Micronesia, Federated States of
The Federated States of Micronesia (FSM) is a lower middle income island nation of 105,544 people on 607 islands with a total land area of 271 square miles and an exclusive economic zone (EEZ) of over one million square miles (2.6 million square km) in a remote area of the Western Pacific Ocean. The nation is composed of formerly unrelated cultures and languages organized into four states under a weak national government. The FSM is part of the former U.S.-administered Trust Territory of the Pacific Islands that gained independence in 1986. Since independence, the U.S. provides over USD100 million annually to the FSM, operated under a Compact of Free Association (Compact) with the U.S. FSM uses the funds for development under the U.S. Department of Interior Office of Insular Affairs’ administration. (DOI) The World Bank estimates FSM’s 2017 Gross Domestic Income (GDI) as $3,187 per person, a trend reflecting no growth over the previous 10 years. The national currency of exchange is the U.S. dollar.
Commercial fishing remained the main industry in FSM. Its primary sources of income were the sale of fishing rights (approximately USD72.5 million in 2017) and taxes on offshore corporate registrations for captive insurance (USD86 million in 2018). It continued largely as a subsistence economy, except in larger towns where the economy was centered on government employment and a small commercial sector. The cash economy was primarily fueled by government salaries paid by Compact funds (70 percent of employed adults work in the public sector) and, to a much lesser degree, by family remittances and Social Security benefits paid to FSM citizens who previously worked in the United States or are the surviving spouse of an American citizen. Compact funding will change in 2023 from direct funding in the form of sector grants, to the use by the FSM of proceeds deriving from a trust fund developed from U.S. contributions over 20 years. Additionally, FSM created its own trust fund, with contributions of USD75 million from FSM revenues to the FSM trust fund in 2018, a significant increase from prior years.
The FSM GDP for 2017 was USD336.4 million, a 2.25 percent increase from 2016 at constant prices. The economy recorded a trade deficit of USD125 million in goods and services for the same year. FSM government debt was low, but the lack of focus on fiscal revenue to supplement Compact funding, the lowest tax-to-GDP ratio in the Pacific, and looming Compact funding reductions in 2023, meant international development banks classified the country as a grant-only client, concerned with the country’s ability to repay loans.
Foreign direct investment (FDI) was almost nonexistent due to prohibitions on foreign ownership of land and businesses, difficulties in registering companies (the process required approvals from the state governments as well as the national government), poor private sector contract enforcement, poor protection of minority (foreign) investors’ rights, weak courts, and weak bankruptcy settlement management. Pohnpei State’s Legislature amended its laws September 2018 to reduce requirements on foreign investment. The law specified which business sectors permitted FDI, with the remaining sectors available for Pohnpei citizens only. Domestic capital formation was very low because the commercial banks were classified as foreign entities and not allowed to provide mortgages or business financing. The cost of doing business in FSM was high due to the region’s remoteness and dependence on imported materials, services and skilled labor.
Most national political power was delegated to the four states by the FSM constitution, including regulation of foreign investment and restrictions on leases. This meant that investors had to navigate between five different sets of regulations and licenses. U.S. citizens were able to live and work in the FSM indefinitely without visas under the Compact but cannot own property on most FSM State islands. FSM voters selected national legislators (senators). The national senators then caucused to select the president and vice-president from among the four at-large senators. There were no political parties. The most recent elections for Congress were held March 5, 2019, where President Peter Christian failed in his bid for a second term. Senators were scheduled to select the next president and vice president on May 11, 2019.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||44/100 (regional
|World Bank’s Doing Business Report||2019||160 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||N/A||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2016||$1||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2018||$3,620||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
While the government of the FSM publicly expressed its intent to increase foreign investment, there were many structural impediments to doing so. FSM had no department dedicated to promoting investment or an ongoing dialogue with investors. These challenges, both regulatory and political, affected foreign investment and economic progress in general, and addressing them would require a constitutional and political will to change that is unlikely in the foreseeable future. Some political leaders at the state and national levels were owners of the largest businesses on the islands and strongly opposed the required structural changes that would result in increased competition. The FSM scored in the lowest quintile in almost all measures and international indices of economic activity and climate for doing business.
