economics,
Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Roslee Baha** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Siti Fatimahwati Pehin Dato Musa** UBD School of Business and Economics,
Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Ly Slesman** Centre for Advanced Research, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Thuraya Farhana Said** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

**Wardah Azimah Sumardi** UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam
Abbreviations and Acronyms

<table><tr><td>ADF</td><td>augmented Dickey-Fuller</td></tr><tr><td>AEC</td><td>ASEAN Economic Community</td></tr><tr><td>AFTA</td><td>ASEAN Free Trade Area</td></tr><tr><td>AIC</td><td>Akaike information criterion</td></tr><tr><td>AMBD</td><td>Autoriti Monetari Brunei Darussalam (now Central Bank)</td></tr><tr><td>APSC</td><td>ASEAN Political-Security Community</td></tr><tr><td>APT</td><td>ASEAN Plus Three</td></tr><tr><td>ARCH</td><td>autoregressive conditional heteroscedasticity</td></tr><tr><td>ARDL</td><td>autoregressive distributed lag</td></tr><tr><td>ASCC</td><td>ASEAN Socio-Cultural Community</td></tr><tr><td>ASEAN</td><td>Association of Southeast Asian Nations</td></tr><tr><td>b/d</td><td>barrels per day</td></tr><tr><td>BAB</td><td>Brunei Association of Banks</td></tr><tr><td>BATP</td><td>Brunei Agro Technology Park</td></tr><tr><td>BDPC</td><td>Brunei Darussalam Deposit Protection Corporation</td></tr><tr><td>BEDB</td><td>Brunei Economic Development Board</td></tr><tr><td>BIBD</td><td>Bank Islam Brunei Darussalam</td></tr><tr><td>BIMP-EAGA</td><td>Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area</td></tr><tr><td>BITA</td><td>Brunei Insurance and Takaful Association</td></tr><tr><td>CAR</td><td>capital adequacy ratio</td></tr><tr><td>CIA</td><td>Currency Interchangeability Agreement</td></tr><tr><td>CIBFM</td><td>Centre for Islamic Banking, Finance and Management</td></tr><tr><td>CIMB</td><td>Commerce International Merchant Bankers</td></tr><tr><td>CPTPP</td><td>Comprehensive and Progressive Agreement for Trans-Pacific Partnership</td></tr><tr><td>CUSUM</td><td>cumulative sum</td></tr><tr><td>CUSUMSQ</td><td>CUSUM of squares</td></tr><tr><td>DARe</td><td>Darussalam Enterprise</td></tr><tr><td>DiT</td><td>development in transition</td></tr><tr><td>DVA</td><td>domestic value added</td></tr></table>
<table><tr><td>ECM</td><td>error correction model</td></tr><tr><td>EIP</td><td>employee involvement and participation</td></tr><tr><td>ETF</td><td>Employees Trust Fund</td></tr><tr><td>FCE</td><td>final consumption expenditure</td></tr><tr><td>FD</td><td>financial sector development index</td></tr><tr><td>FDI</td><td>foreign direct investment</td></tr><tr><td>FSBP</td><td>Financial Sector Blueprint</td></tr><tr><td>FTA</td><td>free trade agreement</td></tr><tr><td>FVA</td><td>foreign value added</td></tr><tr><td>GCC</td><td>Gulf Cooperation Council</td></tr><tr><td>GDP</td><td>gross domestic product</td></tr><tr><td>GPS</td><td>Government Pension Scheme</td></tr><tr><td>GQ</td><td>governance quality</td></tr><tr><td>GVA</td><td>gross value added</td></tr><tr><td>GVC</td><td>global value chain</td></tr><tr><td>HHI</td><td>Herfindahl-Hirschman index</td></tr><tr><td>HS</td><td>Harmonised System</td></tr><tr><td>HSBC</td><td>Hongkong and Shanghai Banking Corporation</td></tr><tr><td>ICT</td><td>information and communication technology</td></tr><tr><td>ILO</td><td>International Labour Organisation</td></tr><tr><td>IMS-GT</td><td>Indonesia-Malaysia-Singapore growth triangle</td></tr><tr><td>IOT</td><td>input-output table</td></tr><tr><td>KNK</td><td>Kenali Negara Kitani (Get to Know Your Own Country)</td></tr><tr><td>LCB</td><td>lower critical bound</td></tr><tr><td>LNG</td><td>liquefied/liquid natural gas</td></tr><tr><td>LU4</td><td>composite labour underutilisation</td></tr><tr><td>MDG</td><td>Millennium Development Goal</td></tr><tr><td>MFN</td><td>most favoured nation</td></tr><tr><td>MIB</td><td>Melayu Islam Beraja (Malay Islamic monarchy)</td></tr><tr><td>MINDEX</td><td>Multidimensional Indicator of Extractives-based Development</td></tr><tr><td>MNC</td><td>multinational corporation</td></tr><tr><td>MoU</td><td>memorandum of understanding</td></tr><tr><td>MRIO</td><td>multiregional input-output</td></tr><tr><td>MSME</td><td>micro, small and medium enterprise</td></tr><tr><td>MUIB</td><td>Majlis Ugama Islam Brunei (Brunei Islamic Religious Council)</td></tr><tr><td>NDP</td><td>National Development Plan</td></tr><tr><td>NEI</td><td>new economy indicator</td></tr><tr><td>NFLC</td><td>National Financial Literacy Council</td></tr><tr><td>NIM</td><td>net interest margin</td></tr><tr><td>NPL</td><td>non-performing loan</td></tr><tr><td>OECD</td><td>Organisation for Economic Co-operation and Development</td></tr><tr><td>OLS</td><td>ordinary least squares</td></tr><tr><td>OPEC</td><td>Organization of the Petroleum Exporting Countries</td></tr><tr><td>PDC</td><td>pure double-counting</td></tr></table>
PENGGERAK Peneraju Gagasan Gemilang untuk Rakyat (Piloting Exclusive National Goals, Gearing Excellent Results and KPIs)

PISA Programme for International Student Assessment

PMP performance management policy

PP Phillips-Perron

PPP purchasing power parity

R&D research and development

RCA revealed comparative advantage

RCEP Regional Comprehensive Economic Partnership

RGDPPC rents and real GDP per capita

ROA return on assets

ROE return on equity

SDG Sustainable Development Goal

SFSB Syariah Financial Supervisory Board

SIC standard industrial classification

SITC standard international trade classification

SME small- and medium-sized enterprise

SPN21 National Education System for the 21st Century

SUT supply-use table

SWOT strengths, weaknesses, opportunities and threats

TAIB Tabung Amanah Islam Brunei

TEU twenty-foot equivalent units

TII trade intensity index

TiVA Trade in Value Added

TPP Trans-Pacific Partnership

UCB upper critical bound

UN United Nations

UNCTAD United Nations Trade and Development

UOB United Overseas Bank

WTO World Trade Organisation
List of Figures

<table><tr><td>Fig. 1.1</td><td>New processes of economic growth</td><td>5</td></tr><tr><td>Fig. 1.2</td><td>Chronology of Brunei's National Development Plans, 1953–2035</td><td>7</td></tr><tr><td>Fig. 2.1</td><td>Brunei Darussalam GDP growth, 2000–2020 (%)</td><td>29</td></tr><tr><td>Fig. 3.1</td><td>Brunei Darussalam: Total crude oil production and exports, and oil price, 1983–2019</td><td>41</td></tr><tr><td>Fig. 3.2</td><td>Brunei Darussalam: Sub-sectoral shares of industry in GDP, 2010–2019 (%)</td><td>42</td></tr><tr><td>Fig. 3.3</td><td>Brunei Darussalam: Natural resource rents and GDP per capita, 1975–2019</td><td>44</td></tr><tr><td>Fig. 3.4</td><td>Brunei Darussalam: Private enterprise share by business size and industry, 2015–2017 (%)</td><td>45</td></tr><tr><td>Fig. 3.5</td><td>Brunei Darussalam: Foreign direct investment stock by economic activity, 2010–2019</td><td>46</td></tr><tr><td>Fig. 3.6</td><td>Transmission mechanism of oil windfalls</td><td>51</td></tr><tr><td>Fig. 3.7</td><td>Brunei Darussalam: Resource versus non-resource shares in current GDP, 2010–2019 (%)</td><td>59</td></tr><tr><td>Fig. 3.8</td><td>Brunei Darussalam: Sectoral shares of GVA content in domestic final demand, 2010–2017</td><td>61</td></tr><tr><td>Fig. 3.9</td><td>Brunei Darussalam: Sectoral shares of GVA content in foreign final demand, 2010–2017</td><td>62</td></tr><tr><td>Fig. 3.10</td><td>Brunei Darussalam: Product concentration in exports and imports, 1995–2019</td><td>62</td></tr><tr><td>Fig. 3.11</td><td>Brunei Darussalam: Private enterprise by business size and employment share, 2015–2017</td><td>63</td></tr><tr><td>Fig. 4.1</td><td>Brunei Darussalam: Total population, 1950–2100</td><td>71</td></tr><tr><td>Fig. 4.2</td><td>Brunei Darussalam: Crude birth rate and crude death rate, 1950–2100</td><td>72</td></tr><tr><td>Fig. 4.3</td><td>Brunei Darussalam: Population and working-age population, 1950–2100</td><td>73</td></tr></table>
<table>
  <tr>
    <td>Fig. 4.4</td>
    <td>Brunei Darussalam: Child and old dependency ratios, 1950–2100</td>
    <td>74</td>
  </tr>
  <tr>
    <td>Fig. 4.5</td>
    <td>Brunei Darussalam: Total dependency ratio and income level groups, 1950–2100</td>
    <td>74</td>
  </tr>
  <tr>
    <td>Fig. 4.6</td>
    <td>Unemployment rate in selected ASEAN countries, 2000–2022</td>
    <td>75</td>
  </tr>
  <tr>
    <td>Fig. 4.7</td>
    <td>Unemployment of young people in selected ASEAN countries, 2000–2022</td>
    <td>76</td>
  </tr>
  <tr>
    <td>Fig. 4.8</td>
    <td>Brunei Darussalam: Breakdown of local employment in the public and private sector, 2014–2021</td>
    <td>79</td>
  </tr>
  <tr>
    <td>Fig. 4.9</td>
    <td>Brunei Darussalam: Share of foreign workers in selected sectors, 2003–2020 (%)</td>
    <td>80</td>
  </tr>
  <tr>
    <td>Fig. 4.10</td>
    <td>Brunei Darussalam: Employment to population ratio by sex, 1971–2021</td>
    <td>82</td>
  </tr>
  <tr>
    <td>Fig. 4.11</td>
    <td>Brunei Darussalam: Total female jobs by skill level and nationality, 2020 (%)</td>
    <td>84</td>
  </tr>
  <tr>
    <td>Fig. 4.12</td>
    <td>Indonesia MINDEX, 1997–2010–2016</td>
    <td>87</td>
  </tr>
  <tr>
    <td>Fig. 4.13</td>
    <td>Malaysia MINDEX, 1997–2010–2016</td>
    <td>87</td>
  </tr>
  <tr>
    <td>Fig. 4.14</td>
    <td>Brunei Darussalam MINDEX, 1997–2010–2016</td>
    <td>88</td>
  </tr>
  <tr>
    <td>Fig. 4.15</td>
    <td>Export diversification index of Brunei Darussalam and selected regions, 1995–2021</td>
    <td>89</td>
  </tr>
  <tr>
    <td>Fig. 4.16</td>
    <td>Export diversification index of Brunei Darussalam and the Gulf countries, 1995–2021</td>
    <td>89</td>
  </tr>
  <tr>
    <td>Fig. 6.1</td>
    <td>Value-added accounting framework</td>
    <td>130</td>
  </tr>
  <tr>
    <td>Fig. 6.2</td>
    <td>Brunei Darussalam: Decomposition of exports into value-added categories, 2000, 2007–2021 (USD billion)</td>
    <td>131</td>
  </tr>
  <tr>
    <td>Fig. 6.3</td>
    <td>Brunei Darussalam: Gross exports decomposition for mining and quarrying, 2000, 2007–2021 (%)</td>
    <td>133</td>
  </tr>
  <tr>
    <td>Fig. 6.4</td>
    <td>Brunei Darussalam: Gross exports decomposition for coke, refined petroleum and nuclear fuel, 2000, 2007–2021 (%)</td>
    <td>133</td>
  </tr>
  <tr>
    <td>Fig. 6.5</td>
    <td>Brunei Darussalam: Gross exports decomposition for chemicals and chemical products, 2000, 2007–2021 (%)</td>
    <td>134</td>
  </tr>
  <tr>
    <td>Fig. 6.6</td>
    <td>Brunei Darussalam: Global value chain participation rates, 2000, 2007–2021 (%)</td>
    <td>135</td>
  </tr>
  <tr>
    <td>Fig. 6.7</td>
    <td>Backward (trade-based) GVC participation rates, selected economies, 2000, 2007–2021 (%)</td>
    <td>136</td>
  </tr>
  <tr>
    <td>Fig. 6.8</td>
    <td>Forward (trade-based) GVC participation rates, selected economies, 2000, 2007–2021 (%)</td>
    <td>136</td>
  </tr>
  <tr>
    <td>Fig. 6.9</td>
    <td>Brunei Darussalam: Top trading partners by value-added category, 2018–2021 (%)</td>
    <td>138</td>
  </tr>
  <tr>
    <td>Fig. 6.10</td>
    <td>Herfindahl–Hirschman index based on DVA embedded on exports, selected economies</td>
    <td>139</td>
  </tr>
</table>
<table>
  <tbody>
    <tr>
      <td>Fig. 6.11</td>
      <td>Upstreamness, Brunei Darussalam and selected economies, 2000–2021</td>
      <td>141</td>
    </tr>
    <tr>
      <td>Fig. 6.12</td>
      <td>Average production length based on forward and backward industrial linkages, Brunei Darussalam and selected economies, 2000–2021</td>
      <td>142</td>
    </tr>
    <tr>
      <td>Fig. 6.13</td>
      <td>Brunei Darussalam: Breakdown of average production lengths, 2000–2021</td>
      <td>143</td>
    </tr>
    <tr>
      <td>Fig. 6.14</td>
      <td>Average production line position in GVCs, Brunei Darussalam and selected economies, 2000–2021</td>
      <td>144</td>
    </tr>
    <tr>
      <td>Fig. 6.15</td>
      <td>Brunei Darussalam: Sectoral average production line position in GVCs, 2000–2021</td>
      <td>144</td>
    </tr>
    <tr>
      <td>Fig. 7.1</td>
      <td>Brunei Darussalam: Exports and imports, 1960–2020 (USD millions)</td>
      <td>161</td>
    </tr>
    <tr>
      <td>Fig. 7.2</td>
      <td>Brunei Darussalam: TII with ASEAN and APT, 1980–2019</td>
      <td>171</td>
    </tr>
    <tr>
      <td>Fig. 7.3</td>
      <td>Brunei Darussalam: FDI to GDP ratio, 1990–2019 (%)</td>
      <td>175</td>
    </tr>
    <tr>
      <td>Fig. 8.1</td>
      <td>Brunei Darussalam: Importance of employability skills (%)</td>
      <td>187</td>
    </tr>
    <tr>
      <td>Fig. 8.2</td>
      <td>Brunei Darussalam: Competence in executive employability skills (%)</td>
      <td>189</td>
    </tr>
    <tr>
      <td>Fig. 10.1</td>
      <td>Framework for analysing cross-border shopping patterns</td>
      <td>223</td>
    </tr>
    <tr>
      <td>Fig. 12.1</td>
      <td>Supplier, consumer and intermediary</td>
      <td>257</td>
    </tr>
    <tr>
      <td>Fig. 13.1</td>
      <td>Respondents who tried to calculate retirement needs (%)</td>
      <td>281</td>
    </tr>
    <tr>
      <td>Fig. 13.2</td>
      <td>Respondents who attended financial events (%)</td>
      <td>281</td>
    </tr>
    <tr>
      <td>Fig. 13.3</td>
      <td>Respondents with voluntary Tabung Amanah Pekerja and/or supplemental contributory pension payments (%)</td>
      <td>282</td>
    </tr>
    <tr>
      <td>Fig. 13.4</td>
      <td>Respondents and additional retirement plans (%)</td>
      <td>282</td>
    </tr>
    <tr>
      <td>Fig. 13.5</td>
      <td>Respondents confident/very confident of meeting basic needs and general expenses in retirement, by ‘financial sophistication 1’ (%)</td>
      <td>283</td>
    </tr>
    <tr>
      <td>Fig. 13.6</td>
      <td>Respondents confident/very confident of meeting basic needs and general expenses in retirement, by ‘financial sophistication 2’ (%)</td>
      <td>283</td>
    </tr>
    <tr>
      <td>Fig. 13.7</td>
      <td>Respondents with concerns about health care cost, by ‘financial sophistication 1’ (%)</td>
      <td>285</td>
    </tr>
    <tr>
      <td>Fig. 13.8</td>
      <td>Respondents with concerns about health care cost, by ‘financial sophistication 2’ (%)</td>
      <td>285</td>
    </tr>
    <tr>
      <td>Fig. 13.9</td>
      <td>Concerns about retirement, by ‘financial sophistication 1’ (%)</td>
      <td>286</td>
    </tr>
    <tr>
      <td>Fig. 13.10</td>
      <td>Opinion of respondents on lack of additional retirement plan, by ‘financial sophistication 1’ (%)</td>
      <td>287</td>
    </tr>
    <tr>
      <td>Fig. 13.11</td>
      <td>Opinion of respondents on lack of additional retirement plan, by ‘financial sophistication 2’ (%)</td>
      <td>288</td>
    </tr>
    <tr>
      <td>Fig. 14.1</td>
      <td>Brunei Darussalam: Strategic planning process with performance management practices</td>
      <td>305</td>
    </tr>
  </tbody>
</table>
List of Tables

