Pacl'fic Island Economies:Toward Efficient and Sustainable Growth(in Nine Volumes) Volume 4: Marshall lslonds - Country Economic Memorandum

March 8, 1"3

Country Department IIIEast Asia and Pacific Region

FOR OFFICIAL USE ONLY

)Pyz41,��

�NA -FAP Type:

PAC I F IS L, A N 1) )MT ES,T i t, 1Authoi- CC)DIPPILY, H.

468 poom:A10025 T)ept. :EAFxt.:82iRT INCOMPLETE VOLUME c-) PEND

LI

$1 3g

R

Z`, AlAl 5�-

4 J, nZ�

S.-

�,,V�7K

ke

alJ,

'-A

4k

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

MARSHALL ISLANDS

FISCAL YR4R

Ootobe 1 - September 30

WEIGH?S AND MEASURES

Metric System

ACRONYMS AND ABBREVUITIONS

ADB - Asian Development BankAM! - Air Marshall IslandsBCC - Budget Coordinat CommitteeBMI - Bank of Marshall IslandsBOD - Biological Oxygen DemandCMI - ^ollege of Marshall IslandsCOM - College of MicronesiaCIP - Capital hnprovements ProgramEIA - Envionmena Impact A ssmentEPA - Envonmntal Protection AuthorityFFA - Ponum Fisheries AgencyFHAS - Foreign Investment Advisory ServicesGATT - General Agreement on Tariffs and TradeGEF - Global Enviromental FacilityHCES - Household Consumption and Expenditure SurveyJICA - Japan Intemational Cooperation AgencyMALGOV - Majuro Atoll Local GovernmentMFF - M and F Fishing CompanyMDF - M and D Fishing CompanyMEC - Marshalls Energy CompanyMIDA - Marshall Islands Development AuthorityMIDB - Marshall Islands Development BankMWSC - Marshls Water and Sewer CompanyNAFTA - North American Free Trade AgreementNEMS - National Environmental Management StrategyNTA - National Telecommunications AuthorityNCT - Nuclear Claims TribunalOPS - Office of Plamning and StatisticsPHC - Primary Health CarePIP - Public Investment ProgramPSC - Public Service CommissionSOE - State of the EnvironmentSPREP - South Pacific Regional Environmental ProgramTCPP - Tobolar Copra Processing PlantUSAKA - United States Anmy at Kwajalein AtollUNCED - United Nations Conference on Enviroment and DevelopmentUNPPA - United Nations Fund for Population ActivitiesWHO - World Health Organization

COUNTRY DATA

Land Area: 181 sq kn Sea Area: 1,942,000 sq kanPopulatim: 48,000(1991) Capital City: MajuroPopuaon of Capitl: 22,000

FOIh OMCIAL USE ONLY

CONTENTS

Page No.

Executive S w .iii..................................

I Economic Growth and Macroeconomic FAwmework ........... 1

A. Background ................... 1B. Recent Economic Developments ........................ 2C. Development chalenges ............................. 9

2 Promoling Pfivate Secdor Development ................... 11

A. Introduction ........................... ......... 11B. The Private Sector in RMI, and Government Policies .... ....... 11C. Incentives for Private Sector Development .................. 12D. Regulatory Barriers to Private Sector Development .... ........ 15E. Improving the Framework of Supporting Policies .... ......... 17

3 Improving Pubfic Sector Management ..................... 19

A. Introduction ..................................... 19B. Reorganizing the Civil Service ......................... 19C. Public Investment Program and Planning & Budgeting .... ...... 21D. Public Enterprise Management ......................... 22

4 Sector Growt Stegies ................... 27

A. Introduction ..................................... 27B. Agriculture ........... .......................... 27C. Fisheries ....................................... 28D. Tourism ............ ........................... 32

Tbis report was prepared by a World Bank mission led by Dipak Das Gupta (Chief of Mission), whichvisited the Marshall Islands in September 1992. The principal author was Cyrus Talati, and the principalcontributors were Dipak Das Gupta, Douglas Adkins (consultant), David Dunlop (consultant),John Floyd (consultant), Peter Johnston (consultant) and Andrew Nyamete (consultant). A draft of thereport was discussed with government officials in January 1993.

i Votume 4: MarhaU Islands

This document has a restricted distribution and may be used by recipients only in the performanceof their oflkial duties. Its c( wtents may not otherwise be disclosed without World Bank authorization.

5 S4fquegwdg du Env,nnen for Sutanabl Grow th ........ 35

A. I n trd u ction ..................................... 35B. Water Supply,Sanitationand WateDisposa .... 35C. Near-Shore Enviroment ................. 37D.OtierEnv3ronena Issues .. 38E. Institutiond Chbalfes .............................. 39

6 Hwnmn Resoume Delopment ......................... 43

A. Itoduction .. 43B. Issu in theEduatonSecor .43C. Issuesin theHealth Sector ........................... 47

7 Mediwn-Term Prospet and ExRnwd fancng ..... 3........ 3

A. Introduction ..................................... 53B. Medium-Term Prospects ............................. 53C. Externam FinancingRNuen ........................ 54

MStati sicale x ................................... 57

TABLEs IN TEXT

1.1 Growth and Composition of GDP, 1980/81-91/92 21.2 Labor Force and Employment, 1982-92. 41.3 Income Disttriution in Majuro, 1991. 51.4 Summary of Central Government Budget, 1985/86-1991/92 61.5 Balance of Payments, 1986/87-1991/92. 71.6 Exteal Public Debt Indicators, 1986/87-1991/92 81.7 Saving-Investment Balances, 1986/87-1991/92. 9

2.1 Average Wages in Selected Developing Countries, 1990 132.2 Indicators of Tax Effort in the Pacific Region, 1991 14

3.1 Indicators of Public Enterprise Performance, 1991/92 24

6.1 Occupational Distribution by Nationality, 1988 .446.2 Enrollment in Regular School Systems, 1991 .456.3 Education Exenditures, 1990/91-1992/93 .466.4 Health Status Indicators, 1986-' 2 .48

7.1 Selected Economic Indicators, 1988/89-2000/01 .557.2 External Capital Requirements and Sources, 1988/89-2000/01 ... 55

FIGURES IN T1xr

1.1 Sectoral Composition of GDP, 1988. 31.2 Employment by Major Economic Sectors, 1988. 3

Volw: Markaff liuk

Marshall Islands

ExCVT7E SUMMARY

i. The Republic of the Marll Islands The repacmet of declining Compact assistcecomprises 29 coral atlfls and 5 islands conaning by alenative sources of grant or conceiojaover 1,200 islets dised across nearly two assistance will be difficult, as the relatvely highmillion square kilometers of the cental Pacific. per capita income prevail in th Marshalls wouldBetween 1945 and 1986 the Marshl Islands was make the country ineligible for most suchpart of the Trust Telrry of the United Nations, assistance. However, this high level of incomeadminired by the United States. In 1986, the would decline with the cessation of the grants.Marshalls became self-governing. At this time, the Moreover, donor fiancing will not finance theUnited States entered into an agreement with the recurrent budget as Compact assistance presentyGovrnment of the Republic of Marshall Islands does. The task facing the Govemment is to prepareknown as the Compact of Free Association, which for the decline and possible withdawal of Compactprovided for significant direct budgetary suppot to assistance while finding altemnative sources ofthe Government, pripally through a block grant growth in incomes and employment. Prospects forand several associated programs. This agreemen *-aintaining comfortable levels of income willis valid for 15 years from 1986/87, with the depend critically on the Goverme's ability toassitance declining by about ten percent every five underke a major economic resructurg programyears. The US has an option to negodate a new to enhance the role and prospects of the privateagreement when the present one expires in fiscal sector while reducing the role and improving theyear 2000/01. It is likely that the United States efficiency of the public sector. Sectoral initiativeswil exercise its option to renegoae and renew the in agricuture, marine resource development, andCompact f r a furer period, but the level of tourim wil require the transformation of theresources provided under a new agreement is not human resource base of the county, particular.y inlikely to increase. The economy is dominaed by the health and education sectors. Protction of thethe public sector, which is the largest employer, en for suainable development will alsoand is highly dependent on Compact flows. The be essential.private sector is very small relatve to the publicsecor, in tenns of both its economic impact and its Recent Economi Devdlpmeniinvestment effort.

iii. Economic growh through the mid-1980sii. The Republic of the Marshall Islands has was strong with real GDP increasing an average ofwnade slow progress since 1986 and faces major 8.7 percent per year between 1980/81-86/87. Thelong-term development challenges. The most main source of this growth was the expandingimportant of these revolves around the issue of public sector, which also led to rapid growth in thedecliing resources under the terms of the fledglig private sector. Since indep ence inCOmpact. Given the important role these resources 1986 GDP growt has stagnated, averaging onlyplay in providing budgetary sport to the 0.3 percent per year between 1986/87-91/92 dueGovernment and for the economy as a whole, there mainly to the poor performance of publicis clearly some urgency in reducing the long-term enterprises. Public sector employment, which grewinome and exenditu imbalac in the economy. rapidly at the start of this period, has since

ui VoeMm.* :Manhd Ids

remained stable. reflecting a tight budgety framework for the domestic and foreign privatesiuation. Contributng factors to tdus poor sector to increase exports and expand investmentperformance bvve been disruptive and u al and employment opporamities. As part of thisweather-related natural diasters, lite investment in effort, the Goverment will need to implementthe producdve sectors, and substai rural-man policy inceives to hut investment in keymigration which has diverted scarce resources to sectoral areas such as agriculture, production,provision of urban services. marine resource development, and tourism while

ensuring that the resultant growth isiv. Inflation in the RMI has been modest, environmentally sustainable. Even if theaveraging 2.5 percent per annum between 1980/81- Government is relatively successful in its efforts to1990/91. Important factors in this are the use of diversify the economy and broaden private sectorthe US dollar as legal tender and the high participation, the gains from these areas will not beproportion of imports in GDP. Inflation during sufficient to entirely replace the decline of Compact'991/92 is expected to be higher, at about assistance. The Government will therefore have to7 perc-nt, due to the effects of a recent cyclone. establish relationships with other donors, and aThe budget deficit, which had averaged about strong record of economic management and policy60 percent of GDP (net of grants) in recent years, making should considerably enhance its prospectsdeteriorated curing 1989/90-1990/91 and is for receiving donor assistance.estimated to have worsened considerably-to over85 percent of GDP-for 1991/92. The main vi. As part of its efforts to increase domesticreasons behind this deterioration in public finances resource mobilization and establish a reformedare: (a) poor performance of several public incentive system for trade, the Government shouldenterprises which have required large outlays from consider a modest ncrease in the average levl ofthe Central Government to sustain them; alU import wrnfft. This should also assist in(b) government expenditure outstripping revenue achieving a desirable outcome, that of reducinggeneration in real terms; and (c) a substantial imports-given the severe structural tradeincrease in public investment in infrastrucure over imbalance, (characterized by an import level fifteenthe last few years, much of which was funded by tmes as high as exports)-and woulo alsoborrowing against future Compact flows, in the contribute to achieving other objectives (seeprocess exhausting all such opportunity. The latter para. ix below). At the same time that it improveshas led to a significant worsening of revenue mobilization. the Government will need tcreditworhnes and debt indicators. More ensure that expendituas are effective.importantly, it wil severely constram theGovernment in the future as the portion of Compact Pivate Sector DeveopmtaSLSIstane designated for capital expenditure will beunavailable to the budget. The external situation vii. The business environment in the RMI ishas also wvorsened, as transfers and factor service generally favorable and has been supported by apayments have declined in keeping with the terms generally stable macroeconomic environment. Inof the Compact. Thus the current account deficit, prticular, the rate of inflation has been quite low,which averaged about 45 percent of GDP up to and there are no Government imvosed pnce1989/90, is estimated to have increased to controls. Nevertheless, the private sector faces77 percent of GDP in 1991/92. significant constraint to its activities in the

Marshalls-poor resource base, the small size andDevelopment Calleges wide dispersion of the domestic market, large

distance from major regional and global markets,v. The main challenge facing the Government low skill levels, high labor costs, and the regulatoryis maintaining growth and development in the face environment. Government policy should aim toof declining Compact funds. Given the narrow offer incentives in some areas through wage, trade,productive base of the economy, it will not be and tax poLicy while reducing regulatory barriers topossible to offset this decline from domestic private sector development through improvementsrevenues only. Instead, the Government will have in investment regulation, land tenure, the legalto undertake a multi-faceted approach to its system, and labor policy.development challenges involving four majorelements-a reduction in the role of the public viii. Wage Poy. Wages are relatively highsector in the economy, a comm e reduction and uncompetitive, and productivity and skdlls lowin government expenditmr, a program of domestic in the Marshalls. In order for the Marshalls toresource mobilization to raise domestic revenue and become more internationally competitive in laborsavings, and establishment of an appropriate policy costs, real wages for unskilled and semi-skilled

VoeIw4: MaolE Ido iv

labor need to be reduce Achievg hs wi Establishing a "one-stop investmew shop-anrequire tb*, Government not to raise the minimum investment promotion bureau which not onlywage and to restrain public sector wages, which, furnishes potential investor with all necessarygiven the rltvely large size of the public sector, licensing requrements but can also guide themdrive private sector wages. At the m time the through land acquisition and leases would be ansWpply of skilled labor needs to be increawd appropriate solution. The Government isthbugh improvements in human rnource encouraged to invite a careful appraisal of itsdevelopment policies. A reinforcing policy would foreign investnt pnomotion efforts for example,be to grant sweeping exemptios from the minimum by Foreign Investme Advisory Services, a Worldwage for the formal sector, both to encourage Bank affiliate, or the Overseas Private Investmenthigher levels of employment and to achieve an Corporation of the US, or other similar group.appropriate distribution of resources in production.

xiii. Land Tenwre. In spite of considerableix. In addton, the Government should progress in improving the tenmr- system, includingconsider designing and implementn a labor the isuance of 50-year leases, acquisition of landtrining sdceme, to raise the level of productivity for investment remains a formidable barrier. Theso as to complement initiatives in human resource mortgage protection law needs to be strengthened,development. Such a labor training scheme should iitily through a program of land registraion andbe designed carefully-targeted at traded goods issuance of tides. Potental investors could then besectors, in new investments, for new entants to the encouraged to acquire lo parters who wouldwork force, and limited in duration. The private hold tidtle to the land, thereby bypassing thesector incurs large costs in finding and training difficulties caused by the traditional system oflabor to needed skill levels, and this scheme would multiple rights.lower these costs whie encouraging such tinng.

xiv. LealSystem. Tle difficultes ecueredX. Thrde and Tax Poly. The trade regime by employers in the formal sector who attempt toin the Marshal Islands is dcaractizd by use the legal system (e.g. to enforce credit andreiadvely low tariffs, but there are several import contacts, or to bring sanctions against employees)duty exemptions-for government, public are well documented and serve to raise the cost ofenterprises, and spedad sectors-which may dojeg business and discourage investment. Thediscourage investment because of their distortlionary Go 'etnmerir needs to encourage the furthereffects on the relative prices facing some producers devsltpment and refinement of the legal system to(namely the private sector) and which should be improve the envirom t and provide a frameworkremoved. This would also reduce the for modern business practices and transactions toadministrative compLcaton of the present system. take place.

xi. A number of other meaures would assist xv. Labor Poly. Given the acute shortage ofin fiscal revenue mobilizaton, an important goal labor of all slfll levels in the Marshalls, a relativelygiven the deterioration in public sector finances. In high proportion of expatriates in the work force isaddition to the ones discussed above these would to be expected and necessary. Present policyinclude-the removal of exemptions on personal directed at restrictng skilled and semi-skilledincome taxes, housing, and raising the personal laborers from other developing countries isincome tax. counterproductive and raises business costs, and the

Government needs to facilitate the acquisition ofReducing Ba=rM to Priate Sector Developent work permits and other docmentation by these

workers and their employers. This will have thexii. Investment Regae Foreign investors added benefit of puttng downward pressure on realapplying for business licenses presently require wages and should foster internationalCabinet approval, which is granted on a case-by- competitiveness.case basis thus generating uncertainty anddiscouraging investment. The Governmient is urged lmroving the Framework of Sapporilag Polciesto move away from a case-by-case approach, andinstead to focus on building an efficient foreign xvi. Flnncial Market Dewlopment The(and local) private investmet promotion agency. existence and proper functioning of the fmancialThe Registrar of Companies or equivalent body sector is crucial for successful private sectorshould grant business licenses and the rules expansion. The futre demand for funding by thegoverning applications need to be trnparent and private sector can be expected to exceed currentreadily available to all potential investors. levels as the economy responds to changes in the

v Volume4: MwhaU Islan

incentive an regulatory framework and the share with the likely availability of resources, and aof private sector activities expands. The following program to upgrade skdlls may need to be adopted.areas need acion in order for the financiu sector tocontinue to support the private sector: xx. Planng and Budgetng. mprwving and

integratng planning and budgeting will require a* Loan collateraliation and ef=orceent of stngdting of the institutional strucures and

speedy credit enforcement mechanisms are systems, especially in fia and economicrequired to uphold and facilitate funcial a in the central policy making agenciestransactions; of fmnance, planning, and cabinet. Ratonalizing

and clarifying the institudonal iechaim and* Prudential reguation, especialy in the area of systems toI managing public expendiures should

baking Wpervision is required to ensure ensure that the investments made by thefuiancial stability. This should be a priority Government maximize social and economic retnsfunction of the recenty announced office of a the country. This will also assist withfull-time Banking Commissioner; and mrtiona g the public investment program, which

is relatively large in the Marshalls.* The Marshall Islands Development Bank

should face competition and market forces to xxi. Publik Enterprse Reform. Publicimprove its efficiency and ensure its viabilty enterprises in the Marshall Islands have significantand should be made subject to the same rules economic and fiscal impact due to the nature ofand regulations on accounting and their activities and the absence of a large privatemanagement applicable to other commercial sector. The Goverment should establish a rate-banks. Its management should be setting authority for the utilities with the objectiveconsiderably strengthened and not subject to of full cost recovery within 4-5 years, and giveextensive Government intervention. serious consideration to reducing the losses of Air

Marshall Islands by (a) tminting unprofitablexvii. Physica Iafiwsud*w. The prsent route, (b) merging with or establishing a reionalinvestnfts in physical infrastructure and carrier, (c) conducting a professional evaluu- . ofservices-mainly power, telecommunications and the airline and its services with a view totanisport-appear to be adequate in the urban restructring it as necessary, or (d) closing thecenters and should provide sufficient foundation for carrier. The Government should not participatefuture expansion as needs dictate. There is a directly in commercial ventres as the financing ofcrdtical need, however, for sufficient resources to these in the past has contributed to the present highbe allocated for mainnance of the infrscture debt levels. Reducing and eliminating thecapital stock, especially in water supply and dependence of public enterprises on the budget wilsanitation. significly help to redress the present fiscal

imbalances.ImproWng Publc Sector Manageent

3ectoral Growth Stteesxviii. With the anticipated decline in Compactassistance, it is imperative that the Government xxi1. The Government has identified agricultue,undertake a comprehensive program of fishing, and tourism as key sectors crucial to long-restrctring and rationalizing of the public sector term development. Given the very narrow naturalin order to increase efficiency and reduce costs. resource base of the Marshall Islands, theThis will require improvements in four broad areas opportunities for rapid development and growth ofof the public sector-the public service, planning the economy are constrained. Nevertheless, someand budgeting processes, public enterprise reform, specific areas of emphasis in these sectors areand revenue mobilization. (The latter is covered by suggested.paras. x-xi above).

xxmi. Agrcr*re. Development and exportxix. Public Sernice Refi The civil service growth in the Marshalls will condnue to beis weak in the Marshalls. Reorganizing the public significantly based on copra production. As a firstservice to better meet the needs of the country in step, the Government needs to initiate aterms of both upgrading human resource slklls and comprehensive rehabilitaion effort to restorerationalizing the exisdng structure is essential. The productivity to coconut plantations in conjunctionGovernment is to be commended for initiating with support services aimed at providing newseveral recent programs in this direction. The size hybrid seedlings and technical assistance in modernof the public service may need to be reduced in line cultivation practices. Other activities, such as

Vohlm 4: Mmhal Isal vi

dowstrem pressing of simple copra-based of the growth process the Govarnmt shouldproducts (e.g. copra meol for anmal feed, rquire the Majuro Water and Sewer Co. tocosmeis , and coconut milk) should be promoted gradually raise tariffs to reflect economic costs.as aras for pdvate sector partdcipation. Tne company wil need sufficiet fumig to allow

it to complete the inon of meters and toxxiv. Ksherles. A new stategy is required in connect ai housholds to the st-water seweragethis se to genrate sustained growth and system, thereby safeguarding the fragile Delap andemployment. The Government should conduct a Laura aquifers. Resources will also be required toprogram to: (a) promote and encourage foreign relocate the Ebeye sewage discharge from thelongline vessels to base their operation in Majuro; lagoon-side to the ocean-side. Finally, the(b) strengthen both the manpower and technical coverage and frequency of household wastecapacity of the Marshall Islands Marine kesources collection by the Majuro Atoll Local GovernmentAuthority to manage, monitor, and promote needs to be increased; the Government shouldfiaheries; (c) improve surveillance and enforcement consider invitng the private sector to provide Ysof fishing rights; (d) uwdertake a multilateral service. Landfill management needs to beapproach to futre negotiations on fishing rights strmtened and resources provided forlicensing; and (e) seek to emulate countries (such as management of hazardous wastes-such as theIndonesia) which have sucessfully implemented establishment and connection to the seweragepolicies to encourage foreign fishing vessels to system of leachate pits.strenthen their ties to the host country-and in theprocess transfer technical skills to the country. xxviii. Near-Shore Environment. The

Government, through the Environmental Protectionxxv. Toursm. Growth prospects for this sector Authority, needs to monitor and oversee futureare not paricularly promising, especialy given the causeway construction to ensure that natural wraterremoteness of the Marshalls and the near total lack flows are not disturbed in order to protect fromof infrastuctu in the outer atolls. It should, coastal erosion. This will also require measures tohowever, be noted that the smalne of the protect the near-shore enwironment-such asMarshalls means that the reuiements are not very prohibiting both the destruction of mangrove reefsgeat. Even a few hundred additional tourists and the removal of stones, rocks, and sand from theannually could make a significant contribution. shore.Growth in the touism industry will dependcrucially on the ability of the Government to xxix. Insitional Issues. There is a need topromote the Marshalls as a specialized create the legal underpinnings for the establishmentdestination-for sport fishermen, naturalists, and and management of coastal and marine areas forthe famflies of war veterans. conservation with the possible assistance of the

South Pacific Regional Environmental Program,Safeguarding the Evronment for Sustinable particularly on Bikar and Bokaak.Devlopmn

A Stty for Human Resource Developmentxxvi. The success of the policies discussed thusfar to create rapid economic growth based on a xxx. Human resource development will play agrowing role for the private sector will depend crucial role in the overall development strategy ofcritically on ensurmg that the growth process is the Marshall Islands. At present the single biggestenviromnentally staminable, given the fragility of human resource problem is the alarzinglY highthe atoll ecosystem. Population pressures in the population growth rate, estimated at 4.0percenturban centers, resulting *rom high birth rates and per year. If the Government is to undertake amigration from the outer atolls, place ever greater successful transformation of the human resources ofstrains on this fragile ecosystem. It is therefore the country, the population problem will have to berecommended that the Government act in three key addressed as a matter of priority as it has adverseareas-providing water supply, sanitation, and effects in many other areas and diverts scarcewaste disposal services; protecting the near-shore public resources. National commitment to familyenviroment; and strengthening environmental planing and population control, through leadershipinstitutions. at the very highest levels of government would go

a long way toward redressing years of neglect. Thexxvii. Wat Sply, Saniton, and Waste Government will also need to undertake otherDiposaL Urban growth is producing sanitation, measures in both the education and hel"th sectors tosewage, and waste disposal problems. In order to improve the health status and improve the skillsafeguard the environment and assure sustainability levels of the populadon.

ii Volwme 4: arshal Islands

xxx. dcaton Secter. The main isue in the work fowe rugh short-term education sector revolves mound the extreely progms to teach relative work slls andpoor quaty at all levels-pimay, seconday and faciitate promotion based on successfulerdary. A second issue is that of extme completion of such couses mn nationally orfragmentatio of financiDg sources, mainly bauy.Of the access of line departqmts to US Govenmenfedera grant programs. There is also a lack of a * nanng policy needs to be substantiallySaegiC overview aVA sense of priorities in the rvised ad rationaized. The presen system,sector, in spite of the existence of a Ten Year charteized by the obtaining of grns fromMaster Plan. The Governmes Is therefore urged diverse biatera donors and agenciesto revisit and revise the Plan, underst a review (pardcuarly those of the US) in an ad hocof the education sector and financing in an fashion, would benefit strongly fromeconomy-wide context. This would then form the consolidation, which would also improvefamework for a nadonal educAiof strategy. Such financial management and planning. The issuean analysis should precede any large investments in of cost recoMe should also be re-examined,the sector. The Government may need to undertake as there may be subsana scope forspeific acdtos in the following areas: incresing fees such as for text book usage.

* Prmary education needs considerable xxxii. Heath Sector. The three major issues instrengthening and should receive the most the sector are: (a) the recent deterioration in severalattntion, especially core subjects such as of the health swus indicators (such as infantmath, science, reading, and wrfing skUls. mortality and total fertlity rates); (b) the prevalence

and spread of ilness associated with lifestyle* Secondary education should continue the factors (such as dietary-rled upper respiratory

emphasis on core subjects established in the and cardio-vascular illnesses, and sexuallyprimary system, to preae people adequately tramr ,-tted diseases) and excessive consumption offor extemal training, higher educaion, and tobac, o Lnd foods high in sugar, salt, and fats, andpost-junior secondary vocatil training in (c) the appearance of disease and illns due tothe Marshall Islands and im neighboring nsfe drinking water, lack of sanitation, andcouPtries. crowded living conditions (such as amoebiasis,

gaoenteritis, scabies, and conjudivitis). These* Other than offering limited primary tacher problems need to be addressed immediately becuse

tainiW and a few vocational courses, it is they are theateing to subvert the emphasis of theunlikely that the Marshalls can afford to sector from preventative to curative-which will,finance and sustain post-secondary education given the higher nit costs of providing the latter,programs. The Government will therefore result in a real deterioration in health services andneed to look outward, particlarly at regional indicatrs. Finally, the health sector also suffersmstiutions such as vocational/technical from a prOblem of fragmenaton of sousres ofinstiutes in Pacific island countries and the financing similar to that of the education sector.University of the South Pacific, for assistance The specific areas which the Goverment needs toin developing a better qualified work force at address and undertake initiatives in are:that level. Donors would also be more willingto assist with such costS on a long-term basis. * Publc education may be the most effective

tool available to the Government to cover* Manpower development needs to be these vital areas-adoption of contraception

established and ;mplemented as part of a and family planming should aim at easing thelonger term strategy. This will require population crisis, teenage pregnancies, highidentification of positions and eventual total ferdlity rates, and sexually tasmittedreplacement with adequately trained diseases; nutrition programs for childrenMarshallese beginning with the lowest skills. should go a long way toward reversing theA bonding program may be required for trends of increasing infant mortality andforeign trainees to ensure they return upon malnutrition among children; similar programscompletion of their programs. At the same aimed at adults must try to modify diet andtime salaries may have to be adjusted for some other lifestyle behavior.of these higher skilled jobs. This should bedesigned to mitigate the incentives favoring * Fiscal measures may be effective in achievingemigration to the US. An important and some behavioral modification among thoseongoing need is upgrading of the existing consuming tobacco products and alcohol.