In theory, the country’s courts supported contractual agreements, but enforcement of judicial decisions was weak. Foreign firms doing business in the FSM had difficulty collecting debts owed by FSM governments, companies, and individuals, even after obtaining favorable judgments. For these reasons, the World Bank ranked the FSM very low in protecting minority investors (185th of 190 countries) and enforcing contracts (183rd of 190 countries). U.S. companies and individuals considering doing business with parties in the FSM should exercise due diligence and negotiate minimal credit and payment arrangements that fully protect their interests.
Limits on Foreign Control and Right to Private Ownership and Establishment
All four of the FSM states had limits on foreign ownership of small- and medium-size businesses. Large projects were assessed by the respective state government on a case-by-case basis. Each state required a separate application for foreign investment permits. Foreign investment was strictly limited by local ownership requirements (51-60 percent) and residency requirements of more than five years. Financing through bank loans was not possible due to a weak financial sector. Local small- and medium-size businesses were protected from foreign competition through law. Larger projects in a business sector already owned by public figures faced strong political opposition. Large and unrealistic development proposals were received enthusiastically by politicians, but did not move forward primarily due to land issues and traditional land owner disputes. The FSM does not maintain an investment screening mechanism for inbound foreign investment
Other Investment Policy Reviews
The FSM government did not have a third-party investment policy review conducted by United Nations Conference on Trade and Development (UNCTAD), World Trade Organization (WTO), or Organization of Economic Cooperation and Development (OECD).
Micronesia lacked a single window for online business registration or information portals providing comprehensive business registration information. The FSM Department of Resources and Development (R&D) maintained information on trade and investment on their website. It was reported that obtaining licenses and permits in a timely manner may depend more on the relationship of the investor (or local legal counsel) with the official in charge, rather than any clear procedure or timeline. The World Bank’s 2018 Ease of Doing Business report ranked the FSM as 160th of 190 countries globally in terms of procedures to register a business.
The FSM government did not promote, incentivize or restrict outward investment.
The FSM government did not restrict domestic investors from investing abroad.
2. Bilateral Investment Agreements and Taxation Treaties
No bilateral investment or taxation agreement existed between the U.S. and the FSM. The 2003 Amended Compact of Free Association was the only applicable guidance, with additional information available online. Under this treaty, articles imported from the U.S. into the FSM were guaranteed to receive treatment that was no less favorable than any other foreign country. Articles exported from the FSM to the U.S. were duty exempt, with a few exceptions as listed in Article IV, Section 242 of the Compact.
3. Legal Regime
Transparency of the Regulatory System
The FSM was not a signatory to any convention on transparency in international investment. Transparency of government actions was typically based more on personalities than on the law. Regulatory bodies sometimes involve themselves in issues beyond their jurisdiction. Conversely, other regulations were not uniformly enforced. It was often difficult to obtain public records, although some states and government organizations do require open meetings. Text or summaries of proposed regulations were published before enactment but they were not printed in an official journal or publication, and there was no appeal or administrative review process. In addition, government audits and statistical reports were not prepared promptly and current data is often unavailable.
One of the two websites that provided relatively recent (if not comprehensive) data and economic reporting were taken offline after government reorganization. The website for the National Public Auditor (http://www.fsmopa.fm) remained active and updated.
International Regulatory Considerations
The FSM was a signatory to the Pacific Island Countries Trade Agreement (PICTA) but FSM did not ratify the agreement. PICTA was a free trade agreement on trade in goods among 14 members of the Pacific Islands Forum. (Australia and New Zealand are excluded.) It was signed in 2001. Eleven countries — Cook Islands, Fiji, Kiribati, Nauru, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu — have so far ratified PICTA. The FSM was not a member of any regional economic block, nor was it a member of the WTO.
