The Creation of the East Timorese Economy: Volume 2: Birth of a Nation (Palgrave Studies in Economic History) 3030220516, 9783030220518

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PALGRAVE STUDIES IN ECONOMIC HISTORY

The Creation of the East Timorese Economy Volume 2: Birth of a Nation Mats Lundahl Fredrik Sjöholm

Palgrave Studies in Economic History

Series Editor Kent Deng London School of Economics London, UK

Palgrave Studies in Economic History is designed to illuminate and enrich our understanding of economies and economic phenomena of the past. The series covers a vast range of topics including financial history, labour history, development economics, commercialisation, urbanisation, industrialisation, modernisation, globalisation, and changes in world economic orders. More information about this series at http://www.palgrave.com/gp/series/14632

Mats Lundahl • Fredrik Sjöholm

The Creation of the East Timorese Economy Volume 2: Birth of a Nation

Mats Lundahl Stockholm School of Economics Stockholm, Sweden

Fredrik Sjöholm Department of Economics Lund University Lund, Sweden

Palgrave Studies in Economic History ISBN 978-3-030-22051-8    ISBN 978-3-030-22052-5 (eBook) https://doi.org/10.1007/978-3-030-22052-5 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: Design Pics Inc / Alamy Stock Photo Design by eStudio Calamar This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

The Districts of East Timor

Preface

This book is the result of one and a half decades of work on East Timor. It could not have been written without the support of many people and organizations. The first visit to East Timor came about after a request in 2004 from the Foreign Ministry of Sweden to evaluate whether budget support was to be offered to East Timor, an issue that soon became irrelevant after the country’s large increases in oil and gas revenues. Our work on East Timor continued when Swedish International Development Cooperation Agency (Sida) asked us to write annual macroeconomic reports on East Timor, something we did for a number of years. We are grateful to Sida for this opportunity to work on East Timor’s development issues and for the valuable suggestions and comments by staff members on many drafts and reports over the years. The Ragnar Söderberg Foundation provided a research grant at a crucial time when the Sida project came to an end. We would not have been able to finish this project without this generous support. It became clear during our work for Sida that there was relatively little written on East Timor in general, and on the East Timorese economy in particular. We then decided to write a monograph on the economy. The work expanded, and it became evident that we needed to understand the historical context of East Timor in order to understand the current development issues. The historical part is found in The Creation of the East Timorese Economy. Volume 1: History of a Colony. Having laid out the vii

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development of East Timor during the Portuguese colonial period and during the Indonesian occupation, we next turn to an analysis of the economic and political development in East Timor since independence in 2002. This is the content of the present volume. Writing on the development problems facing East Timor has been a stimulating but also challenging project. Interesting since it is unusual to have the opportunity to follow the development of a new nation. Challenging since comprehensive and reliable data are often missing. To write on East Timor, therefore, requires a combination of interviews, analysis of sparse data, and theoretical discussions. We have benefited from many discussions with academics, policymakers, government officials, and others, in both East Timor and abroad. The persons who we are indebted to include, in alphabetic order, Mari Alkatiri, Charles T. Andrews, Rui Maria de Araújo, Andrew Bellows, Anne Booth, Peter Boutcher, Olimpio Branco, Wook Chae, Paul Cleary, Candido da Conceicão, Luis Constantino, Chris Day, Thomas Ekeli, Peter Ellis, Margaret Fitzgibbon, Antonio S. Franco, Brian Frantz, Rui Gomes, Maria Odete do Céu Guterres, Naheed Atiq Haque, Hal Hill, Gregg Huff, Elisabeth Huybens, Sigurd Klakeg, Insu Kim, Erling Larsson, Armindo Maia, Manuel Mendonca, Guteriano Neves, Richard Neves, Shui-Meng Ng, Finn Reske-Nielsen, Machiko Nissanke, Saba Nordström, Kanako Nozawa, Tobias Nybo Rasmussen, Tina Redshaw, José Manuel Revez, João Saldhana, Gualdino da Silva, Craig Sugden, Naoki Takyo, Akbar Usmani, Endre Vigeland, and Howard Wilson. Robert Rydén has drawn the maps needed to understand the geographic aspects of our discussions. Lastly, we would like to express our gratitude to the staff members of the library at the Stockholm School of Economics who have been more than helpful locating and ordering the many books and journal articles that we had the pleasure to read and learn from. It is our hope that this volume will be of some benefit to future readers wanting to understand the economic and political development of East Timor. Stockholm, Sweden Lund, Sweden  3 April 2019

Mats Lundahl Fredrik Sjöholm

Praise for The Creation of the East Timorese Economy “The book by Lundahl and Sjöholm is a pioneering work—the first book to provide a comprehensive view of the economy of East Timor after independence in 2002. It integrates economic and political analysis of the main events up to the present. The Creation of the East Timorese Economy: Birth of a Nation concentrates on the poverty issue and highlights the main economic problems of this small nation of one million people: the problem of creating gainful employment through the development of a modern sector, the need for modernization of the agricultural sector and the management of the wealth provided by the offshore oil and gas deposits in the Timor Sea. It applies sound economic theory in a historical setting and sheds light on the problem of how to make the best use of natural resources that will only be available during a short period. The book will appeal both to specialized and non-specialized readers with an interest in East Timor as well as to a wider audience focusing on the economic and social problems of small, poor nations. It is highly recommended to students not only of East Timor but of economic development in general.” —Jagdish Bhagwati, University Professor, University of Columbia, New York “This excellent and timely volume is the first serious study of the economic development of East Timor. The country has had a turbulent and difficult history. Drawing on their deep knowledge of the country and their long experience as development economists, the authors skilfully narrate how the country, the first newly independent state of the twenty-first century, is navigating its way forward—establishing institutions after decades of conflict and neglect; managing its natural resource abundance; developing a productive relationship with Indonesia, its giant neighbour and former ruler; and overcoming endemic poverty. Although East Timor is small and isolated, the study will definitely appeal to a wide audience, from the country itself, from among its neighbourhood, from the Lusophone world, and from anybody interested in how such nation states can forge a development path against considerable odds. I highly recommend this volume.” —Hal Hill, H.W. Arndt Professor Emeritus of Southeast Asian Economies, Australian National University, Canberra

“In this comprehensive study by Mats Lundahl and Fredrik Sjoholm of the travails of one of the newest countries in the world—East Timor—born in blood and suffering from the precious bane of oil, development economists will find a valuable study of economic development in the most difficult circumstances.” —Deepak Lal, James S. Coleman Professor Emeritus of International Development Studies, University of California Los Angeles

Contents

1 A Poor Young Nation  1 2 From Independence to Turmoil 35 3 Political, Economic, and Social Developments 2007–18  77 4 Population Growth and Job Creation: The Search for a Modern Sector137 5 The Agricultural Sector199 6 Oil and the Resource Curse265 7 Conclusions and a Look to the Future315 References333 Index385 xi

List of Figures

Fig. 2.1 Fig. 3.1 Fig. 3.2 Fig. 3.3 Fig. 3.4 Fig. 3.5 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 4.4 Fig. 4.5 Fig. 5.1 Fig. 5.2 Fig. 5.3 Fig. 5.4 Fig. 5.5 Fig. 5.6 Fig. 5.7

Non-oil GDP growth 2001–05 49 Gross domestic product by expenditure 2000–16 109 The non-oil GDP growth rate 2006–18 112 Household final consumption expenditures per capita 2000–16 114 Incidence of child malnutrition 2002–16 116 Life expectancy at birth in East Timor and Indonesia 1960– 2016120 Economies of scale in the public sector 163 The population trap in East Timor 190 Dualistic economic growth 192 The modern service sector 194 Introducing a non-service modern sector 195 Production of maize and rice in East Timor, 1997–2017 206 Productivity in paddy production in East Timor and neighboring countries, 2001 and 2016 207 Productivity in maize production in East Timor and neighboring countries, 2001 and 2017 208 Production of coffee in East Timor, 2001–17 209 The determinants of agricultural output 214 The equilibrium of the farm household 254 An increase in the relative price of cash crops 260

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List of Figures

Fig. 6.1 Maritime borders in the Timor Sea 268 Fig. 6.2 The share of oil in East Timor’s gross domestic product 2000–17274 Fig. 6.3 Market value of the petroleum fund, 2005–17 278 Fig. 6.4 The monthly oil spot price, 2001–18 279 Fig. 6.5 Excess withdrawals from the petroleum fund 281 Fig. 6.6 Producers and grabbers 296

List of Tables

Table 1.1 Livestock numbers in 1999 and 2001 4 Table 1.2 Rankings of aldeias on quality of life indicators 9 Table 1.3 Education in East Timor and other Southeast Asian countries, 200214 Table 1.4 Percent of adults (15 years and above) by level of education as found in the UNICEF multiple indicator cluster survey 2002 17 Table 1.5 Percentage of population above five years by level of education as found in the Ministry of Health survey 2004 17 Table 1.6 Health indicators for East Timor and other Southeast Asian countries, 2002 21 Table 1.7 Share of moderately or severely malnourished children under five years of age, 2002 23 Table 1.8 Births attended by skilled health personnel in 2002 24 Table 1.9 The macroeconomic situation of East Timor, 2000–03 29 Table 1.10 The government budget in East Timor between 2000–01 and 2003–0430 Table 1.11 Budget execution rates between 2002–03 and 2003–04 32 Table 2.1 Expenditures and ETTA revenues, fiscal year 2001–02 41 Table 2.2 The government budget 2002–06 52 Table 2.3 The balance of payments 2002–05 53 Table 3.1 The government budget 2006–17 105 Table 3.2 The balance of payments 2006–17 107 Table 3.3 The share of the population living in poverty 2001–14 113 xv

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List of Tables

Table 3.4 Ownership of durable goods in East Timor 2001–16 119 Table 3.5 Health indicators for East Timor and other Southeast Asian countries in 2017 122 Table 3.6 Literacy, school enrolment, and student-teacher ratios in East Timor and other Southeast Asian countries 127 Table 3.7 The share of the total population aged five or more who can speak, read, and write different languages 2010 and 2015 132 Table 3.8 The human development index for East Timor and neighboring countries 2000–18 133 Table 4.1 Attitudes toward childbearing among women and men 2003, 2009–10, and 2016 139 Table 4.2 Population structure by age groups 2001–16 141 Table 4.3 Employment by sector in 2001 and 2007 142 Table 4.4 Employment in the non-agricultural sectors in 2010 145 Table 4.5 Employment in non-oil-producing businesses 2010–16 147 Table 4.6 Employment by industry 2010–16 148 Table 4.7 Youth unemployment according to census data 2010 and 2015151 Table 4.8 The price of electricity for business customers in East Timor and some neighboring countries 2018 167 Table 4.9 The business climate in East Timor and neighboring countries in 2018 172 Table 4.10 Minimum wages in East Timor and neighboring countries 177 Table 4.11 Bank lending to the private sector 2010–18 183 Table 4.12 Required output growth in the modern sector if outside employment is not to increase 198 Table 5.1 Food crop production in East Timor, 2017 211 Table 5.2 Productivity increases required for international competitiveness in the agriculture and livestock sector 213 Table 5.3 Marketed shares of different crops, 2007 238 Table 6.1 Ranking of some Southeast Asian countries by perceived level of corruption in 2012 and 2018 301 Table 6.2 The global integrity score of East Timor, 2007 and 2013 302

1 A Poor Young Nation

In 2002, East Timor was the youngest nation in the world. The country had recovered comparatively well after the 1999 disaster, thanks to the support of foreign donors and the direct administration by the United Nations (UN), but it remained very poor. At the time of independence, East Timor had the fourth lowest gross domestic product (GDP) per capita in East Asia, only slightly above that of Papua New Guinea, Laos, and Cambodia.1 It comes as no surprise that it was considered to be one of the least developed countries in the world. East Timor was ranked number 158 of 177 countries according to the 2002 Human Development Index (HDI): the lowest-ranked country outside sub-Saharan Africa.2 No less than 40 percent of all its inhabitants lived in poverty (spending less than US$0.55 per day). Consequently, the development strategy of East Timor emphasized poverty reduction. Education, health, agriculture, transport, and communications were the priority sectors, and expenditures related to poverty reduction accounted for almost 70 percent of the total budget expenditures. The fight against poverty was a major challenge in a country with a very small domestic tax base. Until late 2004,  United Nations Development Programme—UNDP (2003), p. xiii.  UNDP (2004), p. 142.

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© The Author(s) 2019 M. Lundahl, F. Sjöholm, The Creation of the East Timorese Economy, Palgrave Studies in Economic History, https://doi.org/10.1007/978-3-030-22052-5_1

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East Timor stood out as a nation that was heavily dependent on donor funds for bridging the gap between budget expenditures and revenues.

Poverty at Independence Various surveys carried out around the time of independence aimed at getting a fuller picture of the living standard situation. In September 2000, the Asian Development Bank (ADB) released a short document with an ‘initial’ poverty assessment for East Timor.3 The idea was to identify the key issues that could be used in the process of developing a country assistance strategy. However, the assessment was marred by three important biases. First, the value of the households’ own food production was not included—a severe limitation in a heavily subsistence-oriented economy. Second, the survey was carried out before the rice and maize harvests, and finally, the coffee harvest was only in the early stage and the sample outside Dili was small. Together, this makes it difficult to make sense of the findings. A more substantial effort to map poverty in East Timor had been launched in 1999, as a joint effort between the Timorese government, the World Bank, the Asian Development Bank, the Japan International Cooperation Agency (JICA), the United Nations Development Programme (UNDP), United Nations International Children’s Emergency Fund (UNICEF), and the United Nations Mission of Support in East Timor (UNMISET). The immediate background to the project was the destruction of the economy and the physical and social infrastructure that took place in September 1999, in the wake of the referendum on independence. The effort was divided into three separate components: a suco survey, a household survey, and a participatory potential assessment. The suco survey was completed between February and April 2001, and the final results were published in October 2001.4 The household survey was carried out between the end of August and

 Asian Development Bank et al. (2000).  East Timor Transitional Administration (ETTA) et al. (2001).

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November 2001, and the results were made available in 2003.5 Fieldwork for the participatory potential assessment, finally, took place between November 2001 and January 2002, and the final report was issued in May 2002.6

The Suco Survey The suco survey was carried out in all 498 sucos of East Timor.7 Altogether, 1465 respondents were interviewed: 434 suco chiefs, 609 teachers, 77 health providers, 139 community leaders, and 59 aldeia chiefs, that is, people supposed to be knowledgeable about local conditions. The survey found that food availability was low on average, and that it varied substantially across the year because of the harvesting pattern. No less than 78 percent of all sucos reported that families did not have enough food in January. The December figure was only slightly lower: 70 percent, and both February (44 percent) and November (43 percent) were months of considerable stress. Maize is normally harvested between February and April and rice from April to October, so the critical period is between the end of the rice harvest and the beginning of the maize harvest. No less than 87 percent of the sucos reported that the rice harvest was used mainly for subsistence purposes. The figure for maize and cassava was only slightly lower: 80 percent. The number of livestock owned also made a difference in terms of poverty. In all cases (buffaloes, cattle, horses, goats, and pigs), the numbers reported for 2001 were lower than those before the 1999 violence. Table 1.1 provides the figures for each category. The availability of basic infrastructure displayed severe deficiencies. Only 20 percent of all aldeias were electrified, as compared to 29 percent  Democratic Republic of Timor-Leste et al. (2003), World Bank (2003).  UNDP et al. (2002). 7  Administratively, East Timor is divided into 13 districts. These are, in turn, split into 67 subdistricts, containing 498 sucos (towns or villages), each with one aldeia (hamlet) or more (Government of Timor-Leste n.d.). The reported number of aldeias varies from source to source. The figure given by the 2010 census is 2225 (National Statistics Directorate and United Nations Population Fund 2011, p. xiii). 5 6

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Table 1.1  Livestock numbers in 1999 and 2001 1999 2001

Buffaloes

Cattle

Horses

Goats

Pigs

112,600 72,200

190,200 98,700

52,800 34,600

189,000 70,700

353,900 198,500

Source: ETTA et al. (2001), p. 52

before the 1999 destructions, a modest figure. Electricity was available for an average of 6 days per week and 13 hours per day. Water in most cases (over 60 percent) had to be taken from rivers, streams, or wells, and only 7 percent of the sucos reported that the main source of drinking water was a pipe to the house. Transportation also proved to be a problem. Most traveling between suco capitals and subdistrict capitals had to be done on foot, and going from the suco centers to the district capitals also required walking in more than one-third of the cases.

The Household Survey The household survey (Timor-Leste Living Standard Measurement Survey) was a sample survey carried out among 9113 people in 1800 households in 300 aldeias (1 percent of the population) in 2001. Its findings were reported in two publications in 2003.8 The basic welfare indicator employed in the household survey was per capita total household expenditure, assuming that families allocated resources equally among their members. Three poverty measures were used: (1) the head-count index, that is, the share of the population whose per capita consumption was below the poverty line, (2) the poverty gap, that is, the average expenditure shortfall of the poor relative to the poverty line, (3) the severity of poverty—an index similar to the poverty gap but which gives more weight to greater distances below the poverty line. The poverty line itself was defined by using ‘common practice in East Asia’,9 taking 2100 calories per person per day as the basic nutritional requirement and using a reference average food bundle based on the food habits of the lowest  Democratic Republic of Timor-Leste et al. (2003), World Bank (2003).  World Bank (2003), p. 30.

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second to fifth deciles of the population in terms of consumption, scaling this bundle to ensure that it provided the 2100 calories per person per day. For the non-food items to be added to the minimum food consumption, two different procedures were used. The first one (the ‘lower’ poverty line) looked at the share of non-food expenditures of people whose total expenditure was just enough to reach the food poverty line defined by the 2100 calories. The argument was that this provided a ‘minimum’ necessary allowance for non-food spending, since the latter had, in fact, been substituted for spending on basic food needs. The second approach (the ‘higher’ poverty line) was based on households whose actual spending on food items did reach the food poverty line, adding their actual non-food spending. This yielded an upper poverty line of US$15.44 per capita per month and a lower poverty line of US$14.41, with 40 percent of the population below the line in the first case and 34 percent in the second case. Using the upper poverty line, the poverty gap amounted to 11.9 percent, which in turn meant that an income transfer of US$1.84 per person per month, or a total of US$18.28 million per annum, or 5 percent of GDP, would be needed to bring all the poor to an income equal to the poverty line. It should be noted that the share of the poor in the population turned out to be quite sensitive to the definition of the poverty line. A doubling of the upper poverty line would almost double the head count of poor people (to 78 percent of the total population), while a halving of it would reduce the incidence of poverty from 40 percent to a mere 7 percent. Poverty was not evenly spread in East Timor, but its incidence varied according to a number of criteria. Household size mattered. Among households with only one or two members, less than 10 percent were poor, against almost 40 percent of the five-person households, and when a household had six members, the probability that it was poor was over 50 percent. Households with many dependent members (below 15 or above 64 years of age) relative to members of working age (15-64) tended to be poorer than those with few. Another determinant of poverty was age. Not surprisingly, children were poorer than adults aged between 15 and 49, and those aged 50 or more were the least poor. The age of the head of the household (usually

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the main provider) also influenced. Both for male and female heads, moving successively from the 15–29 age group to that of 45–55, the incidence of poverty rose and then fell marginally up to the mid-60s before rising again among the elderly. The relation between education and poverty was clear-cut. The incidence of poverty dropped markedly and monotonically with the school grade completed. Among those with no schooling or just pre-school, the incidence was over 47 percent, while among those with a complete primary education, the figure shrank to 36.5 percent. Those with a junior secondary education fared a bit better—32 percent—and the real big drops came after senior secondary school (14 percent) and tertiary education (less than 6 percent). The effect of employment was similar to that of schooling. Members of families where the head was in the labor force were less prone to be poor than when the head did not participate. Among those in the labor force, individuals in households where the head worked only on the farm were considerably poorer (48 percent poor) than those whose heads were in wage employment (19 percent), household business (17 percent), or ‘other’ (27 percent). The latter group was heterogeneous. It contained, for example, people who lived off accumulated wealth. It should be noted, however, that the most common was the farming only category. Almost 70 percent of all East Timorese had no, or only small, possibilities of supplementing their farm income with other sources. This finding points toward the importance of farm assets. When no supplementary jobs exist, income to a very large extent becomes a function of the type and amount of assets owned. Land was the most important asset for farm households—for three-fourths of the East Timorese population. Landownership was widely spread. Six out of seven people lived in households with access to land, and it was claimed that 95 percent of this land was owned by the households, with as little as 4 percent being in dispute. Farms were extremely small on average, with a median area per person of 0.22 hectares. Only 5 percent had access to more than one hectare. Virtually, all the farmland (95 percent) was cultivated, only one-fifth was under irrigation, and less than 40 percent of the area was flat. Urban families cultivated as well, but to a much lesser extent than their rural counterparts: almost one-half did not against 5 percent in the

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countryside. Among the cultivating families, poverty was negatively related to farm size. The second most important household asset was livestock, also discussed in the suco survey (cf. above). Most households in East Timor kept animals—nine out of ten in the countryside and seven out of ten in the cities—but the value of the livestock of the latter households was only one-half of that of the former. Livestock ownership in the cities also seemed to differ from rural ownership in another sense. In the countryside, livestock was a sign of wealth. People without livestock were more likely to be poor (53 percent) than those with livestock (43 percent). In the cities, the opposite applied. Among those without livestock, only 12 percent were poor compared to almost 30 percent of the livestock owners. Thus, the route out of poverty seemed to be one that took people out of both farming and livestock-raising, into wage employment or business. Geography was also an important determinant of poverty. The East was less poor (30 percent) than the West (47 percent) or the Center (41 percent). Lowland (up to 100 meters) households were less poor than households higher up. This is, however, not true if the comparison is limited to rural households. The rural-urban division, on the other hand, was one of the most important determinants. By and large, poverty was a rural phenomenon. While less than 25 percent of all urban households were poor, the corresponding figure for rural areas was over 44 percent, and no fewer than six out of seven poor lived in the countryside. Among rural dwellers, the same marked difference between the East on the one hand, and the Center and the West on the other was also found, with the latter two regions being considerably poorer than the former. There were differences between urban areas as well. The two largest cities, Dili and Baucau, were less poor in head-count terms than other urban centers. One of the most important aspects of poverty was food security. The household survey did not make any effort to measure the extent of malnutrition directly, but it did pose questions about how people themselves perceived their situation. The responses were in line with those of the suco survey. The main finding was that, on average, the Timorese felt that they had inadequate food for 3.6 months and more than adequate food only for 1.7 months of the year, respectively, and that almost 90 percent were affected by food shortage for at least one month of the year. The worst

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months were November to February when more than two-thirds experienced a deficit. Dili and Baucau were better off, with only 1.8 months of shortage, and fewer inhabitants were affected: 40 percent had to face a deficit during at least one month—against over 90 percent in the rest of the country. On the other hand, the period with more than adequate food supply was shorter as well, which, however, presumably, only reflected the better ability of the populations in the two major centers to smooth consumption over the year because of their greater access to non-farm incomes. The periodic food shortages required special strategies. The most common strategy was to cut down on the food intake and the second strategy was to alter the composition of it. The group that appears to have taken the brunt of the adjustment unfortunately was the children. The respondents were asked to identify up to three household members who were most affected, and the result was that children accounted for between 59 and 73 percent of the three.10 Finally, the issue of poverty was strongly related to infrastructure provision. The pattern was clear-cut in urban areas. The absence of drinking water, sanitation, or electricity went hand in hand with a markedly higher incidence of poverty. In rural areas, there was little difference in terms of drinking water; for sanitation, the pattern was the opposite, but the difference was small; and in the case of electricity, the expected pattern materialized. A lack of all three indicated a significantly higher poverty incidence, more so in urban than in rural districts. These findings should also be seen against the fact that, nationwide, three out of four had no electricity, three out of five no safe sanitation, and one out of two no safe drinking water. The household survey also produced some inequality measures. The poorest 40 percent of the population accounted for only 18 percent of the total expenditures, on average US$15.49 per person per month, just above the poverty line, while the expenditure share of the top 40 percent amounted to approximately two-thirds, or a monthly per capita figure of US$18.22 on average. The Gini coefficient11 for the country as a whole was 0.37, slightly higher in urban areas and just above 0.34 in the coun See also Jha and Dang (2012) study on how education affected food insecurity in 2001.  The Gini coefficient ranges from 0 (all income completely equally distributed) to 1 (all income earned by a single person). 10 11

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tryside. The West was significantly less unequal than the rest, with 0.31, against 0.39 in the Center and 0.35 in the East. The evidence did not indicate any systematic differences in terms of poverty between men and women. It should, however, be kept in mind that this finding was based on the assumption that consumption was equally distributed within the households.

The Participatory Potential Assessment The idea behind the participatory potential assessment was to complement the more traditional poverty surveys with an assessment of the qualitative dimensions of poverty, the causes and consequences of it, and the potential means of poverty alleviation, as seen by the inhabitants of the aldeias themselves, as well as the public sector servants in aldeias, sucos, and districts. The 24 representative sucos included were chosen from the 100 included in the household survey, and in each suco, two aldeias (the richest and the poorest) of the three included in the household survey were chosen: a total of 48. In each aldeia, 12 participants were picked—six men and six women—in order to arrive at a composite, not individual, community assessment based on consensus, altogether around 800 people were involved in the process. Table 1.2 presents the rankings of the aldeias in terms of ten quality of life indicators. Each indicator has 0 as the lower bound and 100 as the Table 1.2  Rankings of aldeias on quality of life indicators Quality of life indicator Food Shelter Livelihood Income Health conditions and facilities Education Transportation and communication Clothing Entertainment Religion Source: UNDP et al. (2002), p. 16

Good Satisfactory Average Poor Total 1

1

36 20 19 11 10 8 1 41 21 27

11 28 29 37 38 40 47 6 27 21

48 48 48 48 48 48 48 48 48 48

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(subjective) maximum possible. In practice, only four categories were used: Good (above 75 percent), Satisfactory (50–75 percent), Average (25–50 percent) and Poor (below 25 percent). These categories are, of course, very vaguely defined, but they serve to provide an indication of how the communities perceived their situation. It is clear from the table that the vast majority of the aldeias thought of themselves as poor. The Good category was never used, the Satisfactory category only in two isolated instances, and even the Average classification was used more frequently than the Poor category in only three instances out of ten. An interesting observation is that transportation and communication was a key factor: The majority view is that good transportation and communication is vital to reducing poverty. It has a direct link with all other factors. If transportation and communication improves, it will improve access to markets that in turn will help improve the livelihood opportunities. This will help improve incomes. Also, with better transportation and communication, access to healthcare, access to education and the interaction with the communities will improve.12

Poverty was seen as virtually synonymous with the absence of infrastructure—roads, schools, health facilities, and water supply—because this absence made it difficult for people to cope with their survival needs. It turned out to be difficult to satisfy the basic needs because for most commodities cash was necessary. Poverty, however, also had a psychological aspect because the poor perceived that they were treated rudely by the privileged and the government officials. No support was forthcoming from the better-off strata in society. On the contrary, there was a ­widespread feeling of exploitation stemming from the vulnerability connected with poverty. Finally, it was perceived that the government thought of the poor as a burden and not as an asset that could be developed.

 UNDP et al. (2002), p. 16.

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The causes of poverty were seen as related to the history of East Timor. As we discussed in Chapters 1 and 2 in Volume 1, Portuguese colonial rule was characterized mainly by neglect and virtual absence of investment in education and capacity building. Little was done to develop the economy, with the possible exception of exports. The colonial period was followed by the Indonesian occupation, which, as demonstrated in Chapters 3 and 4 in Volume 1, did little, if anything, to improve the situation, and when the Indonesians finally pulled out, the exodus was accompanied by widespread destruction of the physical and social infrastructure. Finally, when the assessment was carried out, the government was still in transition to East Timorese rule, and it was felt that definite policies and governance structures were lacking. These historical causes translated into lack of infrastructure, passive waiting for assistance from the government, lack of knowledge and technology, lack of incentives to improve, weak leadership on all levels, negative influence of some local customs and traditions—like overspending on weddings and funerals—lack of clear plans and guidelines for community development, weak coordination and support of development initiatives, uncertainty with respect to the future government and high prices of essential commodities, notably manufactures. The situation was, however, not perceived as hopeless.13 East Timor had untapped natural resources and a subsistence economy in place. The struggle for independence during more than 25 years had done a lot to unite and galvanize a people willing to work hard to fulfill their development aspirations. Finally, the strong tradition of decentralized governance had made the East Timorese organize themselves quickly on the suco and aldeia levels. Development would, however, not come about without political support. The country needed a clearly articulated development vision. Responsibilities had to be delegated to the community, the positions as chefe de suco and chefe de aldeia had to be recognized and strengthened, and the responsibility of management of the natural resources had to be delegated to the aldeia level. Overall, support was needed when it came to the upgrading of farming and farm management capacity.

13

 UNDP et al. (2002).

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Changes 1999–2001 Using the household and suco surveys, Kaspar Richter has mapped the determinants of welfare and power in Timorese society.14 The household survey respondents were asked to rank themselves on a scale ranging from 1 to 9 with respect to economic status and power for both 1999 and 2001. The results pointed to changes on both dimensions. In 1999, approximately one-third of all respondents believed they were on the lowest economic level, another third on the second level and another 30 percent no higher than the fifth level. This left less than 1 percent on the four highest levels. The power situation was even worse. More than 60 percent placed themselves on the lowest level and more than 20 percent on the second lowest. Only 1 percent was found on the sixth highest level and none above. In 2001, the economic situation had improved, especially for those at the bottom of the ladder. At that point, 22 percent declared themselves to be at the lowest level while another 10 percent had moved to either the second or the third lowest levels. Higher up, the changes were insignificant. The power situation had improved more markedly. In 2001, only 5 percent indicated that they were at the lowest level, and 28 percent placed themselves on one of the five highest levels. Almost the entire population felt more powerful than two years earlier. Richter found that the losers in terms of welfare were mainly those who had been comparatively better off before the 1999 violence. The returns to economic assets fell from 1999 to 2001. Also, those who had suffered specific damage during the violence (destruction of assets, displacement) turned out to be losers. The determinants of power changes were of a different nature. They mainly had to do with social resources. Having Tetum as one’s mother tongue, instead of merely being able to speak it, was a main determinant of power gains (although it is not ­completely obvious what this means), and so was participation in organized community groups. Negative economic shocks, on the other hand, had a negative impact exactly as in the case of economic welfare, although a less pronounced one. Resettlement, finally, had a stronger negative  Richter (2005).

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impact on power than on welfare, presumably through the disruption of social networks.

Education With this, let us turn to two specific social indicators of poverty: education and health. When the Indonesians left East Timor in 1999, the vast majority of all schools were destroyed. At the same time, around 20 percent of the primary school teachers and 80 percent of the secondary school teachers disappeared: those who came from Indonesia.15 Education was hence high on the policy agenda when East Timor received its independence. Massive domestic and international mobilization of resources allowed the schools to reopen at the end of 2000. Around 78 percent of the sucos reported that all or almost all children aged 6–10 were in school in 2001. However, important problems remained to be solved. The suco survey found that 4449 classrooms were usable in 2001, against 5162 before the violence in 1999. As a result of the destruction, however, many were of lower quality and were often also used for noneducation purposes, so that 29 percent of all schools had to run two shifts per day.16 In 2002, the literacy rate was only 38 percent in East Timor, substantially lower than in other Southeast Asian countries (Table 1.3). The low literacy rate was partly due to the historical neglect of education, and it differed substantially between age cohorts. One report suggested that it was less than 20 percent for the 55 years age cohort and over but as high as around 85 percent in the 15–34 age cohort.17 Hence, the literacy rate had fallen, from 45 percent in 1995, according to the official Indonesian figure, which, however, as we found in Chapter 4 in Volume 1, is believed to have been an overestimate. The number of students enrolled in primary school increased rapidly in the years leading up to independence—from 167,000  in 1998 to

 World Bank (2003), p. 124.  ETTA et al. (2001), pp. 38–39. 17  UNICEF (2003), p. viii. 15 16

38 90 n.a. n.a. 69 89 93 93 90

Country

East Timor Myanmar Cambodia Indonesia Laos Malaysia Philippines Thailand Vietnam

75 89 97 91 76 96 90 n.a. 93

Primary enrolment (net, %) 30 36 19 51 25 66 55 n.a. 72

Lower secondary enrolment (net, %) 9 11 2 15 4 27 30 40 10

Tertiary enrolment (gross,%) 47 n.a. 56 21 30 19 35 19 26

Student-­ teacher ratio (primary) 30 n.a. 22 14 24 18 38 24 26

Student-teacher ratio (secondary)

52 n.a. 15 13 16 18 25 34 22

Student-­ teacher ratio (tertiary)

Note: Figures on lower secondary school enrolment for Indonesia and the Philippines are for total secondary education (upper and lower). n.a. figures are not available. Net school enrolment is the number of enrolled children who belong to the corresponding official age group divided by the total population of the same age group. Gross school enrolment is the number of children enrolled in a level regardless of age divided by the population in the age group that officially corresponds to the same school level Sources: Figures on primary and secondary enrolment rates for East Timor are from UNICEF (2003), Table 6.2. All other figures are from a World Bank database on education available at http://data.worldbank.org/data-catalog/ed-stats. Downloaded 17 February 2017

Adult literacy rate

Table 1.3  Education in East Timor and other Southeast Asian countries, 2002

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185,000 in 2000.18 The household survey argues that the increased school participation was caused mainly by a combination of increased patriotism among the poor and reduced costs of school attendance achieved by abolition of school fees and contributions, and requirements for uniforms.19 Despite this increase, primary school enrolment was, however, lower in East Timor than in other Southeast Asian countries, with the exception of Laos (Table 1.3). It was not only lower in the wealthier ones but also in countries with similar income levels—Cambodia and Myanmar. Secondary school enrolment was also relatively low but still more in line with the ones in other countries in the region, at least the poorer ones. Possibly, tertiary enrolment had increased since the Indonesian occupation. Even if the figures were not directly comparable, Gavin Jones reported that only 0.4 percent of males and 0.2 percent of females had a tertiary education in 1995.20 The relatively low enrolment rates were accompanied by high dropout rates. Around 10 percent of the students in primary and junior secondary schools dropped out each year and between 20 percent and 25 percent, respectively, repeated grades. Given the high dropout figure, only around half of the students who entered Grade 1 eventually completed their primary education.21 The low participation rate was a matter of concern. It was partly due to poverty, which had a negative effect on school enrolment mainly through the difficulties it created for households when it came to meeting the costs of education and doing without the children in income-generating activities. However, many poor countries were doing better than East Timor and child labor seemed relatively limited in East Timor in comparison with many other developing countries. In 2002, about 19 ­percent of children aged between 5 and 14 were working outside of their households, in a household enterprise, or doing more than 4 hours per day of household chores.22 Thus, other factors intervened as well.  World Bank (2004b), p. 8.  World Bank (2003), p. 131. 20  Jones (2001), p. 258. 21  World Bank (2004b), p. xix. 22  UNICEF (2003), p. xii. 18 19

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One such factor may have been a lack of understanding of the importance of education and the concomitant low demand for it. East Timor was an economy dominated by subsistence farming, and it may have been difficult for broad segments of the population to understand that education created opportunities to gain higher incomes. In 2004, the World Bank reported that in families with children aged 7–12, about 32 percent of the poorest families and 26 percent of the richest had ‘no interest’ in sending their children to school.23 Therefore, many children did not attend school. If they did, they found themselves in an environment plagued by various problems which did not facilitate efficient learning. Although the number of students was relatively low in East Timor, the number of teachers was even lower, relatively speaking. As a result, the student-teacher ratio tended to be higher in East Timor at all levels of education than in most other countries in the region (cf. Table  1.3). World Bank data suggest that the student-­ teacher ratio in 2002 was 47 in primary school, 30 in lower secondary school, and 52  in tertiary education. High student-teacher ratios were reported in the suco survey as well: 52 on average, with 56 in state-run schools (78 percent of all schools) in comparison to 40 in the schools run by the Church. In 25 percent of the schools, the figure was 66 or higher, and three-fourths of all schools had more than 30 students per teacher.24 The small number of teachers was a result of the outmigration from East Timor in 1999. In addition, the number of students had increased. Needless to say, classes of 47 students or more per teacher constituted a serious obstacle to efficient teaching. In addition, school materials were in scarce supply and often of poor quality, the teachers were poorly trained, and the students received few hours of instruction.25 Given the quality problems, it is hardly surprising that the student performance was poor. The World Bank reported very low scores in a mathematics test in Grades 3 and 4. Third graders answered no more than 28 percent of the questions correctly, which was only marginally better than what they would have achieved if they had simply guessed on  World Bank (2004b), p. xix.  ETTA et al. (2001), pp. 38–39. 25  World Bank (2004b), pp. 26–31. 23 24

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Table 1.4  Percent of adults (15 years and above) by level of education as found in the UNICEF multiple indicator cluster survey 2002 Never enrolled in school Total 54.3 Urban 38.6 Rural 59.4

Some primary school

Completed primary school

Lower secondary school

Upper secondary school or more

14.4 15.4 14.1

6.2 6.7 6.1

10.4 12.6 9.6

14.7 26.7 10.8

Source: UNICEF (2003), Table 6.3 Table 1.5  Percentage of population above five years by level of education as found in the Ministry of Health survey 2004

Total Urban Rural East Rural Central Rural West

No education

Some primary

Completed primary

Some secondary or more

36.9 26.1 37.3 41.3

35.2 34.6 35.6 35.6

4.6 4.6 4.9 4.2

23.4 34.7 22.2 18.9

43.2

34.7

4.7

17.4

Source: Ministry of Health et al. (2004), Table 3.13

all questions. Fourth graders did better but still only managed to answer about 37 percent of the questions correctly.26 Thus, the picture that emerges of education in East Timor in 2002 is one of low school enrolment, poor quality of education, and poor performance of students. However, East Timor is a rather heterogeneous country and the situation varied between different regions. It is difficult to pinpoint the exact levels of education in different parts since figures differ substantially between studies, as seen in Tables 1.4 and 1.5. The difference is partly due to differences of samples and geographic divisions employed. For example, a UNICEF study measured education among the adult population (above 15 years), whereas a Ministry of Health study from 2004 looked at education in a sample of persons aged 5 years or above. Even so, a number of conclusions can be drawn from the two surveys. The national level of education was very low: between 37 percent and 54 26

 Ibid., p. 35.

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percent of the population had no education at all. The figure differed between the age groups. The Ministry of Health reported that more than 75 percent of the population above 50 years had no education, while the figure for the 20–30-year cohort was about 20 percent.27 Moreover, only about 5 percent of the population had completed primary education, and the figures for secondary education were also very low. The urban population was more educated than the rural population. The difference is clearly seen in the group that had no education and in the group with secondary education: far fewer urban citizens had no education and many more had secondary education as compared to people in the rural areas. The level of education differed not only between urban and rural districts but also between West, East, and Central East Timor. The West seemed to have the lowest level of education. The difference between regions is also seen from the performance on the test of students in Grades 3 and 4, where students from the eastern provinces of Baucau, Lautém, and Viqueque had the highest scores.28 That the education situation in East Timor was very problematic is hardly surprising, given the big challenges that the new nation was facing, with a historical heritage of poor education, large destruction of schools prior to independence, severe poverty, and the necessity to build a functioning school administration from people with little experience in such tasks. The government recognized the importance of education, as seen in the national development plan, and was trying its best to improve the situation, as witnessed by the size of the resources spent on education (cf. below). Still, there were areas with room for policy improvements. One such area was the language of instruction, and a second concern was the functioning of the Ministry of Education. The implementation of the decision to use Portuguese as the language of instruction at all levels of education (although it was said that Tetum would be used in parallel during a transition phase) was, of course, difficult and had to rely on extensive support from Portugal for the provision of teachers, teacher training, and school books. In spite of this support, the use of Portuguese implied that many children would not be able to  Ministry of Health et al. (2004), pp. 40–41.  World Bank (2004b), Annex 4.2.

27 28

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learn how to read and write because they were taught in a foreign language, exactly like during the Indonesian occupation. The lack of teachers who could sufficiently speak good Portuguese to be able to teach the language aggravated the problem. The vast majority of teachers were educated in Bahasa Indonesia and only those who graduated before 1975 could speak Portuguese. The government tried to train teachers in Portuguese by offering language lessons for a few hours a week. National tests, however, indicated that students instructed entirely in Tetum performed better than students instructed in a mixture of Portuguese and Tetum, even after controlling for background characteristics that might affect performance.29 Hence, there were good reasons why using Portuguese in the lower grades should have been abandoned and Tetum used instead. In 2002, East Timor had allocated 17 percent of the total government budget to education.30 The focus was on primary education, which accounted for 37 percent of the total outlays on education.31 While the relative amount spent on education was high for a country at East Timor’s income level, there were signs that the resources were not being used efficiently. Part of the problem seemed to be the poor functioning of the Ministry of Education. The Ministry appeared to have a very limited ability to execute the budget and did not realize that it had to make an expenditure plan and plan ahead of time. As a result, in March 2004, its actual expenditures amounted to no more than 41 percent of the annual budget appropriation, compared to 63 percent for the government as a whole.32 This situation was serious considering that schools were often operating without learning materials and had to introduce school fees to cover their costs. Teachers were reported to have left their jobs because they failed to receive their salaries, in a situation where the lack of teachers had already led to the very high student-teacher ratios seen in Table 1.3.33  Ibid., p. xxii.  Democratic Republic of Timor-Leste et al. (2003), p. 61. 31  Ibid., p. 63. 32  World Bank (2004a), p. 5. The fiscal year ran from 1 July to 30 June. 33  Democratic Republic of Timor-Leste et al. (2003), p. 73. 29 30

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Summing up, the educational situation in East Timor just after independence displayed a number of severe deficiencies. The literacy rate was only 38 percent, primary school enrolment was lower than elsewhere in Southeast Asia, dropout rates were high and many students had to repeat classes, the student-teacher ratio was higher than in other countries in the region, and the quality of education, in general, was low. No more than 5 percent of the population had completed the primary cycle. Factors like the decision to employ a foreign language—Portuguese—as the medium of instruction and the poor functioning of the Ministry of Education constituted obstacles to be overcome.

Health A second important social indicator of poverty was health. The Ministry of Health had designed a strategy to reach as many people as possible with primary care. The program was ambitious and costly: in 2002–03, East Timor spent some 7 percent of its GDP on health, against an average of 1.7 percent for the low- and middle-income countries in East Asia and the Pacific.34 The large public spending on health measures was clearly warranted. As shown in Table  1.6, the health situation in East Timor remained worse than in Indonesia and in other Southeast Asian countries. Life expectancy at birth was only 49 years in comparison to 67 years in Indonesia and an average of 65 years in other developing countries.35 The low life expectancy was mirrored also in a high under-five mortality rate, higher than in most other developing countries and higher than in any other Southeast Asian country except Cambodia (Table 1.6), in the infant mortality rate—88 per 1000 live births36—and in the maternal mortality: around 800 deaths per 100,000 live births. The main causes of  Ministry of Health (2004), p. 26.  The figures on life expectancy, as well as other variables, differ between sources, often because of different definitions. For instance, the Ministry of Health (2004, p. 1) gives a figure for East Timor as 57 years. The UNDP figures are used in Table 1.6 since they use similar variable definitions for the included countries. 36  Ibid., p. 1. 34 35

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Table 1.6  Health indicators for East Timor and other Southeast Asian countries, 2002

Country East Timor Malaysia Thailand Philippines Indonesia Vietnam Cambodia Laos Myanmar All developing countries

Life expectancy at birth (years)

Under-five mortality Tuberculosis cases per 100,000 rate (per 1000 live inhabitants births)

49 73 69 70 67 69 57 54 57 65

126 8 28 38 45 39 138 100 109 89

734 120 179 540 609 263 734 359 176 307

Source: UNDP (2004), Tables 8 and 9

maternal mortality appeared to be the increased incidence of teenage pregnancies and the short time periods between pregnancies. Both factors were reflected in the extremely high, and rising, total fertility rate: 7.77.37 This made the fertility rate in East Timor the highest in the world. The most important explanation was a widespread unfamiliarity with family planning practices.38 A related issue was how to avoid sexually transmitted diseases. Again, such knowledge was lacking, which is perhaps not surprising since only about a quarter of the population had ever heard of human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS).39 It was feared that the country was likely to face an HIV/AIDS epidemic in the coming years.40 The East Timorese population suffered from more or less the same diseases as it did during the Portuguese period. Malaria was endemic in all provinces; four provinces including Dili were high-transmission areas, and chloroquine-resistant strains were reported.41 Even more worrying was the  Ministry of Health et al. (2004), chapter 5, p. 1. The total fertility rate tells how many children a woman would have on average passing through the entire childbearing age. 38  Ibid., chapter 6. 39  Ibid., chapter 14. 40  Interview with Minister of Health Rui Maria de Araújo, 29 October 2004. 41  Ministry of Health (2004), p.1. 37

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fact that the incidence of malaria had increased threefold since 1999, possibly as a result of a breakdown of surveillance, vector control activities, and treatment.42 Other preventable communicable diseases such as tuberculosis and diarrhea-related illnesses were also common. The 2002 Human Development Report includes figures on the number of tuberculosis cases for a large number of countries, including the figures presented in Table 1.6. It is seen that tuberculosis was as common in East Timor as in Cambodia and more common than in other Southeast Asian countries. The most common diseases among children were acute respiratory infections and diarrheal diseases.43 The latter problem, which was common also among adults, was closely linked to the lack of clean water, a situation that did not seem to have improved since the Indonesian occupation.44 Around 60 percent of the rural households did not have access to safe water. The situation was similar in urban areas, where water was widely available but often contaminated by sewerage and other waste.45 The problem of contamination was made worse by the lack of sanitation: around 45 percent of the population had no toilet facilities, and only around half of the existing facilities could be considered safe.46 The disease picture cannot be separated from that of malnutrition. Child malnutrition can be measured either as the weight or as the height for age. Table 1.7 shows the share of children under five years of age who were moderately or severely malnourished according to these two criteria. Moderate malnutrition was very common. It affected more than 40 percent of all children under five years irrespective of the measures used. Around 13 percent of all children suffered from severe malnutrition according to the weight-for-age criterion and 25 percent according to the height-for-age criterion. The incidence of malnutrition differed between regions: highest in the West and lowest in the East, although the pattern depended on the measure used. Malnutrition was more widespread in rural areas than in urban areas, higher among male children than among female children, and it was higher the lower the education level of the  Ibid., p. v.  Ibid. 44  UNICEF (2003), p. 44. 45  Ministry of Health (2004), p. v. 46  UNICEF (2003), p. 45. 42 43

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Table 1.7  Share of moderately or severely malnourished children under five years of age, 2002 (percent) Weight for age

Total Eastern region Central region Western region Urban  Major urban Rural Male Female Mother’s education None Primary Secondary + Wealth quintile Poorest 2 3 4 Richest

Height for age

Moderate malnutrition

Severe Moderate malnutrition malnutrition

Severe malnutrition

42.6 37.4 42.3 50.8 36.2 37.6 44.5 44.2 40.9

12.6 7.8 13.6 16.9 7.6 9.5 14.1 13.6 11.5

46.7 47.9 46.8 44.7 38.9 40.4 49.1 48.4 45.0

24.7 22.6 25.5 22.7 19.2 19.7 25.6 26.6 21.5

45.7 42.2 37.1

14.0 12.2 10.2

50.2 45.8 40.9

27.4 23.4 18.3

45.2 44.6 43.3 45.4 34.5

13.8 13.2 13.4 12.2 10.0

51.3 50.5 49.2 45.4 36.8

28.1 26.1 25.6 23.1 16.9

Source: UNICEF (2003), Table 8.1

mother. Not surprisingly, malnutrition was negatively correlated with household income. The main problem for the Ministry of Health was to bring health services to the rural population. The suco survey found that most of the health care was provided by community health centers (104) and health posts (63). The most common facilities—community health centers without beds—usually worked for 17 days per month and 7 hours per day, and health posts worked 8 days per month and 6 hours per day.47 Finally, a network of radio communication and ambulance services was employed to improve access to health care also for more isolated villages. A substantial amount of health services was also provided by churches and nongovernmental organizations (NGOs). Such clinics accounted for approximately 20 percent of all outpatient visits in 2003.48 47 48

 ETTA et al. (2001), pp. 42–43.  Ministry of Health et al. (2004), p. 244.

