Social and environmental goals in the new Spanish Public Contracts Act. Public procurement is not only the procedure to obtain goods and services for the administrative bodies. His mayor role Is to serve as an instrument to achieve political objetives. Public contracts are, in some, a way to implement public policies. Even if it’s not necessary to remember that almost between 15-20% of GIP is spended through public procurement. In every simple contract we find the expression of an administrative policy. Of course is more clear when the Administration spends building a new infrastructure, but even in a typical and simple contract for cleaning services in a public school we can find policy. The last Directive exprime this idea when it says:
§2 “Public procurement plays a key role in the Europe 2020 strategy, set out in the Commission Communication of 3 March 2010 entitled ‘Europe 2020, a strategy for smart, sustainable and inclusive growth’ (‘Europe 2020 strategy for smart, sustainable and inclusive growth’), as one of the market-based instruments to be used to achieve smart, sustainable and inclusive growth while ensuring the most efficient use of public funds. For that purpose, the public procurement rules adopted pursuant to Directive 2004/17/EC of the European Parliament and of the Council (4) and Directive 2004/18/EC of the European Parliament and of the Council (5) should be revised and modernised in order to increase the efficiency of public spending, facilitating in particular the participation of small and medium-sized enterprises (SMEs) in public procurement, and to enable procurers to make better use of public procurement in support of common societal goals.
The European directive is new including a new perspective of the social and environmental criteria in public contracts across its articles: ambiental and social labels, flexibilizes the link between the object of the contract and social and ambiental objetives, recognition of life cycle and the sustainability of the production process of the works, supplies and services as a element in the public procurement, and among other important issues, enacting the new innovation partnership for the development and subsequent purchase of a new, innovative product, service or works.
The new Directive is one of the reasons why our recent Act 9/2017 of Contracts of Public Sector focus his articles in obtaining political, social and ambiental objetives through the public contracts. The other one is our tradition, especially after the 2007 Contracts Act, that links public contracts and social objetives. I guess that our high level of unemployment is the cause of this perception of the public procurement in Spain.
In other words, when the Public Administration take the decision to open a public procurement a window is open for that administrative body to achieve, indirectly, its political objectives. Not only to obtain goods or a services. Even more important: to promote new goals that are positive for the society, because public procurement serves to change behaviors. Social protection, gender policy, environmental protection, employment for groups with a high level of unemployment… even compliance with tax legislation are objectives that can be accomplished through public procurement.
I think it’s necessary to remark one argument. Competition policy is absolutely important, but if we have only this objective, we have a magnifying glass that distorts the vision of reality. That is what happened with some decision of the European Court of Justice, whose doctrine has been modified in the last Directives.
I said early that the Spanish Act 9/2017, approved on November 8th, has favored the achievement of social, environmental and innovation goals. There are many mesures, direct and indirect whose objective is the obtention of an additional value for money in public contracts. There are actions that brake some negative behaviors of the Spanish administration. When we analyze jointly all the previsions in the Act we have the perception that a new understanding of the quality appears to the eyes of the Administration.
For that reason, I think that even more important that the “new regulation” is the transformation of the public administration. If some one analyze the PPP in health sector, it can be affirmed the bas performance of the public administration and even more, the waste of public money. It was a problem of how the contracts were designed and the skills of the public administration monitoring it.
I don’t have any statistics about the skills of the Spanish administration in public procurement. But I have the facts coming from a French one, about its civil servant in public procurement, that are disheartening: 60% of the workers in public procurement didn’t have legal skills nor they had a special exam (in public procurement and in public contracts). The didn’t have previous training in these areas. Even more, 60% of the workers in public contracts lack knowledge about the economic sector on which they develop their activity. For me it’s the most important problem that the European Union has with public procurement and public contracts.
