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Political Instability: Devastating Effect on Prosperity

By on August 23, 2018

Irrational politics and leadership obstinacy could keep Puerto Rico’s economy hostage to mediocrity and would encourage fi rms to look for other places offering more stable political environments to do business. Politics has permeated all aspects of Puerto Rican life for many generations. Cognitively, politics seems to subconsciously interfere with the critical decision-making processes of high-level government officials, instead of reason and doctrine.

Prof. Helen Heresky in her book “International Management: Managing Across Borders & Cultures” defined political risk as “any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm.”

Foreign and domestic firms are constantly assessing political risks to globally protect their investments and operations. This exercise is now of supreme importance for firms in Puerto Rico to conduct, to measure the level of risk to which business executives expose their organizations. The possible implications of those risks need to be carefully evaluated and business strategies reassessed accordingly, to assure business success going forward.

Questionable decisions made by some government officials of both the previous and current administrations triggered three divisive political events that troubled foreign and domestic businesses the most, and are the essence of my analysis:

Walmart transfer-pricing tax case: In 2016, the administration of Gov. Alejandro García Padilla raised the tax companies pay on goods they buy from “related parties” off the island from 2 percent to 6.5 percent on companies generating more than $2.75 billion in business. Walmart sued the government and won by alleging that government officials were singling out the company for inequitable tax treatment.

From the business perspective, the tax increase was viewed as a political move to quickly raise $125 million in new revenue to close a budget gap at the time. Executives from the corporation believed the new tax rate was “designed to capture Walmart Puerto Rico—the largest private employer on the island.

Resisting Promesa Fiscal Board: Congress created the Financial Oversight & Management Board (FOMB) in 2016 to rescue the government of Puerto Rico from economic collapse. The fundamental goal of the board is to reinstate fiscal integrity through balanced budgets, restructure the island’s debt and restore economic growth. This requires the government to change the way it has managed its finances for generations. The board has the power to review and approve fiscal plans and budgets submitted by the government and review any act of the legislative bodies. However, Congress did not give the board the mandate on how Puerto Rico governs itself and therefore the authority to impose its decisions. And here resides the controversy!

From the business perspective, the government’s refusal to work cooperatively with the FOMB is primarily driven by politics. Both of the island’s main political parties (New Progressive and Popular Democratic) believe it must fight the board to win the 2020 elections, instead of putting the house in order.

Defeat of the Repealing of Law 80: A bill requested by Gov. Ricardo Rosselló to repeal the “unjust dismissal law”—a 1976 law regulating worker dismissals when an employee alleges termination based on an unjust cause—was voted down by the Puerto Rico Senate. The Senate president elaborated on the reason for the defeat, saying: “There is no economic foundation that justifies the repeal of Act 80, anywhere.”

From the business perspective, the executive branch of government has lost control of fiscal issues and the ability to work effectively with the legislative branch. The sequence of political events generated from a secret agreement between the governor and the FOMB has demonstrated the degree of incompetency of the officials advising the government on economic issues.

Triumph of politics: In “Planning the Economic Future of Puerto Rico,” published Nov. 24, 2016 in Caribbean Business, I wrote under the section “Restoring Confidence & Credibility” about several courageous decisions Gov. Rosselló needed to make to restore credibility in the government and solidify his leadership. The first was to “depoliticize the handling of economic matters” and the second was to “incorporate knowledgeable, competent, creative and reputable professionals with vision and a high level of integrity into his team.”

The political events generated by his administration are the outcomes of decisions not made by the governor or ineffectively executed by members of his team.

As government officials keep triumphantly playing the political game, the damage inflicted on the business environment, either intentionally or unintentionally, has been immense.

The final analysis: The handling of those events by high-level officials sends a strong discouraging message to business: uncertainty! The extent to which people and firms feel threatened by ambiguous situations complicates Puerto Rico’s investment business environment. It retards business growth as future investors get spooked by the high political risk of doing business in Puerto Rico.

From the business perspective, the aftermath of those events has severely eroded the credibility and confidence in local government to resolve problems and improve Puerto Rico’s business environment during a critical moment in its history.

– Félix E. De Jesús is an Adjunct Professor of Global Management & International Business in the Leon Hess Graduate Business School at Monmouth University in New Jersey. His research revolves around the dynamics and challenges of leading global corporations and includes extensive experience in International Manufacturing.

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