By Mike Andrew
On August 3 Puerto Rico defaulted on an installment of its $72 billion debt. The Commonwealth paid a mere $628,000 toward a $58 million bill due at the beginning of August to creditors of its Public Finance Corporation (PFC ).
The default was expected, and it’s easily understandable when you consider the fact that Puerto Rico’s GDP is only $69 billion.
The interesting detail that was not widely reported is that the island did pay the regular installments on all its debt obligations other than what was owed to PFC.
In fact, Puerto Rico’s government made a strategic decision not to pay PFC because its investors were merely credit unions representing ordinary Puerto Rican citizens. The debts that were paid were ones owed to Wall Street hedge funds, which could have made much more trouble for the Puerto Rican government.
According to Forbes magazine, at least 36 US hedge funds and some big mutual funds have invested in Puerto Rican bonds and now own 47 percent of the island’s debt.
Debt is only part of the problem for the island. Puerto Rico’s Governor, Alejandro Garcia Padilla, says the island’s whole economy is in a “death spiral.” Only 40 percent of the island’s population is employed or even looking for work. The figure for the US mainland is 60 percent.
Puerto Rico’s population is declining as its people flee to the mainland US. In fact, more Puerto Ricans live on the mainland than on their native island, and the emigration trend is expected to continue for the foreseeable future.
Emigration to the mainland shrinks the island’s tax base, making it harder for the Puerto Rican government to pay its debts or even to keep basic services going. There have been reports from many towns that supplies of drinking water have been interrupted for days at a time.
What went wrong?
According to former IMF chief economist Anne Krueger, the problem is that Puerto Rico is a US commonwealth, and therefore has to comply with US minimum wage laws, while other Caribbean islands do not. US investors who want to open Caribbean resorts, Krueger says, would rather go to the Dominican Republic, where wages are one-fifth of those in Puerto Rico.
Krueger also claims that US public assistance programs make it more desirable for Puerto Ricans to be unemployed than to get a job. According to Krueger, a Puerto Rican household of three that is eligible for food stamps, AFDC, Medicaid, and utility subsidies could receive $1,743 a month, which is more than the median income on the island.
Apart from proving the futility of expecting anything helpful from the IMF, what does Krueger’s analysis show?
Krueger is half right. Puerto Rico’s problems do, in fact, stem from the fact that it’s a US commonwealth – although the more accurate word would be “colony.” That means that the island is wide open to US corporations and is subject to their needs, including trade restrictions which prevent the island from trying to attract competing nonUS investors.
Puerto Rico’s main problem is that it’s surrounded by other island countries that are also economic colonies of the United States but are not protected by US social legislation. Puerto Rico is poor when compared with US states, but when compared to other Caribbean countries it has the highest per capita GDP in the region.
That sounds good, but in a neocolonial system it’s not. What it means is that US resort developers can go to the Dominican Republic and pay $1.45 per hour for hotel staff – one-fifth of the $7.25 US minimum wage that they have to pay Puerto Ricans.
And because they can do so, they do. That’s the reason employment on the island is so low compared to the mainland US.
While Krueger thinks US safety-net programs encourage Puerto Ricans to avoid gainful employment – the same argument Republicans in the US make, by the way – islanders pay US income taxes and are entitled to get the benefits they’ve paid for.
If a Puerto Rican family on public assistance earns more than the median income on the island, as Krueger claims, it must mean that many Puerto Ricans who are eligible for assistance are not getting it.
Puerto Rico has been called “America’s Greece,” and like Greece, the island is trapped in a destructive system not of its own making and which it can’t escape unless it changes the terms of its relationship with the US.