Vanuatu’s economic freedom
score is 56.4, making it the 108th freest economy in the 2010 Index. Its score has decreased by 2.0 points since last year, reflecting deterioration in six of the 10 economic freedoms, including investment freedom and trade freedom. Vanuatu is ranked 19th out of 41 countries in the Asia–Pacific region, and its overall score is below the world and regional averages.
Vanuatu has undertaken a number of reforms to strengthen its entrepreneurial framework and broaden its economic base. It scores well above the world average in fiscal freedom and monetary freedom. Tax rates are competitive, with a top personal income tax rate of 12.5 percent and no corporate taxes. Monetary stability is relatively well maintained. Vanuatu’s small financial sector has undergone significant reforms in recent years to combat money laundering and inefficiency.
Despite some economic transformation and annual economic expansion of more than 6 percent over the past five years, Vanuatu faces significant constraints on long-term economic development. Most of the labor force works in the agriculture sector, which accounts for only 20 percent of GDP. State interference in the economy is pervasive, and inefficient state-owned enterprises crowd out private-sector investment. Corruption and a weak investment climate remain serious impediments to overall economic freedom.
Background Back to the top
The Republic of Vanuatu is composed of 83 islands spread over 4,500 square miles of the South Pacific. Formerly administered by a British–French condominium, it achieved independence in 1970. Today, it is an electoral democracy that remains divided between its English-speaking and French-speaking citizens. Vanuatu has largely avoided the political unrest experienced by several of its neighbors in the South Pacific. The economy is dominated by tourism and agriculture, and over 80 percent of the population is involved in farming. In the years since 2003, Vanuatu has experienced solid economic growth.
Business Freedom68.7 Back to the top
The overall freedom to start, operate, and close a business is constrained under Vanuatu’s regulatory environment. Starting a business takes slightly more than the world average of 35 days, and the entry cost of launching a business is high. Obtaining a business license requires less than the world average of 18 procedures and 218 days. Bankruptcy is relatively time-consuming and costly.
Trade Freedom55.1 Back to the top
Vanuatu’s weighted average tariff rate was 15 percent in 2008. High tariffs, services market access restrictions, import taxes, import permit requirements, inadequate infrastructure and trade capacity, subsidies, underdeveloped private markets, and state participation in the marketing board for key agriculture exports add to the cost of trade. Fifteen points were deducted from Vanuatu’s trade freedom score to account for non-tariff barriers.
Fiscal Freedom94.9 Back to the top
Vanuatu has low taxes. The top income tax rate is 12.5 percent. There is no corporate tax. Other taxes include a value-added tax (VAT) and import duties. In the most recent year, overall tax revenue as a percentage of GDP was 18.9 percent.
Government Spending84.3 Back to the top
Total government expenditures, including consumption and transfer payments, are relatively low. In the most recent year, government spending equaled 22.9 percent of GDP. Vanuatu’s 24 state-owned enterprises are inefficient and in need of privatization.
Monetary Freedom76.8 Back to the top
Inflation has been relatively low, averaging 4.3 percent between 2006 and 2008. Many of Vanuatu’s state-owned enterprises are heavily subsidized, depleting budget resources and distorting price-setting mechanisms that would encourage private-sector development. Ten points were deducted from Vanuatu’s monetary freedom score to adjust for measures that distort domestic prices.
Investment Freedom20.0 Back to the top
In general, foreign investors receive national treatment, but all foreign investment projects must be screened and approved, and certain sectors are reserved for domestic investment. Foreign investors are generally subject to local hiring and training requirements. Barriers to private-sector development are significant and include inadequate infrastructure, a weak legal system, and a large state presence in the economy. Political unrest also adds to the cost of investment. Access to and use of foreign exchange may be subject to restrictions and approvals. Foreign investors may repatriate capital. Foreign investors may lease but not own land.
Financial Freedom40.0 Back to the top
Vanuatu’s small financial sector has been transformed in recent years. Supervision has been strengthened, facilitating efforts to improve the country’s reputation as a sound financial center. With a new commercial bank opening in 2007, Vanuatu now has four commercial banks, three of which are foreign-owned. The state-owned National Bank of Vanuatu has the largest branch network in the country. However, poor access to finance remains a serious impediment to private-sector development. Only 13 percent of the rural adult population has bank accounts, and without access to modern financial services, much of the population is unable to participate in the formal economy. Non-resident business activities dominate commercial banks’ transaction services. Reflecting the lack of efficiency in the financial system, capital markets remain very rudimentary.
Property Rights40.0 Back to the top
Vanuatu has a fairly efficient legal system based on British common law, but the judicial process is extremely slow. The constitution states that village or island courts, presided over by chiefs, should be established by parliament to deal with questions of customary law. Land disputes are a constant source of tension. All land is supposed to belong to traditional customary owners, except for public land. However, investors have acquired and subdivided large parcels of land, angering locals who have lost not only their control of the land, but in some cases direct access to the sea.
Freedom From Corruption29.0 Back to the top
Corruption is perceived as widespread. Vanuatu ranks 109th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2008, a drop from 2007. The law provides criminal penalties for official corruption, but the government has not implemented the law effectively, and officials engage in corrupt practices with impunity. Recently, several high-ranking government officials were charged with forgery and theft in connection with a large-scale fraud scheme involving electoral development funds.
Labor Freedom55.0 Back to the top
Vanuatu’s labor regulations are relatively rigid. The non-salary cost of employing a worker is high, and dismissing an employee is moderately difficult. The agricultural sector remains the most important source of employment, and the formal labor market is not fully developed.