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April 11, 2017

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One could argue that the correct comparison is not Puerto Rico vs. Costa Rica but Puerto Rico vs. the US mainland.

But that wasn't the question.

Puerto Rico, while much poorer than the USA, has a similar standard of living to poorer countries in Western Europe like Portugal while Costa Rica has a standard of living more like an average Latin American country. However given rapid Tico growth and likely Puerto Rican stagnation totally possible to have catch-up by 2040 say.

https://fred.stlouisfed.org/graph/?g=dkFn

Oh, sure!

Although I'd note that Portugal isn't really independent in the sense that Costa Rica is independent; it looks more like Puerto Rico than you might think. Net federal transfers have historically run around 8% of Puerto Rico's GDP; net European Union transfers to Portugal have run about 3%. So while not quite the United States, the E.U. has played a similar role in Portuguese development.

Obviously that doesn't mean that the ticos can't catch-up; other small countries have done so. Panama appears to be in the course of doing so, albeit with eye-popping inequality. I̶n̶ ̶2̶0̶1̶2̶,̶ ̶t̶h̶e̶ ̶m̶e̶d̶i̶a̶n̶ ̶h̶o̶u̶s̶e̶h̶o̶l̶d̶ ̶i̶n̶c̶o̶m̶e̶ ̶i̶n̶ ̶P̶a̶n̶a̶m̶a̶ ̶w̶a̶s̶ ̶$̶1̶3̶,̶7̶1̶6̶ ̶p̶e̶r̶ ̶y̶e̶a̶r̶,̶ ̶n̶o̶t̶ ̶t̶o̶o̶ ̶f̶a̶r̶ ̶o̶f̶f̶ ̶P̶u̶e̶r̶t̶o̶ ̶R̶i̶c̶o̶'̶s̶. Whoops -- apparently the Panamanians use "medio" to mean "promedio." The average income for the middle quintile (≈ median) was $9,138 in 2012. See page 13 here.

I would, however, be reluctant to predict that Puerto Rican stagnation will last until 2040. I'm reluctant to predict anything that far out! I would have been fine with such projections around 1990, but right now I'm not prepared to reject the hypothesis that automation and artificial intelligence is going to blow large and unpredictable holes in all our growth and convergence models over the next quarter-century. (I may just be future shocked, or the robots may indeed be about to destroy our social system.)

Wait, where did I mention Costa Rica?


Doug M.

Also, this may be of interest:

https://medium.com/migration-issues/how-the-long-recession-is-changing-puerto-rican-migration-e0e5ddf29b03

(linking is not advocacy; I disagree with Lyman Stone about a lot of stuff. I like the way he munches numbers, though.)

Doug M.

-- If you don't want to read the whole thing, teal deer: PR's population peaked in the years 1996-2010 at around 3.7 to 3.8 million. It has fallen fast since then, with the current population being around 3.4 million: around a 10% loss over a decade. That looks more like Eastern Europe than anything the Caribbean has ever seen before.

Based on reasonable projections, it should continue to fall for some time to come. An optimistic projection would be around 3.2 million in 2040, and a pessimistic projection would be more like 2.4 million. (The main driver is of course emigration, and emigration that's disproportionately by young people in their peak fertility years. However, low rates of immigration, falling TFRs, and stagnant or rising death rates are all playing a part.)

The crisis going on for a generation doesn't actually seem insane to me, absent some bold action on someone's part.

The discussion was in one of the old email threads: you pointed out that the GDPC of both places was similar. The discussion was really about Guam, which is waaaaay more prosperous than it would be outside the United States. (Or, likely, inside anywhere else.)

The generational crisis possibility sounds plausible. Still, let's run with Portugal. It seems to pulling out without any debt write-downs, which P.R. still seems likely to get. Why would we expect P.R. to follow Greece rather than Portugal? Portugal, after all, had a recent emigration history than Greece lacked. (Relatively.)

Coming back late to this, but:

-- PR seems to be bleeding people fast. Incredibly fast. Like, I'm having trouble finding a recent historical parallel. 10% population loss in a decade? And that almost entirely from emigration?

The debts run up by PR would be hard enough to pay in any case. What happens when its population -- and therefore its economy -- has shrunk by a fifth?


Doug M.

Since Doug brought this up, I now notice that PR held yet another referendum but this time the turnout was shockingly low. Just 23%. When normally for referenda they get over 50% (and I think for status referenda they normally get 70% turnout). Could the high emigration be a reason (but clearly not the only reason) for this large drop in turnout in just 4-5 years?

No. Turnout is low because the opposition (correctly) called the referendum a stunt and boycotted it. The margin for statehood was embarrassingly high.

Doug, keep in mind that things that cannot continue, don't. The Commonwealth government has already announced that it will repudiate its debts to the Government Development Bank. The GDB, in turn, is going to impose haircuts between 25% and 45% on its creditors.

The only part of the debt that can't be restructured are the general obligation bonds. But that's only $13bn of the $64 to $80 bn that the island owes.* Of the remaining $51b-$67b, that's going to be cut by at least a third. Maybe more.

Also note that inflation helps. Even in the case of zero per capita economic growth and 10% decline in the labor force, 2% inflation will cause nominal GDP to grow 10% over the next decade.

Population loss is a problem. But it's a second-order problem.

N

* The courts might interpret Article 6, Section 8 of the Puerto Rican constitution to include more debt issues.

I would disagree that it's a second-order problem. They've had 10% population loss *already*. They're definitely going to lose more. The only question is how much.

The pessimistic projection has them at ~2.4 million in 2040, which would represent a population loss of over a third from the 1996-2010 peak. There's literally no equivalent to that in the developed world in the last hundred years. Some of the more awful parts of Eastern Europe, mmmaybe?

The optimistic scenario has them dropping down to around 3.1 million in the 2020s then beginning a slow rebound in the 2030s. That means nominal GDP will be, at best, stagnant over the next decade or so.


Doug M.

How are you making this calculation of nominal GDP?

Nominal GDP in Puerto Rico has grown every year since 2007. Last year GDP grew 1.8%. Domestic tax revenue rose 3.4%, admittedly due to draconian tax hikes.

All this in the face of a population fall of 1.8%, a drop in the civilian labor force of 1.0% and a fall in employment of 0.8%. The population fall obviously does not help, but it certainly seems to be a second-order problem because inflation.

So if you don't mind, how did you calculate that nominal GDP will stagnate over the next decade?

Error: I meant to say "real", not nominal. Growth slower than inflation is actually contraction, no?

There's this:

https://tradingeconomics.com/puerto-rico/gdp-growth-annual

Annoyingly, it's not giving details, but I think this has to be real (not nominal) GDP.


Doug M.

One very common mistake is to forget that nominal GDP growth is what matters for debt repayment. After all, the debt isn't linked to real growth.

As long as nominal GDP is growing, the debt burden will start to fall once the budget is balanced.

Right now, the Commonwealth government plans to stop the growth in the debt burden through a combination of tax hikes, spending cuts, and debt structuring. The projections assume nominal GDP shrinkage through 2021, which is unlikely. (Page 11 at the below link.)

http://www.gdb-pur.com/documents/PlanFiscal13demarzo2017.pdf

Obviously, a fall in the working-age labor force isn't helpful, but it's a second-order problem. A growing population (everything else equal) wouldn't make Puerto Rico's fiscal challenges significantly easier. An acceleration of inflation by about 0.8% would have the same effect.

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