PALAU

COUNTRY OVERVIEW

LOCATION AND SIZE.

Palau is located in the north Pacific Ocean some 2,000 kilometers (1,242.8 miles) north of Australia. It estimated that there are more than 200 islands in a chain running from northeast to southwest, although only 8 are inhabited. The islands are rocky and mountainous, with the highest point being Mount Ngerchelchauus at 242 meters. The largest island is Babeldoab (also spelled Babelthuap). The total land area is 458 square kilometers (176.8 square miles). There are gold deposits (although unmined) and the possibility of further minerals in the seabed within the 200 nautical mile economic zone claimed by the islands. The capital is Koror on Koror Island. However, the constitution calls for the capital to be sited at Melekeok on the nearby island of Babeldoab, and construction is under way to fulfill that requirement. The country is ranked as the fourteenth smallest nation in the world.

Palau is located in the tropics, and the weather is generally hot and very humid. Temperatures average around 27 degrees Celsius (80 degrees Farenheit), and vary little during the year. A rainy season lasts from May to November, with annual rainfall of around 3,600 milimeters (142 inches). The islands are hit by typhoons from time-to-time, and the main typhoon season is in the second half of the calendar year.

POPULATION.

The population was estimated at 18,766 in mid-2000, giving a population density of 41 persons per square kilometer (106 per square mile), quite a bit lower than the neighboring Marshall Islands, which have a density of 375 persons per square kilometer (971 per square mile). The population was estimated to be growing at 1.8 percent a year in 2000. The birth rate is 20 per 1,000 people, and the death rate is 7 persons per 1,000. Migration is low, with about 90 citizens leaving each year. The average fertility rate is 2.5 children per woman. With this modest rate of population growth, the population can be expected to have most of its population in the working age groups. The 0 to 14 age group contains 27 percent of the population, and the 15 to 64 group contains 68 percent. Five percent are 65 and over. More than half the population live in the current capital, Koror, and urban residents account for 80 percent of the total population.

Almost all the people on the islands originate from Polynesian, Malayan, and Melanesian ethnic groups, and mostly follow the Christian religion, although a local traditional belief, Modekngei, is practiced by more than 30 percent of the population. English is the main official language. In 13 states Palauan is also an official language; in Sonsoral, Sonsoralese is also official; in Tobi, the Tobi language is also official; and in Angaur, Anguar and Japanese are also official. Overall life expectancy is 69 years, with male life expectancy being 65 years and female life expectancy 72 years. The adult literacy rate in 1980 was 92 percent, with 93 percent of adult males and 90 percent of females achieving literacy.

OVERVIEW OF ECONOMY

Given its small population, its inaccessible location, poor infrastructure, lack of skilled labor, and the absence of any significant minerals, it is remarkable that the economy generates as much income for its citizens as it does. Gross domestic product (GDP) per capita, at $6,696 in 1998, places Palau in the upper-middle income group of countries in the world economy. This is increased by significant receipts from the United States, which add around 16 percent to the income generated domestically.

Most employment, 89 percent in 1995, was in the services sector. The agriculture sector is very small in terms of both its contribution to total output and employment, while the industry sector is also small and is mainly made up of construction. Fish is the main export, and tourism is the main foreign exchange earner. Almost all commodities, apart from some food, are imported.

Economic growth can vary yearly, affected by fashions in tourism and by the economic conditions in the countries of origin of tourists. Since 1992, the level of GDP has remained almost unchanged, with a zero growth rate over the period. However, the volatility is observed in a fall in GDP of 12.3 percent in 1993 and an expansion of 14.3 percent in 1995.

