Trade and Growth Horizons for Nusa Tenggara Timur and Timor-Leste

Place: Timor-Leste • Dates: 2009 • Partner: ADB

Project Summary

This report evaluates the prospects for trade and economic growth for two proximate economies in the Indonesian archipelago, Nusa Tenggara Timur (NTT), Indonesia, and the independent state of Timor-Leste (TIM). Both have very low incomes and predominantly rural populations (mainly subsistence farmers and food-insecure households), and both are at the early stages of development with limited regional and global trade linkages. TIM has historically been implicated in disruptive civil strife, which continues to pose risks to existing and prospective economic assets. However, considerable potential exists in both economies relative to today’s living standards. Trade-oriented development of value-added activities associated with the primary sector, including agro food and labor-intensive light industry and services such as tourism might offer important diversification and alleviate social risks from very high current under- and un-employment rates.

A primary impediment to development appears to be real and de facto trade and investment barriers. Real trade barriers consist primarily of infrastructure deficiencies, including port and supporting transport and communication facilities, as well as soft infrastructure to facilitate more efficient trade/investment promotion and supervision. De facto trade barriers comprise a wide array of informal obstacles, including apparent underperformance of border clearance functions, bilateral contractual and market failures, and, sometimes, outright resistance on the part of some toward bilateral flows of goods, services, and persons.

Our review of available evidence suggests that increased trade could be a potent catalyst for growth in both economies, and this report assesses the prospects for such trade expansion. Importantly, our findings indicate that apparent home-market bias is a serious mercantilist fallacy, as growth of exports from more open trade would be much more robust than import growth. In particular, public and private investments to facilitate trade could increase exports as a percent of gross domestic product more than twice as fast as imports, offering both economies significant growth leverage from new external demand and savings inflows. Taken together, the results of this review strongly support an outward-oriented agenda of public and private trade facilitation, including much more determined infrastructure investments for domestic, regional, and global market access, accompanied by public and private capacity development for more effective development of trade and investment opportunities.

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