Life After Debt in Puerto Rico: How Many More Lost Decades? – Center for Economic and Policy Research (CEPR)

July 18, 2017CEPR

Island Has Already Suffered a “Lost Decade”; Fiscal Plan Promises Another, and Possibly More

Contact: Dan Beeton, 202-239-1460

Washington, DC ― A new paper from the Center for Economic and Policy Research (CEPR) examines Puerto Rico’s economy and ongoing debt problems and finds that an Oversight Board-approved fiscal plan not only does not satisfy creditors, it cannot lead to an economic recovery. This is also the case with the current bankruptcy-like legal proceedings, which introduce additional problems, including the threat of privatizing public assets. The Oversight Board’s plan does not adequately address the underlying causes and consequences of Puerto Rico’s crisis, some of which are unique to the island due to its special political status.

“Puerto Rico has already suffered a ‘lost decade’ with negative growth, and the people who designed its ‘bailout’ forecast another lost decade if things go as planned,” CEPR Co-Director and paper coauthor Mark Weisbrot said. “But even that forecast is unfortunately over-optimistic.

“No country, or people, should have to face a future of multiple decades with no economic progress. This is only possible because the Puerto Rican people have no democratic input into these economic decisions.”

The paper notes that a number of the negative economic shocks experienced by Puerto Rico since the 1990s resulted from decisions made in Washington, DC and outside of its control. These include the signing of NAFTA, and China’s entry into the WTO, which created more competition for its manufacturing sector, and the phasing out of tax incentives for companies operating in Puerto Rico. US laws on shipping that prevent foreign vessels from docking at two US ports have also constrained the island’s commerce and therefore its economic development.

The report reviews key economic indicators, including Puerto Rico’s economic growth, its debt burden, its revenue and expenditures, and its fiscal plan.

Puerto Rico has a poverty rate of 46 percent, and only 42.5 percent of the labor force is employed, as compared with more than 60 percent in the US. It has lost almost 10 percent of its population over the last decade, investment has plummeted, and the economy is caught in a downward spiral that continued austerity will perpetuate.

The paper notes that Puerto Rico faces “harmful restrictions on its commerce while not [being] eligible for the full benefits of federal aid that US states receive. For example, its federal payments for Medicaid and Medicare are at a lower percentage than for most US states and unlike in US states, these payments are capped. These limited payments alone, as compared to those for US states, account for billions of dollars of Puerto Rico’s debt.”

For all of these reasons and more, there is a substantial case for federal aid to Puerto Rico, as well as sufficient debt cancellation, to allow for a speedy economic recovery.

The island has also been victimized by hedge funds who bought government bonds, and then lobbied for austerity and against reasonable bankruptcy procedures that would allow for economic recovery. The paper notes that since the proposed agreement will not satisfy the creditors, there is even more risk that their lawsuits, including those from vulture funds, will put further large obstacles in the path of recovery.

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OPINION | Congress will have to implement a comprehensive economic policy program to jumpstart economic growth in Puerto Rico.
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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