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- GDP (PPP):
- $0.3 billion
- -0.2% growth
- -1.2% 5-year compound annual growth
- $2,955 per capita
- Inflation (CPI):
- FDI Inflow:
Micronesia faces considerable geographic and other challenges that arguably reduce its economic potential, but poor policy choices in critical areas of economic freedom have further retarded growth. A significant portion of economic activity is concentrated in the public sector, which is the largest source of employment.
Tariff barriers are relatively low, but overall trade freedom is limited by nontariff 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. The overall regulatory and legal framework remains inefficient and lacking in transparency. The island economy remains highly dependent on foreign aid.
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 most recent parliamentary election for Micronesia’s small unicameral legislature took place in March 2015; in May 2015, the legislature’s at-large members elected President Peter Christian to a four-year term. Under an amended compact, it receives about $130 million annually in direct assistance from the U.S.
Property rights are only well protected for citizens and, to a lesser degree, for foreign nationals who have more than five year’s residence in the country. The government generally respects the constitutionally independent judiciary, but the judicial system is chronically underfunded and subject to political influence. Civilian authorities maintain effective control of the police and investigate abuse and corruption.
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. The overall tax burden equals 19.7 percent of total domestic income. Government spending has amounted to 60.2 percent of total output (GDP) over the past three years, and budget surpluses have averaged 5.7 percent of GDP. Public debt is equivalent to 26.3 percent of GDP.
Given the poor development of the physical and regulatory infrastructure, the formation or operation of private businesses is not easy. A large share of the workforce is employed in the informal sector. The government depends heavily on U.S. subsidies, which account for roughly 40 percent of annual revenue, and is looking to China for future support when the American payments end in 2023.
Trade is important to Micronesia’s economy; the value of exports and imports taken together equals 78 percent of GDP. The average applied tariff rate is 2.2 percent. Foreign investors may not own land, and investment in other economic sectors may be screened. Outmoded regulation, high credit costs, and scarce access to financing continue to constrain the small private sector. Much of the population remains outside of the formal banking sector.