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Government of the Federated States of Micronesia

Economy

For centuries, the people of the Micronesian islands provided very well for themselves through a subsistence economy. Even today, the traditional skills provide an important backstop as the Nation struggles to cope with the emergence of a money economy, and the demands of an increasing population no longer existing in isolation from the rest of the World.

From about 1962 the US, as UN Trustee, began to institute a program of developing a political and physical infrastructure to move the islands in the direction of eventual self-sufficiency in the context of the World at large. By 1986 a great deal had been accomplished in development of public utilities, construction of roads, schools, hospitals, communications, transportation, etc., but locally-generated revenue was still insignificant. The emerging economy was firmly dependent upon US aid.

By that time, two irreversible trends had been established: a. islanders, particularly young islanders, had been introduced to Western standards of lifestyle, and the Western imperative of "development," and b. the need for money to support the maintenance of this process had been instilled, at the cost of traditional values and approaches. This is not a lamentable outcome, but simply a modern reality. If for no other reason, the advent of modern communications and transportation has rendered impossible any thought of returning to "the good old days," and irrelevant any musing over the islands' readiness to pursue development along with their neighbors in the Region.

While private sector development remains the obvious priority, some important accomplishments should not be overlooked. Within the last ten years, 22 private, FSM-owned construction companies have come into being, employing mostly local labor. This accounts for the fact that 50% of all housing in FSM has been constructed in the last ten years, of typhoon-proof materials. All road maintenance in FSM is now performed by private FSM companies. The privatized telecommunications corporation is one of the showcase operations in the Pacific. The privatized Pohnpei Public Utilities Corporation has brought reliable power and water to Pohnpei, and has just eliminated all public subsidies. There are 17 auto repair companies, 3 air conditioning and refrigeration companies, 6 concrete products companies and numerous other private ventures creating local employment.

Of course, this is not to say that all is well. Export earnings, among other things, must be increased, and it is not an easy task. Remote, resource-poor small-island countries present a number of unique challenges in development which, among other things, make it a slow process.

Seeing that a variety of obstacles were hindering the pace of development, and that dependence on US aid was not diminishing at the rate desired, the United States in 1993 initiated a process through the Asian Development Bank to analyze the FSM's situation and assist in designing and implementing effective economic strategies.

In November 1995, with ADB's assistance, FSM convened a large meeting in Pohnpei of State and National government representatives, as well as businessmen from throughout the country. This "Economic Summit" identified a set of goals and objectives for a range of sectors within FSM, such as Commerce and Trade, Agriculture and Tourism. It was also agreed that National and State governments should be downsized on a priority basis.

Subsequently, Pohnpei, Yap and Kosrae have completed follow-up state "Summits" to translate the national Summit mandates into implementing actions at the State level. A similar Chuuk Summit is to be held soon. These implementing actions will occupy the close attention of governments at all levels in the FSM for some years to come. It is worth noting that Yap Sate already has instituted a program to reduce government employment by 37%, and Pohnpei State is moving toward a similar action.

Recently, a good deal of attention has focused on the State of Chuuk, which, in some areas, not all, is lagging behind in development. The ADB has found, however, that reports of Chuuk's financial situation reflect a degree of misunderstanding. Sufficient funds remain on deposit there to substantially address Chuuk's problems, and efforts are being brought to bear at the National and State levels to move the situation forward.

The ADB effort also includes coordinating an overall donor program through the mechanism of a Consultative Group of donor countries, including the US through the Office of Territorial Affairs, which is currently conducting a series of meetings. In this group, FSM has called attention initially to the need for donor support in the downsizing-of-government effort.

Structure of Economy

The sectors which seem to offer the most potential for near- term income generation are Fisheries and Tourism. Agriculture has some potential, particularly for intra-FSM trade, but the small land area limits large-scale farming for export.

FSM has in recent years earned $18-24 million annually in licensing fees paid by foreign vessels for tuna fishing in FSM's Exclusive Economic Zone. More recently, additional earnings have begun to grow as FSM's Fishing Corporation and the Yap Fishing Corporation have initiated their own fishing operations together with onshore processing. A Maritime Academy located in Yap is now graduating Micronesians and other Pacific Islanders to serve aboard fishing boats. Direct exports of sashimi-grade fresh tuna by air to Japan account for increasing traffic at the airports. Farming of giant clams and other marine products has been instituted. Various plans to establish canneries have been discussed, and will be pressed. The outlook for this industry overall is strong.

Tourism, also, has seen significant increases in recent years. A number of new, small hotels have opened in Pohnpei, Yap and Kosrae with support facilities for diving and other tourist activities. At this time, the challenge in terms of larger-scale investment is to overcome limitations of air transportation, land- use issues and competition with other island destinations closer to tourist markets. These are being addressed.

Gross Domestic Product

GDP was estimated at $145 million in 1989. Household and public expenditure account for $80 million, representing the largest component of final expenditure, followed by subsistence consumption at $13.5 million. National per-capita GDP was estimated in 1989 to be $1,467, with a Yap having the highest per-capita GDP of the FSM states at $2,107, and Chuuk the lowest at $1,046.

The ADB estimated in 1993 that a sudden cutoff of Compact assistance in 2002 would produce an overnight drop in per-capita gross domestic product from about $1445 to around $300.

Foreign Trade

The external transactions of the FSM are characterized foremost by a heavy and increasing reliance on imports. Non-oil product imports almost doubled from $38 million in 1984 to over $65 million in 1989. Food imports alone accounted for $17 million or 20% of total non-oil imports in 1989, and represented an increase of some 32% over 1984. Imports of manufactured goods and machinery and vehicles rose to $12 million and $11.7 million respectively in 1989, while imports of petroleum products amounted to $7 million, an increase of 80% over 1984.

The US continues to remain the FSM's principal trading partner, accounting for $27 million, or 38% of all imports into the FSM in 1989.

The total national value of exports (including tourism) is less than 10% of the value of imports. The balance of trade deficit was more than $55 million in 1989.

Banking

Two banks operate in various FSM states and all are FDIC insured. The Bank of the FSM and the Bank of Guam each have branches in each of the capitals as well as in some outer islands.

The FSM Government also operates a Development Bank, which makes concessionary long-term loans, primarily to local investors. The Bank has branches in all states. Due to capital limitations, the Development Bank can only make loans of up to $200,000.