The Republic of Kiribati, a lower-middle-income micro-island state in the central Pacific, confronts daunting physical and economic challenges. Economic policies are rooted in communally oriented values and involve an extensive role for the state and a gradualist approach to structural reform. With prudent economic management, the country has succeeded in maintaining macroeconomic stability and building up large external assets over the past decade. However, slow growth has failed to raise real per capita income. To raise living standards on a sustainable basis, the country will need to foster a dynamic private sector that can serve as the main engine of growth.