Emerging from centuries of colonialism, Alkatiri's new government faced the challenges of nation-building, which includes convincing citizens to accept the U.S. dollar as currency in place of the Indonesian rupiah , and to accept Portuguese (spoken mostly by the older elite) as an official language. Reconciliation and accountability regarding the human rights violations of the occupation period are seen as a major priority for the new government. A Truth and Reconciliation Commission, based on those of South Africa and Guatemala, was established in January 2002, to cover the period of Indonesian occupation. It is intended to provide a forum for airing grievances and recognizing suffering; but major crimes will be prosecuted in the courts. A UN war crimes tribunal, on the postreferendum violence of 1999, has been slow in development because most of the high-level people accused are safe in Indonesia, and because it lacks personnel and funding. An amnesty bill intended as a compromise between prosecution and "forgiveness" was criticized as too soft on those who committed crimes against humanity during the Indonesian occupation. The phasing out of UN troops made the establishment of a functioning police force a priority. Militias still at large in West Timor posed a threat to East Timor security, apparently raiding a border area in January 2003.
The government of East Timor has the daunting task of becoming economically self-supporting. East Timor has extremely high unemployment, especially in Dili. There has been a huge gap between the wages of employees of UN and foreign aid organizations, and other workers; and there is a legacy of economic corruption from the Indonesian occupation. Because of the impoverished state the country was in at the time of the referendum and the destruction following it, East Timor has had to reconstruct most of its roads and buildings, and improve its agricultural production. The country's environment is in terrible condition, particularly from large-scale deforestation. Educational needs are great at all levels, and the same is true of health care. Some progress had been made in the area of health care, however. By 2002, there were 47 qualified doctors in the country, up from only 15 in 2000, but still far short of the number needed to provide adequate care for almost a million citizens.
A visionary National Development Plan for ending East Timor's poverty was adopted after extensive consultation with the people of the new nation. Aid was solicited in the form of grants rather than loans, so that East Timor did not start off as a debtor country. Slow economic progress and a gap between the elite and the impoverished brought about disillusionment not long after independence, though. The months following independence saw public protests over "neocolonial" domination by the UN, poverty, lack of jobs for former resistance fighters, and lack of accountability for human rights violations during Indonesian occupation. There was also a major jail-break in Dili, emphasizing the need for development of law enforcement to replace the UN peace-keepers, most of whom had left the county.
Tensions over high unemployment gave way to violence when severe rioting broke out in Dili in early December 2002. A student demonstration was joined by disgruntled former guerrillas, and fires were set across town. Alkatiri's residence and that of his brother were among the buildings burned. Police and international peacekeeping forces quelled the violence. Supporters of Gusmao blamed the unrest on Alkatiri's lack of leadership and his divisiveness. Some blamed Fretilin itself for inciting the rioting, and pro-Indonesian militias were implicated for involvement in the violence as well.