Federated States of Micronesia 2005: Economic Report Toward A Self Sustainable Economy

Pacific Studies Series
Federated States of Micronesia

2005 Economic Report
Chapter 1. Introduction
he Federated States of Micronesia (FSM) attained self-government in 1979 when four of the seven districts comprising the Trust Territory of the Pacific Islands ratified the Constitution of the Federated States of Micronesia. Under the newly-formed federation, the former Trust Territory districts became the States of Chuuk, Kosrae, Pohnpei, and Yap. Negotiations on the terms of a Compact of Free Association between the US and the Congress of Micronesia (then representing all seven districts of the Trust Territory) began in 1967. In 1986, the Compact was finally implemented and the United Nations Trusteeship of the Pacific Islands administered by the US was formally ended. United Nations acknowledgment of the Compact of Free Association signaled formal international recognition of the FSM as a sovereign nation. The FSM is situated in the western Pacific Ocean, extending from 1350 to 1650 east longitude and 10 south to 140 north latitude. The FSM includes more than 600 small islands historically known as the Caroline Islands. The geographic dispersion of the islands has resulted in an Exclusive Economic Zone (EEZ) of approximately 1.0 million square miles, giving the FSM one of the largest tuna fisheries in the Pacific. While the FSM is comprised of numerous islands, the total land area is only about 271 square miles. The FSM population is small and dispersed. Only the state capital islands include urban areas. Statistics on population, population density, and economically active population by State in 2000 are given in Table 1. Table 1. Population, Population Density and Economically Active in FSM: 2000 Area Chuuk State Kosrae State Pohnpei State Yap State FSM Total Population 53,595 7,686 34,486 11,241 107,008 Population Density 1,094 179 261 244 395 Employed 11,979 1,864 10,368 4,964 29,175
Source : FSM (2000) Census of Population and Housing. Notes : (1) Population density is number of residents per square mile. (2) Employed in formal employment, self-employment and economically active in subsistence production.
Federated States of Micronesia Towards a Self-Sustainable Economy
The discovery of the Caroline Islands by the West occurred in the early 1500s with first contact made by Spanish and Portuguese explorers. However, it was not until the early 1800s that the many island groups and distinct cultures of the Caroline Islands were in frequent contact with foreigners. These contacts were mainly with European traders interested in goods destined for the Asian markets. German traders established the copra trade in the mid-1850s and came to dominate commerce through their control of this industry despite Spains established colonial control over the Caroline Islands. Spanish colonial rule from 1885 to 1898 ended when they sold the Caroline Islands to Germany after their defeat in the hands of the Americans and the subsequent relinquishing of the Philippines and Guam. German colonial rule of the Caroline Islands lasted until World War I. With the tacit agreement of Great Britain, Japanese naval forces quickly captured the Northern Marianas, Marshall, and Caroline Islands in 1914. At the end of WWI, the League of Nations mandated the Pacific Islands of Micronesia, including the Caroline Islands to Japan which remained as an occupying power until the end of World War II. Fisheries and agricultural production, including the cultivation of rice, was substantial and contributed to the Japanese empire and war effort in WWII. At the end of the war, American military forces took control of Micronesia and in 1947 the United Nations established the Trust Territory of the Pacific Islands, which was placed under American administration. The long colonial period that lasted a century under four different foreign powers provided little opportunity for Micronesians to develop the administrative, technical, and commercial skills needed to govern a nation in the twentieth century. Despite American efforts in the 60s and 70s to institute education, healthcare and infrastructure systems, much remained to be done in terms of building an economy that could stand on its own. With this recognition on the part of both Micronesian and US negotiators, economic assistance was inevitably one of the key elements of the negotiations on the political relationship to be established upon termination of the Trusteeship. The Congress of Micronesia was established in 1965 to represent the different island groups comprising the Trust Territory in negotiating with the US on the future political relationship that was to be formed. Early on, most of the Trust Territory Districts decided on a freely associated relationship with the US. However, it took nearly 20 years for the districts comprising the FSM to negotiate the Compact of Free Association. The Compact accomplished several important objectives including: (a) defining the freely associated political relationship that recognized the FSM as an independent sovereign
nation, with national security being guaranteed by the US; (b) enabling FSM citizens the right to reside and work in the US and its territories without any restrictions; and, (c) providing an economic aid package of annual grant assistance and access to a range of stipulated US Government services (e.g., US Postal Service, weather service, Federal Deposit Insurance Corporation program), and federal grant programs. The Compact economic assistance package was committed by the US for a period of 15 years, from 1987 to 2001. An additional two years economic assistance was stipulated, provided negotiations towards a new compact agreement were in progress. The overall economic assistance actually received by the FSM in the period 1987-2003 was about $2.1 billion in 2003 dollar terms, including grant aid from non-US multi- and bilateral donors. As provided in the Compact, negotiations towards an amended or second Compact agreement began in 1999. The negotiations for Compact II (as the Amended Compact will be referred to hereinafter) were focused mainly on the economic benefits package. The lengthy negotiations produced an agreement on Compact II in 2003. The main economic and related provisions of Compact II are summarized in Box 1. With Compact II, the FSM, the US, and the wider donor community anticipate progress in building the nation and reaching economic self-sufficiency through the adoption of more effective development policies. The FSM has just begun the transition to the new US aid package under Compact II, and difficult medium term economic adjustments must be made. The significant decline in grant aid under Compact II, following difficult economic conditions in 1997-2000, requires a major policy shift on the part of all FSM governments. This shift will require steadfast commitment to policies and objectives that have been proposed in the past, but which have never been fully supported. The present economic report reviews the past performance of the economy under Compact I, and closely examines the institutional setting and societal responses to development driven by large-scale US grant funding. The institutional environment, distinctly shaped by the different cultures coming together to form a federation, has in turn profoundly affected intergovernmental relations. All of this has an impact on efficiently and effectively managing the economic development of the nation. Chapters 2-4 cover the historical experience of the FSM and the influence of this on contemporary society and institutional structure. These chapters also discuss how this experience has impacted economic decision making on the part of government and private sector institutions. Chapters 5-7 discuss the economic
Box 1. Economic Benefits of Compact II

Annual grant assistance starting at $76.0 million in the initial 3-year period from 20042006, then steadily declining from 2007 to 2023 as an additional $0.8 million each year is taken from grant and deposited in Trust Fund along with an annual deposit of $16.0 million by the US. The Trust Fund is intended to replace annual US grant assistance beginning in 2024 following the end of Compact II. The annual grant is to be allocated to six sectors: (1) education, (2) health, (3) private sector development, (4) capacity building in the public sector, (5) environment, and (6) public infrastructure. Allocations are to be determined in accordance with sector development plans prepared by the FSM, consistent with annual sector grant proposals made by FSM, subject to policy review and discussions annually by the Joint Economic Management Committee (JEMCO). Voting membership of JEMCO includes three members from US and two members from FSM. Policy decisions are in accordance with majority vote. Additional grant and program assistance is made available under Section 221 (of Title Two Economic Relations). Stipulated programs include US Weather Service and Postal Service, and grant assistance to education and health sectors under the Supplemental Education Grant (SEG). In fiscal year 2005, the amount of the SEG grant was $12.2 million. The SEG amount is not set and will vary from year to year. Additional US federal grant assistance is available on a competitive basis with other US states and territories. Available funding is ultimately dependent on US Congressional appropriations.
performance of the FSM during the Compact I period, from 1986-2003, and address the substantially altered US economic aid package negotiated for the Compact II period to run from 2004 to 2023. These chapters also tackle the need for renewed commitment to development goals and policies that have been widely discussed and supported by stakeholders representing all segments of FSM society. In Chapters 8-11, the nations three most important productive sectors agriculture, fisheries, and tourism will be discussed in more detail as these must play a significant role in enabling the transition to sustainable long-term growth and development. Also covered in these chapters section are other significant emerging economic issues that will need further analysis and debate to be appropriately addressed by development policies and strategies. In the reports final chapter, findings and conclusions will be summarized along with policy recommendations.
Executive Summary
Chapter 2. Economic and Social History

2.1 Economic Changes from Pre-colonial Times
uring the pre-colonial era, Micronesians existed almost solely on subsistence. The natural resources satisfied the requirements of their daily life, although there was also trade taking place. The inhabitants of the low-lying coral islands traded their local valuables with inhabitants of the high islands. The Yap Empire, which extended from Gagil district on the Yap Islands to the Namonwito Islands west of Chuuk Lagoon, was a trading empire. The arrival of beachcombers, traders, whalers, and other foreigners in the 1800s changed the way the Micronesians lived. The metal tools and knives were obviously of high value and better quality than the ones made of stone and wood used by Micronesians. With such tools, building canoes became easier and faster. The traders came to Micronesia in search of goods to sell in the Asian markets. They collected beche-de-mer, turtle shells, bird eggs, and seashells. They sold these items for good prices in the Chinese market. Pohnpei was reportedly exporting between five and six hundred pounds of turtle shells per year. The last traders to arrive in Micronesia were the ones interested in copra. The copra trade started in the mid-1850s and brought in independent traders and large firms from around the world. Copra trading was successful in Micronesia. For the most part, local residents could earn a sustainable cash income from copra. Some traditional chiefs in the Marshall Islands became wealthy enough from the copra trade to purchase their own vessels. The Micronesians used copra income to buy imported goods. For the first time the Micronesians participated fully in the cash economy imposed on them by foreign traders. Even long after the foreign traders left, copra remained as the most reliable source of income for Micronesians living in the outlying villages and islands. The industry was so prevalent, it brought about a minor relocation of population. Some individuals were taken from their homes to work on coconut plantations on other islands. In Micronesian societies, social ranking and stratification permeate all traditional cultures. This is true even in the sparsely-populated coral islands, although the emphasis on rank is not as intense. In highly stratified societies, such as Kosrae, Pohnpei, and Yap, rank is expressed through and consequently controlled by a dualistic sociopolitical system.
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The social changes in Micronesia precipitated by contact with the Europeans have had varied impacts on local communities. Two high islands - Pohnpei and Yap - became the centers of the colonial administration and commercial activity. The towns that grew around these centers triggered further change. Migration from the outlying areas and islands, the introduction of the cash economy, and the establishment of private and public schools brought about social and political development similar to Western models. The members of these local communities who received Western training soon formed a new social and political elite who often challenged traditional authorities. Traditional leadership was further strained as extended family loyalties and maternal ties were weakened as wage labor tended to favor the nuclear family and paternal ties. 2.2 Caroline Economies in Colonial Times In the Federated States of Micronesia, colonial administration started in 1886 when Spain established its headquarters in the Caroline Islands on Yap Islands Proper. The second Spanish administrative headquarters was created the following year on Pohnpei Island. These, however, were not the first established foreign presence on the islands. The German firms had dominated trading in the Marshall and the Caroline Islands for decades prior to the arrival of the Spaniards. The economy was fueled mainly by the thriving copra trade. At the time of Spanish takeover of the Caroline Islands, the economy was dominated by German trading firms like Hernsheim & Company, Jaluit Company, and the DHPG. Germany challenged the Spanish claim to the Caroline Islands based on an absence of exercise of Spanish control. In October of 1885, Germany annexed the archipelago and held it for several months before turning it over to Spain as stipulated in a peace settlement arbitrated by Pope Leo XIII. The resulting situation had the two European presences coexist on the islands. While the Spanish colonial officials controlled the government, the German trading firms dominated the economy. The Spanish officials faced no significant resistance to their government in Yap. The little resistance they encountered came primarily from the local priests who stood to lose their traditional prestige and authority in the community. But the Yapese did not rise up against the colonists in the way that the Pohnpeians did. When the Spanish colonists arrived in Pohnpei in 1887, they encountered local resistance almost immediately. The Spanish governors lack of flexibility towards the traditional chiefs and his lack of good judgment and contemptuous
attitude towards local cultures, coupled with the foremens misappropriation of local workers wages, prompted the people of Sokehs and Nett to attack the Spanish settlement in Kolonia. The rebels killed the Spanish Governor and several of his men. The second war against Spanish rule broke out when the Catholic priests and a contingency of soldiers arrogantly started laying the foundation for a new church next to the Protestant church at Ohwa in Madolenihmw. The local warriors quickly killed the construction workers and the soldiers. They would have killed the Catholic priests too had a local church official not given safe conduct into Kolonia. From the outset of its rule, Spain was too occupied with the rebellions in Pohnpei and never turned its attention to economic and social development. The Caroline and the Marianas Islands were the two last remaining colonies and Spains national commitment to keep them was dubious at best. Spain asserted its claim to the Caroline Islands in 1885 more for national pride than economic benefit. As the succeeding colonizing power, Germany gave supervision of Micronesia to the German Governor of New Guinea. The Germans created four administrative districts in the Carolines: Chuuk, Palau, Pohnpei, and Yap. Kosrae Island was incorporated into the Pohnpei district. The district government was headed by a district officer and a few staff members. To enforce their laws, the Germans brought in New Guinean policemen. The Germans brought sweeping economic reforms. To assist in paying for the colony in the Caroline Islands, the Germans levied a head tax on everyone above sixteen years of age. To encourage development of agriculture, the Germans introduced land title registration, particularly in Pohnpei; and to increase copra production for export, they required Micronesians to convert all uncultivated parcels of land to coconut plantations. They made all able-bodied men work on public projects such as docks, roads, public buildings. They even dug a canal in Yap to shorten trips from one side of the island to the other. When mining of phosphate on Angaur in Palau began, government officers across Micronesia recruited laborers to work in the mine. The Germans also introduced social reforms. Alcoholism and tobacco problems were rampant in the Caroline Islands before the Germans came. The problem existed even among boys and girls as young as nine and ten years old. The Germans solved this by banning the sale of alcohol to Micronesians. There was also a problem of endemic warfare which the Germans stopped by confiscating all firearms and ammunition, and prohibiting their sale to Micronesians. The violators of the bans against the sale of alcohol and firearms
were deportated from the islands. Local trouble-makers were exiled to another part of Micronesia. Several severe typhoons swept through the Carolines during the German colonial period. These typhoons destroyed coconut trees and other crops, and forced the Germans to relocate people from the outlying low coral islands to the high islands. The loss of coconut trees set back copra production for years. Some people from Woleai Atoll in Yap were evacuated to Saipan in the Marianas, joining their fellow islanders who settled there at the beginning of the nineteenth century. Some people from Mokil and Pingelap were relocated to Sokehs in Pohnpei. A group of Mortlockese was allowed to settle in Sokehs on lands confiscated by the German authorities after the Sokehs rebellion. The only people who actively rebelled against German rule were the people of Sokehs in Pohnpei. In the aftermath of the uprising, the leaders of the rebellion were executed and the rest of the population was exiled to Babeldoab Island in Palau. The rule of Germany ended in World War I. Great Britain and Japan entered into a secret agreement dividing the German colonies in the Pacific between them. The colonies that lay north of the equator were to be captured by the Japanese while the colonies south of the equator were for the British. When the war started in 1914, Japanese naval forces quickly captured the Carolines, the Northern Marianas, and the Marshalls. The conquest was bloodless. The Japanese invading force for each major island was then immediately transformed into an occupying power. The commander became the head of the district government, and a functioning administrative apparatus was created. Schools were established and military officers were assigned to teach. Temporary headquarters for the Provisional South Seas Defense Force was set up on Dublon Island in Chuuk Lagoon. It took the Japanese less than three months to firmly establish themselves in their new colony in Micronesia. In 1919, when the victorious Allied Powers assembled in Versailles in France to create the League of Nations and divide the spoils of war, Japan had been in firm control of this former German colony for five years and showed no sign of relinquishing. In fact, the Japanese chief delegate demanded that his country should be confirmed in its possession of Micronesia because in their fiveyear occupation, the Japanese had accomplished much in terms of social, political, and economic development. In spite of President Woodrow Wilsons anti-colonialism posture at the peace conference, the League of Nations awarded several mandates in the Pacific. Japan was awarded authority over Micronesia. Under the League of Nations
mandate, Japan ran the islands as an integral part of the Empire. The Micronesians were considered subjects of the Japanese Emperor, and were under Japanese law. The post-war occupation, however, was not the first contact between the Japanese and Micronesia. Japanese traders started to come to Chuuk Lagoon in the 1890s. They were a nuisance to the German colonial officials because they sold guns and alcohol, both banned items, to the Micronesians. The Japanese were deported from Chuuk but returned with renewed determination to continue their trading activities. Towards the end of the German occupation, the Japanese firms, such as Nanyo Boeki Kaisha (Nambo), were competing with German companies for control of trade. From the outset of Japanese colonial rule, private Japanese commercial firms like Nambo were given government subsidies to provide crucial services such as transportation linking the major islands in the new colony to each other and to Japan. The Japanese called the area Nanyo cho (South Seas). From the outset of their colonial rule, private Japanese firms were given government subsidies to provide services and enhance trade in Micronesia. The dominant commercial presence was Nambo which took over the German copra trading companies. Copra was still the single most profitable trading activity. The Japanese government in Micronesia also established its own firm to take control of the phosphate mines on Angaur Island in Palau. As with every economic development endeavor in the Nanyo cho, the government approached the harnessing of fishery resources with careful research and planning. In 1931, the Nanyo cho government created a Marine Products Experimental Station in Palau to study oceanic conditions, and to perfect catching and canning of fish and shellfish. The fishery resources were exploited by small commercial fishing operations run mainly by Okinawan fishermen. They sold some of their catch in the local fish market and the rest was processed for export to Japan. Agricultural resources were also harnessed by Japan. Farmers from Okinawa were brought in and they grew vegetables, tubers, and grain. As with the fishery products, the farm produce was exported to Japan. The efficient development of marine and agriculture resources, the operation of the phosphate mines in Angaur and Fais, and the increase in copra production made it possible to cut off the annual subsidy provided by the Japanese government to the Nanyo cho in about twenty-five years making the Micronesian economy self-sufficient. However, this success brought about a large migration of Japanese into Micronesia, a phenomenon that had negative effects. From the beginning of the
Japanese colonial administration, its social policies were unfavorable to the Micronesian population. For instance, the Nanyo cho government established a dual system of education: the shogakko and the kogakko. The shogakko were schools for Japanese children; and the kogakko were public schools for Micronesian children. While the shogakko maintained the standards of regular Japanese schools, the kogakko operated on a lower level. For one, they used an inferior form of Japanese. The students in the kogakko could stay for a maximum of five years. At the end of that period, the very best students were sent to attend the Carpentry School in Koror, Palau. These were the minority, however. The education provided by the Japanese was clearly inadequate, but at least they set up an education system accessible to every child. Obviously, the Japanese did not intend to train the Micronesians to run the Nanyo cho government or to assume an active role in the booming economy. The Nanyo cho government created two positions exclusively for Micronesians. The Sosoncho was a village chief s position and was sometimes filled by traditional chiefs. The Sosonchos job was to liaise between the local population and the Nanyo cho government. The other position was Soncho, assistant to the village chief. In terms of health services, the Japanese provided free health care accessible to everyone who needed it. For the first time in their history, the Micronesians could receive free medical attention in any of the public hospitals in the Nanyo cho. The closest a colonial power got to providing health care was when the Germans tried to deliver medical services in response to the typhoons that devastated the region during their occupation. The Japanese attack on Pearl Harbor in Hawaii on December 7, 1941 brought World War II to Micronesia. During the war, American bombers destroyed Japanese military installations and local infrastructure. Although the American forces did not invade any of the high islands, the roads, docks, and other public facilities were completely destroyed. After the war, the Americans repatriated all foreign nationals from Micronesia. Unfortunately, they had been the backbone of the cash economy; and with them gone, the economy collapsed. With the low level of education provided to them by the Japanese, the Micronesians lacked the knowledge and the technical-knowhow to even restore minimum public services such as power and water. So it was left to the new colonial regime to set up social services, and to create administrative structures. Unfortunately, the United States Navy lacked trained personnel to administer the newly-acquired territory. The initial policies of the naval American administration reflected these problems. The first directives issued by Admiral Raymond Spruance were characterized as a policy of minimum government. As
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Admiral Dewitt Ramsey, the first deputy high commissioner, explained it: the Navy does not govern these islands it administers them. This policy was also explained by Admiral Louis Denfield this way: We see no need to interfere unduly with the happy, simple life of these new charges of the American government. This policy of minimum government set the tone for the American administration for the next fifteen years. Even the establishment of the United Nations Trusteeship in 1947 did little to alter the naval policy in Micronesia. As pointed out by Fran Hezel, S.J., (the trusteeship) effect on the machinery of administration in the islands was little more than a change of namefrom military government to civil administration. The budget for the entire Trust Territory was a little over $7 million and it stayed at that level until the 1960s. With a meager budget, the United States attempted to build its new colony. The American administration established elementary schools in every community; and later added junior high schools in every district center. The elementary schools were mostly housed in native thatched roof buildings. In 1952, the first general high school opened in Chuuk and students from all over the Trust Territory were brought in to attend. It would take another eight years for each of the six districts to have its own high school. Development of public health was also slow. Americans were finding out that training of local health personnel was prerequisite to the delivery of adequate health care to the Micronesian population. For this, they relied heavily on the Fiji School of Medicine. Fishing and agriculture did not offer much hope for the American administration to develop the Trust Territory economy. They tried to export fish to Guam, but they stopped because of uncertainty in the industry. The agriculture program in Pohnpei identified several promising products such as ramie, cacao, pepper, and rice. However, benefits did not materialize because of farmers loss of interest in the project, largely due to damage done by pests. With the failure to develop fisheries and agriculture, copra remained the most reliable cash crop in the Trust Territory. Economic development was not easy with the unenthusiastic approach taken by the American administration. Foreign investment was prohibited; and with the constraint of a small budget, the Trust Territory administration had to rely on old industries such as copra for export. Small freighters would bring copra from other parts of the Trust Territory to the dock in Majuro for transshipment. The Majuro dock was the only one in the entire Trust Territory capable of handling large transoceanic vessels.
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Many writers have referred this period in the American administration of the Trust Territory as the period of benign neglect. Critics of American policy started calling the islands the Rust Territory. The second identifiable period of the American administration started in the early 1960s. Three important events converged to focus American attention on the Trust Territory. These were: (1) the 1961 UN Visiting Mission report; (2) the polio epidemic in the Marshall Islands; and, (3) the fact that by 1960, the Trust Territory was among the last few remaining trusteeships the United Nations had created after WWII. The UN Visiting Mission report was very critical of the way the United States was administering the Trust Territory. This report ended up on President John Kennedys desk. In 1962, the president signed National Security Action Memorandum No. 145 creating an inter-agency committee to oversee policy development in the Trust Territory. In addition, President Kennedy authorized an eight-member task force headed by Anthony Solomon to survey the islands and draw up a master plan for development that would secure American goals and interests in the area. After visiting the islands in 1963, the task force produced a three-volume report on how to improve the economy, raise the standard of living, and ensure that Micronesians would choose in a plebiscite a political status compatible with United States security interests. These recommendations became the basis of the new American policy in the Trust Territory. In 1962, the new administration in the United States doubled the budget for the Trust Territory to $15 million. In 1963, the United States administration allotted $10 million to start a crash education program that would construct more than five hundred classrooms and bring four hundred American teachers to the elementary and secondary schools. By 1964, all districts, including Kosrae and Ulithi, had started their own high schools. The US government was pouring money into the Trust Territory in unprecedented amounts. The budget went from a meager $7.5 million annually from 1947 to 1962, to $58 million annually from1963 to 1978. A whole array of new US federal education and healthcare programs were introduced. One important initiative taken by the United States that would change the political landscape of the Trust Territory and serve as counterweight to American aims, was the creation of the Congress of Micronesia in 1965. In just two years after its creation, the Congress of Micronesia had served notice to the United States that it intended to play an active role in deciding the future political status of the Trust Territory. In 1967, they requested the American administration to form a task force to look into alternative political positions for
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the Trust Territory. When the United States government failed to act, the Congress of Micronesia created its own Joint Committee on Future Political Status to investigate political alternatives to the trusteeship. After a year of visiting other dependent territories, the Joint Committee recommended negotiations with the United States for free association status. Formal negotiations with the United States started in 1969. The negotiation for the Compact of Free Association took seventeen years to complete. During those seventeen years, the Trust Territory was fragmented into four political entities: a commonwealth and three independent nations with Compact of Freely Association treaties with the United States. The formal break-up of the Trust Territory came when the Marianas, Marshalls, and Palau Districts did not ratify the draft constitution for the Federated States of Micronesia in the 1979 referendum. In that year, the Chuuk, Kosrae, Pohnpei and Yap Districts officially formed a political union called the Federated States of Micronesia. 2.3 Self-Government and Compact I The four districts of the Trust Territory that ratified the Constitution of the Federated States of Micronesia attained self-government in 1979. Members of the new National Congress were elected in March and took office in May. After taking office, they elected the first president and vice president from among themselves. The first task of the president and vice president was to form the executive and judicial branches of the national government. The new administration modeled the bureaucratic structure of the executive branch after that of the United States government. The judicial branch was created when the FSM Congress confirmed Edward King as the first Chief Justice of the FSM Supreme Court. The legislative branch inherited the administrative staff and offices of the interim FSM Congress. Prior to the implementation of the Compact of Free Association in 1986, the FSM National Government was gradually building its administrative staff to a level where critics were comparing it to the Trust Territory government. To attract qualified employees to work for the new national bureaucracy, the compensation level was set higher than the wages paid to state employees. When the Compact was implemented in 1986, there was a new flurry of hiring. The national government was also staffing federal programs. Some were hired as permanent employees at the end of the programs. By 1987, the national bureaucracy had come to rival the former Trust Territory headquarters staff in size and funding.
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In the same year, the new FSM Administration submitted a reorganization plan for the executive branch to the FSM Congress. The plan was rejected mainly because the ruling politicians felt there was nothing wrong with the current system. The congress approved an emaciated version of the proposal, which at least eliminated most of the independent agencies and folded their functions into existing offices of the executive branch. It is interesting to note that when the governments at the national and state levels were forced to reduce employment and wages in the 1990s, no reference was made to the attempt to reorganize the executive branch of the national government in 1987. Under Compact I, the national and state governments had so many workers that they could not withstand the impact of the second step-down in funding. It was deemed politically risky to lay-off staff members and reduce wages. So the national and state governments initiated an early retirement program for employees that paid two-years wages to those who were willing to leave their government jobs. In the national government, some employees were allowed to take the two-year salary and retire even though the jobs were not targeted for abolition. In some states, employees who were removed under the early retirement program were actually hired back. Some as consultants to the government, doing the same work that they did prior to retirement.
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Chapter 3. Social Institutions and Their Relevance for Economic Decisions

3.0 Introduction
he Federated States of Micronesia is a nation with a dualistic heritage fostered by its traditional customs and beliefs and by assimilation of Western systems of economic, legal, political, and religious models inherited from its colonial past (Box 2) and perpetuated through its continuing reliance on the US. The FSM society that has evolved through this process is one that is multi-cultural, multilinguistic, and fiercely ethnocentric. Ethnocentrism is present in the way FSM conducts its businesses, elects leaders, adjudicates disputes, protects human rights, engages in politics, formulates public policies, allocates resources, prioritizes states interests, and maintains distinctive state identities. The uniqueness of cultural values and beliefs, customs and traditions, and social systems and languages of each of the four FSM States play a decisive role in maintaining a traditional system of decision-making, leadership and governance, conducive to FSM collective and communal traditions. This chapter analyzes how social institutions and systems affect economic development and policymaking. Section 3.1 analyzes how cultural, religious and social institutions, such as the family, the church, and land tenure systems negatively impact private sector development. Section 3.2 proposes an alternative integrated development framework that addresses basic communal economic and social needs specific to rural areas throughout the FSM. Alternative models of people-centered development initiatives designed, owned, and managed by communities in partnership with the private sector, the government, and the donor community are presented. Section 3.3 establishes linkages between the family, the church, land tenure, and economic development. It highlights the opportunities such social institutions bring to creating economic opportunities and an enabling environment that blends traditional and modern systems conducive to public sector development and sustainable livelihood. 3.1 The Family, Its Structures, and Systems of Organization The cultural and social structures of FSM society were traditionally based on extended kinship systems. Kosrae and Pohnpei are predominantly patrilineal while Chuuk is essentially matrilineal. Yap has both patrilineal and matrilineal
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Box 2. Historical Summary

Since the 16th century, the Micronesian islands have been dominated by large foreign powers. The impact of each colonial period is summarized as follows: I. Spanish Colonial rule was formally established in 1869 and ended with the SpanishAmerican War in 1899. Impact of this period included (a) organized religion, (b) introduction of European building construction, (c) trade and commerce, and (d) resultant changes to traditional cultures and traditions throughout Micronesia. German Administration began in 1899 when Germany purchased the Caroline and Mariana Islands from Spain after the Spanish-American War. German rule of the Caroline Islands ended in 1914, at the onset of World War I. Impact of this era included (a) trade and commerce, (b) economic, social and infrastructure development (roads, communication stations, hospital, churches, copra industry, etc), (c) creation of political districts, (d) introduction of the cash economy, (e) activation of patriarchal land registration, personal land rights and titling systems and, (f) levying of taxes.
II.
III. Japanese Administration began in 1914 and ended in 1945 following the ending of WWII. Impact of the Japanese Administration includes: (a) continuation of trade and commerce, (b) land development and commercialization, (c) economic social infrastructure development, (d) introduction of occupation education, (e) military control, and (f) emasculation of island-wide leadership authority and power. IV. American Administration came into force in 1945 at the conclusion of WWII. An initial Naval Administration was put in place from 1945 to see to post-war rehabilitation efforts. This was followed by the Trust Territory of the Pacific Islands (TTPI) period administered by the United States. A High Commissioner was appointed by the US to administer the TTPI as mandated by the United Nations. Rehabilitation of basic infrastructure was undertaken to help restore peace and order and to protect the health and welfare of the people. Basic social services (hospitals, schools, roads, public utilities, transportation, communication and social welfare programs) were provided to assist post WWII recovery efforts in the urban areas. To operate these services the TTPI administration introduced the US civil service system heavily staffed by senior US expatriates. A US Federal System of Government was also adopted. Its centralized headquarters was based in the Marianas and district administrations were established in all TTPI districts. The TTPI period covered the period from 1947 to 1979. ransitional Government administered the islands from 1979-1986. The Micronesian T Transitional This was a period of greater political activism on self-rule, de-colonization and democratization. The establishment of the Congress of Micronesia in 1965 had precipitated intensive political status negotiations between the US Administration, the United Nations De-colonization Committee and leaders of the Congress of Micronesia. By 1979, UN endorsed de-colonization and independence for the TTPI. The UN urged the US and Micronesia to speed up political status negotiations that would eventually result in an agreed political entity for the former TTPI nations. In 1985, the Compact of Free Association status with the United States was ratified by FSM and the Marshall Islands. The Marianas opted to accept Commonwealth status and Palau deferred action on the Compact until 1994.
V.
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Chapter 3. Social Institutions and Their Relevance for Economic Decisions VI. Federated States of Micronesia (FSM) came into being in 1986 following the signing of its Compact of Free Association with the United States. The FSM consists of four of the former TTPI districts Chuuk, Kosrae, Pohnpei, and Yap. The FSM seat of Government is located at Palikir in the State of Pohnpei. The FSM state governments are located in each of the FSM States of Chuuk (Weno), Kosrae (Tofol), Pohnpei (Kolonia), and Yap (Colonia). The FSM National Government represents the Federation and is responsible for foreign affairs. Politically, each state government runs its own domestic affairs but exerts major influence on national policy and decision-making. Each state government holds equal power in national affairs through electoral representation in the FSM National Congress and through specific states rights and powers set out in the FSM Constitution.
systems of association, but increasing modernization and exposure to external lifestyles have made Yap society more patrilineal. The same is happening to Chuuk. In terms of societal structure, Pohnpei retains a monarchy although it is now more symbolic than functional. Modern Yap society is highly stratified, with rules of engagement for and between its social hierarchy and caste system, clearly defined and strictly followed. Exposure to external influences has modified Yapese customs and practices, but the essential principles underlying its unique traditional values and customs remain relevant today. The extended family systems are being supplanted by the nuclear family in contemporary FSM society. However, the notion of extended family still has its influence on social and political relations. There is still the obligation to look after the members of the extended family. For example, wage earners are expected to give cash or cash-bought goods to non-wage earners in exchange for services. Mobility, changing values and lifestyles, and the high cost of living associated with the cash economy have made this obligatory reciprocity difficult to maintain. The difficulty is one major contributing factor to the rapid breakdown of traditional kinship systems. Culture also has a role in influencing the pace of development and the outcome of economic and political decision-making. This is particularly true for Yap, where the government and its Councils of Chiefs have forged a dynamic alliance to guide the States development without unduly compromising customs and traditions. Pohnpei culture, to some extent, is compliant towards traditional social duties and obligations but serves no functional role in its modern institutions and systems. For Chuuk and Kosrae, traditions and customs are not as prevalent as those in Pohnpei and Yap and may be exploited in support of specific political agendas.
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Table 2. Structures and Systems of Organizations, FSM, 2004 Clan and Kinship Systems Matrilinage relationship is based on maternal (female) line of accession Patrilinage relationship is based on paternal (male) line of accession Estate mixed line of accession (adoption, Estates, House Foundations and Communal) Feudal a system based on social class, status, power and control Nuclear relationship based on a couple and their children x x x Chuuk x Kosrae Pohnpei Yap x
Source: Marksbury (1979); Perin (1996); Ritter (1978).
The political exploitation of customs and traditions allows special interest agendas to dominate public events and dictate economic decision-making processes. Often, this hinders national development efforts. Discretionary application of traditional culture in contemporary FSM affairs has occasionally compromised sustainable development efforts. This is because the role of traditional customs in mainstream development policies is not clearly defined. When customs are evoked, the application is inconsistent. There is also the existing attitude that traditions stand in the way of progress and must be altered or reformed. 3.2 The Church and Other Faith-Based Institutions Christianity continues to be the most successful agent of cultural and social change in FSM society. It blends well with the collective, communal, and complementary elements of traditions and customs, and is responsive to the
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basic spiritual and emotional needs of the people. For example, reverence for and fear of an invisible but powerful God is akin to respect for ones ancestors spirits. Both act as a potent force for ensuring compliance and conformity with religious doctrines, and culture and tradition. In addition, the Church and other faithbased organizations have become the major providers of quality education throughout the nation. Today there are many other religious disciplines in the FSM, each trying to win over members in various ways, including economic rewards and offers for better opportunities, both in the FSM and overseas. The depressed economic situation in FSM has made conversion attractive, resulting in many traditional Christians having changed their religion in exchange for economic and social benefits. Table 3 provides a summary of the membership shares of churches and faith-based organizations in the FSM. Table 3: Percentage of Membership in Faith-Based Churches by State, FSM, 2004 FSM State Roman Catholics (Percentage) Protestants (Percentage) Other Faith Based Churches+ (Percentage) 4 4 4 4
Chuuk Kosrae Pohnpei Yap
53 * 53 83
43 89 43 *
Source: FSM (2000). National Census Report. * Included in Other Faith-Based Churches + Bahai, Salvation Army, Seventh Day Adventist, Assembly of God and Mormon, and United Church of Christ
The comparative advantage the Church offers the nation, in its quest for sustainable development, social justice, and self-reliance cannot be underestimated. The Church played a decisive role in opening up traditional systems to pave the way for modern development. In the recent past, the Church was instrumental in mobilizing FSM leaders and people to reject proposals for commercial activities such as beer breweries, casinos, five star hotels, and golf courses on the grounds that these activities would create social and spiritual ills incompatible with Christianity. While this perceived threat was legitimate, the potential for job creation and development was downplayed.
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In times of natural disasters, such as the landside in Chuuk in 2002, the churches and other faith-based organizations provided much-needed emergency services and psychological and social support to victims and affected communities. They also partner with the government and the FSM Red Cross Society to mobilize international humanitarian relief for victims of natural disasters. The Churches and their emergency programs are wellpositioned to provide the moral platform upon which social and political transformation can be built. Many church leaders are influential community, public and/or traditional leaders. As the FSM embarks on a fiscally tighter policy regime dictated by the provisions of the newly amended Compact, the Church may become more useful than ever. As development catalysts, the Churches can partner with government and non-state actors to mobilize the citizenry into collective action. This can be achieved via the Churches public awareness and education campaigns, through its social justice and development outreach activities, and by providing accountable and transparent rules and guidelines for leaders involvement in public and political leadership. The Churches are best suited to instill responsible and accountable governance and leadership ethics in their members. Churches can also work with civil society, businesses, and the government to define expected roles, lines of responsibility, and partnership arrangements that are accountable, participatory, transparent, and protective of human rights and the rule of law. They can do this by focusing collective efforts towards realizing the FSM strategic and infrastructure development plans and other international development commitments. The Micronesian Seminar, a pastoral education and research organization, has contributed to improved awareness and literacy on public affairs, and in speaking out on issues related to development, politics and foreign relations. 3.3 Land and its Titles In Micronesia, land is wealth, power, spirituality, identity, and the basis for life itself. Land is a valuable cultural asset and a priceless heritage to be passed to future generations. The overall land area of the FSM is 271 square miles. Pohnpei has the largest land area followed by Chuuk, Yap, and Kosrae. Sixty eight per cent of the land in the FSM is privately owned. Approximately 98% is privately owned in Chuuk and Yap, while 64% and 36% are privately owned in Pohnpei and Kosrae, respectively. Table 4 presents selected land-related indices to show development potential.
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Land ownership and inheritance are traditionally collective. Land is owned or inherited through the following: direct accession through matrilineal, patrilineal, extended or communal relationships or ancestry; acceptance of a gift or compensation for service rendered; land purchase; land lease; or squatting on unsettled lands. Table 4: Selected Land and Land Use Related Indicators by State, FSM, 2004 Chuuk Land Area (sq.m.) Population Population Density (per sq.m.) Population Growth Rate (in % per annum) 49 53,595 1,094 0.1 Kosrae Pohnpei 42 7,686 179 0.9 133 34,486 261 0.4 Yap FSM
46 271 11,241 107,008 244 0.1 395 0.3
Source: FSM (2002). Statistical Yearbook.
Traditionally, property rights and land ownership are reserved for inheritance within families or clans. They are rarely transferred outside the indigenous community. A majority of land parcels in the FSM continue to have extended family or traditional authority over use or alienation rights. Most of the land in the FSM has not been surveyed, mapped, registered, or titled. These are the main reasons why land is difficult to acquire and develop. To improve land ownership and titling in all FSM states, land administration offices within formal and traditional jurisdictions have to be restructured to allow for more effective and efficient land development and management systems. A review of the laws governing land use needs to be done and it can begin with provisions in the FSM National and State Constitutions that forbid the sale of land, or the indefinite use of land by non-FSM citizens (See Box 3). Developers and landowners have different agendas on how and to what extent land is to be utilized. Developers, on the one hand, see potential for large-scale commercial land development. Landowners, on the other, are largely subsistence users, and view land as the primary source of food production and security for daily survival. In all the states of FSM, the tie between land and traditional ownership and authority is still strong. In Yap, for example, the Councils of Chiefs have the power to veto any decision or law that may affect customs and tradition.
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Box 3. Land Tenure Laws & Regulations

Constitution of the F ederated States of Micronesia Federated Article XIII: General Provisions Section 4 4: A non-citizen of the FSM or a corporation not wholly owned by citizens may not acquire title to land or waters in Micronesia. Section 5 5: A lease agreement for the use of land for an indefinite term by a non-citizen, corporation not wholly owned by citizens, or any government is prohibited. An existing agreement becomes void 5 years after the effective date of this constitution. Within that time, a new agreement shall be concluded between the parties. When the national government is a party, it shall initiate negotiations. Chuuk State Constitution Article XI: General Provisions Section 2: 2 The power to take an interest in land may only be exercised by the State Government for a specific purpose of general public interest, as prescribed by statute. Negotiations with the owner for voluntary lease, sale or exchange shall be fully exhausted and just compensation shall be fully tendered before a taking may occur. The Legislature shall provide for access to the courts to ensure that good faith of the negotiations, the reasonable necessity of the acquisition, and the adequacy of the compensation tendered. Upon the termination of the public use for which an interest in land is involuntarily acquired, the State Government shall return and quit claim the land to the owner or the owners successors. Also refer to Article IV: Traditional Rights for supplementary clauses on customary rights and practices in text box 12 under Chuuk State Constitution Kosrae State Constitution Article XI: Land and the Environment Section 3: 3 The use of real property shall, in the public interest, be regulated by law to assure public health, community well-being, the orderly and economical use of land, preservation of places of cultural or historical value and island beauty. Section 7 7: Only a person who is a citizen of the Federated States of Micronesia and a domiciliary of the State, or a corporation which is wholly owned by such persons, may acquire title to land in the State. Acquisition or utilization of interests in real property may be restricted or regulated by law. Pohnpei State Constitution Article XII: Land Section 1 1: Limitation of Leaseholds. No lease of land, except from the Government or as provided in Section 4 of this Article, may not exceed 25 years. The right for option to renew and other protections shall be provided by statute. Section 2 2: Acquisition of Permanent Interest in Real Property. The acquisition of permanent interest in real property shall be restricted to Pohnpeian citizens who are also pwilidak of Pohnpei, as specified under Article 3 of this Constitution Section 3 3: Indefinite Land-Use Agreements. An agreement that grants the user of land the unilateral authority to continue use for an indefinite term is prohibited. Section 4 4: Land Legislation. The Legislature may provide, by appropriate legislation procedures to permit leases and other uses of land in excess of limits prescribed in Section 1 of this Article. Section 5 5: Land Sale. No land shall be sold, except as authorized by statute.
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Chapter 3. Social Institutions and Their Relevance for Economic Decisions Yap State Constitution Article XIII: Conservation and Development of Resources Section 2: 2 An agreement for the use of land where a party is not a citizen of the Federated States of Micronesia or a corporation not wholly owned by such citizens shall not exceed a term of fifty years. The Legislature may prescribe a lesser term. Section 3 3: Title to land may be acquired only in a manner consistent with traditions and customs.
In the FSM, land rights and land use are based on a principle of reciprocity between landowners and those who have the right to use the land. The existing informal market, however, allows transactions in which land ownership is transferred in exchange for money or power. This will become a more accepted business practice as private sector development needs for land expands, the demand for housing increases, and requirements for local production of consumable goods and services grow. The cash or money economy has changed the socio-economic reality so that landowners are now forced by necessity to exchange their land rights for cash and other material rewards. As land becomes more acceptable as a cash commodity, accession and inheritance rights are changing. For example, in Chuuk, authority to alienate land, once vested in the matrilineal groups as a collective decision-making responsibility, has now been taken over by educated, business-minded individuals. The financial gain from the land is turning into a constant source of family or clan conflicts, and costly legal proceedings. This conflict is a symptom of increasing economic hardships (underemployment and lack of family income), increasing population, and changing economic and social aspirations and lifestyles. Public lands are also the subject of legal issues. Strategically positioned pieces of land where important public infrastructure is built and maintained for government operations is leased, often for huge sums of money. Unpaid land leases have become a major source of litigation and government expenditure. Given these concerns and the fact that land is limited and has high social and cultural value, legislating changes in land use or the relevant constitutionally protected land tenure provisions will take time. This situation raises numerous questions about how land in FSM can be best managed. These issues have been addressed in various ADB-funded technical assistance projects in the FSM. So far, a few key points have been identified but no real consensus reached. The legal framework for secured lending needs to be clarified and updated. New landuse regimes must incorporate customary use rights, but at the same time permit more land to serve as collateral or be available for private sector development.
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There needs to be commitment to change that simultaneously protects traditional land use rights, while facilitating economic development. Culturally sensitive land development policies and enabling legislation can evolve through formalizing stakeholder consultation processes such as national and state economic summits or the establishment of issue-based development policy forums (DPFs). It is also possible to create statutory policy mechanisms such as a Native Land Trust (NLT), or an office of Micronesian Cultural Affairs. Having such systems in place can help bridge the current gaps between government, the private sector, and the people by:
Providing a formally structured, participatory consultation process that involves key representatives of all stakeholder groups in land planning, policy formulation, and decision-making. Making land planning, policy and decision-making processes primarily confined to government officials, accessible to the private sector, civil society, and local development partners such as training institutions, chambers of commerce, and landowners. Ensuring that economic policy and decision-making affecting land development be dictated by national and state development realities rather than driven by external development interests. Making available performance or results-based indicators to assist planning, decision-making, and programming efforts. Conducting workshops and forums to develop consensus on how to strengthen and improve governance, leadership, management, and technical capacities at all levels. Convening conferences or workshops on formulating a clear and unified national vision and to address inconsistencies between national and state constitutional rights and provisions.
The recommended measures would address the long-standing indigenous weaknesses in managing and administering the modern democratic institutions and systems required to successfully promote economic development. There was virtually no real commitment to developing this capacity and the result has been a chronic shortage of qualified professionals and technicians in the public service and in the local labor force. This in turn has resulted in a high dependency on foreign advisors and contract employees. Given this reality, there is a pressing need to conduct a needs-assessment of the institutional (administrative, organizational and technical) capacity of government and public enterprise functions and programs.
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Box 4. S.L. No. 4L-21-96: Pohnpei Development Leasehold Act of 1996

This act is known as the Pohnpei Development Leasehold Act of 1996. This Act stipulated the following: 1) Each notice submitted for the recordation pursuant to Section 3 of this act shall be accompanied by a non-refundable recordation fee of $100 and a refundable bond equal to $100 for each year of the term of the proposed lease Section 5 The recordation fee so paid upon submission of a notice of intent shall be deposited into the General Fund of the Pohnpei Treasury as the realization of general revenue. The refundable bond shall be deposited in a special fund of the Pohnpei Treasury, and shall be returned to the payor or his designee if the prospective development lease agreement is not executed within the time limits prescribed by Section 12 of this act or if so executed on the fifth anniversary of the execution of the development lease upon a finding by the Director that the requisite capital improvements have been emplaced on the real property as prescribed by Section 13(4) of this act; provided, however, that such bonds shall be forfeited to the state if required by Section 16(2) of this act. The maximum number of years for which the lease may be executed, but not in excess of 55 years -Article 13 (3). A covenant stating the minimum value of improvements to the real property that is the subject of the lease which must be emplaced upon the property by the fifth anniversary of the issuance of the lease, the value of which shall not be less than $200,000 Article 13(4) A covenant stating that the lessor shall be entitled to not less than 10 per cent of the capital gains received by the lessee or his successors in interest for an assignment, sublease or subsequent assignment or lease, of the leasehold estate or portion thereof; provided that the calculation of such capital gains shall not include investment less depreciation and reasonable business costs incurred by the lessee or his successors in interest with respect to improving the leasehold estate or developing the business activities thereon Article 13(6) The statutory conditions prescribed by Section 13 of this act are hereby made a part by reference and operation of law of every development lease executed in the State of Pohnpei for the benefit of the lessor, notwithstanding their incorporation or nonincorporation in the written leasehold agreement. Any provision in a lease contract, agreement or subsequent agreement or contract which seeks to effectuate a waiver of the statutory provisions of Section 13 of this act to the detriment of the rights and privileges of the lessor contained herein is null and void as against public policy. Violation of any condition or covenant prescribed by said sections of this act to the detriment of the rights and privileges of the lessor shall be deemed a material breach of the lease agreement, which may be redressed by report to judicial action Section 14 In addition to the civil sanctions as may be imposed under Section 14 of this act, any lessee who, within five years of execution of the leasehold agreement, fails to improve the leasehold estate at a value equal to or in excess of the valuation prescribed in the development agreement shall be liable for the payment to the lessor or his successors in interest of a civil fine of 10 per cent per year of the value of the improvements that have not been so made to the property Section 16(1) In addition to the civil fine imposed by Subsection (1) of this section, the bond paid for filling of a notice of intent to enter or substantially modify a development lease as prescribed by Section 5 of this act shall be forfeited to the state Section 16(2)
2)
3) 4)
5)
6)
7)
8)
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The current impasse between landowners and government on land tenure systems arises because of the perception that development plans promote only the economic value of land as measured by market price, and not its cultural and natural resource use values. It is true that whatever natural resources the present generation has exists because of the investments and conservative decisions made in the past. The management of resources over time, in light of the future benefits those resources may yield, is an important question of economic efficiency. There are also ethical and moral issues involved as to the current generations responsibility to conserve resources for the future. Concerns regarding clear title to land, i.e., identification of all ownership interests in private property, underlies much of the support for land and real estate registration. However, identification is only part of the problem. To serve as collateral with economic value, land ownership rights must be transferable. Land is inalienable to non-citizens which means security interests or liens cannot be enforced. In many customary settings, however, freehold titles do considerable harm to traditional practices. Modern approaches often ignore the fact that land rights in a traditional setting have value over and above simply holding title. Land reform should address the issue of how to harness the values of land while preserving its associated traditional values. One mechanism that provides a robust land tenure system together with economic incentives and legal security for lending is found in the Western ownership model. This required approach would entail the following actions.
Reforming land administration, management, and enforcement; Creating a one-stop-shop for real estate property development and investment; Reforming and expanding EPIC (Refer to 3.1.3); Performing an institutional audit of existing national and state executive, legislative, and judiciary systems to identify administrative and legal constraints and to propose development-friendly improvement measures and legislative acts; Adopting a government policy of pro-actively working with civil society and other non-state actors; and, Providing for independent national and state legal and regulatory reviews and appraisals
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Box 5. Laws on Customs and Traditions

