Photo: Author; San Juan, Puerto Rico
On June 30, 2016, in the midst of a summer rocked by Brexit, terrorism, and an acrimonious presidential campaign, President Obama quietly signed into law a bill that had earlier caused controversy but had now faded from government and media attention. The Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, was a political compromise neither party was happy with, a mishmash rushed into being to forestall a wave of litigation before Puerto Rico defaulted on a series of loans July 1. In addressing this limited objective, the law is a success. But for the island to find a path out of its current troubles, greater attention from the US government, and new thinking from local leaders, is urgently needed.
The law’s title is a forced acronym (“promesa” means “promise” in Spanish), presumably meant to convey a sense of optimism regarding Puerto Rico’s uncertain future. And indeed, Puerto Rico is in dire straits. Recession has plagued the local economy for 10 years, which began to slow well before the global financial crisis of 2008. The 2008 crisis only accelerated an already growing exodus of island residents to the US mainland. The island’s political class, its elected leaders and top bureaucrats, prioritized short term political gains over potentially painful reforms, and despite clear signs remained confident growth would resume on its own. The result was poor policymaking, which combined with recession and exodus, led steadily to the current debt crisis. The island’s government has been shut out of credit markets and so been forced into austerity. Critical public services are being cut. Businesses that have provided services to the government are going unpaid, and doctors waiting for reimbursements from government health insurance schemes are giving up and moving to the mainland. Meanwhile, the Zika epidemic is raging just as the island’s government is least able to mobilize resources to meet it. The White House has described the situation on the island as a “humanitarian crisis”.
In comparison to more severe humanitarian crises around the world, such as the Syrian civil war, Puerto Rico’s troubles constitute something more like a failure of political economy and governance. It is a crisis situation nonetheless, one having a non-trivial effect on the health and well-being of the island’s 3.5 million people. Unfortunately, the only stateside action taken to remedy the crisis, the signing of PROMESA, was difficult to move through Congress, and will address only a small part of the problem. In addition to the stay on creditor litigation, PROMESA creates a mechanism for renegotiating debt, and establishes an “Oversight Board” that is to act as a check on local fiscal mismanagement. Both are important first steps out of the current quagmire. Successful renegotiation will reduce the debt burden, which, as a 2015 report by Anne Krueger and colleagues argues, is otherwise unpayable. Streamlining government operations to reduce operating costs is necessary so that the island can eventually re-enter credit markets, while simultaneously reducing its need to borrow in the future. Politicians on the mainland and citizens on the island hope that a leaner government will also reduce burdensome regulations and help improve the climate for business and investment.
But it will not be enough. Even in the best of regulatory environments, few investors will gamble on an economy in freefall. PROMESA, in fact, does little to help the island fix its economic woes. By emphasizing balanced budgets and formalizing the existing, market-induced austerity, the law provides no options for stimulating the economy and ignores the many compelling arguments that austerity does not work. In the short-term, PROMESA gives both the US government and island residents fed up with the status quo the appearance of action and change. But, alone, PROMESA will not revitalize the island’s moribund economy, which is at the root of the crisis.
Puerto Rico’s economic problems began well before the recession took hold 10 years ago. An edited volume published by Brookings in 2006 was already lamenting the island’s poor economic performance, growing debt, and unresponsive government. The origins of the crisis lie in the rise of globalization and the deep structural changes in the world economy that process entailed. After World War II, Puerto Rico experienced rapid industrialization and growth, and government-led initiatives cut poverty and modernized the island. Living standards were on track to converge with those of the rest of the United States until the 1980s, when increasing openness and trade overseas began to force manufacturing offshore. Little was done to adjust. The period since has seen a slow decline in economic vigor, with deficit spending the principal tool deployed to try to stabilize the economy. The current crisis marks the end of that policy option. While the island’s political class cannot be blamed for globalization, it can be blamed squarely for a failure to adapt.
One important consequence of the recession has been the exodus of skilled and unskilled workers of every sort, and their families, to the US mainland. The freedom to emigrate has, historically, been an important safety valve for the island’s un- and underemployed. With the economy worsening, however, a vicious cycle has set in: as people (i.e. producers and consumers) leave, aggregate demand worsens, and the economy contracts; as the economy contracts, it is harder to find work, and more people leave. From 3.8 million people in 2000, the island’s population has dropped to 3.5 million. If what would have been the natural increase under normal conditions is factored into this calculation, then the loss has been 400,000 or 500,000. Austerity measures are only making the exodus worse.
To stop the vicious cycle, the economy must be revived. But Puerto Rico now has precious few policy options. As part of the United States, it has no control over monetary policy, and shut out of credit markets, it can no longer utilize fiscal stimuli. As a territory without voting representation either in Congress or the Electoral College, it cannot use political influence to steer federal spending its way. Thus, apart from the needed reforms to improve the island’s business environment, Puerto Rico must now depend on the mainland for its resuscitation.
As news stories about the island’s failing hospitals and rising poverty spread in US media, and as Puerto Ricans’ clout in American politics slowly increases (the large number of recent arrivals in Florida may well tip the election in an important swing state), stateside politicians may begin to feel greater pressure to lend a helping hand. The US government can help by finding ways to increase federal spending on the island and boost demand while reforms slowly work to improve competitiveness. Spending to help contain the growing Zika epidemic, which is hurting the economy by affecting productivity and tourism, is urgently needed. Nationwide infrastructure investment, promised by both presidential candidates, can help repair local roads, finish incomplete projects, and lower the increasing cost of energy, which is a significant drag on investment and consumer spending. Federal research and development money could sow the seeds of future development, particularly in the life sciences, where the island has an edge thanks to a fading legacy of pharmaceutical manufacturing. Congressional priorities should also include equitable treatment for health care entitlements as well as a repeal of the unhelpful Jones Act, which requires trade with the mainland to be carried on uncompetitive American ships.
This increased spending would help slow outbound emigration and prepare the island for future growth, but in all likelihood people will continue to leave and the economy will continue to suffer for the next several years. Having toppled over the precipice, the natural floor will be reached when labor shortages eventually result in higher wages. Federal spending will allow the island to reach that point sooner. In the meantime, it is imperative local politicians and bureaucrats, having learned their lesson, work with the Oversight Board to lay the groundwork for private investment and recovery. Having failed to move quickly enough to adapt to globalization, the island’s destiny now rests on an active federal government, and on a political class that must choose a new course for the future.
Carlos A. Salazar is a PhD Candidate in Global Theory and History at the Johns Hopkins University School of Advanced International Studies (SAIS), and a Research Associate at the SAIS Foreign Policy Institute. He is interested in infectious diseases and their effects on power and security in the international system.