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Economy of Puerto Rico

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The geography of Puerto Rico and its political status are both determining factors of its economic prosperity, primarily due to its relatively small size as an island, its lack of natural resources used to produce raw materials, and, consequently, its dependence on imports; as well as its relationship with the United States federal government, which controls its foreign policies while exerting trading restrictions, particularly in its shipping industry.

At the macroeconomic level, Puerto Rico has been experiencing an economic depression for 20 consecutive years, starting in 2006 after a series of negative cash flows and the expiration of section 936 that applied to Puerto Rico of the U.S. Internal Revenue Code. This section was critical for the economy of the island as it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating in the island to send their earnings to the parent corporation at any time, without needing to pay federal tax on corporate income. Puerto Rico has, however, been able to maintain a relatively low inflation rate in the past decade.

Economists argue that most of Puerto Rico's economic woes stem from federal regulations that expired, have been repealed, or no longer apply to Puerto Rico; from its inability to become self-sufficient and self-sustainable throughout history; from its highly politicized public policy which tends to change whenever a political party gains power; as well as from its highly inefficient local government which has accrued a public debt equal to 66% of its gross domestic product over time. Despite these issues, the economy continues to gradually grow.

In comparison to the different states of the United States, Puerto Rico is poorer than Mississippi, the poorest state of the United States, with 45% of its population living below the poverty line. However, when compared to Latin America, Puerto Rico has the highest GDP per capita in the region. Proponents argue it is necessary for Puerto Rico to reach restructuring deals with creditors to avoid a bankruptcy-like process under PROMESA. In 2022 the PROMESA law cut Puerto Rico’s public debt by nearly 60 percent from $70,000 million to $22,000 million, restoring financial stability. More specifically, Puerto Rico has been in an unusual situation since 2016: its economy is under the supervision of a federal board that is managing finances and helping to get access again to capital markets.

The commonwealth has a modern infrastructure, a large public sector, and an institutional framework guided by the regulations of U.S. federal agencies, most of which have an active and continued presence in the island. Its main trading partners are the United States itself, Ireland, and Japan, with most products coming from East Asia, mainly from China, Hong Kong, and Taiwan. In 2016, additional trading partners were established, with Singapore, Switzerland and South Korea commencing import trades with Puerto Rico. At a global scale, Puerto Rico's dependency on oil for transportation and electricity generation, as well as its dependency on food imports and raw materials, makes Puerto Rico volatile and highly reactive to changes in the world economy and climate.

The "Jones Act," also known as the Merchant Marine Act of 1920, requires all goods transported between U.S. ports to be transported by U.S.-built vessels, owned by U.S. citizens, with an American crew, that fly the U.S. flag. The law has been criticized as a law contrary to the economic freedom of Puerto Rico.

An ongoing objective of the Puerto Rican government is to persuade international companies to relocate their manufacturing plants to Puerto Rico, where they would be exempt from customs duties.

In 2022, the United States Supreme Court held that the territorial clause of the U.S. Constitution affirm congressional authority in mandating "reasonable" tax and benefit schemes in Puerto Rico and the other territories that are different from the states, but the Court did not address the incorporated/unincorporated distinction. As a result, the status quo remains, so the U.S. government still defines the Commonwealth of Puerto Rico as a U.S. unincorporated territory.

History

Puerto Rico, like many other economies, has transitioned from an agricultural economy to an industrial one.

Pre-colonialism

The economic history of Puerto Rico prior to the arrival of the Spaniards is not heavily documented. The part that is known about its inhabitants, the Taíno, is that their economy was a mixture of hunting and gathering with agriculture. They inhabited the island for centuries before the arrival of the Spanish in 1493 marked the beginning of their extinction.

The Taíno captured and ate small animals, such as mammals, earthworms, lizards, turtles, and birds. Manatees were speared and fish were caught in nets, speared, poisoned, trapped in weirs, or caught with hook and line. Wild parrots were decoyed with domesticated birds, and iguanas were taken from trees and other vegetation. Livestock husbandry was not practiced as there were no large animals native to Puerto Rico that could be raised in an agricultural setting in order to produce commodities such as food, fiber or labor.

Fields for important root crops, such as yuca, were prepared by heaping up mounds of soil, called conucos. This improved soil drainage and fertility, as well as delaying erosion, and it allowed for longer storage of crops in the ground. Other crops, such as corn, were raised in simple clearings created by slash-and-burn technique. Typically, conucos were three feet high and nine feet in circumference and were arranged in rows. The primary root crop was yuca/cassava, a woody shrub cultivated for its edible and starchy tuberous root. It was planted using a coa, a kind of hoe made completely from wood. Women processed the poisonous variety of cassava by squeezing it to extract the toxic juices. Then they would grind the roots into flour for baking bread. Batata (sweet potato) was another important root crop.

Corn was cooked and eaten off the cob. The Taíno also grew squash, beans, peppers, peanuts and pineapples. Tobacco, calabashes (West Indian pumpkins) and cotton were grown around the houses. Other fruits and vegetables, such as palm nuts, guavas and Zamia roots were collected from the wild.

