Vanuatu’s recent growth has been led by the private sector, not by foreign aid. Foreign aid is no higher this decade than last.

Tourism and construction have been the two main growth areas for Vanuatu’s private sector. The average annual growth in visitor arrivals by air into Vanuatu was 12.5% in the period 2004 to 2008, compared to only 1.8% in the period 1995 to 2003. Cruise-ship visitors to Vanuatu have doubled since 2003. The private sector is reported to be investing heavily in expanding hotel capacity.

Construction growth increased from 7% in 2004 to 25% in 2008. Vanuatu’s construction boom has been driven by tourism growth, and by expatriates and nationals building houses.

Vanuatu’s upsurge in tourism and construction would not have been possible without an active land market. Customary land in Vanuatu can be leased for periods of up to 75 years. 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. Vanuatu’s land market is not well regulated and disputes over ownership are common. There is also discontent that landowners are not benefiting 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 many other Pacific island countries where the land market is dormant.

Vanuatu has also benefited from deregulation. Its 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 6 months. Air travel between Australia and Vanuatu grew by 19% 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. Flights from Sydney to Port Vila cost little more than flights from Sydney to Cairns. Vanuatu is now also served by Air New Zealand, Air Pacific, and Solomon Airlines.

Vanuatu has enjoyed macroeconomic stability in recent years, with relatively low inflation and a slight fiscal surplus in recent years. As many Pacific economies have discovered, however, this is a necessary rather than sufficient condition for growth.

Finally, social stability underlies Vanuatu’s recent success. 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, Vanuatu’s social stability, and its ability to make transitions of power peacefully – national elections in 2008 resulted in another change of government – have provided a supportive environment for economic activity, including by enhancing the country’s reputation among potential tourists.

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.

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 Recognized Seasonal Employer program which provides temporary farm employment in New Zealand. Over 1,700 ni-Vanuatu participated in the scheme in its first year in 2008. Vanuatu has also been included in Australia’s Pacific Seasonal Worker Pilot Scheme, which commenced this year.

Vanuatu’s future is by no means assured. All small island economies are easily destabilized and Vanuatu faces a range of challenges. But it is time to recognize that Vanuatu has good prospects for sustained, rapid growth. For five years, Vanuatu has enjoyed broad-based, private-sector-led and relatively rapid growth in excess of 5.5%. Tourism, construction and seasonal migration will continue to offer opportunities for new employment, not only for Port Vila but the Outer Islands.

There is a lot the Pacific can learn from Vanuatu.

This article draws on the findings of a Pacific Institute of Public Policy brief on Vanuatu written jointly with Nikunj Soni, which can be found here.