Some sage once said, “we ought not  be careless and indifferent about
the future. In prosperity prepare for change”. The Commonwealth faces a
significant development challenge if it is to avoid economic stagnation and
continue to encourage growth. Since 1992, with several exceptions,
available data points to a downward slide for some sectors of the economy
from the high level of business and investment of a few years ago. During
the “boom” years of the 1985 -’90 period, the leasing of land by developers
reached levels never before experienced in the islands. In those days it
was largely a “sellers” market in terms of leasing land as the Japanese and
others rushed in to acquire property for development purposes often
competing with one another in biding land values to exorbitant heights. The
indigenous land owner had to exert little sales promotional effort as it
seemed that there were more potential investors than could be accommodated.
We all remember the resulting pressure on the island’s inadequate
infrastructure as a result of such rapid growth. As lease after lease was
consummated, projects were under construction everywhere as was the entry
of increasing numbers of nonresident workers. Private profits and
government revenues soared. By 1992 total reported business gross revenue
was $1.4 billion dollars almost 28 times that reported in 1980 while
government revenues increased 15.4 times over the $10.2 million generated
in 1980.
Economic Storm Warnings
     Almost overnight the situation changed and the reasons are well known:
confusion over Article XII and the adverse publicity the CNMI received
throughout Asia and North America; the collapse of Japan’s financial
bubble; the increasing cost of doing business resulting from tighter
regulations; shortage of an adequate local labor force, etc.
     Over a fourteen year period, (1980 thru November ‘93), there were
47,638 recorded land transactions in the CNMI. More than half of these
transactions, (57.4%), occurred during the six year “boom” period between
1986 and 1991. In examining transactions over the last three years, namely,
6,500 in 1991; 3,698 in 1992 and 4,054 in 1993 - leases by foreign
investors dropped dramatically in 1992 with the result that most of the
transactions which were recorded involved homesteads and mortgages.
    This decline can also be observed in the reported gross business
revenue generated by land leases/sales as follows: 1989-$78.7 million;
1990- $133.5 million; 1991- $65.8 million; 1992 $15.0 million. Reported
gross revenue from the sale of leaseholds was: 1989-$41.5 million; 1990-
$17.7 million; 1991- $0.5 million and 1992- $3.2 million, (data for ‘93 are
not yet available).
    Of seven major sectors that registered impressive annual growth from
1980 to 1991, five of these sectors were down in their annual gross revenue
by 1992 as compared to their sales of the previous year. Only two major
sectors continued to grow and these were: hotels - $117.1 million in 1992
as compared with $91.7 million in 1991 and the wholesale sector at $97.3
million in ‘92 as compared with $72.2 million in ‘91. Those sectors
reporting less gross revenue in 1992 as compared with that of 1991 are (in
millions of dollars): retail - (‘91) $255.6, (‘92) $252.0; construction -
(‘91) $122.0 (‘92) $91.8; banking and finance - (‘91) $14.6 (‘92) $10.1;
garment manufacturing (‘91) $263.4 (‘92) $ 257.4; all other manufacturing-
(‘91) $ 8.3 (‘92) $ 5.7.
NAFTA  And The Commonwealth
     The full effect of the North American Free Trade Agreement, (NAFTA)
with Mexico on the Commonwealth’s garment industry remains to be seen at
this early date. If this industry eventually relocates to Mexico, (which I
believe it will), the CNMI’s economy will experience the following losses:
$257.4 million in gross revenue which is equal to that of one fifth of the
total reported private business earnings in 1992; a loss of $7.7 million
annually to the treasury generated from user fees; $51.7 million in wages
and salaries paid by the industry, which incidentally, represents 22
percent of all wages and salaries paid within the private sector with the
concomitant loss of wage and salary taxes paid there-on; the loss of 4,000
to 5,000 jobs, the majority of which are held by nonresident workers and
Micronesians;  less revenue generated for communications, freight,
insurance, land lease payments, nonresident worker permits, medical
examinations, etc., all of which will no longer be circulating within the
economy or earned for the Commonwealth treasury.
     NAFTA also has the potential for negating any advantages we may have
had under Headnote 3(a) of the U. S. Tariff Schedules which permitted
qualified products manufactured in the Commonwealth duty free access to the
United States’ market. This offered the possibility for the CNMI to
diversify its export oriented manufacturing sector but may now prove to be
of little interest to existing and future Commonwealth based manufacturers
exporting their products to the United States.
