federated states of micronesia 2005: economic report toward a self sustainable economy

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Chapter 1. Introduction

1


The Federated States of Micronesia (FSM) attained self-government

in 1979 when four of the seven districts comprising the TrustTerritory of the Pacific Islands ratified the Constitution of the

Federated States of Micronesia. Under the newly-formed

federation, the former Trust Territory districts became the States

of Chuuk, Kosrae, Pohnpei, and Yap. Negotiations on the terms of a Compact

of Free Association between the US and the Congress of Micronesia (then

representing all seven districts of the Trust Territory) began in 1967. In 1986, the

Compact was finally implemented and the United Nations Trusteeship of the

Pacific Islands administered by the US was formally ended. United Nationsacknowledgment of the Compact of Free Association signaled formal international

recognition of the FSM as a sovereign nation.

The FSM is situated in the western Pacific Ocean, extending from 1350to

1650east longitude and 10 south to 140 north latitude. The FSM includes more

than 600 small islands historically known as the Caroline Islands. The geographic

dispersion of the islands has resulted in an Exclusive Economic Zone (EEZ) of

approximately 1.0 million square miles, giving the FSM one of the largest tuna

fisheries in the Pacific. While the FSM is comprised of numerous islands, the

total land area is only about 271 square miles.

The FSM population is small and dispersed. Only the state capital islands

include urban areas. Statistics on population, population density, and

economically active population by State in 2000 are given in Table 1.

Table 1. Population, Population Density and

Economically Active in FSM: 2000

Area Population Population Density Employed

Chuuk State 53,595 1,094 11,979

Kosrae State 7,686 179 1,864

Pohnpei State 34,486 261 10,368

Yap State 11,241 244 4,964

FSM Total 107,008 395 29,175

Source : FSM (2000) Census of Population and Housing.

Notes : (1) Population density is number of residents per square mile.(2) Employed in formal employment, self-employment and economically active in subsistence production.


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Federated States of Micronesia Towards a Self-Sustainable Economy

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The discovery of the Caroline Islands by the West occurred in the early 1500s

with first contact made by Spanish and Portuguese explorers. However, it was not

until the early 1800s that the many island groups and distinct cultures of the

Caroline Islands were in frequent contact with foreigners. These contacts were

mainly with European traders interested in goods destined for the Asian markets.

German traders established the copra trade in the mid-1850s and came to

dominate commerce through their control of this industry despite Spains

established colonial control over the Caroline Islands. Spanish colonial rule from

1885 to 1898 ended when they sold the Caroline Islands to Germany after their

defeat in the hands of the Americans and the subsequent relinquishing of the

Philippines and Guam.

German colonial rule of the Caroline Islands lasted until World War I. With

the tacit agreement of Great Britain, Japanese naval forces quickly captured

the Northern Marianas, Marshall, and Caroline Islands in 1914. At the end of

WWI, the League of Nations mandated the Pacific Islands of Micronesia,

including the Caroline Islands to Japan which remained as an occupying power

until the end of World War II.

Fisheries and agricultural production, including the cultivation of rice, was

substantial and contributed to the Japanese empire and war effort in WWII. At

the end of the war, American military forces took control of Micronesia and in

1947 the United Nations established the Trust Territory of the Pacific Islands,which was placed under American administration.

The long colonial period that lasted a century under four different foreign

powers provided little opportunity for Micronesians to develop the

administrative, technical, and commercial skills needed to govern a nation in

the twentieth century. Despite American efforts in the 60s and 70s to institute

education, healthcare and infrastructure systems, much remained to be done

in terms of building an economy that could stand on its own. With this

recognition on the part of both Micronesian and US negotiators, economicassistance was inevitably one of the key elements of the negotiations on the

political relationship to be established upon termination of the Trusteeship.

The Congress of Micronesia was established in 1965 to represent the

different island groups comprising the Trust Territory in negotiating with the

US on the future political relationship that was to be formed. Early on, most of

the Trust Territory Districts decided on a freely associated relationship with

the US. However, it took nearly 20 years for the districts comprising the FSM

to negotiate the Compact of Free Association. The Compact accomplishedseveral important objectives including: (a) defining the freely associated

political relationship that recognized the FSM as an independent sovereign


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nation, with national security being guaranteed by the US; (b) enabling FSM

citizens the right to reside and work in the US and its territories without any

restrictions; and, (c) providing an economic aid package of annual grant

assistance and access to a range of stipulated US Government services (e.g.,

US Postal Service, weather service, Federal Deposit Insurance Corporation

program), and federal grant programs.

The Compact economic assistance package was committed by the US for

a period of 15 years, from 1987 to 2001. An additional two years economic

assistance was stipulated, provided negotiations towards a new compact

agreement were in progress. The overall economic assistance actually received

by the FSM in the period 1987-2003 was about $2.1 billion in 2003 dollar terms,

including grant aid from non-US multi- and bilateral donors.

As provided in the Compact, negotiations towards an amended or second

Compact agreement began in 1999. The negotiations for Compact II (as the

Amended Compact will be referred to hereinafter) were focused mainly on the

economic benefits package. The lengthy negotiations produced an agreement

on Compact II in 2003. The main economic and related provisions of Compact

II are summarized in Box 1.

With Compact II, the FSM, the US, and the wider donor community

anticipate progress in building the nation and reaching economic self-sufficiency

through the adoption of more effective development policies.The FSM has just begun the transition to the new US aid package under

Compact II, and difficult medium term economic adjustments must be made.

The significant decline in grant aid under Compact II, following difficult

economic conditions in 1997-2000, requires a major policy shift on the part of

all FSM governments. This shift will require steadfast commitment to policies

and objectives that have been proposed in the past, but which have never been

fully supported.

The present economic report reviews the past performance of the economyunder Compact I, and closely examines the institutional setting and societal

responses to development driven by large-scale US grant funding. The

institutional environment, distinctly shaped by the different cultures coming

together to form a federation, has in turn profoundly affected intergovernmental

relations. All of this has an impact on efficiently and effectively managing the

economic development of the nation.

Chapters 2-4 cover the historical experience of the FSM and the influence of

this on contemporary society and institutional structure. These chapters alsodiscuss how this experience has impacted economic decision making on the part

of government and private sector institutions. Chapters 5-7 discuss the economic


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performance of the FSM during the Compact I period, from 1986-2003, and

address the substantially altered US economic aid package negotiated for the

Compact II period to run from 2004 to 2023. These chapters also tackle the need

for renewed commitment to development goals and policies that have been widely

discussed and supported by stakeholders representing all segments of FSM society.In Chapters 8-11, the nations three most important productive sectors

agriculture, fisheries, and tourism will be discussed in more detail as these

must play a significant role in enabling the transition to sustainable long-term

growth and development. Also covered in these chapters section are other

significant emerging economic issues that will need further analysis and debate

to be appropriately addressed by development policies and strategies. In the

reports final chapter, findings and conclusions will be summarized along with

policy recommendations.

Box 1. Economic Benefits of Compact II

Annual grant assistance starting at $76.0 million in the initial 3-year period from 2004-

2006, then steadily declining from 2007 to 2023 as an additional $0.8 million each year

is taken from grant and deposited in Trust Fund along with an annual deposit of $16.0million by the US.

The Trust Fund is intended to replace annual US grant assistance beginning in 2024

following the end of Compact II.

The annual grant is to be allocated to six sectors: (1) education, (2) health, (3) private

sector development, (4) capacity building in the public sector, (5) environment, and

(6) public infrastructure. Allocations are to be determined in accordance with sector

development plans prepared by the FSM, consistent with annual sector grant proposals

made by FSM, subject to policy review and discussions annually by the Joint Economic

Management Committee (JEMCO). Voting membership of JEMCO includes threemembers from US and two members from FSM. Policy decisions are in accordance

with majority vote.

