Compacts of Free Association:

Development Prospects Remain Limited for Micronesia and Marshall Islands

GAO-06-590: Published: Jun 27, 2006. Publicly Released: Jun 27, 2006.

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In 1987, the United States began providing economic aid to the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) through a Compact of Free Association. In 2004, through amended compacts with the FSM and the RMI, the United States committed to provide more than $3.5 billion until 2023. Joint U.S-FSM and U.S.-RMI compact management committees are required, among other things, to monitor progress toward specified development goals and address implementation of policy reforms to stimulate investment. The legislation implementing the amended compacts (P.L. 108-188) requires that GAO periodically report on political, social, and economic conditions in the FSM and the RMI. In compliance with this requirement, GAO examined each country's (1) political and social environment, (2) economic environment, and (3) status of economic policy reforms.

FSM and RMI political and social conditions challenge, respectively, effective compact grant implementation and health and education progress. Regarding political conditions, for example, the FSM states and national government have been unable to agree on implementation of the compact infrastructure grant, while the RMI government has had difficulty securing agreement from land owners regarding its use of leased land for compact-related projects. Social challenges in both countries include persistent health and education problems despite substantial expenditures. For instance, the FSM and the RMI have low immunization rates relative to other countries with similar income levels. The FSM and the RMI economies show limited potential for achieving longterm development objectives. Both economies depend on public sector expenditures--funded largely by external assistance--and government budgets have growing wage expenditures, heightening the negative fiscal impacts they will face as compact grants decline. As a result, long-term economic growth must come from the private sector and increased income sent home from FSM and RMI emigrants ("remittances"). However, poor business environments hamper private industry in both countries, and FSM and RMI emigrants' lack of marketable skills hinders increasing revenue from remittances. Compact management committees have not discussed the countries' progress toward budgetary self-reliance and long-term economic advancement at their annual meetings. FSM and RMI progress in key policy reforms has been slow. Country officials reported passing some new mortgage and bankruptcy laws, but other needed reforms have not been implemented. For example, according to economic experts, tax systems remain inequitable and inefficient and foreign investment regulations remain confusing and relatively burdensome. FSM and RMI development plans include reform objectives in each of these areas; however, compact management committees have not addressed the nations' slow progress in implementing reforms.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The U.S. and Micronesia Joint Economic Management Committee (JEMCO) and U.S. and Marshall Islands Joint Economic Management and Financial Accountability Committee (JEMFAC) Committees have taken limited steps to assess progress by the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) in implementing certain business and economic reforms. However, assessments have not been systematic, as we envisioned, but have been limited to questions and answers following economic presentations in some instances.

    Recommendation: To maximize FSM and RMI potential for budgetary self-reliance and longterm economic advancement, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of JEMCO and JEMFAC, to ensure--in coordination with other U.S. agencies participating in these committees--that they evaluate FSM and RMI progress in implementing policy reforms needed to improve the business environment and encourage increased investment and tax income.

    Agency Affected: Department of the Interior

  2. Status: Closed - Implemented

    Comments: The U.S. and Micronesia Joint Economic Management Committee (JEMCO) and U.S. and Marshall Islands Joint Economic Management and Financial Accountability Committee (JEMFAC) have identified challenges for implementing policy reforms in the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) in some cases. For example, in Spring 2007 meetings, both the JEMCO and JEMFAC Committees questioned whether they should do more to address the fact that little progress had been made in reform implementation, noting that they had deferred this topic to the countries in the past. In the August 2007 JEMFAC meetings, the committee discussed potential challenges to land, banking, and labor reforms, including public acceptance and implementation. In the 2010 Resolutions, both the JEMCO and JEMFAC note the need for a review of existing management capacity and rate structures for public utilities given rising energy costs.

    Recommendation: To maximize FSM and RMI potential for budgetary self-reliance and longterm economic advancement, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of JEMCO and JEMFAC, to ensure--in coordination with other U.S. agencies participating in these committees--that they identify problems encountered with policy reform implementation.

    Agency Affected: Department of the Interior

  3. Status: Closed - Not Implemented

    Comments: The U.S. and Micronesia Joint Economic Management Committee (JEMCO) has taken a limited number of steps to discuss the role of U.S. assistance in supporting economic reform implementation. For example, the JEMCO 2010 resolutions also mention the possibility that some Compact funds could be used to support efforts to improve public utility management and efforts to encourage private-sector development through an improved foreign-investment regime. The U.S. and Marshall Islands Joint Economic Management and Financial Accountability Committee (JEMFAC) has not made specific recommendations on how to improve U.S. assistance to support reform implementation, but did note in the August, 2008 meetings that funds could be used for this purpose.

    Recommendation: To maximize FSM and RMI potential for budgetary self-reliance and longterm economic advancement, the Secretary of the Interior should direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of JEMCO and JEMFAC, to ensure--in coordination with other U.S. agencies participating in these committees--that they recommend ways to improve U.S. assistance for these objectives.

    Agency Affected: Department of the Interior

 

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