Puerto Rico - Economy
Puerto Rico had one of the most dynamic economies in the Caribbean region until 2006; however, growth has been negative for each of the last nine years. The downturn coincided with the phaseout of tax preferences that had led US firms to invest heavily in the Commonwealth since the 1950s, and a steep rise in the price of oil, which generates most of the island's electricity.
Diminished job opportunities prompted a sharp rise in outmigration, as many Puerto Ricans sought jobs on the US mainland. Unemployment reached 16% in 2011, but declined to 13.7% in December 2014. US minimum wage laws apply in Puerto Rico, hampering job expansion. Per capita income is about half that of the US mainland.
The industrial sector greatly exceeds agriculture as the locus of economic activity and income. Tourism has traditionally been an important source of income with estimated arrivals of more than 3.6 million tourists in 2008. Puerto Rico's merchandise trade surplus is exceptionally strong, with exports nearly 50% greater than imports, and its current account surplus about 10% of GDP.
Closing the budget deficit while restoring economic growth and employment remain the central concerns of the government. The gap between revenues and expenditures narrowed to 0.2% of GDP in 2014, although analysts believe that not all expenditures have been accounted for in the budget and a better accounting of costs would yield an overall deficit of roughly 5% of GDP in 2014. Public debt rose to 105% of GDP in 2015, about $17,000 per person, or nearly three times the per capita debt of the State of Connecticut, the highest in the US. Much of that debt was issued by state-run schools and public corporations, including water and electric utilities. In June 2015, Governor Alejandro GARCIA Padilla announced that the island could not pay back at least $73 billion in debt and that it would seek a deal with its creditors.
Puerto Rico scaled up to the 30th position out of 144 jurisdictions evaluated in the 2013-2014 edition of the World Economic Forum’s (WEF) Global Competitiveness Report. Puerto Rico surpassed Chile in this edition of the WEF’s report, becoming the most competitive economy in Latin America and the Caribbean. This is the highest ranking Puerto Rico has obtained in this report in its history.
Puerto Rico scaled up 2 notches to the 43rd position out of 138 jurisdictions in the 2010-2011 edition of the Global Information Technology Report published by the WEF. Also, the island scaled up 8 notches to the 45th position out of 139 jurisdictions in the Travel and Tourism Competitiveness Report published by the WEF, the highest-ranking Puerto Rico has obtained in this report in its history.
Puerto Rico enjoys a highly diversified economy and has become a formidable player in high-value added manufacturing industries that include pharmaceuticals, electronics, processed foods, clothing, and textiles. The service sector is playing an increasingly pivotal role in Puerto Rico’s economic development contributing significantly to job creation and growth, particularly in educational and health services, professional and business services, financial and insurance services, among others.
The announcement of Puerto Rico's government decision to adjust its Fiscal Plan and renegotiate the public debt, marks a pivotal moment and points to a new direction for the coming years. Puerto Rico must define a new path to meet its present and future obligations. In spite of the prevailing uncertainty surrounding this situation, my team in the Economic Development agencies has invested time and energy over the last two years to restart key sectors of the economy that hold tremendous potential to generate growth. After a long decade of economic contraction in which many multinational corporations chose to downsize or close their operations, we persevered to create opportunities to attract new business partners that could take advantage of unique offers. Many strengths, like our human capital, world-class infrastructure, competitive incentive package, the experience of doing business at a global scale and the opportunity to operate in a US jurisdiction, have been vital in forging strategic alliances with top companies.
In the 1920s nearly 95 percent of all Puerto Rican exports went to the continental United States. Accounting for nearly 15 percent of the entire U.S. market, Puerto Rican sugar was hugely profitable during the Great War with little competition from warring European nations, but the industry collapsed after Europe returned to its pre-war production in the 1920s. Under the Sugar Act, or Jones–Costigan Act, of 1934 (48 Stat. 670–679), Puerto Rico was assigned an insufficient 800,000-ton quota, with expected production exceeding more than a million tons. Machines replaced men as the preferred form of labor on the island’s sugar plantations, and Puerto Rico began hemorrhaging agricultural jobs. Its manufacturing industry struggled to compensate, and the island was left with catastrophic unemployment rates.
