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The Republic Of Puerto Rico: Perspectives And Implications (Part X)
By CARLOS MARQUEZ
October 7, 2004
Puerto Ricos electorate has consistently and overwhelmingly voted against independence as a political option for the island. Furthermore, the number of votes in support of independence has been declining. Between 1993 and 1998, the number of voters favoring independence was reduced by almost half.
In the status plebiscite on Dec. 13, 1998, out of a total 1,566,270 voters participating, 39,838, or 2.5%, favored independence. Five years earlier, in the plebiscite of Nov. 14, 1993, independence obtained 75,620 votes, or 4.5% of the total 1,700,990. The Puerto Rican Independence Party (PIP) abstained from the first status plebiscite, on July 23, 1967, and independence received only 4,248 votes, or 0.6% of the total 707,293.
Although various other organizations and political parties have advocated for Puerto Ricos independence, the PIP has historically received, since the onset of commonwealth, the majority of the electoral support from independence advocates. The PIP received 5.2% of the votes in the 2000 general election, 3.8% in 1996, and 4.2% in 1992.
Independence would give Puerto Rico the power to create its own economic policies for industry, commerce, and agriculture; to control immigration; and to sign international treaties. Supporters believe that only through independence can the island obtain the powers necessary to augment its economic growth and enhance its competitiveness. Puerto Rico, in effect, would tailor its own policies and laws without having to abide by the laws or the constitution of any other nation.
Independence advocates argue that most people dont have a reasonable grasp of what independence would mean for Puerto Rico. Nevertheless, its implications are quite evident. Independence means Puerto Rico would become a republic, putting an end to the islands status as a U.S. territory. As an independent republic, Puerto Rico would no longer have a commonwealth governor, and the office of the resident commissioner would cease to exist in the U.S. Congress. Instead, the Republic of Puerto Rico would elect a president and appoint an ambassador to the United Nations, where the island would have one vote among 192 other independent nations. Puerto Rico could join 34 other independent countries in the Organization of American States. The republic would also have the ability to enter into individual international agreements and treaties with other nations.
Independence would end the uncertainty regarding Puerto Ricos political status, but the uncertainty regarding the islands political and economic future would certainly escalate. Puerto Rico would be subject to its own constitution; the U.S. Constitution and U.S. laws would cease to apply to the island, as would the jurisdiction of the federal courts. The protection provided under federal laws to U.S. and foreign investors, which has been a key competitive advantage for Puerto Rico and its economic development, would end. Puerto Rico would no longer be subject to U.S. coastal shipping laws. Nor would it be covered by the Jones Act, which provides for the exclusive use of U.S.-built, owned, and operated vessels for maritime trade between all U.S. ports.
In the past PIP leadership proposed a socialist republic to end colonialism and capitalism in Puerto Rico. To reach their objectives, they have contemplated the socialization (transfer to the people) of big enterprises; monopolies; production, distribution, and service oligopolies; and large land holdings. The socialization of the banks and of the islands financial sector would theoretically make possible the channeling of savings to productive investments. All debt, public and private, would be consolidated in a central bank. An import-substitution program has also been proposed; in other words, we would produce in Puerto Rico what is now being imported.
Recently, some independence advocates have moderated their public position and based the potential implementation of this status formula on the principle of legal control by the state, but with substantial involvement in the economic decision-making of workers and their communities. This social democratic approach supports the socialization of wealth within the framework of a mixed economy.
Road to independence
Even with limited electoral support for independence, Puerto Ricos electorate has provided some in the PIP leadership with seats in the Legislature, where they have gained public exposure with one senator and one representative.
In 2004, consistent with its social democratic ideology, the PIP reaffirmed its commitment to a better distribution of Puerto Ricos economic resources and reiterated the need for the government to respond to the interests of the people and not to those of foreign concerns, which would include the U.S. and the privileged class. According to the PIPs political platform, the organization of Puerto Ricos economic system should be conceived within the philosophical framework of a social democracy. Competitiveness would be improved through, among other things, workers acquisition of shares in the businesses where they are employed.
