1

2

3

Bienvenida: Sra. Victoria RodríguezVicepresidenta Auxiliar y Directora Ejecutiva, Instituto de Política Pública

Introducción:Sr. José F. MéndezPresidente, Sistema Universitario Ana G. Méndez

Conferencia Magistral: Governing for Competitive Advantage, Economic Growth & ProsperityHon. Maurice McTigueVice President, Mercatus Center, George Mason University

Reacción de:Sr. Roberto JiménezDirector General, Vision-to-Action, Inc.

Reacción de: Sr. William LockwoodPasado Presidente, Banco Gubernamental de Fomento y miembroConsejo Asesor de Reconstrucción Económica y Fiscal

Reacción de:Sr. Josen Rossi Presidente, Asociación de Industriales

Comentarios finalesHon. Maurice McTigueVice President, Mercatus Center, George Mason University

4

5

6

23

23

24

25

4

BIEN

VEN

IDA

desarrollo de la tecnología electrónica para agilizar los procesos del Gobierno y crear sinergía entre las agencias. Los servicios electrónicos a través del Internet reducen considerablemente costos operacionales y permiten brindar servicios de forma rápida y accesible al ciudadano. A través de un gobierno electrónico más efectivo se podrían consolidar los servicios administrativos como nómina, reclutamiento, adiestramientos, información financiera, requisiciones, contrataciones y compras y sistemas de archivos, entre otros.La consolidación de agencias, es otra de las áreas sobre los que les invito a reflexionar como parte de la discusión que iniciaremos dentro de pocos minutos. En Puerto Rico hay muchas agencias que ofrecen servicios similares, las cuales podrían lograr una reducción sustancial de sus costos operacionales si consolidan esfuerzos y recursos. Del mismo modo, se reducirán procesos burocráticos, duplicación de posiciones y directores con las mismas funciones y definitivamente, mejoraría la comunicación entre agencias y departamentos.

Deseo terminar esta breve introducción compartiendo con ustedes una cita del mensaje del presidente de los Estados Unidos, Honorable Barack Obama durante su ceremonia de juramentación: “Que se cuente al mundo del futuro que en las profundidades del invierno, cuando sólo la esperanza y la virtud podrían sobrevivir, la urbe y el país alarmados ante un peligro común, salieron a su paso”. Aquí en Puerto Rico todos juntos salgamos al paso del peligro, apostemos al futuro y a la esperanza, tomando decisiones valientes hoy para transformar el Gobierno de manera que tenga las herramientas adecuadas para sacar el país adelante.

Sra. Victoria RodríguezVicepresidenta Auxiliar y Directora Ejecutiva, Instituto de Política Pública

El inicio del año 2009 está enmarcado en un conjunto de eventos sin precedentes para Puerto Rico y para los Estados Unidos. A nivel local, el gobernador Luis Fortuño ha propuesto un plan de reactivación de la economía con una inyección de alrededor de 4,000 millones de dólares para obras públicas y para pagar la deuda de gobierno a suplidores, entre otras iniciativas. A nivel federal, el presidente Barack Obama ha propuesto otro plan que podría representar para Puerto Rico alrededor de 2,400 millones de dólares para la reparación de escuelas, inversión en la educación, infraestructura y ayuda adicional en el Programa de Asistencia Nutricional, entre otras medidas.

Este panorama representa la esperanza de un futuro mejor, cuyos frutos esperamos todos. El Instituto de Política Pública, su Junta Asesora y todo el equipo humano detrás de cada iniciativa que emprendemos se siente parte de esta esperanza y de esos frutos tan esperados. Por eso es que iniciamos el 2009 con ese foro sobre la transformación del gobierno.

A la luz del nuevo milenio, la globalización y la rapidez con la que se mueve la economía del mundo, no queda duda que hay que transformar el Gobierno. Los exhortamos a reflexionar en el marco de todos los cambios que se estimen necesarios, pero particularmente sobre dos cambios principales: el gobierno electrónico y la consolidación de programas gubernamentales. Es necesario extender cada vez más servicios electrónicos a los ciudadanos. Más aún, es necesario el

5

INTR

OD

UC

CIÓ

N Sr. José F. Méndez, Presidente, Sistema Universitario Ana G. Méndez

En estos momentos en el que iniciamos un nuevo año, es un momento de reflexionar sobre la necesidad de transformarnos para mejorar. Transformarnos en todos los sentidos de la palabra. El objetivo de este Foro y de la conferencia magistral del Honorable Maurice McTigue es precisamente ése: reflexionar sobre la necesidad de una genuina transformación en todas las estructuras y estrategias que nos atan a viejos paradigmas. Expertos coinciden en que una transformación del Gobierno conlleva cambios profundos en su estructura para atender de manera más eficiente las presiones financieras y la lentitud del Gobierno en la prestación de servicios al ciudadano.

El diccionario Webster define transformación como: “un acto o instancia de cambio; cambio en estructura, cambio en apariencia, cambio en carácter. En estos términos, transformación es mucho más que mejorar lo existente. Conlleva cambios fundamentales en la organización, en el diseño de programas, en los procesos operacionales y en las operaciones para mejorar todos los niveles de ejecución y reducir los costos. Entre los cambios para reducir los costos del Gobierno se requieren acuerdos inmediatos entre varias organizaciones, en diferentes niveles de Gobierno. Sin embargo, para lograrlo se requiere desarrollar la capacidad de adaptarse a nuevas circunstancias con el fin de crear un nuevo enfoque.

Hace cerca de dieciséis años que Al Gore, vice-presidente de Estados Unidos, lideró un equipo de trabajo para buscar cómo reinventar el Gobierno Federal en Estados Unidos.

Aquel equipo contó con civiles, empleados del Gobierno estatal, Gobierno local y varios consultores privados, incluyendo a David Osborne, co-autor del libro Reinventing Government.

