With the recent default on debt payment (see Franqui Rivera and Colón-Garcia 2015), Puerto Rico became a failed state. State failure is the inability or incapacity of a government to provide services it determines are absolutely necessary to its population. Thus, if a government tries to provide services it deems necessary for its population and cannot pay for them or does not have the structure to deliver them, it can drive itself into failure. It is said it is overstretched and that it does not have the income to provide what it promised. This is the case of Puerto Rico—an island in the Caribbean that became a United States colony in 1898 and has been, since after World War II, a US territory with partial autonomy (all federal laws and regulations apply unless specifically exempted from them, but it is not a federal state and lacks any voting representation in the federal government).
Particularly damning is the unwillingness or incapacity of the territorial government in San Juan to collect taxes.1 Rather than go against tax scoffers and collect revenues to ease Puerto Rican default, new taxes are implemented. The gray economy is estimated at somewhere between 35 and 40 percent, and, in fact, consumer taxes have been levied recently to reach indirectly those who did not pay personal and corporate income taxes due by them. This is the acceptance by government of its incapacity or unwillingness to govern. Puerto Rican state failure also arises from the incapacity to pay its debts and continue to provide services. Gov. Alejandro García Padilla declared the debt unpayable on 31 July 2015. Puerto Rico’s agencies and municipalities cannot declare bankruptcy as against counties and cities in the rest of the United States because the island was left out of the revision to the US Bankruptcy Act in 1984. It is seeking inclusion in 2015. When final determination on what a territorial government can or cannot do lies in the hands of the factions that would be affected negatively by a governmental action, there is a real possibility of failure. This is the case of Puerto Rico.
Another characteristic of failure is that when the civil society—the guarantor of government ethics and essential to its operation—ceases to discharge its responsibility and instead serves itself rather than society at large, the assets of government tend to be filtered into the hands of those who were its guarantors. Civil society becomes phagocytic. This is the case of Puerto Rico.
The electoral system ceases to become a mechanism for change in a failed state because political parties, which are an important part of civil society, merely recycle those that are dipping their hands in the till for their favorite factions, defending the few for the many even while mouthing populist slogans. This is the case of Puerto Rico.
Civil society absconded with the government till in Puerto Rico. This includes for-profit organizations posing as NGOs; banking and financial institutions that have directed their efforts at becoming rentists like Section 936 and foreign corporations with substantial federal tax abatement; land and assets speculators who have been given local tax abatement in exchange for living in Puerto Rico; government unions that can sway elections through their organizing power inhibiting efforts to prevent a drain in resources of public corporations and agencies; churches incapable of recognizing moral and ethical dilemmas; the institutional network that lives and thrives in clientelism; and political parties.2
Why is there no mention of Puerto Rico’s state failure?
Were it not for Puerto Rico’s inability to pay what it owes, the islands would be under the radar. And, effectively, it is under the radar for the purposes of factions other than financial that spur Congress into action.3 Also, it is effectively propped by federal transfers. On the other hand, recognition of failure might lead the federal government to change the relationship that led to this disaster. However, there are too many other interests buttressing the current relationship.
Had Puerto Rico had the (quasi sovereign) powers that the Popular Democratic Party (from 1953 to 1968 and from 1984 to 1992) and the people of Puerto Rico requested in the 1967 plebiscite (60.1 percent), it might have been able to avert failure. The same claim is made by statehood advocates because statehood would more than double income from the federal government, which would pay for recurrently underfunded programs such as health care. More importantly, Puerto Rico would be an active power broker in Congress and the executive, something now denied. But Congress will act only if a faction in the nation is endangered by the crisis in Puerto Rico. For example, the crisis created by the possibility that bonds will not be paid forced the Senate into two hearings on the subject (see Klimasinka 2015). If the crisis is not deep enough, what happened in the hearings will stay in Washington, DC, and no changes will filter down except to insulate the financial faction from further distress.
