Junk Status: Economic Reform for Puerto Rico

by / 0 Comments / 39 View / June 24, 2014

During the month of February, both Moody’s and S&P downgraded Puerto Rico’s credit status to “junk” level. The reduction was not unexpected considering that the island has a $70 billion debt and an unemployment rate of 15.4 percent. What remains to be solved is the handling of an economic crisis that directly affects the United States.

Alejandro Garcia Padilla, Puerto Rico’s current governor, has responded to the crisis by implementing a 1.1 percent tax austerity measure. While the tax is projected to reduce the deficit by $1.4 billion, it hits small businesses the hardest, stalling consumer spending and contributing to the mass exodus of professionals. What the Puerto Rican economy needs now is a plan aimed at expanding trade through the reform of the Jones Act of 1920.

The Jones Act, which addresses maritime transport, requires that cargo between U.S. ports be carried by vessels that are (1) registered in the U.S., (2) built in the U.S., and (3) manned by U.S. citizens. Since Puerto Rico is an island, it (along with Hawaii, Alaska and Guam) depends heavily on maritime transportation and is greatly affected by the limitations placed by the Jones Act. A reform lifting the requirement a ship must be U.S.-flagged in order to permit trade between ports for U.S. territories and non-continuous states would reduce the cost of living in Puerto Rico and boost job creation.

The Act already creates 500,000 jobs in the United States. Lifting the U.S.-flagged requirement would not directly affect jobs because U.S.-flagged ships would still be required to be built in the U.S. and manned by U.S. citizens. The reform would in fact encourage competition in maritime global trade. The reform would additionally include an amendment that would reestablish the flag requirement during times of war and national emergencies.

With Puerto Rico’s economy hanging in the balance, evaluating the island’s political status along with its economic crisis is inevitable. However, Puerto Rico’s economic stability must be prioritized over its political status. Whether or not Puerto Rico becomes a state or a nation, it will need a stable economic base before it can contribute to the U.S. or to the international community. Reforming the Jones Act can provide this base if it is approved by the U.S. Senate before the island’s status is determined. Decades of mismanagement will not be fixed on a short-term scale, but both Puerto Rico and the United States can benefit from addressing an expected problem with an unexpected solution.