On Wednesday night, October 21, 2015, The Institute for Latin American Studies, The Forum on Migration, The Greater Caribbean Studies Center, and The Center for the Study of Ethnicity and Race, put together a riveting panel at Columbia University to discuss the current crisis in Puerto Rico.
The prominent panelists included Nobel laureate and Columbia University Professor Joseph Stiglitz; Sergio Marxuach, Public Policy Director & General Counsel at the Center for a New Economy; Joel Citron and Carla Minet, Center for Investigative Journalism; and Frances Negrón-Muntaner, Director, Center for the Study of Ethnicity and Race, Columbia University, as moderator.
Ms. Negrón-Muntaner began by redefining the terms commonly used to describe the Puerto Rican debt “crisis.” She stated that the word “crisis” connotes an anomaly, but the wax and wane of capitalism creates constant lows, such that Puerto Rico’s debt is effectively a “fundamental pre-condition.” Thus, the word “crisis” is misplaced in Puerto Rico, which she characterized as a “colony” of the United States filled with poor workers who cannot afford to be U.S. consumers.
She argued that the word “commonwealth” is similarly misapplied. In her view, the word is “at best misleading and at worst deceitful,” since Puerto Rico is not able to take any part in the “common wealth” of the United States.
Sergio Marxuach, the former Deputy Secretary of Commerce and Economic Development for the Commonwealth of Puerto Rico, agreed with Negrón-Muntaner that Puerto Rico is effectively a colony of the United States.
He blamed the current debt situation, at least in part, on the federal government’s rescission of Section 936 between the late 1990’s and early 2000’s. Section 936, which was primarily used by pharmaceutical and electronic companies, created tax incentives for U.S. companies to manufacture in Puerto Rico. Mr. Marxuach suggested Section 936 gave Puerto Rico a competitive advantage over foreign countries.
Professor Stiglitz defended the rescission of Section 936 because it was extremely expensive for the federal government during a period of major budget deficits. He also pointed out that large pharmaceutical companies, not the Puerto Rican people, were the primary beneficiaries of Section 936. Professor Stiglitz did agree with Mr. Marxuach, however, that eliminating Section 936 removed Puerto Rico’s competitive advantage, which was further depreciated by the North American Free Trade Agreement of 1994.
Stiglitz framed the issue of Section 936 as a “political failure.” As Puerto Rico does not have a voting seat in Congress, it is unable to represent its interests with the resources and effectiveness of a state and lacked the power to enact a replacement to Section 936.
Like Ms. Negrón-Muntaner and Mr. Marxuach, Professor Stiglitz criticized Puerto Rico’s current political status and argued that, as a result, Puerto Rico lacks basic self-determination. He explained that as an independent country, Puerto Rico could go to the IMF for help, and as a state of the United States, Puerto Rico would be able to use chapter 9 of the Bankruptcy Code. Currently, however, Puerto Rico is stuck.
Each of the panelists agreed on the importance of bankruptcy laws, as they allow for an organized restructuring process.
Next, journalists Joel Citron and Carla Minet criticized the lack of fiscal transparency in Puerto Rico. They asserted that Puerto Rico has been using non-standard accounting, its budget is inconsistent with its spending, and new financial records have not been released in two years. They also argued that there is a problematic lack of transparency surrounding the holders of the Puerto Rican bonds, many of which have been traded on the secondary market, and Puerto Rico’s exclusion from the Freedom of Information Act (because it is not a state).
Notwithstanding the information imbalance, all of the panelists agreed that it is clear that mutual funds own the majority of the public debt and hedge funds own the rest. Mr. Citron and Ms. Minet expressed their frustration with the funds’ unwillingness to restructure their debt. Mr. Stiglitz characterized the secondary market participants as “vulture funds” who buy the bonds at a very low rate with the express purpose of suing, but unlike the birds of prey, vulture funds do not benefit the (economic) ecosystem. Mr. Marxuach explained that the mutual funds’ fiduciary duty to their holders will cause them to “fight until the end,” as they historically have done.
Next, the panelists considered the importance of the New York choice of law and forum selection clause, which some of the Puerto Rican bonds have. This means that any bondholder litigation against the Puerto Rican government related to the bonds would have to be brought in New York, not Puerto Rico, raising issues of sovereign immunity. Professor Stiglitz remarked that the United States is one of the few countries to reject U.N. proposals to create an international law on sovereign debt.
According to Professor Stiglitz, one major economic problem in Puerto Rico is that it has the same minimum wage as the rest of the United States, while the income per capita is less than one-third that of the United States. He explained that while higher wages are generally positive, there are not enough jobs in Puerto Rico to sustain the minimum wage. Professor Stiglitz asserted, “The only thing worse than low wages is unemployment.”
All of the panelists agreed that the key question is how to create an economic strategy for Puerto Rico, especially given the lack of a cohesive civic and political response in Puerto Rico. Professor Stiglitz suggested that perhaps something akin to the Marshall Plan, which was an American initiative to rebuild Western Europe after World War II, is necessary. He appeared hopeful that the United States would take action because “no one wants a crisis on their border.” Mr. Marxuach was more pessimistic.
Finally, Professor Stiglitz urged the five million Puerto Rican voters in the United States to become more active and represent Puerto Rican interests. Indeed, any solution to Puerto Rico’s troubles requires the support of both the U.S. and Puerto Rican governments and their constituents.