This analysis was prepared for the Vanuatu Business Review. It appeared in this month’s edition of the magazine.

“…graduation is a waypoint, not an endpoint” – LDC Graduation Strategy Report

It is tempting to talk about Vanuatu’s twice-delayed graduation from Least Developed Country status as an achievement.

It’s more useful to see it as a landmark on the long road to prosperity.

That landmark doesn’t simply disappear once we’ve passed it. It will remain visible in our rear-view mirror for some time to come. Vanuatu’s LDC Graduation Strategy report says it could be useful to continue measuring our progress against the old metrics for some time yet.

But what does graduation actually mean?

Measuring development

The idea of a list of Least Developed Countries arose in the 1960s. It was intended to be a special category for countries with the greatest social and economic development challenges and the least achievements so far.

The list was adopted by the UN in 1971. Within a decade, 31 countries had been rated as LDCs. Vanuatu joined the Least Developed Country club in 1985.

Vanuatu is only the sixth nation to have graduated so far. (One LDC was de-listed when its territory was integrated into another’s.) Samoa was the first Pacific island country to graduate, in 2014. Vanuatu was originally scheduled to follow it in 2015, but the devastation of cyclone Pam led to a request to defer that moment by five years.

Solomon Islands is slated to be the next Pacific island country to graduate, in 2024.

Is it time?

On paper at least, Vanuatu is long overdue for graduation.

When you look closer, though, the picture is less optimistic.

The LDC Graduation Strategy states that these high-level numbers hide “the reality that Vanuatu is a very unequal society, and that graduation does not reflect a large improvement in lifestyles for the majority of people, particularly those living in new urban settlements without access to land, and those living outside Port Vila and Santo.”

Ignoring the slow-rolling disaster that was 2020 for a moment, it is objectively true that Vanuatu has improved since independence. Lives, livelihoods and opportunities are far better now than they were then.

But we still have a long way to go. Assuming no major setbacks, the Graduation Strategy states “it would take over half a century to reach high income status.”

Graduation’s impacts

Most experts agree that Vanuatu’s graduation from LDC status is mostly symbolic. It’s a rite of passage more than a fundamental change.

Economist Nikunj Soni told the Business Review that the impact is effectively neutral “It is simply a change of category. Vanuatu will lose some trade preferences but nothing that is economically significant. Even in these cases there will be a five-year adjustment period, and even after that they could be continued bilaterally.”

Dan Gay agrees. He is a trade advisor who has worked with the government of Vanuatu and the United Nations. He is an expert on Least Developed Countries, and is one of the authors of our LDC Graduation Strategy.

 “I don’t foresee any major changes as a result of graduation,” he said.

Three major areas are affected by LDC status, he added. Countries are expected to receive easier access to Overseas Development Aid (or ODA); they get preferential trade access; and their membership in international organisations such as the UN are subsidised.

But donor countries don’t do as much for LDCs as they’re supposed to. As a result, development aid is likely to remain unchanged. In Samoa’s case, says Dan Gay, “aid actually went up (and loans down) after graduation in 2014.”

All of our largest development partners have all signalled that there will be effectively no change to the amount or kind of assistance they’re prepared to offer. This includes the EU, ADB, Australia, New Zealand, China, France, Japan, and the USA.

One expert suggested that Vanuatu has access to more aid than it can use at this point in time, so a nominal change in financing terms would have no impact. In any case, our most important relationship—with Australia—is a bilateral one. It’s been negotiated independently of our LDC status, and change is unlikely.

Modest decreases in assistance from France and the UK were going to happen anyway, and never played a very large role in the overall aid picture anyway.

China is the only case where even marginal concerns have been raised about aid continuity, but again, Vanuatu’s development status doesn’t really come into it. The real fear here is related to geopolitical concerns that will exist regardless of how worthy we are of development assistance.

China lacks formalised criteria for aid worthiness, but that’s a symptom of their more diplomacy- and policy-driven approach to overseas assistance.

Trade not likely to change

A survey of nine international trade agreements and treaties also shows minimal impacts.

Lost revenue opportunities with the EU, for example, are likely to impact less than 1% of government revenues.

One useful lever to ensure things don’t get out of kilter overnight is a regime called the Generalised System of Preferences, or GSP. It’s different from Most Favoured Nation status, which is used between trade partners at the World Trade Organisation to ensure equality.

In a nutshell, MFN states that the tariffs you offer to your best friends should be the same you offer to me.

