MicSem Publications

An Overview of the FSM Economy

by Francis X. Hezel, S.J.

2003 Economics

The First Compact Period

The onset of the implementation of the Compact of Free Association was a heady period for Micronesians. For eighteen years they had been negotiating for their new political status and making the transition to self-government. In 1986, when the new Compact took effect, citizens looked forward to a promising future. US annual grants to FSM provided for operational funds (60 percent of Compact funds), and capital investment (40 percent) that could be used for infrastructural needs or as seed money for development projects. By the terms of the Compact, annual US aid to FSM, promised for 15 years, was to be cut at the end of each five-year period, so that by the end of the Compact FSM's annual support would be reduced to roughly two-thirds of what it had been receiving during the initial five-year period. The hope was that gradually, with the help of Compact funding, a solid foundation for future economic growth would be laid.

The first ten years of the Compact seemed to fulfill some of this promise of development in an economy that had always been fueled by government payrolls. Through 1995 the economy grew by an impressive 4.3 percent yearly. Even more surprisingly, the private sector expanded by 7.1 percent, as the number of jobs in the private sector surpassed those in government for the first time ever [FSM DEA 2002a: 1]. Even after the first step-down in US funding assistance in 1991-1992, economic growth continued. The negative impact of this cutback in aid was greatly softened as the governments borrowed against the remaining Compact funds.

From 1996, the point of the second funding step-down, the economy went into a sharp decline. The cumulative effect of the two step-downs in funding, coupled with the reforms in the public sector and the resulting reduction in the government payroll, choked the flow of money through the government. As a result, the GDP declined by an average of nearly 1 percent yearly through the last five years of the Compact [FSM DEA 2002a: 4]. The private sector also lost ground during this period, although the decline was not as sharp as in the government sector.

Overall, the economic growth during the fifteen-year Compact period was marginal. GDP grew by 1.6 percent yearly [FSM DEA 2002a: 4]. Employment increased at about the same rate, with almost all the growth occurring during the first ten years. There were real gains in the private sector that survived the final step-down in US funding, but the last five years saw business expansion come to a halt.

Economic performance during the first Compact period varied widely from state to state. Yap, famous for its strong fiscal discipline, showed a 3 percent average annual growth in GDP. Pohnpei, with its GDP growth rate of 2.8 percent yearly, was almost as strong. Kosrae, which has always depended nearly exclusively on the government as its economic mainstay, showed almost no growth at all in its private sector. Its GDP grew by only 0.6 percent a year during the Compact period. Chuuk, the most economically troubled state, suffered two financial crises-one in the mid-1990s and another just last year. At present the state has accumulated debts of more than $20 million due to weak fiscal management. In Chuuk alone, the GDP has shown a net annual decrease (0.4 percent yearly) over the Compact period [FSM DEA 2002a: 4-6].

Extended Compact Funding

The US funding for the initial Compact period was extended for two years while US and FSM negotiators worked out an agreement to provide additional funding to FSM for another twenty years (2004-2023). The financial package presented by the US in this new funding agreement would offer FSM a total of $92 million annually. Of this package $16 million during the first three years, and an increasing amount each year thereafter, would go into a Trust Fund to be used to sustain the government at the end of this twenty-year period [FSM DEA 2002a: 32-34].

US assistance during this second Compact period has conditions attached that the US funding for the first Compact period did not have. Annual grants are targeted toward six sectors, are dependent upon a joint budget submitted by the four states and national government, are tied to performance-based objectives, are subject to a review of the achievement of the previous year's funding goals, and must be approved each year by a committee of five. During 2004, the first year of this funding period, $76 million will be provided for current government expenses. This represents a slight drop from the $80.2 million-excluding "bump up" funds for the two-year extension of the first Compact period-that the US provided this year and last [FSM DEA 2002a: 31].

What this means, of course, is that the government sector, which was struggling with adjustments to downsize in keeping with US aid cuts, can expect no relief in the near future. The US annual subsidy will continue to shrink over the next twenty years, but because the reduction will be very gradual there should be no jolts of the kind felt by the nation in 1996 at the time of the final five-year step down in funding. Gross GDP, which grew by an annual average of 1.6 percent during the first Compact funding period, is projected to increase by 1.4 percent annually during the next twenty years [FSM DEA 2002a: 33]. This is to say that if the economy is to grow to any significant degree, it must look to something other than the government to propel this growth.

