With the United States government in political deadlock over the budget, the debt ceiling, and healthcare, it is a tough time to be a freely associated state. The renewal of funding for Palau’s Compact of Free Association stands as a case in point. In theory, Palau, nestled between the Federated States of Micronesia (FSM) and the Philippines, should be receiving assured U.S. funding for vital infrastructure, healthcare, and education programs. Instead, it is caught in limbo because of political bickering in Washington. Politics are threatening to weaken a decades-long relationship that benefits both parties.

Palau was under U.S. stewardship following World War II until it became independent in 1994, after which it entered a period of free association. The compact agreement benefits both nations. The United States provides Palau’s security, supplements its government’s budget, and gives Palauan citizens the ability to work in the United States in return for privileged access to a strategic area of the western Pacific that is roughly the size of Texas.

There is consensus among Palau’s government, the White House, and Congress that the compact budget should be passed. Palau has proved itself a reliable partner, acting as a regional advocate for U.S. reengagement in the South Pacific and a key supporter in the Pacific Islands Forum and the United Nations. Meanwhile, the compact funding gives the island nation of 20,000 a viable opportunity to achieve self-sufficiency.

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The Month That Was

• Abbott announces cabinet following election win
• Cunliffe becomes New Zealand’s new opposition leader
• Leaders meet for Pacific Islands Forum, endorse declaration on climate change

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Looking Ahead

• Discussion about the path to a new global climate change agreement
• CSIS 2013 Global Security Forum
• Hugh White at CSIS

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Prioritizing Palau: Why the Compact Budget Matters

By Elke Larsen, Research Assistant, Pacific Partners Initiative (@PacPartnersDC), CSIS

With the United States government in political deadlock over the budget, the debt ceiling, and healthcare, it is a tough time to be a freely associated state. The renewal of funding for Palau’s Compact of Free Association stands as a case in point. In theory, Palau, nestled between the Federated States of Micronesia (FSM) and the Philippines, should be receiving assured U.S. funding for vital infrastructure, healthcare, and education programs. Instead, it is caught in limbo because of political bickering in Washington. Politics are threatening to weaken a decades-long relationship that benefits both parties.

Palau was under U.S. stewardship following World War II until it became independent in 1994, after which it entered a period of free association. The compact agreement benefits both nations. The United States provides Palau’s security, supplements its government’s budget, and gives Palauan citizens the ability to work in the United States in return for privileged access to a strategic area of the western Pacific that is roughly the size of Texas.

There is consensus among Palau’s government, the White House, and Congress that the compact budget should be passed. Palau has proved itself a reliable partner, acting as a regional advocate for U.S. reengagement in the South Pacific and a key supporter in the Pacific Islands Forum and the United Nations. Meanwhile, the compact funding gives the island nation of 20,000 a viable opportunity to achieve self-sufficiency.

Palau’s new compact budget should have been passed by Congress in early 2011 but has faced severe obstacles. The newly proposed compact funding is designed to build on the original 1994 compact agreement by improving accountability for grant funding, giving grant funding in decreasing amounts, and feeding funds into a trust that will help sustain Palau’s government budget after the 20-year term of the compact concludes. If the compact is approved by year’s end, the United States will send Palau $189 million in aid between 2014 and 2023, which will have an enormous impact on the island state’s $60 million annual budget.

Unfortunately, Congress refuses to approve the compact without additional offsets to the proposed budget. The Obama administration has suggested that offsets could come from mining on federal lands in the United States and from fees on leases. But this was shot down by the Senate Committee on Energy and Natural Resources, which argues that those revenue sources need to benefit the states in which they are collected. Government functions in Palau are currently being bridged by $13 million of discretionary funding annually from the Department of the Interior, authorized by continuing resolutions in Congress. But the latest resolution for 2014 has been stalled by the current government shutdown, jeopardizing next year’s payment.

A recent report on the Federated States of Micronesia and the Republic of the Marshall Islands (RMI), both of which have free association compact agreements with the United States, will likely feed these budgetary concerns. The U.S. Government Accountability Office report, released in September, finds that there has been poor oversight of how the compact funding has been spent and raises severe concerns about whether FSM and RMI will become self-sufficient by 2023 on their current trajectory. Their compact agreements stipulate that the money must be spent on six key sectors: education, health, infrastructure, environment, private-sector development, and public-sector capacity building. But over the past 10 years, the majority of funding has helped maintain the bloated education and health sectors.

This mismanagement has been exacerbated by a lack of oversight. The Department of the Interior’s Office of Insular Affairs, which is charged with auditing the FSM and RMI governments, has been severely understaffed due to budget constraints and has not been monitoring expenditures closely. The reason this office has been underfunded is depressingly simple: it has not been a budget priority. What data have been collected have been inconsistent and therefore not useful in tracking development progress. It is thought that corruption in the two island states has also played a role.

Palau’s agreement is far more structured than those of FSM and RMI regarding where the money flows. In the past, Palau has also proved more responsible in how it handles its funding. That said, if Palau and the United States plan to honor their commitment to help the former achieve self-sufficiency, then the FSM and RMI experiences should serve as lessons that both sides must invest resources in adequate oversight.

