Puerto Rican Economy in Dire Straits
Dos Mundos, by Marcela Sánchez  
Thursday, 24 April 2008

WASHINGTON -- Corruption charges leveled against Puerto Rico’s governor put the island briefly in the news recently. Aníbal Acevedo Vilá is accused of soliciting thousands in improper contributions to erase campaign debts and cover lavish personal expenses. He denies the charges and is continuing his bid for re-election this year.

While the Acevedo indictment made headlines, a more profound crisis in P.R. continues largely unnoticed on the U.S. mainland. Its economy has been suffering for nearly a decade, and some economists estimate that it has been in recession for 2 years. Unemployment hit 10.5% in December, more than twice the U.S. average. And the number of PRican children living in poverty is nearly 50% -- 3 times higher than the U.S. average.

Many observers argue that these economic difficulties stem from Washington’s neglect and its lack of action on the divisive issue of statehood for the island, which now holds commonwealth status. Nearly half of the population believes that statehood would solve most of their troubles.

8 years ago, President Clinton pledged to clarify P.R.’s relationship with the U.S. and find a permanent solution for the territory, ceded to the U.S. in 1898 as spoils of the Spanish-American War. The task force that Clinton created, and President Bush continued, presented recommendations in 2005 to allow PRicans to vote on the issue, and Congress began work last year on a bill calling for a referendum. But quick progress is unlikely -- even the 3 U.S. representatives of PRican descent can’t agree on the terms of the referendum. And Speaker of the House Nancy Pelosi says she will not bring a bill to a vote until there is consensus.

The fact is that P.R. has not been doing itself any favors. The island has long been mired in political squabbling between Acevedo’s Popular Democratic Party and the New Progressive Party, which currently controls the Legislature.

And while Acevedo’s indictment will only increase the bickering, political consensus is urgently needed to deal with crucial flaws that keep the economy in a rut. For too long, P.R. has bet on a silver bullet solution -- first it was coffee, then sugar and, more recently, multinational pharmaceutical companies. Each product or industry was expected to generate massive numbers of jobs and unprecedented wealth. Yet none had any lasting positive effect and when the pharmaceutical companies pulled out after tax incentives ended, nothing was done to diversify and stimulate local industry.

Government remains the largest employer. According to official data, 3 out of 10 people employed on the island work for either the federal, commonwealth or municipal governments.

Miguel Soto Class, executive director of the Center for the New Economy in P.R., said those numbers can be misleading because the private sector is so underdeveloped. In 2006, he and Barry P. Bosworth of the Brookings Institution reported that starting a business in P.R. was next to impossible. Confusing and time-consuming permit requirements, plus high energy and utility costs as well as poor infrastructure, discourage both homegrown business and foreign investment.

Not surprisingly, according to the center’s latest study, P.R.’s informal economy could represent as much as 23% of the island’s gross domestic product. This means that nearly a quarter of all private-sector employers and employees work under the table, dealing in cash, paying no taxes, and not complying with labor regulations.

Limited job opportunities, low incomes -- 30% of the U.S. average - and a generous welfare system have produced economic idleness. In P.R., a mother of 2 working full time and earning the island’s average income would make only $37 more per month than she would receive through welfare. And that doesn’t include what she would pay in child care costs.

The combination of political paralysis and economic idleness has led many to leave the island. Today, half of PRicans have taken advantage of their U.S. citizenship to move to the mainland.

Even though Soto Class believes P.R. is “really close to hitting bottom,” he is optimistic that the current crisis can bring change. He believes straightforward reforms that would lower tax rates, increase the tax base, and ease dependence on welfare will encourage new small- and medium-size enterprises to open, diversifying the economy and helping turn things around. The question is whether the political class is ready for change.
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