Figure 1.--The Caribbean in the 20th century was a vackwater with a dresressed economy. Except for the tiny Cyman Islkands, Puerto Rico abd the Bahamas were the two leading islands in percapita income. Puerto Rici led the region bcause of Federal paymennts and the Bahamas because it bordered on the United States. Here we seen a scene in the Las Coletors Slum in San Juan on 1967. A question we have is whether Caribbean ialnabds can achieve the same level of prosperity as America and Rurope. Fidel and the Communists have shown how to crash an economy. It is not clear to us what policies can lead to significant economic growth.
Puerto Rico along with the Bahamas (benefitting from bordering Florida) have the highest living standards in the Caribbean. with the exception of the Cayman Islands with its tiny population. Even so, it is also the case that incomes in the Island are below all the 50 sttaes and that gap is not closing. It is not clear to us why Puerto Rico has done so much worst ecomomically than the 50 states. The island operates unnder the same Fedral laws as the states and actually has some advantages. Most Island residents do not pay Federal income taxes despite receiving most Federal benefits. This of course is a hige advantage. Why the economy had not been as successful as the economies in the Atates is nor clear. The Puerto Rican ecomomy seemed to making progress with Opertion Bootstrap, but by the 1970s, economic trends began to go terribly wrong. Federal policies adversely affected Puerto Rico, but the major problems appear to have come from policies pursued by the Puero Rican Government. Most Puerto Ricans gravitated toward the Democrtic Prty creating a basically one-party state. Here are the economic natters we have found in assessing the Puerto Rican economy. Cutbacks in the Federal subsidies in recent years and a range of other problems have adversly affected the Island economy which is currently experiencing a Greek-style fiscal crisis, but so not explain why the usland cannot generate economic growth. The problem may well be the Caribbaen itself. There are no Carinnbean countries, exceot for the tiny Cayman Islands that have achieved a high level of national income. The most prosperous Cribban countries habe only raeched th level of th poorest Ruropean vcountrued and most are substantially below.
Real Estate Slump (2006)
A massive real estate slump began (2006). This reduced tax receipts.
Federal Payments
Puerto Rico has received more than $21 billion annually in federal aid from the United States. [U.S. Census Bureau] A substantial portion of this amount is earmarked for public welfare, including funding educational programs (such as Head Start), subsidized housing programs (such as (Section 8 and public housing projects), and a food stamp system called the Nutrition Assistance for Puerto Rico program. These payments totaled $21 bullion in 2919. Rgat was abiut $4,700 percapita, the 19th hughest of the thev50 states. [MacEwan and Exner] We have had a difficult time fimding more recent data. But it i clear that Federal payments are very substantial, the najor factor in making Puerto Rico along with Bahanas the most properous island in the Caribbean, except for the Caymans with its tiny population.
Health Care
Some 1.4 million people living in Puerto Rico (about 45 percent of its population) have incomes below the Federal poverty line. Thus half of the Commonwealth�s residents depand on and receive health coverage through the Federal Medicaid program. The island�s present-day Medicaid program, the Government Health Plan, was established (1993). The Medicaid program and overall health care system. Puerto Rico differs from United States Medicaid programs in major ways. First, it operatesas a key part of a larger, centrally administered health care delivery system. Approximately half of Puerto Rico's 3.2 million inhabitants are poor and thus depend upon the public health system for their medical care. Second, recipients so not have the abilityt to choose their own provider. They are referred to the approporiate level of care by system professionals. Third, this system has a low average oarticioant cost. Fourth, Congress has 'capped' the Federal financial contrinution since 1968. Fifth, despite the economic constraints and large Medicaid population, health status in Puerto Rico actually compares favorably with that in the United States. Notably there is more funding for health care than any where in the Caribbeam. Ine issue has bee an outflow of doctors and other healthcare professions to continetal United States were saklaries are much higher.
