Puerto Rico’s Troubled Economy And Dissent Over Statehood Options

MS. DIANE REHM

11:06:53
Thanks for joining us. I'm Diane Rehm. Puerto Rico is more than $100 billion in debt. The island's unemployment rate is 15 percent. More than 100,000 Puerto Ricans have left the island for the U.S. President Obama recently convened a taskforce to assist Puerto Rico's leaders with its fiscal problems. Joining me to talk about concerns over Puerto Rico's economy, the debate over statehood and the likelihood of a U.S. bailout: Jose Raul Perales of the Association of American Chambers of Commerce in Latin America; Barbara Kotschwar of the Peterson Institute of International Economics; and Michael Fletcher, The Washington Post.

MS. DIANE REHM

11:07:44
I do hope you'll join us. 800-433-8850. Send us your email to drshow@wamu.org. Follow us on Facebook or send us a tweet. Welcome to all of you.

MR. MICHAEL FLETCHER

11:08:01
Good to be here, Diane.

MS. BARBARA KOTSCHWAR

11:08:02
Thank you. It's a pleasure to be here.

MR. JOSE RAUL PERALES

11:08:04
Thanks, Diane. And good to be here.

REHM

11:08:06
Good to see you all. Michael Fletcher, I know you recently traveled to Puerto Rico. What did you see? What were your impressions of economic conditions there?

FLETCHER

11:08:19
Well, it's interesting. Before going, I had been writing something about Detroit. And the question you'd hear frequently is: Where is the next Detroit? And it turns out many people thought it was in Puerto Rico. Now, let me start by saying there are huge differences. Detroit filed for bankruptcy, as we all know. Puerto Rico can't file for bankruptcy. Puerto Rico's more like a state when it comes to that.

FLETCHER

11:08:41
Puerto Rico has strong debt protections in its constitution, meaning that, by law, you know, by constitution, they will have to pay debtors before even paying salaries of government employees. But, that said, Puerto Rico stood out a place with extreme fiscal distress. Not only do they have this $100, you know, billion dollars in debt you talked about, but their economy has been in a recession for eight years now, more or less. You know, on and off, they've slipped out a little bit. But you had this picture of a place that, at least on paper, was in extreme fiscal distress.

FLETCHER

11:09:16
And going there was interesting, because when you walk around Puerto Rico, walk around on the tourist districts, travel through San Juan, it's not fully obvious. It's a little bit like when I would go on trips to Florida during the height of our recession, when homes were being, you know, taken over by banks and everything. It wasn't always obvious as you drove around. You know, the place seemed to be functioning well. Consumption seems to go on. But, you just stop and talk to people and you get a sense of the kind of distress that people are feeling.

REHM

11:09:46
I gather the crime rate has jumped.

FLETCHER

11:09:50
It's been really high, and it has. And they have other issues going on. It's become a big transshipment point for drugs. And that's part of the problem with their debt. The government cannot marshal the resources to combat problems like crime. The murder rate is something like six times the U.S. average in Puerto Rico right now. And it's always had a fairly high murder rate, but it's been cresting in recent years.

REHM

11:10:13
Michael Fletcher. He's national economics reporter for The Washington Post. Barbara Kotschwar, why is Puerto Rico in such heavy debt?

KOTSCHWAR

11:10:27
Well, there are a couple of reasons. And one is a region-wide phenomenon. Most of the Caribbean is experiencing a debt crisis, largely due to the external global economic crisis. Disposable incomes in the United States and in Europe are down. And these are -- this is the source of tourism. And all of these are economies that are heavily reliant on tourism. Most of these countries also have been high-debt economies for a while. There's structural deficits. Productivity is low. In Puerto Rico, productivity is much lower than it is in the rest of the United States.

KOTSCHWAR

11:11:07
And so that makes growth very difficult. There are also other Puerto Rico-specific issues, but this is a big factor.

REHM

11:11:13
And to whom is all that debt owed?

KOTSCHWAR

11:11:17
Mostly to bondholders. As Michael was mentioning, Puerto Rico has issued large amounts of bonds. It's one of the largest facets of the U.S. municipal bond market. In fact, Morningstar Company has estimated that about 75 percent of municipal bond -- municipal bond funds hold Puerto Rican debt. And so this is a big deal for Puerto Rico, but it's also a big deal for U.S. debt holders.

REHM

11:11:52
Barbara Kotschwar. She's research fellow at the Peterson Institute for International Economics. She's adjunct professor of Latin American studies and economics at Georgetown University. Raul Perales, you were born, raised in Puerto Rico. You even worked, I gather, in government there at one time. What do you see as the causes of the various crises that are hitting Puerto Rico now?

