Moving Beyond Bootstrap

by John Marino

July 29, 2005
Copyright © 2005 THE PUERTO RICO HERALD. All Rights Reserved.

. While traveling in New York this month, a friend asked, are you still going for statehood down there in Puerto Rico?

Many people always are, I said, but the unprecedented divided government, plus internal party squabbling, is making a unified approach on status impossible. Plus, the government has more important concerns, notably its fiscal crisis, a sputtering economy and growing social problems, like rising crime and school dropout rates.

Put it this way, I said. I pay no federal taxes on Puerto Rican income, but I'm taxed as heavily as if I were here in New York City, perhaps the most heavily taxed piece of U.S. soil. That's despite the myriad federal services I get for free, and the often shoddy level of services by commonwealth agencies.

Puerto Rico has tons of potential, and it's a beautiful place, but the government has got to get its act together before it can make genuine progress on status.

There are three basic problems -- the government is too big, the tax base is too small and the economy is suffering as the government leans on a dated economic development strategy.

With the phase-out of Section 936 complete at the end of the year, Operation Bootstrap is officially dead.

For the first time in its century-long relationship with the United States, Puerto Rico will have no federal tax break or other incentive to lure U.S. industries to set up shop on the island.

There has been much talk, for years, about the need for a new development model, and the need for one is great. That's really been apparent for the last decade, when the federal industrial incentives were first closed to non-beneficiaries.

But the government errs in taking a silver bullet approach to the challenge. There is no one solution to the problem. Growing tourism and shipping, cultivating more knowledge-based industries, and increasing exports of local manufacturing goods and professional services are all good ideas. But no one of them alone will be enough to turn around the island's economic outlook.

At least initially, the government would probably be wise to take a broad based approach to economic development, and perhaps gauge what natural strengths arise over time.

In the meantime, government should concentrate where it has most control -- getting down to the really important business of reforming itself and undertaking a sweeping fiscal and tax reform.

Back in the 1950s, along with Operation Bootstrap, the commonwealth government began a plan to boost the economy by increasing government hiring. It never really stopped. For years, however, the strength of the federal tax incentives provided cover for the bloated commonwealth payroll. But even before the federal incentive cuts, their strength had been on the wane for years, with the rise of multinational firms and competitive industrial sites across the globe.

It's not just the market needs to move beyond the economy's traditional reliance on manufacturing, however. The government is simply spending more than it receives. Its current billion dollar budget gap and the recent twin downgrade of the island's credit rating has made that clear.

Despite the deadly seriousness of the situation, the Popular Democratic Party-controlled administration and the New Progressive Party-controlled Legislature warred over the budget instead of reaching an acceptable agreement. Worse, no one in a position of political power has put forward even a rough roadmap towards fiscal reform or scaling back the size of the government.

Tough decisions must be made because the current setup is just not right. Some industries are overtaxed while others receive huge benefits. Too few people pay their fair share of taxes, and those who do don't only pay too much, they also must make additional expenditures on things like private school and water cisterns because government so often fails to provide adequate services.

No political leader today is telling the public how the government can solve this situation. And that's despite the fact that there are a few generally agreed upon things the government could do to achieve a lot.

Instituting a hiring refreeze and allowing attrition to scale down the government payroll works on paper anyway, with government hiring at about 4 percent annually. It would at least be a terrific step in the right direction. At some point, the government must look to consolidating agencies and perhaps eliminating non-essential services, while improving the delivery of the services it must provide.

The government also must expand its tax base by instituting some sort of consumption tax, with a corresponding lowering of income tax rates. An overhaul of corporate and economic development policy is also in order, as is the possibility of spinning off the function of large bureaucracies, like the Puerto Rico Industrial Development, to quasi public boards, made up of a handful of experts in their fields.

Most importantly, government should simply strive to stay out of the way of economic development as much as possible.

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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