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- GDP (PPP):
- $0.3 billion
- 0.1% growth
- 0.2% 5-year compound annual growth
- $3,015 per capita
- Inflation (CPI):
- FDI Inflow:
Micronesia’s economy remains highly dependent on foreign aid. Long-standing problems include poor management of public finance and underdeveloped legal and regulatory frameworks. Weak enforcement of property rights and fragile rule of law have driven many people into the informal sector.
Economic Freedom Snapshot
- 2016 Economic Freedom Score: 51.8 (up 2.2 points)
- Economic Freedom Status: Mostly Unfree
- Global Ranking: 147th
- Regional Ranking: 32nd in the Asia–Pacific Region
- Notable Successes: Trade Freedom
- Concerns: Rule of Law, Management of Government Spending, and Business Freedom
- Overall Score Change Since 2012: +1.1
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 marginalized to a great extent in an economically stagnant environment. The absence of open-market policies is largely responsible for the lack of dynamic investment.
Politically organized as a confederation of four states (the island groups of Pohnpei, Chuuk, Yap, and 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. Micronesia’s most recent parliamentary election took place in March 2015. 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 $130 million annually in direct assistance from the U.S. The government sector employs more than half of the workforce. The country has poor water and electricity infrastructure.
Official corruption is a major source of public discontent. A 2012 public audit report found fundamental weaknesses in the public payroll system, such as paychecks going to past employees and overpayment for unauthorized work hours. Corruption and political influence are serious problems in the chronically underfunded judicial system. Foreign nationals may not own real property.
Micronesia’s tax laws are administered and enforced erratically. The personal income tax rate is 10 percent, and the corporate tax rate is 21 percent. Other taxes include regional sales taxes and import taxes. The overall tax burden is estimated to equal 11.6 percent of GDP. Public spending has been chronically high at levels equivalent to over 60 percent of total domestic output.
Regulations are not applied consistently, and the non-transparent and costly regulatory framework continues to discourage entrepreneurial activity. Labor regulations are not enforced effectively, and a large share of the workforce is employed in the informal sector. The economic outlook is fragile because of Micronesia’s heavy dependence on U.S. assistance and the lackluster performance of its stagnant private sector.
Micronesia’s average tariff rate was 2.2 percent as of 2006. Land may not be sold to foreign investors. State governments impose various degrees of limits on 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.