Puerto Rico has one of the Caribbean’s most dynamic economies, which has however struggled with slow growth and recession over the past four decades, worsened most recently by the global economic crisis. According the Federal Reserve Bank of New York (2012), the territory’s GNP fell by 10% since 2005, with its linkages to the US economy being the main reason for the recession, not least because of the exposure to weakened financial institutions, collapse of the construction/housing industries and reduction in government employment. In 2010, the real GDP suffered a 5.4 reduction compared to the previous year. While the recovery of the US and the global economy, GDP growth trends have looked up, the region has shown only weak signs of recovery. Puerto Rico’s GDP stood at $103.1 billion by the close of the year 2013, representing a marked growth since 2010, when the GDP stood at $93.53 billion. The mild economic expansion is expected to increase over the next few years, despite the fact that the region remains heavily dependent on the US’ economy.
The economy is further burdened by a $70 billion debt (coupled by a poor credit rating), which is a reflection on the government’s growing expenditures. The country’ fiscal problems mainly stem from the necessity of expansionary fiscal policy geared at stimulating growth, even though it is financed by debt, coupled by the fact that the government cannot use US-controlled monetary policy.
Figure 1: The Island's economy has struggled in the Past four decades and only shows weak signs of recovery
The territory’s anaemic economic performance is visible in the labour market, where the rate of unemployment stands at 14.7%, which represents a small growth from 16% in 2011. Labour force participation rate is 20 points lower than the US’ at just 47.5%.
Industry Factors
The services industry is the largest employer comprising of 79% of all jobs while the industry/manufacturing and agricultural industries comprise of 19% and 2.1% respectively. Private sector employment remains relatively low compared to the government. On the other hand, the inflation rate has remained acceptably low on average of 2.83% between 2001 and 2014. In 2013, the rate was 0.9%. The territory has a sizeable export sector, which amounted to upwards of $69.75 billion in the year 2013, compared to imports, which stood at $47.32 billion. The main export products include chemicals, canned tuna, beverage concentrates, electronics and medical equipment, while key imports include equipment and machinery, chemicals, clothing, petroleum products and food.
However, the territory’s high concentration of manufacturing in electronics and pharmaceuticals, coupled by promising tourism sector represent opportunities for turning round the economic performance. The region’s cultural, economic and historic ties with the United States also present opportunities for the emergence of even more industries that could drive its growth. The Commonwealth has shown interest in the medical equipment, biopharma, knowledge-based services and aerospace. In order to foster these changes, there is need to improve labour market opportunities, reduce dependency of contracting industries, mobilize business growth and develop, reduce business costs and develop human capital.
Monetary Issues and Exchange Rate
Puerto Rico’s monetary policy is set by the Reserve Bank of New York, and by extension, the Federal Reserve. The region uses the US dollar, which is an advantage in international trade and foreign direct investments, because it serves to mitigate against the foreign exchange risks associated with profit repatriation as well as the purchase/sale of inputs/outputs. However, the coupling of both the US and Puerto Rican monetary policies exposes the Island to region-specific risks where economies diverge, by because the Fed/New York Fed is driven US-wide monetary needs. The territory has a separate and weak monetary system, which includes up to 19 banks (but no stock market).
Consumer Spending
The slow economic growth may continue to generate weaker-than-expected economy, which would in turn result sustained high unemployment, low incomes (to the 3.615 million people and the government) and equally low consumer spending. The GDP per capita is $16,300, which also compares poorly to the OECD nations. However, demand for specific industries have been and will continue their resilience in the near future. These industries include the construction, tourism and pharmaceutical industries. The construction industry for instance, which is among the largest industries in Puerto Rico received upwards of $4115.9 million in investments during the year 2013, but the demand for cement plummeted by 13.1% and 14.2% in 2014 and 2013 respectively.
Multiple routes-to-market are open businesses operating in or trading with Puerto Rico. This is not least because the Island has very well-developed transport and communications network, which includes 3.06 million mobiles phones, 780,200 telephone lines, 1 million internet users (with 469 hosts), 17 airports (with paved runways), 26,862 km of roadway and five ports.
References
Bram, J., Martínez, F. E., & Steindel, C. (2008). Trends and Developments in the Economy of Puerta Rico. The Federal Reserve Bank of New York Volume 14, Number 2.
CIA World Factbook. (2014, Jan 17). Puerto Rico: Country Profile. Retrieved October 12, 2014, from cia: https://www.cia.gov/library/publications/the-world-factbook/geos/rq.html
Federal Reserve Bank of New York. (2012). Report on the Competitiveness of Puerto Rico's Economy. New York: Federal Reserve Bank of New York.
World Bank. (2014, June 18). Puerto Rico. Retrieved Oct 12, 2014, from World Bank: http://data.worldbank.org/country/puerto-rico
Appendices
Figure 2: Private sector employment as a percentage of total employment