Volum 4: lnIaN Iuxds Vii

Tariffs on these items could be raised quite in the public sector and public sector managanentsigniicantly in order to achieve a reduction in witl be key to enhancing the effectiveness of privateimports as well as consumption while having and public invesment.the advantage of risins additional revenue.In the longer-term the Goverment may need mm. The medium-term projectons illusaue howto consider aising tarffs on a variety of key macroeconomic variables in the economy mightimported foodstuff as well. evolve, assuming success in the policy environment

and notwithstanding any extral shocks such asWhile it is commendable that the country has unanticipated increases in the price of oil, weatier-implemented a social security heat insurance re natural disasters or withdrawal of Compactplan to increase consumer paRicipation in assistance. If the recommendations in this surveyfinancing, user charges should be levied for are pursued, an economic recovery is likely and isdrugs and other medical supplies at levels projected to take place over the medium-term withwhich are in keeping with costs in order to GDP increasing at about 4 percent annuallyimprove efficiency of consumption, bearing in between l995196-2000/01. Although investmentmind the ability of individuals to pay. These growth is expected to remain modest, the share ofcan then be extended to cover certain medical the private sector in investment will need toservices-generally those which have an increase rapidly, accommodated by a decliae inimmediate and visible effect on the patient. public investment. Export growth is expected to

reach about 5 percent per annum based mainly on* A rewe of health sector pnorities is required fishing operations and coconut oil exports, implying

to develop a common ariculated health care current account deficits of about 50 percent of GNPprogram to replace the present one with its (before official transfers).two tiers-covering Section 177 beneficiariesand aU oters-with a unified system. For xxxv. Extnal Fiancang. Tlhe Government, ifexample, the present systemn of multiple successful in its efforts, wil be faced withprocurement of drugs by various programs is financing cent account deficits averaging justiefficient and costly and would benefit from over 50 percent of GNP (before official transfers)integration. In addition, financing and and servicing the principal on its loans over theplanning and budgeting need careful period 1992/93-2000/01. This will require exenalcoordinaion to reduce the present financing averaging about US$68 million per yearfrgmentation of funding and retain the health during 1992/93-1994/95 (rising to aboutsystem priorities. To encourage US$89 million per year during 1995/96-2000/01).implementation it may be useful for donors to The Compact and other transfers from the US wilwork more closely with the implementing be expected to finace about US$50-60 million aagencies concerned. year, (rising with inflation towards the later

period). The balance of financing will have toMedim-Tenr Prospects originate from elsewhere. The private sector can

be expected to account for an increasing but smallxxxiii. In the medium-term, prospects are portion of this as the Government's efforts toreasonable for a resumption of economic growth in enhance private sector participation pay off. Thethe Marsball Islands. The Government will, bulk of the additional financing, however, mayhowever, have to rely much more on the success of need to come from official sources. Theits policy initiatives in the areas of hums tesource Government should concentrate its efforts ondevelopment and private sector development than securing access to official funding, preferably in theon the availabilities of extemal assistance and form of grants, given the relatively small exportfavorable pnce developments in the global base and thus its limited capacity to repay loans.environment. In addition, efficiency improvements

ix Volume 4: Marshall Istuds

1: Economic Growth & Macroeconomic Framework

A. BAcKGRouND is responsible for RMI's defence, and providessubstantial annual economic asesia to the RMI

1.1 The R:epublic of the Marshall Isads principally though a series of grants to theMA) is in the central Pacific just north of the Govemment. These grans are designated for

Eguator and comprises 29 coral atolls and capital investment, communications, energy,S islands. The atolls, run roughly north-south in fnding for the rerent budget, aid funding for atwo parallel chains about 250 km apart and local development authority. The Compact gr-us1,300 km long, known as the Ratak (Sunrise) and provide a total of about US$53 milion for eaca ofRalik (Sunset) chains. t "though scattered across the first five years, decning to aboutearly two million square km of ocean, the total US$49 million for the next five years, and then toland area is only '80 square km, making the RMI about US$46 million for the last five years. Thethe smaUest of the Bank's Pacific island member Compact also established a trust fund forcounties. The largest atoll, Kwajalein, occupies compensaton of victims of the nuclear testng16.4 square km, and the smallest, Jabwot, has an conducted in the Marsball Islands. In addition,area of 0.6 square kh. The olhs are low and special programs of assistance for health care,narrow, encirdling cenal lagoons. Their poorly ocean surveillance, and education, were establisheddeveloped, sandy, salty coraline soils are and the RMI is provided access to US federaunsuitable for most agricultural activity. The low programs for aviation, communications postal, andelevation makes the RMI partculay susceptible to weather services. Over the 15 years during whichdamage from storms, high waves, and typhoons, the Compact is in effect, the RMI will receive analthough the latter are faily uncommon to the area. esmated tomal of US$t billion, adjusted for

inflation. The US retains the right to extend its1.2 The esdmated poplation of 50,000 in leasing agreement on Kwajalein for an additional1992 is growing at about 4 perment per anmm, one 15 years, when the Compact expires in 2001. Theof the fastest rates in the world. Over two-irds of other terms may be renegotiated.the population lives in the urban centers of Majuroand Ebeye, where densities average nearly 3,500 1.4 The economy is aid-driven and dominatedpeons per square kilometer. Prelnimy by the public sector, as the bulk of all aid isestmats of ONP are US$93 million suggestngthat funnelled through it, funding both recurent andGNP per capita is relatively high-approximately i capital expenditus. As a result, the public sectorthe middle of the range for lower middle-income is by far the largest employer. Given the high levelcounies (US$1,236-2,55), but reliable esdmats of aid flows, consmption is very high-in excesshave not yet been comnied.1 of domestic income. This has been sustained by a

high import level relative to GDP. By contrast,1.3 The RMI was part of the Trust Tefritory exports are very small, reflecting the poor naturalof the Pacific admistred by the Unied States resource and labor endowments of the RMI and the(US) from 1945 to 1986. In 1986, under the terms lack of investment opporunities, giving rise to aof an agreement known as the Compact of Free significant strucural imbalance in trade. ThisAssociton, the United States formally relinquished economic stucture and associated features,its trueship and the RMI assumed self-governing c t by high consumption levels and astatus. Under terms of the Compact the US, which severe structr trade imbalance, are an expectedleases most of the islets in Kwajalein Atoll, where consequence of the high aid levels and wiU persistit operaes the Kwqjalein Missile Range (USAKA), as long as the aid flows are maiained.

1 Vdka4 MmrshaE Islds

Table 1.1: GRowTH AND COmpOsoN OF GDP, 1980/81-91/92(PERCENr)

1980/81- g,e1987/88 1988/89 1989/90 1990/91 1991/92

Compensation of employees 5 6296 60.7 69 7 79Public Sector 25.6 27.4 32.7 30.0 32.0Private Sector 31.7 35.2 28.0 39.7 41.9

Overatinj Surolus j. J2 22.1 21Public Sector 0.0 -0.6 -4.9 -10.8 -10.5Private Sector 31.1 29.2 33.1 32.9 32.3

Depreciation 4.2 4.1 44 4.1 4.1

Net indirect taxes & subsidies 7 4 6.7 4t 0.2

GDP at market prices 100.0 100.0 100.0 100.0 IO.

Total GDP (US$ million) 49.2 70.1 73.2 75.7 76.1

Memo Items (% D.a.)Real GDP growth rate 8.4 -1.9 3.2 0.1 -6.0Growth of real per capita GDP 4.4 -5.9 40.8 -3.9 -10.0

Source: Statistcal Abstract 1989/90, data provided by the Office of Planning & Statistics, Majuro,hMF and Bank Staff estimates.

D. RECENT ECONOMIC DEVELOPMENTS Handicrafts are also produced on a very limitedbasis for export. Commercial activity is

Economic Growth and GDP concentrated in retail businesses, contracting for theGovernment, construction, and other services.

1.5 About 90 percent of economic activityemanates from the formal sector, with Govermnent 1.6 GDP estimates on the basis of theservices and the public sector accounting for an productive sectors are available only for 1988 (seeestimated 30 percent of GDP in recent years. Total Figure 1.1). Regular estimates of GDP are basedGovernment expenditure on domestic goods and on the income approach and are presented inservices accoums for nearly one-half of GDP. The Table 1.1. Real GDP is estimated to haveprivate sector is dominated by the services sector, increased by an average of 4.8 percent per annummainly wholesale and retail trade, transportation, over the period 1980/81-91/92. These fgures,construction, and other service<. Fishing, however, mask two underlying trends-unevenagriculture, and small-scale enterprises account for GDP growth from year to year, and a substantalmost of the rest of GDP. Given the scarcity of decline in the GDP growth rate since theland and the poor quality of the soils, agricultural implementadon of the Compact due largely to theopportunities are limited and are centered around poor performance of public enterprises. Thus,copra production for export, which is largely GDP growth, which averaged 8.7 percent perconfined to the outer atolls. Other crops include annurm between 1980/81-86/87, had declined to anbreadfruit, taro, and pandanus, which are grown estmated 0.3 percent per annum over the periodmostly for own-consumption. Fishing is 1986/87-91/92. The decline in growth of per capitapredominandy a subsistence activity, primarily incomes, which have fallen by about 14 percentundertaken on a part-time basis to meet the needs since 1988/89, has been much sharper.of the immediate family in the outer atolls. Somecomme.rcial fishing is undertaken in Majuro andEbeye for supplying restaurants and for export.

Volume 4: Marshall Islnds 2

Fiji.LI: SECTORAL COMPOSMiTON Figure 12: LOYMENT BY MAJOROP GDP, 188 ECONOMIC SECTORS. 1988

.nawlacturingOther industry M anufacturing 9.32

ios Other IndustryIt's% agrIculture a fishiag

.. " ~~21 42-,'.riculture S fishingc

services s.servie

652 M

Source: Office of *leening a Statistics. Maluro. Source: Census of Nousing & Population i988. Kajuro.

are in te public sectr, with te balance in the1.7 After a weak performance in 1990/91, the private sector. A comparisn of Figures 1.1 andprospects for an improvement in 1991/92 are not 1.2 shows that the sectoral distribuion ofencouraging. Real GDP in 1991/92 is expected to emloymt and the sctoral composition of GDPdeine by about 6 pcent. he main factors in 1988 are similar. Nearly 60 percent of thoseunderlying this weak performance are the employed were in the services sector, with thedeteriorating peformamce of publcenterprises, the remainder split about evenly between agricultureeffects of a typhoon, and a large deline in (including fishing) and industry.agneuture.

1.9 Uihe yment Unemployment in theWages and Eapkuat RMI appears to have be on a declining trend

between 1982 and 1988 but has since stgnated.1.8 Labor Fome. The rapid population Preliminary estimates suggest the unemploymentgrowth experienced over the past decade has rate in 1991 was about 16 percent. Unemploymentcontribud to a fast growing labor force. Labor rates in the two urban centers of Majuro and Ebeyeforce data are collected thrugh the Census and are, however, much higher as these areas consttutecomplemented by smaller surveys during some of about 85 percent of the total unemployedthe inter-Censal years. Although these are not very populaton. The unemployment rate in Majuro isreliable due to inc ies, they are indicative believed to be about 22 percent. A large proportionof broad trends. On the basis of these labor force of the unemployed are young and relatively wellgrowth in the early 1980s was about 8 percent per educated. According to the 1988 Census, overanmm, declning to about 4 percent after 1988. 60 percent of the unemployed are in theAbout one-quarter of the popation is economically 15-24 years age group, and almost 80 percent ofactive. Between 1982-88, total employment the unemployed had completed grade 8.increased at about 8 percent per year (seeTable 1.2), more than double the rate of population 1.10 Wages. In 1986 minimum wagegrowth and faster than labor force growth. Most of legisaon was enacted establishing a minmumthis increase came from the private sector as wage of US$1.50 per hour. The Government, asemployment in the public sector was constrained the single largest employer, upholds this standard.due to a hiring freeze brought on by a tight In the private sector, especially in Majuro, somebudgetary sitation. In the period since 1988, employers find that a reservation wage exists asemployment growth has averaged 6 petcent per even unskilled laborers will not work for less thanyear while real GDP gowth averaged -0.1 percent US$2.00 ,er hour. Many small employers,per year, suggesting a dedine in aveae labor however, are believed to pay less than theprodutiv. About a quarter of those employed minimum wage. According to the Majuro

3 Voiwne *4: MrIN Ilands

Table 1.2: LABOR FORCE AD EMPLoym r, 1982-M1992~ECENT)

Est.1982 1988 1989 1990 1991 1992

Public S 46.2 26.8 26.4 25.6 25.3 25.1

}52jAa£e, Sector 53.8 73.2 73.6 74.4 74.7 74.9Majuro .. .. 26.6 28.5 29.1 29.9OtherLa .. .. 11.3 11.4 11.5 11.5Self-employed .. 27.3 26.9 25.9 25.4 24.9Family workers .. 8.9 8.8 8.6 8.6 8.6

,s 10" 100 0 100 0 100.0 100.0 100.0

MemoLabor force (thousands) 8.0 11.5 11.8 12.2 12.7 13.2

la Includes Ebeye & Kwyja1ein Missile Range.

Source: Bank staff estimates based on Ces of Population & Housing 1988, Office of Planning andSatdstics, Majuro.

Consumer Income and Expenditure Survey (see movements in US prices.2 This is evident from theTable 1.3), an estimated 20 percent of employees in decline in the rate of inflation from an average ofthe private sector were receiving less than the 3.7 percent per anumbetween 1980/81-1986/87tomininmm wage; this included self-employed 1.9 percent per anmum during 1986/87-90191,persons. which mirrored the reduction in indlaton

exerienced by the US over the same period.1.11 On the basis of movements in the Preliminary indcations suggest that CPI inflationConsumer Price Index (CPI) between 1986 and for 1991/92 will be higher than the norm, about1992, the minimum wage has declined by over 7.1 percent This is due to (a) a change in the15 percent in real terms. Salaries in the public basis of the business tax from a net profits to asector are generaly higher than those in the private gross receipts basis, which resulted in highersector (see Table 1.3), which usuaUy follows the effective business taxaton and (b) the effects of thepublic sector. Given the atity in public wage two cyclones, Zelda and Axel, which struck theincreases in recent years due to the budget RMI in December 1991 and Jamnay 1992, creatngsiuation, salary movements have been slow. In shortages of both food and construction materials,view of the erosion in the real minimum wage, the thus putting upward pressre on prices.Government is presently reviewing the mimmumwage and considering an increase to US$2.00 per 1.13 The CPI, which is compiled quarterly,hour. However, both the budgetary implications covers only Majuro, and some groups in the basketand the uncompetitiveness of these levels in RMI contain a very small number of items. Its narrow(relative to other counries) would argue against geographic base and the size of the basket rendersraising the minimum wage. it vulnerable to unrepresentative price fluctuations.

Data from the Household Consumption andPres Expenditre Survey (HCES) conducted by the

Office of Planning and Statistics in 1992 indicate1.12 Inflation in the RAI has been modest, this to be the case, and the omission of Ebeye fromaveraging 2.5 percent per annum between 1980/81- the CPI may be understaing the increase in the CPI1990/91. An important contributing factor is the as it is generally regarded as having a higher costuse of the US dollar as legal tener, and the high of living than Majuro. The Office of Planing andproportion of imports in GDP, an average of Statistics intends to use the 1992 HCES to85 percent in recent years. Thus, price movements determine a more representatve basket of goodsin the domestic economy are linked to those in the and revise the CPI in the future.US, and the CPI in the Marshalls has followed

Voue4: MAashal slds 4

Table 1.3: INCOMe DJiummoN IN MARo, branches of the two institons. A lack of viable19911 investent opportunes an US pnxdeal

regulation appear to be consaing the US banksfrom making more loans. BMI has a relatively

@ Of Blo, w high loan-to-deposit ratio, indicating that more tmPublic sector Prive setomr all dqosis are being l out. This is because

BMI is not under the same prdental constaint andLess than $2A4 0.0 12.4 is actively encouraged by the Government to$2,401 - $3,600 0.0 15.3 facilitate investment in the economy by making$3,601 - $4,800 17.7 21.2 loans.$4,801 - $9,600 29.4 31.4$9,601 -$14,4M0 29.4 14.6 1.17 Reognizing the need for inclusion of$14,400 and over 23.s 5.1 monetary analysis in macroeconomic policyTotal 100.0 100.0 making, prudential reguladon of banks, and theTotal________________________ need to expand banking services beyond Majuro

and Kwajalein, the Govemnment has recendyLa Only mcludes wage and salayeaners. decided to appoint a full-time Banking

Commissioner. At prest the Secrety ofSource: MJo Consumer Icome and Fpeendure Finance also holds the post of Baniav

&wMy 1991, Office of Planning and Statistcs, Commissioner. The appoment is awaiingand Bank staff esmates. fiization of draft baking legislation which will

Monaty Dvlopnents and Credit form the core of banking regulation.

1.14 Monetay policy bas viruly no role in Public Financethe RMI because of the adoption of the US dollaras the domestic currency, an open capita account, 1.18 Total revemnes have in recent yearsand very limited domestic borrowing by the averaged about US$23 million per annum,Government Data on the financiad sector are not equivalent to about 30 percent of GDP. Of this,available as there is presenly no designated tax revenues have averaged about US$14 millionauthority in the Government with this per year and non-tax rvenu-consstig mainly ofresponsibility. The entire banking sector consists interest and fishing rights income-have beenof a development bank (Marshall Islands US$8 million. Fiscal policy in the RMI isDevelopment Bank) and thmree commercial banks, underpinned by the availability of foreig grants,two of which are branches of US banks (the Bank principally through but not limited to the Compact,of Hawaii and the Bank of Guam); the other is a which have accommodated a rapid increase indomestkcally chartered bank (the Bank of Mrshall expenditures and sustained a large budget deficit,islands-BMI). The Government conducts most of averaging over 40 percent of GDP betweenits treasury oations through the Bank of Hawaii 1985/86-90/91 (see Table 1.4). During this period,which has two branches, one in Majuro and one in growth in domestic revenues has lagged behind theKwajalein. increase in expenditures due to a stagnation in tax

revenues. Income tax revenues declined after1.15 In the absence of capital controls and as 1988/89. Business tax receipts have also stgated,the banking sector is dominated by US banks, declining substantially between 1985/86-1987/88interest rates follow those in the US fairly closely. partly due to a change from a gross to a net basisIn keeping with movements in the US, interest rates in 1989/90. This was subsequendy reversed at theon all types of loans have decHned duning 1992 start of 1991/92 as the expected increase in revenuecompared to 1991. Typicaly rates for commercial did not materialize. Increasing interest incomeloans are 2-3 percent above US Prme, and rates (mainly from the newly established Trust Funds)for consumer loans are about I-1'/2 percent higher and higher fees from fishing rights licenses boostedthan those in the US, reflecting the higher costs non-tax revenues during 1985/86-1990/91,with theassociated with doing business in the RMI. interest income declining in the latter part of the

period. Expenditures have grown rapidly during1.16 The two US based banks are believed to the period, with capital eenditu rising fromhave relatively low loan-to-deposit ratios, with 3 percent of GDP in 1985/86 to 21.5 percent inexcess funds being invested overseas (in the US). 1990/91. Net lending and transfers to publicAn examination of the loan-to-deposit ratios at these enterprses have increased the most-from abouttwo institutions found them not to be unduly low, 5 percent of GDP in 1985/86 to nearly 16 percentespecially when compared to the norm for all of GDP in 1990/91.

5 Voume 4: ManhailIslads

Table 1.4: SUMMARy OF CENtAL GoVERNMEN BlDGWr, 196/86-1991/92(PCr OF GM)

1985/86- 1988/89 1989/90 1990/91 1991/921987/88

Total Revnu DA. au1 32 3.2 &2Z_Tax rovenue 11.0 19.5 18.8 19.4 21.8Non-tax revenue 5.4 11.3 14.1 11.9 7.9of which fishingrights mcome 1.5 1.9 1.6 2.5 2.1

Totd EKKte52.9 90.1 102.4 99.2 11.SICanmnt experdtue 43.0 66.7 70.1 77.7 85.4

of which wages & salaies 12.9 22.1 22.5 23.3 .Capit expendt. & net lend. 9.9 23.4 32.4 21.5 31.1

of wtich net lending 0.8 -3.3 5.3 5.2 3.3

Overak balance -3.5 -59.3 -69.5 -67.9 -86.8

Net Cange m defenedpaymnens -1.5 1.1 0.9 -1.6

Adiusted overall bance -38.0 -582 -68.6 -69.5 -86.8

miunairw 3850 58.2 68.6 69.5 86.8Grants 43.7 65.4 71.4 57.0 53.4Net LoAg-term borrowing 1.8 19.2 -9.8 46.2 19.6Other -7.5 -26.5 7.1 -33.8 13.8

m'emoItrOverall balae after grants -5.1 7.3 2.7 -12.5 -33.4

Source: Miistry of Fiance, IWF, and Bank staff es_t.

1.19 The fiscal position in 1991/92 is expected Balance of Paymensto deteiorate futher, with expenditures ieasigm spite of lower domestic revenues. The overal 1.21 The balance of payments of the RMIbalance is expected to deteriorate sharply to a reflects the large sbare of consumption in thedeficit of about 87 percent of GDP. Inreasing economy (averaging about 150 percent of GDP ininterest payments and support to public enrprises recent years), the poor resource base, and theare the principal causes of this increase. relatively small private sector. Imports are thus

large elative to GDP (and exports), and averaged1.20 Puc Entprbes. Budgetary support of about 80 pecent of GDP and 2,500 percent ofthe public entrprises takes the form of subsidies, exports in recent years. As Table 1.5 shows, thetransfers, and loans. In 1990191 the Govermment trade balance has been in substantial defiitprivatized (by selling shares domestidcally) the only throughout the post-Compact period. This deficitprofit-making public enterprise, the National has in the past been more than fully offset by aTelecommunications Authority. The remanng surplus on the services account and inflows offour enterprises-Air Marshall Islands, the offiial transfers which have together generated aMarshalls Energy Company, Tobolar Copra current account surplus. For 1991/92, however,Processing Plant, and the Majuro Water and Sewer the current account is expected to go into a largeCompany-continue to be a budgetary burden, deficit even after accouing for official transfers.estimated to cost the Government overUS$17 million or nearly 25 percent of GDP in 1.22 The mainexportcommodities are fishand1991/92. Air Marshall Islands continues to absorb copra. During the latI 1980s, exports declined asa large portion of this, over 50 percent, primarily world copra prices tell. This movement hasdue to the high cost and unprofitability of the partialy reversed in 1990/91 with the recovery ofMajuro-Honolulu route. copra prices and is expected to contnue in

Vohme 4: MarshaN Idands 6

TakbI 1.S: BUALAmw OF PAIMaNIl. 1986W87-1991/92(US$ MWLM)

Estimate1986/87 1987/88 1988/89 1989/90 1990/91 1991/92

Merchandise expors, fob 1.7 2.1 2.4 1.9 2.6 3.9Merchandise impots, cif -48.9 -50.3 -51.9 -56.4 -59.8 -62.9

TradieE" k -L7.1 AU A49.5 :S4.4 -572

Non-fctor sr-vices (not) -3.0 -4.1 -6.1 -9.4 -14.7 -18.0berest payruents (ML1) -5.3 -5.7 -5.0 -6.9 -6.7 -9.8Other fhctor serices and

private trsfers (net) 29.4 20.3 30.3 29.9 29.5 28.1

C\umstf account bnce _26.1 -37.7 -30.3 :-4 -49.2 -8(exchKling ofica transfers)

Officials tansfers /a 209.3 60.9 56.5 63.8 51.4 47.3

Current account balance 1823.0 2.2 :.(mcluding official transfers)

Net oublic flows -38. 13.5 1.2 31.7 -1A

-Q9M &b -44.9 -16.7 -39.7 -24.2 -33.9 12.7

Carren accounttGNP (%)(excluding official trabers) -29.0 -44.2 -31.4 42.0 -49.3 -61.2(imcluding official ransfars) 204.0 27.1 27.2 23.6 2.2 -11.8MILT debts service/exports (%) Ic 15.0 42.1 28.8 35.1 31.9 39.7

a Incldes $150 milion in 1986/87 for establishing Nuclear Claims Trust Fund./b Includes private flows, reserve changes and errors and omissions.Xc Excludes prepayments of $53.3 million in 1986187.

Source: Office of Plaing & Stadstics, Majuro, IMP and Bank staff estimates.

1991/92. As commercial fishing has never been an landowners of Kwajalein Atoll for its use by the USestablished activity in the Marsballs, export Army; (c) labor earnings of the Marsaileserevenues from this source have been sporadic and working at USAKA; and (d) fishing rights income,low. With the re-opening in 1990/91 of the fish which is esdmated to have doubled over seventranshipment facility in Majuro, fish exports began years. The modest deficit on non-factor serices isto pick up, a movement which is expected to to be expected, given the lack of a domesticcondtie through 1991/92. Although declining shipping and insurance industry, but this showsworld prices of tuna are expected to hamper the recent signs of deterioration as the outflowsgrowth in exports, the overall contribution is associated with Air Marshl Islands rise.expected to be positive in 1991/92, with exportsincreasing by more than 50 percent. 1.24 Official transfers are positive and more

than offset net private transfers which are negative1.23 The services account has traditonally because of the relatively large number ofmaintined a surplus largely due to factor service expatriates serving in the RMI. The US throughincome from four sources: (a) interest from the the Compact agreement has been responsible for thevarious Compact Trust Funds and undisbursed bulk of these transfers. Excluding the NuclearCompact grant monies, which has been substantial Claims Trust Fund, official transfers rose graduallyin the past but is begning to decline as a result of to US$63.8 million in 1989/90 and haveboth lower world interest rates and reduced subsequently come down as Compact fundingCompact assistance; (b) rents paid to the declined as set out ii the agreement. The RMId has

7 Volume 4: Afrdsha Iau*ds

not yet replaced any of this decline from other for future borrowing of this type. Thesesources and cureny faces the prospects of its first borrowigs have been us.d to fund investme incu- at account deficit after accounting for official power, water, sewerage, and fiheries, as welt as totransfers in 1991/92, estimated at about finance the losses of public entepises. Couent11.8 percent of GNP. with this borrowing activity there has been a

marked deterioration in debt indicators between1.25 Data on precise flows on the capital 1986/87 and 1991/92 as the debt to GNP ratio hasaccount are not readily available as Table 1.5 risen from 72.4 percent to 117.9 percent and theindicates. Public sector flows are those assocated ratio of debt svice to exports has incresed nearlywith Central Government borrwing activity. The threefold from 15 percent to an esmatdGoverment does not mintain any re2erves in the 40 percent (see Table 1.6). This places anformal sense, other than its accumulated holdings of additional burden on future budgets as capitalundisbursed loans, Compact monies, and truSt expenditure will be unable to draw on the decliningfumds. With the open capital account and the fimds designated under the Compact for thisabsence of any reportng requirements, private purpose, as they are already committed for debtcapital flows are not amenable to monitoring and servicing. Moreover, this will have adverseare estmated in Table 1.5 together with reserve consequences for public investment levels and onchanges and errors and omissions. These flows future growth prospects.have mostly been negative, averaging aboutUS$24 million each year, indicative of subsantdal Saviugs-hnveshnent Bancesoutflows. Although precise information isunavailable on their deployment, it is believed that 1.27 The saving-investnent balances in thethey are being invested abroad. It is intrsting to RMI have been positive over most of thenote that for 1991/92 this category shows inflows, 1986/87-91/92 period (see Table 1.7) as totalpossibly as a result of Government drawing down savings have exceeded investment each year in spiteon it's assets in order to maintain consumption. of a rapidly rising level of investment relative to

GDP. The share of investment in GDP averagedExterinal Debt over 30 percent. Although high by ineaiond

stdards, this is not unusual for a small economy1.26 The RMI enered self-governing stats in of this type in the Pacific partcularly given the1986/87 with US$53.3 million in public debt. That high unit costs associated with infrastructureyear the Govemment borrowed US$65.5 million at provision in remote locations. Most of thisrelatively favorable terms to prepay this debt and investment has been undertaken by the public sectorundertake additional investment. The borrowing and financed through extenal inflows. The highwas undertaken by issuing a bond guaranteed by share of consumption in this economy (estimated atfuture Compact inflows designated for capital nearly 150 percent of GDP on average) hasexpenditure. Since then the Government has used squeezed-out domestic savings, which have beenthis mechanism to borrow forward against future negative as a consequence. The resultant shortfaUCompact monies four times for a total of nearly between the negative domestic savings and the highUS$100 million, thus exhausting all opportunities investment spending has been fimanced principaly

Table 1.6: EXTZNAL PUBUC DEBr INDICATORS, 1986/87-1991/92(PERcENT)

Efmte1986/87 1987/88 1988/89 1989/90 1990/91 1991/92

Debt/GNP /a 72.4 68.5 74.7 66.6 99.5 117.9Debt/exports La /b 183.6 201.7 180.9 160.5 219.2 243.0Debt service/exportsL Ic 15.0 41.7 28.9 35.2 32.2 40.0Jnterest/exports /b 15.0 19.3 12.6 17.1 14.8 21.1

/a Debt refers to debt outsanding and disbursed./b Deminator is exports of goods and services./c Excludes prepayments of $53.3 million in 1986/87.

