Op-Ed: Thoughts on Puerto Rico’s economic development future
The recent article about the Center for a New Economy (CNE) titled “Puerto Rico has ‘once-in-a-generation’ chance to turn economy around” presents us with four positive trends that are creating more fertile ground for the right foundation of a sustainable economic recovery strategy. A new opportunity for change…
CNE reinforces that message by stating that “despite the existence of certain substantial risks, current conditions are ideal for undertaking a broad-based economic development effort in Puerto Rico.”
I agree with that perspective, but the path to a true and long-lasting recovery will be difficult. Any strategy will need to address the key drivers that make a sustained productive society which include demographic, social & political aspects. A commitment to a long-term vision, detailed planning and obsessive execution is no doubt a requirement as well. But there are some key topics unique to our recovery that need to be discussed openly and acted upon quickly:
- Addressing demographic trends: With a shrinking population and a median age approaching 45 years old, we have a problem in the structural foundation of a real productive and long-lasting recovery. In simple terms, our trend shows less people, earning less with less time to be productive, or to be reproductive. As a point of reference, Latin America median age is 31 years old with the likes of Panama and the Dominican Republic trending under 30 years old. As for population growth, the lowest fertility rate in the world is Taiwan with an estimated 1.07 children per woman; as a comparison Puerto Rico’s fertility rate is 1.04 children per woman, a rate lower than lowest in the world. Not good on both fronts. A study by the Rand Corporation deduced that a 10% increase in the fraction of the population ages 60+ decreases the growth rate of GDP per capita by 5.5%. This pattern varies per country and takes multiple elements such as changes in consumption patterns, impact on viable industries because of an aging workforce and lower income trends of the overall population. All impacting the economic growth potential. We need to understand that regardless of ideologies and nationalistic sentiments, promoting the right level and profile of immigration is a reality that must be discussed and considered.
- Right-sizing the government: We need to think in an honest way about the size of our government, its efficiency and sustainability based on current sources of revenues. The current structure has proven to not be a sustainable or effective equation. Different than a private business, right sizing a government structure depends on a successful symbiotic relationship between the public and private sector. In other words, the implementation of the strategy depends greatly on the implementation of technology, process improvement, uncomplicated bureaucracy, and a work-force transfer to a very fertile and growing private sector economy. Another critical element are our 78 municipalities. More than a third of our municipalities are at the verge of bankruptcy with no solution in sight. Right sizing may present an opportunity here as well. The concept of right sizing is not to downsize, but to restructure the organization to improve efficiencies and be effective in its objective at hand; in this case to manage and offer the required services to our society. State and Municipal structures need to be looked at as a single entity for any solution to be effective.
- Maximizing federal funds: Federal funds should not be left on the table unused and unproductive. Our government needs to ensure that all available federal funds are accessed and disbursed on a timely basis. Transparency, proper allocation, planning and governance along with priorities should drive the process. Infrastructure, health, and education are more pieces to the puzzle of developing a sustainable economic development strategy; and the horizon looks cloudy on these three fronts. Municipalities and state departments require assistance in accessing these funds and complying with requirements. The talent is out there to aid with access and oversight to federal programs, let’s institutionalize their use understanding that access is good, but compliance is the key.
- Restructuring tax incentives: As a society we need to take a hard look at the kind of society we want to promote. Are we creating an equitable environment for our fellow citizens or are we selling off our collective future in exchange of a political pyrrhic victory? In an environment where the needs of the government and its citizens are not being met, tax incentives for the few with no long-term commitment or truly measurable impact to our economy should be done away with. Hard times require tough decisions, tax incentives should be provided only when the qualifying entity has proven its long-term commitment to the territory. For instance, an entity that establishes itself on the island first, hires local talent, offers competitive salaries, participates in the local banking system, and promotes the local supplier ecosystem, is an entity that promotes the productive development of the society that it participates upon. That is a place to start; become productive and the right incentives will follow. Our fundamental incentive must be based on our capability to provide the expansion of cost-effective output to the industry, competitive-wage labor (not low-wage labor) and where required, privileged access to the U.S. market. An all-encompassing equation fundamentally like what Operation Bootstrap offered in the 1940’s and Section 936 in the 1970’s.
- Improving the business environment: Upon the many variables that create an attractive business environment, infrastructure holds a place of honor. It has been said that concrete, steel, and fiber-optic cable are the essential building blocks of the economy. Infrastructure enables trade, powers businesses, connects workers to their jobs, creates opportunities for struggling communities and improve upon the community’s quality of life. All driven by well-built roads that provide the appropriate access, reliable and cost-effective utility services, airports & ports that provide fast and cost-effective access to people and supply chain; and so on. So how does our infrastructure rank? We have the second most expensive energy cost per Kw/hr., slightly behind Hawaii. Our power and water services have reliability issues. Our roads are showing their age and our airport and ports capacity remains underused. Will we ever see the Roosevelt Roads runways and ports operational? Security is also of concern and given that we have lost close to a third of our police force since the early 2000’s, we need to ask what the plan is. To have the greatest impact on stimulating economic recovery in the short-term and lasting stability in the long-term, infrastructure should be sustainable, resilient, and inclusive.
