A Global Americans Review of Boom and Bust in Puerto Rico: How Politics Destroyed an Economic Miracle

How did Puerto Rico, once described as an “economic miracle” end up in such dire straits?


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

Price: USD $35.00 | Length: 255 pages

In 2016, Puerto Rico announced that it was bankrupt in what The New York Times described as “the biggest government financial collapse in United States history.”  The amount of money involved stood at $70 billion of government debt, complemented by unfunded pension liabilities, adding up to $120 billion. Hurricane Maria compounded the island’s woes in September 2017, leaving massive devastation in its wake. Complicating matters further, relations with the United States were strained over the passage of the Puerto Rican Oversight, Management, and Economic Stability Act (PROMESA) in the U.S. Congress, which gave Washington considerable say in 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 dire straits?

In Boom and Bust in Puerto Rico, veteran journalist A. W. Maldonado seeks to answer just that question. The author has a long track record of covering Puerto Rican politics and economics, having been a reporter and columnist for the San Juan Star and editor of El Mundo and El Reportero. He has also authored a number of books, including Teodoro Moscoso and Puerto Rico’s Operation Bootstrap and Luis Munoz Marín: Puerto Rico’s Democratic Revolution. Although one can agree or disagree with Maldonado’s interpretation over the rise and fall of the Puerto Rican economy, he has lived through most of the period, knows most of the key actors, and has a strong view of the causes. Indeed, he has written a compelling story, filled with insights into the main protagonists.

Having become part of the United States in 1898 when it was taken from the Spanish Empire, Puerto Rico has held an odd place in U.S. history, eventually becoming a self-governing Commonwealth under the U.S. flag (headed by a locally elected governor). All Puerto Ricans are U.S. citizens, but they cannot vote in the presidential election and are represented in Washington by a non-voting member of Congress. Only a small segment of Puerto Rican society has favored independence, and in recent years a slight majority appears to favor statehood.

This mixed political outlook has left Puerto Rico in an economic conundrum. In the middle of the twentieth century, Puerto Rico adopted Operation Bootstrap, an economic reform program to industrialize the island. The tax exempt nature of investment made the island attractive to large pharmaceutical and medical device companies looking for tax breaks.   

Key elements to transforming Puerto Rico’s economy under Operation Bootstrap included the creation and expansion of the Government Development Bank and the Puerto Rico Industrial Development Company (Fomento); the creation of public corporations for key sectors (power, water, and transportation); and tax exemption. The program needed occasional upgrades to reflect changing global and national economic realities. Following the 1973-74 OPEC oil shock, which left Puerto Rico into a deep recession, the U.S. Congress passed Section 936 of the federal tax code. The 1976 provision, which granted U.S. companies a tax exemption from income originating from U.S. territories, giving Operation Bootstrap a new lease of life as new investment came.

The inflow of pharmaceutical and medical device companies generated employment and revenues, helped develop infrastructure, and made Puerto Rico one of the most dynamic economies in the Caribbean. All of this makes Maldonado wonder, “[W]hy did the government of Puerto Rico petition Congress to eliminate it, and why did Congress and the president agree? The demise of Operation Bootstrap shows how politics destroyed an economic miracle.”

For the pro-statehood movement, tax exemption was a major obstacle for statehood, which meant ongoing pressure in both the island and Washington (through Puerto Rico’s representatives) to end it. Moreover, Section 936 found a powerful enemy in the U.S. Treasury Department, which felt cheated of corporate taxes. Indeed, Maldonado makes the point that the more successful Section 936 became, the greedier big pharma companies appeared. Finally, a pro-statehood administration in Puerto Rico, under Governor Pedro Rosselló, was able to rally support in Washington to kill Section 936, which President Bill Clinton did in 1996.

While Section 936 critics hailed the repeal of the tax break as “ending corporate welfare as we know it” and expected that pharma jobs and investment would return to the mainland United States, Maldonado asserts that the global pharmaceutical industry instead dispersed from Puerto Rico to other parts of the globe, some “to Ireland but primarily to 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 that the island’s monstrous $73 billion debt was not payable.”       

Maldonado provides a detailed explanation of the forces that brought Operation Bootstrap a success, including a review of the government’s major spending programs (including health care reforms and the “pharaonic” Coliseum and Urban Train projects); how the public corporations became beholden to labor unions with leaderships that skimmed from the top; how Puerto Rican labor increasingly outpriced itself in global markets; and how debt financing became the easiest path. Considering the hunger of mutual funds (mainly sold in the United States) for bonds with yield, Puerto Rican debt (which remained investment grade through the 1990s and into the mid-2010s) gave the government of Puerto Rico and its public entities access to capital markets.

By 2016, Puerto Rico’s spending was well ahead of revenues, debt was out of control, and the island’s public institutions were governed by a culture of corruption and greed. This last issue was brought home in 2019, when the leaked phone messages of then-Governor Ricardo Rosselló revealed homophobic comments, plans to create troll accounts for Facebook, and evidence of corruption. The governor soon resigned amid widespread condemnation.

The impact on Puerto Rico has been a lengthy period of economic contraction, which has been a major factor for those who have left the island. According to the U.S. Census Bureau, Puerto Rico’s population shrank 11.8 percent between 2010 and 2020; the figure will likely dip below three million at some point over the next few years. The flow of emigrants includes many young, economically productive individuals badly needed on the island for any long-term economic recovery. Despite a substantial flow of federal government assistance to the island, the economy has not fully recovered; according to the IMF, real GDP contracted by 3.9 percent in 2020 and is estimated to fall by 0.6 percent in 2021.

Maldonado implies that the “fix” to Puerto Rico’s economic problems is probably a tax incentive similar to Section 936, which could attract some of the big pharma companies to return to the island, especially those seeking to reduce their dependence on China. In this, COVID-19 offers an opportunity for both the island and the country to which it belongs; re-establishing a pharmaceutical hub in Puerto Rico would improve the United States’ health security. Maldonado writes, “Will Puerto Rico squander this opportunity to revive economic growth? The answer is in the story of the rise and fall of Puerto Rico. Of the many factors, whether it is a rise or fall has always depended on (whether Puerto overcomes or succumbs to the scourge of Puerto Rican history) the obsession with political status.”

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

Scott B. MacDonald is the 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.

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