GAO

United States General Accounting Office

Report to Congressional Committees

February 2000 NORTHERN 

MARIANA ISLANDS 

Garment and Tourist 

Industries Play a 

Dominant Role in the 

Commonwealth's 

Economy

GAO/RCED/GGD-00-79

Page 1 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Contents

Letter 3

Executive Summary 6

Chapter 1

Introduction

16

Chapter 2

The Impact of the 

Garment and Tourist 

Industries on the CNMI 

Economy

33

Chapter 3

The CNMI 

Government’s 

Revenue-Raising Effort

51

Appendixes Appendix I: CNMI Taxes and Tax Revenue 62

Appendix II: The Potential Shifting of Garment Industry Tax Burdens 66

Appendix III: Comments From the Commonwealth of the Northern 

Mariana Islands and Our Evaluation 68

Appendix IV: Comments From the Department of the Interior and Our 

Evaluation 75

Appendix V: GAO Contacts and Staff Acknowledgments 90
Contents

Page 2 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Tables Table 1: Percentage of Revenue From Local Sources and Federal Transfers 

and Grants in Relation to Total General Revenue for the CNMI and Other 

Outlying Areas, Fiscal Years 1994 Through 1997 52

Table 2: Revenue From Local Sources as a Percentage of GDP for the CNMI 

and Other Outlying Areas, Fiscal Years 1994 Through 1997 55

Table 3: Taxes and Fees Paid by the CNMI Garment Industry as a 

Percentage of Its Gross Receipts, Fiscal Years 1993 Through 1998 56

Table 4: Taxes and Fees Paid by the U.S. Garment Industry as a Percentage 

of Its Gross Receipts, 1991 Through 1996 57

Table 5: Taxes Collected in the CNMI, Fiscal Years 1994 Through 1997 64

Table 6: Sources and Types of Revenue Collected in the CNMI, Fiscal Years 

1994 Through 1997 64

Figures Figure 1: Map of the Pacific Showing the Northern Mariana Islands 18

Figure 2: Population Growth on Saipan, CNMI, 1980 to 1999 21

Figure 3: Rate of Change in Selected Economic Variables for the CNMI and 

Guam, 1982 Through 1997 23

Figure 4: Average Hourly Wages on Saipan, CNMI, 1980 to 1999 24

Figure 5: Average Hourly Wages in Selected Occupations, by Place of Birth, 

1999 25

Figure 6: CNMI Visitor Arrivals and Spending, 1980 to 1999 35

Figure 7: Saipan Employment and Local Labor Force, 1980 to 1999 40

Figure 8: Distribution of Local and Foreign Workers by Occupation and 

Place of Birth, 1999 42

Figure 9: Income Distribution for Saipan Households, 1980 and 1999 44

Abbreviations

ACIR Advisory Commission on Intergovernmental Relations

CNMI Commonwealth of the Northern Mariana Islands

FSM Federated States of Micronesia

GAO General Accounting Office

GDP Gross domestic product

IMF International Monetary Fund

OMB Office of Management and Budget

RTS Representative Tax System

WTO World Trade Organization
United States General Accounting Office

Washington, D.C. 20548

Page 3 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Resources, Community, and

Economic Development Division

B-284271 Letr

February 14, 2000

The Honorable Slade Gorton

Chairman

The Honorable Robert C. Byrd

Ranking Minority Member

Subcommittee on Interior and Related Agencies

Committee on Appropriations

United States Senate

The Honorable Ralph Regula

Chairman

The Honorable Norm Dicks

Ranking Minority Member

Subcommittee on Interior and Related Agencies

Committee on Appropriations

House of Representatives

As directed in Conference Report 105-825, we are reporting on the state of the economy of the 

Commonwealth of the Northern Mariana Islands and its revenue-raising efforts. More specifically, the 

report discusses the impact of the garment and tourist industries and foreign workers on the 

Commonwealth’s economy. It also discusses how the revenue-raising efforts of the Commonwealth 

compare with those of other U.S. territories and Freely Associated States and how the taxes and fees 

paid by the Commonwealth’s garment industry compare with those paid by the garment industry in 

the United States.

We will send copies of this report to the Honorable Bruce Babbit, Secretary of the Interior; Ferdinand 

Aranza, Director, Office of Insular Affairs; and the Honorable Pedro P. Tenorio, Governor, 

Commonwealth of the Northern Mariana Islands.
B-284271

Page 4 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Please contact me at (202) 512-3841 if you or your staff have any questions. Additional contacts and 

key contributors to this report are listed in appendix V.

Barry T. Hill

Associate Director, Energy, 

Resources, and Science Issues
Page 5 GAO/RCED/GGD-00-79 Economic Study of the CNMI
Page 6 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Executive Summary

Purpose The Commonwealth of the Northern Mariana Islands (CNMI) is a U.S. 

territory with commonwealth status in the western Pacific. The Covenant 

establishing the CNMI places it under U.S. sovereignty and provides for 

U.S. citizenship for people born there, yet pledges self-government for local 

affairs. The Covenant also allows the CNMI to control its own immigration 

policy and to set its own minimum wage, which, at $3.05 per hour, is 

substantially below the minimum wage in the United States of $5.15 per 

hour (the CNMI is currently reviewing its minimum wage rate). Businesses 

in the CNMI, particularly in the garment and tourist industries, employ 

many foreign workers who have work permits that do not lead to 

citizenship. To obtain more information on the economy of the CNMI, the 

Congress directed GAO in the conference report accompanying the 

Omnibus Consolidated and Emergency Supplemental Appropriations Act 

of 1999 to complete analyses and reports concerning the CNMI. Following 

discussions with the offices of the responsible congressional committees, 

GAO has addressed the following questions: 

1. What has been the impact of the garment and tourist industries and the 

use of foreign workers on the economy of the CNMI?

2. How do the revenue-raising efforts of the CNMI and the payments that 

the CNMI receives from the U.S. Treasury compare with those of other 

U.S. territories and Freely Associated States?1

3. How do the taxes and fees paid by the garment industry in the CNMI, 

expressed as a percentage of gross receipts, compare with the taxes 

and fees paid by the garment industry in the United States?

As agreed with the offices of the Subcommittees on Interior and Related 

Agencies of the House and Senate Committees on Appropriations, GAO did 

not assess the issue of compliance with labor and worker safety laws in the 

CNMI in this report. Nor did GAO assess the sociological and political 

ramifications of the presence in the CNMI of a large population of 

noncitizens. While GAO gathered information on the effects of the current 

1

The Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic 

of Palau, former components of the Trust Territory of the Pacific Islands, are sovereign 

nations that have compacts of association with the United States and are generally called 

the Freely Associated States. The Freely Associated States and the other U.S. territories (the 

Commonwealth of Puerto Rico, the U.S. Virgin Islands, American Samoa, and Guam) are 

sometimes referred to collectively as outlying areas, a term that GAO uses in this report.
Executive Summary

Page 7 GAO/RCED/GGD-00-79 Economic Study of the CNMI

minimum wage and immigration policies in the CNMI on the garment and 

tourist industries, it did not assess whether changes are needed in those 

policies.

Background The Northern Mariana Islands are a group of 14 islands in the Pacific 

Ocean, lying just north of Guam. They are located about 3,200 miles west of 

Honolulu, 5,500 miles west of Los Angeles, and 1,500 miles south of Tokyo. 

The United States took control of the Northern Mariana Islands from Japan 

during the latter part of World War II. In 1947, the U.S. Congress approved 

the Trusteeship Agreement that made the United States responsible to the 

United Nations for the administration of the islands. Accordingly, the 

United States was obligated to promote the political, economic, social, and 

educational advancement of the Islands’ inhabitants leading to selfgovernment or independence. For about the next 15 years, the Northern 

Mariana Islands had little economic development. Except for some U.S. 

military activity on the Islands, the economy consisted of subsistence 

farming and fishing, small-scale manufacturing, and trading. Later, the 

Northern Mariana Islands sought self-government and permanent ties to 

the United States. Over time, the Islands negotiated different political 

arrangements with the United States. In March 1976, the President signed 

Public Law 94-241, which formed a Covenant to Establish a 

Commonwealth in Political Union With the United States of America. A 

basic objective of the Covenant was to encourage economic growth and a 

standard of living in the CNMI comparable to that in the United States. 

The CNMI has used its authority to control its own immigration policy to 

bring in foreign workers, mostly from China and the Philippines−under 

temporary, but renewable, work permits that do not lead to citizenship−and 

to allow the entry of foreign business owners and their families. In large 

part because of the influx of these foreign workers and entrepreneurs, the 

population of the CNMI has grown rapidly, increasing from about 16,800 in 

1980 to 79,000 in 1999.2

 On Saipan−the island that is the capital of the CNMI 

and its main population center−foreign workers and other non-U.S. citizens

2

The 1999 figure of 79,000 is an estimate based on census figures in 1995 and the growth rate 

of the population between 1990 and 1995. According to the CNMI Governor’s Office, 

immigration data, school enrollment, hospital records, nonrenewals of business licenses, 

and other sources all indicate that there are fewer people. 
Executive Summary

Page 8 GAO/RCED/GGD-00-79 Economic Study of the CNMI

constitute about 58 percent of the population at present.3 Businesses in the 

CNMI can also sell some goods to buyers in the United States duty-free and 

are not subject to import quotas for goods sold to the United States. In 

particular, as long as certain conditions are met, garments manufactured in 

the CNMI can be sold to buyers in the United States without incurring 

import tariffs, and there is no quota on imports of garments to the United 

States from the CNMI. In addition, these garments can bear labels 

identifying them as having been made in the United States. These features 

give garment manufacturers in the CNMI greater access to the U.S. market 

than is available to garment manufacturers from outside the United States. 

The garment industry has grown rapidly in the CNMI and is, along with the 

tourist industry, one of the two largest sectors of the economy. Nearly all 

garments manufactured in the CNMI are exported to the United States. 

Median household income for the largest indigenous group of people in the 

CNMI (the Chamorros) rose from about $8,900 in 1980 to $30,700 in 1999.4

The CNMI government relies on revenue derived locally (taxes, fees, 

charges, etc.) and on payments from the U.S. Treasury. The Covenant 

allowed the CNMI to establish its own tax and fee structure. Garment 

manufacturers in the CNMI presently pay the government a user fee equal 

to 3.7 percent of the gross value of their exports to the United States and a 

tax of up to 5 percent on the gross receipts from sales they make in the 

CNMI. They also pay fees to the government for each nonresident they 

employ. In contrast, garment manufacturers in the United States typically 

pay income taxes (sometimes state and local, as well as federal) and 

property taxes. They may also pay sales taxes.

Results in Brief The garment and tourist industries contribute directly to the CNMI 

economy by creating jobs and producing goods and services for export. 

They also contribute indirectly to the economy through purchases of local 

3

Saipan is the CNMI’s commercial and government center and accounts for about 90 percent 

of the population of the CNMI. Some of the non-U.S. citizens on Saipan are citizens of the 

Freely Associated States and are considered local residents in this report. According to the 

CNMI, in 1999, 1,495 of the non-U.S. citizens were the immediate relations of U.S. citizens.

4

GAO did not calculate the change in income in constant, or inflation-adjusted, dollars 

because it was unable to find a consumer price index for the CNMI that went back to 1980. 

Even if such an index had been available, there would have been problems with using it 

because the types of goods and services purchased in the CNMI—the consumer’s so-called 

market basket—changed so much over this period. Therefore, measuring the change in the 

price level of a fixed market basket of goods and services would not have accurately 

measured the change in the cost of living.
Executive Summary

Page 9 GAO/RCED/GGD-00-79 Economic Study of the CNMI

goods and services and with taxes and fees paid to the government. The 

garment and tourist industries account−directly or indirectly−for about 

80 percent of the employment in the CNMI and for over 90 percent of the 

economy’s exports, according to an October 1999 economic study of the 

CNMI prepared under the direction of the Northern Marianas College with 

funding from the Department of the Interior that GAO reviewed and found 

reasonable. These industries also contribute to the government’s total 

revenue. For example, in 1998, the garment industry directly contributed 

about $52 million, or 22 percent, of the government’s $234 million budget. 

In 1997−the latest date for which data on visitor expenditures are 

available−the tourist industry contributed at least $34 million, or 

14 percent, of that year’s budget of $248 million. The garment and tourist 

industries and the workers that they employ also require government 

spending for services and infrastructure, but GAO questions the conclusion 

of a January 1999 study commissioned by the Department of the Interior 

that this spending exceeds the industries’ revenue contributions.

The garment and tourist industries are dependent on foreign workers for 

much of their workforce because the labor pool of local residents, even 

including those currently unemployed, is insufficient to support an 

economy of the size and scope that exists in the CNMI. For example, on 

Saipan−the most populated island in the CNMI and its business center−the 

current labor force of local residents contains only about 12,800 people, 

including U.S. citizens not born in the CNMI and non-U.S. citizens from the 

Freely Associated States who have the right of residency and employment 

in the CNMI. However, the economy of Saipan employs about 43,700 

people. All sectors of the economy, including the government sector, hire 

foreign workers. In addition, foreigners own and operate businesses in the 

CNMI. The economy of the CNMI is vulnerable to outside events because of 

its heavy reliance on only two industries, which may be affected by 

changes in Asian economic conditions, legislation in the United States, or 

international trade agreements. For example, changes that reduced or 

eliminated the advantages of manufacturing garments in the CNMI might 

cause some or all of the CNMI garment industry to relocate to other 

countries, causing job losses among local residents and revenue losses to 

the CNMI government.

The CNMI is more self-sufficient fiscally than other outlying areas, such as 

Guam, Puerto Rico, the U.S. Virgin Islands, and the Freely Associated 

States. Between 1994 and 1997, about 87 percent of the CNMI government’s 

general revenue came from local sources rather than from payments from 

the U.S. Treasury. The ratio of locally derived government revenue to gross 
Executive Summary

Page 10 GAO/RCED/GGD-00-79 Economic Study of the CNMI

domestic product (GDP) in the CNMI is also higher than that of most other 

outlying areas and is larger than the comparable ratio for all levels of 

government in the United States.

Using data on the major taxes and fees, GAO found that for the period 1993 

through 1998, the taxes and fees paid by the businesses in the CNMI 

garment industry represented about 5.0 percent of their gross receipts, 

while for the period 1991 through 1996, the taxes and fees paid by the 

businesses in the U.S. garment industry represented about 3.3 percent of 

their gross receipts. However, the owners of those businesses may not 

ultimately bear the full economic burden of the taxes and fees that they 

pay. Some of the burden may be shifted to consumers, workers, and 

investors in other industries, but the extent of this shifting is unknown.

Principal Findings

The Garment and Tourist 

Industries Are the Driving 

Forces of the CNMI 

Economy

The economy of the CNMI relies on the garment and tourist sectors for 

most of its employment, exports, and production. Both industries 

contribute directly to the economy by generating employment and bringing 

in revenue from outside the CNMI via exports. For example, in 1999, the 

garment industry directly employed about 16,000 workers, including 

13,500 foreign workers and 2,500 local residents. The tourist industry, in 

1995, directly employed about 9,600 workers, including 6,900 foreign 

workers and 2,700 local residents. According to an October 1999 economic 

study that GAO reviewed and found reasonable, these two industries 

produced about 96 percent of the CNMI’s exports and were responsible for 

about 85 percent of the CNMI’s total economic activity.5

5

An Economic Study for the Commonwealth of the Northern Mariana Islands, Business 

Development Center, Northern Marianas College, with funding provided by the Office of 

Insular Affairs, U.S. Department of the Interior, Oct. 1999.
Executive Summary

Page 11 GAO/RCED/GGD-00-79 Economic Study of the CNMI

The rapid growth of the CNMI’s garment and tourist industries during the 

past two decades has contributed to the development of other businesses 

and the growth of the government sector. These industries are linked to the 

rest of the economy through the purchases of goods and services from 

other industries, tax revenue paid to the government, and workers’ 

spending. In addition, these industries and their workers create a need for 

increased government spending. A January 1999 study commissioned by 

the Department of the Interior concluded that the garment and tourist 

industries and the workers they employ require government spending for 

services and infrastructure that exceeds what they contribute in revenue.6

However, because that study had a number of methodological weaknesses 

(in particular, understating the contributions made by the garment and 

tourist industries to the economy and overstating the industries’ impact on 

government spending), GAO believes that this conclusion is questionable.

Currently, the CNMI’s tourist industry is in a slump caused by the Asian 

economic crisis of 1998 and 1999. The number of visitors to the CNMI 

declined by more than 30 percent between 1997 and 1999, which has 

caused some businesses to close and others to lay off workers. In contrast, 

the garment industry, which sells primarily to the U.S. market, has grown 

since 1997, partially insulating the economy of the CNMI from the Asian 

downturn. Nonetheless, the economy is worse off today than it was in 1997, 

and government revenue was about $32 million lower in 1999 than in 1997, 

a reduction of about 13 percent.

The labor pool of local residents, even including those currently 

unemployed, is insufficient to provide labor for the CNMI economy. In 

1999, the total size of the resident workforce on Saipan was only about 

12,800,7

 while the economy of Saipan employed about 43,700. As a result, 

both the garment and tourist industries are heavily dependent on foreign 

workers. For example, in 1999, foreign workers constituted about 

84 percent of the garment industry’s workforce of 16,000. All sectors, 

including the government, employ foreign workers because they require 

6

CNMI Fiscal Impact Report: The Impact of Non-Residents on the Economy and Public 

Infrastructure of the Commonwealth of the Northern Mariana Islands, prepared for the 

Office of Insular Affairs, U.S. Department of the Interior, by Robert W. Rudolph and James C. 

Nicholas, Jan. 1999.

