Nobel Prize in Economics Joseph Stiglitz warns that Puerto Rico’s debt “will be unsustainable”

While Puerto Rico is in the final stage of approving a Debt Adjustment Plan (PDA) from central government bonds, Laureate economist Joseph Stiglitz argued that the Promise Act has not provided for a sustainable restructuring that will enable a true economic recovery.

“What worries me in the end is that if the debt restructuring is not done well – and it is certainly on the way to not being done well – it will weaken Puerto Rico’s economy forever.”said Stiglitz, who won the Nobel Prize in economics in 2001.

Stiglitz’s expressions occurred during the Growth Public Policy Summit, from the Center for a New Economy, which was held yesterday at the Sheraton Puerto Rico Hotel, in San Juan, and which had other panels of experts in different disciplines.

As a first criticism, the economist argued that the Fiscal Oversight Board (JSF) did not correctly measure the impact that the reduction in the population of Puerto Rico it will take on the government’s ability to repay its debt.

Stiglitz highlighted that during the 15 years that the economic recession has lasted, the average income and gross domestic product per capita stagnated, while the population in Puerto Rico declined.

In addition, he stated that another error in the restructuring process is not jointly addressing the evaluation of what the debt service to which Puerto Rico can commit itself with the level of economic growth that it wants to seek.

“The problem is that if creditors ask Puerto Rico too much and ask it to pay too much, Puerto Rico will not grow and the debt will be unsustainable. So, the interesting thing about this is that it is really not convenient for creditors to demand too much from Puerto Rico because then Puerto Rico will not grow ”, Stiglitz said.

For Stiglitz, Puerto Rico is not alone in this situation and he mentioned the debt restructuring processes that countries such as Argentina and Greece have undergone. He argued that one of the similarities is that, thanks to pressure from creditors, the start of their respective restructurings was delayed too much, and by the time these jurisdictions began the bankruptcy process it was too late.

This delay in starting the bankruptcy process, coupled with insufficient relief, makes – according to the expert – more prone to Puerto Rico to fall back into a crisis.

Stiglitz also went on to analyze what were the catalysts for Puerto Rico’s economic recession that began in 2006. In addition to the debt, the economist stated that the government administrations did not know how to grow or develop the competitive advantages of Puerto Rico.

He gave as an example the companies that arrived thanks to federal incentives known as Section 936 and indicated that Puerto Rico did not seek to develop other attractions for pharmaceutical companies beyond the tax benefit.

Also referring to 936 companies, the economist argued that although much emphasis was placed on the loss of this incentive as one of the catalysts for the crisis, other economic measures that the United States took in the same way were going to have an impact on Puerto Rich.

He explained that in 1994, two years before the gradual end of Section 936 was approved, the United States, Canada and Mexico entered the Free Trade Agreement (Nafta in English), which made Mexico’s goods more accessible. For Stiglitz, Nafta took away Puerto Rico’s competitiveness.

Repeating the same strategies of the past

A connecting thread between the other presentations at the summit is that in Puerto Rico the same failed strategies have been repeated and that the solutions to direct the economy will not be simple.

The economist and emeritus professor in Economics at the University of Puerto Rico (UPR), Francisco Catalá stated that Puerto Rico’s current inability to articulate a country project or a new economic model is not recent. Catalá indicated that the bet for economic development has been a “tax improvisation” by way of giving tax credits and a dependence on federal funds.

ANDn the case of federal funds, Catalá focused on non-recurring monies that have arrived as part of the recovery response to different crises, such as hurricanes Irma and María in 2017. The economist acknowledged that these funds produce “rebounds” in the economy, but these are not lasting since the money does not stay in Puerto Rico because many of the services and products that are acquired with the recovery funds are imported.

“The effective aid is the one that becomes unnecessary, otherwise it turns into economic weakness,” argued the also professor at the UPR.