THE UNPAYABLE DEBT: PUERTO RICO’S FISCAL CRISIS

By Aisha Ali
Staff Writer

Earlier last week, Puerto Rico’s Governor Alejandro Garcia Padilla announced that his government would be unable to make the $400 million debt payment due on Monday. This comes after the Puerto Rican Senate and House of Representatives passed an emergency declaration in April meant to allow the governor to suspend payments on the country’s $72 billion debt. Since then, U.S. Speaker of the House Paul Ryan has been trying to get a bill passed in Congress that would help Puerto Rico restructure its finances before July 1, when the country is slated to pay $2 billion to its creditors.

 

Puerto Rico’s path to incurring $72 billion in debt spans over 40 years. A change to U.S. tax code Section 936 in the 1970s allowed U.S. companies to operate in American territories without paying corporate income tax. Coupled with Puerto Rico’s own tax code essentially eliminating corporate tax income liability, the U.S. territory became incredibly attractive for American companies. In the years following, Puerto Rico developed a fairly large manufacturing sector, primarily focusing in pharmaceutical production. Investments by American corporations after the passage of Section 936 contributed to Puerto Rico’s positive GDP growth rate between 1976 and 2006, when Section 936 was officially phased out of the tax code. The repeal of Section 936 is, in large part, the reason why Puerto Rico is in such deep debt; when American corporations could no longer receive enormous tax breaks for their operations on the island, they left. As Puerto Rico’s debt grew from constituting 60% of its GNP to 100% of GNP, another group of investors started looking toward Puerto Rico as a way to make money. Hedge fund managers bought up Puerto Rican municipal bonds, an attractive investment due to their triple-tax exempt status, which then allowed the government to pay for public services while continuing to incur debt.

 

Despite worsening conditions, some believed Puerto Rico would find a way to repay its debt. Municipal bonds have always been marketed as a relatively safe bet for investors because the bonds are backed by the credit of the city, state, or territory’s government. But over the last few years, particularly with bankrupt cities like Stockton and Detroit, investors have started to realize that there are no guarantees with municipal bonds. Luckily for investors, though not for Puerto Rico, the territory is not included in Chapter 9 of the U.S. Bankruptcy Code, which means, unlike Stockton and Detroit, Puerto Rico cannot restructure its debt by filing for bankruptcy. This exclusion comes from an amendment made to an unrelated congressional bill in 1984, which removed both Puerto Rico and the District of Columbia from being able to file for Chapter 9 bankruptcy.

 

Unfortunately, the debt crisis has already had drastic consequences for the island since Mr. Garcia Padilla announced in June 2015 that the “debt is not payable.” Over the last year, the government has already shut down nearly 100 schools and cut other public services as well in an attempt to save money. This week, the country’s Executive Director of the Medical Services Administration (ASEM), a division of the Department of Health, said that in response to mounting debt, ASEM would reduce the number of beds in their emergency rooms and trauma hospitals. Even without reducing bed space, the island might not be able to take care of its sick as more doctors are leaving for mainland U.S. This all comes at a time when Puerto Rico has seen a sharp increase in the number of Zika virus cases with 70,000 people currently infected and a possible 700,000 total cases by the end of 2016, according to the Center for Disease Control (CDC). Puerto Rican economists project that the spread of the virus will affect more than just healthcare costs by also reducing worker productivity by $31 per day.

 

So what can be done to remedy the situation? H.R. 4900, the bill introduced by Representative Sean Duffy (R-WI), failed to pass in time for Puerto Rico’s May 1 payment, but attempts are being made to reintroduce and pass the bill before July. The bill would include criteria necessary for Puerto Rico to restructure its debt, including the ability to modify all $72 billion of its debt while also allowing a ‘stay’ on any lawsuits from creditors regarding payments. However, the bill would also create a control board for the country, similar to one imposed by President Bill Clinton during District of Columbia’s financial crisis in 1995, essentially removing the island’s autonomy for the first time since 1948. Additionally, only one out of the five members of this potential control board would need to be a Puerto Rican resident even though all five would have complete approval over the territory’s budget and laws.

 

Sadly, Mr. Duffy’s bill is the best-case scenario. Creditors who are still owed money have started lobbying against the bill and measures meant to help Puerto Rico restructure and repay its debt. The Center for Individual Freedom, a “dark money” group with unknown donors, released an advertisement on April 22 targeting lawmakers in favor of H.R. 4900 by calling the bill a “bailout” on the backs of American taxpayers. Despite the inaccurate distillation of HR 4900, if the advertisement works, Puerto Rico will have to find other ways to appease creditors before July 1.