Come back to the new Spanish Act. In this direction the key to understand the new system is article 1.3. Paragraph 1 and 2 are related to “economical and competitive aspects in public procurement” and in paragraph 3 we can read two remarkable aspects: first that pubic procurement introduce in a transversal and mandatory way, social and environmental criteria linked with the object of the contract. Secondly, the conviction that its inclusion provides a better value for money in the contractual provision, as well as a greater and better efficiency in the use of public funds. I have to remark, also, that this prevision wasn’t in the Project of the Act send by the Government to the Parlament but after the amendments submitted by the left wing party it was accepted unanimously by every parties in our Parlament.
From this point I want to give notice of some specific elements that we can find through this extremely long act:
From a qualitative point of view, it is very important the amendment to a administrative practice of the last years: the adjudication of the contract is not only depending on the price but it will consider other aspects of the contracts, that affect to the performance and social and environmental issues. In the last years, specially in the crisis years, it has been a tendency to decide the tender only taking into account the price. Some people say that it’s also a path to fight against corruption, but, from my point of view, it has nothing to do with it. Overall, the results were very unsatisfactory.
This idea is now on our new article 131, saying that the public sector shall base the award of the contract in best price-quality ratio; “which shall be assessed on the basis of criteria, including qualitative, environmental and/or social aspects, linked to the subject-matter of the public contract in question” as is in article 67 of the Directive.
Even more, the Spanish article 127 imposes the obligation on the administration to considere the introduction of social, environmental and innovation elements in every procedure. Those elements can affect also to the suppliers that want to tender in the procedure.
According to article 145, social and environmental clauses can be related to many aspects of the contract among we can find the following: social integration of people with disabilities, disadvantaged people or members of vulnerable groups; the gender equality plans that are applied in the execution of the contract and, in general, the equality between women and men; promotion of female hiring; the improvement of working and salary conditions; stability in employment; hiring of a greater number of people for the execution of the contract; training and protection of health and safety at work; application of ethical criteria and social responsibility to contractual provision; or the criteria related to the supply or use of products based on fair trade during the execution of the contract.
And he environmental characteristics may refer, among others, to the reduction of the emission level of greenhouse gases; the use of energy saving and efficiency measures and the use of energy from renewable sources during the execution of the contract; and the maintenance or improvement of natural resources that may be affected by the execution of the contract.
The next aspect is related to the conditions of execution. In article 70 of the Directive, that are prometed: “Contracting authorities may lay down special conditions relating to the performance of a contract, provided that they are linked to the subject-matter of the contract within the meaning of Article 67(3) and indicated in the call for competition or in the procurement documents. Those conditions may include economic, innovation-related, environmental, social or employment-related considerations”.
This idea is in article art. 202.1 of our new Act, but in a new point of view: is mandatory to include at least one social, environmental or innovative clause for the execution of the contract.
First year of Donald Trump’s Presidency. January 20Th 2017, Donald Trump took office as the 45th President of the United States of America. It is not a long period of time but the feelings are quite different: it seems much longer because of the disaster that the White House is. And, more importantly, it possible to maintain that President Trump and his Cabinet members are implementing a hardline conservative agenda that is quietly reshaping America. He is, right now, changing the social contract of America.
We can summarize the following seven points as the most important hits of Trump’s Presidency from a European point of view:
First, Puerto Rico. Irma and Maria, two Hurricanes brought to the island the most important humanitarian crisis since the beginning of the last century. The response by Trump was disdain, arrogance and lack of concern about the problem. Puerto Rico wanted not only help from the American institutions but also its integration as the 51th state. Again, we can see disdain from the White House. No response. And the worst issue for the island, Trump’s Tax Plan provides a new tax for every good imported from Puerto Rico.
Second, Trump’s decision to exit the Paris Climate Deal, a decision that will be in force next year. This decision exemplified Trump’s environmental policy. Among other issues, in one year, he allowed to build the pipeline from Alaska, fracking’s development and repealed the Obama Climate Action Plan, which cut emissions of polluting gases by the coal sector. One year later, the situation is worse.
