A continuación les presentamos el texto de la ponencia ofrecida por el economista Gustavo Vélez ante la Junta de Supervisión Fiscal. En ésta se exponen sus propuestas para revitalizar la economía del país.
“Dear Mr. Carrión:
Thank you, Mr. Chairman, and board members for inviting me to this public hearing with the purpose of discussing policy options to reactivate the local economy. As one of the first public supporters of PROMESA, I strongly believe that economic growth must be a key component of Puerto Rico’s reconstruction agenda.
The current fiscal and economic crisis are highly correlated to the obsolete institutional framework created during “Operation Bootstrap” in 1948. The institutional framework that served well to Puerto Rico during the early stages of the industrialization process, is no longer viable. Moreover, right after 1968, the technocracy that led the government during the modernization of Puerto Rico was displaced, and partisan politics have affected long-term economic policies.
Right after the elimination of Section 936, private investment started to decrease. For instance, during the phase-out period between 1996 and 2005, investment as a share of GNP decreased from 25% to 22.3%. Nevertheless, once the federal incentives were totally phased out, in 2005, private investment as a share of GNP collapsed from 20.4% to 12.6% in 2015. Global factors, such as the free trade agreements and the rise of other economic world players, as China and India, also affected the Island’s competitiveness.
A decade in depression
Since the elimination of the federal tax incentive program, Puerto Rico has failed to create a new economic development strategy. Instead, all the efforts focused on the fiscal dimension of the problem, by increasing taxes ($22 billion) and expanding public debt to unsustainable levels ($30 billion). Debt as a ratio of GNP increased from 70.6% in 2007 to 92.0% in 2016, fiscal years. These fiscal policies not just failed, but created a death spiral and extended the crisis. Also, the political resistance to reduce government and public spending contributed to the current fiscal situation. Puerto Rico is the only federal jurisdiction that still holds depression status after the U.S. financial crisis of 2008.
During the last decade, manufacturing and construction, key drivers of private investment, experienced historical challenges that affected their role within the local economy. Also, as the government fiscal problems arose, public investment vanished. In the short term, the Island’s main economic challenge is to increase investment to acceptable levels. We estimate that the economy needs from $5 to $8 billion per year in new investment during the next five years to restore economic growth. To achieve this, the Public-Private Partnerships will play a key role.
In comparison with international standards, the local economy is far from being highly competitive. Restrictive laws, the increase in the price of production inputs, and obsolete regulations, all hurt Puerto Rico’s ability to compete. As has been stated, the institutional framework developed during the 1940’s and 1950’s is outdated and does not fit with the new global reality.
Structural reforms to restore economic growth
To restore global competitiveness, Puerto Rico must implement several reforms in the short term by the Fiscal Oversight Board, local businesses, and professional organizations. In the short term, this proposals’ main objective is to create the necessary conditions to reactivate the economy.
Fiscal reform
Puerto Rico needs to develop a culture of public finance transparency and reliable fiscal planning to restore credibility to the capital markets. As recommended by many external organizations the commonwealth should adopt multiannual budgets aligned to specific macroeconomic goals. Also, local government should consider the creation of an independent fiscal council like U.S. Congressional Budget Office, to promote sustainable fiscal planning.
Tax Reform
Previous tax reforms have not accomplished the desired goals in terms of economic growth and expansion of the tax base. In the short term, any tax reform should be aligned with a comprehensive economic reactivation strategy to break the current contraction cycle by simultaneously broadening the tax base and reducing rates across a range of taxes, including corporate and individual taxes.
Welfare reform
The social impact of the welfare state has been dramatically adverse. Furthermore, welfare programs have seriously affected Puerto Rico’s economic potential. For instance, historically the local economy labor market participation rate has been relatively low compared to U.S. standards. During the last decade, as the economy entered in depression, participation rate plummeted from 50% in 2005 to 39% in 2015.
According to the U.S. Census Bureau, the poverty rate in Puerto Rico is 44.9%, twice the level of Mississippi (24.2%), the poorest U.S. state. It is evident that policies adopted to reduce poverty on the island have failed.
The administration must develop a comprehensive policy to reduce dependency on federal and local welfare programs. Through a “welfare to work” policy, government and the private sector could work together to transition current welfare recipients to the labor market.
Economic growth strategies
Aligned with the structural reforms, the Fiscal Oversight Board, the local government, and the private sector must develop an economic growth strategy. Based on my research and previous publications, this strategy should include the following components.
- Puerto Rico as Free Trade Zone
For centuries, our geographical position has been a competitive advantage. Puerto Rico is the southernmost jurisdiction under the U.S. flag, right in the middle of well-traveled and growing multiple air trade lanes between South America, North America, Europe, Middle East and Africa. The local government and Congress must work together to transform Puerto Rico into a Foreign Trade Zone of the United States under the Foreign-Trade Zones Act of 1934, under a modified Stevens Amendment and under travel without visa program. This Zone would permit the free entry of material goods, free immigration, and free trade into the territory. Puerto Rico would then be transformed into the first truly Global Metropolis.
- The lowest tax jurisdiction in the U.S.
Puerto Rico needs to leverage its fiscal autonomy and implement low tax policy to be positioned as the U.S. jurisdiction with the lowest tax rates. Low income and corporate tax rates are powerful incentives to attract high-income professional and all type of corporations from the U.S. mainland. Since 2012, the local government has successfully implemented the Act 20/22 program to attract investors and businesses oriented to export activities using the Island as a hub.
- World class education system
In the knowledge-based economy, education plays a major role as the key driver of global competitiveness. There is enough empirical evidence about the strong correlation of investment in education as a share of GDP and economic growth. The most successful economies like Singapore, Hong Kong, Switzerland have higher ratios education investment to GDP. Furthermore, the qualitative aspect of education is also crucial to sustaining economic growth since human capital has become highly relevant in the new global economy. Puerto Rico needs to transform its education system (K -12) and post-secondary into a world class model capable of producing the best human capital. The Island’s education system, including the University of Puerto Rico, should be a key component of the economic development strategy.
- Promotion of the emerging industries
Some industries are showing a modest recovery process and creating its own competitive advantages. I refer to these sectors as the emerging industries, that will support the recovery process. Tourism, information technologies, professional services are among the potential drivers of the post-depression economy. The government must leverage on these sectors to accelerate the reactivation process.
- International trade
The local private sector needs to develop an export capability and pursue full participation on the free trade agreements such as CAFTA-DR. Government and the private sector must develop a trade policy to integrate the local business community in the global marketplace. The internationalization of the local economy and the expansion of the export activity will be essential to the economic recovery process. The U.S. market, the Caribbean region, including Cuba and LATAM, are natural markets for the local enterprises.
- A new Industrial policy
Manufacturing still the backbone of the local economy contributing to 45% of the GDP. Nevertheless, the multination industrial operations are under intense global competition. Puerto Rico needs to develop a new industrial policy to modernize its promotional strategy to attract new global companies and diversify the industrial base. Recently, PRIDCO started to develop an aerospace cluster in the western part of the Island, where Puerto Rico is developing a competitive advantage. However, in order to compete globally, the promotional strategy should not depend exclusively on tax incentives. PRIDCO and the private sector must work together to identify industrial niches, were the Island could be competitive.
I want to thank the Oversight Board for inviting me to depose today. My objective is Puerto Rico’s growth and I hope my statement today and the discussed strategies can help in our endeavor.
Thank you.”
