The Economy of Puerto Rico

The Economy of Puerto Rico: Restoring Growth

Copyright Date: 2006
Pages: 607
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  • Book Info
    The Economy of Puerto Rico
    Book Description:

    A non-incorporated territory of the United States, Puerto Rico operates under U.S. legal, monetary, security and tariff systems. Despite sharing in these and other key U.S. institutions, Puerto Rico has experienced economic stagnation and large scale unemployment since the 1970s. The island's living standards are low by U.S. standards, with a per capita income only half that of Mississippi, the poorest state. While many studies have analyzed the fiscal implications of Puerto Rico's political relationship with the United States, little research has focused broadly on the island's economic experience or assessed its growth prospects. In this innovative new book, economists from U.S. and Puerto Rican institutions address a range of major policy issues affecting the island's economic development. To frame the current situation, the contributors begin by assessing Puerto Rico's past experience with various growth policies. They then analyze several reforms and new initiatives in labor, education, entrepreneurship, fiscal policy, migration, trade, and financing development, which they incorporate into a proposed strategy for jumpstarting Puerto Rican economic growth. Contributors include Gary Burtless (Brookings Institution); Orlando Sotomayor, Luis Rivera-Batiz, Ramón Cao, Maria Enchautegui, José Joaquín Villamil, Eileen Segarra, Marinés Aponte, and Juan Lara (University of Puerto Rico); Richard Freeman and Robert Lawrence (Harvard University); Helen Ladd (Duke University); Francisco Rivera-Batiz (Columbia University); Steven Davis and Bruce Meyer (University of Chicago); James Alm (Georgia State University); Ingo Walter, Rita Maldonado-Bear, and William Baumol (New York University); Belinda Reyes (University of California, Merced); Alan Krueger (Princeton University); Carlos Santiago (University of Wisconsin); David Audretsch (Indiana University); Ronald Fisher (Michigan State University); Fuat Andic (UN Advisor); Arturo Estrella (NY Federal Reserve); James Hanson and Daniel Lederman (World Bank); James Dietz (University of California, Fullerton); and Katherine Terrell (University of Michigan).

    eISBN: 978-0-8157-1560-3
    Subjects: Political Science, Sociology

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Foreword
    (pp. vii-viii)
    Strobe Talbott and Miguel A. Soto-Class

    This book is the culmination of a collaborative effort between the Brookings Institution and the Center for the New Economy (CNE). Building on CNE’s initial vision to develop a growth strategy for Puerto Rico, the two institutions undertook a research project pairing researchers from the island and the mainland. The resulting papers incorporate empirical analyses and distill policy implications of particular relevance to Puerto Rico at the outset of the twenty-first century.

    The Brookings Institution first became involved in the analysis of the Puerto Rican economy in 1930 with the publication ofPorto Rico and Its Problems. That publication was...

  4. Preface
    (pp. ix-xii)
    Deepak Lamba Nieves, Sergio M. Marxuach Colón and Miguel A. Soto Class
  5. Acknowledgments
    (pp. xiii-xiv)
  6. 1 Introduction and Summary
    (pp. 1-16)

    At the close of the millennium, Puerto Rico was a tale of two economies. It had achieved some impressive economic milestones. Per capita income was substantially higher than in the rest of Latin America. In terms of quality of life measures such as literacy rates, years of schooling, and life expectancy, it ranked close to the most highly developed countries. But in other key dimensions, Puerto Rico appeared stuck under an economic glass ceiling. Although Puerto Rican residents have been American citizens since 1917, nearly half of them still lived under the U.S. poverty line, and the income gap relative...

  7. 2 Economic Growth
    (pp. 17-81)

    Puerto Rico is an extraordinary case study for those interested in the process of economic growth and its determinants. In the decades immediately after World War II, the island enjoyed rapid growth, comparable to that achieved by the so-called Asian Tigers.¹ A large portion of the population escaped the extreme poverty that had been so common in the first half of the twentieth century, and significant gains were made in narrowing the income gap between Puerto Rico and the United States. After the early 1970s, however, growth in income per capita slowed substantially, and progress in narrowing the income gap...

  8. 3 Labor Supply and Public Transfers
    (pp. 82-151)

    Residents of Puerto Rico work substantially less than residents on the U.S. mainland. What is more, the gap between Puerto Rican and U.S. employment rates has widened over the past half century. Working– age men and women in Puerto Rico are less likely to be employed or looking for work than their counterparts in the United States, but only a small part of the difference is directly explained by Puerto Rico’s higher level of unemployment. Most is the result of sharply lower labor force participation rates, and the gap in participation is evident across nearly all segments of the population....

