The Little Island That Could

Guam could become a dynamic commercial center in the western Pacific-if Uncle Sam would get out of the way.

At the southern tip of Asia, just off the Malay Peninsula, lies the 227-square-mile island of Singapore, an independent city-state. It has virtually no natural resources (its most important indigenous export is orchids). It was physically and economically devastated by World War II. It is cursed with an abominably hot and humid climate all year. It must import nearly all of its food except pigs, poultry, and the foul-smelling fruit durian.

Yet Singapore has become one of the most impressive economic success stories of the 20th century. A major regional commercial center, it is involved in trading, servicing and warehousing, shipbuilding, petroleum exploration, construction, manufacturing, communications, and tourism. Per capita income in Singapore in 1981 was US $5,240, the second-highest in Asia after Japan. With a population of nearly 2.5 million—about the size of metropolitan Baltimore—it has the world's 23rd-largest gross national product (GNP) and the world's second-busiest port, even busier than New York City and exceeded only by Rotterdam. Singapore's average annual growth rate in real GNP from 1970 to 1980 was 6.7 percent, compared to 2.1 percent in the United States and 3.4 percent in Japan. The little island had an unemployment rate in 1981 of 2.97 percent, considerably better than the United States' 7.6 percent in the same year. In the midst of a world recession, Singapore has so many job opportunities that industry actively seeks guest workers from neighboring countries and as far away as Bangladesh.

About 2,900 miles east of Singapore, between the Philippines and Hawaii, is the 215-square-mile island of Guam, a territory of the United States. Like Singapore, it is nearly devoid of natural resources, it is cursed with a hot and humid climate, it suffered greatly from World War II, and it has a natural port.

But unlike Singapore, Guam has a sputtering, faltering economy with few bright spots and a long list of woes. Its unemployment rate is estimated to be 14–15 percent, and its consumer price index increases regularly at a double-digit rate—23 percent in 1980, 17 percent in 1981. Per capita income was $6,711 in 1982—and it's as high as it is mostly because a quarter of the island's work force is employed by local government and another 15 percent are civilian employees of the US military. And although Guam has one of the finest deepwater ports between Hawaii and the Philippines, only one-twenty-ninth as many cargo-bearing ships docked there in 1981 as in Singapore.

What is the reason for this dramatic disparity? It's no secret why Singapore has succeeded. It enjoys an essentially free market that "would send chills of delight down the spines of Adam Smith and Milton Friedman," in the words of James K. Glassman writing in the New Republic. And why has Guam stagnated? Could it be that Guam hasn't enjoyed a free-market system, in spite of living under the territorial rule of the world's supposedly most-capitalist nation?

There couldn't be a better time to reverse Guam's fortunes. Doubts about the future of Hong Kong, the Far East's bustling international commercial center, are increasing daily as a Chinese takeover looms large. With Guam's strategic location at the edge of the Pacific Rim and the long-term political stability it could offer (in contrast to Korea and the Philippines), the island is poised to fill the gap left by a shaky Hong Kong. But this would require a pretty radical rethinking of Uncle Sam's role in Guam. To see why, it is only necessary to look behind the island's present picture.

When I moved to Guam from Hawaii in early 1978, it represented to me a land of opportunity. I had just been hired by Gannett Corp., one of America's largest media conglomerates, to work as a reporter for its newspaper on Guam, the Pacific Daily News. America's westernmost frontier beckoned to me, so I went.

I learned that this US territory is a small, verdant island at the edge of the Western Pacific and the Philippine Sea, about 30 miles long and no more than 10 miles wide. The northern end of the island is an elevated limestone plateau that drops off sharply at the coast. The south is more hilly and rugged, with volcanic uplands and valleys ranging from 500 to 1,300 feet above sea level.

Its climate is hardly paradise-like. Besides being hot and muggy, Guam is frequently buffeted by rainstorms and typhoons.

I found many of the consumer conveniences enjoyed in the States—cable TV, radio and TV stations, movie theaters, supermarkets, department stores, telephones, a modern airport, modern hotels and office buildings, and most of America's leading fast-food restaurants. But the island's rural tradition still shows itself—a cow and chickens can be found feeding on an overgrown corner lot across from the island's tallest office structure, the 10-story Pacific Daily News Building. Such a scene of uneven development is symptomatic of larger problems.

I'm back in Hawaii now, but when REASON asked me to investigate Guam's predicament and potential, I had a chance to go beyond my impressions from living there and explore why the island's Singapore-like mix of natural advantages and disadvantages has been the backdrop of an economy with none of Singapore's vitality and prosperity. I found that in case after case where Guam is well suited to prosper and compete in world markets, burdensome US federal regulations that are insensitive to Guam's unique situation have served to thwart its potential.

