South Pacific looks to China as West turns away

China is quietly filling the breach as traditional Western donors cut back on their aid pledges to the South Pacific. And it seems many of the struggling island nations on the receiving end of China’s largesse couldn’t be happier with the shifting currents.

Last month, Australia’s International Development Minister Concetta Fierravanti-Wells scathingly attacked Beijing’s aid program in the region, accusing it of funding “roads to nowhere” and “useless buildings.”

“We want to ensure that the infrastructure that you do build is actually productive and is actually going to give some economic benefit or some sort of health benefit,” she said.

Foreign Minister Julie Bishop was more diplomatic, saying that Australia “welcomes investment in developing nations in the Pacific that supports sustainable economic growth, and which does not impose onerous debt burdens on regional governments.”

Yet there is concern that Australia and its Western allies may be ceding their traditional leadership role in the South Pacific due to a combination of aid cutbacks and increasing Chinese interest in the dozen or so nations in the region.

According to the Lowy Institute, an Australian research outfit, China extended about US$209 million of aid annually to nine Pacific countries — Fiji, Timor Leste, Papua New Guinea, Samoa, Tonga, Niue, Cook Islands, Vanuatu and the Federated States of Micronesia — in 2006-2016.

Canberra gives about US$870 million a year, or 60% of all global aid sent to the Pacific. New Zealand gives US$235 million and the United States US$221 million. But China will likely soon become the second biggest source of aid, as New Zealand and the US are both reducing their aid in real terms.

US President Donald Trump’s administration reportedly plans to slash US assistance by as much as one-third this year, with East Asia and the Pacific receiving 41.4% less. Assuming the policy is implemented, Timor Leste, Micronesia and the Marshall Islands will lose their entire aid and Papua New Guinea 66.4%.

New Zealand’s Foreign Minister Winston Peters said in early February that his country’s aid program has been under-funded for nine years and has slipped to 0.23% of gross national income, against an average of 0.4% for Organization for Economic Cooperation and Development (OECD) members. It is being reviewed, but prospects for a sharp boost in Pacific aid are slim.

Australia has shielded its Pacific aid program from wider budget reductions, but cuts of up to 10% are still likely in some country allocations in 2017-2018. Most aid goes to neighboring Papua New Guinea, which Canberra ruled under a United Nations mandate until it won independence in 1974.

Beijing channels about 40% of its funding into transport, with an eye towards incorporating the Pacific region in its global Belt & Road infrastructure-building initiative.

A further 20% goes to government, civil society and education: China gives US$850 million a year to the secretariat that runs the Pacific Islands Forum, the region’s main consultative body, and offers scholarships in such areas as capacity-building. China has recently trained more than 4,000 in technical skills in the region.

Most Chinese aid goes to Papua New Guinea and Fiji, the only countries that offer any real economic value in a region where many nations are barely above subsistence level. Papua New Guinea needs better access to its lucrative copper, oil and gold resources, while Fiji has rich forestry and farming potential.

“[Papua New Guinea] is available to receive and to partner in where it matters most to suit the interests of our people and our country,” Foreign Affairs Minister Rimbink Pato said in response to Australian Senator Fierravanti-Wells’ criticism of Chinese aid.

“Using the experience with Australia, we will work alongside all the other development partners to ensure that we get the processes right.”

Those processes didn’t work with at least one of the Chinese-funded projects, a US$300 million expansion of Lae Port, the country’s biggest. The Asian Development Bank rated the project “less than successful” after the cost soared by US$134 million due to unforeseen engineering problems.

There will be plenty more debate on the costs and benefits of China’s aid scheme, as 80% in value terms comes in the form of concessional loans — hence Julie Bishop’s barbed reference to “onerous debt burdens.”

Most loans have an annual interest rate of only 2–3% and a repayment period of 15–20 years, including 5–7 year grace periods, which is generous by global standards.

But it will still be a challenge for countries whose gross domestic products (GDP) are often smaller than those of mid-sized Western cities.

For instance, Fiji had a budget deficit of 5.2% of GDP in 2016 and an external debt of US$833.4 million. Papua New Guinea’s budget was 5.7% of GDP in the red and has foreign liabilities of US$22.04 billion.

“For the most part, the island states’ political leaders are well aware of the benefits and pitfalls of Chinese aid,” Anthony Bergin, a senior analyst at the Australian Strategic Policy Institute and senior research fellow at the Australian National University, wrote recently in The Strategist.

Debt issues aside, Bergin believes that China poses little threat to Western interests in the region and advocates a more coordinated approach to aid programs.

“It’s time to talk with our island neighbors about what might work best for them, to facilitate where we can, and to respect their final decisions — even if we consider that the help comes with strings attached,” he wrote.