<table><tr><td>Table 1.1</td><td>Per capita GDP of ASEAN (PPP-based)</td><td>6</td></tr><tr><td>Table 1.2</td><td>Brunei Darussalam: Basic economic indicators, 2000–2019 (% of GDP)</td><td>8</td></tr><tr><td>Table 2.1</td><td>Brunei Darussalam: Worldwide Governance Indicators, 2010–2020</td><td>30</td></tr><tr><td>Table 3.1</td><td>Measurement and unit root tests</td><td>43</td></tr><tr><td>Table 3.2</td><td>Brunei Darussalam: Natural resource rents and economic growth, 1970–2019</td><td>56</td></tr><tr><td>Table 3.3</td><td>Brunei Darussalam: Shares of economic activity in real gross value added (%)</td><td>60</td></tr><tr><td>Table 4.1</td><td>Composite labour underutilisation (LU4) in ASEAN, 2017–2019 (%)</td><td>77</td></tr><tr><td>Table 4.2</td><td>High rents and public employment in selected countries</td><td>78</td></tr><tr><td>Table 4.3</td><td>Brunei Darussalam: Share of foreign workers by occupation, 2014–2021 (%)</td><td>81</td></tr><tr><td>Table 4.4</td><td>Brunei Darussalam: Occupation earning gap: Foreign workers earning/local workers earning, 2014–2019 (%)</td><td>81</td></tr><tr><td>Table 4.5</td><td>Employment to population ratio of women, selected countries (2019–2020), except Kuwait (2015–2016) (%)</td><td>83</td></tr><tr><td>Table 5.1</td><td>Main findings of literature review on the relationship between the development of the financial sector and economic growth</td><td>100</td></tr><tr><td>Table 5.2</td><td>Brunei Darussalam: Structure of the financial sector, 2020</td><td>107</td></tr><tr><td>Table 5.3</td><td>Brunei Darussalam: Trends in the development of the depth of the banking sector, 2014–2018</td><td>112</td></tr><tr><td>Table 5.4</td><td>Brunei Darussalam: Trends in the development of financial access and financial inclusion in the banking sector, 2014–2018</td><td>114</td></tr><tr><td>Table 5.5</td><td>Brunei Darussalam: Trends in the development of the efficiency of the banking sector, 2014–2018 (%)</td><td>116</td></tr></table>
<table><tr><td>Table 7.1</td><td>Brunei Darussalam: Gross domestic product (expenditure type) in current prices, 2017–2021 (BND millions)</td><td>158</td></tr><tr><td>Table 7.2</td><td>Brunei Darussalam: Total export and import headings at product level, 1992–2019</td><td>162</td></tr><tr><td>Table 7.3</td><td>Brunei Darussalam: Top 10 products by export share, 2001 and 2019</td><td>163</td></tr><tr><td>Table 7.4</td><td>Brunei Darussalam: Top 10 products by import share, 2001 and 2019</td><td>164</td></tr><tr><td>Table 7.5</td><td>Brunei Darussalam: Exports to major trading partners, 2010 and 2019</td><td>167</td></tr><tr><td>Table 7.6</td><td>Brunei Darussalam: Imports from major trading partners, 2010 and 2019</td><td>168</td></tr><tr><td>Table 7.7</td><td>Brunei Darussalam: Exports to APT by sector, 2019 (USD1,000)</td><td>169</td></tr><tr><td>Table 7.8</td><td>Brunei Darussalam: Imports from APT by sector, 2019 (USD1,000)</td><td>170</td></tr><tr><td>Table 7.9</td><td>Brunei Darussalam: Top exports of RCA index, 2019</td><td>171</td></tr><tr><td>Table 7.10</td><td>Brunei Darussalam: Domestic value added of gross export, 1995–2020 (ratio)</td><td>173</td></tr><tr><td>Table 8.1</td><td>Brunei Darussalam: Employability skills importance by employers’ sector (%)</td><td>188</td></tr><tr><td>Table 8.2</td><td>Brunei Darussalam: Employability skills importance by employers’ work experience (%)</td><td>189</td></tr><tr><td>Table 8.3</td><td>Brunei Darussalam: Employability skills competence by employers’ sector (%)</td><td>190</td></tr><tr><td>Table 8.4</td><td>Brunei Darussalam: Employability skills competence by employers’ work experience (%)</td><td>191</td></tr><tr><td>Table 9.1</td><td>Community-based agritourism fieldwork research: List of respondents</td><td>204</td></tr><tr><td>Table 9.2</td><td>Brunei Darussalam: SWOT analysis on the potential of community-based agritourism</td><td>205</td></tr><tr><td>Table 10.1</td><td>Bruneian residents leaving for East Malaysia states, 2018–2019</td><td>226</td></tr><tr><td>Table 10.2</td><td>Bruneian residents leaving for East Malaysia states, by yearly quarters, 2018–2019</td><td>226</td></tr><tr><td>Table 10.3</td><td>Brunei–Miri cross-border visitors: Socioeconomic profile of respondents</td><td>228</td></tr><tr><td>Table 12.1</td><td>Brunei Darussalam: Digital marketplaces</td><td>263</td></tr><tr><td>Table 13.1</td><td>Financial literacy: Summary of respondents’ profiles</td><td>278</td></tr><tr><td>Table 13.2</td><td>Chi-squared results: Retirement preparation</td><td>280</td></tr><tr><td>Table 13.3</td><td>Chi-squared results: Quality of retirement preparation</td><td>282</td></tr><tr><td>Table 13.4</td><td>Chi-squared results: Meeting basic needs and general expenses upon retirement</td><td>283</td></tr><tr><td>Table 13.5</td><td>Weighted scores of ranked retirement concerns</td><td>284</td></tr></table>
<table><tr><td>Table 13.6</td><td>Chi-squared results: Cost of health care, by financial sophistication</td><td>284</td></tr><tr><td>Table 13.7</td><td>Chi-squared results: Assets involved in retirement plan (aside from Tabung Amanah Pekerja/old age pensions/ pensions), by 'financial sophistication 1'</td><td>286</td></tr><tr><td>Table 13.8</td><td>Chi-squared results: Opinion of respondents on lack of additional retirement plan, by 'financial sophistication 1'</td><td>287</td></tr><tr><td>Table 13.9</td><td>Chi-squared results: Opinion of respondents on lack of additional retirement plan, by 'financial sophistication 2'</td><td>288</td></tr><tr><td>Table 14.1</td><td>Introduction of performance management initiatives in selected Asian countries</td><td>300</td></tr><tr><td>Table 14.2</td><td>Brunei Darussalam: Reform policies and initiatives for performance improvement</td><td>304</td></tr><tr><td>Table 14.3</td><td>Brunei Darussalam: Difference between the bonus rate in 1992 (still in use) and 2000 (revoked)</td><td>310</td></tr><tr><td>Table 14.4</td><td>Comparison between the case study organisations of the implementation of performance management</td><td>313</td></tr><tr><td>Table 14.5</td><td>Position of office/unit of strategic management</td><td>315</td></tr></table>
<figure><img src="image_8.png" /></figure>

Chapter 1

# Introduction: Brunei Darussalam's Economy—Transition towards Development

Ahmed M. Khalid and Bruno Jetin

**Abstract** The global economy is experiencing a major transformation which requires countries, specifically developing countries, to adopt new policies for economic development. Many developing economies need policies to cope with the emerging challenges of environmental change, technological revolution, the high volume of globalised trade and financial flows, cross-border labour movement, rising inequality, and frequent occurrences of economic crises and natural disasters. The United Nation's 2030 Agenda for Sustainable Development Goals (SDGs) suggests that economic development should have a multidimensional context that includes economic, social and environmental aspects and not just income. Given the recent trends of globalisation, such development is also linked to regional and global factors. Although the development experience of some emerging economies since the 1990s suggests that the fast pace of economic reforms has led to high gross domestic product (GDP) growth, the benefits are not equally distributed. As a consequence, the notion of 'development in transition' (DiT) requires not only a mix of well-designed policies but also timely implementation, enforcement and monitoring of such policies, as well as international cooperation to ensure sustainable development and distribution of benefits on an equitable basis. This introductory chapter discusses the evolution of development models suggested in the literature and practised by developing countries. It then provides an overview of Brunei Darussalam's transitions towards development. Finally, it presents a summary of all the chapters in this volume. The deliberations suggest that more commitments towards policy implementation would help the country achieve the targets set out in its Wawasan Brunei 2035 development blueprint.

A.M. Khalid (✉)

Department of Economics, Lahore University of Management Sciences, Lahore, Pakistan
e-mail: ahmed.khalid@lums.edu.pk

UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei
Darussalam

B. Jetin

Faculty of Law, Politics and Social Sciences, Université Sorbonne Paris Nord, Paris, France
e-mail: bruno.jetin@univ-paris13.fr
**1.1 Introduction**

The Association of Southeast Asian Nations (ASEAN) is among the world's most successful economic blocs. Established in 1967 with only five members from the Southeast Asian region, the group now has 10 member states (Weatherbee 2019). Having multiple objectives, the main focus of ASEAN in the context of economic integration between member states is to achieve sustainable economic growth (Jetin and Mikić 2016). Despite a huge disparity between ASEAN states in terms of size— with Indonesia at 1.9 million km² and Singapore at only 734 km²—and population— with Indonesia again at 275 million and Brunei Darussalam at only 445,000—as well as differences in income levels, culture, locally spoken languages and religious affiliations (Kingsbury 2007), the region has been able to make significant progress over more than five decades. The success of ASEAN has been well acknowledged by developed nations, with the region's policies being followed by other emerging economies and economic blocs to collaborate in achieving certain goals, particularly the facilitation of cross-border movements of labour and goods. An effort is made in this introductory chapter to provide a theoretical discussion of development models, an overview of ASEAN's transition towards development and a summary of the chapters in this book. The introduction is organised in the following manner. Section 1.2 provides a brief overview of the theoretical and empirical literature on the economics of transition. Section 1.3 details the socioeconomic development of Brunei and its long-term plan to achieve economic diversification. A summary of chapters is provided in Sect. 1.4, while some concluding remarks are presented in Sect. 1.5.

**1.2 Economic Transition: Moving towards Development**

The global economy is experiencing a major transformation which requires countries, specifically developing countries, to adopt new policies for economic development. Many developing economies need policies to cope with the emerging challenges of environmental change, technological revolution, the high volume of globalised trade and financial flows, cross-border labour movement, rising inequality and frequent occurrences of economic crises and natural disasters. The United Nations' (n.d.) 2030 Agenda for Sustainable Development Goals (SDGs) suggests that economic development should have a multidimensional context which includes economic, social and environmental aspects and not just income. Given the recent trends of globalisation,
such development is also linked to regional and global factors. Although the devel-
opment experience of some emerging economies since the 1990s suggests that the
fast pace of economic reforms has led to high gross domestic product (GDP) growth,
the benefits are not equally distributed (IMF 2000). As a consequence, the notion of
‘development in transition’ (DiT) requires not only a mix of well-designed policies
but also timely implementation, enforcement and monitoring of such policies, as
well as international cooperation to ensure sustainable development and distribution
of benefits on an equitable basis.

A number of models have been developed in economic theory detailing what is needed for countries to achieve economic development. The Harrod-Domar growth model is considered the first such paradigm to initiate the debate on factors determining economic growth. The model places emphasis on a strong saving-investment relationship as a precondition for economic growth. Accordingly, higher investment can exert two effects—an income-generating effect and a productivity effect by creating capacity, thereby leading to higher growth. W.W. Rostow’s (1959) seminal work on the ‘five stages of growth/development’ further extends this debate on how less-developed countries could pursue economic development (for more details on Rostow, see PennState 2015). Again, the model focuses on a saving-investment relationship, and it suggests that economic development requires substantial investment in capital. The deep-rooted financial sector reforms adopted by some Asian countries during the late 1980s and early 1990s were partly the result of policies intended to provide incentives for savers and investors. However, the Harrod-Domar portfolio of policies did not work in some countries due to: (1) low saving rates; (2) a lack of markets that could channel savings into the most productive applications (investment); and (3) the poor quality of investments.<fnref n="1" /> Some developing countries were thus trapped in a vicious circle with low saving rates to low capital formations resulting in low productivity and income.

The 1990s also witnessed the rapid growth of some countries in Asia and Latin America, along with the transformation of the so-called ‘command economies’ to ‘market economies’. The assessment of reforms during the transition period was important to determine the pace of reforms. Martin L. Weitzman (1993) describes two different models of economic transition or transformation. The first is called the ‘revolutionary’ model (or the East European model), requiring transition at a fast pace through establishing well-defined property rights as a precondition to the ‘proper functioning of a capitalist market economy’, enabling the privatisation of state-owned enterprises. The second is called the ‘evolutionary’ model (or the Chinese model), based on a gradualist approach towards economic transition, ‘allowing market oriented competitive enterprises to develop from within’. Although, both models emphasise privatisation, the Chinese model focuses more on establishing competition. David Lipton and Jeffrey Sachs (1990) also propose a ‘big bang’

<footnote n="1">¹ Rostow’s five stages of development have received considerable criticism in the academic literature. Some critics believe that it focuses only on the Westernised path to economic development. Many countries do not follow the steps Rostow lists, while others simply have a different goal than mass production. For instance, many countries shifted from agriculture and minerals to industry plus services. See Gerald Meier (1989).</footnote>
approach to transition, suggesting all reform policies be implemented quickly and as a package. The same approach is also advocated in Oliver Blanchard et al. (1993). Consistent with the Washington Consensus, this policy model advocates a reform package consisting of liberalisation, privatisation and fiscal discipline (Berglöf and Roland 2007). Jan Svejnar (2002) suggests two types of reforms that transitional economies should follow. Type I requires macroeconomic stabilisation, price liberalisation and institutional changes. Type II reforms call for regulatory restructuring and enforcement to establish a market-driven mechanism. This includes the privatisation of state-owned enterprises, labour market regulation and a prudential regulatory structure.

However, the successful experience of the emerging and developing economies in the late 1980s and early 1990s suggests that a gradualist approach works better to achieve sustainable growth. The risks associated with rapid development were also exposed during the 1997 Asian financial crisis. Indonesia is a good example. Despite accomplishing high growth through fast-paced reforms, without establishing a regulatory structure to ensure the safety of private investment and rights of ownership, it paid a huge price with economic growth declining from a positive 10% growth at the beginning of 1997 to a negative 13% growth during the crisis (Ariff and Khalid 2005). Accordingly, institutional building and regulatory reforms were strongly emphasised during the transition period.

Marcin Piatkowski (2002) emphasises the role of information and communication technologies (ICT) during the transition process. He constructed a 'new economy indicator' (NEI) and used a sample of Eastern European countries to measure the capacity of transitional economies in exploiting the potential of innovation and technology diffusion to help economies in transition catch up with developed countries. Kenneth L. Kraemer and Jason Dedrick (2001) suggest that due to a lack of investment in complementary investment in infrastructure, human capital and research and development (R&D), developing countries have not been able to adapt to high-tech, innovative and efficient production models.

Later, policies of openness, use of information technology and innovative business models would change the whole scenario. As a result, investment was differentiated between public, private and foreign investment. Southeast Asian countries adopted policies to attract foreign investment and encourage domestic investment. The sectoral developmental approach moved from being agriculturally based to manufacturing and services. Diversification became a buzzword in national economic planning. The quality of public sector investment was emphasised. Public-private partnership was now considered an important element of public sector projects. The governance system was reshaped where the government role was seen more as a facilitator through market reforms instead of market controls. The successful experience of East and Southeast Asian economies or what the World Bank (1993) called the 'East Asian miracle' was based on sound principles of competition, decontrol and decentralisation, and restructuring to ensure the efficient use of resources and meeting the market demand for goods and services (Ariff and Khalid 2005). Based on this successful experience, the literature suggests four main ingredients of the transition process towards development: (1) liberalisation in the real and financial
sectors; (2) macroeconomic stabilisation, including both monetary and fiscal sectors to achieve sustainable current account and balance of payments; (3) restructuring of the private sector (to increase its role) and public-private partnership; and (4) legal and institutional reforms and strict standards of prudential and financial management (IMF 2000; Ariff and Khalid 2005). Although there is no one-size-fits-all solution for the sequencing of such reforms, the International Monetary Fund (IMF 2000) suggested that liberalisation, macroeconomic stabilisation and privatisation of small-scale enterprises be initiated first, followed by privatisation of large-scale enterprises and legal and institutional reforms.

In the wake of fast-paced innovation and technological development, new challenges are being faced by businesses and stakeholders. To accommodate these emerging challenges, Nadeem Ul Haque (PIDE 2020) proposed a new framework: a new growth process (Fig. 1.1). According to this process, the quantity and quality of investment are enhanced through market reforms and public sector investment while productivity is improved through innovative practices, entrepreneurial skills and technical knowledge. In this framework, innovations, markets and entrepreneurship work as key instruments, whereas vital interventions include policy, procedural and institutional reforms to create an enabling environment.

In sum, this overview of the literature provides interesting details on how economies should transition towards economic development. The experiences of Eastern European countries and socialist economies in East and Central Asia show that there is no single model or formula for transitional economies to follow. Each country needs to devise a strategy based on its own socioeconomic and geopolitical environment. However, it is very clear through this debate that reforms must look at changing market conditions. Further, sound macroeconomic planning, friendly business environments, and regulatory and institutional restructuring are key to the success of reforms. From a theoretical perspective, policymakers need to think beyond economic theory and make use of the development of contract theory, political economy, law and economics, regulation theory, corporate finance and other areas in applied economic theory (Arrow 2000). Finally, reforms should have a dynamic focus and a regular assessment of gains and losses.

<figure><img src="image_9.png" /><figcaption>**Fig. 1.1** New processes of economic growth. *Source* Adapted from PIDE (2020)</figcaption></figure>
In the context of the above discussion, the next section considers some interesting features of Brunei's economy and its aspirations towards economic development.

## 1.3 Brunei Darussalam: Transition towards Economic Development

On the basis of GDP per capita derived from purchasing power parity (PPP), Brunei is the second richest country after Singapore in ASEAN and ranks ninth in the world (World Population Review 2023; IMF 2023) (Table 1.1). However, Brunei's economy is heavily dependent on oil and gas resources. Given the depleting oil reserves and high volatility of oil prices, this has led to significant uncertainty in the sustainability of Brunei's economic growth. It is therefore imperative for the country to diversify its economy, reduce dependence on oil and gas, and expand its sources of income to other sectors.