El equipo de trabajo del National Performance Review, como se conoció el esfuerzo del vice-presidente Al Gore, se dividió en dos grupos. Un grupo examinó las agencias individuales y el otro se concentró en los sistemas gubernamentales amplios, tales como la contratación en el Gobierno Federal y presupuesto. También se crearon grupos de trabajo en las agencias. El procedimiento básico que se siguió fue observar de cerca a las organizaciones exitosas en gobiernos locales, en el Gobierno central y en otros países, con el fin de indentificar las características de éxitos en éstas. Se generaron más de 100 recomendaciones finales y se inició un proceso de cambio que rindió grandes frutos, sin embargo, se estableció que los cambios tenían que ser constantes para ser efectivos.

Este foro del Instituto de Política Pública pretende aportar a la discusión sobre cómo podemos propulsar ese cambio y cómo podemos transformar el Gobierno. Nuestro invitado especial, el Honorable Maurice McTigue, ex-miembro del Gabinete y del Parlamento de Nueva Zelandia, Embajador de su país en Canada del 1994 al 1997, e investigador distinguido del Mercatus Center en George Mason University. McTigue posee un extenso caudal de experiencias en la transformación del Gobierno de su país, que llevó a Nueva Zelandia de una crisis parecida a la que sufre hoy Puerto Rico, a uno convertir en uno de los países más prósperos del mundo. Los invito a reflexionar sobre este tema junto a nuestro conferenciante y al panel de reacción.

6

CO

NFE

REN

CIA

MA

GIS

TRA

L

Hon. Maurice McTigueVice President, Mercatus Center, George Mason University

Ladies and gentlemen, if I were in my native New Zealand I will say you “I greet the spirits of your ancestors, I greet the spirits of your parents and I greet you”. I just say so much better than the people from Washington because they will say “I’m here from Washington and I’m here to help you” and the audience would immediately leave.

I want to spend a few moments in just talking a little about some of the things that had happened in the United States in the last nine weeks, because I think some of them are very relevant to the circumstances that I see in Puerto Rico. President Obama has done a brilliant job in preparing the American people for the battle ahead. He said some things that I think very appropriate for people and leadership in Puerto Rico to take on board.

In his inaugural address on Tuesday he used the word “I” only three times. The predecessors has used “I” many dozens of time. He used the word “we” all of the time. Since the 4th of November he has not tried to apportion blame for the situation facing the United States and facing the rest of the world. He is focus on whose going to have to fix it, a focus that will require joint efforts of all the people of the United States. The other thing that he is managed to do is that he has convinced the people of the United States that the problem is real. That it cannot be put off to a later date; that it cannot be solved by the government on its own. And the third thing that he is done, is that he is focus on the fact that the cure is going to require hard work and sacrifice from everyone. And what he has done, in my view, is that he has already started to restore confidence in government before he even took office.

So, those things are important as founding principles. In my experience, no country has been able to rise to itself from crisis if it wasn’t a combined effort by all of the different parts of society. The process in

7

Puerto Rico is going to have to be contributed to, by about everyone including the people of Academia.

And I say “thank you very much” to the President and the Chancellor of the University here for the invitation to come and speak to you. I’m not here to solve your problems. I’m here to give you some examples of other crisis on other places, or countries that have faced similar problems. In the end, it is a message of hope because of what you will be able to see as other countries have faced circumstances and situations that are similar to or worse than those experienced in Puerto Rico and they have triumphed in an unbelievable way. So I say thank you to Academia for the contribution that has already being made, to the Senators and to the Representatives of Government. My view of that role is that you need to take the ideas of other people and many of those generated in Academia and develop strategies around them that will allow our Government to put them in place, so you can solve problems.

As a Minister, one of my roles was to run all of the government’s major trading operations. I was the chief administrator and with my Board of Directors I had one prominent rule, and that rule was “no surprises”. The work that I have doing in the last ten years in the United States comes from my experience of having spent ten years as a member of the Parliament during a period of time of massive reform of Government of all of its structure of the economy and of civil society.

The one thing that I have learned from that, is, that if I would try to find one cause of factor for the problems that you are facing in Puerto Rico now, it would be a lack of transparency. If the true nature of your economy and the true state of your Government’s accounts had been known year on year for the last two decades, I don’t believe we would be facing the situation today. Some of the work that we are doing at George Mason University is to try and build a better understanding of the role of transparency in the process of accountability. It seems that the more open and transparent processes are the better accountability will be. And in that process of transparency we have to think much further ahead than we have been prepared to think in the past. We need to think in terms of the next ten and twenty years, and as I will demonstrate to you in a few minutes, there are a number of governments around the world who now focuses on thinking not ten or twenty years ahead, but as much as forty years ahead. What that does is that it brings in the public so they can tell what are going to be the consequences of the changes proposed.

If anybody does not believe that Puerto Rico is in crisis you only have to look at some of these evidences. Unemployment is about 11% to 12%. I’m told that doesn’t probably represent the true unemployment figure in Puerto Rico. Participation rates in your labor math has been going down for a number of years, and there is no place that I know of except for perhaps for one or two oil rich countries of the world, where the country becomes more prosperous by having less of its people involved in creative activities.

8

So I think that’s an indicator. The growth rate of the economy has been negative even while the rest of the world’s economy was in good shape. You have to expect that it is going to be worst in the coming years, with the impact of the decline in the rest of the world economy. Your per capita income is less than 50% of the United States, when it should be closer. You have a great number of advantages that should allow you to have a much better income than at least three quarters of the United States. I will show you some figures shortly that look at what happened to Ireland, which went from being the worst economy in Europe, to be the best one. That went from having the modest per capita income in Europe; to now having the second highest per capita income in Europe and it did that all during the period of the mid ‘90s to about 2004.

So if in an island economy like Ireland can make those changes after a long period of very poor performance it is also possible for Puerto Rico. You have chronic deficit problems. When I first put together this information you did not know what the deficit is in Puerto Rico. There still some questions about even now. The Governor has appointed a high task advisor committee to look at it. That is not satisfactory; you should at least be able to know what exactly the numbers are rather than having continued debate.

