In general, the 14 island nations in the Pacific Ocean that we reviewed face significant development challenges. With few exceptions, such as Papua New Guinea and Fiji, the island nations have small economies and limited natural resources, and most are highly vulnerable to natural disasters, environmental problems, and the impacts of climate change. Their remote location, poor access to commercial and capital markets, and limited institutional capacity hinder economic development. In many islands, the public sector is disproportionately large, the private sector is poorly developed, and there is a shortage of trained personnel to meet development challenges. Finally, rapid urbanization, population growth, and inadequate infrastructure are outstripping the countries’ ability to meet basic health and education needs. (See fig. 1 for a map of most of the island nations and territories in the Pacific region.) Virtually all of the Pacific Island nations, including the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI), receive development assistance. (See app. III for a description of the recipient nations and the assistance they receive.) In addition, at least seven island territories in the Pacific (including New Caledonia) receive direct government assistance from their associated governments and, in some cases, a small amount of development assistance from other donors. Five of the small island nations—Kiribati, Samoa, the Solomon Islands, Tuvalu, and Vanuatu—are “least developed countries,” according to the United Nations, meaning that they have special development needs. In 1986, the United States entered into a Compact of Free Association with the FSM and the RMI, both of which were part of the U.N. Trust Territory of the Pacific Islands administered by the United States. The United States agreed, in part, to provide economic assistance to these countries to help them in their efforts to become economically self-sufficient. A portion of the Compact assistance to the RMI is also used for payments to landowners related to the U.S. military presence at the Kwajalein Atoll. The Department of the Interior has responsibility for administering economic assistance to the two countries. This funding represented a continuation of U.S. financial support that had been supplied to these areas for almost 40 years after World War II. The two nations have also received support in the form of direct government services, such as U.S. Postal Service and National Weather Service assistance, and grants and loans from U.S. domestic agencies. From fiscal years 1987 through 2001, total U.S. support to the islands—Compact assistance and other U.S. assistance—is estimated at more than $2.6 billion. The economic assistance provided to the two countries through the Compact of Free Association expires in late 2001. However, the Compact provides funding for an additional 2 years if negotiations on further assistance are not completed by that time. In June 2000, the Department of State’s negotiator for the Compact of Free Association testified that the general approach to the new negotiations with the FSM and the RMI includes sector grants and trust fund contributions, in place of the financial transfers provided in the first 15 years of the Compact, to improve accountability for the use of funds.State concurred with our finding that the FSM, the RMI, and the United States provided limited accountability over Compact expenditures from 1987 to 1998. From 1987 through 1999, the seven top donor countries and organizations provided about $11 billion, or 93 percent, of all development assistance to help Pacific Island nations. The bilateral donors generally targeted their assistance to a few recipients, while the multilateral donors distributed aid more broadly to member nations in the region. Five bilateral donors—Australia, Japan, New Zealand, the United Kingdom, and the United States—and two multilateral donors— the Asian Development Bank (ADB) and the European Union (EU)—provided about $11 billion in official development assistance to Pacific Island nations between 1987 and 1999, according to our review of data from the OECD and annual financial audits of the FSM, the RMI, and Palau. Figure 2 shows the top donors and the amount of total assistance provided to the Pacific region from 1987 through 1999. The major donor countries and organizations have varied widely regarding the development assistance provided to recipients from 1987 to 1999. The major bilateral donors, except for Japan and New Zealand, have concentrated their assistance on relatively few Pacific Island nations. For example, between 1987 and 1999, about 75 percent of Australia’s assistance to the region went to Papua New Guinea, which is the largest country in the region, and about 91 percent of U.S. assistance went to the FSM, the RMI, and Palau. The multilateral donors also concentrated on a few recipients. The EU and the ADB gave about 65 percent and 55 percent of their assistance, respectively, to their top two recipients—Papua New Guinea and the Solomon Islands for the EU and Papua New Guinea and Samoa for the ADB. Two major donors, the United Kingdom’s Department for International Development and the U.S. Agency for International Development (USAID), significantly reduced their