     In a report entitled, “Potential Impact on the U.S. Economy and
Selected Industries of the North American Free-Trade Agreement” prepared by
the U. S. International Trade Commission for the U. S. Congress the
following statements appear relative to the impact on the textile and
apparel industry. “NAFTA provisions that could significantly affect the
North American textile and apparel sector include: Duty and quota removal
will likely spur an increase in investment in Mexican apparel production
for export to the United States”.
     “Much of the expected increase in investment in Mexican apparel
production is likely to come from U. S. apparel firms, especially those for
which labor costs are a critical competitive factor ---”
     “Investment in apparel production in Mexico, as opposed to importing
apparel from East Asia, will allow U. S. firms to monitor production
quality closely, to develop quick response programs, and to ship apparel to
the United States more quickly and free of duty and quota. Some of these
advantages, along with rising production costs and restrictive quotas
facing East Asia, could also prompt some East Asian investment in the
Mexican apparel industry”.
     The U.S. Trade Office position, or statement, that NAFTA does not
apply to the CNMI and will not affect the Commonwealth, simply means that
CNMI manufacturers can’t ship their products to Mexico or Canada duty free
and vice versa.
     As Lester Thurow points out in his book, Head To Head, The Coming
Economic Battle,  “The history of the American textile industry is
essentially a search for low wages”. Wages in Mexico average about $4.20
per day, about one-seventh of what an American worker earns and four times
lower that the $2.15 per hour paid on Saipan.
     I suspect when the time has past for the construction of plants in
Mexico and the workers trained, the competition for CNMI manufacturers will
be severe for three reasons: (1) the ease in the recruitment of Mexican
workers and their low cost, (2)  a shorter distance to the U. S. market
will lower transportation costs. (3) the investor’s relief from expensive
and burdensome permitting and regulatory requirements such as: OSHA, EPA,
worker’s compensation, social security, employer contributions for medical
insurance and others. These reduction in costs will increase the
manufacturer’s profit margin. Its a deal he can’t resist. While some
garment manufacturers in the Commonwealth may deny that they will relocate
- write in on the wall - they will be gone with 18 months to two years.
Developing An Action Program For The CNMI
     Changing conditions demand changing methods. If the people of the CNMI
hope to see a return to even moderate levels of  increased annual  economic
growth outside the tourism sector a more aggressive development program
must be undertaken. While recent CNMI trade and investment promotion
missions were designed to generate increased investor interest very few of
the private participants in the effort had prepared specific, documented
project investment proposals to introduce to a potential investor.
     The negative publicity generated by Article XII must be overcome by
placing appropriate, well designed, positive advertising announcements in
the major news media throughout Asia and elsewhere such as the Asian
Economic Review, Wall Street Journal and other business and investment
oriented magazines. Those with suitable property  available for lease, that
is to say,  sites which could be exposed to foreign investors should be
prepared to document that such land is free of any Article XII problem or
otherwise be prepared to offer some form of guarantee against such. If the
site is suitable for hotel or golf course development the land owner should
give such projects a “paper personality”, (the proper term being an
investment prospectus), which at the very minimum should consist of: a
cadastral map, aerial photographs, a financial feasibility analysis based
on a typical, albeit, hypothetical project which, in the case of a hotel,
would display an estimated statement of income and expenses at various
levels of occupancy with all assumptions employed clearly explained. This
analysis should be  accompanied by a cash flow projection as well as an
analysis of the Commonwealth’s existing tourist industry and its potential
market. The preparation of such “tools” are simply standard promotional
documents that greatly enhance the possibility of leasing land to foreign
investors for those in the Commonwealth who still wish to do so.
     The government should assist its citizens with the preparation of such
valuable and useful promotional material. A special “investment promotion
office” could be established either within MVB, CDA or the office of the
Governor.  Local people could register the characteristics of the property
they wish to either lease or make available for use as equity participation
in joint ventures with  foreign investors.  This inventory of such land
would then be available  for review and consideration by potential
off-island investors. As it now stands the availability of such land for
lease remains unknown to all but a few. Such an office could serve as a
“one-stop” point where all permitting requirements could be coordinated and
appropriate assistance provided the potential investor including briefings
on the CNMI’s economy, its tourism market and its investment incentives.
     The Commonwealth must take steps to improve its promotional efforts if
it is to compete effectively in the future with Palau, Guam, Vietnam and
other locations for the foreign businessman’s confidence and investment
capital.

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