CNE in Washington DC
On July 18 CNE’s Policy Director Sergio Marxuach participated in a bipartisan roundtable discussion in the US Congress on the future of Puerto Rico’s economy at the invitation of Rep. Nydia Velázquez, Ranking Minority Member of the House Committee on Small Business. Below is a summary of CNE’s testimony as well as a link to the unabridged version of the document submitted by CNE.
PROMESA is not working as expected
With the enactment of PROMESA in June 2016, Congress recognized that it has a moral obligation under the U.S. Constitution to foster the welfare of the U.S. citizens that live in Puerto Rico. This means that it is in Congress’s own interest to see through that Puerto Rico is successful in addressing its current fiscal and economic crisis. However, some of the policy tools set forth in PROMESA may actually hinder the island’s ability to escape its current economic death spiral.
First, the imposition of a Fiscal Oversight Board with broad powers over the island’s fiscal and economic policies, authority to command the implementation of its recommendations, and the capacity to prevent the enforcement or execution of otherwise valid contracts, executive orders, laws or regulations—has seriously undermined the island’s political institutions, already extremely compromised by clientelism, partisan politics and corruption.
The Fiscal Oversight Board has actually added a new layer of opacity to fiscal policymaking in Puerto Rico. The discussions among Board members have been carried out mostly behind closed doors, while interactions between the Board and the Government of Puerto Rico tend to be summarized ex post, usually through succinct letters written in rather cryptic language.
Second, PROMESA’s complicated territorial debt restructuring process combines principles drawn from both the U.S. Bankruptcy Code and from the realm of sovereign debt restructuring. This means that its benefits remain fairly uncertain and contingent on the successful implementation of a completely new and untested legal framework for territorial bankruptcy. The risk if this experimental framework fails is magnified by the fragile state of the Puerto Rican economy, which has already undergone a protracted decade-long contraction.
Jumpstarting the economy will need a Federal component
Puerto Rico needs to devise and execute a two-prong strategy to restore economic growth. First, we have to jumpstart economic growth in the short-term. Second, the island needs to formulate an economic development plan to sustain that growth over the long-term, something it has failed to do for quite some time.
This difficult task is complicated by the austerity policies the Fiscal Oversight Board has required Puerto Rico to implement. The certified fiscal plan orders the island’s government to implement large expenditure cuts, significant tax increases, and deep structural reforms without access to any short-term financing.
The means that if Congress wants to avoid dealing with a full-scale social crisis in Puerto Rico, Federal assistance will be necessary to jumpstart economic growth in the short-term.
The current situation simply does not allow for piecemeal action by Washington, a wide-ranging plan is needed. Congress needs to implement a comprehensive economic program, remove some of the disadvantages imposed on Puerto Rico under the current political arrangement, and eliminate some long-standing inequitable and discriminatory policies.
A short-term economic program for Puerto Rico at the Federal level should include, for example, providing additional funding for healthcare, extending the EITC and the CTC to Puerto Rico, preserving social safety net programs, and increasing funding for education, infrastructure, and research.
CNE aims to craft a long-term economic development strategy
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. Economic growth is not simply a function of exiguous regulation, low wages, or preferential tax treatment. The process is quite complicated and involves the interplay of many variables and factors.
As a first step in charting the road towards sustainable economic development, the Center for a New Economy 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.
Area 2: Horizontal Reforms to Enhance Competitiveness – 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 – 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. It will evaluate the potential for a disciplined fiscal reform to enhance the territory’s competitiveness, given its inclusion in the US monetary union.
Conclusion: Puerto Rico needs a comprehensive approach
Puerto Rico has been under severe economic, fiscal, and financial stress during the past decade. Thus, imposition of the equivalent of an IMF policy straitjacket without access to the few benefits that usually accompany IMF conditionality programs will decrease Puerto Rico’s short and medium-term capacity to honor its obligations by intensifying an already prolonged economic contraction.
To jumpstart economic growth in the short-term Congress needs to implement a comprehensive economic policy program, remove some of the disadvantages imposed on Puerto Rico under the current political arrangement, and eliminate some long-standing inequitable and discriminatory policies.
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.
Article publish in: Center for a New Economy