Mircea Cantor, Sic Transit Gloria Mundi, 2012 (video still), HD video, 4 minutes. Courtesy the artist; Galerie Yvon Lambert, Paris; Dvir Gallery, Tel Aviv; and Magazzino, Rome. Sound: Semantron of Putna Monastery

The Biennale of Sydney, the largest arts event in the Asia-Pacific region, opened to this weekend under a brilliant blue late-summer sky. It must have seemed a welcome omen to curator Juliana Engberg (artistic director of the Australian Centre for Contemporary Art, Melbourne) and the 92 artists on view here, who have been laboring these last few weeks under some very dark clouds.

In the lead-up to this 19th edition of the biennial (Sydney's is the longest-running after Venice and São Paulo), a simmering human rights dispute concerning Australia's treatment of immigrants and refugees exploded into the art world, with unexpected effects and angry governmental retaliations. Yet while this biennial will be remembered for the intense political circumstances under which it opened, it also deserves attention—and in many cases high praise—for the art on display.

Engberg's biennial (Mar. 21-June 9) privileges desire, imagination and sometimes willful optimism, as reflected in her chosen title: "You Imagine What You Desire." (She's borrowed the line from George Bernard Shaw, and the Scottish artist Nathan Coley has reproduced it in a light piece on the facade of the Museum of Contemporary Art, a stone's throw from the iconic opera house.) It stretches across five sites: the city's two largest art museums, the Art Gallery of New South Wales and the Museum of Contemporary Art; the nonprofit venue Artspace; the large multidisciplinary arts center Carriageworks, housed in a former rail yard; and Cockatoo Island, a UNESCO world heritage site lying in Sydney Harbor that once served as a prison and a shipyard.

There are substantial contributions from Nordic artists—the Norwegian daredevil Tori Wrånes, dressed as an elf with a microphone-shaped tail, performed a poignant musical intervention on opening day—and a good deal of film and video. The Carriageworks section of the biennial, easily the best of the five, is overwhelmingly a black-box affair, with strong contributions from Henry Coombes (London-born, Glasgow-based), Laurent Montaron (born in Verneuil-sur-Avre, France, based in Paris), and Ane Hjort Guttu (born and lives in Oslo).

Many of the artworks on display take a dreamy, even mystical approach, such as Mircea Cantor's video Sic Transit Gloria Mundi (2012), in which a woman dressed in Grecian robes places lit dynamite fuses in the hands of two dozen prostrate followers.

Broader social concerns are not absent, however. An impressive video by Australian artist Susan Norrie documents anti-nuclear protests in Japan, while Italian-born, Berlin-based Rosa Barba's film of oil pumpjacks in Texas oscillates between historical investigation and ecological warning. In Interrogation (2009), a fantastic video by the Lithuanian artist Ignas Krunglevicius, the transcript from the police questioning of an alleged murderer flashes across two screens against a pulsing electronic score; some of the suspect's answers are omitted and replaced by bursts of solid color.

The exhibition, however, has been consumed in recent weeks by an intense dispute over one of its sponsors, Transfield Holdings, whose executive director, Luca Belgiorno-Nettis, had served as the biennial's chairman for 14 years. In Australia, asylum seekers who arrive via boat—a hazardous crossing which has taken hundreds of lives—are not permitted to remain in the country, but are instead sent to offshore detention camps in Papua New Guinea and Nauru. They can be detained indefinitely, and earlier this year a riot at the Papua New Guinea facility left one detainee dead and dozens wounded.

Although the United Nations' refugee agency has concluded that the program violates international law, most Australian voters continue to support it and Tony Abbott, the country's prime minister since September, has insisted the camps should be run "fairly, [and] if necessary, firmly." Administration of these detention centers has been outsourced to a corporation called Transfield Services, which won a $1.2 billion government contract this February. And Transfield Holdings, the private holding company with a minority interest in Transfield Services, is the Biennale of Sydney's "founding partner," having supported the exhibition since 1973.

Against this backdrop, 51 of the participating artists—not just Australians but also international artists such as Irish-born, London-based Eva Rothschild, New York- and Stockholm-based Emily Roysdon and Glasgow-based Scotsman Martin Boyce—wrote an open letter asking the biennial to consider severing ties with Transfield. Initially the biennial refused, leading nine artists to drop out of the show. Then, on Mar. 7, it changed course: the biennial ended its relationship with Transfield and Belgiorno-Nettis resigned from the board.

Since then, the Australian art scene has been embroiled in debates about corporate sponsorship and artistic responsibility; one government minister called the artists "viciously ungrateful," while another floated the possibility that arts organizations refusing corporate funding could lose government support too.

And it is not over yet. At an opening reception on Tuesday evening at the Art Gallery of New South Wales, Luca's brother Guido Belgiorno-Nettis—himself the chair of that museum's board—launched a withering attack on "activists and artists" who, he claimed, had damaged the biennial. Several of the artists who had protested were in the audience.

Despite all the controversy, one theme rippled through conversations at the five sites of the Biennale: both the participating artists and the festival's administrators had nothing but praise for Engberg, a hometown favorite who steered the biennial to completion despite the troubles. All but two of the artists who withdrew have returned to the exhibition, and in some ways her open-ended, art-for-art's-sake biennial—one where politics are present but rarely ideological, and which argues that art can change society through imagination and desire—might be just what Australia requires at this fractious moment. Biennials, lately accused of losing their relevance in the face of art fairs and digital media, still offer opportunities for political and social debate; this one does so to an unexpected degree.

A last-minute inclusion to the show served as a reminder of the stakes of this 19th Biennale of Sydney, and of the larger debate on Australia's immigration policy. At the Art Gallery of New South Wales is a neon sign spelling out a quotation from the Palestinian intellectual Edward Said: "Modern western culture is in large part the work of exiles, émigrés, refugees." The white neon shines bright against a black background, and if one looks long enough it leaves an imprint on the eyes, visible for long seconds afterwards. The wall text credits the artwork to Anonymous.