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Table 1.8  Births attended by skilled health personnel in 2002 (percentage of all births) Country

Births attended by skilled health personnel (%)

East Timor Malaysia Thailand Philippines Indonesia Vietnam Cambodia Laos Myanmar East Timor All developing countries

24 97 99 58 64 70 32 19 56 24 55

Source: UNDP (2004), Indicator Table 6

Another measure of access to health is the share of births attended by skilled personnel (Table 1.8): only 24 percent in 2002, a figure which was lower than in most other countries in the region, including those at a comparable income level. Other sources report an even lower rate of attendance by skilled personnel. Thus, the Ministry of Health found that a nurse, midwife, obstetrician, or general practitioner attended only 16 percent of all births.49 The distances to the health-care centers were long, and the roads were poor (notably during the rainy season). The suco survey reported that on average a Timorese could count on eight hours of health staff care per year, but access to the services varied geographically, with 38 percent of all sucos stating that the closest health center was in the subdistrict capital, an average of 90-minutes distance—on foot. Inconvenience and costs for medicines also had a negative effect on the utilization of health care. Only around 10 percent sought health care when sick.50 The low figure was due also to a lack of understanding of the benefits of modern health care. According to the Ministry of Health, there was ‘a widespread lack of awareness of health problems, particularly among women, and a general lack of understanding of health benefits’.51  Ministry of Health et al. (2004), Table 10.9.  Democratic Republic of Timor-Leste et al. (2003), p. xi. 51  Ministry of Health (2004), p. 2. 49 50

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 he Living Standard at Independence: T A Summary Our account shows that East Timor at independence was a very poor country in all possible respects. Some aggregate measures are available. The suco survey developed a suco development index for purposes of regional comparisons. The overall measure was an unweighted average of a wealth index, a social services index, and an access index. The base for the computation of the wealth index was the number of months that a family did not have enough food and the average number of livestock per family. The social services index, in turn, was based on the availability of education and health services: the average student-teacher ratio in primary schools and the average number of females of childbearing age per midwife or traditional birth attendant. The access index, finally, was based on the time it took for most people to travel to a primary school, the time to travel to a vehicle-passable road, and the time needed to reach the subdistrict capital, all during the wet season. The scores varied considerably between geographical areas. The worst performer was the Liquiçá district on the north coast, west of Dili, where 9 of the 50 least developed sucos were found. Ermera and Bobonaro, just south of Liquiçá, as well as Dili and the large Manatuto district in the center of the country also ranked low on the suco development index. The reasons for this differed. In Dili, the problem was a shortage of food and lack of livestock, which produced a low wealth index. Bobonaro and Manatuto, on the other hand, scored low on the social services index. The ‘high performers’ were Manufahi and Cova Lima, mainly as a result of a high rank on the wealth index, and Ainaro—with a somewhat lower wealth index but a comparatively high access score. All three districts are located on the south coast. Both the western and the eastern districts were better off in general than the districts located in the central part of the country, and the lowland districts outperformed the highland districts. The difference between rural and urban areas was small. The former ranked higher on the wealth index, while the latter were more privileged in terms of access. Rice-­ growing areas tended to be better off than other districts.

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The UNDP 2002 East Timor Human Development Report also provides some information about poverty, through its various development indices, based on the findings of the 2001 surveys.52 The Human Development Index for East Timor in 2001 was estimated to be 0.421, on a scale running from 0 to 1. This figure represented an improvement in comparison with the 0.395 obtained for 1999, after the Indonesian destruction (a figure equal to that of Rwanda, which ranked 152nd out of 162 countries for which data were available), although different sources were used for the two calculations. Other indices computed by the UNDP confirm the picture of deep poverty. The Gender-Related Development Index,53 which takes into account the inequality between male and female incomes, was 0.347 in 2001 (i.e. lower than the HDI), basically because women’s earnings were only one-eighth of those of the men. Finally, in 1999, the Human Poverty Index,54 which combines deprivation in terms of longevity (the percentage of people not expected to survive until the age of 40), education (the percentage of adults who were illiterate), and living standards (a simple average of the percentages of people without access to safe water, health services, and of moderately and severely underweight children under five years) was 49.0. (A lower percentage indicates a lower level of poverty.) This indicates that East Timor had the highest rate of human poverty in comparison to all Asian countries for which the index could be calculated.

The Poverty Reduction Strategy Poverty reduction was high on the policy agenda of the first government of independent East Timor. In the national development plan from 2002, a development strategy with two overriding goals was formulated: to reduce poverty in all sectors and regions of the nation and to promote economic growth that was equitable and sustainable, improving the health, education, and well-being of everyone.55  UNDP (2002).  This index (GDI), which is quite tricky to compute, is described in detail in UNDP (1995). 54  For details with respect to this index (HPI-1), see UNDP (1997). 55  Planning Commission (2002b), p. 1. 52 53

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The strategy included a host of policies for achieving these goals, ranging from increased participation of the poor in the political decision-­ making process and in the modern economy to provision of basic social services. The government produced a detailed plan for budget expenditures in order to meet the poverty reduction goals. An explicit ranking was made of the sectors that appeared in the budget. Most important was education. Second was the health sector. Third was agriculture and related activities, and fourth was transport and communications. In education, first priority was given to primary schools (the first six years). Junior secondary education (years 7–9) came second, and technical and vocational education came third. In the health sector, the emphasis was on mother and childcare, contagious diseases, diseases related to insufficient nutrition, especially preventive treatment, and on HIV/AIDS. (The latter was not a problem, but the idea was to raise the awareness among the population.) Environment-­ related diseases also constituted a priority area. Overall basic, preventive measures and information were preferred to curative treatment, and an attempt was made to avoid relying on scarce qualified personnel. The system was built on nurses, mobile health teams, and health centrals rather than on doctors and hospital care. A basic package of measures was defined, and an effort was made to supply this in all districts. The ministry of health also cooperated, for example, with the church and various local community groups. An endeavor was made to delegate more and more decisions to the district level. There is no doubt about the fact that the Timorese government considered poverty to be the country’s number one problem. The entire development strategy rested on the explicit premise that poverty reduction was the primary task for the economic and social policy. The development plan specified a number of sub-goals and development indicators that were to serve as measures of what has been achieved. The degree of concretion in the goals and their operationality, however, varied strongly. During 2004, sector investment programs (SIPs) were developed as a means for implementing the national development plan. The SIPs formulated detailed and comprehensive investment programs in 15 different sectors: health, education, agriculture, civil society, and so on. These programs defined where and when different investments were needed.

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The SIPs helped the government to identify investment opportunities and prioritize between investments within and between sectors. The process was built on consultations, and the government was committed to monitoring the implementation of the programs.56 Hand in hand with the national development plan went the decision to adopt the United Nations Millennium Development Goals (MDGs).57 These goals were quantitative development targets to be reached by 2015, including reductions in poverty and hunger; increased enrolment in primary education; improved gender equality and empowerment of women; reduced child mortality; improved maternal health; reductions in ­HIV/ AIDS, malaria and other diseases; environmental sustainability; and the formation of a global partnership for development.58 Economic growth is necessary for reaching the development goals described above. Societies without growth can be temporarily successful in fighting poverty, but the results tend to be unsustainable. Economic growth generates resources for improving living standards, both by increasing private incomes and by increasing the ability of the government to launch poverty reduction programs. Taking into account the sharp decrease of real GDP in the late 1990s, it is not surprising that economic growth increased in East Timor once the reconstruction began in late 1999. A report from the International Monetary Fund (IMF) suggested a double-digit real growth rate in both 2000 and 2001.59 However, other sources, presented in Table 1.9, suggest a more modest growth, 2.3 percent in 2001,60 and during the first year of independence, 2002, the growth rate collapsed to a negative 7.1 percent. The collapse was followed by stagnant growth in 2003. The most important reasons for the negative growth were the withdrawal of a large number of foreign advisors and with them foreign aid, and substantial flood damage to crops caused by a delayed rainy season in 2002.61  An overview is given in Ministry of Planning and Finance (2005).  UNDP (2009), p. 5. 58  United Nations (2015), pp. 4–7. 59  International Monetary Fund (2004), p. 13. 60  Different sources often report hugely different figures on various economic variables. The figures in Table 1.9 are the official figures for East Timor produced by the Ministry of Finance. 61  Asian Development Bank (2004), p. 2, Durand (2014), pp. 259–261. 56 57

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1  A Poor Young Nation  Table 1.9  The macroeconomic situation of East Timor, 2000–03 GNI current prices million USD GDP current prices million USD GDP growth (constant prices, %) Non-oil GDP growth (constant prices, %) Oil/gas GDP current prices million USD Exports of goods and services million USD Imports of goods and services million USD Overall trade balance million USD

2000

2001

2002

2003

588 444 n.a. n.a. 77 127 632 −505

646 494 2.3 16.3 44 94 807 −713

770 483 −7.1 −6.7 42 89 867 −778

672 503 −0.1 −2.1 53 98 634 −536

Note: n.a. not available Source: Ministry of Finance of Timor-Leste, General Directorate of Statistics (2015), Tables 1.1, 1.2, and 2.1

The economy of East Timor during the first post-independence years largely consisted of traditional subsistence farming and a modern sector that contained only the public administration and some services. Not surprisingly, the result was a very small amount of exports that could produce the foreign exchange necessary for the development effort: about US$89 million. The main export was coffee, targeting the high-quality segments of the United States and Indonesian markets. The United States was also the largest market for the total merchandise exports of East Timor, with 53 percent of the total, followed by Indonesia with 21 percent.62 Official trade figures, however, underestimated the importance of exports to Indonesia. A substantial amount of non-registered trade took place across the border to West Timor. In 2002, East Timorese imports were almost ten times as high as exports. The demand for products necessary for the economic recovery effort was large and the domestic production capacity for these goods was severely limited. As a consequence, the trade balance deficit was close to US$800 million in 2002 (Table 1.9). This was a source of concern since the prospects for future export expansion remained relatively bleak. There was basically no manufacturing in East Timor, and the country was a net importer of food. Poor infrastructure constrained farmers’ access to domestic markets and even more to foreign markets.  Ministry of Planning and Finance (2004a). The shares are based on exports until September 2004. 62

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The Funding of Poverty Reduction The government budget of East Timor was substantially strengthened between 2002–03 and 2003–04. Government revenues amounted to some 21 percent of GDP, divided between oil and gas revenues and other domestic revenues, including taxes and fees. The collection of taxes and fees increased by more than one-third and almost doubled as a share of GDP between 2002–03 and 2003–04 (Table 1.10). The increase was to a minor part due to increased collection efficiency. The bulk of the increased revenues, however, was derived from a dramatic increase of oil and gas revenues: from less than 3 percent of GDP in 2001–02 to almost 13 percent in 2003–04. In 1989, Australia and Indonesia had signed the Timor Gap Treaty, dividing the Timor Sea into oil exploration zones,63 but, in 2001, the sea border between Australia and East Timor yet had to be settled, and it was still not possible to arrive at any meaningful estimates of how future revenues were to be divided. At the time, it seemed likely that the outcome would be 85:15 in favor of East Timor, which was calculated to translate into the equivalent of 25 percent of GDP for at least a decade. The resources had, however, not been fully prospected.64 When the New Timor Sea Treaty between Australia and East Timor was signed in 2002, Table 1.10  The government budget in East Timor between 2000–01 and 2003–04 (percent of GDP) Revenues  Domestic revenues  Oil/gas revenues Expenditures  Recurrent expenditures  Capital expenditures Overall balance

2000–01

2001–02

2002–03

2003–04

7.7 4.0 3.7 14.5 8.4 6.1 −6.8

8.2 5.4 2.8 13.8 10.8 3.0 −5.6

13.8 5.5 8.3 20.0 15.9 4.1 −6.2

21.4 8.9 12.6 21.0 18.0 2.9 0.5

Source: International Monetary Fund (2004), p. 13

 Molnar (2010), p. 104.  Hill and Saldanha (2001), p. 18.

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the split was fixed at 90:10.65 We shall come back to the oil issue at some length in Chapter 6. For the time being, it is enough to note that production in the Bayu-Undan Field started earlier than expected and generated more output than had been hoped for. Extraction began in February 2004 and was then expected to produce around 2.6 trillion cubic feet of gas and 370 million barrels of liquified petroleum during 20 years of exploitation.66 On the expenditure side, increased recurrent expenditures boosted total expenditures from about 14 percent of GDP in 2000–01 to 21 percent in 2003–04. Because of the much larger increase of revenues than of expenditures (as a result of the increased oil and gas revenues), the government budget went from a deficit of about 7 percent in 2000–01 to a small surplus of 0.5 percent in the fiscal year 2003–04. The large increase in government revenues was expected to lead to substantial budget surpluses over the coming years, in spite of the large and widespread need for investments in infrastructure, education, and health. The revenue constraint was about to be broken in East Timor. At the same time, as demonstrated by Table 1.11, budget implementation was running behind schedule. The country lacked the capacity to spend at the rate envisaged in the various plan and budget documents. East Timor was left without qualified and experienced administrative personnel when the Indonesians left the country, and the return of Timorese in exile had not sufficed to bridge the gap. The public administration was crucially dependent on the support of expatriate advisors who in many instances had to assume direct operational responsibility. In order to solve the problem of how to spend the oil and gas revenue, the government decided to propose the parliament to establish a ­petroleum fund, based on the Norwegian model67 to be operational from 1 July 2005 (see Chapter 6 for a more detailed discussion). The basic idea behind the fund was to guarantee that the oil revenues expected to flow into the country over the coming 20–30 years were spent wisely, in the

 Molnar (2010), p. 104.  Ministry of Planning and Finance (2004b). 67  See Norges Bank Investment Management (2018) for details. 65 66

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Table 1.11  Budget execution rates between 2002–03 and 2003–04 (percent of approved expenditures) Sector

2002–03

2003–04

Total Office of the president National parliament Government structures Ministry of state administration Ministry of the interior Ministry of justice Development and environment Trade and industry Agriculture Education Health Employment Ministry of foreign affairs Planning and finance Transport and public works

95.3 85.4 95.2 94.4 95.2 99.2 90.3 83.5 79.5 93.9 94.7 94.2 91.3 78.7 94.2 97.7

92.7 79.9 98.4 90.7 92.6 96.4 86.9 54.0 80.7 88.2 93.4 95.2 88.5 77.9 91.0 94.0

Sources: Democratic Republic of Timor-Leste (2003), Table  5.2; Democratic Republic of Timor-Leste (2004), Table 5.2

interest of the economic and social development of the country.68 To ensure intergenerational equity, the fund built on the perpetual income concept, that is, the real value of petroleum wealth was to be kept constant over time. The permanent income of the fund would be employed each year, and anything in excess of that would be added to the fund. Only the annual interest component on the sum of current assets and expected future revenues was to be spent. * * * East Timor had emerged from the Indonesian occupation as one of the poorest and least developed nations on earth. All the available indicators pointed unequivocally in the same direction. Four out of ten people lived below the poverty level, and the UNDP Human Development Index also gave a low figure for East Timor. Life expectancy at birth did not reach 50 years, and the country performed worse on the specific health indicators  Ministry of Planning and Finance (2004c).

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than both its neighbors and the developing world in general. Malnutrition was a problem among small children. The number of doctors and midwives was low; malaria, tuberculosis, and various skin diseases were common; and East Timor risked an HIV/AIDS epidemic in the near future. The availability of food varied across the year, with November–February being the most difficult period. Access to education was a problem for many, and the physical infrastructure was deficient, especially in the countryside. The East Timorese perceived themselves as poor precisely because of this: the deficient infrastructure which in different ways hindered economic development. Poverty was not equally distributed among the population. Large families were generally worse off than smaller families. Those with little or no education fared worse than those with more schooling, and rural districts tended to be worse off than urban areas. The eastern part of the country was somewhat better off than the central and western parts. The Gini coefficient of inequality was moderately high, below 0.4. Between 1999 and 2001, the economic situation improved mainly for the poor, whereas the better off saw the return to their assets fall in the wake of the physical destruction in 1999. Finally, people on average, felt that they had more power to deal with their situation in 2001 than in 1999. During the first years of independence, East Timor stood out as heavily dependent on foreign aid for its development. It was, however, only a matter of time before money would start flowing into the country on a large scale, as a result of the exploitation of the oil resources in the Timor Sea. The challenge was how to make the best use of it—no small challenge, given the lack of administrative capacity and experience.

2 From Independence to Turmoil

The first few years of independence in East Timor were characterized by strong efforts to put institutions in place with the help of foreign assistance and by the initiation of various poverty reduction programs. The challenges were considerable. An unparalleled and increasing birth rate made for a population growth so high that it put considerable strain both on job creation and on the delivery of public services. The low level of education made it difficult to both expand industrial production and develop the national institutions. At the same time, a mood of optimism prevailed. After more than three centuries of Portuguese supremacy and two and a half decades of Indonesian occupation, the East Timorese were finally free to take their fate into their own hands. Members of the resistance movement had been released from the Indonesian prisons, and the exiles had returned home to the arduous but stimulating task of forging the new nation. The reconstruction of the economy and the infrastructure in the wake of the havoc wreaked by the occupants and their allies could begin. It was hoped that East Timor would develop quickly with the help of a committed leadership and the perhaps largest amount of foreign

© The Author(s) 2019 M. Lundahl, F. Sjöholm, The Creation of the East Timorese Economy, Palgrave Studies in Economic History, https://doi.org/10.1007/978-3-030-22052-5_2

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a­ssistance per capita ever received by a post-conflict country.1 During 2004, it also became clear that East Timor was on the threshold of substantial revenues from large oil and gas deposits in the Timor Sea. In a sense, the country was facing an embarras de richesse instead of the usual tight budget constraint imposed on developing countries. The main problem was how to spend the new riches so as to maximize their development impact. If properly managed, these revenues could provide a golden opportunity to pursue development-oriented policies. The international experience of resource revenue management was, however, not encouraging: most resource-rich countries fail to bring about sustained development and hence remain poor. The usual reason for failure is a combination of negative economic effects stemming from volatility of the revenues, decreasing competitiveness of tradable goods, and increased corruption and institutional inefficiency.2 In this chapter, we discuss economic and social developments in East Timor from 2000 to 2006–07 against the background of the political situation, as the latter developed, especially during the turbulent year 2006.

Economic Structure As we found in Chapter 1, after the 1999 events, the Timorese economy was one of the poorest in the world. The per capita income was presumably less than US$350,3 and no mechanisms were in place that could initiate and propel the development process. The country lacked most fundamental institutions, and an extensive aid effort was necessary to initiate recovery. This effort was directed mainly toward the reconstruction of infrastructure. Dwellings were built, telecommunications were transferred to cell phone networks, and the postal service was rebuilt, albeit slowly and incompletely, as was the case also with the transport

 Scanteam (2007), p. 14.  Cf. Auty (1993, 2001). 3  UNDP (2002), p. 83, Hill (2001), p. 1138. 1 2

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37

network. The repair of the electricity net was difficult and the electricity company had problems charging the consumers. The State of the Nation Report published by the Timorese planning commission in April 2002 indicated that GDP per capita was somewhere in the range between US$412 and US$452 on the eve of independence (2000 and 2001, respectively), and that the economy had not managed to recover from the 1999 events. A GDP growth of an estimated 15 and 18 percent in 2000 and 2001, respectively, was not enough to put production back to the 1997 level.4 The economy was dominated by subsistence agriculture. Between 1993 and 1998, on average, about one-third of the non-oil gross regional product of East Timor came from agriculture, over 20 percent from government services, and a little less from construction and transport and communications and trade. Hotels and restaurants contributed between 9 percent and 10 percent each. The share of manufacturing was low, a mere 3 percent. Agriculture preserved its dominance also after 1999, with close to 26 percent of the non-oil GDP in 2000, almost as much as the contribution of United Nations Transitional Administration in East Timor (UNTAET)related services for reconstruction. As could be expected, construction continued to play an important role (almost 15 percent), while the share of manufacturing had shrunk close to 2 percent.5 More than 84 percent of the population lived in rural areas in 2001,6 and agriculture was the main source of income in no less than 94 percent of all sucos.7 As we discuss in Chapter 4 in Volume 1, this sector received a blow through the 1999 events, which resulted in a reduction of agricultural GDP and the loss of half of the livestock population. However, crop production recovered in 2000 and 2001, possibly enough to put the agricultural sector back at least to the pre-1999 level. Most of the production was for on-farm consumption, and it was estimated that in less than 20 percent of the sucos, most of the rice and maize

 Planning Commission (2002a), p. 20.  World Bank (2002), p. 7. 6  Planning Commission (2002a), p. 22. 7  Ibid., p. 70. 4 5

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crops were sold.8 This was, however, not enough to prevent food shortages of varying severity and duration during the November–February period. The production of the main food crop—rice—had recovered in comparison with both 1997 and 1999, but marketing problems limited its availability in local markets.9 Coffee continued to be the most important cash and export crop. It was grown by around 40,000 farmers at the time, which in turn meant that it affected the lives of around one-fourth (200,000) of the total population. Whether coffee production had recovered from the 1999 disaster in 2001 is difficult to tell. The available output estimates differ widely and do not make much sense. Also, prices were down in the world market, meaning that cash incomes may not have been up to their pre-1999 levels. This, in turn, has to be set against the high costs that prevailed in coffee growing, with wages, comparatively speaking, higher than in Brazil, and high transport costs.10 Farmers reported to be reluctant to sell to the main buyer.11 East Timor had no industrial sector on the eve of independence. Excepting the government bureaucracy, there was not much of a modern sector at all. The money that had been flowing into the country from international donors and investors had been directed mainly to ‘the service sector of the economy in Dili, providing retail, bar, restaurant, hotel, vehicle rental and telecommunication services. Other foreign investments controlled by skilled foreign workers are directly servicing the UNTAET reconstruction program’.12 The State of the Nation Report was vague on the issue. Possibly some investment was taking place, but its magnitude was highly uncertain: Although much of the F[oreign] D[irect] I[nvestment] that has occurred so far has largely been in support of UN operations and personnel, there has also been considerable longer-term FDI in hotel structures, bottled  Ibid.  Ibid., p. 73. 10  World Bank (2002), p. 18. 11  Planning Commission (2002a), pp. 72–73. 12  Ibid., p. 91. Most new investments were undertaken by Timorese citizens, however—no less than 82 percent of all ventures according to government figures. No value estimates are available (ibid.). 8 9

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39

­ rinking water production plants, and warehousing. Although no data is d available separating foreign from domestic investment by sector, anecdotal evidence suggests that there is a small but increasing level of investment in small manufacturing operations, for example in coffee processing and packaging, and in the construction industry.13

The existing support structures had been destroyed during the 1999 violence: buildings, power generation, telecommunications, airports, land transportation, mail delivery, banks, real estate, and land records. The state bureaucracy had been wiped out and had to be built up again— from the lowest level to the highest. The people with business experience had left the country. The legislation necessary for attracting the necessary foreign investment was also lacking. East Timor did not have any functioning company law, no foreign investment law, no bankruptcy law, and no efficient property rights law (which, in turn, opened the door for conflicting claims). The Indonesian legislative system had ceased to function, and no domestic system had been built up. East Timor, by and large, lacked a functioning public administration when the country became independent. During the Indonesian occupation, the government sector had been completely dominated by Indonesians, and they all left in 1999. Hand in hand with the exodus of the trained officials went the almost total destruction of all administrative systems and structures in the country. As we have seen, the consequence of this was that the United Nations Transitional Administration in East Timor (UNTAET) had to start building a new administration from scratch, in a situation where the number of qualified people was extremely low: a difficult mission indeed.14 A conscious decision was made to limit the number of civil servants to about one-third of the figure during the Indonesian period. This gave a number of slightly over 9000 in 2000–01, around 14,800 when defense and police forces were added. That target, however, proved to be too optimistic. When the State of the Nation Report was drafted, the number of positions actually filled amounted to slightly over 10,900, that is the  Planning Commission (2002a), p. 91.  Three concrete instances of institution building—the Ministry of Social Solidarity, the Central Bank and the Ministry of Health, are dealt with in Barma et al. (2014), Chapters 10–13. 13 14

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shortfall was more than 25 percent.15 Training and capacity development proved to be difficult as well. When the lessons of the UNTAET experience were summarized in 2002, the following conclusions were drawn: UN benchmarks were used to set-up the administrative system but, in light of the situation in East Timor, those benchmarks may not have been pertinent. The UNTAET experience has proven again that having people with the right set of skills and technical knowledge is critical to the effectiveness and success of the mission. Having few but competent staff is preferable to having more staff but without the requisite skills. In East Timor, two types of people were needed—one group with the expertise to get the job done, and another with the know-how to train and develop capacities. These skill-sets, though not mutually exclusive, rarely reside within the same group. For UNTAET to be more effective, it might have required a different team of administrators who could deal with the sustainable development issues once the set-up team had completed its tasks.16

Against the above has to be set the fact that East Timor possesses rich oil and natural gas deposits in the Timor Sea.17 In 2002, the uncertainty with respect to future petroleum revenue flows, however, loomed large. Revisions were frequent, and the time profile of earnings, in particular, turned out to be problematic: Revenue flow estimates have been subject to significant changes—both in aggregate and in their distribution over time—reflecting the evolution of negotiations with the commercial operators. As a result, it is not yet possible to derive firm revenue projections of the oil and gas resources from the Timor Sea.18

The conclusion was that East Timor would continue to be dependent on foreign aid to cover the deficit in the government budget for a few years to come:  Planning Commission (2002a), pp. 37–38.  Azimi and Lin (2003), p. xxviii. 17  Planning Commission (2002a), p. 81. 18  Ibid. 15 16

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Table 2.1 Expenditures and ETTA revenues, fiscal year 2001–02 (million US dollars) Expenditures CFET TFET Total CFET + TFET Bilateral UNTAET Total expenditures ETTA Revenues Non-oil and gas revenues Timor Sea Revenues Total ETTA Revenues Total Expenditures – ETTA Revenues

54 50 104 110 101 315 19 12 31 284

Note: CFET Consolidated Fund for East Timor, TFET Trust Fund for East Timor, UNTAET United Nations Transitional Administration for East Timor, ETTA East Timor Transitional Administration Source: World Bank (2002), p. 81

While there may be considerable uncertainty about Timor Sea revenue flows, it is clear that at least for the next two years such revenue under any scenario will be insufficient to finance government expenditure needs. Initial estimates indicate that revenue from the Timor Sea will rise sufficiently by F[iscal] Y[ear] 06 to cover anticipated expenditure needs but hat large fiscal surpluses are unlikely before the end of the decade.19

As shown in Table  2.1, the government budget for the fiscal year 2001–02 can be divided into four different parts on the expenditure side: the two multilateral trust funds—Consolidated Fund for East Timor (CFET) for recurrent spending and Trust Fund for East Timor (TFET) for capital projects—expenditures financed by bilateral donors, and items directly related to the United Nations presence in the country (United Nations Transitional Administration for East Timor—UNTAET). The domestic revenue raised by the East Timor Transitional Administration (domestic taxes plus oil and gas revenue) covered less than 10 percent of the total expenditure (a little more than 14 percent excluding UNTAET expenditure). The bulk of non-petroleum revenue came from import taxes (about two-thirds), with income tax revenue yielding ten times less 19

 World Bank (2002), p. 74.

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because of the weak tax base.20 The expenditure level was high in relation to GDP because of the large investment needs. CFET plus TFET spending alone amounted to about 28 percent of the non-oil GDP, and adding the bilateral expenditure raised the figure to 56 percent.21

Macroeconomic Stability The budget deficit could easily have led to macroeconomic instability. It was not monetized, however, and did not generate any inflationary pressure. During the last years of Indonesian administration, the rate of inflation had begun to shoot up, as a result of the Asian crisis and the violence and destruction in 1999, which resulted in an acute shortage of goods. The latter year, a peak figure of 140 percent was reached.22 Inflation was, however, brought under control by the introduction of the US dollar as the medium of exchange in January 2000 and the financing of the budget deficit by international grants.23 In 2000, the rate of price changes was an estimated 3 percent on a yearly basis, and in 2001, the price level had begun to fall (−0.3 percent).24 Still, the price level was artificially high, especially in the capital. There was a special reason for that: the presence of a large expatriate community of people—around 15,00025—involved in the operations of the United Nations and other international agencies in East Timor. This presence, in fact, meant that a dual economy had been created: on the one hand, the traditional domestic subsistence economy; on the other hand, an urban, aid-driven economy with a high purchasing power. Allegedly, ‘some 80–85 per cent of the economic benefit of the UN presence centered on Dili’.26 The two economies were furthermore connected, in an unfortunate way. One would perhaps think that East Timor would display one of  World Bank (2002), p. 86.  Ibid., p. 81. 22  Planning Commission (2002a), p. 25. 23  Ibid., pp. 24–25. 24  International Monetary Fund (2005a), p. 31. 25  World Bank (2002), p. 17. 26  Leach (2017c), p. 179. 20 21

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the fundamental characteristics of some of the central models of dualistic economies: an infinitely elastic supply of labor and a constant wage rate.27 According to the World Bank, this was, however, not the case: The large influx of international agencies, NGOs and other foreign employers—and the shortage of skilled local staff—resulted in an estimated quadrupling of wages, measured in US dollars. In the coffee industry, for example, unskilled farm labor earned the equivalent of $0.90 per day in mid-1999 and now [2002] earns $3.50. Civil service wages were set at rates starting at about $85 per month, which was about three times the average in Indonesia […] The … [most] serious problem with relatively high public sector wages (at the lower grade levels) is their demonstration effect for the private sector.28

Presumably, the coffee wage rate refers to processing activities; the same World Bank document indicates that, at the grower stage, completely different mechanisms seemed to be at work: Coffee farmers are predominantly the Mumbai-speaking mountain people who are said to be ‘non-mercantile’, viewing themselves as custodians of the land rather than farmers. Accordingly, very little work is put into the husbandry of coffee. Bushes are not pruned or mulched, replanting hardly takes place, fertilizer and pesticides are not used to enhance yields, and families are said to harvest coffee only for present cash needs rather than profit maximization.29

The introduction of a minimum wage may have served to push up the wage level in the coffee industry. The UNTAET administration set an informal minimum wage level of US$85 per month, or some US$4 per day.30 The rate was not formally binding, but ‘it has had an important impact on wage setting in the formal sector’, writes Maitreyi Bordia Das in a study of the labor market impact of the minimum wage.31 According to this study, in the case of unskilled workers  Lewis (1954).  World Bank (2002), pp. 17–18. 29  Ibid., p. 44. 30  Das (2004), p. 23. 31  Ibid. 27 28

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… we find that more than half of them earned below the informal MW in 2001 … There was also a high degree of inequality among unskilled workers, with the top one-tenth earning more than five times what the bottom one-tenth earned in 2001 … This could very well have sectoral explanations. For instance, unskilled agricultural workers may well earn a lower wage compared to those in manufacturing or construction.32

What the quotation indicates is that the coffee wage rate seems to have belonged to the upper echelons in the unskilled wage hierarchy. The World Bank may have picked an atypical example to illustrate the impact of the presence of foreign personnel in Dili on the unskilled wage level, and the impact, in general, on unskilled wages of the introduction of the minimum wage may have been a great deal weaker. The question also arises whether the ‘unskilled’ work in coffee processing was unskilled in the sense that it would be possible to put an unskilled farmer into processing activities without any training or processing actually contained some skill moment which explains the rapid wage rise. Alternatively, the extraordinary circumstances surrounding the end of the Indonesian occupation and the gradual return to normalcy may have created a labor shortage that was only temporary, for, as we will come back to in Chapter 4, the rate of population growth in East Timor and the concomitant annual addition to the labor force have both been so high as to create an unlimited supply of unskilled labor in the sense of Arthur Lewis since independence, making unskilled workers available at a constant real wage rate. Be that as it may, there may have been a wage element in the inflation process but mainly stemming from the skilled part of the labor force. To what extent high wages may have resulted in unemployment is, on the other hand, difficult to say. In the first place, defining employment and unemployment is a difficult task in the Timorese context. The easiest way is by taking the distinction between the formal and the informal sectors as the point of departure. In the latter, demand and supply balanced in the sense that most people were their own bosses or worked within the framework of the family economy. In this segment of the labor market, no open unemployment, hence, arose, because nobody could afford to be  Ibid., p. 26.

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without a job. Instead, the problem was one of low productivity and incomes. The employment problem was a poverty problem. Virtually, the entire East Timorese economy, in 2002, may be classified as informal. The upper limit for the formal sector could be drawn at around 22,000 employees: the public administration, the NGOs, and some foreign companies, out of a total labor force of 310,000. To the latter figure, some 22,000 entrants in the labor market were added each year—people who in their majority had to be absorbed by informal economic activities.33 In 1998, an estimated three-fourths of those in the labor force made their living in agriculture, about 9 percent were found in public administration, less than 7 percent worked in the private sector or in NGOs, and 6 percent were openly unemployed. Three years later, the number of openly unemployed had increased to almost 17 percent, while employment in public administration had fallen substantially, as a result of conscious trimming. Employment in the private sector had also been somewhat reduced, but not too much, because of the existence of a number of public employment projects there. Agriculture continued to serve as the sink in the labor market with almost 74 percent of the total labor force.34 The balance of payments displayed a deficit on the eve of independence. During the last years of the Indonesian period (1995–98), East Timorese exports, on average, amounted to some 12–14 percent of the gross regional product (GRP).35 Agricultural products dominated, with coffee accounting for about 60 percent, supplemented by some food crops, livestock, forestry, and fishery products. In 2000 and 2001, however, these exports dropped drastically, to no more than 2.5 percent of the gross regional product (GRP). (Total exports remained more or less at the same level as before 1999, but only as a result of the introduction of petroleum exports into the balance of payments.) The reasons for the decline were to be sought, on the one hand, in the destructions in 1999, on the other hand, in the loss of important Indonesian markets and ­infrastructural trading facilities.  UNDP (2002), pp. 17–18.  Planning Commission (2002a), p. 22. 35  Note that all official figures on international trade in East Timor underestimate the real figures, since a large amount of unregistered trade is taking place with Indonesia. 33 34

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Merchandise imports exceeded exports substantially before 1999— with around 35 percent of GRP. These imports consisted largely of food, petroleum, and construction materials and were funded by Indonesian transfers. After 1999, imports shot up substantially, as a result of the reconstruction activities related to the 1999 destruction. In 2001, they were estimated to be close to 125 percent of GDP. The deficit on the current account was an estimated 136 percent of GDP that year, substantially higher than the 4.5–5  percent before 1999. This was clearly an exceptional, but necessary, situation requiring massive finance from the international donor community,36 all of which was extended in the form of grants, which, in turn, implies that East Timor did not have any foreign debt. To conclude, looking at East Timor from the stabilization point of view on the eve of independence reinforces the impression of aid dependence. The economy displayed large budget and balance-of-payments deficits financed by an inflow of foreign grants, increased unemployment, and an artificially high price level, however, under quite unusual circumstances, dominated by the reconstruction effort. Thus, with the exception of employment, the situation was not one of immediate concern. The deficits were planned, finance was automatic, and the price level was expected to come down as the foreign presence in the country would decrease during the next few years.

The Development Strategy The development strategy of the Timorese government focused explicitly on economic growth, poverty eradication, and social development.37 According to the national development plan, the road to economic development went via the creation and development of basic institutions in the government sector and elsewhere. That was the most immediate task. ‘In the short-term, legislation and institutional capabilities will be addressed, together with progress in infrastructure, education, and health.  Planning Commission (2002a), pp. 31–33, 129.  For an independent discussion of the development alternatives of East Timor written at the time, see Hill (2001). 36 37

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In the longer-term, development can accelerate on the basis of these foundations.’38 In the economic sectors, the plan focused on agriculture, since that was the sector where most of the poor were found. A combination of infrastructural works and improved techniques was envisaged, and the objective was to enhance productivity in the sector. The plan also stressed the importance of microenterprises and of the private sector in general.39 The East Timorese development strategy provided an explicit ranking of the sectors included in the government budget in terms of importance when it came to poverty reduction. The first priority was education, followed by health, third was agriculture and related activities, and fourth was transport and communication. The national development plan covered the five fiscal years from 2002–03 to 2006–07. It breathed long-run optimism on the economic level: … the immediate challenge is to consolidate on the economic institutions and framework that have been put in place and particularly to ensure that public finances are put on a sound and sustainable medium term path. Provided the transition away from the United Nations period is successfully maneuvered over coming years, the outlook for East Timor is very bright, with the prospect of steadily improving and broadly based growth for decades to come, particularly following the onset of oil production from the Timor Sea and as political liberation leads to economic transformation and improved efficiency throughout the country, especially in agriculture.40

At the same time, an awareness existed of the short-run dependence on external funding. Continued support from the international donor community was seen as critical for both financial resources and capacity building. This Plan asks donors to accept a heavy burden of responsibility for seeing through the generous initial assistance which has been provided. Any move  Planning Commission (2002b), p. 2.  For a discussion of the problems of private sector development in the context of poverty, see Kusago (2005). 40  Planning Commission (2002b), p. 58. 38 39

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to premature withdrawal on the part of donors would be counterproductive for all, and place at risk the important advances made to date. In the short term, over the next three years, donors are being asked to provide further financial resources to basic operations running efficiently and to allow for the development of the government’s own modest investment program. In the longer term, the need will change more to assistance with the development of capacity and the building of physical and social infrastructure.41

Macroeconomic development and public finance management were seen as explicit instruments for poverty reduction, and the macroeconomic goals emphasized growth, particularly outside the oil sector, but also stabilization: low inflation, more jobs, lower unemployment, improvement of the balance of payments, and a strengthening of the banking and finance sector. On the fiscal side, the focus was on growing revenues, responsibility in expenditures, good management of the budget deficit and its financing, and efficient management of oil and gas revenues and the savings resulting from these.42 A list of policy goals, actions, and performance indicators was provided. Guidance in the development effort was also provided by the United Nations Millennium Development Goals,43 which were adopted by the Timorese government. These goals constituted quite a challenge for a nation as poor as East Timor.44 One of the most important determinants of success would be the ability of the economy to produce sustained growth.45

Economic Growth 2002–0546 Three years after independence, the economy of East Timor remained both fragile and vulnerable. The recovery that took place in the wake of the destructions in 1999 could not be sustained in 2002 and 2003.  Ibid., p. 59.  Ibid. 43  United Nations (2003). 44  Cf. Joseph and Hamaguchi (2014), Chapter 7. 45  UNDP (2003), p. 117. 46  For a survey of the economy of East Timor during this period, see Durand (2008). 41 42

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18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8

2001

2002

2003

2004

49

2005

Fig. 2.1  Non-oil GDP growth 2001–05 (percent per annum) Source: Ministry of Finance, General Directorate of Statistics (2015), p. 5

Different measures of economic growth give very different pictures of the development in East Timor because of the large role of oil incomes. The petroleum sector amounted to around 80 percent of the country’s GDP. Thus, changes in the volatile oil price have a strong impact on the growth rate. However, as discussed in detail in Chapter 6, there are almost no direct links from the oil sector to the rest of the economy.47 Hence, GDP is a relatively poor measure of the production capacity of the East Timorese economy. We therefore report the growth of the non-oil GDP in Figure 2.1. The non-oil economic growth rate was no less than 16.3 percent in 2001, but it averaged −0.6  percent per  annum during 2002–05. This was a great deal less than expected considering the low initial level of development of East Timor. The most striking feature of economic growth from 2001 to 2005 in East Timor was its large variability. Taking the sharp decline in GDP in the late 1990s into account, it was not surprising that growth was high once the reconstruction started in late 1999. The high growth rate in 2001 was mainly a result of the recovery from the turbulent year of 1999. The first two years after independence (2002–03), on the other hand, saw nonoil GDP contract by 6.7 percent and 2.2 percent, respectively, an extraor However, there are strong indirect links since almost all public expenditures are financed through incomes from the petroleum fund (cf. Chapter 11). 47

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dinarily poor performance considering the low initial level of income and the massive international support for the reconstruction effort. In 2004, economic growth was positive but low: 0.4 percent.48 It improved in 2005, with a rate of more than 6 percent, due to positive developments in agriculture and increased public expenditures, while the contribution of the modern private sector (industry and services) was modest. The growth figures for 2002–04 were not high enough to make up for the growth of the Timorese population. When the results of the 2003 demographic and health survey became available, they contained a very fundamental finding: the fertility rate in East Timor was the highest in the world with 7.8 children per woman in childbearing age (2001–03), far higher than the figures for other Southeast Asian countries. (Laos had the second highest figure: 4.7.) Worse yet, the figure appeared to be on the rise. During the 12 months preceding the survey, it was as high as 8.3.49 Translated into population growth terms, this implies that the Timorese population increased by 3 percent every year,50 which, in turn, indicates that real per capita income had to be falling and presumably also that the extent of poverty was increasing. A population growth figure of 3 percent per annum, in turn, means that the population will double in 17 years. It is, hence, obvious that the high fertility rate was a ticking time bomb from the point of view of poverty and poverty eradication. The fertility rate did not vary across subgroups among the women between 20 and 35  years of age, and education did not matter either. Higher wealth, on the other hand, led to a small reduction (from 8.1 among the poorest households to 6.9 in the wealthiest). Also, the median age for the first birth appeared to be declining: over 24 years for women over 39, 22 for those between 30 and 39, and 21 for those from 20 to 29.51 Studies of Indonesia indicate that access to family planning may have drastic effects on fertility.52 Unfortunately, the prevailing attitudes in East  One reason for low economic growth was the substantial flood damage to crops caused by a delayed rainy season in 2002. Such external shocks tend to have strong effects on an economy where the overwhelming majority of the people are engaged in agriculture (Asian Development Bank 2004). 49  Ministry of Health et al. (2004), p. 71. 50  World Bank (2005a), p. 6. 51  Ministry of Health et al. (2004), p. 72. 52  Angeles et al. (2005), p. 195. 48

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Timor toward family planning appeared to imply that the high rate of population growth would continue in the foreseeable future. Timorese women expressed a strong desire for many children. Their desired family sizes were the highest ever recorded in any demographic and health survey in the world. Only 17 percent wanted no more children, the same figure as the one for the population in general. Only 13 percent of the married women wanted access to family planning devices—and not in order to limit the number of children (only 3 percent), but to space births properly (10 percent). Altogether, however, only 75 percent of the total demand for family planning was met, and over 60 percent of the women and 70 percent of the men were completely ignorant about possible family planning methods. A mere 10 percent of the women used contraceptives.53 Family planning is a difficult subject in East Timor. Especially in the countryside, having many children is a sign of wealth, since the children can work in agriculture. Also, the Catholic Church is firmly against birth control, and it is capable of quickly mobilizing large numbers of supporters. This was shown in April 2005 when thousands of people took to the streets for three weeks in Dili, demanding that Prime Minister Mari Alkatiri should resign because of the government decision to drop mandatory religious education from the national school curriculum. A national policy for family planning was, however, put in place and was approved by the Council of Ministers. The government would work closely with the Church in the implementation. The idea was based on the concept of conscious parenthood. Prospective parents were to make decisions about the number of children. Regardless of their religious background, the government was under the obligation to provide the available information about methods for family planning.54

Stabilization Aspects The budget situation in East Timor underwent a drastic improvement during the first years of independence. As shown in Table  2.2, on the revenue side, this was a result not only of the rise of the oil and gas reve53 54

 Ministry of Health et al. (2004), chapter 6.  Interview with Minister of Health, Rui Maria de Araújo, 23 August 2005.

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Table 2.2  The government budget 2002–06 (million US dollars) Year

2002–03 2003–04 2004–05 2005–06

Revenue  – Domestic revenues  – Oil/gas revenues  – Grants Expenditure  – Recurrent expenditures  – Capital expenditures  – Previous year spending Overall balance Cumulative oil/gas savings (end-period)  – In percent of GDP  – In percent of recurrent expenditures

81.3 19.3 29.5 32.5 68.5 53.3 4.7 10.5 12.8 10.5 3.6 19.8

105.4 29.2 41.4 34.8 64.4 53.1 2.4 8.9 40.9 13.9 4.6 26.2

336.6 36.9 265.5 34.2 70.4 56.4 2.8 11.3 266.2 70.1 21.9 124.3

516.7 33.9 481.8 1.0 92.7 66.1 15.6 11.0 424.0 649.8 197.3 982.6

Source: International Monetary Fund (2008), p. 18

nue over time but also to improved administration and collection of domestic revenues. On the expenditure side, the weak institutional and administrative framework contributed to keeping expenditure on a lower level than the one originally budgeted, but the rising budget surplus was also due to the deliberate policy of not attempting to spend more than what could be absorbed by the economy. The revenues from oil and gas were more than 16 times as high in 2005–06 as in 2002–03. There was no way that such a huge increase could be put to productive use in the Timorese economy. Hence, as we have discussed in more detail in Chapter 6, most of the increasing inflow of revenue resulting from the oil and gas exploitation in the Timor Sea was, instead, put into a special oil fund. The overall budget surplus was 33 times as large in 2005–06 as three years before. Not surprisingly, the huge increase in available resources was a challenge for the capacity-constrained administration, and the budget execution rate was reduced drastically from 95 percent during 2001–02 to 65 percent during 2004–05 and 2005–06.55 The budget surplus was mirrored in the balance of payments figures, as demonstrated by Table 2.3. The balance of trade was strongly negative and so was the service account, but once the oil and gas revenues were added, the gap started to close, and the current account displayed an  Durand (2008), p. 121.

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Table 2.3  The balance of payments 2002–05 (IMF estimates, million US dollars) Year

2002 2003 2004 2005

Exports of goods exclusive of oil/gas revenues 17 8 8 9  – Coffee 5 7 7 8 Imports of goods −125 −130 −129 −125 Trade balance −119 −121 −121 −117 Services net −478 −330 −302 −159 Income net 16 20 149 365  – Oil/gas royalty and interest 9 13 141 354 Current transfers net 528 408 300 185  – International assistance 527 408 299 184 Current account inclusive of international assistance −53 −23 26 273 Capital and financial accounts 73 41 95 −303 Overall balance 20 18 121 −29 Changes in foreign assets (− = increase) −20 −18 −121 29 Public foreign assets (end-period) 51 72 196 524 Source: International Monetary Fund (2008), p. 26

increasingly positive picture from 2002 to 2005, in spite of the gradual reduction of foreign aid. During this period, as a result of the increasing oil and gas revenues, East Timor increased its foreign assets. The favorable budget and balance-of-payments situation also contributed to keeping the rate of inflation under control after the extraordinary year of 1999. At the end of 2002, the figure was 9.5 percent, after a negative rate in the previous year. In 2003, the figure had been brought down to less than half: 4.2 percent. In 2004, it fell to 2.5 percent, and at the end of 2005, it was down to a mere 1 percent.56 Even more important, however, was that East Timor had chosen to use the US dollar as its national currency. This meant that it would be difficult to deviate from the rate of inflation that prevailed internationally. Should the demand level have increased, this would lead to a rise in the price of non-traded (domestic) goods, while the price of traded goods would not change, since it was given by the conditions prevailing in the world market. At the same time, as imports of traded goods increased, currency would start to flow out to close the gap in the balance of trade. This would, in turn, reduce the money supply (which consisted only of 56

 International Monetary Fund (2008), p. 14.

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foreign currency) and hence act so as to dampen demand, including the demand for non-traded goods, whose price would fall. Adjustment would be automatic and the economy would revert to its original position.

Issues of Good Governance In the new state of East Timor much of the political energy of the first four years of independence was concentrated on putting institutions in place. In April 2006, the World Bank published a study of governance in the country.57 The overall conclusion was that East Timor had made strong progress in institutional development. The reason for this was the national development plan, based on such notions as efficiency, transparency, freedom from corruption, rule of law, and accountability. The bank called the achievements until early 2006 ‘remarkable’: The executive branch of the state, the Government, has been successful in establishing core planning and resource management functions that are effective, transparent, and anchored in the NDP, and compare very favorably with those of other low income countries. The Government has developed solid and transparent arrangements for collecting petroleum revenue, safeguarding the country’s most important resource, and ensuring that sustainable income will be spent only through the budget approved by parliament. Albeit with varying reach and quality, the Government has also succeeded in providing services in health; education; infrastructure and communications; and agriculture, fisheries and forestry. These results have been achieved against considerable odds, including a pervasive lack of technical and management skills and lack of familiarity with the institutions needed to run the state.58

Having said this, however, the World Bank report pointed out that the success in building institutions had been concentrated mainly to the executive branch. Other areas had not been developed to a corresponding extent, and some lagged considerably behind—a situation that called for  World Bank (2006b).  Ibid., p. 1.

