The Political Economy of Puerto Rico: Surplus Use and Class Structure

The Use of the Surplus

Building upon Paul Baran’s pioneering work The Political Economy of Growth (1957), Victor Lippit (2005) provides a practical operationalization of the concept of “economic surplus.” Assuming that the first claim on a society’s output is to meet the essential consumption needs of its citizens, the remainder of its output, the surplus, can be conceptualized as “discretionary income” that it can use in various ways—for example, for “investment, luxury consumption, military expenditure, higher education, the building of monuments, research and development, and so forth” (97). Therefore, “by ascertaining the size of the surplus and who receives it, we can identify potential sources of development finance which more conventional national income accounting techniques obscure” (1985: 14). Furthermore, “an examination of the disposition of the surplus in conjunction with an analysis of class structure can make it possible to grasp the dynamics of development or the factors blocking it.” Lippit operationalizes the surplus as “the difference between actual national income and essential consumption,” and essential consumption is “the equivalent of a poverty line based on community standards of what constitutes the minimum requirements for living decently” (2005: 97).

This essay adopts Lippit’s operationalization. Using Census Bureau poverty thresholds, essential consumption is estimated as the income required for all residents of Puerto Rico to be at the poverty line. Simply subtracting essential consumption from net domestic income provides an estimate of the economic surplus in Puerto Rico. It should be noted at this point that there is a problem associated with measuring national accounts in the case of Puerto Rico. Many U.S. companies report income on the island to avoid paying taxes in the jurisdictions where it was actually produced, a practice termed “income shifting via transfer pricing.” Estimates place actual manufacturing output associated with foreign corporations from 45 percent to 72 percent lower than official figures (Collins, Bosworth, and Soto-Class, 2006: 27–28). Much of what may appear to be surplus extraction actually consists of “paper transactions” whereby companies set prices in the transactions between their affiliates or subsidiaries in such a way as to allow profits generated in other countries to be reported in Puerto Rico. The objective is to take advantage of the island’s low tax rates. ¹ To provide estimates incorporating this reality, surplus and net domestic income in the case that 55 percent of profit repatriations are in fact surplus transfers and not just paper transactions were also approximated.

For example, according to the Puerto Rican Planning Board (2015) ² in 2014 net domestic income was US$90.2 billion. Using the U.S. Census Bureau poverty thresholds and the number of families in Puerto Rico, we can estimate essential consumption, approximately US$21.7 billion—the amount of money needed to ensure that all Puerto Rican families are at the poverty line. Thus, the economic surplus is approximately US$68.5 billion. In 2014, foreign corporations operating in Puerto Rico transferred US$35.6 billion in profits back to their home countries (in almost all cases to the United States). This would suggest that 52 percent of the economic surplus is transferred out of Puerto Rico, but, as we have seen, this figure is misleading. The fact that a significant amount of those US$35.6 billion were not in fact generated in Puerto Rico (because of transfer pricing) must be taken into account. Given Collins, Bosworth, and Soto-Class’s (2006: 27–28) estimates for transfer pricing, I assume that surplus extraction was actually 45 percent lower than official figures (US$19.6 billion instead of US$35.6 billion), making net domestic income US$75.4 billion and the economic surplus approximately US$53.7 billion (US$75.4 billion minus US$21.7 billion of essential consumption). Thus, approximately 36.5 percent of Puerto Rico’s surplus (US$19.6 billion) is extracted from the island and, depending on the extent of transfer pricing, in 2014 between 48 percent and 63.5 percent of the surplus remained in the island. Transfer pricing has been acknowledged and documented not only by researchers but also by the U.S. Government Accountability Office (Ayala and Bernabe, 2009: 269–271). In sum, it is reasonable to conclude that most of the economic surplus in Puerto Rico remains in Puerto Rico. This exercise suggests that the portion of surplus extracted and the portion remaining in the island are relatively constant. During this period, and taking transfer pricing into account, the economic surplus remaining in Puerto Rico was on average 62.5 percent of the total surplus. In other words, Puerto Rico’s remaining economic surplus per year was on average US$30.4 billion from 2005 to 2014. In 2014, remaining surplus represented approximately US$34 billion that could have been used for investment, luxury consumption, higher education, the building of monuments, research and development, or paying off Puerto Rico’s debt. If reinvested productively, it could have been an important source of financing for economic development.