Puerto Rico is still very economically dependent on the United States. The U.S. presence affects Puerto Ricans’ economic lives every day, from the U.S. currency in their pockets, to the many products sold on their store shelves. The U.S. government subsidizes Puerto Rico with about $15.48 billion in federal assistance payments yearly, which covers everything from education to food stamps. It is estimated that in 1999, federal subsidies for unemployment compensation and housing for a family of four cost the U.S. government over $19,000 per year. Should Puerto Rico become the 51st state, it would be eligible for another $3.5 billion in federal assistance (estimated).
Approximately 40 percent of Puerto Rico’s economy has been based on special tax exemption legislation that allows U.S. manufacturers to avoid paying federal tax on profits made in Puerto Rico. This is estimated to be in excess of $4 billion per year. The U.S. industries benefit from operations in Puerto Rico and generate billions of dollars in annual revenue. Puerto Ricans also benefit from the federal guarantee on bank savings, and from the millions of dollars received in disaster relief after a hurricane. Per capita income for the island is $7,600 a year, which is half that of the poorest state, Mississippi, but considerably higher than its nearest Greater Antilles neighbor, the Dominican Republic, where average per capita income is only $1,600 per year.
More than 37 percent of households earn less than $10,000 per year. Official unemployment fluctuates between 11 and 20 percent, although there is considerable employment in various activities not included in the official statistics. Actual unemployment is probably higher, and may in fact be close to 20 percent. In 2000, 1.15 million people were employed. Nearly 60 percent of the population falls within the U.S. government’s poverty definition, and over 30 percent of the population receives some form of public assistance. This includes some 425,000 families (1.1 million people) who received an average of $220 a month in the nutritional assistance program. It is estimated that The U.S./Puerto Rico association is also beneficial to the United States.
The U.S. economy benefits on the order of $720 billion as a result of commerce with the island and the many U.S. companies located in Puerto Rico. Puerto Rico must use the U.S. Merchant Marine to transfer its products and cannot engage in international commercial activity without the consent of the United States. The United States has used Puerto Rico as a strategic military base since the turn of the 20th century, and it remained the U.S. Navy’s primary training facility for amphibious warfare and carrier-based tactical bombing practice until 2003. Numerous U.S. manufacturers have built manufacturing plants in Puerto Rico and account for 42 percent of the gross domestic product (GDP) employing about 24 percent of the workforce (160,000). Industry is the main source of income for Puerto Rico. The services sector accounts for 37 percent of GDP and employs 291,000 people. Various government agencies produce 11 percent of GDP and have 245,000 employees. The utilities sector also produces 11 percent of GDP, with 32,000 employees. Agriculture today accounts for only 1 percent of GDP and employs 26,000. Construction employs 85,000 people.
Puerto Rico once had 70 pharmaceutical firms whose products were viewed as recession-proof. Puerto Rico exported more than $25 billion in products ranging from medicine, refined petroleum products, scientific equipment and machinery, to rum, clothing, and shoes. Unfortunately, the island’s high-value mineral resource base is quite limited. It has a large population on a small land base, and island food production is now low. This results in the need for islanders to spend billions on food imports. In spite of this, Puerto Ricans enjoy the highest standard of living and per capita income in Latin America.
In August 1996, the U.S. government began the phasing out of federal tax benefits that had positioned Puerto Rico as the preferred site for stateside manufacturers. This resulted from the fact that not enough new jobs were being created for the large amounts of tax writeoffs the multinational corporations were receiving. This came at a time when the federal government was also trimming budgets and eligibility for social welfare program spending and preferential treatment for Puerto Rican products. As a result, from 1996 to 2000, Puerto Rico lost 16,500 manufacturing jobs. By early 2002, the total had risen to 27,000 jobs lost. In light of these changes, Puerto Rico’s government is developing a new economic development program called the “New Economic Model,” which has tax incentives, increased foreign trade and investment, and greater-self reliance as major themes that will lead Puerto Rico’s economy into the new millennium.
The Puerto Rico government also tried to convince Washington to amend Section 956 of the federal tax code, which again would provide favored tax status for controlled foreign corporations operating in U.S. territories. This would permit up to 90 percent of their earnings to be returned to the United States without taxation. There was also discussion about trying to have Puerto Rico included in the Earned Income Tax Credit system of the U.S. tax code, as it would subsidize minimum-wage employees, bringing wages up to $14,000 or $15,000 per year.
