```
U.S. Insular Areas: Development Strategy and Better Coordination Among
U.S. Agencies Are Needed (Letter Report, 02/07/94, GAO/NSIAD-94-62).

U.S. policy supports the economic development of the U.S. insular areas
and the Trust Territory of the Pacific Islands, which includes American
Samoa, the Northern Mariana Islands, Guam, and Palau.  The U.S. lacks,
however, specific objectives for its development programs, no clear
overall strategy to attain its goals, and no formal mechanism for
coordinating the activities of the many federal agencies with programs
in the islands.  Although the Commerce Department reports that U.S.
outlays for the insular areas totaled about $1.5 billion in fiscal year
1992, the U.S. government lacks supporting data for these expenditures.
The Interior Department has proposed creating an interagency committee
to coordinate federal policy and activities.  In GAO's view, an
interagency group focusing on policy, strategy, and U.S. government
coordination could substantially improve economic conditions in the
insular areas and U.S. government management of resources being
delivered to the areas.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-94-62
     TITLE:  U.S. Insular Areas: Development Strategy and Better 
             Coordination Among U.S. Agencies Are Needed
      DATE:  02/07/94
   SUBJECT:  Territories and possessions
             Foreign policies
             Economic development
             International relations
             National policies
             Policy evaluation
             Interagency relations
             International economic relations
             Foreign governments
             Foreign economic assistance
IDENTIFIER:  American Samoa
             Northern Mariana Islands
             Guam
             Virgin Islands
             Palau
             Community Development Block Grant
             North American Free Trade Agreement
             NAFTA
             
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Cover
================================================================ COVER

Report to the Secretary of the Interior

February 1994

U.S.  INSULAR AREAS - DEVELOPMENT
STRATEGY AND BETTER COORDINATION
AMONG U.S.  AGENCIES ARE NEEDED

GAO/NSIAD-94-62

U.S.  Insular Areas

Abbreviations
=============================================================== ABBREV

  CNMI - Commonwealth of the Northern Mariana Islands

Letter
=============================================================== LETTER

B-255486

February 7, 1994

The Honorable Bruce Babbitt
Secretary of the Interior

Dear Mr.  Secretary: 

The United States has supported programs to enhance the economic
development of the U.S.  insular areas and the Trust Territory of the
Pacific Islands for many years.\1 We reviewed the extent to which the
federal government has developed goals and strategies for its
assistance and mechanisms to ensure coordination among the various
federal agencies that provide assistance to the areas. 

--------------------
\1 Each of the five areas included in this report is generally under
U.S.  sovereignty and is generally subject to U.S.  laws.  Each has
unique historical and legal relationships with the United States.  We
use the phrase "insular area" in this report to avoid any implication
about these relationships.  Palau is the last remaining entity of the
United Nations' Trust Territory of the Pacific Islands. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

U.S.  policy overall is to support the economic development of the
insular areas.  However, the U.S.  government has no specific
objectives for its development programs; no clear overall strategy to
achieve its goals; and no formal mechanism for coordinating the
activities of the numerous federal agencies with programs in the
islands.  While the Department of Commerce reported that U.S.  direct
federal expenditures or obligations in the insular areas included in
our review totaled about $1.5 billion in fiscal year 1992,\2 the U.S. 
government has no consolidated data on federal spending on economic
development in the insular areas.  The Secretary of the Interior has
proposed establishing an interagency committee that would coordinate
federal policy and activities.  We believe an interagency group
focusing on policy, strategy, and U.S.  government coordination could
play an important role in helping to improve economic conditions in
the insular areas and U.S.  government management of resources
provided to the areas. 

--------------------
\2 Consolidated Federal Funds Report for Fiscal Year 1992, Volume I: 
County Areas, U.S.  Department of Commerce, DFFR/92-1. 

   BACKGROUND
------------------------------------------------------------ Letter :2

The Pacific insular areas of American Samoa, the Commonwealth of the
Northern Mariana Islands (CNMI), Guam, and Palau are between 4,500
and 6,000 miles from the U.S.  mainland, closer to Asia than the
United States.  Their traditional cultures generally emphasize
communal living and resource ownership.  The Virgin Islands, located
in the Caribbean Sea, are closer to the United States and have more
numerous and diverse linkages to the U.S.  economy.  The populations
of the insular areas are relatively small, ranging in 1990 from
15,000 in Palau to almost 135,000 in Guam.  Figure 1 shows the
location of the insular areas.\3

   Figure 1:  Location of U.S. 
   Insular Areas

   (See figure in printed
   edition.)

The economies in some insular areas, notably CNMI, Guam, and the
Virgin Islands, have grown significantly in recent years, with
private sector activities and per capita income increasing.  American
Samoa has been less successful in overcoming development problems. 
Palau is in the early stages of development, but, according to many
observers, has great potential.  Efforts to enhance economic
development through growth of a private productive sector face
numerous constraints.  In addition to remote locations, obstacles
include lack of resources and workers, and inadequate management of
finances by local governments. 

The United States exercises sovereignty over the insular areas of
American Samoa, CNMI, Guam, and the Virgin Islands.  However, since
the installation of popularly elected governors, each of these areas
is responsible for the administration of local government functions. 
Palau is the last remaining political entity of the Trust Territory
of the Pacific Islands, established by the United Nations in 1947. 
Because the United States is Palau's administrator, the U.S. 
government may exercise full administrative authority there and may
directly affect the activities of local government.  Palauans passed
a referendum in November 1993 to accept a Compact of Free Association
negotiated with the United States, and administrative steps necessary
to terminate the trust territory as it applies to Palau and implement
the Compact are beginning.  Guam is seeking commonwealth status. 

The Secretary of the Interior is charged with (1) maintaining general
administrative supervision of federal relations with the insular
areas in matters not the direct responsibility of another federal
agency, such as the military activities of the Department of Defense
and (2) representing the interests of the insular areas within the
federal government and directing the provision of federal financial
support appropriated by Congress through Interior to the insular
areas.  These responsibilities have been delegated to the Assistant
Secretary for Territorial and Insular Affairs. 

Federal funding continues to provide a significant proportion of
local government revenues in some insular areas.  According to data
provided by the insular area governments, the proportion of island
government revenue derived from federal funding was 76 percent in
Palau, 57 percent in American Samoa, 31 percent in CNMI, 27 percent
in the Virgin Islands, and 13 percent in Guam.  Appendixes I through
V provide information on the economic development status of each
insular area, federal assistance, and outlook for further
development. 

