South Pacific nation woos industry to its shore. Tonga blazes the duty-free path to economic growth

Goodbye, Hong Kong. Hello ... Tonga? Trailblazer Paul Pembroke has forsaken the crowds and sweatshops of the British colony and relocated his leather- jacket factory on a palm-studded South Pacific island.

Seventy golden-skinned Tongan women stare from behind their clucking sewing machines, smiling shyly as Mr. Pembroke escorts a visitor onto the six-month-old factory floor.

``They're great workers,'' beams the mustachioed president of South Pacific Leather Co. Ltd. ``In Hong Kong, the labor shortages meant we never ran at more than 60 percent capacity. In Tonga, there's an abundance of labor. They work well and they're conscientious; quality is outstanding. By next May, we'll have doubled the size of this factory.''

The move to Tonga was precipitated by China's pending takeover of Hong Kong in 1997. And the site shift is indicative of two regional trends. First, the exodus from Hong Kong to the South Pacific by a small but growing number of businesses. Second, the spread of a Tongan enterprise-zone concept which is now a model for developing countries.

The Tongan Small Industries Center (SIC), set up in 1980, is a response to the challenge of attracting companies to the poor island nations in the Pacific.

Although Tonga has the quaint distinction of being home of the last ruling monarch in Polynesia, its limitations are typical. Only 36 of Tonga's 170 isolated atolls are inhabited. Bananas, watermelons, and coconuts are its major exports, but these pay only a fraction of the nation's bill for imported flour, dairy products, canned meat, and cars. And until the SIC came along, the job outlook for the 96,000 resident Tongans did not extend much beyond farming, fishing, or working in the dried coconut factory.

But the Small Industries Center is attracting exporters and providing jobs for locals. There are 21 companies - including yacht, paint, and football manufacturers - employing some 400 Tongans on the 12-acre site now. Another 8-acre site is under development and 16 companies have fully booked the space. Another SIC is planned for Tonga's second largest island, Vava'u, says Sioeli Matoto, deputy secretary of Tonga's Ministry of Labor, Commerce, and Industry.

How does Tonga attract companies to the middle of nowhere?

One lure is the very low wages in Tonga. At $3.60 per day, they are four times lower than in Hong Kong. Also, Tonga offers duty-free access to Australia, the European Community, or the US market ``as good or better than from any other area in the world,'' says Pembroke.

His firm is the second largest supplier of men's leather jackets in Australia. For eight years, it paid a 50 percent duty on every Hong Kong-made jacket sold in Australia.

But from Tonga, there is no duty as long as the leather originates from New Zealand or Australia. Under the South Pacific Regional Trade and Economic Cooperation Agreement, nearly all products made in 13 South Pacific island nations get duty-free and quota-free access to Australia and New Zealand. Favorable trade agreements with the European Community and the United States are designed to foster development in these countries.

The Tongan government sweetens the trade pact by charging no duty on imported capital equipment, on raw materials imported during the first two years of operation, or on exported products. It collects no company taxes for the first five years.

Tongan wages are appealing to manufacturers. But productivity is about half that of Hong Kong workers, says Pembroke.

There are no unions here either. Sensitive to the perception of exploitation, Pembroke says, ``we provide free buses to and from work, a subsidized lunch program, uniforms, morning and afternoon breaks, a good lunch hour. Everything you'd expect in a good factory in a developed Western nation.''

Of course, being located mid-Pacific, some 1,990 miles northeast of Sydney has drawbacks. Communication and transport links are expensive, and unreliable.

Everything must be imported. ``In Hong Kong, if we ran out of zippers, we'd just go down the street and pick some up. In Tonga, you're forced to be well organized,'' says Pembroke.

Tonga's SIC is the ``showcase'' of this kind of development project, says Chong Chung of the Manila-based Asian Development Bank. The bank put up $380,000 to fund the project. And the concept is catching on because it overcomes a common development hurdle.

In the Pacific, land is scarce and ownership tends to be tribal or communal. Getting all ``landowners'' to agree to sell or lease land for a factory is often difficult. The government-organized SIC concept removes that obstacle, notes Bill McCabe of the South Pacific Trade Commission in Sydney.

The Asian Development Bank is working with Papua New Guinea, Vanuatu, and the Solomon Islands to create Tonga-like enterprise parks. Kiribati is also drawing up plans for a small industries center.