Maria must be wake-up call to Puerto Rico's economic woe

Maria must be wake-up call to Puerto Rico's economic woe
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If ever an economy needed a coherent economic plan, it has to be Puerto Rico.

Now that a once-in-a-hundred-year hurricane has hit the island and focused the mainland’s attention on the island’s desperate plight, one has to hope that Congress and the Puerto Rican government will come up soon with a realistic economic plan that might both rehabilitate the economy from its hurricane-induced devastation and extricate it from its 10-year economic slump.

If this does not happen, the U.S. should brace itself for a serious Puerto Rican humanitarian crisis. It should also get ready for a large and permanent wave of migration from the island to the mainland.


The last thing that Puerto Rican economy needed was a hurricane on the scale of Maria. Even before the hurricane hit, the island’s economy was in a major downward spiral. For more than 10 years, the island had been mired in economic recession.

That recession has resulted in its output declining by more than 10 percent, and it has occasioned the migration of around 10 percent of its population to the mainland.

It did not help matters that before the hurricane, the island was forced to default on its public debt mountain and was placed by Congress under the tutelage of an Oversight Board.

Reminiscent of the IMF’s mishandling of the Greek sovereign debt crisis, the Oversight Board is condemning the island to a multi-year prolongation of its economic slump by requiring of it draconian budget belt- tightening.

It is doing so despite the fact that, being tied to the U.S. dollar, the island has no monetary or exchange rate policy of its own to offset the adverse effects of major budget restraint on aggregate demand. 

Hurricane Maria must now be expected to hasten the island’s downward economic spiral. It would seem that no modern economy can withstand the virtual shutdown in its electricity supply for six months as the island is now widely expected to experience as a result of  the severe damage to its electricity grid.

This would seem to be especially the case at a time that the island is also suffering from major damage to its communication network and to its tourist industry on which the island so heavily depends.

The Trump administration is correctly being taken to task for its tardy response to Hurricane Maria and for its seeming underestimation of the scale of the hurricane damage wrought to that island’s highly vulnerable economy.

The least that one must expect from the administration is that it will get the island economy quickly back onto its feet. For that, one would need an early and realistic assessment of the economic damage caused by the hurricane followed up by a large-scale program of economic rehabilitation.

Dealing with the island’s damaged infrastructure must be the immediate economic policy priority in Puerto Rico’s present desperate economic situation. However, that will be far from sufficient to extricate the island from its 10-year economic slump.

For that, one will need an economic plan that goes well beyond simple budget belt-tightening. Rather, what is needed is a program that includes additional economic support measures from Congress, major debt relief from its creditors and serious economic reform by the Puerto Rican government.

Such an economic plan might include the permanent repeal by Congress of the Jones Act that presently unfairly disadvantages the island with excessively high transport costs.

It might also include the restoration by Congress of tax incentives for mainland U.S. companies to invest in the island and far-reaching reforms by the Puerto Rican government to the island’s highly rigid labor market.

Hopefully Hurricane Maria will have concentrated minds in both Washington and San Juan about the island’s desperate economic plight. Then, there might still be a chance that something serious is done to fix the island’s economy on a permanent basis before it reaches a point of no return.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.