For the Nobel Prize winner in Economics, Joseph Stiglitz, the austerity measures about to be implemented in Puerto Rico, as part of the Fiscal Plan certified by the Oversight Board and embraced by governor Ricardo Rosselló Nevares, are more “draconian” that those established in Greece, a country that for two years has faced a fiscal and economic crisis that seems to have no end.
The scholar believes that, if the contents of the document approved by the Board in March is implemented, the economy of Puerto Rico could fall by about 15% in real terms, such as was established by the economic forecast figures published last December.
“Puerto Rico could experience another lost decade … This (the plan) will cause the economic depression to continue,” he said in a speech delivered at the Santurce Center for Fine Arts as part of his cooperation with the Centro para una Nueva Economía (Center for a New Economy).
His argument follows a cause and effect reasoning. In the case of Greece, he explained, the cutbacks in public debt, which sought to balance the proportion between what is owed and the size of the economy, were accompanied by a series of austerity measures that stagnated production and commercial trade. Consequently, after some time, the economy had shrunken so much that once again the government could not honor commitments with creditors, which in turn started the deterioration cycle again.
Stiglitz explained that economies that undergo an extended depression, such as Puerto Rico’s, go into a deterioration spiral. To break it requires growth, and the first thing, in the opinion of the university professor, is to restructure the debt and use the money that would have otherwise gone to creditors and invest it back into the economy.
For this, the starting point is a renegotiation of the terms of the debt, and that process is likely to mean more than an extension of payments, as foreseen in the Fiscal Plan. Stiglitz talked about condoning or wiping off the debt from the books. And, according to him, a cutback of 80% might not be enough.
He warned that the expectation behind the Fiscal Plan is that of tightening Puerto Rico as much as possible to draw as much money as possible to meet obligations with debt holders. This, despite of the fact that most bondholders have, in practical terms, recovered their investments in the island, because, given the risk posed by the debt of Puerto Rico, they collected relatively high interests and right from the start of the repayment process.
“(Creditors) are very well compensated for the risk they take by lending the money. They’ve already received their money with interest,” he said.
He indicated that, generally, the financial sector behaves in a “near sighted” manner before the various entities that are involved in a controversy and that the aspiration is to collect it all and before everyone else, regardless of the effects that it may have on the jurisdiction of the controversy or over the other creditors.
He indicated that some countries, in an attempt to alienate wills, promote the restructure of the debt with instruments with which bondholders receive their money if the economy is experiencing real growth.
Stiglitz, however, pointed out that once the debt issue is addressed with sustainable solutions, a process to expand demand should be embarked on by means of public and private investments and even special loans, among other mechanisms.
For example, one of the measures that ought to be considered locally would be intended to strengthening the banking system in such a way as to stimulate capital lending to individuals and small and medium-sized businesses.
Likewise, instead of extending the austerity to the public education systems, they must be strengthened, because knowledge is the greatest asset in today’s economy and education is what can generate this type of wealth.
Origin of the crisis
The former Chief Economist at the World Bank remarked that the Puerto Rican economy deteriorated mainly for two reasons. The first was the creation of the North American Free Trade Agreement (NAFTA) which facilitated Mexico and Canada access to the US economy.
This agreement basically reduced the competitiveness of Puerto Rico which, because of its political condition, had enjoyed that access since the beginning of the 20th century.
The other reason that promoted the deterioration was the elimination of industrial incentives to companies with operations in the island.
Stiglitz pointed out that these incentives, which last version is known as section 936 of the US Internal Revenue Code, were highly inefficient because they involved a significant investment of money in exchange for a poor return. The problem per se was not the elimination of the incentives but that they were not replaced with another tool that would stimulate the economy.
According to Stiglitz, the matter will get complicated in the coming years. The economist gives credibility to the forecasts of the Gross National Product (GDP) –the indicator that measures economic activity – published by the government in December, ahead of the preparation of the Fiscal Plan.
In this document, it was estimated that, by fiscal year 2018, which starts in July, the economy would fall by 17.1%.
In part, his reasoning is because the Fiscal Plan does not include sufficient measures to mitigate this reduction as initially estimated. Also, the economic forecasts, which are usually calculated through a series of multipliers, seem not to have taken into account specific aspects such as the insular geographic isolation of Puerto Rico.
The status is an issue
In conclusion, Puerto Rico ended up without the incentives that sustained its production and without the political clout to promote new initiatives that would have avoided the fall.
Stiglitz compared the matter with the case of Finland, a country that, as he understands it, has every element to grow economically, but which has faced limitations for not having adopted the Euro as its currency.
He explained that, although the Euro sought a series of economic safeguards for the European block, they were insufficient so that the fall of one country could not be offset with the windfall of another.
Stiglitz indicated that something similar is happening to Puerto Rico with its status as a territory of the United States. That condition, in addition to preventing the establishment of measures that help the economy, allows for the imposition of statutes such as the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) which have the potential of doing both good and bad.
“They have to decide between more integration or less integration. Being in the middle doesn’t help,” he said.
In fact, the mobility that allows for the same political status provides for the high levels of migration to the United States, which accelerates the deterioration of the economy.
Economically-motivated migration is relatively common and accelerates during crisis situations. In a way, by moving from countries, young people evade the economic burden entailed in the public debt that their parents left them.
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