PERALES

11:12:29
Well, Puerto Rico is undergoing a transformation. And it's a transformation that is owed in great part to, as my colleagues were saying, globalization. It has started a tremendous amount of pressure in the island. It's a very open economy. It's one of the most open economies in the world. It relies on international trade and, of course, on foreign investment and manufacturing for sustaining a very well-remunerated workforce, but also to sustain an economic model that is built as an export platform.

PERALES

11:13:03
Puerto Rico was, indeed, the first export platform in the world -- the ways of Singapore and Hong Kong are today. That model relied on a series of key factors, one of which involved fiscal incentives, meaning tax exemptions from both the federal taxes, but also additional tax exemptions that the Puerto Rico government enabled companies to invest in the island. And, in fact, the money that was saved on taxes was encouraged to be reinvested in funds both in Puerto Rico, but also in the region. That was the famous Section 936 of the Internal Revenue Service Code. That exemption ran out. It was modified.

PERALES

11:13:45
It was eliminated, which reduced a tremendous amount of incentive that companies had to become situated in Puerto Rico. When other economies and jurisdictions in the world -- and I'm not talking about countries, bear in mind, I'm talking about jurisdictions because we're living in a globalized world and we have many different entities of differing judicial character competing with each other for a directing investment -- when some of these entities made productivity and competitiveness gains, they were really able to catch up with where Puerto Rico was and compete for some of those investments.

PERALES

11:14:17
What ended up happening is that investments dried out. Not to the -- they didn't grow as fast as Puerto Rico's living standards, population growth demanded. What happened? The government had to step in and create jobs. The government grew in size, as it does in many other parts of the Caribbean, and it created a big fiscal hole.

REHM

11:14:41
So there are so many people out of jobs now. Why is that?

PERALES

11:14:49
That's an interesting question, Diane, because, yes, Puerto Rico has a 15 percent unemployment. That is actually a partial figure, because it doesn't take into account underemployment, which means people that are employed in part time or are not working to their full capacity. Plus, Puerto Rico's informal economy, which as a Latin American country, it is quite large and measurements are difficult. But the interesting thing, here, is that Puerto Rico's unemployment has been stuck at double-digit levels for a very long time. This is not a new phenomenon.

PERALES

11:15:24
Part of the dynamics of the Puerto Rico economic model for decades have been this problem of having to generate enough economic growth to provide employment for this densely populated island.

REHM

11:15:37
But that sounds as though the companies, the government, during the good years, may not have been creating the number of jobs it needed to sustain itself during the down period.

PERALES

11:15:54
You're absolutely right. There is a -- Puerto Rico has, as most Latin American countries, learned the hard way. Puerto Rico has had a short-sightedness problem of thinking, over electoral periods -- the political cycle in Puerto Rico is extremely strong -- and so policies are designed for four-year periods. And, when you have a model of this character -- with these characteristics, one would think that there is enough of a political consensus to carry it forward throughout different administrations, regardless of the party that comes in.

PERALES

11:16:28
While the fundamentals are there and everybody agrees on them, most politicians in Puerto Rico took those for granted and did not work in the longer term of things to think about things like productivity, competitiveness and the kinds of investments that should have made Puerto Rico one of the biggest beneficiaries of globalization.

REHM

11:16:48
So, short-sightedness at work here, Michael Fletcher.

FLETCHER

11:16:52
Well, some of the economists I spoke to in Puerto Rico agree with that. And it's a -- essentially Puerto Rico got hooked on an idea of tax incentives, as kind of their economic engine. And it worked for a long time. I mean, there was actually an economic miracle in a sense in Puerto Rico for decades. It was an agrarian society that became this manufacturing hub and this kind of export platform. But it was kind of a one-trick situation. I mean, they had these tax incentives, and 936 was a big one, but others remain.

FLETCHER

11:17:20
And now there's an argument that says that the governments giving up so much in tax incentives, but not getting the bang in terms of job creation. And that's a problem. And what do you do? You know, we think of the Caribbean, for example, as a tourist hub. Puerto Rico's economy is roughly 6 percent tourism. And that's because they haven't worked to develop that, because they relied on this tax-incentive kind of manufacturing model. And, even putting tax incentives aside, we've seen what's happened with manufacturing globally. It's become more mechanized.

FLETCHER

11:17:49
It doesn't employ the same number of people that it did years ago. We have that problem in the United States, even though manufacturing output remains high. Manufacturing employment has dropped off. And I think Puerto Rico has suffered from that. They've suffered from an overreliance on tax incentives. And they're really in a position now where I think they have to remake their economy. But that's tough when you're staring at that much debt. I mean more and more of their government resources are going to have to go to paying this debt to keep Wall Street happy.

