Puerto Rico: a failed economic experiment

It is unbelievable that after the governmental bankruptcy, the public and productive management model of the island is still tied to a large and intrusive government in our daily activities.

Chilean lawyer and political scientist Axel Kaiser, considered among the most influential voices on economic issues, said at a conference on the island that to a large extent, Puerto Rico's social and economic failure is due precisely to the lack of economic freedom. (Nahira Montcourt)

Recently, Chilean lawyer and political scientist Axel Kaiser, thinker, writer, holder of a master's degree in Investment, Trade and Arbitration from Heidelberg University in Germany, among other degrees, was visiting the island. He is considered one of the most influential voices on economic issues, particularly in Latin America, and an advocate of the philosophy of economic freedom. The colleague spoke to followers of this line of thought, and let it be known that, to a large extent, the social and economic failure of Puerto Rico is due precisely to the lack of economic freedom.

It is unbelievable that after the government's bankruptcy, the island's public and productive management model is still tied to a large and intrusive government in our daily activities. As a result, Puerto Rico is the poorest place in the United States (40%), and has an economy that breathes artificially thanks to the millions in federal aid it receives.

The island's productive and social failure has condemned four out of ten families to live permanently on social assistance (state and federal) and income distribution is the most unequal in the nation. It is good that a figure of Kaiser's world stature has come to Puerto Rico to repeat what some of us here have been saying for some time.

However, from the debate provoked by Kaiser, several questions arise: Will businessmen be willing and ready to replace the failed model and substitute it for a new one, based on economic freedom? Are we willing to face the costs and sacrifices involved in leaving the current comfort zone to move to a new reality anchored in a truly free market? This implies giving up market-distorting incentives, eliminating subsidies, protective laws and special government treatment of various sectors.

If we are to embrace the values of free enterprise we must all open ourselves to compete in the free game of supply and demand, where Adam Smith's famous "Invisible Hand" dictates the rules (See "The Wealth of Nations", 1776).

The root of the problem is a failed model.

One does not have to be an economic scholar to conclude that the root of the problem lies in the historical origin of the economic and institutional design of modern Puerto Rico. It all began with an economic experiment devised by Rexford Tugwell (1941-1946), former governor of Puerto Rico, and economist, and in turn, the real architect of the island's economic project.

As the main theoretician of the "New Deal" economic policy under the Franklin D. Roosevelt administration, Tugwell was sent to Puerto Rico to test and experiment with his socialist and statist ideas in the context of the great difficulties the island was experiencing. Tugwell was the manager of the institutional scaffolding that supported the industrialization project known as "Manos a la Obra" (Let's Get to Work).

Guided by a vision known as "state capitalism," he was in charge of setting in motion the island's economic development, led by the government. In other words, in the absence of a strong local private sector capable of developing the economy, the government - through institutions such as the Economic Development Administration, the Government Development Bank and the Planning Board - led Puerto Rico's socioeconomic transformation from the 1940s to the 1970s.

Between 1950 and 1976, the experiment seemed to work well and Puerto Rico was projected as the "showcase of democracy" and an example for other developing economies to follow. However, beginning in the 1980s, the economic experiment began to fail and the government perpetuated itself as the epicenter of the island's productive activity. Sometime in the 1970s, bad governance replaced good governance.

The governors of the day, far from beginning to withdraw from economic life and reduce their meddling, entrenched their role in the economy, increasing government agencies and payroll, making the public apparatus an end in itself. Then came massive indebtedness and increased taxes to sustain the economy and justify the presence of big government. This created the conditions for the eventual bankruptcy of the state and the federal receivership under the federal Promesa law (2016).

Lack of will to implement reforms.

Despite the bankruptcy and the conditions that generated it, the political class refuses to reform the economy and the government itself. The attachment to the old model remains intact and I see no willingness to change. Dependence on federal funds prevails over any consideration of looking at other routes. It is obvious that without market-oriented economic and institutional reforms, neither the government nor the economy will be viable. We know that.

But perhaps it will take a real fiscal and economic crisis without the serum of federal funds or the protection of Promesa, for us to understand that the current mirage is not viable and therefore, the people should firmly demand radical reforms.

This article was originally published in Spanish in El Nuevo Dia.

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