The Open Ocean: The Future of Foreign Aid in the Pacific

The Pacific is not the Caribbean, as economists and foreign policy analysts might do well to remind themselves from time to time. Pacific Island nations, even in the best of circumstances, are barely economically viable. In 2012, for instance, while all Pacific Island nations could support their government services, none—with the exception of Fiji—could do so without some measure of foreign aid. For the small island nations in the northern Pacific and those straddling the equator, foreign aid constitutes a significant part of their economies. Development prospects remain dim for these small nations. First, these states lack the natural resources that some of the larger Melanesian countries enjoy. A notable example is Papua New Guinea, whose gross value of gas, oil, and mineral exports totals nearly 80% of its GDP, even though only a fraction of this amount actually enters the island economy. Second, manufacturing and trade are severely limited by the small size, tiny population, scant resources, and distance from markets. Finally, tourism is modest in nearly all Micronesian nations. Palau, with a resident population of 18,000 and an influx of over 160,000 tourists a year, is the only northern Pacific nation with a sizable tourism industry. Despite this, tourism constituted only 23% of its national GDP in 2015.

Three Pacific Island nations—the Federated States of Micronesia (FSM), the Marshall Islands, and Palau—currently enjoy a Compact relationship with the United States. The Compact of Free Association, originally modeled on the free association of the Cook Islands with New Zealand, offered a political compromise between full independence and ongoing territorial status. It gave the island internal self-governance and annual financial assistance on the condition that the partner nation would manage all foreign affairs and defense needs. For small island nations without the wherewithal to support themselves, a compact of free association appeared to be an ideal political solution. After years of negotiations between the United States and its island wards, self-governance in the island nations expanded to include foreign affairs while U.S. authority narrowed to defense-related matters. By 1986, when the Compact was finally implemented, the political status of free association had morphed into independence.

Five years ago, Compact funds represented 24% of the total GDP of Palau, 34% of the total in FSM, and 45% in the Marshall Islands. Despite this assistance, FSM and the Marshall Islands are still included in the ranks of the Pacific’s economically worse-off nations. Tourism potential is limited in FSM and the Marshall Islands, which have seen no measurable growth in the industry in the 30 years since independence, and even in Palau, the existing tourism industry cannot be relied upon: the government recently adopted measures to curtail the recent Chinese tourist influx, which seems to have displaced the much more lucrative Japanese market. Thus, continued U.S. support remains a lifeline to the Compact nations’ future economic viability.

Yet, the other nations in this area depend even more heavily on foreign aid to support their stagnant economies. In all likelihood, most other Pacific states, not only the Compact nations, will have to depend on foreign aid for a sizable piece of their economies in the foreseeable future. For the Compact nations, this would mean continued reliance on U.S. aid even after the current financial provisions expire in 2023. Other nations in the region with no ties to the United States–particularly Kiribati, Nauru and Tuvalu–will be forced to turn to other nations with whom they may or may not have similar historic ties for the same type of support. Hence, Compact funds do not disincentivize these countries from growing their own economies, but rather remedy a problem common to all small Pacific nations.

Surprisingly, a few months ago, a resolution was introduced into the FSM Congress to terminate the nation’s Compact relationship with the United States in 2018—five years before the current funding agreement between United States and FSM expires. The resolution was perhaps the first formal expression of the frustration that has been building among island leaders in recent years. Much of the region’s leadership perceives the United States as having the upper hand in the Compact relationship because of the financial support that it provides. The FSM resolution has not been acted upon, but the question remains about why was it introduced in the first place. Why should countries like FSM and the Marshalls, so heavily dependent on U.S. financial support, end their relationships with the United States?

All things considered, they don’t want to, of course, as the short-term economic consequences would be disastrous. But the island nations cannot resist the urge to show the United States that they too have a voice in the matter. If you won’t take care of us over the long run, they seem to be telling the United States, we will find another power that will. Those of us who lived through the height of the political status debate in the late 1960s remember how often strident activists threatened that they could always turn to the USSR if the United States were to shrug off island concerns. In the debate’s current form, however, East Asia has replaced the Soviet Union as the object of such threats.

Nonetheless, Micronesian nations seem to recognize that even if China affords a convenient foil to the United States, it has never shown the nations of the north Pacific that it has deep pockets.  Perhaps this is the reason that FSM is the only one of the three Compact nations to continue diplomatic relations with the People’s Republic of China. Palau and the Marshalls have long since switched to Taiwan, and Kiribati did so even earlier. Taiwan has rewarded the recognition of its sovereignty from these island nations by providing financial assistance. Meanwhile, China’s foreign aid to FSM has consisted of buildings, ships, and construction projects of limited cost, planned and built entirely with Chinese labor. Often enough, these projects were later found to have serious defects.

The United States could help its own case by developing a long-term strategy in the Pacific that looks to the future rather than simply focusing on the latest manifestation of an unending series of threats to U.S. security in the area. Such a long-range vision would entail working out what forging a permanent link between the Compact nations and the two U.S. territories (Guam and the Northern Mariana Islands) entails. Bringing these islands to the table and establishing a lasting link would guarantee the United States a permanent presence in the area and the access to East Asia that has time and again proven critical over the last two centuries.

If the United States were to benefit from this link, so would its Pacific partners—three island nations and two dependent entities with strong historical and political ties to the United States. Full economic self-reliance has been elusive thus far despite the progress made by some. A clear U.S. commitment to continue to provide monetary aid to its island partners, which has been so integral to the economies of struggling Pacific nations, would go long way to cement that link.