FLETCHER

11:18:18
And, if Wall Street -- you know, and their bonds are just above junk status now -- if they fall to junk status, they're not liquid and the United States might have to step in to do something to help them.

REHM

11:18:26
Michael Fletcher. He's national economics reporter for The Washington Post. We'll take a short break here. When we come back, we'll talk with Congressman Pedro Pierluisi from Puerto Rico and take your calls. Stay with us.

REHM

11:20:00
And welcome back. We're talking about Puerto Rico. Here in the studio Jose Raul Perales. He is executive director of the Association of American Chambers of Commerce in Latin America, former trade policy advisor to the government of Puerto Rico and adjunct professor at George Washington University. Barbara Kotschwar is research fellow at the Peterson Institute for International Economics. She's at Georgetown University. And Michael Fletcher is national economics reporter for the Washington Post.

REHM

11:20:47
Here's an email from Peter in New York. "It is stated that the eight-year recession has caused 100,000 Puerto Ricans to relocate to the U.S. What has been their economic outcome," Raul?

PERALES

11:21:08
Well, it's -- the phenomenon of mass migration in Puerto Rico right now is one of the more troublesome aspects of this current crisis because the people who are migrating are the people that any -- in the normal circumstance, you would rely on these folks to be productive and to propel...

REHM

11:21:28
...in Puerto Rico.

PERALES

11:21:30
...exactly, to propel the economy forward. Well, you're even speaking to one. I left Puerto Rico on Christmas 2006 at the beginning of this process. Now I didn't leave because the economic circumstances were bad, but one could already see that the crisis was starting to set in. Now interestingly enough, in the first stage of Puerto Rico's economic growth in the mid-20th century when the island performed what many called the economic miracle of the western hemisphere, there was mass migration as well. Because the transformation from an agrarian economy to a manufacturing economy wasn't happening quickly enough, so people did leave.

PERALES

11:22:10
And that had a toll on the ability of Puerto Rico to produce long term growth and a productive workforce. And the very same thing may happen just now.

REHM

11:22:25
Barbara, would you agree?

KOTSCHWAR

11:22:27
I think absolutely. I think that, you know, a percentage of Puerto Rico's GDP relies on remittances. And you might see a greater incidence of that, which is what you see in other countries in the Caribbean and in Latin America, which is good for short term revenues and for families being able to support themselves, but isn't really a long term economic plan.

REHM

11:22:49
Michael.

FLETCHER

11:22:50
Yeah, indeed. But I think this problem with migration is peeking now and between, I think, 2010 and 2012 the island lost 1.5 percent of its overall population. And many people are coming to Florida or the Orlando area's a big thing. New York City, which was the real location for the first big migration back in the 1950s, people are still going there. Philadelphia, Chicago, the places where you see the big Puerto Rican populations on the mainland. That's where people are going.

FLETCHER

11:23:16
And often their economic prospects are uncertain in these places. Florida's had its share of economic problems obviously. You know, you heard Bill De Blasio in his campaign for mayor in New York talk about the two New Yorks. So it's not like people are, like even in the 1950s, walking into sort of ready-made jobs in factories. But people are willing to sort of roll the dice because they feel like their prospects in Puerto Rico are very poor. We talk about the 15 percent unemployment rate in Puerto Rico. Add to that a 40 percent roughly labor force participation rate.

FLETCHER

11:23:45
So these people, you know, 60 to 70 percent of the people aren't even counted in that number. So that speaks to the problems.

REHM

11:23:50
All right. And joining us now from his office here in Washington, D.C. is Congressman Pedro Pierluisi. He's Puerto Rico's nonvoting congressional representative. Welcome to "The Diane Rehm Show," Congressman.

CONGRESSMAN PEDRO PIERLUISI

11:24:11
Thank you so much, Diane, for inviting me. And I'll be pleased to talk with you and answer your questions.

REHM

11:24:18
Good. Tell me how concerned you are about the economic situation in Puerto Rico.

PIERLUISI

11:24:25
I am very concerned as everybody else is in Puerto Rico. This has been a longstanding recession we've been going through. The government also is facing serious fiscal issues. And there are some measures that we have to take on an immediate basis -- short term basis. And there's an underlying structural problem that we also need to deal with. Because when you see what's happening with Puerto Rico, the first thing you realize is that for about 40 years Puerto Rico has been underperforming when you compare it with the states.

PIERLUISI

11:25:10
And lately, for more than ten years, we're losing population on an incredible basis. Puerto Ricans, American citizens by birth, are migrating to the states, 50,000 a year or so. And that's probably the worst problem we're facing at the present time apart from the economical situation.

