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A Territory Vs. The States: The Economy Of Puerto Rico


August 26, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

For 105 years, the U.S. Congress has failed to provide a permanent status solution for the island of Puerto Rico, the longest period of uncertainty in history for any U.S. territory. Almost every administration since that of our first elected governor, Luis Muñoz Marin, has tried to deal with the U.S. Congress and with the White House to resolve this issue.

The result is that Puerto Rico, which transitioned from an agrarian economy with extreme poverty in 1899 to an industrialized growing economy until the early 1970s, has experienced relatively little economic growth over the past 30 years. In the meantime, the economic development gap between Puerto Rico and the U.S. has been widening.

During the 1950s and ’60s, Puerto Rico’s economy grew faster than the U.S. mainland’s. This was partly due to the positive effects of greater interaction between Puerto Rico’s economy and that of the U.S., which resulted from increased industrialization and trade. Muñoz Marin, who administered the local government practically unopposed and controlled the Legislature, was able to implement his economic policies without impediments or major political opposition. This changed when Luis A. Ferre and the New Progressive Party won the 1968 elections, giving rise to a true two-party system and bipartisan battles, clashes over status, and the ineffective administration of Puerto Rico’s government.

Closing the gap

In 1940, Puerto Rico was still struggling with a poor agrarian economy. According to the Puerto Rico Planning Board, the per capita personal income (PI) was $118 a year, though it had more than doubled to $264 by 1947. The island wasn’t alone; at the time, most of the southern region of the U.S. mainland was also poor. In 1940, the per capita income throughout the South was under $400, ranging from $256 in Arkansas to $340 in South Carolina.

Advocates of commonwealth had expected Puerto Rico’s unique status would enable the island to achieve greater levels of growth and income, allowing it to close the income gap between Puerto Rico and states of the union. Gov. Muñoz Marin recognized Puerto Rico had to close the economic gap between it and wealthier states, countries, and other areas to improve the island’s standard of living. This insight was gleaned from the fact that an economy experiences high growth rates as it moves to catch up to a wealthier one. Muñoz Marin’s benchmark, or target, for economic growth was the U.S., the largest and wealthiest economy in the world.

"The island has achieved a standard of living that surpasses all Latin American communities with the exception of Argentina, Chile, and Uruguay. But our net income is half that of the state of Mississippi, the state with the lowest income, and far lower than our goal," Muñoz Marin testified before a Ways & Means subcommittee of the U.S. House of Representatives on July 12, 1949.

The commonwealth’s expectations never fully materialized, and Puerto Rico’s economic performance hasn’t been converging with that of the States. The island’s economy has fallen substantially behind and continues to decline relative to even the poorest state on the U.S. mainland.

To be successful, the theory of convergence is conditional on various factors. In the case of Puerto Rico, a common currency, common market, and common citizenship with the U.S.; federal economic assistance in the form of transfer payments, and tax exemptions haven’t been sufficient to maintain the growth rate that would allow the island to converge with the States.

The commonwealth system has failed to provide the political and economic integration, congressional representation, and governmental-administrative practices needed for convergence to occur. Muñoz Marin’s goal for Puerto Rico of economic convergence with the U.S. came to an end in the early 1970s, when the island’s bipartisan battles began. The same hasn’t been true, however, for the poorer states on the U.S. mainland, which have steadily been closing the gap with the wealthier states.

Convergence in the States

Studies indicate the poorest U.S. mainland states at the beginning of the 20th century, including North Carolina, South Carolina, Mississippi, and Arkansas, have been growing, on average, twice as fast as the wealthier states.

According to a 1997 study conducted by Fernando Lefort at Harvard University, South Carolina ranked as the poorest state in 1929, with a per capita Personal Income (PI) that was 22.4% of New York’s. By 2003, the figure had increased to 71.4%.

