Growth led by the private sector rather than aid

October 2009 Issue

Vanuatu has been identified as an example of gradual and stable economic success that could exemplify what Pacific islands countries could potentially achieve economically.
The observation was made in a recent paper from the Australian-based Pacific Institute of Public Policy (PiPP), prepared by PiPP executive director Nikunj Soni and Dr Stephen Howes of the Crawford School of Economics and Government at the Australian National University.
With an annual average growth rate of 6.6 percent between 2003 and 2008, the island nation is a demonstration of slow but gradual economic success, and growth has been underlined by social stability, among other factors.
“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,” the authors noted.
“Vanuatu suffered from a fiscal crisis in the late 1990s, two years of negative economic growth in 2001 and 2002, and intense political instability mixed with diplomatic tensions in 2004.
"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.
More fundamentally, underlying social stability in Vanuatu and its ability to make transitions of power peacefully—national elections in 2008 resulted in another change of government—have helped lay the foundations for growth, including by enhancing the country’s reputation among potential tourists and by promoting its prospects for inclusion in seasonal workers programmes.
Growth: Like many other Pacific islands nations, Vanuatu has enjoyed macroeconomic stability, the authors observed, and a relatively low inflation history. A slight fiscal surplus in recent years has helped lay growth foundations, with a number of other factors also contributing.
Vanuatu’s growth has been led by the private sector, not aid, while industries such as tourism and construction play a major role in its growth.
“Tourism is fundamental to the Vanuatu economy. Even before the current boom in 2002, tourism was estimated to be 17 percent of Vanuatu’s GDP and 12 percent of employment.
The average annual growth in visitor arrivals by air into Vanuatu was 12.5 percent between 2003 and 2008, compared to only 1.8 percent between 1995 and 2003.
Visitor arrivals reached 90,657 for 2008. This is about the level of Cook Islands and Palau, both of which were well ahead of Vanuatu five years earlier.
Cruise-ship visitors have to Vanuatu doubled since 2003, reaching 106,000 in 2008.
The private sector is reported to be investing heavily in expanding hotel capacity.
Construction growth accelerated from about seven percent in 2004 to 25 percent in 2008. Construction is being driven by tourism growth, by expatriates and locals building houses and now by the Millennium Challenge Corporation’s large road-building project,” the paper noted.
Bright performance: The bright performance of tourism and construction would not have been possible without an active land market, which has allowed for a stable investment and business environment.
Customary land can be leased for periods of up to 75 years, making its marketable.
“This has been effective in making land available for tourism and other uses. Most of Vanuatu’s main island, Efate, has been marketed under 75-year leases, and the land markets in the outer islands are now becoming active as well,” the authors wrote.
“The problem Vanuatu faces is not that it lacks a land market, but that the market is not well regulated, so that, for example, disputes over ownership are common. There is also discontent that landowners are not benefitting from subsequent sub-divisions and development.
"These issues need to be addressed since they raise important questions of equity and may lead to a social backlash, but they are very different issues to those which arise in countries which lack a land market.”
Deregulation also played a part in Vanuatu’s steady growth, in particular in ttelecommunications.
“Vanuatu’s opening up of the telecom sector in 2008 led to an increase in mobile subscribers from 23,000 to 100,000 in the space of just six months. Air travel between Australia and Vanuatu grew by 19 percent the year after Pacific Blue started flying to Vanuatu in 2004 from Brisbane, thereby breaking Air Vanuatu’s monopoly.
A further boost to tourism came in October 2008 when Pacific Blue started to provide competition on the Sydney-Port Vila route. Prior to October 2008, arrivals from Sydney were about 20 percent less than arrivals from Brisbane; by January 2009, they were 20 percent higher.
Flights from Sydney to Port Vila are now available for not much more than flights from Sydney to Cairns. Vanuatu is now also served by Air New Zealand, Air Pacific and Solomon Airlines.”
In recent times, it gained access to foreign labour markets, boosting its growth prospects.
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 Recognised Seasonal Employer programme which provides temporary farm employment in New Zealand. Over 1700 ni-Vanuatu participated in the scheme in its first year in 2008, and the total cap on participants from the region has recently been increased from 5000 to 8000.
Vanuatu has also been included in Australia’s Pacific Seasonal Worker Pilot Scheme, commencing in 2009. This will initially involve smaller numbers, but has the potential to grow bigger.
While there are still risks to Vanuatu’s growth prospects such as the impacts of the global recession, the authors believe its prospects for long-term growth should be recognised.
“Of course, with the global recession, there is enormous uncertainty about Vanuatu’s short-term prospects, as there is for most countries. Vanuatu has a long way to go, and faces a wide range of reform challenges.
"These include improving health and education indicators, promoting further structural reform, reducing corruption, maintaining social stability, ensuring law and order, and promoting equity,” they said.
“But it is time to recognise that Vanuatu has gone much further than achieving macroeconomic stability and that it has good prospects for long-term growth.
For five years, Vanuatu has enjoyed broad-based, private-sector-led and relatively rapid growth. Tourism, construction and remittances will continue to offer opportunities for new employment, not only for Port Vila but the outer islands.
Traditionally, analysts have distinguished between the relatively good performance of the Polynesian countries (Samoa, Tonga, Cook Islands) and the relatively poor performance of the Melanesian countries (Vanuatu, Solomon Islands, Fiji and PNG). That Vanuatu’s recent performance is making the contrast between these two regions less stark is a welcome development,” the authors wrote.