Economy of Puerto Rico

The economy of Puerto Rico is classified as a high income economy by the World Bank and as the most competitive economy in Latin America by the World Economic Forum. The main drivers of Puerto Rico's economy are manufacturing, primarily pharmaceuticals, textiles, petrochemicals, and electronics; followed by the service industry, notably finance, insurance, real estate, and tourism. The geography of Puerto Rico and its political status are both determining factors on its economic prosperity, primarily due to its relatively small size as an island; its lack of natural resources used to produce raw materials, and, consequently, its dependence on imports; as well as its relationship with the United States federal government, which controls its foreign policies while exerting trading restrictions, particularly in its shipping industry.

At the macroeconomic level Puerto Rico has been experiencing an economic depression for consecutive years, starting in 2006 after a series of negative cash flows and the expiration of the section 936 that applied to Puerto Rico of the U.S. Internal Revenue Code. This section was critical for the economy of the island as it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating in the island to send their earnings to the parent corporation at any time, without paying federal tax on corporate income. Puerto Rico has, however, surprisingly been able to maintain a relatively low inflation in the past decade. Academically, most of Puerto Rico's economic woes stem from federal regulations that expired, have been repealed, or no longer apply to Puerto Rico; from its inability to become self-sufficient and self-sustainable throughout history; from its highly politicized public policy which tends to change whenever a political party gains power; as well as from its highly inefficient local government which has accrued a public debt equal to 66% of its gross domestic product over time, though despite these issues, the economy continues to gradually strive.

In comparison to the different states of the United States, Puerto Rico is poorer than the poorest state of the United States, with 45% of its population living below the poverty line. However, when compared to Latin America, Puerto Rico has the highest GDP per capita in the region. The Commonwealth has a massive bond debt that it is unable to service, $70 billion in early 2017, or $12,000 per capita, at a moment when its unemployment rate (8.0%, October 2018) is more than twice as large as the mainland's. The debt had been increasing during a decade-long recession. It is essential for Puerto Rico to reach restructuring deals with creditors to avoid a bankruptcy-like process under PROMESA. More specifically, Puerto Rico has been in an unusual situation since 2016: its economy is under the supervision of a federal board that is managing finances and helping to get access again to capital markets.

The commonwealth has a modern infrastructure, a large public sector, and an institutional framework guided by the regulations of U.S. federal agencies, most of which have an active and continued presence in the island. Its main trading partners are the United States itself, Ireland, and Japan, with most products coming from East Asia, mainly from China, Hong Kong, and Taiwan. In 2016, additional trading partners were established, with Singapore, Switzerland and South Korea commencing import trades with Puerto Rico. At a global scale, Puerto Rico's dependency on oil for transportation and electricity generation, as well as its dependency on food imports and raw materials, makes Puerto Rico volatile and highly reactive to changes in the world economy and climate.

History

Puerto Rico, like many other countries, has transitioned from an agricultural economy to an industrial one. Its economy is currently experiencing a transformation caused by the Information Age, albeit slowly.

Pre-colonialism

Not much is known about the economic history of Puerto Rico prior to the arrival of Spaniards. The little that is known about its inhabitants, the Taíno, is that their economy was a mixture of hunting and gathering with agriculture.

The Taíno captured and ate small animals, such as mammals, earthworms, lizards, turtles, and birds. Manatees were speared and fish were caught in nets, speared, poisoned, trapped in weirs, or caught with hook and line. Wild parrots were decoyed with domesticated birds, and iguanas were taken from trees and other vegetation. Livestock husbandry was not practiced as there were no large animals native to Puerto Rico that could be raised in an agricultural setting in order to produce commodities such as food, fiber, or labor.