Additional grant and program assistance is made available under Section 221 (of Title

Two Economic Relations). Stipulated programs include US Weather Service and Postal

Service, and grant assistance to education and health sectors under the Supplemental

Education Grant (SEG). In fiscal year 2005, the amount of the SEG grant was $12.2

million. The SEG amount is not set and will vary from year to year. Additional US

federal grant assistance is available on a competitive basis with other US states and

territories. Available funding is ultimately dependent on US Congressional

appropriations.


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Executive Summary

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Chapter 2. Economic and Social History

2.1 Economic Changes from Pre-colonial Times

During the pre-colonial era, Micronesians existed almost solely on

subsistence. The natural resources satisfied the requirements of

their daily life, although there was also trade taking place. The

inhabitants of the low-lying coral islands traded their local

valuables with inhabitants of the high islands. The Yap Empire,

which extended from Gagil district on the Yap Islands to the Namonwito Islands

west of Chuuk Lagoon, was a trading empire.

The arrival of beachcombers, traders, whalers, and other foreigners in the1800s changed the way the Micronesians lived. The metal tools and knives

were obviously of high value and better quality than the ones made of stone

and wood used by Micronesians. With such tools, building canoes became easier

and faster.

The traders came to Micronesia in search of goods to sell in the Asian markets.

They collected beche-de-mer, turtle shells, bird eggs, and seashells. They sold

these items for good prices in the Chinese market. Pohnpei was reportedly

exporting between five and six hundred pounds of turtle shells per year.

The last traders to arrive in Micronesia were the ones interested in copra.

The copra trade started in the mid-1850s and brought in independent traders

and large firms from around the world. Copra trading was successful in

Micronesia. For the most part, local residents could earn a sustainable cash

income from copra. Some traditional chiefs in the Marshall Islands became

wealthy enough from the copra trade to purchase their own vessels. The

Micronesians used copra income to buy imported goods. For the first time the

Micronesians participated fully in the cash economy imposed on them by foreign

traders.

Even long after the foreign traders left, copra remained as the most reliable

source of income for Micronesians living in the outlying villages and islands.

The industry was so prevalent, it brought about a minor relocation of population.

Some individuals were taken from their homes to work on coconut plantations

on other islands.

In Micronesian societies, social ranking and stratification permeate all

traditional cultures. This is true even in the sparsely-populated coral islands,

although the emphasis on rank is not as intense. In highly stratified societies,such as Kosrae, Pohnpei, and Yap, rank is expressed through and consequently

controlled by a dualistic sociopolitical system.


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The social changes in Micronesia precipitated by contact with the Europeans

have had varied impacts on local communities. Two high islands - Pohnpei and

Yap - became the centers of the colonial administration and commercial activity.

The towns that grew around these centers triggered further change. Migration

from the outlying areas and islands, the introduction of the cash economy, and

the establishment of private and public schools brought about social and political

development similar to Western models. The members of these local communities

who received Western training soon formed a new social and political elite who

often challenged traditional authorities. Traditional leadership was further

strained as extended family loyalties and maternal ties were weakened as wage

labor tended to favor the nuclear family and paternal ties.

2.2 Caroline Economies in Colonial Times

In the Federated States of Micronesia, colonial administration started in 1886

when Spain established its headquarters in the Caroline Islands on Yap Islands

Proper. The second Spanish administrative headquarters was created the following

year on Pohnpei Island. These, however, were not the first established foreign

presence on the islands.

The German firms had dominated trading in the Marshall and the Caroline

Islands for decades prior to the arrival of the Spaniards. The economy wasfueled mainly by the thriving copra trade. At the time of Spanish takeover of

the Caroline Islands, the economy was dominated by German trading firms

like Hernsheim & Company, Jaluit Company, and the DHPG. Germany

challenged the Spanish claim to the Caroline Islands based on an absence of

exercise of Spanish control. In October of 1885, Germany annexed the

archipelago and held it for several months before turning it over to Spain as

stipulated in a peace settlement arbitrated by Pope Leo XIII. The resulting

situation had the two European presences coexist on the islands. While theSpanish colonial officials controlled the government, the German trading firms

dominated the economy.

The Spanish officials faced no significant resistance to their government

in Yap. The little resistance they encountered came primarily from the local

priests who stood to lose their traditional prestige and authority in the

community. But the Yapese did not rise up against the colonists in the way that

the Pohnpeians did.

When the Spanish colonists arrived in Pohnpei in 1887, they encounteredlocal resistance almost immediately. The Spanish governors lack of flexibility

towards the traditional chiefs and his lack of good judgment and contemptuous


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attitude towards local cultures, coupled with the foremens misappropriation of

local workers wages, prompted the people of Sokehs and Nett to attack the

Spanish settlement in Kolonia. The rebels killed the Spanish Governor and

several of his men.

The second war against Spanish rule broke out when the Catholic priests

and a contingency of soldiers arrogantly started laying the foundation for a new

church next to the Protestant church at Ohwa in Madolenihmw. The local

warriors quickly killed the construction workers and the soldiers. They would

have killed the Catholic priests too had a local church official not given safe

conduct into Kolonia.

From the outset of its rule, Spain was too occupied with the rebellions in

Pohnpei and never turned its attention to economic and social development.

The Caroline and the Marianas Islands were the two last remaining colonies

and Spains national commitment to keep them was dubious at best. Spain

asserted its claim to the Caroline Islands in 1885 more for national pride than

economic benefit.

As the succeeding colonizing power, Germany gave supervision of

Micronesia to the German Governor of New Guinea. The Germans created

four administrative districts in the Carolines: Chuuk, Palau, Pohnpei, and Yap.

Kosrae Island was incorporated into the Pohnpei district. The district

government was headed by a district officer and a few staff members. To enforcetheir laws, the Germans brought in New Guinean policemen.

The Germans brought sweeping economic reforms. To assist in paying for

the colony in the Caroline Islands, the Germans levied a head tax on everyone

above sixteen years of age. To encourage development of agriculture, the

Germans introduced land title registration, particularly in Pohnpei; and to

increase copra production for export, they required Micronesians to convert all

uncultivated parcels of land to coconut plantations. They made all able-bodied

men work on public projects such as docks, roads, public buildings. They evendug a canal in Yap to shorten trips from one side of the island to the other.

When mining of phosphate on Angaur in Palau began, government officers across

Micronesia recruited laborers to work in the mine.

The Germans also introduced social reforms. Alcoholism and tobacco

problems were rampant in the Caroline Islands before the Germans came. The

problem existed even among boys and girls as young as nine and ten years old.

The Germans solved this by banning the sale of alcohol to Micronesians.

There was also a problem of endemic warfare which the Germans stoppedby confiscating all firearms and ammunition, and prohibiting their sale to

Micronesians. The violators of the bans against the sale of alcohol and firearms


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were deportated from the islands. Local trouble-makers were exiled to another

part of Micronesia.

Several severe typhoons swept through the Carolines during the German

colonial period. These typhoons destroyed coconut trees and other crops, and

forced the Germans to relocate people from the outlying low coral islands to

the high islands. The loss of coconut trees set back copra production for years.

Some people from Woleai Atoll in Yap were evacuated to Saipan in the Marianas,

joining their fellow islanders who settled there at the beginning of the

nineteenth century. Some people from Mokil and Pingelap were relocated to

Sokehs in Pohnpei. A group of Mortlockese was allowed to settle in Sokehs on

lands confiscated by the German authorities after the Sokehs rebellion.

The only people who actively rebelled against German rule were the people

of Sokehs in Pohnpei. In the aftermath of the uprising, the leaders of the

rebellion were executed and the rest of the population was exiled to Babeldoab

Island in Palau.

