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New Commonwealth: Economic And Political Implications


September 30, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Since the establishment of commonwealth, Puerto Rico has been wrestling with an unfinished process of decolonization, which leaves it squarely in a limbo characterized by social, political, and economic uncertainties. Puerto Rico’s economic future clearly depends on its political status; under the existing system of commonwealth, locals are unable to effectively influence the political process that controls every aspect of their lives. All three political parties agree that Puerto Rico’s status issue has to be resolved.

To help ease these uncertainties, the Popular Democratic Party (PDP) has proposed resolutions it believes will put an end to the status dilemma by providing more autonomy to the island while not severing its relationship with the U.S. mainland. It is what many have come to call the new or enhanced commonwealth. The U.S. Department of Justice (DOJ) revised the PDP’s proposal and in January 2001, Assistant Attorney General Robert Rabin submitted the analysis to the Senate Committee. In this Special Report, CARIBBEAN BUSINESS discusses the political and economic challenges posed by Puerto Rico’s existing political status, as well the DOJ report on the PDP’s proposed new commonwealth.

Votes that don’t count

While each state elects two senators and a proportional number of representatives, depending on population, to represent their interests, island residents don’t elect any voting member in the U.S. Congress, which makes the laws governing the U.S. mainland and Puerto Rico. Despite the commonwealth’s fiscal autonomy, the U.S. Congress can pass or eliminate laws that directly impact Puerto Rico’s economy. This was in evidence when Congress decided in 1996 to phase out Section 936 of the Internal Revenue Code. The failure of Sila M. Calderon’s administration to persuade Congress to act on the proposed amendment to Section 956 of the Internal Revenue Code is further evidence of Puerto Rico’s inability to effectively influence congressional decisions.

Moreover, the U.S. Senate has the power to confirm executive branch officials, who in turn have the authority to establish and implement public policy affecting the lives and economic future of every U.S. citizen on the mainland and in Puerto Rico. The Senate also confirms justices nominated to the U.S. Supreme Court, which interprets the laws governing all U.S. citizens.

The repercussions of the Supreme Court’s power were demonstrated when it formulated the unincorporated territory theory; through the years, it has allowed Congress to treat U.S. citizens in Puerto Rico differently from U.S. mainland citizens.

Meanwhile, the Supreme Court justices are appointed by the president of the U.S., an elected official for whom locals have no right to vote.

The president also holds the power to decide whether Puerto Rico receives economic assistance in times of disaster. Furthermore, the same president, as commander in chief of the armed forces, has the authority to send Puerto Ricans to fight wars for a nation that doesn’t grant them the same rights held by every other U.S. citizen residing on the U.S. mainland.

Every two years, residents in the 50 states elect legislators to the House of Representatives to protect their rights and interests. The number of representatives is determined by the state’s population. Puerto Rico, however, has no real congressional representation; it must be satisfied with a sole nonvoting (and therefore powerless) resident commissioner, elected every four years.

The U.S. Congress makes a number of other crucial decisions concerning Puerto Rico. It decides how much funding goes to federal programs, in what proportion they are distributed, and where these are channeled. Although Puerto Ricans can lobby Congress, it doesn’t have one single vote to influence how much federal funding it receives. This lack of political power is translated into the lack of economic power.

Obsolete economic model

The commonwealth government has adhered to an outdated economic development model created more than 50 years ago. Puerto Rico’s economic performance, which was dynamic at one time, has been anemic at best for more than the past three decades, and has deteriorated further over the past few years. After 106 years as a U.S. territory and 52 years of self-government, the Commonwealth’s personal per capita income is one-third that of the U.S. average and 50% of the poorest state in the nation, Mississippi.

Although Puerto Rico was rapidly transformed from an agrarian economy to a more sophisticated industrial society, under commonwealth, Puerto Rico has failed to implement the infrastructure and achieve the economic performance, government and business efficiency, and social cohesion that are indispensable for improving quality of life and for thriving in today’s competitive, globalized world.

For decades, Puerto Rico’s economic growth hasn’t been sufficient to help it catch up with wealthier economies, unlike the U.S. mainland and many other previously underdeveloped countries. Unemployment has been high for decades. Poverty and income inequality have also remained high compared with stateside figures.

To compensate for poor job prospects in the private sector, commonwealth government employment has swelled compared with national and international levels. This has placed a heavy burden on the private sector and individual citizens to maintain an inefficient government whose policies, more often than not, inhibit competitiveness and participation in the economy. This situation is further aggravated by a tax system that stifles economic activity with high taxes, unevenly distributed among the society. Large multinationals, which contribute the least to Puerto Rico’s income, employment, and gross product (GP), have received the bulk of economic incentives, mostly in the form of tax exemptions. Local enterprises that tend to be small with limited productivity and growth and few exports have been largely left to their own devices. The lack of investment in local businesses has also limited the island’s capacity to foster technological innovation.

