"Peace meant living from hatred" ... Xanana Gusmao. Credit:Pamela Martin Ten years after then UN secretary-general Kofi Annan anointed the world's newest nation, East Timor is struggling with the legacies of 490 years of foreign occupation, war, trauma, impunity, poverty and under-development. But East Timor's government, elected 4½ years ago after violent upheaval, is presenting a rosy picture of the country of 1.1 million people as dignitaries fly in for tonight's celebrations. They include Australia's Governor-General, Quentin Bryce, and Indonesia's President, Susilo Bambang Yudhoyono. "There was not a single Timorese citizen who did not have at least one traumatic experience," the Prime Minister, Xanana Gusmao, says of crimes committed in the months before and after Timorese voted in 1999 to break away from Indonesia. "There were still many open wounds that did not have time to heal and many feelings that were hard to let go.

"However, the greatness of our people's character is in their tolerance and in their deep yearning to live in harmony … and for Timorese people, peace meant living free from hatred, revenge and distrust." Ahead of the celebrations, roads from Dili airport where the dignitaries will travel have been resealed, squatters have been moved, sheets of iron have gone up to hide slums and putrid canals, and government reports boast double-digit economic growth, reduced poverty, increased employment, improved health and the development of huge infrastructure projects, including an electricity grid to light up the entire country. Thirteen years after Indonesia's humiliating loss of East Timor, the nation is free and democratic, and its citizens can say what they think without fear of retribution - unlike during Indonesia's 24-year occupation when tens of thousands of people were arrested, tortured or killed. But government critics say the ruling five-party coalition has taken a number of serious missteps at a critical time in the country's young history as the UN prepares to withdraw its 1700-strong police, military and civilian mission in Dili and about 400 Australian and New Zealand peacekeeping troops depart by the end of the year. This week, almost 200 non-government organisations in Dili delivered a damning assessment of East Timor's progress, warning the country has fallen into the trap of a "resource curse" where there is almost total reliance on money from diminishing oil and gas reserves.

In a joint report handed to Gusmao after a donors' meeting, the organisations said that despite a big increase in government spending there has been a "shocking under-investment in sustainable development which would address critical issues of poverty, malnutrition and unemployment". The organisations said until the crimes and consequences of the past have been dealt with "they will continue to haunt our people and limit our ability to move forward". Dan Murphy, an American doctor who has worked in East Timor for 14 years, says nobody will disagree that the most important change for East Timor is that violence has ended. But in rural areas, where 75 per cent of the population live, he says life is as difficult as it has ever been, with people entrenched in intergenerational cycles of poverty. "When we set up our mobile clinics in the mountains we see that people are still suffering from extreme malnutrition and many treatable diseases," he says.

Murphy says his patients, mostly women and children, are gracious and smiling "but scratch the surface and inside they are hurting". He points to a recent study showing that East Timor is the world's third worst place for stunted growth in children. "This shows the children are not getting enough to eat … it means their brains are not fully developing, impacting on their ability to become educated and live fruitful lives," Murphy says. Fifty-eight per cent of children under five suffer chronic malnutrition and 70 per cent of young people in Dili cannot find work. Fifty per cent of people live below the poverty line, more children die from diarrhoea than malaria, and about 2000 children under five die from preventable conditions every year. In the government's $US1.8 billion budget this year, only 6.3 per cent of the money is allocated to education, less than 3 per cent to health and about 1 per cent to agriculture, compared to almost 50 per cent to infrastructure.

While domestic violence is the No.1 crime in East Timor - more than 50 per cent of women in Dili have been victims - funding for overwhelmed legal aid organisations dries up at the end of the year. Government officials say big spending on infrastructure projects such as the electricity grid, which could cost $US1 billion by the time it is completed, is needed to kick-start the economy. Once the projects are completed, officials say, capital spending on them can fall. But Jose Teixeira, a former government minister and spokesman for Fretilin, the main opposition party, says the government is paying 40 per cent more than it should to award contracts, with corruption and waste rampant, as most people remain impoverished. Several ministers are under investigation by an anti-corruption commission and the Justice Minister, Lucia Lobato, is facing trial for corruption, which she denies. Government ministers and high-ranking officials are notorious for flying to Bali for weekends and making frequent overseas study tours.