Surplus Use and Class Structure

Puerto Rico is in many ways a textbook example of Baran’s (1957: 163–200) analysis of the “morphology of backwardness”: “Whatever market for manufactured goods emerged in the colonial and dependent countries did not become the ‘internal market’ of these countries. Thrown wide open by colonization and unequal treaties, it became an appendage of the ‘internal market’ of Western capitalism” (174). Precisely this process began or at least was substantially accelerated with the U.S. invasion of Puerto Rico in 1898. The forced dollarization of the Puerto Rican economy, the impossibility of any type of protectionism, and the complete exclusion of the local ruling classes from political power blocked the development of an internal market on the island. ³ As described by González Díaz (1991: 42), “In Puerto Rico the expansion of the market did not constitute the development of a national market, but instead the expansion of a sector or region of the U.S. market. In these conditions, imported goods, from food to manufactured products, increasingly flooded the country.”

Simultaneously, capital from the United States established itself in manufacturing, producing goods destined for the U.S. market, where they were sold at extraordinary profits. Incipient local manufacturing could not compete with imported goods, much less aspire to orient its production toward external markets. Thus, without protection of the internal market, the local ruling classes were unable to develop the material basis for becoming a national bourgeoisie (González Díaz, 1991: 42). As Baran (1957: 173–174) explains, “At a historical juncture when protection of infant industry might have been prescribed even by the sternest protagonist of free trade, the countries most in need of such protection were forced to go through a regime of what might be called industrial infanticide which influenced all of their subsequent development.” The local ruling classes did not, however, simply disappear. A significant part became a comprador class or lumpenbourgeoisie reinvesting what surplus did accrue to it “in the sphere of circulation where relatively small amounts of money go a long way, where the returns on individual transactions are large, and where the turnover of the funds involved is rapid.”

Given the absence of a local capitalist class willing to challenge the hegemony of U.S. capital, the ruling Partido Popular Democrática (Popular Democratic Party—PPD) eventually concluded that it was foreign capital that should lead the transition from an agrarian to an industrial society. In 1950s, the PPD employed an Operation Bootstrap strategy of industrialization. As Dietz (2003: 48) explains, “The essence of this strategy was the reliance upon U.S. financing and U.S.-owned enterprises to rapidly forge a manufacturing sector geared to export to the United States whatever was produced while offering expanding employment opportunities. This sector would become the ‘engine of growth’ for the entire economy.”

According to Puerto Rican Planning Board statistics, between 1950 and 1972 annual growth rates were on average 6.1 percent, but more than half of the population remained in poverty and unemployment never fell below 10 percent. The recession of 1974–1975 marked the end of postwar expansion and perhaps the beginning of the slow but steady collapse of the Puerto Rican government’s development strategy. Migration to the United States functioned as a safety valve, ameliorating the social and economic situation. An analysis of the use of the surplus in present-day Puerto Rico coincides with much of Baran’s analysis. The most comprehensive data on local capitalists are found in the Caribbean Business Book of Lists, an annual report published by Puerto Rico’s main business newspaper Caribbean Business with details on the island’s top 400 locally owned companies. In 2014 trade (including wholesale, retail, and automobile distribution) and insurance had combined revenue of US$15.86 billion and represented 63.5 percent of total revenue in the top 400. Of the top 10, 8 were in either insurance (mostly health insurance) or the distribution of imported products. Until recently, finance was included in the list, but since 2009 the largest financial firm in Puerto Rico, Popular Inc., has not had at least 51 percent of its stock in the hands of residents. Only 42 manufacturing companies made it to the top 400, representing 5.38 percent of total revenue.

Thus, most of what surplus remains is utilized in unproductive activities (i.e., economic activities with relatively little impact on the creation of employment or new wealth in the island). The Puerto Rican capitalist class largely acts as “intermediaries or representatives of U.S. producers (as importers, dealers-distributors, wholesalers-retailers, or providers of financial or transportation services)” and is a “dependent, subordinated stratum, a modern-day version of the comprador bourgeoisie” (Ayala and Bernabe, 2009: 270). Since the 1970s, foreign capital has mainly focused on knowledge- and capital-intensive industries (e.g., pharmaceuticals and electronics) that create relatively little employment, while local capital has invested the remaining surplus in sectors that generate few or mainly part-time jobs. ⁴ According to the Puerto Rican Planning Board (1989), since the 1970s unemployment has been on average approximately 15 percent. During the same period, the labor participation rate on average has been 45 percent, falling to a historic low of 40.6 percent (one of the lowest in the world) in 2014. Although including underemployed workers would be best, simply including the economically inactive population and the unemployed makes the industrial reserve army on average 60 percent of the working-age population since the 1970s.

