MicSem Publications

Sustainable Human Developement in Micronesia

by Jay Dobbin and Francis X. Hezel, SJ

March 1998 (MC #21) Economics

Origin And Meaning Of The Term

"We are no longer the mythical South Seas, the lost island paradise that time forgot," remarked Prime Minister Mara of Fiji in 1994 (Mara 1994: 14). True, but the Pacific islands, especially in Micronesia, lost their romantic, timeless image long before Mara's words. Even the period from 1944 to 1963 in American Micronesia, the Trust Territory period of "benign neglect," was at least a period of slow development by the US government. That changed with the Kennedy administration and the infusion of American funding. Modernization and development became the twin buzz words. Since then modernization has largely dropped from the vocabulary, but development continues to be the magic word to characterize the hopes of the new Pacific nations and the plans from outside donors. This paper deals with one approach to development, one that is phrased "sustainable human development.

Sustainable human development (SHD) evolved out of 40 years of post-World War II experience with development projects. Early post-war approaches, what we might call "plain old theories of development," made development almost synonymous with economic development. In post-war Micronesia, the Navy and Trust Territory officials were not so sure about the benefits of economic development, conscious as they were of the exploitation of islanders during the period of unprecedented economic productivity during Japanese control of the islands (1914-1944). When the Kennedy administration reversed the "hands off'' policy, unprecedented amounts of economic development aid came, with an emphasis on expanding the infrastructure through roads, utilities, health care and schools. The development of an adequate infrastructure was seen as a priority prerequisite for the "take off" stage of increased private sector investment. The policy appeared to follow the Walt Rostow model of the early 1960s (Rostow 1960;1963) whereby the massive influx of outside investment was believed to lead to a large wage-earning sector and replace the traditional, subsistence sector.(1)

Almost concurrently, others were criticizing the lopsided emphasis on economic development and calling for the introduction of a "human" factor into the development equation. The social dimension was to be integrated with the economic development. Human capital was now seen as a component of development along with investment capital. Gunnar Myrdal, the loudest critic of the emphasis on economic development alone, insisted on the integration of the economic with human and cultural dimensions (Myrdal 1968; 1970).

"Sustainable" became part of the popular formula for appropriate development in 1987 with the publication of the Brudtland Report (Davis 1993). Originally, SHD emphasized the impact of economic development on the physical environment and on small-scale, local communities. The failure of many early development projects was undoubtedly another reason for the inclusion of "sustainability." Even those projects that operated successfully during the project phase, often failed during the post-project phase (Davis 1993).

By the mid-1990s sustainable human development had evolved into a broad concept of related emphases. SHD was and continues to be, first of all, a rejection of exclusive economic development–the approach Mara summarized as the desire to "catch up with, and even emulate, the living standards and lifestyles of the so-called developed world so as to give our people the benefits of the modern affluent societies" (Mara 1994: 10). SHD emphasizes human capital, and recognizes the profound truth in the old formula: "development is about people" (Mara 1994: 6). So, the term SHD, became the new buzz word to replace plain old "development," but it also brought several implied or associated meanings.

SHD can, for example, imply indigenous or local control of development: at a minimum development planning is not imposed from without; at a maximum, development management and operation are local, not staffed by expatriates or foreign investors.

SHD can also imply a resurrected emphasis on the subsistence economy, which was once the sign of failure for a developing nation.

This paper is about all the above-mentioned dimensions of this broadly defined but important term, Sustainable Human Development. In summary, then, SHD

  • Aims to increase productivity, which always implies social change, but it is firmly anchored in the society's past and respects its cultural values.
  • Is environmentally sound and does no permanent damage to the ecosystem, nor does it squander scarce resources.
  • Aims at improving the overall quality of life, not just increasing the Gross Domestic Product.
  • Is people-centered: both participatory (involving people in the decision making process) and empowering (bestowing confidence in their own ability).

Having opened this paper with a description of the SHD's evolution, we will focus in the following sections on SHD today in the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI), with some comparative reference to other Micronesian economies. Other former members of the Trust Territory are in significantly different situations. The Compact of Free Association has just begun for the Republic of Palau (ROP); it is about to end for the FSM and RMI. The Northern Marianas (CNMI) chose the commonwealth option and is thus more closely tied politically to the US. Moreover, the CNMI has a mass tourism industry unlike that in the FSM, RMI or ROP. The following three sections begin with a macroeconomic summary of leading economic indicators, followed by a worm's-eye view of the local economy (the microeconomic), then development prospects for the future. The conclusion is a brief and less-than-worst case prediction for the post-Compact situation.


From American Trust Territory to the Compacts of Free Association

The problem with the present economic situation is simple: it is about to end. In four years to be precise. The end of the existing Compacts of Free Association with the US will mean the end of the guaranteed annual grants from the US. In the 1970s the Northern Marianas, Palau and the Marshalls separated from the Trust Territory, leaving Chuuk, Pohnpei, Kosrae and Yap to form the Federated States of Micronesia. In 1986, FSM and the Republic of the Marshall Islands, became states freely associated with the US. Their compacts are essentially a compromise between full independence and continued dependency. In return for recognizing the US right to deny access of these islands by any third country, the US agreed to annual grants for the 15-year life of the compact (Table 1).

In addition to the annual general grants, the compacts provided for block grants for health, education, housing and food assistance. These grants, which were intended to replace Federal programs like Head Start and USDA food, would over 15 years of the Compact give the Marshalls an additional $45 million, Palau another $39 million and FSM an additional $105 million. Moreover, there is a third set of grants for specific purposes such as developing energy and communications infrastructure, providing maritime surveillance, and financing some health and education programs. Finally, the Compact provided for military impact payments to compensate for the use of Micronesian land. Here the monies allocated are significantly different. The FSM was to receive only $160,000 annually for the Coast Guard Loran Station on Yap; but Kwajalein landowners in RMI were to receive over $1.9 million annually for the use of US Army Kwajalein Missile Range.(2)

Table 1: Total of Annual General Compact Grants (in millions, 1982 dollars)

PERIOD FY* FSM  Marshalls Palau
1st Five Years
$60 $26.10 $12
2nd Five Years
$51 $22.10 $12
3rd Five Years
$40 $19.10 $11

Sources: Schwalbenberg 1982; BOH 1997b.

*Palau Compact only went into effect in 1994, so the five-year periods are later than indicated above. It should be noted that because of inflation adjustments the dollar figures of the funds given differ from these figures.

Already, as Figure 1 shows, the Compact funding is reduced by one-third for the FSM and one-fifth for the RMI. The present FSM and RMI Compacts will conclude in 2001. The US may opt to continue, of course, but tighter US budgets and reduced foreign threat to the region may leave congress reluctant to renew large grants. By the end of the Compact, the US will have invested almost $3 billion in the FSM alone, with about half that money spent during the Trust Territory years (BOH 1995).

Both the FSM and RMI have been and are highly dependent on the Compact funds. The ADB advisory team estimates, for example, that the Compact monies accounted for a 36 percent increase in the GDP of the RMI between 1986 and 1994 (RMI-EMPAT 1995a: 1).

Although a mass infusion of cash to the new nations came with the Compact, the story goes back a generation earlier. During Trust Territory days of the 1960s and early 1970s, US funds made possible extensive wage employment that depended directly and indirectly on a large government bureaucracy. Under the Trust Territory and now under the Compact, government is the largest source of employment and cash. The wages of the government employees, in turn, generated small businesses in the private sector to meet the rising consumer demands. This is the "upside-down economy" of today's FSM and RMI. In the most industrialized nations, the private sector is larger than the government sector, and the government supports itself through taxes on the private sector. But in the Compact nations the situation is reversed: the government directly and indirectly supports the private sector and receives little in tax revenue

Bad fiscal habits developed under the compact funding. Rather than developing the private sector, funds were spent on "pork" projects and short-lived equipment and amenities. Bureaucracies expanded, with yet more citizens hired into government employ. US funds had to be entirely spent or local governments ran the risk of being cut for next year's budget. When budgets ran short, the US always found supplemental money to keep things going. The net result was to encourage governments to spend quickly and exhaust their annual budgets, so that they were ensured the same level of funding the following year or an early position in the queue for supplemental aid.

With government being the largest "engine" running the economy, the question is just how nation-states without a substantial resource base and without a well-developed private sector economy can support their present standard of living when the US subsidies dwindle or even disappear?

