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- GDP (PPP):
- $0.8 billion
- 1.4% growth
- 0.9% 5-year compound annual growth
- $7,346 per capita
- Inflation (CPI):
- FDI Inflow:
Micronesia’s economic freedom score is 49.8, making its economy the 153rd freest in the 2014 Index. Its score has decreased by 0.3 point since last year, with declines in business freedom, labor freedom, and monetary freedom outweighing an improvement in investment freedom. Micronesia is ranked 35th out of 42 countries in the Asia–Pacific region, and its overall score is lower than the world and regional averages.
Micronesia was first graded in the 2009 Index, and its economic freedom score has dropped since then by nearly 2 points. In addition to a decline in investment freedom, notable deteriorations have been recorded in the area of regulatory efficiency as measured by business freedom, labor freedom, and monetary freedom. Rated “mostly unfree” for the previous five years, Micronesia’s economy has fallen to the status of “repressed” in the 2014 Index.
Micronesia’s lack of commitment to structural reform is hampering much-needed economic development. Faced with the non-transparent and onerous regulatory framework, the private sector has been marginalized to a great extent 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, 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. 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. Economic development is hampered by poor infrastructure in electricity and water.
Official corruption is a major source of public discontent. In September 2012, the public auditor reported many fundamental weaknesses in the government payroll system, with paychecks going to employees who had been fired and overpayments for unauthorized work hours among the problems. The rule of law remains uneven across the islands, and a well-functioning, consistent legal framework is not in place.
The top individual income tax rate is 10 percent, and the top corporate tax rate is 3 percent. Tax laws are administered erratically among the nation’s 607 islands. The overall tax burden equals 12 percent of gross domestic product. Public expenditures amount to 65 percent of the domestic economy, and public debt is 27 percent of GDP.
The overall regulatory environment is not conducive to business formation and operation. Launching a business takes seven procedures on average, but licensing requirements are time-consuming. The labor market is underdeveloped. Much of the labor force is employed in the large public sector. Attempts to implement public-sector reforms have been undermined by dependence on U.S. foreign aid.
Micronesia’s average tariff rate was 4.5 percent as of 2006. Foreign investors may not own land. Federal and state regulations discourage new 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.