Guam's stifling economic environment has prompted many Guamanians to seek their fortunes elsewhere, which is one reason US military recruiters score big on Guam. It also has prompted a radical shift in the thinking among Guam residents during the past few years. Whereas once Guamanians seemed almost eager to trade federal regulations for federal largesse, now there is a growing desire for the self-reliance and opportunities that only freedom can bring.

That freedom is being sought in a variety of ways, the foremost being an attempt to change the island's political status. Currently Guam is an unincorporated US territory, which means it is subject to only the "fundamental" parts of the US Constitution. In practice, this means that Guam is both an "overseas" and a "domestic" location, to which many but not all federal regulations and laws apply. In a few instances, this has worked for the benefit of Guam, but most Guamanians now believe that the island's political status is one of the major reasons for its economic plight.

Another strategy has been to seek exemption from restrictive federal regulations and taxes through congressional designation of Guam as an "enterprise zone." Meanwhile, Guamanian business and political leaders have been waging an unprecedented lobbying campaign in Washington to obtain regulatory relief for Guam through piecemeal legislative and administrative actions. Guamanians clearly are tired of suffering a stagnant economy.

The southernmost in the Marianas island chain, Guam has been an unincorporated territory of the United States since 1898, when it was ceded by Spain as a result of the Spanish-American War. The island was put under the jurisdiction of the US Navy until 1950—a jurisdiction interrupted only by two years of Japanese occupation during World War II.

Guam's original inhabitants, the Chamorros, were a tall, robust, brown-skinned people with jet-black hair. They are believed to have migrated to Guam from Malaysia around 1500 B.C. Anthropologists and historians have concluded the Chamorros basically were anarchists. They enjoyed a prosperous and peaceful society held together by intertwined religious beliefs, reverence for elders, matrilineal ties, and property rights.

Chamorro society was unraveled by the Spanish after world seafarer Ferdinand Magellan "discovered" Guam for Spain in 1521. Guam became a way station for Spanish galleons traversing between Mexico and the Philippines. Spanish Jesuit priests, meanwhile, saw Guam as an ideal place to gain converts to Catholicism and, backed by Spanish soldiers seeking political stability, ruthlessly eradicated all Chamorro warriors who resisted, which was most of them. The surviving Chamorro women intermarried with the Spanish, Mexican, and Filipino occupiers.

There is little doubt that life under Spanish rule was oppressive, but more and more Guamanians are questioning how happy they should be that Guam was "liberated" by the US government. Before World War II, various Navy commanders of the island banned public religious celebrations, restricted imports and exports, compelled Guamanians to work on public projects, increased taxes, instituted compulsory education, and outlawed a variety of local pastimes. In recapturing Guam during World War II from Japan, the US military virtually destroyed the entire island. Afterwards it confiscated private land for "national security" reasons. This displaced thousands of Guamanians from their homes, permanently disrupted Guam's primarily agrarian economy, and delayed development of industry, housing, and commerce on the island.

The US military wanted Guam for the same reason the Spanish did—its strategic location. Originally Guam was used as a coaling station for Navy vessels and as a communications link for US interests in Asia and the Western Pacific. It continues to be a military stepping stone; during the Vietnam war, Guam was a major forward base for B-52 bombers. But what is good for the military has been disastrous for Guam's social and economic structure.

Fortunately, some of the worst Navy restrictions on Guamanian life ended in 1950 with passage of the Organic Act, which granted Guamanians US citizenship and some degree of self-government. But the federal government still owns a third of the island, largely in military landholdings. And one out of every six Guamanian civilian workers is on the military payroll.

Ironically, however, the more pernicious effects of US rule come from 9,000 miles away, from a host of civilian government agencies in Washington that are responsible for distortions of various sectors of the island's economic life. Take agriculture and food imports. I personally experienced having to buy mangoes from Mexico for almost $2 a pound—because US Department of Agriculture regulations forbid Guamanians to import mangoes from the nearby Philippines, where they sell for just pennies a pound.

Guam once was virtually self-sufficient in food production, but now about 90 percent of its food is imported. And because federal agricultural, labeling, measurement, and customs regulations effectively reduce the level of imports from nearby food-producing countries, most of the food imported to Guam comes from the continental United States. Huge transportation costs are reflected in the island's exceptionally high food prices.

