MicSem Publications

After The Compact, What Then?

by Francis X. Hezel S.J.

November 10, 1993 Economics Government


The all too common view, the Secretary said, is that time is quickly running out on us. Seven of the 15 years of the Compact period are gone; there are eight left. With almost half of the time gone, what do we have to show for the Compact? Is there any real hope that FSM can build a solid economic base for itself by the year 2001? Many people take a negative, almost apocalyptic view of the matter. They are cynical about the future.

Yet, everything considered, the FSM has not done poorly at all, the Secretary maintained. The nation has been especially successful in nation-building, the main task of the past years. Beyond this, moreover, the FSM can be credited with several achievements in the line of economic development. It has expanded its infrastructure, frugally managed its limited financial resources, and built up bilateral and multilateral relations aimed at maximizing sources of foreign aid (eg, with Japan, Australia, China, Israel, UN agencies and banking groups). The Secretary acknowledged that the FSM had made mistakes, but not due to the gross dishonesty and corruption that plague many other developing countries.

It has become fashionable, here and in Washington, to deliver a negative verdict on the FSM's performance, the Secretary said. In the eyes of its critics, the Compact has failed to produce the economic development that was promised. Yet, the 15-year period was never based upon a development schedule. Indeed, during the status negotiations, many Micronesians objected that it would require far longer than merely 15 years to launch Micronesia on the road to real development. Not only did the FSM have to build up its infrastructure and its capacity, but it had the enormous task of changing the mindset of its own people toward modernization and instilling the attitudes that were a prerequisite for development. In the end, however, the US turned down the request for a longer Compact period. Hence, the 15 years of the Compact is a political compromise, not a reasonable estimate of the amount of time needed to achieve self-reliance.

The FSM has built a solid base for the nation's economic future. It has complied with the terms stipulated in the Compact regarding economic development, and so has won the respect of the US and earned the hope for post-Compact funding from the US. It has also cultivated relations with other nations and international agencies that could provide assistance after the Compact period. Thus, there is real hope for life after the Compact. Although the FSM cannot hope to become self-reliant by the end of the Compact, it has laid a good foundation for the future by doing what it can to insure continuing assistance from the US and aid from other nations.

How Can We Be Sure of Post-Compact Assistance?

The strategic value of Micronesia was for years its trump card with the US. With the end of the Cold War, however, strategic value means very little to the US. What is there to assure us that the US will continue to provide financial assistance to FSM after the Compact, now that its military usefulness has diminished? Nothing. There are no guarantees. Yet, it is unlikely that the US would terminate all aid at the end of the Compact period and throw FSM out in the cold. The Compact provides for renegotiation in its thirteenth year (1999), but any decision to renew the Compact would have to be approved by both FSM and US.

Many Micronesians, from FSM as from neighboring countries, assume that if the US balks at extending the Compact, they would only have to move towards commonwealth to get the US to reach into its pocket. They speak of a change in political status as a decision to be made after the Compact, as if the Compact is somehow linked to an interim political status. This is not the case, as a few of the participants reminded us. The Compact is simply an agreement of a sovereign power (FSM) to allow the US to take care of FSM defense needs. FSM's political status has been decided, presumably once and for all. It is recognized as an independent nation. Thus, a deliberate change of FSM's status after the Compact seems out of the question, despite the loose talk that occasionally appears in the papers.

The discussion made it clear that the FSM has lost some of the high cards it formerly might have played to secure assistance from the US. It can not appeal to Trusteeship obligations unfulfilled since the Trusteeship is long ended. It cannot, or will not, bargain away its status for something less than independence in exchange for a higher level of assistance. Nevertheless, it can appeal to its long relationship with the US for continued assistance. It can also build a case on what some feel is its responsible use of Compact monies granted by the US to secure aid in the post-Compact era. FSM, which by the terms of the Compact was mandated to spend 40% of its funds for Capital Improvement Projects, has actually spent over 50% on these, as one man pointed out.

Self-reliance: How Important and Possible is It?