--------------------
\3 There are 10 other U.S.  insular areas that we do not address in
this report.  The areas are:  Puerto Rico and Navassa Island in the
Caribbean, and Baker Island, Howland Island, Kingman Reef, Jarvis
Island, Johnson Atoll, Midway Island, Palmyra Island, and Wake Island
in the Pacific.  Puerto Rico was excluded from this review because it
is not administered through the Department of Interior.  Most of the
other islands we did not include are wildlife refuges and
uninhabited; however, Johnson Atoll and Midway and Wake Islands
support a few U.S.  military personnel.  The United States also
signed agreements of free association with the independent nations of
the Federated States of Micronesia and Republic of the Marshall
Islands.  The agreements, which became law in 1986, pledge U.S. 
defense of the freely associated states for the 50-year terms of the
agreements and financial support for 15 years. 

   FEDERAL GOVERNMENT LACKS CLEAR
   GOALS AND OBJECTIVES FOR
   INSULAR AREAS
------------------------------------------------------------ Letter :3

For many years, overall federal policy has been to support social and
economic development of the insular areas.  To this end, the United
States has provided a variety of assistance, including support for
local government operations, capital improvements, and a range of
social programs, such as educational and health programs.  According
to Department of the Interior officials, the majority of assistance
is provided for social programs rather than economic development. 

In enacting the Compact of Free Association Act of 1985, Congress
noted, among other things, that (1) the United States does not have a
clearly defined policy for U.S.  noncontiguous Pacific areas, (2) the
federal government has often failed to consider the implications for
and potential effects on noncontiguous Pacific areas in the
formulation and conduct of foreign and domestic policy, and (3) the
federal organizational arrangements for liaison with and providing
assistance to the insular areas may not be adequate to coordinate the
delivery of federal programs and adapt policy to the special
requirements of each area.  Congress required that the Secretary of
the Interior, in consultation with the Secretary of State, submit to
Congress and the President within 1 year of enactment of the law and
each 5 years thereafter, a report on U.S.  noncontiguous Pacific
areas policy and recommendations as to how to accomplish the
objectives of such policy.\4 A of November 1993, policy for U.S. 
noncontiguous areas had not been clearly defined, and the required
report had not been issued.  According to an Interior official, the
new administration is looking at relations with the insular areas,
but has no plans to report in the near future. 

Representatives of the insular areas have complained that federal
laws and regulations do not routinely take into account the special
situations of the islands.  While congressional delegations from the
insular areas have access to proposed legislation, and regulations
are published for comments, there is no consistently applied process
for reviewing the applicability to or impact of federal legislation
or regulations on the insular areas.  Bills have been introduced in
Congress that contain proposals to establish a mechanism to ensure
that the insular areas would be consulted before laws are enacted and
regulations are adopted that might have negative consequences or be
inappropriate to implement in the insular areas.  However, no such
mechanism has yet been established. 

--------------------
\4 P.  L.  99-239 (99 Stat.  1770). 

      FEDERAL AGENCIES WORK
      DIRECTLY WITH INSULAR AREA
      GOVERNMENTS
---------------------------------------------------------- Letter :3.1

Although the Department of the Interior has administrative
responsibility for insular area affairs, no one federal agency has
the responsibility or authority for formally coordinating the
activities of all federal programs or activities for the insular
areas.  Moreover, no comprehensive strategy has been articulated. 

According to Department of the Interior officials, the federal
government has not developed an economic development strategy for the
insular areas because (1) development needs vary from island to
island based on demographic characteristics, social needs, level of
economic development, and other criteria and (2) enabling local
island governments to identify their own priorities, rather than
having the federal government dictate priorities, encourages
self-reliance. 

Nevertheless, without a comprehensive strategy, numerous agencies,
each with its own priorities, could be pursuing different development
activities according to their own priorities rather than approaching
problems in a comprehensive and consistent manner to meet long-term
objectives.  For example, the Department of the Interior, the
Department of Commerce's Economic Development Administration, and the
Department of Housing and Urban Development's Community Block Grants
provide funding for capital improvements, such as roads and sewers. 
Because each agency has its own priorities, the federal government
cannot be assured that these capital improvements will be done in the
manner that best addresses long-term goals. 

In addition, there is no formal coordination among federal agencies
involved in the insular areas.  Coordination should include
activities that meet common goals.  According to Department of the
Interior officials, interagency coordination takes place informally
on an as-needed basis, and Department of the Interior field
representatives are generally aware of projects and program
activities in the small insular areas.  In some cases, agencies have
co-funded projects.  However, due to a lack of coordination,
Department of Commerce officials involved in trade promotional
activities for the Pacific insular areas were unaware of videos
promoting tourism and investment in these areas produced with
Department of the Interior grant funds. 

The lack of a central coordinating function also means that no
federal agency consolidates data to develop a clear picture of the
extent of federal funding for economic development going to the
insular areas.  There is no comprehensive listing of all federal
program spending on economic development in the insular areas.  The
U.S.  Department of Commerce report previously noted showed that
about 20 federal agencies, ranging from the Departments of the
Interior, Agriculture, and Education to the National Endowment for
the Arts, provided grants to the insular areas of American Samoa,
Guam, CNMI, and the Virgin Islands in fiscal year 1992.  However,
this report did not identify what funding was used for economic
development projects. 

Bills pending in both houses of Congress recognize that coordination
is an issue that needs attention.\5 The Department of the Interior
has drafted a proposal for an interagency insular affairs committee
of the Domestic Policy Council that could be used as a basis for
presidential action.  The proposed committee would coordinate federal
policy and activities and ensure close consultation with insular area
leaders.  Such a group, if endorsed by decisionmakers in the
administration, could take the lead in reviewing what the goals for
the United States in the insular areas should be.  As of December
1993, the proposal was being discussed among interested
congressional, executive branch, and insular area officials.  The
Department of the Interior could not estimate when executive action
might be finalized. 

--------------------
\5 S.  447, introduced in February 1993, would establish an Insular
Areas Policy Council, chaired by the Secretary of the Interior. 
Comprised of the senior officials of federal agencies, the Council
would coordinate the actions of the federal government with respect
to the insular areas.  H.R.  154, introduced in March 1993, would
establish a formal federal insular policy and establish a Council on
Insular Affairs to be chaired by the President's chief domestic and
foreign policy advisers.  The Council would include policy level
officials from all federal agencies. 

   CONCLUSIONS
------------------------------------------------------------ Letter :4

Although federal funding supports actions designed to enhance
economic development in the insular areas, the federal government has
not articulated a clear policy about the goals it wants to achieve in
the areas and does not always coordinate activities among agencies. 
We endorse the creation of an interagency committee charged with,
among other things, (1) defining U.S.  goals and objectives in the
insular areas and developing an overall insular area strategy to
guide federal activity toward achieving its goals, including
supporting economic development and self-sufficiency and (2)
establishing a mechanism to coordinate federal activity, including
consolidating data on economic development expenditures in the
insular areas. 