The call for diversification was first made in the Second National Development Plan (NDP) (1962–1966), long before Brunei gained full independence in 1984. The need for diversification was further reiterated in the mid-1970s in the Third NDP with a clear stated objective: ‘Diversify the economy through accelerated development of agriculture and industry’. This was broadened in 1996 with the Seventh NDP with ‘economic development through economic diversification’ as the main objective (Mohd Rozan and Milojević 2016) (Fig. 1.2).

In 2007 the government announced Wawasan Brunei 2035 (Brunei Vision 2035) as a national vision and long-term development plan for the country. It outlined three specific goals to be achieved by 2035 through the use of eight strategies (Brunei Darussalam 2019). The three goals are:

<table><caption>**Table 1.1** Per capita GDP of ASEAN (PPP-based)</caption><thead><tr><th rowspan="2">Country</th><th colspan="6">PPP, constant 2011 international USD</th><th rowspan="2">IMF</th></tr><tr><th>1990</th><th>1995</th><th>2000</th><th>2005</th><th>2010</th><th>2015</th><th>2023</th></tr></thead><tbody><tr><td>Singapore</td><td>34,298</td><td>44,860</td><td>51,636</td><td>61,890</td><td>72,018</td><td>80,192</td><td>140,280</td></tr><tr><td>Brunei Darussalam</td><td>85,281</td><td>86,753</td><td>82,717</td><td>83,717</td><td>79,603</td><td>73,605</td><td>79,408</td></tr><tr><td>Malaysia</td><td>10,451</td><td>14,439</td><td>16,146</td><td>18,479</td><td>21,102</td><td>25,312</td><td>33,353</td></tr><tr><td>Thailand</td><td>6,651</td><td>9,417</td><td>9,228</td><td>11,449</td><td>13,584</td><td>15,347</td><td>22,644</td></tr><tr><td>Indonesia</td><td>4,477</td><td>6,023</td><td>5,806</td><td>6,838</td><td>8,465</td><td>10,385</td><td>15,766</td></tr><tr><td>Philippines</td><td>4,010</td><td>3,960</td><td>4,227</td><td>4,786</td><td>5,638</td><td>6,938</td><td>11,106</td></tr><tr><td>Vietnam</td><td>1,501</td><td>2,042</td><td>2,650</td><td>3,485</td><td>4,486</td><td>5,667</td><td>14,248</td></tr><tr><td>Laos</td><td>1,617</td><td>1,908</td><td>2,340</td><td>2,946</td><td>3,974</td><td>5,345</td><td>9,658</td></tr><tr><td>Myanmar</td><td>719</td><td>896</td><td>1,263</td><td>2,207</td><td>3,608</td><td>4,931</td><td>5,137</td></tr><tr><td>Cambodia</td><td>-</td><td>1,099</td><td>1,371</td><td>1,962</td><td>2,513</td><td>3,278</td><td>6,081</td></tr></tbody></table>

*Sources* World Population Review (2023), IMF (2023)
<figure><img src="image_10.png" /><figcaption>**Fig. 1.2** Chronology of Brunei's National Development Plans, 1953–2035. *Source* Adapted from Mohd Rozan and Milojević (2016)</figcaption></figure>

1. The accomplishment of its well-educated and highly skilled people, measured by the highest international standards

2. A high quality of life that is among the top 10 nations in the world

3. A dynamic and sustainable economy with income per capita within the top 10 countries in the world

The eight strategies identified to achieve these goals are:

1. Education

2. Economical

3. Security

4. Institutional development

5. Local business development

6. Infrastructure development

7. Social security

8. Environmental

Data suggest that the process towards economic diversification could not attain the planned momentum, restraining the economy's heavy dependence on natural resources such as oil and gas.<fnref n="2" /> Table 1.2 presents the movement of the basic economic indicators since 2000 and confirms the same volatile pattern.<fnref n="3" /> Continuing volatility in global oil prices impacted on the growth pattern over the years with positive and negative growth correlated to global oil prices rising and falling respectively.

Although several initiatives were taken to accelerate economic diversification, the implementation process was a bit slow. These initiatives focus on improving productivity by taking advantage of innovative technology and the creative industry, as well as creating a friendly business environment. For instance, Darussalam Enterprise (DARe) was established in 2016 as a statutory body to monitor and nurture the development of small- and medium-sized enterprises (SMEs) in an effort to diversify the economy. The *halal* industry aimed to become a hub for *halal* products and services in the region. At the same time, attention was given to the Islamic finance industry, including Islamic bonds and Islamic insurance (*takaful*) as another area of focus. Plans were also put in place for establishing the securities exchange and for

<footnote n="2">² See Chaps. 2–4 and 6 for more on diversification.</footnote>

<footnote n="3">³ We have restricted this table to 2019 to avoid the negative impact of COVID-19.</footnote>
<table><caption>**Table 1.2** Brunei Darussalam: Basic economic indicators, 2000–2019 (% of GDP)</caption><thead><tr><th></th><th>2000</th><th>2005</th><th>2010</th><th>2011</th><th>2012</th><th>2013</th><th>2014</th><th>2015</th><th>2016</th><th>2017</th><th>2018</th><th>2019</th></tr></thead><tbody><tr><td>Real GDP growth (%)</td><td>2.85</td><td>0.39</td><td>2.6</td><td>3.75</td><td>0.91</td><td>-2.13</td><td>-2.51</td><td>-0.39</td><td>-2.48</td><td>1.33</td><td>0.05</td><td>3.87</td></tr><tr><td>Inflation (%)</td><td>1.56</td><td>1.24</td><td>0.36</td><td>0.14</td><td>0.11</td><td>0.39</td><td>-0.21</td><td>-0.49</td><td>-0.28</td><td>-1.26</td><td>1.03</td><td>-0.39</td></tr><tr><td>Gross fixed capital formation</td><td>13.1</td><td>11.4</td><td>23.7</td><td>34.6</td><td>0.1</td><td>0</td><td>0.2</td><td>0.3</td><td>34.4</td><td>34.6</td><td>40.9</td><td>38.5</td></tr><tr><td>Foreign direct investment (net)</td><td>1.0</td><td>1.8</td><td>3.5</td><td>3.7</td><td>4.5</td><td>4.3</td><td>3.3</td><td>1.3</td><td>-1.3</td><td>3.9</td><td>3.8</td><td>2.7</td></tr><tr><td>Government expenditure</td><td>24.8</td><td>22.5</td><td>14.7</td><td>21.2</td><td>25.8</td><td>18.4</td><td>22.2</td><td>26.2</td><td>39.35</td><td>37.58</td><td>32.15</td><td>32.44</td></tr><tr><td>Trade</td><td>83.5</td><td>80.7</td><td>83.3</td><td>86.7</td><td>86.9</td><td>83.2</td><td>83.0</td><td>74.0</td><td>66.2</td><td>85.2</td><td>93.9</td><td>108.5</td></tr><tr><td>Current account balance</td><td>51.5</td><td>47.3</td><td>36.5</td><td>34.8</td><td>29.8</td><td>20.9</td><td>30.6</td><td>15.9</td><td>12.9</td><td>16.4</td><td>6.9</td><td>6.6</td></tr><tr><td>Fiscal balance</td><td>10.9</td><td>21.1</td><td>15.6</td><td>25.6</td><td>15.7</td><td>10.1</td><td>-0.7</td><td>-14.0</td><td>2.9</td><td>-13.2</td><td>0.15</td><td>-1.58</td></tr></tbody></table>

Source World Bank (2020)
capital market to start operating in 2017–2018. However, this has been delayed in part due to the COVID-19 pandemic.

To further accelerate the diversification process, the government issued an Economic Blueprint in January 2021 with specific goals of achieving macroeconomic stability, low unemployment and sustainable growth (MoFE 2020: vii–viii). The blueprint highlighted six aspirations:

1. Productive and vibrant businesses

2. Skilled, adaptive and innovative people

3. Open and globally connected economy

4. Sustainable environment

5. High quality and competitive economic infrastructure, and

6. Good governance and public service excellence

In sum, Brunei has made some progress but more needs to be done since economic conditions are changing at a much faster pace. The slow process of policy implementation could risk the country's strategic and competitive advantages. For instance, to establish Brunei as a hub for the *halal* industry the country faces tough competition within the region with much larger markets and population base. There also needs to be a change of attitude away from a preference for government jobs. This obviously requires policies for a more efficient public sector as well as incentives for the private sector to grow in the market and increase competition. The data from 2019 show that micro and small enterprises comprise 41.8% and 40.9% respectively, while 14.5% consist of medium enterprises. This means that micro, small and medium enterprises (MSMEs) constitute 97.2% of the total (MoFE 2019: 5). There are huge potential gains to be had through policies encouraging the engagement of MSMEs in national productivity. Production and efficiency can be enhanced through entrepreneurial skills development, the use of technology and resource availability to finance SMEs' initiatives. SMEs should also look at the global market by expanding cross-border business activities.

With this background, the contributing chapters in this book highlight the progress made in different sectors of the Brunei economy, challenges faced and suggestions to accelerate the reform process to ensure that the goals of Wawasan Brunei 2035 are achieved. The next section provides an overview of the chapters.

## 1.4 Summary of Chapters

In addition to this introduction, the book consists of 16 substantive chapters split into three parts plus a conclusion. Part I discusses Brunei's economic growth in a shifting Asia. Part II deliberates on the transition of Brunei's economy. Part III focuses on managing the public sector.

The analysis in Chap. 2 by Hafiizh Hashim, Stephen Druce and Abdul Hai Julay on Brunei's economic diversification drive looks at socioeconomic and geopolitical issues. It provides a historical perspective on Brunei's independence and the
challenges faced by the country with a predominantly oil-dependent economy. An interesting element of this chapter is the detailed examination of the importance of institutional reforms and how institutional changes can help achieve economic diversification. The chapter then focuses on the unique religious and cultural identity which manifests in its *Melayu Islam Beraja* (MIB, Malay Islamic monarchy) philosophy. Brunei's political and economic relations within the region, including China, are also addressed.

This topic is further explored by Ly Slesman in Chap. 3. It provides a detailed deliberation of Brunei's economic development using socioeconomic indicators and the country's historical dependence on the oil and gas sector. The discussion considers if such dependency could be understood as a 'resource curse' or 'resource blessing'. This is linked to the theoretical debate on the natural resource curve which argues 'that countries endowed with abundant natural resources tend to grow slower than countries without such resources'. The author extends this debate through new empirical evidence using data from Brunei. The results support a 'resource blessing' view where oil and gas positively contribute to economic growth. However, the empirical investigation finds economic growth to be sensitive to variations in oil and gas prices or rents. These results obviously support a move towards economic diversification and further development of the non-oil and gas sector of the economy.

This is followed by a discussion on demographic trends and labour market conditions in Brunei in Chap. 4 by Bruno Jetin. This looks at long-term demographic trends and points to a predicted decline in the working-age population which is forecast to begin from the middle of the century (around 2050). A declining younger age dependency ratio will be superseded by a growing old age dependency ratio after 2055. This trend will clearly have implications for the labour market and social care, particularly for a country that already has the highest unemployment rate in ASEAN (Global Economy 2022).<fnref n="4" /> The author argues that the people's preference for working for the government and a lack of private sector alternatives have created a segmented labour market. One reason for the preference for public jobs are the much higher salaries the public sector offers compared to the private sector, a phenomenon that is different to what prevails in most other countries. Jetin then discusses resource abundance and the dependence on natural resources that he compares with similar countries in order to assess Brunei's slow progress. He shows that, among the countries receiving high rents from their natural resources, Brunei is one of the top three in terms of the share of public employment. He concludes that more active efforts towards diversifying the economy and building a stronger private sector would be the way to address the challenges the country could face moving forward.

The debate on economic growth dynamics is not complete without an exploration of financial sector development. Seminal works by Ronald I. McKinnon (1973) and Edward Stone Shaw (1973), which argue for the importance of financial sector

<footnote n="4">⁴ The Global Economy ranking places Brunei at the top in terms of the unemployment rate in ASEAN in 2021. However, *ASEAN statistical yearbook 2022* ranks Brunei as third highest in 2021 after the Philippines and Indonesia (no data are reported for Cambodia, Laos and Myanmar) (ASEAN 2022).</footnote>
development and liberalisation, led to an extensive theoretical and empirical study. Although the finance-growth nexus is still inconclusive, a majority of empirical research suggests that the development of financial institutions, financial instruments and financial innovations can impact on economic growth in a positive manner.

Chapter 5 by Biswa Nath Bhattacharyay focuses on the evolution of Brunei's financial sector over the last few decades. Although the Brunei Currency Board was established in 1967—renamed the Brunei Currency and Monetary Board in 2004—a formal central bank/monetary authority was only formed in 2011, namely the Monetary Authority of Brunei Darussalam (Autoriti Monetari Brunei Darussalam). The chapter also examines the 2016 release of the Financial Sector Blueprint (FSBP) (2016-2025), thus providing a roadmap to transform the financial sector into a dynamic and diversified one. The objective is to 'guide the development of Brunei Darussalam's financial sector during the next decade' and sets out the strategic framework within which the Central Bank will be working with other ministries and stakeholders to reach the objectives of Wawasan Brunei 2035 (Autoriti Monetari Brunei Darussalam 2016). Besides a comprehensive review of the literature on the issue of financial sector development in the region and beyond, this chapter also details Brunei's financial sector development from 2014 to 2018. It focuses on the banking sector and highlights major prospects and challenges. Bhattacharyay observes a below target performance (relative to the region) of the banking sector in Brunei during the study period. For instance, the reported statistics suggest that 67% of bank deposits (domestic savings) are invested offshore while the yield for domestic loans/financing is much higher than that of offshore placement and offshore investment. Brunei needs to focus on Islamic fintech to attract Islamic finance and investment from the region. At the same time, Brunei should develop its non-banking financial sector and accelerate the process of developing an active and efficient capital market.

The following three chapters deal with Brunei's external trade and main foreign partners. Global value chains (GVCs) are considered a growing trend for developing countries to increase their participation in global trade and diversify exports in business and economic development globally. In Chap. 6 Angelo Jose Lumba, Mahinthan Mariasingham and Arushi Gupta contribute to an interesting debate on how Brunei can benefit through GVCs. They argue that, given Brunei's goal of economic diversification, GVCs can serve as an opportunity to build much-needed infrastructure to enhance trade beyond the traditional oil and gas industry. Using the Multiregional Input-Output (MRIO) database and a comprehensive input-output analysis, the empirical findings of this chapter suggest that, besides existing GVC participation of the downstream oil and gas industries, the country should also expand investment in other priority areas such as the *halal* industry, aquaculture and ICT.

As noted, the issue of economic diversification is centre stage in Brunei. Many policies have been formulated and measures taken towards achieving the goal of less dependency on oil and gas. The export-led growth experience of many East Asian countries can be taken as a good example of how high and sustainable growth can be achieved. The recent development of the Regional Comprehensive Economic Partnership (RCEP), in which Brunei is a signatory member, also focuses on ways
to enhance regional trade. Chapter 7 by Pang Wei Loon looks into Brunei's potential to expand its export partnerships, specifically with China. This chapter explores the prospect of increasing trade and investment partnerships with ASEAN Plus Three (APT), that is ASEAN plus China, Japan and South Korea. Moreover, it provides a detailed analysis using descriptive data and by measuring interindustry and intra-industry trade (for products and sectors) to identify Brunei's trade linkages with members of APT. The findings suggest that Brunei is mostly engaged in inter-industry trade (trade in different products) although some diversification has been observed recently. Even though Brunei started its campaign to diversify the economy in the mid-1990s, the country is still heavily dependent on oil and gas. The results of some recent initiatives to encourage foreign investment account for an increase in China's funding of important industries in the country. Recent numbers show an increase intra-industry trade in crude oil as Brunei started production of processed petroleum. The country needs to accelerate its diversification policy to achieve the goals stipulated in Wawasan Brunei 2035.

Part II emphasises the policies and initiatives undertaken by the government of Brunei to facilitate the transition towards development and diversification also brings about changes in the skill levels of the workforce. This impacts on the employability of workers (especially young people) and could result in high employment rates as recently experienced by Brunei. In Chap. 8 Adilah Hisa, M. Muzamil Naqshbandi and Fadzliwati Mohiddin focus on the changing conditions in Brunei's labour market and skill mismatch issues. Using survey data, they highlight the skills needed in this changing environment. The findings identify listening, oral communication, learning, leadership and interpersonal skills as the top five abilities demanded by employers. More communication between tertiary institutions and stakeholders (potential employers) is needed to restructure the present curriculum to meet market demand.

Wei Lee Chin and Siti Fatimahwati Musa's Chap. 9 is devoted to agritourism as a means of diversifying economic activities. Agritourism is a popular concept not only in developed countries but also in emerging economies, especially in Southeast Asia. The chapter admits that the agricultural sector in Brunei does not make any significant contribution to the economy. However, the potential for agritourism is discussed in detail. Brunei's advantage is its natural environment; it is an asset that could be used to promote tourism. The study uses semi-structured interviews from communities in three selected farming areas to perform a strengths, weaknesses, opportunities and threats (SWOT) analysis. It suggests that 'the number of strengths outweighs the weaknesses of agritourism'. One of the main issues identified in this chapter is the lack of institutional support. This is not limited to agritourism. There is a need to provide institutional support and improve communication among major stakeholders. Tourism should also be promoted as a package, including the travel industry, hotel industry, hospitality and communication development. There is no doubt that Brunei has good potential to use its tourism industry as an important sector and source of income for the country.

Chapter 10 by Wei Lee Chin covers a related topic, cross-border tourism between Brunei and East Malaysia. The chapter finds that during 2018–2019 a total of 2.4
million Brunei residents travelled to Miri in Sarawak, Malaysia, basically for shopping. This is a significant number, and one factor that is highlighted as the main reason for this high cross-border tourism is the low cost of goods (cheaper in Miri than Brunei). This could also be due to differences in the value of the currencies of the two countries. The findings could serve as a lesson for planners. It is important to note that cross-border travel restrictions during COVID-19 increased domestic tourism and domestic spending in Brunei, though since the pandemic cross-border tourism has resumed its previous pattern. Perhaps it is time to develop a more state-of-the-art shopping mall in Brunei and promote local competition. This could add value to the domestic economy while also attracting tourists.

