National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 2018-2022

4. Vanuatu sector-specific and horizontal challenges to market development 56 Figure 13: Plant capacity use rate among leading manufacturing companies in Vanuatu 25 5. Vision and objectives of National Industrial Development Strategy 64 Figure 14: World Bank Doing Business Index, Vanuatu 2017 27 Figure 15: Economic Complexity Index for Vanuatu and peer countries 1998-2014 31 6. National Industrial Development Strategy: Figure 16: Economic Complexity Index 2014 vs GDP per capita 2015, Vanuatu vs peer countries 31 9 programmes and 35 supporting projects 68 Figure 17: Overview of the coconut value chain 33 Figure 18: Example of complex capabilities associated to simple products 33 Programme 1: Smart Trade 70 Figure 19: Product space for Vanuatu 2005 and 2014 35 Programme 2: Seamless Trade Administration 72 Figure 20: Linking geographic variables with the product space for Vanuatu 2014 37 Programme 3: Smart Investment 74 Figure 21: Matching Vanuatu products with geographic and demographic characteristics 2014 41 Figure 22: Product opportunities for Vanuatu 2014-2027 41 Programme 4: Vanuatu as a Brand 74 Figure 23: Core capabilities and spill-over effects to adjacent industries in Vanuatu 2014-2027 43 Programme 5: Drive MSME 76 Figure 24: Linking capabilities, know-how, and product opportunities for Vanuatu 2014-2027 43 Programme 6: Develop and Retain Talent 80 Figure 25: Vanuatu Product Complexity Index vs Revealed Comparative Advantages for agribusiness products 2014-2017 45 Programme 7: Support Infrastructure 82 Figure 26: Overview of the Sector Prioritization Index 45 Programme 8: Ignite Innovation 84 Figure 27: Vanuatu Sector Prioritization Index 2014 47 Figure 28: Overview of the Agribusiness Prioritization Index 47 Programme 9: Governance and Monitoring 88 Figure 29: Vanuatu Agribusiness Prioritization Index -most promising products 2014 49 Figure 30: Vanuatu Agribusiness Prioritization Index -animal sector 2014 49 Conclusion 96 Figure 31: Vanuatu Agribusiness Prioritization Index -vegetable sector 2014 51 Figure 32: Vanuatu Agribusiness Prioritization Index -other food sector 2014 51 Appendices 97 Figure 33: Overview of the furniture value chain 53 Appendix 1: Acronyms 97 Figure 34: Overview of coconut product applications 57 Figure 35: Vanuatu vision and strategy for industrial development 2018-2022 65 Appendix 2: Methodology 98 Figure 36: Horizontal and Vertical policies to achieve Vanuatu industrial vision in 2018-2022 65 Appendix 3: References and Background Documents 107 Figure 37 Timing and impact of nine core programmes for Vanuatu’s Industrial Development Strategy 2018-2022 69 Figure 38: Smart trade programme overview 71 Figure 39: Seamless Trade Administration programme overview 73 Figure 40: Smart Investment programme overview 75 Figure 41: Vanuatu as a Brand programme overview 75 Figure 42: Drive MSME programme overview 77 Figure 43: Develop and Retain Talent programme overview 81 Figure 44: Support Infrastructure programme overview 83 Figure 45: Ignite Innovation programme overview 85 Figure 46: Governance and Monitoring programme overview 89 Figure 47: Overview of the new Industrial Development Council 89 Figure 48: Ministries and departments central to implementing the NIP 91 Figure 49: Implementation plan for National Industrial Development Strategy 94 This policy document is produced by the Department of Industry Printed in Vanuatu 2 National Department Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu of Industry ©Department of Industry, 2018 3 Ministry of Trade, Industry, Commerce and Tourism Government of the Republic of Vanuatu Department of Industry FOREWORD ACKNOWLEDGEMENTS We have good reason to be proud of Vanuatu. This report on “National Industrial Development Strategy 2018-2022: It is one of the most culturally diverse countries Shaping the Future of Value Addition in Vanuatu” was funded by Australia’s in the world and witnessed tremendous Governance for Growth Programme with support of the United Nations economic development over the last decade. Industrial Development Organisation (UNIDO) and Government of Vanuatu. It is now a premier destination for tourism, The target audience is policymakers, the private sector, the donor a vibrant financial centre, and a reputable community, independent analysts and other development stakeholders. source of unique, high-quality products such as coconut oil, sandalwood oil, kava, tamanu The report was completed by Whiteshield Partners, a global public policy and nangae oil, organic coffee, cocoa, and and strategy advisory firm, originating from the Harvard and OECD albacore tuna. communities. Whiteshield Partners leveraged its knowledge mapping intellectual property to deliver the project. Anthony O’Sullivan, Partner The challenge is now for our country to strengthen value addition by with Whiteshield Partners, led the project supported by Nadia Klos, Senior expanding the nascent industrial sector in a manner that is both sustainable Associate, Elena Balter, Senior Economist and Roy Amos Pakoasongi, and inclusive. independent Local Consultant. Fortunately, we are not starting from scratch. As the new National Industrial The National Industrial Development Strategy could not have been Development Strategy 2018-2022 shows, our industrial capabilities – as completed without the unfailing support of the following people: Acting defined by economic complexity – are growing faster than some other Director General George Borugu for his support and guidance in terms of countries in the region such as Solomon Islands or Papua New Guinea and overall policy direction; Noel Kalo for his leadership in the review process getting closer to those of Fiji. Building on these capabilities and addressing since 2016 up to the closing of the project; Lazarus Aising for his tireless priority policy barriers we can progressively move up the value chain to assistance in collecting data, coordinating interviews and ensuring the reach a target of 10% manufacturing value added in GDP by 2022. smooth advancement of the project; James Tatangis and his team for Achieving this ambitious target will require a concerted effort from all successfully coordinating the financing of the project; Director of Industry, stakeholders, involving the whole-of-government, private sector as well as Jimmy Rantes for his general supervision while doing his studies overseas ; international financial institutions. Anders Jönsson for his expert advice to the project team; Christine Kapalu and her team in coordinating administration and traveling arrangements; I am confident that under the leadership of our government and with the Flaviana Rory, Donalyne Naviti and Margaret Alilee for logistic support support of our new Industrial Development Council, bringing together of meetings and stakeholder participation in the consultation process; government and private sector representatives, we will deliver on new Provincial Officer Keith Antfalo and his team for their support and National Industrial Development Strategy and achieve greater prosperity cooperation in the consultation with the provinces; Andrew Baha for driving for all our citizens. the team around Port Vila and the provinces during the consultation, and the whole DoI team for being helpful and supportive in a million ways. We would like to acknowledge government agencies, NGO's, the private sector and international partners who participated in the consultation and formulation process. Last but not the least we would like to thank Australia’s Governance for Growth Programme for providing the funding for this project, and UNIDO Honorable Bob Loughman MP for their inputs under the framework of Country Programme of Technical Deputy Prime Minister and Minister of Tourism, Trade, Cooperation 2016-2020. Industry, Commerce and Ni-Vanuatu Business 4 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 5 Department of Industry Executive Figure 1: Nine core programmes for Summary National Industrial Development Strategy 2018-2022 Source: Vanuatu is a country with unique characteristics and Whiteshield Partners rich diversity… Vanuatu is an archipelago with 278,000 inhabitants spread over 83 islands across 12,250 km2 of the Pacific Ocean. With over 100 distinct languages, it is one of the most culturally diverse countries in the world – and its tropical islands, volcanic landscapes, untouched rainforests and consistently warm weather make it a premier tourism destination in the heart of South Pacific. Abundant agricultural resources, moderate wages, and English and French speaking labour force offer great potential for industrial development and related services. …with untapped potential for economic growth Starting from a low base – with just 3.8%1 of manufacturing value added as a % of GDP – Vanuatu has untapped potential to move up the industrial value chain. Economic complexity, a measure of manufacturing capability, is growing faster in Vanuatu than in neighbouring countries such as the Solomon Islands or Papua New Guinea, and is moving closer to Fiji. By addressing priority policy barriers, namely with targeted skills, infrastructure, trade and investment policies, the country can hope to achieve a target of The Vanuatu Agribusiness Prioritisation Index prepared for this report 10% manufacturing value added in GDP by 2022. indicates that locally grown primary products with greatest value-added potential include: fish for processing, coconut, tamanu, and sandalwood for oil extraction, coconut for paste and powder, and different fruits for juice The national industrial vision is to fully unlock concentrate. Vanuatu's capabilities to compete in niche markets with outstanding quality of products and services at To achieve the industrial vision, a series of policy premium prices in a sustainable and inclusive manner barriers must be addressed at the vertical and Building on its comparative advantages in animal, vegetable and other food horizontal levels products, as identified through the Whiteshield Partners Sector Prioritisation Index, Vanuatu can expand its industrial base by solidifying, strengthening, At the vertical level, policy constraints mainly involve different product and gradually expanding its core capabilities to spill over to other sectors sectors within agribusiness. For instance, rapid and effective resolution of and establish the foundation for value-adding structural transformation. land ownership rights is fundamental to the future development of the The skills, market knowledge, and methodological expertise involved in coconut, cocoa and coffee based sectors. At the horizontal level, policy growing and processing coconuts, tamanu nuts and sandalwood could barriers relate to trade, investment, skills, support of micro, small and underpin, for instance, the nascent cosmetics industry. medium sized enterprises (MSMEs), infrastructure and innovation. 1 World Bank, 2015 6 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 7 The proposed five-year industrial strategy comprises 9 programmes and 35 projects to unlock Vanuatu’s full value-adding potential Nine programmes, containing 35 projects or initiatives, should help Vanuatu address remaining horizontal and vertical barriers and unlock its full potential for industrial development (see Figure 2). A few initiatives to highlight include: • Launch a “Made in Vanuatu” brand and “Buy Vanuatu” network targeted at the thriving tourism sector and niche export destinations. • Develop an “Export Toolkit” for SME’s in Vanuatu looking to grow internationally. • Develop and expand vertically integrated cooperatives to all relevant agribusiness sectors. • Ignite incremental innovation through a government sponsored innovation fund that co-invests in viable product and service ventures. • Support investments that place an emphasis on renewable energies, replanting and recycling to promote sustainable industrialisation. • Prepare Vanuatu for manufacturing 4.0 by further investing in digital infrastructure and the associated skills to harness digital technologies. • Launch a flagship incubator for 100 local and foreign entrepreneurs to accelerate industrial entrepreneurship. Implementation of the strategy should start immediately Implementation of the strategy will be driven by a newly formed Industrial Development Council bringing together business and government decision makers to take stock of progress and steer the direction going forward. A number of “low hanging fruit” projects can begin immediately, such as the development of an export toolkit for SMEs or the launch of a “Buy Vanuatu” network targeted at the tourism sector. Once the Council of Ministers has adopted the new industrial strategy, additional budget will need to be secured for medium to longer term projects, such as the launch of the innovation fund and the incubator. 8 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu Department of Industry Approach and Figure 2: Analytical framework for Analytical Framework National Industrial Development Strategy 2018-2022 The development of National Industrial Development Strategy 2018-2022 was Source: conducted over 4 months, between end of August and end of December 2017. Whiteshield Partners It followed an analytical framework structured around six steps (see Figure 1): Step 1: Assessment of Vanuatu’s economic situation and market dynamics: leveraging both internal and external sources, a review of Vanuatu’s economy was conducted with a particular focus on the industry and taking into account the demand / supply structure and development of relevant markets. Step 2: Mapping of Vanuatu’s productive capabilities: revealed comparative advantage (RCA), product complexity index (PCI), product- market space, and value chain analysis were applied to identify the country’s core capabilities to help it move up the value chain. Step 3: Leveraging Vanuatu’s capabilities: based on the analysis conducted in steps 1 and 2, a general Sector Prioritisation Index, as well as an Agribusiness Prioritisation Index were developed, combining Vanuatu’s comparative advantage and the intrinsic attractiveness of potential products / services for the country along each step of the value chain. Step 4: Identifying priority policy barriers: this step served to map out pivotal vertical and horizontal structural and policy constraints that should be addressed for Vanuatu to capture and develop the potential already inherent in the capabilities of its economic structure. Step 5: Development of vision and objectives of National Industrial Development Strategy: this step grouped and organised the measures needed under 9 programmes and 35 supporting projects that would impact industrialisation, GDP and jobs by 2022. Step 6: Development of a roadmap and governance to implement National Industrial Development Strategy: a detailed plan of actions was developed for each of the 9 proposed programmes, including concept overview, impact analysis, key actions, timeline, roles and responsibilities, budget and key performance indicators. An overall governance for the Industrial Strategy was also defined. The implementation of steps 1 through 6 were supported by a series of public and private sector consultations and workshops held between September and November 2017, focusing on the islands of Port Vila, Santo and Malekula and Tanna. A validation workshop for the concept of the National Industrial Development Strategy was organised with public and private sector stakeholders in Port Vila on 14 November 2017. 