Trade and commercial policy is one of the keys to a prosperous and viable East Timor. Along with macroeconomic and social policies, and institutional development, no set of policy issues is more important. ‘Openness’, variously defined, consistently emerges as a significant and positive factor in the large ‘determinants of growth’ literature (see, for example, Barro and Sala-i-Martin 1995). Two lessons from more than 50 years of development experience stand out: open economies grow more quickly than closed ones; and high levels of savings and investment – the engine of development – will occur only if economic agents, from rural cottage enterprises to multinational corporations, can operate in a secure, stable and conducive commercial environment.

These propositions provide the unifying themes of this chapter. We develop here the bare bones of an approach to trade and commercial policy which focuses in turn on the specifics of trade policy, trade and industry policy, measures to promote an efficient private sector, and policy issues and options for the state enterprise sector. These are of course large and complex issues, and one paper cannot discuss all of them in detail.

TRADE POLICY

Some General Considerations

Three lessons from economic development should inform commercial policy in East Timor:

1. • outward-oriented economies outperform inward-looking ones;

2. • in small economies the costs of trade intervention are large and quickly evident; and

3. • by dint of geography, it is sometimes observed that ‘God made archipelagic Southeast Asia for free trade’.

East Timor has very little choice other than to maintain an open trade regime, where the lower boundary is obviously free trade, and the upper limit is Indonesia's (now very open) trade regime. Protecting one sector entails taxing others, and it is not obvious that any particular sector deserves protection over any other. Assuming they (deservedly) receive a high priority, rural and agricultural activities can be promoted through direct productivity-enhancing investments in such areas as roads, irrigation and agricultural extension.