TheGovernment ofthe United StatesofAmerica
First Five-Year
Review ofthe
Compact ofFree
Association, As
Amended, Between
the Governments of
the United Statesand
the Federated States
of Micronesia
Report tothe Congress ofthe United StatesofAmerica

TableofContents

EXECUTIVE SUMMARY 1
PURPOSE OFTHE REPORT 1
SUMMARY OFFINDINGS ANDRECOMMENDATIONS 1
ASSISTANCE FRAMEWORK OFTHE COMPACT 5
PROFILE OFTHE FEDERATED STATESOFMICRONESIA S
PERIODS OFU.S. ASSISTANCE 7
PRE-COMPACT OFFREE ASSOCIATION 7
THE COMPACT OFFREE ASSOCIATION 7
THE COMPACT'S FIRSTDIRECT FINANCIAL ASSISTANCE PERIOD:FY1987 -FY 2003 8
THE AMENDED COMPACT: FY2004 -FY 2023 8
NEW FISCAL ANDFINANCIAL ACCOUNTABILITY FRAMEWORK 9
FROM GENERAL OPERATIONAL SUPPORTTOASSISTANCE TOSELECT SECTORS 9
FROM DIRECT PAYMENTS TOANNUAL GRANTS 13
ANNUAL SECTORBUDGETS 13
GRANT MANAGEMENT RESPONSIBILITIES 13
ENFORCEMENT TOOLS 15
THE JOINT ECONOMIC MANAGEMENT COMMITIEE(JEMCO) 15
FROM GENERALIZATION TOSTRATEGIC PLANS 16
FROM LINEITEM BUDGETS TOPERFORMANCE MANAGEMENTANDBUDGETING 17
FROM U.S.DISCRETIONARY GRANTSFOREDUCATION TOSEG 17
FROM RELIANCE ONANNUAL ASSISTANCE TOTRUST FUND 18
SOCIOECONOMIC PROFILEOFTHE FEDERATED STATESOFMICRONESIA 19
POPULATION 19
MIGRATION 20

7

OUT-MIGRATION 20

COMPACTIMPACT
GDP, GROWTH ANDSTRUCTURAL CHANGE
STEADY DECLINE INECONOMIC ACTIVITY
EMPLOYMENT ANDWAGES
WAGE RATES
EXTERNAL DEBT
FISCAL POLICY
DEVELOPMENTS INTHE PRIVATE SECTOR
ECONOMIC RISKSANDVULNERABILITIES
MACROECONOMIC WEAKNESSES
LACK OFESSENTIAL REFORMS
TAX REFORM
SLOW PACEOFREFORM
IMPLEMENTATION PROJECTEDINFY 2011
FOREIGN INVESTMENT REFORM
MODEL LAWDEVELOPED
ATIEMPTED NATIONWIDE IMPLEMENTATION
UNEVEN TREATMENT BYTHE STATES
PUBLIC ENTERPRISE REFORM
COMPACT TRUSTFUNDVIABILITY
TRUST FUNDPROVISIONS
PROJECTED LEVELANDACTUAL VALUE
OTHER RISKSANDVULNERABILITIES
POOR GOVERNANCE
POOR STATISTICAL CAPACITY
EFFECTIVENESS OFU.S. FINANCIAL, PROGRAMANDTECHNICAL ASSISTANCE
THE EDUCATION SECTOR
COMPACT OBJECTIVES, USESANDBUDGET TRENDS

