It would be an understatement to state that the hurricane-battered Puerto Rican economy is at serious risk of entering an irreversible downward spiral. It would also be an understatement to say that the island is in urgent need of an IMF-style structural adjustment program to get its economy back on a sustainable growth path.
An important impediment to Puerto Rico getting an IMF-style adjustment program in place is that being a US territory rather than an independent country, it is not an IMF member and therefore would not qualify for IMF assistance. Worse yet, the island’s government seems to be nowhere near close to having a coherent economic plan that might address the island’s monumental economic challenges.
Before throwing up one’s arms in despair, one might reflect that it would not seem to be beyond the wit of the Trump Administration to work together with the Puerto Rican government to craft a condition-based economic adjustment program for the island along IMF-lines. Such a program might involve a commitment to serious economic reform on Puerto Rico’s part in exchange for both major debt relief from the island’s creditor and major economic support from the US Congress.
One might envisage such a program along the lines of that designed in the mid-1980s by the Reagan Administration together with the Israeli government for a hyperinflation-racked Israeli economy in the context of the Camp David US-support package.
If Puerto Rico is to have any hope of recovering from its current economic depression, it needs to commit to serious economic reform that goes well beyond implementing a disciplined budget policy under the supervision of its Oversight Board. Indeed, it needs to undertake fundamental economic reforms to make its economy very much more competitive and very much more attractive than it presently is to outside investment. Such reforms are particularly needed in the area of labor market and welfare reform if the island is to have any chance of increasing its labor participation rate from its current abysmally low rate of around 40 percent.
While a necessary condition, Puerto Rican economic reform is not nearly a sufficient condition for the recovery of its economy. Rather, that reform needs to be complemented by both major debt relief from the island’s creditors as well as by substantial financial and legislative support from the US Congress.
Beyond having Congress authorize adequate financial support to rebuild the island’s devastated economic infrastructure, Congress needs to take bold measures to improve the island’s competitiveness. At a minimum, such measures should include the repeal of the Jones Act to reduce the island’s transport costs, the restoration of tax preferences for US companies to increase the attractiveness of investing on the island, and the reduction of the minimum wage as it applies to the island to make its labor market internationally more competitive.
In helping craft an economic revitalization plan for the island, the Trump Administration might want to follow the precedent of what the Reagan Administration did in the mid-1980s to help stabilize the Israeli economy. It might do so by appointing a small group of 2-3 highly respected US mainland economists (of the same international stature as Stanley Fischer and Herb Stein, as was the case with President Reagan’s effort to help Israel) to work together with 2-3 highly respected Puerto Rican economists to determine what needs to be done to arrest the island’s downward economic spiral.
One might also think of having the Trump Administration and the Puerto Rican government build trust among both investors and islanders about the viability of any eventual adjustment program by making creditor debt relief and US Congressional support for the island’s economic program conditional upon the Puerto Rican government delivering on its commitment to budget discipline and to serious structural economic reform. It could do so by mimicking what is routinely done in IMF economic adjustment programs by having externally monitored quarterly performance criteria and structural reform benchmarks that would need to be satisfied before financial support was disbursed.
Paul Ryan, the speaker of the House of Representatives, has correctly noted that economic crises often offer opportunities for serious economic reform and that with the right kind of reforms Puerto Rico could be converted into the Singapore of the Caribbean. One has to hope that the Trump Administration and the Puerto Rican government seize this opportunity and lose no time in coming up with an IMF-style program for the island before it is too late.
Desmond Lachman is a resident fellow at the American Enterprise Institute.