Good morning. Thank you all very much for joining us today. We are going to talk about a very serious and urgent situation confronting puerto rico, the home of 3. 5 million americans. The territorys economy as we read every day has been declining for a decade. It has accumulated huge debts that it cant possibly pay. Puerto rico owes 72 billion to investors, about 46 billion to Pension Funds. Started missing bond payments in january and is expected to default on nearly 2 billion payment due july 1st. That is roughly 100 of its Gross National product. Thousands of residents are leaving the island for the mainland every month to look for jobs and better public services. The exodus is accelerating. In this context, congress and the Obama Administration have come up with compromise. The bill would establish a financial control board to oversee the island government and help restructure its debt in federal court. Require the government and the board to adequately finance Pension Funds that are close to empty today. It would temporarily stay or pause lawsuits by prejudice against the islands government which starts its work. Remains to be seen of course who will be appointed to this board. The president would pick four from lists provided by Republican Leaders in the house and senate and won the president would pick to the democratic leaders. The bill has already generated some criticism, including from creditors, and for Different Reasons from labor unions. Others recognize the problems and the flaws but believe this is the best possible formula to address the crisis and recognize that time is running out. In any event, theres a lot of ground to cover about this complex and grave situation. Fortunately, we have three superb experts who closely tracked puerto rico for many years and have kindly agreed to share their insights and perspectives with us this morning. Barry bosworth is a senior fellow at the Economic Studies Program at brookings institution. He served as president ial adviser and specialist on fiscal and monetary policy, Economic Growth, Capital Formation and Social Security. He also has taught at berkeley and harvard and his many publications include an analysis of the puerto rico economy. We are pleased once again to have barry with us at the dialogue. Rafael cox is professor of law at the University District of columbia and is a prominent puerto rican lawyer and in 2012 was candidate for position of candidate resident commissioner alongside governor padilla. He studied at cornell, oxford and graduated from Harvard Law School as part as long puerto rico with reichardt and echevarria. We are happy to have rafael with us this morning. Jose peralta formally served as assistant secretary for private sector within the office of department of homeland security. He currently is deputy chair of the Global Alliance for trade facilitation. Jose has also served as direct. Director of the americas at the u. S. Chamber of commerce and executive director of the association of american chambers of commerce in latin america. He graduated from the university of puerto rico and completed his doctoral studies at the university of michigan. And we are thrilled to have jose with us as well who is really followed this question very closely. We are going to follow a questionandanswer format this morning. Im going to pose questions to our speakers and after a few rounds, we are going to open it up and invite your comments and questions and look forward to a very productive and interesting exchange. Before getting started, i want to acknowledge and thank very much the work of my colleagues here who runs the rule of law program at the dialogue for coordinating the session and all his efforts to make this possible. And also the assistant Program Assistant in the rule of law program at the dialogue and also coauthored a very good paper blog post for the dialect dialogue called puerto rico, and delicate path to solution. Thank you all for all of your support and help. Lets begin with you, barry. There is a lot of ground to cover and a lot of questions. You have been following puerto written about it a lot. If you could just give us your sense of the real what we need to understand to know why this is happening. What are the real origins, main causes of this. How have we gotten into the situation we are currently in . How do you see the roles of the different players . Could this have been avoided . Youve been watching this story for many, many years. How have we gotten to this point . Mr. Bosworth i think there are a multitude of causes of what happened. One thing that emphasizes people think its too recent. Its been going on a long time, basically since the mid1970s. Puerto rico had a remarkably good governor after the end of world war ii they made enormous progress. They used to be called the asian tigers. They were compared with them. And they did extremely well from the end of world war ii up to 1975. But they started from abject poverty. People dont have enough credit for help or the best for how people dont understand how poor puerto rico was when it started up. It did it primarily for by encouraging Puerto Ricans on an overpopulated island had half the population went to the mainland and half of them got jobs basically an expert oriented industry. They were a lowcost supply of labor inside a u. S. Tariff wall. Before 1975, it was very high. When the u. S. Been made all the trade liberalization, this care of wall collapsed. Puerto rico was no longer a lowcost source of manufacturing labor. It was a highcost source of manufacturing labor and it was inevitable the sector was going to be declining just like it has on the mainland. Because its taken over by lowercost countries , particularly in asia. I think that part of it was inevitable. The big engine for growth went away. They were never able to diversify