The rule of Germany ended in World War I. Great Britain and Japan

entered into a secret agreement dividing the German colonies in the Pacific

between them. The colonies that lay north of the equator were to be

captured by the Japanese while the colonies south of the equator were for

the British. When the war started in 1914, Japanese naval forces quickly

captured the Carolines, the Northern Marianas, and the Marshalls. Theconquest was bloodless. The Japanese invading force for each major island

was then immediately transformed into an occupying power. The

commander became the head of the district government, and a functioning

administrative apparatus was created.

Schools were established and military officers were assigned to teach.

Temporary headquarters for the Provisional South Seas Defense Force was set

up on Dublon Island in Chuuk Lagoon. It took the Japanese less than three

months to firmly establish themselves in their new colony in Micronesia.In 1919, when the victorious Allied Powers assembled in Versailles in France

to create the League of Nations and divide the spoils of war, Japan had been in

firm control of this former German colony for five years and showed no sign of

relinquishing. In fact, the Japanese chief delegate demanded that his country

should be confirmed in its possession of Micronesia because in their five-

year occupation, the Japanese had accomplished much in terms of social,

political, and economic development.

In spite of President Woodrow Wilsons anti-colonialism posture at the peaceconference, the League of Nations awarded several mandates in the Pacific.

Japan was awarded authority over Micronesia. Under the League of Nations


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mandate, Japan ran the islands as an integral part of the Empire. The Micronesians

were considered subjects of the Japanese Emperor, and were under Japanese law.

The post-war occupation, however, was not the first contact between the

Japanese and Micronesia. Japanese traders started to come to Chuuk Lagoon

in the 1890s. They were a nuisance to the German colonial officials because

they sold guns and alcohol, both banned items, to the Micronesians. The

Japanese were deported from Chuuk but returned with renewed determination

to continue their trading activities. Towards the end of the German occupation,

the Japanese firms, such as Nanyo Boeki Kaisha(Nambo), were competing with

German companies for control of trade.

From the outset of Japanese colonial rule, private Japanese commercial

firms like Nambo were given government subsidies to provide crucial services

such as transportation linking the major islands in the new colony to each other

and to Japan.

The Japanese called the area Nanyo cho(South Seas). From the outset of

their colonial rule, private Japanese firms were given government subsidies to

provide services and enhance trade in Micronesia. The dominant commercial

presence was Nambo which took over the German copra trading companies.

Copra was still the single most profitable trading activity. The Japanese

government in Micronesia also established its own firm to take control of the

phosphate mines on Angaur Island in Palau.As with every economic development endeavor in the Nanyo cho, the

government approached the harnessing of fishery resources with careful research

and planning. In 1931, the Nanyo chogovernment created a Marine Products

Experimental Station in Palau to study oceanic conditions, and to perfect

catching and canning of fish and shellfish. The fishery resources were exploited

by small commercial fishing operations run mainly by Okinawan fishermen.

They sold some of their catch in the local fish market and the rest was processed

for export to Japan.Agricultural resources were also harnessed by Japan. Farmers from Okinawa

were brought in and they grew vegetables, tubers, and grain. As with the fishery

products, the farm produce was exported to Japan.

The efficient development of marine and agriculture resources, the

operation of the phosphate mines in Angaur and Fais, and the increase in copra

production made it possible to cut off the annual subsidy provided by the

Japanese government to the Nanyo cho in about twenty-five years making the

Micronesian economy self-sufficient.However, this success brought about a large migration of Japanese into

Micronesia, a phenomenon that had negative effects. From the beginning of the


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Japanese colonial administration, its social policies were unfavorable to the

Micronesian population. For instance, the Nanyo cho government established a

dual system of education: the shogakkoand the kogakko. The shogakkowere schools

for Japanese children; and the kogakkowere public schools for Micronesian

children. While the shogakko maintained the standards of regular Japanese

schools, the kogakkooperated on a lower level. For one, they used an inferior

form of Japanese. The students in the kogakkocould stay for a maximum of five

years. At the end of that period, the very best students were sent to attend the

Carpentry School in Koror, Palau. These were the minority, however. The

education provided by the Japanese was clearly inadequate, but at least they

set up an education system accessible to every child.

Obviously, the Japanese did not intend to train the Micronesians to run

the Nanyo chogovernment or to assume an active role in the booming economy.

The Nanyo chogovernment created two positions exclusively for Micronesians.

The Sosoncho was a village chiefs position and was sometimes filled by

traditional chiefs. The Sosonchos job was to liaise between the local population

and the Nanyo cho government. The other position was Soncho, assistant to the

village chief.

In terms of health services, the Japanese provided free health care accessible

to everyone who needed it. For the first time in their history, the Micronesians

could receive free medical attention in any of the public hospitals in the Nanyocho. The closest a colonial power got to providing health care was when the

Germans tried to deliver medical services in response to the typhoons that

devastated the region during their occupation.

The Japanese attack on Pearl Harbor in Hawaii on December 7, 1941

brought World War II to Micronesia. During the war, American bombers

destroyed Japanese military installations and local infrastructure. Although the

American forces did not invade any of the high islands, the roads, docks, and

other public facilities were completely destroyed.After the war, the Americans repatriated all foreign nationals from Micronesia.

Unfortunately, they had been the backbone of the cash economy; and with them

gone, the economy collapsed. With the low level of education provided to them

by the Japanese, the Micronesians lacked the knowledge and the technical-know-

how to even restore minimum public services such as power and water. So it was

left to the new colonial regime to set up social services, and to create administrative

structures. Unfortunately, the United States Navy lacked trained personnel to

administer the newly-acquired territory. The initial policies of the naval Americanadministration reflected these problems. The first directives issued by Admiral

Raymond Spruance were characterized as a policy of minimum government. As


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Admiral Dewitt Ramsey, the first deputy high commissioner, explained it: the

Navy does not govern these islands it administers them. This policy was also

explained by Admiral Louis Denfield this way: We see no need to interfere

unduly with the happy, simple life of these new charges of the American

government.

This policy of minimum government set the tone for the American

administration for the next fifteen years. Even the establishment of the

United Nations Trusteeship in 1947 did little to alter the naval policy in

Micronesia. As pointed out by Fran Hezel, S.J., (the trusteeship) effect

on the machinery of administration in the islands was little more than a

change of namefrom military government to civil administration. The

budget for the entire Trust Territory was a little over $7 million and it stayed

at that level until the 1960s.

With a meager budget, the United States attempted to build its new colony.

The American administration established elementary schools in every

community; and later added junior high schools in every district center. The

elementary schools were mostly housed in native thatched roof buildings. In

1952, the first general high school opened in Chuuk and students from all over

the Trust Territory were brought in to attend. It would take another eight

years for each of the six districts to have its own high school.

Development of public health was also slow. Americans were finding outthat training of local health personnel was prerequisite to the delivery of adequate

health care to the Micronesian population. For this, they relied heavily on the Fiji

School of Medicine.

Fishing and agriculture did not offer much hope for the American

administration to develop the Trust Territory economy. They tried to export

fish to Guam, but they stopped because of uncertainty in the industry. The

agriculture program in Pohnpei identified several promising products such as

ramie, cacao, pepper, and rice. However, benefits did not materialize becauseof farmers loss of interest in the project, largely due to damage done by pests.

With the failure to develop fisheries and agriculture, copra remained the most

reliable cash crop in the Trust Territory.

Economic development was not easy with the unenthusiastic approach

taken by the American administration. Foreign investment was prohibited; and

with the constraint of a small budget, the Trust Territory administration had to

rely on old industries such as copra for export. Small freighters would bring

copra from other parts of the Trust Territory to the dock in Majuro fortransshipment. The Majuro dock was the only one in the entire Trust Territory

capable of handling large transoceanic vessels.