7

This group includes, in addition to U.S. citizens born in the CNMI, U.S. citizens from Guam 

and elsewhere (including the U.S. mainland) and those non-U.S. citizens born in the Freely 

Associated States who have the right of residency and employment in the CNMI.
Executive Summary

Page 12 GAO/RCED/GGD-00-79 Economic Study of the CNMI

workers with skills not available in sufficient supply among the resident 

workforce. Foreigners also contribute entrepreneurial skills and capital to 

start businesses, and many businesses in the CNMI are owned by non-U.S. 

citizens.

Because of its reliance on only two large industries and on foreign workers, 

the economy of the CNMI is vulnerable to events that affect these 

industries or the terms under which foreign workers may enter and work in 

the CNMI. A tourist industry revival, which would have a positive effect on 

the overall economy, depends on continued improvement in the economies 

of Asian countries. If changes in international trade agreements or 

legislative action reduced or eliminated the tariff, quota, and labeling 

advantages of manufacturing garments in the CNMI, some or all of the 

CNMI garment industry might relocate to countries with lower wages.8

Such relocation could cause local residents to lose their jobs and the CNMI 

government to lose tax revenue. Major changes in the availability of foreign 

workers or in their terms of employment would also have a large impact on 

the economy because of the importance of foreign workers in all sectors.9

The CNMI Is More SelfSufficient Fiscally Than 

Other Outlying Areas 

In recent years, the government of the CNMI has relied for its revenue on 

local sources−taxes, licenses, fees, and other charges−to a greater extent 

than have other outlying areas, such as Guam, Puerto Rico, the U.S. Virgin 

Islands, and the Freely Associated States. Between 1994 and 1997, the 

CNMI government obtained about 87 percent of its general revenue from 

local sources, while payments from the U.S. Treasury accounted for about 

13 percent. During this period, other outlying areas obtained more of their 

general revenue from federal contributions and less from local sources. 

Taxes were the predominant source of the CNMI’s local revenue during this 

period, accounting for about 70 percent of local revenue. The largest 

source of tax revenue in the CNMI was the business gross receipts tax, 

which accounted for about 37 percent of total tax revenue.

8

These advantages include tariff-free and quota-free access to the U.S. market and the ability 

to identify the garments as having been made in the United States. Even if tariffs and quotas 

were completely eliminated, the additional advantage that garments manufactured in the 

CNMI can bear labels identifying them as having been made in the United States would 

remain. 

9

Two bills introduced into the 106th Congress, H.R. 730 and S. 1052, could make it harder for 

foreign workers to work in the CNMI.
Executive Summary

Page 13 GAO/RCED/GGD-00-79 Economic Study of the CNMI

GAO estimated that the CNMI’s ratio of government revenue derived locally 

to GDP was between 29 and 45 percent in the period 1994 through 1997, 

which was higher than the ratio for most other outlying areas. This ratio, 

which expresses the fraction of the overall level of economic activity or 

taxable capacity used to finance the government sector, is often used to 

measure a country’s tax effort. GAO provided range estimates for this ratio 

for the CNMI and other outlying areas because the GDP data necessary for 

more precise estimates were unavailable. The ratio of local revenue to GDP 

in the CNMI was also higher than that for the United States (federal, state, 

and local governments combined), which was 28 percent in 1996.

Data Suggest That the 

Garment Industry in the 

CNMI Pays a Higher Share 

of Its Gross Receipts as 

Taxes and Fees Than the 

Garment Industry in the 

United States 

Available data suggest that the taxes and fees paid by the garment industry 

in the CNMI represent a higher share of the industry’s gross receipts than 

do the taxes and fees paid by the garment industry in the United States.10

GAO used data on the major taxes and fees paid and found that from 1993 

through 1998, the taxes and fees paid by the garment industry in the CNMI 

represented about 5.0 percent of its gross receipts, while from 1991 through 

1996,11 the taxes and fees paid by the garment industry in the United States 

represented about 3.3 percent of its gross receipts. 

While remaining legally responsible for paying a tax or fee, garment 

manufacturers, like other businesses subject to taxation, may be able to 

shift some or all of the burden of a tax or fee to other groups in the 

economy. Such shifts would occur through changes in the prices of their 

products or the prices that they pay to acquire labor or materials used to 

make garments. The unavailability of data on supply and demand 

conditions in specific markets, such as the markets for garments and 

garment industry labor in the United States and the CNMI, prevented GAO 

from estimating the ability of the garment industry in the CNMI to shift its 

tax burden compared with the ability of the garment industry in the United 

States to do the same.

10Although some tax data were unavailable, the unmeasured taxes and fees that CNMI and 

U.S. garment manufacturers may have paid are likely to be small relative to the measured 

taxes and fees. Therefore, even if GAO had been able to include these data, the finding that 

garment manufacturers in the CNMI pay taxes and fees that represent a higher percentage 

of gross receipts than do garment manufacturers in the United States would not likely have 

changed.

11Because of processing and publishing lags, no published data beyond 1996 are yet 

available.
Executive Summary

Page 14 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Agency Comments and 

GAO’s Evaluation

GAO provided copies of a draft of this report to the Governor of the CNMI 

and the Department of the Interior for their review and comment. The 

CNMI did not provide an overall assessment; however, it made several 

suggestions for including additional information. In particular, it suggested 

that GAO (1) add information showing that the percentage of the total 

workforce employed by the CNMI government is smaller than in Guam or 

the United States; (2) state that additional nonwage benefits, such as health 

care, given to foreign workers tend to hold down their wages, while the 

wages of local workers tend to be higher to compensate for the lack of such 

benefits; and (3) attribute the high unemployment rate among U.S. citizens 

in the CNMI and a similarly high rate in Guam to the recent economic 

recession in Asia. GAO believes that comparing the total workforce of the 

CNMI to that of Guam and the United States would be misleading because 

the CNMI workforce includes a large proportion of foreign workers who 

temporarily reside in the CNMI and are primarily employed in the private 

sector. Guam and the United States do not have similar proportions of 

foreign workers to total workforce. GAO also believes that there are 

insufficient data on the actual value of benefits, such as health care, 

received by all workers or on deductions to foreign workers’ wages to be 

able to asses the net value of these benefits. Furthermore, GAO does not 

believe that there is enough information about the actual nature and causes 

of unemployment in the CNMI to attribute the unemployment to the 

economic recession in Asia. 

The Department of the Interior stated that while GAO’s report accurately 

depicts the dominant role of the garment and tourist industries in the 

CNMI’s economy, the economic analysis underlying the report is flawed 

because it did not evaluate the effect of these dominant industries and their 

alien employees on the residents who are U.S. citizens and the economic 

development of the CNMI. GAO disagrees that the economic analysis in the 

report is flawed. Contrary to the Department’s assertion, the report 

evaluates the impact of the garment and tourist industries and the use of 

foreign workers on the CNMI economy and finds that the local resident 

population—most of whom are U.S. citizens−have benefited from the 

economic growth and development in the past 20 years because incomes 

and employment opportunities have increased with economic growth. The 

growth in the economy has been driven by the growth of the garment and 

tourist industries and the use of foreign workers. The Department also 

believes that the report gives an erroneous impression that an economy 

based on two dominant industries and foreign labor is beneficial in the long 

run. GAO’s report does not give this impression. While clearly laying out the 
Executive Summary

Page 15 GAO/RCED/GGD-00-79 Economic Study of the CNMI

benefits provided to date, GAO’s report clearly states that the CNMI’s 

reliance on the garment and tourist industries and on foreign workers 

makes it vulnerable to outside events that impact either industry or the 

economy’s access to foreign workers. Therefore, GAO agrees with the 

Department that the future development of the CNMI economy is a 

concern. 

The Department questioned the validity of GAO’s comparison of the CNMI’s 

revenue-raising efforts with those of other outlying areas. In particular, the 

Department questioned the inclusion of the Freely Associated States 

among the outlying areas and GAO’s method for calculating revenues from 

local sources and federal transfers for Guam and the CNMI. Although the 

Freely Associated States are sovereign nations, GAO believes that they 

should be included because they receive federal funds, they have a shared 

history with the CNMI, and their citizens have the right of residency in the 

CNMI. The Department stated that revenue collected by the CNMI 

government from the user fee that the garment industry pays on garments 

exported to the United States should be considered federal transfers rather 

than local revenue. GAO disagrees because nothing required the CNMI to 

impose a user fee on garment exports. Instead, the decision to apply the 

user fee was an autonomous act of the government of the CNMI, 

independent of the exemption from U.S. tariffs. Therefore, it is appropriate 

to include the revenue received from the user fee as local revenue when 

evaluating the revenue-raising effort of the CNMI. 

The Department further asserted that the taxes and fees actually borne by 

the garment industry in the CNMI may be quite small because the user fee 

is shifted to other groups. GAO did not address this issue because data 

limitations prevent a reliable estimate of the extent to which specific 

economic groups actually bear the burden of these taxes. The Department 

also said that the employer’s share of Social Security taxes, which GAO 

included in calculating the taxes and fees paid by the garment industry in 

the CNMI, should not be included. GAO disagrees because these taxes are 

included for U.S. garment manufacturers; hence, it is appropriate to include 

them for the CNMI industry as well. 

More detailed discussion of the comments from the CNMI and the 

Department of the Interior are included at the end of chapters 2 and 

3. These agencies also provided clarification on several technical points 

that have been included in the report as appropriate. The full text of the 

comments and GAO’s responses are included in appendix III for the CNMI 

and appendix IV for the Department of the Interior.
Page 16 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Chapter 1

Introduction Chapte1r

The Covenant establishing the Commonwealth of the Northern Mariana 

Islands (CNMI), a U.S. territory in the western Pacific, gave the CNMI 

authority to establish its own immigration and minimum wage policies. The 

CNMI has used this authority (1) to allow many foreign workers, primarily 

from the Philippines and China, to enter and work in the CNMI and (2) to 

establish a minimum wage, currently $3.05 per hour, that is substantially 

below the minimum wage in the United States of $5.15 per hour. The 

foreign workers are employed throughout the economy but work primarily 

in the garment and tourist industries, which are the two largest industries 

in the CNMI. The garment industry in the CNMI has grown rapidly since 

commonwealth status was obtained because garments exported from there 

to the United States are exempt from U.S. textile quotas and import tariffs 

or duties. In addition, the garments can be sold with labels identifying them 

as having been made in the United States. The tourist industry also grew 

rapidly until 1997 but has declined since then because of the downturn in 

the economies of Asian countries.

Some Members of the Congress and others have expressed concern that 

the garment industry in particular and its foreign workers may have a 

negative fiscal impact on the CNMI government. Specifically, they have 

suggested that the costs of providing infrastructure to support the garment 

industry and of providing government services, such as health care and 

education, for the industry’s workers and their dependents may exceed the 

increased government revenue the industry generates. Conversely, others 

have expressed the view that the garment and tourist industries and the use 

of foreign workers have contributed substantially to the growth of the 

CNMI economy. Specifically, they believe that the revenue generated from 

these industries has contributed significantly to maintaining an economy 

that is self-sufficient and not as dependent on federal subsidies as are the 

economies of other outlying areas.1

 However, there is uncertainty about 

whether the revenue-raising efforts of the CNMI, particularly the level of 

taxes and fees paid by the garment industry, are sufficient to meet local 

needs, necessitating the expenditure of federal funds to subsidize the CNMI 

1

In this report, we use the term outlying areas to include, in addition to the CNMI, American 

Samoa, Guam, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and the Freely 

Associated States (the Republic of the Marshall Islands, the Federated States of Micronesia, 

and the Republic of Palau). The Freely Associated States are former components of the 

Trust Territory of the Pacific Islands that are now sovereign nations with compacts of 

association with the United States. American Samoa is omitted from the comparisons in this 

report because no current data for locally derived government revenues are available for 

that territory.
Chapter 1

Introduction

Page 17 GAO/RCED/GGD-00-79 Economic Study of the CNMI

economy. Furthermore, there are additional concerns about the 

appropriateness of using foreign workers to manufacture garments in the 

CNMI that are sold in the United States with a label identifying them as 

having been made in the United States and about possible violations of 

existing labor and worker safety laws. These include nonpayment of 

overtime pay rates for working beyond 40 hours per week and providing 

workers’ housing that does not meet minimum safety and health standards.

Historical Background 

on the Relationship 

Between the United 

States and the 

Northern Mariana 

Islands 

The Northern Mariana Islands are a group of 14 islands in the Pacific 

Ocean, lying just north of Guam (see fig. 1). The Islands are located about 

3,200 miles west of Honolulu, 5,500 miles west of Los Angeles, 1,500 miles 

south of Tokyo, and 1,400 miles east of Manila. 
Chapter 1

Introduction

Page 18 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Figure 1: Map of the Pacific Showing the Northern Mariana Islands

The United States took control of the Northern Mariana Islands from Japan 

after heavy fighting during the latter part of World War II. In July 1947, the 

U.S. Congress approved by joint resolution the Trusteeship Agreement for 

the former Japanese Mandated Islands,2

 making the United States 

responsible to the United Nations for the administration of the Northern 

Marianas and other island groups, such as the Marshall Islands. This 

agreement established the United Nations Trust Territory of the Pacific 

Islands, with the Northern Mariana Islands constituting one of the districts 

of the Trust Territory. Under this agreement, the United States was 

obligated to promote the political, economic, social, and educational 

advancement of the Islands’ inhabitants. In the 1950s and early 1960s, the 

Northern Marianas were isolated from outsiders except U.S. military 

2

Japan had a mandate from the League of Nations to exercise authority over these islands.

0 1000

Miles

2000

Manilla

Philippines Commonwealth of the

Northern Marianas

Guam

United

States

Los

Angeles

Australia

China

Tokyo

Japan

Hawaii

Honolulu
Chapter 1

Introduction

Page 19 GAO/RCED/GGD-00-79 Economic Study of the CNMI

personnel. The Americans built roads, power stations, sewerage and water 

systems, hospitals, and schools, but the isolation kept substantial 

economic development from occurring. Apart from the military activity, the 

economy of the Northern Marianas consisted of subsistence farming and 

fishing, small-scale manufacturing, and trading.

Subsequently, the Northern Marianas sought a future political status that 

provided self-government and permanent ties to the United States. Hence, 

the Northern Marianas began negotiating differing political arrangements 

with the United States. As a result of these negotiations, in March 1976, 

President Ford signed a joint resolution of the Congress approving the 

Covenant to Establish a Commonwealth of the Northern Mariana Islands in 

Political Union With the United States of America (P.L. 94-241).

The first elected government took office in the Northern Marianas in 

January 1978, although the Islands remained a part of the Trust Territory of 

the Pacific Islands under the jurisdiction of the Secretary of the Interior.3

However, by Presidential Proclamation of November 3, 1986, and as a 

result of a valid act of self-determination pursuant to section 1002 of the 

Covenant, the Northern Mariana Islands ceased to be bound by the United 

Nations Trusteeship Agreement of 1947. Accordingly, the Northern Mariana 

Islands became a commonwealth in political union and under the 

sovereignty of the United States. The Office of Insular Affairs within the 

Department of the Interior is responsible for assisting the CNMI in 

achieving its political, economic, and social goals. 

Key Provisions of the 

Covenant Affect Wages, 

Exports, Immigration, and 

Taxes

The Covenant establishes a unique political relationship between the CNMI 

and the United States. It places the CNMI under U.S. sovereignty and 

provides for U.S. citizenship for people born in the CNMI, yet pledges 

self-government for local affairs. A basic objective of the Covenant is to 

encourage economic growth and a standard of living comparable with that 

in the United States. Accordingly, the Covenant provides several economic 

incentives. Included among them are that (1) the CNMI controls its 

minimum wage because the U.S. minimum wage was considered too high 

for the developing Islands’ economy and (2) businesses in the CNMI 

receive favorable treatment for certain exports to the United States. All 

such exported articles are exempt from federal excise taxes, and articles 

that are made in the CNMI that do not contain foreign substances valued at 

3

This jurisdiction is pursuant to Executive Order 11021, May 1962.
Chapter 1

Introduction

Page 20 GAO/RCED/GGD-00-79 Economic Study of the CNMI

more than 70 percent of the articles’ worth are exempt from U.S. textile 

quotas and from U.S. customs duties. In addition, articles made in the 

CNMI are entitled to bear labels identifying them as having been made in 

the United States. These features give garment manufacturers in the CNMI 

greater access to the U.S. market than is available to garment 

manufacturers in many other nations. 

The Covenant also provides that the CNMI controls its own immigration. 

This provision was included because local representatives were concerned 

that existing U.S. immigration laws would permit excessive immigration to 

the Islands from neighboring Asian countries under terms that would allow 

these immigrants to become U.S. citizens, which would permanently 

overwhelm the local culture. In addition, local representatives recognized 

that the native labor pool of the Northern Marianas was too small and did 

not have all the skills needed to support economic development. Therefore, 

once established, the CNMI developed an immigration policy that allows 

and encourages foreigners to work in the CNMI under temporary, but 

renewable, work permits that do not lead to U.S. citizenship.4

 Many 

foreigners have entered the CNMI to work or to open and operate 

businesses. In fact, as a direct result of the policy decision to restrict 

immigration but permit a large growth in noncitizen residents, the growth 

rate of the population of foreign workers and other non-U.S. citizens has 

outpaced that of the population of U.S. citizens, and at present, noncitizens 

outnumber citizens. About 79,000 people reside in the CNMI, 

approximately 90 percent of whom live on Saipan, which is the major 

business center and the capital of the CNMI. Currently, about 72,000 people 

live on Saipan and about 42,000, or 58 percent, of them are not U.S. citizens. 

Figure 2 shows the rapid rate of population growth on Saipan by citizenship 

status from 1980 to 1999.5

4

Not all noncitizens are foreign workers brought in under the CNMI’s worker permit system. 

Some come from the Federated States of Micronesia, the Republic of the Marshall Islands, 

and the Republic of Palau. Citizens of these countries have the right of residency and 

employment in the CNMI. Other noncitizens are business owners and their families who are 

allowed to stay in the CNMI as long as they remain in business and meet certain 

requirements.

