Newsletter: Puerto Rico Economic Pulse©

The financial and fiscal problems plaguing the Puerto Rico government are not new. The island has been borrowing its way to growth. Over the past years, PR has been struggling under the growing weight of massive fiscal deficits that have increased the costs of credit and among other things, disrupted reimbursements to vendors who contract with the government. The legislature and the governor recently approved a combination of revenue-raising and cost-cutting measures. The new budget includes $1.5 billion in additional new taxes. We need to understand how the underlying budget squeeze and recent wave of tax increases will impact GDP. Many fiscal distortions will deter investment. Can the PR tax system support growth in other ways? Preliminary forecasts suggest impacts on businesses and the economy could derail an already fragile growth in 2014.

Puerto Rico’s own Great Recession has already left an indelible mark on the local economy with several important issues still unresolved. The channels through which microeconomic activities typically unfold are in disequilibrium. Moreover, the Puerto Rican economy has not responded to economic fundamentals for some years, not because policy makers are consistently getting it wrong but rather because the fundamentals themselves have not stopped changing. As a result, old practices are dying out while new ones are emerging in response to these very fluctuations.  These changes will create challenges in the form of market gaps and unmet demand that will transform the way businesses are conducted on the Island. This second installment on local SMEs examines how the new emerging economic fundamentals are creating opportunities for small-scale businesses.  Hence, not everything is lost for the Island.

Puerto Rico’s economic landscape has always been dominated by initiatives targeting big business. In practice, every major initiative relegated small and medium enterprises (SMEs) to the backseat when it came to public policy.  This is not to say that SME-targeted resources were not available (quite the opposite) but rather that SMEs were always considered the complement to the “true” engines of economic growth. A careful look at SMEs reveals, however, a different picture. Personal consumption—typically the largest contributor to GNP growth—depends largely on the jobs generated by SMEs. Furthermore, as PR rebuilds its economic fiber, small businesses will continue to channel innovation, entrepreneurship, and small-scale investment.  Interestingly, opportunities will abound in ways that will surprise even the skeptics. This Pulse will tell you why and where.

In 2011, the Center for Retirement Research at Boston College concluded the average baby boomer was financially unprepared for retirement and, as a result, had to plan to work longer. The 2008 financial crisis wiped out $11 trillion of US household wealth, including both real estate and financial assets. The recent stock market recovery trimmed that loss to about $8 trillion. Since 2004, PR has lost $18 billion of wealth, as measured by the PR Stock Index. People close to retirement age still have an enormous savings gap if they aim to keep their current lifestyles. Since Government accounts for 26% of total employment in PR, public retirees will represent an important share of all retirees. In FY 2011, the unfunded liability of the Public Retirement Systems, Central Government plus Teachers, amounted to $35.6 billion. How did we get there? What can we learn from other jurisdictions? Is recent Law 3 a solution? Find out in this Pulse.

The world is in a state of turmoil that ranges from the chaos after the financial crisis to the current crisis in the Eurozone, from the Arab uprisings to tensions between North Korea and Japan. There are protests everywhere, Cyprus, Athens, Barcelona, New York, and elsewhere. The US dollar faces a real risk of losing its standing among international currency markets. Many of the familiar frameworks are collapsing while the world undergoes rapid change. Political leaders in Puerto Rico need to address local issues and people’s specific demands, but without a clear vision, such a reaction is likely to be inadequate or insufficient to reactivate the PR economy. This Pulse presents a concise outlook of external and internal factors that will define economic policy and strategic planning. HCCG also presents its macroeconomic forecast for fiscal years 2013 thru 2015.

Education is a compelling investment to succeed in today’s global markets. It is critical to achieve productivity, competitiveness, economic growth, and overall wellbeing. The US is currently debating whether subsidized, quality pre-school pays off. Given the difficult fiscal situation both in PR as well as the US, we better not be short on evidence that our education dollars will be well spent if we are to boost economic and social growth. We can buy desks, improve, and build schools but that does not necessarily guarantee outstanding students. Similarly, we have teachers but we cannot legislate excellent teachers. Improving Puerto Rico’s education system is a complex and collaborative enterprise. Some countries have achieved exceptional education systems. Who are these countries? What do these successful education systems have in common? How can education impact growth and competitiveness? How does Puerto Rico compare against performance indicators for education? This issue is about education and what the island could learn from other successful countries.

Worldwide, year 2012 was dangerously tough, with a threatening break-up of the euro zone and economic recession in several countries; political gridlock in the US as the fiscal cliff approached and resulted in self-induced stagnation; and Puerto Rico deep in economic depression and divisive politics. The good news is that, contrary to popular belief in the Mayan prophecy, the world did not end in 2012. However, watch out for 2013 since the economy will continue to be a worry everywhere. Puerto Rico may have reasons to fear a year with the number 13 in it but it might not be so bad after all if the new Administration finally starts implementing a cohesive vision and multi-year economic plan for the island economy; convinces bond rating agencies and investors that Puerto Rico is still a great opportunity; and then executes the plan. This issue examines the most important economic highlights of the past year and sets the stage for the economy in 2013.

In the past decades, the industrial decline of many western economies has forced them to turn towards the tertiary sector (services) in order to diversify their infrastructure and find new sources of income. The city of Bilbao, Spain has a history of both boom times with steel production and hard times with industrial decline starting in the 1970s. The city proceeded to reinvent itself through project-led regeneration programs, of which the Guggenheim Museum became iconic. Cultural policy was accompanied by a series of other urban regeneration strategies, dealing with economic and social aspects. Bilbao is a success story with this strategy. Despite the differences, Puerto Rico also had its manufacturing boom in the 80’s, followed by a decline in the 2000’s. Several strategies have been implemented to reboot the PR economy, but there is no success yet. PR can use entrepreneurial practices implemented in Bilbao. The question is: could a cultural-led approach be the recipe to restore growth in Puerto Rico?

Public private partnerships (PPPs) have become a worldwide modality of cooperation between the private and public sectors.  In a world full of economic superpowers afflicted by fiscal shortages, PPPs have provided a practical and efficient way to energize their battered economies.  A formula pioneered by the United Kingdom in the 80`s has spread across Europe and many other countries.  In Puerto Rico, PPPs have been considered the current administration to undertake and maintain badly needed investments in infrastructure. Puerto Rico is now a leader in the development of PPP`s in the United States, a country that has not quite embraced this formula yet. In this issue, we examine the development of PPP`s in Puerto Rico with emphasis on the controversial agreement involving the Luis Muñoz Marín international airport.

The Puerto Rican economy is at a standstill. Recovery in the US economy is sub-par at best and a rebound in the global economy is looking less and less likely. After five years of negative growth, the PR Government estimates the real rate of growth of the island’s GNP barely grew 0.9% in FY 2012. The island faces a challenging environment as never seen before. The economic situation and its social implications represent a tough challenge for whoever wins next month’s election. The incumbent Luis Fortuño for the New Progressive Party (NPP) and challenger Alejandro García Padilla for the Popular Democratic Party (PDP) are the principal contenders whereas the Puerto Rican Independence Party (PIP) and the other three new parties are far behind. The incumbent claims for continuity in his reforms while the challenger suggests other proposals. This issue analyzes the highlights of the two principal political parties’ economic platforms. It is up to you to judge whether these plans are economically feasible?