East Timor: Challenges for the Xanana alliance

The outcome of Timor Leste's parliamentary election could be seen as a political victory for former president, and now prime minister, Xanana Gusmao.

Xanana has managed to sideline Fretilin (still the strongest political force in the country) for the time being. His Parliamentary Majority Alliance (AMP), created after the election, has a new constellation of ministers and secretaries of state. Fretilin still regards the process by which the AMP was installed as unconstitutional, but has abandoned the idea of a legal challenge.

Xanana's alliance inherits a budget which has more than doubled, thanks to increased petroleum royalties. Further, the Howard government has rewarded with increased aid to what it sees as a more pro-Australian regime. Labor leader Kevin Rudd has already committed to increased aid and scholarships for the entire region. Xanana has contracted the services of former Victorian Labor premier Steve Bracks as an adviser. This will give him an excellent line of communication with the likely incoming Labor government in Canberra.

However, an increased budget and Australian support may not be enough — Xanana has used up much of his political capital in coming to power, undermining the political parties he helped create and he now relies on a disparate group with little collective political will.

The strongest group in the new cabinet is the conservative Social Democratic Party (PSD), with links to the old Timorese Democratic Union (UDT). Xanana's National Congress for Timorese Reconstruction (the new "CNRT" — the same initials as the former National Council of Timorese Resistance), despite being the major party in the AMP, remains more an umbrella group than a party. The Democratic Party (PD), formerly the major opposition party, now has less influence.

Nationalists are thin on the ground. Two of the new ministers and at least three of the secretaries of state backed the 1999 "autonomy" option with Indonesia. Graffiti in Dili reminds them of this, and of their links with militia violence.

Xanana's main post-independence theme of reconciliation has contributed to this realignment. This political shift, more than the somewhat associated "east/west" ethnic divide, reflects the divisions that destroyed the police and damaged the army in 2006.

Former army Major Alfredo Reinado, an escapee wanted for murder, remains at large and a potential embarrassment to the new government. Xanana is widely believed to have backed Reinado's armed rebellion. The UN investigation into the 2006 crisis diplomatically labelled the former president's connection with Reinado as unwise ("increasing tensions between the President and the army") but not criminal. Reinado might yet have his say on this matter, if he faces trial. Resolving the "Reinado problem" is now universally seen as Xanana's responsibility.

Fretilin, the former government leader, has worn its share of blame for the crisis. Its vote fell from 56% in 2001 to 29% in 2007. However Xanana's fall was hardly less dramatic. As a Fretilin-backed independent he gained over 80% in the 2002 presidential vote. His new political party won just 24% in the 2007 elections.

The new "CNRT" (using the initials of an earlier, genuinely broad coalition) has little by way of policies or party structure. On one view, the CNRT, with refugees from Fretilin, PD and elsewhere, is little more than a political vehicle for Xanana. He certainly has all authority in both the CNRT and the AMP.

After the breakup of the original CNRT, in the name of multi-party elections, Xanana encouraged the formation of the PD, which became the main opposition and was the potential beneficiary of the attempted 2006 coup.

However in 2007 Xanana bypassed the PD, attracting some of its support into his new CNRT. As a result, the PD's vote increased only a little over its 2001 result (9% to 11%). PD was offered just two ministries in the new government, plus the presidency of the parliament for PD leader Fernando "Lasama" de Araujo. Many PD members are dissatisfied with this outcome. Lasama seems to have gained little influence, remaining dependent on Xanana.

Timor Leste has acquired a weak and disparate government, dominated by a presidential-style prime minister, with few policies. Its vulnerability to external pressures is plain.

What are these pressures? First, the struggle with Australia over energy resources, having reached some form of compromise over royalties in the Joint Petroleum Development Area, is likely to move on into issues of gas processing and new explorations.

The Fretilin-led government was developing plans and finance for onshore liquefied natural gas processing and allocated some new exploration contracts. There is more money in gas processing than gas royalties, and the benefits from new fields are likely to be substantial.

The immediate Australian pressure on Xanana's government will be to abandon the plan to divert and process gas from the Greater Sunrise Field in Timor Leste and allow it all to be piped to Darwin. Canberra will also seek to exclude new, non-Australian energy development partners. The failure to settle proper maritime boundaries has already allowed Canberra to play on that ambiguity, suggesting Australian consent for new exploration is required. Nevertheless, the Indian Reliance group begins drilling in 2008.

The World Bank is similarly positioning itself to influence the new administration. In August, together with the Asian Development Bank (ADB) — both bodies function as effective lobby groups for private foreign investors — it produced a report called Healing the Nation that reinforced several themes of importance to foreign investors.

