Government of the Federated States of Micronesia

Statement by

the Honorable Peter Christian

Chief Negotiator
for the
Joint Committee on Compact Economic Negotiations (JCN)

Before the
Committee on Resources, United States House of Representatives

Washington, D.C., July 17, 2001

Check Against Delivery

Mr. Chairman:

We are grateful to you, Mr. Chairman, and to the Committee Members, for affording the Government of the Federated States of Micronesia (FSM) this opportunity to appear and present our testimony regarding the negotiations between the FSM and the United States Government (US) to amend certain provisions of the Compact of Free Association, primarily those relating to financial and other assistance that are expiring, after fifteen years.

First, we would like to take this opportunity to reiterate the gratitude of our Government and our people, not only for the very considerable assistance which has been provided to us by the United States for the past fifteen years, but also for the constant friendship you have extended to us. This has been an important contributing factor to our political, social and economic advancement during the Compact period. I am sure that I speak for every citizen of the FSM in saying that we are proud of our close association with the greatest Nation on earth. We are motivated in no small part by this association to maintain principles of freedom and democracy that we share with you.

The US and the FSM share important historical ties in the western Pacific. The tragedies of World War II brought our two peoples together, with some of the fiercest battles of the war in the Pacific being fought on our soil. The experience of the war, and the tragic loss of so many American and Micronesian lives, vividly underscored the strategic value of our islands. At the time, some in the US Congress even went so far as to suggest that Micronesia should remain in US hands indefinitely. Given the historic anti-colonial attitude of the US, we were eventually designated as the only Strategic UN Trust Territory. Our sovereignty was never assumed by the United States. Under this arrangement, the US would maintain military control of the region while pledging a solemn commitment to the "economic and social advancement of the inhabitants."

The early years of the Trust Territory were difficult for both sides. Early on, the US embraced what became known as the "zoo theory," under which it believed a hands-off approach to the Micronesian people, thereby leaving us in a traditional subsistence environment, would be best for us. It soon became apparent that it was too late for that kind of thinking, and it amounted to economic neglect of the Micronesians. As a result little or no development took place, with basic services lacking and only rudimentary infrastructure in place. This would change in the mid-1960s with a sudden increase in the levels of assistance from the US, and also the first concrete steps toward the establishment of political institutions and eventual self-governance. In 1979, the Constitution of the FSM was implemented and our nation was born.

In 1986 the Trusteeship was terminated, and the US and FSM entered into a new relationship under the Compact of Free Association - at the time the first of its kind in international affairs. The Compact recognized the FSM, the Republic of the Marshall Islands, and later Palau, as self-governing sovereign states in free association with the United States. These entities, to be termed the "freely associated states," or FAS, would contribute to the peace and security in the central Pacific through the granting of certain defense and security rights to the US. In exchange, the US would promote the economic and social well-being of the Micronesian people through continuation of financial and other assistance. These arrangements served the US and the FAS well during the first fifteen years of the Compact, and, hopefully, will be reaffirmed and strengthened in the amended document currently under discussion.

In most important respects, the first fifteen years of the Compact have been successful. Great strides have been made in improving economic and social conditions in the FSM and the quality of life of FSM citizens. A stable and democratic political system has been established in the FSM, determined solely through the will of its people. The FSM has taken its place as a full and active participant in the international community. As such, it has been a strong and consistent supporter of United States foreign policy, in its bilateral relations, regionally and at the United Nations. During the Compact period the central Pacific has remained peaceful, secure, and free of foreign interference, in marked contrast to its previous history and to developments elsewhere in the broader Asia-Pacific region.

As with any new relationship, and as with any newly emerging developing country, mistakes were inevitable. Most that involved the Compact were remedied along the way through US/FSM consultations. Not once did either party resort to formal dispute resolution. Not once did the United States invoke the Compact defense veto against any FSM Government action. After about ten years and with the support of the Asian Development Bank, the FSM National and State governments carried out one of the most successful government reform and restructuring programs on record.

Both the FSM and the US are determined in the amended Compact to reinforce those policies that have been successful and correct those which have not. Central to this approach is a shared desire for better administration, transparency and accountability in the management of Compact funding.

This brings us to the negotiations over the past several years to continue this historic relationship. Negotiations on the original Compact began in 1969 and lasted 17 years. Of course, the talks this time are focused primarily on the expiring provisions. Nevertheless, it is a credit to all involved that these talks are nearing completion in less than three years.

