The Federated States of Micronesia (FSM) is a lower middle-income island nation of 104,000 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 and continues to use the U.S. dollar as its currency. Since independence, FSM has operated under a Compact of Free Association (Compact) with the U.S., receiving more than USD 100 million per year in development funding administered mainly by the U.S. Department of the Interior (DOI). The World Bank estimates Gross Domestic Income (GDI 2016) to be USD 3,550 per person, showing no growth over the previous 10 years.
The FSM currently has no major exports or domestic industry. Its primary sources of income are the sale of fishing rights (approximately USD 72.5 million in 2017) and taxes on offshore corporate registrations for captive insurance (USD 20 million in 2017). It is largely a subsistence economy, except in larger towns where the economy is centered on government employment and a small commercial sector. The cash economy is primarily fueled by government salaries paid by Compact funds (66 percent of employed adults work in the public sector) and, to a much lesser degree, by family remittances. Compact funding will change in 2023 from the current grants to proceeds from a trust fund developed over 20 years. This is estimated to lower government revenues from the United States by 20-30 percent.
The FSM GDP for 2016 was USD 329 million, a 4.44 percent increase from 2015 at constant prices. The economy recorded a trade deficit of USD 195 million in goods and services for the same year. The FSM government currently has low debt, but the lack of development of revenue to supplement Compact funding, the lowest tax-to-GDP ratio in the Pacific, and looming Compact funding reductions in 2023 mean that international development banks classify the country as a grant-only client, as they are concerned with the country’s ability to repay loans.
Foreign investment is almost nonexistent due to prohibitions on foreign ownership of land and businesses, difficulties in registering business (the process requires approvals from the four state governments and at the national level), poor enforcement of contracts, poor protection of minority (foreign) investors, weak courts, and weak settlement of insolvency. Domestic capital formation is very low because the commercial banks are classified as foreign entities and are not allowed to provide mortgages or business financing. The cost of doing business in FSM is high due to the region’s remoteness and dependence on imported materials and services.
Most political power of the nation is delegated to the four states by the constitution, including regulation of foreign investment and restrictions on leases. This means that investors may have to navigate between five different sets of regulations and licenses. U.S. citizens are able to live and work in the FSM indefinitely without visas. National legislators (senators) are directly elected, and two of the four at-large senators are selected by the other senators to act as president and vice-president. There are no political parties. The next elections for Congress are in March 2019.
|TI Corruption Perceptions Index||2018||N/A||http://www.transparency.org/
|World Bank’s Doing Business Report “Ease of Doing Business”||2018||155 of 190||http://www.doingbusiness.org/
|Global Innovation Index||2018||N/A||https://www.globalinnovation
|U.S. FDI in Partner Country (M USD, stock positions)||2018||N/A||http://www.bea.gov/
|World Bank GNI per capita||2017||USD 3,590||http://data.worldbank.org/