Mark Dodd – As East Timor's capital Dili lay a smoking ruin and starving dogs picked at rotting corpses, victims of retreating pro-Jakarta militia in September 1999, a US diplomat turned from the bleak apocalyptic vista to Australian ambassador James Batley and said: "East Timor is going to be Australia's Haiti."

Following this week's wave of arson and mob violence stemming from Xanana Gusmao being sworn in as Prime Minister yesterday, many who have followed the painful birth of this young nation are asking: Is East Timor heading down the road of a failed state? Will a new government led by Gusmao, a charismatic former president, guerrilla commander and resistance hero, be able to restore confidence, hope and a measure of prosperity for the troubled half-island state and its long-suffering people?

Yesterday Gusmao pledged to unite strife-racked East Timor when he was sworn in as the country's second Prime Minister at a ceremony boycotted by the former ruling party Fretilin.

Gusmao's new Government promised to lead a nation that has suffered more than a year of political tensions and uncertainty and this week more unrest in the violence-battered capital.

"I swear to God, to the people, and on my honour, that I will fulfil with loyalty the functions that have been invested in me," Gusmao said in Portuguese, as President Jose Ramos Horta administered his oath.

It is a very big ask for Gusmao's coalition led by the National Congress for the Reconstruction of East Timor, or CNRT, and the track record of East Timor's leaders is not encouraging.

Foreign Minister Alexander Downer said East Timorese, particularly young Fretilin supporters whose seat allocation in the 65-seat legislature was slashed to 21 following the June elections, should air their grievances in parliament, not on the streets.

To help control the violence, Australia has agreed to retain a sizeable military presence in East Timor for the foreseeable future, sweetened by aid running at $72.8 million ayear.

"The streets – rock throwing, shooting rifles and pistols – is not a way to deal with political disagreements and we would urge the East Timorese to respect the constitutional processes of the country and its institutions," Downer said.

Tracking the origins of state failure in East Timor is not hard. Humiliated by a resounding 78.5 per cent vote for independence in the UN-backed August 30 1999 referendum, vengeful Indonesians and militia proxies sacked the country, laying waste to the main towns, burning what could not be carted off, executing hundreds of youths and displacing three-quarters of the country's 900,000 population in the process.

The 21.5 per cent who voted for autonomy came mostly from the central and western part of the country.

No foreign army was willing to intervene and halt the rampage and the worst was over by the time a reluctant Australian-led international military coalition arrived to restore order.

Enter the UN global governors. Under Sergio Vieira De Mello, the UN Transitional Administration in East Timor proved to be anything but and East Timor reverted to a non-self-governing territory.

Under the wing of the UN Department of Peacekeeping Operations, UNTAET's De Mello did not benefit from the experiences of former UN Assistance Mission in East Timor staff, resulting in a significant loss of corporate knowledge and continuity in mission planning.

The pro-independence CNRT represented East Timorese sovereignty but had little role in decision making, apart from token consultation. Despite public appearances of solidarity, Gusmao and to a lesser extent Ramos Horta became disillusioned.

Emergency funds poured in from a swag of sympathetic global donors but UNTAET's response to reconstruction needs, employment generation and food distribution was slow and tardy.

UNTAET's centralist tendencies were evident. It opposed a World Bank-backed Community Empowerment Project that cost its outspoken advocate Jarat Chopra his job as head of district administration. Power would reside at the top.

Chopra later wrote: "UNTAET's inability to deliver basic services or tangible reconstruction and its failure to reduce unemployment (exceeding 80 per cent) cost it the confidence of the people, perhaps the critical ingredient in any transitional administration."

Like the UNTAC-run Cambodia of 1993, a parallel economy emerged due to the wide wage differences of UN international staff and East Timorese lucky enough to find work. A hamburger at a Western takeaway in Dili cost $US5 ($5.80), the average daily take-home pay for East Timorese.

East Timorese anger grew over concerns about a lack of promised UN transitional training to run the new country.

"The unavoidable conclusion may be that the UN, despite its ability to monopolise the image of legitimacy, is ill-suited to administering territories in transition," Chopra says. "Just as it became evident in the 1990s that the UN could not command and control high-intensity military enforcement operations, so the same may be true of civilian governance."

