- Federated States of Micronesia
In this report, I discuss the progress of the painful public-sector reforms instituted after the third step-down in Compact I funding in order to stimulate private sector growth in the FSM national economy. I touch on the role of politics in scaling back these reforms. In addition, I address the ever-present tension between the two political branches of the national government. Rather than discuss the progress of issues in much detail, this report summarizes the important economic and political issues taking place during the reporting period.
For the past several years, the main concern for leaders in the Federated States of Micronesia has been the country's slow (perhaps too slow) progress in economic development. To kick-start the economic development program, the Third FSM Economic Summit approved a strategy developed by the Economic Management Policy and Advisory Team (EMPAT) that would encourage growth in the private sector of the economy. The summit, which was held in 2004 as the concluding act of the EMPAT group, followed in the wake of the politically contentious and painful public-sector reforms carried out at all levels of the government at the advisory team's urging.
The main impetus for the private-sector growth strategy was the public-sector reforms instituted after the third and last step-down in funding under the ﬁrst Compact for Free Association. As conceptualized, the reforms included reduction in government employment and salaries. These reforms were supposed to be continuous. Initially under the reforms program, all the states met their objectives of reducing employment and salaries in their respective government sectors. Then some of the states began to roll back the accomplishments of their reform programs, especially after seeing that some elected ofﬁcials who implemented the programs had been thrown out of ofﬁce. After Compact II implementation, all the states and the national government seem to slide into complacency. One national government ofﬁcial complained to me privately that the national government was circumventing its own policy of keeping the public sector small. It has resorted to hiring new employees on special contracts. It is easier to justify this type of hiring because the contract is supposedly for a speciﬁc length of time. In addition, these hires do not show up on the list of permanent employees. However, as another ofﬁcial pointed out to me, "the effect on the overall government is the same: it increases the budget. In fact special contract hiring is more expensive." [End Page 178]
If the degree of complacency about public-sector reforms is the yardstick to gauge the growth of the private sector, then the result is readily predictable: it is growing at an excruciatingly slow pace. In 2005, growth in the gross domestic product hovered around 1.5 percent. This growth may be attributable to new hiring in the public sector after Compact II implementation. The agriculture sector, which has always been a top priority on everyone's list, shows very little development activity. Student interest in agriculture as a major at the national campus of the College of Micronesia–FSM might be seen as a good indicator of the lack of activity in the sector. Every graduation the college graduates 1–2 students in agriculture compared to 7 in Micronesian studies and 20 in liberal arts. This suggests that agricultural development will remain as a top priority on paper only.
Like agriculture, ﬁshery tops everyone's list as the sector with the greatest potential for investment. However, faced with constraints such as high costs, uncertain freight systems, and small proﬁt margins, development activity in ﬁsheries is almost nonexistent. The ﬁshery companies that sprang up almost overnight under the ﬁrst compact and had been the focal points of hope for economic development no longer command any attention. Some have gone bankrupt and others have scaled back their operation to one or two ﬁshing boats. The Micronesian Longline Fishery Corporation is now in receivership and the FSM Congress is calling for investigation and prosecution of its board of directors.
The FSM government will continue to sell ﬁshing rights to "distant-water" ﬁshing...