Puerto Rico is at the threshold of a second economic transformation — from an industrial to a knowledge-based and services economy — and has the necessary infrastructure to pull out of its current crisis and build a “stronger and more vibrant economy.
So believes Popular Inc. CEO Richard Carrión, who for the first time has written a column for the financial institution’s annual report on his outlook of the island’s current situation and what’s ahead.
“The legacy of decades of fiscal mismanagement and the toll of a prolonged recession have combined with a shifting global economy and a lower risk tolerance in the wake of the international financial crisis to create what some have called a perfect storm,” he said in the column titled “Puerto Rico in the face of change.”
“Without minimizing the extent of the challenges Puerto Rico faces, we remain optimistic about the prospects of Puerto Rico emerging from the current situation with a stronger and more vibrant economy,” he said.
Noting that in its 120-year history, Popular has pretty much seen it all, when it comes to Puerto Rico’s history, Carrión said the island’s ability to transform itself time and time again is a testament to its resilience and resourcefulness.
He said the first major transformation came at the end of the last century, when Puerto Rico migrated from an agrarian to an industrial economy. Now, the island is at the threshold of a second economic transformation, shifting from an industrial to a knowledge-based and services economy.
“Readymade infrastructure, tested human capital, high enrollment in local universities, a modern communications and transportation infrastructure and a solid legal and institutional framework are pillars Puerto Rico can build on. Leading institutional investors are taking notice,” Carrión said in the two-page analysis he shared in the company’s 2013 annual report to be released today.
“Stateside and local investors have purchased $1.6 billion in commercial and real estate assets in a span of three years,” he noted.Banco Popular’s building in historic Old San Juan hosts the Banco Popular Foundation, a full-fledged branch and an exhibition hall where it explores Puerto Rico’s socioeconomic issues. (Credit: © Mauricio Pascual)
Steps have been taken, but work remains ahead
In his commentary, Carrión also gave props to the current administration for taking “major steps” toward tackling Puerto Rico’s fiscal issues, but there remains work to be done.
“We see a path of fiscal reconstruction similar to various countries with similar debt levels that, after serious fiscal reforms, have regained market access at favorable rates,” he said. “Additional changes, however, are necessary to speed up an economic recovery and put the economy on a track of sustainable growth. Two areas we see as requiring attention are energy and taxes.”
Reducing the high cost of energy, he said, will free up substantial capital for businesses and consumers, which he believes is key to long-term competitiveness.
Meanwhile, overhauling Puerto Rico’s tax system can “generate greater stability in revenues, promote self-sufficiency and relieve workers and businesses from carrying the tax burden of a substantially large cash economy.”
Carrión noted that while the recent changes in the island’s tax structure — including new levies — have generated additional revenue for the current fiscal year, they are only short-term solutions.
“There is room to maneuver into a more equitable and productive tax system. For example, while income taxes generated 30 percent of revenues in fiscal 2012, property taxes only accounted for about 4 percent of revenues. Most of the island’s residences are exempt from paying property taxes,” he said.
Ultimately, Puerto Rico would be better served by a tax system that “is more efficient to administer, simpler to comply with and better tuned to the island’s economic realities and persistent evasion,” he said.
Meanwhile, Carrión also said the private sector needs to adjust to new economic realities by developing new products and services and finding untapped markets.
“Puerto Rican businesses can leverage our unique position in the hemisphere, which benefits from our relationship with the largest economy in the world as well as our cultural affinity with Latin America,” he said.