Economists Cite Need for Reliable Economic Data to Achieve Recovery in Puerto Rico

As PROMESA moved through the legislative process, one of the challenges facing bill drafters was the lack of reliable data on Puerto Rico. At the Senate Judiciary Committee Hearing on “Puerto Rico’s Fiscal Problems: Examining the Source and Exploring the Solution” on December 1, 2015, Senator Chuck Grassley (R-IA) objected to plans to help Puerto Rico because “the starting point for any solution is to first identify the problem and understand its size and scope.  Unfortunately, confusion reigns as Puerto Rico has failed to provide audited financial statements for the past two years.”

Other decision makers had the same objection. Some expressed disbelief in the claim that Puerto Rico was insolvent and unable to pay debts. Others wanted evidence that the debt crisis was not the result of corruption or mismanagement. For many, recent audited financial reports were a nonnegotiable requirement before any kind of support or assistance for Puerto Rico could be approved.

A recent report, “Establishing Reliable Economic Data for Puerto Rico” by Arthur MacEwan and J. Tomas Hexner,  makes it clear that the lack of reliable data on Puerto Rico’s economy “makes it difficult to gain knowledge of the condition of the economy, undermines the formulation of policy, and creates a degree of uncertainty that inhibits private investment.”

The first problem the authors cite is the use of 1954 prices in calculating GNP. While these prices are adjusted for inflation, they no longer show a real picture of either production or consumption. 1954 prices for smartphones, Botox injections, or the majority of packaged goods in grocery stores simply do not exist, because those products did not exist in 1954.

The informal economy of Puerto Rico is another enormous problem for data collection. “It is widely assumed,” the authors say, “that at least 25% of economic activity in Puerto Rico is ‘off the books’ and is not measured by official data.” While the figure may be “widely assumed,” there is not a great deal of firm evidence for this figure. The source of the number appears to be research conducted on behalf of the Government Development Bank by Estudios Técnicos. The MIMIC model, one of the main tools used in the estimate, relies on tax audits, discrepancies between spending and reported incomes, voluntary surveys, and the use of satellite measurement of energy usage. Statistical models can predict the energy use expected on the basis of reported GDP. The actual energy usage can then be compared with predictions to produce an estimate from observed data.

Accurate measurement of the informal economy is difficult, and this results in inaccuracy in figures on employment and income. There is also probably a loss of tax revenue resulting from the large informal economy.

Apart from these two stumbling blocks, the authors say, the level of transparency and accuracy among the government departments responsible for collecting and reporting on economic data is low.

“The only action that is likely to alter this situation will be to thoroughly integrate the collection and presentation of Puerto Rican economic data with federal agencies—especially, but not only, the Treasury Department, the Bureau of the Census, the Bureau of Labor Statistics, and the Bureau of Economic Analysis. At the least, data collection and reporting requirements for Puerto Rico should be the same as for the fifty states,” the authors conclude. “It may be necessary, further, for federal agencies to directly oversee the data processes in Puerto Rico until they have been put on a sound footing, both in terms of collection and presentation.”

Making this happen is a logical part of the work of the fiscal oversight board. But ensuring that data management is given high enough priority by the board is the essential first step.

The authors conclude, “Reform of the economic data systems in Puerto Rico is necessary for the Oversight Board and the Revitalization Coordinator to understand the situation; to make judgments about appropriate fiscal, financial, and investment policies; and to evaluate the impacts of their decisions. There will be no way to appraise the impact of PROMESA without better data. Accordingly, data reform should be given high and immediate priority.”

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