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Surviving Puerto Rico’s fiscal crisis

A public and private sector initiative needed to turn red into black


June 3, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Hard decisions required for economic transformation

With a commonwealth government that spends too much and a fragile economy, Puerto Rico’s private sector must rise up to the challenge

It has been less than a month since the credit rating agencies, Moody’s and Standard & Poor’s (S&P), downgraded the Commonwealth’s credit rating on $23.2 billion in outstanding general obligation (GO) bonds–already the lowest in the U.S.–to a notch above junk bonds. News of the downgrade unleashed an onslaught of finger pointing and blame from Puerto Rico’s government officials, political leaders, private-sector executives, and the local news media, each blaming someone else and providing different reasons for the actions taken by Moody’s and S&P.

The truth is, the downgrade of the Commonwealth’s general obligations bonds should have come as no surprise to public- and private-sector leaders in Puerto Rico. Four months ago, on Feb. 24, CARIBBEAN BUSINESS in a front-page story headlined "Fiscal Crisis," predicted a downgrade of the Commonwealth’s bonds was imminent.

In its in-depth analysis, CARIBBEAN BUSINESS reported the main reasons behind the potential downgrade would be the Commonwealth’s deficit (estimated to be as much as $2 billion, although government officials have publicly admitted only to $1.7 billion); high Commonwealth debt (which was reaching $40 billion, having increased 74% or $17 billion in the last four years from 2001-2004); the impact of the Commonwealth’s policy of borrowing money from the Government Development Bank (GDB) to balance the budget; the massive size of the government (40,000 public-sector employees were added during the Sila Calderón administration; and during her last year as governor alone, over 21,000 new employees were added to the government’s payroll); the government’s pension fund that is near collapse (underfunded by an estimated $11 billion); and the lack of fiscal or tax reforms, which the Calderón administration committed to implementing.

The credit ratings agencies only confirmed what CARIBBEAN BUSINESS has been reporting for several months. S&P’s final report indicated the rating change reflected the fact that the Commonwealth’s structural imbalance continues due to the combination of disappointing expenditure controls, particularly in the areas of education, public safety, health, and human services–all basic services expected by the island’s residents–and the inability to achieve previously planned revenue control. The S&P report also listed a series of other factors that affected the rating such as thin financial reserves, continued use of nonrecurring revenue in the form of short-term loans from the GDB, failure to adopt a multiannual financial plan leading the Commonwealth to structural balance, an inability to achieve consensus on the adoption of the fiscal 2006 budget and specifics related to tax reform, and the increasing burden of a weakly funded pension system. Moody’s, which also downgraded the GO bonds to Baa2 from Baa1, indicated Puerto Rico’s lack of economic growth and the high rate of government payroll as factors of concern.

Partisan budget battles

Both Moody’s and S&P highlighted the Commonwealth’s deteriorating financial conditions of the general fund during fiscal 2004 and 2005, both of which have financed large operating deficits through borrowing. The consolidated Commonwealth budget submitted by the Calderón administration and approved by the Popular Democratic Party (PDP)-controlled Legislature for 2004-2005 of $24.84 billion, which represented close to 50% of the island’s $50 billion economy, is closing on June 30 with a deficit. This budget was approved by the PDP-controlled Legislature, at a time when there were no battles in the Legislature.

The administration of Gov. Aníbal Acevedo Vilá now is publicly blaming the New Progressive Party (NPP)-controlled Legislature for the current fiscal crisis and for not approving his proposed 2005-2006 budget and contributing to Puerto Rico’s credit downgrade. It is important to note, however, that the proposed budget presented by Gov. Acevedo Vilá, even if approved today, doesn’t commence until July 1 and the fiscal problems cited by the credit ratings agencies existed long before the current budget battles between the executive and legislative branches came underway. Furthermore, in the past, budget disagreements have existed between these two branches of the Commonwealth government and haven’t resulted in credit downgrades by rating agencies nor generated the level of fiscal crisis currently being experienced in Puerto Rico.