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Many writers have referred this period in the American administration of the

Trust Territory as the period of benign neglect. Critics of American policy

started calling the islands the Rust Territory.

The second identifiable period of the American administration started in

the early 1960s. Three important events converged to focus American attention

on the Trust Territory. These were: (1) the 1961 UN Visiting Mission report;

(2) the polio epidemic in the Marshall Islands; and, (3) the fact that by 1960, the

Trust Territory was among the last few remaining trusteeships the United Nations

had created after WWII.

The UN Visiting Mission report was very critical of the way the United

States was administering the Trust Territory. This report ended up on President

John Kennedys desk. In 1962, the president signed National Security Action

Memorandum No. 145 creating an inter-agency committee to oversee policy

development in the Trust Territory. In addition, President Kennedy authorized

an eight-member task force headed by Anthony Solomon to survey the islands

and draw up a master plan for development that would secure American goals

and interests in the area. After visiting the islands in 1963, the task force

produced a three-volume report on how to improve the economy, raise the

standard of living, and ensure that Micronesians would choose in a plebiscite a

political status compatible with United States security interests. These

recommendations became the basis of the new American policy in the TrustTerritory.

In 1962, the new administration in the United States doubled the budget

for the Trust Territory to $15 million. In 1963, the United States administration

allotted $10 million to start a crash education program that would construct

more than five hundred classrooms and bring four hundred American teachers

to the elementary and secondary schools. By 1964, all districts, including Kosrae

and Ulithi, had started their own high schools.

The US government was pouring money into the Trust Territory inunprecedented amounts. The budget went from a meager $7.5 million annually

from 1947 to 1962, to $58 million annually from1963 to 1978. A whole array of

new US federal education and healthcare programs were introduced.

One important initiative taken by the United States that would change

the political landscape of the Trust Territory and serve as counterweight to

American aims, was the creation of the Congress of Micronesia in 1965. In just

two years after its creation, the Congress of Micronesia had served notice to

the United States that it intended to play an active role in deciding the futurepolitical status of the Trust Territory. In 1967, they requested the American

administration to form a task force to look into alternative political positions for


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the Trust Territory. When the United States government failed to act, the Congress

of Micronesia created its own Joint Committee on Future Political Status to

investigate political alternatives to the trusteeship. After a year of visiting other

dependent territories, the Joint Committee recommended negotiations with the

United States for free association status.

Formal negotiations with the United States started in 1969. The negotiation

for the Compact of Free Association took seventeen years to complete. During

those seventeen years, the Trust Territory was fragmented into four political

entities: a commonwealth and three independent nations with Compact of

Freely Association treaties with the United States. The formal break-up of the

Trust Territory came when the Marianas, Marshalls, and Palau Districts did

not ratify the draft constitution for the Federated States of Micronesia in the

1979 referendum. In that year, the Chuuk, Kosrae, Pohnpei and Yap Districts

officially formed a political union called the Federated States of Micronesia.

2.3 Self-Government and Compact I

The four districts of the Trust Territory that ratified the Constitution of the

Federated States of Micronesia attained self-government in 1979. Members of

the new National Congress were elected in March and took office in May. After

taking office, they elected the first president and vice president from amongthemselves.

The first task of the president and vice president was to form the executive

and judicial branches of the national government. The new administration

modeled the bureaucratic structure of the executive branch after that of the

United States government. The judicial branch was created when the FSM

Congress confirmed Edward King as the first Chief Justice of the FSM Supreme

Court. The legislative branch inherited the administrative staff and offices of

the interim FSM Congress.Prior to the implementation of the Compact of Free Association in 1986,

the FSM National Government was gradually building its administrative staff

to a level where critics were comparing it to the Trust Territory government.

To attract qualified employees to work for the new national bureaucracy, the

compensation level was set higher than the wages paid to state employees.

When the Compact was implemented in 1986, there was a new flurry of hiring.

The national government was also staffing federal programs. Some were hired

as permanent employees at the end of the programs. By 1987, the nationalbureaucracy had come to rival the former Trust Territory headquarters staff in

size and funding.


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In the same year, the new FSM Administration submitted a reorganization

plan for the executive branch to the FSM Congress. The plan was rejected mainly

because the ruling politicians felt there was nothing wrong with the current

system. The congress approved an emaciated version of the proposal, which at

least eliminated most of the independent agencies and folded their functions

into existing offices of the executive branch. It is interesting to note that when

the governments at the national and state levels were forced to reduce employment

and wages in the 1990s, no reference was made to the attempt to reorganize the

executive branch of the national government in 1987.

Under Compact I, the national and state governments had so many workers

that they could not withstand the impact of the second step-down in funding.

It was deemed politically risky to lay-off staff members and reduce wages. So

the national and state governments initiated an early retirement program for

employees that paid two-years wages to those who were willing to leave their

government jobs. In the national government, some employees were allowed

to take the two-year salary and retire even though the jobs were not targeted

for abolition. In some states, employees who were removed under the early

retirement program were actually hired back. Some as consultants to the

government, doing the same work that they did prior to retirement.


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Chapter 3. Social Institutions andTheir Relevance for Economic Decisions

3.0 Introduction

The Federated States of Micronesia is a nation with a dualistic

heritage fostered by its traditional customs and beliefs and by

assimilation of Western systems of economic, legal, political, and

religious models inherited from its colonial past (Box 2) and

perpetuated through its continuing reliance on the US. The FSM

society that has evolved through this process is one that is multi-cultural, multi-

linguistic, and fiercely ethnocentric. Ethnocentrism is present in the way FSMconducts its businesses, elects leaders, adjudicates disputes, protects human

rights, engages in politics, formulates public policies, allocates resources,

prioritizes states interests, and maintains distinctive state identities. The

uniqueness of cultural values and beliefs, customs and traditions, and social

systems and languages of each of the four FSM States play a decisive role in

maintaining a traditional system of decision-making, leadership and governance,

conducive to FSM collective and communal traditions.

This chapter analyzes how social institutions and systems affect economicdevelopment and policymaking. Section 3.1 analyzes how cultural, religious and

social institutions, such as the family, the church, and land tenure systems

negatively impact private sector development. Section 3.2 proposes an

alternative integrated development framework that addresses basic communal

economic and social needs specific to rural areas throughout the FSM.

Alternative models of people-centered development initiatives designed,

owned, and managed by communities in partnership with the private sector,

the government, and the donor community are presented. Section 3.3

establishes linkages between the family, the church, land tenure, and economic

development. It highlights the opportunities such social institutions bring to

creating economic opportunities and an enabling environment that blends

traditional and modern systems conducive to public sector development and

sustainable livelihood.

3.1 The Family, Its Structures, and Systems of Organization

The cultural and social structures of FSM society were traditionally based onextended kinship systems. Kosrae and Pohnpei are predominantly patrilineal

while Chuuk is essentially matrilineal. Yap has both patrilineal and matrilineal


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Box 2. Historical Summary

Since the 16thcentury, the Micronesian islands have been dominated by large foreign

powers. The impact of each colonial period is summarized as follows:

I. Spanish Colonial ruleSpanish Colonial ruleSpanish Colonial ruleSpanish Colonial ruleSpanish Colonial rule was formally established in 1869 and ended with the Spanish-

American War in 1899. Impact of this period included (a) organized religion,

(b) introduction of European building construction, (c) trade and commerce, and

(d) resultant changes to traditional cultures and traditions throughout Micronesia.

II. German AdministrationGerman AdministrationGerman AdministrationGerman AdministrationGerman Administration began in 1899 when Germany purchased the Caroline

and Mariana Islands from Spain after the Spanish-American War. German rule of

the Caroline Islands ended in 1914, at the onset of World War I. Impact of this era

included (a) trade and commerce, (b) economic, social and infrastructure development

(roads, communication stations, hospital, churches, copra industry, etc), (c) creation

of political districts, (d) introduction of the cash economy, (e) activation of patriarchal

land registration, personal land rights and titling systems and, (f) levying of taxes.

