It’s The Economy, Stupid!

by John Marino

December 21, 2001
Copyright © 2001 THE PUERTO RICO HERALD. All Rights Reserved.

. JOHN MARINOSan Juan politicians have been making a lot of hay lately about the Calderón administration's handling of the economy.

The governor should be pushing Section 30-A instead of her proposed amendments to Section 956, goes one argument. Why is she wasting time trying to do business with poor neighbors, like the Dominican Republic, when she should be concentrating more on the U.S. market, goes another.

By now politicians know -- it's the economy, stupid! -- what is the issue for most voters. But few appear willing to address the fundamental issues that could really bring about economic change.

The 30-A versus 956 debate is besides the point, and suggesting that the administration should not be trying to drum up business in the region is absurd.

Sure there are some differences between the two proposed tax credits.

Section 30-A, a wage-based credit, may more directly be tied to creating employment, and the New Progressive Party is backing its extension beyond its slated 2006 phase-out. But the counter-argument that industries that are most likely to benefit from such a scheme - labor intensive ones - are leaving the island for lower cost destinations because the tax credit could not make up the difference is also valid.

So is the other argument that because the Rosselló administration had tried and failed to extend its life annually since 1996, there is little environment in Congress to take up the issue now.

On the other hand, those extolling the virtues of making amendments to Section 956 so that controlled foreign corporations can repatriate profits to sister companies in the United States at preferential tax rates are overstating their case.

Rather than being the job-generating machine extolled by some administration officials, it is more likely to have a beneficial effect at keeping high-tech, high-profit companies already located here on the island.

It is to be fair, to borrow a phrase from Economic Development and Commerce Secretary Ramón Cantero Frau, a "clever" idea. Instead of an outright tax exemption, the proposed 956 amendment would "encourage" CFCs operating in Puerto Rico to ship profits back home by being taxed on only 10 percent of profits.

That could promise real dollars to the U.S. Treasury, instead of the imaginary millions it got from the repeal of Section 936, when firms opted to reincorporate as CFCs or shift profits to overseas sister companies rather than paying Uncle Sam on their Puerto Rican profits.

And the Calderón administration has signed up an impressive list of Democratic and Republican Congressional backers even though it’s eventual passage is far from clear.

But the real point is that neither 956 or 30-A is anywhere near the magic bullet that politicians from both parties are painting.

The truth is, when it comes to economics, there is no magic bullet.

That's because Puerto Rico's economic problems are largely internal, not external, and they need to be solved from within.

Boosting exports in the region of Puerto Rico-made goods and professional services is part of this solution.

There's nothing wrong with Calderón attempting to drum up business in the Dominican Republic. Although, the administration's attempts to sit on political bodies such as the Association of Eastern Caribbean States seem an unnecessary distraction in Washington and a waste of time and resources.

Former Gov. Pedro Rosselló spent a lot of time undertaking trade missions in the Caribbean and Latin America and nobody ever accused him of wasting time, or being political.

Furthermore, the message that Gov. Calderón is bringing to the region is essentially the same as that of her predecessor's: with a Latin culture and know-how about U.S. business ways, Puerto Rico is a bridge to the United States from the Caribbean and Latin America.

But getting Puerto Rico's economic house in order goes far beyond such splashy field trips. And all the politicians know it because it's staring them right in the face.

There's a bloated government bureaucracy, and strangulating labor regulations. Related to this is the high cost and inefficiency of public utilities, and the double taxation that occurs when taxpayers are forced to contract private services - such as on education and security - because government provided ones are so shoddy they are not a viable option.

Nobody wants Puerto Rico's workers to be abused, and nobody advocates mass lay-offs at government agencies either.

But a workable blueprint for government reform and labor law reform underway is desperately needed, as well as some follow-through. The constrained energy that would be released from the private sector as a result would boost economic activity much more than any gimmicky tax break or trade trip.

The Rosselló administration made headway in selling off government owned enterprises that competed against private sector concerns. But the stickier problems of reducing public sector employment and liberalizing labor laws eluded it.

Not only were both attempts failures, one of Rosselló's legacies is granting unionization to public employees who already had 30 days of vacation, substantial sick time and nearly 20 paid holidays annually.

Calderón's most visible attempt to boost government efficiency has been a one-year trial of extending operating hours that deal with the public. Although the program is a hit with taxpaying clients, it's costing them more.

The administration assured labor leaders the plan would be voluntary, and few workers volunteered, forcing the administration to hire new employees to work the off-hour shifts.

Down the road, the plan may work, as new hires must work the new hours. But clearly more is needed.

I'm reminded of a conversation with a former colleague, who never let slip where his true political allegiances were. "We should prepare for independence in order to win statehood or improve the commonwealth," he said.

An industrious, efficient, self-reliant Puerto Rico that's ready for anything - who could argue with that!

Except, of course, San Juan's politicians.


John Marino, City Editor of The San Juan Star, writes the weekly Puerto Rico Report column for the Puerto Rico Herald. He can be reached directly at: Marino@coqui.net

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