10 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 11 Department of Industry 1 Introduction to Vanuatu 12 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 13 Department of Industry Vanuatu is a country with Figure 3: Snapshot of the 1 Vanuatu economy unique characteristics and Source: rich diversity Whiteshield Partners Vanuatu has unique characteristics that should guide its industrial strategy Located in the South Pacific, Vanuatu has all the benefits and constraints of a small island developing state. With one of the smallest populations in the world scattered across 83 islands, the economy is driven by agriculture and tourism owing to high levels of fertile land as well as agricultural and maritime endowments (see Figure 3). While Vanuatu’s abundance of natural resources provides a solid platform to move up the processing value chain, the small size of the economy, weak transport and energy infrastructure and high overall cost of doing business are among the weaknesses that must be addressed (see Figure 4). Figure 4: SWOT analysis of Vanuatu's economy Source: Whiteshield Partners Coconut trees at dawn in Malekula island 14 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 15 Department of Industry The economy is still highly dependent on Figure 5: GDP growth and commodities and subject to volatility net FDI inflows 2003-2016 GDP growth has stagnated at around 2%2 over the last five years with a Source: sharp drop experienced in 2015 due to Cyclone Pam, while Foreign Direct Whiteshield Partners Investment (FDI) has continued to be volatile, oscillating between 10 and 60 Data: million USD annually3 over the last decade (see Figure 5). World Bank, 2016 FDI estimate – According to the IMF, economic growth of 3-4% in real terms is likely to based on growth rate in national continue in the short term, reflecting the end of reconstruction and recovery4. data (VIPA) Booming external demand for kava, one of Vanuatu’s most important cash crops, and copra prevent a more pronounced slump – highlighting as well how vulnerable the economy is to external factors. Manufacturing value added, at around 4% of GDP in 20155, is well below neighbouring islands such as Fiji (see Figure 6). Consumer price inflation is modest, at around 1%6, due to a conservative monetary policy. This, coupled with external debt under 30%7 of GDP, keeps lending interest rates relatively low for such an exposed economy. This makes Vanuatu’s risk profile, in particular given that it is often seen as one of the most vulnerable countries in the world to natural disasters, relatively modest. CPIA macroeconomic management credit rating is 4 (on a scale from 1-6), higher than the average for East Asia and the Pacific. Figure 6: Manufacturing Value Added for Vanuatu and peer countries 2002- 2015 Note: 2015 data point for Vanuatu is estimated based on National statistics office data growth rate Source: Whiteshield Partners Data: World Bank, National Statistics Office for 2015 data point estimate 2 World Bank, 2003-2016 3 World Bank, 2003-2016 4 CIA Factbook 2017 5 World Bank, 2003-2016 6 World Bank, 2016 7 World Bank, 2016 16 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 17 Department of Industry Figure 7: In this trade dependent country, external imbalances Breakdown of Vanuatu's exports are mounting but manageable… and imports by country, average 2009-2014 At close to 100% of GDP8, Vanuatu’s trade, is essential to the economy. The country is highly import-dependent, in particular oil and manufactured Note: High levels of products and industrial equipment, while its exports, largely commodities, imports and remain subject to external shocks. For the past decade, this has resulted in exports with Poland are related to trade a negative trade balance, with a steep drop due to reconstruction in 2015 – in upgrade ships, similar to other countries in the region. vessels and tug boats Exports are dominated by a few commodities, along with some trade relay Source: and ship upgrading, with little value-added, while imports are significantly Whiteshield Partners more sophisticated (see Figure 7 and Figure 8). Data: Non-fillet frozen fish and scrap vessels are the two largest export product BACI Comtrade, Vanuatu Statistics categories9. Vanuatu is a WTO member and ratified the Pacific Island Office, World Bank Countries Trade Agreement PICTA in 2005. It is also a member of the Melanesian Spearhead Group, whose FTA has entered a second phase. Both agreements will be extended to services, with significant potential for Vanuatu. An Economic Partnership Agreement with the EU has shown little effect so far, but the potential could be explored further. The current account deficit remains modest, at 9% in 201710, as outbound reconstruction payments on the services account slow, service exports (largely tourism) increase, and seasonal remittances – the second largest source of foreign exchange after tourism – from temporary workers in Australia and New Zealand continue to grow. Donor inflows still underpin Figure 8: the economy, but these will fall as reconstruction finishes. The local Breakdown of Vanuatu's exports currency has seen real devaluation against most leading currencies over and imports by the past decade, which should provide some relief and, as this strategy aims sector, 2005 and 2014 to support, additional opportunities to expand exports and gradually build underlying trade competitiveness. Note: includes passenger and goods transport, ships, Volatile FDI inflows are concentrated in a few sectors boats and tugs, lifeboats Net FDI inflows, at around 5% of GDP over the last 5 years, fluctuate strongly. Source: Whiteshield Partners This is slightly lower than other countries in the region, and a far cry from South and East Asia overall.11 Data: BACI Comtrade, The potential of FDI outside of tourism, retail, and primary sectors remains World Bank largely unexplored. Vanuatu has a welcoming offer for foreign investors, with no income or capital gains taxes, straightforward regulations, and a substantial degree of financial freedom compared to other countries in the region.12 8 World Bank, 2014 9 www.atlas.mit.edu 10 World Economic Outlook, 2017 11 World Development Indicators, World Bank 2017. 12 Note that the OECD has classified Vanuatu as a tax haven. 18 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 19 Department of Industry Yet Foreign Direct Investment (FDI) contributes minimally to the growth Figure 9: of manufacturing value added. Most of it flows into services, particularly Breakdown of Vanuatu’s FDI wholesale or tourism, and only a fraction flows to the primary sector and inflows 2012 and processing activities (see Figure 9). 2016 Note: includes passenger The economy relies on the primary sector and tourism and goods transport, ships, boats and tugs, Agriculture, forestry, and fishing – in particular small-scale agriculture – lifeboats provide a living for 50% of the economically active population and make Source: up 80% of goods exports, while tourism and, increasingly, niche offshore Whiteshield Partners financial services are growing mainstays of the economy. Services, at 60% Data: of GDP13 and 10% of employment, is the most important source of income. Comtrade, World Tourism is a leading light of the economy, with growing potential as a new Bank cruise ship terminal and an upgraded airport increase capacity. A small industry sector caters largely to the local market, hovering at around 9% of GDP – significantly below East Asia, neighbouring Fiji, and Pacific islands overall14. A leading feature that influences all economic activities is geographical remoteness – not only compared to the rest of the world, but also domestically, between constituent islands. This radically increases transaction costs and makes exporting manufactured goods particularly daunting in the face of competition from countries with significantly more established productive capacities. This results, inter alia, in disconnected domestic supply chains. Due in part to transport costs, for instance, the two major beef producers do not really compete directly, but operate in separate markets (Santo Meat in the north part of the archipelago; Val Pacific in the south), with separate suppliers, customers, and export targets. Geography, coupled with the nature of current economic activities, lead to weak linkages both within and between sectors - reducing potential positive spill-over effects and capacity accumulation. 13 CIA Factbook 2017 14 World Development Indicators, World Bank, 2017. 20 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 21 Department of Industry Size and limited opportunities for skills development Figure 10: Literacy rate in 2015, constrain the labour market % of people ages 15 and above, Vanuatu vs peer countries Vanuatu, as is the case with most Pacific Island countries, faces a range of labour market challenges – including the size of its economy, limited Source: Whiteshield Partners employment opportunities, and a looming youth bulge slated to enter the labour market over the next decade. Labour force participation rates Data: Unesco for the working age population is relatively high at approximately 70% in 2013 according to ILOSTAT, but wages are low and most employment opportunities considered vulnerable. The regional differences are stark, with many of the more remote islands seeing high levels of poverty and prevalence of subsistence agriculture – with livelihoods hit hard by frequent natural disasters from cyclones and volcanic activity. Government education expenditure is well in line with regional benchmarks, and while recent reforms have seen primary enrolment rise even in rural areas and secure near-universal literacy, low education levels also impede industrial development. Only 55% of the country’s children enrol in secondary school, far less than neighbouring Fiji (see Figures 10 and 11). Approximately 5% of the population has graduated from universities, and higher education opportunities are limited15. Only a small campus of the University of the South Pacific supplies tertiary education, while a few donor-funded vocational and continuing education Figure 11: centres supply the medium technical skills that are essential to industrial Secondary school development. enrollment 2015 or latest available, % gross, Vanuatu vs peer countries Source: Whiteshield Partners Data: Unesco 15 UNESCO, 2015 22 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 23 Department of Industry Connectivity remains slow and costly… Figure 12: Share of internet users 1998-2016, ICT penetration also lags behind, especially in rural areas. 60% of Vanuatu vs peer the population have mobile telephony subscriptions, but less than a countries quarter report regular internet access – far below regional benchmarks Source: (see Figure 12) (Source: World Bank 1998-2016). Whiteshield Partners Data: Worldbank … and capacity utilisation is still limited Manufacturing companies use less than half of installed plant capacity, which may offer additional opportunities – for instance through sharing logistical services (see Figure 13). Some of this inefficiency results from to the high costs and low reliability of shipping and transportation. The Government, the major shareholder in port infrastructure, should take concrete measures to review its contracts to improve efficiency, reduce delivery time, and cut costs and waste. With a lower cost structure for warehousing and logistics, the export market opportunities should grow substantially. Figure 13: Plant capacity use rate among leading manufacturing companies in Vanuatu Source: Vanuatu National Industrial Programme 2011, Company interviews Mobile telephony stand at Port Vila airport 24 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 25 Department of Industry The overall business climate has improved Figure 14: World Bank Doing Business Index, Business regulation in Vanuatu has improved overall. In the 2017 edition Vanuatu 2017 of the World Bank Doing Business Report, Vanuatu ranked 83rd in the Source: world – ahead of Fiji (97), Samoa (89), and Tonga (85)16. Getting credit, paying Whiteshield Partners taxes, and resolving insolvency are comparatively straightforward, while Data: complying with export regulations, enforcing contracts, and dealing with Doing Business construction permits are more costly and cumbersome (see Figure 14). 2017, East Asia and Pacific Electricity still remains relatively unreliable, comparatively expensive (more than a 1000% of income per capita) and time consuming to secure (120 days – only four countries in East Asia and Pacific region take more time)17. The first industrial policy did not reach the objectives of achieving economic diversification and raising manufacturing value-added The first industrial policy, which came out in 2011 with the objective of raising the value added of Vanuatu’s fledgling manufacturing sector, had four priorities: • Increase economic diversification and domestic value added; • Enhance linkages and spillovers across economic sectors; • Create an enabling environment for the private sector; • Improve the merchandise trade balance. Table 1: While there were some achievements - such as the expansion of copra Priorities of Vanuatu’s first processing in Efate and Santo - the previous section has shown that Vanuatu National Industrial has largely remained an import dependent economy that continues to Programme for 2011 rely on tourism and commodity exports. Table 1 below outlines some of Source: achievements and challenges of the country’s first industrial strategy. Whiteshield Partners Vanuatu National Industrial Programme 2011 16 Doing Business 2017, East Asia and Pacific 17 Doing Business 2017, East Asia and Pacific 26 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 27 Department of Industry Vanuatu’s 2 productive capabilities 28 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 29 Department of Industry Vanuatu’s productive Figure 15: Economic 2 Complexity Index capabilities bear for Vanuatu and peer countries untapped potential 1998-2014 Note: Economic Vanuatu’s economic complexity has untapped Complexity is a reflection potential that could translate into higher GDP per of a country’s capita productive knowledge –See Haussmann & all Productive capabilities, and cultural knowledge with commercial applic- Source: ability, drive the structural change needed to sustain healthy levels of Whiteshield Partners economic growth. Economic Complexity, put forward by Hausmann and Hidalgo18, has proven to be one of the most promising approaches to Data: BACI Comtrade, measure and analyse these capabilities and design measures that may World Bank help enhance them and turn them into sources of comparative advantage. Armed with data to assess productive knowledge, policy makers can recognise different development paths and address capability gaps based on the stage of development. This serves to understand how best to support economic diversification: the more the country has knowledge and capabilities needed to produce a specific product or service, the higher the chances that it can diversify in that direction. Whiteshield Partners has extended the complexity approach by aligning Figure 16: global level information on product complexity with trade in services data, Economic incorporating geographic and demographic indicators, and conducting in- Complexity Index depth sector analysis and analysis of business constraints to identify policy 2014 vs GDP per capita 2015, options that will help move up the value chain. Vanuatu vs peer countries The productive capabilities inherent in Vanuatu’s current economic complexity is a good start, ranking above Solomon Islands and Papua New Note: Correlation Guinea, but below comparable economies such as Samoa and Fiji (see coefficient and Figure 15). means are based on dataset of 172 When comparing economic complexity with GDP per capita, Vanuatu countries demonstrates untapped potential: GDP per capita has the potential to Source: increase by at least 100% at current levels of complexity (see Figure 16). Whiteshield Partners Data: BACI Comtrade, World Bank 18 Hausmann, Hidalgo et al. (2011), “The Atlas of Economic Complexity”, Harvard, MIT. Note: According to the authors calculations, the Economic Complexity Index accounts for 15.1 percent of the variance in economic growth during the 1996-2008 period vs. the World Governance Indicators combined including government effectiveness, regulatory quality, rule of law, voice and accountability, political stability or control of corruption which only account for 1 percent. ECI also has a 0.75 percent correlation coefficient with GDP growth. 