If there is some action insulating the aggrieved faction from greater ills, it will possibly be masked by something that will benefit Puerto Rico. For example, corporate welfare, a term used by Sen. Robert Dole to condemn Section 936 (tax abatement) was masked as a job-creating strategy to benefit Puerto Rico, even though the requirements for creating jobs were trumped by other sections of the law.
Only those who vote matter in a representative government. Therefore, the indifference shown to the problems besetting the Commonwealth since mid century and particularly since 2006 is structural and quite different from the attention paid to one or another corporate group, defense interest, or financial institutions that move billions of dollars, millions of votes, and thousands of lobbyists.
The economic disaster brewing for a generation was not critical to the nation, but the incapacity of the territorial government to pay general obligation and other bonds was enough of a threat to a specific and powerful group to call to the attention of Congress the possibility of negative effects of defaulting. Puerto Rico itself has no votes in Congress and has zero presidential electors. There are, of course, significant numbers of Puerto Ricans living on the mainland. Still, the absence of a formal and immediate impact on the ballot box is the principal reason Puerto Rico and its issues are under the radar.
From 1970 to 2015, Puerto Rico went from the darling in US foreign policy to accursed. What has happened? Among other reasons, after the end of the Cold War, Puerto Rico is no longer important for foreign policy, defense, and commerce—only to a small group of bond holders and financiers. It is effectively disposable once the bond holders are insulated from greater damage.
The federal government has repeatedly said there are no other changes possible than independence or statehood; the two White House reports on Puerto Rico in 2009 (Bush Administration) and 2011 (Obama Administration) confirmed this. A continuation of the current relationship, now proven toxic, might be possible with some temporary concessions by Congress. When Congress finds better things to do with those concessions, it will take them away. As things stand, Puerto Rico is powerless to defend itself from Congress, much as it was with Section 936, taken away at the will and whim of those who created it, without any consideration as to the well-being of the island and islanders.
What happened the last time the some concessions were made? The grand concession made in exchange for local government agreeing to curb political tensions and increasing calls for full sovereignty on the island in the late 1940s was unique access to the US market and tax abatement. Subsequently, however, the US market was opened to most of the Third World and, adding to this, labor and other environmental concessions made Puerto Rican light manufacturing less competitive. When Puerto Rico’s condition was recognized as dire in 1973, as a result of the oil crisis, tax abatement was enhanced (Section 936, 1976). Twenty years later, when the political climate was calm, Section 936 was struck by Congress. If past congressional action is an indication of future action, Puerto Rico can expect something to mask its condition but not solve it.
President Harry Truman’s inaugural speech, in which he set forth the Marshall Plan and his Point Four Program applicable to the rest of the world, addressed containment of communism through the economic might of the United States. As the US market, initially available only to Puerto Rico, opened to the rest of the world, the competitiveness of Puerto Rico declined—laden like other US industry with congressional labor requirements (later to be joined by environmental requisites).
As has been pointed out by researchers recently, Puerto Rico had been presented to Latin America and the developing world as the US answer to communism (Neveling 2015). This meant, however, that when its economic growth began to falter, rather than provide it with the instruments and political power to work out these problems as Gov. Luís Muñoz Marín repeatedly requested, the United States propped it up through transfer payments of the Great Society. The problem was masked, not solved.
Muñoz Marín, already frail of health, retired from active politics in 1964. His heirs were more strident than he in their demand for political changes. However, the problem was not Muñoz’s style but rather the substance of the changes sought: the crisis did not affect the national interests or its corporate and financial powerhouses. President John F. Kennedy found little support in Congress still in the hands of the Southern racistocracy. Jim Crow survived Brown v. Board and the Civil Rights Acts well into the second half of the twentieth century (when the heirs to the Confederacy passed away).4 Racism is not supposed to be part of the US domestic policy, but the racist structure built in 1900 and confirmed with the Commonwealth still defines the relationship of the United States and Puerto Rico. Only the US can change it. However, Sen. Pat Moynihan preferred to explain the attitudes toward Puerto Rico as nativism. On the other hand, the United States has always been more generous with money than with rights—except in foreign policy. But Puerto Rico is not foreign in this sense. Historically, the US response to Puerto Rican destitution since the early days of the Cold War was to substitute the support of economic development for economic growth. This set Puerto Rico on the road to disaster already in the 1960s and 1970s and, again, triggered the 2015 financial and economic crisis.
