From Bad to Worse for Puerto Rico

Feb 28, 2017 Joseph E. Stiglitz , Martín Guzmán

The island's deep and long-lasting recession has made its debt position unsustainable. But the latest fiscal plan imposed by the US commonwealth's federal overseers openly assumes that a Venezuela-scale depression will somehow bring about recovery.

SAN JUAN – Puerto Rico’s deep and prolonged recession has led to a severe debt crisis. And the combination of economic contraction and massive liabilities is having dire consequences for the island.

Everywhere in the United States commonwealth, private-sector jobs are being lost. Total employment in Puerto Rico has fallen from 1.25 million in the last quarter of the 2007 fiscal year workers to less than a million almost a decade later. Without employment, large numbers of Puerto Ricans (who are US citizens) have emigrated. But, despite this flight, the unemployment rate is now 12.4%. Without job prospects, the labor participation rate has plummeted to 40%, two-thirds of the level on the US mainland. About 60% of Puerto Rico’s children live in poverty.

The commonwealth’s debt position is clearly unsustainable, and its economy will be able to recover only if it gets a fresh start. But, unlike US municipalities, Puerto Rico is not protected by the US bankruptcy code. It is well known that decentralized bargaining processes for debt restructuring often lead to disastrous outcomes, with the relief obtained being insufficient to restore debt sustainability.

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Joseph E. Stiglitz

Writing for PS since 2001
312 Commentaries

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is a former chief economist of the World Bank (1997-2000), chair of the US President’s Council of Economic Advisers, and co-chair of the High-Level Commission on Carbon Prices. He is a member of the Independent Commission for the Reform of International Corporate Taxation and was lead author of the 1995 IPCC Climate Assessment.

Martín Guzmán

Writing for PS since 2014
16 Commentaries

Martín Guzmán is a former minister of economy of Argentina.

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0 Comments on this paragraph, 40 Comments on this article

Victor Douglas May 26, 2017

Puerto Rico's problem is a dysfunctional local subculture in which government is highly corrupt and only a few percent of students match the national average in math or English. as a result, Puerto Rico could not pay its own way, even if it had no debt at all. To fix the debt problem, focus on the deeper problem.

The most straightforward way to begin fixing this culture is to integrate Puerto Rico into mainstream American culture by having all educational instruction in English. Within one generation, Puerto Rico will be integrated into the US national culture and economy, not to mention the international economy, because English is the international language. People on the island will be able to sell services to people outside Puerto Rico. People in all of northwestern Europe currently speak better English than Puerto Ricans, and they also have native languages that are not English. This is part of why northwestern Europe has a wealth level similar to the US, and much higher than Latin America and even Spain. If Puerto Rico could just match the productivity of Mississippi, the poorest state, it would be able to pay down all its debt over time.

At present, the University of Puerto Rico is closed for a student strike. It should be closed permanently and the students sent to colleges on the mainland, which would welcome them with open arms in order to meet affirmative action mandates. The young people would all learn English and then, if they chose, return to the island, able to spearhead the new English-language society.
- Peter Olmedo May 27, 2017
  
  This is a bad intake. The problem with this ideology is that Puerto Rico integrated English into their programs during the first great recession (1930) & it caused massive set backs in education systems. The culture of centuries of Spanish rebounded the imposed English language & it became apparent that education in English would only slow down the child growth - this was debated by person who would be the future first lady later on. When the laws imposing the English language were relaxed, the skill level for production grew and the economic flourish. The suppression of the language by another could lead to either massive resentment to the US or low quality education, the subject needs to be treated with care . Potentially by enhancing both language to create a bilingual society which is beneficial due to the strategic position the island posses as middle ground between latin & northern america.
  
  The biggest problem is that Puerto Rico's culture & US culture is not compatible, and the government runs Puerto Rico as if it was. This transcends economic trends with decades of high expenditure & low quality investment. The take on this is that expenditures, is almost equatable by ratio to US, but the island socioeconomic structure is equatable to a Latin american environment. In a sense; their economy is comparable with a third world country, but governs it as a first world country.
  
