Why is PUERTO RICO poor if it belongs to the US?
Puerto Rico’s political status is not normal as some other countries. It is not a fully independent territory because it belongs to the united states, but at the same time, it is not part of the united states. That is, it is not a state like the other 50 that make up this country. Puerto Ricans are also u.s citizens, but they cannot vote from the island to elect the president of the united states.
They receive federal aid but do not pay federal taxes. All these peculiarities are because Puerto Rico didn’t become independent from the Spanish empire, but in 1898 the united states declared war on Spain, and after the u.s triumph and the signing of the treaty of Paris, the possession of Puerto Rico by the united states was legalized from that moment on. The Caribbean island has been launched to the country of the north.
There, the dollar is used as the national currency. There is a close cultural and institutional connection and free mobility of capital and labor between the two territories. So, thanks to these characteristics and the fact of belonging to the richest country in the world it would be expected that they would have similar levels of development and wealth. However, if Puerto Rico were to become the 51st state in the united states, it would be the poorest as of 2018.
The real GDP per capita of Mississippi the poorest state in the country was 35 000, while Puerto Rico’s for the same year was about twenty. Seven thousand dollars. Furthermore, in a 2019 study, it was concluded that 44.9 percent of the population in Puerto Rico was in poverty or more than double that of Mississippi, where the poverty rate was 19.6 percent.
Therefore, the question to be addressed is why does Puerto Rico’s level of development lag so far behind that of the united states, and why has it been in recession for so many years? Several reasons explain Puerto Rico’s current situation, but we will mention three that could be relevant first excessive debt, for which both the federal government and Washington and Puerto Rico are responsible.
When a government wants to finance its expenses through debt, it issues, bonds and promises, whoever buys those bonds some interest in exchange, so that the investor lends money to the government and receives a return.
This interest income received by the investor is subject to federal state, or local taxes, but a u.s law eliminated taxes for those who lend money to Puerto Rico. Predictably, investors from other states began to buy bonds from Puerto Rico, and the government began to use the money to balance the budget and expand government spending.
Puerto Rico is a small island with few natural resources and a population of 3.2 million, so big industry or manufacturing and production of goods was never its strong point. Its economy was sustained for decades by the presence of technology and service companies that settled on the island. In part, because they did not have to pay federal taxes on profits earned in Puerto Rico.
During that time the economy did well. As can be seen in this graph, Puerto Rico’s GDP per capita was keeping pace with our economy. However, in 1996 the u.s government, under the bill of, the Clinton administration, began to phase out those tax benefits in Puerto Rico over 10 years to compensate for the u.s federal deficit. As a result, many companies decided to leave the island in 2006, the tax benefits disappeared completely and since then, the economy has suffered practically.
The island has been in recession for the last 15 years, as can be seen in the graph of Puerto Rico. Gdp per capita has progressively moved away from the u.s since that time, but the other problem that was beginning to brew was the government’s excessive borrowing to balance its budget and as GDP declined, the debt to GDP ratio grew which accelerated the government’s poor credit rating.
The debt bubble burst in 2014 when three major credit rating agencies downgraded the island’s debt to junk status, meaning that the risk was high and there was a high probability that the government would default on its debt and indeed the inability to limit public spending and excessive debt led to Puerto Rico’s, governor announcing in 2017 that the island was declaring bankruptcy with 72 billion dollars in debt. It is estimated to be the largest municipal bankruptcy in u.s history to get an idea of the magnitude of the figure for 2016 Puerto Rico had by far the highest debt to GDP ratio.
Among all states, the island has been bankrupt for four years, but the situation is expected to improve with the approval in early 2022 of a public debt restructuring plan. Second, another factor in explaining Puerto Rico’s current situation is an oversized welfare state. Puerto Ricans enjoy more generous labor protections and retirement benefits than those in the united states. In addition to high mandatory benefits that companies must pay for disability, vacation bonuses, and layoffs.
Puerto Rico has the same: u.s federal minimum wage of 7.25 cents, an hour which is high for a territory with a productivity and income level well below the u.s average. The problem is that the islands generally have higher transportation costs due to their location, but additionally, since 1920 there has been a law that says that goods shipped between u.s ports must be transported only on u.s ships.
This means that Puerto Rico’s transportation costs are much higher than those of its Caribbean neighbors, who do have the possibility of using cheaper ships, thus making the cost of living artificially higher in Puerto Rico.
In other words, a high minimum wage may discourage the hiring of workers, but at the same time, a high cost of living due to federal trade restrictions is offset to some extent by that minimum wage.
But regardless of the reasons a minimum wage is a barrier to entry into the labor market and the higher it is the more difficult it is for less skilled and inexperienced workers to enter. Therefore, it is not surprising that few Puerto Ricans actively participate in the labor market and that informality is so high. It is estimated that only 40 percent of Puerto Rico’s working-age residents are employed or looking for work, and it must be said that many families prefer to live on u.s federal assistance and find informal part-time work.
Another popular choice is that many professionals are looking for a stable job and the public sector offers just that stability and long-term benefits, regardless of the territory’s economic situation or the productivity of the employee, about 30 percent of jobs are in the public sector higher than Wyoming’s 21.5 percent.
which is the state with the highest percentage of public employees, Nevada, has the lowest rate at 9.8 percent. This situation in Puerto Rico is similar to what Detroit experienced a few years ago, a city that in 2011 had one of the largest public payrolls in the country in proportion to its population, most of its employees were unionized and entitled to pensions and health care for life.
As is well known, Detroit declared bankruptcy in 2013, and more than half of the debt that bankrupted Detroit corresponded to those benefit obligations to its public employees. Puerto Rico is not far from this. Almost half of the 72 billion dollars of debt corresponded to public pension funds.
On the other hand, Detroit lost half of its residents in three decades, while Puerto Rico has lost 11 percent of its residents in a decade, most of whom moved to the united states. Fewer residents translate into lower tax revenues, which aggravated Detroit’s situation in its time and aggravates Puerto Rico’s. Today and third, aside from the fact that the economy had been in recession for more than a decade, hurricane maria imposed another blow in 2017, the category 4 hurricane destroyed.
The power grid flooded streets and wiped out entire neighborhoods. Even a year later, there are still thousands of people without electricity, and users are now complaining about the constant power outages with all that this implies for homes and businesses. So return, it seems that our government took on too large a role in Puerto Rico’s economy.
It encouraged local government indebtedness and distorted transportation costs, but Puerto Rico did the same by increasing its economic role, creating an ever larger and more bureaucratic public sector. The question that remains to be answered is what would be the most convenient political status for the island’s independence from the united states or finally annexation and becoming the 51st state, although it is not a decision that depends only on Puerto Rico.