The Evolution Of An Economy

The Evolution Of An Economy

Those new to the Commonwealth may be interested in a little economic history. Having followed the evolution of the economy from that of a stagnate economic base in the seventies, through the boom of the mid ‘80’s, when every sector of the economy grew at an annual rate of sixteen percent, to the slower construction pace presently being experienced it has been like riding an “economic roller-coaster”. The great growth period of the mid – eighties and early nineties is over and we may not see such growth again within the remainder of this century or for some distance into the next.

It is almost as if the CNMI experienced a rate of growth compressed into five or six years that would normally occur over a span of two decades or more. The basic development issue several years ago was – must the islands be forever doomed to a small economy because they had a small local population? The Commonwealth now finds itself in the strange, if not unique, position of having an economy that has far outstripped the capacity of the indigenous population to provide the necessary workers for the labor force. I know of no other area or country, with the possible exception of Saudi Arabia, that is in a similar situation.

For almost all other areas throughout the world the exact opposite is true, not enough jobs for the available work force to occupy. It was only a few years ago that the islands had no economy to speak of and the only employer of size was the Trust Territory Government. By 1973 the Japanese lifted the limit on the amount of foreign exchange, (then the equivalent of $743.), that a Japanese tourist could take abroad. Many that had the money to travel sought the sun, sand and sea and the travel industry in the Northern Marianas was born. As recent as 1976, (the year of the Carter – Ford campaign), the Northern Marianas’ government collected only $3.9 million in local revenues, 22 years later the economy had grown to the point where it produced almost 50 times that amount internally for government use, (an estimated $190 million in FY‘95). The “boom” started around the mid-eighties. In 1980 there were only 740 hotel rooms and tourist expenditures were a low $58.8 million. By 1994 the industry had grown to 3,362 rooms and the combined expenditures of 583,557 visitors was estimated to be $463.5. million. For those that may not have given it much thought, without an income producing private sector there would be no internally generated revenues of any size for the government to spend on employment, infrastructure, education, health, etc., other than that permitted by the limited grant funds from the United States Government and those funds usually require that they be used for the specific purposes Washington considers appropriate and only then within confined perimeters.

With few exceptions the growth which has occurred has been largely a result of outside investment that decided to establish in the islands over the past few years based on conditions that prevailed at the time, conditions which were considered to be very satisfactory – a time when there was no confusion over Article XII, (confusion which still seems to prevail). The source of such investment capital in those days came from countries that were awash with money and from which their businessmen and women actively sought areas with business and investment environments that offered profitable opportunities. The new Commonwealth was one such place. Not only did it offer very generous incentives with a minimum of regulation and “red tape” but it was geographically situated to have been in the right place at the right time when the U. S. Dollar was devalued in 1986 which doubled the value of the Yen. The situation has been slowly changing and it is becoming more difficult and time consuming for new businesses to start up in the islands and there is much more controversy surrounding the leasing of private land – something that did not exist several years ago. Today, foreign investors are much more prudent and selective in the locations around the world where they apply their money with the hope of earning a return on their investment plus a profit. The return must be more profitable than the interest rate offered by a bank – otherwise why take the risk? An investor could deposit his capital in the bank, forego taking a risk, experience a minimum of "hassles" and collect the interest. Those that do not chose to do this we call "risk venture capitalists" and there are not too many of this "breed." As one who has worked in many developing countries of the world, all of which have been struggling for decades and which many still struggle for economic growth and self sufficiency, it seems to me that we should take care not to “over-cook our own golden goose” by excessive regulation which often adds to the cost of doing business, costs which are ultimately passed on to the consumer.

Too many regulations can smother business expansion plans and often discourage new, outside investment. Many of the islands of the former Trust Territory, of which the Northern Marianas was once a part, are still economic backwaters because they never offered the investment incentives that the new Commonwealth decided it would offer in the early eighties. These investment incentives are well known and remembered within the business community and briefly consisted of: the security offered by the American Flag, low tax rate, ability to import nonresident workers, low minimum wage, local control over immigration and customs, the opportunity to export certain qualified products to the United States’ mainland market and proximity to the huge Asian market.

That some abuses have occurred along the way cannot be denied, but these either have been or are being corrected. During the “boom” period of the ‘80’s the CNMI experienced an increase in housing units of 139 percent while the owner occupied rate dropped from a 1980 level of 60 percent to 43 percent in 1990 indicating a significant increase in indigenous owned units constructed for rental purposes. Renter occupied units rose 219 percent as compared with 65 percent for owner occupied units. Those units with air conditioning increased by 28 percent over those of 1980. Median household income rose 43 percent over the decade from $14,425. to $20,644. Median income for owner households rose 94 percent from $13,353. to $25,960. while that of renter households increase about 5 percent from $16,403. to $17,149. , (in 1989 dollars). The median value of owner-occupied, one-family houses increased 1,525 percent over the decade of the ‘80’s from $10,400. to $169,000. This was 22 times as great as the average increase in the United States which rose 68 percent from $47,200. to $79,100. Median contract rent rose 207 percent during the last decade from $125. to $384. as compared with an 89 percent increase in the U. S. over the same period, ($198. to $374.). Both median value and rent in the Commonwealth rose much faster than inflation in the U. S. during this ten year period, (1980 – ‘90). Between 1980 and 1994 there were 51,301 land transactions recorded, (not all involved leased). In 1980 the number of housing units in the islands totaled 3,373 of which 3,028 were occupied units. By 1990 the total number of occupied units had grown to 6,873 of which 2,981 were “owner occupied”, 3,892 “renter occupied” and 1,337 were vacant or under construction. In terms of residential use alone and considering the vacant units that are now occupied for a total of 8,210 residential consuming units (not including apartments, or condominiums), the demand for water (fulfilled and unfulfilled) for these units at an average daily consumption of 145 gallons per day is equal to 1.2 million gallons per day or 438 million gallons per year. Pro-rated for an average family size of 4.2 persons per household the average daily per capita consumption is about 35 gallons.

As an interim solution to the water problem, if the banks won’t do it, perhaps the government should offer medium term, low interest loans to permit homeowners to build water catchment systems or offer such investment as a tax credit. By 1995 the number of residential units as well as the population increased substantially and the precise pace of growth will soon be know once the census planned for this year has been completed. As the 50th anniversary of the conclusion of hostilities was recently observed, one is struck by a strange irony – United States Government expenditures within the Northern Marianas aside – large, private, mainland American investment is somewhat conspicuous in 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 that has resulted in the reconstruction of Saipan's economy. Considering that the Japanese presence in the islands extended for a period of only 30 years as compared to one half century for that of America, it is interesting and fortunate that the economic ties between these islands and Japan were reforged in the seventies and eighties. On any given day in the Commonwealth there are more Japanese present than non-indigenous, native born Americans. Today, the Commonwealth's economy functions between two economic forces – as a political entity affiliated with the United States a thriving U. S. economy and a strong dollar is desired when Americans travel abroad – but the reverse is true with respect to the Commonwealth’s tourism based economy since a strong dollar erodes the competitiveness of the area's Japanese based tourist industry there-by making the islands more expensive for the visitor when an increasing amount of yen is required to purchase the dollar. In 1970 a Japanese visitor had to pay 350.8 yen to purchase one U. S. dollar, today he or she need only pay about 100 yen.

It is curious that the Marianas archipelago and the Philippines are the only western oriented societies situated in the eastern hemisphere. There is no equivalent comparison of an eastern oriented society within the western hemisphere. Aside from the beauty of the islands this unique geographic and cultural anomaly will always make the islands an interesting destination for Asian visitors.