The GSP, meanwhile, is a regime aimed specifically at Least Developed Countries. It provides them with special access to markets that is not available to others.

When Samoa graduated, it negotiated an extension to its GSP status with China, Japan and Europe. A similar extension would protect Vanuatu from future shocks, especially for kava and noni juice exports to China.

Even if we do nothing on the trade front, though, our anaemic export levels mean that the few products and services that might face increased tariffs won’t have any large-scale effects. Individual businesses may see localised drops in profits, but they aren’t likely to prove fatal.

The most likely scenario is their products will become marginally less competitive in those export markets.

Citizenship by (actual) investment

One useful idea that from the Graduation Strategy relates to our Citizenship by Investment programmes:

“The government should also leverage any means at its disposal to persuade potential foreign players to invest in priority products. At US$150,000 plus fees, Vanuatu citizenship is among the least costly in the world, and investors are not currently obliged even to visit the country, still less invest there. Vanuatu citizenship appears to be in such demand that the government could perhaps leverage this interest by obliging buyers to invest a certain sum in priority products or geographical areas.”

The Graduation Strategy notes that the USA, EU and numerous other jurisdictions require large local investment in their programmes. If Vanuatu were to follow suit, it could have several positive side-effects.

Requiring local investment would allow the country to get more economic bang out of each citizenship sale. It would also place every new citizen under additional scrutiny. Recent financial reforms involve close monitoring of commercial activity, and this could make us more confident that all our new citizens are good citizens. It would also slow the rate at which new citizenships are granted, which would make the programme look less like a short-term bonanza and more like a viable source of long-term revenue.

All of that would make the programmes easier to defend to the EU and China, both of whom are already asking awkward questions.

Domestic production needs more emphasis

The Graduation Strategy says that “by far the biggest challenge remains building domestic production rather than securing international market access”.

It adds, “The development of productive capacity is increasingly recognised as the critical challenge for trade development in LDCs.” 

Links exists between our graduation criteria and expanding productive capacity, but they’re not the key factor. Nonetheless, the strategy paper says, we should be focusing our policies on improving our ability to make goods for our own consumption. It suggests that measures should include industrial and trade policies, as well as macroeconomic measures and an active effort to enlist development support.

This would require more involvement for stakeholders: “a briefing with the Vanuatu Chamber of Commerce and Industry in October 2019 was the first time that several members reported having been given a full appraisal of the implications of graduation. If nothing else, such consultations and information sessions will reduce misinformation and avoid unnecessary complications in the run-up to December 2020 and afterwards.”

That hasn’t happened in a meaningful way. But it should, according to the government’s own document:

“The use of participatory techniques and public consultations is critical to all kinds of policymaking, not just LDC graduation. There is widespread recognition that participation brings political, legal and social benefits, improves compliance and reduces the risks of opposition. Participation can be costly but it is usually worthwhile. Stakeholders need to be kept up to date and made aware of the consequences of graduation.”

Something to celebrate?

Was Vanuatu’s graduation from LDC status worth a week-long shindig costing tens of millions of vatu? Yes and no.

Vanuatu is only the sixth country in the world to graduate. In that light, it’s a model global citizen, and can rightly be held up as an example to others.

One economist with significant experience in Vanuatu argued, “Graduation is a success story for all Vanuatu. It was triggered and supported by the important work of Vanuatu’s diplomatic teams in the past two decades, but it’s an achievement that involves everyone.”

He continued, “Graduation can be a powerful marketing tool to say to the rest of the world that Vanuatu is growing and is ready to do business.”

But in light of the dire economic prospects imposed on us by the COVID crisis and the death of tourism, any celebration at all seems ill-timed.

And external risks remain high, no matter what our status.

Dan Gay says, “Covid was just the latest calamity…. Peripheral nations like Vanuatu will always be exposed. Priority should be on resilience—which means… building up sources of domestic investment and financing which are not vulnerable to the vagaries of international markets.”

The list of challenges remains long, he says. The history of “attempting to expose the economy more to market incentives is a history of failure and dashed expectations. Goods trade as a percentage of GDP has gone down in Vanuatu over the last 20 years…. Foreign investment has been weak…. Trade negotiations haven’t delivered enough. Tourism, as we have seen, whilst being a valuable source of income, employment and foreign exchange, can also be very volatile”.

Nonetheless, says another economist, “It’s a positive sign to not be associated with the poorest—and in some cases worst-governed—states on the planet, and it also gives Vanuatu more weight in bodies like the UN.”

