Better Times Coming?

A missile-tracking facility on Kwajalein Atoll. The big question for 'Compact Two' is: Will Kwajalein landowners agree to the new 50-year extension of U.S. use of the test range? Photo: Giff Johnson

Twenty-five years since starting its experiment in democracy, the Marshall Islands still has "economic potential" written on it. That's because the first Compact of Free Association with the United States breezed by almost in a blink, with its lofty goals of economic self-reliance largely-some might argue totally-unmet. Inexperience, bad management, global political factors and, frankly, very little time combined to produce only a modest amount of "economic development."

Compact "Two" is now in its first of 20 years, and is expected to provide a funding foundation for the islands, one that avoids the pitfall of the first Compact's dramatic grant cutback every five years. The national economy, virtually non-existent in the mid-to-late-1990s, has shown signs of modest growth. But then, it had nowhere to go but up.

A recent study produced by the government's Economic Policy, Planning and Statistics Office shows that between 1988 and 2000, fewer than 50 new (net) jobs were created in the country during that period. This was when the engine of out-migration cranked up and the Marshalls suddenly woke up to the fact that about 15,000 islanders had exited the country for America by the early 2000s. That safety valve built into the Compact, allowing visa-free travel of Marshallese to live, work and study in the U.S., has proved its worth to the Marshalls, but it has also underscored the lack of opportunity at home.

The opening of the joint venture PM&O Line/StarKist tuna loining plant in Majuro, which began hiring in earnest in 2000, is itself one of the few examples of American investment in the country. The plant has provided more than 500 jobs and has become a significant contributor to the local economy. But it's one of the few that's expanding.

Most local businesses have been forced to retrench, not only because of the late 1990s rollback in government operations, but because of competition in a private sector increasingly controlled by Taiwanese and Chinese business owners, who are in the country legally on passports purchased in the mid-1990s. The government last year provided multi-million dollar bailout loans to two major local businesses on the verge of collapse, but the writing is on the wall for the retail and wholesale sector.

The construction industry is expecting a revival starting in late 2004, when Compact infrastructure money is released for building local schools. President Kessai Note says that from all sources the government expects to spend $21 million annually over the next three years on construction work. It's welcome news for an industry that has been in the doldrums since 1999, when the last big construction project-the Japanese-funded $13 million road paving-ended. The question is now whether the local construction industry can actually absorb that level of funding after its precipitous decline the last five years.

National governments in the Marshall Islands have historically espoused the cause of the private sector and consistently done little to actually help business development. That appears to be changing through the Note administration's stated anti-corruption, pro-transparency policies. Though implementing transparency in government operations has proved a good deal more difficult than the issuance of campaign promises, it's added a new dimension of benchmarks against which people rate government. The reelection of Note's government in November 2003, with a slightly wider margin in the Nitijela (Parliament), is indicative of public opinion about the direction in which the Marshalls is moving.

One of the positive developments on this front is the Note administration's buy-in on the need for improving the business climate. Many in the private sector have repeatedly complained about the difficulty in figuring out how to comply with many-layered bureaucratic regulations and sometimes the plain intransigence and unwillingness of government offices to process paperwork essential to the functioning of businesses.

Several local business people told Pacific Magazine that it's easier not to follow regulations because if you try to comply with the government requirements, bureaucrats stall, lose paperwork repeatedly or simply don't make a decision for months on end. The flipside of the coin is there's almost no enforcement so it's easier to do what the private sector does best: take action and do what's needed to run the business.

"We have learned our lesson from the past," Note told Pacific Magazine. The goal now is to "improve the policy environment and the basic infrastructure for private business activities. One of the biggest complaints I have been getting from our business representatives is that although we may have good policies and regulations in place, there is still lax enforcement. This creates an uneven playing field and leads to uncertainties that result not only in terms of lost investment opportunities but also lost tax revenues." Note says his government "has to work harder to correct these anomalies."

The ADB is assisting the Marshall Islands in a project to remove obstacles to foreign investment-alien worker permits and foreign investment licenses being two that have been initially identified-that is now in progress. If the government will act on recommendations that come out of the process, which is not a foregone conclusion, it could lead to improving the environment for the private sector.

Another interesting development is in its infancy, but could pay off big time for the Marshall Islands. International donors-everyone from the ADB to the European Union to United Nations agencies-agree on the need for increasing funding to non-governmental organizations and community groups that in the last several years have begun flexing their muscles in a significant way on critical social and health needs in the Marshalls.

To the Note government's credit, it is supporting this with plans beginning this year to inject the first serious funding from government sources into the NGO sector. With NGOs providing key youth health services, vocational training programs for unemployed youth, training and literacy-related programs for parents and children, and counseling services-to name a few-this new level of support will help to address festering and largely unmet needs in the community, while relieving some of the burden from government in a country where the attitude has generally been "let government take care of it."

With the U.S. government focus on education and health in the new Compact, these two ministries are now getting their biggest-ever budgets. It's good, and well-overdue, news. According to an ADB assessment of overall donor and local funding for 2004, the education sector is receiving 32 percent of $116 million, while health is getting 20 percent. Despite the higher budgets, however, both sectors, particularly education, were neglected for so many years, that even with the injection of more money an immediate and dramatic impact is unlikely.

