November 22, 2013


Buying on credit is so nice : The debt crisis has not stopped Puerto Ricans from shopping (The Economist, Nov 23rd 2013)

Doing business there also became frustrating. The informal economy grew to an estimated quarter of GNP, forcing legal companies to shoulder an outsize share of the fiscal burden. The tax code set high rates, but was riddled with carve-outs. Meanwhile, the state electricity monopoly fell captive to its union and suppliers, and lost $383m last year despite charging three times the price of electricity on the American mainland. Faced with all this, the economy fell into recession in 2006. [...]

The other "escape valve" is emigration. Some 29% of those born on the island now live on the mainland. Its population has fallen by 4% since 2000, to 3.7m. The young and jobless are most likely to move. Small communities in the interior are becoming ghost towns.

Unfortunately, this leaves fewer people to pay taxes to the cash-strapped treasury. As the economy shrunk, the government turned to the bond markets, which sopped up paper that was fully exempt from taxation in all 50 states. Investors remained complacent until Detroit went bankrupt in July. Then they soured, and Puerto Rican debt-yields nearly doubled in two months.

The governor, Alejandro García Padilla, had already launched an austerity programme, raising taxes by 1.1% of GNP and making public employees' pension schemes less generous. That is expected to trim the deficit from $2.2 billion to $800m; it has already made 62% of Puerto Ricans disapprove of Mr García Padilla. Yet investors are still unimpressed. Sergio Marxuach, an economist, estimates that the tax increases will shrink GDP so much that half their fiscal benefits will be negated. Investment has fallen by over 20% since 2004. Mr García Padilla is encouraging medical tourism and will allow rich newcomers to avoid tax on passive income. But he opposes opening the market in electricity distribution, which Eduardo Bhatia, the Senate president, thinks would cut energy costs by $2 billion a year.

Posted by at November 22, 2013 6:07 PM

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