Columbia University professor Andrés Velasco, a former presidential candidate and finance minister of Chile, writes an important article on the lessons Puerto Rico can learn from Chile. Here are a couple of paragraphs, but you must read the article in full,
Puerto Rico and its leaders can learn three important lessons from Greece. First, it is no use pretending that debt reduction can be avoided. And when the time comes, action must be sufficiently bold to do away with the debt overhang and encourage private investment.
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The second lesson is that policymakers must put fiscal policy on a sustainable path, while recognizing that austerity alone is not the answer. Puerto Rico’s economy had been shrinking before the fiscal crisis, and the spending cuts and tax increases since it erupted have only made matters worse. The island risks sharing Greece’s fate, with the debt-to-GDP ratio continuing to rise as austerity deepens the recession.
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The third lesson from Greece is that macro tinkering is not enough; highly indebted countries also need a credible growth strategy. Puerto Rico is no exception.
For a long time, the island’s economy grew on the basis of corporate tax incentives. But, beginning in 1996, the US Congress did away with those tax breaks, without producing any blueprint for development. On the contrary, Puerto Rico is stuck with an early-twentieth-century law that forces all trade with the mainland to be conducted with expensive US ships, increasing transport costs and undermining economic competitiveness.
All that must change. Puerto Rico will not pay its debts – not even what is left after debt reduction – unless its economy grows. US creditors and lawmakers must accept that reality, and act accordingly.