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.