Spanish rule

The economy of Puerto Rico was transformed drastically upon the arrivals of Spaniards in 1493 until their departure in 1898. Although Spain was initially drawn to Puerto Rico due to its gold deposits, the deposits were found to be small and they depleted quickly. Spain's interest in Puerto Rico after that point was primarily tactical and strategic.

The economy during that period was driven by slavery of the native population, the Taíno, and by slaves brought from Africa. Slaves were minimally remunerated for or forced to work in farms, mines, households, and other aspects. Agriculture was the primary mean of production, as well as livestock which was originally imported from Europe. Sugar cane, tobacco, coffee, cocoa and minor fruits were the primary cultivations which were exported to Europe and, by so, constituted the main economy for the island. Mining of gold, silver, and copper occurred as well, although not as much as in other territories during the Spanish colonization of the Americas.

The financial administration of Puerto Rico was directly from Madrid, although there were limited elements of home rule. Taxation under Spanish rule entailed stamp taxes on transfers of property and consumption taxes on foodstuff.

United States rule

In the early 20th century the greatest contributor to Puerto Rico's economy was agriculture and its main crop was sugar, displacing other cash crops such as tobacco, cocoa, and coffee. In 1935, United States President Franklin D. Roosevelt launched the Puerto Rican Reconstruction Administration, which provided agricultural development, public works, and electrification of the island. After the end of Spanish rule, Puerto Rico's fiscal administration was reformed.

Economic conditions had improved since the Great Depression because of external investment in capital-intensive industries such as petrochemicals, pharmaceuticals and technology. Starting in the late 1940s a series of projects called Operation Bootstrap encouraged the establishment of factories using tax exemptions. Thus manufacturing replaced agriculture as the main industry of the island. Operation Bootstrap was based on an "industrialization-first" campaign and modernization, focusing the Puerto Rican economy on exports, especially to the United States. As a result, Puerto Rico is now classified as a "high income country" by the World Bank. Although initially there were large gains in employment and per capita income, recessions in the United States were magnified in the country and have repeatedly hampered Puerto Rican development.

With the signing of the North American Free Trade Agreement and the Dominican Republic–Central America Free Trade Agreement, Puerto Rico lost a trade advantage over some Latin American countries as the right to duty-free imports to the U.S. market were expanded. Following the Fair Minimum Wage Act of 2007, Puerto Rico is also subject to the minimum wage laws of the United States, which gives lower-wage countries such as Mexico and the Dominican Republic an economic advantage in the Caribbean. Once the beneficiary of special tax treatment from the U.S. government, today local industries must compete with those in more economically depressed parts of the world where wages are not subject to U.S. minimum wage legislation. In recent years, some U.S. and foreign owned factories have moved to lower wage countries in Latin America and Asia. Puerto Rico is subject to U.S. trade laws and restrictions.

Also, starting around 1950, there was extensive migration from Puerto Rico to the Continental United States, particularly with Puerto Ricans moving to New York City, in search of better economic conditions. Puerto Rican migration to New York displayed an average yearly migration of 1,800 for the years 1930–1940, 31,000 for 1946–1950, 45,000 for 1951–1960, and a peak of 75,000 in 1953. As of 2003, the U.S. Census Bureau estimates that more people of Puerto Rican birth or ancestry live in the U.S. than in Puerto Rico.

On 1 May 2006, the Puerto Rican government faced significant shortages in cash flows, which forced the closure of the local Department of Education and 42 other government agencies. All 1,536 public schools closed, and 95,762 people were furloughed in the first-ever partial shutdown of the government in the island's history. On 10 May 2006, the budget crisis was resolved with a new tax reform agreement so that all government employees could return to work. On 15 November 2006, a 5.5% sales tax was implemented. Municipalities are required by law to apply a municipal sales tax of 1.5% bringing the total sales tax to 7%.

The public debt of Puerto Rico has grown at a faster pace than the growth of its economy, reaching $46.7 billion in 2008. In January 2009, Luis Fortuño enacted several measures aimed at eliminating the government's $3.3 billion deficit, including laying off 12,505 government employees. Puerto Rico's unemployment rate was 15.9 percent in January 2010. Some analysts said they expect the government's layoffs to propel that rate to 17 percent.

In November 2010, Governor Fortuño proposed a tax reform plan that would be implemented in a six-year period, retroactive to 1 January 2010. The first phase, applicable to year 2010, reduces taxes to all individual taxpayers by 7–15%. By year 2016, average relief for individual taxpayers will represent a 50% tax cut and a 30% cut for corporate taxpayers, whose tax rate will be lowered from 41 to 30%.

The President Task Force on Puerto Rico Status recognizes that the status question and the economy are intimately linked. Many participants in the forums conducted by the Task Force argued that uncertainty about status is holding Puerto Rico back in economic areas. And although there are a number of economic actions that should be taken immediately or in the short term, regardless of the ultimate outcome of the status question, identifying the most effective means of assisting the Puerto Rican economy depends on resolving the ultimate question of status. In short, the long-term economic well-being of Puerto Rico would be dramatically improved by an early decision on the status question.

