An inclusive institutional framework allows and promotes the participation of people in economic activities that make the best use of their capabilities and talents and enables them to make the decisions they want (Acemoglu et al., 2012). This is the way in which individual freedom, free enterprise and individual responsibility are upheld (Ginn, 2021); conversely, if institutions are extractive, they take income and wealth away from one subset of society to benefit another (Acemoglu et al., 2012). When this happens, people may fail to achieve the expected upward mobility, remain at low-income levels, or be forced to move to places where they have better opportunities to prosper.
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When government institutions are inefficient and extractive, governments intervene disproportionately in the economy, over-tax and over-regulate the market (to name a few harms); this leads to market failures and restricts people's economic freedom and ability to prosper. When the market is over-regulated, it loses one of its greatest virtues, the ability to self-regulate; and this vicious circle can lead countries to economic bankruptcy.
Studies such as Economic Freedom of North America provide evidence of how higher levels of economic freedom correlate with positive outcomes, such as economic growth, lower unemployment rates and less poverty. This study found that there is a positive causal relationship between economic freedom and per capita income, economic growth, longer life expectancy, lower infant mortality rate, development of democratic institutions, and other desirable economic and social outcomes (Stansel et al., 2022).
According to Perry (2021), the population of states with less economic freedom decreased while the population of states with more economic freedom increased in recent years. To analyze the differences between states whose population has declined in comparison and those whose population has increased. Perry considered issues such as the governing political party, the business environment, personal and corporate tax burdens, state fiscal health, housing and electricity costs, economic outlook and performance, and labor market dynamism. Their analysis shows that people are migrating from high-tax, entrepreneur-hostile and economically stagnant states to low-tax, entrepreneur-friendly and fiscally healthy states.
Florida is among the states with the highest inward migration due to its low tax burden, low government debt, higher private sector employment than government, and fiscal decentralization (Blankley, 2021). Another of the states with higher inward migration is Texas, about which Ginn (2021) posits that its limited governance framework evidence how important institutions are to prosperity. According to his study, Texas' inclusive institutional framework incentivizes economic growth, with relatively low tax and spending burdens, no individual income taxes, and sensible regulations.
In Puerto Rico, where the efficiency of government institutions are limited and the government is in a fiscal crisis and over-regulates the market, the ability of constituents to prosper is hampered. As such, "poverty and a myriad of social needs persist, causing not only socioeconomic crises, but a repetitive pattern of deprivation and austerity" (Harvey, 2014, cited in Colón, 2019, p. 9). Added to this is the process of deindustrialization that has occurred on the Island, which has caused a shortage of jobs in various sectors and has collapsed public finances, thus generating massive emigration (Catalá Oliveras, 2016). As a result of all this, the economic engines to get out of the economic debacle are increasingly fewer and have less strength.
In the period from 2015 to 2019, Puerto Rico had an average annual out-migration of 72,000 people, a figure much higher than that observed during the pandemic of Covid-19 (which was 22,290). The three states where Puerto Ricans moved the most were Florida (30%), Texas (9%) and Pennsylvania (8%). If we use Ginn's (2021) framework of analysis to compare Puerto Rico with the three states where most Puerto Ricans migrated to, we can note that these three states provide significantly more favorable individual and business tax conditions than Puerto Rico; this, in turn, leads to higher unemployment, greater economic inequality, more poverty, and higher net migration than these states (Table 1).
