How a debt crisis is drowning Puerto Rico

July 22, 2015

Puerto Rican socialist Daniel Orsini provides the historical background for understanding the island nation's dire economic crisis--and who's to blame for it.

PUERTO RICO'S Gov. Alejandro García Padilla has declared the island's $72 billion debt "unpayable" and is calling on the U.S. government and Puerto Rico's creditors to negotiate debt relief and other measures to restore Puerto Rico's economic viability.

In a Western Hemisphere replay of the debt crisis strangling the Greek economy, attempts by Puerto Rico's government to stabilize its economy through a combination of harsh austerity measures and further borrowing has created a vicious circle that chokes off economic growth, which only makes the debt overhang bigger.

Among the cutbacks and other measures imposed by Garcia's Popular Democratic Party (PPD), which is aligned with the Democratic Party in the U.S., are massive closures in the public school system; a sales tax increase from 7 to 11.5 percent; the rollback or elimination of public-sector pensions; cuts in teachers' health care benefits; an increase in the tax on a barrel of oil from $9.25 to $15.50; and steep increases in water and electricity bills.

Puerto Rico's Capitol building in San Juan

Puerto Rico's gross national product has fallen on average by 2 percent each year for the last eight years. Some 270,000 jobs have been eliminated. The rapid deterioration in Puerto Rico's economic climate led 140,000 residents to flee the island in 2014 alone.

The government's austerity measures amount to an all-out offensive in the war against all working class people in Puerto Rico. But make no mistake: the colonial government is merely a "front man" for Corporate America and the wolves of Wall Street, which have been extraordinarily successful at compelling a string of governors to implement various neoliberal packages during the past two decades.

Puerto Rico's Shock Doctrine

The year was 1993, and the pro-statehood New Progressive Party (PNP), which is aligned with the U.S. Republican Party, was in power. The governor, Pedro Rosselló González, was the most extreme neoliberal voice the island had ever experienced. He was our native Ronald Reagan, our Margaret Thatcher. With an iron fist, he implemented dramatic changes in the colonial government and society.

One of his first laws, known as "Mano dura contra el crimen" ("Strong hand against crime")--led to the occupation of poor and working-class barrios and projects by the National Guard and militarized police. Cops set up checkpoints at the entrances and exits of targeted communities and, from these strategic strongholds, directed a campaign of brutality, harassment and intimidation against thousands of individuals and families throughout the island. The government's decapitation of the chief organized crime syndicate in Puerto Rico created one of the bloodiest gang wars ever seen, as various players vied for control over the suddenly headless drug trafficking business.

Puerto Rico used to have a relatively robust public-health system that depended on infrastructure all across the island. It was fairly accessible and affordable. If a person got sick, he or she could simply go to the hospital and get treated--no insurance card needed. But Gov. Rosselló privatized the whole system.

He did that by selling off hospitals at almost half their market value and issuing the island's residents private insurance coverage paid for out of public revenue (something like Obamacare). Nowadays, the Puerto Rican health system is on the edge of collapse. Doctors are fleeing the island, which is further raising the cost of health care, and the government's constant scramble to keep up with its health care bills has the entire system sinking in quicksand.

In 1998, the PNP government privatized what used to be one of the island's wealthiest public corporations: Telefónica de Puerto Rico (Puerto Rico Telephone). Telefónica's militant unions waged a fierce battle to maintain the company as a public asset, enjoying active solidarity from many unions in both the public and private sectors, as well as university students and the public generally.

The telephone workers organized a 41-day strike that became known as "La Huelga del Pueblo" (The People's Strike) because it inspired the participation of thousands of people across the island and beyond, including a two-day general strike and dozens of direct actions and work stoppages at various strategic workplaces. But it still wasn't enough. A heavily repressive governmental response defeated the strike and paved the way for privatization of the Telefónica.

In 1999, Rosselló cut $40 million from the University of Puerto Rico's budget. He was now on the offensive, and no social movement seemed capable of stopping him.

His administration also passed "Ley 40" (Law 40), which represented a broad attack on the rights of public-sector workers. In 2008, the governor used the provisions of that law, which made it illegal for teachers to go on strike, to decertify the grassroots Federación de Maestros teachers union after a 10-day strike.

