Seth Mydans – Withdrawing in humiliation in 1999 from the land they had occupied for 24 years, Indonesian soldiers scrawled angry graffiti that warned of poverty and hunger ahead. One of them: "A free East Timor will eat stones."

As they departed, they and the local militias they controlled did everything they could to make their words come true.

They razed most of the territory's buildings, wrecked its infrastructure and took with them the last of the Indonesians who had run its schools, clinics, utilities and civil service. It was, one person here said, as if a tsunami had swept most of the nation away.

More than five years later, East Timor is the world's newest nation, with a functioning democratic government, an emerging set of laws and institutions and, crucially, the peace and stability that have made these gains possible.

For the United Nations, which administered it for its first two and a half years and still keeps a close eye on it, these accomplishments make East Timor a success story. It became an independent nation three years ago this month.

But it is also desperately poor and underdeveloped – the poorest nation in Asia and one of the poorest in the world, on a par with Rwanda, according to a United Nations ranking of quality of life.

For all its emerging institutions, this is the shell of a nation, administered and supported for 400 years by Portugal and then by Indonesia.

It has never been a self-governing state, and it is surviving now with the assistance of large amounts of foreign aid.

It suffers from the limitations that are common to the nation-building efforts of the United Nations, a shortage of educated and qualified people and the lack of a democratic tradition. On many levels, government officials and civil servants are not qualified for their jobs.

The fragility of its institutions and the potential for instability from across the border in Indonesia have caused the United Nations to extend for one more year a presence that was due to end this month.

Its shrinking staff will be further reduced, to 45 civilian advisers, 75 police advisers and up to 10 human rights officers, as well as a peacekeeping force of several hundred soldiers.

The spending of foreign workers like these has had such an impact on this poor nation that their continuing departure is causing its entire economy to contract, according to the Asian Development Bank.

The country's judicial system is seen as the major failure of the United Nations in establishing the institutions of government. Paralyzed by incompetence and corruption, it has collapsed and is being run now by foreign judges. "This was one of the mistakes of the United Nations," said Foreign Minister Jose Ramos-Horta in an interview. "Overall, it's done a reasonable job."

The police force is another weak spot among the institutions set up by the United Nations, criticized by human rights groups for brutality, excessive use of force and lack of discipline.

At the moment, the country's hope for solvency – some say its only hope – comes from an infusion of profits from offshore oil and gas that is beginning to be pumped from under the Timor Sea. The income could make the difference between self reliance and collapse.

But economists warn that windfalls of oil and gas money have wrecked the economies of other poor nations and that in any case they are no substitute for a self-sufficient, self-sustaining economy.

The government is taking a cautious approach and is not yet spending its oil money. It is also working slowly to build the legal and institutional foundations of a new nation, leading to impatience and frustration among many people, who do not see improvements in their lives.

Its starting point is almost as low as the one predicted by the departing Indonesian soldiers. Nearly half the population is unemployed and more than half is illiterate, according to various tabulations. Its infant mortality rate is one of the highest in the world, while its life expectancy is one of the lowest – possibly as low as 49 years.

Many of its schoolhouses are in ruins, with too few teachers and almost no books. It is ravaged by diseases like malaria, tuberculosis and dengue fever, but its health system is barely functioning.

Close to half the population lives on less than 55 cents a day, according to a UN report, and there are times when parts of the country have nothing to eat.

As the country struggles, its population of 900,000 is exploding with one of the world's highest birthrates, 3 percent or possibly even 4 percent a year, dragging down efforts at economic growth.

East Timor is hoping for foreign investment in agribusiness and small manufacturing and is trying to create a tourism industry, according to Jose Teixeira, who is the minister, among other things, of both investment and tourism.

The lack of a solid legal foundation has slowed efforts to attract foreign investors, along with high costs brought on by its poor infrastructure.

It has also aggravated widespread land disputes following the destruction in 1999 – in which not only houses were burned but also the documents of ownership. Partly because of these disputes, the capital is still dotted with the shells of buildings that were burned when the Indonesians departed.

In light of its many problems, it is easy to forget how much worse things could be now. The violence of the Indonesian departure and its legacy of armed militias have not produced the unrest some people expected.

An election three years ago produced a functioning Parliament, and orderly local elections are under way now. A protest over the past two weeks regarding the religious curriculum in schools ended in a peaceful compromise.

"When you look at the starting point and when you look at where we are now, there has been tremendous progress," said Jessica Pearl, the country representative for Catholic Relief Services.