The new 2005-06 budget presented by the Acevedo Vilá administration proposes to spend an additional $820 million, increasing the Commonwealth budget from $24.84 billion in 2004-2005 to $25.66 billion. The administration also seeks to raise taxes by an additional $1.3 billion; however, a reduction in the size of the government isn’t contemplated in the proposed budget. Gov. Acevedo Vilá has publicly stated there will be no reduction in the number of government employees (CB, April 7).

What is contemplated in the proposed 2005-2006 budget is a decrease of 10%, or over $340 million, in capital improvement projects. The results of the proposed budget are increasingly obvious. The massive Commonwealth bureaucracy will continue to hit taxpayers in their pockets, while Puerto Rico residents will continue to receive poor government services, live with ill-maintained highways and roads, and a deteriorating public-school system and healthcare, among others.

"The size of Puerto Rico’s government isn’t allowing the economy to flow; it doesn’t allow individual incentives to flourish. The government has become an impediment and, as someone who works in government, it isn’t something that is easy to admit," Jaime Morales, deputy secretary of the Economic Development and Commerce Department, told CARIBBEAN BUSINESS.

How bad is the Commonwealth’s mess?

Government-led economic development has failed Puerto Rico over the past three decades. Personal income per capita in Puerto Rico is $12,031 or one-third (36%) of the U.S. average and half (50%) of Mississippi’s. Personal income on the island is also less than that of Ireland and Singapore. This is the way it has been for decades, and nothing has been done to close the economic development gap.

Furthermore, over 20% of Puerto Rico’s personal income is derived from federal transfer payments. There are over one million beneficiaries of the federal Nutritional Assistance Program; nearly half the population (48%) lives under the federal poverty level, compared to 12% in the mainland U.S.; and over 40% of salaried employees work directly or indirectly for the Commonwealth government. Unemployment, although officially reported between 11% and 12%, is more likely to be about 30%, because of the island’s low labor participation rate of 46% compared to 66% on the U.S. mainland. In addition, over 40% of Puerto Rico’s school-age children never graduate from high school.

Puerto Rico’s economic development is under siege, and the enemy is inside. The biggest enemy to Puerto Rico’s economic development is the Commonwealth government and its politicized institutions, which has turned the island into a no growth, zero-sum economy.

Capital, profits, private investments, developers, private sector, wealth, even economic growth are negatively perceived by the Commonwealth, whose political and bureaucratic paternalistic structures and policies seem more interested in "governmentwealth" and pluralistic discourse than in Puerto Rico’s economic growth.

Former Gov. Pedro J. Rosselló and now NPP senator for the district of Arecibo told CARIBBEAN BUSINESS there is currently a lot of criticism about big government, but what isn’t being said is where it resulted from.

"We must put this into historical perspective. During all administrations, there have been fewer employees in the central government when they started than when they ended, except one, during my tenure as governor. So, the problem of taking on excess government has never been translated into action except during my administration. After our effort, which decreased the absolute number of government employees and as a percentage of the salaried employees in Puerto Rico, over the past four year’s government jobs increased again by over tens of thousands. So, now they [the PDP administration] are complaining of the excess government, but it was their administration that created the situation. I had a much more productive and active government, yet I had thousands less employees than the Calderón administration," said the former governor.

From 1992 to 2000, government employment declined from 293,400 jobs to 277,000, a decrease of 16,400 public-sector jobs, according to data released by the Puerto Rico Department of Labor. During the Calderón administration, government employment increased from 277,000 to almost 317,000.

"I believe we have to cut expenses, but the emphasis provided is wrong. We have to address those areas, which although the services provided could optimally be good, they aren’t essential," explained Rosselló. "That is where we must start reducing [spending]," he said, adding that Gov. Acevedo Vilá says there is a fiscal problem, but the budget he proposed is higher by more than $800 million than the current one.

Where are we heading?

There is no question that Puerto Rico finds itself at a political and economic crossroads. "Our economy has become one of a zero-sum mentality, and the attitude towards business is a defensive one," argued José Joaquín Villamil, president of Estudios Técnicos during a conference the firm sponsored last week with private- and public-sector leaders regarding trends in the island’ economy. "This defensive attitude towards business generates a frame of mind that incapacitates economic growth." Plus, added Villamil, our government is managed on a crisis basis, with very little analytical capability.