LDC graduation is like emerging from your teenage years and becoming an adult. On the face of it, you’re only a day older. Yesterday’s risks and opportunities remain. The future is no brighter or dimmer than it was.

Our responsibilities, though, are greater. And we have fewer excuses if and when we make mistakes.

If we take this moment to mature as a country, then perhaps we’ll have something to celebrate after all.

The Village Explainer is a semi-regular newsletter containing analysis and insight focusing on under-reported aspects of Pacific societies, politics and economics.

“Pacific island countries feel the effects of climate change more than other countries do, and the issues are real. The mitigation issues are real, the adaptation issues are real, and Australia very much wants to partner and work on those issues. And I think you’ll see a lot more intent in that regard, especially through our infrastructure financing facility focused on mitigation.

You’ll also see, I think, announcements that are listening and receptive to any work that Pacific island countries want to do to mitigate against climate change.

We believe that we’ll meet our Paris targets, and we’re very firm about that. Australia always meets its international targets. We’re a good international player. Not every … country does meet its targets. Some of them fail very badly, and don’t take the environment seriously. We do take the environment seriously, and we do believe that we have to listen very carefully on climate change to Pacific needs.

Do you see climate change as an emergency, as it’s being portrayed in Pacific island nations?

“Well, look, the language of climate change, I think—you know, coming from the field of politics—is often used in a way that isn’t helpful to discussion. That happens a lot in every country at the moment. Whatever language you use, the Pacific feels the impacts of climate change more than other countries do. There’s no doubt about it. That’s the real issue, and we accept that. And we accept that we have to do as much as possible to help with this.

But the language, of course, often gets hijacked by activists worldwide. It isn’t an issue between us. The issue is what we’re doing. The issue is whether we’re responsive and listening, and I think you’ll find that Australia will be there listening.

Alex Hawke, Minister for International Development and the Pacific
August 2019

The Pacific region is feeling the effects of climate change. More than many places in the world.

It’s costing us more and more as the years go by…

… in dollars, and in lives. We’ve gone from fatalities as a once in a generation event to death by weather as part of the landscape.

We need more than listening. We need a realistic global plan to get to zero. With a global target of 1.5 degrees total global temperature rise, we can console ourselves that this annual devastation will at least not get much worse.

Anything more than that will see all of these trends become much, much worse.

This is an emergency.

Yesterday, I sat down to a gloomy cyclone forecast and decided to play out the scenario of what would happen to Vanuatu if the worst were to happen.

I put the last grace notes in [sic] last night, and scheduled the result for distribution to all of you this morning.

This morning, I woke to find the forecasts were markedly less dire. The path projections had shifted markedly, and as I write this, Vanuatu might not get worse than a muddy, blustery week.

Which is fine. Because this is Vanuatu. We can do muddy, blustery weeks.

So this missive is just to tell you that the online version of my post differs somewhat from the one you received. I’ve updated it to reflect the current scenario.

[Vader Voice]: I am amending the essay. Pray I don’t amend it further.

Anyway, here’s the link. Thanks to every single one of you for subscribing, and please feel free to feed back to me with ideas, questions or comments.

Best,

Dan

Well, 2020 is here to tell us it ain’t over yet. Vanuatu woke up yesterday to a cyclone warning.

If things play out the way they’re looking today, then we’re likely in for a weather event affecting the half of the country that wasn’t badly affected by April’s cyclone Harold. Instead, it’s the half of the country that only just recovered from cyclone Pam in 2015.

uh, yay.

Now to be fair, today’s models show the path of the storm threading the needle between Fiji and Vanuatu. We pray that holds. But cyclones are like mad elephants. You can’t tell them where to go, only try your best to be where they’re not.

This was composed when the outcome looked a lot more dire than it does today. Nonetheless, I think the points made remain valid.

If the disaster response played out the way it did in April, we’re in trouble. It would not be the last straw for us, not nearly. But it would put us in a hole that would be very difficult to climb out of, economically, socially and politically.

It would make it impossible to avoid falling into that Lowy calls a Pacific Lost Decade.

But I don’t think it will. Here’s why:

1. The bloom is off the COVID-19 rose. We’re used to it now, and much more capable of dealing with logistics in suboptimal circumstances.

2. The planes are actually flying, and if we needed assistance from outside, there would be ways to manage that. This applies especially to emergency cargo flights, which were inexplicably held up by authorities last time.