REHM

11:25:28
Can you talk about when the $100 billion debt began building?

PIERLUISI

11:25:41
It's about $70 million debt, meaning that from the central government and the government-owned corporations, when you talk about 100 billion, it means you're probably including pension system debt. It's been piling up for a long time. I would say that most of it has been a-- have piled up in the last 10, 12 years or so. And the question is, what's the main reason for this? And the first thing you realize when you deal with a territory like Puerto Rico is that Puerto Rico does not participate in a wide range of federal programs. Yet we're American citizens and we're in American territory.

PIERLUISI

11:26:32
So the local government has been compensating for the lack of federal funding in areas like health and the wellbeing of our people. And two, as a result of this, it has been indebting itself evermore so. There is an issue of mismanagement. We have to improve the way we manage our government, make sure that we have a balanced budget on a yearly basis as our own constitution requires as opposed to simply financing the deficits, which is what has been done in Puerto Rico since year 2000. We have to do that.

PIERLUISI

11:27:11
But again, the root cause is this territorial status we have which makes no sense. We are American citizens, yet we cannot have the same rights, responsibilities, privileges as our fellow citizens in the states. And you're not talking about a small territory with 100,000 people. You're talking about an island in the Caribbean with 3.6 million American citizens.

REHM

11:27:38
All right. And I think Raul would like to make a point here.

PERALES

11:27:45
Well, the congressman is right in the sense that status politics do play a key role in all of this. One of the things that people have pointed out precisely of the uniqueness of Puerto Rico's predicament is that it is not a U.S. City, so it cannot go bankrupt. It is not an independent country, so it cannot go to the IMF or to any other multilateral organization to seek a bailout. The federal government cannot take it over like it did Washington, D.C. when it had its own financial problems.

PERALES

11:28:18
And so its situation resembles a lot the situation of Greece, which is a place that is tied in a monetary union and an economic union with an economy that is a lot more competitive, advanced. And it doesn't have its own exchange rate to compete like to the value and make itself competitive through that avenue. But -- you know, but however, I would not read so much into the status politics of this.

PERALES

11:28:48
Because, as I said earlier, one of the circumstances of Puerto Rico in a globalized economy is that you have jurisdictions that are not independent. Consider the case of Hong Kong for example, or other places that are tied to more competitive places like Ireland, for example, which also is in a situation like Greece, that have been able to invest in competitiveness and productivity over a long term. These are also places that you have seen migration back and forth. I mean, Ireland even had a scarcity of labor and it had to attract them. So it is part of the cause, but I would not ascribe it exclusively to the status situation.

REHM

11:29:25
And Michael, what would you say?

FLETCHER

11:29:28
No, I would agree with much of that, but also when we talk about the status, we also -- there are some benefits that do flow to Puerto Rico. You know, food stamp benefits of course, Social Security disability payments. They have one of the highest percentages of their working age population receiving those benefits. So there is kind of this mixed -- again, this kind of mixed situation where they do benefit from some federal programs.

REHM

11:29:50
But for the most part do you think that Americans here on the mainland would say Puerto Rico has to take care of that itself?

FLETCHER

11:30:03
I think if you asked American, yes. But if you ask policymakers in the know, they would say no, we can't allow Puerto Rico to fail certainly. You know, I was talking to some people on the White House taskforce and I was sort of proposing the scenario saying, well what happens if Puerto Rico defaults? And they're saying, you know, congress would have to step in. Someone's going to have to step in. But politically it feels like a nonstarter right now. I think if there's a bailout, it'll be a bailout by another name. It will be maybe the Treasury stepping up to say, you know, we'll buy bonds, you know, floated by the government to create a market for them. But it wouldn't be a bailout with a B, you know, in the title.

REHM

11:30:40
Congressman, what do you -- sure, what do you think of the...

PIERLUISI

11:30:44
Let me add my five cents on the dollar. And I was the one who started linking these problems to the status issues. So let me expand. The first thing that you -- everybody should realize is that anybody investing in Puerto Rico is facing a huge discount in investing in Puerto Rico just because Puerto Rico's a territory and doesn't have a permanent status. You need only talk to private equity funds or entities doing business in Puerto Rico.

PIERLUISI

11:31:19
And that -- again, we need in Puerto Rico a game changer. There are two paths in Puerto Rico's future. Either Puerto Rico joins the union -- and that's not going to happen overnight -- but just putting Puerto Rico on a path to statehood, it is a game changer in and of itself. There would be -- Puerto Rico would be viewed differently. Instead of being an underperforming territory with a deteriorating quality of life, it would be a territory that is destined to join the union on an equal basis. And everything would be worth more...

