July 2017, Lara Merling, Kevin Cashman, Jake Johnston, and Mark Weisbrot
As Puerto Rico enters the legal debt restructuring process, this paper examines the future prospects for an economy that has had no growth over the last ten years — a lost decade. The fiscal plan approved by Puerto Rico’s Financial Oversight Board, according to their own projections, foresee approximately another lost decade; this paper shows that negative growth is likely to extend even further than that. Nor will the proposed restructuring satisfy creditors, who may then further impede economic recovery by taking
legal action in an attempt to collect the full value of the bonds they hold. The paper also notes the recent histor
ical and structural causes of the economy’s decline, which led to the debt crisis; and that these, too, will need to be addressed if Puerto Rico is ever to have a sustainable recovery.
July 18, 2017
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.
OPINION | Congress will have to implement a comprehensive economic policy program to jumpstart economic growth in Puerto Rico.