How Puerto Rico's sinking economy is crushing the American dream

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Puerto Rican Capitol

Not long ago I had the opportunity to build a hotel in Old San Juan with a group of fellow entrepreneurs. We found an interested developer, but he wanted one thing: a letter from a government official that included a set of written rules that apply to building a hotel in Old San Juan.

"I've done projects in Puerto Rico before," he said. "They change the rules whenever they feel like it."

It should have been easy for us to get an official to send us these rules. Unfortunately, we couldn't. The government officials we contacted would not provide them within the necessary 30 days. The deal fell through and, with it, the possibility of creating more than a thousand jobs.

That was two years ago. Although a federal control board is now overseeing the finances of our debt-ridden commonwealth, it can't fix the real problem that is holding back our economy: Our government simply does not embrace entrepreneurship in a way that would kick-start job creation. The apathy I witnessed was just one of many signs of this bureaucratic disinterest.

In the 2017 Global Entrepreneurship Index, Puerto Rico ranked 41 out of 137 countries, dropping by six positions since last year. Although we are very strong in human capital, we have major weaknesses in cultural support for entrepreneurship, high-growth entrepreneurship and the availability of risk capital, the report found. Puerto Rico could "achieve considerable progress in entrepreneurship by addressing its systemic bottlenecks," according to the GEI.

With a 10 percent increase in its position in the index, Puerto Rico could add an additional $14 billion to the economy, the report found. That's significant.

3 key fixes

So what needs to be done for that to happen? Based on my 20 years of experience in building and running WorldNet, a voice, data, cloud and internet services firm in Puerto Rico that now has about 160 employees, here are the three things I would suggest.

1. Refocus government on economic growth. In Puerto Rico, government is the major employer, and few government leaders envision it doing anything beyond keeping a big portion of the population on its payroll. When government does encourage private industry, it is mainly through federal tax breaks for manufacturing. With many manufacturing jobs globally disappearing due to automation and only being created in Puerto Rico through special tax treatment, it is basing our growth on contrived employment and anachronistic workforce skills. That does not bode well for our workforce and future sustainable economic growth.

What we need to move our economy forward is more and more structured government support for entrepreneurship. Our government should be funding more incubators and accelerators. University of Puerto Rico, which is publicly funded, should be investing heavily in entrepreneurship education.

Government also needs to start acting as a formal emissary to overseas entrepreneurs who want to invest here. I am a member of the Young Presidents' Organization, a global network for entrepreneurs and leaders running high-growth businesses. Last year a group representing about 20 high-net-worth individuals reached out to me because they wanted to invest in local businesses on the island. Our government for six years has successfully offered tax incentives to attract wealthy individuals and businesses to live and operate here but has failed to provide any bridge for them to connect to the local economy.

Although the group sought help from our economic development officials, they did not get any meaningful help. I was happy to give the entrepreneurs some leads, but it was disappointing to see the government's total apathy toward skilled entrepreneurs and investors who want to invest in moving our economy forward. They have significant cash but can't find local businesses in which to invest.

2. Reduce taxes that are hostile to start-ups. In Puerto Rico, businesses must pay a tax on gross revenue of up to 2 percent that goes to municipalities. Talking about repealing this tax is taboo, because the municipalities are always hurting for money.

We need to change that mind-set. The tax is crushing for start-up businesses, especially those that bring in revenue but aren't profitable yet. When I was part of a group in which the government asked for recommendations on how to spur the economy 15 years ago, we suggested taxing profits, not revenue. No change resulted. Given the pressing need for economic growth now, I'd suggest we reconsider that idea — and waive the tax altogether for the first five years that a start-up is in business.

3. Reform the government bidding process. Currently, our government agencies require entrepreneurs to use a competitive bidding process that discourages innovation. Officials come up with the solutions they want and to win the work; companies have to submit the lowest price bid. We would do better with a system that tells us what problems government needs to solve and asks us to submit innovative solutions in the areas where we have expertise. Government should choose solutions based on which ones will truly advance our economy, or at least drive government efficiency.

The changes I suggest require political will — a true desire to build a stronger Puerto Rico for our children. They require sacrifice and political risk by our politicians, but they would transform a seemingly hopeless situation into one in which Puerto Rico controls its own destiny. I plan to keep my business here for the long run, so I hope that in this new era of mandated fiscal discipline, the government will start making decisions that are economically smart, even if they are politically unpalatable. Our future depends on it.

— By David Bogaty, owner of WorldNet, a voice, data, cloud and internet services firm in Puerto Rico and a member of the CNBC-YPO Chief Executive Network

About YPO

CNBC and YPO have formed an exclusive editorial partnership consisting of regional "Chief Executive Networks" in the Americas, EMEA and Asia-Pacific. These Chief Executive Networks are made up of a sample of YPO's global network of 24,000 top executives from 120 countries who are on the front lines of the economy and run companies that collectively generate $6 trillion in annual revenue.