Beyond the Commonwealth’s fiscal crisis lies the potential for an economic crisis unless there is a thorough transformation of Puerto Rico’s economy. This transformation must begin with the Commonwealth government and must be led by the private sector, since the government has demonstrated it is incapable of transforming itself. The constant changes in government officials and policies have demonstrated there is no continuity in the Commonwealth’s policies.

Rafael Hernández Colón, a three-term former governor of Puerto Rico who also attended the Estudios Técnicos conference, stated, "Puerto Rico’s institutional framework requires radical revision."

Three potential economic scenarios prepared for Puerto Rico by Juan Lara, Ph.D., chief economist at Estudios Técnicos, demonstrate the island is undergoing a continued and gradual deterioration of its economy, experiencing mediocre economic growth, slow improvement in productivity, low employment creation, and reduced investment levels.

One of the economic growth scenarios presented by Estudios Técnicos, considers that if things were to remain in Puerto Rico’s economy as they are today (known as the base scenario), 15 years from now Lara projects productivity levels would be increasing at a rate of 0.5%, employment at 0.8%, investment at 1.2%, and the overall economy would be growing at 1.3%, which paints a dismal picture of Puerto Rico’s future. Entrepreneurship would continue to experience little development as the high cost of doing business on the island would also continue, and the informal economy would flourish. The credibility and effectiveness of institutions would continue to decline and levels of dependence would increase.

The pessimistic scenario presented by Estudios Técnicos translates into stagnancy, chronic unemployment, no productivity improvement, reduced levels of investment, increased levels of divergence with the U.S., loss of global competitiveness, and structural fragmentation. Entrepreneurship will disappear, the cost of doing business will increase, and the formal economy will continue to deteriorate. "If the pessimistic scenario sounds a lot like the present reality, it is just pure coincidence," stated Lara with a tone of irony.

If things continue as is, Puerto Rico’s economy will continue to diverge, as it has for decades, from that of the rest of the U.S. mainland. Under the base (or most probable) scenario, during the next 15 years, personal income would diverge another 8.9% from Mississippi’s, the poorest state in the nation. Under the pessimistic, downside scenario, the divergence would increase to almost 15%.

Only through an effective economic transformation will Puerto Rico achieve higher rates of growth that would allow convergence with the U.S. and other wealthier economies around the world, says Lara. The optimistic scenario of effective transformation would show sustained economic growth, strong employment rates, increased investment, and advanced convergence with the U.S. mainland. Transaction costs would be less, and the informal economy would be smaller as well. Puerto Rico would find itself with a secure place in the global market, and there would be less crime and dependency in society. Puerto Rico could become a true global player as the southernmost frontier of the U.S., and achieve a regional leadership with strong institutions and economic diversification.

Under the optimistic scenario, Estudios Técnicos predicts Puerto Rico could achieve an average annual 3.5% economic growth for the next five-year period (2005-2010) and increase to 5.7% for the 2010-2015 period. True convergence with the rest of the U.S. could be achieved. Estudios Técnicos’ model predicts 10% convergence during the next 15 years, under an optimistic scenario.

In a government led, bureaucrat-controlled society there has been little room for economic development over the past three decades. Bartolomé Gamundi, vice president and general manager of Electro-Biology Inc., pointed out, "these days, even the base scenario looks negative. We must define our strategic goals and be able to measure results."

Facing the global challenge

The overall impact of the global context on Puerto Rico has led to the imperative need to compete on the basis of productivity growth and knowledge-intensive production. Globalization has caused capital and resources to go to countries that offer the highest returns. José Antonio Villamil, former U.S. deputy secretary of commerce and president of the Florida-based Washington Economic Group (WEG), points out that competing simply on the basis of the traditional advantages offered by commonwealth status is an obsolete approach. He explains it is vital for the public sector to become a facilitator, as opposed to a generator of economic wealth.

Foreign trade agreements between the U.S., Mexico, Canada, and those being negotiated with a number of Central and South American countries, present a series of additional challenges and opportunities for Puerto Rico. On the upside, Puerto Rico could evolve into the business center of the Caribbean basin. However, on the negative side, the trade agreements could divert trade and investment away from the island toward more attractive and profitable markets. WEG’s Villamil emphasized the importance of creating a business climate in Puerto Rico that will maximize its economic potential. A joint effort from the public and private sector, nongovernmental organizations (NGOs), and academia is imminent to transform the island’s economy and promote growth.

