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Puerto Rico Can Avoid Greek Tragedy with Tough Reforms

By: Nick Zaiac - @NickZaiac - Jul 14, 2015, 12:35 pm
Unlike Greece, there are no plans to bailout Puerto Rico from its debt.
Unlike Greece, there are no plans to bailout Puerto Rico from its debt. (EuGreeka)

EspañolLast Friday, Greece’s legislature passed a raft of reforms to placate European lenders as the country faces a debt crisis with broad international implications. The deal contains many real, painful cuts for Greeks, but certainly ones that are necessary if the country is ever to regain its fiscal footing.

As this unfolds, another fiscal crisis of a small jurisdiction within a currency union also plays out: the pending default of the US territory of Puerto Rico. My last column addressed the federally imposed problems facing the island, but many of the territory’s issues were certainly brought on by poor government choices in the past that have yielded fiscal ruin today.

With such clear parallels between the two jurisdictions, the reforms passed in Greece are a reasonable guide for what could be done to remedy Puerto Rico’s economic woes.

Lenders like the European Central Bank and the International Monetary Fund have regularly included the opening of many professions to competition as an answer to Greece’s economic crisis. Occupational licensing is well understood to be a beneficial reform, yet runs into major political roadblocks.

Tradesmen have many incentives to seek to protect themselves from competition, and reliably oppose any reform that might allow easier entry for newcomers. We see this time and time again in the United States, and Greece is no different. Puerto Rico is similarly overregulated, and could benefit from reduced barriers to entry for people seeking to start businesses.

The deal also notes how challenging it is to start legal businesses. Tax evasion is pervasive in Greece, and a regular target of the nation’s creditors. In Puerto Rico, the territory only collects about 56 percent of sales taxes owed, according to the accounting firm KPMG. When tax compliance is low, it is an indication that running legal businesses is simply too challenging for small entrepreneurs, who resort to the informal economy to make a living instead.

This backs up the data from the World Bank’s Doing Business Index, which not only ranks Puerto Rico well behind the rest of the United States but among some of the world’s most mismanaged countries in areas like registering property, dealing with construction permits, and enforcing contracts. All of these make being a legal entrepreneur in Puerto Rico a serious challenge.

Is it any wonder why entrepreneurial Puerto Ricans regularly flee to the mainland to build their businesses?

Multiple bailout packages for Greece have included requirements to privatize valuable state assets to pay down debts. The nation’s ports and airports have long been key targets for this. Unlike in the United States, most major airports and seaports in Europe are privately owned, or owned in public-private partnership agreements. Puerto Rico’s airports and seaports are ripe for privatization, with proceeds used to pay down the territory’s debt, like in Greece.

The island’s largest airport, Luis Muñoz Marín International, is already held in a public-private partnership agreement. Privatization of infrastructure is not new to Puerto Rico. The Puerto Rico Ports Authority manages a portfolio of nine ports and 10 airports.

Three ports, San Juan, Mayagüez, and the under-construction international megaport at Ponce, handle notable freight traffic, and are particularly valuable to investors. Secondary commercial airports, like those in Ponce and San Juan could also be valuable assets to privatize.

Port of the Americas, near Ponce, is ripe for privatization. Source: Business in Puerto Rico
Port of the Americas, near Ponce, is ripe for privatization. (Business in Puerto Rico)

Similarly, it would not be unreasonable to privatize other state and public-corporation assets. Electricity in Puerto Rico is generated by one such public corporation: the Puerto Rico Electric Power Authority, or PREPA. We know that power on the island is priced higher than its Caribbean neighbors, and mismanagement at PREPA deserves part of the blame.

Power generation for Caribbean nations is a challenge, since the dominant power generation fuel in the region is distillate fuel oil, which is rarely used on the US mainland. Puerto Rico is no different. While its geographic location is certainly an issue, a private power company would likely look for other, less costly alternatives to wide-scale petroleum use in electricity supply, including base-load nuclear and possibly even coal.

When prices are this high compared to neighbors, the problem is not just geography. A privatized PREPA would be one step toward rationalizing the power grid in Puerto Rico.

As with Greece, Puerto Rico faces many challenges in the coming months. The territory’s government must make tough decisions, and benefits to some will need to be cut. Yet parts of the road map laid out for Greece could be easier implemented in Puerto Rico, because the US federal government has the ability to hold local politicians accountable for reforms.

Unlike Greece, there are no plans for a timely bailout of Puerto Rico’s debts. It has taken 5 years for Greece to handle its debt situation, but Puerto Rico does not have that option. The choice is either to reform or face challenges borrowing in the future, or more likely, a combination of the two.

Puerto Rico can no longer put off paying the debt; the time for reform has come. The government of Puerto Rico can learn much from the mismanaged, slow fiscal reform in Greece. The most important lesson of all is to make changes now, not later, because putting it off will only make the pain worse.

Nick Zaiac Nick Zaiac

Nick Zaiac is a public-policy researcher in Washington, DC. He also serves as a policy analyst at the Maryland Public Policy Institute. His column, The DC Leviathan focuses on the often-ignored bureaucratic agencies, from the Department of the Interior to the General Services Administration. He has been published in the Baltimore Sun, City AM, CapX, and other outlets. Follow @NickZaiac.