In the absence of clear, independent policies to defend national assets and build public institutions, the development banks and their privatisation agendas will have greater influence. Two senior ministers in the new cabinet have worked for the World Bank and the ADB.

On the question of prudent use of the Petroleum Fund, the World Bank and Fretilin were in agreement, albeit for different reasons. The World Bank wants limited government expenditure so as to maximise the opportunities for private investment; the Fretilin-led government simply accepted the need for cautious and sustainable fiscal policy.

This is one area where Xanana has proposed a policy departure, through more rapid use of petroleum revenues. However the expanded budget, increased aid and the fact that parliamentary approval is required to draw extra revenue from the Petroleum Fund might help modify Xanana's position.

On the other hand, the World Bank and Fretilin leaders clashed on questions of capacity building and public institutions. In 2000, the bank (and AusAID) opposed the use of aid moneys for reconstructing East Timor's rice industry, and opposed public grain silos and abattoirs. It also pushed for privatisation of Agricultural Service Centres and the newly created Microfinance Institution of East Timor (MFIET).

In Healing the Nation, the bank comes out strongly against any new public banking facilities, arguing for reliance on the established private banks, such as ANZ. This is probably a reference to discussions around a possible rural bank, or at least a regulated line of credit from the private banks to farmers. Privatisation of MFIET also remains on the ADB's agenda.

The banks and the new administration seem to agree on tax cuts, small as Timor Leste's tax base is. President Jose Ramos-Horta has floated the idea of radical tariff and income tax cuts, and Healing the Nation supports such an approach. The objective is increased private foreign investment.

However, Timor Leste has no highly competitive industries, so slashing taxes is unlikely to result in increased foreign investment. New investment, e.g. in tourism, will be far more dependent on political stability, improved infrastructure and improved public health. Experience elsewhere shows that market access, clear rules and the above mentioned conditions are far more important than low tax rates.

On the other hand, abolishing corporate income taxes (while popular with corporations) will increase reliance on the Petroleum Fund and aid programs. Nevertheless, it seems the new government may be headed in this direction.

Xanana's alliance faces the challenge of maintaining and developing the very sound initiatives of the country's first independent government in education and health. These initiatives include the abolition of school fees at primary and lower secondary levels and the introduction of school meals. These meals are important for undernourished children, so they can concentrate in class.

This program, which began in three districts in 2006, needs further investment and development. However pressure from within the alliance to divert funds into a range of pet projects, plus World Bank advisers arguing for greater reliance on "user pays" regimes, could subvert the modest but steady growth in enrolments.

The bank supports using revenue for "Conditional Cash Transfers" (CCT), a sort of micro-dispersal of state funds to families with social objectives attached to provide a stimulus to effective demand. However, such moves are likely to be wasteful, undermining state investment in education, health and infrastructure.

There are many ways in which public moneys can be wasted. There are demands from a wide range of veterans and their families, which might either be sifted through carefully or conceded en masse. The Catholic Church is likely to demand public funds for its social projects. The diverse members of the loose alliance will have their own demands. With an anticipated narrowing of the tax base, greater reliance on the Petroleum Fund and wasteful expenditure could push the country down the "resource curse" road.

Cuban assistance in health and adult literacy has been remarkable. Apart from the 300 Cuban health workers in Timor Leste, 800 Timorese students are now studying medicine with the Cubans; 700 in Cuba and 100 in Timor Leste. Cuba is offering up to 1000 medical scholarships. This collaboration, which began in 2003, is the largest health aid program in the entire Asia Pacific region, and a very good deal for Timor Leste. Within 10-15 years, East Timorese graduates will replace all the Cuban doctors.

An associated Cuban literacy program (currently in Portuguese but moving to Tetum) began in 2007 and is due to spread to the more than 400 villages of the country. Those attending so far are mostly women.

While the Cuban connection has been opposed by the US and sections of the church, the programs are now very popular and have been supported from their inception by Xanana and Ramos-Horta. They seem likely to continue. In a sign of continuity, the new health minister has the minister as an adviser.

A final challenge emerging from the World Bank's recent report is pressure for land registration. It is a common demand of the World Bank and AusAID that land should be commodified and that secure title be made available for investors. Land registration is a process that historically dispossesses small holders in favour of large corporate interests.

Timor Leste's constitution does not permit foreigners or corporations to own land. The World Bank contests this, and is urging the new administration to remove "obstacles" to the commercialisation of land. This could mean changes to the constitution, or contractual means to avoid the constitution. Both the US and Australian governments are believed to be pushing for amendments to the constitution, to allow foreigners to own land. This presents yet another challenge for the Xanana alliance.