Congress needs to look to the national interests of both the United States and Palau, and re-prioritize finding a solution to the disagreement over budget offsets. By passing the compact funding, the United States and Palau will be able to begin a planned reform process and invest in Palau’s future self-sufficiency. Without a new agreement, Palau is receiving just enough money to scrape by and important development projects are being delayed.

There are also strategic implications to continued delay. The longer the United States waits, the more it will be perceived as neglecting an important, reliable partner in the western Pacific. Palau has a special affinity for the United States, but if Washington’s indifference convinces Palau that its interests are better served by turning elsewhere, it will negatively affect the U.S. strategic position in the Pacific. Moreover, the Pacific Islands so far welcome renewed U.S. attention under the Obama administration. But by ignoring one of its most ardent supporters, and the host of the 2014 Pacific Islands Forum, Washington could make it difficult for Pacific nations to take its reengagement agenda seriously.

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The Month That Was

Australia

Abbott announces cabinet following election win. Prime Minister Tony Abbott announced his new cabinet of 19 ministers on September 16. He selected just one woman—Julie Bishop as foreign minister—eliciting criticism for perceived backsliding just months after Australia’s first female prime minister, Julia Gillard, left office. Abbott led the opposition Liberal-National Coalition to a convincing victory in Australia’s September 7 federal elections. Coalition candidates won 90 out of 150 seats in Parliament, while the incumbent Labor Party held on to just 55.

Abbott visits Jakarta amid diplomatic row over asylum seekers. Prime Minister Tony Abbott visited Jakarta from September 30 to October 2 in his first overseas trip since taking over the government helm. The issue of asylum seekers dominated conversations with Indonesian president Susilo Bambang Yudhoyono. Abbott, who campaigned on a controversial pledge to turn asylum seeker boats back to Indonesia, moderated his statements while in Jakarta. He expressed respect for Indonesian sovereignty and downplayed previous statements about using Australian naval vessels to tow asylum seekers back to Indonesian waters if necessary.

Business confidence at two-year high. The Australian dollar has gained 4 percent against the U.S. dollar since the beginning of May, and business confidence is at a two-year high following the September 7 election of Tony Abbott’s conservative government. The economy also benefitted from the U.S. Federal Reserve’s decision to delay a much-anticipated tapering of its $85 billion per month stimulus program, as well as from indications that the Reserve Bank of Australia’s lowering of interest rates to encourage non-mining economic activity is beginning to pay dividends.

Labor parliamentarians vie for party leadership. The Australian Labor Party is carrying out a month-long internal leadership election following its disastrous September defeat to the Liberal-National Coalition. Veteran lawmakers Bill Shorten and Anthony Albanese have emerged as frontrunners and are campaigning around the country before voting closes on October 13. Both the Labor caucus and rank-and-file party members are voting for their new leader, a first for the 112-year-old party.

Government defunds Climate Commission. The government of Prime Minister Tony Abbott cut federal funding for Australia’s Climate Commission on September 20. The commission was set up by former prime minister Julia Gillard in 2011 as an independent source for information on climate science. The decision to scrap the body was widely expected after Abbott ran on a platform that promised to eliminate Australia’s carbon tax. The commission’s head has managed to raise enough funds to relaunch it as a nongovernmental organization called the Climate Council.

Foreign aid agency to be integrated, budget cut. Prime Minister Tony Abbott’s office announced on September 18 that the Australian Agency for International Development will be integrated into the Department of Foreign Affairs and Trade. The government said the reorganization is meant to improve synergy between Australia’s development, trade, and political goals, but budgetary pressure also appears to be a motivating factor. The integration decision came just two weeks after the government announced a $4.2 billion cut to Australia’s foreign assistance budget.

New Zealand

Cunliffe becomes new opposition leader. David Cunliffe became leader of New Zealand’s opposition Labour Party on September 15, defeating fellow lawmaker Shane Jones. David Shearer’s August 22 resignation as party leader triggered the internal election. Shearer said he resigned after losing the confidence of his caucus one year before New Zealand’s federal elections. Cunliffe has announced a “beefed-up” shadow cabinet to see Labour through the 2014 polls with the intent of unseating Prime Minister John Key’s National government.

Referendum to be held on sale of public assets. Prime Minister John Key announced on September 30 that a referendum will be held on the sale of public assets. Citizens will be able to express their support or disapproval of plans to sell government-owned companies, including Mighty River Power and Air New Zealand, by postal vote from November 22 to December 13. The referendum will be nonbinding but will indicate whether Key has a mandate for his policy of privatization.

Key meets with Abbott in Australia. Prime Minister John Key became the second leader to meet Australia’s new prime minister, Tony Abbott, flying to Canberra on October 2 for a brief half-day visit. Key and Abbott had an amicable meeting, although the issue of welfare for New Zealand citizens added a bitter note to the encounter. Advocacy groups in New Zealand have criticized Key for not condemning Canberra’s recent refusal to extend welfare benefits to New Zealand citizens living in Australia, describing it as “discrimination.”

