MICRONESIA

COUNTRY OVERVIEW

LOCATION AND SIZE.

The Federated States of Micronesia forms (with Palau) the archipelago of the Caroline Islands, and lies about 800 kilometers (497 miles) east of the Philippines. The Federated States of Micronesia (FSM) consists of 607 islands and includes (from west to east) the states of Yap, Chuuk (formerly Truk), Pohnpei (formerly Ponape), and Kosrae. Micronesia covers about 702 square kilometers of land (271 square miles), has a coastline of 6,112 kilometers (3,798 miles) and is scattered over more than 2.7 million square kilometers (1 million square miles) of the ocean. Micronesia's largest island cluster is Pohnpei (163 islands), with an area of 344 square kilometers (133 square miles), while the smallest cluster is Kosrae (5 islands), spanning 110 square kilometers (42.5 square miles). The islands include a variety of terrains, ranging from mountainous islands to low, coral atolls and volcanic outcrops.

POPULATION.

The population of Micronesia was estimated at 134,597 in July 2001, up 18 percent from 114,000 in 1998. The current annual population growth rate is 3.28 percent, which will result in a population of 176,815 by 2010. The birth rate is 27.09 per 1,000 population, with a fertility rate of 3.83 children per woman. The death rate is 5.95 per 1,000 population. The immigration rate is 11.65 migrants per 1,000 population. The infant mortality rate in July 2000 was 33.48 per 1,000 births (the U.S. rate was 7 per 1,000).

There are 9 ethnic Micronesian and Polynesian groups, spread across the islands. In 1994, around 53,319 people lived in Chuuk; 33,692 in Pohnpei; 11,178 in Yap; and 7,317 in Kosrae. The highest population density was estimated in Chuuk island with 419.8 people per square kilometer (1,087 per square mile) in 1994.

OVERVIEW OF ECONOMY

Previously administered by the United States as a Trust Territory of the United Nations, the Federated States of Micronesia became self-governing in domestic matters in 1986, and fully independent in 1991.

The small size of Micronesia, both in terms of geographical area and population size, its remote location, and its lack of commercially viable mineral resources all combine to set limits on the economy. The nation's main assets are its tropical location (which provides good potential for tourism), productive fishing grounds, and reasonably well-educated workforce.

Micronesia's estimated GDP per capita is $2,000, which places it near the top of 45 world economies the World Bank classifies as Lower Middle-Income (coun-tries with GDP per capita in a range from $700-$2,800). Financial support from the United States has been a vital feature of the period since self-government was introduced in 1986, with __BODY__.3 billion allocated over the period from 1986 to 2001, an enormous sum for a community of 134,000—almost $100,000 per person. The money has been allocated to improving educational and health provisions, providing infrastructure, training for political and community leaders, bolstering public sector efficiency, and encouraging the private sector. Grants from external sources amounted to some $91.5 million in 1996-97 (equivalent to 43 percent of GDP).

The most significant cash export is fish, which accounted for 82 percent of total exports in 1996. Micronesia has established an exclusive economic zone, which covers an ocean area of more than 2.5 million square kilometers (965,250 square miles) of particularly productive fishing grounds yielding tuna, red snapper, and grouper. Local producers fish these waters, and licenses are granted to foreign fishing fleets to work these waters as well. Other marine resources include phosphate deposits, and there are currently trials under way to see if these deposits on the ocean floor can be exploited commercially.

In the past, copra (the sun-dried white flesh of the coconut, from which coconut oil is extracted) was Micronesia's main cash crop. However, low world prices have led to production plummeting from 8,500 tons in 1979 to 200 in 1992, and it has remained around that level since, although in some years no exports of copra are recorded at all, and this despite a government subsidy to try to maintain production. Copra now makes a small contribution to income in Micronesia, and the economy is no longer buffeted by fluctuations in world copra prices. Also, Micronesia no longer faces a dilemma of whether to continue production in the face of current low prices. Needless to say, the decline in copra production is a particular blow for farmers on the outer islands for whom coconuts have been an important source of income.