Fourth, a new very aggressive migratory policy. The wall between Mexico and the US is the cornerstone of this policy. Some days ago, he changed the deportation policy of citizens coming from El Salvador. This policy is complemented with restrictions and offenses to non-white (and poor) communities and in the limitation to access to the US for people coming from Middle East. A huge contradiction with American heritage and the own personal conditions of President Trump and his family.
Fifth, the aggressive policy against North Korea. Is clear that Kim Jun Un is provoking a global crisis. But the response by Trump provoked, also, an increase of the nuclear race in North Korea whose consequences are unclear but dangerous.
Sixth, during this year the United States exited every multilateral forum on free trade: Trans Pacific Partnership or TTIP. Right now, he is renegotiating a new agreement for commercial relationships that should substitute the NAFTA (signed by Clinton with Mexico and Canada in 1995) to the detriment of Mexico. He wants only bilateral agreements where the US was able to impose its supremacy.
Seventh, a new tax policy. New policy thinking of rich people. It is also remarkable are the attempts to derogate Obamacare, the public health policy by the former President so important in a country without any social protection.
Last but not least. Two notes about Donald Trump himself. First, his problematic situation with his companies and economic interests. We can affirm today, that he is in a huge problem of interest conflict and the response of the American institutions are quite different as compared to the past. But interests conflict in a second way: his relations with Russia that is are under scrutiny by a special prosecutor: this one can be cause of a impeachment in the future.
The second one is the feeling of misrule of its government. He needed a long time to have an executive. He rules its Presidency in a personalistic, little thoughtful and very impulsive way. The famous book Fire and Fury: Inside the Trump White House, by Michael Wolff shows a chaotic White House. It shows Trump as an egotistical, angry, uneducated man incapable of exercising reasonably his rule as President.
In my point and view, that book is not for knowing new things about Donald Trump and his Presidency. It is gossip and therefore morbid. But in fact it’s a book that reminds one of The Emperor’s New Clothes, the short tale written by Danish author Hans Christian Andersen. As in this tale, it is a story about the “naked King”, the man who inhabits in the White House. But in that case, it was the imagination of a writer. Nowadays Wolff writes about what he saw and heard in the White House. And that is a problem for the world.
Fourth Industrial Revolution and Challenges for Governments (I)
The Fourth Industrial Revolution is already all around us. It’s possible to characterize by the digitalization, Artificial Intelligence and machine learning. We will also see disruptive changes in robotics, 3D Printers, nanotechnology and biotechnology, materials science involving the discovery and design of new materials, among many others.
But the Fourth Industrial Revolution is not only about technological changes but also how deep and fast the speed will be developed. The changes will be disruptive because of the integration of knowledge and scientific disciplines. Last, the impact of the Artificial Intelligence will create new ecosystems such as the more recently named Environmental Informatics. Personal Assistants as Siri are good examples.
Actually, this revolution is different in scale, scope and complexity from any that have come before.
So, the Fourth Industrial Revolution is about Science. But right in the middle of that process we can find Governments. There are many points of view that can affirm it, some general and other very specific ones.
In the beginning there are Governments who should provide access to technology in order to have more included citizens enjoying the benefits of the new technological standards and the global society.
Secondly, Governments should be aware about the conflict between the promotion of tech improvements and assuming every consequence for the development of any public policy. Even more, there are many ethical issues involving the new technological advantages. We’ll find many changes in social behaviors that will be the consequence of new kinds of dependences because of all this new products.
The impact of Artificial Intelligence will be disruptive. Obama’s Administration was aware of the difficulties for the States and began to develop a strategy to accommodate the American Administration to the challenges of the AI.
The global companies are dramatically growing its volume. It’s very easy to find some of the global actors that are bigger than many of the GDP of the States. It is they are who are designing the new society, with a small workforce and reducing every day costs of production.
