Analysis of Puerto Rico’s Current Economic and Fiscal Situation

Analysis of Puerto Rico's Current Economic and Fiscal Situation

Published on October 22, 2015

Sergio portrait
Policy Director

What follows is an analysis of Puerto Rico’s current economic and fiscal situation which Sergio Marxuach submitted for the United States’ Senate Energy and Natural Resources Committee hearing on Thursday, October 22nd, 2015.

We live forward; but we can only think backward. —Soren Kierkegaard

Puerto Rico currently faces two distinct, yet related, crises. The first, and most urgent, arises out of the government’s weak financial situation. The second is the product of the chronic stagnation of its economy over the last ten years.

Decades of fiscal and economic mismanagement have engendered an economy characterized by: (1) chronic primary deficits; (2) high debt-to-GNP ratios; (3) low employment levels in the formal economy; (4) a large informal economy, encompassing both legal and illegal activities; (5) significant government corruption and predatory rent-seeking behavior in both the public and private sectors 1; (6) substantial tax evasion; (7) a hollow productive base; and (8) high levels of private consumption and indebtedness enabled by having access to a stronger currency than its economic fundamentals would warrant. In our opinion, the parallels with Greece are quite evident for all to see and none to misunderstand.

In this paper we delve deeper into the some of the historical factors that played a role in creating this dysfunctional economy, analyze some aspects of the current economic and fiscal crises and provide both short and medium-term policy recommendations.