Republicans plan Detroit-style emergency manager for Puerto Rico

For about a decade, Puerto Rico has been in an economic slump. Last year, the island’s governor, Alejandro García Padilla, announced that Puerto Rico now has an unpayable debt of about $72 billion, which it desperately needs to restructure. More than $2.4 billion in payments are due to bondholders between May 1 and July 1 of this year alone.

To deal with the problem, Republicans in Congress are proposing a Detroit-style emergency fiscal management board that would have the power to undemocratically override the island’s elected government and impose its own budget. The plan was put forward on March 29 by Rob Bishop (R-Utah), Chair of the House Natural Resources Committee, with the support of House Speaker Paul Ryan.

Puerto Rico’s own efforts to deal with its fiscal problems continue to be hamstrung by its status as a “commonwealth” of the United States, which many Puerto Ricans see as little better than a colonial set-up. The island does not have its own currency, for instance. Instead, it uses the U.S. dollar, leaving it unable to use devaluation to make its products more attractive. It is also forbidden by a 1984 law from seeking refuge in Chapter 9 bankruptcy for its municipal bodies and autonomous government entities, such as its highly indebted electrical company.

And the elected Puerto Rican government, subordinate to the United States Congress, is forced by the 1920 Jones Act to use expensive U.S.-based shipping services to move goods in and out of the island. Puerto Rico’s ability to develop trade relationships with countries other than the United States is also limited.

With so many hurdles preventing Puerto Rico from effectively resolving the crisis, the GOP plan put forward by Bishop stands out as just the latest episode in the more than century-long story of U.S. domination of Puerto Rico.

America’s model colony

How did Puerto Rico get into this situation? It was a Spanish colony with a mostly agricultural economy until the Spanish-American War of 1898. During the war, the United States seized control of Puerto Rico, an action which was ratified when Congress passed the Foraker Act, making Puerto Rico a U.S. colonial possession.

With the island and its economy under direct U.S. rule, American sugar companies were allowed to move in and take control of much of Puerto Rico’s agricultural production. Organizations which struggled for the island to gain full independence were suppressed, sometimes violently. In 1917, all Puerto Ricans were declared by Congress to be U.S. citizens, just in time to be shoved into the army to fight in the First World War.

After the Second World War, this changed. The United States created for Puerto Rico the unique status of a U.S. “Commonwealth”, or Free Associated State (Estado Libre Asociado), with the power to elect its own governor and other officials.

The first elected governor, Luis Muñoz Marín, set a new course of economic development for Puerto Rico which entailed cooperating with the U.S. government to offer tax incentives for American manufacturers to set up production on the island. This proved to be an ephemeral success. Puerto Rico’s economy grew as former peasants moved into factory production. The mostly rural population became much more urbanized and this formerly agricultural nation now imports most of its food.

Repression of pro-independence agitation continued without letup, however, with a shockingly large percentage of the Puerto Rican population acquiring secret FBI files as “subversives” under J. Edgar Hoover’s COINTELPRO. On the other hand, the U.S., without making any political concessions to Puerto Rico (such as giving it voting representation in Congress) made Puerto Ricans eligible for various kinds of federal aid.

Puerto Rico has also long had a geopolitical importance for the United States government. The fact that Puerto Ricans, up to now, have had a higher material standard of living than people in neighboring countries (though much lower than in any of the 50 states) has been a propaganda asset for U.S. capitalism.

And Puerto Rico is a major U.S. military base, although that has repeatedly sparked sharp conflict between the local population and the U.S. military over the latter’s occupation of Puerto Rican territory, particularly the islands of Culebra and Vieques.  Protests were successful in ousting the U.S. Navy from both islands.

The end of the Puerto Rican miracle

By the beginning of the 21st Century, however, the steam began to go out of Puerto Rico’s economic miracle. Part of the reason was that special U.S. laws giving tax breaks to corporations to set up shop in the island expired in 2006. The expirations came in the midst of corporate globalization’s heyday, when a large number of poor countries were put in competition with each other over who could offer the cheapest workforce and the weakest environmental and labor standards.

The passage of the North American Free Trade Agreement (NAFTA) in 1994 and the Dominican Republic – Central America Free Trade Agreement in 2004 made Puerto Rico’s strategy of attracting industry by offering cheap labor less and less viable.