Hairul Azrin Besar in Chap. 11 discusses the state of the financial services industry in Brunei and its growth potentials. It can be observed from the discussion that Brunei aimed to make itself an Islamic financial hub in the region. Although efforts were made to revamp the financial system by establishing financial institutions, restructuring the regulatory framework and introducing financial instruments in compliance with syariah laws, the transformation process has been slow. The main constraint identified is the absence of a capital market to attract both local and foreign investors. The government has recently implemented important policies through the Central Bank and the Ministry of Finance and Economy, along with other relevant entities, to accelerate development and the restructuring of the financial sector. It is expected that these efforts will help develop Brunei's Islamic financial market as an emerging and competitive market in the region.

The wave of globalisation at the beginning of the twenty-first century called for an infrastructure necessary to facilitate digital trade and business. The inception of platforms such as the ASEAN Economic Community (AEC) and the RCEP include the promotion of digital economic activities as one of the main agendas of their future plans (Jetin and Mikić 2016). The COVID-19 pandemic further increased the importance of digital transactions, not by choice but by necessity. It is therefore not only important but opportune to investigate where Brunei stands vis-à-vis neighbouring countries. In this context, Chap. 12 by Mohammad Nabil Almunawar and Mohammad Alif Azizi Abdullah takes up the important issue of digital marketplaces in Brunei. The chapter provides a detailed analysis of challenges faced in developing a digital marketplace, especially in a small population-based economy such as that of Brunei. The chapter then investigates the state of the existing digital marketplace through interviews with selected digital businesses. It reveals that the current digital marketplace is new (with the first one established in 2015) and only caters to local market demand. Transaction costs (such as delivery time) from offshore markets increased during the pandemic, thus giving a boost to the local digital marketplace. Domestic consumers also prefer transactions through this market so as to mitigate issues surrounding refunds or delays. Perhaps it is a good opportunity for local digital businesses to expand their dealings both horizontally and vertically.

Chapter 13 by Pg Md Hasnol Alwee Pg Hj Md Salleh and Roslee Baha advances the interesting topic of financial literacy and the importance of financial planning for retirement. Based on data from Brunei, the analysis reveals that there is no discrimination in terms of education when it comes to individuals lacking formal financial
planning; even some educated individuals do not have any financial plans for retire-
ment. Given that Brunei is going to face the issue of an ageing population soon
(similar to many other countries in the region), it is important for policymakers to
improve financial literacy and financial planning for the public, especially senior
citizens. Perhaps the Central Bank, financial institutions and higher education insti-
tutions can play an important role in educating the public and improving social
awareness of financial planning.

As detailed in Chap. 4, the public sector is the main employer in Brunei. This makes public sector management the main policy focus of the economic plan. In this context, Part III is devoted to measures and policies to improve productivity through a more efficient public sector. Four chapters take up this important area of concern. Chapter 14 by Thuraya Farhana Said looks into the performance management policies (PMPs) designed and implemented by the government of Brunei to achieve its goals under Wawasan Brunei 2035. Though this chapter uses data based on interviews conducted in 2012, so that any assessment may not reflect current practices, it does help to understand the evaluation of improvement in PMPs. The much-debated issue of slow progress in economic diversification can be partly attributed to inefficiencies in management performance and decision-making.

In Chap. 15 Mahani Hamdan focuses on operational excellence, which means ‘the execution of the business or management strategy in an excellent way’. Besides detailing the historical background of this topic, the chapter also collects some interview-based data to make an assessment and highlight issues in Brunei’s public sector inefficiencies. The findings suggest improvement in the areas of transparency, human capacity development, technology tools, quality management approaches, monitoring and control, systematic evaluation procedures, policies for human development and not least a sense of ownership.

In Chap. 16 Wardah Azimah Sumardi emphasises the management issue in
Brunei's public sector, particularly employee involvement and participation (EIP).
The evaluation is based on interview-based surveys of different levels of management
teams. However, prior to data analysis, a detailed and interesting literature review
is provided to improve the understanding of EIP. The main point highlighted is that
EIP should be viewed from the context of a country's environment. The chapter
observes that a number of initiatives have been taken by the government to improve
public sector efficiency and delivery. Nevertheless, more actions are needed to fill
gaps in capability, competency and expertise, and to provide an effective public
service delivery system as targeted under Wawasan Brunei 2035 (see Chap. 2). The
chapter suggests operational excellence—a process-based approach combined with
an integrated management system, including human intelligence, innovation and
technology—as a way to move forward.
## 1.5 Concluding Remarks

The deliberations and discussion provided in this book consider Brunei's transition towards development. The observations and evidence of the authors suggest the great potential the country has to transform itself from a developing to emerging economy. It is interesting and encouraging to note that all the contributions show that Brunei is changing and modernising to better adapt to a globalised world in constant evolution. The changes taking place are not brutal or dramatic, but they are nonetheless real. Accumulated over several decades, these changes profoundly transform a country that attaches particular importance to stability. We hope that the recommendations gathered in this book will be useful in pursuing this change.

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**Ahmed M. Khalid** is Visiting Professor at the Department of Economics, Lahore University of Management Sciences, Pakistan. He is also an Adjunct Professor and former Dean of UBD School of Business and Economics, Universiti Brunei Darussalam. He holds a PhD in economics from Johns Hopkins University, USA. He previously worked at Bond Business School, Bond University, Australia, and the National University of Singapore. He has considerable experience of
working as a consultant with the World Bank and as an adviser to the Ministry of Planning Devel-
opment and Special Initiatives, Pakistan, as well as visiting appointments at various academic and
research institutions. He is the editor-in-chief of *Journal of Business and Economic Analysis* and
associate editor of *The Singapore Economic Review* and member of the editorial boards of several
regional and international journals. His publications include four books, several refereed journal
articles, chapters in books and numerous consultancy/project reports, technical reports, working
papers and conference papers. His most recent publication, as coeditor, is *Economic integration
among D-8 Muslim countries* (2023).

Bruno Jetin is currently an Associate Professor at the Faculty of Law, Politics and Social Sciences, Université Sorbonne Paris Nord, France, and he holds a PhD in economics from the same university. He was previously an Associate Professor and former Director of the Institute of Asian Studies, Universiti Brunei Darussalam. His current work focuses on the geopolitics of electric batteries, corruption and foreign direct investment, income distribution and growth in Asia, and the Belt and Road Initiative. His recent publications include: Wage-led demand as a rebalancing strategy for economic growth in China. *Journal of Post Keynesian Economics* 43(3) (2020, with Luis Reyes-Ortiz); Electric batteries and critical materials dependency: A geopolitical analysis of the USA and the European Union. *International Journal of Automotive Technology and Management* 23(4) (2023); and, The effect of corruption on foreign direct investment at the regional level: Positive or negative relationship? In *Corruption and illegality in Asian investment arbitration*, ed. Nobumichi Teramura, Luke Nottage and Bruno Jetin (2024, with Jamel Saadaoui and Haingo Ratiarison).

**Open Access** This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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<figure><img src="image_11.png" /></figure>
Part I

Brunei Darussalam's Economic Growth
in a Shifting Asia
<figure><img src="image_12.png" /></figure>

# Chapter 2
## Brunei Darussalam's Economic Diversification Drive: An Assessment of the Socioeconomic and Geopolitical Issues and Challenges. Overcoming Path Dependence?

Hafiizh Hashim, Stephen C. Druce, and Abdul Hai Julay

**Abstract** This chapter uses an institutionalist approach to present an assessment of the key issues Brunei Darussalam currently faces in relation to its pressing need for economic diversification. Given that institutional arrangements can hinder or enhance economic growth, the institutional approach has been central in explaining policies associated with economic growth and development in various countries. The approach also offers a wealth of literature that can be used to explain Brunei's difficulties in reducing its long-standing dependency on hydrocarbons, the extent to which institutions play a role in its economic development and in understanding the complexity of Brunei's political economy. The discussion does not claim to provide a solution to Brunei's economic diversification problem but rather offers some contextualisation that can be of benefit to scholars and policymakers in understanding its symptoms. The chapter also addresses current geopolitical issues and the increasing interconnectivity between Brunei's international relations and economic diversification as it attempts to attract more foreign direct investment.

**Keywords** Brunei Darussalam · Economic diversification · Institutional changes · Geopolitical issues · Connectivity

Hafiizh Hashim (✉) · S.C. Druce · Abdul Hai Julay

Academy of Brunei Studies, Universiti Brunei Darussalam, Gadong, Brunei Darussalam

e-mail: hafiizh.hashim@ubd.edu.bn

S.C. Druce

e-mail: stephen.druce@ubd.edu.bn

Abdul Hai Julay

e-mail: hai.julay@ubd.edu.bn
## 2.1 Introduction

Brunei Darussalam has a long history of reliance on hydrocarbon exports. Oil was discovered in 1929 and first exported in 1932 while the country was under the British residential system.<fnref n="1" /> Since then, revenues from oil—and from liquid natural gas (LNG) since 1972—have dominated the economy and fuelled Brunei’s economic and social development. Together they account for some 65% of gross domestic product (GDP) and 90% of all exports and government revenues, making the sultanate a textbook example of a ‘rentier state’. These revenues have provided citizens with a high standard of living and various socioeconomic benefits since 1953, when Sultan Omar Ali Saifuddien III decided that the creation of a welfare state was the best way forward for the country’s social, economic and political development and stability. Consequently, Bruneians have enjoyed free education through to tertiary level, health care, housing and various subsidies on daily necessities such as petrol, electricity and rice without the burden of income tax. In addition, the government has long been the main employer in the sultanate. The 1950s also saw the commencement of a series of five-year National Development Plans (NDPs) which in part have recognised the need to diversify the economy away from reliance on oil and gas, and set out various policies and initiatives to achieve this. While these plans have been a major success in terms of modernising the sultanate, developing infrastructure, and raising living and education standards, it is only in the last decade that any meaningful progress has been made in relation to economic diversification. Expanding the source of government income to generate non-oil-exporting revenue is a major challenge but one that both scholars and policymakers agree is the primary recipe for the country’s economic sustainability and perhaps even its survival (DEPS 2021; Druce and Asiyah Az-Zahra 2022: 54).

Using an institutionalist approach, this chapter presents an assessment of the main issues Brunei faces today for economic diversification. Institutional arrangements can hinder or enhance economic growth, and the institutionalist approach has proved to be central in explaining the economic growth and policies associated with the economic development of various countries (Peters 2019). It also offers a rich literature that can help explain the difficulties Brunei faces in reducing its hydrocarbon dependency, the extent to which institutions play a role in economic development and the complexity of Brunei’s political economy. The discussion does not claim to provide a solution to Brunei’s economic diversification problem but rather delivers some contextualisation that can be of benefit to scholars and policymakers in understanding its symptoms. The chapter also addresses current geopolitical issues and the increasing interconnectivity between Brunei’s international relations and economic diversification as it attempts to attract more foreign direct investment (FDI).

<footnote n="1">¹ Brunei signed a protectorate agreement with Britain in 1888. The British residential system was established in 1906. For an overview of these and other periods in Brunei history, see Stephen C. Druce and Nani Suryani Haji Abu Bakar (2022).</footnote>
## 2.2 Background and Context

The residential system came to an end with the 1959 Anglo-Brunei Agreement through which Brunei became internally self-governing, with Britain retaining responsibility for foreign affairs and defence. This agreement paved the way for the promulgation of a written constitution later that same year which set out a monarchical form of government that continues to the present. Full independence was attained in 1984 and Brunei began to play an active role in foreign affairs in order to gain recognition in the international arena. The earliest steps were to join the Association of Southeast Asian Nations (ASEAN) and the United Nations (UN). It was a progressive posture in the search for Brunei's role in international foreign policy.

To fully participate in the global economy, Brunei has since adopted successive development strategies that reflected the growing economic interdependence in the international system while continuing to develop its domestic conditions through NDPs. By the 1980s Brunei had become one of Southeast Asia's richest countries based on GDP per capita due to its vast wealth from oil and gas. This wealth was continually used as part of investments to upgrade infrastructure and redistributed in the form of well-paid government jobs and generous socioeconomic programmes that saw the sultanate steadily rise in various UN indexes, outperforming all Southeast Asian neighbours with the exception of Singapore (Druce and Abdul Hai 2020).

While strong economic performances followed full independence—driven largely by an ever-increasing global demand for energy—Brunei has been vulnerable to exogenous shocks, similar to other oil export-reliant countries. In the post-independence period, these shocks include the 1997–1998 Asian financial crisis, the 2014 oil crisis and the recent COVID-19 pandemic, all of which have considerably affected its economic model and exposed its shortcomings. Perhaps more critical today are the sultanate's ageing oil fields and unproven oil reserves that have led some to estimate that Brunei's current proven reserves may run out in about 27 years (BP 2022). Economic diversification is thus an increasingly pressing concern for the country. While some progress in diversification has been made over the last decade, hydrocarbon exports continue to dominate and dependency remains high, with these exports accounting for 47.4% of GDP in 2020 (DEPS 2021).

Perhaps as pertinent as the inevitable depletion of oil reserves is the 2015 Paris Agreement. This international treaty provided a new shift in the paradigm around the future prospective demand for oil as an energy source, and whether oil-exporting countries such as Brunei can continue to sustain their economies due to their extensive welfare systems, large public sector wage bill and absence of income tax. Given the increasing contribution of carbon dioxide to global environmental changes—such as increasingly unpredictable weather patterns and more frequent natural disasters— there is a growing consensus that demand for oil and gas will slowly phase out as demand for alternative renewable energy sources increases (Dale and Fattouh 2018).

Meaningful economic diversification can only be achieved through deep structural reforms that will lead to sustainable economic development. Although the government has managed to redistribute some of its wealth from oil and gas
towards economic development, Brunei's rapid population increase from 1984 and the government's socioeconomic commitments to this population reveal other challenges.<fnref n="2" /> Brunei's structural reforms conform to other international norms, which ensure that even an absolute monarchy such as Brunei must adopt the rules enforced by international institutions. For instance, Brunei's foreign policy principles consist of mutual respect and benefit, non-interference, and maintenance of its territorial integrity, sovereignty and independence, while still considering it of fundamental importance to be part of the established international system. Furthermore, the country hopes to maintain its prosperity and the economic and social well-being of its people that are aligned with international standards, namely the UN's Sustainable Development Goals (SDGs) and their replacement, the Millennium Development Goals (MDGs) (Abdul Hai 2022).

Brunei's political economy is often associated with the so-called 'Dutch disease' and 'rentier state' oil syndrome, a mechanism whereby an increase in natural resource revenue causes appreciation in the exchange rate, which results in a higher price in exports while the non-oil sectors become less competitive (Ross 2001). However, the case of Brunei does not necessarily signify that the country suffers from a resource curse. Brunei, as with other oil monarchies in the Middle East, is often characterised as neither cursed nor blessed (Haber and Menaldo 2011: 6). The stability of Brunei can be regarded as a long-term successful process in that it has consistently been able to maintain peace and economic stability, but at the same time has largely failed to diversify its economy. In other words, Brunei has thus far not been able to overcome the oil syndrome but has managed to avoid the so-called resource curse that has affected most oil-rich states in the Middle East and Africa, many of which have been embroiled in conflicts they have failed to overcome. For example, Matthias Basedau and Jann Lay (2009: 769) show how oil wealth and civil conflicts are associated in countries that are highly dependent on net oil exports.

As with many other so-called rentier states, overcoming economic path dependency is a major challenge for the sultanate. As the energy-intensive economy has been paramount in Brunei's economic development, investments that focus on the oil and gas industry have created institutional lock-ins which ultimately lead to path dependence. Hence, as these institutions become 'sticky', current efforts to diversify the economy have been difficult as the cost of changing the economic institutions to other non-oil and gas industries may create uncertainties in generating state revenues. As such, other sectors often find it challenging to imitate the revenue-generating success of the oil and gas sectors. Can Brunei shift away from being a rentier state to a production state? To what extent can Brunei overcome the institutional lock-in of its oil-dependent economy? What kind of institutional arrangements emerge in Brunei that can either hinder or enhance economic growth? To what extent do institutions play a role in the country's economic development?

<footnote n="2">² Brunei's population has more than doubled since 1984, from 214,582 to 455,858 in 2024, although this trend has slowed considerably in the last few years (Macrotrends 2024).</footnote>
## 2.3 The Institutional Turn towards Economic Development

The notion that institutions matter in economic development has been widely discussed (Bell 2002; Williamson 2009). At a fundamental level, institutions are unique to individual states as they reflect a particular national model. They constitute a state's political, social, legal and cultural beliefs which, prior to their adoption, are often discussed between policymakers and social actors to define a national model for economic strategies. Institutions are commonly referred to as the 'rules of the game' in society that are devised through human interactions that influence political and economic outcomes (North 1991). More importantly, institutions are non-monolithic as different states have different institutional setups because their formation is based on a unique historical legacy, norms and culture (Hall 2016). Studies on institutionalism put emphasis on the context, historical configuring and processes to understand policy outcomes. William H. Sewell Jr (1996), for instance, points out that what has happened in an earlier period of history will likely have a possible outcome for later events.

Institutionalists argue that the origins of institutions are inherently incorporated in the state's antecedent conditions that are linked to its past legacies (Pierson 2000). The central assumption of institutionalism is that political actors are subjected to the context of rules arranged by a coalition of policymakers, which gradually structures individual behaviours because once rules, norms and values are institutionalised, institutions generally remain stable and 'sticky' over a period of time (Hall and Taylor 1996; Steinmo 2008). Institutions are also important in how social actors behave in that they provide incentives or disincentives to decision-making within the society's logic as institutions arise to help capture gains from cooperation (Sanders 2006). Political and economic actors adapt these strategies in a way that reinforces their logic as the latter is embedded in the institutional system over time (Thelen 1999). Since institutions are structured by interactions between policymakers and other social groups, certain policy decision-making will subsume other policy initiatives, which explains the differences in policy outcomes (ibid.).

