Many years of colonization without real development, followed by a deliberate wave of looting and destruction, form the backdrop for the rehabilitation and development work now under way in East Timor. Agriculture cannot be regarded in isolation from its wider context, which includes transport, markets and sustainability.

Employing over 80 per cent of the population, contributing 40 per cent of GDP and accounting for 90 per cent of foreign exchange, agriculture is of vital importance to East Timor in all respects. In addition to the tremendous human costs visited upon the country in September 1999, marketing systems and general economic and commercial life were seriously disrupted. A return to normal economic activity continues to be hampered in many areas by disruption to internal markets, the absence of small traders and merchants, poor roads, and decimated commercial and private transport systems. In spite of all the setbacks caused by the destruction of late 1999 (World Bank 2000e), agriculture is the activity that depends most on the Timorese themselves and is also the area that is now showing the clearest signs of recovery.

Given that the vast majority of the poor still live in rural areas, the effects on agriculture of future structural and policy changes will have a major impact on real income, growth, poverty alleviation and the state of the environment. The purpose of this chapter is to examine the intersectoral implications of macroeconomic and exchange rate policy for agricultural development. A brief explanation of agriculture as the engine of economic growth is followed by an analysis of the effects on agriculture of a boom in other sectors of the economy. The chapter then discusses factor endowments using the ‘Leamer Triangle’ approach (focusing in particular on East Timor's position relative to that of other economies), before drawing some specific lessons for East Timor.