Trouble in Paradise – The Economist (Nov. 9, 2013)

Increasing competition and reducing red tape are indeed necessary to boost Puerto Rico’s economic growth. But more important “structural reform” involves a fundamental shift in the nature of Puerto Rico’s economic activities. For more than five decades, federal tax incentives created an artificial manufacturing sector and diverted capital from Puerto Rico’s true comparative advantages.

Even after these gargantuan tax breaks disappeared in 2006, Island policy makers refused to believe that this subsidy was responsible for the existence of the now dying industry. Virtually none of the patents or technology used in production were homegrown.

In a futile attempt to revive this sector, the Island has ramped up local tax breaks. This continues to drain an already empty treasury.

Unrealistic aspirations for a “knowledge economy” deflect investment from such obviously competitive sectors as tourism and entertainment. To make matters worse, service jobs in these areas are often regarded as undignified. As a result, tourism and entertainment infrastructure remains meager compared with other comparable locations.

For starters, Puerto Rico has just 14,500 hotel rooms. Tourist receipts account for less than 4% of GDP. Meanwhile, Hawaii has 45,000 hotel rooms that contribute to 20% of its GDP. At 5%, Hawaii has one of the lowest unemployment rates in the U.S. Puerto Rico’s next door neighbor, the Dominican Republic, has more than 70,000 hotel rooms and has had GDP growth despite the 2008 financial crisis.

Nonetheless, the current administration has reasserted its intent to “defend” the island’s manufacturing sector and pursue only “moderate” tourism development. Continuing this course, Puerto Rico’s debt crisis will indeed get worse.

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