The risk of delocalization is not only more only provoked by companies anymore but also by people who have a very easy access to the Virtual Private Networks. That means the supervision powers by the State are more difficult. The deeper problem for States are is the tax optimization programs that many companies have in order to localizase localize taxes in the most competitive country.
The impact on Government is very deep and complex. We can identify at least six big issues for the next years:
1. Technology will empower citizens. That is, it will be easier for citizens to participate in the public life. But at the same time we are witnesses to a regression of the democracy not only in countries of the former soviet bloc but also in the USA. People don’t vote as much as they did before, mostly because the consequences of their vote are not so clear.
People will participate through alternative process, as a social network. If Governments have the ability to introduce this revolution in it diary daily behavior, they will be able to have so much information about the society. The Big Brother can be very close to us. It’s an opportunity to help to design better, safer and smarter cities.
The conflict is due, among other things, to the private ownership of those social networks. Private ownership that can reduce democratic rights and limit political participation. That is what Facebook does: it’s the most important media thanks to the friendly collaboration by everyone.
But it can also be also the problem of hacker and its influence in the results of the democratic process. The concerns about the Russian influence in Trump’s election through the electronic vote is a good example. An example that gave the excuse to forbid electronic voting in the Netherlands some months after the American election. It is a good manifestation of the risk society, developed by Ulrich Beck.
2. Do we regulate algorithms? This may be a strange question for you. Regulate a mathematical formula, a list of steps to follow in order to solve a problem, and written before writing codes for computers.
But why should the Government regulate some algorithms? An example can give us the key: Algorithms are the substitute of our driver license when the self-driving cars will be on the highways. But we can’t remain on in the question of self-driving cars.
From that, algorithms must fulfill some requirements. Algorithm regulation have to articulate basic rules of planning and control; as is required in other fields of science. Public Administrations can receive reports about the industrial process and, just in case, monitor how it works. But it’s also the correct procedure for analyzing the problems and preventing them in the future. Right now we have a good example in the black boxes of the airplanes.
It’s important to note that the changes that are important in the content of the procedure but also in the procedure to adapt it. It should be simpler. It’s impossible to pass a regulation that needs such a long procedure as we have. But, also the techniques of regulation should be simpler.
3. The third relevant aspect of the fourth industrial revolution in the Governments is the effect in some monetary aspects related to the money.
First, we are watching in the media how blockchains want/aim to substitute the traditional currencies. There are many problems are behind this proposal. Problems of international economic stability; problems for the economy of every single state that won’t control one typical and very important aspect of the economic policy: the monetary policy that is involved with inflation and salaries.
Second, there is a problem of trust in a decentralized currency system, where there is no State behind it. Right now we can see the bubble in this kind of systems, especially in Bitcoin.
Third, it is a problem for our tax system (and, consequently of for our welfare State that needs these funds) because it is easier to avoid the payments. And it is easier to delocalize activities in order to have a better best tax regulation.
Fourth, blockchains jeopardize the fight against money laundrying. That´s why, the Public administration in the United Kingdom wants to have the right to examine every transaction made on the internet, thanks to the Snooper Act, in order to supervise the real economic capacity of the people.
Those 3 points are the first ones that I want to refer to today Next week I will address 3 other examples of the changes that this industrial revolution will provoke in our life. It is a first approach that will be developed in other posts in the next months.
What we must retain is that this revolution is here. It isn’t a question to accept or not. This new industrial paradigm will provoke a crisis, a crisis because of the conflicts between the old and new values; the old and new behaviors and knowledge. But, as Antonio Grasmci said, that is a normal consequence of the evolution: “The crisis consists precisely in the fact that the old is dying and the new cannot be born”
Let’s make America lesser again … or the return to 1914. No one could think that a few months after a new President took his place in the White House America would lose its prominent role in the World. Today we can affirm that because of the decisions by President Trump, America has resigned the role he it has had since after the end of the Second World War.
