The Economy of Puerto Rico, Explained [Part 3]
By: Jose Sosa
In collaboration with Asociación de Estudiantes de Economía de la Facultad de Ciencias Sociales, UPRRP
This is the third in a three-part series in which we explain, in simple terms, how the economy of Puerto Rico works. If you haven’t read Part 1, start there.
Part 3: Putting it all together
It’s now time to see the whole picture, tying together the different parts we have described so far. Below, I’ve summarized the impact of both outflows and inflows in dollar amounts.
As you can see in the left graph, money leaves the economy mainly through imports ($12B), repatriated profits ($11B), external debt payments to non-residents ($2B), transportation ($2B), and other outflows ($2B). On the other hand, money flows into the economy through net federal transfers ($17B), local exports ($5B), tourism ($4B), federal agency spending ($2B), and other inflows ($1B). Both inflows and outflows closely match for fiscal year 2015, totaling approximately $29B each (that is, the pool was able to maintain its water level).
What do these numbers tell us? First, $29B left the local economy in 2015 between all sources of outflows. To put that into perspective, total local economic activity as measured by economists (also called GNP) was around $65B, so around 40% of that leaked out. That is a huge amount, and it highlights the problem of having so many foreign owned companies and foreign suppliers, also called absentee capitalism.
So, should we boycott all the foreign businesses and just buy local?
Well, it’s not that simple. The reason these US firms are successful here is because they offer more value to consumers than their competitors. Nobody forces you to buy at Wal-Mart, but people do because they know they’ll get a better deal there than elsewhere. In other words, they’re successful here for a reason, and PR consumers benefit greatly from the products and services they receive in exchange for their money. That doesn’t mean that the current situation is ideal either. If we can somehow get local entrepreneurs to establish businesses that can successfully compete with their US counterparts on both quality and price, the local economy as a whole would benefit greatly from every additional dollar spent on the local businesses vis-à-vis the US business. Remember, each product that gets exported means more money coming in, increasing the size of the economic flow.
Another big takeaway is how big a role net federal transfers and federal agency spending play in plugging the hole left by the outflows of money. In fact, close to 70% of the money that came in 2015 was in some shape or form a federal transfer or expenditure. 70%! Think about what that means for a second. The truth of the matter is that most businesses in Puerto Rico (except those who export) depend on the local economic flow, and this local economic flow owes 70% of its annual refill to net federal transfers and federal agency spending. The question we need to be asking ourselves is whether this an ideal situation for us, and how can we move away from this dependence.
We can do this by increasing the participation of local entrepreneurs in the both the local and the global economy, so we don’t continue to lose 40% of our economic activity every year in the way of imports and repatriated profits. In order to make this happen, we need to promote an entrepreneurial mindset within our youth, and understand that we can and should compete in all industries, not just restaurants and bars.
Essentially, improving our economy boils down to two things: 1) reducing the leaks, or outflows, and 2) increasing the sustainable inflows. Of the inflows discussed above, only tourism and local export companies provide a sustainable path for growth. A good first step would be for our government to stop focusing solely on incentivizing foreign companies to operate here (as with the proposed 245a bill) and instead find ways to incentivize local businesses and local entrepreneurs.
Is there any silver lining? Well, the current system does provide a safety net for those at the bottom, and that’s a huge reason why we don’t see the type of debilitating poverty we see in other countries around Latin America. In Puerto Rico, as opposed to other places, not having a job does not mean not having food to eat or healthcare. Additionally, this safety net also guarantees a certain level of economic activity from which we all benefit, helping the PR economy achieve something resembling a first-world country economy. However, it is also true that the high level of US assistance has zapped the energy out of our workforce, helping to explain our alarmingly low labor participation rates and consistently high unemployment rates. Many people just don’t think it worth the effort to go out and look for a job when they can get by with these government assistance programs.
I think it’s fair to say that US dependence has put a ceiling over PR’s economic potential, but it has also put a floor underneath it. Until things change significantly, its unlikely things get much better, but also unlikely that things get much worse (just look at some countries in the Caribbean and Latin America if you want to know how much worse things can get). However, I believe the first step towards solving any problem is to first understand it. I hope that this series of posts can help with that understanding, as well as inspire people to find ways to keep pushing Puerto Rico forward.
About the author: Jose is an associate at a local investment firm. He decided to write about the local economy to educate himself and help others learn about such an important topic in today’s world. He is 28 years old and lives in San Juan.
Sources
Dietz, James. 2003. Puerto Rico: Negotiating Development and Change. Boulder: Lynne Rienner.
Puerto Rico Planning Board. 2015. Statistical Appendix, Economic Report to the Governor. San Juan: Commonwealth of Puerto Rico, Office of the Governor.
_______. 2015. Balance of Payments. San Juan: Commonwealth of Puerto Rico, Office of the Governor.
Susan M. Collins, Barry P. Bosworth, and Miguel A. Soto-Class, editors. 2006. The Economy of Puerto Rico: Restoring Growth. Brookings Institution.
Machlup, Fritz. 1965. International Trade and the National Income Multiplier. Princeton University.