   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :5

The objective of this review was to review the extent to which the
federal government has developed goals and strategies for its
assistance to the insular areas and has mechanisms to ensure
coordination among the various federal agencies that provide
assistance to the areas. 

To gain an understanding of the economic development status of the
insular areas, we reviewed various reports and documentation of
current federal programs and private sector activities in American
Samoa, CNMI, Guam, the Virgin Islands, and Palau.  In performing our
assessment, we used data provided by the Department of the Interior,
other federal agencies and publications, and the island governments,
but we did not independently verify the data.  Our assessment of the
potential impact of the North American Free Trade Agreement was
limited to obtaining the perspectives of officials of the Department
of the Interior and the governments of the insular areas.  We did not
attempt to validate their opinions. 

At the Department of the Interior, we interviewed officials
responsible for coordinating federal policy to the islands, the
Office of the Solicitor, and the Office of the Inspector General.  We
also interviewed officials with program and policy responsibilities
at the Office of Management and Budget and the Departments of State,
Defense, and Commerce.  We interviewed current and former official
representatives of American Samoa, CNMI, the Virgin Islands, and
Palau, as well as economic development experts at the East-West
Center, the Bank of Hawaii, and the Pacific Development Council in
Hawaii.  In addition, we requested information from the governors of
the insular areas about their perceptions of their islands'
development and obstacles to further development.  We received
responses from the governors of CNMI, Guam, and the Virgin Islands. 

---------------------------------------------------------- Letter :5.1

We conducted our review from June 1993 to November 1993 in accordance
with generally accepted government auditing standards.  We did not
obtain formal agency comments on this report.  However, we discussed
our findings with officials at the Department of the Interior and
have included their comments where appropriate. 

We are sending copies of this report to the Secretaries of State,
Commerce, and Defense; the governors of the insular areas; the
Director of the Office of Management and Budget; and interested
congressional committees.  We will also make copies available to
others on request. 

Please contact me on (202) 512-4128 if you or your staff have any
questions on the report.  Major contributors to this report were
Ronald A.  Kushner and Margaret E.  Gaddy. 

Sincerely yours,

Joseph E.  Kelley
Director-in-Charge
International Affairs Issues

PROFILE OF AMERICAN SAMOA
=========================================================== Appendix I

American Samoa is a group of seven islands in the Pacific Ocean,
about 4,100 miles from the U.S.  mainland and 2,300 miles southwest
of Hawaii.  It has a combined land area of 77 square miles.  The
population of American Samoa in 1990 was 46,638.  American Samoans
are nationals of the United States and may become naturalized
citizens.  American Samoa elects a nonvoting delegate to the U.S. 
House of Representatives. 

      ECONOMIC CONDITIONS
------------------------------------------------------- Appendix I:0.1

The American Samoa economy is dependent on two primary sources:  its
tuna processing and canning industry and the American Samoan
government.  The canneries supply about half of the tuna consumed in
the United States, and the two tuna canneries located on the islands
represent almost all of American Samoa's exports.  Of the 13,400
persons employed on American Samoa in 1991, about 4,000 (30 percent)
worked in the tuna canneries and about 4,900 (37 percent) worked for
the American Samoan government.  Other sectors generally support
these two primary sectors.  Because most American Samoan residents
prefer to work for the American Samoan government, most cannery
workers are nonresidents from Western Samoa. 

While many of the problems in attracting industry and capital to the
islands are outside of its control, the American Samoan government
has not been as efficient and effective as it could have been in
supporting development.  For example, the American Samoan government
continues to have significant financial, budgetary, and internal
control problems.  The Department of the Interior's Inspector General
estimated American Samoa's cash deficit for fiscal year 1992 at about
$30 million; the American Samoan government estimates the cash
deficit at closer to $20 million.  These figures are estimates,
however, because as of November 1993 the American Samoan government
had not closed out its financial records for fiscal years 1992 or
1993.  Our 1992 review indicated that a primary cause of the
government's poor financial condition was its management practices.\1
Although the American Samoan government has developed an overall plan
of action for addressing these problems, it has not yet addressed
most of the problems with specific corrective actions. 

Under the Samoan tradition, every member of a family contributes to
the welfare of the group, a tradition very different from most
developed economies, which emphasize individual effort and private
ownership of resources.  In keeping with its cultural traditions,
about 90 percent of the land is communally owned by family clans. 
Land tenure laws generally prohibit sale of land to any person who is
less than one-half Samoan, although land may be leased to non-Samoans
for up to 55 years. 

--------------------
\1 American Samoa:  Inadequate Management and Oversight Contribute to
Financial Problems (GAO/NSIAD-92-64, Apr.  7, 1992). 

      FEDERAL ASSISTANCE
------------------------------------------------------- Appendix I:0.2

Federal support for American Samoa, appropriated yearly through the
Department of the Interior, has averaged over $20 million per year
for the past 5 years.  For 1993, American Samoa received about $22.7
million to support the operations of the local government, including
the judiciary, health, and educational systems, and $6.1 million for
capital improvements.  In addition, other federal agencies, including
the Departments of Agriculture and Education, among others, provide
grant assistance.  Because poor financial management practices have
been a primary cause of the territorial government's continuing
financial difficulties, the Department of the Interior is working
with the American Samoan government to improve financial management
practices. 

      DEVELOPMENT OUTLOOK
------------------------------------------------------- Appendix I:0.3

American Samoa faces difficulties in attracting new investment and
encouraging development, including its remote location, small and
unskilled labor force, and limited infrastructure.  In addition,
limited access to capital, limited managerial skills, the need to
import most goods and raw materials, and high labor costs compared to
the rest of the region inhibit development of private sector
businesses.  High costs and the distance to markets restrict American
Samoa's ability to export.  Land ownership issues are considered by
some experts as obstacles to attracting outside investment. 

American Samoa is currently debating how to diversify the economy
without harm to the local culture.  Potential new sources of income
for American Samoa include tourism, developing local substitutes for
imported products, fisheries and aquaculture, and light industry. 
Although the tourism industry appears to offer the greatest potential
for development in the near future, American Samoa's remote location
and current lack of reliable air service makes the demand for
large-scale tourism questionable.  The American Samoa government is
planning to diversify the islands' economy by supporting creation of
a garment industry.  According to an island representative, the
government has recently recruited a textile expert to try to develop
a small garment industry. 

According to an island representative, the value of economic
incentives that have kept the tuna canneries in American Samoa is
being eroded; these include reduced tax rates, low labor costs
relative to the U.S.  mainland, the ability to unload foreign flag
fishing vessels, and duty-free entry into U.S.  markets.  For
example, although labor rates are lower on American Samoa than the
U.S.  mainland, U.S.-determined wage rates on American Samoa are
higher than on other nearby islands. 