the economy in a way that would give further opportunities. It turned into a political game here in the u. S. I think two big events were organized labor that upset in got upset in the 1970s about all the jobs moving to puerto rico. They convinced the federal government to extend the u. S. Minimum wage to puerto rico. So the federal minimum wage applies to puerto rico. Remember puerto ricos income was one third of that of the United States. Like having the minimum wage three times higher than here. Much higher than the rest of the caribbean area. So tourism is very hard to be profitable in puerto rico. Youd rather go to one of the other islands where it is more attractive and cheaper. It doesnt have a lot of options. The Companies Got mad because they did not have the same competitive advantage anymore, so the government gave them a tax loophole and basically puerto rico turned into a tax game of income shifting, corporations played games, and income to the island so they did not have to pay tax. But it did not generate employment. It was just a subterfuge. It was later phased out to about 2006. A lot of people think thats where the problems started. But they started way earlier. Puerto rico has been declining steadily since 1975. It is true things got much worse in the Great Recession and it has had no recovery unlike the , rest of the economy. The rest of the economy does not think it has been adequate. Puerto rico has this long relative decline. The question is what to do about it. I think that is the big problem. We do not have an Economic Program of what we think would work in puerto rico that would make it economically competitive. Thats enough over there. Thank you. Rafael, would you want to add anything to that . In your view, do politicians, political figures, share some of the blame or responsibility, you know, from the factors he has laid out . Thank you very much for the question. The first thing i want to do is thank the interamerican dialogue for placing puerto rico on the agenda. It is not just a domestic issue as Congress Might believe. The puerto rico conundrum is an International Issue both in its very nature and scope. After all, puerto rico is not merely a u. S. Territory. Puerto rico is a caribbean and latin american nation. I want you to take that away from this panel. To answer michaels question, the first thing i want to emphasize is the geopolitical chronology. Barry mentioned the Second World War. Puerto rico had a prominent role in the United States cold war strategy during the postSecond World War. And that has changed. The United States has actually been rather neglectful and in the bash indifferent towards puerto rico from the 1970s and most important from the 1990s on. That is also something that is crucial to understand. Now, the question michael poses is, if there is a correlation between puerto ricos political status and our current fiscal and economic crisis. Im going to rephrase that question. Im going to say the correlational relation between puerto rico says colonial condition and the current crisis. Why am i using the adjective colonial . Im using the adjective colonial because the cat is out of the bag. For the First Time Since 60 years ago when the United Nations removed puerto rico from the list of independent territories at the best of the eisenhower administration, for the first time the United States and political branches have finally admitted to the world that puerto rico remains a colony. Nothing of note happens in the 1950s. Basically, puerto rico remains a territory subject under the u. S. Constitution. This goes back to michaels question. What is the consequence of the legal reality, what is the consequence of the colonial condition on puerto ricos fiscal and economic implosion . The consequences have been grave. First of all, the most obvious consequence is puerto rico, unlike any sovereign country about the world and unlike the 50 states, puerto rico cannot declare any municipalities for corporations insolvent or bankrupt. Puerto rico cannot do that. Puerto rico has no Legal Authority under the colonial arrangement to declare itself bankrupt. It has no Legal Authority to negotiate binding the agreement with any of its creditors. Puerto rico either has to see congress permission or the supreme courts blessing as it is trying to do with the case currently pending before the supreme court. So thats the first obvious consequence of puerto ricos colonial condition. Now, what are the other consequences question mark how do they relate to the implosion . The answer is in order for puerto rico to jumpstart its economy, bearing in mind that puerto ricos most difficult challenge is not the debt load. The most pressing challenge is the utter absence of Economic Development and growth. The correlation between the debt burden and Economic Growth is so asymmetrical that it makes it impossible for puerto rico to pay off its debts. That is fundamental. In order to jumpstart our economy, to be more competitive in the global scene, puerto rico really needs a set of tools. That set of tools are unavailable under the current colonial condition. Puerto rico has no control over its fiscal policy. Puerto rico has no control of its trade policy. Puerto rico has no control of its monetary policy. Puerto rico has no control of the environmental regulations, communication regulations, air and space regulations, puerto rico has no control even of its own health care policy. Health care represents 2 billion a year worth of cost for the puerto rican government and puerto rico really a very hard time charting a path forward when it controls none of those economic variables. Those variables and triggers are controlled by congress and puerto rico has no meaningful representation in congress. We only have a nonvoting delegate. So in a nutshell and to summarize, yes, the