III. Japanese AdministrationJapanese AdministrationJapanese AdministrationJapanese AdministrationJapanese Administration began in 1914 and ended in 1945 following the ending

of WWII. Impact of the Japanese Administration includes: (a) continuation of trade

and commerce, (b) land development and commercialization, (c) economic social

infrastructure development, (d) introduction of occupation education, (e) military

control, and (f) emasculation of island-wide leadership authority and power.

IV. American AdministrationAmerican AdministrationAmerican AdministrationAmerican AdministrationAmerican Administration came into force in 1945 at the conclusion of WWII. An initial

Naval Administration was put in place from 1945 to see to post-war rehabilitation efforts.

This was followed by the Trust Territory of the Pacific Islands (TTPI) period

administered by the United States. A High Commissioner was appointed by the US to

administer the TTPI as mandated by the United Nations. Rehabilitation of basic

infrastructure was undertaken to help restore peace and order and to protect the

health and welfare of the people. Basic social services (hospitals, schools, roads, public

utilities, transportation, communication and social welfare programs) were provided to

assist post WWII recovery efforts in the urban areas. To operate these services the

TTPI administration introduced the US civil service system heavily staffed by senior

US expatriates. A US Federal System of Government was also adopted. Its centralized

headquarters was based in the Marianas and district administrations were established

in all TTPI districts. The TTPI period covered the period from 1947 to 1979.

V. The Micronesian TMicronesian TMicronesian TMicronesian TMicronesian Transitional Governmentransitional Governmentransitional Governmentransitional Governmentransitional Government administered the islands from 1979-1986.

This was a period of greater political activism on self-rule, de-colonization and

democratization. The establishment of the Congress of Micronesia in 1965 had

precipitated intensive political status negotiations between the US Administration,

the United Nations De-colonization Committee and leaders of the Congress of

Micronesia. By 1979, UN endorsed de-colonization and independence for the TTPI.

The UN urged the US and Micronesia to speed up political status negotiations that

would eventually result in an agreed political entity for the former TTPI nations. In

1985, the Compact of Free Association status with the United States was ratified byFSM and the Marshall Islands. The Marianas opted to accept Commonwealth status

and Palau deferred action on the Compact until 1994.


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Chapter 3. Social Institutions and Their Relevance for Economic Decisions

17

systems of association, but increasing modernization and exposure to external

lifestyles have made Yap society more patrilineal. The same is happening to

Chuuk.

In terms of societal structure, Pohnpei retains a monarchy although it is

now more symbolic than functional. Modern Yap society is highly stratified,

with rules of engagement for and between its social hierarchy and caste system,

clearly defined and strictly followed. Exposure to external influences has

modified Yapese customs and practices, but the essential principles underlying

its unique traditional values and customs remain relevant today.

The extended family systems are being supplanted by the nuclear family in

contemporary FSM society. However, the notion of extended family still has its

influence on social and political relations. There is still the obligation to look

after the members of the extended family. For example, wage earners are expected

to give cash or cash-bought goods to non-wage earners in exchange for services.

Mobility, changing values and lifestyles, and the high cost of living

associated with the cash economy have made this obligatory reciprocity difficult

to maintain. The difficulty is one major contributing factor to the rapid

breakdown of traditional kinship systems.

Culture also has a role in influencing the pace of development and the

outcome of economic and political decision-making. This is particularly true

for Yap, where the government and its Councils of Chiefs have forged a dynamic

alliance to guide the States development without unduly compromising

customs and traditions. Pohnpei culture, to some extent, is compliant towards

traditional social duties and obligations but serves no functional role in its

modern institutions and systems. For Chuuk and Kosrae, traditions and customsare not as prevalent as those in Pohnpei and Yap and may be exploited in support

of specific political agendas.

VI. FFFFFederated States of Micronesiaederated States of Micronesiaederated States of Micronesiaederated States of Micronesiaederated States of Micronesia (FSM)(FSM)(FSM)(FSM)(FSM) came into being in 1986 following the

signing of its Compact of Free Association with the United States. The FSM consists

of four of the former TTPI districts Chuuk, Kosrae, Pohnpei, and Yap. The FSM

seat of Government is located at Palikir in the State of Pohnpei. The FSM stategovernments are located in each of the FSM States of Chuuk (Weno), Kosrae (Tofol),

Pohnpei (Kolonia), and Yap (Colonia). The FSM National Government represents

the Federation and is responsible for foreign affairs. Politically, each state government

runs its own domestic affairs but exerts major influence on national policy and

decision-making. Each state government holds equal power in national affairs through

electoral representation in the FSM National Congress and through specific states

rights and powers set out in the FSM Constitution.


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Table 2. Structures and Systems of Organizations, FSM, 2004

Clan and Kinship Systems Chuuk Kosrae Pohnpei Yap

Matrilinage relationship is x x

based on maternal (female)

line of accession

Patrilinage relationship is x x x

based on paternal (male) line

of accession

Estate mixed line of accession x (adoption, Estates, House

Foundations and Communal)

Feudal a system based on x x

social class, status, power and

control

Nuclear relationship based x x x x

on a couple and their children

Source: Marksbury (1979); Perin (1996); Ritter (1978).

The political exploitation of customs and traditions allows special interest

agendas to dominate public events and dictate economic decision-making

processes. Often, this hinders national development efforts. Discretionary

application of traditional culture in contemporary FSM affairs has occasionally

compromised sustainable development efforts. This is because the role of

traditional customs in mainstream development policies is not clearly defined.

When customs are evoked, the application is inconsistent. There is also the

existing attitude that traditions stand in the way of progress and must be altered

or reformed.

3.2 The Church and Other Faith-Based Institutions

Christianity continues to be the most successful agent of cultural and socialchange in FSM society. It blends well with the collective, communal, and

complementary elements of traditions and customs, and is responsive to the


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basic spiritual and emotional needs of the people. For example, reverence for and

fear of an invisible but powerful God is akin to respect for ones ancestors spirits.

Both act as a potent force for ensuring compliance and conformity with religious

doctrines, and culture and tradition. In addition, the Church and other faith-

based organizations have become the major providers of quality education

throughout the nation.

Today there are many other religious disciplines in the FSM, each trying

to win over members in various ways, including economic rewards and offers

for better opportunities, both in the FSM and overseas. The depressed

economic situation in FSM has made conversion attractive, resulting in many

traditional Christians having changed their religion in exchange for economic

and social benefits. Table 3 provides a summary of the membership shares

of churches and faith-based organizations in the FSM.

Table 3: Percentage of Membership in Faith-Based

Churches by State, FSM, 2004

FSM State Roman Catholics Protestants Other Faith Based

(Percentage) (Percentage) Churches+

(Percentage)

Chuuk 53 43 4

Kosrae * 89 4

Pohnpei 53 43 4

Yap 83 * 4

Source: FSM (2000). National Census Report.* Included in Other Faith-Based Churches+ Bahai, Salvation Army, Seventh Day Adventist, Assembly of God and Mormon, and

United Church of Christ

The comparative advantage the Church offers the nation, in its quest for

sustainable development, social justice, and self-reliance cannot be

underestimated. The Church played a decisive role in opening up traditional

systems to pave the way for modern development. In the recent past, the Church

was instrumental in mobilizing FSM leaders and people to reject proposals for

commercial activities such as beer breweries, casinos, five star hotels, and golf

courses on the grounds that these activities would create social and spiritual illsincompatible with Christianity. While this perceived threat was legitimate, the

potential for job creation and development was downplayed.


