Op-Ed: What makes or breaks Puerto Rico’s investment climate
A good investment climate offers opportunities for companies ranging from microenterprises to multinationals. Promoting a favorable investment climate allows them to invest productively, create jobs, attract new investments to the island, or expand operations, among other activities.
The recent determination of Moody’s Investors Service to withdraw its ratings for the Government of Puerto Rico and its different agencies and public corporations forces us to think about the reasons for this decision, as the mere absence of the rating creates a void in our investment climate.
The investment climate decides if a country’s economy grows if it increases its demographic balance or manages to reduce poverty. Creating a good and stable investment climate is a national priority for most of the world’s nations.
One of the things to keep in mind when we talk about investment climate is that private sector companies create more than 90% of the jobs and produce most of the goods and services needed to improve living standards. The private sector represents most of the tax base that finances the entire government operation and public services, whether essential or not.
Thus, the investment climate translates into a collection of location-specific factors that intertwine the opportunities and incentives for businesses to make productive investments, create jobs, expand their operations, and prospectively drive a decrease in poverty.
On the other hand, a good investment climate directly improves almost every aspect of citizens’ lives. Therefore, creating a stable investment climate without many variations contributes significantly to increasing the country’s confidence level.
That is why the government of Puerto Rico influences the investment climate through its policies and conduct concerning costs, risks, and barriers to competition that companies face.
What are the 10 factors that define the investment climate?
- Macroeconomic stability: the macroeconomic stability of a jurisdiction contributes directly to creating a favorable environment for all types of investments and product development, encouraging the creation of jobs and increases in the productivity of economic activities. Macroeconomic stability is also one of the determining factors for achieving the high levels of confidence and certainty required by economic agents, which are relevant for any investment project’s decision-making process.
- The effectiveness of Puerto Rico’s institutions: the effectiveness of a jurisdiction’s institutions depends directly on the quality of the institutional framework to be certain that it is in tune with the economy’s needs.
- Government efficiency: there is much discussion about reducing government size, and it is critical to have a small but effective government. Therefore, all activities that private enterprises can operate better should be eliminated from the government. On the other hand, it is vital to implement metrics to measure productivity and performance at all levels to obtain the highest efficiency.
- The quality of public services: it is necessary to implement systems and technologies that offer ordinary citizens and companies the opportunity to evaluate all government services’ performance, efficiency, and agility. We must also make it mandatory to make public the evaluations of all the government’s management.
- Corruption: The World Bank considers corruption the most significant challenge to eliminating extreme poverty by 2030 and increasing prosperity in the poorest countries by 40%. Corruption has become the most significant impediment to economic and social development globally and in Puerto Rico. Corruption erodes trust in government and undermines the social contract.
- Physical infrastructure: The state of Puerto Rico’s fragile infrastructure was evident after Hurricane María, which left the electrical, water, road, and telecommunications networks unusable and disrupted the order of life for citizens. Now, we have the opportunity, thanks to billions in federal funds, to create an integrated, multi-year plan to transform the infrastructure into a robust and resilient one.
- Certainty in the rules of law: private investment needs to plan for the short, medium, and long term, and for that, it requires confidence. Sometimes we can change some of the necessary rules of the game, but once they are altered or pre-established, they must remain in place and be transparent. An example that affected Puerto Rico’s investment climate was the approval and implementation of Law 154 for foreign companies. Even today, Puerto Rico has not recovered from that blow, nor has it learned much.
- An agile and objective legal system: a determining factor is to ensure that all legal disputes are heard within reasonable, transparent, and objective time frames. Therefore, our Judicial Branch must have as its sole objective to attend to matters fairly, expeditiously, and according to the law.
- The quality of the social infrastructure: the quality of the educational and health systems is critical in formulating an adequate and stable investment climate. It must be part of the public policy for economic development.
- Country risk: is the economic investment risk due only to factors specific to each nation. Puerto Rico had a tremendous competitive advantage by being part of the US and sharing a zero-country risk. However, since 2019, serious stability issues have affected Puerto Rico’s status and a zero-risk nation. Additionally, the untimely truckers strike and the strike in the port operations of a private entity has created an environment of risk that Fortune 500 companies operating in Puerto Rico have threatened to close their operations on the island. Puerto Rico must push, at all costs, to have a zero-country risk classification once again.
Puerto Rico must take a holistic look at its investment climate to add transparency, preserve the rules of investment, enhance our advantages, and promote a zero-risk environment.