Expediting the Recovery Process: A Proposal to Create a Puerto Rico Development Authority


Puerto Rico is at a critical junction in the disaster recovery process after Hurricane María. Relief efforts, while still ongoing in certain parts of the island, are slowly winding down and soon will give way to recovery activities and the rebuilding of the island. It is, therefore, “a time of desperate loss, yet also a time of distinct possibility.”1

The commencement of the recovery process is crucial to making the most of that “time of distinct possibility”, as research carried out after similar disasters has found that the time between the beginning of the relief efforts and the beginning of the recovery process is highly correlated with the length of the recovery, as well as with the severity and duration of public health and economic impacts of the disaster on the population as a whole.2 So, it is in the best interest of all stakeholders to move the recovery efforts forward as soon as possible.

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Puerto Rico’s Pension System: Knocking on Heaven’s Door

This post was originally published on January 27, 2011.


The Employees Retirement System of the Commonwealth of Puerto Rico (the “ERS”) is a trust created by Act 447 of May 15, 1951 to provide pension and other benefits to retired employees of the government of Puerto Rico and its instrumentalities. According to the Management’s Discussion and Analysis included in the ERS’s most recent financial statements, the system “since its inception lacked proper planning.”1 The problem was (and to a certain extent still is) that the level of both employer and employee contributions was relatively low and was not actuarially determined, while the level of benefits was statutorily defined and bore no relation to employee contributions or to the investment yield of the systems assets.

In 1973 the benefit structure was “enhanced” without enacting a corresponding increase in contribution levels. As government employment increased in the mid-to-late 1970s, partially in response to the general economic slowdown, the gap between the assets available to pay benefits and the actuarial obligation began to widen.


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Roundtable discussion on the future of Puerto Rico’s economy

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Roundtable discussion on the future of Puerto Rico’s economy

USA Congress

On July 18, 2017 CNE’s Policy Director Sergio Marxuach participated in a bipartisan roundtable discussion in the US Congress on the future of Puerto Rico’s economy at the invitation of Rep. Nydia Velázquez, Ranking Minority Member of the House Committee on Small Business. Below is a summary of CNE’s testimony as well as a link to the unabridged version of the document submitted by CNE.


Thank you for the opportunity to participate in this Roundtable to Discuss the Future of Puerto Rico’s Economy. My remarks will cover three topics. First, I will briefly discuss the impact of the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). Second, I will stress the need for policy initiatives at the Federal level to help Puerto Rico end its current downward economic spiral and jumpstart economic growth in the short-term. Finally, I will outline the work of the Growth Commission convened by the Center for the New Economy to develop a long-term economic growth strategy for Puerto Rico.

The enactment of PROMESA in June 2016 opened a new chapter in U.S.-Puerto Rico relations. After decades of benign neglect, Congress recognized in 2016 that it has a moral obligation under the U.S. Constitution to foster the welfare of the U.S. citizens that live in Puerto Rico. This means that it is in Congress’s own interest to see through that Puerto Rico is successful in addressing its current fiscal and economic crisis.

Unfortunately, some of the policy tools set forth in PROMESA are not working as expected and may hinder the island’s ability to escape its current economic death spiral.

First, the imposition of a Fiscal Oversight Board over the duly elected government of Puerto Rico—with broad powers over the island’s fiscal and economic policies, authority to command the implementation of its recommendations, and the capacity to prevent the enforcement or execution of otherwise valid contracts, executive orders, laws or regulations—has seriously undermined the island’s political institutions, already extremely compromised by clientelism, partisan politics and corruption.

In addition, the Fiscal Oversight Board has added a new layer of opacity to fiscal policymaking in Puerto Rico. The discussions among Board members have been carried out mostly behind closed doors, while interactions between the Board and the Government of Puerto Rico tend to be summarized ex post, usually through succinct letters written in rather cryptic language. It is quite ironic that the Fiscal Oversight Board, which, among other things, was given the task of increasing the transparency of Puerto Rico’s finances, has actually contributed to worsening that problem.

