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Challenges for the Xanana alliance

By Tim Anderson - posted Wednesday, 17 October 2007


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, for example, 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.

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On the other hand, abolishing corporate income taxes (while popular with corporations) will place greater 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 enrolment numbers.

The World Bank supports the idea of using revenue for “Conditional Cash Transfers” (CCT), a sort of micro-dispersal of state funds to families, with social objectives attached. The macroeconomic idea is to provide a stimulus to effective demand. However, such moves are likely to be wasteful, undermining state investment in badly needed 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 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. A small country should invest its limited income carefully.

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. The current Cuban offer is for up to 1,000 medical scholarships. This collaboration, which began in 2003, is the largest health aid program in the entire Asia-Pacific region, and very good deal for the country. Within 10 to 15 years, East Timorese graduates will replace all the Cuban doctors.

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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 Catholic Church, these programs are now very popular and have been supported from their inception by Xanana and Jose Ramos Horta. They seem likely to continue. In a sign of continuity, the new Health Minister has the former Health 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 World Bank and AusAID that land should be commodified and that secure title be made available for investors. At first glance this might seem an attractive proposition for a country with many land disputes, arising from distinct colonial periods. However land registration is a process which historically dispossesses small holders and advantages large corporate interests. The likely prizes are fertile land for export crops and prime coastal land for tourism.

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.

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About the Author

Tim Anderson is a Senior Lecturer in Political Economy at the University of Sydney.

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