Published on December 5, 2024 / Leer en español
In This Issue
When we consider the many challenges Puerto Rico’s economy faces, one question often stands out: how do we restore growth? This question is at the core of our thinking at CNE.
A key ingredient for success is garnering consensus across all sectors of society around a shared growth strategy.
In the past couple of years, there has been a growing interest between the private sector and the government around strengthening domestic supply chain production. And that is generally because the pandemic revealed the vulnerabilities of global economic interdependence. We can all recall the shortages of essential household goods. Since then, support to bring back (or reshore) critical industries has grown across the political spectrum. Even in a deeply divided Congress, members came together to pass fundamental legislation that invests directly in research and development and incentivizes reshoring manufacturing production to the United States and its territories.
For Puerto Rico, these trends create a unique opportunity. Federal funds have temporarily ignited some economic activity, but achieving long-term growth requires a more resilient self-sustaining model. Puerto Rico has many assets: remarkable local talent, a strong entrepreneurial spirit, and a commitment to excellence. Now is the time to harness these strengths.
This brief explores how the design of a new industrial policy could create good-paying jobs, reduce dependency on federal funds, and along the way, build a new, thriving economy.
A new economy is possible.
Insights + Analysis from CNE
By Sergio M. Marxuach, Policy Director
In the current global context, Puerto Rico faces the next stage in its economic development. After 15+ years of economic stagnation, a fiscal and debt crisis, the bankruptcy of its government, the damage caused by Hurricanes Irma and MarĂa in 2017 and a series of earthquakes beginning in December 2019, and the pain inflicted by the COVID-19 pandemic, Puerto Rico has a once in a generation opportunity to turn its economy around.
First, the debt restructuring process is over. The certified Plan of Adjustment provided significant debt relief to the island by cutting the Commonwealth’s debt by approximately 50%. The jury is still out on whether this amount of debt relief is sufficient. What is clear is that the medium to long-term viability of the Plan depends on jumpstarting economic growth in Puerto Rico.
Second, the Biden Administration has been willing to disburse the money (in excess of $20 billion) appropriated by Congress several years ago to finance hurricane reconstruction efforts, which will allow Puerto Rico to significantly upgrade a large part of its physical infrastructure endowment to 21st century standards in a relatively short period of time (or so we hope).
Finally, the intellectual and political turn towards a more activist state affords Puerto Rico the necessary policy space to develop and implement creative solutions to its economic problems. The zeitgeist is favorable for the development and implementation of a carefully crafted industrial policy for Puerto Rico. Although several key actors have initiated efforts to stimulate growth in individual sectors, no one is looking at the entire puzzle. Here we would do well to follow the advice of Michael Spence when he said “we shouldn’t slip into the mistake of equating something useful, like financial-sector development or anything else, with a sufficient condition for growth.” Without an integrated approach, we risk missing key opportunities for alignment between sectors, along with the lasting synergies that accompany these efforts.
Similarly, we shouldn’t make the mistake of equating a set of structural reforms with an economic strategy. Simply stated, the structural reforms set forth in the Fiscal Plan are not guaranteed to generate the economic growth Puerto Rico requires, both for increasing the living standards of its people and to pay off its restructured debt, unless they are embedded or framed within a larger economic strategy or vision.
What Puerto Rico needs, then, is an industrial policy.
New Thinking on Industrial Policy
Over the last decade or so, several scholars have challenged the traditional paradigm of industrial policy as limited to activities mostly related to fixing market failures and coordination problems (click here to learn about the origins of industrial policy).
The objectives of a modern industrial policy are not limited to promoting the transition from a traditional agricultural economy to a modern industrial economy based on manufacturing, but rather it seeks to identify economic sectors, for instance, high technology agriculture, advanced or specialized services, or sophisticated manufacturing, in which a country has an opportunity to create greater added value and thus generate economic growth, as well as new and better jobs.
In this sense, modern industrial policy can be described as a process of discovery and continuous learning that requires close collaboration and coordination between the public sector, the private sector, academia, labor unions, and other non-governmental organizations, in order to generate a structural economic transformation in the medium and long term.Â
Click here for more on modern industrial policy.
Strategic Components
According to Professor Robert Devlin, effective industrial policies have at least three elements in common:
- Establishing a national strategic vision for the medium and long term
- Engaging in effective collaboration with the private sector
- Executing industrial policy consistently over time
In addition to these elements, implementing a successful industrial policy in the 21st century requires a fair apportionment of both risks and rewards between the state and the private sectors.
It is necessary to think of industrial policy as an interactive process of strategic cooperation between the private sector and government; which on the one hand, serves to elicit information on business opportunities and constraints and, on the other hand, generates policy initiatives in response. The challenge is to find a middle ground for government bureaucrats between full autonomy and full embeddedness in the private sector. Give too much autonomy to the bureaucrats and you minimize corruption but fail to provide what the private sector really needs. But if bureaucrats become too embedded with the private sector, then they may end up in the pocket of business interests and rent seekers.
Click here to learn more about each of these components.
Reasons for Failure
Industrial policy can fail due to multiple causes. For example, in some countries, the capacity of the state or the private sector to implement a given industrial policy could be overestimated. In other countries, the cause of the failure lies in the extreme politicization of the process and the denial of spaces for participation in the development of the strategy to the political opposition or representatives of other important sectors. Finally, failure can result from the lack of an independent system for evaluating and measuring results.
How do these play out? Click here to learn how.
Traditional Objections in Puerto Rico
When talking about industrial policy in Puerto Rico, two objections immediately arise:
- The first is that Puerto Rico does not have the political powers or the economic resources to carry out an industrial policy.
- The second is that the concept of industrial policy is foreign to the political economy of the United States.
Why are both of these objections false? Click here to find out.