30 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 31 Department of Industry Vanuatu’s focus on primary production and processing captures only Figure 17: a fraction of the value chain. Production and primary processing of the Overview of the coconut value chain coconut, for instance, represents only 20% of the total value that could be captured through advanced processing, manufacturing, extension into Source: more complex products (e.g. soaps, shampoos, cosmetics) and marketing Whiteshield Partners based on secondary to end customers (see Figure 17). research and interviews Relatively low levels of complexity, coupled with remoteness, translate into fragile levels of trade competitiveness. Vanuatu can further capitalise on its existing capabilities The previous section discussed Vanuatu’s level of economic complexity, which in turn reflects the level of capabilities in the economy. The main thrust of the country’s value added strategy in this report is to understand and improve processes for accumulating and enhancing these capabilities; and for allocating them to their most productive use. Exporting frozen tuna fillets, for instance, requires a range of capabilities – especially given the plethora of challenges involved in locating, processing, preserving, packaging, selling and shipping the product to multiple destinations. Capabilities in tuna fishing and processing range from ship-building, to locating tuna using the latest technologies, to primary Figure 18: processing, cooling, storage, packaging and distribution (see Figure 18). Example of complex capabilities associated to Not all of these capabilities are equal. Some, such as processing, preservation simple products and packaging of fish, involve skills that can be used in a wide range of Source: products. Others, such as operating deep sea oil exploration equipment, Whiteshield Partners are more specific and have limited value for other economic activities. The https://korean-products.com product space helps visualise these differences: products located in densely populated parts involve commonly needed capabilities, while those in remote parts of the space are more specific, with limited application to the rest of the economy. 32 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 33 Department of Industry This implies that products located closer to the centre of the product space Figure 19: are more complex and involve capabilities that can be used in a range of Product space for Vanuatu 2005 and other economic activities19. Countries with revealed comparative advantage 2014 (RCA), which indicates that the economy exports more than the global Note: average of that product, in such products would have a better base to RCA is Revealed diversify into new and higher value-added products, compared to those Comparative Advantage. with RCA in products at the periphery. Figure 19 shows the product space for Vanuatu in 2005 versus 2014. The larger dots indicate the products where Source: Whiteshield Partners Vanuatu enjoys RCA – especially in food and agriculture with 17 discrete product groups, as well as wood and wood products. The underlying Data: BACI Comtrade productive capacities may allow diversifying into nearby products (on the graph such products are linked). Food and agriculture products are normally located on the periphery of the product space, meaning that while it is relatively easy to start producing other goods within the sector, it is rather difficult for the country to move from food and agriculture to other sectors. Organic chocolate produced in Port Vila 19 Note: the products here and below are 4-digit product categories. The sectors are 1 or 2 digit category names. 34 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 35 Department of Industry Vanuatu’s geography and demography favours Figure 20: Linking geographic animal, vegetable and food products variables with the product space for Vanuatu 2014 Adding social, demographic and geographic indicators helps nuance the analysis, with focus on agribusiness. Larger red circles on the chart below Note: RCA is Revealed indicate geo/demographic variables for which Vanuatu compares well - Comparative high share of young (0-14 ages) and rural population, high average annual Advantage. Geographic and demographic temperature and low level of temperature fluctuations – and link them indicators, which to products (see Figure 20). This shows that Vanuatu’s demographic and characterize the state of a country, are geographic characteristics are propitious for processing of many animal considered as a special and vegetable products. The country should nurture and develop new kind of “products” and added to the export capabilities to move up the value chain in these existing products. matrix. If an indicator for a country deviates Vanuatu already has a revealed comparative advantage in several products from the worldwide to which its demographic and geographic characteristics are amenable, average of this indicator significantly (the including cocoa beans, fish, coconuts, nuts, oil seeds, crops flours and meals, normalized indicator is coffee, plants for perfumery, etc. more than 0.68 or less than -0.68), then this country has Revealed Comparative Advantage (RCA) on it. Source: Whiteshield Partners Data: World Bank, BACI Comtrade Scented oils produced in Vanuatu 36 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 37 Department of Industry Leveraging 3 Vanuatu’s capabilities 38 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 39 Department of Industry Leveraging Vanuatu’s Figure 21: Matching Vanuatu 3 products with capabilities: diversification geographic and demographic and value addition characteristics 2014 Note: table of linkages Existing capabilities may serve as a base for between products and indicators diversifying into new products within existing is based on sectors… the proximities between them. Vanuatu can use its geographic and demographic characteristics and Source: Whiteshield Partners current advantages to build capabilities in other related and more complex areas, such as processed vegetable products, dates, figs, pineapples, Data: World Bank, avocados, tobacco, legumes, and sugar products (see Figure 21). BACI Comtrade Thus, existing capabilities may serve as a base for the development of new, higher value added capabilities in the medium term and new product opportunities. For instance, having revealed comparative advantage in roughly squared wood, wood sawn, densified wood, wood ornaments and basketwork makes it relatively easy to start producing veneers and sheets for plywood, wood continuously shaped along the edges, paper and paper packaging. If Vanuatu builds capabilities to produce veneers, paper, paper packaging and shaped wood it will have a further spill-over effect with many more potential products linked to only those two groups, such as fuel Figure 22: Product wood, wooden packaging items, household and sanitary paper, and labels. opportunities for Vanuatu 2014-2027 In agriculture and food sectors, existing capabilities could serve as a basis Note: for moving into crustacean fishing and processing as well as baked goods. RCA –number This in turn would foster capabilities useful for sugar confectionary, cereals, of products with Revealed jam based products, ice-creams and drinks (see Figure 22). Comparative Advantage. Source: Whiteshield Partners Data: BACI Comtrade, World Bank Organic coffee produced, processed and packaged in Aore island 40 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 41 Department of Industry … as well as new sectors with spill over potential Figure 23: Core capabilities and spill-over Vanuatu’s strengths in agriculture and food demonstrate productive effects to adjacent capabilities for, inter alia, breeding and selection, fishing, freezing, pressing, industries in Vanuatu and milling. These can also be useful for other products, such as footwear 2014-2027 and headwear, leather goods, pharmaceuticals and furniture production Source: (see Figure 23). Whiteshield Partners Hence, breeding, selection, storage and freezing, required in production of meat of bovine animals, where Vanuatu has an RCA, is also required to produce edible offal of domestic animals and semi-finished meat products (see Figure 24). The desiccation process required for already established dried citrus fruit production, can also be applied in production of jams, marmalades, jelly and sugar confectionary. Pressing and refining processes for coconut oil production are needed for production of soaps, margarines, cosmetics and pharma products. Figure 24: Linking capabilities, know-how, and product opportunities for Vanuatu 2014-2027 Source: Whiteshield Partners Vanuatu soap manufactured with local agricultural products 42 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 43 Department of Industry Combining the complexity of the products that could be produced with the Figure 25: application of these capabilities and the scale of already existent production Vanuatu Product Complexity Index yields a solid framework for setting priorities (see Figure 25). Development vs Revealed of the capabilities for more complex products allows a country to shift to Comparative Advantages for additional new products after these capabilities are developed. RCA for a agribusiness given product shows that capabilities and favourable competitive conditions products 2014-2017 are in place, while the Product Complexity Index (PCI) gives a measure of Source: attractiveness and value-added. Whiteshield Partners Data: BACI Comtrade, The Sector and Agribusiness Prioritisation Indices World Bank, OECD Stat provide further insight into the sectors and products with most potential for Vanuatu Two prioritisation indices – Sector and Agribusiness – combine the product space with a statistical analysis of Vanuatu’s exports and world exports to provide further insight into which product segments / value chains Vanuatu should aim to compete. As a cross check to the product-market space analysis and to consider other worthwhile production opportunities, a Sector Prioritization Index combines intrinsic attractiveness and attractiveness for Vanuatu (see Figure 26). A sector is intrinsically attractive if it contains products with relatively high complexity, it has high share of the product in global export, a growing share of global trade growth, and high and growing manufacturing value added score in 28 EU countries. It is more specifically attractive for Vanuatu Figure 26: if it contains a relatively high proportion of products for which Vanuatu has Overview of the Sector Prioritization revealed comparative advantage. Index The two-dimensional Sector Prioritization Index can also be applied for Source: service sectors, although data availability limits the results. Whiteshield Partners 44 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 45 Department of Industry The analysis suggests that machinery, electrical instruments and Figure 27: transportation, as well as animal products, metals, stones, glass and food Vanuatu Sector could be attractive products, while IT, telecom and travel would be high- Prioritization Index 2014 potential services for the country (see Figure 27). Source: Vanuatu’s Agribusiness Prioritisation Index hones in on animal, vegetable Whiteshield Partners and food products (Figure 28). Similar to the Sector Prioritization Index, this Data: Index is based on two dimensions: intrinsic attractiveness and attractiveness BACI Comtrade, for Vanuatu. A product is considered to be attractive for Vanuatu if it has World Bank, OECD Stat high and growing revealed comparative advantage score, high opportunity gain and high rate of exports growth. It is considered to be intrinsically attractive if it has high complexity, low ubiquity (i.e. uniqueness relative to other countries), low ubiquity growth rate, high share of the product in global export and high rate of the global export growth. Figure 28: Overview of the Agribusiness Prioritization Index Source: Whiteshield Partners Organic nuts and cookies processed and packaged in Port Vila 46 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 47 Department of Industry Agricultural products for which Vanuatu already has a revealed comparative Figure 29: advantage that also scored high on the index are oil cake, frozen fish, and Vanuatu animal products. High-potential new products include feathers, down, bird Agribusiness Prioritization Index skins, wheat, sponges, animal fat and oils, glycerol, and gluten (see Figure -most promising 29). products 2014 Source: Whiteshield Partners The Agribusiness Prioritisation Index points to new Data: animal, vegetable and other food products with BACI Comtrade, World Bank, attractive trade perspectives OECD Stat Most attractive for Vanuatu products in the animal sector are fresh and frozen swine meat, salted, smoked, and dried meat, live horses, donkeys, pigs, poultry meat, bristle, brush making hair, whey, milk, cream and cream products, including cheese and curd (see Figure 30). Figure 30: Vanuatu Agribusiness Prioritization Index -animal sector 2014 Source: Whiteshield Partners Data: BACI Comtrade, World Bank, OECD Stat Poultry meat processing factory in Port Vila 48 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 49 Department of Industry In the vegetable sector, the most attractive additional products include soy Figure 31: beans, oats, sunflower seeds and oil, barley, rape and colza seeds, lettuce, Vanuatu chicory, rye, maze, pepper, pimento, capsicum, grape, and vegetable saps Agribusiness Prioritization Index (see Figure 31). -vegetable sector 2014 In the other food sector, high-potential products are starch, sugar, brewing materials, prepared and frozen vegetables, mushrooms, truffles, chocolate, Source: Whiteshield Partners cocoa powder, butter and paste, fermented beverages, malt extract, tapioca, and sausages (see Figure 32). Data: BACI Comtrade, World Bank, The analysis from the Sector and Agribusiness Prioritisation Index, which OECD Stat reveals where Vanuatu has specific comparative advantages, is particularly important in light of Vanuatu’s likely graduation to a Developing Country in 2020. Anticipating its graduation – and associated loss of preferential market access – Vanuatu should focus on value addition to products in which it has the greatest revealed comparative advantage (RCA) such as processed fish, cocoa or pepper. Figure 32: Vanuatu Agribusiness Prioritization Index -other food sector 2014 Source: Whiteshield Partners Data: BACI Comtrade, World Bank, OECD Stat Black peppercorn produced in Santo 50 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 51 Department of Industry Leveraging synergies in capabilities with other Figure 33: countries can also yield benefits for Vanuatu Overview of the furniture value chain Moving up the value chain, Vanuatu can combine its capabilities with Source: those of other countries to yield mutual benefits. Consider the case of Whiteshield Partners the furniture value chain between Vanuatu and Australia (see Figure 33). Vanuatu has capabilities in forestry and sawmills, some of which are also available in Australia. Gaining access to Australia’s capabilities in furniture manufacturing, through activities such as chemical treatment, logistics, design, painting, adhesion and lacquering will allow Vanuatu entrepreneurs to explore products such as veneers, plywood sheets, simple furniture items, mattress supports, lamps, and light fittings. 