Puerto Rico’s Debt Crisis Is About to Get Worse

How did Argentina pull itself out of its mire? There was no magic bullet. It increased some taxes and benefitted from a commodity boom, particularly in soy, that increased exports during the 2000s, both of which increased government revenues. Argentina also devalued its currency—the Peso—which helped to reduce imports and conversely augment exports. And Argentina negotiated with the IMF to take billions of dollars in foreign debt off the books.

Puerto Rico’s debt, just over $70 billion, is comparable with Argentina’s—around $93 billion at the start of its 2001 crisis. Puerto Rico’s debt-to-GDP ratio of 70% isn’t too remote from Argentina’s 2001 ratio of 65%. In a debt crisis, governments can increase taxes and fees and reduce government services. Puerto Rico has already done so. In the past couple of years, the Commonwealth’s Treasury Department has dramatically stepped up embargoes on businesses for failure to pay back taxes, it raised the business-to-business tax rate from 4% to 10.5%, and it increased the Sales and Use Tax rate from 6% to 10.5%. Puerto Rico now has the highest sales taxes of any U.S. state or territory. The resulting hardships have many middle-class islanders pondering whether they should stay in Puerto Rico or migrate to the U.S. mainland, as hundreds of thousands of Puerto Ricans have done in the past decade.

Can Puerto Rico increase its exports as Argentina did? History says no. Compared to other countries and territories in the Caribbean, Puerto Rico had a fairly robust manufacturing sector. But in the late 1990s, the U.S. Congress severed that economic sector’s jugular vein by sacking Section 936 of the Internal Revenue Code—which exempted U.S. mainland-based companies from paying federal taxes on earnings they generated in the Commonwealth of Puerto Rico—and phasing out its tax incentives over a 10-year period. Congress eliminated Section 936 without any kind of a substitute, and the impact on the Puerto Rican economy has been devastating. Those 936 tax incentives were needed to offset the additional costs of doing business on an island far from the U.S. mainland and burdened with high commodity prices thanks to the Jones Act—a federal law designed to bolster the American merchant marine at the expense of Puerto Rican consumers. As a result, Puerto Rico lost half of its manufacturing jobs a decade ago. This loss has exacerbated unemployment and encouraged outmigration, thus shriveling the island’s tax base. Puerto Rico’s agricultural sector is small, too. There is no comparable soy boom on this Caribbean island. Thus increased exports—whether through manufacturing or other commodities—will not solve this debt crisis.

What about other segments of the economy? After all, Puerto Rico has a thriving tourism industry. Over the coming years, though, improved U.S.-Cuban relations may put a dent in that sector. And unlike Argentina, Puerto Rico cannot devalue its currency, the U.S. dollar.

The island’s political status isn’t helping matters, either. Argentina is sovereign—Puerto Rico is not. Other countries’ judiciaries cannot dictate Argentine polities (except to the degree that they are bound by international accords). But Puerto Rico is a U.S. territory that cannot escape Washington’s edicts. As an overseas possession, it is barred from having any voting representation in the body ultimately responsible for making its laws—the U.S. Congress. The only agent it has in the U.S. House is a non-voting resident commissioner. The Commonwealth of Puerto Rico has no electors for selecting the president who rules over it. With no say in Congress or the presidency, the island lacks any input into the appointment or confirmation of the federal judges who will adjudicate its fate. Thus, unlike Argentina’s case, the U.S. federal government can unilaterally impose its will on the Puerto Rican debt crisis.

So far, the congressional proposals for remedying Puerto Rico’s economic catastrophe involve creating some kind of federally appointed oversight board. In short, this represents the re-imposition of direct colonial rule. Thus far, the proposals coming from the House Republican majority envision an oversight board empowered to crack the fiscal bullwhip. There’s no hint of restoring the incentives necessary to rebuild the manufacturing sector, and the island is powerless to regulate its currency. Borrowing a famous line from the late French philosopher Michel Foucault, in Puerto Rico’s case, Congress seems only interested in discipline and punish.

For decades, some Puerto Ricans hoped the island would be admitted as the 51st state of the Union. Thanks to the debt crisis and its resultant mass outmigration, we are now witnessing the fulfillment of that dream. But rather than taking place in the barrios of San Juan or the coffee farms of Lares, it is becoming a reality in the neighborhoods of central Florida. There is a high probability that Congress will not act until crisis worsens significantly, and even then it might try to pass the buck. A bitterly divided Republican Congress has been unresponsive to calls from the White House to tackle the problems and unwilling to reach a compromise agreement with Democrats. At this point in time, there’s no expectation of a rosy forecast on the horizon.

Amílcar Antonio Barreto is an associate professor of political science, international affairs and public policy at Northeastern University. He is also the director of its MA Program in International Affairs.