Second, the benefits of PROMESA’s complicated territorial debt restructuring process, which combines principles drawn from both the U.S. Bankruptcy Code and from the realm of sovereign debt restructuring, remain fairly uncertain and contingent on the successful implementation of a completely new and untested legal framework for territorial bankruptcy. The risk if this experimental framework fails to adequately address Puerto Rico’s debt restructuring needs is magnified by the fragile state of the Puerto Rican economy, which has already undergone a protracted decade-long contraction.

2. Jumpstarting the Economy – The Federal Component
Moving on to growth, Puerto Rico needs to devise and execute a complex, two-prong strategy to restore economic growth. First, we have to jumpstart economic growth in the short-term. Second, the island needs to formulate an economic development plan to sustain that growth over the long-term, something it has failed to do for quite some time.
This already difficult task is further complicated by the austerity policies the Fiscal Oversight Board has required Puerto Rico to implement. The certified fiscal plan orders the island’s government to implement large expenditure cuts, significant tax increases, and deep structural reforms without access to any short-term financing.
The implication of the Fiscal Oversight Board’s policy posture is that—unless Congress is otherwise willing to address a full-scale social crisis in Puerto Rico—Federal assistance will be necessary to jumpstart economic growth in the short-term. Congress needs to implement a comprehensive economic program, remove some of the disadvantages imposed on Puerto Rico under the current political arrangement, and eliminate some long-standing inequitable and discriminatory policies. The current situation simply does not allow for piecemeal action by Washington, a wide-ranging plan is needed.

A short-term economic program for Puerto Rico at the Federal level should include for example, providing additional funding for healthcare, extending the EITC and the CTC to Puerto Rico, preserving social safety net programs, and increasing funding for education, infrastructure, and research.

3. The CNE Growth Commission – The Local Component
In addition to initiatives at the Federal level, Puerto Rico needs to craft a local long-term economic development strategy and strengthen its execution capabilities.
Achieving long-term, sustainable economic growth and development is a complex endeavor that requires a new set of strategies and the rebuilding of institutions; thus, there are no quick fixes or silver bullets. In other words, economic growth is not simply a function of exiguous regulation, low wages, or preferential tax treatment. Rather, the process of growth is quite complicated, involving the interplay of many variables and factors that must be present if a country is to succeed.
As a first step in charting the road towards sustainable economic development, the Center for a New Economy has undertaken the task of empaneling the CNE Growth Commission for Puerto Rico.

The Commission will work towards (1) identifying and suggesting ways to relax local and external constraints that inhibit the territory from speeding up the process of economic structural change towards higher productivity activities; and (2) generating opportunities to diversify the portfolio of high productivity activities in the economy. Specifically, the Commission will focus on the following areas with the potential for high impact:

  • Area 1: Identifying Sectorial Opportunities
    Using cutting-edge product space analysis the Commission will identify new products and services that could augment aggregate value through the use of existing productive capabilities embedded in the island’s current production structure. This methodology operationalizes the idea that it is generally easier for countries to move from products and services that they already produce to others higher in the value chain that are similar in terms of capital requirements, knowledge, and skills. Because not all feasible new products contribute in the same way to value added and growth, a key challenge along the diversification process is the identification of those goods and services that are feasible and have a higher potential to sustain economic development.
  • Area 2: Horizontal Reforms to Enhance Competitiveness
    At the same time, the Commission will identify opportunities for effective policy reform in areas with the potential to enhance the competitiveness of local and multinational producers across multiple sectors, such as: tax and competition policy, human capital and workforce development, energy production, and communications, information, and technology infrastructure, among others.
  • Area 3: Macro-Fiscal Policy
    Finally, a Working Group of the Commission will develop feasible proposals for tax policy reform with the aim of (i) enhancing the territory’s competitiveness and (ii) reducing tax distortions that may inhibit productivity growth in the private sector. This Group will work on evaluating the potential for a disciplined fiscal reform to enhance the territory’s competitiveness, given its inclusion in the US monetary union.

