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- GDP (PPP):
- $0.2 billion
- 1.4% growth
- $2,237 per capita
- Inflation (CPI):
- FDI Inflow:
Micronesia’s economic freedom score is 50.1, making its economy the 143rd freest in the 2013 Index. Its score has decreased by 0.6 point since last year due to deteriorating control of government spending and a loss of business freedom. Micronesia is ranked 32nd out of 41 countries in the Asia–Pacific region, and its overall score is lower than the world and regional averages.
Micronesia performs very poorly in many components of the Index and remains highly dependent on foreign aid. Long-standing problems include poor public finance management and underdeveloped legal and regulatory frameworks. The weak enforcement of property rights and the fragile rule of law have driven many people into the informal sector. The public sector remains the largest source of employment, and spending is excessively high and inefficient.
Micronesia’s lack of commitment to structural reform has long hampered much-needed economic development. Faced with a non-transparent and onerous regulatory framework, the private sector has been largely marginalized in an economically stagnant environment. Open-market policies are not in place to spur dynamic growth of trade and attract new investment.
Politically organized as a confederation of four states—the island groups of Pohnpei, Chuuk, and Yap and the island of Kosrae—the 607-island South Pacific archipelago of Micronesia has a central government with limited powers. The president is elected by the small unicameral legislature from among its at-large members. Formerly administered by the United States as a U.N. Trust Territory, Micronesia became independent in 1986 and signed a Compact of Free Association with the United States. Under an amended compact, it receives about $100 million annually in direct assistance from the U.S. and close to an additional $100 million each year in other U.S. government grants and services. The government sector employs more than half of the workforce. The economy suffers from a lack of infrastructure, electricity, running water, and employment opportunities.
The rule of law remains uneven across the islands, and a well-functioning, consistent legal framework is not yet in place. Squatters, long-standing disputes over land ownership, and the absence of property records make the exercise or enforcement of property rights difficult. Commercial laws are ineffective and inconsistently applied, and contracts are not secure. Despite laws prohibiting and punishing corrupt acts, corruption is widespread.
Tax laws are administered and enforced erratically. 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. In the most recent year, overall tax revenue was estimated to be 11.9 percent of GDP. Public spending has been chronically high at levels equivalent to nearly 66.9 percent of total domestic output.
Regulations are not applied consistently, and the non-transparent and costly regulatory framework continues to discourage emergence of entrepreneurial dynamism. The cost of starting a business is higher than the level of average annual income. Labor regulations are not enforced effectively, and there is no efficient country-wide labor market. A large share of the workforce is employed in the informal sector. Monetary stability has been weak.
The trade-weighted average tariff rate is 4.5 percent, and non-tariff barriers further constrain trade freedom. The investment framework remains too underdeveloped to facilitate flows of capital and foreign investment. The financial sector remains rudimentary, forcing much of the population to operate outside of the formal banking sector. High credit costs and scarce access to financing continue to constrain the small private sector.