Puerto Rico could simply no longer compete. For example, the same minimum wage applies in Puerto Rico as in the United States, and public sector unions are fairly strong on the island. U.S. and foreign corporations moved out to seek cheaper labor in countries with lower (or no) minimum wages. Unable to keep up in the international game of competitive austerity, the Puerto Rican economy went into decline.

Since the beginning of the economic slide, Puerto Rico’s government has mostly relied on measures such as budget cutting and regressive tax increases to manage the situation. This has led to a rise in unemployment (to over 12 percent) and a decline in wages and public services, and, in turn, to militant protests by students and workers.

But as in other countries, fighting recession by shrinking the economy has not worked.  And as elsewhere, too, predatory hedge funds have moved in to take over distressed investments in Puerto Rico, making a killing one because Puerto Rico cannot use bankruptcy procedures to protect itself.

The decline of wages and public services in Puerto Rico is contributing to a massive outflow of working-age Puerto Ricans to the fifty states, such that there are now fewer Puerto Ricans on the island itself than in the diaspora. As United States citizens, Puerto Ricans can immigrate to the United States without any legal formalities or risk, a factor that has been key in facilitating this major movement. But this, too, harms the economy of the island, as the productive workers needed for recovery are lost.

The uncertain path ahead

Puerto Rico went to court last year to try to establish its right to use Chapter 9 bankruptcy to help restructure its debt. A federal appeals court turned it down in July, and the case is now under appeal to the U.S. Supreme Court. The Puerto Rican government makes the argument that, since federal law blocks it from access to Chapter 9, Puerto Rico should have the right to pass its own bankruptcy legislation.

The Obama administration and many Democratic Party politicians say they would favor changing the law so that Puerto Rico can avail itself of Chapter 9. However, the hedge funds and conservative politicians in the U.S. are against this. Democrats and Republicans in Congress have been crafting rival bills covering the issue.

And that is where Bishop’s plan for an emergency management board comes in. As mentioned, the main feature of the draft bill would be the creation of a new fiscal control board with the power to override the decisions of the Puerto Rican legislature and executive. This entity would be similar to the ones imposed on cities in the United States such as Detroit. It would include no representatives of the Puerto Rican people, yet it would have final authority over the budget and the power impose cuts in vital services. In exchange for this surrender of power, Puerto Rico would be given an 18-month moratorium on payments of its debt.

How quickly the draft can pass the House was immediately put into question, however, as opposition quickly arose from many quarters. On the right, there were complaints by some Republicans that Bishop’s plan was overly generous to Puerto Rico. They were echoed by the business-oriented American Enterprise Institute, which called for harsher measures against Puerto Rico including the “de-unionization” of public services.

There were immediate, strong objections to the bill by political leaders of all stripes in Puerto Rico, and by some politicians in the United States, notably Vermont Senator and presidential candidate Bernie Sanders. Speaking at a campaign rally in New York City, Sanders called for the defeat of such a bill, adding: “Establishing an unelected oversight board that would be given the power to inflict even more economic pain on the 3.5 million American citizens in Puerto Rico would be a move in exactly the wrong direction.”

Democratic lawmaker Luis Gutiérrez of Illinois, who is himself of Puerto Rican descent, characterized the Republican plan as “a new layer of colonial oversight from Washington.”

A former governor of Puerto Rico, Aníbal Acevedo Vilá, denounced the Republican draft in even stronger language, saying that the proposed board should be called the “Omnipresent, dictatorial, and colonial board,” because it would essentially wipe out Puerto Rico’s limited autonomy. The current governor, García Padilla, also denounced the plan.

Though Puerto Rico still lacks a representative with voting power in the U.S. Congress, Puerto Ricans will have the opportunity to deliver their verdict on the plan in the elections for governor and the legislature that are scheduled for November.

All candidates will be under pressure to declare their positions on the fiscal crisis and what to do about it. The candidate of the Puerto Rican Independence Party (PIP), María de Lourdes Santiago, has put forward a radically different strategy, including giving Puerto Rico the right to use Chapter 9, the restructuring of the debt, injecting liquidity into the Government Development Bank, and negotiating a decolonization agreement with the United States government.

If it gains traction, such a strategy would have the potential to dramatically change not only Puerto Rico’s path to economic recovery, but also the very nature of its colonial relationship with the United States.

Photo: National Lawyers Guild