The Federated States of Micronesia (FSM) is a lower middle income island nation of 105,544 people on 607 islands with a total land area of 271 square miles and an exclusive economic zone (EEZ) of over one million square miles (2.6 million square km) in a remote area of the Western Pacific Ocean. The nation is composed of formerly unrelated cultures and languages organized into four states under a weak national government. The FSM is part of the former U.S.-administered Trust Territory of the Pacific Islands that gained independence in 1986. Since independence, the U.S. provides over USD100 million annually to the FSM, operated under a Compact of Free Association (Compact) with the U.S. FSM uses the funds for development under the U.S. Department of Interior Office of Insular Affairs’ administration. (DOI) The World Bank estimates FSM’s 2017 Gross Domestic Income (GDI) as $3,187 per person, a trend reflecting no growth over the previous 10 years. The national currency of exchange is the U.S. dollar.
Commercial fishing remained the main industry in FSM. Its primary sources of income were the sale of fishing rights (approximately USD72.5 million in 2017) and taxes on offshore corporate registrations for captive insurance (USD86 million in 2018). It continued largely as a subsistence economy, except in larger towns where the economy was centered on government employment and a small commercial sector. The cash economy was primarily fueled by government salaries paid by Compact funds (70 percent of employed adults work in the public sector) and, to a much lesser degree, by family remittances and Social Security benefits paid to FSM citizens who previously worked in the United States or are the surviving spouse of an American citizen. Compact funding will change in 2023 from direct funding in the form of sector grants, to the use by the FSM of proceeds deriving from a trust fund developed from U.S. contributions over 20 years. Additionally, FSM created its own trust fund, with contributions of USD75 million from FSM revenues to the FSM trust fund in 2018, a significant increase from prior years.
The FSM GDP for 2017 was USD336.4 million, a 2.25 percent increase from 2016 at constant prices. The economy recorded a trade deficit of USD125 million in goods and services for the same year. FSM government debt was low, but the lack of focus on fiscal revenue to supplement Compact funding, the lowest tax-to-GDP ratio in the Pacific, and looming Compact funding reductions in 2023, meant international development banks classified the country as a grant-only client, concerned with the country’s ability to repay loans.
Foreign direct investment (FDI) was almost nonexistent due to prohibitions on foreign ownership of land and businesses, difficulties in registering companies (the process required approvals from the state governments as well as the national government), poor private sector contract enforcement, poor protection of minority (foreign) investors’ rights, weak courts, and weak bankruptcy settlement management. Pohnpei State’s Legislature amended its laws September 2018 to reduce requirements on foreign investment. The law specified which business sectors permitted FDI, with the remaining sectors available for Pohnpei citizens only. Domestic capital formation was very low because the commercial banks were classified as foreign entities and not allowed to provide mortgages or business financing. The cost of doing business in FSM was high due to the region’s remoteness and dependence on imported materials, services and skilled labor.
Most national political power was delegated to the four states by the FSM constitution, including regulation of foreign investment and restrictions on leases. This meant that investors had to navigate between five different sets of regulations and licenses. U.S. citizens were able to live and work in the FSM indefinitely without visas under the Compact but cannot own property on most FSM State islands. FSM voters selected national legislators (senators). The national senators then caucused to select the president and vice-president from among the four at-large senators. There were no political parties. The most recent elections for Congress were held March 5, 2019, where President Peter Christian failed in his bid for a second term. Senators were scheduled to select the next president and vice president on May 11, 2019.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||44/100 (regional
|World Bank’s Doing Business Report||2019||160 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||N/A||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2016||$1||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2018||$3,620||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|