Puerto Rico’s New Era: A Crisis in Crisis Management

Rafael Bernabe

A visitor strolling past the walls of the San Cristóbal fort in Old San Juan on May 2, 2006, would have readily heard the pleasant strains of live classical music. A few more steps would have led him or her to the square in front of the Capitol building, where the Orquesta Sinfónica de Puerto Rico was giving a free open-air concert. The setting—clear night, bathed by a warm breeze from the ocean—could not have been lovelier. Yet a few moments of observation would have soon revealed that this was not a typical musical offering in the often tourist-filled part of the city. The crowd surrounding the musicians was much larger than one would expect and their mood far too serious. The listeners formed different groups, often identified by distinctive T-shirts, and the square was bordered by makeshift stands and tents sporting the names of several organizations, most of them labor unions. Several times, after a forceful performance, the conductor, as well as some of the musicians, stepped up to the microphone. This was, they explained, a concert for all public workers who, like them, had been recently laid off as a result of a government budget crisis.

It was fitting that the orchestra performed for the workers camping out to protest their uncertain situation, unable as the musicians were to rehearse in their usual venue. A few days earlier, after months of speculation about the precarious state of the government’s finances, the governor of Puerto Rico had announced that at the end of April, many of Puerto Rico’s government agencies would run out of funds for the fiscal year ending June 30, and operations would be shut down for two months. Although essential and emergency services would continue, at least 80,000 public employees would be sent home come May 1, including almost 40,000 teachers.

Governor Aníbal Acevedo Vilá, of the Partido Popular Democrático (PPD), blamed the ­opposition-­led House of Representatives for not agreeing­ to his budget, tax, and refinancing proposals, which, he argued, would have permitted the government to issue new bonds, thus averting the crisis. José Aponte, president of the House and a member of the Partido Nuevo Progresista (PNP), blamed the governor for his unwillingness to negotiate an agreement incorporating some of the opposition’s concerns, creating an impasse and making the crisis inevitable. For many in the street, both parties were taking public employees as virtual hostages, as they blamed each other for the crisis.

After Monday morning, May 1, when close to 80,000 workers found themselves laid off until further notice, there followed a week of wide and varied initiatives: A militant march made its way to the center of Puerto Rico’s banking district, while unions set up permanent tents in front of the Capitol; teachers carried out a massive protest; truck drivers blocked the main roads into Old San Juan; and several marches went past the Capitol and the Fortaleza, the governor’s mansion. Many among the protesters opposed the government’s solution to the crisis—a 7% sales tax—and proclaimed, “Let the rich pay for the crisis!” (¡Qué la crisis la paguen los ricos!) The mainstream press insisted that such talk of “class struggle” was dangerous and misplaced. Others simply demanded an end to government infighting.

Meanwhile, different sectors of a divided labor movement debated and, at times, quarreled about how best to respond to the crisis, making a joint and coordinated mass response impossible. By the end of the week, as the country became increasingly exasperated, the executive and the legislature hammered out an agreement that, with the conditional blessing of Wall Street rating agencies, made it possible for most workers to return to work by May 16. All who went through this unprecedented experience could not help feeling that its significance went beyond the events of those two eventful weeks.

Indeed, the fiscal crisis of 2006 is best understood as the dramatic end of an era, one that began in 1950 with Puerto Rico’s rapid industrialization and political reorganization as a U.S. “commonwealth.” The island’s rapid post-war growth first faltered in the mid-1970s, and several policy initiatives since then have partially held up its cracking structure—an experiment in crisis management that is now itself in crisis.


In the 1930s, economic hardship and stagnation in the troubled sugar industry, as well as the Roosevelt administration’s New Deal, fostered state-led economic reconstruction projects that many hoped would prepare Puerto Rico for independence by creating a more balanced, diversified economy. Such was the initial perspective of the PPD, led by Luis Muñoz Marín. Nevertheless, by the late 1940s the notion of both political independence and self-centered economic development were abandoned. The PPD instead adopted a program known as Operation Bootstrap, which offered tax and other incentives to U.S. investors.

