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UNCLAS SECTION 01 OF 06 DILI 000218 
 
SENSITIVE 
SIPDIS 
 
OSD FOR DASD SCHER 
 
E.O. 12958: N/A 
TAGS: PREL PGOV PHUM PINS EAID ECON EFIN EIND EPET
MARR, MASS, TT 
SUBJECT: TIMOR-LESTE AT TEN YEARS: TO THE BRINK AND BACK 
 
DILI 00000218  001.2 OF 006 
 
 
¶1.  (SBU) SUMMARY: Ten years after the August 30, 1999, 
referendum that put it on the road to formal independence, 
Timor-Leste remains an underdeveloped ward of the international 
community.  Early efforts to portray the country as a triumph of 
international nation-building were shattered by violent chaos in 
2006 as personal, institutional, geographic and generational 
rivalries exploded to the surface, leading to a frantic call for 
the return of international security forces to keep order. 
Basic governance institutions still lack essential capacity and 
enjoy uncertain popular credibility, and an over-reliance on 
foreign experts in some cases may actually have impeded their 
development.  As it celebrates ten years free of hostile foreign 
occupation Timor-Leste is enjoying eighteen uninterrupted months 
of relative calm, the longest such stretch in its history, 
raising hopes that it may have at last turned a corner toward 
sustained stability and development.  To avoid continued 
disappointment in the years ahead, Timor-Leste must dramatically 
improve the capacity of its institutions across the board; 
effectively harness its petroleum revenue to build its economy 
and encourage its private sector; and peacefully usher in a new 
generation of political leaders.  The United States has a unique 
role to play in promoting economic development and reform of the 
security and justice sectors so that our interest in making 
Timor-Leste a more stable and prosperous democracy is achieved. 
END SUMMARY. 
 
 
 
¶2.  (SBU) Timor-Leste in 1999 had no history of governing 
itself.  A 24-year Indonesian occupation, which is estimated to 
have caused well over 100,000 deaths, followed three centuries 
of Portuguese colonization.  Indonesia's scorched earth 
departure destroyed approximately 80 percent of Timor's economic 
infrastructure (utilities, public buildings, houses) and left 
Timor-Leste without a professional class experienced in 
governing.  In retrospect, justified enthusiasm for the cause of 
Timorese independence obscured the enormous challenge of 
launching a new country basically from scratch. 
 
 
 
----------------------------------------- 
 
Security Threat Proves to Be Internal 
 
----------------------------------------- 
 
 
 
¶3.  (SBU) The post-referendum violence and destruction, and the 
presence of hostile militia elements across an ill-defined 
border with Indonesian West Timor, raised initial fears that 
Timor-Leste would face immediate external security threats, but 
such fears were not realized.  Vigorous early work on border 
demarcation during the 1999-2002 transition period reduced the 
number of potential flashpoints.  Critically, domestic politics 
evolved in both Timor-Leste and Indonesia to create an 
atmosphere conducive to reconciliation, as Indonesia redefined 
itself in the post-Suharto era and Timor-Leste acknowledged the 
unavoidable imperative of repairing relations with its much 
larger neighbor.  The positive state of bilateral relations 
between Timor-Leste and Indonesia today is a considerable 
accomplishment in which both sides can justifiably take great 
pride.  Representative of the current warm state of bilateral 
relations, Timor-Leste recently invited the commander of 
Indonesia's armed forces to visit.  Likely to take place in 
September 2009, the Indonesian general's sojourn to Dili would 
be the first since the events of 1999. 
 
 
 
¶4.  (SBU) The greatest threat to Timorese security proved to be 
internal.  As the UN presence drew down after formal 
 
DILI 00000218  002.2 OF 006 
 
 
independence in May 2002, old domestic rivalries buffeted 
fragile institutions that were ill-equipped to manage conflict 
peacefully.  A combination of factors -- personal animosity 
among political elites; institutional tensions both within the 
military and between the military (drawn heavily from the 
independence-era guerrilla force) and the police (populated in 
part with Indonesian holdovers); regional jealousies (Westerners 
alleging bias in favor of the East); and generational grievances 
by the younger Timorese who felt their contributions to the 
independence struggle had not been sufficiently recognized -- 
joined together to produce the crisis of 2006.  Two months of 
street violence claimed dozens of lives, brought down the 
Alkatiri government, resulted in widespread property destruction 
and 150,000 internally displaced persons (IDPs) and took the 
country to the brink of an anarchic civil war.  As in 1999, 
order was restored by an international security force led by 
Australia, eventually supplemented with a renewed United Nations 
peacekeeping mandate that continues today.  The 2006 crisis was 
Timor's most serious test as an independent country, one that it 
failed miserably. 
 