The problems of a bloated government bureaucracy and under-developed private sector are common to many small new nations, especially those in the Pacific. The Cook Islands, also a freely associated state (with New Zealand), has been forced to cut government jobs by 50 percent and the wages by another 15 percent since 1996 (Islands Business, July 1996). The government sector once accounted for half of the salaried work force, and the private sector has not yet picked up the slack. In Kiribati, government also dominates the economy, providing over two-thirds of all wage employment. In short, the economic situation of the FSM and RMI may be somewhat unique in its history of Trust Territory and Compact funding, but these nations face much the same difficulties as their Pacific neighbors in achieving sustainable human development.

The External Debt

The external debt of both the FSM and the RMI is tied to the Compacts, and that is the first reason it is not bad. Most of the government debt is borrowed against future Compact funds; In other words it is really an "advance" on these funds. Second, the debt is small enough so that the two nations cannot be classed with some developing African and South American nations, which have little hope of even keeping up with the interest payments. Third, the debt does not go to the financing of non-productive arms and military sales inasmuch as, under the terms of the Compacts, the US is the guarantor of military security.

On the bright side, most of the external debt is medium-term, low interest loans borrowed against future Compact funds. On the darker side, debt repayment amounted to just over 26 percent of the FSM's total GNP in 1992, and for the RMI the figure was 25 percent of the GNP in 1992. FSM's debt repayment ratio dropped to 18% by 1995.

If we focus only on the FSM debt, the nation went from a surplus in 1989 to a $137 million debt in 1993 representing 13.8% of the total GNP. There has been some debt reduction since 1993, however. How bad is this debt? According to a respected source, "deficits amounting to 10 percent of the GDP are not considered financially destabilizing" (BOH 1995).

How were the FSM loans used and was the loan money spent wisely? The breakdown of the individual loans in Table 2 shows the picture more clearly.

Table 2: FSM Government Loans

Borrowed from Loaned to Purpose Amount ($million) Still owed
Compact Chuuk Fisheries: $2m invested in desalination and ice-making plant for Chuuk Fresh Tuna Inc, as well as purchase of purse-seiners. $10.3 $10.3
Compact Pohnpei Fisheries: Investment of $8.5 million in CFC, including the purchase of three purse-seiners. The remainder was for construction of fish processing plant and purchase of bottom fishing boats. $23.8 $18.3
Compact Kosrae Fisheries: Construction of a cold storage facility intended for a local fishing corporation. $5 $2
Compact Yap Bond investment: State used its compact CIP funds for portfolio investment in bonds guaranteed at 9 percent return; purpose was to provide operational funds for post-compact years. Made in 1991 when the bond market was good, but the market fell afterwards. $71 $51.7
Compact FSM Nat'l Gov Fisheries: Money was invested in National Fishing Corporation [NFC], perhaps to fund a joint venture. $3.76 $0
USDA, REA FSM Nat'l Gov Infrastructure 1992: Loan from US Dept. of Agriculture, Rural Electrification Administration [REA], to fund construction of FSM Telecom office buildings; and phone hookup with rural areas. $41 $37
? Yap Fisheries 1992-93: To the Yap Fishing Corp. $9 ?
ADB FSM Nat'l Gov Fisheries: Intended to develop long-line fishing industry in FSM through the purchase of one training vessel and six long-liners.  $6 approved only
ADB FSM Nat'l Gov Agriculture: Intended to promote import substitution, probably on Pohnpei. Terms not known. $6 approved only
ADB FSM Nat'l Gov Infrastructure 1995? Development of water and sewage facilities.  $6 approved only
ADB FSM Nat'l Gov Public sector employment reduction 1997? To pay for early retirement program to reduce Government employment by 26%. >$18 ?

Source: Hezel 1994b

Only the $41 million FSM Telecom loan and the $6 million for water and sewage were aimed at infrastructural development, and FSM Telecom is already generating a profit. The largest single category of loans is for fisheries, but due to FSM's lack of experience in the fishing industry, the heavy investment in purse-seiners for Yap and Pohnpei have not been successful. Significantly these investments have taken a big bite out of the total development money available under the Compact. By 1994 Yap and Pohnpei had already committed all their development money up to the year 2001.(3)

The prospect of over-borrowing on the future compact funds was and is real. Some reduction in public sector expenses is clearly in order, but to reduce national and state government employment and wages, a new loan was brokered from the ADB for $18 million.

The debt picture for the RMI is remarkably similar. Between 1991 and 1994 the RMI floated a series of bond issues, all backed by Compact funding, as seen in Table 3. These bonds were to consolidate existing debt and "to free up extra resources for more capital expenditures." (RMI-EMPAT l995a: 6)

Table 3: Marshall Islands Government Bond Issues

Fiscal Year Purpose of the Bond Issue Amount
1991 Issued by Kwajalein Atoll Development Authority (KADA) for debt retirement and financing projects on the atoll. $22 million
1993 Issued by RMI for debt retirement and financing development projects through Marshall Islands Development Authority (MIDA)  $100 million
1994 Issued by RMI for MIDA  $30 million

Source: RMI-EMPAT 1995a, 1995b, 1995c

On the wisdom of the loan expenditures, the RMI-EMPAT report concludes: the major share of expenditure from bond proceeds has funded investments in and the operations of public sector enterprises and operations which have exhibited and (continue to exhibit) heavy losses. There have been several instances where the investment itself has been written off (RMI-EMPAT 1995a: 7). The RMI government also subsidies a copra processing company (Tobolar), two government fishing companies, domestic shipping via sea and air, and Air Marshall Islands. In 1992-93 Tobolar Copra had an operating loss of $1.6 million, domestic sea shipping lost $1.3 million, and Air Marshall Islands showed an operating deficit of $5.4 (ADB 1995: 24).

Put bluntly, the borrowing proceeds have financed a calculated budget deficit of $74.8 million between 1991 and 1994 (RMI-EMPAT 1995a: 13).(4)

Like the FSM, the RMI has also turned to the ADB as a source of funds to supplement the overstretched loaning from anticipated compact funds. A recent memorandum of understanding between the RMI and ADB anticipates total loans of $45.7 for capital projects over the 1995 to 1998 period. These include a $6.7 infrastructure improvement of the Majuro Water Supply and a fisheries loan of $6.9 for the RMI to buy fishing vessels, develop a fishing processing facility, expand mariculture on the outer atoll, and develop a fisheries training center (RMI-EMPAT 1995a: 25).<

What is the effect of the RMI borrowings? For the loans and bonds funded against Compact funds alone, uncommitted Compact funds will not be sufficient to pay the debt service and principal retirement by FY 2000 (RMI-EMPAT 1995a: 9). The RMI's available financial holdings in 1995 were close to zero (RMI-EMPAT 1995a: 9). Thus the nation has neither the borrowing collateral (Compact funds) or its own holdings to be able to weather a financial emergency. The government cash-flow may not even be sufficient to make its own payroll (RMI-EMPAT 1995a: 14).

Gross Domestic Product (GDP)

The GDP is frequently listed as a "leading" indicator in most economic reports, but like most statistics it is a mere figure to be interpreted.

First, GDP figures corroborate the picture of large government employment and salaries feeding the private sector in an "Upside-Down Economy" for both the FSM and RMI. In 1994 80 percent of FSM's entire GDP of $200.9 million was accounted for by government expenditures (Hezel et al: 1997: 29). In 1989, private sector capital formation for the FSM was less than 10% of the GDP, making it one of the lowest capital formation rates in the market economies of the world (BOH 1995).(5) Palau, on the other hand, showed a noteworthy decline in government expenditures as a percent of the GDP–from 26.9% in 1993 to 17.2% in 1996 (BOH 1997b: 15). Again the Palau figures are in contrast to both the FSM and RMI where the percentage of the GDP taken by government expenditure rose rapidly and are only now scaling back as the existing compacts come to an end.

Table 4 shows the comparative picture, with a slow and erratic growth for both the RMI and FSM but a significant rise for the ROP as the Compact funds kick in.(6)

Table 4: Gross Domestic Product in Constant Figures (in US millions)

1992 79.3 201.9 82.5 517
1993 83.6 204.8 75.9 520
1994 89.4 200.9 88.9 524
1995 95.5 202.6 117.6 526
1996 95.6 204.3 145.6 550

Sources: ADB 1997, BOH 1997b, BOH 1996.