It is not sufficient just to address the problem of the Government’s deficit. A rescue package has to look at how you create prosperity. More and more countries around the world are recognizing that the big measure of comparableness, which is the step towards

improve prosperity, is who gets the investment capital. Whether is the investment of your own citizens, or whether is the investment of people outside your country, it is immaterial. You are completely competing in a global market for that investment capital and unless you create the right climate, it is not going to come. These are conditions that require government action to remedy. In my view, we should think about government as being the referee in the market place, not a player. It sets the rules of development climates but it is not the participant. The role of the Government is to stand back and create those opportunities and then allow the entrepreneur citizens to create wealth necessary for you to prosper.

Some might argue to my irrefutable truth, but I’m prepared to argue back. Governments consume wealth, they don’t create it. They take resources from citizens and they used it for things that we add some value when we accept them back, but it’s not a wealth creating engine of your economy. The wealth creating engine of the economy is the skills and talents of the people applied in a variety of different ways to improve the quality of their lives. Whether that is teaching us to use more the capacity of our brains, or whether that is teaching us to be able to use the big theory of our heads. What we need to do is to capitalize on that.

I still find circumstances of the world where people believe that globalization is something is about to happen. That is not true. It is a historic event. In fact, you can go right back to the period of the sub-growth and that was

9

the beginning of globalization. So people have been trying more and more over the centuries to turn us back and that is a recipe for failure. We need to be able to focus on that and see how we are going to be able to compete. As I work around the United States, many states still think that competition is with the state next door. Competition might be with the state next door, but it is also with Taiwan, with South Korea, with Poland, with the Check Republic, and with Puerto Rico. And you have to be as good as the others if you are going to be able to get the investments capital necessary for your economy to prosper.

We need to remember this, capital investments precedes job creation; it doesn’t come afterward. Capital migrates to the friendliest environment available and that capital and those jobs are extremely mobile. If you do not believe that, just ask the CEO’s who run the three big automobile manufactures in Detroit, and they have to admit that now, they realized that capital and jobs are extraordinary mobile. If you don’t create a climate for them to occur in your society they are going to go to somebody else.

These are what I called the Rules for Good Government:

1.Good government acts as a referee in the economy, setting the rules and creating an environment for economic growth and prosperity. They do not act as a participant in the economy. I love the quote of Margaret Thatcher, one of my heroes, “No government lead by me will ever be in competition with its own citizens”. And we need to remind ourselves that. And all that the government really needs to do is to see that the citizens have the right to choose among a different range of quality of services.

Why does not it work? I was a Minister of Finance for a few years. I can tell you that if you are trying to run government businesses and there is a social policy issue, and your Government business desperately needs new capital injection, it is not going to get it. That capital or that available cash is going to go to the social policies whether it’s health care, education, or welfare, before it goes to business enterprises. That is why governments do not make good owners of businesses.

They have other agendas and priorities. This means that business itself becomes neglected and run down because it does not get the things that needs, to be as effective and efficient as it might be.

10

2.The second rule, the governments that makes budget decisions based on results. One of the greatest challenges when I went into the Government was to find what actually the Government spent money on. You do not know what happened as a result of spending the money. We use to think in terms of providing money to people who were poor, to people who didn’t have jobs. We determine their entitlement, how much you are allowed to have, how frequently or how long. We actually changed that. We started to think about how we move that person from dependency to independent living.

There are other solutions but are very different. We did not look so much at entitlement, how much are you entitled to give. We look at what we have to do so that you would not need to come to the Government for support. We might need to teach you to read and write, we might need to teach you a language skill, we might need to teach you a physical skill, and we might need to teach you a social skill, like getting out of bed and going to work on time every day. And I know we all laugh about it, but that is the truth for some people because it has not been part of their culture.

We need to get them to that stage that they are contributors to society. Let me assure you they will feel much better about themselves and their family will feel much better about them. Their self esteem will be greater if you can help them to move from dependency to independent living. That single action enables us in one year to increase the number of people that we moved from independency to dependent living by 300%. That’s a massive social and economic gain.

Let me demonstrate: the United States started a process called Food Stamps in 1946. The original intent of the program was to use agricultural resources. It still exists today and it is the major campaign on the United States Government has to combat hunger. Tell me when is that going to stop people from being hungry?

And the answer is never. Because all it does is deal with the consequence of the problem, the fact that they are hungry. Nobody is addressing the cause of their hunger which might be a lack of skills; that it might be a health of problem; it might be educational problem. So when you deal with the consequences of a problem you also need to deal with the cause.

11

There where five questions that we had in Cabinet when I was there, I will give them to you. For every proposal we came up with, they had to meet the check list of these top questions.

I.Show me the evidence that the problem is real. That seems obvious, but often when you put that test you found that, somebody thought that there was a problem, and in reality it was not there.

II.Show me the evidence that this is the solution, or this program will solve that problem. We use the word evidence advisedly, because it’s a higher test.

III.Tell me who is already addressing this problem and should we just support them to do their job on a bigger or better scale.

IV.How much does it cost, and it’s that the best use of this money.

V.Tell me when we will finish and when we do not have to spend money on it again.

What that does of course is to drive you back to find the solution to the causes of these problems. Or are you just playing around with the consequences. Good government is about results.

3.The third rule of the good government agenda is: A government that is honest and truthful fully discloses financial results to the public. There is a world wide movement to build a much greater transparency in the operations of government. It is the

greatest expectations that the citizens have, because it enables them to hold their elected representatives accountable. As I said right at the beginning, if the people of Puerto Rico had known factually what was happening over the last two decades I don’t believe the crisis that exists today would really exist. Many of the citizens would have been saying to their elective representatives this is totally unacceptable. What you are seeing is not unique to Puerto Rico. Every country that’s gone to financial trouble around the world has been involved on doing the same sort of thing. Let’s just massage the information so the results don’t look so bad. Let me tell you from personal experience once again, that the sooner you get the real truth out there, the better off you are going to be, because then you can start to focus on the cure rather than trying to hide the truth that the problem really exist.