  9. 4 Why Don’t More Puerto Rican Men Work? The Rich Uncle (Sam) Hypothesis
    (pp. 152-188)

    One of the biggest economic problems facing Puerto Rico is the low employment rate of its adult population. In 2000 only 31 percent of the overall population was employed, giving the island the lowest employment-to-population ratio in the Americas and the Caribbean, if not in the world. By way of comparison, in the same year 44 percent of the population in the Dominican Republic, 40 percent of the Mexican population, and 50 percent of the U.S. population was employed. The low employment rate compromises the island’s development by diverting resources away from investment and into public assistance and services to...

  10. 5 Education and Economic Development
    (pp. 189-254)

    Puerto Rico has one of the strongest recent records of educational development in the world. With the exception of the Republic of Korea, the rise in the educational attainment of Puerto Rico’s labor force between 1960 and 2000 is unmatched by any other country. During this forty-year period, the average schooling of Puerto Rican workers doubled, from 6.2 years to 12.2 years.

    Despite this remarkable accomplishment, Puerto Rico’s education system today stands at a crossroads. The consensus among policymakers, the education establishment itself, and the population in general is that the public education system on the island is currently in...

  11. 6 The Climate for Business Development and Employment Growth
    (pp. 255-318)

    The employment rate among Puerto Rican residents is stunningly low, and it has been so for decades. Household census data for 1980, 1990, and 2000 yield employment rates in the neighborhood of 40 percent for persons sixteen to sixty-five years of age. Comparable data for the United States yield employment rates in the range of 65– 70 percent. The Organization for Economic Cooperation and Development reports an average employment rate of 66 percent for member countries in 2000; Turkey, at 49 percent, is the only OECD member with an employment rate below 54 percent.¹ These comparisons underscore the puzzle presented...

  12. 7 Assessing Puerto Rico’s Fiscal Policies
    (pp. 319-398)

    The Puerto Rican fiscal system has undergone some major changes in recent years, changes that have been beneficial in a variety of dimensions. Nevertheless, the system is plagued by a number of problems. On the tax side, extensive tax evasion significantly reduces revenues and compromises the distributional objectives of the system. In part as a result of evasion, the tax base has shrunk over time, reducing revenues and leaving the more visible taxpayers (mainly wage earners) still in the tax net. The tax base has also been reduced by the extensive system of tax incentives available, incentives that are seldom...

  13. 8 Financing Economic Development
    (pp. 399-506)

    Some sixty years ago, John G. Gurley and Edward Shaw discussed the importance of the financial sector in the economic development process, although the causality of the relationship was not directly addressed.¹ A decade later, in a well-developed conceptual construct, Rondo Cameron and his colleagues argued that, as historical experience has demonstrated, financial institutions represent leading sectors in the process of economic development and actually induce growth through direct industrial promotion and proactive finance.² Raymond Goldsmith subsequently suggested that financial deepening, the level of financial intermediation, grows along with the level of economic development. Clearly, the direction of the relationship...

  14. 9 Trade Performance and Industrial Policy
    (pp. 507-565)

    Trade performance is of interest for three distinct reasons. The first relates to the external constraint. For most economies, external adjustment has both monetary and real dimensions. Countries need imported components and capital to grow. Although these purchases can temporarily be financed through borrowing, in the long run they have to be paid for by exporting.If exports fail to grow fast enough to meet import needs, relative price adjustments brought about through changes in the real exchange rate may be required.

    Puerto Rico has a fixed exchange rate and is part of the U.S. monetary system. The dollar is both...

  15. 10 Restoring Growth: The Policy Options
    (pp. 566-586)

    In the middle of the twentieth century, Puerto Rico emerged as one of the world’s fastest-growing economies, drawing comparisons with the rapidly industrializing countries of East Asia. Over the past several decades, however, while the economy has continued to grow, it has done so at a greatly reduced rate. Since 1980, there has been no further convergence of living standards with those of the U.S. mainland. Income per capita is currently only 30 percent of the U.S. average, and 58 percent of all children live below the U.S. poverty level.

    Identifying the causes of Puerto Rico’s deteriorating economic performance of...

  16. Contributors
    (pp. 587-588)
  17. Index
    (pp. 589-610)
  18. Back Matter
    (pp. 611-612)