Puerto Rico’s governor is warning that the island can’t pay its public debt. What impact, if any, the situation of Puerto Rico may have on the US economy, and what to do about Puerto Rico’s economy? Read few comments.
Deepak Lamba-Nieves, Research Director, Center for a New Economy, Postdoctoral Fellow, Brown University’s Watson Institute for International Studies
It’s hard to determine the impact that Puerto Rico’s situation will have on the U.S. economy. The government of Puerto Rico has yet to unveil the strategies they will pursue to deal with its creditors; this makes it hard to determine what the overall impact will be, not just on the U.S. economy, but also with regards to the Puerto Rican economy. We do know that a good number of mutual funds in the U.S. hold Puerto Rican debt, so numerous Americans will have to bear some of the costs. This is why it is important that the U.S. federal government become more engaged in this crisis.
In order to move beyond this dire economic scenario, Puerto Rico needs to devise a new industrial policy that promotes balanced and equitable growth. This will only be achieved when the people of Puerto Rico come together and engage in a constructive and effective country dialogue process. One that brings major stakeholders together to work out creative solutions, and promotes a sense of collective responsibility. Organizations in Puerto Rico, like the Center for a New Economy, have already begun to articulate such a process.
Emilio Pantojas García, Senior Researcher & Professor of Sociology, Center for Social Research, University of Puerto Rico
The impact of a potential default would be devastating to both the Puerto Rican and the U.S. economy. The Puerto Rican Government is one of the largest jurisdictions in terms of municipal bond debt. Puerto Rican government Bonds are exempt from Federal, State and municipal taxes. This is called the triple exemption.
If the government of Puerto Rico defaults it will set the bond market on a downward spiral and will most likely affect American retirement funds and other such investors as well as individual investors.
The debt cannot be paid. The alternative is for the Federal Government to guarantee the debt and appoint a regulating board to draft a fiscal, government and economic reform plan and oversee its implementation. See the Kruger Report, that contains the recommendations to the U.S. and Puerto Rican government. Remember, Ann Kruger was Chief Economist of the World Bank, her recommendations are akin to a structural adjustment plan.
Puerto Rico’s debt problem is very serious. The island’s debt is estimated at $72.5 billion and its GDP is just over $100 billion. Public retirement funds have an actuarial deficit estimated at $30 billion.
The key factors that led to this point are public corruption and misadministration, private financial institutions’ speculation and global economic changes. Five points are worth noting in particular.
First, since the 1990s, there has been a practice of basing infrastructure development on debt, outside the margins set in the Puerto Rican constitution. Contractors were expected to kick back 10 percent of the contract to the party in power.
Second, financial intermediaries are said to have charged the government of Puerto Rico premium fees for bond transactions.
Third, the repeal of section 936 of the U.S. Internal Revenue Code made Puerto Rico an unattractive location for manufacturing operations of patented products (drugs, medical equipment). Section 936 corporations were fully exempt from federal taxes when repatriating global profits. Puerto Rico was the largest tax haven for U.S. drug companies.
Fourth, the island went from the number one competitive site in the world in 1990 to number 22 in 1997. No more data was published until 2007, when the island was ranked 36th by the World Economic Forum.
And fifth, since 2006, Puerto Rico’s economy has decreased, falling by over 12 percent, unemployment hovers around 15 percent thanks to migration, and there has been reduction of the labor force participation rate to around 40 percent. Investment has also declined. The island has been marginalized from transnational corporations’ global value chains. The government needs to develop a strategy to link the economy to global enterprises, identifying location advantages such as the bilingual and highly educated labor force. It also needs exemptions from some federal laws, such as the coastwise shipping laws, to open trade with Caribbean neighbors and forge regional joint ventures.
So the economy is stagnant and the government policy of raising taxes to borrow new money to pay debt has backfired. The more taxes are raised the more business close down, workers migrate and revenues contract. High taxes result in a contraction of the revenue base. Less people, pay higher taxes but the revenues shrink. Hence, lenders are unwilling to lend new money or refinance existing debt.
Argeo Quiñones-Pérez, Professor of Economics. University of Puerto Rico
Asymmetry between both economies is such that default on PR obligations posses no significant risk for muni market as mutual funds have been disengaging for a while from PR GO’s and public corporations bonds reducing their exposure as default was clearly the only option left. However, as economic duress mounts in an economy that is going through its 8 year of contraction more unemployment and loss of income will propel further outmigration of Puerto Ricans to the US. Structural adjustments will intensify the downward spiral of contraction and fiscal crisis with no end in sight as economic growth continues as elusive as ever. Whether in Greece, Argentina or Puerto Rico it seems the sacrifice will not suffice until our blood is suck dry by monopolistic finance capital.