An Economic Diagnosis of Palau Through the Liechtenstein Lens: Moving Up the Value Chain—International Political Economy Strategies for Microstates

By its all-inclusive definition, the Pacific Rim accounts for two-fifths of the world’s surface and nearly half of the world’s population. By any standard, the nations that encompass the Pacific Rim are dissimilar in many fundamental respects, with differences ranging from culture to political systems to economic orders. They range in category from regional powers like rich and stable Japan to microstates like bankrupt Nauru and volatile Fiji. In particular, the latter category of small, Pacific Island nations faces a number of challenges in the globalized world.

Contrary to the popular image of these as places isolated in time and space, Pacific Island nations, even the microstates, are becoming more firmly integrated into global economic and cultural systems than ever before. This accelerating process is facilitated by improved transport and communication systems, and driven by the global economy’s insatiable demand for consumers, raw materials, and cheap labor.

Prior to 1989, Pacific Island states could rely on their historic colonial or metropolitan power for aid transfers to prop up their embryonic and often-emaciated economies. Times have changed in the post-Cold War world. For example, the Compacts of Free Association that defined the post-independence relationship between the United States (US) and the Marshall Islands, Federated States of Micronesia, and Palau represent the most spectacular examples of aid- for-security deals in the region, although almost all Pacific Island nations received significant subsidies from external powers. The end of the Soviet threat, and a focus on other regions, particularly Eastern Europe and the Middle East, brought on a more meager era of aid for, and interest in, the Pacific Island states.

Now, metropolitan countries no longer invite Pacific Island nations to join them as ‘partners in progress’ or ‘allies in the defense of freedom’. Instead, their new message is salvation through economic development. This message requires the receiving nation to develop an appropriate development strategy based upon its geopolitical location, resources, history, culture, and ingenuity. This approach requires innovative and creative thinking and planning. Under this new development regime, a number of Pacific Island governments have been rightly criticized for wasteful spending, ill-conceived policies, poor performance and official corruption.

This criticism is justified by the examples of countries that have wasted opportunity through economic mismanagement. Nauru and Tonga are two recent examples. These countries now face a severe challenge in laying out a reasonable strategy for economic growth.