We are not talking about power. Right now it is the most important economy in the world, as it has been since 1871, its army is still very powerful, more than any one in the world (even if has been changing in the last decades) We are talking about some softer but more powerful value: leadership. A leadership that is lost because of resignation and distrust.
In a few months, President Trump allowed America to lose his its leadership in Free Trade, in Defence and in Environment. All together it is a total loss of importance in the world. I can suggest that this is the return to the position before the First World War.
America doesn’t want to lead the new generation of Free Trade Agreements in the world. Right now the decision by President Trump to abandon the TPP is more than the withdrawal from a free trade agreement. By doing so, Mr. Trump reversed a free-trade strategy adopted by presidents of both parties dating from the cold war. By doing so, President Trump allowed China to improve the RCEP, the free trade brokered by China, India, Japan, South Korea and Australia among others. By doing it’s clear that he doesn’t understand how economic relations in a global world rule and the bad consequences to USA. I believe it isn’t time for the kind of agreements based on supremacy. Just what Mr. Trump wants.
The “America First” agenda in free trade forgets what Mr. Xi said in Davos this January against protectionism and thereof we can see that the new American tendencies a big gift: there is a vacuum that China seems eager to fill.
America doesn’t want to lead NATO. In the last meeting of NATO, Mr. Trump didn’t say the one thing about NATO he was supposed to say: his endorsement to article 5 — the keystone principle that an attack on one member is an attack against all —. That symbolic lack of compromise by President Trump provoked this response by Chancellor Merkel: “We Europeans truly have to take our fate into our own hands — naturally in friendship with the United States of America, in friendship with Great Britain, as good neighbors with whoever, also with Russia and other countries,” (…) “But we have to know that we Europeans must fight for our own future and destiny,” she said.
When President Trump announced that the United States would withdraw from the Paris climate accord he told the world that America is not involved in the most critical issue for the humanity. It was a victory for Stephen K. Bannon, Mr. Trump’s chief strategist, and Scott Pruitt, the Environmental Protection Agency administrator.
But by doing so, America let China and Europe to lead this process and to obtain a huge leadership position because of its importance. Right now Trump has only the support of Putin and it’s in the same position as Nicaragua and North Korea, the only countries that didn’t signed the Agreement.
The speech by Mr. Trump had a very impressive sentence: “At what point does America get demeaned? At what point do they start laughing at us as a country?” Mr. Trump said. “We don’t want other leaders and other countries laughing at us anymore. And they won’t be.” It reflects that he doesn’t understand the importance of cooperation in the global world and it’s a sign of some kind of complex on foreign affairs and the role of America in the world.
Its reflexion opens a new scenario where China and Europe seem to be very close: Merkel said “the cooperation of the European Union with China in this area will play a crucial role, especially in regards to new technologies.”
That’s clear: Trump gives an important gift in leadership in diplomacy and economics to China and Europe… and other countries that can assume the leadership in diplomacy.
The new position of America is strange It’s clear that some kind of decline of its position appeared some decades ago. But the withdrawal of a country of its role is usually the consequence of a very big crisis. It isn’t the case right now. It’s only a voluntary decision taken by the President helped by his alt-right staff to abdicate.
When was the last time that America didn’t have a leadership role in the world? We can discuss if it was before First World War -the first global conflict where America participated- or after the second one, whose role in the reconstruction of Europe was very important.
The question is who will fill the hole that America is has opened in global leadership?
It is very clear that China can assume that dominant role in the global economy. Mr Xi said in Davos. We have to remember the Asian Infrastructure Investment Bank (AIIB), the new multilateral financial institution brokered by China because America didn’t want to assume its duties in the IMF.
What would the consequences for the world be? Is it a positive thing for the world that the country that is buying Africa, destroying fisheries and breaking international law in free trade and human rights will be the global leader in the next decades?