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deliberate political action to forestall the emergence of a lack of confidence with respect to the legitimacy of the government among the citizens in general. The checks and balances issue was brought up explicitly. The executive branch was much stronger than the parliament and the judiciary, and both the media and the civil society were weak. The bank pointed explicitly to the need for strengthening the countervailing powers.59 Three issues, in particular, called for attention. The first was the judiciary. This was identified as the weakest of all the fundamental institutions of governance:60 The districts courts in Baucau, Oecusse and Suai function only sporadically. They are currently opening, but judges, prosecutors, and defenders are not in residence and depend on UNOTIL [United Nations Office in Timor-Leste] to travel to the courts for hearings. The OPG [Office of the Prosecutor General] and, to a lesser extent, the courts, have developed formidable backlogs. As of December 2005, there were 474 cases awaiting trial in the district courts. Illegal retention remains a significant problem. The effectiveness of the justice system is further hampered by the fact that laws and proceedings are not translated into languages understood by all court actors, including Timorese legal professionals, the majority of whom were trained in Indonesia.61

As discussed in Chapter 5 in Volume 1, when all Timorese judges had to undergo a professional examination in 2004–05, the result was dismal. Not a single one passed, but all of them had to be put into full-time training, and the entire responsibility for the operation of the court system had to be taken over by international judges. The consequences were predictable. Large backlogs were found in civil cases, that is, in cases which, among other things, may have had direct bearing on the efficiency of the economy. The statistics were overwhelming. Between January and  Ibid. Cf. also Simonsen (2006), which stresses the tendency of the Fretilin government to override the parliament and bypass the opposition, making political decisions in a top-down, noninclusive fashion. 60  World Bank (2006b), p. 19. 61  Ibid. 59

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October 2005, no more than 17 civil cases were tried in the entire country (to be compared with 337 criminal cases). The backlog of civil cases increased to 39 percent during this period. East Timor still lacked the supreme court envisaged by the constitution, which served as a check on the government. It only had a court of appeal, but the decisions of this court on constitutional matters did not bind the government. In October 2005, the court of appeal had a backlog of 54 civil cases (against 4 criminal cases).62 The second issue that called for attention was corruption. The World Bank report expressed the prevailing sentiment among foreign donors well when it stated that there was plenty of anecdotal, but so far not much substantial, evidence of corruption. At the same time, it pointed to a number of typical high-risk areas, headed, not unexpectedly, by customs, tax administration, and procurement, and it stressed the need to be proactive. Once corruption takes hold, it is difficult to weed it out, and the development effort suffers. Perceptions of increasing corruption among the population are dangerous, even if they are not well founded, because they undermine the credibility of the government.63 Intimately related to the corruption issue was the situation of the media. The World Bank stressed that the media have an important role to play in the effort to combat corruption.64 East Timor had four daily newspapers, several weekly magazines, an independent national television, and radio broadcasting station and community radio stations all over the country. This was fine as far as it went, but there was nothing that resembled critical, investigative journalism in the country, and, overall, the media were qualified as weak. They lacked financial independence, and they were highly prone to self-censorship. Even worse, a directive issued by the Council of Ministers in 2004 overturned the 2000 executive order of the transitional administration of the country which established the freedom of the press, and in the 2006 penal code, defamation was made a criminal offense instead of a civil issue. This made it easy to

 Ibid.  Ibid., p. 30. 64  Ibid., p. 13. 62 63

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silence criticism. Alternatively, the media had to resort to self-censorship in order to survive. While Freedom House had classified East Timor as ‘free’ with respect to the situation of the press in 2005, in 2006, the country’s status was changed to ‘partly free’ only, due, first, to the criminalization of defamation in the new penal code, with severe penalties for defamation of public figures, and, second, to the harassment of the oldest Timorese newspaper, Suara Timor Lorosae, by government officials. Prime Minister Mari Alkatiri ordered all government offices to boycott the paper, withdrew government advertising from it, and prohibited government officials from issuing any statements to the paper’s journalists. The paper was also evicted from the building which contained its office.65

Political Developments 2002–06 There was more below the surface. East Timorese society displayed a number of rifts and conflicts. One was between the prime minister, Mari Alkatiri, and the president, Xanana Gusmão.66 As discussed in Chapter 3 in Volume 1, the split between the two went back to the years of resistance against the Indonesian occupation. Their political outlook was very different. Alkatiri was a political left-wing radical who had been in in Mozambique during the occupation years. He was one of the founders of Fretilin and one of the persons who were instrumental in bringing radical ideas from the resistance movements in Lusophone Africa into the Fretilin party program, making Marxism-Leninism the official party ideology. Xanana Gusmão, on the other hand, had spent the occupation years with the Falintil guerrilla forces, until his capture by the Indonesians in 1992. He was far less convinced of the virtues of Marxism-Leninism and moved to broaden the resistance movement to include Fretilin’s domestic political opponents as well. This paved the way for the multi-party democracy that was incorporated into the constitution of the new state.

65 66

 Freedom House (2006).  Shoesmith (2003) discusses the relations between Alkatiri and Gusmão around this time.

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The antagonism between Gusmão and Alkatiri became permanent. The issue of Marxism-Leninism gradually faded into the background as independence drew closer, but the gap was not bridged. On the contrary, it widened further when the constitution was written. Fretilin had obtained no less than 55 of the 88 seats in the constituent assembly in 2001, later converted into the national parliament, and was hence able to concentrate the political power in the government, instead of distributing it equally between the government, the parliament, and the president, as desired by the opposition. In this way, the president, in principle, became a mere ceremonial figure, and the power was concentrated in the hands of the prime minister, a construction that was bound to add fuel to the conflict between two such strong personalities as Alkatiri and Gusmão. During the 2002 elections, Alkatiri also told the Fretilin supporters not to vote for Gusmão as president. Xanana Gusmão was not a person who would be content simply carrying out ceremonial duties. He was intent on a much more active, ­leading, role and hence chose to contest the position of Alkatiri, not formally, but very much de facto, a decision which served to antagonize the latter. Gusmão’s biographer, Sara Niner, writes: The rift between Xanana and the government grew as Xanana became an outspoken critic of government policy. Xanana’s transition from charismatic leader of a guerrilla army to the Presidency of a democratic nation had not been fully realised. His unilateral leadership style created tensions within the constraints of the new democracy. Moreover his effusive and relaxed manner grated against the reserved and taciturn personality of Alkatiri. Politics became ever more polarized.67

A second gap was opening between the government and the people. In Chapter 5 in Volume 1, we pointed out how the exiles who returned to East Timor after the end of the Indonesian occupation began to be referred to as malae—foreigners, and when it turned out that most of the ‘heavy’ government portfolios went to them, an adjective was added to the term. In 2003, Douglas Kammen noted:  Niner (2009), p. 227. Cf. Simonsen (2006), pp. 580–82.

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[T]he expression malae boot, meaning ‘big foreigner’, is now used to refer to East Timorese in positions of power. Something similar is at work with the distinction … between malae and hitam (black). In this instance, malae is intended to highlight the fact that many of the most senior national leaders are mestizos or of wholly foreign descent (Arab and Goan), in opposition to darker-skinned East Timorese without foreign ancestry. [T]his distinction is primarily intended to highlight social status and, of course, opportunity.68

The Fretilin party had problems connecting with the population at large. Few of its senior leaders had spent the occupation years in East Timor and as a result they ‘were out of touch with the people they were intended to represent’.69 They were frequently referred to as the ‘Maputo Group’ or ‘Mozambique Clique’: most prominently, Mari Alkatiri, the minister of the interior Rogério Lobato, the minister of defense Roque Rodrigues, the minister for state administration Ana Pessoa, the foreign minister José Luís Guterres, the minister of agriculture and vice prime minister Estanislau da Silva, the finance minister Madalena Boavida, and the secretary of state of the Council of Ministers Gregório de Sousa. The ‘Maputo Group’ had absorbed important parts of the Mozambican political culture, notably the top-down, Marxist-Leninist, hierarchical organization. ‘In power, this structure was reflected in a disinterest in and a growing intolerance of questioning or criticism, and in what was referred to in Marxist-Leninist states as “bureaucratic centralism”.’70 Possibly, centralization was necessary, but as virtually always, when carried to extremes, it was bound to create problems. The high degree of centralism was, to some extent, caused by the lack of institutional capacity which forced the government to rely on a small number of senior officials for decision-making. A particular problem in this context was the exaggerated concentration of spending decisions to the prime minister. Partly in a bid to ensure that funds were being appropriately allocated, in part to limit the potential for corruption, and in part as a method of micromanaging and hence controlling East Timor’s political and eco Kammen (2003), p. 84.  Kingsbury (2009), p. 105. 70  Ibid., p. 107. 68 69

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nomic environment, Alkatiri personally approved the overwhelming bulk of government spending, especially to the districts, and for amounts as small as hundreds of dollars. This was probably the most constricted point of the administrative bottleneck.71 Alkatiri had taken on a heavy workload and often resorted to ideological and political preferences instead of bureaucratic rules when making his decisions, which, in turn, led to inconsistencies. Furthermore, as Damien Kingsbury has argued, the centralized mode of decision-­ making—almost by definition—tended to starve the provinces of funds, of project money, and of the liquidity needed to propel a virtuous spiral of increased demand and local production. The local districts continued to have to rely on subsistence agriculture, and nothing else. Hopes had been high for something to happen after independence that would improve the living standard, and when they did not coincide with reality, the situation led to resentment and opposition, which, in turn, was interpreted as calling for more centralization and direct control by the government.72 Fretilin came close, sometimes dangerously close, to defining itself as the only party with political legitimacy, identifying the party with the state, and criticism against the government as a challenge to the state itself. Christopher Shepherd summarizes the sentiments of distrust and ill-­ feeling vis-à-vis the government prevailing around 2005: In sum, government was perceived as whiter, foreign, inaccessible, elitist and wealthier. Implicit racial classifications and attendant distributions of power, status and opportunity were now embedded in the system of rule. Not coincidentally, the government was perceived to be doing a bad job at governing. Corruption in the distribution of state contracts was rampant, the security forces were unstable, the legal system was dysfunctional, the education system was a ‘linguistic farrago’ and well over half of the population of Dili was unemployed … Across the board, people who identified themselves as ema ki’ik (small people) felt ignored by govern Ibid., pp. 107–08.  Ibid.

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ment; to have a voice, one had to be ema boot (big people) or ema matenek (educated), preferably with a Portuguese tongue … The gap between Dili and the districts was widening, and with high expectations that independence would bring development and prosperity to all, rural people saw little improvement in their lives.73

A third gap that had opened was the one between the population and the police. The mandate of the United Nations Mission of Support in East Timor (UNMISET) which had originally been set up for a year in the spring of 2002, was extended each year until it was phased out in May 2005, and replaced by a small political follow-up mission, the United Nations Office in Timor-Leste (UNOTIL).74 In the meantime, in December 2003, the national police force, Polícia Nacional de Timor-­ Leste (PNTL) had been given the responsibility for policing the entire country. ‘Without even Unpol’s sometimes inadequate supervision, the standard of policing quickly declined, in many cases to a point at which the PNTL became predatory.’ The national police force stood out as ‘poorly trained, often brutal and in many cases seriously corrupt’.75 ‘Police brutality became commonplace’, claims Damien Kingsbury. Many police officers had been serving in the Indonesian police during the occupation, many were involved in predatory criminal activities, and accusations of corruption were common. The minister of the interior, Rogério Lobato, allegedly used a riot squad unit to bully political opponents. None of this did anything to appease sentiments.76 The police was not the only problem. In 2001, an East Timorese army had been established, the Forças de Defesa de Timor-Leste (also known as Falintil-FDTL or F-FDTL). From 2002, the F-FDTL gradually assumed responsibility for the external defense of East Timor until taking over completely from the United Nations in 2004.77 Unfortunately, as we have discussed in Chapter 5 in Volume 1, the F-FDTL recruitment process was not based on objective criteria, and it left a large number of ex-Falintil  Shepherd (2014), p. 133.  UNMISET (2005a). 75  Kingsbury (2009), p. 118. 76  Ibid., p. 116. 77  Timor Leste Defence Force (2015). 73 74

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fighters who had expected to be drafted outside, a measure that was bound to create resentment and hard feelings, between older and younger members of the armed forces, but also divisions which ran along Falintil factionalist lines that had been established already during the Indonesian occupation. The discontent had a geographic dimension as well, with conflicts between people from east and west of the country:78 Members of the army had grievances based on perceived nepotism by the government in hiring, pay, and promotions that appeared to resemble the old factionalism between those from the east and west—Firaku/Kaladi … fighters who came from the west of the country were accused of having had collaborative sympathies with the former Indonesian occupiers … These western members of the army also claimed to have e­ xperienced discrimination and inequality in promotions as well as poor living conditions … These grievances were not addressed by the government.79

The army, which was basically made up of former Falintil people, was loyal to Gusmão. The Commander-in-Chief, Taur Matan Ruak, was Deputy Commander of Falintil. The police force, on the other hand, was more committed to the government, and there were occasional clashes between the two. The increasing tension led to protests of all kinds. The 2002–06 period was characterized by increasing violence. With a markedly reduced United Nations presence and an inefficient domestic police force, irregular gangs of former pro-Indonesia militiamen, former Falintil fighters, unemployed youth, and indigenous millenarian movements from time to time clashed with the police. In November 2002, after incidents in Baucau between the police and a group that included former freedom fighters, Gusmão called for the resignation of Rogério Lobato as minister of the interior.80 In December the same year, a peaceful student demonstration against police brutality in Dili got out of hand as jobless youngsters took over and began to set fire to cars, loot shops and hotels, and burn houses, including those of Alkatiri and a brother of his, expressing  Molnar (2010), p. 121.  Ibid. 80  Ibid., p. 116. 78 79

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their general dissatisfaction with the government and their own situation.81 Demonstrations and unrest continued also after 2002, and in 2004, the Alkatiri government passed a Law on Freedom, Assembly, and Demonstration, which prohibited demonstrators from questioning the legitimacy of the government and forbade protests in front of government buildings—a law that was immediately criticized by Human Rights Watch for being against the constitution.82 The latter year also saw internal army clashes and clashes between the army and the police.83 In 2004 and 2005, elections to the local suco councils took place, and at the same time, chefes de suco were elected. Those running for the ­councils were required to belong to one of the established political parties, but independent candidates were allowed to become suco heads. The suco council elections reflected the 2001 constituent assembly elections fairly well. Fretilin candidates got 57 percent of the votes and 61 percent of the council positions, while independent candidates won 30 percent of the chefe positions. Local connections turned out to be an important factor in the latter’s case.84 In 2005, Alkatiri signed a controversial executive decree, a new penal code that stipulated jail sentences of up to three years for defaming public officials, twice as much if the offense took place in the media. In February 2006, the decree was, however, referred back to the Ministry of Justice.85 The year 2005 also saw three weeks of demonstrations by several thousand people, in April and May, organized by the Catholic Church, against a government decision to organize education on a nonreligious, secular, basis.86 This was the situation in April 2006. The political actors pretty much conceived of politics as a zero-sum game, where the winner takes all, and there is no role for the loser. Unfortunately, the following year stands out as a year lost from the governance point of view. Politics moved from the  Kingsbury (2009), pp. 112–13, Molnar (2010), pp. 113–15.  Human Rights Watch (2004), Freedom House (2013). 83  Molnar (2010), pp. 117–18. 84  Shoesmith (2013), p. 128. 85  Freedom House (2007). 86  Molnar (2010), p. 119. 81 82

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basic institutions to the streets of Dili, a city that had grown from around 100,000 people in 1999 to 175,000 in 2004.87

A Year of Riots88 In April 2006, the worst riots since 1999 broke out in Dili. In February, almost 600 soldiers, mainly from the western districts of East Timor, had left their barracks without permission, staging a one-month strike and demonstrating against what they perceived as bad working conditions and bias in favor of easterners in promotions. Prime Minister Alkatiri responded to their protests by dismissing them all. Riots began on 24 April in Dili, and they continued on an intermittent basis for almost a year. The soldiers, who became known as ‘the petitioners’, clashed with the police, burning cars and throwing rocks. A few days later, a handful of civilians were killed, more than 30 people were injured, and 7 were arrested. Around 100 homes and a market were damaged in the capital. Strangely enough, the army, and not the police, was called in to quell the riots. ‘Constitutionality aside, to set the army against those members who had been dismissed due to their complaints of discrimination only seemed to crystallize the division within the army and inflame the situation.’89 Thousands of people left their homes and sought shelter in such places as churches, schools, and embassies. The spokesman of the former soldiers, the ex-lieutenant Gastão Salsinha, stated that he was in the mountains above Dili with about 100 men, and that he was prepared to continue fighting. Alkatiri, in turn, asked the soldiers to turn themselves in and cooperate with a commission of enquiry that would study their claims, but the disturbances continued. The inhabitants of the capital began to leave and head for their villages.  Leach (2017c), p. 180.  The following account is based on the continuous reports of the international mass media found on  http://www.asiapacificnews.com, http://wwww.asianews.it/main.php?1=en and  http://www. unmiset.org, all downloaded 22 February 2007. (They were downloaded for  the  preparation of  Lundahl and  Sjöholm, 2007, from  which the  present has been taken.) See also Kingsbury (2009), pp. 142–53, and Molnar (2010), pp. 121–25. 89  Molnar (2010), p. 122. 87 88

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On 9 May, a mob attacked a government office in Gleno, in Ermera, southwest of the capital. Alkatiri claimed that the violence aimed at provoking the fall of the government and blocking the democratic institutions so that the president would have to dissolve the parliament. The UN Security Council extended the mandate of the UN Office in Timor-­ Leste, scheduled to shut down on 20 May, for another month. Two days after the latter date, the rebel soldiers were joined by the head of the Military Police, Major Alfredo Reinado, and 28 of his men, and the conflict escalated again. The following day, ex-soldiers ambushed troops in the hills outside Dili. The government finally asked for outside help from Australia, New Zealand, Malaysia, and Portugal. Another stream of refugees began to pour into churches and convents. Youth gangs armed with stones, slingshots with darts, daggers, and machetes began to attack cars and threaten civilians in the capital. On 25 May, army soldiers killed 8 unarmed policemen and wounded another 25 at the police headquarters in Dili. The police had been under attack for about an hour inside their barracks when UN Police and military advisers managed to negotiate a ceasefire under which the police officers were to surrender their weapons and leave the building unharmed. The killings took place as they were escorted out. A crowd began putting fire to houses, including that of the minister of the interior, Rogério Lobato, killing six of his relatives (including two young children and three teenagers). In the meantime, Australian combat-clad soldiers began patrolling the streets of the capital backed by armored cars and helicopters, and Australia decided to increase the number of soldiers in East Timor. Around the same time, reports began to spread about clashes between armed youth gangs, and Australian troops had to stop a crowd from invading and torching a hotel where Prime Minister Alkatiri was to hold a press conference. The gangs were rumored to side with army factions from the East and the West, respectively. Dili inhabitants were seen fleeing to the airport, where the international presence was heavy, or to the Australian embassy. Over 20,000 people were taking shelter within Red Cross, aid agency and Church compounds, at the airport, and at the seaport of Dili. The majority of the police officers of the capital were reported to have deserted their posts, having joined the rebel soldiers.

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The lines of the conflict were beginning to be defined: East versus West, army versus army, army against police, and ethnic youth groups fighting each other. At the bottom of all this was the structural weaknesses of Timorese society: the fragile economy, the inability of the modern sector of the economy to provide employment, and a growing discontent with the inability of the government to do anything visible about poverty.90

Alkatiri Under Fire At the end of May, questions concerning the role of Mari Alkatiri in the conflict were being raised. His leadership style had been criticized. On several occasions, he had had to call on the army and the police to defend unpopular decisions, but after the decision to use the army instead of the police to quell the April riots, senior army officers began to feel uneasy, and this, in turn, helped to trigger desertions from the armed forces. Observers were beginning to feel that Alkatiri was losing the support of the people, the military, the police, the church, and possibly also that of the country’s most important foreign allies. The question was openly raised whether it would at all be possible to end the crisis unless Alkatiri resigned. On 27 May, Xanana Gusmão met an envoy from the army rebel faction who stated that his people were ready to go back to the negotiation table, and the following day, Alkatiri and the military leaders held an emergency meeting after new outbreaks of gang violence, renewed burnings of homes, and new killings. The Bishop of Dili, Dom Alberto Ricardo, called for the resignation of the prime minister, and rumors were spreading about increasing animosity between the president and the prime minister. On 30 May, Xanana Gusmão announced that he alone would take over the responsibility of security, as an emergency measure, for 30 days, taking control of the army and the key portfolios of defense and the inte Scambary (2009) offers a detailed analysis of the complex relations involved in the conflict. For a critical analysis of the East-West dimension of the crisis, see Leach (2017c), pp. 183–87. 90

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rior. The government announced the dismissal of ministers Roque Rodrigues (defense) and Rogério Lobato (interior). In the meantime, the riots and torching of homes continued, in spite of the presence of more than 2000 foreign security forces. Among the targets was the Serious Crimes Unit Office from which most of the evidence of the responsibility for the 1999 crimes was removed. An estimated 150,000 people were displaced from their homes and had to seek refuge in hastily constructed camps and public buildings or with friends and relatives.91 The World Food Programme of the UN and other international organizations, like Caritas, were supplying food. Violence, arson attacks, and gang fighting continued and more foreign troops were coming in. The rebel leader Alfredo Reinado claimed that it was a mistake by Gusmão not to dismiss Alkatiri, calling the latter ‘a criminal’ who had ordered many of the killings of the previous weeks. On 1 June, Lobato and Rodrigues officially announced their resignation, accepting their failure to deal with the crisis, and José Ramos-Horta had to add the defense portfolio to his responsibilities. The youth gangs began to be identified as ‘martial arts’ gangs, and rumors started to spread that they were being paid by somebody to start violence, a well-­ coordinated violence carried out with the aid of mobile phones and short message service (SMS) messages.92 The looting continued in Dili, with a mob of about 1000 breaking into government warehouses. The commander of the Australian forces met with Reinado, who repeated his demand that Alkatiri should resign, but Alkatiri refused and countered with a demand that the rebels hand in their weapons. On 3 June, Ramos-Horta was sworn in as defense minister, with responsibility for national security, in an effort to heal the wounds. At the same time, the country got a new minister of the interior, Alcino Baris, the former vice minister. Clashes between armed gangs continued on 4 June. When the parliament met, next day, only 50 of the 88 members showed up, for security reasons. Ramos-Horta urged the creation of a government of national unity and on 6 June, 2000 protesters  International Crisis Group (2008), p. 2, van der Auweraet (2012), p. 5.  For detailed, but diverging, analyses of the martial arts organizations (which were outlawed in 2013), see Belun (2014) and Pawelz (2019). 91 92

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headed by Major Augusto Araújo, a friend of Reinado’s, called for the resignation of Alkatiri. After meeting with Ramos-Horta, Alfredo Reinado reiterated his willingness to hold talks with the government but also that he could see no role for Alkatiri in a future solution. On 8 June, a group of 30 people told a reporter from the ABC (American Broadcasting Company) TV channel that they had been recruited by former minister of the interior Rogério Lobato on behalf of the prime minister to form a secret security team and kill political opponents, among those the 600 soldiers dismissed from the army. They claimed to have been given weapons, ammunition, uniforms, and vehicles. The allegations were denied by Alkatiri. The same day, a Fretilin office was burned in Gleno. At the same time, José Ramos-Horta declared that he would be willing to take over as prime minister, should Alkatiri choose to step down. New accusations followed: that armed Alkatiri supporters, with weapons provided by Lobato, had massacred around 60 civilians in April and buried them secretly. On 11 June, the opposition leader Fernando de Araújo, of the Partido Democrático (PD), left the capital, claiming to have received death threats from Alkatiri. The UN relief coordinator to Timor, Jan Egeland, reported that the number of displaced people was far higher than originally thought: around 70,000 in Dili and 63,000 outside the city. When the UN Security Council discussed the situation in East Timor, on 13 June, several speakers called for a stronger presence there, and Secretary-General Kofi Annan stressed that the United Nations was determined not to abandon Timor at a critical moment. Annan asked the UN Human Rights Chief, Louise Arbour, to set up an independent inquiry commission to deal with the violence in the country and also stated that he would send a team there to prepare for the return of the UN forces. A couple of days later, the rebel forces began handing in their weapons to Australian peacekeepers, and Ramos-Horta promised them that their allegations against the armed forces would be made subject to a thorough investigation. Gusmão said that Reinado was not a rebel, and that he was not responsible for the events of the crisis. On 20 June, Prosecutor General Longuinhos Monteiro issued a warrant for the arrest of Rogério Lobato on account of the arming of civilians, and hundreds of protestors demanded the resignation of Alkatiri.

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Alkatiri Resigns The same day, 20 June, President Gusmão asked Alkatiri to resign. The standoff between the two leading political figures had come to an end. The following day, the president repeated his request in a meeting of the council of state—the body of national political and community leaders, which included both the president and the prime minister. The United Nations reported that its mission in Timor, UNOTIL, had been extended until 20 August. On 22 June, Rogério Lobato was arrested and brought before a court. Further house torching was taking place in Dili, and President Gusmão threatened to step down himself. The following day, 2000 demonstrators gathered outside the government buildings in support of Gusmão, and on the 24 June, the number of protesters increased to 5000. Fretilin, however, decided to keep Alkatiri in office in spite of all protests, and Ramos-Horta resigned from the government, making it clear that he would not continue in an Alkatiri-led administration. On 26 June, Prime Minister Mari Alkatiri, faced with the possible resignation of up to eight more ministers, finally gave in and resigned himself. It had become impossible to continue. Crowds celebrated in the streets of the capital. Unrest continued in Dili after the resignation of Alkatiri, as thousands of his supporters moved into the city, clashing with the groups that had demanded his resignation. Houses and shops were torched, and stones were hurled at a refugee camp. Australia announced the doubling of the country’s food aid, as the supplies for the refugees were running out, and New Zealand as well announced an increase of the aid to East Timor. UNICEF reported that 15 percent of the approximately 36,000 children in the camps needed immediate treatment for malnutrition. On 8 July, President Xanana Gusmão announced that José Ramos-­ Horta would be the new prime minister of East Timor. Ramos-Horta pledged to end the violence. He asked the Australian troops to remain in Timor at least until the end of the year. UN spokesman Ian Martin, Kofi Annan’s special envoy to East Timor, stated that the UN presence should be extended well beyond the presidential and parliamentary elections scheduled for May.

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On 14 July, Ramos-Horta’s new cabinet was sworn in. President Gusmão urged the new government to pay special attention to the employment problems of veterans and youth, which he stressed were to a large extent responsible for the past few months’ disturbances. On 26 July, the rebel leader Alfredo Reinado and 21 of his supporters were arrested by Australian troops, suspected of having fueled the April riots. The next day, Ramos-Horta asked for 800 more UN police officers. At the end of July and the beginning of August, things calmed down considerably. Australia began to remove some military personnel. However, over the weekend around 8 August, 40 youth planning to attack a refugee camp were arrested. A couple of weeks later, new gang fights broke out. On 25 August, the United Nations Security Council finally took the decision to establish a new Timor mission, creating the United Nations Integrated Mission in Timor-Leste (UNMIT) for at least six months, with some 1600 police and up to 35 military liaison officers. On 30 August, 57 of the inmates of the Becora Penitentiary in Dili, among them Alfredo Reinado, and several pro-Indonesia militiamen held on account of the 1999 riots and some ordinary criminals, escaped. The following day saw new clashes between gangs armed with stones and machetes. On 4 September, the foreign ministers of Australia, Indonesia, and East Timor met in Dili for security talks. Again, Ramos-Horta stressed the need for continued presence of foreign troops and police. One result of the meeting was a promise of more Australian soldiers. On 9 September, dozens of youth with stones and slingshots attacked a refugee camp in Dili, and international peacekeepers had to fire tear gas to stop them. Four days later, the responsibility for the international police forces was formally handed over to the UN. The following day saw new gang battles, with one dead and five injured. On 24 September, two youth groups from different regions clashed near the Comoro market in the capital. Two days later, Ramos-Horta met with hundreds of the dismissed soldiers, explaining that he was willing to listen to their complaints and secure back pay. Around the same time, the Timorese police force began to return to their work in Dili. Gang fights were renewed on 9 October. A week later, the UN released a report on the events in April and May, recommending that Rogério Lobato and Brigadier General Taur Matan Ruak, the former head of the

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armed forces, among others, should be tried in court over the issue of arming civilians during the conflict. The report also blamed Mari Alkatiri as responsible for the outbreak of violence and for failing to take measures against the distribution of weapons. On 26 October, the Dili airport had to be closed after a clash between two armed rival groups nearby which resulted in two deaths. After a brief interval without incidents, on 9 November, Ramos-Horta stated that the worst period of violence was over, and four days later, members of rival gangs held a rally in Dili to promote peace and unity. At the very end of the month, the trial against Rogério Lobato had to be postponed until 9 January 2007, after he had failed to show up in court. The same day, it was revealed that much of the violence was drug related, with locally made methamphetamine being distributed to gang members before the fights. On 4 December, the brief period of peace and unity was over. Renewed gang fights took a toll of three dead over a couple of days; on 7–8 December, some 35 people were held by the police for throwing stones and carrying arms, and new death incidents were reported during the following weeks. As the trial of Lobato began, hundreds of his supporters rallied outside the court. The political violence continued. Between 15 and 22 January, 5 dead and 24 injured from political violence were reported at the end of the month, Alfredo Reinado had been tracked to a village four kilometers west of Dili, and Australian troops had set up roadblocks to restrict his mobility. Gang violence continued in the capital, and on 1 February, following a two-week investigation in gang neighborhoods, 47 people were arrested for possession of illegal weapons, riotous behavior, and suspicion of homicide. Among them were various ‘martial arts’ gang members. Numerous weapons were confiscated.

Elections In the meantime, the elections were coming up.93 Presidential elections were scheduled for 9 April with parliamentary elections to follow in May. President Xanana Gusmão again let it be known that he did not intend 93

 A detailed analysis of the elections is found in Leach (2009).

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to stand for a second term. Instead, Prime Minister José Ramos-Horta announced that he would run. On 14 February, Ramos-Horta again asked for increased United Nations assistance to stop violence in East Timor, after new incidents just one or two days before, with more teenagers being killed. On 18 February, a second prison escape took place, with around 40 prisoners breaking out, among those both people who had been arrested in connection with the May riots and youth involved in more recent gang fights. Two days later, 79 people were arrested, and the following day, seven international police officers were injured when their vehicles were attacked. On 22 February, the number of arrests over three days amounted to 148. Next day, the UN Security Council voted to prolong the mission of the peacekeepers until 26 February 2008 and to send additional officers before the 9 April elections to ensure that these be fair and free. On 26 February, Xanana Gusmão declared war on Alfredo Reinado after raids by his men on two police border posts and the seizure of 25 high-powered weapons and plenty of ammunition. This meant a turnaround on part of the president who is believed to have defended Reinado behind the scenes before the incident. The border with Indonesia was closed by the Indonesians after the raids. On 26 February, the Australians began chasing Reinado. On 4 March, his base at Same was attacked by the international security forces, and four men were killed, but Reinado himself managed to escape. The following day, thousands of his supporters staged a protest in Dili and blocked roads with burning tires. The president threatened to use emergency measures to quell the unrest. On 5 and 6 March, Reinado’s sisters’ houses were looted and demands were voiced that the Australian troops leave East Timor. On 6 March, Gusmão took direct control of the armed forces. In mid-February, the prosecutors in the Lobato case had disclosed that they were seeking a seven-year sentence, and on 7 March, Rogério Lobato was convicted by a panel of three international judges for abuse of power, manslaughter, and for illegally furnishing civilians with arms to seven-­ and-­a-half years of prison. After going to jail, Lobato managed to be released in August on the grounds that he needed medical attention for a heart problem and left East Timor for Malaysia, after a 24-hour standoff at the Dili airport, since prison guards refused to let him depart. Rogério

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Lobato neither received any treatment nor stayed in Malaysia.94 In 2008, Prime Minster José Ramos-Horta halved his jail sentence, but Lobato did not return.95 On 10 March 2007, the Timorese election authorities announced that eight candidates would be running for president,96 including José Ramos-­ Horta. The election campaign had an uneasy start. On 30 March, supporters from two camps clashed in Viqueque and Dili. On 2 April, a man was murdered and a house torched as part of the election campaign. Just two days before the elections, the team appointed by the UN to supervise the elections reported that it could not certify that the elections would be free and transparent, and half of the candidates expressed fears that the elections would be manipulated. The next day, the police arrested some 200 people in connection with irregularities in the preparations for the elections. (Many were, however, released shortly afterwards.) On election day, 9 April, things were calm, and the voting could take place without incidents. The voters could choose between eight candidates, with José Ramos-Horta, Francisco ‘Lu-Olu’ Guterres, of Fretilin, and Fernando de Araújo, of the Partido Democrático, as the main candidates. Guterres was a former guerrilla commander and had served as speaker in the parliament. Araújo spent six years and four months in prison together with Xanana Gusmão. He was the secretary-general of the youth organization of Timorese resistance, Renetil (Resistência Nacional dos Estudantes de Timor Leste). More than 522,000 people were eligible to vote under the supervision of 2800 foreign troops and police, 3500 election officials, and 232 foreign observers. When 70 percent of the votes had been counted on 10 April, it looked like a very close split between Ramos-Horta, Araújo, and Guterres, with around 21 percent each. On 11 April, five of the presidential candidates wrote to the national election commission accusing Fretilin of intimida Kingsbury (2009), p. 170.  Michelmore (2008). 96  José Ramos-Horta (independent), Francisco ‘Lu-Olu’ Guterres (Fretilin), Fernando ‘Lasama’ de Araújo (Partido Democrático, PD), Francisco Xavier do Amaral (Associação Social Democrata Timorense, ASDT), João Carrascalão (União Democrática Timorense), Lúcia Lobato (Partido Social Democrata, PSD), Avelino Maria Coelho da Silva (Partido Socialista Timorense, PST), and Manuel Tilman (União dos Filhos Heróis das Montanhas de Timor). 94 95

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tion of voters and irregularities in the counting of the votes. The following day, Guterres (28.3 percent) and Ramos-Horta (22.6 percent) emerged as the two leading contenders, followed by Araújo (18.6). Since 50 percent is required to win in the first round, a runoff between the two top candidates was scheduled for 9 May. The election commission began an investigation of vote manipulation, and on 15 April, it was reported that in Baucau, the second largest town, around 100,000 voters had produced more than 300,000 votes, a serious allegation, since the total number of eligible voters was 520,000 in the entire country. The issue was later deemed to be caused by a ‘technical error’. When the official count was announced on 18 April, Guterres had obtained 28 percent and Ramos-Horta almost 22. The same day, the prime minister announced that the hunt for Alfredo Reinado would be suspended in an effort to bring him to the negotiation table instead. In the presidential runoff on 9 May between Francisco ‘Lu-Olu’ Guterres and José Ramos-Horta, the latter was backed not only by his own followers but also by five of the parties losing in the first round, and he won by a comfortable margin: 69 percent of the votes against 31 percent for Lu-Olu, in elections with a voter participation of 80 percent. Parliamentary elections were scheduled for 30 June. Before that, Fretilin split. On 30 April, Xanana Gusmão was elected president of a new party, Congresso Nacional para a Reconstrução de Timor-Leste (CNRT), using the same acronym as the pro-independence movement of 1997: the Conselho Nacional da Resistência Timorense). Mari Alkatiri reacted by calling the use of the initials ‘cynical’ and ‘opportunistic’ and threatened with legal action. Gusmão managed to gather substantial support in a relatively short time for his new political party. A total of 14 political parties participated in the election. The campaign started violently with the killing of two CNRT supporters, but, subsequently, the situation became more peaceful. No single political party managed to obtain a majority. Fretilin became the largest political party with 29 percent of the votes—cut in half in comparison with 2001—followed by CNRT with 24 percent, the social democratic PSD-ASDT coalition between the Partido Social Democrata (PSD) and Associação Social Democrata Timorense (ASDT)

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with 16 percent, and the Partido Democrático (PD)—Democratic Party—with 11 percent, respectively. Discussions regarding possible coalitions started immediately after the elections. CNRT, the PSD-ASDT and the Partido Democrático formed a coalition—Aliança da Maioria Parlamentar (Alliance of the Parliamentary Majority, AMP)—which, as the name suggests, had a parliamentary majority. An attempt to constitute a national unity government including both the AMP and Fretilin failed. The coalition finally decided to form a government on its own and Xanana Gusmão was sworn in as prime minister on 8 August. Mari Alkatiri, in turn, declared the government illegal, and Fretilin supporters started rioting, burning down about 600 houses, and killing at least two people. The situation calmed down, however. The 2007 elections were deemed ‘free and fair’ by independent observers,97 and, what is more, ‘the allocation of the vote across three separate rounds of voting was remarkably consistent, indicating a clear political will on the part of those who voted, and knowledge about what the vote meant’.98 In a comparative perspective, this was a remarkable feat: The history of most other postcolonial states was that, with expectations of independence so high and the capacity to deliver on them so low, to quell political unrest, governments have generally turned authoritarian and, at least initially, abandoned the democratic process. In the lead up to the events of 2006, it appeared that East Timor was beginning to take a turn towards authoritarianism under the leadership of the running Fretilin party. East Timor continued to face many serious challenges, including being one of the world’s poorest and least-developed countries, a legacy of traumatic violence and colonial neglect, and the sometimes ambivalent contributions of the international community, not least including Australia. However, with the success of these elections, unlike most other postcolonial states, East Timor was proving that consolidating democracy was not determined by its other circumstances.99  Kingsbury (2009), p. 181.  Ibid., p. 217. 99  Ibid., pp. 186–87. During the course of the 2006–07 events, East Timor got to the point where speculations began to be made whether the country was on its way to become a failed state (Cotton 2007; Scambary 2009). 97 98

3 Political, Economic, and Social Developments 2007–18

The years between 2007 and the new round of elections in 2012 were politically relatively stable years in East Timor. Paradoxically, one of the factors behind this state of things was the attack by Alfredo Reinado and his group on the president and the prime minister. The search for Reinado had been interrupted in April 2007, in order to open the door for a solution based on dialogue and negotiation. Nothing came out of this, however. Instead, on 11 February 2008, Reinado unleashed an unexpected attack against Prime Minister Gusmão and President Ramos-Horta. The latter was shot in the lower abdomen and in the chest, was taken to the Australian Army hospital in a serious condition and was later evacuated to a hospital in Darwin where he underwent surgery and his condition stabilized. Reinado was killed by the presidential guard during the attack. A state of emergency was imposed. As the remainder of Reinado’s band either surrendered or were arrested, this could, however, be lifted in late April.1 As Damien Kingsbury has pointed out, the attack on the president and the prime minister served to break a deadlock in Timorese politics. Both Ramos-Horta and Gusmão had received criticism for being too lenient  Kingsbury (2009), pp. 207–208.

1

© The Author(s) 2019 M. Lundahl, F. Sjöholm, The Creation of the East Timorese Economy, Palgrave Studies in Economic History, https://doi.org/10.1007/978-3-030-22052-5_3

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toward Reinado, but the attack effectively freed them of any suspicions and added to their legitimacy in an unequivocal way.2 It also put the military ‘petitioners’ into a decidedly weaker bargaining position. They came down from their camps in the mountains in the interior of the country. The internal refugee camps could also be closed down, as people returned to their homes in a negotiated and orderly way. Little by little, East Timor saw a return to normalcy.

The Internal Refugees By June 2006, an estimated 150,000 East Timorese had been displaced from their homes as a result of the violence that erupted in April, and 56 refugee camps had been set up in Dili,3 plus a few in Baucau. At the beginning of 2007, two-thirds of the refugees remained displaced,4 and a year later, the situation was more or less the same: 100,000 displaced people, 30,000 of whom were found in 51 refugee camps in the Dili area.5 The dissension between the leading political actors meant that little had been done to solve the problem during 2006 and 2007,6 but after the elections and the attacks on Ramos-Horta and Gusmão, things changed. The government provided a substantial ‘recovery package’ for those who opted to return to their homes or resettle elsewhere. The sums involved stood in proportion to the extent of damage. The entitlement was US$4500 for houses that were deemed to be destroyed or uninhabitable; US$3000 for severely damaged, but inhabitable houses; US$1500 for partly damaged houses; and US$500 for minimally damaged houses. An option was given in the case of destroyed houses: that the government would provide a new dwelling, but nobody opted for that. All who were entitled to compensation for a destroyed or damaged house were also

 Ibid., p. 191.  Vieira (2012), p. 10. 4  United Nations Security Council (2007), p. 16. 5  United Nations Security Council (2008), p. 16, van der Auweraet (2012), p. 6. 6  United Nations Security Council (2008), p. 1, International Crisis Group (2008), p. i. 2 3

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given an additional US$500 to compensate for the loss of household goods or business stocks.7 The cash grants, which were paid in a single installment, turned out to be a powerful incentive to leave the refugee camps. Those whose homes had been destroyed received the equivalent of what they would earn in nine or ten years.8 The return of the refugees to their former homes was a smooth affair: Very few social tensions were reported, which may be connected to the fact that … [internally displaced persons] did spread some money around in the communities they returned to. It was not infrequent for returnee families to strike a deal with the families who had come to occupy the house or land left behind, with the latter receiving a small proportion of the cash grant for ‘taking care’ of the property in the returnees’ absence.9

Another factor that presumably facilitated the clearance of the camps was the fact that the violence in 2006 hit a broad segment of the Timorese population: The population of the camps is a cross-section of Timorese society. As in the population at large, unemployment levels are extremely high. Many camp-dwellers in Dili, however, have regular jobs, including relatively well-­ paid ones with the government, private sector or international agencies.10

They had strong reasons to leave the camps as soon as possible and go back to a normal life. In January 2009, 54 out of 63 refugee camps in Dili and Baucau had been closed down,11 and in August, all the camps had been officially closed.12 The internal refugee problem had been solved. The oil and gas revenues had allowed the Timorese government to buy the refugees off.  Van der Auweraet (2012), p. 8.  Kingsbury (2009), p. 207. It was, however, far from always the case that the money received was used for housing purposes (Tusinski 2019). 9  Van der Auweraet (2012), p. 8. 10  International Crisis Group (2008), p. 3. 11  United Nations Security Council (2009a), p. 13. 12  United Nations Security Council (2009b), p. 14. 7 8

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The Veteran Issue The veteran issue proved much more difficult. The Timorese resistance forces initially included some 30,000 men, but with time, their numbers dwindled.13 In 1983, they were a mere 4000 in dispersed guerrilla units,14 and in the 1990s, they were probably fewer yet. Many had died during the struggle. Around 1500 former guerrilla soldiers were recognized as such after the 1999 referendum, and 600 were offered positions of different kinds in the public sector.15 This, however, still left the ‘petitioners’, who felt that their 25 years of fighting and sacrifice had not been properly acknowledged and rewarded. The war veterans requested a large number of benefits, including state pensions, school benefits for their children, access to state contracts, and special access to health care.16 Here as well, the oil money came in handy. The budget for veteran programs increased after 2006, from US$0.2 million to US$113.8 million in only five years.17 The veterans made frequent demands for a higher degree of political influence and formal and active involvement in the defense of the security of the state18—a controversial claim considering the role they played in the 2006 turmoil where they displayed lack of both discipline and unity and ‘added to the violence rather than controlled it’.19 Unfortunately, the war veteran compensation issue turned into a lengthy consultative process. Both the identification of the people who were active in the struggle and the decision of the actual rewards, based on length and type of service in the resistance movement, have been problematic. The increased transfers to the war veterans began in 2007 when the new Gusmão government made it a priority in its five-year program. It immediately made the number of claimants skyrocket—to  Durand (2006), p. 74.  Taylor (1999), p. 135. 15  Smith (2004), p. 287. 16  IPAC (2014), p. 12. 17  World Bank (2013a), p. 8. 18  International Crisis Group (2011), pp. 1–2. 19  Ibid., p. 1. 13 14

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200,000 in a country of around one million people.20 The massive number of applications, many of which consisted of fraudulent claims, provided a formidable challenge. The veteran payment scheme discriminated against women. The latter were providing logistic service to the Falintil troops in the mountains, and in some instances, they were also engaged directly in the armed struggle: More commonly, women were involved in the frente clandestina (clandestine front) – the network of civilians based in the villages and towns that supported, and greatly outnumbered, the FALINTIL forces. It has been estimated that women comprised 60 per cent of clandestinos … acting as couriers, supplying those on the frontlines with food and other necessities, seeking support within the church and local communities for the independence struggle, and hiding senior members of the Resistance.21

Around 2014, 38 percent of those who received veteran pensions were women, but, nota bene, 97.5 percent of them did so as family members who got a survival pension after their deceased husbands.22 The main determinants of payments are the length of service and the rank in the resistance movement. ‘A combatant’s years of service are considered to be the sum of all periods of deportation, detention and work in “exclusive dedication” to the Resistance (“exclusive dedication” meaning that individuals were not engaged in study or regular waged labour).’23 Hence, the scheme discriminates against the independent contributions of the women, since the vast majority of them were not involved directly in the armed struggle. It also excludes widows who have remarried, women who suffered sexual violence as a result of their connections with the resistance movement, and the so-called bush wives—women with whom the fighters had relations and children but whom they subsequently abandoned.

 Ibid., p. 6. The number—‘unrealistically high given that Timor-Leste has a population of around one million and more than half of them are too young to have participated in the resistance struggle’—has remained about the same in recent years (Kent 2019, p.185). 21  Kent and Kinsella (2015), p. 214. 22  Ibid., p. 220. 23  Ibid., pp. 216–217. 20

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The number of beneficiaries of the war veteran program expanded rapidly, from less than 4000 in 2009, to almost 28,000 in 2012.24 The latter year, the transfer of benefits to the war veterans amounted to around US$109, or 9 percent of the annual state expenditure. In 2014, it had declined to around US$85 million but was still around four times the amount spent on the military. That year, conditional cash transfers were restricted to a maximum of US$240 per year and old-age pensions to US$360 per year, but war veteran pensions ranged between US$2700 and US$9000.25 The lowest veteran payment was much higher than the average income in East Timor.26 Related to the veteran payment scheme was the conclusion of a number of major infrastructure contracts with potential troublemakers.27 This had begun with the so-called Referendum Package in 2009. The government had set aside more money for infrastructure in the budget that year than what it managed to spend and therefore decided to reallocate some unspent US$75 million to East Timorese contracting firms to be used on small public works projects. This money was spent through a private entity, the Associação Empresários Construção Civil e Obras Públicas. The program gradually developed into the Programa de Desenvolvimento Descentralizado (Decentralized Development Program). Firms located in the districts were eligible for contracts through the PDD, ‘which led to a flurry of newly registered businesses’.28 District-level award committees, consisting of local officials, distributed infrastructure projects of up to half a million US dollars. The PDD projects increased investment in rural areas, but that was not the only purpose of the scheme. ‘Another goal was likely patronage, in part for rewarding party loyalty, but also for paying off spoilers.’29 Businessmen were not the only category to benefit, but people who had demonstrated a willingness to attempt destabilization of the peaceful development of the political process, including gang leaders, hit squad  World Bank (2013a), p. 47.  Ibid., p. 3. 26  Kent and Kinsella (2015), p. 217. 27  International Crisis Group (2011), pp. 14–15, IRIN (2014). 28  International Crisis Group (2013), p. 5. 29  Ibid. 24 25

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members, and petitioners involved in violent attacks, were also able to benefit.30 Again, potentially unruly elements were bought off.