Legal System and Judicial Independence
The FSM followed the U.S. common law system, and used U.S. cases as precedent. There were no specialized courts with the exception of a Land Courts in Pohnpei and Kosrae. All States have Supreme Courts and State Courts. The judicial system remained independent of the executive branch, but was reported to be slow, weak, and lacked the ability to properly enforce judgments. Regulations or enforcement actions were appealable. It was not necessary to have appeals adjudicated at the National court; appeals could be made at either the State or National courts.
Laws and Regulations on Foreign Direct Investment
In September 2018, Pohnpei State Legislature overrode the Governor’s veto of a bill on Foreign Investment regulations. The bill became State Law over the objection of several local business leaders. The new law placed all decision making power into the hands of one person, the Registrar of Corporations.
A constitutional amendment allowing dual citizenship was voted on in March 2017 and again failed to pass. (Note: Dual U.S./FSM citizenship is not allowed under the FSM Constitution.) The individual states directly regulated all foreign investment, except in the areas of deep ocean fishing, banking, insurance, air travel, and international shipping, which were regulated at the federal level. FSM national and state governments used a “traffic light” system to regulate businesses, with red for prohibited, amber for restricted, and green for unrestricted. Industry classifications in this system vary from state-to-state. Thus, a prospective investor who planned to operate in more than one state must obtain separate permits in each state, and often follow different regulations as well.
The following are the regulations pertaining to restrictions by sector in each of the states:
- Red: Arms manufacture, minting of currency, nuclear power, radioactive goods.
- Amber: Increased scrutiny before approval for non-traditional banking services and insurance.
- Green: Banking, fishing, air transport, international shipping.
- Red: manufacture of toxic, biohazard materials, gambling, casinos, fishing using sodium/cyanide or compressed air. (Note: There is also currently a ban on all business transactions on Sundays in the capital town.)
- Amber: Real estate brokerage, non-ecology-based tourism, trade in reef fish, coral harvesting
- Green: Eco-tourism, export of local goods, professional services.
- Red: None presently defined, determined by board from amber candidates.
- Amber: Everything not classified as green.
- Green: Businesses with greater than 60 percent FSM ownership, initial capitalization of USD250,000 or more, professional services with capitalization of USD50,000 or more, and Special Investment Sector businesses with 51 percent FSM ownership in retail, trade, exploration, development, and extraction of land or marine based mineral resources or timber.
- Red: Determined by the Director, none codified in law.
- Amber: Casinos, lotteries, industries that pollute the environment, destroy local culture and tradition, or deplete natural resources.
- Green: Eco-tourism, professional services, intra-state airline services, exports of local goods.
- Red: Manufacture of toxic materials, weapons, ammunition, commercial export of reef fish, activities injurious to the health and welfare of the citizens of Yap.
- Amber: None at present.
- Green: All others.
Competition and Anti-Trust Laws
There is no law or agency governing competition in the FSM.
Expropriation and Compensation
The FSM Foreign Investment Act of 1997 guaranteed no compulsory acquisition or expropriation of property of any foreign investment for which a Foreign Investment Permit was issued, except for violation of laws and regulations and in certain extraordinary circumstances. Those extraordinary circumstances included cases in which such action would be consistent with existing FSM eminent domain law, when such action was necessary to serve overriding national interests, or when either the FSM Congress or the FSM Secretary of Resources and Development has initiated expropriation. There was no history of expropriation involving foreign investors or U.S. companies.
ICSID Convention and New York Convention
Since 1993, the FSM was a member of the Convention on Settlement of Investment Disputes between States and Nationals of Other States (ICSID), but was not a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. To date, there were no ICSID cases.
Investor-State Dispute Settlement
The FSM was not a signatory to a treaty or investment agreement in which binding international arbitration of investment disputes is recognized. Disputes take years to resolve and still may not produce concrete results. Some cases were on the docket, with no or little movement, for thirty years or more.
International Commercial Arbitration and Foreign Courts
There were no provisions under FSM Federal law for alternative dispute resolution. This was also true of the states, with the exception of Kosrae, where an alternative dispute resolution system has taken the place of a small claims court. Judgments from foreign jurisdictions were not enforceable in FSM courts.
