Mainstreaming Trade in Micronesia : Turning Bilateral Dependency into Regional Competitiveness

As the Congress of the Federated States of Micronesia (FSM) prepares to debate a draft trade policy (the first in the young nation’s history) in the next few months, this is as good a time as any to review the broader economic development context in which this policy was framed and to reviews its adequacy given the rapidly developing landscape of trading arrangements and economic integration emerging throughout the region. As this paper will show, the 2004 Amended Compact of Free Association with the United States and the unprecedented amount of monetary transfers it involves from the US to the Federated States of Micronesia provides an ongoing source of budgetary support which has created a bloated public sector, stifled the development of a thriving private sector, and provided a long-term safety cushion until at least 2023 and quite possibly beyond. The result has been a culture of dependency, complacency and no real sense of urgency on the part of policy makers to make the painful political-economy choices that will inevitably have to be made if the economy is to move towards anything resembling competitiveness and economic-self sufficiency. Whereas some of Micronesia’s problems are certainly not of its own making (large distances to world markets, small population, narrow resource base), it is equally true that the vast majority of impediments standing in the way of greater economic efficiency and a business environment in which the private sector can flourish, are solely the cause of poor policies, ill-functioning decision-making structures and the over-fragmentation of sovereignty between the National and State governments. The draft trade policy soon to be debated before Congress cannot be expected to change anything unless it is accompanied by steps to tackle and remove many of these domestic impediments, the political will for which will only be found if the US unambiguously adopts a policy of bilateral engagement with FSM that involves less carrot and more stick