Foreign Assistance

Under the Compact of Free Association, an international agreement with the Federated States of Micronesia and the Republic of the Marshall Islands, the United States provides direct financial assistance to advance the economic development and self-sufficiency of those two countries. To help Congress determine future economic assistance, this report describes the use of Compact funding, the progress both nations have made in advancing economic self-sufficiency, and accountability by the countries and the United States over Compact funds. Although both countries have made some progress since 1987 in achieving economic self-sufficiency, they remain highly dependent on assistance from the United States, which provides more than half of total government revenues in each country. Compact funds have led to little improvement in economic development. Per capita incomes in Micronesia, adjusted for inflation, have stagnated, while in the Marshall Islands they have fallen. Compact funds used to support general government operations have maintained high government wages and public sector employment that have discouraged private sector growth. Compact-funded business ventures have generally failed, many because of poor planning or management, inadequate construction and maintenance, or misuse of funds. The Compact set out specific obligations for reporting and consulting regarding use of funds. The governments of Micronesia, the Marshall Islands, and the United States, however, provided limited accountability over Compact expenditures and have not ensured that funds were spent effectively or efficiently.

GAO noted that: (1) Compact funds were used for general government operations, capital projects such as building roads or investing in businesses, making debt payments, and improving targeted sectors such as energy and communications; (2) while FMS concentrated much of its spending on supporting government activities, the RMI emphasized capital spending; (3) since 1987, the two countries, particularly FSM, have made some progress in achieving economic self-sufficiency, as measured by their governments' lower reliance on U.S. funding; (4) however, both countries remain highly dependent on U.S. assistance, which still provides more than half of total government revenues in each country; (5) scheduled decreases in Compact funding as well as increases in locally generated funds have reduced reliance on U.S. funding; (6) although the amount of Compact funding has decreased since 1987 as required by the terms of the Compact, both countries have received other U.S. funding through their use of U.S. federal services and programs; (7) Compact expenditures to date have led to little improvement in economic development in FSM and RMI; (8) per capita incomes have stagnated in FSM and fallen in RMI; (9) Compact funds spent to support general government operations have maintained high government wages and a large level of public sector employment that has discouraged private sector growth; (10) Compact spending to create and improve infrastructure has not contributed to significant economic growth; (11) in addition, Compact-funded business ventures have generally failed; (12) while the Compact set out specific obligations for reporting and consulting regarding the use of Compact funds, the governments of FSM, RMI, and the U.S. have provided limited accountability over Compact expenditures and have not ensured that funds were spent effectively or efficiently; (13) the U.S. government did not meet the Compact requirement to consult annually with both countries during the first 7 years of Compact assistance; (14) also, the Department of the Interior has devoted few resources to monitoring Compact assistance; and (15) disagreements between the Departments of State and the Interior limited monitoring, as did a Compact provision that guarantees funding to the two nations.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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