DANCING WITH DRAGONS: SOLOMON ISLANDS, TAIWAN & CHINA

  Dr. Tarcisius Kabutaulaka

Since the early 1980s, Solomon Islands has been dancing with the Asian dragons: Taiwan and China. 

But while Honiara dances with Taipei, it has been glancing seductively at Beijing, which has always been happy to show off its dragon moves. 

Now, it seems that Honiara - or at least some Members of Parliament (MPs) - has been seduced by Beijing.

My previous article provided a brief overview of the origins of the ‘dance’ between Solomon Islands, Taiwan and China. 

The dance continues; now influenced by China’s assertive global influence, Taiwan’s weakening global position, and an insatiable desire by some Solomon Islands politicians to dance into Beijing’s kaoni (credit) book.

This piece focuses on the current debate on whether or not Solomon Islands should switch diplomatic relations from Taiwan to China. 

It provides a brief overview of Solomon Islands relationships with Taipei and Beijing, the rationale for the proposed switch, the implications, and issues that should be considered. 

Solomon Islands currently has diplomatic relations with 121 countries. But perhaps the most talked about relationship is with Taiwan. 

This is due partly to the impending possibility that Beijing could lure Honiara away from Taipei as the diplomatic rivalry across the Taiwanese Strait plays out in the southwestern Pacific.

Taipei’s contributions to the Constituency Development Fund (CDF) has also attracted criticisms because of perceptions that it contributes to a hand-out mentality and negative political cultures. 

Milking the Dragons

In the past three decades, Solomon Islands has been ‘milking’ both dragons and they have in turn taken advantage of the island nation for diplomatic recognition, access to resources, a place to invest and a destination for citizens to settle.

Relations with Taiwan started with anticipations that it would improve trade and investments. In 1983, the then Finance Minister, Bartholomew Ulufa’alu,said the relationship will focus, “mainly on promotion of investment, trade, and economic cooperation.” 

However, in the past 30-plus years, Solomon Islands hardly trades with Taiwan – exports to and imports from Taiwan were negligible.

Instead, the relationship between the two countries was characterized by Honiara trading diplomatic recognition in exchange for Taipei’s contributions to the CDF, Scholarships, assistance inagriculture, and small business trainingprograms.

The CDF attracted a lot of attention. This is despite the fact that Taiwan’s contribution (SBD70m) make up for only 27% of the CDF (SBD260m). 

Taipei’s other investment is scholarships for Solomon Islanders to study in Taiwan. The scholarship scheme started in 2003. Currently, 123 students are in various Taiwanese universities and 23 are expected to graduate this year, following the footprints of 100 who have previous graduated. 

On the other hand, while China does not have diplomatic relations with Solomon Islands, the two countries have trade relations.

China’s biggest impacts have been through the Chinese state, investors, and citizens. These different actors are related and overlap, but not always the same.They provide different dimensions of Solomon Islands encounter with China.

The Chinese state has always been in  the shadows, gently encouraging Solomon Islands to dance across the Taiwanese Strait. 

But there is also a tendency to conflate the Chinese state and citizens. Most Solomon Islanders’ encounter with and image of China is through Chinese citizens: the recent migrants who dominate retail businesses and out-buy Solomon Islanders for land leases in Honiara. 

These people are often portrayed as conniving – always trying get away with breaking the country’s laws, only here to make money, and corrupting its politics and public service. These are of course stereotypes.

Not all Chinese citizens are connected to or represent the Chinese state. Many of the recent Chinese migrants to Solomon Islands are probably from Fujian and Guandong provinces and perhaps marginalized from Beijing. 

Chinese investors often precede the Chinese state, although it is not unusual for them to be retrospectively included as part of the Belt and Road Initiative (BRI) when Beijing forges diplomatic ties.

Chinese investors generally have a poor record, especially with environmental and labor laws of the host countries,lower quality products, and they employ mostly Chinese workers and therefore deprive local people of employment opportunities. We have seen these in other Pacific Island countries and around the world.

