Monday, November 20, 2017

[Column] Economics and politics

By on August 16, 2017

Everyone in Puerto Rico agrees on one thing: that the cause of the terrible economic and fiscal crisis is “Puerto Rican politics.”

So it was a hopeful sign when Gov. Ricardo Rosselló created a new group last week, Frente Por Puerto Rico, representing the island’s different sectors, to take to Congress proposals with “one voice.”

In Rosselló’s words, the group will “set aside…partisan politics,” taking to Congress “initiatives that go beyond the partisan discussions here…that allow us to become more competitive.”

Let’s take a close look at this and focus on one word: “competitive.”

Governor creates group to push US Congress to act on economic development

For the Puerto Rican economy to grow, it must compete for new investment. It competes worldwide, but linked to the U.S. economy, it must compete with the states.

In the mid-20th century, Puerto Rico was admired and copied for how aggressive, creative and successful it was in this competition. Puerto Rico offered powerful incentives. One of them was that labor costs were lower than in the mainland U.S. The most powerful was federal tax exemption. Puerto Rico was competitive precisely because no state could offer it.

U.S. tax policy has always been essential to Puerto Rico’s development. The island has always been exempt from federal taxes. In 1921, thinking mostly of American investments in the Philippines, but extending it also to Puerto Rico, Congress approved Section 931, which allowed U.S. investments in Puerto Rico to repatriate their profits tax-free under certain restrictions.

And in 1976, Congress approved Section 936, essentially removing those restrictions, and giving Puerto Rico an even bigger competitive advantage. The island attracted billions in high-tech investment, mostly in the pharmaceutical industry, creating thousands of jobs.

It was evident how essential this competitiveness was, but Puerto Rico learned the hard way when Congress eliminated Section 936 in 1996, it expired in 2006, the island economy stopped growing, went into decline and into crisis.

Today, when I see on C-SPAN state governors delivering their messages to the legislative bodies, I am impressed by how much time they dedicate to their efforts to attract investments to their states. Many obviously see this as their most important task.

The competition has never been harder.

So back to Rosselló’s new group.

For years, the Government of Puerto Rico and the private sector have been urging Congress to restore Puerto Rico’s competitiveness approving a substitute to 936. Former Gov. Luis Fortuño, of the New Progressive Party, proposed amending Section 933a of the U.S. tax code. In 2016, former Gov. Alejandro García Padilla, of the Popular Democratic Party, proposed the Section 245a amendment that would give 85 percent federal tax exemption to income brought back to the mainland by U.S. corporations.

So what makes Rosselló’s new group different? The phrase “one voice.” For any proposal to have any opportunity in Congress, it must not be seen as partisan.

But in Puerto Rico, “politics” means more than partisan: it means “status politics.”

So the private sector has always insisted that proposals must be “status neutral.” Not judged on whether they are pro-Commonwealth or pro-statehood, but on whether they work.

But there is a problem. Federal tax exemption is not possible under statehood; Section 936 was possible only under Commonwealth status.

So the statehooders convinced Congress to eliminate it, opposing it because it was “incompatible with statehood.”

A key part of Puerto Rico’s labor cost competitiveness was the result of federal legislation that gave the island special treatment in the federal minimum wage in order to protect island jobs. Also seen as “incompatible with statehood,” statehooders also got Congress to eliminate the special treatment.

Statehooders have long argued, and do so today, that it was and is a mistake to depend on tax exemption to attract investment. That there are other “economic models” such as one depending more on tourism, like the state of Hawaii.

But, again, competitiveness. Hawaii is surrounded by thousands of miles of open ocean. Puerto Rico by hundreds of beautiful islands with beautiful beaches competing with lower labor and operational costs.

But aren’t there many other things Puerto Rico can do to make itself more competitive?

Of course there are. But where is the competitive advantage if Puerto Rico can only offer incentives that the other states can? And one should not overlook that compared to the states, Puerto Rico has some advantages and many disadvantages, which is precisely why only incentives powerful enough to overcome the disadvantages will work.

Yes, bad politics produces bad economics. And it has in Puerto Rico.

But let’s be precise. There is a specific reason for Puerto Rico’s crisis. This island went into crisis because it lost its competitiveness. And it lost it because of policies and actions meant to remake the island economy compatible with statehood.

Puerto Rico, I believe, will not find the means of getting out of the crisis unless it frees itself from this political, ideological straitjacket that got us into this mess.

Will Rosselló’s apolitical new group do so?

Unlikely, but one must hope it does. The hope that paradoxically comes from knowing the alternative is very bad: the inevitable Puerto Rican tragedy of not pulling itself out of the economic spiral.

-A.W. Maldonado was a reporter and columnist for the San Juan Star, executive editor of El Mundo, and editor and publisher of El Reportero.

 

 

 

 

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