Newsletter: Puerto Rico Economic Pulse©

Fiscal 2009 marked a milestone with the harshest worldwide economic crisis since the Great Depression. The crumble of several financial giants at the end of 2008 sparked a crisis that ripped through the entire world with unknown strength.  Recovery has already started in the US mainland, but jitter and fear have not disappeared. Puerto Rico has also felt the heat and is immersed in a protracted slump that threatens to extend to five consecutive years.  The truth is that the PR economy remains off the path of sustainable growth and desperately needs to restore growth.  Some meager gains, mostly as a result of temporary inflows from the mainland, could mislead the public regarding the dismal situation of our economy. This issue of Pulse analyzes what really lies beneath the recent glimmer of hopes. It evaluates economic events in fiscal 2009 and presents our forecasts thru fiscal 2012.

In the decades following World War II, Puerto Rico was hailed as a success story in Latin America (LA). The island sustained impressive rates of real economic growth and raised its domestic living standards. The transformation and modernization of this economy thru manufacturing, attracted the attention of its Southern neighbors. PR played a role model. Nowadays, it is different. PR is immersed in a deep recession with no apparent immediate light at the end of the tunnel. Two thousand miles South, Peru’s economy shines because of its strong macroeconomic performance, low inflation, and fiscal surpluses (7.3% real growth, 3.1% inflation, and $1.4b fiscal surplus). This was not always the case. Twenty years ago, Peru faced -13% growth, 7,482% hyperinflation, and huge fiscal deficits approaching 10% of GDP. Find out if Puerto Rico can learn some valuable lessons from Peru’s economic policies.

As we start the New Year, it is wise to review the economic events of the past year. In 2009, the PR economy continued into its 3-year old recession and survival seems to be the name of the game. The labor market lost 40,000 jobs in different sectors and unemployment increased. The government adopted painful policies, which included the announced reduction of almost 15,000 public jobs by January 2010 and imposed new taxes during 2009. With less income and jobs, consumers made fewer purchases, including cars, compared with 2008. The financial system posted record loan losses and felt the wave of the global financial crisis. A new President in the US addressed one of the largest fiscal rescues in US history. A new Governor in PR took office with the promise of change. The island expects to benefit from the American Recovery and Reinvestment Act (ARRA) and the local or “Criollo” Plan (PEC). Despite poor results in 2009, there is the hope of a new year when we can start all over again.

Governor Fortuño has selected the Public Private Partnerships (PPPs) to redirect PR’s economic development strategy and steer the island out of its current 3-year old recession. PPPs are forecast to create 99,735 new jobs and attract $6.2 billion investments thru 2013. Will this strategy work? Mega projects such as the Caribbean Riviera in the old Roosevelt Roads navy facility and the Science City in the old penitentiary rely on private partners for financing. Betting on PPPs, implies big gains or catastrophic losses for Puerto Rico. This issue of PR Pulse analyzes the PPP concept. It aims to answer how these partnerships have worked in other countries; successes and failures; economic sectors and countries that have used them successfully or why they have failed. Find out the challenges facing PPPs in PR and what can be done to leave behind the current recession.

Of the 1.673 million women age 16 years and over in CY 2008 in PR, 610,000, or 36.5%, were labor force participants—working or looking for work. They are projected to account for 44% of the labor force by 2020. Of 177,000 self-employed in 2008, 43,000 or 24% were women. The unemployment rate for women was 4.4% compared to 7% for men. This is no small accomplishment since their labor force participation rate in 1970 was a meager 29%. Over the same period, the rate for men fell gradually from 71% in 1970 to 55% in 2008. Find out which economic sector provided more jobs to these women; which occupation has the largest percentage of female employed in PR; whether education played a role in this increasing participation; and if they are earning as much as their male counterparts. In addition, this article discusses the impact of the current fiscal policy on female labor participants.

Puerto Rico has not gone unscathed from the worldwide financial havoc in 2009 and which we discussed in our September issue of Economic Pulse. The big quake has placed more strain on an already jolted local economy.  Internal as well as external factors have blended to pound the PR economy and sink it in its worst crisis since the 70’s.  Getting a recipe to put the economy back on its feet is not a simple task.  However, to find a way out we have to identify first the external forces that affect the economy as well as those setbacks originated within the island. This is a must if the island is to adopt an effective strategy. In this issue, we analyze the roots of the forces that afflict the island economy and present some ideas for the cure.

Five years ago, nobody could predict that in 2009 the most important concerns would be the loss of jobs and increased foreclosures. Nowadays, the financial crisis that started in the US has spread around the world. Unemployment in the US reached 9.7% in August 2009. Sale of houses in the US fell 25% per year since 2005. The Dow Jones Industrial average dropped to 6,547 points, similar to 1997 levels. Many financial and non-financial companies have filed for bankruptcy and almost all states in the US have large deficits. What are the roots of this debacle? Is it a real estate bust gone terribly wrong? Is it financial exuberance with a large dose of greed and creativity? How did it spread so quickly? This and other issues are addressed in this month’s issue of PR Pulse.

In 2008, around 47 million Americans or 15% of the US population were uninsured. In PR, the uninsured were 553,000 or 14% of the population. Today, improving coverage and quality in the health system while reducing medical expenses are key concerns in President Obama’s health care plan. But philosophical and empirical problems combined with political and private power pressures could elude the promise of a universal health system. These days, the discussion in Washington seems to be how many trillions will health care and the recession require for a quick fix. This proposed health reform will unquestionably affect PR as well. Around $13 billion was spent on health care in the island in 2008 while 11% of the public budget was allocated to finance health. The burning question is how will this plan affect the Puerto Rican public health care option?

After five decades of totalitarianism, Cuba is closer to an economic transition. The ultra-centralized economic model is crumbling and Cubans, as well as the rest of the world, are claiming for changes. The new US administration has bet on a more flexible and open policy to make Cuba embrace back the market economy.  Puerto Rico will not remain indifferent to such a milestone.  Many cultural, historical, and even family bonds tie these two islands. The eventual economic openness of Cuba has raised many concerns in Puerto Rico. Many believe Cuba is a big threat to Puerto Rico, in particular its tourist market. It is time to bring down this myth. This issue addresses a new world of opportunities for PR.

The current global financial and economic crises have generated major losses in banks; plunged stocks; blown up bankruptcies filings; escalated unemployment and beaten consumers’ pockets. But, there is another collateral damage that had not been completely realized. The collapse of stocks wiped out wealth and with it most retirement savings. As a result, one thing is sure for baby boomers on the verge of retirement: forget retirement! No doubt, many aging baby boomers will have to continue working past their traditional retirement age in order to enjoy the standard of living they dreamed. This is a dismal scenario but there are some positive outcomes too. This issue discusses how demographic pressures and the current economic crisis will affect our retirement plans.