Federal Laws
Puerto Rico is subject to the Federal minimum wage of $7.25 although local wages and productivity are much lower. This discourages low business develop and entrepreneurship. The United States' free trade agreements with Latin American and Caribbean countries afversly affected Puerto Rico. The Island's manufacturing sector now faces competition from other Caribbean islands. Lucrative tax breaks under Operation Bootstrap drew major pharmaceutical companies to the islands. Thy built manufcturing plants. They provided needed jobs but they companies' involvement in the global supply chains meant that there were small purchasing from Island sources and thus limited benefits to the local economies. When the Federal Governmnt began phasing out the key tax breaks, plant closures and layoffs began. There were few other manufacturrs on the Island that employees could turn to for jobs. An imprtant Federal law to consider isd the Joness Act. This requires among oyher matters the use of American bottoms. This mrans U.S.-flagged vessels in reade with the United Srates. This creates a disadvantage fir Oyerto Rico. Other Caribbean islands can use liss expoensive foreign carriers. .
Job Crisis
Congress ended special tax breaks that hav historically aided the Puerto Rican economy (2006). Drug comapmies and others exited Puerto Rici. The island's job market has never recovered from the shock. This certainly explains an ecomomic fown turn, but it dies nir explain why the economy does not create jons without subsidies And then Puerto Rico was hit ny the Great Recession (2008-09), While the mainland United States gradually recovered from the Great Recession. Puerto Rico did not, had lost more than 20 prcent of its jobs since 2007. Before Hurrican Maria, one economic assessment projected GDP declines of 3.6 percent and 2.8 percent on 2017 and 2018, respectively. As a result of Hurricane Maria, the decline is going to be much higher.
Energy System
Puerto Rico had the most inefficent energu system in the United States and no effort was bring it up to standard. Electrical lines were poorly laid and suspectable to hurricane damage. In adition, most of the generation was from oil-fired plants, the most costly way of generatig electrical power. This meant that individuls and business on Puerto Rico pay sky high prices for elctricity. Puerto Rico has no oil of its own. Thus the Commonwealth has to import oil for nearly all of its energy production. It was thus hit hard when oil prices doubled (2005-12). The dilapidated electrical grid, collapsed during Hurricane Maria. The power company is effectively bankrupt. It is reportedly at least $9 billion in debt and there is no money for upgrades. It was struggling to find $4 billion for upgrading its power plants before the Hurricane. Now it must deal with 80 percent of its power lines down.
Population Loss
Puerto Rico has lost about 10 percent of its population just over the last decade. The recession hs been a major driver. At the time of the Hurricne Maria there were 3.5=4 nillion residents in the Island. The devestation of Hurrican Maaria has resulted in more people leaving (2017). Only 3.0 million people were left by the end of the year. The exodus of island residents to the mainland United states has further weakened the economy and reduced Commonwealth tax receipts meaning increasing difficult pying for the bloted beaureacracy and to even service the hug debt.
Poverty
Puerto Rico has proven incapable of creaging jobs. It has a poveryu rate of almost 50 percent, much higher thn any state. This means that the Commonwlth has an enormous welfare bill and ionsuggicent working and tax-paying residents to pay the enormous bills.
Massive Borrowing Binge
The Commonwealth Governmnt as defecits began to become a real project attempted to borrow its way out of thedebt hole, in part by issuing debt in the form of bonds. Their high yields and tax-exempt status attracted the interest of mutual and hedge funds. Ordinary investors especially retirees and ordinary Puerto Ricans bought the vbonds. The Commonwealth Governmnt went on aassive borrowing binge. By the time lengers refuse to make further loans, the Commonwealth was $73 billion in debt with no way of paying the money back. That may not sound like a huge anount with alrg state tht had a healthy economy. But Puerto Rico has a small population with a weak economy that has been in recession since 2008 and no indication that here is any end to it. Borrowing money to promote projects to devlop the economy could have been beneficial, but the Commowealth has virtually nothing to show for the money borrowed. The money went to finace massive budget defecits. And as the debt increase, servicing the debt became an increasing important part of the Commonwealth budget. One source studying the Puerto Rican debt crisis explained, "Puerto Rico hid its fiscal problems in order to try to borrow its way out. Through ever more creative ways it continued to borrow and build up its debt. But its efforts to disguise its weakening underlying fiscal position ended up digging itself into a deeper hole." [Setser] The borrowing finally stopped.
