CHALLENGES
An Update on the Competitiveness of Puerto Rico’s Economy
July 31, 2014

This is taken from the section titled "Key Challenges to Raising Economic Growth in Puerto Rico" in the full report.

In 2012, we highlighted some of the key challenges facing Puerto Rico’s economy. In this report, we revisit each of these challenges and discuss the progress made in several areas:

  • Improving Labor Market Opportunities

    Puerto Rico’s unemployment remains particularly high for the young and less skilled segments of the workforce. Further, labor force participation continues to be alarmingly weak for this segment of the workforce. Overall, the labor force participation rate has declined even further since the release of our initial report two years ago and now stands at just 45 percent.

  • Developing Human Capital

    The average level of education in Puerto Rico remains below that of the U.S. mainland: An outsized share of the population possesses less than a high school diploma. However, the educational attainment gap between Puerto Rico and the U.S. mainland has closed significantly over the past few decades, a trend that has continued in recent years.

    Equally important to human capital development is the need to build skills through workforce experience. With long spells of unemployment for many workers continuing and labor force participation quite low, skill atrophy and missed opportunities to build skills and experience through work remain significant concerns, especially for young workers who are just starting their careers.

  • Reducing the Cost of Doing Business

    Regulatory burdens, transportation costs, and most notably, energy costs on Puerto Rico can raise the cost of operating businesses. In addition, bureaucracy and red tape remain key issues hindering the establishment of new businesses and the growth of existing ones, and progress on this front appears to have stalled since 2012. Furthermore, while efforts by Puerto Rico’s government in 2012 to streamline the new-company naming, registration, and permitting process helped reduce the time and cost associated with these steps, it is important that these efforts be sustained.

    There have been some notable signs of progress since our report. A useful analysis of Puerto Rico’s energy market was completed by the Regulatory Assistance Project (RAP). The report, commissioned by the Center for a New Economy (CNE), offered a detailed justification for an energy commission and provided a set or recommendations for reforming the electricity sector. Many of the ideas in the RAP/CNE report are contained in legislation signed into law in May 2014. Less movement is seen in the efforts to address shipping costs.

  • Mobilizing Finance for Business Development and Growth

    Since 2012, the availability of credit to local businesses remains constrained, as Puerto Rico’s private commercial banks have continued to deleverage. Bank loan portfolios have contracted since 2008, driven primarily by a reduction in loans to the real estate and construction sectors. More broadly, banks continue to face challenges growing their core deposit base amid the crowding-out effects of the government’s substantial funding needs, with non-core-deposit funding (particularly brokered deposits) representing an important portion of bank funding.

  • Reducing Dependence on a Shrinking Industry

    While the pharmaceutical industry is still an important employer on the Island, the sector does not appear positioned to be a strong driver of future growth. The Commonwealth’s recently announced economic development agenda, however, seeks to capitalize on the strong pharmaceuticals presence on the Island by supporting development of a number of spinoff industries, such as medical devices and biopharma. The agenda also outlines plans to promote tourism and knowledge-based services as well as to build upon Puerto Rico’s aerospace industry presence. A notable element of the Island’s approach to developing the economy is an emphasis on improving the general business environment and thus creating conditions for a variety of industries to take hold.

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