REHM

11:31:59
All right. Let me ask you...

PIERLUISI

11:32:00
...in Alaska and so on. But let me just finish the though. The other path would be to become a sovereign nation, which could be in association with the U.S. But the truth is that the current status is not working as a platform. Just getting incentives -- taxing incentives for companies to do business in Puerto Rico, which we have been doing for decades now, it's not working anymore. And everybody should realize that.

REHM

11:32:26
All right. And you are listening to "The Diane Rehm Show." Congressman, on that statehood question, there was a referendum in November, 2012 on the issue. What did that indicate on the part of those people who voted? What did they say they wanted?

PIERLUISI

11:32:51
The people of Puerto Rico spoke loud and clear like never before. Fifty-four percent of the population of the electorate and about 80 percent of the voters went to the polls, rejected the current status. That's a message that sends -- that changes the dynamics of the status issue in Puerto Rico. I even went to the United Nations, the (unintelligible) committee to advise the United Nations that that happened. We live in the most democratic nation in the world so we cannot simply ignore that request for change on the part of the American citizens of Puerto Rico.

REHM

11:33:31
At the...

PIERLUISI

11:33:31
The second question that the voters answered was that they were given the choice among statehood free association and independent, the only three options we have other than the current status. And the vast majority, 61 percent of the ones answering the question, chose statehood. More people -- for the first time in our history, more people voted for statehood than all the other -- than any of the other options including the current status. That's important to know.

REHM

11:33:59
At the same time, Congressman, despite those results I gather the people of Puerto Rico elected a pro-commonwealth governor, Garcia Padia.

PIERLUISI

11:34:14
That's right (unintelligible) ...

REHM

11:34:15
So how do you jive those two selections, if you will?

PIERLUISI

11:34:21
Yes, because when you run for governor you're not only running on your views on status, but you're also running on your views on government itself, you're philosophy of government and so on. So the same voters who chose Garcia Padia as governor were the ones who rejected this status that he favors. And he must -- if we respect the fact that we -- the people elected him, that we also have to respect the fact that the people no longer want current status and want a different option and chose statehood as one of the best -- the favored statehood in terms of our options.

REHM

11:35:00
Michael Fletcher.

FLETCHER

11:35:02
I think, Diane, you hit upon the great fault line of Puerto Rican politics here. If the governor wanted to show he would make a strong argument in favor of commonwealth status. And obviously Mr. Pierluisi is pro-statehood so, yeah, I think those are the two sort of strongest political prongs in Puerto Rico right now.

REHM

11:35:19
But is that affecting the economy? Is that affecting the economic outlook that you have (unintelligible)...

FLETCHER

11:35:29
You know, I'm an economics writer, not much of a policymaker but my observation is that it affects it but doesn't determine it. It feels like there're things that can be done, there're things that the government now is beginning to do to diversify the economy, to expand beyond this sort of total reliance on tax incentives to create kind of an economic momentum and an economic purpose that will help lift Puerto Rico out of recession.

REHM

11:35:55
Barbara Kotschwar.

KOTSCHWAR

11:35:56
I think that's a very good point. And going back to Raul's comparison of Puerto Rico with countries like Ireland, Hong Kong and maybe Singapore, if you look at Puerto Rico in international perspective, the costs of doing business there are low compared to developing countries but relatively high compared to this group of countries. And so in the World Bank's doing business, ranking Puerto Rico as I think number 41 whereas the United States is number 4, Puerto Rico's cost of electricity is three times that of the mainland.

KOTSCHWAR

11:36:31
The public sector comprises about 20 percent of employment. There are a lot of distortions in the market that could be eliminated, regardless of the political status of the island.

REHM

11:36:41
And who has the incentive or the wherewithal to make those necessary changes?

KOTSCHWAR

11:36:50
Well, Puerto Rico. If Puerto Rico wants long term growth than that and investing in education and human capital training programs and the like, that really is a domestic decision.

REHM

11:37:02
Barbara Kotschwar of the Peterson Institute for International Economics. Congressman, thank you so much for joining us. Congressman Pedro Pierluisi. He is resident commissioner of Puerto Rico and a nonvoting member of congress who caucuses with the Democrats. Short break here. When we come back, your calls, your comments. Stay with us.

REHM

11:39:58
And welcome back. As we talk about Puerto Rico, its debt, its status, its unemployment, obviously it's got lots of problems. Here's an email from Greta, who says, "You say the U.S. will have to step in to do something. I say no. No more bailouts. How weary we all are of government buying votes with taxpayer funded salaries and programs and bad financial management." Any possibility of a U.S. bailout there, Michael?

