Op-Ed: It’s not just PROMESA…

Written by  //  June 13, 2017  //  Biz Views  //  No comments

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Economist José Joaquín Villamil heads Estudios Técnicos Inc., whose Economic Analysis and Policy division wrote this opinion piece. (Credit: © Mauricio Pascual)

In Puerto Rico we have focused so much on the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) that we seem to have forgotten that we are part of a much larger economy beyond our 100×35 and that what happens there has an impact on us.

This is why we felt it important to write a very brief review of the World Bank’s (WB), “Global Economic Prospects: A Fragile Recovery,” published recently. What does it tell us?

The WB estimates that the global economy will grow at a 2.7 percent rate in 2017 and 2.9 percent in 2018. Growth will be highly unequal since it includes China and India with growth rates in excess of 6.0 percent and the economies of Latin America and the Caribbean region where growth will be less than 1.0 percent in 2017, improving in 2018 to 2.1 percent.

Even within the region, only two economies — the Dominican Republic and Panama — will experience growth rates higher than 5.0 percent in 2017 and 2018. The region, as the report clearly suggests, confronts serious risks from political and policy uncertainty.

With respect to the cost of energy, the WB projects increases in 2017 and leveling off thereafter with more modest single digit increases.

There is uncertainty in the estimate since much will depend on geo-political events and the production of petroleum and natural gas in the United States. Food and other commodities will experience modest increases according to the report.

The decisions made by the Trump Administration will impact the global economy. There are two areas that are particularly relevant: those having to do with participation in international trade agreements and those related to the possible changes in the federal tax system.

With respect to the former, decisions up to now include the abandonment by the United States of agreements such as the Trans Pacific Partnership (TPP) and a protectionist attitude with respect to NAFTA and other similar trade agreements.

With respect to taxes, and although not assigned a high probability of approval, a Border Adjusted Tax could, should it be adopted, have negative implications for global trade.

In Europe, Brexit is generating a great deal of uncertainty particularly after the results of the recent election. There are, of course, other issues that impact the European Union, including the situation in Greece that is still to be resolved.

The situation in the Middle East, particularly the recent actions against Qatar, also introduce uncertainty in the global scenario. All of the above situations explain why the sub-title of the report is “A Fragile Recovery.”

For Puerto Rico, understanding what goes on in the global context and the factors that generate its fragility is key because ours is a very open economy subject to external shocks.

The U.S. economy, not so much in terms of growth but in terms of policy decisions is, of course, what most directly impacts our economy. In the global context beyond the United States, changes in economic policies and the behavior of energy, food and other markets will have an impact on us and our competitiveness.

Although PROMESA will determine much of what will happen in our economy in the coming years, it would be a mistake to not consider the influence of global trends on our future.

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