Overcoming Hard Times or “What’s In a Trillion $”

Overcoming Hard Times or “What’s In a Trillion $”

The New York Times carried an alarming article on Japan’s deepening banking crises. American as well as the estimates of others who have been evaluating that country's bad debts indicate that they are nearly double what was previously thought. These estimates, which are still very preliminary, indicate that the total could approach one trillion dollars and could cost Japanese taxpayers far more than the $200 billion that has already been calculated.

This crises has all but halted Japanese lending both in the domestic economy and internationally. New Japanese investment in the CNMI has all but dried up. One of the problems appears to be that for years banks continued to lend money to firms that were insolvent. Another problem concerned the failure of banks to report the true condition of their portfolios with the result that in many cases their balance sheets did not reflect accurate information. The problem was kept hidden for long periods of time. Unlike the United States where banks are subjected to strict audits by some 7,000 inspectors, Japan has less than 500 examiners according to the New York Times’ article. Money spent to recover from Japan’s banking debacle will not be available for financing the nation’s infrastructure improvements.

It will strap the Japanese taxpayer, limit loans to Japanese consumers and businesses and will reduce the amount of imports purchased from America and elsewhere. Already, exporters in California are feeling the impact of declining exports to Japan and other Asian nations. The Asian credit squeeze, caused largely by Japan's financial catastrophe will continue, causing an increase in unemployment and corporate bankruptcies as Asia's recession deepens. The Federal Reserve Board chairman, Alan Greenspan, sounded the alarm several days ago in testimony before Congress when he stated that a number of Asian economies continue to weaken and there is no clear indication of when they will begin to recover.

What this means to the Commonwealth is dramatic. The islands can expect very little, if any, new Japanese investment of substantial size and fewer visitors as many Japanese will tend to carefully monitor their discretionary expenditures – money that might otherwise be used for vacations in the Marianas and elsewhere. The possibility of a promised tax reduction in Japan could ease the pressure on the consumer’s pocket. We will have to wait and see. The enormity of the estimated trillion dollar Japanese bailout is almost impossible for the average person to conceive. It is a thousand billions, ($1,000,000,000,000) or more than 1,750 times larger than the Commonwealth’s entire estimated 1996 gross island product and 5,100 times the total annual ‘96 internally generated resources of the Northern Mariana Islands, (calculated from the best year). Stated another way, the amount is equal to about $16.1 million for every man, women and child in the Commonwealth including all the nonresident workers.

According to the Sizesaurus, a book concerned with large numbers, if you can think of one dollar as one second, then one part per trillion is equal to one second in almost 32,000 years. The sum is about equal to all the household savings in Japan or about $8,000 (113,200 yen) for each of the 125.6 million Japanese. To provide some idea of the scope of the crises, if the entire population of Japan could vacation in the CNMI with an average daily expenditure of $250 per day per person each person could remain for 32 days. Of course, this is not practical but it is one way to illustrate the magnitude of Japan’s problem. The repercussions of the banking misfortune will be felt in Japan for years to come and in my judgment – in the islands as well. The United States devalued the Dollar in 1986 as related to the yen which, at the time, appeared to provide the Japanese with a half price sale on real estate and other assets. The Japanese had more money than they could absorb domestically and they went abroad to invest.

It was during this period that Japanese investment flooded the CNMI. By the late eighties and early nineties the Japanese and many others simply paid too much for too little for everything from an ice cream cone to a square meter of land and in so doing distorted the pricing structure of real estate and many other items. During that period, many – but not all- Japanese investors and speculators failed to have real estate adequately appraised before its acquisition. Others neglected to support their investment decisions with marketing and financial feasibility projections. Aside from the Asian financial crisis which very few could have anticipated, I venture to state that there was no market study undertaken in the CNMI for many Japanese financed projects. Several examples include restaurants, construction firms and many other businesses – now defunct. An example in Hawaii provides another interesting observation. A luxury hotel was constructed at a pro-rated room construction cost of one half million dollars. An industry rule of thumb would require that nothing less than a room rate $500 dollars per night be charged to provide a sufficient return on the investment. Thus, in the highly competitive Hawaiian market the above hotel’s room rate of $500 per night had to compete in an economic environment where a nearby hotel room was available at $150 per night. The Japanese hotel was later sold at a huge loss. The same thing is true of the Pebble Beach Golf Course and other “trophy “ real estate on the United States mainland. As we all know the “bubble” burst in Japan and many foreign assets were placed on the market under “fire sale” conditions. Others simply packed up and walked away from their investment. We have several examples of such abandonment in the Commonwealth. Those that yearn for the “good times” of the late eighties to return will have a long wait. If there was ever a time to work for diversification of the CNMI’s economy and identify alternate tourist markets that time is now. Australia, Europe, North American and mainland China markets should be evaluated as potential visitor markets.