Tensions Stating that the 2007–12 years were relatively politically stable does not amount to saying that no tensions were present. ‘The parties that made up the AMP [Aliança da Maioria Parlamentar] coalition government were uncomfortable partners’, writes Dennis Shoesmith.31 To some extent, this was due to the prevailing political culture. In East Timor, as in so many other countries in the Third World, parties tend to be formed around a leader instead of being independent organizations that choose the persons to head them. This was true of all the leaders and parties that formed the AMP alliance, but especially of Xanana Gusmão and the Congresso Nacional de Reconstrução Timorense (CNRT). Gusmão used the CNRT mainly as a political vehicle for himself, and his control of government was based more on his own person than on his party office, and, according to Dennis Shoesmith, he saw himself as the leader of the nation and not as a member of a team of ministers.32 The AMP coalition parties came into power united mainly by their animosity to Fretilin, with a program that did not differ too much from that of their adversary: The AMP government came to office in August 2007, promising to boost broad-based development in the areas of food sufficiency, health care, education, and infrastructure. On taking office, the AMP parties had anti-­ FRETILIN sentiment in common, shared the Catholic Church’s endorsement, and had broadly concurred on the need to encourage greater levels of foreign investment. As an executive, the AMP government also comprised a wide range of actors with starkly different histories and agendas, combining national heroes of the resistance era with a host of younger  Ibid., p. 6.  Shoesmith (2013), p. 131. 32  Público (2008), Shoesmith (2013), p.  132. For the evolution of Gusmão’s ruling strategy, see Kammen (2019). 30 31

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upcoming leaders and, more controversially, some erstwhile supporters of ‘autonomy’ within Indonesia occupying ministerial positions. The AMP coalition nonetheless itself proved durable despite minor eruptions of disunity.33

In a situation where the government coalition rested ‘on convenience and the distribution of political offices rather than a specific and shared political agenda’,34 conflicts were bound to arise. In May 2008, Francisco Xavier do Amaral, the leader of the Associação Social Democrata Timorense (ASDT), announced that his party would leave the coalition because of ‘nepotism and corruption’ and instead side with Fretilin.35 Gusmão also clashed severely with the Partido Social Democrata (PSD) leader and Foreign Minister Zacarias da Costa and the founder of this party, Mário Carrascalão. In 2010, Gusmão ordered East Timor’s ambassadors back to Dili to attend a donor meeting, overruling da Costa’s order that they should remain abroad. Da Costa threatened to resign, Gusmão exhorted him to do so and thereafter followed up with a harsh personal attack at a televised meeting of the Council of Ministers, where da Costa was humiliated and forced to apologize. When he refused to resign, he was charged with corruption, but the Dili district court dismissed the charges. Carrascalão, in turn, had been appointed second deputy prime minister for state administration in 2009. One of his tasks was to oversee measures to combat corruption, but when he claimed that US$3million related to a road-building contract for which the Ministry of Finance was responsible were missing, he was deprived of the power to oversee government procurement. The Council of Ministers condemned his position, and Gusmão called him ‘stupid’ and a ‘liar’ and even an ‘Indonesian propagandist’. Carrascalão resigned, listing 29 issues of corruption and bad government.36 Still, the PSD did not leave the government coalition, possibly because the government coalition was founded ‘on convenience and  Leach and Kingsbury (2013), p. 8.  Shoesmith (2013), p. 132. 35  Ibid. 36  Ibid., pp. 133–134. 33 34

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the distribution of political offices rather than a specific and shared political agenda’.37 Gusmão’s behavior could easily have triggered a political crisis: His attitude toward his other coalition partners has often been overbearing and, in the case of the PSD … has demonstrated elements of outright hostility … Despite serious fractures within the coalition government, the FRETILIN opposition resisted the temptation in 2010 to exploit these divisions to force a vote of no confidence in parliament and provoke an early election.38

In 2009, suco and chefe de suco elections were held for the second time. By then, the electoral law had been changed so as to forbid candidates to reveal their party affiliations. This makes it difficult to establish the exact outcome in party terms. Mari Alkatiri claimed that Fretilin sympathizers obtained 55 percent of the votes, more than 70 percent together with Fretilin ally parties, and called for early elections for the parliament, arguing that the outcome represented an increase of the support for the opposition and a repudiation of AMP politics. However, as Dennis Shoesmith has observed, the truth rather was that the incumbent chefes tended to retain their position and the majority of them were Fretilin people in 2004–05. A voter survey taken in connection with the 2009 suco elections failed to indicate that voters, in general, rejected the AMP government.39

The 2012 Elections In 2012, presidential elections were due again, in March and April. This time, Gusmão did not support Ramos-Horta, as he did in the 2007 elections. Instead, at a rather late stage of the election campaign, he announced his support for Taur Matan Ruak, the war veteran who headed Falintil after 1998. This gave Ruak a strong political legitimacy despite concerns  Ibid., p. 132.  Ibid., p. 126. 39  Ibid., pp. 128–129. 37 38

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over his involvement in the 2006 crisis when he was accused of distributing weapons to former war veterans. Ruak’s links with Fretilin were strong, but he did not want to run under the party banner. Fretilin, instead, chose Francisco ‘Lu-Olu’ Guterres, another top veteran from the independence struggle, and one of the Fretilin founders, subsequently the speaker of the constituent assembly and the parliament, as its candidate. Lu-Olu won the first round of the elections with 28 percent of the votes, ahead of Ruak with 25 percent and Ramos-Horta with 18 percent. Ramos-Horta supported Lu-Olu against Ruak in the second round, but the latter managed to win rather comfortably with some 61 percent of the votes. Ruak projected himself as an ex-resistance leader which made a number of voters cross the party affiliation line and support him.40 Parliamentary elections were held on 7 July 2012. Before the 2007 elections, a 3 percent threshold had been introduced for a party to enter the parliament. This ruled out half of all the parties in that year’s elections, and in 2012, the effect was stronger yet, ruling out 17 of the 21 parties and excluding 20 percent of the votes delivered from influencing the distribution of seats. Of the remaining four parties, Xanana Gusmão’s CNRT did best, after a well-funded election campaign and lavish spending on the veterans (US$46 million at the beginning of the election campaign) and on a US$3 a day work program (US$20 million around the same time),41 with close to 37 percent of all votes (30 seats), followed by Fretilin with almost 30 percent (25 seats), the Partido Democrático with a little more than 10 percent (8 seats), and the new Frenti-Mudança, which had broken away from Fretilin, with 3 percent (2 seats). The Partido Social Democrata (PSD) and the Associação Social Democrata Timorense (ASDT), which together held 11 parliamentary seats after the 2007 elections, fell through completely. The former party did not gain from getting on a collision course with Xanana Gusmão in 2010 and when Minister of Justice Lúcia Lobato was given a five-year jail sentence for corruption in connection with government procurement in June 2012, its credentials were reduced even more. The ASDT, in turn, was weakened by the death of its founder Francisco Xavier do Amaral in  International Crisis Group (2013), p. 9.  Ibid., p. 10.

40 41

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March 2012 and the subsequent battle for leadership, which lasted beyond the elections.42 The elections were deemed to have been free and fair by international observers. In spite of the fact that Fretilin increased its number of seats in comparison to 2007, the party remained in opposition, since Gusmão chose to form a coalition government with the other two parties, the Bloku Governu Koligasaun (Government Coalition Bloc—BGK).43 The new government declared that the policies laid down after 2007 were to continue. Fretilin, in turn, remained in opposition. The 2012 elections were the third round of elections in East Timor since the Indonesians left. As Michael Leach and Damien Kingsbury have pointed out, thereafter, the country has met a number of the criteria conventionally applied when it comes to judging whether a nation meets the formal or procedural requirements of democracy: free and fair elections, free right of association (including the right to found political parties and to protest), as well as relatively free media. East Timor has a judiciary, a police, and a defense force. The various government departments are in place.44 However, Leach and Kingsbury also stress that it is not enough to look at the formal side of democracy: … the extent to which Timor-Leste conformed to substantive interpretations of democracy [in 2012] was debatable. While representatives were freely elected, the process for selecting candidates was relatively closed, and political leaders frequently appealed to voters on the basis of primordial loyalties rather than policy preferences. State institutions existed, but the notion of the separation of powers, for example, was compromised by occasional executive interference in judicial processes, a practical (as opposed to constitutional) confusion of roles between the president and the prime minister, the army’s adoption of civil policing functions, an inadequate and poorly performing judiciary, a police force still known for its corruption and brutality, and low levels of institutional performance in the public service.45  Ibid., pp. 9–10.  Leach and Kingsbury (2013), pp. 13–14. 44  Ibid., p. 22. 45  Ibid. 42 43

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Still, East Timor had come a long way in terms of political culture since independence. A multi-party system had been substituted for the dominance of a single party. The country had been ruled by coalition governments since 2007, and a functioning and active opposition had been in place in the parliament. As Leach and Kingsbury note, ‘FRETILIN received too little credit for its key role in fostering a culture of democratic parliamentary opposition in that period ….’46 The Economist Intelligence Unit democracy index ranked East Timor as number 43 out of 167 countries during both 2016 and 2017, fifth in all of Asia, and highest in Southeast Asia, based on five variables: electoral process and pluralism, functioning of government, political participation, political culture, and civil liberty.47 One aspect that is sometimes overlooked in the discussion of politics in East Timor is that the modern, party-based political system coexists with one based on traditional authority. The latter operates mainly on the local level, but it also influences what takes place in the modern political sector. In the villages, traditional authorities continue to be strong. Hence, both those elected to the suco councils and the chefes de suco tend to come either from the traditional political elite or are at least sanctioned by the latter. ‘Traditionally, it is important that leaders know “how to speak” the ritual forms of language that command authority.’48 A chefe, hence, stands a much better chance to be successful if he is a liurai (traditional leader) or comes from a liurai house. ‘A common way communities seek to secure legitimacy within both spheres is by electing the most capable and “savvy” candidates from the liurai house, thus incorporating an element of meritocratic competition within the traditional leadership pool.’49 The formal, modern, political system continues to be heavily dependent on the cooperation of traditional authorities: State reach in rural areas is extremely limited and chefes de suku tend to act as a political ‘contact point’ for the state, providing necessary statistics and  Ibid., p. 23.  The Economist Intelligence Unit (2017), pp. 8, 34, (2018), pp. 6, 26. For a brief summary of the struggle to build democracy in the country, see Feijó (2019). 48  Cummins and Leach (2013), p. 176. 49  Ibid., p. 173. 46 47

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information to the East Timorese government, subdistrict administrators, and other service providers. To fulfil these tasks, and the broader roles of resolving disputes and ‘administering’ their populations, chefes commonly work in tight, networked arrangements with the non-elected traditional leaders of the community. Local authority and power is generally shared among elected chefes de suku and non-elected traditional authorities, and there are many instances where chefes de suku engage more closely with the traditional leadership than with the other members of konsellu de suku, who are usually regarded locally as possessing less authority.50

Since the traditional authorities have to engage also in the formalized political process in East Timor, a ‘hybrid’ political system exists at the local level.

After the United Nations In December 2012, the last United Nations Mission in Timor-Leste (UNMIT) units in East Timor were withdrawn, after a 13-year UN presence. This was a potentially difficult political moment. However, the ruling coalition in East Timor, after 2012, proved to be less volatile than the AMP constellation. After the elections, the government consisted of no less than 55 ministers, vice ministers, and secretaries of state (reputedly the largest in the Asia-Pacific region),51 far too large to be efficient, so, in practice, the important decisions were handled by the 15-member Council of Ministers. Xanana Gusmão managed to concentrate the political power to himself and his inner circle after the 2012 elections, and he directly controlled around half the budget.52 Observers were beginning to ask how the political transition to the next generation would take place. Already in August 2012, Gusmão announced that he would retire from his post as prime minister before the 2017 elections, and during the next two years, he kept reiterating his intention. Few believed him, and observers began to speculate about  Ibid., p. 170.  Horta (2014). 52  International Crisis Group (2013), p. 13. 50 51

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what would happen in the event that he actually would choose to step down: Given the almost mythic primacy afforded to Gusmão by many voters, his eventual exit from politics is certain to promote a period of uncertainty and a reconfiguration of power. It is not clear that the CNRT party would survive his departure, because it is such a disparate group of competing interests with neither an ideology nor a charismatic replacement for its leader. The reconfiguration, therefore, is likely to be messy.53

On 6 February 2015, Xanana Gusmão finally took the decisive step and handed in his resignation to President Taur Matan Ruak. His successor was the former minister of health (2001–07) and vice prime minister Rui Maria de Araújo from Fretilin, from 2008 adviser to the minister of finance. His government included three more Fretilin ministers: Hernani Coelho as minister of foreign affairs and cooperation, Santina Cardoso as minister of finance, and Maria do Céu Sarmento Pina da Costa as minister of health.54 This means that the government of East Timor, in practice, became a government of national unity. In 2013, Gusmão and Mari Alkatiri had finally managed to bridge some of their old animosity and differences. In a newspaper article commenting on the 2014 budget debate in the parliament, the minister of the presidency of the Council of Ministers, Agio Pereira, stressed the importance of consensus in East Timorese politics: Political belligerence, violence, street protests and financial crises are all too common nowadays. Therefore Timor-Leste must look at this new politics of national consensus being part of its democracy, as a good example for the country and for the world, perhaps even more so for developing countries; and in particular those that are yet to break free from a cycle of violence and large-scale conflict that negatively impact on their Nation and State building processes. That governance ought to be inclusive is an important principle to ensure that all parties are, and feel, relevant in the political process.55  Ibid., p. 15.  Leach (2015). 55  Pereira (2014). 53 54

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The inclusion of the main opposition party in the government clinched this new political rapprochement. It also meant that there was no opposition in the parliament. The dominant coalition held all the seats. Araújo is generally regarded as a capable minister and administrator, with a bent for consensus solutions. His appointment had the potential to ensure continued political stability and facilitate the transition from the ‘75’ freedom-fighter generation to the younger generation (Jerasaun Foun) of East Timorese politicians.56 In this, he was aided by the fact that the president, Taur Matan Ruak, was born in 1956 and hence falls between the two generations. At the same time, the size of the government was trimmed from the exaggerated figure of 55. The official government homepage listed a total of 40 for the new government.57 Xanana Gusmão stayed on as minister of planning and strategic investment, with responsibility for economic and social development—a powerful position—while Mari Alkatiri, since 2014, was heading a scheme intended to create a ‘special social market economy zone’ for trade and tourism in the Oecusse enclave through investment in infrastructure, education, and health.58 Both Gusmão and Alkatiri remained key figures in the intergenerational transition.59

The 2017 Elections The absence of an opposition in the East Timorese Parliament became a matter of concern for outside observers. Prime Minister Araújo explained the cabinet reshuffle in terms of the smallness of the country. ‘The pool of talent is very limited … We came to the realisation … we have to call everybody who is willing and who is capable of contributing to the development of this country to participate in the government’, he stated.60 In this situation, there was no room for divisive politics, as he saw it. In fact,  Kingsbury (2015), Panda (2015).  Government of Timor-Leste (2015a). 58  UNDP (2014). 59  Leach (2015). For a discussion of intergenerational issues in East Timorese politics, see Nygaard-­ Christensen and Bexley (2019). 60  Beuman (2015a). 56 57

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the only opposition force to be reckoned with was the president, who, as Lydia Beuman has pointed out, had an ‘extra responsibility’ for overseeing both the government and the parliament.61 Taur Matan Ruak had been perceived as a ‘passive’ president. While both Xanana Gusmão and José Ramos-Horta had made use of their constitutional right to veto legislation bills,62 it took until May 2014 before Ruak chose to go against the government. The issue was the media regulation law that was drafted in 2013, and which immediately came under fire.63 This law established a press council consisting of two representatives from the journalistic community, one from the media owners, and two from the public. The latter two representatives are selected by the parliament and could provide a means for the government to exercise pressure since both domestic and foreign journalists must be approved and certified by the council.64 After the parliament passed the law on 9 May 2014, without a single dissenting vote, Ruak refused to sign the bill and requested the court of appeal to review its constitutionality. The court ruled some of its provisions unconstitutional,65 and a few changes were made to the text. The parliament approved the amended law which came into force in December 2014. The amendments were, however, marginal and left paragraphs which stipulated harsh penalties for infractions, obstacles for foreign journalists and domestic journalists without formal education as well as a limitation on foreign ownership to 30 percent of a media organization.66 At the end of December 2015, the president vetoed the 2016 budget law proposed by the parliament because, in his view, it did not pay enough attention to the needs of the poor, spending too little on health, education, rural roads, water, and agriculture and too much on physical

 Beuman (2015b).  Beuman (2014a). 63  The law proposal is found in Human Rights Watch (2014a). For criticism, see, for example, Robie (2014a, b), Gosford (2014), Gillies (2014), Human Rights Watch (2014b), Kine (2014), Betteridge (2014), and La’o Hamutuk (2016a). 64  International Federation of Journalists (2014). 65  Beuman (2014b). 66  La’o Hamutuk (2016a). 61 62

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infrastructure, like highways and airports, and on oil processing. The parliament, however, overruled the presidential veto in January 2016.67 Things took a further turn for worse between the president, on the one hand, and the government and the parliament on the other, in February 2016, when Ruak refused to renew the mandate of the commander-in-­ chief of East Timor’s defense force.68 The parliamentarians contended that the refusal was unconstitutional and threatened to impeach the president,69 before a compromise candidate could be found.70 At the end of the month, when Ruak addressed the parliament to clarify his views on the military matter, he used the opportunity to launch a frontal attack on Timorese consensus politics in general and Gusmão and Alkatiri in particular: In 2013 I asked our brothers Xanana, Mari and Lu Olu, ‘For what purposes is unanimity used?’ Probably to address issues that a political party alone cannot solve. We have the veterans issue, the constitutional revision issue, the national strategic development plan. Unfortunately they don’t use unanimity, mutual understanding, to solve these issues. They use it for purposes of power and privilege. Brother Xanana takes care of Timor while brother Mari takes care of Oecussi. […] The State of Timor-Leste is far too centralising. It centralises skills, powers and privileges. It excessively wastes resources, allowing thousands of Timorese to become second-class citizens. I know what I am talking about, because I have visited 401 sucos. The Government has been talking about decentralisation and centralisation since 2004. 12 years later we are still debating whether the chicken or the egg came first. Municipalities and administrative posts have been long abandoned and left without resources, competences, concerned about life issues, while we are here wasting money. […] I am ashamed whenever I visit the sucos, […] Who allows this waste to take place? National Parliament. […] You allow the Government to waste our resources.  Beuman (2016a).  SAPO 24 (2016). 69  Murdoch (2016). 70  Beuman (2016b). 67 68

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… on 4 February I told Mr Prime Minister that the President of the Republic had received complaints concerning privileges granted to our brothers Xanana’s and Mari’s family members and friends … regarding contracts signed with the State. Mr Prime Minister asked the President of the Republic if an inspection was needed. I said ‘no’, that I just wanted to keep him informed about the widespread discontent over the granting of privileges. Soeharto was overthrown by his family. Too much privileges! […] Do not count on the President of the Republic to build a society based on power and privileges. The days of this type of society are numbered, not only here but anywhere.71

As could be expected, the parliamentarians reacted. Taur Matan Ruak was accused of being critical without providing any alternatives, of using his speech to launch his campaign for the parliamentary elections due in July 2017, of making insults which were ‘out of place’, and even of being a crook or a ‘bad guy’.72 The absence of an opposition in the East Timorese parliament created a somewhat peculiar situation, where the only opposition to the government came from the president, who had not been elected as representative of any political party.73 It was obvious that Taur Matan Ruak would not receive the endorsement of either Fretilin or the CNRT in the 2017 presidential elections. Knowing that he would lose, he chose not to run. In December 2015, a new political party, the Partido de Libertação do Povo (PLP, People’s Liberation Party), was founded by Adérito Soares, the former head of the anti-corruption commission. Soares took on the role of ‘interim leader’ of the party, and it was widely believed that Taur Matan Ruak would succeed him, and that the actual purpose of the foundation was to provide the latter with a platform for the parliamentary elections in July 2017. The presumption proved right. During the first congress of the new party, held between 18 and 20 May, Taur Matan Ruak was elected  Life at Aitarak Laran (2016).  Diário de Notícias (2016). 73  The political system of East Timor is usually labeled ‘semi-presidential’, that is, the country has a popularly elected fixed-term president and a prime minister and a cabinet that is responsible to a parliament (Elgie 1999). Other definitions add one more requirement: that the president should have ‘considerable powers’ (Duverger 1980, p. 166). For the debate of the case of East Timor, see Kingsbury (2013), Feijó (2014, 2016a, b), Strating (2016), and Beuman (2016c, d). 71 72

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president of the PLP. The new party has projected itself as a renovating force in Timorese politics, with a special focus on the transition from the old generation of politicians to the young East Timorese.74 The 2017 presidential elections attracted eight candidates. The outcome, after an orderly election day,75 was the expected one. Francisco ‘Lu-Olu’ Guterres, of Fretilin, was described as ‘“Snow White” surrounded by seven dwarfs’.76 Running for the third time, he was backed both by Fretilin and the CNRT, and he was elected on 20 March 2017 with a voter participation of 71 percent, obtaining a comfortable majority already in the first round: over 57 percent of the votes, against 32 percent for Antonio da Conceição, from the Partido Democrático. None of the other candidates got over 3 percent.77 For the first time, East Timor had got a president who was an official member of a political party. The new president, expected to be more loyal to the Fretilin-CNRT compromise than his predecessor, was sworn in on 20 May 2107.78 The 2017 parliamentary elections were held on 22 July. The population continued to show a strong commitment to exercising their ­democratic rights by voting, as revealed by the turnout: 76 percent.79 More than 20 parties competed for the 65 parliamentary seats with a fiveyear mandate. The elections were for the first time run by the East Timorese themselves and not by an international organization. Around 4000 national and 300 international observers followed them closely. The period leading up to election day was peaceful, and the different parties ran their campaigns without clashes and violence. As summarized by a European Union (EU) delegation invited to observe the elections: On 22 July the Timorese electoral management bodies (EMBs) demonstrated again their ability to organise well-administered, credible and inclusive elections. Voters could exercise their franchise in a peaceful environment

 The Economist Intelligence Unit (2015a), Guide Post (2017).  Gomes (2017), Kingsbury and Maley (2017). 76  Feijó (2017). 77  Election Guide (n.d.). 78  Davidson (2017a), Black (2017). 79  Downer (2017). 74 75

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and without undue interference. Voting, counting and tabulation were conducted efficiently and transparently.80

The young population of East Timor and the right to vote for all citizens of age 17 or above meant that roughly 20 percent voted for the first time. This group had no or limited memories of the pre-independence period. Moreover, although people seemed to think that their own situation had improved during the past years, there was an increased concern about the development of the country. A survey by the Asian Foundation found that the share of the population that thought that things in East Timor were going in the right direction declined from 73 percent in 2014 to 58 percent in 2016.81 Conversely, the share of the population which thought things developed in the wrong direction went from 25 percent to 32 percent. It is notable that young people went from being more optimistic than the national average in 2014 to considerably more pessimistic in 2016. Another survey also found a similar trend of increased pessimism with respect to developments in East Timor: 55 percent thought that things were going in the right direction in 2013, 49 percent in 2016 and 34 percent in 2017.82 Given the young electorate and the growing concern over the development, the results in the election changed perhaps less compared to the 2012 elections than expected. The main change was that the CNRT was no longer the largest party. It went from 36.7 percent of the votes in 2012 to 29.5 percent in 2017. Fretilin, which got 29.7 percent, approximately the same as in 2012, thereby became marginally larger than the CNRT and received 23 out of the 65 seats in the parliament against 22 for the CNRT. The CNRT lost seats to two parties, the newly formed Partido de Libertação do Povo (Peoples’s Liberation Party—PLP) led by Taur Matan Ruak, which received 10.6 percent of the votes and Kmanek Haburas Unidade Nasional Timor Oan (Enrich the National Unity of the Sons of Timor—Khunto), a party linked to martial arts groups, which got 6.4  European Union Election Observation Mission (2017).  Asia Foundation (2017), p. 13. 82  Center for Insights in Survey Results (2017). 80 81

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percent. The PLP was supported by a mix of former resistance members and young intelligentsia members, whereas Khunto’s main support came from unemployed and dissatisfied youth. The Democratic Party retained its share of around 10 percent of the votes from the 2012 election despite the death of the founder Fernando ‘Lasama’ de Araújo in 2015. Frenti-Mudança only received 1.5 percent of the votes and lost its two seats in the parliament. The minimum share of votes needed to get seats in the parliament was changed from 3 percent in the 2012 elections to 4 percent in 2017. Despite this increase, the number of parties in the parliament increased from four to five. One reason for the relative stability of the vote shares may be the basis for the voting behavior of the East Timorese. Around 58 percent of the voters based their decision to vote for particular candidates on their role in the independence movement.83 The figure was higher than for other factors, such as ‘issues’ (54 percent), previous leadership experience (8 percent), and education/qualification of a candidate (7 percent). The pattern of the parliamentary elections was similar with around half the population basing its votes on the party’s role in the independence movement compared to 22 percent who based it on the party’s program and proposals. The formation of a government turned out to be much more difficult than what was anticipated before the elections.84 The expectation that Fretilin and the CNRT would continue their coalition proved wrong. As a consequence of the poor result of the CNRT, Gusmão decided to step down as chairman of the party just a few days after the elections. He also announced that the CNRT would not participate in a coalition with any other party. The negotiations to form a coalition government under Fretilin leadership were painfully slow. Khunto soon decided to join the government, but more parties were needed to form a majority in the parliament. Fretilin seemed to favor collaboration with the PLP, but the negotiations turned out to be very difficult and foundered on the issue of who would

83 84

 Asia Foundation (2017), p. 35.  Kingsbury (2017).

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serve as the speaker of the parliament.85 Six weeks after the elections, the Democratic Party also decided that it would join the government. However, only a couple of days before the new government was to be sworn in on 15 September, Khunto decided to abandon the deal with Fretilin and to stay out of the government. Hence, Fretilin and the Democratic Party were forced to form a minority government with altogether 30 seats out of 65 in the parliament. Mari Alkatiri came back as prime minister, the outgoing prime minister, Rui Maria de Araújo, became minister of health and the former president Jose Ramos-Horta minister of state. The government had a difficult time right from the start. The PLP and the CNRT started to negotiate for a closer collaboration, a move that was quite unexpected, considering the harsh conflict between Ruak and Gusmão a few years earlier, and the large differences in political programs and platforms.86 Together with Khunto, they formed the Aliança de Maioria Parlamentar (Parliamentary Majority Alliance) (AMP). The conflict escalated with heated accusations on both sides. Political tensions were higher than at any time after the crisis in 2006.87 At the center of the conflict stood, as so many times before, Alkatiri and Gusmão. One major criticism from the AMP was that Fretilin now controlled all major political positions: the prime minister, the president, and the speaker of the parliament. This stood in contrast to the previously used arrangement of power-sharing between the major political parties.88 The East Timorese constitution requires that the government’s program is accepted by the parliament within 30 days after it has been sworn in. In mid-October, the AMP moved to reject the government’s program.89 The constitution does not explicitly state when the government needs to come back with a revised program to the parliament. Many observers assumed that it should be presented within 30 days, but Fretilin announced that it would not take place until later. One reason was per Leach (2017a), p. 2.  Leach (2017b), p. 2. 87  Feijó (2017), p.1. 88  Feijó (2018a), p. 2. 89  Ibid., p. 3. 85 86

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haps that it is not possible to dissolve the parliament until six months after the elections, which was on 22 January 2018. If the program was to be rejected before that, it would likely lead to a new government led by the CNRT. On 26 January, President Guterres dissolved the parliament. New elections were set for 12 May, almost a year after the previous ones. An immediate consequence of the long stalemate was that no budget for 2018 could be approved by the parliament, which, in turn, led to uncertainty and a concomitant decline in investment and economic activity.90 The election campaign was tense with constant personal attacks between Fretilin and AMP. Nevertheless, a European Union mission concluded that: Despite an unprecedentedly tense campaign environment, harsh criticism by the main election contenders, and budgetary constraints, the National election commission (CNE) and the Technical Secretariat for Electoral Administration (STAE) were able to deliver transparent, well-managed and credible elections.91

The voter turnout was a high 81 percent, and the elections led to a new government but did not put an end to the bitter conflicts. Fretilin increased from 29.7 percent to 34.2 percent of the votes but stayed on 23 seats in the parliament.92 The Democratic Party lost two seats which meant that the former minority government only had 28 of the 65 seats in parliament. The AMP increased its share of the votes from 46.5 percent to 49.6 percent, losing one seat but retaining the majority with 34 seats.93 A coalition of smaller parties got the remaining three seats. The AMP was hence to form a government, but it did not win the two-thirds majority which is required to overrule the president’s veto against new

 Ibid.  European Union (EU) (2018). 92  The reason that a large share of the votes did not materialize in more seats is that fewer votes went to political parties that failed to meet the 4 percent threshold (Feijó 2018b). 93  The AMP kept its acronym but changed its name to Aliança de Mudança para o Progresso (Alliance for Change for Progress). 90 91

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laws, including budgetary issues and fundamental laws of social security, health, education, defense and security, and electoral laws.94 Surprisingly, Gusmão did not assume the premiership which went to Taur Matan Ruak. Instead, he took on the position as ‘state minister councilor to the prime minister’. The real problem started when, in accordance with the constitution, the president was to appoint the 42 government members. President Guterres refused to appoint 12 of the ministers, for reasons ranging from corruption to poor moral standards.95 Three other ministers, including Gusmão, refused to be sworn in as a gesture of solidarity with their colleagues. The parliament responded by refusing the president a state visit to Portugal. The parliament voted a budget for 2018 but not much more. At the time of writing (April 2019), 9 of the 12 ministerial positions still have to be filled, including those of finance, health, and natural resources, and neither the president nor the government seems willing to compromise. The political situation has come to a deadlock with potentially serious consequences for the economy.

New Economic Policies Economic policies in East Timor since independence have been determined by two main factors: the sudden increase in oil revenues a few years after independence, which fundamentally changed the ability of the government to pursue an expansionary fiscal policy, and the deep political crisis in 2006, discussed in Chapter 2, which changed the government’s willingness to pursue such a policy. Until 2006, government fiscal policy had been very prudent. The restrictive fiscal stance, however, changed drastically when the AMP coalition led by Xanana Gusmão took over from Mari Alkatiri and Fretilin. It was perceived that the turmoil in 2006, to a large extent, was caused by a feeling among some segments of the population that their expectations of improved living standards were not being met.  Feijó (2018c).  Ibid.

94 95

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The AMP government therefore launched a series of cash transfer programs. As we have dealt with earlier, internally displaced people were paid to return home after the end of the turmoil. Other programs have targeted elderly or disabled people. Most of the cash programs, however, have been directed to influential interest groups. In particular, as we have seen, the veterans from the independence struggle were given pensions and other benefits. Although the overall fund transfer program encompassed more than 130,000 people, in 2012, more than half of it targeted the 3 percent of the population entitled to veterans’ pensions.96 Hence, although the transfer programs have expanded, the target groups may be too concentrated for the program to have a widespread impact on growth and poverty.97 It is also clear that the transfer programs do not target the most vulnerable people. They cover about 25 percent of the households with the 20 percent highest incomes, while some 60 percent of the households with the 40 percent lowest incomes do not receive any support at all.98 The Bolsa da Mãe social protection program is another cash transfer initiative which seems to have a better effect on reducing poverty, although the sums involved are low (between US$5 and US$15 per month), and the program suffers from poor targeting.99 This program has expanded from reaching 7000 households in 2008 to 50,000 in 2015 (23 percent of the total).100 The transfer programs increased social spending rapidly. The World Bank estimated that they amounted to 15 percent of the non-oil GDP in 2012, the highest share after infrastructure.101 In 2011, total social assistance expenditures as a share of the non-oil GDP were higher than in all countries expect Iraq and around twice as high as in the country with the third highest ratio (Bosnia and Herzegovina).102 The programs stand out as large even when payments to veterans are excluded and as substantially larger than those of other countries in the region. Taken together, the  World Bank (2013a), p. 47. In 2011, the figure was a mere 1 percent.  Ibid., p. 52. 98  Ibid., pp. 50–51. Cf. also World Bank (2018d), for more statistics. 99  World Bank (2018b), pp. 33–34. 100  Ibid. 101  World Bank (2013a), pp. 1, 35. 102  Ibid., p. 40. 96 97

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transfer programs appear as exceedingly large, badly targeted, potentially unsustainable and encroaching on what would normally be considered priority areas in the development context: The number of recipients of the elderly and disabled support allowance and Bolsa da Mãe programme has risen, largely because administrative improvements have facilitated the identification of more recipients. However, as these programmes remain small, they have had a relatively small impact on the budget. Instead, the veterans’ pensions are by far the largest public transfer scheme, primarily because the value of the veterans’ pensions and the number of veteran recipients have increased. In the US$1,562 million 2016 budget, US$142 million was allocated for public transfer schemes, of which US$104 was for veterans. When the budget for public transfers nearly… [doubles] that for security (US$76 million in 2016), including the military and police force, questions regarding the sustainability of these transfers need to be asked. These questions become more pressing as the budget to other forms of assistance, such as health, education and housing, has been progressively cut.103

In addition, the generous programs run the risk of generating strong expectations of future assistance on the same level, with concomitant demands by groups intent on being bought off and capable of destabilizing political life in the country. ‘… Timor-Leste’s veterans … have emerged as a true megaproject’, notes Douglas Kammen.104 After 2006, the East Timorese government formulated increasingly ambitious development goals. The 2011 strategic development plan states that the country should have double-digit growth figures in the years to come and achieve upper middle-income status by 2030.105 Income levels are to increase and public investment is to provide the foundation for the increase. Improved infrastructure is a key element in the development strategy. This policy change is reflected in the budget. Government expenditures were rather stable at around 20–25 percent of

 Wallis (2019), p. 43.  Kammen (2019), p. 43. 105  Democratic Republic of Timor-Leste (2011a). 103 104

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the GDP between 2002 and 2006,106 but increased almost threefold in the 2006–07 budget. As Table 3.1 indicates, the increase continued until 2016 when they were more than ten times larger than in 2006–07. Adjusted for inflation, total expenditures increased by 12 percent per  annum between 2008 and 2016.107 In 2017, total expenditures declined substantially, with around 22 percent in current prices. The increase up until 2016 has been due to increases in both capital and recurrent expenditures. The latter include salary increases to civil servants and grants to rural communities. The increase in capital expenditures came mainly from accelerated implementation of various infrastructure projects—an aspect that was highlighted in the strategic development plan as crucial for obtaining middle-income status. Capital expenditure per capita first peaked in 2011, at US$588 million, a level that was among the highest in the world.108 After a few years of declining figures, it reached a new peak of US$610 million in 2016, only to decline again in 2017. The electricity sector has been receiving the greatest share, which has resulted in overcapacity and concern with respect to future high costs since electricity consumption is heavily subsidized.109 Other criticisms of the infrastructure projects include too little focus on agriculture and on maintenance of existing infrastructure.110 Concern has also been voiced with respect to the economic and social returns on the investments and on the related issue of risk of inflation due to high public spending.111 It was the large increases in public revenue from oil and gas that made the expansionary policy possible: the budget was strengthened substantially from 2004 to 2012.112 Government revenues, which amounted to about 21 percent of GDP in 2003, more than doubled the following year, and they have increased further thereafter. As a result, East Timor has a very low external debt, which has in turn created a financial situa International Monetary Fund (2007), p. 42.  World Bank (2018d), p. 50. 108  Ministry of Finance and the World Bank (2015), p. ix. 109  Ibid, p. x. 110  Ibid. 111  International Monetary Fund (2017), p. 2. 112  See Chapter 6. 106 107

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tion that is highly unusual in small fragile states.113 An extremely high share of all government revenues come from the oil and gas sector, and East Timor, together with South Sudan, is the most oil-dependent nation in the world. The strong increase in public expenditures has given rise to concern, especially after 2012 when falling oil prices have had a substantial negative impact on government revenues. For instance, oil revenues fell by no less than 40 percent in 2015.114 As shown in Table  3.1, total revenue declined from a peak of US$4351 million in 2012 to US$1309 million in 2017. Domestic revenues cover only 13 percent of the total expenditure and the rest has to be made up for by withdrawals from the petroleum fund, above the level given by the estimated sustainable income (i.e. the permanent income of the fund). The excess withdrawal has been high and growing since 2009.115 It was more than six times as high in 2015 as the year before.116 As a result, the size of the petroleum fund shrank for the first time in 2015 and has continued to decrease thereafter. The spending programs have so far been launched without the restrictions imposed by a hard budget constraint, but in the future, funding may become difficult. The historically large budget surpluses turned into a large deficit in 2016. Hence, considering the likelihood of decreasing revenues from the petroleum fund, it seems clear that the expansion is not sustainable. (We discuss this issue in Chapter 6.) Some reports suggest that the fund will be exhausted by the mid-2020s. If this happens, the expenditure programs will have to be cut, and it is worrying that the government does not seem to be prepared for such a scenario.117 As a result of the increased expenditures, economic activities related to public spending, such as construction, have been the main engines of growth after 2006.118 Private investments have remained very low during the entire independence period. The low figures are caused by a combination of factors. One is the low incomes of the rural population, which serve to  International Crisis Group (2013), p. 28.  Ibid. 115  International Monetary Fund (2013), p. 30. 116  International Monetary Fund (2016), p. 5. 117  Doraisami (2018), p.255. 118  International Monetary Fund (2013), p. 5. 113 114

… 872 300 2086

18

1045 40 993 11 173 134 21 …

…

…

…

…

4351 137 3960 254 1390 674 462

2012

…

3698 105 3286 260 1342 731 351

2013

…

2555 168 2117 270 1608 913 426

2014

11

1674 170 1281 223 1559 1029 307

2015

…

925 215 540 169 1780 1002 610

2016

…

1309 187 966 157 1380 923 301

2017

… … 282 309 284 254 260 270 123 169 157 587 1912 1032 1600 2474 2962 2356 947 115 −855 –71 40 396 512 811 1,055 1055 730 732 1279 1245 1026 2086 4197 5377 6897 9303 11,768 14,952 16,539 16,217 15,844 15,043

42

692 2445 2065 2737 3854 20 45 91 96 108 672 2399 1692 2331 3461 0 1 282 309 284 105 532 1033 1137 1380 62 358 394 506 508 1 175 357 322 588

2006–07 2007H2 2008 2009 2010 2011

Note: H2 Second half. 2006/07 fiscal year (July-June), calendar years beginning in 2008. Some sums do not correspond to the totals due to rounding. The figures for 2016 and 2017 are preliminary Sources: 2006–07–08: International Monetary Fund (2011), pp.  20–21; 2009–12: International Monetary Fund (2013), pp. 29–30; 2013 International Monetary Fund (2016), p. 28; 2014–17: International Monetary Fund (2017), p. 31

Revenue  – Domestic revenue  – Petroleum revenue  – Grants Expenditure  – Recurrent expenditure   – Capital expenditure and net lending   – Previous year spending (carry-over)  – Donor projects Overall balance Petroleum fund withdrawals Petroleum fund balance (end of period)

Year

Table 3.1  The government budget 2006–17 (million US dollars)

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hold back investments in agriculture.119 Another is the almost non-­ existent modern private sector.120 The government has tried to spur industrialization, so far, however, with little success, by setting up special economic zones, a human capital fund, an infrastructure fund, and a development bank.121 The lack of a modern sector is reflected in low export figures as seen in Table 3.2.122 In bright contrast to the situation in many other East Asian countries, exports (other than oil) have not been an engine of growth in East Timor. Coffee has been the only major export good, accounting for around 85–90 percent of total non-oil exports. However, the export value of coffee only amounts to some 2 percent of the non-oil GDP.123 Coffee exports have declined from a peak of US$32 million in 2012 to US$10 million in 2017. This is far from sufficient to cover imports, as indicated in Table 3.2. Remittances, not shown in Table 3.2, have become the largest source of foreign revenues after oil and aid.124 There was roughly a threefold increase in the number of Timorese living abroad between 2010 and 2015.125 Around US$44 million in remittances was sent to East Timor in 2017.126 The main part came from the UK (63 percent), followed by South Korea (22 percent) and Australia (12 percent). East Timorese born before independence in 2002 are eligible for a Portuguese passport, which brings access to the EU labor market. Most East Timorese chose the UK, in particular, England, with a minority in Northern Ireland, where they get different types of low-skilled jobs, mainly factory work.127 An estimated 16,000–19,000 East Timorese live in the UK, compared to around

 See Chapter 5.  See Chapter 4. 121  International Monetary Fund (2013), p. 22. 122  For a more detailed discussion of the private sector, see Chapter 4. 123  International Crisis Group (2013), p. 28. 124  Curtain (2018a), p. 1. 125  Ibid., p.2. 126  Curtain (2018b), p.1. For a summary of the remittance issue, see McWilliam and Monteiro (2019). 127  Wigglesworth (2018). 119 120

7 6 −176 −169

9 −101 −91

2007

9

2006

12 −311 −297

14

2008

14 −335 −320

15

2009

27 −306 −277

29

2010

24 −374 −349

25

2011

32 −672 −638

33

2012

17 −696 −679

18

2013

15 −618 −603

16

2014

17 −653 −635

18

2015

19 −559 −539

20

2016

10 −559 −548

12

2017

Note: Some sums do not correspond to the totals due to rounding. The figures for 2016 and 2017 are preliminary Sources: 2006–08: International Monetary Fund (2011), p. 23; 2009–11 International Monetary Fund (2013), p. 32; 2012–15 International Monetary Fund (2016), p. 30

Exports of goods  Exclusive of oil/gas revenues   – Coffee Imports of goods  Trade balance

Year

Table 3.2  The balance of payments 2006–17 (IMF estimates, million US dollars)

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10,000 in Australia and 1500 in Korea.128 Many migrants to Australia are part of the Australian Seasonal Worker Programme, which allows low-­ skilled East Timorese (and people from some other countries) to work in Australia for a limited time.129 Basically all migrants to Korea are part of a similar program offering temporary work to low-skilled workers: South Korea’s Employment Permit System. Almost US$25 million were remitted to East Timor in 2015, with the UK accounting for 75 percent.130 In 2017, the figure had increased to US$44 million.131 The main part still came from the UK (63 percent), followed by South Korea (22 percent) and Australia (12 percent). Back home, these funds make a big difference in terms of household incomes, generating an estimated three times the average income of rural households among the recipients.132 The discussion can be summarized with the aid of Figure 3.1, which shows the development of consumption, investment, and trade. Government consumption and gross capital formation both increased sharply after 2007. The increased capital formation comes almost exclusively from public investment. Household consumption has remained rather stable over time, with an increase during the last few years as a second-round effect of government spending on, for example, cash transfer programs.133 Finally, imports are many times higher than non-oil exports. The trade deficit increased rapidly after 2007, when public expenditures took off, which suggests that consumption and investment are both import intensive. As expected, increased public expenditures have had a positive impact on the growth rate but perhaps less than what had been anticipated. One reason is poor budget execution rates. The problem is especially pronounced in the case of capital expenditures. Actual public expenditures amounted to no more than 20 percent of the budgeted ones during the first years of independence and capital expenditures to a great deal less.134  Ibid., p. 4.  Curtain (2018a), p. 4. 130  McWilliam and Monteiro (2019), p. 144. The figure is likely to be on the low side, since it does not capture undeclared funds carried back home in person. 131  Curtain (2018b), p.1. For a summary of the remittance issue, see McWilliam and Monteiro (2019). 132  McWilliam and Monteiro (2019), p. 142. 133  World Bank (2018d), p. 7. 134  World Bank (2007a), p. ii. 128 129

109

3  Political, Economic, and Social Developments 2007–18 

1500

1000

500

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0

-500

-1000

-1500 Household consumption

Gross capital formation

Exports minus imports

Government consumption

Fig. 3.1  Gross domestic product by expenditure 2000–16 (constant prices, million US dollars) Note: Exports and imports do not include oil Sources: Ministry of Finance of Timor-Leste, General Directorate of Statistics (2017), p. 7, Table 2.1

During the fiscal year 2006–07, for example, less than 3 percent of the committed capital expenditures were actually disbursed.135 The situation has improved thereafter, but the execution rate for capital and development expenditure still only reached an average of 73 percent of planned ones during 2008–14.136 The focus on electricity projects tended to 135 136

 International Finance Corporation and Asian Development Bank (2007), p. 16.  International Monetary Fund (2016), p. 8.

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increase the execution rate since these projects were few but very large, which made their administration relatively easier. The decline of electricity spending in 2012 and 2013 led to a decline in the execution rate of the infrastructure budget from 95 percent in 2010 to 33 percent in 2013.137 Hence, the government’s ability to carry out all planned capital investment continues to be constrained. One reason for the low budget execution rates has been the highly centralized system where all expenditures have to be cleared by Dili. Another major problem is the widespread lack of administrative capacity. East Timor was left without qualified and experienced administrative personnel when the Indonesians withdrew from the country, and the subsequent return of East Timorese exiles has not sufficed to fill the gap. As a result, some major donors increased the number of foreign experts in East Timor in an attempt to improve the situation. Frequently, these experts, however, acted not only as teachers and advisers but in addition became directly involved in the running of the daily operations. Large parts of the public administration became crucially dependent on this support, which was in direct conflict with the aim of building up an indigenous administrative capacity. Increased efficiency in the short run was considered more important than human capital formation and long-­ run sustainability. Unfortunately, it seems as if the rather intense capacity-­ building effort during the early years of independence has ebbed out, and that administrative capacity has stabilized at a low level.138 The poor administrative capacity in the public sector may have been one of the factors behind the centralization of expenditure decisions to the prime minister in 2012, which put most of the spending on infrastructure directly under him.139 Another reason why public expenditures have not been more efficient is that the absorptive capacity in East Timor has been insufficient. Supply bottlenecks have precluded the productive employment of large expenditure increases. The large increase in demand was not matched by a similar  Ministry of Finance and the World Bank (2015), p. 16.  Viñuela (2014), p. 356. 139  International Crisis Group (2013), p. 12. 137 138

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increase in the supply of goods and production factors. This, in turn, led to increased inflation rates, which fluctuated around 10 percent between 2010 and 2013.140 However, in recent years, the inflation rate has been very low, around 1 percent per year, which may indicate that the situation is improving.141

Economic Growth The positive growth of the economy in 2005 promised a better future, but the growth rate turned negative in 2006, as a result of the political crisis. The economy contracted by almost 5 percent, as shown in Figure 3.2. The private sector contracted when riots and turbulence broke out, and private actors postponed investments. Public capital formation suffered as well. Hence, the crisis dealt a heavy blow to the economy. Income per capita income was lower than during the last years of the Indonesian occupation. The growth rate increased substantially after 2006 and has averaged close to 6 percent since 2007. The rate is decent but far from the double-­ digit growth figures that the government is aiming for. Moreover, the growth trend is a matter of concern. The growth rate has been falling in recent years. (It was even negative in 2017.) Also, the 2.2 percent achieved in 2018 is far lower than what is required to meet the development ­challenges and reduce poverty. The political turmoil, discussed earlier, may continue to put further downward pressure on economic growth. Higher public expenditures (shown in Figure 3.1) explain almost all of the growth. Other potential sources of growth were either too insignificant, like exports, or relatively stable, as was the case with private consumption. An exception is the service sector growth caused by the arrival of a new wave of foreigners in Dili: police officers, military personnel, and a host of administrative staff that were sent to East Timor to stabilize 140 141

 World Bank (2013a), p. 29.  Ministry of Finance of Timor-Leste, General Directorate of Statistics (2016), p. 5.

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14 12 10 8 6 4 2 0 -2

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-4 -6 Fig. 3.2  The non-oil GDP growth rate 2006–18 (percent per annum) Note: Figures for 2017 and 2018 are preliminary estimates Source: 2006–16: Ministry of Finance of Timor-Leste, General Directorate of Statistics (2017), p. 4, Table 1.2; 2017–18: World Bank (2018a), p. 10

the political situation and increase the administrative capacity. The consumption of goods and services by the foreigners increased local incomes, although mainly in Dili.

Poverty Poverty alleviation has been a central theme in Timorese development policy ever since the beginning of independence. As discussed in Chapter 2, the first national development plan rested on a strategy with two overriding goals: the reduction of poverty in all sectors and regions of the nation and the promotion of an economic growth that is equitable and sustainable and which improves the health, education, and well-being of everyone.142  Planning Commission (2002b).

142

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Table 3.3  The share of the population living in poverty 2001–14 (percent of the total population Year

2001

2007

2014

Poverty incidence

36

50

42

Sources: World Bank and Directorate of National Statistics (2008), p.  5; World Bank (2016c), p. 7

The social and economic conditions in East Timor before independence were mapped through a large household survey covering 1800 households143 and the Directorate of National Statistics surveyed almost 4500 households in 2007.144 A third living standards survey of 5916 households was conducted in 2014.145 This enables us to examine the changes in a number of living standard aspects, including poverty, from 2001 to 2014. Table 3.3 shows that the incidence of poverty increased substantially from 2001 to 2007. The former year, around 36 percent of the East Timorese were classified as poor based on their per capita consumption, a share that increased to around half the population in 2007. Thereafter, the situation has improved: around 42 percent of the population was below the poverty line in 2014. Poverty is more common in rural than in urban areas. In 2014, the urban poverty rate was 28 percent compared to 47 percent in rural areas. There is also large variation in poverty between different districts, with the western districts tending to have relatively high poverty rates. Thus, almost 60 percent of the population in rural western East Timor was below the poverty line in 2014.146 The figure for 2007 may have been a poverty outlier that does not reflect the general development over time: a result of the unrest that took place the year before. Hence, the figure may exaggerate the deterioration from 2001 to 2007 and the improvement from 2007 to 2014. That this may be the case is corroborated by an attempt by the World Bank to estimate the poverty rate in 2009.147 The bank used a model with household characteristics that could predict poverty in 2001 and 2007, years for which actual household  Democratic Republic of Timor-Leste et al. (2003), World Bank (2003).  Direcção Nacional de Estatística (2008). 145  World Bank (2016c). 146  Ibid., p. 21. 147  World Bank (2012). 143 144

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2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

800 700 600 500 400 300 200 100 0

Fig. 3.3  Household final consumption expenditures per capita 2000–16 (constant 2010 US dollars) Source: The data come from the World Bank database World Development Indicators. http://data.worldbank.org/data-catalog/world-development-indicators. Downloaded 11 October 2018

poverty figures exist. The model was employed to produce a poverty estimate for 2009 with the aid of the same household characteristics, obtained from the 2009–10 demographic and health survey. The result is an estimated poverty incidence in 2009 of about 41 percent. If this estimate is correct, the extent of poverty declined shortly after 2007. Moreover, it suggests that no real improvements were achieved between 2009 and 2014. The poverty figures can be complemented by other measures of poverty and living standards. Studies using data from the UNDP on multidimensional poverty, including not only income but also factors like health, education, and access to sanitation and water, suggest that 68 percent of the population should be classified as poor in 2009–10—the highest figure for any country outside Africa.148 Moreover, many households that are above the poverty line are clustered dangerously close to it149 and hence risk to fall into poverty as a result of natural disasters, economic disturbances, inflation, or illness. As seen in Figure 3.3, the development of per capita consumption confirms the picture of poverty: a decrease in living standards during the first years of independence, followed by an increase in later years.150  Inder et al. (2014), p. 7.  World Bank (2013a), p. 18. 150  See also International Monetary Fund (2013). 148 149

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Consumption declined every year after 2001 until it touched bottom in 2006. The latter year, household consumption was only around two-­ thirds of the 2001 level. Thereafter it increased, as the economy grew, but it remains lower than at its peak in 2001.

