Private sector development for stability in East Timor

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In a Wall Street Journal op-ed (subscription required), Paul Cleary - an Australian journalist and a former advisor to the East Timor government - links a decline in GDP per capita to instability:

In focusing on the immediate trigger for renewed conflict, however, analysts have largely overlooked East Timor's sharp and sustained decline in per capita GDP -- a sufficient condition for sending any post-conflict country back into conflict.

In the two years that I worked and traveled in East Timor there was a palpable dearth of government activity throughout the country. Labor-intensive capital works were a rarity. Youths would stare blankly when asked when they last had a job; many had never worked. Some of the small towns had no shops because the people living there had no money. Barter still remained a form of exchange in some remote areas.

A lack of financial services was partly to blame for inhibiting the flow of money. Money spent in the districts had to be physically carted around the country because there was little access to banking services outside the capital.

Out of one million residents in the country, 40 percent are unemployed, 45 percent live at $1 or less a day and only about 50 percent are literate and the population is growing at a high rate of 4 to 5 percent a year.

Cleary calls for supporting social safety nets via market-based solutions:

[…] pensions can help to circulate and multiply money, provided that there is an effective financial system. As the financial system is now being slowly expanded though microfinance cooperatives, a more substantial pension scheme for mothers with children, for example, would be an effective way to reduce poverty in a country where 40% of children show the physical effects of under-nutrition. This could also be matched with incentives to arrest the booming birth rate.

Perhaps the most significant spending target would be the expansion of credit to jump start private-sector activity, especially in rural areas. When billionaire investor George Soros visited the country in January 2006 he urged the government to create a rural credit bank. Mr. Ramos-Horta is a strong advocate of microfinance, having used some of the money he gained from the Nobel prize to start small programs.

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