Tourism is Palau's main industry. Activity focuses on scuba diving and snorkeling in the islands' rich marine environment, including the Floating Garden Islands to the west of Koror and the Rock Islands to the south. The number of visitors--85% of whom come from Taiwan, Japan, and the U.S.--reached 90,000 in 2004, more than quadruple the level of a decade earlier. Tourism earned $67 million in foreign exchange for Palau in 1996, accounting for roughly half of GDP. Arrivals from Asian countries dropped in 1998 and 1999 due to the regional economic downturn but rebounded throughout the first half of the 2000s. CBSís airing of ìSurvivor: Palauî in 2004-5 raised the countryís international profile substantially, and in 2005 a new Japan Airlines-affiliated luxury hotel opened for business. Palauan tourism and environmental authorities would like to transition the industry to cater to low-volume, high-dollar tourists.

The service sector dominates the Palauan economy, contributing more than 80% of GDP and employing three-quarters of the work force. The government alone employs nearly 29% of workers. One of the government's main responsibilities is administering external assistance. Under the terms of the Compact of Free Association with the United States, Palau will receive more than $450 million in assistance over 15 years and is eligible to participate in more than 40 federal programs. The first grant of $142 million was made in 1994. Further annual payments in lesser amounts will be made through 2009. U.S. grants in 2003 totaled $11 million.

Construction is the most important industrial activity, contributing over 8% of GDP. Several large infrastructure projects, including the rebuilding of the bridge connecting Koror and Babeldaob Islands after its collapse in 1996 and the construction of a highway around the rim of Babeldaob, has boosted activity.

Agriculture is mainly on a subsistence level, the principal crops being coconuts, root crops, and bananas. Fishing is a potential source of revenue, but the islands' tuna output dropped by over one-third during the 1990s.

The main economic challenge confronting Palau is to ensure the long-term viability of its economy by reducing its reliance on foreign assistance. The Compact of Free Association created a trust fund to provide perennial budget support when U.S. direct assistance ends in 2009. The value of the trust fund in 2005 was approximately $150 million.