1 BAC K GROUND AND INTRODUCTION 

The Republic of the Marshall Islands (RMI) consists of two groups of 29 atolls and five raised coral islands extending 750 miles (1, 200 km) north-south and 800 miles (1, 300 km) east-west, with the capital Majuro located 2, 000 miles (3, 200 km) from both Honolulu and Tokyo^[1]. The land area is about 181 km  but the Exclusive Economic Zone (EEZ) covers about 2 million square kilometers. According to the 1999 census, the total population in RMI was 50,840. The current population is estimated at 58, 291 and about 51% of the population live in Majuro, 20% live in Ebeye (Kwajalein atoll) and about 30% in outer islands. The estimated annual population growth rate varies depending on the source of the data, but according to the World Bank it was 2.29 in 2008. This growth rate is considered to be too high when compared to other Pacific Islands and may not be sustainable^[2].

The RMI became independent in 1986 but maintained a special relationship with the US under the Compact of Free Association Agreement from 1986 to 2001. The Compact was amended and renewed in 2004 and Compact funding is expected to end in 2023. Under the Amended Compact, the US has the right of strategic denial, while RMI benefits from annual payments as well as the right for its citizens to live and work in the US. The US also has exclusive military access into RMI and in return RMI benefits from a guarantee of defence against third parties. 

The Compact also allows the US to lease most parts of Kwajalein for military and defence purposes through to 2066 with an option to extend to 2086.  

The Compact provides for a Trust Fund where the US and RMI are making annual contributions, and this is expected to be the main source of funding from 2024 onwards. With regards to trade, the Compact provides for duty free access to the US market for most goods. However, RMI has not fully utilised this market access opportunity. This is partly because of lack of productive capacity in RMI as well as import duties that are imposed by the US on tuna loins without a clear legal basis.  

The RMI economy is a Small Island State (SIS), which is largely dependent on foreign aid, foreign goods (imports), foreign labor and foreign investment. It receives an average of $70 million in grants annually, or about 45% of gross domestic product (GDP). On average, about 70% of fiscal revenue comes from the Compact of Free Association with the USA (76% and 72.5% of 2009 and 2010 revenue respectively).  

In 1999, the Human Development Index (HDI) was 0.563 and RMI was ranked number 10 out of 15 Pacific Island Forum members. Palau was ranked number 1 with a HDI of 0.86 while PNG was number 15 with an index of 0.314. These criteria are based on life expectancy, literacy level and average gross domestic product (GDP). In terms of Human Poverty Index (HPI)^[3], RMI was ranked number 11 out of 15 with an index of 19.5. Niue was ranked number 1 with an index of 4.8 and PNG was number 15 with an index of 52.2. In terms of the Vulnerability Index (VI)^[4], RMI is considered to be vulnerable to coastal flooding, moderate cyclones, droughts and rise in sea level.  

RMI needs to conduct a census and provide the latest data on the HDI, HPI and the vulnerability index. However, despite the lack of recent data, anecdotal evidence suggests that many children suffer from malnutrition and many adults suffer from obesity and overweight. There are challenges in terms of the quality of education at all levels as well as the healthcare system. All these issues need to be addressed in order to enable RMI to have a healthy and educated work force which can contribute effectively to trade and sustainable economic development.  

Like many other small islands, RMI is a very small economy, with a small population and landmass, narrow resource base, limited economic opportunities and weak institutional capacity. It lacks adequate and cheap financial capital, lacks economies of scale, faces severe transportation problems and is far away from major commercial markets. The island is also vulnerable to external (global) shocks and natural disasters. Climate change is one major challenge affecting RMI and comprehensive solutions need to be found urgently to ensure that trade and economic development is not undermined. This is the broader setting in which a Trade Policy is being formulated. 

1.1 What is a Trade Policy? 

It is important to note that there is no universally agreed definition of a Trade Policy. According to WiseGeek^[5], Trade policy is a collection of rules and regulations which pertain to trade and, the purpose of trade policy is to help a nation's international trade run more smoothly, by setting clear standards and goals which can be understood by potential trading partners.  

Many countries are involved in the formulation of trade policies on a national, bilateral or multilateral level. There are best practices on Trade Policy that are recommended by regional and international organisations. Experiences from other countries that have formulated Trade Policies also play a vital role in shaping the key elements of a Trade Policy. It is interesting to note that even before the key elements of a Trade Policy were discussed, participants and stakeholders in RMI already had a good idea of what they wanted to be included in the Trade Policy and their views are incorporated in this document. Some of the issues that were highlighted during the consultation include the following:  

x Trade Policy should deal with bilateral, regional and multilateral trade agreements 

x Trade must not be a one way street. The Trade Policy should deal with trade negotiations, imports and exports. It must bring mutual gains to trading partners and help RMI to get the best deal from trade negotiations. The Trade Policy must bring benefits to RMI and focus on development aspects 

x The Trade Policy should incorporate gender equality, development of women, protection of indigenous community and the environment 

x The Trade Policy should deal with trade in goods as well as trade in services  

x The Trade Policy should identify the key goals and priorities and set guidelines or a road map for promoting trade and investment.  It should also include best trade policy SUDFWLFHVDQG³GR¶VDQGGRQ¶WV´.  

In simple terms, trade involves the buying and selling of goods and services. A Trade Policy is a collection of basic principles or rules which can be used by the Government to promote trade (goods and services) for the benefit of the nation. It should be used as a guide to stimulate private sector development and sustainable economic growth and development. The World Trade Organization (WTO) is the key global institution that is responsible for setting global rules and best practices on trade policy. The World Bank and the International Monetary Fund as well as other specialised agencies of the United Nations, including the United Nations Conference on 

Trade and Development (UNCTAD), the International Trade Centre (ITC), and major trading countries as well as regional institutions also play a vital role in shaping Trade Policy. Developing Countries and Least Developed Countries (LDCs) also play a vital role in defining Trade Policy and the issues of their interest are also being considered at the regional or global level. 

It should be noted that free trade agreements (FTAs) play a vital role in shaping Trade Policy. 

There are other studies that have an influence on trade policy matters including, the Diagnostic Trade Integration Studies (DTIS), which are conducted under the Enhanced Integrated Framework (EIF) for LDCs. The Integrated Framework (IF) was inaugurated in October 1997 at the WTO High Level Meeting on Integrated Initiatives for Least-Developed Countries' Trade Development by the IMF, ITC, UNCTAD, UNDP, World Bank and the WTO. The key objectives of the IF include:  

x to "mainstream" (integrate) trade into the national development plans of LDCs x to assist in the co-ordinated delivery of trade-related technical assistance in response to needs identified by the LDCs 

The ultimate objective is to assist LDCs to play an active role in trade and enable them to use trade to alleviate poverty and raise their standards of living. From the above discussion, it is clear WKDW WKHUH LV QR µRQH-size-fits-DOO¶ ZKHQ LW FRPHV WR WKH GHILQLWLRQ RI D7UDGH 3ROLF\ $OO WKH policies, practices, laws and regulations that are recommended by various institutions have to be looked at critically to assess whether they are appropriate for a particular country. The Trade Policy should also help a country to make a link between the national, regional and global trade issues. Most importantly, the Trade Policy should assist a country to come up with a clear legal and institutional mechanism that can be used to deal with trade issues.  

Traditionally, the definition of Trade Policy used to be limited mainly to trade in goods, and border issues such as customs rules and procedures, tariffs, rules of origin amongst other things. However, Trade Policy has evolved and now covers behind the border issues such as trade in services, investment, plant and animal health standards, the food safety, technical barriers to trade, intellectual property rights, Government Procurement, competition, and trade and the environment amongst other things.

1.2 The rationale for a Trade Policy  

When RMI attained independence in 1986, it did not formulate a comprehensive Trade Policy to guide the nation on how to conduct trade with third parties and to identify the role of a Trade Policy in its development planning. Aside from a number of policies and trade-related laws developed by specific sectors, RMI did not have a comprehensive Trade Policy to guide the nation on trade matters.  

The first and main rationale of having a Trade Policy is to mainstream trade into the national development plan. The Strategic Development Plan Framework (SDPF) has some references to trade issues. However, there are no direct linkages between the SDPF and trade, in particular, how trade will contribute towards the achievement of national development goals.  The Ministry of Resources and Development (R&D) Strategy and Action Plan attempts to address some traderelated issues, but since it was never designed as a Trade Policy, it is not surprising that it does not address trade issues in a comprehensive manner.

The second rationale is to improve coordination and consultation between the Government, the private sector and civil society. One of the issues hampering RMI¶VHIIHFWLYHSDUWLFLSDWLRQLQ regional and international trade is the fact that there is poor coordination between Government departments, the private sector and the civil society. The institutional support for trade is very weak. This hinders the, negotiation and implementation of trade agreements. A comprehensive Trade Policy and an effective institutional mechanism shall guide the nation on regional and international trade matters.  