According to a Department of the Interior analysis, the North
American Free Trade Agreement may have a long-term negative impact on
the tuna canneries upon which American Samoa's economy relies. 
Currently, Mexican tuna processing facilities do not meet the quality
standards necessary to export their products to the United States. 
However, improvements in Mexican processing plants could lead to
competition for American Samoa's tuna processing. 

PROFILE OF THE COMMONWEALTH OF THE
NORTHERN MARIANA ISLANDS
========================================================== Appendix II

The Commonwealth of the Northern Mariana Islands (CNMI) is
geographically a part of Micronesia; it consists of a chain of 12
groups of small volcanic islands in the Northern Pacific, about 6,000
miles away from the U.S.  mainland.  The CNMI combined land area is
about 184 square miles.  The population of the island has grown
rapidly in recent years, due primarily to immigration, from 43,345 in
1990 to an estimated 1992 population of 52,404.  A person born in
CNMI is, as a general rule, a citizen of the United States.  CNMI has
a resident representative who serves as a liaison to the federal
government, but it is not represented in Congress. 

      ECONOMIC CONDITIONS
------------------------------------------------------ Appendix II:0.1

The CNMI economy grew about 400 percent between fiscal years 1982 and
1991, according to the CNMI government.  Local revenues increased
from $14.2 million to $147 million over the period, and commercial
activity increased steadily.  Employment increased by over 200
percent, according to CNMI government statistics; and, although
development has not been evenly spread among the islands, some
Pacific development experts said that CNMI, along with Guam, can be
considered "developed."

Japanese investment and tourism drove the economic growth during the
period.  Tourism generated about 37 percent of the gross island
product in 1991, according to the CNMI government.  Tourism has also
sparked increases in the construction industry.  The garment industry
is CNMI's only manufacturing activity.  Garment manufacturers have
located in CNMI to take advantage of CNMI's agreement with the United
States that goods produced or substantially transformed in the
territory may enter the U.S.  markets duty- and quota-free under
General Note 3(a)(iv) of the tariff schedule. 

Development in CNMI, particularly in Saipan, has created jobs that
far outnumber the available local labor pool.  Foreign workers have
been imported to fill the labor shortage.  In 1990, the nonresident
foreign workers made up 81.6 percent of the labor force, according to
the CNMI government, and the number of foreign residents roughly
matched the number of local residents.  Employment in private sector
entry level jobs, such as retail clerks and taxicab drivers, is
reserved for CNMI residents, so foreign workers are employed
primarily in the tourist, construction, garment, and domestic service
industries.  Of the local resident work force, the CNMI government is
the single largest employer.  About 50 percent of the local resident
employment is in the CNMI and local governments. 

The garment industry is dependent almost wholly upon foreign workers. 
The U.S.  Department of Labor investigated unfair labor practices and
violations of occupational safety and health laws by five of the
garment firms.  Under the terms of a settlement with the Department
of Labor in 1992, the firms agreed to a payment of $9 million in
additional wages, and the CNMI government recently passed laws
designed to improve treatment of workers.  Questions have also arisen
about the degree to which industry dependent on foreign labor
contributes to the economy when foreign workers spend little of their
incomes locally and place strain on the infrastructure.  The
Department of the Interior is now beginning a study of the costs and
benefits of foreign workers on the islands. 

Article XII of the CNMI Constitution restricts ownership of land to
persons of CNMI descent.  Land may be leased to non-island entities
for up to
55 years. 

      FEDERAL ASSISTANCE
------------------------------------------------------ Appendix II:0.2

The CNMI government reported that the multiyear funding appropriated
by Congress pursuant to the commonwealth agreement\1 has assisted the
island by providing funds for building up infrastructure, economic
development, and support of government operations.  In addition to
assistance provided under the multiyear package, the United States
has also provided funding for special infrastructure projects, such
as $10 million to renovate the Saipan port.  The CNMI government also
reported that federal grants from the Departments of Transportation,
Education, Agriculture, and the Interior have been valuable in
encouraging economic development, and the Federal Emergency
Management Administration's assistance has helped the islands recover
from damage from frequent typhoons. 

Financial assistance to CNMI under the commonwealth agreement totaled
$192.5 million during the first 7 years (1978-85), and was used
primarily to support government operations.  During the second 7-year
period (1986-92), the United States provided $228 million in federal
assistance, with more assistance dedicated to improved infrastructure
and less to local government operations.  For fiscal year 1993, CNMI
received $27.7 million in federal appropriations because another
multiyear agreement had not been negotiated and approved. 

Because CNMI still lacks the infrastructure to be self-sufficient,
the United States and CNMI have agreed that the United States will
provide $120 million of federal funding during the 7 years beginning
with fiscal year 1994.  The agreement, signed in December 1992, has
been presented to Congress for approval as part of the normal
budgetary process.  If approved, federal funds will be used for
capital development and, over the 7-year period, will be matched by
the CNMI government.  The level of U.S.  assistance over the 7 years
will decline from $22 million in fiscal year 1994 to $9 million in
fiscal year 2000, while the CNMI matching portion will increase over
the period by the same amounts.  Because the new agreement requires
that no federal assistance be used for government operations and that
CNMI match 100 percent of construction funding, CNMI may have to make
changes to its local tax system to raise required local revenue. 
According to the Department of the Interior, the United States and
CNMI both expect this to be the final period of guaranteed financial
assistance. 

The CNMI government has completed a report on tax reforms, including
options to generate additional local revenue to support government
operations and to match federal funding for construction.  The
principal option recommended was to implement graduated rebate rates
on personal and corporate income taxes.  However, the CNMI government
did not indicate which proposals and options would be implemented. 
CNMI has implemented a tax on developers to alleviate the impact of
development on key utilities, will soon implement a lottery, and is
proposing using bond proceeds from previous financial assistance to
raise local revenue. 

In 1991, the Inspector General of the Department of the Interior
notified CNMI that it intended to undertake an audit of the CNMI's
income tax system to determine whether the system was capable of
generating sufficient revenues to fund Commonwealth government
operations and whether it effectively assessed and collected the
income taxes imposed.  CNMI challenged the authority of the Inspector
General to audit revenue generated locally.\2 The CNMI government
refused to cooperate with the audit, arguing that such an audit of
locally generated revenue is an invasion of the sovereignty and
principles of self-government.  The 9th Circuit Court of Appeals has
ruled that the Inspector General does have authority to perform the
audit.\3

--------------------
\1 A "Covenant to Establish a Commonwealth of the Northern Mariana
Islands in Political Union with the United States" was negotiated
between the United States and the Northern Marianas.  The Covenant
was signed in 1975, the first constitutional local government took
office in 1978, and the trusteeship under which the United States had
administered CNMI was terminated as it applied to CNMI in 1986. 
