Puerto Rico’s Challenges and Options for Long-term Growth | Business

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“Build back better,” emphasized Professor Stiglitz, encapsulating into three words the essence of what he believes is necessary for Puerto Rico to thrive.

“It is as equally important to acknowledge and understand Puerto Rico’s disadvantages, as it is to acknowledge its strengths,” said Nobel Economics Laureate and university professor Joseph Stiglitz.

To create a comprehensive plan for the country’s economic development, Puerto Rico must understand the adverse circumstances which it faces. Stiglitz doesn’t believe the Federal Oversight and Management Board (FOMB) created under PROMESA has fully integrated those disadvantages into their decisions.

Some of these factors include Puerto Rico’s population decline, which has resulted in an obvious and significant decline in total income. The island also lost a distinctive advantage in 1994, when NAFTA began – Mexico now had free access to the US, weakening Puerto Rico’s position as a middleman.

According to Joseph E. Stiglitz Ph.D., keynote speaker of the Center for a New Economy’s (CNE) Growth Policy Summit, going forward, Puerto Rico must focus on more than recovery. For Stiglitz, there are multiple instruments available to the island and combining them is necessary to create a long-term growth strategy.

Creating a growth strategy

“In general most financial systems do not provide enough finance for small to medium sized businesses. Overall flow of funds from banking into ‘productive activity’ has not been kept at the levels it should be. Then, how can we be sure banks do what they’re supposed to do? One function is to provide finance for productive enterprises. The Small Business Association (SBA) provides partial guarantees for lending, risk absorption,” Stiglitz explained.

Development banks, for instance, “while not always being a positive resource in Puerto Rico”, could provide support. “There are many instances of successful, good development banks,” said Stiglitz. “Today there is a big movement to establish new development banks, particularly green development banks.”

After the presumption that banks allocate local finances well was debunked in 2008, it may be of use to implement a Community Reinvestment Act that will impose requirements on banks that they lend a certain percentage of their portfolio to underserved communities.

Yet another approach to long-term growth is to fund government sponsored research. California’s Silicon Valley, an exemplary case, is a product of the prestigious research universities around it – Stanford University and University of California, Berkeley.

In 2017, Puerto Rico’s electric grid was destroyed by Hurricanes Irma and Maria. Now, residents across the island suffer frequent black-outs, while LUMA Energy (the power utility administrator), the Federal Emergency Management Agency (FEMA), and the Puerto Rico Energy Bureau decide what to do with its obsolete power infrastructure.

“In rebuilding its electric grid, Puerto Rico ought to be sensitive to the changing nature of energy systems,” said Stiglitz. “The money spent to recover from natural disasters and the pandemic should be structured as part of a growth strategy. A long-term strategy that helps create infrastructure will be the basis of Puerto Rico’s future growth and will go beyond mere recovery.”

In this area, Puerto Rico has what Stiglitz called a “climate change advantage”. Using solar energy could be an advantage for the island. Electricity prices are two to three times more expensive than the national average, but they could be lower, if the grid shifts to renewable energy sources, such as solar power.

Sometimes advantageous, Puerto Rico’s status as a US territory has had an adverse effect on its bankruptcy. Puerto Rico was cut out of the Chapter 9 bankruptcy laws, but when they tried to pass their own, the US decided that they did not have the authority to do so. The Chapter 9 bankruptcy laws would, as stated on the US Court’s website, “provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts.”

“Some countries grow, others don’t,” Stiglitz observed. “This conundrum was at the heart of Adam Smith’s Wealth of Nations in 1776.”

According to Stiglitz, a higher standard of living has little to do with capital accumulation, but much to do with developed research and learning.

Other disadvantages of being a US territory include the Jones Act, which entails high shipping costs to Puerto Rico, a severe disadvantage to an island and free migration, which provides an individual advantage, but leads to brain drain as educated professionals move away.

Stiglitz also explained that Act 22 “is not a good development strategy.” The economist compared it to the growth strategy given to Native Americans –the casinos. “Attracting people who organize their life around not paying taxes doesn’t contribute much to the island, and only serves to create negative externalities. There’s something peculiar about people who think the main aim in life is to avoid taxes,” Stiglitz expressed.

The Debt Crisis

“Half the time, when there is debt restructuring, within five years there is another debt restructuring. Too little too late” conveyed Stiglitz. “Puerto Rico’s problems,” he explained, “are compounded by the lack of applicable bankruptcy laws, Congress’s failures in passing PROMESA, and accumulating debt of questionable legality.”

“There were constitutional provisions that tried to limit the accumulation of debt. It’s clear that lenders and investment banks tried to circumvent that provision. Additionally, some debt was based on the hypothecated growth of government tax revenues,” he explained.

“Restructuring is always difficult –creditors never want to admit they made a mistake,” said Stiglitz. He reminded that every loan is an agreement between the borrower and the creditor, and failure cannot be placed on the borrower alone –creditors should better assess the credit –worthiness of the borrower before lending.

To allow for growth while bankrupt, a sustainable level of debt must be calculated. The core problem to figuring out what is sustainable requires evaluating what future growth will be. Stiglitz highlighted that growth can’t be measured by only GDP. An initial increase in GDP reflects the repairing of losses that weren’t shown in the earlier GDP number, not an indication of the country’s actual economic growth.

“It isn’t in the interest of the creditors to demand too much of PR. If creditors ask too much, the country won’t grow, then the debt will become unsustainable,” Stiglitz said of debt restructuring. He also expressed cynicism about debt negotiations in the private sector.

About Joseph E. Stiglitz, Ph.D.

Joseph E. Stiglitz received the Nobel Memorial Prize in Economic Sciences in 2001. He served as senior Vice President and Chief Economist of the World Bank, as well as on the US president’s Council of Economic Advisers as member and chairman. He is currently a professor at Columbia University, where he founded the Initiative for Policy Dialogue, a think tank on international development. In 2011, Time magazine named Stiglitz one of the world’s top 100 most influential people.



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