The Republic of Palau

Republic of PalauEconomic Environment

The Compact of Free Association for the Republic of Palau came into effect on October 1, 1994. The Compact established Palau as a sovereign nation and ensures a continuation of political, economic, and military links between the U.S. and Palau for the next 50 years. During the first 15 years of the Compact, the U.S. will provide up to $500 million worth of funds to the Republic of Palau. Evidence suggests that the fiscal responsibility exhibited by Palau in its handling of Compact funds has met U.S. expectations. The Federated States of Micronesia and the Republic of the Marshall Islands negotiated similar agreements a decade before Palau, but have not spent the U.S. aid money in ways that ensured long-term sustainable economic growth.

Palauís developing economy is sustained through public sector services funded partly with Compact of Free Association funds from the U.S., a growing tourism industry, and a small fishing industry. The challenges Palau faces as it strives to establish a self-sustaining economy include reducing government employment, increasing private sector employment, diversifying its tourism product, and developing its small commercial fishing industry.

In 1999, Palauís total GDP was $122.2 million, down 5.5 percent from 1998. 2000 GDP shows an increase of 4.0 percent to $127.1 million. The rebound in 2000 was mostly fueled by large infrastructure projects including the Compact Road in Babeldaob, the Koror-Babeldaob Bridge, and the construction work on the new national capital. As with other Pacific islands, the government plays a very large role in Palauís economy, accounting for about 25 percent of the GDP and employing about 30 percent of the work force. With a per capita GDP of $6,550 in 1999, Palau has one of the highest per capita GDP in the region, but this is still far below the per capita GDP in the U.S. The other major components of the GDP are estimated at: trade (21 percent), hotel and restaurants (10 percent), transport and communications (9 percent), and construction (8 percent).

There are currently more than fifty public sponsored construction projects at the national and state level. These projects include the 52-mile $149 million Compact Road, construction of the Airport Terminal building at $12.5 million, the National Capital at $25.0 million, and the newly completed Japan/Palau Friendship Bridge. Many of these projects are funded by the US, Japan, and the Republic of China. There are several large private sector projects that are pending or under negotiation. These include: Ngerur Island Resort at $45 million, Aimeliik Golf Course at $23 million, and the Malakal Marine Village complex at $20 million.

The public infrastructure improvements will generate benefits for both the general economy as well as the tourism industry. The completion of the Compact Road will make many historical and cultural locations as well as many commercial facilities more accessible. As a result, there will be more opportunities for tourism and other private sector growth. As lodging, transportation, communications and other public utilities expand to address the needs of the rapidly growing tourism industry, they also serve the needs of other local industries such as commercial fishing and agriculture.

Palauís main industry is tourism. Palauís unspoiled natural wonders offer some of the worldís best diving and snorkeling, and make Palau an increasingly popular destination for upscale travelers interested in marine ecotourism. Palau was recently recognized as one of the best travel destinations in the world. In its October 1999, National Geographic Traveler included Palau among the "50 Places of a Lifetime -- The World's Greatest Destinations." The same month, the television show, A & E Top Ten, ranked Palau fourth on its list of exotic destinations. Palau has long been known as a top-rated diving destination, but it is now gaining recognition for its excellent kayaking and hiking as well.

The tourism sector is rebounding from its downturn in recent years. Between 1993 and 1997 visitor arrivals grew 45 percent, from a little over 40,000 to its peak of 73,719. Unfortunately, the economic downturn in Asia affected visitor arrivals, and resulted in a sharp 15 percent drop of total visitor arrivals in 1998. Visitor arrivals continued to decline in 1999 showing a 16 percent drop compared to the previous year. Recent figures show visitor arrivals in 2000 increased 4 percent. However, as result of the September 11th incident, Palau experienced a 7 percent decline in visitor numbers in 2001.

Marine resource development is Palauís second major industry. In addition to tuna, marine resources encompass such assets as reef fish, bottom fish, turtles, birds, crocodiles, shrimp, clams, trochus, lobsters, pearl oysters, crabs, octopus, and corals. The main economic component of marine resources is tuna fishing by Japanese, American, Chinese, and Taiwanese vessels. Other exported marine products are aquarium fish, cultured giant clams and trochus shells (for the button industry).

Revenues from the tuna industry in Palau have dropped sharply in the 1990s, with a mere $9 million collected in 1997. This represents a 40 percent loss from 1993 to 1997. Furthermore, income received in 1998 from commercial fisheries was only $3.5 million A lack of infrastructure has hindered the development of agriculture, livestock, and forestry industries. At the current time, these industries exist in a subsistence capacity and contribute only a small share to Palau's total national output and income. The principal crops include coconuts, root crops, and bananas.

One reason for agricultureís apparent limited role in Palau's economy is the small local market for agriculture products. As a result, Palauís farmers cannot take advantage of the economies of scale needed to make commercial agriculture financially viable. However, soil surveys show that large portions of Palau's soils are suited to the production of several crops and livestock.