5

We have used Saipan rather than the entire CNMI for this figure because data for 

population by citizenship status of the other islands are not available after 1995. 
Chapter 1

Introduction

Page 21 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Figure 2: Population Growth on Saipan, CNMI, 1980 to 1999

Source: “Recent Trends in Population, Labor Force, Employment, Unemployment and Wages: 

Commonwealth of the Northern Mariana Islands, 1973 to 1999,” draft 1, CNMI Department of 

Commerce, July 1999.

The CNMI government relies on revenue derived locally (taxes, fees, 

charges, etc.) and on payments from the U.S. Treasury. The Covenant 

allows the CNMI to establish its own tax and fee structure. As a result, 

important differences exist in the taxation of business income between the 

CNMI and the United States. In particular, garment manufacturers in the 

CNMI are required to pay a user fee to the CNMI government equal to 

3.7 percent of the gross value of their exports to the United States and a tax 

of up to 5 percent on the gross receipts from sales they make in the CNMI. 

They are also required to pay a fee to the government for each nonresident 

they employ. In contrast, garment manufacturers in the United States are 

required to pay income taxes (sometimes state and local as well as federal), 

property taxes and sometimes sales taxes.

1980 1990 1995 1999

0

10000

20000

30000

40000

50000

60000

70000

80000 Population

U.S. citizens

Non-U.S. citizens

Total population
Chapter 1

Introduction

Page 22 GAO/RCED/GGD-00-79 Economic Study of the CNMI

The Economy Has Grown 

Rapidly Since 1980

Since 1980, the rate of growth of the CNMI economy has been large by any 

measure. Employment, total payroll, the number of businesses, and total 

receipts in the private sector have all grown rapidly. Figure 3 shows the 

percentage growth of several economic variables for the CNMI and Guam.6

The figure shows that the CNMI economy has been expanding and that for 

the variables measured, the rate of growth has been greater than in Guam.

6

We used Guam for a comparison because of its geographical proximity to the CNMI and 

because both have large tourist industries and long-standing relationships with the United 

States. We could not calculate the change in income in constant dollars because we were 

unable to find a consumer price index for the CNMI that went back to 1980. Even had we 

done so, there are many problems with using such an index when the types of goods being 

consumed are changing. In an economy that has grown as rapidly as the CNMI’s has since 

1980, it is likely that the types of goods people routinely purchase−their so-called market 

basket−would be very different today than they were 20 years ago. Therefore, measuring the 

change in the price level of a fixed market basket of goods would not accurately measure 

the change in the cost of living. 
Chapter 1

Introduction

Page 23 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Figure 3: Rate of Change in Selected Economic Variables for the CNMI and Guam, 

1982 Through 1997

Sources: “1997 Economic Census of Outlying Areas: Construction Industries, Manufacturers, 

Wholesale Trade, Retail Trade, and Service Industries, Northern Mariana Islands” and “1997 

Economic Census of Outlying Areas: Construction Industries, Manufacturers, Wholesale Trade, Retail 

Trade, and Service Industries, Guam,” U.S. Department of Commerce, Economics and Statistics 

Administration, Bureau of the Census. 

The wages and incomes of local residents and foreign workers have 

generally risen over the period from 1980 to 1999, with more rapid growth 

occurring in the 1980s. Figure 4 shows the nominal wages for local and 

foreign workers in the CNMI during that period.7

 The wages of local 

7

We did not calculate the change in income in constant, or inflation-adjusted, dollars 

because we were unable to find a consumer price index for the CNMI that went back to 

1980. Furthermore, the finding that the wages of local workers rose faster than foreign 

workers’ wages from 1980 through 1999 would be the same whether we adjusted for price 

level changes or not. 

Change in number of

businesses

Change in annual

payroll

Change in number of

employees

0

200

400

600

800

1000

1200

1400

1600 Percentage change

CNMI Guam
Chapter 1

Introduction

Page 24 GAO/RCED/GGD-00-79 Economic Study of the CNMI

workers in 1980 were close to the wages of foreign workers, but local 

workers’ wages grew faster over the period up to 1999. 

Figure 4: Average Hourly Wages on Saipan, CNMI, 1980 to 1999

Source: “Recent Trends in Population, Labor Force, Employment, Unemployment and Wages: 

Commonwealth of the Northern Mariana Islands, 1973 to 1999,” draft 1, CNMI Department of 

Commerce, July 1999.

Many foreign and local resident workers currently earn more than the 

CNMI’s minimum wage. Figure 5 shows average wages in 1999 for selected 

occupations by place of birth of the worker. This figure also shows that the 

difference between wages earned by those born in the CNMI and those 

born in Asia is more pronounced in some occupations than in others. 

Specifically, a greater percentage difference exists between local and 

foreign workers’ wages in less skilled occupations−such as the service 

industries and operators, fabricators, and laborer−than in more skilled 

positions−such as managerial and professional or technical, sales, and 

administrative positions. 

1980 1990 1995 1999

0

2

4

6

8

10

12 U.S. dollars

Wages for workers born in CNMI

Wages for workers born in Asia
Chapter 1

Introduction

Page 25 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Figure 5: Average Hourly Wages in Selected Occupations, by Place of Birth, 1999

Source: “Recent Trends in Population, Labor Force, Employment, Unemployment and Wages: 

Commonwealth of the Northern Mariana Islands, 1973 to 1999,” draft 1, CNMI Department of 

Commerce, July 1999.

The Use of Foreign Workers 

and Other Issues Are 

Controversial

Substantial controversy surrounds the use of foreign workers to 

manufacture garments in the CNMI that are then exported to the United 

States and sold with a label identifying them as having been made in the 

United States. One area of controversy concerns the appropriateness of 

allowing garments to be sold in the United States with a “Made in the 

U.S.A.” or similar label when the workers are mostly noncitizens and many 

are paid less than the U.S. minimum wage. Interested parties in the United 

States have argued in favor of legislation that would make the immigration 

and minimum wage policies of the CNMI equivalent to those of the United 

States if such labeling is to remain. Other parties have stated that such 

Service

industries

Managerial and

professional

Operators,

fabricators and

laborers

Technical, sales

and

administrative

0

2

4

6

8

10

12

14

16 U.S. dollars

Wages for workers born in CNMI

Wages for workers born in Asia
Chapter 1

Introduction

Page 26 GAO/RCED/GGD-00-79 Economic Study of the CNMI

changes, particularly restrictions on the use of foreign workers, would have 

a serious negative impact on the economy of the CNMI.

Concerns have also been raised about possible violations of existing labor 

and worker safety laws and, in general, about the exploitation of foreign 

workers. In the early 1990s, the U.S. Department of Labor cited a number of 

garment factories in the CNMI for violations of federal wage and labor 

laws.8

 In addition, the U.S. Department of Labor’s Occupational Safety and 

Health Administration began to cite businesses in the CNMI for providing 

foreign workers with living quarters that did not meet minimum safety and 

health standards. Stories in the print and broadcast media have alleged 

many concerns, including substandard working and living conditions; labor 

law violations, such as nonpayment of overtime pay rates for working 

beyond 40 hours per week; leaving workers stranded and without any 

means to feed themselves or to return to their countries of origin; and 

forced prostitution. 

These concerns have led to several lawsuits. Three class action lawsuits 

were filed on behalf of garment workers in the CNMI in February 1999. Two 

of the lawsuits were filed in California: one in state court and the other in 

federal court. The defendants in these suits include many leading American 

retailers and brand name garment manufacturers. The plaintiffs allege in 

the state case that the defendants trafficked in “hot goods” made in 

violation of California’s business practices and engaged in misleading 

advertising by not adhering to their codes of conduct. In the federal case, 

the plaintiffs allege violations of the Racketeer Influenced and Corrupt 

Organizations Act and international human rights law. Nine defendant 

companies have settled the federal lawsuit with the plaintiffs, but other 

defendants remain.9

 Those companies that reached settlement agreed to 

establish a fund to finance an independent monitor of working conditions 

in garment factories in the CNMI, to make payments to workers, to create a 

public education campaign, and to pay attorneys’ fees. The third lawsuit 

was filed in federal court in the CNMI. In that lawsuit, the plaintiffs allege 

violations of wage and hour laws, including the minimum wage law of the 

CNMI, by various garment manufacturers in the CNMI. In addition to those 

lawsuits, the federal government filed two civil rights lawsuits against one 

8

All aspects of the federal Fair Labor Standards Act, except for the minimum wage 

provision, apply in the CNMI.

9

For the remaining defendants, the case has been moved to Hawaii.
Chapter 1

Introduction

Page 27 GAO/RCED/GGD-00-79 Economic Study of the CNMI

of Saipan’s largest garment manufacturers for discriminating against 

pregnant workers because the company refused to allow them to collect 

their benefits and for attempting to fire a worker for trying to organize a 

union. 

The CNMI Department of Labor and Immigration believes that working 

conditions in the garment industry have improved in recent years because 

of the enhanced law enforcement by the Department and pressure from 

buyers in the United States. In addition, the Philippines maintains a 

consulate in the CNMI to assist its citizens who work there. This assistance 

includes reviewing employment contracts to make sure that they comply 

with existing laws. Also, supporters of the current status under which the 

CNMI has the authority to set its own wage and immigration policies point 

out that foreign workers in the CNMI generally receive higher wages and 

more protection than workers in other developing countries, where 

businesses are not subject to the Fair Labor Standards Act and the 

Occupational Safety and Health Act.

The Department of the Interior has raised the concern that children born in 

the CNMI to mothers who are not U.S. citizens will create substantial costs 

for local and federal governments until they reach working age. According 

to data provided by the Department, the percentage of babies born to 

non-U.S. citizens has been rising since 1985—about 26 percent of all births 

in the CNMI in 1985 were to mothers who were not U.S. citizens, compared 

with about 51 percent of the births in 1998. A significant number of these 

births were to mothers from the Marshall Islands, the Federated States of 

Micronesia, and Palau—births to mothers from these countries accounted 

for about 14 percent of all births in the years 1990 through 1993.10

Objectives, Scope, and 

Methodology

To provide information on some of the issues surrounding the CNMI, the 

conference report accompanying the Omnibus Consolidated and 

Emergency Supplemental Appropriations Act of 1999 mandated that we 

complete analyses and reports concerning the CNMI. The conference 

report was not specific on what these analyses should address. Through 

subsequent discussions with the offices of the Subcommittees on Interior 

and Related Agencies of the House and Senate Committees on 

10As discussed in this report, citizens of these countries have the right of residence in the 

CNMI, independent of their employment status, and so are considered to be local residents 

rather than foreign workers.
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Introduction

Page 28 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Appropriations, we agreed to address the following questions: (1) What has 

been the impact of the garment and tourist industries and the use of foreign 

workers on the economy of the CNMI? (2) How do the revenue-raising 

efforts of the CNMI and the payments that the CNMI receives from the 

U.S. Treasury compare with those of other U.S. territories and Freely 

Associated States? (3) How do the taxes and fees paid by the garment 

industry in the CNMI, expressed as a percentage of gross receipts, compare 

with the taxes and fees paid by the garment industry in the United States? 

In this report, we address the first question in chapter 2 and the second and 

third questions in chapter 3.

To determine the impact that the garment and tourist industries and foreign 

workers had on the economy of the CNMI, we collected and reviewed 

studies and data from a variety of sources and met with many CNMI and 

U.S. government officials and knowledgeable individuals in the private 

sector. These studies were conducted by a variety of entities, including the 

Office of Insular Affairs, Department of the Interior; the Hay Group, a 

management consulting company; the Bank of Hawaii; the Business 

Development Center of the Northern Marianas College; and the 

Congressional Research Service. We obtained data on a wide variety of 

economic variables from Census reports, agencies of the CNMI 

government, and the studies mentioned above. In general, we did not 

express data on economic variables in the CNMI in constant dollars, even 

when showing changes over time, because we were unable to find an index 

of consumer prices for the CNMI that went back to 1980. Even if we had 

been able to find an index, there would have been problems using it 

because of major changes in the types of goods and services purchased in 

the CNMI during this period. Where appropriate, we noted the impact of 

using an index of price change for the United States in measuring changes 

over time. However, we did not emphasize those results because of 

considerable uncertainty about whether such a measure is a good proxy for 

a measure of cost of living changes in the CNMI.

We discussed the impact of the garment and tourist industries and foreign 

workers with government officials and individuals in the private sector, 

both in Washington, D.C., and while visiting the CNMI. The CNMI 

government officials we met with included the Lieutenant Governor; the 

CNMI Resident Representative to the United States; the Secretaries of 

Commerce, Labor and Immigration, and Finance; the Special Assistant for 

Management and Budget and the Special Advisor for Finance and Budget, 

Office of the Governor; the Executive Director of the Commonwealth Ports 

Authority; the President of Northern Marianas College; and the Managing 
Chapter 1

Introduction

Page 29 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Director, Marianas Visitors Authority. We also discussed with these officials 

(1) how the current minimum wage and immigration policies affect the 

garment and tourist industries and (2) how and to what extent the CNMI 

government employs the resident and foreign workforce. We also met with 

officials from the U.S. Department of the Interior’s Office of Insular Affairs, 

both in Washington and the CNMI, and with the Philippine Consul in the 

CNMI. To gain a private sector perspective, we met with several CNMI 

Chamber of Commerce officials, owners of businesses in the CNMI, the 

manager of a major resort hotel on Saipan, the Executive Director of the 

Employers Council, the Executive Director of the Saipan Garment 

Manufacturers Association, the chief legal counsel and a vice president of a 

major garment manufacturer, several lawyers, and real estate brokers with 

substantial knowledge of the CNMI.

To determine how the revenue-raising efforts of the CNMI and the 

payments that the CNMI receives from the U.S. Treasury compare with 

those of other U.S. territories and Freely Associated States, we obtained 

data on these outlying areas and on their governments’ general revenues, 

including revenue from local sources and payments from the U.S. Treasury. 

We used general rather than total revenue as the basis for comparison 

because the seven outlying areas included in our comparisons all collect 

the types of revenue included in general revenue: taxes, fees, charges for 

services, miscellaneous revenue, and payments from the U.S. Treasury.11

We obtained revenue data from the General Purpose Financial Statements 

from the outlying areas for fiscal years 1994 through 1997.12 We 

recategorized these data using the Bureau of the Census’s classification 

guidelines for government revenue to compare these areas’ revenue-raising 

efforts.13 Using the guidelines, we compiled total revenue, general revenue, 

11Not all areas collect all types of total revenue, such as utility, insurance trust, and liquor 

store revenue.

12The financial statements were audited by independent auditors in accordance with the 

requirements of OMB Circular A-133, revised June 4, 1997, which requires, pursuant to the 

Single Audit Act of 1984 (P.L. 98-502), that state and local governments that expend federal 

aid undergo independent audits of their financial activities. (Circular A-133 rescinds 

Circular A-128, issued Apr. 12, 1985.)

13The governments of these areas differ in size, activities, organization, financial structures, 

and reporting systems. Census has developed a set of standardized concepts and definitions, 

including revenue classification guidelines, to describe government financial activities in a 

meaningful and comparable fashion. In particular, the guidelines eliminate the difficulties 

caused by different governments giving the same revenue collection activity different 

names.
Chapter 1

Introduction

Page 30 GAO/RCED/GGD-00-79 Economic Study of the CNMI

locally derived revenue, and payments from the U.S. Treasury for each 

outlying area by aggregating the revenue from different financial 

accounting funds. As agreed with the staff of the relevant congressional 

committees, in measuring federal transfers and grants to the outlying areas, 

we limited the scope of our comparison to intergovernmental transfers and 

grants. We did not include federal payments directly to individuals residing 

in the outlying areas, federal payments for services rendered, in-kind 

assistance, or the non-imposition of the federal income tax on residents of 

the U.S. territories.

To express locally derived revenue as a percentage of gross domestic 

product (GDP), we obtained GDP estimates for the outlying areas from 

various organizations, including the Central Intelligence Agency, the United 

Nations, the World Bank, the International Monetary Fund, the Asian 

Development Bank, the Bureau of the Census, the Bank of Hawaii, and the 

areas’ governments. We discussed the limitations of the GDP data with 

knowledgeable individuals. The economic data available for the outlying 

areas are limited, making it difficult to make precise estimates of GDP for 

those areas. Various organizations have made different estimates of GDP 

for the same area and year. We used all the published estimates that we 

found because we had no basis to determine which were superior.

To determine how the taxes and fees paid by the garment industry in the 

CNMI, expressed as a percentage of gross receipts, compare with taxes and 

fees paid by the garment industry in the United States, we identified and 

aggregated the taxes paid by the two industries and divided them by the 

industries’ gross receipts. For the CNMI, we obtained data on taxes paid 

and gross receipts earned from 1992 through 1998 from the CNMI 

Department of Finance. We estimated the employer’s share of the Social 

Security taxes that the garment industry was required to pay directly to the 

federal government by applying the appropriate tax rates to wage and 

salary data provided by the CNMI Department of Finance. The data we 

obtained were sufficiently detailed to permit us to exclude the wages and 

salaries that were exempt from these taxes. For the United States, we 

obtained these data for 1991 through 1996 from published Internal Revenue 
Chapter 1

Introduction

Page 31 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Service documents.14 Because of processing and publishing lags, no 

published data beyond 1996 are yet available.