The third rational of having a Trade Policy is to create a transparent, consistent, coherent and predictable trading environment. A trading environment where rules are unclear, where sectoral policies (e.g. agriculture, fisheries, tourism, investment, and environment) are conflicting with one another will discourage trade and investment. The Trade Policy will help to address these issues and avoid ad hoc decision making and sometimes conflicting rules and policies. In order for RMI to create a good trade and investment climate, it needs a comprehensive Trade Policy, which is applied consistently to ensure certainty, predictability and credibility among its trading partners. Frequent Trade Policy changes or reversals are inimical to free and fair trade and hampers development. 

The fourth rationale is to articulate a clear negotiating strategy that would be applied consistently in trade negotiations to promote and protect 50,¶VRIIHQVLYHDQGGHIHQVLYHLQWHUHVWV7KHglobal trading system is undergoing enormous change and RMI needs to formulate a Trade Policy to protect its interests in trade. RMI needs to develop a position and strategy with regard to the Pacific Island Countries Trade Agreement (PICTA), the Pacific Agreement on Closer Economic Relations (PACER) Plus, the Economic Partnership Agreements (EPAs), the US and the WTO. A Trade Policy helps the country to be proactive in international trade negotiations rather than being reactive.  

The fifth rationale is to develop a holistic solution to trade problems. Most of the products that are produced by RMI fall under various agencies, and the supporting services that are needed to develop production capacity and export competitiveness fall under different agencies or sectors. 7KHUH LV D QHHG IRU D FOHDU 7UDGH 3ROLF\ WKDW µFRQQHFWV DOO WKH GRWV¶ DQG LGHQWLfy strengths, weaknesses and opportunities LQ WKH µWUDGH SROLF\ FKDLQ¶SURGXFWLRQ KDQGOLQJ SURFHVVLQJ transportation, marketing, exporting and distribution) to ensure that all the trade-related problems are addressed in a holistic manner.  

The Trade policy will also help with identifying the constraints in the production of products in agriculture, fisheries, tourism, manufacturing, handicraft and other services including labor mobility. The pre-eminent objective of a Trade Policy should be to create an environment that is conducive for private sector development, to identify and address supply and demand-side constraints inhibiting trade in goods and services. The long-term objective of the Trade Policy should be value addition, diversification of the export basket, addressing product standards, consolidation of the existing markets, finding new markets and assisting exporters to access these markets.  

The Trade Policy Framework should not be drafted in a vacuum but must take into account other social, cultural and environmental goals. Trade is not an end in itself, but a means to achieve export-led economic growth, which in turn should lead to employment, increased standards of living and poverty alleviation. This is borne in mind in the formulation of the present Trade Policy. 

Further, the Trade Policy should encourage private sector development, and the Government should not compete with the private sector but facilitate private sector development and promote investment. RMI needs to develop a long term vision on trade to guide the nation in exploiting its full potential in trade and participate effectively in the global trading system. It is in this context, and in pursuance of the abovementioned objectives, that the Trade Policy is being formulated.  

1.3 Vision 

 The vision for the present Trade Policy takes into account the vision for the nation that is articulated in the SDPF.  Some of the key goals of the SDPF include inter-dependence, socioeconomic self-reliance, educated, healthy and productive people, protection of culture and the need for development which takes into account environmental sustainability.  

The vision also draws upon some of the key issues that are included in the 2005-2010 R&D Strategy and Action Plan. Some of these issues include the need to: 

x take into account the environment and traditional lifestyles when considering  modern  development  

x promote food security and encourage people to eat healthy and locally produced food   x create business and job opportunities for local people  x ensure that RMI is free from pests and disease 

x ensure that Marshallese products are successfully exported around the world 

x enhance economic self-reliance. 

During the National Trade Policy Consultative Meeting that was held in November 2009, the participants also indicated that the vision of the Trade Policy should be: 

x To promote balance of trade, economic growth and sustainable development, self sufficiency in finance, gender equality, environment and the needs of indigenous communities without making others worse off. The end result should be good quality of living for all, and all the stakeholders must participate in and benefit from trade 

x To assist RMI to accede to trade agreements that will benefit the nation and also to ensure that temporary movement of natural persons is included in these agreements. The Trade Policy should also seek to promote exports and imports, improvement in shipping,  competition (regulate monopoly) and an environmentally sound economy 

x To close the gap in trade balance, promote self-reliance, maximize the returns from natural resources without depleting them. It must promote sustainable development and growth and promote political, social, economic and cultural development. 

Based on the above elements the Vision of the Trade Policy is: 

To mainstream trade into the national development plan, create an environment conducive for trade and investment, secure Aid for Trade to build capacity on trade and address supply-side constraints and infrastructural services to enable the private sector to produce quality and competitive goods and services that can be traded globally, thereby enhancing the capacity of RMI to participate effectively in, and benefit from trade, and stimulate sustainable economic growth and development; with the ultimate objective of achieving fiscal sustainability, creating employment, alleviating poverty and raising the standards of living for the Marshallese people.   

1.4 The Legal and Institutional Framework 

The President is elected by the Nitijela (parliament), and he has executive power. The Speaker appoints the President elect. After his election to power, the President nominates to the Speaker for appointment as Ministers not less than 6 and not more than 10 other members of the Nitijela.  

The President, will allocate among the members of the Cabinet (including himself if he so desires) the portfolios of Ministers of Finance, Minister of Foreign Affairs, Minister of Transport and Communication, Minister of Resources and Development, Minister of Social Welfare, Minister of Public Works and such other portfolios as may be necessary or desirable for giving to a member of the Cabinet the primary responsibility for any Department or function of government.  

Legislative power resides in the Nitijela, the lower house of the Marshall Islands bicameral parliament. The Nitijela has seven committees, namely Appropriation, Ways and Means, Foreign Affairs and Trade, Health, Education and Social Affairs, Public Accounts, Judicial and Governmental Relations and Resources and Development.  

The judicial power vests with the courts. The courts are independent of the legislative and executive. RMI has the following courts: the Supreme Court, a High Court, a Traditional Rights Court, and such District Courts, Community Courts and other subordinate courts as are created by law. The arms of the Government must act in accordance with the constitution.  

For any Trade Policy initiative to be successful, it is important for the Cabinet and the Nitijela to be involved in Trade Policy formulation at an early stage. It is very critical for the Nitijela to be briefed regularly on trade matters since it will be responsible for ratifying trade agreements. The Nitijela also needs to be sensitised on the importance of amending trade-related laws in order to create an environment that is conducive for trade and investment.  In this context, it is also important for the Cabinet and Nitijela to be sensitised on the need to review all the trade-related laws^[6] to ensure that they promote trade, investment and private sector development. There is also a need to ensure that these laws are fully applied and enforced by the relevant institutions (police, AG, courts). 

In order to ensure that the Cabinet and the Nitijela are given the best advice on trade policy, it is important to revive and formalise the National Trade Facilitation Committee (NTFC). The NTFC played a vital role in revising labor laws, however, it was noted that very few people were aware of its existence and its effectiveness.  

During the 2009 National Trade Policy Consultative Meeting, all the participants agreed that the NTFC should be revived and formalised with slight amendments^[7]. Some of the common issues that were discussed include the following:  

x The NTFC should be composed of R&D, MIMRA, MIVA, AG, CoC, MOFA, Farmers Association, Handicrafts Association, MoF, Immigration, Labour, EPPSO, EPA, WUTMI, Parliament Committee on R&D/Foreign Affairs and Trade and T&C, MIBA, business representatives from PRC and RoC, CMI, MIMA, MICS.  

x At least 50% of its representatives must be women and at least 50% must also be from the private sector 

x The NTFC can be chaired by the Minister for R&D, Chief Secretary or Chamber of Commerce/private sector. There should be a vice chair. R&D must be the Secretariat 

x Funding must be provided for the NTFC to operate effectively. Initially funding can be sought from donors but in future, the Government and the private sector should consider taking responsibility for funding the NTFC 

x The NTFC should regulate, monitor, develop, implement and review the Trade Policy and report on progress 

x The NTFC should be backed by Cabinet Resolution/Order/law. If it is backed by law this will ensure certainty and raise the priority of trade. This will also ensure continuity and retention of institutional memory. However, the challenge is that it will also be difficult to amend to accommodate new developments. x The NTFC should meet at least four times a year 

Chart  1: Proposed structure of the NTFC 

1.4.1 General Duties and Responsibilities of the Members of the National Trade Facilitation Committee 

a) Ministry of Resources and Development (R&D) 

The Ministry of Resources and Development was established in 1979 under the Constitution of the Marshall Islands. The responsibilities of the Ministry have undergone several changes. The Ministry is responsible for development of the economy through promoting agriculture, fisheries, tourism, trade, investment and energy development. In 1997, the Marshall Islands Marine Resources Authority (MIMRA) was established by an Act and mandated with the management of all marine resources in the RMI. The Marshall Islands Visitors Authority (MIVA) was also created in 1997 to focus on development of the tourism industry. Fisheries and tourism remain the two greatest opportunities for economic development and export. Therefore these two institutions, including the Department of Agriculture are key components of R&D. Another department under the R&D is the Energy Authority  