Under the Covenant, the United States pledged to assist the CNMI
government "in its efforts to achieve a progressively higher standard
of living .  .  .  and to develop the economic resources needed to
meet the financial responsibilities of local self-government."

\2 P.  L.  97-357, 96 Stat.  1705 (1982), provided the Department of
the Interior's Inspector General authority to audit revenues and
expenditures of insular areas. 

\3 U.S.  ex.  rel.  Richards v.  DeLeon Guerrero Nos.  92-15884,
92-16372,__F.3d__ (9th Cir.  (N.  Mariana Islands) 1993). 

      DEVELOPMENT OUTLOOK
------------------------------------------------------ Appendix II:0.3

While CNMI has already experienced significant economic growth, the
CNMI government has identified diversified private sector growth and
increased economic opportunities for residents as its development
goals.  It has identified its geographic proximity to the Pacific Rim
and its political status as a commonwealth of the United States as
advantages to enhance development.  However, CNMI faces substantial
challenges to further development.  Although CNMI has experienced
significant growth in tourism and in its garment industries, further
expansion in these sectors is uncertain due to several factors. 
First, an economic slump has made Japanese investors generally more
cautious.  Second, land alienation laws in CNMI are unresolved. 
Third, inadequate basic infrastructure and the small resident labor
pool may hamper future development.  However, CNMI continues to be a
popular destination for Japanese tourists. 

Restrictions on land ownership and leases by nonresidents may hamper
further foreign investment in the islands.  Because of non-alienation
of land laws, long-term leases are the most common means for
foreigners to acquire land for development.  However, court decisions
concerning the validity of land sales and leases have made investors
less anxious to invest in these islands. 

According to CNMI representatives, the islands' infrastructure is
inadequate to support continued growth in tourism.  The islands'
topography and geography makes it difficult to provide an adequate
water supply, and the water does not meet Environmental Protection
Agency standards.  The sewer system on Saipan, the most populated
island, was designed to accommodate a population less than one-half
the present population and is not adequate to meet present needs. 
The CNMI government estimated that almost $1 billion in
infrastructure improvements is needed. 

Although the small island labor force has necessitated importing
workers for industries, recent labor rights problems have led to
changes in the CNMI minimum wage policy.  The government of CNMI
indicated to us that its policy objectives are to (1) protect the
human rights of guest workers, (2) train local people to replace as
many nonresident workers as possible to keep the number of guest
workers to a minimum, (3) ensure enforcement of labor laws, (4)
establish a fair minimum wage, (5) require that businesses employing
nonresident workers generate enough tax and revenue so that local
government can pay for added services and infrastructure, and (6)
ensure that political power remains with residents by not allowing
guest workers to gain citizenship. 

According to the CNMI government, the North American Free Trade
Agreement would negate the unique trade advantages provided to
investors in the insular areas.  The CNMI government believes that
manufacturers will leave the islands for Mexico to take advantage of
lower labor costs.  Although a Department of the Interior analysis
indicates that the threat of garment plant closures would not be
immediate, there may be some long-term impact on the CNMI's garment
industry.  According to this analysis, the industry has grown
primarily as a means for Asian garment manufacturers to ship in
excess of their home country quotas by moving machinery and labor to
Saipan.  Moving operations to Mexico would not offer the same
advantage under the agreement because of restrictions on the origin
of yarn and cloth.  However, in the longer run, as the Mexican
economy develops, Asian manufacturers may find it cost effective to
move to Mexico and change their operations to satisfy the rule of
origin conditions. 

Development experts and the CNMI government believe that CNMI should
seek to diversify its economy.  According to experts in island
development, marine resources, including fisheries, marine minerals,
and ocean thermal energy conversion, are areas that could be
developed further. 

The CNMI government identified several areas in which it perceives
federal laws and regulations impede opportunities for development. 
For example, the CNMI government believes that federal control of the
exclusive economic zones\4 around the islands should be turned over
to the local government and that land held by the Department of
Defense should be available for development.  Although asserting no
precise estimate of the potential revenue, the CNMI government told
us that minerals on the seabed and licensing of commercial fisheries
could provide substantial revenue.  The CNMI government is currently
negotiating with the Department of Defense regarding the potential
lease-back of Defense-held lands.  In 1988, the Department of Defense
indicated its willingness to arrange a lease-back agreement if the
CNMI government agreed to use the property for purposes not
incompatible with possible future military needs.  The Department of
Defense has not changed its views, but has waited for CNMI to propose
an acceptable use for the property. 

The CNMI government also noted that it would like to see (1)
legislation to allow CNMI to accept assistance from other countries,
(2) appropriation of funds to relieve the impact of Micronesian
migration approved under the Compacts of Free Association with the
Federated States of Micronesia and the Marshall Islands, (3)
exemption from proposed legislation that would bar foreign ships from
insular area ports, and (4) exemption from some environmental
regulations. 

--------------------
\4 The U.S.  federal government has claimed sovereignty over a
200-mile zone extending from the United States' coasts and
surrounding Hawaii, Alaska's islands, and those of other states and
insular areas.  Federal sovereign rights include management,
conservation, and development of whatever natural resources may exist
in the seabed, subsoil, and water column of the zones. 

PROFILE OF GUAM
========================================================= Appendix III

Guam, a single island of approximately 212 square miles, is the
largest island in the Northwestern Pacific and has long been
considered of military importance to the United States.  Guam is
located about
3,700 miles west-southwest of Honolulu and about 6,000 miles from the
U.S.  mainland.  The population of the already densely populated
island is growing rapidly, with an estimated 135,000 persons living
on Guam in 1992.  Guam is the site of two U.S.  military bases: 
Andersen Air Force Base and Naval Air Station Agana.\1 The people of
Guam are citizens of the United States. 

--------------------
\1 Naval Air Station Agana is one of the bases to be closed in
accordance with the 1993 report of the Base Closure Commission. 

      ECONOMIC CONDITIONS
----------------------------------------------------- Appendix III:0.1

Since the mid-1980s, Guam's economy has increased in terms of
employment, per capita income, and local government revenues. 
Private sector employment in Guam more than doubled between 1981 and
1991 to over 45,700 jobs.  As a result, public sector employment,
which reached 18,649 positions in 1992, declined as a percentage of
all employment from about 42 percent in 1987 to about 27 percent in
1992.  Unemployment decreased from 10.1 percent to 4.2 percent,
according to the Guamanian government.  Between 1980 and 1990, median
household income increased from $15,752 to $30,755, and local
government revenues have more than doubled since 1987 to about $5.5
million in 1992. 

