Mainstreaming Trade in Micronesia: Turning Bilateral Dependency into Regional Competitiveness

This paper grew out of two assignments I carried out in Pohnpei, in the Federated States of Micronesia, in 2010. The immediate objective was to help persuade the government to embark upon accession to the World Trade Organization. That mission failed. But my time there, working with trade policymakers, gave me valuable insights into the trade and investment challenges facing a relatively young country with a small population spread across a vast expanse of the Pacific.

The paper captures the policy debate at that time, as the country considered its first national trade policy and its options for closer regional economic integration. It is a snapshot of the choices facing Micronesia in 2010, rather than an assessment of where those choices stand today.

Market access was only part of the problem

Some of the constraints were obvious and difficult to escape: long distances to major markets, a small domestic economy and a narrow resource base. But geography did not explain everything. Rules governing business and investment, the division of responsibilities between national and state governments, and the difficulty of getting decisions made also stood in the way of a stronger private sector.

One of the central arguments of the paper is that negotiating more trade agreements would achieve little if businesses remained unable to take advantage of opportunities already available to them. Market access matters, but so does the ability to produce, invest, move goods and operate a business without unnecessary obstacles.

From dependency towards competitiveness

The Compact of Free Association with the United States was central to this discussion. Its financial support provided an important source of stability, but I argued that it also reduced the urgency of difficult economic reforms and helped sustain an economy in which the public sector played an outsized role.

The challenge was to turn that support into a foundation for greater productive capacity and private enterprise. A national trade policy could contribute to that effort, but it could not substitute for the domestic reforms needed to make investment and business activity easier.

That was also why WTO accession interested me. It offered a possible framework for reviewing legislation, strengthening institutions and giving a wider reform programme some direction. But an accession process cannot supply the political commitment that a government is unwilling to make. My assignments brought that limitation into fairly sharp focus.

What I took away

Although we did not achieve the original objective, the experience was valuable. It reinforced a lesson that runs through much of my work: trade policy has to connect with the practical conditions under which an economy operates. International commitments can support reform, but their value depends on what happens at home.

For Micronesia, the question was how a small island economy, with considerable distances both within its own territory and to the rest of the world, could build a more competitive and less dependent economic future. This paper records my thinking on that question after two assignments spent working with the people responsible for trying to answer it.

Read the paper

Mainstreaming Trade in Micronesia: Turning Bilateral Dependency into Regional Competitiveness, Simon Lacey. Written on 1 September 2010 and posted on SSRN on 26 January 2011.

Download the full paper (PDF) · View the paper on SSRN

Listing photograph: Kolonia viewed from Sokehs Ridge, Pohnpei, by Gargoylepni, released into the public domain.

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