When competing with global headlines, which are keeping many a policymaker awake at night, Puerto Rico can hardly hold attention for very long -- especially in a politically gridlocked Washington obsessed with point scoring and jockeying for the White House. Yet, there are many opportunities to reverse the island's economic woes, which have triggered one of the largest non-conflict related resettlements in recent history.
With nearly 10 per cent of the island's inhabitants foregoing the tropical paradise over the last decade, it begs the question of what policy measures can be implemented to reverse this trend and put Puerto Rico on a path toward a brighter future. I have long argued that Puerto Rico's woes are a matter of broad public and security interest in the U.S. and to think the island's hobbled economy is decoupled from pensions, savings and broader economic health is to trigger another 'Lehman-like' game of brinksmanship.
While Puerto Rico's municipal debt default continues to spiral out of control, it is more akin to falling down a flight of stairs than a precipitous economic collapse. Collapse is near, however, and the debate in Washington about appointing a Federal Financial Control Board signals that an intervention is nigh. The question remains at what cost will this intervention come and how will the long term future of Puerto Rico's Commonwealth be affected. Already, a mute, non-voting observer on Capitol Hill (Puerto Rico and D.C. share this dubious distinction), the likely long term cost of this intervention from a bill introduced by Republican Senator Orrin Hatch in December, 2015, may remove what little powers Puerto Rico has over its domestic and economic affairs. Against this stark backdrop, some options for a path forward:
1.EqualityAcknowledgement of being a U.S. territory conferring equal civil, structural, municipal and financial rights to the island's inhabitants as those enjoyed on the mainland. This includes a voting representative on Capitol Hill. If for this to pass, Puerto Ricans must go to the ballot box exercising their right to self-determination, then such a referendum should be called and the outcome respected. As the expression goes, if you owe the bank $10,000, the bank owns you. If you owe the bank $72 billion, which is Puerto Rico's case, you own the bank. Chapter 9 of the bankruptcy code must form part of this turnaround strategy.
2.Consensus and CentralizationStreamlined island politics and policymaking. With 78 municipalities on an island 110 miles by 40, cutting through the wool of bureaucracy and special interests leaves the narrowest of the island's social fabric to protect its people. The needed era of fiscal austerity, requires leaner more centralized administration in the collective interests of the island.
3.Shared ProsperitySupport for long term valued-adding investors that engage with the local talent pool, promote middle-income and high-skilled jobs and improve economic mobility. Stricter conditions around arbitrage investors are needed genuinely engaging them in the local economy. If John Paulson's vision of Puerto Rico becoming the "Singapore of the Caribbean" is to be realized, the era of zero-risk, zero-reward investment must come to an end. Paulson is a famed 'special situation' hedge fund manager who has taken up residence on the island along with sizeable investments.
4.Revenue PositiveEnd revenue neutrality. Puerto Rico's low median household income of $19,000 betrays a sizeable underground economy and low-levels of tax adherence from households and businesses. This, coupled with mass migration from the island, which has accelerated to 3,000 residents a week, puts downward pressure on the revenue base against upward pressure on the island's debt burden. Driving tax inclusion and compliance are critical and amnesties along with a simplified tax code should be implemented to spur participation.
5.Right-SizingPrivatization of non-performing, financially strained state-owned enterprises. Beginning with the public electric utility, PREPA, a wave of targeted privatizations of state-owned/operated assets will help right-size the island's balance sheet, improve income while reducing the debt burden. Public-private partnerships can be explored ensuring that the most strategic assets continue to have some public oversight and accountability. Similarly, development concessions around strategically vital industries that improve economic diversification should form part of a revitalization plan.
6.Economic IntegrationCreate, strengthen and improve regional economic linkages. With cultural and linguistic ties spanning the Caribbean, Latin and North America, Puerto Rico has an opportunity to position itself not only as a destination for U.S. investors through its tax decrees, like Act 20 and 22, but as a place for long term, value-adding investors throughout the region. Puerto Rico is a natural staging ground for a wide range of service industries and is a natural hub for regional finance, among other sectors. Internal focus on the ease of starting a business and operating on the island are essential. As a measure of this progress, moving up the World Bank's ease of doing business rankings from 57 to parity with the U.S., which is number 7, is a worthy target. Highlighting the distance to Paulson's vision, Singapore ranks number 1 on the list.
7.Lifting Legacy LegislationRemoval of onerous, narrow and dated legislation that hampers the island's economic competitiveness. Chief among these strangling rules is the Merchant Marine or Jones Act, which strangles ship-borne trade - the veritable lifeblood of an island economy. By lifting the Jones Act, Puerto Rico has an opportunity to leverage its comparative advantage, geographic location and deep water ports improving regional economic ties, trade and security. The proposed legislation (Puerto Rico Assistance Act of 2015) on turning the island's fortunes around says nothing of the Jones Act.
8.Safety and SecurityBroad based improvements in public safety and security. Reversing the tide of violent crime, drug trafficking and the real and perceived dangers on the island are key to assuring public safety, regional security and attracting committed value-adding investors and residents - along with a possible return of the Puerto Rican diaspora. For a highly skilled workforce to see Puerto Rico as more than a brief tourist destination, public safety and security are essential.
9.EducationThe only way to combat long term economic change is through a well-equipped, educated workforce. No investment pays better dividends than education and Puerto Rico's latent bilingual abilities in its people can be propelled with a curriculum that emphasizes in-demand careers, technical and vocational training. Program's that match in-state tuition conditions throughout the U.S., like the one offered to D.C. residents, will help address educational affordability and economic mobility.
10.EntrepreneurshipRenowned for their can do spirit and optimism, Puerto Ricans must begin to shake the despair and hopelessness of a decade of recession and tell a new story. Much like Detroit's ability to rise from the ashes, Puerto Rico's revival depends on whether a spirit of optimism and risk-taking sinks in through all levels of society. A new startup incubator, Parallel 18, begins to establish a startup ecosystem in Puerto Rico.
A new story must be told on Puerto Rico's economic trajectory. The central actor in this story (and the elephant in the room) is the island's final status with the U.S. If current legislation under the Republican-sponsored Puerto Rico Assistance Act of 2015 is adopted, the island and its people lose what autonomy they have. Just as states' rights are sacrosanct, the values enshrined in the Constitution should be upheld for U.S. territories. While an economic intervention is clearly needed, one that incorporates these recommendations will be less costly and will help improve long term competitiveness and security.