MicSem Publications

What Can We Do to Promote Private Business

by Francis X. Hezel S.J.

January 26, 1994 Business Economics


The moderator reviewed the facts regarding the situation in which FSM now finds itself. The government is halfway through the Compact funding period. It has already felt the impact of the first step-down in funding and will feel the effects of the second step-down in another three years. Meanwhile, the economy of the FSM remains heavily dependent on US assistance; more than two-thirds of the FSM's annual revenues of $155 million come from the US. The nation's goal during the Compact period is to move toward self-reliance. To do so, the FSM will have to develop industries that are economically viable and self-sustaining. Only in this way can it create a tax base that will generate the revenue needed to support its government, which is becoming costlier by the year. The FSM government has targeted fisheries, tourism and agriculture as its main hopes for economic development. The fishing industry (which was the topic of a previous discussion) is still in its infancy in FSM. With only 20,000 visitors a year, the FSM does not yet have much of a tourist industry. Such agriculture as there is almost entirely on a subsistence or semi-subsistence basis.

In view of this critical situation, what can be done to promote private business? What can the government do to stimulate business? What can we do?

In his brief introductory remarks, Jesse Subolmar noted that the FSM government has more than once stated that the private sector is the backbone of the national economy. Yet, despite these sentiments, the private sector is underdeveloped. This is in contrast with Japan, where the speaker lived for three years while working in the embassy office in Tokyo. He noted that the Japanese economy is built on agriculture, for Japan has always prided itself on its ability to feed itself. Japan has also emphasized the education of its citizenry, formally and informally. As a result, even a taxi driver in Tokyo regards the promotion of his country as his personal responsibility to some degree. This is very different from Micronesia, where people have learned to take their government for granted. The problem, therefore, goes well beyond the resource base of the country (Japan's is very poor, as is Micronesia's). It goes well beyond funding. It touches the matter of people's attitudes toward their work and their nation. We in the FSM can learn from the attitudes that have been fostered among the Japanese people.

Another Look at the Fishing Industry

Almost immediately the discussion turned to the fishing industry. Fish is the only vital resource that FSM has, as one participant said. Fishing is probably the only industry with the potential to provide enough revenue to support the cost of government. If the government purchased longliners and built an ice plant, it could start an industry that might be jointly operated by the government and private interests. Since commercial fishing requires a great capital outlay, another person pointed out, the government might find it desirable to leave this in the hands of foreign investors and concentrate instead on developing support services such as transportation and refrigeration. In any case, the development of a fishing industry allows the FSM an opportunity to enlist the cooperation of the states in focusing on an industry that is truly national in scope. Instead of merely seeking their own benefit, the states would be offered a chance to collaborate in the interests of the entire FSM. They would have to resolve certain difficult questions-which state would get the fishing cannery, for example, if only one were feasible.

Setting up a fishing industry is one thing; staffing it is another thing altogether. Micronesians are good fishermen, but they are used to going out for only a day or two at a time. Do the people here have the willingness to spend 20 or 30 days at a time in a fishing boat, as commercial fishing operations demand? Micronesians who work in garment factories find the rigid schedule, day in and day out, wearisome and often remain only for a few months. The turn-over rate among Micronesians at such factories on Saipan and on Yap has been very high. Do Micronesians have a tolerance for the demands of real industry?

Education as the Answer?

Education was the answer, some of the participants seemed to think. If Japanese can be educated to think of the good of their nation and even to subordinate their personal interests to that of Japan, perhaps Micronesians can do the same. Perhaps with education we can inculcate the same noble attitude shown by the Tokyo taxi driver in our own people. In addition, schools like the College of Micronesia FSM and Xavier and PATS, which draw from all the states, have it in their power to produce a strong sense of nationalism. Yet, education is a two-way street, as we know. How many of our young people who have received a college education would be willing to work the fishing boats, sit at a sewing machine all day long, or take the other menial jobs that are so important for the development of FSM? Education, even as it imparts important skills and knowledge, raises the expectations of students to the point that they are not easily satisfied with manual labor.

Education, though, means more than formal schooling. There is an informal sort of education that can not be neglected by the FSM as it works to build up a strong citizenry. This may include the singing of the national anthem, listening to inspirational speeches on holidays, joining in national events, and the other rituals of patriotism in a country.

Why Isn't the Private Sector Growing?

Most young Micronesian believe that the "road to success is through a government job," one participant remarked. He noted that the salaries and prestige attached to government jobs tends to be much higher than those in the private sector. This mentality may be harmful, but it is common among young and old in FSM. The best and brightest are skimmed off into government employment, and the private sector ends up with the rest. In failing to correct this, the government is not giving the private sector the chance it needs to develop.

Someone pointed out that not all parts of the private sector are undeveloped. Retail and wholesale merchandising is one area that is well advanced in FSM, as the numerous stores throughout the islands and the import figures of $70 million a year testify. The trouble is that these businesses are consumption-oriented. Why hasn't there been similar growth in production-oriented businesses?

