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Every day, the fancy jeeps cruise past Palmira Pereira's shack on the northern coast of East Timor. Sometimes, the passengers inside the air-conditioned vehicles raise their hands in greeting, and Pereira, or one of her 10 children, waves back. But the occupants of the cars—owned by the government, the U.N. or other organizations that are helping to run this infant country, which gained independence from Indonesia in 2002—have never stopped to meet the Pereiras. If they did, they would find a family that has not eaten rice in three months because of shortages that have nearly tripled the price. The younger children are already showing signs of malnutrition. "I love our country very much, but independence has given us nothing," says Pereira, her voice softening as she tries to soothe her hungry infant. "We are starving. Life was better during Indonesian times."

Pereira's wistful recollection of 24 years of brutal Indonesian rule shows just how little progress East Timor has made in its five years of freedom. As the nation prepares for its first post-independence presidential election on April 9, East Timor's 1 million people are ranked by the U.N. as Southeast Asia's poorest. Eight politicians have announced their candidacies, ranging from populist former resistance fighter Fernando de Araujo to Nobel Peace Prize laureate and current Prime Minister José Ramos-Horta. But even as such democratic rituals play out, the capital Dili has erupted into a battleground for gangs, internal refugees and supporters of a former army commander turned rebel, Alfredo Reinado. Last spring, tensions within the army spread to the civilian populace, sparking riots in which dozens died. On March 3, Reinado's forces engaged in a firefight with Australian-led peacekeepers. Four people were killed, but Reinado escaped. Earlier this week, mobs loyal to him thronged Dili's streets, burning tires and threatening to torch government buildings. "It can be hard to understand how things have gotten so bad so quickly," says Lucia Lobato, another presidential candidate. "Without a major change in leadership, I have no confidence that things will get better."

After the disasters of Somalia, Rwanda and the former Yugoslavia, tiny East Timor was supposed to prove that nation building was a feasible exercise. An independence referendum in 1999 forced the Indonesians out, but not before departing soldiers and sympathetic local militias practically leveled the country in a paroxysm of violence that claimed hundreds of lives. All in all, up to 200,000 East Timorese are believed to have perished during the Indonesian occupation. Determined to help reconstruct a country that had been birthed in such chaos, the U.N. set up shop in 1999. A constitution was written, universities were built. Charismatic former guerrilla commander Xanana Gusmão was elected President. Boasting pristine beaches and untouched coral reefs, the Catholic country—a legacy of centuries of Portuguese colonialism—was trumpeted as a future tourism destination. In 2004, the U.N.'s troops began withdrawing (though peacekeepers returned after last spring's violence), and East Timor was hailed as the little nation that could. The euphoria lasted long enough for World Bank president Paul Wolfowitz to visit Dili last year and proclaim: "It really is a remarkable story. In just a few years, the people of [East Timor] have built a functioning economy and a vibrant democracy from the ashes and destruction of 1999."

Just weeks later, East Timor again descended into conflict, and the country still simmers with strife. What went wrong? In reality, the simple narrative of East Timor's success hid a far more complex story line. Yes, the Timorese cherish independence. But no amount of freedom masks the fact that nearly 45% of the country lives on less than $1 a day. When the international community began decamping in 2002, thousands of jobs associated with its presence disappeared. The current government, run by the political party Fretilin, a key resistance force during the Indonesian occupation, hasn't improved the economic situation much. Although Fretilin's reputation is burnished by the brave ex-guerrillas and former exiled activists among its ranks, many members of East Timor's government are woefully inexperienced. "For many of these people, this is the first real job they ever had," says the head of the opposition Social Democratic Party, Mario Carrascalão, who even as the Jakarta-appointed governor to East Timor in the 1980s and early '90s spoke out against the excesses of Indonesian rule.