Food Consumption and Nutrition Food consumption rather than total consumption may be an alternative, and possibly better, indicator of changes in living standards in a poor country like East Timor. The World Food Programme states that about one-third of the inhabitants experienced food shortages in 2010.151 Country comparisons suggest that food is less available in East Timor than in most other countries. One survey of hunger ranked the country as number 75 of the 81 included countries.152 It is not only the insufficient quantity of food that is plaguing the population, the diet mainly consists of carbohydrates, like rice and cassava, which means that the diversity is insufficient. The diet diversity might even have declined for the poorer segments of the population between 2007 and 2014.153 A study carried out between June 2012 and May 2013 confirmed the existence of a ‘hungry season’. No less than 84 percent of the respondents claimed that they had experienced one or more such seasons during the period under investigation. The main ‘hungry season’ extended from November to February and, on average, the farmers had experienced 2.7 months of food shortage, defined as a period when the households had none of the following self-grown crops: maize, rice, peanuts, cassava, or sweet potatoes. Around 38 percent reported not having been subject to food shortage in this sense, but since only 16 percent claimed not to have suffered from any ‘hungry season’, it is obvious that in many cases the home-grown supplies were insufficient during the difficult months.154  As reported in IRIN (2011a). See also e.g. International Finance Corporation and Asian Development Bank (2007), p. 15. 152  IFPRI (2011). 153  World Bank (2018d), p. 20. 154  Ministry of Agriculture and Fisheries, Seeds of Life (2013), pp. 40–42. 151

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70 60 50 2002 40

2003 2010

30

2016 20 10 0

height-for-age

weight-for-height

weight-for-age

Fig. 3.4  Incidence of child malnutrition 2002–16 (percent of under-five population) Sources: 2002 and 2003: National Statistics Directorate et al. (2010), p. 152; 2010 and 2016: General Directorate of Statistics et al. (2018), p. 211

The low food consumption points directly toward malnutrition. Around 27 percent of the East Timorese women and 23 percent of the men were considered to be underweight in 2016, a slight increase since 2010.155 Children are an especially vulnerable group, and child malnutrition is widespread. Figure 3.4 shows three measures of malnutrition: the weight for age (underweight), height for age (stunting or chronic malnutrition) and weight for height (wasting or acute malnutrition). These indicators are compared to a reference population set by the World Health Organization (WHO). Low figures are indicative of long-term deficiencies in nutrition, starvation, and severe diseases (notably those related to diarrhea). The methodologies used to calculate the measures are not identical over time so great care has to be taken when interpreting the trends.156 It is nevertheless fair to conclude that the figures show that many children below five years of age are suffering from malnutrition.  General Directorate of Statistics et al. (2018), pp. 188–189.  National Statistics Directorate et al. (2010), p. 151.

155 156

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Weight and height are substantially lower than one would expect from the age of the children. Around 40–45 percent display signs of malnutrition according to two of the indicators and 24 percent according to the third one. Even worse, the situation does not seem to have improved much over time: one indicator has deteriorated since independence, one has remained comparatively stable, and the last one shows some improvement. Other studies confirm the extreme situation: East Timor has throughout its independence been ranked by the United Nations as having the third highest degree of malnutrition in the world, after Afghanistan and Yemen.157 However, other reports point to a reduction of wasting (acute malnutrition) among children up to five years of age, from almost 25 percent in 2007 to 11 percent and 12 percent in 2013 and 2014, respectively, a decline in the percentage of underweight children from almost 49 percent to 38 and 32 percent, respectively, but only a slight reduction in stunting (chronic malnutrition) from 54 percent in 2007 to 50 in 2013 and 49 in 2014.158 Data from 2013 also point to widespread anemia (over 63 percent), among children between six months and five years, and zinc deficiency among one-third of the same population. As it seems, the incidence of anemia had increased from 38 percent in 2009–10, for reasons that are not well understood but which are not believed to be due to methodological differences between surveys.159 The same 2013 data indicate that almost 25 percent of the nonpregnant women in reproductive age were underweight (a body mass index less than 18.5). The situation had, however, improved considerably in comparison with 2003.160 Hence, malnutrition is widespread in East Timor, but it differs between districts and groups. The incidence is higher in rural than in urban areas,  IRIN (2011b).  World Bank (2016c), p.  36, Provo et  al. (2017), p.  15. The underweight indicator does not distinguish between children who are thin and children who are short but have adequate weight. It has hence been replaced by stunting as the main anthropometric indicator for children (Provo et al. 2017, p. 18). 159  Provo et al. (2017), pp. 20–21. 160  Ibid., p. 22. The body mass index (BMI) is defined as the weight in kgs divided by the square of the height (m2). 157 158

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malnutrition is slightly more common among boys than among girls, and more frequent the less educated the mother of the family. Not surprisingly, malnutrition is negatively correlated with household income.161 A multivariate analysis of the determinants of maternal and child ­undernutrition using the data from the 2013 Timor-Leste Food and Nutrition Survey162 indicates that no single factor can be seen as responsible for the stunting problem: Even after controlling for a variety of factors, nearly all variables remain significantly associated with chronic undernutrition. The child’s age and sex, maternal nutritional status (vis a vis maternal height), the child’s dietary intake and disease status, maternal education, agricultural livelihoods, and household wealth are related to child stunting outcomes. Consequently, intervening to improve any single underlying factor will be insufficient to have a significant impact on stunting.163

Other Measures The East Timorese government has introduced various measures to combat malnutrition, notably food programs.164 Subsidized rice has been made available to the population—with mixed results. Targeting the poorest households has proved difficult. They lack the cash needed to purchase the rice and the poor infrastructure makes it difficult to transport the rice to remote locations.165 Altogether, however, public spending on health is among the lowest in the world: 2.4 percent of the total government expenditure in 2013, considerably lower than the East Asia-­ Pacific average of 9–11 percent, and not only that: its share of the government budget has declined from around 10 percent in 2008 to around 2 percent from 2011. The two nutrition-related ministries, health

 National Statistics Directorate et al. (2010), Table 12.1.  Democratic Republic of Timor-Leste (2015). 163  Provo et al. (2017), p. 41. 164  For an overview of the main policy issues, see ibid., Chapters 4–7. 165  IRIN (2008). 161 162

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Table 3.4  Ownership of durable goods in East Timor 2001–16 (percent of the population) TV Radio Refrigerator Car Motorcycle

2001

2007

2010

2014

2016

6.9 32.4 2.9 1.8 3.0

15.6 25.9 5.6 2.9 6.9

23.9 36.2 8.9 4.0 14.4

39 n.a. n.a. n.a. 24

40.2 24.5 19.6 4.9 32

Sources: 2001 and 2007: Direcção Nacional de Estatística (2008), p.  61; 2010: National Statistics Directorate et  al. (2010), p.  27; 2014: World Bank (2016c), p. 36; 2016: General Directorate of Statistics et al. (2018), p. 18

and agriculture, both saw their funding reduced by 18 percent from the 2015 to the 2016 budget.166 Other measures of material living standards may be used to complement the poverty figures and the figures on consumption. One such measure is how assets or wealth change over time. Table  3.4 shows the ownership of consumer durables, which is an approximate measure of such wealth. The figures are from 2001, 2007, 2010, 2014, and 2016, which enables us to examine changes over time. A minority possess durable goods, but possession has increased over time. Only 24 percent had a television set and 36 percent a radio as late as 2010, but the share for the former durable increased to 40 percent in 2016. The share of the households with a motorcycle increased from 3 percent in 2001 to 32 percent in 2016. Access to all the included goods has increased over the period, often substantially. The share of population owning different durables is many times higher in urban than in rural areas.167

Health The development of health services in East Timor is correlated with the general economic and social development of the country. The maternal mortality rate declined with around one-third during the first seven years 166 167

 Provo et al. (2017), pp. 98–99.  For more information, see National Statistics Directorate et al. (2010), p. 27.

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80 70 60 50 40 30 20 10

East Timor

2014

2011

2008

2005

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

0

Indonesia

Fig. 3.5  Life expectancy at birth in East Timor and Indonesia 1960–2016 Source: The data comes from the World Bank database World Development Indicators: http://data.worldbank.org/data-catalog/world-development-indicators. Downloaded 3 May 2018

of independence, the vaccination coverage of children tripled, and the number of malaria cases declined by 75 percent.168 The improvements are to a large extent a result of the relatively efficient management of the Ministry of Health. The latter is often described as the best functioning ministry in East Timor, and it was one of few government institutions that managed to operate successfully during the 2006 disturbances. The opinion of the development of the health sector held by the population, in general, is also high.169 The quality of health can be measured in many different ways. Figure  3.5 shows the development of life expectancy at birth in East Timor and Indonesia. Life expectancy has always been very low in East Timor. It was a mere 34 years in 1960, compared to 45 years in Indonesia. No other country in Southeast Asia had a life expectancy even close to the  Anderson (2014), pp. 305–306.  Ibid., pp. 307–309.

168 169

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low figure for East Timor. (The second lowest figure was that of Cambodia: 41 years.) Life expectancy increased until 1970–71, when it reached 40 years. However, it started to decline again in 1972, before the Indonesian occupation, and reached a nadir of no more than 33 years 1977–79, as a result of the armed struggle. The comparable figure for Indonesia then was 57 years. Once the most intensive war phase was over, the figure started to climb: back to its previous peak level of 40 years in 1983, 59 years in 1999, 61 years in 2002, and, finally, 69 years in 2016. The life expectancy is now about the same as in Indonesia and also similar to that of Laos, the Philippines, and Myanmar. In Table 3.5, the health situation of East Timor is compared with that of other Southeast Asian countries. Child mortality is high in East Timor: at the same level as in Myanmar and only lower than in Laos. The difference between East Timor and Indonesia is large. However, other sources suggest that child mortality might be slightly lower than indicated in Table 3.5. The last published demographic and health survey from 2016 suggests that the under-five mortality rate has declined from 83 per 1000 live births in 2003 to 64 in 2010 and 41 in 2016.170 Hence, the improvement has been substantial, but even this figure is higher than those for four of the six other countries included in Table 3.5. The reduced child mortality has been caused by various policies.171 Of particular importance is that a comprehensive vaccination program targeting children below 5 years of age has been implemented, and that the coverage of vaccination has increased substantially since independence.172 Despite the progress, however, coverage in 2017 was lower than in the other countries in the region. Table 3.5 shows the tuberculosis situation to be substantially worse in East Timor than in neighboring countries: 498 cases per 100,000 people compared to 345 in Indonesia. Malaria has been endemic in all the provinces in the country and chloroquine-resistant strains have been reported. The incidence increased substantially during the first years after  General Directorate of Statistics et al. (2018), p. 118.  Methods to improve maternal, child and neo-natal health in East Timor are discussed in Fabricant (2013). 172  Direcção Nacional de Estatística (2008), Tables 6.16, 6.19, 6.22, 6.25, 6.28. 170 171

29 93 84 345

70 498

391

97

21 94

175

82

63 85

361

83

49 89

554

89

28 88

133

97

21 94

Cambodia Indonesia Laos Myanmar Philippines Vietnam

48 76

East Timor

Note: DPT immunization protects against diphtheria, pertussis (whooping cough), and tetanus. Figures on tuberculosis are from 2016 Source: The data come from the World Bank database World Development Indicators: http://data.worldbank.org/datacatalog/world-development-indicators. Downloaded 11 October 2018

Mortality rate, under five (per 1000 live births) Immunization, DPT (percentage of children 12–23 months) Immunization, measles (percentage of children 12–23 months) Incidence of tuberculosis (per 100,000 people)

Indicator

Table 3.5  Health indicators for East Timor and other Southeast Asian countries in 2017

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independence,173 possibly as a result of a breakdown of surveillance, vector control activities, and treatment. However, the situation has improved dramatically. The number of reported malaria cases declined from almost 120,000 in 2010, to a mere 1042 in 2013.174 One important reason is the increased usage of mosquito nets.175 The most common diseases among children are acute respiratory infections and diarrheas.176 The latter problem, which is also frequent among adults, is closely linked to lack of safe water, notably among the rural households,177 but the situation is difficult in urban areas too, where the water is contaminated.178 Contamination is related to the general lack of sanitation.179 Maternal mortality is high but declining. The United Nations reported that in 2012, 300 Timorese women died per 100,000 live births.180 In Asia, only the figures for Laos and Afghanistan were higher. Three years later, however, the figure had fallen to 215.181 Another source shows that the pregnancy-related mortality ratio decreased from 557 per 100,000 live births in 2002–09 to 218  in 2010–16.182 Until recently, only a minority of the East Timorese women gave birth in the presence of a skilled birth attendant.183 (Other causes of maternal mortality are the high incidence of teenage pregnancies and the short time periods between pregnancies.) The situation is, however, now improving. Approximately half of all women gave birth in a health facility rather than at home in 2016.184  National Statistics Directorate et al. (2010), p. 173.  Direcção Geral de Estatística (2013a), p. 52. 175  General Directorate of Statistics et al. (2018), p. 211. 176  Ibid. 177  National Statistics Directorate et al. (2010), p. 23. 178  Ministry of Health (2004), p. v. 179  United Nations International Children’s Education Fund—UNICEF (2003), p. 45, National Statistics Directorate et al. (2010), p. 24. 180  Quoted in IRIN (2013). 181  Hou and Asante (2016), p. 4. 182  General Directorate of Statistics et al. (2018), p. 261. 183  Direcção Geral de Estatística (2013a), p. 48. 184  General Directorate of Statistics et al. (2018), p. 130. 173 174

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Bringing health services to the rural population is not easy. Relatively few people seek health care when sick.185 The distances to the health care centers are often long. The roads are poor and get even worse during the rainy season. The high cost of medicines also has a negative effect on healthcare use. Still, the low utilization cannot be explained by distance and costs alone. The lack of familiarity with modern health care must also be taken into account.186 The government has attempted to improve the situation by providing information and by bringing health care closer to the people. Information campaigns disseminate knowledge not only of modern healthcare facilities but also about ways of preventing diseases, for example, by the use of mosquito nets, improved personal hygiene, and safe drinking water— campaigns which are a major challenge in a society with a high illiteracy rate. The main focus of the government health policy has been on the provision of basic primary health care at the local level and concentration of in-patient treatment in large hospitals in the urban centers.187 Health posts, staffed by a nurse and a midwife who provide basic health care, are located in villages, and community health centers with doctors who visit the subdistricts handle the more sophisticated medical care. There were 312 such posts in 2017, staffed with a sufficient number of doctors but with too few midwives and nurses.188 The lack of medical personnel has been a problem but the situation improved ‘dramatically’189 with the arrival of several hundred Cuban physicians and with the conclusion in 2003 of an agreement whereby Cuba agreed to facilitate medical training for hundreds of East Timorese.190 In 2010, East Timor had a mere 30 doctors. In 2014, the figure was 835,

 Direcção Nacional de Estatística, Ministerio das Finanças (2008), Table 6.7.  Ministry of Health (2004), p. 2. Issues of mental health in East Timor are discussed in Barnes et al. (2019). 187  For a discussion of to what extent different types of health services favor the rich and the poor, respectively, see World Bank (2014a). 188  World Bank (2018d), p. 31. 189  Hou and Asante (2016), p. 9. 190  International Finance Corporation and Asian Development Bank (2007), p. 36. 185 186

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and a few years later, there were more than 1000 doctors.191 The number of nurses and midwives has also increased, but not at all to the same extent.192 The expansion of the medical staff over the past decade has put considerable pressure on the health budget, to the point where ­recommendations have been made not to continue the expansion at the same rate as in the past but to maximize the value of the already available health workforce instead. More specialized doctors are needed, not more generalists, and the number of nurses and midwives is still too low. Assistant nurses can be trained with a view to filling some of the vacancies. Also, the quality of the rural health facilities needs to be upgraded, including infrastructure as well as medical devices and supplies.193 A recent survey of health coverage and expenditure in East Timor summarizes the main achievements in health care since independence: Timor-Leste has made significant improvements in the health sector since becoming independent a little over a decade ago. At that time, Timor-Leste had some of the poorest health indicators in the world and a decimated health infrastructure. Since then, the country has made progress, including a reduction in child and maternal mortality, improved antenatal coverage, increased use of contraception, and greater awareness and knowledge of infectious and noncommunicable diseases (NCDs).194

Thus, it is undeniable that progress that has been made on the health front, but many problems remain. The same survey lists the most important ones: The maternal mortality rate (MMR) and the stunting rate for children under age five are still among the highest in the world. The immunization rate is still far from optimal, and access to quality health services remains limited. Like many developing countries in the Asia-Pacific region, Timor-­ Leste is undergoing an epidemiology transition as the burden of NDCs  UNDP (2018), p. 109.  Hou and Asante (2016), p. 12. 193  Ibid., pp. 25–26. 194  Ibid., p. 1. 191 192

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increases. Quality health services are still limited, particularly for the poor. Now, more than ever, strategic planning is critical for the continued and sustained improvement of the Timor-Leste health system.195

Between 2008 and 2014, the government health expenditure increased by almost 48 percent in real terms.196 The health system is, however, likely to come under some financial stress in the near future. The share of central-­level spending of the total government health expenditures grew from less than 19 percent to over 60 percent between 2009 and 2012 (falling back to between 40 percent and 50 percent during the next two years).197 This expansion did not favor local spending in the districts, wage and salary outlays increased at the expense of financing of goods and services, and in the districts a very high share of the allocated budget (around 60 percent or more during 2012–14) went to salaries.198 Another possible future problem is that the foreign aid component (outside the government budget) of the total health expenditure may shrink. This share increased from 19 percent in 2008 to a peak of 50 percent in 2011 and declined thereafter. So did the absolute amount, by 26 percent between 2011 and 2014. Possibly, foreign aid to the health sector has served to some extent to free government funds that would otherwise have been allocated to the health sector for spending elsewhere. If the declining trend continues, the pressure on the government to fill the gap will increase.199

Education The educational level in East Timor continues to be lower than in most parts of Asia. The 1999 violence had a strong negative impact. It interrupted school attendance, destroyed school buildings and learning mate Ibid.  Ibid., p. 28. 197  Ibid., p. 29. 198  Ibid., pp. 39, 36. 199  Ibid., pp. 43–44, 52. 195 196

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Table 3.6  Literacy, school enrolment, and student-teacher ratios in East Timor and other Southeast Asian countries Secondary school enrolment (%)

Student-­ teacher ratio

2016

2016

2011

96 93 91 95 100 96 98 89 96

47 47 78 57 60 67 95 61 75

31 47 16 27 28 31 20 27 18

Adult literacy rate (%)

Youth literacy rate (%)

Primary school enrolment (%)

Year

2015

2015

East Timor Cambodia Indonesia Laos Myanmar Philippines Vietnam Developing countries East Asia and the Pacific

64 78 95 80 93 97 95 82 95

82 92 100 90 96 98 98 89 99

Note: Secondary refers to lower secondary education. Enrolment refers to net enrolment, which is the share of a given cohort that attends school in the correct grade for the age Source: The data come from the online database by UNESCO http://data.uis. unesco.org/. Figures for 2011 and 2015 downloaded 1 June 2017. Figures for 2016 downloaded 3 May 2018

rials, and increased poverty, which made it more difficult to afford to send children to school.200 Table 3.6, which includes other Southeast Asian countries for comparison, lists five indicators of the level of education in East Timor. The literacy rate is 64 percent, which is lower than in other Southeast Asian countries. The youth literacy rate as well is relatively low, as shown in Table 3.6. Other sources give a similar picture, although the exact figures on literacy and illiteracy rates often differ. For instance, a census from 2015 found that the adult literacy rate was around 65 percent in 2015.201 It is interesting that it had increased from around 58 percent in 2010, a sharp increase in relatively few years. Other sources suggest that, in 2001, around 55 percent of the population was functionally illiterate, unable to

200 201

 Justino et al. (2011).  General Directorate of Statistics et al. (2017), p. 51.

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either read or write a letter, a figure that declined to less than 46 percent in 2007.202 The aggregate figures on literacy conceal relatively large differences within the country and between age groups. The literacy rate is ­substantially higher in urban than in rural areas, and higher for men than for women.203 At the time of independence, literacy was less than 20 percent at age 55 and above, but as high as around 85 percent in the 15–34 age cohort.204 In 2015, around 75 percent of men and 88 percent of women over 60 years of age had never attended school.205 Education is high on the policy agenda in East Timor. The focus is on primary education, which after independence has received around 40 percent of the total expenditure on education. Overall, 300 new primary schools were built between 2006 and 2011.206 Unfortunately, however, while the relative amount spent on education is high for a country at East Timor’s income level, there are signs that the resources have not always been used efficiently. Part of the problem seems to be the poor functioning of the Ministry of Education, which historically has had a limited ability to execute the budget.207 One of the educational priorities has been to increase primary school enrolment. The latter was less than 70 percent at the time of independence, and more or less the same during the Indonesian occupation.208 As seen in in Table 3.6, in 2016, net primary school enrolment had reached 96 percent, a figure that is above the average for developing countries and higher than in many other countries in the region. However, this figure might be exaggerated: the demographic and health surveys claim that net enrolment in primary school was 86 percent in 2016.209 Moreover, children can be enrolled in school without really attending. One study states  Direcção Nacional de Estatística, Ministerio das Finanças (2008), Table 5.10.  General Directorate of Statistics et al. (2017), pp. 48, 52. 204  UNICEF (2003), p. viii. 205  General Directorate of Statistics et al. (2017), p. 59. 206  World Bank (2018d), p. 29. 207  World Bank (2004a), p. 5. 208  Direcção Nacional de Estatística (2008), Table 5.13. 209  General Directorate of Statistics et al. (2018), p. 27. 202 203

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the net attendance rate in primary education to be 81 percent in 2015, that is, 15 percentage points lower than the enrolment rate.210 Another survey found that one-third of the primary school students were absent.211 Moreover, for every 100 children entering the first year of school, only 77 reach Grade 6, 67 Grade 9, and 61 Grade 12.212 An important reason for the increased enrolment rate is presumably the deliberate effort by the government to lower the cost of schooling. Cash transfer programs which directly target those households where children are sent to school have been implemented after 2006. Child labor, which keeps children out of school, seems to be relatively limited in East Timor in comparison with many other developing countries. At the time of independence, about 19 percent of children aged between 5 and 14 were working outside the household, in a household enterprise, or doing more than four hours per day of household chores.213 It is difficult to compare these high numbers with the more recent situation since consistent time series data are lacking. Child labor may also explain absence from school. However, there are signs of improvement. For instance, it has been reported that in 2013, only 1.4 percent of the boys and 1.8 percent of the girls between 10 and 14 years of age were working for pay or profits.214 Another 7.7 percent and 7.4 percent, respectively, were working with subsistence foodstuff production. These children tend to combine work and school more easily than children who are engaged in work for wages or profits. One of the most difficult obstacles to improved education has been the rather negative attitude among parents to sending their children to school. The East Timorese economy is dominated by subsistence farming, and it may be difficult for broad segments of the population to understand that education could be instrumental in the creation of better income-generating possibilities. In families with children aged 7–12,  Ibid., p. 32.  World Bank (2018d), p. 30. 212  Ibid. 213  UNICEF (2003), p. xii. 214  SEPFOPE and DGE (2013), p. 33. 210 211

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about 32 percent of the poorest families and 26 percent of the richest families had ‘no interest’ in sending their children to school in 2004.215 No later figures seem to exist, but the increased school enrolment rate may reflect a change in attitude. The enrolment rate for lower secondary school (13–15 years) is much lower than the one for primary school, but it is growing. It was around 30 percent in 2002,216 and increased to 38 percent in 2011 and 47 percent in 2016, as shown in Table 3.6. Hence, the statistics for primary and secondary education indicate that more children than ever are now going to school. The learning environment in the East Timorese schools has improved. For a long time, the student-teacher ratio was more than twice as high in East Timor as in any other country in the region, but as a result of government efforts, it has come down in recent years and is now similar to the one prevailing in many other countries (Table 3.6). The low number of teachers in the early years of independence was a result of the large exodus of Indonesian personnel from East Timor in 1999, and it took time to make up fully for the loss by new recruitments. A number of other problems, however, remain to be dealt with.217 For instance, various reports have shown that teaching materials are in scarce supply and often of poor quality, teachers are poorly trained, and the students receive few hours of instruction.218 On average, students acquire a fairly rudimentary knowledge. A 2004 report claims that third graders answered 28 percent of questions in mathematics correctly, which was only marginally better than what they were expected to have achieved had they simply guessed the answers on all the questions.219 Fourth graders did slightly better but still only managed to answer about 37 percent of the questions correctly. Another  World Bank (2004b), p. xix.  UNICEF (2003), p. A I-30. The net enrolment rate is ‘the number of students of relevant ages enrolled in a particular level of schooling over the number of people of the relevant ages’ (ibid., p. A I-28). 217  UNDP (2018), p. 47. 218  World Bank (2004b), pp. 28–31, (2007a), p. 41, International Finance Corporation, and Asian Development Bank, (2007), p. 19, World Bank (2008), p. 2. 219  World Bank (2004b), p. 35–37. 215 216

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example of the poor quality comes from a 2006 survey that found that 79 percent of the Grade 3 pupils and 76 percent of the Grade 5 pupils failed to reach even a minimum level of knowledge in mathematics.220 The situation in tertiary education is less well documented, but there are reasons to expect it to be poor because of the large number of institutions providing higher education and the lack of quality control. The choice of Portuguese as the language of instruction instead of Tetum has complicated the situation in the educational sector. It takes time for a new language to take root, and East Timor has had to rely on extensive support from Portugal for providing teachers, teacher training, and school books. The language decision has met with criticism because it is difficult for children to learn how to read and write when they are taught in a foreign language. A 2007 report claimed that 96 percent of the Grade 3 students and 90 percent of the Grade 5 students failed to meet even minimum requirements of Portuguese.221 The lack of teachers who speak sufficiently good Portuguese themselves to be able to use it as the language of instruction aggravates the problem. The vast majority of teachers in the early years of independence were educated in Bahasa Indonesia and only those who graduated before 1975 could speak Portuguese. The situation is likely to improve over time since Portuguese is slowly increasing its importance as a language of communication in East Timor. The share of the population that, according to the Timor-Leste living standard surveys, spoke Portuguese increased between 2001 and 2007 from 5 percent to 16 percent.222 As indicated by Table 3.7, this increased further up to 2010 and 2015, to around 24 percent in 2010 and 31 percent in 2015.223 Tetum is still, with ample margin, the most commonly understood of the four languages employed in official contexts: almost 63 percent of the population. Finally, around 18 percent of the population

 International Finance Corporation and Asian Development Bank (2007), p. 22.  Ibid. 222  Direcção Nacional de Estatística (2008), p. 22. As noted in Chapter 5 in Volume 1, a voter survey carried out by the Asian Foundation obtained a much higher figure for Portuguese: 17 percent. 223  Note that the 2010 and 2015 figures include not only ability to speak. 220 221

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Table 3.7  The share of the total population aged five or more who can speak, read, and write different languages 2010 and 2015 (percent) Year

2010

2015

Tetum Bahasa Indonesia Portuguese English

53.4 36.0 23.6 11.5

62.5 36.6 30.8 15.6

Source: General Directorate of Statistics et al. (2017), p. 46

can read and write in only one language and around 15 percent in all four languages.224

 ther Indicators of Economic and Social O Development The use of different measures gives a rather mixed picture of the economic and social development in East Timor since independence. Some indicators suggest that it has been positive while progress is absent in other areas. One way to summarize the picture is to use the UNDP Human Development Index. This index combines life expectancy, school enrolment figures, and gross national income (GNI) per capita to construct a composite index of the degree of human development. The higher the index, the higher is the level. The figures for East Timor and some other Southeast Asian countries in 2000 and 2018 are shown in Table 3.8.225 East Timor was ranked as number 132 out of 189 countries in 2018. This was an improvement on the ranking from 2000, an improvement which is also seen in an increase of the index figure from 0.465 to 0.625. No other country included in the table has experienced such a large improvement. The figures suggest that the human development is better in East Timor than in Laos, Cambodia, and Burma and worse than in the other Southeast Asian countries. It has, however, been questioned whether  General Directorate of Statistics et al. (2017), p. 48.  Note that a comparison of the index over time could be biased by changes in the methodology. Comparisons across countries should be less problematic. 224 225

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Table 3.8  The human development index for East Timor and neighboring countries 2000–18 Country

2018 HDI Rank

2000

2018

Change 2000–18

East Timor Singapore Malaysia Thailand Philippines Indonesia Vietnam Laos Myanmar Cambodia

132 9 57 83 113 116 116 139 145 146

0.465 0.8 0.717 0.649 0.619 0.609 0.563 0.473 0.421 0.466

0.625 0.932 0.802 0.755 0.699 0.694 0.699 0.601 0.578 0.582

0.16 0.132 0.085 0.106 0.08 0.085 0.136 0.128 0.157 0.116

Source: The data on the index are from UNDP. http://hdr.undp.org/en/home. Downloaded 11 October 2018

the index measures the level of development in East Timor adequately. Much of the improvement is caused by the increase of GNI which, in turn, comes from very large increases in oil revenues.226 These offshore incomes may serve to exaggerate the level of human development in East Timor. As a complement to the ‘objective’ measures of the overall standard of living, measures of subjective well-being may be used.227 These intend to capture how people feel they have been affected by the economic and social changes that have taken place over time. They relate to basic needs, such as food consumption, housing, clothing, health care, education, and income. The perception of the welfare situation improved between 2001 when three-fourths of the population considered their incomes to be less than adequate, and 2007, when the figure had fallen to 63 percent. The lack of household income is perceived as a worse problem than failure to meet other basic needs. This may reflect the subsistence farming orientation of the typical household. The food situation stands out as precarious. More than half of the population in 2007 thought it to be less than adequate. The post-­  La’o Hamutuk (2013a).  Direcção Nacional de Estatística (2008), Tables 9.1–9.9 provide such subjective measures on well-­being for 2001 and 2007.

226 227

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independence improvement has been relatively modest. The health sector, on the other hand, is doing relatively well. About two-thirds of the population considered health care to be adequate in both 2001 and 2007, and around 60 percent thought that the situation was adequate also in terms of housing, clothing, and education. When asked to judge the overall change in well-being, the vast majority of the population considered the situation in 2007 to be worse or equal to the one prevailing in 2001. However, the figures are more than a decade old. It is probable that the dramatic events of 2006 had an impact on the subjective perception of well-being, and that the situation has improved thereafter. * * * It is not easy to sum up the social and economic development of East Timor during the first decade and a half of independence. It is clear that economic growth after 2007 has increased the per capita income. It also appears as if other aspects of welfare have improved slightly from the very low level around the time of independence. Ownership of various consumer durables has increased, and school enrolment rates are higher, although the quality of education is low. Child health has improved and so has the health system as a whole. On the other hand, it is also clear that many East Timorese have seen insufficient improvements in their lives. Most live in rural areas where they make a living from subsistence farming. Poverty continues to be widespread, and many families are facing food shortages during some parts of the year. Social indicators suggest that the situation is worse in East Timor than in almost all other parts of Southeast Asia. The economic strategy of East Timor has rested on a strong increase of public expenditures, made possible by large revenues from oil and gas. This policy has bought some peace and political stability, but an important question lurks around the corner: How will East Timor be able to continue its development when the oil fields begin to be exhausted and petroleum revenues begin to decline? It also seems that the effect of rapidly increasing public expenditures has been weaker than hoped for. This is partly due to a weak administrative capacity, but a disproportionate share of the expenditures has been

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targeting important interest groups rather than the neediest segments of the population. East Timor remains a very poor country one and a half decades after independence. The challenges are numerous. The agricultural sector needs to be modernized so as to make it possible to increase productivity and incomes and ensure a secure food supply during the entire year. A modern sector must be developed in order to diversify the economy and create job opportunities for a rapidly growing population. Other income and revenue sources than oil and gas must be created before the oil fields are empty. We discuss these issues in the next three chapters.

4 Population Growth and Job Creation: The Search for a Modern Sector

Growth, employment, and incomes are closely related. High growth generates employment and incomes, and increased incomes generate demand and more jobs. Unfortunately, East Timor is not on an employment-­ generating growth track. Less than 30 percent of all employment is wage based, compared to an average of 43 percent in other parts of East Asia and the Pacific.1 In East Timor, around 80 percent of the population is dependent on subsistence agriculture for a living.2 The productivity of subsistence farming is low, but as we shall see, agriculture still has to absorb the overwhelming majority of new entrants into the labor force. The private modern sector is very small. In the cities, the informal sector has to bear the brunt of the migration from rural areas. The fertility rate in East Timor has been among the highest in the world, and it remains high, which means that the rate of population growth is high as well. Unless a modern sector is developed, the rapidly expanding population can hardly be absorbed in productive activities. East Timor had no industrial sector on the eve of independence. Excepting  World Bank (2013b), p. 2.  Joseph and Hamaguchi (2014), p. 63.

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the government bureaucracy, there was, in fact, not much of a modern sector at all. It was hardly a coincidence that neither the book edited by Hal Hill and João Saldanha on Timorese development challenges published in 2001 nor the report prepared by the World Bank the following year had anything to say about industrial development.3 There was simply nothing to write about. The appendix to the present chapter contains some simple calculations of how fast the modern sector must expand if employment outside the modern sector is not to continue to grow. If the modern sector is defined as either non-agriculture or the private sector, employment there must grow at 6.6 percent and 9.5 percent per annum, respectively, while if we want manufacturing to be the only growing sector, an employment expansion of 70 percent is required. The required output growth is more uncertain, since the results depend critically on what is assumed about the employment elasticity of the modern sector. (The figures are given in the appendix.) This simple exercise highlights the enormous challenge of modern sector job creation that East Timor is facing. The obstacles to high employment growth are many, as described in this chapter, which paints a picture of the employment situation and the state of the modern sector in East Timor. We discuss some of the difficulties facing firms and entrepreneurs and analyze some potential future development paths.

Population Growth In Chapter 2, we found that, around the time of independence, the fertility rate of East Timorese women was the highest in the world. It had been 4.4 children per woman in fertile age in the mid-1990s, but it had increased to an astonishing 7.8 around independence.4 Low-income countries, in general, tend to have high fertility rates, but what made East Timor different is that the rate was high in all income groups, which ­suggests that it might not decline when income increases.5 Between 1980 and 2015, the population of East Timor more than doubled.  Hill and Saldanha (2001), World Bank (2002).  National Statistics Directorate et al. (2010), p. 53. 5  World Bank (2008). 3 4

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Table 4.1  Attitudes toward childbearing among women and men 2003, 2009–10, and 2016 (percent of all women and men 15–49 years of age) Year

2003

2009–10

2016

Another child within two years Another child after two years of more No more children or sterilized Undecided

W: 32 M: n.a. W: 11 M: n.a. W: 27 M: n.a. W: 24 M: n.a.

W: 9 M: 15 W: 35 M: 39 W: 36 M: 23 W: 17 M: 20

W: 14 M: 23 W: 19 M: 14 W: 29 M: 26 W: 30 M: 30

Note: W women, M men; n.a. not available Sources: 2003: Ministry of Health et al. (2004), p. 116; 2009–10: National Statistics Directorate and ICF Macro (2010), p. 92; 2016: General Directorate of Statistics and ICF (2018), p. 83

The population growth rate, however, at long last, appears to be falling. The projected rate for 2015, based on the 2010 census figures, was 2.7 percent, but the recorded average rate for 2010–15 was not more than 2.1 percent, in comparison to 2.4 percent for 2004–10.6 The fertility rate declined to 5.7 in 2009–107 and to 4.2 in 2016.8 As it appears, the attitudes toward childbirths are changing. Table 4.1 compares three demographic and health surveys: those of 2003, 2009–10, and 2016. The most salient finding is the reduction of the percentage of women desiring another child within two years between the first and the second survey, a drop of more than twothirds. Table 4.1 also shows that men are generally more willing than women to have more children, but their willingness was reduced as well between 2009–10 and 2016. The perceived ideal family size has dropped from 5.7 children in 2003 to 5.0 in 2009–10, and 3.7 in 2016 for women and from 5.0 in 2009–10 to 3.3 for men (no figure is available for 2003).9 A recent projection estimates that the population of East Timor will be around 1.39 million in 2020 and 1.82 million in 2030—an increase with around 760,000 people in 20 years.10 The country is still in the early phase of the demographic transition. A number of factors interact so as to put a brake on the reduction of the fertility rate:  Statistics Timor-Leste (2010, 2015).  Population Reference Bureau (2010), based on the findings in National Statistics Directorate and ICF Macro (2010). 8  General Directorate of Statistics and ICF (2018), p. 69. 9  Ministry of Health et al. (2004), p. 121 (for 2003), General Directorate of Statistics and ICF (2018), p. 84 (for 2009–10 and 2016). 10  Hosgelen and Saikia (2016), p. 250. 6 7

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The rapid decrease is a positive sign, but studies have shown that the preference for large families has always been the tradition in Timor-Leste. Among the population, 98 percent identify as Roman Catholic. Family planning methods are used much less often compared with other countries in the region. Modern contraceptive prevalence was reported at 24 percent in 2016 … The legal age for marriage among girls is 16 years. The median age at marriage was 20.9 years in 2010, marking a decline since 2003 … Limited contraceptive use and early age at marriage, coupled with a short average duration of breastfeeding are the predominant factors contributing to high fertility rates in Timor-Leste.11

One consequence of the extreme fertility is that East Timor has a very young population. Table 4.2 shows the population in East Timor by age groups at various points between 2001 and 2016. The figures vary only marginally over time. Over 41 percent of the population was below 15 years of age in 2016, a high figure despite a gradual decrease from around 45.5 percent in 2001. East Timor had the seventh youngest population in the world in 2011, with a median age of 16.8 years, and the 17th youngest in 2018 with a median age of 17.4 years.12 The skewed age structure has economic implications. One is that the need for public provision of education is high, which puts heavy pressure on the government. Second, there are almost as many people outside the working age as inside (15–64 years of age),13 which calls for formal and informal safety nets.14 The situation is extreme in comparison with that of the neighboring countries where the ratio of people outside the working-­ age span to those within it is as low as 0.37 in Singapore, 0.39 in Thailand, 0.49 in Indonesia, and 0.55 on average in South Asia.15 The survey-based 2016 figure for East Timor is 0.90, and the census figure for 2015 is 0.81.16 A third, and perhaps more important, implication of the high population growth rate is the very high need for job creation. The working-age  UNDP (2018), p. 20.  Ibid., p. 2. 13  Ibid. 14  World Bank (2013b), p. iii. 15  UNDP (2018), p. 23. 16  General Directorate of Statistics et al. (2018), p. 20, Statistics Timor-Leste (2015). 11 12

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4  Population Growth and Job Creation: The Search… 

Table 4.2  Population structure by age groups 2001–16 (percent of the total population) Age

2001

2003

2007

2010

2013

2015

2016

0 ) while the other two prices are kept constant. The price increase serves to rotate the income-leisure tradeoff in Figure 5.6 anti-clockwise, since the value of the marginal product of labor in the production of cash crops increases. For any given labor effort in agriculture, household income will increase. At the same time, leisure will become more expensive in terms of income forgone. We have an income effect and a substitution effect, and it will not be possible to reach a general conclusion of whether more hours will be devoted to agriculture than before or the number of leisure hours will increase. However, if leisure is an inferior good, as hinted by Conroy, the number of hours worked will increase. This is a quite realistic case in a poor economy. Households have plenty of idle time. Should income possibilities improve, it is quite likely that the farm household prefers to work more and not less. Leisure does not even have to be inferior. It is enough that the substitution effect is strong enough to swamp the increased demand for leisure at given prices. What will happen to the production of the two goods? The first-order condition (5.7) may be rewritten as:

( pf / pm ) q f L = ( pc / pm ) q c L

(5.8)

Differentiating (5.4) yields:

dL f = − ( dL c + dL e )



(5.9)

and, from (5.8), allowing pc to change and keeping pm and pf constant (normalizing all three prices = 1, at the outset), we obtain

5  The Agricultural Sector 

q f LL dL f = q c LL dL c + q c L dpc



257

(5.10)



Combining (5.9) and (5.10) gives us

(

)

− q f LL + q c LL dL c = q c L dpc + q f LL dL e > 0



(5.11)

provided that dL e < 0, since dpc > 0, and the second derivatives of the production functions are negative. By the same token dL c must be positive. If the rise in the price of cash crops leads to less leisure, the production of these crops must increase. Even if dL e is positive, the production of cash crops may increase, if the price rise is large. The production of food crops may increase as well, in the case where the reduction of the hours devoted to leisure exceeds the increase in the number of hours devoted to cash crop production. Finally, what happens to the marketed surplus of food crops is uncertain. The on-farm demand for food will increase if the production of cash crops, and hence income, increases, since the relative price of food and purchased goods remains constant, but food production may also increase. In the same way as above, it may be demonstrated that an increase in the price of food will lead to increased food production, provided that leisure is reduced or provided that the increase in the price of food is large. What will happen to on-farm consumption and the marketed surplus of food is, however, not clear. When incomes rise in terms of the purchased goods, the farm households will demand more of both these goods and food at given relative prices. However, there is also a substitution effect due to the increase of the relative price of food. This serves to reduce the consumption of food and increase that of purchased goods. The net outcome of this is unclear and will depend on the income elasticity of demand for food products among the farm households themselves. Normally, we should expect Engel’s Law to operate, that is, when incomes rise, less and less of the income increase will be devoted to food consumption, so that the share of the household budget spent on food will decrease as income increases. In Timor-Leste, however, this is not necessarily the case. Various empirical investigations have shown that households experience a shortage of food between November and April,

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that is, for some four months every year (cf. Chapter 3). Hence, given the low-income level and the large share of the population living in poverty, it is far from certain that Engel’s Law is operative. It is not possible to rule out the possibility that an increase in the price of food will lead to a reduction of the marketed surplus.

Cheaper Purchased Goods Finally, we investigate whether a cheapening of the goods that the farm households purchase from the outside will serve as a stimulus to increased production and sales (in the case of food). Again, we differentiate (5.8) but this time holding pf and pc constant, while allowing pm to fall. This yields

q f LL dL f − q f L dp m = q c LL dL c − q c L dp m



(5.12)

In equilibrium, the value of the marginal product of labor in food production must equal that in cash crop production (remembering that we have normalized all prices = 1 at the outset). Hence the second terms on both sides of the equality sign in (5.12) are equal. What remains is

q f LL dL f = q c LL dL c

(5.13)



Either the production of food and cash crops will both increase or both decrease. Rewriting (5.9) as

dL e = − ( dL f + dL c )



(5.14)

shows that the crucial determinant here is what happens to leisure as purchased goods become cheaper. Since we have chosen the price of purchased goods as our numéraire, making these goods cheaper amounts to increasing farm household income. The income-leisure tradeoff in Figure 5.6 will rotate anti-clockwise, exactly when the price of cash crops or food increases. Once more, we have an income effect and a substitu-

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259

tion effect, and if the net outcome of these is to reduce leisure, the production possibility curve will shift outward and the production of both cash and food crops will increase. In the opposite case, it will fall. Again, what will happen to the marketed surplus of food crops is not certain. The same considerations as before apply.

The Importance of Outside Alternatives So far, we have considered farm households with no options to work outside of agriculture. The household survey carried out in 2001, h ­ owever, reported two significant findings: (1) among the individuals who were in the labor force, those belonging to households whose heads were limited to farm employment were considerably poorer than when the heads worked in wage employment, household business, or other outside ventures and (2) almost 70 percent of all Timorese belonged to families with no or only small possibilities of obtaining income from outside agriculture.216 This clearly points to the desirability of creating employment outside the agricultural sector. The conclusion is supported by later empirical evidence as well. The 2011 survey of coffee growers in Ermera stressed that ‘In the current rural economy, almost the only viable path out of extreme poverty is to find non-agricultural labour income’ and that ‘It appears as if the less poor households are able to achieve their higher incomes largely from labour income—roles such as teachers, drivers, security guards etc.’217 In the short run, outside employment could for example take the form of public works during the off-peak season in agriculture. In the longer run, a private sector will develop. Smallholders in the Third World often derive their income from a variety of sources, and this serves to increase  See Lundahl and Sjöholm (2005), p. 14.  Inder et al. (2013), pp. 22, 20. The effects of outside jobs on household income appear to be more uncertain when obtaining an outside job is connected with migration. Thus, Housen et al. (2012, pp. 6, 13) found that in a sample of 654 randomly selected households (4272 individuals) in Baucau, Ermera and Viqueque, 45 percent (294 households) had at least one migrant, but only 19 percent received a cash or in-kind remittance from the latter. 216 217

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E E1 D1 D

O

Labor

B C A

C1

B1

A1

Income

Fig. 5.7  An increase in the relative price of cash crops

their standard of living. This finding can easily be incorporated into our model. In Figure 5.7, the possibility of earning a given outside wage equal to w / pm , when measured in terms of purchased goods, has been incorporated. The household keeps working in agriculture until the value of the marginal product of labor there falls to the level given by the constant outside wage. At this point ( B) , the income-leisure curve becomes a straight line. Thereafter, the remaining hours worked are spent in wage employment, up to point C. The income from this must be added to that from farm work. Hence, the total income line will lie outside IJ and outside the budget line JK. The incorporation of outside employment changes our conclusions. Let us begin with the case of increased prices of cash crops. When pc increases, as before, the income-leisure tradeoff rotates anti-clockwise, from OA to OA1. The value of the marginal product increases in agriculture, and more hours will be worked there. Outside work will no longer begin at B (or D ) but at B1 (or D1 ). The total number of hours worked will, how-

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261

ever, decrease. Provided that leisure is not an inferior good, points C1 and E1 lie to the right of C and E, respectively, as long as some outside work takes place both before and after the price increase. The reason is that the substitution effect disappears. Leisure is no more expensive at the margin after the price increase than before, since the marginal valuation is given by the wage rate and not by the price of cash crops, and the wage rate does not change. All that remains is the income effect, and this makes for increased leisure. Income increases as well but as a result of the reallocation of work hours between wage labor and farm work. Should leisure on the other hand be inferior, C1 will be to the left of C and E1 to the left of E. Work will increase both inside and outside agriculture, at the expense of leisure. Turning to the allocation of work hours between cash and food crop production, (5.8) may now be rewritten as

( pf / pm ) q f L = ( pc / pm ) q c L = w / pm

(5.15)

where the wage rate is given in terms of purchased goods. Also, the available labor time has to be distributed among leisure, crop production, and outside work. This changes (5.4) to

L = Le + Lf + Lc + Lw

(5.16)



Differentiating (5.15) when pc changes and the other two prices and the wage rate in terms of purchased goods ( w / pm ) is held as constant p= pm = 1 at the outset) yields (with p= f c

q f LL dL f = q c LL dL c + q c L dpc = 0



(5.17)

or

(

)

dL c = − q c L / q c LL dp c > 0



(5.18)

and

dL f = 0



(5.19)

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The output of cash crops increases while that of food remains constant. Here, price incentives work unequivocally, and since all cash crops are sold in the market, outside sales will increase as well. The marketed surplus of foodstuffs, on the other hand, will be reduced. Farm household income has increased, and both food prices and the price of purchased goods remain constant. Hence, only the income effect remains. The demand for both food and purchased goods among farm households will increase, but food output remains constant. The marketed surplus of food must therefore shrink. The analysis is analogous for the case of increased food prices. There will be more leisure and larger food production, while cash crop production will remain constant. In this case, however, we don’t know with certainty what will happen to the marketed surplus of food. The price of the latter good increases and the substitution effect will be reintroduced. Possibly, on-farm consumption will be reduced, and more food will be sold outside. The conclusions will change also when the price of purchased goods is reduced (but w / pm remains constant). The income-leisure tradeoff again rotates anti-clockwise, more leisure is enjoyed, and less work takes place outside the farm and more inside. (5.12), in turn, becomes

q f LL dL f − q f L dp m = q c LL dL c − q c L dp m = 0



(5.20)

and

( = (q

) ) dp

dL c = q c L / q c LL dp m > 0 dL f

L f

/ q f LL

m

>0



(5.21) (5.22)

dpm < 0, so the production of both cash crops and food will increase. The farm households will increase their consumption of purchased goods and possibly, but not with certainty, that of food as well, since food becomes more expensive in terms of purchased goods. However, since the

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263

production of foodstuffs increases as well, the net result of the cheapening of purchased goods may be increased leisure, at the expense of outside work (provided that leisure is a superior good), increased on-farm consumption of food, and increased sales not only of cash crops but also of food.

6 Oil and the Resource Curse

As the previous chapters have demonstrated, East Timor faces a number of economic and social challenges—challenges that have long-term implications but which need to be dealt with as soon as possible. Fortunately, revenues from oil and gas have provided the means needed to launch development projects. These revenues amount to several billion US dollars and are invested in a petroleum fund. However, the international experience of resource revenue management is not encouraging. Many resource-rich countries do not manage to get onto a path of sustained development but remain poor. Resource dependence tends to hurt growth for a variety of reasons: volatile revenues, decreasing competitiveness of tradable goods, misconceived strategic investments, increased corruption, and institutional inefficiency. It frequently leads to economic and political decline.1 The problem seems to be particularly severe in post-conflict nations, where war and conflicts are twice as likely to occur in countries that are natural resource dependent as in other countries.2 The risk of falling prey to the resource curse is high in East Timor, con Auty (1993, 2001).  Joseph and Hamaguchi (2014), p. 41.