But it should be noted that Chinese investors are changing their products and how they do business as they learn to compete in the international market place. 

Also, Chinese investors are not the only ones with poor environmental and labor records. Investors from western countries are also guilty of that.  

In the past two decades, China has become a major trading partner for Solomon Islands. It is the country’s largest export destination. This is dominated by the logging industry, which has a reputation for not abiding to environmental regulations, low returns to customary landowners, and meddling in domestic politics. China is also one of the largest sources of imports.

Given this economic influence, it was only a matter of time before it translates into political capital and Honiara is seduced into a diplomatic marriage.

Now, it seems the marriage proposal has been made, the bride price discussed, and preparations for the wedding has started. But what will Solomon Islands gain from this proposed marriage?

Rationale for Switch

In the lead up to the national general elections in April, there were murmurings that the incoming Solomon Islands Government might switch diplomatic relations from Taiwan to China. 

In March 2019, for example, the then PM, Rick Hou’s, political party reportedly said it will review relationships with Taiwan if re-elected.

That intensified after the elections. Last week, the Solomon Star carried a front page story with the headline, “PM Cautioned: Guadalcanal, Malaita MPs led move to back China.” There are definitely Cabinet Ministers and backbenchers activily pushing for the switch.

The call from the Guadalcanal and Malaita MPs shows that they want to hold the PM at ransom over a bilateral relationship. 

I am not privy to their discussions, but it seems their main reasons include expectations that diplomatic relations with China will bring:(i) increased investments, (ii) infrastructure development;and,(iii) increase contributions to CDFand other funds controlled by MPs. 

Beijing hasbeenwatching attentively. Lastweek China’s Ambassador to Fiji, Qian Bo, claimed that Beijing could help Solomon Islands transform its infrastructure “overnight”. 

That must have been music to the ears of the MPs pushing for the switch.

There are problems with both the expectations of the Solomon Islands MPs and Ambassador Bo’s statement. 

But whatever one’s opinion, the stage is set and the dance with the dragons has started.

Issues to Consider

In these discussions, there are a number of issues to consider. I do not mean casual consideration. Rather, comprehensive research, analysis and discussions before any decisions are made. 

I respect the government’s prerogative to make this decision. But there is a need for wider consultation because the impacts of this decision will be wide-ranging and long-lasting. It will continue to affect the country long after those currently in government have passed on. 

Here, I identify two issues.

First, there is a need to evaluate the SIG’s capacity to manage a relationship with China, which will come with aggressive investments in political and financial capital. Not all of it will benefit Solomon Islands.

There is therefore a need to identify what should be done to improve the country’s governance and legal institutions in anticipation for larger and aggressive investments.

Past experiences illustrate the government’s inability (or perhaps unwillingness) to enforce the country’s laws. 

Classic examples include logging companies’ continuing disregard of forestry and environmental regulations and the recent oil leak in West Rennell, for which no one has so far been held accountable. 

Large-scale Chinese investments will be much more intense. Is Solomon Islands ready?

Second, there is a need to assess the political, social, environmental and economic impacts of a relationship with China. Each of these should be examined systematically and in detail, not just by politicians, but including professionals from a cross-section of society.

Here, I provide a brief overview of a potential economic impact. There are others. 

Proponents of the switch argue that Beijing will invest in infrastructure development.

There are two things to note about this. First, infrastructure construction in and of itself is not economic development. It must be part of a broader and comprehensive development plan. I have not seen that from the current government.

Infrastructure should not be built simply for the sake of it, or because they could be used as political capital in the next election – to show voters that you have done something. 

Second, Chinese investments in infrastructure development will likely increase national debt. 

Chinese aid comes mostly in the form of concessional loans. Funds for infrastructure development are typically administered through the Asian Infrastructure Investment Bank (AIIB) and contracts given to Chinese companies who in turn employ Chinese citizens and purchase Chinese material.

Unless the SIG fully understands how China operates and has good negotiators, the country could be left with infrastructure, maintenance costs, and huge loans to repay. 