We discussed with knowledgeable individuals the limitations of the 

garment industry tax data available to us and the limitations of using the 

ratio of taxes paid as a percentage of gross receipts for comparing the tax 

burdens borne by the CNMI and U.S. garment industries. Data on taxes 

paid are unavailable for a few of the taxes paid by garment manufacturers 

in each jurisdiction. In addition, taxes paid can be a misleading indicator of 

tax burden when taxes levied on business are actually borne by other 

groups such as consumers or workers. The unavailability of data on supply 

and demand conditions in specific markets, such as the markets for 

garments and garment industry labor in the United States and the CNMI, 

prevented us from estimating the ability of the garment industry in the 

CNMI to shift its tax burden compared with the ability of the garment 

industry in the United States to do the same. However, taxes paid as a 

percentage of gross receipts was the best proxy for tax burden available to 

us. We did not have sufficient data from either tax returns or financial 

statements for CNMI garment manufacturers to estimate net economic 

income. Thus, we could not measure net economic income, or the ability to 

pay taxes, for this industry. 

We conducted our review from February 1999 through February 2000 in 

accordance with generally accepted government auditing standards. In 

conducting our work, we did not independently verify or test the reliability 

of the data provided by the CNMI government or of the data obtained from 

other sources. However, we compared data from different sources for 

consistency and relied on the best data available. Furthermore, in 

agreement with the offices of the responsible subcommittees, we did not 

assess whether the Covenant should be changed to eliminate the CNMI’s 

authority to control its own immigration and minimum wage policies or 

whether the labor and immigration policies, and the manner in which they 

14See Statistics of Income: Corporation Source Books, Internal Revenue Service, 1991, 1993, 

and 1995 editions; and Statistics of Income: Corporation Income Tax Returns, Internal 

Revenue Service, 1992, 1994, and 1996 editions. The data used were for “apparel and other 

textile products manufacturing” by “active corporations with and without net income in that 

year.” The Internal Revenue Service classifies a business as garment manufacturing when 

this activity accounts for the largest percentage of its total receipts. Statistics for the 

garment manufacturing industry may be either understated by amounts reported by 

corporations whose principal activity lies elsewhere or overstated by amounts reported by 

corporations classified as being in the garment industry but having substantial operations in 

other industries.
Chapter 1

Introduction

Page 32 GAO/RCED/GGD-00-79 Economic Study of the CNMI

are implemented, have contributed to labor abuses or poor housing 

conditions of foreign workers in the CNMI. Nor did we assess the 

sociological and political ramifications of the presence in the CNMI of a 

large population of noncitizens. We are currently reviewing the system 

used by the government to track immigration into and out of the CNMI.
Page 33 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy Chapte2r

The garment and tourist industries contribute directly to the CNMI 

economy through the creation of jobs and the production of goods and 

services for export and indirectly through purchases of local goods and 

services from other industries and by taxes and fees paid to the 

government. With respect to the related fiscal impact of these industries on 

the budget of the CNMI government, the garment and tourist industries and 

the workers that they employ require government spending for services 

and infrastructure. For a variety of reasons, however, we believe that the 

conclusion of a January 1999 study commissioned by the Department of the 

Interior that this spending exceeds the contributions that these industries 

make to the revenue of the CNMI government is questionable. The garment 

and tourist industries are dependent on foreign workers because the labor 

pool of local residents is insufficient to support an economy of the size and 

scope that exists in the CNMI. In fact, all sectors of the economy, including 

the government sector, employ foreign workers. The local resident 

population of the CNMI has benefited, economically, in the form of higher 

incomes and better employment opportunities, from the growth of the 

garment and tourist industries and from the presence of foreign workers. In 

spite of its rapid growth and development, the CNMI’s economy is fragile 

because of its reliance on only two industries for the bulk of its private 

sector employment.

The Garment and 

Tourist Industries 

Drive Economic 

Growth and 

Development

The garment and tourist industries are the source of most of the economic 

activity in the CNMI. Both have grown rapidly during the past two decades, 

and their growth has caused the development of other businesses and 

contributed to the growth of the government sector. According to an 

October 1999 economic study of the CNMI, which we reviewed and found 

reasonable, the garment and tourist industries, in 1995, accounted−directly 

or indirectly−for about 80 percent of the employment in the CNMI, about 

96 percent of the economy’s exports, and about 85 percent of the total 

production of goods and services in the economy.1

Garment Industry Has 

Grown Rapidly

The garment industry has grown rapidly since its origin in the CNMI in 1983 

to 34 businesses in 1999. Since 1983, the garment industry has added about 

16,000 jobs, employing about 13,500 foreign and 2,500 local resident 

1

An Economic Study for the Commonwealth of the Northern Mariana Islands, Business 

Development Center, Northern Marianas College, Oct. 1999. This study was sponsored by a 

grant from the Office of Insular Affairs of the Department of the Interior.
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 34 GAO/RCED/GGD-00-79 Economic Study of the CNMI

workers, most of these on Saipan. Given that there were about 

32,700 foreign and 11,000 local resident workers employed in the entire 

Saipan economy in 1999, the garment industry employed approximately 

41 and 23 percent of all these workers, respectively. The garment industry, 

which sells its products almost exclusively to buyers in the United States, 

also generates a large part of the economy’s exports. For example, starting 

at zero garment exports in 1982, exports to the United States had grown to 

about $273 million in 1994 and, by 1998, had reached approximately 

$1 billion. 

Tourist Industry Peaked in 

1997

The tourist industry was already established in 1980, with about 

117,000 visitors who spent about $61 million in the CNMI in that year. The 

industry grew slowly until 1984 and then more rapidly until it peaked in 

1997 with 727,000 visitors spending about $585 million. The tourist industry 

employed about 9,600 workers in 1995—the latest date for which data are 

available. Of these employees, approximately 6,900 were foreign and 

2,700 were local residents. Given that there were about 24,300 foreign and 

11,600 local resident workers employed in the CNMI economy in 1995, the 

tourist industry employed approximately 28 and 23 percent of the foreign 

and local resident workers, respectively. 

Over the Last 2 Years, the 

Garment Industry Has 

Grown, but Tourism Is 

Down 

Since 1997, the garment industry has continued its strong growth, but the 

tourist industry is in a slump. The Asian economic crisis of 1998 and 1999 

caused a reduction of over 200,000 tourists−about a 30-percent reduction in 

the number of visitors coming to the CNMI from 1997 levels. Figure 6 

shows the growth of visitor arrivals and spending from 1980 to 1997 and the 

subsequent drop in tourism. In contrast with the drop in tourism, the 

garment industry’s exports increased by about 30 percent between 1997 

and 1998 and were projected to increase by another 9 percent in 1999. The 

growth in garment production, according to the CNMI, has mitigated the 

impact of the CNMI’s current economic downturn caused by the recession 

in Japan and other Asian countries.
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 35 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Figure 6: CNMI Visitor Arrivals and Spending, 1980 to 1999

Note: Data were unavailable for visitor expenditures in 1998 and 1999.

Sources: “1998 Commonwealth of the Northern Mariana Islands Statistical Yearbook,” Central 

Statistics Division, Department of Commerce, and the Marianas Visitors Authority. 

Although the continued growth of the garment industry has helped, the 

CNMI’s overall economy is in many ways worse off today than it was 

2 years ago. Government revenue is down from its high of $248 million in 

1997 to a projected $216 million in 1999, a reduction of about 13 percent, 

and business gross revenue fell by 14 percent, from $2.6 billion to 

$2.2 billion from 1997 to 1998. Some CNMI businesses have closed and

0

100000

200000

300000

400000

500000

600000

700000

800000

Total number of visitors

Visitor expenditures ($1000s)

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 36 GAO/RCED/GGD-00-79 Economic Study of the CNMI

others have laid off staff. The unemployment rate among U.S. citizens on 

Saipan is about 13 percent.2

Garment and Tourist 

Industries Affect Other 

Sectors of the Economy

The garment and tourist industries are linked to the rest of the economy 

through the purchases of goods and services from other industries, tax 

revenue paid to the government, and workers’ spending. For example, 

when hotels buy food from local farmers, they indirectly support farming 

employment. Similarly, employers rent housing for their foreign workers 

from local owners of real estate, and these rentals add revenue to the local 

economy. Tax revenue also supports government employment and pays for 

government services. To illustrate, in fiscal year 1993, the garment industry 

paid about $13 million directly in taxes and fees, amounting to slightly less 

than 10 percent of the government’s total revenue of about $139 million that 

year. By fiscal year 1998, the taxes and fees paid by the garment industry 

had grown to about $52 million and accounted, directly, for slightly more 

than 22 percent of the $234 million in total general fund revenue. In 1997−

the latest date for which visitor expenditure data are available−the tourist 

industry directly contributed at least $34 million in business gross receipts 

taxes and hotel taxes and an unknown amount of excise and personal 

income taxes.3

 The tourist industry’s taxes accounted for at least 14 percent 

of that year’s general fund revenue of $248 million.

Although foreign workers in the garment and tourist industries send much 

of their earnings back to their countries of origin, the remainder is spent on 

2

According to the CNMI Governor’s Office, Guam also has about 13 percent unemployment, 

and they attribute this to the drop-off of tourism caused by the Asian economic recession. 

However, the Department of the Interior expressed the opinion that the high rate of 

unemployment among U.S. citizens in the CNMI is the result of the growth of the economy 

based on alien labor. We did not determine the causes for the high rate of unemployment 

among U.S. citizens. However, it should be pointed out that the unemployment rate among 

U.S. citizens has been high since at least 1990 in spite of the fact that the economy has 

grown and added many jobs for both local residents and foreign workers over the past 

10 years.

3

The estimate for the tourist industry’s contribution to the government’s revenue is low 

because it reflects only hotel and business gross receipts taxes on visitor expenditures, 

leaving out other important tax sources such as excise taxes or personal income taxes paid 

by employees or employers. Furthermore, the figures for both industries underestimate 

their total contribution because they do not include tax revenue generated by other sectors 

as a result of their economic transactions with the garment and tourist industries. For 

example, the CNMI Finance Department estimates that the garment industry was indirectly 

responsible for an additional $24 million, or 10 percent, of government’s general fund 

revenue in 1998 that was paid by other industries doing business with the garment industry.
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 37 GAO/RCED/GGD-00-79 Economic Study of the CNMI

local goods and services, further stimulating economic activity and 

employment. For example, according to the CNMI Chamber of Commerce, 

China and the Philippines are the two most common destinations for 

long-distance telephone calls from the CNMI because of workers from 

these countries calling home. Therefore, the local telephone company’s 

revenue is affected by changes in the number of foreign workers employed 

in the CNMI, which in turn can affect other CNMI businesses. According to 

the owner of a local business that sells services to the telephone company, 

the reduction in foreign workers employed in the tourist industry over the 

last 2 years triggered by the decline in visitors to the CNMI has reduced the 

telephone company’s revenue. She said that this has resulted in the 

telephone company’s reducing its purchases from her business. 

Another effect of the garment and tourist industries comes in the form of 

lower shipping costs for imported goods. The high volume of goods 

imported into the CNMI to support the garment and tourist industries and 

the exports of garments to the United States increases the total ship traffic 

into and out of the CNMI. Higher traffic leads to greater port revenue and 

also has the effect of making it cheaper to ship consumer goods to the 

CNMI. Some container ships bringing consumer goods from the United 

States leave the CNMI carrying finished garments. Without the ability to 

carry cargo back from the CNMI, shippers would have to charge more to 

bring goods to the CNMI.

The Department of the 

Interior’s Study Is 

Critical of the Garment 

and Tourist Industries, 

but Its Conclusion Is 

Questionable

According to a Department of the Interior’s study released in January 1999, 

the garment and tourist industries and the foreign workers they employ 

have a negative fiscal impact on the CNMI economy.4

 The Interior study 

concludes that the garment and tourist industries and their workers require 

more spending for government services and infrastructure than the 

revenue they contribute to the government. The services and infrastructure 

include education, health care, public utilities, waste treatment and 

disposal facilities, roads, airports, and port facilities. 

4

CNMI Fiscal Impact Report: The Impact of Non-Residents on the Economy and Public 

Infrastructure of the Commonwealth of the Northern Mariana Islands, prepared for the 

Office of Insular Affairs, U.S. Department of the Interior, by Robert W. Rudolph and James C. 

Nicholas, Jan. 1999.
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 38 GAO/RCED/GGD-00-79 Economic Study of the CNMI

We believe that the Interior study is methodologically flawed because it 

understates the contributions made by the garment and tourist industries 

to the CNMI economy and overstates the impact of these industries and 

their workers on the need for government services and infrastructure. 

While these industries and their workers result in a need for increased 

government spending, the Interior study understates the contributions to 

government revenue made by the two industries because it does not 

adequately account for the revenue resulting from the linkages between the 

garment and tourist industries on one hand and the rest of the economy on 

the other. These linkages need to be taken into account−as is done in an 

analysis in a more recent economic study5

−because most of the production 

and employment in the economy is attributable to the garment and tourist 

industries and, consequently, so is much of the government revenue. 

5

An Economic Study for the Commonwealth of the Northern Mariana Islands, prepared 

for the Business Development Center, Northern Marianas College, with funding provided by 

the Office of Insular Affairs, U.S. Department of the Interior, Oct. 1999.
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 39 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Similarly, the Interior study overstates the impact of these industries and 

their workers on government spending by not fully taking into account that 

foreign workers, on average, use fewer government services than do 

residents. Of the services they do use, their impact on government 

spending is likely to be lower than that of the local resident population. For 

example, while Asian and other nonlocal people accounted for over 

52 percent of the total population of the CNMI in 1995, they accounted for 

less than 13 percent of the students enrolled in CNMI schools in the 1995-96 

school year. In contrast, Chamorros, the largest indigenous group of people 

in the CNMI, made up about 24 percent of the population in 1995 but 

accounted for about 58 percent of school enrollment in the 1995-96 school 

year. Similarly, in fiscal year 1996, Filipino households accounted for over 

16 percent of all CNMI households but received less than 8 percent of 

Nutritional Assistance Program benefits. Moreover, in 1999, about 

79 percent of all non-U.S. citizens on Saipan were between 20 and 45 years 

of age compared with about 31 percent of U.S. citizens in that age range. As 

a result, non-U.S. citizens are likely to use fewer medical services and have 

a smaller impact on the provision of government health services and on 

other services associated with the elderly than the local resident 

population. Finally, the birth rate is much lower for non-U.S. citizens than 

for U.S. citizens. For example, according to data provided us by the 

Department of the Interior, in 1998, the number of children born in the 

CNMI to mothers who were not U.S. citizens was about 33 per 1,000 women 

between the ages of 15 and 44 compared with about 117 children born per 

1,000 mothers in that age group who were U.S. citizens. While the children 

of non-U.S. citizens will no doubt impose some costs on local and federal 

governments until they reach working age, their impact per capita on 

government expenditures is likely to be smaller than that of the children of 

local residents.6

The CNMI Economy Is 

Dependent on Foreign 

Workers

The economy of the CNMI could not have grown to its current size and 

complexity without access to imported labor. To illustrate this point, the 

total number of local residents in the Saipan workforce in 1999 was about 

12,800, including about 11,000 employed and 1,800 unemployed people. 

This number includes−along with those U.S. citizens born in the CNMI−U.S. 

6

The data provided by the Department of the Interior also show that the birth rates for 

non-U.S. and U.S citizens alike have fallen from 1990 to 1998—the rates for the two groups 

fell by about 35 and 31 percent, respectively. If this trend continues, the per capita fiscal 

impact of the children born to non-U.S. citizens in the CNMI will become even smaller. 
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 40 GAO/RCED/GGD-00-79 Economic Study of the CNMI

citizens from Guam and elsewhere and those non-U.S. citizens born in the 

Federated States of Micronesia, the Marshall Islands, and Palau, who have 

the right of residency and employment in the CNMI. Between 4,000 and 

4,900 local residents were employed in government positions, between 

6,100 and 7,000 worked in the private sector, and about 1,800 were 

unemployed. In contrast, the size of the workforce in the garment industry 

alone was about 16,000 in 1999, and total employment was about 43,700. 

Figure 7 shows the total labor force of local residents and the total number 

of employed people on Saipan from 1980 to 1999. The gap between total 

employment and the local labor force has grown over time as the economy 

has grown and the gap has been filled with foreign labor.

Figure 7: Saipan Employment and Local Labor Force, 1980 to 1999

Source: “Recent Trends in Population, Labor Force, Employment, Unemployment and Wages: 

Commonwealth of the Northern Mariana Islands, 1973 to 1999,” draft 1, CNMI Department of 

Commerce, July 1999.

1980 1990 1995 1999

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Local labor force

Total employment
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 41 GAO/RCED/GGD-00-79 Economic Study of the CNMI

In addition to an insufficient number of local resident workers, crucial 

skills are also in short supply. Representatives of the private and 

government sectors told us that foreign workers are employed in all sectors 

of the economy because they bring skills to the CNMI that are simply not 

available among the local residents. The government sector−which 

primarily employs U.S. citizens born in the CNMI−hires some foreign 

workers, for example, as teachers and nurses, because the government 

cannot find sufficient qualified local residents. While most Chinese 

workers are employed in the garment industry as machine operators, 

assemblers, and inspectors, workers from the Philippines are widely 

distributed across occupations and contribute managerial and professional 

skills as well as taking less skilled positions. Figure 8 shows the 

distribution of workers by selected occupations for those born in the 

CNMI, China, and the Philippines in 1999. This figure shows that 

employment for the 6,092 workers born in the CNMI is most heavily 

concentrated in skilled and managerial positions. It also shows that the 

16,739 Filipino workers hold a wide range of jobs, while the 12,797 Chinese 

workers are mostly employed as operators, fabricators, and laborers.
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 42 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Figure 8: Distribution of Local and Foreign Workers by Occupation and Place of Birth, 1999

Source: “Recent Trends in Population, Labor Force, Employment, Unemployment and Wages: 

Commonwealth of the Northern Mariana Islands, 1973 to 1999,” draft 1, CNMI Department of 

Commerce, July 1999.

In addition to providing labor services, foreigners own and operate many 

businesses in the CNMI. In 1992, for example, about 42 percent of the 

1,266 businesses in the CNMI were owned by non-U.S. citizens. Foreigners 

own many types of businesses in the CNMI, from small family-run shops to 

large garment factories and hotels. 