Guam's economic growth has been fueled primarily by Japanese tourism
and investment.  Several factors made the island attractive to
Japanese investment:  (1) a stable government due to Guam's
relationship with the United States; (2) location, within 1-1/2 hours
by air; (3) tropical climate and the largest land area of the nearby
islands; (4) better infrastructure than neighboring islands due to
U.S.-supported construction; and (5) the ability for foreign entities
to own land.  In 1991, Guam fell behind only Hawaii, California, and
New York in amount of Japanese investment in the United States. 
Investments totaled over $1.5 billion during 1990 and 1991. 

Guam's rapid development led to a significant rise in both total
personal income and inflation as resource and labor markets were
stretched.  While median household income nearly doubled between 1980
and 1990, Guam's consumer price index increased 101 percent during
the 1980s, almost twice the increase of the nation as a whole.  The
Guamanian government's decision in 1990 to give every government
employee a salary increase of $5,440 (about 20 percent) caused a
sudden large increase in labor costs and was a primary cause of an
increase in inflation of about 11.5 percent over the 8.5 percent
reported for the previous year.  As well as creating inflationary
pressure on the economy, this action meant that revenues are not
available to invest in the infrastructure needed to improve living
conditions.  In 1992, the inflation rate was about 7 percent. 

According to the Department of the Interior, financial management
practices have improved greatly since our 1988 review indicated
significant financial problems and widespread internal control
weaknesses.  However, the Department of the Interior's Inspector
General reported in 1992 that the government of Guam had problems in
the assessment and collection of property taxes, administration of
retirement funds, and planning and implementing road construction
projects.  The government of Guam has not always taken timely action
to address audit findings and recommendations. 

      FEDERAL ASSISTANCE
----------------------------------------------------- Appendix III:0.2

The government of Guam estimates that federal expenditures in 1992
totaled nearly $715 million, inclusive of military expenditures,\2
federal grants, and payments to individuals.  In all, according to
the Department of Commerce,\3 federal grant awards to Guam totaled an
estimated $178 million in fiscal year 1992.  In addition to these
amounts, the federal government allows Guam to keep the income taxes
paid by mainland residents temporarily living on Guam and from
Guamanians serving overseas in the military.  This amounts to about
$48,500 for 1993.  Guam does not receive additional grants for local
government operations. 

Increased local government revenue has enabled Guam to finance public
works projects through the issuance of revenue bonds totaling $875
million.  Since 1989, Guam has requested congressional appropriations
for only two public infrastructure projects:  a $3.2-million water
project in fiscal year 1989 and a $2.4-million hospital expansion in
fiscal year 1991. 

For fiscal year 1994, the government of Guam has requested assistance
with socioeconomic problems associated with the impact of immigrating
Micronesians.  The Department of the Interior plans to address this
request through technical assistance programs. 

--------------------
\2 The government of Guam noted that military expenditures,
especially salaries, generally do not have multiplier effects on the
island economy.  Military families spend a major portion of their
salaries on the base so spending does not enter the local economy. 

\3 Consolidated Federal Funds Report for Fiscal Year 1992, Volume I: 
County Areas, U.S.  Department of Commerce, DFFR/92-1. 

      DEVELOPMENT OUTLOOK
----------------------------------------------------- Appendix III:0.3

In responding to our questions about obstacles to economic
development on Guam, the government of Guam identified its political
status as the main obstacle to its goal of economic self-sufficiency. 
The government of Guam stated that the Jones Act,\4 immigration
rules, the exclusive economic zone, and other federal laws, are
political issues because they represent federal standards that have
been applied to Guam without giving the people of Guam an opportunity
for approval or disapproval. 

The government of Guam advocates congressional approval of the Guam
Commonwealth Act to address its concerns about its political status
and representation.  The federal government, through an interagency
task force, has not supported the enactment of the law as drafted. 
Key among the disagreements between the task force and the Guam
government are the provisions of the bill that would

  give Guam the right to consent to or reject the application of
     federal laws and regulations in Guam,

  limit electoral rights on the question of political status to the
     indigenous Chamorro people and their descendants, and

  establish a trust for the benefit of the indigenous Chamorro people
     of Guam composed of certain lands returned by the United States
     to Guam. 

The federal task force opposed the first provision because it
believed that it would exempt Guam from the legislative authority of
Congress and from the regulatory authority of the federal government. 
It objected to the second and third provisions because, among other
reasons, they discriminate based on race. 

While maintaining the necessity for a completely different political
status, the government of Guam is seeking exemption from several
regulations that it believes hamper further development.  It believes
that exemption from the Jones Act, which applies only to Guam among
the Pacific insular areas, would reduce costs by fostering
competition on the route between Guam and the United States.  Guam
also seeks exemptions from U.S.  laws that prohibit foreign air
traffic from flying from Guam to another U.S.  point.  Guam believes
that opportunities for stop-over and through foreign carrier traffic
from points in the United States and Asia could help Guam attract
U.S.  and foreign businesses. 

According to the government of Guam, Guam's economic development goal
is economic self-sufficiency.  To that end, the Guam government is
seeking to diversify its economic base, including light
manufacturing, commercial fishing, agriculture and aquaculture,
financial services, high technology, and tourist-related industries. 
Guam is also examining the potential of developing local industries
to replace imported goods and services. 

The Japanese investment that supported rapid economic development in
the 1980s slowed somewhat in 1992 and 1993 due to a recession in
Japan.  Guam has good air transportation links to Japan for tourism
and access to Japanese markets, although tourism has slowed in recent
months, according to a Department of the Interior official.  Guam is
attempting to diversify the countries from which visitors come to
Guam.  There is some concern, however, about the tourism industry's
ability to recruit and satisfactorily train staff for visitor
service. 

Although the infrastructure on Guam is superior to that of
neighboring islands, due primarily to U.S.  investments, electric
power is still a problem.  The Guam government has approved a new
bond issue to finance new generators.  The government of Guam also
believes that current holdings of land on Guam by the Department of
Defense impede the island's economic development.  The Department of
Defense now controls about 18,000 acres of land on the island, and
the government of Guam believes that this is not the "highest and
best" use of the land.  According to a Defense Department official,
Defense intends to continue its presence on Guam for the foreseeable
future.  However, U.S.  Air Force and Navy flight activities will be
consolidated at Andersen Air Force Base over several years, and most
facilities at the Naval Air Station Agana will be turned over to Guam
for civil aviation activities. 

The Department of Defense has declared excess about 3,000 acres that
could be turned over to the government of Guam for agreed-upon public
uses.  However, the federal government and the government of Guam
have not yet agreed on appropriate uses for the land.  In its
response to us, the government of Guam stated that uses of the land
should be up to Guam and reiterated provisions in the Guam
Commonwealth Act that call for the U.S.  government to (1) justify
the requirement for lands in Guam based on actual use; (2) transfer
to Guam without cost or conditions those lands not necessary for
direct and continuous operational, logistical, or security uses; and
(3) reimburse the government of Guam for the lost revenues that
result from the difference between military and civilian use. 

