EAST Timor's security forces and civil service are politicised, a situation that has not been reconciled and could trigger a return to instability on the restive half-island nation, a World Bank report says.
In its annual draft report, a copy of which was obtained by The Australian, the World Bank warns poor government decision-making and lax fiscal management are likely to lead to increasing wastage and corruption.
The role of highly paid expatriate advisers is also cited as a factor undermining government capacity. The report says multi-million-dollar inflows of royalties from the oil and gas rich Timor Sea have failed to bring any fall in East Timorese poverty.
East Timor is Southeast Asia's poorest nation. Nearly half the country's population, 500,000, are living below the poverty line. That compares with 36 per cent in 2001, one year after the country gained its independence.
The report also appears to be critical of the donor community for failing to help lift the country out of poverty after a decade of assistance.
"Despite concerted efforts by government and development partners, human development outcomes remain low," the report says.
"Timor Leste (East Timor) ranks 150th out of 177 countries on the UN's Human Development Index (HDI)," the World Bank says.
Australian official development aid to East Timor in 2008-09 was worth $96.3 million, focusing on security, rule of law and the promotion of political stability.
The report says the Gusmao Government has achieved some "notable success" in maintaining peace despite the attempted killing last year of President Jose Ramos Horta.
Several hundred Australian peacekeepers remain stationed in East Timor at the request of the Government to ensure there is no repeat of the 2006 violence. (TheAustralianNews)
But the World Bank claims little has been done to remove the underlying causes of political instability, which erupted into bloody violence, leaving dozens killed and more than 100,000 people displaced.
"It would be a mistake to believe that these commendable initiatives have eliminated the risk of further political instability," it says.
"Timor Leste's long occupation left violence as a habitual way of dealing with disputes and frustration, and little has been done so far to reconcile old enemies or systematically address the deep trauma of two generations of internecine conflict.
"The security forces and civil service are prone to politicisation."
Unemployment remains another major problem for the country, with little relief in sight. Almost half the population is below the age of 15, placing huge pressure on basic services.
An estimated 15,000-16,000 young people enter the labour market each year to fill about 500 jobs in the formal sector, the World Bank says.
The Government's economic policies came in for strong criticism, particularly after a decision on rice import subsidies that resulted in a dramatic lowering of agricultural production. "Crop yields are among the lowest in the East Asia region," the bank says. "In 2007 ... families went an average of three months without sufficient rice or maize to eat."