MBA Chronicles: Class of 2019 Mrs Enginerd Nerd Stuff

Broken Hill: Puerto Rico in the Context of The Spiky World (by W)


Puerto Rico has been a territory of the United States of America for about 120 years. As a centrally located island in the Caribbean, it was “discovered” by Christopher Columbus during his second trip to the Western Hemisphere for Spain in 1493. It wasn’t until 1508 that Juan Ponce de Leon started the process to outfit it to live to its name, which was given to the territory when it became one of the richest trade ports in the Americas. For over 400 years its inhabitants lived in a peak American city that answered directly to the Spanish crown, which benefited from the extracted gold, precious metals, and agricultural products not found in Europe. When it was acquired by the United States as part of the Spanish-American War reparations in 1898, Puerto Rico began its transition into a global hill, relegated from its position as an innovation and wealthy trade center into a sugar cane and coffee plantation producer, and later as a manufacturing center for the United States due to the very cheap, very skilled labor of its citizenship. It has not been able to become a key strategic player in global policy or trade, and the US government has deprived its citizens and local government with the ability to create connections with international partners to turn the hill into something greater.

How Puerto Rico Became a Broken Hill: Citizenship and the 936

Based on the class discussions about Richard Florida’s thoughts on globalization, the world can be described as a collection of cities that behave as peaks, hills and valleys.  Peaks are known for innovation and trade, while hills are known for supporting the manufacturing and resources required by the peaks to maintain their success and progress. Even though peaks and hills can exchange roles, cities like Detroit rise and fall depending on the economy’s mood and leadership, the valleys can take longer to overcome the financial, social and political hindrances that subjugate these cities and force them to remain poor, corrupt and/or disorganized. In the case of Puerto Rico, certain actions from the US government gave the illusion that the country was positioned to become a steady and strong hill from which businesses and the military could benefit. Manufacturing plants, skilled labor, tax benefits and its status as a territory allowed companies from the mainland to produce cheap high-quality goods for export into the rest of the Americas. For their exemplary service during World War I, Puerto Ricans were formally granted US citizenship through an act of Congress, not through the Constitution, which even though it could be overturned at any time enabled the islanders to consider themselves part of the nation that oversaw them as a Commonwealth territory. This enabled World War II battalions to recruit and deploy Puerto Ricans into battle which is a tradition that still permeates the culture to this day. [1]Most families have several enlisted members, including my own family. My grandfather, who is 103 years old and is still alive served in Germany and later in the Korean War. My mother and father in law are both retired Colonels from the Army National Guard. Because of its status as a hill, the military is one of the few options for decent work and pay for those who don’t take advantage of the subsidized public higher education system.

During the 1900s through the 1940s, Puerto Rico remained an upward hill until the main source of work disappeared from the island: sugar cane production. The behemoth that was the sugar cane plantations took everything from the island’s citizens; there were not enough schools for children to get educated, making working in the sugar cane fields the only viable option. Poverty was compounded by the Great Depression in 1929. Eventually in the 1940s work in the fields was converted to work in manufacturing plants, thanks in part to the first elected governor of the island by the people, Luis Muñoz Marín. Cities began growing, concentrating manufacturing plants and houses closer to one another. Operation Bootstrap was a program enacted by the governor to have people go to school and learn trades in the industrial fields. More schools were opened, and more opportunities came to people to have higher paying jobs. This came at a cost as well; most of the people who did not work in the fields or in the industrial sector suddenly became dependent on the US government aid, creating generations of an increasing population of people who did not produce anything to the GDP but took from the federal budget assigned to the island.

