Subject: AFR: The birth of a nation [+How bad is the economic problem facing E.Timor?]

Gusmao vows to be 'voice of the people'
How bad is the economic problem facing East Timor?

Australian Financial Review April 18, 2002


The birth of a nation

Geoffrey Barker

Independent East Timor will be born with solemn ritual and joyful ceremony in Dili at midnight on May 19. The first new nation of the new millennium, the world's newest democracy, will assume responsibility for its own future after 500 years of colonisation, 25 years of armed struggle and three years of United Nations administration.

Mass will be celebrated, followed by feasting, dancing, flag-raising, a presidential swearing-in and an inaugural presidential address. The historic ceremony will end with dazzling fireworks lighting the black tropical night.

But what then, after the captains and the kings and the visiting heads of state have departed, and the UN officials and the non-government organisations have gone elsewhere in search of another good cause? Can tiny, impoverished East Timor (population 800,000) emerge as a viable, independent and stable state?

Or is it doomed to the aid-dependency, corruption and instability so characteristic of so much of the developing world?

This question matters greatly to Australia because of Australia's role in helping East Timor towards independence from Indonesia, because of Australia's continuing military and aid commitment to the new country, because of the importance of amicable Australian-Indonesian relations, and because of the potentially rich shared oil and gas deposits in the Timor Sea between Australia and East Timor.

The answer is profoundly uncertain. A pessimist can make a strong case by simply citing the daunting economic, political and social problems facing East Timor. An optimist can make a happier case by citing the UN's protracted if imperfect preparation of East Timor for independence and noting the desire of the East Timorese to seize their future after long and violent occupation.

The best answer, perhaps, is that it is just too soon to say. East Timor's longer-term outlook will become clearer over the next 12 months as the independence government takes over the running of the nation, its institutions and what exists of its economy.

Independence initially will have a devastating effect on the bubble economy that has developed in Dili under the UN administration. Peacekeeping forces will be reduced from more than 8,000 to about 5,000; the number of highly paid UN officials will fall from 850 to less than 300.

The departure of these well-paid foreigners will burst the bubble of affluence in the capital. Estimates in Dili are that about 1,700 local people have either lost jobs or will become unemployed when the UN administration winds down.

But much more significant than the Dili bubble will be whether the new government can develop and maintain disciplined long-term fiscal policies in the face of the nation's grim poverty and its competing social and economic needs.

East Timor will enter independence with much of its population displaced, much of its physical infrastructure destroyed, extremely low levels of skill and literacy, and high and rising unemployment levels. The current East Timor Budget notes that the country "will require the careful management of scarce resources and continued financial support and technical assistance from the international community".

East Timor's future prosperity will depend mostly on revenues from Timor Sea gas and oil but world gas deposits are vast and revenues are uncertain. Its other main potential income-earners are coffee and tourism. But economic viability is a distant dream for East Timor.

Independent East Timor will be a one-party-dominant state controlled by the broad-spectrum leftist Fretilin. Most of East Timor's many smaller parties are based on family connections and local interests rather than ideological commitment.

Fretilin has an uneasy relationship with President-elect Xanana Gusmao, the popular hero of the East Timorese independence struggle. A crucial primary question will be how the relationship between Gusmao and the legislature, and especially between Gusmao and the Chief Minister, Mari Alkatiri, evolves.

Despite continuing assistance from UN administrators and other international government and non-government donors, East Timor will go into independence with underdeveloped police and security forces, limited legal and judicial resources, a poorly paid bureaucracy with at best limited training, and a land tenure system that creates grave doubts about title to land and property.

A major and early priority of the independence government has to be to demonstrate to the East Timorese, international donors and potential investors that they are working to build these important state institutions. Australian and other donors have stressed to East Timorese leaders the importance of sound economic management and sound law and order and judicial arrangements. Their mantra has been that international investors want certainty, security and safety of investment, and that means, above all, effective security forces, a transparent legal system, a competent bureaucracy and unambiguous land tenure.

Yet the security forces are either ageing former Falantil guerillas or untrained boys; judges and magistrates have little legal training; the poorly paid local bureaucracy faces major temptations to corruption; and land title is a muddle of indigenous, Portuguese and Indonesian titles.

On the morning of May 20, East Timor will be just another small, underdeveloped nation in which the world will quickly lose interest now that the drama of armed struggle and UN administration is over.

How well or ill East Timor fares will be entirely East Timor's business. "They will just trundle along in the East Timorese fashion," says an optimistic Australian resident of Dili. Asked to define "the East Timorese fashion," he replies: "A mixture of Indonesian authoritarianism and Portuguese laziness."