GDP per capita (Table 5 puts the FSM in the middle of middle-income economies of the world. (Hezel et al 1997: 29; BOH 1995; BOH 1997b). But if inflation is about 4%, several points higher than the US, then any gain in real income may be a loss in purchasing power (Hezel et al, 1997: 29). The booming tourist industry and a made-in-US garment industry in CNMI, on the other hand, show a significantly different picture. Later in this report we will note that hopes ride high in the RMI and FSM on a new rise in tourism and expansion of the garment industry. We will also indicate why those hopes will probably never stimulate the per capita GNP in the RMI and FSM as they have in the Marianas.

What the GDP per capita comparative statistics in Table 5 do not show is precisely what SHD is all about: the quality of life. Nauru is a classic example. For a small island with only one, almost-exhausted resource (phosphate), its per capita GDP of $7,205 is comparatively high, higher than the FSM or RMI. But the toll which the reliance on phosphate investments (some now written off as investment losses) has taken on local culture, lifestyle and health is a good example of economic development which shortchanged the "sustainable" and "human" dimensions of SHD.

Table 5: Gross Domestic Product of Pacific Island Economies

  Population  GDP (in US million $)  GDP per capita ($)
Guam 153,700 3,109 20,228
Commonwealth of N. Marianas 63,000 651 10,327
Federated States of Micronesia 109,200 203 1,860
Republic of Palau 18,146 160 8,806
Republic of Marshall Islands 59,800 96 1,598
American Samoa 58,900 253 4,295
Total/Average 462,746 4,471 9,662

Non-dollar economies

Population  GDP (in US million $)  GDP per capita ($)
Cook Islands 19,600 51 2,596
Fiji 800,500 1,801 2,250
French Polynesia 229,200 3,418 14,914
Kiribati 82,400 55 662
Nauru 11,200 81 7,295
New Caledonia 196,800 3,017 15,330
Papua New Guinea (PNG) 4,141,800 4,600 1,111
Samoa 170,000 170 1,000
Solomon Islands 395,200 209 529
Tokelau 1,800 1 667
Tonga 99,000 125 1,262
Tuvalu 10,200 4 373
Vanuatu 173,900 187 1,075
Wallis and Futuna 14,800 25 1,689
Total/Average 6,348,900 13,750 2,166

Source: BOH 1997b.

Trade and Exports

Here the picture for the FSM shows considerable improvement since 1989, due largely to fees collected from other nations fishing within the FSM Economic Exclusive Zone (EEZ).(7)

In 1989 the trade gap of $65.7 million in imports, or 45 % of the GDP, ranked the FSM among the highest in the world (BOH 1995). But from 1986 to 1994 exports increased thirty-fold (Hezel et al 1997: 30), mostly from fishing fees. Annual fees increased from $0.8 million in 1982 to over $21 million in 1995 (ADB 1997b: 147). Fishing fees in 1993 accounted for half of the government's internal revenue (ADB 1997b), and although these fees have decreased recently, they are still the largest single revenue source apart from FSM Compact funds. For the Marshalls, fishing right fees are far less important and appear to be declining, as Table 6 shows.

6: RMI and FSM revenues from fishing rights ($US million)

  1990 1991 1992 1993 1994 1995
Marshalls NA 1.9 1.5 2.4 3.1 2.1*
FSM 14.0 12.9 12.5 18.3 21.3 21.5

Sources: RMI-EMPAT 1995a, p.11; ADB 1997: 147.


Employment reflects the "upside-down economy" again for both the FSM and RMI. Government was the largest employer in the FSM until 1992 when shrinking Compact funds resulted in government job cutbacks (FSM/OPS, 1996). Although the sheer numbers of private sector jobs now exceed those in government,(8) public sector wages significantly outpace private sector wages (See Table 7).(9)

Table 7: FSM Wages and Salaries by public and private sector (in US million).

  1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Public (Wages) 39.3 42.8 45.2 46.0 48.8 52.2 53.3 57.8 58.5 60.4
Private (Wages) 13.6 15.0 22.9 26.0 24.2 25.5 26.2 36.4 41.9 46.5

Source: FSM Dept of Finance; IMF and EMPAT Staff Estimates

It is more difficult to gain an up-to-date picture of employment in the RMI; 1988 is the latest year for which reliable information in available (RMI EMPAT 1995c: 21). In 1988 about 30% of the Marshallese work force was employed in the public section and 30% in the private sector. An additional problem with the outdated RMI statistics is that the wage earning population is concentrated in two very different kinds of urbanized areas: Ebeye and Majuro. Majuro is the government capital and thus has a higher though unmeasured percentage of wage earners in the public sector. Most wage employment on Ebeye is private, with jobs at the Kwajalein Missile Range employing over 1,200(10) for a total income of more than $14 million annually, making the "Range" the second largest employer in the RMI (USAKA 1997).

Unemployment in both FSM and RMI is likewise difficult to gauge. According to the 1994 FSM Census, the working age population (15-64) was only 56 percent of the total population. Because the 1994 Census defines unemployment as those looking and available for work in the four weeks before the census, the unemployment rate was measured at only 16.2%. The obvious reason for the low percent working and the low percent unemployed is the role of subsistence activity, especially in the non-urbanized areas. The 1988 figures from the RMI are comparable: 12.5% unemployed and 26% engaged in subsistence activity (RMI-EMPAT l995c: 22). What do these figures mean comparatively? The ADB concludes that a recorded employment rate of about 55 percent of the population "is fairly typical of developing countries in which a high proportion of the population are engaged in activities which do not receive direct remuneration such as child minding, food preparation, and subsistence agriculture and fishing. While such activities are very important to the local community, they do not directly contribute to the cash economy and thus create a high dependence on those that are economically active" (ADB 1995: E2).

In the RMI the "dependency ratio" is extremely high: 209/100 people (ADB 1995). But the dependency ratio, as a meaningful statistic, may have limited significance. How much do those in the wage economy depend on the non-cash, informal and subsistence economy to maintain their way of life? Could all those maids and nannies working on Kwajalein be in the cash economy were it not for kin back on Ebeye watching the children, and doing the housework?

Subsistence Economy

Accurate figures are difficult to come by, both because of variable definitions of subsistence and because of lack of data. The Bank of Hawaii 1995 Economic Report notes: "government reports indicate that the subsistence economy generates as much as 25 percent of GDP, but there is no independent data source to verify this claim" (BOH 1995). These figures seem to be based on a restrictive definition which would include only those who farm or fish without selling. Many practice some subsistence activities but also work at wage jobs and so are not included in the restrictive definition. All anecdotal evidence points to a combination of household income produced by subsistence and wage activities. In areas close to urbanized locations, we are probably looking at a category of semi-subsistence economy, which in the FSM could account for about 55% of the population (Hezel et al 1997). As one fisherman from Tol told us, "I work on Weno to pay for the gas to go fishing". However difficult they may be to measure, subsistence activities, especially on the outer islands, contribute substantially to the economy, albeit the hidden economy, of the FSM.

Summary of the Present Economic Situation

Essentially," reads the 1995 Bank of Hawaii Report, "the FSM economy has remained unchanged since Bank of Hawaii's first report on the economy of the islands in 1989. It is as dependent on outside payments as it was then" (BOH 1995). The FSM, like the RMI, was and still is a consumption economy funded by the US. That may be a gloomy analysis of the present economic situation but it is one shared by other regional experts. One long-time observer of the Pacific predicted that countries with extremely limited resources, like the FSM, would probably continue to be dependent on external aid, popular beliefs to the contrary (Hamnet & Kiste 1989: 11). A more optimistic assessment is possible, however, if with Derrin Davis we pay less attention to the macroeconomic analysis of GDP and the economic capital model of traditional development studies. Even the World Bank and Asian Development Bank, notes Davis (1993: 11), are emphasizing the sustainable development through environmental and natural resource assets. In other words, there has been a lack of attention to the positive importance of subsistence sector development. In the next section of this paper, we examine some of the microeconomic factors in the FSM which could stimulate and promote a genuinely sustainable human development.


It is too simplistic to maintain that the FSM has a "dual economy," with an urban sector that is "thoroughly monetized" and a traditional sector in rural and remote areas that relies mostly on subsistence agriculture and fishing. The reality is much more complicated. There exists an elaborate exchange of home-grown agricultural goods and fish for a cash-bought items like cigarettes, cloth or medicine. This is what we might call a semi-subsistence economy. Any estimate of the subsistence sector's portion of the GDP is close to guesswork, as the 1995 Bank of Hawaii Report noted. As resistant to measurement as it may be, subsistence activity remains very important to the people of the FSM.

