Supporters of presidential candidate Francisco Guterres of the Revolutionary Front for an Independent East Timor (FRETILIN) party cheer at a campaign rally ahead of next week's elections, in Tasi Tolu, Dili, East Timor March 17, 2017. Photo: Reuters/Lirio da Fonseca

On May 19, as dignitaries gathered in Dili for the inauguration of Timor-Leste’s new president, Francisco “Lu-Olo” Guterres, the ceremony had an added significance as the new nation celebrated 15 years of independence from repressive and conflict-plagued Indonesian rule.

“We should be proud of so much that has been done during the last 15 years, but we should be aware that there is still much to be done,” Lu-Olo said in his first presidential address.

March’s presidential election was the first to take place in Timor-Leste, also known as East Timor, without the presence of international peacekeepers, a significant step for Asia’s youngest nation. As the small country transitions from conflict to peace, unmistakable progress has been made.

East Timor President Francisco Guterres shows his ink marked finger after he casts his ballot during the presidential election in Dili, East Timor March 20, 2017. Photo: Reuters / Lirio da Fonseca

Timor-Leste now outranks many of its neighbors on international measures of good governance and human rights. In the Economist Intelligence Unit’s latest Democracy Index, for instance, Timor-Leste ranked higher than any other Southeast Asian country in 43rd place worldwide.

“Timor-Leste is a modern-day miracle: In 15 years, we have been one of only a handful of fragile states to manage to consolidate peace and sustain development,” Agio Pereira, Minister of State and government spokesman, told Asia Times.

Lu-Olo’s electoral victory was a vote of confidence in Timor-Leste’s previous “unity government”, formed in 2015 when Xanana Gusmao, leader of the National Congress for Timorese Reconstruction (CNRT), stepped down as prime minister and allowed Rui Maria de Araujo, a member of the rival Fretilin party, to take his place.

Fretilin party leader Francisco Guterres (L) with former president and resistance hero Xanana Gusmao during a campaign rally on March 17, 2017. Photo: Reuters/Lirio da Fonseca

Lu-Olo is the president of Fretilin, formally known as the Revolutionary Front for an Independent East Timor, a former armed group fighting for independence from Indonesian rule. That debilitating conflict took between 200,000 to 300,000 lives, or around one-third of the island nation’s population.

Critics contend that consensus politics between the two main parties has intensified corruption and nepotism, as well as massive government misspending and a lack of accountability, without an effective opposition in parliament.

Taur Matan Ruak, a former president who is expected to run in July’s parliamentary election on the ticket of the newly-formed People’s Liberation Party (PLP), is among the government’s detractors. He said to parliament last year that the state was “far too centralized” and “excessively wastes resources, allowing thousands of Timorese to become second class citizens.”

Supporters hold posters of presidential candidate and former military commander in a file photo: Photo: REUTERS/Lirio Da Fonseca

The country’s political divide in some ways boils down to two different concepts of economic development. The “unity government”, which commentators believe Gusmao still controls from behind the scenes, favors large-scale infrastructure projects and high levels of government spending.

Opponents, on the other hand, say not enough is being spent on public services and grassroots infrastructure and that large state contracts are being doled out to family members of politicians and an entrenched economic elite.

The former path is arguably unsustainable. Since 2004, the country has earned more than US$18 billion from the Bayu-Undan oil and gas field, the country’s largest. The field, however, is expected to run dry as early as 2023.

While there is an estimated US$16 billion in Timor-Leste’s sovereign wealth fund, at current levels of state spending it may also be depleted within the next decade, according to independent industry analysts. Approximately 90% of the country’s GDP and budget is derived from oil and gas revenues.

The government still hopes to get a better deal from Australia on the Greater Sunrise oil and gas field, though it’s not clear Canberra has any intention of amending the 50%-50% revenue sharing arrangement. The Greater Sunrise field’s oil and gas resources have been estimated as high as US$53 billion.

Even if Timor-Leste gets its way at the negotiating table, which still appears unlikely, it might not be able to any reap profits from the field for another six or seven years due to high initial investment costs.

The political differences over how best to develop the nation are rooted in history. Once independence was achieved, the government had to quickly establish a new historical narrative to replace the one imposed by Indonesia. The new nationalism thus predictably centered on the struggle for independence.

But when a new bout of violence spread across the country in 2006, police, army and disaffected veterans of the independence struggle were pitted against one another on political lines, a paroxysm that displaced more than 100,000 Dili residents.

A police officer stands guard at a Francisco Guterres campaign rally in Dili on March 17, 2017. Photo: Reuters/Lirio da Fonseca

Much of the violence was driven by those who felt they had been left out of the country’s new start and denied the expected material rewards of independence. When Gusmao became prime minister in 2007, his government responded to the crisis by what some independent analysts dubbed as “buying peace.”

“[It] gave rewards to the surrendering ‘petitioners’, whose desertions from the army had set the [2006] crisis in motion,” the International Crisis Group, a Brussels-based conflict resolution outfit, reported.

“[It] 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 government also altered the laws on tendering state contracts. All those that met the government’s criteria were automatically awarded contracts, even if they were not cost competitive. A decade on, this practice is still thought to continue to placate dissent.

“As a consequence, corruption has set in,” Damien Kingsbury, professor of international politics at Australia’s Deakin University, recently wrote. “Government tenders were initially overpriced and companies with close connections to senior government members disproportionately benefitted from government business.”

Former East Timor Prime Minister Mari Alkatiri after being forced to quit in a political power play in June 2006. Photo: Reuters/Lirio Da Fonseca

Gusmao also appeased Fretilin general-secretary Mari Alkatari, who was forced to resign as prime minister in 2006, by making him the president of the Special Administrative Region of Oecusse, a coastal enclave in the country’s western region. The government provides ample funds to run the special economic zone.

“Brother [Gusmao] takes care of Timor while brother [Alkatari] takes care of Oecusse,” former president Ruak said last year.

The government grasps the risks of enduring divisions. In 2015, it implemented an initiative known “‘National Mourning-End”, which, according to commentators, maintained that while the past won’t be forgotten, Timor-Leste needs to look ahead for the sake of national development.

That future faces demographic challenges. Between 1999 and 2002, Timor-Leste had one of the world’s highest birth rates with around seven births per mother. As a result, almost 60% of the population is currently below the age of 25. With youth unemployment now around 25%, the government is under heavy pressure to create new jobs.

Low corporate tax rates and other incentives have lured some new foreign investments in construction, manufacturing and tourism. But political stability and strong state spending has not yet sparked a virtuous cycle of private sector-led investment and job creation.

Timor-Leste faces difficult demographics and a stubbornly high unemployment rate, particularly among youth.  Photo: Reuters/Beawiharta

The unity government’s version of stability will be tested in July’s parliamentary election. During his presidential campaign, Lu-Olo won the backing of the CNRT, which was thought to have swung the vote in his favor given that he only received around 30% of votes in the 2007 and 2012 presidential elections.

Second placed Antonio da Conceicao – backed by the Democratic Party (DP) and the PLP, both opposed to the “unity government” – secured almost 30% of the vote. Some analysts anticipate that result could provide the two opposition parties a solid launch pad into July’s parliamentary election.

Although neither party is expected to win a parliamentary majority, there are suggestions they could win enough to ensure Timor-Leste once again has a functioning opposition in parliament and a heartier debate on the country’s political direction and economic model.