PHOENIX RISING

East Timor is starting over. It is very much like the mythical phoenix, rising from the ashes of its recent destruction to become the newest member of the world's family of nations. Most of East Timor's physical infrastructure has been destroyed. Its service delivery and marketing networks are not functioning, families and communities have been decimated by internal displacement and the absence of unrepatriated refugees, and much of East Timor's non-indigenous skilled labour has fled.

But calamity also offers opportunity. After spending a generation in exile, the East Timorese diaspora is coming home to help with nation building, those who never left can now realize their full potential, and the world is offering unprecedented support to the stabilization and rebuilding of East Timor.

One of the critical development challenges facing East Timor as nation building proceeds is the formulation and implementation of an appropriate fiscal policy. It has before it several dramatically different strategic options. The leaders of East Timor will have to make difficult choices between these options, notwithstanding the advice of noted philosopher and baseball coach Yogi Berra, ‘when you come to a fork in the road, take it’.

Fortunately, East Timor can benefit from being a ‘late bloomer’ – it can learn from the mistakes of others as it evaluates the trade-offs between its strategic policy options, and better anticipate the results of the fiscal policy path that it chooses. Key fiscal policy dilemmas include: the role and size of the public sector; fiscal balance; resource mobilization, including dependency on commodity-based revenue and foreign aid flows; expenditure efficiency and effectiveness; and intergovernmental fiscal relations.

The remainder of this chapter is devoted to an examination of the major strategic options for these critical components of fiscal policy, with an assessment of the strengths and weaknesses of each.