Nor is distance the only factor in those transportation costs. Food transported to Guam from the United States must be carried on ships of US registry. The Jones Act, also known as the Merchant Marine Act of 1920, requires that all goods shipped between US ports be carried on US-registered ships. A.B. Laffer Associates, the economic consulting firm of supply-side economist Arthur Laffer, concluded in a 1981 study for the Guam legislature that "the added constraint of having to use U.S. owned and regulated ships when transporting supplies to Guam has increased the cost of virtually everything Guam imports from the Mainland."

The Guam Department of Commerce has estimated that consumer prices on Guam are at least 15 percent greater than in the continental United States. Having moved to Guam from Hawaii, which itself has one of the highest costs of living in the country, I am convinced that the department's estimate is conservative.

The Jones Act is a cornucopia of other headaches for Guamanians. One restriction within the act limits the amount of cruise-ship traffic to Guam by preventing foreign-built vessels from carrying passengers between two US ports. Foreign-built or foreign-flag vessels may be used only for sightseeing voyages or "voyages to nowhere"—specifically, they must go beyond the three-mile territorial sea limit and return the passengers to the point of embarkation.

Yet another federal law prohibits foreign-built vessels of more than five net tons—regardless of ownership—from being employed in American fisheries. This forces commercial or charter fishing companies on Guam either to buy US-built vessels, estimated to cost twice as much as vessels built in foreign shipyards, or simply to abstain from the trade completely. Ironically, federal law allows foreign-flag foreign-built ships to catch tuna, a migratory fish, in the 200-mile fishery conservation zone and then land on Guam, but US-flag foreign-built vessels are prohibited from doing so.

Guam's tourism industry is presently the island's main commercial activity. In 1982 the island hosted more than 326,000 visitors, about 80 percent from Japan. But thanks to the federal government's Civil Aeronautics Board, foreign air carrier service to the island is only a fraction of what it could be. CAB restrictions prohibit foreign airlines from carrying local traffic between two points in the United States, and Guam is classified as within the United States by the CAB. So, foreign airlines flying between Asia and the United States have no incentive to develop an Asia-Guam leg on such flights, since potentially lucrative air traffic between Guam and other US points is off-limits.

One of the ironies of the Guamanian predicament is that while some federal agencies are busily crippling Guam's economy by treating it the same as the 50 states, other federal agencies are inflicting harm by classifying Guam virtually as a foreign country. US Customs is a prime example of the latter.

Guam's trade relationship with the States is relegated to "most favored nation" status. In other words, Guamanian imports are vulnerable to the same array of quotas and restrictions as imports from western Europe and even the People's Republic of China. This is, of course, a far cry from interstate commerce, where such restrictions do not exist.

Guam does enjoy a limited exception to this under a US Customs program known as Headnote 3(a). It allows companies to export certain products from Guam to the United States duty-free, provided at least 70 percent of the value of the product (30 percent for watches) has been added on Guam and a substantial transformation of the materials occurred on Guam.

Critics of the Headnote 3(a) program say it has failed to benefit Guam significantly because of uncertainty by potential investors over which goods will qualify for duty-free status and because potential investors are afraid that import quotas eventually will be imposed on the goods that are approved if they become a threat to mainland manufacturers. And in fact, trade statistics show that Headnote 3(a) probably doesn't help Guam all that much. An Interior Department official revealed that of the $12.6 million worth of Guamanian imports to the United States in 1982, only $3 million came in under the Headnote 3(a) exemption.

Guam is also hindered by a "mirror" tax system, so called because individuals and corporations are subject to the Internal Revenue Code, although all the revenues go directly to the government of Guam. So every time Congress changes the tax laws or the IRS issues a ruling, Guam investors are affected, even though the US Treasury doesn't get any Guam revenues. Even more significant, however, Guam is unable to compete with Southeast Asian hot spots such as Singapore and Hong Kong in attracting foreign investors with tax incentives. In addition, some tax treaties between the United States and foreign nations, intended to eliminate double taxation of corporations, do not apply to Guam.

Federal minimum-wage laws also place Guam at a competitive disadvantage to its neighbors by forcing wage rates upward in labor-sensitive industries. And the list of grievances against the federal government could go on and on. It would be harder to find a better example than Guam of the folly of central government planning. Insensitive to local circumstances, federal regulations have strangled and contorted Guamanian society, causing problems that only now are beginning to be fully recognized.

Infuriating to Guamanians is that they are not even allowed a formal voice in the regulations that govern their island. Because Guam is an unincorporated US territory, Guamanians cannot vote for president or vice-president. They have no representation in the US Senate. And their one delegate to the House of Representatives—Antonio B. Won Pat, a liberal Democrat—has no voting power on the floor.

