Notes on the Role of Debt in US Colonialism

UPDATE: On Tuesday, September 8, the City University of New York (CUNY) Center for Latin American, Caribbean, and Latino Studies is hosting a free panel discussion and presentation based on this blog post. For more details, visit the FocaalBlog event page here.

Early July 2015, at an event discussing the Greek debt crisis hosted by the German Federal Bank in Frankfurt, German Finance Minister Wolfgang Schaeuble talked about a sarcastic conversation he’d had with United States Treasury Secretary Jack Lew. Responding to pressure from the US government for a resolution on the pending Greek debt talks, Schaeuble told Lew that the European Union could take Puerto Rico into the euro zone if the US was willing to accept Greece into a dollar union. In the video of the event, one can appreciate people laughing at Schaeuble’s remarks, made in front of a large projection of the event’s theme “Turning points in history: How crises have changed the tasks and practice of central banks.” Interesting enough, his comments say more about Germany’s intentions and its role in the Greek debt default than about Puerto Rico.

Puerto Ricans seemed oblivious to Schaeuble’s comments. A vast majority of Puerto Ricans prefer to be associated with the US (Álvarez-Rivera 2015; Franqui-Rivera 2015a). If Schaeuble’s joke became reality, Puerto Ricans would not be receiving the EU’s offer with open arms. The comments show the attitudes of powerful countries in the international arena and are a striking revelation how Schaeuble and possibly other leading politicians in powerful nations relate to poorer countries from which they extract wealth. The following, to some extent, takes Schaeuble’s comments seriously in that it highlights the similarities and differences of the Greek and the Puerto Rican debt crises. Our main focus is, however, on discussing the effects of the Puerto Rican crisis and how it is rooted in the islands’ historical dependency on the US mainland.

Unlike Greece, Puerto Rico is a de jure colony of the United States. Puerto Rico’s current colonial arrangement is labeled “commonwealth.” Under this arrangement, the people of Puerto Rico administer the islands with a good deal of autonomy. Yet, the reality is that Puerto Rico does not have political sovereignty. US Congress has an ultimate say in any nondomestic political matters. Still, the Obama administration has kept—for the most part—a hands-off approach regarding the severe economic crisis affecting the islands since quite some time as if Puerto Rico were a sovereign country.

At the time of Schaeuble’s comments, the Puerto Rican government owed $72 billion in public debt (Allen 2015). Simply put, public debt is the total financial obligations incurred by all of the governmental agencies of a country. For the case of Puerto Rico, it is important to consider that the debts were incurred in a political climate best described as “one-termism,” meaning that the islands’ three previous governors have not been reelected to a second term. This is strong evidence for a longstanding public discontent in the face of acute economic problems plaguing Puerto Rico for more than a decade now. During this time, the economy has been contracting, labor participation has been decreasing, and unemployment now hovers at around 12 to 15 percent (Gordon 2015). Mass migration to the US mainland and an aging population could worsen the situation as the tax base further shrinks and an administration desperate for revenue implements another wave of taxes and reduction of public services. But somehow Schaeuble implied that having Puerto Rico as a German colony will be less of a headache than having Greece in the EU.

In order to understand Puerto Rico’s debt crisis in relation to Greece, we need to look at its history. Schaeuble’s remarks reminded us of the way Puerto Rico became part of the United States. In the aftermath of the Spanish–American War of 1898, Spain ceded all of its rights and claims over Puerto Rico to the United States. For 117 years, the Puerto Rican archipelago has been a non-incorporated territory of the United States under the territorial clause of the US Constitution and the plenary powers of US Congress. As such, Puerto Rico is not on the path of either becoming a state or independent. The inhabitants of the islands are US citizens and can vote to elect the local government, but they do not elect any voting representatives to the US federal government.

World War II and the postwar years brought big transformations to the territory. Under the leadership of the Partido Popular Democrático (PPD, Popular Democratic Party), the local government sought to transform the islands from an agricultural economy based on monocrop cultivation to an industrial manufacture one. In the 1950s, the local government with the aid and support of the federal government showcased Puerto Rico as a model of democracy, industrialization, and modernization. The model promoted was one of tax exemptions for transnational corporations (for excellent overviews of Puerto Rican history see, Dietz 1986; García-Colón 2009; Neveling 2015; Trías Monge 1997). That system began to be dismantled in the 1990s by the US Congress as part of a compromise between the Clinton administration and the Republican Party. Eliminating these tax exemptions, with the most famous known as 936s (a reference to the US tax law clause), is in great part responsible for the deceleration of Puerto Rico’s economy culminating with the current debt crisis (Marichal 2015; Orsini 2015).

The German minister of finance made his comments after Puerto Rican Governor Alejandro García Padilla’s recent announcement that his government is not able to pay the islands’ debt. García Padilla emphasized that for resolving the issue, it is now the turn of Puerto Rico’s creditors and called them to negotiate in order to restructure payments. His announcement was made in the context of Greek debt talks and referendum, and, similar to the early stages of the Greek debt restructuring, his administration hired IMF consultants who suggested further austerity measures (Corkery and Walsh 2015; García Padilla 2015). But other than the pre–Syriza Greek governments, the Puerto Rican governor’s message to the people rejected many of the IMF consultants’ more controversial recommendations: more tax increases, pension cuts, and the elimination of the US federal minimum wage in Puerto Rico. This message marked a drastic change in public policy because previous administrations have resolved the problems by increasing the debt and imposing austerity measures. Investors and bondholders now worry and claim that Puerto Rico’s debt problems could affect the confidence and reliability on the bond market (Fox 2015). However, the major problem for Puerto Rico is that its US colonial status means lack of political sovereignty to create the laws necessary to default on its debt. Neither a state of the union nor an independent country, the islands can’t declare bankruptcy and restructure its debt.

