Puerto Rico's Statehood Bid Complicated by a Struggling Economy

By Sarah Pringle
Cronkite Borderlands Initiative

SAN JUAN, Puerto Rico -- This November Puerto Ricans could vote to ask the United States to make the territory a state. If they do the U.S. Congress will have much to consider about the island's economic situation and how it could affect the rest of the country.

Puerto Rico's economy has experienced a downward spiral since the 1970s. Based on tax-incentivized investments from big business and the largesse of big government, the current economic model isn't working, according to key officials and opinion-makers interviewed by the Cronkite Borderlands Initiative.

Puerto Rico's unemployment rate is almost double the U.S. mainland's rate. The labor force participation rate is one of the lowest in the world, an indication that a high percentage of Puerto Ricans find it better to depend on government benefits than to work.

Puerto Rico's per capita income of $15,203 is not even half that of Mississippi, the poorest state in the U.S. The island's largest employer is the government. U.S.-based businesses reap tax benefits as foreign investors, but their profits haven't been invested locally to fuel the infrastructure, growth and job development that were envisioned.

"We do have the poverty we have, and we need to deal with [it], and that's an issue," said Puerto Rico's Resident Commissioner Pedro Pierluisi, who represents Puerto Rico in a non-voting capacity in Congress. "That's going to be an issue as a state, as a territory, regardless."

The Economist magazine calculated that from 1990 to 2009, the U.S. government spent $182 billion more in Puerto Rico than it received from the territory in taxes. Eleven other states had a higher deficit, but Puerto Rico's deficit was the highest when evaluated as a percentage of its annual economic output, Gross Domestic Product. Puerto Rico's deficit was 290 percent of GDP. Comparable measurements indicated that the closest states were New Mexico, Mississippi and West Virginia. The conclusion? Puerto Rico benefits more from federal expenditures than any of the poorest U.S. states.

But for Puerto Ricans, the issues are much deeper than simple economic ones. They are rooted in a paradoxical relationship with the U.S. that many Puerto Ricans view as both paternalistic and second class.

As United States citizens, Puerto Ricans can travel freely to and from the mainland and serve in the U.S. military. But Puerto Ricans cannot vote in general presidential elections. They have one non-voting delegate in the U.S. Congress, Pedro Pierluisi, who holds the title "resident commissioner."

Statehood supporters cut across the political spectrum. Pierluisi and Gov. Luis Fortuño are both members of the pro-statehood New Progressive Party. Pierluisi is a member of the U.S. Democratic Party, while Fortuño serves on the Republican National Committee. They view statehood as the means to building the island's future.

"The crux of the matter is the lack of political rights. That's not right in the 21st century," said Pierluisi. "The model has worked in 50 states, why shouldn't it work here?"

But Puerto Rico, for many reasons, would be unique among U.S. states, and its economy would be the weakest.

The Deterioration of Puerto Rico's Economy

So where did Puerto Rico's economy go wrong? An outdated economic model may be to blame. While it may have worked at one time, proponents of statehood say it no longer makes sense.

Code section 936 of the U.S. Internal Revenue Code, also known as the Possessions Tax Credit, granted tax-free income to U.S. corporations in Puerto Rico to promote economic growth. This credit was repealed by the Small Business Act beginning in 1996, but that measure set up a 10-year transition that allowed U.S. corporations to claim 60 percent of wages and capital investments as allowances against corporate income taxes.

Former Gov. Carlos Romero Barceló said that "initially it was a good gimmick to attract industries to come to Puerto Rico." However, Romero felt that tax credits based on payroll would have done more to provide jobs to Puerto Ricans. Romero said he has recently suggested to President Barack Obama that such a policy would attract those industries that are considering foreign investment in China and other emerging economies.

In 2002, U.S. based businesses were the source of 71 percent of the manufacturing sector's "value added" in Puerto Rico, according to a 2006 U.S. Government Accountability Office study.

"Value added" is the total value of what a business produces minus overhead costs. But experts say the majority of profit from this high level of production returns to the U.S. mainland, instead of shoring up the economy in Puerto Rico.

Even after the expiration of section 936, U.S. corporations have remained because of the island's established labor force and infrastructure. Further, financial burdens are still eased with favorable tax laws -- the maximum tax rate for foreign companies operating out of Puerto Rico is 7 percent.

According to economist and University of Puerto Rico-Rio Piedras professor, Carlos Colón de Armas, many commonwealth defenders wrongfully attribute the end of the tax incentives of section 936 to the economic problems of the island.

"The truth of the matter is that the deterioration of the economy began in the 70s and 936 was enacted in the 70s," said Colón de Armas. "Because we thought that everything was going to be solved because of 936, we didn't adapt to globalization, we didn't adapt to the current world trends."

The tax subsidy hasn't been beneficial for the U.S. treasury, either. It's estimated that tax credits for U.S. firms in Puerto Rico cost the U.S. approximately $3 billion yearly, according to the 2006 GAO study.

The inefficiencies of the tax system do not end there said former Sen. Miriam Ramírez de Ferrer, who has been a long-time fighter of subsidized tax policies.