52 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 53 Department of Industry 4 Policy challenges to address 54 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 55 Department of Industry Vanuatu sector-specific and Figure 34: Overview of 4 coconut product horizontal challenges to applications market development Source: Whiteshield Partners Vanuatu must address a range of vertical policy barriers to fully unlock the potential of some key existing products The vertical level analysis in this report has covered key products that comprise the bulk of Vanuatu’s current production and exports such as coconut, cocoa, coffee, kava, tamanu, nangae, peanut, fish, and furniture. This section lists some examples and potential measures (see also Table 2). Coconut Vanuatu currently captures a fraction of the value-added potential of coconut. Coconuts in Vanuatu are currently used mainly for copra production and some copra oil production while the rest being wasted. Yet each part of the plant has multiple uses and most of them are commercially viable. For instance, husks can be used for rugs, ropes, brushes, pellets, insulation, and soil cover; coconut shells – for decorative elements, musical instruments, household goods, and furniture; palm tree trunks – for windows, carpentry, furniture, and musical Table 2: instruments; leaves – for woven elements and roofs; roots – for beverages, herbal Overview of challenges and medicine, and dye; meat – for baked goods and animal fodder; and oil – for a opportunities for key wide range of cosmetics and food (see Figure 34). Vanuatu products Action to consider: Launch a Total Value Production (TVP) initiative to Note: The references under raise awareness of coconut opportunities and train potential investors and each activity refer entrepreneurs regarding opportunities to add value to local production of copra, to actions in the roadmap that is coconut oil, and the coconut husk, shell, tree and roots. The TVP initiative could detailed in chapter 6 further build on the professional cooperative model to pool resources for training Source: and investment. Whiteshield Partners Cocoa As in the case of coconut, Vanuatu exports most of its cocoa beans in a raw form, failing to capture most of the potential value. Significant capital requirements, uncertainty over land ownership rights, and intense international competition make it difficult for Vanuatu to compete in higher value-added segments. However, some opportunities are within reach, such as cocoa butter and niche, high quality, branded chocolate combined with other Vanuatu products (e.g. pepper, ginger). Action to consider: Target foreign direct investment (FDI) to develop and expand cocoa processing, including expansion into cocoa butter and niche premium organic chocolate mixed with other Vanuatu ingredients. Consider joint ventures with existing local firms. 56 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 57 Department of Industry Coffee Table 2 continued: Overview of Coffee is one of the few products where Vanuatu captures the full value of challenges and the commodity – from growing beans to packaging, branding and retailing. opportunities for key Vanuatu products More than a thousand Ni-Vanuatu farmers have recently been certified to produce organic coffee. While the quality of coffee produced is excellent, Note: The references under production and export volumes are limited, due to limited investment in each activity refer capital equipment, uncertainty around land ownership and insufficient to actions in the roadmap that is numbers of trained farmers. detailed in chapter 6 Action to consider: Leverage the professional cooperative model to expand Source: farmer training and investment in the production and export of coffee. Whiteshield Partners Tamanu and nangae nuts Current production fails to meet the strong demand for tamanu and nangae oil in Europe and the USA. The main constraints seem to be lack of investment into larger scale production. Action to consider: Promote foreign investment into nangae and tamanu nut plantations, potentially in joint ventures with tamanu & nangae nut farmer cooperatives. Peanuts Vanuatu boasts vast supplies of high quality peanuts but very little transformation. Action to consider: Promote cooperative investment into capital equipment to develop and package higher value specialty peanuts (e.g. mixed with spices) and peanut butter. Fish Vanuatu’s waters have among the richest Albacore tuna stocks in the region, but a large part of the fresh fish that is caught is directly exported for processing to neighbouring states such a Fiji, Papua New Guinea or China. Action to consider: Limit the granting of any new fishing licenses to investors that commit to value added processing of the fish in Vanuatu, including frozen and canned fish. Kava Due to particularly favourable soil and climate conditions, Vanuatu boasts among the highest quality kava in the world. However, kava production, which is currently restricted by law to Ni-Vanuatu citizens, is fragmented, costly and barely able to meet local demand. Action to consider: Consider opening investment in Kava to joint ventures with foreign companies to help rationalise and expand production; sponsor research into methods for preserving kava juice to meet rising international demand. 58 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 59 Department of Industry Wood furniture Table 2 continued: Overview of Vanuatu has vast and rich supplies of high quality timber, but the wood challenges and furniture industry is still nascent. Existing furniture manufacturers face a skill opportunities for key Vanuatu products gaps and skill drains from schemes encouraging labourers to work abroad (such as Australia’s fruit picker scheme). Note: The references under Action to consider: Fund research into the treatment of coconut wood each activity refer to actions in the timber for furniture and expand vocational training opportunities in furniture roadmap that is manufacturing. detailed in chapter 6 Source: Tourism Whiteshield Partners The tourism sector bears considerable potential as a source of demand for value added products and services from the local economy. Action to consider: The government and tourism sector should partner to launch a “Buy Vanuatu” network that encourages further purchase of locally produced goods and services. Moreover, through this “Buy Vanuatu” network the major tourism investors in the country can provide valuable insight on how to enhance competitiveness of products and services they elect not to purchase. Table 2 summarises some of the sector challenges and proposed actions. The country must also address horizontal barriers to economic development Beyond the vertical sector / product barriers to moving up the value chain, there are a number of horizontal market barriers that must be addressed. A first set of horizontal issues relate to different aspects of regulation. While the business regulatory burden is low and financial freedom pronounced, partly in due to the island’s status as a regional center for offshore finance, unresolved land property rights problem is likely to stymie consolidation and capital deepening in agriculture – essential not only for productivity overall, but as inputs to the manufacturing activities this strategy proposes to nurture. A second set of issues relate to infrastructure and skills. Although there is substantial forthcoming investment into port and air infrastructure, the time and cost involved in exporting and importing goods could be cut further. The country still has limited, slow, and often inordinately expensive internet access, reaching only a fraction of the population clustered around the capital. Moreover, education levels remain modest – and employees with tertiary qualifications are hard to come by. The booming offshore financial sector, for instance, has to resort to importing qualified labour at world-class salaries. As company surveys confirm, lack of medium and high-tech (i.e. tertiary graduates) skills are another binding constraint to many potential economic activities. The nascent vocational training system does not produce the skills 60 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 61 Department of Industry that the private sector needs – or would need if they would invest in other industrial activities. There are also classical market failures at play. These include information externalities, whereby entrepreneurs thinking about, for instance, processing fish simply do not know if such a venture would be profitable or not. This prevents the entrepreneurs from investing, which hurts the entire economy: if the pilot entrepreneur is successful, a whole new, exporting sector may emerge. And if not, then that sends a signal to entrepreneurs, investors, and policy makers to focus their efforts elsewhere. Another common market failure is co-ordination externalities. These occur when an entrepreneur is not able to invest as he cannot possibly co-ordinate all the different pieces that need to fall into place – from infrastructure, regulation over suppliers and service providers to transport costs and service quality. Even if fish processing would make commercial sense, entrepreneurs will be reluctant to take the step given the uncertainty around everything from supplies over transport costs to product standards for trade. A third market failure involves training externalities. In a sector with a tight labour market, entrepreneurs will underinvest in staff training to make up for the risk that, once trained, competing firms will pouch the talent they 5 just invested in. The case for public subsidies for on-the-job training is solid and one of the most valuable investments that Vanuatu should make, as we propose in our programmes. Finally, a market that does not exist will, by definition fail. As is the case in most lower-middle income countries, for instance, the market for business services is underdeveloped – and non-existent for specialised, sophisticated services such as manufacturing upgrading. In these cases, public policy should try to gradually build up functioning markets through subsidies, public procurement standards, and regulations. National Action to address these horizontal barriers will not be enough to overcome the market failures that impede entrepreneurial exploration of new industrial Industrial activities, however. For that reason, this strategy also proposes concerted Development but carefully calibrated and monitored vertical measures targeting high- Strategy vision potential products for moving up the value chain – mostly by acquiring, and objectives adapting, absorbing, and spreading foreign technology and know-how. A comprehensive set of policy measures to address Vanuatu’s vertical and horizontal market development are incorporated in the proposed industrial strategy detailed in the next section. 62 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 63 Department of Industry Vision and objectives Figure 35: Vanuatu vision and 5 strategy for industrial of the National Industrial development 2018-2022 Development Strategy Source: Whiteshield Partners Vanuatu should strategically expand its productive capabilities… The analysis in the preceding sections shows that Vanuatu has underlying capabilities that, if leveraged in the right manner, can help put the country on the right path to value addition. There are many economic activities that may be possible by using or slightly expanding these capabilities, such a processing kava into powder that is a similar capability that can be extended to processing cocoa into powder. Figure 36: Horizontal and Vertical policies to Value added processing in Vanuatu with Kava powder achieve Vanuatu industrial vision in But this is not easy. The business climate, while comparing well by regional 2018-2022 benchmarks, still stymies development. The most important stumbling Source: blocks may be politically difficult to address, such as land reform – resolving Whiteshield Partners uncertainty around land titles could encourage much needed consolidation and capital deepening in the low-productivity agricultural sector. Policies should address three main areas: • Remove binding constraints: through a dialogue with the private sector, continuously identify constraints to development and act to remove or mitigate them; • Mitigate for the costs incurred by lacking factor conditions or business climate – through targeted subsidies and other instruments; • Actively support sector competitiveness to support private initiatives to diversify the economy or move up the value-chain as proposed in our analysis. To this end, a vision and strategy has been formulated that is supported by concrete policy programmes and projects to help unlock Vanuatu’s full industrial potential. 64 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 65 Department of Industry … supported by an industrial vision that focuses on niche markets Vanuatu’s industrial vision is to unlock the country’s capabilities to compete in niche markets with outstanding quality of products and services at premium prices in a sustainable and inclusive manner. Vanuatu will compete in agribusiness, supported by more effective transport and digital services, and export to neighbouring markets, including Australia, New Zealand, selected Asian countries and other pacific islands. To enable this development, the country will attract targeted FDI and take concerted measures, using Government and donor funding, to ignite innovation in agribusiness, to support vertically integrated cooperatives, especially through joint ventures with foreign investors bringing expertise and technology, to strengthen supply chains and access to markets, to boost technical skills, as well as to invest in energy sustainability and infrastructure development (see Figure 35). There are a number of vertical and horizontal policy barriers for Vanuatu to address in order to achieve its industrial vision (see Figure 36). Vertical policies remove or mitigate sector-specific challenges, such as training of farmers to process organic coffee or addressing land reform to 6 encourage further investment in cocoa and coconut plantations. Horizontal polices cut across sectors and include areas such as trade, investment, micro, small and medium sized enterprises, human capital and labour, infrastructure and innovation. Implementing the National Industrial Development Strategy 66 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 67 Department of Industry National Industrial Figure 37 Timing and impact 6 of nine core Development Strategy: programmes for National Industrial 9 programmes and Development Strategy 2018-2022 35 supporting projects Source: Whiteshield Partners This industrial strategy proposes 35 projects grouped under nine overarching programmes • Smart Trade; • Seamless Trade Administration; • Smart Investment; • Vanuatu as a Brand; • Drive MSME; • Develop and Retain Talent; • Support Infrastructure; • Ignite Innovation; • Governance and Monitoring. Each programme has a different level of impact and timeframe in contributing to implementing the National Industrial Development Strategy (see Figure 37). The next section describes each programme, related projects and implementation arrangements. Trade Trade policy is particularly significant for small and remote economies. Yet value-added trade is hampered by unclear and inconsistent duty exemptions on imports, unsustainable export of strategic commodities, weak product standard certification support, and limited support for infant industries. Through a first “Smart Trade” programme that pro-actively addresses these issues, Vanuatu will aim to reinforce product standards and support infant industries, while reducing the cost of regulatory compliance. 68 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 69 Department of Industry Programme 1: Smart Trade Figure 38: Smart Trade programme The “Smart Trade” programme foresees measures to optimise trade policy overview and practice to facilitate diversification in industrial activities and related Note: services and supplies (see Figure 38). Led by the Ministry of Tourism, Trade, * Ministry of Industry, Commerce and NI Vanuatu Business in collaboration with the Finance, ** Ministry of Foreign Affairs Department of External Trade and the Bureau of Standards, it involves four projects: Source: Whiteshield Partners