A bankruptcy law was in existence since 2005, but was used only three times, generally to avoid taxes.
4. Industrial Policies
There were currently no government programs or incentives to attract foreign investment.
There was no government agency tasked with developing an industrial strategy; however, the FSM government made recommendations for growth in all sectors without substantive measures to realize those goals. The telecommunications sector recently opened up in order to meet the World Bank conditions for a new fiber optic cable project. The largest state-owned enterprise, the FSM Petroleum Corporation (FSMPC), planned to expand into renewable energy technologies like solar power, and coconut oil for export.
Politicians called for expansion of the tourism sector, but have created no tax, licensing, or leasing incentives to encourage investment. Although there was considerable potential for growth in the tourism sector, the remoteness of the FSM, land ownership prohibitions, business ownership restrictions, and the current lack of hotel facilities and tourism services, growth in the tourism sector was likely to limit the ability of the sector to meet local expectations. Recent data shows that growth had fallen in the areas of scuba diving, boating, and fishing. Disagreements over land issues caused the 2013 closure of the most successful hotel in Pohnpei. The United Nations Educational, Scientific and Cultural Organization (UNESCO) adopted the significant archaeological site of Nan Madol as a World Heritage Site in 2016, and was working towards other designations in Yap, Kosrae, and Chuuk. Other efforts, including by the US Embassy and National Geographic, were underway to highlight the considerable cultural heritage extant in the FSM.
Foreign Trade Zones/Free Ports/Trade Facilitation
There are no Foreign Trade Zones, Free Trade Zones, or Free Ports in the FSM.
Performance and Data Localization Requirements
The FSM government mandated local employment when qualified individuals are available. U.S. citizens may reside in and work in the FSM indefinitely. Citizens of other countries must apply for the appropriate permits. There were no defined performance requirements for investments.
5. Protection of Property Rights
The most important impediments to foreign direct investment (FDI) derived from land and contract issues. Foreign ownership of land was prohibited; most land was owned and passed on within the clan structure, leading to conflicting title claims, the need to negotiate leases with multiple parties, and the possibility of changes when the original senior lessor dies. Dual citizenship is illegal, so Micronesian citizens born in the U.S. were unable to inherit or own property. There is no system for land title insurance in any of the country’s four states. The combination of these factors ranked the FSM at 187th out of 190 countries globally in the World Bank’s Ease of Doing Business report’s assessment of registering property.
Foreign nationals, including corporations, cannot own real land but in some cases can own buildings or other structures.
Intellectual Property Rights
Intellectual property rights (IPR) in the FSM are nominally protected, and the country is a member state of the World Intellectual Property Organization (WIPO). The country was not listed in the USTR Special 301 Report, nor was it listed in the notorious market report. The Embassy did not receive complaints from U.S. firms regarding IPR issues, and the only U.S. corporations currently operating in FSM were United Airlines and Matson Shipping. The only three U.S. chains present (Ace Hardware, True Value Hardware, and NAPA auto parts) are 100 percent locally-owned franchises.
For additional information about national laws and points of contact at local IP offices, please see the country profiles on the WIPO website.
6. Financial Sector
Capital Markets and Portfolio Investment
There were no stock or commodities exchanges in the FSM.
Money and Banking System
The two commercial banks operating in the country, the Bank of Guam and the Bank of the FSM, could only make small, short-term unsecured loans because of the prohibition of using land or business as collateral, difficulties inherent in collecting debts, and identifying collateral that could be attached and sold in the event of default. There were no Credit Bureaus. The Bank of FSM was prohibited by its charter from investing in any securities not insured by the U.S. government, so the bulk of its holdings were U.S. Treasury bonds. The Bank of Guam operated as a deposit collector in the FSM, with most of its loans made in Guam.
The Bank of FSM was protected from takeover by a trigger from FDIC that will cancel their insurance status if foreign ownership exceeded 30 percent. Foreigners were not allowed to open accounts with the bank unless they could provide proof of local residence and work permits and fulfill U.S. Treasury “know thy customer” requirements.
