As Cuba Rises, Puerto Rico Falls
President Barack Obama dangles U.S. dollars before the Castros while Congress stonewalls Puerto Rico’s pleas for debt restructuring. The Tampa Bay Rays take the field in Havana as San Juan fends off New York hedge funds wielding legal baseball bats. The Rolling Stones play a free concert for Cubans; Puerto Rico can’t get no satisfaction.
As Cuba rises and Puerto Rico falls, it’s worth considering the diverging trajectories of these two ex-Spanish colonies that the Puerto Rican poet Lola Rodríguez de Tió described more than 100 years ago as “two wings of the same bird.” Even as the resumption of diplomatic ties with the U.S. opens new possibilities for Cuba, Puerto Rico’s current status as a U.S. commonwealth has turned into an ugly dead end.
Puerto Rico is defaulting in slow motion on $70 billion worth of debt. Its economy has shrunk 9 of the past 10 years. A few hundred miles to the west, meanwhile, economic reforms are creating new livelihoods for self-employed Cubans, whose material conditions are improving. Buoyed by the arrival of new tourists, remittances, and foreign investments, Cuba’s economy grew by 4 percent last year.
And when the U.S. embargo is lifted, Cuba – which for much of the 19th and 20th centuries was the Caribbean’s predominant economy -- is likely to take a growing bite out of Puerto Rico’s fortunes, in tourism, manufacturing and services. And that's before accounting for Puerto Rico's existing fiscal straits, which will lead to shrinking government services, higher costs imposed by utilities under siege from creditors and a string of broken social promises and busted pensions.
True, Cubans don’t have democracy. Then again, at the national level, neither do Puerto Ricans: Despite being U.S. citizens, they can't vote for president or in Congress, which these days mostly ignores them. Cubans may face the threat of arbitrary detention and abuse. But they’re much less likely than Puerto Ricans to be shot dead on the street, or to be victimized by drug traffickers or other criminals.
In fact, by many other yardsticks, you’re better off being born in Cuba than Puerto Rico. Don’t take my word for it. Look at the World Factbook put out by those raving socialists at the Central Intelligence Agency. Lower infant mortality? Check! Same with lower unemployment, higher literacy, and a lower overall death rate.
Things weren’t supposed to turn out this way for the island that President John F. Kennedy touted three months after the Bay of Pigs invasion as “a source of hope and inspiration to those of us deeply concerned with charting new courses of social progress for our Hemisphere.”
The proximate cause of Puerto Rico’s current distress is its crushing debt, which has tripled since 2000. And yes, irresponsible and corrupt legislators and executives (and the voters who elect them) deserve much of the blame.
But the larger problem has been Puerto Rico’s relationship with its federal overlords, who have oscillated between patronizing micromanagement and malign neglect -- devising ill-suited development strategies, granting and then revoking economic benefits, imposing regulations that undermined the island’s competitiveness and creating disincentives for work.
Consider the Washington-backed effort to turn Puerto Rico into a manufacturing hub. During the late 1940s, U.S. companies were given federal and local tax breaks to locate on the island. But U.S. minimum wage laws and trade agreements with other nations gradually eroded Puerto Rico's competitive advantages. Moreover, instead of investing in the island, U.S. companies brought their profits back to the mainland.
In 1976, the U.S. tried again, sweetening the pot for companies with Section 936 of the Federal Tax Reform Act. That created new jobs in chemicals, pharmaceuticals and electronics, but at huge fiscal cost as mainland corporations gamed tax laws. When the U.S. phased out the tax breaks, the island's manufacturing employment took a big hit -- a blow that Puerto Rico's legislators are quick to blame for the island's decline, not least because it conveniently absolves them for their own bad decisions.
The Republican-controlled U.S. Congress is now debating what to do about Puerto Rico’s fiscal mess. The island's top officials have all but begged for the ability to restructure the debt of its municipalities under Chapter 9 of the U.S. bankruptcy code – a power Puerto Rico had for decades until Congress took it away. Better yet would be the ability also to restructure its general obligation debt, which it can’t realistically pay.
Congress seems unlikely to allow restructuring. Instead, the Republican majority wants to impose a fiscal control board that takes over Puerto Rico’s fiscal affairs. Analysts at Puerto Rico’s Center for a New Economy have argued against this approach's "colonial and imperialistic overtones," which also contradict the GOP's devolutionary, small-government philosophy. Instead, they advocate passing a "fiscal responsibility law" with strict enforcement provisions.
As smart as this idea looks on paper, the island’s repeated failures to put its own fiscal house in order undermine that case. On the other hand, imposing a control board without granting debt relief risks accelerating Puerto Rico’s downward spiral.
That brings us back to the central question of Puerto Rico’s sovereignty. A control board for Puerto Rico would be all-too-consistent with its quasi-colonial status: Its legislators and executives behave irresponsibly in part because the buck doesn't stop with them. The island depends on the federal government for a quarter of its revenues, on terms that Washington sets, while it's straightjacketed by federal regulations that hurt its competitiveness and estrange it from neighboring economies.
Making Puerto Rico a state wouldn't necessarily cure it of bad fiscal behavior (see: Illinois). And independence would bring huge challenges. But remaining a commonwealth isn't working either. More than a half-century after JFK called Puerto Rico a "source of hope and inspiration," its predicament should be a source of shame for every American. Its U.S. citizens have rates of poverty and unemployment that dwarf those on the mainland, and diminishing prospects that make a mock of the American Dream. They don't even enjoy the full benefits of the U.S. Constitution.
Their lot won't fundamentally improve until they seize control of their own destiny and choose between statehood or independence. And when they finally make that choice, Congress should honor it, either welcoming Puerto Rico as the 51st state or allowing it to be independent.
Once Cuba gained its independence from U.S. control in 1902, it became theoretically free to make its own mistakes, notwithstanding the colossus to the north looking over its shoulder. And Lord knows Cuba made plenty of them, even before its current detour through socialist privation and repression. Over the years, Cuba has nonetheless delighted in tweaking Uncle Sam in the United Nations over Puerto Rico’s "colonial" status, and is doubtless enjoying some quiet schadenfreude over its neighbor's troubles.
Yet these two islands can lift each other up. In addition to their shared history and culture, they face some similar demographic and economic challenges, and have some complementary strengths -- Puerto Rico's pharmaceutical industry and Cuba's nascent biotechnology sector, for instance. An unlikely partnership, perhaps. But as President Obama has noted about Cuban policy, we know what hasn't worked. Maybe it's time to try something different for Puerto Rico too.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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