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OPINION | Congress will have to implement a comprehensive economic policy program to jumpstart economic growth in Puerto Rico.
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The Center for a New Economy Growth Commission – The Local Component
In addition to initiatives at the Federal level, Puerto Rico needs to craft a local long-term economic development strategy and strengthen its execution capabilities.
Achieving long-term, sustainable economic growth and development is a complex endeavor that requires a new set of strategies and the rebuilding of institutions; thus, there are no quick fixes or silver bullets. In other words, economic growth is not simply a function of exiguous regulation, low wages, or preferential tax treatment. Rather, the process of growth is quite complicated, involving the interplay of many variables and factors that must be present if a country is to succeed.
As a first step in charting the road towards sustainable economic development, the Center for a New Economy (CNE)—Puerto Rico’s premier and only independent, non-profit think tank— has undertaken the task of empaneling the CNE Growth Commission for Puerto Rico.
The Commission will work towards (1) identifying and suggesting ways to relax local and external constraints that inhibit the territory from speeding up the process of economic structural change towards higher productivity activities; and (2) generating opportunities to diversify the portfolio of high productivity activities in the economy. Specifically, the Commission will focus on the following areas with the potential for high impact:
- Area 1: Identifying Sectorial Opportunities
Using cutting-edge product space analysis the Commission will identify new products and services that could augment aggregate value through the use of existing productive capabilities embedded in the island’s current production structure. This methodology operationalizes the idea that it is generally easier for countries to move from products and services that they already produce to others higher in the value chain that are similar in terms of capital requirements, knowledge, and skills. Because not all feasible new products contribute in the same way to value added and growth, a key challenge along the diversification process is the identification of those goods and services that are feasible and have a higher potential to sustain economic development.
- Area 2: Horizontal Reforms to Enhance Competitiveness
At the same time, the Commission will identify opportunities for effective policy reform in areas with the potential to enhance the competitiveness of local and multinational producers across multiple sectors, such as: tax and competition policy, human capital and workforce development, energy production, and communications, information, and technology infrastructure, among others.
- Area 3: Macro-Fiscal Policy
Finally, a Working Group of the Commission will develop feasible proposals for tax policy reform with the aim of (i) enhancing the territory’s competitiveness and (ii) reducing tax distortions that may inhibit productivity growth in the private sector. This Group will work on evaluating the potential for a disciplined fiscal reform to enhance the territory’s competitiveness, given its inclusion in the U.S. monetary union.
Conclusion
In sum, the Fiscal Oversight Board has ordered Puerto Rico to put on the equivalent of an IMF policy straitjacket without providing access to the few benefits that usually accompany IMF conditionality programs. The implication of that policy posture is that Congress will have to implement a comprehensive economic policy program to jumpstart economic growth in Puerto Rico. Otherwise Congress will face a full-scale social crisis in Puerto Rico in the near future.
In addition to initiatives at the Federal level, Puerto Rico needs to craft a long-term local economic development strategy. This strategy should consist of sectorial, horizontal and institutional policies to promote Puerto Rico’s capability to progressively move into higher value-added activities. CNE is already working on that strategy.
inally, we stress that without any congressional help to increase aggregate demand in the short-term, implementing a set of supply side policies will be like pushing on a string. The short-term effects will be negligible, leading to higher unemployment, poverty, inequality and migration to the mainland.
Sergio M. Marxuach is Policy Director with Center for a New Economy.
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