Economic Growth in a Vulnerable Island Nation: an Empirical Study of the Aid-growth Nexus in Vanuatu

Among all the island countries of the world, Vanuatu, a small island nation in the South Pacific with a population of 220,000 was once ranked as the most vulnerable economy on the basis of having the least resilience to withstand the adverse impacts of external and internal shocks. Vanuatu is currently designated, on the basis of quality of life, as one of the five least developed countries among the Pacific island countries, the other four being Kiribati, Samoa, the Solomon Islands and Tuvalu. Recognizing its special circumstances, including its high dependency on strategic imports with unstable export earnings, proneness to natural disasters and inadequate human resource skills, the international community has been assisting the country with generous external aid ever since its independence in 1980. Bilateral development assistance comes especially from the two regional powers. But, in terms of pure grants given on an annual basis, multilateral funding agencies, including the Asian Development Bank, have been assisting the country with concessional loans for projects and reform programmes. Despite these annual aid inflows, Vanuatu has been performing poorly which is reflected in the stagnation of its per capita income. This article seeks to examine the nexus between aid and growth in Vanuatu and investigates causes behind the country’s weak performance. Based on the analysis, the article then makes recommendations with some implications for policy.