Fields for important root crops, such as the staple yuca, were prepared by heaping up mounds of soil, called ''conucos''. This improved soil drainage and fertility as well as delaying erosion, and it allowing for longer storage of crops in the ground. Less important crops such as corn were raised in simple clearings created by slash and burn technique. Typically, ''conucos'' were three feet high and nine feet in circumference and were arranged in rows. The primary root crop was yuca/cassava, a woody shrub cultivated for its edible and starchy tuberous root. It was planted using a ''coa'', a kind of hoe made completely from wood. Women processed the poisonous variety of cassava by squeezing it to extract the toxic juices. Then they would grind the roots into flour for baking bread. ''Batata'' (sweet potato) was the next most important root crop.

Contrary to mainland practices, corn was not ground into flour and baked into bread. It was cooked and eaten off the cob. Corn bread becomes moldy faster than cassava bread in the high humidity of the West Indies. The Taíno grew squash, beans, peppers, peanuts, and pineapples. Tobacco, calabashes (West Indian pumpkins) and cotton were grown around the houses. Other fruits and vegetables, such as palm nuts, guavas, and ''Zamia'' roots, were collected from the wild.

Spanish rule

The economy of Puerto Rico was transformed drastically upon the arrivals of Spaniards in 1493 until their departure in 1898. The economy during that period was driven by slavery of the native population, the ''Taíno'', and by slaves brought from Africa. Slaves were minimally remunerated for or forced to work in farms, mines, households, and other aspects. Agriculture was the primary mean of production, as well as livestock which was originally imported from Europe. Sugar cane, tobacco, coffee, cocoa and minor fruits were the primary cultivations which were exported to Europe and, by so, constituted the main economy for the island. Mining of gold, silver, and copper occurred as well, although not as much as in other territories during the Spanish colonization of the Americas.

United States rule

In the early 20th century the greatest contributor to Puerto Rico's economy was agriculture and its main crop was sugar, displacing other cash crops such as tobacco, cocoa, and coffee. In 1935, United States President Franklin D. Roosevelt launched the Puerto Rican Reconstruction Administration, which provided agricultural development, public works, and electrification of the island.

Economic conditions had improved since the Great Depression because of external investment in capital-intensive industries such as petrochemicals, pharmaceuticals and technology. Starting in the late 1940s a series of projects called Operation Bootstrap encouraged, using tax exemptions, the establishment of factories. Thus manufacturing replaced agriculture as the main industry of the island. Operation Bootstrap was based on an "industrialization-first" campaign and modernization, focusing the Puerto Rican economy on exports, especially to the United States. As a result, Puerto Rico is now classified as a "high income country" by the World Bank. Although initially there were large gains in employment and per capita income, recessions in the United States were magnified in the country and have repeatedly hampered Puerto Rican development.

With the signing of the North American Free Trade Agreement and the Dominican Republic–Central America Free Trade Agreement, Puerto Rico lost a trade advantage over some Latin American countries as the right to duty-free imports to the U.S. market were expanded. Following the Fair Minimum Wage Act of 2007, Puerto Rico is also subject to the minimum wage laws of the United States, which gives lower-wage countries such as Mexico and the Dominican Republic an economic advantage in the Caribbean. Once the beneficiary of special tax treatment from the U.S. government, today local industries must compete with those in more economically depressed parts of the world where wages are not subject to U.S. minimum wage legislation. In recent years, some U.S. and foreign owned factories have moved to lower wage countries in Latin America and Asia. Puerto Rico is subject to U.S. trade laws and restrictions.

Also, starting around 1950, there was extensive migration from Puerto Rico to the Continental United States, particularly with Puerto Ricans moving to New York City, in search of better economic conditions. Puerto Rican migration to New York displayed an average yearly migration of 1,800 for the years 1930–1940, 31,000 for 1946–1950, 45,000 for 1951–1960, and a peak of 75,000 in 1953. , the U.S. Census Bureau estimates that more people of Puerto Rican birth or ancestry live in the U.S. than in Puerto Rico.

On 1 May 2006, the Puerto Rican government faced significant shortages in cash flows, which forced the closure of the local Department of Education and 42 other government agencies. All 1,536 public schools closed, and 95,762 people were furloughed in the first-ever partial shutdown of the government in the island's history. On 10 May 2006, the budget crisis was resolved with a new tax reform agreement so that all government employees could return to work. On 15 November 2006, a 5.5% sales tax was implemented. Municipalities are required by law to apply a municipal sales tax of 1.5% bringing the total sales tax to 7%.

