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The economic and cultural patterns of Pacific countries have evolved in a manner that places a strong dependence upon the health of their natural environments. Most Pacific countries are characterized by small island masses dispersed over the world's largest ocean. Many of their diverse landscapes and seascapes are unique, but due to geographic isolation and often extremely limited land and freshwater resources they are naturally fragile and vulnerable to change. This is further complicated by the fact that the region is prone to a wide range of natural disasters such as volcanic activities and cyclones, and must face the potentially devastating consequences of an increased of frequency of extreme climatic events coupled with sea-level rise resulting from global climate change.

During the current Compact of Free Association with the United States (US) that dates from 1987, economic growth in the Federated States of Micronesia (FSM) has averaged a 1.9 percent rate of annual increase in gross domestic product (GDP). Taking into account the population growth of 2.0 percent, GDP per capita declined during this period. At the beginning of the Compact, the FSM was endowed with a weak policy environment, which was inward looking, not conducive for private sector development, and supported a large Government. Supported by large external transfers, the economy initially boomed and grew by over 4 percent annually between fiscal year (FY)1987-FY1995, with the private sector growing by 7.1 percent as a modern cash economy established itself in nontraded activities. However, this period was not to be long-lived.