A Tale Of Two Economic Reports

by John Marino

July 2, 2004
Copyright © 2004 THE PUERTO RICO HERALD. All Rights Reserved.

. Puerto Rico was buffeted by one economic report released this week and disappointed by news that another report’s completion had been delayed indefinitely.

For many Puerto Ricans, the dual developments would have been better if it had been the Congressional Accounting Office releasing a positive report on the island economy and the United Nations Economic Commission for Latin America and the Caribbean delaying its report to gather more data – and not the other way around as really happened.

After all, the GAO study, a sweeping assessment of Puerto Rico’s economy, was ordered by the Senate Finance Committee so that it could more deeply consider consistent commonwealth requests for new federal economic incentives. Recently, those requests have been fueled by the imminent demise of the Section 936 and Section 30A tax breaks, set to phase out completely by 2006. The smart money says the request for additional time means there will be no Congressional action on Puerto Rico’s economy until at least 2005.

But the message of the UN should not be lost by the federal delay. Especially because it spreads a strong note of confidence that Puerto Rico can still succeed in an environment where the loss of federal incentives and a relaxing of trade restrictions between the United States and regional competitors conspire to erode the island’s decades-long advantages of being granted unique access to the U.S. market.

Its essential point: Puerto Rico, with decades of experience of competing in the U.S. market, is miles ahead of regional competitors in its ability to navigate its waters.

Those advantages are both overtly tangible (a manufacturing sector, driven by U.S. based investment, that accounts for 40 percent of the economy) and less so (years of business contacts, a familiarity of U.S. business customs and a thriving professional and entrepreneurial class).

Also, Puerto Rico has been living the reality of the new global economy for 10 years now; since the advent of the North American Free Trade Agreement, Mexico has basically enjoyed the same access as Puerto Rico into the U.S. market.

The island has long been focused on developing its "knowledge" industries, high-tech manufacturing such as pharmaceutical production, since it can’t compete on the basis of wages against competitors in the region for labor-intensive manufacturing work. Those competitors are now faced with having to undertake a similar transformation of their economies as they lose out on low-tech work to China and other low-wage Asian investment destinations.

The U.N. report underlines that Puerto Rico needs to prepare for the future by relying on its advantages and planning for life without federal tax breaks – regardless of the political status views of whichever party is in power. If more federal tax breaks come, they should be considered gravy. Planning for them is simply hazardous, especially given the reticence of Congress to act on new tax incentives since axing them for startups in Puerto Rico and establishing a phase-out timetable for current beneficiaries that began ticking in 1996.

There’s also a measure of good news in the GAO announcement, given that it appears the analysis of the Puerto Rican economy may be the most exhaustive to date. The harm caused by the loss of federal tax incentives, for one thing, will be juxtaposed against the gains the island has seen in federal educational and social spending over the last decade.

The report will compare Puerto Rico’s tax treatment and receipt of federal social spending with other states and territories. It will also undertake a survey of decades of economic indicators, offshore investment and capital flows between Puerto Rico and the United States, as well as the commonwealth to foreign countries.

That should at least provide a wealth of valuable information to chart a future economic course, even if it will not necessarily result in a new future tax break.

It would serve Puerto Rico well if its political leaders look to these reports in planning for the future. They will point out the island’s advantages, its faults and the economic challenges it will face.

The reports will serve as a resounding reality check for those politicians who believe that economic progress can be achieved by new government mandates on workers benefits, a larger commonwealth government workforce and greater regulations on private industry.

The just completed legislative session contained more than its fair share of measures that would harm rather than help Puerto Rico’s investment climate. Thankfully, some of these measures, such as a proposed anti-monopoly bill, died in the face of strong opposition.

But other measures -- such as a tax on offshore bank loans, a measure to mandate increased benefits for part-time workers and a bill to allow courts employees to unionize – have been passed.

Gov. Calderón is expected to veto some, but not all of these measures.

From today’s standpoint, this legislative activism at the Capitol presents a far greater threat to Puerto Rico’s economy than any developments brought about by globalization.

John Marino, Managing 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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