Liberty Street Economics

« Becoming More Alike? Comparing Bank and Federal Reserve Stress Test Results | Main | Financial Stability Monitoring »

July 31, 2014

Just Released: Updated Study of the Competitiveness of Puerto Rico’s Economy Proposes Steps to Address the Island’s Fiscal Stress

James Orr

An Update on the Competitiveness of Puerto Rico’s Economy, released today, offers six steps that the Island’s government should consider taking to restore its fiscal health. Puerto Rico faces interrelated economic and fiscal challenges. The report characterizes economic activity in Puerto Rico as flat at a depressed level and shows that public debt has risen to about 100 percent of GNP, a high ratio compared with the ratios for U.S. mainland states and a number of foreign economies. Besides the weak economy, the main sources of the debt buildup have been increasing general government deficits; debt incurred by COFINA, a special-purpose bond issuing entity; and rising deficits in a group of public-sector corporations that provide a variety of services on the Island, including electricity, water, and transportation. A series of ratings downgrades eventually pushed the credit ratings on the Island’s debt below investment grade in early 2014, and it has become increasingly evident that fiscal and economic reforms will be needed in order to maintain access to capital markets on a sustainable basis.

    The report notes that Puerto Rico is not alone in facing daunting fiscal problems. Within the United States, New York City experienced major fiscal stresses and serious concerns about market access in the 1970s. Faced with the need to act, the city summoned the strong leadership and political will required to tackle these issues head-on and, over time, emerged stronger. Puerto Rico now has an opportunity to help get its economy back on track and to restore its fiscal health, but it needs to act.

    In the spirit of assisting the Commonwealth in this endeavor, the report outlines several steps that could help improve fiscal outcomes. The first step is for the Island to reinvigorate efforts to boost economic growth. Puerto Rico has considerable strengths—a bilingual and well-educated adult population, an open economy occupying a central position in the Caribbean, and close ties to the U.S. mainland economy—and it needs to marshal those strengths to support growth. Measures to reduce the high costs of energy would be particularly helpful in improving the Island’s overall competitiveness. As a second step, the report urges a reform of the Island’s current tax system to achieve a broader tax base and lower rates across a range of taxes. Such a reform should help eliminate disincentives and could produce a bonus in terms of faster economic growth. A third step calls for an improvement in the Commonwealth’s financial reporting. New York City’s recovery from its financial crisis entailed a dramatic improvement in its financial reporting and this improvement may well have contributed to a steady increase in the city’s access to financial markets.

    As a fourth step, the report recommends greater efforts to improve the financial standing and overall operational efficiency of the Island’s major public-sector corporations. The report suggests that Puerto Rico would benefit by leveraging the expertise and reputation of existing independent regulatory agencies in mainland states. The fifth step proposes that the Commonwealth government adopt a capital budget and a binding balanced-budget rule. Such measures should help Puerto Rico better align financing methods with spending priorities. The report also suggests that Puerto Rico consider setting up a “rainy day” fiscal reserve to improve the budget’s resilience to future economic shocks. As a final step, the report urges the Commonwealth to establish a legislative framework requiring multiyear budgeting, the adoption of specific targets for public-sector deficits and debt, and monitoring mechanisms to help ensure that targets are met.

    The report closes by saying that these steps will require changes to a number of past policies and practices as well as some degree of sacrifice by all sectors of the population. The experience of New York City further shows that the problems are best addressed when the government and the private sector work together to find solutions. The report urges all parties to act now to put the Island on the road to fiscal health.

Disclaimer
The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York, or the Federal Reserve System. Any errors or omissions are the responsibility of the author.





Orr_james
James Orr is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.


Posted by Blog Author at 12:00:00 PM in Regional Analysis
Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.

About the Blog
Liberty Street Economics features insight and analysis from economists working at the intersection of research and Fed policymaking.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

Upcoming Posts
Useful Links
Feedback & Comment Guidelines
Liberty Street Economics invites you to comment on a post.
Comment Guidelines
We encourage you to submit comments, queries and suggestions on our blog entries. We will post them below the entry, subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted more than 1 week after the blog entry appears will not be posted.
Please try to submit before COB on Friday: Comments submitted after that will not be posted until Monday morning.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. The moderator will not post comments that are abusive, harassing, or threatening; obscene or vulgar; or commercial in nature; as well as comments that constitute a personal attack.  We reserve the right not to post a comment; no notice will be given regarding whether a submission will or will not be posted.
Archives