For a remote and dry island nation with practically no natural resources, Cape Verde can consider itself fortunate. Long sustained by private remittances and public aid - in recent years the highest foreign aid per capita in Africa - it has managed to distance itself from the worst afflictions of the continent.

The islands are now at a significant turning point, about to graduate next year from the United Nations' list of least developed countries (LDCs) and preparing to enter an upgraded partnership arrangement with the European Union.

Cape Verde is one of the few African countries likely to meet most of the UN's millennium development goals. Among the highest spenders on education, with average life expectancy of over 70 and an HIV prevalence rate below 1 per cent, it has overtaken South Africa in the UN's human development index. In terms of governance and civil and political liberties, it has become a reference point among African nations.

Eager to break away from a relationship of aid dependency, its government has placed its bets on a future based on tourism, financed by foreign capital. Until its recent discovery as a year-round holiday destination, Cape Verde was overlooked by most of the world, a small country that did not fit on the map. But there is another reason it now claims unprecedented international attention: its exposure as an Atlantic crossroads for illegal traffic - of drugs, people and money - that it lacks the means to control.

About 500km off the West African coast, with a largely mixed-race population, the archipelago is culturally and geographically suspended halfway between Portugal and Brazil. It is known less for itself than for its emigrants - its only significant export - and in recent years for its extraordinary wealth of musical talent, led by a succession of internationally popular songstresses.

Cape Verde's beginnings were not auspicious. Uninhabited until the Portuguese came across the islands in the 15th century and started settling them with African slaves, they are poorly endowed, with only a tenth of its land suitable for farming. Portugal, while affording Cape Verdeans more favourable treatment than indigenous populations in its other African territories, left the country underdeveloped. A penal colony built in the 1930s for political offenders stands as a grim memorial to colonial rule.

With no university until six years ago, and no state university before this term, islanders relied on scholarships abroad, from Cuba to France. The country's viability was not always self-evident. In the early years after independence in 1975 the plan was to unite with Guinea-Bissau, Portugal's former West African mainland province. Today the two countries lie at opposite ends of the spectrum of Africa's successes and failures. Guinea-Bissau, unsettled and scarred by conflict, has a battered economy one-third the size of Cape Verde's for three times the population.

Cape Verde had its period of one-party rule up to 1990, but has since built a stable parliamentary system. Power has alternated peaceably between the two main parties, and its opposition acknowledges the existence of "a good democratic climate".

The country has, however, to overcome the legacy of physical isolation, not just from the outside world but between its dispersed islands, nine of which are inhabited, and which fall into windward and leeward groups speaking different versions of the Cape Verdean Creole (Kriolu) language.

Lack of capacity to police its coasts and waters, with a tiny and under-equipped coastguard, has caused growing concern in the US and the EU about the use of Cape Verde's strategic location for drug-trafficking, clandestine migration and money-laundering. Co-operation is being pursued on all these fronts, including US training visits. US officials reckon up to 30 per cent of cocaine en route from South America to Europe passes this way, with part of that being transhipped in Cape Verdean waters or landed, warehoused and passed on.

Control of new migration routes for boat people seeking entry to the EU through the Spanish Canary Islands has been central to negotiations with Brussels on a special partnership, expected to be formally approved by EU foreign ministers next week.

For Cape Verde, the partnership is an opportunity to draw closer to the EU, associating itself with the other volcanic Atlantic island groups, the Canaries, Madeira and the Azores, all of which are part of the EU and receive support as ultra-peripheral regions.

Other international links are also being strengthened. Last year, the islands hosted a military exercise to test the new Nato Response Force. Cape Verde was one of the first countries to qualify for the US Millennium Challenge Account aid programme, based on its record of governance and economic liberalisation. At the same time, like other African countries, it is building ties with China, with plans for a potentially important fish-processing base.

Lengthy negotiations to join the World Trade Organisation are almost complete. The government hopes to secure entry before the year's end, while Cape Verde still ranks among the least developed countries. José Maria Neves, prime minister, argues that it needs a period of preferential treatment. "We have lifted our head out of the water," he says. "Now we have to swim to the beach."

Although successful by most African comparisons, Cape Verde remains economically vulnerable, depending on imports of basic necessities and continuing, despite its new status, to receive food aid. It has few options for diversifying and a scarcity of domestic capital. Growth, which according to revised figures reached double digits last year, has had an uneven reach, with 37 per cent living below the poverty line and 20 per cent reckoned on less than $1 a day. Youth unemployment is estimated at 40 per cent. At the same time, the country suffers from over-administration and conflicts between different layers of authority.

Business complains of excessive "subjectivity" in the application of regulations.

Although it registers low on the scale of corruption, a leading Cape Verdean executive says: "You can't say it doesn't exist." The World Bank's latest rankings place Cape Verde at number 132 of 178 countries for ease of doing business.

Nonetheless, construction of hotels and holiday complexes goes on apace, and cobblestone roads are giving way to tarmac.

The islands, some rugged and mountainous, others flat and beach-fringed, have become a target for property investors. Cape Verde lies in an amenable time zone for European tourists, has a currency pegged to the euro, and the sun beats down all year.

The country has started getting more foreign investment than aid, and more tourism earnings than emigrants' remittances.

But it faces a challenge training the local workforce to fill the jobs that tourism creates.

There is a paradox in Cape Verde's ambitions as a tourist haven. The government aspires to "tourism of quality and high added value". But for that Cape Verde needs investment in basic services, and that requires high-volume projects. José Brito, economy minister, recognises: "What we want is not what we need."

The government is working on a masterplan, aiming to safeguard the islands' environment, arguably their greatest asset.

But the danger is that the country will be overtaken by a kind of development in which Cape Verdeans have limited participation and over which they have little control.

Source: David White and Peter Wise, Financial Times