FLETCHER

11:40:44
I believe yes, eventually. I don't think in the very short term, but if Puerto Rico hits a place where they can't sell their bonds I think the federal government would find a way to step in to create a market for Puerto Rican bonds and to keep that country liquid, essentially. And that has impacts here in the United States. We've talked the migration problem. You know, Barbara mentioned that the number of bond mutual funds that hold Puerto Rican debt. I mean this has real consequences for American pension funds, for American investors of all stripes, people in their 401 (k).

FLETCHER

11:41:19
And it wouldn't be like a systematic failure of the mutual bond system if Puerto Rico defaulted, but it would be a hit. And I don’t think the federal government wants to see that happen. So there is a chance.

REHM

11:41:28
Well, then go back to your lack of comparison with Detroit.

FLETCHER

11:41:35
Well, Detroit has the bankruptcy option. Right. And that gives them the way to restructure their debt in a way that doesn't involve the United…

REHM

11:41:45
Puerto Rico does not.

FLETCHER

11:41:47
And Puerto Rico doesn't have that option.

REHM

11:41:49
Raul?

PERALES

11:41:50
Well, it's interesting, this question, because in fact the federal government hasn't really bailed out Puerto Rico ever. And what we're talking about is perhaps calling it enlightened self-interest. We're talking about the possibility of the U.S. municipal bond market collapsing or having a serious hit. And at a time when the U.S. recovery itself is frail. So federal government addressing this issue isn't, I mean, as much as we would like to think that it is to help Puerto Rico, it is also to help itself.

PERALES

11:42:22
One additional comment that I would say, however, and which we haven't talked about here, is that in Puerto Rico, like in many parts of Latin America, the government plays a tremendous role in the economy. And that is something fundamentally different than in parts of the United States. Even today, if you add not just the size of the government and the economy by amount of employees, but by the amount of business that the government generates, whether it is because of contracting, because of investing, call it Keynesian economics or whatever you want to call it, the role of the government in the economy is a huge factor in Puerto Rico. Which explains also when the government cuts back spending it has a ripple effect much larger than any jurisdiction of the United States.

REHM

11:43:05
All right. To Chris, in Fairfax, Va. You're on the air.

CHRIS

11:43:10
Hi. Good morning, everyone.

REHM

11:43:11
Hi.

CHRIS

11:43:13
I lived in Puerto Rico for several years. I did business there. It was back during the time of the Caribbean Basin Initiative and it was in the hospitality industry. And we were trying, we desperately were trying to get reinvestment of the 936 funds, not just matching funds in the Caribbean Islands, but also just to reinvest, to diversify inputs into the tourism sector in Puerto Rico. And there was a huge resistance from it. And one of the things that it took me awhile to understand after living there is that there's always been a traditional resistance to outside investment and economic diversification.

CHRIS

11:43:55
It's this dependency that Puerto Rico has on the U.S. government. I guess my question is, if there were a bailout or if there was a write-down on the bonds and there was a solution to this problem, how would things change? I mean these problems that you're describing aren't new. They're generations old. They were there when I was there. And I don't see the government depoliticizing its involvement in the economy. The elites really caring about the common jibaro or Juan Bobo that lives there that, you know, your average Puerto Rican that lives outside of San Juan, that lives in Yauco or lives in (unintelligible).

REHM

11:44:39
All right. Michael Fletcher.

FLETCHER

11:44:41
When you talk to Wall Street types, analysts at the various mutual fund companies and places like Morningstar, these research organizations, they're actually pretty impressed by what Gov. Garcia Padilla has done in terms of some of the austerity measures he has taken. He's imposed some new taxes. He's cut pensions for a good share of the government workforce. So there is some feeling that -- and also there's real work going on try to diversify their economy, the kind of work that hasn't probably been done before. Not to say that this is going to totally transform the picture, but one gets the sense that Puerto Rico's kind of gotten the message.

FLETCHER

11:45:19
There's been kind of a wake-up call and there is at least some beginnings, some stirrings of trying to move off the old economic model.

REHM

11:45:26
All right. To Ezekiel, in Casselberry, Fla. Hi there.

EZEKIEL

11:45:32
Hi. Thank you for taking my call, but the caller right behind me actually hit the nail on the head, but I'm assuming the question will be having to see defect or the problem in Puerto Rico with the dependency and having to flow so much money from the United States to Puerto Rico on a yearly basis, I don’t see the government -- even though the gentleman just mentioned that he has cut pensions and stuff like that. What is the near future for Puerto Ricans to actually be on their own ground and start cutting these benefits they are actually playing the system? That's basically the question.