Table 1
|
Measure |
USA |
Texas |
Florida |
Pennsylvania |
Puerto Rico |
|
Leading indicators |
|||||
|
North American Economic Freedom (2021) |
9no |
2do |
27mo |
69no (World) |
|
|
State Business Tax Climate Index (2021) |
-- |
11vo |
4to |
27mo |
51ro |
|
Tasa impositiva corporativa estatal máxima (2021) |
-- |
0% |
5.5% |
9.99% |
|
|
Top state corporate tax rate (2019-21) |
58.40% |
59.80% |
55.20% |
58.20% |
|
|
Average Labor Participation Rate (2019-21) |
77.60% |
77.10% |
78% |
78.20% |
|
|
Lagging indicators |
|||||
|
Unemployment rate (until february 2022) |
3.8% |
4.7% |
3.3% |
5.1% |
6.8% |
|
Economic inequality rate (2022) (GINI coefficient) |
48% |
48.03% |
49% |
46.8% |
47% (2019) |
|
Poverty rate (2022) |
12.2% |
13.5% |
12.9% |
12% |
44.1% (2019) |
|
Net migration as a percentage of population (2015-2019 average) |
1.68% |
0.33% |
0.6% |
0% |
-2.10% |
Legend: green indicates most favorable, red indicates least favorable.
If we use elements of Perry's (2021) framework of analysis, we see a similar situation and indicators that influenced the 10 states with the highest in-migration and the 10 states with the highest out-migration in the United States compared to Puerto Rico can be seen (Table 2). Once again, Puerto Rico's rates of unemployment, economic inequality, poverty and net out-migration are much higher than those of the 10 states with the highest out-migration. This is evidence of some of the reasons why Puerto Ricans have moved to states where there are greater economic freedoms and opportunities to prosper.
Table 2
|
Net migration as a percentage of population (2015-2019 average) |
10 highest inbound average |
Puerto Rico |
10 highest outbound average |
|
Leading indicators |
|||
|
Annual employment growth through November (2021) |
4.00% |
4.70% |
4.50% |
|
Right to work (2021) |
6 de 10 |
No |
0 de10 |
|
State/local tax burden as a percent of income (2021) |
7.70% |
16.30% |
9.60% |
|
Maximum state individual income tax rate (2021) |
6.50% |
33.00% |
7.90% |
|
Maximum state corporate income tax rate (2021) |
5.50% |
37.50% |
7.90% |
|
Cost of electricity (cents per kilowatt-hour) (2021) |
9.871 |
27.19 |
17.287 |
|
Median home price (2021) |
$364,235 |
$429,627 |
|
|
Lagging indicators |
|||
|
Unemployment rate (2020) |
7.7% |
9.20% |
9.10% |
|
Economic inequality rate (2019) (GINI coefficient) |
46% |
55% |
48% |
|
Poverty rate (2020) |
11.24% |
10.85% |
|
|
Net migration as a percentage of population (2015-2019 average) |
0.80% |
-2.10% |
-0.80% |
Legend: green indicates most favorable, red indicates least favorable.
Notes:
- In Puerto Rico, federal individual and corporate taxes are not taken into consideration, which does not make it feasible to make an accurate comparison of tax burdens vis-à-vis the states.
- According to the Tax Foundation, Puerto Rico's top corporate tax rate is the highest in the world.
References
Acemoglu, D., Robinson, J. A., & Woren, D. (2012). Why nations fail: The origins of power, prosperity and poverty. Vol. 4. Crown Publishers.
Blankley, B. (2021, December 7). CATO: Florida leads U.S. as most economically free state. https://www.thecentersquare.com/florida/cato-florida-leads-u-s-as-most-economically-free-state/article_e7907142-570c-11ec-8b1e-23ac5757ae3c.html
Catalá Oliveras, F. (2016) Advertencias desoídas: entre el espacio financiero y la economía real. Revista Jurídica UPR, 85(3).
Colón, D. (2019). Instituciones extractivas e improductivas: el caso de Puerto Rico.
Ginn, V. (2021, December 10). Institutions matter: Reasons people move from blue to red states. https://uprrp.libguides.com/educacion/estiloAPA/tipos-de-documento/paginas-web
Perry, J. M. (2021, December 29). Top 10 inbound vs. top 10 outbound US states in 2021: How do they compare on a variety of economic, tax, business climate, and political measures? [Entrada de blog]. https://www.aei.org/blog/carpe-diem/
Stansel, D., Torra, J., McMahon F. & Carrión-Tavárez, Á. (2022). Economic Freedom of North America 2022. Fraser Institute. https://doi.org/10.53095/88975009
