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A Century of... Not Much for Puerto Rico

posted by Mark Weidemaier

This is a joint post by Mitu Gulati and Mark Weidemaier   

March 2 was the hundredth anniversary of the Jones Act, which gave United States citizenship to many inhabitants of Puerto Rico. An act of benevolence? Hardly. The U.S. needed soldiers. The infamous insular cases ensured that, while tens of thousands from Puerto Rico could fight in the U.S. military, they would remain "foreign in a domestic sense." 

Today, Puerto Rico and its municipalities are mired in debt--over $100 billion counting pension obligations. A bizarre exception to the bankruptcy laws prevented it from restructuring much of this debt, although no one seems to know exactly why the exception exists (aside, perhaps, from the fact that Puerto Rico has no representation in Congress). 

So what will happen? Puerto Rico tried to put its own municipal bankruptcy regime in place, but the U.S. Supreme Court rejected this attempt. Congress has now put in place a control board, which is prescribing austerity while considering whether and how to restructure Puerto Rico's byzantine stock of debt. There is Puerto Rican representation on the board, and its members include fine and thoughtful people. But such oversight does not remotely resemble democratic control.

Puerto Rico and its people have gotten a raw deal from the United States, and the legal history underlying this "caste system" is an ugly one. Others, including eminent federal judges, have written extensively on the topic. Perhaps representation in Congress for Puerto Rico will arrive some day, although the current President and Congress hardly seem like the ones to remedy the situation. For now, it may be that the best that can be hoped for is a rational resolution to Puerto Rico's debt crisis. If you have not seen it yet, John Oliver's terrific explication remains the best introduction to the debt debacle. It is well worth watching, and the best part is at the end.   


It is interesting to see austerity prescribed once again without authorities insisting on debt relief before implementation of structural changes. If there is one lesson to be learned from the Greek debt debacle is that more austerity is not a one-size-fits-all remedy for crisis; on the contrary, it may worsen the financial health of the country/territory. Prescribing austerity for Puerto Rico without assessing the dynamics behind the debt crisis seems to be a recipe for disaster. It would be mirroring the approach that European official creditors are taking against Greece, which even the IMF has criticized. Debt relief and structural measures have to be complementary if the goal is long term debt sustainability as opposed to moral grandstanding.

The way the US is handling PR's crisis raises twin concerns. One relates to what this blog post largely describes, which is a lack of recognition of any democratic legitimacy of PR. In a way, the US is treating PR as a colony. Concerns about the democratic legitimacy of the US approach could however be overlooked if the economic proposals put in place by the control Board were economically sound and could guarantee success in ensuring economic growth, and thus debt sustainability. This does not seem to be the case.

The recent PROMESA Board proposal (found here: https://juntasupervision.pr.gov/wp-content/uploads/wpfd/50/587fea840f998.pdf) outlines the economic reforms recently imposed on PR. The reforms likely ensure the prolongation of the crisis and the suffering of PR's population. Stunningly, the Board itself recognizes that the proposals it sets forth will lead to a GNP decreases of 16.2 % for 2018. This is massive, and is followed by a projected 1.2 % drop in 2019. No doubt some of the tax/spending reforms should be expected, as a means of rebalancing public finances. But as witnessed in the Greek crisis, they cannot be implemented at the expense of growth. There is no serious proposal for sustained economic growth, especially if PR is facing a demand-side problem rather than a supply-side problem (something that prominent economists have argued).

Austerity by itself rarely leads to efficiency or increased productivity and usually leads to a downward spiral of debt un-sustainability. In some ways, PR is in worse shape than Greece. At least, austerity in Greece was imposed as a condition for receiving fresh credit by EU's official creditors and the IMF, that could help rebalance the economy (in return IMF new loans enjoyed senior status). PR does not currently have similar access to fresh credit, and is less able to implement sound macroeconomic policies that ensure sustainable growth in the short and long term.

The situation is similar to Greece in that Puerto Rico does not have a power to control the currency, and no fiscal support from other area. The difference (from Greece situation in 2010) is that it is clearly not a liquidity problem, un-sustainablility of its debt is obvious and there is less contagion risk. Its economic downturn is not caused by the financial difficulty but due to the abolishment of the tax benefits given to the companies that had advanced to that area until 2006. Since then, jobs and population in that area started decreasing and previous investment turned out to be over-investment constituting excessive burden. It seems impossible to get back or maintain the economic growth that the are enjoyed before the tax benefit was abolished. Compelling a balanced contraction could be reasonable, but significant loss cut would be inevitable anyway.

Maybe it just hit me, a bit too late possibly, but all this ever so fascinating sovereign debt restructuring and debt default dramas always involve very badly-performing and badly-behaving borrowers. Puerto Rico, Greece, Argentina, Venezuela next...I mean these are among the very worstly managed economies in the entire universe, incredibly unproductive super business-unfriendly and populated by millions who believe themselves entitled to craddle-to-grave state handouts. And yet so many side with them and against the lenders. Why? Is it "mediocrity fetish"? Is it "radical chicness" on steroids? It is plainly so obvious that this whole odious debt and debt forgiveness movement is very-thinly-disguised hatred towards the parts of the world that work (including abiding by the rule of law and contractual obligations).
Puerto Rico = Greece = Argentina = Venezuela = untold inefficiency and waste = disaster and default.
Oldest story in the book.

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