presence in the Pacific in the 1990s. The programs of two other donors, New Zealand and Japan, were under review in those countries at the time we prepared this report. The purpose of the New Zealand review is to examine how the development assistance program can best meet the long-term development needs of the recipients, given that most of the recipient countries will be dependent on aid indefinitely. The purpose of the program review in Japan is to look for opportunities to improve Japan’s budget deficit. Many Pacific Island nations are dependent on a single donor for most of their assistance. Seven of the 14 recipient countries received more than 50 percent of their aid from a single donor from 1987 through 1999. For example, the FSM and the RMI received 93 percent and 89 percent of their assistance, respectively, from the United States, according to our analysis. In addition, aid is concentrated between donors and recipients linked by free association agreements. The five Pacific Island nations with free association status—the FSM, the RMI, and Palau, which are freely associated with the United States, and Niue and the Cook Islands, which are freely associated with New Zealand—received an average of 84 percent of their aid from their top donor, while the other seven recipients received an average of 37 percent of their aid from their top donor. According to documents of the major donors, their principal development objectives are to alleviate poverty in the region and help the island nations become more self-sufficient. To achieve these objectives, Australia, for example, focuses its assistance in the Pacific on education and training, economic reform and governance, health, environment and natural resources, and private sector development. In 1998-99, Australia allocated 35 percent of its aid for education and training, 20 percent for economic reform and governance, 15 percent for health, 15 percent for environment and natural resources, 5 percent for private sector development, and 10 percent for other areas. Similarly, to achieve its objectives, New Zealand supports projects around six strategies: security and governance, civil society, gender equality, social development, the environment, and business. Finally, as another example, the ADB is tackling poverty through promoting programs, such as public sector reform programs, in its Pacific member countries. Since 1995, the ADB has undertaken reform programs in seven Pacific Island nations for macroeconomic stabilization, good governance, public sector efficiencies, and private sector development. The major donors recognize that their choice of assistance strategies must address long-term aid dependence by many Pacific recipients and trade- offs involving multiple objectives for assistance, costs, effectiveness, and accountability. Within this environment, the donors have tried several strategies to achieve their development objectives, such as incorporating flexibility and relying on trust funds. (See app. IV for further information on trust funds.) Economic self-sustainability will be a difficult challenge for many Pacific Island nations and is not a realistic goal for the smaller and more remote countries, according to officials at and documents from the Australian Agency for International Development, the Japan Ministry of Foreign Affairs, the New Zealand Ministry of Foreign Affairs and Trade, and the ADB. The officials expect that, under the best circumstances, most countries will need assistance for the foreseeable future to achieve improvements in development. According to an ADB report, “t is widely understood that the smallest and least-endowed island states will need to be assisted by free transfers of resources indefinitely, if they are to maintain standards of welfare that the donors of the aid can bear to look at.…” Two major donors—the United Kingdom Department for International Development and USAID—chose to cut their bilateral programs significantly in the 1990s, due to changed priorities and agency budgetary reasons. The United Kingdom switched from a bilateral program to a regional program in 1995 that focused on three countries—Kiribati, the Solomon Islands, and Vanuatu—where the need was greatest. According to a Department for International Development official at the regional office in Fiji, the United Kingdom now expects to end the regional program by 2004, as part of a worldwide change in the agency’s focus, and will provide support to the region through multilateral donors. USAID ended its bilateral program in the South Pacific in 1994, due to agency budgetary reasons, and now provides modest assistance for a regional environmental program. In providing assistance to the Pacific, most of the major donors combine their development interests with other motivations, according to officials and documents of the donor agencies. These other motivations include historic ties between the donor and the recipient (such as former dependencies), foreign policy interests, and strategic interests. Australia’s large commitment of assistance to Papua New Guinea, for example, responds to development needs in the country but also reflects the historical relationship and the development assistance program as agreed through a treaty with its former territory.