1. Review trade agreements customs regulations to ensure that all inputs necessary for processing and unavailable locally be exempt from import duties and set up a procedure whereby entrepreneurs that need inputs can apply for such exemptions according to simple, transparent criteria.

2. In collaboration with the Vanuatu Bureau of Standards (VBS), invite a specialised company to offer laboratory and related technical services to certify product standards across the archipelago. The laboratory should have the authority to certify local producers with the most commonly required certifications in target export markets, including FSANZ / Pacer Plus, EU and North America.

3. Employ, in a transparent fashion tied to strict performance criteria, the temporary “infant industry” protection clause in existing trade agreements to provide temporary (2-5 years, with support gradually decreasing and annual renewal based on strict export competitiveness criteria) protection for emerging Vanuatu companies moving up the value chain in very targeted areas such as chocolate processing.

4. Put in a place a review process for exports of strategic commodities beyond certain volumes that do not fulfill minimum local processing value added threshold in order for the country to move up the value chain and create new productive capabilities. Identify actions in collaboration with investors to boost higher value added investment in processing of commodities. Complementing trade policy measures, trade administration must be improved, namely the time, cost and complexity of customs administration as well as the speed and cost of port logistics. 70 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 71 Department of Industry Programme 2: Seamless Trade Administration Figure 39: Seamless Trade The Seamless Trade Administration Programme aims to reduce time, Administration programme overview complexity and cost of exports and imports, especially for manufactured products. It includes four projects (see Figure 39). Note: * Ministry of Finance,

1. Accelerate efforts to streamline customs licensing, permits, and ** Ministry of Infrastructure and biosecurity procedures, and introduce a single window, based on Public Utilities recommendations in the World Bank time release study20. Source:

2. Turn the new Lapetasi and Santo wharfs, supported by the Bauerfield Whiteshield Partners and Pekoa airports, into hubs for the Pacific by marketing their advantages and offering competitive cost and service conditions for operators.

3. Transform the emerging Santo special economic zone and wharf into a model of customs administration and port logistics to compete with Port Vila.

4. Explore feasibility of a public-private partnership to design and build a dedicated wharf for fish offloading and adjoining fish processing plant. The Programme will be led by the Ministry of Tourism, Trade, Industry, Commerce and NI Vanuatu Business in collaboration with the Department of Customs and Department of Public Works. Investment Foreign Direct Investment (FDI) is a critical vehicle for Vanuatu to absorb technology, build value-adding skills and compete on international markets. However, as seen in the first part of this report, FDI inflows into Vanuatu are small overall and negligible in the manufacturing sector. Challenges to address in attracting more and better FDI include: • Continued uncertainty over land ownership and property rights; • Complex licensing procedures; • Limited open investment opportunities due to “Reserved list” for Ni-Vanuatu citizens; • Deficits in skills and infrastructure; • Understaffed and underfunded investment promotion agency (IPA). 20 Time Release Study – Processing times, World Bank, 2017. 72 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 73 Department of Industry Programme 3: Smart Investment Figure 40: Smart Investment programme overview The proposed Smart Investment programme targets investment attraction efforts at strengthening supply chains, adding value to local inputs through Source: Whiteshield Partners processing, transferring technology, and opening new markets (see Figure 40). Led by the Ministry of Tourism, Trade, Industry, Commerce and NI Vanuatu Business, this programme includes six projects:

1. Establish criteria to assess the potential social and economic return of new investment projects, including product diversification, job creation, value added potential, skills development, and linkages.

2. Open Ni-Vanuatu reserved sectors such as handicrafts, kava and fisheries (within 6 nautical miles of mainland) to joint ventures with foreign investors (possibly restricting foreign ownership to 50%).

3. Create and manage sector and company databases to actively target potential foreign investors in high-potential sectors.

4. Ensure current planned amendment of the investment law is consistent with the new industrial policy.

5. Clarify land rights with farmers and local chiefs in disputed areas.

6. Ensure that the VIPA one-stop shop initiative is achieved as announced by Q4 2018 and increase funding where necessary. Figure 41: Vanuatu as a Brand programme Programme 4: Vanuatu as a Brand overview Note: Beyond investment policy and promotion, Vanuatu currently lacks a * Ministry of Internal distinct recognisable character drawing affinity towards the country as a Affairs manufacturing center and tourism destination: there is no established Source: country brand and the capital city does not provide an attractive first point Whiteshield Partners of entry for investors due to poor urban planning and related infrastructure. The “Vanuatu as a Brand” programme involves first creating a country brand and logo that reflects its unique characteristics. The new Vanuatu brand should be supported by a “Made in Vanuatu” trademark subject to strict criteria, and reinforced by the “buy Vanuatu” network, especially in the tourism industry (see Figure 41). First impressions count. Beyond creating and nurturing its country brand, Vanuatu will aim to hire an urban planner and architect to redesign downtown Port Vila so that it becomes the postcard for Vanuatu and the wider Pacific. 74 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 75 Department of Industry This programme will be led by the Ministry of Tourism, Trade, Industry, Figure 42: Commerce and NI Vanuatu Business in collaboration with the Department Drive MSME of Local Authorities (for the part related to Port Vila). programme overview Note: * Ministry of Education Micro, Small and Medium sized Enterprises (MSMEs) Source: Whiteshield Partners Micro, small and medium-sized enterprises, the foundation for sustainable and inclusive growth and investment in small, developing economies, face substantial constraints, including: • Skills gaps; • Lack of market intelligence; • Limited and costly access to finance largely related to perceived commercial risk; • Poor linkages between companies and with foreign investors; • Disjointed, fragmented supply chains; • Insufficient economies of scale and pooling of resources; • High regulatory and logistical costs of trade; • High regulatory burden. Programme 5: Drive MSME Building on the existing policy framework for SMEs21, the proposed programme “Drive MSME” aims to address some of these challenges through the following actions (see Figure 42):

1. Expand the vertically integrated cooperative model to all productive sectors of the economy leveraging best practices from the handicrafts and other relevant sectors (see Box 1). Consider the strategic use of public procurement to encourage development of productive capabilities. 21 Accord International Management Services Inc.; Micro-, Small and Medium Enterprise (MSME) Policy and Strategy For Vanuatu, April 2011. 76 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 77 Department of Industry

2. Negotiate access to credit for micro-enterprises with microfinance Illustration Box 1: and other financial institutions using cooperatives to lower credit Overview of the Vertically Integrated risk and provide the necessary guarantees. Cooperative Model

3. Evaluate and reform the existing training offering to MSMEs Source: focusing on TVET, VCCI and VIT and expand training options for Whiteshield Partners adults.

