It would be tidy for New Zealand and Australian leaders to blame China’s debt within Sri Lanka for its collapse, so that they could scare Pacific Island nations back into the fold. It would be wrong.
A lot of good came out of the Pacific Island Forum and in particular the 2050 Blue Pacific strategy, and some big new diplomatic investments by the United States.
But in this interview with Jack Tame, the Minister of Foreign Affairs traverses a lot of ground, but from 9.20m discusses how mindful the government is about the collapse of Sri Lanka.
You’ll be aware that the way New Zealand funds is largely by grant funding. We would like to see the opportunity of development partners to look towards greater coordination of its efforts,” said Mahuta.
“I’d say there’s a level of indebtedness that sits across the whole of the Pacific to financial institutions, including the way in which China has funded into certain countries.”
The minister described it as a “key area of vulnerability that should be addressed, and we need to find different ways to work together on the challenges that sit within the Pacific.”
Sometimes, however, it’s better to see what’s on the ground causing civil unrest before reaching for blaming other countries. The Pacific Forum was Chaired by a person who had led coups in Fiji. Its own multiple coups were caused for the most part by native Fijian-origin military and paramilitary groups seeking to ensure Indo-Fijians didn’t achieve parliamentary rule.
In the Solomon Islands, troops and police from Fiji, Australia and New Zealand have been invited in several times over the past decade to restore order after inter-ethnic fighting broke out. It stems from a really poorly handled internal decision to switch recognition of Taiwan to that of China, which cut off critical Tainwanese aid to parts of the Solomon Islands. It’s complex but aid withdrawal was at its base. The US stepped in with massive replacement aid but the cack-handed damage was done.
Further back, in 2006 New Zealand and Australian troops were invited to secure Tonga’s main city and airport after massive riots. Tonga has a messy and multi-layered relationship between authoritarian monarchical rule, feudalistic restrictions of political rights, cultural patronage, massive inequality, and a very low wage economy. Their path to greater democracy was and is very, very hard.
In none of those examples did Chinese state loans cause civil unrest. Nor in any of them was New Zealand out of the picture.
And so to Sri Lanka. Certainly China financed a billion dollar port+airport at Hambantota, but then accepted a lease of the property in place of much of the repayment. At 99 years it’s more like a equity-for-debt swap.
And of course it was in Rajpaksa’s constituency, ‘nuff said. But the lessons out of Sri Lanka that New Zealand can draw are simpler, and little to do with how China forms debt agreements within Pacific island states.
The first lesson is very very few small states will ever have the headroom to massively slash income taxes, as the Sri Lankan government did in 2020. VAT was halved from 15% to 8% and many other taxes minimised. Well, state got no money. Fiscal deficit soared to 11% of GDP. Those lenders that had hung in there for a long time like the IMF were just shown empty pockets. No party that promises massive tax giveaways can also promise that the state will stay stable.
The second lesson for New Zealand is that the fastest thing we can do to stop layabouts on the streets looking for trouble, is get them jobs here. Developed countries like us have that power. Talk a lot less about medium term hero projects for climate change and more about dollars and cents to get cash into small island villages. We will need the workers particularly in horticulture, until such time as we get much greater harvest mechanisation. We caused stress through shutting them out during COVID.
A big lesson for countries that are striving their way out of subsistence and poverty is that they will stop getting access to highly concessional loans from the IMF and World Bank – so that’s the point where very kind lenders or donors like New Zealand, Australia and China need a whole bunch less suspicion of each other and a lot more coordination of what they are actually funding. Surely the PIF can do an actual job of coordinating that rather than complaining.
Sri Lanka’s farmers also give New Zealand a much more direct lesson, namely: you can’t force organic farming on farmers and banning fertiliser imports. When Sri Lanka’s government tried that to decrease import costs, rice and tea harvests crashed 20%. Dilmah Director Malik Fernando gives a sense of how Sri Lanka is continuing to rebalance tea production and tourism amongst the crisis:
Tourism continues without any untoward incident. Citizens have been protesting the government’s mishandling of the economy. Demonstrations have been peaceful, barring a few at the start where protesters were dispersed by the police. Sri Lankans from all walks of life came together peacefully and demanded that the government step down. The entire cabinet resigned. There is a strong sense of unity. Tourists have also joined the protests in some places. Although it may look worrying in the news, there’s no risk whatsoever to tourists.”
Now, granted he’s entitled to his advertorial spin, but he points to a very simple lesson for New Zealanders: the easiest thing you can do to build up a small island state is go there on holiday. Take your family and NZ$5-$10k and buy everyone some happiness. Stop scolding farmers about how to produce, and instead help them diversify their economy. After all it worked here.
None of the above examples of disruption had a Chinese debt trap as their cause. All of them have solutions that don’t necessarily require more loans or more grants for whatever reason. Our New Zealand government needs a whole bunch less political suspicion about sovereign loans, a whole bunch more focus on actual jobs that give Pacific Island families cash in hand, and actually an acceptance that – just as New Zealand did in the 1990s real estate market – Chinese money is a permanent part of our picture.
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