The gap between a small wealthy elite in Dili and the poor majority has widened in recent years, analysts and residents of the capital say. People linked to the ruling elite have built sprawling homes and drive expensive vehicles. "Most Timorese remain untrained and unemployed spectators in their own country as the bulk of the work goes to foreign companies with 10 per cent Timorese partners," Teixeira says. Many of the workers on infrastructure projects are Indonesian and Chinese. Charles Scheiner, a founder of the La'o Hamutuk organisation, says disaster could be looming in 10 years as oil and gas revenues dry up, interest on loans becomes due and the number of youths entering the workforce doubles. He points out that almost all the food and goods bought in East Timor are imported, a consequence of the resource curse where "everything is seen in terms of dollars".

"It is easier to buy things rather than build or grow them," he says. Last year East Timor exported goods worth only $US16 million, mainly coffee, but imported goods worth $US288 million. Most of the bottled water and canned tuna in East Timor's stores and markets comes from Indonesia. Frozen poultry comes from Brazil while chickens are prolific breeders in East Timor's villages and towns. Garlic that could easily be home-grown comes from Bangladesh and fruit juice arrives from Cyprus, including papaya, banana and mango, which are grown in East Timor. By some estimates, up to 80 per cent of East Timor's budget actually ends up outside the country. The Nobel laureate Jose Ramos-Horta, who steps down as the country's president at midnight tonight, concedes the country has made mistakes.

"But remember, this is only a 10-year-old country and the challenges and priorities have come at us from every direction," he says. Ramos-Horta says that since gaining independence the international community has spent several billion dollars in East Timor, which has been welcomed by Timorese. "But I look around and ask myself: 'Where has it been spent?' … I can't see it," he says. Ramos-Horta says that non-government organisations and international agencies have written more than 3000 reports on the country. "We are the most psychoanalysed people in the world," he says, adding that he no longer wants to read reports. "Do you think it is a major discovery to be told there is extreme poverty … we just need to go to the villages and ask the poor people: 'Are you poor?'

''They will reply: 'Yes we are'." East Timor's future will be decided at elections in July, heightening political tensions in the coming weeks. With 21 parties contesting, it is likely no single party will win enough votes to form government without soliciting the support of other parties to form a coalition. The government has come under growing pressure over its failure to negotiate a deal with a Woodside-led consortium to pipe gas to East Timor from the Greater Sunrise field in the Timor Sea, which the country jointly owns with Australia. Emotions are running high over the issue. On Wednesday, guests at a waterfront lunch waited with great expectation for the unveiling of something special for Timorese to mark the anniversary.

When Gusmao pulled open black curtains they saw a length of pipe encased in a see-through cubicle that is usually laid under the sea, one of the more unusual official unveilings by a world leader. As Gusmao rejoined his guests, who included Dili's top diplomats, Alfredo Pires, the Secretary of State for Natural Resources, explained the German-made pipe a few metres long was laid as a monument to symbolise his government's fight to have the pipeline come to East Timor. The consortium wants to build a floating platform to process the gas above the field. "We have made up our minds," the minister declared. Asked if the government has drawn a line in the sand on the issue, Pires replied: "No, in concrete." He said studies commissioned by East Timor show it is "rubbish" for Woodside to claim its proposal would be billions of dollars more profitable than building a pipeline to Timor. Ramos-Horta has criticised the government for making the pipeline a matter of national pride, saying the issue should be decided on the best available technical and economic advice.

Manuel Tilman, the leader of the small Timorese Hero's Union and a member of a parliamentary committee dealing with finance and corruption, says unveiling the pipe was a "comical" stunt by Gusmao to win support before the election. He says that like most Timorese, he believes a pipeline will one day come to Timor to benefit all Timorese. "But at the moment it is only a pipe dream," he says. There is a renewed sense of optimism in the air ahead of tonight's party in Tasi Tolu, a beachside area on the outskirts of Dili where East Timor proclaimed its independence from Indonesia in 2002. The tiny nation has emerged from the ashes of the Indonesian-sponsored campaign of terror in 1999 and violent upheaval in 2006 that displaced 150,000 people.

Gusmao says that "with all that our people have suffered, with all that our people have given and with all that our people have struggled, they deserve to celebrate". He says his government has honestly tried to take stock of the country and discuss what has been working well and what has not. "Independence provided our people with the opportunity to set their own priorities and the right to determine their own future," he says. Ines Lemos, now in her 60s, says life has become harder as she gets older and cannot work but she has family to look after her. Tomorrow morning she plans to go to an independence anniversary ceremony in her village on a slope overlooking coffee plantations, like all the other villagers.

There will be a flag-raising and prayers. Loading "My daughter died for independence … I am proud of her," she says. Lindsay Murdoch reported from Dili throughout the violence of 1999 and covered East Timor's proclamation of independence in 2002.