 
 
-------------------------------------------- 
 
Economy: Real Development Lagging Behind 
 
-------------------------------------------- 
 
 
 
¶5.  (SBU) As it did ten years ago, Timor-Leste ranks among the 
least developed economies in the world.  Non-oil per capita 
gross domestic product of $350 places it toward the bottom of 
the rankings of low income countries.  The economy is split into 
two very unequal parts -- the 85 percent of the work force 
devoted to subsistence agriculture (cooking with firewood and 
fetching water), alongside a services sector (60 percent of the 
economy by value, an extremely high level for an LDC) driven by 
the needs of the large international presence in the country as 
well as spiraling government spending.  Timor's nominal wealth 
began to increase in 2005 when revenue from a gas field shared 
with Australia began to come online.  The increased income went 
overwhelmingly to purchasing imported goods and cash pay-outs to 
resolve the political problems of IDPs and pensioners, however, 
leaving domestic production little changed and poverty levels 
actually worse than ten years ago.  The UN ranks Timor-Leste 
158th of 179 countries in terms of human development indicators. 
 Petroleum revenue has boosted nominal statistics like gross 
national income, making Timor-Leste look more prosperous on 
paper, but that stimulative demand effect has yet to filter into 
the real domestic economy. 
 
 
 
¶6.  (SBU) Two of Timor-Leste's biggest economic decisions -- to 
set up a special petroleum fund to manage its revenue on a 
sustainable basis and to dollarize the economy -- remain two of 
its best.  By smoothing petroleum income and removing the 
possibility of exchange rate appreciation Timor-Leste has 
avoided the worst of the Dutch Disease that often plagues 
resource-rich economies.  On the negative side, Timor's private 
sector remains extremely small.  A major obstacle is the poor 
regulatory environment for business, which the World Bank ranks 
170th of 181 countries.  The country's infrastructure needs, 
from schools to roads, water and power, are immense.  Half of 
the adult population has zero educational attainment and 
functional illiteracy and innumeracy are well above 70 percent. 
 
 
 
---------------------------- 
 
 
DILI 00000218  003.2 OF 006 
 
 
Accountability and Impunity 
 
---------------------------- 
 
 
 
¶7.  (SBU) Despite the suffering that took place in 1975-99, the 
desire to hold Indonesia accountable for the crimes committed 
during its occupation is not a pressing issue for most Timorese. 
 Timor-Leste views itself as the victorious party, having won 
its independence.  Two reports catalog the events of the 
Indonesian occupation and departure.  The Commission for 
Reception, Truth and Conciliation (CAVR) submitted the Chega! 
(Enough!) report to the Timorese parliament in 2005, describing 
the 1975-99 period.  The bilateral Indonesia-Timor-Leste Truth 
and Friendship Commission in its June 2008 report assigned 
institutional responsibility for 1999 human rights violations to 
the Indonesian military.  Both reports have been submitted 
formally to the parliament but neither has been publicly 
debated.  Documenting the evidence preserves the possibility of 
justice in the future, but the Timorese leadership has no 
intention of pursuing Indonesian accountability now. 
 
 
 
¶8.  (SBU) Timor-Leste has domestic accountability issues as 
well.  A UN Commission of Inquiry documented possible illegal 
actions from the 2006 petitioners crisis.  Some criminal cases 
have moved forward but the president has repeatedly proposed a 
general amnesty for 2006 crimes.  A group that includes former 
petitioners is on trial for the 2008 attacks against the 
president and prime minister, but the president indicated he may 
pardon them if convicted.  The reluctance to hold guilty parties 
accountable for their crimes demonstrates a lack of faith that 
Timorese society could hold together if stressed and creates a 
culture of impunity that threatens to undermine the rule of law 
and perpetuate the violent political environment that has 
plagued the country. 
 