Image By Alexander Rabb

CYBER SOVEREIGNTY: THE ECONOMIC IMPERATIVES OF A SECURE CYBERSPACE

High Tech Inside by aotaro

By Kris Klein

Staff Writer

Cyber Sovereignty: The Economic Imperatives of a Secure Cyberspace

Mounting tensions spark talk of war as the table is set for a dinner between rivals. On the eve of the first state visit to the United States by Chinese leader Xi Jinping, a single occurrence seems to calm threats of economic sanctions and cyber-attacks. Chinese hackers, accused by the United States of stealing trade secrets, are quietly arrested by their own government.

Reports of the arrests found a welcome, yet wary audience in American media. They are a sign of goodwill from China at a time when relations have grown determinedly apprehensive.

The United States and China maintain a relationship fraught with angst over cyber-espionage. As early as 2007 US officials accused China of stealing designs for a major American weapons system, and by 2013 the tally grew to as many as two dozen major weapons systems that were reportedly compromised by Chinese hackers.

In 2014, a Senate panel found that Chinese hackers had infiltrated the computer systems of private firms involved in the transportation of US troops and military equipment.

In 2015, a massive cyber-attack that originated in China infiltrated the federal Office of Personnel Management, exposing the personal information of millions of government employees.

The Obama administration has been lenient in its response to Chinese hacking that is used for military or political purposes and has tried to distinguish between these attacks and the types of attacks that are used to gain commercial or economic advantage. The US continues to struggle with engraining that principle in the conduct of international espionage.

During Xi Jinping’s US visit, he and Barack Obama vowed that their governments would not engage in or support commercial espionage. The verbal agreement between the two leaders tenders an opportunity for US diplomats. If China were to cede its commercial espionage programs, it would be a profound victory for US efforts to impede such spying.

Despite hope of progress, suspicions linger.

US intelligence officials expressed doubt that China will follow through on its promises. None of the hackers arrested by the Chinese government have yet to be prosecuted and reports continue to surface of subsequent Chinese commercial hacking of private American companies.

Punishing any future commercial spying, even if being permissive of political spying, can strengthen American innovation. While gradual progress is made in halting Chinese hacking altogether, the priority of the US is to protect innovation and technology. Setting clear limits on what the US deems permissible will deter foreign actors from stealing American technology.

The importance of Intellectual Property to Protecting Innovation

Legal protection for those who develop new ideas and technologies encourages advances that makes the US economically competitive. When those protections are not enforced, innovation falters and so does the economy. In a report to the United States Congress, the Commission on the Theft of American Intellectual Property emphasized the economic consequences of allowing IP theft to go unpunished.

Theft of technology robs companies of their investment in developing designs for competitive technologies. When these designs are stolen the result is typically cuts to payrolls that cost the American economy jobs.

IP theft also diminishes the incentives companies have to invest in future research and development. If a company cannot be guaranteed that a potential investment in research will offer any form of competitive advantage, the company has no reason to invest in research at all. The decline of investment in research and development means slower innovation and fewer new technologies to help create economic growth.

Chinese Hacking and the Threat to Intellectual Property

The commission’s report highlights China’s cyber-attacks as a particularly potent threat to protecting innovation. The commission identified China as the world’s most persistent perpetrator of IP theft, revealing that hacking from China accounts for between fifty and eighty percent of the value stolen in commercial espionage.

Sustained Chinese commercial hacking would be a significant setback for global efforts to strengthen intellectual property rights. How China chooses to develop its own legal system can be a useful tool in gauging the respect the Chinese government has for innovation and its willingness to help protect intellectual property.

Problems with China’s Legal Protections for Innovation

In 2012 the US Patent and Trademark Office (USPTO) published a report on China’s patent process in which it outlined legal enforcement as a major concern of American companies.

In order for a Chinese court to hear a legal case, the court must first accept the case. However there are no specific criteria outlining if a court will or will not accept a particular case, nor do courts publish the reasons they had against accepting a case. This leaves judges the power to arbitrarily decide whether or not a case will be heard.

American companies cited discriminatory legal practices as one of their main concerns with China’s patent enforcement. Companies perceive China’s legal system as discriminating against American companies in the favor of their Chinese competitors.

The lack of legal enforcement allows technology to be stolen from American companies with little cost to the the Chinese companies doing the stealing. The lack of legal enforcement for patents held by US companies reflects the unwillingness of the Chinese government to respect intellectual property rights across the globe and in cyberspace.

Reform and Hope for Chinese Support of Intellectual Property

Earlier this year Chinese President Xi Jinping announced a new ideological campaign called “The Four Comprehensives”, and one ‘Comprehensive’ is of particular interest to the fate of IP in China.