Moreover, economists and planners tend to think of subsistence largely in terms of what went into peoples' stomachs, (locally grown or store-bought food) thus neglecting building, capital works such as land development, road-building, handicrafts, and services such as child care, housekeeping and the like (Fairbairn 1985: 325). As was noted above, the subsistence sector or semi-subsistence economy is a complicated reality.

The notion of a "subsistence affluence" or "plenty"–a "romantic picture of people living in a state of bliss and harmonious adaptation to their environment"–should not be uncritically applied to the Pacific as a whole, especially in the light of high infant morality rates, low life expectancy, malnutrition and lack of protection against droughts and typhoons. It is precisely in these areas where the subsistence economy comes up short and the social services of the government and a cash economy are needed.

In short, subsistence or semi-subsistence economy still plays a vital role in the total lifeways of both the FSM and RMI, and probably also in the rural areas of Palau.(11) SHD does not see the continued existence of this way of life a sign of underdevelopment.

Cultural Attitudes about Jobs, Work and Money

Not surprisingly, FSM attitudes about work reflect a blend of the newer wage economy and the older subsistence economy. The subsistence way of life is as much a mind set as a mode of production. It implies a no-rush approach to life with a disdain for long hours of work day after day since the production of surplus food, apart from those relatively few times that the community is preparing for a major event, is useless anyway. It implies a leisurely cultivation of social relationships, which are regarded as the most important value in island life. In such a lifestyle, people can afford to take time out to let the land and sea resources regenerate, for their needs are relatively simple and can be easily satisfied without putting pressure on valuable resources. A form of natural conservation is an integral part of the lifestyle of those who live a subsistence mode of life.

Although these points are obvious enough to anyone familiar with the Pacific, there is a value in repeating them here because this approach is so contrary to that required for rapid economic development. A disregard for creation of a surplus, accumulation of goods, intense and regular labor, and punctuality, while part of the mind set of subsistence life, are usually looked upon as obstacles to development.

Nonetheless, there is also a widespread feeling in Micronesia that one must have a government job to be successful. Unlike so many of the private sector service jobs, a government job brings a good salary, a high level of security and desirable health and retirement benefits. Micronesians are looking for salaried employment but they carry the cultural baggage of subsistence economy values.

These cultural values also extend to job management. Government funds can be considered as income to families in the form of salaries, rather than as a resource to be used for the overall public good. Similarly, when there are cutbacks, the perception is that the impact should be felt and shared by all employees. The result is that, rather than cut back to a lower number of people getting a good wage, governments will keep on more employees at reduced wages for all. Employment in and of itself, without regard for a person's value or dispensability, seems to be the paramount objective. Thus, salaries and employment are the very last thing to be reduced even if, by keeping more employees hired, there is no remaining money with which to do anything.

Here again we find this attitude elsewhere in the Pacific. To the dismay of expatriate planners, Chamorros on Guam, for example, persist in viewing government as an employment agency rather than as a provider of necessary public services. We read again and again in the letters to the editor of Guam's Pacific Daily News that public agencies should cut staff and provide essentials of clean water, pot-hole free roads, and a regular supply of electricity. The stateside letters to the editor miss the point: culturally speaking, the job of the government is to provide jobs first and services second. Lest they thumb our noses at this attitude of tiny developing nations, Americans might recall that the great political machines of Chicago and Boston were once based on providing jobs for loyal party voters. Perhaps even today an American mayor or two with a sprawling and decaying inner-city might well espouse the FSM and RMI attitude about cutting jobs. In any case, the priority of jobs above services is a critical cultural dimension of the local economy.


Track Record and Cost-Benefit Approach

Since the beginning of US administration of Micronesia at the end of WWII, the plan was to develop a self-sufficient economy–one that was based on private development rather than government aid. US money under the Trust Territory administration was supposed to develop the islands' infrastructure in preparation for private investment. The development funds for the second five years of Compact funding was earmarked for private sector investment. It never happened. The private sector economy of the FSM and RMI did not develop sufficiently to carry the new nations into the desired self-sufficiency. Yet, the transition was successful elsewhere. The former Trust Territory Northern Mariana Islands–now Commonwealth of the Northern Mariana Islands (CNMI)–has a prosperous if not booming private sector based on garment manufacturing and tourism (BOH 1997a). The FSM, by comparison, has two small garment factories (Pohnpei and Yap State) which do not contribute substantially to either Pohnpei or Yap State or the federal FSM coffers; Palau has one small factory; and the Marshalls is due to open its first garment factory soon. Tourism, which is booming in CNMI, is either stagnating or rising very slowly in the FSM. Last year's visitor figures to the former Trust Territory entities will suffice to show the difference (Table 8):

Table 8: Visitor Arrivals for 1996 to former Trust Territories.

Commonwealth of the Northern Marianas 721,935
Chuuk State, FSM 5,103
Kosrae State, FSM  2,674
Pohnpei State, FSM  9,558
Yap State, FSM 5,313
Majuro, Republic of the Marshall Islands* 10,943

Source: Guam Visitors Bureau as published in Pacific Daily News Supplement, July 1997, p 18. *1995 figures.

Of course there are many factors in why the select examples of tourism and garment manufacture became the foundations of a booming economy on Saipan and not for the FSM or RMI. But the two examples do show that development must be evaluated not only against a theoretical potential, but also against the real "track record" or experience. Development possibilities should also, we believe, be measured through a cost fit analysis for Sustainable Human Development. In the following section, we outline development possibilities against their "track record" and balance them for their costs and benefits to SHD.

Potential development areas are few. The much repeated generalization that Pacific Islands are resource poor and distant from existing markets is both correct and incorrect. Obviously for an industrialized, land-based logging or mining industry, none of the former Trust Territory nations have anything like PNG or the Solomons, nor do they have the arable land tor large-scale agriculture like New Caledonia or Fiji. Both the RMI and FSM may be too geographically isolated and remote ever to develop a tourist industry the size of Saipan's, although Palau's recent tourist boom may eventually give both Guam and Saipan a good competitive run. It seems, however, that there are real potential areas for growth within the limits of available resources and granted the distance from population centers. These potential industries are:

  1. Econiche agriculture such as sakau (kava) and pepper
  2. Locally-based fishing and processing
  3. Sale of fishing rights
  4. Tourism
  5. Gambling
  6. Subsistence living.

We have a priori eliminated "refuge" industries (sale of passports, citizenship), off-shore banking, and disposal of toxic wastes because of their inability to contribute significantly to either the "human" or the "sustainable" dimensions of SHD.

We have also eliminated migration–that is, migration to the US, Guam or Saipan–because we do not think migration meets the definition of Sustainable Human Development. First, out-migration develops nothing; it is a safety value against increasing demographic pressure and few jobs. Second, even if one were by some stretch of the imagination to include it under development, it may not be sustainable after the expiration of the present Compact agreement with provisions for free entry into the US. Third, should migration to the US and its territories continue in some new Compact agreement, the only development impact will be remittances sent back to the FSM, RMI or Palau. Unlike other Pacific island economies (e.g., Cook Islands), measured remittances back to the FSM, for example, have thus far been small. The 1994 FSM Census recorded $1.2 million in remittances during the previous year (Hezel & Levin 1996).(12)

1. Econiche agriculture

At first glance, large-scale agriculture might appear historically feasible. In the 19th century the Germans hoped to exploit Micronesia for plantations, while in the 20th century the Japanese made their foreign administration of the island self-supporting as a result of agriculture and mining. In fact, no administration before or after the Japanese has made the islands so economically productive. On the other hand, the economic miracle of Japanese development was bought at a cost. Land was expropriated; Okinawan and Japanese settlers were imported to do the farming; labor intensive and minimally mechanized techniques were employed. Today agricultural exports are little value. Copra prices have crashed and tropical oil products are seen as unhealthy. The cane sugar market is glutted and in competition with beet sugar. Only the dried tuna (bonito) for the Japanese delicacy katsobushi still has a viable market, but only for an almost exclusively Japanese market. Incidentally, a katsobushi processing plant operated in the Palau until 1979 and another has operated sporadically in the Marshall Islands (Togolo 1987: 58). In any case, the unprecedented agricultural export of the Japanese period is not a model for contemporary development.

This does not mean that agriculture has no potential. The $1.6 million value of FSM annual agricultural produce is at least a sign of (1) the ability to reduce imports with subsistence agriculture and (2) the ability to produce specialized "econiche" products.