Source: Office of Planning & Statistics, Majuro, IMF and Bank staff esimates.

VoIwa. 4: Marlsha mld 8

Table 1.7: SAvHnG4GrvfmrmNT BLdANCES 1986/87-91/92(MaIRrNT OF (DP AT CRE M(,%S)

1986187 1987/88 1988/89 1989/90 1990/91 1991/92

Gross domestdc investment 24.3 28.5 32.5 42.3 33.1 43.3

National savings 75.5 61.7 69.5 73.4 35.3 28.0Gross domstic saings -53.2 -46.4 -47.1 45.2 -62.7 -58.1-Net fator inme 38.6 22.3 37.5 32.8 31.8 25.9-Net curn trnsfers 90.1 85.8 79.1 85.8 66.2 60.3

Saving-investment gap 51.2 33.2 37.1 31.1 2.3 -15.3

Source: Ministry of Finance, Office of Planning & Statistics, Majuro, IMP and Bank staff estmates.

by net factor income-mainly income from Government and (b) a deficit in the balance ofKwajalein, fishing rights fees, and interest-and, payments. Given the narrow producive base of thenet current transfers-mainly grants from the economy, it will not be possible to offset theseUS-both of which have been substantial in the declines from domestic revenues only.RMI. Thus in spite of domestic savings beingnegative, national savings have been positive due to 1.30 With the antcipated reduction inofficial transfers and facor income receipts which resources the Govermnent will be unable to sustinhave amply financed the high investment rates. As the same level of participation and will need tothese decline, the pro' lects for financing high restuture the public service by reducing functionalinvestment rates will bea.xme difficult. overlap and redundany and thereby improving the

efficiency of the sector. In particular, publicenterpises which are a large drain on the budget

C. DEVELOPMENT CHALLENCES must be reorganized.

1.28 The major development challenge facing 1.31 Reducing the size of govermment shouldthe Govement of RMI is finding new sources of reduce public expenditre. The Govemnment will,productivity and economic growth, and mantning however, need to reduce its spending still frher,that growt in the face of declining enemal by eliminating subsidies to ensure efficiency in useresources. The Government will have to undertake of scwe resources. At the same time, a concerteda multi-faceted approach to its development effort will be required to increase domestic resourcechallenges involving four major elements-a mobilization. Both tax and non-tax revenues willreduction in the role of the public sector in the need to be increased from their present levels whileeconomy, a reduction in goverment expenditures ensuing that expenditures are efficient andcommensur with such a role, a program of effective.domestic resource mobilization to raise domesticrevenue and savings, and establishment of an 1.32 The difficulty will be in creating newaropria policy framework for the domestic and sources of growth and expanding the productiveforeign private sector to increase exports and base of the economy as the Govemment reduces itsexpand investment and employment opportunities. direct participation in the economy. Thus theUnless domestic production and exports grow more Government will need to ensure that the privaterapidly than the decline in Compact inflows (not a sector replaces it and increases its role, which willvery likely outcome), domestic consumption and/or require establishing an enabling environment toinvestment will also fal. encourage private sector participation in appropriate

activities. In particular, given the relatively weak1.29 Replacing declining foreign assistance domestic resource base, it would be particularlybefore the end of the Compact is a secondary but desirable to encourage foreign direct investment inmxportant challenge for the Government. There are appropriate activities. Given the remoteness of thetwo key aspects of such a decline in foreign RMI from major markets and the uncompetitivenessassistance: (a) a decline in revemnes of the of wages, this will be a difficult underking.

9 Velme 4: Msiw Island

1.33 With a population growth rate of and to ensure a comfortable level of income. This4 perct per ammm and over half the population will reqr much effort in health and education asunder age fifteen, eployment creadon in the both the requireim of a rapidly growingprivate sector will become an urgent part of the population and that of improved skills for the laborGovernmet's agenda. The Govemment will need force will increasingly make demands on a systemto conena its efforts on improving its human constrained by declining resources.recources in order to improve its competitiveness

ENDNOTES

Although large gants from the US support a iniatively high level of domestic income as measured by GDP,nationa income is significantly igher than domesic income. The divergence between per capita GDP and percapita GNP, averaged about one-third of GDP during 1989/90-1990/91. This difference can be attributedprincipally to land rents received for use of Kwajalein Atoll by the US military as well as intest income,derived principally from US-established trust funds for nuclear compensation. These relatively high per capitaincomes, however, probably overste living standards quite significantly.

2 Statistical analysis shows a high degree of correlation between the US CPI and the Majuro CPI between 1980and 1992, in excess of 95 perment.

Volw*e* Ah Islada 10

2: Promoting Private Sector Development

A. INTRODUCTION investment-invement approval, land tenure, legalsystem and labor policies. Finaly, Secdon E

2.1 This chapter discusses a framework of highlihts the constrain in the finamcial andpolicies to encoua private participation in the infastue sectors, and meir effects on privateRMI economy. There are two compelLng reasons sector development.for emphaszing the development of the privatesector. First, with the decline of Compactrevenmes, the Governent will have to reduce its B. THE PRIVATE SETR JI RI ANDrole in the economy. Second, the private sector is GOVURME1VT POLICSlikely to be more efficient than the public sector atmobilizing savings and cayimg out investments. 2.4 The Privae SecOor Today. The privateGovenment effort to promote the development of sector is already quie significant in terms of itsthe privat sector will need to focus on: employment share (about 40 pement) and(a) incenive policies to promote investment; contribution to GDP (about 60 percent). There are(b) policies to reduce reguory barriers to three distinct groups of .roducers, eachinvesmn; and (c) policies to improve the c d by the type of activites theyavailability of fiancial and infrastucur services. participate in. The first group consists of two largeA stable macroeconomic enironent will also be enterrises which are involved in a wide range ofan essenial part of the foundation for successful activities-the bulk of the wholesale trade,and increasing private sector participation in the large-scale retailing, tounm, inter-land tr_aeconomy. and other activities in the service sector. The

second group also mimbers few entrprises and2.2 Many factors constrain private sector comprises companies involved in design,development-poor resource base, low skill levels, construction, small-scale fabrication, and otherhigh labor costs, busins environment, small size related activities. The third group is the largest inof the domestic market, and large distance from terms of numbers and encompasses smallmajor markets. Only a few of these constraints can enterprises involved in retailing and services, suwhbe addressed by Government policy. Thus the as small grocery stores, bakeries, and laundries. Inprospects for private sector development are likely additon to these largely domestic entrepreneursto remain limited over the medium term. However, some foreign entrepreneurs, mainly in the fisheriesconcerted Government action to foster private sector, are also active in the Marshall Islands.sector development will increase economicefficiency and improve resource allocation 2.5 The Goverment Poliy Framework.throughout the economy. Since idependence, the Government has

encuraged a larger role for the private sector in2.3 The remainder of the Chapter is organized the economy. FiM, the trade regime has been keptalong the following lines. The role of the private relatively free and domestic taxes are low. Second,sector in the economy, and the exisdng policy regulaory baiers to private investment have notframework are discussed in Section B. Section C been excessive. Third, in the major urban ceters,then discusses key conslldnts in the incentive Majuro and Ebeye, i uctr services (power,framework-in trade, tax, and wage policies. tel ons, roads, and water) have beenSection D covers the regulaorybiers toprivate considerably improved. The Government has

tl Vlwow 4: Anhd Iskmh

ecouragod a high quality of service provision However, it means that RMI has little control overthrough the system of private contracing and interest rates and cannot use the exchange rate tomanagement which it has employed. It has also promote competitiveness.enouaged the estab_lshment of a private domesticbank and provided additional support through the Wage Powkstao-owned development bank. Fourth, in order toattract foreig investment, the govermt has 2.9 Wage policies are ater key policyformed joint ventures and provided other sUpport. intument The forma sector in the Marshalls isThe business enviromn appears on the whole, to subject to minimum wage legislation and isbe favorable. However, application of the rules dominated by the urban areas of Majuro and Rbeye,and tio ns suggests otheise, and there patdculaly the public sector and USAKA whichremain a range of constaints to private sector together are responsible for about 50 percent ofdevelopment which are discussed in Sections C formal sector employment. This constrains etherand D. employers in their ability to attract workers. Thus

the minimum wage legislaton applies may to theurban population. Since the domestic market is

C. JNCTnTES FoR PRivATE SECrOR extremely small, the RMI will have to look toDEVELPMENT foreip markets to support its development efforts.

This will require wage competitiveness on an2.6 As mentioned above, wue business intenmational scale, but labor costs in the RMIenvironment in the RMI is generally favorable, appear to be among the highest in the Pacific regionalthough there are uncerainties on a number of and as high even vwhen compared to other smallfronts-the evolving Govemment fisc and balance developing counties in Africa and the CaribbeanOf payments situation, changes in business tax (see Table 2.1). Strictly speaking, the apropriatepoicies, and vulnerability to demand flucuations. comparmor for inernational competitiveness inIn spite of this, the macroeconomic environment wages would be wage costs adjusted forhas been relatively stable, and the rate of inflation product but this is not possible given thehas been low. There are no Goverment imposed unavailability of data. An infonnal business sunvey,price conols. Given the high import content of however, suggests that tue level of skldls in theconsumption and the remoteness of the RMI, the RMI is low, and consequny wage rates adjustedprevailing prices of most goods are quit for labor productivity would be even hwher thanreasonable. Nevertheless, the remoteness of that suggested by the compaison of average wagemarkets, low domestic demand, and relatively high costs. Moreover, as previously discussed (seewages have severely limited the growth of the pam. 1.8) there is evidence which suggests thatprivate sector. labor productivity in the Marshall Islands has been

declining in aggregate.2.7 There are generaly three different policyareas which a government has at its disposal in 2.10 The chaUlenge for the Govenment then isorder to encourage production and foster to improve the working of labor markets bycompetivene-espaytoencourageinvestment reducing real wages m order for the Marsllin traded goods sectors. These are exchange rate Islands to be more internationally competitive inpolicies, wage policies, and trade and tax policies. production. Since the Government is unable to use

the exchange rate and has little scope with which toEzchwage Raft Po* hold inflation below uo levels, adjustments in the

real wage will have to come primarily through2.8 Exchange rate policy is not an available adjusments in nomal wages, which are verypolicy option in the RMI, as the US dolar is legal difficult to achieve in pice. The Governmenttender for all domestic transactions. The use of the should therefore, initially aim to achieveUS dollar as the local currency has conferred many competitiveness in some part of the labor force.benefits on the Marshalls as it has precluded thegovernment from financing deficits by printing 2.11 In this situation the Government shouldmoney, an important source of inflation in many not raise the minimum wage, pardicarly in thecounies. This has helped the govenment to face of declining marginal productivity of labor inmaintain a trade and exchange system free from aggregate. It will also be imporant for therestrictions, which has in turn encouraged t Govement to restrain public sector wages,foreign investment in the Marshalls. The use of the because given the relatively large size of that sectorUS dollar has benefitted the RMI primarily through as an employer, its wages drive private sectorits role in m a stable price level. wages. A reinforcing policy would be to grant

Voew 4: MaRshllds 12

Table 2.1: AvRAGs WAG S N Sxe= labOr tough improvements in human resourceDzVNWPzr, COUMNUm, 1990La developmet pohicies. This is discussed in

Chapter 6.

Average Wage TM! ad Tax Policy

(_S__ __ )_ 2.14 Trade Policy. The trade regie in theMar Islaunds is fairly free and is characterized

Camroon 1,428 by generaly low levels of tariffs on most ims,Fi 3,780 averaging 10 pecent. with higher tariffs asssedDominican Repubik 888 on alcohol and cigarettes. Lower rat of aboutJamaica 1,044 5 percent are levied on food, medicine, andKenwa 468 building matals. Import duty exemptions areKIibad 1,478 granted on a variet of items-government imports,

Kom 3,2~~~00 private sector imoufor the governumen or for

Igovenment supported projects, and imports forSriAfka s520 manufacturing eneprises, tourism, fih, andTaiwan 3,252 hotels; and fuel oil and diesel oil. There are noWestemn Samoa 1,000 non-tariff barriers and there are no export taxes.

The import regime is primaily a source of/a Rfrs to fomal sector wages. Wage rates are for 1989 budgetary revenue.

or 1990.

Source: World Development Report 12, World Bk, 2.15 The mport day eenp*ons on privatePacic blands Regional Economic Report 1992, imports for traded goods and services in exportCountry Surveys on Kiribai and Westem Samoa, sectors may be retined on the grounds ofServices Group 1989 an Bank staff esdmates. encouraging export development, and a duty

drawback scheme for exporters in certain sectorsexemptions from the minimum wage for the formal should be considered. However, otber exemptionssector, both to encourage higher levels of need to be removed as they are distortionary inemployment and in the interest of achieving a their effects on relative prices. In addition, underdistribution of resources in production which more the present policy, the Treasry is being deprivedaccurately reflects RMI's resource endowments. of some revenue as imports destined for the pivate

sector are often undii le from government2.12 As part of its effort, the Government imports being made by the private sector. It shouldcould help improve the quality of the work-force be noted that there is no net effect on the budget ofthrough a labor raiinig scheme-to enable firms to lifting the import duty exemption for Governrmeemploy and train new entrants to the labor force, imports. This would also have the beneficial effectand to offset to firms the high costs of trainig and of reducing the adminisatve complicationemploying such labor. The design of such a characteristic of the present system.scheme should be done carefully-targeted at tradedgoods sectors, in new investments, for new entants 2.16 To increase revenues, the Governmentto the work force, and limited in duration (say for could raise the average level of aU import tariffs.1-2 years). A survey of existing investors suggests This would (a) provide resources for the financingthat they incur veiy high costs in training their new of labor training schemes, and (b) raise thelabor force, deterring employment and investment. incentives for domestic production of small-holderThe two princi drawbacks with this approach, food and agriculture and manufactures withoutare (a) this policy requires a long-term commitment introducing a major misallocation of resources. Forand support on the part of the Governent, and example, a relatively small tariff increase, say(b) the substantial resources which a scheme of this about 5 percentage points, could potetilynature would require, given the situation of generate additional revenues of about US$4 million,declining revenues it presently faces. The or the equivalent of 100 percent of current exports,discussion of trade policy below, however, suggests and be sufficient to fund a labor training scheme.how the Government night raise the equired A supeior instrumeh. to trade taxes, more neutralresources and also improve the incentives for in its efficiency effects, would be the introductioninvestment in traded goods sectors. of a general value-added tax on consumption.

However, given the limited capacity of tax2.13 The other longer-term challenge facing administration at present and the limited amount ofthe Government is to improve the supply of skilled domestic processing, trade taxes are reasonable at

13 VaIne 4: Marshaol Ilads

Tabe 2.2: IDICATORS OF TAX EFFORT IN TM PACIFC REGION, 1991(PElRCEPi2

Avage Nominal Income Tax/GDP As Share of Govt. RevenueEffective Tadrffl bIpor Duty Icome Tax

Marsall Islands 7.8 9.8 25.0 31.5Tonga 16.9 2.7 28.4 9.7Fiji 18.5 5.5 28.4 21.9Kiribati 18.7 4.3 23.2 7.5Vanuatu 23.3 .. 50.1Solomon Ilands 50.0 5.6 42.1 23.7

la Data for Tonga and Marshall Islands are for fiscal year 1990/91./b Defined as the share of import duies in total imports.

Souce: Padfic Islands Regional Ecnomc Repot 1992, Country Survy on Fiji, Kiribati, Solomon Isands,Tonga, and VMuu, and Bank staff esma.

this stage. Compariss sggest that the average retain the new net revenue tax for five years waseffective tariff in the RMI, esimated at 7.8 perMent broken after only two years. Such actions createfor 1990/91, is quite low comed to other uncerinty and undermine private sectorcountries in the region (see Table 2.2). confidence. The Government needs to maintain a

stable policy to improve the busiess chmate. This2.17 Tax Polc. The tax rate on businesses is is best done by pre-anouncing all changes,quite low, consistng of a gross revene tax levied esuecially in tax policy and to invite disussion ofat US$80 per year for gross eves under the same with the prvate sector, before decisonsUS$10,000 and 3 percent for businesses geatng are made. Once cages are un , theover US$10,000per annum. The Government Government should avoid sudden reversals inreplaced this at the beginning of 1989/90 with a tax policy in order to maintain investor confidence. Itassessed on net profits, to be in effect for a should, however, be noted that the Governent hasminimum period of five years. However, as tax a very limitd capacity to enforce taxes and givenrevenues fell dramatically under the new basis, the the weakness of tax ad the shift in theGovenment reversed its decision only two years basis of the business tax resulted in wdspreadlater and reverted to the tax on gross revenue. Tax evasion and led to a significant decline in taxholidays are granted for a period of five years for revenue. Under the cumsns the Governmentbusinesses meetng minimum investment or had little choice but to respond as it did.employment criteria in cerain sectors-fishing,manufaring, tourism, and hotels. 2.20 Personal ink. me tax is payable at two

rates: 8 percent for annual incomes under2.18 Although the rates of taxation for US$10,400 and 12 percent for incomes in excess ofbusinesses appear to be relatively low, even when US$10,400. An exemption of US$1,040 is appliedcompared to other countries in the region, it may to those with incones under US$5,200 per year.be necessary for the Government to mainain them Concessional rates of 5 and 10 percent apply to theas to encourage more business activity. Experience Kwajalein landownes, US citizen employees ofdemonstrates that simplicity in tax code and USAKA, and USAKA-related contractors, and non-administration needs to have precedence, as the residents. Regional comparison of personal incomedifficulties with the experiment of a net profits tax tax rates suggests that tax effort in the Marshallshowed. Islands is the highest (see Table 2.2). The

relatively high tax effort in the RMI is not due to2.19 In connection with the changes to the high income tax rates, which for example are muchbasis for the business tax, it should be noted that higher in Kiribati, but is more a reflection of thethese changes were made with litde or no prior ease of collecing income tax given the very largewarning to the private sector, and the pledge to government sector, the large number of employees

Voe 4: Alshdub Ikw 14

at the USAKA miie base, and the recent applicable to US employees of USAKA. The netinoduction of a comprhensive social security eft on the inomes of those affected woul besystem. zero becuse of the prevailing ta treaty laws with

the US, but It would generate additoa resouc2.21 In addition to the preceding tax policy for the RMI. In spite of the reladvely low taxissues which are designed to increase the incenives rates, receips from personal income taxes in thefor private sector pacipation and development, RMI are high relative to other countries in the area,there are a smia! number of other issues to enhance but this is due to the reladve ease of tax collecdon.fiscal revenue mobilaton wbich are addressed (See para. 2.20 and Table 2.2).here. These cover recent ieases in importtariffs, improvements to the personal income tax, 2.25 The policy of exempling housingand tax exemptions. allowances from taxes and the provision of free

housing needs to be reviewed to determine those2.22 With Compact funding presendy fnancing instances where it maybe justified-forexample, inabout 70 percent of the recurent budget, the the case of workers who because of a temporaryGovernment must try to improve efficiency across posting away from their homes are required tothe board in the fiscal areas. Several of the policies maintin two households. Housing allowances anddiscussed in the preceing sections should improve the provision of free housing should be taxed. At

enditure programming and thereby, fiscal the present time, it is commonplace to findperformance. Improving the RMI's fiscal employers and employees using this exemption toperformance will require measres to raise increase personal renumeration free of tax.additional revenue to replace, to the extent it can,the anticipated decline in Compact assistance. In 2.26 There is no tax presendy levied onaddition, fiscal policy should be geared toward interest income. The Government shouldproviding incentives for private sector development. investigate the revenue potential of taxing interest

income after also considerng the administrative2.23 The Government is to be commene on costs of implementing such a system, and lossesas recent initiative to raise revemnes for the due to avoidance.1992/93 budget year. These proposals weredesigned to protect the health and education sectorsfrom the 10 percent cuts to which aU departments D. REGULATORY BARRMS TO PRrKATEwere subject. The meaures will: SECTOR DEvELoPrmNIT

* raise import duties on alcohol, Invesbtent Regationautomobiles, cigarettes, diapers, softdrins, and diesel fuel; 2.T7 Given the relatively smal domestic

mnarket and the undeveloped state of the private* termnate the practice by airlines of sector, investment regulations are especally

refuelling at Kwajalein where fuel is relevant for foreign investors. In principle, theduty free in order to avoid investment regime is relatively neutral andpurchasing it in the RMI. structured to encourage foreign participation.

There are import duty exemptions for importedThe Government, however, needs to ensure that inputs and favorable tax treatment. In practdce,when additional revenues are raised to assist however, the system does not appear to work asparticular sectors, such as the social sectors, that smoothly as it should. AU foreign investors need athese revenues go to fulfill the need which was business license. The application for a businessidentified. license has to be submitted to the Cabinet for

approval. The procedures for such scrutiny are not2.24 In the area of personal income taxes, the transparent, and considerable uncertainty surroundsGovernment should review the present system. The the outcome of each application. At the same time,two rates are low in relation to other countries in the institutional support of Government agenciesthe Pacific region. The Government should (such as the Marshall Islands Developmentconsider adding a third rate, for incomes in excess Authority) is extremely weak. The Cabinet alsoof US$10,000. Exemptions for certain income has the authority to formulate policies regardingearners, such as those engaged - agriculture and incentives for foreign investment. As a result itfishing, should also be removed. To the extent it often ends up trying to provide tailor-madecan, the Government should try to renegotiate with concessions, which are costly and risky, as in jointthe US the low (presently 5 percent) tax rates venture arrangements. This, in tandem with

15 Vo1w 4k: Marshd blend

d iifficuties in laud tenure and legal enforcement creadon of u nmic units. One implicadion of(see paras. 2.29-2.33) makes the generad business this tat it would be difficult for the Govemmentand invwestm cimae less favrable and may be to establish new urban areas even when it madea detren to entry, as most enu_trnes would sense from the point of view of provison of basicbe dsouned and srch out ateivplaces to infrastfucture. Access to credit is fequenymvest in. The Govemment spends far too mUch affected because of the difficulty in definig and

time on screenlng and evaluating idividual foreign acquiing pWerty rights. Thus lnd cannot readiyinvestment proposals, which it is ill-equ to do, be used as colateral.and far less time on promoting an overallfraework that facilitates investment within a 2.30 In response to some of the abovegeneral incentives framework. The Governmnt is difficulties entaLed by the traditional tenue system.encuraged to invite a careful apprisal of its the Government passed legiation allowing 50 yearforeign investment promotion efforts by experts, land leases on an unconesd basis. This wassuch as the Foreign Investment Advisory Services designed to protect investor-lessees from protracted(FIAS), a World Bank affiliate, or the Overseas legal challenges after they had negodated andPrivate Investment Corporation of the US, or other ratified leases. Although this has been an importantsimilar group. milestone in improving the tenure sysm, in

practice it has not wored as designed. Investors2.28 The Government needs to move away often have to negotiate leases with scores offrom its case-by-case consieration of each individuals, and the clmants to the land frequetyapplicaton by Cabinet. Granting of business increase, leading to a protracted and uncertainlicenses shoud be the job of the Registrar of negotiation.Companies or equivalent body. The rulesgovering dte applicatior should be transpare and 2.31 The mortgage protection law needs to bethe information readfly available to any and all enghndainstitutionaliedas practice. Landpoteta investors. The Goverment should aionad issuance of tides would assistconsider establishing a "one-stop investment shop" prospective investors in identiijring the partes withor mvestm promotion bureau which not only whom they must negotiate. The acquisition processfunshes potntial in with all ecesary needs to be assisted both indirectly (throughlcensig requrements but can also guide them registration) and direcdy (dtrough assistance of landthrough land acquisition and leases. bureau etc.). The present system of tenure and

adjudication creates serious impednts toLand Tenue and Issues poal investors. Thus the policy emphasis

should be to reduce the costs associated with this2.29 Land owneship in the Marshali Islands is part of the transaction. This should have the addeddetennined according to a traditional matrilineal benefit of improving the workings of financialsystem. This means that inheritance is through the markets as land could be pledged as collateral. Thefemale, usually passing from the oldest female to Government should also encourage the use ofthe oldest female heir. Under this system, land use vacant land by non-owners for productive purposesis not vested in the female but m the oldest male of within a framework which preserves ownershipthe line such as the oldest son. This separation of rights.ownership and access rights causes severalproblems in defining legal rights to land. Titles are Legal Systennot commonly utilized, so there is a problem of alack of land registration, although it is generally 2.32 In addition to the above-mentionedwell known who owns a partcular piece of land. problems of the tenure system, it is difficult forRights to land are more access or use-based than employers in the formal sector to undertake legalownership-based. This results in many people action against employees for criminal wrongdoingfrequenty having rights to land, leading to a such as theft. When legal action is underken,thediffusion in ownership, and in practice multiple courts are not anxious to uphold and enforce theownership is the norm. This raises the problem of law. Thus, employers have a distrust for thewho the leaseholder is in a modern transaction. integrity of the legal system. This problem is acuteFurthermore, as land use patterns are known in in the private sector and contnutes to economicterms of rights, vacant land is rarely/never used by inefficiency by raising the cost of doing business.those who do not have rights to it. An additionalproblem occurs in the way in which land is 2.33 The required policy action is that the legalsubdivided across atolls/islets from the lagoon to system must be applied equally and upheld to theocean side, thus leading to fragmenaon and same standard for all who may come before it.

