One possibility is to look for ways to expand the support for the formation of partnerships between higher education and industry, which have proven to be effective ways for regions to promote innovation, entrepreneurship and economic growth. Puerto Rico has many of the ingredients in place to harness the benefits of these industry-education partnerships and policymakers should begin to look for promising opportunities for mutually beneficial collaboration. A second step is to comprehensively reform the Commonwealth’s tax system, which is heavily dependent on income taxes and tends to levy high rates on narrow bases. When rates are high, it increases incentives for activities to be shielded from taxes, perhaps by moving activity to the informal sector, or perhaps by halting the activity altogether. Either way, collecting the necessary revenue requires rates to be even higher on activities that remain in the base, reinforcing the problem. Typically, comprehensive reform is necessary to break the cycle by simultaneously broadening the tax base and reducing rates across a range of taxes. Such a reform would likely produce a significant bonus in terms of faster economic growth, particularly in the formal sector. A third step would be to improve the Commonwealth’s financial reporting. Puerto Rico’s unique status means that it is one of few jurisdictions whose finances are not regularly surveyed by a public agency. The U.S. Census Bureau reports annually on mainland state finances and the International Monetary Fund generally reports on the finances of nations.
In addition to this work, our commitment is reflected in our research on issues of concern to the Island. Our economists monitor and analyze local economic conditions. A complement to our internal research is the outreach that I and other senior bank staff undertake to meet with our stakeholders – the leaders in the business community, members of professional organizations like yourselves, academics, students, elected officials and leaders of nonprofits – to hear firsthand about the issues and problems facing the people in our district. What we learn during these engagements also helps to shape our understanding of the issues facing the Puerto Rico economy and inform our efforts to support it. Earlier on this trip I met with leading business owners from many different sectors of the economy, elected officials and several agency heads. And from what I have learned so far, there are many important initiatives underway to effect change and to address what are clearly large and complex issues. On my last visit to the Island in 2011, I saw examples of expansion and growth. This gave me confidence that Puerto Rico has the capability to be an economic success story. However, my discussions with a range of stakeholders confirmed to me that conditions were not what we want them to be – in particular, growth and expansion were not happening either fast enough or broadly enough.