In 1940, Mississippi was the poorest state and had a per capita PI that was just 22% of Delaware’s, the wealthiest state at the time. By 2003, although it was still the poorest state, Mississippi had increased its per capita PI to 54.3% of Connecticut’s, the wealthiest state then. So, in about six decades, Mississippi had reduced by more than half the distance separating it from the wealthiest state in the nation.

In 1950, a year after Gov. Muñoz Marin clearly established his goals for Puerto Rico before the U.S. Congress, the island’s per capita PI was just 38.4% of Mississippi’s. According to the Planning Board, Puerto Rico’s per capita PI was $296, or 19.6 % of the U.S. average of $1,510. At the time, Mississippi’s per capita PI was $770, or 51% of the U.S. average. Between 1950 and 1970, Puerto Rico would close the gap with the U.S. average by more than 14 percentage points.

In 1976, when Section 936 of the Internal Revenue Code was enacted, Puerto Rico’s per capita PI was $2,592, or 38.4% of the U.S. average. By 2003, Puerto Rico’s per capita PI was 35.7% of the average in the U.S., dropping 2.7 percentage points since corporate tax benefits under Section 936 were granted to the island. Instead of converging with the states, Puerto Rico had been diverging.

In 1970, Puerto Rico’s per capita PI had increased to $1,384, or 52.9% of Mississippi’s $2,617, 48.9% of Arkansas’ $2,828, and 45.4% of South Carolina’s $3,051. By 2003, over three decades later, however, the island’s per capita PI had lost ground to the three states.

By the end of that year, Puerto Rico’s annual per capita PI was $11,279, 48.1% of Mississippi’s $23,448, a reduction of 4.8 percentage points from 1970, when the proportion was 52.9%. It was also 46.4% of Arkansas’ $24,289, representing a decrease of 2.5 percentage points from 1970, and 43.2% of South Carolina’s $26,132, down 2.2 percentage points from 1970. Even if Puerto Rico’s growth rate were equivalent to, say, Mississippi’s, the island still wouldn’t be able to close the gap with the poorest state of the nation.

While Puerto Rico has been falling behind, it is quite a different story on the mainland. States like Mississippi and South Carolina have been closing their economic performance gaps. In 1950, the per capita PI of Mississippi and South Carolina were 51% and 61.3% respectively of the U.S. average. By 2003, Mississippi had narrowed the gap by 23.1 percentage points, reaching 74.1% of the U.S. average, and South Carolina by 21.3 percentage points, with 82.6% of the U.S. average. Mississippi and South Carolina had come closer not only to the U.S. average but also to Connecticut, the richest state in the nation.

The economic policies of the commonwealth, which have maintained an unsustainable political status, not only have prevented Puerto Rico residents from closing the income gap with citizens residing in the States but also have caused the income discrepancy to widen. The Lefort study concluded that if Puerto Rico’s economy had been converging with that of Mississippi, the average Puerto Rican would have had an income of almost $6,000 more a year than he or she actually had in 1994. Lefort maintains that if we accumulate this loss from 1955 to 1994, each Puerto Rican could have been $110,000 wealthier.

While the commonwealth has continued to discuss the need for additional fiscal and political autonomy, tax exemptions, membership in international organizations separate from that of the U.S., and the like, the states have been improving the well-being of their residents and creating the conditions for adequate job creation in their economies.

Not enough jobs

In 2003, the Bureau of Labor Statistics, an agency of the U.S. Department of Labor, portrayed a dismal picture of the commonwealth’s job creation in comparison with the States’. The labor-force participation rate in Puerto Rico’s population (16 years and older) that year was just 46.6%, way below the 66.2% participation rate on the U.S. mainland. The participation rate is the proportion of the able labor force (the noninstitutionalized population 16 years and older) that is employed or actively seeking employment.

The participation rates in Mississippi, Arkansas, and South Carolina were 61.4%, 61.1%, and 63.7%, respectively. Compared with the larger states, where there are substantial Hispanic populations, Puerto Rico comes out no better. In 2003, the participation rate was 62.6% in New York and 61.8% in Florida.

