America’s Former Spanish Colonies at Painful Crossroads

by Roy C. Smith

Puerto Rico’s $73 billion bankruptcy, the largest ever among US municipalities, brings to mind the sad history of two former Spanish colonies in the Caribbean – the other being Cuba - annexed to the US in 1898 after the Spanish-American War.  Though Cuba (current population 11.2 million) was allowed to become an independent nation in 1902, it did so under conditions that essentially made it an economic colony of the US that collapsed into the corrupt, authoritarian state overthrown by Fidel Castro in 1959.  Puerto Rico (current population 3.5 million) was retained as a “Territory” of the US just as Guam (also acquired in 1898) is today, and Hawaii was before it became a state. Congress made Puerto Ricans US citizens in 1917.

Both Cuba and Puerto Rico have retained similar Spanish-speaking cultures and traditions (note the similarity of their flags), and both have had the presumed benefit of being closely affiliated with the US acting in a benign capacity to assist in economic and political arenas. US corporations made investments and purchased commodities, mainly sugar, and facilitated commerce and trade in both.

                                                         

Yet, these relationships with the American colossus came with a dark side.

Cuba was considered a tame and useful ally by successive US governments, but otherwise it was ignored. Large corporations freely lobbied Congress to enable them to exploit Cuba’s resources, and ultimately American gangsters came to dominate the oppressive government of Fulgencio Battista. A large portion of the Cuban population was no better off economically in 1959 that it was in 1899. Castro was able to change the government and introduce reforms, but wasted the opportunity to create an economically independent Cuba by rendering it into “Socialismo.” Today, Cuba’s economy, even after several years of efforts to upgrade it by Raul Castro, remains a mess. Its GDP per capital in 2016 was $6,500, about the same as the Republic of the Congo. Puerto Rico’s was $27,900, though this is lower than all but one of the 50 US States and about the same as Russia’s.

Because of its status as a Territory, Puerto Rico has been provided with many more economic advantages than Cuba, but it has never realized its potential. Several efforts to industrialize the island were undertaken through tax benefits offered to entice US corporations (especially in pharmaceuticals) to the island, but as these wore off so too did the investment flows, and Puerto Rico has struggled to keep its economy above water for a decade. Today its unemployment rate is 12% and nearly half the population lives in poverty.

Puerto Ricans, however, as citizens have the advantage of free access to the US. So, when times are tough at home, the best and brightest can relocate to New York or Miami to make their way.  About 10% of the Territory’s population has left in the last decade. There are now more Puerto Ricans (5 million) in the US than in Puerto Rico.  This has had a significant hollowing-out effect on the island’s economic potential.

Also, since 1917, Puerto Rico, as a sovereign Territory, has been able to issue bonds free of any Federal or State tax on interest (tax-free municipal bonds) and, since 1952, Puerto Rican bonds have been enhanced by a Wall Street-backed constitutional provision giving priority to bondholders over all assets and resources of the government. Thus secured, Puerto Rican bonds have long been hugely attractive to US mutual and hedge funds – so attractive that Puerto Rico has been able to issue new bonds continually despite mounting economic problems and a deteriorating credit rating. Accordingly, Puerto Rico’s public debt has exploded well beyond its ability to service it.

Last year, in an effort to assist Puerto Rico in managing its financial burdens, Congress passed a law that enabled the territory to seek a form of bankruptcy protection from its creditors in order to restructure its debt. This law essentially bypasses the Puerto Rican constitutional protection that bondholders have, and sets the stage for a major legal battle that will be fought over the next year or so. A bankruptcy proceeding would take into account the interests of other public creditors and claimants (pensions, public services, etc.) which would dilute the claims of bondholders.

Puerto Rico surely faces a lengthy period of economic austerity, no matter who wins the bondholder lawsuit. The irony is that after a hundred years of operating in the shadow of American capitalism, Puerto Rico has been brought to its knees by it. To regain its solvency, the island will have to become competitive. For this to happen, wages and pensions will have to decline and public services cut back.

Meanwhile, Cuba, after half a century of socialism that has left it on a GDP per capital par with Albania, has ended up in a similar position. So far, Cuba’s efforts to reopen relations with the US have not have much economic benefit. Tourism has experienced a boom (though it is now receding) but Raul Castro’s economic reforms have been cautious and ineffective. After his death, Cuba’s economic future will be open to greater experimentation, but for it to aspire to the GDP per capita of Puerto Rico, it will have to convert itself into a high growth economy.

Both former Spanish colonies have reached points of starting over. It will not be easy for either, but it is essential that they find their way to competent leadership and good policy. Both will have to avoid the perils of socialism, which has wrecked the economies of Cuba, Venezuela, Ecuador and from time to time other former Spanish colonies in America, and of the benign neglect that the capitalistic US bestows on its former colonies.