To understand government institutions and the degree of constituent confidence in government, it is necessary to know the track record of their performance. When government institutions function properly, they facilitate prosperity and a high quality of life by building human capital, public health, safety, security, and a healthy fiscal environment; this gives them the confidence of citizens. However, when these institutions perform their functions inadequately, they negatively affect all the above, including markets, and generate aversion and distrust (Newton & Norris, 2000).
Façade of the CDT Dr. Gualberto Rabell (Hoare), in Santurce >Josian E. Bruno Gómez/EL VOCERO
The role of government institutions is, in essence, to provide society with the right conditions for the best functioning of the economic system and to generate innovation and development (Rodriguez-Pose et al., 2014). When such institutions are in poor condition it can affect the effectiveness of policies, as well as the economic structure of a country (Rodriguez-Pose et al., 2014). This can have serious repercussions for social acceptance of government institutions; it is therefore essential that institutional development be encouraged to maintain healthy free markets and achieve development. Once there is a healthy free market, development will be driven by creativity, entrepreneurship, and innovation (Yueh, 2018).
The absence of functional administrative and regulatory frameworks prevents the promotion of private investment and entrepreneurship; consequently, markets fail to self-regulate and remain competitive. Interest groups pursue public policies that serve personal interests or offer protections over public interests; this limits economic development and promotes market failures such as corruption, clientelism, rent-seeking and corporate subsidies.
The institution-building process in Puerto Rico was led by the last U.S. governor of the Island, Rexford G. Tugwell, between 1941 and 1946. In this institution-building process, Tugwell envisioned a more diverse and sectorally integrated economy, with greater capacity for autonomous development (Marxuach, 2013). This was a response to the establishment of foreign direct investment enclaves, a modus operandi that has condemned the Island's economy to dependence and economic unsustainability; however, this institutional platform began to be dismantled in 1947 after the passage of the first industrial incentives law (Marxuach, 2013).
This law sought to accelerate the industrialization of Puerto Rico by attracting foreign investment through tax exemptions. This initiative was a key tool in Puerto Rico's economic development, contributing to the Island's transformation from an underdeveloped to an economically developed territory. This transformation led to an increase in medical facilities, an increase in life expectancy from 46 to 76 years, more than 73% of families owning homes and an increase in the percentage of individuals with higher education (Amato, 2006). The problem with this mode of economic development was the high concentration in a specific economic activity, the possible neglect of primary economic activities and the allocation of resources not based on self-directed market forces. According to Catalá Oliveras (2013), the result of these enclaves of foreign direct investment generated insufficient job creation, expatriation of profits and environmental degradation, among other ills; this produced an institutional stagnation on the Island that led to what is known as "ceremonial encapsulation", a phenomenon whereby society becomes indoctrinated to the order and values in force (Catalá Oliveras, 2013). This phenomenon prevents the search for innovative solutions to the social, political and economic problems of Puerto Rico today.
Institutionalist designs and the set of institutions of a society "are the key piece that conditions economic performance" (Colón, 2019, p. 7). Puerto Rico's institutional framework (laws, regulations, government processes, public sector organization, etc.) has been obsolete and in decline for several decades, which has fostered greater rigidity in bureaucratic processes and increased transaction costs (Villamil, 2009). For economic development to occur, it is necessary for government institutions —public safety, public health, essential services, regulatory systems, among others— to function efficiently (Santos Negrón, n.d., cited in Ramos, 2020); however, when the public sector merit system is weakened, as in the case of Puerto Rico, low productivity is produced, which generates institutional stagnation (Ramos, 2020). This has caused the Island's economic development to be constrained, preventing the progress of a genuine and healthy free market. The effects of an obsolete institutional framework can be devastating for the free market and its pillars: individual freedom, private property rights, rule of law, and a country's limited and efficient government. Such institutional gaps can foster destructive and unproductive forms of entrepreneurship (Baumol, 1990).
One of the most cumbersome deficiencies in governmental processes and regulations in Puerto Rico is the registration of property. Registering a property on the Island can take approximately 190 days and require 8 different procedures to complete the process. Similarly, as outlined in the Puerto Rico Fiscal Plan 2021, the government's efforts to implement the ease of doing business reforms have been insufficient. For a clearer view of how much the ease of doing business in Puerto Rico has worsened, in 2006 the Island was ranked 18th in the World Bank's business report, while in 2020 it was ranked 65th.
What has been established in the previous paragraphs is linked to the reasons why governments fail. Light (2014) posits that government failures happen for five reasons:
- Inefficient and ineffective policies to solve issues or too complex to execute or delegated to unreliable agencies.
- Insufficient resources (funds, employees, institutional capacity, etc.) to consistently generate positive impacts.
- Extremely complex administrative structure for communicating information, overseeing contractors, and resolving issues.
- Leadership exercised by government officials incapable or unqualified to make highly responsible decisions.
- A culture that lacks clear communication is plagued by a high level of corruption and misconduct, with little measurement of management performance.
If governmental organizations do not honor the good practices of public administration, they may be legally condemned, losing the support and acceptance of the society to which they belong. The lack of social support and acceptance may in turn impact organizational success possibly destining them to fail (Scott, 2014). This could cause a deterioration in the impact of institutions to encourage domestic and foreign investments by increasing the costs of doing business, discouraging entrepreneurship of individuals and leading to poor execution of contracts.
References
Amato, A. (2006). Puerto Rico ante el problema del desarrollo económico: miradas, memorias y reflexiones de un economista. Ethos Gubernamental, 25‒48.
Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5): 893–921.
Catalá Oliveras, F. A. (2013). Promesa rota: una mirada institucionalista a partir de Tugwell. Ediciones Callejón.
Light, P. C. (2014, July 14). A cascade of failures: Why government fails, and how to stop it. Brookings Institution.
Marxuach, S. (2013, 19 de mayo). El (sub)desarrollo institucional de Puerto Rico. El Nuevo Día. https://grupocne.org/2013/05/19/el-subdesarrollo-institucional-de-puerto-rico/
Newton, K., & Norris, P. (2000). Confidence in public institutions. Disaffected democracies. What’s troubling the trilateral countries, 52‒73.
Ramos, C. (2020, 29 de octubre). Urge un nuevo marco institucional en la isla. El Vocero. https://www.elvocero.com/economia/urge-un-nuevo-marco-institucional-en-la-isla/article_2137033c-198f-11eb-90ff-d368c52b1ba8.html
Rodríguez-Pose, A., Di Cataldo, M., & Rainoldi, A. (2014). The role of government institutions for smart specialization and regional development. S3 Policy Brief Series, 4.
Scott, W. R. (2014). Institutions and organizations: Ideas, interests and identities, 4th ed., SAGE Publications.
Yueh, L. (2018). Friedrich Hayek’s devotion to the free market. The Times Literary Supplement. https://www.the-tls.co.uk/articles/hayek-devotion-free-market/#:~:text=Friedrich%20Hayek%20believed%20that%20the,those%20held%20by%20mainstream%20theorists.
Villamil, J. (2009). Después de la crisis. Perspectivas, 16(5).