4.And the final one, a government conducting fiscal responsible budgeting by eliminating deficits and using surpluses to pay of accumulated debts. Once again, pretty obvious, but many nations since the Second World War have moved into deficits financing and the idea that Canes had, when he advocated this kind of public policy approach, was that you could start during periods of hardship to use some of tomorrow’s wealth to create the opportunities for greater prosperity. And when that greater prosperity arrived you paid all those debts. The failure of that philosophy is that the political process on those countries never ever used the

12

surpluses to pay all their debts. So that just accumulated and accumulated over time.

Our bankers will tell us the disaster and all that we have will be placed at risk. It is possible to get to surpluses, and there are a number of countries that have done that in recent years, and it hasn’t destroyed their society or their culture and in fact it has done the reverse.

A number of countries are now implementing what they called fiscal responsibilities laws and that is to provide some kind of standards so the people can judge with the decisions being made by their leaders are wise and prudent. It started in New Zealand in 1994 and it started really with a group of people that had been involved in the recovery process saying, having cleaned up this mess don’t let it happen again. The Australians and the British moved to pass laws in 1998. The Australians called theirs “The Budget Honesty Act”, and the British called theirs “The Code of Fiscal Stability”. But in every case they were setting down on statutes what is prudent behavior. British behavior in every case was that over time the government should budget through balanced budget on a regular basis. In Canada they have something that is called “Government Accountability and Transparency Act” with some of the same kind of things.

The United States has done something that I find innovative. It does not really get to fiscal responsibility in total, but they actually put all of their spending up on the Web. Anybody can go and look at it, you can do it from here in Puerto Rico, and it’s up there by amount,

by recipients, for what purpose, and for what results. You can pull up all of the contracts that go to anyone, individual or organization you can pull it up on the basis of how much is spent in each sector. Europe also has a kind of fiscal stability measure called the “Maastricht Treaty”. This is a massive document of 450 pages that deals with every part of governance in the European community. But what is does require is prudent fiscal management from the governments at the European community. Just before Christmas the European Commission imposed fines on France, Germany and Italy for being outside of their criteria. I don’t know if they are going to be able to collect the fines but they proposed the fines. So that one actually has some teeth attached to it. The United States just before Christmas when we did a count, 20 states were in the process of passing transparency legislation. So those are certainly some things that I would advocate Puerto Rico does very soon.

Now these are some of the things that I think should be at the center of decision making for Puerto Rico. How it is getting an understanding of what prosperity is?

Prosperity, in our view, is the result of free people using intellectual talent combined with physical skill and a superior work ethic to produce goods and services that are valued and desired by others. Prosperity is not just about money, it’s also about quality of life. And we need to value those things and to include them on that process.

13

Competitiveness, which you will hear a lot of talk about, is a measure of one economy’s ability to successfully improve its prosperity in the face of competition with others. It is important that we get that into perspective. It’s not about just dealing with us, is about taking into account what other states are doing and making certain that we are equal to or better than them and being able to take capital.

When you start to look at some of the things that you might be able to do, to improve the attraction of Puerto Rico, here is something that comes from the World Bank. It’s called “The Ease of Doing Business” index. And it takes ten different criteria and I just pull a number of small countries from around the world so that you can make some comparisons with Puerto Rico.

You are rate number 35 in the world of about 150 countries. That is not too bad. It is relatively easy in Puerto Rico to start a business, but awfully difficult to deal with construction permits, permissions, and things like that. You need to be in the top 30, not in the bottom of 30. And at the moment you are in the bottom of 30. Probably need to do some things around employing workers to get rid of the rigidity in the life of America. Or make it easy for entrepreneurs to employ new people. And that means that you shouldn’t scare them with the consequence of taking on a new employee by doing some of the things that make it very difficult to get rid of them. For example, Germany through the ‘60s and the ‘70s was the miracle economy of Europe; it consistently had an unemployment rate of around 2% to 3%. It had a

EASE OFDOING

BUSSINESSRANK

STARTING ABUSSINESS

DEALING WITHCONSTRUCTION

PERMITS

DEALING WITHCONSTRUCTION

PERMITS

EMPLOYINGWORKERS

REGISTERINGPROPERTY

GETTING CREDIT

PROTECTINGINVESTORS

PAYINGTAXES

TRADINGACROSS

BORDERS

ENFORCINGCONTRACTS

CLOSING ABUSINESS

Singapore

New Zealand

United States

Ireland

Estonia

Lithuania

Azerbaijan

Puerto Rico

Georgia

Mauritius

Latvia

Hong Kong,China

1

2

3

4

7

15

22

24

28

29

33

35

10

1

6

15

5

4

23

7

74

35

13

9

2

2

26

20

30

10

19

36

63

78

155

144

1

14

1

20

38

5

163

64

131

103

15

39

16

3

12

74

82

2

24

127

4

77

9

122

5

5

5

2

12

28

43

84

43

12

12

12

2

1

5

3

5

38

53

11

88

53

18

15

5

12

46

3

6

110

34

11

57

36

102

98

1

23

15

2

18

81

5

20

26

25

174

101

14

11

6

1

39

43

30

76

16

4

26

97

2

17

15

13

6

92

58

70

34

86

81

97

14

very high work ethic and it was extraordinary competitive. Sound employment rate today runs around 10%, 11% or 12%. Why is that? When I was talking to some of the members of the Germany Parliament what they said to me is that the cost of employing somebody in Germany is 225% of the wage that we pay them. The cost of employing somebody in Poland is 125% of the wage that we pay them. That’s the reason they lost competitiveness.

So addressing those kinds of issues will bring good results. In New Zealand there is if a transfer of property, or mortgage, or something like that, you can actually register those changes at a desk of your lawyer in probably about 15 minutes. It’s all online; it’s possible to do. So copy some of the things that are happening in other places and remove those encumbrances. If you would to look at the top two or three countries, say Singapore, Hong Kong, you will see that they rank extremely well on all of those things. They have taken problem by problem and they have eliminated them. And every time you do it you make it more attractive for investors to come in and say “I want to do business in Puerto Rico rather than in Miami, or other parts of Florida, or other parts of the world”.

