Saipan-- Then and Now - “Post War Economic History in a Nutshell"

By William H. Stewart, Economist

From the Trust Territory period to U.S. affiliation
    I suspect there are many people new to the islands along with some college students here and abroad who have little knowledge of the area's relatively recent and turbulent economic history -- not having lived it. The following essays present some of the highlights in somewhat abbreviated form.

    That the islands have recently experienced both "boom" and "bust" over a rather short span of development since their affiliation with the United States, I do believe that the relationship assures -- if for no other reason -- that the U.S. can not afford the embarrassment of having a third word economy under the American Flag. Certainly not if it is to continue to offer the American model as an example for many underdeveloped economies to emulate.

    Since the end of World War II the United States has spent untold billions of dollars in foreign economic aid in dozens upon dozens of countries
throughout the globe in an effort to assist in lifting them from the depths of poverty. In some respects that was what the Cold War was about. I dare say that none have been the recipient of funds anywhere near the amount the United States has provided the Northern Mariana Islands (NMI) from the period of the seventies when the area was still under the jurisdiction of the Government of the Trust Territory of the Pacific Islands up to the present.

    I doubt if anyone knows for certain the total dollar amount of the assistance made available to the NMI in a variety of forms either through the Covenant Agreement or direct financial monetary flows directly from various U.S. Government departments as non cash assistance programs.

    The islands have benefited from a myriad of social and economic programs made available by the U. S. Government such as: food stamps; medical care provided virtually free of charge from the U. S. National Health Service; Medicaid and Medicare; rent subsidies; low cost housing for the disadvantaged; loans for small businesses and higher education; agricultural services; children's headstart programs; social security and many more programs and services of the various departments of the U.S. Government. Add to the above the use of the U. S. Postal System with its cooperative agreements among the nations of the world; the benefits which accrue from drug enforcement capabilities and life saving, search and rescue activities of the U. S. Navy and Coast Guard. The weather service and typhoon warning systems, typhoon damage relief from a variety of agencies; diplomatic protection when traveling in foreign lands, and on and on -- all not even pro-rated calculated and included in the direct financial support provided the NMI
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    I think I'm probably as qualified as anyone to estimate the total financial contribution flowing to the NMI since 1970 when I first documented the need for a $5 million grant from the U.S. Congress for the island's Economic Development Loan Fund (EDLF) a portion of which was later morphed into the Commonwealth Development Authority. From that time until the present I estimate that the islands have probably received almost one billion dollars in financial assistance from U.S. taxpayers beyond that provided by Covenant agreements.

    That the islands have not been able to sustain a vibrant, self sufficient, continuous economy in view of the huge expenditures made available to assist in this endeavor is unfortunate. Of course, many outside forces have had a serious impact upon the economy most of which have been beyond the control of the Commonwealth. It is entirely possible that the islands will forever be subject to the economic ebb and flow of economic tides periodically rising and falling as they effect the fortunes of island businesses and residents alike. Experience tells us these should be anticipated and appropriate contingency plans prepared, "rainy day" emergency funds you might say.

    There is probably no other area under the American Flag with a more fragile economy susceptible to the negative influences of outside forces than the Mariana Islands. The health of their economies are influenced by many external forces beyond their control of which a partial list includes, but not limited to: U.S. inflation rates magnified in the islands as a result of increase transportation costs; volatile fuel costs; fluctuating foreign currency exchange rates related to the U.S. dollar; political and terrorist attacks against the nation at large will often discourage tourists from Asia as will the area's communicable diseases such as SCARS, Asian Flu, etc. and the high cost of living largely resulting from the time and cost of transporting goods and supplies great distances to the islands. Saipan is 5,300 nautical miles from San Francisco -- 3,200 n.mi. from Honolulu
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    Following the Covenant agreement It was the mid-eighties which could be considered the "take-off" point for the economic "boom" which was to follow. Two serendipitous events occurred almost simultaneously both propelled by events far beyond the control of the NMI to influence -- and both somewhat coincidental in an odd way probably never again to be repeated.

    The first was the recognition by a number of garment manufacturers involved in "cut and sew operations" that they could manufacture their products in the CNMI and -- as permitted by the U.S. Custom regulation known as of Headnote 3 (a) -- export their goods to the huge United States domestic market duty free. This would ultimately result in more than 34 manufacturers by 1997 employing some 15,700 nonresident aliens and several hundred local workers.