Vo1une 4: MtarsIwislans 16

Transpar_nt and fahr treatent by the courts will 2.37 Another problem with loan defaults,send a message to workes and entrprns ali4e, mainly consumer loans, .in the RMI is that whenimproving both productivity and employmen and borrowers lose their jobs, they believe it is justifiedltimately cotrbutn to incrased income. and appropriate to defaulet on their loan since they

have been depived of their fonnal source ofLabor Plky income.1 The Courts appear reluctant to enforce

santions against defaulters. The outcome is that2.34 One area of labor regulations wbich the cost of capital is driven up and that banks aredeserves mendoti is that which governs expatriate less inclined to make loans in this environment,employees. Given the severe scarcity of sklls thereby depriving potential investors of access toamong the Marshallese, it is expected that RMI will capital. The Government needs to ensure that thedepend on expatriate workers across a wide range legal system works as designed and that sanctionsof professional and tchnical skills. There is a against loan defaulters are imposed. Additionalperception in the private sector that bureaucratic measures which may help small domesticobstacles to hidng semi-skilled expatriates are entrepreneurs would be to encourage private effortsincreasing. The Government should dispel this to extend credit facilities to the outer islands.perepion and ensue continued ease of hiring forexpatriats because any hger costs related to their 2.38 Finaly, as the private sector expands andhiring wil ultimately be passed. on as a cost to the its demand for capita grows, competition withineconomy. the financial sector wil increase. This wil require

prudntl reglaion, especialy in the area ofbankdig supervision of private banks. Capital

E. IMPROVING TEM FRAMEWORK OF adequacy requements may need to be reviewedSUPPOR2;NG POMC=S and revised periodically to reflect banking system

portfolios. It will also be importan to require2.35 An imporn t role for the government is standard financial reports based on agreedto ene the availabilit of a supporting financial accounting principles as well as data collection ofsystem and infrastucture. The existence and basic indicators to allow the inclusion of monetaryproper unctioning of a financial sctor to provide and credit developments in macreconomic analysiscredit to the private sector is crucial in this regard. and monitorig of exteal private debt. AsThe future demand for funding by the private sector discssed in Chapter 1 (see para. 1.17), thecan be expected to gready exceed current levels as establishment of a full-time Bankingthe economy responds to changes in the incentive Commissioner's Office, with appropriate prudenaand regultory framework and the share of private regulations, should go a long way towardsector activities expands. The provision of basic improving the functioning of the financial system.infratucue semvces such as tranport roads,

ter, and power ar also aey elements 2.39 The Marshal Islam& Development Bankwater, andspower are also keyelements.~eeds substantial strengtning. As the optiCnS of

PsW Mark*et Dvlopt privatization or merger would require constitonalamendments, it is recommended that the bank be

2.36 The finacial sector in RMI, primarily the subjected to competition and market forces. As abanking system, appears to be functioning well with prelimnary step in this direction, it should becomeinterest rates closely following those in the US. a deposit-taking institutionjust like any commercialThe relatively low loan to deposit ratio for some bank, and its management needs to be considerablyfinal institutions should be taken not as an strengthened and not be subject to Gover rentindicator of credit avaiabilty, but rather an itervention in its activities. These problems withindicator of the investment opportnities available state-owned development banks in other countriesin the RMI. Lack of colkeral and the relatively have caused major inefficiencies and led to veryhigh loan default rates may be hampering activity in risky and inefficient vesmens.the sector. The colleral problem revolves aroundthe previously discussed issue of land tenure (see Phya Ieparas. 2.29-2.31 above) and, together with the highloan default rates, raises interest rates to borrowers 2.40 The present investments in physicaland reduces lenders' willingness to lend. With few pnferastu te and services-mainly transport"bankable" projects, effective demand for credit i power, and telecommr nications-appear to below, adequate in the urban centers given the Marshall

low. Islands' current demand. They should providesufficient foundation for future expansion as needs

17 VoeIn 4: Arahai Isl

dictate. The Govemment's role in the provision of priarly through the domestic carrier, Airphysical infrstniatre shoiud be to ensure that Msrshall Islands, and appear at the present time toinvesmt are made which reflect an appropiate be contributg litde direcdy to the development ofallocation of resources, given the resource base of the private sector in air transport or elsewhere,the Marshal Islands. At present both water and while continuing to be a large drain on budgetarypower are heavily subsidized.2 This leads to resources. This issue is discussed at length ininefficient use of scarce resources, water and Chapter 4. Inter-atoll sea transport is presentlypower, which is placing pressure on the budget at provided on a regular basis by government shipsa ime of declining revenues. The Government, and also on an ad hoc basis through die privatetherefore, needs to end the present practice of sector. The high costs of providing this servicesubsidizing power and water and should move to a suggests that it may be uneconomic and needs to besystem of user charges which better reflect the reviewed and then radonalized to reduce theeconomic cost of providing these services. budgetauy burden on the Government. Expansion

of private sector participadon in this segment of2.41 In the area of the transport sector, given transport services should be encouraged.the small size and fragmentation of atolls thepresent road network appears to be adequate and 2.42 Telecommunications services areprovidedfuture needs are minimal, mainly to improve by a now-privatized public enterprise. As a resultmanenance. The provision of road transport of substantial new investment undertaken over theservices, dominated by a system of shared-taxis, is past few years, telecommunications services arepresendy in private sector hands. Air transport intaionally comparable and competitivelyservices within the Marshall Islands are available priced.

ENDNOTES

This is partly because banks often try to secure personal loans by direct and automatic payment fromemployers.

2 Prelim y estmates indicate that even if power tariffs were doubled they would cover less than half ofoperatng costs.

Volaw 4: MairlslaNd 18

3: Improvng Public Sector Management

A. INTRODNC7ION and in the investmen decisions of key governmentagencies.

3.1 With the aniipat decline in Compactassistance, the Government must restucure and 3.4 Publc enterprises in the RMI althoughrationalize the public sector to increase efficiency small in number are significant in terms of theirand reduce costs. This chapter concerns itelf with economic and fisca impact-due to both theiressential improvements in three broad areas of the activities and the absence of a large private sector.public sector-reornizing the public service to These have direy contributed to the present highbetter meet the nceds of the RMI in terms of both debt levels.upgrading human resource skdlls and rationlizingthe existng struc ; imprwving and integrating theplanning and budgetig processes with a view to B. REOMRGNZNG THE CIm SERViCErationalzing the public invesutent program; andreducing and eimiating the depene of public Backgrondenterprises on the Government budget. Anadditiona important area -ch offers considerable 3.5 Formal sector employment in the RMIscope for improvement,flscal revenue mobiliaon, totalled about 7,750 persons in 1992, of whichis addressed elsewhere (refer to paras. 2.14-2.26) 2,924 were in the public sector accouning foras much of the discussion perains to private sector about 43 percent of total wages and salarizs paid.development. The Government has inidated and is Both the level and the share of public sectorpaticipating in several initiatives' which form an employment is high compared to many countries.importa first-step in fuling the above needs. Neverteless, the public service faces difficulty in

providing a full range of services.Main lies

3.6 The public service is organized in ten3.2 rhe public servce faces a number of ministies headed by the Chief Secretary, whoconsraints, which will require time to overcome. reports direcdy to Cabinet. The secretary of eachThe most serious are its organizaton and staffing, ministry is responsible to the Minster as well as toits poliqy-making capacity in the econmic and the Chief Sec&tary.social sectors and the shorage of adequate skldls ofmany staff members. This is a reflection of the 3.7 The public service is hampered byshort time since self-governing status was acheved, duplication and functional overlap, with the resultand the difficulties faced by the education system in that responsibilities are not clear and accountabilitymeeting the overall needs of the country. (The suffers. In addition, recruitment and employmentlatter are discussed in ger detail in Chapter 6). practices often lack objectivity so that candidates

are not malched to identified needs. One outcome3.3 he pknning and budgetingprocesses are of this is a deterioration in staff morale andneither complementary nor well organized, leading performance. Finally, there appears to be a seriousto inefficiency and lack of coordination within the problem of delegation with practically all decision-cent institutional stuctues and systems in fiscal making power overly centralized, in the hands ofand economic management in the cental policy the Cabinet. The Govermment has ecoized themaking agencies of finae, planning and cabinet, need for reform of the public sector and is to be

19 Voe 4: tMeh Isa=ds

commended for the recent Cabinet decision one that sets the standards and ensures that theauthorizing a civil service reform initiative. This is service complies, will be necessary.an impor first step towards cking the aboveissues which are elaborated below. Reendimm and Enpoyment

Pabic Service Ceomulsu 3.12 Practices in the PSC and the ministriesare in considerable need of strengthening. Staff are

3.8 The PSC is responsible for setting and sometimes recred whose experience orenforcing sdards on matters of personnel to qualifications do not meet the specificato of theensure that the civil service meets the needs of the position. In addition, some ministries have excesscountry. These cover arbitraon, regulations staff, often recruited in response to outsidegoverning hiring and firing, stards for pressure. As noted above, downsizing the publicpromotion, renumeration etc. The PSC therefore service is a current policy of the Government,requires some technica capacity, in order to supported at the highest levels. Thus strengtheningevaluate positons and establish required standards. current practice trough clearer job descriptions and

a better matching of applcants to vacant positions3.9 The PSC lacks the technical capacity to is an important step.assess and enforce regulaons and is thereforesusceptible to extemal influence in its affairs. The 3.13 Staff Modvaion ad Peornnance. StaffGovernment, therefore, needs to strengthen the PSC motivation and performance are widely regarded asand allow it to maintain its impardality. Such a poor for a number of reasons. First there is amove would raise the credibility and profile of the mismatch of qualifications with positions mentionedPSC and place it on a comparable basis with above. Few job descriptions exist, and even whenpractice in a modern public service. A productive they do, they are not clear, which adversely affectspublic service is not possible without this job performance. There is therefore a clear needindependence. for effective personnel policies, clear statements of

expectations regarding output and attendant3.10 The selection ofComsioners shouldbe follow-up, and above all greater levels of delegationmade from members of the public service and/or (see para. 3.17). An important step in meetingthe judiciary. In addition, if Commissioners were these requirements would be to clarify jobappointed at least at secretary level, they would be responsibilities through issuance ofjob descriptions,more able to take decisions on personnel actions and to establish a system of performancewhich are in the best interests of efficient expectaions for staff with promotions being basedadminisation. Finally, the commissioners should on a system of merit and examination.be encouraged to reinforce their collectiversponsibility, rather than their individual Wages and the Gri&ng Systemresponsibilities, and be required to consult and acttogether. 3.14 There are currently 28 pay scales in the

civil service covering aU personnel. This is a large3.11 Many of the practices discussed below number by the standards of most civilwill need to be implemented through the PSC. The atns. The more levels, the morePSC will, in many instances, have the difficult it is to distinguish between one positionadm e capacity to implement the reqiired and the one immediately above or below it. It alsoreforms, but it wil also need direct technical is more difficult to introduce methods forassistance. It does not have experience in some performance appraisal. Compouding this situationareas and many of its procedures are slow. It also is the current pracdce whereby ministries upgradebecomes too involved in many smaller activities staff as a means of providing salary increases orthat should best be left to ministries, and does not cost of living adjustments. Such practices indicateprovide the support necessary for staff disciplinary that the classification and duty statements of thematters. Practice with public service commissions positions, both before and after upgradi, are notaround the world in recent years has been to distinct. The current system therefore needs todelegate more authority to the operating reviewed and simplified along with a revised anddepartments. Some ministries in RMI do not yet stngtned job description system. Moreover,have the managerial capability and adm inive promotions and wage increases need to be based ondiscipline, however, to take sole authority for merit. The introduction of lassifications based onrecruitment, major promotions and disciplinay occupational skills, as adopted by a number ofmatters. A strong Commission in these respects, countries in the Pacific, is an improved approach

that deserves consideration.

Voumw4: Miashal Ilads 20

nautienoal Issues C. Pmuc IN ws MNT PROGRAM AADPLANNiG ADBOWGETN

3.15 Ratonalizing the objectives and functionsin a number of m ries and agencies, will reduce 3.18 Economic mangement requires tuat hieoverlap and help to idenify peonel dt could be planning and budgeting processes be integrated.

tained and assied to oter taks. For example, Thus, die public investm program, as articulatedthere appears to be consieae overlap between i the Second 5-Year Development Plan, shouldthe Marshall Islands Development Authority form the basis for the development budget in any(MIDA), Capital Improvement Proam (CIP), the gwen year. Curnty, these two process areOffice of Planning and Staistis (OPS), and the quite separate. Furthermore there are aspects ofMinistry of Resources and Development. Under- the budget process itself which are of concern tostaffing in a nmbe of minishies appears to be a economic management and public expendituepotentially crippling problem. In some instances programnig.essental services are neglected-such as repair andmantnance of equipment and vehicles. Sometmes Cpi Dgetngunder-staffimg is the outcome of too broad amandate for the respective agency. The Minisy of 3.19 Under the terms of the Compact theResoure and Development is a good example of Government was required to establish an economicthis. It is responsible for agriculture, fisheries, development agency to undertake investment inenergy, labor, mapping, industry, trade, tourism capital projects. The establishment of MIDAand outer-island infr cture. Given te present fud that reqnrement. In addition, 40 pecentclimate of budget cuts it has had to crStail of the general fund support must be spent on capitaldrastically its services in many areas and to suspend projects.some of its important programs. Ratizaion ofthe civil service, based on a clear unersdI of 3.20 Development expendiure requests areobjectives and the eVnination of duplication, has currenty channelled through the Budgetthe potntial to go a long way towards addressing Coordinating Committee (BCC) or by MBA or thesome of the more pressing issues identified above. Mahall Islands Development Bank (MIDB)

direcdy to the Cabinet without review by the3e I*iws Ministry of Finance, and in many cases, without

sufficient analysis of the comparative costs and3.16 Delegan. There is an almost complete benefits of alternate investments. In the case ofabsence of delegation within many areas of the commercial investments, proposas are madeGovernment-for example, ministers must sign direcdy to the Cabinet, without any deteminationrequisitions for aU items including office supplies. of alternative investments. In many cases decisionsIn practice, the degree of delegation varies from have been made that reduce the availability of fundsministry to ministy. Lack of delegation has for desirable social infrastucture or investmentscenalized all decision-making and responsibility. that have been a contnung drain on the budget.It, therefore, prevents individuals from developingprofessionally and perpeotates the low levels of Pub,fc Sector Investment ProgrumskiUs and esteem which abound in such a system.In a smaU country, ministers cannot (and should 3.21 A Public Investment Program (PIP),not), restrict their work only to policy building on that proposed in the Second 5-Yearissues-active involvement in the day-to-day work Development Plan, needs to be developed. Thisof the department is necessary. There is would assist in managing the budget planningnevertheless, room for greater delegation of process and assessing prorities, as well asauthority and responsibility, at all levels. improving overaU economic management. The PIP

shoud be managed jointly by OPS and the Ministry3.17 Folow-up Monitoring. There is a need of Finance, and should include all capital projects.to ensure, that aU assigned tasks are carried out. The PIP would also provide a framework to assessAt the top levels, monitoring is required to ensure the priorities and benefits cf all investments, and athat cabinet decisions are monitored and followed- vehicle for detrmining finances in the medium-up on. At other levels, staff require training in term.planning and scheduling of work and in adoptingsystems, such as weekly progress meetings, to 3.22 The current level of public investment inensure adequate and appropriate follow-up. GDP, about 30 percent, is high relative to GDP

growth and in comparison to those in othercountries. Dunng the first tree years of the First

21 Voelaw4: Marshall ISl

5-Year Development Plan, only about 45 percen of Aid FTwsplannd development expenditures wer made.amounting to US$44 million. About two-thirds of 3.26 The bulk of aid flows have been from theths was for infrastructure investents, about US, principly throug the Compact. Aboutanother 20 pecent went to the soca sectors and 95 percent of fundinh for the First S-Yearthe balance to economic and govrnment sevices. Develomt Plan, originated in the US eitherThe Second 5-Year Developmnt Plan enmisions through the Compact or as grns from governmentinvestment outlays of US$219 millio, with only agencies. The balance came maily from the JapanUS$157 million in fundi identfied. Sectoral lntmmatond Cooeaon Agency (JICA) and UNpriorities are now chaged somewhat, with agencies. The Govement is developinginfrastcture allocated one-third of expendre and reltionships with other donors, both biatal andsocial services doubling their share. multilat, in order to Increase foreign assistance.

In December 1991, it participated in a UNDP-3.23 The Second 5-Year Development Plan sponsored Round Table Meetig of donors. As aidentifies a core investment progrm of about result, the Goverment expects to receiveUS$158 million whic corresponds roughly to the development assistance in 1991/92 totalling abouttotal amount of fndig identified. Given the US$14 million.shortfall in fimding and the low absorptive capacityof the public sector, the Government should Omher Jaswconcentrae it's efforts on implementng the coreinvestment program. Within this core investment 3.27 There are a number of other issuesprogram, it will be important to ensure that peraining to budgeting which require attendon.adequae funding is provided for the expansion of There is a need to consider supplemeaiywater supply and seweage connectons a tions symically rather than in theExitures for operations and maintenance present ad-hoc fashion. Guidelines should be(O&M) to maintin the infrasaucte stock are also established requiring project proposals to supply aimportant, especially in the areas of education, set of stmndard information and analysis. Budgetwater supply and sewerage, and the environment preseaion and accounting need to be improved,These issues are discssed at length in espialy the capacity to make forward estimates.Chapters 4-6. Resolution of these issues will clearly require

significant departures from present practices but the3.24 linage between it and Recret biggest difficulty will contnue to be the problem ofExpeditr. Many past investments, as well as staff skills, traimg and performance in these areas.new inve ntven those made through Some of these issues are discussed in the nextconcessional finance or grants-have a coinuig section.call on the recurrent budget, yet there is no linkbetween the capita and recurret budgets. A newschool, for example, requires teachers, supplies, D. PWBLIC ENTERPRISE MANAGEUENTand mainenane for its operations. Establishing aninstitutional framework for assessing the recuarent 3.28 There are seven public enterprises in thecost implications of any new development RMI, including the MIDB. Non-financial publicexpendes is therefore an important priority. entewrprises are limited almost exclusively toCombining or otherwise integrating OPS and the utlities-water and power on the larger atolls, andMinistry of Finance, is a desirable first step to telecoummuncations. Only one of these publicachieving these linkages, enterprises is profitable, the remainder rely heavily

on subsidies from the Central Government. The3.25 AssessmentefMacrmeconomucPrlordes. Government has taken an important first stepOne result of the separation of the capital and towards divestiture by initiating privatization of therecurrent budgets is an imability to ensure that totl one profitable enterprinse. The Government has alsoexpenditures reflect economic priorities. invested in a mœber of commercl ventures,Integration of the planing, capital budget, and mainly in the fisheries sector.recurrent budget formulation processes, and of theinstitutional responsibilities for these functions, Public Enterpise Peormaenwould help in this regard.

3.29 The non-financial public enterprises arethe National Telecommunications Authority (NTA),Marshalls Energy Company (MEC), MarshallsWater and Sewer Company (MWSC), Air Marshall

Voluae 4: MArdwii slahnd 22

Islands (AMI), Tobolar Copra Processing Plant meter needs to be performe immediately in order(TCPP) M and F Fishing Company (MFF) and to cover the entire netor. Finally, bls must beM and D Fishing Comany (MDF).2 With enforced so ta non-paymt results in trinationexception of the NTA, all are loss-makig of srvice. This will require both organizationalenprise (see Table 3.1). These comansad and personnel changes in order to etabish anan opeg deficit of US$11 m in 1990191, effective acountng system and enfore bills.contibutingabout 20 percent of the bu"et 4deficitand equivalent to nely 15 percent of uavi. One 3.33 The MEC has expatriate managers, aniof these, AM!, was responsible for nearly receives budgetay support to cover both its capital95 percent of these losses on a net basis. Net and recurrent costs. It appears well-positioned tofinancing (after subsidies), amounted to expand its services to meet future demand given theUS$9.3 million, and was obtained mainly from the present capital stock. The principal issue is theCentral Govemment and MIDB, and to a lesser power tariff which is so low that even doubling itextent commacial baos. would cover less than half the opeting and capital

costs. A proposal was recenty discussed which3.30 Given the shortage of tehnical and would have raised commercial tariff rates bymanagerial skills, the Government contacts out the 50 percent from 12 cets/kwh The outcome,management and operations of these non-financial however, was an icrease of only about 17 percentpublic enteie. The lack of profitability of the to 14 cents/kwh effective December 1992. It wasutlities does not necessarily reflect inefficient also announced that residential tariffs would rise bymanagement but rather the rate-seting proess, 10 percent in December 1993. The Govenmentwhich is highly centalized within the Cabinet and needs to allow the MEC to establish a rate-settingnot based on concepts of cost recovery. Thus, mechanism which is based on sound pnmciples ofalthough the utilities do periodically request rate cost recovery. In addition, tariff adjusmetincreases, the Government response is usually not should be reviewed by an idependent regulatingto grant them but to instead offer a tansfer agency or group. Given the present exmely lowequivalent to the expected revenues from the levels of cost recovery, a gradual program of tariffproposed new rates. As a result, the utilities are increases with a target of achieving full costfalling further behind in terms of recovering their recovery over four or five years would beeconomic costs, and budget fmance is being appropriate.inc:reasingly used to subsidize public utilities.

mp3.34 The TCPP is managed by a private firm3.31 Until recendy, the MWSC was managed for the Government for a management fee. Mostby a rrivate company. Under the terms of the copra is produced on the outer islands and sold tomanagement contract, the company's annual fee TCPP in Majuro for processing and export. TCPPwas based on the number of sewer connections has recently begun to manufacture soap frommade. Ilegal water connections and resulting coconut oil, one of the few domesticaly madelosses are serious problems for MWSC. Illegal goods available in the RMI. Copra production hasconnections and wels run the risk of damaging the been declining, due to a number ofestablished distnbution system with serious factors-declning world prices for copra and itsconsequences for water delivery and salt water derivatives, declining yields of establishedintrusion. Accounting and administrative records plantations due to shenilty and a lack ofare in disarray and the extent of present coverage is ma c, improper drying techniques and anot known. Only about half of those households chronic shortage of storage and ransortaton. Aswith connections have water meters. In any event a result, TCPP presendy operates at less thanthe meters are not closely monitored and unpaid 25 percent of capacity. Copra production has beenbills are not enforced. The company is unable to supported by a general subsidy which has been inmaintain the present network due to a lack of effect for a considerable period of time. Thiscapital and wil encounter difficudty expanding subsidy has been rather modest, averagingservices as well. US$0.7 million per year over 1990-92. In an effort

to stem migration into Majuro from the outer3.32 The management contract for running the islands, the Government recenty instructed TCPPMWSC because did not provide appropriate to increase the price paid to producers by anincentives, as it rewarded new connections at the average of nearly US$300 per ton. The durationexpense of operations and maintnance (O&M). for this special subsidy has not been determined,O&M must be an integral part of any expansion but the allocation for 1992 was US$3 miUion.plans. Rates need to be set in order to improve Given the generaly unfavorable outlook for long-cost-recovery. Acquisition and inallaon of water run world prices, the special subsidy should not be

23 Vokmeiw4: MarshallIdan

Table 31: NDICTORS OF FUJC Em wU PRFORMANC, 1991/(US$ MLION)

Operatig Non-operating Trsfers & FinancingSuS Revenue Subsidies Required

Air Mal Ilds -9.0 -0.4 +0.6 -8.8National Telecommunications Auth. +0.9 +0.3 +0.2 +1.4M & D Fishig Co. -0.8 -0.5 0.0 -1.3Marls Energy Co. -1.5 0.0 +0.4 -1.1Majuro Water & Sewer Co. -0.3 0.0 +0.4 +0.1Tobolar Copra Processing Plant 40.3 -0.1 +0.8 +0.4

Tot -11.0 40.7 +2.4 -9.3

Source: Ministry of Finance & IME.

considered as anything but a short-term measure, analysis of load factos might reveal theand it is responsible for the operatng losses faced inappropriateness of the present fleet, andby TCPP. Tbe only way to reduce TCPP's reliance corrective measures could result in lower operatingon the budget is to remove the copra subsidy but costs thereby enhancing profitability;clearly given the impotce the Goverment (c) terminating unprofitable routes;attaches to reducing migration to Majuro and Ebeye (d) privadzation; or (e) closing the carier. In anyfrom the outer atolls this is not a viable almative event, it does not make economic sense for theat this time. Government to spend over US$8 million (the

estimaed financing requiement for AMI in3.35 AMI is Mashallese maned and 1991/92) mainly to supprt fish exports generaingoperated. One route of its operation is rn by a US$4 million in revenue. The subsidy on AMI isforeign company under a management contact. As serving to cross-subsidize the operations of theTable 3.1 shows, AMI is by far the biggest loss- commercial fishing operator. It should, however,maker of all public enterprises. The eratng be noted that the exected expansion of the fishinglosses of AM! are more than three times as high as opeation in Majuro by the additon in late 1992 ofthose of all other public enterprises combined. The ten new boats, may result in substantially lowerairline operates services from Hawaii to the RMI operating losses. The Government's strategyand to Fiji via Kiribati and Tuvalu, as well as should be to select a program which will eliminateinternal routes withn RMI. The Majuro-Honolulu these losses within 3-4 years at most, with clearlyroute is largely responsible for the operating defined benchmarks to measure implemenion.deficits that AMI has been generaing. By contrast,the inter-Micronsia routes are profitable. The n_vsWzrdenMajuro-Honolulu route was established in order toserve the commercial fishing industry which was 3.37 In 1990, the Government undertook abelieved to be consrained by transport to Hawaii privatization program for the NTA. It was basedand other foreign markets for its fresh fish. Given on an evaluation of the management and technicalthe present situation of one commercial fishing quality of the NTA and was encouraged by the factvenure utilizing the services of AMI, unless fish that it was a profit-maklng enterprise. Theexports increase rapidly these losses will continue privatization program aims to reduce theindefinitely. Government's stake in the NTA to 25 percent

within five years by selling shares to the general3.36 The Government should explore public subject to limitations on the size ofalternatives, such as: (a) establishment of a regional individual holdings. Presently, only 12 percent ofairline (a concept which generates enthusiasm in the stock has been sold to individuals and as aneighboring countries) which might then continme result the Government is considering relaxing theto operate that route; (b) undertaking a professional ownership restrictions.technical evaluation of the airline and its serviceswith a view to restructring it. For example, an

Voluw 4: MashallsIlallds 24

Co_uhwdil *uveutne public investments in support of fishing and,. .. tourism. Additonal Investments are being examied

3.3 RMI has made and is continuing topursue actively by MIDA and the Ministry of Resourcesa number of investments in commrcia and Development. There is a strong need to obinundertals. Many have been unsuccessful. One the best posible advie on mtionalizig pastexample, was the purchase of two pursseiner for ivestme. At th se tme, the Gov entoffshore fishing one of which the Govenment is shouldavoid further commercial ventures, so as notpresenty seeklog to sell. Curret piioutd to crowd-out private investment.in the Second S-Year Development Plan propose

ENDNOTFS

This section draws on the work of a recent UNDP project appraisal mission which aims to strengthen publicadnistraon in the RMI. In addition, the ADB is implementing a project to upgrade human resourcesdevelopment in the public service. A number of other donors are also active in training and managemtefforts, most notably the US Department of Agriculture, Australia, Cbina, Japan, the South Pacific Forum andUNDP.

