Historical background

The Portuguese began to trade with the island of Timor in the early 16th century and colonized it in mid-century. Skirmishing with the Dutch in the region eventually resulted in an 1859 treaty in which Portugal ceded the western portion of the island. Imperial Japan occupied Portuguese Timor from 1942 to 1945, but Portugal resumed colonial authority after the Japanese defeat in World War II. East Timor declared itself independent from Portugal on 28 November 1975 and was invaded and occupied by Indonesian forces nine days later. It was incorporated into Indonesia in July 1976 as the province of Timor Timur (East Timor). An unsuccessful campaign of pacification followed over the next two decades, during which an estimated 100,000 to 250,000 individuals lost their lives. On 30 August 1999, in a UN-supervised popular referendum, an overwhelming majority of the people of Timor-Leste voted for independence from Indonesia. Between the referendum and the arrival of a multinational peacekeeping force in late September 1999, anti-independence Timorese militias - organized and supported by the Indonesian military - commenced a large-scale, scorched-earth campaign of retribution. The militias killed approximately 1,400 Timorese and forcibly pushed 300,000 people into western Timor as refugees. The majority of the country's infrastructure, including homes, irrigation systems, water supply systems, and schools, and nearly 100% of the country's electrical grid were destroyed. On 20 September 1999, the Australian-led peacekeeping troops of the International Force for East Timor (INTERFET) deployed to the country and brought the violence to an end. On 20 May 2002, Timor-Leste was internationally recognized as an independent state. In late April 2006, internal tensions threatened the new nation's security when a military strike led to violence and a near breakdown of law and order in Dili. At the request of the Government of Timor-Leste, an Australian-led International Stabilization Force (ISF) deployed to Timor-Leste in late May. In August, the UN Security Council established the UN Integrated Mission in Timor-Leste (UNMIT), which included an authorized police presence of over 1,600 personnel. The ISF and UNMIT restored stability, allowing the Government of Timor-Leste to hold presidential and parliamentary elections in April and June 2007 in a largely peaceful atmosphere. In February 2008, a rebel group staged an unsuccessful attack against the president and prime minister. The ringleader was killed in the attack and the majority of the rebels surrendered to the government in April 2008.

Economic overview

In late 1999, about 70% of the economic infrastructure of Timor-Leste was laid waste by Indonesian troops and anti-independence militias. Three hundred thousand people fled westward. Over the next three years a massive international program, manned by 5,000 peacekeepers (8,000 at peak) and 1,300 police officers, led to substantial reconstruction in both urban and rural areas. By the end of 2005, refugees had returned or had settled in Indonesia. The country continues to face great challenges in rebuilding its infrastructure, strengthening the civil administration, and generating jobs for young people entering the work force. The development of oil and gas resources in offshore waters has begun to supplement government revenues ahead of schedule and above expectations. The technology-intensive industry, however, has done little to create jobs for the unemployed because there are no production facilities in Timor. Gas is piped to Australia. In June 2005, the National Parliament unanimously approved the creation of a Petroleum Fund to serve as a repository for all petroleum revenues and preserve the value of Timor-Leste's petroleum wealth for future generations. The Fund held assets of US$3.9 billion as of October 2008. The economy is recovering from the mid-2006 outbreak of violence and civil unrest, which disrupted both private and public sector economic activity. The government in 2008 resettled tens of thousands of an estimated 100,000 internally displaced persons (IDPs) and planned for all IDPs to return home by early 2009. The underlying economic policy challenge the country faces remains how best to use oil-and-gas wealth to lift the non-oil economy onto a higher growth path and to reduce poverty.