Puerto Rico: A Mess with Structural Causes

By Eric Hershberg and Fulton Armstrong

Roselló and Trump

Puerto Rico Gov. Ricardo Roselló, U.S. President Donald Trump and First Lady Melania Trump discuss relief efforts during a cabinet meeting at Muñiz Air National Guard Base, Carolina, Puerto Rico, Oct. 3, 2017 / U.S. Air National Guard photo by Staff Sgt Michelle Y. Alvarez-Rea / Public Domain

Puerto Rico’s ongoing political and economic crises are similar to those in many other Latin American systems – but with the additional burden of lacking the sovereignty or U.S. support to act independently in pursuit of solutions. Two weeks of spontaneous, massive protests over vulgar on-line chats and evidence of corruption forced Governor Ricardo Rosselló to resign on August 2. In the nearly 900 pages of “Rickyleaks” published by Puerto Rico’s Center for Investigative Journalism, Rosselló and his aides are quoted as exchanging misogynistic and homophobic messages about fellow politicians and leaders across society. Protestors accused him of mismanagement and malfeasance in the wake of Hurricane María, which devastated the island in September 2017 (nine months into his term), and of mishandling the territory’s relationship with Washington. The Puerto Rican Supreme Court found his hand-picked successor, Pedro Pierluisi, constitutionally ineligible to take the job, and Justice Secretary Wanda Vázquez was sworn in on August 7.

The success of the mobilization in the streets and in social media is a hopeful sign for democracy and good governance in Puerto Rico, according to many observers. But the island’s complex economic challenges, including a massive debt crisis, and a legal relationship with the mainland United States that is vulnerable to shifting political trends make attaining that vision especially hard.

  • The island’s economy has been in recession for 13 years and is severely handicapped by a $124 billion debt crisis caused by irresponsible decisions by its government, private lenders, and Washington policies – driving a loss of productive population, erosion of the tax base, and a downward spiral of public finance and services, akin to that seen in U.S. cities such as Detroit. Hurricane María further plunged the island into misery. An estimated 3,000 people died directly or indirectly because of the storm, often because poor maintenance resulted in much of the island’s electricity and water supplies being disrupted for many months. (Carpetbaggers from the mainland are reestablishing some basic services but at exorbitant prices.) A fundamental problem for the island is that in the 1990s Washington took away tax incentives, such as for the island’s formidable pharmaceutical industry, that had fueled strong growth for several decades. These conditions have accelerated the outflow of citizens to the mainland – an estimated 4 percent of the island’s 3.5 million inhabitants in just 2018.
  • Further complicating matters, the Governor must submit all budget decisions to a Financial Oversight and Management Board established by the U.S. Government in 2016, which has seven members appointed by the U.S. President and one non-voting member appointed by the Governor. The board can block spending, institute hiring freezes, and take other measures when it does not approve of an expenditure. Puerto Rico’s proposed package of measures to climb out from under the debt, result of three years of negotiations, has been derailed by the political crisis.
  • Numerous experts have demonstrated that the U.S. Administration’s claim that it has sent $91 billion of aid to the island is false. As of early this summer, about $11.4 billion in Federal Emergency Management Agency funds had been approved, and only about $5.72 billion disbursed (including assistance to individuals and families). Puerto Rico has only a single representative in the U.S. Congress – a non-voting delegate – and its relations with Washington depend on the goodwill and expertise of a host of bureaucracies that often have conflicting agendas. As a U.S. territory, it cannot easily receive international assistance directly.

Corruption, bad policies, weak institutions, and vulgar leaders are obviously not unique to Puerto Rico (or Latin America), but the behavior that resulted in Rossello’s ouster underscores the toxic, bankrupt nature of much of Puerto Rico’s political class despite years of lip-service to democracy, transparency, and accountability. Full sovereignty, of course, is no guarantee that any of the territories, protectorates, and “special” jurisdictions in the Caribbean would fare better if they weren’t dependent on a protector nation. But Washington’s ability to give – and take away – benefits without dealing with San Juan as an equal partner, and then judging the island’s performance and meting out sanctions, further complicates efforts to find solutions to Puerto Rico’s many problems. Puerto Ricans have shown that they can take to the streets to dump venal leaders, but, made vulnerable by multiple crises, there’s little they can do to wake up the U.S. Congress from its neglectful slumber.

August 14, 2019

Puerto Rico: Debt and Budget Crisis

By Fulton Armstrong

Photo Credit: Erica Feliciano / Flickr / Creative Commons

Photo Credit: Erica Feliciano / Flickr / Creative Commons

Puerto Rico’s debt and budget crises – worsened by the legislature’s rejection last week of the governor’s proposed fiscal reforms – threatens to plunge the island into a deeper, longer-term depression and is already causing tensions with Washington.  The government and state-run corporations are $73 billion in debt, with little prospect of paying it off.  The Puerto Rican Electric Power Authority (PREPA) alone owes investors, mostly based on Wall Street, about $9 billion.  Last year, the government restructured about $19 billion of PREPA, the water company, and the highway administration’s debt – giving itself barely a year’s breathing room.  The inability to make good has caused internal political tensions and thrust the government into the danger of defaulting, which would shut off access to much-needed credit for potentially years to come.  Hedge funds and others have been buying Puerto Rican paper at deeply discounted rates.

No solution seems possible to make good on such monstrous debt.  Governor García Padilla last year took steps to rein in spending and dramatically reduce the deficit – from $2.2 billion to $200 million a year.  Government personnel have declined by 16,000 positions without disruptive layoffs.  But such measures have barely made a dent in the $73 billion in outstanding liability.  García Padilla has been reluctant to fight PREPA over its inefficient management structure, force it to shift away from expensive hydrocarbons (which account for 98 of electricity production), and adopt renewable energy sources.  The legislature last week killed the centerpiece of his budget reform – a 16 percent value-added tax – and further complicated efforts to persuade lenders that the debt will be paid.  A broader economic slowdown over the past decade, with even tourism registering declines, has been a key factor.  The Governor’s biggest hope at this time seems to be legislation in Washington, introduced by Puerto Rico’s non-voting member in the U.S. House of Representatives, that would allow the corporations to declare Chapter 9 bankruptcy – which Puerto Rico (unlike the 50 states) is forbidden to do under current federal law.

The economic crisis is triggering a political crisis on the island and potentially in relations with Washington.  As Argentina’s failure to make good on its debts has demonstrated, U.S. hedge funds have extraordinary clout and will use it to block anything that lets Puerto Rico off the hook, reducing the chances that Representative Pedro Pierluisi’s bill will pass to practically nil.  The United States may press the island harder to reform its inefficient corporations, but it will ultimately have no option but to watch the crisis deepen.  The situation will give greater urgency to another referendum on Puerto Rico’s status, which the Governor said will take place in 2016, with two contradictory trends at play.  While many Puerto Ricans undoubtedly resent aspects of Washington’s attitudes toward the island, polls show no change in single-digit support for independence.  Most Boricuas, if nothing else, value their U.S. citizenship and the ability to move stateside if conditions on the island get much worse.  Even if the debt crisis frays relations with Washington, inertia argues for no redefinition of the relationship.  There is little indication that Washington will clarify the island’s status unless Puerto Ricans become a factor in Florida during the 2016 presidential campaign.

May 7, 2015