However, the failed state was born much earlier in the relationship between Puerto Rico and the United States; the Foraker Act of 1900, the Jones Act of 1917, and the US Supreme Court cases (the Insular Cases) that still define said relationship did not allow the territorial relationship to mature. When the Commonwealth was organized in 1953 at par with the end of the Korean War and the consolidation of the Soviet Empire and the awakening of the Chinese powerhouse, the United States kept, naturally, its full power over island issues, choosing to exercise it through Congress, presidential directives, and Supreme Court decisions. This state of affairs persists in 2015.
Carlos E. Chardón studied for a PhD in Anthropology at Syracuse University with Helen Safa and Preston James (Geography) before returning to Puerto Rico to continue the work of his father, Carlos Chardón. He has worked for various Puerto Rican and federal administrations since 1965. Among many other functions, he has been involved in the nationalization of the sugar cane industry in the 1960s in the governor’s office; he was territorial Secretary of Education, Caribbean Director for the US Small Business Administration, Executive Vice President of the Ponce Museum of Art, Chairman of the Board of the Institute of Culture and the Conservatory of Music of Puerto Rico, and Chair of the Board of various government corporations such as Housing; and in three administrations he was in charge of US federal funds in the governor’s office.
1. “Economists say Puerto Rico captures just over half the tax revenue it should, failing to collect on an estimated $800 million in unreported income each year” (Associated Press, 8 March 2015); “Puerto Rico fights tax evasion as it seeks new revenue sources” (Fox News, 8 March 2015, accessed 1 November 2015).
2. Puerto Rico has a long history of tax-haven status, beginning with the privatization of state-owned factories around 1945 and continuing with the “invention” of the export processing zone export-oriented development model that puts the financial burden for setting up industrial infrastructure on the local state while offering generous tax and customs holidays to corporation (Neveling 2015). These policies have never been discontinued but instead have taken new forms in, for example, the US Internal Revenue Code section 936. This “effectively” exempts US corporations from taxes on income earned from operations in Puerto Rico and, further, from taxation on various passive investments (United States General Accounting Office 1993).
3. The above leaves aside the possibility that Puerto Rico is not a failed state but a dream state—the ideal ground for operations for some actors, such as corporations and investment funds.
4. For one of many books on the Republican control of Congress and the presidency by seeking the racist vote in the South, see Aistrup (1996).
Aistrup, Joseph A. 1996. The Southern strategy revisited: Republican top-down advancement in the South. Lexington: University of Kentucky Press.
García-Colón, Ismael, and Harry Franqui-Rivera. 2015. “Puerto Rico is NOT Greece: The role of debt in US colonialism.” FocaalBlog, 26 August. www.focaalblog.com/2015/08/26/puerto-rico-is-not-greece-the-role-of-debt-in-us-colonialism.
Klimasinka, Kasia. 2015. “Puerto Rico debt crisis eludes US fix, top Republicans say.” Bloomberg Business, 29 September.
Neveling, Patrick. 2015. Export processing zones, special economic zones and the long march of capitalist development policies during the Cold War. In Leslie James and Elisabeth Leake, eds., Negotiating independence: New directions in the histories of the Cold War and decolonisation, pp. 63–84. London: Bloomsbury.
United States General Accounting Office. 1993. Puerto Rico and the Section 936 Tax Credit: US Operations in Puerto Rico and Its Tax Implications. GAO/GGD-93-109.
Will, George F. 1991. “Puerto Rico’s difference.” Washington Post, 17 March.
Cite as: Chardón, Carlos E. “Masking Puerto Rican state failure.” FocaalBlog, 3 December. www.focaalblog.com/2015/12/03/carlos-chardon/masking-puerto-rican-state-failure.