Puerto Rico: A U.S. Territory in Crisis

A man rides his bicycle through a damaged road in Puerto Rico after Hurricane Maria.
A man rides his bicycle through a damaged road in Puerto Rico after Hurricane Maria. Ricardo Arduengo/AFP/Getty Images

The Caribbean island, which shares a close yet fraught relationship with the rest of the United States, faces a multilayered economic and social crisis, rooted in long-standing policy and compounded by natural disasters, political instability, and migration.

Last updated February 13, 2020

A man rides his bicycle through a damaged road in Puerto Rico after Hurricane Maria.
A man rides his bicycle through a damaged road in Puerto Rico after Hurricane Maria. Ricardo Arduengo/AFP/Getty Images
Backgrounder
Current political and economic issues succinctly explained.

Puerto Rico is a political paradox: part of the United States but distinct from it, enjoying citizenship but lacking full political representation, and infused with its own brand of nationalism despite not being a sovereign state. More than a century after being acquired by the United States from Spain, the island continues to grapple with its status as a U.S. territory and the legacy of colonialism in the Caribbean.

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That debate remains as relevant as ever, with Puerto Rico struggling with the combined effects of economic depression, debt crisis and bankruptcy, natural disasters, and political instability. Absent a solution, migration to the U.S. mainland is likely to continue to surge. At the same time, a resolution of Puerto Rico’s debt woes could serve as a template for debt-saddled U.S. states.   

What is Puerto Rico’s historical backdrop?

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Christopher Columbus reached the island that would become Puerto Rico, then home to the indigenous Taino people, in 1493, ushering in more than four hundred years of Spanish rule. It became a critical military outpost, allowing Spain to defend its New World colonies against other European powers. By the eighteenth century, Puerto Rico had become a major exporter of tobacco, coffee, and sugarcane. Yet discontent with colonial rule led to a growing independence movement on the island, and Spain granted Puerto Rico self-government in 1897.

Just months later, however, the United States invaded the island during the 1898 Spanish-American War, a broader U.S. effort to push Spain out of the Caribbean and the Pacific.  Spain lost the war and ceded Puerto Rico to the United States, along with other territories, including Guam and the Philippines.

 

How has its relationship with the United States evolved?

A raft of legislation and court rulings in the early twentieth century forged a unique relationship between Washington and its Caribbean territory. After two years of direct U.S. military rule, the 1900 Foraker Act reestablished a civilian government and specified Puerto Rico’s territory status. While it had an elected legislature, the U.S. president appointed the island’s governor and other major officials. The Foraker Act also granted Puerto Ricans a nonvoting representative in Congress, but not citizenship. Ambiguity over the island’s status was fueled by Supreme Court cases [PDF] that declared it an unincorporated territory with no clear path to statehood.

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By 1917, Congress had granted Puerto Ricans U.S. citizenship, as the newly created Panama Canal increased the island’s strategic value. That spurred a wave of migration, with more than one million Puerto Ricans moving to the mainland by the mid-1960s.

In the wake of World War II and a global wave of decolonization, U.S. policymakers faced pressure to increase Puerto Rico’s autonomy. In 1946, President Harry S. Truman installed the territory’s first native-born governor. A year later, Congress granted residents permission to elect their own governors. In 1952, it approved a constitution that recast the island as a U.S. commonwealth capable of independently conducting its own affairs, including choosing its own leaders.

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Puerto Rico’s economy boomed in the postwar period, with per capita income jumping by more than 500 percent between 1950 and 1971. An economic development plan known as Operation Bootstrap transformed the largely agrarian island into a manufacturing magnet, relying on federal tax exemptions, low labor costs, and other incentives to draw American companies to the territory.

 

What does its territory status mean?

Article 4, Section 3, of the U.S. Constitution, known as the territorial clause, gives Congress broad authority to govern U.S. territories. Puerto Rico is the most populous U.S. territory. Others include American Samoa, Guam, the Northern Mariana Islands, and the Virgin Islands. They are granted various measures of self-rule by Congress, but lack their own sovereignty. 

Though Puerto Ricans are U.S. citizens eligible for military conscription and subject to federal laws, they lack full congressional representation. A single member of the U.S. House of Representatives, known as the resident commissioner, represents the island’s interests but has no voting power. Nor can Puerto Rican residents cast ballots in U.S. general elections.

Puerto Rico also lacks economic sovereignty. The U.S. dollar is its currency, U.S. federal regulators oversee its businesses, and U.S. laws dictate its trade policy. Residents pay most federal taxes; their contributions totaled $3.6 billion in 2016. However, Puerto Ricans generally do not pay federal income tax, and they continue to enjoy the tax exemptions that have historically incentivized outside investment. 

