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Ending Puerto Rico’s Perpetual Crisis

Ending Puerto Rico’s Perpetual Crisis

When Hurricane Maria struck Puerto Rico in September 2017, Americans on the mainland were horrified by the scale of the damage—thousands of deaths, hundreds of thousands displaced, millions left without electricity, and, by some estimates, economic losses as high as $90 billion. What few registered, as the hurricane’s toll and the shocking inadequacy of the U.S. government’s response became clear, was an underlying cause of Puerto Rico’s condition: that the island is still effectively a U.S. colony.

Since 1898, when Washington took possession of it at the end of the Spanish-American War, Puerto Rico has been neither granted sovereignty nor fully integrated into the United States. Instead, it has remained an “unincorporated territory,” a place that is simultaneously a part of, yet apart from, the rest of the country. Residents of Puerto Rico are U.S. citizens, subject to federal laws and eligible for the draft, but they do not enjoy the same political rights as their fellow Americans. They have only one, nonvoting member in the House of Representatives, and although they can vote in U.S. presidential primaries, they have no Electoral College votes in the general election.

Without any say in the federal policies that govern it, Puerto Rico has for decades been neglected by Washington. Such neglect has been costly: even before Maria, Puerto Rico’s economy had been in sustained decline for years. Between 2004 and 2017, economic output dropped by 14 percent. If Puerto Rico were measured as a country, that decline would rank among the worst in recent history for a nation not at war. This economic crisis has sparked a wave of out-migration: Puerto Rico’s population has fallen from over 3.8 million in 2006 to less than 3.2 million today. The island has a poverty rate double that of Mississippi, the poorest U.S. state: around 45 percent of Puerto Rico’s residents and 56 percent of its children live below the federal poverty line.

The status quo cannot continue. The United States’ continued economic and political neglect of the island is a stain on the country’s moral authority. Puerto Rico did not choose to enter the United States—it was conquered in an expansionist war, and its wishes have been ignored ever since. For the United States to remain a voice for democracy and self-determination on the international stage, it must end its unjust colonial relationship with Puerto Rico and the damaging purgatory that the island’s current status represents.

The United States initially appointed a colonial government in Puerto Rico. But local resistance led to the Jones Act of 1917, which granted the inhabitants of the island U.S. citizenship and created a popularly elected Puerto Rican Senate. In 1947, Congress passed legislation allowing Puerto Ricans to elect their own governor. Three years later, driven in part by a desire to comply with UN rules related to the self-government of territories, it permitted the Puerto Rican legislature to draft its own constitution, subject to congressional approval. Since ratification of its constitution in 1952, Puerto Rico has officially been called a “commonwealth” in English, yet its Spanish title of “free associated state” implies a degree of autonomy that Washington, despite patchwork reforms, has consistently failed to grant it.

The question of status has long defined Puerto Rico’s own politics. Its main political parties are centered on their support for statehood or commonwealth status, and policies are routinely designed and discarded in view of their implications for one or the other position. The island has held five nonbinding referendums on its status. The first two, in 1967 and 1993, indicated a preference for the commonwealth option, but in the third, held in 1998, “none of the above” won just over half the vote. More recent votes have appeared to show greater support for statehood. In 2017, for instance, in a referendum designed by the current, pro-statehood government, statehood received 97 percent of the vote, but turnout was a mere 23 percent, as both pro-independence and pro-commonwealth parties boycotted the referendum.

The federal government, for its part, has been largely content to maintain the colonial relationship. In response to the 1967 referendum, in 1970, U.S. President Richard Nixon created an ad hoc advisory group on Puerto Rico, which recommended that residents of Puerto Rico be allowed to vote in U.S. presidential elections. But that proposal failed to receive congressional support, and a later recommendation to grant the island greater autonomy was rejected by Nixon’s successor, Gerald Ford, who favored statehood. Over the past three decades, Congress has periodically considered legislation to address the status of Puerto Rico, but the only measure ever passed was a small appropriation in 2014 that provided federal funding for a vote without any commitment to act on the results. And so the status quo prevails.

he United States has not only asserted political sovereignty over Puerto Rico; it has fundamentally shaped the island’s economy. Puerto Rico’s currency is the U.S. dollar, its major banks are supervised by U.S. regulators, and its commerce with the 50 states is governed by U.S. law. When a foreign good enters Puerto Rico, it clears U.S. customs and faces no further duties or trade restrictions. The federal minimum wage has applied in Puerto Rico since 1983. Puerto Rican residents can move freely within the United States, and Americans can visit Puerto Rico without a passport. Yet the island is not fully integrated with the mainland: for income tax purposes, Puerto Rico is legally offshore. Companies operating in Puerto Rico pay no federal income tax on profits earned on the island. And although Puerto Rican residents pay local and U.S. payroll taxes, most do not pay federal income tax. As a result, they receive only some of the federal benefits available to Americans on the mainland—Social Security, for example, but not Supplemental Security Income.Puerto Rico is still effectively a U.S. colony.