    The second event also occurred in 1986 at the Plaza Accords in New York when the United States as a result of huge trade deficits and other factors devalued the dollar in relation to the Japanese yen and other currencies. By the end of 1987 the dollar had fallen by 54% against the yen. This had the effect of doubling the size of the Japanese economy almost overnight and was the "kick-off" for massive amounts of Japanese investment in the NMI's tourism and other sectors soon resulting in tremendous increases in Japanese visitor arrivals. The islands had never seen anything like it and likely never will again.

    It was during this period that one might be struck by a strange irony -- United States Government expenditures within the Northern Marianas aside -- large private American investment was somewhat conspicuous by its absence in the islands.   It is something of a paradox that, at least for a period of time in the eighties, it was largely private capital from a defeated former adversary rather than investment of any magnitude from the victor's private sector that resulted in the initial reconstruction of Saipan's economy. The only U.S. investment at the time was made by Guam's Bob and Ken Jones in Saipan's Royal Taga Hotel and a cattle ranch on Tinian along with several other business investment endeavors.

    Considering that by the early eighties the prewar Japanese presence in the islands had, for the most part, extended for a period of only 30 years (1914 to '44), as compared to more than the equivalent of four decades by 1986 for that of America. It was somewhat surprising that the geographic and economic ties between the islands and Japan were reforged so vigorously in the decade of the eighties.

     Surprising, until one considers the strong ancestral relationship Japan has with the islands. A relationship which should have be nurtured all along -- and to some extent was, but I fear was also taken for granted particularly in later years as witnessed by the "bail-out" of many Japanese investors in recent years.

Setting the stage for an economic "take-off"
    As mentioned in part one I suspect there are many people new to the islands along with some college students here and abroad who have little knowledge of the area's relatively recent and turbulent economic history -- not having lived it. These essays present some of the highlights in somewhat abbreviated form.

     The following is a brief review of the government's financial resources which over the period described below would indicate that a larger portion could have been used to improve basic infrastructure -- but was neglected in spite of the huge sums of money available at the time to meet such needs.

     During the period 1986 to 2004 (the period for which have data) the CNMI government's total internally generated revenue was $3.07 billion. During this period the total expenditures on capital improvement projects in the Commonwealth as generated from the islands' own internal sources was a meager 3.2 percent ($78.4 million). Over the above period, other government expenditures were wages and salaries $1.6 billion (64%) and all other expenditures of $807.5 million (32.8%).

   The vast majority of the total expenditures made on capital improvement infrastructure projects resulted not from locally generated revenues but largely as a result of U.S. financial assistance in the form of program grants and loans and Covenant Funds.

     The result being that CNMI's locally generated revenue permitted the NMI government to employ more people. According to census figures, at the time of the enumeration, government employment figures for 1990 were 3,116 and ten years later in the year 2000, at a time when the economy was contracting -- government employment totaled 4,996. The increase over the ten year period was almost 30 percent.

     Over the period 1986 - 2004 the total reported business gross revenue generated by the private sector was $31.3 billion. Add to the above $393.6 million in section 702 Covenant grants from the Federal Government (from the 2nd and 3rd funding agreements) and it can readily be concluded that U.S. financial assistance has accounted for the bulk of the islands' infrastructure and "freed-up" huge locally generated sums permitting an increase in government employment and, of course, its payroll.

     The above sums do not include the myriad of Federal program grants provided the islands in the form of: education, health and human services, road improvement, transportation, housing and energy assistance, food stamps, etc., all provided by the U.S. government.

    Since the inception of Commonwealth status the precise amount of Federal program assistance over and above Covenant funds is unknown -- but my estimate is certainly more than 1/2 billion dollars -- actually closer to one billion.

    Again, these were funds for programs the CNMI did not have to finance from its own internally generated sources which in turn "freed-up" more local revenue for the government's payroll amounting to $1.6 billion over an 18 year period for an average of $88.9 million per year.

    The above is a brief cursory review of the island's financial association with the United States. Prior to that political affiliation and following the devastation of Saipan and Tinian's as a result of the war -- the Northern Marianas remained remote and largely isolated for many years during which there was no economy.

Saipan before Commonwealth status and the economic "boom"
    Before the island's association with the United States and for a long period following Saipan and Tinian's devastation as a result of the war -- the Northern Marianas were remote and largely isolated during which time there was no economy worthy of the term.

