Agriculture, tourism, offshore financial services, and cattle ranching are the four pillars of the economy. There is significant fishing activity, although this sector does not generate much foreign currency. Copra, kava, cattle, cocoa, and wood are among the exports, while machinery and equipment, foodstuffs, and fuels are among the imports. Mining activity, on the other hand, is insignificant.
While manganese mining ceased in 1978, a deal was reached in 2006 to export manganese that had previously been extracted but had not yet been shipped. There are no known petroleum deposits in the nation. The local market is served by a modest light-industry sector. Import tariffs and a 12.5 percent VAT on products and services provide the majority of tax income. Economic growth is hampered by the country’s reliance on a small number of commodity exports, susceptibility to natural catastrophes, and vast distances between component islands and major markets.
Agriculture is utilized both for consumption and for export. It provides a livelihood for about 65 percent of the people. Copra and kava production, in particular, provide significant income. Many farmers have abandoned food crop production in favor of kava farming, with the proceeds used to purchase food. Kava has also been utilized in clan and village ceremonial exchanges. Cocoa is also cultivated for the purpose of generating foreign currency.
In 2007, there were 15,758 families involved in fishing, mostly for consumption (99 percent), and the average number of weekly fishing excursions was three. The tropical environment allows for the cultivation of a diverse variety of fruits, vegetables, and spices such as banana, garlic, cabbage, peanuts, pineapples, sugarcane, taro, yams, watermelons, leaf spices, carrots, radishes, eggplants, vanilla (both fresh and cured), pepper, cucumber, and many more. In 2007, the following agricultural goods were valued (in millions of vatu – Vanuatu’s national currency): kava (341 million vatu), copra (195), cattle (135), crop gardens (93), cocoa (59), forestry (56), fisheries (24), coffee (12).
Tourism generates much-needed foreign currency. Vanuatu is generally regarded as one of the best holiday locations for scuba divers looking to experience the South Pacific region’s coral reefs. The wreck of the US luxury cruise liner and converted troop carrier President Coolidge on Espiritu Santo island is also a major draw for scuba divers. It was sunk during World War II and is one of the world’s biggest shipwrecks that is accessible for recreational diving. According to one estimate, tourism grew 17 percent from 2007 to 2008, reaching 196,134 visitors. The 2008 total represents a significant increase over the previous year’s total of 57,000 visitors (of which 37,000 were from Australia, 8,000 from New Zealand, 6,000 from New Caledonia, 3,000 from Europe, 1,000 from North America, and 1,000 from Japan. (Note: figures are rounded to the nearest thousand)). Tourism has been boosted in part by Vanuatu’s appearance on numerous reality television programs. The ninth season of the reality television series Survivor, titled Survivor: Vanuatu—Islands of Fire, was shot in Vanuatu. Two years later, the Australian edition of Celebrity Survivor was shot in the same location as the US version. In the middle of 2002, the government increased its attempts to promote tourism.
Financial services are a critical component of the economy. Vanuatu is a tax haven that did not share account information with other countries or law enforcement agencies until 2008. International pressure, mostly from Australia, pushed the Vanuatu government to start conforming to international transparency standards. There is no income tax, withholding tax, capital gains tax, inheritance tax, or exchange control in Vanuatu. Because of the tax advantages and favorable labor regulations, several multinational ship-management firms prefer to flag their ships under the Vanuatu flag (Vanuatu is a full member of the International Maritime Organization and applies its international conventions). Vanuatu is designated as a nation using a “flag of convenience.” Several file-sharing organizations, including Sharman Networks’ KaZaAnetwork and the creators of WinMX, have opted to incorporate in Vanuatu to escape regulatory and legal problems. As a result of international concerns, the government has pledged to strengthen regulation of its offshore financial center. Vanuatu gets the majority of its foreign assistance from Australia and New Zealand.
Cattle raising leads to the production of beef for export. The total value of cow heads sold in 2007 was estimated to be 135 million vatu; cattle were originally brought into the region from Australia by British planter James Paddon. Each family has 5 pigs and 16 hens on average, and although cattle are the “most important animal,” pigs and chickens are essential for subsistence cultivation as well as ceremonial and customary purposes (especially pigs). In 2007, there were 30 commercial farms (37 percent single proprietorships, 23 percent partnerships, and 17 percent corporations), with revenues of 533 million vatu and expenditures of 329 million vatu.
Earthquakes may have a detrimental impact on the island nation’s economic activities. A strong earthquake followed by a tsunami in November 1999 caused significant damage to the northern island of Pentecost, displacing hundreds. In January 2002, another strong earthquake caused significant damage in the city, Port Vila, and neighboring regions, and was followed by a tsunami. On August 2, 2007, another 7.2 magnitude earthquake hit.
In 2008, the Vanuatu National Statistics Office (VNSO) published its 2007 agricultural census. According to the study, agricultural exports account for roughly three-quarters (73%) of all exports; 80 percent of the population lives in rural areas where “agriculture is the main source of their livelihood”; and almost all (99%) of these households are involved in agriculture, fisheries, and forestry. Annual family income was 1,803 million vatu. Agriculture produced for their own home use was worth 683 million vatu, agriculture for sale was worth 561, gifts received were worth 38, handicrafts were worth 33, and fisheries (for sale) were worth 18.
Households spent the most money on food (300 million vatu), next on home appliances and other essentials (79 million vatu), transportation (59), education and services (56), housing (50), alcohol and tobacco (39), and clothes and footwear (17). Copra (485), kava (442), cocoa (221), beef (fresh and chilled) (180), wood (80), and fish (live fish, aquarium, shell, button) were among the exports valued at 3,038 million vatu (28). Industrial materials (4,261), food and drink (3,984), machinery (3,087), consumer products (2,767), transport equipment (2,125), fuels and lubricants (187), and other imports totaled 20,472 million vatu (4,060). There are a significant number of crop gardens – 97,888 in 2007 – with many on flat land (62 percent), slightly hilly slope (31%), and even steep slopes (7%); there were 33,570 households with at least one crop garden, and 10,788 of these households sold some of these crops over a twelve-month period.
In the early 2000s, the economy expanded at a rate of around 6%. This is greater than in the 1990s, when GDP increased by less than 3% on average.
The Asian Development Bank’s assessment on Vanuatu’s economy received mixed responses. It observed that the economy was “growing,” noting that it expanded at an outstanding 5.9 percent rate between 2003 and 2007, and praised “promising indications about government reform efforts in certain sectors,” but identified some constraining limitations such as “poor infrastructural services.” Because power is generated by a private monopoly, “electricity prices are among the highest in the Pacific” among developing nations. The study also highlighted “poor governance and invasive State initiatives” as factors reducing productivity.
In the March 2011 Euromoney Country Risk rankings, Vanuatu was rated 173rd as the safest investment location in the world. The Heritage Foundation and The Wall Street Journal rated Vanuatu as the 84th most economically free nation in 2015.