East Timor: Development Challenges for the World's Newest Nation

1. The Key Issues

This volume offers a forward-looking perspective on the economic development of East Timor. It traces the country’s ‘initial conditions’, assesses and adapts the lessons of international experience, and contains detailed discussions and recommendations across a broad range of subjects. Very few countries are commencing the long march towards economic development in such an ill-prepared state. Centuries of Portuguese colonial occupation and neglect were followed by almost one-quarter of a century of troubled and sometimes brutal Indonesian rule, though with quite rapid economic development for a period. Then, in the wake of the August 1999 vote for independence, there was massive destruction on the part of the militias and departing Indonesian military. The country reverted temporarily to UN administration, with an impossibly ambitious timetable for independence. The country’s starting point could hardly be more difficult. • It is an extremely poor country, with a per capita income of about $300.1 This is broadly equivalent to the income of the poorest states of mainland Southeast Asia, and that of Portugal’s former African colonies, but well below that of most small Pacific Island and Caribbean nations. • About 70 per cent of its building stock was substantially or partially destroyed in September–October 1999. In that tragic year, East Timor’s GDP was estimated to have declined by about one-third. • There was massive population resettlement and dislocation in that year. At the time of writing (May 2001), about 10 per cent of the country’s pre-1999 population still resides abroad, mostly in squalid refugee camps across the border in West Timor. • Much of the commercial expertise fled in 1999 and is unlikely to return. • The country lacks high-level bureaucratic capacity. During the Indonesian 3 1 The Key Issues Hal Hill and João M. Saldanha* East Timor/final 29/7/01 6:20 PM Page 3 period, senior echelons were dominated by non-Timorese; currently, UN officials occupy most senior positions. • The country doesn’t have a constitution or a legal system; land ownership disputes are rife. • Serious political fissures are emerging as the 30 August 2001 election approaches. • East Timor must reach an accommodation with Indonesia on a complex array of economic, social and political issues. Yet, Indonesia is distracted with its own crises, and significant elements of its military and foreign policy establishments are either indifferent to or hostile towards the new nation. But there are rays of hope, and the country is not without potential. • There is the unifying presence of its three key political/religious figures – Xanana Gusmao and Nobel Laureates Bishop Carlos Belo and José Ramos Horta. • Notwithstanding the political tensions, we are not going to see an Angolanstyle civil war erupt. In fact, East Timor is recovering more quickly than practically any other war-torn economy in the recent past. • There is much international goodwill, and aid flows are very large. • There is a sizeable diaspora with skills and money. • A sense of pragmatism on economic policy pervades much of the putative Timorese leadership, as evidenced by its willingness to adopt some tough macroeconomic policy decisions. • There is significant export potential, including for oil and gas, coffee and tourism. • As a ‘latecomer’, there is much to learn from the mistakes of other newly independent states. One fact which is beyond dispute is that East Timor is a tiny and extremely poor country. Its measured GDP is about equivalent to that of a few suburbs in an affluent country (with the obvious caveat that such comparisons need to make allowance for purchasing power parity adjustments). At $300 per capita, even with rapid growth it will remain poor for many years to come.2 Development is a long-term process in which there are no ‘quick fixes’. It is clear, then, that East Timor needs economic growth that is both rapid and ‘high quality’, the latter denoting inclusive socio-economic outcomes and sustainable management of its natural resources. Economic policy in East Timor is a tabula rasa. Everything is urgent and demands attention. Crucial decisions on the eve of nationhood will go a long way towards determining Timor’s future development trajectory, and how quickly its people are lifted out of poverty and socio-economic deprivation. In 4 Hal Hill and João M. Saldanha East Timor/final 29/7/01 6:20 PM Page 4 other words, a coherent economic policy is absolutely critical to the future course...