The Government Accountability Office told the U.S. Congress in June that unless the Federated States of Micronesia and the Marshall Islands implement extensive political social and economic reforms not even $5.7 billion in economic assistance will be enough to make these countries self-sufficient.

Under the Compacts of Free Association the U.S. has sent approximately $2.5 billion to the FSM and the Marshalls as of 2006 and plans to send over $3 billion more through 2023. The money is intended to aid the two countries in becoming economically self-reliant. Yet ineffective governments extensive health and education problems unfriendly business climates and poor economic development prospects still plague the FSM and the Marshalls.

The GAO laid most of the blame on the FSM and Marshall Islands governments for not initiating real reforms and for poor management of grant monies. However the GAO also found that the management committees appointed to oversee the compact grant monies are failing their duty. Annual committee meetings chaired by Department of Interior representatives focused on grant approval and management and ignored big-picture discussions on how the grants actually met goals such as increasing private sector development strengthening education and training and improving public sector management.

These problems aren’t new. In 1987 the U.S. entered into the compacts with the FSM and the Marshalls and Washington began pumping more than $100 million annually into the two governments with the aim of making both nations economically self-reliant. Yet year after year neither country made significant economic progress. Money intended to promote private enterprise instead found its way into general government operating funds. Legislatures talked endlessly about tax reform but never got around to passing new tax laws. Foreign investors looked to other more welcoming countries.

In other words not much happened except that government payrolls got bigger.

In 2003 after 17 years and $2.1 billion in economic assistance the U.S. government amended the Compacts promising another $3.6 billion over the next 20 years. This time around however the U.S. wanted proof of progress.

The amendments called for management committees for each country’s compact expanded audit and performance reviews and sector-specific grant categories targeting health education private enterprise and public infrastructure. The new guidelines were to ensure the FSM and the Marshalls used the Compact monies to make measurable progress toward economic self-reliance.

Yet despite these amendments The GAO’s recent study found no significant improvement in either country’s economic standing. Problems in both the FSM and Marshall Islands governments still present major obstacles to economic self-reliance. In the FSM each state has its own constitution and authority over budgetary policies yet compact monies are granted to the weak national government. The national and state entities have not been able to agree on how to implement the compact infrastructure grant. The result? Over two years in infrastructure grant delays. In the Marshalls Kwajalein Atoll landowners and the national government are embroiled in land use disputes causing delays in grant allocations for new schools utility improvements and economic development efforts.

The GAO found that both governments have withheld information from citizens citing FSM censorship of a local public radio station and the Marshalls’ lack of public hearings on a project affecting public resources.

Health and education problems abound in both countries. Despite record spending on health care the FSM and the Marshalls have low immunization rates and rising rates of obesity diabetes heart disease and cancer. Ninety percent of FSM teachers do not meet new certification standards while 50% of the Marshalls’ teachers have failed basic English literacy tests.

On the economic front the GAO painted a grim picture. Government spending accounts for about 60% of the gross domestic product of each country. Both governments are primarily funded by foreign assistance. Yet despite the planned annual decreases in U.S. compact grant monies government payrolls are expanding in both countries. Both countries have stagnant private sectors that exist primarily to provide services to the public sector and public sector wages run about twice those of the private sector siphoning talent from the private sector.

Other factors in the unfriendly business climates include poor business tax systems that act as disincentives to investment; unreliable power water and other infrastructure; and governments’ failure to pay for services rendered by private sector. The FSM and Marshalls governments also compete directly with the private sector in several commercial enterprises even though most of these government ventures lose money.

While the FSM and Marshall Islands legislatures have enacted some laws to improve their business environments neither country has moved on major reform. The FSM has discussed tax reform extensively and even agreed on several key elements of reform but has no plan to implement the reforms. The Marshall Islands government has yet to even agree to change its tax system.

Land issues only make the situation worse for prospective investors. Traditional land ownership systems are complex and few parcels have registered legal owners. Banks are unwilling to make liens against land without a clear title and since the majority of islanders’ wealth is tied up in property money for business investment is difficult to secure. Foreign investment is hampered by confusing and restrictive regulations and foreigners are prohibited from owning land in either country.

The only two industries identified by the FSM and Marshall Islands governments as having significant expansion prospects tourism and fishing are hampered by several factors: remote geographical location increasing airfares poor flight connections freight transport problems over fishing and a limited pool of skilled labor.

The GAO indicated that the single most likely source of long-term economic growth for both the FSM and Marshall Islands was income sent home from Micronesians living abroad. Currently most FSM and Marshall Islands emigrants lack marketable skills thanks to poor education and vocational training in their home country and almost half of these emigrants live below the poverty line. But the GAO pointed to a bright spot: these emigrants’ free access and strong historical link to the U.S. market has potential. Tapping that potential however depends on extensive improvements in the education system back home improvements that seem unlikely if the status quo continues to prevail.

The GAO recommended in the report that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs as chairman of the compact management committees to address the lack of progress in tax reforms increased investment and tax income in these island nations. MBJ