"We have a false economy. We're a foreign country for ushered tax benefits for multi-national corporations," said Ramírez. "But we are a territory with U.S. citizens. What are we?"

"Foreign" or not, one of the reasons Puerto Rico sought outside capital was to gain more political freedom. However, the corporations established through section 936 controlled economic development strategies of the Popular Democratic Party and tried to control those of the New Progressive Party, said Carlos Chardón, Puerto Rico's assistant secretary of state for government affairs.

"[Puerto Rico] ended up being captive of the party. You cannot separate capital and finance and all that from politics," said Chardón. "We can separate it for the purpose of a study, but essentially it's one in the same thing."

With so much emphasis on foreign capital over the years, Puerto Rico's domestic economy hasn't prospered. Its Gross National Product (GNP), a measure of how the residents of a country are doing economically, has dropped dramatically in the past 40 years. In 1970, the GNP was 93 percent of Gross Domestic Product (GDP), a measure of the strength of a country's domestic economy. This meant that almost all of the products and services produced in Puerto Rico came from domestic sources. Forty years later, in 2010, local production comprised only 65.8 percent of total production.

"Puerto Ricans shot themselves in the foot with the economic development program they designed," said Chardón. "They did not use the capital that existed locally to develop."

Increasingly Dependent on the U.S. Government

In addition to its reliance on outside investment, Puerto Rico has become increasingly dependent on Washington. Of the approximately $22 billion it receives from the U.S. annually, more than $6 billion went towards federal aid such as food stamps and funding for low income housing in 2011.

Rather than empowering Puerto Ricans and encouraging a strong manufacturing and small-business platform, the system encourages government handouts, said Franklin Delano López, former chairman of the New Democratic Party of Puerto Rico.

"The failure that we're seeing on the island in terms of economy, in terms of violence and corruption," said López, "is a result of a failed educational system that has been designed within the framework of a paternalistic society."

Welfare incentives mean families are often better off accepting federal assistance than they would be working low-wage jobs, explained Ricardo "Ricky" Rosselló Nevares, son of former Gov. Pedro Rosselló, who led Puerto Rico from 1993-2001. Taking a job may mean losing benefits for your children, your house and other economic incentives.

"The system itself is designed to keep you dependent, to keep you away from those opportunities," said Rosselló, "and I think that the only way to change it is if we get the power to choose what the future of Puerto Rico is."

Aguadilla Mayor Carlos Méndez said that more emphasis is needed on improving the educational system to give Puerto Ricans the tools to make better, smarter decisions.

"I don't believe in welfare," said Méndez. "I don't want the United States to give me a fish; I want them to teach me how to fish, so I can make my own living."

These dire economic situations, said Ramírez de Ferrer, the former senator, have put the island in a low mood, which in turn has fostered a burgeoning drug trade and increasing violent crime. In 2011, 1,136 people were murdered on the island, marking its deadliest year in history. That's an average of three violent deaths per day and a per capita murder rate about twice that of Mexico.

"OK. So you don't want statehood for Puerto Rico? We're just going to move into your backyard and see how you feel about it," said Ramírez de Ferrer. "That's what's happening."

Puerto Ricans are increasingly moving stateside. As the second largest Latino population group in the United States, there were over 4.6 million Puerto Ricans living in the United States in 2010, according to the U.S. Census Bureau. This tops the number of Puerto Ricans living in Puerto Rico, which was approximately 3.7 million in 2010.

Migration throughout the nation and in and out of Puerto Rico is normal, said former San Juan Mayor Hernán Padilla. It's the "why" that's become worrisome. Padilla said too much of the migration is fueled by fear.

"The fear of not having a good job, the fear of poor quality of life, the fear of crime rate because of drug trafficking," said Padilla. "If the decision is to move because, 'I want to improve and I can,' go for it."

Better financial opportunities, said Luis Dávila Colón, commentator and political analyst, is the reason behind Puerto Rico's so-called "brain drain." Doctors, lawyers, and other professionals have little incentive to remain on the island if they can earn three times as much on the mainland United States.

For those not moving out, many appear to be giving up. The labor force participation rate in Puerto Rico is one of the lowest in the world, with about four out of 10 people employed or seeking employment. Puerto Rico had an unemployment rate of 13.5 percent in August 2012, down from 15.5 percent a year ago August, reported the Bureau of Labor Statistics. The U.S. unemployment rate in August was 8.1 percent.

In October 2009 when nearly a quarter of the workforce was employed by the public sector, Gov. Luis Fortuño unveiled plans to slash thousands of government jobs. With Law 7, about 13,000 government workers were laid off and an additional 4,000 left the central government voluntarily, taking advantage of early retirement incentives. The massive layoffs were met with weeks of protests by union workers and student protests at universities, creating an unpopular sentiment among Puerto Ricans. Employment has shrunk by thousands more since then as municipal governments and public corporations continue cutting jobs.

Still, the huge government presence subsists. According to the Bureau of Labor Statistics, there were approximately 266,400 government jobs in Puerto Rico in August 2012.