No one seems to believe that full self-reliance is possible by the end of the 15-year Compact period. Some wonder whether it is possible at all. They cite the example of other independent Pacific nations to show that all island states require some form of ongoing assistance from abroad. Is full self-reliance a will-o-the-wisp, an attainable dream? Perhaps, but just about everyone supports greater efforts to move in this direction, even if FSM will still need some external funding in the future.

FSM still has a long way to go in realizing this goal. At present some 87% of the money available to the government comes from foreign assistance.

The FSM Development Plans outline a strategy for moving the nation toward greater productivity and fuller self-reliance. The plans stipulate that the first five-year period of the Compact should be dedicated to building up the infrastructure; the second five years should focus on economic investment; and the third should target economic viability as the goal. There have been great strides made in the development of the nation's infrastructure, and now the government is indeed concentrating on economic investment (especially in the area of fisheries). Even so, government leaders are forced to acknowledge that the FSM is probably falling behind the goals it set for itself.

What Can Be Done to Promote Economic Growth?

The national plan designates as priority areas tourism, fisheries and agriculture. The first two are seen as sources of foreign exchange, while agriculture is seen mainly as a means of import substitution. The government has done much to promote these areas of development. Through improvements to airfields and roads and through the establishment of visitors bureaus it has worked to establish the islands as a tourist destination. Its efforts to build up a fishing industry are well known and were the subject of a previous discussion.

The government has done its part in promoting economic growth, some of the participants argued, but it can not do the whole job by itself. The private sector must bear its share of the burden. Government and private business share a joint responsibility for economic development. Government should provide the atmosphere and services needed to stimulate economic growth, while the private sector should furnish the initiative and perhaps the capital. The FSM government has already established fisheries on a rather large scale, but it has done this only to fill the gap until business interests are capable of investing and taking over the fishing industry.

Other participants wondered whether the government had truly done all it could to promote development. If the private business is so important for creating jobs, what incentives has the government given private business to do this? One discussant pointed out that commercial banks are unwilling to give loans extending beyond the Compact period. They also demand such collateral and assurances of security that "you have to be rich to get a bank loan," as he put it. Someone pointed out that the FSM Development Bank offers loans at very low 5-7% interest rates, but there was no mention of how ready the bank is to give high-risk loans.

There are other ways in which government may provide incentives or disincentives to private business. High government salaries can serve to discourage people from going into the private sector with its lower salaries. Government employees have other benefits, such as health insurance and life insurance, that many in private business do without. If the government wants to do all possible to promote development, it will have to keep looking over its shoulder to ask itself how its own policies affect the growth of private business.

Some participants clearly felt that the government and the private sector were not working together as well as they should. "How can the voice of the private sector be heard?" was one person's question. There are channels, to be sure, such as the Chamber of Commerce and public hearings, but they are not always utilized as well as they might be. If there is to be genuine development, the private sector must be carefully nurtured and encouraged to work with the government. There was so much interest in the private sector that the group decided to devote the next monthly discussion to this topic.

Does the FSM have the expertise needed to carry out development projects successfully, one participant asked. He suggested that there were not the experienced investment counselors, economists, fisheries management personnel and others needed to choose wisely from among possible projects and move along those that were chosen. This raised the question: Can Micronesia run its own affairs? Admittedly the assumption during past colonial years was that it could not do so-at least if this implied moving toward modernization at the same time. Nowadays this has changed; it is assumed that FSM can manage its own affairs. The country may be obliged to hire some specialists from abroad, of course, but it should be remembered that development requires more than expertise on the part of a few. It demands a wholehearted commitment from many people all the way down the line to work to make this succeed.

Development As More Than Money

At different times during the evening there were admonitions sounded against a narrow focus on economic development. Individuals noted the key role that education would play in creating the FSM of tomorrow. One person suggested, toward the end of the discussion, that we ask ourselves what the social position of the FSM should be by the end of the Compact period. As important as money is, it isn't everything. What goals have we set for education, health, youth, and so forth? The social structure needs to be cultivated as carefully as the economy. To do this, we must have a sense of where we would like to go socially.

Implicit in this admonition, however, was a reminder on building a national economy: FSM still has the option of consuming less, spending less, and so cutting back on the services that the government will be required to fund in the future. This remains an option, even if one not often willingly chosen by developing nations.