The islands all have some tree cover, and timber, including wood from the coconut tree, is used for house construction, furniture, and household utensils. The climate in the Micronesia is tropical, and there is a healthy amount of rainfall. The soil is rich, and fruits indigenous to the islands include bananas, mangos, pineapples, and papayas.

Economic growth in the Micronesia is heavily influenced by changes in global and regional commodity prices and the climate. The nation is mainly made up of small, flat islands, which makes it difficult to support large-scale cultivation. The main form of agriculture is therefore subsistence production. It is difficult for subsistence producers to create a large surplus due to the lack of storage facilities and transportation. The strongest areas for economic growth are tourism, fishing, manufacturing and mining.

The government employed as much as two-thirds of the population before 1997. However, in 1997, the Asian Development Bank approved a loan of $17.68 million for the funding of a program of major economic structural adjustment. This was done in preparation for the ending of U.S. assistance under the Compact of Free Association at the beginning of the 21st century. The reform package included measures for attracting new sources of foreign aid and private investment, for fiscal reform, and for the strengthening of the private sector, as well as severe reductions in the number of public-sector employees. The year 1997 saw the balance of the workforce begin to tilt toward the private sector, and in 1998, government expenditures declined by 27 percent, spurred by continuing privatization. In terms of GDP components, the government's recent efforts to encourage privatization of certain industries seem to be working. Non-market production dropped 4.3 percent as more citizens chose to work in the money economy.

In exchange for allowing the United States exclusive access to its waters, Micronesia receives an annual fixed payment from the U.S. government.

POLITICS, GOVERNMENT, AND TAXATION

The Federated States of Micronesia emerged as a nation from the former United Nations Trust Territory of the Pacific Islands (TTPI) administered by the United States from the end of World War II. The Federated States of Micronesia became self-governing in 1986.

Political legitimacy rests on a majority vote through elections in accordance with the constitution. On May 10, 1979, the locally drafted Constitution of the Federated States of Micronesia incorporated the 4 states of Kosrae, Yap, Ponape (later Pohnpei), and Truk (later Chuuk). The Congress includes 14 members, called Senators. The 4 states each elect 1 "Senator-at-Large" for a 4-year term. The remaining 10 Senators are elected for 2-year terms: their seats are distributed in proportion to the population of each state. Each of the 4 states has its own constitution, governor, and legislature. The federal president and vice-president are elected by the Congress from among the 4 "Senators-at-Large." The president of the Federated States of Micronesia since May 1999 has been Leo A. Falcam.

The state governments are fairly autonomous and work like state governments in the United States, with individual executive, legislative, and judicial systems. In each state, traditional leaders work closely with the local governments to maintain cultural traditions.

There are 3 branches of government: an executive branch led by a president who also serves as head of state; a unicameral (single house) legislature elected from the 4 constituent states; and a judicial system that applies criminal and civil laws and procedures closely paralleling those of the United States. Under the Compact of Free Association, the United States is responsible for defence.

The Council of the Micronesian Government Executives aims to facilitate discussion of economic developments in the region and to examine possibilities for reducing the considerable cost of shipping essential goods between the islands.

The main tax that all businesses in Micronesia pay is the Gross Receipts Tax. The tax is assessed on the gross revenues of businesses, which includes all receipts without deductions. The rate is $80 on the first $10,000 of gross revenues and 3 percent of any excess for the calendar year. Businesses with less than $2,000 gross revenue in a year are eligible for a refund of the taxes paid for that year. A Wages and Salaries Tax is assessed on an employee's income. The Social Security Tax requires the employer to pay half of the tax and the employee to pay the other half. The current rate is 4 percent of wages paid by both the employee and the employer.