To date only a few products have proven to be of significantly commercial export value. Each is a story in itself of what can and will succeed. All are small enterprises: pepper, sakau, shell buttons, betelnut and tangerines.

Pepper Pohnpei is, according to one expatriate consultant, "The island God would design if He wanted to create the perfect place to grow pepper." The product has attracted international attention as a gourmet spice, and is often mentioned when topics like agriculture, exports, diversification, and niche markets are discussed. In 1994, pepper exports amounted to $95,300.

Pepper has had a checkered past. Attempts to process and market the pepper have not been successful–cooperatives did not work, and product quality and quantities have not been consistent. Most recently, Pohnpei State's Agricultural office took up the challenge, attempting to process and market a consistent product. They bought pepper from the farmers for spot cash, and assumed responsibility for the rest of the process. Unfortunately, they were not able to market all of the product they collected and ended up with a surplus. The project closed down in a short time. The Pohnpei State Agricultural Office ended up subsidizing pepper, paying up to $1.00 per pound for even poor quality pepper. Today, there is only one private firm that still processes and markets Pohnpei pepper. One other individual is said to be starting up a business with an eye towards Asian markets.

Sakau (kava).Few outside the Pacific have even heard of sakau or kava. Sakau (Pohnpeian name; kava is the Polynesian name) is a drink derived from the roots of a pepper plant. It is widely used as a slightly narcotic beverage throughout the Pacific. Until recently its use in Micronesia was limited to Pohnpei, but it is now being exported in the form of the uncrushed roots at about 1,000 pounds per week at a street value of $2 per pound for an annual export value of $100,000. Upland forest subsistence growers are finding the receptive market so attractive that they have moved farther into the virgin native forests, but the expansion has had disastrous human and environmental impact. Clearing the forests has caused erosion and runoff, created landslides, changed the vegetative cover and threatened the integrity of the island's watersheds and reefs. Although sakau farming cannot be blamed for all Pohnpei' s environmental woes, the area of intact forest area was reduced from 42% to only 15% between 1975 and 1996. Germans and French may be enthusiastic about developing the legitimately relaxing and anti-depressant qualities of sakau, but until environmental concerns are met, sakau does not meet the ecological conditions of SHD.

Buttons.Yes, buttons made from the shells of trochus. An enterprising expatriate family on Pohnpei found that they could sell buttons cut from trochus shells to such prestigious designers as Gucci and Loreal and. The project was abandoned because the government claimed over-exploitation of the species and proceeded to sell the raw shells on its own. Curiously enough, it was the Japanese who introduced the planting of trochus in Micronesian atoll lagoons as a source of shell for buttons and costume jewelry.

Betelnut.Again, a somewhat esoteric, small market product probably unknown to the Western industrialized world, but Yap betelnut exports to other Pacific islands may be as much as a 0.25 million dollar annual export crop. Yap betel, for example, was once a much sought after item in Guam's farmer's market, but has now disappeared from the replacement "Chamorro Village" only to reappear in at least 10 small grocery stores on Guam. The market for it is growing, according to anecdotal reports.

Citrus fruits.Anyone flying the Continental flight through Kosrae will recall islanders in the know quickly deplaning and returning with bags of sweet, tree ripened tangerines. But the famous citrus fruits of Kosrae rarely seem to appear in the fruit-barren stores of Micronesia.

Mariculture.We have no statistics on existing mariculture projects. Palau has been exporting giant clam meat for some years. Newspaper reports and editorials from Guam to Majuro frequently cite plans and hopes for mariculture, and various forms of mariculture have been multi-million dollar money makers. Tahiti's pearl oyster industry brings in over $100 million annually and was touted as a model for a oyster farm in the Marshalls. Most mariculture is, unfortunately, not a get-rich-quick scheme. It requires a long term investment of time, energy and money before pay-off.

In short, econiche agriculture has little potential for large scale development, but it can sustain some enterprising families and entrepreneurs. The importance of these small scale enterprises, especially if they are multiplied, should not be underestimated. The Philippines, for example, has had a national policy for aid to what are called "micro-enterprises" (Midgley 1995: 113) and the pilot programs have been successful enough to continue the program.(13)

2. Local Fishing Industry

Greater development potential can be seen in fishing . Here we consider only fishing which is not subsistence fishing within the reef. The marine resources within the 2.5 million square kilometers of the FSM's Exclusive Economic Zone (EEZ) are undoubtedly the region' s greatest natural resource. This resource offers good prospects for development, whether by local firms or by the great fishing fleets of outside countries. Both the RMI and Palau also see the potential of marine resources. Tuna is the primary resource. Present annual catches are estimated at over 150,000 tons in the FSM alone, and current estimates indicate that this harvest is within sustainable limits (Hezel et al 1997: 4). The question is whether the Micronesian states themselves will exploit these fish stocks or leave the task to the big corporations and more experienced fleets and processing companies from outside the region. Obviously some combination of joint venture is also possible.

Canneries. The options and combinations of options are many. Many have been tried and failed; some are succeeding. To look at the development potentials is, in many ways, a look at the ups and downs and shifts in the global tuna industry. Tuna canneries were once the development dream of the Trust Territory (Stewart 1972), as officials looked enviously at American Samoa's Starkist and Van Camp plants. The cannery on American Samoa, for example, once accounted for 74% of the total capacity of Starkist and Van Camp (Schug and Galea'i 1987: 199). But the historical record for Pacific canneries has not been bright, with canneries shifting to Asian countries like Taiwan and Thailand. The cannery operating in Hawaii closed in 1984 (Togolo 1987: 58); one of the two in American Samoa has closed; the one on Fiji has never operated to capacity; and the fifth one in the Pacific, a joint local and Japanese venture in the Solomons, has had a roller coaster history (Hughes 1987: 203ff).

The likelihood today that any Micronesian nation could have its own cannery is remote indeed, despite the recent plans for a cannery on Tonowas, Chuuk.(14)

Transshipment of fresh tuna.Still, the duty-free access to the US permits other options. Nearby Guam and CNMI benefit from their duty-free access and a "significant share" of the tuna harvested in Micronesia, especially the lucrative fresh sashimi-grade tuna, exits through the two ports as a transshipment point (Togolo 1987; Diplock 1993: 5).(15) The FSM had hoped for a similar access through the Compact to the lucrative US market, but the initiative was squashed by the US tuna lobby. Some transshipment of fresh, high grade tuna to Japan has been carried on out of Pohnpei, Chuuk and Yap, and to Taiwan from Palau, but the Japanese government has restricted transshipment, although these restrictions may ease (Diplock 1993: 5). Currently, between 90 to 175 longline fishing boats based in Pohnpei transship their fish from that port (Pohnpei State Government 1997: 11).

Processing and loining plants.What appears to be a variation on the cannery and the transshipment schema is gaining in popularity. This is the processing of tuna at plants in the FSM and RMI. Whose fleet supplies the tuna is irrelevant, for a government plant may buy and process tuna caught by a foreign fleet or local ships. Instead of shipping tuna in whole fresh form, the newer type of plant prepares only parts of the fish for fresh transshipment. Some tuna is cut and quick frozen as loins ("loining") for export to the US and the Japanese frozen tuna steak market. Still other tuna parts may be selected for smoking or drying to be sold as tuna jerky, smoked snacks or katsobushi. Such plants carrying out some or all the above operations already are operational on Pohnpei, Majuro, Chuuk and Yap. In a 1997 solicitation for investment in Pohnpei State's existing plant, the government expressed interest in broadening the products from the processing plants, developing markets for tuna tails as fish stock, trim meat for pet food and even tuna skins for leather (Pohnpei State Government 1997b: 15).

The processing plant option has many pluses. First, butchered fresh tuna, pound for pound, brings a higher price than whole tuna. Second, the export of frozen loined steaks, fillets or entire tuna bellies enters a growing market niche in between the canned tuna and the high grade fresh or frozen sashimi tuna. Third, the products are value added, thus putting more money into the local economy than fish simply transshipped fresh and whole to market. Fourth and probably most importantly, the schema means jobs for local people. The Pohnpei plant, as an example, already employs 65 regular employees (Pohnpei State Government 1997b: 16); and the Majuro loining plant is projected to create 300 new jobs (Marshall Islands Journal, Oct. 10, 1997).(16) On the negative side, the biggest problem and risk for any processing plant in Micronesia is the same: an adequate supply of raw tuna. Local fleets are too small and perhaps too inefficient to maintain an adequate supply. Foreign fleets face regulatory restrictions from their home governments. A second problem is environmental: apparently the loining facility in Samoa causes "terrible" pollution problems (Marshall Islands Journal, Oct. 10, 1997). A third problem is that the plants may need a tax holiday or tax incentive to be competitive. Already the Marshallese Nitijela is considering reducing the minimum wage of $2.00 per hour to $1.50 for the loining plant so that it can be competitive with Philippine, Thai and South American plants that give workers only 30 to 50 cents per hour (Marshall Islands Journal, Oct. 3, 1997: l & 4).

