Puerto rico government

How politics destroyed an economic miracle

AW Maldonado, Boom and Bust in Puerto Rico: How Politics Destroyed an Economic Miracle. University of Notre Dame Press, August 2021.

Price: US$35.00 | Length: 255 pages

In 2016, Puerto Rico announced that it was bankrupt in this The New York Times described as “the greatest government financial collapse in United States history”. The amount of money at stake was $70 billion in public debt, supplemented by unfunded pension liabilities, totaling $120 billion. Hurricane Maria compounded the island’s woes in September 2017, leaving massive devastation in its wake. To complicate matters further, relations with the United States were strained by the passage of the Puerto Rican Oversight, Management, and Economic Stability Act (PROMESA) in the United States Congress, which gave Washington considerable influence over the restructuring of the island’s debt and its economic activity. . How did this island, once described as an “economic miracle”, end up in such a bad patch?

In Boom and Bust in Puerto Rico, veteran journalist AW Maldonado seeks to answer that question. The author has extensive experience covering Puerto Rican politics and economics, having served as a journalist and columnist for the Star of San Juan and editor of El Mundo and The Reporter. He is also the author of several books, including Teodoro Moscoso and Puerto Rico‘s Operation Bootstrap and Luis Munoz Marín: Puerto Rico’s Democratic Revolution. While one may or may not agree with Maldonado’s interpretation of the rise and fall of the Puerto Rican economy, he has lived through most of the period, knows most of the key players, and has a vision clear of the causes. Indeed, he wrote a fascinating story, filled with ideas about the main protagonists.


Becoming a member of the United States in 1898 when it was removed from the Spanish Empire, Puerto Rico occupied an odd place in United States history, eventually becoming a self-governing Commonwealth under the American flag (ruled by a Governor locally elected). All Puerto Ricans are US citizens, but they cannot vote in the presidential election and are represented in Washington by a non-voting member of Congress. Only one small segment of Puerto Rican society has favored independence and, in recent years, a slight majority seems to favor the creation of a state.

This mixed political outlook has left Puerto Rico in an economic bind. In the mid-20th century, Puerto Rico adopted Operation Bootstrap, an economic reform program aimed at industrializing the island. The tax-exempt nature of the investments has made the island attractive to large pharmaceutical and medical device companies seeking tax breaks.

Key elements of the transformation of Puerto Rico’s economy under Operation Bootstrap included the creation and expansion of the Government Development Bank and the Puerto Rico Industrial Development Corporation (Fomento); the creation of public enterprises for key sectors (electricity, water and transport); and tax exemption. The program needed occasional improvements to reflect changing global and national economic realities. Following the OPEC oil shock of 1973–74, which plunged Puerto Rico into a deep recession, the U.S. Congress passed Section 936 of the federal tax code. The 1976 provision, which gave US companies a tax exemption on income from US territories, breathed new life into Operation Bootstrap as new investment came in.

The influx of pharmaceutical and medical device companies has generated jobs and income, contributed to infrastructure development, and made Puerto Rico one of the fastest growing economies in the Caribbean. All of this makes Maldonado wonder, “[W]Why did the government of Puerto Rico ask Congress to eliminate him, and why do Congress and the President agree? The demise of Operation Bootstrap shows how politics destroyed an economic miracle.

For the pro-state movement, tax exemption was a major obstacle to statehood, which meant continued pressure both on the island and in Washington (through Puerto Rican officials) to end it. Additionally, Section 936 found a powerful enemy in the US Treasury Department, which felt cheated on corporate taxes. Indeed, Maldonado points out that the more successful Section 936 has been, the more big pharma has appeared to be greedy. Finally, a pro-state administration in Puerto Rico, led by Governor Pedro Rosselló, was able to rally Washington’s support to kill Section 936, which President Bill Clinton did in 1996.

While critics of Section 936 hailed the repeal of the tax break as “the end of corporate welfare as we know it” and expected pharmaceutical jobs and investment to return to Continental United States, Maldonado says the global pharmaceutical industry has rather dispersed from Puerto Rico to other parts of the globe, some “in Ireland but mainly in China and India.” For Puerto Rico, the author notes, “as the island lost jobs, the Puerto Rican government lost tax revenue and became increasingly dependent on borrowing. In 2014, the government of Puerto Rico lost its [investment grade credit ratings]. A year later, Governor Alejandro García Padilla declared the island’s monstrous $73 billion debt unpayable.

Maldonado provides a detailed explanation of the forces that made Operation Bootstrap a success, including a review of the government’s major spending programs (including health care reforms and the “pharaonic” Colosseum and city train projects ); how state-owned enterprises became beholden to unions with management skimming from the top; how Puerto Rican labor has increasingly overvalued itself in world markets; and how debt financing became the easier route. Given mutual funds’ (primarily sold in the United States) thirst for yield bonds, Puerto Rican debt (which remained investment grade through the 1990s and into the mid-2010s) allowed the Government of Puerto Rico and its public entities to access capital markets.

In 2016, Puerto Rico’s expenses far exceeded revenues, debt was out of control, and the island’s public institutions were governed by a culture of corruption and greed. The latter issue was brought home in 2019, when leaked phone messages from then-Governor Ricardo Rosselló revealed homophobic comments, plans to create Facebook troll accounts and evidence of corruption. The governor quickly resigned amid widespread condemnation.

The impact on Puerto Rico was a long period of economic contraction, which was a major factor for those who left the island. According to the US Census Bureau, the population of Puerto Rico decreased by 11.8% between 2010 and 2020; the figure is likely to fall below three million at some point over the next few years. The flow of emigrants includes many economically productive young individuals that the island badly needs for any long-term economic recovery. Despite a substantial flow of federal government aid to the island, the economy has not fully recovered; according to the IMF, real GDP contracted by 3.9% in 2020 and is expected to fall 0.6% in 2021.

Maldonado suggests that the “solution” to Puerto Rico’s economic problems is likely a tax incentive similar to Section 936, which could entice some of the big pharmaceutical companies to return to the island, especially those looking to reduce their dependence on with regard to China. In this, COVID-19 offers an opportunity both for the island and for the country to which it belongs; re-establishing a pharmaceutical center in Puerto Rico would improve US health security. Maldonado writes, “Will Puerto Rico squander this opportunity to revive economic growth? The answer lies in the story of the rise and fall of Puerto Rico. Among the many factors, whether it is a rise or fall has always hinged (whether Puerto overcomes or succumbs to the scourge of Puerto Rican history) on obsession with political status.

Considering that the 2020 referendum gave supporters of a state 52.52 percent of the vote (with 54.7 percent voter turnout), further tax incentives are unlikely. With statehood caught up in Washington politics, a change in Puerto Rico’s political status is probably not a near-term option. Given Maldonado’s views, Puerto Rico’s economic problems are likely to persist. For anyone wanting an insightful account of how Puerto Rico ended up where it is in the early 2020s, Maldonado’s Boom and Bust in Puerto Rico is a must read.

Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings, Research Fellow at Global Americans, and Founding Director of the Caribbean Policy Consortium. He is currently working on a book on the new cold war in the Caribbean.