Guam also seeks control over its exclusive economic zone.  The
government of Guam noted that numerous resources exist in its
exclusive economic zone.  The government of Guam believes that Guam
has an inherent right to the zone. 

--------------------
\4 The Jones Act requires that U.S.  flag vessels be used to
transport passengers and cargo between two points in the United
States (46 U.S.C.  13). 

PROFILE OF U.S.  VIRGIN ISLANDS
========================================================== Appendix IV

The Virgin Islands are located about 1,000 miles southeast of Miami
in the Caribbean Sea.  Although more than 50 islands and cays
totaling
132 square miles comprise this group, only St.  Thomas, St.  Croix,
and St.  John have populations of significant size.  Most of the
other islands are uninhabited or lack facilities necessary to make
them habitable.  The 1990 population was 101,809.  Persons born in
the Virgin Islands are U.S.  citizens. 

The United States purchased the islands from Denmark in 1917.  A
naval governor ruled the islands from 1917 until 1931.  At that time,
jurisdiction over the islands was transferred to the Department of
the Interior, and a civilian governor was appointed by the President. 
Island residents were granted U.S.  citizenship in 1927.  In 1936,
Congress passed an Organic Act, establishing a civil government,
providing for universal suffrage, and extending most of the
protections of the U.S.  Bill of Rights to island residents.  In
1954, the Revised Organic Act of the Virgin Islands was passed.  The
act stated formally that the islands are an unincorporated territory. 
The governor continued to be appointed by the President; the
Secretary of the Interior was responsible for carrying out
administrative functions for the islands.  The act also required the
U.S.  Treasury to pay to the Virgin Islands federal taxes and duties
collected on items produced in the Virgin Islands and shipped to the
United States.  The amount of the payment could not exceed the total
local revenues collected by the Virgin Islands government for the
fiscal year.  In 1968, the Virgin Islands Elective Governor Act
amended the 1954 law to provide for the popular election of the
governor.  The act eliminated some administrative functions of the
Department of the Interior and the right of the President to veto
local legislation.  In 1972, Congress granted the Virgin Islands the
right to elect a nonvoting delegate to the U.S.  House of
Representatives. 

      ECONOMIC CONDITIONS
------------------------------------------------------ Appendix IV:0.1

The Virgin Islands has the most diverse economy of the insular areas. 
The Virgin Islands government reported that over 1.9 million tourists
visited the islands in 1992, and their expenditures were about $791.5
million.  Manufacturing also plays a large part in the Virgin
Islands' economy, with heavy manufacturing (oil refining and alumina
production) and light manufacturing (watch assembly, pharmaceutical,
garments, sensitive instruments, and rum).  Over 2,500 foreign sales
corporations have been established in the Virgin Islands to take
advantage of special tax incentives on worldwide exports, good
infrastructure, modern communications, excellent transportation
links, and U.S.  currency and postage.  There are no specific
restrictions regarding land ownership in the U.S.  Virgin Islands. 

According to the Virgin Islands government, in 1992, the value of
imports, exports, and corporate income taxes fell by 25 percent.  The
U.S.  economy's recession and slow growth had a negative impact on
the Virgin Islands, according to a Virgin Islands official. 

According to the Virgin Islands government, the public sector is
still the largest employer, with federal and territorial governments
employing about 31 percent of Virgin Islands labor force.  Of the
private sector employment, wholesale and service industries make up
32 percent and 31 percent of employment, respectively. 

The Virgin Islands government has experienced severe fiscal crises
over the past several years.  The government deficit for fiscal year
1992 was estimated at between $35 million and $45 million.  In
addition to declines in revenues due to the general U.S.  recession,
the Virgin Islands government did not manage its resources as
effectively and efficiently as possible.  The Department of the
Interior's Inspector General has reported that funds were not always
adequately accounted for, consultants were hired without contracts,
and equipment and supplies were not always adequately controlled.  In
addition, lack of accurate and up-to-date financial information
contributes to the government's management problems. 

      FEDERAL ASSISTANCE
------------------------------------------------------ Appendix IV:0.2

The Virgin Islands has become less dependent on U.S.  funding than
are most of the Pacific insular areas.  The percentage of funding
derived from federal grants has decreased from about 29 percent in
1988 to about 19 percent in 1992.  In addition to between $150
million and $200 million in federal program grants, the Virgin
Islands receive between $26 million and $30 million annually from
rebates of U.S.  excise taxes on Virgin Islands rum. 

The Virgin Islands government indicated that programs administered by
the Economic Development Administration, the Farmers Home
Administration, and the technical assistance programs of the
Departments of Housing and Urban Development and the Interior have
encouraged economic development.  In particular, the government noted
that programs that have allowed the insular area flexibility to
design programs to meet specific needs were most beneficial.  The
government identified needs for continued assistance in the areas of
health services, law enforcement, drug enforcement, education, and
provision of capital for private investments and public
infrastructure improvements. 

      DEVELOPMENT OUTLOOK
------------------------------------------------------ Appendix IV:0.3

The Virgin Islands' strategy for economic development is twofold: 
(1) enhance tourism by attracting more international visitors and (2)
diversify the economy by attracting small- to medium-sized
manufacturing or nonpolluting assembly industries and expanding the
financial services sector.  The government has recently developed a
strategic plan to address perceived obstacles to development based on
a survey undertaken by the Virgin Islands Department of Economic
Development in 1990 and 1991.  Businesses and community and business
leaders surveyed perceived the greatest assets to be affiliation with
the United States, climate, tax incentive programs, tourism, English
language, and a strong economy.  The greatest liabilities identified
were lack of public/private partnership, inadequate
education/training, inadequate infrastructure, lengthy and expensive
permitting process, limited manpower availability, and cost of
retraining. 

