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Puerto Rico – an economy in trouble

PETER O’CONNOR
Contributing Columnist
oconnor@lbknews.com

“Puerto Rico  Spanish pronunciation: [pʷeɾto ˈriko]), officially the Commonwealth of Puerto Rico (Spanish: Estado Libre Asociado de Puerto Rico), is an unincorporated territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the United States Virgin Islands and the British Virgin Islands.

Puerto Rico (Spanish for “rich port”) comprises an archipelago that includes the main island of Puerto Rico and a number of smaller islands, the largest of which are Vieques, Culebra, and Mona. The main island of Puerto Rico is the smallest by land area of the Greater Antilles. It ranks third in population among that group of four islands, which include Cuba, Hispaniola (Dominican Republic and Haiti), and Jamaica. Due to its location, Puerto Rico enjoys a tropical climate and is subject to the Atlantic hurricane season. Official languages of the island are Spanish and English, with Spanish being the primary language.

Originally populated for centuries by an aboriginal people known as Taíno, the island was claimed by Christopher Columbus for Spain during his second voyage to the Americas on November 19, 1493. Under Spanish rule, the island was colonized. The Taíno were forced into slavery and suffered high fatalities from epidemics of European infectious diseases. Spain held Puerto Rico for over 400 years, despite attempts at capture of the island by the French, Dutch, and British. In 1898, Spain ceded the archipelago, as well as the Philippines, to the United States as a result of its defeat in the Spanish–American War under the terms of the Treaty of Paris of 1898. In 1917, the U.S. granted citizenship to Puerto Ricans; since 1948, they have elected their own governor. In 1952 the Constitution of Puerto Rico was adopted and ratified by the electorate.

A democratically elected bicameral legislature is in place but the United States Congress legislates many fundamental aspects of Puerto Rican life. The islanders may not vote in U.S. presidential elections because the territory is not a state. The island’s current political status, including the possibility of statehood or independence, is widely debated in Puerto Rico. In November 2012, a non-binding referendum resulted in 54 percent of respondents voting to reject the current status under the territorial clause of the U.S. Constitution. Among respondents to a second question about alternatives, 61 percent voted for statehood as the preferred alternative to the current territorial status.” (Wikipedia)

West Side Story is an American musical with a book by Arthur Laurents, music by Leonard Bernstein, lyrics by Stephen Sondheim, and conception and choreography by Jerome Robbins. It was inspired by William Shakespeare’s play Romeo and Juliet.  To many, especially New Yorkers, this 1957 Broadway production was an early look at Puerto Ricans living on the Mainland.  To many of us these American citizens were becoming a large portion of the urban population.  In my youth, naval service in the Caribbean provided the opportunity to live on that island.  Seabees learned a lot at Roosevelt Roads, a base at the eastern end of the Puerto Rico – built during WWII as a haven for the British fleet, which was never needed.  I returned there some years ago to find the base closed and in decay.  In those early days we watched the post-war development of the island, with San Juan a fine liberty port.  Puerto Rico was booming.  Things there, they are a changing.

“The macroeconomic situation in Puerto Rico is strikingly similar to that of Greece in 2010.  It uses an expensive currency it cannot control.  Its citizens eagerly dodge taxes to a bloated public sector.  And its officials protest too much that default is unthinkable.  However, there have been no riots or calls for a change of government.  Boricuas, as the islanders are known, are too busy spending to take to the streets: since 2006 personal consumption has crept up 2%, while real GNP has fallen by 12%.  And local analysts stress that Puerto Rico’s close ties with the United States provide numerous ‘escape valves.”              (Buying on credit is so nice, The Economist November 23rd 2013)

“The island’s economy has been slowing for decades.  After the second world war, America weaned it off sugar-cane by offering open repatriation of profits.  Along with cheap labour, these perks lured in textile and food firms and, in the 1970s, drug companies.  By the 1990s, however, the island’s comparative advantage began to wear out.  It began to lose its federal corporate tax break, and had to apply the federal minimum wage. Rivals like Singapore and Ireland competed for pharmaceutical  investment, and the United States signed free-trade deals with Puerto Rico’s neighbors.”  Crack downs on southern U.S. border drug routes drove some traffickers towards Puerto Rico.  It is reported that that the island now handles 40% of the cocaine entering the United States.  Crime has risen.  I noticed that police officers in San Juan wear flak jackets over their uniform shirts.   Yet we ensure that Puerto Ricans, Americans remember, cannot fall too far.  A third of boricuas receive food stamps; they are eleigble for unemployment insurance and for Medicaid.  The 2009 fiscal stimulus included $7 billion in Obama Money for Puerto Rico.

