Benchmarking Puerto Rico

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Benchmarking Puerto Rico

• Presentation by
• Peter R. Merrill
• Puerto Rico Manufacturers Association
• Executive Summit The Road to Competitiveness
• San Juan, Puerto Rico
• January 17, 2008

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Benchmarking Puerto Rico

• Agenda
• Introduction
• World Economic Forum Global Competitiveness
  Index
• World Bank Doing Business Indicators
• Tax Benchmarking
• Brookings Report The Economy of Puerto Rico
• Conclusions

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Introduction

• Why Benchmark Economies?
• Prioritization Identifying largest performance
  gaps relative to competitors allows focusing of
  private and public resources where expenditures
  will have biggest return.
• Best practices Identifying most successful
  competitors provides guide to best practices that
  may be copied.
• Monitoring Tracking indicators over time allows
  monitoring of progress relative to competitors
  and assessing whether competitiveness policies
  are working.

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Global Competitiveness Index (GCI), 2007-8

• World Economic Forum has published GCI since
  2004.
• Includes rankings for 131 countries.
• Puerto Rico included for the first time this
  year.
• Rankings based on 113 indicators covering 12
  components of competitiveness
• 79 indicators come from a survey of over 11,000
  senior business executives completed in June 2007
• 34 indicators are based on hard data

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Global Competitiveness Index (GCI), 2007-8

• Competitiveness defined as
• the set of institutions, policies, and factors
  that determine the level of productivity of a
  country
• productivity depends both on quality and
  efficiency of production
• Competitiveness has macro and micro components
• Macro Macroeconomic stability, political and
  legal systems
• Micro Quality of the business environment,
  sophistication of business networks
• Increased productivity ultimately is key to both
  increased wages and sustained economic growth and
  thus should be the focus of national
  competitiveness policy.

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Global Competitiveness Index (GCI), 2007-8

• Different competitiveness indicators are relevant
  depending on the stage of economic development.
• GCI distinguishes three stages of development
• Factor-driven.Competition based on factor
  endowments, primarily unskilled labor and raw
  materials. Companies compete on basis of price,
  sell basic products, and pay low wages.
• Competitiveness depends on basic institutions,
  infrastructure
• Efficiency-driven.As wages rise, countries must
  increase efficiency and quality of production.
• Competitiveness depends more on education,
  business environment
• Innovation-driven.To sustain wage growth,
  companies must compete through innovation,
  producing new and unique products.
• Competitiveness depends more on RD climate,
  business networks

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Global Competitiveness Index (GCI), 2007-8
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Global Competitiveness Index (GCI), 2007-8
Weights of the Three Main Components of GCI at
each Stage of Economic Development
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Global Competitiveness Index (GCI), 2007-8
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(1-131)
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World Bank Doing Business Report, 2008

• World Bank has published Doing Business since
  2004 edition.
• Includes rankings for 178 economies.
• Report measures impact of laws and regulations on
  ease of doing business.
• Rankings based on 39 indicators covering 10
  stages of a firms life.
• For data comparability, a representative limited
  liability operating in the largest business city
  is analyzed.
• Report does not consider other factors affecting
  competitiveness such as macroeconomic stability
  quality of infrastructure and government
  institutions proximity to markets.
• Some Doing Business indicators also are used in
  GCI.

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World Bank Doing Business Report, 2008

• Ten stages of firms life that are measured
• Starting a business
• Dealing with licenses
• Employing workers
• Registering property
• Getting credit
• Protecting investors
• Paying taxes
• Trading across borders
• Enforcing contracts
• Closing a business

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World Bank Doing Business Report, 2008

• Puerto Rico scores below Mexico and the Dominican
  Republic with respect to
• Ease of dealing with licenses
• Ease of registering property
• Ease of trading across borders
• Ease of enforcing contracts

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World Bank Doing Business Report, 2008Ease of
dealing with licenses index
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World Bank Doing Business Report, 2008Ease of
registering property index
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World Bank Doing Business Report, 2008Ease of
trading across borders index
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World Bank Doing Business Report, 2008Ease of
enforcing contracts index
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Tax Benchmarking

• One way to benchmark Puerto Ricos tax system is
  the World Bank Doing Business Ease of Paying
  Taxes indicator.
• PwC assists World Bank in computing the Ease of
  Paying Taxes indicator.
• Standardized 60 employee ceramics firm used for
  benchmarking.
• PwCs international offices determine
  hypothetical firms annual number of tax
  payments, hours to comply, and Total Tax Rate.
• Total Tax Rate is equal to all taxes borne by
  business (including income, property, employer
  share of payroll, etc.) divided into profits
  before all tax borne by business.
• Based on PwCs Total Tax Contribution framework.

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World Bank Doing Business Report, 2008Ease of
paying taxes
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Competitor Tax Systems Ireland, Netherlands,
Singapore
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Competitor Tax Systems Ireland, Netherlands,
Singapore
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Competitor Tax Systems Ireland, Netherlands,
Singapore
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Competitor Tax Systems Ireland, Netherlands,
Singapore
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Competitor Tax Systems Ireland, Netherlands,
Singapore
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Brookings Report The Economy of Puerto Rico

• Published in 2006 with sponsorship from the
  Center for the New Economy.
• Seeks to answer why Puerto Ricos growth has
  lagged that of the US over the last 30 years
  despite open economy, protection of property
  rights, population with schooling years at OECD
  levels, and extensive public investment.
• Report contains status neutral recommendations
  for reform.

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Brookings Report The Economy of Puerto Rico

• Key concerns about Puerto Ricos economy
• Low measured labor force participation (2/3rds US
  level)
• High wage rates relative to skill levels
• Low productivity growth due in part to low
  private capital accumulation
• Low quality of public schools
• Large size of public sector (40 of employed
  college graduates work for government)
• Low productivity of government sector
• Excessive bureaucracy
• Tax system relies heavily on income taxes
• High government debt crowds out private investment

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Conclusions

• PR is most competitive economy in Latin America
  and the Caribbean.
• However, growth has not kept pace with US for the
  last 30 years
• Productivity growth in Puerto Rico is being held
  back by
• Excessive size of public sector
• High debt
• Excessive regulation of economy
• Excessive employment by government
• Excessive investment by government relative to
  private sector
• Excessive transfer payments
• Low labor force participation
• Poor performing public schools
• Excessive reliance on high-rate, narrow-base
  income tax system
• To grow, P.R. must improve economic efficiency
  and support private sector innovation.

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For more information
Peter R. Merrill PricewaterhouseCoopers LLP 1301
K St., NW Suite 800W Washington, DC
20005 202-414-1666 Peter.Merrill_at_us.pwc.com