Puerto Rico is a lesson in social and economic decline and a fiscal conundrum. A Caribbean island with a Latin feel and smell, it is the classic getaway for the United States tourist, with miles of spectacular beach and great nightlife. It is also a popular destination for Eastern Caribbean nationals, as it is a US gateway and port of call for West Indian travellers who shop at malls in San Juan and access its US-standard medical facilities. Like the American territories of Guam and the US Virgin Islands, Puerto Rico’s infrastructure and road network is similar to what is found on the US mainland.
Now, poverty in Puerto Rico is worse than in the poorest US states. Some Puerto Ricans claim that this poverty is the result of the territory being treated unfairly by the US. Poverty could also be the result of Puerto Rico being a magnet for migration from places such as the Dominican Republic and Latin America.
There is net migration out of the island into the US. Some of Puerto Rico’s brightest and smartest are leaving the Caribbean island for a “better life” in states such as Florida, New York and Texas, where there are more employment and economic opportunities.
The island’s population is on the decline as a result. This emigration is exacerbating the island’s economic problems. A declining population leads to lower consumer demand and slower economic growth.
When the “best and brightest” leave, a country or territory loses human capital in the form of scarce skills and specialised knowledge. Those at the top of the employment food chain have greater spending power. That is cash lost to the native and home market. But when a declining population is mixed with recession, the result is depression and worse.
Overspending
For decades, Puerto Rico lived above its means. In other words, government spent more than it earned in revenues. It took for granted the links it had to the US politically and financially. As a result of this excess in spending, annual deficits became unsustainable.
Today, Puerto Rico is facing a debt of $72 billion. It has a GDP of over $100 billion, and income per capita of $35,000. The debt-to-GDP ratio is not out of the park by any means. Still, this is money owed to creditors such as pension funds, government corporations, and various bond instruments. And these creditors want to be paid their cash as it becomes due.
Now the island is in a position where it is about to default on its debt repayments. In fact, as of last month, the territory’s development bank stated that there was less than $1 billion in its coffers.
Then it has to meet an immediate payment of $700 million, in addition to another major payment of nearly $1 billion in 2016. In addition to these debt payments, Puerto Rico must meet its regular expenditure requirements for public services and infrastructure needs.
Similar to Greece
Austerity is being forced down the throat of Puerto Rico by its creditors as a result of its debt conundrum. There is a lack of willingness by the US financial establishment to forgive Puerto Rico’s debt, or reschedule that debt to such an extent that it allows the economy to function as normal. In that way, Puerto Rico resembles Greece. It possesses a debt that it simply cannot repay based on its present fiscal position and current and future growth prospects.
Teachers recently went on strike to protest cuts in education spending. Puerto Rico has great nightlife, but when daylight comes reality sets in. People go home from the night’s gaiety to communities under severe social and economic strain.
Unemployment is a huge problem. This has led to a contracting economy. With no customers, hundreds of businesses hit the proverbial wall and have to shut their doors. Whole communities have been hit. Businesses in towns all over the country are boarded.
Now, unlike Greece or other independent countries that have to suffer fully for their economic sins, Puerto Rico has a “get-out-of-jail-free card.” The territory’s residents are US citizens. They can leave the island and live, work and vote in the US. This means that there is a limit on what creditors can force down the throat of the Puerto Rican government. Puerto Ricans, unlike Trinidadians, can simply move away and settle in the US.
Options
There are options for getting Puerto Rico out of the economic swamp. One is to allow businesses on the US mainland tax incentives to invest on the island. This could spur both job and economic growth, and enable Puerto Rico to meet its debt obligations. Already there is a real estate developer making use of a tax loophole. He is re-creating whole neighbourhoods and hopes that the majority of clients for the homes and businesses he is building are Puerto Rican.
The other option is full statehood. How Puerto Rico gets there only heaven can tell. However, if Puerto Rico became a full US state, then its debt would be shared by the rest of the states in the union in one form or another. There would be federal aid. Residents would be able to vote in presidential elections and send representatives to Congress and the Senate to fight for the state’s interests.
One last option is for Puerto Rico to be allowed to file for bankruptcy. That is an option allowed only for US states. This would allow for a rescheduling of Puerto Rico’s debt. The whole process would be managed by a board of control. In other words, Puerto Rico would have to give up a significant amount of political and economic control over its own affairs. And the board would probably be at the beck and call of Puerto Rico’s creditors.
Main lesson
The key lesson of Puerto Rico is that governments must live within the parameters of the budgets that they write. Governments must also determine appropriate debt-to-GDP and debt-to-public-revenue ratios, and then stick by them. The red light should be observed when parameters are breached. And wise decisions must be made to avoid going over the proverbial precipice.
Puerto Rico has some difficult days ahead.
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