More than 24,000 miles of highway make all points on Puerto Rico no more than two hours from any airport or seaport on the island. Puerto Rico has an extensive road system with a main freeway crossing the north side from San Juan to Arecibo, and another one linking San Juan to Ponce that crosses the central east side from the north to the south coasts. Another important freeway goes from San Juan to Canóvanas in the northeast. In addition, an efficient mass transit system, known as "Tren Urbano" (Urban Train), interconnects the San Juan metro area. Also operational in 2012, is the new bus rapid transit (BRT) system that aims to extend the Urban Train line through connections to island suburbs.
Puerto Rico’s air access is by far the best in the Caribbean, which characterizes the island as the gateway to the Caribbean. Puerto Rico has eleven airports servicing residents and visitors, of which three have direct service to the U.S. mainland. The San Juan Luis Muñoz Marín International Airport (SJU) serves as the regional hub, receiving upwards of 8 million passengers a year. It handles 4,300 cargo flights per month and over 1,800 weekly flights from more than 20 airlines connecting Puerto Rico to worldwide destinations.
Puerto Rico has three main state of the art port facilities in San Juan, Ponce and Mayaguez. San Juan has the largest cruise ship harbor in the Eastern Caribbean and it stands as the main harbor for several cruise ship companies. This busy seaport services 1.2 million cruise ship passengers per year. Seven cruise lines use San Juan as both a transit port and a homeport: Carnival, Celebrity, Royal Caribbean, Azamara, Seabourn, Silversea, Sea Dream. An additional nine cruise lines use San Juan as a transit port: Holland America, Regent, MSC, Norwegian, Disney Cruise Line, Princess, Club Med, Oceania, P&O.
Puerto Rico announced 03 May 2017 an historic restructuring of its public debt on Wednesday, touching off what may be the biggest bankruptcy ever in the US$3.8 trillion U.S. municipal bond market. While it was not immediately clear just how much of the island's US$70 billion of debt would be included in the bankruptcy filing, the case was sure to dwarf Detroit's insolvency in 2013. The move comes a day after several major creditors, including usurious hedge funds with “vulture fund” reputations, sued Puerto Rico for defaulting on its bonds.
Bankruptcy will likely impact the daily lives of the people of Puerto Rico, who could face austerity measures such as cuts in pensions, worker benefits, and a reduction in health and education services.
The debt restructuring petition was filed by Puerto Rico's financial oversight board in the U.S. District Court in Puerto Rico on Wednesday and was made under Title III of last year's U.S. congressional rescue law known as PROMESA. The Title III provision allows for a court debt restructuring process akin to U.S. bankruptcy protection. Puerto Rico is barred from a traditional municipal bankruptcy protection under Chapter 9 of the U.S. code.
Commonwealth of Puerto Rico’s ad hoc retiree committee filed 08 May 2017 with the U.S. District Court a motion for an order directing the appointment of an official retiree committee and appointing the pre-petition ad hoc retiree committee as the official retiree committee. The motion explains, “Consistent with the case-law….the size and complexity of this case clearly militate in favor of creating an Official Retiree Committee to ensure adequate representation of Retirees. There are approximately 160,000 public-employment retirees in Puerto Rico and approximately another 160,000 active public employees holding accrued retirement benefits. The claims of these Retirees for pension benefits, health care, and other post-employment benefits are complex and completely distinct from other types of unsecured claims.”
In addition, “The claims for pension underfunding alone are estimated at approximately $50 billion. In light of the size, volume, uniqueness, and complexity of Retiree claims, the appointment of an Official Retiree Committee is warranted and necessary to provide adequate representation of Retirees….Negotiating with over 300,000 individuals; creditors is simply impossible….Even collectively, the Ad Hoc Retiree Committee cannot afford to pay the legal fees.”
The motion continued, “An official Retiree Committee will be able to deploy professionals to analyse issues and appear at court in negotiations on behalf of all retirees, collectively , is a more efficient and realistic method of giving voice to Retiree concerns and salsa provides a centralized point of contact for the professionals representing the Oversight Board and Governer Rosello’s administration.”
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