The President of the New York Federal Reserve, William Dudley, had this to say about the situation in the US Caribbean territories last week:
The US territories of Puerto Rico and the Virgin Islands will need to take painful actions to restore their economies amid the hurricane devastation, New York Federal Reserve President William Dudley said Thursday.
The island territories, especially Puerto Rico, already faced dire economic realities even before hurricanes slammed into them late last summer, but the recovery now is complicated by shrinking populations, high debt, high unemployment and plunging growth, Dudley said.
“Puerto Rico now must not only complete the recovery from the hurricane, but also do what is necessary to get on a sustainable economic and fiscal path,” Dudley said in prepared remarks.
“Given the island’s high debt, unfunded pension obligations, declining population, and now the hurricane, the outlook may seem grim.”
While he provided few specifics on the steps needed, he said they likely would be unpopular.
In my opinion, both Puerto Rico and the US Virgin Islands are looking at a decade or more for recovery, and Puerto Rico may take even longer. In order for any kind of real economic recovery to take place, two things must happen.
The first is that both territories must find a way to discharge their debts. Without finding some way to unwind those unsustainable debts, the economies of these areas will never recover. Whether through reorganization or debt forgiveness, the debts must be dealt with.
The second thing that must happen is major economic reforms must take place, both locally and at the Federal level, to ensure the economies on these islands are actually able to function and to ensure this never happens again.
In Puerto Rico’s case, they are also hobbled by a massively corrupt and incompetent government that has proven a hindrance to US efforts to rebuild the island. I covered this in January when news came out that employees of the government-owned electric company PREPA turned out to be stealing and hoarding reconstruction supplies.
What is going to have to happen is that inefficient government run bodies will need to be closed down and growth will have to come from the private sector, something which will be very difficult for Puerto Rico particularly given the post-Hurricane destruction and the shrinking population and the depressed economy.
It is possible for such a recovery to take place even in such dire circumstances, however. It receives very little attention in the major US/European press, but Jamaica has made a remarkable recovery after about five years under a major IMF adjustment program.
Jamaica had a massive 140% debt to GDP ratio in May 2013 when the IMF program began, which has since come down to 106% debt to GDP. The government is running large budget surpluses, and unemployment is now at an 8 year low. But it’s worth noting that even with a working IMF program and a government that is genuinely committed to reform, across party and ideological lines, the IMF is warning Jamaica will need to continue the adjustment program until 2025:
Yes, there is room for more progress. This will require continued fiscal discipline to reduce the public debt to 60 percent of GDP by 2025/26, consistent with the 2014 Fiscal Responsibility Law. The government is also pursuing other options for debt reduction including a debt-for-nature swap supported by the World Bank, as well as the use of government assets for debt reduction.
Still, this is remarkable progress for a poor island country that was once written off as a hopeless basket case, and proves that Puerto Rico should be fixable too. But Puerto Rico’s government will have to commit to a long, painful process, and they will have to reject socialism and the fantasy of a Washington bailout to do it, and it will require commitment from the US federal government to act as a responsible overseer much like the IMF is doing for Jamaica.
If all these things don’t happen, Puerto Rico is at risk of becoming a perpetual disaster area, much like Haiti.