The State of the Economy

Despite some progress during the early years of the Compact, particularly in the expansion of the private sector, the nation's economic performance is still heavily dependent on government spending. Most of the private sector itself consists of goods and services provided exclusively for domestic consumption, goods and services that would be unmarketable were it not for government spending. What we once referred to as exports and is now being termed "traded goods and services" is a minuscule part of the current FSM economy. Fisheries, tourism and commercial agriculture combined account for a mere 5 percent of the total FSM economy [FSM DEA 2002a: 7]. After thirty years of trusteeship, ten years of self-government, and fifteen years of full independence, FSM is a nation still searching for an industrial base capable of supporting its economy. Although its survival is virtually guaranteed by extended US financial aid and the interest generated by the Trust Fund, its prospects for economic prosperity are not particularly bright. There is no major industry in FSM today and none in sight for the future.

One of the three development areas targeted by FSM in its First Development Plan at the onset of the Compact was fishing [FSM OPS 1985]. This would seem to be an obvious avenue for development in view of the extensive marine area that FSM controls. During the early 1990s, the national and state governments invested heavily in the fishing industry, often in partnership with outside interests. The investments, totaling $56 million, included the purchase of purse seiners and long line fishing boats, establishment of on-shore processing facilities, and the lease of planes for shipment of the product to market [Jacobs 2002: 3-7]. None of the public sector investments in fishing has turned a profit. Despite cumulative losses of $21 million between 1993 and 1998, the governments have been reluctant to sell off these enterprises [Jacobs 2002: 7-8]. Hence, far from generating revenue, the investments continue to drain off critical government funds to sustain them. The only source of revenue earned from fishing has been from the annual license fees that FSM negotiates with outside nations proposing to fish in its waters. This has totaled a substantial $212 million over the Compact period [FSM DEA 2002a: Table 8a].

Tourism, the second targeted area of development, is more a distant hope than a reality. Visitor entry figures for FSM have been hovering between 15,000 and 18,000 for the past five years [FSM DEA 2002a: Table 2a]. This represents roughly one-quarter of the yearly visitor total in Palau, the new rising star in the area, and about one-fortieth of the yearly trade in the Northern Marianas. High airfares and limited tourist facilities have been impediments to the development of a major tourist industry, but the potential exists for growth in this area.

Commercial agriculture, which has never been a significant factor in the economy, today brings in about $2 million a year, accounting for merely 1 percent of the economy [FSM DEA 2002a: 7]. Over the decades there has been a long list of commercial crop failures. To this list must be added pepper, the production of which has all but ceased on Pohnpei despite its early promise. The copra industry, which for years provided a source of ready cash for people living off the land, has all but disappeared, a victim of falling prices.Not only is there no major industry, then, but the islands lack even a viable cash crop since the demise of the copra industry. For decades, villagers and outer islanders could make copra to earn a few dollars as occasion or need arose. This was an important means of stabilizing the subsistence sector, in which an estimated half of the population is engaged. Families could support themselves from the land and sea, while earning a modest cash income to supplement their livelihood. Moreover, copra production could easily be integrated into the ebb and flow of village life. With the decline of copra, villagers are resorting to the sale of other local produce: in Pohnpei sakau, in Yap betelnut, in Kosrae bananas and taro, and in Chuuk reef fish and local food. While these provide something of a cash income for villagers, questions can be raised about the sustainability of these efforts and their impact on the environment.

The absence of a viable cash crop is a serious issue, no less so than the absence of an industry. The exigencies of modern life have made it impossible for that fifty percent of the population that lives a village life to remain there without at least a small cash inflow. Remittances have never been a dependable source of cash for people living on the land. Unless these people are able to find a replacement for copra, there is danger that the rural population will become increasingly uprooted and add to the stream of emigrants abroad. On the other hand, there is the contrary danger that the need for a cash income may be satisfied in a way that does violence to the resources from which these villagers live-for instance, by highland planting of sakau on Pohnpei or of bananas on Kosrae.

Prospect of Economic Expansion

What would it take to build a firm industrial base in FSM? Notwithstanding the disappointments of the past decade, fishing and tourism may remain solid pilings on which to build an economic foundation. FSM has still done very little to market itself internationally as a tourist destination, even to the limited numbers diving enthusiasts prepared to explore its world-class undersea wonders. Likewise, it has done little to appeal to the lucrative Asian tourist market, the very market that has been the base of the tourist boom in Guam, Saipan, and more recently Palau. Commercial fishing, too, might be explored further, perhaps making use of Asian fishermen on contracted boats. Ting Hong, a Chinese firm that operated out of Pohnpei during the mid-1990s, showed that a company supplying fresh sashimi to the Japanese market could make a decent profit. Even high-end agriculture, as in the case of Pohnpei pepper, could be turned into a successful business. There is room for FSM to carve out for itself small-niche specialities if it should choose to do so.

