structural change in the economy of puerto rico

7/29/2019 Structural Change in the Economy of Puerto Rico

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during the 1982-83 periods. Total unemployment will overpass

the 300,000 persons level and the 30 percent rate.

2. Even though, recovery is expected from 1984 to 1987, it will only be

a partial recovery, since investment will remain relatively stagnant.

3. The economy will require a huge amount of external capital flows in

order to be able to grow at even a modest real rate during the next

six years, unless a drastic change takes place in the consumption

and savings patterns.

4. Chronic unemployment will persist at very high levels, even after

the economy shows signs of recovery, during the period of

simulation. What is basically needed is a combination of

decreasing interest rates, increasing public employment after 1984,

a sharp reduction of net factor payment abroad (by means of higher

levels of internal savings) and higher levels of domestic investment.

5. Emigration will somewhat dampen the effect of stagnant levels of

investment and no growing (in real terms) transfer payments.

6. Citibank slightly decreases its share of total commercial bank

deposits throughout the period of simulation.

6.3 Conclusions

Although the Model generates values for all endogenous variables for up

to ten years, and print values up to 1987, they become increasingly unstable as

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the time horizon advances beyond 1985. A wide perspective of the economy can

be drawn from the results obtained.

The effects of the recession are clearly visible in 1982 and 1983 as

reflected in the rates of growth of Ex ante Aggregate Demand, Real GDP,

unemployment levels and as a percentage of the labor force, and specially total

investment. These effects are less pronounced in the Best Guess Scenario. The

long term trend in the ex-ante (desired or expected) values of Aggregate Demand

and Supply and in the Financial and Foreign trade ex-ante gaps are present in all

scenarios. This, of course, is to be expected given the structure of Puerto Rico's

economy.

Several conclusions can be reached from the analysis of these :

1. The economy of Puerto Rico will require a huge amount of

external capital flows in order to be able to grow at even a

modest real rate during the next five years unless drastic

changes take place in the consumption and saving patterns.

2. Chronic unemployment will persist at levels which are close to

25 percent of labor force throughout the period of simulation.

Only a combination of decreasing interest rates, increasing

public employment after 1984, a sharp reduction of net factor

payments abroad, and emigration can dampen the force of the

reductions in real fixed investments and transfer payments.

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3. City bank slightly decreases its share of total commercial bank

deposits throughout the period.

We must indicate that the Citysim forecasts of constantly decreasing short

and long term interest rates are not shared by us. Rather, we see continuing

high rates of long term interest rates and highly volatile short term rates during

the simulated period.

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APPENDIX

COMPUTER OUTPUTS FOR ALTERNATIVE SCENARIOS

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1. INTROUCTION

CITIBANK Management has shown special interest in the projected ex

ante estimates for Puerto Rico's Finance Gap as obtained from CORPLAN

Macroeconomic simulator. The estimates correspond to simulations generated

under a set of assumptions which were put together by a joint effort between

CITIBANK and CORPLAN. Although the terms and definitions of all variables

obtained from the model are incorporated in our report, we feel that the economic

and practical interpretation of the gaps generated by the simulator warrants some

additional attention. The following brief discussion has the purpose of clarifyingand further explaining the significance of the gaps results.

2. THE GAPS

The gross national output which is obtained from the production function

within the model can be interpreted as an efficient outcome of the utilization of all

factors of production -or a target level of output. Given the import requirements

of the present economic structure, then a probable, on expected (ex ante) level

of imports can be estimated. Together, the targeted level of gross national

output plus the expected level of imports, make up the aggregate supply

projected by the model.

The question that follows is whether aggregate supply will be compatible

with the expected or desired (ex ante) level of aggregate demand for goods and

services which will be generated by the economy. This, of course, is not neces-

sarily so. The consumption patterns reflected through the various consumption

functions of the model generate desired aggregate consumption levels which,

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together with the investment expenditures required by the target level of output,

may not equal aggregate supply. In that case an (ex ante) internal gap

appears. This gap is defined as the difference between required investment

expenditures and expected (ex ante) gross internal (domestic) savings.

Likewise, a trade gap can appear in the external sector of the economy.

This gap appears if the expected export level plus net unilateral transfers from

abroad cannot provide-the required amount needed to finance expected imports

plus net external factor payments. External factor payments include interests,

profits and dividends paid out (or repatriated) during the accounting period to nonresidents.

Now, after all transactions are made and all accounts are settled, expost

(or observed) supply and demand must be equal. Therefore, as recorded by the

national accounting system, the expost internal finance gap and the foreign trade

gap must be equal. In other words, the difference which may exist between

investment expenditures and internally generated savings must be exactly equal

to the deficit on current account which the economy experiences on its balance

of external payments. 3 The deficit in current account is financed by the economy

with a flow of external savings in the form of unilateral transfer payments and net

capital imports. In other word; investment expenditures cannot exceed available

savings. The economy will adjust itself, in some undetermined way, so that the

differences that may occur between investment expenditures and internal

savings will be exactly offset by the external net inflow of foreign savings

3 Note that net factor payments, which include such capital flows as repatriated 936 profits, tend to increase the deficit oncurrent account and therefore to increase the finance gap.

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(capital). Expost both gap must be equal. Ex ante they will probably differ.

3. ADJUSTMENT PROCESS

When there are differences between the ex ante gaps, the first problem is

to determine which tile dominant gap is. The dominant gap indicates the

constraining, or scarce, resource for the economy from the growth point of view:

internal savings or foreign exchange.

Puerto Rico has no foreign exchange (or convertibility) constraint.

Therefore it is not surprising that tile dominant gap generated by the model

happens to be the internal savings gap.

When the internal savings gap is dominant, and strict policy measures are

not applied to reduce it drastically, then the economy becomes characterized by

a great difficulty to finance investment with a large national component (housing,

public works, education, related construction, health related construction,

sanitary infrastructure, etc.) On the other hand, a trend develops which over-

stimulates imports. Now, what are the possible adjustments that will bring the

ex ante gaps to equilibrium. 2 There are two possible adjustments: either the

smallest gap is increased or the dominant gap is decreased. The first solution

implies that the flow of external savings (capital) increases through transfer

payments or through externally held investments (which have by definition a low

national (resident) content and which tend to increase the leveraged nature of the

economy. The reduction of the internal savings gap may be obtained by

reducing investment expenditures. This will assure that the target output level

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will not be obtained. Internal savings could be simulated. Thus, consumption

expenditures will be reduced and ex ante aggregate demand will be reduced.

Which of these alternatives, or combination of alternatives, is finally

responsible for the unavoidable adjustments will depend on the policy decisions

which finally are implemented?

4. THE INTERNAL FINANCE GAP

The internal finance is of special reference to Puerto Rico to the

intimidators in Puerto Rico. Two components are of special interest. Obviously

the capital out-flow through 936 profit repatriation increases the finance gap andreduces the availability of domestic (although not national) savings. This out-flow

can be compensated by an increase in transfer payments, and/or direct foreign

investments. Present federal policies have put a stop to the growth rate of

transfer payments. The general economic outlook in the U.S. economy and

within the economy of Puerto Rico, do not point to an increase of externally held

investments.

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structural change in the economy of puerto rico

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