Restoring Growth in Puerto Rico

Restoring Growth in Puerto Rico: Overview and Policy Options

Copyright Date: 2006
Pages: 136
  • Cite this Item
  • Book Info
    Restoring Growth in Puerto Rico
    Book Description:

    As a territory of the United States, Puerto Rico enjoys the benefits of key U.S. legal, monetary, security, and tariff systems, and its residents are U.S. citizens. In the decades following World War II, Puerto Rico emerged as one of the world's fastest-growing economies. From 1950 to 1970 per capita income nearly doubled as a percentage of the U.S. average, making the island the richest economy in Latin America. Since the mid-1970s, however, labor force attachment has declined, economic growth has slowed, and the island's living standards have fallen further behind those on the mainland. Today more than half of all Puerto Rican children live below the U.S. poverty level. Why did Puerto Rico's economic progress stall? And more important, what can be done to restore growth? A number of overlapping concerns& #151;labor supply and demand, entrepreneurship, the fiscal situation, financial markets, and trade& #151; -are at the heart of its economic difficulties. This is a companion volume toRestoring Growth: The Economy of Puerto Rico(Brookings, 2006), in which economists from Puerto Rico and the United States examine the island's economy and propose strategies for sustainable growth. This monograph summarizes the analyses published in that volume and presents a set of policy recommendations to increase employment, improve education, upgrade infrastructure, and fix government finances. Contributors include James Alm (Georgia State University), Barry P. Bosworth and Gary Burtless (Brookings Institution), Susan M. Collins (Brookings Institution and Georgetown University), Steven J. Davis (University of Chicago), María E. Enchautegui, Juan Lara, Luis A. Rivera- Batiz, and Orlando Sotomayor (University of Puerto Rico), Richard B. Freeman and Robert Z. Lawrence (Harvard University), Helen F. Ladd (Duke University), Rita Maldonado-Bear and Ingo Walter (New York University), Francisco L. Rivera-Batiz (Columbia University), and Miguel A. Soto-Class (Center for the New Economy).

    eISBN: 978-0-8157-1559-7
    Subjects: Political Science, Sociology

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Foreword
    (pp. vii-viii)
    Strobe Talbott and Miguel A. Soto-Class

    This book is the culmination of a collaborative effort between the Brookings Institution and the Center for the New Economy (CNE). Building on CNE’s initial vision to develop a growth strategy for Puerto Rico, the two institutions undertook a research project pairing researchers from the island and the mainland. The resulting papers incorporate empirical analyses and distill policy implications of particular relevance to Puerto Rico at the outset of the twenty-first century.

    The Brookings Institution first became involved in the analysis of the Puerto Rican economy in 1930 with the publication ofPorto Rico and Its Problems. That publication was...

  4. Preface
    (pp. ix-xii)
    Deepak Lamba Nieves, Sergio M. Marxuach Colón and Miguel A. Soto Class
  5. Acknowledgments
    (pp. xiii-xiv)
  6. 1 Introduction
    (pp. 1-4)

    At the close of the millennium, Puerto Rico was a tale of two economies. On the one hand, it had achieved some impressive economic milestones. Per capita income was substantially higher than in the rest of Latin America. On quality-of-life measures such as literacy rates, years of schooling, and life expectancy it ranked close to the most highly developed countries. But in other key dimensions, Puerto Rico appeared stuck under an economic glass ceiling. Although they have been American citizens since 1917, nearly half of Puerto Rico’s residents still lived below the U.S. poverty line, and the income gap relative...

  7. 2 Economic Growth
    (pp. 5-18)

    In their chapter, Barry Bosworth and Susan Collins conduct an extensive analysis of Puerto Rico’s growth performance and its determinants. The island enjoyed very rapid economic growth in the decades immediately after World War II, comparable to that achieved by the so-called Asian Tigers.¹ Over the past twenty-five years (since the early 1980s), however, growth in income per capita slowed substantially, and progress in narrowing the income gap with the mainland has stalled.

    Figure 2-1 highlights two critical aspects of Puerto Rico’s growth performance. The top line shows output per worker in Puerto Rico, as a proportion of the corresponding...

  8. 3 Labor Supply and Public Transfers
    (pp. 19-30)

    Puerto Rico’s per capita income is less than one-third that of residents on the U.S. mainland. A large part of this gap can be traced to differences between the two economies in the proportion of the population that is employed.¹ And, as shown in figure 3-1, the differences have increased substantially over time. In the immediate postwar period the commonwealth’s employment-to-population ratio was 85 to 90 percent of the comparable rate on the mainland. By the early twenty-first century the ratio had fallen to 65 percent.