Dávila Colón contends that the vast majority of those jobs aren't needed. In fact, he claims the island could get by with only 75,000 of those jobs.

"When you see somebody from the electric company there, you see the guy pulling the bulb and three guys looking and having coffee. Why?" he asked. "The public payroll has been used as an easy way for job creation."

Chardón, the assistant secretary of state, agrees. The invention of jobs in the government sector hurts the private sector, he said, and the system for starting a business is already complex.

"You can't run a business when you've got one-fourth of people working in government looking after you," said Chardón. "Not really looking after you, running after you!"

The Fight for Statehood

Padilla said "el síndrome del mango bajito," a phrase that means Puerto Ricans are always picking the lowest-hanging fruit, is the root behind support for the status quo. He also said that lately, this concept has been increasingly challenged.

What Padilla describes can be explained by behavioral economics or the natural inclination to take the easy route, said Colón de Armas. People make decisions on the wrong basis and consequently, the economy of Puerto Rico is often analyzed in the wrong way, he said.

"We give more importance to inputs over outputs. If you think about it, the factors sound like they are better under the current status," Colón de Armas said. "We are able to give tax incentives – 'oh that's good' – but what about the results?"

Would the average Puerto Rican be better off under statehood? That question has spawned endless debate. Many see it as a question of tax burden versus benefits.

Contrary to widespread misconception, Puerto Ricans do pay U.S. federal taxes for Social Security and Medicare. They also pay federal taxes on sources of income outside the island, such as capital gains on stock transactions.

Unless Puerto Ricans are employed by or do business with the federal government, they do not pay U.S. federal income taxes. However, Puerto Ricans have their own income tax system, which is modeled after the U.S. tax system. In addition to their Commonwealth tax burden, residents of Puerto Rico collectively paid more U.S. federal income taxes in 2010 than residents of Vermont, according to the IRS.

It's the working and middle classes in Puerto Rico who bear the brunt of the tax burden says Dávila Colón, the island's most well-known political analyst and commentator. And they're afraid of losing current benefits.

"It's like a Catch 22," said Dávila Colón. "The ones at the top don't want to pay federal taxes. The ones at the bottom feel that any change may alter their cradle-to-grave welfare system."

But resistance to statehood is driven by more than economic considerations. The fear of losing Puerto Rico's cultural identity concerns many, but former Gov. Romero argues this is nonsense.

"Is that going to change the way we think? Are we going to stop going to the church that we go to? Are we going to stop thinking about our parents the way we think about them?" said Romero. "The only way that a culture changes is when an overwhelming number of people from outside with a stronger or just as strong culture come in."

Diversion to other, often petty issues by political parties, Dávila Colón said, also takes away from what's really important – solutions for the economy. As a nation Puerto Rico must reorganize all its priorities, Dávila Colón said.

"It's more than economics. We're in the middle of a democratic revolution. We're in the middle of a major social change," said Dávila Colón. "We just don't see it. We don't see it because we're stuck on the little issues."

The island remains split on the issue of statehood. Getting past these barriers will require a well-liked, trusted leader -- something Puerto Rico currently lacks say proponents of statehood. Puerto Ricans are more partisan than in the states, said former San Juan Mayor Padilla, but of primary importance is strong leadership.

"If you're in government, you must show that you are running a good government," Padilla said. "You must be an example of good administration. You must be a role model."

Some claim that Puerto Rico hasn't had a real leader since Gov. Pedro Rosselló, who served as the sixth governor of Puerto Rico from 1993 to 2001.

The former governor's youngest son, Ricardo "Ricky" Rosselló, just may have inherited his knack for leadership in politics. While he's too young to run for governor at the age of 33, there's much talk of him running for office in the future.

Rosselló currently resides part time in the U.S. and works as a stem cell researcher at Duke University’s Howard Hughes Medical Institute; however, as a private citizen he does much more. For three years now, Rossello has traveled throughout the island with a grassroots initiative, encouraging a full campaign for statehood embodied by Puerto Ricans themselves.

Past efforts, he contends, have proven unsuccessful; statehooders cannot expect a different result unless they enter into real conversation with the pro-commonwealth and independent parties.

"Creating a crisis is what drives issues," Rosselló said. "If we don't do something now, in the near future, I think we may lose many of the benefits, or many of the nice things we have to say about Puerto Rico."

Rosselló is trying to introduce another message among Puerto Ricans. The issue of political status has been defined as one of parties, Rosselló said. Yet Puerto Ricans must look at the data more objectively because the colonial system affects not just one party, but everybody residing on the island.

"The worst bias in Puerto Rico is not necessarily color. It's political," said Rosselló. "Our effort is to enable people who have historically been for a system just because they're loyal to a party, to be able to detach it."

Despite these roadblocks, the process of assimilation to the United States has begun and statehooders are confident that with time, Puerto Rico will attain statehood.

"It's humanity that binds us after all, and in the end, what makes nations is a common bond of economics, interests, values – so it's inevitable," said Dávila Colón. "When it will come, I don't know."

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