Look what’s happening in other countries around the world. I spend some time recently in Eastern Europe, and I have spent some time there because what we see in Eastern Europe at the moment is probably the greatest living liberality on economic management that the world has ever seen. We have a lot of countries that came from communism

and extraordinarily circumstances, who are experimenting with all sorts of options as a means of becoming prosperous. And one of the things that they are doing is that they are recognizing, as Ireland did, that taxation systems have an extraordinary effect on business decisions in terms of where investments will go. That is the reason why 25 countries in Eastern Europe have gone to flat taxes. One of the countries that I have been working is the very new country of Kosovo. This month they intend to reform their income tax down to rates of 4% for low income people, 6% for middle income, and 8% for high income people. The interesting thing that these countries have done with this is that they have actually improved their collection system so that they are able to collect much more of the revenue. Georgia also went through and wipe out much of its regular retroactivity. There were too many controls on place.

I don’t know if you would do it here, but in other places and in the United States there is a licensing process for hair dressers. Most of us pretty much know whether or not we have a good hair cut. We know what to do if we have a bad one. So why do we licenses that? Many of those things we really have to seriously question there impediments to making progress. Sometimes we just do not ask the most basic questions.

On one occasion when I was in Cabinet, the Department of Transportation came to us and asked for new increase for drivers licensing and we asked them “Why?” They said “Government policy is that we have to fully

15

recover the cost of these things now”. And we said: “Okay. Why do we actually do it?” And they thought that was a pretty stupid question. They said: “Well, everybody needs a driver’s license”. We said: “Okay, but why do we have this renewal process? What part of that renewal process actually tests the competency of the driver?” That was a tougher question. They said: “We need time to think about it”, so we gave them 10 days. They came back in 10 days and they said: “We can’t actually find any good reason for doing it”. So we gave people lifetime driver’s licenses and we do not need to renew them until you are age 74, after which you have to get an annual medical to show that you are still physically fit to drive. And post 9-11, you have to have your photo renewed every 10 years now. So they didn’t actually need an increased in fees, there was a whole activity that we didn’t need. Today driver’s license is actually issued by the Automobile Association, not by a government department.

So, it’s asking ourselves very fundamental questions and insisting on getting the answers that will allow you to open up a lot of activities that previously were closed. Anybody like to guess why did we start to renew driver’s licenses? We actually went to the trouble to find out. Well, the answer was that it started back around 1905 and the driver’s licenses were made out of paper and they lasted about five years. And we did it for the next 90 years without anybody asking the question about why we actually do it. Asking those questions and insisting on the answers, is some of the ways to open up the economy, and some of the ways to cut out government bureaucracy that does not add any value.

Here is something for legislators. Know the consequences of decisions before you make the decision. But knowing it in particular areas and what the effect of these particular decisions would be on the intention of the investors. Knowing the effect on the existing businesses ability to compete in the global economy, giving a big advantage to the new guy coming in, might also be a disadvantage to the people you already got. You owe as much to the people who have been there creating work for a long period of time as you owe to the new partners that are coming in. The government should be the referee and the rules should be the same for everybody, that’s the way to get a desirable economy. Know the effect on the existing jobs and know the effect on the creation of future jobs, and I say the legislators if you can’t get positive answers to all of those questions, just say no until you can, because you should not go ahead unless you know those consequences.Here is just a little bit of indication about what happened on economies that were real troubled and how did they get out of those problems. I picked Ireland and New Zealand, because I know something about New Zealand and my ancestors

16

came from Ireland. But also they are islands economy, so they have a similarity in lots of ways to Puerto Rico. Ireland in particular because lives next to and extraordinary prosperous market, as Puerto Rico does with the United States next door. In 1984 New Zealand had unemployment ranging around to 10% to 11%, had a non growth about half a percent per annum, and that had gone on for the previous 10 years regardless of what happened to the rest of the world. It had very poor competitiveness which could not attract new investments. We had stagnant job creation. The only jobs being created were those that were created by the government; we had poorly per capita income. In 1950 New Zealand used to be number 3 in the world in per capita income, by 1984 we were number 27, about level with Portugal and Turkey. We had high debts and they were continuing into grow. We had massive deficits. It was pretty much the same as Puerto Rico and you can say the same kind of things about Ireland.

So how do you build the reform strategy? We need something that says “How do we measure success?” And what we actually picked out was what would make young New Zealanders to stay in New Zealand rather than go to Australia, North America, Europe or somewhere else. Are there youth people from Puerto Rico needing to go somewhere else for job opportunities? I think that it is probably true. It would be nice if they would be able to stay home and have those job opportunities here. So, what you are really doing is looking at the heritage and the legacy for future generations. That’s a good measure. Prosperity can be measured on a variety of different ways, the quality of life certainly, but also in terms of per capital income. The reforms strategy was eliminate government deficits, easier to say than do it; eliminate government debt, also easier to say than do it. Attract capital investment and improve the country’s international competitiveness. So those are the big goals. How do we go about doing it?

What we did was that we look at the taxation system, how the government gathers it’s revenue, and we redesign the entire taxation system. I don’t advocate a tinkering. The best thing to do is redesign it and look on how you are going to gather revenue. And you are going to do it in a way that it’s going to give the best advantage to business and enterprise. Going to be the better, certainly, and going to be able to gather the revenue without having to have a lot of fights with the citizens. We had many tax rates: got rid of capital gain taxes, debt taxes, excise taxes, sales taxes, and payroll taxes. All of those were eliminated, and we finished up with a tax on income and a consumption tax, deliberately picking up those two things. Because we wanted to tax income, we wanted to tax consumption; because that means that every single citizen is making some contribution. At the same time

17

we decided that we would open the borders. New Zealand traders needed to be able to buy their inputs at the best possible world prices and barriers were one of the things that made the production expense, so we got rid of those. We did that unilaterally before the WTO was formed. We decided that social policy, instead of being on the basis of using the taxation system to get credits to people should be done by direct payment to people. And by doing that you can better target the social policy at the individual and you can see that you can do it on a need basis and be more generous than you would be able to in other circumstances. We did regulate labor markets, to make the labor market competitive, we removed subsidies from agriculture industries and we reformed all the financial reporting and disclosure requirements on government. We reformed government departments, we reduced governments share of GDP. It was 45%, we got it down to 26% over the next 10 years.