REHM

11:46:12
Playing the system, Raul?

PERALES

11:46:14
Well, this is part of the problem that I was mentioning earlier, that Puerto Rico has a chronic unemployment and underemployment problem. There is something that Puerto Ricans have been, you know, Puerto Ricans have been surviving for decades. And they have been making ends meet through an informal economy for a very long time. One thing that one can think about, and it's, again, something that I would encourage thinkers, not just in Puerto Rico, but in other parts of the world, certainly people with experience, who have seen, for instance, what happened in Latin America in the 1980s and '90s when the countries were going through a debt crisis and they had to do brutal fiscal adjustment -- the same way Puerto Rico has -- to think about what would a growth shock for Puerto Rico look like?

PERALES

11:46:58
And, again, this happened previous times in our history, in the 1940s and '50s there was a concerted effort to think broadly and big about what could a growth shock look like for Puerto Rico. That happened in Latin America in the 1980s for instance and some bold decisions were made. And I would say that that's missing right now for Puerto Rico.

REHM

11:47:16
Barb?

KOTSCHWAR

11:47:16
Yeah, and I think that's an important point and policy makers should be thinking about that in Puerto Rico. Raul's point that Puerto Ricans have managed to survive and they've gone through hard times and they continue, as with Michael's point that when he was there it didn't look like this was a nation in crisis. One worrying fact that underscore that sense of lack of crisis, is the increasing level of household debt. So a lot of that lack of crisis, the standard of living is being maintained by credit card purchases. And that's somewhat concerning.

REHM

11:47:50
And that's certainly what happened in this country for quite a while.

KOTSCHWAR

11:47:55
Right. And so we've seen some adjustments in this country. And when we look at countries in Latin America that have gone through shocks to their economy, you've seen a real need to cut fiscal spending, a real need for individuals to change their spending patterns. And that's, in many cases, has led to a more diversified, more resilient economy, but it needs a lot of government planning.

REHM

11:48:20
All right. To Justin, in Raleigh, N.C. You're on the air.

JUSTIN

11:48:27
Hi. Thanks for taking my call.

REHM

11:48:28
Surely.

JUSTIN

11:48:30
So I work in the biotech industry. And I have additionally a lot of family ties to Puerto Rico. And I've noticed over the last, roughly, decade that there's been a consistent trend towards divestment in Puerto Rico. And there's a lot of speculation within the industry and also within my family in Puerto Rico, that this has been intentional by elected officials to sort of drive this decision to a head, so that the people of Puerto Rico are sort of forced to make this decision one way or the other by intentionally tanking the economy, by losing these high-paying jobs. And I'm just curious if any of your guests have any thoughts on that.

REHM

11:49:10
Raul?

PERALES

11:49:11
Well, one of the points that was made earlier about Puerto Rico losing the tax exemptions from the section 936 code, the IRS was actually politically premeditated in a certain way because a group of politicians wanted to wean Puerto Rico off this "model" and propel something forward. The problem is that there was nothing else put in place to propel this forward. Now, having said that, the recent divestment from the biotech industry (unintelligible) to a variety of factors.

PERALES

11:49:47
In some cases, it is because the biotech industry is very cyclical, which means that when some pharmaceutical products reach a certain period, in which the patent for the drug matures and the data becomes open so that generic drugs can be manufactured, that is a moment of retrenchment for the companies. And then you see that drop in investment. The problem with Puerto Rico having such a tremendous over reliance on biotech industries, for instance, that makes it very vulnerable to Michael's point about diversification of the economy. Makes it very vulnerable to the cycles.

REHM

11:50:24
Here's an email from Shelly. She says, "I'm a Puerto Rican American who's lived on the U.S. mainland most of my life. My only living grandmother continues to live in Puerto Rico. I'm increasingly concerned about her well being there. Do I need to be even more worried about my grandmother's state and how her finances are cared for? What would your panel advise for Puerto Rican citizens to do with their personal finances?"

PERALES

11:51:08
Well, you know, it's an interesting question because today Moody's came out with the rankings of four Puerto Rico banks. And Puerto Rico went through a very -- part of this crisis involved a major bursting of a bubble, like in the United States, a housing bubble that many banks had underperforming loans and several of them closed actually. But Moody's maintained their stable rating for these four banks. Worried about the long-term situation, but saying that the fundamentals are okay. They want to see how the banks perform over a long term. So in terms of savings, that should not be so much of a problem. House property values have stabilized in the island, so whoever owns property is not making money out of it.

REHM

11:51:56
Do the banks in Puerto Rico operate under the same insurance program for savings?

