Crisis of Puerto Rico in 5 Graphs. On September 30 2016, a historical fact took place in Puerto Rico: For the first time since 1898 the authorities of the USA took under their control the finances and most of the agencies of the Government of Puerto Rico. It was the consequence of PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act), an Act of the Congress of the USA with an ironic name that dramatically changed the economic relation between Puerto Rico and the United States.
Actually, there is a Financial Oversight and Management Board for Puerto Rico that consists of seven members appointed by the President of the United States and one ex officio member designated by the Governor of Puerto Rico. The Board was established with broad powers of financial and budgetary control of Puerto Rico. Those powers are incompatible with the standards of self-government of the United Nations and in fact are a mutation of the rules of the Constitution of Puerto Rico… without modifying a line of its text.
During the years of the crisis we can identify two aspects of its relationship with the United States: Puerto Rico is was excluded from bankrupcy (that was a good solution in other cases, such as Detroit) and when they decided to legislate, the Supreme Court of the United States affirmed that Puerto Rico can’t legislate to restructure its debts and struck it down. These are some consequences of being only a Free Associated State, or seen from the American side, an unincorporated territory under the control of the Authorities of the United States.
How can we summarize the crisis of Puerto Rico?
The crisis in Puerto Rico is very deep
The crisis in Puerto Rico is long and very deep. We can’t say that is such a crisis as Greece suffers but it is strong, persistent and is affecting both the public sector and the private economies. The big difference with Greece is that Puerto Rico is part of the U.S. Fiscal Union.
In this moment, we can say that every fiscal year begin with a deficit over the 20%. The public debt is over 100% of the GDP and has ballooned to $72 billion. If we read the latest statistics, we can see for example that the Last Economic Activity Index of 2016 reflects a dramatic reduction in only one year and the lowest number in 25 Years.
The unemployment rate is very high in comparison with the United States. And the number of private jobs is lower than in the main States. The conjunction of both elements complicate the resolution of the crisis: if one of the consequences of the austerity that the Board and the Government of Puerto Rico are applying is the reduction of jobs in the agencies and the Public sector, the revenues in taxes become even lower.
But another fact is even more important: less than the 40% of the population is productive. The average in the USA is more than 60%. There is another impressive figure: since 2007, Puerto Rico lost 25% of its jobs. It is a strong impediment to balance the budget.
Where can we find the origins of the crisis of Puerto Rico?
But the crisis in Puerto Rico is not new. In my opinion there were three decisions of the Americans authorities that provoked that crisis:
- Yes, the North American Free Trade Agreement is one of the causes of the crisis. The objective of this Agreement is to establish a free trade area between Canada, Mexico and the USA but had an unexpected effect on the island: Puerto Rico lost its comparative economic advantage because of Mexico. Even its location is now a point of disadvantage with other partners in NAFTA.
- In 1996 the Section 936 of the Tax Code of the United States removed, with the “strong support“” of Governor Roselló . That Section allowed the manufacturing sector in Puerto Rico to grow in spite of the cost of other economic factors. The effect of the legislative change was immediate: when the new regulation was enacted, the decline of the manufacturing sector in Puerto Rico began.
- I can imagine another legislative change in American policy that affected to Puerto Rico: the process of peace in Ireland was brokered by the USA by granting tax benefits to companies that located activities in that country.
We can see in that graph the evolution of the production in Puerto Rico since the mid 90´s
But there are other problems in the economy of Puerto Rico.
The Merchant Marine Act –known as Jones Act- is a strong problem that raises the price of the goods and provokes a loss of competitiveness of the economy because it prevents foreign-flagged ships from carrying cargo between the United States and other noncontiguous territories such as Puerto Rico. The price of transportation and the consequence of the Jones Act is another point to be revisited.
We shouldn’t forget some decisions taken by the American institutions in the 20’s of the last century that provoked some issues in the agriculture of Puerto Rico. And there is a big problem with the price of the energy that causes a lack of competitiveness of such an economy.
What are the consequences of the crisis?
The first consequence of that deep and prolonged recession that began so many years ago is that Puerto Rico, its administration, is now in a severe debt crisis. Even more, right now there are many problems in order to determinate the law to the restructuration of the debt and it should be a huge liability of for the Government in case of failure of payments.
But the crisis is not only in the Public Sector. The huge consequences of the crisis in the private sector were two, one economic and the other social:
The first one is that the salaries were frozen. Right now the gap with the United States is growing day by day.
The social consequence of the crisis is the population decline in Puerto Rico. Between 2006 and 2015 300.000 people left the island, mainly to the United States. That means about 10% of the population in 2006. Even more, it is a good educated workforce that left the island in the last 15 years.
Regarding to the population, there were two other effects for being considered. Its ageing has a strong impact on the economy and on public finances and the stability of the public finances. The second one is the low birth rate because of the lack of future prospects, the worst conditions in public health and public education. It is the first time in its history that the average age in Puerto Rico is higher than in the United States.
The solution of the crisis of Puerto Rico is very complicated.
From a political point of view, Governor Roselló brokered a referendum about the legal relationship with United States that remains unsettled. He is promoting the position of being the 51th State in the United States of America… but without the positive or negative decision of the American Congress.
From an economic point of view, Puerto Rico is another State that suffers the consequences of the austerity policy. The solution of the crisis can’t be found in the cuts nor in the raising of taxes because the strength of the economy is very low. According to Stiglitz and Guzmán, “Puerto Rico is in a demand-constrained regime, demonstrated by the significant subutilization of its factors of production. The Board’s plan markedly exacerbates this problem, without showing any awareness that it is doing so. (…) The PROMESA Board was supposed to chart a path to recovery; its plan makes a recovery a virtual impossibility. If the Board’s plan is adopted, Puerto Rico’s people will experience untold suffering. And to what end? The crisis will not be resolved. On the contrary, the debt position will become even more unsustainable”.