Puerto Rico's Illness Is Threatening To Become A National Epidemic

10-years of economic stagnation has taken its toll on Puerto Rico. Unemployment is skyrocketing, infrastructure is degrading, and the exodus away from the island is accelerating. Structural reforms that will stabilize the financial crisis in the short-term, and revitalize the economy in the long-term, are necessary. Such reforms will benefit the rest of the country as well.

Perhaps most obviously, these reforms will benefit the rest of the country because many Americans have directly invested in the bonds that Puerto Rico is currently unable to repay, or their pensions have invested in these bonds on their behalf. According to an analysis by USA Today based on Morningstar data, 40 percent of “municipal bond funds still have exposure to Puerto Rico debt”.

Therefore, any defaults or write downs on Puerto Rico’s $74 billion in outstanding debt will be a zero-sum game. Puerto Rico will gain debt relief, but savers and retirees in the rest of the country will be poorer.

It is imperative to keep this perspective during Puerto Rico’s debt renegotiations to ensure that Puerto Rico’s need for immediate debt relief is appropriately balanced with the need to minimize the losses on the territory’s current debt holders.

While debt renegotiations are necessary in the short-term, only economic growth can permanently fix Puerto Rico’s fiscal crisis. Economic growth does not simply occur because politicians wish it to be so. Instead, politicians must implement the right policies that empowers individuals, small businesses, and large companies (e.g. the private sector) to invest and grow the economy.

Puerto Rico’s economic malaise is attributable, in part, to poor economic policies implemented by both Puerto Rico and the federal government. These policies increase the costs of doing business, and create obstacles to working, saving, and investing in the territory.

There has also been, particularly in the past twelve months, a failure of leadership. In the PROMESA Act passed by Congress last year, an Oversight Board was charged with addressing the Puerto Rico’s fiscal crisis, along with a major role for the Governor of Puerto Rico. Both the Board and the Governor have failed to deliver a responsible fiscal plan, and the threat of a drawn-out bankruptcy court process and unequal treatment of creditors threatens to further undermine Puerto Rico’s long-term recovery.

Unsurprisingly, the private sector is unable to create strong and sustainable economic growth under these circumstances.

Wayne Winegarden
Puerto Rico's Illness Is Threatening To Become A National Epidemic