Puerto Rico and Wall Street’s 21st Century Debt Peonage Imperialism

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The Genealogy of the Crisis

Puerto Rico and Wall Street’s 21st Century Debt Peonage Imperialism

by VICTOR M. RODRIGUEZ
CounterPunch, FEBRUARY 19, 2014

Puerto Rico is usually thought of as a tourism destination or is usually invisible in the U.S. media. In recent times, its fiscal and economic crisis has led to inaccurate comparisons with Detroit or Greece whose fiscal crises have attracted much media attention. As usual, the mainstream press looks at the illness without looking at the root causes. And the comparisons are usually risky because they tend to ignore history and the nuances of each case. Unfortunately for Puerto Rico, its fuzzy political relationship with the United States is always described with euphemisms (“Commonwealth”) in order to avoid the undeniable truth: Puerto Rico is a colonial possession of the United States in the 21st century. The colonial model that was developed after World War II is entering a stage of complete collapse and the colonial government has few alternatives to repair the economic crisis. But the United States, like an alcoholic has always been in denial of the fact that a democratic nation has colonies. But in Puerto Rico the wall of denials is cracking and threatening to impact the U.S economy and national security.

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The Fiscal Debt of Puerto Rico

In the meantime, as a result of the failure of the colonial system to provide the momentum for the economic development of the island, the colonial government, especially since the 1970s began to rely on debt to pay for basic public services and to pay for previous debt. Since last February 4, 2014, Standard & Poor’s, Moody’s and Fitch have downgraded its debt to junk status, brushing aside a series of austerity measures taken by the new governor which were considered necessary but only helped to avoid a further lowering of the credit rating. Also, despite the announced radical measures by the governor of Puerto Rico’s Governor Alejandro Garcia Padilla to reduce appropriations by $170 million and plans to have a balanced budget for 2015, Standard & Poor surmised that the government may have to return to the market to cover a 2015 deficit. This is a chaotic situation given that the public debt of Puerto Rico is $70 billion dollars or 102 per cent of the island’s GNP the highest of any state in the U.S. The debt income ratio is 83 per cent (Villamil, 2014) almost 14 times the same measure as New York, California or Illinois. The island is paying close to $3.7 billion a year to service the debt. To compound the situation the population is declining, the labor participation rate has declined to 41.3 per cent (one of the lowest in the world). In addition, the unemployment rate is 15.4 per cent, highest than any state of the U.S.

Colonialism and the Failure of Economic Development

The Achilles heel of any effort to heal Puerto Rico’s financial crisis is its inability to expand its economic growth in a self-sustaining way. While according to the governor there is an increase in revenues that may help the island avoid a deficit in 2015, the reality is that Puerto Rico decades ago chose a growth and not a developmental path that was limited by its colonial status. Puerto Rico cannot issue its own currency, because of cabotage laws enacted by Congress in 1920 Puerto Rican trade has to utilize the U.S. merchant marine, the most expensive and likely the most inefficient in the world. It is also unable to protect its local production because it does not have the power to raise tariffs. Its poultry sector, its agriculture, housing construction and even its once thriving banking sector are also in a crisis. Three major banks were liquidated by the FDIC. Puerto Rico also cannot enter into trade agreements with its neighbors directly it has to use the United States government as an intermediary. In fact, contrary to the experience of Detroit, Puerto Rico cannot go into bankruptcy. To add insult to injury, Puerto Rico’s constitution requires the government to pay general obligation bond holders before it fulfills other regular governmental obligations. In other words, services to the citizenry could be further cut to pay for its fiscal debt. At this point, with the reduction of the island’s credit rating even if they wanted they could not afford the higher interest rates that the markets have imposed. For many years Puerto Rico bonds did pretty well in the market offering higher interest rates than those bonds issues by states and municipalities in the U.S. The constitutional clause and the backing of the colonial government made these bonds very profitable to its buyers. For example California was paid 2.375 for its bonds while Puerto Rican bonds earned between 8 and 10% (2013). Now that bonds have been reduced to a junk status this source of income is almost closed to Puerto Rico. Finally, raising taxes in an already regressive tax system will only further accelerate the depressed economy. Puerto Rico’s economy, while the U.S. economy is enjoying a modest recovery, is in it eight recessionary year. Its GNP has been reduced by 15 per cent in real terms.

