Micronesia - 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 $1.3 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.