Battling ‘Malaise’

Pacific Magazine: What are the top two to three things that the government and/or the private sector needs to do in the coming year and beyond to get the economy charged up again?

Robert Muller: First, we need to streamline and improve timely public sector infrastructure investments. This will lay the groundwork to improve the outcomes of core sectors such as education and health, and it will provide a stimulus to the economy.

Second, we need to shore up the government's medium-term budget and investment framework so that it truly becomes the actual operating foundation for the government's activities.

Third, the government and private sector need to work together to rationalize the tax system. The current system is unpredictable and is leading to a cascading effect that results in higher costs for business and difficulties in fair and uniform collection. In the end, as consumers both the government and the general public pay artificially higher prices, especially in the outer islands.

Robert (“Bobby”) Muller Photo: Giff Johnson

Fourth, we must do further work to encourage commercial lending for businesses on reasonable terms. This will mean improving the framework and implementation of using land as collateral for loans as well as adopting new measures such as certain provisions of the Uniform Commercial Code. By way of example, we would note that both Bank of Hawaii and Bank of Guam have robust commercial lending programs in Palau (which has adopted provisions of the UCC) even though Palau also has similar issues with land.

Fifth, we must put in a place a coherent policy designed for private sector development, including an achievable program to privatize a number of government functions and services, and certain state-owned enterprises.

Finally, it goes without saying that a collaborative effort is necessary to move the economy forward, and that starts with open lines of communication between the government and the private sector.

PM: Virtually everyone, from the ADB to people in the RMI, says that the government's public service system must be reformed if any progress is to be made. Your comments?

Muller: The public service is in need of effective leadership. With effective leadership, the government will be able get beyond the current malaise and bring to fruition transparent and enforceable performance criteria that will result in a more efficient and performance-oriented public service. We need to take the necessary reform actions now so that the government is not faced with a fiscal crisis in the future. Part of this will also involve some fundamental changes in the attitudes of people employed by the government. The government exists to serve the public, not those in government.

PM: Given the departure over the past couple of years of Bank of Hawaii, Outrigger, Wallace Theaters and Aloha Airlines, and the demise of the PMOP (tuna loining) plant, is it realistic to hope for investment from U.S. companies?

Muller: There are several reasons for the departure of companies such as Outrigger, Aloha, and Bank of Hawaii over the course of the past several years. In the cases of Aloha and Bank of Hawaii, a significant factor in those companies' decisions to pull out of the RMI was the overall financial condition of the companies in their operations outside of the RMI. In the case of Outrigger, the government made a conscious decision that it was no longer going to continue to subsidize the hotel operation that was the basis for Outrigger doing business in the RMI. Problems with PMOP stemmed from problems with management and an apparent lack of working capital. PMOP was also looking to the government to provide direct subsidies for their working capital. As for Wallace Theaters, the influx of pirated videos of new theatrical releases undermined their revenue base.

Unlike the past, the government has determined that it will not pay direct subsidies to private businesses. This policy of the past has only resulted in failure and the expectation that certain private sector businesses will receive funding directly from the government. The government needs to focus its attention on its core obligations to the people, such as improving health and education. It cannot be overemphasized how critical it is to for the government as a whole to be geared toward our education sector.

Even under the best economic circumstances, realistically speaking our small island economy will never be able to create enough jobs for our growing population. This means we must equip our people with basic skills that will allow them to find good-paying jobs elsewhere.

PM: Although Taiwan is providing about $7 million in funding for projects identified by the RMI government; it appears that this money is not being focused at all on social/health needs. Your comments about how ROC funding could be more effectively utilized.

Muller: The RMI appreciates the flexibility that ROC has accorded the RMI in utilizing its assistance. That said, we need to exercise better fiscal discipline on the use of these funds. Similar to the regime set up under the amended Compact, we need to allocate ROC capital funding on a multi-year basis as set forth in the medium term budget and investment framework, and more importantly maintain the discipline to stick with our allocations. Items such as office equipment and vehicles should not be funded out of the capital budget allocations and should instead be part of operational budgets. Finally, we believe that greater consultations with the ROC will provide for more effective use of ROC donor funding. This will ensure the timely disbursement of funds from ROC as this has been an ongoing issue that has resulted in cash flow problems for the RMI.