Other 1.3%

CNMI

Philippines

Precision

production,

craft and

repair

Operators,

fabricators

and laborers

Service

Technical, sales and

administrative

31.8%

33.6%

14%

12.3%

30.2%

20.8%

14.8%

6.2%

Managerial and

professional

specialty

Technical, sales

and administrative

Service

18.8% Managerial and

professional 

specialty

Other 2.7%

Operators,

fabricators

and laborers

13.5%

Precision

production,

craft and repair

China

Technical, sales and 

administrative 1.9%

Service 4.4% 

Managerial and

professional 

specialty 2.4%

Other 1.3%

Operators,

fabricators

and laborers

86.9%

Precision

production,

craft and repair 3.1%
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 43 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Local Residents Have 

Benefited From 

Economic Growth 

Much of the increase in local residents’ wages since 1980 can be attributed 

to the CNMI’s general economic growth, which has been driven by the 

garment and tourist industries and by access to foreign workers. Local 

residents have enjoyed greater employment opportunities, both within the 

government and in the private sector. For example, on Saipan, the number 

of jobs held by U.S. citizens grew faster than the population of U.S. citizens 

between 1980 and 1999−employment increased by about 183 percent, while 

the population increased by 169 percent. Over the same period, labor 

participation rates for U.S. citizens on Saipan increased from about 

58 percent in 1980 to 68 percent in 1999. In addition to wage income, some 

local residents have earned income by leasing their land to garment and 

tourist businesses. Others have enjoyed increased opportunities to operate 

their own businesses−the number of U.S. citizens on Saipan who were 

self-employed rose from 80 (or 2.5 percent of those employed) in 1980 to 

451 (or 5 percent of those employed) in 1999. Increased tax and fee revenue 

from the garment and tourist industries and their employees has enabled 

the government to expand employment and pay higher wages and salaries, 

actions that have primarily benefited those born in the CNMI who hold 

most of these government jobs. However, a smaller proportion of U.S. 

citizens rely on the government for employment now than in 1980−in 1980, 

about 53 percent of employed U.S. citizens worked for the government, 

while in 1999, 44 percent were government workers. Median income for 

Chamorro households−the largest ethnic group among the local residents−

increased from about $8,900 in 1980 to $30,700 in 1999, in nominal terms 

with more rapid growth occurring in the 1980s than in the 1990s.7

 The 

distribution of income in the CNMI has also changed as the economy has 

grown. In 1980, household and family incomes on Saipan were heavily 

concentrated in the three lowest income categories, with over 55 percent of 

all households earning less than $10,000. By 1999, incomes were more 

evenly distributed among all income categories, and far fewer households 

7

We could not calculate the change in income in constant dollars because we were unable to 

find a consumer price index for the CNMI that went back to 1980. Even had we done so, 

there are many problems with using such an index when the types of goods being consumed 

are changing. In an economy that has grown as rapidly as the CNMI’s has since 1980, it is 

likely that the types of goods people routinely purchase−their so-called market basket−

would be very different today than they were 20 years ago. Therefore, measuring the change 

in the price level of a fixed market basket of goods would not accurately measure the 

change in the cost of living. To put the nominal change in incomes into some perspective, we 

have calculated the change in constant U.S. dollars, using the U.S. GDP deflator. In this case, 

the change in median household income for Chamorro households in 1999 dollars was from 

about $17,000 in 1980 to $30,700 in 1999. 
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 44 GAO/RCED/GGD-00-79 Economic Study of the CNMI

were in the lower income brackets. Figure 9 shows the distribution of 

income for Saipan households in 1980 and 1999 and illustrates the more 

even distribution across income categories in 1999.

Figure 9: Income Distribution for Saipan Households, 1980 and 1999

Source: “Recent Trends in Population, Labor Force, Employment, Unemployment and Wages: 

Commonwealth of the Northern Mariana Islands, 1973 to 1999,” draft 1, CNMI Department of 

Commerce, July 1999.

< $2,500

$2,500 to $4,900

$5,000 to$9,999

$10,000 to $14,999

$15,000 to $24,999

$25,000 to $34,999

$35,000 to $49,999

$50,000 to $74,999

> $75,000

0

5

10

15

20

25

30 Percentage

Income range

1980 1999
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 45 GAO/RCED/GGD-00-79 Economic Study of the CNMI

The Heavy 

Dependence on Two 

Industries Makes the 

CNMI Economy 

Vulnerable to Outside 

Events

Because of its reliance on only two large industries and on foreign workers, 

the economy of the CNMI is vulnerable to events that affect these 

industries or the terms under which foreign workers may enter and work in 

the CNMI. These events include changes in economic conditions in Asia, 

possible changes in international trade agreements, and potential 

legislation.

The downturn in the CNMI economy since 1997 due to the reduction in 

tourism illustrates the importance of economic conditions outside of the 

CNMI, particularly in Asia. A revival of the tourist industry depends on an 

improvement in the economies of Asian countries. Because of the linkages 

to the rest of the economy and the size of the tourist industry relative to the 

overall CNMI economy, a revival of the tourist industry would have positive 

effects throughout the economy.

The future of the garment industry in the CNMI could be influenced by 

changes in international agreements or legislation that may reduce or 

eliminate the advantages of manufacturing garments in the CNMI. 

Currently, garment manufacturers in the CNMI can sell their products to 

buyers in the United States without import tariffs, these imports are not 

subject to quotas, and they can bear labels identifying them as having been 

made in the United States. These features give the garment manufacturers 

in the CNMI greater access to the U.S. market than is available to the 

garment manufacturers in many other nations who face import duties, or 

tariffs, and quotas. However, the 1994 Uruguay Round Agreement on 

Textiles and Clothing calls for World Trade Organization (WTO) members 

to eliminate quotas by 2005. Additionally, under this Agreement, the United 

States agreed to slightly reduce its tariff on imported garments. Therefore, 

one advantage that the CNMI has over locations in WTO countries is 

scheduled to end in a few years. The CNMI would continue to have an 

advantage relative to other WTO members because its garment exports to 

the United States are not subject to tariff. However, although wages in the 

garment industry in the CNMI are typically lower than they are in the 

United States, they are higher than in some WTO member countries. So, 

whether garment production will leave the CNMI for other WTO members 

in 2005 and beyond will depend on whether the value of the benefits 

received from the tariff-free status and the identification of products as 

having been made in the United States offsets the higher wages paid in the 

CNMI. If some or all of the CNMI garment industry relocates, this will cause 

job losses among local residents and revenue losses for the CNMI 

government. 
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 46 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Whether China becomes a member of the WTO may also affect the garment 

industry in the CNMI. Currently, because China is not a member of the 

WTO, the 1994 agreement to eliminate quotas by 2005 does not apply to the 

quota limiting the export of Chinese garments to the United States. Many 

garment factories in the CNMI are owned by Chinese companies. 

Production from these factories has been concentrated in the garment 

categories for which China has traditionally filled its quota. China is now 

negotiating for entrance into the WTO.8

 If China becomes a member, 

depending on the terms of its admission, the quota on garments imported 

from China might also be eliminated by 2005. If so, the garment industry in 

the CNMI might be more likely to shrink. 

Legislation currently being considered by the Congress could affect the 

garment industry in the CNMI by giving garment manufacturers in 

countries in sub-Saharan Africa access to the U.S. market on the same 

terms as garment manufacturers in the CNMI (except for the identification 

of their products as being made in the United States). If this legislation 

becomes law, the future competitiveness of the garment industry in the 

CNMI will depend on the relative differences in productivity; quality; and 

cost of materials, labor, and shipping between the CNMI and potential 

competitors in Africa.9

Finally, the high dependence of the CNMI’s entire economy on foreign 

workers puts it at risk if its access to these workers is disrupted. The right 

of the CNMI to define its own immigration policy and minimum wage can 

be revoked or modified by the Congress. Two bills introduced in the 106th 

Congress, H.R. 730 and S. 1052, could make it harder for foreigners to work 

in the CNMI. Since the CNMI is dependent on foreign workers for most of 

its labor force, major changes in the availability of these workers or in their 

terms of employment would have a large impact on the overall economy.

In testimony before the House Committee on Resources on September 16, 

1999, the Governor of the CNMI acknowledged that the CNMI’s economic 

downturn was caused by its tourist industry’s reliance on Asian economies. 

The Governor also discussed other potential effects on the economy that 

might result from a decline in the garment industry. For example, the 

8

Recently, the United States announced its support for the admission of China to the WTO.

9

The House of Representatives and the Senate each passed bills in 1999 that would, if 

enacted, liberalize trade with African nations. A conference committee will meet in 2000 to 

reconcile differences between the bills.
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 47 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Governor stated that a drastic drop in government revenue would occur in 

fiscal year 2004 if quotas and tariffs applied to garments produced 

elsewhere and exported to the United States are removed, causing the 

CNMI garment manufacturers to leave or reduce their production. He said 

that the loss of the garment industry not only would reduce general 

revenue but would also affect the revenue of the Commonwealth Ports 

Authority derived from garment-related shipments. In addition, without a 

source of replacement revenue, the loss of the revenue from the garment 

industry would leave the Ports Authority unable to meet its payments on its 

long-term bond debt. The loss of the outbound cargo from the garment 

industry would also mean higher shipping costs for the entire CNMI. The 

Governor also said that the Commonwealth Utilities Corporation would 

lose its revenue from the garment industry, which accounts for about 

one-fifth of its total revenue. 

The Governor stated that the government of the CNMI has implemented 

austerity measures in an attempt to deal with the decline in government 

revenues resulting from the downturn in tourism. In January 1998, the 

Governor imposed restrictions on expenditures for personnel, professional 

services, travel, communications, leased vehicles, and the general 

procurement of goods and services. These measures have reduced 

government expenditures by about $52 million. In addition, over 1,000 

government positions have been eliminated through attrition and by 

leaving vacant positions unfilled, and some government offices have 

implemented a reduction in work hours. However, the Governor 

recognized that further reductions in government expenditures present 

major difficulties. According to the Governor, the CNMI is faced with the 

problem of providing full government services to three islands−in the form 

of police, utilities, air and sea ports, education, health, and roads−despite a 

declining economy and without Compact Impact Aid from the federal 

government. The Governor concluded that if it is to maintain its 

self-sufficiency, the CNMI must diversify its economy.

Agency Comments and 

Our Evaluation

Both the CNMI and the Department of the Interior raised concerns about 

this chapter. While the CNMI did not provide an overall assessment of the 

report, it suggested that we add additional language in several places. The 

CNMI suggested that we include information showing that the percentage 

of the total workforce employed by the CNMI government is smaller than in 

Guam or the United States. We believe that comparing the total workforce 

of the CNMI with that of Guam and the United States would be misleading 

because the CNMI workforce includes a large proportion of foreign 
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 48 GAO/RCED/GGD-00-79 Economic Study of the CNMI

workers, who temporarily reside in the CNMI and are primarily employed 

in the private sector. Guam and the United States do not have similar 

proportions of foreign workers to total workforce. The CNMI suggested 

that our report should state that additional non-wage benefits given to 

foreign workers tend to hold down their money wages, while the wages of 

local workers tend to be higher to compensate for the lack of such benefits. 

However, we believe that there are insufficient data on the actual value of 

benefits received by all workers or for deductions to foreign workers’ 

wages to accurately assess the net value of these benefits. The CNMI 

government further suggested that we attribute the high unemployment 

rate among U.S. citizens in the CNMI and a similarly high rate in Guam to 

the recent economic recession in Asia. Our report does not attempt to 

determine the cause of unemployment in the CNMI, and we do not believe 

that there is enough information about the actual nature and causes of 

unemployment in the CNMI to do so. In addition, the CNMI government 

said that we should note in the report that the people of the Freely 

Associated States who come to live and work in the CNMI place a heavy 

burden on the government and increase its deficit problem. Our report 

does not address the issue of the government deficit, and we do not believe 

that there are sufficient data or a reasonable methodology available to 

determine how particular groups in the economy affect the CNMI’s budget 

deficit. 

The Department of the Interior stated that while our report accurately 

depicts the dominant role of the garment and tourist industries in the CNMI 

economy, the economic analysis underlying the report is flawed because it 

did not evaluate the effect of these dominant industries and their alien 

employees on the residents who are U.S. citizens and on the economic 

development of the CNMI. We disagree that the economic analysis in the 

report is flawed. Contrary to the Department’s assertion, the report 

evaluates the impact of the garment and tourist industries and the use of 

foreign workers on the economy and finds that the CNMI’s local resident 

population—most of whom are U.S. citizens−has benefited from the 

economic growth and development in the past 20 years because incomes 

and employment opportunities have increased with economic growth. The 

growth in the economy has been driven by the growth of the garment and 

tourist industries and the use of foreign workers. The Department also 

stated that the report gives an erroneous impression that an economy 

based on two dominant industries and foreign labor is beneficial in the long 

run. Our report does not give this impression. While clearly laying out the 

benefits provided to date, our report clearly states that the CNMI’s reliance 

on the garment and tourist industries and on foreign workers makes it 
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 49 GAO/RCED/GGD-00-79 Economic Study of the CNMI

vulnerable to outside events that have an impact on either industry or the 

economy’s access to foreign workers. Therefore, we agree with the 

Department that the future development of the CNMI economy is a 

concern. 

The Department stated that the report answers its objectives narrowly, 

without reference to the economic, legal, and regulatory context in which 

the CNMI economy operates. It stated further that the report contains data 

and observations that are out of context, incorrectly categorized, and 

misleading. We disagree with this assessment. The report describes in 

detail the historical, economic, legal, and regulatory context in which the 

CNMI economy operates and, in our view, presents an objective description 

of controversial issues. In addition, the report uses data and information 

from a wide range of sources and presents the results in a balanced, 

fact-based, and objective manner. The Department also stated that the 

report does not evaluate the effect of the development and dominance of 

the garment and tourist industries on the CNMI’s population of U.S. citizens 

and further stated that training and employment of local workers has fallen 

behind. We disagree with this assessment. While we did not specifically 

examine the issue of training, the report explains in detail how local 

residents, most of whom are U.S. citizens, have benefited from economic 

growth. For example, we point out that the number of jobs held by U.S. 

citizens has grown faster than the population of U.S. citizens, while labor 

participation rates increased for U.S. citizens in the period between 1980 

and 1999. The report distinguishes between local and foreign residents and 

workers in the CNMI whenever the data were available to do so. 

The Department questioned how much the CNMI economy’s growth has 

contributed to the long-term well being of the CNMI’s citizens. It stated that 

employment of residents has grown little, while the number of foreign 

workers has doubled since 1995. We do not agree that private sector 

employment for local workers has grown little since 1995. For example, 

according to data from the CNMI Department of Commerce, private sector 

employment of U.S. citizens increased by about 24 percent between 1995 

and 1999 on Saipan, while total employment of U.S. citizens, including 

employment in the government sector, rose by about 22 percent. The 

employment of non-U.S. citizens increased by about 43 percent over the 

same period, but this includes about a 27-percent increase in employment 

of people born in the Freely Associated States and therefore considered 

local residents of the CNMI. The Saipan economy added about 2,100 jobs 

for local residents, including about 1,650 jobs for U.S. citizens and 450 jobs 
Chapter 2

The Impact of the Garment and Tourist 

Industries on the CNMI Economy

Page 50 GAO/RCED/GGD-00-79 Economic Study of the CNMI

for workers born in Micronesia. During the same period, the economy 

added about 10,000 new jobs for foreign workers.

The Department stated that under the WTO agreement, the U.S. garment 

quotas will cease on January 1, 2005, and the artificial advantage enjoyed 

by the CNMI will come to an end. It concluded that our report ignores the 

danger of relying on an industry that is scheduled to cease abruptly in 

5 years. We disagree that the garment industry will necessarily cease in 

5 years’ time. The advantages that the CNMI garment industry has over 

many of its international competitors are three-fold: (1) Garment makers in 

the CNMI can sell their products to buyers in the United States without 

import tariffs. (2) The imports are not subject to quotas. (3) The products 

can bear labels identifying them as being made in the United States. Even if 

quotas are eliminated as scheduled, the tariff and labeling advantages will 

remain largely intact, and at this point, it is not possible to determine 

whether the garment industry will remain viable in whole or in part.
Page 51 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Chapter 3

The CNMI Government’s Revenue-Raising 

Effort Chapte3r

The CNMI is more self-sufficient fiscally than other outlying areas. In the 

years 1994 through 1997, the CNMI government collected about 87 percent 

of its general revenue from local sources and relied on payments from the 

U.S. Treasury for about 13 percent. The portion of its budget funded from 

local sources is higher than that of the other outlying areas. For 1994 

through 1997, we estimate that the CNMI’s ratio of government revenue 

derived locally to GDP was between 29 and 45 percent, depending on 

which published estimate for GDP we used. This estimate is higher than 

estimates of that ratio for most other outlying areas. It is also higher than 

the comparable percentage for the United States for all levels of 

government combined−28 percent in 1996.

Available data suggest that the taxes and fees paid by the garment industry 

in the CNMI as a share of gross receipts are higher than those paid by the 

garment industry in the United States.1

 For the period 1993 through 1998, 

the taxes and fees paid by the CNMI garment industry for which data were 

available represented about 5.0 percent of the industry’s gross receipts. In 

comparison, for the period 1991 through 1996 (the latest year for which 

data were available), the taxes paid by the U.S. garment industry 

represented about 3.3 percent of gross receipts. However, the owners of 

businesses in the garment industry in the CNMI and the United States may 

not bear the full economic burden of the various taxes and fees that they 

pay to their respective governments. Garment manufacturers may be able 

to shift some or all of the burden of these taxes to consumers, workers, and 

to investors in other industries. The extent of this shifting is unknown.