Let me tell you, you can’t do that just by cutting government expenditures; you have to grow your economy away from the current government spending. So, it has to be a joint approach that looks at a growth strategy as well as looking at fiscal control for the government. And it takes longer than you would think, but the benefits as you go along are accumulative. You do not get all of the benefits until you finish, but you get some of the benefits each time you make a change. And it’s important that you portray that in terms that this is not a quick fix. It’s not a silver bullet that would say that by the 30th of June we fix all of our problems.

You can’t actually borrow your way out of debts either. Many governments try to do that. We privatize and commercialize many government activities; some were things that we had acquired over the time. Commercialization was making government owned organizations operate on a profitable basis. So things like ports and railroads and things like that we had, we put them into a state where the government was still a shareholder, but they had a private sector Board of Directors. They had to run profitably, they had to pay taxes and they had to pay dividends.

If I took all of the things that we commercialized, before we commercialized them, they cost the government 1.4 billion dollars a year, and covering their losses, providing subsidies, and capital. After we commercialized them they paid taxes and dividends. They contributed to the government 1.4 trillion dollars a year. A 3.8 trillion dollars turn around. I mean billions; just sort of a slip of a magnitude of 10 times. And we use a variety of other measures to be able to create a growth economy.

So, what happened? New Zealand is now on 16 years of surpluses, repaid virtually all of their debts, and the count government debt is now down to 2% of GDP. The count of debt for government trading organizations is about 18% of the GDP. It was around 70% of the GDP. Unemployment went from 11% down to 3%, economic growth went from .4% to around 5%. The population increased from 3.6 million to 4.3 million which was those returning to New Zealand. Young people

18

came back; and that is one of my measures of success.

The government workforce was shrunk by 66%. That is quite frightening. The interesting think though is that you do not put all of those people out of work. In many cases they were running businesses on providing services that were previously being provided by the government, but were now done in the private sector where they properly should have been. The government share of GDP shrunk from 44% to 27% and we went from 27% per capital income to 11%.

What did Ireland do? Ireland was, what later I would tell them, in a pretty bad shape. Unemployment in Ireland when I talked to them was up in between 17% to 23%; growth rate were extraordinary low. What they did was that they decided that they needed to be the most attractive place in Europe for capital investments. And what they did was concentrate on tax rates for a start. The personal income tax rate was 65%, and they cut that in the year 2000, to 40% and 20%. The corporate tax rate was cut from 50% to 12.5%. The lowest of all of Europe by a massive amount. They cut their capital gain tax from 40% to 27%. They simplify the government bureaucracy in lots of different ways.

What happened in Ireland? Their GDP went from about 4% to 10% and they had been about 10% for a good part of the last 10 years. Not that quite high, now. Their debt went from 118% of GDP to 39% of GDP. Their unemployment went down from 15.7% to the

lowest rate in Europe at 3.5%. They have the second highest per capital income in Europe, and the population of Ireland grew from 2.6 million to 3.4 million during that period of time. Once again that was reversing a trend that has been prominent in Ireland for the previous 200 years. In Ireland the greatest Irish export was the Irish people. And now they were deciding to come home again.

So, that tells you that it is possible. Here some interesting things from Ireland. What happens to revenue when you cut tax rates like this? It’s an issue that is debated by economists, issues that are debated a lot in the United States. One of the things that cause that debate is the way in which you do the calculations. A lot of governments do them on a strict arithmetical basis. So, if you cut the rate by 10% then the revenue must go down by 10%. If you really want to do that accurately do it on an arithmetical basis, but also do dynamic modeling because as you change the rate, you change the investment climate, you change people’s behaviors in a variety of different ways and you have to take that on board.

So, what happened in Ireland was that they cut those personal tax rates, the revenues were up 5 fold. That is a 500% increase. The corporate tax rate is up 600%. They went for 50% down to 12.5, is up 600%. The capital gains tax revenue went from 48% down to 27% is up 40%. Their deficits use to be 14% of the GDP, they are now running surpluses around 5% of the GDP, and that is why their debts shrunk. So, there are some lessons

19

there. If you create the right kind of dynamics growth in economy then it has a material effect on revenues.

This is something that Ad Laffer, an economist in the United States, came up and it is a theory called the Laffer Curve. It says that if the tax rate is cero, the revenue would be cero. And if the tax rate is a 100% then the revenue also would be cero. And some where between those two points is the ideal position for the rate that will

generate the highest level of revenue. Nobody knows exactly what that figure is, but we do know that there are some perverse rules that apply that sometimes when you rise tax rates, revenue tends to go down. And sometimes when you lower tax rate your revenue goes up. And there are a lot of reasons for that.

This is an example of the United States at the time of John F. Kennedy. One of the things that he did was cut that tax rate, which I think the top rate was 94% at that time, and he cut it down to 70%. In 1981 Reagan wanted to cut tax rate, but Congress would not let him cut it all at once. They made him cut it in two stages because they thought revenue would go down if they would cut the tax rate.

Russia in 2001 instituted a flat tax. It went from an income tax of around 56% down to 13%. Their revenue by 2005 was up a 100%, and now is about 190%. India reduced their top income tax rate from 65% to 50%, still extremely high, but the revenue increased by 40%. New Zealand halved their tax rates and increased their revenue by 20% in year one. We work very hard to make that a cero someday. So, what are some of the things that happened? If you look at what happened in Russia, what happened was that a huge amount of economic activity came out of the black market economy and entered into the white economy. The redesign system which didn’t have exemptions made it much harder for people to avoid paying income tax. So, the collection system was much better, and that seems to be one of the causes of factors that redesigned systems have become much more robust to evasion or avoidance.

The Laffer Curve

ProhibitiveRange

0

100% Tax Rates

Revenues ($)

Source:

Arthur B. Laffer

20

Here are some of the tools I believe very strongly, accountability and transparency. The more open and transparent the government is the greater public confidence will be. Building those transparencies techniques is something much easier today because technology allows us to do it. In a number of places you will find that that information can be updated on a weekly or on a monthly basis.