There seems to be no lack of investment capital in FSM. The FSM Development Bank, which makes loans for development projects, was given $20 million from the US. This money was granted in compensation for the failure of the US to give FSM a tax break on imports into the US. If the FSM can prove the damages it incurred exceeded this amount, the US will make available an additional $40 million in restitution. The 40 percent of the annual US subsidy earmarked for development represents an additional source of investment capital. Between FSM's own funds and what is being dangled by foreign investors, there is plenty of money around to capitalize businesses. In fact, the money supply is so large at present that the government and economy can not absorb all the funds available.

The money may be there, but do Micronesians planning to go into business have access to these funds? Some participants thought that the government policy on business loans was too restrictive and should be changed. The insistence that the borrower show collateral makes it impossible for many to obtain loans. Although these restrictions do make it harder to get seed money, one man remarked, the major problem is the lack of sound business plans that are being brought in for funding.

Another problem is the high government salaries, which tend to push private sector wages beyond the point where products can be competitive on the world market. A case in point is the pepper industry on Pohnpei. Because of high labor costs in this labor-intensive industry, a producer would just about break even on a pepper plantation, a recent study showed. Even if they could make a modest profit in a business, prospective entrepreneurs sometimes choose not to launch an operation because the returns are not high enough. People expect a killing in business investment rather than settle for smaller profits over a long period of time.

Coupled with the search for instant profits is another mindset that makes the sound development of businesses difficult. Micronesians, emerging from a subsistence economy, are used to looking at work as an "occasional" activity-something to be done when there is urgent need. Villagers harvested trochus or made copra when they needed ready cash, and they stopped their work when they had money in their pocket. Farmers will transport their vegetables and fruits to hotels and stores for a while, but sooner or later will grow tired of the effort. The supply of produce will suddenly stop, much to the consternation of those businesses that depend on a steady flow of goods. This seems to explain what happened to a number of small businesses that once proved successful-chicken farms and a seaweed harvesting project, for example. Once the first profits are made, the owners spend them instead of reinvesting in the project. This is reportedly what happened to the seaweed farm.

This same mindset often shows up in the form of absenteeism when people begin working for wages. Even if the Micronesian has the necessary skills for a job, there is a real risk that he may fail to show up for work at times, especially when his wallet is full. It is fear of absenteeism even more than dissatisfaction with the level of skills of Micronesians that lead many employers to hire foreign workers.

Can education remedy these obstacles to development? Can the people of FSM be trained to change their mentality towards quick profits and occasional work? Some participants evidently thought so. But a few others wondered whether something else wasn't necessary to bring about such a change. Are the people of FSM hungry enough, one man asked, to do all the difficult things required to create successful new businesses? Another wondered whether the private sector in FSM would ever develop until after US aid and foreign workers disappeared, forcing FSM to take a firm hold of its own economic destiny.

What Can the Government Do About This?

There was a call, repeated several times in the discussion, for stronger efforts at government coordination. The states must put aside their differences and allow the national government to take a stronger hand in coordinating major industries such as fishing. It was suggested that a national commission be established to integrate planning for the development of tourism and agriculture. This would help us avoid some of the wasteful reduplication of effort and expense in the states. Better coordination is also needed between different government offices, and between the government and private sector. The Chamber of Commerce could be a help in bringing about coordination within the private sector and in linking it to government.

The government could also take a leadership role by privatizing some of its services. It has done this successfully with telecommunications and power, but it could go well beyond this in the future. Garbage disposal, for instance, could be turned into a private business when the service becomes available, as it almost certainly will in time. The government might do well to withdraw from printing and turn this over to local businessmen.

The government might also consider ways of protecting small locally-started businesses from outside competition. Someone suggested that the government compile a list of businesses that are declared off limits to foreign investors. Duties on imported goods such as soap and soft drinks, although painful to store owners and consumers, could be an incentive for Micronesians to set up small industries that might substitute for imports. Sometimes such measures are frustrated, however, when local people fail to understand these measures. Once, when the government raised the tax on soft drinks to help the local farmers sell more coconuts, they promptly raised the price of coconuts and so canceled the price advantage they had just gained.

To encourage the growth of the private sector, perhaps the government should consider extending to private businesses some of the benefits it enjoys. Couldn't the government health insurance plan be broadened to include private employees? The government exempts itself from certain laws that strangle private businesses. When the government hires alien workers who have worked in Micronesia before, it is not obliged to send the employees back to the point of origin, as private employers must do at great expense.

There are certain government practices that work against the build up of a strong private business community. Under the present Financial Management Act, for example, the government is obliged to wait 30 days before discharging financial obligations towards businesses. But for a small and fragile local business a 30-day delay in payment on a large order could make the difference between solvency and bankruptcy. Some also suggested a revision of the taxation laws so that businesses pay taxes on profits rather than

We were far from exhausting the topic by the end of the allotted time, and some participants seemed frustrated that we were able to gain so little ground. Consequently, we agreed to devote next month's discussion to some facet of the same general topic.