CAN THE ISLAND PULL OUT OF THE RECESSION?
Ramon Cantero Frau, former head of the Economic Development Administration, this past week painted a grim picture of the island economy, focused on two statistics.
One, the banking crisis. From late 2004 to the present, the market value of Puerto Rican bank stocks has declined by $19.4 billion. Assuming that 40 per cent is owned by local residents and corporations, Puerto Ricans have lost $7.7 billion.
Two, the energy crisis. Puerto Rico consumes some 70 million barrels of oil a year. The increase in the price of oil since 2005 up to now has cost Puerto Rico $9.9 million. This is real money: “money that has not created roads, schools, housing, hospitals. It is money that has evaporated from the pockets of the Puerto Ricans.”
This is a massive decrease of wealth in Puerto Rico. In the past, Cantero writes, Puerto Rico has overcome serious economic crisis. But they were basically one dimensional and the solutions consisted in one form or another of fiscal stimulation.
Today’s crisis, he writes, is different. It is multi dimensional and extremely complicated. Short term there is little Puerto Rico can do about the world-wide banking credit crisis or about the world-wide energy crisis. Long term, he writes, Puerto Rico must recognize that the magnitude of the crisis “transcends political parties. This is the first time that we have to establish national consensus to resolve the economic crisis.”
How bad is the recession? As island economist Mohinder S. Bhatia puts it: “The overall picture of the economy is not pretty.” The Gross Domestic Product declined by 2.1 per cent in fiscal year 2008. It would be worse if not for the $1.2 billion in U.S. economic stimulus money sent to nearly one million Puerto Rico a few weeks ago. Bhatia also points out that although unemployment is up to 11.4 percent, this is still far below the 1975 recession, 26 percent, or the 1983 recession, 25 percent.
But the fundamental question is whether Puerto Rico, this time, can pull out of the recession. The point of Cantero’s article is that there must be a political “national consensus”: a recognition that this crisis is so serious, so deep and so complex, that Puerto Rico must transcend partisan politics. This, of course, is what numerous other private sector leaders and organizations have been pleading for months – with the one important achievement being last month’s bipartisan approval of a wide-ranging investment incentive law.
And this brings us to what happens in November of this year. Whoever wins, needless to say, will be faced with the economic crisis. And the newly-elected government will have to make a fundamental, and crucial decision: in fact, a decision that in island history all governors and parties have had to make. What will be the priority – the economy or political status?
#At this point the opinion polls say not only that Luis Fortuno and the New Progressive Party will win, but that they will sweep the entire government. The NPP has always called itself an “ideological party”, that its reason- to-be is statehood. And we see once again that the NPP cannot wait for next year to “eliminate” Commonwealth status. The NPP Legislature passed a bill that would allow the next Governor to change the official name of the government from the Commonwealth of Puerto Rico to the Government of Puerto Rico. Governor Anibal Acevedo Vila vetoed the bill pointing out that “Commonwealth” is the government’s constitutional name.
This sounds like, and in fact is, superficial ideological politics. But if the he polls are right and Fortuno and the NPP control the entire government, the executive, the Legislature, and soon after, ideologically the Supreme Court, there is no question that there will be another statehood crusade on this island and in the U.S.
Puerto Rico has seen the economic effect of past crusades. Carlos Romero Barcelo went to Congress to give up Puerto Rico’s vital exemption in federal minimum wages. Pedro Rossello lobbied Congress to eliminate of Section 936. In both cases because both were seen as “obstacles to statehood.”
Statehooders have always argued that statehood will boost the island economy. The problem is that economic reality tells us that they are dead wrong. We see precisely today the negative effect of the latest increase in the federal minimum wage from $5.85 to $6.55 an hour. And we have seen the decline in new industrial promotion, and the loss of over 40,000 manufacturing jobs, since the repeal of 936 in the late 1990’s.
There is no mystery here. A big NPP victory here, and in the U.S., if the Democrats win the presidency and control of Congress, will produce the perception that Puerto Rico is finally on the road to statehood. Democrats, believing that Puerto Rico would give them seven more members of the House and two Senators, have been increasingly statehood-friendly. Yes, Fortuno is a national Republican, but resident commissioner candidate Pedro Pierluisi is an Obama Democrat.
Perception, of course, is not reality. The reality is that in the end, statehood is economically impossible. But the perception of the inevitability of statehood will have an effect on the island economy far worse than the loss of minimum wage flexibility and the loss of 936.
The obsession to eliminate Commonwealth will undermine the foundation of the island economy. The perception will be that Puerto Rico will soon lose federal tax exemption, triple Puerto Rico bond exemption, and other vital benefits.
Can Puerto Rico pull out of the recession? It is evident that It will depend to a great extend on world conditions. But it will also depend on how the newly-elected government answers the essential question of priorities: the economy or status? #One thing we know. As bad as Cantero’s statistics paint the economy today, a new statehood crusade will make it worse.
Friday, August 1, 2008
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