An Aggressive Program To Stimulate Economic Growth

An Aggressive Program To Stimulate Economic Growth

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.