Overcoming man-made impediments to growth in the FSM

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Category: Opinion

Published on Wednesday, 27 June 2012 13:02

Written by Peter A. Prahar U.S. Ambassador to the FSM

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On February 8, 2011, I spoke at the National Economic Symposium in Chuuk which had been called to address the topic Overcoming Impediments to Growth. I believe the participants at the symposium understood that the country has a long way to go and a short time to get there. The FSM's gross domestic product is essentially unchanged since 1995. Per capita income, adjusted for inflation, has stagnated since the early 1980s. The main source of income and employment remains the public sector, which is largely funded by Compact grants and other U.S. federal programs. Government operations are becoming increasingly constrained as Compact funding decreases (as planned) year after year until it ends in 2023. FSM citizens are leaving for good in large numbers – some 2,000 a year, including some of the country's best and brightest – in search of the opportunities the FSM economy is not generating.

We all know that the FSM faces impediments to growth that are inherent to Pacific Island economies: relatively high costs of energy and transportation, small domestic markets, and frequent natural disasters. These are a reality of doing business here and cannot be changed. However, in my 2011 speech, I spoke of a number of impediments to growth that could be changed: ones that were the result of human choice and those which have created a policy environment that impedes private-sector led growth.

I am not a lone voice crying in the wilderness on this. Every year, for example, the World Bank reviews laws, regulations, and practices in ten different areas including registering property, getting electricity, paying taxes, starting a business, and enforcing contracts. I think all would agree that these are of critical importance to any businessman, foreign or domestic, and, in total, are a fair and straightforward way to evaluate the "business climate" of a country.

So how is the FSM doing in these ten areas?

Well, the answer is not a happy one. Year after year, the World Bank Ease of Doing Business Report (http://www.doingbusiness.org/reports) puts the FSM's business climate among the also-rans and flat-out losers in the global economy – a rating, sadly, that is perfectly consistent with the country's poor economic performance and prospects. In 2012, the World Bank placed the FSM 140 out of 183 countries in its overall rating. This means that the FSM is among the most difficult places in the world to do business. What should be even more eye-opening (and action-inspiring): No country in the Pacific Ocean rated lower than the FSM. Not one.

The purpose of the World Bank Ease of Doing Business Report is to spur macroeconomic reforms – and it works. Doing Business 2012 shows that governments in 125 economies out of 183 that were measured implemented a total of 245 business regulatory reforms—13 percent more reforms than in the previous year.
Unfortunately, the same report made clear that in the FSM another year passed without tackling the impediments to growth that the country can control.
Admittedly, some painfully slow progress has been made in implementing tax reform. The proposed tax reforms would, among other things, incentivize local business to reinvest their profits into new and expanding enterprises. They would also improve the administration of the tax system to ensure that everyone is paying what is owed. If this country is to have modern health and education systems after the end of direct Compact funding, it simply must have a modern tax system and vibrant economy to fund them.

However, we have yet to see any progress with regard to land registration and titling reform. No sensible investor, domestic or foreign, wants to put his money into improving someone else's property. An investor needs security of title, lease, or easement. In this sector the FSM ranks 183. That's not a typographical error. The World Bank considers the FSM the worst place in the world in terms of registering property. At least according to the World Bank, you're better off trying to secure property in war torn Afghanistan than you are in the FSM. You can argue the point, but the message this rating sends to potential investors is unmistakable: Steer clear, look elsewhere.

The World Bank also flunked the FSM in the area of enforcing contracts and resolving insolvency. It is not hard to see why this is important: A business cannot be successful if it cannot depend on the contracts it signs or collect the debts it is owed.

Per the World Bank ranking, the FSM rates 146 out of 183 in enforcing contracts and 164 out of 183 on resolving insolvency. On the later, the FSM rates lower than Haiti, which is still recovering from a devastating earthquake that destroyed its national capital – not to mention its history of failed governments. The FSM rates slightly better than Rwanda (the scene of one of the worst genocides in the 20th century) and the Democratic Republic of the Congo (scene of the world's deadliest conflict since World War II, killing more than five million people since 1998). I am personally familiar with Rwanda, having served as the State Department's Desk Officer for that country, and the Democratic Republic of the Congo, having served there for two years at the height of the fighting. Believe me, any time you are lumped in with these two, you are in trouble. A high-level review of courts' capacity to handle commercial matters quickly and transparently is in order. This systemic failure is yet another impediment that could be removed.

Overcoming these and the other impediments to growth requires effort and creativity, and – let's be blunt – will entail sacrifice and perhaps short-term pain. While most will benefit from tax reform, a few are bound to pay higher taxes – and you can be sure they will do everything in their power to stand in the way of reform. Some may profit from a chaotic system of land registration too, but many more are kept from engaging in business or even their own home improvements, because they cannot secure title to a piece of property.

Reliance on foreign donors or fly-by-night development schemes is not a strategy for long-term success. However, decades of experience around the world demonstrate that comprehensive reforms along the lines suggested by the World Bank and others will, over time, result in greater economic activity and a higher standard of living. In addition, the effort to comprehensively address the man-made impediments to growth would be evidence of political courage and a seriousness of purpose towards self-reliance which is a key principle of the Compact of Free Association between our two nations. A tall order to be sure, but certainly not an impossible one.