These incentives, which included the nonapplication of U.S. minimum wage legislation, unrestricted access to the U.S. market for products manufactured in Puerto Rico, and exemption from federal and insular taxes, attracted massive new U.S. capital investment. The PPD-led industrialization had a major impact. Between 1950 and 1970, output grew, per capita income increased considerably, and most Puerto Ricans experienced notable improvements in their standards of living, which helps explain the party’s overwhelming support until the late 1960s.

Yet even at its brightest, Puerto Rico’s growing economy had clear limits. Through the mid-1960s the growth of factory employment did not compensate for the reduction in agricultural and other employment. The official unemployment rate never fell below 10% and would have been much higher had it not been for another feature of Puerto Rico’s modernization: mass migration to the United­ States. Between 1950 and 1970 net out-­migration was equal to 20% of Puerto Rico’s population in 1950.

Nor did industrial growth solve Puerto Rico’s productive imbalances or the colonial and dependent nature of its economic dynamics. Whereas before 1945 Puerto Rico had lacked a significant industrial sector, industrialization was now coupled with the atrophy of agriculture and by even greater dependence on food imports. The new factories were enclave operations that imported their raw materials and shipped out their output. Meanwhile, ecomomic expansion or contraction remained linked to the preferences and moods of U.S. investors, who controlled a growing portion of the island’s productive assets.

The fragility of Puerto Rico’s prosperity, easily ignored in the context of rapid growth and improved living standards, was dramatically put on the display during the global recession of 1974–75, which ended the Puerto Rican “miracle.” Both the manufacturing and the petrochemical sectors went into crisis; real yearly average GNP growth fell from 7% in the 1960s to 3.5% (and less than 3% in the 1980s and 1990s); and unemployment increased, surpassing 20% during recession years.1 Per capita income was barely half that of the poorest state (Mississippi), and enduring poverty still kept many dependent on federal funds to maintain a minimum of purchasing power. Operation Bootstrap’s original goals—drastically reducing unemployment, freeing the island from reliance on U.S. relief funds (which had expanded during the Great Depression), and attaining living standards comparable to those in the U.S. mainland—had not, and still have not been achieved. Today, almost half the population (45%) lives under the federal poverty line, compared to 13% in the mainland United States.2

Apologists for U.S. colonialism to this day often refer to the several billions in U.S. welfare funds spent in Puerto Rico. But the fact that billions are needed to avert misery for many is, if anything, an indication of the limits of the colonial economy resulting from a century of U.S. rule. Meanwhile, residents control a decreasing portion of the island’s productive assets, a process of denationalization that continues to this day.

Despite the sudden economic downturn of the mid-1970s, the PPD did not reconsider its past economic strategy. Quite the contrary: Crisis management crucially included a deepening of tax exemption policies intended to attract U.S. investments. Beginning in 1976 and lasting until the mid-1990s, new incentives enacted under Section 936 of the U.S. Revenue Code proved quite attractive to high-tech operations (especially pharmaceuticals and precision instruments). Puerto Rico is today the largest exporter of legal drugs into the United States.

Nevertheless, since these operations are capital-intensive, Section 936 only led to a slight expansion in employment. During the 1980s unemployment rarely fell below 15%, and the labor force participation rate (LFPR) fell to less than 50%. Government employment grew to a third of the labor force by 1992, partially compensating for low employment growth in the private sector.3 Meanwhile, the island’s public debt rose from $1.6 billion in 1970 to $12.5 billion in 1990, and to more than $30 billion by 2004.4 Federal funds received by the insular government, $261 million in 1970, reached $2.9 billion in 2000.5

This triad of expanded tax incentives to U.S. capital, an increase in the flow of welfare and other federal funds to the island (both to individuals and the government), and expanding public employment partly financed by increased government borrowing helped stabilize the economy. But these policies were at best a stopgap solution, and the crisis of 2006 served as but a first moment of reckoning.