These institutions can be formal and informal. Formal institutions can take different forms such as rules and regulations that are encapsulated in formal structures like constitutions, political systems or judicial systems. In a basic formal institutional model, rules are implemented through a legal framework. Informal institutions, on the other hand, typically correspond to the social embeddedness of such norms, customs and traditions in society (Helmke and Levitsky 2004). Informal institutions are normally social behaviours that are regulated by socially shared rules, usually unwritten and enforced in unofficial settings (ibid.). Once implemented, institutions determine how social actors behave for a long period of time. This is because institutions affect social actors and can influence their perception to act in a certain way given that their behaviour is constrained by existing institutional designs. Based on institutionalist perspectives, formal rules are usually enforced by official entities such as bureaucrats, courts, police and other actors, while informal institutions are largely self-enforcing, implemented through obligations such as traditions, patron-client
relationships or simply because following the rules set in society will benefit the interests of the individuals (North 1990). Institutions are commonly stable features of a nation, often termed as ‘institutional lock-in’ because social actors that benefit from the institutional settings can constrain any institutional changes.

The positive reinforcement provided to social actors enables these institutional arrangements to persist for a long time. This is because even though institutional changes can lead to new policy initiatives and implementations, such changes may be slow and incremental and as such may not necessarily undermine the previous institutions that were created by these policymakers (Firdausi 2019). Thus, even when actors attempt to redesign certain institutional settings, they are sometimes constrained in what they can conceive due to cultural limitations to avoid conflict.

However, this does not mean that institutional change cannot take place. Institutional change can occur with a significant renegotiation of the regulated social market economy. Building on work by Wolfgang Streeck and Kathleen Thelen (2005), there are instances where certain factors may arise that lead to institutional changes—for example, critical junctures which create new paths for institutional development such as, in the case of Brunei, the 2014 oil crisis. Based on institutional logic, institutional changes may also occur when a certain endogenous or exogenous ‘shock’ takes place within a state. According to James Mahoney and Kathleen Thelen (2010), institutional changes can occur in various forms that do not lead to an institutional breakdown. Rather, institutional changes can be accommodating, complementary, substitutive or competing depending on the effectiveness of the enforcement.

The interplay between policymakers and society has a decisive effect on the level of institutional change that occurs within a polity that can be evolutionary from the previous institutional arrangements. Therefore, even though new institutional arrangements are introduced and formalised, this does not necessarily undermine the informal institutions, which results in an incremental change. Gretchen Helmke and Steven Levitsky (2004) argue that informal institutions should not be neglected because they tend to persist even though formal institutions are introduced. This is because informal institutions tend to shape how actors behave.

Based on the discussion above, it is clear that institutions matter as they shape and facilitate policymakers’ interactions. It is fair to say that there is an intellectual consensus that institutions play a crucial role in economic growth (North 1991; Acemoglu and Robinson 2012). However, as Frances D. Cook and Karen Nielson (2011: 199) point out, a ‘one-size-fits-all’ approach may not work for all countries. While economic diversification is necessary for countries such as Brunei, achieving sustainability requires not simply economic reforms but also social and environmental changes. Although previous studies have concluded that economic development depends on institutional quality and requires institutional changes, institutions are complex and unpredictable. A state’s developmental project cannot be prophesised without an understanding of how informal institutions, such as culture and norms, can either hinder or enhance an optimal outcome.

It is important to consider institutionalist perspectives which point out that institutional arrangements are not homogenous. Instead, different societies have distinctive
sets of rules, norms and values that are embedded in the state. In turn, the manifestation of institutional designs that are being shaped in a particular polity cannot be compared to those of so-called developed countries (Haggard 2004). The historical legacies and social context have significant implications on the role of institutions in policy decision-making processes. Understanding these legacies and social context provides us with the tools to build a more accurate picture of the specific way certain policy implementation is conditioned. However, the success rate tends to vary.

The institutionalist perspective fits well with our explanation of Brunei's current dilemma in diversifying its economy. Brunei's economic diversification challenges are a function of timing, sequencing and path dependence. The institutional lock-in rests on the timing of the state's discovery of oil and the path-dependent nature of the economy. The existing institutions provide Brunei's policymakers with mental maps of the economic and social realities that are locked.

## 2.4 Background to Brunei's Economy: The Oil Boom and Economic Development

The foundation of Brunei's economy can be traced back to the British residency period in which the discovery of oil essentially rendered Brunei a 'rentier state'. Historically, the discovery of large oil reserves at the Seria field in 1929 was a blessing for Brunei and made the sultanate a significant oil producer, especially to the British. Economic development advanced rapidly between 1930 and 1940 following the discovery of oil, as did economic restructuring as the British developed Brunei, paying specific attention to infrastructure such as roads, water piping, electricity, sewage systems and so on (Saunders 2002: 116–120).

Due to the increasing importance of energy demands for the British Empire as a result of economic development, Brunei's oil exports became one of the most important commodities in the world (Mukoyama 2020). However, like most oil-producing countries, abundant natural resource endowment can be a blessing or a curse, depending on how a state chooses to manage its resources. Hazem Beblawi (1987) and Daniel Lederman and William F. Maloney (2007) describe how oil countries associated with rentier states and the resource curse can lower participation of human activity and physical capital, since they are weak in diversification, have lower economic productivity and are public dominant, among other things.

The importance of oil and gas grew further after the discovery of offshore oil reserves in the early 1960s. With new state-of-the-art technologies, oil was discovered in South West Ampa in 1963, making it a powerhouse for oil and gas in the region. By the time of the Second NDP (1962–1966), the primary product exports deriving from oil and gas contributed around 80% of Brunei's GDP (Abdul Amin 2010).

More importantly, the large endowment of natural resources spurred the government to invest heavily in modernising the state. In the First NDP (1953–1958), the state spent considerable funds on high-quality infrastructural projects, such as roads,
airports, schools and hospitals. Conversely, with the generosity of its public expenditure, the government entered into a social contract with the population which provided Bruneians with a wide range of free or low-cost services, including pensions, education, housing, health care, staple food and fuel subsidies, making Brunei the first welfare state in Asia (Cheung 2017). On the other hand, the rentier nature of Brunei's political economy also provided the country with huge foreign exchange reserves, similar to other oil-producing countries in the Arab Gulf (Gunn 2008). With strong economic performances derived from hydrocarbon resources, Brunei managed to lift the population out of poverty with a GDP per capita second only to Singapore in Southeast Asia. The rapid expansion of Brunei's economy also resulted in the creation of a large administrative state whereby the public sector became the main source of employment while the oil and gas sector became the second-largest employer (Bhaskaran 2010). By 1987, some 47% of the labour force in Brunei was employed by the government (Abu Bakar 1989).

Similar to the Gulf countries, the rentier nature of Brunei's economy based on hydrocarbon rents became embedded over time but would be undone by global changes. We identify two critical periods that have led to significant changes in Brunei's political economy: the Asian financial crisis of 1997–1998 and the 2014 oil crisis. The Asian financial crisis caused oil prices to plunge below USD10 in late 1998, which caught many oil-producing countries off-guard. While the petrodollar had helped Brunei increase its developmental projects, the two financial crises were to affect both the public and private sectors. These financial crises caused a slowdown in economic development which led to a severe recession, especially in the local construction industry. As businesses predominantly relied on contracts awarded by the government, the financial crisis heavily affected the private sector, consequently leading to higher unemployment among the local population (Ismail 2003). Although the impact on Brunei's economy was not as severe as other Southeast Asian states, it nevertheless served as a critical juncture for Brunei.

Driven by a paradigm shift around the prospect of diversifying away from oil, Brunei released a number of NDPs that more firmly recommitted itself towards the promotion and development of non-oil industries. In 2007 Brunei adopted an ambitious long-term development plan called Wawasan Brunei 2035 (Brunei Vision 2035) that set out a more detailed strategy to achieve economic diversification and shift away from its long-standing overdependence on one economic sector to avoid future economic downturns. Since the introduction of Wawasan Brunei 2035, Brunei has implemented a series of institutional reforms to address these formidable challenges. For instance, prior to the 2014 oil crisis, Brunei's GDP was growing at a steady pace as a result of high oil prices (Fig. 2.1). However, the global financial crisis in 2008 followed by the oil crisis in 2014 led to a deterioration in the current account balance. This weakening fiscal balance was a critical juncture for the sultanate. In particular, the 2014 crisis created a sense of urgency for the Brunei government and led to increased attention on economic diversification.
<figure><img src="image_13.png" /><figcaption>Fig. 2.1 Brunei Darussalam GDP growth, 2000–2020 (%). Source World Bank (2020)</figcaption></figure>

## 2.5 Institutional Changes in Brunei: Response and Implications for Economic Diversification

To accommodate the changing global economic landscape, Brunei has increased efforts to develop its human capital. As the economy started to recover from the 1997–1998 recession, especially as oil prices began to stabilise, it enabled the country to again earn large budget surpluses. Under the Ninth NDP (2007–2012), the government allocated BND9.5 billion to be implemented in developmental projects to further accelerate the non-oil sectors. Under the Tenth NDP (2012–2017), a total of BND8.2 billion was invested in developmental projects that saw Brunei oversee major structural reforms in relation to diversification. These implemented strategies, with certain long-term goals such as economic, human, social and environmental development, aimed to significantly reduce Brunei's overreliance on the hydrocarbon sector.

These structural reforms saw Brunei incrementally changing its institutions in an attempt to move away from a rentier state to a productive state. As a consequence, Brunei's institutional qualities have improved considerably over the last decade. Based on the World Bank's highly cited Worldwide Governance Indicators, Brunei scored highly for five out of six measures: above the 90th percentile for maintaining ‘political stability’ and ‘government effectiveness’ in 2020, while improving its scores on ‘control of corruption’ and ‘rule of law’. However, its score on ‘regulatory quality’ saw a slight dip compared with its 2010 score (Table 2.1). Clearly, this shows that Brunei is on the right path in conditioning itself for good governance and prosperity.
<table><caption>**Table 2.1** Brunei Darussalam: Worldwide Governance Indicators, 2010–2020</caption><thead><tr><th></th><th>2010</th><th>2014</th><th>2018</th><th>2020</th></tr></thead><tbody><tr><td>Control of corruption</td><td>78.1</td><td>69.7</td><td>79.8</td><td>87.0</td></tr><tr><td>Government effectiveness</td><td>77.5</td><td>82.2</td><td>86.5</td><td>90.4</td></tr><tr><td>Political stability and absence of violence/terrorism</td><td>93.4</td><td>94.8</td><td>92.9</td><td>90.6</td></tr><tr><td>Regulatory quality</td><td>82.3</td><td>79.8</td><td>74.0</td><td>76.9</td></tr><tr><td>Rule of law</td><td>72.9</td><td>69.2</td><td>74.5</td><td>80.3</td></tr><tr><td>Voice and accountability</td><td>29.8</td><td>29.0</td><td>24.2</td><td>22.2</td></tr></tbody></table>

Source World Bank (2022)

Note Percentile indicators are ranked between 0 and 100 with 100 being effective

Acknowledging the importance of attracting FDI, Brunei authorities stepped up institutional upgrading to further accelerate diversification initiatives. They also achieved a relatively meaningful transformation by reducing red tape and bureaucratic processes. Since the Ninth NDP, Brunei has recalibrated its economic policy agenda away from a rentier-driven developmentalism to one that is more market oriented. This strategy saw a large number of reform programmes, privatisation of major public assets, cuts to public spending as well as the creation of more private sector jobs. For example, prior to the COVID-19 pandemic, the government introduced regulatory and institutional reforms to create appropriate incentives and a better business environment that was more conducive to economic diversification. This improved Brunei's institutional quality, which saw significant progress in the World Bank's Ease of Doing Business index, rising from a rank of 105 out of 190 economies in 2014 to 66 out of 190 economies in 2019 (World Bank 2020).

Perhaps a more meaningful policy that has been implemented is Brunei's attempts to reindustrialise its economy, especially in the downstream sector. To date, Brunei is slowly diversifying through downstream sectors such as the Brunei Methanol Company, the Hengyi refinery and petrochemical plant and the recently established Brunei Fertilizer Industries. Over the past decade, Brunei's path towards economic diversification has been commendable and the impact of institutional changes will play a determinant role in Brunei's economic survival and macroeconomic performance.

While these downstream projects are still in their infancy, the upgrading of Brunei's economic institutions, especially within the oil and gas sector for productivity improvement, can further accelerate the goal to achieve Wawasan Brunei 2035. Yet the process of economic diversification remains relatively insufficient. While these downstream activities support Brunei's overall export growth, oil and gas exports continued to account for 80% of total exports in 2020. A more perennial issue is that the unemployment rate, especially among the youth, remains significantly high, despite it falling from 28% in 2018 to 16% in 2021 (DEPS 2022). The downstream sector, however, encompasses capital-intensive industries that require specialist skills that Brunei cannot fully offer. For example, Hengyi Industries employed 1,665 people in 2020, only 40% of whom were local (AMRO 2022).
Although Brunei has implemented new rules and regulations to accelerate its diversification policies, this may not necessarily undermine its informal institutions. The unintended consequences of Brunei's welfare system have also created a high dependency on the government to create employment and it remains expected that they continue to ensure the availability of well-paying and prestigious jobs for the population. The persistence of informal institutions in the face of attempts to move towards a more market-friendly ecosystem means that these attempts have so far been limited. Despite seeing improvements in Brunei's Ease of Doing Business index, the country has thus far been less successful in fostering business environments that support the growth of entrepreneurs and small- and medium-sized enterprises (SMEs). The success of economic diversification thus requires a change in both the government and society.

Despite this, overcoming the path dependence of institutions and their jurisdictions following the policy implementations of the late 1950s creates a trajectory that is difficult to deviate from. It highlights the importance of sequencing in which of society's perceptions influence these policy choices that were conditioned and institutionalised in the culture of the sultanate. As Manu Bhaskaran (2010) observes, the rentier nature of the state left Brunei confronted with a population that is likely to induce an aversion to risk and a lack of accountability. To tackle these problems, the sultan of Brunei stated in a 2019 order (titah) that the public should not be plagued with 'lazy syndrome' (Borneo Bulletin 2019). Brunei's dependence on one sector has nevertheless caused other industries to stagnate as the public payroll for the vast majority is far more lucrative than the private sector. In 2020 a total of 70,700 people (32.6%) in the labour force were employed in the government sector. As Siti Fatimahwati Pehin Dato Musa and Siti Rozaidah Pg Hj Idris (2020) highlight in their study of unemployment issues in Brunei, the young local population seeking job opportunities clearly prefer to enter the public rather than private sector, primarily because of higher salaries, better perks and job security. Moreover, this appears unlikely to change in the short term.

## 2.6 The Geopolitical Context

Since full independence in 1984, the sultanate's main foreign policy objectives have been to maintain and preserve its sovereignty, independence, territorial integrity and unique religious and cultural identity which manifests in its *Melayu Islam Beraja* (MIB, Malay Islamic monarchy) philosophy. As a small state, it has also been an active member and supporter of regional and global organisations such as ASEAN and the UN which promote regional and global security and stability. Like many other countries, Brunei has also used foreign policy to seek opportunities that can enhance its prosperity and economic development. In recent years, however, foreign policy and economic diversification have become increasingly interconnected, particularly as FDI is seen by the sultanate as a main strategy in its economic diversification drive. This has led to an increasing bilateral and multilateral economic push, the latter of
which has seen greater active participation in the ASEAN Free Trade Area, the Asia-Pacific Economic Cooperation, the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which developed from the now defunct Trans-Pacific Partnership (TPP) after the US withdrawal under the Donald Trump administration. Bilaterally, the sultanate has enhanced economic ties with various countries. However, with the exception of China which is eager to push its own Belt and Road Initiative projects in the region, FDI remains limited.

Brunei-China partnerships were first established in 2013 and subsequently developed rapidly. The largest and most important project is a USD17.1 billion crude oil refinery and petrochemical plant complex initially established in 2019 (Xinhua 2020). This plant represents a joint venture between China's Zhejiang Hengyi Group and the Brunei Economic Development Board, with the former holding a 70% stake and the remaining 30% held by the latter.<fnref n="3" /> In 2021 the plant contributed some 7.5% to Brunei's GDP. China has also become one of Brunei's largest trading partners, accounting for about 15% of the sultanate's global trade (Borneo Bulletin 2022).

China has thus become a major partner for Brunei in its economic diversification drive. However, as with several other ASEAN countries that receive FDI from China or Chinese companies, the relationship is complicated by the ongoing South China Sea dispute, which supposedly places Brunei in opposition to its main investor (Druce and Abdul Hai 2019; Hafiizh 2020). However, unlike many of the other claimants, Brunei has been largely silent on the issue and, as a small state, its overriding concern is with regional security and stability. While Brunei quietly maintains its claim and, together with other ASEAN nations and China, is currently working on an ASEAN-China code of conduct in the South China Sea, it has not allowed the dispute to influence its foreign policy or investment opportunities. As Stephen C. Druce and Asiyah Az-Zahra Ahmad Kumpoh (2022: 56) point out, ‘For Brunei, the ascendancy of the PRC and its growing geopolitical and economic influence in Southeast Asia is an inexorable reality that presents both challenges and opportunities’. The East Asian giant has made significant contributions to the sultanate’s economic diversification drive but, as with its ASEAN counterparts, Brunei is wary of a Chinese-led regional order developing and has no wish to see revisions to the current international order system that has served it so well since 1984. As with most of its neighbours, Brunei will continue to maintain close ties with extra-regional powers, such as the United States, in order to try and maintain a balance in the region while continuing to accommodate China and any other potential investor.

<footnote n="3">³ For an overview of the development of Brunei-China relations and economic partnerships, see Stephen C. Druce and Abdul Hai Julay (2019, 2020).</footnote>
## 2.7 Conclusion and Policy Recommendations

There is no question of Brunei's endorsement and commitment to economic diversification in order to achieve a more sustainable growth model. The changes in the global economy, particularly during the Asian financial crisis and the 2014 oil crisis, played a fundamental role in transforming Brunei's socioeconomic strategies. The consequences of exogenous as well as endogenous shocks have driven policy-makers to initiate various socioeconomic reforms. Despite the numerous criticisms of Brunei's economic performance (Gunn 2008), there is clear evidence that Brunei is increasingly committed to taking on the responsibility of being a more productive state. Based on Dani Rodrik et al.'s (2004) work, it is clear that good institutions play a critical role in economic development. However, to reiterate Cook and Nielson (2011: 199), institutional upgrading and real changes depend on the individual state's capacity as there is no one-size-fits-all approach in ensuring successful economic diversification.

