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The tie that binds

Updated: Jan 6



Shoreline By Joyce McClure

“Show me the money!” is a phrase made famous by the 1996 movieJerry McGuire.”


FSM citizens yell the same demand when the Compact of Free Association’s grants aimed at “economic advancement, budgetary self-reliance, and economic self-sufficiency” are announced every year.


Since the U.S. Congress signed the Compact into law in 1986, approximately $3.14 billion in grants and another $517 million invested in trust funds have turned FSM into a welfare state.


For fiscal 2023, the FSM requested a total of $83 million with less than $700,000 allocated as of July for private sector development in Chuuk and Pohnpei. None is requested for Yap or Kosrae. Chuuk’s half is for tourism site development while Pohnpei’s is for agricultural development, among others. There’s nothing about small business development. The states’ strategic plans for tourism also focus on site development. Only Chuuk includes destination marketing using social media and unnamed websites.


The philosophy expressed in the movie “A Field of Dreams” does not cut it in the highly competitive tourism market. Build it and they will not come unless they know about it.


A year ago, the national government held a five-day conference to discuss ways “to facilitate sustainable economic development.”


The conference tackled the challenges facing the private sector such as a lack of infrastructure development, like roads and docks; a lack of human capital worsened by brain drain; and a lack of regular consultation from the government.


The participants suggested that the government negotiate with foreign shipping entities to ensure fair and consistent prices; improve awareness and education about foreign investment policies; and provide subsidies to ensure the viability of private sector entities when outside forces are beyond their control, such as the Covid-19 pandemic.


Coulda. Woulda. Shoulda. Talk is cheap. With the lack of knowledge, motivation and manpower needed to take action, these recommendations go nowhere. Show me concrete actions to help the states overcome those never-ending problems.


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The national government’s 2004 strategic development plan titled “The Next 20 Years: Achieving Economic Growth & Self-Reliance reported that the first 17 years of COFA were “successful and saw the emergence of a stable democracy.” However, it noted that “economic growth was disappointing.”


FSM leadership committed to implementing a series of reforms and measures to facilitate growth and development, but never implemented any of them.


The World Bank estimated FSM’s 2020 gross domestic income at $3,950 per person, reflecting no growth over the previous 10 years.


The cash economy is fueled by government salaries that are also paid by Compact funds. Fully 70 percent of adults work in the public sector.


A government job is easier than starting a business. It is a regular paycheck despite low minimum wages that range from a high of $2.65 at the national level to Yap’s $1.60. Only Pohnpei has a private sector minimum wage of $1.75.

The job pool is narrow due to the brain drain, and prior experience is rarely required. Job security, nepotism, lackadaisical performance assessments, no career paths or accountability have resulted in an untrained, unmotivated, bloated workforce with no other options.


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The 2004 plan also noted that during the original Compact period, economic growth was not sustainable, and the impetus for growth had to lie with the private sector. Only through adopting a more aggressive reform agenda could the FSM “provide the type of environment that our citizens could hope to find gainful economic opportunities at home and avoid the need to migrate to neighboring territories.”


But migrate they did when FSM citizens were awarded college scholarships to the U.S. where they found better paying, visa-free jobs.


Another challenge is the roadblocks encountered by foreign investors. According to the U.S. Department of State, the FSM “lacks a single window for online business registration or information portals providing comprehensive business registration information” and there is no investment screening mechanism for inbound foreign investment.


The World Bank’s 2020 Ease of Doing Business report ranked the FSM 158th of 190 countries globally in terms of procedures to register a business. Obtaining licenses and permits depends “more on the relationship of the investor (or local legal counsel) with the official in charge, rather than any clear procedure or timeline.”

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The Department of Resources and Development maintains information on trade and investment on its website, but “all information is woefully out of date,” according to the World Bank.


The statistics office reported during last year’s conference that it has completed a “Strategy for the Development of Statistics.” Among the challenges cited is the lack of an up-to-date, centralized management information system and baseline data; and high staff turnover.


Each state has its own foreign investment rules. An investor must obtain separate permits from each state and the national government with differing regulations.


The bureaucratic bottlenecks are compounded by a ban on foreign land ownership and certain business sectors, scarcity of commercial flights, poor health and education systems, an inadequate labor pool, weak courts, poor infrastructure, high costs of imported goods and business services, limits on commercial loans from the foreign-owned banks, and no department dedicated to promoting investment opportunities and facilitating the process.


According to the U.S. State Department’s 2022 Investment Climate Statement, “these challenges, both regulatory and political, affect foreign investment and economic progress in general, and addressing them requires a constitutional and political will to change that is unlikely in the foreseeable future. Some political leaders at the state and national levels are owners of the largest businesses on the islands and strongly oppose the required structural changes that would result in increased competition.”


The only way economic development will be more than a talking point during Compact negotiations is if the U.S. stops throwing coins at the problem while expecting different results.


However, when the Compact was last negotiated in 2001, the funding it provided made up one-third of FSM’s GDP. Increasing funding is predicted to further widen the gap between the public and private sector since it is used to prop up FSM’s bloated bureaucracies and not as investment.


FSM President David Panuelo recently told the U.S. to stop micromanaging the FSM by removing bureaucratic barriers. “The compact isn’t a charity but a fair trade between two completely sovereign nations,” he said. However, Panuelo has not identified any examples of micromanagement and appears to be mistaking micromanagement for the U.S. government to ensure compliance with an international agreement.


Nonetheless, it is time to switch lanes and leave behind an aging strategy that no longer works.


It is time to make “this closest alliance that cannot be found elsewhere” an active partnership to solve the economic development and other conundrums that FSM has not solved on its own. Only then will FSM become a truly independent, sovereign nation.


Or, simply call the Compact funding what it is – the price of carte blanche for the U.S. military to control this immense region.


Panuelo stated that U.S. officials allayed worries about a possible fiscal cliff recently. If the COFA negotiations are not completed by 2023, the U.S. will simply extend financial support until the negotiations are completed. If true, albeit highly questionable, the black cloud of self-sufficiency has been lifted. The U.S. taxpayer dollars will continue for another 20 years.


Use it wisely.


After a long career as a senior marketing executive, Joyce McClure traded the island of Manhattan for the island Yap as a Peace Corps response volunteer in 2016. She is now a freelance writer and photographer living in Guam. Send feedback to joycemcc62@yahoo.com




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