It's the road from nowhere, but it's surprisingly busy. Mafalda Florindo and Isabella Antonine walk along it, smiling betel-stained grins as they talk about cloth they had just bought for a good price. A little farther, Alicin Soares, a rice grower, maneuvers his truck along the dusty track. His vehicle is filled with people, some of them smoking, and five jerricans of gasoline. Later Antonio Serrano arrives in a van filled with Coke and Fanta, 50 cases in all, to be sold at a tidy profit of $1 a case. He does the trip every day.

"Nowhere" has a name: Lesu Tunubibi. It's not on any map, but it does exist, a few hundred meters from checkpoints where United Nations and Indonesian soldiers patrol respective sides of the river that separates East Timor and Indonesia. The border has been closed since East Timor voted two years ago for independence. But there's a steady stream of people going back and forth, bringing money to Indonesia and goods back to East Timor. Mattresses, cooking oil, detergent, you name it.

Lesu Tunubibi is one of three black markets operating on the Indonesian side of the 120-km border. It's open from 4 a.m. to 3 p.m., and it's the worst-kept secret in East Timor. "You can't stop it. It's too extensive," says Lt. Col. Jeff Sengelman, commander of the Australian unit patroling this section of the border, watching for members of pro-Jakarta militias who might try to slip in along with cases of soap. Besides, in this desperately poor place, trying to rebuild after militias burned much of it to the ground after the 1999 autonomy vote, smuggling is not just a crime � it's a vital economic sector. Says Sengelman: "People are trying to make a living and there's not a lot of alternative sources of income for them."

As the former Indonesian province prepares for an election Aug. 30 that will set the stage for formal independence within the next year or so, the problems it faces are not only the political issues one would expect in a new state, matters of constitutions and electoral systems. More pressing are the fundamental economic questions of how to rebuild an economy virtually from scratch in one of the poorest places on earth. Laws for basic business needs like buying and selling land must be passed. The largely rural population must be educated. And investors must somehow be attracted. Says Michael Francino, a Canadian who serves as East Timor's finance minister under an arrangement with the International Monetary Fund: "No one's ever tried to create a country overnight."

Timorese officials also privately express concerns that Megawati Sukarnoputri's new government in Jakarta will take a harder line toward its former 27th province. The new president is strongly nationalistic. One of her closest military advisers, retired Gen. Theo Syafei, was a commander in East Timor for many years. Few expect Jakarta to try to regain control; it has enough problems elsewhere. "They now accept the reality," says Dili's Foreign Minister Jose Ramos-Horta. But U.N. Secretary-General Koffi Annan last week cited the continued activity of militias in Indonesian West Timor, and suggested that U.N. troops and police remain in East Timor after independence.

The Aug. 30 vote is for an 88-seat assembly that will formulate a constitution and an exact timetable for independence, which will end the trusteeship by the U.N. Transitional Administration headed by Sergio Vieira de Mello and staffed by more than 1,000 international civil servants. Independence will most likely come next year. But if East Timorese were united in wanting Indonesia out, unity in the absence of an enemy has been difficult to maintain. Xanana Gusmao, the charismatic guerrilla leader pegged as the most likely future president, may be the only one who can keep the Timorese together � and he does not want the job (see box page 23). Sixteen parties covering the spectrum of ideologies are vying for voter attention. One even advocates reintegration with Indonesia.

But if East Timor has politics in abundance, what it doesn't have is money. This year, out of a $305 million budget, it raised only $25 million from taxes and fees. The rest came from foreign donors. Portugal, East Timor's colonial ruler until 1975, put up $51 million last year, says the aid coordinator of the Portuguese mission in Dili, Antonio Perez-Metelo. The World Bank administers a $170 million trust fund used to rebuild schools, hospitals and other infrastructure destroyed in the post-referendum violence. Then there's the $700 million a year for 8,000 peacekeeping troops, and other U.N. costs. "East Timor is right now the biggest recipient of international assistance per capita on Planet Earth," says Perez-Metelo.

How long donors will keep spending is a big question. Says one Western diplomat: "Sooner or later the novelty will wear off." That day has not yet come. But Perez-Metelo notes that donors are being generous because East Timor is relatively stable. Should political debates provoke widespread violence, all bets are off. Says Perez-Metelo: "The message is: If you start killing each other, it's over."

The flood of aid money and well-paid U.N. staff has transformed Dili, or parts of it. With high rates of malaria and dengue, it is still that "highly pestilential place" that author Joseph Conrad visited a century ago. But it is also a town where so-called "internationals" can sip a cappuccino at an outdoor restaurant, or treat friends to a $13-a-plate Sunday brunch at a floating hotel in the harbor.

