‘Puerto Rico Is an Artificial Economy’ – CounterSpin interview with Ed Morales on Puerto Rican debt crisis

Janine Jackson interviewed author Ed Morales about Puerto Rico’s debt crisis  for the July 31 CounterSpin. This is a lightly edited transcript.

Ed Morales

Ed Morales: “The creation of the commonwealth…created this illusion that Puerto Rico was no longer a colony.”

Janine Jackson: Rep. Luis Gutierrez delivered some strong remarks on the House floor, calling out what he described as a lack of urgency in Washington to take action to help Puerto Rico, whose Gov. Alejandro Garcia Padilla recently announced that Puerto Rico’s debt is not payable. “This is not politics, this is math,” Garcia Padilla said. There’s not a great deal of media coverage, and what there is sounds very familiar — lots of talk of belt-tightening and “shared sacrifice.” What’s missing from the story?

We’re joined now by Ed Morales, author of Living in Spanglish and the forthcoming Raza Matters. He co-directed the film Whose Barrio? about gentrification in East Harlem, and he’s currently a lecturer at Columbia University’s Center for the Study of Ethnicity and Race. Welcome to CounterSpin, Ed Morales!

Ed Morales: Hi, thanks for having me.

JJ: In part because coverage of Puerto Rico is so spotty, so inconsistent, some media seem to be shorthanding the debt story, making comparisons to Greece or to Detroit. There are some similarities, but neither of those examples really gets at the particular story of what’s happening in Puerto Rico, do they?

EM: No, there is a lot missing from the story. Puerto Rico differs from both of those situations, because Greece owes its money primarily to the International Monetary Fund, and the government bank is in charge of that debt. And that’s one reason they have things like bank panics. Whereas in Puerto Rico, the banks in Puerto Rico are under the Federal Reserve, and so no matter what happens, they are not beholden to the Puerto Rican government for their liquidity. So there is no bank panic.

And then the difference from Detroit is that Puerto Rico no longer can file for bankruptcy under Chapter 9. I found out recently that that really only happened as a result of a congressional action in 1984, and a lot of people are at odds to explain why that happened. I can only speculate that it was sort of the beginning of the neo-liberal agenda; I think that they were just trying to make it more difficult for marginal interests to declare bankruptcy, and maybe open up some new kind of investment opportunities. But I had been under the assumption that forever, since Puerto Rico has been an unincorporated territory of the US, that it could not declare bankruptcy, but it’s really only been since 1984.

JJ: Talk about the deeper roots of the debt problem itself; it’s not a brand new thing.

EM: The story has roots in Puerto Rico’s economic relationship to the United States, which is primarily determined by the fact that it’s an unincorporated territory, or a colony, of the United States. The word “colony” isn’t used that much, because of the actions that were taken by the United States government and elites in Puerto Rico to create this idea of a commonwealth, which allowed limited autonomous rule for Puerto Ricans.

San Juan, 1941 (photo: Jack Delano / Library of Congress)

Until 1952, all of Puerto Rico’s governors were appointed by Washington.

Because until 1952, when the commonwealth and the constitution were devised, all the governors of Puerto Rico were appointed by the US, and they were all Anglos, and often they were from the military. There were some exceptions, like one of the last US-appointed governors was actually close with Franklin Roosevelt, and was somewhat progressive or a liberal, although many of them before that were repressive military governments. So in 1952, with the creation of the commonwealth, it created this illusion that Puerto Rico was no longer a colony.

However, economically, Puerto Rico is almost like a wholly owned subsidiary of the US economy, and various laws inhibit it from making decisions to develop their own economy. And basically Puerto Rico is used as a kind of a dry run for free-trade policies in the ’50s and ’60s, before the era of free-trade economics, in the sense that it was the first place that was sort of off-shore for the US, and one of the first places where they were dealing with a population that did not speak English, and were not “American,” quote-unquote, and allowed multinational corporations to set up shop.

And the irony of it was that they were allowed wages that were close to minimum wage in the US, and a lot of protections, such as unions, right after, actually, the US invasion in the 19th century. One of the few positive things that happened in Puerto Rico was that many representatives of the AFL-CIO, including Samuel Gompers, went to Puerto Rico and helped to unionize people and there is a chapter of the AFL-CIO in Puerto Rico. So what you had was a place where US and then multinationals corporations could set up shop, mostly pharmaceutical corporations and petrochemical corporations but also light industry, and pay Puerto Ricans slightly less than they would pay workers in the US, and they would still be protected by this union stuff.

