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Puerto Rico's Economy\

The status of Puerto Rico has been a controversial topic ever since its annexation in 1898.  Many people and organizations have voiced their opinions for either the statehood of Puerto Rico or for its independence.  The current situation between Puerto Rico and the United States may seem confusing or even wrong to people.  But, if the current situation changed, would Puerto Rico’s economy crumble, or would it prosper?

Puerto Rico’s current economy is not thriving, but nor is it dying.  Puerto Rico has a history of primarily being in the agricultural business growing sugar, but that has changed dramatically.  Agriculture now only accounts for about 0.5% of its Gross Domestic Product (GDP) composition, whereas, manufacturing now composes over 40% of Puerto Rico’s GDP.  The goods that Puerto Rico are manufacturing vary from chemicals to electronics to medical equipment.  In 2005, Puerto Rico exported $56.6 billion of goods and services while only importing $38.9 billion, running a budget surplus of over $15 billion. 1

The monetary system in Puerto Rico is existent, but weak.  There are commercial banks, and Puerto Rico does have its own taxing system, but the Puerto Rican currency is the U.S. dollar.  The advantage/disadvantage of having the dollar as a currency is it appreciates/depreciates just as it does in the United States.  The problem with this is that Puerto Rico’s economic scenarios may not be the same as the United States’, which could lead to a larger economic gap.  Also, the United States controls the dollar supply, so Puerto Rico cannot shift the money supply to counter economic fluctuations.  This is a simple monetary policy that Puerto Rico is deprived of from using the U.S. dollar.

In 2006 Puerto Rico’s GDP was estimated to be $75.82 Billion ($19,300 per capita).  The United States’ GDP was estimated to be $13.06 Trillion ($43,800 per capita).  The poorest state in the United States is Mississippi, which had an estimated GDP of $84.225 Billion ($28,170.15 per capita).  So if Puerto Rico was a state of the United States, it would be the poorest state by over $9 Billion and over $8,000 per capita.  Not only is Puerto Rico’s GDP per capita extremely low relative to the United States’, but inflation is very high in Puerto Rico compared to the rest of the United States. 2

Inflation is measured by a country’s Price Index.  Here we will use the Consumer Price Index (CPI), which is the sum of prices of a basket of goods with a fixed quantity.  The price of the basket is what is measured to find the inflation rate of a country.  The table below compares the CPIs of Puerto Rico and the United States with a base year of 2000.  The formula to calculate the inflation rate is: Inflation Rate = ((Current CPI - Prior CPI)/Prior CPI)x100.

*All numbers taken from unstatus.un.org 3
The unstable inflation rate in Puerto Rico shows signs of a fluctuating economy.
           

The two main types of economic policy are monetary policy and fiscal policy.  Since Puerto Rico cannot control the money supply of the U.S. dollar, Puerto Rico is limited to using fiscal policy.  But since inflation is defined as the growth rate of the money supply, the Puerto Rican government is relatively helpless.

If Puerto Rico were to become an independent nation, they would be able to help boost their economy by using economic policy in whichever manner they choose.  Independence would allow Puerto Rico to produce and govern themselves the way they want.  Depending on how they would set their government up, they would be able to elect their own leaders who are willing and able to pursue economic policy that best fits Puerto Rico’s needs.

However, the economy of Puerto Rico currently depends heavily on finances from the United States.  Puerto Rico does not have, what many economists believe to be, resources of economic value.  So if Puerto Rico does become independent, the question is if the U.S. government will take away the tax incentives for investing in businesses in Puerto Rico.  If Puerto Rico does not receive a reasonable amount of funds for capital accumulation, their GDP growth rate will be greatly slowed.  And with GDP being slowed, there will be fewer jobs available, meaning more people will leave Puerto Rico looking for more jobs.

So there are economic advantages and disadvantages to any system Puerto Rico may choose.  The most important aspect of a county’s economy are the people running the country.  So Puerto Rico has the ability to thrive in either case; however, in order to continue thriving in the future, Puerto Rico will need to find an area of production and specialize in that area to make itself, as a country, more valuable to other countries.  One of the ten principles of economics is: trade can make everyone better off.  So if Puerto Rico does not specialize in an area to trade, other countries will not have an interest to trade with them.