Puerto Rico crisis to get worse before it gets any better

A weak economic and industrial infrastructure means Puerto Rico’s hopes to exit the crisis as successfully as others in their position are slim.

Puerto Rico’s present crisis bears a strong resemblance to another of LatAm’s great 21st century economic debacles, the case of Argentina in 2001. Puerto Rico’s debt is currently at $70 billion, somewhat comparable to the $93 billion that struck down on Argentina, and their debt-to-GDP ratio is at 70%, also similar to Argentina’s 65%.

Unfortunately, due to drastic differences among the economic infrastructures of both countries, Puerto Rico might not get out of its hole the same way that Argentina did.

After declaring a multi-billion dollar default in 2001, Argentina was able to recover, but it was not a simple process. Through tax increases, a commodity price boom, particularly in what refers to soy, one of Argentina’s primary exports and a local currency devaluation that stimulated exports, the crisis was dealt with attaining relative success.

The primary measure when attempting to contain and reverse default, as tested by Argentina, is to increase taxes and reduce government spending. However, Puerto Rico has already done so, they increased their sales tax from 4% to 10.5% and enforced embargoes on businesses failing to pay their taxes. Their treasury has not felt an improvement proportional to the tax increases, and what’s worse, the higher cost of living has encouraged Puerto Rican’s to leave the island and rejoin the mainland US.

Furthermore, the tax increases are forcing businesses to leave, resulting in a much increased unemployment rate of 12%, the highest of any US State or territory. In fact, it should come as a surprise that businesses remain in Puerto Rico after the US congress phased out Section 936, a section of the US Internal Revenue Code which provided federal tax exemptions to businesses operating in Puerto Rico.

Section 936 was the life blood of the Puerto Rican economy, it encouraged manufacturing businesses to plant themselves in Puerto Rico, generating an important amount of employment and boosting their revenue.

936 was a mixed blessing however. Although it did successfully develop Puerto Rico, it prevented the island from constructing a more resilient economic infrastructure. The agricultural sector came to a rushing halt and Puerto Rico struggled to develop businesses of their own, depending instead of those coming from the US. Argentina, on the other hand, did count with a substantial capacity to produce agricultural goods, as well as a self-reliant economic infrastructure.

Puerto Rico will clearly be unable to devalue its currency in order to promote exports and discourage imports, as Argentina did, because they operate on the US dollar, shutting that option down altogether.

To make matters worse, Puerto Rico lacks the political and economic autonomy that Argentina enjoyed. They are a US territory, they depend exclusively on the work carried out on the US congress, and in Washington not only Puerto Rico, but all US non-state territories, are greatly overlooked, and will be even more so when considering they lack any voting power within the organ that determines its fortune.

Puerto Rico faces what could be their most difficult challenge yet, they hoped the solution to their second class citizen status would be to be accepted as the 51st State of the Union, however their economic catastrophe might complicate the fight. Unless the US Congress takes resolute action on the matter, there is no way Puerto Rico will drag itself out of the bog anytime soon. Still, they must not rely completely on the US to leave behind its troubles, instead, a lesson the island’s leaders must understand is that in order to avoid the repetition of current events, Puerto Rico must forge its institutions and economic infrastructure in the heat of its own fires.

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