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Economic issues in Puerto Rico

Since 2006, Puerto Rico has been facing the worst economic crisis in its history.
This crisis has had many manifestations linked to deindustrialization and public
debt.

The reality is that since the end of Section 936, initiatives have been created
that have not resulted in significant changes in the productive structure, since
economic policies are often limited to offering tax incentives that do not
require a minimum number of directly generated jobs and investment.
Furthermore, it is common to see agency heads celebrating the arrival of a
new fast food restaurant as an economic development "achievement" and/or
taking week-long trips to other countries to meet with businesspeople to
stimulate trade with Puerto Rico. The international reality is that free trade
agreements are negotiated over months or years, which is why these week-
long trips rarely achieve anything significant.

By sector of activity, according to ICEX data, manufacturing is the sector with

the greatest weight in Puerto Rico's GDP, accounting for more than 47% of the
total. On the other hand, finance and insurance are important components,
contributing around 4.13% of GDP.

The 1950s were just beginning and Puerto Rico was experiencing an economic
recovery projected by some of the media at the time as an economic miracle.
The first urbanization, Puerto Nuevo, was born. There were around 4,000
houses, tiny, made of cement, side by side. Cheap. From the middle of the
20th century, living conditions improved.

Unlike today, when Puerto Rico is suffering an economic recession after an

almost five-year legal battle that ended with the green light from the courts for
the restructuring of a huge public debt (73 billion dollars), back then it was in
full swing.
Puerto Rico is facing the largest municipal debt restructuring in the history of
the United States, after the courts approved its plan.

Puerto Rico's industrialization process, which had an impact on people like

Serrano, who after facing poverty managed to enter university and achieve a
better standard of living, began in the 1940s.

Rexford Tugwell, a governor appointed by President Franklin D. Roosevelt,

promoted the creation of local companies, subsidized by the state.

Unlike today, when Puerto Rico is suffering an economic recession after an

almost five-year legal battle that ended with the green light from the courts for
the restructuring of a huge public debt (73 billion dollars), back then it was in
full swing.

Within a few years, glass, cardboard, cement and other factories were built on
the territory, which began to displace the agricultural economy. However, after
the Cold War, this approach was left behind and the government began a
strategy of "investment by invitation".

The new economic model consisted of granting tax incentives to American and
foreign companies. "They tried to replace this model of development and
industrialization by the state and the import substitution strategy with an open
capital model, opening up to foreign capital," explained Puerto Rican
economist and lawyer Heriberto Martínez. It was at this time that most of the
state-owned factories were sold off and foreign companies arrived in search of
cheap labor and tax breaks. At first they were textile companies and other
heavy labor companies, such as the food industry, and later pharmaceutical
companies.
"Direct jobs have been created, industrial employment, a middle class has
developed and many people have been lifted out of poverty," he said.

"Social objectives were also set to improve education, health, housing and, in
addition, economic objectives to improve the infrastructure of roads, bridges,
ports, electricity, drinking water and communications," said economist Martha
Quiñones, a professor at the University of Puerto Rico. During this period (the
late 1940s and early 1950s), the integration of women into the workforce grew
and families had two incomes, added Serrano. The first women I saw working.
It was a tobacco factory, they made cigars.

Over the following decades, economic indicators supported the reforms

established by the government. From 1950 to 1980, the island's GNP per capita
grew from US$342 to US$3,479, second only to Venezuela (US$3,630), an oil-
rich nation.

The rows of wooden houses without basic services that used to occupy both
inland mountain villages and coastal urban areas have been replaced by
extensive concrete developments. New highways have replaced dirt roads and
cars have replaced horses and mules.

Workers swapped the scorching sun of the cane fields for offices and assembly
lines. They learned to read, sent their children to university and abandoned the
markets for shopping malls.

Poverty fell from 62.8% in 1970 to 44.6% in 2000, according to a presentation

by the Center for the New Economy in Puerto Rico.

Puerto Rico had an economic growth rate of 6% per year between 1948 and
1974, according to the Economic Commission for Latin America and the
Caribbean (ECLAC).
These changes were even analyzed by Time magazine in 1958. On the cover,
the publication claimed that the island had become a "Laboratory of
Democracy", after years of being considered - as some history books claim -
"the home of poverty in the Caribbean".