Money Exchange companies such as Western Union operated within FSM and handled the majority of remittances.
Since most businesses were family owned, there were no shares that could be acquired for mergers, acquisitions, or hostile takeovers. The FSM enacted a secured transaction law in 2005 and established a filing office in October 2006 primarily to serve the foreign corporate registration market.
Foreign Exchange and Remittances
The currency of the FSM remained the U.S. dollar. The only two commercial banks operating in the country at present were the Bank of Guam and the Bank of the FSM, both of which were Federal Deposit Insurance Corporation (FDIC) insured.
There were no specific restrictions on repatriating profits from a business, except in the state of Chuuk, where an amount greater than USD50,000 requires state approval.
Statistics on family-level and personal remittances were difficult to obtain, with various studies reporting figures ranging from USD3 to USD14 million per year entering the FSM. However, remittances travel into and out of the country. Micronesians working abroad and in the U.S. sent money to their families in the FSM, while Filipino professionals and laborers working in FSM sent money to their families in the Philippines.
Sovereign Wealth Funds
The FSM had no sovereign wealth fund, but the government established a national trust fund modeled on the Compact Trust Fund to provide additional government income after 2023. That fund was managed by a U.S. based commercial fund manager.
7. State-Owned Enterprises
The FSM established state monopolies and maintains state owned enterprises (SOEs) in the areas of fuel distribution, telecommunications, and copra production. These companies were the FSM Petroleum Corporation (FSMPC), the FSM Telecommunications Corporation, and the FSM Coconut Development Authority, which was folded into the FSMPC in 2014. Legislation passed in 2016 opened the telecom market to private companies in order to qualify for World Bank funding for a submarine fiber optic cable to Yap and Palau. Other prominent SOEs include the National Fisheries Corporation, the FSM Development Bank, the College of Micronesia, and Caroline Islands Air, Inc.
FSM did not currently adhere to the convention on the Organization of Economic Cooperation and Development (OECD) guidelines on corporate governance of SOEs.
There is currently no privatization program in the FSM.
8. Responsible Business Conduct
There was little awareness or definition of responsible business conduct (RBC) in the FSM. However, most local businesses were small and generally responsive to the community in which they operate. The two U.S.-based companies in the FSM generally follow RBC principles. The host government did not promote RBC or factor it in evaluations for public contracts, nor did the country adhere to the convention on OECD guidelines for multinational enterprises.
The FSM has laws prohibiting corruption and there were penalties for corrupt acts. The National Office of the Public Auditor, with support from the Department of Justice, was the entity most active in anti-corruption activities. A number of senior ex-FSM Government officials were convicted of corruption under the FSM Financial Management Act, usually involving procurement fraud. A FSM government transportation official pled guilty April 3 in U.S. District Court to conspiring to launder bribe money he accepted from a U.S. citizen president of a Honolulu Civil Engineering Company. The official was FSM President Christian’s son-in-law who faced a maximum 20 year prison term at sentencing in July. Corruption was not a predicate offense under the money laundering statute. Bribery was punishable by imprisonment for not more than ten years in addition to disqualification from holding any government position. Yet, traditional custom permits a lawbreaker to ask and receive forgiveness by paying a fine to those victimized. Given that many FSM National, State, and Municipal Government officials also own businesses, there existed significant potential for conflicts of interest.
The degree to which government officials accepted direct bribes is unknown but believed to be commonplace, especially deriving from state actors. Pohnpei State and Yap State were currently prosecuting corruption cases. The Yap State governor and lieutenant governor reported receiving cash envelopes in inauguration presents which they promptly handed to Yap State Acting Attorney General who conducted an investigation. The FSM did not sign or ratify the UN Convention on Corruption, or the OECD Convention on Combating Bribery.