Rosselló wasn't the first or the only governor to implement neoliberal policies, but until he took power, no one had done it so effectively or widely. Rosselló's neoliberal "reforms" contributed $10 billion of debt to the current $72 billion debt crisis.

After Rosselló's rule, the PPD won the next two gubernatorial elections, and continued to advance the neoliberal agenda, but in a more populist fashion. During the first two weeks of May 2006, the island government shut down because the executive branch controlled by the PPD and the House and Senate dominated by the PNP couldn't agree on which form of regressive taxation to implement in order to balance the budget.

The PPD preferred a value-added tax, which is a common form of taxation in Latin America, while the PNP preferred a U.S.-style sales tax. The successive PPD administrations of Sila María Calderón Serra, the first woman elected governor of Puerto Rico, and Aníbal Acevedo Vilá added to Puerto Rico's debt by $13.3 billion and $10.1 billion, respectively.

When the PNP returned to power in 2009, Gov. Luis Fortuño Burset quickly became a contender for Pedro Rossello's legacy as the island's foremost neoliberal heavyweight. Fortuño was a card-carrying member of the U.S. Republican Party and public admirer of Milton Friedman. He held up Ronald Reagan as the best president in American history. With that pedigree, it wasn't difficult to envisage his plans for Puerto Rico.

During his four-year term, a two-month-long student strike shook the island to its roots. An $800 increase in student fees was the detonator for this historic struggle that led to the student occupation of all 11 campuses of the University of Puerto Rico. While public and private police forces meted out violence and repression, the students fought back--with street art, political strategy, ingenious solidarity campaigns and, of course, self-defense.

But Fortuño's greatest neoliberal legacy was the "Special Law Declaring a Fiscal State Emergency and the Establishment of an Integral Plan of Fiscal Stabilization to Save Puerto Rico's Credit." No one in Puerto Rico knew the law by this ridiculous name--we just called it "La ley 7" (Law 7).

Law 7 resulted in the dismissal of 30,000 public employees, the freezing of all collective bargaining agreements in the public sector, massive tax credits for corporations, and on and on. Law 7's shock waves still reverberate in the collective consciousness of the people of Puerto Rico.

Fortuño's contribution to the debt was the most generous of all--he added as much to the debt as the previous two PPD governors combined: $23.4 billion. By the time he left office, the debt of Puerto Rico stood at $70 billion.

Last but not least, the current neoliberal in the Fortaleza (the governor's mansion) is Alejandro García Padilla. He represents the PPD's most conservative wing and has distinguished himself through his poor leadership, his marriage of the interests of national and international capital, and his shameful acceptance of the notion of Puerto Rican "democratic self-government" under the terms of U.S. military occupation.

His victory in the 2012 election was based on the logic of "lesser evilism." A lot of independentistas (people who support Puerto Rico's political independence), nonpartisans and even the PNP's working-class militants joined together to defeat Fortuño's bid for reelection. But the honeymoon with García Padilla was short-lived. A few weeks after his inauguration, García Padilla consummated Fortuño's efforts to privatize the island's international airport.

The Greece of the Caribbean

Alejandro García Padilla's rule has coincided with the worst economic crisis in Puerto Rican history. For good reason, Puerto Rico is now known internationally as "The Greece of the Caribbean." Puerto Rico's debt is roughly $72 billion, which amounts to nearly 70 percent of GDP. Greece's debt stands at 177 percent of GDP.

Besides the difference in their debt proportions, there are other significant factors to take into account. Since 1898, the year that the U.S. Navy bombarded Puerto Rico and began the occupation that continues to the present day, the island's economy has existed to serve the military, political and economic interests of the North American empire. For example, Puerto Rico's imports more than 80 percent of its consumer goods. Want to guess where they come from? That's right: the United States of America.

And that's not all. The Jones Act passed by the U.S. Congress in 1920 requires that all shipping to and from U.S. ports be conveyed by U.S. vessels and crews. As Nelson Denis, author of War Against All Puerto Ricans: Revolution and Terror in America's Colony, explains in a recent blog post:

This includes cars from Japan, engines from Germany, food from South America, medicine from Canada--any product from anywhere. In order to comply with the Jones Act, all this merchandise must be off-loaded from the original carrier, reloaded onto a U.S. ship and then delivered to Puerto Rico. It all makes as much sense as digging a hole and filling it up again. This is not a business model. It is a shakedown. It's the maritime version of the "protection" racket.

