to suggest some steps for improving fiscal outcomes on the island. i present these ideas in order to solicit your input, based on your deeper understanding of the situation. i present them not as quick fixes – as there are no quick fixes to these fiscal situations – but as changes to financial practices that over the next several years can help to restore fiscal health to the island. the first step would be for the commonwealth government to reinvigorate its efforts to raise economic growth. while puerto rico has a number of features that make it a potentially the debt figures reported for the u. s. mainland states refer to debt held by the public and exclude debt held by government agencies. most puerto rico debt is held by the public. bis central bankers ’ speeches strong economy, economic growth on the island has been weak for almost a decade. to restore growth and raise living standards, it is critically important for policymakers to expand efforts to marshal the island ’ s considerable strengths – a bilingual and well - educated adult population, an open economy occupying a central position in the caribbean, a wide experience as a host to multinational corporations, and close ties to the u. s. mainland economy. while the challenges to restoring growth are clearly complex, i want to highlight some key areas where policies to support efficiency and growth might be strengthened. first, barriers to job creation and active participation in the labor market should be reduced. the current structure of labor market incentives could be examined to ensure that firms do not face significant hurdles in creating jobs and workers are not discouraged from entering the labor force. second, policymakers should continue their efforts to create a more dynamic business environment, including the elimination of unnecessary costs of setting up and operating a business, particularly with respect to energy costs. third, economic development efforts should consider a more proactive approach to utilizing the island ’ s educated workforce and well - established higher education system. one possibility is to look for ways to expand the support for the formation of partnerships between higher education and industry, which have proven to be effective ways for regions to promote innovation, entrepreneurship and economic growth. puerto rico has many of the ingredients in place to harness the benefits of these industry - education partnerships and policymakers should begin to look for promising opportunities for mutually beneficial collaboration. a second step is to comprehensively reform the commonwealth ’ s tax system, which is heavily dependent on income taxes and tends to levy high rates on narrow bases. when rates are high, it increases incentives for activities to be shielded

william c dudley : the competitiveness of puerto rico ’ s economy – reducing the cost of doing business and improving labor market opportunities remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york and chairman of the committee on the global financial system ( cgfs ), before the puerto rico chamber of commerce annual convention, fajardo, puerto rico, 29 june 2012. * * * good morning and greetings from new york city. i sincerely thank the chamber for giving me the opportunity to address your annual meeting. unfortunately i am unable to be in puerto rico in person, because i have a broken leg and am under doctor ’ s orders not to fly. the good news is that i am on the mend and that i have this opportunity to speak to you via video. we at the new york fed are pleased that puerto rico is part of the second federal reserve district that we represent in the federal reserve system. we are committed to the people of the island and to its growth and prosperity. our commitment is reflected in our ongoing work with our many partners on the island. last spring, with the puerto rico chamber of commerce and other local partners, we co - sponsored a forum aimed at helping small businesses in puerto rico learn about export opportunities. we have been involved with education on the island for two decades, including by helping to set up the alianza. today we help promote financial literacy through a video competition in partnership with the puerto rican bankers association. our banking supervisors work to strengthen the financial system so it can readily supply credit to families and businesses, while our research economists monitor and analyze local economic conditions. this analysis – along with similar analyses from other regions across our nation – feeds into the decisions the federal reserve makes on monetary policy. in support of this work, i and other senior officials have traveled to puerto rico a number of times in recent years and met with a wide range of stakeholders, including university officials, students, business leaders, entrepreneurs, bankers and government officials. what we learn during these engagements helps to shape our understanding of the puerto rican economy and our efforts to support it. i have seen numerous examples of expansion and growth. this gives me confidence that puerto rico has the capability to be an economic success story. nevertheless, these local engagements have also confirmed to me that conditions are not what we want them to be – in particular, growth and expansion are not happening broadly enough. the task of putting the island on a path of robust,