Whatever happened to the Free Trade Zone?

By William H. Stewart
Economist

Second of two parts

As one who has observed the evolution of this economy for more than 35 years, I can state unequivocally that the islands have now wrapped themselves in a rigid, regulatory “ball of red tape,” much of which now acts as a serious disincentive to outside investment.

The freewheeling, big spending days of the late ’80s will probably never return. It cannot be expected that future investors will lease land at the unrealistically high rates that were once witnessed. The world has changed and the Commonwealth must change with it. One positive change is the creation of a free trade zone exactly as envisaged by the committee members that planned this vital investment incentive back in 1998.

The “pre-bubble” investment ghosts of yesteryear may have distorted the belief of many in the Commonwealth as to the present value of land and may have made suspect the normal appraisal technique of comparing property under valuation with actual past sales with that of similar unsold, or leased property nowadays. This is because the Japanese distorted land values in some cases in the late ’80s and often leased land that had not been adequately appraised, with the result that many probably paid too much for too little. The impact of this is not readily apparent in the Commonwealth since there is no tax on real estate but if you doubt the observation, just ask a bank mortgage officer or property owner in Hawaii how much the assessor increased their taxes as a result of an excessive price previously paid by Japanese investors for a land parcel adjacent to their property.

Notwithstanding the importance of other factors in the appraisal process, normally one definition of market value is the highest price that a property will bring if exposed for sale or lease in the open market by a seller or lessor who is willing but not obligated to sell or lease, allowing a reasonable time to find a developer who is willing but not obligated to invest, and who does so with the knowledge of all the uses to which the property is adapted and for which it is capable of being used. In some cases, however, this “rule of thumb” was not followed by many Japanese investors in the past. Those “big spending” days will never return.

Impose taxes on zone occupants, levy unrealistic public land rental fees, then forget about attracting occupants to the free trade zone. They will simply go elsewhere.

The FTZ concept is not a raid on the treasury—far from it. It is an effort to make currently unproductive land productive; provide employment for highly paid, skilled workers at wage levels even higher that of the current U.S. minimum wage of $5.15 while contributing to an increase in the amount of money in circulation within the local economy as well as increasing wage and salary tax revenue. Such zones must have some value otherwise there would not be so many being established elsewhere in the world.

The economic morass the CNMI now finds itself cannot be blamed entirely on the Asian economic crisis. Part of the blame rests with the Commonwealth. To paraphrase Pogo’s famous remark, “We have identified the problem—and it is us.” In my opinion, there are simply far too many people and too many agencies involved in the process of investment approval and too few in participating in positive investment promotion efforts.

People who know me also know that it is not my nature to be critical; however, many people within the business community with whom I have talked are utterly disgusted with the government that has developed around both local and federal regulations and the extreme difficulty in getting anything accomplished in a timely and efficient manner. But because of friendships within the system, or fear of reprisal, many—particularly those non-indigenous to the islands—are loath to speak out. As one who has worked within and without the system I suspect that all too often some employees within the bureaucracy spend more time handicapping or delaying some element in the investment progress than assisting in its implementation by helping overcome a particular delaying obstacle. If it isn’t some bird in a bush somewhere, it’s an Article XII problem or an incomplete application for one of a multitude of required permits. I am sorry but the above has to be stated. In my judgment a high level commission should be formed to sort things out and “streamline” the investment approval process.

It is understandable that the CNMI should strive to enlist investment on terms devised locally. The problem, as I see it, is that there is little, if any, latitude left for compromise in accepting investment “trade-offs.” It is now all “one-way,” often at the expense and to the detriment of the potential investor.

There seems to be little appreciation within some government agencies of the needs of the investor. With the way things are going as a result of reduced foreign investment and the departure of other businesses, it would appear that the CNMI has painted itself into a corner, leaving the potential outside investor with the impression that the Northern Marianas has all but closed its doors on additional investment projects. If this is what it wanted, so be it. However, consideration should then be given to phasing out several of the regulatory agencies, thus contributing to a reduction in the size of government. As things now stand, with the difficulty in accommodating additional outside investment, these agencies increasingly have little left to regulate. In any case, it is my belief there are now too many agencies involved in a process designed to regulate too few investors.

Over the years I have written several books on investment in the CNMI, written over two hundred articles on the subject, participated in investment promotion missions to Asian nations, talked with dozens of potential investors and prepared a summary of all (that’s all) the regulations, rules, procedures and permits required of developers. I have come to the regrettable conclusion that if the CNMI wants to attract additional outside investment, then most of the regulations should be thrown out and the process of rebuilding the regulatory system in a more investor accommodating manner should start over. Certainly a formidable task and one not likely to garner much support. Otherwise, in my judgment, to keep existing requirements on the books will likely result in only a “trickle” of foreign investment in the future. If that is what the “powers that be” want—then keep the existing procedures.

The CNMI is certainly a nice place to live in; it is also expensive. People need money to live here: Jobs provide income, businesses provide jobs. If we are not careful, all that will remain will be tourist-related employment. As valuable as this sector is, it is very fragile and influenced entirely by forces outside the Commonwealth. Some sage once said, “We ought not be careless and indifferent about the future. In prosperity prepare for change.” The Commonwealth faces a significant development challenge if it is to avoid economic stagnation. Economic diversification is the key and it fits the free trade zone “lock.”

Suggestion: Hire an attorney with a mandate to “make it work”—not one who spends time trying to figure ways to “make it not work.”

Editor’s Note: The author, an economist, has spent the last four decades actively involved in the process of economic development within many foreign countries and financial institutions. His association with the U. S. State Department’s foreign policy involved the encouragement of the concept of private enterprise and capitalism within developing economies.