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Governor’s adviser discusses economic viability of small islands at Micronesian forum

ON Day 2 of the 23rd Micronesian Islands Forum at Fiesta Resort & Spa,  Gov. Ralph D.L.G. Torres’s executive adviser Matthew Deleon Guerrero presented on the economic viability of Micronesia and small island states.

His presentation centered on a case study of the CNMI economy and “an outline of a new vision for Micronesian economies with the goal of economic stability.”

“The underlying philosophy of this effort is that the unique circumstances of each economy should govern development policy, so we hope an outlining of our ongoing process and policy framework can provide new ideas to your individual efforts in your islands,” he said.

Matthew Deleon Guerrero

“In this presentation we will cover a brief overview of a traditional understanding of economic development, and current methods that development is implemented. This is a bird’s eye viewpoint of the concepts we often internalize within the economic field that showcases itself in our development policy throughout the world and the region.

“We believe it’s important to discuss the trajectory of the CNMI’s growth since its inception, through rapid expansion to a depression into the current environment of again experiencing economic growth. These years have provided a range of examples and lessons of development policy that we will cover that leads us to a new approach and the path forward. This will be a survey of the history and plans for the future that we hope will be useful for your individual efforts, with recognition that you may have similar plans and ongoing work.”

Deleon Guerrero then poses the question of economic viability to the islands’ chief executives.

“Important to this question is the nature of economics in general. Economics is essentially the study of individual actions and choices in the environment of scarcity. Viable economies are multi-faceted with diversified sectors whose risks of full economic collapse are mitigated to reduce severity of downturns.

“But in our situations, we all have of extreme scarcity toward achieving growth. With that in mind the operative definition we are using is that economic viability is an economy that can advance to meet the growing needs of the population. Our particular focus on viability is creating an economy that can withstand shocks to an industry without a ripple effect to the foundations of our economy.

“Traditional economic development theories provide a pathway toward that end. Where the path follows a standard trajectory toward achieving maturity and developed status. The theory suggests that traditional societies, where the economy is largely geared toward subsistence agriculture limits the socio-economic mobility of the populous.

“From this point, through development of infrastructure, communications channels, and specific extractive industries, the economy becomes positioned to build in the resources to expand its development.”

Deleon Guerrero then touches upon economic development.

“The take off point is the creation of industries that support wages, government revenues, and general economic activity. As these industries progress, the growth and resources provided by them become normalized and the economic foundations form.

“After accumulating capital and resources through this point, the economy begins to reshape and drive toward maturity. With a higher skilled workforce and more developed physical infrastructure, the economy transitions from its focus on the foundational industries into differing sectors, diversifying and entering into industries that it chooses. The ability to develop and depend on external factors by choice and not necessity is a clear marker of this stage and is in essence a key pinnacle of viability.

“Once diversification and greater control on dependence is successful the society can restructure its distribution of wealth to support greater levels of welfare and security and a consumer class begins to take shape. The driver of this model is investment.”

Deleon Guerrero then provides a brief history of the CNMI’s economy.

“What seemed like a diversified economy with two pillars (garment and tourism) was not so. The departure of Japan Airlines in 2005 was a loss with many causes. Some unrelated to the garment sector, like the Asian financial crisis, the SARS outbreak, and the events of September 11th 2001, but a large contributor to the loss of the crucial Japanese market was the loss of outbound cargo from the islands declining garment manufacturing sector.

“2007 and 2008 compounded these issues as the United States first enacted legislation to place the CNMI under the national minimum wage laws, then by the federal take over of the CNMI’s immigration system, whose ramifications we are dealing with today.

“In 2009 the last garment factory closed its doors and the CNMI fell into a deep multi-year depression. Recently we have had to retool our economy and are experiencing once again economic growth. Here we see, using the standardized metric, the collapse of the CNMI economy. And the recent pick up in growth. And along with the economic collapse we witnessed a sever reduction to government revenues which corresponded with reduced government services, and government austerity measures. Standard economic theory suggests that in times of recessions, governments can stimulate economic activity through increased expenditures, funded by external debt. In the CNMI, where the economy fell out from under us, we had limited ability to showcase debt worthiness, but encumbered debt through reduced payments to our pension fund, land compensation claims, and other government obligations we are paying back now.

“Through our development cycles, and following the trajectory set out before us, we are unable to gain footing due to geographic, and political barriers, regardless of having the right ingredients for growth. Whether it was larger international economic issues, or political manipulation of the economy, the CNMI was not resilient to external forces, and did not have a strong foundation against the tides. During the heights of the CNMI economy, policy was based on supporting economic growth, which saw successes, but lacked effort to ensure sustainability against foreign forces. Despite the high rates of growth and Federal government infrastructure support, the CNMI was unable to truly take off.”

Deleon Guerrero then points out why small island economies find it difficult to achieve true viability in the global marketplace.

“One primary issue is that if we look to the traditional factors of production of any economy in the world, our islands suffer from shortages in land, labor and capital. Economic development theory requires these factors of production in order to advance through the stages, but because of our location, limited labor pool and inability to draw in necessary capital in the form of manufacturing or machinery to increase productivity, we begin this process at a competitive disadvantage versus other economies throughout the world.

“Recognizing these limitations leads us to a number of assumptions about the current system that lies over this discussion. Small Island economies do not have the scale of land or domestic markets to accumulate sufficient capital to move from one stage to the next. The limitations on our markets reduce employment opportunities for the skilled labor force and outbound migration affects all of our island’s potential labor. As transportation technologies advance, we can no longer rely upon the distance of the Pacific Ocean to be in our advantage. Transportation networks are condensing, strengthening the points between areas of larger economic activity. Due to our size and scale, we should assume transportation and logistics providers will find more profitable regions to serve.