In sum, Puerto Rico’s class structure has the following characteristics: As in all capitalist social formations, the capitalist class has almost exclusive control over the use of the surplus. A foreign capitalist class controls and extracts a substantial part of it, with Puerto Rican capitalists functioning as a comprador bourgeoisie, unproductively using the remaining surplus. The working class has little or no control over the use of the surplus, though strong unions have some influence. There is a significant reserve army of labor, and jobs are predominantly low-paying. Furthermore, according to the Puerto Rican Department of Labor and Human Resources (2014), only 9.97 percent of Puerto Rican workers were unionized in 2014 (which is low by the standards of the Organization for Economic Cooperation and Development (2015), in which unionized workers represented on average 16.7 percent of the workforce in the same year).

In this context, both dominant parties, the PPD and the right-wing pro-statehood Partido Nuevo Progresivo (New Progressive Party—PNP), have historically favored “supply-side” policies, consistently reducing taxes for local big business and in most cases not taxing foreign capital at all. The result has been a severely fiscally constrained government that has issued debt as a short-run solution. Economic growth, faltering since the 1970s, entered a period of stagnation in the 2000s and contraction since 2006. Between the 1980s and the early 2000s, PPD and PNP governments employed the same development policy framework. Federal transfer payments, migration, and debt served as temporary Band-Aids during this period. Faltering growth and the subsequent 2006 recession shed light on the difficulties the government might have repaying its debt. The island’s bonds were classified as junk bonds in 2014, igniting the current debt crisis (Figure 1).

OPEN IN VIEWER

Figure 1.

Real GNP growth, 1947–2014 (data from Puerto Rico Planning Board, 2015).

In sum, a significant amount of wealth remains in Puerto Rico being unproductively utilized by local financial and commercial capitalists. Puerto Rico could secure funds for both paying off its accumulated debt and financing development by taxing part of the surplus repatriated abroad and, more important, by transferring surplus from unproductive sectors to productive activities within the island. The latter could be achieved by imposing taxes targeting Puerto Rican financial and commercial capitalists and channeling these funds into a radical industrial policy. A simple exercise using human development indicators may provide insight into the potential outcomes of using the surplus in this way. In 2010 the United Nations Development Program (UNDP) introduced the Inequality-Adjusted Human Development Index (IHDI) as a complement to its Human Development Index (HDI). The HDI can be viewed as an index of potential human development, while the IHDI is the actual level of human development (UNDP, 2010: 87). The UNDP does not include Puerto Rico in its reports, but according to independent estimates Puerto Rico’s HDI in 2012 was approximately 0.865, ranking it twenty-ninth, “very high” (Fuentes-Ramírez, 2014). However, the island’s IHDI is 0.685, “medium.” According to the U.S. Census Bureau’s American Community Survey (2015), Puerto Rico’s Gini index was 0.5472 in 2014, making it one of the most unequal nations in the world. Inequality in Puerto Rico is the result of a class structure that marginalizes most of the population, with high levels of unemployment forcing most Puerto Ricans out of the workforce or into migration to the United States. Meanwhile, local and foreign capitalists’ incomes continue to rise. For example, according to the Puerto Rico Planning Board (2015) from 2006 to 2014 profits transferred to the United States increased by 9.5 percent and national income distributed to local Puerto Rican capital by 55.5 percent while national income distributed to workers as employee compensation decreased by 0.8 percent. Reducing inequality is fundamentally linked with transforming the mode of use of the surplus. The gap between Puerto Rico’s actual and potential levels of human development illustrates the possibilities for the island if the state were to direct the surplus to productive activities or use it more democratically.

Radical Industrial Policy as an Alternative to Austerity

Historical surveys confirm that almost every now-developed country used infant-industry protection and other protectionist industrial, trade, and technology policies to arrive at its current position (Chang, 2005: 59). Many of these policies are effectively ways to transfer the surplus from unproductive to productive activities. In addition to tariff protection, countries have utilized “export subsidies, tariff rebates on inputs used for exports, conferring of monopoly rights, cartel arrangements, directed credits, investment planning, R&D supports and the promotion of institutions that allow public-private cooperation” (65). Similarly, taxing certain activities has been fundamental in ensuring that the surplus is invested productively. For example, East Asian countries imposed heavy tariffs and taxes on the production or import of certain “luxury” goods to keep local capitalists from wasting the surplus on luxury consumption (25). Economic development requires active state intervention to ensure that the surplus is invested in a way that is conducive to development. Intervention accompanied by participatory planning and decision making would augment the policy’s transformative and emancipatory potential.