Government borrowing could not increase indefinitely, while the flow of U.S. funds and federal tax incentives to U.S. corporations were vulnerable to political shifts in Washington. By 2006, Section 936, representing the centerpiece of the PPD’s industrial policy, had been eliminated. Since the early 1980s a budget-conscious and increasingly fiscally conservative Congress had looked unfavorably upon a tax loophole that allowed U.S. corporations to avoid paying hundreds of millions of dollars in taxes each year.6 And because many of the “936 corporations” were pharmaceuticals, the tax exemption was even more vulnerable: The relatively few jobs the companies offered did not seem to justify the sacrifice in federal revenue, while the parent companies’ pricing policies made them the object of strong attacks in the name of consumers and other sectors of U.S. capital, for which high medicine prices are a source of rising costs, not profits. Beginning in 1983, Puerto Rico’s government repeatedly mobilized its lobbying muscle to salvage all or part of Section 936 from the attacks of U.S. Treasury officials and congressional representatives who in some cases sincerely questioned, and in others opportunistically denounced, “corporate welfare.”7.

In 1996, Congress began phasing out Section 936, to be concluded in 2006. The impact on Puerto Rico’s economy was profound. Since the phaseout began, about 40,000 manufacturing jobs have been lost.8 Today the official unemployment rate hovers around 12%, with a 46% LFPR; if calculated with an LFPR similar to that of the United States (66%), unemployment would be around 30%.9 Meanwhile, the billions in corporate 936 funds deposited in island banks ebbed out of Puerto Rico, never having been efficiently chaneled into a coordinated economic development project. Spiraling borrowing has led to a downgrading of Puerto Rico government bonds on Wall Street, while federal funds to state agencies and individuals have been cut or frozen.

In sum, the mid-1970s rescue operation has failed, and the fiscal crisis and government lockout of May 2006 served notice of this fact to anyone requiring a dramatic indication of the gathering storm.


But the widespread feeling of crisis is not only connected to the uncertain economic landscape. It is also present in the erosion of support for Puerto Rico’s political arrangement, known as the Estado Libre Asociado (ELA), or, as the term is officially translated, the Commonwealth of Puerto Rico, coupled with a paralyzing deadlock between the PPD and its major rival, the pro-statehood PNP, both of which are, in turn, largely discredited among the electorate. No well-defined alternative projects have risen to challenge the status quo and the old political machines, heightening a widespread frustration regarding the island’s future.

Back in 1950, the state counterpart of Operation Bootstrap was the rearrangement of the colonial government, which until 1948 had been headed by governors appointed­ by the U.S. president. In 1950 Congress allowed Puerto Rico’s voters to elect a constituent assembly to write a constitution that was ratified by plebiscite in 1952. The resulting ELA was presented as a “compact” between Puerto Rico and the United States, yet the U.S. federal government retained all its prerogatives; federal legislation extended to Puerto Rico, overriding the ELA constitution in cases of conflict. The ELA government had jurisdiction only over insular matters, while all issues pertaining to Puerto Rico’s relations with the United States remained off-limits. Unrestricted­ trade between the United States and Puerto Rico was still the rule, and the insular government ­remained powerless to protect the island market from well-­established U.S. competitors. Independentistas denounced this as simply a reorganization of the colonial relation, and the Nationalist Party launched an armed insurrection in 1950. But in a context of rapid growth and improving living standards, combined with the repression of dissidents, the PPD was able to gather solid support for the ELA, presenting it as a step toward self-government.

Things gradually shifted, as the economy stagnated in the late 1960s. By then, even some PPD leaders began acknowledging that the ELA was far from perfect. While reluctant to use the term colony, some of its leaders grudgingly admitted that Puerto Rico still lacked many of the features that would make it a truly self-governing entity. The growing questioning of the status quo was accompanied by the rise of a lively independence current that to this day plays a major role in labor and social struggles. But this current was more evidently reflected in the gradual electoral rise of the statehood movement that was reorganized through the creation of the Partido Nuevo Progresista, which in 1968 dealt a divided PPD its first electoral defeat since 1940.10 Since then the PPD and the PNP have alternated in office, each winning four elections. They are now evenly matched, with elections at all levels often decided by less than 1% of the votes cast.

As it emerged in the late 1960s and early 1970s, the PNP presented itself as a party of the poor, even embracing the anti-discrimination discourse of the civil rights movement. But as much as the PPD, the PNP remained a party organically connected to sectors of the Puerto Rican possessing classes, and while in office it responded as sternly as the PPD did to labor and social movements from below. After an interlude of two PPD administrations, the PNP regained control of the insular government under the leadership of Governor Pedro Rosselló (1993–2000). Whatever his populist flourishes, Rosselló embraced a neoliberal agenda centered on privatizing Puerto Rico’s large public sector, leading to repeated clashes with unions, while his administration was plagued by a string of unprecedented corruption scandals.