3. This is callous, but I believe it’s accurate: It’s happening to Us. It shames me to say it, but my sense of things is that the people of west and south Santo, Malo and Pentecost didn’t have access to, or leverage over people in power that folks in Port Vila and Tanna do. I think there will be a great deal more concern and hurry this time.

   (I hope it’ll be better, regardless of the motivation. It’s hard to imagine what worse looks like.)

4. The logistics of the response are different, and are better-understood by all. We went through a storm that followed an almost identical path five years ago. April’s cyclone, on the other hand, consisted of a series of separate responses across dramatically different terrains, each with different constraints and requirements.

   Some of the areas struck by the worst winds hadn’t seen a really powerful storm since all the way back to independence. And when it came, the winds in the worst-affected areas were multiplied because of a unique combination of the wind’s force and direction and the terrain. Harold was—in some places—a perfect storm.

Vanuatu is better at dealing with cyclones than most places because we get so many. We can joke about naming the coming storm Cyclone 2020AintOver, but the fact is it’s just another of the many we’re going to see.

We know what the climate scientists have been saying: No likely change in frequency, but more severe storms are expected, over a longer season.

And for your sins, that’s what we’re getting.

But three national disasters in one year will dent any nation’s pace.

And this is not a healthy nation. The government still has some cash in hand, thanks to passports, but most people don’t. Businesses are distressed, shuttered or wobbling. Individuals are tapped out. Bank sales and personal vehicle sales have jumped. One realtor has resorted to mass SMS messaging to try and find buyers.

Next year, we’re supposed to claw back many of the losses we made this year. Or rather, we were. This will shorten the horizon on a lot of livelihoods.

And of course, COVID’s not over yet. With damaged living spaces, reduced access to clean water and sanitation, and massively increased hurdles to conducting any kind of vaccination programme, not to mention an overstretched and massively under-resourced public health service, any outbreak now would be made worse by this.

We’ll get by. We always do. But it will be harder this time, I fear, than at any time since independence.

The Village Explainer is a semi-regular newsletter containing analysis and insight focusing on under-reported aspects of Pacific societies, politics and economics.

Before we can discuss employment, we need to establish a few facts:

• Every single business owner in Vanuatu prefers to hire locally.

• Hiring someone from overseas costs more per year than a similarly skilled Ni Vanuatu. Relocation, permits, insurance, taxes and assistance are all expensive, as are inducements for the person to move to Vanuatu.

• Local workers are a better deal for everyone.

• Skilled Ni Vanuatu are already in high demand.

• There is no shortage of employment for citizens with advanced professional skills and experience.

Job creation is a responsibility of the private sector and growth should bring an increase in number of positions available overall. The private sector, government, ministry of education, and all of society should work together to increase the number of skilled and experienced Ni Vanuatu to fill those positions.

Broadening the employment base and improving access to technical, executive and management positions is a goal we all share.

The 2018 National Human Resource Development Plan is an excellent guide. It contains data and insights that are critical to any plan. Its findings should form the basis of this country’s employment plans in the future.

Basic principles of employment and economic growth

Education = employment

Until recently, successive governments neglected education. Even as late as 2013, less than 2 out of 10 young people managed to complete high school. While governments provided scholarships for many of these graduates, they spent hundreds of millions on the fortunate few, and far less on primary and secondary school students.

That has changed recently. The current primary school population will be better prepared for advanced education and training than the last one, but that’s years away.

The Human Resource Development Plan spends much of its 140 pages discussing education opportunities for the next generation. Focusing on education to drive employability and to provide professional and technical training is the right choice.

Even before the final report came out, the government of Vanuatu had committed massive funds to improving our education system. This is the right place to focus. It will take time and immense effort, but it’s the only way to ensure that employment levels improve for the next generation.

This country needs to give its existing policies time to work. There are no quick fixes here.

Skilled Ni Vanuatu workers are already in high demand

Vanuatu citizens with professional and technical skills seldom have trouble finding a job. The people who struggle most are unskilled and semi-skilled workers.

The Human Resource Development Plan makes it clear that of the small fraction of the workforce with work permits at the time, nearly all were in areas with a shortage of skilled Ni Vanuatu workers.

The only real exception to this was for missionary workers.

The problem Vanuatu faces is not demand for workers. It’s supply.

Employers prefer to hire locally whenever they can, because it saves them money. Why would they spend months of time and millions of vatu if they could find the right person right here?

