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Policy Paper No. 24

Limping on Three Legs: The Development of Timor-Leste

Policy Paper
Lundahl, Mats and Fredrik Sjöholm (2008). “Limping on Three Legs: The Development of Timor-Leste”. IFN Policy Paper No. 24. Stockholm: Research Institute of Industrial Economics (IFN).

Mats Lundahl, Fredrik Sjöholm

Timor-Leste is plagued by poor economic development and widespread political turmoil. Any substantial improvement in living standards requires the emergence of a modern sector. People must be given the opportunity to move out of agriculture where marginal productivity levels are very low and into an expanding modern sector.

Since the modern sector has so far not been able to absorb the growing labor surplus in the economy, this surplus has had to go into subsistence agriculture instead. This paper focuses on the creation of a modern private sector in Timor-Leste. As a consequence of the inability, hitherto, to develop a viable alternative to agriculture, we will also focus on the economic mechanisms governing the behavior of rural farm households. Before we go on to the development complex proper, we will, however, offer an account of the main political, economic and social development in the recent past.