Puerto Rico’s economy starts 2014 significantly worse off than it began 2013 — continuing many years of deterioration.
2014 commences during the eighth year of an economy that has shrunk in all but one of those years, although, overall, the “Commonwealth” economy has underperformed for four decades: Puerto Ricans on average are poorer than their fellow U.S. citizens in the States than they were more than a third of a century ago.
A year ago, “Commonwealth” party leaders took control of the governorship and both houses of the Legislative Assembly from statehood party members. Coincidentally or not, economic indicators have gotten worse since the extremely close November 2012 elections — despite Governor Alejandro Garcia Padilla’s multiple claims of turnarounds in the economy (that generally were contradicted by facts shortly after being made).
One of these claims came in November when it was announced that the Government Development Bank’s Economic Activity Index rose 1.1% in September and .6% in October — although October’s increase was less than September’s. The Index was only .047% higher in November — indicating the downturn that the economy had demonstrated since November 2012.
More significantly, the November index was 5.7% lower than economic activity a year before — and the indexes for each month of 2013 were worse than the same month of the previous year. The indexes from July on were at least 5% less than the economic activity measurements for the same months in 2012.
One of the November economic indicators was particularly ominous: cement sales were 15.8% below sales during the same month in 2012 — continuing a trend for the year. With cement a main construction material for buildings in Puerto Rico, the substantial decrease indicated a critical reduction in construction, a major factor in the economy.
Puerto Rico’s Planning Board projects that the year ending June 30th, Puerto Rico Fiscal Year 2014, will see an overall .8% smaller economy than the previous year. Its calculation of economic shrinkage in Fiscal Year 2013 was only .3%, indicating that the rate of decrease is accelerating.
Comparing Puerto Rico to countries, the Economist magazine has projected that the territory’s Gross Domestic Product will fall more in 2014 than all but two nations around the world.
At about 897,700, there were approximately 40,800 fewer non-farm jobs in the territory in November 2013 than when Luis Fortuno lost re-election as Governor in November 2012 – 4.3% less jobs.
Most noteworthy, this includes some 26,000 less non-farm jobs than when Garcia took office. A key factor in Garcia’s very narrow victory was a commitment to increase employment by 50,000 by July of this year.
The Governor often boasts that more than 25,000 jobs have been created since he took office — but he does not note that many more jobs have been lost. As of November, the Commonwealth unemployment rate was 14.7%.
To fulfill his 50,000 more jobs pledge, during the next six months, his commitment needs to be met plus another half again as much. In a respected, independent poll three months ago, most Puerto Ricans had concluded that Garcia would not keep his promise.
Another indicator of Puerto Rico’s economic woes is bankruptcies: As of November, there were 4.75% more in 2013 than there had been during the first 11 months of 2012.
Housing is a major driving force in the economy, affecting many other sectors. Estimates of sales in 2013 were only 3,000. This is down from approximately 3,500 in 2012.
It is also an astounding decrease compared with the 13,000 sales in 2006, the first year of what has been a recession in all but 13 months since then.
The sinking “Commonwealth” economy has made international news in recent months as the value of bonds issued by the Government of Puerto Rico plummeted, particularly in September and has remained at depressed levels.
Commonwealth debt is trading at ‘junk’ prices. It is now pegged at the lowest level of investment grade by all three major national agencies rating the reliability of borrowing payment promises by governments.
Two of the agencies have put Commonwealth bonds on watches for possible drops to ‘junk’ status early this year. A further downgrade would require the Government of Puerto Rico to quickly pay out about $1 billion because of debt terms.
A downgrade would also mean in huge decreases in the value of Puerto Rico’s bonds as many investment funds that cannot own ‘junk’ bonds would be forced to sell.
The territory would also find it extremely difficult to borrow the money it needs to operate its government and to build infrastructure required for economic growth and an improved standard of living.
The shrinking Commonwealth economy is a major factor in the national bond rating agencies evaluations of the Government of Puerto Rico’s ability to pay its debts.
As both a consequence of and a contributor to the poor “Commonwealth” economy, Puerto Rico’s population decreased by just over 1% — 36,359 — between July 2012 and July 2013, according to a U.S. Census Bureau estimate.
The drop continued a nine-year slide in population. Puerto Rico was home to an estimated 110,703 fewer people in July 2013 than it was in July 2010.
With the territory’s death rate not increasing, two factors are responsible for the reduction in population. One is that individual Puerto Ricans are voting for statehood for themselves and their families with airline tickets by moving to the States. There, they enjoy greater economic opportunities and benefits and lower crime rates.
The other reason for the drop in the number of people is a much lower birth rate. About 60,000 people were born in the territory in 2000. Only 42,000 were born in 2010 since a large percentage of the individuals who are moving away for equality in the nation are of the age to become parents — and to work.
Puerto Rico is often misleadingly called “a commonwealth” but “Commonwealth” is actually just a word in the formal name of its insular government and the “Commonwealth” is subject to the Federal government’s broad authority to govern the territories of the U.S.
This authority enables the Federal government to treat territories differently than the States — and one another. Puerto Rico is considered a State for the purposes of most laws, including many that impose costs of doing business and govern the economy.
The territory is treated differently in some major programs for ensuring health care and for impoverished and disabled people. This denies the insular economy many billions of dollars a year.
Puerto Rico is also treated differently than the States in most tax laws. This enables multinational businesses and companies and the wealthy in Puerto Rico to avoid Federal taxation but it also means that low income working Puerto Ricans — most Puerto Ricans and Puerto Rico’s economy — do not benefit from most Federal tax system-based assistance to the tune of many hundreds of millions of dollars annually.
Territory status also means that the Commonwealth cannot have votes in the government that makes many of the most important laws affecting its economy.
Puerto Rico’s “Commonwealth” economy was primarily built on two factors. One was Federal tax subsidies for manufacturers based in the States. The other was being within the Customs territory of the U.S. — which means that there are no duties or quotas on goods made in the territory as there were on products of foreign countries, and some other factors.
The U.S. Government Accountability Office and others found, however, that Puerto Rico’s tax haven status benefited companies much more than Puerto Rico’s economy and was unfair to the States and businesses operating in them. The Federal government ended the tax credits that manufacturers could take on Puerto Rico income, and overall Federal policy is for equal taxation of all income. This policy is in line with international agreements to end tax law loopholes that permit companies to move income to low tax jurisdictions.
Puerto Rico’s trade advantage over foreign countries has also mostly been ended by U.S.-international free trade agreements.