New York Times (rejected)
Puerto Rico is on a snail’s pace to normality after the destruction caused by Hurricane Maria. Overnight lines at the gas station are now just an unpleasant memory, mobile phones are showing increasing signs of life, but only 40% of the economy was operating with public utility power seven weeks after the power grid collapsed. A greater challenge, however, is normality in an island in its eleventh year of recession, crushed by debt, retirement liabilities, and even before Maria, scheduled to lose a quarter of its peak population within a decade.
Only economic growth can save Puerto Rico, but its main obstacle is policy that has never been about getting the fundamentals right, e.g., high-quality schools and universities, a predictable institutional environment, and a focus on production rather than dependency on a clientist state. Instead, development policy is about the eternal search for a free lunch in the form of funds from the Federal government or other advantages associated with our relationship to the US. Residents of Puerto Rico do not pay Federal taxes and this formed the basis of an industrialization drive that offered investors an invitation to move their factories to the island and produce, basically, tax-free. Some say that our current problems are the result of the eventual loss of this benefit, but an alternative interpretation is that our growth policies have never been about anything other than tax exemption and public transfers.
Old habits die hard, and a new version of the strategy entices individuals to move to the island in exchange of exemption from taxes that would have been owed to the IRS. In parallel, local officials travel regularly to Washington DC to lobby for additional funding for health care, infrastructure, and more recently, for disaster aid. Whereas there is nothing wrong with these requests, it is also true that the island must also do everything within its power to help itself.
Puerto Rico sorely needs reform
Radical changes are required in an economy where 6 in 10 adults are neither working nor seeking a job. The same goes for a public education system where only 6% of 8th graders show a basic understanding of mathematics, as compared to 68% in the US. At the same time that the island calls for an exemption from a Federal law that limits competition in shipping, it does not act to repeal local laws that do the same to local transport, communications, and wholesale trade. Lack of action is explained by the fact that reforms are politically unpopular and successive governments do the impossible to maintain an unsustainable status quo. Even if the ship is sinking, the cafeteria must not be closed.
Not all the blame falls on Puerto Rico, as economic growth is also hampered by application of Federal government policy without regards to its effects on an island where poverty is more than twice as high as in the poorest state. A Federal minimum wage that in a Mainland setting is not generous by international standards, relative to Puerto Rican median earnings, it is the highest in the world. Research with Gary Burtless from the Brookings Institute establishes that Social Security and other Federal program benefits replace much larger shares of labor income in Puerto Rico relative to the US, a result of the progressive nature of the programs’ benefit formulae and island earnings that are half as high as the prevailing ones in the US. Therefore, while on the one hand a high minimum wage discourages job creation, on the other hand public program design discourages labor force participation. An economy with few job opportunities and few people looking for work may be a common (and fair) description of Puerto Rico, but the role played by centralized policymaking in contributing to this outcome should be equally well known.
Regardless of who is to blame, Puerto Rico will require short-term aid to avert a humanitarian crisis, record migratory flows, and a prolonged government shutdown caused by plunging fiscal revenues in an economy stalled by lack of electric power, water, and reliable communications. A portion of an aid package should take the form of loans that could be forgiven if in the medium term the island shows progress in implementation of education, labor market, welfare, energy, fiscal, and other reforms that are required to ensure that the island remains a viable entity and a better place to live. Aid can provide relief and short-term stimulus, but only reforms can save the island by spurring long-term growth.
The author is a professor of Economics at the University of Puerto Rico.