Australian Financial Review July 5, 2002

East Timor tottering after first few steps

Geoffrey Barker

Sixty influential Chinese business association leaders arrived in Dili from Macau last week to talk to East Timorese leaders about investing in the impoverished new nation.

Within days the group had flown home disappointed and frustrated: senior government leaders would not meet them to discuss investment opportunities and rules.

The incident illustrated painfully that East Timor, barely six weeks after independence, is in economic, administrative and political free-fall as its leaders struggle to run the country with vastly reduced international support.

"The place is falling off the cliff. It's riddled with economic, administrative and political incompetence," said one long-term Dili observer.

Another said: "The bubble economy in Dili has burst. Unemployment is soaring as jobs in hotels, restaurants, construction and road building disappear with the departure of most of the United Nations administration."

To compound its problems, East Timor's district courts have been closed since Independence Day, May 20, because the Government has not renewed contracts for judges. Appeals courts have been closed since October.

Moreover, much of the newly installed public administration is barely functioning as UN and other international experts leave and as leases on basic office equipment used by the UN expire and are not renewed. Government offices in Dili lack faxes, shredders, copiers and basic security systems.

Virtually no progress has been made on permanent rules for foreign investment or on clarifying East Timor's uncertain land title and tenure regimes.

With the Fretilin Government headed by Chief Minister Mari Alkatiri showing little leadership, domestic political tensions are rising as the minority Social Democrat Party (PSD), headed by Mario Carrascalao, moves to exploit popular unease.

The unease has been intensified by an increase of roughly 20 per cent in service and other taxes on Monday and by the perception that the Parliament is, in the words of one observer, "a bit like a kindergarten".

At the same time, relations between the popular independence President, Xanana Gusmao, and Mr Alkatiri remain uneasy as Mr Gusmao moves to use the largely symbolic presidency as a bully pulpit to urge economic prudence on the Government.

Earlier this week, Mr Alkatiri hosed down rumours that Timor Sea oil and gas development would result in an employment bonanza. He said rumours that oil and gas would deliver up to 80,000 jobs were "not feasible".

The Macau business leaders thought they would receive a warm welcome. They spoke Portuguese, the official language of East Timor; they were looking to invest in a country desperate for foreign investment; they were well connected to the local Chinese community. But Fretelin's leaders were not interested. It was left to local Chinese businessmen to arrange a hasty conference and workshop before the group left.

Senior Australian diplomatic sources said there is no reason for concern over East Timor. The economic downturn had been expected and was predicted on the departure of the UN administration, while domestic political tensions were bound to re-emerge, they said.

Diplomats said the downturn reinforces warnings from the UN administration, the World Bank and others that East Timor must maintain prudent fiscal policy and avoid fiscally unsustainable spending driven by short-term pressures.

The good news, they said, is that relations between East Timor and Indonesia continue to be cordial as border security issues and the return of displaced East Timorese continues.

Mr Gusmao has made a successful first state visit to Jakarta.

There is also little evidence of corruption, although poor wages paid to civil servants and lack of progress in promoting effective governance leave East Timor vulnerable to corruption.

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