Meanwhile, the legitimacy of the existing status has deteriorated. Most Puerto Ricans would admit the ELA is a colonial form of government, and it is increasingly hard to find policy makers in Washington who still describe it as a compact.11 But the impasse remains: Statehooders failed to win either of the two plebiscites sponsored by the PNP in 1993 and 1998 (obtaining around 46% of the vote on both occasions), and none of the several bills sponsored by both parties to allegedly solve the “status question” have made much progress in Congress.

After a lackluster four years of PPD rule, the 2004 election resulted in near total deadlock: The PNP obtained more party votes and secured majorities in the legislature, but the PPD won the governorship. By 2006, for many, the infighting between and within the dominant parties, combined with the unprecedented budget crisis, widespread factory closures, and a wave of corruption scandals, signaled a new low in Puerto Rico’s social and political crisis.

Regardless of differences on the status issue, both major parties and key corporate and banking interests agree on the main lines of a response to the recent budget crisis: freezing government recruitment and salary increases; gradually eliminating subsidies to public corporations; consolidating or eliminating some government agencies; and increasing charges for public utilities. A regressive 7% sales tax has been decreed, while the negotiations with public sector unions have been paralyzed and their leaders put under extreme pressure (suspension of union leaves, threats of union decertification).

According to elite sectors, Puerto Rico’s economic crisis resulted from the erosion of competitiveness and lack of “work incentives” due to public sector overexpansion, over-regulation (zoning, environmental permits), over-generous welfare and public service provisions, the “inflexible” work rules imposed by unions, and other obstacles to “entrepreneurial initiative.”12 The solution is a new round of privatizing, pro-market, deregulating reforms, which Wall Street rating firms stand fully behind.

There is more ideology than substance behind these policies. As even mainstream economists admit, Puerto Rico’s economy is one of the most “open” in the world, while the size of government expenditures relative to its economy is comparable to those of many developed countries.13 Its welfare and public service provisions, palpably inferior to their U.S. equivalents, can hardly be described as overgenerous. Pro-market recipes are rather a means of leveraging the cost of the crisis of a market and colonial economy onto the shoulders of the unemployed or wage-earning majority.

Fragmentation in the labor movement has made a coordinated response to these measures very difficult. Since the 1974–75 recession, Puerto Rico’s unions have remained split among several federations and have steadily lost ground in the private sector, where only 2% of the labor force is now organized.14 Three orientations coexist within the four federations and independent unions. One current seeks a return to the past routine negotiation of collective agreements and has been amenable to the government’s proposed solution to the fiscal crisis, including the regressive sales tax. The second includes unions like the UTIER (electrical workers) and the Federation of Teachers, which resisted the tax and the privatization measures, but their efforts remain isolated. A third current is not as yielding to government pressures as the first, but is often at odds with the second. The labor movement has been further weakened by the government’s ability to discredit it through indicting undoubtedly corrupt union officials.

But there are hopeful signs in this landscape. Symptoms of resistance can be discerned in dozens of community, environmental, labor, and other initiatives that perpetuate a long string of battles going back to the early environmental movement in the 1960s and the housing struggles and land occupations (rescates) of the 1970s, among others. The ecological consequences of Puerto Rico’s road to modernity—from the misuse of land and water resources to the adoption of the U.S. automobile-centered model of urban sprawl and the displacement of poor communities by “developers”—underlies the early emergence and resilience of environmental-community struggles. All of these movements, along with labor unions, share one characteristic: They all embody the struggle of people to more directly control their lives, from their work conditions, the quality of the environment, the way their communities are policed, or how the state budget is distributed. They are all, in that sense, struggles for self-determination. The task at hand is to turn these fragmented initiatives into a wider movement for public democratic sovereignty over key economic decisions.