Even though the scope of the current renegotiation is much more limited than that of the original negotiations, many of the original principles and formulations have had to be reassessed in a substantially different post-Cold War international relations environment. Also, proper account has to be taken of technological innovations that were nearly unimaginable when the Compact was signed in 1986. Further, with fifteen years of history behind the two nations, both must now reinforce and build upon the positive accomplishments of the Compact while addressing the problems that have arisen.

Still, it is understandable that some might ask why these talks have taken this long. Please allow me briefly to trace a history of the renegotiation process, which we hope will shed light on the reasons for the delays that have occurred.

The FSM Joint Committee on Compact Economic Negotiations (JCN) was created by the FSM Congress in 1997, to begin preparations for the Compact negotiations which were mandated to begin in 1999. The JCN was formed a full two years before a similar agency was established by the US.

During these first years, the FSM developed the mechanisms necessary to ensure proper representation by the FSM in the talks, and conducted extensive research into some of the major issues likely to arise in the renegotiation. Keys to this research were a comprehensive survey of the FSM's economic needs and the development of projections for the twenty years following the end of the current Compact. These figures have since been fine-tuned and examined by economists from the FSM, the US, and international organizations. They constitute a detailed and useful picture of the FSM's economic prospects, especially in the near future.

At the opening round of negotiations, mandated by the Compact to be held in November 1999, the two sides agreed to four principles that would guide the work on a renewed Compact agreement. These were: a rededication to the goals of Title Two (economic provisions) and Title Three (security and defense provisions) of the Compact; commitment to completion of public sector reform and to private sector development in the FSM; and greater accountability for the use of Compact funds. This meeting accomplished its purpose as a forum to establish the broad constructs for the new agreement.

The comprehensive FSM economic study that we mentioned before served as the basis for the FSM's original economic proposal put forward at the second round of talks in April 2000. In this document, the FSM proposed ongoing grant assistance for a period of twenty years, and the formation of a US-funded trust fund during the same period, which would provide a funding stream at the end of twenty years adequate to eliminate the need for further US grant assistance. This was accompanied by a macroeconomic strategic planning framework that was the result of a series of nationwide economic summits held in the FSM. The first FSM proposal called for a total of $84 million annually in grant funding along with annual $20 million trust fund contributions. We presumed at the time that the inflation adjustment and full faith and credit provisions were not expiring.

Also at the second session, the FSM made a very important concession, agreeing in principle to the US proposal that grants would be specified in sectoral areas.

Work continued in a series of technical meetings between the sides. The FSM waited, meanwhile, for the US reply to its economic proposal. The FSM proposed a third formal round to be held in Yap, in September 2000, to receive the US counterproposal. The US agreed, and the FSM negotiators assembled in Yap, only to be notified from Washington that the US was not yet ready to present its counterproposal.

Two months later, in November 2000, a US economic concept paper was presented in Washington. The FSM was gratified that the US had accepted the need for a trust fund and adopted other elements of the FSM proposal. Still, the financial gap between the two proposals was huge. The US proposed annual grants for fifteen years - not twenty - amounting to a grant level of $56 million per year and a trust fund contribution of $13 million per year, all without inflation adjustment. An additional $5 million in grant funding would be available if the FSM met a vague macroeconomic performance standard.

In the FSM's view, this proposal, if accepted, quickly would lead to economic chaos and political instability in the FSM and would not result in anything resembling a viable trust fund at the end of the agreement. Further, the FSM viewed the US proposals regarding accountability as over-reaching, despite both parties' commitments to improvement in that area.

In January, 2001, when the third round finally convened, it was not possible to narrow the gap between the FSM and US proposals, but the parties executed a Joint Statement of Principles, reiterating the four original principles and memorializing progress made up to that time. That statement is provided as an annex to our testimony. This statement expressed agreement on a sector grant approach and a trust fund.

The FSM agreed to another series of technical discussions focusing on the US and FSM financial positions. In one such meeting, in April 2001 in Honolulu, the FSM tabled a revised version of its original proposal, which now offered a $5 million reduction in our earlier request for grant funding, applying somewhat more optimistic assumptions about the future performance of the FSM economy. The key feature of the revised proposal was to establish an entirely new structure for accountability centered on a Joint (US/FSM) Economic Management Mechanism ("JEMM") that would be supported by a full-time joint secretariat. The idea was to move beyond simple oversight, as embodied in the US counterproposal, to the principle of a proactive partnership for FSM economic development and accountability. The revised FSM proposal also specified an inflation adjustment formula and full faith and credit guarantee, as well as continuation of all federal programs.

The longest delay in the negotiating process came about as the result of the uncertainty over the US Presidential results and the eventual change in administrations. A new negotiator was named in the fall of 2001, but the tragic events of September 11 resulted in still more delays.