The Ministry of R&D will serve as the Secretariat to the NTFC and it will coordinate development and Trade Policy issues relating to marine, agriculture and tourism, the three key priority sectors. The Ministry is in charge of international trade and facilitates trade and investment matters in RMI. The Directors for MIMRA, MIVA, Agriculture, Trade and Investment could serve as chairpersons for the sub-committees on Fisheries, Tourism, Agriculture, Market Access, Services and Investment.   

b) Ministry of Justice 

The Ministry of Justice is responsible for looking at the legal issues pertaining to trade agreements such as PICTA, PACER, EPA, and US (Compact). It also oversees the registration of businesses, enforcement of contracts and upholding the rule of law to create a good environment for business. It should also ensure that the laws relating to labor and immigration are not more trade restrictive than is necessary. The Ministry should also participate effectively in trade negotiations and develop the capacity to deal with trade issues. It should work with R&D and incorporate training and capacity building in trade as part of its human resources development.  

c) Ministry of Foreign Affairs (MO FA) 

The Ministry should assist with mobilizing Aid for Trade from RMI¶Vtrade and development partners to implement the Trade Policy, promote commercial diplomacy and ensure that its overseas missions are staffed with officials who are knowledgeable on trade, investment, tourism and Aid for Trade. The Ministry should focus on finding markets for goods and services that are produced in RMI. There is also a need for the Ministry to assist RMI producers and exporters with joining organizations that will assist exporters to access export markets. 

The Ministry of Foreign Affairs, Finance, R&D and EPPSO need to work together to secure Aid IRU7UDGHIURP50,¶VWUDGe and development partners to support trade and investment activities identified in the Trade Policy. The Office responsible for Compact management must ensure that trade and investment activities are prioritized in Compact funding and there is also a need to improve the trade preferences that were given to RMI because these preferences have been eroded. 

MOFA is the key ministry that deals with the international community and should also be actively involved in trade. The RMI Ambassadors must also strengthen their role in promoting trade and investment. 

d) Ministry of Finance 

The Ministry needs to ensure that the tax reform goes ahead smoothly to ensure that the negative effects of trade liberalization are minimized. The Ministry is also responsible for reviewing the customs legislation to comply with international trade obligations including tariff reduction schedules, import and export procedures, and rules of origin amongst other things. It is also the responsibility of the Customs Department to facilitate trade and to ensure that all the red tape that is inhibiting imports and exports is removed. The Customs Department needs to work with the World Customs Organization, Oceania Customs Organization (OCO) and WTO to upgrade customs procedures and standards in order to facilitate trade. All the issues relating to smuggling of goods should also be addressed.  

RMI has just adopted the Harmonised Commodity Description and Coding System (HS) 2007 and should be ready to adopt the 2012 HS and future amendments. This will be very important to enable RMI to effectively participate in trade negotiations. RMI also needs to adopt a customs automation system which can be used to capture trade data. The current system where trade data is captured manually is hindering trade and also makes it difficult to retrieve and analyse trade data. 

The Customs Department also needs to work with other agencies including quarantine, health and immigration to ensure that there is smooth movement of goods, services suppliers and people to facilitate trade and investment.  

The budget allocation must be sensitive to projects that are aimed at facilitating trade in tourism, fisheries and agriculture. Local revenue as well as donor funding, including Compact funding in general should be used to support priority trade projects. 

e) Ministry of Health  

The Ministry must assist in ensuring that RMI has a healthy population which can contribute effectively to the economy. The Ministry can also play a vital role in advising the nation on the effects of unsafe imports of food, drugs and other products. The Ministry should also advise the NTFC on all issues pertaining to trade in health services, including the number of foreign medical personnel or private hospitals that should be allowed in RMI, restrictions that may need to be put in place on trade in goods or movement of people especially after an outbreak of a pandemic like swine flu, as well as training of local people in this sector. 

f) Ministry of Education 

Education plays a vital role in trade and its role is rarely acknowledged in economic development. For any nation to prosper in trade there must be a good education system especially the production of relevant skills that are needed to turn the economy around. Areas such as mathematics, science and ICT are some of the areas that warrant attention. There is also a need to prioritize Technical and Vocational Education Training Centres (TVET) to enable the nation to develop the skills that are needed in the economy and also export the surplus skills and earn remittances. The poor education system in RMI is another factor that is slowing trade and economic growth. This issue needs to be tackled at all levels, from the elementary level to tertiary level.  

g) The Ministry of Transportation and Communications 

Transportation is a key issue in RMI, particularly for exporters, importers, consumers and tourists. The Ministry of T&C needs to work with all the stakeholders to address the transportation (air, maritime) problems. Telecommunication is another issue that affects the RMI business environment and the relevant policies need to be put in place to address these shortfalls in order to promote trade and investment. RMI needs to ensure that the regulatory framework governing transportation and communication is adequate. The Government must adopt measures to facilitate the participation of the private sector in these sectors. The RMI should explore the possibility of public-private sector partnership in providing infrastructure services in the transport sector. The transportation and telecommunication sector has a huge impact on the costs of doing business in RMI and affect any activity that will take place in tourism, fisheries and agriculture.  For this reason, the Government needs to ensure that the right policies are adopted to address these issues. 

h) Economic Policy, Planning and Statistics Office (EPPSO) 

According to the Act establishing the Economic Policy, Planning and Statistics Office (EPPSO), the Office comprises of the Policy and Strategy Development Unit; Performance Monitoring, Evaluation and Aid Coordination Unit and the Statistics and Analysis Unit. The Policy and Strategic Development Unit is responsible for providing advice on general economic policy, including periodic review of overall national development goals and strategies to Cabinet through the National Policy Coordinating Committee; providing advice on general economic policy and planning in order to assist the Ministry of Finance in the budget preparation and preparing the five-year rolling Economic Policy Statements to be updated annually. The Economic Policy Statement will identify the main economic goals and objectives and be supported by brief sector strategies. EPPSO is also responsible for conducting economic and social studies, reviews and assessments as required. 

The Performance Monitoring, Evaluation and Aid Coordination Unit is responsible for providing advice on general economic policy in order to assist the Ministry of Finance in negotiations with external sources and lending institutions on programs and projects of assistance. It is also responsible for the monitoring and evaluation of the Compact and related agreements, acting as the Secretariat for the RMI-US Joint Economic Review Board. It is charged with preparing and updating the performance score card, and preparing quarterly monitoring reports on budget and major projects and programs for submission to the National Planning and Coordination Committee.

The Statistics Collection and Analysis Unit is responsible for the collection, compilation, analysis and publication of certain statistical data and information, and for matters incidental thereto. 

It is clear that EPPSO plays a major role in economic development and trade. The Office must be given more resources to ensure that all the policies and plans that are developed are coherent and contribute towards achieving the goals that are stipulated in the SDPF. EPPSO should play a vital role in ensuring that trade is mainstreamed into the SDPF or any subsequent development plans.  

The Statistical Unit must ensure that disaggregated national statistics including those relating to GDP, BOP, trade in goods, trade in services, remittances and investment are improved to enable RMI to monitor progress and take the necessary remedial action. Statistics is vital for guiding policy makers as well as in measuring progress either under the SDPF or under the Trade Policy. 

i) Environment Protection Agency (EnPA) 

Development in RMI is prone to natural disasters and global shocks including climate change and the rise in sea level as a result of global warming. These are serious challenges and the office of EnPA needs to be vigilant in protecting the environment to ensure that development is sustainable. There is a clear link between trade and environment and this theme is gaining prominence at the global level and the EnPA needs to monitor these developments to ensure that trade and economic endeavour is undertaken in a sustainable manner.  

j) Non-Governmental Organizations  

WUTMI and MICNGOs should also play a vital role in coordinating all the input and comments from the NGOs and defending these interests in the NTFC.   

k) Nitijela

In order to improve understanding of key trade issues, it is recommended that the R&D Committee or the Committee for Foreign Affairs and Trade be actively involved in the formulation and implementation of the Trade Policy. This is important because the Nitijela will be responsible for approving the ratification of various trade agreements and allocating funding that is needed to implement the Trade Policy. It will be important to ensure that the Nitijela is briefed and updated regularly on major trade policy developments to avoid a situation where they will only be asked to ratify trade agreements that they have never been involved in. 

l) Sub-Committees

In order to advance discussions at the technical level, the Chairman of the NTFC should be empowered to establish specialized sub-committees to deal with sectoral issues and formulate plans on issues such as agriculture, fisheries, tourism, services, investment, market access, traderelated issues and Aid for Trade. The Chairman of the sub-committee can work closely with interested stakeholders and present their recommendations to the NTFC for consideration. 