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In times of natural disasters, such as the landside in Chuuk in 2002, the

churches and other faith-based organizations provided much-needed

emergency services and psychological and social support to victims and

affected communities. They also partner with the government and the FSM

Red Cross Society to mobilize international humanitarian relief for victims

of natural disasters. The Churches and their emergency programs are well-

positioned to provide the moral platform upon which social and political

transformation can be built. Many church leaders are influential community,

public and/or traditional leaders.

As the FSM embarks on a fiscally tighter policy regime dictated by the

provisions of the newly amended Compact, the Church may become more useful

than ever. As development catalysts, the Churches can partner with government

and non-state actors to mobilize the citizenry into collective action. This can be

achieved via the Churches public awareness and education campaigns, through

its social justice and development outreach activities, and by providing

accountable and transparent rules and guidelines for leaders involvement in

public and political leadership. The Churches are best suited to instill responsible

and accountable governance and leadership ethics in their members.

Churches can also work with civil society, businesses, and the government

to define expected roles, lines of responsibility, and partnership arrangements

that are accountable, participatory, transparent, and protective of human rightsand the rule of law. They can do this by focusing collective efforts towards

realizing the FSM strategic and infrastructure development plans and other

international development commitments. The Micronesian Seminar, a pastoral

education and research organization, has contributed to improved awareness

and literacy on public affairs, and in speaking out on issues related to

development, politics and foreign relations.

3.3 Land and its Titles

In Micronesia, land is wealth, power, spirituality, identity, and the basis for life

itself. Land is a valuable cultural asset and a priceless heritage to be passed to

future generations.

The overall land area of the FSM is 271 square miles. Pohnpei has the

largest land area followed by Chuuk, Yap, and Kosrae. Sixty eight per cent of the

land in the FSM is privately owned. Approximately 98% is privately owned in

Chuuk and Yap, while 64% and 36% are privately owned in Pohnpei and Kosrae,respectively. Table 4 presents selected land-related indices to show development

potential.


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Land ownership and inheritance are traditionally collective. Land is owned

or inherited through the following: direct accession through matrilineal,

patrilineal, extended or communal relationships or ancestry; acceptance of a

gift or compensation for service rendered; land purchase; land lease; or squatting

on unsettled lands.

Table 4: Selected Land and Land Use

Related Indicators by State, FSM, 2004

Chuuk Kosrae Pohnpei Yap FSM

Land Area (sq.m.) 49 42 133 46 271

Population 53,595 7,686 34,486 11,241 107,008Population Density

(per sq.m.) 1,094 179 261 244 395

Population Growth Rate

(in % per annum) 0.1 0.9 0.4 0.1 0.3

Source: FSM (2002). Statistical Yearbook.

Traditionally, property rights and land ownership are reserved forinheritance within families or clans. They are rarely transferred outside the

indigenous community. A majority of land parcels in the FSM continue to have

extended family or traditional authority over use or alienation rights. Most of

the land in the FSM has not been surveyed, mapped, registered, or titled.

These are the main reasons why land is difficult to acquire and develop. To

improve land ownership and titling in all FSM states, land administration offices

within formal and traditional jurisdictions have to be restructured to allow for

more effective and efficient land development and management systems. Areview of the laws governing land use needs to be done and it can begin with

provisions in the FSM National and State Constitutions that forbid the sale of

land, or the indefinite use of land by non-FSM citizens (See Box 3).

Developers and landowners have different agendas on how and to what

extent land is to be utilized. Developers, on the one hand, see potential for

large-scale commercial land development. Landowners, on the other, are largely

subsistence users, and view land as the primary source of food production and

security for daily survival.

In all the states of FSM, the tie between land and traditional ownership

and authority is still strong. In Yap, for example, the Councils of Chiefs have

the power to veto any decision or law that may affect customs and tradition.


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Box 3. Land Tenure Laws & Regulations

Constitution of the FConstitution of the FConstitution of the FConstitution of the FConstitution of the Federated States of Micronesiaederated States of Micronesiaederated States of Micronesiaederated States of Micronesiaederated States of Micronesia

Article XIII: General Provisions

Section 4Section 4Section 4Section 4Section 4: A non-citizen of the FSM or a corporation not wholly owned by citizens may notacquire title to land or waters in Micronesia.

Section 5Section 5Section 5Section 5Section 5: A lease agreement for the use of land for an indefinite term by a non-citizen,

corporation not wholly owned by citizens, or any government is prohibited. An existing

agreement becomes void 5 years after the effective date of this constitution. Within that

time, a new agreement shall be concluded between the parties. When the national

government is a party, it shall initiate negotiations.

Chuuk State ConstitutionChuuk State ConstitutionChuuk State ConstitutionChuuk State ConstitutionChuuk State Constitution

Article XI: General Provisions

Section 2Section 2Section 2Section 2Section 2: The power to take an interest in land may only be exercised by the State Government

for a specific purpose of general public interest, as prescribed by statute. Negotiations with

the owner for voluntary lease, sale or exchange shall be fully exhausted and just compensation

shall be fully tendered before a taking may occur. The Legislature shall provide for access to

the courts to ensure that good faith of the negotiations, the reasonable necessity of the

acquisition, and the adequacy of the compensation tendered. Upon the termination of the

public use for which an interest in land is involuntarily acquired, the State Government shall

return and quit claim the land to the owner or the owners successors.

Also refer to Article IV: Traditional Rights for supplementary clauses on customary rights

and practices in text box 12 under Chuuk State Constitution

KKKKKosrae State Constitutionosrae State Constitutionosrae State Constitutionosrae State Constitutionosrae State ConstitutionArticle XI: Land and the Environment

Section 3Section 3Section 3Section 3Section 3: The use of real property shall, in the public interest, be regulated by law to

assure public health, community well-being, the orderly and economical use of land,

preservation of places of cultural or historical value and island beauty.

Section 7Section 7Section 7Section 7Section 7: Only a person who is a citizen of the Federated States of Micronesia and a

domiciliary of the State, or a corporation which is wholly owned by such persons, may acquire

title to land in the State. Acquisition or utilization of interests in real property may be

restricted or regulated by law.

PPPPPohnpei State Constitutionohnpei State Constitutionohnpei State Constitutionohnpei State Constitutionohnpei State Constitution

Article XII: Land

Section 1Section 1Section 1Section 1Section 1: Limitation of Leaseholds. No lease of land, except from the Government or as

provided in Section 4 of this Article, may not exceed 25 years. The right for option to renew

and other protections shall be provided by statute.

Section 2Section 2Section 2Section 2Section 2: Acquisition of Permanent Interest in Real Property. The acquisition of permanent

interest in real property shall be restricted to Pohnpeian citizens who are also pwilidak of

Pohnpei, as specified under Article 3 of this Constitution

Section 3Section 3Section 3Section 3Section 3: Indefinite Land-Use Agreements. An agreement that grants the user of land the

unilateral authority to continue use for an indefinite term is prohibited.

Section 4Section 4Section 4Section 4Section 4: Land Legislation. The Legislature may provide, by appropriate legislation

procedures to permit leases and other uses of land in excess of limits prescribed in Section

1 of this Article.

Section 5Section 5Section 5Section 5Section 5: Land Sale. No land shall be sold, except as authorized by statute.


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In the FSM, land rights and land use are based on a principle of reciprocity

between landowners and those who have the right to use the land. The existing

informal market, however, allows transactions in which land ownership is

transferred in exchange for money or power. This will become a more acceptedbusiness practice as private sector development needs for land expands, the

demand for housing increases, and requirements for local production of

consumable goods and services grow.

