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p. 40 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific Cook Islands Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

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Marshall Islands

Due to contractions in trading and transport, primary production, and manufacturing, real GDP declined by about 2 percent in 2000. Along with modest growth prospects in the medium term, the economy faces a major challenge in moving toward greater self-reliance and providing employment for the growing labor force.

Recent Trends and Prospects

Real GDP contracted by 2.3 percent in 2000 after growth of around 0.8 percent in 1999 (see Figure 2.21). Government expenditure grew marginally, while trading and transport, primary production, and manufacturing fell. Due to the strengthening of the US dollar and low demand, and despite the rise in world oil prices, price deflation of 1.9 percent was recorded, compared with inflation of 2.0 percent in 1999.

Exports in 2000 increased by 9.7 percent to $7.9 million, while imports declined slightly to $58.8 million. The trade deficit in 2000 represented 53 percent of GDP, a slight deterioration from the 1999 deficit. The current account in 2000 showed a surplus equivalent to 7.6 percent of GDP. On the capital account, the main item was loan repayments, which absorbed most of the current account surplus.

The budget surplus in 2000 fell by more than half to 5.2 percent of GDP from 10.5 percent of GDP in 1999. Total government revenue of $62.1 million in 2000 was lower than the 1999 figure, mainly due to a reduction in import taxes and despite a 50 percent increase in income from fishing license fees. Government expenditure rose slightly.

Total external debt in 2000 dropped significantly to 72 percent of GDP, from the previous year’s corresponding figure of 90 percent. Debt service in 2000 equaled 22.5 percent of GDP. External assistance rose to 70 percent of GDP, from 44 percent of GDP in 1999; the largest component was the payment from the US under the Compact of Free Association. Taipei,China made a large grant of $19 million.

The average rate of interest on savings and time deposits in 1999 was 2.8 percent, marking a decline from previous years, as the banks acquired more deposits than they could lend and inflation stayed low. Lending rates were at 10–16 percent in 1999. These high real rates and the wide spread between deposit and lending rates suggest weak competitive pressure on the banks to increase lending. These trends continued in 2000.

According to the 1999 census, 69 percent of the labor force of 14,700 were employed, including those in subsistence activities. Formal sector employment is estimated to be as low as 54 percent. Around 31 percent of those employed work in the public sector.

The 2001 budget incorporates an 8 percent reduction in expenditure, and a 15 percent increase in revenue, to give an overall surplus equivalent to 15 percent of GDP. Given that the public sector, excluding state-owned enterprises, accounts for about one third of economic activity, it is therefore unlikely that GDP will grow in 2001.

Issues in Economic Management

For many years, payments of interest and principal (debt-service costs) on public sector debt, comprising government and state-owned enterprise bond issues, have run at $25 million to $26 million annually, or about 27 percent of GDP. The biggest of these bond issues will be fully repaid in 2001, relieving the balance of payments, and providing an opportunity for financial stabilization. In fact, this will free up $18 million of annual inflow for the remainder of the first 15-year Compact period—which ends in September 2001—perhaps allowing for some easing of fiscal policy. As a result, GDP is projected to grow at least slightly in 2002. For the past 13 years, the Government has had the benefit of annual grants of around $30 million under the Compact, and its future fiscal position is dependent on the outcome of negotiations on a second compact.

The Public Sector Reform Program, which began in 1997 with the support of an Asian Development Bank loan, has targeted the main economic management issues. Its objectives are stabilizing government finances in the short run, ensuring long-term structural stability, and creating an improved environment for the private sector. Achievements include reducing the government payroll by 30 percent, privatizing domestic shipping services, streamlining Foreign Investment Board License applications, and establishing the Marshall Islands Intergenerational Trust Fund to provide an additional source of revenue for the government budget.

Despite these measures, several issues remain, including low levels of efficiency in public service, weak government financial management, and a slow buildup of funds in the Intergenerational Trust Fund. The Government is developing a program for public finance management reform to establish systems of annual and medium-term budgeting, financial control, accounting, internal audit, and reporting to Parliament. Accounting of the capital account of the balance of payments also needs significant improvement.

Policy and Development Issues

About 600–700 new jobs a year are required to broadly keep up with population growth. Thus efforts to attract foreign direct investment must be stepped up, and existing firms expanded. Apart from the problems of remoteness and small size, high local wages make it difficult for firms to compete internationally.

In the last few years, significant positive changes have been made to the process for approving and licensing foreign direct investment. The Government has published a statement on investment policy and amended the law so as to implement easier and quicker investment procedures. It has reestablished the Trade and Investment Division with the aims of promoting investment and trade and supporting small business growth. However, if the economy is to compete effectively, it has to overcome three important structural obstacles: the lack of secure leasehold title to land that can be developed, a complex tax system, and inadequate levels of education for workers in a modern economy.

Action is under way to deal with the first of these, with a draft law being considered to establish registration of “development land” that would be available for lease to investors under government-guaranteed title. The passage of this law and successful establishment of the authority to implement it will go a long way toward removing this first obstacle. Tax reform is currently on the policy agenda, and moves are afoot to conduct a review of tax policy in 2001.

At present, nearly half the teachers in the country have only a secondary school diploma as their highest qualification. The Ministry of Education, with the College of the Marshall Islands, is introducing new regulations for teacher certification, and is encouraging teachers to obtain tertiary degrees. Upgrading the educational system to expand the skill base is important if employment is to move into high-technology areas.

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