The Genealogy of the Crisis

Puerto Rico’s colonial governments have relied upon tax exemption benefits to muster economic growth since the failure of a modest import substitution effort in the 1940s. This effort was modeled on similar efforts in Latin America to develop industries that had some linkages to the local economy and that would reduce the dependency on imports. The intellectual template for this effort was the “Chardon Plan,” Carlos Chardon was the first Puerto Rican chancellor of the University of Puerto Rico (1931-35). In 1935 he developed the framework for what was to become the Puerto Rico Reconstruction Administration (PRRA) created by the Roosevelt administration to help solve some of Puerto Rico’s economic problems. The local government provided some resources and had the support of a progressive colonial administration under Governor Rexford G. Tugwell (1941-46) who was appointed governor of the island by President Franklin Delano Roosevelt. With government financing, publicly owned industries were created (like the Tennessee Valley Authority), enterprises like a glass bottle plant, a cement plant, a box carton plant and other agencies with the purpose of decreasing the reliance on imports, provide some resources for local industrial development and provide local employment. Most of the publicly owned initiatives were labor intensive. Unfortunately, management problems and political problems led to the eventual privatization of these enterprises. Politicians both in Puerto Rico and the U.S. had complained calling this a socialist experiment a complaint that resonated among conservative sectors in the U.S.

The first effort after World War II to improve the economy was called “Operation Bootstrap” which was a misnomer because Puerto Rico was not pulling itself by the bootstraps instead it was relying on U.S. corporate investment in labor intensive light industry. Initially these enterprises provided significant local employment. However, because the colonial government provided generous tax incentives to these corporations it also reduced the tax revenues for basic services. While the tax incentives attracted corporate investment that increased employment the fiscal situation of the island remained under control. From 1950 to 1970 the model had some success in attracting U.S. capital because since U.S. workers had not been allowed to strike during World War II U.S. capital had accumulated huge profits during the war. Then after the war, since the traditional economic rivals of the United States, Japan and Germany had their industrial base demolished the U.S. became the dominant economic power.

This unique combination of factors created a niche that helped Puerto Rico achieve some economic growth, however, no development. The income per capita in in the U.S. 1950 was $1,935 (Dietz, 2003) or six times larger than Puerto Rico’s. As the industrialization program developed under these conditions it achieved some success, by 1960 income per capita in the island had reached $723 and by 1970 it had doubled to $1,857. During a short period there was a convergence between the local economy and the U.S. For example, during the first two decades 1950-1970s the U.S. per capita gross domestic product (GDP) as a multiple of the island’s income was only four in 1960 ($2,915) and then in 1970 it was only 2.7 times ($5,050) greater than Puerto Rico’s (Dietz, 2003). The income convergence between the U.S. and Puerto Rico began to slow after 1970, and through 1990s remained virtually unchanged. But while in absolute terms there were increases in income, the position of the economy of the island relative to the United States remained static, the convergence ended. One factor that stabilized local income was the federal transfers to the island that began in 1975 when food stamps were approved for Puerto Rican residents. This infusion of money helped the commercial sector and brought many out of deep poverty. But in addition to the federal transfers one factor that aided in the reduction of poverty and the unemployment rate was the massive emigration of Puerto Ricans. The industrialization process included the overt and deliberate promotion of emigration to the United States as an escape valve. During the 1940s and 1950s Nationalist activism created fear of political disruption in Puerto Rico and the United States. In 1950s there was a Nationalist insurrection and in 1954 nationalists engaged in armed action against congress.

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http://www.counterpunch.org/2014/02/19/puerto-rico-and-wall-streets-21st-century-debt-peonage-imperialism/