POLITICS, GOVERNMENT, AND TAXATION

The islands of Palau were originally settled by people from neighboring Pacific islands. In the 16th century, Spain claimed the islands, although Germany was allowed trading rights. With the decline of Spanish influence, the islands came under German control. The Germans established Palau as a protectorate. At the outbreak of World War I, the Japanese took over the islands and administered them under a United Nations (UN) mandate. This was a period of considerable development, with the creation of schools, hospitals, and a change in land tenure that allowed private land rights. By the end of their administration period, the Japanese in Palau numbered 26,000, outnumbering the local inhabitants. During World War II, the United States clashed with the occupying Japanese, and the United States established control of the islands in 1944. From 1947, the United States administered Palau as Trustees for the United Nations. Talk of self-determination for Palau began in 1965. In 1979, Palau approved a constitution, and in 1981 became the Republic of Palau, although not fully independent of the United States. Efforts to have approval for a Compact of Free Association with the United States (which would allow the United States to provide defense and contribute financial support) were continually thwarted by an inability to have the proposals approved by 75 percent of the vote in a referendum. After changing the constitution to allow approval by simple majority, the compact was approved in 1993, and Palau became fully independent in 1994.

The Palau government is a democracy modeled on the United States. Although the country has a long history of traditional tribal rule, democracy has been accepted and any citizen is eligible for high office. The 1979 constitution established a parliamentary government, with 2 houses. The Senate (Oibiil Era Kelulau) has 14 seats, and members are elected for 4-year terms by popular vote. The House of Delegates has 16 members, one for each state, and members are elected by popular vote, also for 4-year terms. Parliamentary candidates contest elections on the basis of their personalities and platforms; there are no party affiliations. There is a president and vice-president. There are 3 levels of court, headed by a Supreme Court, supported by a National Court, and Courts of Common Pleas.

Palau has been successful at blending its traditional heritage with its new democratic government, and that resulting government has helped to mix Palau's traditional economy with its new, more market-oriented one. Land ownership is one example of Palau's success at blending traditional practices with its new economy. As with many Pacific island nations, Palau has a long history of sharing income and land within a clan and community. Market economies are based on private ownership of land. The Palau government has taken legislative steps to accommodate the traditional sharing of lands with the free market economy by designing laws that provide guidelines for issuing land titles on land traditionally held by a family or clan.

In the year 1997-98, that government revenue (including grants) was anticipated in the budget as 57 percent of GDP. Of this, 59 percent was raised by government tax and other non-tax income, and 41 percent was grants from the United States. Income tax raised 11 percent of government revenues (excluding grants), import duties 10 percent, gross revenue tax on business 14 percent, other taxes 8 percent, and non-tax revenue (licenses, fees, trust fund income, investment income) 56 percent.

Total spending in 1997-98 was projected at 50 percent of GDP. General administration makes up 57 percent of total government spending, education 14 percent, health 14 percent, and capital expenditures 15 percent. A budgetary surplus of 6 percent of GDP was realized. The budget has been in overall surplus from 1992 to 1998, although the annual outcome has varied between a 119 percent surplus in 1994-95 (as a result of a substantial grant from the United States on the final acceptance of the Compact agreement), and a projected deficit of 18 percent in 1997-98.

The main tax rates are: 6 percent on incomes from employment, rising to 12 percent; 4 percent on the gross revenues of businesses; 4 percent on the net incomes of financial institutions; import duties varying between 3 percent (most goods) to 150 percent (tobacco); hotel room tax (10 percent); departure tax ($20); and road tax ($50 to $150).

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

There are 61 kilometers (38 miles) of roads, of which 36 kilometers (22.4 miles) are paved. The road round Babeldaob, 100 kilometers (62 miles) in length, is a major improvement in the road system. The unpaved roads are coral-surfaced roads and provide practical, if bumpy, highways. There are no railways. The main port is on Koror, and this is the only port that is able to receive large ocean-going vessels. The mountainous terrain makes the construction of airports a problem, but there are 3 airports. The only one with a paved runway is the international airport located across from the capital Koror on Babeldoab island.

Palau's electricity is supplied mostly by diesel generators (85 percent in 1996), but the terrain does allow for the construction of dams, and 15 percent of electricity comes from hydroelectricity. In 1996 the Palau generated 200 million kWh. There is some domestic use of bottled gas for cooking. Water supply is adequate.

In 1988, there were an estimated 1,500 land line telephones in use and no mobile telephones. It is to be expected that provision of telephones, both land lines and mobiles, have increased substantially since then. International links are provided by an Intelsat satellite earth station.

The islands had 1 AM radio station and 1 shortwave station in 1998, and in 1997 there was 1 television station, and 11,000 television receivers. The Palau Gazette is published monthly by the government, and Tia Belau is published bi-weekly in both English and Palauan.