ii
20

21

21

23

25

26

27
29

30
30
31
31

32

34

34
34

35

35 35

36

36
36

37
37

37

38
38
38

EDUCATIONALDEVELOPMENTS 38
DATA COLLECTION REPORTING 38
INCREASED ACCESSTOEDUCATION 39
DECLINING STUDENTENROlLMENT 39
LOW STUDENT ACHIEVEMENT 40
DISCOURAGING STUDENTRETENTION RATES 40
DECLINING COMGRADUATES ANDUNKNOWN IMPACTOF
SCHOLARSHIPS 40
FOCUS ONTEACHER CERTIFICATION 41
PROBLEMATIC TEACHERATTENDANCE 42
INEFFECTIVE INTEGRATION OFPROGRAMS FUNDEDBYTHE SEG 42
MOVING EDUCATION FORWARD 42
LIMIT USESOFAMENDED COMPACTANDSEGGRANTS 42
THE SEGSHOULD BEMAINTAINED 43
BUDGETING ROlESNEEDCLARIFICATION 44
REEXAMINE FISCALPRACTICES ANDSUBSIDIES 45
SCHOLARSHIP POLICIESANDTRACKING NEEDIMPROVEMENT 46
JEMCO MUSTBECONCERNED WITHSUSTAINABILITY OFPOST-
SECONDARY EDUCATION 46
FSM EDUCATION SYSTEMSMUSTGIVEATTENTION TOCOMMUNTIY
INVOLVEMENT 47
THE HEALTH SECTOR 47
COMPACT OBJECTIVES, USESANDBUDGET TRENDS 47
GRANT TOTALS, PROPORTIONAL SHARESANDUSES 48
REDRESSING PRIORDEFICIENCIES 48
PERSONNEL ANDNON-PERSONNEL COSTS 49
PER CAPITA HEALTH DOlLARS 49
TEMPERED EFFECTSOFEARLY BUDGET INCREASES 50
HEALTH SECTORPERFORMANCE 50

iii

PROGRESSINREACHING FIVE-YEARPERFORMANCE TARGETS 50
HEALTH INFRASTRUCTURE DEVELOPMENT 59
OTHER INDICATORS OFHEALTH 59
SUCCESSFUL RESPONSETOSIMULTANEOUS OUTBREAKSOFMDR-TB 60
RISKS ANDVULNERABILITIES 61
DEPENDENCE ONAMENDED COMPACTANDOTHER U.S.FEDERAL
ASSISTANCE 61
INATTENTION TOPLANNING 64
DELIVERY OFHEALTH CAREINREMOTE SETTINGS 65
THE PUBLIC SECTOR INFRASTRUCTURE PROGRAM 65
PRIORITY OFTHE AMENDED COMPACT 65
SENSE OFCONGRESS 65
DEVELOPMENT PROGRESS 66
DISAPPOINTING START 66
STALEMATE OVERISSUES 66
MEASURABLE PROGRESSBEGANIN2007 68
FINDING WAYSFORWARD 68
PRIVATE SECTORDEVELOPMENT 68
SECTOR OBJECTIVES ANDPRIORITIES 68
U.S. GRANT FUNDING ANDACTIVITIES FROM2004THROUGH 2008 69
GRANT AWARD TOTALS 69
INITIAL DIFFICULTY ADAPTINGTONEW USE 69
SUCCESSFUL GRANT-SUPPORTED ACTIVITIES 70
BARRIERS TOPRIVATE SECTORDEVELOPMENT 71
THE ENVIRONMENT SECTOR 72
PURPOSE OFTHE GRANT 72
FUNDING HISTORYANDGRANT USES 73
ISSUES AFFECTING EFFECTIVEGRANTPLANNING ANDIMPLEMENTATION 73
iv

OVERLYBROADMANAGEMENT ISSUES 73
PLANNING 74
PUBLIC SECTOR CAPACITY BUILDING 75
PURPOSES OFTHE SECTOR GRANT 75
GRANT FUNDING HISTORYANDUSES FROM 2004THROUGH 2008 75
FUNDING HISTORY 7S
FSM-WIDE PROJECTED BUDGETARY CRISISOMPTS TRANSITIONAL
GRANT USE 75
FOCUS ONIMPROVED FINANCIALACCOUNTABILITY 76
IMPROVED PERFORMANCE MANAGEMENT 76
GENERAL FUNDCRISES ANDREDUCTION INFORCE INKOSRAE AND
CHUUK 77
NEED TOFOCUS CAPACITY BUILDINGATTENTION 77
PLANNING FORPSCB 77
CONTINUING NEED 77
THE DISASTER ASSISTANCE EMERGENCY FUNDSECTOR 78
SINGLE AUDITASSISTANCE 78
JUDICIAL TRAINING 78
EXTENDED FEDERALPROGRAMS, SERVICESANDTECHNICAL ASSISTANCE 79
CONCLUSIONS ANDRECOMMENDATIONS 82
v

