Puerto Rico: Continuing Socio-Economic Deterioration and the Need for Change

The long-run decline of the Puerto Rican economy, predating the recession of the last decade, is evident in the relative stagnation that emerged from 1980 onward. The roots of both the relative stagnation and the long recession lie in the political status of the island. The option of statehood, however, can be the foundation for a new era of economic expansion. The long-lasting economic problems of Puerto Rico are evidenced by several measures: the low rate of economic growth, the high unemployment rate and the low labor force participation rate, the falling investment rate, the high poverty level, the extreme degree of economic inequality, and the massive exodus to the states. And, of course, there is the very high—crisis level—amount of public debt. In addition and of central importance, the poor treatment of Puerto Rico relative to the states by the U.S. government has contributed to the economic situation on the island and demonstrates the role of status in bringing about economic weakness and decline. The popular belief that Puerto Rico receives “generous” treatment from Washington is belied by the data. Moreover, while many observers viewed Puerto Rico as an economic success story during the late 1900s, this view erred in measuring success by the growth of GDP instead of GNP, the former including the profits of firms based off the island (mainly in the U.S.) and not providing a measure of economic conditions of Puerto Rican people of firms. The detrimental impact of Puerto Rico’s political status as a U.S. territory—or, if one prefers, a U.S colony—shows up clearly in the unequal treatment of Puerto Rico relative to the states in certain important federal programs. For example, Puerto Ricans have not been eligible for the federal Earned Income Tax Credit (EITC) and only partially eligible for the Child Tax Credit (CTC). A Puerto Rican family with two parents and two children and with earnings of $25,000 would have had a net income in 2011 of $23,587 after all federal taxes. It would not receive the EITC and CTC. An identical family in the states with earnings of $25,000, after all federal taxes and the EITC and CTC would have a net income of $30,013—$6,426 more than the Puerto Rican family. Beyond these vary tangible negative impacts of the current status, and more fundamental, is the broad economic dependency of Puerto Rico. This dependency has led to an underdevelopment of Puerto Rican based economic activity and to government policies that have always looked outward for special favors from Washington and investment from abroad. The results show up in an excessive reliance on manufacturing and a failure to develop economic activity in areas where Puerto Rico has clear advantages—e.g., tourism and specialized business services linking the states to Latin America. The results of dependency also have included a weak and distorted financial sector and a failure to invest sufficiently in infrastructure, education, and science.