The employment-to-population ratio reveals an even worse situation. In 2003, Puerto Rico was the only jurisdiction in the U.S. with an employment-to-population ratio of less than 50%. In New York and Florida it was 58.6%, while Mississippi, Arkansas, and South Carolina had employment-to-population ratios of 57.5%, 57.3%, and 59.4%, respectively.

Even with these low labor-force participation rates, Puerto Rico’s average unemployment rate of 12% in 2003 was double the U.S. national average, which stands at less than 6%. The unemployment rate is the proportion of the participating labor force that is seeking but can’t find work.

An assessment of the number of people employed in South Carolina and Connecticut, which have a working-age population comparable to Puerto Rico’s, further demonstrates the commonwealth’s inability to provide sufficient jobs for the island’s potential work force. Connecticut, with a working-age population of 2.68 million (300,000 fewer than Puerto Rico’s), provided employment to 1.7 million people, approximately 480,000 more jobs than in Puerto Rico. South Carolina, which has a potential work force of 3.14 million (about 162,000 larger than Puerto Rico’s), in 2003 generated employment for 1.87 million people, or about 650,000 more jobs than on the island. While the commonwealth economic development model has been incapable of creating the necessary conditions for sufficient long-term job growth, acknowledging this failure would have placed tremendous pressure on the issue of political status many years ago. Instead, government administrations have tried to conceal this deficiency by creating thousands of jobs in the public sector.

A surplus of government jobs

The government of Puerto Rico is, by far, the island’s largest employer. In fact, Puerto Rico has more government employees as a percentage of the population than eight states surveyed by Quality for Business Success Inc. (QBS) Intelligence Unit have on average, including those with large populations such as Illinois and New York.

According to data obtained by QBS, for every 10,000 people, there are approximately 771 employed in the public sector in Puerto Rico. The figures are 645 in Mississippi and 600 in South Carolina. Illinois has 518 government employees per 10,000 residents, while Hawaii has 582 and New York 627.

The overall average number of government jobs in the eight states surveyed by QBS was 589 per 10,000 people, 182 less than Puerto Rico’s 771. Thus, the commonwealth government employs approximately 30% more people than the states employ on average, which could partially explain its inability to improve the salary of efficient and productive public servants.

The proportion of government employment to total employment further demonstrates the structural deficiencies of the commonwealth’s economic development model. In Hawaii, for example, only 12% of the total employment is in the public sector. In Mississippi, it is 15%, and in New York 14%. In Puerto Rico, however, it jumps to 31%.

Too much poverty

Poverty indicators in Puerto Rico are extremely troubling when compared with the U.S. mainland states’. The commonwealth’s inability to close the income gap by creating enough well-paying jobs for its residents, in comparison with the rest of the U.S., has kept almost 50% of the population living under the federal poverty level.

In 1969, after 17 years of commonwealth, 65.2% of the residents of Puerto Rico were living under the federal poverty index, compared with just 12.7% of the U.S. population, according to the U.S. Census Bureau. At the time, Mississippi, the poorest state, had 35.4% of its population below the poverty level.

Twenty years later, in 1989, 58.9% of Puerto Rico’s population still lived under the federal poverty index. Although the percentage had dropped to 48.2% by 1999, it remained unacceptably high. Mississippi had been able to cut its poverty level in half during these three decades, to 17.6%. Reducing their poverty level has set Mississippi and other states on a path toward convergence with the U.S average.

The poverty rates of the poorer states have been on the same path as per capita PI, converging toward the U.S. average. While Mississippi has been able to reduce the poverty rate of its population by 50%, Puerto Rico has only been able to reduce its poverty level by less than 30%. Puerto Rico’s poverty level remains above what Mississippi’s was over 30 years ago.

