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Getting out of a tight spot

By Elisabeth Roman of Caribbean Business

August 25, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Just eight months into his administration, Gov. Aníbal Acevedo Vilá is facing major economic and political challenges. Not only is the administration dealing with a fiscal crisis that entails deficits of $2 billion and the prospect of government job cuts to help balance the Commonwealth’s budget, stagflation has reared its ugly head to haunt the administration and the island’s economy.

Stagflation, the term used to describe the economic menace of the 1970s on the U.S. mainland, is making quite a comeback in Puerto Rico. Slow economic growth, rising inflation, high oil prices, weak labor markets, and double-digit unemployment rates are the classic symptoms of stagflation and have combined on the island with threats of salary cuts and layoffs in the government and a loss of confidence to back Puerto Rico’s economy into a tight corner.

In recent months, Puerto Rico consumers and businesses have seen the cost of electricity and gasoline skyrocket thanks to petroleum prices that have more than doubled over the past year reaching $67 per barrel last week. In addition, the island is threatened with a record increase in water rates, elimination of excise taxes on certain industries leading to higher costs of medicine and food, an increase in the capital-gains tax, higher taxes on banking institutions, increases in tolls and auto license fees, and higher taxes on businesses and consumers, among a long list of others. These increases combine to make Puerto Rico, already the most expensive site in Latin America and the Caribbean, even costlier, impacting the island’s ability to compete in a global economy and to attract investment. Higher operating costs on the island also are having an impact on businesses already struggling to survive in Puerto Rico’s slow economy–an economy that is performing slower than the stateside economy, which is doing much better.

The increasing cost of utilities and taxes also translates into consumers having less disposable income, further impacting local economic growth. Puerto Rico’s political and economic woes are leaving the island behind in terms of growth. Economists are predicting the local economy will grow by less than 2% this year. By comparison, the U.S. mainland’s economy will grow this year between 3.5% and 4%, while South America should see a 4.7% growth, and Mexico and the Caribbean should register 3.7%.

Some analysts estimate about 1,000 people from middle- and upper-income families are leaving Puerto Rico each month and relocating to the mainland, seeking not only job opportunities, but a better quality of life for their families. This is nothing new. For years, migration has been used as a safety valve, effectively disguising the Commonwealth system’s inefficiencies and inability to create sufficient jobs for the island’s population. First, it was migrant-level workers but, in recent years, it has turned into a growing brain drain of our middle classes.

For decades, with Puerto Rico’s economic model unable to generate sufficient job opportunities in the private sector, Commonwealth officials found another economic safety valve: government employment. A fiscal crisis, however, which has the Commonwealth on the verge of reducing employees’ salaries and potentially cutting jobs, has made government jobs no longer an option for reducing unemployment in Puerto Rico. We already have the highest ratio of government employees to population when compared to the states and most other countries.

The current economic and political situations facing Puerto Rico have led to a tense social climate, where the threats of islandwide work stoppages and unrest are becoming widespread.

How can Puerto Rico’s economy squeeze out of the corner it has been backed into? Economists believe the conventional remedies the Commonwealth turned to in the past are no longer enough to remedy the situation. Finding a way out of the bind Puerto Rico’s economy currently finds itself in requires tough measures, cooperation, and dialogue among all sectors of the economy and government. It is time to work together.

In the 1970s, the U.S. government managed to deal with stagflation through government deregulation, among other strategies. At the time, the federal government dealt with the nation’s economic weakness by deregulating various industries, including airlines, trucking, and railroads, and by relaxing controls on banking interest rates and long-distance telephone service. The result was that less government and a growing pro-business climate led to the end of stagflation on the mainland.

With 80% of the commonwealth government’s budget spent on payroll, deregulation, privatization, and public-private sector partnerships are strategies that should be examined closely and considered as alternatives. Puerto Rico’s political parties must put politics aside and should examine these strategies as a way to start digging out of our current economic crisis.

This Caribbean Business article appears courtesy of Casiano Communications.
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