Recommendations of the National Trade Policy Meeting: 

The National Trade Policy Consultative Meeting agreed that:  

1. The NTFC be revived with improvements.  
2. The NTFC be composed of R&D (MIMRA, MIVA, Agriculture), AG (Immigration), CoC, MOFA (Compact, Labor), Farmers Association, Handicrafts Association, MoF, 

EPPSO, EPA, T&C, MIMA, Ministry of Internal Affairs, NGOs (WUTMI/MICNGOs), Parliamentary Committee on R&D/Legislative Counsellor,   MIBA, business representatives from PRC and RoC, CMI, MICS. 

1. The chair be empowered to establish technical sub-committees to deal with technical trade issues relating to fisheries, tourism, agriculture, market access, trade in services and investment, trade-related issues and Aid for Trade.  
2. The Chair of the NTFC should report to Cabinet and Nitijela.  
3. At least 50% of the members of the NTFC must be women.  vi.            At least 50% of the members must be from the private sector.  
4. The Government must provide adequate funding to enable the NTFC to operate effectively. Assistance should also be sought from donors and the private sector to fund NTFC activities. 
5. The NTFC will be chaired by the President of the Chamber of Commerce  and the Vice 

Chair will be from R&D, which will also serve as the Secretariat  

1.5 Schedule of Work 

The Ministry of Resources and Development organised the first National Trade Policy Consultative Meeting in November 2009. The purpose of the Meeting was to gather views from all the stakeholders. Consultations were also held with key Government ministries, the private sector, farmers, major operators in tourism, and non-governmental organisations. The list of participants is attached. Based on these consultations, a first draft Trade Policy was prepared and presented during the second National Trade Policy Consultative Meeting that was held in May 2010. The draft was circulated in July 2010 to all the relevant stakeholders for comments and the comments were incorporated into the Final draft which was submitted to the Ministry of R&D. The draft was updated and circulated in April 2012 and presented to the NTFC on 03 May and submitted to Cabinet immediately thereafter. This exercise was transparent and inclusive in order to allow all the stakeholders to participate freely and contribute to the Trade Policy. 

1.6 Structure of the Trade Policy 

The Trade Policy Framework is structured as follows: Section One looks at RMI and the Trade Policy Framework covering the introduction, the definition, the rationale, the vision of the Trade Policy, the legal and institutional framework, the schedule of work and the structure of the Trade Policy.  

Section Two reviews the state of RMI¶V macro-economic environment with a focus on the Strategic Development Plan Framework (SDPF) and the R&D Strategy and Action Plan and assesses whether these documents have contributed towards economic growth or not. The SDPF is critically important because the Trade Policy must be mainstreamed into the overall development framework. The section also recommends measures that need to be taken to promote economic growth, employment and how to reduce trade deficit and fiscal imbalances. It is important to have sound economic fundamentals and clear economic targets to enable trade and investment to flourish.  

Section three deals with trade policy by sector and assesses how agriculture, fisheries and tourism have been performing including the contribution of these sectors to economic growth and development.  

Section four looks at the participation of RMI in merchandise trade including the import and export trends as well as other measures that are required to facilitate trade. This is followed by section five which deals with investment and the general laws that are affecting investment in 50,,WDOVRUHYLHZV50,¶VSHUIRUPDQFHLQWKH Ease of Doing Business and recommends the key actions that must be taken to improve the trade and investment environment.  

A full description of the key laws and regulations affecting trade in services in RMI including recommendations on how RMI can reform these laws is provided in section six. The section also highlights the importance of labour mobility and the need for RMI to strengthen its capacity in this area to supply the skills that are required locally and export surplus skills and earn remittances. 

Section seven deals with a number of trade-related issues such as taxation, competition policy, Government Procurement, corporate governance, intellectual property rights, trade and environment and trade and gender. The section provides recommendations on how to build capacity in these areas and reform the relevant laws, thus creating a more conducive business environment.  

Section eight deals with market access and trade negotiations and discusses the key issues pertaining to regional and international markets, including the ongoing and/or potential trade negotiations. The section provides recommendations on how to improve the existing market access as well as how to diversify export markets. It also provides general guiding principles that RMI should adhere to when undertaking trade negotiations.  

Most importantly, sections nine and ten deal respectively with Aid for Trade and implementation. Section nine makes it clear that Aid for Trade is required to assist RMI to implement the priorities that are set out in the implementation Matrix. The ultimate objective is to use Aid for Trade to build the capacity of RMI to use trade as a tool to fuel economic growth, create jobs, fight poverty and contribute towards meeting the national development goals including the Millennium Development Goals (MDGs). 

2 THE MACRO-E CONOMIC ENVIRONMENT 

This section gives a brief overview of the SDPF, WKH5            '6WUDWHJ\DQG$FWLRQ3ODQ50,¶V economic performance, the structure of the economy, the fiscal policy and employment. This will set the context in which the Trade Policy is being formulated. The main objective is to mainstream trade into the national development plan and ensure that trade will play a vital role in promoting export-led sustainable economic growth and development.  

The ultimate objective is to ensure that trade and investment contribute to the achievement of the goals that are set in the national development plan including the MDGs. Trade should not be an end in itself, but must be used as a tool to fight poverty, create employment, stimulate private sector development and raise the living standards of the Marshallese people. 

2.1 50,¶V6WUDWHJLF'HYHORSPHQW3ODQ Framework 

In June 2001, the RMI adopted the Strategic Development Plan Framework (SDPF) 2003-2018, which is commonly known as Vision 2018. The SDPF is complimented by Master Plans focusing on major policy areas as well as Action Plans of Ministries and statutory agencies, which show the relevant programs, projects and costs. The overall vision of the SDPF is: 

³ to become a country within an inter-dependent world, with an enhanced socio-economic selfreliance, and educated, healthy, productive, law abiding and God-loving people in which individual freedom and fundamental human rights are protected and culture and traditions are respected and development and environmental sustainability are in harmony´.   

Goal 1 deals with operating in an interdependent worlGLQSDUWLFXODU50,¶V)RUHLJQ3ROLF\DQG climate change.The Foreign Policy seeks to assist RMI to develop the capacity to implement national sustainable development policies to maximise national benefits and foster international relations, recognising the limits and opportunities offered by political and economic ties with the rest of the world, globalisation and technological advances.  On climate change, RMI seeks to cooperate with regional and international organisations to minimise the adverse impact of global warming and climate change. 

Goal 2 deals with enhanced socio-economic self-reliance. The first part deals with the macroeconomic framework and seeks to achive a level of quality development such that dependence on foreign technical and financial assistance and skills as well as the dependence of the private sector and households on Government expenditure is reduced. The second part deals with partnership and coordination and seeks a partnership with all important decision makers at all levels. The third one is directly relevant to trade because it deals with food security and import substitution to the best extent possible, and the development of exports. The fourth one deals with infrastructure development to assit the nation to achieve the goal of sustainable development and enhance self-reliance with minimum impact on the environment. The table below summarises some of the key issues that are still relevant for the Trade Policy. 

Table 1: Objectives outlined in the SDPF 

Goal 3 deals with education and seeks to establish a knowledge-based economy by equipping Marshallese citizens with internationally competitive skills, qualities and positive attitudes to work and society.  

Goal 4 deals with health and seeks to build the capacity of RMI citizens to care for their own health through primary health care program and to provide high quality, effective and affordable and efficient healthcare services.  

Goal 5 seeks to develop a productive people capable of contributing in the sustainable development of the nation. Goal 6 deals with obediance to the law and good governance. Goal 7 ackonwledges the spirituality of the Marshallese  people and the right to religion.  

Goal 8 deals with individual freedom and fundamental human rights. Goal 9 deals with  the need to respect culture and tradition. Goal 10 focuses on environmental sustainabilty and the need to develop a regulatory system that can be enforced to achieve sustainable developemnt of natural resources, while protecting the environment from any adverse impacts. It also places emphasis on the need to minimise the impact of climate change.  

To realise this overall vision the SDPF has set out ten goals, which together seek to contribute to sustainable ecoconmic developmnet. Some of the specific trade issues that are included in the SDPF especially under goal two include the following: 

x to attain food security for all people at all times and to substitute imports to the best extent possible and develop exports 

x to increase output of local foods and agricultural exports 

x to enhance the capacity of the fisheries sector to increase production, processing, trade and exports in a sustainable manner 

x to increase the number of tourists, to at least by 15 000 by year 2018 

x to enhance the production and processing of local goods for domestic consumption and export  

x to achieve a more balanced structure in the economy with a greater reliance on foreign exchange earnings and import substitution.  

The section dealing with Foreign Affairs and Trade requires RMI to put in place policies that will assist in implementing the SDPF, including creating an good environment for investment, REWDLQLQJWDULIIFRQFHVVLRQIRU50,¶VSURGXFWVLQPDMRUPDUNHWVVXFKDVWKH86DQGEHQHILWLQJ from opportunities in the information technology industry, for employment creation and trade. One of the goals (Goal 2) also makes reference to other infrastructural services such as communication, transportation, water and energy, which are relevant sectors when    trade in services is concerned. It is clear that provision of infrastructure is hampered by lack of economies of scale and limited landmass. However, poor policies also hinder the private sector from providing some of the infrastructural services, thus contributing to the existing poor quality of infrastructure. The Government needs to establish and implement adequate and effecive policies in these areas to improve trade-related infrastructure.  

