POLICY PAPER ON

INCOME INEQUALITY IN TIMOR-LESTE

 Sonny Harry BudiutomoHarmadi*

Rui Augusto Gomes**

ABSTRACT

The overall economic performance of Timor-Leste during last the six years as measured by several macroeconomicindicators is arguably insufficient. As a very young nation, Timor-Leste hasrequired fundamental development on almost all fronts: political, economic, andsocial. This development has given rise to a paradox. Income (calculated hereas consumption expenditure) distribution became less dispersed over time,suggesting decreasing inequality. However, the poverty incidence in Timor-Lestehas increased during this period. In fact, income inequality was not thetrigger of political turmoil in Timor-Leste. Thedecline in income inequality occurred mostly due to the fact that thehouseholds in the bottom quartile received a significant amount of money fromgovernment transfers. Nevertheless, this transfer strategy should beimplemented prudentially. Since the informal sector plays an enormous role inthe East Timorese economy, taxes should not be used as instruments for incomeredistribution policy. Due to this situation, the Petroleum Fund can beregarded as one of Timor-Leste’s main tools for easing inequality. Inclusivegrowth can be implemented by using the Petroleum Fund to stimulate thecountry’s economic growth, benefiting the low income people, reducing thepoverty incidence and income inequality, increasing the human capitalaccumulation, and preventing political instability in the near future. Also, anationwide pro-poor programme will be more appropriate than a regional orgeographically targeted programme in Timor-Leste.

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