The Puerto Rican Economic Challenges and Alternatives: A Review of Recent Literature

Abstract

The decline of Puerto Rico’s economy has been inextricably linked to the federal government’s phasing out and ultimate elimination of tax incentives that made it attractive for U.S. companies to establish operations on the island. One unsurprising consequence of these tax incentives is that they made the economy heavily dependent on both U.S. policies and the actions of U.S. companies. Thus, when the federal government repealed the incentives, including the well-known section 936, a major economic decline on the island was virtually inevitable, particularly in the absence of any alternative program to fill the vacuum left by the departure of U.S. firms. The consequence has been the creation of crippling debt, sky-rocketing unemployment, and the reversal of economic growth. The historical problems with the island’s fragile and outdated energy sector and power grid -- which are heavily dependent on expensive, imported fossil fuels, has been exacerbated by the economic decline. One viable solution in this critical sector is a transition to clean renewable energy, which would spur economic growth by increasing employment and enabling reduction of the debt. Execution of such a strategic option, however, is compromised by Puerto Rico’s status as a commonwealth rather than a U.S. state or independent sovereign state. Any long-term, meaningful reforms or programs for economic development are thus largely dependent on resolution of the status issue, which requires a decision by both the U.S. Congress and the people of Puerto Rico to determine on statehood or independence.