The SDPF attempts to address trade-related issues, however, it is not detailed enough. There is a need for a comprehensive Trade Policy to supplement the SDPF, and which will fully mainstream trade into the development plan and link this to the budget process, including the technical and financial assiatance that is provided by donors and trading partners, as well as measurable performance indicators. 

2.1.1 The Ministry of Resources and Development Strategy and Action Plan 2005-2010 

The Marshall Islands Resources and Development Strategy and Action Plan 2005-2010 complements the SDPF and provides specific strategies and activities that must be implemented to achieve some of the development goals that directly fall under the Ministry of Resources and Development (R&D). The vision for the Ministry of Resources and Development Strategy and Action Plan 2005-2010 provides for a future where:  

x Modern development and urbanization co-exists with the environment and traditional lifestyles  

x Physically active people eat locally grown and processed healthy foods, and have secure supplies of food 

x There are business and job opportunities for the people x Each outer-island household has access to electricity x 50,¶Vbeautiful islands are safeguarded from pests and disease x The unique Marshallese products are being successfully exported around the world x 50,¶V traditions are alive, and the country is economically self-reliant 

The R&D Strategy provides for an integrated approach to development, geared towards primary production, value-added production and market development.  Some of the issues that were recommended in the R&D Strategy and Action Plan include the need to establish a farmers market where people can come together and sell their local fruits and vegetables, fresh fish, preserved pandanus, roasted breadfruit, handicrafts or clothes.  In the past, an attempt was made to establish a IDUPHUV¶market and a building was established several years ago near the building of the Ministry of R&D but it was subsequently appropriated for other uses. The Bank of Marshall Islands established a farmers market but it was not being fully utilized mainly because of low levels of production, high transportation costs to bring the produce to the market and high rentals ($5 per day) for using the market.  

The other program that was recommended in the R&D Strategy is WKH&RFRQXW³7UHHRI/LIH´ Development project. The objectives of this project are to increase the value of coconut and coconut products to the Marshall Islands, reduce dependence of outer islands on imported fuel and copra subsidies and develop value-added coconut products for export. This project has not been implemented and there is a need to assess the best ways of implementing it. 

The atolls have many coconut trees which are underutilized. RMI could derive more benefits if it adopts an integrated approach to the development of coconut resources. Rather than concentrating on copra-exports, RMI needs to focus on value added products. Value addition will contribute to improving the living standards of local people and also reduce the Government subsidies for copra.  

It is also recommended that the extraction of coconut oil could be decentralized and carried out on outer islands at a relatively low cost. The oil can then be used to run electricity generators (at a significantly lower cost than solar power), diesel vehicles and outboard motors. Coconut oil can also be used directly for cooking or to develop value-added products such as beauty creams, oils and livestock feed. Parts of the coconut tree are already being used for handicrafts, and senile plants can be used for timber while the coconut shell can be used to produce charcoal. Another project focuses on increasing domestic food production and some measures have been taken to implement this project, but more still need to be done.  

The other objectives include the need to replant trees including coconut plants to ensure that there will be adequate raw materials for handicrafts, medicine, coconut products and other nonfood production. 

The R&D strategy also calls for RMI to take the necessary measures to prevent the introduction and spread of injurious pests and diseases into and within the Marshall Islands.  

Another component of the R&D Strategy deals with product and market development, including product development services, domestic marketing services, international marketing services and trade facilitation services. It also deals with export requirements and labeling. However, there is a need to provide training and relevant information to encourage the development of new products and to improve the production of existing ones. Some of these products include handicrafts, processed foods, preserved fish, pandanus, nin juice and other products made from local raw materials. This will help to increase consumption of domestic products, thus decreasing dependence on imports. Targeted technical assistance should be provided towards the production of a few products and if successful, this can be expanded gradually to other products. 

The R&D Strategy also focuses on developing products for the local and export market. The current major export products include copra oil and fish. There is also potential in handicraft and nin. The R&D Strategy also recommends the Government to improve access to credit through micro-finance schemes. Furthermore, it calls for the development of Trade and Investment Policies to contribute to the economic development of the RMI. The Trade Policy is therefore key to achieving the goals on the SDPF and the R&D Strategy. 

Recommendations: 

i. RMI must assess the results of the SDPF and use the lessons learnt to develop a new National Development Plan which will take into account Vision 2018, the existing reports, plans and, policies, and introduce performance based budget and realistic and measurable indicators.  ii. The Ministry of Finance/Cabinet must allocate adequate resources that are required to implement the Trade Policy. iii. RMI must also assess and refresh the R&D Strategy to ensure that trade is fully mainstreamed into the strategy.  iv. The Division responsible for trade and investment needs to be strengthened and staffed by at least three trade experts. 

v. There is a need to sensitize the Cabinet on the importance of trade and the need to provide the necessary support for trade and private sector development. 

2.2 Economic Growth 

7KH VHFWLRQ DERYH GHVFULEHG EULHIO\ 50,¶V Strategic Development Plan Framework and the R&D Strategy. The common trend that could be seen in both documents is the need to enhance sustainable economic growth, self-sustenance and improve the standard of living for Marshallese people. This section on its part, ZLOOUHYLHZ50,¶VHFRQRPLFJURZWKDQGassess 50,¶VHFRQRPLF performance and its impact on development. This review will help to assess the trade and investment measures that need to be introduced to boost export-led economic growth and sustainable development. 

According to chart 2 below, the current GDP increased from $110.9 million in 2000 to $162.9 million in 2010.   

Chart  2: RMI GDP based on current methodology, FY2000 to FY2010 (USD Millions) 

Source: EPPSO 

Real GDP per capita increased from about $2,367 in 2000 to about $2,748 in 2007 but declined to $2,663 in 2008. Inflation increased from -1.8% in 2000 to about 15% in 2008. 

Table 2: Real GDP and GDP annual growth and GDP per Capita 

Source: EPPSO 

The chart below shows the performance of real GDP from 2000 to 2010. 

Chart  3: Real GDP annual growth, 2000-2010 

Source: EPPSO 

In the late 90s, GDP was affected by a 30% downsizing of the public service in 1995-1997 since Government wages and salaries accounted for a significant portion of GDP. The economy was affected by a reduction in revenues to fund Government operations mainly through the Public Sector Reform Program (PSRP) that was initiated with assistance from the Asian Development Bank (ADB). Through the Policy Reform Program, which was launched in 1995, the size of employment in the public sector ±excluding state owned enterprises (SOEs) was reduced from 2,303 in 1995 to 1,484 in 1999. A Reduction in Force (RIF) was the major component of the reforms intended to reduce Government costs.  

The adverse weather conditions in 1997 and 1998 also contributed to the decline in GDP. The Government also had a lot of debt in Government bonds. However, by the beginning of FY2000, the fiscal pressure had eased as a result of the reforms and the economy grew by 5.9%. By 2002, the Government had paid all the bonds, thus allowing it to use the original Compact funds that 

KDGLQSULRU\HDUVEHHQDEVRUEHGLQGHEWUHSD\PHQW)<DQG)<ZHUHDOVRWKH³EXPSXS´\HDUVXQGHUWKHRULJLQDO&RPSDFWDQGVDZDQLQIXVLRQRIDGGLWLRQDOUHVRXUFHV  

In 2004, RMI received about $35 million compared to $25 million, which was received during the pre-bump up levels and this stimulated economic growth during the succeeding years. From 2005 onwards, the injection of Compact funds contributed to public sector growth. Some of the key projects that contributed to  real GDP growth include the  new construction projects funded by the Amended Compact infrastructure grant, the FAA-funded Majuro international airport development, and in FY2007 the reconstruction of the Majuro tuna loining plant, as well as the convention center funded by the Republic of China (ROC).   

However, contrary to earlier reports that indicated that the initial period of the Amended Compact FY2003-FY2007, had been a period of sustained fiscal expansion and public sector led growth, with overall GDP growing by an annual average of 2.6%, the revised GDP data shows that the average growth during this period was only 1.9%. RMI experienced negative growth in FY2008 and FY 2009 mainly because of the global recession. Growth bounced back to in 2010 mainly as a result of a reduction in inflation and expansion in the fisheries sector. In order for RMI to generate sufficient activities to fuel economic growth and development, there is a need to adopt positive trade measures. These measures are elaborated in the Trade Policy under various sections.  

