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  • Federated States of Micronesia
  • John R Haglelgam (bio)

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...


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pp. 178-182
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