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

Micronesia has a total of 240 kilometers (149 miles) of roadways, 42 kilometers (26 miles) of which are paved. Macadam (a mix of small broken stone and concrete or asphalt) and concrete roads are found in the more important islands. Other islands have stone and coral-surfaced roads and tracks. There are no rail lines in the islands.

The country has a total of 6 airports, of which 5 have paved runways. International airports which can accommodate medium-sized jets can be found in Pohnpei, Chuuk, Yap, and Kosrae, and there are airstrips in the outer islands of Onoun and Ta in Chuuk. The Federated States of Micronesia is considering expanding air terminals in order to meet the increasing demand for air traffic. The islands are served by Continental Micronesia, Air Nauru, and Continental Airlines (USA). Pacific Missionary Aviation, based in Pohnpei and Yap, provides domestic air services.

There are several ports and harbors, such as Colonia (Yap), Kolonia (Pohnpei), Lele, and Moen. All of the states in the Federated States of Micronesia have deep draft harbors capable of handling almost all commercial shipping needs. Each port is capable of providing containerized cargo handling, as well as some warehousing and transshipment capabilities. All ports offer cold storage

facilities. Shipping services are available to anywhere in the world on a monthly schedule by PM & O Line, Pacific Micronesia Line, Kyowa Lines, Palau Shipping Lines, Tiger Lines, and Saipan Shipping Company. Freight rates are relatively high, as volume shipping is rarely possible.

The 4 urban centers all have public water and sewer systems. Outside of the urban centers, the populations rely on water catchments (devices for trapping water), wells, and septic tank systems. Charges for water usage range from __BODY__.50 to $5.40 per 6,000 gallons of water. Kosrae does not charge for water and sewerage.

With the exception of some small hydroelectric facilities in Kosrae and Pohnpei, electricity in the Federated States of Micronesia is produced by diesel generators. The principal energy source in Micronesia is imported petroleum. From 1993 to 1997, Micronesia spent $10 to $20 million per year for petroleum products. Power is generally available only in the 4 urban centers. The power system in Pohnpei is operated as a state enterprise fund and is the most reliable system. The other 3 states are moving in a similar direction. The existing power system can accommodate additional users, and the government is willing to provide such means when necessary. Electricity generating costs are __BODY__.19 a kilowatt-hour, while charges range from $.05 a kilowatt-hour to __BODY__.25 a kilowatt-hour.

The telecommunications system in the Federated States of Micronesia is highly developed and offers satellite access for telephone, telex, and facsimile to any location worldwide. There were 8,000 main telephone lines in use in 1995. For domestic purposes, the islands are interconnected by shortwave radiotelephones (used mostly for government business). For international links there are 4 Intelsat (Pacific Ocean) satellite earth stations.

The Federated States of Micronesia Postal Service delivers and sends mail by air. The Federated States of Micronesia is part of the U.S. zip code system. Postage rates between the Federated States of Micronesia and the United States are the same as U.S. domestic rates.

There are 5 AM radio stations and 1 FM radio station. The majority of stations broadcast in English. There are 2 broadcasting television stations.

ECONOMIC SECTORS

Economic activity in Micronesia consists primarily of subsistence farming and fishing as well as revenues from external licensing (the U.S. government, for example, makes a fixed payment to the Federated States of

Micronesia for exclusive access to its waters). In the financial year ending September 30, 1997, fees from fish-eries licensing agreements, mainly with Japan, contributed some 30 percent of domestic budgetary revenues.

The islands have no mineral deposits worth exploiting, with the possible exception of off-shore phosphate, but it is uncertain whether these deposits can be extracted commercially. The potential for a tourist industry exists, but the remoteness of the location and a lack of adequate facilities hinder development. Currently, monetary aid from the United States provides the majority of revenue for both the government and the national economy.

The government's main economic priority is to develop a sustainable, independent economy by bolstering the private sector and reforming the public sector with the objective of reducing dependence on foreign aid and encouraging economic self-sufficiency. In addition, the government supports international efforts to stop global warming and pollution in general, in order to protect the islands and their agricultural sectors. In recent years, the climate has been very unstable with typhoons, flooding, and mudslides followed by a drought.