 
 
--------------------------------------------- 
 
The Challenges of Timor's Next Ten Years 
 
--------------------------------------------- 
 
 
 
¶9.  (SBU) Timor-Leste is a long-term project with decades of 
work left undone.  For the first time in its history it has its 
political independence and a moderate amount of domestic 
economic resources.  Without continued support, the right 
decisions and great determination, however, Timor-Leste could 
still fail.  Timor-Leste's success over the next ten year period 
will be shaped by its response to several key challenges. 
 
 
 
--------------------------------------------- -------------- 
 
Ensuring an Appropriate Draw Down of UN Presence and ISF 
 
--------------------------------------------- -------------- 
 
 
 
¶10.  (SBU) On three occasions, in 1975, 1999 and 2002, 
Timor-Leste has been ill-prepared for full sovereignty.  The 
timing of the fourth opportunity must be driven by a clear 
analysis of the conditions on the ground as well as the 
capability of Timor-Leste's governance institutions.  The 
security sector is the biggest and most obvious test.  The 
 
DILI 00000218  004.2 OF 006 
 
 
International Stabilization Force (ISF) reduced its numbers by 
20 percent earlier this year and appears poised to consider 
further reductions in the near future.  UN police this year have 
ceded primary law enforcement responsibility back to Timorese 
police in three of 13 districts.  In both instances the 
drawdowns are in response to improving security conditions and 
fledgling improvements in local capacity. 
 
 
 
------------------------------------------- 
 
Ushering in the Next Political Generation 
 
------------------------------------------- 
 
 
 
¶11. (SBU) Timor-Leste's political history to date has been 
dominated by three figures: Prime Minister Xanana Gusmao, 
President Jose Ramos-Horta, and Fretilin Secretary General and 
former PM Mari Alkatiri.  These three elder statesmen (Gusmao is 
63 years old; Alkatiri and Ramos-Horta will both turn 60 later 
this year) represent the generation that remembers the 
Portuguese colonial era.  Over the course of the next two 
election cycles, due in 2012 and 2017, they will likely be 
confronted with a new generation of voters and leaders.  No 
figure on the horizon, however, has Gusmao's profile at home or 
Ramos-Horta's abroad. 
 
 
 
¶12.  (SBU) While there are many with aspirations for the 
country's highest political positions, including the incoming 
Ambassador to the U.S. Constancio Pinto, four individuals are 
likely to be involved in the next round of jockeying for the two 
senior leadership positions of president and prime minister. 
 
 
 
-- Taur Matan Ruak, Commander of the Armed Forces (53 years 
old).  TMR was a guerrilla colleague of Gusmao's during the 
Indonesian occupation.  He was a central player in the 2006 
crisis and was recommended for prosecution by the UN Commission 
of Inquiry.  Nevertheless, he is seen and occasionally revered 
as a founder of the nation due to his long service in the 
military resistance.  Gusmao's CNRT party could support TMR as a 
presidential candidate. 
 
 
 
-- Fernando "Lasama" de Araujo, President of Parliament (46 
years old).  Lasama founded the Democratic Party (PD) and led it 
into the parliament as Fretilin's first opposition.  He served 
as interim President of the Republic after Ramos-Horta was shot 
in 2008.  With Ramos-Horta uncertain to stand again for the 
presidency, Lasama is a leading candidate to replace him. 
 
 
 
-- Jose Luis Guterres, Deputy Prime Minister and former 
Ambassador to the U.S. and UN (54 years old).  Guterres is an 
estranged member of Fretilin who allied himself with Gusmao's 
CNRT party in the 2007 parliamentary elections.  He led the 
"Mudansa" (reform) element within Fretilin and unsuccessfully 
challenged Alkatiri for party leadership in 2006.  Guterres 
could return to lead Fretilin, still the best-organized and most 
national of Timor's parties, should Alkatiri decide or be forced 
to step aside. 
 
 
 
-- Aniceto Guterres, head of Fretilin's parliamentary caucus (42 
 
DILI 00000218  005.2 OF 006 
 
 
years old).  Guterres is spearheading Fretilin's preparations 
for the upcoming local elections.  He chaired the CAVR 
commission that investigated crimes during the Indonesian 
occupation and is a human rights lawyer by profession.  Guterres 
is a possible replacement for Alkatiri as leader of Fretilin. 
 
