Academic journal article The Fletcher Forum of World Affairs

Is Puerto Rico Greece in the Caribbean? Crisis, Colonialism, and Globalization

Academic journal article The Fletcher Forum of World Affairs

Is Puerto Rico Greece in the Caribbean? Crisis, Colonialism, and Globalization

Article excerpt

In October 2013, The Economist compared the debt crisis in Puerto Rico to the Greek crisis, calling the island "Greece in the Caribbean." Among other criticisms, it called Puerto Rico a "chronically uncompetitive place locked in a currency union with a richer, more productive neighbor."1 Nearly two years later, on June 29, 2015, after much fiscal maneuvering and requests for assistance to the U.S. Congress and the President, Governor Alejandro García Padilla announced on a televised message what everyone knew: that the debt of the Government of Puerto Rico was unpayable.2 The Economist had recommended that (1) fiscal austerity alone was not the best route to solvency in an uncompetitive economy; (2) debt restructuring was best done sooner than later; and (3) American policymakers should ensure that Puerto Rican debt restructuring is orderly and provide interim finance to assist in the process.3 However, the key measures for fiscal stabilization taken by the García Padilla administration were the opposite of these recommendations.

First, the government enacted an austerity program, passing Law 66 of 2014, "The Special Law for Fiscal and Operational Sustainability of the Government of the Commonwealth of Puerto Rico." Second, new taxes were levied and other regressive taxes were increased, including an increase in sales and value tax from 7 percent to 11.5 percent, while taxes on oil and its by-products increased by 68 percent. Third, the government borrowed USD 2.5 billion in 2014 to ensure cash flow until 2015. Finally, the government did not articulate a strategic plan for economic reactivation or a repositioning of the Puerto Rican economy in global value chains.

While the Puerto Rican and Greek crises share root causes of bad governance, they differ in the contexts, nature, and magnitude of their debts. A long-term solution to the Puerto Rican crisis must address the issues that brought the island to this point. What were the roots of the crisis, and what happened in both the polity and the economy to cause the politicoeconomic collapse of Puerto Rico, which in 1958 had been proclaimed by TIME Magazine a showcase of democracy and development?4 The Puerto Rican crisis is not just an economic and fiscal crisis. It is, above all, a crisis of governance.

WHAT HAPPENED TO THE PUERTO RICAN ECONOMY?

Trade liberalization and the end of protectionism led to a collapse in the Puerto Rican model of industrialization, disrupting its position in the global economy as a unique industrial tax haven for U.S. transnational corporations. .

Until 1996, the Commonwealth of Puerto Rico enjoyed a number of fiscal, trade, and economic preferences that gave the island distinct competitive advantages in the international economy. Since Puerto Rico is a possession (an unincorporated territory) of the United States, businesses operating and citizens residing on the island are exempt from federal taxes. Federal tax exemptions, complemented by local "tax holidays" and unrestricted access to the mainland market, fostered export-led industrialization between 1948 and 1996. These advantages were significantly increased in 1976 with the passage of Section 936 of the U.S. Internal Revenue Code, which allowed U.S. transnational corporations to operate as "possession corporations" (also known as "936 corporations"). Section 936 allowed these companies to repatriate all profits reported from operations in Puerto Rico free of federal taxes, once these profits had remained for a minimum of five years in earmarked bank deposits on the island and the company had paid a 2 percent tollgate tax to Puerto Rico's government.5

This tax status stimulated the proliferation of pharmaceutical industries in Puerto Rico. The island functioned as a unique tax haven, where companies transferred international profits to avoid paying federal taxes on their global income. American pharmaceutical companies, such as G.D. Searle, Merck, Sharp & Dohme, Eli Lilly, and others sold their patents and the components of patented medicines called "miracle drugs" (prescription pain killers, blood pressure and diabetes medication, etc. …

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