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Tuvalu: Trust Fund Nation

Though it has attempted to take advantage of unusual assets—including its .tv domain name—Tuvalu continues to lean most heavily on a trust fund.

By Elena Gooray


Tuvalu. (Photo: ist4u/Flickr)


Tuvalu — the world’s fifth least-populous sovereign nation — has made money through fishing rights, Internet domains, phone sex, and collectible stamps. But its most successful source of income has perhaps been its strangest one: a national economy-building trust fund. For nearly 30 years, Tuvalu has built a federal budget on one of the world’s most stable financial arrangements between a small, poor country and larger economic powers. It’s the tiny island that has lived on a parent’s dime — not because it’s too busy chartering yachts and eating caviar to find meaningful employment but because it’s too small, too remote, and too threatened by climate change to do anything else.

Totaling 10 square miles, Tuvalu is a collection of nine land bodies — three reef islands and six atolls, or rings of coral that encircle a shallow lagoon. The land is unforgiving to crops, provides little fresh water, and has been deeply vulnerable to rising sea levels caused by climate change, which has already forced internal migrations. The islands’ remote location makes exporting the few items they can produce, such as copper, time-consuming and costly. “Here in the Pacific, we are so isolated,” says Tuvalu’s permanent representative to the United Nations, Aunese Makoi Simati. It takes a day and a half to travel by boat from Tuvalu’s capital of Funafuti to Simati’s home island of Nanumanga. Flying to New Zealand or Australia, the closest large, urbanized countries, first requires a two-hour flight to the airport in Fiji on a 48-seater plane, which only travels Tuesdays and Thursdays.

Immediately after independence, Tuvalu’s prime minister handed over approximately one-fifth of the national budget to a businessman from Encino, California, promising lucrative investments.

From this remote outpost, Tuvalu has struggled to build a self-sustaining economy since gaining independence from Great Britain. Under British reign, Tuvalu was known as the Ellice Islands, which were lumped together with the nearby Gilbert Islands into a single colony. It was political competition with the Gilbert Islands that drove Ellice’s push for independence. With a much larger population — 53,000 to Ellice’s 7,000 — the Gilbert Islands dominated the colony’s government. Gilbert residents were also seen by many Ellice Islanders as too culturally different — Catholic and ethnically Micronesian, rather than Protestant and Polynesian. Ellice wanted out, and Britain granted the islands sovereignty in 1978, forming the nation of Tuvalu.

But the nation’s finances started out rough. Immediately after independence, Tuvalu’s prime minister handed over approximately one-fifth of the national budget to a businessman from Encino, California, promising lucrative investments. Hundreds of Tuvaluans followed suit by investing in land development projects in far-off Texas, managed by the same Californian swindler. The bulk of that money never came back.

The financial strain forced Tuvalu to ask its former parent nation repeatedly for financial support. In 1987, the two nations finally formalized that aid relationship. Australia, New Zealand, Japan, and South Korea joined the United Kingdom in pooling money with Tuvalu to form a trust fund to support the islands’ development. The U.K. withdrew from the fund’s board in 2004, as it re-organized its aid relationships throughout the Pacific. Japan has not contributed since the trust’s 1987 founding.

Australia and New Zealand (plus Tuvalu itself) continue to contribute to the split fund, which is invested partly in Australian assets, partly in Tuvalu’s national savings account. The fund is currently worth close to $140 million — around three times the size of the country’s gross domestic product — and generates between $8 and $10 million in interest for the yearly federal budget, according to Simati. That’s not small change in a country of fewer than 11,000 people, most of whom work in government-owned businesses that lean on the fund.“What else can you do in Tuvalu to generate that kind of profit? Probably nothing,” he says.

“If anything further happens to sea levels, we’ll probably submerge in the next 20 to 50 years.”

Tuvalu has tried selling off some of its other non-financial assets. Those include fishing rights to its waters, where companies from China, Taiwan, Korea, Japan, and the United States have bought access. Most famously, Tuvalu has generated millions of dollars selling its .tv website domain, coveted by entertainment companies worldwide. It has also leased its area code to international phone companies — some of which wanted cheap lines for phone sex — and has sold collectible stamps, including some printed during Tuvalu’s years as a British colony.

None of those sales compete with the stable revenue from the fund, rated by development experts at the East-West Center and the U.N. as one of the most successful aid relationships supporting any small country in the Pacific. It’s hard to find similar models anywhere in the world. Zimbabwe’s government, for example, benefits from a multi-donor trust fund — but its total is only about one percent of the size of Zimbabwe’s gross domestic product.

Tuvalu’s trust will continue to provide a financial backbone to the government in its continued fight for survival. Instead of pushing back against rival islanders, Tuvalu is now fighting rising temperatures. The country joined with other Pacific Islands — including the former Gilbert Islands, now called Kiribati — during last winter’s global climate talks to push for a maximum temperature increase of 1.5 degrees Celsius by 2100, below the competing 2-degree limit. “If anything further happens to sea levels, we’ll probably submerge in the next 20 to 50 years,” Simati says. “Beyond development, our real issue is that. It’s at the heart of our survival.”