The CNMI Is More SelfSufficient Fiscally 

Than Other Outlying 

Areas

The CNMI is less dependent on federal transfers and grants to meet its 

budgetary needs than other outlying areas. Table 1 shows that locally 

derived revenue as a percentage of general revenue for the CNMI was

1

Data were available for most, but not all, of the taxes and fees that the CNMI and U.S. 

garment industries are responsible for paying. The ratio of industry tax payments to gross 

receipts for the CNMI industry would likely continue to be higher than that for the U.S. 

industry if more complete data had been available because the unmeasured taxes and fees 

paid are likely to be small relative to the measured taxes and fees. 
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 52 GAO/RCED/GGD-00-79 Economic Study of the CNMI

higher than that of the other areas and that transfers and grants from 

thefederal government were lower than those of the other areas.2

Table 1: Percentage of Revenue From Local Sources and Federal Transfers and Grants in Relation to Total General Revenue for 

the CNMI and Other Outlying Areas, Fiscal Years 1994 Through 1997

2

We could not precisely determine the Federated States of Micronesia’s (FSM) general 

revenue from federal transfers and grants because data were not available that would allow 

us to distinguish between transfers and grants to the national government of the FSM versus 

to the four FSM state governments. However, on the basis of the available data, the 

combined governments of the FSM are dependent for more than 50 percent of their general 

revenue on federal transfers and grants.

Dollars in millions

Outlying area/revenue 1994 1995 1996 1997

CNMI

General revenue $221.8 $284.5 $305.9 $326.7

Revenue from local sources 86.1% 86.3% 86.6% 88.1%

Revenue from federal transfers and grants 13.9% 13.7% 13.4% 11.9%

Guam

General revenue $807.2 $813.3 $880.3 $876.7

Revenue from local sources 79.5% 82.6% 83.5% 83.6%

Revenue from federal transfers and grants 20.5% 17.4% 16.5% 16.4%

Marshall Islands

General revenue $103.0 $121.5 $126.2 $112.4

Revenue from local sources 47.7% 49.8% 44.0% 39.1%

Revenue from federal transfers and grantsa 52.3% 50.2% 56.0% 60.9%

Palau

General revenue $46.9 $239.7 $75.7 $93.3

Revenue from local sources 34.1% 12.5% 50.9% 59.3%

Revenue from federal transfers and grants 65.9% 87.5%b 49.1% 40.7%

Puerto Rico

General revenue $9,588.2 $10,563.8 $13,174.6 $12,151.9

Revenue from local sources 72.7% 74.1% 79.8% 74.4%

Revenue from federal transfers and grants 27.3% 25.9% 20.2% 25.6%

U.S. Virgin Islands

General revenue $669.5 $694.1 c c

Revenue from local sources 81.0% 83.6% c c

Revenue from federal transfers and grants 19.0% 16.4% c c

(Table notes on next page )
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 53 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Note: Revenues of institutions of higher education were not included because complete data were not 

available.

a

Interest income earned on funds in the Marshall Islands’ Nuclear Claims Trust Fund and Tribunal is 

included.

b

Palau received a large lump sum payment in 1995 under its Compact of Association with the United 

States. 

c

Data not available.

Sources: General Purpose Financial Statements and Independent Auditors’ Reports, Commonwealth 

of the Northern Mariana Islands, fiscal 1994 through 1997. Public School System, Report on the Audit 

of Financial Statements in Accordance with OMB Circular A-128, Commonwealth of the Northern 

Mariana Islands, fiscal 1994 through 1996. General Purpose Financial Statements, Additional 

Information and Independent Auditors’ Reports, Government of Guam, fiscal 1994 through 1997. 

Independent Auditors’ Reports, General Purpose Financial Statements and Additional Information,

National Government, Federated States of Micronesia, fiscal 1995 through 1997. (The fiscal 1994 

report was not available; data for that year are from the fiscal 1995 report.) General Purpose Financial 

Statements and Independent Auditors’ Reports, Republic of Palau, National Government, fiscal 1994, 

1995, and 1997. (The fiscal 1996 report was not available; data for that year are from the fiscal 1997 

report.) General Purpose Financial Statements and Independent Auditors’ Reports, Republic of the 

Marshall Islands, fiscal 1995 through 1997. (The fiscal 1994 report was not available; data for that year 

are from the fiscal 1995 report.) Comprehensive Annual Financial Reports, Commonwealth of Puerto 

Rico, fiscal 1994 through 1997. Single Audit Reports, Government of the U.S. Virgin Islands, fiscal 

1994 through 1995. U.S. Department of the Interior. 

Types of federal assistance vary among the outlying areas. In our 

compilation of federal transfers and grants to these areas, we include all 

types of direct government-to-government assistance. These include 

(1) capital project funding and other subsidies and grants for the outlying 

areas, including funding for the CNMI under its Covenant in Political Union 

With the United States; (2) compact of association funding for the Freely 

Associated States; (3) federal income taxes that U.S. federal employees in 

Guam pay to the U.S. government that are then remitted to Guam; 

(4) excise taxes collected under the internal revenue laws of the United 

States on certain products produced in the Virgin Islands and exported to 

the United States (primarily rum) that are then remitted to the Virgin 

Islands; and (5) excise taxes on shipments of alcoholic beverages and other 

taxes on shipments of tobacco products from Puerto Rico to the U.S. 

mainland that are then remitted to Puerto Rico.3

 We did not include federal 

payments directly to individuals residing in the outlying areas,

3

According to the CNMI, Guam has a significant U.S. military presence that provides 

additional revenue to the Guam government, which is something that the CNMI does not 

enjoy. For example, total wages and salaries paid to federal employees in 1997 were about 

$1.9 million in the CNMI compared with $359.2 million in Guam.
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 54 GAO/RCED/GGD-00-79 Economic Study of the CNMI

federal payments for services rendered, in-kind assistance, or the nonimposition of the federal income tax on residents of the U.S. territories.4

As table 1 above indicated, between 1994 and 1997, the CNMI government’s 

percentage of general revenue derived from local sources was about

87 percent, while its percentage derived from the federal government was 

about 13 percent. The CNMI’s revenue from local sources during the period 

from 1994 through 1997 came predominantly from the taxes it collected. As 

shown in table 5 in appendix I, in 1997, 70 percent of the CNMI’s locally 

derived revenue came from taxes, while 30 percent came from licenses, 

fees, other charges, and miscellaneous general revenue. The largest source 

of tax revenue was the business gross receipts tax, which accounted for 

about 37 percent of all tax revenue. Wages and salary and income taxes 

accounted for 23 percent, while excise taxes and the customs certification 

user fee each accounted for 14 percent of tax revenue in 1997. 

Table 2 shows that from 1994 through 1997, the revenue collection of the 

CNMI relative to the size of its economy was comparable to or slightly 

greater than that of most of the other outlying areas. We estimate that 

locally derived revenue as a percentage of GDP (which is commonly used 

to compare the revenue-raising effort, or tax effort, among countries5

) 

ranged from 29 to 45 percent in the CNMI, higher than the combined ratio 

for all levels of government in the United States, which was 28 percent in 

1996.6

 The percentages in table 2 are given as ranges if more than one 

estimate of GDP was available. The percentages reflect the highest and 

lowest estimates from all the organizations that estimated GDP for a given

4

If the federal income tax were imposed, many residents of the U.S. territories could receive 

payments from the federal government because of the earned income tax credit.

5

There are more sophisticated methods of comparing the revenue efforts of different 

jurisdictions. One method is the Representative Tax System (RTS), devised by the U.S. 

Advisory Commission on Intergovernmental Relations (ACIR) to measure the hypothetical 

abilities of U.S. state and local governments to raise revenue. The RTS measures revenueraising ability by estimating the tax yield that would result from applying a standard, 

representative set of tax base definitions and tax rates in each jurisdiction. (See RTS 1991: 

State Revenue Capacity and Effort, ACIR, M-187, Sept. 1993, pp. 3, 6.) However, methods 

such as this require a considerable amount of detailed economic data, for example, data on 

tax bases in each jurisdiction. These data were not available for the CNMI and the other 

outlying areas.

6

Because of processing and publishing lags, no published data beyond 1996 are yet available.
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 55 GAO/RCED/GGD-00-79 Economic Study of the CNMI

area and year.7 For the CNMI for 1997, the only estimate of GDP available 

(made by an expert in the U.S. Bureau of the Census) is a range rather than 

a point estimate. He provided a range estimate because the data necessary 

for a more precise estimate were unavailable.8

Table 2: Revenue From Local Sources as a Percentage of GDP for the CNMI and 

Other Outlying Areas, Fiscal Years 1994 Through 1997

Note: If there was more than one estimate of GDP, a range of percentages was provided. 

a

Percentages for the Federated States of Micronesia (FSM) may be slightly overstated because of a 

small amount of double counting when aggregating local source revenue for the FSM’s national 

government and its four state governments.

b

No estimate of GDP was available. 

Sources: For GDP, the Central Intelligence Agency, United Nations, World Bank, International 

Monetary Fund (IMF), Asian Development Bank, Bank of Hawaii, Bureau of the Census, and the areas’ 

governments. For outlying areas’ revenues, the general purpose financial statements and independent 

auditors’ reports for 1994 through 1997. Also, Report on the Audit of Financial Statements in 

Accordance with OMB Circular A-133, Chuuk State Government, Federated States of Micronesia, 

fiscal 1994 through 1997; Report on the Audit of Financial Statements in Accordance with OMB 

Circular A-133, State of Kosrae, Federated States of Micronesia, fiscal 1994 through 1997; Report on 

the Audit of Financial Statements in Accordance with OMB Circular A-133, State of Pohnpei, 

Federated States of Micronesia, fiscal 1994 through 1997; Report on the Audit of Financial Statements 

in Accordance with OMB Circular A-133, State of Yap, Federated States of Micronesia, fiscal 1994 

through 1997. 

7

The economic data available for the outlying areas are limited, making it difficult to make 

precise estimates of GDP for those areas. Various organizations have made different 

estimates of GDP for the same area and year. We used all the published estimates that we 

found because we had no basis to determine which estimates were superior.

8

See Marc Rubin, “National Income Accounts in the Northern Mariana Islands,” Eurasia 

Bulletin, summer 1999, pp. 13-14.

Year CNMI Guam

Federated

States of

Micronesiaa

Marshall

Islands Palau

Puerto

Rico

U.S.

Virgin

Islands

1994 36% 21% 26-33% 51-65% 16-20% 16-26% 45%

1995 31-45 22 28-35 57-64 25-28 17-26 b

1996 41 24-25 28-37 52-57 26-32 21-33 b

1997 29-34 23 35 45 35 19-27 b
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 56 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Available Data Suggest 

That Garment Industry 

Taxes Are Higher in the 

CNMI Than in the 

United States, but the 

Burden of These Taxes 

Is Uncertain

The available data suggest that garment manufacturers in the CNMI pay 

taxes and fees that represent a higher percentage of the industry’s gross 

receipts than do the taxes and fees paid by garment manufacturers in the 

United States. Although these data are incomplete for the garment industry 

in both the CNMI and the United States, the data represent a large enough 

share of all taxes and fees paid that additional data would be unlikely to 

change the results. However, uncertainty remains about which economic 

groups actually bear the burden of these taxes and fees because 

manufacturers may be able to shift some of the burden to others.

On average, CNMI garment manufacturers paid taxes and fees equal to 

about 5.0 percent of their gross receipts between 1993 and 1998. By 

comparison, U.S. garment manufacturers on average paid taxes and fees 

equal to about 3.3 percent of their gross receipts between 1991 and 1996 

(the latest period for which data are available). See tables 3 and 4.

Table 3: Taxes and Fees Paid by the CNMI Garment Industry as a Percentage of Its Gross Receipts, Fiscal Years 1993 Through 

1998

Dollars in millions

1993 1994 1995 1996 1997 1998

Taxes

User feea $8.907 $9.576 $13.897 $17.981 $27.653 $36.846

Employer’s share of Social Security taxesb 3.611 4.399 5.002 6.330 9.873 11.037

Nonresident worker fee 0.693 0.797 1.705 1.902 2.406 3.575

Corporate income tax 0.060 0.025 0.000 0.000 0.372 0.218

Business gross receipts tax 0.044 0.049 0.011 0.572 0.360 0.500

Total taxes $13.315 $14.846 $20.615 $26.785 $40.664 $52.176

Gross receiptsc

 $297 $319 $397 $514 $790 $1,039

Taxes as percentage of gross receipts 4.5% 4.7% 5.2% 5.2% 5.1% 5.0%

(Table notes on next page )
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 57 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Note: Excise taxes paid on the garment industry’s purchases, such as on construction materials, are 

not included in the total.

a

The customs certification user fee was 3.0% of the value of exports to the United States in 1993-94; 

3.5% from Oct. 1, 1994, to July 9, 1998; and 3.7% beginning July 10, 1998. Any inconsistency 

between user fees collected, the user fee rate, and gross receipts is caused by lags in reporting gross 

receipts.

b

The employer’s share of Social Security taxes paid directly to the federal government was estimated 

based on wage and salary data provided by the CNMI Department of Finance.

c

Gross receipts figures have been rounded to the nearest million.

Sources: CNMI August 1999 Financial and Economic Information Sheets: Highlights; also, data 

provided by the CNMI Department of Finance.

Table 4: Taxes and Fees Paid by the U.S. Garment Industry as a Percentage of Its Gross Receipts, 1991 Through 1996

Note: Data are for all active U.S. garment industry corporations. Data are for corporation accounting 

periods ending between July of the stated year through June of the following year. 

a

Federal income tax paid, after all credits except the foreign tax credit.

b

Taxes reported as deductions on corporate income tax returns. Included among the deductible taxes 

are ordinary state or local taxes paid or accrued during the year; Social Security and payroll taxes; 

unemployment insurance taxes; excise taxes, import and tariff duties; business, license, and privilege 

taxes; the environmental tax; and income and profit taxes paid to foreign countries unless claimed as a 

credit against income tax. Data may not include all taxes paid because some U.S. corporations include 

sales, excise, and related taxes that were part of the sales prices of their products in the cost of goods 

sold, rather than as part of a separate deduction for taxes paid.

Sources: Statistics of Income: Corporation Source Books, Internal Revenue Service, 1991, p. 49; 

1993, p. 50; 1995, pp. 50, 529; Statistics of Income: Corporation Income Tax Returns, Internal 

Revenue Service, 1992, p. 58; 1994, p. 64; 1996, pp. 62, 199-200.

We cannot precisely compare the taxes and fees paid by garment 

manufacturers in the United States and the CNMI because data on taxes 

directly paid by those manufacturers are incomplete. For example, when 

paying corporate income tax, some U.S. corporations include the sales, 

excise, and related taxes that were part of the sales price of their products 

in the cost of goods sold, rather than as part of a separate deduction for 

taxes paid. These taxes may not be included in the statistics we have for

Dollars in millions

1991 1992 1993 1994 1995 1996

Taxes

Federal income taxa $737 $846 $915 $978 $985 $900

Other taxesb 1,495 1,771 1,751 1,763 1,717 1,810

Total taxes $2,232 $2,617 $2,666 $2,741 $2,702 $2,710

Gross receipts $71,573 $77,332 $76,367 $80,248 $82,523 $83,384

Taxes as percentage of gross receipts 3.1% 3.4% 3.5% 3.4% 3.3% 3.3%
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 58 GAO/RCED/GGD-00-79 Economic Study of the CNMI

taxes paid.9 These missing taxes might be paid by those manufacturers that 

(1) operate their own retail outlets in jurisdictions in which retailers are 

responsible for paying sales taxes and (2) account for their tax deduction in 

the manner just described. However, we believe that these missing tax 

payments represent a small share of the total tax payments made by the 

U.S. garment industry.

We do not have data on the excise taxes that CNMI garment manufacturers 

paid on their purchases of inputs such as construction materials. However, 

any excise taxes paid by the CNMI garment manufacturers would increase 

their taxes paid relative to taxes paid by U.S. garment manufacturers. 

Therefore, more complete data would be likely to continue to show that 

garment manufacturers in the CNMI paid taxes and fees that represent a 

larger share of their gross receipts than do the taxes and fees paid by 

garment manufacturers in the United States.

The ratios of the taxes and fees paid to the industry’s gross receipts provide 

some perspective on the amount of revenue that the CNMI and U.S. 

governments are collecting through taxes directly imposed on the garment 

industry, controlling for the size of the industry in each location, but the 

ratios do not provide a very clear picture of the relative tax burdens. 

Determining whether garment manufacturers in either the CNMI or the 

United States bear a greater tax burden requires knowing what proportion 

of the taxes paid is shifted to other parties and then comparing the taxes 

actually borne by manufacturers in each location to some measure of the 

industry’s ability to pay. We do not know what share of the reported taxes is 

actually borne by the industry owners. Moreover, we do not have an 

accurate measure of either group of garment manufacturers’ ability to pay 

taxes. The preferred measure of the ability to pay would be net economic 

income. Prior studies comparing corporate tax burdens have used net 

income, as reported on income tax returns or in financial statements, as a 

proxy for net economic income. However, we did not have sufficient data 

from either tax returns or financial statements for CNMI garment 

manufacturers to estimate net economic income. The only measure 

available that gives even a rough sense of manufacturers’ ability to pay is 

gross receipts. The limitation of this measure is that two businesses with 

the same gross receipts can have much different profit margins and, 

therefore, much different net incomes.