ECONOMIC SECTORS

The services sector dominates the economy, with a large number of public sector employees. In 1998, services generated 87 percent of GDP and employed 76 percent

of the labor force in 1995. The incomes in this sector are above average. The smallest sector in terms of output is agriculture (which includes fishing), which produced 5 percent of output in 1998 and engaged 9 percent of the labor force in 1995. The industry sector only employed 15 percent of the labor force in 1995, generating 8 percent of GDP in 1998.

AGRICULTURE

Palau does not produce enough food to support itself, mainly because the cost of doing so is higher than the cost of importing needed items. The main crops are coconuts, bananas, root crops such as taro (similar to the potato), vegetables, and tropical fruits. Poultry, pigs, and dairy cows are the main livestock. Crops and livestock generated only about 2 percent of GDP in 1998. Since Palau cannot incorporate any economies of scale in agricultural production, the likelihood of significant increases in the sector are slim. Fisheries generated about 3 percent of GDP in 1998, but output from the fisheries sector appears to be in a steady decline—in 1992, the value of fish landed was almost 4 times greater, and the fishing fleet has halved to 150 vessels in 1998.

Much of the catch from Palau's waters is taken by Chinese and Japanese vessels, and Palau receives income from licence fees of around $200,000 a year. It is felt that there is considerable illegal fishing. In addition, local boats meet with Chinese and Japanese vessels at sea and sell their catches to them, leading to under-recording of the Palau catch.

INDUSTRY

There is little mining and quarrying, being almost entirely the quarrying of coral for construction. The main manufacturing enterprise is a garment factory, employing some 300 workers. Other manufacturing includes bakeries, building material, furniture, and handicrafts, all of which serve the domestic market.

There are 2 power plants at Aimeliik and Malakai. The construction sector is the largest part of the industry sector, and it generates 8 percent of GDP and employs 14 percent of the workforce.

SERVICES

The services sector employs three-quarters of the workforce and generates more than four-fifths of GDP. Transport and communications generate 16 percent of GDP; distribution, restaurants and hotels, 27 percent; financial services 6 percent; and public administration, community and other services, 51 percent.

The banking sector is made up of 3 U.S. commercial banks, 5 domestically-owned commercial banks, and the National Development Bank of Palau (NDBP). Most lending by the commercial banks is made up of consumer loans for construction, travel, and education. The NDBP is responsible for most business loans. There was concern over the operation of the domestically-owned commercial banks in 1999, which were not subject to any banking regulation. A ban was imposed on certain international transactions, as it was thought that the banks were being used for money laundering. There have subsequently been U.S.-assisted initiatives to tighten control of the banks.

The publicly-owned Palau National Communication Corporation, by virtue of operating a monopoly, generally manages to cover its costs. However, the 1997-98 reduction in tourism, as a result of the Asian economic crisis, led to a fall in the number of lucrative international calls, and the corporation posted a loss.

Tourism is a major source of foreign exchange earnings. In 1997, there were 73,000 arrivals in the Islands, and the sector generated $70 million, equivalent to 53 percent of GDP. The sector is expanding rapidly—in 1993, tourism receipts were $18 million. At present there are 1,200 hotel beds, and a further 560 are planned to be in operation by the end of 2001.

INTERNATIONAL TRADE

Merchandise exports of $11 million in 1997-98 were made up almost entirely of fish products. There are some exports of copra (dried coconut), garments and handi-crafts. Exports of seashells for buttons, ornaments, and making lacquers are not recorded, but there is probably a small amount of informal trade. The fishing sector appears to be in a steady decline. In 1992-93, fish exports were around $17.7 million. The decline is partly because of changes in the available fish stocks, as a result of oceanographic factors. In addition, fish prices fell after 1996 as a result of the Asian economic crisis, reducing demand for fish. Exports of fish have also been hindered by a shortage of refrigerated air freight services from Palau. Exports go mostly to the United States and Japan.