At times, Puerto Rico has benefited from its economic ties with the United States. After World War II, a number of manufacturers opened factories in Puerto Rico, drawn by the island’s low wages, increasingly skilled work force, and tariff-free access to the U.S. market. Average annual growth topped five percent in both the 1950s and the 1960s, and income levels, although low compared with those on the mainland, were far higher than those in the rest of the Caribbean. Many viewed Puerto Rico as the capitalist and democratic answerto communist Cuba.

Yet the island’s postwar boom was not built to last. Puerto Rico’s growth was heavily dependent on federal policies that shielded it from international competition. These policies began to change after the 1970s, when the United States became more deeply integrated into the global economy. In 1973, when the United States abandoned its oil import quota system, which had privileged Puerto Rican oil imports and thus helped stimulate the island’s economic development, Puerto Rico’s sizable petrochemicals industry collapsed.

As Puerto Rico’s traditional manufacturing sectors were exposed to global competition, the island became more and more dependent on its status as an offshore tax haven for U.S. firms. A 1976 change to the U.S. tax code, Section 936, allowed firms to repatriate income earned in Puerto Rico to the U.S. mainland without paying taxes. This made the island an attractive destination for U.S. companies, particularly those in the pharmaceutical industry, which could transfer intellectual property rights for a valuable drug to a Puerto Rican subsidiary, manufacture the drug in Puerto Rico, charge a high markup on its sales to customers on the mainland, and then repatriate the tax-free profit. Over time, other high-profit industries reliant on intellectual property also took advantage of Puerto Rico’s tax status—but they failed to generate much local employment.

As a result, even with these tax incentives, Puerto Rico in the 1970s and 1980s never replicated the rapid, broad-based growth of the 1950s and 1960s. By the time the United States repealed Section 936 (through a ten-year phaseout ending in 2006), the federal policies that had supported the Puerto Rican economy—high external tariffs, oil import quotas, and tax-free repatriation of offshore profits—were all gone. When the island’s real estate bubble burst in 2008, Puerto Rico’s economy collapsed, and then continued to decline even as the mainland recovered. Not surprisingly, the island’s government began facing persistent revenue shortages and budget deficits, which it financed through excessive (and often hidden) borrowing and through sales of whatever marketable assets remained in its already depleted public pension system. Between 2005 and 2017, the island’s total public debt rose from $35 billion to over $70 billion, or $20,000 for every Puerto Rican. The last time that Puerto Rico tried to issue bonds, in 2014, the three major U.S. credit-rating agencies scored them as junk.

The United States initially appointed a colonial government in Puerto Rico. But local resistance led to the Jones Act of 1917, which granted the inhabitants of the island U.S. citizenship and created a popularly elected Puerto Rican Senate. In 1947, Congress passed legislation allowing Puerto Ricans to elect their own governor. Three years later, driven in part by a desire to comply with UN rules related to the self-government of territories, it permitted the Puerto Rican legislature to draft its own constitution, subject to congressional approval. Since ratification of its constitution in 1952, Puerto Rico has officially been called a “commonwealth” in English, yet its Spanish title of “free associated state” implies a degree of autonomy that Washington, despite patchwork reforms, has consistently failed to grant it.

The first priority for both U.S. and Puerto Rican policymakers must be to reduce the commonwealth’s overwhelming debt burden, which, measured both in per capita terms and relative to GNP, is far higher than that of any U.S. state. Puerto Rico’s contracted debt service amounts to around 20 percent of its annual revenue, compared with below five percent for the average state. Now that Puerto Rico has entered the bankruptcy-like process set out by Congress in 2016, it should be able to reduce its debt. But there is no guarantee that once Puerto Rico, the oversight board, and various creditor groups agree to a debt restructuring, the island will emerge with a truly sustainable debt burden.

Foreign Affairs, read the full article

A torn flag of Puerto Rico waves from a car a week after Hurricane Maria ravaged the island. Photo by the Rev. Gustavo Vasquez, UMNS.