Polanco Politics: Puerto Rico’s Debt Crisis

Capture_J C Polanco_2015Puerto Rico’s Debt Crisis

by Juan Carlos Polanco, Esq., MBA

Private financial interests contributed to Puerto Rico’s debt crisis nightmare, and private interests will save it from ruin. Absent Puerto Rican statehood, only a combination of a private financial convention, deregulation and new tax breaks for job creation to tackle an almost 13% unemployment rate, reestablishment of the triple tax incentive on municipal bonds, elimination of arcane parts of the Jones Act, make American money spent or remittances sent to Puerto Rico tax deductible, and an Operation Bootstrap 2015, may save the island from certain financial obliteration


For the last 522 years, the island has been a colony of Spain and the United States. Because of this, the island has not developed the political leadership and financial expertise to sustain a viable and sovereign economy.

Since colonization, Puerto Rico’s inhabitants have been dependent on the whims of their colonial masters as well as subsidies in the form of Spanish situados and American tax policies and welfare entitlements to survive. In my view, those policies and subsidies were designed to assist the island to withstand the violent economic cycles that plague most of Latin America and to protect the colonial powers’ financial and military interest.


Puerto Rico Debt Crisis


Some of these included enormous tax breaks encouraging American companies, particularly drug companies, to aid an economy on the island. To that end, Americans invested millions of dollars setting up universities and reformulating academic curriculums that would provide an educated workforce schooled in the American ways including English.  


One of these colonial policies needs to be reexamined immediately. The Jones Act, a rather complex piece of legislation designed to control the island, prevent foreign powers from gaining a foothold, and keep Puerto Ricans under firm control by limiting their ability to trade independently. The Act forces Puerto Rican merchants to use American ships and ports for commerce and adds millions of dollars of unnecessary costs to industry. That may have been the right course of action in the early 20th century but in our new integrated global economy, time and economic imperatives have passed by the Jones Act. Today, the Jones Act is crippling the Puerto Rican people. Congress must repeal the Jones Act.


Congress must allow investors the opportunity to earn triple incentives if they purchase Puerto Rican municipal bonds. Bondholders were free of federal, state and local taxes. Many took advantage of this and invested heavily, even well after the Puerto Rican officials and “vulture” hedge fund managers became aware that the tax incentive would disappear. Irresponsibly, several island administrations doubled down on the sales of these junk instruments –relying on false revenues and with no real plan to repay the accumulated $73B debt.


The solution to Puerto Rico’s debt crisis may be right in our history books.

In 1907, several years after the assassination of the dictator Ulisis Hereaux of the Dominican Republic, that nation was left with a national debt surpassing $1.5 billion (in today’s dollars), the United States stepped in to protect Dominican assets. In order to prevent foreign (i.e., European) debt holders from invading the island nation and liquidating assets, the United States government (under President Teddy Roosevelt) developed the Dominican American Convention.


The convention allowed for the US to collect fees from the customs houses and to reorganize the Dominican banking system. Although a military occupation followed in 1916 and it took 33 years to repay that debt, the debt was repaid and the Dominican peso stabilized.


Because Puerto Rico is a commonwealth, not a sovereign nation, it does not qualify for funds from the International Monetary Fund (IMF) or US foreign aid. And because it isn’t a state, American bankruptcy laws do not apply. However, placing Puerto Rico in private receivership in order to reorganize the island’s finances does not require sovereignty or statehood. I believe that allowing American financial interests to assume the debt of Puerto Rico, and to handle the cash flow of island revenues, the debt would decrease and the economy would begin to stabilize.


The major industry in the Caribbean is tourism. With American labor and minimum wage laws applying to Puerto Rico, it remains difficult for hotel builders to develop in Puerto Rico as opposed to the Dominican Republic where workers earn $60 a week as opposed to $240 week in PR. Cuba and Dominican tourism tripled in recent years, leaving Puerto Rico in the dust. As the American and Cuban relationship warms up, the future in Puerto Rico tourism looks to grow cold. which presently makes up only 2.3% of the commonwealth’s GDP.


To increase tourism’s contribution to the GDP, Congress must encourage tourism to Puerto Rico. New York Governor Andrew Cuomo and Assembly Speaker Carl Heastie have pledged a $5 million joint I LOVE NY tourism campaign to promote travel between New York and Puerto Rico.


In light of the competition for the American dollar from other islands in the Caribbean, Congress should allow American travelers to Puerto Rico take a tax deduction. I believe that a tourism deduction would stimulate tourism and generate an economic stimulus for the Puerto Rican economy. 


It is in all interests that Puerto Rico resolve its debt crisis.


J.C. Polanco, Esq., MBA, teaches History, Latino Studies, Economic Development of the Dominican Republic and Caribbean at the City University of New York. Polanco is the NYC Director for the NY Assembly GOP, Republican contributor for Univision NY, appears regularly on NY1 Inside City Hall, Pura Politica and BronxNet.

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