AGRICULTURE

Farming is mainly on a subsistence level, although its importance is diminishing. The principal agricultural crops are coconuts, bananas, betel nuts, cassava, and sweet potatoes. The agricultural sector contributed 19 percent of GDP in 1996 and engaged 27 percent of the total labor force in 1994. Exports of agricultural products (excluding fish) accounted for 6 percent of export earnings in 1996, while exports of marine products accounted for 84 percent of total export revenues in that year. The annual rainfall received each year varies from 2,500 millimeters (98 inches) in Yap to 4,500-7,500 millimeters (177-295 inches) in Pohnpei. The limited water reserves in both Chuuk and Yap are a source of concern for the long term.

INDUSTRY

Industry (including mining, manufacturing, utilities, and construction) provided 4 percent of GDP in 1996, and engaged 10 percent of the total labor force in 1994. The major industrial productions are construction, fish processing, and craft items from shells, wood, and pearls. There is little manufacturing, other than garment production (in Yap) and the manufacture of buttons using troche shells.

SERVICES

The service sector provided an estimated 77 percent of GDP in 1996, and government services alone contributed 42.1 percent. The national and state governments in 1996-97 employed a total of 6,015 people, and services as a whole employed 63 percent of the labor force. Tourism is an increasingly important industry, and it is hoped that several projects to improve communications will further stimulate the sector, which has been hindered by the territory's remote location. The tourism industry was identified in the Asian Development Bank in mid-1995 as having the greatest potential for development and thus contributing to Micronesia's economic growth. Presently, most of the Federated States of Micronesia's tourism industry is inadequate and not competitive with destinations such as Guam and, soon, Palau. As of 1991, the most recent year for which such data are available, the Federated States of Micronesia's entire tourism industry (hotel, motel, and other accommodations) amounted to only 290 rooms, 144 of which were in Pohnpei, 80 in Chuuk, 26 in Yap, and 30 in Kosrae. Among the visitors from overseas, 60 percent are from the United States and 25 percent from Japan.

INTERNATIONAL TRADE

Thanks to its lack of exportable goods, Micronesia has traditionally run a large trade imbalance. In 1996, the trade deficit was $95 million, on exports of $73 million and imports of $168 million. The main exports of the Federated States of Micronesia are marine products, while the main imports are food, manufactured goods, machinery and equipment, beverages, and fuels. Micronesia's main trading partners are the United States, Japan, Australia, and Guam. In 1996, the United States supplied 73.2 percent of Micronesia's imports and Japan 11.9 percent.

MONEY

The United States dollar is the official currency of Federated States of Micronesia. Its value fluctuates in terms of the other main currencies of the world, but remains relatively stable. Financial regulation is provided by the Federated States of Micronesia Banking Board. Commercial banks include the Bank of the Federated States of Micronesia, the Bank of Guam, and the Bank of Hawaii. There is also the Federated States of Micronesia Development Bank, which has branches in all of the states, and which makes low-interest, long-term loans primarily to local investors.

POVERTY AND WEALTH

The average per capita income was estimated at $2,000 in 1998 (in the United States, by way of comparison, per capita income in 1998 was $29,340). Although manufactured goods are expensive, as they are mostly imported, basic foodstuffs are cheap, and this does much to alleviate poverty. The government has a considerable amount of income at its disposal as a result of the financial support from the United States, and as a result, it is able to support sections of the community (such as farmers in the outlying islands, with the subsidy of copra production) that might otherwise be in poverty.

There is a compulsory education law that requires all children to begin school at the age of 6. Children may leave school when they reach the age of 14 or after completing the eighth grade. There are virtually 100 percent enrollment rates in primary and, until the age of 14, in secondary education. The adult literacy rate was estimated at 89 percent in 1980. The government maintains a free medical service.

