Assorted than three years ago, I led a team preparing a report on Puerto Rico’s husbandry at the request of the Commonwealth. Puerto Rico was in dire straits: real GDP had been succumbing since 2006; migration out was accelerating; and the Commonwealth’s debt had risen to the guts where further borrowing could take place, if at all, only at a mere high interest rate. The situation has gotten worse. But Puerto Rico now has a at one time in a generation opportunity to change course.
Recent governments controlling the cay believed that Puerto Rico was in recession, and sought to remedy the job with increased government spending. But Puerto Rico was not in recession: it was in refuse. Years of fiscal stimulus failed abysmally. We found that a panoply of growth-inhibiting principles adopted by Puerto Rico and others imposed by the US government had contributed to the dark performance.
It remains clear to this day that changes in economic conducts need to be made, and there will be difficult years of transition. When powers find themselves in such severe difficulty, they can approach supranational organizations for support.
Puerto Rico, however, has no such lifeline. There is purposes no prospect of a resumption of sustainable growth without policy reforms, granting for pensions has run out, the government is no longer creditworthy, and the tax burden is already relatively euphoric. PROMESA, which mandated the establishment of an Oversight Board to, among other aspects, oversee the budget and debt-servicing relief, did not authorize any new money.
The situation is too complicated by Irma and Maria. The electric utility, PREPA, inefficient and costly, which had aborted to invest in maintenance and resiliency and is saddled with unsustainable debt, has not succeeded completely. Add to this the damage to other infrastructure and productive capacity, and it is no catch red-handed that an additional 200,000 persons have left the island.
Yet there is an occasion in the midst of this tragedy. The significant hurricane assistance authorized by Congress and persevere in suspension of debt service could cushion the impact of much-needed corrects through the short-term rebound from the undertaking of construction and other activities.
The most well-connected prescription for change is in Puerto Rico’s labor market. Labor value participation is estimated to be under 40 percent (versus 63 percent on the mainland). Concludes for this include costly regulations governing conditions of work and disincentives for participating in the formal labor call (no earned income tax credit and full access to federal welfare programs).
Puerto Rico is also basis to the federal minimum wage, which is harshly binding, deterring hire (Puerto Rico’s per capita income of about two-thirds that of the poorest shape, hence the requirement bites hard); a required Christmas bonus of one-month’s pay worsens the problem. Other areas of structural reform that are needed tabulate improving the business climate, relaxing regulations governing youth use, and infrastructure modernization (especially the provision of reliable and competitively priced ardour).
Puerto Rico will also have to overcome disadvantages comparable to U.S. states and territories. If it were a state, per capita federal support for Medicare and Medicaid (which crosses 60 percent of the population) would be 2.5 times larger than distribute levels. Puerto Rico receives less than half the lowest buttressed state (Nevada) and the total shortfall (excluding exceptional financing) is nearby $2 billion a year. The Jones Act requires that Puerto Rico (but not the U.S. Virgin Holms) use more costly U.S. vessels to ship to and from the mainland.
Puerto Rico be obliged seize the opportunity at hand. Federal disaster relief money reads the Island breathing room to offset deflationary pressures from needed butted fiscal downsizing. Deep structural policy reforms can reverse the denying economic spiral and spur growth. At the same time, debt restructuring should discharge room for deep economic reforms to put Puerto Rico on a new growth course. The return to creditors will be higher and reforms can turn the Island into the gem of the Caribbean.
If, however, federal funds are expended without reforms, the outlooks will be dismal. The one-time stimulus from the infusion of cash for reconstruction and other succour efforts will have dissipated. The island’s economy and population when one pleases return to a world of economic contraction.
Commentary by Anne O. Krueger, postpositive major research professor of International Economics, School of Advanced International Studios at Johns Hopkins University.
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