2 The discussion and analysis of public entewrise finances excludes M and F Fishing Company as no auditedaccounts are available, but it is known to have been losing money.

25 Voeiw4: MAruhd Islads

4: Sectoral Growth Strategies

A. INtRODUCTION RMI, but one which is viewed as a new andimpoa source of growth for the economy.

4.1 The Marshall Islands has a very poorresource base, wbich constrains oppornities forrapid development and growth. Given the poor S. AGmcULTwmRnatural resource base, the best option available tothe Govennnent is to rely on a strategy of privat Bwckrewdsector-led growth, utilizing the only natrresources available in abundance to the RMI-its 4.3 Agriculture in the Marshall lands hashumn resources. This Chapter oudines policies in traditionally been a semi-subsistence activity.three key sectors which should considerably Before the availability of imported foods in themiprove the environment facing the private sector 1960s and 1970s, bananas, breadfruit, copra, limes,and should allow it to locate seoral iches where and a variety of other fuis were grown. Today,-t can be competitve. These sectors are few food crops are grown and the sector consists

iculture, fishing, and tourism. The latter two mainy of copra in the outer islands forare identified in the Second 5-Year Development consumptn and export. Soils are thin, poorlyPan (1991/92-1996/97) as crucial to long-term developed, coralline in naue, and susceptible todevelopment, and the Government clearly sees them shnization by tidal flooding. This, together withas providing the primary impetus to developmen. low rainfall, inhibits agricultural production on aSection B disusses the prospects for agriculture sustained basis and severely constains crop choice.emphasizing the outer isands. Section C outlines The remoteness of the country from major marketsa stategy for development of the marine resources and high transport cost reduce the possibilities forof the RMI, and Section D identifies constraints export agriculture. The lack of reliable ad cost-faoing the tourism industry and suggests directions effective inter-island tranwort within the Marshallfor the future. Islands, also hampers substantal production for the

domestic market locaed in the utban centers of4.2 Agriculture is the main activity for about Ebeye and Majuro. A lack of data makes itone-third of the population in the Marshalls. The difficult to assess the contnbution of copra to GDP,poor evionment of the RMI-in terms of but it is the main productive activity and source ofiadequacy of soils and rainfall-severely limits the cash income in the outer islands, where one-third ofgrowth and income poteal of the seco. At the the population is located. Other agriculturalsame time much of the land previously devoted to activities on the outer islands include the productionagriculture is neglected and yields have been of bananas, breadfruit, sweet potatoes, taro, anddeclining. The challenge is to rehabilitate the pandanus. These are grown mosdy for subsistence.sector and to find new sources of growth and Livestock rearDg is limited to pigs, which thoughproductivity for those engaged in it. The fisheries widespread, are reared in limited numbers.sector has been beset by severe problems-a lack ofmodern fishing techniques within the RMI and a 4.4 The Division of Agricultre in thehistory of project failure in the sector. These will Ministry of Resources and Development ishave to be overcome in order for the sector to be responsible for agricutural development andviable in terms of generating employment and support. The First 5-Year Development Planexports. Tourism is an ama relatively new to the (1986/87-1991/92)focussed on replanting programs

27 Volume 4: ManIaU 1Slnds

in the outer isands-mainly coconuts, taro, 4.7 In tbe short-term, the recovery in worldpandamus, breadfi, and bananas. An extension prices may be sufficient simulus to increase copraagen was statoned on eah atol to support te output quite subs ntially. T Goverm_. will,program (total cost was $200,000 per yea however, need to increase its efforts in twoicluding wages and supplies). The 1991/92 budget directions-rehabiitaion and an input orientedcuts have ended this program. Through a support progrm to modernize coconut farmingdemonstration farm in Amo, vegetables were also techniques. The rehabilitation program should aimpromoted on a more Imited basis. This does not to clear abandoned plantaions and restore them toappear to have progessed sigificandy, and another producdve staus. This could be undertaken withdemonstaton farm at Laur on Majuro has since well-defined rights of use for those who pardcipateclosed down. An Isaeli managed poultry project in the rehabilitation. At the same dme, thehas been established on Majuro and presenty has Government will need to reactivate its extension2,500 laying-hens with plans to double production agents and encourage them to provide improvedsoon. It is also experimenting with locally hybrid seedlings to replace the aging tree stock andproduced feed using copra and fish meal, which if to promote modern practices such as the use ofsuccessful should result in small import savings. ferdlizers and improved havesting techniques. The

extension agents will also need to provide training4.5 About 70 percent of the 22,000 acres in special techniques such as copra diying, the lackplanted to coconuts are productive. Copra of which has contributed to low outut. Theseproduction has declined from a high of about extension agents wil require traiing and7,000tons in 1970 to an estimated 5,000- spervision to raise thr level of experdse, and6,000 tons in 1991-92, wel below the potntial of they should also encourage increased production of14,000 tons. The TCPP purchases copra and food crops and livestock rearing for domestictransports it to Majuro for proessing into coconut c ion. Some simple value-added agro-oil which is exported. The princpal reason beind processing based on copra should also bethe stgnating performance of copra is the iong-run considered, such as the recent production ofdecline in the world price of coconut oil which has coconut oil soap-but the success of these willfallen by 64 percent in real terms between 1980 and ultimately depend on the maintnane of a stable1990. Other factors behind the low prouvity supply. As these actions will require additionalinclude: (a) chmging pattns of temnre; (b) a lack resources at a time when the budget is underof matenance of the plantons; and (c) changing pressure in the aggregate, the Government ismgration pattems of the population. The shift in encouraged to seek donor assistance to implementtenure from traditional communa based cultivation such a program. In time, these actions will reduceto individual systma has in some cases resulted in import demand for food items. The new emphasisuneconomical units of production and generally on agriculture encouraged by the President, todiscouraged cultivation. Declining world prices produce food for own-consumption, should helpand lack of knowledge of modern practices in create momenatm to implement this sttegy. Asaddtion to depressing production, have resulted in outer island incomes rise, migration to Majuro anda lack of maintena of the coconut plantations Ebeye will become less attractive, and pressure onwith the relt that much of the crop is aging and uban land and in6fastucture may abate.yidds are furher depressed. Income opportnitiesin the urban centers have encouraged migration outof the outer islands, leaving many plauations C. F[SHiwSneglected and labor in short supply on those stillunder cultivation. 4.8 The Marshall Islands' Exclusive

Economic Zone (EEZ) extends over approximatelyProspeot & Sb5tgy 2 milhon square km, and the RMI looks to its

marine fieries resources as the main basis for4.6 World prices of coconut oil are expected economic development. The Second 5-Yearto coniue thL. covery which began in 1991, Development Plan envisions a national fisherieslargely due to adverse developments in the palm-oil industry as the backbone of the economy, supportedsector. This should encourage copra production by artsnal fisheries, and mariculture in the outerand increase income in the outer islands, provided atolls.the increase is passed on to prducers. It also willaRow the Goverment to discontinue the price 4.9 Resoures. The lagoon and coral reefsubsidy of US$0.4 per pound introduced in 1992. systems in the Marshall Islands support a diverseThis should assist TCPP to reduce its operating variety of both fish and invertebrates. These near-deficit estmatd at US$0.3 million in 1991/92. shore resources provide food and protein on a

Voeli4: Marsha Islans 28

sained basis for local inhabitants, but are of PtPrat ectnlted economi value beyond the subsitnlevel.' Excepdons are trochu, giant clams, nd 4.14 Seval prects bave been undertaken,sea cucumbers, which may be commerclly but many have enounted numer problemsharwvced on a sustainable basis. Their sedetay which have led to a substanta curtalment in theirnature require stict mangement to preen activides. These have included:overexploitation.

(a) a fore¢>-. med fish transshipment facility4.10 Although the distribution and abundance which was consucted on Majuro in te mid-of slope fey resoures just beyond the frging 1980s but never became operational;reefs are not well known, sners, groupers,frigate tuna, and other comme species are (b) a foreign-fuded pilot project established inpresent in substial quandties. Exploraory deep- 1989 on Arno Atoll to promote commercialwater shrimp fising has also demonstrated the bottomfish and trolling fiheries, which haspresece of several species of deep-water shrimp, tained about 200 fisbermen. Ths project hasbut the stocks are not sufficient to be commercially encountred difficulties in maintainingexploitable. equipment, providing adequat training, and

motivating fishermen. There are, however,4.11 Several pagic species abound in the plans to extend the project to neighborigwaters surmunding the M all Islands. Skipjack atolls;tuna is the most importn, followed by yellowfin,bigeye, and albacore. Bllfish, marlin, some (c) a foreign-MarshaUese joint veture to producespecies of sharks, and other pelagic fishes such as clothes butuons from trochus shells harvestedmahimahi and wahoo are also commoMn but their in the RMI and other Micronesian islands.commercial importance and value on intadonal No actual processing was ever done, and themarkets is limited. facility is now abandoned;

4.12 Fh Openu*m, FPishing in the (d) a foreign-Marshallese private joint ventureMarsall Islands is predominmdy a subsistence establishing a processing factory in Majuro, inacuivity, undrtke by virtly all households on the mid-1980s to dry and smoke skipjack tunaa part-time basis to meet their needs. It is practied for the Japanese katuobushi (dried smokedin lagoon and near-shore reef areas with spears, tuna) market. The plant reportedly operatedthrow nets, cages, traps, and handies using for 3-5 years but was forced to dose becasecanoes. Fish make a particularly importnM it could not obtain enough wood for theconXtution to the local diet in the outer islands, smoking and curing process;where the average Annual per capita fishconsumption is reported to be as high as 218 (e) a deep-water shrimp fishing venre by anpounds. National average per capita consumption established business in Majuro whichhowever, is only 37 pounds because of the relative termina operations in 1986 after about oneshortage of fresh fish, the difficulties of year because of technical difficulties;transportation from the outer islands, low marketdemand, and the comparatively high prices (f) a private venture to cultivate pearls on Arnocompared to imported camed fish and frozen meat Atoll which has been abandoned;available in Majuro and l3beye.2

(g) two joint ventures between the RMI and4.13 Commercial fishing is centered around private interests centered around the purchaseMajuro and Ebeye. These operations involve and operation of two purse-seiners. These aretrolling for tuna and other pelagics, and ha"dline losing money due to high equipmentfishing for lagoon bottomfish on small boats. replacement and operadonal costs and theEstimates indicate there are 50-70 boats used for generally unfavorable environment for purse-transport, recreation, and fishing, but only 15 are seining. The Government is presendy tryingused on a full-time commercial basis becase of to sell one of the vessels.low demand and few market outlets.3 Thecommercial catch is sold direcdy to restaurants and Reladvely few projects in the sector have enjoyedretail stores. There has been no fish market in success. These include:Majuro since the Majuro Fish Market wasabandoned in 1983.

29 Volume 4: Mwuhail Iuonsds

(a) a modest aquarium sh eoxon busiess which negotiated mulyatetaly, fishing rights acces foeshas been o successfully out of Mqjuro are paid to the RMI under tms of blatfralyfor the last 10-15 years; negotite contracts with the partcipadon of the

egionld Forum Fisheries Agency (FFA). Japnese(b) an outer-island giant clam project funded by aces fees which avead about US$1 million in

the Goverment on Likiep atoll whch is stl the mid-1980s have recety risen to aboutin its infancy. Two other clam production US$1.3 million in 1991 but can be expected toprojects awe also ongoing, but operations are decrease in 1992 because of the declining worldcomparatively small; and price of tuna and the shatp drop-off in Japanese

fishing effort in RMI waters. Similarly, the purse-(c) the previously unusd tansshipmnt facility on seinirg access fees paid by the US have also

Majuro was leased under the tem of a joint declined from about US$0.5 million in 1990 toventure beween MIDA and a Hawaii-based US$0.3 million in 1991.company which has based five lont4 netishing vessels in Majuro, in support ot - 4.18 Enforcement of fishing rights access s aoperation. Fresh fish (primarily sashimi-grawe difficut if not impossible undetakin, given thebigeye and yellowfin tuna) is air-freighted to vastness of the Marshall Islands' EEZ and the smallHawaii and trans-shipped to Takyo. Ten hmnan and financa resoures available to theadditional ships Joined the facility in late Govemment. The Government has, however,1992. recently stepped up its enforcement efforts in this

area and is reported to have successfully takenTan and Lrge-Scale FThhbg actions against violators.

4.15 Tana Operloa. Tuna is the most New Wvjectimportant commercial marine resource in the RMI,fonning an important part of the diet of the 4.19 A number of projects are preseny in thesubsistence sector in the outer islands. Tunas are planing and implementation stages. Thesealso caught by small-scale commercial fisheries and include: (a) a jint-venture to purchase five long-sold fresh in the urban markets of Ebeye and liners, to be financed by MIDA; (b) an expansionMajuro. These activities are important locally, but of the Majuro transshipment operation throughproduction is insignificant compared to the acquisition of five additional long-liners; (c) variousproduction of large-scale, distant-water-fshing- mariculture projects being considered by thenation (DWFN) fleets. Marshal Islands Marine Resorces Authority

(MMRA) in seaweed and giant clam production;4.16 Large-scale fishing operations are carried (d) constuction of a tua cannye aimed at the USc,ut by pole-and-line and purse-seine fleets primarily market, which would take advantage of the dutyfrom Japan and the United States. These vessels exemption granted by the US; and (e) an ADB-harvest surface-dwelling tuna, the overwhelming funded project to build a transshipment facility inmajority of which is skipjack. Japanese vessels Ebeye, similar to the one in Majuro.return to their home base to off-load theirproduction for canning or processing as Piwpects and Recemneadadnskatsuobushi. American vessels deliver their catchto cannery centers or to transshipment bases for 4.20 Despite the problems, the limited longlinetransfer to canneries. Arge subsurface tunas, fisig effort to date has demonstrated that thealbacore, bigeye and yellowfin, are targeted by capture and shipment of sashimi grade tuna fromlongline fishing vessels from Japan, Taiwan, and Majuro may be a viable undertakng. Fishingmore recendy the United States. Albacore operaions have conimed catch rates and theproduction is transferred to canneries, while large, quality of tuna in the area, and Air Marshall Islandshigh-quality bigeye and yellowfin are delivered to has shown its air cargo capability to handle andsashimi markets in Japan and increasingly Hawaii. deliver the fish to market though the airline is

operating at a considerable loss. The high cost ofLicensng Arrangemen air freight and reliability of air service remains

problematic.4.17 Both the pole-and-line and longlinefisheries in the Marshall Islands are dominated by 4.21 The constraints to commercial fisheriesthe Japanese, while the US effort is cocentrated in development remain centered around the poorlypurse-seining. With the exception of the agreement developed domestic commercial fishery, remotenessgoverning purse-seining with the US, which was of the RMI from major metropolitan markets, high

Vouee 4: Marhu slnds 30

labor costs, de difficulides and high cost of (c) negodatng access fees mullaterally witi thetrasportation, and the poor long-tem oulook for other member natons of the FFA and in closeglobal ta prices. The proposa to build a tuna collabotation witi FFA. This is in thecanny would not at the prent time be colective interest of all members;ecnmically viable, given the comedisadvatage of the RMI-in terms of high cost (d) strengteing RMI insdtuions to spport andlabor, lack of appropriate sklls, lack of feshwater, manage fisheries development. MIMAR, theand high baport costs give its remote locato. Govenment's lead agency charged withEven caneries in American Samoa which operate fisheries development, has very linitedunder a much easier envirome ae operating in manpower and instdtutional capacities. Thedeficit. The future prospects in tis area may not ADS has placed consideable emphasis onbe much improved becase of the pottal of strengthening MIMRA so that it can provideincreased competition which can be expected to the technical support, incentives, and servicesfollow ratfiation of the North American Free required for the longer term development ofTrade Agreement (NAPTA) and completion of the the fisheries sector with an increasingpresen round of the General Agreement on Tariffs involvement of the private sector. Theand Trade (GArf). Govemment should additionally focus its

efforts on sehngenng negotiating skills in4.22 In the short-term the Govemment should MIMRA, as these are ultimately linked toconcentate its efforts on: outcome of fishing rights licensing

discussions;(a) finding cost-effecive ways to air freight fish

exports, including through improvements to (e) divestng itself of commercial undertan inAMI (see pas. 3.35-3.36) in order to reduce the fisheries sector as part of a consolidationtransport costs; effort and coentaing its resoures to ense

the viabiity and success in a single area. As(b) encouraging more of the DWFN fleet noted above, experience has demonstrated the

operating in Marshalese waters to tabe very high cost to the RMI of involvement inadvantage of the Majuro transshipment these activities. These activities should be leftfaciliy; open for private sector participation;

(c) increasing surveillance and enforcemea, (f) developing and implemendng a program topartilarly through the use of commercial attract foreign longline vessels to base theirarline fly-overs, and institing an incentive operations in Majuro to take advantage of thesystem for DWFN vessels to report violators; excess capacity of the transshipment facility

(presently operating at 2.5 percent of(d) improving and estabLishing data collection capacity). The Govemment should actively

mechanisms in MIMRA in support of promote such a program among the majorconservation, management, and monitoring; foreign fishing nations. The success of thisand effort wil be highly dependent on ensuing

proper hadling and storage facilities, and this(e) not participating in any new commercial will in tutn require the following:

ventures in fisheries activities. The pastexperience discussed above (see p3ra. 4.14) * internationally competitive handling chargesdemonstates the high costs and failure rates at the transshipment facility;of Past ventures. * adequate storage facilities;

4.23 In the longer-term the Govemment shouldconsider: * reliable, cost-competitve air freight

services;(a) improving surveillance through the use of

vessel-based tranonders and '-xploring the * an incentive structure designed to encouragepossibility of satellite surveillance; foreign operatom to base their vessels in the

RMI. All vessels fishing in Marshallese(b) increasing coordinadon and cooperation with waters should be exempted from fuel tax and

FFA to enforce sanctions on violators; import duties on fishing equipment as is thecurrent practice for government-ownedvessels, or all be taxed modestly.

31 Vekuime 4: M aha isl"atS

4.24 These measures should over the medium- investes in the sector have been establisbedterm crea a fsheries presce and capabiity in along with other incenives such as duty freethe RMI which does not presey exist The impoion of goods for use in the sector.Indonesian case shoud be studied and emulbdwhe possible-for example in terms of requiring MuJar COn*Wvessels fishing in the ESz to fly the national flagand to creat incentives favoring the employment of 4.27 The major costs to the developmentsome local crewme The latter will be an of tourism are, as in the case of oher actdvities.importan conduit to improve the human resource linked to the remotess of the RMI. Air serviceskils in the sector but may also require traing in into and out of dte RMI.s not diredy linked tofishing technologies. Other employment can also mta3r metropolitan markets such as Japan and thebe expet to be generatd as these vessels will US, which could potentialy supply the tourists.requie services and provisining, and possibly Furtermore, tourists flying long distances may nottheir small-scale m ce needs can also be met want to stop in Majuro, given the lack of touristdomestically given the curent availability of skills atrcons, but would prefer to fly directly to thdirin small-scale fabrication and engineering services. final destinaions-prmably the outer atolls. At

the present time. these atolls are cbacerzd by acomplete lack of tourist Ir truc and

D. TORISM amenities. Provision of inrastutr in theseremote aolls may be uneconomical, as in the case

4.25 The Government has highlighted the of electricity, and very diffit in other insuces,development of tourism as an important area in the such as for water supply.seond 5-Year Development Plan. The RMI is,however, not an important tourist detinaon based Polc Optioson hsrical treds and does not possess a welldeveloped turism industry. Of the approximately 4.28 Given the foregoing constaints. the4,000 anual visitors in recent years only about poteial for development of tourism appears very10 pement came as tourists. Practicay the only limited. There are, however, some areas which thedestination for incoming tourists is Majuro, which Government should consider, areas which can beis served by two air caffiers, Air Marshall Islands best characteized as niche-tourism and which willand Air Micronesia. Half these flights are to and have a narrow and specialized appeal. The needsfrom the US, the remainder covering a route which of the RMI are in any case relatively limited. Anextends eastward across Micronesia to Guam and increase of 500 toursts per year would besouthward to Kiribati. equivalent to a 15 percent increase in export

earnings. The Government should therefore try to4.26 Majuro is not particuarly suited to capitalize on these niches by:tourism, being a highly populated urban center. Asmall number of hotels exist, with a tota capacity * promoting the annual sport fishingof 130 rooms, and mainly serve visitors on competiton widely in the US and Japan;business. The vast majority of the towurists are fromthe US. There are no hotels on the other atolls, * trying to develop speciazed tours to visitwhich are served by inter-atoll air service provided the sites of World War II batdes, especiallyby AMI on a regular but infrequent basis. Many of Jaluit, where much of the military equipmentthe outer atolls are considered to be quite worthy is inta but overgrown by vegetadon;tourist destinatons-being pictumrsque and offeringexcellent conditions for diving. Private * developing specialized diving tours whichentrepreneurs have been making an effort to might cover the full breadth of possibilitiespromote sport-fishing in the RMI and to this end in the RMI-from the lagoon side of reefs,have recently established an annual event designed to atolls populated by giant clams and seato aac sport fishermen to the RMI. This appears cucumbers;to be meeting with modest success but is still in itsinfancy. The Government, through the Ministry of * promotig eco-tourism in the RMI. AsideResources and Development, has tried to promote from the pristine outer atolls, the norernthe production of handicrafts for tourists and atolls of Bikar and Bokaak have much toexports, but this has met with limited success. A offer natmalists. The latter may be the onlysmall fund of US$50,000 has been established to completely natural, semi-arid atoll ecosystemprovide seed capital for such small-scale projects in remaining in the world.the outer islands. Co7porate tax holidays for

Velame 4:Mrs hl Ids 32

E NDNOTES

For a full descripdon of the mriie resources in the Marshall Islands, see Republic of t!ie Marshall Islands:Maine Resmcs Pofiles. draft report ppaed for the South Pacific FFA, 992.

2 Economic Report on the Republic of the Maws,hal Islands, ADB, Report No. 1ECR MAR 91006, 1991.

No statistc data arc maintained on the volume and compositionof the commecial tch. A fishery statisticsproject to establish a standardized collection system was started in 1988, but information was only collectedfor eight months.

33 Vo1m. 4: M18uta lulds

5: Safeguarding the Environment for SustainableGrowth

A. INTRODUCTION B. WATER SUPPLY, SANIATION & WASTE

5.1 To the extent dtthe policies discussed inthe preceding chapters to create rapid economic 5.3 The filty of an atoll ecosystem isgrowth based on a growing role for the private based on the absolute scarcity of fresh water, givensector are sucesfl, the Goverment will also the absence of surface water such as rivers, lakes,have to ensure that the growth process is or streams. Thus the RMI has to rely on rainfallenvironmentally sustainable, given the fragiliy of catcbment as its principal source of water.the atoll ecosystem. Population pressres in the Combined with the scarcity of land, this makesurban centers, resulting from the high birth rates availabiLty of potable water for household use,and in-migration place ever greater strains on this sanitation, and waste disposal an important issue.fragile ecosystem. Furthmore, presentGovernment policy promoting growth from marine 5.4 The RMI has addressed water supply,resource-based industies and tourism will place a distribution, and related issues through thegreater burden on the envionent and will have to estabishment of the commercialized Majuro Waterbe in compliance with strict envionmental and Sewer Company (MWSC) in 1989. (A moresafeguards. The objective of holding the thorough dicussion of MWSC can be found inenvironmntal heritage in tmst for fiue Chapter 3.) The MWSC works closely with thegeneratons has been part of formal RMI policy RMI Enviromenal Protection Authority (EPA) tosince 1986. To thid ead, a solid foundation was assure water quality and protect the aquifers fromLaid in 1992 wit' the completion and cabinet comination through seweage hookups, buildingendorement of t, State of the Environmen Report restrictions, and septic tanks.and the Nati ial Enviornmenl ManamentStegy. Water Sup$y

5.2 The key envomal issues in the RMI 5.5 Mwuro's fresh water is derived from rain-are in Majuro and Ebeye, where two-thirds of the fall, normally collected direcdy from an auportcounty's popuation live on small, resource-poor, runway catchment system supplemenztd by pumpedurbanized islets which occupy about 5 percent of water from aquifers-primarily the Laura fresh-the total land area. Urban growth is producing water lens floating on higher density saltwatersanitation, sewage, and waste disposal problems. beneath the islanw The water is filtered, chlori-The water supply problem on Majuro has been nated, and tested . ularly. The available volumeexacerbated by recent rainfall failures. The near- and salinity of water depends upon the amount ofshore environment is vulnerable to flooding, water drawn from the lens and the rainfall. Normalerosion, silting and lagoon europhicaton, due to 1992 demand is esdmated as 1.1 milion gallons perpoorly designed causeways. Other envonmentl day, but this has been constrained by supply toissues such as protection of biodiversity and about 600,000 gallons per day in rece years andagrodeforestation are important. The uccess of 300,000 gallons per day during 1992 due to apolicies to address these issues will ultimatey drought between January and July.' Water isdepend on the instiutional framework. typically available for 3-4 hours per day, but this

35 Voluw 4: M iaha Islnds

has been reduced to about three hou on alternate capital ivestment s. The existidays during much of 1992. The newly developed building code should be a d to require all newLaura aquifb has provided nearly the entire public homes and buildigs to insa rooftop catchmentsupply in 1992, with salinity and overall quality systems to supplement the water supply. MWSC'sremaiing well witi US standards despite the nar pesent plans to extend and protect the runwaytotal lack of replenishment. The water supply catchment system should be supplemned withsituation in Majuro conuies to deteriorate, with an investment in rooftop cachment systems. Theestmated 35 percent of the population receiving latter should lso be extended to a number ofwater only once every three days, for a few hours. smaller atolls, to supplement existing sources.

