Expert: Labor reform, expanded tourism would steer P.R. economy forward
Puerto Rico must make tourism attractive for investment.
The Puerto Rican economy would get a full point of economic growth with proper labor market reforms, and would largely benefit from an expanded tourism industry, which currently represents 6 percent of the island’s GNP.
So said Andrew Wolfe, a professor of American University’s School of International Service, and an advisor to the government of Puerto Rico since retiring in June 2014 from the International Monetary Fund after 27 years, where he was a senior manager of the Western Hemisphere Department.
“The biggest issue clearly is labor market reform. The labor participation rate in Puerto Rico is 38 percent, which is abysmally low,” he said. “It’s hard to imagine that they will get a vibrant, growing economy with that kind of number.”
In a podcast conversation with American Bankruptcy Institute Executive Director Sam Gerdano, Wolfe said there is a need for reforms on the labor supply and demand sides, specifically to incentivize people who are part of the island’s informal economy into the ranks of formal employment.
“It’s not that 62 percent of the people are sitting home doing nothing. It’s that there’s an informal sector that pays very little taxes and does not protects workers in any way. The idea of the Fiscal Plan is to get those people and all of that sector into the formal sector so you can actually raise the tax base,” said Wolfe.
“You’ve got to get these people in the formal sector, so you’re looking at incentives to get that moving in that direction, such as tax credits and work requirements on food stamps,” he said. “ That’s all great, but you have to get folks to want to hire them, so there are reforms on demand side. You have to make it worth it to hire people.”
Meanwhile, Wolfe also said “the way to get [economic growth] on a sustainable basis is to actually try to get the investment environment correct on the island,” said Wolfe, who along with Economists Anne O. Krueger and Ranjit Teja, co-authored the 2015 report, “Puerto Rico – A Way Forward,” which contained many suggestions that the Financial Oversight and Management Board for Puerto Rico included in its recent Fiscal Plan.
He said one sector that Puerto Rico must make attractive for investment is tourism. Other islands, like the Dominican Republic and Jamaica, have diversified economies, “and tourism represents between 25 percent and 35 percent of those economies,” Wolfe said.
“On the sovereign level, no country has ever gotten itself out of debt crisis without getting economic growth moving in the right direction. Puerto Rico finds itself right now in that situation,” he said.
As for the inflows of federal money after Hurricanes Irma and Maria, Wolfe said the funds are creating “a false optic” that the island’s economy is improving.
“Structural reforms that are desperately needed have not been implemented, and until they’re implemented, we’re not going to see an upturn in growth on a permanent basis,” he said.
Saying that a government bailout of Puerto Rico’s $72 billion debt load is highly unlikely, Wolfe is also not convinced that resurrecting business-friendly tax cuts would stabilize the Puerto Rican economy.
“I’m very reluctant from the economics of it to say that you should go back to Congress and get some of those tax breaks again because who knows, in 20 years somebody will take those breaks away again,” he said.
Andrew Wolfe’s comments sound great but the documentation regarding the impact of labor reform as moving real GNP growth by 1% is absent. Where are the models? or is it by faith that we in Puerto Rico should drink this Kool-Aid. I think these are serious times in Puerto Rico and we need serious policies based on transparency, statistics, modeling, scenarios, impact analysis. What the Fiscal Board in Puerto Rico submitted to justify some elements of labor reform does not demonstrate a quantified impact on growth. We need to talk about investment and how this economy starts moving in the right direction with key strategic sectors as H. Calero has indicated in the study: How Hurricane Maria Forges Puerto Rico’s Economic Future.