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Puerto Rico's Economic Challenges

Dec. 06, 2017 5:19 AM ET
Desmond Lachman profile picture
Desmond Lachman

Statement before the Puerto Rico Oversight Board

Thank you for allowing me the honor of testifying before this session.

I would like to make three basic points:

a. First, the Puerto Rican economy is in real danger of entering into a downward economic spiral.

b. Reliance on budget discipline alone is all too likely to exacerbate Puerto Rico's economic decline.

c. A piecemeal approach is not going to rescue the island's economy. Rather what is desperately needed is a comprehensive IMF-style structural adjustment program. Such a program should involve budget discipline, serious structural reform, increased US Congressional financial and non-financial support, and major debt relief.

Allow me to elaborate on each of these points:

1. The island is at risk of a downward economic spiral.

Even before Hurricane Maria, the Puerto Rican economy was in a multi-year economic depression. Since 2006, the Puerto Rican economy has contracted by 10 percent and it has lost 10 percent of its population to the mainland. At the same time, in the context of its budget adjustment program, over the next decade, the Puerto Rican economy was officially projected to decline by another 10 percent (Figure 1). This would make the island's depression worse than that of Greece (Figure 2).

Hurricane Maria has substantially darkened what was already a bleak economic outlook. Not only has very major permanent damage been done to the island's economic infrastructure, rather the hurricane has dealt a major body blow to the island's economic output. As a measure of the hit to the island's economic outlook, it is estimated that much of the island remains without electricity and in the three months since the hurricane, the island has lost more than 5 percent of its population to the mainland.

2. Over reliance on budget discipline could exacerbate the crisis.

This article was written by

Desmond Lachman profile picture
Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.

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