Nevertheless, Brunei can gain some insights from other countries in developing further its resources to accelerate its economic development. As the pace and depth of globalisation accelerate, the development of a strong educated base is crucial to Brunei's sustainable development. It is clear that Brunei has paid particular attention to education and has made significant strides in enrolling children and youth in education programmes from early ages. As we can observe from the Organisation for Economic Co-operation and Development (OECD) countries, a fundamental building block to economic expansion is a high-quality educated workforce. However, Brunei's 2018 Programme for International Student Assessment (PISA) ranking has been underwhelming in comparison to high-income countries in East Asia and OECD countries, given the sultanate's income level (World Bank 2019). To make Brunei more competitive in the global value chains, major efforts are required to modernise the educational system and to continue to invest in human capital, which are essential in promoting valuable skills beneficial to high value-added industries and service sectors. Education and training within an industry are highly significant in generating human capital as they are a prerequisite for the success and effectiveness of an efficient professional labour force (Fakhro 2011).

In relation to developing human capital, the ability of Brunei to successfully adopt and utilise technology from abroad depends on its existing human capital. With technology continuing to evolve at a rapid rate and the constant introduction of new products, Brunei must continuously adapt for other non-oil sectors to participate in global value chains. Hence, human capital accumulation is important especially for Brunei to attract FDI as these multinational companies require human resources for the diffusion of advanced technology. More importantly, deeper human capital stocks make it possible for Brunei to absorb new technologies into local production processes that can create a spillover effect towards other sectors.

Brunei has also been relatively ineffective at marketing itself to potential FDI. It is vital for Brunei to acquire the right marketing skills, advice, strategies and effort to attract global investors. Thus, instead of outsourcing to foreign firms and consultants,
Brunei policymakers should consider increasing engagements with local institutions to increase collaboration in developing Brunei's own brand of developmentalism. By fully utilising its own local scholars and experts, policymakers will be able to reduce public spending while also providing better opportunities for local people in serving specialist needs. Local experts and scholars have a better understanding of the institutional arrangements in Brunei which are conducive for the state to achieve favourable developmental outcomes and inclusive economic growth. Such considerations have been put in place in countries like Oman where its government has increasingly relied on local Omanis to meet its policy goals.

Lastly, Brunei needs to create more jobs with higher technological or knowledge content that will provide better-paying jobs targeted at local people. However, these types of jobs are only conceivable in the private sector as the market forces private companies to employ technology to be more productive. Brunei's labour market is of a dual nature wherein public sector employment is part of a social contract that is deeply institutionalised in the country, offering better pay and high-level job security with shorter working hours than the private sector. To make private sector jobs more attractive to local people, reforms should increase the productivity of the private sector by shifting the economic activity to higher value-added sectors, more technology-intensive production, diversified and more sophisticated exports, and technology-driven FDI (Hvidt 2020). The inclusion of more local people in the private sector remains a contentious subject as it requires the population to be motivated and willing to take jobs in this sector. Nevertheless, policymakers can have a major impact in changing the Bruneian mindset based on the government's capacity and willingness to enforce its will. As Indra de Soysa and Johannes Jütting (2007) point out, governments set the rules of the game whereby they can induce particular types of behaviour to evolve into a production state.

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**Hafiizh Hashim** holds a PhD in politics from the University of Bristol, UK. He is currently a Lecturer in the Academy of Brunei Studies, Universiti Brunei Darussalam. His main area of research focuses on the comparative study of Southeast Asia’s security policy, the nexus between security and economic development and the international political economy. Recent publications include: The development of sub-regional institutions in Southeast Asia: The Case of BIMP-EAGA. *Akademika* 91(3) (2021, with Abdul Hai Julay); Brunei’s path towards mitigating the climate change and the whole nation approach. Stratsea (2021, with Abdul Hai Julay); and, Continuity in the age of security uncertainty: A view from Brunei. *Kyoto Review* 27 (2020).

**Stephen C. Druce** obtained his PhD from the Centre for South-East Asian Studies at Hull University, UK. He is currently affiliated to Universiti Brunei Darussalam where he is Deputy Director of the Academy of Brunei Studies, responsible for research, innovation and sustainability, and Associate Researcher in the Institute of Asian Studies. His main interests include the history, archaeology, and oral and written literature of the Austronesian-speaking world, particularly Sulawesi and Borneo, international relations in the Asia-Pacific region, and historical and contemporary Brunei Darussalam. His major works include: *The lands west of the lakes: A history of the Ajattappareng kingdoms of South Sulawesi, 1200 to 1600 CE* (2009); an edited special issue of the *International Journal of Asia Pacific Studies* themed *Orality, writing and history: The literature of the Bugis and Makasar of South Sulawesi (2016); Origins, history and social structure in Brunei Darussalam (2021, coeditor); and *Continuity and change in Brunei Darussalam* (2021, coeditor).

**Abdul Hai Julay** holds a PhD in political science from Universiti Malaysia Sabah. He is currently a Lecturer and Deputy Director responsible for academic and student affairs at the Academy of Brunei Studies, Universiti Brunei Darussalam, where he teaches a broad range of subjects relating to Brunei, including *Melayu Islam Beraja*, non-governmental organisations, politics, foreign policy and research methods, and supervises graduate and undergraduate students. His main research interests focus on environmental politics, civic culture and democratisation, particularly Brunei’s environmental civic culture and NGOs’ participation, and Brunei’s foreign policy and diplomacy. Recent publications include: Culture of volunteerism: An overview of youth participation in NGOs and youth-led platforms in Brunei Darussalam. In *Routledge handbook of contemporary Brunei* (2022, with Siti Mazidah Mohamad); The development of sub-regional institutions in Southeast Asia: The Case of BIMP-EAGA. *Akademika* 91(3) (2021, with Hafiizh
Hashim); and, Brunei's path towards mitigating the climate change and the whole nation approach. Stratsea (2021, with Hafiizh Hashim).

**Open Access** This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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<figure><img src="image_14.png" /></figure>
<figure><img src="image_15.png" /></figure>

Chapter 3

Natural Resource Rents and Economic
Development: Evidence from Brunei
Darussalam

Ly Slesman

**Abstract** This chapter examines Brunei Darussalam's economic development from the perspective of an oil and gas-dependent economy. First, using relevant socio-economic indicators, it assesses the economic structures, tracing their evolution to their current forms, the dynamics of Brunei's reliance on the oil and gas sector, and the relative importance of the non-oil and gas sector in its economic progress. Is Brunei's experience with oil and gas dependency in line with the 'resource curse' or 'resource blessing' viewpoints? What do the data say? The analysis provides answers to these questions by quantifying short- and long-run effects of oil and gas rents on economic growth over the 1970–2019 period using the dynamic time series econometric modelling framework of the autoregressive distributed lag (ARDL) model. Given the importance of economic diversification in achieving Wawasan Brunei 2035 (Brunei Vision 2035), the chapter further discusses its progress and challenges.

**Keywords** Brunei Darussalam · Natural resource rents · Oil and gas industry · Economic development · Diversification · Resource blessing

**3.1 Introduction**

The sultanate of Brunei Darussalam is a small Southeast Asian country that is rich in oil and gas reserves. It has relied on its natural resource wealth to fuel its development needs—and has consistently ranked as a high-income economy and as very high on human development indexes. Like many resource-rich countries, especially those in the Middle East, Brunei has a generous welfare system with highly subsidised basic necessities (such as staple food, petrol and electricity), free education, affordable health care services, low-cost housing and old-age pensions. However, Brunei's economy has been growing at a slower pace with a gross domestic product (GDP)

Ly Slesman (✉)

Centre for Advanced Research (CARe), Universiti Brunei Darussalam, Gadong, Brunei
Darussalam

e-mail: Slesman.ly@ubd.edu.bn
average growth rate of 1.7% over the period from 1975 to 2019 (World Bank 2024). Its non-oil private sectors are still relatively small (less than 30% share of GDP) and mostly made up of micro, small and medium enterprises (MSMEs) in the service sector. The manufacturing sector is dominated by downstream oil and gas manufacturing goods while agriculture accounts for just 1% of the total output. The Brunei government has been actively seeking, through its National Development Plans (NDPs), to diversify the economy towards the non-resource sector with various policy initiatives, institutional reforms and large investment projects, as well as by modernising its business and economic infrastructure. This is guided by Wawasan Brunei 2035 (Brunei Vision 2035) which aims to transform the country into a dynamic and sustainable economy.

This chapter addresses three objectives. First, it seeks to provide an overview of the resource and non-resource structures of Brunei's economy using various economic indicators to gauge their evolution over time. Second, there is a debate in the academic literature that countries that are well-endowed with abundant natural resources tend to grow more slowly than those without such abundance. This view is known as the 'natural resource curse'. It draws on the experiences of many developing countries in Africa, Latin America and the Middle East that tend to have disappointing economic performances, suffer from macroeconomic volatilities, inefficiencies and low productivity, and even social conflicts. The opposing 'resource blessing' view argues that subsoil assets can be transformed into surface assets that benefit the development of resource-rich countries. This chapter examines empirically the long-run and short-run effects of oil and gas rents on Brunei's economic growth in the period from 1970 to 2019. Finally, further assessments on the progress of economic diversification in Brunei are provided, using various economic indicators. The conventional policy wisdom suggests that structural economic transformations away from the resource-based to non-resource-based economy would promote long-run sustainable economic progress. To what extent have such structural transformations taken place over time?

## 3.2 Brunei's Economic Structure

### 3.2.1 Resource Sectors

The oil and gas sector has played a vital role as the generator of the Brunei economy. Since the oil discovery in 1929 and the establishment of the Brunei LNG plant in 1969, Brunei's economy has been highly dependent on the export earnings of oil and gas. After earlier fluctuations, oil production slowly picked up speed and settled at a high of 221,2448 barrels per day (b/d) in 2006, after which it declined to 111,6231 b/d in 2018 as oil reserves depleted from 1.35 billion barrels in 2006 to 1.1 billion barrels since 2007 (Fig. 3.1). Oil exports have closely correlated with this trend in oil production, reflecting the high proportion of exports relative to the small and highly
<figure><img src="image_16.png" /><figcaption>**Fig. 3.1** Brunei Darussalam: Total crude oil production and exports, and oil price, 1983–2019.
*Source* US Energy Information Administration (2022) and British Petroleum (2022)</figcaption></figure>

subsidised domestic oil consumption. There is also a clear correlation between oil production and export with oil price at least until 2006, when the pattern of this relationship became less visible.<fnref n="1" /> This pattern of correlations may expose Brunei's economy to volatility caused by changing oil prices that may hit its fiscal policy (government expenditure) stance as most government revenues come from oil and gas earnings. For example, Wee Chian Koh (2017b) shows that any unanticipated decline in the oil price would negatively affect government expenditure.

Furthermore, the sectoral share in GDP of the oil and gas sector has been very high, at about 66% in 2010–2014, though it declined to 54.5% in 2015–2019. This falling off is mainly caused by the decline in oil production since 2013 and in oil prices since the third quarter of 2014. The dominance of the oil and gas sector can be seen in the GDP shares of the sub-industry sector of oil and gas mining: an average of 47% in 2010–2019 (Fig. 3.2). The second largest share of the industry is the downstream sector—the manufacturing of liquefied natural gas (LNG) and other petroleum and chemical products—with an average of 13.5% in the same period.<fnref n="2" /> There are a few firms producing oil and gas in Brunei, the main one being Brunei Shell Petroleum, the joint venture with equal shares between the Brunei government and the Royal Dutch Shell Group. Brunei Shell Petroleum's production capacity is 10,000 b/d. There are other major companies that dominate Brunei natural gas and oil supply chains: Brunei LNG, Brunei Shell Tankers, Brunei Gas Carriers and Brunei

<footnote n="1">¹ The correlation coefficients between oil production and oil exports with oil price were 0.61 and 0.73 in 1983–2006 but declined to 0.53 and 0.12 in 2007 and 2018 respectively.</footnote>

<footnote n="2">² In other words, the sectoral shares of ‘oil and gas mining’ and ‘manufacture of liquefied natural gas and other petroleum and chemical products’ in total industry are more than 70% and 20% respectively.</footnote>
<figure><img src="image_17.png" /><figcaption>**Fig. 3.2** Brunei Darussalam: Sub-sectoral shares of industry in GDP, 2010–2019 (%). *Source* DEPS (2020a)</figcaption></figure>

Shell Marketing. Brunei LNG operates the country's sole liquefaction plant and LNG export terminal; Brunei Shell Tankers transports LNG sold to Japan and South Korea; Brunei Gas Carriers manages LNG carriers; and Brunei Shell Marketing is the sole supplier of petroleum products for the domestic market (Koh 2020).

The Brunei Economic Development Board (BEDB) has also actively promoted the development of downstream oil and gas sectors through several initiatives, such as the Sungai Liang Industrial Park that currently houses the Brunei Methanol Company which produces 850,000 tonnes of methanol annually; or the development of Pulau Muara Besar which currently hosts an oil refinery and an aromatics and cracker plant of China's Zhejiang Hengyi Group, with a production capacity of 175,000 b/d of refined crude oil for export. This may explain the reversing trend in the share of oil- and gas-related manufactured goods from a trough of 10% in 2016 to 12.3% in 2019. The centrality of hydrocarbons is also evident in the utilities sector as Brunei's electricity is sourced entirely from its natural gas. Moreover, Brunei subsidises most of its domestic energy consumption, having one of the lowest retail petrol and diesel prices in Asia, at BND0.53 and BND0.31 per litre respectively. This clearly shows how Brunei's economy depends highly on the oil and gas sector, though less so on oil and gas mining and with increasing downstream activities.

The dependency of Brunei's economy on the non-renewable resource sector can be approximated using the ratio of total natural resource rents (and oil and gas rents)—net market monetary values of natural resource production including oil and gas production—over GDP (a detailed explanation is provided in Table 3.1 below). With the availability of data for an earlier period, total rents, oil and gas rents and real GDP per capita (RGDPPC, measured using 2010 US dollars) for 1975–2019 can be plotted to gauge their historical coevolution and possible correlation (Fig. 3.3).
<table><caption>**Table 3.1** Measurement and unit root tests</caption><thead><tr><th colspan="2">Variables</th><th colspan="2">A. Variables and measurements</th></tr><tr><th colspan="2"></th><th>Unit of measurement</th><th>Sources of data</th></tr></thead><tbody><tr><td>RGDPPC<sub>t</sub></td><td>Real GDP per capita</td><td>Constant 2010 USD</td><td>WDI, World Bank</td></tr><tr><td>RENT<sub>t</sub></td><td>Total natural resource rent</td><td>Percentage share of GDP</td><td>WDI, World Bank</td></tr><tr><td>OGRENT<sub>t</sub></td><td>Oil and gas rents</td><td>Percentage share of GDP</td><td>WDI, World Bank</td></tr><tr><td>GFCF<sub>t</sub></td><td>Gross fixed capital formation</td><td>Percentage share of GDP</td><td>UNCTAD, United Nations</td></tr><tr><td>GOV<sub>t</sub></td><td>Government expenditure</td><td>Percentage share of GDP</td><td>UNCTAD, United Nations</td></tr><tr><td>OPEN<sub>t</sub></td><td>Trade openness</td><td>[(Import + export)/GDP] × 100</td><td>UNCTAD, United Nations</td></tr><tr><td colspan="4" style="text-align: left;">B. Unit root tests</td></tr><tr><td colspan="2"></td><th colspan="2">Augmented Dickey-Fuller (ADF) Test</th><th colspan="2">Phillips and Perron (PP) Test</th></tr><tr><td colspan="2"></td><th>Level</th><th>First differenced</th><th>Result</th><th>Level</th><th>First differenced</th><th>Result</th></tr><tr><td>LRGDPPC<sub>t</sub></td><td>-3.0319</td><td>-5.5655***</td><td></td><td>I(1)</td><td>-2.5450</td><td>-5.5996***</td><td>I(1)</td></tr><tr><td>RENT<sub>t</sub></td><td>-3.2673*</td><td>-4.9841***</td><td></td><td>I(0)</td><td>-3.2673*</td><td>-5.4453***</td><td>I(0)</td></tr><tr><td>OGRENT<sub>t</sub></td><td>-3.2681*</td><td>-4.9782***</td><td></td><td>I(0)</td><td>-3.2681*</td><td>-5.4565***</td><td>I(0)</td></tr><tr><td>GFCF<sub>t</sub></td><td>-1.7399</td><td>-6.2582***</td><td></td><td>I(1)</td><td>-1.8697</td><td>-6.2590***</td><td>I(1)</td></tr><tr><td>GOV<sub>t</sub></td><td>-1.9390</td><td>-8.6351***</td><td></td><td>I(1)</td><td>-1.9075</td><td>-8.5998***</td><td>I(1)</td></tr><tr><td>OPEN<sub>t</sub></td><td>-1.8882</td><td>-6.7330***</td><td></td><td>I(1)</td><td>-1.9330</td><td>-6.7153***</td><td>I(1)</td></tr></tbody></table>

Note LRGDPPC_t is the natural logarithmic value of RGDPPC. WDI: World Development Indicator; UNCTAD: United Nations Trade and Development

First and foremost, the total rents and oil and gas rents move in an almost identical manner, confirming the fact that most rents are from oil, with gas rent accounting for less than 10% of the total rent share of GDP. Second, as expected, we observe that the movement of these rent series over time (like the oil production and export in Fig. 3.1) move closely with oil prices. Third, RGDPPC and total and oil rents were relatively high before the 1980s, a period marked by a sharp spike in oil prices, but have dropped to lower levels since the 1980s. There is a moderate correlation, especially in 1981–2019.<fnref n="3" /> It follows that, after a dip in 1983 from the peak in 1976, resource rents share in GDP has fluctuated between the two peaks of 1984 (36%) and 2006 (38%), hitting a trough (13.3%) briefly in 1998 that coincided with the 1997–1998 Asian financial crisis. Since then rents have decreased to about 22% in 2019.

<footnote n="3">³ The correlation coefficient between total resource rents and RGDPPC is -0.4 for 1975–1980 and 0.5 for 1981–2017.</footnote>
<figure><img src="image_18.png" /><figcaption>**Fig. 3.3** Brunei Darussalam: Natural resource rents and GDP per capita, 1975–2019. *Source*
*Adapted from data from World Bank (2024)*</figcaption></figure>

These patterns are suggestive of some form of dynamic correlation between the
natural resource rents, including oil and gas rents, and income per head in 1975–
2019. In the next section, an empirical analysis takes stock of the possible correlation
between oil and gas dependency and the real GDP per person in the long and short
run.