FSM Constitution - Article V : T raditional Rights V: Traditional Section 1 1: Nothing in this Constitution takes away a role or function of a traditional leader as recognized by custom and tradition, or prevents a traditional leader from being recognized, honored, and given formal or functional roles at any level of government as may be prescribed by this Constitution or by statue. Section 2: 2 The traditions of the people of the FSM may be protected by statute. If challenged as violative of Article IV, protection of Micronesian tradition shall be considered a compelling social purpose warranting such government action. Section 3 3: The Congress may establish, when needed, a Chamber of Chiefs consisting of traditional leaders from each state having such leaders, and of elected representatives from States having no traditional leaders. The Constitution of a state having traditional leaders may provide for an active, functional role for them. Chuuk State Constitution - Article IV : T raditional Rights IV: Traditional Section 1 1: Existing Chuukese custom and tradition shall be respected. The Legislature may prescribe by statute for their protection. If challenged as violative of Article III, protection of Chuukese custom and tradition shall be considered a compelling social purpose warranting such government action. Section 2 2: Nothing in this Constitution takes away the role or function of a traditional leader as recognized by Chuukese custom and tradition, or prevents a traditional leader from being recognized, honored, and given formal or functional roles in government. Section 3 3: The Legislature may appropriate funds annually for a traditional leaders conference Section 4 4: Traditional rights over all reefs, tidelands, and other submerged lands, including their water columns, and successor rights thereto, are recognized. The Legislature may regulate their reasonable use. Kosrae State Constitution - Article II: The Community and the Individual Section 1 1: Except when a tradition protected by statute provides to the contrary. Section 2: 2 The State Government shall protect the States traditions as may be required by the public interest. Pohnpei State Constitution - Article 5: T radition Tradition Section 1 1: Customs and Traditions. This Constitution upholds, respects, and protects the customs and traditions of the traditional kingdom of Pohnpei. Section 2 2: Protection of Customs and Traditions. The Government of Pohnpei shall respect and protect the customs and traditions of Pohnpei. Statutes may be enacted to uphold customs and traditions. If such a statue is challenged as violating the rights guaranteed by this Constitution, it shall be held upon proof of existence and regular practice of the custom or tradition and the reasonableness of the means established for the protection, as determined by the Pohnpei Supreme Court. Section 3 3: Family Obligations. (1) To strengthen and retain good family relations in Pohnpei, as needed, this Constitution recognizes and protects the responsibility and authority of parents over their children. (2) This Constitution also acknowledges the duties and rights of children in regards to respect and good family relations as needed.
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Federated States of Micronesia Towards a Self-Sustainable Economy Yap State Constitution - Article III: T raditional L eaders and T raditions Traditional Traditions Section 1 1: There shall be a Council of Pilung and a Council of Tamol which shall perform functions which concern tradition and custom. Section 2: 2 Due recognition shall be given to traditions and customs in providing a system of law, and nothing in this Constitution shall be construed to limit or invalidate any recognized tradition or custom. Section 16 16: A certified copy of every bill which shall have passed the Legislature be presented to the Council of Pilung and Council of Tamol for consideration. The Councils shall have the power to disapprove a bill which concerns tradition and customs or the role or function of a traditional leader as recognized by tradition and custom. The Councils shall be the judge of the concernment of such a bill. Section 17 17: The Council of Pilung and the Council of Tamol may disapprove a bill by returning the certified copies of the bill with their objections within thirty days after it is received from the Legislature. A disapproved bill may be amended to meet the Councils objections and, if so amended and passed, only one reading being required for such passage, it shall be presented again to the Councils.
Innovative approaches are needed to achieve small-scale interventions which strengthen and support existing goals and values in a manner complimentary to social-cultural relationships within the community. There is a perception that current FSM development policies and structural adjustment programs emphasize an overly top-down economic development agenda perpetuated by the discretionary application of customary governance. This neo-traditional policy framework undermines the dynamism of a collective and communal lifestyle suitable to a largely subsistence economy and society. Traditional authority and governance were purposefully stripped of any functional role in the modern FSM democratic government in all but one state. As a result, the role of traditional authority in public governance has taken on a more superficial ceremonial role that often is subject to financial gain or political manipulation. Customs and traditions are often invoked in times of crisis to pull the nation together, or to appeal to a collective endorsement and legitimacy for otherwise unpopular leadership actions. In the political sphere, traditional customs and extended kinships hold the authority and wield the bargaining influence that opens doors to elected office and positions of power. Political aspirants actively seek endorsement from traditional authority and closely align themselves with these traditional processes to further their political aspirations. People expect elected leaders and politicians to reciprocate by honoring obligatory duties and rights prescribed by traditional authority.
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The extent of traditional authority and status is intrinsically proportional to ones relative relationship to the land and collective extended family systems. There are two ways to be elected into leadership and power: (1) ride on the ticket of the extended family alliances and networks in ones electoral district or in ones municipality or state; and (2) use of current position and authority to buy votes or provide employment opportunities. Once elected, these leaders are subject to keeping and nurturing the electorate they represent. This is their priority mission. Those who reciprocate and fulfill their obligatory duties secure for themselves a perpetual elected position. 3.4 Community-Based Development Approaches The search for national identity in the post-colonial era and the preoccupation with economic development has relegated social welfare to secondary importance in the FSM. Already, the pace of urbanization and population growth is challenging the ability of customary traditions to protect people from hardship. Pockets of squatter dwellings and settlements are beginning to emerge throughout the FSM. An estimated 20% of FSM citizens have migrated overseas in search of better economic and social opportunities. Economic and social development of heritage and natural resource-based assets, based on traditional, indigenous cultural values and practices may be an effective approach for rural areas and those adjacent to them which contain cultural and natural resources. This involves initiating a variety of community participatory activities which act as catalysts for local community interest groups to assess the unique characteristics and economic potential of the elements making up their physical heritage. This assessment can provide a basis for designing community action plans that are both profitable and sustainable. This approach would be complementary to private sector development that would be more focused on utilizing land in the urban areas. While the private sector development approach would depend to a much larger extent on foreign investment and the use of technological and management skills prevalent in the global economy, the community-based approach would likely be a more effective approach for mobilizing resources in the non-profit sector, relying more heavily on local labor and capital. A significant portion of the labor could come from the underemployed in the subsistence sector. Three alternative models for rehabilitating and empowering local communities to achieve self-reliance through responsible cultural heritage preservation are presented.
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ocal Effort And P The L Local Preservation reservation (LEAP) Model is a process-based model premised on local communities assuming an active stewardship of their cultural heritage and being empowered to develop elements of that heritage in a responsible, profitable and sustainable manner. LEAP views preservation as an activity that can bring economic opportunities and serve as a tool for job creation and income generation based on traditional technologies, locally available materials and the human resources in the local community. This model stimulates economic opportunities by using traditional skills and indigenous resources available in the community. Recruiting the potential of cultural tourism as a tool for the preservation and enhancement of both the physical and intangible heritage can be combined with a specific cultural industry to promote urban regeneration and revitalization of rural and remote island communities throughout the FSM. Land development can be a catalyst for further cultural development. LEAP aims to empower inhabitants in local communities to: Understand and advocate the sustainable conservation of locally significant monuments, sites, and the material and tangible traditions uniquely associated with local culture; Play a leading role in actual hands-on conservation and preservation work, as well as in the interpretation of the heritage values which are to be safeguarded; Develop the means through which they can benefit financially from the enhanced conservation of their heritage.
Such promotional efforts also restore pride in local heritage thereby attracting opportunities for income generation and job creation in ecobusinesses in local communities. The aim is to restore heritage conservation from an elite technical specialization practiced by a handful of experts to a popular grass-roots movement. LEAP would serve as a tool for endogenous and sustainable economic and human development that is appropriate to a particular locale. acilitation Model has as its primary focus building The Enterprise F Facilitation communities around people doing what they love and empowering local economic development based on the personal growth of people within the communities they live in. The Enterprise Facilitation Model is a grassroots approach to local development that promotes and teaches civic leaders how to establish a program that transforms individual passion and community activism into rewarding and
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sustainable local enterprises. It is a client-centered, management coaching method made available to self-motivated individuals with a bona fide business idea. It is a low-cost, locally managed project that complements strategic infrastructure development and provides for better utilization of all business-related resources already available in each community. It succeeds by introducing sound and effective management principles to the grassroots by restoring personal motivation and talent to its central role in spurring entrepreneurship and promoting economic development. Since 1985, Enterprise Facilitation has demonstrated that the provision of competent and dedicated support to entrepreneurs is as important as the building of physical infrastructure to the development of a stable and successful economy. This is because true economic development is two-fold: the creation of infrastructure for development, and building the capacity of people to utilize such infrastructure. Enterprise Facilitation is a social initiative that helps communities create diversity and sustainability that is people-centered and locally owned and controlled. This model challenges leaders, managers, planners, and policymakers to listen, keep development simple, and do whatever it takes to make sure the entrepreneurs have a strong team in place. It forces the community to build enterprises with ordinary people. It offers a practical tool that gives communities the ability to create their own prosperous future. The Community Economic Development Initiative (CEDI) Model is a bottom-up approach to economic planning and development. This initiative seeks to bring members of the community, the private sector, civil society organizations, and various government departments together to generate a more informed response to the communities development efforts. It focuses the attention of central and local government on the economic development needs of local communities, and it provides a mechanism for coordinating the delivery of government services with the private sector to remove bottlenecks. The approach uses a participatory planning process to ensure that communities identify what they themselves can do to achieve economic development, and what services and assistance they need from others to help them achieve their plans. The output is a community-formulated resource development action plan that is owned by a broad-based constituency of stakeholders, all of who have a vital interest in the plans success. The CEDI Model is based on getting a community to work on the following: assess and prioritize its needs; identify its resources and assets; determine viable economic ideas and potentials; match community development ideas with existing enterprise facilitation programs; develop community cooperative
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plans; convene financing forums between cooperative officials and investors/ donors to deliberate on cooperative plans to secure financing; form community cooperatives and revolving loan and savings funds; and establish cooperative business ventures and community development corporations. Economic development has more to do with people than with so-called comparative advantage. Wealth can be generated in the short term by exploiting natural resources, but long-term prosperity can only be created collectively exchanging ideas, and sharing technologies and resources. CEDI helps communities initiate and generate their own solutions to common economic problems, build long-term community capacity, and foster the integration of economic, social, environmental and cultural heritage objectives to expand livelihood and to improve productivity. 3.5 Developing a Shared Vision Developing a shared vision is important to building and strengthening national identity. This goal entails a strategic planning framework that cuts through institutional boundaries by establishing a multi-sector, multi-disciplinary, partnership-based decision-making process. This participatory development framework would contribute to:
Promoting good governance and respect for the rule of law; Improving governance as stakeholders seek to achieve consensus on policies and practical measures that enhance the urban-rural linkages and harness the potential of towns to productively absorb increasing urban congestion; Strengthening national, state, and municipal links so that all are wellinformed and ready to participate in public affairs critical to their mandates; Encouraging citizen participation in public affairs and the developmental process; Promoting agreement on actions to be taken and timetables for implementation; Clarifying roles and responsibility of the private, public and civil sectors (non-profit organizations); Strengthening the judicial sector; Reducing government control over the economy.
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To actively support and facilitate the community-based development approach, there is a need for an agency or office of government that is mandated to work with the non-profit sector in seeking external financing (and in the future, government funding out of domestic revenues) and in assisting in the programming of such funding. This new agency (perhaps a Bureau of Community Development and Cultural Affairs) could also be responsible for ensuring national and state government support to the non-profit sector towards achieving the nations MDGs (discussed in Section 10.2). To this end, serious consideration should be given to establishing a Social Development Fund (SDF). The SDF is a means to provide much-needed assistance for basic community services not provided under traditional national and state health and education programs. Some of the MDG targets that could be addressed by the SDF include hardship reduction by creating employment, and environmental sustainability by furthering the targets on protection of forested land and maintenance of biological diversity. Other programs could address public education, legal literacy, human rights education, and basic adult literacy.
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Chapter 4. Government Structures and Implications for Economic Development

4.1 National and State Governments Role in the Federal Structure
he national constitution created three levels of government in the Federated States of Micronesia: national, state, and local. A state, however, is not required to establish a new local government if none existed prior to the effective date of the constitution. Under this federal system of government, the areas of responsibility between the national and the state governments are separated. The constitution delegated to the national government two types of power:
powers expressly delegated to the national governments; powers that are indisputably national in character as to be beyond the powers of the states to control.
The powers granted to the state governments are:
powers not expressly delegated to the national government; powers not prohibited to the state.
The constitution does not grant any authority to the local governments. The powers granted to the state are residual, i.e., the states exercise the remaining powers. The FSM Constitution does not seem to make any use of the doctrine of pre-emption on the part of the national government to encroach on state power. The powers delegated to the national government are legislative and enumerated in Article IX. Among these legislative powers are:
to regulate banking, foreign and interstate commerce, insurance, the issuance and use of commercial paper and securities, bankruptcy and insolvency, and patents and copyright; to impose taxes, duties, and tariffs based on imports; to impose taxes on income; to establish usury limit on major loans; to regulate navigation and shipping except within lagoons, lakes, and rivers;
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to regulate the ownership, exploration, and exploitation of natural resources within the marine space of the Federated States of Micronesia beyond 12 miles from island baselines.
In addition, the national government has the power to establish and administer post-secondary institutions and provide legal assistance. Pursuant to these powers, the national government established the College of MicronesiaFSM and the Public Defenders Office, and provided funding for the Micronesian Legal Services Corporation. Among the residual powers exercised by the state governments are to:
establish and administer elementary and secondary schools; establish and administer health services; establish local government units; borrow money on state credit; establish and maintain public safety; regulate intrastate commerce; regulate navigation and shipping within lagoons and rivers; regulate the sale and use of land; regulate fishing within the twelve-mile territorial sea; levy sales tax.
Despite the fact that the states control their area of jurisdiction, the FSM Constitution is the supreme law of the land and any state constitution and laws in conflict with it are invalid to the extent of conflict. However, some of the states have enacted laws that may be in breach of the equal protection clause of the national constitution. The legality of these laws has not been challenged in national courts so the states continue to enforce them regardless of their discriminatory nature. 4.1.1 The National, States, and Local Governments The national government of the FSM is one of the four successors to the government of the Trust Territory of the Pacific Islands and the newest level of government in the federation. Two states, Chuuk and Yap, inherited their boundaries from the former administrative districts of the Trust Territory. The other two states, Kosrae and Pohnpei, were administered as one unit under the UN Trusteeship. Prior to the referendum on the national constitution, Kosrae became a separate and distinct state. With the exception of Chuuk, the
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municipalities in the other three states maintained the boundaries that existed during pre-colonial times. In Chuuk, the Japanese consolidated the villages on each high island into local governmental units. Consequently, the boundary of each municipality in Chuuk transcended the borders of the autonomous precolonial local villages. So with the exception of Chuuk, the municipalities in the other three states are the oldest political units in the Federated States of Micronesia. 4.1.2 The Hot Spot: Center versus the Periphery Despite the clear allocation of powers to each level of government, there is often conflict between the national and state governments which usually involve political power, money, and land. One recurring issue, which started surfacing very early after the national government was installed, is which government state or national has the power to issue foreign investment permits. This power is not specifically allocated to the national government, but it could assert jurisdiction to regulate foreign and interstate commerce. In addition, foreign investment is linked to foreign affairs making it national in character. But in the journal of the 1975 Micronesian Constitutional Convention, the authority to regulate the issuance of foreign investment permits was listed as an example of a power a state may exercise. This conflict over jurisdiction prompted state and national leaders to call for leadership conferences to sort out the issue. The conferences decided on a compromise that resulted in both state and national governments having the authority to issue foreign investment permits. This political solution did not please the states. In 1997, the national congress enacted a foreign investment law which set up national categories of economic sectors to be regulated by the national government and their state counterparts. It is unlikely that the states will readily embrace this new foreign investment law because it essentially dictates to the states what they can and cannot do. The states will view the new foreign investment law as a national government attempt to further control economic development activities. This issue should be revisited by national and states leaders to decide on where to draw the jurisdictional line between the national and state governments. Another flash point has to do with the power of the national court to hear cases arising in areas of jurisdiction constitutionally delegated to the states. These cases deal with land, and foreign boats illegally fishing in the territorial sea. The national court has introduced the legal fiction of concurrent jurisdiction
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to hear these cases. The state courts consider this claim as another example of national governments encroachment on state jurisdiction. An issue that has caused many political problems and dissention in the states, mainly in Pohnpei, is land. All the states incorporate in their constitutions some form of restriction against the sale of land. In Yap, any transaction must be in accordance with local custom and tradition. In Pohnpei, the restriction against sale of land applies to foreigners as well as non-Pohnpeian citizens. In spite of this restriction, Pohnpeian landowners have found a lawful way to transfer title to their land to FSM citizens from the other states by treating the transfers as gifts and accepting payment as a private loan. This problem exemplifies the difficulty in regulating the use of private land. The constraint on the sale of land discourages foreign investors from establishing business ventures. Pohnpei, under pressure from donor agencies, has enacted a land-use law which allows fifty-five year-leases, but it attaches so many conditions that no investor would want to obtain such a lease. The effect of this law is disappointing to donor agencies that have encouraged FSM governments to promote private sector development. The states need to enact new land-use laws that will allow long-term leases to attract investment in the private sector. The states must do their part to demonstrate to donor agencies and countries that they are serious about private sector development. There also exists a conflict about money which has to do with revenue derived from two sources: tax on wages and gross business receipts, and fishing permit fees. The national government collects wages and salaries tax, and gross receipts tax then pays each state its share of 50% as mandated by law. The dispute centers around the share of each state. The states wanted a split of eighty-twenty: 80% of the taxes collected going to the state, and 20% to the national government. Each state government was able to collect enough signatures to force the national government to subject the eighty-twenty formula to a nationwide referendum. The new formula failed to gain the constitutionally mandated prerequisite of at least two thirds of the votes cast in three of the four states. After the referendum, the national congress enacted a new revenue sharing formula of seventy-thirty. The national congress also mandated that the states should use the revenue received under the new formula only for education and health. The states argued that even though they would be getting a bigger share of the revenue, the attached condition made the law incapable of meeting their needs. But with the defeat of the eighty-twenty formula at the hands of the voters, the states shied away from risking another showdown with the national government over revenue sharing. So the seventy-thirty formula remained until 2004 when the national congress amended the revenue sharing law to restore the original fifty-fifty split.
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A second money problem deals with the fishing permit fees. The national government, through the National Oceanic Resources and Management Agency (NORMA), issues licenses to foreign vessels to fish within the exclusive economic zone (EEZ). When the Micronesian Constitutional Convention met in 1975, the delegates did not foresee the revenue that would derive from issuance of permits to foreign fishing vessels. The proposal to allow the national government to regulate the use of living and non-living resources in the EEZ was adopted without any attempt to require the national government to share the revenue with the states. To the delegates, the constitutionally mandated creation of the EEZ was a political statement intended to strengthen the hands of the Micronesian negotiators at the Compact negotiation. In just a few years after the national constitution took effect, the revenue derived from the issuance of fishing permits to foreign fishing boats became a major source of funds for the national government, and the states had started to express interest in receiving a share of the fishing permit fees. There was no response from the national government so the states circulated a proposed constitutional amendment that would declare the states as the owners of the exclusive economic zone (The National Union, 1998). The amendment was greatly flawed, but the states were determined to push it in a nationwide referendum. The proposed constitutional amendment failed in the four states, but this issue continues to be a potential source of conflict in the relationship between the national government and the states. Pohnpei has been the most vocal critic of the national government. In 1991, the Pohnpei State Legislature created a special committee to look into areas of state concern vis--vis the national government. The committee reported that Pohnpei was actually worse off at the beginning of Compact I because it was receiving less funding than under the Trusteeship. The committee also indicated that with the impending step-downs and termination of Compact I, the state would face a drastic cut in operating revenues. One way to increase revenue is to liberalize foreign investment law. The only way the state could manage this is to have the power to make decisions without interference from national government. The committee report also leveled the following complaints against the national government:
Pohnpei needs more liberalized investment policies than the FSM is willing to provide. The FSM government is encroaching on the authority of the state by making payments to local governments and handing out Congress money to other institutions over the heads of state officials.
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FSM government is not compensating Pohnpei for its government services to non-Pohnpeian FSM citizens. Pohnpei is obligated to honor those FSM laws that may be against its best interest; e.g., open immigration policy. Land on Pohnpei is being lost to other FSM citizens, even though purchase of land by non-Pohnpeians is illegal. The presence of the national government on Pohnpei only intensifies negative social change as exemplified in the increased rate in crime and family breakdown. There are too many levels of government (national, state, municipal) for effective and decisive action. Pohnpei is ready for full independence, as opposed to being a part of the FSMs Compact of Free Association with the US.
A glance at the list shows that only one has to do with the federal relationship with the national government. The first complaint has to do with foreign investment policies which the state shares with the national government. The other complaints are misleading. An example is the accusation made against the national government for failure to compensate the state for services (presumably education, health, and utilities) provided to non-Pohnpeian FSM citizens. In fact, employees from other FSM states who reside in Pohnpei pay taxes to the Pohnpei State treasury, but their children are not eligible to receive scholarships from Pohnpei. In addition, most of the national government employees from other FSM states enroll their children in private schools and join the health insurance program. When they are sick they utilize the services of the various medical clinics in Kolonia. These employees pay their utility bills, too. The committee report did not discuss the benefits Pohnpei receives from the presence of the national government and the College of Micronesia in the state. The committee also attributed the rise in crime rates and family breakdown to the presence of non-Pohnpeian FSM citizens. This claim is potentially divisive. The problems articulated in the report of the special committee have little to do with the nature of the federal system of government. These tensions are political. Since the inception of the Federated States of Micronesia, Pohnpei has attempted several times to secede. This breakaway movement flares up from time to time, especially during economic hardship such as the Compact funding step-downs in the 1990s. The criticism against the national congress for directly providing funds to the municipalities is valid, but this is not unconstitutional. The funds are used to build secondary roads, repair municipal offices, and extend power in the villages.
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A possible incentive for the national government is that providing funds for infrastructure development in the villages make the national senators more influential with the local leaders and voters. The complaint that FSM has too many levels of government is valid, but the national government is not responsible for creating municipal governments. The state could choose to utilize the traditional political structure already in existence. This arrangement will actually be less expensive for the states. Despite being home to the government for 24 years, Pohnpei is still uncomfortable with this role. Although the discomfort of Pohnpei does very little harm, the picture of political instability it portrays is not conducive to economic development. The ongoing Yap State Constitutional Convention is considering a proposal that would ask the voters, at ten-year intervals, whether the state should remain a part of the Federated States of Micronesia. At present Yap is considered as the most politically stable state in the federation. However, the fact that this proposal is being discussed in the state constitutional convention would mark Yap State as politically unstable and discourage potential investors in the local economy. The structure of the federal system of government in the Federated States of Micronesia is not an insurmountable barrier to a good working relationship between the center and the periphery. To maintain political unity in Micronesia, a federal system is more acceptable than a unitary one. The resentment directed towards the national government is due to the division of national resources and the perceived co-optation of state powers. It will take an innovative approach and commitment to national viability and economic self-sufficiency on the part of the national and state leaders to reach an acceptable division of national resources and to solve the nuances of the federal relationship that exist in the Federated States of Micronesia. 4.2 Role of the Legislature vis--vis the Executive The FSM Congress is given the power to elect the President and Vice President from among its four at-large members who represent the four states. These members serve a longer term of four years. The other ten members of Congress, who represent single-election districts, serve two-year terms. The National Congress has no term limit. A quick glance at the lists of powers delegated to the three branches of the national government indicates where the power in the national government lies. The powers assigned to the National Congress fill more than four pages while the
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ones entrusted to the Executive Branch fill only two. Aside from the power to elect the President and Vice President, the National Congress possesses three other important powers: to impose taxes; to appropriate public funds; to override presidential veto. The power to elect the President and the Vice president gives the National Congress undue influence over the executive branch. If the president wants to run for reelection, he must act upon requests from members of Congress. Perhaps what impacts the presidents decision the most is the knowledge that any use of his power might alienate the people who handed him the presidency. The power to impose taxes gives the national congress the authority to control the financial policy of the nation. For instance, earlier this year congress altered the revenue sharing formula despite strong protest from state leaders. In addition, the power to appropriate public funds enables Congress to have influence over decisions that could result in conflicts of interest, such as projects in their election districts. The president is almost powerless to guide such decisions. Since 1992, the Congress has developed a practice of overriding presidential veto of appropriations for projects in their election districts. This year Congress overrode a presidential veto of an appropriation of $2 million for public projects in the states, an act which put the nation in deficit. The cornerstone of the relationship between the national congress and the executive branch is the doctrine of checks and balances. For this relationship to work properly, the functions of the legislative and executive branches must be complementary. In the FSM, the political culture is devoid of ideology; and political parties are yet to develop. Lacking these necessary political ingredients, politics in the FSM is driven mainly by the interests of the states, as represented by the individual politicians. One political phenomenon unique to the FSM government system is the cohesiveness that exists among the members of the national congress. The only centrifugal force is state interest. The members have an informal understanding that each state congressional delegation has exclusive authority to determine the funding priority for its state public projects appropriations. The direct result of this unity among the members is the ability of congress to override presidential veto with ease. Political observers contend that there are too many checks and no balance between the Congress and the President. This problem will persist until the political infrastructure in the system becomes fully developed.
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The president however is not completely powerless. He is bestowed with such constitutional powers as the nomination of the principal officials of the government; appointment and reception of ambassadors; the conduct of foreign affairs according to statute; and the veto of bills enacted by the congress. The president derives additional power from the respect and prestige of his office as the head of government and head of state. This accords the president the power to persuade. This means that the president must be fully immersed in politics with the national congress and the state governments. The presidential position is key to the system, and success depends on the political skill to persuade and to build political alliances that transcend regional, ethnic, and cultural divides. At the state level, the executive and legislative branches work relatively well together. Yap is a model of cooperation in a government that espouses the doctrines of separation of power. Yap practices cannot be replicated in other states because the Yapese have lived under a traditional political system that practiced a similar type of checks and balances as that built into the modern government. Three states have fulltime unicameral legislatures. Chuuk, on the other hand, chose a bicameral legislature, with a senate and a house of representatives. The advantage of a bicameral legislature lies in the internal checks and balances between the two chambers. But this system of government is expensive and Chuuk can hardly afford the expense. 4.3 Economic Implications The economic implications of the political problems come down to one thing: if people perceive the FSM to be politically unstable, nobody will make any significant investment in the country. The national and state governments need to work out a more acceptable solution for the good of the entire FSM. The delineation of power should be reviewed. In matters concerning economic development, the national governments role should be to support state efforts. The states need a clearly designated area of jurisdiction with respect to foreign investment. The national government can step in if, for example, the foreign investor is involved in export from FSM then the national government may regulate such an activity through taxation. The other issue has to do with the sharing of fishing permit revenues. Much tension can be alleviated if the national government shared this income with the states. The matter of revenue is particularly important to the states because it is at that level that the cost of education and health is shouldered.
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Another fiscal measure that may be adapted to avoid conflict over domestic revenue is the application of VAT as a substitute for business gross tax and duties on imported goods. VAT has two major advantages. The first is that since it is spread across a broad base, it may be assessed at a lower rate. Second, since VAT is not assessed against investment goods and exports, it makes the economic environment more conducive to the development of the private sector. The implementation of VAT, however, must come with an amendment to the FSM constitution granting both the national government and the states the concurrent power to levy value-added taxes. This is necessary because as a tax on goods and services, VAT comes within the taxation power of the state but also falls under the authority of the national government as a tax on imported goods. There are concerns over the checks and balances applicable to the national Congress. The recent indictments against several members of the national congress for criminal conspiracy and theft of public funds are the symptoms of a corrupt national political system. Similarly, there are concerns over the incomplete separation of powers. For example, the Chuukese national senators have created the Chuuk State Committee on Improvement Projects despite the national court ruling in Udot v. FSM that national senators involvement in choosing and approving projects for funding by the Committee is in violation of the separation of powers embodied in the FSM constitution and that the existence of the Committee itself is constitutionally suspect. Protection of public confidence and trust in the national government requires that these matters be carefully examined. Promotion of transparency in the three levels of government in the Federated States of Micronesia requires an interested public. The lack of media to report what is happening in government is a big factor in the lack of public interest. One option is to encourage non-governmental organizations to report on the happenings in government. To reduce the cost of government, the states need to consider amending their constitutions so that members of their legislatures are only paid when they are actually performing official work. For the Federated States of Micronesia to effectively promote an attractive political and business climate for investment and economic development, governance standards must be raised substantially, through implementation of initiatives to achieve transparency and accountability and in the end, by removing the potential for corruption.
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Chapter 5. Economic Development, 1987-2003

5.1 Compact I in Historical Perspective he relationship between the government of the FSM and the US from the end of World War II until 1986 was defined in accordance with the United Nations International Trusteeship System. In the latter years of the transition to independence, the FSM opted to continue its relationship with the US through a treaty of Free Association. This relationship was formalized through the Compact of Fee Association (Compact I), which stipulated the respective governments rights and obligations through a 15-year period term. An important obligation of the US under Compact I was financial aid in terms of general, special, and capital grants that cumulatively amounted to $1.54 billion. During Compact I, the bulk of financial assistance was provided in the form of budgetary transfers general and capital grants that were subject only to a few restrictions. Under Compact I, 40% of total grant funding (excluding special grants) was to be allocated to capital investment, as indicated in Table 5, but this was a cumulative requirement and did not have to be met on an annual basis.
Table 5. Compact I Grant Funding by Category and Period: Fiscal 1987 to 2003 (Millions of Current Dollars) FY87-91 General Grant Capital Grant Special Grants 36.00 24.00 15.27 FY92-96 30.60 20.40 15.27 FY97-01 24.00 16.00 15.27 FY02-03 30.198 20.132 15.27
Source: Compact of Free Association, Articles I, II and III. November 1986; and subsidiary agreement specifying allocation of selected Special Grant funding between the FSM and the Republic of the Marshall Islands (Article I, Section 216 and Article II, Section 221).
The smaller special grants were designated for specific purposes, including communications, energy, medical referrals, scholarships, health and education, and support for the activities of the Civic Action Teams provided by the US military. Compact I also provided for continued access to other US domestic programs.
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The funding levels under the capital and general grant transfers and for some of the special grants were partially adjusted for inflation. They were also subject to substantial step-downs at five-year intervals. In addition, the agreement provided a temporary increase in transfers during a two-year negotiating window following the end of Compact I. General grant transfers could be combined with funds from other sources and become part of general revenues. Typically, no further accounting to the US was required for the use of these funds. Expenditures to be counted against the required 40% capital investment had to be documented and associated with particular uses, but the list of allowable uses was broad. The level of documentation required by the US was essentially limited to the project description. Of the various special grants, only the grant for health and education required that specific uses be identified. Figure 1. Compact Transfers by Category
120.00
100.00
80.00
$ millions
60.00
Special Capital General
40.00
20.00
0.00 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03
Source: FSM Department of Economic Affairs, EMPAT.
The US Department of the Interior (DOI) was the primary agency responsible for Compact management. Other agencies carrying out programs in the FSM were able to obtain reimbursement for their activities through the DOI budget. This eventually created problems for the DOI, as it was unable to effectively manage programs mainly because there appeared to be no ceiling on the value of reimbursement.
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Box 6. Federal US Program Assistance

US Federal program assistance was an important part of the overall Compact I aid package, with the health and education sectors being the primary beneficiaries. These programs provided a combination of technical and grant assistance. The FSM was eligible, on a competitive basis with other US states and territories, for a wide range of programs. In addition, several projects included specific provisions for assistance to the FSM and the other Freely Associated States. Federal Program Assistance in Health and Education: 1996-2000 (in current US $) 1996 Health 2,123,906 Education 4,471,432 1997 1,854,975 3,246,928 1998 1,976,277 6,803,676 1999 2,168,365 6,814,478 2000 2,120,579 7,180,371
Source: Deloitte and Touche (1987-2001). Single Audit Report.
The table above summarizes government current expenditures for health and education, but excludes payments made directly to beneficiaries and programs implemented through non-governmental organizations. Nevertheless, these expenditures accounted for more than 10% of the total value of Compact grant assistance between 1998 and 2000.
5.2 Structure and Performance of Economy 5.2.1 Economic Structure The FSM economy in the mid-1980s leading into the initial Compact period, was dominated by a large public sector funded by US budgetary transfers. The funds essentially paid for all government functions, including a large public service wage bill and external trade imbalance in favor of merchandise imports. The economic structure of the nation was the product of policies that emphasized the building of institutions and infrastructure patterned after those in the US. Less priority was placed on providing the policy climate, technical assistance, and training and institutional support needed to promote development of a competitive private sector. National, state and municipal government employment accounted for an average of 58.7% of employment from 1987-1989 (Table 6), compared with a 31.6% employment share for the private sector, 7.9% for the non-profit sector, and 1.9% for public sector enterprises (PSEs). In terms of GDP contribution, the government accounted for 37.5%, compared with a 26.8% share for the private sector. PSEs and non-profit groups each contributed 2.9% of GDP. Other activities, which mainly include the household sector
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(subsistence agriculture and fisheries), contributed an average of 29.9% of GDP from 1987-1989. Table 6. FSM Employment and GDP by Institutional Sector: 1987-89 and 2001-03 (figures in %) Sector 1987-1989 Average Employment Private Government Public Sector Enterprises Non-Profits Other 1/ Total 31.6 58.7 1.9 7.9 100.1 GDP 26.8 37.5 2.9 2.9 29.9 100.0 2001-2003 Average Employment 42.6 42.9 5.6 8.9 100.0 GDP 30.8 27.2 7.6 4.8 29.6 100.0
Source: Annex A Tables A1 to A10. 1/ - Other GDP includes subsistence, home ownership, indirect taxes, less bank charges.
Meanwhile, private sector employment averaged 42.6% of total employment in 2001-03 - an 11percentage point gain - almost equal to the government share of 42.9%. The decline in government share by15.8 percentage points was offset by the rise in the PSE share. In terms of GDP contribution, the rise in private sector share was significantly less only a 4 percentage point gain. On the part of government, its share in the GDP declined by 10.3%. The significantly smaller gain in GDP contribution of the private sector over the 17-year Compact period, compared with employment, is largely explained by the persistently large gap in wage rates between government and private sectors. It also reflects lack of improvement in productivity. Although employment by itself is a significant structural indicator, the composition of employment within each sector is also important. For example, a large share of private sector jobs in export industries is indicative of a relatively strong economy. Relative wage levels (per employee per period) is also important. More will be said about these dimensions of economic structure in later sections.
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5.2.2 Growth of GDP Income and expenditure accounts in the FSM only present estimates of domestic value added using the income approach. Data on goods and services expenditures (final demand) and capital investment are not available. Gross domestic product estimates for the FSM as a whole and by State are presented in Tables A5 (Appendix A). In the first year under the Compact, nominal GDP was estimated at $113.7 million for the nation, about $1,260 per capita, which placed the FSM among lower middle income developing countries based on World Bank criteria. By the end of the Compact I period in FY2003, nominal GDP doubled to $229.6 million. In real terms (1998 $) GNP grew from $164.3 million (1987) to $218.9 million (2003), representing average annual growth of 1.8% over the entire Compact I period (Table 7). Table 7. Real GDP and GDP per Capita in the FSM by State: FY1987-FY2003 (GDP in millions US$)
FSM/ State FY87 FY95 Growth1/ FY87-95 3.9 2.5 1.4 5.6 3.7 1.9 0.5 -0.2 3.3 2.0 FY99 Growth FY95-99 -3.6 -5.9 -2.5 -4.1 1.8 -3.8 -6.0 -3.1 -4.6 1.8 FY03 Growth Growth FY99-03 FY87-03 3.2 4.5 3.5 3.0 1.6 2.9 4.4 2.6 2.6 1.3 1.8 0.8 1.0 2.4 2.7 0.7 -0.2 -0.3 1.1 1.8
Real GDP: FSM 164.3 Chuuk 56.6 Kosrae 15.9 Pohnpei 67.6 Yap 24.1
223.4 69.2 17.8 104.3 32.2
193.2 54.2 16.1 88.1 34.6 1,809 1,013 2,118 2,561 3,089
218.9 64.7 18.5 99.1 36.8 2,031 1,205 2,342 2,840 3,257
Real GDPPer capita: FSM 1,822 2,112 Chuuk 1,249 1,296 Kosrae 2,446 2,405 Pohnpei 2,372 3,086 Yap 2,459 2,875
Source: Table A1, Annex A/ Average annual growth.
In per capita terms, real growth amounted to 0.7% for the same period. Growth of GDP in the first half of the Compact I period (fiscal 1987-1995) was satisfactory in terms of its rate, particularly in Pohnpei and Yap, but the growth was being generated by large government expenditures and public sector investment. There was no development of competitive, private sector-led activities. The large
48
government and PSE investments, mostly in commercial fisheries, were substantially non-performing, resulting in significant operating losses and need for government subsidies. The substantial step-downs in US grant assistance in 1992 and 1997, in tandem with the large amount of non-performing government investments, resulted in a significant decline of GDP in the 1995-1999 period. The economic contraction occurred in all states except Yap. Individual states differed significantly (Figure 2). Among the four states, both Chuuk and Kosrae experienced a contraction in real per capita GDP , with only Pohnpei and Yap able to generate a modest positive growth rate for the entire Compact period at 1.1 and 1.8% per annum, respectively.
Figure 2. Growth in FSM and State Real GDP

2 5 .0
2 0 .0
1 5 .0
1 0 .0
5 .0
FSM C huuk K o s ra e P ohnpei Yap

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Percent
0 .0
- 5 .0
- 1 0 .0
- 1 5 .0 F is c a l Y e a r
5.2.3 Balance of Payments Balance-of-payments current account data are summarized in Table 8. As noted earlier, merchandise imports and official unilateral transfers dominate the nations external account. In 1994-1996, average merchandise imports amounted to $95.2 million, while merchandise exports averaged $17.9 million, a ratio of 5.3 to 1.0 in favor of imports. This resulted in a large trade deficit averaging $77. million over the three-year period. In the last three years of the Compact, the corresponding deficit in merchandise trade was $88.5 million, with the import to export ratio averaging 3.9 to 1.0.
49
Table 8. FSM Balance of Payments Current Account: FY1994-FY2003 (in millions US$) Item FY94-FY96 Average -77.3 17.9 -95.2 -23.1 17.5 -40.6 22.5 34.4 -12.0 98.0 1.2 96.8 20.1 FY97-FY00 Average -78.7 17.1 -95.8 -31.6 16.5 -48.1 19.5 28.7 -9.2 89.5 2.0 87.5 -1.3 FY01-FY03 Average -88.5 22.6 -111.1 -29.2 18.2 -47.4 10.6 16.8 -6.2 109.8 2.3 107.5 2.7
Trade Balance Exports, fob Imports, fob Services Receipts Payments Income Receipts Payments Unrequited Transfers Private Official Current Account Balance
With implementation of the Public Sector Reform Program (PSRP) in 1996, the level of both imports and exports declined in nominal terms during the period 1997-2000. Exports in 1997-2000 averaged $17.1 million per annum while imports averaged $95.8 million per annum. Details of external trade are covered in Section 5.2.5. From 1994-2003, there were substantial deficits with respect to services, factor and resource payments, and other current account items. As expected, the deficits were offset by the large official transfers of Compact money. The annual deficit in services, typically in the $20-30 million range (see Table A26), is driven by the large cost of freight, transportation, and insurance of merchandise imports. While the tourism sector does make positive contributions to the national account (an average of $10.6 M from 20012003), it is not enough to offset the costs of merchandise imports. Overall, the net income balance has declined from over $20 million in the 19941996 period to an average of just over $10 million in 20012003. This decline is largely the result of a drop in interest and dividend income in 2002003.
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Between 1994 and 2003, average annual total transfers amounted to $98.2 million. The lowest amount of $80 million came in 1997 and the largest transfer of $122.3 million was made in 2003. Of the official transfers, $37.2 million or 30 per cent came from the donor community. Without these transfers, the current account was in deficit, averaging $81.12 million annually, equivalent to an average of 39% of the GDP from 1994-2004. 5.2.4 External Debt The external official debt of the FSM is shown in Table A27. The data reported are for the fiscal years 1990 to 2003. The nation had no external debt before 1990. Shortly after the commencement of Compact I, FSM governments began borrowing heavily overseas to fund investments. Much of the early borrowing, through utilization of Medium Term Notes bonds secured by future Compact transfers, was used by Yap for portfolio investment ($71.0 million) and by Chuuk, Kosrae, and Pohnpei to fund fisheries investments ($42.9 million). From nearly $20 million in borrowing in 1990, external debt increased rapidly to a peak of nearly $137 million in 1993. A significant share of this external debt represented financial assets (mainly Yaps portfolio investment) held in overseas investment accounts. Taking into account adjustments made for offsetting externally held financial assets, the external debt balance peaked at $78.3 million in 1993. External debt then declined steadily through 2003, despite the necessity to borrow in 1997-1998, when the country implemented a Public Sector Reform Program. External debt, with adjustments for overseas financial assets, steadily declined from 41.0% of GDP in fiscal 1993 to 17.0% in 2003. In relation to exports (value of goods and services), debt service declined from 35.0% in 1994 to 7.5% in 2003. 5.2.5 Exports and Imports Commodity exports and imports for the nation and by state are presented in Tables A40-A41. With respect to total commodity imports (Table A40), the total cif (cost, insurance and freight) value of commodity imports averaged $108.3 million in the three-year period 2000-2002. The largest import category was food and beverages, accounting for 28% ($30.0 million). The next largest category was industrial supplies, which accounted for 18%, followed by fuels and lubricants, with a 15% share. In the food and beverage category, the largest imports were (2000-2002 average): rice ($3.8 million), poultry and meat ($3.1 million), beer
51
($2.5 million), canned meat ($2.2 million), and canned fish ($1.7 million). Another large item, accounting for $1.6 million, was cigarettes and tobacco. Table A42 presents figures for total FSM exports for 1992-1994 and 20002002. Marine exports represent the single largest category, accounting for over 90% of total exports on average in the 1992-1994 period, and 68 per cent in 2000-2002. It should be noted that the value of marine exports declined sharply from an average value of $43.6 million per annum in 1992-1994 to $16.5 million per annum in 2000-2002 a 62% drop. The bulk of the decline came in the offshore fish catch. Agricultural commodity exports represented less than 10% of the total in both periods. Chapters 8 and 9 contain a more detailed discussion of agricultural and fisheries exports, respectively. Commodity imports for 2002 by State are shown in Table A41. The pattern of state imports generally follow the order of importance for the nation. Food was the highest import category in all states except Yap which imported more industrial supplies. Chuuks food imports accounted for 38.3% of its total. This state, with the lowest per capita GDP, was also the leading importer of fuels and lubricants in terms of proportion to total imports (19.4%). Chuuk was also the smallest importer of capital goods (6.2% compared with 11.3% for Kosrae and 12.7% for Pohnpei). Total imports per capita amounted to $550 for Chuuk, $1,279 for Kosrae, $1,255 for Pohnpei, and $1,932 for Yap. Commodity exports for 1992 and 2002 by state are shown in Table A43. Offshore fish (mainly tuna) was the primary export of the nation accounting for 84% of total exports in 1992 and 61% in 2002. For 1992, nearly all offshore fish exports were produced by Pohnpei and Yap, each with 47% of the total. The second largest commodity export for the FSM is garments, all exported from Yap. In 1992, this commodity comprised about 25% ($3.6 million) of total FSM exports. Given that Compact II removes the import preference granted to FSM imports into the US, the continued viability of this export is in question. 5.2.6 Employment, Wages and Prices The main data source on formal employment is the FSM Social Security Administration. Their reports contain quarterly and annual data on both private and public sector workers. The data do not include information on those working in the subsistence sector, in family-owned businesses, and the self-employed. In the first years of Compact I, employment growth was strong, averaging 4.0% per annum between 1987 and 1992. Figure 3 depicts employment performance for the FSM and for each of the states. Annual employment and wage figures are detailed in Tables A6-A15, in Appendix A.
52
Figure 3. FSM and State Total Employment: FY1987-FY2003

E mp lo yment
18000 16000 14000 12000 Numbe 10000 8000 6000 4000 2000 0 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FS M Chuuk K os rae P ohnpei Y ap
Fisca l Ye a r
Nationwide employment growth remained strong in 1992-1995 averaging 2.6% per annum and reaching a peak of 16,000 in 1995. However, with the severe fiscal shock of the second step-down in Compact funding, overall employment declined in the next three years, before recovering. In the last three years of Compact I (2001-2003), total FSM employment remained level between 15,100 and 15,350. Private sector employment grew strongly in the first half of Compact I, averaging 7.3% per annum between 1987 and 1995. Most of this growth occurred in non-tradable services industries, including retail and wholesale, construction, and transport. Employment growth in government (including local governments) during the same period averaged 0.6% per annum. In the PSE sector, employment jumped nearly five-fold from about 220 to 949 between FY87 and FY95, a growth average of 21.3% per annum. Population, labor force, and employment data for the census years 1994 and 2000 are shown in Table 9. There was little population growth between 1994 and 2000, as out-migration to the US and its territories appeared to have accelerated. Out-migration is discussed in Chapter 7.
53
Table 9. Population and Labor Force by State: 1994 and 2000

Population Population Labor Force Formal Employment Subsistence Agriculture/ Fisheries Non- Marketed Market 1994 Chuuk Kosrae Pohnpei Yap FSM 53,319 7,317 33,692 11,178 105,506 29,068 4,251 19,500 6,754 59,573 11,140 2,079 9,020 3,733 25,972 5,373 1,386 5,539 2,083 14,381 2000 Chuuk Kosrae Pohnpei Yap FSM 53,595 7,686 34,486 11,241 107,008 31,587 4,628 20,468 7,153 63,836 18,192 2,232 11,816 5,174 37,414 4,546 1,468 5,375 2,570 13,959 5,134 198 3,058 2,234 10,624 2,299 198 1,935 160 4,592 6,213 368 1,448 210 8,239 3,119 98 1,408 1,249 5,874 430 282 756 33 1,501 2,218 313 1,317 368 4,216 Unemployed
Source: FSM (2002.) National Census Report. Table 9.1
Despite the lack of growth in overall employment in the last half of Compact I, there was a sizable contingent of foreign workers holding jobs in the FSM nearly 1,700 at the end of 2003, about 11% of the total workforce (FSM Immigration records). Government wages have been consistently higher than those in the private sector. There is also a sizable differential in wage rates between national and state governments. Table 10 summarizes wage rates among institutional sectors at beginning and end of Compact I. In the first three years of the Compact, the average private sector wage rate was around half that of state governments and one-quarter of the national government rate. The municipal government average wage rate was only 40% that of the state. As indicated in Table 10, the differences among levels of government narrowed substantially by the end of Compact I, although average private wage relative to the state government wage remained about the same.
54
Over the 14-year period between 1989 and 2003, the real wage rate in the private sector declined by 8.0%, while that of both national and state governments also declined, by 29.2% and 5.4%, respectively. Table 10. FSM Wage Rate Comparisons Among Sectors and Over Time: 1987-2003 (Mean Wage Rates in 1998 US Dollars)
Sector Differential 2001-03 Differential Wage Rate Average Among Average Among Increase Sectors Sectors 1989-2003 (in %) 4,257 4,965 7,699 15,425 7,821 3,042 0.544 0.635 0.984 1.972 1.000 0.389 3,915 7,090 9,871 10,925 7,398 4,473 0.529 0.958 1.334 1.477 1.000 0.605 -8.0 42.8 28.2 -29.2 -5.4 47.0 1987-89
Private Non-Profits Public Enterprise National Govt. State Govt. Municipal Govt.
Source: FSM Department of Economic Affairs
Prior to 1999, the US Consumer Price Index was used as a proxy for movements in price levels in the FSM. In 1999 an FSM CPI was established for the nation and for each state. In the case of Chuuk, however, the CPI was not fully established until the first quarter of 2001, and for the interim period 1999-2000, average prices of index items in the other three states were combined with Chuuk price data (on a subset of items) to estimate the Chuuk CPI series. Annual CPI data are presented in Tables 11 and 12 for the nation and each of the states for the period 2000-2004. Table 11. Consumer Price Index by State: 2000-2004(All Items 1999=100)
Period 2000 Q1 - Q2 - Q3 - Q4
FSM 100.8 102.0 102.5 103.3
Chuuk 100.4 101.5 101.4 103.1
Kosrae 101.1 101.2 101.4 101.9
Pohnpei 101.4 102.8 104.5 104.4
Yap 100.1 100.6 101.4 102.1
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2001 Q1 - Q2 - Q3 - Q4 2002 Q1 - Q2 - Q3 - Q4 2003 Q1 - Q2 - Q3 - Q4 2004 Q1 - Q2
102.8 102.6 102.5 102.7 102.8 102.7 102.4 102.3 102.0 102.6 102.7 103.5 103.9
101.7 100.9 102.3 102.9 102.6 103.4 103.0 103.3 102.7 103.3 103.5 105.6 106.3
101.8 101.3 100.7 100.4 99.1 97.3 96.8 96.6 96.5 96.4 96.7 96.7 97.1
104.4 104.4 102.5 102.8 103.7 102.6 102.6 102.0 102.2 103.4 103.1 102.8 103.2 104.2
102.5 103.4 103.6 103.0 102.7 103.4 102.5 102.7 102.1 101.5 102.0 101.9 101.5
Table 12. Annual Inflation Rate by State: FY2000-FY2004 (%)

Period 2000 2001 2002 2003 20041 Q1
1
FSM 2.0 1.3 -0.1 -0.2 1.9
Chuuk 1.4 1.0 1.0 .2 3.5
Kosrae 1.2 0.4 -3.0 -1.8 0.6
Pohnpei 3.6 1.4 -1.0 -0.2 1.0
Yap 0.7 2.4 0.0 -0.8 -0.5
Quarter relative to year earlier quarter
5.2.7 Money and Banking The unit of currency in the FSM is the US dollar. In the absence of any capacity to control the quantity of money in circulation and exchange rate against other currencies, there is little room for monetary policy as an instrument in overall macroeconomic management. Given the small population and economy of the FSM, together with the long-standing modern era historical trade and political links to the US, the utilization of the US dollar has probably represented stability and efficiency for the financial sector. With little capacity to influence the structure of interest rates, prevailing credit and lending rates have essentially
56
reflected trends in the US economy, with appropriate adjustments for the higher degree of risk in FSM. The risk premium is a consequence of a number of factors including a relative lack of entrepreneurial, technical, and management skills to run businesses profitably, and a high cost of doing business. The commercial banking sector currently includes only two banks the Bank of the FSM, which is domestically owned, and Bank of Guam, a branch of the parent corporation that is based in that US Territory. The Bank of Hawaii also operated in the country until December 2002, but closed its FSM operations in line with an overall corporate restructuring. Under the Compact, commercial banks were supervised by the US Federal Deposit Insurance Corporation (FDIC) for greater assurance of a sound banking system. The nation has an FSM Banking Board responsible for the licensing of both domestic and foreign banks. This body takes care of on- and off-site commercial bank supervision, consumer protection, and FDIC coordination. Commercial bank deposit and loan statistics are compiled by the FSM Banking Board, and are presented in Table A33. Bank assets, and deposit and loan balance sheet data are given for 1993-2003. In this period there was little growth in total assets, essentially reflecting the difficult economic situation coinciding with the large step-down in Compact I funding, implementation of the Public Sector Reform Program, and the period of uncertainty associated with FSM-US negotiations to amend the Compact. While total commercial bank asset growth was marginally positive, total bank loans declined substantially from just over $50 million in the three-year period 1999-2001, to an average of $31.6 million from September 2002 to September 2003, a decline of 39%. Assets not going into loans were essentially invested overseas. The low rate of growth in commercial bank deposits over the 19932003 period and decline in loan-to-deposit ratio in 2002 and 2003 may in part reflect the government fiscal crisis that occurred in Chuuk in 2000-2001, when government failed to pay employee allotments many tied to employee loan payment deductions and vendors. Given the sharp decline in bank loans in 2002-2003, the banking sector has been criticized as being less competitive since the withdrawal of the Bank of Hawaii. The FSM development bank (FSMDB) also had to adopt a relatively conservative approach to lending, particularly in recent years, due to concerns about the availability of future capital transfers from the government. Access to loan or grant funds from outside sources is likely to depend largely on the banks financial performance. The FSMDB is perceived to have increasingly assumed the normal lending functions of a commercial bank, as reflected in the more stringent criteria being applied to prospective borrowers.
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The development bank is able to offer more favorable terms longer loan terms and lower interest rates than the commercial banking sector. It allows a loan term of up to 25 years, at a fixed interest rate of 9.0%, while the commercial banks restrict lending to a 5-year term at a variable interest rate. This allows the FSMDB to select the most viable borrowers and projects. Bank management is currently pursuing changes in regulations that would remove the 9.0% cap on interest rates and allow it to charge different rates for different clients and activities. 5.2.8 Fiscal Policy and Macroeconomic Performance In assessing fiscal and macroeconomic performance in the FSM, it is necessary to examine the position of both national and state governments (see Tables A34A37). The four states account for a large share (more than two-thirds) of total income and expenditure because they provide most of the essential services including education, health care, and utilities.
5.2.8.1 National and Consolidated Government

With the onset of Compact I in 1986, FSM governments received large US transfers of both current and capital funding. On a consolidated basis, the FSM Government enjoyed a budgetary surplus between 1986 and 1990 (Figure 4). By 1991, government had adjusted to the larger budgetary resources and had begun to make major capital investments, mainly in the fisheries sector. In 1991, the consolidated budget position of government (national and state governments) slipped into a small deficit position as a result of capital expenditures (Figure 5). In the first five years of the Compact, total revenues from grants and all domestic revenue sources amounted to 117% of GDP on average, with grants (mostly through Compact) accounting for 75% of total revenues. The government wage bill in this period amounted to 121% of domestically generated revenues. Tax revenues as a percentage of GDP, the standard measure of tax effort, came to only 9.7% in the initial five years of Compact I. Capital expenditures, which were at modest levels in the first two years, nearly doubled in the next three and averaged $37.5 million during the initial five years of the Compact. Despite a 15.0% step-down in the basic Compact general and capital grants at the beginning of the sixth year (FY92), governments in general were able to absorb the external shock largely by carrying over unspent revenues, augmented in some States by the issuance of Medium Term Note (MTN) bonds secured by future Compact transfers. From a healthy 12-33% of GDP in 1987 to 1990, overall budgetary balances slipped into deficit, ranging from negative 1.0 to
58
Figure 4. Compact Transfers in Relation to Government Budgetary Balance and Wage Bill (Consolidated FSM Governments)
120.0
100.0
80.0
60.0 $ millions
40.0
Compact transfers Fiscal balance Government wage bill
20.0
0.0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-20.0
-40.0 Fiscal Year
Source: FSM Department of Economic Affair. (2004). EMPAT.
Figure 5. National and States Budgetary Balance