Jurisdictions worldwide have adopted new economic policies to improve competitiveness and drive economic growth said William Boardman, a senior adviser to Estudios Técnicos who is based in Boston. These leading jurisdictions have adopted three fundamental policies: they build innovation capacity, establish linkages and clusters, and drive liberalization and government and business efficiency.

Leading regions around the world recognize that regional competitiveness and winning in the marketplace is the result of aligned science, engineering, business, and academic training with both local and global linkages; that science and technology development is global and an essential to value-chain migration; and that technology development, transfer, and licensing are key underpinnings of global competition.

While the island is struggling to create a world-class economy, many other countries are already sustaining world-defining economies; they are setting the standards in the global market. Puerto Rico continues to be a follower as opposed to a leader. Puerto Rico’s economic policy must address issues such as where to stimulate education upscaling; where to stimulate research & development investment; and where to establish mentoring functions. Boardman pointed out that the island must build a system of innovation focused on the competitive advantages of the different sectors, the rapid diffusion of technology and knowledge systems, and the creation of world-class human capital and physical infrastructure to assure the availability and meritorious access to risk capital.

In the late 1990s, Boardman directed Arthur D. Little’s multiyear analysis and recommendations for Puerto Rico’s economic development through cluster formation. After securing dozens of Memorandum of Understanding (MOUs) with multinational corporations for research and development projects on the island, the incoming Calderón administration ignored them.

Puerto Rico must create the linkages of ground innovation with world-class commercial and research enterprises, and this must be done locally across government, industry, and academia; and it must be done quickly if Puerto Rico wants to aspire to world competitiveness standards, Boardman said. The reform of government and business processes to attract linkages and macroeconomic stability must be achieved by institutional reforms toward transparency, governance, efficiency, and productivity. Unleashing economic growth in selected areas can be accomplished through a system of innovation built around linkages and efficiency.

Puerto Rico’s political leaders have also ignored the fact that the center of the economic world is shifting towards Asia and have consequently failed to adapt our own structure to that reality, evidenced in the fact that the economy is still concentrated heavily on the manufacturing sector. Competing with Asian markets that can offer labor at a fraction of the cost is unrealistic. Puerto Rico must focus instead on becoming an economy of knowledge. Even in the States, manufacturing jobs are being lost to the Asian markets. That is one area Asian countries have Puerto Rico beat, offering hundreds of millions of unemployed people willing to work for very little and almost no labor laws.

"We like to talk a lot about shifting toward an economy of knowledge, but in reality we don’t have the basic infrastructure or the institutional framework necessary to promote a shift towards a system of innovation," stated Villamil of Estudios Técnicos.

Furthermore, Villamil explained the message Puerto Rico is sending to the world is wrong if the island wishes to develop an economy of knowledge and specialization. "Last week, there was an ad in the Economist about Puerto Rico that could have been published 20 years ago," stated Villamil, pointing out that tax incentives and the benefits of being a federal jurisdiction aren’t enough to entice foreign investment any longer. The modern requirements to attract investment are production, execution, innovation, and the capacity for strategic shifting. Villamil believes the absence of any one of these factors is enough to impede the island’s economic growth and success.

Private-sector-led initiatives are needed

To address Puerto Rico’s capability of achieving the optimistic economic growth scenario presented by Economist Juan Lara at the Estudios Técnico’s conference, the board of directors of the Institute for Public Policy (IPP), a think tank created by the Ana G. Méndez University System (Agmus) held an exclusive roundtable at the university campus in Cupey, which was moderated by CARIBBEAN BUSINESS Editor Elisabeth Román, and included the participation of Estudios Técnicos’ President José J. Villamil, William Boardman, and Washington Economic Group (WEG) President José A. Villamil. Also present were former President of the Puerto Rico Senate Miguel Hernández Agosto, former Resident Commissioner Antonio J. Colorado, and attorney César Vázquez of the IPP board.