Largely because of these exemptions, residents receive fewer federal benefits than other Americans. Puerto Ricans are ineligible for the Earned Income Tax Credit and Supplemental Security Income and earn less, on average, in Social Security and veterans’ funding. Still, the island receives more in benefits than it pays in taxes, like most U.S. states. The U.S. government has distributed about $15 billion in disaster funding alone to Puerto Rico since 2017, when annual federal revenue from the territory was $3.4 billion [PDF].

What is the island’s current economic situation?

Puerto Rico has been ravaged by economic recession over the past thirteen years. It has also entered bankruptcy proceedings after defaulting on its massive debt, a downward spiral that has been compounded by natural disasters, political unrest, and population decline.

Economic growth fell by nearly 10 percent between 2004 and 2018, while Puerto Rico’s population declined by more than 16 percent. The island’s average household income is about one-third of the nationwide average, and its unemployment rate, though it has fallen from a high of 17 percent in 2010, remains above 8 percent, more than twice the national average. Recent estimates suggest that the territory’s poverty rate is about twice that of the poorest state, Mississippi.

Meanwhile, Puerto Rico’s debt skyrocketed over the past decade, reaching $123 billion [PDF]—118 percent of gross domestic product—in 2017. On a per-person basis, this far outpaces any U.S. state. Unable to borrow on global markets, Puerto Rico is in economic limbo after turning over its budget to an independent control board appointed by Washington as part of a plan to restructure its debts. Making matters worse, in 2019, U.S. authorities arrested former high-level officials in a corruption scandal, leading to the resignation of Governor Ricardo Rossello.

What has driven the crisis?

Experts say the island’s economic crisis is rooted in [PDF] twentieth century legislation that encouraged Puerto Rico’s reliance on debt to fill federal funding gaps. It did this by giving bond investors higher returns and loosening borrowing limits. Since 1917, lenders to Puerto Rico have been exempt from local, state, and federal taxes—the so-called triple tax exemption—effectively boosting their profits and making the island a more attractive investment. The territory’s constitution also allows Puerto Rico to balance its budget with debt, among other provisions that facilitate borrowing.

The debt problem accelerated after 1996, when the U.S. government began phasing out Internal Revenue Code Section 936. This provision had allowed American businesses to operate tax-free in Puerto Rico, which critics viewed as a windfall for wealthy corporations.  Section 936’s repeal triggered a deterioration of Puerto Rico’s manufacturing sector, and the territorial government increasingly turned to debt to cover its spending.

The 2008 global financial crisis hit Puerto Rico especially hard, with the recession further lowering tax revenues, souring an early-2000s construction boom, and giving investors pause. The territorial government implemented austerity measures, including layoffs of public workers, that sent unemployment soaring. It also crafted dubious deals to balance its budget, including letting government agencies borrow from one another to pay back bonds. 

On top of that, experts say, much of this money was poorly spent. Leaders failed to parlay the billions of dollars they borrowed into strong institutions, a deficit laid bare by the natural disasters that have devastated Puerto Rico’s underfunded and poorly maintained infrastructure. Hurricane Maria brought ruin to the island in 2017, causing about three thousand deaths [PDF], knocking out the electrical power grid, and costing tens of billions of dollars. An earthquake at the start of 2020, the island’s strongest in a century, also created a power blackout.

These troubles have driven an exodus from the territory, further depressing economic activity, crippling schools and other institutions, and leaving fewer taxpayers to shoulder the debt. Of all living Puerto Ricans born on the island, more than half have moved elsewhere, with about 130,000 residents fleeing to the mainland after Hurricane Maria alone. More people of Puerto Rican descent now live on the mainland than on the island, and the territory’s population is predicted to fall by another 8 percent [PDF] by 2024.

What are its options for dealing with the debt crisis?

Since it began defaulting on major debt obligations in 2016, Puerto Rico has struggled with how to pay its creditors—many of whom hold bonds that are protected by Puerto Rico’s constitution—while maintaining basic public services and avoiding an even deeper economic collapse.

As a territory, its options are limited. It cannot receive International Monetary Fund assistance, like insolvent countries such as Greece have. Neither can it file for Chapter 9 bankruptcy, which municipalities such as Detroit have used to receive legal protection against creditor claims while they restructure their payments. Compounding the problem is the sheer size of the debt: Puerto Rico’s is by far the biggest government bankruptcy in U.S. history.

The island’s legislature tried to design its own restructuring process [PDF], which would have allowed public services to continue uninterrupted while it negotiated lower debt payments, but the U.S. Supreme Court rejected the law. Congress and President Barack Obama’s administration drew up an alternative plan, the 2016 Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).

Most notably, PROMESA created a seven-member financial oversight board appointed by the White House that was granted full control of Puerto Rico’s finances. It also created a debt restructuring process similar to Chapter 9 that governed negotiations with creditors to reduce debt payments.

Those negotiations have been beset by controversy, as it became clear that all involved— bondholders, Puerto Rican pension funds, and other public services—faced steep losses. In September 2019, the PROMESA board announced a sweeping plan that would cut the island’s debt by one-third, largely by imposing losses on creditors.