FLETCHER

11:52:03
Yes, they do. Exactly. FDIC is there and that's actually one of the big economic benefits of doing business in Puerto Rico. You have all of the U.S. legal protections and the banks have all of the protections that the banks on the mainland have. So I wouldn't worry so much about someone's individual money being in a Puerto Rican bank. I'd be more concerned to say is the neighborhood becoming more crime ridden? The kind of things you worry about here in Washington or anywhere else.

KOTSCHWAR

11:52:28
Now, on the other hand, if the grandmother is relying on the pension we should take into account that Puerto Rico's pension fund is only about 10 percent funded. So, you know, whatever happens in the next couple of years will certainly be of interest to the lady's grandmother.

REHM

11:52:42
Indeed. I should say. Let's go to Rockville, Md. Arnoldo, you're on the air.

ARNOLDO

11:52:50
Good morning. And I want to say thank you for having me on the show and also the panelists, very (unintelligible). I'm from Puerto Rico originally. And I've been here for 30 years and I'm a consultant and I work in maritime, which actually was a type of business created by United Kingdom. And there is a subject that hasn't been actually mentioned. We saw the links to your previous program, when it comes to world trade. And it's a fact that most of the trading in the world -- 80 percent is done by ships obviously, maritime industry.

ARNOLDO

11:53:26
Puerto Rico is one of the main ports, not only in Latin America, in the world. And there is one single problem that we have for many years. It is the so-called cabotage law. And I know every panelist can agree with me, that one of the major hindrances in Puerto Rico's economy for many years, before all this started, has been the cabotage law.

REHM

11:53:51
All right. I'm going to get them to describe that law and its implications, after I remind you you're listening to "The Diane Rehm Show." Barbara, do you want to?

KOTSCHWAR

11:54:06
Sure. This is part of the Jones Act that says that only U.S. carriers can do business between the United States and Puerto Rico. So U.S. goods can only be shipped by U.S. carriers. I don’t know if you want to elaborate it on that.

PERALES

11:54:18
Well, it is. It is a law that applies also to Hawaii, Alaska. It basically means that even if you have a foreign ship coming to a U.S. port, that ship may not pick up merchandise to carry between ports in the United -- within U.S. customs' jurisdiction. Puerto Rico being in Latin America, near the Caribbean, is surrounded by other countries that do business globally. People feel that it's a -- Puerto Rico could exploit its potential as a trans-shipment port, if these laws would not apply, so that merchant marines from different parts of the world can serve as trade between Puerto Rico and the mainland.

PERALES

11:54:53
It is a catchy question though because the biggest product that Puerto Rico -- pertaining precisely to our previous caller -- the biggest export product for Puerto Rico is in the biotech field, which means that Puerto Rico imports a tremendous amount of industrial goods which occupy a large amount of bulk on ships, but those ships leave Puerto Rico relatively empty because it's basically drugs and pharmaceutical products that come out. Which means that in reality the cost of using the U.S. merchant marine, per se, is not as straight forward as a cause of the problems of Puerto Rico in terms of importing and exporting goods and the maritime industry, as it is a structural nature of Puerto Rico's economy.

PERALES

11:55:38
Now, having said that, there are initiatives the some people are contemplating or have been propose to flexibilize the laws because there is room for growth. For example, Puerto Rico -- to Michael's point earlier about Puerto Rico's energy costs. Puerto Rico is diversifying itself into natural gas as a source of energy production. Puerto Rico can import liquefied natural gas, but also can become a distribution hub in the region. The United States has only two ships that can ship liquefied natural gas for such distribution purposes. And those ships are old and not very viable for making Puerto Rico into this kind of platform. So in exception to the law, to the Jones Act, for the purposes of energy distribution in the region, might actually be good.

REHM

11:56:26
What will the task force appointed by President Obama have as its goal?

FLETCHER

11:56:34
They say they want to maximize U.S. various federal programs, make sure Puerto Rico is tapping into there most efficiently, making sure that Puerto Rico authorities are running their programs efficiently. They're going to almost be in kind of an oversight role. And there's no deadline as to when they'll leave.

REHM

11:56:56
I see. And that's key, it would seem to me, a deadline, so that some report will be made public. Michael Fletcher of the Washington Post, Barbara Kotschwar of the Peterson Institute, Jose Raul Perales of the American Chambers of Commerce in Latin America, thank you all so much.

PERALES

11:57:24
Thank you, Diane.

KOTSCHWAR

11:57:25
Thank you, Diane.

FLETCHER

11:57:25
Thank you, Diane.

REHM

11:57:26
And thanks for listening all. I'm Diane Rehm.
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