Timor's big challenge still ahead

A top priority is to create jobs for the large number of unemployed

DILI, East Timor (CNN) -- As East Timor celebrates its hard-won independence, the biggest challenge facing the world's newest nation is still ahead -- building an economy.

After years of hardship and suffering and the almost total destruction wrought by pro-Indonesian militias in 1999, the people of East Timor have high hopes that independence will bring them a better life.

Now it is up to the new government to deliver.

"Our people need money," says newly inaugurated President Xanana Gusmao. "They need to sell their products. They need to have money to send their children to school and to start improving their daily lives."

Wildly popular across East Timor, Gusmao swept the board in April's presidential election, taking more than 80 percent of the vote.

However, many observers warn that the presidency could turn out to be a poisoned chalice with Gusmao's popularity bound to be dented when the post-independence aspirations of many East Timorese are not met.

CNN NewsPass VIDEO CNN's Atika Shubert reports on the concerns and celebrations in East Timor after its new government was sworn in. (May 20) Play video • East Timor video archive    MORE STORIES • East Timor pins hope on energy deal    IN-DEPTH East Timor: Birth of a nation    WEB MOVIE Flash intro: A new nation    RESOURCES Photo gallery: Voices of Timor  Photo gallery: Countdown to a new nation    PROFILES • Xanana Gusmao  • Jose Ramos-Horta  • Bishop Belo    EAST TIMOR • Timeline: Road to nationhood  • Country profile

Already, farmers are complaining they have no buyers for there rice.

Under Indonesian rule, they say, they at least had a guaranteed buyer in the form of the government who would take their rice for a steady price.

That disaffection could spread yet further if much-needed jobs fail to materialize.

Estimates of the new nation's unemployment problem vary wildly, with some debate over whether the majority of Timorese who survive on subsistence farming and fishing should be included in the figure or not.

What is clear though is that is that if nothing is done to tackle the unemployment problem, the danger of social unrest will be high.

Surviving on aid

Another challenge will be to soften the blow created by the downsizing of the United Nations presence in the wake of independence and the handover to East Timorese rule.

Since 1999, East Timor's economy has effectively been subsidized by the international community.

Now standing on its own two feet politically, it must also demonstrate that it is financially viable as well.

In the capital, Dili, the arrival of some 10,000 highly paid (by local standards) international aid workers has created a stark dual economy sending prices skyrocketing.

On the surface, that transformed East Timor's economy, sparking growth of 18-20 percent a year in the two years since 1999 -- a figure that belies the continued dire state of the new nation's infrastructure and economic fundamentals.

The dozens of new restaurants that have opened in the past two years charge an average $10-15 for a meal -- an exorbitant amount of cash for most East Timorese who earn an average of just 55 U.S. cents a day.

In the center of Dili the Hello Mister supermarket has done a roaring trade supplying mostly expatriate NGO (non government organization) customers with some of the comforts of home.

Its manager, Kurt McManus, says he plans to keep the business going despite the declining international presence, but its survival will depend on the growing affluence of the Timorese themselves.

"We're hoping to be a long term business," he says. "However, we do realize that after the U.N. and most of the foreigners go, there won't be nearly as much money in the economy."

Bubble economy

Many businesses will find it hard to survive as the U.N. reduces its presence

Like the U.N., many of these new businesses have provided much needed jobs for local East Timorese staff.

Now, as East Timor begins its independence, many fear that this bubble economy will burst as it did when the U.N. departed Cambodia in the early 1990s after organizing elections there.

Sergio Viera de Mello, who led the U.N. transitional government in East Timor, says that emphatically won't happen here, because the world body will remain engaged for many years to come.

"This bubble economy will not burst for one simple reason," he says.

"We're not pulling out, we're only reducing our presence here ... The gradual reduction of the international presence will ensure that the so-called artificial economy will not collapse overnight."

East Timor, de Mello says, has a lot of potential.

"It can be self-sufficient in terms of agriculture -- it is not overly populated. It also has huge wealth in the seas that surround it and the fishing industry needs to be developed as a matter of urgency."

The problem is, where to get the money to fund such development.

To date, some $1.2 billion in international assistance has been spent on reconstruction, creating fledgling political, legal and judicial systems and training some 11,000 East Timorese staff to run them.

Large amounts have also been spent on resettling more than a quarter of a million people displaced by the violence in 1999.

A lot has been achieved, but much remains to be done.

Donor boost

With pristine beaches and a rugged interior, tourism is seen as a potential big income earner

For the time being, East Timor will remain heavily reliant on the goodwill of the international community -- something which, despite problems in other areas of the world such as Afghanistan, continues to be forthcoming.

At a meeting last week donors agreed to provide enough money over the next three years to cover East Timor's annual budget of around $90 million.

Apart from agriculture and fishing, among areas being targeted for development are East Timor's coffee growers.

Long been famed for producing some of highest quality beans in the world, the industry has suffered from massive under investment and will take many years before it forms a significant part of the economy.

Another sector being looked at is tourism, with the government keen to market the new nation with its pristine beaches, world class diving and rugged interior as Asia's next big adventure and eco-tourism destination.

In the longer term however, East Timor's big hope is oil.

Need for patience

After the violence of 1999 much reconstruction work remains to be done

Under a deal with the Australian government, oil and gas reserves under the Timor Sea will be exploited by Australian firms, with East Timor earning several hundred million dollars a year in a form of royalties.

But the oil, and with it the much-needed cash, is not expected to start flowing for at least another three years.

When it does the plan is to use the money to invest in training, job creation schemes and the development of East Timor's other resources.

The challenge now for East Timor's new government to bridge that gap and ensure that the high aspirations of independence do not translate into social unrest.

To date, says Foreign Minister and Nobel Peace Laureate Jose Ramos Horta, East Timor will remain reliant on international support to finance its development strategy.

"This will take time," he says. "It will take at least two or three years before we see begin to see the benefits of independence."

"Between now and then we have to ask our people to trust us. To be patient."

-- CNN correspondent Maria Ressa contributed to this report