Subject: FT/E Timor: Economists search for the blueprint

Financial Times Tuesday November 16 1999

EAST TIMOR: Economists search for the blueprint

Economists must map out a plan for building an economy and its institutional infrastructure from scratch, report Ted Bardacke and Shawn Donnan

Only in academic exercises has the assignment for development experts been as wide open as it has for a team of planners camped out on the floor of the gutted governor's office in Dili, East Timor's capital.

Their task: build an economy, and all the necessary institutional infrastructure to manage it, from scratch. Indonesian troops and anti-independence militia followed a scorched-earth policy when they pulled out from the territory earlier this year, destroying public buildings, looting banks and taking most of the civil service with them.

In doing so they destroyed studies by exiled East Timorese economists and others who, when it appeared in early 1998 that Indonesia might let go of the territory, began designing what an independent East Timorese economy might look like.

Now the task of rebuilding is much greater. But so are the international resources available. This increases the risk that East Timor will turn into a poor, aid-dependent nation for decades.

When this week experts from the World Bank and the International Monetary Fund and East Timorese leaders unveil preliminary plans for basic government institutions, they will be constrained by questions of geography.

Is East Timor part of south-east Asia, with natural trade ties to Indonesia and the countries that supported its occupation by Jakarta for two decades? Or is it part of the South Pacific, with which it has ethnic and religious ties but which is poor?

Comparisons with other strife-torn countries are also being made.

East Timor is wracked by a legacy of internal violence, like Rwanda. It will have all the trappings of a national state, without being one, like Gaza and the West Bank. It will be run for the next few years by UN agencies and troops, like Cambodia earlier this decade, while the sometimes difficult relationship between armed local leaders and aid officials is likened to the Balkans.

Mission leader Klaus Rohland is the World Bank country director for Papua New Guinea and the Pacific islands, while the top IMF official in the team is Luis Valdivieso, a specialist in "post-conflict" economies with previous assignments in Armenia and the Balkans.

East Timor leaders want to use the Portuguese currency, the escudo, in the territory and Portugal says it will print the notes and initially pay for the salaries of civil servants. While such gestures are welcomed by international officials there are reservations about the use of such an obscure currency (which will in any case disappear with the full introduction of the euro in 2002).

Meanwhile, officials want to prevent a "boom economy" fuelled by temporary services for expatriate international aid officials.

East Timorese leaders already complain that free spending by westerners has caused inflation in Dili's markets. "We want to give a measured dose of support. Too much money too quickly can ruin the social fabric and structure of a country as we saw elsewhere in the 1970s and 1980s," said Mr Rohland.

"One of the things they're going to have to be very careful of is that they don't build up an infrastructure and police force and bureaucracy and so on that they can't support," said Bob Lowry, an Australian academic who is a leading expert on East Timor.

Joao Saldanha, an East Timorese economist who is part of the mission, says this should not be too much of a problem compared with the system Indonesia created. Bloated by an estimated 5,000 "ghosts" (non-existent workers whose wages are collected by someone else), the 33,000-strong Indonesian civil service was renowned for its corruption and a drain on the Timorese economy, according to Mr Saldanha. The new civil service, he said, is likely to be a third its size with a budget around $64m a year compared with the $116m Indonesia is thought to have spent.

One windfall that is not likely to arrive soon is from oil. The UN and then independent East Timor will take over Indonesia's role as signatory of the 1995 Timor Gap Treaty with Australia and some see future oil and natural gas royalties from the co-operation zone created by the treaty as a potentially significant revenue source.

The $1bn Bayu-Undan project, led by Phillips Petroleum and with probable reserves of 325m barrels of condensate and natural gas reserves of about 3,400bn cubic feet, could be ready for production by 2004. But Timorese economists say there are still too many questions for it to prove a reliable source of revenue for now and they have begun treating any possible oil or gas revenues as a potential bonus and nothing more.

"We are not intending to develop our economy on the basis of the Timor Gap," says Mr Saldanha.

Instead, East Timor's initial economic focus is likely to be on agriculture, with self-sufficiency in rice and increasing the territory's $20m annual coffee exports high on the list. Gold, marble and other mineral resources may turn out to be a big revenue source. There are also plans to develop an "eco-tourism" industry.

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