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sidering that it is one of the most oil-dependent countries in the world. Oil revenues are highly dependent on oil prices which vary from year to year, but oil revenues have in recent years accounted for close to 80 percent of GDP and more than 90 percent of government revenues and of total exports.3 East Timor needs to develop good economic policies to avoid the resource trap: to avoid that the availability of natural resources has a negative impact on economic growth and development. Fortunately, the economic literature is clear with respect to the main risks of natural resource dependence. The present chapter is devoted to a discussion of these risks in the East Timorese context.

 he East Timorese Oil Reserves: The Maritime T Border Issue While it has been known for a long time that oil and gas reserves exist in East Timor—oil companies showed their interest already at the beginning of the twentieth century4—the exact size of the gas and oil reserves of East Timor is not known. Hydrocarbon data from the time before the Indonesian occupation were available only in unpublished geological reports. The Portuguese attempted to map the existing oil reserves between 1957 and 1975.5 The focus was on on-shore basins along the south coast. Some twenty wells were drilled. The result was encouraging but the effort ground to a halt when the Portuguese left.6 Most of these reports were destroyed in 1999.7 New fieldwork was carried out during the Indonesian occupation in the 1980s and 1990s. However, because of the occupation and the East Timorese resistance, remote mountain areas had to be left out.8  International Monetary Fund (2013), p. 19, (2016).  Jannisa (1997), pp. 157–165 tells the story of oil explorations up to 1975. 5  Rau (2002), p. 12. 6  Ibid., p. 19. 7  ESCAP and UNDP (2003), p. 25. 8  Ibid. 3 4

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Nevertheless, it was clear that the potential for finding new hydrocarbon resources was good. Numerous oil and gas seeps were known to exist along the coast of the country.9 More careful mappings of East Timor’s natural resources conducted in 2002 and 2005 resulted in rich mineral and hydrocarbon resource discoveries.10 Oil and gas are found mainly on the south coast and in its immediate vicinity. No oil and gas deposits have been identified on the north coast of the country and no production takes place anywhere in mainland East Timor. The exploitation of the on-shore oil and gas reserves will not begin in the near future. So far, there have not been any indications that their size should be substantial. Instead, the focus has been on the offshore reserves. The Bayu-Undan field has dominated oil and gas extraction completely up to the present. Production there started in 2004 and the field has ­produced around 110,000 barrels of liquids per day.11 The Elang-Kakatua field was in operation in the early years after independence but it only contained small amounts of gas that lasted for just a few years, until 2006.12 Kitan, which was discovered in 2008 and began producing in 2011,13 was exhausted and shut down in 2015.14 Other minor fields, such as the Phoenix and Laminaria-Corallina fields, have either been very small and hence not developed or have been developed but have generated money to Australia rather than to East Timor, as discussed below. The Greater Sunrise field is a major field that was discovered already in 1974 but it remains undeveloped. As shown in Figure 6.1, it is located in the sea around 150 kilometers southeast of East Timor and 450 kilometers northwest of Darwin in Australia. Greater Sunrise is estimated to include less oil but substantially more gas than the Bayu-Undan field. Territorial disputes between East Timor and Australia have complicated the attempts to estimate East Timor’s oil reserves and have made it impossible to extract oil from all of the fields in the Timor Sea.15 ‘Since  Ibid., p. 19.  Ibid. 11  Timor Sea Office (2006). 12  La’o Hamutuk (2008), World Bank (2018d), p. 38. 13  A Barrel Full (2014). 14  La’o Hamutuk (2016c). 15  For a history of the boundary negotiations, see Schofield and Arsana (2019). 9

10

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Fig. 6.1  Maritime borders in the Timor Sea

the late 1960s, the delimitation of the seabed south of East Timor has been a matter of contention’, writes Joseph Nevins.16 In 1972, Indonesia and Australia agreed on a maritime boundary based on the Convention on the Continental Shelf, from 1958, rather than on the distance between countries.17 According to this convention, a country is entitled to all the resources contained within the underwater extension of its land mass. Australia could hence successfully argue that the Timor Trough was a natural boundary since it separated the continental shelf of Australia from that of Timor (and other parts of Indonesia). In practice, this meant that Australia obtained control of around 80 percent of the disputed territory and that the boundary that was agreed lay far closer to the Indonesian coast than to that of Australia.18 The chief Indonesian ­negotiator was  Nevins (2004), p. 3.  King (2002), p. 3, Nevins (2004), p. 3. 18  Nevins (2004), p. 3. 16 17

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criticized at home because of the deal, both because it put potential natural resources under Australian control and because the Indonesians lost traditional fishing grounds in the eastern part of the archipelago.19 Portugal, however, refused to accept the argument of a continental shelf and maintained that the natural boundary would be halfway between Australia and East Timor. Australia continued to insist that the natural solution would be to draw a straight line between the two ends of the boundary negotiated with Indonesia. While the maritime border between Australia and Indonesia had been determined both west of the West-East Timor border and east of the island of Timor, no agreement was reached on the portion corresponding to the extension of East Timor itself before the Indonesian occupation.20 A ‘gap’ remained on the map, a gap that came to be known as the Timor Gap.21 The occupation meant that an agreement on the Timor Gap was to be made between Indonesia and Australia. Negotiations started in 1979, after the Australian recognition of Indonesian sovereignty over East Timor. This time, however, Indonesia was not willing to place the boundary in accordance with Australia’s argument about continental shelves.22 International praxis had become less favorable to the Australian claim.23 The negotiations took ten years, before the Australian and Indonesian foreign ministers signed the Timor Gap Treaty, in 1989, in a plane flying over the seabed subject to negotiation. The area was divided into three zones, shown in Figure  6.1: Area A, a Zone of Cooperation for Joint Development, between Indonesia and Australia, where the two countries would share the revenues equally; Area B, to the south, to be controlled by Australia; and Area C, north of Area A, to be controlled by Indonesia, against a payment of 10 percent of Indonesia’s ‘contractors’ income tax’ to Australia.24  Balint (2005), p. 43.  Ibid. 21  Antunes (2002), p. 5. 22  Cleary (2007), p. 34. 23  Ibid., p.10. 24  Nevins (2004), p. 4. 19 20

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The independence of East Timor resurrected the maritime border issue. The Timorese claimed that they were not bound by any agreements that had been concluded by Indonesia during the occupation.25 By then, international law with respect to seabed boundaries had undergone substantial change. In 1982, the United Nations Convention of the Law of the Sea (UNCLOS) had been concluded. This convention, which was based on the principle of equidistance— the median line between two countries—entered into force in 1994, after having been ratified by 60 countries. Already during the protracted Indonesian-Australian negotiations, Indonesia had adhered to this principle while Australia had stuck to the continental shelf argument. It was precisely this disagreement that produced the Zone of Cooperation for Joint Development, where some of the potentially richest oil and gas deposits were found, leaving the final division to the future.26 A large number of similar cases around the world were settled after the agreement between Indonesia and Australia and they supported a boundary based on distance.27 In fact, out of 60 cases that at the time had been negotiated around the world, every single one except the agreement between Australia and Indonesia had been settled based on a median line.28 Also Australia had settled its maritime boundaries with other neighboring nations with the aid of the median line principle. (The 2004 boundary agreement with New Zealand was based on this principle.)29 It thus seemed that Australia’s case was very weak. This presumption was also borne out by the country’s previous decision to leave both the dispute resolution tribunal of the United Nations Convention on the Law of the Sea and the International Court of Justice, only two months before East Timor’s independence.30 These unilateral actions left East Timor without any possibility to have the case settled in an international court.  Schofield (2005), p. 263.  Nevins (2004), p. 5. 27  Dusevic (2004). 28  Cleary (2007), p. 125. 29  Leach (2016). 30  McBeth (2004). 25 26

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East Timor also claimed areas to the east and west of the Zone of Cooperation. The previous boundary took into account the location of some very small Indonesian islands. This may be against international law and East Timor protested against it.31 The Australian dilemma was twofold. An agreement based on the principle of a median boundary between East Timor and Australia would basically place all the oil and gas fields within East Timor’s territory, as shown by Figure 6.1. Australia was also afraid that by giving in to East Timor, it would open for Indonesian complaints and renegotiations of their agreement.32 East Timor, in turn, which at the time was heavily dependent on foreign aid, was in desperate need of revenue that could be spent for development purposes. It comes as no surprise, then, that East Timor endeavors to see the conflict resolved according to international standards and/or through international legal mechanisms, whereas Australia seeks to restrict the conflict to what may be considered the binary scale, an arena which is limited to Australia and East Timor in which differences are to be resolved by negotiation, a process that is infused with various forms of power, the distribution of which … greatly favors Australia.33

It was obvious that the negotiations between East Timor and Australia were going to be difficult. In 2001, the United Nations Transitional Administration in East Timor (UNTAET) signed a memorandum of understanding with Australia which secured the continuation of the work in the Zone of Cooperation, henceforth renamed the Joint Petroleum Development Area (JPDA).34 All of the area is north of the median line, in the area that was claimed by East Timor. In May 2002, a Timor Sea Treaty was substituted for the Timor Gap Treaty and in March 2003, it was ratified.35 East Timor got a more favorable agreement, receiving 90 percent of the oil revenues compared to the previous Indonesian share of  Bugalski (2004), pp. 291–292.  McBeth (2004), Nevins (2004), p. 5. It should be noted that the maritime boundary between Indonesia and East Timor also awaits settlement (Schofield and Strating 2018). 33  Nevins (2004), p. 13. 34  Antunes (2002), p. 13, Nevins (2004), p. 5. 35  Mercer (2004), p. 290. 31 32

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50 percent.36 However, as the treaty put 80 percent of Greater Sunrise within Australian waters and only 20 percent within the Joint Petroleum Development Area, the effective share of the revenue from this field accruing to East Timor was a mere 18 percent.37 In addition, East Timor agreed that the treaty would remain in force for 30 years, unless a permanent delimitation had been reached before then.38 Australia continued to take all, or the bulk of, the revenues from a number of fields that are in the immediate vicinity to the west or the east of the Joint Petroleum Development Area, such as the Corallina and Laminaria fields to the west. The country was accused of delaying settlement and in the meantime exhausting the reserves in areas claimed by East Timor.39 Australia also continued to issue exploration licenses in the disputed area.40 Both the agreement and José Ramos-Horta, who was instrumental in getting it in place, came under heavy criticism by the public and by other politicians in East Timor.41 Negotiations continued. A new agreement signed in 2006 came into force in 2007. This agreement focused on the Greater Sunrise field. The Timorese government was not pleased with the 2003 outcome and argued for a larger share. The 2006 agreement decreed that revenues from the Greater Sunrise field were to be equally divided between Australia and East Timor. Hence, the Timorese share of revenues increased from 18 percent to 50 percent. In return, East Timor agreed not to raise the maritime boundary question for 50 years.42 Both the 2003 and the 2006 agreements were thus temporary agreements in the sense that the maritime boundary remained unsettled. This, in the Australian context, was an anomaly, since the country had concluded maritime boundary agreements with all its other neighbors.43  República Democrática de Timor-Leste (2003), Mercer (2004), p. 302.  Schofield (2005), p. 263. 38  Nevins (2004), pp. 14–15. 39  Gavin (2004), Bugalski (2004), p. 293. 40  Bugalski (2004), p. 290. 41  Cleary (2007), p. 58–59. 42  La’o Hamutuk (2018), p. 2. 43  Schofield (2005), p. 262. 36 37

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The disputes continued, in spite of the agreement. In 2013, a former Australian intelligence officer claimed that the East Timorese ministers had had their offices bugged during the negotiations leading up to the 2006 agreement. The alleged espionage was carried out for commercial purposes, to enable Australia strike a better deal. Australia reacted to the accusations by raiding the homes of the former intelligence officer and the Australian legal office of the East Timor adviser in the negotiations, seizing papers and electronic files. The Timorese reacted strongly and the International Court of Justice ordered Australia to stop spying.44 East Timor took the incident as a reason for once again bringing up the issue of the maritime boundary, despite the previous agreement to let the issue rest, and initiated a case at the Permanent Court of Arbitration in the Hague to cancel the previous agreement with Australia. In late 2014, the legal action was, however, suspended and new talks between the two nations were initiated. In September 2017, Australia and East Timor announced that they had resolved their long-standing dispute and reached an agreement on the maritime boundary, which was set as the median line between the two countries. This was followed by an agreement on the sharing of the revenues from the Greater Sunrise field, in February 2018. Even so, however, one more major issue remains to be resolved: the issue of where the oil and gas extracted from the field should be processed. As we come back to in some detail below, the cornerstone of the East Timorese strategic development plan for 2011–30 is the construction of three petroleum-­based industrial clusters on the south coast of the island, including a pipeline from the Greater Sunrise field to Beaço. According to the 2018 agreement, East Timor will receive 80 percent of the revenues if the pipeline to be constructed runs to Darwin and 70 percent if it runs to East Timor.45 The final decision will involve negotiations with the oil companies in charge of exploiting the field: Woodside Petroleum and Osaka Gas, who are in favor  Allard (2014), McGrath (2014).  Schofield and Strating (2018), p. 3. The 2018 agreement also states that East Timor will receive all the remaining revenues from the Bayu-Undan field together with revenues from the Buffalo field, previously considered to be in the Australian territory. However, these revenues together will not amount to more than US$2 billion, ‘barely enough to cover one year of the state budget’ (Scheiner 2019, p. 95). 44 45

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of processing in Australia or on a floating facility at sea.46 The negotiations may become protracted—in May 2017, Woodside stated that it might only start development of Greater Sunrise after 202747—and in the worst case they will lead nowhere. As feared by Australia, the deal with East Timor has made Indonesia moving toward a re-opening of the discussion on the maritime boundary between these two countries.48

The Petroleum Fund Large and sudden inflows of oil revenues are problematic in the sense that it may be difficult to spend the money wisely—and oil revenues in East Timor have been sudden and very large. Figure 6.2 shows the share of oil in East Timor’s gross domestic product. It amounted to around 10 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Fig. 6.2  The share of oil in East Timor’s gross domestic product (2000–17, %) Sources: 2000–16: Ministry of Finance, General Directorate of Statistics (2017), p. 1; 2017: estimate by the IMF (2017), p. 31

 Hutt (2018). ConocoPhillips has pulled out, selling its share to East Timor (Reuters 2018), and Shell has sold its share to East Timor as well (McWilliam and Leach 2019, p. 12). 47  Gloystein and Paul (2018). 48  Massola (2018). 46

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­ ercent of GDP at the time of independence but exploded to around 60 p percent of GDP in 2004 and was between 75 and 85 percent of GDP in 2005–13. The share of oil has declined to around one-third GDP in recent years. The decline is not caused by strong growth in non-oil GDP but because of a decline in oil extraction and a decline in oil prices. Some economists argue that it may be better to leave the oil in the ground until the right conditions for an efficient spending of resources are met.49 This is, however, a very difficult policy to implement in countries with widespread poverty and a massive need for improvements in such areas as education, infrastructure and health. An alternative approach is to spread the use of the oil revenues over time, not using more than what can be efficiently spent. During the first post-independence years, the government of East Timor chose to pursue the latter policy and created a petroleum fund to handle the oil revenues in the meantime. The idea of setting up a petroleum fund was conceived in 2004, when it became clear that the revenues from oil and gas accruing to East Timor were going to be substantially higher than what was envisaged at the time of independence.50 Advice from international organizations played an important role in the design of the fund.51 An initial draft of how to establish it was followed by six months of public consultation, which led to some modifications of the original plans. The petroleum fund was established by law in 2005. The fund was set up with the Norwegian oil fund as the model, and Norwegian advisers provided the necessary knowledge and assistance. The regulatory framework surrounding the Timorese fund, however, explicitly addresses transparency and accountability issues, which the Norwegian oil fund does not, and this is therefore sometimes referred to as the ‘Norway Plus Model’.52 The Ministry of Planning and Finance is responsible for the fund and the operational management is entrusted to the central bank. A special steering committee has been set up to advice the ministry, and auditing is performed by an independent external agency.  Humphreys et al. (2007), p. 9.  Triwibowo and Miranda (2016), p. 2. 51  Ibid. 52  Drysdale (2005). 49 50

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The fund subscribes to the Santiago Principles for sovereign wealth funds, which include guidelines for operations, ethics, and transparency. For the petroleum fund to receive broad support from the population, transparency is necessary. A good regulatory framework is also needed to avoid the spread of serious corruption, as discussed below. The East Timorese framework looks good in an international comparison; it seems that the East Timor petroleum fund is doing very well in terms of both transparency and other important respects. A number of different agencies have ranked it among the most transparent funds in the world.53 The Peterson Institute of International Economics put East Timor’s petroleum fund in sixth place among 44 similar sovereign wealth funds,54 and the Natural Resource Governance Institute ranked the petroleum fund as number 6 among 34 funds in 2017.55 The petroleum fund provides guidelines for how the revenues of the fund may be invested and for how much may be withdrawn. It also establishes penalties for mismanagement and provides instructions for the establishment of a consultative council.56 Other parts of the regulatory framework include the Petroleum Act and the Petroleum Tax Law from July 2005. The Petroleum Fund Law states that all income from oil, including profits, royalties and taxes, shall be invested in the fund. The latter must be invested abroad and the returns are to be reinvested in the fund. The reason for the latter requirement is the desire to put less pressure on the domestic economy and enable a better risk diversification of the portfolio. Transfers from the fund have to be approved by the parliament and can only be spent via the government budget.57 The initial strategy was to invest only in foreign bond markets. However, in 2011, it was decided that a maximum of 50 percent could be invested in equities, in an attempt to increase the return on the fund. The equity portfolios are managed by international financial firms.58  Joseph and Hamaguchi (2014), p. 52.  McKechnie (2013), p. 5. 55  Natural Resource Governance Institute (2017), p. 20. 56  Democratic Republic of Timor-Leste (2005). 57  Drysdale (2005), p. 3. 58  McKechnie (2013), p. 2. 53 54

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The basic idea behind the fund was to guarantee that the expected oil revenues during the next two or three decades will be spent wisely, in the interest of the economic development of the country.59 To ensure intergenerational equity, the fund builds on the perpetual income concept: the real value of petroleum wealth should be kept constant over time. The permanent income of the fund may be spent each year, but anything in excess of that should be added to the fund. Hence, only the interest on the sum of current assets and the present value of expected future revenues can be spent every year. In East Timor, this is referred to as the estimated sustainable income (ESI): the maximum amount that can be spent by the government each year. The withdrawal from the fund is limited to 3 percent of the current value of the oil fund plus the expected future revenues.60 This limit on withdrawals was introduced as a way to secure revenues even after the oil sources have been exhausted. However, the maximum spending legislation is not binding. Excess withdrawals from the petroleum fund are allowed under special circumstances and have been made every year since 2008, except 2013. It should be noted that it is very difficult to produce an adequate estimate of the sustainable income. Most resource-rich countries have failed to make such predictions of future incomes.61 Governments tend to be too optimistic about future income flows and therefore overspend.62 The establishment of the petroleum fund reduces the risk of abuses but does not remove it. Given the large assets in the fund and the low level of development in East Timor, it is tempting to increase withdrawals. Excess withdrawals require approval by the parliament, but this is of course no guarantee against future misuse of the fund. Countries like Oman and Venezuela have had similar types of stabilization funds and have made frequent changes of the rules, with negative effects on the economy.63 The value of the oil fund hence depends on a combination of factors: the amount of oil extracted, the price of oil, the return on international investments, and the withdrawal from the fund. Its value has grown substantially  Ministry of Planning and Finance (2004c).  International Monetary Fund (2013), p. 19. 61  Auty (1993), p. 25. 62  Drysdale (2009), p. 24. 63  International Monetary Fund (2005b), p. 22. 59 60

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over time. Figure 6.3 shows that it increased from US$370 million in 2005, to almost 7 billion in 2010, and 16.5 billion at the end of 2014, that is, with a staggering 4370 percent between 2005 and 2014. The fund will presumably not display such spectacular growth in the future. On the contrary, in 2015, its value shrank for the first time because of lower oil prices and negative returns on the investments, and it continued to decline in 2016. The size of the fund increased somewhat in 2017, mainly due to high returns on the investments which contributed to almost 80 percent of the total fund revenues that year, compared to 20 percent from petroleum revenues.64 Then it declined again in 2018, now with around US$1 billion or 6 percent of the 2017 value. The market value of the fund amounted to US$16.7 billion at the end of February 2019.65 The overall impression is that the fund has been stable at around US$16 billion since 2014. These revenues, however, show a strong negative trend—an indication that the petroleum fund may decline in the future. They peaked at around 18 16 14 12 10 8 6 4 2 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fig. 6.3  Market value of the petroleum fund, 2005–17 (billion US dollars) Sources: 2005–17: Ministry of Finance (2018), Figure 3, p. 5; 2018: Banco Central de Timor-Leste (2018), p. 10

 Ministry of Finance (2018), p. 5.  Banco Central de Timor-Leste (2019).

64 65

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US$3.5 billion in 2012, decreased to 3 billion in 2013, and continued to decline substantially, to 1.8 billion, in 2014, 1 billion in 2015, and only 220 million in 2016.66 Revenues in 2016 were only 6 percent of the peak in 2013 and lower than in any year after 2005. They, however, increased again in 2017, to 422 million.67 The difficulty of estimating future oil revenues, and hence the size of the petroleum fund, creates uncertainty with respect to the amount of resources available for the government. Past estimates have often been completely mistaken. For example, the estimated future oil revenues in 2002 were US$84 million—no more than a small fraction of the realized figure.68 Accordingly, the government’s estimate of expected future oil incomes increased with US$2 billion between 2005 and 2006.69 One of the most difficult components in the estimates is the highly volatile oil price. Figure 6.4 shows the oil prices between 1999 and 2018. The 140 120 100 80 60 40 20 0

Fig. 6.4  The monthly oil spot price, 2001–18 (US dollars per barrel) Source: US Energy Information Administration. https://www.eia.gov/dnav/pet/ hist/LeafHandler.ashx?n=PET&s=RBRTE&f=D. Downloaded 1 November 2018  Ministry of Finance (2018), p. 6.  Ibid., p. 7. 68  Drysdale (2009), p. 74. 69  Ibid. 66 67

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daily oil spot prices of North Sea oil (Brent), the most commonly used measure of world oil prices, varied between US$16.5 per barrel in November 2001 and almost US$144 in July 2008, a 770 percent increase in seven years.70 In the preparation of the petroleum fund and in the initial estimations of future revenues the assumed price was US$27 per barrel.71 Figure 6.4, however, shows that the actual price has been higher than so throughout the period. This is a major reason why actual revenues were much higher than what was expected during the early years of the fund. The large price increase up to 2008 coincided with the introduction of a more expansionist government expenditure policy in 2007. The oil price jumped from around US$60 in 2006 to a peak of US$144 in 2008. It is possible that this sharp increase affected the government’s perception of future incomes and contributed to the sharp increase in government consumption and investment reported in Chapter 3. However, the price declined to around US$40 per barrel during the global financial crisis in 2008. New high prices from 2011 to 2014 could not be sustained. Needless to say, in this situation, predictions of future oil prices, and hence government resources, are difficult to make and different observers make very different forecasts.72

How Long Will the Petroleum Fund Last? All of East Timor’s oil and gas production takes place in the Joint Petroleum Development Area. The only field which is currently exploited is the Bayu-Undan field, where production started in April 2004. Bayu-­ Undan is, however, about to dry up: it could be exhausted already within five years, several years earlier than what was thought just a few years ago.73 The only other producing field, Kitan, ended production in 2015.74  The price of Brent is very similar to the price of West Texas Intermediate crude oil (WTI Crude) but differs from the price of oil from the Middle East (Dubai Crude Oil). 71  Ministry of Planning and Finance (2004c), p. 7. 72  Knoema (2016). 73  Asian Development Bank (2014). 74  La’o Hamutuk (2016c). 70

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High hopes are placed on the Greater Sunrise field, which, for reasons that we have already discussed, has not been exploited. The question is how much it will eventually contribute to the state budget. Even if Greater Sunrise will start to generate gas and oil in the next few years, it has been estimated that all extraction from the Joint Petroleum Development Area may be finished sometime between 2020 and 2024.75 The government has for a number of years withdrawn resources from the petroleum fund well in excess of the estimated sustainable income, as seen in Figure 6.5. (Positive figures indicate that the withdrawal was in excess of the ESI and negative figures that it was below the ESI.) The withdrawals amounted to on average US$430 million above this level during 2010–17. A ‘Yellow Road framework’ was adopted in 2013, in order to reduce public expenditures and put withdrawals more in line with the ESI, to ensure that the petroleum fund will last longer. It managed to lower the excess withdrawal temporarily, as shown in Figure 6.5. However, the approved budget framework for 2014–18 is above the Yellow Road ceiling, with very large 1000 800 600 400 200 0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-200 Fig. 6.5  Excess withdrawals from the petroleum fund (million US dollars) Note: Negative (positive) figures indicate that the withdrawal was lower (higher) than the ESI Source: Ministry of Finance (2018), Figure 9, p. 8 75

 International Monetary Fund (2013), p. 19, Scheiner (2015), p. 88.

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excess withdrawals in 2015–17. Part of the excess was caused by low oil prices and declining oil and gas production, as discussed above, which contributed to a lower ESI. The ESI declined from US$787 million in 2013 to 482 million in 2017.76 However, a transfer of US$982 million from the fund to the state budget took place in 2018, which shows that the excess withdrawals continue.77 The petroleum fund will last longer if withdrawals decrease and are balanced by higher alternative public revenues. There seems to be some scope for this. East Timor has the third lowest total tax rate in the world: around one-quarter of the world average.78 This is partly a result of a reform carried out in 2008, when taxes were cut in an attempt to attract foreign investment. (Since very few foreign firms have decided to invest in East Timor even after the tax cut, the policy must, however, be regarded as a failure.) Altogether, the proven oil and gas reserves are about to dry up and are already at a low level. On a per capita basis they are much lower than in neighboring Australia and Brunei and they will not last as long as the reserves in Indonesia.79 One forecast of future oil incomes, based on optimistic assumptions with respect to oil prices, development of the Greater Sunrise field, government expenditures, and returns on the petroleum fund investments, suggests that ‘By 2026, before today’s infants finish secondary school, the Fund will be used up, and state spending will have to be slashed by more than two-thirds from desired levels …’80 If new oil deposits are discovered in the future it would change the current predictions of how long the petroleum fund can last. Many observers are, however, pessimistic with respect to the possibilities of finding more substantial amounts of oil and gas.81 It seems very likely that the days of large oil incomes are about to be over. If so, East Timor will face a major challenge.  Ministry of Finance (2018), p.8.  Banco Central de Timor-Leste (2018), p. 9. 78  Scheiner (2015), p. 78. 79  Ibid. p. 11 80  Scheiner (2015), p. 92. 81  Asian Development Bank (2016), p. 2, Scheiner (2015). 76 77

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The Resource Curse: Dutch Disease Ceteris paribus, it is of course better to have more natural resources than less. The existence of oil and gas reserves is, however, not an unmitigated blessing. Natural resources are sometimes seen as a curse rather than a promise. This view is based on the weak economic performance of many resource-rich nations. Countries like Nigeria, Zambia, Sierra Leone, Angola, Venezuela, and Guyana are resource rich but have still displayed slow growth over the last decades and most of them remain poor in terms of GDP per capita. They have not been successful in lifting the population out of poverty in spite of their wealth of resources.82 All too often, natural resources seem to be negative for economic development. One indication of this is that around 60 percent of the world’s poorest people live in resource-rich countries.83 In this context, oil tends to be particularly problematic. Oil-dependent countries have performed economically worse as a group than other countries.84 Resource-rich countries not only tend to have slow economic growth but also more unequal income distribution, less democratic regimes, and more corruption.85 These findings may sound surprising, but while rich-­ resource endowments often contributed to industrialization and growth during the late nineteenth century, up to World War I, during the ‘golden age’ of the Heckscher-Ohlin type of trade—primary products against manufactures86—such endowments may also lead to various problems. The World Bank makes a distinction between economic and institutional effects.87 We analyze both of these in turn. One economic effect is the so-called Dutch Disease: increased revenues from primary exports, like oil and gas, shift resources away from sectors with high growth potential to non-tradable sectors with lower growth potential.88 In an economy which has its own currency, this is due to two different mechanisms. In the first place, the domestic currency will appreciate as sales of oil and gas  Auty (1993, 2001), Sachs and Warner (1995, 1999), Mehlum et al. (2006a, b).  Peck and Chayes (2015), p. 5. 84  Sachs and Warner (1995), p. 11; Karl and Gary (2004), p. 35. 85  Palley (2003). 86  Findlay and Lundahl (2017), Chapters 9–10. 87  World Bank (2005c), p. 304. 88  Corden and Neary (1982). 82 83

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lead to an inflow of foreign currency. The domestic cost level then rises in terms of foreign currency and it becomes harder to export goods and services other than those which led to the original inflow. The inflow of foreign currency also increases the money supply and with that domestic demand and hence the price of non-traded goods. The price of traded goods, on the other hand, will remain constant since this is determined in the world market. Production factors are then pulled out of the traded goods sectors and into activities producing non-traded goods. Hence, traditional production and exports are easily hurt by large endowments of natural resources. This is borne out by evidence from countries like Algeria, Colombia, Ecuador, Nigeria, Trinidad and Tobago, and Venezuela.89 The typical negative effect on agriculture-based industries, in turn, tends to have negative distributional consequences. Jobs are lost in agriculture and labor-intensive manufacturing while few new jobs are created in the capital-intensive resource-based industry. In addition, increased prices of non-tradable goods tend to hurt poor people by further reducing their real incomes. Poor resource-rich countries with poor institutions, such as East Timor, are the ones most likely to be caught in the resource curse trap.90 The Timorese government has been aware of the potential negative aspects ever since it became clear that large oil revenues were about to materialize. According to a report used as a background paper for consultations with the public in 2004: Significant petroleum resources can be seen as a gift from mother nature to Timor-Leste, a gift which has the potential to improve the standards of living of its people. However, even if the petroleum wealth is managed wisely, it is also important to bear in mind that petroleum activities can make the economy more vulnerable to instabilities and cost pressures. Spending of petroleum revenues normally leads to structural changes in the economy, where some groups lose out (such as agriculture and manufacturing industry). The presence of petroleum wealth also tends to contribute to a degree of ‘laziness’, in the sense that there is often less attention paid to the continuous need to reform work practices in the economy.91  Peck and Chayes (2015), p. 4.  Bulte et al. (2005), p. 1039. 91  Ministry of Planning and Finance (2004c), p. 8. 89 90

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The quotation refers to the Dutch Disease effect. Its two parts, the appreciation of the currency and the increased price level, are both negative for the non-oil-tradable sector. Since the currency of East Timor is the US dollar, in the Timorese case, the former effect disappears. The second part, however, remains: an increased money supply, increased demand, and higher prices of non-traded goods. The competitiveness of traded goods is eroded when wages and input prices increase but output prices remain at the world level. Alternatively, as in the case of East Timor, it becomes difficult for sectors that attempt to establish themselves in the export market to compete for resources. Thus, there is a risk that large oil revenues may act as an obstacle to the development of non-traditional exports and in addition create difficulties for the traditional coffee exports. This seems to be a real threat, as seen by East Timor’s already relatively high prices and wages.92 The introduction of an independent currency and a flexible exchange rate could facilitate a more competitive environment but would presumably require a substantial capacity improvement within the East Timorese administration,93 and, as we saw in Chapter 4, the exchange rate is far from the only constraint on industrial development in East Timor. A national currency would furthermore introduce the possibility of Dutch Disease through currency appreciation. Another problem with resource-based revenues is that they tend to be ‘windfall gains’. Such revenues can constrain efforts to develop other parts of the economy. Firms and individuals become more focused on lobbying for economic rents than on making efficient use of their productive resources.94 The efforts devoted to organizing production of goods and services are weak. This may hamper long-term growth since the generation of incomes based on a natural resource can take place without creating linkages to the rest of the economy.95 One implication is that resource-rich countries tend to have less sophisticated economies than other countries at the same income level. They may also fail to invest in for example education—investments that are necessary for a more diversified economy—because of the ‘easy’ incomes generated by their  See the discussion in Chapter 5.  International Monetary Fund (2013), p. 13. 94  Lane and Tornell (1995), Mehlum et al. (2006a, b). 95  Humphreys et al. (2007), p. 4. 92 93

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natural resources.96 Such neglect constrains the economic development and poses a serious threat to the country, should the natural resources dry up. Thirdly, prices of natural resources tend to be volatile, as indicated by Figure 6.3. Volatility has negative effects on economic development. The boom and bust cycle of resource prices tends to make a country overspend during the boom period, and because of the uncertainties, it also tends to lead to high interest rates and thereby to a reduction of investments in other sectors of the economy.97

Tasi Mane The oil problem that has been most widely discussed in East Timor is overspending by the government. As discussed above, the spending policy was relatively prudent before the political turmoil in 2006, but from 2007, expenditures have expanded rapidly. Most of East Timor’s non-oil GDP is generated by government spending on public administration, procurement, and infrastructure building. For the time being, the growth of the non-oil GDP stands and falls with public spending.98 Whether the increased expenditures will lead to long-term development is, however, unclear. Oil extraction is in itself likely to generate relatively weak linkage effects that can serve to encourage the creation of a modern sector in East Timor. The oil sector’s purchases of domestic inputs are very small and few local citizens are employed there. The only linkage from the oil industry to the domestic East Timorese economy goes through the revenues that accrue to the government. This has been an issue of concern for the latter, which has identified the oil industry, together with tourism and agriculture, as a strategic industry to be promoted.99 In order to increase the employment effect of oil extraction, the government endeavors to make the oil field operators agree to the location of refineries on the south coast of East Timor. The idea is that these refiner Gylfason (2001).  Hausmann and Rigobon (2002). 98  Scheiner (2015), p. 74. 99  Asian Development Bank (2016), p. 3. 96 97

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ies would increase the amount of linkages with the local economy. The strategic development plan 2011–30 points to the petroleum sector as ‘a key pillar of our future development’.100 A national petroleum company, Timor Gas and Petroleum E.P. (Timor GAP), has been established and the plan envisages the development of three industrial clusters related to oil and gas from Suai to Beaço on the south coast, the so-called Tasi Mane (Male Sea) project, a megaproject that extends over a period of two decades. The first cluster is the Suai supply base cluster, an entry point for materials and equipment and provision of services and logistics. The second is the Betano refinery and petrochemical industry cluster—an industrial park with refinery and petrochemical industries—and the third is the Beaço liquefied natural gas (LNG) plant cluster.101 The Tasi Mane project also includes a highway along the coast, linking the three clusters, a new harbor, and an airport. The project has been strongly supported by Xanana Gusmão, both during his time as prime minister and later as minister for planning and strategic investment.102 In June 2015, a South Korean consortium, led by Hyundai Engineering and Construction, the country’s largest builder, was awarded a US$719 million contract for the Suai project,103 but in October, the East Timorese audit chamber (which monitors the government’s budget expenditure) refused to grant approval for the contract because of ‘non-­compliance with basic standards in force in Timor-Leste’.104 The government decided to appeal the decision, but before the appeal was presented, Hyundai decided to pull out of the venture, in June 2016.105 A year later, the court of appeal overturned the decision of the audit chamber,106 but the problem of finding willing and able developers remains. The Tasi Mane project contains a number of dubious features. The ‘flagship programme of Timor-Leste’s development strategy’107 therefore  República Democrática de Timor-Leste (2011a), p.138.  Ibid., pp. 140–141, Palatino (2011), Timor Gap (2016). 102  Cryan (2015), p. 5, Gusmão (2018). 103  Dias (2015), Macauhub (2015). 104  Oil & Gas Asia (n.d.). 105  Reynolds (2016). 106  La’o Hamutuk (2016b). 107  Palatino (2011). 100 101

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met with strong criticism from the very beginning. ‘The Tasi Mane project could be a multi-billion white elephant’, wrote the independent NGO watchdog La’o Hamutuk. ‘We remain dubious about the potential return on this “investment,” which may have no offshore operations to supply. Bayu-Undan will probably be supplied from Australia until it runs dry … At present, no oil companies plan to drill more wells in the nearby Timor Sea …’108 The distance from the oil fields to East Timor is much shorter than that to Darwin. The establishment of refineries in East Timor would, however, mean that the gas pipeline has to cross the very deep Timor Trough, and this is certain to create substantial technical problems. The economic return on such an investment is also uncertain. The potential for creating linkages and jobs for East Timorese nationals109 has to be put against the likelihood that the refinery project becomes a project that will not achieve international competitiveness and will not function without large government subsidies. No proper cost-benefit analysis of the project has been undertaken and both petroleum experts and economists are questioning its viability.110 Commenting on the 2017 state budget, La’o Hamutuk had the following to say about Tasi Mane: Since it started, La’o Hamutuk has seen this project as wasting the people’s money for the benefit of foreign contractors and Timor-Leste’s petroleum agencies. We have often asked TimorGAP, E.P., as the owner of this project, to produce evidence that it is commercially viable to the public, even though they continue to ask Parliament to approve money for both it and for their operational costs, but they refuse to do so.111

La’o Hamutuk pointed out that ‘the desired gas pipeline from Greater Sunrise and LNG plant in Beaçu … may never happen as Woodside and its partners who hold the Sunrise contract continue to insist on a floating LNG plant.’112 The organization has recommended that the entire  La’o Hamutuk (2011), p. 12.  It is far from certain that those affected directly by the project understand its possible implications for them (cf. Bovensiepen et al. 2016). For an analysis of some of the negative effects, see Cryan (2015b). 110  Dias (2015), Strating (2017). 111  La’o Hamutuk (2016c). 112  Ibid., p. 13. 108 109

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project be shelfed until it is certain that the Greater Sunrise pipeline will actually run to East Timor.113 The Economist Intelligence Unit has called the project ‘a substantial gamble with the country’s financial resources as oil and gas resources dwindle and spending in other vital areas [education, health and agriculture] is cut’,114 and La’o Hamutuk has voiced concern that the total cost of the project may ascend to over US$10 billion.115 Also, as we pointed out in Chapter 4, in December 2015, President Taur Matan Ruak (unsuccessfully) vetoed the 2016 budget because of its high opportunity cost: it allocated too much money to megaprojects like Tasi Mane instead of spending on agriculture, education, and health. Two years before, on the occasion of promulgation of the state budget, he had called for ‘a public explanation for allocating these funds, in particular when compared with other expenses with obvious social utility. For example, two kilometers of highway are likely to cost $20 million and the budget allocated to agriculture is about $25 million’.116 International organizations are worried as well. In December 2017, the IMF noted both the lack of economic analysis and the neglect of the social sectors: Frontloading of capital spending to close Timor-Leste’s large infrastructure gap should be moderated and prioritized, in line with its scarce resources and capacity constraints. It should also be in line with the reforms of [the] public investment management system. Public investment should be prioritized with a focus on high-return projects determined through rigorous investment appraisal, cost-benefit analysis, and risk assessments. Recurrent spending should also be rationalized, while health and education spending need to be protected and the efficiency of public spending improved.117

The spending on infrastructure is so large that it has forced East Timor to borrow money abroad. The country has had virtually no public debt until very recently, a feature that is uncommon in developing countries.  Dias (2015).  The Economist Intelligence Unit (2015b). 115  La’o Hamutuk (2018), p. 11. 116  Quoted by La’o Hamutk (2016b). 117  International Monetary Fund (2017), p. 2. 113 114

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However, the 2017 state budget projects are spending almost US$1.2 billion of borrowed money between 2017 and 2021.118 East Timor’s estimated public debt thus increased from 3 percent of GDP in 2017 to 10.6 percent in 2018—still an internationally very low figure119—but this does not mean that there is no reason to worry. In the first place, together with the upgrading of the Dili airport, the Suai supply base and the south coast highway account for more than 900 million of the 2017–21 loans, all projects with highly uncertain benefits. Calculations performed by La’o Hamutuk indicate that in the worst case, as much as one-fourth of all state revenue will have to be devoted to loan payments by 2026–37 if the intentions spelled out in the 2017 budget are realized. Secondly, the increased planned borrowing does not correspond to any reduction of planned withdrawals from the petroleum fund. On the contrary, the 2017 budget projected withdrawals of almost four times the estimated sustainable income from 2018 to 2021.120 The situation is far from convincing: The main justification given for borrowing is that Timor-Leste needs to build infrastructure, but it has limited financial resources to do so. Therefore, rather than continuing to withdraw too much from the Petroleum Fund (PF) and reducing its sustainability, loan proponents in the Government and lender agencies argue that borrowing can reduce these withdrawals while allowing the necessary infrastructure spending to continue.121 However, the government is not reducing its withdrawals from the PF as it borrows more; rather, it is planning to continue withdrawing unsustainable amounts from the PF every year. Indeed, the 2017 state budget projects to withdraw almost four times the estimated sustainable income from 2018 to 2021; this will reduce the PF balance by almost one-­quarter by the end of 2021, from today’s 16.8 billion to 12.8 billion. It could fall even further if PF investments do not earn the expected returns (returns were negative in 2015 and 26 percent lower than projected in 2016) or if domes La’o Hamutuk (2017b). To this comes US$85 of loans already signed in 2017.  International Monetary Fund (2017), p. 4. 120  La’o Hamutuk (2017b). 121  The loans obtained are loans from multilateral agencies and foreign governments on concessionary interest rates. 118 119

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tic revenues do not increase as quickly as the Government hopes. La’o Hamutuk estimates that without major changes to the Government’s current course, the PF would be entirely depleted by 2028.122

Managing the Resource Curse All resource-rich countries are not doomed to fail. Some have successfully combined large revenues from natural resources with high and sustainable economic growth and social development, by not putting all the eggs in the same basket. To learn from the experience of these successful ­countries is of obvious interest to East Timor. One of the prime examples is Indonesia, which experienced a resource boom in the 1970s and managed to combine it with economic development much better than many other nations.123 Indonesia is Southeast Asia’s largest oil producer. The country faced dramatically increased revenues after the oil boom in 1974. Oil revenues as a share of total government revenues increased from 21 percent in 1971 to 48 percent in 1974 and to a peak of 62 percent in 1981.124 The government revenue from oil came mainly from taxes on foreign oil producers operating in Indonesia.125 The Indonesian oil boom years were characterized by fast economic expansion: GDP growth between 1973 and 1981 averaged 7.5 percent annually.126 As a result, the Indonesian population experienced a drastic increase in incomes in just a few decades. Nigeria and Indonesia were at about the same per capita income level and shared the same dependence on oil in the 1970s. Thirty years later, per capita income in Indonesia was about four times as high as that of Nigeria.127 The high Indonesian growth was accompanied by low inflation and a prudent fiscal policy which managed to balance the large inflows of oil  La’o Hamutuk (2017b).  World Bank (2005d), pp. 306–307. 124  Hill (1996), p. 46. 125  Thee (2002), p. 207. 126  Hill (1996), p. 21. 127  Humphreys et al. (2007), p. 1. 122 123

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revenues. The government did not fall into the trap of overspending on prestige projects.128 Indonesian economic growth was stimulated by a strong expansion of agriculture and manufacturing.129 This was an outcome of the explicit strategy of using the country’s oil revenues to improve the competitiveness of the tradable sectors. Considerable resources were put into agriculture to boost rice production. Emphasis was put on the use of high-yield rice varieties, fertilizers, and irrigation, with the result that Indonesia became self-sufficient in rice production by the mid-1980s.130 As a result, the decline of oil prices and oil revenues in the early 1980s could be balanced by a steady growth in agriculture and by a subsequent strong expansion of manufacturing.131 The government also pursued policies that made broad segments of the population benefit from the increased revenues. Efforts were made to expand the provision of health and basic education after the oil boom132 and substantial resources were used in infrastructure projects in more backward parts of the archipelago through the Inpres program.133 Why did Indonesia succeeded in pursuing a sound economic policy when so many other resource-rich countries failed? An important reason is the strong and unique role of economists or ‘technocrats’ in Indonesian policymaking since the launching of the ‘New Order’ in 1966. The economy was close to a collapse during the last years of the Sukarno regime in the early 1960s, and substantial policy changes were needed to turn the deteriorating situation around. When Suharto took over power in 1966,

 Usui (1997).  Manufacturing accounted for about 22 percent of total GDP growth during the oil boom, followed by trade with 17 percent, agriculture with 16 percent, and public administration with 13 percent (see Hill 1996, Table 2.1). 130  Booth (1988). The growth of industry and agriculture was also supported by currency devaluations in the 1970s and 1980s—a measure not available to East Timor—that partly offset the appreciation of the real exchange rate caused by large oil revenues (Usui 1997, p. 158). Hence, Indonesia managed to avoid decreased competitiveness of the country’s tradable sectors caused by Dutch Disease. 131  Tabor (1992), p.161, Hill (1996), chapters 7–8. 132  Sjöholm (2005), p. 43, Thee (2002), p. 203. 133  Sjöholm (2002), p. 384. Inpres—Instruksi Presiden (Presidential Instruction). 128 129

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he relied to a large extent on advice from the ‘Berkeley Mafia’134 in the formulation of a new set of economic policies.135 While it may be difficult to use the Indonesian example to prescribe direct policies for East Timor, it does indicate that oil revenues create an opportunity to increase the competitiveness of tradable sectors and improve social development. In particular, considering the importance of agriculture for the overwhelming majority of the population of East Timor, it would be wise to follow the Indonesian example of channeling resources into measures which benefit this sector, as discussed in Chapter 5.

The Role of Institutions Let us next turn to the institutional problems related to natural resources. The lack of administrative capacity increases the risk of poor investment decisions. East Timor does not have a group of highly qualified civil servants. Such groups played crucial roles in the making of public policies in many other successful resource-rich countries. Chile had its ‘Chicago Boys’, Indonesia its ‘Berkeley Mafia’, and Malaysia its ‘Backroom Mafia’. All these groups of well-educated and competent high-level bureaucrats were crucial in shaping policies that made it possible to avoid the resource curse.136 The situation in East Timor is quite different: After the restoration of independence, many resistance leaders became leaders of public sector institutions, not because of their educational qualifications, professional experience, and knowledge of how to run a democratic institution properly, but because of their past credentials during the resistance era. Some tried to adjust to their new roles and responsibilities, while others, retaining the mindset of the resistance period, tended to overlook procedural rules and legal standards and instead use their discretionary power.137  Several of its members had pursued post-graduate studies at the University of California, Berkeley. 135  Thee (2002), pp. 194–196. 136  Stevens (2005), Drysdale (2009), pp. 26–27. 137  Guterres (2017). 134

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The use of discretionary power is dangerous in a context where the giving and receiving of gifts is an important part of the social culture. In East Timor, gift giving is an accepted way of thanking people for help and favors. While it may work in the traditional setting, once the same culture starts to pervade the modern administrative and political system, it easily opens the door for grabbing and outright corruption. The pervasiveness of family connections and networks within Timorese society … tends to create a lax attitude, with people somehow becoming tolerant of corrupt practices. When someone holds a higher office, be it in the public or private sector, there is a strongly felt obligation to take care of ‘our family’, ‘our networks’, or look after ‘our people’ … Decision-­makers indirectly favoring one potential contractor over the others in a tendering process often evince this sentiment. Further, potential contractors, highlevel officers, and junior staff, all of whom try to benefit from corruption, share in the ill-gotten gain. For example, as a kickback from a particular tender award from Timorese or foreign companies, high-level officers may get fancy gifts for assisting with administrative work.138

Resource endowments may ruin institutions and increase rent seeking. A number of studies have demonstrated that resource-rich countries tend to have poor institutions and that these poor institutions explain almost all of the poor growth performance.139 Windfall profits from natural resources tend to corrupt the bureaucracy by shifting its focus away from delivering public services to fighting for control over the rents.140 Oil is more related to corruption than most other lines of business, with the main exception of arms deals.141 It should also be noted that even when oil-rich countries attempt to provide for example health and education to the population, the results tend to be relatively poor because of the lack of rigor and perseverance in the implementation and the control of costs and outcomes.142 It is, however, not necessarily the case that the existence of natural resource rents causes deterioration of institutions.143 An alternative  Ibid.  See World Bank (2005b), p. 306, for a summary of the literature. 140  Sala-i-Martin and Subramanian (2003). 141  Gutierrez (2003). 142  Karl and Gary (2004), p. 36. 143  Sachs and Warner (1995). 138 139

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hypothesis—consistent with the available empirical evidence—is that it is the quality of the existing institutions that determines whether the impact of resource is beneficial or harmful for the economy. In two interesting articles, the Norwegian economists Halvor Mehlum, Karl Moene, and Ragnar Torvik demonstrate how in countries with good institutions resource abundance attracts entrepreneurs into productive activities, while weak institutions make them concentrate on rent seeking.144 Rent seeking outside the productive economy pays off when institutions are bad: dysfunctional democracies invite political rent appropriation; low transparency invites bureaucratic corruption; weak protection of property rights invites shady dealings, unfair takeover, and expropriation; weak protection of citizens’ rights invites fraud and venal practices; weak rule of law invites crime, extortions, and mafia activities; and a weak state invites warlordism. All these forms of direst wealth grabbing are made possible by bad institutions—‘grabber-friendly’ institutions …145 The demand for the goods of the producers depends on the total income of the economy. When the number of producers is low, so is demand and hence producer profits. When their number is high, demand is high too and (with a given number of entrepreneurs) the extent of grabbing is low. Both factors combine to make producer profits high. Grabber profits also depend positively on the number of producers. If their number is low, there is little to be extracted and there are many grabbers who compete for rents. The profit curve of grabbers is steeper than that of producers. When the number of producers decreases, competition for the remaining rents becomes more intensive among grabbers. The situation is depicted in Figure 6.6. The number of producers (P) is measured from left to right and that of grabbers (G) from right to left. The  equilibrium number of producers and grabbers, respectively, is obtained when profits are equal in both activities, in point A .  It also depends on the quality of institutions. If the latter become more producer friendly, grabbing becomes more difficult, and the profit curve of the grabbers shifts downwards. This leads to a new equilibrium with more producers, fewer grabbers, and higher profits (also for the remaining grabbers, since profits have to be equalized). The improvement of the institutions induces a shift from grabbing to production. Possibly, this 144 145

 Mehlum et al. (2006a, b). See also the classic article by Baumol (1990).  Mehlum et al. (2006b), p. 1121.