Out of the Four Comprehensives, the third is the most significant to IP. The stated aim of Xi Jinping is to “Comprehensively govern the nation according to law”. The rule of law in China may aptly demonstrate the posture of Chinese leaders toward IP and the potential for those leaders to agree to limit the theft of IP through commercial cyber-espionage. Developing the rule of law in China by fighting corruption that hampers legal enforcement could be the key to developing China’s intellectual property rights into those of a modern economic power.

As China’s President presses on with his political campaigns against corruption and in support of his “Four Comprehensives”, the politically inclined on-looker will be wondering if these campaigns will bear fruit of substance to the economy and to international relations, or if they are merely Xi Jinping’s tools for consolidating power.

The potential growth of the global economy will be determined by our technological innovations, and therein lies the importance of China’s willingness to reform its behavior in both cyberspace and the courtroom. We can all hope that Chinese leaders mean what they say when they promise us their support for innovation and the rule of law.

Image by aotaro

TOO LITTLE, TOO LATE: CHINA’S FUTURE WITHOUT THE ONE CHILD POLICY

TOO LITTLE, TOO LATE: CHINA'S FUTURE WITHOUT THE ONE CHILD POLICY

By Julia Aurell
Staff Writer

Two weeks ago, the People’s Republic of China, led by Xi Jinping, decided to revoke its highly debated one-child policy. The policy, which was introduced over 35 years ago, has been a constant point of controversy at home as well as abroad, as China stands as one of the few countries in the world to insist that it can manage population growth as it sees fit. Initially designed to ensure that the emerging population did not gobble up economic growth, the source of the Communist Party’s legitimacy, the policy has led to worrying demographics. By 2050, 35% of the 1.35 billion population is predicted to be over the age of 60. Meanwhile the working-age population fell by 3.71% in 2014, a trend which is predicted to continue over the next decade. With such statistics, one must pose the question; will Xi and his government be the victim to the Communist party’s own policies?

Introduced in September 1980, the program is estimated to have prevented the birth of nearly 400 million children. Many women have reported dealing with the personal traumas of losing these children. Nevertheless, social consequences never motivated any reassessment of the policy. Rather, the worries of an aging population and declining economic growth have been the primary cause of concern for the Communist Party. Yi Fuixan, an outspoken critic and professor in Human Demographics, has frequently voiced his opinions of the economic downfall associated with declining demographics, noting that if the trend is not reversed “the future for China’s economy will look grim.” For the People’s Republic of China, the continuous economic growth has been a major source of power. An instantaneous decline in economic growth could threaten the regime and spark a demand for a change in ideology. Because of these economic pressures China may have revoked its policy to maintain political balance and control over its population.

However, this is not the first time the Communist Party has taken steps to relax the brutal reinforcement of the policy. In 2013, Beijing introduced a policy that permitted parents who had only one child to apply for consideration to have a second child. This change was predicted to boost China’s population by 2 million annually. However, by September of this year only 1.76 million people had applied for this privilege, implying only an increase of 1 million newborns, half of the Communist Party’s predictions. The selective two-child policy proved a failure, and thus the only sensible route was scrapping the policy completely and allowing all women to have two children. The Chinese government has proclaimed an annual target of 20 million births per year; an 8 million increase to the amount of births recorded in 2013. Will the predictions be correct this time around, or has the ship sailed for higher Chinese population growth?

Stuart Gietel-Basten, associate professor of social policy at the University of Oxford says that “the reforms will be too little too late.” Although the Communist party seems to have bowed to the reality of the situation, without acknowledging their immediate failure, couples will still face a two-child policy; a system enforced through permits and heavy fines.

Nevertheless, the two-child policy will not solve the deeper issues which are coming to underpin Chinese society. With an incredible population source available to employers, parents are forced to spend both time and money on their child in order to secure success. In 2011, it was estimated that the average disposable income in Shanghai was 32,000 Yuan. However, schooling for one child equated to nearly 31,838 Yuan, leading 35% of parents to parents to deem that raising a child is a burden. Not only must parents take care of children, the Chinese society and tradition states that a good child must take care of their parents. Further, the demographics of women in China have changed. According to the Chinese government, nearly 90 million women are eligible for the 2nd child policy. Conversely, 60% of these women are over 35. Not only have families and careers often been created at this point, females may not wish to undergo the health risks associate for both baby and mom at such an age.

With these burdens, many couples may not be willing to have more children, even if they will be encouraged to do so. Though there may be steps for the Chinese government to promote growth, such as offering cash incentives to mothers to encourage large families, decades of government propaganda may have convinced them that one child really is the best and any deviation from such is unacceptable. The social stigma around two-children, coupled with increasing financial and social burdens will have continuous impact on China’s demographics for years to come. However, this offers a problematic picture. Will the falling demographics resulting from a policy implemented to preserve economic growth and power prove to be the Achilles heel of the Chinese Communist Party?

Photo by kattebelletje