Marshall Islands - Economy

The economy consists of a monetary sector and a nonmonetary subsistence sector. The monetary sector is localized in Majuro and Ebeye and is sustained largely by expenditures of the government and Kwajalein Missile Range employees. In turn the government is heavily dependent on grants from the US government provided, particularly those under the Compact of Free Association, which went into effect in 1986. These grants, averaging ranging from $40 million/year to $60 million/year, are given in exchange for furnishing military facilities and comprise roughly 60% to 70% of total government revenues, and 40% to over 50% of total GDP (though individual estimates are subject to statistical deficiencies due to the uncertainties in the collection of data). Copra (dried coconut meat) production provides a source of cash income for outer-atoll families engaged in subsistence activities.

The labor force has increased 160% from 1988 to 1999, to about 28,700, with the percent in industry doubling from 10% to 21%. Among the 21% engaged in agriculture and fishing, the main activities are copra (dried coconut meat) production, and the cultivation of breadfruit, taro, and pandanus. The nascent tourist industry employs less than 10% of the labor force, and efforts to capitalize on beautiful beaches enlivened with WWII relics are hampered by fears of radioactive fallout from the atomic testing done in these remote islands in the 1950s. At least half of the population still suffers from the effects of this fallout. In services, there have been attempts to develop offshore financial and ships registry services taking advantage of the time-space convergences in the computer age. In 1993, the Marshall Islands led all other countries in the passage of legislation decentralizing procedures for ship registry and mortgages so that they could be handled from distant offices, an important advantage for a country whose nearest neighbor, Hawaii, is over 2100 miles away. By April 2001, the Marshall Islands had become the ninth-largest flag of convenience registry in the world in terms of tonnage. However, attempts to offer competitive offshore services have also put the Marshall Islands on virtually every blacklist developed during the 1990s to crack down on tax havens and regulatory avoidance, including the US Financial Action Task Force (FATF) for inadequate safeguards against money laundering and the OECD's blacklist for open registry countries with poor health and safety records.

The islands have few natural resources, and imports exceed exports by factors ranging from 11 to 18, a gap that is also financed by grants from the United States under the Compact Agreement. Negotiations to extend the terms of the agreement with the United States were initiated in 1999, although the long-term goal was to substitute grants under the Compact with returns from a Marshall Island Intergenerational Trust Fund (MIITF). In the meantime, the Compact arrangements were extended through 31 October 2003. Savings for an MIITF were expected to come out of decreased expenditures on debt servicing.