Push for Competitive Reforms Amid Contraction
SAN JUAN — An economic analysis conducted by financial consulting firm Birling Capital Advisors LLC proposes the urgency of implementing four reforms to restore economic development in Puerto Rico.
Among the reforms the company noted are those in “taxes and fiscalization, labor laws, permits and welfare benefits that must be tied to incentives to work.”
According to the World Economic Forum, Puerto Rico is ranked No. 44 out of 120 jurisdictions in the indicator that measures the efficiency of the island’s labor market.
This creates an aggravating situation, since the government can no longer be the main entity that stimulates the local economy, although officials have been carrying out public policy measures so the island serves as a free-trade zone; a jurisdiction with lower taxes; a world-class educational system; with increased promotion of emerging industries, increased international trade and a renewed industrial policy.
Therefore, the main challenges the report highlighted are: the expiration of Obamacare funding by $1 billion; expiration of Act 154, representing $1.6 billion or 20% of total government collections; debt restructuring that implements haircuts of 70% to 80% to bondholders; austerity measures to stabilize Puerto Rico’s public finances without any federal support; and pension insolvency in 2018, which threatens 200,000 retirees.
One of the challenges that Puerto Rico confronts will be to successfully implement reforms associated with social assistance programs, with a view to encouraging recipients to work, since the analysis reveals the population reduction projected for 2025 will leave 3.2 million inhabitants, compared with 2014 when Puerto Rico had 3.5 million people.
According to the statistics from the Planning Board and the firm Estudios Técnicos Inc. on the island’s gross national product (GNP), this macroeconomic indicator is projected to continue to decrease.
As a consequence of this economic contraction, the report concluded consumers have reacted as expected since the start of economic recessions in Puerto Rico in 2006 and the United States in 2008 with “worsening expectations and increasing their debt repayments.”
The analysis shows exports are expected to see an uptick in recent years, while imports should drop. “A small, open economy such as ours must necessarily stimulate exports if it wants to spur growth,” Birling Capital said.
The analysis also stated that the Puerto Rico economy has experienced a deceleration in economic growth since the mid-1970s. “Up to the late 1990s, the local economy’s cycle was significantly correlated with the U.S. business cycle. Since then, their growth paths have diverged. The underlying reasons leading to the U.S. recession in 2008 are fundamentally different from those that led to the start of the P.R. recession in 2006,” Birling Capital said.