State and locally owned fleets. The tuna is there in Micronesian waters and the world wants it for dinner. Would the nations get a better deal for its sustainable human development if they did their own fishing? The benefits from domestic industry development are potentially greater than benefits now received from the foreign access fee payments (Togolo 54), but the track record for local fleets and processing is not good. For every locally-based development tried or suggested, there is also an example of failure somewhere in the Pacific.

The Caroline Fisheries Corporation of Pohnpei State is an example of an FSM venture into doing its own fishing. It is equipped with three purse-seiners that bring in an average of 700 tons a year. This company, of which the federal National Fisheries Corporation (NFC) is a co-owner, appears to be hampered with cash flow problems and is barely getting by. Most of the fishermen on these vessels are foreigners, some of them from Croatia. For some reason or other, CFC does not regularly sell fish to the PFC processing plant, although it is trying to work out a contract to do so. Meanwhile, the PFC plant is busy arranging for a Chinese company to come to Pohnpei to fish on condition that it sell its catch at half price to PFC. Why bring in a foreign company to do what a Micronesian-owned fishing company should be able to do? Because Chinese salaries and overhead are lower than Micronesian and PFC stands to make a bigger profit from the deal. This is the same sort of thinking that mooted foreign workers for the proposed Tolowas Chuuk cannery: cheaper labor to remain competitive.

Other states in the FSM have their own fishing companies, with the National Fisheries Corporation a co-owner of at least one fishing company in each state. The Yap Fishing Company, founded by NFC and Yap State, owns four purse-seiners. The ships are old, however, and maintenance costs are steep. The drop in the price of tuna over the past year has hurt the company, but it seems to be getting by. Aside from about ten Micronesians, the fishermen are Americans.

A second fishing company in Yap is Yap Fresh Tuna, Inc. (YFTI). This company, like so many other new fishing operations in FSM, is trying to take advantage of good prices for high-grade tuna to satisfy the Japanese craving for sashimi. YFTI is now putting up a cold storage facility and transships to Japan tuna that it buys elsewhere.

Chuuk has its own fishing company that also exports tuna to Japan. The company, called Chuuk Fresh Tuna, Inc. (CFTI)and partially owned by NFC, has about twenty long-liners supplying the fish it exports. Some of the boats are Chuukese-owned, but most are foreign.

Kosrae's new fishing operation, Kosrae Sea Ventures Inc., is just getting started and is not yet producing fish. The company has purchased three long-liners.

Why the poor investment return on local fishing ventures? Culture, experience, competition and organizational fragmentation are the main reasons.

Culture. Micronesian fishermen do not like the long periods at sea that are required of commercial operations. Marshallese fishermen in Majuro, although outfishing rival Chinese fishermen per trip, only spent half as much time at sea as their Asian rivals. Over a fifteen-year period of operation in Palau, Van Camp was never able to hire more than a handful of Palauans to work on the boats, they had to be staffed by Okinawans.

Experience and competition. FSM is competing with the big boys who bring decades of experience to their management. Seventy percent of all tuna and tuna products are caught, processed, traded or distributed by ten multinational corporations (Hudkins and Fernandez 1987: 290). Any successful operation, as Skapkin and Pintz (1987: 24) have noted, must bring demonstrated competence and experience in the technical aspects. Micronesia has the fish but no experience in large-scale fishing ventures. This in a commercial market considered to be high risk and low reward (Hudkins and Fernandez: 320). Commenting on the Solomon islands joint tuna venture, Hughes concludes that "most of the problems concerned people rather than fish?" (Hudkins and Fernandez 1987: 211). The same could be said for the FSM state ventures.

Organizational fragmentation. In an industry dominated by highly centralized multinationals, the FSM ventures are a mishmash of small local companies, as described above. There is no national FSM fisheries policy. The track record is not good and future prospects not bright.

3. Sale of Fishing Rights to Multinationals

The FSM is already selling its fishing rights to the large corporations (Hezel et al 1997: 33). Current agreements with Taiwan, Korea and Japan bring in over $20 million a year, about 14% of the FSM government's total revenue. Fishing fees account for over half the FSM's internal revenue. In the RMI, the sale of fishing rights reached at their peak in 1994, bringing in only $3.1 million out of total revenues and grants of $69.2 million (RMI-EMPAT 1995a: 11). There are associated revenues from shoreside spending, ship service and fines for violations; in 1993, shoreside spending and servicing brought an estimated $1.4 million to Yap alone. In view of the problems associated with creating a local fishing industry, licensing fees are particularly attractive. But licensing fees are inadequate when we consider the sum of money needed to replace Compact funding and the need for more wage-paying jobs. Could the licensing revenue be increased, even doubled? Probably not, so the sale of fishing rights is really not "development" potential. Since the FSM began selling fishing rights to other nations in 1982, it has collected about $100 million. Since 1982 fishing fee revenues have risen from $0.8 to a high of over $20 million. The large jump in revenue is due not only to an increased catch but the strength of the Japanese yen against the American dollar. (Most of the fees come from Japanese vessels). If the combined catch is worth $200 million a year, the FSM gets rather little for access to its greatest but limited resource. Both the RMI and FSM have seen a decline recently in the revenue from fishing rights.

The fishing rights are not a free lunch either. They bear distinct costs to the host countries. The case of Ting Hong Oceanic Enterprises, a Taiwanese firm, is illustrative of the costs of selling EEZ fishing rights. Ting Hong is noteworthy because at one time or another, the firm has had or was brokering deals with all the entities of the former Trust Territory and with Guam. On Chuuk Ting Hong entered into a joint venture with the state, in 1992, to lease the Tonowas Fishing Complex, service vessels from Taiwan and some from the Peoples' Republic, so as to carry on transhipment from Chuuk. Ting Hong has reported only a very general estimate of economic benefits to Chuuk State–a sum of about $300,000, including rental and docking fees (Muckenhaupt 1994: 12). By 1994, however, Chuuk State's fishery-related investments, of which the Ting Hong transshipment agreement was the first, totaled over $70 million. For the fleets which dock at the Ting Hong managed facility, the fishing corporations declare the weight of their catch and the FSM receives.(17) The FSM is without means to enforce either stricter accounting for the catch or for violations within its own waters. There is little verification of the catch transshipped through Chuuk as reported by Ting Hong. On at least one occasion a Ting Hong vessel was caught fishing within Chuuk's 12 mile zone reserved for local fishermen. The out-of-court settlement of $12,000 was paid by the Chinese ambassador, who simply wrote the check and refused to process any papers. By law Ting Hong could have been fined $50,000 to $70,000 and the vessel confiscated (Muckenhaupt 1995: 20).

Ting Hong vessels have already polluted the waters and divers report decreased visibility. Questions of environmental pollution were raised by Palau when Ting Hong requested a foreign investment permit to operate a transshipment facility in Malakal Harbor. The permit on Palau, by the way, was held up due to allegations that Ting Hong bribed members of the Foreign Investment Board (Muckenhaupt 1995: 15). Ting Hong vessels were bypassing the local economy by refueling at sea with their own tankers or buying gas on Guam at a cheaper price than in Chuuk. Their vessels were reportedly selling fish to Pohnpeians and undercutting the local fishermen.

On Pohnpei, Ting Hong unilaterally and precipitously pulled the operation out of the state in 1996 after the company was fined $2.2 million and charged with failure to pay taxes. The full details of Ting Hong in Micronesia will probably never be known because records and documents are so far and few between. Of course all fishing companies are not like Ting Hong but his case is indicative of the potential cost of selling fishing rights and the potential problems in joint ventures. Ting Hong came, fished, and left when competition destroyed profitability in the FSM. The FSM, and Pohnpei State especially, have little to show for the Ting Hong "make money, cut and run" operation. Ting Hong, at least in its FSM operations, is a classic case of development that was neither sustained nor human; it was, for a brief moment, plain old short-term economic development.