During fiscal year (FY-2012), the Consolidated Budget for the archipelago, including both direct transfers from federal programs (Social Security and Medicare benefits for workers, Veteran's benefits, Pell Grants and student loan's interest subsidies and miscellaneous temporary appropriations -e.g. American Recovery and Reinvestment Act of 2009 grants totalling $2.6 billion-) represented more than $28.7 billion, or approximately 30% of its GDP, while revenues surpassed $31 billion. In 2010, federal transfers amounted $16.710 billion, while the Commonwealth's government managed funds of $10.12 billion.

In June 2013, a $300 million US Medicaid payment to Puerto Rico was delayed because the Puerto Rican Government had changed their nationally sponsored insurance carrier without obtaining approval from the US Health and Human Services Department. This one of several troubling economic developments, including high debt to population ratios that have caused consternation in the US municipal bond market.

Puerto Rico has been experiencing an economic depression for 20 consecutive years, starting in 2006 after a series of negative cash flows and the expiration of the section 936, that applied to Puerto Rico, of the U.S. Internal Revenue Code. In 2014, it was still in an economic depression.

Section 936 was critical for the economy as it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating on the island to send their earnings to the parent corporation at any time, without paying federal tax on corporate income. The government has also experienced 26 consecutive negative cash flows since 2000, exacerbating its fragile economic situation as the government is forced to incur into new debt in order to pay the old one.

Puerto Rico has, however, surprisingly been able to maintain a relatively low inflation in the past decade. Academically, most of Puerto Rico's economic woes stem from federal regulations that expired, have been repealed, or no longer apply to Puerto Rico; its inability to become self-sufficient and self-sustainable throughout history; its public policy which tends to change whenever a political party gains power; as well as its slightly inefficient local government, which has accrued a public debt equal to 66% of its gross domestic product throughout time.

By mid January 2017, the debt had reached $70 billion or $12,000 per capita in a territory with a 45 percent poverty rate and double digit unemployment that is more than twice the mainland U.S. average. It is essential for Puerto Rico to reach restructuring deals with creditors to avoid a bankruptcy-like process under PROMESA. In late January, the federal control board gave the Government of Puerto Rico until 28 February to present a fiscal plan (including negotiations with creditors) to solve the problems. A moratorium on lawsuits by debtors was extended to 31 May.

Governor Ricardo Rosselló strongly favored statehood for Puerto Rico, thinking in particular on the financial benefits statehood would offer. These include an additional $10 billion per year in federal funds, the right to vote in presidential elections, higher Social Security and Medicare benefits, and a right for its government agencies and municipalities to file for bankruptcy. A fifth plebiscite is due to be held on 11 June 2017. The two options at that time will be "Statehood" and "Independence/Free Association". It will be the first referendum not to offer the choice of "Commonwealth". Regardless of the outcome, Congress will be the body to make the final decision on the status of Puerto Rico.

A review of the economic situation in May 2017 by the Official Monetary and Financial Institutions Forum, an independent think tank, led to a warning that the planned "draconian budget-tightening" would cut up to 6% of the island's GNP over the next four years, leading to continuing decline. "Puerto Rico urgently needs an International Monetary Fund-style programme involving debt relief in return for a commitment to far-reaching reforms ... that will facilitate growth", the group concluded.

Then Hurricane Maria struck the island on 20 September 2017, destroying infrastructure, causing great loss of life, and leading to a large exodus of residents. The 2020 census showed the population of Puerto Rico dropping by 11.8%.

In August 2023, Governor Pedro Pierluisi floats a proposed resolution that would extend many of the benefits of Act 22 to all Puerto Ricans, but it risks being rejected by the U.S. Congress as part of the bankruptcy of the Commonwealth of Puerto Rico. The only merit of this proposal is that it would correct a fundamental inequity in the tax code.

In January 2024, the State of Puerto Rico relaxed its remote work requirements with Act 52-2022, which exempts foreign employers with no connection to Puerto Rico from withholding income tax for employees working remotely in Puerto Rico, provided certain conditions are met.

In April 2025, Nydia Velázquez of New York State introduced legislation aimed at eliminating Puerto Rico's appeal as a tax haven for cryptocurrencies. The bill would add a provision to the U.S. Internal Revenue Code requiring that digital asset income earned by Puerto Rican residents be taxed under the same federal rules as income earned in the U.S. mainland.

On April 30, 2025, the Fiscal Board asked the government for a plan to "free itself" from dependence on federal funds. The fiscal agency requested the establishment of a centralized office for the use of federal funds, for which funds have been allocated since 2022, but none have materialized.

In June 2025, Puerto Rico Senate President Thomas Rivera Schatz introduced a resolution demanding that the United States Congress and the President of the United States dissolve the Puerto Rico Fiscal Oversight Board.

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