This is precisely the alternative to austerity available to Puerto Rican policy makers. While the most common infant-industry protection tool, tariff protection, is unavailable to Puerto Rico because of its colonial status, according to Chang (2005: 65) it is not the only or even necessarily the most important such tool. As Dietz (2003: 106) argues, the Puerto Rican government could organize a successful industrial policy via subsidies. Subsidies may take the form of “low-cost loans, tax and other fee exemptions, assistance with training costs and technology acquisition, and a whole host of specific actions designed to reduce the costs of production of local producers vis-à-vis the costs of imported goods.” Ironically, the Puerto Rican government has been proactive in providing many of these subsidies to foreign capital while halfheartedly providing only some of them to local capital (see Dietz, 1986). Greater emphasis on progressive income taxing, along with taxing businesses in unproductive activities (such as finance, insurance, and trade), could potentially fund these policies and transfer the surplus to productive investment in local infant industries.

Two potential obstacles are worth discussing. An industrial policy such as the one being suggested here does not represent a threat to the capitalist class’s existence. In fact, it could actually be understood as beneficial, for it would represent elevating the Puerto Rican capitalist class from its intermediate and subordinate position in a poor developing economy to that of one willing and able to compete with foreign capital. However, it does entail government’s actively intervening in (and therefore reducing) capitalists’ decision-making power, and therefore local capitalists would most likely actively oppose it. Their lack of collaboration would not, however, necessarily make the project infeasible but would simply require the state to play a more direct role in the development process, as occurred in Taiwan from the 1950s to the 1980s (see Wade, 1990). Financing such a development project would require more emphasis on transferring wealth via taxation from foreign capital and wealthy Puerto Ricans to the state. Thus, the relative political strength of the state and its supporting social movements vis-à-vis the capitalist class will codetermine its success or failure.

In other words, whether and how Puerto Rican capitalists collaborate with a radical industrial policy will be shaped by the political and social forces behind that policy. A related and perhaps more important potential obstacle is finding the political will to develop such an industrial policy. Both the PPD and the PNP have embraced neoliberal and austerity policies as the only alternative. The only question, from their viewpoint, is to what extent to carry them out (with the PNP favoring an aggressive approach). Under the current scenario, it is unlikely that the Puerto Rican government will adopt an industrial policy such as the one I am suggesting, but there are two potential scenarios in which the necessary political will might be developed. First, social movements might organize a broad antiausterity party that gains strength in electoral politics and eventually succeeds in organizing broad support for an industrial policy project. The relatively new PPT, for example, has an anti-neoliberal and antiausterity program. Its slogan is “In the Ballot Boxes and the Streets,” emphasizing that any popular alternative must include electoral as well as more militant politics. Alternative or grassroots parties have been capable of breaking the hegemony of previously dominant parties in other countries. In the 2016 elections the PPT’s candidate for governor obtained only 0.65 percent of the vote, but the party managed to elect four municipal legislators. Alternatively, if the PPD’s mildly left-of-center minority were to grow, it might change the island’s political landscape. This scenario might be just as difficult as organizing alternative grassroots parties, for the PPD’s establishment leaders have actively sought to alienate this minority (see, for example, Bauzá, 2015).

Puerto Rican Independence, Capitalist Economic Development, or Socialist Revolution?

Any critical analysis of the Puerto Rican case must include the role of the island’s status. According to Dietz (2003: 178), “the status issue has become such a distraction that it is in the interest of both Puerto Rico and the United States to resolve it, and the sooner the better.” Baran (1957: 218) warned that in most cases

the fight for national independence overshadowed and absorbed the struggle for social progress. While a number of important, indeed central, issues of economic and social development in colonial and dependent countries are actually closely linked with the question of national independence, there are at least as many the relation of which to the -national problem consists primarily of their being confused and obscured by it.

When independence is finally obtained, “it turns into a sham” in which “the amalgam of property-owning classes supported by the imperialist interests uses its entire power to suppress the popular movement for genuine national and social liberation and reestablishes the ancien régime not de jure but de facto” (Baran, 1957: 221).