Other Pacific Islands countries illustrate this: about 60% (US$115.5 million)of Tonga’s foreign debt is owed to China; 48% (US$168 million) of Vanuatu’s total foreign debt is owed to China; 36% (US$410) of Samoa’s total government debt  is owed to China. 

Diplomatic relations with Beijing will give Solomon Islands access to the BRI funds, but it could also create national debt.

Debt in and of itself is not a problem. Most governments have debts. The challenge is the ability of the government to repay the loan.

Yesterday, during the launch of the Central Bank of Solomon Islands (CBSI) Annual Report 2018, the bank’s Governor, Denton Rarawa, said the country’s average economic growth in 2018 was 3.9% and predicted to increase to 4.5% over the next four years, but stressed that the country needs an average growth of at least 6% to sustain the country’s bourgeoning population. 

This raises questions: How will it affect Solomon Islands ability to repay loans? Will infrastructure development engender higher economic growth, or burden the economy?

To measure this, lets examine the country’s Debt to GDP, which is a ratio that indicates whether or not a country is able to repay its debt. Or in other words, whether its debt is sustainable or if it is overly indebted. 

For Less Developed Countries (LDCs) with weak governance structures and fragile economies, the recommended sustainable debt level is around 30% – 35% of GDP. Anything above would make that debt unsustainable or unserviceable, particularly when faced with shocks (e.g. rising oil prices) and vulnerabilities (like climate change and natural disasters). 

One approach to the see the impact of debt is to review various scenarios with the debt from the most recent year, 2018. At the end of 2018, Solomon Islands’ ratio of debt to GDP was 11%, compared to an unsustainable 70% in 2003, attributable to “the conflict” (see Figure 1). 

Let’s assume that the country takes a loan from China for three infrastructure projects: (i) submarine cable; (ii) port/wharf; and, (iii) airport. Based on the cost of similar projects elsewhere in the Pacific Islands, it is estimated that a submarine cable would increase the country’s debt to GDP by 17%, a wharf by 19% and an airport by 23%. All three projects would exceed the ceiling at 38% of GDP (see Table 1).  

We could also look ahead over the medium term, say 2022. By that time, a variety of other loans would have come on line, particularly the Tina hydro and other World Bank related projects. These projects have already been approved or are key priorities, like the Pacific Games stadium, so should be projected as part of the debt in 2022. Now, when the same scenarios are introduced, we can see the potential impacts these Chinese loans would have on the country’s projected debt over this period. 

So from a baseline of 30% of GDP that includes Tina hydro, the stadium and other loans, scenario 1 with the cable will go up to 36%, exceeding the sustainable level. With the wharf, it would be 37% and the airport, 40%. If we take all these scenarios, it would reach unsustainable territory at 52% of GDP (see Table 2). 

These are scenarios for only three projects. Imagine if politicians, excided by access to credit, decide to have more projects funded by Chinese loans. Solomon Islands would have an unsustainable Debt to GDP ratio that the country’s future generations will be repaying long after some of us have passed on. That would be unfair to the future generations.

Taming the Dragons

China is a global power that is here to stay. With its huge economy and excesss capital ready to be invested, it has a lot to offer the world. Solomon Islands has already benefited from trade with this Asian giant.

But Honiara must be strategic in its dealings with Beijing. It should not rush into a diplomatic marriage. 

Solomon Islands’ leaders must first assess the country’s ability to manage the relationship, identify potential economic, social, environmenta and political impacts, and put in place mechanisms for mitigating negative influences. This means strengthening the country’s governance and legal institutions to be able to accommodate such a powerful country. 

If politicians rush recklessly, Solomon Islands could find itself buried in debt that it can’t dig itself out of. 

In his speech yesterday, the CBSI Governor highlighted the need to build a broad-based economy – “setting the foundation for robust, and broad-based inclusive growth.” I am skeptical about Chinese investors’ interest in a broad-based inclusive growth.

So, before Solomon Islands dances withthis giant dragon, it must first tame it. Dancing with dragons is fascinating, but can be dangerous. 

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