Long road to economic recovery in Puerto Rico

Long road to economic recovery in Puerto Rico

Economic recession and high unemployment rates has left Puerto Rico, known as the “Greece of the Caribbean”, to find other means to generate revenue.

In recent years, Puerto Rico has come to be known as the “Greece in the Caribbean,” or “America’s Greece,” due to its poor credit ratings, high debt levels, and deteriorating economy.

In other words, Puerto Rico is a tiny Caribbean island with a simple and limited economy that was supercharged by tax breaks the U.S. Congress granted it to promote its manufacturing industry.

The economy has been decreasing for a decade and the unemployment rate is nearly 12%, as of May 2015. The territory has accrued a debt of $73 billion, where its public pension funds are seriously underfunded. In addition, 45% of Puerto Ricans live below the poverty line, and 20% of citizen income in the commonwealth comes from federal or Puerto Rican public funds.

In contrast to the Greeks’ economic woes, which have struggled to implement reliable reforms, Puerto Ricans have been engaging in economic change for almost a decade. Such engagements include a new sales tax and public sector job cuts.

Furthermore, as Greece struggles to negotiate an agreement with its lenders, Puerto Rico’s leaders have preserved their commitment to meeting all government obligation debts. Hedge fund holders of Puerto Rican debt are keeping a watchful eye for results over legislative efforts concerning the territory’s 2016 budget.

Pushing for legislative action, Governor Alejandro García Padilla has proposed replacing the island’s 7% sales tax with a 16% value-added tax. Given the economy’s weakness, the proposal may be too big an increase — a smaller increase, however, phased in over time with higher income tax rates, may not help to foster a more stabilized economy.

With Puerto Rico in its eighth year of recession, the government is struggling with its $73 billion debt, and citizens are concerned that some of the island’s public agencies could go bankrupt. The island’s Government Development Bank recently warned that the government could shut down within three months if nothing is changed.

The government needs to act quickly to deal with its financial problems if the desire to quell public unrest, remove a significant amount of debt, and attract outside investors holds strong. Swift legislative action will show not only the public but also the international business community that Puerto Rico can facilitate raising revenue towards its economic recovery.

Puerto Rico could also improve its investor attraction by raising their taxes, which are low by international standards. Puerto Rico only collects about 11% of its gross domestic product in taxes, compared with the 33% average for more advanced states.

Recently, Governer Padilla and other lawmakers reached an agreement on a proposal to raise the island’s sales tax. This move could potentially help sell Puerto Rican debt, which could be a temporary alternative to the governor’s proposal for a value-added tax.

There is much that can be done to revive Puerto Rico’s economy. Stronger efforts to boost its revenue through targeted public investments may lead to stabilized growth and an end to the moniker of being known as the “Greece of the Caribbean.”

Categories: Economics, Latin America

About Author

Yesenia Lugo

Yesenia Lugo has written and worked on global governance and international financial institutions (IFIs) for a Washington, D.C. NGO. Her interests include economic opportunities, emerging financial markets and fiscal transparency reform. Yesenia holds a Masters in Diplomacy and International Relations from Seton Hall University, where she specialized in economic development and international security.