Although the island’s poverty rate in itself is cause for serious concern, even more troubling is that the U.S. Congress discriminates in its funding allocations against citizens simply because they reside in the Commonwealth of Puerto Rico. As a result of its territorial status, Puerto Rico has been unable to attain complete access to federally funded programs to assist the U.S. citizens residing on the island.

Supplemental Security Income (SSI) is just one of the federal programs that could alleviate poverty in Puerto Rico, as it does throughout the U.S. mainland. In 2003, the federal government distributed over $36 billion in SSI payments throughout the 50 states. However, U.S. citizens who reside in Puerto Rico and qualify for SSI benefits aren’t eligible to receive them.

The elderly, blind, and disabled who reside in Puerto Rico and have little or no income are unable to benefit from a program designed to supply their basic needs of food, clothing, and shelter. The reason is that SSI is funded by general tax revenues and not by Social Security taxes, which are paid by employees and employers in the commonwealth. One of the alleged benefits under the commonwealth is that Puerto Rico residents and corporations, with few exceptions, don’t have to pay federal income tax. Instead, income taxes are paid to the Puerto Rico Treasury Department (Hacienda).

According to the Social Security Administration, in December 2002 alone, 4.5% of the population of Mississippi, over 127,000 people, received an average of $348 in monthly Social Security Insurance benefits, for a total of $44.2 million a month. In South Carolina, 2.6% of the population, or just over 105,000 people, received an average of $349, for a total of $36.6 million a month.

Over the past 30 years, through the creation of jobs and the support of programs such as SSI, most of the southern states have been able to substantially reduce and overcome much of their poverty. Yet, nearly 50% of the citizens residing in Puerto Rico, a territory of the U.S., continue to live below the federal poverty level.

Federal expenditures

Puerto Rico receives less federal money proportionate to its total population than any state on the mainland. According to the U.S. Census Bureau’s Consolidated Federal Funds report for fiscal year 2002, the most recent available, federal-government expenditures and obligations surpassed $1.9 trillion. An additional $912 billion was provided in other federal assistance, including loans and insurance programs. The funds were distributed among the 50 states, with few exceptions, in proportion to their share of the U.S. population.

To illustrate the point, Connecticut, which has 1.2% of the total population in the U.S., received 1.3% of the federal expenditures and obligations. With 5.7% of the U.S. population, Florida received 5.5% of the allocations. Hawaii, Mississippi, New York, and South Carolina, with population shares of 0.4%, 1%, 6.5%, and 1.4%, respectively, received their proportionate share of funding: 0.5%, 1.1%, 6.7%, and 1.4% each.

With just over 3.8 million residents, Puerto Rico represents 1.34% of the total U.S. population. Federal expenditures received on the island, however, are only 0.73% of the total, or $14 billion in 2002. Puerto Rico received approximately 45.5% of what it should receive if the island were to obtain federal funding at a level proportionate to the population.

Reduced benefits

For decades, the commonwealth’s economic model promoted Puerto Rico’s low salaries and wages to attract investment and jobs. These lower salaries resulted in lower contributions to the Social Security retirement system and, consequently, lower pension benefits upon an employee’s retirement.

The end result is that Puerto Rico residents not only earn less than their counterparts in the states—when they can find a job, which is also less likely than in the states—but also tend to retire with fewer benefits than retirees on the U.S. mainland. In 2002, Social Security benefits were paid to 688,140 residents in Puerto Rico. Retired workers on the island received an average monthly pension of $592, whereas retirees in Mississippi received an average $814 per month, $222 more than in Puerto Rico.

On average, Social Security beneficiaries in Puerto Rico receive substantially lower average monthly benefits than those on the U.S. mainland. In 2002, monthly benefits for retired workers were an average of $303 less than the U.S. average; for widows and widowers, the average was $322 lower; disabled workers received $121 less; and wives and husbands of retired and disabled workers obtained an average of $176 less every month. Benefits for the children of deceased, retired, or disabled workers were also lower.

Children of deceased workers received an average monthly payment $193 lower than the U.S. average; children of retired and disabled workers received $157 and $61 a month less.