EXECUTIVESUMMARY

Purpose ofthe Report
This report reviews theterms ofthe Compact ofFree Association betweentheGovernment of
the United States(U.S.)andtheGovernment ofthe Federated StatesofMicronesia (FSM)as
required bySection 104(h)(2) ofPublic Law108-188, theCompacts ofFree Association
Amendments Actof2003 (Amended Compact). Thelawstates thatthereview isto occur
during theyear ofthe fifth, tenth andfifteenth anniversaries ofits enactment. TheAmended
Compact wasenacted onDecember 17,2003. Thefifth year ofimplementation endedinFY
2008 onSeptember 30,2008.
The report addresses theoverall natureofthe relationship betweentheU.S. andtheFSM;
describes thegeneral social,political andeconomic conditions ofthe FSM, including estimates
of economic growth,percapita income andimmigration rates;andassesses progress madein
the following areas:
• The useand effectiveness ofUnited Statesfinancial, programandtechnical assistance;
• The status ofeconomic policyreforms including butnotlimited toprogress toward
establishing self-sufficient taxrates;
• The status ofefforts toincrease investment including,therate ofinfrastructure
investment ofU.S. financial assistance undertheAmended Compacts, non-U.S.
contributions tothe FSM trust fund, andthelevel ofprivate investment; and
• The report considers theoperating requirements ofthe FSM inmeeting itsstrategic
development objectivesandoffer recommendations onways toincrease the
effectiveness ofUnited Statesassistance.
Summary ofFindings andRecommendations
The FSM isin afragile fiscalcondition fromtheeffects ofthe recent worldwide recession,
inflation, investment decisionsandthetiming ofannual decreases inannual Compact grant
assistance. Alarge public sector dominated theeconomy whiletheprivate sectorwassmall
and operated inan environment oftenunfriendly toforeign investment. Weakinternal fiscal
policies andsluggish progress ininstituting necessarytaxand other reforms alsocontributed to
the situation.
FY 2004 through FY2008 wasadifficult periodofadjustment tothe new terms andconditions
for financial assistance undertheAmended Compact. Challenges withcommunication and
coordination betweentheFSM national government andthestates werebarriers tothe
implementation ofthe Amended Compactduringthefive-year reporting period,resulting inthe
submission oflate financial andperformance reportsornone atall. Financial andperformance
r"oortin" didnot meet theletter andspirit ofthe Amended Compactanditssubsidiary Fiscal

ProceduresAgreement. Annualbudgets generally lackedspecific performance objectives,
priorities, andtargets thatlinked backtothe FSM's Strategic Development Plan(SDP).
At the end ofthe reporting period,Infrastructure fundsremained unspentbecauseof
management issuesanddifficulty insetting priorities forcapital investment thattook the
interests ofthe nation intoconsideration ratherthantheparochial interestsofindividual
states. landtitling problems thatexisted beforetheAmended Compactremained unresolved.
While therewassome improvement ineducational andhealth outcomes, thereneedtobe
better results withinthesesectors.
Development planning,budgeting practices,andperformance monitoringbythe FSM didnot
meet thenew accountability regimenrequired bythe Amended Compact. Processesandtools
need improvement andplans needtobe reviewed andupdated tobe useful. Most
significantly, theFSM hasnot planned aheadforthe impact thatCompact-mandated decreases
in annual financial assistance wouldhaveonthe Amended Compact's threepriority sectorsand
for support forprivate sectordevelopment, improvingthehuman environment, building
capacity inmanagement, accounting,andother areascritical toeffective FSMgovernance.
The Amended Compactsetsforth aprocess forcollaborative management ofannual allocations
and related policydecision-making bythe U.S. andtheFSM through theJoint Economic
Management Committee(JEMCO).Itis primarily tothat body thatthisreview addresses
recommendations toimprove theuseand effectiveness annualassistance fromtheUnited
States.
Recommendations:
1. The bilateral JEMCOshouldaidthe FSM inplanning forthe annual decreases ingrant
assistance, especiallywithregard tothe priority sectorsofeducation, health,andpublic
sector infrastructure development.
2. The FSM andUnited Statesshould actively seekthird-party donorsandcollaborate in
examining theprojected incomefromtheTrust Fundforthe People ofthe Federated States
of Micronesia after2023, andexplore optionsthatmayassist theFund toincrease its
projected valuewithin thebounds ofacceptable risk.
3. JEMCO shouldadoptallocation policiesandgrant conditions thatensure maximum benefit
in the sectors ofeducation, health,infrastructure maintenance,environment, privatesector
development andpublic sector capacity building.
4. JEMCO andtheFSM national andstate governments shouldensure thatannual sectorgrant
allocations followawell-defined annualbudget plandeveloped bythe FSM that hasspecific
annual performance targetsthatlinktothe country's StrategicDevelopment Planandinthe

