Bill Choy, a former resident of Suva, Fiji, could be forgiven for thinking that the slow-moving military coup of December 2006 would result in riots on the doorstep of his family-owned internet telephony business. “After the Solomons and Tonga, I wasn’t going to wait and find out,” he says.

In April 2006, the Chinatown district of the Solomon Islands capital, Honiara, was burnt to the ground. Riots over alleged corruption between Chinese business and local politicians engulfed the sunny South Pacific island state in mayhem. About 500 ethnic Chinese, aided by embassy staff flown in from Papua New Guinea, sought protection in the Solomon Islands police headquarters.

In September, the usually tranquil Tongan capital of Nuku’alofa suffered a similar fate. A peaceful demonstration for greater democracy against the absolute monarchy of King George Tupou V developed into riots and arson. While ostensibly directed at businesses owned by the royal family, the disproportionate impact on Chinese-owned businesses was evident.

Mr Choy saw this as a pattern. The Chinese community in Suva was already concerned by a spate of attacks on ethnic Chinese during 2005 and the seeming failure of police to address the issue. In Fiji, there are officially 6000 ethnic Chinese out of a total population of 900,000. Estimates suggest illegal residents could swell this number to more than twice as many again.

Chinese input

Chinese businesses have long been the backbone of many South Pacific island economies. Chinese immigrants to the South Pacific were among the first waves of new settlers, arriving during the colonial era to work as labourers, cooks, washers and administrators. Many integrated into local communities, moving into retail, agriculture and even politics.

More recent waves of immigration have become controversial. The Solomon Islands, Tonga, Fiji and other South Pacific states have all had their fair share of immigration scandals involving Chinese nationals. In March 2005, senior Royal Fiji Military Forces spokesperson Lieutenant Colonel Orisi Rabukawaqa claimed substantial numbers of illegal mainland Chinese immigrants over the previous two years had led to a correlated increase in prostitution, illegal gambling, money-laundering and illegal fishing.

But Mr Choy argues that attacks on Chinese businesses are more a sign of declining economic prospects than hysteria at growing Chinese immigration. “It’s only natural” says Mr Choy, “if you see a guy making more money than you, while you can’t find a job, you’d get mad.”

South Pacific economies face significant economic and political challenges. A 2005 World Bank study found the region faces economic hurdles that are unique to small-island development, including remoteness, low levels of economic diversification and susceptibility to natural disasters.

Elisabeth Mealey, spokesperson for the World Bank, agrees: “Pacific island economies are open, narrow economies and, as price takers, are vulnerable to volatile world prices.” States in the South Pacific are reliant on remittances from nationals working abroad, tourism, exploitation of limited resources and highly volatile commodity exports.

Splendid isolation?

The case of Tonga is representative of most South Pacific island economies. The capital of Nuku’alofa has a population of about 23,000, with the nearest market of economic significance being Auckland, New Zealand, a three-hour flight away.

Tonga relies heavily on a single export item, squash pumpkins, which are exported to a single market, Japan. Apart from squash pumpkins, economic activity revolves around aid, remittances from nationals in Australia, New Zealand and the US, tourism and fishing – the latter two handicapped by deteriorating infrastructure.

These economic challenges are compounded by demographics. Over half of the population of the South Pacific is under the age of 24. This overwhelmingly youthful age structure can exacerbate existing economic and governance issues, as has occurred in developing countries across sub-Saharan Africa and the Middle East. Basically, large numbers of unemployed youths do not bode well for peace and prosperity.

Like the rest of the world, the South Pacific is also adapting to a stronger, more confident and wealthier China. The South Pacific has in fact become a microcosm of the wider political, economic, strategic and military melodramas associated with the growth of China.

In the 1990s, China’s political reach in the South Pacific was marked by its struggle for diplomatic recognition with Taiwan. Pacific island states swapped allegiance between Beijing and Taipei for increases in economic aid, soft loans, infrastructure development and, occasionally, outright bribes. This led to unproductive aid programmes, reduced momentum for economic reform and weakened governance. Arguably, it also played a direct role in stirring up ethnic and civil unrest.

Changing allegiance

Since the end of the 1990s, China’s rise has greatly increased the cost of maintaining diplomatic relations with Taiwan. China no longer views diplomatic recognition by South Pacific states as essential to its legitimacy. Instead, it looks towards South Pacific island states solely in terms of mutual economic benefit and has begun to tailor its aid and trade programmes accordingly.

However, China’s rise, and its increased capacity to assist South Pacific states, continues to affect economic and governance reform. Island states in the region are beginning to view China as an alternative to the tightly controlled aid programmes of Australia and New Zealand, which tie aid projects to economic and governance reform.

After the military takeover in Fiji, coup leader Commodore Frank Bainarama told reporters that he would look to China and other Asian countries to replace aid cancelled by Australia, New Zealand and the US.

Wary of China

As in the rest of the world, the growth of China has created alarm in some quarters of the Pacific. This has included reports of China seeking military bases in key South Pacific island states, or seeking to play a larger role in their internal politics. But just as the rest of the world is getting over the hysteria associated with China’s growth, so too will the South Pacific.

In the short term, the region will face ongoing challenges associated with political and governance reforms, market liberalisation and deepening regional integration. This could mean continuing economic stagnation and even civil unrest.

In the medium term, there are brighter prospects. The Australian government is already heavily involved in the South Pacific and this will continue into the future. Australia is committed to ensuring that aid provided to the region is tied to governance, economic and political reform. Although this has resulted in several diplomatic setbacks for Canberra, the medium-term benefits for the South Pacific will be substantial.

There are also growing calls in Australia for the establishment of a South Pacific guest worker scheme to fill gaps in the Australian labour market. With Australia going to the polls sometime this year, it is unlikely that implementation of such a scheme would occur in the near future. However, when the scheme does go ahead, South Pacific island economies will receive a much needed boost.

There is even speculation that Australia may recruit labour from the region into its armed forces. The British armed forces recruit extensively from former Commonwealth countries, including Pacific island states such as Fiji. The Australian Defence Force is currently seeking to expand its army by two divisions. Recruiting from the region could ease domestic recruitment pressures in Australia, boost island economy remittances, and foster returning service personnel’s respect for democratic institutions.

Diplomatic games

China continues to increase its aid and trade programme in the South Pacific. Ultimately, the diplomatic game between China and Taiwan will recede into history and with it will go much of the perceived conflicts of interest, corruption and dollar diplomacy. In its place will be China’s ever growing middle-class investing, holidaying and spending – looking for postcard sunsets, sandy white beaches, serene blue seas, and the obligatory leaning coconut palm.

Negative short-term prospects and positive medium-term prospects bode well for investors. Paradise has not been lost in the South Pacific; rather, it has just been suspended while economic, governance and political reforms take their course.