Washington, DC, May 8 2018 --  

Puerto Rico's economic crisis won't be over until a new economy emerges.

When hurricane Maria slammed into Puerto Rico last fall, the island went black. The territory's devastated power grid took over three months to return service to most households. As of last month, 4 percent of homes still lacked power¹ and island-wide blackouts continued. The economy is expected to decline by 11 percent this year.²

But Puerto Rico was in economic trouble long before the storm hit. The commonwealth's government defaulted on its bonds last May.³ Rising unemployment and emigration to the mainland has created an ever-shrining tax base has put its government into a state of perpetual crisis.

How did America's Caribbean territory become such a basket case?

To understand Puerto Rico's troubles, it's helpful to look at its neighbors. Just over a century ago, Puerto Rico was united with the neighboring island nations of the Dominican Republic and Cuba as provinces of the declining Spanish empire. Each island had an agricultural economy based on rum and sugarcane. Only the largest cities of Cuba and Puerto Rico had attracted significant European immigration.

After the United States seized the Spanish Caribbean territories in 1898, the islands' 400 years of shared history began to diverge. The Dominican Republic and Cuba became independent countries, with the latter becoming the Western Hemisphere's only communist state. Only Puerto Rico remained a part of the United States.

Until quite recently, this worked out very well for Puerto Rico. Even in the midst of the current crisis, the average income on the island dwarfs that of its neighbors. Puerto Rico's GDP is $37,9000, compared with $17,000 in the Dominican Republic and $11,900 in Cuba.⁴ These figures are in purchasing power parity, so adjusted upward in the case of Dominican Republic and Cuba to account for much lower consumer and housing prices on those islands. As difficult as things are in San Juan, few residents would trade their lives for one of food rationing and internet censorship in Havana.

So, yes, relative to its neighbors, Puerto Ricans are quite well off. But they aren't nearly as well as they used to be, and they aren't doing nearly as well as folks in the rest of the United States. it's no wonder that people are itching to leave.

Back in the late-1990s, when the United States was enjoying the dot-com boom, Puerto Rico's industrial economy was nearing its peak, focussing on the manufacture of pharmaceutical products. Factories had been lured by section 936 of federal tax code, passed in 1976, which let U.S. companies basing subsidiaries on the island pay no corporate tax on income originating from the island.⁵ This was repealed in the 1996, and after a10-year phase-out period, the tax break was eliminated in 2006.

Sure enough, these factories started closing and shedding jobs. Puerto Rico entered economic recession the same year the tax breaks expired, and the recession has never ended. The situation was exacerbated by the closure of the massive Roosevelt Roads naval base one year earlier in 2005, which took away thousands of jobs and the sailors who once spent their money in neighboring towns.⁶

What happened next? The financial crisis, of course. In December 2007, the United States economy as a whole entered recession triggered by the financial crisis. Puerto Rico was not immune from its effects, and unemployment went up there, too.

Just like other Americans, many Puerto Ricans without jobs moved to places where work was more plentiful. These destinations —almost always on the mainland — brought many thousands more Puerto Ricans to join their families and friends in New York, Miami and Orlando. And while plenty of Cubans and Dominicans migrate to the U.S. mainland, too, Puerto Ricans' U.S. citizenship makes it much, much easier. Today, most people of Puerto Rican descent live not on the island but in the mainland United States. You just can't say that about Cuba and the Dominican Republic.

For the government of Puerto Rico, this emigration has been a fiscal catastrophe. Many poorer countries face the problem of a brain drain as the best and brightest emigrate to seek opportunity. But in Puerto Rico, the government faces long-term declines in both GDP and population. There is simply no way that the island's government will ever be able to pay its debts, and Washington must provide a legal way out.

The near future is not bright for Puerto Rico. Factory jobs and naval bases aren't coming back. Lots more people will certainly leave.

But things absolutely will get better. The island is in the middle of a major restructuring of it economy, one that will hopefully embrace its natural advantages of it sunny climate and maritime location than manufacturing. Life will go on. Two decades from now, Puerto Rico will have a much smaller population and a much different economy. But its a safe bet that Puerto Ricans will still be far richer than their cousins in Cuba and the Dominican Republic.

Notes:

1. Department of Energy, Hurricanes Maria & Irma April 4 Event Summary, April 4, 2018

2. PBS, Puerto Rico's Economy Will Shrink 11 Percent by 2019, Governor says, January 25, 2018

3. CNN, Puerto Rico Defaults on $422 Million, May 2, 2016

4. CIA World Factbook, as posted May 2018

5. Tax Foundation, Tax Policy Helped Create Puerto Rico's Fiscal Crisis, June 20, 2015

6. New York Times, After Closing of Navy Base, Hard Times in Puerto Rico, April 3, 2005

Related Web Columns:

Wings of the Same Bird, August 3, 2015

Vamos Federales!, December 15, 1998