In Puerto Rico during the late 1960s and early 1970s, the two largest pro-independence organizations, the Partido Independentista Puertorriqueño (Puerto Rican Independence Party—PIP) and the Partido Socialista Puertorriqueño (Puerto Rican Socialist Party—PSP), both argued that independence was necessary but insufficient, socialist reforms and the overthrow of capitalism being equally urgent. Under the influence of the Cuban Revolution, the Puerto Rican independence movement combined anti-imperialism and socialism as a single struggle. By the 1990s the PIP had substantially changed its discourse. Its minority Marxist faction had been expelled in the 1970s, and the party eventually abandoned radical socialist ideals (Ayala and Bernabe, 2009: 229). It became an almost “exclusively electoral organization with few activist links with the social and labor movements” (310). Within the PSP, the nationalist faction, which understood independence (not socialism) as the central goal, became hegemonic. Instead of a working-class movement, it chose to build a patriotic front with the “patriotic wing” of the PPD. While the PPD had historically been the main advocate of the current colonial status, the left-of-center minority previously discussed was already emerging and was identified by the PSP as a potential ally. After the PSP slowly disintegrated in the late 1980s and early 1990s, this nationalist faction eventually reorganized as the Movimiento Independentista Nacional Hostosiano (Hostosian National Independence Movement—MINH) and its leadership gravitated to a de facto alliance with the PPD during the 2000s. One of its historical leaders, Juan Mari Bras, argued that it was necessary to postpone any socialist vision to an indefinite future while seizing the opportunity to turn Puerto Rico into an effective player in an emergent globalized market (Ayala and Bernabe, 2009: 310). Nevertheless, in the 2016 elections the MINH endorsed only PIP and PPT candidates.

The PPD has been a historical ally of both foreign and local capitalists. If independence were to be obtained as a result of a broad patriotic front, as conceived by the nationalist faction of the former PSP, with the direct or indirect participation and/or leadership of Puerto Rican capitalists, it would most likely result in a sham independence that merely reproduced dependency in a new setting. The current unproductive use of the surplus could easily be reproduced, as it has been elsewhere, in the context of independence. De facto rather than de jure independence would mean challenging the political and economic power of the foreign capital that the PPD has subserviently empowered since the second half of the twentieth century.

In contrast to classical colonial domination, the current commonwealth status allows for the colonial government to be composed of Puerto Ricans rather than foreign colonizers, facilitating alliances among the colonized despite their potential class antagonism. Most high-ranking leaders of the PPD and PNP are wealthy individuals with close links to foreign and local capitalists who have not hesitated to attack public sector unions, fire public employees, and implement “labor flexibility” laws against the interests of workers. In other words, commonwealth status serves to intensify class contradictions and hinders the formation of a broad pro-independence national front.

Finally, the preferred tactic of both the MINH and the PIP—affirmation of national identity or national pride—plays into the hands of the PPD, which has skillfully turned national pride into a means for furthering its own politics (Ayala and Bernabe, 2009: 311). In fact, it is not uncommon for PNP politicians to incorporate the affirmation of Puerto Rican identity into their pro-statehood discourse.

A Puerto Rican multiclass national liberation front based on an alliance between poor and working-class Puerto Ricans and local capitalists is difficult to organize, and its most likely result, a neocolonial independence, would not represent a substantial improvement. It is precisely the poor and working classes that should form the vanguard of the national liberation movement. This in itself is a challenge. Despite the fact that 54 percent of Puerto Ricans expressed their opposition to the island’s colonial status in the 2012 referendum, most Puerto Ricans (94.5 percent) currently do not favor independence. In other words, it is reasonable to assume that approximately 95 percent of the poor and working classes prefer some direct political relationship with the United States. A radical political party, organization, or movement that required its members to be pro-independence would automatically limit its potential.

The alternative is organizing a working-class party or organization that, without renouncing its opposition to the island’s colonial status, does not require its members to be explicitly pro-independence. This would provide a space for workers who are willing to organize against the neoliberal policies of the PPD/PND but currently prefer statehood or some association with the United States. This is also one of the underlying ideas behind the PPT.

While decolonization is a fundamental aspect of resolving the Puerto Rican crisis, it is clear that economic development policies cannot be postponed until the status issue is resolved. The Obama administration argued that Puerto Rico was “in the midst of an economic and fiscal crisis” that “could become a humanitarian crisis” (White House, 2015). The impact of the crisis on the safety and well-being of the Puerto Rican people suggests that the latter may already be the case.

Concluding Remarks

Under PPD/PNP hegemony, the underlying idea behind policy making has consistently been that there is no alternative to austerity policies. I have argued that there are alternatives and that Puerto Rico has sufficient wealth to pursue them. The problem is that wealth has accumulated in the hands of the island’s richest individuals and in local sectors that are not necessarily conducive to economic development such as trade and finance. In other words, the challenge is in fact more political than economic. The task is developing the political will to transfer this wealth from high-income Puerto Ricans and unproductive sectors to a radical industrial policy initiative. ⁵ While the prospects for social movements’ obtaining sufficient strength to carry out this initiative may seem limited in the current conjuncture, the deepening of the current crisis could potentially provide a tipping point. Emphasizing that there are in fact alternatives to austerity may facilitate social movements’ coalescing around these policies and thus contribute to the development of the political conditions necessary for restoring growth and development.