Puerto Rico’s creditors, holding a meeting in New York Thursday to discuss their fears of an inevitable debt default, had this message for the island’s administrators: you’re not invited.
With more than $70 billion in outstanding debt, Puerto Rico’s debt per capita is nearly $19,000 (not including unfunded liabilities, which puts per capita debt as high as $30,000), far higher than any state in the U.S. Much of this debt is held in the form of what was once America’s most attractive municipal bond, which means most American investors stand to lose if Puerto Rico’s bonds lose value.
No matter what Puerto Rico’s current funders decide, Puerto Rico can still become successful if it acts wisely and invests in what will ensure long-term growth, not short-term spending.
To be fair, this isn’t the first time creditors have held closed-door meetings to express their concerns about Puerto Rico’s ability to satisfy its debt obligations. Nevertheless, this may be the first time they’ve met with debt restructuring specialists to consider how to handle the increasing likelihood that Puerto Rico will not be able to keep up with its payments. The fact that fiscal administrators weren’t invited to defend themselves might also suggest that lenders have lost confidence in management.
Numerous analysts have expressed their concerns for Puerto Rico’s uninspiring economy in newspapers and websites across the country. (I’ll admit, I even posted my own scathing review recently in Forbes.) However, few have offered advice that may serve to turn the economic tides. Here’s my best shot.
If Puerto Rico wants to increase employment, it has to make it easier to employ. A few years ago, I investigated the viability of expanding a chain of senior living facilities in Puerto Rico, a project that would have increased employment and provided a valuable service to an aging population. At the time, it would have taken up to five years to obtain all of the licensing and permits necessary just to begin construction. Even the most labyrinthine of state bureaucracies requires one-fifth of the time. Needless to say, this investor was turned off. How many others have experienced the same?
Some reforms have been enacted, but with unemployment at staggering levels (more than double the U.S.) and an embarrassingly low labor force participation rate (just 2/3 of the new 30-year low that exists in the rest of the country), Puerto Rico’s desperation should necessitate the easiest business climate on the planet ... at least until things turn around.
Puerto Rico has a tremendous number of advantages that should be better marketed to businesses around the world. Not only are there numerous tax benefits – investments in certain sectors have tax rates below 5 percent – but Puerto Rico also offers a highly educated, stable, and cheap labor force as well as one of the most beautiful work environments on Earth. Combined with a substantial list of personal tax incentives, the likes of which have attracted the attention of several American billionaires, it seems like an ideal location to operate in.
Despite all of the opportunities, the Puerto Rican economy isn’t growing. I, for one, refuse to give in so easily and history gives me hope. Historical examples of successful economic turnarounds have provided economists with a roadmap for transforming an unproductive economy.
The initial step should be a more effective marketing campaign centered on the tax, labor, environmental, and Latin American and American market access opportunities that are second to none in the Western Hemisphere. Industrial manufacturers were once drawn to the island, making it the major manufacturing hub for pharmaceutical manufacturers that it is today, but an unstable economy and an increasingly unfriendly business environment has forced several to reduce operations or move away from Puerto Rico altogether. Puerto Rico has to guarantee the promise of long-term, low operating and labor costs, providing the necessary incentive of higher profits. There is no reason Puerto Rico can’t poach manufacturers begging to retain their “American” identities, while seeking a greater competitive advantage.
Secondly, Puerto Rico should aggressively target marketing to companies in industries that are currently experiencing highly profitable growth. Outside of industrial jobs, attracting firms in the growing science, technology, and healthcare sectors will instigate job growth that is simultaneously synergistic with Puerto Rico’s already educated and trained workforce. Even if this means providing permanent “zero-tax” holidays to investors, the long-term benefits resulting from increased employment will far outweigh the investment.
Once lower costs, skilled labor, quality of life, and global competitiveness begin to attract the investment needed for long-term economic growth, then it will be time to get creative. The lack of a passport requirement and ease of travel, should mean that Americans visiting the Caribbean shouldn’t want to go anywhere but to the 'isla del encanto.' Yet, for some reason tourism is dwindling and young people are leaving the island at record speeds. Tourist attractions and quality-of-life improvements have to be updated to compete in the 21st century.
In the eyes of current bondholders and other lenders, it may be too late for Puerto Rico to push such an ambitious long-term plan in order to change the hearts and minds of those who hold the island’s near-term economic fate in their hands. But, no matter what Puerto Rico’s current funders decide, Puerto Rico can still become successful if it acts wisely and invests in what will ensure long-term growth, not short-term spending.