Regions and Countries

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Country Strategy and Program Update 2003-2005: Republic of Marshall Islands

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II. Current Development Trends and Issues

A. Recent Political Developments

7. A new Government, elected on a reform platform, took office in January 2000. Its commitment to public sector reform was demonstrated when the third tranche conditions specified in ADB’s loan for the Public Sector Reform Program⁷ were fully met in June 2000. Despite some adverse political pressure, the commitment to reform remains. This has again been demonstrated by the Government’s reaffirmation of its commitment to the policy conditions of the subsequent FFMP loan.

8. The future of the RMI economy will be critically dependent on the outcome of the current negotiations for the renewal of the economic provisions of the Compact (footnote 5). The economic provisions are likely to be renewed with a focus on education, health, infrastructure, and the environment, with separate payment for the use of Kwajalein atoll for defense purposes. Further, the compensation for the Marshallese that were affected by the nuclear testing also has an important bearing. ADB has been assisting the Government in preparing for negotiations for the new Compact. This is providing ADB with an opportunity to help the Government plan for the more effective and sustainable utilization of these resources.

B. Economic Assessment and Outlook

9. ADB provided assistance to review the economy and recommend development strategy options based on a highly participatory approach (Meto 2000). Among the major findings of the economic performance review were (i) no economic growth since independence, (ii) the labor force will grow much faster than wage employment, (iii) investment in fisheries and services offers the best prospects for growth, (iv) improvements are needed in the investment environment, (v) strengthening of public financial management is essential, and (vi) government revenues need to be put on a sustainable basis.

10. Payments by the United States (US) under the Compact have contributed an estimated 50% to 70% of gross domestic product over the past 16 years. However, average per capita growth has been zero over the same period. Misdirected public investment, a poorly developed environment for private sector development, undeveloped land markets, and more generally, the lack of competitiveness have constrained the economy’s capacity for growth.

11. Real GDP grew by only 0.7% in 2000. Consumer prices also increased by about 1.6% during 2000 and 2.0% in 2001. Contained inflation was due to cheaper imports arising from the strengthening of the US dollar (used as the RMI currency) and sluggish demand, the combination of which more than offset the impact of the sharp rise in fuel prices. While imports have remained fairly constant over the past 6 years, exports have declined by almost two thirds over the same period, marking a decrease in fisheries and copra product exports.

12. Government budget balances have fluctuated widely. Recent surpluses have been used to repay earlier accumulated debts, including that of the Marshall Islands Social Security Administration. Since October 2001, ADB loans have become the RMI’s primary debt obligation. Although tax revenues have fallen and tax collection is a serious governance concern, overall total domestic revenues are estimated to increase by almost 14% in 2002. Revenue from fishing license fees fluctuates, but is expected to increase by almost 50% in 2002. The Government is now aiming to produce a balanced budget in future years.

13. Public and private shares of formal employment have changed dramatically over the past 10 years. Between 1991 and 1999, the share of public sector workers declined by 45%, while the number of private sector workers increased by 15%. While natural population growth has not declined significantly, a recent census noted the population to be less than expected due to a high rate of out-migration. Notwithstanding this, the unemployment rate increased from 12.5% in 1988 to 30.9% in 1999. Youth unemployment rates in the 15–19 age group were higher, at 73.2% in 1999. On the positive side, employment opportunities created by recent private sector developments have been the establishment of a tuna-loining plant employing some 350 people, associated fisheries industry investments, and other private investments in black pearl cultivation and niche market tourism.

C. Implications for the Country Strategy and Program

14. The current reform-minded government, the renewal of Compact provisions, the increasing poverty, the potential for new private investment, and ADB’s role as the lead agency in stimulating reform, present an opportunity for ADB to influence the future direction of the RMI economy toward a more sustainable, equitable, and independent path (para.1). Consistent with these implications, ADB will continue to build on its strategy of deepening fiscal and public sector reforms, with a focus on the special needs of disadvantaged outer island communities, and to support the creation of an enabling environment for private sector development. The pace of reforms is necessarily conditioned by the acceptance of the community and the demands of the political leadership. In regard to the latter, the next national elections are scheduled for November 2003.

15. The Economic Policy Planning and Statistics Office, established under the FFMP, will help to implement the strategy, and is being considered as the possible focal point for the proposed joint economic review board under the new Compact. A summary statement of the strategy is in Appendix 1.

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