If it’s not China, the eyes land on Europe. But what about Europe, without a real foreign policy; consumed by Brexit, with a lot the problems with values, institutions and economy and in the minimum of popular endorsement in the polls? Is Europe able to assume a prominent role for the next decades? Only by accident.
Digital Sovereignty and Global Data Business. Can you imagine that your Government has the right to watch your web’s history, what you bought and where, how much coffee you drank in your last Nespresso machine connected to the Internet? Even more, can you aware that that Government has the ability to treat that information?
Well, that is happening right now. But it is not your Government who is doing it but some companies whose HQ are in the USA. That is the latest business niche, the global data.
When we talk about the global business of data, the first thing we have to keep in mind is that without our friendly cooperation it wouldn’t impossible. And even worst, maybe that is impossible to avoid. Every time we turn on our computer linked to the Internet, we take our smartphone or the tablet or we are driving our car (among other things) we are giving the companies a gift: our data.
We can find some examples of similar public activity. The Investigatory Powers Act of the United Kingdom is following the track for protecting the public interest. But that is not this case. The only reason to have and processing the data is trading and doing business. Of course the profit of the business is not shared with us.
John Chambers, CEO of CISCO said recently that “Our analysis indicates that there is as much as $14.4 trillion of potential economic “value at stake” for global private-sector businesses over the next decade, as a result of the emergence of the Internet of Everything”.
Artificial Intelligence is, at the same time, the next big issue in the protection of human rights for the next decades. You have in your mind that Artificial intelligence is the future. Maybe you think that Artificial intelligence is science fiction. But the reality is that Artificial intelligence is already part of our everyday lives.
Let´s pause a moment on what AI is able to do right now using the data that is on the cloud. Yes, I’m talking about every single bit of data that we send with our email, walking with our smartphone or reading this blog. Everything is uploaded to the cloud. Behind the sexy name of “cloud computing” we should think of “some dark bunker in Idaho or Utah.” And with cloud comes Artificial Intelligence.
AI can discriminate between sounds and images; is able to know the IP that your device is using to access to the internet. That is easy. The most important thing is that AI does deep learning. With deep learning, the machines “runs deep learning algorithms, simulating human intelligence, and acts as the brain of computers, robots and self-driving cars that can perceive and understand the world”, as Huang said.
The profits of that activity are incredibles. Just one fact: for Amazon the business about data is more important than its activity as seller in the United States. It obtain more profit. The data arrive to Utah or Idaho (where the servers stay) from everywhere in the world. The profits are increasing day by day, and the risks for us also.
It is the moment in history where the knowledge of the world population is so waste. Now more than ever that knowledge is concentrated in so few people. The risk of a real Big Brother is real.
Facebook, IBM, Google, Amazon or Apple obtain a lot of profits with data and they have so much information about us. It is strange how confident we are with these private companies… and so few we are with the State. It’s possible that you are thinking that they need a lot of money for developing its products and technologies. But at that price?
They are developing many technologies that are helping us. Right now, for example, Apple has a division studying the impact of glucose and how to obtain data to improve the life of diabetics. But, at the same time the behavior of those companies is not as kind as it should be. The deep knowledge of everyone of us coexists with the delocalization of activities and profits to save costs. What would happening if every single economic activity do the same.
Profits are increasing day by day. Facebook, for example. Your account give the stockholders a minimum of 3.62 $ per year. Now many universities have their cloud provided by Google, with storage, e-mail and other electronic tools for professors, staff and students … apparently for free. Every time we use the internet the information arrive to them who are obtaining profits, with our cooperation but without our conscience. The real problem is that no one of us is willing to return to the pre-smartphone’s era.
Nowadays there doesn’t exist a debate about the consequences for the population of that concentration of knowledge in those companies.
In Europe it is the European Court of Justice of the European Union that seems to be more worried about that issue. But it isn’t in the agenda. In the USA neither leaders of the Democrats as Elisabeth Warren or Bernie Sanders are focused on that concentration of information in the hands of a few num companies.