This is what we call appropriation transparency. What governments tend to do is that they appropriate monies for goods, but it is really like giving a grant on money. I describe it as giving pocket money to your kids and hope that they are going to invest it, but which you know they are going to spend it, probable on things of little value, like chocolates, or cigarettes. There needs to be a title regimen around how you appropriate money. You see, if I go in to a store to buy something, I know exactly what I am buying, and I know what I expect to get, and I know what I can do if it doesn’t produce the results that I want. Being more specific on how money is appropriated is one of the techniques.

This is one of my Ministries, and before we changed it, they thought that the job of the Ministry of Employment was to fix unemployment. Micro policy can’t fix macro problems. Unemployment is a factor of macro economic policies so they had an impossible goal. They had lots of programs but very unclear goals for those programs. They thought that they were helping people on needs. That’s probably true. They had a multitude of process measures that would count how many people in the program, count how much they like them, and whether they had even distribution on what portion of society. One thing they did not count was how successful they were putting people in to work. And I inherited 34 programs when I took over that portfolio.

This is what we did: we gave the department a clear vision. Its job was to improve the employability of unemployed people. Measurable and achievable was pretty important. One of the reason people are unemployed is because they don’t have the right skills. Their skills become redundant in the market place. Sometimes it’s a macro effect, but a lot of the time the people that are unemployed are the same people year after year. And that’s really a skill, social, or a health problem. So, the goal was to improve the employability of the people. We got rid a 30 of the programs and kept 4. They were matching unemployed jobs providing work experiences for people, because one of the criteria for employing somebody was whether this person is been in work recently. The longer that they have been out of work the less likely they would have been offer a job. The valuable marketable skills are something that the market actually wants in repairing social problems. The

21

outcome measure was people on the work and under that new regimen we put 300% more people into the work with 40% less money. Those are major quantum progressive steps forward. They are not unusual. I can quote a number of cases where that level of improvement in public benefit was possible.

This is how we used to fund it. The old appropriation system gave money to programs, $60 million in total and then allocated out through the programs. And it placed 40,000 people into work.

The new system appropriated the same quantity of money, but it specified how many people would have to place back into work, a 120,000. Specified what kind of people: long term unemployed, had to be more than 50% of them. Our native Maori people had to get more than 25% of them. People with disabilities had to be more than 14% and 7% of people with social problems. So now the contract was very, very different. The legislative knew exactly what it was that they bought from that Department. It was a 120,000 people that was put in to work with all these kind of social problems. In fact we got 130,000 people in to work, more than we’ve been contracted to do.

Let’s look at another appropriation where we used the same process. This is the Inland Revenue Service which their job is to collect the revenue owned. Appropriation used to be $117.43 million. Its output was audits and investigations, and the contract was 137,000 investigations and verification checks: 58,000 GST audits on 20,000 payroll audits. But it

goes further than that. It also says what we expect to get back.

For every investigation, we expected to get a return of $14.00 for every dollar spent on investigation. For verification we got $4.00 for every dollar spent on it. For GST audits we got $6.00 for every dollar spent on it. For payroll audits we got $5.00 for every dollar spent on it. So, now they actually also had some rate of return criteria that they had to meet as well. Part of that process was to say do not do things that don’t produce any results. Do not audit people that are not going to produce any improvements in the revenue. So, now about 67% of New Zealanders do not have to file tax returns, because if you are on wages and salaries the source deduction by your employer is so closed to accurate, that is not worth doing it. And that is part of that process, looking at things and saying “If the rate of return from these activities is negative why don’t we just stop?”

So, why did these approaches work? Transparency. The government knew the results that were seeking and it knew if they were achieving those results. The accountability, the government knew what was achieved, they knew whether or not they had bought the right program, and it knew what the public benefit was. The Department actually knew what it was expected to deliver and it could tell whether or not it succeeded.

Ladies and gentlemen what I have outline to you is experiences of a lot of countries that are dealing with problems that are similar to those of Puerto Rico. I’m not saying copy

22

everything that we’ve done. But pick it up and use it to design your own cure and then applied with determination. And my experience over the years: the greatest factor in being able to succeed and putting a reform package in place, is the courage of the people in public office. Interestingly people who make courageous decisions tend to be reelected. People who avoid making decisions at all tend to lose. And there are many examples of that criterion around the world.

23

REACCIÓN DE: Sr. Roberto JiménezDirector General, Vision-to-Action, Inc.

Mr. Mc Tigue, first, thanks on behalf of the panel for your very illustrative presentation. I think is very, very relevant to Puerto Rico that we face today, not only with our own specific problems, but also in the context of the global situation. So, basically your ideas are extremely welcome. Having said that, I think my questions go around on how to get started. I think the agenda is large. I think each one project is extremely difficult to implement. If you take tax reform, or labor reform, these are very complex projects to implement. We also have, like in the private sector. that competition play a roll that help private sector get better, become more productive investing new technologies. In a sense we do not have that in the public sector. So my question is what kind of things government can do, or private sector can do, or the citizens can do to inject, what competition does to the private sector so that it can force government to transform, specially, lacking the effect that competition does on the private sector? REACCIÓN DE:Sr. William LockwoodPasado Presidente, Banco Gubernamental de Fomento y miembro Consejo Asesor de Reconstrucción Económica y Fiscal

I would like to thank you again and also to focus on two things that you mentioned. First, transparency and having a deeper understanding of how this came about. Focusing on providing the solutions rather than blaming, and in that regard, it is important to have the understanding of the system. We had a very stable structure even after the elimination of Section 936 by the U. S. Government in 1996 even though we lost over 40,000 manufacturing jobs in labor intensive industries. The end result was that the public sector took on almost the same number of jobs. Is very important to go back and see where we are creating wealth from our multinational sectors, local capital. The fact that we have very limited local firms, exporting and providing other services, outside of Puerto Rico rather than feeding from the salaries that are circulating the economy from multinational sectors.We also have a fragmented structure that responds to initial post war needs on the fiscal management side. Since we have completely separate institutions working on revenue collections, financing and budgeting, and a separate institution working on economic forecasting, reviews, and setting fiscal targets, is very,

REA

CC

ION

ES

24

very difficult to have a comprehensive vision when they are so fragmented. So, the understanding of the structure of the economy, the centralization of the two main themes probably on fiscal management and private sector, I think are essential components to a very strong top down leadership on pursuing both measures such as the one that you are recommending. And this will require in our current environment some inter emergency coordination structures and potential consolidation to respond to measuring, the implementation of a new visionary; the design of a new vision. REACCIÓN DE:Sr. Josen Rossi Presidente, Asociación de Industriales

I agree in that we have lot of things here in general, including non governmental organizations which intended to act very much effectively at times, but seldom cohere searching for competitiveness. So, right now in the Puerto Rico Manufacturers Association, along with many other leading organizations we are talking about that and how we can be better leaders, and more courageous and cohere leaders.

