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The Australian National University

The Pacific Economic Bulletin is not longer being published and will be incorporated into a new journal, Asia and the Pacific Policy Studies. To enquire about the new journal please email

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Issue:Pacific Economic Bulletin - Volume 25, Number 3, 2010

Author:Samuel Brazys

Title:Dutch Disease in the Western Pacific: an overview of the FSM economy under the Amended Compact of Free Association

Abstract:It is argued that in the Federated States of Micronesia (FSM) US aid has distorted consumption, expenditure and relative prices to such an extent that tradable production is practically non-existent. These ‘Dutch Disease’ impacts of aid are so dire that the economy is beyond the point of self-correction and targeted intervention by FSM governments and international development partners could be the only way to overcome the structural failings. Use of the remaining US compact infrastructure grant funds to invest in telecommunications infrastructure could increase the annual GDP growth rate by up to 0.6 per cent. Investing these funds in transportation infrastructure could increase the annual GDP growth rate by 0.67 per cent. Overcoming Dutch Disease in the FSM is no easy task, but ways forward exist for policymakers who are willing to tackle the infirmity at its core.

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