A Recovery Plan for East TimorÊ
By Wolfgang Kasper
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Australians will soon discover in East Timor what lobsters learn in the pot: it was much easier to get in than to wriggle out unscathed! It is one thing to engage in and pay for a temporary peace-making mission, and another to commit to a massive open-ended foreign aid project.

This is not to say that military intervention was not justified, but to make the point that the most difficult part of the job still lies ahead. The danger for Australian taxpayers is that the government will be sucked into an open-ended and thankless process of support-giving and become the warden of a dysfunctional mini state. The danger is also that the East Timorese will fail to take energetic control of their own lives and remain claimants and aid seekers who blame Big Brother for the inevitable disappointments with their independence. These dangers are greatly increased if old-fashioned collectivists in the United Nations and Australian bureaucracies, whose trust in top-down solutions seems undiminished, construct an ambitious state which the East Timorese themselves can neither afford nor manage successfully. The task now is to avert a second Papua New Guinea or Angola and to foster an ultimately self-reliant, secure and peaceful community in East Timor.

East TimorÕs assets and liabilities

The prospects for a prosperous, stable East Timor look sobering. Living on a sometimes arid half-island on the periphery of global networks, the 600,000 to 800,000 East Timorese do not have the resources for rich agriculture or tourist development. East Timor has been a net importer of food, its secondary sector has been minute, and its reliance on government spending has been excessive (Saldanha and da Costa 1999; Soesastro 1989). Per-capita incomes rank at basket-case level after the 1999 cataclysm, far below the poor and remote provinces of eastern Indonesia.Ê In the years prior to the present turmoil, incomes were probably in the neighbourhood of the average of low-income countries (World Bank definition), i.e., about US$350 per-capita. Infant mortality, an indicator of basic living standards, was higher than the Indonesian average though markedly lower than in many African countries (Hull and Jones 1994: 141), and life expectancy at birth in 1990 was estimated at only 55 years (Indonesian average: 65 years) (Saldanha and da Costa 1999). One therefore has to conclude that the East Timor condition must be thought of in terms of the poor, part-dysfunctional states of Africa, and not as a typical Asia-Pacific economy.

East TimorÕs geography stands in the way of low-cost domestic transport and easy access to world markets. Forestry and mining resourcesøas far as we knowøare limited, although oil and gas revenues from the Timor Gap could provide much needed starting capital. This will require negotiations with Indonesia and much good will all around. But whatever the outcome, we know from the history of other mono-resource-rich countries, such as the oil producers in the Gulf, that easy oil wealth is a mixed blessing and not necessarily a good foundation for broad-based development.

The safest, if not the only way for poor communities to raise their living standards is by trade and foreign investment. This route is not easy for tiny, backward, remote East Timor. Strained relations with its biggest neighbour, Indonesia, would hinder trade and transport, as well as keeping foreign capital, skills and technology away. The former colonial master, Portugal, cannot be counted on as a sufficiently accessible foreign market or foreign investor, and the European UnionÕs main interests lie elsewhere.

All this means that economic development from the present low level will not be easy and will require skilful policies to promote the creation of competitive resources by the citizens. The approach should be somewhat in the mould of what remote, small and isolated Singapore undertook in the early 1960s: turn outward; become a magnet for foreign capital and know-how; and mobilise domestic resources, in particular, human capital through a massive learning effort. This was arguably much easier for the immigrant, urban population of Singapore than it will be for a traditional, rural East Timor. Nonetheless, without such an effort, East Timor will remain a basket case.

Inventing small government

What then is the institutional setting which enables the East Timorese to catch up with learning the habits, institutional practices and skills of successful economic development?

As of 2000, oversized governments around the world are being pared back by privatisation and deregulation because statist-nationalist models of development have failed everywhere. Fortunately, East Timor can leap-frog into the administrative technology of the 21st century by creating small government that concentrates on a few priority tasks of collective choice and leaves the rest to private enterprise. Besides, the size of the population of East Timor (about the same as Adelaide) justifies the administration that can run a few suburbs, rather than a fully-fledged national government of the sort that post-colonial regimes set up in Africa or other poor parts of the world. Here is a chance to invent a small government, which is focussed on protecting life, limb, property and a peaceful societyøin short, the essentials of governanceøand which fosters competitive advantages in the open world economy of the 21st century.