By controlling all foreign trade, Puerto Rico could impose tariffs on U.S. and other foreign products. The PIP advocates putting a hold on the development of shopping centers; the rezoning of agricultural land that could promote additional commercial construction would also be prohibited. When seeking to attract foreign capital, particular attention and priority would be given to joint-venture arrangements. New companies would be required to commit significant resources to research and development.
The agricultural sectors development would rely on producing in Puerto Rico the largest possible quantity of the food that is consumed on the island. Food products and their agricultural raw materials would be subject to an import-substitution program. It is important to note that Puerto Ricos agricultural sector wouldnt be able to achieve the economies of scale necessary to make most local products competitive; therefore costs to consumers would increase.
Also envisioned is using capital contributions from workers and savings deposits to develop hundreds of co-op housing complexes and transportation, service, manufacturing, and agro-industrial workers cooperatives, which would allegedly propitiate production and reduce external dependency. Production cooperatives are a key element of the economic development strategy under the independence status option.
A redistribution of federal funds (while they last) for public assistance is also proposed, so instead of going to individuals, they would be sent as a block grant to the government of Puerto Rico. The funds could then be used not only for public assistance to the needy but for other purposes and priorities established by the government of the republic. Of course, whether an independent Puerto Rico would receive any sizeable amount of federal funds, as it does now, would be up to the U.S. administration and the U.S. Congress.
Citizens of Puerto Rico
Under independence, Puerto Ricans would become citizens of the Republic of Puerto Rico. Although the PIP claims those who wish to keep their U.S. citizenship would be allowed to, it would be up to the U.S. Congress or the U.S. courts to decide. After the proclamation of independence, the continuation or cessation of Puerto Ricans status as U.S. citizens would depend on what the U.S. Constitution disposes and the will of the U.S. Congress.
The issue of U.S. citizenship is one that could generate many uncertainties in Puerto Rico and on the mainland. There are currently 4.9 million Puerto Ricans residing on the U.S. mainland, every one of them a U.S. citizen and millions of them voters in key states. These Puerto Ricans could exert political pressure on the U.S. government to protect the rights of the people residing on the island. The loss of U.S. citizenship could lead to massive migration from the island to the mainland, as many escape to avoid losing their citizenship and their U.S. passport. It certainly is highly doubtful whether Puerto Ricans newly born on the island would be U.S. citizens.
Citizens of the Republic of Puerto Rico would be required to use a passport issued by their government when traveling to the U.S. or to other foreign countries, unless Puerto Ricans were allowed to retain their U.S. citizenship through some form of agreement, in which case they would still be allowed to carry a U.S. passport. This would depend on the U.S. Congress giving its approval.
Treaty of Friendship & Cooperation
Independence proposals submitted to the U.S. Congress include the negotiation of a Treaty of Friendship & Cooperation with the U.S. and a transition period. The PIP has suggested a transition period not exceeding 10 years. Independence advocates expect such a treaty would include economic aid for Puerto Rico as compensation for the years of colonial control by the U.S. government.
The treaty is also expected to address areas regulating commerce, transit, and the withdrawal of all U.S. military personnel from Puerto Rico. Nevertheless, there are no guarantees of the terms and conditions of such a treaty, or even that there would be a treaty, as no foreign country can obligate the U.S. government and the U.S. Congress to enter into any treaty. In 2001, the U.S. Department of Justice said, "If the proposal did intend to impose such obligation, we would construe its language as precatory, not binding, in order to preserve the sovereign prerogatives of the U.S."
According to a June 22, 1998 study by J. Tomas Hexner, Glenn Jenkins, and Neil Allison, "Puerto Rican Independence: The Economic Implications for the U.S. and Puerto Rico," the uncertainty and fear about the future would probably trigger capital flight from the island. Many investors would probably phase out operations in Puerto Rico and adopt a wait-and-see attitude until the economic policies and prospects of the new nation became clear. The transition period would effectively become an economic purgatory with a severely diminished capital stock. It is unlikely investors would consider Puerto Rico until at least three to five years had passed since independence and it had become clear what positions the new government would take.