The representation issue has much symbolic significance on Guam, where people still talk emotionally of being "put through the test of fire" during World War II, when the island was ruled harshly by the Japanese, to prove their loyalty to the United States. But it is doubtful whether obtaining the voting rights of other US citizens would do Guamanians much good, especially considering the small impact their votes would have on federal elections.

Not surprisingly, many Guam business and political leaders have pinned their hopes for change on other options. So far, the results have been mixed.

When the Reagan administration came in in 1980, Guamanians tried to work with sympathetic federal officials to achieve some regulatory relief. The only significant relaxation has been exemption from the "adverse effect wage rate."

Under the 1941 US Defense Base Act, Guam was classified as an overseas base. Domestic firms doing business with the Defense Department there were required to buy special workers' compensation insurance for their American employees, over and above locally required workers' comp. Businesses said that this requirement imposed costs amounting to as much as 35 percent of the payroll costs for some firms doing business on Guam.

Government rules often have effects very different from what is originally intended, and that was the case here. The Defense Base Act gave a large advantage both to foreign firms, regardless of the composition of their work force, and to American employers who hired alien workers. These entrepreneurs were exempted from the requirement to purchase the special insurance. In 1977, the Labor Department sought to correct this imbalance, not by ending the Defense Base Act requirements, but by imposing an "adverse effect wage rate," which mandated that alien construction workers on Guam be paid US mainland rates.

This was purportedly intended to make local workers as employable as alien workers. But once again, the result was different from what was intended.

The higher wages for both local and alien workers wreaked havoc on a construction industry already debilitated by rising interest rates and energy prices, high transportation costs, and a new contractor-licensing law. Between 1977 and 1981, the annual number of construction permits on Guam plummeted by 55 percent, according to Stuart Butler of the Heritage Foundation.

In 1983, a delegation of Guamanian business operators traveled to Washington to plead their case and were successful. The adverse effect wage rate is no longer being enforced, and the Labor Department is preparing a rule change for publication in the Federal Register that will formally abolish the rate.

While this is a welcome victory, by itself it provides little reason to be sanguine. Lifting this one regulatory burden took several years of effort. Many, many more burdens remain.

In at least one instance, Guamanians have eventually turned to litigation in an attempt to achieve reform. In November, Guam's Gov. Ricky Bordallo sued Treasury Secretary Donald Regan for the right to tax-haven status. Guam wants, for example, to free foreign investors from a 30 percent withholding tax imposed on interest derived from the United States. But the Internal Revenue Service does not share Guam's vision.

According to a recent Wall Street Journal report, when Guamanian officials failed to work out a compromise with the IRS, Governor Bordallo sued, arguing that IRS rules are cutting off needed investment in Guam and violate the right of the island's government to interpret and administer its own taxes. At this writing, it is too early to tell how successful this tactic will be.

Another stratagem contemplated by Guamanians—designation of their island as an enterprise zone—is stalled. At the end of the 1983 congressional session, the enterprise-zone legislation of Reps. Jack Kemp and Robert Garcia was bottled up in Congress with little hope of passage and little more than nominal support from the Reagan administration, although early on Reagan had held out great promise for helping economically blighted areas of the country by easing regulations and taxes in what would then be known as "enterprise zones."

A third stratagem—changing Guam's political status—appears somewhat more feasible. The process for change began in May 1980 when the Guam legislature established a 15-member Commission on Self-Determination. The commission conducted a plebiscite in February 1982, and a large plurality of Guam's voters indicated that they wanted a commonwealth status with the United States. Statehood was the second most popular option, ahead of unincorporated territory (the status quo), incorporated territory, free association, independence, and "other." In a run-off plebiscite seven months later, commonwealth was favored over statehood by a three-to-one margin.

"A commonwealth is very much like a territory, but it's a territory that has a covenant," explained Cecilia Bamba, the head of the Commission on Self-Determination and a former Guam senator. Bamba told me that the covenant would detail "what the territory's responsibilities and authorities are and what they are for the U.S." Covenant negotiations, she said, would give Guamanians an opportunity to chart the future course of the island.

Right now, the next step for the commission is to prepare a working document for negotiation. The proposed document would than have to be approved by the voters. Bamba hopes a vote will take place next November.

While a change to commonwealth status might be valuable for political and symbolic reasons, there is no guarantee that it would bring with it the economic framework that Guam needs to compete with its Southeast Asian neighbors. Indeed, the US General Accounting Office recently reported that there is no precise definition for commonwealth status. The ambiguity has already caused economic and legal problems for Puerto Rico, which changed from an unincorporated territory to a commonwealth in 1952.

