Analistas 13/07/2015

¿Is geography at the root of Puerto Rico’s crisis?

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The island does, of course, have warm winters and beaches, but so do a number of places. And Puerto Rico is much larger and more populous than its neighbors - with a much smaller ratio of coastline to area or population - so it is not as well positioned to have a tourism-centered economy. Indeed, the commonwealth has historically grown largely as a center for manufacturing, especially for the pharmaceutical industry.

But why manufacture in Puerto Rico? There are various ways to develop a competitive advantage in manufacturing: You can have a unique skills base, like much of Germany; you can have very low wages, like a number of emerging Asian economies; or you can have a logistical advantage due to your proximity to major markets, like a fair bit of what remains of manufacturing in the United States or, these days, the export belt in northern Mexico.

For Puerto Rico, however, none of these options are available. It doesn’t have a special skills base. Its wages are low by mainland standards, but not that low (and as I’ll argue in a moment, they can’t get that much lower). And while Puerto Rico is close to the mainland, it’s fairly slow and expensive to ship things in and out. In a fundamental sense, it’s not that easy to see why there should be a sizable economy on that island, in that location.

Now, you might say that this is just an argument for big wage cuts. But Puerto Rico is part of the United States, and its residents are American citizens. This tends to put a floor under wages in several ways. The Federal Reserve of New York emphasized how the federal minimum wage and relatively generous safety-net programs (given low productivity) may be causing people to leave Puerto Rico’s work force in the face of low wages (read the report, published last year, here: nyfed.org/1eD17Bd). But even without this driver, the relative ease of emigration would tend to support wages.

Put it this way: If a region of the United States turns out to be a relatively bad location for production, we don’t expect the population to maintain itself by competing via ultralow wages; we expect working-age residents to move to more favorable places. That’s what you see in poor mainland states like West Virginia, which actually looks a bit like Puerto Rico in terms of its low labor force participation. (Mississippi and Alabama also have low participation rates.)

And out-migration need not be such a terrible thing. There has been much discussion of what’s wrong with Puerto Rico, but maybe we should, at least some of the time, just think of the island as another ordinary region of the United States. At any given time, we expect some regions to be in relative decline, and maybe even absolute decline, as the winds of technology and global trade shift. I wonder, in particular, whether Puerto Rico is suffering from the forces that seem to be leading to a general shortening of logistical chains and the “reshoring” of manufacturing to advanced economies.

Now, all this can lead to problems of governance. Puerto Rico benefits a lot from federal programs, but the commonwealth does have to pay for a lot of stuff itself, and the emigration of workers undermines revenue, while leaving many of the costs of serving the remaining population, notably seniors, unchanged.

But I’d argue for paying a lot of attention to the nonspecific forces affecting the island, and in particular its economic geography.

Puerto Rico may, to an important extent, just suffer from being a slightly hard to reach island at a time when corporations are placing a high premium on easy, just-in-time shipments.

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