20.0
15.0 10.0 National Millions US$'s 5.0 0.0

FY 87 FY 88 FY 89 FY 90 FY 91 FY 92 FY 93 FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03
Chuuk Kosrae Pohnpei Yap
-5.0
-10.0 -15.0 Fiscal Year
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negative 6.0% of GDP. Subsequently, the overall balance ranged from negative 1.0% to negative 4.0% from 1991 to 1996. With the larger 22% step-down in Compact basic grant transfers beginning in 1997, compounded by the earlier large external debt financing of non-productive fisheries investments, there was recognition on the part of government and donor community that the magnitude of the required fiscal adjustment would necessitate extraordinary measures. The national government, with ADB support, led the way in implementing a Public Sector Reform Program (PSRP). To weather the fiscal shock of the large step-down in Compact grants beginning in 1997, the PSRP targeted a 27% reduction in government employment and a 35% reduction in the corresponding wage bill. The PSRP results, while a little short of the targets, did achieve significant reductions by 1999 22% and 28%, in employment and wage bill for government respectfully. This coincided with the end of the Early Retirement Program which was funded by an ADB loan. The reductions in spending were achieved as a result of both cuts in the workweek of employees, early retirements, and a freeze on hiring. Unfortunately, by the close of the 15-year Compact I period in 2001, the initial fiscal restraint achieved with the PSRP had been significantly reversed through increases in the wage bill as most governments went back to a full, or nearly full, work week. 5.2.9 State Governments
5.2.9.1 Chuuk
Fiscal performance in the first five years of Compact I was generally satisfactory with respect to maintaining overall and current budgetary balance. However, Chuuk slipped into a small current budget deficit in 1991, the seeds of which had been planted in 1990 when the government wage bill increased 12% over the previous year and continued to rise sharply through 1993. With respect to the capital budget, Chuuk had a healthy surplus in the early years of the Compact. Chuuks large capital account balances stemmed mostly from a constitutional provision requiring the state to transfer to the municipalities 40% of all Compact capital grants received. Since the municipalities lacked the capacity to plan and implement capital projects, these funds were spent slowly and large balances accumulated. Interest on the accumulated capital balances accrue to the state, thus contributing to the States capital account balance, while providing little incentive for the state to assist the municipalities in implementing capital investment projects.
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Lack of fiscal discipline with respect to current expenditures, especially the wage bill, coupled with the step-down in Compact aid funding in 1992, produced a severe financial crisis in the mid-1990s. Reacting to the cash-flow problem, the state ran up large arrears with suppliers and stopped paying allotments on public employee payrolls (money scheduled to be withheld for payment to banks that had made employee loans). In late 1996, Chuuk began implementing a recovery program with conditional assistance from the national government. Recovery was greatly aided by the FSMwide PSRP that included the Early Retirement Program, the results of which produced sharp cutbacks in government employment and the wage bill. Total current expenditures were reduced to 20.3% for 1997-1999. Over 90% of this cut in current spending was the result of lowering the state wage bill. Unfortunately, the fiscal discipline applied by authorities for most of 19971999 was not maintained. This lack of restraint was manifest not only with respect to its wage bill, but also because of a jump in capital improvements spending as the state undertook a large airport renovation project and a number of other capital projects that had been put on hold earlier. While the 1999 overall budget deficit was primarily the result of capital spending, current expenditures also began increasing, largely driven by increased wages (and new hiring) and other discretionary spending. The overall budget deficit during the period 19992001 totaled $23.6 million.
5.2.9.2 Kosrae
Kosrae, like Chuuk, is heavily dependent on government expenditures to generate overall economic activity, income, and employment. This is a function of a small population with limited markets and little room for economies of scale in competing with outside suppliers to provide goods and services. Although considerable improvement was made over the Compact I period in reducing dependence on government expenditures, the ratio of this spending to GDP still averaged 71% from 1999-2001 (compared to an average of 109% in the first three Compact years, 1987-1989). During the first three years of the Compact, the state maintained comfortable current and capital budget surpluses. Beginning in 1991, the overall balance fell into deficit mainly as a result of large capital investments. Capital investments, mostly in PSEs, have been large in relation to GDP, particularly in the first half of the Compact period (averaging 43% of GDP in the first seven years of the Compact, 1987-1993; and 23% in the last 8 years, ending in 2001). Given such a high rate of capital investment, the relatively low growth rate of real GDP of an
61
average of 1.5% over the 15-year Compact I period, is a reflection of the poor return on investment in PSEs. The large-scale capital investments made in 19911993, partially financed by the sale of MTNs, were mainly responsible for the States overall budget deficits in the same period. Kosraes fiscal performance with respect to the current budget was commendable, even after the first step-down in Compact grant aid. Limiting growth in the wage bill was an important contributory factor. Even with the substantially larger second Compact step-down in fiscal 1997, Kosrae was able to maintain fiscal balance in the current budget, except for the initial step-down year, when it failed to act quickly enough in implementing the PSRP to further reduce payroll costs.
5.2.9.3 Pohnpei
Pohnpei is least dependent on grants to fund operations and capital investment. In the first seven years of the Compact, total grants averaged only 42% of state GDP, and 26% in the last eight years. Despite having the least dependence on external aid, Pohnpei failed to restrain growth in the wage bill, which increased 49% between 1989 and 1997. Lack of discipline on the wage bill, in conjunction with the first step-down in Compact aid, resulted in a current budget deficit equivalent to 2% of GDP in 1992. This deficit persisted through 1996, peaking at 9% of GDP in 1995. The situation was worsened by the onset of interest payments on MTNs issued earlier to fund large capital investments. Pohnpei, like Chuuk and Yap, made large-scale investments in the fisheries sector early in the Compact period. The state resorted to the sale of $23.9 million in MTN bonds between 1990 and 1993 to invest in a fish processing plant and the Caroline Fisheries Corporation. Beginning early in the Compact period, Pohnpei invested aggressively, not only in state-owned fisheries operations but in other PSEs as well. In general, these investments were not productive and subsequently drained the current budget in terms of interest and principal payments against borrowing. The investments ended up requiring subsidies to maintain operations. Between 1989 and 1993, capital budget deficits ranged from 3.1% to 8.5% of GDP. By implementing the PSRP in coordination with national government, the state substantially reduced its wage bill, achieving an estimated $4.0 million in payroll savings as of September 2002 (IMF Staff Report, 2003:7). Fiscal performance in terms of the current budget was strong between 1997 and 2001.
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5.2.9.4 Yap
During Compact I, Yaps overall fiscal performance was strong. With respect to the current budget, in only one year (1993) did the state run a deficit. Early on, Yap opted to pursue a monetization scheme whereby MTNs were issued to borrow externally, with the state using the proceeds to make overseas portfolio investments. The success of the scheme depended on the borrowing cost being lower than the return on portfolio investment. Since the MTN bonds were secured with future Compact grant receipts, Yap could expect to obtain a favorably low borrowing rate. Thus, instead of investing heavily in PSEs that proved unproductive, Yap was able to profit from the monetization scheme by obtaining a positive return on the portfolio investment. Even with the sharper second step-down in Compact aid in 1997, Yap was able to avoid a current budget deficit. Much of its strong fiscal performance was due to restraint in the wage bill. Unique among the states, Yap exceeded its workforce reduction and wage bill reduction targets, maintaining a 33% cut in workforce and 34% cut in wage bill as of September 2002 (FSM Department of Economic Affairs, EMPAT). Perhaps the only area in which performance lagged was state tax revenue which declined from $1.8 million in 1996 to $0.9 million in 2001. 5.3 Economic Adjustment and Public Sector Reform Following the initial step-down in Compact assistance in 1992, the FSM continued to enjoy real growth through 1995. Faced however with the much sharper second step-down in fiscal 1997, it was apparent that FSM would have to implement extraordinary fiscal measures to avoid a major economic crisis. In anticipation of the second step-down, the FSM requested assistance from the ADB to prepare for reduced funding. The resulting study showed that there should be a substantial structural change centered on the public sector. An FSM Economic Summit was held in November 1995. This summit became one of three convened between November 1995 and April 2004. The initial 1995 summit (subsequently referred to as First Summit) brought together a wide range of stakeholders to discuss sector development strategies and overall national development goals and strategies. The First Summit endorsed a set of economic reforms that were then presented to a Consultative Group (i.e., donor community) and discussed in a series of state-level summits during 1996.
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In 1996, each of the five FSM governments created a task force charged with reviewing current public sector organizational structures, and developing the elements to be included in a set of policy matrices that would constitute the core elements of a Public Sector Reform Program (PSRP) loan proposal to be submitted to the ADB. The main objectives of the PSRP were to: (a) restructure government operations, thereby reducing the size and cost of the civil service; (b) transform or restructure public enterprises to eliminate subsidies and increase operating efficiencies); and, (c) promote private sector development. The PSRP loan, which entailed two payment installments totaling $18 million, was approved by the ADB in April 1997. The centerpiece of the PSRP initiative was an Early Retirement Program (ERP). In advance of the PSRP, about 500 positions were eliminated throughout the five governments through a combination of attrition, hiring freezes, termination of temporary and contractual personnel, and the relocation of some employees to public enterprises (primarily to the public utilities). As part of the PSRP program, there was a streamlining of government operations at the national level whereby several departments, divisions, or offices were merged. The Office of Planning and Statistics became part of the Department of Economic Affairs. The Office of Administrative Services and the Budget Office were incorporated in a newly organized Department of Finance and Administration. The Departments of Health and Education were combined in a new Department of Health, Education, and Social Affairs. This organizational restructuring resulted in the elimination of about 50 positions at the national level. A number of additional positions were removed through a bargaining process between the different departments. Employees in positions identified as being non-essential were encouraged to leave the public service through departure bonuses. Finally, the individual governments also resorted to reductions in the length of the workweek as a means of reducing wage bills. While a significant reduction in the overall public sector wage bill was achieved, this was not matched by unit labor costs, mainly because the wage bill reductions came through shortening the workweek. Also, the ability of some government offices to effectively carry out their functions was compromised. The targets for reductions were not closely tied to the personnel needs of the different offices and agencies, while rules for eligibility for the ERP inadvertently encouraged the departure of some of the more highly skilled employees. The hope had been that reductions in the wage bill would be implemented in a way that would lead to a reduction in public sector unit labor costs thereby enabling the private sector to attract skilled workers, which in turn could be expected to make FSM exports more competitive in regional markets.
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The reduction in the public sector wage bill had a significant impact on overall economic growth. At the national level, real GDP growth was negative for three consecutive years, from 1996 through 1999. Performance at the state level varied, with only Yap showing positive growth during this interval. Growth resumed towards the end of the 1990s, led by the private sector. The slowing of growth in the public sector following the initial step-down led to an actual contraction in the private sector, despite the fact that the government wage bill continued to increase. This probably reflects the impact of delayed payments from government to private sector vendors, which was one of the means by which Chuuk funded its fiscal deficit. The private sector experienced negative growth in 1994, 1996 and 1997, and grew relatively slowly in 1998 and 1999, before rebounding strongly in 2000. By 2000, it was clear that the US intended to provide continued grant assistance, although the level of future assistance was not yet known. The increase in funding during the two-year negotiating period added to the eventual adjustment burden as some of the FSM governments used much of the step-up funding to support increased current expenditure. Efforts to persuade the states to save the additional funds were only partially successful. Some of the funds were retained to help meet the required FSM contribution to the new Compact (Compact II) trust fund, but a substantial portion went to increased government spending. Figure 6. Relative Growth in Real GDP Contribution of Government and Private Sectors
80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 Private Government
Source: FSM Department of Economic Affairs.
Million 1998 $
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Box 7. Economic Summits and the Economic Policy Interpretation Council

The Economic Summits and the Economic Policy Implementation Council (EPIC) were used to respond to the macroeconomic implications of the unsustainable public sector fiscal structure. The two institutional initiatives have been used to bring representatives from the different governments together to discuss issues that affect the FSM as a whole. They are essentially advisory bodies, whose work is reflected in the form of resolutions aimed at the executive and legislative bodies of the five governments. Without the endorsement of these bodies, either in accepting or modifying the content of the Summit or EPIC resolutions, there can be no action or implementation of the resolutions. While the advisory bodies have no legally defined role in policy setting, they have served as useful forums for discussing policy issues and proposed actions. The three economic summits brought together a broad range of stakeholders, including government officials, and private sector for-profits and non-profits comprising the nongovernmental sector. These advisory bodies provide a framework for consultation, particularly in conjunction with critical emerging issues such as the PSRP. Beginning with the Second Economic Summit, they became the vehicle for identifying sector-level development goals and objectives. The results of each of the Summits were endorsed by the participating leaders of the five governments, through the issuance of a Joint Communiqu. However, given the advisory role of the Summits, this did not constitute approval and adoption. Approval and adoption of Summit development goals and policies still must be accomplished through individual National and State Government action. With the implementation of performance-based budgeting in all governments in the FSM, the role of the Summits took on even greater significance. With the terms of Compact II having been largely agreed, the Third Economic Summit was designed to cast its policy and planning results in the form of sector specific Strategic Planning Matrices. These were seen to be critically important for meeting the requirements for receiving the sector grants provided for in Compact II. Much of the work in developing sector specific objectives and performance measures took place in advance of the summit. Both health and education sectors organized workshops, bringing together personnel from the State and National offices. The EPIC originally was intended to bring the leadership of the different governments together to address policy issues related to the reform program. Members of EPIC include the FSM President, governors of the states, and the presiding officers of the state and national legislatures. In addition, the state and national delegations include a number of other officials. It has essentially taken over the role of the previously held state and national leadership conferences.
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Chapter 6. Economic Policy in Light of Amended Compact

6.1 Economic and Financial Provisions of Compact: Comparative Analysis
egotiations regarding amendments to the Compact of Free Association, which focused primarily on the financial provisions, were completed in May 2003. After review and approval by the respective legislatures, the amended Compact was formally ratified in June 2004. In October 2003, interim procedures were approved for implementation in early 2004. Under the terms of Compact II, budgetary transfers are replaced by sector grants designated for specific purposes jointly agreed upon by the FSM and US governments. Six sector grants are specified: (1) Health, (2) Education, (3) Infrastructure, (4) Capacity Building, (5) Private Sector Development, and (6) Environment. In the new Compact, the real value of annual grant assistance is substantially lower than at the end of Compact I. The assistance package includes an annual US contribution to a jointly-managed trust fund, the earnings from which are intended to replace annual grant assistance beginning in 2023, the end of Compact II. The annual grant amount under the new agreement, before inflationary adjustment, is $76 million for the initial years (fiscal 2004-2006, Table 13). Beginning in 2007, the annual grant amount will decline by $800,000 annually. This amount will be added to the annual trust fund contribution. Table 13. Compact II Grant Assistance: Fiscal 2004-2023 (in Millions of US$)
Annual Grant Trust Fund Contribution Audit Grant Contribution to Disaster Fund 0.2 0.2 Total
FY 2004-06 FY 2007-23
76.0 75.2 - 62.4
16.0 16.8 - 29.6
0.5 0.5
92.7 92.7
Source: Compact of Free Association, as amended.
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There is still access to US program assistance under Compact II, except that certain education programs are replaced by an annual cash grant intended to allow the FSM to develop similar projects. The terms under which the services of various US agencies are provided were renegotiated. The new terms and conditions of Compact II include a substantial increase in US involvement in programming and monitoring the use of grant assistance. Under Compact I, US concurrence was required only for the use of the special grant for health and education. The allowable uses of funds designated for capital expenditure were subject only to a list of expenditure categories. The reporting requirements, being limited to an annual report, were minimal.
Box 8. The Supplemental Education Grant

During the initial 17 years of the Compact relationship, US domestic programs provided substantial amounts of technical and financial support to the FSM, particularly in the areas of health and education. With respect to the education sector, federal programs accounted for an average of more than 21% of total expenditure between 1996 and 2000. This included a combination of grants that were awarded on a competitive basis (competitive grants) and amounts specifically designated for use by the FSM (formula grants). The new Compact arrangements contain important changes in the way many services are funded Most formula grants will be replaced by the new Supplemental Education Grant (SEG). The FSM will continue to be eligible, on a competitive basis, for a wide range of US domestic programs. The rationale for the change, which takes effect in fiscal 2005, is to allow the FSM the flexibility to develop programs that are better adapted to its needs. FSM FY2005 Proposal for Supplemental Education Grant National
Freely Associated States Education Grant Vocational Education Improvement Program Workforce Investment Act Head Start Program Adult Education Program College Work Study Program Supplemental Education Opportunity Grant Other Total 0 0 281,474 0 100,000 174,331 95,937 75,745 727,487 794,586 140,000 658,884 2,498,532 0 0 0 796,094 140,000 777,842 140,000 611,248 2,979,770 140,000 560,000
Chuuk
Kosrae
Pohnpei
Yap
Total
100,253 448,429 147,216 1,636,256 110,000 1,851,788 1,348,641 5,808,961 0 0 0 0 0 0 0 0 0 100,000 174,331 95,937
337,389 96,747 224,722 140,222 874,825 4,429,391 1,243,094 3,442,781 2,387,327 12,230,080
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Chapter 6. Economic Policy in Light of Amended Compact Unlike other Compact II grants, the SEG is funded through a discretionary appropriation, the value of which may vary from year to year. This is a significant change, as the value of programs under the previous formula grants was generally known in advance. It also moves some activities that had previously not passed through FSM governments to the state and national budgets. Head Start programs had previously been managed by state-level NGOs, while College Work Study and the Supplemental Educational Opportunities Grant were paid directly to students. The initial FSM proposal for the use of the grant was based on the programs it was intended to replace, and the historical level of services and funding. One problem in determining the level of funding is that it does not consider benefits received under the College Work Study and the Supplemental Educational Opportunities Grant by FSM students studying in US institutions, due in large part to the lack of information on the amount of these payments.
Compact II continues to give high priority to education. The major changes made in the terms for providing grant assistance for education and training reflect this policy. These are summarized in Box 8. Grant assistance under Compact II is administered by the Joint Economic Management Committee (JEMCO), which consists of three members designated by the US and two by the FSM. This committee is specifically empowered to determine the allocation of the main sector grants, and has also become the vehicle for programming the SEG. Quarterly and annual reports are required, with an understanding that reports will include the use of performance indicators to assess progress. The programming and management of the grants should be consistent with the goals contained in the Strategic Development Plan prepared in conjunction with the Third Economic Summit. In the future, the FSM will be obligated to prepare or maintain an updated development plan that meets the requirements of Compact II. The FSM governments must prepare proposals for the use of the sector grants as part of the overall budget preparation process. The amount of funding available is given at the aggregate level specific levels are not assigned to the individual grants. In practice, the US has typically approved financing for virtually all activities in the health and education sectors, while calling for the phasing out of funding for recurrent expenditure in support of governance. Another priority sector under Compact II is infrastructure, with much of this funding earmarked to support education and health. Other sector grants, can be expected to account for a relatively small share of total available funding.
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6.2 Strategies and Policies for Achieving Sustainable Development The FSM has committed to the improvement of public sector governance, including changes in the management of public sector enterprises. As part of the ADB-supported Private Sector Development Program, the FSM will transform a number of enterprises and activities currently owned and operated by the public sector. This would include taking steps to privatize, or contract to the private sector the management of enterprises or activities delivering goods and services to intermediate and final demand markets (including services that are paid for by government, e.g., food service in schools and hospitals). Making good on this commitment constitutes an important element of an overall government policy towards private sector development. 6.2.1 Strategic Development Plan The FSMs current strategic planning process evolved from the need for a more flexible framework to facilitate the design and implementation of the Public Sector Reform Program. The strategic planning framework will include a set of long-term goals for each of the sectors, as well as a listing of medium-term objectives and strategies. While the long-term goals will tend to remain the same over time, the specific activities will be updated periodically. The ultimate objective is to create an explicit linkage between the development planning and budgeting processes. The goals and objectives of the initial Strategic Planning Framework were developed in the Second Economic Summit. Documents were prepared for each of the sectors in advance of the summit, including descriptions of key issues and proposed strategies. Summit participants then worked to develop sectoral matrices that associated broad strategic goals with more focused objectives and activities. The provisions of Compact II require the FSM to prepare and submit a development plan to the US that is strategic in nature and continuously reviewed and updated through the annual budget process. It shall identify the goals and strategies of the Government of the Federated States of Micronesia to promote economic advancement, budgetary self-reliance, and economic self-reliance, and contain specific multi-year objectives for the sectors described in section 211(a) of the Compact, as amended. The Third Economic Summit in March 2004 was convened primarily to prepare the sector level Strategic Development Plans (SPDs) and Strategic Planning Matrices (SPMs) that would fulfill the Compact II sector plans requirement. The agriculture and fisheries SDPs were prepared along with this report.
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The main objectives of the Summit were to: (1) build awareness of the economic structure of the amended Compact provisions and the likely impact on the economy; (2) achieve consensus on an overall strategy consistent with the theme of achieving economic growth and self-reliance; and (3) improve implementation and monitoring of the outcome of the planning process. The extent to which the Summit accomplished the three objectives is debatable. Certainly, among the approximately 400 participants at the Third Summit, the first and second objectives were at least nominally accomplished, as indicated by the principal resolution that endorsed the high-growth strategy. The overall Strategic Development Plan, which was completed by the beginning of fiscal year 2004, was submitted to the FSM Congress for approval in January 2005. The Third Economic Summit accomplished the task of drafting Sector Planning Matrices (SPMs) for eight sectors: private sector, agriculture, fisheries, tourism, environment, health, education, and gender. However the SPMs for agriculture and fisheries, as well as the Macroeconomic Framework of the SDP, were not finalized until January 2005. Having completed most of the work of preparing the SPMs, the Summit was presented with three economic scenarios that the FSM could face in the next 20 years, the period covered by US Compact II grant assistance. The scenarios were: (a) the dismal scenario; (b) the moderate growth strategy scenario; and, (c) the high-growth scenario. The last was subsequently renamed the sustained growth strategy. Each scenario assumes the presence of a policy environment and commitment to reform that enables economic growth and development. However, in the dismal scenario, problems in implementing the infrastructure grant result in low levels of investment. It is also assumed that the policy regime remains essentially the same. This scenario represents the status quo development projection essentially nil growth of real GDP over the 2004-2023 period. The moderate growth strategy will result in little growth of per capita real GDP over the 20-year Compact II period, averaging less than 1.0% per annum. The modest growth scenario assumes governments adoption of a reform agenda, but with less commitment than in the sustained growth scenario. For example, although the foreign investment climate has improved, reform efforts are weak with respect to public sector enterprises. Agriculture sector growth is projected at only 2.5%, but little growth occurs in the fisheries sector because important PSE reforms are not implemented. Tourism improves significantly in this scenario with at least a five-fold increase projected in visitor arrivals from 21,000 to 110,000 by 2023.
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The sustained growth scenario assumes that FSM governments follow a rigorous reform agenda with the private sector as the main focus. An improved regulatory regime brings about a drastically improved foreign investment climate. Reform of the PSE sector is also vigorously pursued with most non-performing enterprises being privatized, or liquidated. Access to land is improved, and legislation is enacted that supports long-term leases and mortgages. In the sustained growth scenario, real per capita GDP (in 1998 $) is projected to rise to about $3,200 by 2023, from an estimated $1,950 in 2004. This entails real growth averaging about 2.6% per annum. With respect to the main productive sectors, this scenario assumes significant growth in agricultural exports ($12 million in 2023) and a fisheries sector projected to expand by four-fold by 2023 (roughly $100 million in 2004 dollars). Tourism is the leading sector under the sustained growth scenario, with 110,000 projected visitors by 2023 (generating roughly $137 million in 2004 dollars). To achieve this, private investment would have to increase from the currently estimated 7% of GDP (about $16 million based on 2003 GDP) to a projected level of 17%. This question of whether this strategy can be implemented is critical. If the SDP does not have the support of the political leadership in the states and at the national level, then the policies and strategies of the Plan will not be implemented, even if the resources are available. There needs to be renewed effort to obtain commitment from the political leadership to authorize and follow the recommendations and decision-making of EPIC, or another body that would fulfill EPICs role in marshalling consensus across the five governments in adopting the Strategic Plan. The record thus far on the effectiveness of EPIC is not encouraging (see Box 9). While economic planning at the national level has had considerable support from the donor community (e.g., EMPAT in the DEA), relatively little assistance has been received by the states. At both national and state levels, strategic planning capacity has not been institutionalized. Little progress has been made in building ongoing planning capacity, even at the national level. With the end of the EMPAT project in December 2004, the FSM lost critical capacity just as the nation was faced with the major challenge of transitioning to Compact II. The SDP was structured and prepared for FSM-wide implementation, necessitating translation to the state level in terms of disaggregating strategic outcomes, activities, and outputs. This is clear from the sector SPMs. In the case of tourism, for example, the SPM specifies that all states produce a 10-year tourism development plan by 2006. Given the degree of autonomy afforded the states under the FSM Constitution, nationwide development planning must include specific institutional linkages between national and state planning agencies and
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Box 9. Government Endorsement of Policy-Related Outputs of the Summits and EPIC

In the aftermath of the first two Economic Summits, some leaders within the FSM governments questioned whether the summits policy and planning outputs truly represented the development policy of the FSM. Legislators in some of the governments indicated that even though the executive branch had endorsed summit policies, they had not been approved by the legislatures. Some senators in the National Congress also questioned the legitimacy of the initial Strategic Development Framework on the same basis. The establishment of the Economic Policy Implementation Council (EPIC), following the second Summit in 1999, was probably intended to address this issue. This body included the chief executives of all the governments, and the presiding officers of all of the legislative bodies. Nevertheless, the resolutions coming out of the EPIC meetings did not legally bind the participants, and the record of subsequent legislative implementation of the decisions has been mixed at best. In recent years, there has been a move towards seeking explicit legislative endorsement for key policy documents. This was done for the Infrastructure Development Plan, and is now being done through the legislative budget process for the decisions of the US-FSM Joint Economic Management Committee.
professional-technical capacity for strategic planning and performance budgeting. Another critical issue relates to the infrastructure development plan (IDP). Although the SDP planning papers prepared for each sector were to explicitly consider infrastructure needs, the IDP was prepared separately. The strategic planning process must integrate infrastructure investment with sectoral planning. This is currently not the case in the FSM. Under Compact II this would be the Project Management Units (PMUs). The PMU approach was first proposed in the report by Nathan Associates, from which a large portion of the IDP was drawn. Discussions regarding the PMU are ongoing. Its structure is likely to include a central office in the national government and project managers in each of the state governments. Part of the funding will come from the Compact infrastructure grant since 15% of the value of each project can be added to total project costs to cover PMU operating expenses. A key element of the FSM negotiating position was the role of performancebased budgeting and management in providing a link between planning and expenditure. Progress has been made in establishing the technical components of the performance budgeting system and training mid-level staff in using the software, but higher-level professional capacity in using the system for planning, budget preparation and performance monitoring is still lacking. Governments
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need to renew efforts to move forward with full implementation of performance budgeting and its integration with strategic planning, in both executive and legislative branches. 6.2.2 Reform of the PSE Sector The top-heavy public sector structure was a carry-over from the US Trust Territory administration. In the early years of the Compact, government involvement was deemed necessary, based on the belief that large-scale investments were required to establish viable enterprises and that the local private sector was not capable of such commitment. In early 2000, the Aries project determined from interviews that the annual wage bill for formally constituted PSEs amounted to an estimated minimum of $2.7 million per annum for the 2,073 people formally employed. A total of 26 enterprises and 25 or more commercial activities have been identified. These generally fall within one of four distinct categories: (1) units or activities that carry out the functions of an enterprise or engage in commercial activities through a government department or agency created by statute; (2) PSEs that carry out enterprise functions through an authority created by statute and which are owned and operated by the state; (3) PSEs that carry out functions of an enterprise through a public corporation created by specialized statute without share capital and that are wholly owned and operated by the state; and (4) PSEs that carry out the functions of an enterprise through a private corporation organized under the Companies Act and whose shares are held in whole or in part by the state. At the same time, governments gradually privatized various services that had been part of government agencies under the former Trust Territory administration and during the early years of the Compact. Beginning in the early 1990s, the public utility services were moved out of the public works departments and transformed into independent corporations, albeit with continued state ownership. Electrical power generation has also followed this system but corporatization of the water system in Kosrae has lagged behind due to public resistance to water charges and the existence of many small water systems. Similarly, the ports and airports in Kosrae and Pohnpei are now operated by independent authorities which are overseen by boards composed of political appointees. All of the economic summits resulted in policies that strongly endorsed the need to reduce government involvement in market-oriented enterprises and activities that could be more efficiently operated either on a strictly commercial basis, or through some form of privatization. In some cases, the closing of operations
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was recommended. An important step in advancing overall public sector economic reform, following the First Summit, was the specific focus given to the PSE sector. An ADB project, TA No. 3201, was initiated in October 1999 to assist the FSM in formulating a comprehensive program for privatization and corporate governance reform of public sector enterprises. The project, commonly referred to as the Aries Study, included three broad policy objectives: (1) promote more efficient operations through corporate governance reforms and de-monopolization and exposure to competition in order to reduce the need for State subsidies; (2) spread and encourage local ownership through disposition either in whole or in part in order to enlarge the private sector; and, (3) obtain the best value possible taking into account the interests of all stakeholders in the event of disposition. The scope of work of the Aries study included taking a comprehensive inventory of all PSEs, both national and state-owned; preparing an in-depth analysis of ten pilot PSEs targeted for corporatization and/or privatization (including a transformation plan); and the preparation of a model Five-Year Master Plan, and a one-year, Action Plan for a Public Sector Enterprise Unit (PSEU). The PSEU was to be instrumental in managing and coordinating implementation of the PSE program. Upon completing the inventory, the Aries project submitted a list of proposed pilot PSEs for transformation, two in each of the five governments. In early 2001, the project submitted a preliminary master plan for the reform of all PSEs. There is substantial financial, administrative and legal work entailed in achieving the transformations. For this reason, the follow-on work envisioned for the Public Sector Enterprise Unit (PSEU) is critical and was addressed in terms of its recommended organizational structure, including duties and responsibilities and staffing requirements. Duties and responsibilities of the PSEU include: (a) working with outside consultants to implement approved Transformation Plans as directed by the Public Enterprise Reform Committee (PERC); (b) coordinating with the state counterparts on the preparation of Enterprise Transformation Plans for state enterprises; (c) providing assistance to state counterparts and coordinating with the states and outside consultants involved with the implementation of the program; (d) monitoring the performance of the public enterprises from the latest financial statements available and provide the PERC with reports on their performance and impact on national and state budgets; and (e) formulating a Multi-Year Master Plan and Annual Action Plans (for transformation of enterprises). The PERC is the high-level decisionmaking committee on Public Sector Reform Program chaired by the FSM President or Vice-President. The Committee is responsible for approval of Enterprise Transformation Plans.
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Clearly, the work of the PSEU will be substantial and critical to the success of the Public Enterprise Reform Program. The importance of this reform program is underscored by the level of support provided by the ADB. It endorsed in part the recommendation made by the Aries project to fund a long-term advisor to .. provide continuity to identify and oversee the performance of a number of tasks in order to tackle the numerous specialty challenges arising out of this program. At the time of this report (March 2005), planned public sector enterprise transformations in the four States had been adjusted to one in each state rather than the two originally planned. No PSE transformation has actually taken place. With respect to the PSEU, the Secretary of the DEA has assumed the position PSEU unit head, and neither the full-time financial analyst, nor the part-time lawyer have been employed. Although progress in privatizing, commercializing, or divesting the PSEs has been disappointing, there has been some progress in reducing the level of operating subsidies, as shown in Figure 7. However, there are still many PSEs that continue to operate inefficiently and effectively preclude (because of subsidization) the market entry of private enterprise. Some SOEs continue to operate at a loss by drawing down invested capital, and direct and implicit subsidies continue to adversely impact government budgets. As indicated in Figure 7, the direct subsidies alone still account for about $4.0 million per annum (implicit subsidies are not included in the subsidies and transfers shown in Figure 7). 6.2.3 Private Sector Development In the seventeen years of receiving large-scale economic aid under Compact I, there has been modest progress in building a larger private sector, both in terms of GDP and employment. Table 14 indicates the relative shares in GDP and employment for the four institutional sectors in 1987 and 2003. A similar table was presented and discussed in Section 5.2.1.
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Figure 7. Government Subsidies and Capital Transfers to Non-Financial Public Sector Enterprises
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: FSM Department of Economic Affairs .
Table 14. Sector Shares of GDP and Formal Employment: FY1987 and FY2003 1987 Sector GDP Percent 1/ 34 57 4 5 100 Employment Percent 29 60 2 9 100 GDP Percent 1/ 41 40 12 7 100 2003 Employment Percent 42 42 6 10 100
Private Government PSE Non-Profit Total
Source: FSM Department of Economic Affairs. 1/ - Only relevant components of GDP are included for comparisons.
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Throughout the Compact I period the level of private sector activity in the FSM has been driven in large part by the level of Compact transfers and government expenditure. This is illustrated in Figure 8. Given the significant decline in Compact II grant assistance and the fact that in real terms the decline will steadily continue to 2023, the FSM will have to do more towards increasing the size of the private sector. This restructuring will facilitate an increase in tax base and productivity and will enable a rise in share of tradable goods output, all key elements needed to raise the standard of living and economic self-sufficiency. In the overall FSM development context, private sector is explicitly meant to encompass all non-governmental organizations whether or not they are profit-oriented. Although the size of the private sector has increased modestly, the structure has not fundamentally changed since the mid-1990s. Expansion has occurred almost exclusively in the non-traded goods sector of the economy, i.e. in the retail and wholesale sectors and services activities (e.g., repair and maintenance, residential and commercial construction related mainly related to retail and government demand, and communications) and not to the main productive sectors in the FSM agriculture, fisheries, and tourism. It is these latter sectors that include the production of tradable goods and services that Figure 8. Relationship Between the Government Wage Bill and Private Sector GDP Growth
70.00
60.00
50.00
40.00 $ millions Private Sector VA Government Wage Bill 30.00
20.00
10.00
0.00 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03
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can compete with overseas suppliers (e.g., food commodity imports, processed/ manufactured items) or in overseas markets (e.g., tourists to FSM, regional and international fisheries and agricultural commodity exports). The Second Economic Summit identified a number of specific factors limiting private sector growth, including:
Excessive government intervention in productive sectors as opposed to removal of business constraints; Greater public sector employment opportunities and higher relative wages; Skill limitations; Dependence on government rather than commercial financing for development; Evolving land tenure systems (that include constraints to economic development, including inefficient land markets, restrictions on leases, slow titling and registration, and limitations on use of secured loans); Variable transparency and efficiency in the business and investment environment; Protective attitudes towards foreign investment; Variable infrastructure and transport limitations that undermine private sector growth and competitiveness; and, Transport constraints and high fuel costs (affecting international access).
The Second Summit reviewed efforts to address these limiting factors. The initiatives included the PSRP aimed at downsizing government and restraining the wage bill, creating an enabling and regulatory environment to facilitate private sector development (revisions of codes related to foreign investment, secured transactions and taxation), changing attitudes to foreign investment, revising land titling procedures, and extending leasehold terms in some states. Policy elements endorsed by the Second Summit with respect to private sector development included: (1) Commitment to economic reforms Macroeconomic policy that fosters fiscal responsibility Maintenance of financial stability Limits on size of government and development of public accountability Consistency of tax regime with private sector-led development strategy
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(2) Outward-looking approaches to economic development Make tax regime consistent with outward-oriented economic strategy Encourage investment in priority and potentially competitive export growth industries (3) Lower costs, improve performance and develop competitive markets for the means of production Ensure labor is wage competitive by reducing public/private sector wage differentials Increase labor productivity and competitiveness Direct human resources development investment towards skill gaps for priority growth industries Make land more readily available to those who need it for sound development Facilitate the use of land as collateral to increase availability of development financing (4) Reorient public agencies and administration to facilitate private sector development; decrease the cost and increase the ease of doing business; promote good governance; and, minimize government involvement in commercial and service activity Develop a business-enabling regulatory environment that promotes a private sector capable of generating long-term economic value Foster a corporate climate which respects the interests of stakeholders and society Focus support on competitive tradable goods and services Focus on efficient, coordinated support services providing information, advice and training not subsidized finance Allow the market to determine the value and commercial viability of state-owned productive enterprises earmarked for privatization Now that the FSM is well into fiscal year 2005, the second year of Compact II, it is possible to briefly review the progress made in addressing the main constraints to private sector development that have been identified in the economic summits. Discussed here are: (a) commitment to economic reforms in support of private sector development; (b) access to land; (c) labor market inefficiencies; and (d) enabling environment.
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6.2.3.1 Commitment to Economic Reforms

Studies conducted in the Pacific Islands region and in developing countries around the world affirm the importance of an appropriate policy framework and pro-active commitment to working with the private sector to create a favorable business and investment climate. Strength of commitment is the key to success in building a private sector that is outwardly competitive and capable of sustained growth. These are elements critically needed to enable the nation to adjust to the diminishing aid provisions of Compact II. While government commitment is important to all components of a comprehensive PSD strategy, this section focuses mainly on encouraging private investment, both domestic and foreign. As noted in the Third Economic Summit: Experience has shown that foreign investors tend to require a significant period of policy reform coherence before they become sufficiently confident that improvement will be long-lasting. It may be the case that recent policy reform stagnation (and even some back-tracking) has made domestic investors somewhat skeptical that FSM policy makers will, in fact, follow a coherent economic strategy. For the private sector to confidently invest and create new jobs, their perceptions about governance need to be effectively addressed. Through an improved public-private dialogue four positive outcomes can be achieved: (i) private sector perceptions can be comprehensively addressed; (ii) misperceptions and misinformation can be corrected; (iii) information on actual improvements and policy objectives can be shared; and (iv) emerging issues can be addressed collaboratively. Potential investors are more likely to commit to opportunities in which the costs of doing business are reasonably predictable. Transparency of regulations, security of transactions, and access to factors of production at reasonable cost, are factors that permit the investor to determine their risk-return situation. This increases the likelihood of achieving an acceptable return on investment. There are weak communications, little interaction, and a significant degree of mistrust between the government and the private sector. There has been no formal program for government to interact on a regular basis with the business (and civil society) community to discuss outstanding issues perceived to be detrimental to operating profitable businesses. Government needs to provide this venue. Specific mechanisms need to be created for involving the business and civil society in regularly scheduled national and state workshops or
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conferences organized to enable participation and input into economic planning and policy-making. Very little foreign investment has been attracted, not only because of the high-risk business environment, but also because of non-transparent and essentially non-accommodating provisions included in the foreign investment statutes and regulations. As noted in the Third Summit, even though . Foreign investment laws were reformed as part of the reform program in 1997-98 to remove overlapping jurisdiction at the national and state levels. Implementation of the reformed laws through regulations reduced the intended effect and left a large degree of bureaucratic discretion and lengthy case-by-case reviews for many applicants. In 1999, the Foreign Investment Advisory Service (FIAS), a joint service agency of The World Bank and the International Finance Corporation, conducted a review of FSM national and state foreign investment legislation. In its review, FIAS noted the practice of the national and state governments to develop lists which categorize sectors and give particular options to investors. The first is the red list which specifies sectors reserved for citizen investments. Second is the amber list in which a foreign investor must obtain a permit and fulfill the specified conditions. The third category contains sectors in need of foreign investment. In this third list, investors need to secure a permit but may operate without conditions. FIASs review pointed out that sectors or activities on the amber list should clearly specify the attached conditions (for each activity or sector) and they must be transparent and publicly listed. The intent of the foreign investment law should be to make the issuance of a foreign investment permit (FIP) a simple registration process. This enables the investor to know before applying whether or not he will qualify for the permit, and what conditions (if any) will have to be met.
6.2.3.2 Access to Land

From an economic development standpoint, difficulties in gaining access to land for business purposes translates into increased cost of doing business and higher risk in achieving an acceptable return on investment. This is especially true for foreign investors and many FSM citizens wanting to start businesses in states other than their home state. While land occasionally may be leased, even this is difficult given traditional values towards keeping title and use rights in the clan (refer to Chapter 3 discussion). Each state has jurisdiction under the FSM Constitution to legislate and regulate land transactions, and therefore each state has distinct laws governing the sale, lease, registration and transfer of title to land. In most states, long-term leases can be obtained if an investor can find an available land parcel. However,
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in the case of Pohnpei, land lease terms are limited to 25 years, a term too short for most large capital investments. To mitigate this problem, legislation was passed by Pohnpei State to allow a 55-year lease provided the lessee meets certain conditions for making capital improvements within 5 years (see Chapter 3 Box 4 on Pohnpei Development Leasehold Act provisions). However, the conditions specified under the law apparently are perceived as excessively burdensome, discouraging the use of this lease option. While the Deed of Trust can be used in some states in conjunction with leaseholds, it is seldom used because of unfamiliarity and because of difficulties resulting from ownership challenges. As most privately-owned land in the FSM is still collectively held by the clan (i.e., not formally registered in individual title), the risks involved in leasing or buying land are high because of the uncertainty of obtaining a valid title or lease rights. Also, in the absence of price data on sale or lease transactions (in part because land is seldom leased or sold), it is difficult for investors or buyers to determine the value of available land. Implementing more workable land tenure and mortgage financing laws and regulations is an important objective of the current PSD program. With appropriate commitment on the part of FSM governments, new or amended laws and regulations making it easier for investors to obtain land (and use of land for mortgage secured finance) would significantly contribute to promoting both domestic and foreign investment.
6.2.3.3 Labor Market Inefficiencies

Although the FSM is not affected by labor-industry discord as there are no unions and governments, along with the COM, represent the largest employers the large differential in salary rates between government and the private sector constitutes a major structural inefficiency. The ratio of average wage in Government to that in the private sector was nearly 2:1 at the beginning of the Compact (1987-1990) and actually increased to 2.08 to 1.0 in the 2000-2003 period. This discrepancy has acted as a major distortion in the FSM labor markets, attracting the most skilled and educated to government jobs. This has had the effect of lowering the competitiveness of the private sector, not only because of the lower skills and education of the remaining labor pool but because of the pressure on the private sector to raise rates to compete with government. Excessively high wage rates is a government pay structure the FSM carried over from the Trust Territory era, but is also a result of the large grant transfers flowing into government treasuries in the initial years of Compact I. It has also profoundly affected agricultural and near-shore fisheries production which has largely stagnated during
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most of the Compact I period. The PSRP in 1997, intended to reduce the wage rate differential but this was never realized. With the grant aid step-downs of Compact I and continuing grant aid decline built into Compact II, the government cannot be a future source of employment growth. The right to freely immigrate into the US in conjunction with a scarcity of jobs in the domestic economy, has led to a large out-migration of younger workers and their families. With higher pay and job training incentives available in Guam, the CNMI, and in the US, out-migration is likely to be a continuing reality that will have to be taken into account in strategic planning, as discussed in 7.3.
6.2.3.4 Enabling Environment

In addition to assisting the PSEU in the National DEA to work with the states in facilitating PSE transformations, the long-term PSD advisor has been working with the states to implement laws and regulations on key commercial codes that are taken for granted in most countries. These include a bankruptcy law, secured transactions law, revisions to foreign investment laws and regulations, and legislation or regulatory changes to facilitate use of land (owned or leased) to secure mortgage lending. Another function of government that is critically important but is not addressed by the PSD program is the provision of information and technical assistance to key productive sectors such as agriculture, fisheries and tourism. In agriculture, for example, a well-qualified group of extension agents is based at the national COM campus, but is unable to provide field visitations to farms to assess needs and give technical advice. Also, since the closure of most state agriculture departments, no commodity price, supply, export and import and other important industry statistics are made available to farmers and other sector stakeholders. For the fisheries and visitor sectors, lack of industry data and information is also a problem. Basic sector or industry performance data and technical assistance is an important enabling service that government either provides, or contracts for, to support the sector.
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Chapter 7. Challenges to Achieving Economic Self-Sufficiency

