Commentary: Shaky Puerto Rico Needs a New Renaissance of Sorts

The Commonwealth of Puerto Rico needs a big "boot" in the butt, or perhaps needs to be picked up by its "bootstraps," as in "operation bootstrap."

That endeavor was a mid-1900s industrial revolution created by the Industrial Incentives Act of 1947. It helped transform Puerto Rico from an agricultural economy dependent on sugarcane to an industrialized one with hundreds of factories producing a wide variety of consumer goods.

The act also provided companies that opened facilities in Puerto Rico with many incentives, including various income and several types of tax exemptions. In addition, Section 936 of the Internal Revenue Code gave many U.S. corporations with facilities in Puerto Rico the ability to shelter profits from taxation. Major pharmaceutical companies still have plants on the island, as do various other industries.

Things have changed dramatically over the past six or seven years. A combination of the elimination of Section 936 by the Clinton administration in 2006, as well as the disastrous effects of the "Great Recession" a few years later, have left the Puerto Rican economy staggering.

Moody's Investors Service, Standard & Poor's and Fitch Ratings have recently downgraded the island's bond ratings to junk status, or below investment grade.

Unemployment is 14% or more, population is dwindling as young, well-educated professionals are leaving for better opportunities on the mainland, and the risk of default is increasing on $70 billion or so in public sector bond debt. Crime is rampant, public services are being cut back and the island's reputation as the "isle of enchantment" is losing its luster.

Currently, the Government Development Bank of Puerto Rico, similar in many ways to the Federal Reserve Bank, has arranged the sale of $3.5 billion of municipal bonds to assure that the government continues to operate. This sounds eerily similar to the mainland's insatiable issuing of debt.

Tax hikes and various cost-cutting moves were implemented by Puerto Rico's current administration. It all seems like a valiant effort of too little, too late, or perhaps a "band-aid" type approach.

What is really needed is a revitalization from the ground up — a renaissance of sorts. An all-encompassing program to expand and diversify the economy, stem the outflow of residents and again showcase Puerto Rico as the beautiful and resourceful island that it is. It was long considered the economic hub of the Caribbean. With that in mind, the following recommendations are being offered:

 

BOOST AGRICULTURE

A thorough analysis of the agricultural potential of the island in order to increase crop production for island consumption, thus reducing dependence on costly food imports. Currently, only about 3% of the workforce is employed in agriculture and it is only about 1% of GNP. Bringing in major mainland agri-companies and agri-economists to analyze all climate, soil, topography and other elements would be important to this endeavor. Obviously, the abundant sunshine supports an all year-round growing season. Additionally, can woodlands on the island be used more for the construction trades or for export?

 

STEM RESIDENT EXODUS

Provide various incentives to try to keep young and old, well-educated and skilled residents from leaving the island in search of more opportunities on the mainland. Try to attract industries that workers want, and make conditions desirable enough that they want to stay — low-cost loans, attractive housing options, low-cost health care coverage, free job training and tuition subsidies. Instill in the commonwealth a new sense of PRIDE (Puerto Rico is Desirable for Everyone).

 

NEW TAX BENEFITS

Reinstate Section 936 or some more up-to-date and effective form of tax or economic incentives. Try to target those industries that would benefit from these incentives and appeal to the population.

Form a task force to promote Puerto Rico as a beautiful place to live and a conducive island to do business. Strongly express the commonwealth's commitment to train a labor force to provide the skills companies need, offer a safe environment to live and work in a healthy and affordable lifestyle.

 

DEBT REFORM

Analyze the commonwealth's debt

issuing patterns. Have overzealous financial advisors-bankers induced the GDB and Puerto Rico's administration into issuing too much debt by recommending costly interest-rate swaps or other hit-or-miss esoteric innovations? Can any agencies be consolidated or eliminated to achieve economies of scale by cutting costs?

Also, the commonwealth's outstanding bonds are trading at very depressed prices due to financial uncertainties and bond- rating downgrades. Might it be prudent to use some of the GDB's resources to buy back various bonds at these low levels to retire them early, or as an investment if the belief is that Puerto Rico's fortunes will improve in the near future?

Another consideration would be to satisfy active sinkin- fund requirements by purchasing bonds at deep discounts instead of redeeming them at par.

 

ATTRACT NEW RESIDENTS

Promote Puerto Rico as a great place to retire or relocate to. Offer such perks as a year's property-tax abatement, low-cost housing loans, college tuition reduction, free Spanish lessons and free job placement services.

Highlight the measures that the commonwealth is taking to become economically sound, reduce crime and provide increased job training and more employment opportunities. Showcase the desirable housing options for retirees, potential new relocaters and vacationers.

 

ATTACK CRIME

Recently, the commonwealth hired a top law enforcement official from New York City to head up Puerto Rico's Police Department. That's a strong indication of its commitment to fight crime. They should continue to bolster this effort by offering various incentives to other active or retired U.S. law enforcement people to move to Puerto Rico and work full or part time to help reduce crime.

A retired police officer with a lifetime pension could supplement that with part-time police work and have a nice and affordable lifestyle. Trying to attract former islanders back to the island work in this endeavor might prove to be very resourceful.

 

ENERGY POLICIES

Do a comprehensive analysis of the commonwealth's electric power system. Instill strong conservation measures to cut usage and eliminate waste. Review all options for alternative energy resources (if not being done already), including solar, wind, ocean and the economics of a waste-to-energy plant.

The latter might also help to curb the use of unsightly landfills. These suggestions could also help reduce the amount of imported oil used in 90% or more of electricity generation.

 

TOURISM

Launch an aggressive advertising campaign to promote tourism. Many commercials appear on TV, radio and in print about Jamaica, Bermuda and the Bahamas; few are about Puerto Rico.

The island of Puerto Rico is beautiful, has many attractions other than fine beaches, is economically reasonable and only a three-hour plane trip from the New York metropolitan area. It is also "related" to the mainland as a territory of the U.S.

For years, Puerto Rico has attracted investors to buy the commonwealth's municipal bonds due mainly to the triple tax-exemption the bonds offer. But make no mistake about it, historically Puerto Rico was also well-run and a creditworthy investment in its own right. In fact, many perceived that the island was better managed than the mainland with its outlandish borrowing practices.

So, perhaps a new and more up-to-date "operation bootstrap" is what is really needed to re-energize Puerto Rico and re-establish it as the economic hub of the Caribbean. Welcome back to the "isle of enchantment."

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