Indeed, Dr. Neal Palafox, who has worked in the Micronesian region since the 1980s and is now based in Hawaii, observed to a meeting of Micronesian region medical officials late last year that the problem with the new Compact's focus on health is that the funding is not pegged to a level needed to lift health levels to a defined standard, with benchmarks. Instead, the goal is just to "improve health" and the question, he poses, is to what degree will it improve?

Coupled with the new Compact funding is a new regime for accountability. Since the advent of the American Trust Territory administration, soon after World War II, there has never been the requirement that grant funds expended actually needed to accomplish results. Certainly U.S. federal grants arrived with objectives. But the fact was that most grants kept flowing year after year, despite little apparent progress, and it has been a truism that a program here had to work very hard to lose its funding.

Short of outright theft, programs were virtually guaranteed access to a vast array of grant funding from the U.S., with federal officials largely ignoring "questioned costs" identified by auditors or inclined to excuse lack of performance on the basis of inexperienced island administrators. Washington, largely in the form of the Interior Department, absorbed a heavy dose of General Accounting Office criticism in the last two years for its lack of oversight of funds in the first Compact.

“Although we may have good policies and regulations in place, there is still lax enforcement. This creates an un-even playing field.” —President Kessai Note Photo: Giff Johnson

The new Compact's stringent financial reporting procedures-including the three-to-two U.S. majority on a Joint Economic Management Committee that has the power to approve and reject budgets-have raised objections from some politicians and other critics who say these are violations of the sovereignty of the Marshall Islands. Program level managers, especially those in education and health who see the benefit of vastly increased budgets, largely support the new accountability measures because they see, for the first time, that funds can no longer be taken away from their ministries at the whim of a Cabinet minister.

The focus on education started by Note's first administration in 2000 is long over-due, and already there are indications of modest improvements. A national high school entrance exam in 2003 showed the highest-ever test scores, with scores generally rising over the last several years. But key problems continue to confound planners, including the high truancy rate-an estimated 20 percent of school age children are not in school; a lack of space in both public and private schools that can accommodate only about 70 percent of graduating eighth graders-meaning that close to one-third of all students are pushed out of school after eighth grade; the large number of students who don't make it from ninth grade to graduation, which speaks to lack of parent support, alcohol abuse and a high teen pregnancy rate-38.8 percent in 2003; and a largely under-qualified teaching force-the highest qualification for 46 percent of public school teachers is a high school diploma.

If any area of the Marshall Islands has potential written on it, it's public school education. Still, and despite the most objective-driven Ministry of Education ever, it will be years before the country gets a grip on its current educational woes.

And if the schools start producing academically skilled graduates, what is the Marshall Islands going to do with them, given the lack of growth in the economy? The Marshalls really has two possibilities for economic growth: fisheries and tourism. The latter accounted for $3.7 million into the local economy in 2002, according to the Marshall Islands Visitors Authority, suggesting the potential in that area. The high airfares, absence of direct flights from Asia, and few tourist activities as a result of a very modest number of visitors annually are the challenges that tourism operators face. The Hawaii-based Outrigger hotel chain pulling out after nearly eight years of hotel management in Majuro doesn't help.

Fisheries is more complex, because the real job and revenue generating potential, for Marshall Islanders at least, is in mariculture work, including clams and pearl oysters. The success of these has been demonstrated by local businesses-largely Robert Reimers Enterprises, which back before anyone had even heard of mariculture in the mid-1980s was investing in growing clams and pearls. They grow well in the islands, there are proven markets and they produce jobs and revenues for Marshall Islanders.

But while the government fisheries agency has provided modest support to research into clams and pearls, its mariculture program is unfocused. Instead of helping to take these two pilot industries to the next level of production, and thereby expanding employment and revenue generation, the government brings in grants to pilot such untried projects as seaweed growing. Nevertheless, the fact that as a result of private sector initiative pearl harvests continue to grow, and the Marshall Islands has found its niche in the American and European aquarium market for the smaller "maxima" clams, suggests that there is a bright future.

The largest private sector employer remains the U.S. Army's missile testing range on Kwajalein Atoll, which employs 1,400 Marshall Islanders. And on Kwajalein rests a significant portion of the Marshall Islands economy: rent to landowners, salaries to workers and taxes on American workers at Kwajalein.

The newly amended Compact provides for extending American use of Kwajalein to 2066. There is, however, a major problem. Kwajalein landowners said for months before the final deal was approved, and continue to repeat it months after the deal was concluded, that they would not accept it.

Last year, landowners received $11.3 million in rent. The new Compact provides $15 million, inflation adjusted upward each year, but the landowners want $19.1 million. Unless they sign a new land use agreement allowing the new agreement to take effect, it's dead in the water. In fact, the U.S. Congress in approving the Compact recognized this and put a five-year window for getting approval of a new land use agreement, with the difference in rental payment over the first Compact going into an escrow account.

If the landowners won't budge-and so far there's no indication they will-the current land use agreement expires in 2016. Pushing the point, leading landowners are saying publicly it's time to start planning for 2016. Bluff or not on the landowners' part, the Compact of Free Association may be a house of cards without the landowner's consent.