**3.2.2 Non-resource Sector**

With the slowly declining shares of the resource sector, the non-oil and gas private
sector has seen a modest increase from a 34% share of GDP in 2010–2014 to 45.5%
in 2015–2019. Increments mostly occurred in the service sector with a 9.2% increase
between the two periods. The increase included business, financial, real estate and
communication services. Government services also increased by 2.4% during this
same period. Overall, the non-oil and gas sector comprised 62% of the private sector
and 38% of the public sector in 2010–2019, with a modest decrease in the public sector
and a corresponding increase in the private sector from 2010–2014 to 2015–2019.

Brunei has made significant improvements in its ranking in the Ease of Doing
Business index published by the World Bank over the years. Its ranking has consid-
erably improved from 97 in 2016 to 72 in 2017, 56 in 2018 and 55 in 2019. However,
its 2020 ranking dropped to 66, mainly due to the decline of 0.8 from the previous
year in the Ease of Doing Business’s component of ‘registering property’ score.
Despite the overall drop in ranking, the notable 2020 reforms made by Brunei are
that contract enforcement and resolving insolvency are now easier. Moreover, the
ease of doing business component of the ‘ease of starting a business’ indicator had
a structural break from past trends of low average scores (about 50 from 2007 to
<figure><img src="image_19.png" /><figcaption>**Fig. 3.4** Brunei Darussalam: Private enterprise share by business size and industry, 2015–2017 (%). *Source* DEPS (2020a)</figcaption></figure>

2015) to a higher average score of 90 (2016–2020). The cost of starting a business (number of days and procedures used to get necessary licences and permits) indicator showed a similar trend—dramatically reducing from more than 100 days to fewer than 20 days—during the same periods. These favourable institutional and policy reforms can be expected to spur growth in the private sector moving forward.

Data from the World Bank's entrepreneurship surveys show that, compared to other countries in the Association of Southeast Asian Nations (ASEAN), business density in Brunei has grown considerably from a 1.3 share of new limited liability companies (per 1,000 adults aged 15–62) in 2011 to 2.4 in 2018. This may be corresponding to the uptake in the ease of doing business and ease of starting a business. However, the private sector is dominated by MSMEs, accounting for 97% of total enterprises, and most of these enterprises are in the service sector (Fig. 3.4).

Over the years, the Brunei government has initiated favourable business environment reforms to support growth in the private sector, particularly for local enterprises and start-ups and most notably through the establishment of Darussalam Enterprise (DARe). DARe is the accumulated outcome of earlier BEDB initiatives and provides an industry business academy, start-up bootcamps, the iCentre (Brunei's first information and communication technology [ICT] incubation centre) and the Knowl-edge Hub (a technology-based research and development [R&D] centre). DARe also microcredits financing, manages industrial sites and operates a dedicated business support centre (Koh 2020). However, growth constraints in MSMEs in Brunei remain and, according to Koh (ibid.), these include weak entrepreneurial skills, limited financing and a lack of a specific policy for small- and medium-sized enterprises (SMEs).

Researchers have argued that inflows of foreign firms through long-term greenfield foreign direct investment (FDI) may have a spillover effect on domestic entrepreneurship in the forms of new knowledge and advanced technological know-how, efficient managerial practices, exposure of local firms/entrepreneurs to new supply chains and
international markets for export, access to international networks, learning-by-doing and observing, and other backwards and forwards spillover effects into the local firms, entrepreneurship and the economy. Brunei's policy initiatives aim to attract FDI into five key priority sectors: downstream oil and gas, food, tourism, ICT and services. As of 2018, there were 15 FDI projects, including a crude oil refinery (Hengyi Industries), methanol production (Brunei Methanol Company), oil company tubular goods supply and services (SC Tubular Solutions Brunei), ammonia and urea production (Brunei Fertilizer Industries), steel pipe manufacturing (HLDS (B) Steel), aluminium casting (Dongyang Gangchul), margarine manufacturing (Western Foods and Packaging), fisheries (Hiseaton Fisheries (B)), animal feed mill (Gold Coin), logistics (Amann Shipping Group), *halal* pharmaceuticals (Simpor Pharma), biotechnology (MC Biotech), a molecular diagnostic laboratory (Sengenics), aquaculture (Golden Corporation) and a multipurpose training facility (CAE Brunei MPTC) (see *ibid.*: 114).

The distribution of FDI stock in Brunei for 2010–2019 was concentrated in mining and quarrying (traditionally embodied by the presence of Brunei Shell Petroleum and its sister companies), manufacturing, financial and insurance activities, wholesale and retail trade, construction and others (Fig. 3.5). Though slightly declining from the peak of 66.9% oil and gas sector share in total FDI stock in 2016, the average over 2010–2019 shows that the sector absorbs half of the total stock. The only percentage share that shows an increase is manufacturing, from just 9.6% in 2010 (or 10.5% in 2010–2014) to 34.3% in 2019 (or 21% in 2015–2019), reflecting the FDI projects noted above. There is also a dramatic shrinking of financial and insurance activities from 51.5% in 2010 (or 32% in 2010–2014) to 10% in 2019 (or 13% in 2015–2019). This may reflect the withdrawal of Hongkong and Shanghai Banking Corporation

<figure><img src="image_20.png" /><figcaption>**Fig. 3.5** Brunei Darussalam: Foreign direct investment stock by economic activity, 2010–2019.
*Source* DEPS (2020a)</figcaption></figure>
(HSBC) from nine branches in 2017 after selling all its retail and commercial banking portfolios to Baiduri Bank. All in all, the inflows of FDI are mainly concentrated in the oil and gas sector and its related downstream activities. Recently, the Brunei government has put forward a clear policy direction in its Economic Blueprint that aims to achieve medium- and long-term goals to create a dynamic and sustainable economy. Many of these policies emphasise the transformation of non-oil and gas private sectors along MSMEs and FDI inflows. When these policies and reforms take effect, high value-added local enterprises will flourish.

## 3.3 Natural Resource Wealth and Economic Development

### 3.3.1 Theoretical Review

There is a cross-country divergence of experiences in using endowments of abundant natural resources to promote long-term economic growth and development. Gavin Wright and Jesse Czelusta (2004) provide powerful historical accounts of the US natural resource-based economic transformation and development that helped propel the country as a world leader in non-resource-based manufacturing industries and technology. Ugo Fasano (2002) argues that the United Arab Emirates is also a case in point where oil resource endowment is turned into blessings, such as low government debt, low inflation, modernised infrastructure and a generous welfare system.

However, the success stories seem to cluster around the experiences of developed countries while similar accomplishments have been lacking in some resource-rich developing countries across the Middle East, Latin America and Africa. The heterogenous experiences of these resource-abundant countries are reflected in the contradictory findings of many recent empirical studies on the impacts of resource dependency and endowment on economic performance and development.

The seemingly straightforward transformation of subsoil assets into surface assets to generate employment and economic growth can, in practice, be paradoxically difficult, especially in developing countries (Venables 2016). The tendency of resource-abundant economies to grow less rapidly compared to non-resource-abundant economies has become a phenomenon known as the resource curse, as opposed to the resource blessing. The literature proposes various explanations as to why resource windfalls, if not well managed, can negatively affect long-term domestic economic performance. Though the fine line between the two views is sometimes blurred, resource-exporting economies can transform their economic structure towards a non-resource-based economy with diversified exports and a stable macroeconomy to turn the curse into a blessing.

A well-known view is the ‘Dutch disease’ effect that W. Max Corden and J. Peter Neary (1982) theoretically coined to capture the undesirable effects of the real exchange rate appreciation, as the consequence of a booming resource sector, in
reducing the competitiveness of all non-resource sectors.<fnref n="4" /> According to the Dutch disease model, the economy comprises three sectors: a tradeable natural resource sector, tradeable non-resource sector and non-tradeable sector.<fnref n="5" /> The booming natural resource sector puts a general equilibrium pressure on other sectors (Corden 1984). The resource windfalls from the sale of natural resources such as crude oil, natural gas and other mineral resources would increase factor income in the booming resource sector. Such positive income effects (or spending effects) would increase consumption demand for non-tradeable goods, causing upward pressure on the relative prices of non-tradeable goods and the corresponding real exchange rate appreciation. The higher relative prices of non-tradeable goods would induce the expansion of non-tradeable goods (that is, increase its supply) and further shift some resources (labour and capital) away from the non-resource tradeable sector towards the non-tradeable sector (and booming resource sector)—the so-called resource movement effects (Acosta et al. 2009). The net effects of real exchange rate appreciation (and a shrinking labour supply) would thus make production and export of goods produced by non-resource tradeable sectors more expensive and less competitive in international markets. This Dutch disease-induced structural change in the economy may have a direct effect on the competitiveness of the non-resource sector, including the manufacturing industry and agriculture sectors. If such sectors induce increasing returns through their backward and forward linkages<fnref n="6" /> with other sectors and

<footnote n="4">⁴ Other explanations include the volatile commodity price induced by macroeconomic volatility, unproductive spending and investment in physical and human capital, and procyclical fiscal policy. Overreliance on a single source of income derived from resource export that correlates with highly fluctuating world commodity prices would make resource-dependent countries' macroeconomy more susceptible to destabilising volatility (Venables 2016). As fiscal policy in many oil-exporting countries is procyclical, Koh (2017a) shows in a panel of 42 oil-exporting countries that sovereign oil funds can reduce this procyclical tendency and thus minimise macroeconomic volatility, which is effective in a high-quality institutional setting.</footnote>

<footnote n="5">⁵ The non-tradeable goods sector (including service sector) denotes goods and services that can only be consumed in the economy in which they are produced—they cannot be exported or imported. Classic examples are barber services, housing rentals, homebuilding/construction, lawyers and doctors. Transportation cost and the extent of trade protection determine whether goods are tradeable or non-tradeable. According to Sachs and Larrain (1993), using the United Nations's standard industrial classification (SIC), goods and services can be broadly classified into different tradeable industries: (1) agriculture, forestry and fishing; (2) mining and quarrying; and (3) manufacturing; and non-tradeable industries: (4) electricity, gas and water; (5) construction; (6) wholesale and retail trade, restaurants and hotels; (7) transport, storage and communications; (8) financing, insurance, real estate and business services; and (9) community, social and personal services. The list was revised by the United Nations (2008) but as a rule, construction, services and domestic transportation are not easily traded.</footnote>

<footnote n="6">⁶ Backward linkage refers to the impact of any change in the output of a sector on the sectors producing its input requirements, implying the interdependence of a sector with its input suppliers; forward linkage is the impact of any change in the output of a sector to the sectors consuming its output as an input in their own production, suggesting an interconnection of a sector with sectors buying its output (ADB 2018: 5–6).</footnote>
‘learning-by-doing’ externalities, then they serve as important engines of employ-
ment and economic growth, whereas natural resource booms would stunt economic
growth.<fnref n="7" />

In addition, the Dutch disease model assumes that final natural goods of the
booming resource sector are wholly exported, ignoring domestic absorption as oil
is also partly consumed domestically in producing countries (Apergis et al. 2014).
Besides export, oil is domestically used as a final good for consumption as well
as an intermediate good in the production of other goods. In this case, Nicholas
Apergis et al. (ibid.) suggest that the following dynamics would take place. First, if an
exogenous high oil price causes a boom in the oil sector of oil-exporting countries and
if that price passes through to the domestic oil market, then the increased spending
effects in the oil/resource sector would be eroded as daily oil consumption now
costs more. However, in most cases, the domestic oil price is subsidised by oil-
exporting countries, so the net spending effects would still be positive. Second,
when oil is an intermediate good, there are substitution effects, along with resource
movement effects, between the non-resource and non-tradeable sectors, depending
on which sector is less oil-intensive and hence more profitable. For example, if the
non-tradeable sector is less oil intensive, it would need less oil as input and hence
have a lower production cost. Then it would produce higher output at any prevailing
prices, which in turn would slow down the upward pressure on its relative prices,
creating less real exchange rate appreciation. Thus, given the fact that oil is produced
for both export and domestic consumption, the net effects of the Dutch disease may
be ambiguous.

How could resource-abundant economies avoid the adverse effects predicted by
the Dutch disease? The literature offers some remedies to this problem depending
on the context. If the economy experiences un-(or under-)employment, which is
mostly the case in resource-abundant countries, the expanding non-tradeable sector
(and booming resource sector) would absorb (unemployed) labour into employ-
ment, hence positively contributing to economic growth.<fnref n="8" /> According to Anthony J.
Venables (2016), such a positive adjustment is most likely to take place when two
conditions are met. First, there must be flexibility in the economy with minimal
supply bottlenecks; this leads to trade openness, ease of doing business and entry of
new firms, labour market flexibility, accessible skilled labour and ease of migration to
urban and city centres with supporting transport and utility infrastructure. Such flex-
ibility would make it easier for entrepreneurs, firms and labourers to take new oppor-
tunities offered by the changing economic structure. Second, an offshore ‘parking
fund’ for instant oil funds, better known as a sovereign wealth fund—savings from

<footnote n="7">⁷ Learning by doing is relative to the size of the manufacturing industry. The assumption that it only exists in the manufacturing sector (and not in the resource sector) lacks historical evidence as the experiences of the United States, Australia and the Netherlands, among others, demonstrate that resource booms led to the technological advances that propelled modern manufacturing and economic development (Stijns 2005; Wright and Czelusta 2004; de Ferranti et al. 2002).</footnote>

<footnote n="8">⁸ This will work in the opposite direction if the economy operates at full employment: shrinking the labour supply in the non-resource tradeable sector, causing its contraction and hence lower economic growth.</footnote>
resource windfalls—must be in place to support smooth fiscal expenditures given volatile oil/resource revenue. Since oil-exporting countries’ fiscal policies tend to be procyclical (Haseeb et al. 2008; Koh 2016)—increasing government expenditure (expansionary) when the economy is expanding or booming and decreasing government expenditure (contractionary) when the economy is in recession—and this links closely with oil revenues that correlate with volatile oil prices, a sovereign wealth fund would help minimise dependence on (commodity/oil price-induced) volatile oil revenue, alleviating fiscal procyclicality and destabilising macroeconomic volatility (Koh 2017a).

Koh (ibid.) provides a schematic depiction of the stylised transmission mechanism of oil windfalls following positive oil price shocks in a typical oil-exporting economy that captures the important role of government fiscal policy and expenditure (Fig. 3.6). It shows that, following an exogenous increase in world oil prices, there will be a booming oil sector that sees an increase in oil export earnings, government revenue and GDP. Assuming fiscal policy is procyclical,<fnref n="9" /> the positive oil price shock would increase demand for imports and domestic goods (spending effects). The increased factor income (credit expansion of the household and corporation) would increase demand for domestic and import goods, putting upward pressures on aggregate price levels (inflation) and real exchange rate (appreciation). Such real exchange rate appreciation may possibly crowd out the non-oil sector as predicted by Dutch disease model, though the extent depends on net spending and substitution effects. As noted above, a sovereign wealth fund can mitigate fiscal volatility induced by oil price shocks and offset the boom-and-bust cycle in fiscal policy (Fig. 3.6).

### 3.3.2 Empirical Review

There is evidence supporting both resource curse and resource blessing views. This reflects the mixed empirical evidence on the effects of natural resource endowment and dependence (such as resource rents and export) on economic growth and development for resource-exporting countries (Badeeb et al. 2017). Jeffrey D. Sachs and Andrew M. Warner (1995) empirically show a negative correlation between resource export intensity (GDP share of natural resource export) and economic growth in 1970–1990, thus supporting a resource curse hypothesis. The literature has since checked the robustness of this negative result.<fnref n="10" /> In line with their findings, Thorvaldur

<footnote n="9">⁹ Aasim M. Husain et al. (2008) show that, in oil-exporting countries, there is no significant effect of oil price shocks on output in the absence of a fiscal policy response to the shocks.</footnote>

<footnote n="10">¹⁰ We restrict this brief review of empirical evidence to the nexus of resource abundance or dependence and economic growth. Suffice to note here that there are two other strands of empirical studies that investigate the resource curse or blessing. First, there are studies looking at the channels of the curse or blessing along other economic development outcomes such as saving, investment, education, human capital development and financial development. These studies find no consensus in many of these issues. For example, there are studies that find natural resources crowd out human capital development (Gylfason 2001), while others show the opposite that natural resources (subsoil</footnote>
<figure><img src="image_21.png" /><figcaption>**Fig. 3.6** Transmission mechanism of oil windfalls. *Source* Koh (2017a)</figcaption></figure>

Gylfason and Gylfi Zoega (2006) identify negative effects of resource dependence on savings, investment and economic growth in 1965–1998. In a more recent study that focuses on 37 Asian economies, Hiroyuki Taguchi and Ni Lar (2016) investigate two subperiods of 1980–1995 and 1995–2014 and find that resource abundance crowded out manufacturing activities in 1980–1995 but not in 1995–2014. The authors attribute this to the recent improved governance and policy efforts in these Asian countries.

The most comprehensive critical checks and challenges to Sachs and Warner's resource curse was conducted by the World Bank, led by Daniel Lederman and William F. Maloney (2007) under the title *Natural resources: Neither curse nor destiny*. This collection of studies examines the resource curse view using cross-national panel data, theoretical and historical evidence, and detailed country case studies. Lederman and Maloney show that the negative effects found in Sachs and Warner (1995) disappear when an additional set of controlled variables and panel data estimations that control for intrinsic country-specific factors are employed. Instead, Lederman and Maloney find a positive correlation between natural resource abundance (including using Sachs and Warner's natural resource export measure) with economic growth, even after controlling for a host of other theoretical driven variables such as physical and human capital accumulation, terms of trade variations and macrostability, export concentration (export Herfindahl index) and intra-industry trade.

wealth and resource rents) crowd in human capital accumulation (Stijns 2006). The second strand is recent studies that take resource curse as a given and investigate whether the nexus is conditional on moderating variables such as financial development (Moradbeigi and Law 2017) and institutional quality (Mehlum et al. 2006; Abdulahi et al. 2019).
This resource blessing view is also supported by other studies (Stijns 2005; Brunnschweiler and Bulte 2008; Alexeev and Conrad 2009; Boyce and Emery 2011; James 2015; Ben-Salha et al. 2021; Haseeb et al. 2021). For example, Michael Alexeev and Robert Conrad (2009) provide strong evidence for the positive effects of oil and mineral resource dependence and endowments on economic growth, even after controlling for institutions and their interaction with natural resource variables found by an earlier study to help turn the resource curse into a blessing (Mehlum et al. 2006). Similarly, Ousama Ben-Salha et al. (2021) restrict the sample to a panel of the top resource-rich countries and exploit time series information over 1970–2013 to examine the nexus between resource rents and economic growth. They find that resource rents have a positive effect in the long run, supporting a resource blessing view, but there is no statistically significant evidence in the short run. Muhammad Haseeb et al. (2021) investigate five Asian countries—Malaysia, Indonesia, Thailand, China and India—and find similar support for the resource blessing view. Overall, the literature suggests that the resource curse is far from universal, and some scholars even argue that it may be a ‘statistical mirage’ (Alexeev and Conrad 2009; James 2015).