  To my understand, the only research University is University of Puerto Rico. I've read an article on NYtimes about it's current dilema. The problem here is that austerity measure are inconsistent & potentially damaging if cuts aren't redirected for job & economic growth within the island, particularly the private sector. If you reduce post-graduate education then you'll have a weak work force without the necesary skills to undertake jobs in the private sector, or build their own small business. Puerto Rico should probably restruture the debt in a way that it can provide economic growth in the macroeconomic but also in microeconomics with small business paving the way for job growth & cash flow. A better stance on education it's needed to create a good working force, University of Puerto Rico has been the epicenter of economic growth for decades, relaxing import & export laws to increase usage of the island strategic placement and turn Puerto Rico into an import & export center in the middle of america, and incentives for small business to develop in urban areas. The initial thing that need definitive attention first should be accessing market credits and addressing the deficit, and then investing on economic growth & education as they cautiously pay the debt principals.
  
  Was in Puerto Rico a few months ago & its depressing the state the island is in.
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Maria Aponte Mar 16, 2017

Please note that Puerto Ricans emigrate to other countries or move from the island to the mainland US, another USA colony or territory, or Alaska. As you correctly pointed out, Puerto Ricans are American citizens. We therefore don't "emigrate"! If an American citizen moves from Massachusetts to Florida, for instance, you don't say that they have emigrated. Pretty much the same applies to Puerto Ricans. I moved from Puerto Rico to Massachusetts decades ago. I have never emigrated anywhere.
- e h May 5, 2017
  
  Not necessarily, you can emigrate from one state to another:
  
  For example, Pennsylvania's 1776 Declaration of Right states:
  
  XV. That all men have a natural inherent right to emigrate from one state to another that will receive them, or to form a new state in vacant countries, or in such countries as they can purchase, whenever they think that thereby they may promote their own happiness.
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Henri Erti Mar 5, 2017

Typical Stiglitz - Not a single word of how Puerto Rico ended up in the current situation to begin with (unsustainable government spending).

Typical Stiglitz goes further to suggest that the path out for PR is to do the same thing that got them there in the first place. Why are people still listening to this lad who once thought Venezuela should serve as an example for Western economies?
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Peter Schaeffer Mar 5, 2017

Here is the bottom line. PR can’t make it on its own. With heavy Federal subsidies, PR can survive. Without Federal subsidies… Not so much. The issue isn’t debt or debt restructuring, the issue is PR and the very (very) low skill level of the population.

Somewhat by accident, I turned up the article below. The source is “unconventional” (to say the least). I didn’t even know that the New York Fed published a newsletter. Who would have guessed that the New York Fed would produce an article highly relevant to Puerto Rico’s future?

Quote(s) (out of order) from "Human Capital and Education in Puerto Rico" by Rajashri Chakrabarti, Giacomo De Giorgi, and Rachel Schuh

“In the maps below, we examine how Puerto Rico stacks up against individual states, as measured by the percentage of students scoring at or above the proficient level in NAEP math. Again, Puerto Rico lags dismally behind all states. In fourth-grade math, Alabama and New Mexico are the lowest scoring states as measured by this indicator, with 26 percent and 27 percent of their students, respectively, scoring at or above proficient. In contrast, this number is 0 percent in Puerto Rico. In eighth-grade math, Alabama and Louisiana were the lowest scoring at 17 percent and 18 percent respectively. In contrast, no sampled Puerto Rican eighth-grader scored in the proficient category.”

“In fact, in Puerto Rico virtually none (less than 1 percent) of the sampled students scored above level 3, which is generally considered a basic proficiency level, on the PISA test. To have a sense of what that level entails, the NCES offers the following characterization:”

“In this post we focus on the mathematics test score, which has been shown to be a good predictor of future labor market outcomes. Among the sixty-six countries and territories and three U.S. states that participated in the PISA test in 2012, the average score in Puerto Rico is fifth from the bottom, with only Colombia, Qatar, Indonesia, and Peru having worse scores. In the figures below we present the results for the top scorer, the U.S. mainland and participating states, the overall average, and for Puerto Rico and twelve “peer” countries closest to Puerto Rico in terms of GDP per capita in 2012.”

Apparently, PR has (essentially) zero high-school graduates (measured in terms of actual education) and presumably almost no college graduates (measured in terms of actual education). Debt or no debt, PR is in deep trouble. PROMESA isn't going to fix PR. However, Stiglitz and Guzman are just as clueless.
- Peter Schaeffer Mar 6, 2017
  
  Alas, life for the reading challenged. Just in case you didn't notice, let me quote again
  
  "In fourth-grade math, Alabama and New Mexico are the lowest scoring states as measured by this indicator, with 26 percent and 27 percent of their students, respectively, scoring at or above proficient. In contrast, this number is 0 percent in Puerto Rico. In eighth-grade math, Alabama and Louisiana were the lowest scoring at 17 percent and 18 percent respectively. In contrast, no sampled Puerto Rican eighth-grader scored in the proficient category."
  