The fireworks display at Taci Tolu marking East Timor's emergence as the world's newest country in May 2002 was spectacular but the government led by Mari Alkatiri quickly realised fighting a 28-year guerilla war was easier than running a country.

The Marxist-trained Alkatiri's autocratic tendencies emerged. After gaining control of government (it had won 57 per cent of the vote in the 2001 elections) Fretilin politicised the civil service, appointing loyalists to 64 of the 65 subdistrict administrative posts across the country.

Like the UNTAET predecessor Alkatiri ran a highly centralised top-down decision-making apparatus with power vested in the Council of Ministers at the expense of the parliament.

Between 2002-2005, only two of 100 pieces of legislation passed by the Alkatiri administration were initiated by parliament. The level of debate and parliamentary oversight was laughable.

The unfulfilled promise of a bonanza in cash from fraught Timor Sea oil and gas negotiations with Australia further fuelled civil unease.

There was increasing concern about issues of transparency. As first reported in The Australian in July 2005, a $145,000 arms contract was awarded to Caval Bravo, a company run by Alkatiri's younger brother Bader. A family-owned construction company was also very successful in securing lucrative road and building contracts.

In a country where unemployment and poverty was chronic, public dissatisfaction with the government took root.

Earlier this year, Ramos Horta told me he could not recall a single time when Alkatiri met with the Opposition party leaders. It was during this period the leaders of three Opposition parties left parliament: Democrat Party's Fernando La Sama in 2002; Mario Carrascalao, head of the Social Democrat Party, in 2004; and Francisco Xavier do Amaral, a founding member of Fretilin, in 2005. (All three are members of the new Gusmao-led coalition.)

Public anger with the government boiled over in 2005 when the Catholic Church threw its considerable support behind anti-government protests over its plans to outlaw compulsory religious instruction in schools in a country that is 98 per cent conservative Catholic.

Trouble was also brewing in the security sector. Alkatiri's ambitious interior minister Rogerio Lobato had begun to build a formidable police apparatus to counter what he saw as a potential threat from the East Timor Defence Force, a successor organisation to the Falintil guerilla force that lay outside government control and influence and whose senior commanders were loyal to then president Gusmao, no friend of Alkatiri.

When about 600 so called "petitioners" deserted the army in 2006, claiming unfair pay and conditions and ethnic discrimination by senior ranking eastern-born commanders, Alkatiri sacked the soldiers, mostly ethnic western-born Loromonu people.

Dili exploded into violence again in May 2006. An Australian-led peacekeeping force was sent to restore law and order after clashes between military, police factions and youth gangs in April. At least 37 people were killed and some 150,000 others forced from their homes. In May last year Alkatiri was forced to resign.

An estimated 100,000 people, or about 10 per cent of the population, are still sheltering in refugee camps, too afraid to return or with no homes to go back to.

Former Australian UN military commander in Dili, Mike Smith, now chief executive officer of the respected aid agency AustCare, warns East Timor is not a failed state, but it could become one.

"I think more than anything else, what's been happening there over the past 12 months or so has been a struggle for democracy. I still remain optimistic for East Timor because most East Timorese people I speak to genuinely do want peace."

He believes the new Gusmao-led Government and viable Opposition will be good for East Timor. But apart from political success, little has been achieved in reducing rampant poverty.

"My focus and AustCare's focus is to do what we can to capacity build and to try and help these people lift themselves out of poverty. The population is about a million people, of which more than 50 per cent are 18 years or younger. You have a huge and growing young population and the unemployment issue is real," Smith says.

This is Gusmao's challenge. Unlike Alkatiri, whose government failed to spend money, executing only 35 per cent of its annual $160 million budget, Gusmao needs to pump the economy with oil revenue to help ease poverty.

Gusmao also needs to engage three Fretilin bastions of support in the east, Baucau, Los Palos and Viqueque where trouble erupted and two people were shot dead on his most recent election visit.

In Opposition, Alkatiri still leads Fretilin and could cause trouble for Gusmao. While Lobato was sentenced to jail for his role in arming pro-Alkatiri militia, an amnesty has been declared for army rebel Alfredo Reinado, a Gusmao supporter.

"Alkatiri will still be politically active and he has a very, very, very long memory," says one Western intelligence analyst. Remember, these guys have been arguing among themselves and doing all this stuff since (Richard) Nixon was president – think about that."

[Mark Dodd is The Australian's defence and foreign affairs writer.]