Economic growth: Puerto Rico’s missing third arrow

As Congress resumes work to craft a rescue package for Puerto Rico, one must be struck by the absence of any serious attempt to extricate the island from its 10- year economic slump. This is all the more disappointing since, without resumed economic growth, there is no prospect that a long-term solution will have been found for Puerto Rico’s debt crisis.

House Speaker Paul Ryan’s efforts to forge a bipartisan consensus on a rescue bill for Puerto Rico centers on two main planks. The first is to provide the island with some sort of bankruptcy mechanism that might allow it to restructure its US$72 billion debt mountain in an orderly manner. Such a mechanism might include an 11-month stay on Puerto Rico’s debt service payments that would give the island time to restructure its debt.

Puerto Rico's Governor Alejandro Garcia Padilla and U.S. Treasury Secretary Jack Lew in San Juan, Puerto Rico, May 9, 2016. REUTERS/Alvin Baez.
Puerto Rico’s Governor Alejandro Garcia Padilla and U.S. Treasury Secretary Jack Lew in San Juan, Puerto Rico, May 9, 2016. REUTERS/Alvin Baez.
The second is some sort of fiscal control board for the island along the lines of the earlier control board for Washington DC. Such a board would be intended to impose much needed budget discipline on the island’s wayward public finances.

Admirable as those two initiatives might be, by themselves they would seem to be providing little more than a temporary fix for the island’s problems, which might get us through this November’s US mainland electoral cycle without a full scale economic and social meltdown on the island. By doing nothing to revitalize long-term economic growth, they will have done nothing to have kick-started the island’s ailing economy or to have arrested the accelerating outward migration of its population to the mainland.

The importance of revitalizing Puerto Rico’s economic growth cannot be overstated if a long term solution is to be found for its debt crisis. Since it should be obvious that if the island’s economy were to continue to contract and if it’s able-bodied population were to continue to decline, the island would become progressively less capable of servicing its debt or honoring its US$45 billion in pension liabilities. A lack of restoring economic growth would also mean that the island would probably need a series of debt write-downs over time.

All of this is not to say that restoring economic growth to the island’s battered economy will be easy particularly if the island were to be required to undertake major fiscal retrenchment within a US dollar straitjacket. However, it is to say that Congress should not allow itself to be deluded into thinking that it will have provided a long-term solution to the island’s debt problem by providing the island with some form of bankruptcy procedure and with a control board.

Economic growth: Puerto Rico’s missing third arrow - AEI | Economics Blog » AEIdeas

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