ca:li.1:=~!::i:;!'i:i',::i,;:;i~:~:::i::;r::i,ggi!::!~~:m:iii;~1:~=!!JiH!jS~i:!":l:"i::~=:!-,,:::,!:.~~~,iS¥1:!:~:;~.!::~::E!::.!,i:!:"i~;:;:~~i:li:~:i.:.i
" ERFORMANCE MANAGEMENT STATUS:TheFSM found budgeting byperformance objectivesanimportan
ut onerous processtoimplement andneeded moretimetodevelop itfully, TheFSM began developing it
udgeting preparation approach(BPS)in2003 asastop-gap measure, andinstituted thesystem in2004
udgets tracked organizational lineitem spending andnumerical targetsforsub-activities thatdidno
orrelateiwith nationalstrategic outcomes, sectorgoalsandquantifiable overallperformance targets
espite attempts toimprove theclari ofthe submissions byOIA andOCM, thedeficiencies remaine
urin thereorti,n J>eriod
ecause thebudgets didnot show relationships toperformance indicatorsforthe fiscal year,OCM
ttempted toimprove trackingtheFSM's approach throughitsquarterly performance reporting,Theoffice
ired consultants todevelop software thatwould retoolperformance reportsandtowork withthestates in
eveloping specificsectorperformance measures,Theeffort, whilewell-intentioned, causeddissatisfaction
nd confusion amongthestates, produced reportswithinaccurate expenditure summariesofactivity-base
utputs andblank descriptive pages,andobfuscated performance accountability, Evidenceofthe use
0

udgets tomanage andmonitor performance wasminimal. (Atthe time ofthis report, OCMwasnoIon e
sin consultants andwas tacklin howbesttoimprove thesystem ofperformance reortin
,j

From LineItem Budgeting toPerformance Management andBudgeting
In order toprovide thereports required undertheFPA, particularly thosepertaining tobudget
development, executionandprogress inachieving annualoutcomes, theAmended Compact
requires theFSM toprovide budgets thatinclude updated performance indicatorsforitssector
grants, WhiletheFPA does notmandate theuseofperformance-based budgetingasaspecific
approach totie expenditures toperformance goals,itdoes require thatcostaccounting
structures reportonoperational costsatthree levels: (1)onanentity-wide oragency basis,(2)
by responsible segment,and(3)bysegment outputs.
From U.S.Discretionary GrantsforEducation toSupplemental EducationGrant
In addition toCompact sectorgrants, theFSM began receiving approximately $11.9million (or
as otherwise appropriated bythe u.s. Congress) inannual funding through aSupplemental
Education Grant(SEG)in2005. TheAmended Compact's implementing legislationauthorizes
appropriations forSEG tothe Secretary ofEducation thatreplace or"cash-out" severalU.s.
education, health,andlabor programs. Examplesofthe discontinued programsinclude,but
are not limited to,Head Start(Departments ofEducation andHealth andHuman Services) and
the Workforce Investment Act(Department ofLabor).
Under theFiscal Procedures Agreement, SEGfunds aretobe used tosupport "direct
educational servicesatthe local school levelfocused onschool readiness, earlychildhood
education, primaryandsecondary education, vocationaltraining,adultandfamily literacy, and
the smooth transition ofstudents fromhighschool topostsecondary educationalpursuitsor
rewarding careerendeavors."