While identifying the market is half the equation – the other half is devising something different and unique to draw visitors from much greater distances. The lure has to be more than the sand, sun and sea since that tripartite can be met at many other locations along the way. The CNMI must devise something unique and truly different to draw visitors from such time consuming distances. So, what could it be? Perhaps it will have to involve “connecting” a series of dissimilar destination links in the visitor’s “travel chain” with the Commonwealth as one of the links. Some Ideas: Almost thirty years ago several international carriers had daily flights around the world. One flight traveled east to west while a second flew in the opposite direction from west to east.

They met halfway in the Pacific. You can bet that the Asian economies will recover and when they do the world will beat a path of jet contrails to their door. Some carrier, someday, will re-instate that route. Indeed, it may be just such a schedule that will contribute to a more rapid recovery. Perhaps the time has come to suggest the concept to air carriers with Saipan as the European or Northern American antipodal link in a new world circumferential system. In terms of economic diversification the CNMI should do everything possible to protect its ability to export qualified manufactured products duty free to the U. S. mainland market before U. S. trade barriers against many countries drop in the next century as a result of World Trade Organization, (WTO), agreements. This means resisting all pressure from members of the U. S. Congress who threaten to withdraw or modify Headnote 3 (a) benefits within the U. S. custom tariff schedule. It means getting serious about encouraging commercial fishing and farming endeavors, mariculture, animal husbandry, horticulture and light manufacturing. All of which are capable of either substituting imports or producing export oriented commodities. Of the numerous nations which are signatory to the Generalized System of Preferences, (GSP) Australia, New Zealand and Japan are several countries where Commonwealth located manufacturers of qualified products can benefit from reduced import tariffs in countries that are the recipient of their exports.

With the exception of certain products, tariff reductions of up to fifty percent are allowed. The import regulations from countries participating in the GSP program vary depending upon the country. More than 2,700 product categories of exports from developing areas are listed as being eligible under the program. Of course, only a few would “fit” in the islands. Being in proximity to the vast Asian markets the Commonwealth’s geography might also be promoted as branch sales office locations for American export oriented firms who recognize the advantage of being situated under the stability provided by the American flag, the U. S. judicial and banking systems while benefiting from the CNMI’s lucrative tax rebate advantages. I am quite certain that many United States’ firms are unaware that businesses registered in the Northern Marianas and engaged in export sales can enjoy significant tax relief from their tax obligation to the Internal Revenue Service by establishing offices within the CNMI since a portion of the income generated by foreign sales is exempt from U.S. tax. This is another opportunity to attempt to diversify. Still another incentive for investment in the CNMI, and one largely unknown to many U. S. firms, is section 936 of the Internal Revenue Code which permits "qualified" U.S. corporations to operate virtually free of federal tax on their income derived from business activity in the Commonwealth.

This particular section of the tax code was designed to encourage employment generating corporations to establish businesses in United States possessions and associated areas. While technically the Commonwealth is not a possession of the United States, if this section still applies, (I’m not certain),U.S. corporations could qualify for this tax concession with the result that the maximum income tax rate would be 11.5 percent for a period up to 10 years or more if extensions are granted by the IRS. To qualify, corporations must have a fixed percentage of their gross income derived from the active conduct of trade or business within the Commonwealth. The potential of this tax provision should be investigated.

Unfortunately, to my knowledge the U. S. Alien Entrepreneur Program does not apply in the Commonwealth. It could possibly – if the U. S. law were modified. This law relates to citizens of other countries seeking permanent resident visas in the United States (commonly referred to as "Green Cards"). These people may apply for such status in one of the fifty states but currently not in the Commonwealth since the Northern Marianas administers it own immigration laws. This program is administered by the U. S. Immigration and Naturalization Service for those individuals that can qualify by investing at least $1 million in a new or existing business that will employ at least ten people. The requirement is only $500,000 if the business is located in a rural or economically distressed area in the United States mainland or Hawaii. It may be that the CNMI could obtain a wavier and qualify should the program be deemed to be of interest. Again, it may be worth looking into. While the passage of local laws offering investment incentives is one thing, such incentives still have to be made known outside the area and recognized by potential investors as business opportunities in which he or she may be interested. In short, they must be packaged, advertised and the initial inquires adequately and successfully serviced.