5.6 At current growth rates, Majuro's Sweswepopulation will double in twelve years placing aheavy demand on the water resource both dircdy 5.9 Groundwater supply in atolls is extremelyand through increased danger of conaminon. In susceptible to contmination wherever there is poornon-drought periods, there is aldy excessive sanitation. The coverage of the sewere system inwater consumption, due in part to heavy subsidies the RMI is incomplete. The 1988 Census reportedand poor meering.2 The inaquacy of the public that the majority of people in the country had nowater supply has already led to increased use of un- toilet facilities at all. The coverage in Majuro wasmonitored and possibly unsafe well water. Aside worse than in Ebeye-in Majuro, 55 percent had afrom the health risks these wells pose, there is the flush toilet and nearly 25 percent had none or useddanger that they may damage the natural lens with pit latrines, whereas in Ebeye 88 percent had apoally disastrous conseques for the overal flush toilet.water supply. Given present consumption patterns,lack of a reliable and sae water supply will emerge 5.10 In Majuro, an estimated 40 percent ofas a serious constraint to development over the households are connected to a salt water seweragenext decade unless altratives are found. The system. This connects nearly all households andGovernment is presendy considering acquiring a businesses in two of the tlree principal areas, Ritadesalination facility to supplement the public water and Jenrok, with a sewerage plant that dischargesswply. This proposal involves a desalination plant on the ocean side of the lagoon.3 In the third area,running off the waste heat generated by MEC's known as Delap, which contains the only otherelectric power genetors and producing significant water lens of usable quality, only400,000 galons per day. The deaination plant 50 perent of homes are connected to the system.will require an investment of US$4 million but no Sixty-eight homes have no sanitry facilities at all,funding has been idenified yet. and 74 with pit latines or septic tanks need to be

conneted to protect the lens. Funds have been5.7 Ebeyesufferedfromachronicshortageof allocated for some, but not all, of thesewater until recently, with water available for only connections. The nearly 60 percen of householdsabout one hour per day through the public water which are not connected to the saltwater sewersupply. The situation has, however, improved system use freshwater systems with septic tanks,greatly with the acquisition of a smaU desalination water seal toilets, pit latrines, and/or the beach.facility. Water is now available on a near- There are no facilities for emptyig septic systems.

nuous basis. In the outer atolls, private weUs Much of the sewerage equipment is old and inare the main source of water, however, some wells margin condition-pumps, reservoirs, piping, andin Jaluit and labor have been conminated. controls are all in need of maienance. In the long

term, the ground water supply could be tratened5.8 Protecig the water resource on Majuro by failures in the sewerage system if mainteshould be the Government's key objective in water is not improved.supply. This will require two sets of policies-tefirst aimed at securing the safety of the lens from 5.11 The sewerage system in Ebeye is plaguedcontamination and the second designed to reduce with problems regarding the adequacy of ewagwater consumption. To this end the MWSC will trament This problem is further compounded byrequire staff to inspect and police ilegal wells. the existng outfal disposition, which may pose aMWSC should immiaelry meter al consumers serious public health hazard. The discharge of theand bill them according to actual consumption. sewerage system is on the lagoon side, close to theover a period of 4-5 years the Goverment shodd shoreline, with the rsut that facl mattereliminate all subsidies to the MWSC and allow it to frequenty washes up on shore. The problem mayraise charges to the ful cost of supply. This will have been exacerbated by the location of thereduce consumer demand and, over the long term, causeway underconstuction in mid-1992. Inouter

Voea 4: Manul Isknds 36

atolls the mjorlty of people bave no toilet faciities and numeu old PCB-filled transformers areat all and use the beaches., st at or nea Ihe Public Works ste on Majuro.

WHO has prepared a series of recommendations for5.12 The poliy imperaive in M*o is to short-term inexpesive pv beterextend the salt water sewerage system and increasedlection, ex ionofcolletionbeyondits covae from the prese 40-43 peren to at DUD, leachate pit conectin to the sewer lines,least 80-85 percent within five yeas. This should and taks for hazardous wastes-and for longerhelp to lower water consumption (as most of the term options-better equipment, financial control,uncnnected househokls are using freshwate for and mainte plus composting and recycling.5

flushing) and thereby protect the fragile Delap andIaua lenses through both lower withdramwal rates 5.17 The Government needs to improve theand reduced danger of groundwatercontmnaton reliability of household wast collection in Majurowhich would be extremely cosdy to rectify. Suffi- and increase the coverage from the presentcient fuig for regular ongoing matna of 40 percent to a more reasonable level of 80 percentpumps, reservoirs, piping, controls, etc. will be (slighty lower than e Bangkok rate). The Go-essental. The MWSC estimates that it will need vernment should also explore altnatives such asUS$20 million for sewerage development over the privatizig the collection of houiseI-old garbage innext 5-10 years. In Ebeye, where population densi- conjunction with enforcement of anti-litering laws.ties are extremely high and good sanitation is espe- The other short-term rcomm ons made byciaLly important, consderaon should be given to WHO need to be adopted immediately and those forrelocatig the sewerage outfall to the ocean side of the long-term assimilated into the planning andthe lagoon. investment cycles of the authorities concmed. All

owners of the widespread accumulation of rusted,Waste Dposal dilapidated equipment should be required to move

it to a specified dump area, and stiff fines should be5.13 Household waste is collected eveiy introduced for non-compliance. The Ebeye landiillseveral days from the center of town known as the requires protection from wave action, and itsDUD area by the Majo Atoll Local Government mana needs to be stengteed in order to(MALGOV) and taken to landfills which are used reduce the widespread proliferation of materiasfor land reclamation once fiLled. The World Health from the dump.Organization(WHO) estimates that only 40 percentof household waste is collected, with the remainderbuned or scattered.4 C. NEAR-SHORE ENVMONMENT

5.14 There has been haphazard selection and 5.18 The near-shore environment in an atoll isue of disposal sites, a lack of cover material for extremely important in terms of its effects on thethe Rairik landfill (near the aiport), and generaUly population, which must rely on it to provide foodunsightly disposal of large amounts of usted, and frequently uses it for baffing. Coral deathdilapidated equipment throughout Majuro. along the coastlines of Majuro and Ebeye isAlthough unsightly, these are not a major hazard. responsible for eutrophication of lagoon watersMore serious is the lack of control of leachates and (especially evident near those homes lacking toilethaphazard disposal of hazardous materials such as facilities) and the lack of natural lagoon flushingasbestos, fluorescent lights, batteries, paints, and due to causeway construction. Monitoring by thechemicals. The ocean waters near the landfill EPA indicates that Majuro lagoon water quality hasconsistey fail to meet EPA water quality declined continuously since 1982. RMI waters arestandards, and the dump site is freqenly well endowed with marine resources, and reefscavenged by pigs. slopes are abundant with snappers, groupers, and

other food species. These are especially important5.15 In Ebeye, rubbish collection is reliable for the outer islands, where fish consumption is abut disposal is poor. The landfil is not secure and major source of protein. Therefore it is imporantchildren somedmes consume discarded food. The that coastal waters be proteted from deteroration.landfill has been eroded by wave action, thuspolluting the ocean and near-shore. Caseways

5.16 In July 1992, transformers throughout the 5.19 The road encircling two thirds of MajuroRMI were tested for hazardous poly-chlornated lagoon includes numrous land-fi1led causewaysbiphenyls (PCBs), and a report is expected shortly. which increase both erosion and flooding. RecentAbout fifty 55-gaUlon drums of carcinogenic wastes studies doumenting the effects of poorly-designed

37 Volue 4: MaruIwil Isk,ds

causeway inl Kiribati ar re t to the RM1.6 Idgou mlti-use eiea, reamaton, andThese show that the impacts of causeways have coass re-enrcmt s required to protect theIncldedmagroveforestdepletion,ducd lagoon coasts and to provide resomces for food andflushing, i asedpollutn, masive crab, fin fish, onal products. Do assisce should beand shell fish changed pas of erosion sought to estab baseline sea-level data and toand i on, declining oxygen levels to the determine the vlneablt of RMI shorelins topoint of eutrophicadon, coasine erosion, and I-ncr-sed stom action and sea-level rise.complete di c of some idets. It isunderstood tht the desgers of the Ebeye- FseriesGugeegu-NiDJi causeway currently underconstucton have studied the Kiribati experience. 5.23 RMI has a relatively large tuna resource

whch is rotedly exploited well below susinable5.20 It is recommended that new causeways in levels. Local tu processing has been consideredthe RMI be of open designs which do not unduly by the Government for a number of years as arestrict natural curren and change eiting pattns desirable indust activity to promote exports andof lagoon flushing or lead to sim on with incrase employment and incomes, and is discussedadverse effects on coral and marine life. The at leng in Capter 4. Fish caning and fish mealGovernment should reconsider its recent deciion to production require high qual water at the rate ofallow the buflder of the Ebeye causeway to import about 530,000 gallons per day for every 100 tonsoil and metal soaked soil for landfill over the of fish. Given the currt problems of waterobjections of the EPA, as the pottial for costly availability, this clearly poses a problem. Onedamage from contmiion is high. solution which has been actively considered

involves utilizing waste heat from the MEC powerCostd Erosion and Sea-evel Rise plant to produce water (see para. 5.6). Aside from

divertng potentally scarce water from households5.21 There is already extensive land loss on a more serious problem that this would raise is thatMajuro-particuly on the ocean side due to ero- most of the water used in tuna processing ission-and on Ebeye atoll and elsewhere on Kwaja- remurned to the land Ci ocean as a high biologicallein. One recent assessment charcteized the oxygen demand (BOD) polluting effluent.problem on Majuro as critial.1 The effects ofpossible global climate cange and the ensuing rise 5.24 The Govenment should ensure that anyin sea level would exacerbate land-loss on the feasibility studies for a tuna cannery or otheraleady vulnerable islets. This is widely perceived processing facility explicitly take account of bothwithin the RMI as the most serious long-term the water scarcity and its effect on consumers asproblem facing the country. A recent study esti- wel as the pollution potial of the effluent in themated that a one-meter rise could decrease the land context of nvironmen damage to the near-shore,area of Majuro atoll islets by 28 percent, decreme and that it pays full cost for water used.the volume of the inmortant LIaura groundwat lensby about half, and increase the severity and fre-quency of flooding cridcally.8 For example, it D. O1ER ENVRONMWENAL ISSUESsuggests that ocean side flood frequency would in-crease from once in thirty years to over ten times BbRidvfty and Agroreealonper year. Poction against flooding through theconstrution of berms, revetments, bulkheads, rub- 5.25 The Limited soils of the Marshall Islandsble slopes, etc. would be prohibitively expensive.9 are exmy inferle. There are no known

species of plants or animals that occur only within5.22 Whether or not the threat of sea-level rise the terrestrial areas of the RMI. The maineis real, there are a number of measures which the environment is richer with nearly 200 species ofGovermment should take to improve the resilience coral, 250 species of reef fish, and perhaps 27of the foreshore. These include prohibiting the species of whales, dolphins, and porpoises indestruction of live coral and mangroves, which Marshallese waters. Over 60 percent of the land isstabilize the reefs and coastal zones respectively, under coconuts, of which half is productive. In theregulatng beach sand removal, and prohibiting the past, planting of coconUt trees has degraded thecollecion of reef rock, stones, and sand from areas naural landscape and resulted in deterioration ofof flat reef near settled areas. Major new traditional agroforestry. However, two pisinedevelopments should be set back from the high northern atolls, Bikar and Bokaak, have beenwater mark. A long-term program of protecdng idendfied as importat for preservation. Bokaak,existing coastal mangrove forests, replanifng an important rookery for at least twent species of

Vokwe 4: Mfarsl IlNs 38

birds, may be the only completely natural, semi- Pafic region, 46 tmes higher than the nom,arid atoll ecosystem remaiing in the wotld. Both indicatve of a very high degee of waste.atolls are important breeding sites for tutles, Consumption in Mtjuro is Fven higher. by nearlyinluding the mare and endangered green tutle.t 50 percent. Excessive eneg consumption of this

type wastes scarce resources and incrats the risk5.26 It is clear that the RMI lacks the - of envime damage rough oil spilage.sources, both tecal and fincial, to safeguardbiodiversity. Therfore, the Governmem should 5.30 Ad e standards for fuel hanling andapproach the South Pacific Regional storage need to be established and enforced toProgram (SPREP) for asshuce in creadng and ini- reduce the potnally serious risks associatd withaially m_nagig tenstrW and marine areas under spi1lage and fre. In addidon, adopton of the

the Global Environmental Facility (GEF) funded earlier o ts regarding raising of powerSouti Pacific Biodiversity Conservation Program. tariffs to reflect a policy of cost recovery (see

para. 3.33) would go a long way toward reducingRm%aidie.c excessive consumption and thereby alleviate safety

concerns further.5.27 Between 1946 and 1960, the MarshallIslands were the site of nuclear testng undertakenby the US for its atmospheric nuclear tesng E. INS TUTIONAL CIALLENGFSprogram. During the course of this, 66 nucleardevices were detonated. The nuclear s as Envhwnwod lIs onsconfned to the norhern atolls of Bikim andewetok, although Rongelap and Utrik atolls and 5.31 The EPA was established in 1984 and re-

their populations were also affeced by the ensuing organized as a goverment-funded statutory autho-fallout. Today, Bikini and its 24 islets and many rity in 1987. It is quasi-autonomous, linked to theprs of Enewetok remain uninhabitable. Damage MiniFay of Health Services and Environment, andfrom this program is not limited to residual resp nsible for monitoring and regution of waterradiation and its health effects-one of the tests in qu sty, solid waste disposal, hazardous wastes, andEnewetok fractured the earth's surface at the lagoon sesiage. The EPA is a professional organizationbottom to a depth of nearly 500 meters. which has improved its competncy in recent years.

5.28 The long-term effects on the physical 5.32 The EPA has a public education program,enaronm and health from radioactive materials and its own legal specialist, and drafted thereleased during nuclear weapons tesdng is well environment chapter of the current nationalcovered by various joint programs funded directly development plan. It has sixteen staff, fourteen ofby the US or through the Compact. There have whom are local, and half of whom are professional.been nuerous studies over the years, and a US- It has good laboratory facilities, performs regularfunded program is attempting to clean-up damaged checks on water quality, and the staff appear to belnds. The RMI government has had extensive conscientious and well-motivated. Both staffingadvice from scientific and legal experts and has and budgetary provisions appear to be adequate.established a Nationwide Radiation Survey withinthe Enviromental Radiation Laboratory. The 5.33 WeaknessesinenvironmentalmanagementUS$3 million Compact-funded survey, guided by an include limited coordination among governmentinterational advisory panel, commenced in late agencies, relatively poor public support, and1989 and is measuring and assessing the effects of ineffective enforcement of exisdng environmentalnulear testing on the people, land, and marine regulations. Another apparent weakness is the lackenvironment of all RMI atolls. Results from this of staff and funds to cary out the EPA's coastalwork are not expected until late 1993. As the issue management planning anu regulatory commitments.is being adequately addressed by the Govermment,it is not examined further in this report. 5.34 The Government needs to raise the profile

of the EPA within govemment deparments,EnerV Secdr emphasizing the imporamce of the environment and

the role of environmental planning in order to5.29 Fuel storage and handling in both Majuro increase inter-departmental coordination. Thisand Ebeye are deficient, posing risks of ground- could be undertaken as part of a broader programwater and marine pollution as well as fire hazards. of public education and awareness of theHousehold electricity consumption in the RMI, at environment. Finally, the EPA should be provided700 KWH per month, is amongst the highest in the with one additional staff member to deal with

39 velw 4: Manhl blend

coastal ent pnig and u in eo ans in tis area, sb as acquiton ofcoiunction wilh the earir n ecorndSo to asistance and funin for theestabish a program for creng and a establishmet and managemen of coast andtrestri and marne aras for conseaion (se marine resrves.para. 5.26).

5.37 Nao I MgLeAl Faewwk Suutey. A national task force on envirnmental

management and sustaible development was5.35 The 1984 Nadood Elvkomend established by Cabinet in 1991 to overseeProtction Act established the EPA and provided it prepaatdon of the 1991 Rio United Nationsin principle wkh broad powes O po gate and Conferee on Environment and Developmetenfore reguaions. A Coasta Consvation Act (UNCED) submission, the 1992 State of thewas passed in 1988, which provides for conrol of Envioment (SOE) report and the Nationalcoastal zone development and specific Environmental Management Saey (NDMS), allEnvironmental ImpactAssessment(EIA)procedures spported by the ADB and cooriated by SPREP.but this has not been implemented. Zoning laws The SOE is an excellent summary of issues, and thewere proposed by MALGOV in 1991 but were NEMS, endorsed by Cabinet in May 1992,defeated during sbseque public heaings. The provides a program of action detiling 1992-19961988 MIMRA Act provides We powers to control pnonties and budgets. There has been relahvelyand manage the pelagic marine resources out to the lite public inipUt to the NEMS except through the200 nautical m le EZ. Earlier lesaton provided single private sector member of the five-personfor the control of endangere species. In general, EPA board.BlAs are not obligatory but can be required at thediscrdon of the EPA. An analysis of 5.38 The NEMS recom_meds 1992-1996envirnmenta law was completed in mid-1992 expediture of US$10 mfllion emphasizing sea levelwhich idenified the main gap as the lack of rise stuies, water supply enhancement, improvingprovision for establishing coast and marine se and odter waste disposal throughout thereserve areas. country, environmental education, and legislation

and establsment of protected areas. The three5.36 Lgslaton needs to be drafted and highest priorties idenified were sea-level rise,enacted to allow for the establishment of coastal water supply, and waste disposal. The report hasand marine conservation areas. This will need to been endorsed by Cabinet but none of the fundingbe done in order to complement the other has yet been approved.

ENDNOTES

Based on 45 US gallons/capita (170 liters) x 25,000 people on Majuro, the EPA estmate of demand for a 24-hour period. For other atoll counties in the region, UNDP's regiond water program assumes much lowerconsumption-about two-thirds lower.

2 The present tariffs cover less tan half the estimated operatn costs of the water uility, and may consumerspay a fixed rate because of the lack of meters.

3 The system has corctd 948 households with plans to connect an additional 142 soon. This effort is EPA-funded to assure groundwater protection.

4 Solid Waste Managment Master Plan for Majuro (WHO, September 1991). A reliable level of 80 percentcollection. slightly under the Bangkok rate, is a reasonable goal. Even Singapore collects only 91 percent.WHO staff reportedly stated in 1991 that the Majuro landfill, though inadequate, is one of the best-managedin the Pacific region.

5 Recycling is preseatly undern on a limited basis-aluminum cans aTe collected, crushed, and shipped tothe US west coast. The shipping cost is US$1,000 per container load worth about US$5,000 as scrap.

Vole 4: Marsha lands 40

I is It Devewopment or Daestrxdon? Intpac of Physical Innovadons on AtoUls: Biological and EcologiscalhnplhtpLions, T. Tebano, Univemity of the Souffi Pacific, Instimte of Marine Resourc, 1991.

7 CoaGst Erosion on MqauJ Atoll, Marshall IslamsW, 0. PIlkey, Depam of Geology, Duke University,1990.

8 VkerabUity Assessment to Accelerated Sea level Rise Case Study; Majuro AtoU, South Pacific RegionalEnvirom_ental Program, 1992.

9 The cost of raising the level of one square mile of Majuro by one meter is estimated at US$40-SO millionexcluding moving of buildings. Ptotecting the DUD and airport areas fom a one meter rise would costroughly US$127 million.

to Partial rsults from an August 1992 survey indicate that both birds and turdes are seriously threatened byrecent large increases in rat populations on Bikar.

41 Vome 4: arshl Ilnds

6: Human Resource Development

A. nTOUCION future be encura d by the increasing puaionpressures and lack of employment opportunities.

6.1 The developnt sratK enumeted inthe p n chers of this survey is based, 6.4 Labor Force Tren. The labor force ofbroadly speaing, on i inreasg private sector about 13,000 persons in 1992, is increaing slighlypardcipation and inidative in the economy, with faster than the rate of popuon growth, equivalentGovenmnt playing a largely fa role in to about 600W700 persons per year. The publicSupport of the private sector. Thus, in this contet sector is no longer in a position to absorb increas-human resource development will be crucial to ing amounts of this labor; it is increasingly resourcefuture developmentprospecu,pardculy given the constaned as Compact fundig has begun torather narrow endowment of natura resowces. A decline. Thus, increasingly, the burden of provid-healthy, well-ducated, and motivated work force ing new jobs will fall on the private sector.will in turn be an invaluable economic asset.

6.5 SAW Shore*es. There is an acute lack of6.2 In the period since self-governing stnts skilled and semi-skilled labor in the RMI affectingwas achieved, the public sector and USAKA have both the public and private sectors. The publicbeen the main source of employment opportyin sector is especially handicapped by the lack ofthe RMI. For the future, however, this situation middle-level and upper managemet skills. Thecan be expected to reverse itself: the private private setor on the other band is more concernedsector-expanding in response to Government about the availability of technical skills, but theefforts to encourage development-will become the RMI is unable to respond to that need because of amain source of ne jobs, as the public sector wil weak foundation at the primary level in language,be increasingly consained by a dghtening fiscal mat atics, and scientific concepts. These basicsituation. This in turn suggests that far greater sill shortages also result in a relatively largedemands will be placed on human resources in number of expariates employed in the RMI acrossterms of both the required skill mix and the quality a large range of professions (see Table 6.1).of sklds. Thus a well delineated human resourcedevelopment suaegy will clearly eap importantdividends for the RMI. B. ISSUES IN TrE EDUCATION SECBoR

6.3 Deerphic Tre1 . The Marshallese 6.6 The education sector in the Marshallpopulaton is relatively young, with 60 percent of Islands consists of about 95 primary schools, 6the population under the age of 18 years in 1992. seconday schoob, and one college. All the sec-This population is growing very rapidly, at 4 per- ondary schools are located on three atolls-Ebeye,cent per year, and the urban based population is Jaluit and Majuro. About one-fifth of the primarygrowig even more rapidly. Thus the time required schools and two-thirds of the secondary schools arefor the population to double is only 16 yea. private. The former offer educaion from grdes 1Although the Compact allows Matshallese to to 8, and the latter conue it through grade 12.emigrate to the US, very small nbers of them The College of the Marshall Islands (CMI), stillhave taken advantage of this provision. Emigra- formaly a part of the tri-ountry College of Micro-tion, which may presently be consraned by the nesla (COM) which also has campuses in Palan andrelatively low levels of skills in the RMI may in the the Federated States of Micronesia, is now largely

43 Vele : MashaU Islands

Table 6,1: OCCUPATIONAL DwfoN BY N&TONwALTrY, 198

Total Marshall- Other US Percentese Pacific Filipino Citzen Other Foreign

(Aectual Number)

Architects, Civi, Electrical, and 18 4 0 3 6 S 78Mechanical Engineers

Elocklayers 21 5 0 16 0 0 76Economists, Statisticians, 8 2 2 0 2 2 75

Systems AnalystsMedical Doctors, Dentists, Vetern- 30 10 1 9 9 1 67

arbim, nanacisis, OptomeXnsBiologists, S 2 0 1 0 2 60Plots, Flight Engineers 13 6 4 0 2 1 54Seconw y Teacders 95 55 4 3 26 7 42Managers and Supervisors Ja 144 97 10 13 18 6 33Accounant 84 61 6 13 3 1 27Judges, Lawyers 58 43 1 0 11 3 26

/g Not includig sales and restaurantlhotel supervisors.

Source: Census of Poputaon awd Housing 1988.

atonomous and in 1991 was accredited at the was qually poor for boys and girls. The mnmeracycommuty college level by the United Stats reslts were coniderably better than those forWestern Association of Schools and Colleges. Up lteacy, with 79 percent (compawd with 87 petto 1991, it had associate-egree progrm in nurs- for the nine-country average) being minimay;n and pre-servie primay educaon, and present- numcrate. For secondary school, the only interna-ly has 90 and 74 enrollees in those programs, tionaly ndardized test taen by la numbers ofresectively. CMI has also epanded into business- Marsballese Grade 12 student is the United Stateseated education, liberd arts, vocational pograms, Armed Forces Qualify Test. In 1989, about halfadult basic educadon and college preparatory thoseeolled in Grade 12 took the test, and onlycourses, with a totl enrollment of 365 in 1992. 12 percet of these passed a low threshold for

further consideration (a score of 21 or better out of6.7 Basic or primnay education attendance is 100), indicating very poor overal perfonne.compuloy for age cohort 6-14 years. Given the The results of this test were simila in 1990 and inevere drte of secondary school, :;mbined with 1992.

the end of compdlsory schooHng transiion friomprimary to secondary, enroLlment is low for stu- 6.9 The country's massive educational de£i-dents aged 14-15, with gross ewoilment declindig ciency commences in the weak performance offrom 93 percent to 70 percnt between grade 8 and primary schools. Secondary schools, in turn, do9, and then to 50 percent from grade 9 to 10 (see not add suffiient educational value to the weakTable 6.2). Although rughy equal numbers of educational base given to them by the primarymales and females enroll in school, consderably schools. Pupi/parent motivation for education ismore females drop out than males. Thus, accord- said to be generaly weak. Thus, the causes of theing to the 1988 Cens, about 13 percent of males poor quality appear to lie both witbin and outside ofin the 25-29 age cohort had post-secondary educa- the educational system.' Nevertheless, viralytion whereas the corresponding share for females every aspect impacting on quality is deficient andwas only 7.5 percent. reqires major attention and inves in terms of:

orgaWzation and governance; curriulum; texts and6.8 Q&afy. The 1991 UNESCO Pacific supplies; teacher training; student evaluation,Islands Literacy Levels Project found that only teacher com on; and provision and mainte-51 percent of RMI Grade 7 sudents, compared to nance of faciities.-an average of 82 percent of those in the nine otherPacific countries, tested as minimaly literate in 6.10 FI;acng. Educational expenditure inEnglish. The English performce of the RMI the RMI-at 14 percent of Central Governmentstudents was the worst among the 10 countries, and curent expenditrs in 1991/92-falls below the

Vale4: MAnlaU land 44

Thbb 6.2: BwAouhmwr uR REGuAR SCHL SMg 191

TotoalUsual Enrolment

Year Age at Number Number % Number RAio (To CensusEnollme Erled Erolled Pivate Enrolled (Ag Group)La

Kfixdrgaten 5 7001k 138Le l8kc 858 50Pdf

1 6 1,459 588 29 2,047 1242 7 992 444 31 1,436 873 8 1,213 410 25 1,623 984 9 1,156 358 24 1,514 975 10 1,125 336 23 1,461 1016 11 1,038 318 23 1,356 877 12 869 306 26 1,175 858 13 936 255 21 1,191 93

Subtota L8M MQIL V I

9 14 325 S10 61 835 7010 IS 225 359 61 584 S011 16 179 264 60 443 3912 17 165 210 56 375 35

Subtot 894 1.343 Q 2.237

Total Primar and Secondary 1.98 22 l S.S0

La The censu age cohorts were reduced by the appropriate morly rates.1k The Head Stat program maly for Ages 4-5 is fianced by the US Government. This figure for Age S is estimated as

23rds of dhe total of 1,050 children in the program.ic This is 60 percent of the prvate pre-school enrollment, a rough estimate of age 5 enrollment.

Sources: Deatment of Education; Censu of Popudaton and Housing 1988; College of the Marshall ands.

lower end of the range of expenditure by countries declined by 14 percent and educaional resourcesat similar levels of per capita GDP-1S-20 percent for prmary and secondary schools were much more(see Table 6.3)-and has suffered a significant drop severely curailed over the same period.4 In realfrom two years earier, when it was 19 percent. terms, they declined by 55 percent (58 percent onCetainly, the avaiable finance is far below the a per-student basis). The equivalent decline foramount that would be required to buy an adequate secondary education was 23 percent (29 percent oneducation for the nation's children, either in terms a per-student basis). At the same time these basicof quantity or quality. This was true before the educationat programs suffered severe declines inpha-out of several US Federal education pro- fundg, several programs experienced majorgrams under terms of the Compact, and has inte increases-educational administaon (+ 140 per-fied since.3 Due to the limited national resources, cent), CMI (+32 percent), the Head Start programthe Govenment should consider measures to (+180 percent), and a new program to provideincrease cost recovery, and obtaining resources shipboard experience for small groups of high-from both other bilateal governmns and private school students ($305,000). Resources should besources-however, long-term alternate sources of focwssed at the primary level, and expenditres atfinancing should only be sought based on a clearly the secondary and post-secondary limited to selec-defined and costed education strategy. tive and essential programs.