4. Develop “business startup” and “exporter” toolkits including sector specific knowledge basic to connect with international market opportunities.

5. Taking into account that startup companies require access to office space, high speed internet connectivity and opportunities for partnerships, launch a new flagship incubator in Port Vila that can house at least 100 foreign and local entrepreneurs that contribute to the industrial policy; negotiate a self-financed fibre cable connection with one of the leading telecom operators. The “Drive MSME” programme will be led by the Ministry of Tourism, Trade, Industry, Commerce and NI Vanuatu Business in collaboration with the Department of Education and OGCIO. Education, skills and labour Developing the right skills and fostering a vibrant labour market are vital to the success of National Industrial Development Strategy. Measures should concern not only schooling but also adult education and other measures ensuring that the work force have the skills that industry requires. Due to its remoteness and small population, Vanuatu faces serious challenges in educating and retaining talent: Straw hats produced by the WEAV cooperative 78 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 79 Department of Industry • Existing educations institutions are too scarce and lack resources, Figure 43: in particular qualified trainers; Develop and Retain Talent programme • Low rates of secondary school attendance; overview • Visa policy does not place emphasis on attracting foreign talent; Note: • Insufficient support for companies that invest in worker training * Ministry of Internal (public-private partnerships for skills development for instance). Affairs, ** Ministry of Trade Programme 6: Develop and Retain Talent Source: Whiteshield Partners The “Develop and Retain Talent” programme sets up a system of positive reinforcement to develop a pool of skilled labour, starting with more relevant and higher quality training and better labour market regulation. It has six projects (see Figure 43):

1. Renegotiate “fruit picker” scheme so that it provides real opportunities to unskilled Vanuatu citizens to develop value-adding skills;

2. Encourage the development of public-private partnerships to train workers through targeted government subsidies. Make it also mandatory for employer to grade workers according to different category of skills or capabilities and award them according to this different grade system;

3. Review visa policy and criteria related to granting work permits in Vanuatu with a view to attracting value-adding skills (managers, trainers, specialists, technicians etc);

4. Reduce secondary school fees and make school attendance mandatory for all children, increasing secondary enrolment to at least 80% of the age cohort;

5. Expand opportunities for visiting professors and specialist trainers in Vanuatu educational institutions and for bright Ni-Vanuatu students to study abroad;

6. Promote Vanuatu as destination for technology and IT freelance professionals and involve them in educational activities. The programme will be led by the Ministry of Education in collaboration with the Department of Labor and VIPA. 80 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 81 Department of Industry Infrastructure Figure 44: Support infrastructure Transport, energy and IT infrastructure enables trade, investment and the programme development of manufacturing. Vanuatu has challenges in all aspects of overview infrastructure, exacerbated by its geography. For example: Source: Whiteshield Partners • Internet penetration and speed severely constrain the networking and knowledge creation that will underpin industrial development – in 2016, only 1.6% of the population had fixed broadband access22. • Transport is limited, time-consuming, costly and inefficient, including domestic inter-island connections. • High costs and unstable supply of electricity supply for manufacturing. Programme 7: Support Infrastructure Led by the Ministry of Public Utilities, the Ministry of Trade, Tourism, Industry and Ni–Vanuatu Business and the Ministry of Health, the program to support infrastructure involves four projects (see Figure 44): Vanuatu’s programme on infrastructure will be also be supported by the initiative on Quality Infrastructure Policy. It will cover issues of metrology, standardization, accreditation, conformity assessment, and market surveillance that together form the Quality infrastructure system. The effective operation of this system is a requirement to enhance the quality, safety and environmental soundness of goods, services and processes, both for the effective operation of domestic markets and to enable access to foreign markets.

1. Improve, through concerted implementation of the 2016 Universal Access Policy, broadband connectivity through the launch of 4G+ and expansion of VSAT installations through government guarantees and co-financing.

2. Design a pilot with a reputable company for drone transportation of high value / low volume goods.

3. Invite solar power companies to propose renewable energy options in line what was done in the Samoa islands.

4. Work in partnership with the Vanuatu Bureau of Standards and UNIDO to develop a National Quality Policy Note that additional actions related to infrastructure are included in the trade programmes already cited. 22 ITU 82 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 83 Department of Industry Innovation Illustration Box 2: Solar power and drones transport Fostering different forms of innovation would help Vanuatu build and strengthen its niche positioning, raise prices and compete on international Source: Whiteshield Partners; markets. However, there are low general levels of public and private spending Data: National on R&D, gaps in protection of intellectual property and generally low levels Geographic, 02/2017 of absorptive capacity and awareness of opportunities for innovation among entrepreneurs. Starting from a limited base, there are a number of opportunities for enterprises in Vanuatu to engage in incremental innovation by combining their talent and other assets, including acquiring and adapting technologies from abroad. For instance, fresh preservation packaging could be adapted for a new fresh kava juice product with export potential, and chemical treatment methods could harden coconut tree wood to be used in new furniture (see Illustration Boxes 3 and 4). Even in developed countries, most of the innovation-related productivity growth comes from absorbing and adapting existing technologies: in the US, 50% of IT-related productivity growth accrued to the retail sector alone. Programme 8: Ignite Innovation The Ignite Innovation programme aims to tap the full potential of innovation opportunities in Vanuatu. It has two projects (see Figure 45): Figure 45:

1. Set up an innovation fund to co-finance strategic research projects Ignite Innovation involving multiple consortia members with strong potential for programme overview commercial application in activities with higher value added, such as: Source: Whiteshield Partners - Treatment of the coconut timber wood for the furniture industry; - Development of long conservation kava juice.

2. Raise awareness of IPR registration and ensure IPR enforcement through additional well-trained staff and resources for the Vanuatu Intellectual Property Office. Solar power facilities at Iririki Island Resort 84 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 85 Department of Industry It is important to note that incremental innovation in Vanuatu will be also Illustration Box 3: depend on the development of diagnostic laboratories and related facilities Examples of incremental for agro-industrial research and innovation. innovation in Vanuatu The programme will be led by the Ministry of Tourism, Trade, Industry, Commerce and NI Vanuatu Business. Source: Whiteshield Partners Governance and monitoring Inclusive governance and rigorous monitoring are central to effective implementation and continuous improvement. During the first National Industrial Policy of 2011, private sector engagement as well as monitoring and evaluation of results was insufficient. Illustration Box 4: Potential for innovation in the cosmetics industry using local Vanuatu products Source: Whiteshield Partners Private sector consultation for the new National Industrial Development Strategy 86 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 87 Department of Industry Programme 9: Governance and Monitoring Figure 46: Governance and Monitoring Drawing lessons from the implementation of the first industrial strategy of programme 2011, the last programme serves to: overview Source: • Engage the private sector on a systematic basis, both in individual Whiteshield Partners projects, overall co-ordination, and oversight; • Systematically involve and coordinate the roles and contributions of different Ministries and government organisations; • Define set of accessible and representative indicators to track progress and impact at the project, programme, and aggregate level; and • Improve the accuracy and availability of statistics. Two projects are involved (see Figure 46):

1. Set up an National Industrial Development Strategy, with subsidiary bodies and a strong Secretariat, representing the public and private sector to monitor and guide the implementation of the industrial strategy and define the way forward;

2. Set up a multi-level monitoring and evaluation process with a series of industrial policy monitoring indicators, distinguishing policy inputs, outputs and outcomes and linking them to overall impact on socio-economic development. Figure 47: Overview of the Set up a new Industrial Development Council new Industrial Development Council Implementing the National Industrial Development Strategy will require co-ordination across the board. On the Government side, Vanuatu needs to Source: Whiteshield Partners align and co-ordinate the actions of over 30 agencies across 9 ministries – as well as those of regional and local governments, including in remote areas. In addition, the National Industrial Development Strategy requires a strong and consistent engagement with the private sector as well as the flexibility to respond to an evolving market landscape. 88 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 89 Department of Industry The proposed Industrial Development Council involves a high-level co- Figure 48: ordination body with representatives from both the private and the public Overview of Government sector. Chaired by the Prime Minister, it brings together eight ministries Industrial and private sector representatives twice a year to assess progress and set Committee Governing Board priorities for the short-term. Note: Two committees will feed into these biannual meetings. The Government *Ministry of Tourism, Industrial Committee brings together senior officials from within the Trade, Industry, Commerce, and Ni government twice a year to review progress in detail and decide on issues Vanuatu Business that should be brought to the attention of political representatives in the Source: Council (see Figure 47 and 48). Whiteshield Partners Table 3: Involvement of the key government stakeholders in the National Industrial Development Strategy Source: Whiteshield Partners Public-private consultation for the NIDS led by Acting Director-General for Ministry of Tourism, Trade and Ni-Vanuatu Business, George Borugu 90 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 91 Department of Industry For each of the 9 programmes and associated projects the strategy has clearly defined departments that are accountable, responsible, consulted or informed (see Figure 49). The Business Industrial Committee mirrors the government structure from a business perspective, bringing in not only established companies and business associations, but also entrepreneurs and actual and potential foreign investors. The new Industrial Development Council will include all government units and private sector representatives under one umbrella, helping to ensure tighter co-ordination and monitoring of National Industrial Development Strategy. Timeline and Monitoring process The timeline for this industrial strategy is ambitious, involving 35 projects which are mainly concentrated over the next 5 years (see Figure 49). Implementing the strategy requires careful and continuous monitoring and evaluation at multiple levels. First, at the level of the projects and individual actions and decisions, officials should be held accountable not only at the output level, with indicators such as number of companies supported and events carried out, but also in terms of linking those outputs to the outcome and impact level. At the level of programmes, clear KPIs should reflect the outcome level. For instance, for programme 1, Smart Trade, outcome KPI’s should look at the trade balance, the share of manufactured exports, and export sophistication (or level of value added through processing, technology, or branding). Through a regular process feeding into the oversight discussed above, these should also reflect a clear contribution to the impact level, or the structural transformation towards a higher-value added, sustainable production structure in the economy. 92 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 93 Department of Industry Figure 49: Implementation Key Performance Indicators (KPIs) plan for National Programme Overall KPI: Manufacturing value Impact 2018 2019 2020 2021 Industrial added as % of GDP Development Strategy H 1.1 Source: Whiteshield Partners • Trade deficit as % of total trade • Trade suppor ng industrial development H 1.2 1. • Manufacturing exports as % of total exports • Solid supply chains Smart Trade • % of commodity exports out of total exports • High value-added exports Ministry of Trade • % of first level processing exports out of total exports • Diversified markets H 1.3 H 1.4 2. • Number of days for custom clearance H 2.1, 2.2 Seamless Trade • Cost of customs clearance • Decrease in cost of trade AdministraƟon • Number of procedures for companies for customs Ministry of Trade clearance H 2.3, 2.4 • Inward net FDIs, % of GDP H 3.1, H 3.2, H 3.4, H 3.6 3. • Net manufacturing FDI as % of total FDI • Investments suppor ng industrial • Net value-added services FDI as % of total FDI development Smart • FDI in Ni-Vanuatu reserved sectors • Solid supply chains H 3.3 Investment • Number of land disputes, area disputed • High value added exports Ministry of Trade • Number of steps and number of days to establish a • Diversified markets business by residents and non-residents H 3.5