Finally, with the new negotiator in place, the US agreed to meet in a fourth formal round in Honolulu, last December. The meeting served to reaffirm key principles from past sessions as well as to outline the new US Administration's vision for the renegotiations. Additionally, the two sides agreed to an ambitious negotiating schedule with a view toward completing draft Compact amendments by the summer of 2002. The first agreed document of the negotiations, a subsidiary agreement on Civil Aviation Safety, was initialed ad referendum at the fourth round. Progress was also made on agreements relating to postal services, telecommunications, FDIC and US military civic and humanitarian assistance (CHAP).

A full slate of technical meetings took place leading up to the fifth formal round in San Francisco in May 2002. During these meetings, the US and FSM discussed for the first time in detail the US recently-proposed language for Title Two, regarding economic assistance. The new US proposal narrowed the gap between the sides substantially, offering an initial grant amount of $72 million annually, for a period of twenty years, and provided for sufficient trust fund contributions to ensure viability at the end of the period. Both were subject to partial inflation adjustment and a multi-year appropriation variation of full-faith and credit. These contributions would, however, be conditioned on an initial FSM contribution to the fund of $30 million.

In addition to detailed discussion of new US drafts for Title Two, the San Francisco round was marked by consideration of newly-proposed US draft language for Titles One, Three and Four. The two sides made significant progress on the former, initialing many sections. The latter, however, created a series of unexpected problems for the FSM, as the US draft proposed changes to important elements of the Compact that are not expiring, and are thus beyond the JCN's mandate to negotiate. The sides also initialed agreements related to the FDIC, postal services, and CHAP.

Nearly continuous technical meetings have been held since the San Francisco Round, resulting in further progress on many fronts. We are currently in the process of reviewing the US draft agreements on telecommunications, law enforcement, and military use and operating rights. We are awaiting promised drafts on topics such as the trade provisions of Title Two, status of forces, and the US Weather Service. We have just provided to the US a proposed redraft of the existing agreement relating to economic regulation of civil aviation.

In early 2002, the US announced that it was proposing changes to non-expiring provisions of the Compact in a number of areas, primarily immigration. As the JCN was not granted a mandate to discuss issues other than expiring provisions, we have been unable to negotiate these elements thus far in the process. We am pleased to report that a special negotiating body appointed by the President of the FSM to consider US proposals to amend non-expiring provisions of the Compact, will hold its first meetings with US representatives next week.

That is where we stand today. It had been the mutual goal of both sides to approach the Committee today with an agreed document, and to outline the ways in which this will strengthen our bilateral relationship, enhance the economic development of the FSM and serve US security interests in the region. While we are not quite there yet, these remain our goals. I assure you that we are working hard to arrive at a document that adequately reflects these aspirations. Still, we cannot in good faith gloss over the significant challenges that remain in the talks.

We are cognizant of the time constraints we face, and we think the record clearly shows that the FSM has, at every stage in the process, done its part to keep the discussions moving. The process has been subject to several unfortunate delays, and while these were beyond the ability of the FSM to control, and often beyond that of the US, they have placed us in a difficult situation with the deadline for Congressional consideration looming. That said, the issues remaining are too vital not to consider thoroughly.

While the gap between the two assistance proposals has narrowed markedly, and we are appreciative of the US efforts in this regard, the ability of the FSM to sustain and accelerate its economic progress over the next twenty years is a bottom-line requirement. It is also a key to the successful implementation of the trust fund. We are told that the US negotiator has reached the limits of his authority in this regard, and we have looked for any conceivable way in which we could accommodate the figure we are currently offered.

That problem, however, does not exist in a vacuum. Our position on the matter of financial assistance is complicated by a number of other unresolved issues with significant financial implications. Some of these, such as the still-emerging US Fiscal Procedures draft, are highly complex.

As the documents now stand, in the first year of the proposed US draft, the FSM economy would need to absorb a $12 million reduction in grant assistance; repatriate migrants who would no longer be allowed unlimited stays in the US under the more restrictive immigration provisions; scramble to produce the initial $30 million trust fund contribution; adjust to a nearly incomprehensible series of new administrative procedures; bear, for the first time, the cost of audits required by the US at an estimated cost of $1 million annually; prepare for an increase in postal rates; and adjust to the new pay-as-you-go CHAP scheme, as opposed to the $1 million provided for the former Civic Action Teams.

