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Face to Face: A Conversation with Jose Joaquin Villamil
The noted economist talks about Puerto Rico's troubled economy and its impact on South Florida.
Q. Puerto Rico's economy has been growing by 1 to 2 percent a year, slower than the United States. Its finances are a mess, so much so that the island government closed down schools and offices for two weeks. What role does the debate over Puerto Rico's political relationship with the United States play in all this?
A. The whole debate over political status has a distorting effect in that it distracts from the more important priorities, such as the economic well-being of the island. Politicians basically use the status debate as a barrier to hide their inability to deal with these other issues.
Q. How do they hide behind it? For example, how does it affect the fiscal reform?
A. Take the sales tax. The pro-statehood people wanted a sales tax, because that's what is used in the [mainland] United States. The (pro-commonwealth) Popular Democratic Party initially opposed the sales tax for essentially the same reason.
And if we go a little bit further back, the federal tax breaks for U.S. factories on the island known as Section 936 had a strong enemy in the (pro-statehood) New Progressive Party, because they felt it was an obstacle to statehood. And it had support from the Popular Party, because they also felt it was an obstacle to statehood.
So, once that tax became a political issue, it no longer made a difference if the tax itself was good or bad for Puerto Rico's economy.
Q. Were the federal tax breaks for U.S. factories on the island killed, then, because of local politics -- because of the statehood party?
A. I think the death of the tax breaks was foretold many years before. As recently as two years after the tax was approved, there were already rumblings about it in Congress. It was threatened in 1985 and 1993, until it was finally done away with in 1996 because of a great deal of resentment in Congress over the tax as corporate welfare. But the statehood party also had a role.
Q. In terms of the fiscal woes, would it make a difference if Puerto Rico were a state, remained a commonwealth or became independent?
A. No. If you look at the states, there are a number that have had even more difficult fiscal situations than Puerto Rico. For example, the New Jersey fiscal shortfall for 2007 is almost 15 percent of the budget. Maine has an 8.5 percent budget deficit. So, it's not a question of political status.
I think the fiscal situation basically reflects poor fiscal management on the part of the government over many, many years and, of course, stopgap financing to fill in the inefficiencies. Traditionally, what has happened is at the end of the budget year, we have a shortfall, and we either issue short-term bonds or go to the Government Development Bank of Puerto Rico for a loan. So, somebody bails out the government. Well, it reached a point where we couldn't do that again.
Q. Is that because with the slow economy, there wasn't enough tax revenue?
A. Yes. The main issue we have to tackle is that this economy has not been growing at a reasonable rate for the last 30 years. And the reason is that we became victims of our own success in the 1950s and 1960s. The world changed, and we did not. We continued to believe that the same model successful in 1950 could still be successful in 2000, and that, of course, was not the case. We did not adjust to changing competitive conditions.
Q. So, Puerto Rico relied too much on tax incentives for factories?
A. Exactly. We should have looked to a different set of incentives. At our firm, Estudios Tecnicos, we made a strong case many years ago for improving the fundamentals: the education system, the science and technology capabilities, the physical infrastructure (such as roads and ports) and also new infrastructure such as telecommunications.
Yet Puerto Rico still lags in many of these things. We are way behind in education, and even our physical infrastructure leaves a lot to be desired. Our electrical rates are high, the electric system is not reliable, and our water and sewer rates are also very high.
Q. Yet, these issues have been discussed at least for 20 years and it seems pathetic and frustrating that so little is done. Why don't things get better?
A. Not only don't things get better, things have gotten worse in many ways. It's a slow rate of deterioration, so there is no sense of urgency. In fact, what we have lacked is a good crisis to create a good sense of urgency.
Q. And what about the two-week government shutdown in May?
A. This may be it. I'm hopeful there will be substantial government restructuring. We've begun to move in the direction of restructuring the government electricity company. The Puerto Rico Industrial Development Co. has been restructuring, with our help. So maybe this crisis will provide the incentive to change things radically, which we need to do.
One major obstacle is the Legislature. Our Legislature is expensive and inefficient. And legislators have been encouraged to act as an economic class, a privileged economic class.
Q. In what way?
A. The average salary and benefits package for a legislator is about 12 times the average per-capita income in Puerto Rico. That works out to about $140,000 to $150,000 per legislator. And the state that comes closest is Florida, though the average package for a Florida legislator is only around two-and-a half times Florida's per capita income.
