UN peacekeepers withdrew from Timor-Leste in December 2012, ending a thirteen-year presence after two successful elections underscored the country’s continued stability. Pragmatic decisions by local leaders after the 2006 crisis to use swelling petroleum industry revenues to buy peace have paid dividends. But that strategy rests on three anchors: the authority of the current prime minister; the deferral of institutional reforms in the security sector; and the flow of oil and gas revenues from the Timor Sea. The dependence on the petroleum industry is unsustainable, and the need to develop alternative anchors may be more urgent than it appears.

Timor-Leste has recovered well from the 2006 crisis, when tensions spilled onto the streets as police, army and disaffected veterans fought one another, and over 100,000 Dili residents were displaced. Oil and gas revenues have helped provide the cure. The Petroleum Fund began to swell after production from the Timor Sea began in 2004 and now stands at $11.7 billion. The money gave the Aliança da Maioria Parlamentar (AMP) government headed by Xanana Gusmão the confidence and the resources to spend its way out of conflict. It gave rewards to the surrendering “petitioners”, whose desertions from the army had set the crisis in motion; offered cash grants to persuade the displaced to return; funded lavish pensions for disgruntled veterans; and put potential spoilers to work pursuant to lucrative construction contracts.

The 2012 elections bore testament to greater political stability but placed power in the hands of a few. Gusmão’s party returned with a broader mandate and streamlined coalition; his former guerrilla army subordinate (and recent armed forces chief), Taur Matan Ruak, became president. Both mobilised the structures of the resistance to aid their elections, while business interests also played a large role in the parliamentary poll. Though he formed a 55-member cabinet, Gusmão has been reluctant to delegate political authority to potential successors, instead centralising power under himself and a few key ministers. All political parties face internal problems, and the question of who will succeed such a dominant figure remains. Ruak is one possibility – he has been a vocal government critic, providing some accountability not offered by a weak parliament. But there are few other obvious successors, and the transition could be messy.

Overly centralised political power sharpens risks from the dual lack of effective oversight and of adequate institutional arrangements in the security sector. Gusmão, who reappointed himself joint security and defence minister, has used his personal authority to tamp down tensions among and between the various security forces rather than make long-term policy. The police are without clear leadership and hobbled by inadequate investigative skills and discipline problems. Proposals to establish a separate criminal investigation service to address the poor track record of prosecutions may only weaken the force as a whole. The military has become more professional, but as it doubles in size and deploys across the country, the reluctance to outline a clear division of labour between the security forces poses greater risks. That task will not be made easier by the anomaly that though the country faces almost no external threats, the army’s ambitions are expanding.

The government will also have to work harder to ensure improved and more equitable returns on its investments. The Petroleum Fund provides considerable independence from donor-driven priorities and freedom to spend without going into debt. The government views spending as an economic stimulus measure and improvements to infrastructure as a prerequisite to sustainable growth, but returns have been woeful. In recent years, over half the state budget has been devoted to construction projects, but actual execution has sometimes seemed an afterthought. Limited investment in the weak education and health sectors is not doing enough to ensure the welfare of future generations.

The greatest challenge facing this government will be to make progress in providing economic opportunities without exhausting national wealth. It will have to prioritise the search for more sustainable employment for a rapidly growing workforce, driven by one of the world’s highest birth rates. It will also need to find ways to tackle the perceived growth in social inequality, as elites largely centred in the capital benefit from access to increased spending. It must produce visible results against alleged corruption. And in designing major measures, such as land-titling legislation and decentralisation, it will need to work with parliament and civil society in order to produce legislation and policies that enjoy a greater degree of public legitimacy.

Timor-Leste deserves praise for the success with which it has implemented pragmatic policies designed to bring rapid stability following the 2006 crisis. Promoting confidence at home and abroad is important for transforming any post-conflict economy. But it likely has a very limited window of opportunity during which to make investments – both political and financial – that might mitigate the still real risks of an eventual return to conflict.

Dili/Jakarta/Brussels, 8 May 2013