Foreign Assistance

The United States entered into an international agreement--the Compact of Free Association--with the Federated States of Micronesia and the Republic of the Marshall Islands in 1986. This agreement represented a continuation of the U.S. financial support that had gone to these areas since the end of World War II. GAO found that Micronesia and the Marshall Islands spent about $1.6 billion in Compact funds on general government operations, capital projects, and targeted sectors, such as energy and communications, from fiscal years 1987 through 1998. Micronesia and the Marshall Islands have made some progress in achieving economic self-sufficiency since 1987, although both countries remain highly dependent on U.S. assistance, which has maintained artificially high standards of living. Compact expenditures so far have led to little improvement in economic development in the two nations. Substantial compact expenditures used to maintain high levels of public sector growth have acted as a disincentive to private sector growth. Both countries have also spent Compact money on infrastructure projects, such as electrical power and telecommunications systems, that they viewed as critical to creating an environment attractive to private businesses. However, the projects have not spurred significant private sector activity. Finally, investment of Compact funds in business ventures has been a failure. GAO found that many projects funded by the Compact had problems because of poor planning and management, shoddy construction and maintenance, or misuse of funds. The governments of Micronesia, the Marshall Islands, and the United States have provided limited accountability over Compact expenditures.

GAO noted that: (1) Micronesia and the Marshall Islands spent about $1.6 billion in Compact funds on general government operations, capital projects, and targeted sectors, such as energy and communications, from fiscal years (FY) 1987 through 1998; (2) Micronesia used about 47 percent of its $1.08 billion in Compact funds to support general government operations such as salaries and travel; (3) the Marshall Islands spent 45 percent of its $507 million in Compact funds on capital projects such as developing physical infrastructure, establishing businesses, and servicing debt; (4) both countries together issued $389 million in Compact revenue-backed bonds from the late 1980s to the mid-1990s in order to obtain more funding during the earlier years of the Compact; (5) Micronesia and the Marshall Islands have made some progress in achieving economic self-sufficiency since 1987, though both countries remain highly dependent on U.S. assistance which has maintained artificially high standards of living; (6) GAO used dependence on U.S. assistance, or total U.S. funds as a percentage of total government revenues in each country, as an indicator to gauge economic self-sufficiency; (7) the reliance on U.S. funding as a percentage of total government revenue in Micronesia fell from 83 percent in FY 1987 to 54 percent in 1998; (8) the Marshall Islands also reduced its reliance on U.S. funding from 78 percent in 1987 to 68 percent in 1998; (9) Compact expenditures to date have led to little improvement in economic development in Micronesia and the Marshall Islands; (10) substantial Compact expenditures used to maintain high levels of public sector employment have acted as a disincentive to private sector growth; (11) both countries have also spent Compact funds on infrastructure projects that they viewed as critical to creating an environment attractive to private businesses; (12) however, these projects have not generated significant private sector activity; (13) many Compact-funded projects had experienced problems because of poor planning and management, inadequate construction and maintenance, or misuse of funds; (14) the governments of Micronesia, the Marshall Islands and the United States have provided limited accountability over Compact expenditures; (15) while Micronesia and the Marshall Islands generally prepared planning and reporting documents required under the Compact, most of these documents could not be used to determine if Compact funds were being spent to promote economic development; and (16) in addition, the U.S. government did not meet many of its oversight obligations.