7.0 Introduction
he steady decline in grant aid and conditions placed on use of funds makes it imperative for governments to increase tax revenues. At the same time, development strategies must be carefully examined to ensure that government programs efficiently address social needs and encourage meaningful private sector involvement in planning and policymaking.
7.1 Public Sector Adjustment Under Compact II 7.1.1 Development Impact of Funding Level and Terms The impact of the steady decline in grant funding under Compact II is indicated in Table 15. Although the decline in real value of the Compact grants is in itself a source of fiscal pressure, an even more difficult problem is the conditions attached to the use of the Compact funds. Column 5 indicates the amount of government expenditures in 2005 that are deemed ineligible or non-conforming by JEMCO for use of grant funds. Table 15. Projected Compact Grants, Domestic Revenue and Expenditure (Millions of US Dollars at 2004 Prices) Government 2005 Compact Grants 29.31 8.41 19.52 12.18 6.57 76.00 2009 Compact Grants 27.70 7.94 18.45 11.51 6.21 71.81 2005 2005 2005 Domestic Ineligible Capacity Revenue Expenditure Bldg. Grant 5.53 2.42 7.81 4.38 21.79 41.92 8.12 3.85 6.95 6.20 21.73 46.85 3.15 0.90 2.10 1.31 0.71 8.17
Chuuk Kosrae Pohnpei Yap National Total
Source: FSM National Department of Economic Affairs, and TA No. 4258, November 2004.
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Although there is no explicit clause in the Compact agreement that prohibits grant funds from being used to pay for general government recurrent expenses, JEMCO has authority to stipulate how grant funds may be used and what conditions shall apply. Of the six sector grants provided for, the Compact clearly gives highest priority to education and health care. As discussed previously, in negotiating the terms of Compact II, the FSM sought to include government recurrent expenditures in the Public Sector Capacity Building Grant to the extent activities contributed to enhanced government capacity and increased productivity. The US which controls decision making with three of the five voting members did not agree to this. However, the US did agree to a 5-year phase-in period during which capacity building grant funds could be used for non-conforming (recurrent expenditure) purposes. As indicated in Table 15, the 2005 capacity building grant of $8.17 million represents just 10.8% of the total sector grants funding of $76.0 million. The largest sectors those being given the highest priority by the US are: education at $27.1 million (35.7%), health at $17.43 million (22.9%), and infrastructure at $16.9 million (22.2%). These high priority sectors, along with capacity building, take up nearly 92% of the 2005 grant funding, leaving small amounts for private sector development and the environment. The data on state-generated domestic revenues clearly indicate that without the capacity building grant funds (column 6), only Pohnpei and the national government will be able to cover the cost of ineligible expenditures (column 5). The national government is in a much stronger revenue position, but for all the states general government recurrent expenditure (on virtually all program purposes, except education and health) will fall below what is needed unless government revenues can be increased significantly. Technical assistance on improving and reforming tax systems in the FSM has been ongoing in recent years. The latest study, ADB TA No. 4258-FSM, Compact Fiscal Adjustment and Transition, provides detailed analysis and recommendations on both the transition associated with the phasing out of the capacity building grants and the urgent need for governments to increase tax revenues to accommodate the steady decline in Compact II grant funding. Tax effort (ratio of tax revenues to GDP) in the FSM is among the lowest in the Pacific Region at 12.3% of GDP. Of seven countries, the FSM had the lowest tax effort and it was the only country with a tax effort below 17%. Three countries were above 20% and three were between 17 and 20%. The latest tax study recommended a number of options for increasing revenues, with most options necessitating substantial changes to tax administration. In options requiring
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lesser increases in tax burden, the states would be required to cut expenditures more deeply to accommodate the decline in Compact grant funding. The technical assistance studies have unanimously recommended implementation of a value-added tax (VAT) to effectively raise revenue to meet both medium and long term FSM needs. The VAT would replace the customs duties and state sales taxes. A major advantage of the VAT is that it will replace two taxes that have distorting effects on the economy. The VAT is relatively simple to administer, entailing a single rate that would apply to a broad tax base including both goods and services and private and public enterprises. The VAT avoids the distortion of the sales, customs, and gross receipts tax, with their cascading effects as goods move through each level of distribution. Another major advantage is that the VAT provides positive incentives to export and investment activities, in that exported goods are exempt from this, and exporters receive refunds for VAT taxes paid on material and service inputs used to produce export goods. In the case of investment, business expenditure on capital goods is exempt from the VAT. This tax is also consistent with the requirements of international and regional trade agreements (against export subsidies vis--vis tax system). Another big advantage of the VAT is that it would constitute an efficient means of raising tax revenues over the long term as Compact II aid steadily declines, as the single rate could be increased. Other Pacific Island countries that have adopted the VAT include: Fiji Islands, Samoa, Vanuatu and the Cook Islands. Effective administration of the VAT clearly calls for changes in the tax jurisdictions of the national and state governments. The recommended reform would entail a single FSM Unified Tax Administration (FUTA), which would be an independent agency patterned after the current FSM Social Security Administration. This agency would be empowered to collect all taxes (not just the VAT) on behalf of both national and state governments. However, each government would still maintain the authority to set the tax rates (for each category of tax, e.g., VAT, personal income tax) in its own jurisdiction. A critical issue, given the dual taxation powers of the national and state governments, is the most appropriate way to authorize and implement a VAT. Two approaches are suggested: (1) the national government will enact legislation for a VAT on imports, and it will be left to the States to enact associated legislation for a VAT on domestic production; and (2) the states will endorse VAT without the national government taking any action on the premise that even though the VAT would be collected on imports (a national tax power) it would subsequently be rebated. In view of possible legal complications in interpreting constitutional jurisdiction on States levying VAT on imports, the first approach may be preferable but would be administratively more complicated to implement.
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While the VAT would be the best long-term solution for the need to increase tax revenues, in the short term there will be a need for the state governments to raise existing taxes, and cut recurrent expenditures.
Box 10. Revenue Sharing Betweem the State and National Governments
The FSM Constitution specifies that the taxes collected by the national government on imports, fuel, wages and salaries, and business receipts be divided between the national government and the states in which they are collected. The division of the Compact transfers in Compact I was established by a memorandum of understanding worked out between representatives of the different governments. The level of fisheries revenue, primarily from agreements with distant water fishing nations, increased sharply during the late 1990s. This led to an effort by the states to have these funds be divided in the same way as the tax revenues. This attempt was unsuccessful, as the courts ruled in favor of the national government. Nevertheless, the FSM Congress agreed to increase the states share in tax revenue, with the proviso that the additional funding be used for capital expenditure in the areas of health and education. Compact Distribution Formulas Chuuk FY 2004 FY 2005 36.00% 38.57% Kosrae 10.80% 11.06% Pohnpei 24.10% 25.69% Yap 15.80% 16.03% National 13.30% 8.65%
More recently, the states have pushed for a change in the distribution formula for Compact revenues, which would reduce the share going to the national government. Partially in response to this move, the FSM Congress withdrew the additional amount of revenue sharing from tax revenues, returning to the amounts required by the Constitution. The end result was that the States ended up with a larger share in Compact revenues, which are subject to significant restrictions, while losing access to domestically generated tax revenues. The applicability of the revised distribution formula for Compact revenues has been called into question, effectively reopening the dialogue in that area. The FSM Congress approved the change in the distribution formula for FY 2005, but reserved the right to make adjustments in future years. It is clear that there will be a need for continued dialogue on issues related to revenue sharing.
7.1.2 Medium Term Policy Adjustments In view of the restrictive terms on use of funds and the steady decline over time in grant funding, Compact II will place an increased burden on the management capacity of the FSM governments. Preparing the consolidated funding proposals and keeping up with required reporting for the five governments will be
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a significant challenge. Several proposals have been prepared for a restructuring of government services in order to better deal with these requirements, but none have been adopted. In adjusting to the reduced level of annual grant funding, FSM governments in the short to medium term will have to increase tax revenues and raise efficiency in the provision of services. Service cutbacks in the short-term are also probably unavoidable. Short-term tax revenue raising options being considered include the following:
Import duties in the FSM are generally low by regional standards. Several types of commodities enjoy a significant level of tariff protection, including bar laundry soap and fruit juices. The protected industries have difficulty in meeting local demand, so that there is some support for the removal of this protection. It seems likely that the initial target for revenue increases would be import surtaxes on tobacco and alcohol. Reduced consumption of alcohol and tobacco as a result of increased taxes would also be expected to have positive economic consequences, through health and social impacts (i.e., lowering healthcare and social services costs). The use of the GRT as a substitute for a business earnings tax leads to significant distortions due to differences in the effective rate for different industries and businesses. It would be preferable to replace the current GRT with a less distortionary alternative, such as a corporate income tax. It would appear that a revenue-neutral profit tax in the range of 20 per cent could be a feasible option, since this rate would be at the low end of the rates currently applied in other countries in the region. The Wages and Salaries Tax is only mildly progressive, with a significant discontinuity at the $5,000 level on annual income. The top rate of 10% is quite low by regional standards. A revised structure, involving additional brackets and higher rates, could increase collections and make the overall tax system more progressive.
Constitutional restrictions on the taxes that can be collected by the different levels of government complicate any attempt to increase revenues. This is particularly true for the potential implementation of excise taxes or the VAT. The national government has the right to levy import and income taxes, the proceeds of which are shared with the states. Income taxes include a Wages and Salaries Tax that applies to individuals and a Gross Receipts Tax that applies to businesses. Other taxes including sales and other consumption-based taxes are reserved for
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the states. There is considerable variation in the tax effort at the state level. Overall, however, state level taxes account for only about 20% of total tax revenues. A further complication is introduced with the continued application of the revised distribution formula of the Compact grants (Box 10). It is probable that there will be further dialogue between the two levels of government regarding the distribution of Compact grants and the formula for revenue sharing. This dialogue could be a useful opportunity for discussing other issues related to taxation, such as the potential for coordinating efforts to improving collections. 7.2 Policies and Strategies for Achieving Sustainable Growth In the medium term, the reduced level of Compact transfers can be expected to have a negative impact on overall economic growth. The series of annual reductions in grant assistance, in favor of increased contributions to the trust fund, can also be expected to have a similar impact. In the short to medium term, private sector activity in the FSM is likely to continue to be dominated by services including retail sales aimed at the local market. Retail activities may become increasingly competitive, and some consolidation is possible as real incomes (and consumer spending) fall in the short term under the pressure of likely public sector expenditure cuts. Import substitution, particularly in terms of local substitutes for imported produce, could become more important. Imported produce is expensive and often of poor quality due to shipping time and costs. Falling real incomes heavily affected by necessary public sector wage restraint and other recurrent expenditure cuts in conjunction with price level inflation may make agricultural selfemployment a more attractive option for those with access to land. Distance from markets and high labor costs will continue to work against the development of export-oriented manufacturing. Changes in the world trading system, including the development of regional trade agreements to which the US is a party, are also expected to reduce or eliminate former incentives in the freely associated countries for activities such as garment manufacturing and fish processing plants. The terms of the original Compact I agreement were intended to provide the FSM with unusually favorable access to US markets. These benefits have lost value over time, as other countries also tapped into US markets through regional trade arrangements. Broader changes in the world trading system have also reduced the value of the provisions in the original agreement. In the course of the Compact II negotiations, the FSM expressed an interest in exploring arrangements similar to those under regional trade agreements
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between the US and other nations. In the end, however, the outcome was limited to an updating of the original terms. Several elements of an overall development strategy have been suggested in previous sections. These include:
Reform of the FSM governments tax systems. This includes implementation of a unified tax administration system and VAT to replace customs and sales taxes; Raising efficiency of public service. This involves increased HRD, comprehensive review of departmental and agency missions, functions and job position requirements, wage rates, and performance incentives; Accelerated movement towards rationalization of the PSE sector. This will demonstrate a firm commitment to the principal of encouraging private sector performance of commercial activities and non-competition of public enterprises with private businesses in providing goods and services; Pro-active policy of encouraging growth of the private sector including non-profit organizations. This should include policy elements focused on gradually reducing wage rate differentials between public and private sector employees, implementing a tax system which provides incentives for investment, exports and equal treatment of PSEs and private businesses, and contracting out services that can be provided more efficiently by the private sector; Public sector provision of critical support services. Among these are agricultural extension, industry/sector price and production statistics, credit and loan financing accessible to small and micro businesses, institutional mechanisms enabling businesses and non-profits to participate in planning and policymaking at national and sectoral level, and support in working with private sector to jointly provide entrepreneurial and business skill training; Accelerated movement towards providing the critical elements of a PSD enabling environment. This entails transparent and efficiently administered foreign investment regulations, legal-regulatory regime that enables efficient equitable access to land, secure transactions and other commercial legislation designed to lower risk and cost of doing business, and legal/regulatory mechanisms enabling mortgage or other landsecured loan financing.
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Implementing some of these strategies will require specific support actions on the part of JEMCO to increase the likelihood of success, and reduce the time required for implementation. There needs to be explicit agreement on use of Compact II grant funding for private sector targeted training, industry information/ technical support, facilitation of the transformation of PSE activities to private sector operations, and contracting of legal/technical expertise to assist achievement of specific elements (objectives) of private sector enabling environment. Together with this, it is necessary to preclude government use of funds for recurrent costs. In conjunction with human resource development, there is a legitimate need for project/program funding that should come via the capacity building sector grant. If tied to specific project designs, this would constitute a use of funding consistent with the goals and objectives of Compact II. 7.3 Out-Migration Out-migration has increased significantly since 1997 and the FSM needs to take a close look at this phenomenon in terms of its extent and likely consequences. Certainly more information and analysis will be needed to enable the formulation of policy options. What is apparent is that continuing poor economic performance in terms of job creation and maintaining household incomes in the face of inflation will result in continued heavy out-migration of FSM citizens. There were over 9,100 FSM citizens living in the CNMI, Guam, and Hawaii in 1997 according to US Bureau of the Census survey data. This number refers to the Compact impact population those who emigrated from the FSM after 1986. The US Census Bureau conducted an update survey in the same areas in 2003. For the impact population in 2003, the number of migrants included children of the post-1986 emigrants under the age of 18. This latter survey indicated an FSM migrant impact population of 15,514, an increase of about 6,400 or 70%. This number will be significantly higher if total migrants including those who emigrated to the US mainland and children above18 are taken into account. Estimates have been made based on adjusting the intercensal population growth rates for declining fertility rates. Data from the FSM 2000 National Census Report indicates that the decline in fertility rates was most pronounced from 1980-1990. Utilizing data on both Age Specific Fertility Rates and Crude Birth Rate for relevant periods between 1980 and 2000, a low (2.12%) and a high (2.58%) adjusted population growth rate was estimated for the purpose of projecting total FSM population growth between 1989 and 2003. These rates are
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of course mere approximations. Resulting projections of total FSM population (both resident in FSM and all citizens living outside the FSM) for the year 2003 would be between 128,400 and 136,800. Given that the estimated 2003 resident FSM population is 107,800, this means that between 20,600 and 29,000 FSM citizens are estimated to be living overseas between 16 and 21% of the total FSM population. Most of the overseas citizen population would be in the CNMI, Guam, Hawaii and US mainland. Differences in social and economic characteristics of the Compact impact population and the FSM resident population are highlighted in the box below. The comparisons are based on the US Census survey data and the FSM 2000 Census. Not covered in the box is the place of residence of impact area migrants in 1993, 10 years before the survey was taken. Of the impact area population 10 years of age and older in 2003 (11,292), 50.5% (5,702) had lived in the FSM in 1993, and of this number, 68.6% (3,911) were from Chuuk. Of the total number who were resident in Chuuk State in 1993 (2,751), a majority lived in islands outside of Weno, the State center. The migrant population in the US impact areas had a higher labor force participation rate 58% (of those age 16 and older) versus 44% (of those 15 and older) for the FSM resident population. In terms of economically active people in relation to working age, 49% of the migrant population was economically active (either in formal employment, self-employment or, in family businesses) versus 37% in the FSM. In the FSM, the economically active includes those in subsistence livelihood in addition to those in formal and informal wage employment. With respect to the number of unemployed people, 9.0% were unemployed in the migrant population a higher rate than the 7.1% in FSM. These are not comparable to unemployment rates reported in most industrial countries, which are based on the number of persons in the labor force without any work and who are available to work and are actively looking for work. Availability of subsistence work in the FSM (but essentially not available in the US impact areas) makes comparisons of unemployment, even in terms of working age population, difficult between the two populations since most FSM residents could be working in subsistence activities even if this were only part-time in nature. Having said this, the formal unemployment rate for migrants in the impact areas is quite high, 15.5% in 2002. This high rate may reflect the reality that FSM citizens are not as competitive in the labor market as FSM residents who have been trained in the US, even in the CNMI and Guam. Migration has been an important part of the FSM-US relationship since the beginning of Compact I. The right to live and work in the US and its territories
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Box 11. Socioeconomic Differences Between FSM Residents and Out-migrants in US1
In the 20-39 age group, there is a significantly larger percentage of both males and females (39.1 and 38.4%, respectively) in the out-migrant population, compared with the FSM resident population (27.1 and 28.3%, respectively). With respect to educational attainment of persons aged 25+, 53.6% of migrants had a high school diploma or at least some level of high school attainment, compared with 32.3% of FSM residents. 18.8% of migrants compared with 14.8% of FSM residents attained an AA or AS college degree or some college. Only in terms of bachelors degree or higher degree did FSM residents have higher attainment (3.6% compared with 1.8% of migrants). The latter figures for higher educational achievement are not surprising, given that the majority of FSM citizens seeking a bachelors or higher degree probably go to a mainland US institution. But data for the US mainland migrants are not available. In terms of income, median household income in 2002 for out-migrants was $21,317, compared with 1999 household median income of $4,618 for FSM residents. For individuals age 25 and over, the median income of out-migrant population in 2002 was $11,041 for males and $8,928 for females. For FSM residents, the median income for males age 25 and over was $2,044 in 1999, and for females it was $918. With respect to out-migrant households with public assistance income, 414 households (14.6% of all households) received assistance in 2002 and the mean amount of assistance per household was $161. Given the mean amount, it seems evident that most migrant households receiving public assistance typically did so for a relatively short period of time. There is no comparable data for FSM residents. However, in 1999 there were 2,437 persons receiving income from social security, pension or retirement, and median income from this source was $1,848. In terms of remittances, 74 impact area out-migrant households (2.6% of total households) received such income and median amount received was $3,747. For FSM residents, 5,837 persons reported receiving remittances from outside of the FSM and the median amount of such income was $565. In terms of reason for out-migration, of those born outside the impact area, the main reason given was employment (33.2%). Second largest reason category was, dependent of employed person (23.9%). None of the other reasons given accounted for more than a 6.8% share of the reasons, but a large number surveyed gave no reason (25.7%).
Note: 1 Characteristics are for those migrants in CNMI, Guam, and Hawaii only, based on the 2003 surveys, compared with FSM residents surveyed in 2000 Census. Data are not available for FSM citizens living in US Mainland.
was seen as an important safety valve, allowing Micronesians to seek employment there in the event that adequate opportunities were not available at home. There has been a substantial flow of migrants throughout the Compact period, primarily towards Guam and Hawaii, but in the early years migration was often temporary. Since the second step-down of US grant aid in 1997, the volume of migration has increased substantially, and increasing numbers of migrants are
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moving beyond Guam and Hawaii to the US mainland. With larger numbers of better-educated citizens moving abroad, remittances could become an increasingly important source of income for the FSM economy. Further survey and research work will be needed to determine whether remittances are likely to become an important source of transfer income, or whether they will not be a factor if FSM households in the US become less involved with their families in the FSM. Eventually, at least some portion of the out-migrant population will return to the FSM. To the extent that they bring new ideas and skills, they may help boost entrepreneurial activity in the economy. This could also help address human resource constraints with respect to the provision of government services. 7.4 Self-Sufficiency by 2023: Attainable Goal? The high-growth or sustained growth strategy endorsed by the Third Economic Summit relies mainly on tourism. The tourism sector has substantial potential, but all the elements needed to stimulate significant growth will require a strong commitment to the policies recommended by this report, the same policy recommendations made by a host of technical assistance missions in the last decade. Even with the new commitment called for by the Third Economic Summit, there will be a time-lag factor in that many policy initiatives need two years or more to be fully implemented (e.g., tax reform, comprehensive training and institutional strengthening of the public service). Another major medium-term constraint is likely to be the adequacy of infrastructure investment, particularly those needed to support a major campaign to make tourism the leading economic sector. Given the realities of Compact II conditions, there will be an inadequate level of funding for key infrastructure needed to support rapid growth in tourism. Another major concern is whether the general public will accept and support a major expansion in tourism. As acknowledged in the SDPs tourism sector plan, a major education and awareness program will have to be undertaken. Better economic performance in the agriculture and fisheries sectors will require sufficient resources to implement the recommended policy initiatives. However, given the fiscal expenditures compression that must be borne by FSM governments in the mid-term, there will unlikely be any available resources to support PSD. With demonstrated commitment of FSM governments to policy reforms, adjustments in JEMCO policies on sector grant use conditions would be warranted. This would at least partially address the economic and financial
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capacity constraints that will have to be overcome if sustained growth is to be achieved and progress made in becoming more self-sufficient by 2023. The Compact II trust fund will provide a sustainable, relatively stable source of funding for government operations. The performance of the fund, over the twenty years covered by the amended Compact, can be expected to have a positive longer-term impact on investor confidence, as will any indication that the US will continue to provide additional economic assistance beyond 2023. There has been a succession of ADB-supported resident economic advisors, with significant continuity in terms of personnel, over a period of nearly nine years. The primary functions of the economic advisors in the FSM remained largely the same. However, a gradual shift in emphasis of duties has occurred, from acting in an advisory capacity to becoming more involved in line management responsibilities. The EMPAT team and successor activities have essentially filled the role of government personnel that would normally have been responsible for economic management. An example of one such activity has been technical assistance provided by advisors acting in the capacity of linking the FSM and the donor community on issues related to economic management. Capacity building in economic planning and statistics in the national government has been limited in both scope and effectiveness. Rather than working with mid-level counterparts, the focus has been on recruiting trainees who essentially serve as junior-level members of departmental planning and statistics divisions. To the extent that ongoing substantive training would have been given in conjunction with the assignment of increasing responsibilities and commensurate wage increases, the limited capacity building would probably have had a more permanent beneficial impact. The experience has been that most of the junior citizens who received graduate level training have left government service.
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Executive Summary
n the FSM the three main productive sectors agriculture, fisheries, and tourism have the largest potential for generating income and jobs. From these sectors they could generate the export and import substitute income necessary to narrow the existing large gap in merchandise trade and in the overall current account imbalance. The lead-up to the Third Economic Summit included a Strategic Development Plan (SDP) for the tourism sector. The tourism SDP was valuable in informing summit participants, and enabled the Third Summit Tourism Committee to produce a Tourism Strategic Planning Matrix (SPM) based on a current sector assessment. The same cannot be said for the agriculture and fisheries sectors. The Third Summit did produce SPMs for these sectors, but without the benefit of current SDPs. One may question the basis for including these sector study findings and recommendations along with other emerging economic issues. However, sector performance in both agriculture and fisheries in recent years has been poor relative to the early 1990s, and many of the constraints to better performance could be overcome. Given these circumstances, agriculture and fisheries performance constitute emerging issues. The tourism sector also has not performed well, and it must do much better if sustained growth of income and employment is to be achieved and the FSM is to make any progress in becoming more selfreliant. The poor performance of tourism may be explained in large part by the same lack of commitment on policy reforms that has affected the performance of agriculture. Although the FSM Strategic Development Plan that was submitted to Congress for approval in January 2005 assumes agriculture and fisheries would also contribute to sustainable economic growth, the SPD clearly expects tourism to be the principal driver. Chapter 11 covers other emerging economic issues that must be addressed by the FSM if it is to achieve its Millennium Development Goals (MDGs) by 2015 and significantly raise economic self-sufficiency by the end of Compact II. These emerging economic issues include out-migration, capacity and productivity of the public sector, increased hardship, and governance standards.
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Chapter 8. Agriculture Sector

his review looks at the sector in its entirety recognizing the major role played by traditional farming systems and the impact of sociocultural realities. The 1996 Country Economic Report emphasized the importance of traditional agriculture. Another ADB technical assistance project highlighted opportunities for domestic and export marketing. The reality is that the sector continues to be dominated by tradition and that commercial agriculture is almost embryonic. Farmers are getting little if any support from government. Money is being spent on the sector, but little is for the benefit of farmers. 8.1 Situation Analysis Out of a total FSM population of 107,000, an estimated 80% depend on subsistence or semi-subsistence livelihoods. Agriculture is not a major contributor to export receipts but provides livelihood and employment to much of the population. Recent policies have tended to favor commercial development of agriculture, failing to adequately account for subsistence and semi-subsistence farming systems and their inherent characteristics. The vision for the sector has been inconsistent. Government funding has been allocated without a fiscal rationale, and with insufficient attention to sector needs or quality outcomes. Traditional subsistence foods have been overwhelmingly replaced by imported foods, and are regarded as inferior (starch foods), and not fully recognized for their economic or nutritional value. Support services have not targeted traditional agriculture. Commercial agriculture has had some successesespecially in niche export markets, e.g., kava (sakau), betel nut, cooked breadfruit, and bottled processed noni . The common feature of these products is that their markets were developed and are operated entirely by the private sector, with government support confined to quarantine services. This should be the model for the future. Products where government has been involved or is active have either largely failed (pepper, livestock) or continue to require subsidies (copra). There is room for import substitution on a limited scale. In 2002, food imports totaled $28.2 million, of which about $1.4 million were for fruit and vegetables that could be produced locally.
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In summary:
Government expenditure in the sector is largely ineffective; Government expenditure can be better targeted at traditional crop production; Non-government groups can provide cost-effective support to traditional farmers; More people rely on subsistence agriculture for employment than they did 10 years ago; The integration of agriculture and culture must be recognized by sector planners; Traditional farmers place higher priority on social obligations than on agriculture; Traditional farmers prefer crops that allow flexibility to meet social/ cultural obligations; Land resources are adequate in Kosrae, Pohnpei and Yap, Chuuk is under pressure; Niche markets exist for traditional crops; Opportunities exist for local production of some imported fruit and vegetables; and Some local foods can address serious dietary deficiencies and disorders.
8.2 Farming Systems Most agricultural production in the FSM is subsistence in nature, producing food for family use, ceremonial purposes, social obligations, and income generation. But most people have come to prefer the convenience of cash transactions. The decreasing regard for local foods had made policy makers overlook subsistence agricultural development. However, reductions to Compact funding coupled with cuts in the public sector, have forced many families to fall back on subsistence agriculture. The 2000 Census indicated that nearly 17% of families were dependent on subsistence agriculture for their main source of employment, compared with 10% in the previous census. A recent survey on Pohnpei showed the value of average agricultural production per household at $4700 in 2003, equivalent to 74% of median household income in 2000. However, only 25% of this came from market sales; own consumption accounted for about 53%, and 22% was used for ceremonial activities or to fulfill social obligations. Looking at it another way, after providing for household needs, only about half of the discretionary surplus is used to generate cash income.
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The major species of livestock are free-range chicken and pigs which are kept for home consumption. Pigs have an important ceremonial value, especially in funerals. There are few regular piggeries, and prices are high because of expensive imported pig feed. Poultry are run free-range, and are used for both meat and egg production. There are a few commercial layer poultry operations, but imported feed makes production costs high. Egg imports in 2002 amounted to $444,400, suggesting additional opportunities for local production, based on locally grown feeds. There are export markets in Guam, the Marshalls, and Saipan for root crops, bananas, betel nut and kava, and in many countries for copra. In addition, there are immediate prospects for import substitution of selected fruit and vegetables in local markets. Agriculture exports amounted to about $1.4 million in 2002, equivalent to an average annual increase of 6.5% from 1999-2002. Exports of betel nut, kava, and copra grew annually by 18%, 7%, and 5% respectively in the same period. All three crops are grown by traditional, semi-subsistence farmers. Exports of banana, citrus fruits and root crops declined over the same period by an average of 17%. The majority of agriculture exports are sourced from Yap - 51% and 65% of total agriculture exports for 1999 and 2002 respectively - while Pohnpei accounted for 31% and 26%, respectively. Conversely, exports from Chuuk and Kosrae are negligible. Gross margin analysis of cabbage and cucumber shows a profitable opportunity to grow crops which are currently imported in significant quantities. Costs of production are five times lower than the CIF cost of an equivalent imported product. Assuming a crop failure rate of one in four (e.g., caused by drought, typhoons, disease), farmers can still expect to earn about $5 per hour, about three times the rate for agriculture labour. Internal marketing infrastructure is limited. Most produce is marketed through supermarkets, with individual growers delivering directly, but supermarkets report that supplies of local product are limited and erratic. The coconut tree stock is ageing and there has been limited replanting. Since 1991, copra production has exceeded 1,000 tons only once, and it has averaged 610 tons in the last five years. Prices are subsidized but irregular collection and slow payment are disincentives to farmers. Subsidy allocations by the national government have dropped by 62% from $200,000 in 2002 to $75,000 in 2005. In September 2004, the farm-gate price of copra was reduced from 13 cents/lb ($260 per ton) to 5 cents/lb ($100 per ton). Widespread opposition ultimately led to introduction of a subsidized price of 10 cents/lb ($205 per ton) still a 23% drop in price. Freight costs an additional $205 per ton, making the FOB price still higher than the world price of around $350/t.
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Availability of inputs e.g., seeds, fertilizer, chemicals, animal feeds, is variable. The private sector provides feeds for pigs and poultry on a fairly regular basis. However, the Department of Agriculture in some states continues to compete with the private sector in the provision of seeds and fertilizer. While this is done with the best of intentions, it undermines the opportunities for smaller private sector providers.
Box 12. Case Study: A Commercial Fruit and Vegetable Farmer Pohnpei
Three generations make a living off 10 acres of rocky, medium fertility land. About two acres are rock free and can be mechanically cultivated. On this land, a range of vegetables are grown, including eggplant, cherry pepper, cucumber, runner beans, Chinese cabbages, gourds, and pumpkin. On the rocky land, they are moving to sweet taro (colocasia) for the restaurant market and betel nut for local and export markets. All soils require heavy compost, supplemented with inorganic fertilizers. Vegetables are marketed locally to outlets with which there is an established relationship. Buyers accept everything delivered, but with a right to reject poor quality product, which is replaced free of charge. Payments are made weekly for deliveries that week. In addition, they raise pigs large animals for the funeral market ($1000 per head) and smaller ones for everyday use. Annual sales are about 10 big funeral pigs and 40-50 smaller pigs (at about $200/head). The market for funeral pigs is weakening due to weaker economic conditions. The family regards its livestock as ready collateral for the FSM Development Bank and an important fertilizer source for vegetables. The family sees commercial agriculture as a risky business, due to the variations of climate and markets. Although droughts are a constant worry, a loan application for irrigation development was declined because of the risk. Typhoons also cause losses. The land is government land, allocated to the wifes family in 1960 under the Homestead Grant Scheme. They have been applying for individual title ever since, and especially in last few years, but to no avail. Lack of clear title is also constraining their ability to access development finance. Reliable access to inputs (especially seeds and fertilizer) is a problem. Fertilizer supplies from the Department of Agriculture are currently erratic, but generally alright. But the family expects supplies to become more erratic as the frequency of shipping services declines. They are the only private commercial growers in Pohnpei. Why is this? They note a number of constraints. People do not differentiate between traditional and commercial farming both have low status. There is a general unwillingness to work hard on a sustained basis. The farming system is too complicated Pohnpeans lack business and farming skills. What can be done to develop agriculture? They say people lack initiative life is too easy. Agriculture is the victim of people in government with grand visions of big international markets and large-scale livestock production and slaughter facilities. The reality is different what is needed is a community grassroots approach, not fantasies. Lessons should be learned from previous failures especially pepper. There should be more realistic expectations of production potential and markets, and adequate technical backup before investment begins.
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8.3 Productive Resources land, labor and capital 8.3.1 Land Arable land in FSM is generally sufficient to support food production needs. The exception is Chuuk, where a combination of high population and limited land means food production capacity is stretched under traditional farming practices. Chuuk accounts for over 50% of FSMs population, but has only 12% of the arable land. Arable land per capita is 0.1 ha in Chuuk, compared to 0.95 ha, 0.65 ha and 0.80 ha in Kosrae, Pohnpei and Yap, respectively. In pre-colonial times, land tenure was the responsibility of the traditional chiefs, then it passed to successive colonial rulers. Since the Federation in 1986, surveying of individual land plots for issuance of title has proceeded slowly. Previous studies have also highlighted this point. Land can be mobilized under private lease arrangements. The terms of lease of agricultural land varies: Chuuk 99 years; Kosrae 25 years; Pohnpei 25 years; and Yap 49 years. However, rental arrangements are mostly informal, with little transparency of terms. Land degradation is a serious issue on most islands. On Pohnpei, encroachment by squatters growing kava into the upper watershed has reduced the area of primary forest significantly from 15,000 ha in 1975 to 5,200 ha in 1995 to 4,200 ha in 2002. Siltation of the fringing reefs as a result of deforestation and subsequent erosion is causing significant damage to traditional marine food supplies. 8.3.2 Labor The 2000 Census shows that 52% of the labor force (37,414 out of a total working-age population of 63,836) were engaged in agriculture and/or fishing. Of these, 70% said they were engaged in subsistence activities. Eighty per cent of the males and 86% of the females engaged in subsistence agriculture had either no education or had failed to complete high school. This stark reality highlights the dualistic nature of FSM society the educated participate in the cash economy while the rest are increasingly marginalized to subsistence agriculture. In 2000, the Census showed 17% of the working age population engaged in subsistence activities up significantly from 10% in 1994. The rate for females increased from six per cent in 1994 to 18% in 2000. Of significance to the agriculture sector is the continuing out-migration of young people, especially men. Anecdotal evidence suggests that this is a factor,
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but not yet a major concern. The youth of FSM tend to prefer the cash economy and imported food rather than agricultural work. Agriculture as a career has low status as illustrated by the closure in 2002 of the Pohnpei Agriculture and Trades School course on vocational agriculture one of the few remaining courses of its type in the region. The College of Micronesia is offering a two year degree course in agriculture but currently only 15 of 2500 total students (0.5%) are enrolled. 8.3.3 Capital Access to affordable capital is a constraint. Loans are geared towards larger commercial operations, though FSMs recent history is littered with such failed enterprises. Evidence suggests that commercial crop production is sufficiently profitable to justify a well-designed credit program at an appropriate scale. Opportunities for capital formation from savings are constrained by social issues and a shrinking job market. The FSM Development Bank and others are building compulsory savings into their loan products. But FSMDB has had very limited exposure to the agriculture sector over the past five years with only 0.2% of total portfolio concerned with that sector in 2002. The budget for agriculture in 2004 and estimates for 2005 demonstrate the lack of government support. Agriculture is designated as a priority productive sector, but only 1.8% is set aside for agriculture in both 2004 and 2005 national and state budgets. The small budget is made worse by the fact that most of the budget is absorbed by personnel costs (i.e., wages and benefits) of agriculture staff, leaving even less to cover the costs of providing field support to farmers. 8.4 Technical Support The major thrust of agricultural technical backup is offered through the COM Cooperative Research and Extension Service affiliated with the USDA Land Grant Program. This service has a budget of $0.75 million and total of 43 staff members 21 of whom are either extension agents or researchers. But as salaries account for over 97% of total budget, their capacity to deliver relevant services to rural communities is constrained. There is an opportunity to improve the productivity of these funds. Discussions with the relevant USDA staff regarding funding of community-oriented NGOs to deliver agriculture extension should be a priority. SPC and Peoples Republic of China also have activities in FSM and there are volunteers from Peace Corp and JOCV supplementing State Agriculture staff.
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8.5 Policy Issues The agriculture sector has been typified over the last 20 years by the lack of a consistent vision and by expensive failed government investments. Policy and investments are made in relative isolation, with little or no data, and without reference to the needs and priorities of either rural communities or the private sector. The problems in agriculture are, for the most part, directly attributable to leadership and governance failures. The rate of out-migration in the FSM is a clear measure of the degree of that failure. Policy advice has favored commercial, market-oriented approaches and paid too little attention to the realities in particular the prevalence and characteristics of traditional agriculture and the varying needs of the different states especially Chuuk. Future agriculture policy must reflect the needs of those who rely on the sector for food, livelihood and employment, with investments directly benefiting them. There are opportunities to work with village communities, and to introduce simple but improved technologies, business understanding, and market awareness. One State Director of Agriculture freely admitted that little, if anything, was being done for traditional farmers. Research and development (R&D) has been limited and of little value to farmers. Poor performance and fiscal constraints have created the need to develop alternative strategies. A number of agencies are using a community-based approach, recognizing that farmers do respond to new technologies. The FAO believes that for any positive changes to be initiated, target groups need a better basis for decision making. Decisions should be made based on an understanding of the real agricultural business environment (without handouts and subsidies). The Natural Resource Conservation Service (NRCS) in Pohnpei has been doing community-based extension work with farmer groups organized by the village chief. NRCS believes the key is grassroots involvement in initial planning, when needs are determined by the community for the type of service required. They also see demonstrations as a key approach, with many opportunities to improve the performance of traditional agriculture. The Pohnpei Conservation Society (PCS) started as an NGO in 1997 and has 19 staff members and a $350,000 budget now funded independently of government. The PCS works with farmers to encourage agriculture and discourage forest encroachment. It believes science can be applied to traditional farming systems, but must be underpinned by proper dissemination through farmer groups. It sees a current gap between R&D and farmer needsno interaction, no dissemination, and no feedback.
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The Yap agriculture garden program aims to help people establish a food garden by providing funds for seeds, fertilizer, tools, fencing, and other inputs up to about $200 per applicant. The ultimate aim is to form a cooperative serving the successful grantees, with a market outlet based on the local supermarket. Rice has become the single largest imported staple, valued at nearly $4.4 million (cif) in 2002. The shift away from reliance on traditional crops brings exposure to cash shortages and shipping delays. As one villager commented our traditional root crops and bananas have become show foods at special occasions afterwards we go home to eat rice and tinned meat. A 1994 blood survey in Chuuk and Pohnpei showed that more than 50% of children had low levels of vitamin A, with Chuuk having the worst levels. In 2000, another blood survey showed Yap and Kosrae had 38 and 63% of children with low levels of vitamin A, respectively. A recent UNICEF study found that 3050% of youth in Pohnpei state reported consuming no fruit or vegetables. Vitamin A deficiency can lead to diabetes, infections, impaired vision, heart disease, cancer and anaemia. Infant mortality (aged 0-1 year) is about 50 per 1000 in FSM. In a recent dietary survey in Kosrae, not a single mother or child was meeting vitamin A dietary needs, but many were eating three times their protein needs. Some traditional FSM foods (especially yellow flesh banana, taro and breadfruit) are high in beta keratin (bk), the source of vitamin A. While a white Cavendish banana has 30 micrograms of bk per 100 gm, the FSM karat banana has 800 micrograms of bk. One karat banana per day would be more than sufficient to provide a childs vitamin A needs. Conversely, rice contains no bk. Rice has to be supplemented by healthier and more nutritious traditional local foods. FSM agriculture must be adaptable to the demands that socio-cultural activities place on farmers and their families - in particular the funeral culture. The main constraint to commercial agriculture is not technical, economic, or the lack of markets, but local culture, especially attitudes to agricultural work and the costs and obligations associated with funerals. It is harder for a farmer to opt for agricultural work rather than participate in a funeral, an obligation that typically lasts three days. Coconut provides the only cash crop option for the 19,071 people living in the outer islands. The crop has been heavily subsidized by Government through shouldering shipping costs and price support. In 2004, the total subsidy required will be about $73,000 and is projected to be about $68,000 in 2005. These losses would be much higher if the copra price had not increased by 70% in the last 2-3 years.
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While the coconut tree stock is ageing, it is still productive and younger than in other parts of the region, e.g., Tonga or Samoa. There are prospects for extraction of oil in situ in each outer island, reducing freight costs and storage losses. There is a current capacity to produce about 100,000 gallons of oil, equal to $210,000 of oil exports a 33% increase on the 2004 copra export revenue, after subsidies. This should allow farmgate payments to increase and subsidy payments to be eliminated. There are still further opportunities for value adding to the coconut crop by processing the oil into high-end consumer products. Previous development approaches have identified market opportunities, assuming farmers would capture these opportunities. However, the cumbersome processes of governments are typically too slow for niche marketing. Agriculture in the FSM will never develop on the basis of large monoculture crops. Supply capacity is too limited and most farmers will not change their farming system. Imports of vegetables and fruits that can be grown locally in FSM amounted to $1.4 million in 2002. It seems reasonable to assume that technically this amount could be replaced with local production in the medium term. In addition, imports of rice and noodles amounted to $5.9 million in 2002. It is assumed that 10% of this amount could be replaced with locally produced root and tree crops in the medium term. In this kind of flexible market, governments role is to provide an enabling environment, including a consistent and appropriate policy framework, secure land tenure, public infrastructure, R&D, and effective quarantine and protection services. The private sectors role is to find and fill markets with quality products, on a consistent basis and in a manner that treats farmer suppliers equitably. There has to be regular dialogue between the farmers, government, and the private sector. Such dialogue does not occur in FSM at this time. An important function of government is establishment of an enabling policy framework. To develop effective policy that reflects the priorities of all stakeholders, policy makers need good information on crops and livestock. At present there is a complete absence of such data with the only reliable information coming from the quarantine service. However, because of staff constraints, their data is not up-to-date. The extension staff will greatly benefit from a simple farm-monitoring program where they work with village leaders to gather area and yield data and identify a few randomly selected farmers to monitor in-depth on a regular basis. This way, the data could be constantly updated, both horizontally (general data) and vertically (in-depth data from individual farmers). As part of an enabling environment, land tenure systems need to be assessed. The following account is considered an accurate assessment of land tenure issues in relation to agriculture. Land tenure arrangements vary in each state, and
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depend on the type and prevalence of traditional and customary authority, and the degree of change to modern systems of land registration and ownership. Systems that are in the process of transition are least clear. Land is perceived as scarce and has high value (but there is no transaction price data that would at least provide some indication of land values) but standards for land value appraisal systems are not clear. Where survey and ownership records and values are disputed, and progress with new surveys and registration is slow, the access and security of ownership to land is a constraint to production and investment. Where customary agreements or modern systems provide fair and undisputed access, value and ownership, the constraint is diminished. 8.6 Sector Goals & Policies The sector goals and policies are designed to support agriculture sector development strategies that:
Ensure that within an agreed framework, investment in the sector is consistent, equitable, and relevant; Encourage dialogue between stakeholders, including national and state governments, private sector businesses, civil society agencies, and farmer groups; Focus attention on the reality that agriculture is based on traditional farm systems; Recognize that significant commercial production comes from traditional agriculture; Bring rural communities into the decision making process, encouraging greater self reliance, responsibility and local level initiative for the development of agriculture; Develop both extension and research services that respond to the different needs of traditional and commercial farmers; Encourage civil society participation in extension delivery on a contractual basis; Recognize market opportunities in import substitution, and local and regional exports; Allow the private sector to devise realistic strategies for each market segment; Ensure that the private sector is fully responsible for supplies of farm inputs; Encourage the provision of sustainable financing for commercial farming; and Ensure environmentally sustainable production.
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The mission statement for the agriculture sector is:
The agriculture sector , including forestry , shall provide: sector, forestry, (i) food security , cash income, and healthy livelihood; and, security, (ii) opportunities for domestic and export markets, while promoting environmentally sustainable production within a stable and consistent policy framework.
The Draft Strategic Goals and Policies for the agriculture sector are: Strategic Goal 1: A well resourced and properly focused agriculture sector consistently operating within a stable policy framework. Supporting Policies: Adherence to an agreed policy framework based on solid information Allocation of an equitable Government budget share to agriculture Equitable allocation of Government agriculture budget between staff salary-related costs and operating expenses Delivery of effective education to rural population Raising the image of agriculture as a worthy and satisfying career choice This Strategic Goal provides a consistent vision and adequate productive investment that benefits farmers and their families, and not government staff. Agriculture receives inadequate funding and existing funds are largely unproductive, i.e., expenditure is ineffective in helping traditional farmers. Compact II funding levels and restrictions on uses will result in reduced Government budget resources. Thus, greater efficiency and productivity of Government expenditures will have to be achieved. The agriculture sector has lacked a consistent vision. Policy advice has tended to favor commercial, market-oriented approaches (both export and import substitution at various times) and has paid too little attention to the realities of the sectorthat it is substantially based on traditional agriculture and that the states have different needs constraints and opportunities especially Chuuk. Future agriculture policy must reflect the expressed needs of those who rely on the sector for food, livelihood, and employment. Future investments must directly benefit them. Policy and investments are made in relative isolation, with little or no data, and without reference to the needs and priorities of either rural communities or the private sector. The norm for investment in agriculture has been single solutions
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based on large government expenditure. But most such investments have failed and have tended to either ignore or overwhelm small, traditional farmers. The major share of expenditure is on agriculture staff that are perceived by farmers to be ineffectual in providing assistance because they offer little of relevance to them or their families. Agriculture successes in recent times (in kava and betel nut production) have been achieved despite Government involvement in the sector, not because of it. Strategic Goal 2: T o increase production of traditional farming To systems for home nutritional and traditional needs, and cash incomes. Supporting Policies: Improved outputs and profitability from traditional farming systems Development of a flexible extension service specifically designed to deliver quality services to traditional farmers Elimination of Vitamin A deficiency among the FSM population Development of a more focused household food security strategy for agriculture in Chuuk Replacement of some imported foods with local product Adequate investment in border protection and agricultural quarantine This Strategic Goal aims to: (i) focus specifically on the farm family; (ii) differentiate services, especially extension services, between traditional and commercial agriculture; (iii) highlight the need to offer support services at the community level where extension will be effective; (iv) employ agencies best equipped to deliver such services not necessarily from inside the government; and (v) ensure that closely related aspects of traditional agriculture such as quarantine and nutritional health are seen as part of the same goal. Strategic Goal 3: Increased volumes of saleable surpluses to be placed into local and regional mark ets by the private sector . markets sector. Supporting Policies: Establishment of regular dialogue between stakeholders (Government, private sector and growers) Recognition of the separate roles of stakeholders Encouragement of niche commercial crops for import substitution and export
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Manage the coconut industry for the benefit of both producers and processors Differentiate extension services between commercial and traditional farmers Develop small-scale agriculture/food production units and industries
This Strategic Goal aims to ensure that: (i) the role of the private sector in market development is realized; (ii) there is recognition of the need to hold dialogues between all market stakeholders; (iii) there is a focus on small incremental gains from niche markets which will build confidence among all stakeholders, especially farmers, to whom improved status and recognition are important needs; (iv) the potential of selected commodities, such as coconut, for value adding is captured. In any successful marketing environment, each stakeholder will recognize its particular role. Some niche markets already exist. There are opportunities to leverage the FSM image of a clean and green environment where food can be produced without concerns about contamination. Niche markets can also be tapped for import substitution. A community of farmers could agree to produce to replace a share of the market of some imported fruit and vegetables. Strategic Goal 4: P romote environmentally sound and sustainable Promote production. Supporting Policies: Establish effective mechanisms to control invasive species Discourage slash and burn farming/deforestation The FSMs limited land resources and fragile ecosystems should not be left to casual methods of environmental protection given the rapid deterioration that can result from inappropriate production practices. The causes and effects of environmental decline are often not immediately understood by resource users. For those striving to make a living, the issue may not be a priority. As proven in a number of programs, a community-based approach focusing on resource users through education and appropriate support services can yield results. The policy is aimed at a pro-active and integrated approach to addressing environmental sustainability.
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8.7 Agriculture Sector Growth Projections (2005 2023) Growth scenarios for agriculture have been calculated, demonstrating that the sector could make significant contributions to economic growth if it were provided with appropriate support and direction. In the average growth scenario over the period from 2005-2023, subsistence agriculture is expected to grow by 3.3% per annum, agriculture exports by 13.3%. Eighty two per cent of the readily replaceable food imports will be locally produced. The average growth scenario assumes a population growth of 0.5%. In addition, there is an expectation that a higher proportion of the population will go back to traditional agriculture, and a higher productivity from traditional agriculture will result from the implementation of the Agriculture Sector Matrix. Export receipts are expected to grow as a result of improved extension services to commercial farmers, and a greater focus on niche markets and increases in food processing. In the average growth scenario, coconut crop potential is captured by moving to oil extraction. Import substitution of readily replaceable products is achieved, and there is some tourism growth averaging 1.5% annually. In the high growth scenario, subsistence agriculture is expected to grow by 9.6% per annum, exports by 33.5%. Ninety seven per cent of the readily replaceable products will be locally produced. With enthusiastic and full support for the policies and strategies recommended, including the full collaboration of stakeholders, this scenario is achievable. In the low growth scenario subsistence agriculture is expected to grow by 1 per cent per annum, exports by 3.6% and 59% of the readily replaceable products would be locally produced. A continuation of current policies, resource allocations and governance standards, will result in this rather dismal scenario. 8.8 Agriculture Infrastructure Investment Needs An Infrastructure Development Plan (IDP) for FSM was prepared in 2002 to address anticipated needs for the period 2003-2017. While the IDP addresses the infrastructure needs of the private sector in general, it makes no specific mention of agriculture, except that for secondary rural roads. In fact there is $250 million earmarked for investment in roads. Additional investments in agriculture that should be considered, in addition to that contained in the IDP, is infrastructure for quarantine ($1,040,000), additional market infrastructure ($120,000) and coconut oil extraction facilities in the outer islands ($180,500).
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Chapter 9. Fisheries Sector
he marine resources of the Federated States of Micronesia are contained within an Exclusive Economic Zone (EEZ) covering some 900,000 square miles extending from 135 to 165 east longitude and from 10 north to 1 south latitude in the western Pacific Ocean. Responsibility for the oversight and management of near-shore and coastal resources to 12 miles is vested in FSM state governments with the management of offshore oceanic resources retained as a national government function under the National Oceanic Resources Management Agency (NORMA). Since the 1996 FSM Economic Report there have been a number of studies on FSM fisheries. The ADB TA 2832 Fisheries Management and Development Project alone produced 40 substantial TA reports, many of which continue to remain relevant to the FSM. 9.1 Coastal and Near-Shore Fisheries and Marine Resources Coastal and near-shore marine and fisheries resource use in FSM comprises inshore fisheries (those taking place in mangroves, reef areas, and lagoons), near-shore fisheries for large pelagic species (including tuna), and bottom fisheries for snappers, groupers and other demersal species. The coastal areas and lagoons have an enormous variety of living resources including reef and deep-slope fish, mangrove crab, land crab, coconut crab, lobster, deep-water shrimp, trochus shell, clams, pearl oyster, ornamental shells, turtles, octopus and squid, sea cucumber, sponges, and corals. Reef and lagoon areas also provide a source of sand and coral rubble for construction and road building. Subsistence fishers make the greatest use of inshore resources with much of the artisanal (small-scale commercial) fishing effort focused on near-shore, bottom and coastal pelagic resources. In the main islands of each state, small-scale fishers sell catch in excess of their own requirements through various outlets. A few fishers and traders also ship small quantities of fish to other parts of FSM and overseas although commercial activity in the export of reef fish has recently been controlled in Kosrae, Yap and Pohnpei due to resource depletion concerns. The greatest cash value resource is trochus (Trochus niloticus) shells, a commodity specific to Yap but which since the 1930s has been progressively introduced to many other locations within FSM. Attempts to develop and structure small-scale commercial fisheries, through projects such as the financing (or gratis provision) of fishing craft have met with limited success. Problems with catch distribution and marketing are perennial
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constraints. Nevertheless, a great deal of (mainly foreign) development funding has been directed towards the commercialization of inshore fisheries, and has included regional or village fisheries centers, infrastructure projects, and the provision of boats, motors, and other equipment. The development and management of coastal fisheries encompasses all reef and lagoon fisheries as well as near-shore fisheries for coastal and ocean pelagic species, including tuna. Responsibility for marine resource fisheries development and management activities has been divested to separate agencies in Kosrae, Pohnpei and Yap with a single agency responsible for both management and development in Chuuk. The FSM national government, through the Fisheries Section of the Division of Sector Development within the Department of Economic Affairs, has the responsibility to provide support to state agencies involved in coastal fisheries development and management efforts. The Fisheries Section assists the states in implementing their development and management plans through the provision of technical support and information, facilitation of contacts between state agencies and external organizations, and coordination of the activities of FSMs international development partners in the fisheries sector. The Fisheries Section also retains responsibility for the operation of the National Aquaculture Center in Kosrae State. Various other organizations, including environmental agencies, fisheries and economic development authorities, and non-government organizations are also involved in coastal resource management, making coordination of activities and harmonization of goals and objectives an ongoing challenge. In the mid-1990s draft marine resources legislation was prepared for each State to enable community or traditional participation in fisheries management, and to harmonize key provisions among states and with the national government for effective management and enforcement. These respective marine resources laws, responding to different needs and situations in each state, were originally inspired by the concept of a model law. Since then, there have been changes in personnel, political administrations, and priorities in the states causing uneven progress in revising the state fisheries laws. New laws have been passed in recent years in Yap and Kosrae but have yet to be adopted in Pohnpei and Chuuk. However, in Pohnpei, the recent adoption of a Marine Protected Areas Act has provided a partial framework for fisheries management. 9.1.1 Coastal Fisheries Landings and Economic Contribution Dalzell et al. (1996), using information from Smith (1992), estimated coastal fisheries production and value as approximately 6,243 metric tons (mt) valued at
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$11,237,400 for subsistence fisheries and 637 mt valued at $1,483,544 for small scale commercial fisheries. The Statistics Unit suggested that some 490 mt of fish and shellfish worth about $1.2 million was purchased by local fishing markets in 1997. The Household Income and Expenditure Survey reported that $18,496,000 was spent by FSM households on fresh and frozen fish, the vast majority of which come from small-scale commercial fishing. Using average fish price information in Statistics Unit (1999), this equates to 6,323 mt of purchased fish. Fisheries Engineering carried out extensive fieldwork in Pohnpei and estimated the total coastal fishery production of Pohnpei Island to be about 1780 mt (75% reef/inshore, 25% pelagic). Of this, 780 mt was attributed to subsistence catch and 1000 mt to commercial effort (with the proviso that approximately 28% of this was for non-sale domestic consumption). If the catch level reported in Pohnpei (32% of FSM population) were extrapolated to all of FSM, the coastal fisheries catch would be about 5,500 metric tons. However, taking into account population increase and the likely higher per capita catches of the outer islands and Chuuk, a more likely catch estimate is approximately 8,000 metric tons per year. Gillett et al. estimated an annual catch of about 2,000 metric tons of tuna in small-scale coastal fisheries. However, with known increases in fishing effort in recent years and increasing populations, an approximate indication of coastal fisheries production would possibly be in the range of 10,000 metric tons . At $2.90 per kg for the commercial catch and $2 per kg of value for the subsistence catch this equates to a value of $24.5 million per year. 9.1.2 Problems, Constraints, and Issues Near-shore marine and fisheries resources have increasingly become the target for commercial development. New fishing methods and associated technology, and the establishment of fisheries infrastructure have made commercial activity more prevalent and accessible, especially in proximity to urban development. In some cases, traditional communities have become more susceptible to the use of unsustainable fishing methods to meet needs for immediate cash income. Increasing population over the past fifty years has placed greater demands on coastal resources for income generating activity, food, housing, and other developments. Inappropriate fishing techniques have accelerated resource depletion. Recent years have seen an increasing focus on resource management and issues relating to sustainability and the need to preserve fisheries for subsistence
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and community access. This is clearly exemplified in the work of state marine resource agencies and NGOs, and reflected in the recommendation of the 2002 National Coastal Fisheries Consortium that FSM should Take a precautionary approach to management of inshore resources and refrain from promoting or allowing commercial exploitation for export until it is determined to be ecologically sustainable. Chuuk has the largest state fishery agency in FSM. It is also the state with the most serious fishery management problems. A rapidly growing population is creating greater pressure on resources. There is no current data on fish catches or production but anecdotal information suggests that large quantities of reef fish are being exported by air to Guam, and declines in abundance of some resources are said to have occurred. Dynamite fishing is prevalent, and dredging and sand mining for landfill and for building materials is largely uncontrolled. The dredging problem is exacerbated by the shortage of land on Weno, the state center, where development is leading to extensive shoreline reclamation. The states numerous municipalities (and in some cases individual reef owners) nominally have some authority to control access to their fishing areas but these seem to be upheld only in the outer island and more remote parts of Chuuk proper, and are largely ignored close to the population centers. Kosrae is the state with the least complicated fisheries management environment because historically its people were not into fishing. Kosraes fishery management problems are mainly related to the smallness of the resource. Harvests of certain key species such as trochus and crabs are, or need to be, controlled, but most threats to coastal resources come from land-based developments that cause increased runoff, pollution, or sedimentation. Kosrae probably has the bestdeveloped coastal management system among the states, with environmental review procedures being progressively implemented for all coastal development projects. Basic statistics on catches are said to be collected on a regular basis, but these are not analyzed or published. Pohnpei is an intermediate case in terms of resources, degree of exploitation, and the extent of fishery management problems. Some production statistics are collected by the state fisheries agency, but these are not analyzed to show trends or even annual production data. The general perception in Pohnpei seems to be that resources are not yet in crisis but that the time is approaching when management action will be needed. As in other states, enforcement of State fishery laws by State police or conservation officers is largely ineffective, while the absence of traditional reef/lagoon tenure systems on Pohnpei proper may impede the development of community-based management arrangements. The island has lost a large proportion of its virgin forest to the cultivation of sakau and
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this is thought to have caused increased runoff, sedimentation, and chronic reef degradation. Yap is unique in the degree to which traditional marine tenure arrangements have been preserved. Inshore fishery management in the state is communitybased because the state constitution and laws recognize that communities and their leaders have authority over access to, and use of coastal areas. Relative to other states, Yap has a large resource base and in most areas a small population, so management issues related to over-exploitation are generally not pronounced. Nevertheless some resources, especially of sessile types such as clams and bechede-mer, or of other species close to the state center of Colonia, have been overexploited in the past, demonstrating that the traditional system of tenure does not guarantee effective stewardship. For several years the state government has been progressively trying to introduce a coastal area management plan to be implemented through both Government and traditional groups. 9.1.3 Development Potential Due to their distinct biological, physical, and economic characteristics, FSMs four states each have different prospects for the development of coastal living marine resources. In terms of resource endowment Chuuk and Yap and, to a lesser extent, Pohnpei, have extensive areas of reef and lagoon and therefore relatively substantial inshore resources. Kosrae, a single high island with a short coastline and small fringing lagoon, is much more limited in this regard. The commercial potential varies considerably from state to state. Local markets for fish could be developed further in each state, particularly in Pohnpei, which, as the seat of national government, has the most extensive cash economy. Yap formally participated in a relatively steady reef fish export trade with Guam. As a resource management measure however, this trade has recently been restricted. Pohnpei also participates in a similar trade albeit with some species controls and a higher overall cost for fish transportation. Chuuk exports of reef fish have increased in recent years despite lack of transport hubs. Kosrae, which is hampered both by high transportation costs and limited resource endowment, is effectively excluded from such trade. In all the states but Kosrae, there exist outer islands that are either coral atolls or single coral islands. For most of the atolls, the lack of regular transportation and resource limitations preclude money-economy marketing of most coastal fishery resources. There are also uninhabited or lightly-inhabited atolls (and islands, in the case of Chuuk) which have commonly been seen as storehouses of marine resources, and whose existence further complicates management in those states.
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The main role of small-scale fisheries is likely to continue to be providing subsistence protein, contributing to dietary health, and helping maintain rural lifestyles in the face of a tendency to urban drift or emigration. Artisanal fishing may be able to expand in some areas through local market development or by taking advantage of export opportunities to Guam and Saipan. Where marketing problems can be overcome, however, resource constraints are likely to quickly limit commercial fishery expansion. One possible area of development potential is in linking the management of inshore resources to key activities in the tourism industry based on sound environmental management. A pristine marine environment is one of the underpinning sales opportunities for tourism development. For example, if key selected areas of coral biodiversity or fish abundance were reserved as dive sites and marketed accordingly there could be greater overall community benefit from income generated by the dive industry. This has been clearly demonstrated in Palau which has an extensive Marine Protected Area (MPA) program. Primarily due to the efforts of the Pohnpei Conservation Society, a network of 11 MPAs are already in place. The development challenge is to link conservation efforts to tourism marketing and establish mechanisms to ensure direct benefits to communities. There may also be room to further develop coastal pelagic fisheries. Deployment of Fish Aggregating Devices (FADs) in coastal areas has the potential to divert fishing effort from near-shore and reef-based fishing to targeting tuna and other coastal pelagic species. The emphasis in this scenario will be on diverting fishing effort from heavily-fished resources rather than increasing overall fishing effort. Given the increasing focus on resource management and conservation, it must be concluded that there is very little real development potential in nearshore and coastal fisheries. 9.1.4 Aquaculture Aquaculture has been the focus of technical and development attention in FSM, as well as in some neighboring countries, for at least 20 years. A National Aquaculture Center (NAC) was established in Kosrae in 1991 to explore aquaculture potential and to undertake research and training. Its primary work involved the propagation of giant clams for farming and re-seeding in other states. In its early days the NAC was the operational base for aquaculture extension agents funded through the US Center for Tropical and Sub-Tropical Aquaculture (CTSA)/Land Grant Program, but these have now relocated their activities to Pohnpei.
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Despite the activities of the Center, no private commercial culture operations for giant clam have commenced in FSM. There has been little reseeding activity and there appears to be little prospect of any such development in the foreseeable future. The operation of the NAC was reviewed in 2000 and it was concluded that the focus on giant clam aquaculture provided little or no economic benefit to FSM. A number of other aquaculture initiatives have been undertaken by both local and international organizations. Sponge culture started in Pohnpei about 10 years ago and several pilot farms began with donor funding support. There are now nine established farms in operation but production volumes have yet to reach the levels required to attract export markets. The culture of Eucheuma seaweed was attempted in Pohnpei during the mid-1980s, but relatively low returns to farmers and other problems prohibited it from developing. Black pearl culture trials began on Nukuoro atoll in Pohnpei state in 1995. Initial harvesting has reportedly yielded good quality pearls and several other ventures are in the early stages of development. Operations in farming milkfish, tilapia, carp, and prawns have been attempted or proposed but have not resulted in sustained commercial success. More recently, a Korean Joint Venture company (Hans Micronesia Inc) has reportedly commenced an operation whereby fry are imported into Chuuk for sea-cage grow-out and subsequent export. In Kosrae, a project is underway to develop capacity for the culture of mangrove crabs. Despite widespread investment and interest in the commercial potential of various aquaculture pursuits, there has been very little commercial development. Prospects for commercial activities have probably been overstated, and it seems unlikely that the sector will become a significant revenue earner for FSM, at least in the near future. However, there is still potential for subsistence and artisanal aquaculture activities to be successful, both in income generation or simply for food production. 9.1.5 Coastal and Near-shore Resources and the FSM Sustained Growth Strategy Inshore fisheries and marine resources are seen as having a number of inherent advantages as a source of income and employment. If incomes fall (as a result of a decline in Compact funding) there is likely to be greater activity and supply from inshore fisheries for food and cash purposes, especially from subsistence and artisanal activity. The overriding issue in near-shore and coastal fisheries is the sustainability of resources. The inshore resource has, in many cases, already been depleted and the immediate focus required is resource conservation and management .
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9.2 Oceanic Resources The Exclusive Economic Zone (EEZ) of the Federated States of Micronesia is one of the largest declared national jurisdictions in the Western and Central Pacific Ocean (WCPO). The EEZ supports diverse tuna fishery operations which range from subsistence and artisanal activities to industrial scale longline, pole and line, and purse seine fishing. The main oceanic target species are skipjack tuna (katsuwonis pelamis), yellowfin tuna (thunnus albacares) and bigeye tuna (thunnus obesus) with the vast majority of fishing effort coming from the established distant water fishing nations (DWFN), the United States, Japan, Peoples Republic of China (PRC), Republic of Korea, Taipei,China. The extent of the tuna resource of FSM has the potential to vary greatly depending on fishing effort, the migratory nature of the species, and the climatic events La Nia and El Nio which affect sea temperature. During a La Nia period (such as 1995), surface tuna schools are most active in the western Pacific Ocean in the area of the FSM EEZ. In contrast, the surface schools concentrate more to the eastern part of the central Pacific during El Nio periods, as was the case in 1998. Tuna catches in FSM waters increased steadily to 253,174 mt in 1995 with subsequent significant declines through 1998. An improved catch in 1999 was followed by progressive declines to the low catch of 43,690 mt in 2002. The catch trend improved in 2003. Reflecting the La Nia and El Nio phenomena, the catch in FSM started declining in 1996 while overall Western and Central Pacific Ocean (WCPO) catches continued to increase. Large purse seine vessels land more than 80% of the tuna. For the period 1999 2003, the largest catch went to Japan followed by Taipei,China, Republic of Korea, the US and FSM domestic vessels. The total catch for purse seine vessels fishing in FSM waters for the period was 562,509 mt. Longline fishing showed a dramatic reduction in catches in the period 19992002 with a subsequent increase again reported in 2003. The downward trend matches reported catch reductions in other WCPO fisheries such as Fiji Islands, Samoa and Tonga. From total landings for the period 1999 2003 of 32,900 mt, the Guambased Japanese fleet vessels reported current landings of 16,799 mt inclusive of by-catch. The average catch per vessel in 1999 was 61.84 mt compared to 52.46 mt in 2003. In pursuit of domestic capacity development in the longline fishery in the 1990s, FSM encouraged both public and private sector investment in longline
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vessels. Domestic vessel numbers reached 25 in 1999 with 487 mt of landed catch. Domestic vessels numbers have declined to 18 in 2002, 21 in 2003 and only 12 vessels reportedly operating in 2004. The Japanese pole and line fishing fleet has operated variously in FSM with catch highs achieved in 1991 and 1995 and a subsequent reduction in fishing from 2000 to 2003 where there were 6 licensed vessels and reported landings of 1733 mt. 9.2.1 Oceanic Resource Management Following a review and consultation process spanning some 10 years, the Marine Resources Act of 2002 (MRA 2002) was passed into law as Title 24 of the FSM code. The law established the National Oceanic Resource Management Authority (NORMA), previously known as the Micronesian Maritime Authority (MMA) and the Micronesian Fisheries Authority (MFA), as the national agency responsible for the management of oceanic resources from 12 200 miles in the FSM economic zone. The mission of the Authority is to be an effective guardian and manager of the living and non-living marine resources in the EEZ of the Federated States of Micronesia. The Authority is empowered to draft regulations for the management, development, and sustainable use of fisheries resources and related activities in the EEZ, in relation to fisheries monitoring and control and to implement access agreements and fisheries management agreements. Other regulatory powers relate to compliance with regional arrangements, the issuance of citations, and assessment of penalties. NORMA is also tasked with the regulation and management of marine scientific management and training, the delineation of boundaries in the EEZ, and the issuance of fishing licenses. The agency also has a coordination role in the implementation of fisheries monitoring and control activities but active surveillance activity and the operation of patrol boats is carried out by the Maritime Wing of the FSM National Police under the Department of Justice. FSM has a history of participation in the programs of the regional fisheries agencies such as the Oceanic Fisheries Program of the Secretariat for the Pacific Community and the Forum Fisheries Agency (FFA). As such, FSM is a party to the 1982 Nauru Agreement Concerning the Management of Common Interest and the 1994 Federated States of Micronesia Arrangement for Regional Fisheries Access. Agency managers have attended all 7 sessions of the Preparatory Conference for the Establishment of the Commission for the Conservation and Management of Highly Migratory Fish Stocks in the Western and Central Pacific.
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The FSM has been selected to host the new Commission that is being established as the major coordinating agency for western Pacific oceanic fisheries management. In 2000, the FSM President directed NORMA (then MMA) representatives to establish a National Steering Committee in support of the development of a Tuna Management Plan for FSM. A comprehensive plan has subsequently been developed and approved and is now recognized as the guiding instrument for tuna resource management in FSM. The specific goals adopted in the plan are to ensure that the tuna catch does not exceed sustainable levels, obtain national revenue from foreign fishing access agreements, support development of FSMowned and/or foreign FSM-based fishing enterprises, encourage investment in enterprises related to tuna fisheries, promote employment opportunities, and enhance international relationships beneficial to FSM. The plan recognizes that the tuna resource is shared with other countries in the region and is finite. It thus embodies principles relating to the precautionary approach to fisheries management. 9.2.2 Situational Analysis and Economic Contribution The contribution of oceanic fisheries to the economy of FSM can be divided into benefits derived from activities as follows:
Access arrangements
By far the largest and most consistent contribution to the economy has been the income derived from access fees. With the inclusion of a 2003 access fee return of $13,473,183, total income for the period 1990-2003 is close to $200 million. Purse seine fees have stabilized with the implementation of 5-year access agreements with the Republic of Korea and Taipei,China. However, fees dropped in 2000 as a result of reduced fishing effort due to depressed prices. In addition, as party to the Forum Fisheries Agency-administered Multilateral Treaty with the United States, FSM receives around $110,000 annually for fisheries development projects. The Japanese agreement also includes an annual payment of goods and services with an estimated value of $550,000. Infrastructure and long line transshipment FSM national and state government investment in fishing vessels and infrastructure during the early 1990s is reportedly $100-130 million. Much of this investment was channeled through government-owned corporations in each
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State with the intention that the establishment of fisheries infrastructure would stimulate state economies and foster further investment. The various government entities established for fishing, vessel servicing, and transshipment have ultimately not performed well. They have accumulated high debt levels and financial loss and have either ceased to operate or scaled back their activities. Utilization of facilities in Yap, Chuuk, and Kosrae are reduced to the extent that facilities in each port are now inoperable and longline transshipments no longer take place. For the purpose of overall operational efficiency, the longline fleets of Japan, Peoples Republic of China, and Taipei,China have opted to move their operational base for transshipment to Guam. Operators cite airfreight issues, high costs, and poor service as the principal reasons for the transfer. A 1995 fisheries development study estimated the retained value of longline transshipment at $120,000 per annum per vessel. With only 21 Chinese vessels continuing to transship from Pohnpei in 2004 the overall loss to the economy from the departure of the foreign longline fleet could be as much as $21,000,000 per year. The degraded state of the transshipment facilities represents an additional economic loss.
Domestic operated long line and purse seine vessels