Puerto Rico’s economy lacks diversification and its historical dependency on tax exemptions stunts competitiveness and economic development. Despite Puerto Rico’s political and geographic proximity to the U.S., its competitive advantage is being eroded as the U.S. establishes numerous free trade agreements with foreign countries. Meanwhile, compared to the U.S. mainland, Puerto Rico has only limited participation in federal expenditure programs; the potential reduction of funds further threatens Puerto Rico’s economy.

The challenge ahead

Puerto Rico faces enormous challenges in its economic development. Forty-eight percent of the population lives under the federal poverty level, with double-digit unemployment and a labor-force participation rate that is below 50%. As foreign countries gain more access to the U.S. market, Puerto Rico’s competitive position continues to deteriorate. Meanwhile, industrial development policies based on low wages and corporate tax-exemption schemes have become a thing of the past for Puerto Rico.

Puerto Rico’s per capita income under commonwealth is the highest in Latin America, but lags behind the world’s most competitive economies, including the U.S. mainland. U.S. investment and trade with the mainland have attracted many multinationals engaged in high-technology manufacturing and exports. However, the island has failed to capitalize on these industries by not creating adequate local linkages.

Puerto Rico’s work force is one of the most highly skilled in Latin America and the Caribbean, but it is far behind the U.S. mainland and other developed economies. The brain drain to the mainland is further eroding it. In addition, Puerto Rico’s infrastructure may be among the best in the region, but it hasn’t been able to achieve the competitive levels seen in the States; major investments are required to boost these levels.

A grim outlook

According to the Intelligence Unit of Quality for Business Success (QBS), a San Juan-based research firm, in the past 30 years, Puerto Rico’s economy has seen a set of recycled development paradigms. The initiatives taken to date provide little empirical evidence that they work and have only eroded Puerto Rico’s economic, social, and political fabric.

Economic public policy has involved several key elements. First, colonial administrators created tax exemptions to attract U.S. and foreign operations to Puerto Rico, bringing with them direct investments. Second, they increased the number of federal transfers, both to government and individuals, to increase consumption, personal expenditures, and personal per capita income. Third, local government jobs swelled from 11,000 in 1940 to 274,000 in 2003. This created a massive, inefficient bureaucracy. Fourth, commonwealth’s poor employment outlook prompted it to encourage migration in the second half of the 20th century to lower unemployment rates.

But little, if anything, has been done to revise or radically transform the underlying principles of economic enhancement, management, and growth. To complicate matters further, the accelerating pace of demographic changes, globalization, and technological innovation are transforming the concepts of economic development and public administration. In addition, fundamental shifts in the location of global demand, trade, and investment have left Puerto Rico unable to coherently and intelligently respond to these challenges.

Economic forecast

The future of Puerto Rico’s economic performance, if the island holds on to its outdated economic strategies, appears grim, said an economic report prepared by the QBS Intelligence Unit. Its forecast presumes that the current political, social, and economic situation will remain the same and includes three possible growth scenarios: best, intermediate, and worst.

The growth of real gross domestic product (GDP) has been stagnant at best from 2001 to 2003; in fact, it accounts for only $95 million in real growth during these three years, from $10,573 million to $10,668 million. It is important to point out that the GDP takes into account all domestic economic production, including that production which doesn’t contribute to the local economy since it is transferred out of the island.

Since 2003, only QBS’ best and intermediate scenarios predict nominal GDP real growth in the next five years. Only the best scenario predicts an average economic growth of more than 4% for the next five years. The intermediate scenario averages 2.8%, which is considered weak. The worst scenario averages a dismal 0.7% growth for the next five years, practically nothing in terms of economic expansion.

Nevertheless, the real GP forecast is a different story. This indicator doesn’t include transfers out of the local economy and is what really more accurately reflects the state of the economy. Nominal aggregated GP growth for the past three years has been almost nonexistent.

The best and intermediate projected scenarios have little possibility of materializing unless there is a sharp decline in world oil prices. Even then, the projected growth is nothing to get excited about. The economy has been registering decreases in its rate of growth since 2000, when the economy’s growth rate dipped from 4.05% to 2.97%; it continued decreasing in 2001 to 1.57% when compared with the previous year, ending with a contraction of the economy in 2002. In 2003, the economy registered a 1.72% growth, primarily the result of government spending.

Since 2003, the outlook has been grim. In QBS’ analysis, the best scenario averages an annual growth of 3.27% for the next five years; the intermediate scenario averages a growth of 1.58% for the same period, which means that the economy is very weak and can’t provide the cushion needed to weather any acute global economic fluctuation. Finally, the worst scenario averages a reduction of .23% for the next five years, further proving that yesterday’s economic development formula has lost its relevance.

