Making The Future Work

Allen Stayman

The revised and extended Compacts recently implemented in the U.S., the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) not only reaffirm the political and security foundations of the special relationships started 18 years ago, they also demonstrate the adaptability of free association by refocusing these relationships from the realities of the Cold War to the economic challenges of the 21st Century.

The U.S. judged the Compact negotiated in the 1980s as a political and security success that fell short of its full economic potential. The economies of the FSM and RMI remain heavily dependent on U.S assistance and on the public sector, the private sectors are small, local revenues are not diverse and rely on outdated and inefficient tax systems, and the health and education systems continue to perform poorly. Most important, both economies were essentially stagnant once the initial growth spurt had ended.

Why didn't the first Compact meet its economic development potential?

A major reason was poor economic planning and management. The shortcoming of direct transfers to local general fund accounts was compounded by the local governments' weak planning and management capabilities.

Fortunately, in the years leading up to the renegotiations, successful partnerships were formed between the U.S., the island governments and the Asian Development Bank to develop macro-economic planning capacity and long-range development plans. These partnerships laid the groundwork for informed negotiations with the U.S. based on professional economic analysis and on economic strategies that have formal political support.

Notwithstanding the relatively weak economic performance under the first Compact, the U.S. remained committed to continuing assistance under what became known as "Compact II." The U.S. focus shifted to economic development -- to continuing support for the planning and structural reform process that had been initiated in the mid-1990s.

The Compact II negotiations established enhanced accountability mechanisms for all financial assistance. Instead of transfer payments, funding will be made available through grants in six priority sectors: education, health, capital construction, private sector development, capacity building and the environment - with emphasis on education, health and infrastructure construction. Planning and evaluation for these grants will be done through joint economic management committees which are also required to advance the structural reforms that are essential to private sector investment.

There has been debate in some quarters that these accountability measures interfere in local autonomy. In truth, a U.S. role in establishing objectives in critical areas and striving to achieve those objectives is not interference. It is simply good government: lessons learned over many decades in the Pacific and around the world. This is the same approach taken with more than 100 other countries that have bilateral aid relationships with the U.S.

There is also concern about prosecuting officials who have misused public funds. Fortunately, legislation introduced in the FSM to grant amnesty to those who may have acting improperly in the past was not enacted, and the conviction of the former Speaker of the FSM Congress demonstrates political courage by key officials. Many observers look forward to a sustained commitment to bring those who abuse public funds to account. Reducing waste and misuse of public funds is an important part of seizing the opportunity that Compact II offers.

Free Association has demonstrated adaptability. The FSM and RMI continue to face economic challenges, but they have already taken essential steps toward success: first, by assuring better performance from U.S. assistance through joint planning and management. And second, by maintaining political commitment to their economic development strategies and to their strengthened economic planning capabilities. Most encouraging is the emergence of a new generation of leaders who, like Compact II, are focused on the future.

Allen Stayman served as U.S. Negotiator for the Compacts with the FSM and RMI from 1999 to 2001.