A look back at the economy: How it happened

By WILLIAM H. STEWART
Special to the Saipan Tribune

Last of a two-part series

As mentioned in Part 1 of this series I have unofficially taken it upon myself to record the military and economic history of the Northern Marianas as recently transpired.

Up until the so-called “Asian crises,” the CNMI had benefited from a once-in-a-lifetime economic windfall and one likely to never occur again. Exactly what happened to initiate the unprecedented economic growth of almost 20 years ago? What happened to start its decline? Here’s how it all happened.

For many years the United States ran huge annual trade imbalances with Japan. This was simply a result of the United States purchasing more Japanese manufactured goods than the Japanese bought from the U S. At the time this was referred to as a “negative balance of trade.” In an effort to make American produced goods less expensive with the hope that the Japanese would purchase more from U. S. manufacturers and agricultural producers, in 1986 at the Plaza accords in New York, the U. S. devalued the dollar in relation to the yen. In 1985 the average annual exchange rate of the yen was 245.6 to one dollar. It then fell to 169.0, (‘86); 137.0, (‘87); 128.0, (‘88) and 135.0, (91). Dollars could be purchased for fewer and fewer yen.

By devaluing the dollar in 1986 it was believed this would stimulate exports to Japan, which the Japanese would purchase with the immense sum of dollars they owned at that time. However, someone on the American side forgot that we produced few manufactured goods that the Japanese wanted. The man on the street in Japan wasn’t likely to purchase a Boeing 747, high tech medical equipment, etc., items so expensive that only governments could afford their high cost.

Japanese consumers were not in the market for small, relatively inexpensive items such as VCRs, TV sets, cameras, etc. Americans were purchasing these items from Japan—in fact so much so that this was partly the cause of the U.S. trade imbalance in the first place.

U.S. products that the Japanese wanted were few indeed and their dollars continued to pile up. What did the Japanese do? They took their U.S. dollars, flew to the United States (and elsewhere), and purchased real estate and other assets. This also occurred on the islands as well, as they purchased prime real estate. Since undeveloped land yields little monetary return in its raw state, the Japanese constructed hotels primarily to accommodate Japanese tourists, operated Japanese tour buses to drive them around, created restaurants to feed them, along with many small gift shops, ground tour operations, etc., to service their other needs.

The great boom period in Japan from 1986 onward fueled Saipan’s economic engine. Throughout the last half of the ’80s, Japan registered huge annual trade surpluses, had an ever strengthening currency and one of the lowest interest rates in the industrialized world. Japanese banks overflowed with money, much more than they could accommodate by relending in Japan itself. It was this money that went abroad and around the world to finance a myriad of projects. The millions invested in the Northern Marianas launched the islands on the road to a thriving tourism industry. It has been estimated that from 3/4 to one billion dollars in foreign investment flowed into the Commonwealth during the short period of about six years—most of it Japanese.

With Japan’s huge trade surplus with the United States and America’s corresponding trade deficit, the Japanese had to find investment opportunities for the dollars they had earned and, since their trade restrictions allegedly made it difficult to export U. S. products to Japan to earn the dollars back, the Japanese used their American currency and credits to invest in the Commonwealth and elsewhere in the United States, often in the form of real estate. All this happened during the last half of the eighties. On Saipan, land, which had been leased for $30 per square meter in 1986, increased in value to $300 per sq. meter or more by 1989-’90, with beach front hotel sites ranging from $150 to $500 per square meter.

In 1980 there were 1,294 land transactions recorded. By 1989 there was a total of 4,424, with the peak in 1991 of 6,500 dropping to 3,698 in ‘92 and 2,664 by November ‘97. In the late eighties and early nineties the Japanese and others simply paid too much for too little for everything from an ice cream cone to a square meter of land and in so doing distorted the pricing structure of real estate on the islands during those years. The same thing occurred in Hawaii.

All went well until the Japanese financial “bubble” burst in the early ’90s and their speculative “house of cards” collapsed. As it turned out, many Japanese firms defaulted on their loan payments, having gambled that real estate prices would continue to rise.

