On June 30, the U.S. Congress approved the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which is designed to address Puerto Rico’s debt crisis by imposing a stay on litigation brought by creditors demanding repayment and empowering a board to oversee the island’s taxation, regulatory, and spending policies. But debt is not the root cause of Puerto Rico’s problems, and the board—to be appointed by U.S. President Barack Obama—could actually make matters worse by gutting regulations, undercutting spending, and encouraging the flight of the skilled workers who hold the key to the island’s future. What Puerto Rico really needs is not a PROMESA but a growth strategy.
Over the course of the past decade, Puerto Rico has fallen into a state of near-permanent recession marked by rising unemployment, falling personal income, and an exodus of skilled and unskilled labor. The results include a declining tax base that can fund neither the provision of essential services nor the payment of public debt. The island has thus found itself trapped in a vicious circle of divestment, departure, and decline.
This represents a profound reversal of fortune for an economy that until recently represented a model for the developing world. In the 1950s and 1960s, Puerto Rico was transformed from a poor, ill-educated backwater into one of the wealthiest and most prosperous territories in Latin America—with an abundance of engineering talent and a per-capita income that dwarfed those of its regional neighbors. By most of the standard metrics, in fact, the Commonwealth was a superstar. It was on a par with—and in some senses ahead of—the so-called Asian tigers.
That turnaround was, in large part, the product of Operation Bootstrap, a Washington-backed development strategy that lured labor-intensive industry to the island with the promise of tax breaks, low-cost labor, and duty-free access to the mainland market. In the early days of Operation Bootstrap, the strategy targeted firms that provided primarily unskilled jobs
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