Government and domestic private sector investment in longline and purse seine vessels has proven to be high risk as seen in the significant reduction in the number of operational vessels in the domestic longline fleet. Since 1999, the number of operational vessels has decreased annually with only 18 vessels active in 2002, 21 in 2003, and only 12 vessels reported operational in 2004. The State Governments of Pohnpei, Chuuk, and Yap have all invested in the purchase and operation of purse seine vessels. Pohnpei has two small seiners operated by the Caroline Fishing Corporation. Following issues relating to joint venture ownership and a period of receivership, the operational performance of these vessels has improved in recent times with higher international bulk tuna prices. Yap also experienced difficulties with the operational management of their purse seine business. However, with a vessel purchased from South America and tight management, Yaps Diving Seagull company has performed well in recent years and is reportedly debt free in 2004 and able to pay dividends to the state. The Chuuk investment also involved complex joint venture arrangements. These ultimately led to the ownership of a single vessel, the Nien Feioch, by the Chuuk Public Fisheries Corporation. This vessel sank at the wharf in Chuuk in early 2004 and was uninsured.
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Under a foreign investment permit, Tri-Marine was established in FSM in 1999 and by 2004 had 3 operational FSM registered vessels.
The purchase and on-sale or value adding of by-catch

Outside of the construction of cold stores in Kosrae and Yap, major investment in processing and value adding capacity has been limited to the Pohnpei Fisheries Corporation (PFC) which was established as a Pohnpei State public corporation in 1993. PFC is engaged in two principal lines of business the provision of ice, and processing and marketing of second grade tuna, marlin, and bi-catch. A review of PFC in 2000 revealed significant cumulative loss, cash flow difficulties, and an inability to source sufficient raw material to adequately utilize facilities.
Services provided in support of purse seine transshipment

Since 1993, there has been a regional ban on at-sea in-zone transshipments of purse seine catches. This was intended to facilitate monitoring of catches, increase port usage, and generate revenue. In subsequent years, a large amount of tuna has been transshipped through FSM ports with an estimated 2400 individual transshipments for 1993-2003. The majority of FSM transshipments in the past 2 years (130 in 2002 and 100 in 2003) have been in Pohnpei. The number of transshipments in a particular port in any given year cannot be guaranteed as decisions on location are most often made by the company operating the carrier vessels in consultation with the purse seine vessel owners or managers. However, other factors are also taken into consideration, such as the availability of licenses in the particular country concerned, weather conditions, and recent experiences in that port. Purse seine transshipment does not require specific infrastructure other than general wharf facilities and port services associated with standard cargo handling. It contributes to local economies through the purchase of goods, services, and labour as well as in the collection of fees and charges. The extent of spending in any single transshipment will depend on the goods and services available. In the current study, the estimated retained value from each purse seine transshipment is $10,200 per vessel.
Employment and employment opportunities

Formal employment in tuna fisheries or related activities was estimated in 2001 to total some 614 jobs comprising those on foreign vessels (150), jobs on
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locally based vessels (86), those in domestic tuna enterprises (178) and employment on artisanal vessel operations (200). This estimate is at odds with the 2000 census data that reports formal employment at 226. Possible reasons for this discrepancy are that 200 of the reported jobs are essentially informal and many of the 178 reported jobs in domestic tuna enterprise are likely to be casual in nature. While the loss in formal employment in the fisheries sector (Table A6) is reflective of the general downturn in transshipment and FSM port based fishing, it must also have been seen as a serious indicator of the major problems facing the sector. Accepting the median incomes of the respective census periods, this reflects a loss of annual wage income in the vicinity of $1.7 million. The real contribution of oceanic fisheries to the economy of FSM in any given year is difficult to define. Account must be taken of fluctuations in prices for purse seine caught species as well as the substantial variations in prices obtained for sashimi exports. There is also an issue in defining retained value in the services provided to the sector and in the value of the subsistence sector contribution. While the data provide a reasonable estimate of the total value of the resource, they do not in any way take account of costs or contribute to the determination of profitability. In reality, further analysis would reveal a very high production cost in achieving the overall value. This has been exemplified in the generally poor performance of domestic longline vessels. 9.2.3 Problems, Constraints, and Issues The most significant problem with oceanic fisheries in FSM is the failure to fully realize the potential benefits associated with the exploitation of available resources. While FSM has enjoyed a reasonably consistent return from receipt of fisheries access fees, attempts to promote returns through infrastructure investment, transshipment, domestic fishing, value added processing, vessel servicing, and employment have essentially failed to add significant value or return on investment. Since 2000, Pacific Island domestic-based sashimi tuna industries have experienced a downturn across the region. Operators in Fiji Islands, Samoa, and Tonga have had declining catch levels (despite increasing fishing effort) and increasing competition from international suppliers to the principal market in Japan. Primarily as a result of supply and the sustained Japanese economic recession, sashimi tuna market prices have remained flat. The Asian economic crisis and the SARS epidemic have also impacted sashimi market prices. Coupled
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with post 9/11 security issues, increases in fuel prices and airfreight costs, there has been an overall reduction to profit margins in sashimi tuna longlining. The supply of tuna for canning from purse seine fishing is essentially a commodity trade and is thus subject to significant market price variations. The very high regional catch levels of the late 1990s saw bulk tuna prices reduced to as little as $350/mt in 1999 and 2000. Prices have subsequently stabilized in 2003 04 at $ 750 - $850/mt. As a result of the volatile nature of the market, commercial purse seine fishing is a high-risk business, especially for small operators. The fisheries policies of FSM, as developed during the 1990s, promoted foreign access arrangements, government and private sector investment in infrastructure and fishing vessels, the provision of transshipment services, and value-added processing and employment as principle development strategies. An evolution is apparent in the national direction regarding sectoral investment. Fifteen years ago the general perception was that, because of the weak private sector and other factors, development opportunities relating to tuna were in government investment in infrastructure and fishing, and government participation in commercial activities. Following a generally poor performance from these government interventions, the direction shifted to the idea that the most favorable opportunities were for domestic private sector companies to longline for fresh tuna. In subsequent years, numerous failed operations of this type appear to have resulted in an additional evolution in direction. This is essentially that tuna fishing itself is too risky and that value adding ashore and servicing of fishing vessels are the most important opportunities. In considering development constraints, the 1995 study on tuna industry development noted the major issues to be:
The limited size of the FSM labor pool in both number and range of current skills. The tuna industry specifically needs foreign skills and foreign management until Micronesians can be trained and can gain experience in the industry. Imports of foreign labor are discouraged by bureaucratic administration and the requirement to annually renew elaborate work permits. All non-service FSM State and National government enterprises that have been in operation for more than 2 years have proven unprofitable. For longline transshipment, the inability to extend airport runways in almost every state without major capital cost could be a development limitation in the future. Additional runway length allowing larger aircraft and improved payloads could be a key factor in achieving improved airfreight economies of scale.
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Though simple to administer and understand, Gross Receipts Tax (GRT) is a cascading tax and the prevailing tax regime is a disincentive to primary industry and manufacturing investment. A very significant problem in the FSM is the difficulty in finding out exactly what the current law is. The FSM currently is a comparatively highly protected economy with highly priced resources. The FSM economy is further protected by investment and recruitment approval processes that emphasize sanctions and concessions as opposed to open, uniform treatment.
While strategies to mitigate these constraints are reflected in policy documents, there has been limited success in addressing these issues. The principal issue is generally limited accountability in policy implementation and a lack of political will. This is particularly apparent at the state level, especially in relation to dealing with difficult issues such as the commercialization of stateowned assets. The development of domestic fisheries capacity throughout the Pacific region was reviewed in detail in 2003. The FSM component of this review reiterated the perspectives put forward in 1995, and cited the principal constraints to include:
Reductions in air freight capacity and availability, and the economic limitations of restricted freight volumes due to aircraft and runway limitations; Increases in the cost of air freight due to escalating fuel costs; A poor business environment and inadequate provision of services; Government agencies with commercial involvement in the tuna industry detracting from the functioning of private sector tuna firms, especially the Economic Development Authority (EDA) in Pohnpei; Requirements for local vessels fishing in FSM waters to undergo customs and immigration formalities and the high cost of these services; High cost of operation high prices for fuel and skilled labour; and a requirement to airfreight many parts/supplies.
Other issues raised included fee variance, higher access fees compared to Palau and the Marshall Islands, the provision of conflicting consultancy advise, the inadequacy of port infrastructure for vessel maintenance, the scarcity of skilled labor, declining catch rates, unclear legislation, and unnecessarily high penalties for regulatory transgressions.
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The demise of transshipment services from FSM ports and the associated loss of income generating opportunities is a clear indication that FSM has failed to adequately deal with constraints and issues that have been on the table for a number of years. There has been a very large amount of technical assistance focused on the development of FSMs fisheries sector with more that 20 documented interventions. There is a sense that outside assistance to tuna industry development is fatigued by the continued failure of FSM to address key issues. Constraints to industry development have been widely documented, especially those relating to the lack of progress on privatizing government fishery companies and continued government monopolies providing essential commercial services to the tuna industry. While much of this failure can be attributed to a lack of accountability and political will, there is an additional issue relating to lines of communication and the need to clearly define responsibilities in relation to policy implementation. The formation of the FSM Offshore Fisheries Association in 2002 has provided a clear direction for an industry voice in policy determination and implementation. However, the same cannot be said of Government. There is a range of conflicting national and state agencies with varying responsibilities. For a potential foreign investor in fisheries, there is no clear process or specific agency to facilitate the investment process. It is clear that further development of the sector cannot take place without additional investment. State governments having previously invested large sums in fisheries projects are reluctant to commit further investment. The domestic private sector has been similarly affected by poor sectoral performance. Investor confidence will continue to be constrained by an ongoing failure to address development issues and achieve progress with policy implementation. Perhaps the key requirement to address the sectors development issues is a clear political will to do so. 9.3 Fisheries Sector Policy The process of developing a fisheries policy for the FSM was initiated with the declaration of the FSM EEZ in 1989 and was first articulated in a 1991 study. More detailed analysis was undertaken in 1996 for the consideration of the National Fisheries Summit of FSM in December 1996. The recommendations of the National Summit resulted in the presentation of a National Fisheries Policy Document.
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Key elements of this policy were the promotion of the private sector, the creation of a favorable business environment, and privatizing government owned fisheries enterprises. FSM ownership of fishing vessels and shore enterprises was proposed with the possibility of using access fees to finance enterprises and the promotion of other possible incentives such as tax breaks and amended investment rules. A more strategic approach to human resource development was also proposed, as was a commitment to conservation and management of resources. Consolidation of responsibilities for fisheries policy development, management and enforcement under one well-financed and autonomous body was suggested to lead the reform of laws inhibiting fisheries development (tax, duties, levies, foreign investment, fisheries and maritime laws and land tenure). The promotion of value-added investment in processing, manufacturing, and marketing was also proposed, as was more stringent control of fisheries access. A public awareness program to stimulate FSM citizens interest in fisheries through information programs underpinned these key policy areas. In the lead-up to the 1999 Second Economic Summit, these policy elements were expanded to detail strategies, activities, and accountable agencies in two separate strategic policy framework documents covering oceanic and inshore fisheries. These policy frameworks and detailed activity plans were subsequently adopted by the Summit and can thus be accepted as the agreed National fisheries policy for the period 1999 2004. The expected process leading up to the Third Economic Summit was that the 1999 framework would be tabled to both public and private sector stakeholders for review and comment, especially in relation to implementation progress, issues, current relevance, and changing circumstance. However, policy implementation has not been widely reviewed, perhaps because it is also apparent that very little progress has been made in implementing the 1999 policy. While the passing of the Title 24 fisheries law, the adoption of the tuna management plan, the consolidation of NORMA, and the re-opening of the Yap Fisheries Academy are positive steps, the majority of key policy directions remain as sector development issues. Strategies to clearly promote investment and growth have not been forthcoming and private sector investment has not been successful. Domesticbased foreign longline vessel numbers have dropped to a low of 20, SOE infrastructure is either closed or underutilized and remains the responsibility of Government agencies. The majority of long-line transshipment activity has essentially transferred to Guam. Considering the time-span for policy implementation (1999 2004), the lost opportunity for economic benefits
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from the successful implementation of previously recommended policy elements is substantial. In situations where the activities associated with policy elements have been actively facilitated (such as in the preparation of a Tuna Management Plan by NORMA), policy implementation has been successful. In many cases, the absence of a facilitator for activities would appear to have limited activity success. For example, in the absence of a committed driver to campaign for a fuel subsidy, there is no incentive for Government to establish such a subsidy. Policy elements that relate to wider fiscal management or changes in legislation (such as taxes, labour laws, immigration laws, subsidies and duties) are much broader in application than just fisheries, and are thus more complex and challenging to achieve. Even if there is a strong driving influence from the fisheries sector, success in legislating industry-backed measures will be determined by wider political considerations. It is apparent that one of the key factors in policy implementation is political will. This is most evident in the apparent failure to produce results in relation to the performance and future direction of certain SOEs. Clearly, without the support of State Governments, an activity to promote private sector or investor management or ownership of these facilities will not succeed. In determining the future direction of policy, it is perhaps useful to consider the scenario that FSM would like to achieve for fisheries in the next five-year period. In a review context, it appears that there are no major differences from the overall objectives of the past five years. However, it is important to consider policy direction in relation to lessons learned from the previous period and also in relation to possible changes in the wider (international and regional) sector environment in the coming period. The key lessons in relation to policy implementation are:
There need to be clear responsibilities assigned to undertake activities associated with policy implementation; The agency or entities assigned such responsibilities should be required to account for progress in relation to activities undertaken; In situations where a particular policy requires the wider endorsement of government or legislative enactment, the implementation strategy should include activities that take account of the need to generate political will.
Taking into account the findings of the situational analysis for the sector and the intent of the Third Economic Summit, the following policy themes are apparent:
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For Coastal Fisheries, increased focus on:
resource management strategies encompassing traditional practice and protected areas; ensuring resource exploitation is carefully managed and priority access is accorded to subsistence and low level artisanal activities rather than commercial fisheries; aquaculture activities at the subsistence and artisanal levels; community participation in management.
For Oceanic Fisheries:
a continued emphasis on improving economic benefits, utilization of infrastructure, and domestic commercial activity; in the context of the Tuna Management Plan, a more focused emphasis on resource management and monitoring; acknowledgement of the urgent need to attract investment.
A revised fisheries policy matrix has been prepared as part of the fisheries sector strategic development plan that was drafted at the request of national government in follow-on to the Third Economic Summit.
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Chapter 10. Tourism Sector
hile FSM leaders in the past have recognized tourism as a productive sector with significant development potential, national economic policy has not designated it a leading economic sector. In accordance with the Third Summits Select Committee endorsement of the High Growth Strategy, tourism will be the dominant sector enabling growth and development of the economy in the 2004-2023 Compact II period. This policy stance represents a major change in thinking on the role of tourism in development, as many people in the wider community in all the states have consistently expressed concerns about potential negative impacts of tourism on both the socio-cultural fabric and the natural environment of the FSM. The following sector review represents a summary of the Tourism component of the Strategic Development Plan prepared by the National Government Department of Economic Affairs in conjunction with the work of the Third Economic Summit. 10.1 Tourism Sector Review 10.1.1 Current Status of Industry There were 18,500 international visitor arrivals in the FSM in 2003 (Table 16), slightly less than the peak of 20,000 visitors recorded in 2000 based on time series compiled by the DEA. Corresponding figures for each of the states are presented in Appendix A (Tables A29-A32). Compared with the growth of tourism arrivals in the Pacific Islands, which recorded an increase of 23% over the 19962003 period, the FSM has clearly under-performed. Based on an FSM inventory of 476 hotel rooms, 42,000 visitors would be required annually to achieve an acceptableoccupancy rate of 65%. The principal origin markets for the FSM have traditionally been the US and Japan, with Europe becoming a significant market in recent years. Travel to FSM, however, may be negatively affected by different factors like the economic recession in Japan, the SARS (pneumonic flu) outbreak, and security concerns brought about by the World Trade Center attack. The overall positive trends in travel to the Pacific region, particularly to destinations such as Palau and the Cook Islands, strongly suggests that the FSM has not made any progress towards becoming an internationally-recognized tourist destination. The FSM appears to be caught in a vicious cycle in which tourism under-performs because of a lack of infrastructure
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Table 16. FSM International Visitor Arrivals by Nationality: FY 1996-FY2004 FY97 2,301 452 224 995 4,223 119 52 1,580 7,137 17,083 14,275 15,512 5,912 6,950 8,605 20,038 1,231 843 1,249 90 74 116 128 140 111 87 63 962 6,966 15,494 3,429 3,399 4,661 3,194 1,048 1,302 1,427 1,235 169 177 188 192 223 1,343 4,061 161 91 1,423 943 8,152 18,700 438 563 791 540 566 1,830 2,064 2,890 2,255 1,737 1,842 639 214 1,668 3,984 143 85 1,150 1,035 7,736 18,496 FY98 FY99 FY00 FY01 FY02 FY03 FY04 2,003 840 195 1,353 3,661 171 117 1,414 1,149 7,101 18,004
Nationality
FY96
Asia
2,029
Australia
561
Canada
187
Europe
1,007
Japan
5,519
132
New Zealand
113
Other
52
Pacific Islands
1,608
Philippines
USA
7,083
Total
18,159
Source: FSM Department of Economic Affairs
and poor service and promotion. This results in low profitability and little public and private investment. Consequent low visitor satisfaction, in turn, leads to unfavorable word-of-mouth recommendations, thus perpetuating the sectors under-performance. The critical issue for tourism development in the FSM is to break this cycle of poor industry performance and initiate changes that will stimulate new investment, growth, and development. 10.1.2 Development Potential Despite the FSMs distance from major tourism origin markets and the consequent high cost and inconvenience of travel, the nation offers many attractions for selected niche markets: a pristine marine environment, tropical scenery and diverse plant and bird life, traditional cultures all in sparselypopulated, clean environmental settings outside the district center urban areas. For the sophisticated and experienced tourism markets that are looking for something different, the FSMs isolation is a potential selling point for niche markets such as eco-tourism, cultural tourism, water sports, and other special interests, e.g., traditional plant medicines, bird-watching, and social anthropology. The main question to be addressed is: can the FSM achieve the volume and value of tourism that would meet its economic objectives for the sector? The SDP tourism sector assessment notes that the current hotel stock would be filled to an acceptable average occupancy rate if some 46,000 visitors staying for five days on average came to the FSM annually. This represents a short-term objective of increasing current visitation levels by around two and a half times. Pointing out the small size (land area and population) of the islands, the assessment notes that it is crucial that the high end characteristic of tourism be a focal point. Product development should be designed to capture and retain maximum visitor expenditures. That is, attracting the more affluent tourists who have high average daily expenditure rates, and ensuring that the local economies are capable of supplying a relatively large share of the goods and services sold to visitors (i.e., strong cross-sectoral linkages) must be part of the tourism development strategies. To realize its potential and achieve the economic benefits that have been targeted, goals and policies are detailed in the tourism sector chapter of the SDP and in the associated Strategic Planning Matrix (SPM).
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Before discussing issues and problems facing tourism development in the FSM, the sector assessment summarizes the main points of a comprehensive program needed to achieve the long-term development desired:
the tourism sector will require influential champions at the highest level of government to ensure that the proposed program is pushed through; concerted action on all fronts; real investment resources will be required over a sustained period that will demand that a higher priority be given to tourism; product development and diversification will be needed to attract visitors; an overall plan for these actions will be required; and, in order to gain the desired economic benefits, a special effort will be required to develop genuine inter-sectoral linkages.
10.1.3 Constraints to Development The goal for tourism in the FSM should be to develop high end, low impact tourism, meaning relatively modest numbers of visitors, each making a relatively large financial impact in terms of average daily expenditure. Residents in each state have expressed concern about tourism damaging the social and cultural environment, and also to the fragile natural environment. Therefore, while there will be an inevitable impact, policymakers will need to strike a careful balance between sector development and sustainability, both socio-culturally and environmentally. At present the nation offers a very limited range of activities and opportunities for visitors, and therefore product development is a critical area that the tourism industry will have to address. Even the most rudimentary amenities expected by international visitors are not available, such as sidewalks or boardwalks, trails, access to beaches or shoreline areas, public transport such as buses, safe boat transport services. There is a lack of information for visitors, and very few restaurants and cafes, and points of interest or assembly that appeal to most international visitors. As mentioned earlier, the FSM is remote and does not lie on any of the major long-haul air routes. Inter-island air routes carry limited traffic and therefore are costly to operate making air access both limited and expensive. Also, from the standpoint of developing a national tourism product, a major obstacle is inability to directly access the State of Yap from any of the other three States. Infrastructure is poor both in terms of national services such as power, safe water and health services, and in terms of the tourism sector itself as some hotels do not meet international standards.
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Immigration procedures are unwelcoming, and airport facilities are deficient. In relation to the relatively low volumes of passenger traffic handled by the four main airports, the time required to pass through the airport and board departing flights is grossly excessive. Visual and other environmental standards are poor, detracting from one of the key motivations for foreigners to visit the FSM. In terms of overseas promotion of the nation as a tourism destination, there is little information made available, giving the FSM a low profile in the tourism trade and a lack of competitiveness in terms of brand recognition compared with other Pacific island countries. Another significant constraint to tourism development is the lack of unanimous commitment to tourism in all states. There is a need to educate the general public on the importance of tourism, and a need for FSM leadership to give their full support. Of particular relevance to the hotel industry and to small business support are the following points:
Since development of hotel capacity, either new or refurbished, will likely attract foreign investment, there is a need to make the process of foreign investment registration and approval consistent and transparent. There is also a need to ensure that any investment project is subject to appropriate national and state planning controls, especially in regard to making it mandatory to undertake an environmental impact assessment; Foreign investment will be important not only in providing sufficient funding for development, but also with respect to two other critical needs: (i) design and construction skills that will have to be imported to ensure the attainment of standards appropriate to the new hotels grade and corresponding quality of services, and (ii) the transfer of professional hotel management and marketing skills from abroad to enable the attainment of a satisfactory level of profitability; Except for hotels and aviation, most private sector activity in tourism will likely be operated by small businesses. Private sector development policies and strategies that address the needs of small business are critical for tourism development. Prime areas of need have been identified: business management, financing, and marketing. While the proposed FSM Visitors Authority should have a role in pinpointing and coordinating the needs and provision of support to the small businesses in the tourism sector, the main burden for this support should be with the small business management specialists and the banking system. With regard to financing, there is a need for a small-loans facility.
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10.1.4 Infrastructure Development Plan Implications for Tourism The FSM Infrastructure Development Plan 2003-2017 (IDP) was prepared before the SDP , but was intended to anticipate the long-term needs in support of development, taking into account expected economic aid under Compact II. Considering that tourism has been recognized as one of the three main productive sectors of the FSM, the IDP specifically addressed infrastructure support for this sector. Tourists must have adequate standards of utilities, transport, and health services in their holiday destination. As for the current status, the IDP notes that much of the basic infrastructure that should be in place to provide a foundation for growth of the tourism industry (and related industries) remains on the drawing boards. The IDP specifically noted the following areas as being important for tourism development:
Air Transport
Passenger terminals in all four States need to be expanded and improved, along with the provision of new baggage handling and security equipment. Pohnpei Airport is in urgent need of runway, taxiway, and apron pavement rehabilitation to meet safety standards. There is an issue about whether airport runways will need to be extended. With the exception of Ulithi, the outer islands of the FSM do not have air service that meets acceptable standards.
Road Transport
In Chuuk, Kosrae, and Pohnpei circumferential roads are incomplete and some parts are in need of repair. These roads are important for enabling visitors to access scenic sites and rural nature-based attractions. Few routes have pathways for pedestrians and bicyclists, and in some areas roadways may be considered unsafe. Also, there is virtually no public transport or tour bus service available.
Sea Transport and Marine Facilities

No public maritime transport services suitable for visitors are available to the outer islands of the FSM, and in the case of privately operated transport, government does not certify the safety of boats and vessel crews. In the lagoon islands, particularly in Chuuk, docking facilities are inadequate. Even on the main islands, there is a lack of pier facilities offering direct access to vessels, and no shops and restaurants that would attract tourists.
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Power and Water

While power is generally adequate for the current level of tourism activity, expansion, particularly in rural areas, will require additional generating capacity and distribution systems. In Chuuk, the power system is inadequate, and there are some rural areas in Kosrae and Pohnpei without power service. Sewerage systems and treatment plants are generally inadequate and/or inoperative, resulting in surface water pollution and damage to lagoons and wetlands. Potable water is not available in many areas.
Heath Services
Health services are limited, and this lack of minimally acceptable health and medical services constitutes a significant constraint to developing a larger tourism sector. 10.2 Strategic Goals, Policies, and Outcomes This summary draws from both Section 6.2, Strategic Goals, Policies and Outcomes, of the tourism chapter in the SDP, and the SPM for tourism that was prepared in conjunction with the Third Economic Summit. Strategic Goal 1: Making tourism the leading economic activity in the FSM The main outcomes targeted include: (a) increasing international tourism arrivals from the current 19,300 to 35,000 by 2008, and gross income (tourism expenditures) to $25 million, with subsequent growth of visitor arrivals and gross income of 5.0% and 7.0% per annum respectively; (b) average annual occupancies of 50% by 2008 and 65% by 2010; (c) sustained total employment in tourism of 1,250 by 2008, thereafter growing by 5.0% per annum; (d) By 2012, the FSM should be positioned as a premium priced destination with average per visitor per day expenditure of $250, exclusive of airfare. Key policy implications for policy goal include: (a) ensuring that foreign investment laws and practices are welcoming, transparent in their application, and respectful of FSM interests; (b) giving priority to public investment in services and infrastructure that benefit residents and tourism development (including provision of safe water in all main islands); (c) adopting planning practices that enhance the physical environment and allow for the development of activities
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and points of interest for tourists, such as attractive retail centers; (d) providing incentives for raising standards and skills across the industry. Critical issues for implementation include: (a) having each State formulate and implement a 10-year tourism development plan to be coordinated by the FSM Visitors Authority; (b) establishing the FSMVA by 2005; (c) producing updated marketing and promotion plans coordinated by the FSMVA in collaboration with State Visitor Bureaus; and, (d) formulating and implementing tourism sector investment programs. Strategic Goal 2: Integrate the tourism sector into national economic planning and development In 2002, the FSM contracted an overseas travel research firm to prepare a National Tourism Marketing and Promotion Action Plan (NTMPAP). Completed in April 2002, the national tourism marketing plan recommended that Congress enact legislation establishing the FSM Visitors Authority (FSMVA). The FSMVA is targeted to become fully operational by the second half of 2005. The tourism SPM specifically notes that the FSMVA budget should be funded out of national governments Private Sector Grant. Other critical issues include: (a) insuring that national investment plans incorporate all key tourism projects by 2007; (b) producing a draft tourism sector policy paper with input from FSMVA and state VAs by first half of 2006; (c) preparing a statement of tourism sectors key investment areas, e.g., health, sanitation, infrastructure, that would be coordinated at the national level by the FSMVA. Strategic Goal 3: Create an attractive and supportive environment for private sector tourism industry investors It is anticipated that most of the larger tourism businesses and investments will be in relation to the hotel industry, and most other tourism-related businesses will be owned and operated by small-to-medium size enterprises (SMEs), e.g., car rentals, restaurants, marine transport. To achieve strategic goal 3 there must be at least one new tourism investment proposal per annum in each state. In addition, the targeted new employment mentioned earlier must be achieved. In terms of activities, each state should establish a private tourism and hotel association by 2006, and the FSMVA establish a coordinating signposting system by 2007 to assist private sector businesses in obtaining assistance from existing institutions in and outside the FSM.
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Outputs include: (a) a program of grant assistance to SMEs funded by international grant aid that would entail the provision of business support services on a fee basis; (b) FSMVA compilation of indicative investment opportunities guidelines starting in 2008; (c) provision of semi-annual project briefs and tourism market assessments to the banking and investment community in the FSM and abroad starting 2008; (d) an annual conference for all tourism stakeholders; and (e) Small Business Development Centers (SBDCs) assistance to at least 100 current or potential tourism-related activities annually. Strategic Goal 4: Invest in tourism product development to diversify and expand the range of attractions and activities for visitors A major constraint to tourism development in the FSM is the lack of a welldeveloped range of activities. Many natural scenic and historic attractions are inaccessible and poorly presented. Outcomes that have been targeted include: (a) the compilation of a complete inventory of land and water transport services, cultural centers, and attractions used by tourists by 2006; (b) identification of the top 3-5 tourist attractions in each state to enable the main focus of product development by 2006; and (c) preparation of an outline product development plan for each state by 2006. Principal outputs contributing to the achievement of goal 4 include: (a) an outline plan for upgrading existing accommodation completed by 2007; (b) an outline plan for accommodation expansion by state and possible location by 2008 in conjunction with each states tourism development plan; (c) an outline plan for tourism transport sector expansion by 2008 to be prepared in conjunction with each states tourism development plan; (d) specific plans for infrastructure and service improvements (e.g., marinas, cruise ship and out island facilities) to be completed by 2008; and (e) submission to UNESCO World Heritage Site applications (for specific identified sites) by 2008. Strategic Goal 5: Establish the FSMs tourism sector as having a high standard in dive, eco- and cultural tourism to command a premium in global tourism markets There are two reasons why the FSM has the potential to command a premium in global tourism markets. First, the FSM has some of the richest and most deeply-embedded social and cultural traditions in the Pacific. This represents a resource for international tourists interested in indigenous cultures. However,
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this resource is also susceptible to damage or impacts from tourism that would change traditional values and lifestyles, and therefore diminish or degrade the attractiveness of the FSMs cultures as a tourism destination. For this reason, high volume or mass tourism would not be appropriate for the FSM. Second, the FSM offers one of the most pristine natural environments available to tourists. Given its small physical size, there is recognition that limits must be placed on the number of international visitors that can come to each of the islands in the FSM. At the same time, tourism offers economic benefits for all of the communities that would participate in attracting visitors. The FSM needs high tourism standards to attract big-spending visitors. Principal outcomes to achieve strategic goal 5 are: (a) hotel/resort accommodation standards in FSM raised and graded according to accepted international standards by 2007; and (b) tourism industry standards raised sufficiently to enable charging a premium to international visitors by 2012. Main outputs include: (a) mandatory accommodation grading system in place by 2008; (b) all dive operations licensed by FSM government in accordance with international standards by 2006; (c) national boat operators licensing system implemented by 2008, and technical safety standards for tourist boats and for crew qualifications specified for 2008 and beyond; (d) tourism service industry quality accreditation implemented from 2010; (e) tour guide certification standards and procedures established by 2006; and (f) proposed planning controls, capacity limits, minimum daily charges, and other acceptable measures presented to Congress in 2012. Strategic Goal 6: P romote inter -sectoral linkages Promote inter-sectoral and maximize use of local produce and services This goal is designed to ensure that import leakages are minimized, and visitor spending in FSM is maximized in terms of generating value-added activity and employment in the country. Principal outcomes include: (a) hotels in the FSM to buy 100% of their fish, 50% of vegetables, and 10% of meat from within the FSM; and (b) ensure that every foreign visitor spends at least $50 on locallyproduced artifacts, souvenirs, and handicrafts. Main outputs include: (a) demand assessments prepared by State VBs for consumption of local produce by the tourism sector; (b) tourism industry purchasing consortia and/or cooperatives created where necessary to regularize demand by 2007; (c) a range of handicrafts and products available for sale to visitors in each state certified in accordance with FSMVA standards by 2010; and (d) where appropriate, State VBs to operate their own shop(s) and/or cooperatives for local artisans by 2010.
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Strategic Goal 7: Involve FSM residents in tourism sector development Given the multitude of issues, effects and risks associated with developing tourism to become the leading economic sector in the FSM, a major educational program will be required to properly inform citizens and gain their support. Principal outcomes to be targeted for this goal include: (a) achieve nationwide awareness of tourisms importance by completing initial public awareness campaigns in all four State main islands by 2008; (b) raise ability of residents to respond to tourists needs; and (c) obtain acceptance of citizens to tourism development plans. Main activities to be undertaken include: (a) develop tourism awareness programs to inform FSM citizens of tourisms benefits, opportunities and impacts; (b) develop programs to educate citizens on tourists requirements; and (c) develop public consultative mechanisms with traditional leaders, the church and other relevant stakeholders on tourism development strategies. Strategic Goal 8: P romote the FSM in appropriate mark ets Promote markets and mark et segments to realize the sector s potential market The primary role of the FSMVA is to promote and market the FSM as a leisure destination to key international markets. These have been identified in the NTMPAP as North America, Japan/Northeast Asia, and Europe. In its primary role, the FSMVA will be responsible for a number of key tasks, including: (a) overseeing the role and performance of the regional marketing agents; (b) coordinating all national collateral and associated marketing material; (c) establishing a national photo library; (d) maintaining and developing the FSM website as an active tool in the countrys tourism marketing and promotional program; and (e) monitoring the results of marketing initiatives and modifying subsequent programs accordingly. Although its primary role is in marketing and promoting the whole of the FSM, the FSMVA will have a much broader role in developing the tourism sector. Main outcomes and activities to be undertaken by the FSMVA to help achieve strategic goal 8 include: (a) marketing and promotion to help achieve the objective of increasing both visitor expenditures and visitor arrivals by 5.0% per annum from 2006 onwards; (b) raising visitor satisfaction by 5 percentage points per annum (based on visitor surveys) beginning in 2007 and continuing until the visitor satisfaction rate reaches 85%; and (c) creating new business in the amount of 5% gain in verifiable sales and/or new relationship contacts with the travel trade based on trade shows at which the FSM is represented.
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Principal activities of the FSMVA would include: (a) implementation of the NTMPAP to include selecting regional marketing agents that will begin arranging FSM representation at trade shows, deal directly with regional travel agents, tour operators and other travel industry interests, and other tasks specified in the agents performance and reporting requirements; and (b) taking advantage of international travelers increasing use of Internet and the potential of electronic marketing. Outputs of the FSMVA to further this second activity would include launching a new fully-interactive website, and commencing an active and ongoing electronic marketing campaign to targeted consumers (e.g., divers, eco-tourists) and a regular quarterly e-mail news bulletin service, by 2006. Strategic Goal 9: Ensure that tourism is developed in a manner that actively contributes to environmental conservation and cultural protection Awareness of sound environmental practices, both in terms of resident lifestyles and business practices, leaves much to be desired with respect to solid waste management and conservation. There is also a general lack of understanding about what forms of tourism would best protect the environment and cultural practices. Ensuring that the tourism industry adopts an effective environmental protection and conservation program will require the committed involvement of many different organizations and government agencies. There may also be a need for additional legislation to ensure strict environmental impact assessment (EIA) requirements specifically for tourism developments and regulations or controls applicable to new hotel/resort structures. While the FSMA will have a major role in implementing the program, other agencies will also have a major responsibility for the establishment and enforcement of controls. Targeted outcomes include: (a) adoption by all existing tourism businesses of environmental sustainability and eco-friendly practices; (b) preparation by all new tourism developments of an EIA; (c) enforcement of environmental laws and regulations within the tourism industry; (d) competition for internationally-recognized awards for sustainable tourism commencing in 2006; and (e) establishment of a World Park by 2007. Significant activities include, for existing businesses: (a) adoption of environmentally friendly practices; (b) establishment of environmental/ conservation standards and provision for issuing green accreditation; (c) establishment of environmental monitoring systems for all tourism enterprises; and (d) maintenance and protection of cultural, historical and natural sites. For new developments: (a) establishment of national
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criteria and standards that must be addressed in preparing the EIA; and (b) establishment of a national monitoring system to ensure that no further , divers, and snorkelers, and to damage is done to coral reefs by tourist boats, ensure protection of flora, fauna, and natural resources. For awareness: (a) regular collection of trash, removal of old cars, beach clean-up, etc. and introduction of other appropriate measures to enhance the environment by 2005; (b) development of environmental sustainability and conservation modules on all school and COM tourism courses; (c) facilitate accessibility of traditional culture (dances, villages and footpaths, etc.) without impinging on cultural values; and (d) protection of historical sites and improvement of their accessibility. Main outputs would include: (a) a tourism environmental practices manual by 2006; (b) national Green awards scheme introduced by 2007 and each state VB to ensure that 30% of establishments are on register by 2007; (c) baseline environmental audit of existing businesses conducted by a respected environmental body (e.g., TNC) to commence immediately; (d) beautification programs and anti-litter laws in place and actively followed; (e) lists of cultural events, places accessible to visitors and a guide to social and cultural sensitivities for the visitor by 2005, with annual update; (f) EIAs specifically designed for tourism sector, carried out on all proposed tourism developments from 2008; (g) environmental information guide for visitors produced by FSMVA and made available to all state VBs by 2006; (h) World Park plan developed by 2007; and (i) World Park public awareness campaign launched by 2008. Strategic Goal 10: P ut in place a reliable system Put of measuring tourism activity in the FSM to enable accurate monitoring of progress Currently, statistics on international visitor arrivals, purpose of visit, length of stay, and other important parameters are not reliable. There are difficulties in reconciling state data (sum of four states) with national data (e.g., unduplicated count of visitor arrivals in FSM). It is absolutely essential that adequate, reliable statistical data be made available on a timely basis to policymakers and planners. Given the relatively small size of the tourism sector and volume of activity, establishing an effective and efficient system should not be too difficult or expensive. Principal outcomes to be targeted include: (a) new immigration forms issued and processing procedures implemented by 2006 to accurately measure arrivals by origin, length of stay, purpose of visit, and intra-FSM travel; (b) establishment of accurate real-time computer-based immigration system for visitors in each
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state by 2012; (c) availability of annual visitor and accommodation surveys by 2007; and (d) regular reporting of accurate data on monthly hotel occupancy rates available throughout the FSM by 2006. Outputs include: (a) Redesigned immigration cards for foreign visitors in all four states in 2006; (b) Monthly visitor arrivals analysis issued by FSMVA from 2006 (including on FSMVA website), based on reports from each state, including hotel occupancy rates; (c) Periodic and regular reports issued on tourist expenditure, activities, nights spent, length of stay, origins, purpose of visit, satisfaction and other relevant issues commencing 2007; (d) Computer network installed at all points of entry for real-time monitoring of visitor arrivals and flows by 2012; and (e) annual report to President and Congress on recommendations for future tourism policy based on ongoing monitoring of industry development progress. Strategic Goal 11: P rogressively develop tourism Progressively services that are acceptable to the international market through structured training programs The FSM must implement a comprehensive training program addressing all segments of the tourism sector that cater to visitors, from the immigration and customs officers to retail sales persons to the hotel and restaurant food service workers. While some establishments, notably the hotel sector, have ongoing inhouse training programs, much remains to be done throughout the industry to bring service standards up to the level consistent with the premium, high per capita spending tourist destination that the nation has targeted. In addition, given that Japan is one of the prime origin markets in terms of volume of visiting tourists, Japanese-speaking guides, front-desk staff, restaurant personnel and others must be recruited and/or trained to become an integral part of industry staffing. The main outcomes are: (1) basic level training programs for all key staff who would have received appropriate certificates of competence by 2008; (b) intermediate-level training completed for all selected recipients/groups by the end of 2009; (c) advanced level training for all selected recipients/groups by the end of 2010; (d) service quality accreditation schemes operative by 2008 for all tourism sector businesses; (e) all tourism-related transport services to hold FSMVA approval licenses by 2008; (f) work place orientation course modules and procedures to be agreed and implemented for all new industry entrants by end-2008; and (g) certified training achievements to be formally incorporated into positioning of FSM as a premium tourism destination by 2012.
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Targeted outputs include: (a) tourism industry training operational plan and budgets prepared by 2006 covering the three year period 2006-2008; (b) approval secured for Year 1 (2006) training budgets and outline budgets for Years 2 and 3; (c) state visitor bureau staff training plan prepared by 2006; (d) allocate increased resources to COM state campuses for tourism certificate training programs agreed by 2006; (e) schedule of short-term vocational courses and onthe-job training for the tourism sector agreed by 2006; (f) action program designed, with input of responsible tourism authorities, to identify special industry training needs; (g) training schedules for main sub-sectors completed by State Visitor Bureaus and FSMVA by 2006; and (h) agreement with all State governments on enrollment of participants for training programs and/or for on-site training modules.
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Chapter 11. Emerging Economic Management and Policy Issues
he emerging economic management and policy issues discussed in this chapter are critical in the sense that maintaining the status quo, rather than making a firm commitment to policy changes, is likely to result in less growth and development and increased hardship for segments of the already struggling community. Some of the issues covered have been apparent for some time and others have emerged more recently as FSM governments have had to meet the more restrictive conditions for receiving Compact II grant assistance. 11.1 Out-Migration Although there is almost total agreement that emigration will have an economic impact on the FSM, there is little agreement on whether the effects will be negative or positive. Most of this uncertainty comes from not having factual information on the number, socioeconomic characteristics, and motivations of FSM citizens who have emigrated to the US and other countries. Anecdotal information indicates that many, if not a majority, of the emigrants to the US are going for the purpose of earning a four-year degree in Mainland schools. Another significant group of emigrants are those joining the US armed services. To the extent that large numbers of younger residents out-migrate, population growth will decline and the demographic profile (age distribution) will change. Without appropriate demographic studies and data on the rate and characteristics of out-migration, it is difficult to predict likely impacts. One possibility would be an increase in the dependency ratio (i.e., ratio of number of non-working age to number of working age population). Fewer workers to support those that cannot work will have consequent household hardships. Also, there would likely be more of the nations most intelligent and capable persons leaving, with the potential consequence of lower workforce productivity. Given that lack of jobs and income tend to be more prevalent in rural and out-island areas, there may be much greater out-migration from these areas, with consequent disruption in delivery of social services as facilities must be closed because of cost factors. School enrollments would also likely be reduced, and again the pattern of reductions would very likely affect rural areas to a higher degree.
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On the positive side, greater out-migration in the long-run could result in significant benefits, if citizens living in the US and other countries became a major source of remittance income to relative living in the FSM. In many South Pacific nations such as Tonga and Samoa, overseas remittances are a major source of foreign exchange and household income. Another potential longer-term benefit would be the return of citizens who have lived abroad that have acquired occupational and entrepreneurial skills needed in the FSM economy. A number of Pacific countries have adopted policies to recruit or promote the return of citizens with critically needed skills. 11.2 Public Sector Capacity and Efficiency There is an urgent need to strengthen economic and financial management and planning at state and national government levels to formulate and implement more effective SDPs, and to effectively monitor and report on achievements. While the work of the Third Economic Summit resulted in a set of sectoral Strategic Planning Matrices (SPMs) intended to provide the basis for government budgeting of Compact and other expenditures, considerable difficulty has been encountered in obtaining the necessary legislative endorsement. Institutional strengthening involving both training and technical assistance, is needed to raise productivity of the public service and to enable the capacity to efficiently carry out the programmatic reporting mandated under the Compact. However, not only has Compact II funding been significantly reduced, but JEMCO has directed that the Capacity Building sector grant may not be used for government recurrent expenditures. FSM representatives appealed this decision, and the US has agreed to a five-year phase-out period during which FSM governments may use a declining portion of the capacity building grant for recurrent government costs. As noted in Chapter 7, beginning in fiscal year 2009, any funding received for capacity building cannot be used to fund government recurrent costs. There is a need to undertake a review of all organizational functions and associated personnel requirements. There must be an ongoing policy mandate to gradually reduce public sector employment in conjunction with rising productivity resulting from the institutional strengthening. Other human resource development (HRD) elements would include more rigorous applications of job position skill and education requirements, elimination of non-essential government functions (or contracting services to other parties), and implementation of measures to enable a transition of job position pay rates to
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levels comparable to equivalent jobs in the private sector (and equivalence across governmental levels state and national). With well-designed institutional strengthening and associated HRD programs, the FSM should be in a good position to request Compact II capacity building sector grant funding to pay for public service training and technical assistance. 11.3 Reducing Hardship The FSM is a participatory country in the ADBs regional project on National Poverty Reductions Strategies. As part of this project, an updated hardship assessment was conducted in late 2003. This assessment was part of the ADBs program for achieving Millennium Development Goals (MDG) which the FSM committed to in 2002. This commitment requires that government: (a) better define and assess the concept of hardship in the FSM; (b) monitor progress towards the achievement of the MDGs; (c) design appropriate strategies to reduce hardship; and (d) incorporate these strategies into the countrys development plans. The hardship assessment conducted in the FSM utilized data from the Household Income and Expenditure Study (HIES) done in 1998, and the 2000 Census. A Participatory Assessment of Hardship (PAH) survey was held in nine communities, three each in the States of Chuuk, Pohnpei, and Yap. The PAH was undertaken to obtain a qualitative assessment of the perceptions of the community on hardship. Groups interviewed (about 30-40 persons in each community) included traditional leaders and elders, church leaders, youth, and representatives of womens groups. Based on the PAH, poverty in the FSM was perceived to be hardship. This concept has been defined as: An Inadequate Level of Sustainable Human Development, manifested by:
A lack of access to basic services; A lack of opportunities to participate fully in the socio-economic life of the community; and A lack of adequate resources (including cash) to meet the basic needs of the household or customary obligations to the extended family, village community and/or the church
An analysis of the HIES and Census data determined that there was a large incidence of low income families experiencing periodic cash shortages that kept
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them from meeting all their basic needs. The hardship assessment defined food poverty lines (FPLs) and basic needs poverty lines (BNPLs) in relation to the cost of providing an inexpensive, minimally nutritious diet for each state. The BNPL excludes food and is calculated as a percentage of the FPL. The BNPL for Pohnpei was 74.5% of the FPL (which in 1998 was calculated to be US$437 per capita per annum) and for Kosrae the BNPL was 114%. Based on the FPL and BNPL criteria, a surprisingly large proportion of households in the states had incomes below the BNPL. 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 (ADB TA 6047-REG: Table 8). The HIES data in 1998 indicated substantial inequality in distribution, whether measured in terms of household expenditure or income, particularly for Chuuk and Pohnpei, the states accounting for over 80% of total national population. With respect to expenditure, in Chuuk 56.0% of all households are in the bottom quintile and in Pohnpei 39.1% are in the lowest quintile. In contrast, in Kosrae only 0.8% and in Yap only 4.0% of households are in the bottom quintile. The results for distribution according to income are similar, with Chuuk and Pohnpei having nearly the same proportions of households in the bottom quintile. Two indices defined by the United Nations Development Programme (UNDP) are used to make cross-country comparisons of human development and hardship status. Based on 1999 rankings, the FSM ranked 7th among 12 Pacific developing countries (ADB member countries), and 9th in terms of poverty. The human development index takes into account life expectancy, adult literacy, school enrollments, and per capita GDP. The human poverty index takes into account underweight children under 5, people without access to safe water and health services, as well as specific measures of illiteracy and life expectancy. Inadequate social services in the rural and outer islands contributes significantly to the FSMs low ranking on these indices. The MDGs have been set to define quantitative targets to be achieved by 2015. For example, current infant mortality rate of 40 (per 1000 live births) is to be reduced by two thirds to below 14 by 2015. The goals for hardship, defined in the FSM in accordance with the FPL and BNPL criteria, call for reducing hardship by 50% by 2015. The FSM governments in general have not addressed the hardship issue in their strategic planning. In part, this is may be based on a gap between the perceptions of government leaders and those of the community groups assessed in the PAH work. That is, most government executives and politicians are of the
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view that the traditional customs and systems of social obligations provide a safety net that keep families from experiencing hardship. Another reason may be that many officials do not believe the underlying data (HIES and Census) are reliable or applicable for measuring hardship. 11.4 Governance The federal structure has come with costs as well as benefits for the nations citizens. As a larger nation state having territorial sovereignty over a vast expanse of ocean, the FSM has realized benefits in its international relations (e.g., fisheries licensing agreements). However, perhaps less obvious, there have been significant costs in terms of the multi-levels of government, particularly the state-national relationships. From the beginning of the Compact of Free Association and national independence, there has been the inevitable political friction between the states and the national government as each state competed for Compact assistance and other bilateral and multilateral assistance that had to come through the national government. With the high degree of autonomy given the states under the FSM constitution, building cooperative and efficient working relationships at the beginning of a new federation probably could have been expected to take some time. However, after nearly 20 years there may be a reasonable expectation that inter-governmental relations would be functioning much more efficiently than they have in the last five years. Political in-fighting and non-productive competition has also extended to the executive and legislative branches with detrimental results. With the outcome of the Compact II negotiations, it was apparent that the new economic aid regime was not only less generous, but would come with many conditions attached in terms of eligible expenditure purposes and the degree of required planning, budgeting and accountability. Governments thus far have not responded well to the new regime, as required, planning and budgeting tasks have been delayed. With the difficult medium-term transition required of FSM governments to adjust fiscally to the lower initial grant assistance of Compact II and the continuing decline in grant funding over the entire assistance term, it is imperative that governments strengthen their policy and management linkages, including capacity for executive and legislative branches cooperate to enact and implement policies and measures. Good governance extends to many other aspects of development besides the efficient utilization of Compact and donor assistance. The four basic elements of good governance identified by Mellor include: (a) accountability making public
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officials answerable for government behavior and responsible to the entity from which they derive their authority. Criteria must be established to measure the performance of officials along with oversight mechanisms to ensure that the criteria are met; (b) participation people (citizens) must participate in the process of governance, as people are the heart of development; (c) predictability means rule of law, which refers to the existence of laws, regulations and policies to regulate society, and their fair and consistent application; and (d) transparency refers to the availability of information to the general public and clarity about government rules, regulations, and decisions. Policies or decisions that are known only to the preparers and administrators of the information, distort the governance process. Mellor notes that, while governance means different things in different contexts and to different people . for its purposes, ADB defines governance as the manner in which power is exercised in the management of countrys economic and social resources for development. Thus the concept of governance is concerned directly with the management of the development process, involving both the public and private sectors. Good governance is necessary in providing the requisite enabling environment or business climate to achieve sustainable development of the private sector. Transparency and accountability are critical in establishing a favorable policy and regulatory environment for building a more diversified, competitive private sector. Attracting foreign investment is a case in point. Not only has there been friction between the states and national government over jurisdiction, but there has been no consensus regarding the steps or measures that should be implemented to attract foreign investment. Law and regulations for issuing foreign investment permits must be transparent to attract investors. This has been an ongoing issue for nearly two decades, and remains unresolved. Public confidence in the integrity of government is important for obtaining and maintaining support of policies and programs. Timely financial audits (accountability), openness (transparency) in informing or disclosing program performance, dialogue and opportunity to contribute or comment on the making of policies, plans and budgets, are all important elements in building public confidence. While the series of economic summits provided an opportunity for the public to participate in the making of policies, there were little or no followon provisions to enable participants to learn what policies or actions were adopted, and what progress was made in their implementation. Also, since a large share of the funding and other resources required to convene the summits came from donors, it is questionable whether they would have been held if government had to depend only on its own resources.
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Fairness in the application of laws and regulations, and due process in the adjudication of law or regulatory violations, also is very important for building and maintaining public confidence in government, and in promoting both political stability and participation in the political process (backing issues and petitioning legislators to support specific legislative bills or proposals, for instance). Appointment or election of an independent ombudsman to handle citizen complaints or appeals, promotes fairness and hence good governance. Loss of confidence in government to effectively manage the economy and to deliver satisfactory social services is almost certainly a factor contributing to the large out-migration in the last six years. At this juncture, it is very important for FSM governments to critically examine their position on all the elements that contribute to raising the level or standard of governance. Not only is this important from the standpoint of promoting public confidence and support of the citizenry, but improved governance also can be expected to result in greater efficiency in the conduct of government.
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Chapter 12. Conclusion: Challenges to Achieving Sustainable Development