So far there is no time series study conducted on Brunei that investigates the impacts of natural resource dependence on long-run and short-run economic growth. Earlier attempts investigated the drivers of economic growth in Brunei. For example, Kwabena A. Anaman (2004) examined the long-term effects of government expenditure, total investment, labour force and exports on Brunei output growth in 1971–2001. The study finds that only the growth of export followed by a moderate government size increase promote growth in the long run. Koh (2011) provides a sectoral macroeconometric analysis and forecast on key macroeconomic variables. His findings highlight the potential transmission of exogenous oil price volatility-induced fluctuation in export and government revenues and hence volatile government expenditure and GDP growth. His findings also emphasise the important short-run role of government expenditure in promoting growth and employment. Using quarterly data between 2003 and 2014, Koh (2016) further suggests that Brunei’s fiscal policy to be procyclical, while Koh (2017b) finds negative transmission effects of declining oil prices on government expenditure and the non-oil sector. As Brunei depends on the oil and gas sector, the net implication from these studies is the important role of smooth government expenditure. Koh (2017a, 2017b) and Venables (2016) suggest using oil funds to support budget deficits during downturns and low oil price periods to support economic growth and development.

Though these studies draw attention to the important role of external shocks on macroeconomic volatilities in Brunei—which warrant important macroeconomic policy responses, including fiscal policy and economic diversification strategies—they do not provide a direct test on the resource curse or blessing hypothesis for Brunei along natural resource dependency. This chapter is the first to fill this gap.
### 3.3.3 Empirical Analysis

#### 3.3.3.1 Empirical Model, Data and Method

To investigate the long-term and short-term dynamic effects of resource rents on economic growth in Brunei, this chapter employs a time series empirical analysis using the autoregressive distributed lag (ARDL) model for 1970–2019. Consider the following empirical economic growth model specification that augments the role played by natural resource rents in the economic growth process in Brunei.

$$LRGDPPC_t = \alpha_0 + \alpha_1 NRESOURCE_t + \alpha_2 GFCF_t + \alpha_3 GOV_t + \alpha_4 OPEN_t + \mu_t \quad (3.1)$$

$LRGDPPC_t$ is the natural log of real GDP per capita. $NRESOURCE_t$ is natural resource rents measured by total natural resource rent ($RENT_t$) and oil and gas rents ($OGRENT_t$). $RENT_t$ is the sum of rents from oil, natural gas, coal (hard and soft), mineral and forest rents, and the sum is further divided by GDP. Each component of natural resource rents is computed as the difference between its value at world prices and its costs of production. $OGRENT_t$ is GDP share of the sum of oil and gas rents. $GFCF_t$ is gross fixed capital formation as percentage of GDP. $GOV_t$ is government expenditure as percentage of GDP. $OPEN_t$ is total trade (such as import plus export) as percentage of GDP. $\mu_t$ is the normally distributed residual term. Table 3.1 details measurements and sources of data.

Equation (3.1) can then be expressed within the ARDL framework to test for the cointegrating/long-term relationship using the bound-testing approach proposed by M. Hashem Pesaran and Yongcheol Shin (1998) and Pesaran et al. (2001) in the following form.

$$ \begin{aligned} \Delta LRGDPPC_t ={}& \beta_0 + \beta_1 LRGDPPC_{t-1} + \beta_2 NRESOURCE_{t-1} + \beta_3 GFCF_{t-1} \\ & + \beta_4 GOV_{t-1} + \beta_5 OPEN_{t-1} + \sum_{i=1}^{p} \gamma_i \Delta LRGDPPC_{t-i} \\ & + \sum_{j=0}^{q} \lambda_j \Delta NRESOURCE_{t-j} + \sum_{k=0}^{r} \pi_k \Delta GFCF_{t-k} \\ & + \sum_{l=0}^{s} \delta_l \Delta GOV_{t-l} + \sum_{m=0}^{u} \phi_m \Delta OPEN_{t-m} + \sigma CRISIS + \varepsilon_t \end{aligned} \quad (3.2) $$

$\Delta$ is the first-difference operator, $\varepsilon_t$ is the residual term and CRISIS is a dummy variable that captures periods of crisis: oil price crises (1973, 1979, 1990–1991), the Asian financial crisis (1997–1998) and the global financial crisis (2007–2008).
Equation (3.2) constitutes an ARDL (p, q, r, s, u) model. Long-run elasticities can be obtained by dividing coefficients on the one lagged explanatory variable (multiplied by a negative sign) with the coefficient on the one lagged dependent variable (Slesman 2021). The dynamic short-term effects are the coefficients on the first-differenced variables (terms with the summation sign).

There are several advantages to using the ARDL approach. First, unlike traditional cointegration approaches that only hold when all variables are I(1), the ARDL cointegration approach allows us to test for the existence of cointegrating/long-term relationships between variables in levels with the mixture of stationary variables in level and first differenced form (Pesaran et al. 2001). In this case, the outcomes of the standard augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests (Table 3.1) show $LRGDPPC_t$ to be stationary in the first differenced form, hence integrated of order one [I(1)]; $GFCF_t$, $GOV_t$ and $OPEN_t$ are I(1); while $RENT_t$ and $OGRENT_t$ are I(0), stationary in the level form. Thus, the ARDL model is warranted. Second, using sufficient lag structure (of p, q, r, s and u), the ARDL framework can satisfactorily correct for residual correlations that minimise the endogeneity problem (Pesaran and Shin 1998), thus distinguishing more clearly between dependent and independent variables. In this study, the Akaike information criterion (AIC) is employed to determine optimum lag length (p, q, r, s and u) for the ARDL model. Third, this approach has better finite sample properties than traditional cointegration approaches (Engle and Granger 1987; Johansen and Juselius 1990; Phillips and Hansen 1990), thus making it relatively more appropriate to test long-run relationships between variables using small sample sizes (Pesaran et al. 2001). Furthermore, the ordinary least squares (OLS) estimators for short-run and long-run coefficients of the ARDL framework are consistent and super-consistent respectively (Pesaran and Shin 1998). When the ARDL bound test confirms a unique cointegration among variables, the error correction model (ECM) can be estimated to assess the speed of adjustment from short-run disequilibrium to long-run equilibrium without the loss of long-run information (Ahmad and Du 2017). Equation (3.2) is estimated as follows.

First, we must determine the optimum lag order of p, q, r, s, and u using AIC in our estimation of the ARDL model via OLS criteria. The estimated ARDL model is then diagnosed with various tests—normality distribution in residuals (Jarque-Bera test), residual serial correlation (Breusch-Godfrey test), autoregressive conditional heteroscedasticity (ARCH) effect, heteroscedastic residuals (White test), model misspecification (Ramsey's RESET test) and model stability (cumulative sum [CUSUM] and CUSUM of squares [CUSUMSQ]) tests. Third, once the model is well specified, we conduct the ARDL bound test to determine the existence of a cointegrating/long-run relationship between the level variables, using the F test on the estimated coefficients based on the null hypothesis of no cointegrating or long-run relationship, $H_0: \beta_1 = \beta_2 = \beta_3 = \beta_4 = \beta_5 = 0$, against the alternative hypothesis of the existence of a cointegrating or long-run relationship, $H_a: \beta_1 \neq \beta_2 \neq \beta_3 \neq \beta_4 \neq \beta_5 \neq 0$. Pesaran et al. (2001) provide critical bounds values in the forms of lower critical bound (LCB) and upper critical bound (UCB) for this test but for a large sample. We thus rely on Paresh Kumar Narayan's (2005) LCB and UCB for a small sample to evaluate the above hypothesis. If the
computed F-statistics is larger than the UCB we reject $H_0$, but we would fail to reject $H_0$ if it is smaller than the LCB. It is inconclusive if the computed F-statistics falls between the UCB and LCB. Fourth, if the bound test confirms the existence of a cointegration among the variables (that is, if the $H_0$ above is rejected), we then estimate a single cointegration vector to derive the long-run effect of $NRESOURCE_t$. Finally, we proceed to estimate the corresponding short-run effects from the following unrestricted ECM.

$$ \Delta LRGDPPC_t = \beta_0 + \sum_{i=1}^{p} \gamma_i \Delta LRGDPPC_{t-i} + \sum_{j=0}^{q} \lambda_j \Delta NRESOURCE_{t-j} \\ + \sum_{k=0}^{r} \pi_k \Delta GFCF_{t-k} + \sum_{l=0}^{s} \delta_l \Delta GOV_{t-l} + \sum_{m=0}^{u} \phi_m \Delta OPEN_{t-m} \\ + \sigma CRISIS + \rho ECT_{t-1} + \varepsilon_t \quad (3.3) $$

The $\rho$ coefficient on the error correction term $ECT_{t-1}$ in Eq. (3.3) captures the speed of adjustment towards long-term equilibrium from short-term shocks/deviations.

### 3.3.3.2 Empirical Findings and Discussion

Table 3.2 reports the empirical findings. With optimum lag length determined by AIC, the estimated ARDL models for oil and gas rents and total resource rents are ARDL (3, 4, 0, 0, 0) for both models. These ARDL models are well specified as they pass relevant diagnostic tests (Newey-West corrections were applied).<fnref n="11" /> The ARDL bound test confirms that there exists a stable long-term relationship between included independent variables and RGDPPC. In Model 1, the long-run coefficient on oil and gas rent is statistically significant at the 1% level. Its coefficient assessments suggest that a 1% increase in its GDP shares would be associated with the 3.3% increases in long-run RGDPC. This finding confirms oil and gas rents (and total natural resource rents) have been an important driver of long-term economic growth in Brunei. Using resource rents to finance government expenditure, development of non-resource sectors (diversification) and socioeconomic development including generous welfare benefits have been an integral part of long-term development goals in Brunei (Abdul Amin 2010). This finding of positive long-term impacts corroborates with the resource blessing view and with similar findings recorded for other ASEAN countries such as Malaysia, Indonesia and Thailand (Haseeb et al. 2021). It is also noted that government expenditure and trade openness have positive and statistically significant effects on Brunei's economic growth, underlining the importance of the public sector and commodity trade in long-run economic development.

<footnote n="11">¹¹ The residual has a normal distribution and no ARCH effects; the model is also correctly specified and stable, as suggested by Ramsey's RESET test and the CUSUM and CUSUMSQ (not reported).</footnote>
<table><caption>**Table 3.2** Brunei Darussalam: Natural resource rents and economic growth, 1970–2019</caption><thead><tr><th></th><th>Model 1<br>NRESOURCE<sub>t</sub> =<br>Oil and gas rent</th><th>Model 2<br>NRESOURCE<sub>t</sub> = total rent</th></tr></thead><tbody><tr><td colspan="3"><strong>Long-run effects (dependent variable: LRGDPPC<sub>t</sub>)</strong></td></tr><tr><td>NRESOURCE<sub>t</sub></td><td>0.0327 (0.0016)***</td><td>0.0322 (0.0014)***</td></tr><tr><td>GFCF<sub>t</sub></td><td>0.0013 (0.7366)</td><td>0.0012 (0.7439)</td></tr><tr><td>GOV<sub>t</sub></td><td>0.0305 (0.0114)**</td><td>0.0299 (0.0110)**</td></tr><tr><td>OPEN<sub>t</sub></td><td>0.0056 (0.0670)*</td><td>0.0056 (0.0640)*</td></tr><tr><td>Constant</td><td>8.3874 (0.0000)***</td><td>8.4148 (0.0000)***</td></tr><tr><td colspan="3"><strong>Short-run effects (dependent variable: ΔLRGDPPC<sub>t</sub>)</strong></td></tr><tr><td>ECT<sub>t-1</sub></td><td>-0.3006 (0.0000)***</td><td>-0.3048 (0.0000)***</td></tr><tr><td>ΔLRGDPPC<sub>t-1</sub></td><td>-0.1117 (0.4295)</td><td>-0.1072 (0.4461)</td></tr><tr><td>ΔLRGDPPC<sub>t-2</sub></td><td>-0.3681 (0.0068)***</td><td>-0.3623 (0.0074)***</td></tr><tr><td>ΔNRESOURCE<sub>t</sub></td><td>0.0082 (0.0000)***</td><td>0.0082 (0.0000)***</td></tr><tr><td>ΔNRESOURCE<sub>t-1</sub></td><td>-0.0046 (0.0044)***</td><td>-0.0046 (0.0042)***</td></tr><tr><td>ΔNRESOURCE<sub>t-2</sub></td><td>0.0005 (0.6697)</td><td>0.0005 (0.6626)</td></tr><tr><td>ΔNRESOURCE<sub>t-3</sub></td><td>-0.0019 (0.0918)*</td><td>-0.0019 (0.0880)*</td></tr><tr><td>ΔGFCF<sub>t</sub></td><td>-</td><td>-</td></tr><tr><td>ΔGOV<sub>t</sub></td><td>-</td><td>-</td></tr><tr><td>ΔOPEN<sub>t</sub></td><td>-</td><td>-</td></tr><tr><td>Crisis</td><td>0.0250 (0.1060)</td><td>0.0252 (0.1030)</td></tr><tr><td colspan="3"><strong>Cointegration tests</strong></td></tr><tr><td>ARDL bounds test (F-statistics)</td><td>3.7732*</td><td>3.7969*</td></tr><tr><td>Optimal lag length (AIC)</td><td>ARDL (3, 4, 0, 0, 0) <sup>a</sup></td><td>ARDL (3, 4, 0, 0, 0) <sup>a</sup></td></tr><tr><td colspan="3"><strong>Diagnostic tests</strong></td></tr><tr><td>χ<sup>2</sup>NORMAL (p-value)</td><td>0.0956 (0.9532)</td><td>0.0932 (0.9544)</td></tr><tr><td>χ<sup>2</sup>SERIAL (p-value)</td><td>1.3243 (0.5157)</td><td>1.3126 (0.5187)</td></tr><tr><td>χ<sup>2</sup>ARCH (p-value)</td><td>2.0962 (0.1477)</td><td>1.9782 (0.1596)</td></tr><tr><td>χ<sup>2</sup>WHITE (p-value)</td><td>25.4773 (0.0127)**</td><td>25.2994 (0.0135)**</td></tr><tr><td>RAMSEY F statistics (p-value)</td><td>0.2429 (0.6258)</td><td>0.2112 (0.6492)</td></tr><tr><td>CUSUM</td><td>Stable</td><td>Stable</td></tr><tr><td>CUSUMSQ</td><td>Stable</td><td>Stable</td></tr><tr><td>F statistics (p-value)</td><td>83.0535 (0.0000)***</td><td>51.6121 (0.0000)***</td></tr><tr><td>Adjusted R<sup>2</sup></td><td>0.9351</td><td>0.9353</td></tr></tbody></table>

(continued)
<table><caption>**Table 3.2** (continued)</caption><thead><tr><th></th><th>Model 1<br>NRESOURCE<sub>t</sub> =<br>Oil and gas rent</th><th>Model 2<br>NRESOURCE<sub>t</sub> = total rent</th></tr></thead><tbody><tr><td>Durbin-Watson statistics</td><td>1.8981</td><td>1.8954</td></tr><tr><td>Period (T)</td><td>1970-2019</td><td>1970-2019</td></tr></tbody></table>

Note *p*-values are reported in the parentheses. Finite-sample bounds F critical values are based on Narayan's (2005) methods. ARDL models are estimated with restricted constant. Optimal lag length is determined by AIC. ***, ** and * indicate significance levels (to reject the null hypothesis) at 1%, 5% and 10% respectively. ARDL (p, q, r, s, u) with a superscript indicates the model is estimated with Newey-West corrections on the residual variance-covariance matrix after it was confirmed to have either serial correlation and/or heteroscedasticity problems

We now proceed to short-run coefficients to evaluate short-run dynamics. First, the negative signed coefficients on lagged error correction term *ECT*<sub>t-1</sub> are statistically significant at the 1% level, confirming the existence of the cointegrating (or long-run) relationship between the variables. The annual speed of adjustment is about 30%, implying that it would take approximately three years for any short-run deviations (from long-run equilibrium) to disappear completely to restore long-run equilibrium between the variables. Second, both models show that changes in the GDP shares of oil and gas rents have statistically significant positive current and past negative effects (lagged one and three) on income per capita growth. A 1% increase in the current oil and gas rents to GDP ratio contributes about a 0.82% increase in income per capita growth rate, but in past years its increase is associated with 0.46% and 0.19% reduction effects on income growth. These give the net effects of a 0.17% increase in short-run real income per capita growth in Brunei. This suggests that there are fluctuating contributions from changing intensities of resource dependence on income growth in the short run. All in all, this empirical analysis suggests that oil and gas rents positively contribute to long-run real income per capita in Brunei, in line with recent growing literature that confirms the resource blessing view (Ben-Salha et al. 2021; Haseeb et al. 2021).

In other words, this study implies that any reduction in oil and gas rents would lead to economic slowdown in both the long and short run. The volatility of oil and gas prices would also induce volatility in government revenue, government spending and macroeconomic volatility (Koh 2011, 2017b). Furthermore, the non-renewable nature of oil and gas makes them unsustainable to promote economic growth indefinitely. Economic diversification is therefore an important solution. The next section looks at the progress and challenges of Brunei's quest for economic diversification.