The
Economist
Stuck with
a real debt crisis in its back yard, America
can learn from Europe ’s Aegean follies
Oct 26th
2013 |From the print edition
IT WILL not
be long till Congress and the White House start squabbling again about the
budget in Washington , DC . But before they create another
artificial debt crisis, Barack Obama and his Republican opponents ought to pay
some attention to a real one 1,500 miles to their south-east.
Like Greece , Puerto Rico
is a chronically uncompetitive place locked in a currency union with a richer,
more productive neighbour. The island’s economy is also dominated by a vast, inefficient
near-Athenian public sector. And, as with Greece ,
there are fears that a chaotic default could precipitate a far bigger crisis by
driving away investors, and pushing up borrowing costs in America ’s
near-$4-trillion market for state and local bonds. Yet the Hellenic comparison
is also helpful: it should show the Americans what not to do.
For decades
Puerto Rico has been sustained by federal
subsidies. Its people, far poorer than the American average, get lots of
transfers, from pensions to food stamps. Until 2006 the economy was buoyed by
tax incentives for American firms that manufactured there. As drug companies
took advantage, the territory became a vast medicinal maquiladora.
This tax
break disappeared in 2006, and Puerto Rico ’s
economy has shrunk virtually every year since. It has been able to keep on
borrowing, thanks to another subsidy: interest on Puerto Rican debt is exempt
from state, local and federal taxes in America , making it artificially
attractive to investors.
Some Puerto
Rican bonds that are just dyin’ to meet you
No growth
and heavy debt are a toxic combination. In 2010 Puerto
Rico ’s previous governor tried—and failed—to boost the economy
with tax cuts. The current one, Alejandro Padilla, has raised taxes sharply,
and hopes for a balanced budget in 2016 (see article). Puerto Rican officials
insist their country is solvent. And with some heroic assumptions about future
growth and rising tax revenue, you can get the numbers to add up.
This is
where Greece ’s
experience warrants study. It suggests that austerity alone is no route to
solvency in a chronically uncompetitive economy. Puerto
Rico ’s priority should be structural reforms to boost growth, from
breaking up monopolies to reducing red tape. The island scores 41st in the
World Bank’s Doing Business index, whereas America is fourth. Labour costs are
too high, not least because the federal minimum wage, which applies in Puerto Rico , is almost as much as the average wage.
Politicians in Washington
must help, not least by getting rid of crazy rules that force all cargo between
the island and American ports to be carried on American ships.
The second
lesson from Greece
is that if debt does need to be restructured, it is best to do it sooner rather
than later. Greece
waited far too long. America ’s
Congress is unlikely to provide official loans to pay off private bondholders,
as the Europeans did for Greece .
But America ’s
policymakers could, and should, ensure that a Puerto Rican debt restructuring
is orderly. The federal government could provide interim finance to assist the
restructuring, much as the IMF does elsewhere. Even the legal details of Greece ’s bond
swap could be a model.
None of
this would be easy even if policymakers in San Juan
and Washington
were bold and far-sighted. But the former are pussyfooting, and the latter are
not even paying attention. Expect Puerto Rico’s debt crisis to get
worse.
From the print edition: Leaders
No comments:
Post a Comment