4. Tourism

The FSM has an attractive natural tropical setting with unparalleled sites for scuba diving and snorkeling and visiting megalithic archaeological ruins, but economic contributions from tourism are quite modest if compared with the revenues tourism generates on Saipan (CNMI). Against the actual 1996 visitor total of about 23,000 visitors to all four FSM states, the Tourism Committee's 1995 projection of 100,000 visitors per year was an exercise in fantasy. The natural beauty is there, but the tourist infrastructure of fine roads, luxury hotels, exquisite cuisine, meaningful tours and high quality service is not there–with few notable exceptions. The infrastructure and the tourist industry will not support the general package tours that are the backbone of Saipan's prosperity. The visitor to the FSM will be one of several related species: (1) backpacking young people trekking through Micronesia on a shoestring budget searching for the tropical paradises that Robert Lewis Stevenson, Somerset Maughm and James Michener overlooked; or (2) those anthropological wannabies looking for the lost tribes; (3) scuba divers in quest of the ultimate dive or wrecks of hitherto undiscovered vessels; or (4) war veterans or their kin in search of the old battlefield or cemetery.

The response to such limited tourism potential is sometimes called eco-tourism, a type of tourism that features nature and the local history and culture in ways that are sensitive to the environment and the local population. Various enterprises across the FSM have emerged and have a good but not spectacular record. Hotels which cater to divers have been built on Chuuk, Pohnpei and Yap. Cottage type tourist accommodations, blending a combination of spectacular scenery in simple thatched settings, have been successful on Pohnpei and Yap. A restored "traditional" village was popular on Yap. Pohnpei's grand megaliths of Nan Madol are accessible by motor launch tour. However attractive to the few, the FSM tourist sites simply do not generate much money or many jobs. Ecotourism as it exists and may develop within the foreseeable future can in only the most minimal way offset the disappearing Compact funds and generate private sector development from within or from outside.

Palau, on the other hand, has greater tourism potential and is seeing that potential achieved largely because of better access to direct flights to Asian capitals. For the FSM there are the limited flights of a single commercial provider island hopping back and forth from Guam to Honolulu. As FSM tourism stagnates, two new hotels on Palau are in the offing–one a proposed 5-star 450-room resort and the Outrigger Palasia Hotel of 165 rooms to be completed in 1998 (BOH 1997b: 14).

The alternative to the small-scale present tourism in either the FSM or RMI is to go big. That is precisely what Saipan and Guam did. But the attraction of the CNMI and Guam is that they are so close to Japan, so loaded with luxury hotels and duty-free shopping facilities and covered with inexpensive golf courses (by comparison with Tokyo, Nagoya, Hiroshima, etc.), that a weekend insertion into "American culture" can be made quickly, cheaply, and in luxury. Neither the FSM or RMI have any of the above and so far there is no one beating down the door to make any town there a second Saipan or the hotel-row of Guam. Palau, not the FSM or RMI, is seen as the next viable Japanese tourist development locale.

5. Gambling

What could attract a tourist clientele other than the backpacking trekkers? Gambling, casino gambling in particular. Korean investors are said to be developing a large gambling resort on Mili, an exclusive atoll near the Marshall's capital of Majuro. Tinian in the CNMI will soon see the opening of a major casino that is expected to transform the island's economy and lifestyle. Pachinko parlors catering to mostly Korean, Taiwanese and Japanese patrons have sprung up on Guam. The potential revenue from gambling is there.

The idea is not new; as early as 1983 investors proposed an offshore gambling resort on Pohnpei. In recent years several new proposals have surfaced. In the light of the recent economic crisis in Korea, one newspaper report of a Korean development proposal sounds utterly ludicrous, but it certainly is an example of "going big." According to the Marshall Islands Journal, Haeng Yong Mo, named by the RMI government as honorary consul in South Korea and called "Mr. Big" in Majuro, heads a joint venture, Marshalls Development Ltd., promoting a $6 billion plan to build world-class resorts on Arno, Mili and Majuro. The project would be completed in 2000, said Honorary Consul Mo, so that tourists to the Olympic Games in Australia would visit the Marshalls on their return home (Marshall Islands Journal, Oct 10, 1997).

Certainly casino gambling elsewhere has succeeded in bringing in revenue and creating jobs. Christmas Island is a case in point; rich tourists are flown in by charter flight to the island to spend a few days at its casino. But a cost-benefit analysis reveals problems. The resorts on Guam and to a greater extent Saipan depend heavily on Asian workers. Guam once had slot machines but outlawed them because of the adverse impact on local citizens. Whether it can be established that other crimes, such as drugs and prostitution, and criminal syndicates accompany gambling and casinos is debatable. Perhaps more damaging is the "materialistic and hedonistic atmosphere" that the Bishop of Reno-Los Vegas finds in communities that cater to the gaming industry. Certainly gambling resorts have good potential, but the human cost ought to be meticulously studied and weighed before these nations take the leap.

6. Subsistence Living

An earlier generation of development writers would be aghast that subsistence living could be a development potential, since, development implied shedding the old subsistence economy. There is, however, a growing opinion that subsistence living must be factored into SHD (Davis 1993; UNDP 1994). The idea that some people should stay home on the farm and watch the bright lights of the city from afar is not universally acclaimed since it appears to suggest that fifty years of movement into the cash economy must be reversed. A return to the rural areas in a Micronesian version of Pol Pot's forced abandonment of the cities for manual farm labor is not what is proposed here. Yet, some interaction between the wage economy and the subsistence economy should be fostered, however naive the concept might appear. If there is no prized goose coming over the horizon to lay the golden egg of thousands of private sector jobs, then the FSM and RMI must have their own egg that can be nurtured and developed. For the FSM and RMI this is subsistence living. It is still there and can serve as a valuable reserve against limited wage-earning jobs. But is it feasible? Who could get elected an a platform of return to the past? We think the tradition of small, community based projects and extended family land is still strong enough to make a combination of subsistence-living and wage-earning a viable lifeway. It is highly unlikely that any government or elected official will promote subsistence activities, but we think it is important that when 2001 comes and Compact funds shrink, the subsistence option be viable in a way that it is no longer in the CNMI or Guam. Unfortunately, although subsistence activity can work as a safety value against fewer wage and salary jobs, it cannot produce the tax base to support government service in health, education and welfare.

Summary of Development Possibilities

Econiche agriculture. Of the items harvested – pepper, pepper root for sakau, and trochus shells for buttons, citrus and mariculture–only pepper root farming for sakau seems environmentally unsound, and then only when planted upland in great quantity. We wonder if agencies might begin experimenting with exotic plants for the pharmaceutical industry. In the Caribbean where various South Pacific plant species were very successfully transplanted during plantation times, such exotic varieties as aloe vera are being grown and harvested by small scale, semi-subsistence farmers. The potential of newer econiche crops has not been adequately explored.

Locally-based fishing and processing. Although local fishing industries are potentially more profitable than licensing foreign companies, they are capital intensive, risky ventures requiring considerable technical experience. The FSM ventures also suffer from fragmentation into small fleets operated by the member states and competing with each other. These small, decentralized operations are competing with highly centralized and experienced multinationals. The existing ventures have yet to show a return on investment and are using foreign crews, thus not even generating jobs. Perhaps a national FSM policy and a centralized industry would produce better results, but both are unlikely because of the rivalry between the federated states. Our prediction: local fishing ventures will produce neither the revenues nor the jobs required by the post-Compact situation. On the other hand, processing and "loining" plants have distinct potential to wedge into a growing market for frozen tuna steaks and fillets.

Licensing to foreign firms. The sale of fishing rights is producing revenue but not enough to replace the Compact funds. It is unknown whether the market could sustain increased licensing fees. The nations are without means of enforcing the existing or future measurements of the foreign catch and hence the percentage due the host nation. Foreign licensing creates no new jobs directly, although offshore spending and ship repair provide small revenues. Licensing has a proven track record, is environmentally sound at present catch levels, but needs to provide more revenue. Even when a foreign firm enters a joint venture, there are problems. Ting Hong came, made money and left the FSM none the richer.

Tourism. Despite the spectacular beauty of the Pacific, pristine diving, and interesting historical and archeological sites, the track record of FSM tourism is, comparatively speaking, not good. FSM can continue to develop small-group eco-tourism, but this will never bring in the large visitor numbers of a Saipan or Guam. Palau is already gearing up its infrastructure (new hotels, new roads) to meet the growing tourist market.

Gambling. Potentially gambling is a big money maker and could provide jobs, but the schemes already proposed promise much and guarantee little. The cost to the human community is potentially high.