But what happened was when the US began to go into a recession in the 1970s, Puerto Rico’s economy also suffered, and then these corporations were not as willing to invest as much. So they implemented this thing called section 936 of the Internal Revenue code, which allowed US and multinational corporations to operate in Puerto Rico without paying taxes on the profits that they were making there. So basically what you had in Puerto Rico, it’s an artificial economy designed to create these consumers and a small middle class that would look good for the US, particularly taking in line the Cold War, because it was so embarrassed by the Cuban revolution.

So they had this other Caribbean possession where they could demonstrate that free-market capitalism could work in the Caribbean and create what they called the Showcase of the Caribbean at the time. But it was a completely artificial economy in which profits were not staying in Puerto Rico, so that inhibited real development of the economy. The borrowing that the government starting doing to cover its operating expenses began in the mid-’70s as a result of the fact that it was not a real economy that could develop on its own.

And then it only worsened in 1996, when section 936 was eliminated, and that was the period when the debt really started to grow exponentially. And then when 936 was phased out finally in 2006–it was a 10-year period–that’s when Puerto Rico went into its period of negative growth, and the beginning of its depopulation. So it predated the Great Recession by two years.

So in effect, Puerto Rico has been borrowing to keep its government afloat since the mid- to late ’70s, and then the situation really worsened in the period between 1996 to 2006, and since Puerto Rico never had a self-sustaining economy, it was inevitable, really, that this happened.

JJ: What about going forward? We’re hearing a lot of talk about changing the law to allow Puerto Rico to declare bankruptcy, but is that really the solution? We are also hearing a lot about austerity,  which I thought maybe there was a bit of a change happening. I mean, are we not shifting our ideas a little bit about, if not the cruelty of austerity, about its efficacy? About whether or not it works?

EM: That’s the big debate that is going on now. This sort of moderate position that is held by the Democrats, and by the ruling party in Puerto Rico, is that the law should be changed so that Puerto Rico could declare bankruptcy. That’s where sort of the argument and the fight begins because–well , first of all, a lot of the bond holders, that range from mutual funds to hedge funds and what are called vulture funds, which are people who buy bonds really as a speculative way to take advantage of distressed economies–those people are lobbying Congress heavily not to allow bankruptcy, because they don’t want the debt structured at all; they want it repaid in full, which is similar to the insistence of many of the bond holders in confronting Argentina.

The problem is that if bankruptcy protection was allowed, there would still have to be negotiations off of certain government expendituresm and so the IMF report was authored mainly by a woman named Anne Kreuger, who was a long-time official for  the IMF and actually worked on the Argentina crisis, who recommended a lot of things like lowering minimum wage and cutting back on overtime benefits, cutting back on vacation time, cutting back on Christmas bonuses.

The problem is that there are going to have to be concessions made if the bankruptcy protections are allowed, which will probably involve austerity of some sort. So even if that is won, which is what the moderate people want, which is what the governor of Puerto Rico wants, Luis Gutierrez and a lot of moderate Latino Democrats and other Democrats, like Chuck Schumer, want, they all want this. There is still going to be a price paid by Puerto Rico.

And then how this restructuring will occur is also up in the air. The Puerto Rican government has created its own working committee to make recommendations about how the restructuring should occur. But there has also been some noise from more right-wing Republicans or conservative Republicans in Congress that they want a US oversight committee for a Puerto Rican economy which would take away a lot of the autonomy of Puerto Rico to determine its economic future.

And then the final thing is that if things go best for Puerto Rico in terms of getting bankruptcy protection and getting sort of autonomy of controlling what will be done with the liquidity that would be gained by restructuring the debt, what kind of moves would they make with this liquidity? Would it merely be to just continue treading water, or would it be a serious thing like investing in  infrastructure? Would it be trying to change some of the laws that inhibit Puerto Rico’s ability to have an autonomous economy? This is really unknown right now.

The scary thing about the Kreuger Report is the stuff that it says, that Puerto Ricans should no longer think of themselves as entitled to wages that are almost minimum wage. They should think of themselves to be more competitive, in a business sense, as only deserving wages that are parallel to the wages of the surrounding Caribbean islands, like the Dominican Republic, etc., Where the wages are much lower and it’s really kind of a neo-liberal language of being competitive in a global economy means offering competitive wages to investors, and those investors want significantly lower wages.

So the problem is that Puerto Rico still faces the threat of lower wages, lower investment in education and other kind of government institutions, and probably increasing depopulation.

JJ: We’ve been speaking with Ed Morales. His article, “Puerto Rico’s Dance with Debt,” appears online at JacobinMag.com. Thank you very much, Ed Morales, for joining us this week on CounterSpin.

EM: Well, thank you very much for having me.

This piece was reprinted by RINF Alternative News with permission from FAIR.