17

SEGfunds areappropriated tothe Department ofEducation andtransferred tothe Department
of the Interior fordisbursement. Interiorwasresponsible forensuring thattheuse,
administration, andmonitoring ofSEG funds areinaccordance withamemorandum of
agreement executedamongtheDepartments ofEducation, HealthandHuman Services, Labor
and Interior, aswell ascomplying withtheFPA. TheAmended CompactrequiresthatU.S.
appointees toJEMCO "consult withtheSecretary ofEducation regardingtheobjectives, use,
and monitoring ofUnited Statesfinancial, program,andtechnical assistance madeavailable for
educational purposes." Arepresentative fromtheU.S. Department ofEducation attends
annual JEMCO meetings toprovide technical adviceandensure theeffective useofSEG andthe
FSM's basicsector grant.
From Reliance onAnnual U.S.Assistance toTrust FundProceeds
The U.S.Trust FundAgreement withtheFSM states thatthepurpose ofthe Trust Fundisto
contribute tothe FSM's economic advancement andlong-term budgetary self-reliance by
providing anannual sourceofrevenue afterFY2023 (thefinal year ofannual Compact sector
grants). Although theagreement maintainsthattheannual disbursements maynotexceed the
amounts thattheFSM receives asgrant assistance in2023, itdoes notestablish orguarantee a
minimum disbursement level.
Under theAmended Compact,annualU.S.contributions tothe Trust Fundincrease bythe same
amounts asannual grantstothe FSM decrease ..In addition, PL108-188 includes apartial
inflation adjustment ofthe yearly contribution. Thegrant decrease andTrust Fundincrement
for the FSM is$800,000 peryear. Thedecrease forthe FSM began in2005.

18

SOCIOECONOMICPROFILEOF
THE FEDERATED STATESOFMICRONESIA

Population
The FSM's population grewrapidly at3percent perannum between the1986 census and1989.
Table 1on the following pageshows thepopulation numbersandgrowth ratebystates from
1980 through 1994.Between 1989andthenext census countconducted in1994, therate fell
to 1.9 percent, primarily resultsoflower fertility ratesandmodest ratesofemigration. The
rate felleven lower to0.2 percent between 1994andthemost recent census in2000. Falling
fertility rateswere afactor butmost ofthe decline reflected outwardmigration toGuam, the
Commonwealth ofthe Northern MarianaIslands,HawaiiandtheU.Smainland underthe
migration provisions ofthe Compact.
The FSM's negative growthratesoccurred afterthesecond step-down infinancial assistance
under theoriginal Compact andcorrelate withtheeconomic downturn experienced throughout
the nation. Large-scale migrationfollowedthefiscal contraction forbetter employment
opportunities andbetter ratesofremuneration inthe U.S.
In the long term, FSMmigration willplay anequilibrating role:asincomes decline,outward
migration willcompensates toimprove theaverage incomelevelsforindividuals remainingin
the country. However, outwardmigration willhave adistorting impactifitcauses alarge loss
of economically activeandskilled workers. Thislossofhuman capitalwillreduce thelong-run
productive potentialofthe economy.
Table 1:Population bystate andannual average growthrates
Population numbers Annual
average growth
1980 198919942000 1980-89
1989-941994-00
Chuuk 37,48847,87153,31953,595 2.7%2.2%
0.1%
Kosrae 5,4916,8357,3177,686
2.4%1.4%
0.8%
Pohnpei 22,08030,669 33,692
34,486 3.7%1.9%
0.4%
Yap 8,10010,365 11,17811,241
2.7%1.5%0.1%
FSM 73,15995,740
105,506 107,008 3.0%1.9%
0.2%
Source National
CensusReportMay2002
19

Migration
Out-migration
The out-migration ofFSM citizens, asmeasured bynet movements ofdeparting airpassengers
from 2004through 2008,hasbeen large. Figure1below illustrates thestrong relationship
between realincomes andmigration. Inall states, realincomes eitherfellorremained largely
stagnant, reflecting pooreconomic performance duringthelast 13years.