4. H 4.1 • Vanuatu interna onal brand recogni on Vanuatu • Number of official “Made in Vanuatu” products and • Vanuatu brand recogni on and affinity as a Brand services H 4.2 Ministry of Trade • Number of MSME H 5.1, H 5.2 5. • Value added generated by MSME as % of GDP • MSME drive economy securing the • Value of domes c credit to MSME an % of domes c Drive MSME credit to private sector necessary diversifica on benefi ng H 5.3 Ministry of Trade from economy on scale • Number of MSME served by export promo on agencies H 5.4, H 5.5 • Knowledge intensive employment, % of total employment • System of posi ve reinforcement factors H 6.1, H 6.4 6. for skilled labor to stay / maintain contact • Number of visas issued to expats for knowledge Develop and with the country intensive jobs as % of total work visas • Educated local workforce H 6.2, H 6.3 Retain Talent • Secondary gross enrollment Ministry of Educa on prepared to work at each level of • Government spending on educa on, % of GDP industrial / manufacturing sectors H 6.5, H 6.6 (each level) H 7.1 • Internet coverage as % of popula on 7. • Speed of internet as % of total internet • Access to resources and Support • Average me and cost of internal transport of goods markets for business H 7.2 Infrastructure • % of households and businesses with access to • Reduced cost of certain resources electricity • Be er educated labor force Ministry of • Renewable energies as % of total energy produced due to improved access to informa on H 7.3 Public U li es and consumed in Vanuatu H 7.4 8. • Access to resources and • Spending on R&D as % of total cost H 8.1 markets for business Ignite • Share of researchers in total employment • Reduced cost of certain resources InnovaƟon • Number of patents, trademarks and designs registered • Be er educated labor force Ministry of Trade • Number of IP related cases considered in court due to improved access to informa on H 8.2 9. H 9.1 Governance and Monitoring Industrial H 9.2 Development Council 94 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu ▲ ▲ ▲ ▲ 12/31/2018 12/31/2019 12/31/2020 12/31/2021 Department of Industry Conclusion Appendices Vanuatu’s industrial development vision is to fully unlock its capabilities to Appendix 1: Acronyms compete in niche markets with outstanding quality of products and services MSME Micro, Small and Medium-sized Enterprises at premium prices in a sustainable and inclusive manner. Building on its SME Small and Medium Enterprises comparative advantages in animal, vegetable and other food products, IFC International Finance Corporation Vanuatu can expand its industrial base by solidifying, strengthening, and FDI Foreign Direct Investments gradually expanding its core capabilities so that they can progressively GDP Gross Domestic Product MSG Melanesian Spearhead Group spill over into other sectors and establish the foundation for value-adding LDC Least Developed Country structural transformation. CPIA Country Policy and Institutional Assessment To achieve the industrial vision, a series of policy barriers must be addressed WTO World Trade Organisation PICTA Pacific Island Countries Trade Agreement PICTA at the vertical and horizontal level. At the vertical, or activity-specific FTA Foreign Trade Agreement level, these constraints mainly involve different product sectors within ILOSTAT International Labour Organisation agribusiness. For instance, rapid and effective resolution of land ownership VC Value Chain rights is fundamental to the future development of the coconut, cocoa and CAGR Compound Annual Growth Rate coffee based sectors. At the horizontal level, policy barriers relate to trade, MVA Manufacturing Value Added investment, skills, MSMEs, infrastructure and innovation. ECI Economic Complexity Index (Hausmann, Hidalgo et al. 2011) OG Opportunity Gain Nine core programmes and 35 projects are proposed to deliver on the HS Harmonized System (standardized system of names and numbers to National Industrial Development Strategy. Involving both the private classify traded products) VUV Vanuatu Vatu and public sector, these programmes cover trade, investment, MSMEs, PCI Product Complexity Index (Hausmann, Hidalgo et al. 2011) infrastructure, skills, innovation, country branding and governance. PC Contribution to Processing Sector Index Delivering on this industrial strategy requires not only high-level support and RCA Revealed Comparative Advantage (Balassa 1986) co-ordination across the whole-of-government, but also strong engagement nRCA number of Revealed Comparative Advantages, regional level R&D Research and Development with the private sector. The proposed new Industrial Development Council, TVP Total Value Production with representatives from both the public and private sector, will ensure JV Joint Ventures effective governance and implementation of Vanuatu’s National Industrial VCO Virgin Coconut Oil Development Strategy 2018-22. NTB Tariff Barriers to Trade WDI World Development Indicators UNESCO United Nations Educational, Scientific and Cultural Organization EU European Union OECD The Organisation for Economic Co-operation and Development (OECD) VBS Vanuatu Bureau of Standards FSANZ Food Standards Australia New Zealand Pacer Plus Pacific Agreement on Closer Economic Relations (PACER) Plus IPA Investment Promotion Agency VIPA Vanuatu Investment Promotion Authority TVET Technical and Vocational Education and Training VCCI Voluntary Control Council for Interference by Information Technology Equipment OGCIO Office of the Government Chief Information Officer ITU International Telecommunication Union VSAT Very Small Aperture Terminal IPR Intellectual Property Rights 96 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 97 Department of Industry