It is important to note that GDP is often positively correlated with the standard of living, however, its use as a stand-in for measuring the standard of living has come under increasing criticism and many countries are actively exploring alternative measures to GDP for that purpose. For example, the French President, Sarkorzy called for a "great revolution" in the way national wealth is measured and supported a report by Joseph Stiglitz and Amartya⁸which criticizes "GDP fetishism" and prioritizes the quality of life over financial growth. He said governments should do away with the "religion of statistics" in which financial prowess was the sole indicator of a country's state of health. He argued that GDP ± the standard means of measuring a country's economic growth ± ignores other factors vital to the well-being of its population.  

Joseph Stiglitz and Amartya⁹ recommended that a new indicator which would be calculated with GDP but taking into account issues such as environmental protection and work/life balance as well as economic output to rate a country's ability to maintain the "sustainable" happiness of its inhabitants should be considered. Stiglitz argued WKDW³GDP statistics were introduced to measure market economic activity. But they are increasingly thought of as a measure of societal wellbeing, which they are not." 

RMI should also consider taking into account socio-economic issues - such as environmental protection, life balance a sound economic output at a level to ensure sustainable societal happiness RU µJRRG OLIH¶ DV UHIHUUHG WR LQ WKH 6'3) - in measuring societal well being^[8]. However, RMI needs to gather disaggregated data on GDP to actually see how much agriculture, fisheries, tourism and other services contribute to GDP. EPPSO should be given more resources to improve its statistics.   

Recommendations: 

(i)            EPPSO should be given enough resources to be able to compile base-line data and disaggregated statistics on GDP and contribution of agriculture, fisheries, services to GDP to enable RMI to use verifiable indicators to measure economic progress and the implementation of the Trade Policy. Such information should be regularly shared with the department of trade and investment of the Ministry of R&D. 

(ii)           RMI should adopt measures that will stimulate trade and private sector development in order to enhance sustainable economic growth and development. 

(iii)         EPPSO should be given more resources to continue working with the Secretariat of the Pacific Community (SPC), Pacific Financial Technical Assistance Centre (PFTAC) and IMF to improve its statistics. 

2.3 The Structure of the RMI Economy 

The RMI economy is largely influenced by the financial provisions of the Compact of Free Association with the United States. The structure of the original Compact economic assistance was front-loaded with two step-downs after 5 and 10 years entailing a 15 and 14 percent reduction in base grant funding respectively. This also affected economic performance. The Compact funding also contributed in creating a large public sector and a very small private sector. 

Public sector activities mainly consist of compensation of Government employees at the national and local levels, and various public agencies and enterprises. The performance of the private sector has been volatile, and influenced by large projects that were implemented in RMI. The private sector activities have been focused on non-foreign exchange earning activities such as wholesale and retail of imported goods, construction, hotels and restaurants, banking and insurance and transport services. There has been little growth in foreign exchange earning activities. The private sector is heavily dependent on the public sector and it produces largely non-traded goods and provides services to the Government and its employees. Aside from the fisheries sector, establishments producing goods and services for the domestic market dominate the private sector. The developments in the private sector basically follow the rise and fall in public expenditure, and this influences the demand for private sector services.  

Table 3 below shows that in 2010 agriculture contributed about 3.4% to GDP, whilst fisheries contributed about 10.9%, and hotels and restaurants contributed 1.5%. Wholesale and retail had the highest contribution of about 13.6%, which is followed by public administration and education. These trends show that the key sectors of agriculture and tourism do not contribute much to trade and the RMI economy is largely driven by the public sector and the private sector which supplies goods and services to the Government and its employees. 

Table 3: RMI GDP by industry, FY2000 ± FY2010 

According to Table 4, Government contribution to GDP increased from $35.9 million in 2000 to $55.4 million (34% of GDP) in 2010 and the contribution of the private sector increased from 31.5 million to $48.2 million (29.6% of GDP) during the same period.  Government contribution to GDP continued to be higher than the contribution of the private sector throughout the period.  

The economy is affected by the flow of Compact funds or changes in investment decisions by the private sector. For example, exports from Ting Hong ended in FY1998 and this affected the contribution of the private sector to GDP. In FY2005, the closure of the Philippines Micronesia and Orient Line (PM &O) plant also affected the contribution of the private sector to GDP. Aside from the private sector and Government, households and indirect taxes also play a vital role in the economy. The household sector represents the production of non-marketed goods and home ownership. The share of households increased from 10.5% in 2000 to 15.5% in 2010. The share of indirect taxes increased from 6.75% to 10.55% over the same period.  

Table 4 shows that growth has been led by the public sector and this was fuelled by an injection of Compact funds. However, this type of growth is not sustainable because a reduction in or expiry of Compact funds will mean that the economy will be affected severely.   

Table 4: Current price GDP by institutional sector, FY2000-FY2010 

Source: EPPSO estimates  

Air Marshall Islands (AMI) recorded a positive contribution to GDP during the FY1997-FY2006 period, but only made a positive profit in two out of the ten years. The Kwajalein Atoll Joint Utility Resources (KAJUR) and Marshalls Energy Company (MEC) have not been performing well. The contribution from KAJUR has been negative throughout much of its history. MEC has benefited from cross subsidization of fuel sales to fishing fleets with electricity production and has been viable. The Marshall Island Resort made a positive contribution throughout the period, and reported positive profits in FY2005 and FY2006.  

Tobolar, the Government enterprise responsible for copra collection and production of coconut oil, made a negative contribution to GDP throughout the period. However, it plays a vital role in sustaining the livelihoods in outer islands. The National Telecommunications Authority (NTA) makes the largest contribution to GDP, reflecting its monopoly status and ability to set prices. In general, the performance of some of the public sector players is positive, however, there is room for improvement. However, AMI and Tobolar have been draining a lot of resources. Therefore AMI needs to be privatised or restructured and alternative ways of helping the outer islands should be found while Tobolar should either be re-organised or privatised.  

The Table below provides details on the contribution of the public enterprise sector to GDP by enterprise at factor cost (before receipt of subsidies.)   

Table 5: Public enterprise value added, FY1997 ± FY2006, USD 000s 

Source: EPPSO 

The above trend basically underscores the well known principle that Government should not be involved in business but should create a good environment for the private sector to develop the economy. The performance of Tobolar is a clear testimony to this. Even though AMI had positive contribution to GDP, the situation could be better if these services were provided by a private entity or by a public-private entity. The performance of NTA, on its part could have been better if there was competition in the sector and less Government involvement. 

,QRUGHUWRKDYHDGHWDLOHGDQDO\VLVRI50,¶VHFRQRPLFVWUXFWXUHLWZRXOGEHXVHIXOWRKDYH accurate disaggregated data which show how much the key sectors in the private sector contribute to GDP. It will also be good for disaggregated data to be provided on the percentage contribution of agriculture, fisheries, tourism and other services to GDP. This base-line data will enable the policy makers to assess whether progress is being made and to design targeted measures to improve the situation. However, based on anecdotal evidence as well as data from various sources, it is clear that exports of fisheries, agriculture and tourism have not been contributing much to GDP. A lot of work needs to be done to improve exports in these priority sectors. 

Recommendations: 

1. RMI must take urgent measures to curb uncontrolled Government expenditure and introduce positive measures that are necessary to create an environment that is conducive for trade, investment and private sector development. However, the Government must ensure that adequately qualified and experienced personnel are employed in the Government to enable it to function efficiently.  
2. The role of Government must be limited to providing basic infrastructure, essential services, regulation and adopting measures that enhance and facilitate private sector development rather, than venturing into direct commercial operations in competition with the private sector.  
3. The Government must set targets on economic growth as well as other socio-economic goals.  
4. RMI must reform and/or privatise public enterprises to enhance efficiency in service delivery, promote competitiveness and lower the cost of doing business in RMI.  
5. The Government must adopt trade measures that will enhance private sector development and stimulate the production of goods and services that can be traded competitively in the local market and in major export markets.  

2.4 Employment 

One of the objectives of the SDPF, which is also the ultimate goal of the Trade Policy, is to use trade to enhance private sector development, create jobs and raise the living standards of the Marshallese people. This section reviews the employment situation in RMI and recommends actions that need to be taken to ensure that trade plays a vital role in creating quality jobs and decent income for workers, especially the vulnerable groups such as women. 

50,¶V SRSXODWLRQ LV relatively young and has also been affected by emigration to the US. Between 1990 to 2007, over 15,000 Marshallese are estimated to have emigrated to the US. The labor force (15 to 64 who are able to work) is estimated to be between 14,000 - 15,000 persons. About 10, 216 people were formally employed in 2009 and more than 5,000 people are either LQIRUPDOO\HPSOR\HGRUQRWHPSOR\HGZKDWVRHYHU7KH50,¶VRIILFLDOXQHPSOR\PHQWUDWHbased on the 1999 census stood at 30.9%.  

Since the majority of the population lives in Majuro and Ebeye urban areas, subsistence activities are very limited for most people. This means that formal, cashǦearning employment activities are needed for the survival of most Marshallese today. Only around 40 percent of adults in the RMI have completed high school and about 5% have completed college level (bachelor level degree). These rates are very low compared to other Pacific Islands. 