Can’t take anything for granted

Commonwealth advocates haven’t realized how much the political winds have shifted in Washington, D.C. For some time, people have been questioning whether the U.S. should continue providing a free ride to Puerto Rico. Indeed, the U.S. Congress has taken some measures to end that ride. A classic example: After foregoing more than $60 billion in tax revenue from Section 936 corporations over the years, Congress axed the tax incentive.

Puerto Rico can no longer take it for granted that it will always receive special economic treatment from the U.S. government. The U.S. Congress is likely to oppose proposals giving Puerto Rico preferential treatment over states or making Puerto Rico more attractive to investors from U.S. or foreign companies. Dependence on flawed political and economic strategies is a risky business. Investors are left uncertain; island residents are left dependent; and it impedes real, long-term, and solid economic transformation.

New commonwealth, a hybrid status

The PDP has recommended that a Constitutional Assembly be held to resolve Puerto Rico’s political status issue. Although there are different schools of thought among the party’s leadership and base, the PDP supports increasing Commonwealth’s autonomy according to a resolution approved by the party’s Governing Board in October 1998.

As mentioned earlier, the Office of Legislative Affairs of the U.S. DOJ analyzed the option of new commonwealth in 2001, along with the other two status options, for the U.S. Senate Committee on Energy & Natural Resources. In some sections of the proposal, Puerto Rico is treated as an independent nation; in others, it remains subject to U.S. sovereignty to some degree.

Translation: Puerto Rico’s status would be a hybrid. The U.S. Constitution, however, doesn’t allow for this category. The precise nature of the constitutional issues raised by the proposal is whether Puerto Rico is to be recognized as a sovereign nation or if U.S. sovereignty will be maintained over Puerto Rico. But whether the new commonwealth proposal contemplates full Puerto Rican independence or continued U.S. sovereignty over the island, the proposal’s mutual consent provisions are constitutionally unenforceable, according to the U.S. DOJ.

The requirement for the agreement to be made by mutual consent appears numerous times throughout the PDP’s proposal. For example, Article X specifies that the new commonwealth would be implemented pursuant to an agreement between the people of Puerto Rico and the U.S. government. This bilateral agreement couldn’t be unilaterally renounced or altered.

The preamble states that Puerto Rico’s union with the U.S. would be permanent under a covenant that couldn’t be invalidated or altered unilaterally. Article II (A) states that people born in Puerto Rico would remain U.S. citizens by birth and specifies that this stipulation couldn’t be unilaterally revoked. Furthermore, Article XIII says the U.S. couldn’t unilaterally alter the agreement, as the people of Puerto Rico would have to approve any changes to the terms of the compact.

Nevertheless, according to the DOJ, the U.S. can’t irrevocably surrender an essential attribute of its sovereignty. For example in U.S. v. Winstar Corp. (1996), the U.S. Supreme Court stated the U.S. couldn’t contract away an essential attribute of its sovereignty. In Burnet v. Brooks, it was decided that because the U.S. is a nation with all the attributes of sovereignty, it is vested with all the powers of government necessary to effectively control international relations. This premise is reflected in the general rule that one congress can’t irrevocably bind subsequent congresses.

In addition, a compact couldn’t require a U.S. president first obtain the consent of other signatories in a contract, which would limit the president’s power to terminate treaties. For example, U.S. v. Curtis-Wright Export Corp. (1936) established the president has plenary and exclusive power as the sole organ of the federal government in the field of international relations.

If, as the PDP’s proposal recommends, the U.S. maintains sovereignty over Puerto Rico, then it would remain subject to congressional power under the Territorial Clause of the U.S. Constitution since the new commonwealth wouldn’t be a state. It follows, then, that Congress could unilaterally alter the terms of the covenant between the U.S. and Puerto Rico. In fact, in the District of Columbia v. John R. Thompson Co. (1953), it was established that if Congress delegates power to a territorial government, a later Congress can revise or revoke the power.

Consequently, if Puerto Rico were to become independent under the new commonwealth proposal, the DOJ has determined the U.S. Congress or the president could still alter the relationship between the two countries, even without Puerto Rico’s consent.

Generally, a treaty can’t, for purposes of domestic constitutional law, irrevocably bind the U.S. according to the DOJ. In particular, because the power to make and break treaties is inherently inseparable from the conception of national sovereignty, as per Curtis-Wright Export Corp., it can’t be contracted away. Therefore, if Puerto Rico were to become independent, the PDP’s mutual consent requirements found in its proposal would be constitutionally unenforceable.