For such development to take place, a major effort would be required utilizing both foreign investment and outside managerial talent. The investment climate in FSM, however, is not such as to encourage foreign entrepreneurs to do business in the islands. Restrictions on the length of land leases, uneven court enforcement of contracts, lack of tax incentives, and multiple bureaucratic requirements imposed on outsiders all make investment unattractive. All of this could be changed, of course, but it will necessarily have to be done over time. In the next few years it is unlikely that the climate will change significantly enough to render the islands favorable to foreign investment. This being the case, there is little hope that the FSM economy will show any substantial expansion in the next five or ten years. In all likelihood, FSM faces the prospects of a stagnant economy for the next ten years or longer.

Jobs and Migration

To gauge the reaction of the FSM to a stagnant economy, we need only review what happened during the last several years of the first Compact funding period. The step-down in US aid and the public sector reforms, as we have seen, put the brakes on the impressive growth that the private sector showed during the first ten years. This was to be expected since the private sector largely consists of services (taxis, stores, restaurants, etc) that depend on government spending. Consequently, employment between 1996 and 2001 showed virtually no growth, moving from 15,304 jobs in 1996 to 15,392 in 2001 [FSM DEA 2002a: Table 3a].

Such a no-growth job market is unprecedented in recent history. For the previous twenty-five years, employment had been continually rising in FSM, as Table 1 shows. The increase for each five-year period ranged between 1,000 and 2,800 jobs between 1970 and 1995, regardless of political status changes and fluctuations in economic policies. FSM citizens had come to expect a growing job market, no matter what else might happen. The tail end of this Compact funding period, with its employment increase of a paltry 88 jobs, was a shock that they had never before experienced.

Table 1. EMPLOYMENT GROWTH IN FSM (1970-2000)
1970 4,702  
1975 6,964 +2,262
1980 9,760 +2,796
1985 12,630 +2,870
1990 13,734 +1,104
1996 15,304 +1,570
2001 15,392 +88

Sources: US DOS 1981: Table 9; FSM OPS 1985: 97-99; FSM DEA 2002a: 51

The public reaction can be measured in the comparative census figures for 1994 and 2000. During this six-year period, the total FSM population grew from 105,506 to 107,008-a growth of 1,502 [FSM DEA 2002b: 4]. This represents a growth rate of only 0.2 percent annually, a large decline compared with an FSM growth rate of 3 percent for 1980-1989 and 1.9 percent for 1989-1994 [FSM DEA 2002a: 9]. On the basis of recent fertility rates for FSM, we can assume a natural increase rate of 2 percent yearly disregarding migration, which would have yielded a population of 118,816 (FSM DEA 2002b: 25-31]. The "missing population" of 11,808 gives us a reasonable estimate of the number of FSM emigrants during the six years between 1994 and 2000.

Put simply, nearly 2,000 FSM citizens a year were leaving the islands to take up residence in Guam, Saipan, Hawaii and the mainland US to find the jobs there that were not available to them at home. Assuming that the ratio of dependents established in a 1997 survey of FSM residents in Hawaii holds for this population, then over 4,000 of these emigrants found jobs abroad during this period [Levin 1998].

If we accept these figures, the annual emigration rate from FSM during the late 1990s was about 1.8 percent of the population. This is a significant increase over the emigration rate of 1 percent noted for the first eight years of the Compact, 1987-1994 [Hezel & Levin 1996: 97-98]. The accelerating emigration from FSM during the Compact years is represented in Table 2. The obvious conclusion is that as jobs become scarcer, a growing segment of the population leaves to find them elsewhere.

  1987-1994 1995-2000 1987-2000
No. emigrants 8,750 11,800 20,550
Yearly outflow 1,100 1,970 1,430
Yearly outflow rate 1.0% 1.8% 1.3%
Migrants as % of FSM-born population 7.7% 9.9% 16.

