Micronesia, Federated States of

Country Information

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Location and People

Socio- Economic Conditions

Challenges and Key Issue

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Location and People

The Federated States of Micronesia (FSM) is a grouping of 607 small islands in the Western Pacific about 2,500 miles southwest of Hawaii, lying just above the Equator. Generally speaking, FSM comprises what is known as the Eastern and Western Caroline Islands. While the country's total land area amounts to only 270.8 square miles, it occupies more than one million square miles of the Pacific Ocean.  (FSM Government Site)

FSM’s 107,008 people inhabit its confederation of four States – Chuuk, Kosrae, Pohnpei and Yap.  Each of the four States centers around one or more “high islands,” and all but Kosrae include numerous atolls.  Each State has its own government, language(s), culture and identity. Although means of communication, in particular telecommunications, have improved over recent years, the physical isolation of the country, and the States from each other, pose particular development challenges.  (ADF IX)

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Socio- Economic Conditions

The economy is dominated by the public sector. Although efforts to downsize the government have been made, central government expenditure still accounts for approximately 68% of GDP (2005).  The formal private sector is small, inexperienced, focused on the local market (predominantly servicing government), and relatively isolated form international opportunities. The growth of the private sector is further constrained by inadequate public infrastructure, a deficient collateral framework, poor skills, ineffective and often inconsistent investment policies for both local and foreign investors, and state owned enterprises that provide unreliable, expensive services while crowding out private-sector initiatives.  (FSM CSPU)

Key Social and Poverty Indicators
Indicators	‘02	‘03	‘04	‘05
Total population (‘000)	107.5	107.8	112.7	113.8
Annual pop. growth rate (%)	0.3	0.3	4.5	1.0
Pop. below poverty line (%)	27.9a	—	—	—
Unemployment rate (%)	22.0b	—	—	—
Maternal mortality rate (per 100,000 live births)	274.0c	317.0	—	—
Infant mortality rate (per 1,000 live births)	—	21.0	—	—
Life expectancy at birth (yrs)	66.5	70.0	—	—
Adult literacy rate (%)	92.4b	—	—	—
Human development index	0.569d	—	—	—
— not available a 1998 HIES data b 2000 census data c 1999 data d Pacific HDI calculations using 1998 data Source: ADB

FSM is heavily reliant on external assistance, which accounts for more than half of government revenue. The Compact of Free Association (Compact) with the United States is a major source of external assistance. The value of imports is six times that of exports, and the trade deficit was 50% of GDP in FY2004.  (ADF IX)

Extreme poverty and hunger are not issues in the FSM.  The nature of poverty in FSM is associated with both a lack of and deteriorating access to essential social services, such as primary education, health, and potable water, and also a lack of jobs and markets. Poverty is increasing as a result of the weak economic performance, poor public services, growing inequalities, and a break down in the traditional support systems.

Mother of four, 37 Years Old “I am 37 years old and have four young children. The oldest is 9 years old and the youngest is 1 year old. My husband is from Riken. I have lived in various places in Yap before I moved to Riken. I have a high school diploma and I used to work in a garment factory. “Currently, my husband and I are both unemployed. We live off the land and often sell goods such as betel nuts and sew clothing, and earn an unpredictable income of about $50 a month. A third of the income is used to pay utility bills and the rest is for food and school supplies for our children. My husband gets drunk and used drugs a lot and often uses our food money to buy frugs. I am generally left alone to take care of the children and do all the household duties including his share and rightful responsibilities. “Life is difficult and I find strength and encouyragement through prayer and Jesus Christ. I believe that someday my children will live a better life compared to mine and God will bless and help my family prosper.”

Read and understand the needs and views of those facing hardship in the FSM in  Priorities of the People:  Hardship in the Federated States of Micronesia

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Challenges and Key Issues

Economic behavior in the FSM is shaped by a number of social and economic institutions whose structure, functions, and significance have been changing over the years. The family and church, for example, largely determine the form of social interaction and expectations among economic actors. The geographic condition of small islands and their limited land and population, and a tribal society based on an extended family structure have induced forms of land tenure and succession that may have restricted private sector investment. Traditionally important economic factors such as human resource development, entrepreneurship, consumption and investment patterns, emigration, and the supply of social services are largely affected by Compact provisions, local institutions, and the government development strategy. Financial sector development, increasing poverty, and environmental concerns are also posing new challenges to social and economic development.

In 2004, the second, 20-year, phase (FY 2004-2023) of the financial provisions of the Compact of Free Association* (the Compact) between the FSM and the US commenced. The Compact provides for U.S. economic assistance, defense of the FSM, and other benefits in exchange for U.S. defense and certain other operating rights in the FSM, denial of access to FSM territory by other nations, and other agreements.

While funds under new Compact arrangements are substantially lower in real terms than under the first Compact agreement ($92 million each year partially indexed for inflation), grant funds are equivalent to about 40% of GDP. There is also access to separate additional US program assistance. The new agreement suggests that similar financial provisions will not be extended to a third period after their expiration in 2023, imposing economic self-reliance on the FSM. A trust fund has been established to help replace reliance on annual Compact funding. Initially, $16 million annually is to be saved into the trust fund, but from FY2007 the amount saved will increase by $800,000 a year until trust fund contributions are about 30% of total Compact funding. The amended Compact requires adoption of a number of rules and performance measures for the use of public funds. The rules associated with the use of public funds are notable for establishing controls that extend beyond the trust fund and recognize the need to take a “whole-of-government” perspective in determining the fiscal position of the Government and the country.

The FSM has prepared a strategic development plan identifying the goals and a broad strategy to promote sustainable growth and achieve economic self-reliance, to reassess the role of existing social and economic institutions, and consider the possibility of creating new agencies that can respond to future challenges. (See Box)

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