The Republic of Palau (locally known as Belau) is situated in the western Pacific and comprises more than 300 islands in the Caroline Islands archipelago, only nine of which are inhabited. Formerly a part of the US-administered Trust Territory of the Pacific Islands, Palau became independent in association with the USA in 1994, but continues to be heavily dependent on US aid.

Palauans can claim a diverse genetic heritage. Palau was first colonized by southeast Asian peoples some 3000 years ago. There has also been mixing with other Melanesian and Polynesian peoples. More recently, low-skilled Filipinos have added to the population. Immigration from south Asia was banned in 2001 due to rising tensions.

Some 70% of Palauans live on the island city of Koror (a new capital is being constructed on neighboring Babelthuap island). The thinly scattered remaining population are linguistically diverse, with distinct separate languages in the most southern islands. Cultural influence from the USA and Japan has been strong, though in the more remote islands a more traditional way of life has been maintained. Society remains largely matrilineal. The indigenous Modekngei religion is a unique blend of traditional beliefs and Christianity.

Strengths

Relationship with aid donors – the USA and Japan – provides economic stability and access to lucrative markets. Improved transportation infrastructure. Tourism growing. Fishing and copra production important. Increasing regional trade. Trust funds established from Compact money.

Weaknesses

Heavy dependence on aid. Underemployment. Remote location limits tourism and trade prospects. Few resources.

The Compact of Free Association with the USA formed the basis of Palau's independence. One clause, requiring the transit and storage of nuclear materials, was the subject of several referendums until a simple majority in 1993 brought sovereignty the following year. Vice President Tommy Remengesau was elected president in November 2000.

The USA has exclusive control over Palau's foreign affairs and defense policies under the 1994 conditions of the Compact of Free Association. Cordial relations with the Pacific Islands Forum were restored in 1999 after tensions caused by Palau's bid to give Japan the right to veto the establishment of a whale sanctuary in the South Pacific.

Under the 1994 Compact of Free Association, the USA is responsible for Palau's defense.

On some islands the soil is highly fertile, although the terrain of the larger islands makes farming difficult. Some islands are densely forested. Palau has copra and some gold deposits. There is also the possibility of exploitation of reserves of minerals on the seabed. Palau has a small fishing industry with the potential for development.

Palau suffers from inadequate facilities for the disposal of solid waste. Sand and coral dredging and illegal fishing practices pose a significant threat to the marine ecosystem. Palau and its surrounding waters are Micronesia's richest habitat; however, there is concern about the commercial export of fruit bats to neighboring islands as a delicacy. Typhoons sometimes cause severe damage to infrastructure.

There are limited air and sea links between islands. A new bridge, opened in 2002, connects Koror to Babelthuap.

Basic health care is available. Many outlying islands do not have easy access to qualified doctors and therefore often rely on nurses or traditional health remedies. An epidemic of mosquito-born dengue fever hit Palau in 2000.

Elementary education is compulsory between the ages of six and 14. The Micronesian Occupational college, based in Palau, provides two-year training programs.

There is a little alcohol-related crime, but much of the country, particularly the outlying islands, is crime-free.

The gap between rich and poor is steadily growing, as entrepreneurs and government officials exploit aid and develop the tourist industry. In 2001, a program providing cheap rental housing for low-income families received a US grant of $200,000.

Tourism is becoming more important. Improved transportation access is planned, amid concerns about impact on traditional culture. Several islands have battle sites from the Pacific War. The outlying islands remain unspoiled.

The Caroline Islands were colonized in turn by Spain, Germany, and Japan before being transferred to US control in 1945.

• 1947 UN Trust Territory of the Pacific Islands established.
• 1982 Compact of Free Association with USA signed.
• 1993 Compact approved.
• 1994 Independence in free association with USA.
• 2001 Tommy Remengesau assumes presidency.