On Thursday, February 17, 2022, Harvard’s Kennedy School’s Mossavar-Rahmani Center for Business and Government hosted a panel on Zoom entitled “The Economic Outlook for Puerto Rico Post-Bankruptcy.”
The three panelists were: Andrew Biggs of the American Enterprise Institute and a Puerto Rico Oversight and Management and Economic Stability Act (PROMESA) oversight board member; Antonio Weiss, a former point man for President Obama during the enactment of PROMESA; and Sergio Marxuach, policy director and general counsel at the Center for a New Economy and a former official of two Puerto Rico government offices.
Biggs began by asserting that the control board has been a success. When it started, debt levels and unfunded liabilities were at very high levels. The board has now negotiated down enough debt such that annual debt payments are only 8 percent of the Puerto Rican government budget. In addition, all new teachers and some other government employees will have a defined contribution pension (like a 401(k) plan) instead of a defined benefit pension. This reduces the unfunded liabilities of the pension system over time.
Biggs observed that these achievements come despite the fact that the PROMESA control board was weaker than the DC control board, and that this type of bankruptcy had to make the subject (Puerto Rico) healthier than before (a kind of dual mandate on top of debt restructuring).
Biggs believes the big challenges the island faces going forward include: education outcomes are worse even than bottom-rung Alabama; it has the worst labor force participation rate in the world (fewer tourism employees than Nebraska); government effectiveness is ranked 122nd in the world; political corruption is systemic. He further believes that there will be no long term prosperity for Puerto Rico until the territorial government addresses each of these areas.
Weiss struck an optimistic note. He believes the end of the control board and Covid waning means Puerto Rico has a one time opportunity to embrace prosperity. U.S. government assistance has been impactful. Unfunded pension obligations are way down. Debt service has been reduced to 8 percent of the government budget, echoing a common theme of the panel. Medicaid funding has grown as the various, ongoing fiscal “cliffs” have been averted. The Covid bills had substantial help for Puerto Rico in the areas of disaster aid, the EITC, and an expanded child tax credit.
Weiss noted that Puerto Rico has come a long way since the days of 10 percent unemployment, annual out-migration of 2-3 percent, and looming insolvency.
But there are obstacles. Stakeholders in Puerto Rico need to learn to work better together. There are constant threats of Medicaid and other cuts. The tax laws in Puerto Rico need to be reformed so as not to be taken advantage of by corporations and the wealthy moving in from the states.
Marxuach had one recurring theme: industrial policy. Puerto Rico has a one time opportunity to be the natural location of domestic supply chains. Companies are looking at where to source these things given recent events, and Puerto Rico can be the natural answer. But it will take what he terms “industrial policy.” What he means by this is that the government, labor, and business need to work together. In doing so, they need to keep three principles in mind: consistency of policy, a strategic vision they keep going back to, and coordination of everyone involved.
The common theme all the panelists touched upon is the opportunity Puerto Rico has to thrive. It has gotten out from under crippling debt and unfunded liabilities. Federal government funding is generous and likely at a peak. Covid and international strife means Puerto Rico is a natural source of manufacturing allocation. But the moment will be lost if the government gets into the same bad habits of corruption and mismanagement.
Updated on February 26, 2022.