Creditvagencies began downgrading The Commonwealth's credit rating (2014). This cut off access to new credits. The governor declared the Commonwealth's debts 'unpayable'. It was no longer a question of paying off the loan principle. The Commonwealth could no longer even service the debt and began missing interest payments (2015).
Bloated Beaureacracy
Many political supporters were hired. Puerto Rico had a larger number of employees per resident than of the 50 states. And a very substantial part of the popularion received welfare payments than any of the states. The Commonwealth Government as the defecit widened continued to issue balanced budget statements for many more years even while tax revenues fell far short of both outlays and forecasts. The Democratic Party has used the welfare system as a way of garnering votes. The government is the largest employer, representing about 25 percent of the total workforce. but unlike the private sector the Government does not generate wealth. The money to pay government salaries has to come from the private sector.
Part of the beauracracy of course filled necessary dunction, police, firemen, teachers, and others. Others essentially pursued make work activitiesas beauracraies tend to do. Many observers believe that the massive Puerto Rican massive government bureaucracy and regulatory structure were essentially barriers to investments and growth. Complicated and lengthy permitting processes are among the many problens that disciuraged buildimg and investors. The island is suffers from bureaucratic disarray and lengthy permitting processes that cause expensive delays. This ties up projects and discourages new business development. There are reports of 5-year waits to permits. Locals describe mountains of paper work for simple food festivals.
Hurrican Maria show how few buildings were constructed to required stndards leading one to wondder what the permitting process was all about. Not only dis the bloated beauracracy require huge payouts in salaries, but as employees began to retire pensions had to be paid further expanding the deffecits. The needed funds could only be obtaind by borrowing.
Budget Defecits
The Commonwealth's budget defits stemed from massive overspending. Again there were no important development projects, even infrastructure spending was limited. Most of the money went for welfare spending and to support hiring for a bloated Commonwelth government.
Successive administrations attempted to keep the size of the deficits secret and pursued the approach of borrowing from Peter to pay Paul. The Commonwealth placed loans to pay off old debts and keep the money flowing. Now that the Commonwealth is cut off from the bond market, even without debt payments, meeting obligations is becoming increasingly dificult.
Hurricane Maria (September 2017)
Hurricane Maria struck Puerto Rico (September 20, 2017). Itis regarded as the worst natural disaster on record in Dominica and Puerto Rico. The tenth-most intense Atlantic hurricane on record and the most intense tropical cyclone worldwide of 2017. Puerto Rico was in a serious stte beforefe Maria, but the islabd was desestated by the storm. "The storm is only going to accelerate the economic decline of the Commonwealth. The electrical gid is the most obvious problem. But the water, sewer and gas line infrastructire is also antiquate and damaged by Maria.
Sources
Burrows, Geoff G. The New Deal in Puerto Rico: Public Works, Public Health, and the Puerto Rico Reconstruction Administration, 1935-1955 (Burrows, Graduate Center, City University of New York).
MacEwanand, Arthur and J. Tomas Hexner. "Puerto Rico: Quantifying Federal Expenditures." Data to calculate net federal expendituresper capita for the states, Puerto Rico, and D.C. have been available in the annual Consolidated Federal Funds Reportfrom the U.S. Department of Commerce and Internal Revenue Service Data Book from the Department of the Treasury. However,and unfortunately, the former of thesesourceshas not beenpublished since 2010, and the data it contained are not available for later years.
Setser, Brad. A senior fellow at the Council on Foreign Relations, an independent, non-partisan think tank. Interviewd for a NBC News report.
U.S. Census Bureau. "Consolidated Federal Funds Report compiled by the U.S. Census Bureau."
