Good Any business information is hard to find about most of the Pacific islands. There are very few embassies out there on the big water. Few consulting firms take a serious look unless they are paid by one of the island governments to be optimistic. Market researchers pay no attention, because these are tiny, tiny markets – especially when compared to the huge markets on the western edge of the Pacific. So it is unusual to see something useful that may also be unbiased.

The U.S. Department of the Interior, despite its name, is responsible for much of the United States’ relations with the former Pacific Island Trust Territories of the Federated States of Micronesia, the Republic of the Marshall Islands and the Republic of Palau. Interior recently released studies of the economies of the first two done, not by Interior (which might have an axe or two to grind), but by students at Graduate School USA, a grad school on subjects needed by the Federal Government.  The school has been around for 90 years and has a good reputation, even if you have never heard of it. Students come from all over and try to leave their turf battles behind. So I am reasonably sure that the reports on the FSM and the Marshalls are an unvarnished, unbiased assessment. You can download the reports here.

Sokeh's Rock, Pohnpei

The Federated States of Micronesia (FSM) is composed of islands that most of you know only if you have studied the Pacific campaigns of World War II. The capital is Palikir on Pohnpei, a high beautiful high island, where Sokeh’s Rock is the equal of Hawaii’s more famous Diamond Head. Pohnpei is also home to the enigmatic city of Nan Madol, built on Venetian-like canals about a thousand years ago. Farmers on Pohnpei produce a wonderful pepper – some chefs say it is the world’s best – but usually not in commercial quantities. Other states and island groups include Yap (of the stone money), Kosrae and Chuuk. You may know Chuuk by its original western spelling of Truk, the huge lagoon where an incredible number of Japanese ships were sunk. I have dived Chuuk Lagoon on some of those ships. Magnificent and chilling.

Let’s take a look at what industries the FSM has. Won’t take long. The FSM’s GDP is forecast at $222 million for 2012, so we are talking small here. Of that, $34 million will come from hunting, agriculture and forestry – most of that specialty crops, like Pohnpei pepper, or subsistence agriculture. About $24 million will be from fisheries. Much of that is from small fishermen in the lagoons, though Pohnpei and Yap operate purse seiner fleets. The FSM has a continuing problem with foreign large-scale fleets sucking up the offshore catch. Some pay for the fishing rights, some don’t – and they are tough for an impoverished nation to catch. An increase in shore-based fish processing may be in the offing.

Wholesale and retail trade accounts for about $26 million, plus another $29 million for real estate and other business activities. Transport, storage and communications come in at about $14 million and construction at about $10 million. Manufacturing is a paltry $1 million, but these are islands with very few resources and even less energy. (I once looked into building a veneer factory on Chuuk, but – like so much else in these islands – it never materialized.) Yap once had Taiwanese and Hong Kong-owned garment factories, but these closed when word of their sweatshop conditions came out.

Specialty agriculture, handicrafts, fisheries products and tourism have been the big hopes to become export industries in Micronesia. But they have never lived up to their promise. Hotels and restaurants add about $4 million to the GNP. Tourism is highly specialized, focused on diving tourists from Japan and elsewhere. A few days on Pohnpei, seeing Nan Madol and soaking up the laid-back atmosphere would benefit any traveler, but Pohnpei is a long way from anywhere.

The Graduate School USA study does not come to a rosy conclusion. The study assesses the FSM’s chances of growing on different development tracks, but concludes that the most likely is the worst, the so-called “dismal” growth path. That anticipates slightly negative growth over the next decade or so.

The FSM market will remain minuscule, but it can still be lucrative for the right company and product. Less expensive consumer goods are sold through general stores. There aren’t many specialty shops, and I have never seen anything I would dignify by calling it a department store. There is a small market for fishing and boating supplies, DIY goods, construction materials, that sort of thing. There is the occasional tourism-related project, though recent airport expansion projects have been completed.

A large problem is the decline in U.S. federal monies going out to the FSM. These islands were German colonies, but were given to Japan after World War I. The Americans took them under their wing under a UN mandate, but granted independence in the 1980s. A so-called Compact of Free Association was negotiated by which the FSM retained many U.S. Government services, such as postal delivery, and received considerable economic development aid, to be delivered by the Interior Department. Years later, the Compact programs are expiring and the federal grants are trailing off.

I am not recommending that U.S. spending necessarily be increased again. The FSM and the other “freely associated states” have done relatively little to foster business and many of their politicians have been deeply suspicious of outside investors. The culture, too, seems to have an adverse reaction to any person or clan that does well at something – which has played a role in the failure of the pepper industry to grow. One result is that Micronesians, Marshallese and Palauans have picked up sticks and moved – putting a huge burden on social services in Hawaii and on Guam.

As an aside, I suggested when the first Compact was being negotiated that the FSM and the Marshalls be given access to using U.S. export promotion programs – thinking mostly about potential markets for Pohnpei pepper. As luck would have it, the first time that the FSM took advantage of this was for a trade show in Taipei when I was the senior American commercial officer in Taiwan. We dutifully helped the Micronesians set up their stand, spread their wares, and sell some pepper and handicrafts. I don’t know if the FSM ever did it again, but they gave me an FSM flag that I still treasure.