Australian Financial Review April 18, 2002

Gusmao vows to be 'voice of the people'

Tim Dodd in Dili

Xanana Gusmao accepted East Timor's presidency yesterday "with enormous gratitude and humility" after winning 82.7 per cent of the vote in last Sunday's election.

In the presence of his Australian wife Kirsty Sword, his toddler son Alexandre and the man he defeated, Francisco Xavier do Amaral, he said that his five-year term, which begins when East Timor becomes independent on May 20, would be a challenge.

His acceptance speech managed to bridge the many phases in East Timor's long independence struggle.

Mr Amaral, the losing candidate, embraced Mr Gusmao after the press conference, a public gesture that showed that he accepted his loss gracefully.

Mr Amaral was a link to the past, having been president of an independent East Timor for nine days in 1975 before invading Indonesian troops deposed him.

But the man who is likely to be a major problem for Mr Gusmao's presidency, Chief Minister Mr Mari Alkatiri, was not present. Mr Alkatiri will hold the political power in the new state while Mr Gusmao, who is largely a figurehead president, has moral authority backed by his enormous popularity.

But earlier in the day Mr Alkatiri, whose Fretilin party holds a parliamentary majority, congratulated Mr Gusmao and paid tribute to his long guerilla struggle against Indonesian forces.

"I want to congratulate Xanana Gusmao from the depths of my heart for winning the election," said Mr Alkatiri who spent most of the Indonesian occupation exiled in Mozambique. "The people know who struggled with them and who struggled with them to the end and who suffered with them."

The two leaders have poor personal relations as well as political differences. Mr Gusmao, by far the most popular political figure, stands outside Fretilin, which is the most popular political grouping.

But Mr Alkatiri tried to damp down speculation about friction developing between president and chief minister. "I will do all in my power to create conditions for a sound relationship between the president, the parliament and the government," he said.

The powers of the president under East Timor's constitution are circumscribed and bound by the parliament - although he can dissolve a government in extreme cases - and Mr Gusmao said he would use the job to "be a voice for the concerns of the people".

Mr Gusmao made his victory statement in three languages: the local Tetun, then Portuguese and then English, leaving out Indonesian, which is the language of the former occupying power, but also the one in which most educated young East Timorese are most at home.

Australian Financial Review April 18, 2002

An economy in free-fall

Tim Dodd in Dili

With independence only a month off, how bad is the economic problem facing East Timor?

Here's an indicator. Even after two years of heavy spending by cash-rich UN workers and aid staff in Dili's hotels, restaurants and retail stores, this year East Timor's real GDP will still be less than it was in 1998, the year Indonesia's campaign of destruction caused the economy to collapse by 34 per cent.

And in the rural areas where three-quarters of East Timorese live, people are still worse off because they did not gain the benefit of the service industry revival in the capital.

In the past two years, East Timor's Dili-driven economic growth was spectacular, up 15 per cent in 2000 and 18 per cent in 2001 in real terms. But now, with independence, the numbers of highly paid international workers are on their way out, leaving East Timor with a difficult economic outlook.

This year, the International Monetary Fund projects that East Timor's real economic growth will be zero.

"It's a tough year ahead," says one foreign official in Dili who has closely observed East Timor's progress towards statehood since the independence referendum in 1999.

Not only is the flow of cash from free-spending aid workers drying up. The original pledges of aid from other countries and multi-lateral organisations, worth more than $1 billion, are running out and now East Timor is competing with urgent calls for assistance from new world trouble spots like Afghanistan and Argentina for access to the international aid pot.

East Timor's problem is that there is a two- to three-year gap which has to be bridged in the Government's budgeting between the end of current assistance programs and the beginning of significant revenue from the Timor Gap gas projects.

So far, East Timor's aid has been solely through grants and it will begin life as an independent nation debt-free.

The Government, led by Chief Minister Mari Alkatiri, says it wants to avoid receiving loans. But international donors, including Australia, who will gather in Dili for meetings just before the May 20 independence day, may not see it that way. Although there is willingness to offer more grants, they may not cover the full budget gap that is emerging, forcing the new country to accept loans, albeit at concessional rates.

The exodus of foreign workers is also leaving a skills gap. Half of the senior jobs in the Government are still unfilled and the UN is to bear the cost of 100 foreign managers who will remain after independence. It is asking other donors to fund 200 more.

But many East Timorese would rather be without them.

Ten locals could be employed for the cost of one foreigner, complains Soraya Beatrix Soares, a university-educated East Timorese who returned from Java with her architect husband to join the new country. Her husband is working on a school building project funded by the World Bank.

She says she realises that East Timorese don't have all the skills but believes locals could have done more in the reconstruction projects under supervision and thus acquired more expertise.

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