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Think Tank: Puerto Rico At An Economic Crossroads

End Of Tax-Incentive Development Demands New Direction


August 5, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

The tax incentives that for years have been available under the federal Internal Revenue Code Section 936 (and its predecessor Section 931) to lure manufacturing companies to set up operations in Puerto Rico expire next year. This reality has already forced the island to make changes to secure its social and economic competitiveness.

Based on this assessment, the Center for the New Economy, Puerto Rico’s first nonprofit, nonpartisan, economic policy think tank, has forwarded a number of proposals to help steer Puerto Rico down a new path of social and economic development.

As the world has undergone sweeping economic changes with globalization, Puerto Rico’s connections with the stateside economy has given it a reprieve that won’t last much longer, said Center for the New Economy Executive Director Miguel Soto.

"Having had 936 and the huge success of the manufacturing sector, we’ve grown too complacent," said Soto. "Having those structural connections allows you to slack off more than if you are in a sink-or-swim situation."

The need for economic and institutional changes in Puerto Rico has even caught the attention of people in high places in Washington where the Senate Finance Committee, the General Accounting Office, and the Congressional Budget Office are all studying the Puerto Rican economic situation, said Soto. "Even Washington is asking what’s next for this island," he said.

The good news is that Puerto Rico has a number of options open to it, but to be successful, it must fundamentally change old thinking patterns and the way institutions interact. For one thing, leaders don’t necessarily have to rely on making Puerto Rico an inexpensive place to do business. "Cheapest isn’t the only name of the game," said Sergio Marxuach, the center’s director of policy development. "Some of the most successful regions are some of the most expensive places to do business." But Puerto Rico has suffered from an absence of strategic thinking both in government and the private sector. "You have to establish not only a vision but a theory of development," said Soto.

A look at successful communities elsewhere shows that the key is collaboration among institutions in the public and private sectors, universities, and research centers to make the most of available talent and brainpower to harness the entrepreneurial potential and generate new businesses. "You have to have the right institutional mix," said Deepak Lamba, the center’s senior policy analyst. "You have to have all the right players interacting in a synergistic relationship."

The center’s position paper "Silicon Reef, Puerto Rico’s Path Towards the Digital Economy," prepared in the summer of 2003, noted that "the need for collaboration is on everyone’s radar, but hasn’t become a prime target."

The report also suggested the need to promote Puerto Rico as a major business center, make high technology more familiar to the general public, and make the government meet the economy’s needs to create incentives for the high-tech economy.

The center is also concentrating on strategies of poverty alleviation. "There has to be an understanding that Puerto Rico’s economy can’t grow while so many residents are living in poverty," said Soto

One of the center’s biggest objectives is to promote the adoption in Puerto Rico of an earned income tax credit, a program that over the last 30 years has been responsible for moving people into work and out of poverty in the mainland U.S. The tax credit would pay rebates to low-income wage earners who file tax returns, scaling up on the low-end to encourage work and topping out at $1,500 for those who earn between $10,000 and $12,000. The credit scales down to the income level of $15,000 a year. The cost of the program would be between $150 million and $180 million a year, a small amount compared with the billions spent on welfare and other entitlement programs, said Soto. "Some 20,000 workers would be brought into the formal economy from the informal economy," he said.

The think tank is also promoting stakeholder accounts, a government program being instituted in the United Kingdom whereby the government provides each newborn with a savings bank account for the amount of 250 pounds sterling (equal to $457.00) and another 250 pounds sterling for children of low-income families.

Held in trust, the money collects interest until the individual’s 18th birthday. At this time, he or she can buy a home, capitalize a small business, or pay for education. The program’s purpose is to promote the population’s participation in the financial system from a very early age and to give people a stake in the economy. In the U.K., the program is complemented by financial education programs in savings and investment.

The Center for the New Economy aims to offer a space for rational discussion of the island’s problems divorced from the contentiousness of party politics. "These are issues that need to be taken care of whether or not a resolution to the status issue comes," said Soto. "There’s a lot of altruistic thinking that goes on in here, but we’re also thinking of ourselves because we are all in this together, and these are problems that will affect all our futures."

This Caribbean Business article appears courtesy of Casiano Communications.
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