The Vanuatu economy is based on agriculture, fishing, tourism and offshore financial services. Much of the agriculture is subsistence farming. As most exports are agricultural – for example, copra, coconut oil, kava, beef, timber, cocoa and coffee, Vanuatu is vulnerable to fluctuations in world commodity prices. The country has inherent economic difficulties (it is remote and isolated, so faces heavy transport costs, and it is prone to cyclone damage) and is therefore dependent on aid for development projects.
Vanuatu created an offshore tax haven in 1971, with a very liberal financial regime. Many banks set up in the country and by the late 1980s the offshore financial sector contributed 12 per cent of GDP. However, from the late 1990s this tax haven came under growing pressure from the OECD’s campaign to counter money laundering and many of the more than 100 banks closed. By 2003 only seven banks were able to comply with the tighter regulations the government introduced to meet the OECD’s requirements.
A long strike by public-sector workers in 1993–94 and subsequent dismissal of all those involved plunged the country into crisis, which was only resolved when the Asian Development Bank agreed (in 1997) to financial support to lift the economy, but its support was tied to a Comprehensive Reform Programme. At the core of this were structural reforms, including reducing the public sector, tighter fiscal control and boosting exports.
The government continued in the 2000s to be committed to encouraging the private sector and foreign investment, improving living standards and reducing economic inequalities. In 2001–02 the economy shrank by more than two per cent p.a. It then recovered and the growth rate strengthened, averaging more than five per cent p.a. over 2003–08, a recovery that has been attributed to sound fiscal and monetary management, increased private capital inflows and better donor relations. From 2009, in the adverse international economic climate, the economy grew more slowly, showing growth of one to two per cent p.a. in 2010–13, then picking up in 2014 (estimated 3.5 per cent).