 By the 1970s, pharmaceutical companies invaded the island and created a specialized workforce which produced a sizeable amount of medications for the United States. The pharmaceutical companies, like the sugar cane companies before them, enjoyed producing without having to pay taxes or leaving much money to develop the island, maximizing their profits at the cost of the Puerto Rican worker; no benefit was trickled down to the island except wages. The tax break named Section 936 was enacted in the 1970s to promote businesses to develop and invest in Puerto Rico. The break was for US companies to build subsidiaries in US territories, as they were given a tax exemption: it gave the parent company the ability to pay itself with its subsidiary’s earnings in the US territory as dividends. This immediately brought industrialization to the island and many jobs. The hill shifted again and Puerto Rico for decades enjoyed renewed influx of money. Urban areas developed and many businesses from the United States flocked to the island to enjoy the consumer’s ability to afford their products and services.  The 936 tax breaks were renewed several times, but by 1996, a plan was enacted to eliminate this tax break. President Clinton signed a ten-year limit to the 936 tax breaks, and by 2006 most of the pharmaceutical companies had left a skeleton crew and plants in the island, for products they could not find a place to move its manufacture cheaper than in the island or moving to the mainland US.

Once the well dried up, most industries ran away from the island and left a local economical void again, in this case one the island never recovered from. There were no alternatives to keep these companies, no negotiations to help the people who would lose these jobs. The local government had its hands tied, as it was the federal government’s money and breaks that helped them get these companies and jobs established, but they were not empowered to negotiate themselves with companies, as they had no budget themselves to operate any plan. The US government in part allowed this to happen. Very similar to the 1900s, when the first governor appointed to the island used the laws to his benefit, the pharmaceutical companies did the same 80 years later. Eventually the specialization of this pharmaceutical workforce became too expensive to the corporations, as well as their benefit of no taxes paid on production ceased in the late 1990’s-2000’s. In 2006, a recession began from which the island never recovered to this day[2].

Junk Bonds and Natural Disasters

The 939 and subsequent tax breaks helped put the island into greater debt which could not be repaid. Bonds were downrated to Junk status and bills began piling up on local utility companies. By the 2010’s the island had amassed a massive deficit and could not find any reprieve from Capitol Hill to acquire the resources to turn around the downward spiral. The industries that fed its economy dried up, big pharma moved operations back to the states, and Puerto Rico has no alternate means of income except for tourism, which was not enough to sustain the infrastructure. Massive media and sponsorship campaigns were created by the tourism bureau and government to entice people to visit the island and in some cases move as tax incentives for the rich became popular. Seems more people decided to leave the island than stay and work through the recession, as many small and medium sized businesses closed its doors or outsourced production to China to make ends meet. The chart below illustrates that by time Hurricane María hit in September of 2017 there was already an observable migration trend.

Notice that the largest exodus was before the 2017 hurricanes, but there had been a downward trend of professionals leaving the island as there are not enough jobs, besides the burden of the island’s debt falling on the middle-class workforce who are estimated to barely make $20,000 a year[3]. Once the island fell into its insurmountable debt, which many hedge fund managers and investors owned, the island’s government wanted to restructure the debt and declare bankruptcy. Due to a determination in the 1950s, it was decided that Puerto Rico, as a territory, could not declare bankruptcy, unlike Detroit who had gone through a similar crisis and had been bailed out, it had to be monitored on how it was to pay back its debt owners. An oversight committee was appointed in 2016, and to this day they basically prepare the budget for the island and tell the Puerto Rican government who to pay first and what to sell to pay back the debt. The strategic island in the Caribbean which evolved into a manufacturing specialist at a discount was left to turn into a debt behemoth no one wants to touch.

There are many factors for the decline of the economy as Puerto Rico’s circumstances and lack of political autonomy created a perfect storm of budget mismanagement, poor decision making, opportunistic external businesses exploiting the local worker, and indecision by the overlooking government of the United States. Because of the high reliance on US corporations and brands, most of which were victims of the economic recession of 2008 as well, some South American and European companies were able to swoop in to benefit from the need to sell property and inventory at bargain prices. A notable example were gas stations. As Exxon (Esso), Texaco, Mobil, and Gulf limited their presence in direct to consumer sales, Royal Dutch Shell, Puma and Total, as well as independent gas stations had to take over the gas pumps from the mid 2000’s. It almost feels like Puerto Rico was given back to Spain, or at least to the rest of the Americas. The island seems to be forgotten in the middle of the same Caribbean Sea that had made it once a commerce and innovation hub due to its location and traffic.