The cash or money economy has changed the socio-economic reality so

that landowners are now forced by necessity to exchange their land rights for

cash and other material rewards. As land becomes more acceptable as a cash

commodity, accession and inheritance rights are changing. For example, in

Chuuk, authority to alienate land, once vested in the matrilineal groups as a

collective decision-making responsibility, has now been taken over by educated,

business-minded individuals. The financial gain from the land is turning into a

constant source of family or clan conflicts, and costly legal proceedings. This

conflict is a symptom of increasing economic hardships (underemployment

and lack of family income), increasing population, and changing economic and

social aspirations and lifestyles.

Public lands are also the subject of legal issues. Strategically positioned pieces

of land where important public infrastructure is built and maintained for

government operations is leased, often for huge sums of money. Unpaid land leases

have become a major source of litigation and government expenditure.

Given these concerns and the fact that land is limited and has high social

and cultural value, legislating changes in land use or the relevant constitutionally

protected land tenure provisions will take time. This situation raises numerous

questions about how land in FSM can be best managed. These issues have

been addressed in various ADB-funded technical assistance projects in the FSM.

So far, a few key points have been identified but no real consensus reached. The

legal framework for secured lending needs to be clarified and updated. New land-use regimes must incorporate customary use rights, but at the same time permit

more land to serve as collateral or be available for private sector development.

YYYYYap State Constitutionap State Constitutionap State Constitutionap State Constitutionap State Constitution

Article XIII: Conservation and Development of Resources

Section 2Section 2Section 2Section 2Section 2: An agreement for the use of land where a party is not a citizen of the Federated

States of Micronesia or a corporation not wholly owned by such citizens shall not exceed a

term of fifty years. The Legislature may prescribe a lesser term.

Section 3Section 3Section 3Section 3Section 3: Title to land may be acquired only in a manner consistent with traditions and

customs.


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There needs to be commitment to change that simultaneously protects traditional

land use rights, while facilitating economic development.

Culturally sensitive land development policies and enabling legislation can

evolve through formalizing stakeholder consultation processes such as national

and state economic summits or the establishment of issue-based development

policy forums(DPFs). It is also possible to create statutory policy mechanisms

such as a Native Land Trust(NLT), or an office of Micronesian Cultural Affairs.

Having such systems in place can help bridge the current gaps between

government, the private sector, and the people by:

Providing a formally structured, participatory consultation process that

involves key representatives of all stakeholder groups in land planning,

policy formulation, and decision-making.

Making land planning, policy and decision-making processes primarily

confined to government officials, accessible to the private sector, civil

society, and local development partners such as training institutions,

chambers of commerce, and landowners.

Ensuring that economic policy and decision-making affecting land

development be dictated by national and state development realities

rather than driven by external development interests.

Making available performance or results-based indicators to assist

planning, decision-making, and programming efforts.

Conducting workshops and forums to develop consensus on how to

strengthen and improve governance, leadership, management, and

technical capacities at all levels.

Convening conferences or workshops on formulating a clear and unified

national vision and to address inconsistencies between national and

state constitutional rights and provisions.

The recommended measures would address the long-standing indigenous

weaknesses in managing and administering the modern democratic institutions

and systems required to successfully promote economic development.

There was virtually no real commitment to developing this capacity and

the result has been a chronic shortage of qualified professionals and technicians

in the public service and in the local labor force. This in turn has resulted in a

high dependency on foreign advisors and contract employees. Given this reality,

there is a pressing need to conduct a needs-assessment of the institutional(administrative, organizational and technical) capacity of government and public

enterprise functions and programs.


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Box 4. S.L. No. 4L-21-96: Pohnpei Development Leasehold Act of 1996

This act is known as the Pohnpei Development Leasehold Act of 1996. This Act

stipulated the following:

1) Each notice submitted for the recordation pursuant to Section 3 of this act shall be

accompanied by a non-refundable recordation fee of $100 and a refundable bond equal

to $100 for each year of the term of the proposed lease Section 5

2) The recordation fee so paid upon submission of a notice of intent shall be deposited into

the General Fund of the Pohnpei Treasury as the realization of general revenue. The

refundable bond shall be deposited in a special fund of the Pohnpei Treasury, and shall

be returned to the payor or his designee if the prospective development lease agreement

is not executed within the time limits prescribed by Section 12 of this act or if so executed

on the fifth anniversary of the execution of the development lease upon a finding by the

Director that the requisite capital improvements have been emplaced on the real property

as prescribed by Section 13(4) of this act; provided, however, that such bonds shall beforfeited to the state if required by Section 16(2) of this act.

3) The maximum number of years for which the lease may be executed, but not in excess

of 55 years -Article 13 (3).

4) A covenant stating the minimum value of improvements to the real property that is

the subject of the lease which must be emplaced upon the property by the fifth

anniversary of the issuance of the lease, the value of which shall not be less than $200,000

Article 13(4)

5) A covenant stating that the lessor shall be entitled to not less than 10 per cent of the

capital gains received by the lessee or his successors in interest for an assignment,

sublease or subsequent assignment or lease, of the leasehold estate or portion thereof;provided that the calculation of such capital gains shall not include investment less

depreciation and reasonable business costs incurred by the lessee or his successors in

interest with respect to improving the leasehold estate or developing the business

activities thereon Article 13(6)

6) The statutory conditions prescribed by Section 13 of this act are hereby made a part by

reference and operation of law of every development lease executed in the State of

Pohnpei for the benefit of the lessor, notwithstanding their incorporation or non-

incorporation in the written leasehold agreement. Any provision in a lease contract,

agreement or subsequent agreement or contract which seeks to effectuate a waiver of

the statutory provisions of Section 13 of this act to the detriment of the rights andprivileges of the lessor contained herein is null and void as against public policy. Violation

of any condition or covenant prescribed by said sections of this act to the detriment of

the rights and privileges of the lessor shall be deemed a material breach of the lease

agreement, which may be redressed by report to judicial action Section 14

7) In addition to the civil sanctions as may be imposed under Section 14 of this act, any

lessee who, within five years of execution of the leasehold agreement, fails to improve

the leasehold estate at a value equal to or in excess of the valuation prescribed in the

development agreement shall be liable for the payment to the lessor or his successors

in interest of a civil fine of 10 per cent per year of the value of the improvements that

have not been so made to the property Section 16(1)

8) In addition to the civil fine imposed by Subsection (1) of this section, the bond paid

for filling of a notice of intent to enter or substantially modify a development lease as

prescribed by Section 5 of this act shall be forfeited to the state Section 16(2)


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The current impasse between landowners and government on land tenure

systems arises because of the perception that development plans promote

only the economic value of land as measured by market price, and not its

cultural and natural resource use values. It is true that whatever natural

resources the present generation has exists because of the investments and

conservative decisions made in the past. The management of resources over

time, in light of the future benefits those resources may yield, is an important

question of economic efficiency. There are also ethical and moral issues

involved as to the current generations responsibility to conserve resources for

the future.

Concerns regarding clear title to land, i.e., identification of all ownership

interests in private property, underlies much of the support for land and real

estate registration. However, identification is only part of the problem. To

serve as collateral with economic value, land ownership rights must be

transferable. Land is inalienable to non-citizens which means security

interests or liens cannot be enforced. In many customary settings, however,

freehold titles do considerable harm to traditional practices. Modern

approaches often ignore the fact that land rights in a traditional setting have

value over and above simply holding title.

Land reform should address the issue of how to harness the values of land

while preserving its associated traditional values. One mechanism that providesa robust land tenure system together with economic incentives and legal security

for lending is found in the Western ownership model. This required approach

would entail the following actions.