As an independent country, Puerto Rico would have the opportunity to issue a national currency, use the U.S. dollar (if Congress approves), or both. Puerto Rico would be in control of its monetary policy, issue the amount of currency it wishes to keep in circulation, establish and modify the value of the national currency relative to other currencies, and regulate interest rates. This way, independence advocates claim, Puerto Rico would be able to stimulate the economy and control inflation rates.
This hasnt been the case in most Latin American countries, which historically have suffered from high interest rates, inflation problems, and exchange-rate fluctuations. Many countries in Latin America live under the watchful eye and economic control of the International Monetary Fund.
To claim a Puerto Rican currency would have the soundness, acceptability, and international conversion capability necessary for Puerto Rico to be a global player in todays competitive world would be highly speculative at best.
Elimination of federal funds
The economic prospects for the Republic of Puerto Rico become even more precarious when the flow of federal funds to the island is considered. Independence, without a doubt, would mean a reduction in federal programs and funds and their eventual elimination after the transition period. If we use as a base the federal funds Puerto Rico received during federal fiscal year 2002, the island could expect an immediate reduction in the total amount of $14 billionwithout taking into account loans, loan guarantees, insurance coverage, and disaster assistance.
The U.S. Social Security Administration (SSA) would probably be phased out on the island, and the government of the republic would create a new Puerto Rican social security system. Independence proposals include a commitment from the U.S. to respect the vested rights and benefits that people in Puerto Rico have enjoyed as a result of their service and/or their monetary contributions to the U.S. before the independence proclamation. Such directives would apply to Social Security, Medicare, and veterans pensions. Although various members of Congress have expressed their willingness to go along with this proposal, it would be subject to U.S. congressional approval.
All employees and employers working in Puerto Rico would have to contribute to a new Puerto Rico Social Security System. From that point, people who retired or were disabled would receive benefits from the U.S. and the Puerto Rico systems, in accordance with how much they had contributed to each. As workers in Puerto Rico stopped contributing to the U.S. system, their benefits would decline until ending completely; these benefits would include retirement insurance, survivors insurance, and disability insurance.
In 2002, payments for Social Security benefits to individuals on the island amounted to $4.56 billion. From 1971 to 2003, residents of Puerto Rico received $65.4 billion in Social Security benefits. In that period, contributions to Social Security by Puerto Rico employees amounted to $20.2 billion and by employers to $19.1 billion, for a total of $39.3 billion or net positive transfer to Puerto Rico of $26.1 billion in federal funds, according to the Puerto Rico Planning Board.
In the case of the Medicare program, from 1971 to 2003, Puerto Rico received almost $15.9 billion in benefits and contributed $2.8 billion. As Puerto Ricans stopped contributing to the Medicare system, the amount of benefits received on the island would be reduced. In 2002, Medicare benefits amounted to $1.42 billion.
Eventually, Puerto Ricans would also stop receiving at least another $2.6 billion a year in other direct payments to individuals from the federal government, for unemployment compensation, housing assistance, agricultural assistance, and more.
According to proposals of the PIP, federal funds to the new republic could be capped at the level they were the year before independence was declared and end after the transition period. However, this would require congressional approval. Based on the amount of federal funds received by the commonwealth government in grants during fiscal year 2002, this would mean $4.8 billion in assistance. This amount alone adds up to more than 10% of Puerto Ricos gross product. Any economy taking such a hit would be in serious economic trouble; this would be especially true in Puerto Rico, where these funds keep the commonwealth government operating.