The Virgin Islands government indicated that lack of
entrepreneurial/technical knowledge and skills, inadequate shipping
and cargo handling facilities within the region, insufficient capital
for both private investment and infrastructure improvements, and lack
of wind storm insurance are all significant obstacles to increasing
private sector growth.  The government identified several federal
laws and regulations it believes have a negative impact on
development.  These include rules that govern implementation of
textile agreements, lack of on-island U.S.  Customs Service clearance
for cargo being shipped to the United States, the need for Virgin
Islands firms to receive certification from U.S.  Customs to export
duty-free to the United States, and the reduction in the percentage
of federal excise taxes on rum turned over to the local government.\1

Because it has a larger manufacturing sector than other insular
areas, the Virgin Islands economy may be more vulnerable to some
negative impacts from increased competition under the North American
Free Trade Agreement, according to federal and Virgin Islands
officials.  The rum distilling and watch assembly industries in the
Virgin Islands are the primary industries that may be threatened by
Mexican competition.  The Virgin Islands government asserted that
there is a strong likelihood that imports of Mexican rum will flood
the U.S.  market before the end of the 10-year phase-out of duties on
Mexican rum and indicated a need for an import surge "side
agreement." In addition to the potential loss of jobs in the rum
industry, the Virgin Islands government also pointed out that the
excise tax rebates on imported rum make up about 10 percent of the
islands' local revenue, a payment of about $30 million annually.  In
addition to the duty-free access that would be shared with Mexico and
Canada under the agreement, however, rum industries in the Virgin
Islands receive 90 percent income tax rebates and exemptions from
other taxes under the local industrial incentive laws. 

The Virgin Islands' watch assembly industry, like the rum industry,
will still enjoy special benefits not limited to duty-free access, if
the agreement is adopted.  For example, watches imported from the
U.S.  insular areas are subject to special trade rules that permit
them to ship to the U.S.  mainland watches assembled from foreign
components.  Even after the 15-year phase-out of U.S.  duties under
the agreement, Canada and Mexico will not be allowed to ship watches
assembled from foreign components duty free. 

--------------------
\1 Until a few years ago, the Virgin Islands received 100 percent of
the federal excise tax of $10.50 per proof gallon.  The Virgin
Islands still receives $10.50 per proof gallon, although the excise
tax has been raised to $13.00 per proof gallon. 

PROFILE OF THE TRUST TERRITORY OF
THE PACIFIC ISLANDS:  THE REPUBLIC
OF PALAU
=========================================================== Appendix V

The Republic of Palau is located about 4,000 miles west-southwest of
Honolulu and 530 miles from Manila in the Western Caroline Islands. 
The land area of Palau is 170 square miles, and the 1990 population
was about 15,100.  Palau is the only remaining entity of the United
Nations' Trust Territory of the Pacific Islands.\1 The United States
does not exercise sovereignty over Palau, and it is bound by the
terms of the trusteeship agreement.  Citizens of Palau are citizens
of the Trust Territory of the Pacific Islands, not citizens or
nationals of the United States. 

Palau is currently governed under the Department of the Interior's
Secretarial Order 3142 and the Constitution of Palau.  The United
States and the Republic of Palau have signed a Compact of Free
Association,\2 which upon entry into force would terminate Palau's
status as a trust territory.  The citizens of Palau passed a
referendum approving the Compact in 1993.  The administrative steps
necessary to terminate the trust territory status with respect to
Palau can now be begun. 

--------------------
\1 The United Nations created the Trust Territory of the Pacific
Islands in 1947 and appointed the United States as trustee of the
Trust Territory.  Originally the Trust Territory included the
Marshall, Caroline, and Northern Mariana Island groups. 

\2 The Compact recognizes that Palau is a self-governing state, but
gives full authority and responsibility for its defense to the United
States for a period of 50 years.  The Compact also guarantees
continued U.S.  economic assistance to Palau for 15 years. 

      ECONOMIC CONDITIONS
------------------------------------------------------- Appendix V:0.1

Palau's economy remains dependent upon the government sector but has
shown slow but steady private sector growth.  The government
dominates the economy with funds available through various federal
grant programs.  Fishing and tourism are Palau's main private sector
activities.  Fisheries exports have grown significantly in recent
years, primarily through exports to Japanese sashimi markets.  The
number of tourists visiting the islands rose to over 36,000 in 1992,
an increase of about 12 percent, according to the Palau Visitors
Authority. 

Pursuant to its laws, Palau grants fishing rights, mainly for tuna,
to companies and associations from Japan, Taiwan, the Philippines,
and the United States.  Subsistence farming dominates the
agricultural sector.  Also, the laws of Palau prohibit ownership of
land in Palau by any non-Palauan citizens or firms, although sites
can be leased from the government or private landowners. 

According to the Department of the Interior, financial management
practices have improved greatly since our 1988 review disclosed
significant financial problems and widespread internal control
weaknesses.  However, problems remain.  For example, in September
1992, the Department of the Interior's Inspector General reported
that Palau did not effectively audit or collect gross revenue
taxes.\3 In 1992, Palau reported the first operational surplus in its
history. 

--------------------
\3 Billings and Collections of the Republic of Palau's Gross Revenue
Tax, Department of the Interior Office of Inspector General (Report
No.  92-I-1368, Sept.  1992). 

      FEDERAL ASSISTANCE
------------------------------------------------------- Appendix V:0.2

U.S.  grant assistance provides the majority of Palauan national
government revenues.  In fiscal year 1992, the United States, through
the Department of the Interior, provided almost $24.5 million to
support Palau's government operations, and development and capital
improvement projects, in addition to about $8.1 million in grants
from other government agencies for education, health, safety, and
economic development. 

Unlike the U.S.  insular areas, Palau may receive foreign assistance
from other countries.\4 Japan has provided about $3 million per year
since 1989.  This assistance has been used to install electrical
power lines and rural fishing infrastructure.  Australia, New
Zealand, and South Korea have also provided grants and technical
assistance. 

--------------------
\4 The United States, as a donor nation, does not accept foreign aid. 
This prohibition covers U.S.  states, the District of Columbia, and
the insular areas. 

      DEVELOPMENT OUTLOOK
------------------------------------------------------- Appendix V:0.3

According to federal officials, Palau's potential as a tourist
destination is good because of its natural scuba diving attractions
known worldwide and hotels that are comparable to those on the U.S. 
mainland.  Several development experts expect Palau's economy to
improve substantially after approval of the Compact of Free
Association with the United States.  Palau's objective, according to
Interior officials, is to maximize the benefits of development
without endangering the islands' culture and environment. 

In addition to tourism, other opportunities for development include
mariculture, fishing, and fish canning industries.  However, because
land ownership is restricted to Palauans and recent legislation
enacted further requirements to increase participation of residents,
Palau may have difficulty attracting foreign investment. 

Upon acceptance of the proposed Compact of Free Association, the
United States has pledged to provide annual financial assistance
totaling about $450 million over 15 years.  However, according to the
Compact terms, no funds would be available until a national economic
development plan is in place.  The United States has funded the
development of such a plan by a development firm selected by the
United Nations Development Program.  The plan is expected to be
completed in 1994. 

The Palau government will have to improve its ability to maintain and
manage public sector services efficiently if it is to facilitate
economic development.  For example, the government faces severe debt
problems due to its 1985 default on loans from commercial banks and
may not be considered creditworthy.  Resources will have to be used
to repay debts that otherwise could be used for developing
infrastructure. 

```