Employment increased from 7,940 in FY1997 to 10,709 in 2011. The opening of PM&O in FY 2000 and its subsequent closure in 2004 contributed to the fluctuation in the employment numbers in the private sector. Compared to the 2004 figures, in 2005, employment in the private sector fell by about 14.3%. However, the private sector employment increased significantly from 2,525 in FY97 to 4,440 in FY 2011 mainly as a result of the developments in the fisheries sector.  

After the downsizing in the public sector in late 90s, public sector employment decreased to about 3,672 in FY1999. However, it increased to 4730 in 2011 and the RMI Government contributed a lot to this expansion.  

Table 6: Public and private sectors employment FY2000-FY2011 

Source:  Social  Security  plus  EPPSO  'non-­reported'  estimate.  FY2011  based  on  six  months  data.  

In 2011, the total number of people employed in the private sector was 4,440 and the wholesale and retail sector had the largest contribution to employment. This was followed by fisheries, construction, transport, storage and communications, real estate, renting and business activities and hotels and restaurants. The employment in the fisheries sector increased mainly as a result of the opening of the processing facility by Pan Pacific Foods. Very few people are employed in the manufacturing and agriculture sectors. From the table below, it is clear that the fisheries industry has the potential to create more jobs. 

There is also an opportunity for growth in the tourism sector; however, for the tourism industry to expand, the Government needs to provide the necessary support. Agriculture contributes very little in terms of formal employment. The Government should use the Trade Policy to develop trade and investment in fisheries, tourism and perhaps agriculture to increase the contribution of these sectors to employment. 

Table 7: Employment by industrial sector (numbers) FY2000-FY2011 

1)  Includes  Shore  based  fish  processing  and  vessel  support  services.  Part  time  workers  may  be  significant.  2)  Not  including  Government workers  which  are  included  under  "Public  AdministrationSource:  Social  Security  plus  EPPSO  'non-­‐reported'  estimate.  FY2011  based  on  six  months  data  

The Table below shows employment by industrial sector and wage costs for the FY 2000 to FY2011. It is clear from the table that the public administration has the highest wage costs, followed by the private sector.  

Table 8: Employment by Industrial Sector, wage costs, 2000 - 2011 

Source: Social Security plus EPPSO 'non-reported' estimate. Wage Costs = Gross wages and salaries as per Social Security regulations. FY2011 based on six months data

The private sector earnings indicated very little growth and the PMOP did not influence the wages and salaries because it was exempted from minimum wages and many employees worked less than fulltime work week. However, for the low income workers who lost employment when PMOP was closed, the impact was significant. It is also important to note that PPF has also been exempted from the minimum wage. 

Even though it is not possible to conclude that Government wage rates are higher than the private sector since the skill mix in the two sectors is different, it is clear from Table 9 that the wage differential between the two sectors has widened significantly. This means that more qualified people would be attracted to work in the public sector than in the private sector.  

Table 9: Employment by institutional sector, average wage and salary rates, FY2000 ± FY 2011 

Source: Social Security plus EPPSO 'non-reported' estimate. FY2011 based on six months data.  

Recommendations: 

1. The Government must create a good trade and investment environment to enhance private sector development, trade and employment particularly in the productive sectors of fisheries, agriculture, tourism, handicraft, manufacturing and services. 
2. RMI must adopt best practices on labor as recommended by the International Labor Organization, to ensure that the rights of workers including decent work program, basic conditions of employment and the freedom to organize are fully implemented.  
3. Education and training from elementary to tertiary levels should include entrepreneurship skills and, the vocational training and other training by the College of Marshall Islands, the National Training Council (NTC) should focus on skills that are in short supply in RMI and abroad.  

2.5 Balance of Payments 

In simple terms, the balance of payment measures the amount of money coming into the country from abroad less all the money going out of the country during the same period. It is normally broken into the current account and the capital account. The current account includes: 

x visible trade (merchandise trade) 

x invisible trade which is receipts and payments for services and other intangible goods such as intellectual property, cross border dividends and interest payments 

x private transfers (e.g. remittances) x  official transfers (e.g. international aid).  

The capital account includes long-term capital flows, such as funds invested in foreign firms, and the profits made by selling those investments and bringing the money home. It also covers shortWHUPFDSLWDOIORZV7KLVVHFWLRQJLYHVDEULHIRYHUYLHZRI50,¶VEDODQFHRISD\PHQWVWDWLVWLFV

(a) The current account 

According to the data SURYLGHGE\(3362WKH50,¶VFXUUHQWDFFRXQWEDODQFHimproved from $22.8 million in 2000 to $-3.9 million in 2008 and fell sharply to $-26.4 in 2009 and $-40.7 in 2010. The total exports in 2000 were $15.5 million and increased to $32.3 million in 2010. Imports increased from $77.9 million in 2000 to $94.1 (f.o.b) million in 2009, then rose sharply to 125.5 in 2010. Exports from RMI consist mainly of fuel re-exports, coconut products, fish, and a few other small items. The RMI has a large trade account deficit which is matched by substantial inflows on the primary and secondary income accounts. The imports of goods and services are financed mainly by earnings of Marshallese workers at the Kwajalein U.S. base, rent of the base and Compact current transfers. RMI is not generating its own foreign exchange to pay for its imports. 

The service account on the receipt side includes transhipment fees of fishing fleets restocking in the RMI, port facilities, telecommunications, travel expenses of visitors to the RMI, and local expenses of Continental airlines. The payment side includes freight and insurance for imported items (estimated), payments for passenger services, in particular air travel expenses overseas for Government officials and private individuals. The other items include small payments for pension services, business and financial services etc. 

The primary income account consists mainly of compensation of Marshallese employees on the Kwajalein military base, the receipts for rent received by the Kwajalein landowners and ship registration fees which have been increasing over the years. However, since most Kwajalein landowners live in the U.S., only the transactions related to residents are included in the flows. The other category includes fishing licence fees, as well as the interest earnings of the various Trust Funds (including Compact Trust Fund), the MISSA social security funds and commercial bank off-shore investments. On the payments side, primary income flows are mostly represented by interest payments on external debt, payment for non-resident Kwajalein land owners and compensation of employees. 

The secondary income account includes budget grants, Compact current grants and other transfers received from the ROC and U.S. federal programs. Other receipts include inward remittance flows to households, but there is no reliable data.  The College of the Marshall Islands also receives relatively large transfers from Pell grants and other U.S. Federal grants. Remittance outflows mainly consists of household transfers and are estimated to be larger than remittances that are sent home by Marshallese living in the U.S. Outward transfers consists of  payments from Marshallese families to relatives in the US as well as Chinese and other Asian communities living in the Marshall Islands. 

(b) The Capital Account 

The capital account includes Compact capital grants, and before FY2004 these were represented by the original Compact I CIP funds and mainly Compact infrastructure sector grant. Now RMI has improved its capacity to use Compact capital grants. The receipt of funds for the Compact Trust Fund is also included in the capital account and matched by a contrary entry in the financing account. The capital account is always positive, reflecting receipt of capital transfers from the U.S. and ROC. 

(c) The financial account 

The financing account shows that direct investment flows have generally been small, but increased to $7.0 million in FY2007 because of the re-construction of the fish loining plant by Pan Pacific. However, it decreased to $5.7 million in FY2008. Portfolio investment represents contributions to the Compact Trust Fund from the RMI, U.S. and ROC; investments by MISSA in the U.S. for the social security portfolio. These investments were affected in 2008 and 2009 by the global financial crisis. 

During Compact I, the RMI issued a series of Medium Term Notes, to cash in on future Compact receipts. The portfolio investment item underʊOLDELOLWLHVPDinly represents repayment of notes, which were finalised in FY2001. Other investment represents changes in commercial bank foreign assets, which has generally shown large increase and net changes in liabilities on external debt. The finance account has been negative in many years, reflecting the build-up of assets, whether contributions to the Compact Trust Fund, the social security portfolio, or commercial bank accumulation of foreign assets. However, for the last 3 years the financial account was positive reflecting a big increase in foreign direct investment especially in the fisheries sector.  

Table 10: 50,¶V%DODQFHRI3D\PHQW)<-FY2010 

*Other: copra and re-­exports 

**Pelagic fishing vessels operated economically from abroad are treated as non-­resident, thus their sales are not included as exports in the main dataset. 

Source: EPPSO 

2.6 External Debt 

During Compact I, external debts affected economic performance because in the mid-1990s bond issues (MTNs) made as far back as 1987 resulted in almost all Compact revenue streams being committed to repayments by the mid-1990s. Unfortunately, most investments that were funded out of bond proceeds did not perform well. This affected economic growth in the second half of the 1990s. However, by end of FY2001 all the bonds were paid. 