acing a significant reduction in grant funding, and an aid management regime under Compact II that largely stipulates the allocation of funding among relatively few priority sectors, FSM governments will have to reach consensus on new economic development policies and strategies. Maintaining the status quo can no longer be tolerated, if the nation has any chance of achieving sustainable growth of employment and income, slowing the out-migration of its more productive citizens, and avoiding social decline. The Third Economic Summit held in early 2004 deliberated economic policies and strategies to enable the nation to transition to the reduced level of aid under Compact II and to achieve sustainable growth and increased selfsufficiency by 2023. The recommended economic strategies and policies endorsed by this summit essentially mirrored those recommended in the 1st and 2nd Summits. The latter policies and strategies were largely not supported, and thus not implemented. Consensus among governments was not achieved, and there was little dialogue among and between stakeholders and government on why or how the earlier recommended policies and strategies should or could be implemented. The Strategic Development Plan that resulted from the 3rd Economic Summit provides the basis for the nation to move ahead toward reaching a consensus on development policies and priorities. Broad based supportthat of the general public, private sector, FSM governments, and the donor community can be expected to generate the strength of commitment needed to complete and implement the currently proposed SDP. Summarizing specific challenges, it is critically important that the FSM has resident (citizen) capacity to carry out strategic planning on a continuing basis. While this capacity will in the short-term necessarily have to depend on externally supplied expertise, more institutional strengthening will be required to ensure the development and institutionalization of planning and policymaking capacity at both national and state levels. Both national and state governments need to implement institutional strengthening and human resources development (HRD) programs to raise productivity of the public service. Strengthening institutional capacity, particularly in economic and financial planning and management is a high priority in all governments. Integrating strategic planning and performance budgeting
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will require substantially more training, to enable efficient and effective execution of the monitoring, reporting, budget preparation, revision of strategic development plans and grant proposal preparation that is required to satisfy Compact II requirements. Strengthening governance standards may be one of the most important tasks for achieving sustainable development. Governance elements to be addressed would include commitment (to stated policies), transparency, accountability, efficiency, equity (fairness), inclusiveness (promoting participation of all citizens), and predictability. Other important elements include, honesty (absence of corruption, ethical behavior), prudence, and cooperativeness. Increased growth in private sector activity will create new jobs and provide an expanded tax base. A number of elements contributing to an enabling environment must be addressed, including strengthened communications between public and private sectors, rationalization of the Public Sector Enterprise sector to remove unfair competition and pro-active initiatives to contract out activities that can be more efficiently performed by businesses, a needs assessment to pinpoint and address industry short- and longer-term skills training to raise productivity, a regulatory climate characterized by transparency and efficient customer-oriented responsiveness of public agency services, and legal framework supportive of business that includes secured transactions and bankruptcy laws. There must be renewed commitment on the part of national and state governments to attracting foreign investment. Private sector development, particularly in fisheries and tourism, will require substantially greater foreign direct investment (FDI) than what has occurred in the past, to achieve sustainable growth in income and employment. Particularly important elements in promoting greater domestic investment and FDI include: (a) greatly improved public-private sector dialogue; (b) reasonably predictable costs of doing business; and, perhaps most importantly, (c) transparency of foreign investment regulations. National and state governments need to reach consensus on a consistent, transparent set of procedures for issuing foreign investment permits. Improved fiscal performance is needed to increase tax revenues to offset declining Compact II resources and to provide budgetary balance that promotes overall macroeconomic performance conducive to promoting private sector growth and investment. As recommended by several technical assistance missions, the FSM may consider implementing a value-added tax (VAT) to replace import and state sales taxes. The NGO sector represents large unrealized potential toward enabling the nation to achieve sustainable development and increased self-sufficiency. While the NGO sector currently is heavily involved in social and economic development,
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Chapter 12. Conclusion: Challenges to Achieving Sustainable Development
the unrealized potential could be tapped by FSM governments working more directly with the NGO sector, particularly if this approach is facilitated by dedicated funding and an agency or bureau made responsible for coordinating all government working relations with the NGO sector.
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Appendix : Statistical Tables

Table A1 FSM Gross Domestic Product: Fiscal 1987-2004 (in US $ Millions)
Sector
Productive Enterprises Private Sector Compensation Operating Surplus Public Enterprises Compensation Operationg Surplus Less Subsidies Financial Enterprises Government National State Municipal Non Profit Organizations Households Subsistence Home Ownership Indirect Taxes Less Bank Service Charges Nominal GDP Per capita GDP ($) Inflation Index Population (000) Real GDP (in FY98 $ millions) Real GDP Growth Rate (%) -4.8 -5.9
Source: FSM Department of Economic Affairs. Note: e - estimated
FY87
29.4 26.1 10.5 15.6 3.3 1.7 1.9 -0.3 2.6 44.4 7.1 35.7 1.6 3.6 30.3 18.4 11.9 6.9 -3.5 113.7 1,261 69.2 90.2 164.3 2.0 -0.3
FY88
34.4 31.0 12.6 18.4 3.4 1.9 2.1 -0.6 2.9 47.0 6.6 38.6 1.9 3.8 32.5 19.8 12.7 8.6 -3.8 125.4 1,350 72.1 92.9 173.9 5.8 -3.2
FY89
37.9 34.0 13.4 20.6 3.9 2.3 2.5 -0.9 3.0 47.9 7.6 38.3 2.0 3.5 35.1 21.3 13.8 9.0 -4.0 132.4 1,384 75.5 95.7 175.4 0.9 8.9
FY90
44.3 39.5 16.3 23.1 4.8 2.7 3.0 -0.9 3.3 50.8 7.9 41.0 1.9 3.4 37.6 22.8 14.7 9.7 -4.4 144.6 1,482 79.3 97.6 182.3 3.9 0.1
F Y9 1 Y91
51.5 46.8 17.7 29.0 4.7 3.0 3.4 -1.7 3.7 54.3 8.4 43.8 2.1 4.0 40.2 24.4 15.8 12.1 -4.9 160.9 1,617 83.3 99.5 193.2 6.0 0.7
FY92
58.1 53.3 21.9 31.3 4.8 4.0 4.6 -3.7 4.0 55.7 8.8 44.5 2.4 4.8 42.2 25.7 16.5 13.0 -5.3 172.5 1,700 85.8 101.5 201.0 4.0 3.3
FY93
65.1 59.2 24.4 34.9 5.9 5.6 3.1 -2.8 4.5 61.9 9.9 49.3 2.6 4.9 44.3 27.0 17.3 15.2 -5.9 190.0 1,836 88.4 103.5 214.9 6.9 -3.4
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FY94
70.7 56.8 24.4 32.3 13.9 7.9 10.3 -4.2 5.8 62.3 10.4 49.1 2.8 5.1 46.3 28.2 18.1 15.4 -7.2 198.5 1,882 90.7 105.5 218.9 1.9
FY95
74.3 58.8 23.7 35.1 15.5 10.4 9.4 -4.3 5.8 66.8 11.0 53.0 2.9 5.7 47.8 29.1 18.7 14.9 -7.1 208.2 1,969 93.2 105.8 223.4 2.1
FY96
68.1 56.3 23.4 32.9 11.8 11.7 5.9 -5.8 5.6 67.1 11.5 52.7 2.9 6.3 49.2 29.9 19.3 14.6 -7.1 203.8 1,922 95.8 106.0 212.7
FY97
64.0 51.9 22.4 29.5 12.1 11.3 5.2 -4.4 5.3 62.2 13.5 45.8 2.9 6.9 50.7 30.8 19.8 14.3 -6.4 197.0 1,854 98.4 106.3 200.2
FY98
72.1 53.2 23.2 30.0 18.9 13.5 10.0 -4.6 5.7 53.5 12.5 38.2 2.7 7.5 51.6 31.4 20.2 16.2 -7.1 199.6 1,875 100.0 106.5 199.6
FY99
66.6 55.1 25.3 29.8 11.5 13.2 3.0 -4.7 5.9 53.7 11.8 38.9 2.9 8.1 52.7 32.0 20.7 17.4 -7.5 196.9 1,844 101.9 106.8 193.2
FY00
79.8 63.8 27.9 35.9 16.0 13.3 8.4 -5.7 7.4 56.5 11.4 41.7 3.4 8.8 54.0 32.7 21.3 21.2 -8.9 218.8 2,042 104.0 107.0 210.4
F Y0 1 Y01
79.7 63.9 29.1 34.8 15.7 12.7 8.9 -5.8 7.1 58.8 11.6 43.4 3.8 9.5 54.9 33.3 21.6 20.1 -8.4 221.7 2,067 105.3 107.3 210.5
FY02 FY03 FY04e

79.1 61.9 29.3 32.6 17.2 11.4 10.5 -4.7 6.6 61.5 12.7 44.9 3.8 11.1 54.9 33.3 21.6 17.7 -8.0 222.9 2,074 105.2 107.5 211.9 82.6 64.2 30.2 34.0 18.4 11.8 11.2 -4.6 4.2 63.0 12.9 46.3 3.8 11.7 54.9 33.3 21.5 18.3 -5.1 229.6 2,130 104.9 107.8 79.1 64.5 32.0 32.5 14.7 11.4 8.0 -4.8 3.5 60.9 12.5 44.4 4.0 12.4 55.7 33.9 21.8 17.8 -4.3 225.1 2,084 106.5 108.0
218.9 211.4
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Table A2 Chuuk Gross Domestic Product: Fiscal 1987-2003 (in US $ Millions)

Sector
Productive Enterprises Private Sector Compensation Operationg Surplus Public Enterprises Compensation Operationg Surplus Less Subsidies Financial Enterprises Government National State Municipal Non Profit Organizations Households Subsistance Home Ownership Indirect Taxes Less Bank Service Charges Nominal GDP Per capita GDP ($) Inflation Index Population (000) Real GDP (in FY98 $ millions) Real GDP Growth Rate (%)
FY87
9.2 8.3 3.1 5.2 0.9 0.2 0.6 0.0 0.8 15.3 0.3 14.4 0.6 1.1 11.4 9.0 2.5 2.5 -1.0 39.2 865 69.2 45.3 56.6 -2.4
FY88
11.0 10.2 3.2 7.0 0.8 0.2 0.6 0.0 0.9 17.3 0.3 16.5 0.6 1.0 12.2 9.6 2.6 3.6 -1.2 44.7 959 72.1 46.6 62.0 9.5
FY89
11.8 11.2 3.6 7.6 0.7 0.3 0.8 -0.4 0.9 16.5 0.3 15.4 0.7 1.0 13.2 10.3 2.8 3.5 -1.2 45.7 958 75.5 47.7 60.5 -2.4
FY90
12.4 11.3 3.7 7.6 1.1 0.4 1.0 -0.3 1.0 18.2 0.3 17.3 0.7 0.9 14.1 11.1 3.0 3.4 -1.3 48.7 996 79.3 48.9 61.4 1.5
F Y9 1 Y91
15.0 14.1 4.1 10.0 1.0 0.4 1.1 -0.6 1.1 19.7 0.3 18.7 0.7 1.2 15.1 11.9 3.3 4.7 -1.5 55.4 1,108 83.3 50.0 66.5 8.3
FY92
16.8 14.9 4.6 10.3 1.9 0.6 1.5 -0.2 1.2 20.3 0.3 19.3 0.7 1.5 15.9 12.5 3.4 4.4 -1.6 58.6 1,147 85.8 51.1 68.3 2.7
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FY93
16.1 15.4 5.2 10.3 0.8 0.5 0.7 -0.4 1.2 22.5 0.4 21.3 0.8 1.5 16.8 13.2 3.6 4.9 -1.6 61.4 1,176 88.4 52.2 69.5 1.8
FY94
16.0 14.8 5.3 9.4 1.2 0.6 1.7 -1.1 1.6 21.5 0.4 20.3 0.8 1.5 17.6 13.8 3.8 4.8 -2.0 61.0 1,144 90.7 53.3 67.2 -3.3
FY95
17.2 15.5 5.4 10.1 1.7 0.8 1.4 -0.5 1.4 23.3 0.4 22.1 0.8 1.6 18.1 14.2 3.9 4.6 -1.7 64.5 1,208 93.2 53.4 69.2 3.0
FY96
12.2 12.6 4.7 8.0 -0.4 1.1 1.3 -2.8 1.2 22.0 0.4 21.0 0.6 1.9 18.6 14.6 4.0 3.6 -1.6 57.9 1,084 95.8 53.4 60.4 -12.7
FY97
13.3 11.8 4.2 7.6 1.6 1.5 1.9 -1.9 0.9 18.0 0.5 17.0 0.5 2.0 19.1 15.0 4.1 3.8 -1.2 55.9 1,045 98.4 53.5 56.9 -5.8
FY98
14.1 12.5 4.1 8.3 1.7 1.6 1.6 -1.5 0.9 13.7 0.5 12.9 0.3 2.2 19.5 15.3 4.2 4.6 -1.2 53.7 1,004 100.0 53.5 53.7 -5.6
FY99
13.4 12.4 4.5 7.9 1.1 1.8 1.0 -1.7 1.0 15.1 0.5 14.3 0.3 2.3 19.9 15.6 4.3 4.9 -1.4 55.2 1,032 101.9 53.5 54.2 0.9
FY00
20.0 18.1 5.5 12.6 2.0 2.0 2.0 -2.0 1.5 17.7 0.4 17.0 0.3 2.4 20.2 15.8 4.3 7.1 -1.8 67.1 1,252 103.4 53.6 64.9 19.7
F Y0 1 FY02 Y01
18.3 16.6 5.3 11.3 1.7 2.0 1.7 -2.0 1.7 19.2 0.4 18.6 0.2 2.5 20.4 16.0 4.4 6.7 -2.1 66.7 1,244 104.4 53.6 63.9 -1.5 16.8 15.1 5.6 9.5 1.8 1.9 1.9 -2.0 1.6 19.2 0.5 18.5 0.2 3.0 20.6 16.2 4.4 5.4 -2.0 64.6 1,203 105.4 53.7 61.3 -4.1
FY03
18.7 16.8 6.1 10.8 1.9 1.9 1.9 -2.0 1.5 20.1 0.5 19.5 0.2 3.1 20.7 16.2 4.4 6.1 -1.9 68.3 1,272 105.6 53.7 64.7 5.5
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Table A3 Kosrae Gross Domestic Product: Fiscal 1987-2003 (in US $ Millions)

Sector
FY87
3.0 3.0 0.9 2.2 0.0 0.0 0.0 0.0 0.3 4.9 0.2 4.6 0.1 0.1 2.3 1.0 1.3 0.8 -0.4 11.0 1,692 69.2 6.5 15.9 2.3
FY88
2.4 2.4 0.8 1.6 0.0 0.0 0.0 0.0 0.3 4.9 0.2 4.6 0.1 0.1 2.5 1.1 1.4 0.7 -0.3 10.5 1,591 72.1 6.6 14.6 -8.2
FY89
2.4 2.4 0.7 1.7 0.0 0.0 0.0 0.0 0.3 5.0 0.2 4.7 0.1 0.1 2.6 1.2 1.5 0.6 -0.4 10.7 1,574 75.5 6.8 14.2 -2.7
FY90
2.8 2.8 0.9 1.9 0.0 0.0 0.0 0.0 0.3 5.2 0.2 4.9 0.1 0.1 2.8 1.2 1.6 0.7 -0.4 11.5 1,667 79.3 6.9 14.5 2.1
F Y9 1 Y91
3.3 3.3 1.0 2.4 0.0 0.0 0.0 0.0 0.3 5.4 0.2 5.1 0.1 0.1 3.0 1.3 1.7 0.9 -0.4 12.6 1,800 83.3 7.0 15.1 4.1
FY92
2.9 2.9 1.1 1.8 0.0 0.0 0.0 0.0 0.3 5.7 0.2 5.3 0.1 0.2 3.1 1.4 1.8 0.8 -0.4 12.7 1,789 85.8 7.1 14.8 -2.0
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FY93
3.8 3.3 1.1 2.2 0.5 0.2 0.4 -0.1 0.4 5.9 0.2 5.6 0.2 0.1 3.3 1.4 1.9 0.9 -0.5 14.0 1,944 88.4 7.2 15.8 6.8
FY94
6.6 4.2 1.2 2.9 2.4 0.9 2.6 -1.0 0.5 5.9 0.2 5.5 0.2 0.1 3.4 1.5 1.9 1.1 -0.6 17.0 2,329 90.7 7.3 18.7 18.4
FY95
5.5 3.8 1.2 2.6 1.7 1.3 1.1 -0.7 0.4 6.3 0.3 5.9 0.2 0.2 3.5 1.5 2.0 1.2 -0.5 16.6 2,243 93.2 7.4 17.8 -4.8
FY96
5.9 4.6 1.4 3.2 1.3 1.1 0.8 -0.6 0.4 6.7 0.3 6.3 0.2 0.2 3.7 1.6 2.1 1.2 -0.5 17.6 2,378 95.8 7.4 18.4 3.4
FY97
4.9 3.7 1.4 2.4 1.1 1.0 0.8 -0.7 0.5 6.7 0.3 6.2 0.2 0.2 3.8 1.6 2.1 1.2 -0.6 16.6 2,213 98.4 7.5 16.9 -8.2
FY98
5.1 4.0 1.4 2.6 1.1 1.4 0.4 -0.7 0.5 5.4 0.3 5.0 0.2 0.2 3.9 1.7 2.2 1.3 -0.6 15.8 2,079 100.0 7.6 15.8 -6.5
FY99
5.6 4.4 1.5 2.9 1.3 1.4 0.5 -0.7 0.4 5.3 0.3 4.9 0.2 0.3 4.0 1.7 2.3 1.4 -0.5 16.4 2,158 101.9 7.6 16.1 1.9
FY00
6.6 5.4 2.2 3.2 1.2 1.3 0.6 -0.8 0.8 5.7 0.3 5.3 0.2 0.3 4.1 1.8 2.3 1.7 -0.9 18.3 2,377 103.2 7.7 17.7 9.9
F Y0 1 FY02 Y01
8.5 6.6 2.8 3.9 1.9 1.1 2.3 -1.5 0.7 5.8 0.3 5.3 0.2 0.3 4.1 1.8 2.3 1.8 -0.8 20.4 2,649 103.6 7.7 19.7 11.3 7.5 5.8 2.8 3.0 1.7 1.1 1.5 -0.9 0.8 6.6 0.3 6.1 0.2 0.4 4.0 1.8 2.3 1.4 -0.9 19.7 2,526 100.5 7.8 19.6 -0.5
FY03
6.3 5.3 2.8 2.6 1.0 1.0 0.6 -0.6 0.4 6.3 0.3 5.8 0.2 0.4 4.0 1.7 2.3 1.3 -0.5 18.2 2,304 98.6 7.9 18.5 -5.6
161
Table A4 Pohnpei Gross Domestic Product: Fiscal 1987-2003 (in US $ Millions)

Sector
Productive Enterprises Private Sector Compensation Operationg Surplus Public Enterprises Compensation Operationg Surplus Less Subsidies Financial Enterprises Government National State Municipal Non Profit Organizations Households Subsistance Home Ownership Indirect Taxes Less Bank Service Charges Nominal GDP Per capita GDP ($) Inflation Index Population (000) Real GDP (in FY98 $ millions) Real GDP Growth Rate (%) Source: FSM Department of Economic Affairs.
FY87
13.4 11.5 5.0 6.5 2.0 1.1 0.9 0.0 1.3 18.1 6.6 11.0 0.6 2.2 11.1 5.3 5.8 2.4 -1.7 46.8 1,642 69.2 28.5 67.6 7.1
FY88
16.6 14.6 6.7 7.9 2.0 1.3 1.0 -0.3 1.4 18.6 6.1 11.7 0.8 2.5 12.0 5.7 6.3 2.9 -1.9 52.1 1,760 72.1 29.6 72.3 7.0
FY89
19.1 16.3 7.0 9.3 2.8 1.7 1.4 -0.3 1.6 20.2 7.0 12.2 1.0 2.2 13.1 6.2 6.8 3.5 -2.1 57.5 1,873 75.5 30.7 76.2 5.4
FY90
22.1 19.0 8.7 10.3 3.1 1.9 1.6 -0.4 1.7 21.0 7.3 12.8 1.0 2.2 14.0 6.7 7.3 3.5 -2.3 62.2 1,987 79.3 31.3 78.4 2.9
F Y9 1 Y91
25.3 21.6 9.3 12.3 3.6 2.2 1.8 -0.4 1.9 22.7 7.8 13.8 1.1 2.5 15.0 7.1 7.8 4.2 -2.5 69.1 2,173 83.3 31.8 83.0 5.9
FY92
26.6 24.7 11.5 13.2 1.9 2.9 2.3 -3.3 2.0 23.0 8.2 13.7 1.2 2.9 15.7 7.5 8.2 4.8 -2.6 72.4 2,235 85.8 32.4 84.4 1.7
162
Appendixes
FY93
33.8 30.3 14.0 16.3 3.4 4.1 1.4 -2.1 2.4 26.4 9.2 16.0 1.3 3.1 16.5 7.8 8.6 5.9 -3.2 84.9 2,565 88.4 33.1 96.0 13.7
FY94
36.7 27.7 13.1 14.6 9.0 5.5 5.4 -1.8 3.2 27.3 9.6 16.3 1.4 3.3 17.2 8.2 9.0 5.9 -3.9 89.8 2,665 90.7 33.7 99.0 3.1
FY95
40.9 30.6 12.9 17.7 10.3 7.2 5.9 -2.8 3.5 29.3 10.1 17.8 1.4 3.6 17.8 8.5 9.3 6.3 -4.2 97.2 2,876 93.2 33.8 104.3 5.4
FY96
38.1 29.1 12.7 16.4 9.1 8.2 2.9 -2.0 3.5 30.2 10.6 18.1 1.6 3.9 18.4 8.7 9.6 6.3 -4.4 96.0 2,824 95.8 34.0 100.2 -3.9
FY97
33.1 26.2 11.9 14.3 6.9 7.2 1.2 -1.5 3.4 29.9 12.4 15.8 1.6 4.4 18.9 9.0 9.9 6.1 -4.0 91.8 2,692 98.4 34.1 93.3 -7.2
FY98
35.0 25.1 11.5 13.6 9.9 7.8 4.2 -2.1 3.8 27.2 11.6 14.1 1.6 4.9 19.3 9.2 10.1 6.6 -4.6 92.2 2,696 100.0 34.2 92.2 -1.2
FY99
31.8 25.2 12.4 12.8 6.6 7.8 0.6 -1.8 3.8 26.7 10.9 14.1 1.7 5.2 19.8 9.4 10.4 7.4 -4.8 89.8 2,610 101.9 34.4 88.1 -4.4
FY00
37.9 27.8 12.8 15.0 10.1 7.7 5.1 -2.7 4.3 26.5 10.5 14.1 1.9 5.7 20.6 9.8 10.8 8.6 -5.1 98.5 2,855 105.7 34.5 93.2 5.8
F Y0 1 FY02 Y01
35.9 27.3 13.2 14.0 8.6 6.9 3.5 -1.8 3.8 26.5 10.8 13.7 2.0 6.2 20.9 10.0 11.0 7.7 -4.5 96.5 2,789 107.1 34.6 90.1 -3.3 40.2 28.6 13.1 15.5 11.6 6.4 6.6 -1.4 3.3 28.2 11.8 14.3 2.1 7.1 20.8 9.8 10.9 7.9 -4.0 103.5 2,974 106.1 34.8 97.5 8.2
FY03
40.5 28.6 13.4 15.2 11.9 6.7 6.7 -1.6 1.9 29.0 11.9 14.9 2.2 7.4 20.8 9.9 10.9 7.6 -2.3 104.9 3,006 105.9 34.9 99.1 1.6
163
Table A5 Yap Gross Domestic Product: Fiscal 1987-2003 (in US $ Millions)

Sector
FY87
3.8 3.4 1.6 1.8 0.5 0.4 0.4 -0.4 0.3 6.2 0.1 5.7 0.3 0.2 5.4 3.2 2.3 1.2 -0.4 16.7 1,704 69.2 9.8 24.1 -1.0
FY88
4.5 3.9 1.9 2.0 0.6 0.4 0.5 -0.3 0.3 6.2 0.1 5.8 0.3 0.2 5.8 3.4 2.4 1.4 -0.4 18.0 1,782 72.1 10.1 25.0 3.7
FY89
4.6 4.1 2.1 2.0 0.5 0.3 0.4 -0.3 0.3 6.2 0.1 5.9 0.2 0.1 6.3 3.6 2.6 1.4 -0.4 18.6 1,788 75.5 10.4 24.6 -1.6
FY90
7.1 6.4 3.1 3.4 0.7 0.4 0.5 -0.2 0.4 6.4 0.1 6.1 0.2 0.1 6.7 3.9 2.8 2.1 -0.5 22.3 2,124 79.3 10.5 28.1 14.2
F Y9 1 Y91
7.9 7.8 3.4 4.4 0.2 0.5 0.5 -0.8 0.4 6.5 0.1 6.2 0.2 0.2 7.1 4.1 3.0 2.3 -0.5 23.9 2,234 83.3 10.7 28.7 2.1
FY92
11.9 10.8 4.8 6.0 1.1 0.6 0.7 -0.2 0.5 6.7 0.2 6.2 0.4 0.2 7.4 4.3 3.1 3.0 -0.7 29.0 2,685 85.8 10.8 33.8 17.8
164
Appendixes
FY93
11.4 10.2 4.2 6.0 1.2 0.8 0.7 -0.3 0.5 7.0 0.2 6.5 0.4 0.2 7.8 4.5 3.3 3.5 -0.7 29.8 2,709 88.4 11.0 33.7 -0.3
FY94
11.4 10.2 4.8 5.4 1.3 0.9 0.7 -0.3 0.5 7.6 0.2 7.0 0.5 0.2 8.1 4.7 3.4 3.6 -0.7 30.9 2,759 90.7 11.2 34.1 1.2
FY95
10.7 9.0 4.2 4.8 1.7 1.0 1.0 -0.4 0.6 8.0 0.2 7.3 0.5 0.3 8.3 4.9 3.5 2.8 -0.7 30.0 2,679 93.2 11.2 32.2 -5.6
FY96
11.9 10.0 4.7 5.4 1.8 1.3 0.9 -0.3 0.5 8.2 0.2 7.4 0.6 0.3 8.6 5.0 3.6 3.4 -0.6 32.3 2,884 95.8 11.2 33.7 4.7
FY97
12.8 10.3 5.0 5.3 2.5 1.6 1.2 -0.4 0.5 7.7 0.2 6.8 0.7 0.3 8.8 5.1 3.7 3.2 -0.6 32.7 2,920 98.4 11.2 33.2 -1.5
FY98
17.9 11.7 6.2 5.4 6.2 2.8 3.9 -0.4 0.6 7.1 0.2 6.2 0.7 0.3 9.0 5.2 3.8 3.7 -0.7 37.9 3,384 100.0 11.2 37.9 14.2
FY99
15.8 13.2 6.9 6.3 2.6 2.2 0.9 -0.5 0.7 6.6 0.2 5.7 0.8 0.3 9.2 5.3 3.8 3.7 -0.8 35.3 3,152 101.9 11.2 34.6 -8.7
FY00
15.2 12.5 7.3 5.2 2.8 2.4 0.7 -0.3 0.9 6.5 0.2 5.3 1.0 0.4 9.2 5.4 3.9 3.7 -1.1 34.9 3,116 102.6 11.2 34.0 -1.7
F Y0 1 FY02 Y01
17.0 13.4 7.7 5.7 3.6 2.7 1.5 -0.6 0.8 7.3 0.2 5.7 1.4 0.5 9.5 5.5 4.0 3.9 -1.0 38.0 3,363 105.1 11.3 36.2 6.5 14.6 12.5 7.8 4.7 2.1 2.1 0.5 -0.5 0.9 7.6 0.2 6.0 1.4 0.6 9.5 5.5 4.0 3.3 -1.1 35.4 3,133 105.1 11.3 33.7 -6.9
FY03
17.0 13.4 8.0 5.5 3.6 2.2 1.9 -0.5 0.4 7.7 0.2 6.1 1.4 0.8 9.4 5.5 3.9 3.4 -0.4 38.3 3,389 104.2 11.3 36.8 9.2
165
Table A6 FSM Employment by Industry: 1987-2004

Industry
Agriculture and Forestry Fisheries Mining and Quarrying Manufacturing Utilities Construction Wholesale & Retail; and Repair of Vehicles, Personal & Household Goods Hotels and Restaurants Transport, Storage and Communications Banking and Other Financial Services Real Estate and Other Business Services Public Administration and Other Government Services Education Health and Social Work Other Community, Social and Personal Services Foreign Government and Private Organizations Unclassified Total
Source: FSM Department of Economic Affairs. Note: e - Estimated
FY87
11 57 53 117 2 819
FY88
10 75 44 181 11 945
FY89
10 85 60 365 10 929
FY90
12 93 60 476 10 1,141
F Y9 1 Y91
16 109 61 486 13 1,055
FY92
27 127 54 636 34 1181
FY93
49 253 51 671 126 1,256
1,544 277 469 137 225 7,445 362 1 619 69 1 12,20 8 2,208
1,685 320 540 180 231 7,787 433 1 595 68 0 13, 10 6 3,1
1,870 369 611 201 230 7,900 320 1 473 71 0 13,5 05 3,505
1,946 401 690 219 258 7,645 339 2 462 49 0 13,8 03 3,803
2,095 434 680 235 257 7,972 369 6 536 55 0 14,3 79 4,37
2,236 497 788 248 293 7,670 399 9 527 90 7 14,823
2,361 545 826 261 311 7,986 386 9 526 112 1 15,730
166
Appendixes
FY94
44 470 48 612 203 1,086
FY95
41 632 39 610 229 994
FY96
33 493 17 621 293 877
FY97
38 420 11 572 403 796
FY98
38 356 12 555 415 879
FY99
33 304 7 581 429 881
FY00
30 225 15 700 429 935
F Y0 1 Y01
25 222 14 812 412 917
FY02 FY03 FY04e

27 176 11 794 411 788 26 187 12 684 417 812 30 181 12 625 423 776
2,471 584 859 251 285 8,005 387 11 456 133 0 15,9 05 5,905
2,410 642 955 240 303 7,845 439 15 460 148 0 16,002
2,309 708 857 232 288 7,619 471 15 482 141 0 15,45 6 5,456
2,320 677 840 226 291 7,145 513 12 590 137 0 14,9 91 4,99
2,291 731 798 232 278 6,410 557 11 711 148 0 14,422
2,454 755 825 229 301 6,299 580 14 745
2,585 827 870 206 362 6,353 587 22 545
2,452 744 804 206 410 6,706 605 31 573
2,591 709 761 202 454 6,894 686 45 611
2,733 720 793 178 423 6,635 729 53 676
2,784 707 810 174 392 6,475 799 64 722
152 152 0 1 14,5 8 9 14,8 44 4,58 4,844
169 183 177 180 1 1 2 2 15, 103 15,344 15,25 7 15, 15 6 5,1 5,257 5,1
167
Table A7 Chuuk Employment by Industry: 1987-2004

Industry
Agriculture and Forestry Fisheries Mining and Quarrying Manufacturing Utilities Construction Wholesale and Retail; and Repair of Vehicles, Personal and Household Goods Hotels and Restaurants Transport, Storage and Communications Banking and Other Financial Services Real Estate and Other Business Services Public Administration and Other Government Services Education Health and Social Work Other Community, Social and Personal Services Foreign Government and Private Organizations Unclassified Total
FY87
0 18 45 67 0 134
FY88
0 23 35 88 0 91
FY89
0 27 54 101 0 120
FY90
0 20 55 141 0 84
F Y9 1 Y91
0 27 56 130 0 57
FY92
0 18 50 144 0 94
FY93
1 76 50 149 0 88
668 94 226 37 38 3,118 95 0 175 4 0 4,7 19 4,71
673 121 248 38 36 3,336 93 0 161 5 0 4,948
726 159 223 43 37 3,303 102 0 162 6 0 5,063
710 154 227 44 49 3,019 115 0 165 6 0 4,789
753 168 230 42 39 3,339 124 0 181 6 0 5, 152 5,1
797 187 269 44 32 2,943 142 0 185 5 0 4,9 10 4,91
816 217 302 42 26 3,276 132 0 201 5 0 5,38 1 5,381
168
Appendixes
FY94
2 100 46 139 0 70
FY95
2 67 37 111 0 70
FY96
0 27 14 94 44 56
FY97
0 14 8 83 88 44
FY98
0 13 9 60 85 63
FY99
0 32 5 61 95 63
FY00
0 20 13 55 99 125
F Y0 1 Y01
0 0 13 55 102 74
FY02 FY03 FY04e

0 0 10 49 105 58 0 1 10 41 104 64 0 3 10 30 104 69
874 199 288 36 28 3,308 127 2 191 6 0 5,4 16 5,41
791 252 341 30 30 3,366 149 2 209 6 0 5,463
680 293 278 23 28 3,155 151 3 192 6 0 5,044
625 262 300 20 30 2,875 143 3 223 4 0 4,722
597 255 279 20 31 2,505 150 3 282 6 0 4,358
631 271 298 21 26 2,359 143 4 339 5 0 4,353
704 335 291 22 32 2,403 143 5 225 6 1 4,479
750 269 239 21 36 2,623 140 8 221 7 1 4,559
825 248 210 22 32 2,733 144 13 241 8 1 4,699
902 254 208 24 34 2,415 140 14 250 11 1 4,473
946 258 206 26 35 2,332 142 20 264 14 1 4,460
169
Table A8 Kosrae Employment by Industry: 1987-2004

Industry
Agriculture and Forestry Fisheries Mining and Quarrying Manufacturing Utilities Construction Wholesale and Retail; and Repair of Vehicles, Personal & Household Goods Hotels and Restaurants Transport, Storage and Communications Banking and Other Financial Services Real Estate and Other Business Services Public Administration and Other Government Services Education Health and Social Work Other Community, Social and Personal Services Foreign Government and Private Organizations Unclassified Total
FY87
1 5 0 7 0 98
FY88
1 8 1 14 0 49
FY89
1 9 1 12 0 32
FY90
3 9 1 17 0 64
F Y9 1 Y91
4 10 0 24 0 67
FY92
1 7 0 38 0 33
FY93
1 2 0 38 0 39
112 4 50 4 20
130 12 60 4 18
146 17 46 4 15
161 20 38 3 18
172 23 38 3 15
191 39 43 2 17
189 41 49 3 23
915 0 0 19 1 1 1,23 7 ,237
906 0 0 19 1 0 1,223
877 0 0 18 1 0 1,179
888 0 0 15 1 0 1,238
888 0 0 19 1 0 1,26 4 ,264
904 0 0 14 1 0 1,29 0 ,290
881 0 0 26 1 0 1,293
170
Appendixes
FY94
1 37 0 30 7 38
FY95
1 87 0 23 27 34
FY96
1 87 0 25 29 39
FY97
1 62 0 32 33 56
FY98
1 68 0 30 33 80
FY99
1 62 1 28 32 99
FY00
1 27 0 29 35 122
F Y0 1 Y01
1 30 0 24 30 87
FY02 FY03 FY04e

1 0 0 33 32 78 1 0 0 31 33 111 1 0 0 29 34 90
185 34 56 2 24
182 46 30 1 44
190 55 34 0 53
187 61 33 0 49
200 52 30 0 49
215 55 34 0 48
228 44 62 0 53
236 42 51 0 43
240 47 42 0 42
295 47 41 1 40
274 48 48 3 43
881 8 0 27 1 0 1,33 1 ,331
799 14 0 36 1 0 1,325
824 0 0 27 1 0 1,365
804 0 0 18 2 0 1,338
701 0 0 20 3 0 1,26 7 ,267
672 0 0 18 3 0 1,26 8 ,268
680 0 0 23 3 0 1,30 7 ,307
670 0 0 44 3 0 1,26 1 ,261
695 0 0 49 3 0 1,262
704 0 0 55 3 0 1,362
697 0 0 55 2 0 1,324
171
Table A9 Pohnpei Employment by Industry: 1987-2004

Industry
Agriculture and Forestry Fisheries Mining and Quarrying Manufacturing Utilities Construction Wholesale and Retail; and Repair of Vehicles, Personal & Household Goods Hotels and Restaurants Transport, Storage and Communications Banking and Other Financial Services Real Estate and Other Business Services Public Administration and Other Government Services Education Health and Social Work Other Community, Social and Personal Services Foreign Government and Private Organizations Unclassified Total
FY87
10 0 7 38 2 430
FY88
9 0 8 66 9 618
FY89
9 3 5 54 8 602
FY90
9 4 4 60 8 684
F Y9 1 Y91
11 7 4 63 11 622
FY92
25 18 4 77 32 704
FY93
39 60 2 76 124 868
549 137 166 83 150
644 144 198 126 158
755 147 318 141 157
840 175 401 161 162
901 199 390 177 173
964 216 455 188 206
1,053 224 450 203 217
2,369 267 1 390 63 0 4,662
2,452 337 1 379 59 0 5,208
2,637 213 1 254 63 0 5,367
2,659 216 2 252 40 0 5,677
2,693 238 6 304 47 0 5,846
2,751 245 9 297 82 7 6,280
2,656 241 9 261 106 0 6,589
172
Appendixes
FY94
32 175 2 76 194 799
FY95
28 328 2 77 200 713
FY96
25 257 3 78 199 559
FY97
30 223 3 71 199 488
FY98
30 212 3 63 207 494
FY99
26 174 2 52 205 524
FY00
25 124 1 51 194 488
F Y0 1 Y01
20 140 1 44 186 555
FY02 FY03 FY04e

21 140 1 64 180 422 21 145 2 45 181 366 26 139 2 39 183 381
1,061 237 480 200 194
1,075 228 549 198 193
1,066 230 513 197 171
1,066 218 472 195 173
1,069 233 455 200 154
1,134 206 461 196 143
1,173 203 475 181 160
1,068 221 465 185 193
1,137 227 467 180 238
1,152 230 495 153 226
1,178 215 501 145 228
2,562 236 10 200 126 0 6,584
2,545 262 13 160 141 0 6,7 12 6,71
2,515 306 12 193 134 0 6,458
2,430 356 9 242 131 0 6,306
2,226 401 8 292 139 0 6, 186 6,1
2,372 435 10 272 143 0 6,355
2,363 442 15 209 142 0 6,246
2,433 463 20 209 160 0 6,363
2,486 539 30 234 172 0 6,538
2,508 586 37 238 164 0 6,549
2,445 654 42 255 164 0 6,597
173
Table A10 Yap Employment by Industry: 1987-2004

Industry
Agriculture and Forestry Fisheries Mining and Quarrying Manufacturing Utilities Construction Wholesale & Retail; and Repair of Vehicles, Personal & Household Goods Hotels and Restaurants Transport, Storage and Communications Banking and Other Financial Services Real Estate and Other Business Services Public Administration and Other Government Services Education Health and Social Work Other Community, Social and Personal Services Foreign Government and Private Organizations Unclassified Total
FY87
0 34 0 5 0 157
FY88
0 44 0 13 2 186
FY89
0 46 0 198 2 175
FY90
0 60 0 259 2 309
F Y9 1 Y91
1 64 0 269 2 309
FY92
2 83 0 378 2 349
FY93
8 114 0 408 2 262
215 43 27 12 17
238 44 33 12 20
243 46 24 12 22
235 52 25 12 29
269 44 21 13 30
283 54 22 14 38
304 63 26 14 45
1,044 0 0 36 2 0 1,5 92 ,592
1,092 3 0 36 3 0 1,726
1,082 6 0 39 2 0 1,8 97 ,89
1,079 8 0 30 2 0 2, 102 2,1
1,053 7 0 31 2 0 2,115
1,073 12 0 31 2 0 2,343
1,173 14 0 38 0 1 2,472
174
Appendixes
FY94
9 158 0 367 2 178
FY95
9 151 0 398 2 177
FY96
7 123 0 424 21 224
FY97
7 122 0 386 83 208
FY98
7 62 0 402 90 242
FY99
6 36 0 440 97 195
FY00
4 54 0 565 101 201
F Y0 1 Y01
4 52 0 689 95 201
FY02 FY03 FY04e

5 35 0 648 94 230 4 41 0 567 98 272 3 39 0 527 102 236
351 113 34 13 40
362 116 34 11 37
374 129 32 11 36
441 135 34 11 39
424 191 33 12 44
474 223 33 12 84
481 244 41 3 118
398 212 49 0 138
389 186 42 0 141
385 189 49 0 123
386 186 56 0 86
1,255 16 0 39 0 0 2,575
1,134 14 0 55 0 0 2,500
1,125 14 0 70 0 0 2,590
1,036 14 0 107 0 0 2,623
978 7 0 116 0 0 2,608
895 2 0 116 0 0 2,6 13 2,61
906 2 2 88 0 0 2,8 10 2,81
981 2 2 98 0 0 2,92 1 2,921
980 3 2 88 0 0 2,843
1,007 3 2 134 0 1 2,875
1,000 3 2 147 0 1 2,774
175
Table A11 FSM Employment by Institutional Sector: 1987-2004

FY87
Private Sector Public Enterprise Financial Institutions National Government State Government Municipalities Non-Profits
Total
FY88
3,916 250 161 556 6,307 797 1118
FY89
4,378 280 177 591 6,362 823 894
13,505
FY90
4,909 291 198 634 6,173 751 847
13,803
F Y9 1 Y91
5,046 306 215 651 6,433 778 951
14,380
FY92
5,655 351 230 681 6,033 819 1052
14,821
FY93
6,148 484 245 722 6,291 851 988
15,729
3,492 202 137 515 6,050 775 1038
12,209 13,105
Source: FSM Department of Economic Affairs. Note: e- data are estimates.
Table A12 Chuuk Employment by Institutional Sector: 1987-2004

FY87
Private Sector Public Enterprise Financial Institutions National Government State Government Municipalities Non-Profits Total 1,304 10 37 0 2,663 365 339 4,718
FY88
1,325 10 38 0 2,866 373 337 4,949
FY89
1,460 13 43 0 2,755 457 333 5,061
FY90
1,457 14 44 0 2,569 397 306 4,787
F Y9 1 Y91
1,491 14 42 0 2,825 443 337 5,152
FY92
1,612 16 44 1 2,416 421 400 4,910
FY93
1,750 15 42 1 2,735 453 383 5,379
Table A13 Kosrae Employment by Institutional Sector: 1987-2004

FY87
Private Sector Public Enterprise Financial Institutions National Government State Government Municipalities Non-Profits Total 309 0 4 2 861 52 9 1,237
FY88
302 0 4 3 861 42 10 1,222
FY89
286 0 4 3 826 48 12 1,179
FY90
334 0 3 4 848 36 12 1,237
F Y9 1 Y91
357 0 3 5 851 32 17 1,265
FY92
366 0 2 4 863 36 18 1,289
FY93
394 0 3 4 838 39 14 1,292
176
Appendixes
FY94
6,149 719 236 730 6,244 877 949
15,904
FY95
6,141 949 227 712 6,094 878 1002
16,003
FY96
5,770 976 220 684 5,918 824 1064
15,456
FY97
5,567 1,038 217 694 5,497 763 1,214
14,990
FY98
5,551 1,021 224 683 4,935 619 1,388
14,421
FY99
5,832 965 222 835 4,659 634 1,441
FY00
6,366 892 200 801 4,695 678 1,210
F Y0 1 Y01
6,281 867 200 845 4,918 741 1,251
FY02 FY03 FY04e

6,250 849 195 837 5,075 787 1,351 6,379 847 170 861 4,777 768 1,455 6388 825 162 788 4697 766 1530
14,588 14,842 15,103 15,344 15,257 15,156
FY94
1,786 15 36 0 2,747 457 374 5,415
FY95
1,756 14 30 0 2,830 433 402 5,465
FY96
1,520 56 23 0 2,676 340 429 5,044
FY97
1,403 101 20 0 2,473 268 458 4,723
FY98
1,355 88 20 0 2,251 134 511 4,359
FY99
1,438 95 21 0 2,120 117 563 4,354
FY00
1,666 98 22 0 2,142 115 434 4,477
F Y0 1 Y01
1,554 98 21 0 2,374 86 425 4,558
FY02 FY03 FY04e

