Business Beyond the Reef

The Commonwealth of Guam has been granted parole authority for Russians. No, that has nothing to do with releasing them from some gulag. Parole is a special geographically limited visa waiver program. You see, Guam – though part of the United States – has a separate, though related visa system for foreign visitors. Most countries are subject to the same visa requirements as for the United States itself, but there are exceptions made because a visa to visit Guam does not entitle the holder to travel on to the United States itself. That’s why when a flight from Guam arrives in Honolulu, the passengers have to go through Customs and Immigration.

Washington granted parole authority to Guam as of January 15. Only about 500 Russians visited Guam in 2011 when they had to go to American consulates to get visas. The visa process typically took a couple weeks and, of course, the United States charges for visas. Now, with parole authority, a Russian family can board a flight to Guam without visas, with the assurance of being “paroled” at the airport in Guam. Once paroled, they can stay for up to 45 days enjoying the fun and the sun. Folks on Guam expect visitor numbers from Russia to triple this year. A local hotel, the Pacific Islands Club, has Russian-speaking staff, and Guam’s DFS – I’m told it is the largest in the world – is preparing for Russian buyers. Guam tourism has subsisted on Japanese tourists for years, but they tend to stay only for a few days, perhaps only a long weekend. Russians, many coming from eastern Siberia, tend to stay for two weeks, especially in winter.

The Commonwealth of the Northern Marianas received parole authority for Russians and Chinese in 2009. This has boosted the local tourism industry, but not as much as had been hoped. Most of the Russians and Chinese want to go to the casinos on Tinian – and there was hope that charter flights would be allowed to fly directly to Tinian. This never happened because the Department of Homeland Security, responsible for immigration, only has enough officers in the CNMI to staff the airport on Saipan. Thus, flights from other countries are prohibited from landing on Tinian. Tinian is close to Saipan, but transferring between the two can be a nightmare. There are only small commuter aircraft to do the job, so the looked-for 747s full of rich Chinese and Russians never materialized.

Guam should do better. The island has a more developed tourism infrastructure, better shopping, more restaurants, historic sights – though no casinos. Guam is already working to obtain direct flights between Guam and Vladivostok. But Guam wants more. Unlike the CNMI, Guam does not have parole authority for China, so …

The next step is China.
- Guam Governor Eddie Baza Calvo

Selling in the Pacific Islands could be called a micro-markets strategy. I posted earlier about selling in the Federal States of Micronesia (FSM), a market with an estimated 2012 GNP of $222 million – smaller than many cities elsewhere. The Republic of the Marshall Islands (RMI) is another micro-market, its 2012 GNP forecast at about $170 million. Unlike the FSM, where potential business is spread among four states, the economy of the Marshalls really means one, perhaps, two islands – though there are physically many more.

Things are a bit more upbeat in the Marshalls than in the FSM, GNP growing by a quite respectable 5.2% in FY2010. GNP growth was negative during the recession and quite low for years before that, so this healthy rise is welcome. It comes mostly from growth in the Marshalls’ fishing industry. What’s more, this growth looks solid for the next three years as more investment goes into fishing and airport expansion projects move into high gear. Though Marshallese imports are tiny by world standards, the pickup in economic activity raised imports of goods and services to nearly $180 million in 2010.

Economic activity centers on Majuro and Kwajalein. The latter acts as a brake on the economy as U.S. military spending spirals down. The American base on Kwaj has been a mainstay of the Marshallese economy for decades while the U.S. conducted first its nuclear tests at Bikini and later continued using Kwaj as the western terminus of the Pacific Missile Range test facility. Despite pumping money into the economy, especially on the neighboring island of Ebeye, nuclear testing displaced the Bikinians to Majuro where something of a slum grew up. Many Bikinians (and other Marshallese) have since moved to the mainland U.S. and to Hawaii, stressing social programs there.

Government spending drives most Marshallese economic activity - based on U.S. support under the Compact of Free Association. That said, the private sector is growing, based primarily on the fishing industry, copra production and construction (much of which takes us back to government spending). Coconut oil prices rose to very high levels in 2010, boosting the economy.

Formerly dominated by foreign fleets (most of whom paid for their fishing rights), the Marshalls now have at least eight modern purse seiners with three more expected in the next two years. There is a fish loining facility on Majuro, but it operates at a loss and is subsidized by sales of fishing rights. The Marshalls also has a small tropical fish collecting industry.

Tourism has been a disappointment despite outstanding fishing and some good diving. The hotel and restaurant sector has declined at a steep 9% annual rate since 2001.

You can find out more about economic activity in the Marshall Islands here.

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

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

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

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

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

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

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

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

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

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

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