    Burtless and Sotomayor identify four distinct phases in the trend toward lower employment rates...

  9. 4 Why Don’t More Puerto Rican Men Work? The Rich Uncle (Sam) Hypothesis
    (pp. 31-42)

    María Enchautegui and Richard Freeman also focus their chapter on Puerto Rico’s strikingly low employment rate. In 2000, only 31 percent of the population was employed, giving the island the lowest employment-to-population ratio in the Americas and Caribbean, if not in the world. The low employment rate compromises the island’s development by diverting resources from possible investment to public assistance and services to the large nonworking population. Their analysis focuses on men because they find that it is the low employment rate for men that is “off the map” in comparison with that in other countries.

    The discussion is organized...

  10. 5 Education and Economic Development
    (pp. 43-54)

    In this chapter, Ladd and Rivera-Batiz review Puerto Rico’s remarkable record of educational development over the past forty years—one that is surpassed by few countries in the world. Moreover, this educational expansion has contributed significantly to the economic development of the island. Despite its accomplishments, they argue that the Puerto Rican education system currently faces serious challenges. Significant increases in the quality of schooling are necessary for the island to continue to use education as an engine of economic development. The problem of large educational inequities among different social groups also deserves close attention.

    Starting in the mid-1940s, the...

  11. 6 The Climate for Business Development and Employment Growth
    (pp. 55-64)

    Puerto Rico has struggled with an employment shortfall of stunning dimensions. The employment rate among working-age persons stood at nearly 50 percent in the early 1950s, then declined over the rest of the decade and again after 1971 to reach levels below 35 percent in the early 1980s. In the past thirty years, Puerto Rican employment rates range from 55 to 65 percent of U.S. rates. This huge employment shortfall holds for men and women, cuts across all education groups, and is deeper for persons without a college degree—about four-fifths of Puerto Rico’s working-age population. The shortfall is concentrated...

  12. 7 Assessing Puerto Rico’s Fiscal Policies
    (pp. 65-78)

    Puerto Rico’s fiscal system has undergone major changes in recent years. While these changes have been beneficial in various dimensions, the system remains plagued by problems. Alm provides a critical assessment, addressing the role of fiscal deficits and some features of public expenditure. He focuses on the tax side, emphasizing extensive tax evasion with a shrinking tax base, weak tax administration, an unnecessarily complex tax system, and overuse of tax incentives. These features interact to undermine government effectiveness in promoting development and economic growth.

    Beyond the limitations of the tax system, there are other persistent and growing fiscal problems. Table...

  13. 8 Financing Economic Development
    (pp. 79-90)

    The financial architecture of national economies plays a critical role in economic development because it stands at the center of the capital allocation process. In this chapter, Maldonado-Bear and Walter posit a set of benchmarks for the appropriate financial architecture in the context of economic development and relate this architecture and its benchmarks to the unique context of Puerto Rico. They also develop an extensive data appendix, including balance sheet information for each segment of the financial system (see Maldonado-Bear and Walter, 2006).

    The financial sector, in Puerto Rico as elsewhere, is the equivalent of a major industry in terms...

  14. 9 Trade Performance and Industrial Policy
    (pp. 91-102)

    Puerto Rico has a small but extremely open economy. Thus its trade—both with the mainland and with the rest of the world—is a central determinant of its economic performance. In this chapter, Robert Lawrence and Juan Lara consider some of the issues related to Puerto Rican trade performance, focusing on implications for external adjustment and domestic employment and growth. In addition, they analyze the strengths and weaknesses of Puerto Rican industrial policy and present policy recommendations to improve Puerto Rico’s trade performance.

    Trade performance is of interest for at least two distinct reasons. The first relates to the...

  15. 10 Restoring Growth: The Policy Options
    (pp. 103-124)

    In the middle of the twentieth century, Puerto Rico emerged as one of the world’s fastest-growing economies, drawing comparisons with the rapidly industrializing countries of East Asia. Over the past several decades, however, while the economy has continued to grow, it has done so at a greatly reduced rate. Since 1980, there has been no further convergence of living standards with those of the U.S. mainland. Income per capita is currently only 30 percent of the U.S. average, and 58 percent of all children live below the U.S. poverty level.

    Identifying the causes of Puerto Rico’s deteriorating economic performance has...

  16. References
    (pp. 125-128)
  17. Contributors
    (pp. 129-130)
  18. Index
    (pp. 131-136)
  19. Back Matter
    (pp. 137-137)