Puerto No Rico

by Anamaria LopezWhen the average American hears of Puerto Rico, several images are likely to enter their mind: white sand, turquoise oceans, and the cast of West Side Story. But behind the façade of picturesque beaches, salsa music, stately Spanish architecture, and seaside resorts lies a far bleaker reality. Puerto Rico is currently suffering from what onlookers in journalism and politics are referring to as an economic “death spiral.” The island’s government has just declared the first of many expected defaults on payments to debtors, the consequence of years of virtually unchecked borrowing, primarily from Wall Street firms. To free up money for debt payments, the government is beginning to enact austerity measures, such as cuts on social programs and attempts to lower the minimum wage. While Puerto Ricans do not pay federal income tax, they are experiencing skyrocketing sales and gas taxes as the government attempts raise revenue. Infrastructure is becoming increasingly privatized as the government seeks any and all possible methods of raising funds, which means any future revenue from airports, toll roads, or ports is being sacrificed in order to obtain instant cash. The Puerto Rican government is clearly prioritizing quick revenue over the future economic stability of the island, and the consequences are already beginning to make themselves known. Nearly half the population lives below the poverty line, a figure that will only grow as taxes rise, services are cut, and businesses are closing their doors. In response to this dismal economic state Puerto Ricans are leaving their homeland by the thousands, and emigration continues to accelerate at an alarming rate.

It is obvious that action needs to be taken to ensure that Puerto Rico’s financial crisis does not spell disaster for the island’s future, but the government is simply no longer capable of solving this problem alone. At this point, some degree of federal intervention seems inevitable; US corporations are too heavily invested in Puerto Rico to allow the island’s economy to be destroyed beyond repair. But while there are strong economic incentives for aiding Puerto Rico, such as the consequences Puerto Rico’s economic collapse would have on American industry, the most compelling argument for intervention is a moral one. Assigning all of the blame to the United States for Puerto Rico’s current state would be a gross oversimplification of the matter, but the primary issues facing the island today are rooted in centuries of colonialism and exploitation by the federal government. America has played a leading role in the breakdown of Puerto Rico’s economy. Now, it is morally obligated to help them rebuild.

Admittedly, much of the fault lies with the Puerto Rican government, which has been almost entirely immobilized by corruption, a lack of sufficient revenue, and a grossly oversized bureaucracy. Despite the “anti-corruption” platform of nearly every political campaign since the inception of self-governance in 1948, corruption not only persists, but thrives. In 2008, then-governor Anibal Acevedo Vila was officially charged with 19 counts of corruption. Just this year, a petition to remove the current governor, Alejandro García Padilla, from office on grounds of his alleged mismanagement of public funds garnered over 100,000 signatures. The rampant corruption in government has created an institution that is poorly organized and unequipped to efficiently solve the issues facing its constituency. Most notably, tax evasion is going largely unchecked, a serious issue given the revenue crisis the government is facing. Economists estimate Puerto Rico is receiving only about half of the tax revenue it should, but a lack of funding and well-trained personnel to better enforce tax laws leaves the government with no clear solution. The informal economy in Puerto Rico is also massive, currently estimated to make up about 30 percent of the island’s GNP. This includes income from federal transfers, such as Social Security and food stamps, as well as the thriving underground drug economy. This income is obviously untaxed, further exacerbating the issue of insufficient tax revenue. With a labor participation rate of only about 50 percent, widespread tax evasion, and an enormous informal economy that operates entirely without taxes, it is unsurprising that the Puerto Rican government is grasping at straws to support its population. Recent natural disasters like Hurricane Sandy and an ongoing drought have placed even more strain on already depleted government coffers, and politicians have struggled tremendously with balancing the necessary disaster relief with debt payments. As the debt grows and revenue falls, funds intended to aid citizens and improve crumbling infrastructure shrink.

The government is also disproportionately large relative to the population of the island. Reliance on the bloated public sector for employment has resulted in an underdeveloped private sector and a dependence on American corporations to fill this gap, a phenomenon with significant economic consequences for Puerto Rico. Most educated young people either take a job in government or leave home for employment opportunities in the continental United States, resulting in a shrinking middle class. Furthermore, the half of the population that lives below the poverty line overwhelmingly rely on government benefits, not as a temporary means until employment can be found, but as a permanent source of income. It is difficult to imagine that a state with such close ties to the United States could be in such a dismal economic state. How, then, did Puerto Rico’s economy spiral so wildly out of control?

Puerto Rico’s relationship with the United States might initially seem like it should preclude the commonwealth from such dire financial woes; the United States is undeniably one of the wealthiest countries on earth, and even poverty as it’s defined in America is far less severe than is the case in other countries. The reality, though, is that this relationship with the United States is exactly how Puerto Rico’s financial crisis came about. The fundamental issue of the United States-Puerto Rico relationship is simple: Puerto Rico, regardless of its official designation as a commonwealth, is essentially a colony of America. As stated in the 1901 Supreme Court decision Downes v. Bidwell, Puerto Rico belongs to the United States, but is not an officially incorporated part of it—a statement that defines the political status of Puerto Ricans (residing on the island) as inherently inferior to that of those who live on the mainland. Moreover, Downes effectively granted Congress ultimate authority over Puerto Rico, despite the fact that Puerto Ricans have no voting representatives in Congress. Puerto Rico’s muddled territorial status grants it absolutely no influence in the legislative branch, and because the voices of Puerto Ricans are not being heard, federal policies that are destroying the island’s economy remain in place.