The unanimous consensus of those present at the IPP and CARIBBEAN BUSINESS roundtable was Puerto Rico’s economy required private-sector-led initiatives and transformation. Those present also agreed the transformation had to begin with the Commonwealth government.

"We have a need for consensus and a need for continuity. Things that should be continued in the government aren’t continued, and things that should have never been started are started just for political reasons," stated Hernández Agosto. "We must make the community aware there is an institution above the political spectrum promoting alternatives for our current and future development, this is exactly what the Ana G. Méndez University and IPP are trying to accomplish; promoting the kind of valuable discussion we are having in this session," Hernández Agosto added.

The former president of the Puerto Rico Senate, pointed out that we still think the government has to take everyone by the hand, a paternalistic attitude. "It must be made clear, we aren’t promoting our self-interest [private sector] only. We are promoting Puerto Rico’s interest. To the degree that the private sector can do that, we will be able to convince government to start eliminating many problems and obstacles. It is a work-in-progress," Hernández Agosto said.

"We have a need for continuity, an institution that will follow up on plans, projects, and ideas. There is need for an institution that can rise above political agendas, that will commit to a work plan for an extended period of time, not subject to political partisanship," he added.

Former Resident Commissioner Colorado pointed out that Puerto Rico’s society needs to change its attitude vis-à-vis the private sector. "The economic transformation needed won’t be achieved unless the private sector takes a leadership role. The era of the paternalistic, all-providing government needs to change," Colorado stressed.

In an effort to make sense of the Commonwealth’s existing economic situation, Hernández Agosto commented that we live in a society that thinks the government should take everyone under its wing. Economic growth can no longer be in the hands of government, but in the private sector.

Villamil of Estudios Técnicos added that the government lacks an economic policy and fails to even execute many of the programs and policies to which it sets out. "For over 10 years, we have been talking about the Mega Port, the Technological Corridor, and still nothing has happened," he said, adding, "In many respects, Puerto Rico continues to be an island surrounded by mirrors and, in the global economy, that is a serious problem. The Commonwealth government operates on a crisis basis; there is very little analytical capability in the government. For example, the fact that government is fully unionized also creates rigidity, it is very hard to be flexible...if we want to promote change it will have to be forced by the private sector."

There should be a cohesive set of actions, instead of an abundance of ‘studies’ added Boardman, senior advisor to Estudios Técnicos. The problem lies in the Puerto Rico government’s inability to execute.

Amid the economic mayhem threatening our development and growth, IPP’s roundtable participants concur that Puerto Rico should follow the example of jurisdictions that have undergone economic difficulties and have successfully emerged from them. The cases of Florida and New York City, they cited, are examples that could shed light on possible alternatives for the island’s economic resuscitation.

Creating an effective economy

So, how can Puerto Rico aim toward achieving an effective economic transformation? Villamil of Estudios Técnicos stated during the IPP roundtable that an effective economy requires a focus on sustainability rather than just plain growth. The economy should also focus on other areas such as services, as opposed to manufacturing. Productivity should also become the priority as opposed to employment. Villamil stated that Puerto Rico’s economy needs to become one of production as opposed to an economy of consumption.

The private sector needs to replace government as the main engine of the island’s economy. For this to happen, decentralization needs to take place, regulations need to be replaced by promotion, planning should eliminate improvisation, and strategic intelligence must take the place of plain statistics.

The former deputy secretary of the U.S. Commerce Department recommends a series of policy suggestions for Puerto Rico. First, the island needs to significantly lower the dependency on external savings flows through tax reform and business climate improvements, as well as decrease the reliance on federal transfers and tax-code exemptions. Villamil, CEO of WEG, believes Puerto Rico would also benefit from attracting Homeland-Security-oriented technology industries, which would be defined as a cluster strategy.

South Florida, Ireland, Singapore, Taiwan, and Finland, are all economic success stories. The application of such policies in these states and countries has resulted in high levels of manufacturing growth and increases in medium- and high-technology share of manufactured exports.

Estudios Técnicos’ adviser Boardman pointed out that Puerto Rico can achieve economic growth by building a system of sustainable innovation. This is achieved by linking government, the financial sector, industry, and education. Boardman went on to identify a series of value-creating technology-based initiatives, such as the creation of innovation centers, incubation and acceleration centers, new business creation centers, and business attraction and retention activities. He believes these initiatives can result in gross domestic product growth, employment, company development, and access to technology.