Appendix 2: Methodology We end up with a recursive process when diversity of countries and ubiquity of products are recursively corrected by one another. On the first step, we Key concepts examine how many products the country exports with advantage. On the second step, each of these products is weighed by its ubiquity. The resulting There are three basic principles behind the theory of Economic Complexity23: indicator is then corrected by diversity of countries that also have RCA in Products are combinations of a large number of factors, including these products, and so on. The process converges, and the resulting two regulations, different forms of physical capital, organisations and human indicators – the Economic Complexity Index (ECI) for countries and Product capital. We cannot measure them all explicitly, but we refer to them all as Complexity Index (PCI) for products – are the outcome measures of various ‘capabilities’. capabilities embedded in the production process. Countries have some of these capabilities and lack the others. Capabilities of a country can be mapped on a Product Space, a graph, which Countries produce products if they have all required capabilities. visualizes world trade in terms of proximities between products. Proximity between two products A and B is a conditional probability of a country to The Diversity of a country, i.e. the number of products exported by the have RCA in product A if it has RCA in product B25. On the Product Space, country with Revealed Comparative Advantage (RCA)24 is the first important two nodes (products) have an edge between them if their proximity above measure of the capabilities it possesses. 0.5, or if the edge was forced by the Maximum Spanning Tree algorithm. Products also differ in the number and type of capabilities required to Thus, products form clusters based on the underlying capabilities. produce them. For example, in 2011, both Pakistan and South Korea have approximately the same number of RCAs. However, we expect that they produce products that require different sets of capabilities. Thus, it is reasonable for each product to look at the number of countries, which produce it. This is the second building block of the analysis called Ubiquity (the number of countries, which have RCA in this product). We can expect that products, which require a small set of capabilities (for example, meat and milk products) will be exported by many countries. At the same time, X-ray machinery requires very complex technologies possessed only by a minority of countries. Moreover, capabilities often overlap. If a country can produce X-ray machinery, it is also likely to produce other kinds of machinery and equipment. On the other hand, if it exports bananas, it will probably also export mangoes, but not cars. But what about exporting diamonds? If the production of diamonds required many different capabilities, we would expect that countries that have these capabilities are also able to produce many other different things. But this is not true: all exporters of diamonds have low diversity. Thus, we conclude, that ubiquity of this product is low not because it is complex, but rather because it is rare. Summing up all these considerations, we expect that countries possessing many capabilities are able to produce many products that can only be produced by a few other countries, which in turn are also well diversified. 23 Source: C. Hidalgo, R. Hausmann (2009) “The building blocks of economic complexity”, Harvard University, Cambridge, C. Hidalgo, R. Hausmann et al (2011):“The Atlas of Economic Complexity”, Harvard, MIT 25 Note: If a pair of products require similar institutions, capital, infrastructure, or technology, they are likely to be 24 Definition of RCA is taken from Balassa (1986): RCA of a country C in product P equals to the share of this product in produced in tandem. Thus, they will have high proximity. C’s total exports divided by P’s share in total world exports. It is considered that a country has RCA in product P, if its RCA in P is above one. 98 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 99 Department of Industry Technical summary The process converges after a few iterations, and the quantitative measure of Economic Complexity is given by the eigenvector of matrix Export data for the global level Economic Complexity analysis was taken corresponding to the second largest eigenvalue. By the definition of from the UN Comtrade database26. Analysis covered 180 countries and eigenvector, can be found from the equation: economies27 and 1215 products classified by HS 1996 4 digit codes. The definition of Revealed Comparative Advantage (RCA) of a country c in product p is the following (Balassa, 1986): When kc,N = kc,N-2 =1 we have a trivial vector of ones associated with the largest eigenvalue. This vector is not informative, so the eigenvector , associated with the second largest eigenvalue of , is chosen as an We say that country c has RCA in product p, if RCAcp is above 1 indicator of economic complexity. After standardisation of , we obtain The world export structure is represented by matrix : Index of Economic Complexity (ECI): To estimate Economic Complexity Index, two simple measures of Diversity where is the mean and stdev is the standard deviation of . and Ubiquity were introduced: Index of Product Complexity (PCI) is obtained calculated in the same way as ECI by transposing matrix and considering eigenvector , associated with the second largest eigenvalue of the matrix : Diversity of country c stands for the number of products, in which the country c has Revealed Comparative Advantage. Ubiquity of product p is the total number of countries, which have RCA in product p. where is mean and stdev is standard deviation of . The measure of Economic Complexity is obtained via recursion by correcting Product Space is a graph with nodes representing exported goods. Two Diversity and Ubiquity by each other: nodes have an edge between them if their proximity is above 0.5. Also, in order to guarantee connectedness of the graph, we use the Maximum Spanning Tree algorithm to add some more links even though their proximity is below 0.5 Proximity between two products p and p' is the minimum of two conditional probabilities – the probability to have RCA in After inserting (6) in (5) we obtain: p' if there is RCA in p and vice versa. Conditional probabilities are estimated based on frequencies in the RCA matrix: is the matrix of Revealed Comparative Advantages, c is the number of the country, kp,0 and kp’,0 are ubiquities of products p and p' respectively. The minimum probability (maximum of kp,0 and kp’,0) is taken to avoid the 26 Source: http://comtrade.un.org/db/ asymmetry in conditional probabilities. For example, if product p is much 27 Note: Economies like Hong Kong and Taiwan regions more rare (has lower ubiquity) than p' , the conditional probability P(p'|p) will 100 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 101 Department of Industry be much higher than P(p'|p), though distance between products should be Indicator Revealed Comparative Advantage (IRCA) of a country c in indicator p symmetrical by definition. Based on Proximity matrix (formula [12]), Product Space was constructed by following algorithms: 1. ‘Skeleton’ of the graph: Maximum Spanning Tree algorithm was used to construct connected graph with (n-1) edges with the where X stands for the value of indicator, maximum total proximity (n – number of products). ‘Tissue’ of Xcp – the average value of indicator p for all countries the graph was obtained by adding to ‘Skeleton’ all links between std(Xcp) – the standard deviation of indicator p taken over all countries. products with proximity above 0.5 For the calculation of proximity matrix, we use the Mcp matrix of binary 2. Force algorithm for graph layout to separate clusters of products. IRCAs: For downward directed indicators, Geocapability Mapping approach Geographic and demographic factors influence the export competitiveness and the economic development. For instance, high altitude and rural population help explain export competitiveness for certain agricultural products like goats, sheep, tea and organic vegetables, buffaloes and yaks. For upward directed indicators Geocapability Mapping approach as a supplement to the Economic Complexity approach helps to reveal products whose development, production and export can be facilitated by the geographic/demographic features of the country. Geographic and demographic indicators, what characterize the country’s Geocapability Mapping approach in the case of Vanuatu was applied to geographic and demographic features, can be considered as a special kind Agribusiness sector, thus the further analysis includes the initial data and of “products” and added to the export matrix of products. calculations only for products of animal, vegetable and food sectors. The RCAs, the matrix and the Diversity for these products are calculated If an indicator for a country deviates significantly from the worldwide as in the Economic Complexity approach. The RCAs, the matrix for average, then this country has a distinctive feature - an analog of Revealed products are complemented correspondingly by the IRCA matrix and the Comparative Advantage (RCA) - in the corresponding geographic or matrix for indicators. The Ubiquity for each products and indicator demographic characteristic. It is called Indicator Revealed Comparative and the Proximity Matrix are calculated as in the Economic Complexity Advantage. approach. Product Space was constructed using the Economic Complexity Indicators can deviate from the average in the upward or downward algorithm. direction, thus the set of indicators are duplicated using one copy for each direction. Sector Prioritization Index Methodology for Products Downward direction: for example, if the annual temperature is much lower than the worldwide average, the indicator “Annual temperature Vanuatu attractiveness: low” for this country is assigned 1, else 0. Upward directed indicators: for example, if the annual temperature is much higher than the worldwide average, the indicator “Annual • RCAbini =1 if RCA ≥1 and 0 otherwise for the product i included to temperature high“ for this country is assigned 1, else 0. the sector • n – total number of products in the sector 102 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 103 Department of Industry All variables are normalized using this formula: where • VExporti – Vanuatu Export of product i included to the sector • z – indicator • VExport – total sum of Vanuatu Export • μ – mean • σ – deviation Sector Prioritization Index = (Vanuatu Comparative Advantage Index for Product Sectors + Intrinsic Attractiveness for Product Sectors)/2 • VExporti2014 – Vanuatu Export of product i included to the sector in 2014 • VExporti2009 – Vanuatu Export of product i included to the sector in Sector Prioritization Index Methodology for Services 2009 Share of Vanuatu service sector i in Vanuatu export and share of global service sector i in global export were defined using the following Worldbank indicators: • Communications, computer, etc. (% of service exports, BoP) • Insurance and financial services (% of service exports, BoP) Intrinsic attractiveness: • Transport services (% of service exports, BoP) • Travel services (% of service exports, BoP) • ICT service exports (% of service exports, BoP) • PCIi – Product Complexity Index for product i included to the sector • GExporti – Global Export of product i included to the sector • GExport – total sum of Global Export Vanuatu Comparative Advantage Index for Services Sectors = =(Vanuatu Share of Sector + Vanuatu Sector Growth )/2 • GExporti – Global Export of product i included to the sector Intrinsic attractiveness for Services Sectors = (Global Share of Sector + Global Sector Growth)/2 All variables are normalized using this formula: where EUMVA_si – EU Manufacturing Value Added of ISIC sector s to which the • z – indicator product i belongs • μ – mean • σ – deviation Sector Prioritization Index = (Vanuatu Comparative Advantage Index for Services Sectors + Intrinsic Attractiveness for Services Sectors)/2 Intrinsic Attractiveness for Product Sectors = the product i belongs 104 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 105 Department of Industry Agribusiness Prioritization Index Methodology Appendix 3: References and Background Documents For each product of animal, vegetable and food sector were calculated 1. Accord International Management Services Inc.; Micro-, Small and following indicators based on export data and Economic Complexity Medium Enterprise (MSME) Policy and Strategy For Vanuatu; Volume One statistics: Situation Analysis, April, 2011; p. 1-71. 2. Accord International Management Services Inc.; Micro-, Small and Medium Vanuatu attractiveness: Enterprise (MSME) Policy and Strategy For Vanuatu; Volume Two MSME Policy, April, 2011; p. 1-26. • RCA 3. Accord International Management Services Inc.; Micro-, Small and Medium • Growth of RCA (2009-2014 CAGR) Enterprise (MSME) Policy and Strategy For Vanuatu; Volume Three MSME Strategy, Business Linkages Program, Action Plan, April, 2011; p. 1-77. • Growth of Vanuatu Product Export (2009-2014 CAGR) 4. Act 2000 Commencement: 8th February 2011; REPUBLIC OF VANUATU; COPYRIGHT AND RELATED RIGHTS ACT NO. 42 OF 2000; p. 1-57. • Opportunity Gain 5. Andrew McGregor and Pierre Chanel Watas with Livai Tora; The Vanuatu Organic Growers Association: A Case Study of Agriculture in the Pacific; 2009; pp. 1-54. Intrinsic attractiveness 6. Asian Development Bank; Independent Evaluation Department; ADB Support for Public Sector Reforms in the Pacific: Enhance Results through • PCI Ownership, Capacity, and Continuity; Reference Number: SST: REG 2009- 24 Special Evaluation Study July 2009, p. 1-122 • Ubiquity 7. Biman Chand Prasad and Doctor Andrea Giacomelli under the direction • Growth of Ubiquity (2009-2014 CAGR) of the Department of External Trade (DET), Ministry of Trade, Commerce, Industry, and Tourism (MTCIT); VANUATU GOVERNMENT | 2012 | TRADE POLICY FRAMEWORK; p. 1-67. • Global Share of Product 8. Chocolate Survey in Vanuatu • Global Export Growth 9. Cocoa industry Assessment- Epi (Vanuatu) Opportunity Gains measures how much a location could benefit in opening 10. Cocoa value chain review future diversification opportunities by developing a particular product. 11. Coconut value chain review Opportunity gain quantifies how a new product can open up links to more, 12. Commencement: 1 March 1984; LAWS OF THE REPUBLIC OF VANUATU; and more complex, products. Opportunity gain accounts for the complexity CONSOLIDATED EDITION 2004; CHAPTER 163; LAND LEASES; Act 4 of 1983 Act 32 of 1985 Act 10 of 1987 Act 30 of 1988, Act 38 of 1989 , Act 24 of 2003; of the products not being produced in a location and the distance or how p. 1-111. close to existing capabilities that new product is. 13. Commencement: 8th February 2011; REPUBLIC OF VANUATU; PATENTS ACT NO. 2 OF 2003; p. 1-31. 14. Department of Industry; Ministry of Trade, Industry, Commerce and Tourism Government of the Republic of Vanuatu; with financial and technical assistance from UNDP; National Industrial Policy, Department of Industry, Government of the Republic of Vanuatu; December 2011; p. 1-39. 15. Department of Lands Land Acts; https://mol.gov.vu/index.php/en/acts-and- laws/231-lands-acts 16. Department of Strategic Policy, Planning and Aid Coordination; Vanuatu 2030: The People’s Plan, National Sustainable Development Plan 2016 to 2030; (2016); P. 1-28. 17. Designs Act 2003; Commencement: 8th February 2011; REPUBLIC OF Vanuatu Comparative Advantage Index=(RCA + Growth of RCA + Growth of VANUATU; DESIGNS ACT NO. 3 OF 2003; p. 1-54. Vanuatu Product Export )/3 if OG=0 and (RCA2014 + Growth of RCA + Growth 18. Draft Cocoa value chain study of Vanuatu Product Export + OG)/4 otherwise 19. Eleventh European Development Fund; VANUATU CATTLE SECTOR VALUE CHAIN ANALYSIS & PROPOSED STRENGTHENING PROJECTS AUGUST Intrinsic attractiveness=( PCI - Ubiquity - Growth of Ubiquity + Global Share 2015 To Support Programming for EDF 11; p. 1-118. of Product +Global Export Growth)/5 20. FAO Piat Paris, Vanuatu Overarching Productive Sector Policy: Report on Consultations during 12-30 July 2010; p 1-43. Sector Prioritization Index = (Vanuatu Comparative Advantage Index + Intrinsic 21. Government of Vanuatu; National Information and Communication Attractiveness for Services Sectors)/2 Technology Policy; December 2013., p. 1-72. 22. Hausmann, Hidalgo et al. (2011), “The Atlas of Economic Complexity”, Harvard, MIT. 106 National Industrial Development Strategy: Shaping the Future of Value Addition in Vanuatu 107 Department of Industry 23. IFC, World Bank Group; Vanuatu Agri-Tourism Linkages: A Baseline Study of ACT NO. OF 2012; p. 1-24. Agri Demand from Port Vila’s Hospitality Sector, 2015, p 1-31. 46. REPUBLIC OF VANUATU; ENVIRONMENTAL MANAGEMENT AND 24. Keith Phillips Linda Kerkmann (2012) Vanuatu Business Cost CONSERVATION ACT [CAP 283], Environmental Impact Assessment Competitieness, QLBS.com Regulations, Order No. 175 of 2011, UNOFFICIAL CONSOLIDATED VERSION 2012, p. 1-22. 25. Land Laws amendment, https://mol.gov.vu/index.php/en/acts-and- laws/232-the-new-land-laws-2014 47. Roy Amos Pakoasongi; Pro-link Consultancy Group; VANUATU NATIONAL INDUSTRY POLICY REVIEW: A Preliminary Assessment Report on the 26. LAWS OF THE REPUBLIC OF VANUATU CONSOLIDATED EDITION 2006; Implementation Process of the National Industry Policy from 2011-2016; Commencement: 24 March 1972; CHAPTER 65 ELECTRICITY SUPPLY ; JR 17 2010; p. 1-46. of 1971 Act 21 of 2000; p. 1-6 48. SANMA PROVINCIAL GOVERNMENT COUNCIL; LUGANVILLE MUNICIPALITY 27. LAWS OF THE REPUBLIC OF VANUATU CONSOLIDATED EDITION STRATEGIC DEVELOPMENT PLAN 2017- 2026, p 1-47. 2006; Commencement: 20 September 1977; CHAPTER 96 SUPPLY OF ELECTRICITY (DISTRICTS); JR 9 of 1977 Act 22 of 2000, p. 1-5. 49. Strengthening the Vanuatu Cocoa Value Chain: Recommendations for Consideration 28. LAWS OF THE REPUBLIC OF VANUATU CONSOLIDATED EDITION 2006; Commencement: 30 July 1980; CHAPTER 123 LAND REFORM; JR 31 of 1980 50. Study on the Development and Marketing of cocoa and coconut Act 6 of 1981 Act 32 of 1985; Act 6 of 1992 Act 35 of 2000; Act 11 of 2014; p. 51. Telecommunications Act; LAWS OF THE REPUBLIC OF VANUATU; 1-16. CONSOLIDATED EDITION 2006; Commencement: 1 June 1989; CHAPTER 29. LAWS OF THE REPUBLIC OF VANUATU, CONSOLIDATED EDITION 2006, 206; TELECOMMUNICATIONS; Act 10 of 1989; Act 3 of 1992; Act 18 of 1993; p. Chapter 283, ENVIRONMENTAL PROTECTION AND CONSERVATION Act 12 1-26. of 2002, Commencement: 10 March 2003, p. 1-3. 52. 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