A Brief Look At The Commonwealth’s Economic Environment

A Brief Look At The Commonwealth’s Economic Environment

The Northern Marianas had a choice in 1975 when Commonwealth status was selected by plebiscite. Its economy could have remained minuscule at former Trust Territory levels or it could offer investment incentives to achieve economic growth and start on the road to obtaining a standard of living similar to that of many American communities. One need only look at the present economy of the independent Federated States of Micronesia to comprehend the results if the Trust Territory status quo had been maintained. In order to develop economically, the Commonwealth had to offer a series of very important investment incentives to developers.

Principal among these were: local control of immigration to overcome the constraint of a small indigenous labor force. The Commonwealth – not unlike the continental United States and Hawaii -in the early years – has relied upon imported labor to develop its economy. Other incentives include the ability to offer wage rates lower than the United States minimum wage – at least for a period of time and finally a lucrative tax rebate incentive – not unlike many states that offer a tax holiday. These incentives and its association with the United States and the advantage of being able to ship qualified manufactured products to the United States duty free combined to propel the CNMI’s economic “take-off.” Without the above incentives the economic progress the Commonwealth has attained would not have been possible. By 1978 the small economy was capable of generating local revenues totaling only $14.9 million. Today, locally generated government revenues have reached an estimated $190.4 million. The Commonwealth's proximity to Asia places it within reasonable distances to 1.4 billion people with a combined gross domestic product equal to $2.9 trillion dollars. Japan alone accounts for 11 and 70 percent respectively of the regional totals mentioned above. As the ceremonies commemorating the 50th anniversary of World War Two come to a close, one is struck by a strange irony – United States Government expenditures within the Northern Marianas aside – large private American investment is somewhat conspicuous by its absence in the islands. It is something of a paradox that it has been largely private capital from a former defeated adversary rather than the wealth from the victor’s private sector that has resulted in the reconstruction of Saipan's economy.

Considering that the Japanese presence in the islands extended for a period of 30 years as compared to one half century for that of America, it is fortunate that economic ties between these islands and Japan were reforged in the seventies. The question must be posed as to why there is not more U. S. private investment in evidence in this American affiliated Commonwealth. The answer may lie in the geographic, demographic, climatic and physical environment of the islands. Geography: The Commonwealth is somewhat isolated from the major suppliers and markets of North America and the concomitant freight costs associated with importing equipment and materials increases the cost of doing business. Sheer distance and the time involved in traversing the Pacific are factors which must be taken into consideration when planning projects. For example, the Commonwealth is about as far away from the U. S. west coast as, for example, Washington, D. C. is from Cairo, Egypt.The swiftness of jet aircraft, while having the apparent effect of shrinking distance, tends to distort the perception of time and space in the vastness of the Pacific. The Marianas archipelago is closer to Moscow than Washington, D. C. At 7,000 miles, the area is the most distant member of the American political family and the United States Capitol. Geography also separates the major population groups of Saipan, Tinian and Rota and fragments the small domestic market; adds to the expense of transportation and communication and limits the cohesiveness of the population.

The separation of the three principal islands requires a tremendous duplication of government services as each island requires its own air and sea port, power and water production facilities, schools and other public services which cannot otherwise be consolidated. Demographic: The population of the CNMI is about the size of many communities in rural America. With a large percentage under the age of 15 years and with a lesser number over 65 years of age, there are not enough local people to fill available jobs. One important issue facing the Commonwealth today in terms of the labor force are the large number of alien workers and there is a paradox inherent in the current labor situation since any successful attempt to stem the flow of nonresident workers could likely slow the pace of economic development as foreign workers are recruited precisely because the local labor supply does not meet current demands. Climate: With respect to an otherwise pleasant and enjoyable tropical climate the Commonwealth is situated some 600 miles east of an area in the western Pacific which is the breeding area of cyclonic disturbances. As a result the Commonwealth is in what is known as weather condition four at all times which means that 40 mile an hour winds are possible within 72 hours. These cyclonic disturbances can quickly and sometimes unexpectedly develop into typhoon force winds of 120 miles per hour or greater. The effect of such storms on both government and private facilities and services can be profoundly disturbing and can result in property damage and, on occasion, loss of life as well. Such events result in added costs to the government and the private sector. Physical: For Saipan at least, these constraints include little or no surface or subterranean mineral resources, limited land area particularly as relates to assembling large tracts of agricultural land, relatively poor agricultural soils, no stream or river courses which could be used for irrigation purposes during dry periods or for a potable water supply. There are no reservoir sites with a sufficiently large enough drainage area to sustain an adequate supply of impounded water. In terms of ground water sources, Saipan's principal sources for obtaining a potable water supply are located at widely separated wells on the island making consolidation of supply difficult and costly. At lower elevations salt water intrusion can limit the usefulness of some ground water sources.

Capital Intensive vs. Labor Intensive Investment: There are those that suggest the CNMI should concentrate its economic diversification efforts toward encouraging capital intensive industries rather than labor intensive activities. While this would obviously be more desirable for the Commonwealth it is probably unrealistic to think that such will, in fact, ever occur to any great extent. The reason being the availability of low cost imported labor as compared with the high cost of automated equipment and machinery. In manufacturing endeavors, as in all others, there are only two ways to make money in business: holding costs and increasing sales is one method. When events make increasing sales difficult one must, as an alternative, attempt to maintain previous sales levels and cut production costs, (usually labor costs are first). In an attempt to cut costs in a capital intensive industry it must be realized that you can't "fire" a robot as the amortization expenses of mechanical equipment – once purchased – is "fixed" as opposed to the cost of labor which is "variable" and can be adjusted to fit production demands. An investor in a manufacturing enterprise will be the first to recognize this economic fact as well as the high electrical charges and maintenance costs associated with capital equipment in a humid tropical environment.