However, Puerto Rico found itself in trouble at the end of the 1960s. During
this time, it moved its economy towards the petrochemical sector, with the
idea of producing refined petrochemicals and exporting them to the United
States.
But the sector collapsed in the face of the international oil crisis, which
occurred in 1973 after OPEC decided to raise fuel prices in the context of the
Yom Kippur War. A situation that had an impact on the world economy.
The United States' response to this crisis was to approve new tax exemptions
in 1976, with the intention of attracting more pharmaceutical and high-tech
companies.
The legislation allowed US companies in Puerto Rico to deposit their earnings
in the territory's banks and then send them to their subsidiaries free of taxes,
explained economist Quiñones.
However, in 1996 the US government decided to withdraw the contributory
benefits. By 2006, when the transition period granted by Congress came to an
end, investment by foreign companies had fallen considerably.
From 1997 to 2012, the island lost around 80,000 jobs in the manufacturing
sector alone.
And Puerto Rico, during its boom times, after the state-owned local companies
it had established, didn't make any great efforts to promote local production.
"We focused on creating the brains to work abroad," said economist Martínez.
"Puerto Rico was the archetype of what later became in Latin America the
maquiladora-based industrialization, the assembly industry," said sociologist
Emilio Pantojas. "But it was an urban country with dependent
industrialization," he said.
Faced with the departure of these companies, the territory began to take steps
to sustain social spending and its government apparatus.
While the economy contracted, the debt grew exponentially.
For 2006, Puerto Rico's debt amounted to US$48,000, compared to a GNP of
US$68,000 million, which represented 60%, Martínez said. Ten years later, the
debt had increased by 103%.
Now the island was far from being an example to follow. The poverty rate was
at 45%, unemployment was rising and there was a massive emigration of
boricuas to the United States.
However, some local politicians claimed that the debt could be repaid, despite
the experts' warnings. The territory's periodicals published again and again
how Wall Street's accrediting houses were debasing their bonds.

In 2015, Alejandro García Padilla was the first governor to state that Puerto
Rico's debt could not be paid. In 2016, under Ricardo Rosselló, the collapse
became official.
In 2015, former governor Alejandro García Padilla accepted the augury: "The
debt is unpayable... there is no other option. This is not a matter of politics, but
of mathematics".
A year later, the United States passed legislation that allowed Puerto Rico to
restructure its debt in the courts, but at the same time imposed a Fiscal
Oversight Board.
The body, made up of seven people appointed by the president and the
Congress, has been responsible for representing the Boricuas in court since
2017, when the restructuring process began.
In addition, it has the power to approve its budget, above the local
government.
The "Junta", as it is called in Puerto Rico, has pushed through austerity
measures since its arrival, with the justification that they were necessary to be
able to comply with debtors.

Natalie Jaresko is the executive director of the Puerto Rico Tax Supervisory
Board.
Among the policies that faced the most opposition was a cut of almost half of
the University of Puerto Rico's budget and the intention to cut public pensions.
A US court of appeals has approved a plan to restructure the debt of Puerto
Rico's central government.
The so-called Debt Adjustment Plan, which was in the hands of Judge Laura
Taylor Swain of the Southern District of New York, incorporates agreements
between a series of creditors, reducing US$33,000 million in bond debt to
US$7,000 million. Annual debt payments will be reduced by 80%.
"There has never been a public restructuring like this in the entire United
States or the world," David Skeel, president of the Board, told The Washington
Post.

The process was marked by intense encounters between the politicians of the
territory, the Junta and the purchasers, who on both sides were sued on
several occasions in the face of various disagreements.
The operation cost more than $1 billion, paid for by taxpayers.
During these years, Puerto Rico has also experienced two major hurricanes and
an earthquake. Also the resignation of a governor.
"We are facing a trascendental moment in which the government of Puerto
Rico is moving towards ending the bankruptcy process and thus concentrating
on returning to the progress that our people expect and deserve", wrote the
current governor, Pedro Pierluisi, on Twitter once the restructuring plan was
announced.
The agreement signed by Swain does not include the proposal to cut pensions
for retirees, although it does stop the defined benefit programs that cover
teachers and judges.
The debt adjustment plan would come into force on March 15, but before that
it could be challenged in the courts.

According to the judge, Puerto Rico has the economic resources to meet its
debt payments until 2034. Over the next few years, it will have to continue
implementing "structural reforms" in order not to fall into bankruptcy again.
February 9, 2023 - The United States Treasury Department announced today
that Puerto Rico will receive up to $109 million in funds under the State Small
Business Credit Initiative (SSBCI), as part of the American Rescue Plan (ARPA).

Puerto Rico accumulated unsustainable levels of debt in the years prior to

2017, when it declared itself in bankruptcy and undertook the process to
restructure its multimillion-dollar debt of more than US$70,000 million.
At the time, the island was mired in a serious economic crisis. It had a poverty
rate of 45%, unemployment of 12% - double the US average - and its
population was emigrating massively.
The so-called Debt Adjustment Plan approved this March, proposed by a
financial supervision board appointed by the federal government, incorporates
agreements between a series of creditors, reducing US$33,000 million in bond
debt to US$7,000 million. Annual debt payments will be reduced by 80%.