6.11 While total inflation-adjusted government 6.12 US Government assistance is the largestexpenditures increased by 18 percent from 1989/90 extemnal source of education finance for the Mar-to 1991192, educational and training expnditures shall Islands, but it does not follow the usual mode

45 Volme 4: Ma 1haff islads

TIbb 6,3: EDUCATION Emnmmus, 199W191-1992M93(tee U81)

}rt 1990 EXf l- EX l2 Q WI('912 uActua Au % Budget % 19925 %JPpil

Ministry of EducationPrimary 6,166 77 3,376 62 2,903 52 -3,263 -53 -57Sewondary 1,419 18 1,335 25 1,130 20 -289 -20 -26Marilmd & Other 0 0 0 0 471 8 471 -Administraion 4S0 6 722 13 1,122 20 671 149Total MOE 8,035 74LA 5,433 611A 5,625 S8A -2,410 -30

Head Stat Program 439 4l 746 8La 1,272 13LA 833 190College of Marfshal dands 869 8La 1,125 131f 1,191 12/a 322 37

Tuidton & Fees 391 4 416Scholrshlps Board& 882 8l 886 10I 897 9/A 1S 2lob Traiing Parteshaip Act 607 6/a 669 8SA 644 71A 37 6

Total Education 10,832 19& 8,859 14t 9,630 15/b -1,202 -11

Total Government S4,925 100 62,955 100 65,000 100 10,075 18

minimtt of 8ducaton FXFdiuPersonnel 6,445 80 4,208 77 4,571 81 -1,$74 -29Non-Personnel:Travel 56 1 51 1Books/Supplies/Freight 367 S 402 7Equipmentfuzuiture 55 1 64 1Contractual Services 589 7 143 3Other 3 0 170 3Grants to Private Schools 519 6 396 7

Subtotal Non-Personnel L00 20 12 2 1.054 19 _-36 -34

Total Mnistry of Educaton 8,035 100 5,433 100 5,625 100 -2,410 -30

/a Pereant of total educadon.& Percent of total govenment.Source: Department of Education.

of providing deveopment assistance through the (Job Trang Partneship Act), special education,Agency for International Development. Instead, the and college preparatory assisUMce (Upward Bound).US Department of the Interior is the lead agency In addition, the RMI is eligible to apply for com-and numerous other agencies also operate in the peiive grants admJstered by a range of agencies,country, largely ndependenly. In theory, most US including the Pacifi -egion Education Laboratory,assistance programs were to cease with the Com- the US Deparm t of Education, and the USpact, since the funds were considered to have been Depart of the Interior Office of Territorial andfolded into the Compact block grats. The only Insular Affairs, and it receives significant funizgconstraint on the block grant under the Compact is through this channel.that 40 percent must be used for capital expendi-tures. As the impact of the loss of US education 6.13 Despite early innvations in many areas,programs became appart, the US Congress such as adopton of multi-grade teaching, educationrestored the RMI's eligibility for a series of pro- in the RMI is beset by a host of problems centredgrams-pre-school education (Head Start), college around the quality of students which the systemstudent assistance (Pel Grants, Supplementary produces. It is further hampered by the rapidEducational Opportunity Grants, and College increase in the primary age population, which isWork-Study), teacher traing (Territorial Teacher eroding the ability of the Minstry of Education toTraining Assistance Program), vocational tng provide resources for all prrms and especially

Volume 4: MAnMll Islw. - *46

for mnnnce of facilities. This will most cer- to assist the RMI with such costs on a long-tainly have ar advers effect on national develop- term basis;ment prospects if the education system is unable toproduce individuals suitable for employment and * Manpower development needs to be estab-further tralmg. The small number of Marshalese lished and implemented as part of a longerwho have merited futher training abroad have had term strategy. This will require identifica-limied success with their training and returned to tion of positions and eventu replacementthe RMI.5 with adequtely trained Mashallese begin-

ning with the lowest rtng. A bonding6.14 Education policy in the RMI is guided by progam will be required for foreign traineesa Ten Year Master Education Program which was to ensure that they return upon completionconceived in 1989.6 Although many of the recom- of their programs. At the same time, sala-menda.tons of tdis plan remain valid today, the ries may have to be adjusted to reduce theGoverm'ent is urged to revisit the Plan and revise salary differendal between the RMI and theit fter undertaking areview of the education sector US by the time the bonding program isand financing in an sector-wide context, with completed so as to midgate the incentivesparticular emphasis on defining more realistic and favoring emigration to the US.7 An impor-sustaiable goals. This could then form the frame- tant and ongoing need is the upgrading ofwork for a national education stmte. Such an the existing work force through short-termanalysis should precede any large investments in the training programs used to teach relativesector and maximize the use of the donor funds work slklls and facilitau: promotion based onreplacing the present ad hoc donor funding ap- the successful completion of upgradingproach. courses run nationally or externally; and

6.15 Important elements ofa national education * Financg policy should be substantallystrat would include the following: revised and rationalized. The present sys-

tem of obtaining grants from diverse bilater-• Primary educaion needs considerable stren- al donors and agencies, (particularly those of

gthening and should receive the most atten- the US) in an ad hoc fashion would benefitnon. As a fist step, the curriculum needs strongly from systematic treatment at theto be linked more strongly to those of major center and would also improve financialhost systems. Additionally, core subjects management and planning. The issue ofsuch as math, scence, raing, and wridng cost recovery should also be re-examined, asskills should be e;nphasized; there may be substantial scope for increasing

fees, e.g. for tex books usage. As a firstD Seconday education should contnue with step in this proceis, demand surveys should

the emphasis on core subjects established in be undertaken wo determine realistic parame-the primary system. The aim of the second- ters of financial requirements, and identifica-ary sector should be to prepare people ade- ton of the present sources can be maxi-quately for external training, higher educa- mized-or, as an alternaive to cost recov-tion, and some post-junior secondary voca- ery, bilateral long-term support could betional traiing in the RMI and neighborng determined.countries. Due to limited numbers of stu-dents, the high cost of skill training in coop-erative efforts with other Pacific island C. ISSUES V THE HEALTH SECTORcountries needs atention;

6.16 Populaion growth is presently estimated* It is unlikely that other than offering limited at 4.0 percent per year, which means that the

primary teacher training and a few vocation- present population of 49,900 will double to anal courses, the RMI can afford to finance estimated 100,000 by 2008.8 Total fertility ratesand sustain post-secondary education pro- are aarmingly high, in excess of 7 children pergrams. The Government will need to look woman of childbearing age. Further, iu 1988, overoutward, particularly at regional instutions half the population was under 15 years of age, upsuch as vocational/technical institutes in from about 48 percent in 1973, and nearly fivePacific island countries and the University of percent was over 60 years of age. Thus the depen-the South Pacific for assistance in develop- dency ratio in the RMI is very high at 134 percenting a better qualified work force at that when compared to most countries.9 Given thelevel. Donors would also be more willing scarcity of land in the RMI, together with the fact

47 Vokame 4: Marshal Islands

dist 20 percnt of the land surface is unavailable Tabb 6.4: HEALTH STATUS INDICATORS, 198M92due to past mnu testing.nd to preseuse by Ihe vUS mitary, this situation is unsustable. Evenif it were posstchievtadve a drastic reduction in 1986 1992&the popuato growt rate the short-term ts ._of reducing populaton presswe are ve imited.A rapidly growing populadon will place Populaon gowth mte (% pa.) 3.5 4.0demands on scarce resources for heath care, Crude birth ae (per dhousamd) 38.2 48.7education, and irasuue, thereby reducing the Inabt morality rate (per thousand) 26.1 63.0ability of the Govment to maintain quaity across Life expecacy at birth (years)the enti range of services. However, since two Male 59.2 60.9thirds of the populion is conctated in tie two - Female 62.4 63.9major urba cenes, delivery of health care and _

other public services is made easier.IsmLatest available year is used when 1992 is una'ailable.

6.17 The main factor behid the high popula-tion growth rate appes to be culural-for a Source: South Pacific Comission, Mintry of Heath,woman to be considered mature she must bear a office of Pbnning and Stadstics, and Bank staffchild-and this leads to anothe culturaly tolerated estimas.phenomenon, that of single mothers. Teenagepregnanes are thus on the rise, and it is not degradation and neglect, breeding a looming healthuncommon for first prepancies to occur as early as care crisis manifested today in an increasing inci-ae 12. Over 12 percent of the births registered in dence of gasteteitis.the RMI in 1988 and 1989 were by women eighteenyears of age or less. Becase of the high cmde 6.20 Family Pannig. The family plannigbirth ratea direct consquen of these cultural program in the RMI has been in place since themores-the lack of good infant nutrition and poor mid-1960s, initally funded by the US Federalsanittion, relatively high infant mortality rates Maernal and Child Health Block Grant Program,coninue. Another factor adversely affectng these and later by the WHO and the United Nations Fundindictors is tha the spag between live births is for Population Activities (UNFPA). The programgetting smaller-nearly half the recorded live birdts is presenty adminsred by the Depatmet ofin 1989 occred within two years of the previous Family Planning in the Ministry of Health and basbirth. Finally, the lower educational attaiment and been expanded to cover population issues. AnparticiPation in the work force of Marshallese expanded distnbution network for disseminatingwomen play a role. population information and contraceptive methods

was established after the completion of the 19886.18 Many health and morbidity related indica- Cenms Report, when the Govemment realized thattors for the RMI are poor and are showing signs of it had a significant issue to resolve. This networkdeterioration (see Table 6.4). The infant mortality now includes inmovative progr4ns including therate is high compared to almost all Pacific island Youth to Youth program, church groups, and actionnations and high for the level of income, having by the media to extend information coverage.worsened significantly from 26 per thousand in These complement traditional Ministry of Health1986 to 63 per thousand in 1988. Similarly, life sources-such as urban based hospitals and ruralexpectany appears to be declining from an estimat- dispensaries and health workers. As of 1991 theed 66 years in 1980 to about 62 in 1988. In 1986 contraceptive prevalence rate was an impressivethe Ministry of Health adopted a bnalth sector 31 percent, up from very low levels before thestrategy with a focus on primary hea e (PHC) census, primarily because women residing on theespecially on the outer islands. two most populated atolls had increased their use.

However, reports from the outer atolls indicate that6.19 The RMI is atan impoi-ant juncture in its coatraceptive use remains very low. In order tohealth stats-the deterioration in health indicators foster further demographic change, it is vital tojust beginning to emerge will continue to worsen sengthe both urban and rural based familyunless urgent actions are taken to arrest this de- planning program efforts.cine. The three most pressing problems requiringatenion are: (a) population growth; (b) increasing 6.21 Lifestyle Related lesses. As in manyprevalence of lifestyle-related health problems other countries in the Pacific, the people of theincluding diabetes, heart disease, and sexually Marshall Islanh nave developed a taste for manytransmitted diseases (STDs); and (c) environmental consumption items which have adverse impacts on

V*awe 4; MarshIds 48

their heath and longe ity. For example, tobacco, adjacent to homes and water sources remain com-alcoholic beverages, and many presed foods mon practices. Tese paice in conjunction withhigh in sugar and fat have become well estabLshed the large household sizes have led to an increse initems and most are priced less than many locally the incidence of water borne heath problems suchproduced and tradionally consumed items. In as amoebiasis, diarrhoea, and gastoentetis. TheMo and Ebeye, it is easier and cheaper to buy problems with the collection of houshold wastebeer, carbonated soft drinks, and potato chips than disussed m Chapter S have significant effects onit is to obtain banas or taro. These poor nutri- public health, as uncollected garbage is a richtional habits are leading to increasing rates of breedng ground for disease carfying organisms.dental problems, diabetes, cardio-vascular disease, Furtiermore, the irregular disposal of this waste inand cancer. They are also believed to be responsi- an open landfill may lead to futher health hazardsble for the emerging problem of malnutrition in downstream. Finally, in water quality tests theyoung children (0-5 yeas of age).'0 EPA has found much of the lagoon in Majuro to be

dangerously poluted, yet people continue to bathe6.22 In addition, the increasingly prevalent and fish in it.habit of smoking tobacco is beginning to showadverse effects in the health of the population. This 6.25 The health care system in the Marhallcan be seen in the growing trend of asthma and Islands is completely public, comprising two hospi-bronchitis, the incidences of which have quadrupled tals (one each in Majuro and Ebeye) with a com-since 1980. With the i agly crowded house- bined total of 110 beds, and about 64 dispen-saries,holds common to the urban ceters, where the each staffed by a health assistant (most of whomaverage household has 8.8 persons, dtese and other have graduated from high school and received up todiseases such as conjunctivitis, scabies, tuberculo- two months of additional health training). InSis, and yaws are on the rise. addition to this government-operaed health care

delivery system, there is a parallel system, which6.23 A third and final group of lifestyle-related was established under the terms of Section 177 ofIllnesses am STDs-such as Acquired Immune the Compact for the connued care of those peopleDeiency Syndrme (AIDS), gonorrhoea, and who were affected by the US nuclear testig pro-syphilis-the prevalence of which are diecty gram and provides US$2 million per year for thisSated to the high rates of teen pregnancies and purpose. The Section 177 health program contractscuItuallyencourged promiscuity discussed earlier. with Majuro Hospital to provide all inpatient caeAvailable information sugges tat while the services as required by the approximately 10,000 -country has not experienced an AIDS case among beneficiares covered by the program, and indepen-Mrlle living in the country, the rate of other dendy operates a set of 7 health clinics on the outerSTDs has been increasing. A recent survey con- islands and Majuro. In addition, the US Govern-ducted over December 1989-April 1990 found that ment through the Deparment of Eergy providesabout one third of the syphilis cases identified health care to Section 177 beneficiaries on its shipduing this peiod were among single people, and which frequents RMI waters to monitor radiationabout one third of the syphilis cases were under levels in the atolls affected by nuclear tesdng. The20 years of age while a little over a quarter affected USAKA army hospital also provides occasionalthe 20-25 year age group." About 90 percent of emergency and other medical care to Marshallesethese were in Majuro and Ebeye, and over 55 per- resident on Ebeye.cent of the cases occurred in women. This surveysuggests that in 1990 about 4 percent of the adult 6.26 Finandag. Recunrent expenditure on thepopuation (those aged 15 and over) were syphilis health sector has averged over 15 percent of GDPcarie and the rate of new STD cases suggests duing 1990/91-1991/92, and at least 12-13 percentthat an equal percentage of the population have since 1988/89. As a share of total recurrent gov-gonoffhoea. emient expenditures, this amounts to over 20 per-

cent since 1988/89. Although this level of expendi-6.24 Environm lna negled and degradton is tre is large, in real terms it has declined quitespawning a whole new set of illnesses, relating significantly, by 25 percent since 1988/89. Themainly to water and saniton praces, which will aggregate level and pattern of health expenditrecontinue to worsen with increasing population suggests that while expendiue have declined inpresure.12 Much of the population, even in urban recent years, adequate resources ame available forareas, obtains drinking water by using shallow the health progrms in the country. A review ofwells or acmulad rainwater, or by eraching expditure trenids on a program-specific basison the remiculaed spplies in Majuro and Ebeye. highlights several important trends. First, the shareFuthermore, beach defecation and family burial of health spending for hospital-based care in the

49 Volume 4: Mai Islands

Marshal Islads has declined over the past seven factors, and environmetal factors all threaten toyears from over fifty five percent of recurent strain the health care system and divert its emphasisspending to about 45 percent. Second, the share an resources from preventative to curative healthfor outer island iral based care has inmcreased since services. It is recommended that the Government1988 from about 11 percent to over 14 percent, undertake initiatives in the following areas:even though the absolute amount has declinedslighdy. This, together with spending on promotive e Public edaion may be the most effectiveand preventative health care services (which totalled tool available to the Goverment to coverabout 35 percent of spending in 1991/92) can be these vital areas-adoption of contraceptionconsidered evidence of the Government's strong and famdly planning should aim at easig thecommimt to a stategy focussed on PHC. population crisis, teenage pregnanies, highFinally, the share of expenditures devoted to total ferilit rates, and STDs; nutitionmatemal and child health care programs and family programs for children should go a long wayplanning services has increased, especily in the toward reversing the trends of increasingaftermath of the 1988 Census which revealed the infant mortality and malnutrition amongmagnitude of the population problem. children; similar programs aimed at adults

must try to modify diet and other lifestyle6.27 The health sector has been financed by behavior, for examWle, awareness campaignsfour principal sources of revenue: (a) general on the health hazards of smoking would begovernment revenue such as taxes; (b) government important. The effectiveness of a publicrevenue from Compact funds; (c) public health education and awareness effort of this nauregrant programs of US govemment agencies; and can be significantly enhanced in a country(d) revenue from user chages. Most recently these the size of the RMI if the campaip canhave been supplemented by revenue from the Social draw on the commitment and support of theSecurity Health Insurance Fund which was enacted top leadership.in 1991/92.13 This is expected to lead to a reduc-tion in the relative imporne of general govern- * Fiscal measures may be effective in achiev-ment funding of the health sector in the future. ing some behavioral modification among

those consuming tobacco products and alco-6.28 Development expenditumes in the sector hol. Tariffs on these items could be raisedhave been funded by WHO, UNICEF, UNFPA, quite significantly in order to achieve aand US federal grants in the past. Most of this aid reduction in imports as well as consumptionprovided by bilateral sources is directed to preven- while having the advantage of raising addi-tative and promotive services including maternal tional revenue. In the longer-term the Gov-and child health, community health clinics, and emnment may also wish to consider raisingcommunicable disease control. Unforunately, the tariffs on a variety of imported foodstuffs asprogrmmatic focus of aid funds is defined by well;donors rather than set by the Govermment.

Whle it is commendable that the couty6.29 Cost recovery through user charges has has implemented a social secuity healthbeen modest when compared to the service provid- insurance plan to increase consumer partici-ed. A copayment charge of US$2 is levied for padon in fiancing, user dwrges should beambulatory care at the two hospitals during daylight levied for drugs and other medical supplieshours but may be waived and is not levied for visits at levels which are in keeping with costs inmade after daylight hours or for visits to the emer- order to improve efficiency of consumption,gency room. Thus the system is deprived of bearing in mind the ability of individuals torevenue as many patiens wait till night-fail to avoid pay. These can then be extended to coverthe copayment. This fee structure is lower than it certain medical services-generally thosewas prior to the enactment of the social security which have an immediate and visible effecthealth insurance fund. on the padent;

6.30 While the country has made a major * A revew of health sedor priorites is re-commitment to developing a PHC-oriented health quired to develop a common articulatedcare sategy by strengthening the outer island health care program to replace the present-dispensary system and improving the training of one with its two tiers-covering Section 177health assistants who work in these facilities, the beneficiaries and all others-with a unifiedemergence and increasing incidence of disease and system which would employ efficiencyillnesses related to the population crisis, lifestyle -- =asures over the present system. For

Vomn 4: MAul slands 50

example, the present system of multiple pro- ties. To encourage implementation itcurement of drugs by various programs i8 may be useful for donors to work moreInefficient and costy and would benefit from closely with the implementing agenciesInteration In additionk fancing and concerned. The urgency for developingplanning and budgeting need caefl coordi- such a common systm is growing as thenationto reduce the present ation of Section 177 fumding will cease in 2001.funding and retain the health system priori-

ENDNCTES

The poor quality of educaion in the Marshall lands has recny been inducing some parents to send theirchildren to the US for primary education, an opdon opened by the Compact-provided right of free immigration.

2 A 1987/88 survey found that, while 45 percent of the 99 school buildings were in good condition, 33 percentrequired major reconstruon or replaemt and another 18 percent needed major or minor repairs. Sincethen some work has been underae using Compact development funds, but the stock of faiilities haswotinued to deteiorate, and new schoo ar needed for Majuro to accommodate the growing school-agepopuaon.

3 The major prgrams for primay and seconday finance were the funds provided by the Elementary andSeconday Educaotin Act and the Eduaional Consolidaton Improvm t Act.

4 Not inluding expenditures on training activities carried out by govement deparments.

3 Data compiled in 1988 indicate that only 43 pcet of grantees completed their programs, but that 85 percentof these rened to the Marshall Islads. Over the decade 1982-1991, only 56 scholarship recipients receivedbahelor's or higher degrees, and 67 received cerdflcates or associate degees.

6 Towwds Self-Reldane: Republic of the Marl Islands Ten Year Eduation Master Plan, Academy forEducatiotna Development, WaMigton DC, 1989.

7 At the presentime Marshaliese cizes have free rlght to enter and work in the US. In spte of this, relativelyfew Marshales have emigrated to the US. This can be expecd to change in the future if populationpreuescontaue to worsen and living standards decline.

8 Although there is some continuing debate which suggests that the actuai growth rate may be slightly lowerbecause of an undercount in a previous census, the basic conclusion that the population growth rate is too highremains unchaged.

9 The dependency ratio is defined as the proportion of the population which is both too young and too old to beproductive as a share of the economically productive population. The first two groups are conventionallydefined to be the 0-15 age group and those over 65 years, whfle the latr is assumed to be the 15-64 agegroup. The dependency ratio for low income and lower-middle income countries is esdmated to be 66 percentand 72 percent respectively, for 1990.

10 These problems are docment by a recent UNICEF survey cooducted by Emily Flores, The Republic of theMarshaU Islands' M Prt National Nuitonal Surve, 1991, UNICEF, Maila, 1992.

" Natonal Syphilits Report, Ministry of Health, Majuro, 1990.

12 Refer to pages 35-37 for a more complete disusion of the main issues in water supply, sanitation, and wastedisposal.

51 Veome 4: Mhall slnds

13 This requires all employees to make a contibution of 2.5 percent of grs income and employers make a likeco-payme.

VeIwu 4: AeihwAwg luaud 52

7: Medium-Tern Prospects & External FYnancing

A. INTRODVCHION its sound ecnomic management and policymaidng.The Govemen wil therefore need to address the

7.1 The - challnenge facing the fisca imbaances as an urg matter, reducngRMI ftrough the end of the decade are daing recurt costs to the extent possible, and increas-and wil remain focused on mainlan growth ing domestic resource mobiiation. By undertak-whfle reducing struc imbalances. The main ing such reforms as are necessaty to increase publicdifficulty lies in the reduction and possible phasing sector efficiency and reduce costs, the Governmentout of extern assisce as the present Compact will enhance its prospects consierably for donoragreement is scheduled to expire in 2000/01. Even assin and reduce the shocks due to a deline inif the Compact is renewed, as is lily, the amount totld aid.Of resouces will probably decline. If the policyrecommendatio oudined in this srvey areimplementd, there is some posslit of resring B. MIMW TE1 PROSPECThpositive rowth in per capita incomes nd

emlyet Auwpda

7.2 The wihdrawal of Compact assisce by 7.4 ExtenaL The forecasts made in thisthe US would deprive the Govenment of about section are prediated on a coentid recovery of70 percent of its revenues for recrret expen the world economy and the maintenan of finncialture. At the same time the trade imbalance ad stability. The level of inflation in the Group ofresultant current account deficits are such that a Five (G-5) will remainlrelatively low throughouttotal loss of Compact funding could destabilize the 1993 (under 3 percent per annum), and will theneconomy. Thus, even if the Govenment is rise slowly over the next couple of years beforesuccessful in its efforts to maintain posive growth, stabilizing for the rest of the decade. The cost ofthe looming fiscd ad exteal imbalances are fuel in real terms will rise by about 16 percent inenormous and will not be easily overcome. To be total by the end of the decade, after an initialsuccessfu, the Goveanment will need to: decline. The world price of coconut oil, which is(a) mobilize new sources of assistance which will the RMI's major export commodity, is projected torequire considerable efforts at donor coordination decline again (m real terms) after the rapid increaseand marketig; (b) prepare a pipeline of public of 45 percent forecast in 1992. Even so, most ofinvestment projects for possible donor financing as these gains are expected to be preserved, as thedonors will not finance recurent expenditure; projected price in 2000 is 33 percent higher in real(c) address the intemal imbalances by reducing the terms than that in 1991. Tuna prices are assumedrecurrent costs of government; and (d) encourage to continue their present decline for the next twodomestic growth so as to increase the base for years and then to hold their price in real terms. Aresource mobilzation. final assumption is made regarding the RMI's

position in world trade as a price taker and that all7.3 The principal imediment to obtaining markets will remain relatively open to exports fromextund financing may be the relatively high level the Marshals.Of per capita income, which will be above levelsthat would qualify the RMI as recipients of 7.5 D _meste. As discussed previously (seeconcessional assistance. The Govemnent's strategy Chapter 3), the implementation of the PIP in thefor obtaining external assistance should be based on First 5-Year Development Plan was severely

53 Volme 4: Marshal Isawds

hamperd by the low ipl I cpaci management wil be e3y to eci_n the effective-the public sector. Thus the doulin of public ness of privat and publc nvtment.invtmt proposed inthe Second 5-Year Devep-meet Plan appears ambitious, especially g tat 7.8 The agenda for human resource developonly about 70 perce of the f hlas been ment is broad and its In calenging.identified so far. Therefore given the poor imple. Basic skills will have to be upgraded at all levels,mentation perfonnance of the public sector in ms but particularly at the y education level, inof nmeeti ts invtnot objectives for the first orde to mold the labor force into a competitveplan period, it is assumed tbat a much lower level one, capable of providing the rlatively unsklledof pubLc invesm will take place during the labor whch primary m ai induss andSecond S-Year Development Plan. In parcu, it the service sector will require. Vocatonal skillsis assumed that the imple wi remain training will also play an important role in fillingroughly uwhanged over the period. This asump- the next rung in the human resouroe requib emdon is furer reinforced by the fact that much of of the economy. Finally, a camin amount ofthe major infrtu investments which needed manag and c hnical skills will also be impor-to be made have already been put in place in the tant, especialy for staffing the public sector. Theserecent past-partiularly in the area of power-so policies to upgraJe the labor force ar long-gestat-major new investm will not be required for some ing. A ncsary Ingredient in the success of thistime. It is also assumed that investment in general, effort will be a shap and susined decline in thebut especially publc investment, will become more poplation growth rate.eficient largely as a result of improvemens in theorganization, management, and human resource 7.9 Both publc and private savings wil haveskills in the public sector (oudined in Chapter 3) so to be raised. A condnued reduction in publicthat in the near-term invesutent needs will be invesment in the near-term, noted above, shouldrather modest. Thus, given the relatively high not adversely affect the prodctivity of privateinefficiency of investmenit a lower level and im- investment given the improvements in the pubLcproved selection of projects would be appropriate. sector and the adequacy of the present ifrastuc-

tue resoures. While ratinaization of publicShort-Tenn Pwspetg pn:diur programs and increased efficiency in

providing public services will be cucial, they wil7.6 In the short-term, the RM1 will be makdng not be able to contribu much to domesdc savings.a transition from an era of curent account surplus- These efforts will need to be supported by a s-es due to large inflows of gants from the US to a t _engthening of domestic resource mobilization asperiod charactrzed by currat account deficits on outined in Capter 3.the order of 10 percent of GNP, as these inflowsslow down and import demad contmies to grow 7.10 The economic recovery is proected to(see Table 7.1). GDP growth, which is projected coniue over the medium-term, with GDP increas-to average 3.7 percent per annum, will be largely ing at about 4 percent ammally between 1995/96-export-driven. Exports are forecast to increase 2000/01, and per capita consumption flat in realquite rapidly in the near tem at nearly 10 percent terms. Ilvestmet growth remms modest, and isper annum. This will be mainly on account of the consaed by the public sector which has few10-15 longliners transhipping fresh fish through resoures with which to undertake investment (withMajuro-operational capacity has reportedly more the bulk of Compact funds designated for invest-than doubled recently. This surge in exports will ment going to repay loans). The share of thebe supported by expanding coconut oil exports, as private sector in investnent is forcast to increasecopra production responds to the price develop- rapidly in response to policy changes which im-ments oudined above (see para. 7.4). Together prove the incentive framework. Export growth isthese should result in a modest improvement in the expected to slow down, to about 5 percent perterms of trade as well. aum based mainly on the of fresh

fish and cocomnt oil exports, implying a wideningMedjo-Term Prwspec of current account deficits to about 25 percent of

GNP.7.7 Over the medium-term, the Govermmentwill have to rely much more on the success of itspolicy initiatives in the areas of human resource C. EXTrNAL FINANClNG RgurWNmdevelopment and private sector development thanon the global environment. In addition, efficiency 7.11 All the above efforts should contribute toimprovements in the public sector and public sector growth and an easing of constraints, but the longer-

Vo.e 4: Mahe IslNs 54

Table 7.1: SE5cD EcoNmc I ATWORlS 193189-2000/01(WT PER AM)

e ~~~~~~PrgfrfXd1988/89-1990191 1991/92 1992/93-1994/95 1995/96-2000/01

Growo RaGDP 1.7 -6.0 2.7 4.1EBpons 29.4 10.1 7.0 5.0

pots 13.9 1.2 2.3 3.1Gr Investnent 2.6 23.1 1.7 3.3

Stnutute of the EconomyBxpors/GDP 14.0 21.7 26.6 29.1Imporls/GDP 101.7 123.1 122.0 116.9Gross domesdc inestment 36.0 43.3 39.6 38.0

Cuffent account/GNP -41.3 -61.5 -56.7 -56.0

Source: Misty of Pinance, Office of Plnning & Statistis, Majuro IMP and Bank staff estimates.

tm structua imbalnces will remain. As noted deficit is not likely in the foreseeable fiture evenin Table 7.1, uren acount deficits will coninue with exports expandg more rapidly than imports.to increase (in absolute terms) in spite of this Any decline in aid will lower imports and henceprogram but these deficits are only possible ff aid will reduce consumption, and could lead to a dras-increases. The underlying causes are two-fold: tic reduction in living standards. It will be ex-(a) the present trade imbalance is highly skewed, tremely impor theeifore, to increase domesticand (b) Compact assia is declinig and may production sufficiently so as to offset the reductionevenually end. A narrowing of the current account in aid to the full extent possible. The projections

indicae that this can be achieved.