One of our greatest concerns at this stage is the preservation of FSM eligibility for federal programs and services. Extension of these to the FSM has been a mutually shared intention of both sides since the start of the original Compact negotiations, and has not changed over time. The economic calculations of both the FSM and the US negotiators are based on an assumed continuation of current levels of federal program activity. However, we are alarmed by recent signs that Congress may seek to remove eligibility in certain important program areas.

Federal programs have always represented a critical portion of the overall Compact package, providing vital services and technical expertise which still cannot otherwise be funded by grants as currently offered by the US, or by local revenues. Given the proposed reduction in the levels of grant assistance, they will become even more important under the amended Compact. The FSM's health and education sectors are particularly reliant on eligibility for these programs. Any cutback would have a devastating effect. No matter how much the negotiators may agree that these programs should be continued, that is, of course, ultimately subject to the will of the US Congress. It is for these reasons that we seek to work with the Congress to address, in advance of adverse actions, any concerns you may have regarding our eligibility for these programs and to ensure that maximum benefit is derived from their provision. Believe me, we are not talking about "double-dipping" here. Programs as currently provided are envisioned to be an integral part of the future Compact assistance package.

Under the new US proposal, we would no longer be eligible for FEMA disaster assistance should it be required. Acts of God now hold the potential to wipe out the investments of both the US and FSM in the essential infrastructure of our islands. As we have seen in the tragic, storm-driven landslides that struck Chuuk just a few short days ago, killing more than fifty people, the FSM is not immune to these threats. With the scientific community pointing to an increase in the intensity, and possibly the frequency, of tropical storms, this loss of our only substantial disaster assistance channel could not come at a worse time. Given the substantial investment the US has made, and will continue to make in the FSM, the withdrawal of FEMA assistance at this time is difficult to understand.

When one considers the effect of earlier reductions in grant assistance under the Compact step-down process, requiring adjustments far less than those now proposed, it is not difficult to see that the shock to the economy may be too great to recover from, even after twenty years. With one of the primary goals of the two sides being promotion of the private sector, this does not paint an attractive picture for local businessmen, and certainly not for outside investors.

The earlier step downs prompted one of the most ambitious public sector restructuring efforts ever undertaken in the region, and eliminated twenty percent of government jobs. We would face the prospect of undergoing an even more severe restructuring, less than five years after the first.

So yes, as some have said, the gap is "only a few million dollars a year." But a "few million dollars" represents a large share of the FSM economy. And this cannot be considered in isolation, as one must examine the full slate of increased costs due to changes to other elements of the relationship proposed by the US. In all, the current US proposal falls short of meeting one of the key US objectives of the Compact - the promotion of the economic self-sufficiency of the FSM.

Outside of the financial provisions, there are a number of items remaining on the table which are not consistent with the FSM's status as a sovereign nation. The first is the provision calling for a grant of a permanent defense veto. Second, Section 234 of the US draft Title Two would provide an over-reaching law enforcement role for the US and would seek to institute intrusive measures such as the enforcement of US subpoena of documents and testimony of witnesses. Finally, many of the elements of the proposed Fiscal Procedures Agreement were developed from legislation applicable to US States, and are not found in other US aid arrangements. The FSM is not a US State or Territory, and does not have access to the resources that make those requirements workable in States and Territories.

Looking at the situation purely as though this were a negotiation between equals, one can fairly say that both sides have shown movement and flexibility that has narrowed the remaining gaps. Without question, the US is offering the FSM a very large amount of assistance, for a long time. We are not ungrateful, nor are we just looking to squeeze the last dime out of the negotiating process. We think that our announced method and intention from the very beginning points in the opposite direction. We believe, Mr. Chairman, that at the end of a day which must come very soon, the US and the FSM will reach an agreement that is faithful to the common interests that we share - interests that were first expressed in the original Compact, and again expressed repeatedly as the four principles guiding the present negotiations. With that in mind, now we both must carefully examine the current proposals to judge their impact on our shared aspirations for the social, political and economic future of Micronesia, and the maintenance of peace and security in the greater Pacific region.

We look forward to responding to questions raised by the Committee on any aspect of the talks, and would be happy to provide a more detailed explanation of the issues of contention that remain in Titles One, Two, Three and Four, and with the Fiscal Procedures and Trust Fund Agreements.

In closing, we wish to reiterate our thanks to the Committee for holding this important hearing and for inviting us to provide testimony. We would also like to express our appreciation to the US negotiating team for the constructive spirit in which they have viewed these negotiations, and we share the view that we will soon have an agreement of which both nations can be justifiably proud and one that should lead to speedy and affirmative Congressional approval.

Thank you, Mr. Chairman.