Question 21N.2.HL.TZ0.a.ii

Changing times for Vanuatu

1. Vanuatu is an island nation in the west of the Pacific Ocean. The islands are isolated with 80 % of the population living in rural villages as subsistence farmers. In recent years, Vanuatu has experienced strong economic growth driven by tourism, construction and foreign aid. However, Vanuatu has a United Nations (UN) status as the world’s most vulnerable country to natural disasters, and this vulnerability is intensified through climate change. Furthermore, economic development in Vanuatu is constrained by lack of education, limited public sector capacity, poor infrastructure and low labour market participation rates of women and youth.
   
   
2. Vanuatu currently faces growing income disparities between rural and urban areas. The poverty rate is currently at 3.8 % in the rural areas and 10.4 % in Port Vila, the capital city. Urbanization has led to large numbers of unskilled low-income workers concentrated in informal sectors in Port Vila. As a result, there is a shortage of housing, water and electricity services.
   
   
3. The UN categorizes Vanuatu as a Least Developed Country, but it will be moving to the higher category of Developing Country by the end of 2020. This will mean that some special assistance such as access to development finance, trade and market access, and technology transfer will be slowly withdrawn. However, there will be benefits for Vanuatu as it will gain greater access to commercial lenders, foreign direct investment (FDI) and climate finance funds.
   
   
4. To help with the transition to the new UN category, Australia and New Zealand are continuing aid projects to improve public sector capacity, increase economic participation of women and youth and improve access to electricity in Vanuatu. Moreover, Japan and China have significantly increased aid through grants and concessional loans. China is now the leading donor to Vanuatu.
   
   
5. The Vanuatu government has targeted the development of human capital through education, healthcare and infrastructure. Most of the aid from China has been used to develop new airports and shipping ports. This infrastructure will further help producers to access export markets and gain economies of scale. However, government institutions need to be improved so that the benefits of export revenues are redistributed to those in need. Historically, the lack of good governance has led to misuse of funds.
   
   
6. Economists believe the foreign aid spending could help attract FDI, which is important to help Vanuatu develop export markets in organic beef, sandalwood oil, tamanu oil and canarium nuts to provide areas for growth. Historically, growth was driven through import substitution by subsidizing manufacturing industries.
   
   
7. Vanuatu is currently reforming the tax system to lower the reliance on indirect taxes and implementing a progressive tax system to increase government revenue. The increased tax revenue will also decrease Vanuatu’s dependence on foreign aid.

[Source: Daily Post, 2019. Vanuatu poised to graduate from Least Developed Country status [online]. Available at https://
dailypost.vu/news/vanuatu-poised-to-graduate-from-least-developed-country-status/article_203172ef-98a8-5e83-
ab2c-515c4858ee86.html [Accessed 27 October 2020]. Source adapted.]