    In the days before jets, the trip to Saipan required many mind numbing hours. Including ground time for refueling the flight from San Francisco to Honolulu took 9 1/2 hours; from Hawaii to Wake Island another 9 1/2 hours; from Wake to Saipan - 8 more hours. Imagine that! Today there is no place on the globe that can't be reached in a much shorter period of time and in greater comfort.

    Aside from the geographic isolation there were other reasons for the economic isolation. It was the period at the height of the Cold War. In the fifties the CIA had closed off Saipan for use as a covert training base. The United States discouraged foreign investment by exercising the restrictive United Nation's "Favored Nation Clause -- which effectively prohibited any foreign investment in the islands. It was necessary to keep the covert training base a secret.

    In 1962 the CIA closed its secret training complex and soon thereafter Saipan became the Trust Territory Government's administrative center for managing the affairs of 2,100 islands spread over 3 million square miles of the western Pacific.

    Even after the CIA facility was closed the restrictive foreign investment policy remained in place as an obstacle to some types of development until rescinded in 1973. The effort to remove this constraint was a direct result of the vision and work of David M. Sablan.

    Those were the days when the islands were still largely devoid of many of the amenities of the mid 20th century, amenities which one would normally associate with a developed economy -- in fact there was no economy worthy of the name until around the mid-eighties and the introduction of the garment industry and the beginning of a fledging tourism sector.

    It was a time when one reached the islands from the United States either on a Pan Am Boeing 707, or on Trans World Airlines flight #1 enroute around the world which landed at Guam for a short fuel stop before proceeding with its military passengers to battlefields of Vietnam then on to Bangkok and points west as the jet raced to catch the sun.

    To get to Saipan from Guam one transferred to an ancient 4 engine, 84 seat D C 6 which flew with its on-board mechanic and a bunch of spare parts for a 45 minute flight to Saipan's brush lined, unlighted, coral airstrip at Saipan International at the southern end of the island.

    Saipan's airstrip had no control tower and a “fly by” was necessary to check the wind direction and scare away any stray dogs or cattle that might have wandered onto the weed infested landing path of World War Two’s Kobler Field situated at the southern tip of the island.

     Disembarking from the aircraft one entered a small, dilapidated, sun bleached, corrugated tin structure without doors and without glass in open air windows furnished with several roughly hewn wooden benches.

    In those days before U.S. grant in aid for road improvement and surfacing Saipan's roads were largely pot holed and were either choked with coral dust during dry periods or deep, water filled, bone shattering, axle breaking craters which had remained unimproved since the U. S. military left years before.

    The Townhouse market (later Payless) was situated in a quonset hut. There were only two hotels -- the Hafa Adai consisting of 10 ply-wood bungalows each a little larger than a shipping container and the 56 room Royal Taga Hotel (where the Saipan World Resort now stands). In those days long distance calls could not be made from one’s residence, overseas telephone calls had to be placed from an RCA booth in Susupe.

    There were no recreational craft in the lagoon save one, a glass bottom boat operated by Tetsuo, a Palauan.

    Middle Road was almost entirely undeveloped. It was another pot holed, two lane, dusty road with hardly a business on either side. The maximum speed possible was about 20 - 25 mph. It is amazing what a paved road can do to encourage investment and development along both sides of its length.

    To even think of a tourism based economy was a dream of only a few as the Japanese could only convert yen in an amount equivalent to $743. This amount was hardly sufficient to develop a tourism sector of any size even in view of a low price structure. A round trip ticket to Guam purchased at the Pan American Airline office, or from Continental Air Micronesia, was $28. Those were the days when there was only one flight a day and one cargo ship a month. The population of Saipan, Tinian and Rota combined was 12,256 including the employees of the Trust Territory Government, the islands’ major employer.

     The purchasing power of the dollar at the time would be equal to about 18 cents today. The 2,376 registered vehicle owners, including those of the Trust Territory and Marianas District governments, purchased gasoline for 38 cents a gallon; rice was 13 cents per pound. There were 55 businesses in the Northern Marianas employing 673 people.The total annual government revenue was only $433,334 and the islands’ exports amounted to a meager $254,635. There was no private sector economy worth mentioning, no tourism, no garment factories, only government jobs for the most part.
     Personal computers, fax machines and the internet were unheard of and slide rules were still widely used.

     Doctor Torres hospital was located where the college is today. Capitol Hill Housing built by the CIA was considered by some to be among the best on the island. The single Duty Free Store was housed in the Royal Taga Hotel and was no larger than a row of telephone booths, ten people in the shop made a crowd. The number of island restaurants could be counted on one hand.

