Puerto Rico's Economy Has Not Reach Bottom Yet

The excess of federal aid that has come to the Island -associated with the recent natural calamities- seems to have clouded the understanding of the true state of the Puerto Rican economy. The federal money has created a kind of hypnosis that has paralyzed us when it comes to the economic and fiscal reforms needed to achieve a healthy and dynamic economy.

As it is, we all seem to be enjoying the state of economic comfort generated by the $34 billion that came to Puerto Rico between 2017 and 2022, after Hurricane Maria (2017) and then the COVID-19 pandemic (2020-2022). So brutal has been the effect of this aid, that the government itself has used funds from the American Recovery Act (ARPA) to pay bonuses and finance employer parties.

Prospectively, there is also little enthusiasm for reform or a new development program, because "economic growth" must miraculously occur thanks to the $40 billion that has yet to arrive and that would go to finance the reconstruction. In short, we have federalized the local economy, to the extent that money not produced organically on the Island will move the Puerto Rican economy.

Without structural changes, the economy heads for a new abyss

In 2026, it will be thirty years since the end of Section 936 (1996) and since then, we have not been able to devise a new development program like the one created in 1948 known as "Operation Let's Get to Work". The end of federal tax incentives represented a profound structural change in the Puerto Rican economy and the massive closure of industrial establishments, as well as the loss of over 100,000 jobs in that sector. As a result of this change, manufacturing consolidated into a few capital-intensive operations, but with a smaller workforce, essentially in the biotechnology and medical device industries. In these industries we still preserve some global competitiveness and local incentives have allowed us to retain them in the short term.

High government indebtedness and increased taxes at a time of economic contraction exacerbated the economic crisis and accelerated the government's bankruptcy between 2014 and 2015, which gave way to the passage of the federal Promesa Act in 2016.

Federal funds have stopped the economy from spiraling downward

But when it was thought that we would see a period of deep budget cuts because of the fiscal crisis, the tragedy represented by the natural calamities, and COVID-19, on the other hand, gave access to $34 billion in direct aid to citizens, businesses and the government. These funds have represented the financial rescue that the local government begged from the federal Treasury between 2014 and 2015, while the Commonwealth's finances dried up.

From a macroeconomic point of view, these funds temporarily halted the free fall of the local economy due to the lack of a development strategy and the absence of structural reforms. It should be added that Promesa saved the government from paying its financial obligations and created a legal framework to restructure the public debt of over $70 billion.

These possibilities could provoke a dangerous second migration wave like the one experienced between 2010 and 2018, when we lost nearly 600,000 people, according to Gustavo Velez. (The Associated Press)

Prior to the bankruptcy, the government and its public corporations paid some $4 billion in principal and interest to bondholders. Even so, the various governments are resisting the implementation of reforms demanded by the JSF to avoid a second insolvency of the commonwealth.

Between 2018 and 2022, the economy has experienced an unusual dynamism that responds to the injection of external funds and it is expected that, if reconstruction funds can be optimized, the economy will remain in positive territory for two or three more years. However, what will happen after the end of the reconstruction process? or what will happen if these funds do not flow at the necessary speed? Under these possible scenarios, the economy will continue in free fall, as there is no economic development strategy in place.

These possibilities could provoke a dangerous second wave of migration like the one experienced between 2010 and 2018, when we lost nearly 600,000 people. We are in time to devise an alternate route and leave everything to the magical effect of federal funds.

This article was published originally in Spanish by El Nuevo Dia.

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