Saturday, 3 September 2011

Vanuatu’s recent economic success: lessons

Vanuatu’s recent economic success: lessons for the Pacific
August 4th, 2009
Author: Stephen Howes

Prior to 2004, Vanuatu, like many other Pacific island countries, had a long-term rate of economic growth little different from its population growth, about 2.5%. But economic growth in Vanuatu took off in 2004, and growth for the 2004-2008 period has averaged 6.6%.

Vanuatu’s growth acceleration is important for the Pacific. It dispels the myth that the Pacific island economies cannot grow, and it confirms the range of factors which are important for growth in the Pacific – a dynamic private sector, active land markets, deregulation, and macroeconomic and social stability.

Vanuatu’s recent growth has been led by the private sector, not by foreign aid.

Tourism and construction have been the two main growth areas for Vanuatu’s private sector.

Vanuatu’s upsurge in tourism and construction would not have been possible without an active land market.

Vanuatu has also benefited from deregulation.

Vanuatu has enjoyed macroeconomic stability in recent years, with relatively low inflation and a slight fiscal surplus in recent years. As many Pacific economies have discovered, however, this is a necessary rather than sufficient condition for growth.

Finally, social stability underlies Vanuatu’s recent success.... Throughout this difficult period, violence was limited. Vanuatu has a tradition of political instability – with nine prime ministers between 1995 and 2004. Perhaps the relative political stability enjoyed since then – with a single prime minister from end-2004 to end-2008 – has helped promote growth.

Social stability is a key factor behind Vanuatu’s ability to attract and retain expatriates, who bring investment and specialist skills to the economy. Its lack of an income tax is also an attraction for expatriates, though its role as an offshore financial centre seems to have played little role in its recent growth.

Vanuatu, like other Melanesian countries, has traditionally lacked access to foreign labour markets. However, Vanuatu was included in, and in fact is the biggest beneficiary of the Recognized Seasonal Employer program which provides temporary farm employment in New Zealand.

This article draws on the findings of a Pacific Institute of Public Policy brief on Vanuatu written jointly with Nikunj Soni, which can be found here.

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