2009 Index of Economic Freedom

Quick Facts

Population:

• 0.1 million

GDP (PPP):

• $0.6 billion
• -0.7% growth
• 0.2% 5-year compound annual growth
• $5665 per capita

Unemployment:

• 22.0%

Inflation (CPI):

• 2.8%

FDI Inflow:

The 2009 Index is the first to assess Micronesia's level of economic freedom. The country's economic freedom score is 51.7, making its economy the 139th freest in the Index. Micronesia is ranked 30th out of 41 countries in the Asia–Pacific region, and its overall score is lower than the world average.

Micronesians face considerable challenges in realizing their economic potential. The economy scores poorly in many of the 10 components of economic freedom, and growth has been erratic. A significant portion of economic activity is still concentrated in the public sector, which is the largest source of employment.

Micronesia's tariff barriers are relatively low, but its overall trade freedom is still limited by non-tariff barriers and poor trade infrastructure. Development of the private sector has been marginal because of a business environment that is not conducive to entrepreneurial activity. As evidenced by low scores in business freedom, investment freedom, financial freedom, and property rights, Micronesia's overall regulatory and legal framework remains inefficient and lacking in transparency.

Background Back to the top

Micronesia is a South Pacific archipelagic nation with a population of approximately 100,000. Formerly administered by the United States as a U.N. Trust Territory, it became independent in 1979 and in 1986 signed a Compact of Free Association to govern its continuing close relationship with the United States. Under an amended compact, Micronesia receives $100 million annually from the U.S. in addition to the $35 million in other U.S. government grants that it receives. As a result, the government sector employs more than half of Micronesia's workforce, and taxes are low.

Business Freedom 59.8 Back to the top

The overall freedom to start, operate, and close a business is constrained by Micronesia's regulatory environment. Starting a business takes about half the world average of 38 days, but the entry cost is high. Closing a business is time-consuming and costly.

Trade Freedom 81.0 Back to the top

Micronesia's simple average tariff rate was 4.5 percent in 2006. Some high tariffs, import restrictions, inadequate infrastructure, and underdeveloped markets add to the cost of trade. Ten points were deducted from Micronesia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 97.4 Back to the top

Micronesia's tax regime is poorly documented, and collection rates are low. National taxes include a wages and salary tax (10 percent at the highest level); a 3 percent gross revenue tax on businesses with turnover that exceeds $10,000 a year; and an excise tax on alcohol and tobacco products. Sales taxes are set and collected separately at the state level. In the most recent year, overall tax revenue as a percentage of GDP was 12.3 percent.

Government Size 0.0 Back to the top

Total government expenditures, including consumption and transfer payments, are extremely high. In the most recent year, government spending equaled 63.1 percent of GDP. Government and public enterprises account for nearly 40 percent of GDP and over 50 percent of paid employment. Private-sector growth is negligible.

Monetary Freedom76.7 Back to the top

Inflation is moderate, averaging 4.4 percent between 2004 and 2006. The U.S. dollar is the official currency, and the government relies heavily on outside financial assistance. Ten points were deducted from Micronesia's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom30.0 Back to the top

The Foreign Investment Act of 1997 provides for non-discriminatory treatment of foreign investment, indicates the sectors in which foreign investment is not allowed, notes additional regulation for certain sectors, and sets out guarantees regarding expropriation. All foreign investment is prescreened. The states license and regulate all other sectors and may impose additional restrictions. Each of Micronesia's four states has a unique foreign investment regime and can counter national policy. Regulations are applied inconsistently, and enforcement of contracts is weak. There are no limitations on currency or capital transactions. Foreign investors may not own land but may lease it for short periods.

Financial Freedom30.0 Back to the top

Micronesia's financial system is hindered by a large government presence and not developed enough to generate and support dynamic entrepreneurial activity. The formal private sector is small and constrained by ineffective regulation, high credit costs, and scarce access to financing. Much of the population remains outside the formal banking sector. The financial sector is dominated by banking, which includes one state-owned development bank and two commercial banks, one of which is majority government-owned. State influence in allocating credit is substantial, and government-controlled or government-owned banks make 90 percent of all loans.

Property Rights30.0 Back to the top

Foreign ownership of land is not permitted. Lease terms for real property are controlled at the state level and often limited to relatively short periods. In some locales, squatters, long-standing and multiple disputes over land ownership, and the absence of property records make leasing land extremely difficult, costly, and uncertain. Transfer of title sometimes occurs informally, and this causes a lack of accurate public pricing information. Most original land records in Chuuk State were destroyed in a fire; the other three states have functioning land offices. Copyrights are protected by statute, but there are no trademark, patent, or other intellectual property rights regulations currently in effect.

Freedom From Corruption30.0 Back to the top

Corruption in Micronesia is perceived as widespread. The level of corruption varies in each island state, with Chuuk perceived as the worst. Micronesia has laws prohibiting corruption, and there are penalties for corrupt acts. The Department of Justice has been the most active in anti-corruption activities. A number of senior ex-government officials have been convicted of corruption, usually involving procurement fraud. Bribery is punishable by imprisonment for not more than 10 years and disqualification from holding any government position. Micronesia has not signed or ratified the U.N. Convention on Corruption. Many government officials also own businesses.

Labor Freedom82.3 Back to the top

Micronesia's flexible labor regulations enhance overall employment and productivity growth. The non-salary cost of employing a worker is low, and dismissing a redundant employee is moderately easy. The formal labor market is not fully developed.