WORKING CONDITIONS

The unemployment rate in Federated States of Micronesia was estimated at 27 percent in 1989, but had fallen to 16 percent by 1999. These figures are high, the degree of under-utilization of the labor force is somewhat greater than even these figures suggest. For much of the year in small-scale family farming there is relatively little work to do, and this is shared among the family members. During planting and harvesting, there is more work to be done, and everyone is more fully occupied. Everyone sharing the work appears to have an occupation in agriculture, but many workers are not engaged full time for all the year, and hence there is some "disguised unemployment."

The government respects the human rights of its citizens. There is no law dealing specifically with trade unions or with the right to collective bargaining. Individual employers, the largest of which are the national and state governments, set wages.

Neither the constitution nor the law specifically prohibits forced and bonded labor by children, but such practices are not known to occur. There is no law establishing a minimum age for employment of children. While in practice there is no employment of children for wages, they often assist their families in subsistence farming activities.

The 4 state governments have established minimum wage rates for government workers. Pohnpei has a minimum hourly wage rate of $2.00 an hour for government and __BODY__.35 an hour for private workers. The other 3 states have established minimum hourly rates only for government workers of __BODY__.25 for Chuuk, __BODY__.49 for Kosrae, and __BODY__.80 for Yap. The minimum hourly wage for employment with the national government is __BODY__.68. These minimum wage structures and the wages customarily paid to skilled workers are sufficient to provide an adequate standard of living under local conditions.

There are no laws regulating hours of work (although a 40-hour workweek is standard practice) or prescribing standards of occupational safety and health. A federal regulation requires that employers provide a safe work-place. The Department of Health has no enforcement capability and working conditions vary in practice. Foreign laborers are paid at a lower rate than citizens, work longer hours per day, and work a 6-day week in contrast to the 5-day week for citizens.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

1525. Portuguese navigators in search of the Spice Islands (Indonesia) come upon Yap and Ulithi. Spanish expeditions later explored the rest of the Caroline Islands and make the first European contact with native peoples.

1526-1899. The Spanish Empire claims sovereignty over the Caroline Islands.

1899. Facing insurmountable management challenges in its Pacific empire as war with the United States looms, Spain sells the islands to Germany. The German administration encourages the development of trade and the production of copra (dried coconuts).

1914. German administration ends when Japanese naval squadrons take possession of the Caroline Islands, the Marshall Islands, and the islands of the Marianas at the start of World War I (1914-18).

1918. Japanese economic interest and settlement in the islands expands. The Japanese population in Micronesia exceeds 100,000, compared with an indigenous population of about 40,000. Sugar cane, other tropical crops, mining, and fishing are developed as major industries.

1939-1945. World War II abruptly ends the relative prosperity experienced during the period of Japanese civil administration.

1947. The United Nations establishes the Trust Territory of the Pacific Islands (TTPI), and the United States takes on the role of trustee as administering authority. The TTPI consists of the 4 island groups that will later become the states of the Federated States of Micronesia.

1965. The Congress of Micronesia formed.

1967. A commission is established to examine the future political status of the islands.

1970. Micronesians declare their rights to sovereignty over their own lands, to self-determination, to devise their own constitution, and to revoke their association with the United States.

1977. U.S. President Jimmy Carter announces that his administration intends to terminate the trusteeship agreement.

1978. Following a constitutional convention, the Federated States of Micronesia drafts a constitution that provides for federation of the 4 states: Chuuk (formerly Truk), Pohnpei (formerly Ponape), Kosrae (formerly Kusaie), and Yap.

1979. The 4 states ratify the constitution, and the Federated States of Micronesia comes into being.

1982. The United States signs a Compact of Free Association with the Federated States of Micronesia.

1986. The Federated States of Micronesia becomes self-governing.

1991. Micronesia achieves full independence and becomes a member of the United Nations.

1993. Micronesia joins the International Monetary Fund.

2001. Micronesia begins a renegotiation of Compact of Free Association with the United States to secure the continuation of financial support. The government announces a privatization plan.