The roots of the economic crisis, as mentioned, began in the 1990s when administrations implemented policies that accelerated borrowing for public works and universal health care system, while the islands still enjoyed relative economic prosperity and a solid tax base. By the 2000s, administration after administration addressed a lack of liquidity with further borrowing. In 2004, the PPD, which is interested in maintaining the current political relationship with the US, won the governorship while the legislature was controlled by the oppositional Partido Nuevo Progresista (PNP, New Progressive Party), which seeks annexation to the US as a federated state. Political paralysis followed and was a key factor in triggering a severe local recession (Marichal 2015; Orsini 2015).

Even though Puerto Rico is a territory of the United States and limited by Washington’s monetary and fiscal policies, the Obama administration’s response is that it will not rescue or aid the government of the islands. Congress has timidly approached Puerto Rico’s crisis, in part due to the efforts of Puerto Rico’s representative to Congress (Comisionado Residente), Pedro Pierluisi. One of the proposals being discussed by Puerto Rican officials and US Congress members is the elimination of Article 27 of the US Merchant Marine Act of 1920 (known as cabotage laws) that requires all goods transported by water between US ports, including Puerto Rico, to be carried on US ships. Officials argue that elimination will relieve the price of exported and imported goods, since they tend to be 20 percent higher as a result of the law (St. James 2013). Furthermore, there are bills in Congress, both in the Senate and in the House, to extend the protection of Chapter 9 of the US Bankruptcy Code to Puerto Rico, allowing the territory to restructure its debt, but so far those bills are stalled. However, only about a third of the debt –owed by municipalities—could be restructured under Chapter 9 if the bills finally pass (Marxuach 2015).

Although popular demonstrations have been staged against pension cuts and layoffs, the country as a whole seems to suffer from a collective inertia. Approximately half a million Puerto Ricans have left the islands since 2000, many of them college graduates, decreasing labor participation and the tax base. Orlando, Florida, and Southern states have become favorite destinations for middle-class emigration, and Orlando now has the major demographic growth for Puerto Ricans in the US mainland. Many working poor have left to become factory workers in places like Oklahoma (Meléndez and Vargas-Ramos 2014). That is not to say that traditional Puerto Rican diaspora destinations are no longer attractive. Nowadays, it is common to hear recent migrants speaking insular Puerto Rican Spanish in New York City.

Abandoned building, Mayaguez, Puerto Rico (Photo by Harry Franqui-Rivera, 2015)

Of course, the crisis has also affected the working poor. Half of the approximately five thousand Puerto Rican seasonal farmworkers in the United States made their first trip in the past ten years. A group of workers in upstate New York indicated that they began migrating because they could not find work in retail or constructions. For example, a 19-year-old Puerto Rican worker from the municipality San Lorenzo, whom I met in southern New Jersey, could only work a few hours a week and, in desperation to provide for a newborn baby, decided to migrate (García Colón and Meléndez 2013). As even retirees have started to migrate, the vast majority of people staying in Puerto Rico are those with steady jobs or those who can’t afford to migrate. Until the debt crisis is resolved and socioeconomic stability is restored, the Puerto Rican exodus will continue. Sadly, it may come to the point when those needed to rebuild Puerto Rico in the postcrisis era may no longer be on the islands.

Puerto Rican migrant farmworker, onion field, muck farm, central New York (Photo by Ismael García-Colón, 2013)

Still, there are considerable local efforts to tackle the crisis. Some of these involve the rethinking of environmental strategies and the return to the countryside. There is a growing movement of urban, middle-class youth learning about agriculture and traditional ways as a rejection to the modernizing paradigm of urban life. However, these are half measures as they are not part of a concerted public policy. Further, though commendable, these initiatives do not alleviate the crushing effect that the public debt has on the economy.

Fishermen, southwest coast, Puerto Rico (Photo by Harry Franqui-Rivera, 2015)

While the islands will certainly benefit from developing and diversifying the agricultural sector—especially if guided by a comprehensive public policy—much more needs to be done to address the crisis. Restructuring the debt and eliminating the cabotage laws are a good start. Future administrations need to promote the development of small and medium local business and to ease the tax burden on the popular sectors and the middle class, as opposed to previous policies of creating a tax haven for US corporations and (multi)millionaires. The pipe dream of attracting foreign investment by returning to a more “Caribbean” socioeconomic reality (touted by several US outlets and including the elimination of federal minimum wages, as well as the reduction of pensions and services like public schooling) is not the way to fix the economy: it will only lead to more poverty and dependence (Franqui-Rivera 2015b).

Briefly returning to Schaeuble’s proposal that the US and the EU could swap Puerto Rico and Greece, we can conclude that to the imperial politician of the twenty-first century, debt problems may look similar throughout the world, but the particularities Puerto Rico’s case lie in its political status as a colony of the United States. German empire making in the twenty-first century may seem similar to US colonialism around 1900, but the neocolonial forms now emerging in Greece are not the same as those well established in Puerto Rico.

Ismael García Colón is an Associate Professor of Anthropology at the College of Staten Island and CUNY Graduate Center. His areas of interest are historical and political anthropology, oral history, political economy, and Caribbean, Latin American, and Latina/o studies.

Harry Franqui-Rivera is a historian and Research Associate at the Center for Puerto Rican Studies at Hunter College, CUNY. He specializes in Caribbean, Latino, and Latin American history with a particular focus on nation building, national identities, military institutions, and imperial–colonial relations.