Private-sector unites

Taking a note from the success that private / public committees and the Florida Chamber of Commerce had in facilitating economic development in Florida, the Puerto Rico Chamber of Commerce (CCPR by its Spanish acronym) has taken a proactive approach in organizing a similar type of committee on the island. "We are joining together into a united front; one that will stop criticizing and start finding solutions," said Leonardo Cordero, president of CCPR.

The committee will be integrated by members of the private and public sectors, who will work together to design an agenda that will allow Puerto Rico to reach its competitive potential. Nearly 40 organizations from the private and third sector have already accepted a participating role in the proposed CCPR committee.

Although the new CCPR committee will be led primarily by members of the private sector, there will also be representatives of the executive branch, the Legislature, the resident commissioner in Washington, and island municipalities. CCPR believes since there will be representatives of all sectors and political offices, the measures shouldn’t be met with opposition. The private/public committee’s main goal is to provide the necessary consensus and continuity for Puerto Rico’s work agenda.

The main committee will design the structure, function, and composition of four work groups before June 25. Those groups will be Permitting, Planning and Infrastructure, Education, and Health. Each one of the groups will create their own work plan by Aug. 12. From that day forward, each group will work to prepare a final report by Dec. 9 that will include the recommendations under their area and the necessary legislative measures to make them possible. After the established deadline, the main committee and affiliated groups will continue monitoring the process of the recommended measures.

While CCPR’s idea is a good one, it brings to mind other committees, projects, and initiatives that have commenced with excellent intentions, cost millions of dollars, and have ended up nowhere. Many believe, however, as a result of the current fiscal crisis in the Commonwealth government, leaders in the private sector will be more inclined to take a lead in transforming Puerto Rico’s economic future. Puerto Rico can no longer depend on the government to generate its economic growth.

Leadership required

There is a lack of confidence throughout Puerto Rico that the current administration can carry out the policies needed to end the Commonwealth’s fiscal crisis. What is required from Puerto Rico’s government leaders is they implement the difficult decisions necessary to solve the Commonwealth’s fiscal crisis. Leadership is required to impose the major budget cuts needed and that go beyond the simple reduction of cellphone and car usage; a complete government restructuring is also necessary that includes eliminating agencies that are no longer necessary or inefficient; and overhauling Puerto Rico’s tax system to insure the tens of thousands of tax evaders and those who don’t even file tax returns pay their fair share.

These are the difficult decisions government leaders in states and cities throughout the U.S. have made and have contributed to successfully bringing them back from the brink of bankruptcy.

Right now, Puerto Rico lacks the confidence that the current Commonwealth administration can carry out the necessary reforms required to end the island’s fiscal crisis, simply because instead of seeking to resolve the island’s fiscal crisis by establishing a real fiscal and tax reform, the Acevedo Vilá administration proposes to spend $820 million more than the Calderón administration did in the 2004-2005 budget, which already includes a deficit of nearly $2 billion.

This is why it is the private-sector leaders who must take the initiative to compel government leaders to impose a real reform.

Stateside models of reform

New York City, the city that never sleeps, perhaps was baptized with that nickname in the 1970s after years of sleepless nights caused by one of the city’s worst fiscal crises in history. For several years the city battled with the risk of bankruptcy, a scenario similar to the one Puerto Rico could face.

Back then, public assistance programs in New York dedicated to healthcare, education, and housing, were at risk on account of poor funding. The city had no ready access to credit. Concerns about looming layoffs and tapped pension funds dominated negotiations. Making problems worse, city planners lacked accuracy and transparency in accounting methods, which made it difficult to navigate the crisis.

Then-mayor Abraham Beame slashed the city workforce, froze wages, and restructured the budget. Yet, these measures proved to be insufficient until reinforced by actions from newly created state-sponsored entities, such as the Municipal Assistance Corp. (MAC), which issued bonds backed by a portion of the city’s sales tax, and the granting of federal funds. President Gerald Ford threatened in the mid-1970s to veto a federal bailout plan for the city, a fact which some believe cost him the election.

