The Micronesian Alliance
ADB Points Out Weaknesses in FSM Economy & Private Sector

April 1, 2005

For the Marianas Variety

TOFOL, Kosrae - The Asian Development Bank (ADB) brought some tough recommendations to town last week when a team of consultants - led by privatization specialist Robert Lucas - hosted a two-day briefing and presentation for the islands' Chamber of Commerce, Government and NGO sectors.

The ADB presented their Pacific Islands Economic Report (PIER), an extensive compilation of data and interviews gathered since September 2004. Its purpose is to assess the FSM's economic performance under the Compact of Free Association with the United States, present it to the states and get input and feedback on the findings.

The report notes that overall economic assistance received by the FSM in the period 1987-2003 was about $2.4 billion, including non-Compact US grants and other donor funding. Official development assistance received by the FSM in 2000 on a per capita basis amounted to about $850, compared with $200 per capita in Kiribati, $175 in Samoa and $200 in Tonga.

"In the light of the aid that is received in the FSM - which is three to four times that of other Pacific Islands in general - the GDP number are quite disappointing," stated Lucas.

Lucas also noted the five to one ratio of imports to exports that exists throughout the FSM - numbers that will not be able to be carried by Compact II and ADB funds for very much longer.

Lucas called for the need during the meeting of "a more outwardly competitive economy" to chip away at the $80 million per year trade deficit that the nation currently carries.

In Pohnpei and Yap, the report notes, the economy performed relatively better than in Chuuk and Kosrae over the course of Compact I. In Yap and Pohnpei growth was significantly better, 1.5 percent and 0.9 percent per year, respectively, while in Chuuk and Kosrae real GDP (Gross Domestic Product - a measure of all goods and services bought and sold) per capita growth was negative, -0.4 percent and -0.6 percent, respectively.

From 1995-2003 Yap and Kosrae experienced positive employment growth, of 1.8 percent and 0.3 percent, respectively. Employment growth was negative in Chuuk and Pohnpei, -2.5 percent and -0.3 percent, respectively, the two most populace states of the federation, accounting for 80% of the total population. Overall, the unemployment rate for the FSM is rising.

Between 1986 and 1996, an estimated $300 million had been invested in public sector enterprises or economic activities operated by government. "Not one of them was successful," said Lucas.

Lucas noted that in order for Private Sector Development to occur under Compact II, there would need to be greater communication and collaboration between the public and private sectors, as well as all community groups and stakeholders.

Currently, he said that, "the situation can be characterized by weak communications, little interaction and a significant degree of mistrust."

The report notes this: "While the (FSM's) 3rd Economic Summit provided an opportunity to establish an ongoing dialogue, not only with the private sector, but with all stakeholder groups, there has been almost no follow-up to the summit."

Access to land was also an issue that Lucas discussed as being important to PSD."How do we increase access to land? How do we make it easier," asked Lucas, speaking about the negative social repercussions that can often go along with the selling of land in the FSM.Lucas also said that good governance is vital in fostering private sector growth.

Greater transparency, he explained, or openness of government would promote greater public awareness and involvement in the political process, thereby facilitating focus on policy and programmatic issues that are of priority to stakeholder groups and the general public.

Governance, the PIER notes, "has many dimensions, including transparency, accountability and honesty, and is pervasive in its affect on society. Good governance is a cross cutting issue for virtually all areas of economic development, ranging from fiscal efficiency and stability, to equitable delivery of social services, and to private sector development."

The meeting also involved a discussion of poverty and hardship. Although Kosrae refused to participate in the ADB poverty study - citing the lack of poverty conditions on the island - Kosrae would be included in future efforts to gain better information regarding poverty across the FSM.

The ADB has published a book detailing poverty in the Pacific, entitled, "Priorities of the People." The publication incorporates the World Bank's Millennium Development Goals.

Throughout the FSM, stated Lucas, "there is a significant incidence" of poverty, according to the basic needs poverty line (BNPL), which in the FSM is not defined by people suffering starvation or destitution, but rather it is a situation in which people lack access to basic services; or lack opportunities or adequate resources (including cash) to meet the basic needs of the household or customary obligations.

Generally speaking, Kosrae would appear to have a higher standard of living and a more equal distribution of income across the social strata than in Yap and particularly moreso than Chuuk and Pohnpei, where disparities of wealth are rather glaring in particular areas.

In the FSM overall, 27.9% of households were below the BNPL, meaning that this proportion of all FSM households had insufficient incomes to meet the level of expenditures required to provide basic needs. By state, 32.9% of Chuuk households, 12.3% of Kosrae, 29.5% of Pohnpei, and 14.4% of Yap households fell below the BNPL.

Out migration was also discussed in the PIER report. A U.S. Census showed that between 1998 and 2003, more than 6,500 more FSM citizens migrated to the CNMI, Guam and Hawaii, a 70% increase in regard to total expatriate numbers.

The statistics also show that these people are generally younger and better educated than in years past, people looking to work abroad. Many young FSM citizens who go abroad end up working in the fast food service industry.

Between 20,600 and 29,000 FSM citizens are estimated to be living overseas - between 16 and 21 percent of the total FSM population.The economic implications are greater remittances coming back from abroad. This also opens up export opportunities, stated Lucas. An ADB household survey planned for 2005 will include more detailed information on the subject.

"What is apparent," states the PIER, "is that continuing poor economic performance in terms of job creation and maintaining household incomes in the face of inflation, will likely result in continued heavy out-migration of FSM citizens."

Preliminary recommendations of the report include, raising local capacity to carry out strategic development planning on a continuing basis; a state and national commitment to private sector development; improving fiscal performance to increase tax revenues (replacing import and sales taxes with a value added tax); strengthening public sector capacity; improving governance (transparency, accountability, efficiency, equity and cooperativeness); greater JEMCO support to enable increased capacity building and PSD grant funding; attracting more foreign investment; improving access to land; developing a more detailed out-migration policy; and getting better information on the extent of poverty and hardship in the nation.