Table 11: External debt, original value and outstanding principal by loan 

Note: As of September 20, 2010 no drawdown on MEC Public Sector Program loan has taken place 

Source: EPSSO 

The Government also contracted loans from the Asian Development Bank during Compact I, some of the funds were used to fund fisheries development in Ebeye. Other loans included water supply, social sector and transport projects, as well as reform program loans. In total, the ADB has approved $76.2 million worth of loans since the RMI joined in 1991. According to the Ministry of Finance, after debt repayment and lack of full disbursement for some loans, outstanding ADB debt at the end of FY2010 was $56.7 million^[9]. All these loans save for the $4 million loan, are provided on highly concessional terms from the Asian Development Fund (ADF) resources of the ADB. These resources provide grace periods of 8±10 years and full repayment of principal over 40 years (inclusive of grace periods) for older loans and 32 years for more recent loans. No interest is applied to the principal of these loans, but a service charge of 1± 1.5% is applied to the outstanding principal. New program loans, such as those through the Fiscal and Financial Management Program, now have a term of 24 years. The concessional nature of the lending means that the ADF loans have a significant grant component when valued on a discounted cash flow basis. 

The Government has also guaranteed loans taken by state owned enterprises (SOEs) and these include the Rural Utilities Service (RUS, formerly the Rural Electrification Administration) loans for National Telecommunication Authority (NTA) and the Marshall Islands Energy Company (MEC). In 1989, the RMI guaranteed an $18.8 million loan for NTA to finance fiberoptic cable and administration facilities in Majuro. NTA extended this loan by another $4 million in 1993, though the extension of the loan was not guaranteed by the RMI. The estimated outstanding principal for NTA was estimated at $30 million. In 1997, MEC secured an RUS loan for $12.5 million to finance the new power plant on Majuro. More recently, in FY2004 the Government guaranteed a loan issued by the International Bank of China to the Marshall Islands Development Bank. In FY2007 MEC took a $12 million loan from Bank of Guam which was guaranteed by the Government. The Government will be obligated to meet debt service requirements in case of default by the state owned enterprises (SOEs). 50,¶VGHEWLQZDVPLOOLRQ, which represented about 115% of GDP. It finished paying the bond debt in FY2002 and the debt had declined to $87 million. In FY2008, outstanding external debt was $99.1 millionbut rose $104.7 million in 2010, representing 64.3% of GDP^[10]. 7DEOHVKRZV50,¶VH[WHUQDOGHEWDQGGHEWVHUYLFLQJWUHQGVEven though the debt servicing has fallen significantly, the increasing trend since FY2002 represents the expiration of grace periods and could pose problems for RMI.  

Table 12: External debt and debt servicing 

*General Fund revenue = uncommitted Governmentrevenue available for debt service

Source: Department of Finance and Administration and EPPSO estimates 

Recommendations: 

(i)            RMI should privatise some of the SOEs that are draining most of the resources and only borrow money for essential infrastructural projects and public services.  

(ii)           Some of the infrastructure projects should be funded through public-private partnerships. 

2.7  Fiscal Policy  

The fiscal position in RMI is largely influenced by Compact funding. Under Compact 1, the Government received funds to support general Government activities and these funds were largely unrestricted. The Government also received special grants which were tied to specific sectors and had access to U.S. special and federal programs. There were two step-downs in FY1992 and FY1997, and an increase in funding in FY2002±FY2003 at the average levels of the first 15 years. As seen above, these step-downs and the bump-up funds affected economic growth and the economic trends were merely following the fluctuations in Compact funding. 

The Amended Compact which entered into force in FY2004, ushered a new fiscal framework which entailed a series of sector grants earmarked for education, health, environment, private sector development, capacity building and infrastructure. It also introduced a Trust Fund, which was designed to provide a yield sufficient to replace the annual grants after 20 years. 

Table 13 shows that each year, over a 20- year period, the United States will contribute to the RMI $57 million, partially adjusted for inflation. In 2004, the annual sector grants started at $35 million but will be reduced annually by $0.5 million. The difference between the total contribution and the annual sector grant levels will be deposited in the Trust Fund to accumulate over the 20-year Compact period. In addition to the sector grants and Trust Fund, the United States will contribute $15 million a year for Kwajalein impact to the Kwajalein landowners. The United States agreed to contribute a further $5 million to the RMI in FY2014, $2 million of which would be added to the annual sector grants and the remaining $3 million would be used for Kwajalein impact. 

Table 13: U.S. Annual Compact Grants and Contributions to the Trust Fund, FY04-FY23 

The annual reduction in real resources is estimated to be approximately 2% per annum. This will require active fiscal policy adjustments, unless RMI can develop a policy regime that will attract and encourage private sector investment and economic growth great enough to offset the decline. The Trade Policy will play a vital role in guiding RMI to use trade as an engine of economic growth and private sector development.  

RMI and the US agreed that between 30% and 50% of the total Compact sector grant will be devoted specifically to infrastructure and 5% of the infrastructure grant must be set aside for infrastructure maintenance, and the RMI must contribute an additional 5% out of local revenues.   In FY2004-FY2008, the use of the minor sector grants for private sector development, environment, and public sector capacity building was minimal. There is also provision for the community needs of Kwajalein Atoll. RMI can also access federal programs with the exception of certain education programs, which were cashed out and have been replaced through the Supplemental Education Grant (SEG).   

RMI also received about $10 million from RoC, of which $4 million was transferred to the General Fund and the remaining $6 million was available for special projects to be agreed upon between the parties. In FY2008, the contribution to special projects had risen to $12 million and was no longer strictly earmarked for development projects. However, when the fiscal problems increased, an increasing amount of the project money has been used for general activities, and, in effect, the project contribution simply augmented general fund revenues. RoC also agreed to transfer $50 million to the RMI over the period of the Amended Compact and $40 million of this ZLOODFFXPXODWHLQWKHʊA account DQGPLOOLRQLQWKHʊD account. Funds in the A account may not be touched during the Amended Compact period, but RMI has the right to utilize the yield earned on the resources in the D fund once they have reached $10 million. 

The Compact Trust Fund is an important component of fiscal policy. In FY2004, at the inception of the CTF, the RMI transferred $25 million to the new fund, coupled with the U.S. contribution of $7 PLOOLRQ+RZHYHUGHVSLWHVRPHFKDOOHQJHVLQWHUPVRI50,¶VFRQWULEXWLRQVWRWKH&7), by FY2006, the RMI managed to make the final contribution of $2.5 million to the CTF through transfer of funds from the D account. In FY2006, the funds in the CTF stood at $63.1 million in the A account and $3.0 million in the D account. During FY2007, the U.S. made its annual contribution of $8.9 million, and the ROC contributed $2.5 million, of which $0.75 million was earmarked for the A account and the rest for D. At the end of FY2007, the balance on the A account stood at $83.9 million, after a bullish year on the U.S. stock market. In FY2008, the U.S. made an annual contribution of $9.7 million; however, RMI lost about $20.5 million due to the financial crisis. The delay in investments during the early years and the financial crisis raise doubts whether the CTF would meet the target for FY2024, at which time withdrawals from the Fund are to replace the use of the annual sector grants.   

However, according to the 2010 Economic Review^[11], RMI should focus on ensuring that there are sufficient funds in the Trust Funds in 2024 to allow a smooth and sustainable transition from Compact grants to annual Trust Fund distributions to the RMI. The authors project the terminal condition for sufficiency of the Trust Fund to be $748 million at the outset of FY2024. For RMI to beon track to achieve this, the Trust Fund performance should have reached $157.3 million in June 30, 2011 but the actual value was just $141.9 million. This means that a projected growth rate of 8.6% would be required WR³FDWFK-XS´. The authors argue that this rate of return still remains achievable but not guaranteed. They recommended RMI to mobilize additional contributions to the Trust Fund from domestic and external sources to support the RMI¶s longterm fiscal stability and sustainability. 

Despite maintaining a balanced budget over the last few years as indicated in chart 5, the authors argue that the crisis in FY2008 and higher fuel prices precipitated a financial crisis at the MEC and this threatened the fiscal stability of the nation. They also argue that the existence of a priority list of creditors, difficulties in maintaining debt service obligations to the ADB, and the fact that RMI started using ROC project grants to fund operational expenditures, and the daily cash flow problems shows that RMI is facing fiscal challenges. This is exacerbated by the limited ability of the Government to borrow to finance the deficit, the fine balance between revenues and expenditures, and the high risk of insolvency in the SOE sector. 

In keeping with the constitution, RMI is required to maintain a balanced budget. Fiscal policy in the macro-economic sense is thus executed only through the general fund because there is very little flexibility on other funds.  Local Government expenditures constitute about 6% of national Government expenditures. Under the constitution, powers to raise taxes rest with the national government, but local governments may raise taxes provided the increase has been authorized by law. The Local Government Act of 1989 provides the framework and limits the powers of local governments to levy taxes in specified areas, notably sales taxes, licenses, and other indirect taxes. In FY2008, the local Government share of total domestic revenues amounted to 11%. 

Table 14: RMI Government Finances, revenue and expenditure: 2000 ± 2010