Time to Rebound From Puerto Rico’s Lost Decade
This edition’s Front-Page cover story marks the first installment in a series that outlines the unrelenting decline of Puerto Rico’s economy, which commenced in 2006 and has yet to subside. The death knell was actually struck in 1996 when Section 936 of the Internal Revenue Code was targeted for phase-out by the Republican majority in the U.S. Congress because the tax break had the stench of corporate welfare and failed to create jobs on par with the tax decrees that were being awarded.
Sure enough, 10 years on, Puerto Rico’s economy began a free fall prompted by a confluence of events—the end of Section 936 without a suitable replacement. Puerto Rico never got Section 933-A wage credits in the tax break’s stead, leaving the island’s job-creation engine throttled. Along with that came the flight of massive capital—more than 40% of the capital in Puerto Rico’s banks were 936 funds. Then came the vortex spun by the closing of Puerto Rico’s government tied to a budget impasse between the Executive and Legislative branches and a fracas over the implementation of a sales & use tax. The 2006 closing of the government sent shock waves through Puerto Rico’s economy and proved to be the catalyst for a severe economic contraction that continues to this day.
All told, Puerto Rico’s economy has shrunk by some 16% in the past decade, more than 290,000 jobs have been lost and 12,000 businesses have shuttered. There was a time when the spiral of decline was masked by a government that became a refuge for jobs that were being lost in the private sector, with some 325,000 reported jobs in government in 2003. The charade is over.
Fast forward to 2016. Net jobs lost in 2015 amounted to 48,000 island wide, prompting the continued outmigration of Puerto Rico’s residents—many young adults with families—to the United States. The statistics are disturbing—the net population decline in 2015 amounted to some 64,000 taxpayers packing their bags to seek work elsewhere. This is pressure that a paper-thin tax base cannot withstand.
If the outmigration continues at that pace, economists project the island’s population could be around 2.8 million in 2030, far below the 3.45 million of today. The numbers tell a devastating story. Manufacturing employment is down to 74,000 from a peak of 165,000 in 1996. Investment in construction—one of the island’s economic pillars during the 1990s—is down to $4.3 billion in 2015 from a high of $6.6 billion in 2004. Home foreclosures reached a record high of 4,000 in 2015. Aside from that Mrs. Lincoln, how did you like the play?
More than just a devastating indictment of failed policies, Caribbean Business’ Lost Decade series will chronicle socioeconomic trends over the past decade. The idea is to outline exactly where the island stands on several fronts as a precursor to a plan for economic recovery.
The truth is that there is no credible plan for job creation in Puerto Rico anywhere to be found. It is time for the government to put a premium on job creation tied to economic incentive packages that are very attractive to generate capital and investment, but it must be tied to huge net job creation. Without economic development—there is no brand of orderly debt relief that can put Puerto Rico on a path to sustainable growth.