9

See Statistics of Income: 1996 Corporation Income Tax Returns, Internal Revenue 

Service, p. 200.
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 59 GAO/RCED/GGD-00-79 Economic Study of the CNMI

There is uncertainty about which economic groups actually bear the 

burden of the taxes paid by the U.S. and CNMI garment industries. While 

remaining legally responsible for paying a tax or fee, garment 

manufacturers, like other businesses subject to taxation, may be able to 

shift some or all of the burden of a tax or fee to other groups in the 

economy. Such shifts would occur through changes in the prices of their 

products or the prices that they pay to acquire labor or materials used to 

make garments. (See app. II for further discussion.) The unavailability of 

data on supply and demand conditions in specific markets, such as the 

markets for garment and garment industry labor in the United States and 

the CNMI, prevented us from estimating the ability of the garment industry 

in the CNMI to shift its tax burden compared with the ability of the garment 

industry in the United States to do the same.

Agency Comments and 

Our Evaluation

The Department of the Interior raised several concerns about the data 

presented in this chapter. The Department questioned our inclusion of the 

Freely Associated States in our comparison of the fiscal self-sufficiency of 

the outlying areas, including the CNMI. We disagree with the Department’s 

comment. The CNMI and the Freely Associated States have a shared 

history, maintain an ongoing economic and social relationship, and receive 

federal funds. These factors, along with congressional interest, make the 

comparison between the CNMI and the Freely Associated States relevant. 

The Department suggested that taxes the U.S. government collects from 

federal employees living in Guam and remits to the Guam government, 

which we classified as federal transfers, should be considered as local 

revenue. We do not agree that federal income taxes paid by U.S. federal 

employees in Guam should be considered local revenues rather than 

federal transfers in making a fair comparison of the self-sufficiency of 

Guam and the CNMI. We classified federal income taxes paid by federal 

employees in Guam and then remitted to the government of Guam as 

federal transfers because this remittance is legislatively required. The 

CNMI has not sought similar treatment for wages and salaries paid to 

federal employees in the CNMI primarily because the amounts are very 

small. (For example, total wages and salaries paid to federal employees in 

the CNMI in 1997 were about $1.9 million compared with $359.2 million in 

Guam.) 

The Department said that the CNMI’s user fee on garment exports to the 

United States should not be counted as a local revenue source but should 

be considered a federal transfer resulting from the absence of import tariffs 
Chapter 3

The CNMI Government’s Revenue-Raising 

Effort

Page 60 GAO/RCED/GGD-00-79 Economic Study of the CNMI

on garments exported to the United States. We disagree. Nothing required 

the CNMI to impose a user fee on garment exports. Instead, the decision to 

apply the user fee was an autonomous act of the government of the CNMI, 

independent of the exemption from U.S. tariffs. Therefore, it is appropriate 

to include the revenue received from the user fee as local revenue when 

evaluating the revenue-raising effort of the CNMI.

The Department said that the taxes and fees actually borne by the CNMI 

garment industry are quite small. The Department also said that we should 

have identified which groups bear the burden of taxes. We did not address 

this question because data limitations prevent a reliable estimate of the 

extent to which specific economic groups actually bear the burden of these 

taxes. As agreed with the offices of the responsible congressional 

subcommittees, we compared the taxes and fees paid by the garment 

industry in the CNMI with those paid by the U.S. garment industry.

The Department said that we should exclude nonresident worker fees from 

our compilation of taxes and fees paid by CNMI garment manufacturers. 

We disagree. The fee is paid to the CNMI government by garment 

manufacturers who hire foreign workers and is correctly included in the 

total taxes and fees paid by the CNMI garment industry.
Page 61 GAO/RCED/GGD-00-79 Economic Study of the CNMI
Page 62 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Appendix I

CNMI Taxes and Tax Revenue ApApenednxidexiIs

Taxes on Business The Commonwealth of the Northern Mariana Islands’ income tax system is 

largely based on the U.S. Internal Revenue Code. For example, the 

Northern Marianas Territorial Income Tax is calculated in essentially the 

same manner as the U.S. income tax, with a corporate tax for those 

businesses that are corporations and a tax on personal income for 

businesses that are partnerships, family-owned, or special types of 

corporations.1

 The income tax base, deductions, and rates are the same 

under the CNMI income tax and under the U.S. Internal Revenue Code, 

except that the CNMI imposes tax on a few of the deductions and credits 

allowed under the Internal Revenue Code. Under its Covenant to Establish 

a Commonwealth in Political Union With the United States of America, the 

CNMI is authorized to rebate to taxpayers 100 percent of the income tax it 

collects on income sourced within the CNMI.2

 Rebate rates are identical for 

corporate and personal income. Rebate rates are graduated and currently 

range from 50 to 90 percent of the “rebate base.” The rebate base is the 

total income tax paid on CNMI-source income minus allowed 

nonrefundable credits.

In addition to the income tax, the Covenant permits the CNMI to impose 

other taxes on businesses. These taxes include the business gross receipts 

tax and the customs certification user fee. Both are levied on gross 

receipts, the first on business receipts except those from the sale of 

exported goods and the second on the sale of goods exported to the United 

States. These local taxes may be used as nonrefundable credits against the 

income tax, provided the taxpayer has not used the local tax as an income 

tax deduction. Because these other taxes may be used as credits against 

the income tax, CNMI taxpayers pay only the greater of the local tax or the 

income tax, but not both.

The business gross receipts tax and the user fee both have gross business 

revenue as their base and are calculated with no deductions. The rate for 

1

The CNMI has not actually codified the Internal Revenue Code’s provisions that are 

applicable in the Islands. Instead, the CNMI incorporated by reference the applicable 

provisions into its local statute and applies the Internal Revenue Code in a “mirror” fashion. 

That is, the CNMI utilizes the applicable Code provision by substituting nomenclature. For 

example, any reference in the Code to the “United States” would have “CNMI” substituted.

2

The rebate system evolved in part because the United States wanted the CNMI to acquire, 

implement, and become adjusted to an established and effective tax structure. Thus, the 

United States required the CNMI to adopt the U.S. income tax laws. However, at the same 

time, it permitted the CNMI to rebate all income taxes collected to meet local policy goals.
Appendix I

CNMI Taxes and Tax Revenue

Page 63 GAO/RCED/GGD-00-79 Economic Study of the CNMI

the business gross receipts tax is graduated and currently ranges from 

0 (on revenue of up to $5,000 per year) to 5 percent (on $750,001 or more). 

Garments that are manufactured for export to the United States are exempt 

from the business gross receipts tax but are instead subject to the user fee. 

The user fee currently is 3.7 percent of the merchandise’s gross value if the 

CNMI must certify for the country of origin. 

The CNMI imposes a general excise tax at various rates depending on the 

item for the privilege of first selling, using, manufacturing, leasing, or 

renting goods, merchandise, resources, or commodities in the CNMI for a 

business purpose or for personal use exceeding specified limits. Generally, 

the excise tax is imposed on luxury items. In addition, the CNMI imposes a 

nonresident worker fee on businesses that hire nonresidents as employees. 

The CNMI does not tax either real or personal property, and CNMIproduced goods exported to the United States generally are exempt from 

U.S. customs duties.

Tax Revenue Table 5 shows the taxes collected by the CNMI government between 1994 

and 1997. Table 6 shows the other types of revenue in addition to taxes that 

the CNMI government collected during that same period. The presentation 

of the CNMI government’s revenue follows the U.S. Bureau of the Census’s 

classification guidelines for the definitions of total revenue, general 

revenue, and local source revenue.
Appendix I

CNMI Taxes and Tax Revenue

Page 64 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Table 5: Taxes Collected in the CNMI, Fiscal Years 1994 Through 1997

a

Data on excise taxes and customs certification user fees, reported separately, are from “Financial and 

Economic Information Sheets: Highlights,” CNMI Department of Finance, Aug. 1999.

Sources: General Purpose Financial Statements and Independent Auditors’ Reports, Commonwealth 

of the Northern Mariana Islands, fiscal 1994 through 1997.

Table 6: Sources and Types of Revenue Collected in the CNMI, Fiscal Years 1994 Through 1997

Dollars in millions 

Tax 1994 1995 1996 1997

Business gross receipts tax $57.6 $59.1 $67.2 $74.6

Wages and salary, and income taxes 31.0 47.4 56.3 46.6

Excise taxa 18.3 26.8 25.0 29.2

Customs certification user fee 9.6 13.9 18.0 27.7

Fuel tax 6.0 6.5 7.5 4.9

Beverage container tax 1.8 3.5 4.1 4.0

Hotel room occupancy tax 7.8 8.7 9.9 10.8

Developers’ tax 0.4 0.7 0.6 1.0

Other taxes 2.9 3.1 2.9 3.2

Total $135.4 $169.7 $191.5 $202.0

Dollars in millions 

Revenue source 1994 1995 1996 1997

General revenue

Revenue from federal transfers and grants $30.9 $39.0 $40.9 $38.9

Revenue from local sources

Taxes 135.4 169.7 191.5 202.0

Licenses, fees, other charges, and miscellaneous general revenue 55.5 75.8 73.5 85.8

Subtotal, revenue from local sources $190.9 $245.5 $265.0 $287.8

Subtotal, general revenue $221.8 $284.5 $305.9 $326.7

Utility charges 48.1 a 54.3 60.2

Insurance trust revenue 0.1b 43.4c 61.2 99.1

Total $270.0 $327.9 $421.4 $486.0

(Table notes on next page )
Appendix I

CNMI Taxes and Tax Revenue

Page 65 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Note: Revenues of the Northern Marianas College were not included because complete data were not 

available.

a

Not available.

b

Most components not available.

c

Some components not available.

Sources: General Purpose Financial Statements and Independent Auditors’ Reports, Commonwealth 

of the Northern Mariana Islands, fiscal 1994 through 1997; Public School System, Report on the Audit 

of Financial Statements in Accordance with OMB Circular A-128, Commonwealth of the Northern 

Mariana Islands, fiscal 1994 through 1996; U.S. Department of the Interior.
Page 66 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Appendix II

The Potential Shifting of Garment Industry 

Tax Burdens ApendxiI

Economists recognize that the businesses or individuals that are legally 

responsible for paying taxes that governments impose may be able to shift 

some or all of their tax burden to others. Data limitations, however, often 

prevent a reliable estimate of the extent of this shifting. As a result, there is 

uncertainty about which economic groups actually bear the burden of the 

taxes paid by the CNMI and U.S. garment industries. Tables 3 and 4 in 

chapter 3 show the amounts of various taxes and fees that corporations in 

those industries were legally responsible for paying. However, these 

amounts may not represent the actual burden that the taxes and fees 

imposed on the shareholders of those corporations. The taxes may have 

altered the prices that the garment manufacturers charged for their final 

products or paid for their labor and other production inputs. Such price 

changes would have resulted in the shifting of some of the tax burden to 

other groups in the economy, such as consumers, workers, or the suppliers 

of other inputs. Conversely, the shareholders of garment manufacturers 

may bear some of the burden of taxes that other groups are legally 

responsible for paying. For example, in some situations, garment factory 

workers may be able to shift some of their taxes back to manufacturers in 

the form of higher wages. Which groups bear the burden of the taxes on 

garment manufacturing differs by type of tax and depends on conditions of 

demand and supply for inputs (such as labor and cloth) and outputs 

(garments). We do not have enough data on the supply and demand 

conditions in the CNMI and U.S. markets for garments, garment workers’ 

labor, and so on to estimate which groups bear the burdens of the taxes 

imposed. 

For some taxes assessed in the United States and the CNMI, there is a 

consensus among economists about whether businesses or other groups 

bear the burden. For example, economists generally believe that retail sales 

taxes are borne by consumers. Excise taxes also usually are assumed to be 

borne by consumers of the taxed products. Although excise tax revenue is 

collected from producers, manufacturers, or importers, the economic 

burden of the tax generally is passed on through higher prices to 

consumers. Although payroll taxes are collected from employers, they 

generally are assumed to be borne by workers, being passed back through 

lower wages. Similarly, the nonresident worker fee is likely to be passed 

back to labor through lower wages.

Gross receipts taxes are levied on the total receipts of a business, with no 

deductions permitted. In the long run, a gross receipts tax may act like a 

sales tax in that it may raise the prices of consumer goods. However, in the
Appendix II

The Potential Shifting of Garment Industry 

Tax Burdens

Page 67 GAO/RCED/GGD-00-79 Economic Study of the CNMI

short run, a gross receipts tax may be borne by producers.1 In that case, the 

tax will be absorbed by a business’s shareholders in the form of lower 

returns on their investment and by its workers in the form of lower wages.

There is no consensus among economists on which groups bear the tax on 

corporate net income. The burden may be borne by or shared by owners of 

the corporation, by owners of production inputs such as labor and land, or 

by consumers of the output produced. Some economists maintain that 

taxes on corporate net income have no effect on output, output price, or 

input prices but are reflected in lower profits, net of tax, and thus are borne 

by the corporation’s owners, especially in the short run. There are many 

reasons, however, for believing that the corporate income tax can be 

shifted at least partly to labor inputs or to capital in general in the long run. 

Empirical research has been inconclusive about the extent, if any, to which 

shifting occurs.

1

Producers in different industries would face different amounts of burden, depending on the 

degree of vertical integration in their industry.
Page 68 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Appendix III

Comments From the Commonwealth of the 

Northern Mariana Islands and Our Evaluation ApendxiI

Note: GAO’s comments 

supplementing those in the 

report text appear at the end 

of this appendix. 

Now GAO/RCED/GGD-00-

79.

The page numbers in this 

letter refer to a draft of this 

report. We have indicated 

page number changes for 

those comments that we 

discuss in detail.
Appendix III

Comments From the Commonwealth of the 

Northern Mariana Islands and Our 

Evaluation

Page 69 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Now on p. 7.

See comment 1.
Appendix III

Comments From the Commonwealth of the 

Northern Mariana Islands and Our 

Evaluation

Page 70 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Now on p 9.

See comment 2.

Now on p. 10.

See comment 3.

Now on p. 22.

See comment 4.

See comment 1.
Appendix III

Comments From the Commonwealth of the 

Northern Mariana Islands and Our 

Evaluation

Page 71 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Now on p. 23.

See comment 5.

Now on p. 24.

See comment 5.

Now on p. 25.

See comment 6.

Now on p. 26.

See comment 7.

Now on p. 26.

See comment 8.

Now on p. 38.

See comment 10.

Now on p. 36.

See comment 9.
Appendix III

Comments From the Commonwealth of the 

Northern Mariana Islands and Our 

Evaluation

Page 72 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Now on p. 39.

See comment11.

Now on p. 44.

See comment 12.

Now on p. 46.

See comment 14.

Now on p. 46.

See comment 13.
Appendix III

Comments From the Commonwealth of the 

Northern Mariana Islands and Our 

Evaluation

Page 73 GAO/RCED/GGD-00-79 Economic Study of the CNMI

GAO Comments The following are our comments on the Commonwealth of the Northern 

Mariana Islands’ letter dated January 25, 2000. The Commonwealth 

provided clarifications and technical points that were incorporated into the 

report as appropriate.

1. We added the suggested caveat about the 1999 population figure (see 

footnote 2, executive summary) and added that some of the non-U.S. 

citizens are from the Freely Associated States or are immediate relatives of 

U.S. citizens (see footnote 3, executive summary). 

2. While we do not dispute the figures the Governor’s Office provides, we 

believe the comparison between the percentages of workers employed by 

the private sectors in Guam and the United States with the percentage 

employed by the private sector in the CNMI could be misleading because 

the CNMI workforce includes a large proportion of foreign workers who 

temporarily reside in the CNMI and are primarily employed in the private 

sector. Guam and the United States do not have similar proportions of 

foreign workers in their total workforces. While the percentage of total 

workers employed by the CNMI government may be relatively low, the 

percentage of the U.S. citizen population employed by the government is 

much higher. 

3. The January 1999 study is correctly identified.

4. We added some suggested language regarding the large U.S. military 

presence in Guam. See footnote 3, chapter 3.

5. We do not think there is empirical support for the claim that mandated 

additional benefits to foreign workers hold down their wages or that the 

lack of similar benefits cause local wages to rise. While foreign workers do 

often receive these additional benefits, it is also the case that employers 

can legally deduct some money from these workers’ wages. We believe 

there are insufficient data on the actual value of benefits received by all 

workers or on the deductions to foreign workers’ wages to assess the net 

value of these benefits. 

6. The context of the discussion pertains to a controversy over garments 

that are labeled as “Made in the U.S.A.” and not over those labeled as “Made 

in the Commonwealth of the Northern Mariana Islands.” 
Appendix III

Comments From the Commonwealth of the 

Northern Mariana Islands and Our 

Evaluation

Page 74 GAO/RCED/GGD-00-79 Economic Study of the CNMI

7. The issue concerns violations of federal wage and labor laws regardless 

of who has the enforcement responsibility. 

8. The report properly attributes the source of the information to the print 

and broadcast media. 

9. The report does not attempt to explain the rate of unemployment among 

local residents or U.S. citizens in the CNMI because we do not believe there 

is enough information about the causes of unemployment in the CNMI to 

do so. We have added the views of the CNMI and the Department of the 

Interior on this issue to the report (see footnote 2, chapter 2). The number 

of unemployed local residents that we cite in the report as 1,800 includes 

about 1,400 unemployed U.S. citizens and about 400 permanent residents of 

Saipan who are not U.S. citizens. 

10. The discussion in this section is designed simply to show that the 

CNMI’s population of local residents is insufficient to supply enough labor 

for an economy of the size and scope of the CNMI’s. The report does not 

measure the fiscal impacts of particular groups.

11. The number of unemployed local residents that we cite in the report as 

1,800 includes about 1,400 unemployed U.S. citizens and about 400 

permanent residents of Saipan who are not U.S. citizens. 

12. The report describes the potential outcome if China were to become a 

member of the WTO. The impact on the garment industry does not 

necessarily depend on how many Chinese- or U.S.-owned garment factories 

there are in the CNMI. 

13. This report does not specifically address the causes of the government’s 

deficit. We discuss the relative size of federal spending on wages and 

salaries in Guam and the CNMI in footnote 3, chapter 3.

