Authored by Benjamin Dierker via The Foundation for Economic Education,
The establishment of an Economic Freedom Zone, would set off an explosion of growth.
After a particularly devastating hurricane season, Puerto Rico has an uncertain future. Already mismanaged and saddled with debt, the island territory now faces the virtually insurmountable task of rebuilding its infrastructure and economy. But amidst the rubble and heartache lies one of the greatest opportunities in the modern era not just to rebuild, but to reimagine the possibilities for economic and political freedom.
Two simple but powerful steps taken by Congress could hasten recovery and redefine the trajectory of the island’s future.
First, the United States should assume all of Puerto Rico’s outstanding bond debt.
Second, in exchange for debt assumption, the federal government should establish the island as an Economic Freedom Zone.
Within a year, these reforms would help rebuild Puerto Rico; within a decade, they could rebuild our conception of the free market in the Western Hemisphere.
It is important to note that hurricane destruction has not created economic gain by boosting demand for construction. This broken-window view fundamentally misunderstands the nature of this potential. Nor should this plan come at the expense of traditional disaster relief. Before infrastructure can be rebuilt, urgent human needs must be met with outside aid.
But rather than pursue traditional recovery with an eye toward returning to business as usual, this proposal seeks to fundamentally remake Puerto Rico into a modern and dynamic economy built to match and surpass any on earth.
Puerto Rico's Debt
The first step would wipe the slate clean to rebuild from a neutral position. The assumption of Puerto Rico’s debt would be both a relief effort aimed at freeing the local government’s limited resources and a signal to the world of our intentions to further the cause of freedom. Partly borne of mismanagement and partly of miscalculated federal policies, the territory’s debt can at least partially be attributed to the ambiguity of its relationship to the United States. Despite the political challenge of assuming the debt with a $20 trillion debt already on our books, absorbing the $74 billion debt would pay immediate dividends. Puerto Ricans, our fellow American citizens, would have immediate relief, and the freed cash flow would allow them to focus solely on rebuilding the island's infrastructure.
The federal government’s assumption of a constituent government's debt would follow historical precedent. As part of his First Report on the Public Credit, and later codified by the Funding Act of 1790, Alexander Hamilton proposed the assumption of state debts in order to both strengthen the financial position of the union and that of the individual states – allowing them each to lower their taxes and establish themselves on equal footing at the outset of our nationhood.
Our fledgling nation took on debt equal to 10 percent of our entire domestic product – a massive undertaking brought forth by visionary leaders. This set up the new federal government to be an instantly credible player on the world stage and made the phrase “backed by the full faith and credit of the United States” the closest thing to a guarantee as can be found in global finance more that 200 years later.
By comparison, assumption of Puerto Rico’s debt by the U.S. in 2017 would be a mere 0.4 percent of our more than $19 trillion economy, a greater political consideration than fiscal. As with the states in 18th century America, 21st century Puerto Rico would be in position to lower its taxes and the U.S. would strengthen its ability to back the reborn Puerto Rico.
The second step of the proposal is the establishment of an Economic Freedom Zone, which would set off an explosion of growth. The zone would flatten or suspend numerous taxes and regulations, prompting an immediate increase in productivity. The less restricted environment with more available resources would open the doors to investment and real estate development. Velocity of money would increase at the same time as new money is infused and invested into the economy, as relatively wealthier locals combining with aide workers, construction crews, and business investors spend on the island economy.
Suspending or streamlining environmental regulations would allow expedited construction on essential infrastructure projects, and needless economic hindrances like the Jones Act would finally be dissolved. Serving as a case study on microeconomics, the federal minimum wage would be suspended to allow private actors to negotiate their wages during the rebuilding effort. The government would no longer rob the worker of his bargaining power by mandating a price floor on labor.
Taking inspiration from Hong Kong and Singapore, governance from a lean, honest, and efficient local government, combined with openness to international investment and trade, will allow Puerto Rico to capture business that would be regulated away in the States – if they were allowed to get off the ground at all.
Proximity to the mainland provides access to wealth and high skill, while the separation and economic autonomy make it a distinctly productive business zone. The island is situated in the Caribbean Sea with access to multiple markets including developed and emerging economies and established trade routes. Starting from scratch, it could build a high tech integrated electrical grid and modernized ports, and with low taxes and regulations, attract highly skilled technical workers. At every level, innovation would dominate as free enterprise sets the agenda. Puerto Rico would essentially be liberated from the U.S. tax and regulatory burdens but protected by its legal system to secure property rights and thwart corruption, fraud, and cronyism.
With government taking a backseat, free markets would liberate the people of Puerto Rico, restoring dignity alongside material wealth. Allowing local government to make local decisions rather than being subject rules from Washington, D.C. would give control to those who know the island best. Favoring economic freedom to government regulation, resources would go to their highest valued use.
This proposal would gather support from both sides of the aisle in Congress. To begin, there is a bipartisan desire to help our fellow citizens in Puerto Rico after the destruction of their economy and infrastructure. Democrats in Congress would rally around debt assumption as relief, while Republicans would be eager to tap the potential of free market reforms. Wrapped up as a hurricane recovery package, the timing is right.
On the mainland, we value the freedom of federalism, which allows different states to have wildly different policies and experiences. Just as states are the laboratories of democracy, Puerto Rico is poised to be a laboratory of both democracy and economic vitality. As the federal government has increasingly encroached on areas that were once the province of the states, much of the policy in America has become homogenized. Reestablishing the primacy of federalism to allow Puerto Rico to pursue low-regulation, fast-growth policies would provide a small-scale proving ground for the county to relearn what made America so successful.
In foreign policy terms, this would extend American exceptionalism and economics toward the Latin American world. With so much misguided focus on socialism and government control, the time has never been more critical to demonstrate the power of the free market and the value of freedom.
Rather than focusing on statehood or representation, this proposal frames Puerto Rico as an economic arena with the only priority being the prosperity of its people. In time, the politics that govern classification can be settled. The autonomy gained from the Economic Freedom Zone would simultaneously allow Puerto Ricans to forge a political identity and remain protected as U.S. citizens. The reforms will lift the citizens out of poverty, help reconcile pension obligations, provide a path for sustainable growth, and encourage local government stewardship that will render many of the statehood challenges moot.
Puerto Rico Could Be the Hong Kong of the West
Puerto Rico would become a magnet for investment with money pouring in from around the globe. As an Economic Freedom Zone, the local workforce would see a drastic rise in standard of living, while highly skilled and competitive human capital would expand economic potential. The unrestrained economic power of these reforms would bolster the political freedom of the island. Not only would Puerto Ricans be free from their current destitution, but they would get a taste of genuine political and economic freedom to truly engage with the world.
Having an economic power center so close to our shores would be a boon to our economy and would make theirs the envy of the world. Tourism, technology, luxury, and more would redefine Puerto Rico.
Puerto Rico is needlessly impoverished, and we have a unique opportunity to reverse course, improving the lives of its residents while also broadcasting the appeal of economic liberty to the world.
By restoring power to its people and unleashing the unbridled force of free market entrepreneurial capitalism, Puerto Rico will become a beacon of freedom and prosperity unparalleled in the Western Hemisphere. The invisible hand is knocking at the door. All it will take is for the federal government to open the door and get out of the way.