The Puerto Rico Legislature also has 22 employees per legislator, and the average in the [rest of the] U.S. is five. And the average cost per legislator is about $1.6 million, compared to Florida, California and New York, where it's about $500,000. The Legislature has become a major obstacle to carrying out any kind of radical reforms.
Q. Whatever happened to efforts to make the two-chamber Legislature unicameral?
A. There was a referendum. Only 22 percent of eligible voters took part. Of those, 85 percent voted in favor of going to a unicameral. But nothing has happened. The legislators, acting as an economic interest group, are resisting.
Q. Was it always that bad?
A. No. This is the result in part of legislation approved about 10 years ago making legislators full-time, not part-time. They have a very good deal.
Q. I also heard there's been a change whereby political parties in Puerto Rico now get public financing, so there's a disconnect
A. Between the people and the parties. The law assigns a certain amount of money to each of the parties during election years and all years. So, political parties are subsidized by the state to a significant degree. So, your political class now has significant interest in maintaining the system as it is.
Q. And the government is unionized, too. Does that matter?
A. Unionization has made the executive branch in particular much more rigid in terms of change. It becomes very difficult, for example, to eliminate government agencies.
One very good example of that is the Public Buildings Authority, which was created many decades ago and no longer has any reason to exist. But it has maybe 600 to 700 employees, and it has a union. Both major parties felt it should be closed, but the union pressured the politicians, so it never happened.
Q. So, how do you break through the quagmire of two major parties entrenched for their own economic-class interests and focused more on the political status question than the island's well-being?
A. Well, the only way is for the private sector and civil society to assume a much more aggressive role than they have. But the business and professional groups have a special responsibility because they have the resources.
The private sector is not investing enough in dealing with the economic agenda for Puerto Rico. Private-sector organizations are basically focused on their own more narrow interests, not on alternative programs or an overview for the island. For example, in this whole fiscal crisis, the only organization that produced an alternative to the government's fiscal reform was the Certified Public Accountants, which produced a study about a year and a half ago.
Q. Why don't the business groups take a broader role? Because of political status issues?
A. No. I think it's because the government of Puerto Rico has such a presence in just about everything that the private sector tends to be very timid when confronting the government.
Q. They're scared of reprisals or not getting contracts?
A. Right. For example, banks are regulated by government. Manufacturers get incentives. So that makes it difficult to be pro-active.
Q. So, where do you see it going?
A. I think we are at a tipping point. If we take the correct actions now, if the private groups become more involved and proactive, and if we're able to stimulate changes in the way the government functions, we may move into a more optimistic, better-performing stage.
If we don't, if we simply assume that with this most recent decision to bail out the government, and with some minor changes to the cost of operations of government, that we solve the issue, then I think we're in a very serious problem.
My sense is that there's an awareness -- particularly on the part of people like Secretary of Economic Development Jorge Silva and the governor (Anibal Acevedo) -- that we need very radical changes in the way the government operates, that it's not just a question of reducing the size of government or reducing the cost of government, but making government much more efficient than it is now.
Q. But what are the chances, with entrenched unions and entrenched parties
A. Obviously, there is some opposition.
If we're going to restructure government, that means to put in place the right incentives that would make it attractive for the people in government to accept the changes. That means, for example, retraining programs, early retirement schemes and stimulating private-sector growth so that you can generate the jobs.
Because basically what happens now with the economy growing slowly is that if you lower the number of people in government, it would be difficult to absorb them into the private sector.
Q. So, what kind of incentives must you create?
A. As I said, retraining. Also dealing more closely with community-based organizations, local economic development agencies, so they can be given a much greater role. But all of these things have to be part of a systemic approach, that has to be well-planned, and it has to incorporate not just government, but civil society.
Q. Yet there's so much pessimism now on the island. So many people are fed up and saying `I'm going to Florida,' `I'm going wherever
A. I think we brought it on ourselves. We let the political system go wild. And basically, we need to take back the country from the politicians.
Interviewed by Business writer Doreen Hemlock
Economist José Joaquin "Joaco" Villamil is the president of Estudios Tecnicos Inc. consulting firm, one of Puerto Rico's most respected economic research and planning groups. He has consulted for numerous international companies and served on boards and advisory groups to businesses and government.
A former president of the InterAmerican Planning Society and also of the Puerto Rico Chamber of Commerce, Villamil, 66, was a professor for many years at the University of Puerto Rico's graduate school of planning and also has taught at Harvard, University of Sussex and various universities in Latin America.