Many people believe Puerto Rico should postpone its decision on status until the island achieves higher levels of income and growth, but they don’t realize the problem is that the economy can never achieve such an objective under its territorial status and the limited growth it does accomplish. The reality is that the economic performance of even the poorest state on the mainland has been greater than Puerto Rico’s, and the gap continues to widen. Puerto Rico has gone backward in relation to even the poorest state in the nation.

Convergence targets (the U.S. states, for example) aren’t stationary; their economies and incomes continue to grow. The only way to close the gap is to grow faster than the target. Unfortunately, the required growth rate for Puerto Rico to converge isn’t happening and, as history has proved, it can’t happen under the island’s existing territorial status.

Next week, CARIBBEAN BUSINESS will examine the commonwealth’s economic performance in comparison with that of independent foreign countries.

Personal Income Per Capita

Puerto Rico Compared to U.S. Average & Two States

United States / South Carolina / Mississippi / Puerto Rico


$29,847 / $24,426 / $21,007 / $10,204


$19,477 / $15,894 / $13,089 / $6,001


$10,114 / $7,743 / $7,007 / $3,455


$4,085 / $3,051 / $2,617 / $1,384


$2,276 / $1,437 / $1,237 / $587


$1,510 / $925 / $770 / $296

Source: Bureau of Economic Analysis & Puerto Rico Planning Board

Analysis: CB & QBS Intelligence Unit

Puerto Rico’s Poverty Rate Compared to Mississippi & U.S. Average*

1969 / 1979 / 1989 / 1999

United States: 12.6% / 13.0% / 13.5% / 12.7%

Mississippi: 35.4% / 24.3% / 25.7% / 17.6%

Puerto Rico: 65.2% / 62.4% / 58.9% / 48.2%

*1999 is the latest year available

Source: U.S. Census Bureau

P.R. Personal Income Per Capita as a Percentage of U.S. National Average

Puerto Rico / Mississippi / South Carolina


20% / 51% / 61%


26% / 54% / 63%


34% / 64% / 75%


34% / 69% / 77%


31% / 67% / 82%


34% / 70% / 82%

Source: Bureau of Economic Analysis & Puerto Rico Planning Board

Analysis: CB & QBS Intelligence Unit

No. of P.R. Public Employees per 10,000 Residents

Compared to Eight States

Hawaii: 582

Illinois: 518

Mississippi: 645

New Jersey: 576

New York: 627

New Mexico: 650

South Carolina: 600

West Virginia: 515

Puerto Rico: 771

Source: Bureau of Economic Analysis & Puerto Rico Planning Board

Analysis: CB & QBS Intelligence Unit

Labor Force Selected Indicators 2003

In thousands

Working Age Population / Labor Force / Labor Force Participation Rate / Employed / Unemployed / Unemployment Rate

United States: 221,168 / 146,510 / 66.2% / 137,736 / 8,774 / 6.0%

Connecticut: 2,680 / 1,803 / 67.3% / 1,704 / 99 / 5.5%

New York: 14,891 / 9,315 / 62.6% / 8,726 / 589 / 6.3%

Florida: 13,211 / 8,164 / 61.8% / 7,744 / 420 / 5.1%

Arkansas: 2,071 / 1,265 / 61.1% / 1,186 / 78 / 6.2%

Mississippi: 2,138 / 1,312 / 61.4% / 1,229 / 83 / 6.3%

Hawaii: 944 / 618 / 65.5% / 592 / 27 / 4.4%

South Carolina: 3,142 / 2,003 / 63.7% / 1.866 / 136 / 6.8%

Puerto Rico: 2,958 / 1,378 / 46.6% / 1,211 / 167 / 12.1%

Source: Bureau of Labor Statistics & Puerto Rico Planning Board

Analysis: CB & QBS Intelligence Unit

This Caribbean Business article appears courtesy of Casiano Communications.
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