Beyond President Biden’s Rescue Plan

Beyond President Biden’s Rescue Plan

Published on January 21, 2021 / Leer en español

Director, Madrid Policy Bureau

President Biden’s American Rescue Plan brings much-needed relief to Puerto Rico. However, the Plan must only be seen as one of many pieces of a very complex jigsaw puzzle. Coupled with protracted stagnation, a public debt crisis, and the havoc caused by Hurricane Maria, economic recovery from the pandemic presents Puerto Rico with particular long-term challenges.

Beyond the short-term palliative measures contemplated in President Biden’s Plan – the $1,400 check for individuals, for example – experts agree that post-pandemic recovery will necessitate massive investments in order to overcome the “shock” that lockdowns and restrictions to mobility have brought to productive infrastructures throughout the world.

Puerto Rico will not be an exception and will need to face the structural challenges posed by the “new normality” of a post-COVID world: the increasing digitalization and automatization of economic activity, the global realignment of supply and value chains, and the increasing need for governments to invest ever more resources in ensuring social cohesion.  How can the island start framing mid- and long-term policies in this direction? A survey of European think tanks and economic intelligence groups provide important insights for the island.

  • The magnitude of President Biden’s Plan to address immediate needs is impressive: the $ 1.9 trillion that the US will distribute in the short run triples the short-term funds that the European Union (EU) mobilized in its anti-COVID emergency package during the Summer of 2020 to reinforce public health systems, bolster employment and enhance financial liquidity throughout the region (the equivalent of more than $650 billion, a massive amount in itself). The Plan brings, no doubt, relief to Puerto Rico, but the transition to the complicated post-pandemic world will require other types of mid- and long-term measures. That is, the recently announced short-term Plan will provide us with much-needed oxygen but will need to be paired with other public policy measures if the island’s economy is to transcend its comatose state. A second stimulus package focused on the reconstruction and transformation of the US’ infrastructure – proposed as part of the Biden-Harris campaign – will probably bring the island important elements in that direction.
  • There is no doubt, short-term measures are indispensable: they mitigate the most pernicious effects of the pandemic. Spain has called this “putting the economy in hibernation”, that is, ensuring that the productive apparatus is kept alive while the pandemic abates and economic recovery kicks-in. In its December 2020 report for the Eurozone, the International Monetary Fund (IMF) points out that short term measures have been fundamental in keeping economies afloat in the US, Europe, and Japan: increases in health expenditures; public schemes of supplementary income; reductions or postponements of tax payments; asset-buying programs; and credit and liquidity guarantee mechanisms. These last measures have amounted to the equivalent of 20% of the Eurozone’s Gross Domestic Product.

There have been differences in emphasis: the US, for example, has used a larger proportion of its resources in encouraging consumption, while the European countries have proportionally used more of theirs in loans, credit guarantees, and capitalization mechanisms. The results have been significant: despite the economic standstill caused by lockdowns and restrictions to mobility, unemployment in the Eurozone increased only one percentage point; in the US, the increase has been of  3 ½ percentage points.

In Spain, the two main mechanisms have been the ERTE (Temporary Employment Regulation Files) and the  ICO (Official Credit Institute) credit lines. The ERTEs, salary supplements that the Spanish government gives companies in order to avoid lay-offs, (similar to the US’ Payroll Protection Payment (PPP) program), have sheltered 4.8 million workers or 30% of the country’s workforce and may have reduced the risk of corporate insolvency by 25 to 30%. The ICO credits (government credit guarantees that back private bank loans to business) have facilitated more than half a million business loans totaling the equivalent of more than $78 billion.

  • Nonetheless, the post-pandemic “shock” to the productive apparatus will be significant and short-term measures will not be enough. The Centre for Economic Policy Research in London has found that despite massive public spending programs, only one out of four of the 120-thousand businesses it surveyed in 60 countries had actually received any public assistance. The Bank of Spain has noted that many companies, despite having had access to emergency measures, are actually under financial strain. The IMF has estimated that the number of companies facing liquidity or solvency problems could increase to 21 and 19% respectively in the Eurozone; that is, one in five businesses will have problems in the post-COVID period. In Spain, the pandemic could more than triple corporate insolvency.

