August 17, 2017
The New York Times, August 17, 2017
A Congressional board’s remedy for Puerto Rico’s financial ills will only deepen the island’s impoverishment for decades.
The United States invaded Puerto Rico in 1898 and took it from Spain. Although the residents became United States citizens in 1917, the island’s colonial status has been a locus of political debate and struggle for most of its subsequent history.
Just a few months after gaining citizenship, Puerto Ricans were made subject to a United States military draft. But they never got the right to elect a voting member of Congress, despite being governed by United States law. The island is officially an “unincorporated territory” of the United States, but since the 1950s, it has preferred to call itself an “estado libre asociado” — free associated state — or a “commonwealth.” If the word “colony” was once judged too harsh, at this moment in Puerto Rico’s history it looks like an understatement.
That’s the thing about not having control over your own most important economic policies. It’s not as noticeable when times are good, but when things go south, it can be a long nightmare. The Greeks discovered that in the depression that has swallowed up most of their last seven years; sadly, Puerto Ricans have even less power than Greeks to alter a cruel fate that others have designed for them.
The Puerto Rican economy has already suffered a “lost decade” — no economic growth since 2005. The poverty rate is 46 percent, and 58 percent for children — about three times that of the 50 states. Unemployment is at 11.7 percent, more than two and a half times the level in the states. Employment has plummeted, and about 10 percent of the population has left the island since 2006.
Worst of all, there is no light at the end of the tunnel. As revenues fell with the economy over the past decade, the island’s government increased borrowing in an attempt to maintain levels of economic activity and social spending. Puerto Rico ended up with $73 billion in debt that it couldn’t pay, and officially defaulted in 2015.
In June 2016 Congress passed the terribly misnamed PROMESA act (it means “promise” in Spanish), which created a financial oversight and management board to direct Puerto Rico’s finances. This board, to which President Barack Obama appointed four Democrats and four Republicans, has now approved an austerity regimen that, if things go according to plan, envisions a second lost decade — in other words, no economic growth from 2005 through 2024. But the plan doesn’t take into account the impact of such austerity, which would add more years of decline. And there’s more: All the budget tightening over the second decade, including cuts to health care and education, would pay only about $7.9 billion of Puerto Rico’s $73 billion debt.
That means that creditors’ lawsuits, which have already been filed, could inflict yet additional damage and worsen the quarter century of economic stagnation that is now in the cards. Hedge funds hold much of Puerto Rico’s debt, and since May their claims have been under consideration in a bankruptcy-like proceeding – also under the PROMESA act — that does not look any more promising than the oversight board’s plan.
An economic decline of this duration is rare in modern history, and Puerto Rico’s colonial status appears to be a major reason for the anomaly. If Puerto Rico were an independent country, it could try to make a new start after defaulting on its debt. Although the international financial system still lacks a badly needed bankruptcy mechanism, governments that default are usually able to return to international borrowing after an economic recovery. Even in some of the worst scenarios — for example, a decision by a New York judge in favor of vulture funds in Argentina three years ago — the end results have been vastly better than the purgatory that Puerto Rico is facing.
And even if Puerto Rico were a state, its two senators and four or five voting members of Congress, combined with the more than five million Puerto Ricans in the current 50 states, would give them more of a fighting chance than they have today.
There is a strong case to be made for serious debt relief and a plan that will allow for an economic recovery. Most of the economic decline that led to the debt crisis resulted from decisions made by the federal government or international treaties that it signed. Among these were the rules of the World Trade Organization and China’s accession to it in 2000, which set off an out-migration of pharmaceutical production — a mainstay of the island’s economy — and other manufacturing. Employment in manufacturing, which was a much bigger percentage of jobs in Puerto Rico than in most of the rest of the Americas, fell by more than half from 1995 to 2016. The repeal of a special tax break for American corporations that operated in Puerto Rico helped drive down investment and employment. Between 1999 and last year, investment fell from a peak of 20.7 percent of Puerto Rico’s gross domestic product to 7.9 percent.
Puerto Rico’s international commerce also suffers from a federal law that significantly raises the cost of traded goods and the cost of living there by preventing foreign ships from stopping first at the island before proceeding to a mainland port. Reduced funding for Medicaid and Medicare, when compared to states of comparable per capita income levels, also account for billions of dollars of Puerto Rico’s debt.
For all of these reasons and more, the United States government has a responsibility to contribute to Puerto Rico’s economic recovery. In doing so, it should ensure that the creditors who made foolish loans or bought Puerto Rico’s bonds at a steep discount do not profit from those decisions.
The structural problems — the unfair economic relationships and legal inequities carved out for Puerto Ricans because of their colonial status — will take longer to resolve. But there is no excuse for the prolonged collective punishment of so many American citizens that is currently being prescribed.