0.5%

0.0%
-0.5%

-',0%

-'.5%

-2.0%
-2.5%
-3.0%
l:IGDPper
capitagrowth

FY95-FY08
o
Net Migration 2004.08

Figure 1:losses andgrowth inper capita GDPandemigration (annualaverages)
Compact Impact
PL 108-188 authorizes andappropriates afixed annual amount of$30,000,000 forgrants to
affected jurisdictions (Hawaii,American Samoa,GuamandtheCommonwealth ofthe Northern
Mariana Islands). Thefunding isto help defray costsincurred asaresult ofincreased demands
placed onhealth, education, social,publicsafety orinfrastructure issuesrelated tothe
migration ofqualified non-immigrants fromthefreely associated states(FAS),which include the
Republic ofthe Marshall Islands,theFederated StatesofMicronesia andtheRepublic ofPalau.
2

An enumeration ofFAS migrants residinginthe four jurisdictions determinesthedivision ofthe
Compact ImpactFund.Basedonthe count ofFAS migrants conducted in2003 and2008 under

2
In addition tothe $30 million ayear already appropriated, appropriations forfiscal year2012 included $5million
in discretionary fundsforimpact ofcompact purposes.

thesuperVISion ofUnited StatesBureau ofCensus, thedistribution amongtheaffected
jurisdictions wasasfollows:
20032008
Jurisdiction Migrant
Count MigrantCount
Hawaii 7,29712,21S
Guam 9,93118,305
CNMI 3,5702,100
American Samoa 1015
Total 20,80832,635
The Census Bureau didnot enumerate FASmigrants inthe 48contiguous statesordifferentiate
among Palauans, Micronesians, andMarshallese. The2010 U.S.census willgenerate themost
accurate countofall Micronesians acrossthecountry. Fromanecdotal information, significant
clusters ofFSM citizens resideacross continental U.S.,including inWashington State,Oregon,
California, MissouriandTexas.
The consensus isthat themajority ofFAS migrants comefromtheFSM. Under theAmended
Compact, thenext five-year countofmigrants isdue in2013. Thecount willexclude the
continental UnitedStates.
GOP,Growth andStructural Change
Steady Decline inEconomic Activity
FSM's overall economic performance waspoor during thefive-year reporting period,reflecting
Amended Compactadjustment problemsexperienced bythe country, lackofapositive
environment tosupport privatesectorgrowth, aswell asdeclines infish licensing revenue. The
FSM economy contracted inall but one year from FY2003 through FY2008, andGDP fellby4.1
percent overall,oran annual average of0.8 percent. Thepublic sector showed acontinuing
decline. BothFY2007 andFY2008 showed verysignificant economicdeclinesfromactions to
reduce publicexpenditures inKosrae andChuuk. Mostofthe cost-savings camefroma
reduction inpublic sector payrolls. Privatesectoractivity wasalso weak fromFY2003 through
FY 2008, showing anannual rateofdecline of1.2 percent. Thisdownturn reflectsthereduced
demand forprivate sectorbusiness fromthepublic sector.
Significant contributors tothe FSM's economic declinefromFY2004 through FY2008 included:
(1) the lack ofeconomic development, and(2)the lack oftax reform thatwould encourage

21

foreigninvestment. Othergovernmental problemareasthatneed attention and(1)the annual
reduction indirect grantfunding undertheAmended Compactthatbegan inFY 2007; (2)the
reduction inthe public sector workforce ofChuuk andKosrae in2008; (3)alack ofcapacity to
meet newfiscal procedure requirements; and(4)the need togradually usegeneral revenue to
cover non-conforming usesofthe Public Sector Capacity Buildinggrantbeginning inFY 2005.
Real per-capita incomesfell$98from $2,213 to$2,115.
A reduction inthe public sector employment rollby1,039 jobs,or6percent, contributed to
FSM's weakeconomy. Asincomes fell,theeconomy failedtoprovide alternative work-
producing opportunities tothe population, duetolack ofattention toprivate sector
development. Outwardmigration continued at2.1 percent perannum.
The implementation ofrecent measures tobegin adjusting todecreasing annualCompact
assistance reducedthecountry's fiscaldeficit 1percent ofGDP.
Table 2below describes FSM'seconomic performance fromFY1995 through FY2008. Thedata
indicate thatpublic sector accounted formost economic growthandcompeted withtheprivate
sector. Theoverall resultisdisappointing: GDPgrowth declined andtheprivate sector
contracted.
From FY1995 through FY2008, thecountry's economydeclinedby0.1 percent. Thisdownturn
reflected economic performance ineach ofthe FSM'sfourstates. Growth inChuuk andKosrae
recorded annualdeclines of-0.9 percent and-0.5 percent. PohnpeiandYapachieved positive
but small ratesofeconomic growthof0.2 percent and0.4percent, respectively. Growthinthe
public sector reflected theeconomy atlarge, withboth Chuuk andKosrae recording negative
growth. PohnpeiandYap achieved positiveresults. Inall states, theprivate sectorcontracted
during theperiod.
Table 2:FSM Economic Performance fromFY1995 through FY2008

