Alex Chadwick, host: This is Day to Day. I'm Alex Chadwick.

The world's newest nation, East Timor, celebrated its second birthday in May without much to really celebrate. Most of the 800,000 people are poor. Foreign donors provide as much as half the country's annual budget.

That's only $80 million a year, but already donor nations are warning the aid will be cut. East Timor is going to have to provide for itself, which means a new dispute with an until-now friendly neighbor is a big problem. NPR's Michael Sullivan reports.

Michael Sullivan reporting: Outside a small three-room school in East Timor's Liquica district, children play tag as they wait for classes to begin. Nearby, a large pile of palm fronds cleared by local farmers burns fiercely in the morning sun.

Five years ago, much of the country was in flames after East Timor citizens voted for independence from Indonesia. After the vote, marauding Indonesian militias looted and burned as much as they could before withdrawing.

Schoolteacher Markita Suarez Trindaday is glad those times are over. Now she's waiting for better times, especially for her students.

Ms. Markita Suarez Trindaday (Schoolteacher): (Through Translator) We have desks and chairs now donated by UNICEF, but we still don't have enough books for the children. Sometimes we have to collect money from them just to buy the paper for them to use in their exams.

Sullivan: She says many of her students have told her they'll have to leave school soon, their families unable to afford the fees of 50 cents a month.

Keryn Clark is East Timor country director for Oxfam Australia.

Ms. Keryn Clark (Oxfam Australia): East Timor is one of the poorest countries in Asia, with over 40 percent of the population living under the poverty line of 50 cents a day. You've got infant mortality of one per 10 children reach the age of five. Access to schools, access to health posts are very, very low. So I think, at all levels, we're dealing with a very, very poor country with very low education levels and a government that has very, very few resources to address these issues.

Sullivan: East Timor was poor long before the vote for independence and the terrible destruction that accompanied it. There is no industry here to speak of. Most eke out a living either farming or fishing.

(Soundbite of a man speaking in a foreign language)

Sullivan: Not far from the elementary school, a dozen men surround a battered wooden boat, picking small red fish from a net. Today's catch wasn't very good, the boat's owner, Jom Dey Susa(ph), says. He hopes tomorrow's will be better.

Mr. Jom Dey Susa (Boat Owner): (Through Translator) Every day is different. It all depends on the ocean. If the situation in the ocean is good, then we will make good money. But if the situation in the ocean is not good, we get very little.

Sullivan: The situation in the ocean is good, very good, a little more than 100 miles offshore in the Timor Sea. There lie vast reserves of oil and natural gas worth as much as $30 billion. Oil and gas revenue, East Timor's leaders say, are key to the country's economic survival. Without those resources, they warn, East Timor could quickly become a failed state.

Mari Alkatiri is East Timor's prime minister.

Prime Minister Mari Alkatiri (East Timor): It's extremely important for us because people are expecting something, they were fighting for 24 years, resisting, with this kind of expectation. And we need to respond to their expectation.

Sullivan: The trouble is, East Timor's neighbor, Australia, is claiming the lion's share of projected oil and gas revenues. It insists the most promising area, which includes what's known as the Greater Sunrise field, belongs to Australia under an agreement reached with Indonesia in the mid-1970s, when East Timor was still a colony. East Timor insists that agreement is no longer valid, and wants to negotiate a new boundary with Australia. Australia isn't interested. Australia's foreign minister, Alexander Downer...

Mr. Alexander Downer (Australian Foreign Minister): First of all, East Timor makes claims that we don't accept. And we have very long maritime boundaries with other countries, in particular Indonesia, and we're not shifting all of our maritime boundaries and abandoning very long-standing principles of international maritime law. And secondly, it's a curious principle, that if one country is richer than another and the two countries are adjacent to it, the richer country should cede territory to the poorer country. And on that principle, I suppose the United States should cede Texas to Mexico or something. I mean, it's not the way those inequities in wealth are addressed.

Sullivan: Australia also says it's been more than generous already. Australian troops led the international peacekeeping force sent to East Timor after the vote for independence. And since then, Australia has been one of East Timor's largest donors. In addition, the Australians argue that East Timor already receives 90 percent of the revenue from another smaller field under an interim agreement it signed with Australia two years ago. East Timor's Prime Minister Alkatiri calls that a smoke screen. The Greater Sunrise field, he says, is worth far more.

Prime Min. Alkatiri: I made it clear that we are not asking for generosity. We are claiming for our rights based on international law and the law, clearly, that their arguments are baseless, legally baseless. And what they are trying now is to use their power as big brothers in these regions, and to use this kind of power to get what through legal base they will never get.

Sullivan: Many familiar with international maritime law, including the law of the sea, say that East Timor has a good case, given that the most lucrative field, Greater Sunrise, lies roughly 125 miles south of East Timor and more than 300 miles north of Australia. Australia insists the agreement it made with Indonesia will stand, and has withdrawn from an arbitration process set up to resolve maritime disputes at the International Court of Justice. Again, Australian foreign minister Alexander Downer.

Mr. Downer: I make this point. If we were to go to, say, the International Court of Justice, which is what one of their negotiators wants us to do, it could take a decade to have the matter resolved. So I would've thought it was much better, since we've always got to reside side by side with each other, that we're able to negotiate in a civilized and constructive way. I know that they think that part of their negotiating tactic should be to try to shame us into concessions, but we won't be shamed into concessions.

Sullivan: If East Timor had its way, almost all of the disputed resources in the Timor Sea would fall under its control. Prime Minister Alkatiri acknowledges that isn't likely to happen. And he says he's open to compromise and what he calls a fair solution. The two sides sat down in April for their first meeting to try to resolve their differences.

Another meeting will be held later this year. Some fear the dispute could drag on for years, even decades, but Prime Minister Alkatiri says he's not worried. 'We waited 24 years for independence,' Alkatiri says. 'We can wait a little longer to get what's fair here.' Michael Sullivan, NPR News, Dili, East Timor.

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Chadwick: I'm Alex Chadwick and this is Day to Day.