The public debt of Puerto Rico has grown at a faster pace than the growth of its economy, reaching in 2008. In , Luis Fortuño enacted several measures aimed at eliminating the government's deficit, including laying off 12,505 government employees. Puerto Rico's unemployment rate was 15.9 percent in . Some analysts said they expect the government's layoffs to propel that rate to 17 percent.

In November 2010, Gov. Fortuño proposed a tax reform plan that would be implemented in a six-year period, retroactive to 1 January 2010. The first phase, applicable to year 2010, reduces taxes to all individual taxpayers by 7–15%. By year 2016, average relief for individual taxpayers will represent a 50% tax cut and a 30% cut for corporate taxpayers, whose tax rate will be lowered from 41 to 30%.

At the same time, the latest report by the President Task Force on Puerto Rico Status recognizes that the status question and the economy are intimately linked. Many participants in the forums conducted by the Task Force argued that uncertainty about status is holding Puerto Rico back in economic areas. And although there are a number of economic actions that should be taken immediately or in the short term, regardless of the ultimate outcome of the status question, identifying the most effective means of assisting the Puerto Rican economy depends on resolving the ultimate question of status. In short, the long-term economic well-being of Puerto Rico would be dramatically improved by an early decision on the status question.

During fiscal year (FY-2012), the Consolidated Budget for the archipelago, including both direct transfers from federal programs (Social Security and Medicare benefits for workers, Veteran's benefits, Pell Grants and student loan's interest subsidies and miscellaneous temporary appropriations -e.g. American Recovery and Reinvestment Act of 2009 grants totalling $2.6 billion-) represented more than $28.7 billion, or approximately 30% of its GDP, while revenues surpassed $31 billion. In 2010, federal transfers amounted $16.710 billion, while the Commonwealth's government managed funds of $10.12 billion.

In June 2013, a $300 million US Medicaid payment to Puerto Rico was delayed because the Puerto Rican Government had changed their nationally sponsored insurance carrier without obtaining approval from the US Health and Human Services Department. This one of several troubling economic developments, including high debt to population ratios that have caused consternation in the US municipal bond market.

Puerto Rico has been experiencing an economic depression for consecutive years, starting in 2006 after a series of negative cash flows and the expiration of the section 936 that applied to Puerto Rico of the U.S. Internal Revenue Code. In 2014, it was still in an economic depression.

Section 936 was critical for the economy as it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating in the island to send their earnings to the parent corporation at any time, without paying federal tax on corporate income. The government has also experienced consecutive negative cash flows since 2000, exacerbating its fragile economic situation as the government is forced to incur into new debt in order to pay the old one.

Puerto Rico has, however, surprisingly been able to maintain a relatively low inflation in the past decade. Academically, most of Puerto Rico's economic woes stem from federal regulations that expired, have been repealed, or no longer apply to Puerto Rico; its inability to become self-sufficient and self-sustainable throughout history; its highly politicized public policy which tends to change whenever a political party gains power; as well as its highly inefficient local government which has accrued a public debt equal to 66% of its gross domestic product throughout time.

File:Puerto-rico-economic-activity-index-2005-2013.png, Puerto Rico's Economic Activity Index for FY 2005–2013 evidences its depression.
File:Puerto-rico-month-over-month-economic-activity-index-2013.png, Puerto Rico's month-over-month Economic Activity Index for FY2013 evidences its sluggishness and decline.

By mid January 2017, the debt had reached $70 billion or $12,000 per capita in a territory with a 45 percent poverty rate and double digit unemployment that is more than twice the mainland U.S. average. It is essential for Puerto Rico to reach restructuring deals with creditors to avoid a bankruptcy-like process under PROMESA. In late January, the federal control board gave the Government of Puerto Rico

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