It is especially strange in the case of Senator Warren who fight against the bank and promoted the Consumer Financial Protection Bureau (CFPB). The problematic is similar. There is not a public debate about the problems and consequences for the population and even less a debate to open new ways to redefine the relationship. It is possible that the traditional good relations between democrats and Silicon Valley are an impediment to do it.
Even more, the state is promoting the development of that kind of activities, as we can see the so called Obama’s start-up.
Only in France things begin to be different. The first issue for the French Government is the link between AI and taxes. But they also talk about the earns that the producers of the data should have in order to share the profits. Right now a new concept is taking its first steps: digital sovereignty. It’s a very deep concept whose consequences come from taxes to human rights as the right to privacy or the secrets of communications, from national security to the governance. And is also a geopolitical issue that concerns many countries because most of the data are now in the USA, even if the production was everywhere in the world.
But right now the question is: Is it possible to do something about it? The concentration of power in so few companies reminds the problems that the United States had with ATT or Standard Oil. In both cases the solution was the same: the beakup of the companies, one in 1982 the second at the end of XIX century. It is a usual solution against monopoly and that can be useful face a oligopolistic situation.
The European Parliament suggested that solution against Google. For them, Google is too so it is necessary to divide the company in two: one for the searching activities and the other for the rest. Of course without any relationship between them.
Edward Snowden warned us about the abuse of the information by the American authorities, who are very naïve if they think that they can prevent another 9/11 by obtaining so much data about everyone in the world. Just remember the Boston Marathon.
But the problem is now deeper because of the use of the data by private companies for its own profit. The situation in America is so problematic that we can say, as Mozorov said: “My name is America and I’m a dataholic”.
From Europe we should be more concerned about that issue… but in the Internet era without cooperation there is not solution.
Crisis of Puerto Rico in 5 Graphs. On September 30 2016, a historical fact took place in Puerto Rico: For the first time since 1898 the authorities of the USA took under their control the finances and most of the agencies of the Government of Puerto Rico. It was the consequence of PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act), an Act of the Congress of the USA with an ironic name that dramatically changed the economic relation between Puerto Rico and the United States.
Actually, there is a Financial Oversight and Management Board for Puerto Rico that consists of seven members appointed by the President of the United States and one ex officio member designated by the Governor of Puerto Rico. The Board was established with broad powers of financial and budgetary control of Puerto Rico. Those powers are incompatible with the standards of self-government of the United Nations and in fact are a mutation of the rules of the Constitution of Puerto Rico… without modifying a line of its text.
During the years of the crisis we can identify two aspects of its relationship with the United States: Puerto Rico is was excluded from bankrupcy (that was a good solution in other cases, such as Detroit) and when they decided to legislate, the Supreme Court of the United States affirmed that Puerto Rico can’t legislate to restructure its debts and struck it down. These are some consequences of being only a Free Associated State, or seen from the American side, an unincorporated territory under the control of the Authorities of the United States.
How can we summarize the crisis of Puerto Rico?
The crisis in Puerto Rico is very deep
The crisis in Puerto Rico is long and very deep. We can’t say that is such a crisis as Greece suffers but it is strong, persistent and is affecting both the public sector and the private economies. The big difference with Greece is that Puerto Rico is part of the U.S. Fiscal Union.
In this moment, we can say that every fiscal year begin with a deficit over the 20%. The public debt is over 100% of the GDP and has ballooned to $72 billion. If we read the latest statistics, we can see for example that the Last Economic Activity Index of 2016 reflects a dramatic reduction in only one year and the lowest number in 25 Years.
The unemployment rate is very high in comparison with the United States. And the number of private jobs is lower than in the main States. The conjunction of both elements complicate the resolution of the crisis: if one of the consequences of the austerity that the Board and the Government of Puerto Rico are applying is the reduction of jobs in the agencies and the Public sector, the revenues in taxes become even lower.