Note: 1987-1994 figures are based on FSM emigrants to Guam and Saipan only. Sources: Hezel & Levin 1996: 95-98; extrapolations from census data in FSM DEA 2002b

There are now at least 20,000 FSM-born islanders living overseas. Given the no-growth scenario projected here, it is reasonable to assume that large numbers of Micronesians will continue to emigrate in search of jobs, and perhaps also to afford their families a standard of health care and education that they will not easily find at home because of financial pressure on government services. Assuming that the US continues to offer FSM citizens the right to live in US states and territories, it is likely that future emigration will match the level reached in the final years of the first Compact funding period.


Table 3 reveals the sharp downturn in population growth rates everywhere in the FSM during the past twenty years. From an annual growth rate of 3 percent during the 1980s, FSM has dropped to a growth rate of only 0.2 percent yearly. As Table 3 shows, the sudden reversal of population trends has occurred in every state. Economic planners have been sounding the alarm for years about the need to take action to control the excessive population growth rate so as not to overtax the slender resource base of the islands. It is of interest to note that what a plethora of community education programs urging limitation of family size have not been able to achieve, a serious economic downturn accomplished. In less than a generation, population growth was brought down from one of the highest in the world to nearly zero.

  1980-1989 1989-1994 1994-2000
Chuuk 2.7% 2.2% 0.1%
Kosrae 2.4% 1.4% 0.8%
Pohnpei 3.7% 1.9% 0.4%
Yap 2.7% 1.5% 0.1%
FSM 3.0% 1.9% 0.2

Source: FSM DEA 2002a: 9

The reason for this, as we have seen, is widespread emigration. Since there is no reason to believe that economic prospects will brighten greatly in the near future, we can assume that population growth in FSM will be all but negligible over the next ten to twenty years. It appears that FSM is heading for a long period of population stability like that which many nations of the South Pacific have experienced.

Micronesians may feel themselves powerless to create economic growth, for they control neither the size of the US funding stream that is so critical in supporting their government nor the investment that could generate an industry of any appreciable size. They can, however, employ the strategy that they have used for generations to adjust the balance between resources and the numbers of people these resources are expected to support. They have done this by modulating the population levels so as not to overburden the resource base-on small atolls in the past by sending off young people to marry and live on a more productive island, in their cash-strapped nation today by waving farewell to family and friends who are departing for California or Oregon. There is no reason to think that Micronesians will abandon this time-tried strategy today as long as they have the option of using it.

Consequences of Economic Stagnation

Economic stagnation, especially as embodied in the lack of new jobs, will almost certainly cancel the effects of the once high population increase rate through emigration. A near zero-growth population scenario has a number of consequences impacting still further on economic conditions in FSM. The latter, in turn, will almost certainly have significant consequences on the environment.

We can expect to see much less home construction in the future and probably less road-building; this should mean less damaging effects of excavation on slopes and ecologically fragile areas. There will also be less clamor for rapid and large-scale economic growth-in the form of resort hotels, golf courses, garment factories, etc-regardless of the social and environmental cost. With the option to go abroad to earn a living, blind economic development will seem less urgent than it once did.

Heavy emigration and its result on population growth rates will certainly lighten the pressure on public service systems. Elementary school enrollments in FSM peaked as early as the mid-1990s, as we have noted elsewhere [Hezel & Heine 2000: 9-10]. No longer will it be necessary for the government to build new classrooms simply to provide for ever increasing enrollments. Scarce government resources can finally be used to strengthen education and health systems rather than simply expand them.

Theoretically, the same could be said of public utilities and communications services. Yet, political and commercial forces will conspire, as they always have, to extend these services to ever more outlying areas. Even now Pohnpei Utilities Corporation (PUC) is accepting a several million dollar loan to expand its water system to include many new villages just beyond the reach of its present waterlines. However limited their resources, governments in FSM have usually been sympathetic to requests from remote villages and outer islands for extension of basic services, including electrical power, water, telephone, and nowadays television. While extension of such services to outlying populations might seem only fair, the cost of doing so could further depress an economy that will need to use wisely the few dollars it has. Extension of services to the hinterland will not contribute substantially to production, except insofar as it increases the budget needs of the typical rural household. Faced with the need to pay monthly power, telephone and television bills, the household will have no choice but to intensify its efforts to produce saleable items from the land and sea.

