Reuters in Melbourne – Corruption poses the biggest risk to the future of East Timor, says its president, Xanana Gusmao.

The world's newest country, which will celebrate its first anniversary next month, was struggling to make democracy work beyond just holding elections every five years, he said.

Mr Gusmao estimated it would take 10 years to establish a solid foundation for democracy. "The greatest risk is if our independence serves one group of people – if corruption, nepotism, collusion are the rule," he said.

He said East Timor could do with more aid beyond the A$150 million a year it was receiving from countries led by Japan, Australia and the United States, but it was up to the Timorese to prove they could manage the money wisely.

"We have to continue to secure these donors' trust, and the responsibility is in our hands," Mr Gusmao said. "That's why even with a small amount of money, it's better to accept this situation than to receive a big amount without the capacity to manage it."

Mr Gusmao, once a poet, guerilla and political prisoner and now head of state, is in Australia on a 17-day visit, giving speeches on nation-building and democracy.

East Timor is one of the poorest countries in the world, with 40 per cent of its people unable to meet their basic needs, 60 per cent illiterate, and 8 per cent of children dying before the age of one, according to aid agencies.

It won independence from Indonesia after pro-Jakarta militia responded with a wave of violence to a 1999 referendum that called for East Timor to secede.

East Timor and Australia this week put into effect the Timor Gap Treaty, which will give East Timor 90 per cent of oil and gas royalties from fields in a jointly-owned zone in the Timor Sea. The royalties are expected to funnel up to A$8 billion to East Timor over about 20 years from next year.

The two countries also signed an agreement last month on the Greater Sunrise field, which straddles the joint zone, that would give East Timor only 18 per cent of royalties from the field.

East Timor is hoping to redraw maritime boundaries to give it more royalties from Greater Sunrise, a move opposed by Australia.

Mr Gusmao agreed with some critics of the Greater Sunrise deal that it could backfire on Australia by depriving East Timor of desperately needed cash and stoking instability there.

Mr Gusmao said the riots that hit the capital, Dili, in December, killing two people, were a sign of the fragile balance in a country recovering from conflict.

He predicted it would take 10 years for East Timor to develop the strong judicial system it needed to underpin democracy. While education and health were top priorities, Mr Gusmao said the young people of East Timor had the "wrong dreams" in looking for office jobs instead of tilling the land.