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- GDP (PPP):
- $0.8 billion
- 0.6% growth
- 1.3% 5-year compound annual growth
- $7,288 per capita
- Inflation (CPI):
- FDI Inflow:
Micronesia’s economic freedom score is 49.6, making its economy the 154th freest in the 2015 Index. Its score has decreased by 0.2 points since last year, reflecting declines in business freedom and fiscal freedom that outweigh improvements in labor freedom and monetary freedom. Micronesia is ranked 35th out of 42 countries in the Asia–Pacific region, and its overall score is lower than the world and regional averages.
Over the past five years, economic freedom has declined in the archipelago, pushing the Micronesian economy further into the “repressed” category. Higher taxes, inflation, and the lack of progress in reforming the entrepreneurial environment have gradually undermined Micronesia’s economic freedom.
A weak institutional foundation is holding back advancements in economic freedom. Enforcing the rule of law evenly on over 600 islands remains a challenge, exacerbated by the prevalence of corruption that undermines effective governance. The underdeveloped financial system hampers the emergence of a vibrant private sector, leading to high financing costs and denying many Micronesians access to formal banking services. The restrictive investment regime makes capital accumulation from outside sources unlikely.
Politically organized as a confederation of four states—the island groups of Pohnpei, Chuuk, Yap, and Kosrae—the 607-island South Pacific archipelago of Micronesia has a central government with limited powers. The president is elected by the small unicameral legislature from among its at-large members. Formerly administered by the United States as a U.N. Trust Territory, Micronesia became independent in 1986 and signed a Compact of Free Association with the United States. Under an amended compact, it receives about $130 million annually in direct assistance from the U.S. The government sector employs more than half of the workforce, and economic development is hampered by poor infrastructure in electricity and water.
Official corruption remains a major source of public discontent. The government awarded a contract to a Chinese consortium to build a 10,000-room casino and tourism complex on the island of Yap, but the head of the company disappeared unexpectedly in 2014 during an anti-corruption investigation. Corruption and political influence are serious problems in the chronically underfunded judicial system.
Micronesia administers a 10 percent tax on individual income and a 21 percent tax on corporate income. Other taxes include regional sales taxes and import taxes. The overall tax burden equals 11.6 percent of the domestic economy. Government expenditures amount to 65.2 percent of domestic production, and public debt is equal to 26 percent of gross domestic product.
Procedures for establishing a business are opaque. Regulations are not applied consistently, and the non-transparent regulatory framework continues to discourage private-sector development. Labor regulations are not enforced effectively, and the labor market is rudimentary. Pressure for public-sector reforms has been reduced as a result of continued large flows of U.S. foreign aid.
Micronesia’s average tariff rate was 4.5 percent as of 2006, and imports can face delays. Foreign investors may not own land, and the government caps most foreign investments. The financial sector remains underdeveloped, leaving much of the population without formal access to banking services. Constrained access to financing severely impedes entrepreneurial activity and private-sector development.