Table 7.2: ETRMRNAL CAPIfAL REQUIREMErnS AND SOURCES, 1988/8-2000/01(uS$ MON PER ANNUM AT CURRNT PRCES)

~~ma1~~~~ Projected1988/89-1990/91 1991/92 1992/93-1994/95 1995/96-2000/01

Reauiremets 48.4 68.3 68.1 88.9Current account deficit 40.4 58.9 58.6 78.0

of which: trade deficit (64.1) (77.2) (78.3) (101.3)of which: interest payments (5.3) (5.3) (5.3) (9.2)

Princpal repymen 7.2 8.8 9.2 10.1Incrase in net foreign assets 0.7 0.6 0.3 0.7

48.4 68.3 6. 1Disbursemnt of putblic

MLT loans 20.8 22.5 0.0 0.0Grants 57.2 47.3 67.0 87.1Other /a -29.7 -1.5 1.1 1.7

L Includes net disbursemens of private MLT loans, direct foreign investment, net short-term borrowing and othercapital.

Source: Ministry of Fmance, Office of Planning & Statistics, Majuro, IMF and Bank staff esdmates.

55 Volwme 4: Marha Ilands

7.12 The Govemt, if successful in all its tic enviroment for investment so as to encourageefforts, would stll be faced with fancing current the return of captl outflows which havc alreadyaccount deficits aveng just over 50 percent of taken place.GNP (before official trasfers) and seving theprincipal on its loans over the period 1992/93- 7.13 The pricipal difficulty the Govement2000/01. This wil require an average of about c expect to face is that, given the high level ofUS$68 milion per year during 1992/93-1994/95 per capita income presenly prevadmng in the coun-rising to about US$89 milion per year during ty, the RMI may not meet the eligibilit criteria1995/96-2000/01 (see Table 7.2). After a required by foreign donors. In addition, the RMIfor assistance under the Compact, this woud impy has been handicapped by its past status as a USa shortfall of roughy US$6 million per year be- Trust Territory becse bilate relaionps withtween 1992/93-1994/95, rising to as much as other potential donors were not developed. ThusUS$2S-30 million per year between 1995/96-2- the Govemnment will need to expend a significant000/01. This shortfall appas to be manageable in effort aimed at developing these ties and donorthe near-term but considerable uncertainty sur- coordination. Donors, however, as a rule do notrounds the longer-term availability and accessibility provide funding for government's reunt budget;of new sources of funding. The private sector can but this is the very area which will require assis-be expected to account for a small but increasing tance as Compact funding (which presently pays forportion of this as the Govenment's efforts to about 70 percent) declines. As wages and salariesenhance private sector participation pay off. The are the largest component of the recurrent budget,bulk of the financing, however, will need to come this will place pressure on the public service. If thefrom official sources. The Government should, Government can undertake and successfully imple-therefore, in the medium-term concnrate its ment a thorough review and restuctuing of theefforts on increasing its access to official funding, public servce (as discussed in Chapter 3), thispreferably in the form of gras, given the relative- would serve to enhance its credibility considerablyly small exor base and thu s itmited capacity to with donors and enhance its abity to obtain in-generate revenes to repay loans. At the same time creasng amounts of donor assistance on conces-the Govermment should aim to Improve the domes sional terms.

Volme 4: Maud Idonds 56

Stadstical Appendix

Contents

Populai and Emploment

1.1 Population, and Growth Rates by Atoll, 1958-881.2 Distribution of Population by Age Group and Sex, 19881.3 Employment by Main Industry, 1980W88

National Income Accounts

2.1 Gross Domestic Product at Current Market Prices, 1980/81-1991/922.2 Distribution of Gross Domestic Product at Current Market Prices, 1980/81-1991/92

tewadonal Ihade and Baace of Payments

3.1 Balance of Payments, 1986/87-1991/923.2 Value of Imports by Principal Country of Origin, 1976-883.3 Value of Imports by Commodity Group, 1984-903.4 Value of Exports by Commodity Group, 1979-89

External Assitnce and Debt

4.1 External Public Debt, 1986/87-1991-92

Public Fnance

5.1 Statement of Expenditures, 1986/87-1990/915.2 Statement of Revenues, General & Special Revenue Funds, 1987/88-1990/91

Prices

6.1 Consumer Price Index, 1982-92

Toursm

7.1 Visitor Arrivals by Purpose, 1983-88

/a With the exception of the tables on External Debt and the Balance of Payments, the Statistical Appendix is acompilation of official data from Govemment sources. In some instances these data may differ from data in the maintext due to different Bank defintions and methodologies in construction of the statistical series.

57 voeme 4: Marsha Islas*

MARSHALL ISLANDSPOPUJLATION AND GROWTH RAT-ES BY ATOLL. 1958-8

Population Average gwh rate (% p"A.1958 1967 1973 1980 1988 1958-67 1967-73 1973-80 198088

Ailinglaplap 1,288 1,195 1,100 1,385 1,715 -0.8 -1.4 33 2.7Ailuk 419 384 335 413 488 -1.0 -2.2 3.0 2.1Arno 1,037 1,273 1,120 1,487 1,656 2.3 -2.1 4.1 1.4Aur 241 361 300 444 438 4.6 -3.0 5.8 -02Bikini 0 0 75 0 10 ..Ebon 819 836 740 887 741 0.2 -2.0 2.6 -2.2Enewetok 0 0 0 542 715 .. .. 3.5Jabat 0 0 70 72 112 .. .. 4 5.7Jaliuit 1,098 1,113 925 1,450 1,709 0.2 -3.0 6.6 2.1Kili 267 309 360 489 602 1.6 2.6 4.5 2.6Kwajalein 1,284 3,540 5,469 6,624 9,311 11.9 7.5 2.8 4.3Lae 165 131 154 237 319 -2.5 2.7 6.4 3.8Iab 44 142 98 98 115 13.9 -6 1 0.0 2.0

Lik',ep 636 430 406 481 482 -4.3 -1.0 2.5 0.0MWuro 3,415 5,249 10,290 11,791 19,664 4.9 11.9 2.0 6.6Maloelap 454 494 432 614 796 0.9 -2.2 5.2 3.3Mejit 346 320 271 325 445 -0.9 -2.7 2.6 4.0Mili 412 582 538 763 854 3.9 -1.3 5.1 1.4Namorlk 523 547 431 617 814 0.5 -3.9 5.3 3.5Namu 482 597 493 654 801 2.4 -3.1 4.1 2.6Rongelap 264 189 165 235 0 -3.6 -2.2 5.2Ujae 167 191 209 309 448 1.5 1.5 5.7 4.8Ujelais 172 251 342 0 0 4.3 5.3Utirik 198 269 217 336 409 3.5 -3.5 6.4 2SWotho 71 0 61 85 90 ..- 4.9 0.7Wotje 361 396 425 535 646 1.0 1.2 3.3 2.4Other 0 0 19 0 0 . _ s

TOTAL 14.163 18.799 25.045 30.873 43W,3 3.2 4.9 3.0 4.3

Source: Office of Planning and Statistics.

IRSHALAL ISLANDSDISTNRIBlUTIOQN OP POPUnLAION BY

AGE OROWU AND SEX. 1988

Age Group Males Females Totd

0.4 4,423 4,228 8,6515.9 3,884 3,725 7,60910-14 3,055 2,821 5,87615-19 2,104 1,981 4,08520-24 1,686 1,824 3,51025-34 2,868 2,815 5,68335-44 1,963 1,716 3,67945-54 935 779 1,71455-64 672 643 1,31565+ 591 667 128

TIo. 2X181 21.199 43.380

Preutaee citribution

0-4 19.9 19.9 19.95-9 17.5 17.6 17.510-14 13.8 133 13.515-19 9.5 9.3 9.420-24 7.6 &6 8.125-34 12.9 13.3 13.135-44 8.8 8.1 8.545-54 4.2 3.7 4.055-64 3.0 3.0 3.065+ 2.7 3.1 2.9

TQI 100.0 100.0 100.0

Source: Office of Pluanng and Statstcs.

59 VWoawe 4: Anhailrhlaads

Table 1.3

MARSHALL ISLANDSELOYmNT BY MAIN INDUSTRY. 1980-88

1980 1988

Agriculture, forestry, & fishing 3,044 2,178Mining and quarrying 2Manufacturing 114 946Electricity and water 59 83Construction 372 1,090Wholesale and reil trade & restaurants 543 1,404Transpor, storage & communications 243 544Finance, insurance, real estate &

business services 635 842Others 997 3,066

Total 6.007 10.155

Source: Office of Planning and Statistics.

Vo1. A MuwaU bhi" 60

MARSHALL ISLANDSGROSS DOMESTIC PRODUCT AT CURRENT MARKET PRICES. 19808l-1991B2

(USS milio)

1980/81 1981/82 1982f83 1983/84 1984/85 198Sf86 198Cf8 1987/88 19889 198990 1990/91 199192

Compensation of employees 16.8 21.0 w 23.7 2S.8 31.6 39.9 44.1 43.9 44.5 S 56.Public Sector 8.8 10.2 10.8 11.9 11.8 13.7 1S.6 17. t9.2 23.9 22.7 24.4Private Sector 8.1 10.8 11.4 11.7 14.) 17.9 24.4 26.3 24.7 205 30.0 31.9

Operating Surplus 1 108 14.5 16.0 14.1 17.8 186 19.2 20 20.6 16.B 16.Public Sector 0.2 -0.9 0.4 0.9 -1.5 -0.3 0.8 0.2 -0.4 -3.6 48.2 4.0Private Sector 4.1 4.6 6.1 6.4 6.9 9.2 8.0 8.6 9.S 11.7 12.4 14.9Subsistence Sector 4.2 4.5 5.0 5.3 5.6 6.0 6.4 6.7 7.2 8.3 8.6 4.SAgricultue 1.7 1.5 1.9 2.2 1.9 i.7 2.0 2.2 2.3 2.3 2.1 3.2Other 0.9 1.1 1.1 1.2 12 1.3 1.4 1.5 1.6 1.8 1.9 2.0

Depreciation 1.2 1.6 1.7 1.8 1.9 2.4 2.9 3.1 2.9 32 3.1 3.1

2. GDP at factor cost 29.2 33.3 38.4 41.5 41.8 51.9 61.5 66.3 66.9 68.3 72.6 76.0

Net indirect taxes & subsidies 2.7 2.8 3.7 5.3 3.4 4.6 3.3 3.5 3.3 4.9 3.1 0.2

GDP Al market wOAf traes ja Z zu.

Source: Office of Planning and Statistics.

I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~|gI~~~~~~~~~~~~~~~~~~~

KMR-HAlL ISLANDS.6DISIBUTION OF GROSS DOMSTIC PRODUCT Al CURRENT M&RKE PRICE&. 19811A-19182(mpet)

[ 1980R1 1 1981 192 198d 193R84 1984/85 1985/86 1986J87 1987/88 19W8 198990 1990/91 1991892

|, Compenaton of employeb 27 81 52.8 071 5.9 61.6 63.1 6 .L 69.7 73.9Public Sector 27.4 28.2 25.7 25.5 26.1 24.2 24.0 25.S 27A 32?7 30.0 32.0Private Sector 25.2 30.0 27.1 25.1 30.9 318 37.6 37.7 35.2 20 39.7 4L9Operatg Surplus 35.1 29 34.3 A Ha 316 2 27.4n 28A 2 A 2Public Sector 0.7 -2.4 0.9 2.0 -3.4 0.6 1.3 0.3 -A6 -4.9 -10. -10.5Private Sector 12.9 12.7 14.S 13.7 15.2 16.2 12.3 12.3 13.5 16.0 16.4 19,6Subistence Sector 13.2 12.6 11.8 11.3 12.4 10.5 9.9 9.6 10.2 114 11.4 S5Agriculture S.4 4.1 4.5 4.6 4.1 3.1 3.1 t;2 3.3 3.2 2.7 42Other 2.9 2.9 2.6 2.5 2.7 2.3 2.2 2.1 2.3 2.5 23 2.6DeecIatio 3.6 4.4 4.1 3.9 4.3 4.3 4.S 4.4 4.1 4.4 4.1 4.1

a GDPatfacooost 91.4 92.4 91.2 88.7 92.5 91.8 94.8 95.0 95.3 933 9S.9 99.8Net inirect taes & subidies 8.6 7.6 &8 11.3 7.5 8.2 52 S.0 4.7 6.7 4.1 0.2

MAInu JaA 10M AM 1nu

Source: Oftle ot Planig and Statfstc.

Table 3.1

MARSAL ISLADBALANCE OF PAYMEN1S. 198617-199112

(USS imnoll)

Estimate198687 1987/88 198/89 1989/90 1990191 1991/92

Merchandise exports, fob 1.7 2.1 2.4 1.9 2.6 3.9Meradise imports, cif -48.9 -50.3 -51.9 -56.4 -59.8 -62.9

Trade balance 47.1 -48.2 -49.5 -54.4 -572 -59.0

Non-factor services (net) -3.0 4.1 -6.1 -9.4 -14.7 -18.0Interest payments (MU1) -5.3 -5.7 -5.0 -6.9 -6.7 -9.8Other factor services and

private transfers (net) 29.4 20.3 30.3 29.9 29.5 28.1

Current accout balance -26.1 -37.7 -30.3 -40.8 49.2 -58.6(excluding officia transfets)

Official transfers /a 209.3 60.9 56.5 63.8 51.4 47.3

Current acoount balance 183.2 23.2 26.2 23.0 2.2 -11.3(including official transfers)

Net public flows -138.3 -6.5 13.5 1.2 31.7 -14

Other /b -44.9 -16.7 -39.7 -24.2 -33.9 12.7

/a Includes $150 milion in 1986/7 for establshing Nuclear Claims Trust Fud.k Includes private flows, net short term flows, other capital, reserve changes and errors and omissions.

Source: Office of Planning & Statistics, Majuro, IMP and Bank Aaff estimates.

63 Voeaw4: M * iwJld fAa*

Tble 3.2

1AsfL ISLAN-DSYALME OF IMPORTS BY PRINCIPAL COUNTRY 0F ORIGIN. 1976-88

(USs thousand)

1984 198S 1986 1987 1988 1989 1990

Australia 66 1,370 1,S79 2,080 1,052 1,292HwnKong 259 311 382 436 S22 .. 18SJapan 5,098 6,097 5,945 6,641 S,929 .. 8,7Q2Nea Zealand 8S 163 204 268 31 . 862phippne 23 41 23 34 168 10TaIwan 200 108 180 201 388 .. 297United Slates 16,266 20,942 22,168 23,713 25,472 .. 39,141

Maland 10,211 13,352 12,684 14,724 17,300 - 27,968Guam S,155 6,337 8,098 7,379 6,065 .. 284Hawaii 900 1,253 1,386 1,610 2,107 .. 10,889

Otes - 144 90 168 172 .. 6417

lbld 21,997 2.76 30.51 33.541 33.734 56-906 569%X

percentAustalia 03 4.7 5.2 6.2 3.1 *- 2.3HongKong 12 1.1 12 1.3 1.5 - 0.3Japan 232 209 19.4 19.8 17.6 .. 15.3NewZealand 0.4 0.6 0.7 0.8 0.1 * 1.5PhppIes 0.1 0.1 0.1 0.1 0.5 -.ODTaan 0.9 OA 06 0.6 1.2 .. 0.5United States 73.9 71.8 72.5 70.7 75.5 .. 688

Mainland 46.4 458 41.5 43.9 51.3 .. 49.1Guam 23A 21.7 26.5 22.0 1&0 .. 0.5Hawai 4.1 4.3 4.5 48 6.2 .. 19.1

Others - 0.5 0.3 0.5 0.5 .. 11.3

ToWal 100< I00 100.0 100.0 100.0 100.0 100.0

Note: 1. Imports by goement agencies and tax exempted goods are excluded.2. Data for 1986 and 1987 are estamates.

Source: Offce of Planinig and Statistis, Majuro.

VYoi : Arsha Islads 64

MARSHALL SANDAVALUI OF WORTS BY COMMODrIY GROU. 1976.8

(USS thauad)

1976 1977 1978 1979 1960 1981 1982 1986 1987 1988

Food and lve 2,2 3919 309 4,21 4,678 S, 5,215 909 9,SS7 11,499Bevergs and tobacco 793 1,974 1,146 1,475 1,792 2,24 1,84 34 3,612 43,Cmde materials 38 128 98 235 342 407 192 428 4S1 607Minall bes and ubt 1,554 1,716 1,SS3 2,086 2,718 3,317 3,684 S 54 3618Animadandvegetablsol0 13 25 4 19 22 23 33 31 32 18Chemicproduhs 280 459 525 611 6S7 703 681 1;253 1,322 681ManfaIctured soods 844 1,226 1,651 2,252 2,976 3,48 1,525 4,249 4,482 1,866MachiDey and tansxrt equipen 3SS 1,OSS 998 1,676 2,013 4,274 1,966 3,760 3,966 3,636Mseinaneous manufactures 623 1,019 1,007 1,663 1,9S7 2,519 1,031 2,996 3,161 4,108Unclaulfed goods 0 0 0 0 0 0 0 0 0 4,477

Total 738 11521 10.791 1423 17.1SS 2 16.211 3QS70 6 33.764

Note: 1. Impotbygovnmentagenciesand tau mpted goodsareexuded.2. Data for 1986 and 1987 are estimat

Sow=e Offte of laning and St, Majuro

I~~~~~~~~~~~~~~~

MRSHALL ISLANDSVALUE 0F OP EORTS BY COMMODllY GROW. 197949

(USS thoad)

1979 1980 1981 1982 1983 1984 198 1986 1987g 1988 1989 1990 91

Copracako 84 462 341 304 320 241 195 128 38 6 99 94 18cude coco"t Cl 2,3 1,832 2,253 1,766 2,794 5,20 2,417 974 1,64 1,743 I.7 1,148 1396Handkafts 258 233 301 95 29 30 33 26 31 1 _ 2 4UIveanmals 62 50 73 60 S8 49 37 31 8 8 . 264 517Trd - a a . _ -_ 179 350 467 179 176Setp Mad a - 8 - _ I _cod sh - 1 _ 77°Sb8ar fls _ _ _ .. _ _ _ _ _ 8 31a

mad WE l M- &M-1 s1 2. kiJ-9 12-l 2.19 M-3 1.719 &M

So Office ofPlma and Sta s, Mauro.

ElW

MARSHAL ILMANDB-gflTBAL PUJ DM. 1986W187-11 M

1987 1987M/ 1989 1989/90 1990/91 1991/2

D _------ 065.0 0.0 20.0 0.0 42. 2

Dbt servfice 86. 12 VA .41 14-6 186Prcpailrepa n 53.3 6 6.5 7.3 7.9 8.8lntereszpayznents 5.3 S.6 5.0 6.9 67 9.8

Debtwouza&din sburd 65.0 a8S 72.0 64.7 99.3 113.0

DODJ/NP 24 685 74.7 66.6 99.5 117.9DODIaflezpongoods& services 183.6 20L7 18D.9 16D.5 2192 243.0Debt servlceMzportsafgoods& wvIoe~a 15.0 41.7 289 352 322 40.0_Intorestlozpos of oods& arvces 15.0 193 12.6 17.1 14.8 211

Soue: Offiw of Planlun & Sas Majuro, IMF and Bank sf_smates

67 VOdAa 4: Marsha Ielwd

Table S.,

MARSHALL ISLANDSSUAlTllEM OP EXPENDITURES.1986187-1990/91

(USS thousand)

19W887 1987188 1988189 1989/90 1990/91

Wages and saldes 12,812 14,474 15,830 16,642 17,931Travel 1,091 1,26 1,446 1,686 1,837Feight 237 238 253 183 207Communnications 418 51 102 172 331Printing & reproduction 138 109 163 137 203Profesdonal services 561 1,025 1,646 740 127Food stuffs 1,354 1,808 1,456 1,401 1,332Medical supplies 1,200 1,112 1,585 921 1,442Supplie & materials 2,869 1,984 2,282 1,839 1,998Medical care 657 194 291 2,571 227POL 1,226 735 2,755 660 1,013capital outlay 1,513 1,821 3,151 15,021 6,645Contractual services 4,052 3,429 3,702 5,444 3,037Rentals 623 357 465 548 595constrcution 7,220 7,029 8,060 632 6,790Alowances 645 759 983 1,197 1,219Grants and subsidies 1,175 3,031 3,003 2,875 3,337Interest expensee 5,339 5,606 5,023 6,726 5,858Principal repayment 34,386 6,500 6,500 7,182 7,495Land use distributions 6,800 7,028 7,137 7,313 7,747Income tax refund 305 317 325 0 0Amorftiaon of bond issues 31 183 194 228 1,739Loss on nvestment 436 0 0 0 0Bad debt expense 413 0 433 581 0Philatelic charges 230 0 0 0 0Penalty charges 295 0 0 0 0Four atoll medical 371 0 0 0 0Local govrnments 9,519 12,784 12,465 12,589 12,684Claims tribunal 71 237 482 616 0Leased housing 0 140 286 177 192Utilities 0 507 604 734 894Other 6,484 7,934 5,128 7,684 14,604

Total 102.473 80.618 85.751 96499 99.485

Source: Office of Planning and Statistics, Majuro.

V*em4: auWhAadu 68

Table S.2

MARSHALL ISLANDSSTATEENT OF RBVBNUES.

GEERAl & SPECIAL REVENUE FUNDS. 191889890(USS thoUad)

1987/88 198889 1989j90 1990!91

Grant Revenue 29.678 28-792 26a277 24.86Compact of Free Association 21,241 20,664 18,584 18,890Fedetal contributions 7,922 7,964 6,592 4,073Federal & others 395 133 224 1,124Department of the Interior 120 32 876 0

Tax Revenue 11.304 13.732 13.794 14.668Income tax 5,674 7,745 6,126 7,443Import duty 4,369 4,520 5,507 S,898Business tax 90S 898 516 30Fuel tax 231 491 663 538Sale tax 0 0 37 0Others 124 77 94S 759

Other Local Revenue 88 89 17 23Utility charges 88 89 17 23Health servces 0 0 0 0other 0 0 0 0

Fees and Charges 2.421 1.074 1.495 1.93SBusiness 132 112 115 93other 2,289 962 1,380 1,842

Other Revenue 3.512 5.537 7.830 8.425Fishing rights income 1,238 1,344 1,188 1,856Philatelic sales 0 231 409 260Sale of government property 16 1 22 3Interest Income 1,560 1,903 3,173 2,027Sales 185 214 247 270Miscellaneous 512 1,844 2,791 4,009

Total 47.002 49.224 49.413 49,137

Source: Office of Planning and Statistics, Majuro.

69 Volme 4: MwihaE Idwda

MARSIAL ISLANDSCONSUMER PCE INDEX 1982-92

End of Foodstuff HEo l cIo1bin DabIe TolW Oang TPersonal Fbal (f)

1982 100.0 100.0 IOOA) 1000 1O0.01983 1052 1080 949 103.6 104.1 4.11984 104.0 114.9 1089 1153 1080 3.71985 106.7 1012 107.0 116.3 107.4 451986 105. 122.0 128.2 142.7 116.5 8.1987 106.1 136m1 127.1 106.9 1129 -3.11988 113.1 1203 1343 115.1 117.1 .71989 117. 1323 13 11.7 1199 2.41990 121.0 128. 124.1 109.0 120 1991 125.0 132.0 1265 11S3 124.7 3.41992 & 129A 19 13. 1210 12 63

& Asofrtd-1992.Souc= Ofce Of Pannn and Stbtkat , UMa

El

MARSHALL MSLANDS

VISflOR ARRIVALS BY PURPOSE. 1983-88

1983 1984 1985 1986 1987 1988

Tourism 1,999 2,166 1,58 1,848 2,290 2,6Business 951 978 636 997 151 30QReligious ActIvity 158 198 55 43 8 2Employment 250 230 133 158 192 209Other 272 34t 232 381 490 202

Toal8 3630 3.913 .14 3.427 3.131

Source: Offiic of Plnning and Statistics, Majuro

.4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3I~~~~~~~~~~~~~~~I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~tI II~~~~~~~~~~~~~~~~~~~~~~~~~~~9

18RD 24596

,p ~~~~MARSHALL *W' ' X'(

-o*_t ' -~~~~ -N a g ow s .~~~ NK?RJH PACIFICNORTH PACUFfC OC:EAN

- £o K : ~~~~~~~~~. W. i-

\ s * _, 19ANDS ,.f--^, - . # - IU~~~~~~~~ARSHALL ISLANDS\ s \ _ ! t8~~~~~~~~~ : , -S A ~.

\s . . " - >>Ut : ' 'I LAou~~~~~~~~~~~~~~~~~~~~MJW OCEND WMas-

; \e :,,_ . ' ' : c:7Kh f

FEDERATED STATES ' OF MICRONESIA \.;

-- ~ ------- -

t4P w I *a? ttp , ~~~~~~~~~~~~~MAlJURS NORTH PACIFIC

_ ~~~~~~~~~~~~~~~~~~~~~~OCEANr---_ ~~~~~~~~~~~~~N OF DVAAWADN e s6OrGO ;AE

.#_--* r-^ _ _ P^CtWFIC OCEANQ.

\ta > 'st -- -~~~~~~7Q .- t 7 ?1°X 9

FEBRUM 1993