Now What?

The problem of being a broken hill is that the country is not too poor and exploited to be considered a valley, but it isn’t strong enough to fully claim that it is a viable hill or even on the rise. The corruption that allowed Domino Sugar’s dominance over the island, which was attained though favors of the US appointed governor was still ingrained in the culture, spread to the leaders that later enticed the pharmaceutical companies to Puerto Rico with promises of cheap labor, and high dividends. For decades the pharmaceutical companies made billions, at one point having companies such as Pfizer, Merck, Astra, Eli Lilly, among others build and run manufacturing plants in several cities. As the pockets of the alleged benefactors grew, the opportunities for the people of the island shrunk to the point no one knows how to turn things around without resurrecting the tax breaks and incentives lost decades ago.

 To complicate matters, the Cabotage Law, enacted as the Jones Law[4] in 1920, forces any ships bringing good to Puerto Rico be from a US port, with US flagged ships. This drives up the prices of all goods coming to the island, as well as it hinders the ability local government from making trade deals with any other country, as they would require dealing with a US party to ship said goods. No foreign business can trade with Puerto Rico without incurring the expense of transferring goods form their ships of origin to a US ship to import what they will sell into the island. In 2017, hurricanes Irma and María proved that this law also hinders humanitarian aid and relief efforts as neighboring countries had to send supplies through US ships or companies instead of directly into Puerto Rican ports. In contrast, when Florida and Texas were hit by hurricanes during the same season, assistance from neighboring states was provided immediately. Only after nonstop news coverage and debate over the law internationally was the mandate lifted for 10 days, enabling resources to reach the island’s citizens directly from Latin America, items they had desperately needed and were not making it in time because of bureaucracy. At a minimum, the people who could help did nothing or delayed their action because Puerto Ricans are seen as second-class citizens[5]. A year later, that debate stills lingers.

There were also ramifications in the US after the hurricane. Many of the pharmaceutical produced in the island are sold for people in the US, and after the hurricane, a good amount of these facilities were not running at full capacity. The FDA even had to asses the situation to forecast which medicines could have the chance of having shortages if the manufacturing plants were not repaired and returned to expected capacities[6].  It is difficult to understand and explain how policies that affect a very important medical hill have not been revamped and updated to ensure this doesn’t happen again. How is the island going to recover if there is no sane recovery plan for its economy and its benefactors?

At some point the politicians who made the decision to line their pockets, selling the public they claim to represent for money have to be purged. Many housing communities, or projects, are nothing more than hubs for illegal drug activity and live on an underground economy built by the illicit sale of narcotics. These avenues of income produce enough cash for people to go buy at Saks Fifth Avenue and Nordstrom, and drive BMWs, Mercedes-Benz, and other imports on the streets. The reality is that the middle class ends up paying for the economic gap and since there aren’t many left, tax hikes are not going to help bridge the budget gaps created by the 936s. People with high earning salaries are unaffected by the workings of the politicians and businesses coming in and exploiting the middle-class workers, and the low wage families get subsidies form the federal government, which is in part financed by those same middle class workers. These are employed directly by these large corporations coming in, slaves to the new business that is enjoying benefits through the local government or allowed by the Unites States. The cycle needs to be broken or the island may well be sold to the highest bidder.  In a global business strategy, there is no room for a country with no incentives and no way out of the economic downturn to play as a hub for expansion and growth. With no back up energy and transportation systems that can outwit and/or survive hurricane seasons there is no guarantee more companies and workers will flee to greener pastures. Overall, there is a need to overhaul the political and trade laws that have kept the island economically underwater for so long. There is still an opportunity to turn the human capital into a technology and services hub that can alter the broken hill status and make it big enough to register as a small peak.  If not, Puerto Rico will become obsolete and discarded in a very competitive spiky world.









By MrsEnginerd

Engineer, DIY enthusiast, world traveler, avid reader, pitbull owner, and nerd whisperer. 😎🤓😘🐶

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