What is needed is a government that concentrates on the essential protective function of collective action and leaves most productive and all redistributive functions to private choice (for a definition of small government and the protective function of government, see Kasper and Streit 1998: 293-311, 457-469 and Kasper 1998: ch. 6). Such a choice will not come naturally to a population where traditional tribal loyalties, Roman Catholic teachings about social justice, Luso-Marxist ideas, and the lobbying of charitable non-government organisations seem to portray the state as the instrument that produces many goods, services and infrastructures and that redistributes income and wealth. Yet if public-sector production and redistribution dominate East TimorÕs style of governance, the prospects for self-generated prosperity and internal peace seem dim.

East TimorÕs development urgently requires the evolution of a commercial culture with good standards of honesty, punctuality, reliability and other Ôsecondary virtuesÕ that facilitate the voluntary, effective and peaceful cooperation of people in markets. In this context, it is worth noting that the author heard frequent complaints from private traders in eastern Indonesia about the poor payments morale and lack of reliability of their East Timorese business partners. To the extent that these observations can be generalised, this constitutes a serious cost handicap in dealing with East Timor, and a handicap which is hard yet essential to address.

There is no tradition of self-governance beyond the village, and the population is split into small, disjointed communities with little consciousness of communality beyond the tribal, village or valley context. The split between pro-Indonesian and pro-independence Timorese may prove as durable as divisions in Northern Ireland or the Balkans. Most institutions of modern civic and economic life are underdeveloped in East Timor. There are serious shortages of teachers, policemen and local administrators, as well as technical, professional and intellectual assets. Officials at United Nations headquarters may well have jotted down multi-billion dollar plans to parachute essential human resources in, but the UN lacks the resources to fund them, even if the Australian government can be morally obliged to keep contributing substantial amounts. It is ominous that World Bank estimates for the Ôre-Õconstruction of East TimorÕs infrastructures seem to increase by the month. Having started with a low estimate of $A45 million, they had snowballed to some $A300 million by November 1999. The costs will keep growing as a multi-agency Ôproject findingÕ team discovers more and more projects that should be started.

There can be little doubt that Australia, by its military initiative, has assumed a measure of at least temporary co-responsibility for protecting East TimorÕs future stability, security and prosperity. It is in AustraliaÕs national interest, too, to fosterøwhatever the oddsøa stable, free society on East Timor which learns non-violent habits of community life and achieves a degree of material progress. But AustraliaÕs commitments have to be limited in duration and have to be made conditional on the behaviour and contribution of the East Timorese themselves. Otherwise, public supportøand tolerance of the Timor tax levyøwill soon wane. The feeling that Australia has led a creditable effort, so prevalent here and overseas in 1999, could quickly turn on its head, as one can already observe in similar missions in the Balkans.

It seems therefore essential that the UN, as well as the Australian government and its allies, spell out a limited list of practical tasks in clear and verifiable terms, setting modest goals that can be achieved by increasingly drawing on local effort.

A strategy for recovery

An East Timor recovery strategy could be inspired by the Marshall Plan for war-ravaged Europe. American Marshall aid was conditional on the behaviour and contribution of the European aid recipients. In the present circumstances of East Timor and at the start of the 21st century, a strategy for recovery should contain the following elements.

¥ Australia and other partners provide long-term guarantees of external security. Security guarantees by specific national governments seem more credible than ambit guarantees by the UN. Credible foreign guarantees save East Timor the costs of external defence and allow it to remain de-militarised. The de-commissioning of Falantil weapons would make it easier to re-integrate those East Timorese who favoured union with Indonesia, including those who were armed, but did not commit crimes that can be proven in court.

¥Foreign aid disbursements should be made conditional on the development of a dialogue on crossborder cooperation with Indonesia, for example, on shipping and air transport. This will not be easyøas it was not easy for the foes of the Second World War in 1947 to discuss Marshall Plan aid and to meet in the Organisation for European Economic Cooperation, the predecessor of the OECD, in order to cooperate. Without American insistence on such cooperation, the rate of return on Marshall Plan funds would have been much less.

¥The Australian and other friendly governments undertake to support internal security and the Rule of Law. The gradual involvement of local citizens needs to be actively fostered so that the East Timorese become exclusively responsible for their internal security within ten years. In the interim, Australia and other countries with similar institutions and laws should provide legal, judicial, policing, accounting and administrative support for law and order and help with relevant education and training. Such a transfer of institutions is only possible if the East Timorese opt explicitly for a by-and-large Anglo-Saxon system of law and order. If such a choice is not made up-front, Australia should not commit to official support of internal security and order because we simply do not have the resources and the time to invent and implement an alternative institutional order for a small-sized community. Social orders normally evolve and are deeply anchored in a communityÕs culture; but East Timor, after the traumas of 1999, will not have the luxury of a leisurely evolution of new institutions. There are of course alternatives, namely to ignore the issue of institutional choice or accept generic, internally incompatible hybrids. They do not seem promising.