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Profits

Profits

A P G P

G

Fig. 6.6  Producers and grabbers

improvement also makes the producer profit curve shift upwards, which enhances production, profits, and incomes further yet. Assume that a natural resource is discovered. If institutions are completely grabber friendly, this will provide more opportunities for grabbing but not for production. The grabber profit curve shifts upwards. More entrepreneurs become grabbers while the number of entrepreneurs decreases. Given the shape of the profit curves, profits decrease for both producers and grabbers. The higher income from the natural resource decreases total income. With grabber-friendly institutions the economy is worse off than before. If institutions are instead completely producer friendly, the opposite result is obtained. The resource discovery makes the producer profit curve shift upwards, leaving the grabber curve unaffected. The number of producers increases and the number of grabbers decreases. Profits and incomes increase in the economy. The underlying mechanism is simple. ‘With producer-friendly institutions natural resources stimulate production. With grabber-friendly institutions natural resources hamper production. As there are positive complementarities between producers there is a multiplier effect so that any impulse—positive or negative—is amplified.’146 The difference in institutional quality also makes for different growth performances. A resource-rich economy with producer-friendly institu­  Ibid., p. 1125.

146

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tions (B*) outperforms a resource-poor economy with the same institutions (A*) , while the opposite applies in the case of grabber-friendly institutions (A>B) , and a resource-poor economy with producer-friendly institutions (A*) does better than one with grabber-friendly ones (A) . Thus, if all four of them start at the same income level, the following comparative growth performance is obtained: B* > A* > A > B . As the Norwegian trio demonstrates, the presumption that the effect of increased resource abundance on growth is a positive function of institutional quality is borne out by the empirical evidence of 87 countries.147 It is difficult to predict whether oil revenues will have a negative impact on institutions in East Timor. Today, the Timorese institutions are very weak and many crucial ones, like the judiciary and the Ministry of Finance, are dependent on foreign expertise. The quality of local staff tends to be low. As a shocking example, the average staff member at the Ministry of Finance in 2009 is said to have been educated only to the third-grade level.148 Even simple calculations were reported to be beyond the capacity of large parts of the staff. As we argued above, it is not necessary that the existence of natural resources and resource rents affects a country’s institutions. It could be enough that the existing institutions are already bad (‘grabber friendly’) for economic development to be hampered. In the case of East Timor, the main risk in this context is perhaps that politicians and bureaucrats are seeking ways of enriching themselves and their friends rather than focusing on the provision of public goods, but there are also examples of how ‘shady characters’ have been attracted to the oil wealth of the country.149 This type of behavior is likely to be encouraged in a situation with large inflows of oil revenues, simultaneously characterized by a lack of an efficient civil service, legal system, and tax authorities.150 Other high-risk countries are those without democratically accountable leaders, active civil societies, and transparent policy processes. In this respect, East Timor, however, appears to be performing better than many other oil-­ producing developing countries.  Mehlum et al. (2006a, 2006b).  USAID (2009), p. 3. 149  Scheiner (2015), p. 84. 150  For example Karl and Gary (2004), p. 40. 147 148

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Corruption How ‘good’ or ‘bad’ are the institutions of East Timor and are large oil revenues making East Timor a corrupt country? According to a publication by Transparency International: Indeed, while the growth in oil revenues has allowed the government to invest in much needed infrastructure and human development initiatives, it has also created new opportunities for corruption and administrative ‘malpractice’, as reflected in the increasing number of high-level corruption cases being brought before the courts.151

‘There is a perception of high levels of corruption’, states a 2013 report from the International Crisis Group.152 The view that the risk of falling into a situation with serious corruption is high in East Timor is shared by other international observers, who also stress that the emergence of corruption may seriously jeopardize the country’s economic development.153 The extent of corruption is, however, difficult to determine. When the first household corruption perception survey in East Timor was carried out in 2011, only 0.7 percent of the respondents thought that corruption was the most serious problem facing the country, but close to 57 percent perceived that, taken alone, it was a serious problem (40 percent ‘very serious’), and 45 percent thought that the extent of corruption had increased.154 Between 45 and 55 percent saw the government, the national parliament, the office of the president, and the law enforcement offices as corrupt. The Ministry of Finance was labeled as corrupt by more than half of those interviewed, followed by the office of the prime minister and vice prime minister and the Ministry of Education and Culture. Five other ministries ranked almost as high as the latter.155 The survey concluded:  Bosso (2015), p. 1.  International Crisis Group (2013), p. 35. 153  For example World Bank (2005c), p. 5. 154  At the same time, 52.5 percent revealed that they did not understand the meaning of corruption—a somewhat puzzling result. 155  Comissão Anti-Corrupção (2012). 151 152

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Corruption is clearly perceived to be alive and well in Timor-Leste in both government institutions and those in civil society. A few institutions and sectors (e.g. the military, ombudsman’s office, religious groups) are considered relatively less corrupt, but most others are perceived to be corrupt by large percentages of survey participants.156

Concern has been voiced with respect to government procurement and tender practices: For instance, the government has awarded infrastructure projects through single source mechanisms to a small group of national contractors known as the Consorcio Nasional de Timorense (Timorese National Consortium) that has strong connections with those in power. These apparent conflicts of interest have evoked some public criticism as potentially leading to corruption. […] Thus, this discretionary power of leaders in terms of awarding government projects has created the perception of corruption, if not actual collusion.157

The strategic development plan 2011–30 puts emphasis on large infrastructure projects. Such projects tend to be especially vulnerable to corrupt practices: A major focus of the development budget in the last two years has been infrastructure development, primarily roads, electric power, and two ‘megaprojects’: the Suai pipeline and the establishment of a Special Economic Zone in the Oecussi enclave (ZEEMS). Experience in other parts of the world strongly suggests that such megaprojects have the potential to give rise to large contractual deals between political elites and their clients, which can have a huge effect on the budget bottom lines, often associated with a lack of oversight, lack of transparency, corruption, and bribery.158

In 2013, 3019 of the 4117 tenders posted on the government eProcurement portal were not open,159 and the contracts related to them were  Ibid., p. 31.  Soares (2015), p. 210. 158  Guterres (2017). 159  Bosso (2015), p. 5. 156 157

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not made public in spite of the fact that some of them represented a value of several million dollars.160 Many inhabitants claim that they observe corruption in their daily lives. Thus, a 2013 survey of public servants, carried out by the Timorese Anti-Corruption Commission, among other things, reported that ‘more than one-third of the respondents (36%) said that they had witnessed corruption, collusion, nepotism or a conflict of interest at their workplace in the last year’, and 68 percent of this group reported that they saw private interests being placed above the interests of the organization, 41 percent of them had seen bribery, and 36 percent theft. Overall, 13 percent had observed false reports and documentation being produced.161 Transparency International measures people’s perceived level of public sector corruption in a large number of countries. The survey carried out by the organization is used to construct an index which has become a standard measure in studies of corruption. The index is a measure of the perceived administrative and political corruption rather than that of the actual level of total corruption in a country. A low (high) rank means that the country has a high (low) degree of corruption. The index has been calculated for a number of years but changes in the methodology only enable comparisons from 2012. A ranking of countries from the least to the most corrupt ones put East Timor as number 113 among 176 countries in 2012, as shown in Table 6.1. The country was ranked higher than the other relatively poor countries: Laos, Myanmar, and Cambodia and also better than Indonesia and Vietnam. Six years later, East Timor had advanced in the ranking: its position was 105 out of 183 countries. The perceived corruption remained lower than in the other low-income countries in the region and lower than in Vietnam but was now higher than in Indonesia. The same picture emerges if we look at the index itself rather than the ranking. The index, ranging from 0 (high corruption) to 100 (no corruption), has increased for East Timor, from 33  in 2012 to 35  in 2018. Hence, both the ranking and the index suggest that the situation is improving.  La’o Hamutuk (2013b).  Comissão Anti-Corrupção (2013), pp. 10–12.

160 161

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Table 6.1  Ranking of some Southeast Asian countries by perceived level of corruption in 2012 and 2018 Country

Rank in 2012

Rank in 2018

Singapore Malaysia Indonesia Thailand Philippines East Timor Vietnam Myanmar Laos Cambodia

5 54 118 88 105 113 123 172 160 157

3 61 89 99 99 105 117 132 132 161

Note: A low (high) rank means a comparable low (high) degree of corruption. A total of 176 countries were included in 2012 and 183 countries in 2018 Sources: Transparency International (2012, 2019)

A complement to the perceived corruption index in Table 6.1 is the Global Integrity Score published by Global Integrity, an independent organization. Originally—beginning in 2004—a Global Integrity Index was published, but this was discontinued in 2011. Thereafter, only individual country scores have been issued. These do not measure the ­perception or prevalence of corruption but ‘the existence, effectiveness, and citizen access to key anti-corruption mechanisms at the national level in countries’. The index is constructed by country-specific experts and consists of a large number of different aspects of the regulatory environment which can be aggregated to six broad categories: Civil Society, Public Information & Media, Elections, Government Accountability, Administration & Civil Service, Oversight & Regulation, and Anticorruption & Rule of Law. The index runs from 0 (lowest amount of anti-corruption measures) to 100 (highest amount of anti-corruption measures). East Timor was included in the measurements in 2007. The figures are found in Table  6.2. In 2007, the country performed worse than the Philippines and Thailand, the other two Southeast Asian countries included in the survey, and also worse than the average (50 countries, average score of 67). Most, but not all, of the included countries were low- and medium-income countries. The last year for which the index is available is 2013 when two more countries were reported:

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Table 6.2  The global integrity score of East Timor, 2007 and 2013 Year

2007 Classification 2013 Classification

Legal framework score Actual implementation Civil society, public information and media Elections Government accountability Administration and civil service Oversight and regulation Anti-corruption and rule of law

73 45 80 63 35 46 50 75

Moderate Very weak

65 48 54

Weak Very weak

66 36 56 62 77

Sources: Global Integrity, 2007: https://www.globalintegrity.org/research/reports/ global-integrity-report/global-integrity-report-2007/; 2013: https://www. globalintegrity.org/research/reports/global-integrity-report/global-integrityreport-2013/. Downloaded 26 September 2016

Indonesia and Vanuatu. East Timor’s performance, measured by the index, did not change and remained markedly weaker than that of the other included Southeast Asian countries. Looking at the different components, East Timor was doing relatively well when it came to Freedom for Civil Society and the Media in 2007 but a lot worse in 2013. It scored particularly low on Government Accountability, Administration and Civil Service and Oversight and Regulations improved over time. Indications exist that corruption may have reached the very core of East Timor’s leadership. Some alleged cases have originated in the office of the prime minister.162 When Vice Prime Minister Mário Carrascalão resigned in September 2010, he cited rampant corruption in the government as the reason for quitting.163 One of the former prime minister Alkatiri’s brothers received lucrative ammunition purchasing contracts through a public procurement process that has been characterized as non-transparent.164 In 2012, former Minister of Justice Lúcia Lobato and the former director of procurement for the Ministry of Finance were both found guilty of corruption and sentenced to prison, and in 2013, a former secretary of state for the environment and two of his staff members were also found guilty of corruption and were put in jail.165 However, in  Montlake (2005).  International Crisis Group (2013), p. 35. 164  Dodd (2005). 165  Bosso (2015), p. 9. 162 163

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2014, President Taur Matan Ruak granted Lobato an official pardon, overriding a rejection of her appeal by the supreme court in 2013.166 The same year, Finance Minister Emilia Pires was indicted for a US$1 million contract for hospital beds that was awarded to a firm owned by her husband. She was sentenced to a seven-year prison term in 2017 but was allowed to leave East Timor shortly before the verdict. The number of proven cases of corruption is low, despite the high-­ profile ones mentioned above. (Most of them concern payments to members of the police force, often at the border, to enable smuggling, or from brothels involved in trafficking.)167 It is perhaps fair to say that corruption is a potentially serious threat to development but that the present situation is better than could be expected from a country at East Timor’s income level and with the same institutional problems: The country has … apparently succeeded in avoiding widespread misappropriation of public funds for private gain. Thanks to transparent systems to manage petroleum revenues and contracts, very little money has been siphoned off to private bank accounts. Although the Anti-Corruption Commission, Transparency Portal, procurement processes and judicial system all have room for improvement, they have not yet seen massive diversion of government funds; every known case of corruption has been less than $4million, about what the state spend in one day …168

Anti-Corruption Measures In 2008, East Timor signed and ratified the United Nations Convention against Corruption, and the country has a legal framework which penalizes corruption, embezzlement, misappropriation of public assets, and abuse of public power.169 Far from everything is, however, covered by the latter. Thus, there are no legal limitations on donations by private citizens to political parties:  Freedom House (2015).  United States Department of State (2014). 168  Scheiner (2019), pp. 90–91. 169  Bosso (2015), p. 7. 166 167

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Political party financing is an area of particular regulatory weakness. The law does not establish limits on private donations to political parties or individual candidates, nor does it provide for a disclosure requirement. While there is a complete ban on corporate donations to parties, this does not extend to individual candidates. Moreover, the ban is systematically disregarded. Before the 2012 elections, for instance, several companies that had been awarded lucrative government tenders were reported to have pledged a total of US$2.6 million for the electoral campaign of the prime minister’s party …170

Nor is there any norm that prohibits government members from accepting gifts and hospitality. On the contrary, as we have already seen, this forms part of the traditional culture. Conflict of interest legislation exists for public servants, but the implementation of it apparently leaves a lot to be desired. The supreme court does not have any review power over the executive, and the mandatory disclosure of assets by the president and the cabinet ministers is not independently audited or made public. There is no law protecting whistle-blowers and the citizens have no legal right to request information and records from the government.171 The weak understanding of corruption and its consequences that we made reference to in the preceding section makes it difficult to weed corrupt practices out. A similar lack of understanding, or perhaps rather disinterest, has been reported to be prevalent within the ministries.172 Most reports and memoranda about corruption are met with complete silence from the responsible ministers and secretaries of state. When corruption is discussed, the government often argues that the allegations are highly exaggerated and based on rumors and that the close monitoring by international organizations provides an effective obstacle to corruption among public officials.173 Throughout the post-occupation years, attempts have been made to establish institutions whose aim is to fight corruption. The Office of the  Ibid.  Ibid. 172  USAID (2009), p. 5. 173  See, for example, the comments by Prime Minister José Ramos Horta in McKenna (2005). 170 171

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Inspector General was set up by the United Nations during the transition from occupation to independence.174 The institution continued its work after independence. It completed investigations of 66 cases of alleged corruption between 2001 and 2005.175 Five cases were deemed to be criminal acts, including theft, bribery, and falsification of official documents. The remaining 61 were considered to be instances of negligence by public officials. Between 2006 and 2010, the Human Rights Commission (Provedor dos Direitos Humanos e Justiça—PDHJ) also played a role in independent investigations of corruption. The Anti-Corruption Commission (Comissão Anti-Corrupção—CAC) was established in 2010 and took over the responsibility of the Human Rights Commission for investigating corruption, with a broad mandate to carry out criminal investigations. It was also made responsible for improving the awareness of corruption among the population.176 In the household corruption survey taken in 2011, almost one-fourth of the respondents indicated that they knew of the existence of CAC, in spite of the fact that at the time it was a relatively new institution, and three-fourths of these thought of it as ‘very or somewhat effective’.177 CAC hands its investigations over to the Office of the Public Prosecutor (Procuradoria-Geral da República) which decides whether to pursue cases at the court. Also, an audit court was established in 2012, to audit all government expenditures. Whether corrective action is taken within organizations where dubious practices are found is, however, an open question. In the 2013 public servants survey, a total of 77 percent believed that senior managers would be held accountable if found to be breaching the code of conduct of their institution. Around 54 percent agreed fully but only 44 percent of the senior managers themselves,178 which may be an indication of ‘a sense of impunity’.179 No less than 78 percent agreed that processes and regulations scheduled to reduce corruption could be improved significantly or greatly.180  Soares (2015), p. 207.  UNMISET (2005b). 176  Soares (2015), p. 207. 177  Comissão Anti-Corrupção (2012), p. 17. 178  Comissão Anti-Corrupção (2013), pp. 17–18. 179  Bosso (2015), p. 3. 180  Comissão Anti-Corrupção (2013), p. 19. 174 175

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One reason why the court procedure has been slow in the corruption cases is that the judiciary does not function well in East Timor. It is very small, with only around a dozen judges and 80 lawyers, half of whom work in internationally supported legal aid projects. As we found in Chapter 4, the situation became substantially worse in October 2014, when Prime Minister Gusmão decided to dismiss seven international judges and prosecutors. The resolution of the East Timorese parliament attacked them head-on: … in fact, what has been observed is that these external professionals, rather than empowering our judicial system and … [equipping] the Timorese staff with the appropriate technical knowledge, revealed a lack of technical capacity to achieve the purposes for which they were hired. Also, the Anti-Corruption Commission has hired professionals of foreign nationality to educate and to train the public servants attached to that judicial organ.

However, the performance of these professionals … [has] not proved to be satisfactory, since it is public that the Anti-Corruption Commission has not acted in accordance with the criminal evidence that such [an] institution takes note [of ], in the sense of promoting the proper investigations in relation to such facts […]181 The decision that was made was to throw all the international advisors in the judicial sector out of the country: … As a transitional measure, and without prejudice that any order may be … [reversed] in the future, should cease immediately, for reasons of force majeure and national interest, any existing contract and renewals of international judicial staff hired, including international advisors, ­ appointed to perform in the Court, in the Public Prosecutor, in the Public Defender Office, the Anti-Corruption Commission and, also, in the Judicial Training Centre.182

The reason given for the dismissal of the international personnel was their behavior in a couple of high-profile tax recovery cases (one was against ConocoPhillips, the Operator of the Bayu-Undan oil field). However,  National Parliament Resolution (2014).  Ibid.

181 182

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some independent observers claim that the real reason was to protect members of the government from being convicted for corruption.183 The former anti-corruption commissioner Adérito de Jesus Soares has pointed to how the lack of respect for the rules laid down for the intercourse between the public and the private sector may lead to a private sector behavior akin to the one predicted by the model of institutions and natural resources presented earlier in the present chapter. His argument is that the private sector is far too dependent on obtaining government contracts, mainly in infrastructure, instead of investing in industry or agriculture. Many domestic companies have also become brokers for foreign companies which are after large government contracts. These tendencies could easily result in the establishment of patron-client networks across the economy.184 Soares is not alone. In a recent essay on challenges for the consolidation of democracy in East Timor, Rui Graça Feijó as well holds out the existence of unacceptable links between the government and its supporters: … the perception of corruption is not improving. […] The casuistic dependence of society in relation to those who happen to be in power, rather than the deployment of sound rules, is venom for a healthy civil society that democracy requires to thrive. The recent upgrade of the Court of Auditors, with the ensuing increased capacity to uphold clearly defined and institutionalised procedures, is a step in the right direction. However, it still must compete with a political culture that is permeable to ways of performing public duties that conflict with the rule of law. It is not uncommon to hear voices saying ‘We’ve won the elections and this is the time for us to do things our way, and to pay our supporters. When others win the general elections, it will be their time.’ Comments such as these [made by a businessman supporting the government] suggest a candid justification of patronage as the basic language in the relations between government and civil society.185

The lack of qualified personnel is present in all areas of the judiciary. It has only been the presence of foreign experts that has enabled the system to work even at a rudimentary level, but since late 2014, that is history. All court procedures, not only in corruption cases, are slow. As a result,  Wyvill (2014), p. 2.  Soares (2015), pp. 210–211. 185  Feijó (2015), p. 65. 183 184

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there is a large backlog of cases to be taken up in court. It thus seems likely that it will take considerable time before the judiciary will work efficiently—without the help of foreign experts.

The Media Up to recently, East Timorese media have been relatively free to investigate and write about different issues including corruption. Attacks on journalists have been very rare and a decriminalization of defamation has removed a previous potential restriction on what journalists choose to report.186 There are, however, signs of deterioration of the situation. Reporters Without Borders calculates an annual World Press Freedom Index which reflects the degree of freedom for media and journalists.187 East Timor was ranked as number 30 out of 158 countries in 2003, indicating a relatively high degree of press freedom. Thereafter the situation has deteriorated. East Timor fell to a rank of 93 out of 173 countries in 2010, and to 98 out of 180 countries in 2017,188 but climbed marginally to rank 95 in 2018.189 The main worry is the media regulation law dealt with in Chapter 3 that was enacted in 2014 and which immediately came under fire. The effectiveness of the media in fighting corruption is limited for two more reasons. In spite of their enthusiasm, journalists do not always know how to investigate potential corruption cases and back up accusations with solid evidence.190

The Budget Budget processes can also have an important impact on the extent of corruption in a country. The East Timorese budget presents a potential problem, although the extent of information released by the government has improved slightly in recent years. In the 2010 open  Wyvill (2014), p. 13.  Reporters Without Borders (2003). 188  Reporters Without Borders (2017). 189  Reporters Without Borders (2018). 190  USAID (2009), p. 13. 186 187

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budget survey made by the International Budget Partnership, East Timor received a score of 34 (below the average of 42 for 94 countries), which placed the country in the ‘minimal information’ category (the second lowest one).191 Two years later, the score was 36 (still minimal),192 while in 2015 it had improved enough (41) to place East Timor on the lowest echelon of the ‘some information’ category, or ‘limited information’, as it was then labeled. In 2016, the situation was slightly worse. One of the eight budget documents examined was no longer available to the public.193 Considering the political turbulence in 2017 and the resulting difficulties with the budget, it comes as no surprise that the situation remained troublesome, with a 2017 score of 40.194 East Timor hence still has some way to go as far as budget transparency and availability are concerned. The most worrying feature is that information is lacking with respect to a number of crucial issues both on the revenue and on the expenditure sides. The report issued by the International Budget Partnership that followed the 2012 open budget survey recommended the country to increase the comprehensiveness of the executive’s budget proposal by providing missing information on a number of items: ‘expenditures and revenues for the year prior to the budget year, extra-budgetary funds, transfers to public corporations, quasi-fiscal activities, earmarked revenues, financial and nonfinancial assets, and percentage of the budget devoted to secret items’.195 It also recommended the government to establish a number of procedures to improve the budget oversight by the legislature: a formal pre-budget policy prior to the tabling of the budget proposal, consultation with the parliament when determining budget priorities, and mandatory approval from the legislature before shifting funds between administrative units and budget lines and before making use of contingency funds.196  International Budget Partnership (2010).  International Budget Partnership (2012). 193  International Budget Partnership (2016). 194  International Budget Partnership (2017). 195  International Budget Partnership (2012), p. 2. 196  Ibid., p. 3. 191 192

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As it seems, however, little, if any, progress has been made on this front: Thus, more than one-quarter of the proposed 2015 budget consisted of ‘special funds’ which the executive can still freely shift among different large infrastructure projects, including ones which were not mentioned in the budget … Moreover, in both 2013 and 2014, the parliament merely rubberstamped the budget proposed by the executive without substantial open debate …197

The Uncertain Future In which direction will the extent of corruption in East Timor go in the future? In an insightful and well-argued article, Peter Blunt deals with some of the most important factors promoting bad governance in the country. At the heart of his argument is the fact that East Timor is a very undeveloped economy, an economy where the state plays a central role, both in terms of investment and in terms of job creation. It is furthermore a ‘rentier state’. Government revenue rests almost entirely on the exploitation of oil and gas in the Timor Sea. ‘When such conditions ­combine with the concentration of political and economic power in the hands of small ruling elites comparative experience shows that the “inevitable result” is “personal aggrandisement”, which is seen as a “prerogative of political power”.’198 Resource abundance allows the political powerholders to generate support through spending on patronage, through jobs in the public sector, and public infrastructure contracts. In a country like East Timor, the risk is high that this situation degenerates to one of institutionalized corruption, for, as Blunt points out, the nation is young, the state has been established only recently, and the democratic institutions have been threatened by outbreaks of violence. Traditional structures matter more: The main elements of social organisation and obligation in Timorese society derive, first, from the extended family; second, from marital alliances forged through bride price contracts and negotiations; third, from a com Bosso (2015), p. 5.  Blunt (2009), p. 93.

197 198

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plex mosaic of secret societies and other social groupings; and finally, fourth, from ethnic and linguistic affiliation. […] Moreover, alliances exist between some of these groups and political parties; but again, such alliances are fluid and therefore difficult to pin down.199

The fact that East Timor emerged as a sovereign nation after a prolonged freedom struggle has contributed to conferring a high degree of legitimacy on the post-independence governments. The members of the latter have come out of the ranks of the resistance movement to the Indonesian occupation. However, as Blunt warns, this kind of legitimacy tends to have a finite life span. ‘The length of the grace period depends a great deal on the extent to which citizens feel that their lives have benefited materially from their hard-won freedom and on the share of national assets perceived to have been acquired (or misappropriated) by governing elites and their supporters.’200 If enough people feel that they have been excluded, economically and socially, from the post-independence dividend, a perception of grand-scale corruption easily begins to spread, and the legitimacy of the government vanishes, and as Blunt points out, freedom-­fighter governments are in no way immune to this. The situation is made even worse when, like in East Timor, there are ‘deep and bitter rifts between political elites’.201 This leads to conflict over the access to the state and assets owned and distributed by the state, and in the end to political instability, whereas when corruption networks extend across party lines, political stability tends to prevail. East Timor provides an example of both mechanisms. By the time Blunt wrote his article, ‘bitter criticisms of government by the opposition and vice versa … [were] laced with accusations of corruption, suggesting that if corruption networks exist they do not transgress party lines’.202 The picture painted by Blunt is a bleak one. The existence of traditional mechanisms of patronage serves as a means to legitimize corruption on all levels of society and the substantially increased government spending beginning in 2007 provides more occasions for politically motivated  Ibid., pp. 90–91.  Ibid., p. 92. 201  Ibid., p. 93. 202  Ibid. 199 200

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patronage. Reform of corrupt structures may then be difficult. Putting the anti-corruption institutions in place is easy. This step has already been taken with the creation of the Anti-Corruption Commission and the audit court. Making the institutions work properly is much more difficult. Much depends on the functioning of the judicial system, and as we know, this system is exceedingly weak in East Timor. There will be no ‘quick fixes’. ‘The factors underlying corruption in fragile, rentier states like Timor-Leste are too deep-seated and fundamental to be amenable to overnight change; and for many ruling elites the social pressures and financial incentives to resist reform are likely to be too great to ignore.’203 The existing mechanisms may be self-enforcing. As long as political patronage is not perceived as damaging by the population it will both continue and, if it is reasonably widely spread, contribute to the strengthening of this perception. ‘Mature systems of good governance and of political democracy come about because demand for them evolves from within society at all levels and because such demand is consistent with prevailing local notions of morality.’204 East Timor is fortunate to have large revenues from oil and gas. This provides a potential economic leverage that few other low-income countries enjoy. The country would be in a decidedly worse position without its oil and gas. The petroleum revenue makes it possible to invest in infrastructure, agriculture, education, and health. Economic development will, however, not come automatically. It requires careful and stringent policies. If not, the black gold may turn out to be the ‘excrement of the devil’.205 The main risks with large windfall gains from the oil and gas resources are that the government may start to overspend, that income volatility and Dutch Disease will wipe out the tradable sector, and that corruption will ruin the institutions and the social fabric of the country. The East Timorese government has created a petroleum fund in an attempt to avoid some of these problems. The mere existence of  Ibid., p. 99.  Ibid. 205  The Venezuelan Minister of Mines and Hydrocarbons, Juan Pablo Pérez Alfonzo, ‘the founding father of OPEC’, quoted in Karl (2003), p. 8. 203 204

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the fund does, however, not guarantee that the available money is wisely spent. On the contrary, in recent years, government withdrawals from it have regularly exceeded the amounts stipulated in the fund statutes and the money has been used for megaprojects with highly uncertain returns—in a situation when the risk of depletion of the fund is becoming imminent. The risk for oil-driven corruption and deterioration of institutions has been repeatedly pointed out in the literature. A weak administrative capacity may ruin government attempts to foster growth and development through increased public expenditure, and increased expenditures may serve to foster political patronage on a larger scale than hitherto. Corruption has not been exceptionally high in East Timor so far, but there are indications of a deteriorating situation. A number of institutions have been created to deal with the problem, but it is unclear how efficient they are. Accordingly, freedom of the media is important when it comes to fighting corruption, but concerns are being voiced that this freedom is at risk in East Timor. East Timor may be lucky and find new oil and gas fields in the future, and if the world market price of oil increases this will also have a strong impact on the resources available to the government for development purposes. For the time being, however, the overall picture is that the oil money, and hence time, is beginning to run out for the government in the process of laying the foundation for long-term growth and diversified development not based exclusively on oil and gas revenues.

7 Conclusions and a Look to the Future

At the time of independence in 2002, East Timor was one of the poorest countries on earth. The majority of the population lived a poor rural life based on subsistence farming which relied on time-honored techniques. Modernity and change had been restricted to a limited share of the population based in the few major cities, notably the capital. A number of surveys made around the turn of the millennium, all in various ways, indicated that the material living standard was low, that as much as 40 percent of the population was living in poverty, that food security was a major problem during almost one-third of the year, that life expectancy at birth was about 60 years, that infrastructure—roads, schools, health care—was lacking, and that hardly any of the East Timorese themselves perceived of their situation as satisfactory. As a result, the 2002 national development plan put heavy emphasis on poverty reduction and equitable and sustainable economic growth. At the time, East Timor was a heavily aid-dependent country. After independence, the difficult task of building an entirely new administrative apparatus had to be undertaken. At the same time, it became evident that during the coming years East Timor would receive substantial government revenues from the oil and gas deposits in the Timor © The Author(s) 2019 M. Lundahl, F. Sjöholm, The Creation of the East Timorese Economy, Palgrave Studies in Economic History, https://doi.org/10.1007/978-3-030-22052-5_7

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Sea. The national development plan was optimistic. The independence of East Timor had been achieved with great sacrifices. For the first time, the East Timorese had their destiny in their own hands. The government’s development ambitions were high and corresponded to the popular expectance of improvements in the living standard. The on-the-­ground reality turned out to be different, however. In 2006, the economic and social situation of East Timor did not differ visibly from the one prevailing in 2002. The economic growth of the non-oil economy had been highly variable, with negative rates during some years and modest growth during others, which, however, had to be seen in relation to one of the highest rates of population growth in the world. The political atmosphere during the first post-independence years was characterized by a widening rift between the Fretilin prime minister, Mari Alkatiri, and the president, Xanana Gusmão, by increasing discontent among the population at large who felt that the government was not doing enough to alleviate poverty, by tension within the newly established armed forces, and between the latter and the police. Altogether, this led to an atmosphere of increasing violence, until in 2006 large-scale riots broke out in Dili, riots which in the end led to open rebellion by former soldiers and military police and in the end also to the demission of Alkatiri as prime minister. The 2007 elections, in turn, put a new political constellation into power. At the head of a new party, Gusmão proceeded to set up a new government and Fretilin went into opposition. The new government managed to make those who were displaced by the 2006 disturbances return home, through a system of subsidies, and also launched a very generous veteran pension program which together with infrastructure contracts to veterans served to soothe a hitherto grumbling group. On the road to the 2012 elections, tensions mounted between Gusmão and ministers from other parties, but a major political crisis was avoided. The 2012 elections marked the beginning of a political transition in East Timor—but only the beginning. Gusmão again led a coalition government, but in 2015, he chose to step down as prime minister. His successor was Rui Maria de Araújo from Fretilin. This both inaugurated an intergenerational transition and a transition from tensions between the Congreso Nacional de Reconstrução Timorense (CNRT) and Fretilin to what was in

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practice a government of national unity, with no opposition in the parliament. The main criticism instead came from President Taur Matan Ruak. The 2017 elections again changed the political map. The division of votes between the main parties remained much the same as in the 2012 elections but the willingness to form a CNRT-Fretilin coalition government was gone. Once again, the old animosity between Gusmão and Alkatiri had surfaced. Alkatiri formed a minority coalition government, whose program was, however, rejected by the opposition coalition led by the CNRT and in January 2018, the parliament was dissolved by the president, and new elections were called. These were dominated by the antagonism between Fretilin and the coalition led by Gusmão. The latter won the elections but the new prime minister, Taur Matan Ruak, clashing with President Lu-Olu Guterres has so far failed to put together a complete government. Until 2006, government economic policy was prudent. The oil revenues accruing to the government were put into a petroleum fund and only the yield of the latter was spent each year. However, after 2006, a more aggressive spending policy was begun, on the one hand, via the transfer programs for veterans and internally displaced people, on the other hand through investments in infrastructure as part of the 2011–30 strategic development plan. Already the 2006/07 budget represented a threefold increase and from then to 2016, expenditures expanded ten times, with the result that the size of the petroleum fund began to shrink from 2015. The new spending policy boosted economic growth substantially during a couple of years, but thereafter the rate was reduced until it recovered somewhat, beginning in 2013. As it seems, the incidence of poverty has decreased. Also, ownership of consumer durables, education, and health care have developed favorably. However, malnutrition is much worse in East Timor than in comparable countries. Periodic food shortages continue to be a problem.

Structural Problems What can be done to lift East Timor out of poverty? The present book devotes three chapters to a discussion of three crucial structural components of the Timorese equation: the need for a modern sector able to

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provide jobs, the need for a market-oriented agricultural sector, and the need for a government spending policy that is conducive to an efficient diversification of the economy and does not deplete the petroleum fund. The need for a modernization of the East Timorese economy derives from the high rate of population growth, the highest in the world at the time of independence, subsequently lower, but still high. High fertility rates have made for a young population in need of employment, a population that tends to gravitate toward the capital, where the vast majority of jobs are found in the informal sector. The low level of education has created a matching problem when it comes to formal employment. At the time of independence, East Timor had no modern sector except the public sector. Over the next few years, a public administration was gradually built up, but no industry. The population in the working age was concentrated in subsistence agriculture. The non-agricultural private sector, which mainly consists of very small enterprises, employs at most around one-fifth of the population, its growth is slow, and to the extent that an expansion takes place it is mainly in the service sector. Manufacturing and tourism by and large continue to be missing from the picture. The main generator of growth during the past decade has instead been public sector investment in infrastructure (mainly electricity). In addition, a number of measures have been introduced in recent years to facilitate the creation and operation of private businesses. However, East Timor was ranked 178 among 190 countries in the 2019 Ease of Doing Business report issued by the World Bank. The operations of the judiciary leave a lot to be desired, and the existing business legislation is incomplete. The minimum wage rate is extremely high for a country at East Timor’s income level. Finally, it is difficult for companies to obtain bank loans. These difficulties must be put against the fact that the modern sector of the economy may have to grow at an unrealistically high rate if traditional agriculture does not continue to be the main provider of employment. The agricultural sector is low-productive and it is not competitive internationally. Imports have to be resorted to in order to ensure food security. Production still rests on shifting cultivation, bush-fallow rotation, and simple hand tools. The main crops, rice and maize, both display considerable fluctuations and their absolute yields are among the lowest in the region. The production of coffee, the most important export crop,

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is decreasing. The quality of the land is low and possibly declining, capital inputs are sparsely used, and credit is difficult to obtain. Most of the time, unimproved seed is used, but introduction of high-yielding varieties has proved successful for several crops, with the caveat that it has rested on government subsidies. The low educational level and the lack of an effective extension service make the introduction of innovations difficult. Little attention has been given to the development of animal husbandry and fishery. Agriculture in East Timor rests to an overwhelming extent on subsistence considerations and only to a minor extent on market transactions. In order to increase the scope of the latter, above all, the road network must be improved to make it possible to transport produce to the existing marketplaces in towns and larger villages and develop new ones. The 2011–30 strategic development plan puts heavy emphasis on road development, but the implementation has left a lot to be desired. Expensive roads for trucks have been promoted at the expense of rural feeder roads. Another factor which makes agricultural development difficult is the general absence of land titles. The head-on collision between claims based on different judicial systems makes land transactions difficult, makes it impossible to use land as collateral, and tends to make investments uncertain. In order to increase production for the market, suitable incentives must be developed. The East Timorese farmers may sell both cash crops, like coffee, and food crops in the market and they purchase such consumer and capital goods that they cannot produce themselves. Higher prices for the former goods and increased availability and lower prices of the latter may hence serve to increase the marketed share of agricultural production. We have carried out a model exercise to determine how farmers are likely to react to these incentives. The exercise indicates that much depends on how farm households value leisure and on the extent to which they are able to obtain ‘outside’ jobs that complement the income obtained from farming. As it seems, the access to wage labor increases the likelihood that price incentives will serve to increase agricultural production, although—in the case of food crops—the marketed share will not necessarily increase. Where some of the price increase is converted into increased leisure this will take place at the expense of outside work instead of crop production.

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In the longer run, the agricultural sector will also face problems of a different kind: deforestation and erosion as a result of population growth, as well as climate change. Experience from similar countries indicates that when the population grows and the demand for food increases, food crops tend to move up the hills and mountains at the expense of tree crops. Tree crops bind the soil and protect it from heavy rains and the change to food crops tends to destroy the soil and erode the mountainsides. The effects of climate change are more uncertain and depend on the crops in question. The main danger stems from future temperature increases. The third structural problem of the East Timorese economy is that of the oil reserves. That oil and gas reserves exist in Timor has been known for a long time, but commercial exploitation was not begun until the beginning of the present century, in the Bayu-Undan field south of the island. A second field, the Greater Sunrise, is yet awaiting exploitation. The main problem has been the lack of an agreed sea boundary between East Timor and Australia, an issue that was not resolved until 2017 after protracted negotiations. The revenues derived from oil and gas accounted for between 75 and 85 percent of total GDP between 2005 and 2013, before dropping to around one-third due to lower oil prices and reduced extraction. They are put into a special petroleum fund, and the original intention was not to spend more than the yield from this fund every year so as to maintain its real value constant over time. However, since 2006, excess withdrawals from the fund have been the rule. This has to be seen against the fact that the market value of the fund has declined in recent years due to low oil production, low prices, and negative returns on the fund. Even more problematic is that the East Timorese oil and gas reserves that are currently exploited risk to be depleted in the near future. If and when exploitation of the Greater Sunrise field will begin is a moot point. The government has so far insisted that the oil and gas from this field should be transported through a pipeline to East Timor to be refined there, that is, exploitation is tied to the Tasi Mane megaproject for the south coast, a project with an uncertain future, the completion of which is itself dependent on finance from the petroleum fund. The existence of oil reserves may also be conducive to Dutch Disease through inflationary pressure generated by the spending of resource-based revenues and thereby act as an obstacle both to coffee exports and to the development of other, non-oil export products.

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What all this means is that the oil and gas bonanza may soon come to an end, which will in turn reduce the ability to fund development projects, unless alternative, domestic revenue sources can be developed. Oil and gas are exhaustible resources providing an opportunity to diversify the economy and increase its overall productivity and make it possible to improve the social conditions for the majority of the population—especially the poor—for example, through increased spending on health and education, expenditures which in a poor country like East Timor are in addition likely to contribute further to productivity and income increases. This, however, requires that resources are spent in a clever way.

The Continued Challenge The birth of the sovereign nation of East Timor was a birth in pain. The destruction carried out by the retiring Indonesians left the newborn nation at square one. Everything, almost literally, remained to be done. The country was extremely poor and skilled labor was wanting. The challenges were gigantic. The economy was in ruins and no state apparatus whatsoever existed that could administer the reconstruction. It had to be built with international assistance. Given the adverse circumstances, it was hardly reasonable to expect any miracles. Seventeen years later, the results are decidedly mixed. On the positive side, the East Timorese have managed to effectuate the transition from colonial rule and occupation to democracy. Elections take place regularly, in a peaceful way, and the results are respected. The electoral process works better in East Timor than in most other developing countries. Governments are held accountable to the population with regularity, every five years. Nobody is perfect, however. While the electoral machinery has worked, the parliament has been able to perform its duties and changes in ­government have taken place without too much turmoil, party politics has been characterized by tension between the two leading actors, Xanana Gusmão and Mari Alkatiri—a tension that goes way back to the Indonesian occupation. This tension became apparent already when the first government was to be formed in 2002 and it was one of the main reasons behind the 2006 riots which ended with the resignation of Alkatiri. The riots were followed by a period of relative, but not absolute, calm up to the 2012 elections. Three

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years after the latter, it seemed as if the ‘freedom-fighter’ generation would quit politics. Gusmão stepped down from his post as prime minister and the new government contained ministers both from Gusmão’s CNRT and from Fretilin. However, the harmony turned out to be more apparent than real. The 2017 elections once more brought the tension between Gusmão and Alkatiri to the forefront. The attempts to form a new government broke down and the president had to call new elections in 2018. Once again, putting a government together has proved difficult. Sustainable economic and social development requires good, supporting, institutions. The East Timorese politicians have understood this. Hence, during the early years of independence, the highest political priority was given to institutional development. This has, however, been problematic. All ministries do not function well and in some cases the dependence on foreign experts has been strong and when the experts have left, the efficiency of the ministries has been reduced. In many cases, internal control mechanisms have to be strengthened in order to ensure accountability and transparency and safeguard against an inefficient use of resources. External checks, through a free press, popular participation, alert NGOs, and impartial investigators also have an important role to play here. Unfortunately, the current press law leaves a lot to be desired. It is difficult to avoid the conclusion that its purpose is to reign in the media, prevent them from doing their job, and force them to a degree of self-­ censorship not compatible with the exercise of democratic rights. The judiciary is even more problematic. The failure of the East Timorese judges to pass the compulsory professional examination made it necessary to resort to international personnel in the courts, but the decision of Xanana Gusmão to throw all international judges and prosecutors out of the country in 2014 amounted to a big step backwards in the development of rule of law in East Timor. Altogether, in comparison to the catastrophic situation which prevailed at independence, governance and institutions have been strengthened but not without setbacks. After the 2006 riots, some observers began to speculate whether East Timor was on its way to become a failed state,1 ‘tense, deeply conflicted, dangerous, and contested bitterly by war Durand (2008), p. 158.

1

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rying factions’.2 Foreign Policy put East Timor in the 20th position in its 2007 failed state ranking, in the ‘alert’ category.3 Fortunately, the threat of failure did not materialize, but much more remains to be done when it comes to securing the institutional environment. Putting institutions in place formally does not necessarily mean that they work as intended. Further improvements are needed. Securing the competence to run the country democratically and efficiently is a pressing but unfortunately also slow task. Laws and regulations that promote both economic and social development have to be worked out and implemented, and an efficient and transparent administration must be developed. East Timor has had a good start, but the task is not finished yet.

The Economy Nor is the task of developing the economy. Any discussion of the economy of East Timor must take the country’s demography as its point of departure: an explosive, almost Malthusian, situation during the first years of independence, followed by somewhat lower, but still high, fertility and birth rates in recent years. Ten years ago, a population time bomb was ticking. In the worst case, the growth would yield a population of more than 2.1 million in 2030 and close to 3.9 million in 2050, according to the calculations of the National Statistics Directorate.4 The decline of the population growth rate to 2.1 percent per annum, 2010–15 (lower than the best-case scenario of the National Statistics Directorate), has improved the situation, but even so, the population is likely to grow from around 1 million 2010 to 1.8 million in 2030. The high population growth rate translates into a high number of entrants in the labor market every year. Over the same time period—2010–30— around half a million young people will have entered the labor force. Where will they go? The East Timorese economy is an extremely undeveloped economy. The vast majority of the population—around 80 percent—still  Rotberg (2003), p. 5.  Joyner (2007), Durand (2008), p. 158. 4  National Statistics Directorate (2006), p. 29. Cf. Durand (2008), pp. 128–132. 2 3

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make their living in the agricultural sector: a sector that rests on subsistence cultivation. The rest of the economy does not have much to offer. In the first place, most of it is informal. If you leave agriculture, you are likely move into an urban environment, and most likely of all, into Dili, into the informal trade sector or some other street activity, where markets clear every day and you have to fend for yourself, being your own boss. There is nowhere else to go. If you are lucky, you land an unskilled job in the public sector, but even that requires a certain experience that has to be acquired directly, in the urban environment, and there is not room for everybody. So, what do you do? Those who are employed in the formal sector constitute a lucky minority. What this means is that the agricultural sector becomes the ‘residual claimant’. It has to act as a ‘sink’. The result is predictable: unless the labor productivity can be increased there, by the addition of other production factors or by technological change, diminishing returns to labor will serve to reduce incomes in the countryside and continue to push people into marginal pursuits in urban areas, which themselves are subject to diminishing returns. Unfortunately, there is no quick fix for the East Timorese economy. Our analysis of the need for employment outside agriculture points to unrealistically high growth rates to be realized in the non-agricultural sector if more people are not to become subsistence farmers. The alternative is to develop agriculture itself, making it a market-oriented sector, by improving the road network, by making non-agricultural consumer goods more available to the farmers, and by introducing new cultivation techniques. East Timor is a poor country in the sense that the per capita income is low but rich in the sense that it is abundantly endowed with an attractive natural resource: oil and gas. The challenge is to use this resource in a way which is conducive to structural change in the non-oil economy. The oil reserves have a limited life. Sooner or later they will be exhausted. The window of opportunities is open right now, but at some point it will close, and that point may not be very far away. East Timor is, and will remain, dependent on its large neighbor Indonesia. The two countries are closely integrated with goods flowing back and forward without too many formalized border procedures. More

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than 30 percent of all goods officially imported into East Timor come from Indonesia.5 Hence, it is important to maintain a good relationship with the neighbor. The development strategy of East Timor must take this into account. Fortunately, there are no major conflicts between Indonesia and East Timor and the relationship has been improving continuously since independence. One sign of the good relationship is the Indonesian support of East Timor’s application for ASEAN membership. That Indonesia is East Timor’s closest neighbor also creates problems, however. As discussed in Chapter 4, the fact that East Timor is an open economy makes it difficult to develop a domestic manufacturing sector. Cheaper and better products imported above all from Indonesia will provide tough competition. On the other hand, Indonesia could provide a major export market for whatever niche products East Timor may develop in the future. Possibly East Timor may also attract some of the many tourists who visit Indonesia. The latter country receives more than 15 million visitors per year.6 Bali, which alone attracts several million, has direct flights to Dili, and Labuan Bajo (including the Komodo Island), one of the major tourist destinations in Indonesia, is located on the western tip of Flores, close to East Timor. Tapping into the big Indonesian tourist boom hence may be a promising avenue for developing tourism.

 he Strategic Development Plan: A Realistic T Vision of the Future? Which, then, is the East Timorese vision of the future? The point of departure of the 2011–30 strategic development plan is the oil and gas deposits. These provide a unique opportunity for economic development: The revenue from the sector can be invested in education and health services for families and in helping framers to increase their productivity so  Scheiner (2019), p. 101. Second is China (17 percent), third Singapore (12 percent), and fourth Hong Kong (11 percent) (ibid.). 6  15.8 million in 2018 (Sekretariat Kabinet Republik Indonesia 2019). 5

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that our agriculture sector becomes a leading driver of private sector jobs. This revenue can also help to fund the infrastructure necessary to build a diversified economy and transform our country into a modern nation.7

The aim is ‘to transition Timor-Leste from a low income to [an] upper middle income country, with a healthy, well educated and safe population by 2030’.8 Education and training are pointed to as the ‘keys to improving the life opportunities of our people and enabling them to reach their full potential’,9 and access to ‘good health care, nutritious food, clean drinking water and good sanitation’ is a fundamental right for all citizens and in particular for the children.10 This is a big step indeed. Statistically, East Timor has been a lower middle-income country according to the World Bank classification11 since 2006 (with a GNI per capita of US$1790 in 2017).12 However, the income figure for East Timor is heavily affected by the large oil revenues and the government expenditures made possible by these revenues. The living standard of the average East Timorese, on the other hand, is hardly on a level comparable to living standards in other lower middle-income countries. For practical purposes, and especially in c­ onnection with the strategic development plan, it is better to think of East Timor as a lowincome country. Diversification is the key to economic development. The strategic development plan envisages a modern economy in 2030 which rests on agriculture, tourism, and petroleum. The agricultural sector will be completely transformed. ‘Subsistence agriculture will have been replaced by commercial, smallholder agriculture. Timor-Leste will be self-sufficient in food and be producing a range of agricultural products for world markets including staples, livestock, fruit and vegetables and other cash crops, as well as forestry and fishery products.’13  Democratic Republic of Timor-Leste (2011a), p. 11.  Ibid. 9  Ibid., p. 16. 10  Ibid., p. 35. 11  According to the latest definition, lower middle-income countries have a GNI per capita of 996–3895 US dollars (World Bank 2018b). 12  World Bank (2018c). 13  Democratic Republic of Timor-Leste (2011a), p. 108. 7 8

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If we are to believe the development plan, the transformed agricultural sector will be complemented by industries based on the petroleum deposits and by tourism. ‘The petroleum sector, including oil and gas production and downstream industries, will provide an industrial base to our economy. Tourism, and in particular eco-tourism, will be a major contributor to the national economy and light industry will complement and diversify the economy.’14 The latter is, however, given less emphasis. According to the plan, the economy will in the main rest on the tripod of agriculture, oil, and tourism, fueled by investments in infrastructure, and the driving force will come from the petroleum sector. That is where the funds for investment in other sectors, in infrastructure, and in education and health will be generated.