International treaties

According to the PDP’s proposal, the commonwealth would have control over its international trade and fiscal policy and have the power to enter into international agreements or treaties. It would also have the power to belong to and enter into agreements with international organizations. In this regard, the DOJ has also pointed out that the U.S. Constitution vests the foreign relation’s power of the U.S. in the federal government. This includes the power to enter into treaties.

In Curtis-Wright Export Corp., the Supreme Court specified the Treaty Clause in the Constitution prohibits states from entering into any treaty, alliance, or confederation. However, the Compact Clause in the Constitution does allow states, if authorized by Congress, to enter into agreements or compacts with foreign nations. The constitutional implications for Puerto Rico remain unclear. Do commercial, tax, and international agreements and participation in regional and international organizations (which the new commonwealth proposal calls for) constitute agreements or compacts to which Congress may give its consent? According to the DOJ, it is unclear whether either the Treaty Clause or the Compact Clause applies to Puerto Rico, since both clauses explicitly refer only to states.

Therefore, the DOJ maintains the U.S. Constitution recognizes only a limited number of political status options. Puerto Rico could become a sovereign nation or remain subject to U.S. sovereignty. The latter can only be done by being admitted as a state or by remaining subject to the authority of Congress as a territory. The terms of the U.S. Constitution don’t provide for an option other than independence, statehood, or territorial status, according to the DOJ.

In his analysis, Assistant Attorney General Rabin said, "If the island remains subject to the [U.S.], the provision in the PDP’s proposal that says Puerto Rico would ‘retain all the powers that haven’t been delegated to the U.S.’ rests on a constitutionally flawed premise. The legislative powers of a non-State region under the sovereignty of the U.S. are entirely vested in the U.S. Congress."

The DOJ’s analysis added, "Because territories are created by the nation, as a matter of constitutional law, they can’t delegate power to the nation." In the U.S. vs. Sharpnack (1958), the Supreme Court said, "While Congress may delegate some of its power to the territory itself, such delegation is always subject to Congress’ own plenary power to revise, alter, or revoke the authority." The bottom line, according to the DOJ’s analysis, is that the proposed new commonwealth presents serious constitutional problems.

Union or association

The PPD’s proposal refers to Puerto Rico as a nation and describes the free will of its people as the ultimate source of political power. Article V of the PDP’s document refers to the new commonwealth’s authority over international matters; nevertheless, it also describes the island’s permanent union with the U.S. In Article II, the proposal provides for the continued U.S. citizenship of people born in Puerto Rico, but also calls for the establishment of a Puerto Rican citizenship.

In Article VIII of the proposal, federal court jurisdiction is allowed over matters arising from the provisions of the U.S. Constitution and of those federal laws that would apply to Puerto Rico. In addition, the PDP’s proposal specifies that such laws can’t violate Puerto Rico’s Constitution, while Article XII states that the resident commissioner of Puerto Rico be considered a member of the U.S. House of Representatives for all legislative matters involving Puerto Rico.

Under chapter XIII, the PDP’s proposal states a Constitutional Assembly would negotiate with the U.S. the terms and conditions of the association (not union, the term previously used in the document). It further proposes that the Constitutional Assembly design and submit to the U.S. a mechanism that would allow the local government to decide which of the federal laws approved by Congress after the adoption of the compact would apply to Puerto Rico.

Keeping the funds

The proposal doesn’t specify how long the federal government would directly provide funds to individuals through the Nutritional Assistance Program, Pell Grants, educational loans, and others. However, the PDP wants them to continue. It also proposes that the U.S. commit to providing the commonwealth government with block grants, which U.S. taxpayers would finance, so the local government could continue offering incentives and funding social assistance, public works, and infrastructure. The PPD also wants the federal government to transfer to the commonwealth all the properties it owns in Puerto Rico, except for those necessary for common defense or required to exercise the powers the new compact would delegate to the U.S. government.

The federal court would only intervene in matters where the U.S. Constitution is applicable to Puerto Rico. The new compact also would require the federal laws applicable to Puerto Rico must not conflict with the island’s constitution. The U.S. DOJ warns this provision also may present constitutional concerns in the U.S.

The PPD also wants the commonwealth to retain all powers not specifically delegated to the U.S.; the delegated powers would include federal laws related to defense, currency, U.S. citizenship, Social Security, Medicare, unemployment insurance, banking, postal service, public assistance programs, and veterans’ and citizens’ education. In other words, the U.S. Congress and the federal government’s executive branch would continue to exercise control over the lives and economic future of the U.S. citizens living in Puerto Rico, who would still have no elected representatives with voting rights in the U.S. Congress, and would still have no right to vote for the president.

Economist Manuel Maldonado assisted with this series. Elisabeth Roman edited the articles.

In the next issue, CARIBBEAN BUSINESS will examine the political, economic, and social implications of independence for Puerto Rico.

This Caribbean Business article appears courtesy of Casiano Communications.
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