FY1995-FY2008
2nd
Step.Oown
FinelPhase Compact I
CompactII

FY1995~FY1997
FY1997-FY2003

FY2003~FY2008

GOP Gov
Private

GOPGovPrivote
GOPGovPrivate GOP
Gov
Private
Chuuk
-0.9
-1.6-2.0 -4.4-5.1.11.8
2.63.24.3
-3.5 -5.7.5.1

Kosraa
-0.5
-0.7 -0.5.3.0
0.3-8.4 0.8-0.4
2.5-1.1 -1.5
-0.8

Pohnpei2
0.20.5-0.3 .7.1
-3.8 -7.8 1.81.7-0.1 1.4
0.9 2.6

VO"
0.4
0.3-0.5
0.8-0.7 3.21.8
-0.6 1.9-1.3
1.9-4.8

FSM
-0.1-0.7
-0.2-4.6~.9-3.4
2.01.61.7-0.8
-0.9 .1.2

Notes 1

2
Growth
ratesannual averages basedonperiod endpoints.
Pohnpei includestheFSM national government.
Figure 2below shows economic development fromFY2004 through FY2008. TheFSM
experienced growthinFY 2002 andFY2003 because ofthe infusion oftwo years ofbumped-up

u.s.
funding undertheoriginal Compact. Theeconomy wentintorecession inFY 2004 asthe

22

levelofCompact fundingfelltoalevel lower thanFY2003. Compact receiptsfromfellfrom
$84 million (Compact Ilevel without bumpup)to$76 million.
Figure 2.Changes inFSM GOP 1996-2008

6%

4%
2%

0%

-2%

-4%

-6%

~8%
FY1996 FY1997FY1998FY1999 FY2000FYZ001 FY2002FY2003FY2004 FY200SFY2006 FY2007FY2008

GDP atconstant
prices
-2.3%
-6.8%

2.5%
1.3%

4.6%
0.8%
1.1%

1.6%
-3.6%
3.0%

-0.4%
-0.1%
-2.9%
Employment andWages
Employment figureswereverydisappointing fromFY2004 through FY2008. Thelackofjob
creation activityreinforced analready strongincentive tomigrate tothe
U.s.
foremployment
opportunities andhigher wages. Table3on the next page shows thatfrom FY1995 through FY
2008, sector employment contractedbyan annual average rateof-0.9 percent (-11%overthe
period) andwas unable toprovide enoughjobsfornew jobseekers. Overtheperiod,
approximately 1,930jobswere lostinChuuk, 123inKosrae, and104inYap. Pohnpei managed
to generate anadditional 246new jobs that represented some3percent ofthe state labor
force.
Public sector employment contractedoverallinall states except Pohnpei. Thesituation
followed thedownsizing ofthe public sector afterthesecond mandatory step-downinoriginal
Compact fundingandthecompletion ofan FSM-wide reductioninforce inFY 2007 that

23

intendedtomitigate thecountry's growingeconomic troubles. Privatesectoremployment
generation waspositive inKosrae andPohnpei butcontracted inChuuk andYap.
Table 3:Employment GrowthRatesbySector andState (annual averages)

FY19E6-PY2lll8 2rd

SEp-rnr.n
Fina

pt-a;e 0:rr]:B:t I 0:rr]:B:t1l

FY1995-FY1900 FY1~ Pr2OJ3.fY2l)8

Tcial
G::w
Aivate Tcial
G::w
Aivate
Tela
GIN

AMte Tela
G::w

AivaIe

QuJ< -2.9% -4.2'10 -1.3% -4.4'10 -0.9'10 -3.8%. 0.8%0.5%2.2'/, -5.7% -7.9'/,-2.5% I