1,557 99 22 0 2,464 99 458 4,699 1,644 1722 96 90 22 22 0 0 2,136 2062 100 88 476 476 4,474 4,460
FY94
389 41 2 4 836 40 19 1,331
FY95
392 101 1 4 756 39 32 1,325
FY96
424 107 0 5 783 37 9 1,365
FY97
424 105 0 5 763 36 6 1,339
FY98
419 137 0 5 659 36 10 1,266
FY99
453 130 0 5 633 34 13 1,268
FY00
521 94 0 6 639 36 13 1,309
F Y0 1 Y01
517 67 0 6 629 35 8 1,262
FY02 FY03 FY04e

494 70 0 6 651 37 5 1,263 578 544 73 71 1 3 6 6 661 654 37 42 5 5 1,361 1,325
177
Table A14 Pohnpei Employment by Institutional Sector: 1987-2004

FY87
Private Sector Public Enterprise Financial Institutions National Government State Government Municipalities Non-Profits Total
FY88
FY89
1,929 206 118 588 1,736 280 508 5,365
FY90
2,212 206 139 630 1,718 278 493 5,676
F Y9 1 Y91
2,258 220 157 646 1,739 268 559 5,847
FY92
2,562 244 170 677 1,763 279 584 6,279
FY93
2,879 368 186 718 1,639 265 535 6,590
1,436 1,768 141 179 83 107 513 553 1,559 1,557 282 313 648 732 4,662 5,209
Source: FSM Department of Economic Affairs. Note: e - data are estimates.
Table 15 Yap Employment by Institutional Sector: 1987-2004

FY87
Private Sector Public Enterprise Financial Institutions National Government State Government Municipalities Non-Profits Total 443 51 12 0 967 77 42 1,592
FY88
521 62 12 0 1,023 69 39 1,726
FY89
703 60 12 0 1045 37 41 1,898
FY90
906 70 12 0 1,038 41 36 2,103
F Y9 1 Y91
940 71 13 0 1018 35 38 2,115
FY92
1,115 91 14 0 991 82 50 2,343
FY93
1,125 102 14 0 1,079 94 57 2,471
178
Appendixes
FY94
2,835 553 185 726 1,516 269 498 6,582
FY95
2,844 691 185 708 1,510 270 506 6,714
FY96
2,591 661 186 679 1,455 327 560 6,459
FY97
2,442 655 185 689 1,346 338 649 6,304
FY98
2,423 641 192 678 1,176 319 757 6,186
FY99
2,496 586 189 830 1,140 353 761 6,355
FY00
2,528 520 176 796 1,169 367 693 6,249
F Y0 1 Y01
2,518 534 179 839 1,179 385 728 6,362
FY02 FY03 FY04e

2,545 538 174 831 1,215 424 813 6,540 2,543 2613 537 518 147 137 855 782 1,207 1215 405 410 855 922 6,549 6,597
FY94
1,138 112 13 0 1,144 111 57 2,575
FY95
1,150 143 11 0 999 136 62 2,501
FY96
1,236 151 11 0 1,004 121 66 2,589
FY97
1,298 177 11 0 915 120 101 2,622
FY98
1,353 155 12 0 849 129 110 2,608
FY99
1,446 155 12 0 766 130 104 2,613
FY00
1,651 179 3 0 746 160 70 2,809
F Y0 1 Y01
1,692 167 0 0 737 234 91 2,921
FY02 FY03 FY04e

1,654 141 0 0 745 227 76 2,843 1,614 1509 142 146 0 0 0 0 773 767 226 226 120 127 2,875 2,775
179
Table A16 FSM Nominal Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in US $)
FY87
FY88
FY89
3,037 5,865 8,879 10,519 5,646 2,330 3,920 4,744
FY90
3,306 6,470 9,693 11,348 6,108 2,567 4,114 5,090
F Y9 1 Y91
3,490 6,989 10,129 11,667 6,547 2,727 4,232 5,409
FY92
3,843 7,941 10,858 12,553 6,848 2,863 4,532 5,667
FY93
3,914 8,099 11,437 13,092 7,448 3,056 4,962 6,014
2,991 3,190 5,593 5,222 7,846 8,793 11,376 11,461 5,619 5,668 2,004 2,266 3,440 3,408 4,720 4,804
Table A17 Chuuk Nominal Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in US $)
FY87
FY88
FY89
2,445 3301 8104 5,304 1347 2403 3,950
FY90
2,524 3947 11033 5,686 1590 2219 4,206
F Y9 1 Y91
2,709 4445 9965 6,244 1507 2876 4,619
FY92
2,826 5518 12220 1920 6,435 1543 3080 4,604
FY93
2,921 5263 11371 1920 6,613 1729 3145 4,786
2,365 2,377 3671 3717 5986 6828 5,304 4,870 1470 1508 2551 2227 4,000 3,782
180
Appendixes
FY94
3,918 7,935 12,518 13,810 7,480 3,187 5,393 6,128
FY95
3,808 7,663 12,364 14,682 8,095 3,265 5,676 6,361
FY96
3,938 8,163 12,829 14,711 8,182 3,459 5,786 6,552
FY97
3,941 8,532 13,091 14,651 7,613 3,821 5,573 6,360
FY98
3,990 8,997 13,385 13,768 7,661 4,356 5,433 6,365
FY99
4,054 9,764 14,407 12,896 7,620 4,584 5,521 6,402
FY00
4,091 10,491 16,043 11,785 7,850 4,926 7,148 6,528
F Y0 1 Y01
4,287 11,014 16,040 11,892 7,954 5,074 7,534 6,756
FY02 FY03 FY04e

4,315 10,815 15,481 12,304 8,151 4,843 8,088 6,881 4,408 10,960 16,630 12,100 8,482 4,940 7,939 6,981 4,414 10,815 14,493 12,787 8,365 5,200 8,003 6,932
FY94
2,973 5458 12274 6,399 1714 3165 4,686
FY95
3,059 5,503 12333 7,173 1848 3221 5,162
FY96
3,053 6,615 14938 7,093 1611 3358 5,219
FY97
2,961 7,175 13589 6,106 1818 3,308 4,712
FY98
3,029 8,435 13235 6,054 2146 3,241 4,745
FY99
3,107 10,284 14590 5,970 2836 2,972 4,688
FY00
3,282 10919 16054 6,599 2393 3,780 5,123
F Y0 1 Y01
FY02 FY03 FY04e

3,649 3526 10397 9408 12110 12466 7,469 7223 1466 1746 4,214 4497 5,669 5,467
3,391 3,523 10774 10153 16159 13462 7,007 6,974 1890 1710 3,967 4,384 5,518 5,564
181
Table A18 Kosrae Nominal Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in US $)
FY87
FY88
FY89
2,282 6,348 3,914 5,330 2,231 3,669 4,446
FY90
2,615 6,404 3,438 5,249 2,830 3,331 4,446
F Y9 1 Y91
2,622 5,271 3,162 5,569 3,464 2,619 4,634
FY92
2,815 5,550 3,416 5,873 3,823 2,946 4,899
FY93
2,735 6,590 3,285 6,511 4,100 2,592 5,235
2,753 2,475 6,259 6,247 4,660 4,128 4,326 4,919 2,473 2,944 5,088 4,175 3,868 4,244
Table A19 Pohnpei Nominal Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in US $)
FY87
FY88
FY89
3,620 6,822 9,323 10,555 6,388 3,477 5,062 5,653
FY90
3,891 7,721 9,439 11,402 7,411 3,542 5,269 6,167
F Y9 1 Y91
4,106 8,256 10,354 11,728 7,826 4,263 5,216 6,492
FY92
4,437 9,711 10,724 12,616 8,265 4,305 5,756 6,885
FY93
4,771 9,255 11,669 13,159 10,258 4,811 6,566 7,642
3,432 3,770 6,301 5,791 9,107 9,700 11,401 11,500 7,048 7,452 1,985 2,686 3,884 3,947 5,681 5,843
182
Appendixes
FY94
3,088 4,831 5,855 3,167 6,446 3,977 2,252 5,270
FY95
3,007 6,159 4,259 3,061 7,236 3,876 3,244 5,693
FY96
3,216 5,600 2,964 7,317 4,587 3,200 5,792
FY97
3,128 7,880 2,876 7,431 4,322 2,095 5,981
FY98
3,279 7,936 2,795 6,715 4,254 2,097 5,588
FY99
3,223 8,936 2,720 7,248 4,476 1,894 5,834
FY00
3,169 10,926 2,652 7,474 4,538 1,807 5,849
F Y0 1 Y01
3,466 11,700 2,588 7,669 4,662 2,629 6,021
FY02 FY03 FY04e

3,552 10,881 2,529 9,004 4,039 3,475 6,779 3,596 3,602 9,542 9,464 1,651 2,086 2,508 2,508 8,456 8,369 4,270 4,040 4,334 5,093 6,292 6,280
FY94
4,536 9,005 12,828 13,872 11,099 5,144 7,502 7,935
FY95
4,454 8,548 12,509 14,755 11,151 5,093 8,147 7,994
FY96
4,782 9,460 12,686 14,792 11,526 4,835 8,047 8,346
FY97
4,723 9,679 13,145 14,734 10,902 4,710 7,790 8,215
FY98
4,606 10,099 13,527 13,850 11,767 4,823 7,549 8,198
FY99
FY00
F Y0 1 Y01
FY02 FY03 FY04e

5,102 12,122 17,372 12,168 11,540 5,329 10,580 8,791 5,111 11,947 15,090 12,867 11,463 5,522 10,360 8,703
4,836 4,925 5,142 5,019 10,785 11,995 12,574 11,866 14,551 16,098 16,026 15,735 12,961 11,849 11,956 12,374 11,270 11,081 10,888 10,974 4,712 5,242 5,262 5,027 8,057 9,861 10,232 10,501 8,268 8,427 8,624 8,590
183
Table A20 Yap Nominal Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in US $)
FY87
FY88
FY89
2,972 3,157 8,103 5,565 5,908 2,138 4,478
FY90
3,392 3,333 8,527 5,701 5,196 2,250 4,575
F Y9 1 Y91
3,582 3,595 9,024 6,018 5,766 2,526 4,805
FY92
4,284 3,628 9,051 6,188 4,305 2,425 5,053
FY93
3,678 4,338 9,528 6,024 4,086 2,693 4,756
3,569 3,708 4,018 3,808 5,439 7,733 5,335 5,817 4,288 4,054 3,421 3,311 4,701 4,995
Table A21 FSM Real Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in 1998 US $)
FY87
FY88
FY89
4,023 7,770 11,762 13,934 7,479 3,087 5,193 6,285
FY90
4,172 8,163 12,230 14,318 7,707 3,239 5,064 6,422
F Y9 1 Y91
4,193 8,395 12,166 14,014 7,863 3,275 5,083 6,497
FY92
4,481 9,259 12,661 14,637 7,985 3,338 5,284 6,608
FY93
4,429 9,165 12,942 14,815 8,429 3,459 5,615 6,806
4,322 4,427 8,081 7,246 11,337 12,202 16,437 15,904 8,119 7,865 2,895 3,144 4,971 4,730 6,820 6,666
184
Appendixes
FY94
4,148 4,091 9,913 6,038 4,237 2,660 4,986
FY95
3,623 4,647 10,458 6,740 3,972 2,699 4,954
FY96
3,718 4,881 10,875 6,912 4,598 2,728 5,071
FY97
3,795 5,452 11,298 6,998 5,634 1,769 5,064
FY98
4,071 5,705 11,296 6,971 5,522 1,342 5,101
FY99
FY00
F Y0 1 Y01
4,087 5,904 6,554 5,993 3,020 4,933
FY02 FY03 FY04e

4,206 7,240 6,696 5,996 4,888 5,170 4,378 4,513 7,666 8,319 6,528 6,525 5,899 6,177 4,010 4,148 5,222 5,388
3,906 3,921 6,276 5,659 11,713 12,445 7,060 6,702 5,848 6,106 1,228 2,218 4,995 4,861
FY94
4,321 8,750 13,804 15,229 8,249 3,515 5,947 6,758
FY95
4,084 8,219 13,262 15,748 8,683 3,502 6,088 6,823
FY96
4,156 8,518 13,387 15,350 8,538 3,609 6,037 6,836
FY97
4,005 8,672 13,305 14,890 7,737 3,883 5,663 6,464
FY98
3,990 8,997 13,385 13,768 7,661 4,356 5,433 6,365
FY99
FY00
F Y0 1 Y01
FY02 FY03 FY04e
3,978 3,890 3,949 3,915 3,882 3,823 9,580 9,976 10,147 9,811 9,654 9,367 14,136 15,256 14,777 14,044 14,647 12,554 12,653 11,207 10,956 11,162 10,657 11,076 7,477 7,465 7,328 7,395 7,470 7,246 4,498 4,684 4,674 4,394 4,351 4,504 5,417 6,798 6,941 7,337 6,992 6,932 6,282 6,208 6,224 6,242 6,148 6,004
185
Table A22 Chuuk Real Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in 1998 US $)
FY87
FY88
FY89
3,239 4373 10736 7,026 1784 3183 5,233
FY90
3,184 4980 13921 7,174 2006 2800 5,307
F Y9 1 Y91
3,254 5339 11970 7,500 1810 3455 5,548
FY92
3,296 6434 14248 2239 7,503 1799 3591 5,369
FY93
3,306 5956 12868 2173 7,483 1957 3559 5,416
3,417 3,298 5305 5158 8650 9475 7,664 6,759 2124 2092 3686 3090 5,779 5,248
Table A23 Kosrae Real Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in 1998 US $)
FY87
FY88
FY89
3,023 8,408 5,185 7,061 2,955 4,860 5,889
FY90
3,299 8,080 4,337 6,623 3,570 4,202 5,609
F Y9 1 Y91
3,150 6,331 3,797 6,689 4,161 3,146 5,567
FY92
3,282 6,471 3,983 6,848 4,457 3,435 5,712
FY93
3,095 7,458 3,717 7,369 4,640 2,933 5,924
3,977 3,434 9,043 8,669 6,734 5,729 6,250 6,826 3,573 4,085 7,352 5,794 5,588 5,889
186
Appendixes
FY94
3,278 6,019 13,535 7,056 1,890 3,490 5,167
FY95
3,281 5,903 13,228 7,694 1,983 3,455 5,537
FY96
3,185 6,902 15,587 7,401 1,681 3,503 5,446
FY97
3,009 7,292 13,811 6,206 1,848 3,362 4,789
FY98
3,029 8,435 13,235 6,054 2,146 3,241 4,745
FY99
3,049 10,091 14,316 5,858 2,783 2,916 4,600
FY00
3,121 10,383 15,266 6,275 2,276 3,594 4,872
F Y0 1 Y01
3,124 9,926 14,887 6,455 1,741 3,654 5,084
FY02 FY03 FY04e

3,196 9,211 12,213 6,326 1,552 3,977 5,048 3,214 3,054 9,158 8,149 10,666 10,798 6,578 6,257 1,291 1,513 3,712 3,896 4,993 4,735
FY94
3,406 5,237 6,456 3,492 7,108 4,386 2,483 5,811
FY95
3,225 6,606 4,568 3,283 7,761 4,158 3,479 6,106
FY96
3,356 5,843 3,093 7,635 4,786 3,339 6,044
FY97
3,179 8,009 2,923 7,553 4,393 2,129 6,078
FY98
3,279 7,936 2,795 6,715 4,254 2,097 5,588
FY99
3,162 8,768 2,669 7,112 4,391 1,859 5,724
FY00
3,013 10,390 2,522 7,107 4,315 1,719 5,562
F Y0 1 Y01
3,193 10,779 2,384 7,065 4,295 2,422 5,547
FY02 FY03 FY04e

3,223 9,871 2,294 8,168 3,664 3,153 6,150 3,167 3,120 8,404 8,198 1,454 1,806 2,209 2,173 7,448 7,249 3,760 3,500 3,818 4,411 5,542 5,439
187
Table A24 Pohnpei Real Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in 1998 US $)
FY87
FY88
FY89
4,796 9,036 12,351 13,981 8,462 4,606 6,706 7,489
FY90
4,909 9,742 11,909 14,386 9,351 4,470 6,648 7,782
F Y9 1 Y91
4,932 9,916 12,436 14,087 9,400 5,120 6,265 7,797
FY92
5,174 11,323 12,504 14,711 9,636 5,019 6,711 8,028
FY93
5,399 10,474 13,206 14,891 11,609 5,444 7,431 8,648
4,959 5,231 9,104 8,037 13,159 13,461 16,474 15,959 10,184 10,341 2,868 3,727 5,612 5,478 8,208 8,108
Table A25 Yap Real Wage Rates by Institutional Sector: 1987-2004 (Annual Wage Rates in 1998 US $)
FY87 Private Sector Public Enterprise Financial Institutions National Government State Government Municipalities Non-Profits Total FY88 FY89 3,936 4,182 10,734 7,372 7,826 2,832 5,931 FY90 4,280 4,205 10,759 7,193 6,555 2,839 5,772 F Y9 1 Y91 4,302 4,317 10,839 7,229 6,926 3,034 5,772 FY92 4,995 4,230 10,553 7,216 5,019 2,828 5,891 FY93 4,162 4,909 10,782 6,818 4,624 3,048 5,382
5,158 5,145 5,806 5,285 7,859 10,731 7,708 8,072 6,196 5,625 4,942 4,595 6,792 6,931
188
Appendixes
FY94
5,002 9,930 14,146 15,297 12,239 5,673 8,272 8,750
FY95
4,778 9,169 13,417 15,826 11,961 5,463 8,738 8,574
FY96
4,989 9,871 13,237 15,435 12,027 5,045 8,396 8,709
FY97
4,800 9,837 13,360 14,975 11,080 4,787 7,917 8,349
FY98
4,606 10,099 13,527 13,850 11,767 4,823 7,549 8,198
FY99
FY00
F Y0 1 Y01
FY02 FY03 FY04e

4,494 10,677 15,301 10,717 10,164 4,694 9,319 7,743 4,427 10,348 13,071 11,145 9,929 4,783 8,973 7,539
4,745 4,683 10,582 11,406 14,277 15,309 12,717 11,268 11,058 10,538 4,623 4,985 7,905 9,378 8,113 8,014
4,737 4,553 11,584 10,765 14,764 14,275 11,015 11,226 10,031 9,956 4,848 4,560 9,426 9,526 7,946 7,793
FY94 4,574 4,511 10,931 6,658 4,672 2,934 5,498
FY95 3,887 4,984 11,218 7,230 4,261 2,895 5,313
FY96 3,879 5,093 11,347 7,212 4,798 2,847 5,291
FY97 3,857 5,541 11,482 7,113 5,726 1,798 5,146
FY98 4,071 5,705 11,296 6,971 5,522 1,342 5,101
FY99
FY00
F Y0 1 Y01 3,765 5,439 6,038 5,522 2,782 4,545
FY02 3,816 6,568 6,074 5,440 4,435 4,691
FY03
FY04e
3,832 3,729 6,158 5,382 11,493 11,834 6,927 6,374 5,738 5,807 1,205 2,109 4,901 4,623
3,856 3,909 6,752 7,206 5,750 5,652 5,196 5,350 3,532 3,592 4,600 4,667
189
Table A26 FSM Balance of Payments: Fiscal 1994-2004 FY95 FY96 FY97 FY98 FY99 FY00 (in millions of U.S. $) -76.6 15.5 -92.1 -11.1 -30.4 15.4 13.9 1.1 0.3 -45.7 -16.2 -9.8 -4.9 -14.8 21.3 29.6 15.9 15.0 14.1 1.1 0.5 -47.4 -18.0 -10.8 -5.4 -13.3 18.8 26.6 14.1 12.4 1.8 0.3 -45.9 -19.5 -11.0 -5.5 -10.0 8.6 15.0 12.0 2.8 2.1 0.1 -47.0 -17.7 -11.1 -5.5 -12.7 10.4 16.1 11.2 4.9 -82.7 19.0 -101.7 -13.7 -28.8 18.6 17.0 -88.1 22.4 -110.5 -15.9 -29.1 16.8 14.7 -76.8 23.8 -100.6 -12.5 -28.0 19.0 16.9 -100.7 21.6 -122.3 -11.0 -30.5 18.8 16.8 1.9 0.1 -49.3 -21.6 -11.6 -5.7 -10.4 12.9 16.1 13.5 6.1 FY0 1 Y01 FY02 FY03 FY04
FY94
-85.1 12.1 -97.2 -12.2 -27.2 14.8 13.7 0.8 1.4 -36.4 -15.7 -9.6 -4.9 -6.3 23.5 35.0 21.5 14.1 14.1 15.2 1.0 2.3 -43.2 -17.5 -9.6 -4.7 -11.3 23.2 34.6 20.5 0.8 1.1 -49.5 -16.7 -12.8 -4.9 -15.1 19.6 29.3 14.4 1.1 0.1 -49.6 -16.7 -9.9 -4.9 -18.0 18.0 28.6 13.5
-67.0 22.0 -89.0 -11.6 -18.5 17.9 15.7
-79.7 19.6 -99.3 -13.4 -23.3 19.9 16.6
-78.7 15.8 -94.5 -11.3 -31.8 17.7 15.8
-76.9 18.0 -94.9 -10.9 -35.2 14.4 13.2
-113.8 19.6 -133.4 -17.3 -30.9 19.9 17.9 1.9 0.1 -50.8 -23.5 -11.3 -5.5 -10.3 14.0 17.1 11.8 8.8
190
Trade balance Exports, f.o.b. Imports, f.o.b. 1/ Petroleum products Services account Receipts Travel Communications (net) Other Payments Freight and insurance Transportation Travel Other Income, net Receipts Fishing rights fees Interest dividend income
0.7 0.4 -42.1 -17.1 -8.2 -4.6 -12.1 20.7 21.3 21.3
11.8
Table A26 (continued) FSM Balance of Payments: Fiscal 1994-2004 FY95 FY96 FY97 FY98 FY99 FY00 (in millions of US $) -8.7 -2.5 -4.6 -7.7 -2.7 -3.7 -6.2 -2.8 -2.0 -5.7 -2.6 -1.7 -6.8 -3.7 -1.6 FY0 1 Y01 FY02 FY03 FY04
FY94
-12.4 -1.6 -9.5
-12.1 -2.0 -8.7
-11.4 -2.0 -7.7
-9.9 -1.7 -6.7
-10.5 -3.4 -5.5
-6.6 -3.6 -1.6
191
98.0 1.1 3.4 -2.2 96.9 61.4 35.5 35.4 17.6 34.5 29.4 5.1 5.4 6.3 29.8 30.2 24.0 4.3 13.4 35.2 35.2 36.5 23.6 28.3 18.9 -5.7 -5.1 4.7 18.3 29.0 24.5 4.5 0.7 13.0 29.9 24.5 5.5 -11.9 20.0 31.0 24.6 6.4
97.4 1.2 3.5 -2.3 96.2 62.1 34.1
98.7 1.4 3.7 -2.3 97.3 62.8 34.5
85.1 1.7 4.0 -2.2 83.4 53.6 29.8
89.1 1.9 4.2 -2.2 87.1 54.4 32.7
90.3 2.2 4.4 -2.2 88.1 54.4 33.7
93.4 2.2 4.6 -2.5 91.2 54.7 36.5
96.7 2.3 4.7 -2.5 94.4 55.3 39.1
110.6 2.3 4.8 -2.5 108.2 65.9 42.3 16.2 36.6 37.4 31.8 5.6
122.3 2.3 4.9 -2.6 120.0 66.6 53.4 3.9 21.4 37.5 32.2 5.2
106.8 2.4 5.0 -2.6 104.3 58.9 45.4 -23.9 5.2 5.2 0.0 5.2
6.5
30.0 37.6
Payments Interest payments Dividends Unrequited transfers Private Inflows Outflows Official Compact funds Other Current Account Balance Capital and Financial Account C apital T ransfers Transfers Capital Transfers, Official Capital Transfers, in-kind
28.8
Appendixes
8.8
Table A26 (continued) FSM Balance of Payments: Fiscal 1994-2004 FY95 FY96 FY97 FY98 FY99 FY00 (in millions of U.S. $) FY0 1 Y01 FY02 FY03 FY04
FY94
1.9 -9.5 2.2
-7.4 -9.5 0.3
-6.2 -15.6 0.8
2.9 -4.2 11.7
-1.3 -3.4 11.8
0.2 -10.9 3.8
0.1 -17.0 2.2
-2.1 -8.9 0.0
-0.8 0.0 0.0
-16.0 0.0 0.0
0.0 0.0 0.0
192
Short term, net Medium term, net Inflows Medium-term notes (MTN) Other borrowing Outflows MTN amortization Other amortization Overall balance 2/ Errors and omissions
0.0 0.3 -9.8 -9.2 -0.6 53.0 51.9 0.0 0.8 -16.4 -15.8 -0.6 32.3 42.1 0.0 11.7 -15.9 -8.3 -7.6 29.5 9.7 0.0 11.8 -15.2 -11.3 -3.9 18.5 27.9 0.0 3.8 -14.7 -11.0 -3.7 23.0 23.1 0.0 2.2 -19.2 -18.5 -0.7 13.7 31.6 0.0 0.0 -8.9 -8.2 -0.7 8.1 45.8 0.0 0.0 0.0 0.0 0.0 52.8 28.8
0.0 2.2 -11.7 -8.6 -3.1 36.4 -55.7
0.0 0.0 0.0 0.0 0.0 25.3 25.3
0.0 0.0 0.0 0.0 0.0 -18.7
Source: FSM Department of Economic Affairs, Statistics Division. 1/ Based on import tax collections FY94-FY99, thereafter actual imports 2/ Includes changes in FSM reserves, valuation changes, errors and omissions
Table A27 FSM External Debt (in US $ millions)

FY94 2.2 138.8 11.7 9.4 127.1 64 79 0.3 127.4 9.8 8.7 117.6 56 46 0.8 118.4 16.4 7.7 102.0 50 61 11.7 113.7 15.9 6.7 97.8 50 67 11.8 109.6 15.2 5.6 94.4 47 64 3.8 98.2 14.7 4.7 83.5 42 63 2.2 85.7 19.1 3.8 66.6 30 61 0.0 66.6 8.8 2.1 57.8 26 28 0.0 57.8 0.6 1.7 57.2 26 5.5 FY95 FY96 FY97 FY98 FY99 FY00 F Y0 1 Y01 FY02 FY03 FY04 2.0 59.2 0.6 1.7 58.5 25 8.2 1.1 59.6 0.7 1.7 58.9 26 6.5
E x ternal Debt T otal Total 19.3 128.7 11.7 7.7 117.0 68 28.6 145.6 9.0 9.1 136.6 72
FY90
F Y9 1 FY92 FY93 Y91
19.9 19.9 0.0 0.0 19.9 14
91.9 111.7 2.3 2.2 109.4 68
193
19.9 19.9 0.0 0.0 19.9 31% 172.5 190.0 198.5 26.9 0.3 208.2 39.9 35% 17% 32% 1.1 203.8 39.5 41% 38% 35% 32% 29% 40% 12.8 196.9 33.6 27% 31% 24.6 199.7 32.4
20.9 40.7 2.3 1.9 38.4
19.3 57.7 4.9 2.9 52.8
28.6 81.4 3.1 3.7 78.3
2.2 80.5 5.1 4.4 75.4
0.3 75.7 2.6 4.3 73.1
0.8 73.9 8.7 3.9 65.2
1.7 66.9 9.8 3.5 57.1
3.8 60.9 7.2 2.8 53.7
3.8 57.5 8.7 2.6 48.8 25% 36% 28.4 196.8 30.9
2.2 51.0 5.6 2.2 45.4 21% 21% 30.6 218.5 37.6
0.0 45.4 5.6 1.8 39.8 18% 19% 30.6 221.7 39.3
0.0 39.8 0.6 1.6 39.2 18% 5.1% 30.6 223.0 42.8
0.0 39.2 0.6 1.5 38.5 17% 7.5% 32.6 229.5 28.9
0.0 38.5 0.7 1.5 37.9 17% 5.9% 33.7 225.1 37.0
14%
24%
New Outstanding Amortization Interest Principal balance External Debt as % of GDP Debt Service as % of exports* External Debt Adjusted for Offsetting Assets** New Outstanding Amortization Interest Principal balance External Debt (adjusted) as % of GDP Debt Service (adjusted) as % of exports* Memorandum Items: Debt to ADB (all concessional) GDP (US $ millions) Export of Goods and Services
144.7
161.0
Appendixes
Source: FSM Department of Finance and Administration and EMPAT estimates. Notes: * export of goods and services ** Yap MTN (medium term notes), and three ADB loans all held/hold secured assets in offshore investments equal/greater than discounted value of debt.
Table A28 FSM International Visitor Arrivals by Nationality: FY1996-FY2004 FY97 FY98 FY99 FY00 FY0 1 Y01 FY02 FY03 FY04
Nationality
FY96
194
Asia Australia Canada Europe Japan New Zealand Other Pacific Islands Philippines USA 14,275 15,5 12 5,51 20,038 15,49 4 5,494 18,7 00 8,700 18,49 6 8,496
2,029 561 187 1,007 5,519 113 52 1,608 7,083
2,301 452 224 995 4,223 119 52 1,580 7,137
1,830 438 169 1,048 3,429 128 90 1,231 5,912
2,064 563 177 1,302 3,399 140 74 843 6,950
2,890 791 188 1,427 4,661 111 116 1,249 8,605
2,255 540 192 1,235 3,194 87 63 962 6,966
1,737 566 223 1,343 4,061 161 91 1,423 943 8,152
1,842 639 214 1,668 3,984 143 85 1,150 1,035 7,736
2,003 840 195 1,353 3,661 171 117 1,414 1,149 7,101 18,00 4 8,004
Total
18, 15 9 8,1
17,0 83 7,083
Source:FSM Department of Economic Affairs.
Table A29 Chuuk International Visitor Arrivals by Nationality: FY1996-FY2004 FY97 FY98 FY99 FY00 FY0 1 Y01 FY02 FY03 FY04
Nationality
FY96
195
Asia Australia Canada Europe Japan New Zealand Other Pacific Islands Philippines USA 5,578 4,094 5, 112 5,1 6,857 4,256 6,066 5,598
417 163 45 291 731 28 5 63 1,789
1,004 122 72 402 1,181 13 22 160 2,602
647 67 50 349 901 19 35 128 1,898
827 153 55 534 1,023 39 30 112 2,339
1,052 283 62 510 2,045 31 39 130 2,705
548 109 62 313 1,277 10 20 107 1,810
370 189 103 473 1,690 32 19 162 293 2,735
381 226 85 423 1,057 48 16 178 374 2,810
492 373 60 511 1,699 57 23 173 487 2,412 6,287
Total
3,532
Appendixes
Table A30 Kosrae International Visitor Arrivals by Nationality: FY1996-FY2004 FY97 FY98 FY99 FY00 FY0 1 Y01 FY02 FY03 FY04
Nationality
FY96
196
Asia Australia Canada Europe Japan New Zealand Other Pacific Islands Philippines USA 2,245 2,044 2, 142 2,1 3,697 2, 177 2,1 2,244 1,9 93 ,993
271 63 36 155 297 9 11 377 1,293
217 64 18 84 220 14 8 622 998
193 63 24 76 263 21 4 559 841
281 86 22 100 339 21 5 249 1,039
288 71 34 127 244 20 24 616 2,273
278 95 28 118 163 16 11 298 1,170
97 110 26 121 235 19 10 375 118 1,133
96 61 25 105 213 23 8 272 156 1,034
103 78 24 106 314 22 14 466 155 910 2, 192 2,1
Total
2,5 12 2,51
Table A31 Pohnpei International Visitor Arrivals by Nationality: FY1996-FY2004 FY97 FY98 FY99 FY00 FY0 1 Y01 FY02 FY03 FY04
Nationality
FY96
197
Asia Australia Canada Europe Japan New Zealand Other Pacific Islands Philippines USA 6,534 6,442 5,969 6,667 7,038 8,5 18 8,51 9, 137 9,1
1,181 497 96 417 3,701 83 12 880 3,171
663 302 47 293 2,428 73 21 489 2,218
1,008 374 51 334 1,853 105 52 481 2,184
988 366 60 280 1,565 68 16 363 2,263
1,289 506 71 317 1,496 58 37 453 2,440
1,276 359 67 331 1,727 55 36 375 2,812
1,022 361 65 269 1,802 105 47 877 486 3,484
1,161 335 85 544 2,375 87 51 622 598 3,279
1,316 394 85 354 1,488 136 58 683 763 2,929 8,206
Total
10,038
Appendixes
Table A32 Yap International Visitor Arrivals by Nationality: FY1996-FY2004 FY97 FY98 FY99 FY00 FY0 1 Y01 FY02 FY03 FY04
Nationality
FY96
198
Asia Australia Canada Europe Japan New Zealand Other Pacific Islands Philippines USA 5,089 4,003 4,405 5,0 13 5,01 4,722 4,328 4,8 61 4,86
660 77 89 423 1,208 29 33 299 2,111
614 97 99 412 997 25 24 448 2,373
463 57 68 428 745 26 9 225 1,982
442 72 82 533 837 40 26 235 2,138
745 71 70 665 867 22 42 190 2,341
647 69 67 624 699 18 21 195 2,382
411 88 65 589 707 37 33 159 143 2,096
540 143 81 810 741 27 19 175 203 2,122
433 126 77 566 483 15 37 192 258 2,080 4,267
Total
4,929
Table A33 FSM Commercial Banking Survey (in millions of US $) 19 9 4 Dec.31 126.3 128.7 75.8 5.4 4.1 4.2 5.5 4.6 4.2 4.4 127.8 75.8 123.8 78.4 135.8 83.8 134.2 80.6 137.0 81.2 138.6 82.2 128.3 83.5 5.2 19 9 5 Sept.30 19 9 6 Sept.30 19 9 7 Sept.30 19 9 8 Sept.30 19 9 9 Sept.30 2000 Sept.30 200 1 2001 Sept.30 2002 Sept.30 2003 Sept.30 137.1 107.7 3.1
19 9 3 Dec.31
129.1
199
TOTAL AS S E TS ASS Total Liquid Assets Cash & Due from Local banks Foreign Assets - Due from Banks Abroad Total Loans Commercial Loans Consumer Loans Other Assets 57.9 20.7 37.2 70.4 51.3 18.7 32.6 1.5 71.7 49.3 18.8 30.5 2.7 74.2 42.9 17.8 25.1 2.5 78.3 48.1 22.0 26.0 3.9 75.9 50.0 21.7 28.3 3.6 77.0 52.4 21.3 31.1 3.4 77.8 52.0 18.3 33.8 4.4
58.1 19.8 38.4
78.3 39.1 21.0 18.1 5.7
104.6 24.0 10.1 13.9 5.4
TOTAL LIAB I LIT IES LIABI LITI D C AP IT AL AN CAP APIT ITAL AND Total Deposits: Demand Savings Time Other Other Liabilities & Capital 126.3 113.6 24.8 40.4 48.3 12.7 12.3 15.5 14.5 128.7 116.3 23.7 36.0 56.6 127.8 112.3 22.1 30.5 59.7 123.8 109.3 21.6 31.6 56.1
129.1 116.7 21.0 52.6 43.1
135.8 120.0 25.9 37.9 56.3 15.8
Appendixes
12.5
134.2 119.1 23.3 41.0 54.7 0.1 15.1
137.0 120.8 24.2 36.1 60.5 0.1 16.1
138.6 128.3 137.1 121.7 112.0 119.8 24.2 25.5 28.1 42.8 44.7 60.2 54.5 41.7 31.4 0.2 0.1 0.1 17.0 16.3 17.3 continued on next page
Table A33 (continued) FSM Commercial Banking Survey (in millions of US $) 19 9 4 Dec.31 51 36 64 -3 0 5 -3 -16.1 -6.5 -17.7 -12.8 0.5 -5.0 23.6 3.7 -14.9 -2.3 -12.9 12.0 3.3 -3.5 -2.7 9.8 -0.8 4.0 -1.5 8.6 64 62 58 54 57 59 1.5 4.8 -2.0 10.0 36 38 42 46 43 41 44 44 39 40 42 43 43 35 65 0.7 -0.7 -14.1 8.5 35 54 46 -7.9 -24.9 15.0 -46.5 19 9 5 Sept.30 19 9 6 Sept.30 19 9 7 Sept.30 19 9 8 Sept.30 19 9 9 Sept.30 2000 Sept.30 200 1 2001 Sept.30 2002 Sept.30 2003 Sept.30 20 42 58 6.9 -38.7 -52.0 -23.3
19 9 3 Dec.31
50
34
66
200
24
Memorandum Items: Loan/Deposit Ratio Commercial Loan Share of Total Loans (%) Consumer Loan Share of Total Loans (%) Deposits Annual Rate of Change (%) Loans Annual Rate of Change (%) Commercial Loans Annual Rate of Change (%) Consumer Loans Annual Rate of Change (%)
12
30
Source: FSM Banking Board.
Appendixes
Table A34 FSM Consolidated Government Revenues and Expenditures Fiscal 1987-2004 (in million US $)
FY87 FY88 FY89
Total Re venue and Grants Revenue Revenue Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others All other tax (National) State tax revenue Nontax revenue Fishing access revenue Dividend and interest income Other nontax revenues Grants Current grants Compact General Compact Special Other: Current Capital grants Compact CIP Other: Capital Expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Net lending (domestic) Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 142.3 16 4.5 15 9.8 23.9 28.2 46.0 9.7 12.3 13.3 3.3 4.0 3.9 2.6 3.2 3.7 0.4 0.4 0.5 1.4 2.0 2.1 0.0 0.0 0.0 2.0 2.8 3.1 14.2 15.9 32.6 3.8 7.7 10.8 4.7 3.5 13.2 5.6 4.7 8.7 118.4 136.3 113.8 78.0 95.1 77.2 43.9 44.6 45.7 19.5 28.9 15.9 14.5 21.6 15.6 40.4 41.2 36.6 29.3 29.8 30.5 11.2 11.4 6.2
FY90
16 0. 1 0.1 42.0 13.6 3.8 4.2 0.5 2.0 0.0 3.1 28.4 12.7 7.7 8.0 118. 1 8.1 83.3 46.8 23.8 12.7 34.8 31.2 3.6
F Y9 1 Y91
16 8.8 49.6 17.0 4.5 5.2 0.6 2.3 0.0 4.3 32.7 12.9 11.1 8.7 119.2 78.7 44.5 19.3 15.0 40.4 35.9 4.5
FY92
148. 1 48.1 48.4 17.7 4.6 5.7 0.6 2.6 0.0 4.2 30.7 12.5 10.2 8.0 99.7 69.6 42.2 17.8 9.6 30.1 28.2 2.0
FY93
157.0 55.7 21.5 5.4 6.2 0.5 4.6 0.6 4.2 34.2 18.3 7.4 8.5 101.3 65.3 38.9 17.9 8.5 35.9 33.1 2.9
FY94 FY95
162.4 56.0 21.2 5.7 6.0 0.9 4.3 0.0 4.4 34.7 21.3 6.6 6.8 10 6.4 70.5 39.7 17.9 12.8 35.9 33.7 2.2 17 0.3 58.7 21.1 6.2 6.1 0.7 3.8 0.3 4.0 37.6 21.5 8.2 7.9 111.6 77.2 44.7 18.3 14.3 34.3 29.8 4.6
6 9.9 -1 5 8.4 -1 0 4.3 -1 25.5 - 1 43.0 - 1 -16 -15 -10 -125.5 143.0 143.0 43.0 -1 -84.0 -100.4 -95.8 -100.1 -117.7 -119.6 -82.5 -42.0 -5.1 -35.4 0.0 -1.1 -0.4 -20.3 -2.8 -17.3 -0.2 0.0 38.0 17.9 20.2 114.1 103.8 83.2 8.5 -73.6 -17.8 33.3 15.7 -94.2 -44.2 -4.2 -45.8 0.0 -6.2 0.0 -25. 1 -25.1 -3.3 -18.9 -3.0 0.0 39.0 23.0 16.0 126.0 108.1 82.9 9.8 -79.6 -19.9 30.9 18.2 -92.6 -44.8 -5.1 -42.7 0.0 -3.2 0.0 -4 7.2 -47 -4.4 -27.9 -14.9 0.0 16.8 27.4 -10.5 132.9 85.6 71.2 10.0 -72.1 -35.5 12.7 20.6 -95.8 -47.7 -5.7 -42.4 0.0 -4.3 -0.1 -42.9 -10.2 -19.9 -12.8 0.0 17.1 25.2 -8.1 145.3 81.3 73.8 9.4 -68.9 -29.5 11.8 17.3 -112.4 -50.7 -6.0 -55.8 -1.6 -3.7 0.0 -52. 1 -52.1 -14.4 -24.3 -13.5 0.0 -1 .1 -1. 10.7 -11.7 162.2 73.5 70.6 10.5 -72.6 -32.2 -0.7 6.6 -107.0 -51.9 -6.2 -48.9 -6.8 -5.1 -0.7 -38.8 -13.4 -21.8 -3.6 0.0 -1 0.2 -10.2 -1.6 -8.7 173.2 57.6 67.3 10.2 -69.1 -22.4 -5.9 -0.9
-1 61.2 - 1 63.0 - 1 73.4 -16 163.0 173.4 -123.6 -128.3 -142.2 -109.8 -57.9 -5.7 -46.3 -7.3 -5.0 -1.4 -3 7.6 -37 -7.7 -25.1 -4.8 -4.5 -8.7 -7.0 -1.7 190.4 53.2 64.5 11.3 -64.9 -19.7 -4.6 -3.7 -114.7 -58.4 -5.8 -50.5 -7.4 -4.9 -1.3 -34.7 -7.4 -19.1 -8.2 0.0 -0.6 -1.8 1.2 199.2 53.4 65.5 10.7 -64.4 -17.4 -0.3 -0.9 -130.0 -62.9 -6.2 -60.9 -6.8 -4.9 -0.6 -3 1.1 -31 -8.2 -18.9 -4.1 0.0 -3. 1 -3.1 -6.3 3.2 208.1 53.6 65.5 10.1 -68.4 -15.0 -1.5 -3.0
continued on next page
201
Table A34 (continued) FSM Consolidated Government Revenues and Expenditures Fiscal 1987-2004 (in million US $)
FY96 FY97 FY98
Total Re venue and Grants Revenue 162.9 138.7 Revenue 54.2 48.7 Tax revenue 21.1 20.6 Wages and salary tax 5.6 5.4 Gross revenue tax 6.0 5.5 Import tax: Fuel 0.9 0.7 Import tax: All others 3.7 4.1 All other tax (National) 0.3 0.5 State tax revenue 4.6 4.3 Nontax revenue 33.1 28.1 Fishing access revenue 20.5 14.4 Dividend and interest income 8.1 8.7 Other nontax revenues 4.5 5.1 Grants 10 8.7 90.0 Current grants 77.2 66.0 Compact General 45.3 38.0 Compact Special 18.0 18.0 Other: Current 13.9 9.9 Capital grants 31.6 24.0 Compact CIP 30.2 22.0 Other: Capital 1.4 2.0 Expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Net lending (domestic) Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 151.2 55.6 26.1 7.8 5.7 0.8 6.3 0.2 5.4 29.5 13.5 8.9 7.2 95.6 71.0 37.9 18.2 14.9 24.6 23.3 1.3
FY99
149.4 53.4 25.3 5.6 5.8 0.8 6.3 0.7 6.0 28.2 16.0 7.4 4.7 96.0 70.9 37.5 18.2 15.2 25.1 23.7 1.4 -165.3 -126.6 -114.3 -50.2 -7.7 -56.4 -2.9 -4.3 -5.2 -38.8 -14.8 -23.0 -1.0 0.0 -15.9 -2.3 -13.6 194.1 49.4 64.2 13.0 -65.2 -20.0 -8.2 -1.2
FY00
148.8 52.6 27.1 6.4 6.9 0.7 7.2 0.0 6.4 24.9 14.1 5.2 5.6 96.2 70.4 36.9 17.7 15.8 25.8 24.6 1.1 -163.2 -131.9 -119.7 -52.2 -8.4 -59.1 -1.9 -5.9 -4.5 -3 1.3 -31 -9.4 -21.5 -0.5 0.0 -14.4 -8.8 -5.6 216.5 44.4 64.6 12.8 -60.9 -14.5 -6.6 -4.1
F Y0 1 Y01
141.1 45.4 26.5 6.1 6.9 0.9 7.0 0.2 5.5 19.0 11.3 2.1 5.5 95.6 70.5 37.4 17.8 15.2 25.1 25.0 0.2 -160.6 -129.7 -122.1 -54.3 -8.9 -58.9 -0.6 -3.6 -3.4 -30.9 -12.1 -18.5 -0.3 0.0 -19.6 -13.8 -5.8 220.8 43.3 67.8 12.0 -58.8 -14.0 -8.9 -6.3
FY02e FY03e FYO4p

16 0.2 46.3 27.2 8.0 6.3 0.9 6.1 0.9 5.1 19.1 10.6 2.0 6.5 113.9 82.1 47.7 18.2 16.1 31.8 31.8 0.0 -147.1 -124.9 -116.1 -56.9 -8.5 -50.6 0.0 -4.2 -4.7 -22.2 -6.4 -15.9 0.0 0.0 13.1 3.5 9.6 222.4 51.2 71.1 12.2 -56.2 -10.0 5.9 1.6 161.9 45.7 25.9 7.3 6.1 0.7 6.3 0.4 5.1 19.8 13.5 1.1 5.2 116.2 83.0 48.3 18.3 16.4 33.2 32.2 1.0 -150.5 -126.4 -117.8 -58.4 -8.6 -50.8 0.0 -4.3 -4.3 -24. 1 -24.1 -6.8 -17.1 -0.3 0.0 11.4 2.3 9.1 221.7 52.4 71.8 11.7 -57.0 -10.9 5.2 1.1 117.9 43.1 25.3 7 5.8 0.7 6.3 0.5 5 17.8 11.8 1.3 4.6 74.8 74.8 0 58.9 15.9 0 0 0 -133.0 -120.4 -114.8 -56.6 -8.5 -49.8 0.0 -1.3 -4.2 -1 2.6 -12.6 -5.5 -7.1 0.0 0.0 -15.1 -2.5 -12.6 225.1 33.2 63.5 11.2 -53.5 -5.6 -6.7 -1.1
-162.4 -137.9 -165.3 -132.8 -124.4 -124.9 -119.7 -63.2 -5.1 -51.4 -5.7 -6.3 -1.1 -29.6 -4.4 -22.2 -3.0 0.0 0.4 -1.5 1.9 203.0 53.6 66.8 10.4 -65.4 -14.6 0.2 -0.7 -113.6 -109.1 -58.5 -50.1 -6.9 -6.8 -48.2 -52.2 -4.8 -3.6 -3.9 -3.4 -1.9 -8.8 -1 3.5 -40.4 -13.5 -3.3 -21.3 -10.2 0.0 0.0 0.8 -9.7 10.5 195.6 46.0 64.9 10.5 -63.6 -6.9 0.4 -5.0 -16.9 -2.2 0.0 -14.1 1.7 -15.8 197.3 48.4 63.2 13.2 -63.3 -20.5 -7.1 0.9
Source: FSM National Department of Economic Affairs, EMPAT. Figures for FY01- FY03 are estimates and FY04 is projected, as audited data not available.
202
Appendixes
Table A35 National Government Revenues and Expenditures: FY2001-2003 (in million US $)
FY87
Total R e venue and Grants Re Total revenue Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others All other tax (National) Nontax revenue Fishing access revenue Dividend and interest income Other nontax revenues Grants Grants from abroad Current grants Compact General Compact Special Other: Current Capital grants Compact CIP Other: Capital Total e xpenditure and net lending expenditure Total expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers [Memo: incl. transfers to state governments] Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 38.3 10.0 3.8 1.7 1.3 0.1 0.7 0.0 6.2 3.8 1.4 0.9 28.2 28.2 20.4 6.4 11.6 2.4 7.8 2.7 5.1 25. 1 25.1 25.1 19.7 18.6 7.1 2.0 9.5 0.0 0.8 0.4 1.7 5.4 0.0 5.2 0.2 13.1 10.7 2.4 114.1 24.7 73.8 6.9 17.3 4.7 11.5 9.4
FY88
48.2 15.5 4.6 2.0 1.6 0.1 1.0 0.0 10.9 7.7 1.7 1.5 32.7 32.7 24.2 6.5 15.8 1.8 8.5 2.8 5.7 34.7 34.7 25.5 20.0 6.5 1.6 11.8 0.0 5.6 0.0 0.7 9.1 0.0 6.1 3.0 13.6 14.2 -0.6 126.0 25.9 67.8 7.5 20.3 7.2 10.8 11.3
FY89
38. 1 38.1 19.1 5.0 1.9 1.9 0.1 1.1 0.0 14.1 10.8 2.2 1.1 19.0 19.0 12.9 6.7 3.9 2.4 6.1 2.9 3.2 44.0 44.0 25.1 22.8 7.5 2.1 13.2 0.0 2.3 0.0 0.7 19.0 0.0 5.5 13.5 -5.9 6.9 -12.9 132.9 14.3 49.9 7.7 18.9 14.3 -4.5 5.2
FY90
4 7. 6 23.7 5.1 1.9 2.1 0.1 1.0 0.0 18.6 12.7 2.7 3.2 23.9 23.9 21.0 6.8 11.9 2.3 2.9 2.9 0.0 32.3 32.3 26.7 23.3 7.7 1.9 13.7 0.0 3.4 0.0 1.7 5.5 0.0 2.0 3.5 15.3 17.9 -2.6 145.3 16.5 50.3 7.2 18.4 3.8 10.6 12.3
FY91
40.3 24.3 6.1 2.3 2.6 0.1 1.2 0.0 18.1 12.9 3.5 1.7 16. 1 6.1 16.1 9.0 3.3 3.9 1.8 7.0 6.8 0.2 42.0 42.0 29.7 27.7 8.3 2.1 17.2 0.0 2.0 0.0 0.9 12.3 0.0 1.2 11.0 -1.7 3.6 -5.3 162.2 9.9 39.8 7.8 18.3 7.6 -1.0 2.2
FY92
3 7.0 22.3 6.6 2.3 2.9 0.1 1.3 0.0 15.8 12.5 1.9 1.3 14.7 14.7 12.0 6.2 4.0 1.9 2.7 2.6 0.0 35.7 35.7 32.4 30.8 8.7 2.4 19.6 0.2 1.4 0.0 2.6 3.4 0.0 0.9 2.5 1.3 2.0 -0.7 173.2 8.5 39.6 7.8 18.7 1.9 0.7 1.1
FY93
48.0 31.7 8.7 2.7 3.0 0.1 2.3 0.6 23.0 18.3 2.0 2.6 16.3 16.3 6.2 0.0 4.0 2.3 10.0 9.0 1.0 4 0. 1 0.1 40.1 34.9 30.1 9.9 2.6 17.7 0.0 3.7 1.1 2.2 5.2 0.0 3.2 2.0 7.8 3.0 4.8 190.4 8.5 33.9 9.0 18.4 2.7 4.1 1.6
FY94
50.5 32.8 8.0 2.7 3.0 0.2 2.1 0.0 24.7 21.3 2.1 1.3 17.7 17.7 8.9 2.1 4.0 2.8 8.7 7.1 1.7 45.4 45.4 38.0 34.7 10.3 2.5 22.0 0.0 2.1 1.2 1.9 7.4 0.0 2.7 4.7 5.0 3.7 1.3 199.2 8.9 35.0 8.3 19.1 3.7 2.5 1.8
FY95
54.3 33.8 8.4 2.8 3.1 0.2 2.0 0.3 25.5 21.5 2.4 1.5 20.5 20.5 14.4 6.5 4.0 3.9 6.1 2.8 3.3 52.0 52.0 43.4 41.2 10.9 2.9 27.5 0.0 1.7 0.5 2.1 8.6 0.5 4.7 3.4 2.3 4.8 -2.5 208.1 9.9 37.8 8.2 20.9 4.1 1.1 2.3
203
Table A35 (continued) National Government Revenues and Expenditures: FY2001-2003 (in million US $)
FY97 FY98 FY99
Total re venue and grants revenue Total re venue revenue Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others All other tax (National) Nontax revenue Fishing access revenue Dividend and interest income Other nontax revenues Grants Grants from abroad Current grants Compact General Compact Special Other: Current Capital grants Compact CIP Other: Capital Total e expenditure xpenditure and net lending Total e xpenditure expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers [Memo: incl. transfers to state governments] Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 52.3 32.2 8.2 2.7 3.1 0.2 2.0 0.3 24.0 20.5 2.1 1.4 28.2 20.1 17.2 6.6 4.0 6.6 2.8 2.8 0.0 51.0 51.0 43.7 41.4 11.4 2.6 27.3 0.0 1.5 0.8 4.7 7.3 0.0 4.3 3.0 1.3 5.8 -4.5 203.0 9.9 38.4 8.2 21.5 3.6 0.6 2.9 42.0 26.3 8.2 2.6 2.9 0.1 2.1 0.5 18.2 14.4 1.9 1.9 15.6 15.6 13.3 5.2 4.0 4.0 2.3 2.3 0.0 51.3 51.3 50.4 47.9 13.5 4.3 30.2 0.0 1.0 1.4 4.7 0.9 0.0 0.9 0.0 -9.3 -10.7 1.4 195.6 8.0 37.2 8.3 25.8 0.5 -4.8 -5.5 4 7. 0 30. 1 30.1 10.4 3.9 2.8 0.2 3.2 0.2 19.6 13.5 2.2 4.0 16.9 16.9 14.6 5.4 4.1 5.2 2.3 2.3 0.0 55.8 55.8 48.1 44.9 12.5 4.2 28.2 0.0 1.3 1.8 6.5 7.7 3.3 2.9 1.5 -8.8 -3.4 -5.4 197.3 8.6 36.0 10.8 24.4 3.9 -4.5 -1.7
FY00
43.0 25.2 6.4 1.5 1.8 0.2 2.0 0.7 18.9 16.0 1.6 1.2 17.7 17.7 15.5 5.4 4.1 6.0 2.3 2.3 0.0 52.5 52.5 47.0 42.4 11.8 4.7 26.0 0.0 1.5 3.0 4.5 5.5 3.7 0.8 1.0 -9.5 -6.3 -3.2 194.1 9.1 41.3 10.3 24.2 2.8 -4.9 -3.2
F Y0 1 FY02e FY03e FYO4e Y01