  PR is so far below the least educated U.S. states, that any comparison is crushing (to PR). As a consequence, it is rather unlikely that PR will recover on its own. You will note that I neither advocated nor opposed federal subsidies. My point was more basic. Stiglitz/Guzman and the authors of PROMESA are all clueless because they don't understand why PR has failed.
  
  As for Mississippi, Louisiana, New Mexico, and Alabama, they all have extensive military facilities and hence more Federal dollars. Military facilities (and National Labs in the case of NM) are hardly a subsidy. Take a look at per-capita Federal spending by state. The differences are real, but hardly overwhelming.
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- John Cowan Mar 5, 2017
  
  Without heavy federal subsidy, Mississippi, Louisiana, New Mexico, and Alabama couldn't survive either: they get back about $3 in federal benefits for every dollar in federal taxes. And yet nobody says we ought to treat them as colonies and put them in an extreme austerity regime that will make their problems worse.
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Dallas Weaver, Ph.D. Mar 5, 2017

The ultimate issue is economic growth and actions about debt doesn't solve this issue, but may just kick the can down the road.

Puerto Rico doesn't have a demand limited economy when it can export to the US, however it does have most of the regulatory/bureaucratic blocks to economic growth and innovation that the US has.

To back up the above claims that the lack of economic growth is a problem created by the political/regulatory/bureaucratic class (who is doing very well in this society), we can look at the following facts and specific situations.

1- The US imports about $14 billion in seafood per year from around the world.
2- Puerto Rico has a huge marine area inside territorial waters and does have significant control over the Carribean Fisheries Management Council which controls the US EEZ (outside the territorial waters). This is a real resource.
3- An experimental offshore fish-farm (full-size net pens) was operated in PR for years and proved that there were no significant environmental impacts. They were using state of the art technology, producing an excellent quality product. They had the capital, talent, market and technology for a major expansion and creation of a billion dollar class industry potentially creating 20,000 or so jobs (including the fish processing required).
4- They were not able to obtain the required permits to operate and they gave up and move elsewhere.
5- The World-wide growth rate of aquaculture is in the 9% per year range providing the expanding demand for seafood, while the US aquaculture growth rate was -6%/yr for the last several years and zero before that. Offshore aquaculture is expanding rapidly, but all outside the US with the primary reason being regulatory permissions being impossible to obtain or requiring decades of delays inside the US.
6- As a consultant in this area, I recommend that clients leave the US if you want to build an offshore aquaculture facility. I have seen too many good projects die in regulatory delays and nonsense to be willing to waste the client's money.

If the government won't allow economic growth, it can't ever solve the debt issue and any proposed "solution" will just make the problem worse and is a waste of effort. A classic case of throwing money down a rat hole.
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Peter Burgess Mar 5, 2017

Remember in Dec 2015 when the PR government stopped paying bond holders so that they could payout $120 million in Christmas bonuses to government workers?

http://www.reuters.com/article/us-puertorico-bonuses-idUSKBN0U403J20151221

And the nearby US Virgin Islands has a current revenue short fall of $100 million (for a population ~ 120k!) after a bond offering on future revenue failed to generation sufficient interest.
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Tim McDonald Mar 5, 2017

Wrong from the first sentence. The severe debt crisis was caused by spending more than you were collecting. Tennessee does not have a debt crisis. Why? Constitutional requirement to balance the budget. Fiscal responsibility is the key to Puerto Rico getting out of debt. And if they cannot do it for themselves, appoint a bankruptcy conservator who will enforce it for them.
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Ted Peters Mar 4, 2017

I'm no liberal... but I have seen how Detroit has benefitted from bankruptcy and I see no reason why Puerto Rico should similarly avail itself of this purgative process.
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Anglo Mirror Mar 3, 2017

I find it so deeply concerning, yet typical, for the Anglo-Saxon press to not mention this brutal creditor regime imposed by the US on a colony - again colony in 2017 when this exact same press railed against Germany for years for supporting a much less brutal restructuring program for Greece. Uhhh the double standard of the US/UK. A snake at its best. Treplace the US in this case with Germany and you would have media riots about it for years. Just said America, very, very sad.
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Mauricio Duran-Loriga Mar 3, 2017

This article has been written by people who may spend countless hours at figuring out bizarre debt shemes, but who obviously have not spent a sinlge hour within the borders of Puerto Rico.