FUTURE TRENDS

Although Micronesia will continue to be hampered economically by its isolated location, small geographical area, and population size, it has the enormous benefit of the generous financial support of the United States. The level of this support is undergoing renegotiation, with the United States offering $74 million a year and Micronesia requesting $84 million. Even at the lower level of support, this would secure Micronesia's living standards for the next 15 years of the agreement (the level of U.S. assistance in 2000 was $79 million).

Micronesia had a positive GDP growth rate in 2000 of 2.5 percent, and although this is encouraging in view of the negative growth rates recorded from 1996 to 1999, it is still below the population growth rate of 3.3 percent a year. There is pressure on the government from the IMF to reduce expenditures and increase revenue collection to maintain the budget surplus achieved since 1996, and to maintain the current low inflation rate (2.8 percent in 2000). The government has announced a privatization program to try to improve efficiency in the economy, and this is to be supported by loans from the Asian Development Bank

Fisheries is targeted as one the industries presenting the greatest potential for growth in the private sector. The fishing industry should see improvements in the near future as Japan is funding a $2.8 million project to train fishermen in Micronesia. However, both Taiwan and Japan are seeking to reduce the license payments they make for fishing in Micronesia's waters. They argue that the current low price for tuna on the world market makes this necessary, and they also claim that tuna have begun to migrate away from Micronesia's waters to other parts of the Pacific.

Tourism is the second sector with expansion potential. In 2000, the islands received 17,152 visitors. The number of visitors has fallen slightly for each of the past 4 years. Initially, the fall was credited to the Asian financial crisis, particularly affecting the number of Japanese tourists. However, the fact that the fall has continued indicates that there is much to be done in regenerating the sector, and this will require foreign investment in hotels and an international marketing program. A British firm, Travel Research International, has been engaged to promote Micronesia's tourism, concentrating on diving, cultural tourism, deep-sea fishing, and eco-tourism as the main attractions.

In common with many other South Pacific countries, Micronesia is alarmed by the effect continuing global warming will have on its islands. The consequent rise in the level of the oceans threatens low-lying islands with flooding and, eventually, with submergence.

DEPENDENCIES

Micronesia has no territories or colonies.

BIBLIOGRAPHY

Economist Intelligence Unit. Country Profile: Federated States of Micronesia. London: Economist Intelligence Unit, 2001.

Embassy of the Federated States of Micronesia, Washington, D.C. <http://www.fsmembassy.org>. Accessed September 2001.

Goetzfridt, N. J., and W. L. Wuerch. Micronesia 1975-1987 .Westport, CT: Greenwood Publishing, 1989.

Pacific Islands Business Network. Federated States of Micronesia: Country Profile. <http://pidp.ewc.hawaii.edu/pibn/countries/fsm.htm>. Accessed September 2001.

U.S. Central Intelligence Agency. World Factbook 2000. <http:// www.odci.gov/cia/publications/factbook/index.html>. Accessed August 2001.

U.S. Department of State. Background Notes: Federated States of Micronesia, June 1996. <http://www.state.gov/www/background_notes/micronesia_0696_bgn.html>. Accessed September 2001.

—Oygul Musakhanova

CAPITAL:

Palikir, Pohnpei Island.

MONETARY UNIT:

The official currency of Micronesia is the United States dollar ($). One dollar equals 100 cents. There are coins of 1, 5, 10, 25, and 50 cents and 1 dollar. There are notes of 1, 2, 5, 10, 20, 50, and 100 dollars.

CHIEF EXPORTS:

Fish, garments, bananas, and black pepper.

CHIEF IMPORTS:

Food, manufactured goods, machinery and equipment, and beverages.

GROSS DOMESTIC PRODUCT:

US$263 million (1999 est.).

BALANCE OF TRADE:

Exports: US$73 million (1996 est.). Imports: US$168 million (1996 est.).