Limiting the skills pool limits growth

Employers everywhere have to work hard to find people with the right skills and experience. The Human Resource Development Plan shows that Vanuatu has lots of people with the right attitude. But we have a shortage of people with key skills.

Here is what the Human Resource Development Plan found:

·      64% of all respondents agreed that ‘we cannot find enough staff with the skills we need’.

·      70% agreed that ‘most locally trained staff have only basic skills’.

·      89% agreed that ‘our staff have a good attitude toward their work’.

·      67% agreed that ‘we have to employ foreign staff’.

Employers would hire more local staff to these roles if they could. But there just aren’t enough of them. The problem is finding staff with higher education.

·      75% of respondents disagreed that ‘it is hard to find staff with secondary school qualifications’.

·      82% agreed that ‘it is hard to find staff with basic teaching qualifications’.

·      65% agreed that ‘it is hard to find staff with technician-level qualifications’.

·      63% agreed that ‘it is hard to find staff with relevant degrees and post-graduate degrees’.

Looking at who does get hired from overseas makes that clear. Aside from NGO workers and missionaries, only finance professionals numbered more than 20 in 2018.

By any measure, the number of foreign workers is very small. We’re talking about a dozen jobs or less here or there. Employers hire overseas when they cannot fill the position locally. In many cases, this is because the role requires specific qualifications or certifications.

Employers do not hire internationally if they don’t need to. That means they can’t do without these positions.

If we impose a shortage on these few key positions, we could slow down the entire economy.

Open economies are prosperous economies

All of the world’s most successful economies—both the largest and the most prosperous—have derived a key advantage from opening their labour force to all. The UK, France, Canada, the USA, China, Australia, New Zealand, Singapore… the list is long.

Open economies are healthy economies. Just ask our thousands of Ni Vanuatu seasonal workers.

The USA and China both relied heavily on skilled worker visa programmes to establish their world-class tech industries.

The lesson is clear: Skilled worker visa programmes build economies, and restrictions slow them down.

Employment breeds more employment

In a growing economy, the number of jobs increases faster than the population. Opening the door to more skilled workers means more businesses will set up shop here. More businesses mean more jobs for everyone.

The other side is equally true: Taking a job away from someone doesn’t mean it goes to someone else. It could just as easily remove the job entirely.

In many cases, removing the job of the skilled worker will mean several other jobs disappear as well.

If you stifle even a single business, you take many jobs out of the market. Not just the employees, but the mamas who sell them food, the store keepers who sell them goods and the staff who help them shop, the bus and taxi drivers who get them to work and back, and the people they employ when they save and build a home.

This can create a negative multiplying effect, a vicious circle of lost opportunities that can slow or even stop growth.

If we want to create more opportunities for Ni Vanuatu, we should create more opportunities for everyone.

Markets drive economies

Everyone needs rules. Fairness, openness and honesty are necessary for a market economy to function.

But that doesn’t mean that more rules make a better economy. Freedom is just as important. Companies, investors and workers all need to be free to make their own decisions. Putting too many restrictions on businesses is just like squeezing a balloon. Businesses move away from where the pressure is greatest, and set up where it isn’t.

In order for markets to work, governments need to understand and accept that the private sector can grow and develop on its own. And when companies prosper, they gladly contribute taxes, wages and wealth to the society that gives them a home.

Recommendations

It is incumbent on businesses to show that they’re acting in line with market forces and for the common good. We support reasonable oversight in this area.

Some of the fields on the proposed reserved list (auditor, accountant, project manager) are required to have professional qualifications. No such qualifications exist in Vanuatu and our preferred default is usually ANZ or Fiji standards. This presents a challenge. Currently only small numbers of Ni Vanuatu with such qualifications exist. There is a risk of these positions remaining unfilled.

1. Positions requiring professional certification should not be included in the reserved list, as the adverse effect on the economy would be too great.

2. Positions up to VT 400,000 per month in salary: Reasonable efforts must be taken to locate and recruit Vanuatu citizens before a non-resident can be hired.

3. Professional/executive positions paying over VT 400,000 per month should be open to competition, but subject to the same Immigration and ‘fit and proper person’ requirements as already exist.

I fear that the value of competition is being overlooked. Competition and the right to trade freely are the core of every market economy. We should all applaud every effort that helps Ni Vanuatu compete more effectively, and grown in success.

But the proposed measures would shrink the employment market, not grow it. They would achieve the opposite of what they intend.