Pacific Magazine > Magazine > June 29, 2007

U.S. IN THE PACIFIC

Living With Tough Love

Can FSM, RMI Do More Than Tread Water?

By By Giff Johnson, Majuro

If anyone needed reminding that the United States now approaches its Micronesian allies with a hard line, recent tough-love actions by Washington cleared the air. The U.S. cut off funding to two states in the Federated States of Micronesia for “illegal” use of Compact of Free Association money and publicly reprimanded the Marshall Islands for borrowing U.S. funds for unapproved purposes.

The actions point to vastly divergent views between officials in Washington and the islands about Compact implementation. They also underline the increasingly apparent financial problem that big government payrolls pose for islands long used to being sustained by donor transfers but now having to contend with declining donor aid and stricter terms.

U.S.-FSM and U.S.-Marshall Islands officials will meet this August for their annual financial management meetings to address funding plans for next year and beyond. But the challenges are deeply rooted and don’t lend themselves to resolution by spreadsheet or technical meetings.

From the early 1960s—when President John F. Kennedy, responding to criticism of U.S. neglect of Micronesia, tripled U.S. aid overnight—to 2003, government leaders in the FSM and Marshall Islands grew accustomed to their role as the receivers of relatively large aid transfers with few strings attached.

In the new Compacts “performance” is the buzzword, and the talk among implementers is all about “outputs” and “performance indicators” and “good governance.”

On the ground, while there’s been some shift to the new performance orientation, the reality is that most of the governments are just trying to keep their heads above water and maintain employment levels that currently drive the government-dependent economies.

“The major challenge for FSM states is to think outside of the old paradigm of having the entire economy based upon receiving Compact funds and dividing those funds among the population in the form of government jobs,” U.S. Interior deputy assistant secretary David Cohen told Pacific Magazine. “Although that is the approach that U.S. aid may have inadvertently encouraged prior to Compact II, that approach is not sustainable.  Compact II cannot work unless the grant funds are treated as investments, which must be expected to yield some positive benefit in the future. We understand that it’s difficult to move from an emphasis on current consumption to an emphasis on investment for the future.”

Epel Ilon, the director of the FSM’s Compact implementation office, described the problem for Pacific Magazine: “Use of Compact funds presents some very challenging issues for the FSM, particularly as the FSM migrated from the pretty flexible Compact I to the amended Compact with its many restrictions and requirements. Imagine all departments being funded by Compact funds then, and now, only those meeting the sector-defined uses can be eligible for funding. And yet, the needed local revenues have not necessarily increased to be able to cover these changes.”

The FSM lobbied the U.S. to give it a transition period for the adjustment from Compact I to Compact II.  “But the U.S. did not agree to such an arrangement and so, I believe what we are facing, as evidenced by Chuuk’s and Kosrae’s situations, is a crying need for the transition period,” says Ilon.

But Cohen disagrees. “We provided a transition period by allowing the public sector capacity building grant to be used to fund existing recurring operating expenses over a five-year period. Some people might say that if your transition period lasts for more than five years into a program that only lasts 20 years, you’re no longer talking about a mere transition period.”

Earlier this year, the FSM asked the U.S. to give it a two-year extension on use of “capacity building” funds for government salaries. The U.S. is not enthusiastic. But Ilon believes the extension is essential, “particularly for Chuuk and Kosrae, given their financial situations and the slowness of our revenue generation through our comprehensive tax reform, which has yet to be implemented.”

What prompted Interior to suspend Compact transfers for Chuuk, last November, and Kosrae more recently, was the use of Compact funding to pay salaries and other non-Compact designated local expenses. Both used slightly more than $1 million each, but were forced to repay Compact accounts to get resume the flow of U.S. funding. “The so-called ‘misuse’ of Compact funds is essentially based on Chuuk and Kosrae using Compact sector grants for those programs and services that were supposed to be paid by local revenues,” Ilon said.

Compact I paid for big national governments in both Marshall Islands and FSM, and in the case of FSM, state governments, too. But “capacity building” money is intended, at least in the U.S. view, to develop new skills, not just pay for existing staff. “What we did not want to see was the FSM taking the entire Compact budget, applying it to their existing payroll, and calling it ‘capacity building,’” Cohen says.

In the Marshalls, a financial crisis at the main power utility coupled with a government payroll that has leaped by more than 50 percent since 2000, has stressed government finances, forcing it to repeatedly reprogram money for fuel purchases, and to borrow nearly $600,000 in Compact funding to meet a fuel payment deadline in March. This produced a rebuke from Interior, with Cohen saying the Marshall Islands “violated a basic Compact requirement.” But Marshall Islands Chief Secretary Casten Nemra was unrepentant, telling Interior officials in a letter that the 24-hour borrowing of Compact funds “avoided major disruption to the provision of electric services” preventing “adverse affects on the economy and social welfare.”

The FSM and Marshall Islands national governments, and the FSM’s four state governments have historically been employment agencies, a means for distributing the wealth of donor funding.

Cohen says that has to change, and he thinks the two island nations might find it helpful “to rethink their relationship with the private sector. Government leaders in the freely associated states may have believed in the past that Compact aid gave them the luxury of neglecting the health of their business climate.” But, he told Pacific Magazine, “no economy can sustain itself without a healthy and growing private sector.”

Both the FSM and the U.S. call for teamwork, but they have different agendas. “There should be more (partnership) than the taking of sides on issues,” Ilon says. “The Joint Economic Management Committee (JEMCO), for instance, should be one where the two governments work together to address issues and not take sides against each other.”

Cohen has similar thoughts: “I believe that Compact II can give children in the Marshall Islands and the FSM a much better future, but only if we’re all pulling in the same direction and agree that the deal that we all signed is the deal that we’re all going to make a success.”

But Washington and Pohnpei and Majuro are obviously not on the same page, and the 40-year legacy of donor aid and government dependent economies cannot be easily undone, and certainly not from Washington.

For its part, the U.S. clearly believes that it’s the FSM and Marshall Islands that have to shape up, and with the U.S. providing upwards of 60 percent of their two national budgets, it’s a hard voice to ignore. “Compact II challenges to the Marshall Islands and the FSM to envision a prosperous future for themselves and then go out and seize that future,” Cohen says. Whether the FSM and Marshall Islands have the will or inclination to do it the U.S. way remains an open question.

This is an expanded version of the story that appeared in the print edition of Pacific Magazine.