The N.Y. Fed has a diagnosis for what’s ailing Puerto Rico

One of the oddities about Puerto Rico is that it falls under the jurisdiction of the New York Federal Reserve. And this week, the New York Fed, which flagged some of Puerto Rico's debt problems back in 2012, has begun publishing a series of blog posts about what's ailing the debt-laden commonwealth -- and what the island needs to do to get its economy back on its feet.
The New York Fed kicked off its Liberty Street Economics blogs by declaring that "ultimately, achieving fiscal sustainability depends greatly on reinvigorating economic growth, which has been unsatisfactory in Puerto Rico in the past decade." It said that stronger growth would boost tax revenues, providing more room to reduce the deficit while maintaining essential public services, and gradually bend the debt-to-GDP trajectory in a more favorable direction."
Still to come: How to do that. For now, members of Congress and many creditors of Puerto Rico are calling for curbs on government spending and other austerity measures that could make it difficult to boost wealth in the U.S. territory. That tension is one of the many problems facing Greece. Even if Puerto Rico's government manages to create a budget surplus, it may not be enough to service the debt is is taking on.
Second, the Fed says that Puerto Rico must find a way to hang onto young working people. One of the starkest issues in Puerto Rico is the extremely low -- 40 percent -- rate of labor force participation, a level far lower than states on the mainland, where the average is somewhat over 60 percent. Many analysts explain that by pointing to the prevalence of the black market economy there, or people's dependence on generous social benefits. Others say lowering Puerto Rico's minimum wage, as allowed under the rescue legislation President Obama signed a few weeks ago, would create jobs and spur greater participation in the labor force.
But the New York Fed blames the low participation rate on demographics. Puerto Rico's birth rate has tumbled by one third over the past 15 years. The massive outmigration of the relatively young compounds the problem. More than 300,000 people have left the island over the past five years leaving a population of 3.5 million. Who's left? The population over 65. It has increased substantially while the population age 5 to 24 has fallen sharply.
The New York Fed's concludes that persuading the young to stay in Puerto Rico and participate in the labor force is “of vital importance to Puerto Rico’s efforts to get its economy back on track.”
Third, while the flight of doctors from Puerto Rico to the mainland has drawn a lot of attention to a brain drain (frequently highlighted by Treasury Secretary Jack Lew), the bank says the impact of people leaving the island has been softened by the fact that those leaving are ever so slightly more likely to come from the lower skilled, less-educated ranks.
"In 2014, about 36 percent of those who migrated to the United States had a high school diploma as their highest educational attainment, compared with 31 percent of the Island’s population," the Fed said. "Similarly, 25 percent of these migrants had a college degree or higher, compared with 28 percent of those remaining in Puerto Rico."
The New York Fed added "it would make matters worse if Puerto Rico were losing an outsized share of its highest-paid workers."
Still, the population has dropped by 600,000 over 15 years, more than 15 percent of its peak, a decline that represents a serious loss of human capital, the Fed said.
But Puerto Rico's problem with human capital also lies in a dismal education system. Although Puerto Rico has a large number of teachers per student and although the number of years spent in school is very close to the number spent in school on the mainland, the average Puerto Rican 15-year-old student lags far, far behind his or her counterparts in the United States and abroad.
On Thursday, the Fed blog looked at a sample of 1,668 students from 56 public and private schools in Puerto Rico on a math test done by the Programme for International Student Assessment (PISA). The test is designed to capture the ability to perform specific tasks in an internationally comparable setting and the basic math test is considered a good predictor of job prospects.
"Among the sixty-six countries and territories and three U.S. states that participated in the PISA test in 2012, the average score in Puerto Rico is fifth from the bottom, with only Colombia, Qatar, Indonesia, and Peru having worse scores," the blog observed. Less than 1 percent of Puerto Rican students scored at level 3, considered the level of basic proficiency. Other tests produced similar results.
The Fed bloggers called the results "alarming" and said they explained a puzzle about why Puerto Rico has had such slow growth despite a workforce with a substantial number of years of schooling.
This goes beyond restructuring debt or taming deficits.
"Without more progress" on enhancing the island as a place to live and work, or in boosting educational performance, the N.Y. Fed blog said, "Puerto Rico’s out-migration and long-term economic malaise are likely to continue."



By Steven Mufson
The N.Y. Fed has a diagnosis for what’s ailing Puerto Rico

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