All the debate on Guam isn't confined to arguing which strategy is most promising for economic freedom from Washington's depredations. There are people on Guam who are skeptical of the need for such freedom at all. John Simpson, on leave as Pacific Daily News executive editor, says more thought needs to be given to the pros and cons of specific federal regulations before they are abolished. It just may be, my former newsroom boss told me, that Guam is a net beneficiary of federal government policies.

He suggested that more attention needs to be paid to the effect of local legislation and regulations, too. "To say that lifting federal regulations is going to solve everything is a rather simplistic suggestion," Simpson told me.

"It's true that there are a number of federal regulations that have been applied to Guam without much thought and have been detrimental. But at the same time, there are probably an equal number of locally generated regulations that in some ways can be just as constraining and hampering."

While there is ample reason to believe that Guam does not benefit from federal controls taken as a whole, Simpson's contention that local regulations can be as harmful as federal regulation is borne out by other observers. Simpson's politics are such that a photo of John Kenneth Galbraith hangs on his office wall, but the A.B. Laffer Associates report in 1981 made much the same point.

It suggested that Guam's local tax policies, especially, need to be overhauled. Among its recommendations were elimination of the island's 4 percent gross receipts tax, which taxes goods at each stage of production and discriminates against small diversified businesses in favor of larger integrated businesses. The consulting firm recommended that Guam's gross receipts tax, liquid-fuels tax, admission tax, alcoholic-beverage tax, hotel-occupancy tax, and other indirect business taxes be consolidated into a single value-added tax, levied at a constant 5 percent rate.

Other changes that, the Laffer report noted, could be undertaken by the Guamanian government on its own include exploring privatizing the Guam Memorial Hospital, the Guam Power Authority, the Guam Telephone Authority, the Guam Port Authority, and all of Guam's public utilities, each of which is horribly overstaffed, inefficient, and a drain on the public purse. The report also noted that the Guam Economic Development Authority, a partially federally funded local government agency, could be more aggressive in using its authority to reduce corporate income tax rates through rebates and tax holidays.

Unfortunately, none of the report's major recommendations have been implemented. Clearly, if Guam is to become an economically vibrant success, Guamanians themselves must put aside old ways of thinking of their country as a US dependent. As Stuart Butler, who first visited Guam in 1981 and has maintained an interest in the island, noted in a recent Heritage Foundation report, since "more than 40 percent of all workers are employed by the federal or territorial governments (compared with about 15 percent on the US mainland),…the public sector has tended to be viewed by the Guamanian government and population as the only hope for economic development." And this, says Butler, won't do if Guam is to build a future based on the risk taking associated with free enterprise.

That's what Singapore has done. And that's what its island "twin," Guam, could do as well. The fate of the British crown colony of Hong Kong offers a golden opportunity, although it's a source of hope for Guam not often mentioned by Guamanian politicians or Washington government economists.

In 1997, Britain's 99-year lease of 375 square miles of Chinese mainland and islands will expire. This means that nearly all of the world's third-largest financial center—after New York and London—will almost certainly revert to rule by China. It is conceivable that China would leave all or part of Hong Kong's capitalist system intact, but most residents of Hong Kong aren't counting on it.

Already the Hong Kong dollar has fallen in world markets. Real estate prices have tumbled. Many Hong Kong residents are reportedly sending their families to Canada and desperately looking for inexpensive and obtainable citizenship as far away as the Dominican Republic and Belize. As a recent Business Week report on Hong Kong said, "The future does not look very promising after 1997."

But as Stuart Butler has pointed out, Guam has great potential to attract beleaguered Hong Kong businesses and investors. It occupies a "pivotal position in the western Pacific," only three hours' flying time from Hong Kong, Tokyo, Seoul, and Manila. With its affiliation with the United States, it is far more secure politically than the Philippines, South Korea, and Taiwan.

In several forums, Butler has urged the US government to "decolonize" Guam through "sensible changes in the laws that govern the island." Such changes, he notes, could transform Guam into a "power house of trade in the Pacific Basin and a forward base for American business in Asia," and provide a "showcase experiment on the effects on economic activity of sensible deregulation and tax policy."

"All that Guam needs is a green light from Washington," Butler wrote in one report. He might have added a green light from Guam's own government, but the point is the same. If Guam were freed of some of the senseless government burdens on its economy, its chance to become the next Hong Kong could be just around the corner. It might even give Singapore a little competition, for a change.

Mark Coleman is a reporter for Pacific Business News in Honolulu. This article is a project of the Reason Foundation Investigative Journalism Fund.