Newsletter: Puerto Rico Economic Pulse©

From 1992-2005, Puerto Rico’s banking industry enjoyed historical growth rates thanks to favorable economic conditions and low interest rates. For the past two years, the banking industry has faced an economic deceleration, an inverted yield curve, and a credit crunch. All these factors are forcing banks to look for ways to increase efficiencies in order to maintain profitable operations. Many argue that an overdue industry consolidation is necessary to reach those efficiencies. During the past 15 years, the industry consolidated from 22 institutions in 1992 to 10 in 2007. Given this trend, is Puerto Rico still overbanked?

At last, after ten long years, low wage workers finally received some relief from the overall price increases of the past decade as the minimum wage increased $0.70 to reach $5.85 an hour on July 07. Further increases are scheduled to reach $6.55 on July 08 and $7.20 on July 09. There is little research for PR and no hard evidence whatsoever regarding the effects of minimum wage. This issue analyzes the likely effects of the minimum wage increase on the PR economy. Will we end up with fewer employed workers earning higher hourly wages?  Find out how many workers are at risk; which industries are the most affected; and  what are the expected short and long run effects.

Over the past ten years and whether from the central government, public corporations or municipalities, Puerto Rico has piled up a huge amount of public debt. Puerto Rico is not the only developed country afflicted by large public debt, but we have many reasons to be concerned. Despite big injections of money, our public infrastructure is nothing to be proud of. The government has covered budget shortfalls with debt issues. It is definitely time to find a way out of this perverse trend that drags the economy and clouds its recovery. This issue zooms on public debt in Puerto Rico and analyzes how sustainable is the pace of public debt and its implications for economic growth.

How far is Puerto Rico from becoming a Bio-Island? A new public policy is geared to taking PR in that direction. But, is PR equipped with the basic educational endowments needed for this new development phase? Educational outcomes indicate there is a wide gap between our current educational level and the state’s policy goal. Proficiency levels in Math and Science tests are low. Reducing high school dropouts and the need to increase the skills of labor are essential ingredients if PR wants to get ahead in the race for high quality education. This edition of Economic Pulse analyzes how biotechnology and R&D can work if education plays center stage in the island’s economy.

What is the role of agriculture within the PR economy?  What would happen if food imports were suddenly interrupted? Agriculture is central to any economy and Puerto Rico is no exception. It is more than farming since it touches jobs, animal welfare, socio-economic and environmental issues. Today’s agricultural industry is changing as a result of global awareness to the growing importance of environmental concerns and key issues such as the socio-economic development of rural communities and world hunger. World agricultural production must double to meet the needs of an estimated additional 3.5 billion people in 2050. This edition of Pulse analyzes recent developments within the international agricultural sector and explains what are the challenges and how PR is guiding its policy.

Studies by the Federal Reserve Board have shown that an increase in housing wealth leads to an increase in long-run consumption 1.5 times greater than stock wealth increases. Homeownership in Puerto Rico is estimated at around 80% of households. Several arguments support this theory. For instance, home prices are less volatile than stock prices. Stocks are highly concentrated among high-income individuals. Finally, stocks are subject to capital gain taxes and early withdrawal penalties.  In contrast, housing wealth receives a more favorable tax treatment. Will future gains in housing wealth require a healthy mortgage banking industry and an efficient construction industry in PR? Currently the mortgage banking industry is facing tough times. In addition, the signs of a slowing construction industry and declining stock prices, raised concerns about what would be the source of household wealth for the upcoming years.

The PR economy is going through one of its worst times over the past 20 years. While most world economies are defying wars and political turmoil to grow at impressive rates, the island economy has retreated. Even worse, the economy is already in recession.  Many local setbacks and adverse winds blowing from the mainland threaten to derail a timid recovery. This issue reviews the current stage of our economy, highlighting the main obstacles to a coveted rebound. We also present our forecasts up to 2009 and address the most likely economic scenarios here as well as for the mainland. We invite you to view PR’s short-term economic future through our looking glass.

In 2006, Puerto Rico replaced part of the old and fatigued excise tax system with a new one: a sales tax, the UVT, Uniform Value Tax. By shifting to a 7% sales tax, PR has moved in the right direction and joined the many countries in the world that rely on a consumption tax to balance their budgets. However, instead of being part of a long-term plan, the new tax system responds to the urgent needs of a government struggling with mounting debts and current deficits. In fact, many expect the sales tax to be the savior of the budget and end the mess in public finances. This issue provides insights on a system that is novel to Puerto Rico and which opens the door for a more complete analysis of the overall Puerto Rican economy.

Panama is experiencing an economic boom like never before. Known worldwide for the Panama Canal, one of the modern marvels from the past century, this country has managed to overcome pessimism and doubts, and is proving what a small country can do.   A very open economy, which relies heavily on the export of services, Panama is embarked on ambitious projects to take the country to new heights.  The Canal expansion, an avalanche of magnificent skyscrapers, an unstoppable international financial center and an upcoming free trade agreement with the US are among the strengths and achievements that Panama can proudly boast.  Find out how PR can draw some valuable lessons from Panama.

Cuba is still a kind of black box for many of us. Despite the many cultural, historical, idiosyncratic and even familiar bonds with Cuba, Puerto Rico has no economic relations with its neighbor.  Nonetheless, after nearly five decades of a very centralized economy, some recent developments are signaling that the current socioeconomic system in Cuba is about to change. It is definitely time for us to know more about Cuba and understand the implications for Puerto Rico of the foregone Cuban transition towards a market economy. When will Cuba open? Will it entail the demise of tourism and manufacturing in Puerto Rico? Or, will this transformation open up opportunities for PR? Do not miss this interesting analysis on this very strategic issue for Puerto Rico.