But many bondholders have promised to challenge the plan in court. Other critics allege that the process undermines the territory’s already weak self-rule and that its actions, including cuts to health care and education, further compromise the island’s frail institutions. At the same time, some experts have suggested Puerto Rico’s experience could be a potential test case for heavily indebted U.S. states such as Illinois and New Jersey, which are also constitutionally ineligible for bankruptcy protections.

What are the arguments for changing Puerto Rico’s status?

The island’s relationship with the rest of the United States is the subject of vigorous debate. Puerto Rico’s political parties, which are distinct from the mainland’s Democratic and Republican blocs, hold different views on changing the island’s status. The five major positions are:

Status quo. Some say the U.S.-Puerto Rico relationship should remain as is. The centrist Popular Democratic Party has historically championed the status quo, which is also called the commonwealth position.

Enhanced commonwealth. Others, including some PDP members, advocate what they call an enhanced version of Puerto Rico’s current commonwealth status. This could include allowing the island to conduct its own foreign policy and exempting it from federal law. However, U.S. officials—including a presidential task force and the Justice Department—have repeatedly dismissed this option.

Statehood. Proponents of statehood, including the island’s other major party, the New Progressive Party, say it would finally make Puerto Ricans full citizens. Additionally, the island could receive at least $1.7 to $5.4 billion more [PDF] in federal benefits, including Medicare and Medicaid, according to recent estimates. The U.S. Constitution gives Congress the authority to create new states, though territories have no defined road to statehood, and giving Puerto Rico senators and full representatives could shift the country’s balance of power.

Independence. Puerto Rico has a long history of pro-independence movements, dating back to uprisings against Spanish and American colonial rule. Nationalists have attempted to assassinate a U.S. president, Harry Truman, and they carried out a wave of more than 130 bombings on the mainland during the 1970s and 1980s. The island’s Independence Party argues for full sovereignty, but support for that position has dwindled to single digits.

Free association. Supporters of free association envision an independent, sovereign Puerto Rico still closely linked to the United States. The federal government has similar relationships with the Marshall Islands, Micronesia, and Palau, which receive U.S. aid, military protection, and immigration benefits, but not citizenship.  

Residents have weighed in on the island’s status in five plebiscites since 1967. Today, public opinion is split between statehood and some form of the current commonwealth. However, inconsistent options, allegedly biased ballot language, and boycotts—only 23 percent of Puerto Ricans participated in the most recent referendum, in 2017—have cast doubts on the results. 

Some presidents have sought to move the needle [PDF] on Puerto Rican rights and status, with Presidents Gerald Ford and George H.W. Bush publicly favoring statehood, but Congress has declined to pursue the matter. 

What else could be done?

Beyond a change in political status, Washington could do more to ease Puerto Rico’s crisis, observers say. Some have called for federal policymakers to implement an economic stimulus program, which the territorial government cannot do because of federally imposed spending restrictions. The Obama-era Affordable Care Act (ACA) provided Puerto Rico with billions of dollars in additional spending, but the ACA aid expired [PDF] in 2019.  

Others propose that Congress change territory-specific policies that disadvantage Puerto Rico. The Jones Act, passed in 1920, requires goods traveling by sea between the mainland and Puerto Rico to be transported only by U.S.-built, -owned, and -operated vessels, which drives up prices on the island. Repealing it could create more than thirteen thousand jobs [PDF] and inject $1.5 billion into the economy.

Disaster relief is another area of contention. Washington has allocated more than $44 billion in emergency aid to the island since 2017, but the Donald J. Trump administration was criticized for what researchers say [PDF] was a slower, smaller federal response following Hurricane Maria compared to what states have received after natural disasters. Nearly two years after the storm, only about one-third of allocated government relief funds had reached the island. After earthquakes wracked Puerto Rico in January 2020, the administration released about $16 billion in already-allocated relief for the territory. However, the aid comes with stringent conditions and is subject to PROMESA board oversight.

Zoltan Aguera contributed to this report.

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Resources

In Foreign Affairs, Antonio Weiss and CFR’s Brad W. Setser explain Puerto Rico’s “perpetual crisis.”

This Congressional Research Service report describes the U.S.-Puerto Rico relationship [PDF].

George Mason University’s Mercatus Center analyzes historical roots [PDF] of Puerto Rico’s economic crisis.

CNN visualizes the Puerto Rican exodus following Hurricane Maria.

Pacific Standard explores young Puerto Ricans’ decisions to leave or remain on the cash-strapped island.

The Atlantic lays out how Hurricane Maria deepened Puerto Rico’s existing public health crisis.

Quartz explains the economic crisis through charts.

CFR’s Brad W. Setser explains the February 2020 debt restructuring deal between the PROMESA board and Puerto Rico's creditors.

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