In line with Rodrik’s summary of how economies develop,34 MDF’s approach is essentially about changing the structure of Timor-Leste’s economy: first, through tailor-made support to businesses, as defined in partnership agreements; and, through the sum of its partnerships, influencing entire parts of the economy. However, when MDF started working in Timor-Leste, it was faced with a difficult question: What were the viable entry points for inclusive private sector development in a small island emerging from conflict, with only a few early stage economic activities outside oil and gas?
In this context, MDF had to make bold decisions about the most likely future sources of economic growth and poverty reduction. In addition, MDF repeatedly assessed where its support would add the most value. In fact, MDF has entered, and stepped out of, an entire engagement area – the construction sector – when it could not find suitable entry points to promote more inclusive growth. Given that the sector’s growth was driven by government spending, MDF found it was left with little room for manoeuvre to stimulate private investment and innovation. Instead, other areas, which are also prioritised in Timor-Leste’s National Strategic Development Plan 2011-2030, showed better opportunities: agriculture, as well as manufacturing and tourism ? both of which are essentially new to the economy.
In MDF’s experience, the early stage of economic activities as well as institutional structures in each of the three engagement areas, however, meant that programme activities could not ‘get off the ground’ as easily as in other economic contexts. MDF had to bring in more resources, allow more time and flexibility, and identify strategic partnership opportunities. This is explained further in Lesson 1.
Lesson 1: In an early-stage economy, getting an inclusive growth programme started requires additional resources, time and flexibility.
When MDF started in Timor-Leste, it had to adapt to a number of challenging features of the country’s early-stage economy. Overall, these factors meant that MDF was only able to identify three partnerships in its first year, and its portfolio has grown more gradually than in other countries:
MDF invested in substantial in-house research to gather information that no one else had: When MDF started, it was faced with a lack of structures to tap into for information and contacts to help build an overview of the economy, the situation of the poor, and potential partner businesses. There were few company offices, no up-to-date government business registers, no functioning business associations and surprisingly limited informal interactions among the few private sector actors. MDF, therefore, had to invest more time into gradually building up a network of informants and doing more research in-house, e.g. for its Poverty and Gender study
The presence of few investment-ready actors and investment opportunities meant that MDF had to be particularly versatile and open-minded about which specific activities to support in its engagement areas: While bigger and/or more advanced developing economies may feature hundreds, thousands or more businesses in the same industry, the situation is very different in Timor. Manufacturing and tourism businesses are often the first of their kind, while agriculture is characterised by few and small businesses, and only features one cash crop – coffee. Therefore, MDF decided to consider a wide range of possible activities that could trigger economic dynamism in agriculture, including in stimulating supply of agricultural produce through improved access to inputs and embedded extension services and increasing demand for local produce through agro-processing. In manufacturing and tourism, MDF had to be ready to respond to any promising partnership opportunities it could find.
It took MDF longer to build up a qualified national team: Timor-Leste’s history has also taken a toll on the availability of qualified Timorese staff to develop and manage partnerships. Recruiting a national team, therefore, took longer than in other countries where MDF operates.
The table below summarises in more detail the growth constraints and opportunities in each engagement area, as identified by MDF. It also links to specific partnership examples, which are elaborated in the next chapter.