Large segments of the rural Timorese population survive on subsistence farming characterized by simple production methods and low output. Broad-based improvements in Timorese living standards require increased agricultural output. This article discusses what determines agricultural development in Timor-Leste and how such development can be achieved. The main causes of low agricultural output are found to be scarcity of land and capital, poor technology and education, and lack of government support, such as extension services and provision of infrastructure. We construct a model of an agricultural household to examine how increased market incentives will affect agricultural output and incomes. The effects of different price changes on household production, consumption, sales, income, and leisure are investigated. We find that the objective of increasing the living standard of Timorese farmers may in part be achieved via increased earning opportunities outside agriculture.

The article was presented at the Asian Economic Panel meeting in Lund, 10–11 September 2012. We are grateful for constructive comments to Machiko Nisanke, Tobias Axelsson, Anne Booth, Arne Bigsten, and Naoyuki Yoshino. Financial support from the Ragnar Söderberg foundation is gratefully acknowledged.

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