colonial condition makes it harder for puerto rico to chart a path forward. And i believe this is the most propitious moment in recent history for puerto rico to articulate the total package. That is negotiate with the political branches in washington a way out of the fiscal crisis by negotiating a decolonizing timetable to address the pink elephant in the room, that most want to put aside. That is puerto ricos undignified colonial condition. Thank you. Lets turn to you. Youve also been extremely engaged and focused on puerto rico for a number of years. How did we get to this point . Youve been in washington. Are there steps that might have been taken, policy measures in washington, to try to stem where we are at today . Thank you for the question michael. Thank you for being here. Before i begin, i want to acknowledge the role of my colleagues in the Diaspora Network of professionals here in washington working to support Civil Society environment and in puerto rico. There are several missing links in the conversation. This is a great example of the kind of networks that can support solutions. Im going to take your question. Im going to talk a little bit about what happens in puerto rico. There are things that can be done in washington and my copanelists have eloquently explained the macro situation and the political situation regarding the colony and whether we believe thats the case or not. But i want to talk about the institutional problem in puerto rico. Most people, when they look at the causes of puerto ricos crisis, we want to summarize in economic terms. We are talking about an economy that has lost competitiveness. The government overspends to compensate for shortcomings regardless of the behavior of the Business Cycle and other microeconomic factors. That is a recipe for disaster. When you combine some economic mismanagement in the way that these financing mechanisms were issued and structured not to mention shortsighted fiscal policy because of the political cycle, the budget process which is a bit chaotic as you can imagine. And some of the questions that have emerged about the lack of transparency in how the government does its accounting. All of these things have been mentioned several times. I want to highlight the factor that unites all of these various things. It is the question of the quality of institutions and in puerto rico. Who makes decisions, even in the context and lets assume we control the colonial issue and are able to fix it. We have to have a set of leaders and decisionmakers making decisions for the longterm. Puerto rico has an institutional problem in the sense that puerto rico has for many years and many years. It has been ruled by coalitions that compete with each other for electoral competition as opposed to productive coalitions, the the ones that led puerto rico out of poverty. There has been no productive coalition in puerto rico since the which is remarkable 1970s, considering nobody has had to rethink how the economy works. There has been no such coalition governing puerto rico in that point. In that sense, the other component of the problem of institutions is in puerto rico Political Parties act as mechanisms for recruitment and movement abilities. Puerto rico doesnt have a fully functioning Civil Service that creates incentives for Public Officials to behave in a way that leads to better or improving excellence in the way they manage. It is determined by the way parties recruit elite and the way parties move people off the channel and tube leadership positions which means loyalty is fundamentally attached to the party and not to the fundamental Political Economic system. That is a recipe for this coalition. This uncertainty on the political status creates a vested interest in maintaining the system that lets the party survive in its current form without seeing the need to revisit economic incentives which should be the basis for a productive coalitions. We have a fundamental vicious cycle in the way the institutions work and the way in which the structure of incentives that decisionmakers have to make longterm and shortterm decisions about of course shortterm decisions and that of course leads to credibility problems we can talk about a little later. Barry, lets go back to you and talk a little bit about this pending bill. To what extent, in your view, does this really address some of the problems . Is it a bandaid . Some critics have said it is a bailout. You know, where do you come down on this and is this given where we are today and the urgency of the situation i think all of us see, is this the best sort of formula at this time . What is your sense of this bill . First of all, the bill is not a bailout. One of the things that has created some tension in all of the negotiation is the refusal of the federal government to put up any new money in resolving the situation in puerto rico. Theres no bailout in that sense. Unless you wanted to say it is going to be a bailout by debt bondholders who are not going to get paid. I think it just recognizes reality. If they dont pass this bill, on july 1, the last major element of puerto rican debt will go into default. Default can be an extremely unruly process because at that point, courts get in. If you look at what happens in the u. S. , one of the bondholders will sue. Everybody in this room must be aware of what happened with respect to argentina when it tried to negotiate an agreement debtors and a couple people dissented and a judge stepped in and said youve got to pay them first. That is the sort of threat that would happen but in an even more complicated situation in argentina. You have to accept some sort of a notion of an Oversight Board of some kind. I also think the idea that puerto rico could be left to do it itself is just not realistic. These are going to be very painful measures to t