Americas

Puerto Rico: The Worst-Performing Economy in 2018


Hurricane Maria devastated Puerto Rico earlier this year, leaving fifty people dead, destroying thousands of homes, and putting 5,000 small companies out of businesses. To alleviate this crisis and rebuild Puerto Rico’s economy, Congress and the Trump and Roselló administrations must adopt a strong economic plan and commit to substantial economic reforms.

Image courtesy of Staff Sgt Michelle Y. Alvarez-Rea, U.S. Air National Guard, © 2017.

The hurricane comes on the backdrop of the island’s worst economic performance in recent history. Since 2006, Puerto Rico has experienced a recession, which reduced the size of its economy by 10 percent. Amidst the crisis, roughly 10 percent of Puerto Ricans migrated to the mainland, further jeopardizing the island’s chance for economic recovery.

Following Hurricane Maria, the island’s economic prospects look bleaker than ever before. 84,000 Puerto Ricans have left the island in the last 42 days, and an estimated 2,000 people are leaving the island every day. According to the Economist Intelligence Unit, the island’s economy is projected to contract by 8 percent in 2018, which would constitute the worst economic performance in the world, below countries like Venezuela and Swaziland.

If policy leaders are not able to put a swift end to Puerto Rico’s economic crisis, it is all too possible that the island will find itself in a downward economic spiral—the last thing that its already devastated economy needs. To prevent this downward trend, policy makers must commit to serious economic reforms—especially in the island’s labor and financial markets.

First, Congress and Trump and Roselló administrations need to work together to develop a comprehensive assessment of the island’s infrastructure loss. They must also formulate an economic strategy to restore the island’s infrastructure, especially in electricity. This is especially the case since, eight weeks after the hurricane, more than half of the island still remains without access to electricity.

In addition to addressing the power outage, Congress must exempt Puerto Rico from the Jones Act, which mandates that all shipments to and from Puerto Rico be carried on U.S.-flagged vessels. Because U.S.-flagged vessels are more expensive than internationally competitive rates, food prices in Puerto Rico are almost twice as much as those in the mainland, and the overall cost of living is 13 percent higher—despite Puerto Ricans earning significantly lower incomes than Americans living in the other states.

In order to accelerate Puerto Rico’s recovery, Congress waived the Jones Act for ten days following Hurricane Maria. However, to improve Puerto Rico’s competitiveness, reduce living costs for ordinary Puerto Ricans, and attract more tourists to the island, Congress must exempt the island from the Jones Act permanently.

Congress should also introduce much-needed labor market reforms in order to improve the island’s economic competitiveness. Currently, Puerto Rico’s minimum wage—as a percentage of its median wage—is amongst the highest in the world. The high minimum wage, especially compared to that of Cuba and El Salvador, reduces the incentive for investing in Puerto Rico. For instance, the federally mandated minimum wage, $7.25, translates to around $290 a week, compared to only $4 per week in Cuba.

Along with Puerto Rico’s high energy costs and burdensome labor market regulations, the high minimum wage discourages investments, especially in the tourism industry. To encourage more investments and create more jobs, Congress must consider exempting Puerto Rico from the federal minimum wage and relax its rigid labor market regulations.

Apart from labor market reforms, economic policy makers should also examine and enact other measures to make Puerto Rico more attractive to investors. For instance, allowing U.S. companies tax breaks for investing in Puerto Rico would go a long way in making Puerto Rico a more attractive place for investment.  In addition, Puerto Rico’s creditors should also recognize that the island has no way of paying roughly $74 billion in liabilities under its current terms, especially after Hurricane Maria devastated its economy. Without a significant write down of its debt, it is unlikely that Puerto Rico can significantly improve its economy.

In light of the humanitarian crisis that Hurricane Maria has caused, economy policy makers have no time to waste. It is now time for comprehensive reforms aimed at restoring Puerto Rico’s energy infrastructure, improving its competitiveness, and strengthening its economy. If Congress and the Trump and Roselló administrations act quickly, they might still be able to save Puerto Rico from a major economic disaster in 2018.

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  • Jose Cabrera

    Unfortunately Puerto Rico was already subsumed in an 11-year economic downward spiral and a worsening fiscal debacle. Hurricane Maria exponentialy aggravated and accelerated these maladies. Puerto Rico, which lacks any self-sustaining economic base, is dependent on Congress and the federal government to reconstruct it through a Puerto Rican Marshall Plan. In Puerto Rico, truly, these are times that try our souls.