2009 Index of Economic Freedom

Quick Facts

Population:

• 0.2 million

GDP (PPP):

• $0.8 billion
• 7.2% growth
• 2.9% 5-year compound annual growth
• $3768 per capita

Unemployment:

Inflation (CPI):

• 3.9%

FDI Inflow:

• $61.3 million

The 2009 Index is the first to assess Vanuatu's level of economic freedom. The country's economic freedom score is 58.4, making it the 92nd freest economy in the Index. Vanuatu ranks 16th out of 41 countries in the Asia–Pacific region, and its overall score is just below the world average.

Continuing political stability and considerable foreign investment in the tourism sector have allowed Vanuatu to gain some momentum in its economic growth in recent years. Vanuatu scores well above the world average in fiscal freedom and government size and moderately above average in business freedom and monetary freedom. Vanuatu has a low personal income tax rate of 12.5 percent for the highest bracket and no corporate taxes. Government spending is moderate, but state-owned enterprises are inefficient and need to be privatized. Monetary stability is relatively well maintained. Vanuatu's small financial sector has undergone a transformation in recent years in order to combat money laundering and inefficiency.

Corruption is rampant. Even though there are criminal penalties for official corruption, the law is not implemented effectively, and government officials abuse the law with impunity. The labor market remains rigid. Legal and regulatory inefficiency discourages entrepreneurial activity.

Background Back to the top

The Republic of Vanuatu is comprised 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 is still divided between its English-speaking and French-speaking citizens. It has largely avoided the political unrest experienced by several of its neighbors in the South Pacific. The economy is dominated by the tourism and agricultural sectors, and over 80 percent of the population is involved in farming. Since 2003, Vanuatu has experienced solid economic growth.

Business Freedom 69.0 Back to the top

The overall freedom to conduct a business is constrained by Vanuatu's regulatory environment. Starting a business takes about the world average of 38 days. The entry cost of launching a business is high. Obtaining a business license requires less than the world average of 18 procedures and 225 days. Bankruptcy proceedings are relatively time-consuming and costly.

Trade Freedom 63.0 Back to the top

Vanuatu's weighted average tariff rate was 11 percent in 2007. High tariffs, services market access restrictions, import taxes, 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 Freedom 95.3 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 17.8 percent.

Government Size 84.0 Back to the top

Total government expenditures, including consumption and transfer payments, are relatively low. In the most recent year, government spending equaled 23.1 percent of GDP. State-owned enterprises are inefficient and in need of privatization. Government spending is directed primarily toward the wage bill, leaving infrastructure and other public projects with little funding.

Monetary Freedom78.7 Back to the top

Inflation is relatively low, averaging 3.2 percent between 2005 and 2007. 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 Freedom30.0 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 and security concerns also add 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. Financial sector supervision has been strengthened, facilitating the country's efforts to improve its reputation as a sound financial center. Responding to international calls to address money-laundering problems, in 2002 Vanuatu made amendments to its International Banking Act that moved the responsibility for bank licensing to the National Reserve Bank (Vanuatu's central bank) from the Financial Services Commission. 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. Non-resident business activities dominate the commercial banks' transaction services. 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 also 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 in Vanuatu. All land is supposed to belong to traditional customary owners, except for public land. However, in recent years investors have acquired large parcels of land and have then subdivided them, angering locals who have lost control of land and direct access to the sea.

Freedom From Corruption31.0 Back to the top

Corruption is perceived as widespread. Vanuatu ranks 98th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The law provides criminal penalties for official corruption; however, 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 Freedom52.6 Back to the top

Vanuatu's relatively rigid labor regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is moderately difficult. The agricultural sector remains the most important source of employment, and the formal labor market is not fully developed.