While the struggle against the U.S. Navy presence in ­Vieques has received well-deserved attention, the experience of the Comité Amplio de Organizaciones Sociales y Sindicales (CAOS) as an anti-privatization coalition in 1997–98 may be equally significant for the future. Bringing together labor, student, community, environmental, religious, political, and other organizations, CAOS led two public sector general strikes in October 1997 and July 1998. It demanded essential services for all, questioned the expansion of multinational corporate control of Puerto Rico’s economy, insisted on the right of citizens to have a say on key policy decisions, and implicitly and often explicitly criticized the logic of competition as a desirable means of regulating human and social relations. But CAOS had a brief life. Seen as threat by part of the labor leadership, it collapsed soon after the hard-fought but defeated telephone workers’ strike against privatization in 1998.15 A similar, more durable coalition must now be rebuilt, a daunting but urgent task, if fragmentation and demobilization are to be transcended.

This is also a challenge for the independence movement. While electorally weak, independence activists have played a key role in Puerto Rico’s labor and social movements since their revival in the 1960s. They have often been the most consistent and dynamic participants, advisers, and supporters of a variety of struggles. Yet today the independence movement is split into several tendencies. The Partido Independentista Puertorriqueño (PIP) remains convinced that congressional opposition makes statehood impossible, while the ELA is increasingly unviable: Even Congress will eventually opt for independence. Any blow dealt to the ELA, even by statehooders, and its exclusion from a future plebiscite, can only hasten that outcome.

The Movimiento Independentista Nacional Hostosiano (MINH, a fusion incorporating currents emanating from the old Partido Socialista Puertorriqueño and other sectors), less convinced of the impossibility of statehood, wagers on the fact that the PPD now needs the votes of many independentistas to prevail over the PNP: The independentista minority creates a fulcrum for sliding a wing of the autonomist current into a broad anti-annexation alliance. While they support labor and other social struggles, the PIP and the MINH center their attention on the status issue. In contrast, the Frente Socialista and the Movimiento Socialista de Trabajadores emphasize linking the anti-­colonial struggle to constructing working-class and poor people’s movements. While small, they play a visible role in social and labor organizations, like the Federation of Teachers and the student and community-environmental movements.

As progressive forces brace for future battles, it is important to remember that a century of colonial misdevelopment is not easily superseded. It will require an expanded public sector, led by the imperatives of social well-being and ecological protection, the democratic determination of priorities and participatory administration, none of which is possible without taking on the prerogatives of corporate capital and the logic of the market—the very opposite of the neoliberal agenda favored by both major parties. Such a project is unviable in strictly insular terms, but neither is the need for radical change exclusive to Puerto Rico. The impact of late-capitalist crisis and social deterioration cannot but pose the same problem within the United States. It is therefore necessary and possible to work toward constructing new social and political projects in collaboration with similar forces in the United States and the Caribbean. The need to oppose, for example, the bureaucratic control of Puerto Rican unions by U.S. internationals must not exclude the cementing of bonds with progressive forces within the U.S. labor movement.

Finally, two opposed but equally one-sided perspectives must be overcome. Some progressives mix their support for independence with a narrow-minded indifference to the evolution of social struggles in the United States, while others wish to unite with progressive struggles in the United States, hurriedly concluding that the goal of independence is obsolete. A third approach would seek to transform future working peoples’ self-organization in Puerto Rico into a movement for political sovereignty in close association with progressive forces in the United States, whose program must include restructuring relations with the Caribbean. From this perspective, the struggle of immigrant communities (including Puerto Ricans) in the United States, the fight to remake the economies and polities of the independent Caribbean (like the Dominican Republic), and the search for Puerto Rico’s self-determination can be seen as facets of a complex international movement to remake, indeed unmake, the hierarchies erected by more than a century of colonial, imperial,­ and capitalist rule.16 Embracing such an internationalist vision and giving it concrete shape is one of the central challenges for Puerto Rico’s progressive forces as we move into the second decade of the 21st century. The problems posed by colonial capitalism are part of a larger and layered whole, and contrary to all simplistic approaches, the alternatives to it cannot be any less international or nuanced.

1. Eliezer Curet Cuevas, Economía política de Puerto Rico: 1950–2000 (San Juan, Puerto Rico: Ediciones M.A.C., 2003), p. 38; Edwin Irizarry Mora, Economía de Puerto Rico: Evolución y perspectivas (Mexico City: Thomson Learning, 2001), pp. 88, 156, 219.