Garment manufacture. Already we may be seeing the twilight of the large-scale garment manufacturing industry in the CNMI. American labor organizations and the US Congress may soon take away the loopholes or provisos which make the industry possible: local control of immigration, exemption from the Stateside minimum wage, and duty-free entry into the US. We see no reason to believe that the small-scale industries on Pohnpei, Yap and Palau will not continue. They contribute something to the tax base, but little to employment because they use mostly foreign workers.

Untried proposals. The literature is filled with proposals that barely got beyond the drawing board. Some of these earlier proposals–manufacture of mosquito coil repellant, for example–are not viable because of the rise of cheap Asian labor (Stewart 1971). Others have been tried but were unable to compete with exporters of scale, as when bananas grown at PATS were exported to Guam. But other proposals, although old, have recently been resurrected; the growing of tropical aquarium fish is a good example (Stewart and Callaghan 1973; Tellock 1996).

Subsistence living. Citizens want wage-earning jobs, especially government jobs with the money, the security, and benefits they bring. Proposing supports for some combination of subsistence and wage household income is political death for elected officials–people want wage jobs and jobs are bread and butter for local politicians. But subsistence living continues and will be an important safety net if private sector development projects cannot replace Compact funds. We anticipate no program or movement to a strengthening of the subsistence sector until the Compact funds dry up and the private sector cannot provide jobs. If we anticipate a worst case scenario similar to that reached by the Cook Islands, in which the FSM verges on bankruptcy and must slash salaries by half and cut government jobs by 50 percent, there will be no choice but a return to greater reliance on the subsistence sector.


Compact funding, as now stipulated, is expected to end in 2001. Some continued funding by US federal agencies may continue, but nothing comparable to the $40 to $60 million annually provided by the FSM Compact. We are reasonably certain that sale of fishing licenses will remain a source of income, although probably continuing to decline from earlier highs. Local fishing ventures probably will flounder without the infusion of new money; they already have serious problems and have yet to produce a profit. Fish processing plants may prove to be the right investment at the right time. Some econiche agriculture, such as gourmet pepper, will continue to be produced, but with gross receipts of only $100,000 a year. Tourism in the FSM will probably not hit the 100,000 per year mark projected by the 1995 FSM Economic Summit, but will hover at the present rate of 25,000 to 30,000 a year and may even decrease if the roads, electricity, water and other services of the infrastructure deteriorate because of declining funds. World class tourist resorts in the Marshalls appear as a development phantasm, the so-called "green flash" on the horizon at sunset. We predict few new private sector jobs by 2001, unless one or more of the fishing or development joint ventures are accepted. Infrastructure construction may provide some new jobs in Palau, but the heavy dependence on foreign labor may preclude that.

It would appear, then, that existing development projects, together with those proposals on the board, will not make up for the loss of Compact funding. This will mean not only continued cuts in working hours, but eventually wholesale layoffs at both the federal and state levels.

We are brought back, then, to the gloomy predictions of earlier reports. The 1995 Bank of Hawaii Report claimed that, if unrestricted emigration to the US ends in 2001 and there is a substantial decline in US funds, the FSM will be unable to absorb the labor and income losses. "Without concrete steps toward creating a functioning market economy, FSM's indigenous wealth-generating resources remain idle while external rents and aid payment perpetuate a consumption economy." The FSM economy is unchanged since 1989, claims the report. It was and is dependent on outside payments. Much the same can be said of RMI (BOH 1996).

Can the FSM and RMI break out of this historical mold, a mold that began before the Compact during the Trust Territory? Our analysis of existing and potential development suggests not. Is there a possibility that US funding will continue in some form or another after 2001? Probably, but not at the present funding levels. If US funding declines, a realistic scenario must show higher unemployment, more government layoffs, and a return to greater reliance on subsistence living, while emigration to Guam, Hawaii and the US mainland will increase.


ADB Asian Development Bank

BOH Bank of Hawaii

CNMI Commonwealth of the Northern Mariana Islands

EEZ Economic Exclusive Zone

EMPAT Economic Management and Policy Advisory Team Report

FSM Federated States of Micronesia

FSM/OPS Federated States of Micronesian Office of Planning & Statistics

RMI Republic of the Marshall Islands

ROP Republic of Palau

SHD Sustainable Human Development

UNDP United Nations Development Programme


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1. Underdevelopment came to be defined by these economists as a large subsistence agriculture sector, traditionalism and a small modern sector operated by expatriates (Midgley 1995: 58)

2. The original agreement is difficult to analyze, but in addition to the $1.9 payment to the landowners, a second payment includes money for atoll development, plus a third, special payment from $1 to $2 million made each year to the Kwajalein landowners for the right to keep the range beyond the 15 year compact (RMI-EMPAT 1995a: 4).

3. Part of Yap's debt is an investment in stock. Interestingly when the final Compact with Palau was signed, it stipulated that over $70 million was set aside from the first year's compact fund for investment to be used only after the first 15 years of the 50 year contract (BOH 1997b).

4. To the outsider, the subsidized Tobolar Copra plant might appear as so much economic foolishness in the light of world demand and sinking world prices. But copra remains one of the only cash crops on the outer islands–which means most of the RMI population not living in the two urbanized centers of Majuro and Ebeye. Sea shipped copra then needs to be subsided to get the crop to the processing plant. Moreover, part of the Air Marshall Islands subsidy is used to air-ferry critical medical cases in from the outer islands. According to the 1988 RMI Census, the rural population was 35.5% of the total 43,335 (Nanayakkara 1988).

5. Out of a total $44.2 million in capital formation, the public sector accounted for $30.7 million and $13.5 million for the private sector (BOH 1995).

6. A tourism boom may also account for some of the ROP GDP's rise. Total arrivals increased 71.2% from 40,497 in 1993 to 69,330 in 1996 (BOH 1997b: 12).

7. Here again, the ROP picture is precisely the opposite: a dramatic drop in fisheries share of the GDP. In 1991 fisheries (mainly fees from fleets fishing in Palau's EEZ) accounted for 25.2% of the GDP; by 1996 fisheries made up only 4.4% (BOH 1997b: 13).

8. In 1994, there were 6,324 public employees and 7,396 private sector employees. (FSM-OPS 1995).

9. Government salaries higher than those of the private sector is a regional pattern. On Guam the average GovGuam employee pay is nearly three quarters more than the average private sector pay. For CNMI, the government employee makes twice as family maids, baby-sitters and nannies.

10. The total number of Marshallese employed on the US Missile Range is certainly higher because of the number of women working in the informal sector as family maids, baby-sitters and nannies.

11. A recent economic report concludes that "most" households in rural Palau earn at least part of their livelihood from subsistence farming and fishing (BOH 1997b: 18).

12. We have only anecdotal evidence for some remittances sent back to Palau or RMI.

13. Peter Drucker claimed that in the US the Fortune 500 lost 4 to 6 million jobs in the 1970s and 1980s, but small and medium-sized businesses created 35 to 40 million new jobs (as quoted in Midgley 1995: 110).

14. This was a planned joint venture between Chuuk State's Department of Marine Resources and the San Diego firm of Cabason, Inc. The venture goes against the advice of the World Bank's Memorandum to the FSM (Muckenhaupt 1994: 20-22).

15. The transshipment tuna are sold mostly on the sashimi market as fresh fish, primarily in Japan. "The landed value of sashimi grade tuna on FSM ports is approximately US10,000 per metric ton; about 12 to 15 times the value of seine caught tuna" (Pohnpei State Government 1997: 3).

16. Pohnpei has two fishing companies: Caroline Fishing Corporation (CFC) and Pohnpei Fishing Corporation (PFC). PFC is the owner of the fish processing plant. Acquired ten years ago by Pohnpei State for some $11 million, the plant is considered something of a "white elephant" since it was designed to process reef fish rather than tuna. For this reason it cannot operate at maximum efficiency. Even if it could, however, its success would depend on obtaining sufficient fish, for it has no boats of its own. At the present time PFC are buying from local fishermen, exports three tons of processed fish a week. The fish goes to Japan for ten dollars a pound, while rejected fish is sold locally at less than a dollar a pound (Hezel 1993a).

17. The RMI has an agreement with Ting Hong for $10,000 per boat per year to fish in the Marshallese EEZ. In 1996 Ting Hong had 42 fishing boats based in Majuro, half its previous number (Marshall Islands Journal, April 11, 1997).