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Report says Puerto Rico has moderate level of economic freedom

By on March 25, 2019


Scores close to average global score but lower than region’s average

SAN JUAN – Puerto Rico was ranked 61 worldwide in the 2018 Economic Freedom Index (EFI), which was developed by the Center for Economic Renewal, Growth and Excellence (Crece by its Spanish acronym), a nonprofit foundation established by former Gov. Luis Fortuño in 2014 and based at the Metropolitan University, in San Juan’s Cupey sector.

The island’s result for the index, which measures the capacity with which a country generates economic activity, signals that the economy is in a state of transition, and headed into positive territory.

Performed by the local consulting firm, Inteligencia Económica, economist Gustavo Vélez, its founder, revealed the results in a presentation he gave Monday alongside Fortuño; Joaquín Villamil, president of Estudios Técnicos; and Rodrigo Masses, president of the Puerto Rico Manufacturers Association.  

The independent analysis was performed to assess and determine the island’s position in comparison with other countries, using the parameters established by the Heritage Foundation’s annualIndex of Economic Freedom, which focuses on four key aspects of the economic environment where government typically exerts policy control. These are: 1) rule of law; 2) government size; 3) regulatory efficiency; and, 3) market openness. 

“The island’s economy is in transition because a lot of fiscal reforms are being implemented now. So it is a transition that goes together with a structural transition, a fiscal transition and the investment of federal funds. The Financial Oversight Board has only been here for three years. We got hit by a hurricane and the money is getting here just now. So there are a lot of processes running at the same time. The economy, for the first time, is in positive territory and will remain there as reforms materialize,” Vélez explained.

Economic freedom goes beyond the capacity of generating economic activity and trade among individuals. The level of economic freedom in a jurisdiction also influences the freedom to interact with others, travel and say “what needs to be said without government restrictions,” according to a release.

There is evidence that suggests that economic freedom is associated with a healthier economic society. The results of the study gave Puerto Rico 61 points, reflecting a moderate level of freedom, comparable among other jurisdictions with Croatia, Oman and Honduras. The average score of economic freedom worldwide is 61.1. When compared with the average score in the Caribbean region, Puerto Rico is below the average.

“Jurisdictions with a higher level of economic freedom have a better quality of life and higher per capita income. This is what we all want for our children. This index is a valuable and practical tool to measure the strengths and weaknesses of our economy. It provides us a clear picture to determine the areas of opportunity to achieve sustainable economic growth,” said Fortuño.

“After analyzing the results of the study and comparing them with other jurisdictions, we can conclude that Puerto Rico’s economic freedom is somewhat limited, and that its potential for economic growth is being affected by a challenging business climate, high taxes and recurring fiscal deficits,” explained Vélez, while emphasizing the need for  tax, fiscal, welfare and labor reforms to improve Puerto Rico’s competitiveness.

Vélez also highlighted the importance of promoting the ease of doing business on the island as a key component for economic development. In this regard, he said Puerto Rico must adopt reforms to improve construction permitting, streamline the process for business permitting and registrations by creating a digital, one-stop-shop system, as well as improving the property registry and taxpaying systems.

Referring to the possibility that President Trump changes the island Financial Oversight and Management Board’s members, unless the U.S. Supreme Court rules otherwise, Vélez said there has been “a learning process over the past three years, so that could be criteria used by the new board members, taking into account the experience.” 

Fortuño, who is a Republican, noted that the issue of the board’s legality is still in court but declined to speak about any of the party’s plan for the board.

Regarding the selection of federal officials to monitor the use of federal disaster recovery funds on the island, a discussion centering on whether an official can work with the local government, as was the case in Louisiana after Hurricane Katrina, Fortuño said:  “I don’t know if one is finally going to be designated, but it is not a person that would take away the power of the local government.”

The EFI measures 12 specific components of the economy, each of which is graded on a scale from 0 to 100. These economic components and their grade for Puerto Rico are:

Vélez said Puerto Rico ranked 71.3 in fiscal health because the fiscal board has given investors confidence. The fiscal health indicator includes the deficit and debt as factors, which have been handled by the board.

“The deficit is also being improved, so the value of the number rose but is still a low number,” the economist said.

Impediments to economic growth in Puerto Rico, according to the report:

·         Limited size of the private sector

·         Government deficit

·         Pension deficit

·         Low labor-force participation rate

·         Population decline

·         Collapse of the mortgage market

·         High cost of energy

Other recommendations in the report to increase economic freedom:

Government Integrity

·         Paying public servants well

·         Creating transparency and openness in government spending

·         Cutting red tape

·         Replacing regressive and distorting subsidies with targeted cash transfers

·         Optimizing the use of technology in government processes 

Judicial Integrity

·         Strengthening internal oversight within the judiciary

·         Modernizing of the court management systems

·         Facilitating the disclosure of information and public monitoring of trials

·         Creating a nonpartisan system to select judges and prosecutors

Trade Freedom  

·         Repealing the Jones Act

Fortuµño said that while the report makes certain recommendations to increase the index, changes need to be made in a consensus with all sectors, including the media, to become more competitive and achieve more economic freedom.

For instance, while the report calls for a hike in the salaries of public workers, it also discusses rebalancing the entire government.  

“As I see it, we are talking about a smaller government but with more efficiency and capability,” the former governor said.

For his part, Masses, the Manufacturing Association’s president, said: “What we are talking about is a renaissance that will take us to another place. A rebirth of all components. It is an opportunity to be able to transition Puerto Rico to a new form.”

Puerto Rico No. 31 Among Countries in Economic Freedom Index

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