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