    There was very little money available on Saipan at the time. Nor was there much criminal mischief in those days, usually only rocks being reported thrown at someone’s tin roof. or a stolen chicken. But don't be mislead -- it was a great place to live -- it still is.

Building a 21st century future
    The islands have had to overcome some tremendous obstacles in their quest for economic growth. They had a small indigenous population and thus a small domestic market fragmented over three inhabited islands. There were no known readily exploitable natural resources in the traditional sense other than those of the sea. The islands were, and still are, located far from major sources of supply and foreign markets. Both raw materials and exported products, (of which there were none) were subject to high freight rates. Jet aircraft was not that frequent a visitor and thus had not become a major contributing factor in disjointing one’s concept of time and space in the vastness of the Pacific cosmos. In those days the air was filled with invisible waves transmitting teletype, telex, and radio signals from every corner of the world -- but the messages they carried were largely unheard by many. Walter Cronkite’s CBS News was ten days late in reaching Saipan and when received was aired in black and white originating from WSZE TV, the small television station on Navy Hill that glowed to life about 6 P.M. and went off the air around midnight or earlier to the sound of the National Anthem. Mail from the U. S. east coast took 10 or 12 days. Some things never change.

    It’s unfortunate the politicos have gotten themselves into the current situation since the islands have so much potential but fall so far short of achieving that potential.

    I do not know of any other government in the world that would permit so many non-resident aliens to invest in such a small economy at the expense of depriving its own citizens of the opportunity to enter businesses that should have, at least in my opinion, been reserved for local implementation.

    I have a friend who lives on the eastern side of Saipan on a little plot of land he refers to as a ranch. His house is a small structure with a tin roof, he has a pick-up; a few chickens; pigs and a goat and grows a few vegetables. He’s happy and really doesn’t need anything and is quite satisfied with his life style. Like some other local people in the islands, he is not -- and has never been -- a direct participant in the island’s tourism based economy.

    He probably could care less that the garment industry died or whether the tourism sector rises or falls -- it makes little difference to him.

    That in my mind is a basic issue -- too many local people were left out of the private sector for too long. Even to the extent of permitting non U.S. citizens and others to take over the “mom and pop” neighborhood stores, gift shops and other small “entry-type” businesses. Hindsight being what it is -- in my judgment this should never have been allowed to the extent -- and to the degree -- which occurred. In my judgment many such businesses (not all) should have been reserved for the time when a local person stepped forward to implement the activity.

    Geographic isolation and cost has served to limit cultural and economic exposure of many residents. Too many local people have been confined to the islands without the benefit of travel to other touri= st destinations.

    Result: Many have nothing to compare Saipan with another successful tourist destinations such as: Bermuda, Bahamas, the Greek Islands, etc. -- they simply don’t know and have no vision as to what an island tourist destination could be and the satisfaction and benefits by participating more directly in the economy.

In any case, no one ever said it’s a perfect world. If some of the constraints to additional investment are to be overcome, or mitigated, at least the starting point should be that they be recognized. In the final analysis it's their island -- the bones of their ancestors are buried here-- they will make of it what suits them.

    Today the Marianas archipelago, situated in a universe of water, are the farthest stars out in the American galaxy, a political affiliation few could have foreseen several decades ago.

    I’m beginning to suspect -- truth be known -- that the United States Congress is not all that familiar with the nation's newest affiliated political entity and doesn’t quite know what its long-term policy should be toward the islands.

    I personally believe the NMI will overcome its present economic difficulties and with the wise counsel of Greg Sablan, the NMI delegate to the United States Congress and others, the United States will continue to assist the people to develop the islands to their full economic potential.

    The islands have certain advantages provided by their geographic proximity to the vast markets of Asia including the one great advantage of economic stability provided by American law which is the absolute bedrock of stability upon which confidence rests and which creates the investment atmosphere permitting individuals and businesses to prosper and grow.

Note: Bill Stewart is a former senior economist for the NMI and has privately authored several books including:"Saipan In Flames", a WW II account; the “Business Reference and Investment Guide to the CNMI" and several hundred thousand tourist and historical maps of Saipan, Tinian and Rota distributed free by MVA and island businesses. His other investment promotional materials published by the government include:“Introducing the Northern Mariana Islands - An American Doorstep to Asia”; and "Tourism Investment Opportunities in the NMI.”