Just six months ago, in one of our meetings, we decided that we were going to select no more than five issues that require immediate action from government and industry to regain competitiveness. For example, we have a good manufacturing incentive law, but if we don’t have energy competitiveness, if we don’t have labor competitiveness and less labor costs and regulations, if we don’t have prompt permits and easier government transactions, and if we cannot show to our investors, that our Government is actually fiscally responsible is very hard to attract investment to Puerto Rico.

In the Puerto Rico Manufacturers Association case, energy is our primary role, and what we are proposing in short term is that in six months we can re-regulate for competitiveness in our electrical energy sector.

The other thing that we did was that in five years we should get to a no more than 20 cents kilowatts per hour for residential, and no more than 12 cents kilowatts per hour for heavy industrial consumers. And we think is important to set both short and long term measurable achievable goals as you mentioned.

25

CO

MEN

TAR

IOS

FIN

ALE

SHon. Maurice McTigueVice President, Mercatus Center, George Mason University

Thank you to try to address in sequence some of the questions that I have raised. Where to start? I compliment the Governor in the fact that he put together an advisory committee to start and to put together knowledge and to spill out, some information that starts to form the basis of actions. My view is that all the government needs to do is to build that strategic team of people that start to put together the plans for how the economy is going to be reformed. The base of taking your comments is that you have to think about the role of Puerto Rico in the future and how that would that form. I refer you to a few places in the United States that have sort of regionally restructured themselves. If you look around the city of Austin, Texas they have used the power of two great universities to create a technology area that is extremely successful and has a very booming economy. There is nothing excited about Austin, Texas, I’ve been there many times and nothing apart from that would make it an attractive place to go. You can look at North Carolina where they put together the technologies triangle and that was very successful. You can go around Richland, in Washington State. If we go back a number of years, after 1979 Japan totally restructured its entire economy to get away from a heavy dependence on foreign oil and heavy industries, and went to light high tech, high value industry and Japan and was extraordinarily successfully. So, I think that you can take those things on board and

say: “Those old manufacturing production line jobs are gone and they are not coming back”. They are going to be gone to other places around the world. Even if they did come back they are not the jobs that you really want to be given in Puerto Rico. They have aspirations to jobs of higher value that require more creativity. So, part of my answer to that would be a heavy commitment to developing intellectual brain jobs and utilizing intellectual brain jobs and industries that go with it.

So, that’s where I would start, in terms of how do you get performs of improvement inside government. And one of the things to do is to change scrutiny of government to scrutiny based upon outcomes. And what you do with that is that you don’t look at activities, on an activity by activity basis. Just look at all of those activities that are focus on literacy and you might have 25 or 30 programs. And you can compare them in terms of effectiveness of making people literates and you invest more heavily on the ones that are successful and the ones that perform very bad you eliminate. That produces a degree of competition. You can do that right across government, you can look at it by outcome to outcome, and in effect the New Zealand Government restructured the entire Parliament to look at the economy on a circular basis rather than the government department basis So, every government department that had education programs would have to go to the Education Committee and would have to defend their programs.

26

The second thing is that you can go to what I call evidence based budgeting. And what evidence based budgeting does is that it turns upside down the burden of proof, and it makes the Department put up in the table the evidence of last year performance that justifies the appropriation on the coming years. And rather to prove that this program was now redundant, you turned the other way around and say to the Department you have to prove to us that this is the best investment for that money. That brings also some of the competitions which we are talking about.

And the last comment, what’s the role of the private sector? The role of the private sector is to move away from just having sectoral interests and to play a role in the economy at large. Also support good policy even when there is some public shock at the change that is going to be required to be made. We had an incredible rigid labor market which was a disincentive to people who employed new employees. We needed to take that away if we wanted a dynamic process where more people were brought on. If you are going to have a process like that, accept that not all of the ideas are going to work. So, you have to allow them to exit from those ideas and those new businesses and that expansion and to exit without being extraordinary penalty to the bottom line. So, fighting for some of those issues I think some of those things that the private sector can do.

The Government needs good managers particularly in some of this trading enterprise. The private sector can produce and contribute those managers. The people

that sits on boards of directors see that these organizations operate in a business like manner, in a profitable manner, that the right kind of scrutinizes are applied to the activities, and that the correct kind of investments are made. Those kinds of contribution it would make a big difference among you.

27

Editor: Lcdo. César VázquezCoordinadora de producción: Melissa RiveraDiseño gráfico: Maximum DCImpresión: Imprenta SUAGM

Para información sobre EL INSTITUTO DE POLÍTICA PÚBLICApuede comunicarse con:Victoria RodríguezVicepresidenta Auxiliar y Directora Ejecutiva del IPPTel. 787-751-0178 ext. 7367Fax 787-296-0190v_rodriguez@suagm.edu

Ave. Ana G. MéndezCarr. 176 km. 0.3Cupey, PR 00928

PO Box 21345San Juan, PR 00928-1345www.suagm.edu

Los escritos publicados en este documento no reflejan necesariamente la postura oficial del Sistema Universitario Ana G. Méndez ni de sus instituciones.

Derechos de Autor 2009.© Sistema Universitario Ana G. MéndezDerechos Reservados SUAGM 2009.