Congress is not done yet with Puerto Rico

The enactment of PROMESA in June 2016 opened a new chapter in U.S.-Puerto Rico relations. After decades of what can be charitably described as benign neglect, Congress recognized in 2016 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. In other words, Congress now owns the Puerto Rico issue.

{mosads}Unfortunately, both the fiscal plan and the budget for fiscal year 2018 that have been certified by the federal Fiscal Oversight Board impose significant austerity measures in the short-term.

The most likely result of the implementation of these policies will be a further contraction of the Puerto Rican economy; increased unemployment, poverty, and inequality; thus generating further migration to the mainland and lower tax revenues in the island as the tax base shrinks; which will lead to calls for more cuts in government services; less government services, in turn, will lead to a general decrease in quality of life and living standards, which will result in yet more “push” migration to the mainland.

Jumpstarting the Economy – The Federal Component

Puerto Rico needs to devise and execute a complex, two-prong strategy to restore economic growth. First, it has 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.

It is important to highlight that this already difficult task is further 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 implication of the Fiscal Oversight Board’s policy posture is that—unless Congress is otherwise willing to address a full-scale social crisis in Puerto Rico in the near future—Federal assistance will be necessary to jumpstart economic growth in the short-term. 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. The current situation simply does not allow for piecemeal action by Washington, a wide-ranging plan is needed.

A short-term economic program for Puerto Rico at the Federal level should include many of the proposals set forth in the December 2016 Congressional Task Force Report. 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.

The Center for a New Economy Growth Commission – The Local Component

In addition to initiatives at the Federal level, Puerto Rico needs to craft a local long-term economic development strategy and strengthen its execution capabilities.

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. In other words, economic growth is not simply a function of exiguous regulation, low wages, or preferential tax treatment. Rather, the process of growth is quite complicated, involving the interplay of many variables and factors that must be present if a country is to succeed.

As a first step in charting the road towards sustainable economic development, the Center for a New Economy (CNE)—Puerto Rico’s premier and only independent, non-profit think tank— 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. This methodology operationalizes the idea that it is generally easier for countries to move from products and services that they already produce to others higher in the value chain that are similar in terms of capital requirements, knowledge, and skills. Because not all feasible new products contribute in the same way to value added and growth, a key challenge along the diversification process is the identification of those goods and services that are feasible and have a higher potential to sustain economic development.

• Area 2: Horizontal Reforms to Enhance Competitiveness

At the same time, 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

Finally, a Working Group of 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. This Group will work on evaluating the potential for a disciplined fiscal reform to enhance the territory’s competitiveness, given its inclusion in the U.S. monetary union.

Conclusion

In sum, the Fiscal Oversight Board has ordered Puerto Rico to put on the equivalent of an IMF policy straitjacket without providing access to the few benefits that usually accompany IMF conditionality programs. The implication of that policy posture is that Congress will have to implement a comprehensive economic policy program to jumpstart economic growth in Puerto Rico. Otherwise Congress will face a full-scale social crisis in Puerto Rico in the near future.

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. CNE is already working on that strategy.

Finally, we stress that without any congressional help to increase aggregate demand in the short-term, implementing a set of supply side policies will be like pushing on a string. The short-term effects will be negligible, leading to higher unemployment, poverty, inequality and migration to the mainland.

Sergio M. Marxuach is Policy Director with Center for a New Economy.

The views expressed by this author are their own and are not the views of The Hill.