The 178-nation Happy Planet Index, compiled by British think-tank the New Economics Foundation, found that people could live long and happy lives without consuming vast amounts of the world's resources.
The top ten places were dominated by Latin American countries, while Central America was the region with the highest average score. The world's leading industrialized nations languished far behind, with Germany ranking 81st, Japan 95th, Britain 108th and France 129th.
Meanwhile, African and Eastern European states occupied most of the bottom ten places.
The index is based on consumption levels, life expectancy and happiness, rather than traditional indicators such as national economic wealth.
Nic Marks, one of the report's authors, said its aim was to show that quality of life was not necessarily linked to high levels of consumption.
"It is clear that no single nation listed in the index has got everything right, but it does reveal patterns that show how we might better achieve long and happy lives for all while living within our environmental means," he said.
Vanuatu, situated in the middle of the South Pacific, has a population of just 209,000, and has an economy built on small-scale agriculture and tourism. In terms of Gross Domestic Product, it is ranked just 207th out of 233 economies.
The New Economics Foundation is proposing a "global manifesto for a happier planet" outlining ways that nations ways nations can live within their environmental limits and increase people's well-being. The recommendations include eradicating extreme poverty and hunger, recognising the contribution of individuals and unpaid work, encouraging personal development and ensuring economic polices stay within environmental limits.