Puerto Rico’s economic freedom is somewhat limited, scoring 61 out of 100 points in the Economic Freedom Index (EFI) Report for 2018, unveiled by the Center for Economic Renewal, Growth and Excellence.
As a result, its potential for economic growth is being affected by a challenging business climate, high taxes and recurring fiscal deficits.
Such was the conclusion offered by Economist Gustavo Vélez, during a presentation of the study commissioned to his firm, Inteligencia Económica.
The index is based on the methodology and model developed by The Heritage Foundation to measure the efficiency of public policy in promoting economic freedom and sustainable growth.
The study places the island at a moderate level of freedom and its competitiveness below other jurisdictions in the region. The EFI measures 12 specific components of the economy, each of which is graded on a scale from 0 to 100.
Puerto Rico was graded as follows: Property rights (50); Judicial effectiveness (50); Government integrity (41.8); Tax burden (61); Government spending (31); Fiscal health (71.3); Business freedom (62); Labor freedom (63); Monetary freedom (77); Trade freedom (80); Investment Freedom (70); and, financial freedom (70). (See PDF for details.)
Puerto Rico’s scores versus other jurisdictions in the Caribbean basin show the island lagging behind the U.S. mainland (75.7), Jamaica (69.1), Colombia (68.9), Panama (67), Costa Rica (65.6), and the Dominican Republic (61.6.) The island is trailed by Belize (57.1), Haiti (55.8), Cuba (31.9) and Venezuela (25.2.)
“Jurisdictions with a higher level of economic freedom have a better quality of life and higher per capita income,” said former Gov. Luis Fortuño, founder of CRECE, founded in 2013 as a think tank of his namesake think-tank.
“This is what we all want for our children. This index is a valuable and practical tool to measure the strengths and weaknesses of our economy,” he said.
“It provides us a clear picture to determine the areas of opportunity to achieve sustainable economic growth,” said Fortuño.
Impediments for growth defined
The EFI study concluded that impediments to economic growth in Puerto Rico, are related to the limited size of the private sector, the government and pension deficits, low labor participation rate, the population decline, the collapse of the mortgage market, and the high cost of energy.
Furthermore, the independent analysis focused on four key aspects of the economic environment, where the government usually exercises policy control — the rule of law; government size; regulatory efficiency; and market openness.
Economic freedom goes beyond the capacity of generating economic activity and trade among individuals. The level of economic freedom in a jurisdiction also influences the freedom to interact with others, travel and say what needs to be said without government restrictions.
There is evidence that suggests that economic freedom is associated with a healthier economic society. The results of the study show that Puerto Rico has an EFI score of 61 points — a moderate level of freedom — that is comparable to Croatia, Oman and Honduras, among other jurisdictions.
The average score of economic freedom worldwide is 61.1. When compared with the average score in the Caribbean region, Puerto Rico is below the average.
In his analysis, Vélez emphasized the need for structural reforms to improve Puerto Rico’s economic competitiveness. Areas of reforms include tax, fiscal, welfare and labor.
The EFI report also made a series of recommendations to increase Puerto Rico’s economic freedom, including elevating government integrity, paying public servants well, creating transparency and openness in government spending, cutting red tape, replacing regressive and distorting subsidies with targeted cash transfers, and optimizing the use of technology in government processes.
Other suggested steps were ensuring judicial integrity and trade freedom, which calls for repealing the Jones Act.