 
 
-------------------------------------- 
 
Building Institutions Across the Board 
 
-------------------------------------- 
 
 
 
¶13.  (SBU) Timor-Leste's basic governance institutions are still 
works in progress.  The country needs but still lacks police 
that can combat criminal activity, serve the people and keep 
domestic order; a professional, disciplined military that 
carries out a well-defined national security mission; political 
parties that institutionalize the peaceful transfer of power; a 
justice system that credibly and expeditiously punishes the 
guilty and resolves disputes; an educational system that 
delivers basic literacy and numeracy; and a health system that 
reduces infant mortality and extends life expectancy. 
 
 
 
--------------------------------------------- -- 
 
Reaping Real Benefit from Petroleum Revenue 
 
--------------------------------------------- -- 
 
 
 
¶14.  (SBU) Timor-Leste's known oil and gas resources provide a 
one-generation window to build the country.  The total value of 
reserves is estimated to be between $14 billion and $20 billion, 
to be expended on a sustainable basis if the government 
continues to abide by the strictures of the Petroleum Fund.  To 
date, petroleum revenue has financed a massive ten-fold increase 
in government spending.  Recurrent expenditures such as wages 
and salaries still make up the majority of the budget, but the 
share allotted to capital expenditure and development projects 
is growing.  Among other tasks the increased revenue enabled 
Timor to buy its way out of two sources of instability by 
offering one-time buyouts to the petitioners and resettlement 
bonuses to IDPs.  Additionally, it has also enabled the 
government to establish a very popular welfare system for the 
elderly, veterans, and the infirm; to make an enormous purchase 
of rice to guard against food riots that occurred in the past; 
and to afford a large number of overseas scholarship programs 
for Timorese students. 
 
 
 
¶15.  (SBU) Timor-Leste must generate substantial labor-intensive 
activities to soak up a pool of unemployed that is poised to 
grow massively in the years ahead.  Close to half the population 
is under the age of 15 and the birth rate is among the highest 
in the world.  Unemployed youths have fueled Dili's street 
violence and unrest in the past, drawn to the city without the 
job creation needed to sustain them.  Sectors such as coffee, 
processed foods, handicrafts and tourism offer potential for 
growth but even in optimistic scenarios the likelihood of 
substantial manufacturing activity is low.  Government 
investment in badly-needed infrastructure projects offers the 
best opportunity to create the employment that is needed to keep 
Timor-Leste's coming generation gainfully occupied.  There is 
broad support to bring a gas pipeline to Timor-Leste as a future 
offshore field is exploited.  While proponents of the pipeline 
 
DILI 00000218  006.2 OF 006 
 
 
hope it will provide the basis for a small petro-chemical 
industry, there is considerable skepticism regarding its cost 
and viability. 
 
 
 
------------- 
 
U.S. Strategy 
 
------------- 
 
 
 
¶16.  (SBU) The United States has a unique opportunity to play a 
positive role in Timor-Leste's continued development as a 
country.  We do not have the same historical baggage as 
Timor-Leste's other major international partners, such as 
Australia, Indonesia, Portugal and the United Nations.  It is 
easier for the Timorese to accept us as an honest broker 
supporting the development of Timorese democratic institutions. 
Our fundamental interest here is to extend the period of 
stability that began 18 months ago and ensure that this is 
merely the beginning of a new, more positive phase of 
consolidation, stability and development. 
 
 
 
¶17.  (SBU) To achieve this, the United States will continue to 
engage and assist the Timorese pursue their priority goals, 
including developing and strengthening essential institutions. 
Our development assistance strategy focuses on accelerating 
economic growth, strengthening good governance, especially 
security sector reform, and improving health.  U.S. programs 
have produced significant achievements in coffee production, 
land and property rights, private sector development, elections, 
independent media, and public health, results that help to plug 
yawning gaps that threaten the foundation of Timor-Leste's 
future success.  Anti-corruption and judicial assistance will be 
crucial in the years ahead to ensure that the rule of law takes 
hold and that the public's faith in its political institutions 
is not squandered.  Growing military-to-military engagement will 
help to professionalize Timor-Leste's armed forces and keep them 
from being a spoiler on peace and stability issues.  The return 
of the Peace Corps would be a dramatic sign of support of 
Timor-Leste at the grassroots level, one which would have great 
resonance in the country from the top of the country's political 
leadership on down.  Ten years after the start of Timor-Leste's 
road to independence there is much left to do -- and much that 
the United States can do -- to ensure that the next ten years 
achieve the promise that all friends of Timor-Leste hope and 
believe is possible. 
KLEMM