Nor is it any secret that the fierce determination that makes a good resistance fighter can prove disastrous in a democracy where conciliation and flexibility are paramount. Opposition parties snipe that Fretilin has become more concerned with internal squabbles and retaining power than with the nation's welfare. Case in point: Fretilin's élite—many of whom were educated in Portuguese and spent decades in exile in countries like Mozambique where it's also spoken—imposed the European tongue as East Timor's official language. Yet less than 10% of the population understands Portuguese. The decision, largely acquiesced to by an international community that sympathized with Fretilin's reluctance to adopt the language of East Timor's former occupier, excluded an entire generation of Indonesian-educated citizens from government service. "The current leaders have decided that their own history is more valuable than ours," says António da Conceição, who was trained in Indonesian and English and now works as a consultant for AusAID, the Australian government's overseas aid program. "But we younger people, we fought for independence, too. How can we be turned into second-class citizens?"

Other divisions are festering, too. Even though the country was hardly riven by ethnic hatred like, say, Rwanda or the former Yugoslavia, tensions between the half-island nation's eastern and western populations exploded in the spring of 2006 after then Prime Minister Mari Alkatiri fired nearly 600 army troops predominantly from the country's west. In protest, Commander Reinado later deserted, claiming that westerners were being discriminated against by eastern army officers. The dispute sparked weeks of fatal mob unrest that sent some 15% of the population fleeing to the hills. (On Wednesday, ex-Interior Minister Rogério Lobato was sentenced to 71/2 years in jail for abetting the violence.) Other effects of the crisis linger. Today, tens of thousands of people from the country's east still live in makeshift refugee camps around Dili. Late last month, Australian-led peacekeepers, who were invited back to East Timor nearly a year after they had jubilantly ended their mission in 2005, clashed with a group of armed men from these camps, resulting in the deaths of two refugees. With Reinado still on the run, Australian Prime Minister John Howard talked tough on Monday, calling for the renegade soldier to "be neutralized."

The lawlessness of Dili's streets is exacerbated by gangs of unemployed youth, many of whom belong to rival martial arts clubs that have turned certain parts of the capital into no-go zones. The spreading anarchy is, in turn, triggering a sense of despair among many East Timorese, who realize that the fledgling nation's honeymoon is over. "What has happened in East Timor over the past year has destroyed the claim that this is a nation-building success story," says Laurentina Barreto Soares, a researcher with the United Nations Development Program in Dili. "Whoever wins the presidential election could face even tougher problems than Xanana has."

Presidential candidate Ramos-Horta, who is an early favorite despite the nation's mounting woes during his tenure as Prime Minister, says it's unfair to condemn East Timor to the dust heap of failing states after just five years of independence. "It can take five years for a Chinese take-away in Manhattan to break even," he says. "How can we dismiss East Timor as a failed state when it's not even been given enough time for a restaurant to turn a profit?" Ramos-Horta, a Fretilin founder who is now an independent, is right in that East Timor is no Afghanistan or Iraq. "There is no civil war or bombs bursting on the streets," he says. "These are just growing pains of a young country."

Still, there is palpable discontent in East Timor—and that could boost Ramos-Horta's main rival Fernando de Araujo, the leader of the Democratic Party, which holds the second-largest number of parliamentary seats after Fretilin. Imprisoned for six years by the Indonesians for his pro-independence activities, de Araujo shares a similar resistance-hero status with current President Gusmão, who is not running for re-election. (Gusmão, however, may form his own party and could conceivably end up as Prime Minister after parliamentary elections later this year.) Yet de Araujo is deeply critical of the old guard with which Gusmão has surrounded himself. "We are a new country, but we are not a new society," says de Araujo, whose party membership is largely under the age of 40. "Our people can see with their own eyes what has happened. It has been five years and what is there to show for it? Almost nothing."

Afonso soares was supposed to be one of East Timor's bright hopes. The 22-year-old son of a vegetable vendor from the eastern town of Baucau had done well enough in school to earn a place at Dili's Universidade da Paz in 2002, the same year his homeland gained independence. Soares chose to study law, believing that a strong legal system was a key institution for the young nation. But all that changed last April, when the army revolt ignited clashes between Dili residents from the country's east and west. "Before the crisis, east was where the sun rose and west was where the sun set," says Soares. "Now, differences between these two groups, which I never even knew about growing up, have been politicized." In late April, Soares' home was burned down by mobs, as was his mother's vegetable stall. Today, he lives in a camp for 2,825 internally displaced refugees near Dili's waterfront, sharing a small tent and one bed with six others who must sleep in shifts. His mother's source of income destroyed, he can no longer afford university. "My dreams have died," Soares says. "We have no jobs, no education, no homes." The former law student admits to knowing people in the camps who get drunk on palm spirits and throw stones at peacekeepers and passersby. "I don't do it myself," he says. "But life is so frustrating, it's hard to calm down."