¥Constitutional provisions should focus the future government of East Timor, which will suffer from extreme shortage of administrative and political talent, on fostering its protective functions, in tune with the foreign support outlined above, and constrain government agencies from engaging in producing infrastructures and a wide array of services, let alone redistributing income and wealth. The precedent of African countries where politicians became patrons of numerous public programs and redistribution schemes and where political life therefore became thoroughly corrupted, need not be replicated.

¥Australia and its allies should provide material and financial aid for ten years, with a substantial injection of finance into a development trust fund for an initial reconstruction phase of three years (2000-2002). All official aid should be in the form of outright, tax-funded donations, since East TimorÕs future government has no capacity to take up and repay loans. Indeed, the East Timor recovery plan should impose very narrow limits on government borrowing.

¥All product and factor markets need to remain unregulated, other than to ensure essential safety, health and environmental standards. In East TimorÕs desperate circumstances, the discovery potential of free markets is crucial to any material improvement. And because of East TimorÕs lack of administrative talent, regulation has to remain limited to the minimum of essentials.

¥A stable and effective monetary system will be essential for inspiring trust, civil peace, solidarity and spontaneous development by the citizens and potential private foreign investors. This requirement can be met by a currency-board system or a freely floating exchange rate, but either case requires a completely independent monetary authority. Alternatively, the East Timorese might simply adopt Australian or Singapore dollars and forget about creating a national currency for less than a million people.

¥There must be a constitutional commitment to periodic parliamentary elections, a clear division of powers with appropriate checks and balances, and a diffusion of many petty administrative tasks to local governments.

¥The internal constitutional control of political power needs to be supplemented by the unconditional external disciplines of free trade and free capital flows. Economic openness from the outset is not only a time-tested means to stimulate the discovery of resources and economic development. It is also the only means of cultivating habits and rules of economic and political conduct that are essential to peaceful cooperation and reconciliation. The unconditional opening of East Timor to trade and investment will require simple, credibly enforced laws and transparency in governance to keep criminal influences and political discrimination at bay.

What might emerge?

No one can know what shape East TimorÕs development will take, and no one can pick the comparative advantages of a future East Timorese economy. No one can therefore try to plan specific industries. All that can be done is to design the institutions which allow the East Timorese to discover their comparative advantages reasonably quickly.

If the above basics of governance are put in place, one can imagine some hope-inspiring patterns of development. Small, effective government, low taxes and international legal and security guarantees carry the promise of a small regional business-service centre. Much trade in ideas and many internationally traded services now rely on the Internet, and low-cost keyboard workers can sell their services everywhere. One can of course not turn East Timor hill farmers into accounting clerks overnight, but if East Timor became the location of internationally-oriented private enterprises, many of the young in Dili would find jobs and learning opportunities. An outward-oriented business culture seems the best assistance to the next generation of East Timorese who want both to join the world and to be protected from the corrupting influences of constructivist, government-driven development schemes which have done so much harm in Africa and South Asia.

If Australians do their bit by helping a small neighbour in dire circumstances to turn adversity into freedom, security and prosperity, they will have helped to create a worthwhile new model for cooperation between rich and poor countries, and they will be able to walk away from the East Timor venture with the justified pride in a job well done.

References

Hull, T.H. and G.W. Jones 1994, ÔDemographic Perspectives,Õ in H. Hill (ed.), IndonesiaÕs New Order, Allen & Unwin, Sydney.

Kasper, W. 1998, Property Rights and Competition, The Centre for Independent Studies, Sydney.

Kasper, W. and M.E. Streit 1998, Institutional EconomicsøSocial Order and Public Policy, E. Elgar, Cheltenham.

Saldanha, J.M. and H. da Costa 1999, ÔEconomic Viability of East Timor, Revisited,Õ Strategic Development Planning for East Timor Conference, mimeo, April, Melbourne.

Soesastro, M.H. 1989, ÔEast Timor: Questions of Economic Viability,Õ in H. Hill (ed.), Unity and Diversity, Regional Development in Indonesia since 1970, Oxford University Press, Singapore.

Author

Wolfgang Kasper is Emeritus Professor at the Australian Defence Force Academy and Senior Fellow at The Centre for Independent Studies.

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