Pacific Magazine > Magazine > December 1, 2005

Commonwealth of the Northern Marianas

Dire Times

Saipan Is On The Verge Of A Collapse

By Frank S. Rosario

Once blessed by a seemingly neverending stream of yen-rich tourists and off-shore investors, and annual growth rates that were the envy of its neighbors, the Commonwealth of the Northern Mariana Islands now faces an economic crisis so dire that the U.S. possession's short-term future appears at best bleak. Indeed, the chain of islands in the Western Pacific is on the verge of an economic collapse that could rival in impact Nauru's stunning financial meltdown.

Chinese tourists at Saipan’s Last Command Post. (Photo: Floyd Takeuchi)

The signs of the impending collapse are everywhere:

>>> Japan Air Lines, which provided 40 percent of the seats to the Northern Marianas capital of Saipan from Japan, ended all service on October 5th. Japan is the Northern Marianas' largest market, providing some 70 percent of the commonwealth's visitors. No airline has stepped in to make up the difference in available seats.

>>> Japanese investors, many involved in tourism, are leaving Saipan in droves following years of dismal financial results.

>>> Saipan's once powerful garment manufacturing industry, which propped up the Northern Marianas in the late 1990s, continues to contract, and some government and industry officials believe it could be all but extinct within two years. Garment factories are shutting down, in many cases resulting in thousands of alien workers, many from China, stranded on Saipan.

>>> Saipan's government-run electrical utility has been unable to provide consistent 24-hour power to the island for months. Rolling blackouts, and unscheduled outages are now a way of life on one of the most developed islands in the Western Pacific. And many villages also don't have regular access to water, let alone potable water. Conditions are so bad that the governor earlier this year declared a state of emergency because of the power crisis.

>>> The commonwealth government faces an operating budget crisis. One deeply troubling sign of the government's financial problems: it has unfunded liabilities to the commonwealth retirement system amounting to more than $532-million.

>>> After years of trying to close its acquisition of the commonwealth's dominant telecom company from Verizon, a process delayed by vigorous government opposition, the new owners now face the possibility that they will have to shut down some services temporarily to reroute phone lines that are on public lands. The result, the telecom warns, could be that Saipan is cut off from the outside world by telephone.

"The state of the economy in the Northern Marianas is dismal," says Alex A. Sablan, president of the Saipan Chamber of Commerce (SCC). "The economy has not been good during the past seven to 10 years."

Adds Joe C. Ayuyu, an economist by education and one of Saipan's most successful entrepreneurs: "I foresee more closures of businesses due to combination of reasons foremost of which is the way government treats businesses."

And David M. Sablan, one of Saipan's best known business executives and current chairman of the Marianas Visitors Authority, predicts the "worst is yet to come."

What does it say about Saipan's economy when tax revenue from poker machines -electronic (and legal) gaming devices that are found in poker parlors in every village - now comprise the commonwealth's second-largest source of tax revenue, greater than the amount of taxes raised from the garment industry by some $5 million a year?

The commonwealth government remains the lightning rod for criticism by the local business community. "It's unfortunate that over the years we've never really had a person that provides good (government) leadership," Ayuyu says. "And when I said good leadership I expect this person to have a vision on how the Northern Marianas should be in the future."

Alex Sablan is blunter: "The government has been dysfunctional for many years for not seeing the writing on the wall about the demise of the economy due to policy decisions that made no sense whatsoever," he says. "We need to call the attention to everyone that there are serious mistakes being made in governing the islands because nobody wants to make hard decisions to actually lead properly,"

Governor Juan Babauta, who has been in office for nearly four years, says much of the commonwealth's economic problems are the result of forces beyond local control. Peter Callaghan, Babauta's press secretary, says the soaring price of fuel, changing world trade regulations that make Saipan less competitive as a garment manufacturing center, and the economic woes of Japan Air Lines are examples.

The Bank of Hawaii's Northern Marianas country manager, Vice President Stephen A. Brock, also points to external factors. He notes that JAL's load factors on CNMI-Japan flights were a respectable 82 to 89 percent. And the airline also pulled back from other resort markets, including Guam and Hawaii, to concentrate on more profitable business-travel routes. "There must be other factors intertwined in the basic fabric of the CNMI economic landscape that are contributing to the economic downturn," Brock says. Among the possibilities: an aging hotel industry that has years and millions of dollars of deferred maintenance on its books, a dearth of new attractions and brazen prostitution in the middle of Saipan's main tourist district.

The government's top finance official says things are actually beginning to look better. In Fiscal Year 2005, hotel occupancy tax revenues grew slightly to $6.5 million, up from $5.9 million the previous year, according to commonwealth Finance Secretary Fermin Atalig. "A lot of people are saying that the economic activities in the CNMI have gone down," he says. "But I'm not convinced because the figures show our collections have increased. Numbers don't lie and I have the figures to prove it." He also noted that the business gross revenue tax revenues increased to $57 million this year, compared to $54 million last year.

Saipan's current economic crisis is also focusing attention on a long-standing impediment to new foreign investment: Article 12 of the commonwealth's constitution. That provision restricts land ownership to indigenous residents. Many investors would rather own the land under their investments rather than rely on potentially more uncertain land leases. Northern Marianas voters will have an opportunity to reconsider Article 12 in a referendum scheduled for 2012.

"What is not up for debate is that a change to Article 12 would create the opportunity for an economic boom in the CNMI fueled primarily by the construction, commercial real estate and residential real estate industries," the Bank of Hawaii's Brock told Pacific Magazine.

Given the enormity of the economic challenges facing the Northern Marianas, no single individual will be able to nudge the floundering commonwealth toward recovery. Still, that was a key element that was riding on the outcome of November's gubernatorial election. For embattled local business executives, who have watched in horror as a once booming Saipan has deteriorated into a virtual economic wasteland, the ability to pin their hopes on something is better than the stark reality they now face.