14. We have added text to chapter 2 noting the concerns of the CNMI that it 

is faced with the problem of providing government services for three 

islands despite a declining economy and without receiving Compact Impact 

Aid.
Page 75 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Appendix IV

Comments From the Department of the 

Interior and Our Evaluation ApendxiIV

Note: GAO’s comments 

supplementing those in the 

report text appear at the 

end of this appendix.
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 76 GAO/RCED/GGD-00-79 Economic Study of the CNMI

See comment 1.

See comment 2.

See comment 3.

See comment 4.
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 77 GAO/RCED/GGD-00-79 Economic Study of the CNMI

See comment 5.

See comment 6.

See comment 6.
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 78 GAO/RCED/GGD-00-79 Economic Study of the CNMI

See comment 7.

See comment 8.

See comment 9.

See comment 10.
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 79 GAO/RCED/GGD-00-79 Economic Study of the CNMI

See comment 11.

See comment 12.

See comment 13.

See comment 14.
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 80 GAO/RCED/GGD-00-79 Economic Study of the CNMI

See comment 15.

See comment 16.

See comment 17.
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 81 GAO/RCED/GGD-00-79 Economic Study of the CNMI

See comment 18.
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 82 GAO/RCED/GGD-00-79 Economic Study of the CNMI

GAO’s Comments The following are our comments on the Department of the Interior’s letter 

dated February 1, 2000. The Department provided clarifications and 

technical points that were incorporated into the report as appropriate. 

1. We do not agree that the report answers these questions narrowly or 

without reference to economic, legal, and regulatory context. We also do 

not agree that the data and observations in the report are taken out of 

context, incorrectly categorized, and misleading. The report describes in 

detail the historical, economic, legal, and regulatory context in which the 

CNMI economy currently operates. Specifically, it explains the context in 

which the garment industry in the CNMI has come into being along with the 

use of foreign workers. It also enumerates a number of concerns expressed 

by some about violations of existing labor and worker safety laws and the 

fiscal impact of the garment industry on the government of the CNMI. In 

addition, it discusses the relationship between the United States and the 

Northern Mariana Islands, both before and after the Commonwealth was 

formed. In this context, the report discusses key provisions of the 

Covenant establishing the CNMI that affect wages, exports, immigration, 

and taxes. The report also presents an objective description of the 

controversies surrounding the use of foreign workers and the garment 

industry. Furthermore, the report uses data and information from a wide 

range of sources and presents the results in a balanced, fact-based, and 

objective manner.

2. We disagree. The report provides more than a simple description of the 

CNMI’s major industries and does not ignore the effect of the industries’ 

development on the population. The report explains how local residents, 

most of whom are U.S. citizens, have benefited from economic growth. We 

define local residents as the combination of U.S. citizens and citizens of the 

Freely Associated States of the Republic of the Marshall Islands, the 

Federated States of Micronesia, and the Republic of Palau because citizens 

of the Freely Associated States have the legal right of residency in the 

CNMI. Whenever data were available to do so, we make the distinction 

between local residents and foreign workers. In other cases we distinguish 

between U.S. and non-U.S. citizens. For example, figure 2 distinguishes 

between U.S. and non-U.S. citizens in the population, figures 4 and 5 show 

average wages of workers born in the CNMI and workers born in Asia, 

figure 7 isolates local residents as a component of the total labor force, and 

figure 8 shows the occupations of workers and distinguishes between those 

born in the CNMI, the Philippines, and China. 
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 83 GAO/RCED/GGD-00-79 Economic Study of the CNMI

3. We disagree that our definition and interpretation of the data generate 

distorted and inaccurate comparisons. Although the data we used to 

answer the questions on the CNMI’s revenue-raising effort and the 

comparative taxation of the garment industries of the CNMI and the United 

States have limitations, we discussed these limitations with the offices of 

the responsible congressional subcommittees and described them in 

various places throughout the report. We used the best sources of data 

available to address the questions that we were asked, and we believe that 

the comparisons we present, with the accompanying caveats, are as 

accurate as possible.

4. We agree that the report does not address the question of the 

appropriateness of the CNMI economy in the context of traditional 

American values and laws. It was beyond the scope of our objectives to 

address potential alternatives to the CNMI’s current economy. We do not 

agree with the Department’s statement that the foundations of economic 

growth, including employment of local residents, have fallen behind. For 

example, we point out that the number of jobs held by U.S. citizens has 

grown faster than the population of U.S. citizens, while labor participation 

rates increased for U.S. citizens in the period between 1980 and 1999. In 

addition, a larger proportion of U.S. citizens became self-employed over 

that period. Finally, a bigger proportion of U.S. citizens work in the private 

sector now than in 1980, despite the rapid growth in government 

employment. 

We agree that the high rate of unemployment among U.S. citizens is an area 

for concern as is the CNMI’s budget deficit. However, we disagree that the 

garment and tourist industries or the foreign workers are the causes of 

these problems. We found no data that support the claim that 

unemployment in the CNMI is caused by the garment and tourist industries 

or by their use of foreign labor. On the contrary, we agree with the October 

1999 report prepared under the supervision of Northern Marianas College 

with funding from the Department, which states that the garment and 

tourist industries are the source of most of the CNMI’s economic activity, 

including exports, employment, and production of goods and services. We 

did not determine the cause of the high rate of unemployment among U.S. 

citizens, but we added the views of the Department and the CNMI 

government to the report (see footnote 2, chapter 2). 

We agree with the Department that the long-term prospects for the CNMI 

economy are also a concern. The report states that the CNMI’s reliance on 

these two industries and on foreign labor for much of its workforce makes 
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 84 GAO/RCED/GGD-00-79 Economic Study of the CNMI

the economy vulnerable to outside events. Specifically, we say that changes 

in the Asian economy that affect tourism, potential legislation changing the 

CNMI’s immigration policy, and the potential for changes in international 

trade agreements that might cause all or part of the garment industry to 

leave the CNMI would all have a major impact on its economy. 

5. We agree with the Department that the multipliers for the CNMI garment 

industry are low compared with garment industries in other countries and, 

as we stated in comment 4, that high unemployment rates among U.S. 

citizens and the budget deficit are problematic. We did not determine the 

cause of the high rate of unemployment among U.S. citizens, but we added 

the views of the Department and the CNMI government to the report (see 

footnote 2, chapter 2).

We do not agree that private sector employment for local workers has 

grown little since 1995. For example, according to data from the CNMI 

Department of Commerce, private sector employment of U.S. citizens 

increased by about 24 percent between 1995 and 1999 on Saipan, while 

total employment of U.S. citizens, including employment in the government 

sector, rose by about 22 percent. Employment of non-U.S. citizens 

increased by about 43 percent over the same period, but this includes about 

a 27-percent increase in employment of people born in the Freely 

Associated States, who are not considered foreign workers. 

Furthermore, the numbers that the Department presents and its use of 

multipliers may be misleading. The Saipan economy added about 2,100 jobs 

for local residents, including about 1,650 jobs for U.S. citizens and 450 jobs 

for workers born in Micronesia. During the same period, the economy 

added about 10,000 new jobs for foreign workers. In other words, the 

economy added almost 2 jobs for local residents for every 10 jobs it added 

for foreign workers, about twice what the Department claims. The growth 

in employment for U.S. citizens from 1995 to 1999 occurred even though 

the economy suffered a 30-percent decline from 1997 levels in visitors in 

1998 and 1999. 

6. We do not intend to give the impression that the CNMI is a melting pot in 

the sense commonly used to describe the United States. Foreign workers 

send much of their incomes back to support their families in their home 

countries. Nonetheless, the CNMI does not have sufficient labor and skills 

to have developed as it has without access to foreign workers, and all 

sectors of the CNMI economy rely on foreign workers. 
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 85 GAO/RCED/GGD-00-79 Economic Study of the CNMI

We do not agree with the Department’s implication that the economic 

advances of local residents come at the cost of transferring wealth from 

foreign workers. While it is true that foreign workers earn lower wages 

than do local resident workers−we point this out in figures 4 and 5 of our 

report and in the accompanying text−it is also true that for foreign workers 

born in Asia, wages have risen since 1980 and that in 1999, these workers’ 

average wages were $5.33 per hour. Moreover, average wages of workers 

born in Asia in every major occupational category except “farming, 

forestry, and fishing” (in which only 76 people were employed in 1999) 

were higher than the CNMI’s minimum wage of $3.05 per hour. Finally, 

foreign workers come to the CNMI voluntarily to work, and the Philippine 

Consul told us that the CNMI is a destination of choice for workers from 

her country, in part because wages in the CNMI for foreign workers are 

much higher than wages in the Philippines. The minimum wage in the 

Philippines is about $1.00 per day, compared with $3.05 per hour−or 

$24.40 per 8-hour day−in the CNMI. 

We do not agree that the distribution of income in the CNMI has changed in 

favor of the affluent. As discussed in the report, the distribution of income 

was flatter in 1999 than in 1980. Median household incomes of local 

residents have increased−in particular, Chamorro household income rose 

from about $8,900 per year in 1980 to about $30,700 in 1999. 

7. The data collected by the CNMI government are not sufficiently detailed 

to evaluate the Department’s claim that jobs in the tourist industry are 

inherently more attractive than jobs in the garment industry. The data on 

employment do show that on Saipan in 1999, about 900 workers born in the 

CNMI (and who were therefore U.S. citizens) worked as operators, 

fabricators, and laborers−the occupational category that employs about 

86 percent of Chinese workers, most of whom work in the garment 

industry. About 2,000 workers born in the CNMI worked in managerial and 

professional specialties, and about 2,000 worked in technical, sales, and 

administrative support positions. However, for these 4,000 U.S. citizens, the 

data do not distinguish whether they work in the garment or tourist 

industry or elsewhere. 

We do not disagree that a large proportion of tourism employees in Guam 

and the United States may be recent immigrants or that, as resident 

immigrants, these workers have a bigger stake in their communities than 

do temporary resident workers. As stated, in chapter 2 of our report, 

foreign workers in the CNMI send much of their earnings back to their 

countries of origin.
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 86 GAO/RCED/GGD-00-79 Economic Study of the CNMI

8. We disagree that the garment industry in the CNMI will necessarily cease 

in 5 years’ time. The advantages that the CNMI garment industry have over 

many of its international competitors are three-fold: (1) They can sell their 

products to buyers in the United States without import tariffs. (2) The 

products are not subject to U.S. import quotas. (3) The products can bear 

labels identifying them as being made in the United States. Even if quotas 

are eliminated as scheduled, the tariff and labeling advantages will remain 

largely intact, and whether garment production will leave the CNMI for 

other WTO members in 2005 and beyond will depend on whether the value 

of the benefits received from the tariff-free status and the identification of 

products as having been made in the United States offset the higher wages 

paid in the CNMI. 

9. We disagree that the growth in the economy based on alien labor has led 

to increased fiscal deficits. On the contrary, we found that a study prepared 

for the Office of Insular Affairs that concluded that alien workers had a 

negative fiscal impact on the CNMI government was methodologically 

flawed. We also disagree that the growth of the economy has led to 

increased unemployment as discussed in comment 4.

We agree that our report does not offer a complete alternative analysis to 

the 1999 Fiscal Impact Report. We believe, however, our report offers 

detailed, factual examples indicating that foreign workers have a smaller 

fiscal impact than do local residents. It also points out that the 1999 Fiscal 

Impact Report understates the contributions of the garment and tourist 

industries to the CNMI economy and provides specific examples of the 

types of contributions that were not taken into account in the 1999 Fiscal 

Impact Report.

10. We added text to include the information provided by the Department 

that since 1991, the births in the CNMI to mothers who were not U.S. 

citizens have been greater than births to mothers who were U.S. citizens. 

We also added information showing that the birth rate for women between 

the ages of 15 and 45 is much lower for non-U.S. citizens than for U.S. 

citizens and discussed the implications of this on the fiscal impact of 

foreign workers.

11. We disagree that the inclusion of the Freely Associated States of the 

Marshall Islands, the Federated States of Micronesia, and Palau distorts a 

comparison with the CNMI. These countries have a shared history with the 

CNMI as part of the former Trust Territory of the Pacific Islands and have 

an ongoing economic and social relationship—citizens of the Freely 
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 87 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Associated States have the right of residency and employment in the CNMI, 

and many have come to the CNMI to live and work. In addition, the Freely 

Associated States and the CNMI receive federal funds. Finally, as the 

Department has pointed out, the CNMI was similarly dependent on federal 

budget assistance during the early years of its commonwealth status. These 

factors, along with congressional interest, make the comparison between 

the CNMI and the Freely Associated States relevant. To ensure that the low 

level of economic activity in the Marshall Islands and the Federated States 

of Micronesia does not distort the comparison, we present data showing 

the percentage of local source revenue as a proportion of GDP—if local 

source revenue is low because local economic activity is small, then the 

ratio of the two is a way to control for the size of the economy. 

12. We added text clarifying that we included annual Covenant funding 

from the Department of the Interior in calculating federal transfers to the 

CNMI. For more details on the amounts and types of federal transfers and 

grants to the CNMI and Guam, see, for example, General Purpose 

Financial Statements and Independent Auditors’ Report, Commonwealth 

of the Northern Mariana Islands, fiscal 1997 (pp. 55, 61), and General 

Purpose Financial Statements, Additional Information and Independent 

Auditors’ Report, Government of Guam, fiscal 1997 (pp. 53, 67-71, 73, 75, 

84, 94-95). 

13. We do not agree that federal income taxes paid by U.S. federal 

employees in Guam should be considered local revenues rather than 

federal transfers in making a fair comparison of the self-sufficiency of 

Guam and the CNMI. We classified federal income taxes paid by federal 

employees in Guam and then remitted to the government of Guam as 

federal transfers because this remittance is legislatively required. The 

CNMI has not sought similar treatment for wages and salaries paid to 

federal employees in the CNMI primarily because the amounts are very 

small. (For example, total wages and salaries paid to federal employees in 

1997 were about $1.9 million in the CNMI compared with $359.2 million in 

Guam.) 

14. We changed our source of data on gross receipts for the CNMI garment 

industry for 1997 and 1998 to make it consistent with the data that we used 

in previous years. This change resulted in a small reduction in the ratio of 

taxes to gross receipts for the CNMI garment industry for those 2 years. We 

also added a note to table 3 that acknowledges possible lags in reporting 

gross receipts. 
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 88 GAO/RCED/GGD-00-79 Economic Study of the CNMI

However, we do not agree with the Department that the revenue that the 

CNMI receives from the user fee on garment exports to the United States 

should be considered as a federal transfer because nothing required the 

CNMI to impose a user fee on garment exports. Instead, the decision to 

apply the user fee was an autonomous act of the government of the CNMI, 

independent of the exemption from U.S. tariffs. Therefore, it is appropriate 

to include the revenue received from the user fee as local revenue when 

evaluating the revenue-raising effort of the CNMI.

15. We disagree that the CNMI’s user fee should be excluded from the 

comparison between taxes paid by the garment industry in the CNMI and 

taxes paid by the garment industry in the United States as explained in 

comment 14. We did not address the question of whether the taxes and fees 

actually borne by the CNMI garment industry are nearly negligible and 

lower than those borne by the U.S. garment industry. We compared the 

taxes and fees paid by the garment industry in the CNMI, expressed as a 

percentage of gross receipts, with the taxes and fees paid by the U.S. 

garment industry. In our report, we state that one limitation to this 

approach in evaluating the relative tax burden of the garment industry in 

the CNMI and in the United States is that there is uncertainty about which 

economic groups actually bear the burden of the taxes paid by the CNMI 

and U.S. garment industries. Garment manufacturers may shift some or all 

of their tax burden to others, and data limitations prevent a reliable 

estimate of the extent of this shifting. 

16. We have added a note to table 4 indicating that we included the 

employer’s share of Social Security taxes in our calculation of taxes paid by 

U.S. garment manufacturers. Accordingly, it is appropriate to also include 

them in calculating taxes paid by the CNMI garment industry. We disagree 

that the nonresident worker fee should be excluded when comparing the 

taxes paid by the garment industries in the CNMI and in the United States. 

The Department states that we should exclude that fee because we do not 

include fees that U.S. garment manufacturers pay to employment services. 

However, the former is a tax paid to the CNMI government by garment 

manufacturers who hire foreign workers and is correctly included in the 

total taxes and fees paid by the CNMI garment industry, while the latter is 

not a tax paid by the U.S. garment industry and is correctly excluded.

17. As discussed in comment 15, we did not address the question of the tax 

burden borne by the CNMI garment industry. However, in comments 14 and 

16, we explain why it is appropriate to include the user fee, the employer’s 
Appendix IV

Comments From the Department of the 

Interior and Our Evaluation

Page 89 GAO/RCED/GGD-00-79 Economic Study of the CNMI

share of Social Security taxes, and the nonresident worker fee in 

calculating the taxes paid by the garment industry in the CNMI.

18. We believe that the CNMI economy and its local resident population 

have benefited from the economic growth in the past 20 years. That growth 

has been driven by the garment and tourist industries and the use of foreign 

workers. In terms of future growth—as discussed in comment 4−we agree 

with the Department that the long-term prospects for the economy are a 

concern. The report states that the CNMI’s reliance on the garment and 

tourist industries and on foreign workers makes it vulnerable to outside 

events that affect either industry or the economy’s access to foreign 

workers.
Page 90 GAO/RCED/GGD-00-79 Economic Study of the CNMI

Appendix V

GAO Contacts and Staff Acknowledgments ApendxiV

GAO Contacts Jay Cherlow, (202) 512-4918

Frank Rusco, (202) 512-4597

James Wozny, (202) 512-9084

Acknowledgments In addition to those named above, Roy Judy, Anne Stevens, Emil Friberg, 

Shirley Jones, Dick Kasdan, Nina Pfieffer, and Cheryl Pilatzke made key 

contributions to this report.

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