Flying the flag: How bitter conflict brought peace and prosperity to St anley

War dragged a forgotten outpost of the empire into the 20th century. Andrew Marshall continues our series on Britain's last colonies

You can smell the change in Stanley. Fifteen years ago, most people used peat-fired stoves to cook and on a Sunday lunchtime the warm, sweet odour made the cold air smell like fine malt whisky. Now, less than a sixth of the houses have stacks of the thick, chocolate-coloured slabs stacked outside; oil and electricity have taken over.

That is just one indicator of the huge changes that have transformed the Falkland Islands from a backward, agricultural outpost into a more recognisably modern, if still isolated and rural society. One of the less- noticed results of the 1982 conflict between Britain and Argentina has been rapid economic development, with incalculable consequences for the 2,300 inhabitants.

You can see the changes, too. The population of Stanley has increased from about 1,200 to 1,600 according to the 1996 census, and it is still growing.

The solid, whitewashed stone and timber houses, with their brightly coloured metal roofs, still line the waterfront of this tiny cathedral city on roads named after the great explorers, mariners and their ships. But now, on Jeremy Moore Avenue and Thatcher Drive, there are newer houses, many of them jaunty Scandinavian and Swiss timber prefabs. Fifteen years ago there was a handful of broken down and patched up four-wheel drives from the days when a Land-Rover was just a Land-Rover. Now there are shiny new Countys, Defenders, and Discoverys, as well as Mitsubishis, Suzukis and Toyotas.

To go with the cars, there are roads. Fifteen years ago, outside Stanley, in "camp", there were only tracks, deeply rutted, muddy trails that beat hell out of the toughest vehicles. When the military built the new airport and military base at Mount Pleasant they built a road to it, which has now been extended to San Carlos. It would still destroy the average family saloon, but an eight-hour drive can now be done in three.

A programme of new all-weather tracks is being constructed, connecting the isolated settlements and transforming life for the farmers. This, says Bill Luxton, one of the farmers, is "the greatest boon to civilised living. Now people can just take off, and they can drop in on their neighbours".

When the Argentine troops scrambled ashore here in April 1982, the Falklands were close to death as a community. The remoteness of the place and falling wool prices may have been at the root of the problem. But what God started, the Foreign Office and the Falkland Islands Company (FIC) had apparently set out to finish through under-investment, neglect and ineptitude. This was perhaps the most forgotten corner of empire, and government tacitly wanted shot of it.

The war changed everything. Mount Pleasant brought a twice-weekly Royal Air Force flight to and from Britain. Bureaucratic attention was at last focused on the islands' many social and economic problems. The commercial stranglehold of FIC was broken, farms were subdivided and sold off to people who had frequently been the victim of absentee landlords, and a programme of development was established to help drag the islands into the 20th century. Most important of all, an exclusive economic zone was declared in Falklands waters and a fishery was opened, bringing European and Asian vessels to chase the squid and fish in the islands' waters.

Nothing can change the Falklands' remote geography and their harsh, if beautiful, landscape. But society and the economy have been through a small revolution, stoked by the revenues from fishing.

The islands receive no income from British government funds; development is financed from fishing proceeds, and managed by the Falklands Islands Development Corporation. "It's taken an economy that was based on a single product, operated on a very feudal, low-wage system, and got well on the way to making it a mixed economy," says Hugh Normand of FIDC. A healthy nest egg has also been built up in case fishing income falls.

The number of farmers has declined; instead, the number of professionals, technical staff, and the sales and service sector has boomed, as new restaurants, offices, shops and transport services arrive. FIC, under new management, is a much more lively and well-managed organisation, spurred into action by competition and the shift out of farming. Nearly everybody has a telephone, instead of the radios that used to be the lifeline for most people.

There is a large and well- financed hospital, and a brand new school. The bars are newly decorated, and the old, rugged and rather grim atmosphere, redolent of rural Britain 50 years ago, has largely gone. There are barmaids with pierced noses; there is even a karaoke machine in one of the bars.

There are plenty of problems, of course. The biggest is that agriculture is still in sharp decline. "The farming industry is in a pretty difficult situation now," says Mr Luxton. The rural population has dwindled in 10 years from about 750 to 550, and it is aging. Low wool prices mean low incomes and little investment; many people bought their own farms only to see the debt become a millstone. Sheep farming may be economically marginal, but it is vital to the culture and society of the islands.

The future of fishing, too, is unsteady. Argentina has opened its own fishing zone, undercutting the Falklands and leading to overfishing of the valuable illex squid, which, apparently unaware of its political faux pas, divides its life between Falkland and Argentine waters.

Sometimes, the development seems skin-deep. Wealth has affected everyone's lives, but those who have gained in a big way form a small part of the population. The sense of equality that used to prevail - that everyone was in it together - is fading.

"There are people who are very concerned that oil wealth and fishing wealth shouldn't subvert traditional Falklands life and values," says Richard Ralph, Governor of the islands. But Bill Luxton feels little nostalgia. "I really don't hanker after the good old days at all, when we were short of money and we had an indifferent medical service at best," he says.

Yet the next revolution is already starting, even as the old one is still underway. Oil exploration licences have been issued and seismic surveying is underway. In the next five years, oil reserves may be confirmed and production begun. If that happens - and if the revenues are as high as some people think - then the islanders can burn banknotes, not peat, in their stoves.

The ultimate prize that would come with oil is greater self-determination. Already financially self-sufficient, the Falklands are still dependent on Britain for defence. The islands' legislative council has already said that it would like to repay the British Government for the costs of defence spending - about pounds 70m a year.

None of the islanders wants to be an Argentinian; and the war has strengthened that feeling. But many would like to have greater autonomy, again a view that has been strengthened by the war. The poor administration suffered by the islands before the war left resentments, and many islanders feel they could look after themselves - apart from defence. Some speak of independence, perhaps, in the far-off future, but most prefer to think about greater self-reliance.

At the time of the Falklands war, one motive often ascribed by outside critics to the British response was the acquisition of oil: London wanted to ensure that it got the reserves. That is almost certainly rubbish: the Foreign Office had no interest in retaining the islands at all until the Argentinian forces landed. The only reason the Falklands are still British is that Argentina invaded. All the more ironic, then, that this, one of the last of the red specks on the map, may yet turn out to be worth billions.

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