But another fact is even more important: less than the 40% of the population is productive. The average in the USA is more than 60%. There is another impressive figure: since 2007, Puerto Rico lost 25% of its jobs. It is a strong impediment to balance the budget.
Where can we find the origins of the crisis of Puerto Rico?
But the crisis in Puerto Rico is not new. In my opinion there were three decisions of the Americans authorities that provoked that crisis:
Yes, the North American Free Trade Agreement is one of the causes of the crisis. The objective of this Agreement is to establish a free trade area between Canada, Mexico and the USA but had an unexpected effect on the island: Puerto Rico lost its comparative economic advantage because of Mexico. Even its location is now a point of disadvantage with other partners in NAFTA.
In 1996 the Section 936 of the Tax Code of the United States removed, with the “strong support“” of Governor Roselló . That Section allowed the manufacturing sector in Puerto Rico to grow in spite of the cost of other economic factors. The effect of the legislative change was immediate: when the new regulation was enacted, the decline of the manufacturing sector in Puerto Rico began.
I can imagine another legislative change in American policy that affected to Puerto Rico: the process of peace in Ireland was brokered by the USA by granting tax benefits to companies that located activities in that country.
We can see in that graph the evolution of the production in Puerto Rico since the mid 90´s
But there are other problems in the economy of Puerto Rico.
The Merchant Marine Act –known as Jones Act- is a strong problem that raises the price of the goods and provokes a loss of competitiveness of the economy because it prevents foreign-flagged ships from carrying cargo between the United States and other noncontiguous territories such as Puerto Rico. The price of transportation and the consequence of the Jones Act is another point to be revisited.
We shouldn’t forget some decisions taken by the American institutions in the 20’s of the last century that provoked some issues in the agriculture of Puerto Rico. And there is a big problem with the price of the energy that causes a lack of competitiveness of such an economy.
What are the consequences of the crisis?
The first consequence of that deep and prolonged recession that began so many years ago is that Puerto Rico, its administration, is now in a severe debt crisis. Even more, right now there are many problems in order to determinate the law to the restructuration of the debt and it should be a huge liability of for the Government in case of failure of payments.
But the crisis is not only in the Public Sector. The huge consequences of the crisis in the private sector were two, one economic and the other social:
The first one is that the salaries were frozen. Right now the gap with the United States is growing day by day.
The social consequence of the crisis is the population decline in Puerto Rico. Between 2006 and 2015 300.000 people left the island, mainly to the United States. That means about 10% of the population in 2006. Even more, it is a good educated workforce that left the island in the last 15 years.
Regarding to the population, there were two other effects for being considered. Its ageing has a strong impact on the economy and on public finances and the stability of the public finances. The second one is the low birth rate because of the lack of future prospects, the worst conditions in public health and public education. It is the first time in its history that the average age in Puerto Rico is higher than in the United States.
The solution of the crisis of Puerto Rico is very complicated.
From a political point of view, Governor Roselló brokered a referendum about the legal relationship with United States that remains unsettled. He is promoting the position of being the 51th State in the United States of America… but without the positive or negative decision of the American Congress.
From an economic point of view, Puerto Rico is another State that suffers the consequences of the austerity policy. The solution of the crisis can’t be found in the cuts nor in the raising of taxes because the strength of the economy is very low. According to Stiglitz and Guzmán, “Puerto Rico is in a demand-constrained regime, demonstrated by the significant subutilization of its factors of production. The Board’s plan markedly exacerbates this problem, without showing any awareness that it is doing so. (…) The PROMESA Board was supposed to chart a path to recovery; its plan makes a recovery a virtual impossibility. If the Board’s plan is adopted, Puerto Rico’s people will experience untold suffering. And to what end? The crisis will not be resolved. On the contrary, the debt position will become even more unsustainable”.
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