It's a bubble economy, and Pedro Soares is a bubble boy. The 14-year-old sells papers outside the blue-awninged City CafE, making about $2 a day, double what many Timorese farmers make. The U.N. photocopying and printing budget is about $2 million a year. That's not much, but it equals two days worth of production from the entire economy. Says Mari Alkatiri, the economics minister in the outgoing government: "This is a completely distorted economy in Dili."

The bubble makes people like Pedro happy. But not others. Last year the Cooperativa CafE Timor hired more than 300 women to pick defective beans from its coffee, says David Boyce, an official with the U.S. Agency for International Development, which funds the cooperative. This year, inflated wages are pricing local labor out of the market. Rates are now about $3.50 a day � double the minimum wage in Jakarta � compared with a dollar a day in 1999. The cooperative, which buys about 20% of East Timor's all-organic coffee crop, has bought a $10,000 vibrating table that picks out the bad beans. As a result, it will hire only about half as many sorters, and the workers complain that their wages still don't keep up with price rises. A few weeks ago, workers at CCT's drying fields on Dili's outskirts went on strike demanding a second shift. "It's an international company and the wages are not good," says Ajitao, one of the strikers.

Landmark Trading is a supermarket in Dili that feels all the good and bad of the bubble. Gary Loh and his family arrived from Singapore and set up shop a year ago, investing almost $100,000. Most of its custom comes from U.N. international staff. Given that dependence, Loh says he hopes the U.N. will abandon plans to cut its civil service staff by about half by year-end. But, in virtually the same breath, Loh complains that high wages hurt the business. Labor costs are higher than in China or Vietnam, he says, and productivity is low so that "we use a lot of manpower to do little." Sarah Cliffe, who heads the World Bank mission in Dili, says the combination of high wages and low skills make East Timor uncompetitive for labor-intensive industries.

In the rural areas, where 85% of the population lives, things are very different. Joseph Alfonsius and his wife Grajella live on a salty and seasonally parched coastal plain west of Dili in a small thatched hut with a floor of carefully swept dirt. In the rainy season, Alfonsius grows corn and vegetables on the family's 2-hectare farm plot in the hills a kilometer away. In the dry, he grows a few vegetables in a dusty garden near the house. He owns a pig and a few chickens. Wood from the palm-like Pandamus trees used to construct his hut provides the only cash income. He cuts and splits the branches and sells bundles for about 50 cents each. In a year, he makes about $50, less than the daily expense allowance for a U.N. staffer.

East Timor's hope for economic transformation lies in the waters of the Timor Sea between the island and Australia. Natural gas should begin to flow in 2004. The Bayu-Undan field being developed by Phillips Petroleum will produce what for the tiny territory will be a veritable bonanza. A new treaty agreed in principle July 5 with Canberra will give Dili 90% of the royalties, or as much as $4 billion over 20 years. A row over what level of tax Phillips would have to pay is now threatening to delay the project. But once it comes on line, says de Mello, "there will be enough revenue to bring prosperity to East Timor."

But the Timorese leadership realizes only too well that natural gas proceeds could be a curse. The gas will come ashore in Australia but any operations that may be set up in East Timor will bring in a new crop of foreigners and keep wages up. As has happened in other countries, resource wealth could also blind the government to other economic activities, especially unglamorous ones like farming. It could entice politicians to put money in show projects or big government buildings. There's also the risk of corruption. When oil or gas runs out, says the World Bank's Cliffe, "many countries end up poorer."

The gas money's not even in the bank yet, but Francino says some budget choices already made are worrying. There is a debate about the costs of providing electricity, which is principally a subsidy for people in Dili as electrical power in the villages is uncertain or nonexistent. Higher rates will hurt the poor but Francino notes that the subsidy is now as large as the total health budget. Then there's the university debate. The tiny country has one, set up by Jakarta, but critics argue the money would be better spent on primary schools to combat illiteracy. Already-planned spending plus a slowdown in donor financing could mean that when the revenues from Bayu-Undan arrive, they will already be spoken for.

De Mello acknowledges the U.N. has made mistakes. The world body had never actually governed a territory before and "the early days were pretty messy." Complicating the task, most of East Timor's professionals and civil servants had been Indonesians; almost all of them left when the army did. But de Mello says critics should remember the smoldering wreckage that was East Timor less than two years ago. "The most important thing for business is stability," he says, and the country has that now.

The past two years have been dreadful but also a time of hope. At a rally for national unity ahead of the elections, Enrique Cortereal, 49, watches with his wife Maria and three-year-old daughter Maria, who's all dressed up in her best red-and-white striped frock, her long dark hair swept up in a bun. "I'm sure she'll have a good future," Cortereal says as he shifts his gaze to his daughter. Hopes for a better tomorrow rarely come true in this part of the world. But in the next few months, the East Timorese will get to make their own choices about the path they want to follow. The country's fate will be in their hands. For Maria's sake, they'll have to get it right.