In sum, Puerto Rico has been under severe economic, fiscal, and financial stress during the past decade. Furthermore, the Fiscal Oversight Board has ordered Puerto Rico to put on the equivalent of an IMF policy straitjacket without providing access to the few benefits that usually accompany IMF conditionality programs. In our view, this policy posture simply does not make sense and implementing these policies will, in a perverse way, decrease Puerto Rico’s short and medium-term capacity to honor its obligations by intensifying an already prolonged economic contraction.

Second, to jumpstart economic growth in the short-term Congress needs to implement a comprehensive economic policy program, remove some of the disadvantages imposed on Puerto Rico under the current political arrangement, and eliminate some long-standing inequitable and discriminatory policies.
Third, in addition to initiatives at the Federal level, Puerto Rico needs to craft a long-term local economic development strategy. This strategy should consist of sectorial, horizontal and institutional policies to promote Puerto Rico’s capability to progressively move into higher value-added activities.

Thank you.

Center for a New Economy
Washington, DC
18 July 2017

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Comisión de Crecimiento para Puerto Rico de CNE: Apuntes para una Agenda

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The CNE Growth Commission for Puerto Rico: Proposed Notes Towards an Agenda

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Endeudando al de aquí: Los préstamos por depósito diferido en Puerto Rico


La prensa ha reportado recientemente que se ha radicado un proyecto para legalizar la practica de prestamos por deposito diferido o “payday loans.” Una practica abusiva y depredadora que denunciamos en el 2006. A continuación el post y el policy brief que escribimos en aquel entonces oponiéndonos a legalizar el negocio de estos traficantes financieros en Puerto Rico.

En Puerto Rico se está contemplando actualmente legalizar la práctica de otorgar préstamos por depósito diferido, conocida en inglés como “payday lending.” En términos generales, un préstamo por depósito diferido consiste de una transacción crediticia donde un prestamista le ofrece a un consumidor un préstamo a corto plazo a cambio de un cheque personal postdatado con un valor mayor, el cual el prestamista se compromete a no depositar o negociar hasta la fecha de vencimiento del préstamo. Por ejemplo, un prestamista podría otorgar un préstamo de $200 a cambio de un cheque personal del prestatario por la cantidad de $230, el cual el prestamista se compromete a retener sin negociar hasta la fecha del próximo día de pago del prestatario, digamos en catorce días. En este caso el préstamo por dos semanas conlleva un tipo de interés anual (“APR”) de 391%.

Las instituciones financieras tradicionales, por lo general, no ofrecen este tipo de producto a sus clientes. La mayoría de los proveedores de estos servicios son (1) compañías que se dedican exclusivamente a este negocio, (2) establecimientos dedicados a cambiar cheques (“check cashers”) y (3) tiendas de empeño. Hace escasamente 15 años estas compañías de préstamos por depósito diferido no existían en los Estados Unidos. Sin embargo, algunos analistas estiman que actualmente existen 22,000 establecimientos que proveen más de $40,000 millones de préstamos por depósito diferido anualmente.1 Un total de 37 estados han aprobado legislación para permitir este tipo de préstamos. No obstante, existe una gran variación con respecto al grado de reglamentación que les aplica a estos prestamistas.

Sergio M. Marxuach
Director de Politica Publica
24 de marzo de 2017


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Letter to Fiscal Oversight Board regarding Fiscal Plan

In response to an invitation to comment the Commonwealth’s October 14, 2016 Fiscal Plan, CNE spelled out five key principles that should govern the preparation of any fiscal plan for Puerto Rico, identified several concerns with the October 2016 Fiscal Plan, and provided recommendations moving forward.


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Memo from a Working Group of the CNE Growth Commission to the Congressional Task Force on Economic Growth in Puerto Rico

Devising economic development opportunities should be one of the most pressing goals for both U.S. and local policy makers. In the following memo, a Working Group of the CNE Growth Commission charts a preliminary vision for addressing the deeper, structural constraints to economic advancement and for spurring economic growth.

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Memo to Bipartisan Congressional Task Force on Economic Growth in Puerto Rico

Restoring sanity to the economy of Puerto Rico will require a long-term term approach. CNE is recommending to the U.S. Congress the creation of a permanent working group at the federal level focused on structural and long-term issues related to economic growth in Puerto Rico.

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