Merchandise imports were $52 million in 1997-99. Food products made up 14 percent of imports by value, beverages and tobacco 8 percent, petroleum 25 percent, chemicals 3 percent, machinery and transport equipment 23 percent, and manufactured consumer goods 26 percent. The main sources of imports were the United States (40 percent), Guam (18 percent), Japan (13 percent), Singapore (13 percent), and Taiwan (5 percent).

MONEY

Palau uses the U.S. dollar as its currency. This has the advantage of bypassing the expense of running a central bank. Also, the currency is completely convertible,

and price stability is reasonably well ensured, as Palau does not have the ability to print currency. The rate of inflation was less than 3 percent a year from 1996-98. The only drawback for "dollarised" economies is that they do not earn the seigniorage (the profit earned from the minting of coins) they would gain if they issued their own currency. The increasing number of countries that have been attracted to using the U.S. dollar in place of a domestic currency has caused the United States to consider sharing some of the seigniorage it earns as a currency issuer.

POVERTY AND WEALTH

There are no figures on the numbers below the poverty line, but given the income level and the structure of the economy, probably less than 10 percent of the population live in poverty. Most of those affected are among the 30 percent of the population living outside Koror, who rely on small-scale agriculture and fishing for their livelihoods. Infant mortality is 18 per 1,000 births in 2000 (in the United States, the rate is 6 per 1,000). The per capita GDP of Palau ($6,987 in 1998) was one-third that of Guam and about one-quarter that of Hawaii. Household and agricultural workers had the lowest wages, while bankers, insurance agents, and lawyers had the highest.

Retail workers made up the largest category of wage earners and reported an average yearly wage ($6,044) that was slightly lower than the GDP per capita.

A life expectancy in 2000 of 69 years is high, and the level of adult literacy, last surveyed in 1980, was 92 percent. Taken together with its upper-middle income status, these factors, when evaluated by the criteria used by the UN, give Palau a position near the top of the countries with a medium level of human development.

WORKING CONDITIONS

The economically active labor force was estimated at 8,300 in 1988, and 7 percent of the labor force was recorded as being unemployed. However, the unemployment rate has little meaning in an economy like that of Palau—it relates to those registering as looking for jobs in the urban areas as a percentage of the formal labor force. A substantial part of the labor force is in the agriculture and fishing sectors, much of it in small-scale family enterprises outside the formal sector. There are no unemployment benefits, and those without work or support from families or charities cannot survive. It is likely that there is considerable disguised unemployment in the rural areas, with tasks being shared and the work capable of being carried out by a smaller workforce.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

1000 B.C. Migration to Palau Islands from other Pacific Ocean islands begins.

1525. Spanish navigator Alonso de Salasar is first European to sight the archipelago of the Caroline Islands, of which present-day Palau is a part.

1529. Alvaaro de Saavedra lands on the Caroline Islands, and claims them for Spain.

1783. British vessel, under Captain Henry Wilson is shipwrecked near Koror, and the crew stays 3 months rebuilding the ship.

1885. Pope Leo XIII, acting as a European mediator, confirms Spanish dominion over the Caroline Islands, while also allocating Germany trading rights.

1899. Spain sells islands to Germany, who begin phosphate mining in Anguar, plant coconuts and begin to reduce the impact of influenza and dysentery which were causing widespread loss of life.

1914. With the outbreak of World War I, Japan assumes control of the islands.

1920. Japan receives a UN mandate to administer the islands, establish schools and land property rights, and develop Koror.

1922. Japan establishes administration of all of its Micronesian territories from Koror.

1944. After fierce fighting between Japanese and American forces, the United States occupies the islands.

1945. Japanese settlers are repatriated.

1947. UN assigns the Caroline Islands, as the Trust Territory of the Pacific Ocean, to the United States. The U.S. Navy undertakes day-to-day administration.

1965. Congress of Micronesia formed by delegates from Pacific islands to press for independence.

1967. Commission established to make recommendations on the future government of the islands of Micronesia.

1970. Commission confirms that the peoples of Micronesia have a right to sovereignty, self-rule, and to terminate association with the United States.

1979. Referendum in Palau District approves constitution, which forbids presence of nuclear weapons, including those on visiting vessels.

1981. Constitution comes into effect, and the islands become the Republic of Palau, although not independent of the United States. Haruo Remeliik becomes first president.