The Jones Act is perhaps the most obvious example of the marked detrimental effect Puerto Rico’s ill-defined territorial status has had on its economic development. Intended as a measure to protect American shipping companies, the Jones Act prohibits any international parties from transporting goods between Puerto Rico and the United States. This mandate, which applies exclusively to Puerto Rico, has resulted in shipping costs at least twice as high as those of neighboring islands. Higher shipping costs leads to a higher cost of living, driving further emigration from the island. American shipping interests are being prioritized over the Puerto Rico’s future prospects, largely because shipping companies have a degree of influence in Congress that Puerto Rico has never enjoyed.

Protectionist policies like the Jones Act have prevented Puerto Rico from expanding trade extensively past America’s borders, and as a result, Puerto Rico has been forced to shape fiscal policy in order to appeal to American corporations and investments. For example, Puerto Rico’s governments bonds are triple tax exempt, which has allowed for huge borrowing from Wall Street firms at cripplingly high interest rates—a set of circumstances which has been a major factor in the current debt crisis. Various tax exemptions and subsidies have also been established to attract American industry to develop on the island, most notably Section 936 of the United States Internal Revenue Code (26 U.S.C. §936). Section 936 granted tax exemptions to income originating on US territories, drawing thousands of corporations to Puerto Rico and substantially accelerating its economic growth. When Section 936 eventually came under criticism for essentially allowing large companies to avoid paying taxes, it was phased out—and with the disappearance of the tax exemptions came the disappearance of industry in Puerto Rico. Corporations that no longer had any incentive to operate on a fairly distant island with high property costs relocated to the continental United States. Since 2006, when Section 936’s tax breaks were substantially eliminated, Puerto Rico’s economy has contracted significantly every year. The decision to enact these tax breaks had ensured that Puerto Rico’s economy would become dependent on the continued existence of them, and the decision to abolish it was made by Congress, not the Puerto Rican government.

Protectionist policies and tax regulations are several manifestations of a larger trend that has revealed itself over the course of the Commonwealth of Puerto Rico’s existence: Puerto Ricans’ interests are consistently put second to the interests of American industry or the federal government. A lack of Puerto Rican representation in Congress allows these policies to remain in place indefinitely, prompting the question: what will it take to abolish these policies? Will Puerto Rico’s imminent collapse finally constitute a significant enough impetus for Congress to take action? If so, what form should federal intervention take?

Those opposed to intervention are quick to label the concept of aiding Puerto Rico as a “bailout”, but a mere bailout would simply palliate Puerto Rico’s current issues without solving the long-term problem. What Puerto Rico needs is not a bailout; Puerto Rico needs extensive, long-lasting reform. Firstly, Congress needs to grant the Puerto Rican government the right to file for bankruptcy under Chapter 9 (11 U.S.C. §900 et seq.), from which it is currently inexplicably prohibited from doing. Filing for bankruptcy will allow the island to restructure its debts and take the first steps towards paying them off. Simply paying off debts, however, is not a solution to the crisis, only the necessary first step. Congress needs to work alongside the Puerto Rican government to abolish protectionist policies, expand international trade, and halt the island’s pernicious dependency on American industry. Finally, both the federal government and the people of Puerto Rico need to seriously consider the relationship they share, and evaluate whether the current commonwealth system is truly what’s best for both parties.

Specifically, the question of Puerto Rico’s lack of representation in Congress must be addressed. The Puerto Rican government deserves to have a say in deciding issues that directly affect the island – otherwise Puerto Rico will remain under what is, at its core, colonial rule. The debate whether to annex Puerto Rico as a state or establish it as an independent country has existed for decades, and both alternatives have advantages and disadvantages. It’s unlikely any momentous decisions will be made in the foreseeable future, at least until Puerto Rico’s economy has stabilized somewhat, but recent years have seen a shift in public opinion in favor of statehood. The 2012 referendum on statehood indicated that a majority of those who voted were in favor of it, but a majority of Puerto Ricans intentionally did not vote, evidence of the complex and multifaceted nature of the issue. Statehood could grant Puerto Ricans the representation and equal treatment that they deserve, and supply the island with the resources needed to rekindle economic development and address the myriad problems plaguing the government, but the answer is not so simple. There are limitations and consequences associated with statehood that must be more thoroughly explored, such as the effect Puerto Rico’s economy would have on the American economy as a whole and the potential degradation of Puerto Rico’s distinct culture that could occur were it to become a state. It is difficult to say whether statehood is a feasible option, but unless the United States seriously invests in Puerto Rico at this critical moment, the possibility of attaining statehood in the future could be jeopardized.

The economic repercussions of Puerto Rico’s crisis constitute a convincing argument for federal intervention on their own, as the adverse effects on Wall Street corporations and American trade could be potentially disastrous if the island continues to default on its debts. But the most compelling reason that the government must take action is the responsibility the United States has for Puerto Rico’s situation. American colonialism has left deep scars on what is known as the Island of Enchantment, and at perhaps no other time in its history have they been so apparent. Only when the United States recognizes its own culpability in Puerto Rico’s crisis and takes action to save the island from total collapse can these scars begin to heal. •

Anamaria Lopez is a freshman in Columbia College hoping to major in Economics and Political Science. Hailing from the San Francisco Bay Area, she was part of the first generation of her family to be raised outside Puerto Rico. She is passionate about equal educational opportunity, especially for students of color, and economic development of postcolonial nations in Latin America and the Caribbean. She can be reached at: al3509@columbia.edu.