Why Statehood for Puerto Rico is the Wrong Solution
With $72 billion in outstanding liabilities, Puerto Rico is dangerously close to the verge of an economic disaster. Instead of addressing the underlying causes of this crisis, Puerto Rico’s newly elected governor, Ricardo Rosselló, has chosen to make Puerto Rico’s statehood his number one priority. It is understandable why Governor Rosselló and ordinary Puerto Ricans, amidst the worst crisis in their history, would like a positive change in their fortunes. However, given the deep-rooted nature of its economic problems, a mere change in Puerto Rico’s political status will not solve its problems.
Over the last 10 years, Puerto Rico has been experiencing its worst economic crisis in its history. Between 2006 and 2015, the island’s economy contracted 13 percent. As the economy stalled, the lack of opportunities at home forced Puerto Ricans to leave the island in droves—resulting in the territory’s population decreasing by 7 percent in the last decade, encompassing the largest exodus in its history. Governor Rosselló identifies the “colonial situation” as the main reason for Puerto Rico’s crisis, promising to hold a referendum asking voters to choose statehood or independence from the United States.
A 2017 referendum would not be the first time that Puerto Ricans have voted on the island’s political status. Since its establishment as a U.S. commonwealth in 1952, there have been four referenda— 1967, 1993, 1998 and 2012. In the last referendum, Puerto Rican voters rejected the island’s status as a U.S. commonwealth by a 54-46 margin. Of the 54 percent who rejected Puerto Rico’s current status, 61 percent prefer statehood as an alternative.
Supporters of Puerto Rico’s statehood and independence view the island’s current political status as the primary reason for the territory’s economic decline. However, these supporters seem to forget that since its establishment as a U.S. commonwealth in 1952, Puerto Rico grew well over 7 percent for nearly three decades. Puerto Rico’s development has indeed been an economic success story: between 1960 and 2013, its income per capita grew by a factor of 40 times, from a mere $717 to $28,529, according to World Bank data. In comparison, the U.S. economy grew by only a factor of 17.5 times and the Dominican Republic grew by a factor of 8 times.
It is important for statehood and independence supporters to remember the causes of Puerto Rico’s problems. As Anne Krueger, the country’s prominent expert on Puerto Rico, points out in her seminal report, the causes of the island’s economic crisis is multifarious: The phasing out of U.S. corporate tax breaks in 2005, combined with the 2007-8 recession, and a dysfunctional labor market and increase in transportation costs, all wreaked havoc on Puerto Rico’s economy.
At the same time, unbridled government spending and lack of fiscal controls led to rapid build-up of island’s debt. Starting in 2013, the risk premia on Puerto Rican bonds increased rapidly, reflecting a significantly diminished confidence in Puerto Rico’s ability to service its debt. Since 2016, the territory has been effectively shut out of the bond market, meaning that its government cannot borrow to fund its expenditure.
While granting statehood would allow Puerto Rico access to Chapter 9 bankruptcy and the ability to restructure its debt, Congress can allow access to Chapter 9 bankruptcy without declaring it a state, which was the case before 1984. Furthermore, if Puerto Rico were to become a state, its tax burden would increase: Currently, Puerto Ricans are exempt from paying federal taxes, which would no longer be the case.
Given that the reasons behind Puerto Rico’s crisis are economic, rather than political, it is unlikely that statehood will be a panacea for its economic woes. While Puerto Rico’s admission as the 51st state may placate the pro-statehood factions of Puerto Rico, it will do little to improve its competitiveness relative to its Caribbean rivals and its ability to bring investors back to the island. Statehood will not fix its dysfunctional labor market and reduce its minimum wage, which is equal to 77 percent of Puerto Rico’s per capita income, compared to 28 percent on the mainland United States.
Because the island is not generating enough revenue to provide public services and repay its debt, even big spending cuts and tax increases will not fix that problem, nor will statehood. Congress will inevitably need to step in to provide debt relief, and it is imperative that key stakeholders—including Governor Roselló, the Financial Control Board, and the Congressional Task Force on Puerto Rico—work together to reform the island’s finances and ensure its future growth.
Over the longer term, Puerto Rico and Congress need to focus on structural reforms, notably in the context of developing and implementing to a long-term fiscal plan. The creation of the aforementioned Financial Control Board last summer, with the authority to review the island’s financial plans, is a good step in that direction.
Additionally, Congress should also eliminate the 95-year old Jones Act, which mandates that cargo between Puerto Rico and the mainland must travel on expensive U.S. ships and increases transportation costs. Puerto Rico needs to improve its tourism sector, which has fallen behind its Caribbean rivals—particularly Cuba and the Dominican Republic—in the last decade.
In a future plebiscite, Puerto Ricans can decide if they would like a continuation of the island’s status as a U.S. territory, statehood, or independence. Congress, of course, has the final say over the island’s political status. However, as the Congressional Task Force recommends, Congress should regard the result of this plebiscite with care and due seriousness. But for now, Puerto Rico and Congress must focus on ending the economic crisis that inflicts 3.4 million American citizens in Puerto Rico. The key to doing so is not granting statehood, but restoring economic growth.