Even if such services are slow in arriving to outlying areas, villagers will still feel the need for a solid cash crop to replace copra. It is these rural people, closest to the land, who ironically pose the greatest threat to the resource base in their islands. Industrial polluters present a large target and are easy to spot in their offense, whether disposing of fish offal, creating oil slicks, or pumping waste products into off-shore waters. The major problem is not with these major offenders, who can be controlled, but the ordinary villager who is struggling to provide for his family with what he can find. It is these people, not the fish exporters, who dynamite coral reefs in Chuuk, who find ways to beat the surveillance and hack through the watershed so they can plant sakau on Pohnpei, who cut down mangrove in Kosrae for firewood.

These people-who have elected to remain in FSM when so many others have left, the people who have not even moved into town to compete for the few jobs to be had there-are by default the guardians of the land. But they also stand to be its main despoilers.

Social Forces towards Individualism

Throughout the Pacific, one of the main effects of a cash economy is the atomization of societies that were once famed for their group-centeredness. Everywhere in Micronesia the extended family, once the basic productive unit, has been fragmented as money has come to rival land as the chief source of livelihood. The households of the extended family that once ate together, worked together, and formed a single economic unit began to feed themselves. As this happened, these nuclear families became increasingly independent of the authority of the lineage head. It is difficult to exaggerate the importance of the impact of this change, for its effects are being felt at just about every level in society [Hezel 2001: 8-32].

As this fragmentation of the extended family occurs, there is an contrary tendency by Micronesians to reassert the importance of the larger family group. People are using important milestones such as births, weddings, funerals as opportunities to gather together the family as if to reassure themselves that nothing has really changed. Yet, it is clear that the lineage and the larger social units no longer exercise the control over the nuclear family that they once did. Decision-making today resides in this small unit to a degree that would have been unimaginable 30 or 40 years ago. In other words, choices governing the use of resources, among other things, are being made by ever smaller groups. These decisions are not subject to the checks of larger groups in the way they would have in earlier times.

As smaller households struggle to provide for themselves, whose will be the voice to urge long-range prudence in the use of these resources? Who will provide the wisdom to look ahead so that the same resources may be used by future generations? In a society in which decisions are made collectively in larger kin groups, each of them rooted in the land, this concern often naturally emerges from the group. In today's more individualistic society, this voice has to come from somewhere else.

Traditional chiefs, who were once seen as exercising control of the land, seem to have taken on this role anew in the two states of FSM where they are a real force. (Kosrae lost its traditional leadership system decades ago, and Chuuk, which is a Melanesian "Big Man" society rather than a Polynesian-type hierarchical one, never really had chiefs with any modicum of authority.) In Pohnpei particularly, where traditional chiefs seem to have staked their claim to overseeing the land and other traditional resources, some have become champions of conservation [Hezel 2001: 130-133].

In those places where they are a force, traditional chiefs may become vocal advocates of wise use of resources. They could well be a source of collective wisdom that is not as easily available to persons making decisions today in an increasingly atomized society. Traditional leaders may be an asset where they exist and are disposed to help, but it would be better not to rely on them too much. After all, they simply don't exist in two of the four states of FSM. Any effective strategy looking toward environmental conservation should look to developing other advocates for the land and sea, even if these are not built into the old social and political systems of the islands.


(FSM DEA) FSM Department of Economic Affairs
2002a Economic Review, October 2002. Pohnpei, FSM. 89 pp.

2002b FSM 2000 Population and Housing Census Report. Pohnpei, FSM. 163pp.

FSM Office of Planning and Statistics
1985 First National Development Plan: 1985-1989. Pohnpei, FSM. 441 pp.

Hezel, Francis X.
2001 The New Shape of Old Island Cultures: A Half Century of Social Change in Micronesia. Honolulu: University of Hawaii Press. 198 pp.

Hezel, Francis X. and Michael J. Levin
1996 "New Trends in Micronesian Migration: FSM Migration to Guam and the Marianas, 1990-1993." Pacific Studies 19(1): 91-114.

Hezel, Francis X. and Hilda Heine
2000 "Here's Where We're Headed; Which Way Should We Be Going?" Micronesian Counselor #28. Pohnpei, FSM. 14pp.

Jacobs, Matthew
2002 "Spoiled Tuna: A Fishing Industry Gone Bad." Micronesian Counselor #40. Pohnpei, FSM. 15pp.

Levin, Michael J.
1998 A Study of the Impact of the Compacts of Free Association. Office of Insular Affairs, Department of Interior, Washington, DC,

(US DOS) US Department of State
1981 Trust Territory of the Pacific Islands 1981: 34th Annual Report to the United Nations. Washington, DC: Government Printing Office. 238 pp & 15 tables.