A tiny nation with a tiny economy, Tuvalu spent much of its history under the control of foreign powers. The islands were originally populated by immigrants from other South Pacific islands nearly 2,000 years ago. Later, Europeans seized many of the islands' inhabitants to serve as slaves; during the 19th century, slave traders from South America reduced Tuvalu's population by nearly 80 percent. Efforts to harvest copra (dried coconut meat which produces coconut oil) and mine guano (seafowl excrement used as fertilizer) led the United States to claim the 4 southern islands in 1856 and the British to claim the northern territory in 1892 as part of its Gilbert Islands Protectorate. Many Tuvaluans emigrated to the larger Gilbert Islands to find employment, especially after World War II. In 1974, Tuvaluans voted for independence from the other Gilbert Islands (now Kiribati). Tuvalu became independent from the British Commonwealth in 1978, but the new nation possessed few economic resources. In 1979, the United States relinquished its claim to the 4 southern islands.
Even among the developing nations of the South Pacific, Tuvalu's economy is relatively undeveloped. The bulk of the nation's economy is based on subsistence farming and fishing. However, the soil is poor and there are no natural sources of fresh water. This has created pressure for the limited arable land. The only significant cash export is copra, although the government derives funds from the overseas sale of stamps and coins to collectors and there is limited export of garments. There is little unemployment in the nation because of the prevalence of subsistence farming (unemployment hovers around 4 percent). The nation's main port is located in Funafuti and a major harbor dredging in 1980 made the port accessible to deep-draft ocean vessels.
During the latter part of the twentieth century, some 1,000 Tuvaluans worked in the phosphate mines in the island nation of Nauru and their remittances (money sent home to family or friends) contributed substantially to the nation's economy. However, by the turn of the century, the phosphate industry was in decline in Nauru and the government began repatriating (returning to their home-land) Tuvaluans. Many Tuvaluans are employed as sailors on foreign-based ships and also contribute remittances.
Until the year 2000, the principal source of foreign revenue for Tuvalu was international aid. In 1987, Australia, New Zealand, and the United Kingdom established a US$17 million trust fund for the territory. Later, Japan and South Korea also made contributions. Tuvaluan governments have only cautiously made withdrawals from the fund and generally adopted a conservative investment strategy which has substantially grown the fund. By 1999, the fund was valued at US$35 million. In addition, the United States makes payments to Tuvalu for fishing rights under the terms of a 1988 treaty between the 2 nations. In 1999, these payments totaled US$9 million.
The government has traditionally played a major role in the economy and controls many of the main economic sectors. In an effort to improve the economy, the government has undertaken a variety of reforms, including the privatization of many functions and personnel cuts of 7 percent. These reforms are especially significant in light of the fact that almost 20 percent of the Tuvaluan workforce is employed by the government. To raise revenue, the government began licensing Tuvalu's area code of 688 to international companies to use for "900" number calls in 1998. The arrangement has generated US$1.2 million per year. After it was discovered that a Hong Kong company was using the number for adult businesses, the overwhelmingly Protestant population of Tuvalu forced the government to revoke the licenses. In 1998, the government negotiated a contract to lease its Internet domain name ".tv" to companies in exchange for an estimated US$50 million over the next decade. Under the terms of the agreement, Tuvalu will receive a minimum of US$4 million annually for 10 years. These new sources of income could triple Tuvalu's GDP.