The plan also includes protections that limit the amount of debt Puerto Rico
can have in the future, according to the Reuters news agency.

Getting out of bankruptcy will allow Puerto Rico to overcome default, foster
new investments to boost its exhausted economy and rehabilitate its
infrastructure, including its weak electricity grid.

The supervisory board has said that under the plan most of the retired officials
will receive their full pensions. However, the plan cancels the defined benefit
pension programs that cover tens of thousands of teachers and judges.

The case has cost around US$1,000 million in legal fees, something that has
also aroused criticism. As of today, with the PDA, the central government has
cut around $33,362 million in obligations - the most recent figure from the JSF
- to around $7,400 million. From the outset, the figure implies that the
government would see a 78% reduction between what it owed before
Promesa and the balance that would be pending payment.
Puerto Rico is an unincorporated territory of the United States, which means
that it operates under the legal, monetary, security and tariff systems of the US
1. However, Puerto Rico also has its own local government and fiscal
autonomy, which allows it to manage its own budget, taxes, public services
and economic development 12
In recent years, Puerto Rico has faced a serious debt crisis that led it to declare
the largest municipal bankruptcy in US history in 2017 34. As a result, the US
Congress created a federal oversight board to oversee Puerto Rico's finances
and restructure its debt 34. The board has the power to approve or reject
Puerto Rico's fiscal plans, budgets, contracts and laws, as well as initiate legal
action on behalf of the island 34.
Therefore, control of Puerto Rico's economy is shared between the US federal
government, the local government and the federal oversight board, each of
which has different roles and responsibilities. The US federal government
provides Puerto Rico with legal and monetary frameworks, as well as federal
funds and disaster relief. The local government is responsible for implementing
policies and providing public services that affect the island's economic growth
and social well-being. The federal oversight board is tasked with ensuring fiscal
responsibility and negotiating debt relief with creditors.

Puerto Rico's minimum wage is a complex topic that depends on several

factors, such as Fair Labor Standards Act (FLSA) coverage, date of hire and type
of industry. According to the results of the web search, here are some key
points to consider:
The minimum wage under Puerto Rican law is 6.55 dollars per hour, lower than
the federal minimum wage of 7.25 dollars per hour 12.
However, when the local minimum wage is lower than the federal one,
employers must pay their staff the higher amount. This makes the minimum
wage in Puerto Rico $7.25 by default for employers covered by FLSA 12.
Puerto Rico recently adopted a Minimum Wage Act that will gradually increase
the minimum wage for workers covered by the FLSA to $8.50 per hour on
January 1, 2022 and to $9.50 per hour on July 1, 2023 3.
There are some exceptions and variations to the minimum wage, depending on
the industry, such as tourism, agriculture, construction and manufacturing. For
example, the minimum wage for tipped workers in the tourism sector is $4.10
per hour, as long as the tips make up the difference to reach the federal
minimum wage 2.

According to an article published in September 2023, poverty in Puerto Rico

has grown under US colonialism, which limits the island's capacity to develop
its own economy and meet the needs of its population 3. The article states that
poverty in Puerto Rico was 41.7% in 2018, before the 2020 earthquakes and
the COVID-19 pandemic, and that it has increased since then 3. The article also
criticizes the austerity policies imposed by the Fiscal Supervision Board, which
have cut public services and social programs that benefit the poorest 3.

Compare the unemployment rate

According to labor market statistics published by the Puerto Rico Department

of Labor and Human Resources (DTRH), the seasonally adjusted
unemployment rate in Puerto Rico remained at 6 percent in April 2023, the
same as last month and the previous year 1. This figure reflects a historical
stability in the Puerto Rican labor market, which has managed to remain below
7 percent since March 2022.

According to the available data, the Dominican Republic's unemployment rate

in 2023 was estimated at 5.6% in June 1. The government expects it to fall to
6.2% in 2023 2. Puerto Rico's unemployment rate in 2023 was estimated at
6.0% in April 3. No data was found on the forecast for 2023.
These data suggest that the Dominican Republic and Puerto Rico have similar,
but not identical, unemployment rates. Both countries are below the world
average, which was 8.3% in 2020. However, there are also factors that can
influence the measurement and interpretation of the unemployment rate,
such as the definition of the active population, labor informality, job quality,
underemployment, youth unemployment, etc.