November 30th, 2017
“While economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.”
From the book “Why Nations Fail” by Daron Acemoglu and James A. Robinson
Thank you, Mr. Chairman, and board members for inviting me to this public hearing with the purpose of discussing new perspectives and recommendations to develop a new Fiscal Plan.
Two months after Hurricanes Irma and Maria destroyed Puerto Rico, the commonwealth’s, the Fiscal Oversight Board and the different sectors must work together to develop a new Fiscal Plan, adjusted to the new economic reality.
I maintain that there is no doubt that the situation after the hurricane is extremely challenging. Washington can’t solve all of Puerto Rico’s financial needs with aid packages the complexities at play when it comes to Puerto Rico’s financial situation are enormous.
Complicating the recovery response is Puerto Rico’s financial situation and history of poor governance. In addition to the new economic and demographic challenges, the new Fiscal Plan should focus on developing a new institutional framework and modern government. Puerto Rico’s public sector became obsolete, highly expensive, and obstructive to the private sector development. The institutional development achieved during the early stages of Operation Bootstrap (1948 – 1973), was very successful to support the accelerated the Island’s industrial development.
Nevertheless, after the first economic recession (1973-75), increasing spending and higher public debt became normative of Puerto Rico fiscal policy.
For instance, in 1940, the public sector employed 13,000 (2% of total labor force). But five decades later, in 1993, the government was responsible for 227,800 jobs or 26% of total employment. Since 2009 public payroll expenses started to decrease by an average of -4.0% annually.
In 2016, according to the Department of Labor, public payroll reached 156,600 jobs, representing 18% of total employment. State employment in Puerto Rico is reaching the national average and is below several other states, like Wyoming whose state labor accounts for 22.4% of all employment. The government has reduced its payroll and the goal now is to maximize its employees and eliminate its bureaucracy to facilitate services for its citizens.
Puerto Rico cannot longer sustain 140 government agencies and corporations. Recent studies prepared by independent institutions such as The Brookings Institute and the Federal Reserve Bank of New York show that Puerto Rico needs to modernize its institutional framework.
The central government, public corporations, and the municipal governments themselves must undergo a profound transformation that allows society to optimize the limited resources that exist today. Trying to continue imposing taxes and increasing public sector spending will only extend the cycle of economic contraction that has brought Puerto Rico to its current state of stagnation and insolvency. The Government Accountability Office (GAO) published a report in 2015 with detailed recommendations to increase government efficiency
Government Accountability Office (GAO) recommendations to increase efficiency
- A separate entity should be created to provide the methods, tools, and systems necessary to transform government into a more effective entity; this provides agencies with the necessary expert resources while they keep the trains running.
- COO’s should take the responsibility to ensure program and mission activity is as efficient as possible with the flexibility to assign the right people and the right resources and apply the savings to other programs. This puts the accountability where it should be — at the local level rather than the political level. A culture of efficiency can be created through a combination of aligned employees, development programs, leadership attention, measurement systems, and appropriate processes and resources.
- Technology, as well as program success, should be shared across agencies to eliminate redundancy and help agencies move forward more efficiently; a clearinghouse to share best and existing practices among agencies should be created.
- Duplication should be eliminated through interagency councils or the transformation entity discussed above
Subsequent, I present some guidelines for the transformation of the public sector within the Fiscal Plan.
Policy recommendations
- Government as a facilitator of economic development: The structure and philosophy of the government must move from a large, inefficient, and obstructive government of economic development to a well-managed, efficient, and facilitating government of economic development. The government must promote the private sector as the engine of economic development.
- Private investment: The insolvency of public corporations, such as PREPA, PRASA and PRHTA, and other government operations, evidence the government’s managerial incapacity. The fiscal plan must adopt the privatization of all activities that are not an essential service for citizenship. PPP’s and private capital must be the drivers of new investment and good management.
- Zero-based budget: For decades, government budget planning allowed agencies to increase their revenues without justifying the effective use of allocated resources. We recommend a Zero-Based Budget as part of the new fiscal plan.
- Metrics of efficiency and productivity: The Office of Management and Budget (OMB) must adopt a system of indicators to measure efficiency and labor productivity. These indicators should guide budget decisions and allocation of fiscal resources.
- Technology: Despite some progress in digitizing some government functions, there is still a lot of room to expand this model and increase efficiency. The government must reinstate the figure of the “Chief Technology Information Officer” and provide by law the fiscal and operational autonomy to enable the implementation of long-term programs for the digital transformation of the government.
- Meritocracy: The politicization of the public sector has affected good governance and effective management. We recommend adopting the principles of merit within the government sector, which was one of the great successes during the period from 1950 to 1973.
- Responsible fiscal management: Puerto Rico needs to develop a culture of public finance transparency and reliable fiscal planning to restore credibility to the capital markets and the business community in general. As recommended by many external organizations the government should budget 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.
- Long-term macroeconomic planning: Economic growth demands discipline and commitment from all sectors, therefore public and private sector must work together in the implementation the strategies to generate new investment and create jobs. A non-partisan entity should oversee long-term plans and assure that economic policies will not be interrupted or affected by the political cycles.
- Reopen Capital Markets: The government and the Fiscal Oversight Board should engage with the Commonwealth government creditors to secure a comprehensive program to rebuild Puerto Rico.
Nations fail when their economic and political institutions fail. We must work together to assure that Puerto Rico, does not become the only failed economy in the United States. I hope that our comments and recommendations will be useful in the task of preparing the new Fiscal Plan under this new challenging context.
Cordially,
Gustavo Vélez