“The other ‘escape valve’ is immigration,” our British editors remark.  “Some 29% of those born on the island now live on the mainland.  Its population has fallen by 4% since 2000, to 3.7m.  The young and jobless are most likely to move.  Small communities in the interior are becoming ghost towns.”  “Unfortunately, this leaves fewer people to pay taxes to the cash – strapped treasury.  As the economy shrunk, the government turned to the bond markets, which sopped up paper that was fully exempt from taxation in all 50 states.  Investors remained complacent until Detroit went bankrupt in July.  Then they soured and Puerto Rican debt yields doubled in two months.”

“The governor, Alejandro Garcia Padilla, had already launched an austerity programme, raising taxes by 1.1% of GNP and making public employees’ pension schemes less generous.  That is expected to trim the deficit from $2.2 billion to $800m.”  “If the governor cannot reverse the spiral of recession, austerity and population loss, Puerto Rico’s debts will become intolerable.  Some $10 billion of them are protected by a constitutional guarantee, but the remaining $60 billion are backed only by specific taxes or utilities.”

Finally from The Economist, “Congress has little appetite to bail out Puerto Rico.  But Mr Obama could probably spare it by simply looking the other way.  In 2010 the island placed a levy on firms that sell products to parent companies on the mainland.  The Internal Revenue Service now grants a  dollar-for-dollar credit against federal corporate tax to the businesses this law affects.  As a result the policy costs the firms nothing, while transferring revenue from Washington to San Juan.  Thus Puerto Rico can help itself to as much federal money as it wants by raising the tax.” The greatest escape valve of all.

Update as markets open for 2014:

Puerto Rico Yields Hit High, To Access Debt Market, Island Tries to Soothe Unease About Its Financial Health   ( Wall Street Journal, Thursday,  January 2, 014 )

“Puerto Rico is struggling to convince investors and rating firms that it is on the path to financial health amid rising borrowing costs and fears over a potential downgrade of its debt.  Yields on Puerto Rico’s $70 billion worth of debt, which is held by many small investors through mutual funds, ended 2013 at record highs, raising questions over the commonwealth’s ability to tap credit markets to bolster its finances.  The average yield on Puerto Rico’s 10-year bonds hit 9.87% on Friday and hovered there through Tuesday, the last trading day of 2013.”  Yields, which move in the opposite direction of prices, more than doubled in 2013.

 

 

 

 

 

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3 Responses for “Puerto Rico – an economy in trouble”

  1. Peter O'Connor says:

    Jose,
    Thanks for your thoughtful and comprehensive comment. One of our purposes is to entertain, another to educate, another to stimulate thought and dialogue. You filled the last, very well.

  2. Jose Diaz says:

    Be careful with what you google on wikipedia.

    The pro-statehood Legislature in 2012 excluded the developed Commonwealth and the “none of the above” alternatives from the ballot in the plebiscite held in 2012 and structured two ballots in such a way that a majority voted for a change in the current status of Commonwealth. This majority was not only composed of statehood and independence voters. Supporters of a developed Commonwealth also favor changes in the current status and that is why they had no alternative but to, supposedly, reject the current status under the territorial clause of the U.S. Constitution. The plurality voting for statehood in the second ballot by this process has not been taken seriously in the Congress.

    Exclusion of a developed Commonwealth from the ballot would deprive Commonwealth supporters of their right to vote. Developed Commonwealth must be on the ballot for a plebiscite to be a fair exercise of the right to vote of U.S. citizens in Puerto Rico when making use of their right of self-determination to propose to Congress changes in their political status. Developed Commonwealth however does not mean a sovereign Commonwealth as if Puerto Rico were an independent nation.

    The U.S. Supreme Court has held that the Commonwealth of Puerto Rico like a state is an autonomous political entity “sovereign over matters not ruled by the U.S. Constitution.” The developed Commonwealth would include changes in the compact establishing the federal relations to provide for more effective self-government. There is nothing in the Constitution that prevents Congress from making changes in federal laws. Basic democratic principles require that voters may vote for such changes if they prefer Commonwealth over statehood or independence.

    By disenfranchising the supporters of Commonwealth, the policy announced by Senators Wyden and Murkowski will delegitimize whatever results stem from a referendum and derail the process towards an ultimate solution on status. The proposal by President Obama including Commonwealth in the process subject to an opinion by the Justice Department as to the constitutional viability of its development is the way to move forward the process.

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