Visions and Reality The expected outcome of the implementation of the strategic development plan, formulated as ‘targets’, was two-digit non-oil growth in 2011–18 and possibly all the way up to 2030,15 ‘higher than any country in recent history’.16 As it turned out, actual growth was much lower: below 6 percent every year except 2011, culminating with a negative ­figure in 2017.17 The vision has so far not proved to be compatible with reality. Altogether, the strategic development plan conveys a reasonably balanced picture of the vision for the economy, but how well does the vision correspond to what is actually being done? What accounts for the difference in targeted and realized growth rates? It is obvious that the implementation of the vision is not as balanced as the vision itself. It is heavily concentrated to a combination of infrastructure and integrated megaprojects, while agriculture, tourism, health, and education have been pushed into the background. Thus, between 2011 and 2017, the budget appropriations for the latter three sectors  Ibid.  Ibid., p. 211. 16  La’o Hamutuk (2011). 17  Ministry of Finance of Timor-Leste, General Directorate of Statistics (2017), p.  2, República Democrática de Timor-Leste (2018), p. 12, World Bank (2018c), p. 1. 14 15

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amounted to a mere 3.8, 8.7, and 17.5 percent, respectively, of that of infrastructure, and their shares of total spending were reduced substantially between 2013 and 2017. Roads received more than agriculture and education together. The appropriations for cash transfers were also generous. They amounted to almost 1.5 times that of agriculture, health, and education together, with veterans’ payments only exceeding the combined health and agriculture appropriations.18 Tourism, in turn, is virtually absent from the 2011–18 state budgets. A special policy for tourism was worked out and was approved by the parliament in 2017. The aim is to bring in 200,000 tourists per year from 2030 who will spend US$150 million.19 However, so far, the project has not advanced beyond the preliminary planning stage. The strategic development plan puts emphasis on infrastructure, and considerable effort has been made to provide as many people as possible with electricity—to the point of creating substantial excess generation capacity. The road component of the infrastructure program is even less convincing. It does not seem to rest on any systematic economic analysis either of its costs or of its expected effects. A good road network has a central role to play when it comes to the development of a nationwide market economy in East Timor. Above all, it should serve to link farmers to both output and input markets. A central part of such a network c­ onsists of feeder roads which make it possible to transport goods on wheels instead of on animals and humans to the main roads of the country. The 2011–30 road program is indeed ambitious, even overambitious. If carried out in its entirety, it will give East Timor a higher road density than many middleincome countries and a higher paved road density than most upper middle-income countries. As it seems, however, the need for continuous maintenance has not been taken into account, extension has been favored at the expense of rehabilitation of the existing roads, and the entire program may prove economically unsustainable in the long run. Alternatively, road expenditures may crowd out spending on health, education, and agriculture.  Doraisami (2018), p. 255.  República Democrática de Timor-Leste (2016e), Government of Timor-Leste (2017a).

18 19

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In the worst case, the road expansion program may turn out to be a white elephant. Unfortunately, it is not the only dubious megaproject. Another is the ‘Special Social Market Economy Zone’ in the Oecusse enclave, one of the least developed regions of the country. The idea is to launch an extremely ambitious and comprehensive investment package, ranging from industry and tourism to financial services and research, to be fueled by heavy investment in infrastructure: a highway, a dam, a port, a power plant, and, not least, the biggest airport in the country—in an enclave where everything has to be done from scratch, where skilled labor is extremely scarce, and where furthermore few linkage effects can be expected since Oecusse has no direct overland connection with the rest of the country. The third dubious megaproject is the development of oil refining on the south coast. Hitherto, the oil extraction in the Timor Sea has not created any employment inside the country, but by launching the triple-­cluster Tasi Mane project, the government hopes to change this fact: oil and gas refineries, petrochemical industries, a highway, a port, and an airport—over a period of some two decades. The problem, however, is that the project stands and falls with the construction of a pipeline from the Greater Sunrise field to Timor, across the very deep Timor Trough. The consortium which holds the contract for the exploitation of Greater Sunrise prefers a floating liquefied natural gas plant and the company that was to develop the first part of the Tasi Mane complex pulled out of the deal. Whether the project will ever materialize is thus highly uncertain. If it does, it means more strain on the budget. As things stand, East Timor has already resorted to international lending to supplement the excess withdrawals from the petroleum fund. In the longer run, especially if the oil revenue continues to dwindle, it may call for increased debt payment from a shrinking budget and should the revenue dry up completely—a realistic possibility—in the end, the fund will be depleted, and in the worst case, it will have been wasted on projects with little or no economic value, projects that will have crowded out other essential areas like agriculture, health, and education—an appalling perspective indeed. The oil money may be wasted in yet another way. As is well-known, the existence of natural resources in a country easily leads to corruption. This risk is high in a country like East Timor, where gifts are an essential

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part of the traditional social culture. In the resource-rich setting this easily leads to rent seeking and shady deals—‘grabbing’—of all kinds. Resource abundance may be conducive to bad institutions and bad institutions of course hamper economic and social development. As it seems, corruption is not rampant in East Timor. On the contrary, the country scores well in comparison with other countries in Southeast Asia, in spite of a few high-level cases. Institutions have been established to deal specifically with corruption, but how efficient they are is uncertain and at the same time, the new legal regulation of the media makes it difficult to undertake independent investigation of suspect practices.

Institutions and the Economy The need for continued institutional development remains. As pointed out in the 2018 Timor-Leste Economic Report by the World Bank, In a young country with a fast-changing political and social landscape, there is a need to focus on strengthening institutions that create the enabling environment for good policy-making, economic prosperity and inclusivity. The development of public institutions that enable the private sector, provide public services and are accountable, is a long process that needs to be sustained over time. In Timor-Leste, a resource-rich country, there is a heightened risk that institutional development may be stalled by entrenched interest groups.20

Without stable, reliable institutions, the risk increases that government spending will amount to wasteful spending that is not conducive to a reduction of poverty, malnutrition, and food insecurity and to increased prosperity for the vast majority of the population—a prosperity that can be maintained once the oil revenues are no longer available. How long it will take for the oil reserves to be depleted is far from clear, but for the time being it does not appear very likely that new deposits will be discovered. The only actually producing field is Bayu-Undan which is, however, about to be exhausted sometime before 2025, possibly as early  World Bank (2018c), p. 17.

20

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as 2021.21 This is likely to lead to an at least temporary suspension of oil production. The main problem with respect to the Greater Sunrise field— where the refining of oil and gas is to take place—has not been solved. Nobody knows yet whether the Tasi Mane project will materialize, much less when. This means that in the meantime, government expenditures will have to come either from lending or from the returns obtained from the petroleum fund. The market value of the fund shows signs of shrinking as production continues to fall and withdrawals continue to be made in excess of the estimated sustainable income. Sooner or later, the window of opportunities provided by the petroleum deposits will close. How will they have been used and what are they likely to have produced? As things stand today, unfortunately, the implementation of the strategic development plan leaves a lot to be desired. Education, health, agriculture, and tourism—all of which have been identified as strategic components of the development strategy—have been more or less steamrolled by investments in physical infrastructure and megaprojects of dubious economic value, projects that were not subjected to a proper cost-benefit analysis before they were decided. A strategy for the economic development for East Timor that endeavors to have a major impact on the living standard of the citizens must rest on two legs. On the one hand, it has to be conducive to modernization and improvements in the traditional agricultural sector where most people are making a living, but it also has to create a modern sector where incomes are higher and which can be expanded in the future. The implementation of the strategic development plan, however, pays little attention to the former and chooses to perpetuate the dependence on petroleum when attempting to create the latter. In addition, the risk is high that neither of the megaprojects will ever produce the economic returns necessary to justify them. In the creation of a viable modern sector, the human factor plays a central role. Regardless of how much you spend on sophisticated state-of-the-art physical equipment, unless you have access to properly trained people to run and manage it, no modern sector will ever be created. Unfortunately, education and training are time-­consuming processes which cannot easily be sped up, which in turn means that it may not make a lot of sense to 21

 World Bank (2018d), p. 6.

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hasten physical investments. Human and physical capital must in principle be developed pari passu. Otherwise, both the return on the latter and the spillovers will be low, in the worst case negative. That East Timor has oil and gas resources does not mean that it can afford to squander them. The budget constraint applies. The desirability of spending on infrastructure has to be compared to the desirability of spending on other sectors and this comparison must be made explicitly, with the aid of the available analytical techniques. ‘Nationalistic’ or ‘political’ ‘white elephants’ have no place in this process of setting priorities and analyzing tradeoffs. The expansion of the public sector has driven the East Timorese economy during most of the post-independence period, but if prestige projects are allowed to squeeze out projects with sound economic or social returns, public spending will rapidly run into steeply diminishing returns. Frontloading an investment process always entails the risk of making ill-informed decisions based on insufficient information and of setting up structures that are not easily dismantled but will continue to have unfortunate consequences for the economy and the taxpayers for many years to come, and the bigger the projects, the more serious are the consequences likely to be. East Timor may be at a political and economic crossroads. The course opted for in the implementation of the strategic development plan is one which threatens to spend inordinate sums on projects that should not have seen the light of day, at least not in their present form. ‘Even though the petroleum industry provides few jobs, its revenues allow the state to employ people, pay pensions, purchase imports and subsidize non-viable businesses, giving the appearance of economic growth. Although such spending builds support for populist politicians in the short term, it is not sustainable’, concludes Charles Scheiner.22 Unless the course is corrected, at the end of the journey, the country may have found out that the oil money is gone and that it has little to show for it. East Timor would then be back, if not at square one, in a situation not so far removed from it, with plenty more infrastructure23 but far fewer jobs than it needs and a far lower standard of living than the upper middle-income countries. That would be a pity.  Scheiner (2019), p. 89.  ‘… full implementation of all the SDP projects would result in Timor-Leste having a stock of infrastructure assets to a value considerably higher than that of the average upper-middle income country. This suggests that full implementation of all SDP projects may not be necessary to achieve upper-middle income status’ (World Bank 2015, p. ix). 22 23

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Index1

A

Absorptive capacity, 110 ADB, see Asian Development Bank AEI, see Agência Especializada de Investimento Afghanistan, 117, 123 Agência Especializada de Investimento (AEI), 171 Agriculture, 1, 27, 37, 45, 47, 50, 50n48, 51, 59, 92, 103, 106, 119, 137, 142, 144, 146, 153, 157, 165, 187, 188, 192, 193, 196, 197, 199–201, 203–205, 212–215, 217, 220, 222, 223, 231, 236, 237, 239, 240, 242, 244, 245, 247, 250, 251, 256, 259–261, 284, 286, 289, 292, 292n129, 292n130, 293, 307,

312, 318, 319, 324, 326–329, 331 Ainaro, 25 Airports, 39, 65, 71, 72, 93, 165, 166, 187, 287, 290, 329 Aldeias, 3, 3n7, 4, 9, 10 Algeria, 284 Aliança da Maioria Parlamentar (Alliance of the Parliamentary Majority, AMP), 75, 83–85, 89, 98–101 Aliança de Mudança para o Progresso (AMP), see Aliança da Maioria Parlamentar (Alliance of the Parliamentary Majority, AMP) Alkatiri, Mari, 51, 57, 59, 66, 69, 71, 74, 75, 85, 90, 91, 98, 100, 186, 316, 321

 Note: Page numbers followed by ‘n’ refer to notes.

1

© The Author(s) 2019 M. Lundahl, F. Sjöholm, The Creation of the East Timorese Economy, Palgrave Studies in Economic History, https://doi.org/10.1007/978-3-030-22052-5

385

386 Index

Amaral, Francisco Xavier do (Associação Social Democrata Timorense, ASDT), 73n96, 84, 86–87, 210n41 AMFITIL, see Association of Microfinance Institutions in Timor-Leste AMP, see Aliança de Maioria Parlamentar; Aliança de Mudança para o Progresso Anemia, 117 Angola, 283 Annan, Kofi, 68, 69 Anti-Corruption Commission, 300, 305, 306, 312 Araújo, Augusto, 68 Arbour, Louise, 68 Army, 61–66, 68, 233 Army rebels, 66 ASDT, see Associação Social Democrata Timorense ASEAN, see Association of Southeast Asian Nations Asian Development Bank (ADB), 2, 174, 182 Asian Foundation, 96, 131n222 Associação Empresários Construção Civil e Obras Públicas, 82 Associação Social Democrata Timorense (ASDT), 74, 84, 86 Association of Microfinance Institutions in Timor-Leste (AMFITIL), 180 Association of Southeast Asian Nations (ASEAN), 158–159, 171, 325 Ataúro, 172 Attitudes toward childbearing, 139

Australia, 30, 65, 69, 70, 106, 108, 166, 167, 179, 185, 267–274, 282, 288, 320 Australia and New Zealand Bank, 179 Australian troops, 65, 69–72 B

Bahasa Indonesia, 19, 131 Balance of payments, 45, 46, 48, 52, 53, 107 Balance of trade, 52, 53 Banco Central de Timor-Leste, 184 Banco Nacional de Comércio de Timor-Leste (BNCTL), 179, 180 Banking, 48, 179, 183, 221 Bank Mandiri, 179 Bank Rakyat, 179 Banks, 39, 54, 55, 113–114, 169, 179–181, 183–185, 188, 222, 275 Baris, Alcino, 67 Baucau, 7, 8, 18, 62, 74, 78, 79, 112, 259n217 Bayu-Undan, 31, 185, 267, 273, 280, 288, 306, 320, 330 Beaço, 273, 287 Beans, 205, 210, 211, 247 Betano, 216, 287 Beuman, Lydia, 92 BGK, see Bloku Governu Koligasau Birth rates, 35, 190, 323 Bloku Governu Koligasau (BGK), 87 Blunt, Peter, 310, 311 BNCTL, see Banco Nacional de Comércio de Timor-Leste

 Index 

Boavida, Madalena, 59 Bobonaro, 25 Bolsa da Mãe, 101, 102 Bosnia and Herzegovina, 101 Brazil, 38 Budget, see Government budget Budget execution rates, 32, 52, 108, 110, 163 Budget expenditures, 1, 2, 27, 166, 287 Budget, quality of, 229 Budget revenues, 2, 30, 31, 36, 52, 53, 103–105, 290, 309, 329 Buffaloes, 3, 212, 221, 225 Bush-fallow rotation, 204, 251, 318 Business activity surveys, 147 C

Caixa Geral de Depósitos, 179 Cambodia, 1, 15, 20, 22, 121, 132, 160, 176–178, 207, 300 Capacity building, 11, 47, 110 Capital, 4, 24, 25, 41, 42, 64, 65, 68–71, 108–111, 147, 158, 165, 170, 181, 182, 184, 193, 199, 204, 214, 217–222, 251, 315, 318, 319, 332 Capital expenditure, 103, 108–109, 164 Cardoso, Santina, 90 Caritas, 67 Carrascalão, Mário, 84, 302 Cassava, 3, 115, 205, 212, 223, 224, 247, 249 Catholic Church, 51, 63 Cattle, 3, 212, 225, 226 Center region, 7, 9

387

Centralism, 59 Chefe de aldeia, 11 Chefe de suco, 11, 85 Chicken, 212, 225, 244 Child malnutrition, 22–23, 33, 69, 116–118, 203 Chinese, 185 Church, see Catholic Church Civil code, 170 Civil court cases, 55–56 Civil servants, 39, 103, 149, 176, 237, 293 Climate change, 202, 245, 248–251, 320 CNRT, see Congresso Nacional de Reconstrução Timorense; Congresso Nacional para a Reconstrução de Timor-Leste Coelho, Hernani, 90 Coffee, 2, 38, 43, 44, 185, 208–211, 225, 234, 239n175, 241n179, 249, 250, 259, 318–319 Coffee exports, 29, 106, 209, 285, 320 Colombia, 284 Comissão Anti-Corrupção, see Anti-Corruption Commission Commercial agriculture, 200, 236 Communications, 1, 10, 23, 27, 37, 47, 131 Community health centers, 23, 124 Comoro market, 70 Comunidade dos Países de Língua Portuguesa (Community of Portuguese Language Countries), 150

388 Index

Congresso Nacional de Reconstrução Timorense (CNRT), 83, 86, 94–99, 316, 317, 322 Congresso Nacional para a Reconstrução de Timor-Leste (CNRT), 74, 75 ConocoPhillips, 185, 274n46, 306 Consorcio Nasional de Timorense (Timorese National Consortium), 299 Conroy, John, 240, 255 Consensus, 9, 90, 91, 93 Consolidated Fund for East Timor (CFET), 41, 42 Constituent assembly, 58, 63, 86 Constitution, 56–58, 63, 98, 100 Construction, 37, 46, 58, 104, 146, 148, 154, 166, 172, 173, 182, 219, 228, 273, 329 Consumer durables, 119, 134, 317 Convention on the Continental Shelf, 268 Corruption, 36, 54, 56, 59, 61, 84, 86, 100, 276, 283, 294, 295, 298–308, 310–313, 329, 330 Court of appeal, 56, 92, 287 Court of Auditors, 307 Courts, 55, 56, 71, 84, 92, 173–175, 188, 270, 287, 303–308, 312, 322 Cova Lima, 25 Credit, 170, 179–184, 188, 217, 221–223, 234, 236, 319 Credit guarantee scheme, 184 Criminal court cases, 56, 174, 188 Current account, 46, 52 Customs, 11, 56, 169, 171, 175, 179

D

Da Conceição, Antonio, 95 Da Costa, Helder, 245 Da Costa, Zacarias, 84, 90 Darwin in Australia, 77, 267 Da Silva, Avelino Maria Coelho (Partido Socialista Timorense, PST), 73n96 Da Silva, Estanislau, 59 Das, Maitreyi Bordia, 43 De Araújo, Fernando, 68, 73, 74 De Araújo, Rui Maria, 90, 98, 316 Debt, 46, 103, 222, 289, 290, 329 Deforestation, 216, 245–248, 320 Demographic and health surveys, 51 2003, 50, 139 2009–2010, 114 2016, 121, 128 De Sousa, Gregório, 59 Destruction of infrastructure by Indonesians, 11, 42, 45, 46, 48, 159 Determinants of welfare, 12 Development strategy, 1, 26, 27, 46–48, 102, 187, 287, 325, 331 Diarrheal diseases, 22 Dili, 2, 7, 8, 21, 25, 38, 42, 44, 51, 60–62, 64–73, 78, 79, 84, 110–112, 141, 142, 147, 149, 152, 158, 161, 165–167, 172, 176, 179, 188, 193, 212, 215, 228, 229, 233, 290, 316, 324, 325 Discouraged workers, 151 Displaced people, see Refugees Districts, 3n7, 8, 9, 18, 25, 27, 33, 60, 64, 82, 84, 113, 117, 126, 144, 155, 167, 204, 210, 220

 Index 

Doing Business, 172–176, 178, 179, 233 Drinking water, 4, 8, 124, 326 Dropout rates, 15, 20 Droughts, 206, 215, 223, 246, 248 Dry season, 215, 248 Dualistic development, 157 Dutch Disease, 283–286, 292n130, 312, 320 E

Ease of Doing Business index, 172, 318 East region, 18, 22, 65 East Timor Human Development Report (2002), 26 Economic growth, 26, 28, 46, 48–51, 111–112, 134, 191–196, 200, 266, 283, 291, 292, 315–317, 332 Economist Intelligence Unit democracy index, 88 Ecuador, 284 Education, 1, 6, 11, 13–20, 22, 25–28, 31, 33, 35, 46, 47, 50, 51, 63, 91, 92, 100, 112, 114, 126–134, 140, 150, 152–155, 161, 180, 190, 196, 223, 231, 251, 275, 285, 289, 292, 294, 312, 317, 318, 321, 326–329, 331 Egeland, Jan, 68 Elang-Kakatua, 267 Elections, 58, 63, 69, 71–75, 77, 78, 85–89, 91–100, 218–219, 316, 317, 321, 322

389

Electricity, 4, 8, 37, 103, 109–110, 165, 168, 173, 318, 328 price of, 167 Ema boot, 61 Ema ki’ik, 60 Ema matenek, 61 Employment, 6, 7, 44–46, 66, 70, 108, 110, 137, 138, 142–150, 152, 155–162, 169, 178, 189–198, 217, 240, 251, 259, 260, 286, 318, 329 by industry, 148–149 by sector, 142 outside agriculture, 144, 145, 196, 197, 324 England, 106 English, 132, 170 Enrolment of students, 14, 15, 17, 20, 28, 127–130, 132, 134, 153 Enrolment rate, see School enrolment Enterprise and skills survey 2013, 154 Enterprise and skills survey 2014, 154 Enterprise survey 2004, 181 Entrepreneurship, 169–176, 185, 188, 244 Ermera, 25, 65, 259, 259n217 Erosion, 202, 216, 226, 245–249, 251, 320 ESI, see Estimated sustainable income Estimated sustainable income (ESI), 104, 277, 281, 290, 331 Excess withdrawals from the petroleum fund, 277, 281–282, 320, 329

390 Index

Expatriate community, 42 Exports, 11, 29, 29n62, 38, 45, 46, 106, 108, 109, 111, 158n89, 166, 169, 171, 175, 178, 185, 188, 199, 208–210, 212, 266, 283–285, 318, 320, 325 Extension workers, 236, 237 F

Failed state, 75n99, 322, 323 Falintil, 57, 61, 62, 81, 85 Falintil-FDTL, see Forças de Defesa de Timor-Leste Family planning, 21, 50–51 Farm assets, 6 Feijó, Rui Graça, 99n92, 307 Fertility rate, 21, 21n37, 50, 137–140, 216, 318 F-FDTL, see Forças de Defesa de Timor-Leste Fiji, 176, 183 Financial capital, in agriculture, 217, 221 Firewood, 216 Fiscal policy, 100, 291 Fishery, 45, 205, 227, 319, 326 Fitzpatrick, Daniel, 233, 233n152, 233n153, 233n156, 233n157, 234n159 Food consumption, 5, 115–118, 133, 257 Food programs, 118 Food security, 7, 202, 203, 218, 225, 315, 318 Forças de Defesa de Timor-Leste (Falintil-FDTL, F-FDTL), 61 Foreign advisors, 28

Foreign aid, 28, 33, 40, 53, 126, 271 Foreign community, 176 Foreign experts, 110, 297, 307, 308, 322 Foreign judicial officers, expulsion of, 174 Foreign personnel, 44, 155 Forestry, 45, 144, 187, 326 Formal economy, 146 Formal sector, 43, 45, 147, 151, 156, 169, 181, 185, 324 Freedom House, 57 Freedom of the press, 56 Frenti-Mudança, 86, 97 Fretilin (Frente Revolucionaria de Timor-Leste Independente), 55n59, 57–60, 63, 68, 69, 73–75, 83–88, 90, 94–100, 316, 317, 322 G

Gangs, 62, 65, 67, 70, 71 Gas, 30, 31, 36, 40, 41, 48, 51–53, 64, 70, 79, 103, 104, 134, 135, 165, 208, 265–267, 270, 271, 273, 275, 280–283, 287–289, 310, 312, 313, 315, 320, 321, 324, 325, 327, 329, 331, 332 Gender-Related Development Index, 26 Gini coefficient, 8, 8n11, 33 Gleno, 65, 68 Global Integrity Score, 301 Goats, 3, 212, 225, 226, 246 Governance, 11, 54–57, 63, 90, 186, 310, 312, 322

 Index 

Government budget, 19, 30, 31, 40, 41, 47, 52, 105, 118, 126, 165, 176 Government expenditure, 41, 102, 118, 280, 282, 305, 326, 331 Government services, 37 Grabbers, 295, 296 Greater Sunrise, 185, 267, 272–274, 281, 282, 288, 289, 320, 329, 331 Green Revolution, 214 Growth, 26, 28, 35, 37, 44, 46–51, 101, 102, 104, 106, 108, 111–112, 134, 137–198, 200, 202, 206–208, 211, 212, 217, 231, 232, 240, 242, 247, 250, 265, 266, 275, 278, 283, 285, 286, 291, 292, 292n130, 294, 296–298, 313, 315–318, 320, 323, 324, 327, 332 Gusmão, Xanana, 57, 58, 66, 69, 71–75, 83, 86, 89–92, 100, 287, 316, 321, 322 Guterres, Francisco ‘Lu-Olu,’ 73, 73n96, 74, 86, 95, 99, 100, 293n137, 299n158, 317 Guterres, José Luís, 59 Guyana, 283 H

Head-count index of poverty, 4 Health, 1, 3, 10, 13, 20–28, 31, 32, 46, 50, 51, 54, 80, 83, 90–92, 98, 100, 102, 112, 114, 118–126, 128, 133, 134, 139, 142, 144, 146, 150, 156, 231, 275, 289, 292, 294, 312, 315, 317, 321, 325–329, 331

391

Health facilities, 10, 123, 125 High-yield seed varieties, 221, 223, 225 Hill, Hal, 138 Hitam, 59 HIV/AIDS, 21, 27, 28, 33 Horses, 3, 221 Hosgelen, Merve, 141 Household survey 2001, 2, 4–9, 12, 15, 113, 259 Human Development Index, 1, 26, 32, 132, 133 Human Development Report, 22, 151 Human Poverty Index, 26 Human Rights Commission, 305 Human Rights Watch, 63 Hungry season, 115 Hyundai, 166, 287 I

IMF, see International Monetary Fund IMfTL, see Instituto de Microfinanças de Timor-Leste (IMfTL) Imports, 29, 46, 53, 106, 108, 109, 158, 175, 193, 202, 203, 239, 244, 318, 332 Independence, 1–3, 11, 13, 18, 20, 25–26, 28, 29, 33, 35–75, 81, 86, 88, 96, 97, 100, 101, 104, 106, 109, 110, 112–114, 117, 120, 121, 123, 125, 128–132, 134, 135, 137, 138, 169, 175, 176, 180, 209, 211, 216, 222, 223, 228, 234, 236, 267, 270, 275, 293, 305, 315, 316, 318, 322, 323, 325, 332

392 Index

Indonesia, 13, 19, 20, 29, 30, 43, 45n35, 50, 55, 70, 72, 84, 120–122, 131, 140, 160, 166, 168, 175–177, 175n176, 179, 186, 200, 232, 247, 268–270, 274, 282, 291–293, 292n130, 300, 302, 324, 325 Indonesian market, 29, 45 Indonesian occupation, 11, 15, 19, 22, 32, 35, 39, 44, 57, 58, 62, 111, 121, 128, 158, 165, 169, 201, 206, 227, 266, 269, 311, 321 Industrialization, 106, 186–189, 197, 283 Industrial sector, 38, 137, 178, 194, 196, 200, 203 Industry, 39, 43, 50, 142, 146, 148, 157, 166, 186, 187, 193, 196, 240, 243, 251, 284, 286, 287, 292n130, 307, 318, 327, 329, 332 Inequality, 8, 26, 33, 44, 62 Infant mortality rate, 20 Inflation, 42, 44, 48, 53, 103, 111, 114, 291 Infrastructure, 2, 3, 8, 10, 11, 29, 31, 33, 35, 36, 46, 48, 54, 82, 83, 91, 93, 101–103, 106, 110, 118, 125, 150, 159–162, 164, 165, 172, 187, 190, 196, 200, 219, 227–232, 234, 236, 275, 286, 289, 290, 292, 298, 299, 307, 310, 312, 315–318, 326–329, 331, 332 Institutions, 35, 36, 46, 54, 55, 64, 65, 87, 120, 131, 160, 171, 172, 174, 179–183, 218, 222,

227–232, 284, 293–299, 304, 307, 310, 312, 313, 322, 323, 330–332 Instituto de Apoio ao Desenvolvimento Empresarial (IADE), 169 Instituto de Microfinanças de Timor-Leste (IMfTL), 180 Instituto Nacional de Desenvolvimento de Mão-de-­ Obra, 154 International Budget Partnership, 309 International Court of Justice, 270, 273 International Crisis Group, 298 International Finance Corporation, 181, 222 International Monetary Fund (IMF), 28 Investment law, 39, 169–171 Irrigation, 6, 187, 205n23, 214, 217, 218, 220, 221, 223, 292 J

Japan International Cooperation Agency (JICA), 2, 178 Jerasaun Foun, 91 João Carrascalão (União Democrática Timorense), 73n96 Joint Petroleum Development Area (JPDA), 271, 272, 280, 281 Judges, 55, 72, 134, 173, 174, 306, 322 Judiciary, 55, 87, 173, 297, 306–308, 318, 322 Juvenile delinquency, 152

 Index  K

Kaebauk Investimentu no Finansas, 180 Kammen, Douglas, 58–59, 59n68, 83n32, 102, 102n104 Khunto, see Kmanek Haburas Unidade Nasional Timor Oan (Khunto) Kingsbury, Damien, 59n69, 60, 61, 61n75, 63n81, 64n88, 73n94, 75n97, 77, 77n1, 79n8, 84n53, 87, 87n43, 88, 91n56, 94n73, 95n75, 97n84 Kitan, 267, 280 Kmanek Haburas Unidade Nasional Timor Oan (Khunto), 96–98 L

Labor force, 6, 44, 45, 137, 142, 144–147, 150–152, 154, 155n82, 158, 162, 178, 194–197, 201, 239, 240, 242, 247, 259, 323 Labor force participation, 145, 150–152 Labor force survey, 143, 155, 143, 145, 146, 154, 155n82, 156 Labor market entrants, 142 Laminaria-Corallina, 267 Land, 6, 39, 43, 79, 166, 173, 175, 181, 187, 204–207, 214–217, 220, 222, 233–236, 240–242, 245, 247–252, 268, 319, 324 Land law, 173, 184, 235 Landownership, 6 Land productivity, 206 Land Titles, 173, 233–235, 319

393

La’o Hamutuk, 288–291 Laos, 1, 15, 50, 121, 123, 132, 160, 176, 178, 300 Lautém, 18 Law on Freedom, Assembly and Demonstration 2004, 63 Lawyers, 173, 175, 306 Leach, Michael, 87 Lewis, W. Arthur, 43n27, 44, 157, 157n88, 191, 191n256, 192 Lewis Model of Economic Growth, 191–196 Libya, 233 Life expectancy, 20, 120, 121, 132 Life expectancy at birth, 20, 32, 120, 315 Liquiçá, 25 Literacy rate, 13, 20, 124, 127, 128 Liurai, 88 Livestock, 3, 4, 7, 25, 37, 45, 205, 212–213, 225, 226, 326 Loans, 179–185, 221, 222, 290, 290n121, 318 Lobato, Lúcia, 73n96, 86, 302 Lobato, Rogério, 59, 61, 62, 65, 67–73 Lubrication effect, 162–164 M

Macroeconomic stability, 42–46 MAFF, see Ministry of agricultury, fisheries and foretstry (MAFF) Maize, 2, 3, 7, 115, 203–206, 206n29, 208, 211, 221, 223–225, 232, 237, 243, 247, 249, 250, 318 Malae, 58

394 Index

Malae boot, 59 Malaria, 21, 22, 28, 33, 120, 121, 123 Malaysia, 65, 72, 73, 160, 177, 179, 200, 293 Male employment, 147 Malnutrition, 7, 22, 23, 33, 69, 116–118, 203, 246, 317, 330 Manatuto, 25 Manuel Tilman (União dos Filhos Heróis das Montanhas de Timor), 73n96 Manufacturing, see Industry Manufahi, 25 Maputo, 59 Maritime border, 266–274 Maritime border agreement 2006, 272 Maritime border agreement 2017, 273 Market incentives, 255–256 Market incentives in agriculture, 235–239 Marshall Islands, 233 ‘Martial arts’ gangs, 67, 71 Martin, Ian, 69 Marxism-Leninism, 57, 58 Maternal mortality, 20–21, 119, 123, 125 Mechanization in agriculture, 205, 217 Media, 55–57, 63, 87, 92, 308, 313, 322, 330 Media regulation law, 92, 308 Mehlum, Halvor, 295 Mestizos, 59 Microfinance, 179–182, 188, 222 Micronesia, 233

Millennium Development Goals, 28, 48 Minimum wage, 43, 44, 176–178, 220, 318 Ministry of Agricultury, Fisheries and Forestry (MAFF), 218, 219 Ministry of Education, 18–20, 128, 298 Ministry of Finance, 84, 219, 220, 229–231, 274, 297, 298, 302 Ministry of Health, 17, 18, 20, 23, 24, 39n14, 120 Modern sector, 29, 38, 66, 106, 135, 137–199, 207, 239, 240, 251, 286, 317, 318, 331 Moene, Karl, 295 Monteiro, Longuinhos, 68 Mozambique, 57 Multidimensional poverty, 114 Mumbai, 43 Myanmar, 15, 121, 178, 300 N

Natarbora, 216 National currency, 53, 285 National development plan, 18, 26–28, 46, 47, 54, 112, 164, 165, 315, 316 National Directorate of Roads, Bridges and Flood Control, 230 National Land Registry, 235 Nepotism, 62, 300 Nevins, Joseph, 268 New Timor Sea Treaty 2002, 30 New Zealand, 65, 69, 179, 270

 Index 

Nigeria, 283, 284, 291 Niner, Sara, 58 Nongovernmental organizations (NGOs), 23, 43, 45, 180, 322 Non-oil GDP, 37, 42, 49, 101, 106, 112, 182, 189, 191, 203, 240, 275, 286 Non-registered trade, 29 Northern Ireland, 106 Norwegian oil fund, 275 O

Oecusse, 55, 91, 168, 171, 171n150, 172, 186–188, 226, 329 Office of the Inspector General, 304–305 Office of the Prosecutor General, 55 Office of the Public Prosecutor, 305 Oil, vii, 30, 31, 33, 36, 40, 41, 47–49, 51–53, 79, 80, 93, 100, 103, 104, 106, 133–135, 165, 185, 186, 190, 191, 200, 208, 265–313, 315, 317, 320, 321, 324–327, 329–332 Oil and gas revenues, 30, 31, 48, 52, 53, 79, 313 Oil fund, see Petroleum fund Oil price, 49, 104, 266, 275, 278–280, 282, 292, 320 Oil refineries, 286 Oil reserves, 266–274, 320, 324, 330 Oil revenues, 31, 100, 104, 133, 190, 266, 271, 274, 275, 277, 279, 284, 285, 291–293, 297, 298, 317, 326, 329, 330

395

Oil sector, 48, 49, 191, 286 Oman, 277 On-shore oil and gas reserves, 267 Osaka Gas, 185, 273 P

Papua New Guinea, 1, 207, 221 Parliament, 31, 54, 55, 55n59, 58, 65, 67, 73, 85, 86, 88, 90–94, 94n73, 96–100, 160, 164, 170, 171, 174, 188, 235, 276, 277, 298, 306, 309, 310, 317, 321, 328 Participatory potential assessment 2001–2002, 2, 3 Partido de Libertação do Povo (PLP), 94–98 Partido Democrático (PD), 68, 73, 75, 86, 95 Partido Social Democrata (PSD), 74, 84–86 Payment and Banking Authority, 180 PDD, see Programa de Desenvolvimento Descentralizado Peanuts, 115, 204, 221, 223, 224, 247, 249, 250 Peas, 205 Penal code, 56, 57, 63 Pereira, Agio, 90, 90n55 Pessoa, Ana, 59 Petitioners, 64, 78, 80, 83 Petroleum Act, 276 Petroleum fund (PF), 31, 79n47, 104, 265, 274–282, 290, 291, 312, 317, 318, 320, 329, 331 Petroleum Fund Law, 276

396 Index

Petroleum sector, see Oil sector Petroleum Tax Law, 169, 276 Philippines, 121, 160, 175, 179, 208 Phoenix, 267 Pigs, 3, 212, 225, 226 Pina da Costa, Maria do Céu Sarmento, 90 Pires, Emilia, 303 PLP, see Partido de Libertação do Povo PNTL, see Polícia Nacional de Timor-Leste Police, 39, 61–66, 70–73, 87, 102, 111, 142, 158, 303, 316 Polícia Nacional de Timor-Leste (PNTL), 61 Population, 4–6, 8, 12, 16–18, 20–23, 27, 33, 35, 37, 38, 44, 50, 51, 56, 59–61, 79, 81n20, 89, 95–97, 100, 101, 104, 113–120, 124, 127, 129, 131–135, 200–204, 207, 211, 213, 216, 227, 229, 237, 237n172, 239, 247–251, 258, 276, 283, 291–294, 305, 312, 315, 316, 318, 320, 321, 323, 326, 330 Population growth, 35, 44, 50, 51, 137–198, 207, 247, 250, 316, 318, 320, 323 Population structure by age groups, 141 Population trap, 158, 189–193 Portugal, 18, 65, 100, 131, 269 Portuguese, 11, 18–21, 35, 61, 106, 131, 131n222, 150, 159, 179, 209, 233, 266 Portuguese as the language of instruction, 18, 131 Portuguese colonial rule, 11

Poverty, 1–11, 13, 15, 18, 20, 26–33, 35, 45–48, 47n39, 50, 66, 101, 111–115, 119, 127, 134, 200, 202–204, 212, 232, 237, 243, 258, 259, 275, 283, 315–317, 330 Poverty alleviation, 9, 112 Poverty eradication, 46, 50, 203, 204 Poverty gap, 4, 5 Poverty line, 4, 5, 8, 113, 114, 203 Poverty measures, 4 Presidential elections, 71, 85, 94, 95 Primary school, 13, 16, 25, 27, 128–130 Primary school enrolment, 15, 20, 128 Private investment, 104, 171, 173 Private sector, 43, 45, 47, 47n39, 50, 79, 106, 111, 138, 146, 148–150, 161–165, 170, 173, 180, 182, 183, 197, 198n260, 225, 230, 236, 237, 239–241, 259, 294, 307, 318, 326, 330 Procuradoria-Geral da República, see Office of the Public Prosecutor Procurement, 56, 84, 86, 165, 169, 219, 286, 299, 302, 303 Productivity in agriculture, 137, 191, 199, 202, 213, 240 Programa de Desenvolvimento Descentralizado (PDD), 82 PSD, see Partido Social Democrata Public administration, 29, 31, 39, 45, 110, 142, 144, 146, 149, 158, 161, 162, 176, 193, 239, 286, 292n129, 318 Public employment, see Public sector employment Public expenditures, 49n47, 50, 104, 108, 110, 111, 134, 281, 313

 Index 

Public finance, 47, 48 Public investment, 102, 108, 155, 164–168, 182, 289 Public sector, 9, 43, 80, 110, 142, 144, 146, 149–150, 158, 176, 179, 197, 293, 300, 310, 318, 324, 332 Public sector employment, 149, 161 Public sector, optimal size of, 161–164 Q

Quality of education, 17, 20, 134 Quality of life indicators, 9 R

Rainfall, 204, 215–217, 246, 249, 250 Ramos-Horta, José, 67–69, 72–74, 73n96, 92, 98, 272 Rasik, Moris, 180 Recovery package for refugees, 78 Red Cross, 65 Referendum Package, 82 Refugee camps, 69, 70, 78, 79 Refugees, 65 Reinado, Alfredo, 65–68, 70–72, 74, 77, 78 Remittances, 106, 259n217 Renetil, see Resistência Nacional dos Estudantes de Timor Leste (Renetil) Rent seeking, 294, 295, 330 Reporters Without Borders, 308 Resistance movement, 35, 57, 80, 81, 311 Resistência Nacional dos Estudantes de Timor Leste (Renetil), 73 Resource curse, 265–313

397

Respiratory infections, 22, 123 Revenues, 2, 30–32, 36, 40, 41, 48, 51–54, 79, 100, 103, 104, 106, 133–135, 160, 171, 190, 191, 231, 265, 266, 269, 271–280, 273n45, 282–286, 290–293, 292n130, 297, 298, 303, 309, 310, 312, 313, 315, 317, 320, 321, 325, 326, 329, 330, 332 Ricardo, Alberto, 66 Rice, 2, 3, 36, 115, 118, 188, 200, 202–208, 205n23, 206n29, 211, 212, 217–220, 223–225, 224n105, 227, 237, 243, 250, 292, 318 Rice imports, 202 Richter, Kaspar, 12 Riots, 61, 64–67, 70, 72, 111, 152, 316, 321, 322 Roads, 10, 24, 25, 46, 72, 92, 124, 157, 161, 165, 166, 190, 227–232, 243, 255, 299, 315, 316, 319, 324, 328, 329 Rodrigues, Roque, 59, 67 Ruak, Taur Matan, 62, 70, 85, 90–92, 94, 96, 100, 289, 303, 317 Rwanda, 26 Rybczynski theorem, 247 S

Saikia, Udoy Sanker, 141 Saldanha, João, 138 Salsinha, Gastão, 64 Samoa, 183 Sanitation, 8, 22, 114, 123, 165, 231, 326 School enrolment, 15, 17, 20, 127, 128, 130, 132, 134, 153

398 Index

Schools, 6, 13, 15–20, 25, 51, 80, 126–132, 134, 144, 151–153, 282 Secondary school, 6, 13, 16, 130, 237, 282 Secondary school enrolment, 15, 153 Secretario do Estado para a Política de Formaçao Profissional e Emprego (SEPFOPE), 154 Sector investment programs (SIPs), 27, 165 SEPFOPE, see Secretario do Estado para a Política de Formação Profissional e Emprego (SEPFOPE) Services, 23–27, 29, 35, 37, 38, 50, 54, 112, 119, 124–126, 124n187, 143, 146, 148, 157, 158, 168, 169, 181, 182, 185, 186, 193–195, 214, 223, 236, 237, 240, 284, 285, 287, 294, 325, 329, 330 Service sector, 38, 111, 142, 146, 158, 193, 194, 196, 251, 318 Serviço de Registro e Verificação Empresarial (SERVE), 170 Severity of poverty, 4 Sheep, 212, 225, 226 Shepherd, Christopher, 60–61 Shifting cultivation, 204, 245, 246, 248, 318 Shoesmith, Dennis, 57n66, 63n84, 83, 83n31, 83n32, 84n34, 85 Siam weed, 247, 248 Sierra Leone, 283 Singapore, 140, 160, 166 Skilled wages, 162, 176 Soares, Adérito de Jesus, 299n157, 305n174, 305n176, 307, 307n184

Soares, Adérito P., 94, 170 Solomon Islands, 176 South Korea, 106, 108 South Korea’s Employment Permit System, 108 South Sudan, 104 Soybean, 211 Special social market economy zone, see Special Zone for Social Market Economy (Oecusse), 91, 171, 329 Stabilization, 46, 48, 51–54, 165, 277 State of the Nation Report 2002, 37–39 Stock market, 182 Storage in agriculture, 232 Student performance, 16 Student-teacher ratios, 16, 19, 20, 25, 127, 130 Stunting, 116–118, 117n158, 125 Suai, 55, 166, 287, 290, 299 Suai Supply Base, 166, 287, 290 Suara Timor Lorosae, 57 Subdistricts, 3n7, 4, 24, 25, 89, 124, 241 Subsistence agriculture, 37, 60, 137, 150n58, 151, 152, 157, 187, 188, 191, 192, 240, 318, 326 Subsistence farmers, 143–146, 155n82, 205, 324 Subsistence farming, see subsistence agriculture Suco councils, 63, 88 Suco development index, 25 Suco survey 2001, 2, 3–4, 7, 12, 13, 16, 23–25 Suharto, 200, 292 Supreme court, 56, 173, 303, 304 Sweet potatoes, 115, 205, 212, 221, 223, 224, 247

 Index  T

Tasi Mane, 186, 286–291, 320, 329, 331 Tax administration, 56 Technology in agriculture, 214, 223 Telecommunications, 36, 38, 39, 185 Telemor, 168 Telin, 168 Telkomcel, 168 Tenders, 294, 299, 304 Tertiary school enrolment, 15 Tetum, 12, 18, 19, 131 Thailand, 140, 160, 179, 200, 207, 301 Tibar, 166 Timor Gap, 269 Timor Gap Treaty, 30, 269, 271 Timor Gas and Petroleum E.P. (Timor GAP), 287 Timor-Leste Food and Nutrition survey 2013, 118 Timor-Leste Investment Guide, 179 Timor-Leste Living Standard Measurement Survey 2001, see Household survey 2001 Timor-Leste Survey of Living Standards 2014, 143 Timor Sea, 30, 33, 36, 40, 41, 47, 52, 267, 268, 271, 288, 310, 329 Timor Sea Treaty, 30, 271 Timor Telecom, 168 Timor Trough, 268, 288, 329 Tonga, 176, 183 Torvik, Ragnar, 295 Tourism, 91, 159–161, 165, 185–187, 196, 286, 318, 325–329, 331 Tractors, 205n23, 217 Trade balance, 29

399

TradeInvest Timor-Leste (TITL), 169, 171 Transfer programs, 101, 102, 108, 129, 317 Transparency International, 298, 300 Transport and communications, 1, 27, 36–38, 47, 118, 166, 186, 228, 228n121, 238, 319, 328 Transport costs, 38, 238 Trinidad and Tobago, 284 Trust Fund for East Timor (TFET), 41, 42 Tuba Rai Metin, 180 Tuberculosis, 22, 33, 121 U

Under-five mortality rate, 20, 121 Unemployment, 44, 46, 48, 79, 143, 154, 156, 157, 198n259 United Nations (UN), 1, 41, 42, 47, 61, 62, 68, 69, 72, 89–91, 117, 123, 158, 175, 305 United Nations Convention of the Law of the Sea (UNCLOS), 270 United Nations Development Programme (UNDP), 2, 20n35, 26, 26n53, 114, 223 United Nations Integrated Mission in Timor-Leste (UNMIT), 70, 89 United Nations International Children’s Emergency Fund (UNICEF), 2, 17, 69, 130n216 United Nations Mission of Support in East Timor (UNMISET), 2, 61

400 Index

United Nations Office in Timor-­ Leste (UNOTIL), 55, 61, 69 United Nations Security Council, 70 United Nations Transitional Administration in East Timor (UNTAET), 37–41, 43, 176, 271 United States market, 29 UNMIT, see United Nations Integrated Mission in Timor-Leste UNOTIL, see United Nations Office in Timor-Leste UNTAET, see United Nations Transitional Administration in East Timor Uruguay, 176 V

Vanuatu, 176, 183, 302 Venezuela, 277, 283, 284 Veteran payments, 81, 82, 201 Veteran pensions, 81, 82, 316 Veterans, 70, 80–83, 85, 86, 93, 101, 102, 201, 316, 317, 328 Vietnam, 160, 168, 177, 178, 232, 300 Viettel, 168 Viqueque, 18, 73 Vocational training, 154, 156

191–196, 198, 220, 240, 241, 259–261, 285, 318, 319 Wärtsilä Corporation, 167 Wasting, 93, 116, 117, 288 Water, 4, 8, 10, 22, 26, 39, 92, 114, 123, 124, 143, 149, 158n89, 165, 205, 206, 214, 216–218, 220, 225, 231, 246, 272, 326 West region, 22 West Timor, 29, 226, 233 Wet season, 25, 204, 215 Woodside Petroleum, 185, 273, 274, 288 Worker skills, 38, 154 World Bank, 2, 16, 43, 44, 54, 56, 101, 113, 138, 141, 149, 152, 153, 163, 164, 171n150, 172, 173, 176, 178, 187, 198n259, 203, 204, 210n39, 219, 220, 229–231, 233, 283, 318, 326, 330, 332n23 World Food Program, 67, 115, 222 World Health Organization (WHO), 116 World Press Freedom Index, 308 Y

Yellow Road framework, 281 Yemen, 117 Youth unemployment, 150–152

W

Z

Wage employment, 6, 7, 259, 260 Wage rate in coffee sector, 43, 44 wages, 6, 7, 38, 43, 126, 129, 137, 156–158, 162, 176–178, 188,

Zambia, 283 Zinc deficiency, 117 Zone of Cooperation for Joint Development, 269, 270