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Is Puerto Rico Ready For The New Global Economy?

by Lance Oliver

December 1, 2000
Copyright © 2000 THE PUERTO RICO HERALD. All Rights Reserved.

In "The Lexus and the Olive Tree," Pulitzer Prize-winner Thomas L. Friedman’s look at globalization, he lists the key questions he asks when he visits a country today. In the Cold War era, the questions were few: primarily, Which side are you on?

Today, globalization and the end of the Cold War have torn down walls of all kinds around the world. In the Cold War era, inefficient and corrupt regimes were subsidized by the United States and the Soviet Union, merely because they were allies. Today, capital and human talent move around the world quickly and easily. Nobody is interested in subsidizing someone else’s folly or evil.

There are new questions to ask, Friedman notes.

"So when I come into a country now, one of the first questions I ask is: How quickly does your government and society evaluate, innovate, decision-make, deregulate and adapt? That is, to what extent have you restructured your economy to increase the speed of government approvals, transactions, investment and production? How fast can you raise capital for a crazy idea, and how quickly can you come up with new ideas? And how quick are you at destroying, through bankruptcy, inefficient firms?"

So how does Puerto Rico measure by these new yardsticks?

How will Puerto Rico’s competitive position in the global economy improve or decline as new leadership takes over the government?

These are relevant questions because, in many ways, Puerto Rico is like one of those countries that was subsidized during the Cold War but found that the flow of money, arms, food, technical expertise or whatever else it was it needed had been cut off when that old system died. The resemblance is there because Puerto Rico continues to be subsidized, in the sense that it sees a net inflow of funds from the United States. And while that flow is unlikely to be abruptly cut to zero, Congress showed with the repeal of Section 936 tax credits just how easy it is to trim it.

So how well is Puerto Rico prepared for the new world order?

The answers are not encouraging. Nor is recent past performance. The Puerto Rican economy grew 2.9 percent in the fiscal year that ended June 30 and local economists are predicting growth of between 2 percent and 2.6 percent for the next two years.

Gone is the era in which the Puerto Rico economy grew faster than the U.S. economy, thereby closing gaps between the standards of living on the island and on the mainland. Instead, now the concern is that Puerto Rico will fall further behind.

Looking at Friedman’s questions, there are doubts. How fast does government move to adapt, deregulate and encourage private-sector innovation? Puerto Rico is known for the size of its bureaucracy, which gobbles up 30 percent of the workforce. It is not known for agility. Too many still see the government as a source of jobs, not as the necessary regulatory structure to create the conditions of transparency and fair play that allow private industries to create jobs in open markets.

How fast are you at destroying the outdated and the inefficient? Puerto Rico gets an F on this one. The government artificially maintained the sugar industry, or at least a shell of it, for 50 years after it was dead. Some deregulation has been accomplished, but in the most visible case, the Puerto Rico Telephone Company, it was handled so badly that a public mildly opposed to privatization was radicalized against it. That will hinder future privatizations.

In the private sector, the very nature of Puerto Rico as an island also provides protections to inefficient and outdated industries. The poor service provided at some companies is a result. Local companies sometimes rely on the difficult access to the market to be able to continue doing business in slipshod fashion.

Beyond those questions, what about the attitudes of the incoming administration? In a recent roundtable discussion of economists, some still advised the incoming Calderón administration to focus on increasing manufacturing. This is stubborn swimming against the tide that will ultimately result in drowning. Except as a minority element, manufacturing is not the future in any developed economy.

Meanwhile, resident commissioner-elect Aníbal Acevedo Vilá has promised to go to Washington and try to get federal tax incentives, like the Section 936 previously killed by Congress.

The 21st century economy calls for private-sector agility, not government lethargy. It calls for moving information, which is profitable, not selling commodities, which isn’t. It calls for entrepreneurial daring, not reliance on subsidies.

With some entrepreneurial exceptions, so far it’s hard to find evidence that Puerto Rico is adapting to the new realities in a way that will allow it, once again, to become the engine of economic growth that once promised to close the gap between the standards of living on the island and in the 50 states.

Lance Oliver writes The Puerto Rico Report weekly for The Puerto Rico Herald. He can be reached by email at:

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