European think tanks like the French OFCE and the Belgian Bruegel have begun to warn of a wave of corporate insolvencies in the post-COVID period and advocate for changes in legal frameworks in order to facilitate bankruptcies. McKinsey & Company’s Madrid office, for its part, has proposed additional measures to help sustain corporate liquidity once the pandemic recedes: accelerating the payment of invoices to government suppliers; consumption vouchers; reducing or suspending certain business taxes; and the outright elimination of value-added taxes (Puerto Rico’s IVU) in specific sectors.

In Puerto Rico, the pressure on the business eco-system must be significant: 95% of companies are small and medium businesses and 56% are actually micro-businesses of less than 5 employees.  Access to federal funding in the island has been uneven: the Financial and Oversight Board of Puerto Rico estimated that 91% of the businesses that have had access to the federal PPP program only received 34% of the funds; and the southern municipalities – as well as Maricao, Arroyo, Guánica, y Maunabo – have been severely underserved by the program. The Board estimated that in May 2020 the per capita amount received by Puerto Rico under the PPP program had been only 1/3 of that received by states in the US. It is important to note that the pandemic has only compounded the negative effect that Puerto Rico’s protracted recession, its debt crisis, and the devastation wreaked by Hurricane Maria have had on the island’s businesses.

  • “Bridge” policies will be necessary to facilitate the transition of businesses and workers to the post-COVID economy. Inasmuch COVID has accelerated a series of tectonic shifts in the global economy, it will not be possible to “go back to business as usual”. Eurochambres, the association that represents over 1,700 regional and national European chambers of industry and commerce called in December 2020 not only for the continuation of palliative rescue measure but for the implementation of mid- and long-term recovery policies, particularly those that would train business and workers in the new skills that will be required in the post-pandemic world. The “new normality” – of which Puerto Rico will not be exempt – will need to take into account the increasing digitalization and automatization of productive activity, the realignment of global supply and value chains, and the growing role of states and supra-national entities in sustaining social cohesion in ever more unequal and fragmented societies.
  • It will be necessary to postpone the return to austerity in public finances. COVID has increased the levels of public debt around the world, and some, like English economist Mervyn King, are warning of an imminent global debt-crisis. In Spain the Independent Authority for Fiscal Responsibility (AIREF in Spanish) has estimated that the country will need two decades in order to reduce the post-COVID public deficit to 2019 levels, that is, from the actual Debt to Gross Domestic Product of  123%  to 95.5%. The European Union has suspended fiscal rules (these require a ratio of 60% or less), but there is growing concern that a rapid recovery in Germany, the Netherlands and Austria will prompt an early return to the Stability Pact and fiscal austerity in the region.

The IMF, once the bastion of economic orthodoxy, is warning that “countries must not withdraw fiscal support too quickly even if there might exist pressure to do so in countries with high levels of indebtedness”: the post-COVID world will require not only expansive but transformative policies.  Mackinsey highlights the importance of “policies that sustain the recovery of traditional growth engines and the evolution of new growth sectors, guaranteeing adequate normative frameworks and a resilient health systems”; that is, both industrial and social policies.  It will be necessary to facilitate the reallocation of resources – people, capital and knowledge – to new sectors and to adapt public policies both to the increasing automation and digitalization of the economy as well as to the monumental green transformations that will need to be fostered to combat climate change.

The challenge is enormous. Spain, for example, has assigned the equivalent of $ 44 billion to programs that will foster this transformation in areas such as education and skill-development, modernization and digitalization of industry and small businesses, and strengthening its innovation, science and health infrastructure. However, assigning economic resources is not enough: it is necessary to design targeted programs and to have the institutional capacity to execute them. The IMF has warned that, until now, the plans that the majority of EU countries have designed to manage the massive infusion of funds for the region’s digital and green transformation are ambiguous and lack specificity. And according to Bruegel, Spain has been notoriously incapable in the past years to absorb and utilize those European funds that have been available for investment in infrastructure.  To that effect, the Spanish think tank ESADE has called for the government of Spain to bolster its planning and management capabilities in order to increase its possibilities of making effective use of the massive influx of funds that are expected to be disbursed from mid-2021 on as part of the European infrastructure and investment program NextGenEU.

Which brings us back to Puerto Rico and the American Rescue Plan. The funding is, no doubt, more than welcome, but constitutes only one piece of a very complex jigsaw puzzle that must be assembled in order to achieve the island’s long-term economic recovery.