2. U.S. Bureau of the Census, http://factfinder.census.gov/home/saff/main.html?_lang=enun. Search for “Puerto Rico poverty.”

3. Irizarry Mora, Economía de Puerto Rico, p. 135. On the evolution of the public sector, see Leonardo Santana Rabell, Fulgor y decadencia de la administración pública en Puerto Rico (San Juan, Puerto Rico: La Torre del Viejo-DEGI, 1994).

4. Eliezer Curet Cuevas, Economía política de Puerto Rico, p. 178.

5. Irizarry Mora, Economía de Puerto Rico, p. 226.

6. For these estimates, see several studies carried out at the time: General Accounting Office, “Pharmaceutical Industry Tax Benefits of Operating in Puerto Rico” (1992); “Congressional Budget Office, Potential Economic Impacts of Changes in Puerto Rico’s Status Under S. 712,” 1990. See also Government Accountability Office, Puerto Rico, “Fiscal Relations With the Federal Government and Economic Trends During the Phaseout of the Possessions Tax Credit,” May 2006.

7. See Sarah Grusky, “Political Power in Puerto Rico: Bankers, Pharmaceuticals and the State” (Ph.D. dissertation, Howard University, 1994).

8. José A. Delgado, “Cuadran cifras en la manufactura,” El Nuevo Día, October 21, 2005.

9. Caribbean Business, “A Cornered Economy,” August 18, 2005, p. 18.

10. See Edgardo Meléndez, Puerto Rico’s Statehood Movement (Greenwood Press, 1988).

11. A task force appointed by President Clinton rendered a controversial report in 2005 that concluded that Puerto Rico remains a possession of the United States. See “Report by the Presiden’s Task Force on Puerto Rico’s Status” (December 2005). Predictably, its conclusions have been strongly denounced by ELA supporters.

12. Although there are some dissident views in the texts by Eileen V. Segarra, Katherine Terrell, James Alm, Ronald Fisher, and James L. Dietz, this is still by far the dominant thrust of the interventions and policy recommendations included in Susan M. Collins, Barry P. Bosworth, Miguel A. Soto-Class, The Economy of Puerto Rico: Restoring Growth (Center for a New Economy, San Juan; Brookings Institution, Washington, D.C., 2006). Collins, Bosworth, and Soto-Class argue, for example, that Puerto Rico is “one of the world’s most open economies, with free mobility of goods, services, capital, and labor to the large, prosperous U.S. market. One might expect these conditions to pave the way for rapid economic development in Puerto Rico, with living standards converging steadily with those enjoyed in the rest of the nation” (p. 1). Much of the following text is devoted to searching for the causes that may have prevented the market from working its magic, without any pause to consider the possibility that the free market is itself the problem.

13. See James Alm, “Assessing Puerto Rico’s Fiscal Policies,” in Collins et al., The Economy of Puerto Rico.

14. César S. Rosado Marzán, “Dependent Unionism” (Ph.D. dissertation, Princeton University, 2005), p. 16; Carlos Alá Santiago, “The Puerto Rican Labor Movement in the 1990s,” in Edgardo Meléndez, Edwin Meléndez, eds. Colonial Dilemma: Critical Perspectives on Contemporary Puerto Rico (South End Press, 1993), p. 143.

15. See Conferencia Sindical, “De la huelga del pueblo a la cumbre social: El movimiento obrero puertorriqueño en la encrucijada” (Río Piedras, Puerto Rico: Frente Socialista, 2001), http://es.geocities.com/frentesocialistapr/page2/files/librosindical2001....

16. Some of these ideas are developed in Rafael Bernabe, Manual para organizar velorios. Notas sobre la muerte de la nación (Río Piedras, Puerto Rico: Huracán, 2003).

Rafael Bernabe is the author, with César Ayala, of Puerto Rico in the American Century: A History Since 1898 (University of North Carolina Press, 2007).He teaches at the University of Puerto Rico, Río Piedras, and is a spokesperson for the Frente Socialista.

Tags: Puerto Rico, social movements, politics, independence, labor unions, fiscal crisis

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