Federal agencies would cease operating in Puerto Rico and would stop paying salaries and wages to their employees on the island. In 2002, these salaries amounted to $930 million. Federal employees would most likely be relocated to agencies on the U.S. mainland. Independence would mean the end not only of federal salaries and wages in Puerto Rico but also of the services provided by over 100 federal agencies operating on the island. Under independence, these services would have to be provided by the government of the new republic. These include services currently provided by the U.S. Postal Service, Army Corps of Engineers, Federal Aviation Administration, Food & Drug Administration, Forest Service, Census Bureau, Centers of Disease Control & Prevention, Immigration & Customs Enforcement, Occupational Safety & Health Administration, and Environmental Protection Agency.
With independence, the U.S. Coast Guard; Federal Bureau of Investigation; Marshals Service; Secret Service; Bureau of Alcohol, Tobacco, Firearms & Explosives; and Drug Enforcement Administration could join all U.S. military forces in leaving Puerto Rico. This could have a direct impact on the lives of tens of thousands of Puerto Ricans who are serving or have served with pride in the U.S. armed forces. The U.S. military would be fully dismantled and removed from the Republic of Puerto Rico. As the PIP believes in a completely demilitarized island, Puerto Rico would become defenseless to foreign intervention, drug cartels, and terrorist organizations, some of them as near as Colombia.
With few exceptions, newly independent nations have struggled economically. Those that have succeeded have been able to do so based on a pro-business climate that has attracted foreign investment and adopted pro-market principles and reforms. The prospects in this regard from groups that advocate independence for Puerto Rico arent too bright.
The Republic of Puerto Rico would inherit from the commonwealth not only a gigantic and inefficient government but also a public debt of over $30 billion (as of 2004), payable in U.S. dollars, not Puerto Rican currency. The situation has deteriorated since credit-rating agencies recently announced a negative outlook for general obligation bonds of the commonwealth government. The costs of maintaining a national government and making the required investments to upgrade electricity, water, ports, waste disposal, and other basic infrastructure would present an overwhelming financial challenge to the new republic.
Independence advocates believe that under independence, Puerto Rico would be more efficient in attracting foreign direct investment through treaties like those Germany, France, Great Britain, Canada, and Japan have signed with other developing nations. Nevertheless, dozens of small independent countries around the world have had the opportunity to enter into these international treaties for decades, or have done so, yet most are still way behind Puerto Ricos economic performance as a U.S. territory.
Puerto Rico could presumably benefit from the dispositions of the U.S. Internal Revenue Code and international treaties, through which U.S. companies would get tax-exemption benefits similar to those formerly offered under Section 936, meaning Section 901. In reality, a considerable number of U.S. companies that were operating in Puerto Rico under Section 936 have converted to Section 901, which allows controlled foreign corporations (CFCs) a credit for taxes paid from their operations outside the U.S. mainland. The PIP proposes to tax the Puerto Rican profits of these corporations, but these tax payments would be returned in such a way that the federal government couldnt interpret these corporations as receiving a tax subsidy.
To achieve this, the PIP proposes the creation of an incentive mechanism financed by taxes collected from CFCs, from which other companies could benefitfor example, use of electricity at a lower cost; transportation infrastructure; employee training; development of new production, administrative & marketing techniques; improved productivity, protection of the environment, among others. According to the PIP, a credit or subsidy system could profit all or one of these areas. The net result would be that the CFC would be able to deduct all of the taxes paid in Puerto Rico from its federal taxes, and it would get most of the money back in benefits such as those described above.
Through these programs, the PIP is proposing to reduce the cost of doing business on the islandin the same way the commonwealth has been doing for decadesby penalizing the individual local taxpayer.
Risk to investors
Stateside investors, businesses, and the federal government have billions in assets at risk in Puerto Rico, including, but not limited to, real property, machinery & equipment, and billions in government and private debt. There are also billions in outstanding home loans guaranteed by the U.S. government and private investors, which are particularly dependent on long-term economic stability. Many U.S., foreign, and local firms and investors have relied upon the protection of federal laws for their investment decisions.
