Puerto Rico’s economic model must change its old ways and look to what has worked for other countries other than the United States to regain traction and truly compete on a global scale, according to an analysis by economic firm H. Calero Consulting.
Given that help from the U.S. government has been somewhat slow to come after the devastation caused by Hurricane María last September, and Puerto Rico cannot rely on issuing public debt any longer, then the island will have to make structural changes to attract foreign investments.
First, it needs to upgrade and overhaul its electric power grid, which was pretty much destroyed by the hurricane, as well as highways, ports, water facilities, and telecommunication systems.
“Almost four months after the disaster, Puerto Rico faces a more challenging situation compared with the weeks after María,” the latest edition of the firm’s “Pulse” newsletter stated.
“We have a broken infrastructure, lack external financing, tensions with the Federal Emergency Management Agency and the U.S. Treasury regarding the implementation of the Community Disaster Loans (CDL), a Financial Oversight and Management Board for Puerto Rico that does not have a development plan nor a revitalization plan, and massive outmigration,” the firm noted.
Deploying a new development plan for Puerto Rico will require technology and an electric power sector with systems, regulation, and infrastructure that encourage business creation and increases the island’s competitiveness.
“This requires: low electricity prices, stability through a resilient grid, diversified generation, continued investment, privatization, and technology,” the firm added.
The island also needs to diversify its electricity generation, as countries like New Zealand have done. Also an island, New Zealand generates 81 percent of its electricity with renewable resources.
But all of the changes that Puerto Rico needs are costly, requiring billions that will likely come from outside investments. Countries where investment caused structural changes in their economies include: Estonia, Ireland, and Peru.
Estonia, with a population of 1.3 million, ranks among the most digitally advanced countries in the world. The country combined privatizations with government-led advances in education, business and digital citizenship.
“After its independence from the Soviet Union in 1991, the country decided that the online economy and massive technological innovation was the way forward for a small country with no natural resources. Estonia is expected to get a 100-to-one return on investment for its e-Residency program, which allows any person to start a business from afar,” the analysis noted, adding it got funding from public or public-private foundations to deploy its initiatives.
Meanwhile, Peru implemented a privatization program in 1993, when it auctioned off virtually all of its state-owned companies over a short span — including oil, electric, telephone, mining, airport, ports, and railroad companies.
The country also simplified its tax system, which required a new code and a new constitution.
“The sources of funding were revenues of the privatization program and after all its reforms, Peru regained access to the market and could sell bonds,” H. Calero Consulting said in its report.
Finally, Ireland — often compared to Puerto Rico when it comes to its manufacturing sector — benefited from a large number of foreign companies that have chosen it as a location for European expansion, mainly due to a low corporate tax rate of 12.5 percent and other competitiveness factors, such as a comparatively high level of workers with post-secondary education, more affordable office space, large multinational presence, judicial independence, no barriers to establish a new business, and ranks number one in Foreign direct investment technology transfer.