NEW YORK – Puerto Rico’s economy has been contracting for nearly a decade – one of the worst recessions in recent history among economies not experiencing domestic conflict. Indeed, its slump has far outlasted that experienced by, say, the Baltic states, which also endured sharp contractions in the aftermath of the 2008 global financial crisis. Why hasn’t Puerto Rico’s economy rebounded?
The situation in the US commonwealth certainly looks dire. Puerto Rico is second only to Greece in terms of the rate at which GNP is contracting (14% from 2006 to 2015). Investment has fallen by more than 30% since 2006, and employment by more than 20%. Faced with few job opportunities, about 1% of the island’s population is migrating to the US mainland every year.
One key difference between Puerto Rico’s crisis and those of Greece and the Baltic states is that it began before the global financial crisis. In fact, the economy had not experienced strong growth since the mid-1970s, at which point per capita income still amounted to only one-third of that in the United States. The subsequent economic slowdown caused the income gap to widen. In a sense, Puerto Rico is an early example of an economy that got stuck in the so-called middle-income trap.
Puerto Rico’s fiscal situation was also worsening before the crisis. Public-sector debt, which hovered around 60% of GNP in the 1980s and 1990s, started to rise in the early 2000s, and stood at 76% of GNP in 2006. The reduction in government revenues caused by the crisis has exacerbated the debt problem, even though the government’s real (inflation-adjusted) primary expenditures (not including interest payments) have fallen by over 20% during the current decade. Debt now exceeds GNP – even without taking into account unfunded pension liabilities.