39.7 20.9 5.5 1.4 1.9 0.1 2.1 0.0 15.4 14.1 0.1 1.2 18.8 18.8 16.5 5.4 4.1 7.1 2.3 2.3 0.0 51.3 51.3 47.9 41.8 11.4 4.9 25.6 0.0 2.2 3.8 6.2 3.5 2.7 0.7 0.0 -1 1.7 -11 -10.5 -1.2 216.5 8.7 47.4 8.5 22.1 1.6 -5.4 -4.8 3 7.8 19.6 5.7 1.5 1.8 0.2 2.1 0.2 13.9 11.3 0.7 1.8 18.2 18.2 15.9 5.5 4.1 6.3 2.3 2.3 0.0 50.3 50.3 47.0 42.0 11.6 5.2 25.2 0.0 1.6 3.4 6.4 3.3 1.6 1.7 0.0 -1 2.6 -12.6 -11.6 -1.0 220.8 8.2 48.2 8.6 21.3 1.5 -5.7 -5.2 41.5 20.3 7.6 2.9 1.9 0.1 1.8 0.9 12.7 10.6 0.5 1.6 21.2 21.2 18.2 7.0 4.8 6.5 3.0 3.0 0.0 43.3 43.3 40.6 35.2 12.7 4.4 18.0 0.0 1.9 3.6 3.0 2.7 1.4 1.3 0.0 .8 -1.8 -1 -2.1 0.3 222.4 9.5 51.0 10.6 18.3 1.2 -0.8 -1.0 42.9 21.5 6.4 2.2 1.8 0.1 1.9 0.4 15.0 13.5 0.2 1.4 21.5 21.5 18.4 7.0 4.8 6.6 3.0 3.0 0.0 43.4 43.4 40.7 35.6 12.9 4.5 18.2 0.0 1.6 3.6 2.6 2.7 1.4 1.3 0.0 -0.5 -0.8 0.3 221.7 9.7 50.0 9.4 18.4 1.2 -0.2 -0.4 40.0 23.7 10.2 3.5 2.9 0.1 3.1 0.5 13.6 11.8 0.2 1.6 16.2 16.2 16.2 0.0 9.8 6.5 0.0 0.0 0.0 41.7 41.7 39.2 34.7 12.5 4.4 17.8 0.0 1.0 3.6 0.0 2.5 1.3 1.1 0.0 .7 -1.7 -1 0.7 -2.5 225.14 7.2 40.6 14.7 17.4 1.1 -0.8 0.3
Source: FSM National Department of Economic Affairs, EMPAT. Figures for FY02- FY03 are estimates and FY04 is projected, as audited data not available.
204
Appendixes
Table A36 Chuuk Government Revenues and Expenditures: FY2001-2004 (in million US $)
FY87 FY88 FY89
Total re venue and grants revenue Total re venue revenue Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others State tax revenue Nontax revenue Dividend and interest income Other nontax revenues Grants Grants from abroad Current grants Compact General Compact Special Other: Current Capital grants Compact CIP Other: Capital Grants from national government Current Total e xpenditure and net lending expenditure Total e xpenditure expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers Capital expenditure Acquisition of fixed capital Multi-purpose development projects Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 41.4 3.5 1.7 0.5 0.4 0.1 0.2 0.5 1.8 0.8 1.0 3 7.9 37.9 24.8 16.1 3.2 5.5 13.1 11.2 1.8 0.0 0.0 31.7 31.7 27.7 27.7 14.4 1.1 12.2 0.0 0.0 0.0 4.1 0.0 4.1 9.6 0.6 9.0 39.4 96.2 91.6 7.1 70.3 10.3 24.4 1.5 48.8 4. 1 4.1 2.8 0.7 0.6 0.1 0.4 0.9 1.3 0.8 0.6 44.7 44.7 33.0 16.4 5.0 11.5 11.8 11.4 0.4 0.0 0.0 39.0 39.0 34.8 34.8 16.2 0.9 17.7 0.0 0.0 0.0 4.2 1.2 3.0 9.8 2.2 7.6 44.9 99.5 91.6 10.0 77.5 9.3 21.8 4.9 51.1 11.3 3.1 0.7 0.6 0.1 0.4 1.3 8.2 4.1 4.1 39.8 39.8 27.5 16.8 4.7 6.0 12.4 11.7 0.7 0.0 0.0 40.2 40.2 29.7 29.3 15.2 1.0 13.0 0.0 0.4 0.0 10.6 1.6 8.9 10.9 9.1 1.8 45.8 87.0 77.9 10.6 64.8 23.1 23.8 19.8
FY90
45.4 6.3 2.8 0.5 0.6 0.1 0.4 1.2 3.5 1.9 1.6 39.0 39.0 26.3 17.2 4.7 4.4 12.8 12.0 0.8 0.0 0.0 39.7 39.7 31.6 31.4 17.0 1.8 12.6 0.0 0.3 0.0 8.1 2.3 5.8 5.6 0.9 4.7 48.8 79.9 86.1 8.9 64.8 16.5 11.5 1.9
F Y9 1 Y91
55.0 10. 1 0.1 4.1 0.7 0.8 0.2 0.5 1.8 6.0 3.0 3.1 44.9 44.9 31.7 17.7 6.0 8.0 13.2 12.3 0.9 0.0 0.0 54.2 54.2 42.1 41.6 18.2 2.1 21.2 0.0 0.6 0.0 12.1 3.4 8.7 0.9 -0.3 1.2 55.6 80.9 81.7 11.0 75.8 21.7 1.6 -0.6
FY92
42.6 7.2 3.7 0.7 0.9 0.2 0.4 1.6 3.5 1.8 1.7 35.4 35.4 23.8 15.5 5.3 3.0 11.6 10.8 0.8 0.0 0.0 45.3 45.3 34.6 33.9 19.1 2.0 12.9 0.0 0.2 0.4 10.8 3.4 7.4 -2.8 -3.7 0.9 58.7 60.3 83.2 9.7 59.0 18.4 -4.8 -6.2
FY93
41.5 6.8 4.1 0.8 0.9 0.1 0.8 1.5 2.7 1.3 1.4 34.7 34.7 25.0 17.8 5.3 1.8 9.7 9.0 0.7 0.0 0.0 48.9 48.9 36.0 35.6 21.0 1.5 13.1 0.0 0.2 0.3 12.9 3.6 9.3 -7.5 -4.2 -3.2 61.5 56.5 83.7 10.6 58.6 21.0 -12.1 -6.9
FY94 FY95
41.8 6.7 3.9 0.7 0.8 0.3 0.7 1.4 2.8 0.9 1.9 35.2 35.2 23.8 16.2 5.4 2.2 11.4 11.3 0.1 0.0 0.0 4 7. 5 4 7. 5 34.2 33.3 20.1 1.3 11.9 0.6 0.3 0.1 13.3 3.2 10.1 -5.7 -3.8 -1.9 61.1 57.5 84.1 10.1 56.0 21.7 -9.2 -6.2 42.8 7.0 3.6 0.9 0.7 0.3 0.5 1.3 3.3 1.2 2.1 35.8 35.8 24.3 16.4 5.3 2.6 11.5 11.4 0.1 0.0 0.0 42.4 42.4 33.6 32.0 21.9 0.8 9.3 0.7 0.9 0.1 8.7 2.2 6.6 0.4 -2.3 2.8 64.8 55.3 83.7 9.0 51.9 13.5 0.6 -3.6
205
Table A36 (continued) Chuuk Government Revenues and Expenditures: FY2001-2004 (in million US $)
FY96 FY97 FY98 FY99 FY00 F Y0 1 Y01 FY02e FY03e FYO4p
Total re venue and grants 40.0 34.2 3 7.5 39.3 42.2 38.7 44.2 45.2 25.5 revenue Total re venue revenue 5.3 6.0 8.0 8.6 10.1 8.3 6.7 8.5 6.5 Tax revenue 2.8 3.2 5.0 5.3 7.4 6.3 5.2 6.5 4.6 Wages and salary tax 0.7 0.5 1.7 1.1 1.4 1.4 1.2 1.5 0.9 Gross revenue tax 0.5 0.6 0.7 0.9 1.7 1.3 1.1 1.3 0.8 Import tax: Fuel 0.1 0.1 0.2 0.1 0.3 0.3 0.2 0.2 0.2 Import tax: All others 0.3 0.5 0.8 1.2 1.6 1.4 1.1 1.5 0.9 State tax revenue 1.1 1.5 1.6 1.9 2.4 2.0 1.6 2.1 1.8 Nontax revenue 2.5 2.8 3.0 3.3 2.7 2.0 1.5 2.0 1.9 Dividend and interest income 1.4 1.9 2.2 2.2 1.6 0.3 0.1 0.2 0.3 Other nontax revenues 1.1 0.9 0.8 1.1 1.1 1.7 1.4 1.7 1.5 34.7 28.2 29.5 30.7 32.1 30.5 37.5 36.7 19.0 Grants Grants from abroad 34.7 28.2 29.2 30.5 29.0 29.5 36.3 36.7 19.0 Current grants 23.0 19.0 19.8 21.1 19.6 19.9 24.1 24.4 19.0 Compact General 16.6 13.2 13.5 13.5 13.6 13.8 17.5 17.7 0.0 Compact Special 5.0 5.0 5.0 5.0 5.0 5.1 5.0 5.0 17.4 Other: Current 1.3 0.8 1.3 2.6 1.0 1.1 1.6 1.6 1.6 Capital grants 11.7 9.2 9.4 9.4 9.5 9.6 12.2 12.4 0.0 Compact CIP 11.6 9.2 9.4 9.4 9.5 9.6 12.2 12.4 0.0 Other: Capital 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Grants from national government 0.0 0.0 0.3 0.2 3.1 1.0 1.2 0.0 0.0 Current 0.0 0.0 0.3 0.2 3.1 1.0 1.2 0.0 0.0 1 50.2 48.5 45.2 40.3 42.2 36. Total e xpenditure and net lending 39.3 25.8 3 7.2 36.1 expenditure Total e xpenditure 39.3 25.8 3 7.2 50.2 48.5 45.2 40.3 42.2 36. 1 expenditure 36.1 Current expenditure 32.3 23.6 26.7 31.1 35.6 35.1 33.9 34.4 31.2 Expenditure on goods and services 29.1 21.4 22.5 28.2 34.0 34.1 32.7 33.2 31.2 Wages and salaries 20.9 16.9 12.8 14.0 16.8 18.4 18.4 19.3 18.1 Travel 0.7 0.8 0.7 1.1 1.3 1.3 1.2 1.1 1.1 Other 7.5 3.7 9.0 13.1 15.8 14.4 13.2 12.8 12.0 Interest payments 0.7 0.7 0.4 0.5 0.3 -0.1 0.0 0.0 0.0 Subsidies 2.5 1.5 1.2 1.5 1.2 1.2 1.2 1.2 0.0 Transfers 0.0 0.0 2.6 0.9 0.1 0.0 0.0 0.0 0.0 Capital expenditure 7.0 2.2 10.5 19.0 12.9 10.0 6.4 7.8 4.9 Acquisition of fixed capital 1.7 0.2 3.7 4.2 3.3 3.3 2.2 2.6 1.7 Multi-purpose development projects 5.3 2.0 6.8 14.8 9.6 6.8 4.2 5.2 3.1 0.7 -6.4 3.9 3.0 -1 0.6 8.4 0.3 -1 0.9 -6.3 -10.6 -10.9 Overall Balance Current Balance -4.0 1.5 1.5 -1.2 -2.8 -6.0 -1.9 -1.6 -5.7 Capital Balance 4.7 7.0 -1.1 -9.6 -3.5 -0.4 5.8 4.6 -4.9 Memo items: Nominal GDP 58.0 56.0 53.8 55.3 66.8 66.8 65.4 66.5 65.5 Grants as % of GDP 59.8 50.3 54.8 55.6 48.1 45.6 57.4 55.2 29.0 Grants as % of Total Revenue 86.7 82.3 78.6 78.2 76.1 78.7 84.9 81.2 74.6 Tax Revenue as % of GDP 7.5 8.6 15.3 12.2 14.2 12.1 10.2 12.7 8.8 Current Expenditure as % of GDP 55.6 42.1 49.6 56.3 53.3 52.6 51.8 51.8 47.6 Capital Expenditure as % of GDP 12.1 4.0 19.6 34.5 19.4 15.0 9.8 11.8 7.4 Overall Balance as % of GDP 1.2 15.1 0.6 -19.7 -9.4 -9.7 5.9 4.5 -16.1 Current Balance as % of GDP -6.9 2.6 2.7 -2.2 -4.2 -9.0 -2.9 -2.3 -8.7 Source: FSM National Department of Economic Affairs, EMPAT. Figures for FY02- FY03 are estimates and FY04 is projected, as audited data not available.
206
Appendixes
Table A37 Kosrae Government Revenues and Expenditures: FY2001-2004 (in million US $)
FY87 FY88 FY89
Total re venue and grants revenue Total re venue revenue Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others State tax revenue Nontax revenue Dividend and interest income Other nontax revenues Grants Grants from abroad Current grants Compact General Compact Special Other: Current Capital grants Compact CIP Other: Capital Grants from national government Current Capital xpenditure and net lending Total e expenditure Total e xpenditure expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Net lending (domestic) Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP 7Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 15.2 2. 1 2.1 0.5 0.2 0.1 0.0 0.1 0.1 1.6 1.3 0.3 13.2 12.8 6.7 4.0 1.0 1.7 6.2 3.5 2.7 0.3 0.0 -0.3 12.7 12.7 7.6 7.6 4.2 0.8 2.5 0.0 0.0 0.0 5.1 0.4 -4.7 0.0 0.0 2.6 1.1 1.4 11.5 115 87 7.6 65.9 44.2 22.3 9.8 15.4 0.9 0.6 0.2 0.1 0.0 0.1 0.1 0.4 0.1 0.3 14.5 14.2 7.9 4.1 1.8 2.0 6.4 3.6 2.8 0.2 0.0 -0.2 12.5 12.5 7.8 7.8 4.3 0.4 3.1 0.0 0.0 0.0 4.7 0.3 -4.5 0.0 0.0 2.9 1.0 1.9 11.1 131 94 8.9 70.2 42.9 26.2 9.3 14.2 2.3 0.6 0.2 0.2 0.0 0.1 0.1 1.8 1.3 0.4 11.8 11.8 7.3 4.2 1.6 1.5 4.5 3.7 0.8 0.0 0.0 0.0 11.7 11.7 8.0 8.0 4.4 0.5 3.2 0.0 0.0 0.0 3.7 0.5 -3.1 0.0 0.0 2.5 1.7 0.8 11.3 104 83 8.5 70.8 32.3 21.9 14.6
FY90
14.2 1.4 0.6 0.2 0.2 0.0 0.1 0.2 0.8 0.5 0.3 12.8 12.7 8.3 4.3 1.6 2.4 4.4 3.7 0.7 0.1 0.0 -0.1 13.8 13.8 8.2 8.2 4.5 0.6 3.1 0.0 0.0 0.0 5.6 1.8 -3.8 0.0 0.0 0.4 1.5 -1.1 12.2 105 90 8.7 67.3 46.1 3.6 12.6
F Y9 1 Y91
13.9 1.6 0.8 0.2 0.2 0.0 0.1 0.2 0.8 0.4 0.4 12.3 12.3 7.9 4.4 1.9 1.5 4.4 3.9 0.6 0.0 0.0 0.0 14.8 14.8 8.1 8.1 4.6 0.4 3.1 0.0 0.0 0.0 6.6 3.8 -2.8 0.0 0.0 -0.8 1.3 -2.2 13.4 92 88 9.6 60.5 49.4 -6.3 10.0
FY92
12.3 1.9 0.7 0.2 0.2 0.1 0.1 0.2 1.2 0.3 0.8 10.4 10.4 6.7 3.9 2.0 0.9 3.8 3.4 0.4 0.0 0.0 0.0 15.2 15.2 7.9 7.6 4.9 0.3 2.4 0.2 0.0 0.0 7.3 5.4 -1.8 0.0 0.0 -2.9 0.7 -3.5 13.4 78 85 9.0 58.7 54.3 -21.4 4.9
FY93
12.7 1.4 0.8 0.2 0.2 0.0 0.2 0.1 0.7 0.2 0.5 11.3 10.8 7.1 3.9 2.0 1.2 3.7 3.4 0.3 0.5 0.0 -0.5 13.6 13.6 9.1 8.8 5.1 0.3 3.4 0.3 0.0 0.0 4.5 0.5 -4.0 0.0 0.0 -0.9 -0.6 -0.4 14.8 76 89 9.2 61.6 30.7 -6.4 -3.8
FY94 FY95
15.0 2.0 0.9 0.2 0.3 0.1 0.2 0.1 1.1 0.5 0.6 13.0 12.1 8.3 4.0 2.0 2.3 3.8 3.5 0.3 0.9 0.2 -0.6 13.4 13.4 9.6 8.7 5.1 0.5 3.1 0.2 0.7 0.0 3.8 0.5 -3.1 -0.3 0.0 1.6 0.9 0.7 18.2 71 87 8.9 52.7 20.9 8.8 5.2 15.2 2.4 0.9 0.3 0.2 0.1 0.2 0.1 1.5 0.4 1.1 12.8 11.9 7.9 4.1 2.0 1.8 4.0 3.6 0.5 0.9 0.1 -0.7 13.6 13.6 10.5 9.9 5.5 0.6 3.8 0.1 0.4 0.0 3.1 0.4 -2.7 0.0 0.0 1.5 -0.1 1.6 17.5 73 84 9.4 59.7 17.9 8.8 -0.5
207
Table A37(continued) Kosrae Government Revenues and Expenditures: FY2001-2004 (in million US $)
FY96 FY97 FY98
Total re venue and grants revenue venue revenue Total re Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others State tax revenue Nontax revenue Dividend and interest income Other nontax revenues Grants Grants from abroad Current grants Compact General Compact Special Other: Current Capital grants Compact CIP Other: Capital Grants from national government Current Capital Total e xpenditure and net lending expenditure xpenditure Total e expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Net lending (domestic) Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 15.2 1.8 1.0 0.3 0.3 0.1 0.2 0.2 0.8 0.3 0.5 13.4 12.1 8.2 4.1 2.0 2.1 3.9 3.6 0.2 1.3 0.2 -1.2 15.3 15.3 10.0 9.5 5.8 0.4 3.3 0.0 0.5 0.0 5.3 0.3 -4.9 0.0 0.0 -0.1 -0. 1 0.1 -0.2 18.4 73 88 9.6 54.5 28.7 -0.5 0.7 13.3 1.5 1.0 0.3 0.2 0.1 0.2 0.2 0.6 0.3 0.3 11.8 10.1 6.7 3.3 2.0 1.3 3.4 2.9 0.5 1.7 0.1 -1.6 13.3 13.3 9.4 8.4 5.7 0.4 2.3 0.0 1.1 0.0 3.8 0.3 -3.6 0.0 0.0 0.0 -1.1 1.2 17.0 70 89 10.1 55.7 22.6 0.2 -6.6 12.0 1.5 1.0 0.3 0.2 0.1 0.3 0.1 0.5 0.3 0.2 10.4 10.4 6.9 3.4 2.1 1.5 3.6 2.9 0.6 0.0 0.0 0.0 11.3 11.3 8.4 7.0 4.6 0.5 1.9 0.0 0.5 0.9 2.8 0.5 -2.4 0.0 0.0 0.7 0.0 0.7 16.4 64 87 11.4 51.4 17.3 4.3 -0.1
FY99
12.4 1.8 1.4 0.4 0.4 0.1 0.4 0.2 0.4 0.3 0.1 10.6 10.0 7.0 3.4 2.1 1.6 2.9 2.9 0.0 0.6 0.1 -0.5 11.8 11.8 8.1 7.5 4.6 0.4 2.4 0.0 0.5 0.1 3.6 0.4 -3.2 0.0 0.0 0.7 0.8 -0.2 17.1 62 85 11.4 47.6 21.1 3.9 4.9
FY00
14.3 3.2 1.6 0.4 0.4 0.1 0.5 0.2 1.6 0.8 0.8 11.1 10.5 7.6 3.4 2.1 2.1 3.0 3.0 0.0 0.6 0.1 -0.5 13.4 13.4 8.4 8.4 4.9 0.7 2.8 0.0 0.0 0.0 5.0 0.5 -3.9 -0.5 0.0 1.0 2.5 -1.5 18.5 60 78 11.7 45.5 26.9 5.3 13.5
F Y0 1 Y01
13.8 1.4 1.9 0.5 0.5 0.1 0.5 0.2 -0.4 -0.8 0.3 12.4 10.6 7.7 3.4 2.1 2.2 3.0 3.0 0.0 1.7 0.1 1.6 14.6 14.6 9.5 9.0 5.0 0.7 3.3 0.0 0.5 0.0 5.1 0.3 -4.6 -0.3 0.0 -0.8 -0.3 -0.6 20.7 60 90 12.3 45.7 24.8 -4.0 -1.3
FY02e FY03e FYO4p

14.8 2.1 2. 1 1.5 0.5 0.4 0.1 0.4 0.2 0.6 0.2 0.4 12.8 12.5 8.7 4.4 2.0 2.3 3.8 3.8 0.0 0.2 0.1 0.1 14.5 14.5 10.9 10.1 5.7 0.8 3.6 0.0 0.5 0.4 3.5 0.3 -3.2 0.0 0.0 0.3 0.0 0.4 20.0 64 86 10.2 54.7 17.6 1.7 -0.2 15.0 1.8 1.5 0.5 0.3 0.1 0.4 0.2 0.4 0.1 0.3 13.2 12.7 8.6 4.4 2.0 2.2 4.1 3.9 0.2 0.5 0.1 0.3 14.0 14.0 10.2 9.9 5.5 0.8 3.6 0.0 0.3 0.0 3.8 0.3 -3.2 -0.3 0.0 1.0 0.4 0.6 19.0 69 88 10.6 53.6 20.0 5.2 2.0 8.9 1.4 1.1 0.3 0.2 0.1 0.3 0.2 0.3 0.0 0.3 7.5 7.5 7.5 0.0 5.3 2.2 0.0 0.0 0.0 0.0 0.0 0.0 10.5 10.5 9.7 9.7 5.4 0.8 3.5 0.0 0.0 0.0 0.8 0.2 -0.6 0.0 0.0 -1.6 -1 .6 -0.7 -0.8 17.8 42 84 8.3 54.2 4.6 -8.8 -4.1
Source: FSM National Department of Economic Affairs, EMPAT. Figures for FY01- FY02 are estimates and FY03 and FY04 are projected, as audited data not available.
208
Appendixes
Table A38 Pohnpei Government Revenues and Expenditures: FY2001-2004 (in million US $)
FY87 FY88 FY89
Total re venue and grants revenue Total revenue Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others State tax revenue Nontax revenue Dividend and interest income Other nontax revenues Grants Grants from abroad Current grants Compact General Compact Special Other: Current Capital grants Compact CIP Other: Capital Grants from national government Current Total e xpenditure and net lending expenditure Total e xpenditure expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 0.0 10. 1 0.1 4.1 6.0 46.5 51.0 80.1 8.7 38.4 3.7 21.7 8.8 0.0 7.8 3.5 4.4 52.0 51.9 83.6 9.1 38.3 8.7 15.1 6.7 -1.4 3. 1 3.1 5.0 -1.8 57.1 46.0 76.6 9.4 37.6 17.0 5.5 8.7 -5.6 -3.9 2.0 -5.9 61.9 40.5 80.1 8.8 34.4 22.5 -6.3 3.2 -2.2 -3.0 1.9 -4.8 69.0 40.3 79.2 9.1 35.6 19.7 -4.3 2.7 -1.1 -6.8 -1.7 -5.1 71.9 33.5 76.4 9.9 36.2 17.1 -9.5 -2.4 -2.8 -4.7 -1.8 -2.9 84.1 28.9 76.2 10.6 30.9 12.7 -5.6 -2.2 -3.3 -0.7 -2.0 1.3 88.8 29.6 79.2 9.9 31.2 7.0 -0.8 -2.3 -0.7 1 -5.1 -5. -8.3 3.2 95.5 28.5 78.5 10.4 36.6 5.1 -5.4 -8.7 29.7 5.9 2.4 0.8 0.6 0.1 0.3 0.6 3.5 0.5 3.0 23.7 23.7 16.0 10.3 2.2 3.4 7.7 7.5 0.3 0.0 0.0 19.6 19.6 17.9 17.9 10.8 0.4 6.6 0.0 0.0 0.0 1.7 0.6 1.1 32.3 5.3 2.9 0.8 0.7 0.1 0.3 0.9 2.4 0.6 1.8 27 .0 7.0 27.0 18.1 10.5 3.5 4.1 8.9 7.6 1.3 0.0 0.0 24.4 24.4 19.9 19.7 11.5 0.6 7.6 0.0 0.3 0.0 4.5 1.1 3.5 34.3 8.0 3.1 0.9 0.8 0.2 0.4 0.8 4.9 2.7 2.2 26.3 26.3 18.4 10.8 3.3 4.4 7.9 7.8 0.1 0.0 0.0 31.2 31.2 21.5 21.2 12.0 0.9 8.3 0.0 0.3 0.0 9.7 1.1 7.3
FY90
31.3 6.2 3.1 0.9 0.9 0.2 0.4 0.7 3.1 1.1 2.0 25. 1 25.1 24.8 16.8 11.0 3.3 2.5 8.0 7.9 0.1 0.3 0.3 35.2 35.2 21.3 20.9 12.7 0.8 7.4 0.0 0.4 0.0 13.9 1.3 7.0
F Y9 1 Y91
35.2 7.3 3.7 1.0 1.1 0.2 0.4 1.0 3.6 1.6 2.0 27 .8 7.8 27.8 19.1 11.4 4.6 3.1 8.8 8.2 0.6 0.0 0.0 38.2 38.2 24.5 22.9 13.5 0.8 8.7 1.3 0.4 0.0 13.6 1.1 10.2
FY92
31.5 7.4 4.2 1.1 1.2 0.2 0.5 1.2 3.2 0.9 2.3 24. 1 24.1 24.1 16.8 9.9 3.9 3.0 7.2 7.2 0.1 0.0 0.0 38.3 38.3 26.0 21.1 13.3 0.7 7.1 1.6 3.3 0.0 12.3 0.6 10.7
FY93
31.9 7.6 5.2 1.4 1.5 0.1 0.9 1.4 2.4 0.5 1.9 24.3 24.3 16.5 10.2 3.7 2.7 7.8 7.3 0.5 0.0 0.0 36.6 36.6 25.9 23.3 15.6 0.7 7.1 1.5 1.1 0.0 10.7 0.6 7.2
FY94 FY95
33.2 6.9 5.1 1.4 1.3 0.2 0.9 1.3 1.8 0.6 1.2 26.3 26.3 18.8 10.4 3.7 4.7 7.5 7.5 0.1 0.0 0.0 33.9 33.9 27.7 24.3 16.2 0.9 7.2 1.7 1.8 0.0 6.2 1.1 1.8 34.7 7.4 5.7 1.8 1.6 0.1 0.8 1.3 1.8 0.8 0.9 27 .2 7.2 27.2 19.1 10.5 4.0 4.6 8.1 7.6 0.5 0.0 0.0 39.8 39.8 34.9 31.6 17.7 1.0 13.0 1.6 1.7 0.0 4.9 0.6 3.6
209
Table A38 (continued) Pohnpei Government Revenues and Expenditures: FY2001-2004 (in million US $)
FY96 FY97 FY98 FY99 FY00 F Y0 1 Y01 FY02e FY03e FYO4p
Total re venue and grants 33.7 29. 1 31.4 32.3 32.7 33.2 38. 1 36.5 27 .0 revenue 29.1 38.1 7.0 Total revenue 6.4 7.1 8.1 10.3 10.4 9.9 10.8 9.2 7.5 Tax revenue 5.7 5.5 6.5 8.6 8.5 8.8 9.8 8.0 6.8 Wages and salary tax 1.5 1.6 1.5 2.2 2.3 2.4 2.7 2.3 1.7 Gross revenue tax 1.5 1.3 1.3 1.7 1.7 1.8 2.2 1.9 1.4 Import tax: Fuel 0.4 0.3 0.2 0.3 0.2 0.3 0.3 0.2 0.2 Import tax: All others 0.8 0.9 1.3 1.9 2.0 1.9 2.0 1.6 1.3 State tax revenue 1.5 1.4 2.3 2.4 2.4 2.4 2.4 2.0 2.2 Nontax revenue 0.7 1.6 1.5 1.7 1.9 1.1 1.1 1.2 0.7 Dividend and interest income 0.5 0.7 0.4 0.8 1.2 0.1 0.3 0.2 0.3 Other nontax revenues 0.2 0.9 1.2 1.0 0.8 1.0 0.7 1.0 0.4 .2 22.0 23.3 22.0 22.2 23.4 27 .3 27 .4 19.4 27 7.3 7.4 7.2 Grants Grants from abroad 25.4 20.8 22.9 21.7 21.9 22.1 26.5 26.5 19.4 Current grants 17.2 16.5 17.2 16.1 15.6 15.8 18.4 18.3 19.4 Compact General 10.7 10.5 9.8 9.4 8.7 8.8 11.2 11.4 0.0 Compact Special 4.0 4.0 4.1 4.1 3.8 3.8 3.7 3.7 16.2 Other: Current 2.5 2.0 3.3 2.6 3.1 3.1 3.4 3.2 3.2 Capital grants 8.2 4.3 5.7 5.7 6.3 6.4 8.1 8.2 0.0 Compact CIP 7.7 4.1 5.0 5.4 6.3 6.4 8.1 8.2 0.0 Other: Capital 0.5 0.3 0.6 0.2 0.0 0.0 0.0 0.0 0.0 Grants from national government 1.8 1.1 0.5 0.3 0.4 1.2 0.8 0.8 0.0 Current 1.8 1.1 0.5 0.3 0.4 1.2 0.8 0.8 0.0 27 .6 29. 1 30.4 32.2 33.7 27 .6 30.2 2 7 .7 29.6 expenditure 7.6 29.1 7.6 7.7 Total e xpenditure and net lending T otal e xpenditure 30.2 2 7 .7 29.6 27 .6 29. 1 30.4 32.2 33.7 27 .6 Total expenditure 7.7 7.6 29.1 7.6 Current expenditure 27.6 24.3 24.6 23.5 24.7 23.9 24.4 25.8 24.9 Expenditure on goods and services 25.8 22.6 22.1 22.8 22.2 23.7 24.1 24.9 24.9 Wages and salaries 17.9 15.7 14.1 14.1 13.8 13.6 14.1 14.7 14.6 Travel 0.5 0.6 0.6 0.6 0.6 0.7 0.8 0.8 0.8 Other 7.4 6.3 7.4 8.1 7.8 9.3 9.2 9.4 9.5 Interest payments 1.2 1.0 0.6 0.4 0.2 0.1 0.0 0.0 0.0 Subsidies 0.6 0.1 0.2 0.3 2.3 0.1 0.3 0.9 0.0 Transfers 0.0 0.5 1.8 0.0 0.0 0.0 0.0 0.0 0.0 Capital expenditure 2.7 3.5 5.0 4.1 4.4 6.5 7.8 7.9 2.7 Acquisition of fixed capital 0.5 0.6 1.2 0.7 0.9 1.6 1.0 1.0 0.7 Multi-purpose development 2.2 2.9 3.8 3.4 3.5 4.9 6.8 7.0 2.0 projects Capital Transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.4 1.3 1.8 4.7 3.6 2.8 5.9 2.8 -0.6 Overall Balance Current Balance -2.1 0.5 1.1 3.2 1.7 3.0 5.6 2.6 2.1 Capital Balance 5.5 0.9 0.7 1.6 1.8 -0.2 0.3 0.3 -2.7 Memo items: Nominal GDP 94.1 89.7 89.7 87.4 96.4 95.9 102.5 99.2 105.6 Grants as % of GDP 28.9 24.5 26.0 25.2 23.1 24.4 26.6 27.6 18.4 Grants as % of Total Revenue 80.8 75.5 74.3 68.1 68.0 70.3 71.6 74.9 72.0 Tax Revenue as % of GDP 10.2 10.4 12.0 12.8 11.5 12.0 12.5 10.6 8.3 Current Expenditure as % of GDP 29.3 27.1 27.4 26.9 25.6 24.9 23.8 26.0 23.6 Capital Expenditure as % of GDP 2.8 3.9 5.6 4.7 4.6 6.8 7.6 8.0 2.6 Overall Balance as % of GDP 3.6 1.5 2.0 5.4 3.7 2.9 5.8 2.8 -0.6 Current Balance as % of GDP -2.2 0.5 1.3 3.6 1.8 3.1 5.5 2.6 1.9 Source: FSM National Department of Economic Affairs, EMPAT. Figures for FY01- FY02 are estimates and FY03 and FY04 are projected, as audited data not available.
210
Appendixes
Table A39 Yap Government Revenues and Expenditures: FY2001-2004 (in million US $)
FY87 FY88 FY89
Total re venue and grants revenue Total re venue revenue Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others State tax revenue Nontax revenue Dividend and interest income Other nontax revenues Grants Grants from abroad Current grants Compact General Compact Special Other: Current Capital grants Compact CIP Other: Capital Grants from national government Current Capital Total e xpenditure and net lending expenditure Total e xpenditure expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Net lending (domestic) Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 19.5 2.4 1.3 0.2 0.2 0.1 0.1 0.8 1.1 0.6 0.5 17.1 15.7 10.1 7.0 1.6 1.5 5.6 4.3 1.3 1.4 1.3 0.1 15.2 15.2 11.2 10.8 5.6 0.7 4.6 0.0 0.3 0.0 4.0 1.8 2.2 0.0 0.0 4.3 2.6 1.7 16.7 102 88 11 67 24 25.9 15.7 20.4 2.4 1.5 0.2 0.2 0.1 0.1 0.8 0.9 0.3 0.5 18.0 17.6 12.0 7.1 2.7 2.1 5.6 4.4 1.2 0.4 0.4 0.0 14.8 14.8 12.3 11.9 5.6 0.6 5.7 0.0 0.3 0.0 2.6 0.7 1.8 0.0 0.0 5.5 2.5 3.1 18.0 100 88 12 68 14 30.8 13.8 22.8 5.2 1.5 0.2 0.2 0.1 0.1 0.9 3.7 2.9 0.8 17.6 16.9 11.1 7.3 2.4 1.3 5.8 4.5 1.3 0.7 0.6 0.1 15.8 15.8 11.6 11.3 5.7 0.6 5.0 0.0 0.3 0.0 4.3 1.1 3.1 0.0 0.0 6.9 5.4 1.6 18.7 94 77 11 62 23 37.1 28.6
FY90
23.3 4.4 2.0 0.3 0.4 0.1 0.2 1.1 2.4 1.4 1.0 19.0 17.7 11.0 7.5 2.3 1.2 6.7 4.6 2.1 1.3 0.5 0.8 22.0 22.0 12.3 11.9 5.8 0.7 5.5 0.0 0.2 0.1 9.8 4.9 1.2 3.7 0.0 1.3 3.6 -2.3 22.5 84 81 12 55 43 6.0 16.2
F Y9 1 Y91
25.3 6.4 2.3 0.4 0.5 0.1 0.1 1.3 4.1 2.7 1.4 18.9 18.0 11.0 7.7 2.8 0.5 7.0 4.8 2.2 0.9 0.5 0.4 20.8 20.8 13.2 12.1 6.0 0.6 5.5 0.3 0.8 0.0 7.6 6.1 1.3 0.2 0.0 4.5 4.6 -0.2 24.2 78 75 13 55 31 18.4 19.2
FY92
27.4 9.6 2.5 0.3 0.6 0.1 0.2 1.3 7.1 5.3 1.8 17.8 15.2 10.4 6.8 2.6 1.0 4.8 4.2 0.7 2.6 0.4 2.2 23.8 23.8 18.8 13.5 6.0 0.8 6.8 4.8 0.2 0.2 5.0 4.0 1.1 0.0 0.0 3.6 1.6 2.0 29.2 61 65 12 64 17 12.4 5.4
FY93
25.1 8.2 2.7 0.3 0.6 0.2 0.4 1.3 5.5 3.5 2.0 16.9 15.2 10.4 6.9 3.0 0.5 4.7 4.3 0.5 1.7 0.3 1.5 26.3 21.8 17.5 12.0 6.3 0.6 5.1 5.4 0.1 0.0 4.3 3.0 1.3 0.0 -4.5 -1.2 -3.1 1.9 30.0 56 67 14 58 14 -4.0 -10.3
FY94 FY95
23.8 7.6 3.3 0.6 0.6 0.1 0.5 1.6 4.3 2.5 1.8 16.2 15.1 10.7 7.1 2.9 0.8 4.4 4.3 0.1 1.1 0.9 0.1 22.8 22.8 18.7 13.7 6.7 0.7 6.3 5.0 0.1 0.0 4.1 2.6 1.4 0.0 0.0 1.0 0.5 0.5 31.2 52 68 16 60 13 3.2 1.5 25.4 8.1 2.5 0.4 0.5 0.1 0.3 1.3 5.6 3.4 2.2 17.3 16.1 11.5 7.2 2.9 1.5 4.6 4.4 0.2 1.2 1.1 0.1 25.5 25.5 19.8 15.3 7.0 1.0 7.3 4.4 0.2 0.0 5.7 4.4 1.3 0.0 0.0 -0.1 0.8 -1.0 30.3 57 68 12 66 19 -0.4 2.8
211
Table A39 (continued) Yap Government Revenues and Expenditures: FY2001-2004 (in million US $)
FY96 FY97 FY98
Total re venue and grants revenue Total re venue revenue Tax revenue Wages and salary tax Gross revenue tax Import tax: Fuel Import tax: All others State tax revenue Nontax revenue Dividend and interest income Other nontax revenues Grants Grants from abroad Current grants Compact General Compact Special Other:Current Capital grants Compact CIP Other: Capital Grants from national government Current Capital expenditure Total e xpenditure and net lending Total e xpenditure expenditure Current expenditure Expenditure on goods and services Wages and salaries Travel Other Interest payments Subsidies Transfers Capital expenditure Acquisition of fixed capital Multi-purpose development projects Capital Transfers Net lending (domestic) Overall Balance Current Balance Capital Balance Memo items: Nominal GDP Grants as % of GDP Grants as % of Total Revenue Tax Revenue as % of GDP Current Expenditure as % of GDP Capital Expenditure as % of GDP Overall Balance as % of GDP Current Balance as % of GDP 26.5 8.4 3.3 0.4 0.6 0.1 0.5 1.8 5.1 3.7 1.3 118.1 16.6 11.6 7.3 2.9 1.4 5.0 4.5 0.5 1.5 1.0 0.5 26.6 26.6 19.3 14.0 7.3 0.9 5.8 3.8 1.2 0.3 7.4 1.9 5.5 0.0 0.0 -0.2 1.7 -1.8 32.5 56 68 15 59 23 -0.5 5.2 24.7 7.7 2.8 0.4 0.6 0.1 0.4 1.2 4.9 3.9 1.0 17.1 15.2 10.5 5.8 2.9 1.8 4.7 3.5 1.2 1.8 1.3 0.5 19.8 19.8 16.7 13.4 6.7 0.9 5.7 3.2 0.1 0.0 3.1 2.2 0.9 0.0 0.0 5.0 2.8 2.2 32.9 52 69 13 51 9.4 15.0 8.5 29.8 7.9 3.1 0.4 0.6 0.1 0.7 1.4 4.8 3.8 1.0 21.9 16.1 12.5 5.9 2.9 3.7 3.6 3.6 0.0 5.8 1.3 4.5 31.4 31.4 17.2 12.7 6.1 0.9 5.7 2.6 0.2 1.7 14.3 12.5 1.0 0.7 0.0 -1.6 4.6 -6.2 37.4 59 73 13 46 38.2 -4.4 12.2
FY99
26.9 7.5 3.6 0.4 0.9 0.0 0.7 1.5 3.9 2.6 1.3 19.4 16.0 11.2 5.9 2.9 2.4 4.8 3.6 1.2 3.4 1.4 2.0 23.3 23.3 16.8 13.3 5.6 0.9 6.8 2.0 0.5 1.1 6.5 5.7 0.7 0.0 0.0 3.6 3.3 0.3 34.4 56 72 13 49 18.8 10.4 9.5
FY00
26.2 8.0 4.7 0.9 1.2 0.0 1.2 1.4 3.3 1.6 1.6 18.2 16.0 11.2 5.9 2.8 2.5 4.8 3.6 1.1 2.2 1.3 0.9 20.9 20.9 15.3 13.3 5.3 0.9 7.1 1.3 0.2 0.6 5.5 1.9 3.7 0.0 0.0 5.3 5.2 0.1 34.8 52 69 18 44 15.8 15.3 14.9
F Y0 1 Y01
24.0 6.3 3.8 0.3 1.5 0.1 1.1 0.9 2.5 1.8 0.7 17.7 15.2 11.3 6.0 2.8 2.5 3.9 3.7 0.2 2.5 2.4 0.1 20.1 20.1 14.2 13.4 5.6 1.1 6.7 0.6 0.2 0.0 5.9 5.4 0.5 0.0 0.0 3.9 5.8 -1.9 37.4 47 74 13 38 15.7 10.4 15.5
FY02e FY03e FYO4e

24.6 6.4 3.2 0.7 0.7 0.1 0.9 0.8 3.3 0.9 2.4 18.1 17.4 12.7 7.6 2.8 2.3 4.7 4.7 0.0 0.7 0.7 0.0 16.9 16.9 15.0 14.0 6.0 1.4 6.6 0.0 0.3 0.7 1.8 1.5 0.3 0.0 0.0 7.7 4.8 2.9 34.6 52 74 12 44 5.3 22.3 14.0 24.9 4.7 3.5 0.9 0.8 0.1 0.9 0.9 1.2 0.4 0.8 20.1 18.8 13.3 7.7 2.7 2.8 5.5 4.8 0.8 1.3 1.3 0.0 17.1 17.1 15.3 14.3 6.1 1.4 6.8 0.0 0.3 0.7 1.9 1.6 0.3 0.0 0.0 7.7 4.1 3.7 37.0 54 81 12 41 5.1 20.9 11.0 16.5 3.9 2.6 0.5 0.5 0.1 0.6 0.8 1.3 0.5 0.8 12.6 12.6 12.6 0.0 10.2 2.5 0.0 0.0 0.0 0.0 0.0 0.0 17.1 17.1 15.4 14.4 6.0 1.5 6.9 0.0 0.3 0.7 1.7 1.5 0.3 0.0 0.0 -0.6 1.1 -1.7 36.2 35 77 9.2 42 4.8 -1.7 3.1
Source: FSM National Department of Economic Affairs, EMPAT. Figures for FY01- FY02 are estimates and FY03 and FY04 are projected, as audited data not available.
212
Appendixes
Table A40 FSM Imports by Product Category: 2000-2002 (CIF Value US$ Millions) Category Food and Beverages Industrial Supplies N.E.C. Fuels and Lubricants Capital Goods, except transport equip. Transport Equipment, Parts & Accessories Consumer Goods N.E.C. All Other Goods Total 2000 20.8 19.5 16.2 8.6 7.1 9.6 25.0 106.8 200 1 2001 35.3 20.2 18.7 10.7 9.8 14.6 4.5 113.8 2002 33.9 20.1 14.8 11.2 6.5 14.6 3.3 104.3
Source: International Trade Publication. FSM Department of Economic Affairs, Division of Statistics, September 2004.
Table A41 FSM Imports by State and Product Category: 2002 (CIF value US$ Millions) Category Food and Beverages Industrial Supplies N.E.C. Fuels and Lubricants Capital Goods, except transport equip. Transport Equipment, Parts & Accessories Consumer Goods N.E.C. All Other Goods Total FSM 33.9 20.1 14.8 11.2 6.5 14.6 3.3 104.3 Chuuk 11.3 4.8 5.7 1.8 1.3 4.3 0.3 29.5 Kosrae 2.9 1.8 1.6 1.1 0.5 1.2 0.7 9.8 Pohnpei 13.9 7.4 5.1 5.5 3.3 5.8 2.2 43.3 Yap 5.9 6.0 2.4 2.7 1.4 3.3 0.1 21.7
213
Table A42 FSM Commodity Exports by State and Product: 1992 and 2002 FOB value in US$ 000) FSM 1992 2002
154 148 0 0 0 0 223 525 1,071 39 522 21 1,653 0 12 3 15 2,193 8 198 206 535 0 0 0 0 130 2 10 1 13 63 76 147 23 246 0 0 0 0 0 0 5 8 nil 13 9,216 15 0 16 9,247 0 21 165 186 9,622 6 19 1 26 8 37 7 52 456 9,198 11 2 2 9,2 13 9,21 2,045 1 2,046 11,372 76 7 0 83 0 92 15 0 0 8 15 130 nil 6 25 nil nil 3 3 37 68 22 0 nil 32 nil 67 18 9 88 13 nil 241 31 1 4 378 0 16 0 94 0 2 1 113
Chuuk 19 92 2002 19 92 2002

211 26 28 241 888 4 30 1,428 8,796 110 206 26 9, 138 9,1 3,591 11 251 22 3,875 14,441
Kosrae
Pohnpei
Yap 1992 2002

46 nil 3 857 25 1 93 931 22 32 1 55 3,591 1 5 14 3,611 4,597
Commodity
1992 2002
222 278 15 94 32 11 306 958
19,485 65 524 39 20, 113 20,1
Copra Banana Citrus Kava Betel Nuts Black Pepper Root Crops Other Fam Commodities Total Agriculture E xpor ts Expor xports Marine Products Offshore Fish Reef Fish Crab/Lobsters Trochus Shells/Meat Other Marine Products Total Marine E xpor ts Expor xports Other Products Garments Handicrafts & Souvenirs Cooked Food Other Products N.E.C. Total Other Exports EX PORT RTS TOTAL E X PO RT S
2,045 35 168 2,248 23,319
Source:
FSM Trade Bulletin No.9, Department of Economic Affairs, Statistics Unit, November 1998. International Trade Publication. FSM Department of Economic Affairs, Division of Statistics, September 2004.
Notes: 1. denotes, not available or not separately reported. 2. In 2002, offshore fish data not available by state. 3.Handicrafts & Souvenirs are sales reported by outlets.
Table A43 FSM Commodity Exports: 1992-1994 and 2000-2002 (FOB value in US$ 000) Commodity Copra Banana Citrus Kava Betel Nuts Black Pepper Root Crops Other Farm Commodities Total Agriculture Exports Marine Products Offshore Fish Reef Fish Crab/Lobsters Trochus Shells/Meat Other Marine Products Total Marine Exports Other Products Garments Handicrafts & Souvenirs Cooked Food Other Products N.E.C. Total Other Exports Total Exports 1992 222 278 15 94 32 11 306 958 19,485 65 524 39 20,113 2,045 35 168 2,248 23,319 1993 0 754 8 267 36 85 530 1,680 25,217 75 3 30 25,325 2,055 85 24 2,164 29,169 1994 390 456 9 152 252 95 91 327 1,620 73,573 97 430 13 74,113 2,161 240 39 2,440 78,173 2000 186 72 44 160 625 30 30 1,139 12,143 75 172 42 12,432 3,010 9 191 6 3,216 16,787 200 1 2001 201 33 23 241 908 17 25 1,367 12,100 101 178 3 12,382 4,391 11 232 17 4,651 18,400 2002 211 26 28 888 4 30 1,428 8,796 110 206 26 9,138 3,591 11 251 22 3,875 14,441
Source: FSM Trade Bulletin No.9, Department of Economic Affairs, Statistics Unit, November 1998. Notes: Handicrafts & Souvenirs are sales reported by outlets. denotes, not available or not
Appendix 6. Tourism Strategic Planning Matrix
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Federated States of Micronesia 2005: Economic Report Toward A Self Sustainable Economy

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Pacific Studies Series

Federated States of Micronesia

Federated States of Micronesia Towards a Self-Sustainable Economy

Federated States of Micronesia Towards a Self-Sustainable Economy

Box 1. Economic Benefits of Compact II

Chapter 2. Economic and Social History

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 2. Economic and Social History

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 2. Economic and Social History

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 2. Economic and Social History

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 2. Economic and Social History

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 2. Economic and Social History

Chapter 3. Social Institutions and Their Relevance for Economic Decisions

Federated States of Micronesia Towards a Self-Sustainable Economy

Box 2. Historical Summary

Federated States of Micronesia Towards a Self-Sustainable Economy

Source: Marksbury (1979); Perin (1996); Ritter (1978).

Chapter 3. Social Institutions and Their Relevance for Economic Decisions

Chuuk Kosrae Pohnpei Yap

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 3. Social Institutions and Their Relevance for Economic Decisions

46 271 11,241 107,008 244 0.1 395 0.3

Source: FSM (2002). Statistical Yearbook.

Federated States of Micronesia Towards a Self-Sustainable Economy

Box 3. Land Tenure Laws & Regulations

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 3. Social Institutions and Their Relevance for Economic Decisions

Box 4. S.L. No. 4L-21-96: Pohnpei Development Leasehold Act of 1996

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 3. Social Institutions and Their Relevance for Economic Decisions

Box 5. Laws on Customs and Traditions

Chapter 3. Social Institutions and Their Relevance for Economic Decisions

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 3. Social Institutions and Their Relevance for Economic Decisions

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 3. Social Institutions and Their Relevance for Economic Decisions

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 4. Government Structures and Implications for Economic Development

The powers granted to the state governments are:

Chapter 4. Government Structures and Implications for Economic Development

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 4. Government Structures and Implications for Economic Development

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 4. Government Structures and Implications for Economic Development

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 4. Government Structures and Implications for Economic Development

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 4. Government Structures and Implications for Economic Development

Federated States of Micronesia Towards a Self-Sustainable Economy

Chapter 5. Economic Development, 1987-2003

Chapter 5. Economic Development, 1987-2003

Special Capital General

Source: FSM Department of Economic Affairs, EMPAT.

Federated States of Micronesia Towards a Self-Sustainable Economy

Box 6. Federal US Program Assistance

Source: Deloitte and Touche (1987-2001). Single Audit Report.

Chapter 5. Economic Development, 1987-2003

Federated States of Micronesia Towards a Self-Sustainable Economy

223.4 69.2 17.8 104.3 32.2