- Educating an aging workforce: An economic development strategy dependent on an aging and shrinking population requires a re-education component. In today’s world, as the pandemic has proven, a business can outsource its processes and labor throughout diverse geographies, thus minimizing its independence on the local pool of talent. From one perspective this is optimal for it expands the access to talent that otherwise would be limited, and no doubt local businesses benefit from it. But from a counter-point perspective, outsourcing becomes a challenge to a population not in sync with the skill set needs of the industries driving its economy. Education of an aging workforce is not an easy task, but we need to develop a strategy to bridge the gap if we aim to be successful in restarting our economy. Thus, why retrain? Local labor’s income has a multiplying effect on the local economy, whereas the income of a geographically outsourced labor provides zero benefit to the local economy. Keep it simple and hire local.
- Re-balancing key industries: To position Puerto Rico for a sustainable economic development phase, we need to complement the current key driving sectors of our economy, seeking new areas of productivity where we can generate a competitive advantage. Must we look back so that we can move forward? Our recent supply chain challenges resulting from the pandemic and Russo-Ukraine war may hold the key. If we go back to World War II, the reality of ensuring the supply to local consumers and the US armed forces with products which might otherwise not become available in the event of a German naval blockade became the trigger for the industrialization of Puerto Rico and later the genesis of Operation Bootstrap in 1947. A well devised plan offered the right incentives to bring a myriad of industries that yielded over 150 manufacturing plants in the span of about five years. Granted, we are not in 1940’s Puerto Rico but let’s fast forward to 2022 and think about the supply chain issues that have been impacting us and our biggest trading partner over the past two years. There is a need for repatriation of advanced high-end technology to low-tech manufacturing and agricultural resources. Areas in which Puerto Rico can find opportunities. Repatriation of certain products has become a topic of national security; and for us a topic of national opportunity. We need a thorough plan to execute on the opportunities that may appear in front of us. With global shortages on baby formula, certain antibiotics, and other specialized drugs, can our pharmaceutical manufacturing past help us in addressing current and future needs? This hemisphere is looking for alternatives; less talking and more walking in seizing these opportunities is warranted.
- Reshaping the political realm: The American comedian George Carlin, in one of his many funny diatribes, would say that he did not complain about politicians; he complained about the public. His point being that we can always do better in our selection and oversight of political leaders. I must agree to that. The reshaping of Puerto Rico’s economy is dependent upon a complicated and well-orchestrated series of factors, events, relationships, leaders, and commitments to a higher goal. The executive & legislative must possess not only the intellectual might to focus on the key issues surrounding our future but also must possess the right level of incentives to seek positive change. The right incentive being the unforgiving oversight by voters. Economic recovery is not just about attracting new industries, capital, or investors. The main purpose of any economic development plan is to address the socioeconomic reality of our society. Better quality of life, less unemployment, more competitive salaries, improvements in education and health amongst all other benefits that a healthy and productive society demands. But the fundamental question remains; are we willing to be party blind in exchange for a better future?
- Improving United States relationships: Status has been the top political mantra since I have had use of memory; no doubt our status does require us to keep that conversation top of mind and top of hearts. But reality has shown that we are not anywhere near achieving a final solution for that question in the short term. Our current needs demand governance of the basic needs of the population and thus greater efforts should be directed and maintained towards that objective. Regardless of ideology, the key to a successful long term economic development strategy depends in great part in our ability to maintain a positive relationship with all the Government branches and political parties within the US. I am sure that from all side of the aisle, some may disagree with my statement. However, in a pure pragmatic sense, this is necessary.
- Expanding economic horizons: Our logical economic relationships have gravitated around our biggest trading partner, the US, and their primary economic orbit. Puerto Rico continues to be well positioned to explore and exploit import/export opportunities as well as access to other sources of investment within our Latin America & Caribbean backyard. Our bilingual & bicultural skills have yielded many successful executives and entrepreneurs that have accurately identified and acted upon these opportunities with remarkable success. An all-encompassing economic development plan must consider the expansion into other non-traditional markets that can benefit our economy, particularly locally owned businesses.
In the “talk Show” spirit, this was my Top 10 List; but in all fairness the topics are more expansive with a significant degree of complexity; a puzzle with many pieces. No doubt, the development of a well-structured economic recovery plan will take time, intellectual capital, and a dedication to push forward come “hell or high water.”
Although pragmatic, I hold optimism in our capabilities as a people and do not discount the core of public servants that will make a difference if given the chance. Our economic future is at a crossroads and will require political will from all sides to develop a solution but more important to seek consensus and commitment to execution.
Thus, in the spirit of the pursuit of change we can look to the words of the Roman philosopher Seneca, “Every new beginning comes from some other beginning’s end.”