“Our development is externally driven by available resources and foreign investment leading to a risky centralization of our economies that pose threats to sustainability. We have seen the risk of this centralization of economic activity in the CNMI, but also more broadly when looking at the economies of Nauru and Papua New Guinea where we have all witnessed their incredible gains, but have also seen the perilous foundations to which they are built. And that in order to grow to increased levels and progress toward advanced stages in the economy many of us require more workers than we physically or politically can obtain.”

Deleon Guerrero said the focus of the CNMI’s efforts in the current environment of growth is to prevent a repeat of past errors and to structure an economy that recognizes our vulnerabilities and takes steps to ensure risks are mitigated.

“We’ve learned many things, but important among them are three: The CNMI like all our islands in the region are extremely vulnerable due to the size of our economies, and geographies, and our political weight globally. The cause of our economic downturn was not necessarily a factor of economics, but of political decisions out of our control. Recognition of this disproportionate balance of power is necessary moving forward. Second, is that stability should be the marker of success and development planning efforts should forego the reliance on a growth mindset in order to ensure the foundations of the economy are resilient to economic shocks. Third, is that we need to break out of the growth mindset by revisiting the measurements we are using to measure progress as a society, with a focus both ideologically and policy-wise on stability and quality of life of the population.”

His recommendations:

“In recognizing vulnerabilities, there are several paths to take in succeeding in this environment. Policy should be pursued to strengthen linkages to foreign investment among domestic and regional actors. Allowing capital accumulation to exist outside of the foreign investment sectors to see internally driven advancements to alternative markets.

“The focus on alternative industries is a critical part that gets lost in a growth mindset. Recognizing vulnerabilities allows policy makers to break from focusing efforts on the protection of the primary driver toward a diversified base.

“Building a stronger presence in Washington D.C., is a step Governor Torres made great effort in the current context and we hope to continue building a presence in D.C. as an important economic development policy. Through this recognition and communication with the larger political arena, we must take steps to build an adaptive system that can adjust to external forces quickly and seamlessly.

“Stability is the core of the forward efforts, and requires a deeper understanding of the domestic economy, its strengths and its relationships to foreign investment.

“Once that is understood, foreign investment decisions should be measured against its effects on the domestic and regional market. By the nature of small economies, most if not all domestic enterprises will receive a benefit to foreign investment, but with an eye toward stability, we need to develop the capability to measure whether risks become too centralized into foreign cash flows.

“And it is critical that gains from foreign investment find immediate reinvestments into areas critical toward the ultimate goals of stability and quality of life improvements.

“And to best accomplish the goal of stability, we are working to redefine the measurements of growth that are important to the CNMI and its people. Internal measurements of progress, while not comparable to international measurements, allows us to prevent for the size and quantity of foreign investment to create unstable centralization of the economy. And we can directly improve our population’s quality of life, and not see these improvements as merely a positive outcome of economic growth.

“The ultimate takeaway from our history of development is that we must change the way we think of development in order to survive and thrive in a global economy.

“Traditional models using GDP and foreign investment to drive growth have merit, but in our specific context, where you all deal with issues that most of the world does not have to deal with, a different model is necessary.

“This model of development is only as good as its implementation, but if done successfully in the coming years, can provide a more stable foundation for which to build a viable pacific economy.

“Here are four items that are pillars to this model:

“Instead of an arrow of development, it’s more of an expanding pie that works in tandem to steadily increase what’s available for our population. We endeavor to establish internal measurements that matter to the CNMI and not what is comparable or desirable for larger economies in the world.

“We must recognize the importance of economic growth toward meeting those objectives, but not be solely fixated on growth as the end of our development efforts. They are the means.

“The CNMI needs to establish a new system to ensure gains are reinvested into further progress where progressing toward our goals provides greater stability and potential for future gains.

“And most critically, we must strengthen regional cooperation in economic and workforce flows to widen our perspective of ‘domestic’ to the greater Micronesian Region. Strengthening our economic ties within our respective domestic industries, builds a stronger network of resiliency.

“In order to accomplish this we need dialogue. We need to know what you want, and work together to meet your needs.

“One primary area of vulnerability in the CNMI that prevents our continued growth is labor and this is something we want. Building in regional cooperation on labor flows, allows for our gains to provide the resources for you to meet your islands’ needs. There are opportunities around us to take fuller advantage of our strengths, and looking inward could, in the long run, establish a stronger region and even closer political and social ties.

“Each one of our islands has its strengths and its weaknesses, yet the rate of trade between our economies discounts our shared struggles and histories. We look toward opportunities to tie our economies together and build a broader definition of domestic industries that encompasses the wider Micronesia.

“Above all, in developing this path forward it is necessary and urgent that we recognize that we have all been recipients of development. Whether it be the development provided by colonial regimes, or by the more modern U.S. models of economic growth that drive outward measurements of our progress. The concepts and models of development to this day have been given to us along with our role supporting development of other nations.

“As the generations have progressed, and the world has changed, we believe we have an opportunity to take a step toward self-defining what development means to us.

“In closing, this is a new effort to try and grasp at the concept of creating viability in the Pacific. In a globally interconnected economy, we must all play a role in order to receive the resources to survive, but we can create our own game and redefine what is possible for Micronesia.”