“From Bad to Worse for Puerto Rico” is a thought-provoking article by Joseph E. Stiglitz (recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979), professor at Columbia University, and Martin Guzman, a research associate at Columbia University Business School and an associate professor at the University of Buenos Aires. Here are excerpts:
Puerto Rico’s deep and prolonged recession has led to a severe debt crisis. And the combination of economic contraction and massive liabilities is having dire consequences for the island.
Everywhere in the United States commonwealth, private-sector jobs are being lost. Total employment in Puerto Rico has fallen from 1.25 million in the last quarter of the 2007 fiscal year workers to less than a million almost a decade later. Without employment, large numbers of Puerto Ricans (who are US citizens) have emigrated. But, despite this flight, the unemployment rate is now 12.4%. Without job prospects, the labor participation rate has plummeted to 40%, two-thirds of the level on the US mainland. About 60% of Puerto Rico’s children live in poverty.
The commonwealth’s debt position is clearly unsustainable, and its economy will be able to recover only if it gets a fresh start. But, unlike US municipalities, Puerto Rico is not protected by the US bankruptcy code. It is well known that decentralized bargaining processes for debt restructuring often lead to disastrous outcomes, with the relief obtained being insufficient to restore debt sustainability.
Aware of this reality, Puerto Rico enacted its own bankruptcy law, but the US Supreme Court struck it down, because the island is de facto an American colony, and the federal bankruptcy code permits only the US Congress to enact bankruptcy legislation over its territory. Eventually, Congress took action and enacted PROMESA, a law ostensibly designed to facilitate debt restructuring and economic recovery. Reflecting the standard colonialist view that a colony cannot be trusted to make independent decisions, a bipartisan Financial Oversight and Management Board was created to make fiscal decisions for Puerto Rico.
But PROMESA is bringing more problems than solutions. Recently, the Board—seemingly lacking both any understanding of basic economics and democratic accountability to provide checks against its incompetence – published its demands for the next fiscal year. The Board actually predicted that its proposals would turn Puerto Rico’s recession into a depression of a magnitude seldom seen anywhere: a 16.2% decline in GNP in the next fiscal year (and a further decline the year after), which is comparable to the experience of countries undergoing civil wars, or that of crisis-ridden Venezuela.
That is because the Board’s plan gives priority to the island’s creditors. It arbitrarily defines a minimum that must be paid to them in the short run, and forces the government to do whatever it takes to reach that goal, even if it means devastating the local economy. Indeed, the plan all but guarantees a social as well as an economic catastrophe, owing to substantial cuts in pensions, education, and health spending. [. . .]