The Australia in the Asian Century White Paper hints at, but does not explore, interesting political dynamics that may be playing out in the aid and development sector. As the White Paper notes, in 2010 Australia had the sixth-largest development program to Asian countries amongst OECD Development Assistance Committee donors (p.80). However, Australia may be beginning to slip down the order as a number of Asian countries transition from being donees to donors.

The White Paper mentions India’s transition, but focuses on China. The White Paper notes that China’s grant aid has doubled since 2005, and it now has a much larger concessional loan program than previously (p.248). The delineation between ‘aid’ and ‘concessional loans’ made in the White Paper is an interesting one. Commentators have noted that is unclear whether many of China’s concessional loans are designed as ‘aid’ meaning to help stimulate economic development in the recipient country) or as trade an investment agreements (that ease market access for incoming Chinese companies). Either way, the growth in China’s ‘aid and loans’ programs may have ramifications for Australia and wider geopolitics in the South Pacific.

China: A New Banker Creating Choice in the Region

In negotiations with Pacific countries, Australia has traditionally had a privileged position as the region’s ‘chief bank’. This is because economically, Australia dominates in this region. More than 50% of all donor funding to the region comes from Australia. Australia is the Pacific region’s biggest aid donor, approaching $1.2 billion.

Australia’s privileged position may be on the wane as growing Chinese aid makes money increasingly available from Beijing, as well as Canberra. In late September 2012, Papua New Guinea obtained a $A2.8 billion loan from China to improve the country’s infrastructure, particularly to upgrade the Highlands Highway and airports. More broadly, China had pledged more than $600 million since 2005 in ‘soft loans’, offering long interest-free periods to nations such as Tonga, Samoa and the Cook Islands. It also stepped up its aid to Fiji following the 2006 coup in which military leader Voreqe Bainimarama seized power from the elected government.

The US: Another Banker and More Choice

Australia’s privileged position might be weakened still further as the United States re-enters the region after suspending aid programs to the Pacific 18 years ago. The growth of Chinese investment has triggered growing US interest in the region. Earlier in 2012, in her testimony to the Senate Foreign Relations Committee, Secretary of State Hilary Clinton announced that proposed cuts to the foreign affairs budget, which includes aid, would hit US efforts to compete with China's rising power. She cited both PNG and Fiji as countries in the Pacific where China had increased its influence.

The US Government listened to Clinton, and acted accordingly. At the Pacific Islands Forum, held on 27-31 August 2012, Hilary Clinton attended the annual South Pacific summit, the first US Secretary of State to do so. She pledged $32 million in new projects to the region. Clinton commented that the US would remain committed to the South Pacific ‘for the long haul.’ Reports suggest that the US now spends about $300 million a year on Pacific nations, although around $100 million a year is on military assistance.

China and the US have been making thinly veiled barbs at each other as they seek to jostle for position in the Pacific. For example, when at the Pacific Islands Forum, and amid criticism that China’s open wallet has undermined international pressure for democracy in Fiji and other nations, Clinton said: ‘Here in the Pacific, we want to see China act in a fair and transparent way’. China’s comments were similarly ill-disguised: Vice Foreign Minister Cui Tiankai said that China was willing to work with other countries but added: ‘It will not mean that China will have to change its foreign aid policy. We are not changing it.’

What Can Australia Do?

If Australia’s privileged position in the Pacific is under threat, what can it do? Directly competing with the size of the US and China’s aid program over the long term is probably unfeasible. Australia currently provides $A491.7 in aid to PNG, a figure far smaller than even the one off $A2.8 billion loan that China provided to the country.

Complaining, particularly in relation to China, will do nothing. Australia seems to have worked this out. On 28 August 2012 Foreign Minister Bob Carr commented ‘My message really is that Australia and New Zealand have got to live with the fact that China will want to deliver aid in this part of the world [and] there is nothing we can do to stop it. It’s a fact of life.’ He could have said the same thing about the US’ increasing interest in providing aid to the Pacific.

Instead, and as suggested by the Lowy Institute, Australia may need to engage and be seen to be engaging with Pacific island states on the broader menu of shared issues. The White Paper may have touched on this strategy, albeit obliquely. In the context of aid, the White Paper stated that ‘trust-building policies will be directed towards information sharing and building contacts between specialists’ (p.248), and that Australia will engage with the region ‘more actively on wider peace-building questions’ (p.249). Furthermore, much of the aid-related material in the White Paper relates to interacting with other donors, particularly China and South Korea (p.248) and multilateral bodies, such as the International Labour Organization (p.249).

However, as with other parts of the White Paper, there is a lack of detail and substance on how Australia would work towards these objectives. More fundamentally the next step should be some creative thinking and then policy action on how Australia’s aid program can adapt to the region in the era of increased Chinese and US involvement, particularly by rethinking engagement with the recipient countries.