Unfortunately, not even a complete debt writedown will bring PR back to previous glorious times.

Guys go and have a week there before re-writting this rubbish.
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Stephanie Aviles Acevedo Mar 2, 2017

First, Those statistics about PR economic detrimental status aren't new. For more that 10 years we have being in a decrease of our profits and a huge acquisition of new ILEGAL, UNETHICAL, and UNCONSTITUTIONAL debts. Second, is not a fact that PROMESA Law is because our colonial status, that's absurd. Is a fact that PR status is a very unfairly system that limits our potentiality to development and growth. Is a fact that this systems also restring our government capacity to make fruitful decisions. But is a fact that the Board have been an alternative in other US countries to balance their finances. So I believe it's presence is not attained with our colonial status, but with US unwillingness to assume their moral and human responsibility within all puertorrican community. Is a shame to be sucked for so long and that US doesn't even divise us as a part of their priorities. Third, the unethical and partisan idealism interrupt our social and economical progress. This anti-democratic tendencies also unable leaders capacity to make decisions toward our affordable capabilities. Fourth, This debt process has revealed our blind spots, as individuals, as communities, and as a country. The debt have become a very unhealthy, unfair and sorrow experience for the less fortunate. It is not a human conscience aspect; to fight to elevate rich richness and perpetrate and aggravate poverty.
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Joel Lumer Mar 1, 2017

The preferable solution is for the United States to once and for all say that 1) colonialism and imperialism are wrong; 2) maintaining colonies in third world nations (islands) is wrong; 3) the people of Puerto Rico deserve the respect of being a free, independent and sovereign nation; 4) the Congress is granting Puerto Rico its independence from the United States; and 5) as a sovereign nation they are free to adopt any bankruptcy law the people of Puerto Rico want. Bankers and Columbia University business and economics professors be damned.
- Ted Peters Mar 4, 2017
  
  An independent Puerto Rico would look more like Haiti than Miami in no time. The economics just aren't there.
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Prithvi Joshi Mar 1, 2017

The solution recommended by the authors does not seem that appropriate as, although it will allow Puerto Rico to take fresh credit but when it comes to pay both old and new debt, at that time, the economy of Puerto Rico can take a big hit.
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Jose Garcia Mar 1, 2017

How are we supposed to take the authors -both Columbia University professors- seriously when they keep referring to US citizens moving to the continuous 48 states as "immigration"?

Puerto Ricans are not foreigners in the US.

im·mi·gra·tion
noun
the action of coming to live permanently in a foreign country.
- J C Mar 1, 2017
  
  LOL thanks for that undergrad level analysis Vivek. I hope professors Guzman and Stiglitz got much of a kick from that response as I did.
  
  So now we are moving goalposts from existence of the fairy godmother to the impacts she will level on the private sector. Fine. Let's talk about how much investment was made by the private sector relative to their savings during the recession years, shall we? Let's also note how much help they got from the federal government. That would be around 4 trillion and about 15% of that stimulus money invested by the private sector. Not going to productivity increasing enterprises either, just more collateralized real estate like the previous bubble. And who picks up the slack when this bubble bursts? You still don't understand what separates the U.S. from developing nations.
  
  I have no idea what you are referring to with regards to gunboat diplomacy. Germany has nothing to gain by threatening the lives of Greeks because there is not enough money around to pay back no matter what The Germans do. The military prowess I am referring to reflects why the US dollar's prominence remains unquestioned despite yokels telling me the dollar us worth less than toilet paper. You also want to have a conversation about expectations yes? Great, I will start. Below is a link to a chart that shows increase in money supply since 1984. What do you think will happen? What would Milton Friedman say here and how does it jive with realities of today?
  
  http://static1.businessinsider.com/image/4e41503c6bb3f7682b000061-538/chart.jpg
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- Jose Garcia Mar 1, 2017
  
  "...On the contrary, lower wages will lead to decreased spending, aggravating the depression, and further increase the likelihood of immigration to the US..."
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- Jose araujo Mar 1, 2017
  
  To my knowledge there are 50 states in the US and Puerto Rico is not one of them.
  