The sense of frustration is also shared by many in East Timor's nascent middle class. Adérito de Jesus Soares (no relation to Afonso) does have a law degree, one from New York University no less. Before his nation's independence, he served as a crusading human-rights lawyer in Indonesia and helped draft East Timor's constitution. Yet today Soares doesn't practice law at home. Like most people of the post-'75 generation, Soares was educated in Indonesian and English. The country's courts, however, operate in Portuguese. Indeed, the language obstacle is so great that every single one of East Timor's judges, prosecutors and public defenders failed a competency evaluation in 2005. While they undergo 212 years of linguistic training, the courts are being run by a dwindling group of international legal experts. In August 2006, for instance, not a single civil or criminal trial hearing was scheduled because of a lack of staff. Even though corruption is becoming a concern in East Timor, no cases of graft have been brought to trial since independence. Today, with so few Portuguese-speaking judicial employees available, police are having to release suspects because the courts cannot schedule hearings within 72 hours, as required by law. "The justice system is being seen as enabling the criminals," says Katherine Hunter, head of the Asia Foundation in Dili, which works on governance and legal issues. "That creates a growing sense of impunity that makes the situation on the streets much more fluid."

Like many talented East Timorese who have grown disenchanted with the state of their homeland, human-rights lawyer Soares has decided to leave. He plans to pursue further studies in Australia next month. "Linguistic ability is becoming the priority in hiring, not judicial expertise," Soares says. "How can you build a competent civil society with limitations like these? I don't want to participate in such a system." But he's among the lucky few. Others like Avelina Gomes, whose children's school in Dili has been shuttered for a month because it is located in a no-man's land between two gang territories, can't just pick up and leave. "I'm so worried about my kids' education," says Gomes, who works as an administrative assistant at a government office. "There's no sign that the school will reopen, and the security situation is only getting worse."

Some members of Fretilin do acknowledge that divisions have widened under their leadership. "Our biggest mistake was pretending we are not a traumatized people," says Minister of State Administration Ana Pessoa, who is a senior member of the ruling party. "By focusing almost exclusively on the physical reconstruction of this country, we didn't pay enough attention to people's mental states. People's irrational fears helped trigger the crisis last year, but we didn't understand it well enough to take it seriously." For his part, Ramos-Horta is urging his countrymen to look ahead, speaking glowingly of the country's economic potential. Revenues from offshore oil and gas reserves increased nearly ninefold to $351 million from the 2003-04 fiscal year to the 2005-06 fiscal year. The reserves, which are located between East Timor and Australia, are to be developed by international and Australian companies, who will hand over half the royalties to Dili. "We could have 10% growth rates and a shortage of labor in a few years," predicts Ramos-Horta. Entrepreneurs are also trying to develop East Timor's once prized coffee plantations. But all the talk of future earnings means little to Dili resident Linda Ricardo, who lined up one day last month from 5 a.m. in hopes of securing a few sacks of rice in the afternoon. "The government does nothing," she says. "The situation is hopeless."

Fretilin's pledges of concern were undermined last month when Deputy Prime Minister Estanislau da Silva denied reports of famine in the countryside, insisting that not a single person in East Timor had died of hunger since independence. "Every day I have people coming to my door who are slowly starving," says Bishop of Baucau Basílio do Nascimento. "Are you saying these people do not exist?" Even if the April presidential election is supposed to give these citizens a voice, many are so disenfranchised that they see little point in participating in the democratic process. Back in her shack on the northern coast of East Timor, Pereira just laughs when asked which candidate she will choose to lead her country. "When I am asked to vote for President, I will just close my eyes and pick one," she says. "The leaders don't care about people like me, so why should I care about any of them?"

• Hannah Beech/Dili