According to the Hexner study, fiscal difficulties in an independent nation could put these bonds at risk for nonpayment. The elimination of federal transfers (a full third of Puerto Ricos revenues) and the increased expenses of a new nation could put added pressure on the governments ability to meet debt-service requirements.
Freddie Mac (the Federal Home Loan Mortgage Corp.) and Fannie Mae (the Federal National Mortgage Association) have purchased billions in Puerto Rico loans that U.S. investors now hold as mortgage-backed securities. Both corporations would be at risk in the event of any property dislocation in Puerto Rico, as both guarantee the payments on the securities. In addition Ginnie Mae (the Government National Mortgage Association) guarantees billions in Federal Housing Administration loans in Puerto Rico.
According to the Hexner study and other independent studies, Puerto Ricans would leave for the U.S. mainland in greater numbers under the independence option than under any other political status. There is a significant risk that U.S. citizens wouldnt remain in Puerto Rico since their federal benefits would decline and eventually would be completely cut off under the republic.
As U.S. citizens, Puerto Ricans already have free mobility between the island and the States, and they travel to visit friends and family and to work. Travel by U.S. citizens between Puerto Rico and the mainland is already highly sensitive to economic and political conditions on the island. Independence would threaten to significantly increase the levels of migration to the mainland.
In a poll conducted in May 1997, 30% of Puerto Ricans indicated they would move to one of the 50 states if Puerto Rico were to become a separate sovereign nation, according to the Hexner study. That means over 1.2 million Puerto Ricans wouldnt contribute to the Puerto Rican economy, meaning, among other things, less revenue for the government, which would put additional financial pressure on the new republic. The probability is that a substantial number of these Puerto Ricans would be from the middle and upper-middle income classes.
Not enough foreign aid
Some independence advocates point out that an independent Puerto Rico would have access to development assistance not only from the U.S. but from other countries as well. Nevertheless, world foreign aid isnt that large, at least relative to the sum Puerto Rico receives from U.S. domestic programs.
There are 22 wealthy economies that contribute most of the worlds foreign aid to approximately 180 recipient countries. In April 2004, the Organization for Economic Cooperation & Development issued a preliminary estimate of the total official development assistance (ODA) in 2003 of $68.5 billion. The U.S. ranked first, contributing $15.9 billion, almost one-fourth of the total. Puerto Rico now receives close to that amount from the U.S.
In addition, development assistance to Latin America has been declining. In 2000, Latin American countries received close to $5 billion in development assistance, 16% less than in 1991. Puerto Rico shouldnt expect much from European countries, as their contributions to Latin America from 1991 to 2000 declined by 30%, from $2.58 billion to $1.82 billion. The latter figure is less than half of what the commonwealth government got just in federal-expenditure grants during 2002.
In 2001, ODA from international organizations to Latin American countries amounted to $14.9 billion, 90% of which came from the World Bank, the International Finance Corp., and the Inter American Development Bank. With a reported Latin America population of 522.5 million that year, this development assistance represented $28.52 per capita. Brazil and Mexico received 50% of all development assistance to Latin America. Per capita federal expenditures in Puerto Rico for 2001 (excluding loans and loan guarantees) was $3,460, or over 120 times more than the ODA per capita to Latin America.
In summary, independence for Puerto Rico would allow the government of the republic complete authority in its economic and political decisions. It could also bring economic and political uncertainty and instability and the end of federal programs, services, and funds to the island. Puerto Rico would become one more republic in the Caribbean without the protection of the U.S. Constitution. This could have staggering implications not only for Puerto Rico and the U.S. but also for Puerto Ricans, who are U.S. citizens and would be left behind in the new republic, having lost many of the rights they currently enjoy. It is because of all these negatives that the PIP receives such a poor response from voters in plebiscites and general elections.
Economist Manuel Maldonado assisted with this series. Elisabeth Roman edited the articles.
Next week, CARIBBEAN BUSINESS will examine the economic and political implications of statehood for Puerto Rico.
This Caribbean Business article appears courtesy of Casiano Communications.