Reforming land administration, management, and enforcement;

Creating a one-stop-shop for real estate property development and

investment;

Reforming and expanding EPIC (Refer to 3.1.3); Performing an institutional audit of existing national and state

executive, legislative, and judiciary systems to identify administrative

and legal constraints and to propose development-friendly

improvement measures and legislative acts;

Adopting a government policy of pro-actively working with civil society

and other non-state actors; and,

Providing for independent national and state legal and regulatory reviews

and appraisals


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Box 5. Laws on Customs and Traditions

FSM Constitution - Article VFSM Constitution - Article VFSM Constitution - Article VFSM Constitution - Article VFSM Constitution - Article V: T: T: T: T: Traditional Rightsraditional Rightsraditional Rightsraditional Rightsraditional Rights

Section 1Section 1Section 1Section 1Section 1: Nothing in this Constitution takes away a role or function of a traditional

leader as recognized by custom and tradition, or prevents a traditional leader from being

recognized, honored, and given formal or functional roles at any level of government as

may be prescribed by this Constitution or by statue.

Section 2Section 2Section 2Section 2Section 2: The traditions of the people of the FSM may be protected by statute. If

challenged as violative of Article IV, protection of Micronesian tradition shall be considered

a compelling social purpose warranting such government action.

Section 3Section 3Section 3Section 3Section 3: The Congress may establish, when needed, a Chamber of Chiefs consisting

of traditional leaders from each state having such leaders, and of elected representatives

from States having no traditional leaders. The Constitution of a state having traditional

leaders may provide for an active, functional role for them.

Chuuk State Constitution - Article IVChuuk State Constitution - Article IVChuuk State Constitution - Article IVChuuk State Constitution - Article IVChuuk State Constitution - Article IV: T: T: T: T: Traditional Rightsraditional Rightsraditional Rightsraditional Rightsraditional Rights

Section 1Section 1Section 1Section 1Section 1: Existing Chuukese custom and tradition shall be respected. The Legislature

may prescribe by statute for their protection. If challenged as violative of Article III,

protection of Chuukese custom and tradition shall be considered a compelling social

purpose warranting such government action.

Section 2Section 2Section 2Section 2Section 2: Nothing in this Constitution takes away the role or function of a traditional

leader as recognized by Chuukese custom and tradition, or prevents a traditional leader

from being recognized, honored, and given formal or functional roles in government.

Section 3Section 3Section 3Section 3Section 3: The Legislature may appropriate funds annually for a traditional leaders

conferenceSection 4Section 4Section 4Section 4Section 4: Traditional rights over all reefs, tidelands, and other submerged lands,

including their water columns, and successor rights thereto, are recognized. The Legislature

may regulate their reasonable use.

Kosrae State Constitution - Article II: The Community and the IndividualKosrae State Constitution - Article II: The Community and the IndividualKosrae State Constitution - Article II: The Community and the IndividualKosrae State Constitution - Article II: The Community and the IndividualKosrae State Constitution - Article II: The Community and the Individual

Section 1Section 1Section 1Section 1Section 1: Except when a tradition protected by statute provides to the contrary.

Section 2Section 2Section 2Section 2Section 2: The State Government shall protect the States traditions as may be required

by the public interest.

PPPPPohnpei State Constitution - Article 5: Tohnpei State Constitution - Article 5: Tohnpei State Constitution - Article 5: Tohnpei State Constitution - Article 5: Tohnpei State Constitution - Article 5: Traditionraditionraditionraditionradition

Section 1Section 1Section 1Section 1Section 1: Customs and Traditions. This Constitution upholds, respects, and protectsthe customs and traditions of the traditional kingdom of Pohnpei.

Section 2Section 2Section 2Section 2Section 2: Protection of Customs and Traditions. The Government of Pohnpei shall

respect and protect the customs and traditions of Pohnpei. Statutes may be enacted to

uphold customs and traditions. If such a statue is challenged as violating the rights

guaranteed by this Constitution, it shall be held upon proof of existence and regular

practice of the custom or tradition and the reasonableness of the means established for

the protection, as determined by the Pohnpei Supreme Court.

Section 3Section 3Section 3Section 3Section 3: Family Obligations. (1) To strengthen and retain good family relations in

Pohnpei, as needed, this Constitution recognizes and protects the responsibility and

authority of parents over their children. (2) This Constitution also acknowledgesthe duties and rights of children in regards to respect and good family relations as

needed.


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YYYYYap State Constitution - Article III: Tap State Constitution - Article III: Tap State Constitution - Article III: Tap State Constitution - Article III: Tap State Constitution - Article III: Traditional Lraditional Lraditional Lraditional Lraditional Leaders and Teaders and Teaders and Teaders and Teaders and Traditionsraditionsraditionsraditionsraditions

Section 1Section 1Section 1Section 1Section 1: There shall be a Council of Pilung and a Council of Tamol which shall perform

functions which concern tradition and custom.

Section 2Section 2Section 2Section 2Section 2: Due recognition shall be given to traditions and customs in providing a system of

law, and nothing in this Constitution shall be construed to limit or invalidate any recognized

tradition or custom.

Section 16Section 16Section 16Section 16Section 16: A certified copy of every bill which shall have passed the Legislature be presented

to the Council of Pilung and Council of Tamol for consideration. The Councils shall have

the power to disapprove a bill which concerns tradition and customs or the role or function

of a traditional leader as recognized by tradition and custom. The Councils shall be the

judge of the concernment of such a bill.

Section 17Section 17Section 17Section 17Section 17: The Council of Pilung and the Council of Tamol may disapprove a bill by returning

the certified copies of the bill with their objections within thirty days after it is received

from the Legislature. A disapproved bill may be amended to meet the Councils objections

and, if so amended and passed, only one reading being required for such passage, it shall be

presented again to the Councils.

Innovative approaches are needed to achieve small-scale interventions which

strengthen and support existing goals and values in a manner complimentary to

social-cultural relationships within the community.

There is a perception that current FSM development policies and structural

adjustment programs emphasize an overly top-down economic development

agenda perpetuated by the discretionary application of customary governance.

This neo-traditional policy framework undermines the dynamism of a collective

and communal lifestyle suitable to a largely subsistence economy and society.

Traditional authority and governance were purposefully stripped of any

functional role in the modern FSM democratic government in all but one state.

As a result, the role of traditional authority in public governance has taken on a

more superficial ceremonial role that often is subject to financial gain or political

manipulation.Customs and traditions are often invoked in times of crisis to pull the

nation together, or to appeal to a collective endorsement and legitimacy for

otherwise unpopular leadership actions. In the political sphere, traditional

customs and extended kinships hold the authority and wield the bargaining

influence that opens doors to elected office and positions of power. Political

aspirants actively seek endorsement from traditional authority and closely

align themselves with these traditional processes to further their political

aspirations. People expect elected leaders and politicians to reciprocate by

honoring obligatory duties and rights prescribed by traditional authority.


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The extent of traditional authority and status is intrinsically proportional to

ones relative relationship to the land and collective extended family systems.

There are two ways to be elected into leadership and power: (1) ride on the ticket

of the extended family alliances and networks in ones electoral district or in

ones municipality or state; and (2) use of current position and authority to buyvotes or provide employment opportunities. Once elected, these leaders are subject

to keeping and nurturing the electorate they represent. This is their priority

mission. Those who reciprocate and fulfill their obligatory duties secure for

themselves a perpetual elected position.

3.4 Community-Based Development Approaches

The search for national identity in the post-colonial era and thepreoccupation with economic development has relegated social welfare to

secondary importance in the FSM. Already, the pace of urbanization and

population growth is challenging the ability of customary traditions to protect

people from hardship. Pockets of squatter dwellings and settlements are

beginning to emerge throughout the FSM. An estimated 20% of FSM citizens

have migrated overseas in search of better economic and social opportunities.

Economic and social development of heritage and natural resource-based

assets, based on traditional, indigenous cultural values and practices maybe an effective approach for rural areas and those adjacent to them which

contain cultural and natural resources. This involves initiating a variety of

community participatory activities which act as catalysts for l

federated states of micronesia 2005: economic report toward a self sustainable economy

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