1982. The United States signs Compact of Free Association which will allow an independent Palau to rely on the United States for defense and to receive U.S. aid.

1983. Referendum in Palau fails to endorse Compact of Free Association (which allows transit and storage of nuclear materials) by requisite 75 percent of votes cast.

1984. Referendum again fails to endorse Compact.

1985. President Remeliik assassinated. Lazarus Salii elected to succeed Remeliik.

1986. Despite the United States agreeing to observe ban on nuclear material, Compact again fails to be endorsed in 2 successive referenda.

1987. Fifth referendum on Compact fails. President suspends 70 percent of public sector employees on the grounds of financial crisis. Further referendum approves change in constitution to require only simple majority for the endorsement of the Compact. In December, Compact is approved by referendum on a simple majority.

1988. Supreme Court rules against approval of Compact by a simple majority. President Salii, under investigation for corruption by U.S. General Accounting Office, commits suicide. Ngiratkel Etpison elected president.

1990. Seventh referendum again fails to approve Compact by required 75 percent.

1992. Kuniwo Nakamura wins presidential election. Second referendum to allow simple majority for endorsement of Compact is approved by 62 percent of voters. Challenge to decision in courts is unsuccessful.

1993. Eighth referendum on the Compact is endorsed by 68 percent of voters, but the decision is challenged in the courts.

1994. Court challenges fail. Palau finally becomes independent on October 1, under the terms of the Compact of Free Association.

1996. During presidential election, bridge between the islands of Koror and Babeldoab collapses, killing 2. Nakamura re-elected president.

1997. Legal settlement for collapse of bridge between Koror and Babeldoab with payment of $13.8 million to Palau. New bridge approved at cost of $3.8 million.

1999. Palau is subject to an international banking transactions ban as a result of practices thought to facilitate money laundering.

2000. Tommy Remengesau elected president. New $100 million road around the island of Babeldoab is announced which will allow capital to be moved to Melekeok.

FUTURE TRENDS

The economy is heavily dependent on the grants received from the United States as part of the Compact agreement. In the 1998-99 budget the Compact grants were $13 million (10 percent of GDP), and other grants from the United States were $11 million (8.5 percent of GDP). The Compact grants are scheduled to be phased out, and to end in 2008-09. Palau has invested some of the large early payments under the Compact agreement, and income from these investments will serve to cushion the position when the Compact agreement is due to end. It is expected that the Compact agreement will be renewed, as the defense provisions are an important consideration for Palau, and it is possible that Compact grants will be continued. Even if they are not, it is likely that the United States will increase grants under other headings to compensate, so that the situation after 2008-09 is not likely to be as severe as at one time anticipated.

Tourism is clearly the best long-term prospect for generating income in Palau, given the scenic attractions of the mountainous islands and the strong association with Japan (Japanese is an official language in one of the states). However, international investment will be necessary for the development of tourism, but a barrier at present is the regulation that prevents foreigners from owning land.

DEPENDENCIES

Palau has no territories or colonies.

BIBLIOGRAPHY

Bank of Hawaii. Republic of Palau Economic Report: 2000. <http://www.boh.com/econ/pacific/pal/2000/palau2000.pdf>. Accessed August 2001.

International Monetary Fund. Republic of Palau: Recent Economic Developments. Washington D.C.: IMF, 1999.

U.S. Central Intelligence Agency. CIA World Factbook 2000: Palau. <http://www.cia.gov/cia/publications/factbook/geos/ps.html>. Accessed August 2001.

World Yearbook. London: Europa Publications, 2000.

—Michael Hodd

CAPITAL:

Koror (a new capital is being constructed on the nearby island of Babeldoab).

MONETARY UNIT:

United States dollar ($).

CHIEF EXPORTS:

Fish, coconut products, shells, handicrafts.

CHIEF IMPORTS:

Foodstuffs, beverages, tobacco, petroleum, cement, machinery, transport equipment, consumer manufactures.

GROSS DOMESTIC PRODUCT:

US$160 million (1997 est.) [includes U.S. spending].

BALANCE OF TRADE:

Exports: US$11 million (1998 est.). Imports: US$63 million (1998 est.).