If the Puerto Rican government hoped that releasing big news on a Sunday afternoon would mean it would go largely unnoticed, officials’ dreams were dashed quickly.
After word got out that Governor Alejandro García Padilla had confessed that the island’s debt is significantly higher than originally reported and likely can’t be paid off, his admission was picked up by major media outlets and even became a trending topic on Facebook by Sunday night.
Caught in the spotlight, Governor García announced that he would address the public on Monday afternoon at 5 p.m. Eastern time.
Meanwhile, a report was released that had been drawn up by former World Bank Chief Economist and former Deputy Director of the International Monetary Fund Dr. Anne Krueger, and economists Dr. Ranjit Teja and Dr. Andrew Wolfe. In the report, the authors summarized the island’s fiscal crisis and outlined a set of recommendations that would, if followed, pull Puerto Rico out of debt and set it on the road to financial health by 2020.
In a press release sent to journalists on Monday morning, Governor García wrote, “It is no secret that the Commonwealth has faced fiscal issues over the last decade. However, the report from Dr. Krueger and her team – commissioned at the request of the Commonwealth – for the first time acknowledges the true extent of the problem. We must make difficult decisions to meet the challenges we now know are ahead, and I intend to do everything in my power to lead us through this time.”
Solutions for Puerto Rico?
A close reading of the summary version of the report leads one to wonder, however, whether the economists’ recommendations are at all feasible. While they acknowledge that Puerto Rico’s relationship with the United States saddles it with particular advantages and disadvantages with respect to the fiscal crisis, the experts’ suggestions reflect a near total lack of understanding of Puerto Rico’s particular conditions as they are experienced at individual and societal levels.
Among the recommendations are three measures that seem particularly implausible and, if implemented, potentially more devastating to the economy.
The first is “relaxing” the federal minimum wage — on an island where median household income is just over $19,000, the costs of basic goods are always higher because most are imported and where sales tax just increased to 11.5 percent, higher than that of any state.
A second suggestion is to cut energy costs. While this recommendation makes sense overall, the economists provide no roadmap for realizing the goal, and no ideal is offered as a baseline objective. The island’s energy authority has long been recognized as recalcitrant and is not likely to voluntarily slash costs at the level of the individual consumer.
The third recommendation is also a cost-cutting measure and involves reducing subsidies at public schools, such as the University of Puerto Rico, and, by extension, increasing tuition. However, the authors of the report seem completely unaware of the fact that this measure has been attempted on repeated occasions, and has always been met with vigorous resistance and even university shut-downs, which don’t benefit an already-struggling economy.
The summary version of the report largely glosses over one of the island’s biggest problems — unemployment — and while the economists write that the island has “wonderful potential,” with “enormous” possibilities in the tourism sector, they offer no real suggestions about how to optimize those possibilities, nor do they examine any of the existing obstacles that prevent tourism from becoming a more robust industry.
The authors even admit that their suggestions aren’t really customized for Puerto Rico.
“The recommended changes were identified relying largely on the experience of other countries,” write the economists, and “[t]hey would need to be adjusted to Puerto Rico’s individual situation and to be phased in over time….”
The problem, of course, is that the economists were commissioned to write a report about and for Puerto Rico, which isn’t quite like any other country. Its complicated relationship with the United States colors every aspect of life on the island, with economic policy and financial hardships chief among them.
Taking on a “shared sacrifice”
In his press conference on Monday afternoon, Governor García addressed islanders frankly, saying that while he does not agree with all of the specific recommendations presented to him, he is in general agreement overall.
“The failure [of the suggested strategy] won’t benefit anyone,” he said, adding, “I know it’s not easy, but we have no alternative…. We must assume shared sacrifice.”
While much of his address was motivational in nature, the governor did outline a few of the specific actions he is taking. He called upon the U.S. government to extend Chapter 9 bankruptcy protection to Puerto Rico and said he is considering the privatization of certain services presently provided by the public sector, though he did not specify which services.
In the short term, he has appointed a commission of Puerto Rican leaders to develop a comprehensive strategy, which is due by August 30. He did not specify how debts due in the interim will be handled.
The complete report can be read online.