New Compact, New Opportunity

The most immediate effect will, of course, be on government operations; however, the most lasting impact will be on the economic opportunities future generations of Micronesians will have within their own islands. As the U.S. and FSM continue to jockey over the issue of fiscal flexibility under the amended Compact, two things are clear: the U.S. will be controlling the money; and any economic development will result from the efforts of Micronesians themselves and from policy decisions made by their leaders.

The U.S. government has made health, education and infrastructure clear priorities over the next 20 years. While some Compact money will go to fostering the environmental and private sectors, the terms of the financial assistance being offered by the U.S. are much more social than economic.

To the extent that any model for development existed during the first Compact, it appears to have been a deliberate, public sector-led strategy. The FSM chose the strategy largely by default, and it was supported by the U.S., largely through neglect. From the outset, today's equivalent of more than $150 million per year was spent to expand government both in terms of public administration and public enterprises. Create government jobs, the logic went, and private sector development will follow. The logic further implied the creation of profitable public enterprises, later turned over to the private sector.

With few exceptions the intentions were good and targeted to promote development. Alas, the results were sadly predictable. The FSM economy today still suffers from an expensive and ineffective public service-despite one painful round of downsizing in the late 1990s-while its private sector remains weak.

The strategy for economic development under the next 20 years of the new Compact is no clearer. Deputy Assistant Secretary to the Department of the Interior and Chairman of the Joint Economic Management Committee, David Cohen, says, "the strategy is to shore up the basic needs which will make economic development impossible if not addressed. A healthy population, and an educated population is needed, and we need basic infrastructure for the private sector to function properly. We need to create conditions to allow the private sector to be comfortable pursuing opportunities in the islands." Although the amended Compact's Fiscal Procedures Agreement calls for joint committees to "monitor the progress made…toward sustainable economic development and budgetary self-reliance," most current efforts seem to be narrowly focused on accountability measures. At some point, broad issues of economic development need to be addressed and a coherent vision needs to emerge from the U.S. side.

The role the U.S. has chosen to take appears to be that of an enabler: concentrate efforts on health, education and infrastructure (sectors in which they are confident they can make a difference), make sure money does not get misspent, and give the FSM the opportunity to develop economically on its own. Some observers say the U.S. is simply taking the easy road-spending U.S. money in social sectors where they will be inoculated from criticism by U.S. taxpayers-while leaving the harder work of balanced economic development largely unaddressed. It is plausible that the U.S. money will be "well-spent" while the FSM economy lags further and further behind.

In other words, the FSM has no assurances that spending U.S. money in exact accordance with the Fiscal Procedures Agreement of the Compact will lead to a stronger economy in 2021. The population will likely be healthier and better educated by that time, but economically sound? Nobody is making promises. At the end of 2023, the FSM will gain access to a Trust Fund, perhaps still with U.S.-imposed restrictions, but annual support from the U.S. will terminate under current terms of the Compact.

And that need for true economic independence puts the challenge facing the FSM in clear terms. The current administration needs to find ways to make up for declining levels of support, all while coming to terms with the restrictions placed on U.S. Compact money. As Kosrae is discovering rather painfully, U.S. capacity building money under the Compact can't be used to fund public operations. Chuuk won't be using Compact money to pay for land leases, and Pohnpei continues to struggle to identify infrastructure priorities. Even legitimate infrastructure projects won't be funded until a program management unit is fielded, a contract management and reporting system is in place, and bonded construction companies win procurement bids. The FSM is truly off to a slow start, in large part due to their own failure to prepare for-some say swallow-the new realities of Compact II.

The FSM’s National Capitol complex at Palikir, Pohnepi, is a sprawling collection of buildings that are based on island-style architectural elements. Photo: Floyd K. Takeuchi

For the FSM, now is the time for change. If they are to undergo serious tax reform, make a transition to performance-based management, stop trying to prop up failed public enterprises and seriously try to attract foreign investment, the stalled efforts to reform the economy should be reinvigorated now, building on the momentum of the Third Economic Summit held earlier this year.

Clearly these are difficult adjustments. For his part, David Cohen said that he "realize[s] this is a difficult transitional period for the FSM, and [takes] no pleasure in the fact that FSM leaders have painful decisions to make." But those painful decisions need to be made sooner rather than later.

The alternative for FSM's leaders, of course, is to do nothing. With a national and four state governments to coordinate, the impediments to organizing budgets and committing to reform initiatives may be insurmountable. The FSM could simply concede that the current out-migration will continue at prevailing or even accelerating levels. Already one in five Micronesians live abroad. The FSM could simply stumble through the next 20 years and make plans to survive on the Trust Fund. But this would not be "Achieving Economic Growth and Self-Reliance," as the theme from the Economic Summit so boldly stated, and more significantly, it would be missing an important opportunity.

Before ratifying the amended Compact, FSM Congressional Speaker Peter Christian noted, "at stake is nothing less than the quality of life of every citizen of this nation. The amended Compact of Free Association offers us the opportunity…to take control of our own economic destiny. It does not guarantee financial security for our citizens, it merely provides us with the opportunity to put distance between us and economic dependence." What better way to describe both the challenge and the opportunity facing the FSM?

Opportunity is exactly what sits before the FSM now. The U.S. will be taking care of the basics through health, education and infrastructure funding, but all the rest is up to Micronesians themselves.