Just a few hundred metres offshore from Nassau, capital of the Bahamas, stands one of the world's busiest tourist resorts. Hotels, a golf course, casinos and even a reconstructed medieval French cloister are incongruously scattered on its 277 hectares. It used to be called Hog Island, a scrubby wasteland named after the semi-wild pigs that foraged around its interior. Its makeover came in 1962 when the US entrepreneur Huntingdon Hartford II persuaded the Government to change its name to Paradise Island and built a bridge, unleashing a torrent of tourism-related investment. More recently, South African billionaire Sol Kerzner has invested in the strikingly pink Atlantis Resort and Casino; reclusive residents have included Howard Hughes and the Shah of Iran.

The Bahamas' transformation from subsistence farming to mass tourism took place over the 20th century but really accelerated from the 1960s onwards. Today the islands welcome over three million tourists annually, with the industry accounting for more than 60 per cent of GDP and over half of employment. Growth in the 1990s was largely fuelled by hotel construction, but the trade gap widened steadily, as food, fuel and machinery were imported.

Veronica Garbutt / Panos Pictures

The glittering attractions of Paradise Island are mirrored in other resorts, especially on the larger islands of New Providence and Grand Bahama, which cater primarily to US tourists. Cruise ships are also big business, with the Bahamas featuring on most itineraries out of Miami. But many of the 700 islands and 2,000 cays that make up the archipelago are either uninhabited or have much smaller-scale tourism.

The proximity of these small islands to the United States (Bimini is only 50 miles from Florida) has shaped their history. Loyalists founded settlements after the American War of Independence, bringing their slaves with them, while from the 16th century pirates used the isolated cays as bases. The British imposed colonial rule in 1717, but it was American trade, legal and illegal, that underpinned the economy. Arms and supplies were smuggled to Confederate forces during the American Civil War, making the fortunes of the 'Bay Street Boys', the white merchant élite operating out of Bay Street, Nassau.

But it was booze that really lined the merchants' pockets when the Bahamas became the favoured departure point for Prohibition busters such as Bill McCoy ('the real McCoy') who smuggled rum and whisky to thirsty 1920s America. Economically dominant, the white traders stalled the advent of democracy, preventing adult suffrage until 1961. Soon afterwards the firebrand black politician, Lynden Pindling, shot to power, promising a fairer deal for the majority.

Pindling, who died in 2000, became synonymous with corruption (he engagingly described himself as 'less than perfect'), even though allegations against him were never proven. Yet during his period in office, the Bahamas became notorious for another illicit trade - the smuggling of cocaine into the US. Throughout the 1980s and 1990s sleek and speedy 'cigar boats' plied the waters between the islands and Florida, with US coastguards overwhelmed.

The CIA continues to describe the Bahamas as 'a major trans-shipment point for illegal drugs' and is also concerned that undocumented refugees from Haiti and Cuba use the islands as stepping stones towards the US. A large Haitian community, meanwhile, does the dirty jobs that Bahamians prefer to avoid.         

Few of the visitors to Paradise Island see these murkier sides to the Caribbean dream, though residents in more isolated islands such as Abaco have complained of growing drug smuggling. In this sense, the Bahamas is merely doing what it has done for most of its history: supplying American demand.

James Ferguson