Pacific Islands

Pacific nations sign small arms treaty. Kiribati, Nauru, and Samoa joined 104 other nations, including the United States, in signing the United Nations Arms Trade Treaty on September 26. The treaty seeks to regulate the $70 billion global trade in armaments and stop the diversion and misuse of small arms. These weapons have proven destabilizing in the Pacific Islands in the past, particularly in Fiji and the Solomon Islands.

Bainimarama presents new constitution to United Nations. Fiji’s interim prime minister, Commodore Voreqe Frank Bainimarama, presented his country’s new constitution to UN secretary general Ban Ki-moon on September 30. The constitution, adopted on September 6, has been criticized for insufficiently protecting human rights. Fiji is scheduled to hold elections in September 2014 that will return a democratic government to power. Overseas registration for the Fijian expatriate community will begin on October 23 in Wellington and is expected to take place as far afield as the United Kingdom.

Tongan prime minister suffers stroke while in New York. Tongan prime minister Lord Tu’ivakano suffered a stroke on September 30 while attending the Plenary Session of the United Nations General Assembly in New York. Before falling ill, he presented UN secretary general Ban Ki-moon with a declaration on September 27 for the establishment of a “Pacific Regional Data Repository for Sustainable Energy for All.” The prime minister was part of a Tongan delegation led by King Tupou V.

Leaders meet for Pacific Islands Forum, endorse declaration on climate change. Leaders from across the Pacific gathered in Majuro, Marshall Islands, on September 3–6 for the Pacific Islands Forum (PIF). Attendees endorsed a Majuro Declaration that commits PIF members to take action to address climate change. The declaration was presented to the United Nations General Assembly and has since found traction in the United States. Secretary of State John Kerry voiced U.S. commitment to fighting climate change during a meeting with PIF leaders in New York, and the State of Hawaii signed the declaration.

New Zealand commits $17.7 million to upgrade Tongan power network. The New Zealand government announced on September 25 that it will fund an upgrade to a power network covering 33 Tongan villages. Costing an unprecedented $17.7 million, the project is the largest investment in electricity in the Pacific Islands to date. The upgrades will decrease transmission voltage to the villages, improving both safety and efficiency.

Papua New Guinea government takes over mine, repeals laws protecting BHP Billiton. Papua New Guinea’s prime minister, Peter O’Neil, has incorporated the Ok Tedi mine, long owned by Australia’s BHP Billiton, into a national trust following an October 2 court ruling. Improper disposal of waste from the mine caused severe environmental damage in the 1980s and 1990s. BHP Billiton agreed in 2002 to transfer its 63 percent stake in the mine to the Singapore-based PNG Sustainable Development Program in exchange for immunity from litigation. But O’Neil repealed that agreement on September 19 amid accusations of corruption in the program.

Papua New Guinea prime minister suggests federalism. Prime Minister Peter O’Neil on September 25 asked the Constitutional and Law Reform Commission to consider switching the government from a Westminster-style parliamentary system to a federal system. Governance in Papua New Guinea has for years been challenged by votes of no confidence and minority governments in Parliament. O’Neill said that a federal system might increase political stability at a time when the semiautonomous island of Bougainville is considering pushing for independence and other provinces are seeking greater autonomy from Port Moresby.

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Looking Ahead

Discussion about the path to a new global climate change agreement. The Brookings Institution will host a discussion October 11 on the challenges and opportunities the world faces in reaching a new treaty on global climate change. Pascal Canfin, France’s deputy minister for development and lead climate change negotiator, will provide remarks and outline possible parameters for a new agreement. The event will run from 9 a.m. to 10 a.m. in the Saul/Zilkha Rooms at the Brookings Institution, 1775 Massachusetts Ave., NW. For more information and registration, please click here.

Screening of Australian film The Rocket, set in Laos. The National Geographic Society and the Embassy of Australia will cohost a premier screening of The Rocket on October 22. The 2013 Australian movie is one of the first feature films for international release set and shot in Laos. It tells the story of Ahlo, a boy who is believed to bring bad luck, and his attempt to prove to his family that he is not cursed. The screening will be held at 7:30 p.m. at 1600 M St., NW. Tickets are $10. Click here to RSVP.

CSIS 2013 Global Security Forum. The Center for Strategic and International Studies will host its 2013 Global Security Forum on November 5. The forum will address critical challenges facing the United States and global security with a keynote address from Secretary of Defense Chuck Hagel. Panels will include “A Simulated Crisis in East Asia.” The event will be held from 8 a.m. to 4:30 p.m. at CSIS’ new headquarters at 1616 Rhode Island Ave., NW. Registration is not yet open. Click here for more information.

Hugh White at CSIS. Australian National University professor and international security expert Hugh White will give a presentation on November 6 at the Center for Strategic and International Studies on his views of the U.S. rebalance to the Asia Pacific. White will provide insight into broader regional strategic and alliance issues, and will also talk about his recent book, The China Choice. Registration for this event is not yet open, but more details will follow.

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