Throughout the decade of the ’90s drastic changes occurred in Japanese investment abroad. By the first quarter of 1990, the Japanese economy started to cool, partly as a result of a decline in the Japanese stock market; rising interest rates and an unexpected drop in the value of the yen against the dollar—it took more yen to purchase a dollar.

Japan’s economic difficulties worsened as stock prices continued to decline sharply resulting in a slowdown in investment in the Commonwealth and elsewhere.

The nation’s wealth in the ‘80s had been largely tied to grossly inflated paper values on the Tokyo Stock Exchange and, as values tumbled, stock prices fell dangerously low. The Nikkei Stock Averages—the equivalent of Wall Street’s Dow Jones Industrial Averages—lost 60 percent of its value, falling from 40,000 in the fall of 1989 to below 15,000 by mid-1992 and increasing only to 15,427 by November 1997. Many Japanese firms had used the value of their stock as collateral to secure bank financing. As stock prices fell, so did their ability to borrow funds from banking institutions or raise additional capital from the sale of stock.

Major Japanese banks with large stock portfolios lost hundreds of millions in value and many previous loans became worthless. The 100-year-old Yamaichi Securities, the 4th largest brokerage in Japan, went broke. Japanese banks stopped lending, particularly on the international scene, as they strived for more liquidity. New, additional Japanese investment interest in the Commonwealth all but dried up. Several previously planned hotel projects were postponed or canceled. Japanese tourism-oriented construction activity in the Northern Marianas slowed considerably but was partially replaced by Korean and Chinese investment. Japanese visitors became more prudent in their spending habits, purchasing less expensive gift items and dining in less costly restaurants.

The Economist magazine observed: “Convinced that rapid economic growth would forever rescue them from bad lending judgments, bankers failed to examine the financial risks they were undertaking— a lunch or round of golf would do more to influence their credit decisions than spreadsheets of financial data.” This “Asian way” of evaluating borrowers and their projects has proved costly indeed to many Asian investors. Part of the problem appears to be that government authorities with various “pet projects” pressured banks into financing projects of dubious viability. Investors in many Asian nations now exhibit a lack of confidence as they observed their stock prices fall. Many sold out at a loss.

Of course, and in my opinion, the CNMI Legislature didn’t help matters before and during the period of the economic slide by imposing a number of growth inhibiting restrictions on businesses, along with frequent changes in laws and regulations, among other things. Indeed, it may have aggravated the economic decline to some extent by failure to improve the business climate with less restrictive policies while there was still time. Some local business people are also of the belief that certain CNMI policies have exacerbated an otherwise dire economic situation. But that’s another story.

On top of it all, we now have the terrorist threat coupled with the reluctance of many “would be” Japanese tourists and others to fly to foreign tourist destinations. While this fear will hopefully eventually be overcome in the not-too-distant future, the “boom years” of the ’80s are not likely to ever happen again. The Commonwealth had no influence whatsoever in precipitating the “economic boom” and it had none in initiating the current crises except for possibly failing to improve the business climate. But even that—had it occurred—might have been too late as “the horse was already out of the barn.” Nor has it been able to mitigate the damage. So far the islands have remained helpless against the forces of change brought about by events that no one could have ever predicted.

The CNMI must strive to do two things at a minimum. Protect what remains of the economy and take all the necessary action that that might require. Second, make every possible attempt to develop a new and different economic sector. Exactly what that might be—if anything of major significance other than tourism—remains to be seen.

There has been much talk about diversification but so far there is little evidence that it will—or can—occur to any great extent to equal that of the now declining garment industry. Competition is severe and a sophisticated infrastructure is essential, infrastructure far beyond the provision of 24-hour potable water, reliable power, research facilities, etc. A benchmark that I always apply is: If it hasn’t developed in Hawaii or Guam, what chance does it have in the CNMI? The recruitment of new businesses other than tourism just might require more inducement than tax rebates; low minimum wage rates and local control of immigration and customs. Many countries can make these enticing incentives available. New, “out of the box” ideas are required. It has to start with finding a comparative advantage over other areas—whatever that might be: geographic, economic, demographic or political. Then promoting it. It will be a sales job.

(William H. Stewart is an economist, historian, and military cartographer.)