  By the way the author referrs to emigration :
  
  "Without employment, large numbers of Puerto Ricans (who are US citizens) have emigrated"
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G. A. Pakela Mar 1, 2017

Puerto Rico should default on its debt. Market participants that invest in bonds should do their due diligence. Presumably they received higher interest rates in exchange for taking on that risk. After receiving zero on their assets, Puerto Rico bond holders will be forced to renegotiate.
- Jose Garcia Mar 1, 2017
  
  Isn't the crux of the whole discussion that they can't default (for some of the obligations)?
  
  The Commonwealth's constitution demands that they be paid first, even before essential services. So choosing to default is not a legal option.
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Jose araujo Mar 1, 2017

At least Americans will save on buildind a wall.

Only idiots would think on applying the EU solution to the Puerto Rico problem, but alas, the world is full of idiots and supply sidders
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Cate Long Feb 28, 2017

Mr. Little's comment about attempting to locate a factory in Puerto Rico is the most instructive thing on this page.

Puerto Rico is ranked 55th for doing business by the World Bank and a quick survey of their scores would suggest any manufacturer should head away from PR as fast as possible.

For example dealing with PR construction permits is ranked 131st in the world. This is the level of a third world country : http://www.doingbusiness.org/data/exploreeconomies/puerto-rico/

These administrative "impediments" have nothing to do with actions of the US Congress or PR's status. They are purely an example of a bloated, inefficient govt that makes no effort to work in an open and transparent manner with those who approach it. You cannot have capitalism and growth if new businesses cannot be easily formed. Puerto Rico embodies crony capitalism in spades.

The oversight board, appointed by Pres Obama, has 5 Puerto Ricans and two non Puerto Ricans. It's clear that their understanding of the situation on the ground is infinitely better informed than Prof Stieglitz. Apart from any efforts to restructure debt they recognize that the PR govt needs to be reshaped. https://juntasupervision.pr.gov/index.php/en/home/
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Patrick Trombly Feb 28, 2017

Hair of the dog that bit you, eh?

Keynesians can never admit when they're wrong - which is always.
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Odyssios Redux Feb 28, 2017

So now the US has its very own little offshore Greece. We all know how both of those are going to end. In the grinding poverty of the effectively colonized.

In neither case need things have come to this. In both cases there are obvious measures of relief that won't be taken. Greece could conceivably leave both the Euro and EU; Puerto Rico can't secede since not a state. Ubiquitous lunacy seems to be the political flavor du jour
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Francisco-Javier Alejo Feb 28, 2017

I agree complitely with J. Stiglitz analysis on the Puerto Rico situation. The colonial regime (under the 'polite' denomination of Common Wealth) imposed over them has finally reached its logical destination. The recognition of the services rendered to the US all along the Cold War years is all but ?blowing in the air'
Francisco-Javier Alejo.
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Kenneth Pao Feb 28, 2017

The similarity between what's happening in Puerto Rico vs Washington DC and Greece vs EU/IMF is striking. Not even this author is discussing the plainly obvious that those cannot manage their own financial affairs and those taking the risks lending to those known as financially irresponsible must suffer its consequences - let them go bankrupt.

Puerto Rico will go to the depths of recession and wages and prices of everything will free fall and risk takers will move in and new businesses will start and over time Puerto Rico will recover. End of story.
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Manuel G Samuel Feb 28, 2017

Puerto Rico's malaises and debt restructuring process are a déjà vue of Greece and Portugal's travails over the last ten years. Reforming the economy, especially the labor market, under the extreme stress of debt reduction imposed by Brussels (aka Berlin) or Washington is a typical catch 22 in a cull de sac. Look at Greece now (Portugal has become a touristic Mecca in the meantime and boasts some of the biggest lithium reserves worldwide) and you will see how Puerto Rico's economy and financial imbalances will be in 2027. At least some pundits (e.g. DIW Berlin) are starting to come to terms with the "lovely" byproducts of harsh austerity.
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Bennett Little Feb 28, 2017

I tried to discuss putting in a factory in Puerto Rico....contacted the mayor's office of the city (which has a plethora of suitable empty buildings) and contacted the Development Authority in DC....no one evinced interest. From personal experience as well as observation, the sad and degenerating situation is apparently exacerbated by inefficient and ineffectual governmental regimes who seem to expend their full effort in bleating and blathering and absolutely none doing anything remotely considered to be constructive.
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