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HONOLULU, Hawai‘i (July 11, 2000 – Bank of Hawai‘i)---Bank of Hawai‘i’s fourth economic report on the Federated States of Micronesia (FSM), researched and written by Regional Economist Dr. Wali M. Osman, describes an economy at a critical stage of development, especially in relation to the United States.

In 1986, the Federated States of Micronesia (FSM) entered into the Compact of Free Association with the United States. Under the Compact, FSM conducts its domestic and foreign affairs as a sovereign nation, while the U.S. is granted exclusive strategic access to FSM’s waterways, for which it makes annual rent payments, in addition, U.S. aid is provided. The Compact’s first 15-year financial package expires in 2001, and FSM and the U.S. are currently negotiating the second financial package, with talks expected to conclude some time next year. Osman explains that until the outcome of these negotiations is known, both in terms of the level and mechanism of support, the usual economic forecasting parameters do not apply, and any forecast would be guesswork at best.

Negotiations will cover two broad areas: rent or fixed payments to keep the economy going and aid, or support to create income-generating assets that would produce income to replace fixed payments. Osman suggests that economic aid should focus on the issues of what can be produced within FSM’s resources, and how the process would lead to a greater share of the economy for the private sector.

The FSM economy generated a total gross domestic product (GDP) of $223.6 million in 1998 and an estimated $224 million in 1999. Based on Bank of Hawai‘i’s data per capita gross domestic produce rose slightly to an estimated $1,977 in 1999 from $1,961 in 1998.

FSM’s economy is sustained mainly through the public sector (government wages, salaries and benefits, and additions to public infrastructure), which is the engine that supports a private sector that includes fishing and fisheries, tourism, garment manufacturing and farming. According to Osman, the past decade can be divided into two distinct sub-periods in terms of economic growth: 1989-93, the growth and prosperity years, and 1994-99 the years of stagnation and contraction.

In the period 1989-93, FSM’s real GDP gained a robust 5.1 percent annually, while per capita real GDP increased 3.5 percent a year. In the period 1994-99, which included short-lived gains in 1995, the real GDP growth rate averaged 0.9 percent a year. In 1999, per capita real GDP stood at $1,927, only slightly higher than 1989’s level of $1,908.

At this stage in its economic and political evolution, Osman proposes that policymakers adopt an economic change strategy based on two principal parameters: institutional reform, and an explicit and irrevocable commitment to market principles and openness, which will encourage the flow of outside capital to the FSM market.

Bank of Hawai‘i’s Federated States of Micronesia Economic Report and other reports on Pacific island economies are available online in the economics section of the bank’s Internet website, 

Bank of Hawai‘i is the principal subsidiary of Pacific Century Financial Corporation, a $14.3 billion regional financial services holding company. Bank of Hawai‘i provides a full range of financial services to consumers, businesses and governments in four principal markets, Hawai‘i, the West and South Pacific, Asia and selected markets on the U.S. Mainland.

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