Why does Palau rely heavily on financial assistance from the United States?

Palau’s reliance on financial assistance from the United States is primarily established through the Compact of Free Association, an agreement signed in 1982 and approved in 1993. Under the terms of this compact, the United States provides financial support to Palau in exchange for maintaining responsibility for the country’s external security and defense.1

This economic relationship is deeply rooted in the history of the region following World War II, during which the government became the primary employer in Palau—initially through the U.S. Navy and later the Trust Territory of the Pacific Islands. While Palau has experienced economic growth through tourism and maintains a subsistence economy in rural areas, it lacks major exportable crops and relies on the U.S. dollar as its official currency. The compact also facilitated significant infrastructure projects, such as the construction of the 53-mile highway on Babelthuap, known as the Compact Road.2