As a result, Puerto Rico's imports cost at least twice as much as neighboring islands.

Added to this burden, Puerto Rico can't establish trade relations with other countries without U.S. permission. A few years ago, for example, former Venezuelan President Hugo Chávez offered Puerto Rico a generous deal that would have brought a steady flow of Bolivarian crude oil to the island on very favorable terms. It didn't take long for the U.S. Congress to forbid such an arrangement.

The structure of the debt itself also distinguishes Puerto Rico from Greece. Puerto Rico's lack of sovereignty means that it cannot secure loans from the International Monetary Fund or World Bank. As a result, its debt takes the form of lines of credit and bond issues traded on the open market. In June 2015, Fortune magazine reported that more than 50 percent of the island's debt is owned by the infamous vulture funds. According to the hedge fund watchdog site, the debt vultures have a take-no-prisoners strategy for the island:

Hedge funds and billionaire hedge fund managers have swooped into Puerto Rico during a fast-moving economic crisis to prey on the vulnerable island. Several groups of hedge funds and billionaire hedge fund managers have bought up large chunks of Puerto Rican debt at discounts, pushed the island to borrow more, and are driving towards devastating austerity measures. At the same time, they are also using the island as a tax haven...They are fueling inequality by demanding low taxes on wealthy investors, higher taxes on working people, lower wages, harsh service cuts and privatization of public schools...The spoils they ultimately seek are not just bond payments, but structural reforms and privatization schemes that give them extraordinary wealth and power--at the expense of everyone else.

But perhaps the starkest difference between Greece and Puerto Rico at the moment is the character of the ruling political party. The agreement of Greek Prime Minister Alexis Tsipras to a new round of austerity measures has left the people of Greece and the international left with a bitter taste of betrayal after the historic July 5 referendum against austerity. Yet trying to compare Tsipras' left-wing SYRIZA government with García Padilla's PPD government would be like comparing Chile's former President Salvador Allende with the general who overthrew him in a coup, Augusto Pinochet.

While SYRIZA members are arguing in workplaces and communities for social revolt against austerity, García Padilla commissioned former IMF official Anne Krueger to issue a report on the island's economic situation as well as to propose solutions to the debt crisis. In keeping with the IMF's record of further impoverishing poor countries around the world with its program of "structural adjustment," the Krueger report prescribes the same bitter medicine to "improve" Puerto Rico's health:

Restore competitiveness by lowering labor costs, including eliminating the federal minimum wage and other deregulation of labor markets;

Cut federal welfare payments because they are "too generous" relative to Puerto Rico's low wages;

Allow private companies to compete with the public sector in generating electricity while keeping public electrical transmission and distribution, which are the least cost-effective sectors of the energy industry;

Reduce subsidies for the University of Puerto Rico;

Cut Medicaid benefits in excess of minimum standards on the U.S. mainland.

If Puerto Rico decides to impose the utterly predictable economic policy proposals of an IMF veteran like Anne Krueger, the island will most definitely follow Greece's path toward an ever-greater debt crisis.

Fight Like a Greek

If the people of Puerto Rico, including those who have recently fled in search of a better life, don't want the island's destiny placed in the hands of vulture-fund managers, transnational corporations, the U.S. and its colonial puppet government, we must fight--as the Greek people have been for some years now.

The Puerto Rican left has been evolving and transforming itself in recent years, but it still has yet to congeal into any semblance of a coherent social force. At this juncture, different groups have been organizing assemblies to assess the current situation and call for the development of a social movement capable of reaching beyond the organized labor and student movements in order to challenge the austerity regime.

At the beginning of June, more than 100 young activists from across the island participated in a youth assembly. In July, there was a progressive artists assembly as well as a women's assembly. These meetings are taking place in the run-up to a rally outside the island's Capitol on July 24.

The Puerto Rican nation is made up of roughly 8 million Puerto Ricans; only 3 million currently live on the island, while a majority of the rest lives in the U.S. Any serious political contribution to challenging U.S. imperialism and neoliberalism and to fighting for independence and socialism on the island must base itself not only on Puerto Ricans living in the colony, but also those living in the belly of the beast.

Further Reading

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