Yet, 30 years later, New York City has not only flourished, it has also claimed the title of financial capital of the world. Last week Mayor Michael Bloomberg reported New York would operate under a balanced budget and Standard & Poor’s gave New York City bonds the highest creditworthiness rating it had ever awarded them.

Moody’s assigned an A1 rating with a stable outlook to the City of New York’s $690 million of Fiscal 2005 Series O general obligation bonds. As stated in the report, the city’s rating reflects its well-institutionalized budgetary controls and sound fundamental economic base. Moody’s attributed the city’s recovery from fiscal crisis to a combination of strong budgetary and fiscal policy decisions, a recovering economic and revenue base, the strength of the city’s fiscal management, spending restraint, increased property taxes, temporary increases in personal income and sales taxes, increased federal and state assistance, the use of deficit financing, and the defeasance of outstanding MAC bonds.

New York’s current good standing is attributed by many to the leadership of former Mayor Rudolph Giuliani, who orchestrated a huge cleanup of the city.

Yet, others attribute the current boom to a plain old economic cycle. The low interest rates of the past few years have helped the city’s real-estate market boom. Increased demand, encouraged by the low rates, sent prices soaring.

However, as in true cycle behavior, the higher interest rates that are fast approaching could leave a dent in the city’s armor. Also, budgetary challenges may be just around the corner, as budget gaps are already projected for several years starting with fiscal 2006. The city’s economy is also described as a volatile one, extremely vulnerable to business cycles and external shocks.

The lesson Puerto Rico could learn from New York City seems to be that it is possible to come out shining after years of economic uncertainty through good leadership and a series of difficult decisions. Although New York City’s economy is far from risk-free, the city managed to gain control of the situation before market forces made the challenge even greater.

If Puerto Rico doesn’t manage to do the same, the island may be facing many sleepless nights in the near future.

The private-sector factor

While in New York City, fiscal crisis was in the most part brought under control through internal management, in the state of Florida it was private-sector initiatives that came to the aid of the public sector in times of crisis.

"In the early 1990s, Florida’s credit was headed toward junk bond ratings. It was a time of credit crunch that almost collapsed in Florida," said WEG President Villamil. "The turning point came when certain elements of the private sector joined efforts to discuss what needed to be changed in Florida. The main focus was to determine what needed to be done to change the existing model of centralized government in Tallahassee [Florida’s state capital]."

However, a change in model for the state’s economic growth allowed for a more streamlined and flexible governmental structure, which was able to adapt to and take advantage of private-sector leadership and flow of capital. Since the public administration and policy changes of the early 1990s, Florida has consistently ranked in the upper quintile of U.S. states in key measures of economic activity, business vitality, and productivity to the public sector. In 1996, Florida chose to privatize its Commerce Department and to reduce significantly the size and scope of its Labor Department during 2002.

Privatization of public functions in Florida has accelerated since Gov. Bush’s first term, starting in 1999. Currently, about one-third of state appropriations of $21 billion are for purchased services such as contracting a private entity to perform all or a portion of selected public activities.

Entities such as Workforce Development and Visit Florida have created public-private partnerships that facilitated contractual agreements allowing state government and private-sector entities to perform and deliver public services.

Ever since Visit Florida was created in 1996, its greatest strength has been the fact that it is industry driven. The best and brightest minds of the Florida tourism industry have helped guide the operation of Visit Florida to make it the preeminent model of how the private and public sectors can successfully work together in support of destination marketing.

To enhance industry involvement, Visit Florida’s board of directors established the Marketing Council, which is comprised of a Marketing Council Steering Committee, five discipline-based committees, and a "Marketing Council At-Large." The purpose of the council structure is to maximize industry input toward fulfilling Visit Florida’s commitment to being "industry-led." Committee members are volunteers dedicated to putting the industry above their own interests as they interact with Visit Florida’s staff.

Privatization in Florida has contributed to fiscal savings and to maintaining an attractive business climate by keeping taxes relatively low.

If Puerto Rico were able to emulate the economic models that rescued both New York City and Florida from economic instability, then the much needed economic transformation on the island could become another world-defining economic success story.

This Caribbean Business article appears courtesy of Casiano Communications.
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