A New Economic Plan For Puerto Rico

Puerto Rico has had a fairly simple economic plan for decades. The plan is based on preferential tax treatment for U.S. based and foreign corporations, and some fear that if Puerto Rico gives up its territorial status, this perceived economic advantage will also be lost.

The theory behind this strategy is straightforward: by offering very low tax rates for corporations, Puerto Rico can lure U.S. corporations its shores. These corporations, it is thought, will then provide jobs and spend money in Puerto Rico, boosting the island’s economy.

How is that working out for Puerto Rico?

  • The economy has declined for all but two of the past nine years, while neighboring Caribbean nations saw increases.
  • Puerto Rico’s labor participation rate, the percentage of people of working age who are employed, is 20% lower than that of the rest of the U.S.
  • Puerto Rico’s debt is equal to 95.7% of the gross domestic product of the island.
  • The per capita income of Puerto Rico is $18,080, lower than Cuba as well as all 50 states.
  • The per capita income fell by $1,000 between 2004 and 2013, while even the poorest states saw a rise.

Clearly, things are not going well for Puerto Rico economically.

Robert Shapiro,chair of NDN’s Global Initiative, has an alternative to suggest. In a new paper, Dr. Shapiro compares Puerto Rico to Ireland. Just as Ireland has been able to position itself as a low-cost option for foreign companies hoping to access the lucrative UK market, Puerto Rico can offer foreign investors an affordable access point for the US market.

“Ireland,” Shapiro points out, “transformed itself over one generation from the poorest country in the E.U. to one of its most prosperous members.”

Puerto Rico has some advantages already: a skilled, low cost workforce, easy travel and trade to and from the mainland US, and a bilingual population. With both Spanish and English already in place, Puerto Rico can attract both Latin American companies used to trading in Spanish and European and Asian companies used to trading in English.

Shapiro emphasizes that Ireland’s transformation wasn’t just a marketing push. By focusing on very strategic initiatives for education, finance, and business-friendly infrastructure, Ireland was able to become a very welcoming environment for businesses. Puerto Rico would need to do the same.

Puerto Rico has weaknesses in its infrastructure, particularly in the area of energy costs and transport (logistics) which make it less attractive for businesses. Rethinking government regulations and tax policies could also make a difference, Shapiro suggests.

Puerto Rico’s “long reliance on U.S. tax breaks for American corporations operating there to spur growth and modernization has failed,” Shapiro concludes.  “Like Ireland and its relationship to the E.U., Puerto Rico can offer a low-cost platform for foreign multinationals to engage in the U.S. market.  The key to this new approach lies in the deliberate and sometimes politically difficult promotion of the economic and political conditions that attract large volumes of foreign direct investment.”

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