Puerto Rico devastated from economic inequality, corruptions, hurricanes and covid

What is the island’s economic outlook? Puerto Rico continues to be ravaged by a sustained recession. Annual economic growth fell by roughly 12.5 percent overall between 2004 and 2020, while Puerto Rico’s population shrunk by more than 16 percent. It has also struggled under a large public debt in recent years, totaling about $70 billion—or 68 percent of gross domestic product (GDP)—in 2020. Puerto Rico’s downward spiral has been compounded by natural disasters, government mismanagement and corruption, and the COVID-19 pandemic. Unable to borrow on global markets, Puerto Rico was in economic limbo for years after turning over its budget to an independent control board appointed by Washington as part of a plan to restructure its debts. Making matters worse, in 2019, U.S. authorities arrested former high-level officials in a corruption scandal, leading to the resignation of Governor Ricardo Rosselló. The island’s average household income is about one-third of the U.S. average, and its poverty rate is more than twice that of the poorest state, Mississippi. Meanwhile, the territory’s unemployment rate has stayed at almost twice the national average for the past decade, at times reaching double digits. However, it fell to about 8 percent in 2021 and has continued to drop. What has driven the crisis? Experts say the island’s economic crisis is rooted in [PDF] twentieth-century legislation that encouraged Puerto Rico’s reliance on debt to fill federal funding gaps. It did this by giving bond investors higher returns and loosening borrowing limits. Since 1917, lenders to Puerto Rico have been exempt from local, state, and federal taxes—the so-called triple tax exemption—effectively boosting their profits and making the island a more attractive investment. The territory’s constitution also allows Puerto Rico to balance its budget with its debt, among other provisions that facilitate borrowing. The debt problem accelerated after 1996, when the U.S. government began phasing out Internal Revenue Code Section 936. This provision had allowed American businesses to operate tax-free in Puerto Rico, which critics viewed as a windfall for wealthy corporations. Section 936’s repeal triggered a deterioration of Puerto Rico’s manufacturing sector, and the territorial government increasingly turned to debt to cover its spending. The 2008 global financial crisis hit Puerto Rico especially hard, with the recession further lowering tax revenues, souring an early-2000s construction boom, and giving investors pause. The territorial government implemented austerity measures, including layoffs of public workers, that sent unemployment soaring. It also crafted dubious deals to balance its budget, including letting government agencies borrow from one another to pay back bonds. On top of that, experts say, much of this money was poorly spent. Leaders failed to parlay the billions of dollars they borrowed into strong institutions, a deficit laid bare by the natural disasters that have devastated Puerto Rico’s underfunded and poorly maintained infrastructure. Hurricane Maria brought ruin to the island in 2017, causing about three thousand deaths [PDF], knocking out the electrical power grid, and costing tens of billions of dollars. An earthquake at the start of 2020, the island’s strongest in a century, also created a power blackout. Months later, the pandemic exposed the territory’s disjointed and inefficient health system, which critics say has impeded care for COVID-19 patients. In September 2022, Hurricane Fiona triggered severe flooding and mudslides and knocked out power to more than one million homes and businesses. The combination of government mismanagement and unrelenting natural disasters has driven an exodus from the territory, further depressing economic activity, crippling schools and other institutions, and leaving fewer taxpayers to shoulder the debt. More than 130,000 residents fled to the mainland after Hurricane Maria alone. Today, more people of Puerto Rican descent live on the mainland than on the island, and a 2019 study projected that the territory’s population would fall by another 8 percent [PDF] by 2024. How has it dealt with the debt crisis? Since it began defaulting on major debt obligations in 2016, Puerto Rico has struggled with how to pay its creditors—many of whom hold bonds that are protected by Puerto Rico’s constitution—while maintaining basic public services and avoiding an even deeper economic collapse. It took more than five years of negotiations for a federally appointed oversight board to approve a restructuring plan, and controversy persists. As a territory, Puerto Rico’s options were limited from the beginning. It could not receive assistance from the International Monetary Fund, like insolvent countries such as Greece have. Neither could it file for Chapter 9 bankruptcy, which municipalities such as Detroit have used to receive legal protection against creditor claims while restructuring their payments. Then there is the sheer size of the debt: Puerto Rico’s is by far the biggest government bankruptcy in U.S. history. The island’s legislature tried to design its own restructuring process [PDF], which would have allowed public services to continue uninterrupted while it negotiated lower debt payments, but the U.S. Supreme Court rejected the law. Congress and President Barack Obama’s administration drew up an alternative plan, the 2016 Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Most notably, PROMESA created a seven-member financial oversight board appointed by the White House that was granted full control of Puerto Rico’s finances. It also created a debt restructuring process similar to Chapter 9 that governed negotiations with creditors to reduce debt payments. Those negotiations were beset by controversy, as it became clear that all involved—bondholders, Puerto Rican pension funds, and other public services—faced steep losses. Several versions of a sweeping plan to cut the island’s debt were floated, but creditors promised legal challenges, and efforts were paused due to the COVID-19 pandemic. In January 2022, a federal judge approved a final plan between the PROMESA board and Puerto Rico’s government, paving the way for the island to escape bankruptcy and resume making payments to creditors. The deal cuts $33 billion in total debt obligations down to $7.4 billion, lowering Puerto Rico’s annual debt payments from nearly $4 billion to just over $1 billion. Supporters say the deal puts the island on a sustainable path while avoiding any cuts to public pensions, which had been a major point of contention. However, critics are wary of the resolution. Some argue that cutting debt without requiring deeper structural reforms means problems are likely to repeat. Others worry that maintaining pension obligations—which amount to $2.3 billion yearly—will prove unsustainable. Advocacy groups such as the Center for Popular Democracy say the deal will result in more economic austerity, including cuts to health care and education. They echo many critics who oppose the PROMESA process on the grounds that it undermines the territory’s already weak self-rule. PROMESA’s oversight board will remain in place until Puerto Rico meets several financial milestones—three more years at least. Meanwhile, experts have suggested that Puerto Rico’s restructuring experience could be a test case for heavily indebted U.S. states such as Illinois and New Jersey, which are also constitutionally ineligible for bankruptcy protections.