Resources to Report Corruption
The FSM had no government agency specifically assigned with responsibility for combatting corruption. State prosecutors were the usual avenue for prosecuting corruption, with a number of cases brought to trial in the last few years, especially in Pohnpei State. The Public Auditor highlighted irregularities, but relies on government prosecutors for enforcement capability. The Department of Justice in prior years prosecuted cases, but activity in this area recently has been variable; Pohnpei State and Yap State have been more active.
Attorney General, FSM Department of Justice
There were no non-governmental “watchdog” organizations in Micronesia that monitor corruption.
10. Political and Security Environment
FSM enjoyed a stable, democratic form of government with no history of civil or political strife. The islands became part of a UN Trust Territory under US administration following World War II. In 1979 the islands adopted a constitution, formally becoming the Federated States of Micronesia. Independence came in 1986 under a Compact of Free Association with the U.S., which was amended and renewed in 2004. Under this agreement, the U.S. Government guaranteed the FSM’s external security.
The country’s last presidential election was held in March 2019, in which president Peter Christian lost his bid for a second term. The Senate planned to select a president and vice president in May 2019. The population’s main concerns during the campaign season related to the high unemployment rate, depletion of marine resources from overfishing, corruption, and a reliance on foreign aid.
11. Labor Policies and Practices
Wages in FSM were low, with minimum wage laws for government employees in all states and the federal government. Only Pohnpei had a minimum wage for the private sector at USD1.75 per hour. Employment in the public sector was preferred because the wages are significantly higher. The minimum hourly wage for employment with the national government was USD2.34. The minimum hourly wage for government workers in the individual states was: Pohnpei USD2.00, Chuuk USD1.25, Kosrae USD1.42 and Yap USD1.60.
There was no law regulating hours of work (although a 40-hour work week is standard practice, 32 hours was standard in Kosrae State), nor are there enforceable standards of occupational safety and health. While there was one federal regulation that required that employers provide a safe workplace, neither the Department of Health nor the Environmental Protection Agency had enforcement capability, resulting in varying working conditions. There was no law for either the public or private sector that permits workers to remove themselves from dangerous work situations without jeopardizing their continued employment.
Skilled labor in FSM is limited, with few FSM citizens trained to perform tasks of any technical nature. Foreign workers, primarily Filipinos, were hired to fill roles requiring technical skills. In September 2018, after having banned all Filipino workers from working in the FSM in mid-2018, the Philippine Department of Foreign Affairs revised its deployment ban on Philippine labor coming to the FSM to include only new recruits. Philippine overseas foreign workers were FSM’s main source for educated and skilled labor but with the ban in place this pool could no longer be replenished.
A labor dispute at a privately run hospital in Pohnpei led to the dismissal of several doctors and surgeons, all from the Philippines. As a result, service hours were cut and capacities were in doubt. The hospital is one of the embassy’s preferred medical providers, as the island’s only other hospital did not meet hygienic standards, although the medical care itself was generally adequate for non-specialized treatment.
The majority of doctors, nurses, accountants, lawyers, engineers, construction foremen, and heavy equipment operators were overseas workers from the Philippines.
The FSM had no collective bargaining or strikes. Unemployment was high, and workers were easily replaced. There was no child labor, except in small family businesses. Occupational safety and health standards are low.
12. OPIC and Other Investment Insurance Programs
In 1988, FSM signed a bilateral agreement with the Overseas Private Investment Cooperation (OPIC). OPIC expressed 2018 interest in engaging with the FSM government.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Table 3: Sources and Destination of FDI
There is no data available from the IMF’s Coordinated Portfolio Investment Survey regarding sources and destination of FDI in Micronesia
Table 4: Sources of Portfolio Investment
There is no data available from the IMF’s Coordinated Portfolio Investment Survey regarding sources of Portfolio Investment in Micronesia
14. Contact for More Information
NAME Anthony Alexander
TITLE Economic/Consular Officer
ADDRESS OF MISSION/ U.S Embassy Kolonia P.O Box 1286 Kolonia, Pohnpei FM 96941
TELEPHONE NUMBER +691 320-2187
EMAIL ADDRESS AlexanderAW@state.gov